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journal: mac
Counterspective: Apple is a hardware company.
Apple is a hardware company. Repeat ad nauseum.
This article started out as a comment on UnnDunn’s latest entry, and grew long enough to merit its own entry. For more on this topic, see John Gruber’s The Art of the Parlay, Or: How I Learned to Stop Worrying About Platform Licensing and Market Share.
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Say it with me.
APPLE IS A HARDWARE COMPANY.
Good, now repeat until it sinks in.
Apple is not in the business to sell software. Why? Because they make lots and lots of money from the high premiums they place on Macs and, in the last 5 years, iPods. These are both hardware products. This whole Intel switch? It’s a hardware transition. For all intents and purposes, the software is exactly the same on a MacBook Pro as on a Powerbook.
Putting Intel Inside was never the smartest technical decision. But it makes it easier for Apple to move to a software licensi g business for Mac OS X, or sell the computer business completely.
This would be like Ford Motor Company selling their auto manufacturing business to sell car seats and auto upholstery to other manufacturers. That’s what OS X is: the cushy, comfy interface to the machine. Now, I’m not going to get into too many car analogies because at some point they don’t fit anymore (i.e. you can drive any car on any road), but in this case it’s a good fit: you buy a car that has good performance, good mechanical features, and a nice interior with well-designed controls. Similarly, you buy a computer with good performance, long-lasting parts, and a nice operating system to use it.
People seem to assume that if Apple went to a software-only company, they would be able to focus all their R&D efforts on producing fantastic software. Except, the R&D budget would be substantially slashed, because Apple would have sold off a market of over a billion dollars per year in gross revenue. According to this press release, Apple sold 1,254,000 Macs and 14,043,000 iPods quarter 1 of 2006 (ended December 31, 2005, strangely). If one averages the current MSRP for all the Mac and iPod models on Apple’s store, that comes out to $1607 per mac and $229 per iPod, which would translate into revenues of $2.015 billion in Mac sales and $3.215 billion in iPod sales. That adds up to $5.23 billion in hardware sales. These numbers are far from accurate because they do not take into account variables like educational/government discounts, third party retailers, and so on; nor do they account for Xserve sales (which I imagine are comparably low). But they do provide a rough estimate of how much silicon and steel Apple is pushing out the door.
Now, from that press release, Apple made $5.75 billion in revenue in Q1 2006. For the sake of argument, let’s say my calculations are close to accurate and Apple earned $5.25 billion on Mac and iPod sales. That means Apple only sold $500 million worth of software. In other words, 8.7% of Apple’s gross revenue came from software sales last quarter. That includes all sales of OS X, iLife, iWork, Final Cut Pro/Express, Logic, .mac, and anything else Apple ships on a disc. 8.7% of $5.75 billion… yeah, they really should drop their hardware business! I smell a great untapped opportunity here!
Speaking of opportunity, one of the arguments in favor of selling off the hardware divisions and licensing the software is a greater installed user base. However, the opportunity cost of losing $5 billion per year to gain a questionable amount of marketshare competing directly with Windows is much too high. It would take many years for OS X to reach the penetration level of even double digits in the Wintel world, much less anything even remotely close to what Windows currently commands. Apple would have to sell anywhere from 2-5 times as much software just to reach 10% penetration, and that’s at a mere $129 per sale. Compare that to, at minimum, $500 per pop with the software automatically included (some may argue, forced down the throat): the opportunity cost is at least $370, per sale. That adds up pretty quickly with millions of customers.
Gratia compleo, Apple builds machines and writes cool software specifically to sell more of those machines. That’s why so many of Apple’s innovations, especially in the software arena, are not true in-house developments, but refinements of other products (OS X based on UNIX, the iTunes Music Store based on other online music stores, hell, iTunes itself originally being SoundJam). Apple puts money toward finding ways to sell great products, even if they don’t completely come up with the idea for those products in-house. This is why Apple tries to market its machines in the best way possible (when they market them at all), proudly displaying (possibly misleading) benchmarks when they give Macs a clear advantage and removing said benchmarks when the Macs are surpassed. This is why Apple dropped the name Powerbook in favor of the tongue-twisting MacBook Pro. This is why Macs are such things of beauty, with smooth lines, clean, flat surfaces and no unnecessary or overtly obvious distuinguishing marks. (No “Intel Inside” stickers, for example.) Apple’s hook is selling computers and iPods, and their software development is the bait.
