Who Will Pay More for MacBook in This Economy?

Yesterday's Microsoft earnings announcement puts new context around Apple's MacBook pricing. Yes, Microsoft. The company reduced fiscal 2009 guidance from $1.7 billion to $2.4 billion and earnings per share from 8 cents to 12 cents. Microsoft's quarter ends on June 30. The guidance reduction and the reasons for it are a crystal ball into future technology spending. Apple should take notice.

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By the way, for the quick answer to the blog title's question, skip down to the subhead "Who Is Going to Buy MacBook?"

Microsoft Warns of Slower PC Sales Ahead
First, the big caveat: Apple and Microsoft largely sell to different markets, predominately consumers and businesses, respectively. But Microsoft is the maker of Windows, the dominant operating system, and that gives the company tremendous insight into worldwide PC buying trends.

During its July earnings call, Microsoft projected that worldwide PC shipments would grow 20 percent year over year throughout fiscal 2009. Yesterday, Microsoft reduced those growth projections to the 8-12 percent range. The company expects growth rates to be in the mid-teens in emerging markets, but 6 percent or a little better in mature markets.

However, the holiday quarter is still respectable, with Microsoft projecting worldwide PC shipment growth between 10 and 12 percent. While cautious, Microsoft Chief Financial Officer Chris Liddell remained optimistic about holiday sales. But the company is hugely uncertain about the first half of 2009, which is a major reason for reduced guidance.

Something else: netbooks. Everybody is asking about this category because it's doing so surprisingly well. Gartner says that netbooks accounted for about 5 percent of notebook shipments in third quarter, adding as much as 2 percent growth. Yesterday, Chris indicated the impact was much bigger: During the third calendar quarter, PC shipments in mature markets were flat, with netbooks adding 8 percent to growth. Where would growth be if not for netbooks then?

Netbooks Nag Apple, Microsoft
The netbook category presents problems for both Apple and Microsoft, but in different ways. Apple doesn't compete there, while Microsoft offers an inferior product.

During Tuesday's Apple earnings call, CEO Steve Jobs described netbooks as a "nascent category," with "not a lot of them getting sold." He described the iPhone as "one of the entrants into that category." Steve said that the "iPhone is a pretty good solution for that, and it fits in your pocket." Apple is closely watching the category and has "got some pretty interesting ideas if it does evolve."

I'll partially accept the iPhone-as-netbook-substitute argument. Both devices are mini-portable computers. As low as netbooks are selling, the iPhone will cost less, for qualified new or existing wireless carrier customers. The operating system will be better in most cases and the application experience better through the iPhone App Store. I say that because of Microsoft's netbook problem: Windows XP. Vista is too demanding for most netbooks, even newer models with Intel Atom processors. So, Microsoft licenses Windows XP Home for the devices. Netbook sales hurt Microsoft at the bottom line during the third calendar quarter because XP Home licensing fees are lower than for Windows Vista.

The question: Will the sluggish economy lead more people to buy a netbook because of the lower cost, pretty good performance, and small size and weight? Chris shied away from answering that question yesterday. Steve wasn't so shy.

Chicken and Egg: Cheap Computers Came First
"This particular downturn is not creating a market of cheaper computers. That market has existed for some time," he said. Steve emphasized that there "are parts of the market" where Apple chooses not to compete. "Is the downturn going to drive some of our customers to those lower segments of the marketplace?" Apple's CEO asked. He would be "surprised if that happens in large numbers." Steve emphasized: "We're not tremendously worried."

Should he be? Chris couldn't express enough caution yesterday looking at fiscal 2009. A surge in netbook sales hurts both companies—Microsoft with lower licensing fees and Apple for where it doesn't compete. There's a huge price gulf between a $500 netbook and the $1,299 MacBook.

Apple shouldn't so quickly disregard the netbook category, whose appeal is more than pricing. Steve is right about the economic crisis not creating the market for lower-cost notebooks. But netbooks appeal for their smaller size, bulk and weight, too. Yes, the iPhone will appeal to some people looking at netbooks, but not unless somebody points out the advantages of one over the other. Maybe it's time Apple stepped up the iPhone as portable computer marketing.

Who Is Going to Buy MacBook?
So, how do I answer the question, "Who will pay more for a MacBook in this economy?" For starters, let me remind you that Apple essentially raised MacBook prices with the new models. The earlier $1,299 model is Apple's best-selling portable. Still, by eliminating a $1,099 entry-level new MacBook and charging $1,599 for the high-end model, Apple raised prices by $200 and $100, respectively. That's a seemingly bullish move. But I think not, and the answer to who's going to buy is a major reason:

MacBook pricing will release pent-up demand, particularly people who wanted the look and performance of MacBook Pro without spending $1,999. Apple observers have focused too much on price comparing Macs to Windows PCs when the comparison should have been MacBook to MacBook Pro. There are lots of people out there who already made the decision to buy a Mac notebook, but they didn't want the school kid finish of a white or black MacBook. The newer, aluminum model is more sophisticated in appearance and features. Others couldn't justify $1,999 for MacBook Pro.

There is always somebody with money to spend. Apple sells a premium product, for which Steve makes no excuses. While the lot of us may be worrying about rising prices, increasing recession and keeping our jobs, there are plenty of other folks who can afford a new MacBook or MacBook Pro and who demand the newest, coolest thing. To many of these buyers, the tech gadget is as much an accessory—statement of their coolness, superiority—as useful product.

These categories of buyers share something in common: Readiness to buy now, and Apple gladly will let them pay more. Clothing stores do this. There are teens who buy the newest wears from Aeropostale, American Eagle, Gap or Hollister at full price, rather than waiting a few weeks for the sale price. These Mac laptop buyers will go for the newest wares instead.

Apple's pricing is high enough that there is plenty of legroom to make cuts should holiday sales tank. Microsoft's cautious optimism means something. Chris Liddell typically offers conservative guidance. MacBooks could still sell well, even at prices higher than PCs. In September, average selling price for Windows notebooks was $689, compared with $1,483 for Mac laptops, according to NPD.

Post-holidays, Sales Are Bleak
Apple is well-positioned for the holidays, methinks, but unless the economy takes an upturn, 2009 is bleak. There are three quarters to the next holiday sales period. Typically, the second calendar quarter is Apple's slowest sales period. The first quarter should get a boost from that "one more thing" Steve will announce at Macworld. Apple will likely get its third-quarter sales surge from back-to-school buying, but the company should plan on working harder to get Mac sales when Windows notebooks cost less. Also, during the third calendar quarter that just ended, Apple watched educational sales recede as state and local governments tightened their budgets.

Perhaps Apple understands the economic risks more than Steve lets on. During Tuesday's conference call he joked, "We are not economists. Your next-door neighbor likely can predict what is going to happen as accurately as we can." Steve took great pains to emphasize the iPhone's contribution to third calendar quarter revenue—39 percent, when reported in a way that acknowledges otherwise deferred revenue. The message: If computer sales slow or shift more to the netbook category, Apple still has the iPhone.

I have to ask: When is there going to be a "Get a Mac" ad featuring PC as a netbook running Windows XP Home? There are loads of good metaphors, such as squeezing him into a small box where it's so cramped he can't do as much with his arms.

[Please send your tips or rumors to watchtips at live.com].

Posted by Joe Wilcox on October 24, 2008 4:43 PM