What Would We Do Without Analysts?

Arik Hesseldahl

What, did I fall into a time machine back to 1997? You know those days when Apple was the computer industry’s hard luck case, and when the triumvirate of Microsoft, Intel and Dell were on their way to conquering the world? Well that was nine years ago, and if Apple’s earnings report plus a few other industry indicators didn’t suggest that times have changed a great deal then you’re just not paying attention.

To sum up: Apple’s now a nearly $20 billion company on an annual sales basis; It sold 5.3 million Macs worldwide, and in the U.S. market is now within less than 40,000 units of overtaking Gateway as the third largest PC vendor. Meanwhile Hewlett-Packard has eclipsed Dell as the world’s biggest PC vendor, Intel is fighting off a serious competitive threat from rival Advanced Micro Devices, and Microsoft, is still turning out second-rate computer operating systems, and constantly missing delivery date targets on its major upgrades.

So what’s to complain about? Well, this. Here we have a report from Gartner, the uber-IT consultant firm, saying that Apple should license the Mac OS to Dell, and stop making hardware.

Yes. Read that one again. My head hurts at all the many things that are wrong with this argument, that I don’t know even where to start. But I'll do my best , after the jump.

It turns out, the Gartner report argues, that what Apple does best is not hardware, but – wait for it -- software. Never mind that fabulous, often-copied consumer PC called the iMac. Never mind that Apple has over the last decade been first in the industry with such steps forward as dumping the floppy disk drive, adding the USB port, and designing personal computers to look in a way that they turn out not like an eyesore, but are widely used as props in TV shows and movies about what a computer should look like.

“Apple should leverage its close relationship with Intel and team up with Intel's closest ally, Dell,” the report reads. Perhaps the analyst at Gartner hasn’t been paying attention: Since Dell started using AMD chips in its servers and desktop machines, after more years than I can remember of being an Intel-only operation, the relationship between Intel and Dell isn’t nearly as cozy as it once was.

Apple, one of maybe two companies actually innovating the design of the personal computer, get out of the business in favor of Dell, whose Research and Development work is essentially outsourced to Intel, and couldn’t design its way out of a

The result of an Apple-Dell-Intel tie up of this nature could eventually push the Mac platform’s share of the personal computing market to north of 20%. Never mind that Apple has found its own way to grow its market share: The Apple stores. One fascinating stat that emerged from Apple’s earnings conference call on Oct. 17 was that each Apple store sold on average 1,000 Macs to customers who were “new to the Mac.” Additionally, more than half of the 323,000 Macs sold in the stores were to new Mac converts. And that retail footprint is only going to get bigger: Best Buy now has Macs in 50 stores, up from seven at the beginning of the quarter, and will only add more as time goes on.

Well it gets better, this report. The author views Intel as “subsidizing” and “propping up” Apple. I can’t quite figure out where words like this come into play, as though Apple were a charity case. Sure, Apple doesn’t take near as many chips as say, Dell or HP. But let’s remember how many computers Apple sold in the fiscal year just concluded: 5.3 million.

Let’s assume that number grows only a little in 2007, and hits, say 6 million units. That’s business that even so big a behemoth as Intel can’t exactly sneeze at. In January of this year, Intel had $310 worth of silicon in an Intel-based iMac. Let’s assume that since microprocessor prices are generally under pressure and that because Steve Jobs is a tough negotiator, the price of Intel’s components in the Mac’s across the entire Mac family averages out to a conservative $250. That’s for the microprocessor, chipsets, and any other Intel components a Mac may need. That works out to a cool $1.5 billion, which amounts to nearly 4% of Intel’s sales in 2005. I’d use many words to describe the Apple-Intel relationship, but describing Intel as “propping up” Apple isn’t a characterization that comes to my mind.

“Whether Apple's Steve Jobs would sanction any of the suggestions made by Gartner is hard to gauge. However, comments made by the Apple chief executive in April this year suggest that he is not unduly worried by his company's limited share of the PC market,” the report goes on. No, I doubt he’s worried about Apple’s place in the market at all. I can give you many reasons why – 1.9 billion reasons why, in fact, as that is number of dollars Apple made in profits in its fiscal year 2006. Indeed there are yet another 10 billion reasons I can think of, and that would be the amount of cash that Apple has on hand.

And by the way, have you looked to see which company is more valuable these days? Apple’s market cap as of the close of market today was $67.4 billion. Dell’s? $52.5 billion.

Yes, I can think of many “sanctions” that Steve Jobs might have in mind for Gartner report this subject: The first would be putting in the trash where it belongs.

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