Apple goes for bigger bite with low-cost products

The computer giant has just released its Mac Mini, which is designed to make converting to Mac a cinch, writes Karlin Lillington in Paris.

Apple Computer has lived with a not-altogether-unhappy conundrum for the past two years: it sells lots of its iPod digital music player. In the recent holiday quarter, it shipped a staggering 4.58 million of them, which is more than double the number in the previous quarter ending in October, and compares to 733,300 in the same holiday quarter last year.

Apple has now sold 10 million iPods - so many, that it is the dominant manufacturer in the sector by a long, long margin; so many that the very term "iPod" is becoming the generic term for this type of device, just as "Walkman" did for portable tape players.

Nothing to complain about there, then. The irony for Apple is that what it intended as a high-end (and rather pricey) accessory to its Macintosh computer has instead become the star of the show. Sales of Macs tallied up at 1.046 million in the holiday quarter just ended - one-quarter of the number of iPods sold.

Apple founder and chief executive Mr Steve Jobs hailed this figure, a 26 per cent increase over the previous quarter's Mac sales, when Apple released its quarterly results on Wednesday. Those numbers helped push the company to its highest earnings quarter ever - 74 per cent revenue growth over the year-ago quarter.

Yet the company is eyeing that gap between iPod and Mac sales with frustration. Apple has watched its market share in computers slowly slide over the years to somewhere between 2 and 4 per cent, despite the fact that its computers are widely praised for their beauty (not a common attribute in the clunky, putty-coloured world of PC desktop machines). The Mac operating system is lauded for its ease of use, and Mac software, such as its newly upgraded iLife suite, admired for the innovative, intuitive way it handles tasks such as managing photos and music collections and creating DVDs.

The goal for Apple is to convert iPod fans to being Mac users. A key element in the success of the iPod, which initially could only be used with Macs to transfer and manage music, was to offer a Windows version - and the same approach has been central to the success of Apple's iTunes Music Store, the market leader in downloadable music sales, which also initially could only be used by Mac owners. The Music Store has sold 230 million songs to date, and is averaging 1.25 million songs per day, according to Mr Jobs.

This week's announcement of a new Mac model, the Mac Mini, made by Mr Jobs in a typically showman-like keynote speech at San Francisco's MacWorld show on Tuesday, shows a radical new approach by Apple to try to get those Window-using iPod people to "switch", as a long-running Apple campaign has it.

The Mac Mini - whose name no doubt deliberately echoes that of the iPod Mini to better appeal to the subconscious desires of the iPod generation, and whose tiny size, 6.5 inches by two inches and barely three pounds in weight, was shown onscreen by Mr Jobs with an iPod Mini to further cement the association - is designed to make converting to the Mac a cinch.

It is an extremely low-cost machine (€519 including VAT in the Republic) but comes in a tiny carrying box because it doesn't include a monitor, keyboard or mouse (it is, as Mr Jobs said, "BYOKMD - bring your own keyboard, mouse and display").

That might seem insane at first but, when you realise it enables a Windows user to unplug a Windows machine from the KMD he or she already owns, connect up the tiny Mac, and go Apple, you see the method in the madness.

"We want to price this Mac so that people who are thinking of switching have no more excuses," said Mr Jobs in his keynote, which was broadcast live to European press and resellers in Paris.

The Mac Mini comes in two versions, with a high-specification G4 chip, a choice of a 40 or 80 gig hard drive, and 516 megs of memory as standard, and includes almost all the software the big Macs come with, which means owners of older PCs can considerably upgrade their computer and capabilities at minimal cost.

Displays now routinely outlast the computers they are sold with, anyway, so the notion of selling a box without display may come to be yet another standard procedure pioneered by Apple then followed by the PC industry at large.

Combined with better-than-expected results, and better-than-expected predictions from Apple for the next quarter, the announcement of the Mac Mini and a new low-cost iPod called the iPod Shuffle (€99 including VAT in the Republic) sent Apple's shares upward, although they initially tumbled slightly following the product announcements, no doubt because the low-cost products mean lower margins than the company is used to.

However, after the results were announced, investors no doubt were also cheered by the success of Apple's stores, which doubled revenue of a year earlier, to €561 million (€424 million).

Mr Jobs said on Tuesday that the huge London Apple Store which opened in November is the biggest in the chain and the second-highest grossing worldwide. He said Apple will open several more UK stores this year, although it is understood there are no plans for an Irish store.

Apple's retail success with its own stores is in stark contrast to manufacturers such as Gateway, which has closed stores worldwide.

Many analysts seem to find Apple's strategy convincing.

"We believe the Mac Mini will increase the percentage of iPod-toting Windows users who purchase a Mac by almost threefold," wrote Needham analyst Mr Charles Wolf in a research note that came ahead of Apple's earnings statements.

Other analysts noted that the increase in Mac sales mentioned in this week's results, prior to the introduction of the Mac Mini, indicated the predicted "halo effect" the iPod would have on bringing in new Mac converts had already begun.

Certainly the iPod remains on the up and up. Several car manufacturers, from Nissan and BMW to Ferrari, will include audio systems that can incorporate an iPod, Mr Jobs said in his speech.

Apple also announced new software products, including Pages, a revamped version of its AppleWorks product intended to take on Microsoft's Word programme.

Following this week's developments, the risks for Apple - which has always followed a strategy of occupying a niche in which it could offer high margins on small sales - are clear. To make money on its low-cost Mac and iPod, it must sell them in huge amounts. The iPod Shuffle and Mac Mini could cannibalise the market share of its more profitable products, too.

But Apple needed to create a compelling way to win new Mac users, and the Mac Mini is a bold - and good-looking - strategy stroke. The company clearly believes that once it adds new users to its extraordinarily loyal user base, it will have them hooked - and willing to upgrade to better-margin Macs further down the line.