Why Apple needs a $US700 MacBook Air

High margins still doable by switching to Intel's 'Bay Trail,' argues analyst

Apple has been able to maintain high prices for its Mac personal computers, and thus its high margins, even as competitors have jumped into a pricing pit that gives them little in return, according to analysts.

But with overall PC sales, Macs included, drooping in 2013, Apple may use the opportunity to do what its competitors already have: Lower prices.

It won't do that across the board, argued Ezra Gottheil, an analyst with Technology Business Research. Instead, it will deliver a a-cut-rate-for-Apple notebook.

"They could have a Mac with nice margins at a lower price point, and they may well do that," said Gottheil. "I think they will. They could easily do a Bay Trail MacBook Air in the $US700 price range."

Bay Trail is the nom de guerre of a platform of Intel system-on-a-chip (SoC) silicon from the Atom family, a line of lower-powered x86 chips targeting smartphones and tablets, but also eyed by makers of so-called 2-in-1 devices and some traditional clamshell notebooks, that costs hundreds less per unit than the more powerful Haswell line now inside the MacBook Air.

Gottheil's thesis rests on the cost reduction Apple would reap by going with Bay Trail, which in turn would let it cut the price of an entry-level MacBook Air without skimping on other specs or components, and most importantly, without reducing profit, a move that would be anathema to the Cupertino, Calif. company, which jealously guards its margins.

Historically, Apple's Macs have been revenue-making machines, with an average selling price (ASP) more than twice that of other systems, the vast bulk of them powered by Microsoft's Windows.

In the September 2013 quarter, the Mac ASP was $US1230, down 6 per cent from the same period the year before. (Mac ASP rebounded in the December quarter to $US1322 on the back of brisk sales of more expensive MacBook Pro notebooks.) Meanwhile, PCs overall had an ASP of just $544 in the September quarter, according to estimates compiled by Charles Arthur of the U.K. newspaper The Guardian.

Independent analyst, Horace Dediu, weighed with charts and graphs that illustrated the Mac's resistance to the industry-wide downturn in ASP.

"The point being that [Apple's] violation of the axiomatic price erosion rule in PCs is not anomalous," Dediu wrote on his Asymco website. "It suggests something about the violation of the same rule in devices. It suggests that perhaps the company does not respond to the same market forces."

In fact, it doesn't, echoed Gottheil, who explained how Apple has avoided the plunge in prices -- and thus, profits.

"Apple says, 'This is the Apple experience,'" Gottheil said in an interview Thursday. "What I'm getting is a PC experience that will last me quite a few years. And for me, it will be a better experience than from other vendors because it's hardware, software, services, support, the whole thing."

All those factors, particularly Apple's software -- OS X as an operating system, its now-free iWork productivity programs, its iLife creative suite -- are important to acknowledge, said Gottheil. Not because they're necessarily better than the competition, although Apple's fans would argue that they are, but because they're included.

Mac average selling prices have been remarkably stable since 2008. (Data: Apple, SEC filings.)

Apple is able to rake in the margins it does on its hardware because software, which always has a higher profit margin than hardware, is part of the package. In the Wintel oligarchy, those profits are split between the OEMs (original equipment manufacturers) -- the Lenovos, HPs and Dells of the world -- and Microsoft.

Microsoft comes out on top, margin-wise. While OEMs eek out tiny margins, Microsoft books very high margins. In the December quarter, for example, the divisions within Microsoft that derive their revenue from software licensing recorded margins of 92 per cent and higher.

Gottheil's point was that if one averaged OEM and Microsoft margins, the result would be more Apple-like. "Margins for the package [hardware and software] on PCs are pretty good, too," he said.

Apple's not completely insensitive to price, Gottheil argued, but was spoiled by the sales boom it experienced after it moved the Mac to the Intel platform. "There was no incentive for them to compete at a lower entry price point," Gottheil said of long stretches in the post-2006 timeframe, when Mac sales were growing by as much as 50 per cent year-over-year, at least until the Great Recession of 2008-2009.

"Apple understands that its pricing does hold them back. Sales are not growing near as fast as they once did, and the real barrier to adoption is the price," Gottheil contended. "If they feel like they're not gaining some market share, I think they'll selectively cut prices. They don't want to leave too great a price umbrella [under their prices] for others to exploit.

"They're very aware of price sensitivity," Gottheil continued. "They don't want to be the Aston Martin of computers, they want to be the Lexus."

Gottheil didn't mention it, but Apple may have another kind of opportunity to grab additional sales share. In 2006-2009, when Microsoft stumbled with Windows Vista, Mac share almost doubled, according to measurement firm Net Applications. That was the heyday of the "Get a Mac" advertising campaign, featuring actor Justin Long and humorist John Hodgman, who portrayed a Mac and Windows PC, respectively, and poked fun at Vista and its quirks.

Windows 8 and 8.1, Microsoft's 2012 revamped OS and its 2013 update, have struggled almost as much as did Vista, with some customers and analysts -- and reportedly, Microsoft itself, at least internally -- comparing the two, to the detriment of Windows 8.

Apple hasn't capitalized on Windows 8's struggles, but it could, and perhaps duplicate the share gains of last decade.

A price cut to Gottheil's $US700 for an entry-level MacBook Air - 30 per cent less than the current low-end model -- would help Apple maintain the Mac line as a going, growing concern, a goal CEO Tim Cook has expressed.

"If they price [a MacBook Air] at 20 per cent to 40 per cent above the sweet spot for [Windows] PCs, they could still have a very comfortable place in margins, but create a more enduring market for themselves," Gottheil said.

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is gkeizer@computerworld.com.

See more by Gregg Keizer on Computerworld.com.

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