Apple sees no reason to slash prices and sacrifice margins on its laptop computers when consumers are still willing to pay top dollar
From a product point of view, Apple CEO Steve Jobs usually goes bold. But when it comes to running the company's numbers, he rarely goes out on a limb. That was made plain Oct. 14, when Jobs announced a new laptop lineup. Despite rumors he'd introduce a laptop for $800 or less that might have helped Apple (AAPL) gain market share at the expense of margins, the company held prices close to where they've always been.
The company trimmed the price of the basic MacBook by $100, to $999. It also introduced a new midlevel MacBook with many of the features of the MacBook Pro starting at $1,300—the same as the old mid-range MacBook—and a version of the swankier MacBook Pro for $2,000, the same as its predecessor.
No doubt, there's more Mac for the money. All of the new devices feature an instant-on, backlit LED screen and faster graphics, courtesy of a chip from NVIDIA (NVDA), while the $1,300 and $2,000 models are packaged in a beautiful new aluminum shell that's thinner than ever.
Why Trim Margins?
But many Wall Street analysts thought Apple would use the product introductions to steal a large chunk of market share. After all, the company has grown two to three times faster than the PC market over the past four years, thanks in part to a successful "I'm a Mac" ad campaign and disappointing demand for Microsoft's (MSFT) competing Vista operating system. Apple even said it would sacrifice some margin (BusinessWeek.com, 7/21/08) during the quarter that includes the yearend holidays. While Apple has enjoyed this success by focusing on customers willing to spend for a higher-end machine, BMO Capital Markets analyst Keith Bachman figured that an $800 MacBook would help Apple compete for 62% of the laptop market, vs. 51% of the market with a low price of $999.
But giving in to the margin-grab temptation would have been risky to Apple's long-term health, says Stephen Baker, an analyst at NPD Group. A slew of PC companies over the years (Packard Bell and eMachines, anyone?) became money-losing businesses by slashing prices too far. Gross margins narrowed not only as a result of lower prices but because price-conscious shoppers with less tech acumen make more support calls. As a result, any profits on the initial sale frequently disappeared amid rising customer service costs.
Apple can keep on rankling rivals without overdoing it on price cuts. The company's share of the U.S. retail PC business is now 18% by units and 31% by sales, Apple Chief Operating Officer Tim Cook said at the Oct. 14 product introduction. He noted that Apple has sold as many Macs in the past three quarters as it did all of last year.
Apple also has little reason to move on prices, given a relative lack of new technologies or features from PC makers this Christmas. Baker figures most people who want to try out a Mac already have decided to do so. As a result, a big price cut would needlessly eat into Apple's revenue. "People come into Apple stores expecting to pay a certain amount," he says. "There's no evidence that customers are particularly asking for a $799 Mac. But if you offered it to them, many of them would make that choice…One of the reasons Apple does so well at selling $1,000 computers is that they don't give you the choice of a $799 model."
Consumers Still Pony Up for Electronics
Of course, the reluctance to cut prices too far could alienate customers looking for a bargain amid economic turmoil. Fears of Apple's exposure to a big downdraft in consumer spending sent Apple shares down 5.6%, to 104, on Oct. 14. "People say Apple is fortunate to sell to more sophisticated customers, not Joe Six-Pack," says Roger Kay, founder of Endpoint Technologies Associates. "But a lot of those sophisticated customers were supporting their spending with credit last year. Some of those folks that want to put the fancy Apple decal on their fancy car won't have the cash for a new Mac this year. They may settle for something cheaper."
But so far, there's little evidence to suggest that U.S. consumers are getting thrifty when it comes to consumer electronics, says Baker of NPD. Three of the best-selling categories—digital SLR cameras, LCD televisions, and laptops—are "also among the most expensive products you can buy," he notes. "And sales of all three have continued to grow throughout 2008." Jobs hopes the trend continues well into the new year.