Data and calculations gathered from:
- Apple press release on Q1 2006 earnings
- The Apple Store
- Google Calculator
- Poor Latin translation provided with the help of FreeDict Latin/English translator
- Dashboard’s Calculator widget
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| Arden | comments | views |
thinkback
Thanks for linking to that PDF. Unfortunately for you, it simply proves my point. 
Look at the numbers. 1,254,000 Macs sold in Q1 2006 translates into $1.72 billion. 14,043,000 iPods comes out to $2.9 billion. “Other Music Related Products and Services” which “Consists of iTunes Music Store sales, iPod services, and Apple-branded and third-party iPod accessories” comes out to another $491 million, peripherals, etc. sold $303 million (including Cinema Displays, mice, keyboards, etc.), and finally, Apple sold a mere $325 million in software… including OS X. Taking your profit margin estimate of 50%, that’s $162.5 million in net profit, and that’s only selling to Mac users for the most part.
Now imagine what would happen if Apple tried to sell to the Windows world. They would have an incredibly tough time penetrating the market because there’s already so much competition from every angle. So yes, Apple would have a greater number of users to target, but they would have more competitors as well.
And all of this assumes that Apple would start porting their programs to Windows. If Apple kept their programs OS X-only, and simply released OS X for normal PC systems, they would completely flop because consumers would have to buy the OS before they buy the software. It’s almost the same as trying to get people to switch to Linux: sure, there may be advantages, but there are big disadvantages, too.
My guess is this is exactly what Apple is planning but they are having the Mac users transition so there is a nice selection of Intel native OS X software before they do the license thing. Right now, it makes no sense because there’s little native software. Two years from now?
Yes, there will be Intel-native OS X software. But it will be native to the Intel Dual Core (and related) chips, because that is what Apple is writing for and putting in the Macs, and that is what will be in Macs 2 years from now. But that doesn’t mean Apple is going to release their software for P4, AMD, Itanium, etc. because they are currently locking OS X to the Dual Core chips. So they can sell more Macs.
Everyone is reading way to much into this and hoping for more than is going to happen. Just because Apple is now making computers with Intel chips in them doesn’t mean they are going to abandon the Mac platform and simply be a software company; it just means they’re changing the hardware a little. Back to the car analogy, it’s like Ford (or, perhaps BMW) changing engine manufacturers; it doesn’t mean they’re going to stop selling cars.
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| Jan. 26, 2006 | |
| Arden | 2:35 pm |
And all of this assumes that Apple would start porting their programs to Windows. If Apple kept their programs OS X-only, and simply released OS X for normal PC systems, they would completely flop because consumers would have to buy the OS before they buy the software. It’s almost the same as trying to get people to switch to Linux: sure, there may be advantages, but there are big disadvantages, too.
They wouldn’t keep their programs OS X-only for that very reason.
One of the reasons many people like their Macs is the software and the OS. Put iLife and OS X on a Dell PC and it will be exactly what many of us love about the Mac.
I don’t know enough about Linux to comment except that Michael Dell was quoted saying he would sell OS X Dell PCs. Do they sell desktop Linux PCs?
Also, Linux doesn’t have MS Office nor iLife. It’s debatable on whether or not MS would keep Office on OS X if OS X was competing with Windows on X86 PCs. One side of that argument is that MS has no choice because they would face new anti-trust lawsuits. The other side of that argument is MS would immediately pull Office from OS X.
I think an OS X Dell PC would still sell comparatively well (compared to Apple Macs) even without MS Office if those OS X Dell PCs came with iWork, Safari, Mail, iLife, and some games for a good price.
