Thinking Beyond the Box at Apple

Knowing that ever-faster machines no longer excite buyers, its push to make Macs your digital hub makes more sense every day

By Charles Haddad

Nothing makes computer users reach for their wallets like a new generation of speedy machines, right? Not anymore. Today's consumers spurn even the fastest PCs with microprocessors surpassing 2.4 gigahertz -- four times the top speed three years ago. Typical PC users find such velocity superfluous, since their old machines are fast enough to handle most common tasks: writing memos and e-mail, crunching numbers, and playing games. The question the average consumer increasingly asks is: Why drop a thousand bucks for a faster computer?

To the PC industry, such thinking is lethal. It represents not just the bottoming out of a business cycle, but a seismic shift. It's the death of the business model that drove the industry for the past 20 years. Now, even as computers have raced ahead in speed, sales have slowed -- down 5% last year alone, according to Gartner Group. Declines were unheard of in the 1990s, when double-digit annual growth was the norm, some years even approaching 30%.

Apple understands this change. In fact, it saw the shift before just about anyone else. When CEO Steve Jobs began talking of making the Mac a "digital hub" for music, video, and communications two years ago, he wasn't just babbling marketing happy talk. He recognized, as B.B. King would say, that the thrill is gone: Consumers no longer lust after PCs.


  Microsoft saw the romance fading, too. That's why it plunged into making software for cable boxes, PDAs, and the new hybrid cell-phone PDAs. It's even building a video-game player: the Xbox. But none of these initiatives generated much passion from consumers.

Not that Microsoft is giving up on the PC. Neither is Apple. For one thing, neither one can afford to. Gartner research shows that 80% to 85% of all computer sales are to veteran users, not newbies. This market has matured. Nearly everyone who wants a computer now has one. The trick is to keep the faithful coming back for more.

That's especially true at Apple, where most of the profits come from hardware sales. Software is just the candy that lures the buyers to the box. But a new box does entice buyers to upgrade software designed to tap into new advances in chip technology. It was a virtuous circle.


  In the past year, the circle has lost its virtue. The upgrade cycle, if not dead, is on life support. San Francisco industry marketing consultant, Odyssey Ventures found in a recent survey that the number of PC owners intent on buying a new computer in the next six months had fallen to 11%, from 21% in 2000 -- the lowest level in five years. Half of PC owners today, Odyssey found, have had their computers for at least two years, the highest that number has been since 1994.

So what's a struggling computer maker to do? Apple's solution is twofold. One strategy is an attempt through aggressive marketing to redefine its core product. Apple, you see, would never make anything so humdrum and uncool as a mere computer today. What it makes now is a digital appliance which captures, stores, edits, and transfers any kind of digital file, whether music, video, or data. It's not just a computer -- it's something new, special, and must-have. You get the spin.

The second part of Apple's plan is to branch into new electronic devices. Along with the iPod digital-music player, rumors persist that Apple is working on some kind of cell phone or PDA-cell phone hybrid.

This strategy isn't unlike Microsoft's right now. Both companies secretly know that PCs aren't likely to generate techno-lust any time in the near future. So they're hunting for something that geeks will once again feel they can't live without. Of course, it has to be a device that either Apple or Microsoft controls -- the digital equivalent of the Holy Grail.

Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online

Edited by B. Kite

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