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The iMac Needs to Lose Its Head

By Alex Salkever When Steve Jobs introduced an iMac with a floating flat-panel display in January, 2002, the faithful roared. The press wrote about it incessantly. Time even gave Jobs a gushing cover story based on the iMac, hailing the elegant desktop PC as a "sleek machine" that could be the future digital hub of the home.

Digital anchor is more like it. In the first fiscal quarter of 2004 ending December 27, 2003, iMac unit sales and revenue plummeted by 24% and 29%, respectively, compared to the same period last year. The iMac was the only Apple (AAPL) product line to show shrinking revenues and unit sales over that interval. Indeed, the iMac has posted disappointing numbers for several quarters now, leading some to wonder whether the product that Time dubbed Apple's "new core" has gone rotten.

Alas, it has. Yes, the iMac remains profitable. By how much Apple won't disclose, but certainly the line provides millions in net profits. And the iMac remains an important part of Apple's income stream. It brought in about one-fifth of computer revenues in Apple's fiscal first quarter and more than 10% of total quarterly revenue of $2 billion, which also includes the red-hot iPod as well as software and services. But in their earnings conference call, Apple execs' silence on the issue of iMac stagnation was deafening.

CREAKY CHIPS. The iMac's underperformance is one of the key reasons why Apple's last quarter was merely solid instead of stellar. Sure, it's a beautiful machine -- I'm typing on one right now. But I wouldn't go out and buy a new iMac.

Why not? For starters, the iMac's G4 chips are getting creaky. When I look at the speed demons going into the G5 line and the promise of a G5 laptop coming soon, why would I want to invest in a G4 iMac with chips that are markedly slower? And, even worse, with a diminutive case that precludes most real hardware upgrades?

iMac aficionados may have some hope on the speed front. IBM just released specs on a new generation of G5 chips that will have the lower power consumption and heat output required to keep a faster iMac from overheating inside its tiny, milky-white case.

TUMBLING PRICES. The bigger problem is the iMac monitor. It's a beautiful concept. I love the way it swivels, and I often vary the position and angle of the screen (really helps when doing yoga exercises on a mat on the other side of my desk). But the fast-changing world of flat-panel displays has left Apple behind. LCD monitors are no longer the expensive luxuries they were when the iMac launched. A 17-inch LCD monitor that cost close to $1,000 two years ago now runs less than $500 in some stores and online shops.

At the same time, boxes running Microsoft (MSFT) Windows on much faster Intel (INTC) or AMD (AMD) chips with comparable features and capabilities cost well under $1,000. That means Apple's 17-inch widescreen iMac looks pretty pricey at $1,800. And at $1,300, the 15-inch model seems almost as expensive. Only the 20-inch iMac appears marginally justifiable because most flat panels of this size still cost over a grand. Still, at a heart-stopping $2,200, the biggest iMac is a hefty investment.

This leads me to what I think is the major weakness in the iMac line: It's an all-in-one machine, which the market has moved away from. The iMacs come in a cute package with a small footprint of only 10.6 inches, about the size of a Frisbee. But for many Mac lovers it might as well be a rock sitting on their desk. They would rather have a notebook that they can close and slip onto a shelf or under their desk.

IT'S TIME. At least, this is what Apple's sales trend are saying. The two notebook computer lines have performed the strongest over the past four quarters -- in keeping with Jobs's pledge to make 2003 the year of the laptop.

So what to do about the iMac? Cut off its head. This suggestion has been floating around the Apple community for a while, and it's time for Apple to listen.

A competitive, freestanding, entry-level computer that's sleek and powerful has a role. The all-in-one eMac with a CRT monitor has done fine by targeting schools, but it's just too bulky for consumers, I think. The PowerMac G5 line is a big jump up in cost from the iMac when you add the requisite monitor. The PowerMac G4 is competitive price-wise with the iMac and offers better expansion options, but it has a clunky, massive footprint that barely fits under a normal desk.

iPOD OF MONITORS? So a headless iMac -- a pretty little machine that sits beneath your desk and provides enough power to do nice things but not enough to run a advertising agency -- might fit into the plans of people who, say, own an Apple laptop and want a second machine.

As for the monitor, I think Apple could successfully sell it as a stand-alone unit. Separating the monitor from the CPU and shrinking its footprint even further probably wouldn't involve major surgery or rocket science. Voila, Apple would have the most usable monitor on Earth and possibly even something the Wintel crowd would be willing to buy at a premium. Heck, it could be the iPod of monitors.

Well, that may be a stretch, but if Apple made the monitor relatively portable and added wireless data capability or even a TV card, it would have an untethered display par excellence and a solid competitor in a budding field of wireless monitors and TV.

SOLID NO. 2. Of course, Apple might do better just milking the iMac until the very end or pulling it to make way for a whole new concept. Consumers might not really be interested in a higher-peformance, lower-cost Apple. And the monitor might not prove attractive enough to entice Wintel or other users in sufficient numbers.

I'd buy that display in a heartbeat, particularly if it could extend further up or down. And I'd probably buy a faster, headless iMac, too, as an affordable backup to my Apple laptop. But the chance that I'll buy another iMac as we know it today is nil. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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