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The G5: Finally Ready for Prime Time

By Alex Salkever On June 28 at Apple's annual World Wide Developers Conference in San Francisco, CEO Steve Jobs will take the podium to pump up the faithful with new product offerings. When he stood in the same spot just a year ago, Jobs introduced the much awaited PowerMac G5 desktop computer. The new boxes boasted snazzy new G5 chips that would replace the aging G4 processors inside Apple's (AAPL) high-end machines, aimed at moviemakers, musicians, and advertising shops.

The G5 line drew rave reviews -- and rightly so. With chip clock speeds ranging from 1.6 ghz to 2.0 ghz and a new 64-bit architecture that significantly enhanced performance, the G5 effectively eliminated the massive speed advantage Intel (INTC) and Advanced Micro Devices (AMD) offerings held over Apple's tired chips. While the prices for G5-equipped computers were steep, starting at $2,000, they were in line with the premium pricing Apple has always levied on its professional units.

DEBUGGED. Still, the G5 didn't catch fire. Unit sales of the PowerMac line rose 26%, 30%, and 12%, respectively, during Apple's past three quarters. While those numbers seem respectable, the reception on Wall Street was cool. That's because the PowerMac line, which accounts for about 25% of Apple's revenues, was coming off a dismal bottom in 2002 and early 2003, when an advertising and publishing slump pushed sales of high-end Apples down to about 150,000 units per quarter.

Bugs in early G5 boxes, including noisy fans and glitchy power supplies, spooked early adopters. Worse, Steve Jobs himself froze many potential buyers when he proclaimed at the G5 unveiling that Cupertino would deliver a much faster 3 ghz G5 system by the summer of 2004.

Apple has rebounded to shipping an average of 200,000 PowerMacs per quarter. And Apple Operations Chief Tim Cook indicated during the last earnings call that execs believe they can sustain that level of sales. But some analysts worry that Apple needs to sell 20% to 25% more of the highly profitable G5s to justify its stock price (it closed around $29 on June 2).

They probably shouldn't fret. The advertising sector is looking up again. Steve Jobs is expected to announce faster chips at the conference this June. And the bugs and glitches that have plagued G5s are nearly stamped out. The upshot: Expect a G5 bounce in the next several quarters, as the stars align and sales climb 10% to 20% above the 200,000 level.

TRADE-IN TIME. The brightest star in the firmament is the ad market. According to the latest figures from the Publishers Information Bureau, U.S. magazine advertising was up 6.5%, to $5.8 billion, in the first three months of 2004 over the same period a year ago. Domestic newspaper advertising for the same period climbed 3.46%, to $10.2 billion. And Internet advertising soared 38%, to $2.3 billion, in the first quarter of 2004 -- the highest total since 1996, when the Interactive Advertising Bureau first started tracking. Most of the large advertising agencies, including Omincom and WPP Group, are predicting strong revenue growth in the quarters ahead.

Those revenues will convert to profits that grease the skids for G5 purchases by graphics jocks itching for faster gear. "When I talk to the guys in the graphics and ad world, they'll tell you that even a 10% or 15% speed improvement is money in their pocket," says Tim Bajarin, president of tech consultancy Creative Strategies. Anecdotally, Bajarin says he's hearing from stores and resellers that interest in G5s is picking up.

That's no surprise, considering that the upgrade cycle is running late. According to analyst Michelle Gutierrez of Schwab Soundview Capital Markets, most design and publishing companies are using Apple hardware that's four years old -- a year older than the historical average. Says Gutierrez: "We're definitely talking about pent up demand."

POWERING UP. Another key factor that could spur G5 sales is the reduction in bugs. The cooling-fan and power-supply issues have largely been solved, and G5 users have been reporting few big problems with their boxes. What's more, many Apple adherents prefer to wait a year after a product is released to buy the second generation, which tends to be more polished. That year will be up later this summer, and potential G5 buyers will likely feel more comfortable making a purchase of a field-tested system.

Faster chips are on the way, too. Though Apple declined to comment on future products, most analysts doubt it will be able to roll out a 3 ghz G5 in time for this year's WWDC in late June. Apple chip supplier IBM (IBM) has struggled to get production lines humming on the existing G5 chips -- bringing out faster chips with more integrated circuits could result in additional production problems. Still, IBM is pushing hard to rev the new chips, which also power some of its own server lines.

Chances are, Jobs will have to come out with some speedier G5 machines at the conference or risk looking like a flake. I would expect at the very least a PowerMac G5 performance upgrade into the upper ranges of the 2 ghz spectrum. That should be enough to make buying a new G5 appetizing. More speed, more ads, and fewer bugs looks like a sweet confluence for Apple -- one that Steve Jobs can take to the bank in the coming quarters. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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