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Apple's Growing Army of Converts

Nothing fires up a group of Mac users like the chance to score a convert -- except maybe the chance to offer an opinion on what Mac someone should buy.

I was reminded of this last week when a BusinessWeek colleague, Rob Hof, posted a comment on our Tech Beat blog saying he had decided to switch from using a notebook sporting Microsoft's (MSFT) Windows to one of Apple's portables (see BW Online, 11/02/05, "Speaking of Apple...Some Advice?"). Hof asked readers to advise whether he should get an iBook or PowerBook. (I linked to his inquiry from our new Apple-centric blog, which is a companion to this column.)

MORE DEFECTORS? Comments poured in by the score -- many laced with anti-Microsoft invective, a few touting the virtues of the Linux operating system over Apple's (AAPL) Mac OS, most analyzing the finer points of buying an iBook vs. a PowerBook. All of them were enthusiastic at the prospect of helping only one single person switch computing platforms.

But there's a bigger trend at play here. And Charles Wolf, a financial analyst at Needham & Co. in New York, discussed it in his latest research note on Apple. While downgrading the stock from to "hold" from "buy," based on the shares' recent price spike, Wolf noticed something else: a measurable surge in purchases of Macs by people who had previously been Windows users.

Wolf has created an interesting forecast model in which he assumes that 11% of Windows users who buy iPods also purchase Macs at the same time or soon afterward. The model also assumes that of these new Mac buyers most stick to the Mac platform and buy a second one when it comes time to upgrade. The conversions resulted in about a half million Macs purchased by Windows users in fiscal 2005. In all, Apple sold 4.5 million Macs in the period, vs. 3.3 million in 2004.

NEW LIFE. But Wolf built the model a year ago, and now thinks he's underestimated the switching phenomenon. No doubt Apple is experiencing an iPod "halo effect," whereby rising popularity of the digital-music player is reviving interest in Apple's other products.

But Windows users are also moving to the Mac in increasing numbers for other reasons. Among them: the perception that Mac users suffer less from the daily irritants of viruses, spyware, and worms. (This is yet another topic, the finer points of which Mac enthusiasts can debate for hours on end [see BW Online, 10/24/05, "Why Worms Shun Apple's OSX"].)

Hence, the strategic importance of these "switchers" -- as Apple once called them in a TV ad campaign -- to the future of the Mac platform. "The sad reality about the Mac market is that until the fourth quarter of last year, it had been shrinking," Wolf says. "Apple sold a million more Macs during the first three [calendar] quarters than it would have if it were only Mac users buying."

STOREFRONT SUCCESS. Pushing the model forward, Wolf projects that a growing number of Windows-to-Mac converts will propel Mac shipments from 3.3 million in 2004 to 12.8 million in 2014, by which time Apple's market share will effectively double, to about 4% from 2%.

The Apple retail stores also have a big role to play here, Wolf argues. Foot traffic at the stores broke the 50 million mark in Apple's fiscal 2005. Apple CFO Peter Oppenheimer told analysts on a conference call discussing last quarter's results that about 45% of visitors to Apple's stores can be described as "new to the Macintosh." If only 1% of those "new to Mac" customers actually walked out with a Mac, that would account for nearly 203,000 Macs sold.

Considering that Apple sold 609,000 units through its retail channel in fiscal 2005, vs. 314,000 in 2004, that's equal to about two-thirds of the difference. And the retail effect only gets better as Apple opens more stores around the world: 35 to 40 new stores will open in the coming year.

BATTLE IS JOINED. Sure, the iPod has its halo effect. But there are other reasons -- disparate and difficult to track -- that are encouraging a small-but-measurable migration away from Windows to the Mac.

It may be too soon to declare the platform-supremacy wars between Apple and Microsoft reopened. But the opening skirmishes may be well underway.


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