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A Picture-Perfect Opportunity for Apple

By Alex Salkever The Christmas season is looking very merry for Apple (AAPL) and Steve Jobs. iPod sales continue their torrid pace, despite the music-player's hefty price tag. A crop of new iMacs should stoke sales. The version sporting a 20-inch floating flat-panel monitor is a stunner, and actually pretty reasonably priced, considering the cost of a detached 20-inch monitor -- $800 and up in many cases. Sales of G5s are also moving along smartly. That's all well and good. But I have one word for Apple. Actually three: Think digital cameras.

These little beauties are one of the hottest consumer-electronics buys of the holiday season. According to retail sales data from U.S. outlets collected by consultancy NPD TechWorld, digital cameras brought in $1.92 billion during the first nine months of 2003. That's a 24.5% increase over the same period in 2002, when the devices amassed $1.54 billion in sales.

LESS THAN SATISFACTORY. The growth rate outpaced all other major PC-centric categories, including desktops, laptops, monitors, and printers. The Consumer Electronics Assn. found that in January, 2003, 28% of U.S. households had a digital camera. And the story is only beginning. Tech tracker InfoTrends expects consumer digital-camera sales to hit 53 million units worldwide in 2004 -- about double the 2003 tally. By 2008, yearly sales should eclipse 82 million units, creating a global market worth more than $11 billion.

That's a lot of birthday pics. And if played correctly it could be a lot of bucks for Apple. How? Not through hardware. Sony (SNE), Canon (CAJ), Kodak (EK), Olympus, and Fuji already own 75% of digital-camera-sales pie. Those are brand names with long track records and reputations. It's completely unlike the fragmented market for digital music-players that Apple pounced on with the iPod.

So if you can't do hardware, maybe software would work. The digital-photography hobbyist software market for Windows machines remains hugely splintered. Most cameramakers bundle their own image-processing and cataloging software with their machines. I've used this type of software from three camera companies. Suffice it to say that I now understand why they make cameras instead of software.

Microsoft (MSFT) bundles image-processing software with its consumer operating system. But using it is a chore, particularly because of its reliance on a semi-inscrutable folder system. A handful of third-party outfits also sell image-processing software aimed at Windows users. Most notably, Adobe (ADBE), the biggest name in professional image processing, which also plays in the consumer market with Photoshop Album 2.0. This $40 package has won solid reviews but is relatively new on the scene.

ENCORE SET. This chaotic situation represents an opportunity for Apple. Steve Jobs has already proven he can translate his mastery of the intuitive user interface to the PC world with the successful launch of iTunes software for Windows machines. That release garnered rave reviews, even from some of the most technophilic publications around, such as Slashdot and ArsTechnica.

For an encore, Apple should release a version of iPhoto for Windows. After iTunes, it's the next most popular digital-lifestyle application on the Mac. And iPhoto is an excellent product, better in my mind than anything PC makers have offered with the single exception of Adobe's consumer package.

So how big a market could this create for Apple? That's hard to tell. If Apple could convince even 3% of all digital-camera buyers to purchase iPhoto software next year -- say, for $30 -- then it would grab revenues of $45 million. That could conceivably climb to $100 million or more within a few years if Apple manages to merely maintain that market share. That's not a ton of money, but it should be more than enough to cover the cost of the launch. The move would also fit in with Apple's new push to diversify its revenue streams.

SPREAD THE JOY. Beyond that, it would all be gravy and profits. Operating margins for profitable software producers tend towards the mid to high double digits, since everything beyond the initial cost of building the product and selling it is basically profit. That's why Microsoft is filthy rich. Keep in mind, too, that Apple, despite its protestations to the contrary, really is a software company. They've been able to sustain sky-high profit margins on their hardware largely due to their operating system, which is software.

Naturally, this strategy has a few hazards. Apple can't put too many of its prized software products onto Windows machines without diluting the Mac's allure. Why buy a more expensive Mac when you can get all the same software on a PC? However, that might not be as much of a problem in this case because Apple includes iPhoto for free with new Macs. And having a couple of Apple's software offerings on Windows machines will hardly shatter the Mac's overall cachet.

Furthermore, Apple has significantly closed the price gap in the last six months. Apple laptops, in particular, are comparably priced with Windows competitors. That parity, should Apple be able to maintain it, could free the Mac team to sell far more software in the Windows world, where the real money is, and still maintain its cozy hardware business.

EVERYONE'S INVITED. Then there's the marketing-momentum effect. After the spectacular iPod and iTunes Music Store advertising campaign aimed at Windows users (for sure you've seen it -- the one with the brightly colored backgrounds and blacked-out figures boogieing down), Apple's already strong brand appeal among non-Mac heads has likely grown even stronger.

Jobs & Co. would waste this goodwill and buzz by not bringing out another Windows software title sometime in the near future. If Steve Jobs is really serious about the digital lifestyle -- and profits -- selling something to the other 95% of computer users is much better than selling them nothing. Salkever, Technology editor for BusinessWeek Online, is alternating with Charles Haddad on Byte of the Apple

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