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Wednesday, December 24, 2003

Selling Apples

There's a lot of garbage written about Apple, but the cover story of the latest issue of Fast Company seems pretty fair, if unoriginal. (Innovation on its own doesn't make money: who'd'a thunk?) The bit which piqued my interest was in the sidebar at the bottom of the article, on the new Apple store in Burlingame, California:

The store is done in iPod shades of white. "We chose hand-selected Tuscan stone for the floors--a stone that's somewhere between sandstone and limestone," says Ron Johnson, Apple's vice president of retail. "It's the same stuff Florence was built on." ...
Apple is holding leases on some of the most expensive real estate in the country, in places such as tony Michigan Avenue in Chicago and New York's trendy SoHo. And then there are those Tuscan stone floors. "Apple is creating a boutique environment, and they're doing it in a very expensive way," says Roger Kay, from the technology market research firm IDC. "It doesn't seem very reliable as an approach for selling large quantities of goods."

I think Kay is exactly right. People tend to ooh and aah whenever they see an Apple store: they'll even line up round dozens of blocks to get in. It's far from clear, however, that the Apple stores are particularly good at getting people to actually buy their computers: the company's market share seems to be stubbornly stuck at around 3% these days.

Apple's retail strategy isn't working, and the reason, I think, is the signal that the expensive polished fabulousness of the stores sends to the Great Unwashed on Wintel machines. Tourists from Pennsylvania come to New York to window-shop, and if they walk down Prince Street from the Prada store, they'll find Apple just past the Mercer Hotel, and opposite Miu Miu. All of them have austere white interiors, carefully designed to showcase objects of unrivalled beauty and sophistication (or, in the case of the hotel, Christina Aguilera). For all that people are welcome to browse the machines in the store, check their email, and ask questions, you're never quite rid of the feeling that you're basically in a design museum with price tags.

Virginia Postrel is making a big splash these days with her book about how great design is becoming ubiquitous in contemporary culture. But there's something interesting about, say, the huge success of Michael Graves at Target: while the individual items are wonderfully designed, they're still sold alongside bog roll and Wonderbread in cavernous warehouses abutting even larger car parks. They're cheap, they're accessible, and they're not in the least bit intimidating.

Now, New Yorkers do not get intimidated by retail spaces such as the Apple Store Soho, and in fact it might be the perfect shop for them. But selling Apples to downtown New Yorkers is a bit like having half a dozen shops in the Bay Area: you're preaching to the converted. Apple wants its stores to appeal to the 97% of the population who use Windows, and that means going beyond the creative metropolitan types with high disposable incomes and targeting what politicians like to call Working Families.

For one thing, Working Families live in places like Oklahoma and Oregon, neither of which have an Apple store. If you look at the map on the left, the black dots represent Apple retail outlets: they're clustered in Boston-Washington corridor, the two big California conurbations, and a handful of other urban centers. Dye the Apple stores blue, and you could almost have a map of Democratic states. (No wonder Al Gore's on Apple's board.)

More importantly, however, Working Families, even if they're in Oakland or Staten Island and have easy access to an Apple store, tend not to pride themselves on paying extra for glitzy packaging. That's not to say they won't do so if given the opportunity: if they see a sleek stainless steel dishwasher next to an ugly beige one, they might well pay a small premium for it. But here's a thought experiment: take that same sleek stainless steel dishwasher, at the same price, and put it in a super-sleek Soho kitchen-design store, full of polished marble countertops and state-of-the-art ranges. Then, take your average working stiff, put him or her in that shop, and ask him if he'd like to buy the dishwasher. There might be lots of cooing over it, but ultimately the answer will be "oh, no, that's not for me."

What Postrel talks about in her book is not just a reflection of the way in which Americans are increasingly conscious of good design; it's also a reflection of the way in which American mass retailers are increasingly proficient at selling that design to their customers. But Apple is not, and never has been, a mass retailer, and its aesthetic is much closer to Helmut Lang than it is to JC Penney.

It's entirely natural and proper for Apple to position itself as the computer company for people who "think different". But the risk in that strategy is that people will consider themselves more-or-less normal as far as computers go, and therefore not the kind of people who should be getting a Mac. I have a nasty feeling that Apple's ultra-high-end retail stores only serve to reinforce that notion: that Apples are for the kind of people who shop in Soho, or Michigan Avenue, or Ginza.

What Apple needs to do, I think, is break out of the white box. The white stores, the white-background television ads, the white computers: these all look gorgeous, but they're also somewhat intimidating. People need to be persuaded that the guy next door has an Apple, not because he's different or particularly cool, but just because it does what he needs it to do much better than a Windows machine could.

In a way, the evangelical fervour of the Apple faithful works against the company: the average Windows user, looking at the wild-eyed fanatics who'll line up round the block to celebrate the release of an upgrade to their operating system, simply doesn't understand why anybody would feel so strongly about their computer. These people, maybe they Think Different because they are different.

Most people are intimidated by computers, and Apples, by right, should be less intimidating than PCs. Apple should, really, be able to paint PC users as the megahertz-and-gigabytes crowd, while Mac users don't really care what's going on under the hood, they just know that they find it really easy to get things done. Apple shouldn't be the computer equivalent of a Viking range. Rather, it should be a George Foreman grill: simple, accessible, and popular.

