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Macworld '05: A New Direction?

By Peter Burrows Every year around this time, a great debate breaks out in one particularly colorful corner of tech land. That's because early January is when Apple (AAPL) CEO Steven P. Jobs takes the stage at the Macworld trade show in San Francisco to unveil his outfit's first new products of the year.

Often, the ensuing controversies that follow are of interest primarily to die-hard Macolytes -- should Apple have added an extra USB connector to this product or offered a faster chip in that one. But when he appears on Jan. 11, the stakes could be considerably higher. That's because rumor Web sites have been buzzing with talk of a sharp shift in strategy for the Cupertino (Calif.) computer maker.

First, the word is that Apple will field a cheaper version of its hugely successful iPod digital-music player, one that uses lower-capacity flash memory to store songs, rather than a hard drive, as in current models. Even more worthy of note, many expect Apple to unveil a $500 Mac. Even without a monitor, that would be far more affordable than the $800 eMac machine sold mostly to schools or the $1,300 consumer iMac.

BARGAIN BASEMENT? Of course, secretive Apple isn't showing any cards prior to the keynote --- even suing, the site that has broken much of the news. But from a distance, such moves make sense. As anyone awake at some point over the past year knows, Apple has been on a tear.

The iPod has established itself as the century's first blockbuster product -- a cultural icon, and a nifty Christmas gift, to boot. Most analysts think Apple sold between 4 million and 5 million units in the fourth quarter. That's almost as many as had been sold up until that period since the iPod was introduced in 2001.

But all that success came without Apple even playing in the biggest-volume part of the music-player market. One chip supplier says around 23 million flash-memory-based players were sold in 2004, vs. fewer than 9 million hard-drive-equipped models. As such, Apple could potentially increase iPod sales -- and put the kibosh on rivals seeking to undermine its empire with cheaper models. "There's a lot of volume there," says GartnerG2 analyst Mike McGuire.

BIGGER HALO. Another notion making the rounds concerns a cheap, "headless" (that is, monitor-less) Mac. Ostensibly, such a product would appeal to iPod lovers who might want to go to the Mac as well -- especially if they're tired of dealing with the viruses and ad-ware that bombard Windows-based PCs every day.

No doubt, such a product would enhance what's already being called the iPod "halo effect." Even with its pricey product lineup, analysts expect Apple to gain PC market share this year. (That's remarkable, since its cheapest model, the $800 eMac, costs more than the average spent on a PC in 2004 -- around $720 -- according to NPD Group.) A cheaper Mac would clearly add to that momentum.

But while lower-price Apple products would certainly find many takers, they also would come with many risks. Would a flash-based iPod with, say, one gigabyte of storage, cannibalize sales of the higher priced iPod-mini, which offers four gigabytes for $250? Would Apple find ways to make the device stand out from the many other flash products that are already out there?

"Steve Jobs's mission has always been to innovate and deliver things that consumers really want and need," says McGuire. "Can they innovate in this part of the marketplace? That will be interesting to me."

A DOOZY OF A SHOW. The same goes for the PC market. Could Apple stuff enough features and style into a $500 PC to maintain its hard-won brand as an innovation leader? For such a product to generate meaningful profits, Apple would need to sell millions of them, says NPD's Baker. That could require expanding its distribution network and investing heavily in product catalogs and ad inserts in Sunday newspapers, the goal being to highlight prices and features, vs. the competition. "They don't do that kind of advertising," says Baker. "They do aren't-our-products-beautiful advertising."

Add it all up, and this should be one of the most fascinating Macworlds in memory. Along with his knack for squeezing innovative products out of Apple, Jobs also deserves kudos for having had the financial discipline to stay out of no-win commodity markets. That's why Apple is the only PC maker, other than Dell (DELL), to show consistent profits from the PC game.

If Jobs wades into those cutthroat markets, it will likely say a lot about Apple's future. It could that that tomorrow's Mac addicts will look back on 2005 as the year Apple set out to conquer the mainstream -- or shot itself in the foot trying. Burrows is BusinessWeek's Computer editor in Silicon Valley

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