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Intel's Chips: Juice for Apple?

With all the attention paid its iPod music player and its hot-and-cold relationship with major music labels, it's easy to forget that Apple Computer (AAPL) is at its core a computer company.

And a computer company at a critical crossroads. Having announced a once-unthinkable shift to using chips from Intel (INTC) in its systems beginning next year, it's enjoying renewed interest in its traditional desktop products -- sparked, in part, by the iPod's popularity. And with the move to Intel, Apple may begin to regain some of the market share that has ebbed away over two decades of competition from Windows-based rivals.

TURNING POINT? Indeed, Apple's computer sales are growing at a rate more than twice the industry average. In July, research firm IDC reported that Apple PC sales grew by 37% in the second quarter, compared with a 16.6% rate for the PC industry as a whole. That was enough to push Apple's share of the U.S. PC market to 4.5% in the same period, up from 3.7% in the second quarter of last year.

The switch to Intel, if negotiated properly, could prove to be the turning point by enabling Apple to grab a larger slice of the PC market. But it won't happen without challenges. The changeover won't begin until next year and isn't expected to be completed until sometime in 2007.

Also, Apple has hedged its bet on Intel by signing a new deal that ensures it will have a supply of chips from Freescale Semiconductor (FSL), which go into its current lineup of lower-end products like the Mac Mini as well as its iBook and Powerbook laptops (see BW, 6/20/06, "Tougher Days, Bolder Apple").

FEWER VIRUSES AND HACKERS. For the short term, that leaves open the question of how Apple's consumers may alter their buying plans before the Intel switch begins. And over the long term, Apple faces questions about how its long-time devotees will respond to the new hardware. Probably like they always do, says analyst Tim Bajarin of Creative Strategies in Campbell, Calif.: With their wallets. "Apple will carry off a spectacular transition to the Intel platform," he says. "The bigger question is how they market the overall value proposition of the Mac."

Forget about the Macintel era resurrecting any hopes of Macs retaking a significant share of the business PC market, cautions Bajarin. Indeed, most analysts think that reviving the battle for corporate purchase orders won't work to Apple's advantage. But they do agree on one area where Apple has an advantage: Security. Macs are targeted by viruses and hacking attacks far less often than machines running Microsoft's (MSFT) Windows simply because there are fewer of them around. Computer criminals strive for maximum impact, so they pay less attention to the relatively small number of Mac users.

While Microsoft struggles to build firewalls, anti-spyware, and anti-virus technology into Windows, Mac users are for the most part untroubled by these annoyances, and that's a point it could press, says Richard Forno, a principal consultant with KRVW Associates, a computer-security firm in Alexandria, Va. "I'm seeing more and more people in the security business using Macs and saying they trust them and don't have to cope with viruses and other hassles," he says. "I just wish Apple would market its security as a key feature to corporate customers." Of course, the more popular Apple machines become, the more likely they are to be targeted by hackers and virus writers.

DIGITAL HUB. Instead, the new Mac World Order will be all about catering to consumers, and in the process showing how ham-handed Windows PC vendors have been at winning the much coveted place as a fixture in the living room. "The guys in the PC industry realized that the enterprise market flattened out and that the next true growth market is going to be consumers," Bajarin says. "Steve Jobs, to his credit, declared early that the Mac was going to be the hub of the digital lifestyle, and it's a strategy Apple has pursued aggressively and with no apologies since then."

That's something Intel would like to be a part of. PC makers like Hewlett-Packard (HPQ) and Toshiba have sought to lead the industry with so-called media center PCs that combine features for watching and recording TV shows, playing music, and managing personal video clips and photographs. But consumers have so far paid scant attention to such machines -- that is, until prices on them were cut.

In June they accounted for less than one-fifth of all desktop PCs sold at retail, according to research firm Current Analysis. Recent cuts -- some sending prices below $900 -- have encouraged interest and boosted sales. In one recent week, media center machines accounted for slightly less than half of retail desktops sold.

"LACK OF IMAGINATION." Intel has been talking up its own media-centric consumer PC platform, known as VIIV (rhymes with "five"), which will launch in early 2006. As a indicator of where Intel thinks the PC world is going, the VIIV platform could say a lot about the potential of the Apple-Intel collaboration: PCs connected to big-screen TVs, controlled with handheld remotes accessing video, music, and games on demand from the Internet, boasting knockout sound quality and a living-room-friendly appearance.

Now imagine what Apple's designers and interface engineers -- those who built iTunes and the iPod -- could do with a machine built from the ground up with home entertainment in mind. "Intel has been stymied by what you might call a lack of imagination on the part of its hardware partners and by Microsoft," says Charles Wolf, an analyst with brokerage Needham & Co. "It has always wanted to move aggressively into the living room, and now that the gaming world is turning to IBM (IBM) for its chips, it doesn't want to miss out on the consumer business. This is where Intel and Apple have the same interest. Apple will be at the forefront of showing how Intel chips can be used in that way."

Before it starts giving Intel lessons on designing products for the home market, Apple might want to look at its laptop line. With notebook computers starting to outsell desktops, Apple's top goal should be to shop an Intel-based PowerBook notebook as soon as possible, Wolf says.

"Apple should have Intel-based networks on the market today," he says. "If I had to prioritize, I would bring out Intel Powerbooks, then iBooks, and then move on to the Mac Mini." In previous statements, Apple has said its first Intel-based product would be a revised Mac Mini, and that it will have finished the migration to Intel chips across the product lines by the end of 2007.

BUILDING A BETTER ALBUM. On a unit basis, notebooks account for 46% of Apple's PC shipments, and about 20% of its $3.5 billion in total revenue as of its most recent quarter. That's a change from the third quarter of 2004, when Apple sold more notebooks than desktops.

But in the coming year, Apple may tweak its marketing approach, particularly in its retail stores. While consumers are scooping up digital still and video cameras by the millions, Apple will seek to capitalize by pushing the Mac as the computer of choice for managing all that content. Wolf expects Apple will develop new areas within some of its major retail stores devoted to showing customers how a Mac can be used to make better home movies and build better digital photo albums.

"It's so obvious they should do this," he says. "The fact that you will be able to get this kind of help for free in an Apple store will become an inducement to buy more Macs." At least Apple hopes consumers will think so.

By Arik Hesseldahl in New York

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