Apple probably came closest to that ideal when it released the original iMac in a rainbow of fruit flavours, back in the olden days of OS 9. But, bizarrely, now that it has an operating system which is orders of magnitude better, Apple doesn't seem to have capitalised on its newfound user-friendliness to gain any market share at all.

When Steve Jobs gives his next major speech, at Macworld San Francisco on January 6, everybody's expecting him to announce new, lower-priced iPods. What I'm hoping for are new, lower-priced computers: when the iBook went from G3 to G4 a couple of months ago, the prices actually went up, ferchrissakes! If the iPod can come in a low-priced, mass-market, brightly-coloured version, then – fingers crossed – maybe the Macinosh can, too.

Posted by Felix at 17:45 EST

Comments

What is your major malfunction, Felix? I've got a PC-head of a brother-in-law converted to Macs here over Christmas eve (with the judicious use of propaganda-disguised-as-pocket-guide) and we're talking major Windows afficionado. Recent Web and blogging conventions are almost exclusively PowerBooked. 14% of people in the market for a new computer are now leaning to Macs. the Apple-share of the market is not 3% because they are not desirable, but because they are as desirable (and affordable) as Ferraris and as requiring of passion. A majority of people who blog own Macs (at worst, a plurality). iTunes and iPods are Trojan horses. Apple is expanding its stores way beyond the 50 originally planned because they are proving such revenue spinners, not cannibalizing on either local stores or net sales. New evidence points to Macs outselling far beyond the 3% average. Universities are lining up to clone the Virginia Tech supercomputer layout. Next year we'll see new iMacs, faster G5s, mini iPods, a huge new corporate offense, and all this by a profitable company.

The do not need to make an iKea. That would be the worst idea.

Posted by: Stefan Geens at 19:57 EST, December 24, 2003

PS your map is missing. Merry non-denominational end-of-year pseudo-religious festive season!

Posted by: Stefan Geens at 20:19 EST, December 24, 2003

Sorry about the map. Fixed now. If you care to send me any URLs to substantiate what you say above, I'll happily edit them into your comment where appropriate. Or I guess you can just post your own comment. But when you start going on about bloggers and Ferraris, you're basically just reinforcing everything I've been saying. Most people neither blog nor drive a Ferrari. Apple should be selling WAY more iBooks than PowerBooks, not the other way around. iTunes and iPods aren't Trojan horses, because they're completely Windows-compatible, and although they help Apple's revenues and mindshare, I don't think they're nearly as good at selling Macs. The Apple Stores made a grand total of $1 million last quarter (and here's a link to prove it). Please show me your "new evidence" along with some idea of what "leaning to" means -- what percentage of people "leaning to Macs" actually end up buying a Mac rather than a PC?

Posted by: Felix at 20:31 EST, December 24, 2003

Felix, under your same logic, would you say that BMW should be selling to Joe Six-pack because BMW cars are very well made?

Posted by: Eric R at 0:41 EST, December 25, 2003

check this out:

Apple Store Tokyo

http://homepage.mac.com/hsk/applejapan.html

Posted by: eric at 22:09 EST, December 25, 2003

ooooh - never mind the last comment - you already have the link in the body of the main post. doh!

Posted by: eric at 22:11 EST, December 25, 2003

Eric, yes, OF COURSE BMW should sell to Joe Six-pack, if Joe Six-pack can afford it: no company can afford to get snobbish about its customers. The only reason that Joe Six-pack generally doesn't drive a BMW is that it's prohibitively expensive. Apples, although they do cost more than PCs, don't cost so much more that Joe Six-pack can't buy them.

Posted by: Felix at 19:44 EST, December 26, 2003

The piece you seem to be missing in all this is profit margins. Apple is never going to be able to compete with the generic PC companies on a price point basis. Instead they are building the infrastructure that reinforces the price points that equal large amounts of profit. Last I looked (in the spring) Apple had $4 billion in *cash* in the bank. They can afford to throw some at the Tuscan stone. It sounds like a better choice then competing to become the next Gateway...

Really, if you ran Apple would you want to become Acer just cause they sell a couple more computers? I'd say it's a hell of a lot nicer working in Apple then in Acer, just as its probably nicer to work in Prada then at a Rainbow clothing store.

And yeah there is zero indication that Apple is getting pushed out of the MP3 player market. More like dominating it...

Posted by: Abe at 11:30 EST, December 27, 2003

Abe, I basically agree with you: I never said that Apple should lower its prices. But you're wrong about profit margins. This from the Fast Company article:

Where Apple was once one of the most profitable companies in the category, its operating profit margins have declined precipitously from 20% in 1981 to a meager 0.4% today, just one-tenth the industry average of 2%.

I'm not saying that Apple should try to be Gateway or Acer. I'm just saying they should try to sell more computers! The fewer people that buy Apples, the fewer people will write software for Apples, and the lower the marginal benefits of owning an Apple will be.

