Will This Be the Summer of Mac?

A promising new set of chips, a possible Quark version for OS X, a surge in online advertising, and a new music store could goose sales -- and the stock

By Alex Salkever

For three years, investors have turned up their noses at Apple. Like most tech outfits in the postbubble economy, Apple suffered sliding profits and declining sales. Its stock, which had been trading at around $15 for almost a year, saw a slight uptick at the beginning of May on news of Apple's foray into the music business, and has been around $18 since.

Few on Wall Street are predicting much more upside for Apple this summer. But let me be contrarian: I think this is going to be the summer of Mac, one of its best seasons in a long time -- one that might even provide a nice lift to Apple's stock price.

My logic? Several stars are set to align for Steve Jobs & Co. Although Apple (AAPL ) won't talk about it, IBM (IBM ) is developing a new set of chips that Apple could use to replace the aging Motorola processors used in its G4 line. (IBM did not confirm it was building a chip specifically for Apple, but it does say its new PowerPC chip will work on Apple platforms.)

Plus, desktop publishing and graphics software giant Quark is hinting it will finally bring out an OS X version of its software. And finally, the creative markets in advertising and media should begin to rebound in the summer, which will allow media and advertising companies to proceed with long-postponed hardware upgrades.

Let's take the positive factors one at a time.


  First, the chips. For a long time, Macolytes claimed that the architecture of Apple's PowerPC (PPC) chips allowed them to outperform Intel wares boasting far higher clock speeds. Their rationale: PPC chips divide processing tasks and complete them in parallel, while Intel (INTC ) and Advanced Micro Devices (AMD ) chips process their tasks in larger chunks, even though they perform each individual calculation more quickly. Plus, the fact that PCs are increasingly being used as multimedia hubs to stream music, edit video, and manipulate digital photos plays to Apple's strengths, since the PPC chip works particularly well on such applications.

Still, sometimes sheer number-crunching strength wins out. The new Intel chips are so fast they're eliminating much of the PPC's architectural advantage. The disparity between Intel and PPC has reached the point where even the hard-core Mac devotees admit that Apple desperately needs newer, faster chips. While many Intel chips run at 3 gigahertz, PPC chips top out at about 1.4 Ghz. Drop in a new, much faster chipset, and the PowerMac line will compare smartly with the PC competition. In the graphics, film, and biotech industries, where Apple already holds a strong hand, the new chips could prove a strong sales inducement.

For home users, the new chips would come online just as consumers are increasingly looking to use PCs to handle processor-intensive tasks such as digital photography and digital music. Apple's timing is spot on. Coincidence? Perhaps, but the results are the same.


  The emergence of Big Blue as an innovative force in the Mac universe is a very good thing for Apple. Lackluster Motorola (MOT ) has taken the lead in the PowerPC consortium. Distracted by internal woes and a mandate to get profitable fast and stay there, Motorola hasn't paid much attention to the PPC chip. Some feel that Apple's limited market share has discouraged Motorola. Investors already complain that Motorola has too many product lines, and some industry watchers even expect Motorola to exit the chip business altogether.

While Motorola has struggled in chips, IBM has soared. Under CEO Sam Palmisano, Big Blue has poured money into chip research and upgraded its factories. IBM says the new Apple chip will be of the 64-bit variety, which means it can process twice as much information per cycle as existing 32-bit chips.

That's not even counting an anticipated initial speed boost in the new chip's clock cycle to well over 1.8 Ghz -- and likely well beyond that over the course of the year. The new chip could also prove extremely valuable for specialized IBM workstations -- and a possible means for Big Blue to compete with archrival Sun Microsystems (SUNW ) and its 64-bit architecture. For Apple, it means a quick injection of speed and power.


  The second key factor to watch is Quark. The most popular graphics application for Apple has never made the transition from OS 9 to OS X. It's still wedded to the legacy operating system that Apple no longer ships. Big problem for Apple. The PowerMac desktops most often used to run Quark sell for high prices and give Apple its fattest margins. But with no new version of Quark on the market, graphics shops have felt less pressure to upgrade.

And the slow-chip problem has reinforced their reluctance. In fact, top-end Apple buyers seem to have lost interest in the existing line of PowerMacs. Apple executives noted in the latest earnings briefing that big price cuts on existing PowerMacs didn't budge the sales numbers.

Yet, help may be on the way. Quark is signaling that it might soon release an OS X version. No guarantees and no dates, to be sure. But there's talk of an announcement timed around MacWorld in July. A new Quark release will mean new customers for an improved PowerMac line. And the twin incentives of Quark and faster chips are far stronger than either single offering alone and could boost revenues for Jobs & Co.


  The nascent, Net-driven recovery in the graphics and advertising business is another important factor. While advertising in traditional media remains lackluster, online advertising is growing at a double-digit clip. Apple owns the graphics and advertising sector. And any uptick there will likely pour cash into Apple's coffers, since many graphics companies running three-year-old hardware are itching to upgrade as soon as revenues start trending back upward.

Music, too, could make profits dance. After rolling out iTunes 4 -- which offers 99-cent, no-subscription, no-strings downloads, Apple sold 2 million tunes in the first two weeks. Since the money is also divided between labels and artists, Apple's take will be considerably less than $2 million. But it could see cash flow as soon as the end of this summer. Much of the infrastructure for iTunes 4 was in Apple's big .Mac effort to provide easy Web publishing tools, remote storage, antivirus, and e-mail services to Apple users. So the incremental startup cost was probably far less than for other online music businesses that had to build everything from scratch.

Granted, Apple's traditional core strength, the education market, continues to erode: Apple now has only a 14% share of new-computer purchases in the sector, down from 27% three years ago. Crushing budget deficits at schools and universities around the country won't help.


  Furthermore, Apple faces a large overhang of stock options awarded to employees. That could hurt shareholders down the road when Apple employees and execs buy these options and, suddenly, the pool of Apple shares on the market grows considerably larger. While Apple continues to claim that 50% of all people buying new computers at their company stores previously never owned a Mac, the Cupertino crew hasn't shown any major market-share gains yet.

Nevertheless, I think the positive developments outweigh any negatives right now. Given the unique advantages in each market, an Apple resurgence need not be tied to a broad PC recovery. So add up the benefits from promising new chips, an OS X version of Quark, a rebounding online ad market, and, oh yes, a rocking music store, and Apple could outpace many other PC makers in the months ahead.

Salkever, Technology editor for BusinessWeek Online, is filling in while regular Byte of the Apple columnist Charles Haddad is on leave

Edited by B. Kite

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