Apple is now making computers with Intel chips in them doesn’t mean they are going to abandon the Mac platform and simply be a software company; it just means they’re changing the hardware a little. Back to the car analogy, it’s like Ford (or, perhaps BMW) changing engine manufacturers; it doesn’t mean they’re going to stop selling cars.
This analogy doesn’t work for me. Ford makes the bulk of their money from selling cars. Apple makes the bulk of their money from iPods.
And it’s the OS and the software that makes a Mac, IMHO. Why do people buy Fords? Is there something special about Ford cars that no other manufacturer has? Not really.
That’s why I don’t think this car analogy works really well.
Apple made a ton of dough when they put iTunes on Windows and started selling iPods for Windows PCs. I think selling OS X and their software to all those PC users out there, and to PC manufacturers selling new PCs, would give us the same result - record revenue and profits.
I honestly think Apple would end up making more money, as long as Dell/HP/Gateway license OS X/iLife/iWork. If they don’t, then all of this is out the window.
Do I think Apple will actually do this? I don’t have a clue. I doubt it, but it depends on what the Mac sales do over the next two years and whether or not they keep the same number of software titles on their platform. Didn’t MS recently “promise” MS Office for OS X for another five years? I wonder if that agreement includes a promise from Apple that they wouldn’t license OS X to PC makers.
Personally, I don’t really care if they do it or not. I just want their software and their OS. Their hardware is cool, but it wouldn’t kill me to have the same experience on PC hardware. The cool designs never really did it for me. The PC laptops are great if you ignore Windows. The desktops are fine, hardware wise and the days of Apple putting the cutting edge, innovative hardware on their platform first are over.
| Jan. 26, 2006 | ||
| 3:17 pm |
EDIT - they would keep their applications OS X-only. Their software is one reason to use OS X over Windows no matter what hardware you are using.
| Jan. 26, 2006 | ||
| 7:02 pm |
Personally, I don’t really care if they do it or not. I just want their software and their OS. Their hardware is cool, but it wouldn’t kill me to have the same experience on PC hardware. The cool designs never really did it for me. The PC laptops are great if you ignore Windows. The desktops are fine, hardware wise and the days of Apple putting the cutting edge, innovative hardware on their platform first are over.
See — that’s exactly the point! Everyone loves OS X, and the only (official) way to get it right now is to buy a high-margin Mac. Sure, software may be 50% profit — but that is 50% of either a low-priced software package like OS X or iLilfe, or a relatively low-selling package like Final Cut Pro. Apple makes much higher profit off their computers, regardless of the percent profit, than they do on their software.
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| Jan. 27, 2006 | |
| Arden | 1:33 am |
Apple makes much higher profit off their computers, regardless of the percent profit, than they do on their software.
Well sure, and so does Rolls Royce compared to Honda. Honda makes more profit as a company, though. (car analogy again, )
All I’m saying is I do think they would sell enough copies of OEM software to Gateway/Dell/HP to at least make as much profit as they make from Mac hardware. That’s speculation, obviously. There are other factors that could change the dynamics in a positive and negative way.
Before the iPod, I would completely agree with you and I’d say “no way”. Now with the iPod, I’m not so sure.
Even if you don’t, they’re still pretty nice.
Sure, with OS X installed.
| Jan. 27, 2006 | ||
| 9:44 am |
Well put, Liam.
I completely agree!
For people who don’t mind referring to “The Great Book of Shady Sites” every time they surf the web so they don’t hose their system, Windows is nice.
If you don’t mind altering your computing habits and “learn” how to not hose your system, Windows is nice.
If you don’t mind launching your applications in a specific order just so you have muscle memory of the task buttons in the chronologically ordered task bar (I’m looking at you, Dylan), Windows is nice.
If you don’t mind two methods of working with applications (SDI and MDI) and having to memorize which application you own uses which method, Windows is nice.
Nice article on which software I should get to keep Windows running, Liam. Which registry fixer should I get? Which spyware removal application should I get? Which virus protection application do you prefer?
| Jan. 27, 2006 | ||
| 6:43 pm |
If you want an OS that can run a very large library of application, Windows is nice.
If you want to have an OS that can run on a computer you built yourself and work with a large variety of hardware, Windows is nice.
