Stable Mac prices fuel reliable profit engine

Mac division's operating margin is actually higher than Google's

Even though iPhone revenue dwarfs the Mac, Apple's personal computer line remains important to the business because its average selling price is virtually unchanged from four years ago.

In the June quarter, the average selling price, or "ASP" of all Macs was $1,255, just $1 more than the ASP of the September 2010 quarter.

During the same nearly-four-year stretch, the iPad's ASP fell by 33.5%, as both the smaller iPad Mini and more capable second-and-later generations were discounted when they aged out of the premier spot. After the second quarter of 2011, the iPad's ASP has been in a slow decline.

The iPhone's ASP has also fallen since the 2010 September quarter; last quarter it was down 12% from four years earlier.

Although Apple does not disclose how much profit it makes from each of its three major hardware lines, the assumption is that the amount of profit from each Mac, if not the percentage of the revenue that becomes profit, is highest for the Mac because, well, d'oh, it's priced higher than either an iPhone or iPad.

The fact that Mac ASPs have remained stable -- certainly they've fluctuated over the four years, but for the long haul they haven't changed -- means that Apple hasn't had to amp volume to make up for ASP declines, as it has had to do with the iPhone (very successfully) and iPad (less so).

That doesn't change the dynamics of Apple's business -- it's still largely a smartphone maker and seller, with 53% of last quarter's revenue coming from the iPhone. But maintaining Mac prices provides a dependable profit engine for the company.

Over the last 12 months, for instance, the Mac has generated revenue of $23 billion, 45% more than Google made in its most recent quarter. (Put another way, Mac revenue for the past year was 74% of what Google earned in the first half of 2014.) While the comparison may be ultimately unfair because of the companies' wildly different business models, and thus their presumed profit margin, it is fair in putting the Mac, by reputation a niche product, in the context of a company considered extremely non-niche.

But is the Mac's operating margin really that different than, say, Google's?

Not according to estimates made last year of Apple's Mac business by independent analyst Horace Dediu. In an analysis titled "Escaping PCs," Dediu calculated that Apple's profit from the Mac was greater than the top-five personal computer makers' combined. (For Dediu's estimate, and his inferences, head to his April 2013 piece.)

Computerworld duplicated Dediu's estimate of Mac profit by plugging in numbers from the June 2014 quarter -- Dediu had used the December 2012 period in his example -- and came up with a margin for the Mac of 27.5%, an average operating profit of $345 on the sale of each computer, and a total operating income of $1.52 billion in the just-concluded quarter.

Google's company-wide operating margin for the June quarter was 27%.

So, how does the Mac stack up against the iPad?

Nicely, in fact: Using Dediu's same generalized formula, Apple turns an average operating profit of $122 on each iPad. But because Apple sells far more iPads than Macs -- 13.3 million versus 4.4 million in the latest quarter -- it ends up producing a larger amount, $1.62 billion during the April-June period, in operating income from tablets.

The bottom line, literally, is that the Mac, with just 33% of the unit sales that the iPad recorded last quarter, generated 94% of the iPad's operating income. In even plainer terms, that means that Apple must sell almost three iPads for every Mac to put the two lines in profit-generating harmony.

Increase the number of Macs sold, and the revenue produces a inordinate amount of profit, at least compared to the iPad (and also compared to the iPhone, but the comparison really breaks down there, as everyone needs a phone).

No wonder analysts like Ben Bajarin of Creative Strategies have been optimistic about the Mac, its future, and its impact on Apple.

While the Mac's ASP, or "average selling price," has fluctuated somewhat over the last four years, it's been remarkably stable over the long haul. (Data: Apple, SEC filings.)

"I maintain a very bullish narrative on Mac Sales," Bajarin said on Twitter during Apple's second-quarter earnings call of July 22.

For Bajarin and others who share his thinking, the personal computer industry, long in a slump -- nine quarters of contraction and counting -- will make a comeback of sorts as consumers inevitably upgrade old machines. Under that theory, the Mac, although now only about 6% of all machines sold worldwide, has a chance of gaining ground because as consumers realize they need fewer computers, they may opt for better-built, longer-lasting -- and higher-priced -- devices. That's the Mac's wheelhouse.

The evidence suggests that Macs have become mainstream: Of the last 33 quarters -- more than eight years -- Macs have beaten the industry average's growth rate in all but one. In the June quarter, for example, research firm IDC pegged the overall PC business as down 2% from the same period the year before. Meanwhile, Apple sold 18% more Macs in that quarter than the year prior.

Growth of Mac sales in the enormous China market, said Apple, was 39%, more than twice the global rate. In that market, said IDC, shipments of all personal computers were down 10% year-over-year.

A 12% share of the global market for the Mac -- about twice the current share -- would put another $20-$25 billion in annual revenue on Apple's books, and another $6 billion of profit in its pockets each year.

Many have looked at new features in OS X Yosemite, the upgrade slated to ship this October, and seen clues that Apple realizes the opportunity for increased Mac sales and has begun to act. Continuity, the umbrella term for several components that promote sharing and interaction between iOS and OS X, and specifically the "Handoff" feature, which lets users start a task on an iPhone or iPad, then pick it up on a Mac, have been the basis for such thinking.

Continuity in general, Handoff in particular, promotes a greater commitment to Apple's hardware ecosystem: It only works with iOS 8-powered mobile devices and Macs running Yosemite. Because there are far more iPhones than Macs, a boon from Continuity should result in more sales of Macs than, say, iPhones, as people with the latter but not the former decide they want the feature, and buy accordingly the next time they purchase a computer.

Another factor: Continuity appears to require a relatively new Mac -- two to three years, or younger -- because of the need for Bluetooth LE (low energy) technology, perhaps a prompt for current Mac owners to upgrade. In other words, more sales.

Apple's price changes, especially those for the MacBook Air in April, also had an impact on sales, another clue that the company understands that when the larger industry has problems it has a chance to grow volume. It used that tactic to some success when Microsoft's Windows Vista was widely panned in 2007 and 2008.

In last month's quarterly earnings call with Wall Street, both CEO Tim Cook and CFO Luca Maestri credited notebooks, the MacBook Air in particular, for fueling sales. "The [18% year-over-year] increase was driven by portables, thanks to very strong growth of MacBook Air," said Maestri.

The growth was fed by price cuts to the MacBook Air early in the quarter. Those cuts, $100 off for each of the line's four stock models, represented discounts of between 7% and 10%, and resulted in the first sub-$900 notebook from Apple.

Those price cuts dropped the ASP by 7% -- probably no coincidence that the decline was in the price-cut range -- compared to the prior quarter, but the slip came after two quarters of sequential ASP growth.

The decline returned the Mac to the same ASP from nearly four years ago.

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.

Read more about macintosh in Computerworld's Macintosh Topic Center.

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