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Apple's Other Hardware Hit

By Alex Salkever Anyone following Apple Computer (AAPL) should be forgiven if they feel that iPod has hogged all the glory lately. The wildly successful digital music player has dominated media coverage and garnered accolades, as well as capturing about one-third of the market for these devices. But that golden halo has overshadowed another big Apple hardware success: Its popular Airport line of wireless networking devices.

The AirportExtreme base station acts as a wireless broadband router that can support up to 50 computers, Macs or PCs. Apple also makes wireless broadband cards that allow Macs to pull in signals based on the 802.11 standard, known as Wi-Fi. Apple engineers jumped on the Wi-Fi bandwagon early, building Airport-card slots into iMacs and other Apple computers four years ago. Indeed, Apple had seen the promise of wireless broadband when 802.11 was only emerging from standards bodies (see BW Online, 2/18/04, "Wi-Fi's Growing Pains").

REVENUE LEAD. How fast did Apple embrace Wi-Fi? According to research by tech tracker In-Stat/MDR, Apple grabbed 20.2% of the global market for network interface cards (NIC) and wireless access points offering the 802.11g flavor of Wi-Fi. That put the Mac folks behind only Cisco (CSCO) subsidiary and industry leader Linksys in sales of gear running 802.11g, which is quickly become the de facto standard for consumer and small-business Wi-Fi use.

Still, if Apple is No. 2 in sales, it leads in revenues. In 2003, it pulled in $148.3 million in 802.11g revenues, putting Jobs & Co. ahead of Linksys by some $32 million. True, Apple had a much smaller market share in older and slower 802.11b devices, but it didn't even bother to advertise its products available in that market, instead choosing to emphasis the zippy newer line.

The numbers are slightly misleading, however. A chunk of Apple's 802.11g share probably came from PowerBook laptops -- the 15-inch and 17-inch versions come with Airport Extreme Wi-Fi cards already installed. That means it doesn't count as a separate buy, and it's hard to parse out the 802.11g benefit from the computer's total price. At the same time, the 802.11g market remains smaller than the more established and much cheaper market for 802.11b devices. Apple shipped just over 1 million 802.11g NICs and access points combined for most of 2003.

PREMIUM PRICES. That's not much compared to the total number of PCs shipped or sales of more popular and more widely used tech gear. But it's notable that an outfit that holds 5% to 7% of the current laptop market and only 3% of the total desktop market has grabbed such a huge chunk of Wi-Fi.

Furthermore, Apple has done so while charging premium prices for essentially the same hardware and chipsets that Wintel-centric competitors are offering. An AirportExtreme base station runs $200 and up, well above other 802.11g routers. And Airport cards cost about double what other companies charge for similar gear.

With many consumer-electronics retailers offering deep discounts on Wi-Fi gear, in addition to perks such as in-home installation, Apple is probably making nice coin on its Airport business. How much it's hard to tell, but, conservatively, Apple's gross profits run a minimum of 20% on these devices when the cost of the chips and other gear is tallied. In other words, the Airport family is probably adding at least $30 million or so to Apple's gross profits.

EASY CONFIG. So what's behind the success of Apple's air assault? A few key factors. First, like other Apple products, Airport is exceedingly easy to use and manage, particularly compared with other Wi-Fi routers and cards. While Wi-Fi installation has become easier across the board, stringing together PCs that might have several different operating systems can still present headaches.

Not so with the Airport family, which is up and running in minutes. This is thanks to super-intuitive configuration software that easily handles the configuration and setup of both Macs and PCs on a network -- even if the PCs are running 802.11 cards from other manufacturers.

In addition, Airport incorporates product updates using Apple's handy automatic OS X software-updating engine so you don't have to make separate requests as you would with other Wi-Fi routers.

UP AGAINST WINDOWS. For Apple users, Airports are the easy choice because Mac support from other Wi-Fi gearmakers remains limited. So, in a sense, Apple has had a bit of a captive market, which means an easy sell. This may change as more vendors add Mac support and Mac-centric competitors such as Asante roll out more products in the 802.11g market.

I would also hazard that Apple has had some success in crossing the Airport base-station line over to the PC market. In mixed networks of Windows and Apple machines, managing both varieties with an Airport saves time and effort, thanks to Airport's configuration software.

However, Apple's share of the market may fall as more and more people buy Wi-Fi equipment and PC makers begin bundling the gear in their standard packages. This will become more apparent in 2005 and after, as more consumers move beyond computers to Wi-Fi networked printers, stereos, TVs, and cameras.

BLEEDING-EDGE ADVANTAGE. The lessons from Apple's Airport success are many. First, Apple can compete in the peripheral and hardware markets for Windows users. It has already done so with the iPod, and Airport proves that wasn't a fluke. Second, Apple's ease-of-use calling card may be a stronger selling point than before the era of networked devices progesses. That's because setting up networks is a lot more complicated than running a default installation on a preloaded PC.

Last, Apple does well chasing early adopters. Its strong showing in the 802.11g market illustrates that when a product sector is still on the leading edge, Apple can compete exceptionally well. Expect to see the next Apple Airport series come out with the capability to handle more modes of 802.11 and work even better with Windows machines. That's what it'll take for Apple to stay ahead of this lucrative and fast-moving wireless locomotive. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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