If you want an OS that you can be almost 100% garunteed that most people you know run the same OS, Windows is nice.
I could go on if you’d like.
| Jan. 27, 2006 | |
| Liam | 8:29 pm |
Back on-topic: The unfortunate truth is as you have said. I would like an opportunity to try out OS X without having to invest in a $500 computer when I already have a perfectly good one.
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| Jan. 27, 2006 | |
| Liam | 10:13 pm |
That’s a good point there too, Liam. If OS X was freely available to purchase to run on any old X86, I’d probably own a copy myself for one of my boxes…
As it is, the main reason I don’t purchase a Mac is the cost. Far, far too much money for me to spend when I can get what I have - about all of it - for the cost of one PM.
There are other reasons, too, of course, such as the software I love in Windows that has no match anywhere else (WinAmp, the games I play).
Finally, and to be quite frank, I don’t care to give my money to a company that wants to divide the computing community into us vs. them.
Edit last one… “I don’t care to give THAT MUCH of my money” to a company...”
So as not to imply that I wouldn’t think about dropping $150 on a copy of the OS. It’s the multiple thousands that get me
If you want an OS that you can be almost 100% garunteed that most people you know run the same OS, Windows is nice.
Not the people I know! I own an iBook. My sister owns a PowerBook. Her husband owns a PowerMac G4. My brother owns an iBook. My boss owns a PowerBook. A couple of my coworkers own Mac laptops and another is switching this spring. A significant number of fellow Berkeley students own Macs, as Apple seems to be the most popular computer brand on campus. And that’s not counting the people on my buddy list! 
I’m probably an exception to the rule, but my universe is very Mac-centric.
| Nick | Jan. 28, 2006 | |
| 12:05 am |
Of course, Nick, that would be why he put “can be almost” in there. Still wordy, but he’s fully acknowledging you and folks like you in that statement.
Yup. But it’s always interesting how uneven these things are. I still haven’t figured out why Macs are so prominent in Berkeley. 
| Nick | Jan. 28, 2006 | |
| 12:54 am |
Because you have to be smart to get into that school.
Us versus them! Us versus them! Ha! PWNED, Dylan. Just kidding.
A large software library doesn’t make an OS nice (OS X has a large library). It helps people justify putting up with garbage. The same goes with being able to build your own.
Being able to build your own is very cool, to be able to customize it exactly how you want it. However, that again doesn’t make Windows a better OS. That helps you justify putting up with Windows.
I don’t care at all which platform everyone else has. Why should I? Well, it would be nicer if my neighbors had Macs instead of Windows PCs because then I wouldn’t have to fix hosed Windows PCs. My next door neighbor’s HD got hosed by a virus or something “shady”.
Is the iPod the nicest portable media player because “almost everyone has one”? Is the Dell/Gateway/HP PC the nicest because almost everyone has one? There goes that “you can build it yourself” argument. Everyone I know bought a pre-built computer, BTW.
But Liam and Dylan’s comments support my position that OS X would do well if licensed to all X86 PCs. There are a lot of people out there who either can’t afford to buy a Mac and already have a PC, or want to build their own system, etc., and they would own OS X.
This adds customers to Apple’s base that are currently unattainable.
Some people can justify spending hundreds to use WinAmp. Others spend $700 (or $1,400 for two and put them in SLI) on the greatest video card to play Quake 4 with graphics that are the same as a $300 console.
But some of most die-hard Windows fans are saying they would purchase OS X for their PC, if given the opportunity. And I think the most die-hard Mac fans would be perfectly happy with OS X on a PC laptop.
| Jan. 28, 2006 | ||
| 9:13 am |
Is the iPod the nicest portable media player because “almost everyone has one�?
I would argue that the converse is true: almost everyone has one because the iPod is (one of) the nicest, nay, coolest MP3 players on the market, besides having lots of market share, accessories, etc.
But Liam and Dylan’s comments support my position that OS X would do well if licensed to all X86 PCs. There are a lot of people out there who either can’t afford to buy a Mac and already have a PC, or want to build their own system, etc., and they would own OS X.