Posted by: Felix at 13:01 EST, December 27, 2003

Saw that, How 0.4% is one tenth of 2% is beyond me. In any case this is very much a statistic that can go negative in lean times, an it has for Apple in the past, and it can also skyrocket. As far as I know, Apple was one of the few profitable computer companies during the past recession.

But Apple has one of the industry's highest gross profit margins--in the upper 20% range. That's the figure worth looking at, and the one you want to keep high.

Posted by: Stefan Geens at 13:20 EST, December 27, 2003

Simplified a bit, you take the gross margin, add in salaries and things like that, and end up with the operating margin. So if Apple pays lots of hardware and software designers lots of money, then those costs aren't included in the gross margin, but they are included in the operating margin. In the case of other computer manufacturers, the hardware and software design is effectively outsourced, so that it's included in both the gross and operating margins. Naturally, then, Apple's gross margins are going to be higher than its competitors, because they don't include things like design costs. Why is gross margin "the figure worth looking at"?

To me, the figure worth looking at -- the only figure that really matters -- is the market share. That HAS to start increasing at some point.

Posted by: Felix at 14:17 EST, December 27, 2003

Or to put it another way, think of a computer as a delivery mechanism for an operating system. Looked at that way, it makes sense to compare Apple's gross margins not to Dell's, but to Microsoft's. Care to go down that road?

Posted by: Felix at 14:30 EST, December 27, 2003

I stand corrected on the profit margins, but I'm still not convinced on the "market share must increase" argument. Is it better to have 5% of the market with Joe Schmoe as the user base, or have 2% with a high end customer base? Fiscally maybe. If the company succeeds in the transition, which is not a given. But there are other factors a well. Happiness of employees is a big one. I suspect Steve Jobs and the Apple design team is happy staying high end.

As for software, again market share is not everything. A high end customer base is more likely to spend more on software. If you water down the base just to increase market share how much benefit do you gain?

The other factor that often gets left out of these market share discussions is that the net number of computer users must be growing. Don't have any numbers but I can't imagine that its not. Is Apple actually losing customers as its market share declines? Perhaps in the early 90's but I doubt it is now. As long as a few million people are using Macs there is a market for developing Mac software. And if it's a few million wealthy people then there is even more of a reason to develop software. Factor in open source developers and the fact that Apple is now making quality software of its own, and I'm not too concerned.

Posted by: Abe at 15:50 EST, December 27, 2003

Let's rephrase your question, shall we, Abe? Is it better to have (say) 2 million high-end customers, or to have 2 million high-end customers AND another 3 million Joe Schmoes? Apple's high-end customers -- the people who are already using OS X and loving it -- are great, and I would never advocate doing anything to alienate them. Keep on making dual-processor G5s and 23" Cinema Displays, and they'll stay very happy. And they'll keep on buying expensive software, as well.

But if you add in some lower-end computers (like a flat-panel computer for less than $1000, which is not exactly difficult, seeing as how Apple had one up until a couple of months ago), you're not reducing the amount of money that the high-end customers are spending on either hardware or software. And I can't for the life of me see how the happiness of employees is going to be reduced if their company becomes more successful.

What you call "watering down the base" I call "expanding the base". Why does EVERYBODY have to be a high-end user? Why does Apple need to sell to rich creative types EXCLUSIVELY? I think, Abe, you're fighting the old battles here. Yes, Apple needs to address the needs of its high-end users, and it's doing that pretty well, with the G5s and whatnot. But now it's done that, it should move on and try to address the needs of the next demographic down AS WELL, rather than simply resting on its laurels and being satsified with a 3% market share.

Posted by: Felix at 16:29 EST, December 27, 2003

this is a test. pay no attention. In fact, you may even delete me.

Posted by: Stefan at 15:50 EST, December 28, 2003

sounds like a branding issue. maybe apple needs a Lexus or Infiniti-type luxury brand to they can open up their base.

Posted by: tim at 15:26 EST, December 29, 2003

Be wiser than other people if you can; but do not tell them so.

Posted by: Sierra Sue Patterson at 16:48 EST, January 25, 2004

Hi Felix,

Sorry, realise this isn't the right place but your email mailbox is full and bounces your mail. I'm in New York next month, wondered if you fancied tea. Or Rioja.

Howard

Yes, I realise and article about Apple isn't the best place to put this. It was either than or interrupt a debate on the WTC site...

Posted by: Howard Ramsay at 12:53 EST, January 31, 2004

I'm possibly in the minority by agreeing with you. To another poster that asked if market share really matters, the simple answer is, YES. Market share controls tons of things, a few examples would be stock price, credit rating, ability to attract investors, and one of the most important: economies of scale.

Apple lost the major battle back in 1991 when they decided to hardheadedly refuse to liscense their OS to people who could make the computers cheaper.

Microsoft went this route, leading to one of the largest reversals of fortune in marketing history.

Apple certainly has its niche markets, as well as the foaming-at-the-mouth loyalists who will do anything to "stick it to Bill Gates".
(This foam tends to go away when you point out that Microsoft owns around 18 million shares of Apple stock.)

Posted by: Ryan Williams at 23:17 EST, February 08, 2004