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A Better Measure of Apple's Success?

Last fall, Steve Jobs and his executive staff sat around the boardroom at Apple's "Infinite Loop" campus in Cupertino, Calif. The subject was how many iPods to build for the coming holiday quarter. Jobs asked each of his lieutenants to give their opinion. The consensus: around 500,000 -- twice as many as Apple had sold the previous fourth quarter. Jobs considered the guidance, and then made his decision. They'd build 730,000.

"It was a big gamble on our part," says Jobs. "We thought we could be way too high." They weren't. Apple (AAPL) sold every last one and could have sold significantly more, he says. "The thing that I love is that the best product is winning for a change."

One can hardly blame him for feeling that way. Apple's Macintosh computers have long been considered more elegant, easy-to-use, and innovative than their Microsoft (MSFT) Windows and Intel (INTC) rivals. Yet Apple's market share has slipped inexorably. It dropped from 9.4% in 1993 to just 3% in 1997, the year Jobs was rehired to run the company, according to Gartner Inc. By then, most companies and consumers had already made the jump to Wintel, due to cheaper prices and a wider selection of software titles.

FURTHER TO FALL? Jobs embarked on a plan to win back a point of market share each year. That would have been more than enough to deliver brisk revenue growth. But despite a series of impressive machines such as the iMac and the 17-inch PowerBook G4 laptop, and a pricey "Switcher" TV ad campaign to win converts, Jobs has been unable to stop the bleeding.

According to Gartner's preliminary market-share data, Apple held just 1.8% of the worldwide PC market in the fourth quarter of 2003. And some think Apple's share will fall further, if it can't keep pace with surging overall PC demand. Salomon Smith Barney analyst Rich Gardner expects Apple to post PC unit growth of 6% in 2004 this year, vs. 11% for the entire PC industry. One reason is price. Gardner says the average price of a Mac is $900, although half of PC buyers now spend less than $600.

That sounds awful, but it might not be so bad -- if Apple can maintain its success with the iPod, and follow up with other non-Mac products (the iPod works with the Mac as well as with Wintel PCs). Indeed, the iPod just might cast the Mac in an entirely new light. It may be a lousy growth-engine -- so why not focus on using the Mac to boost the bottom rather than the top line?

THE PORSCHE OF PCs? In a business where profits are almost nonexistent if your name isn't Dell (DELL), Apple delivers rich gross margins of around 27%. And the Mac business is a key reason Apple saw its cash horde climb to $4.8 billion. Indeed, Apple sold nearly as many iPods as Macs, 733,000 to 829,000 in its 2004 fiscal first quarter, ended December 27, 2003. Despite far lower prices, the iPod actually brought in more revenue ($256 million) than Apple's consumer flagship iMac line ($251 million). And yet it saw its best operating margins in 13 quarters.

Jobs hasn't said anything about treating the Mac differently than in the past, and he says he still wants to gain market share. But he told BusinessWeek, "There's no reason we can't be like Porsche or BMW and have a very successful business [making Macs], and at the same time go after some new markets like we're doing with the iPod. They're not mutually exclusive."

The quarterly performance shows the Mac is currently enjoying a growth spurt. Sales grew 12% during the quarter (iPod sales grew 238%, by comparison, but off a smaller base). The sleek PowerBook laptops remain hot items. Sales of higher-end PowerMacs -- used by publishers, ad agencies, and the like -- are getting a lift from the economic rebound.

HOLDING ITS OWN. Some evidence even points to Apple turning around its long decline in the education market. In a survey of school districts, market researcher Quality Education Data found that 30% plan to buy Macs this year, up from 21% in 2003. And brisk sales of the latest upgrade of Mac OS X, called Panther, suggest that many Mac customers are planning on sticking around.

Still, analysts are already warning that the sales growth could dim soon, after pent-up demand is satisfied. That might be O.K., if Apple keeps churning out Mac-related profits. After all, the product still brings in nearly 70% of sales, and that's not likely to change in the short term. While Salomon's Gardner expects iPod sales to leap from $345 million this year to $1.3 billion in 2005, the music player would still represent only 15% of Apple's sales. "If they're going to make Wall Street happy, it's going to be about PCs," says Merrill Lynch analyst Steve Milunovich.

Judging from Jobs's comments, he has no intention of letting Wall Street down. But he wouldn't mind if those analysts would start measuring the Mac by the profits it produces, rather than by its market share. "We've got 25 million customers that want the best computers in the world. If our market share grows, we're thrilled. But we've held our own, while our rivals were losing hundreds of millions of dollars a year," he says. "We're in pretty good shape." By Peter Burrows in Cupertino, Calif.

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