This adds customers to Apple’s base that are currently unattainable.
I think Apple is willing to accept the loss because they still control the platform, and they still get high-margin sales from other customers. Again, it comes back to opportunity cost.
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| Jan. 28, 2006 | |
| Arden | 11:23 am |
I’m probably an exception to the rule, but my universe is very Mac-centric.
Amazingly enough, you are not.
My universe for 40-60 hours a week is Mac-centric as well.
The laegest problem with selling OS X and other software packages (iLife, iWork, etc) as OEM rather than specifically for Macs is that now, all of the sudden, all of these programs will have to work with an infinite number of hardware configurations v the strict few that Apple uses in its machines..
That is one of the main reasons that OS X works so well. It is designed to work with a select few configurations rather than being forced to work with the world. If you take that aspect away, that OS X is designed to work on selected hardware configurations, OS X may develop man of the same problems that MS has. Drivers failing, not loading correctly, etc.
I agree. Apple is a hardware company and uses its software as a means to attract people to its hardware. OS X is so good that it got me to pay far more for a computer than I otherwise would have (I used to custom build all of my computers at a cost of < $500).
That is why they will continue to keep hardware as their mainstay and not software. Why should they settle for a mere chump change in profit from software, when they are the position to make far more off of their hardware?
Apple has the right strategy, I think. If people want the best computing experience on the net, they will buy a Mac. If not, then well they’ll flounder in Windows-land. And Apple is okay with that.
It is like with all products. People will pay a premium to get a better experience, and Apple takes advantage of that.
It seems that market share is prioritized too highly by those who think that Apple ought to go to software alone. Market share is not the end-all in any product. No one think that Mercedes ought to start selling their interiors simply because their market share is similar in car ownership as Apple is to computer ownership. Why should Apple do the same?
| Jan. 29, 2006 | |
| e:leaf | 6:32 pm |
1.
Look at the details in this pdf:
http://images.apple.com/pr/pdf/q106data_sum.pdf
Apple’s actual revenue for Macs was $1.724 billion.
Actual revenue from iPods was $2.906 billion.
At 27% profit margin, that $1.724 billion in Macs is getting them around $470 million in profit. That figure is probably a bit higher than actual Mac profit.
The profit margin of software is much higher, say 50%.
Apple would keep their iPod revenue, obviously, if they licensed OS X to Dell/Gateway/HP. They would get around $70 per OS X license (guessing), right? But they would also be able to sell iLife too - let’s say at $60.
So that’s $130 for Apple per Dell/Gateway/HP OS X PC sold. For Apple to meet their $470 million in Mac profit, they would need to sell 3.615 million OS X PCs, approximately.
But that’s ignoring the revenue Apple would make selling OS X, iLife, iWork, Final Cut Pro Suite, etc., for X86 PCs at retail stores and other PC makers.
That’s also ignoring the .Mac revenue, increased iTMS revenue from a much greater customer base, increased software update revenue from a much bigger customer base.
Dell sells around 9 million per quarter all by themselves.
Given all that (assuming my math isn’t way off somewhere), I think it would be very easy for Apple to license OS X to X86 PC makers.
And here’s a big factor - right now the war is DRM. Apple is doing well locking in millions of iPod and iTMS customers into FairPlay. So for Apple, there is a huge incentive to create a much bigger customer base than there was before.
Imagine seeing a TV ad for a Dell OS X PC with iLife. I think that would sell really well.
And as the Mac user base multiplies, Apple sells more iPods (guessing), more songs and videos, more software upgrades.
My guess is this is exactly what Apple is planning but they are having the Mac users transition so there is a nice selection of Intel native OS X software before they do the license thing. Right now, it makes no sense because there’s little native software. Two years from now?
Like Undunn said, who would have thunk Apple would drop FireWire from the iPod in favor of USB and drop the PowerPC for Intel? Who would have thunk 10 years ago that almost the majority of Apple’s revenue would be from Windows PC users who bought an iPod? Assuming the vast majority of iPod customers are PC users and given the latest revenue, that’s what’s going on.