Charlie Wolf: How the Mac roared back
Needham & Co.'s senior analyst explains how Apple outgrew the PC market seven fold
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Needham's Charlie Wolf was as surprised as anyone when Apple (AAPL) reported that it had sold a record 3.05 million Macintosh computers in its fiscal fourth quarter — a 16.4% increase compared with just 2.3% growth in the PC market.
The estimate Wolf had filed — 2.63 million units for the quarter — was one of Wall Street's lowest. (See here.)
So he took a close look at how Apple did it, and on Tuesday in a detailed report to clients he offered his answer: the home market.
"The twin drivers of the Mac’s rebound," he writes in his executive summary, "were the home market’s continued share gains in the PC market and the Mac’s share gains in the home market itself. Shipments in the worldwide home market increased 18.1% compared to an 11.5% decline in all other PC segments, while Mac shipments in the home market increased 28.8%. In the Western European home market, shipments rose an impressive 58.9%.
Wolf's findings are driven home by a series of charts and graphs. The first, reproduced above, shows that the home market, which represented 64% of all Mac shipments, was the only segment of the PC market to show any growth in the September quarter.
The second, below, shows that the Mac outgrew the home market itself (28.8% vs. 18.1%), while holding its own in the business market (-12.4% vs. – 13.7%).
Another spreadsheet shows that the Mac grew faster than the PC market in all regions of the world — most impressively in Western Europe, where the Mac outgrew the market by 38 percentage points.
In the remainder of his long report, Wolf makes the case that there's an iPhone "halo effect" that's even stronger than the original iPod halo, especially in Europe. And he applauds Apple's management for ignoring the advice of the many pundits who warned that it would lose share if it didn't abandon its premium pricing structure.
Apple stuck to its guns, and it paid off. Its dollar share of the home market is growing even faster than its unit share. Today, Apple gets one out every ten dollars spent on home computers worldwide. (See below.) In the U.S., its dollar share is more than one in five.
[Follow Philip Elmer-DeWitt on Twitter @philiped]
I believe that people are becoming aware that having a computer that may cost a little more in the initial investment, but will last longer and not be as prone to malware while having close by support in the form of retail stores with hands on help trumps getting a cheaper windows computer that would probably need replacing in 2 or 3 years due to malware slowdown instead of 5 years or so with a Mac.
The MAC percentage in the market will grow. Yes it is hard to pay more for a computer, but when I switched to a MAC, literally all my headaches went away. No more blue screen of death etc. Apple makes a good product that works, not like GM. A car is one thing, and someone may opt for a cheaper American made car than a Lexus, but when you spend 8 hours a day on a computer, nothing ruins your day more is that computer locking up and hiccuping all the time. I don't know what it is about PC's, but if your car gave you that many problems, you would demand your money back. Hey, PCs have their place, and I run Win XP on my MAC at times, but nothing will beat a MAC.
@Steinzo: the other poster's Windows-is-to-Mac-as-VHS-is-to-Betamax analogy is hardly laughable. VHS machines were fed to the masses by the more powerful consumer products companies, but engineering geeks understood that Betamax was the superior technology. Sadly, VHS won the battle. Likewise, the fact that many techies believe that the the Windows PC is inferior to the Mac platform hasn't made a big dent in PC sales.
@Macmanchgo
I got a good chuckle from your reference to Apple as "a scrappy little company". Did you realize that, based on market capitalization, Apple is the 3rd largest technology company in the world, behind Microsoft and just slightly behind Google? And that they are roughly half the size of Exxon-Mobil, the largest company in the world? So, they might be "scrappy" (or "aggressive", or "dominant in certain markets"), but they certainly aren't "little".
I got an even bigger laugh from your analogy that Windows = VCR (I think you meant VHS) and MacOSX = Betamax. A better analogy, taking into account profit margins and user experience and not just market share, would be that Windows = General Motors and MacOSX = BMW.
The increase in the home market is due to the Mac's overwhelmingly positive user experience: NO viruses, easy to set up and run, error messages that help you fix the problem rather than hunt for a techie, and super customer support on the phone and at the Genius Bar when you need it.
Businesses are slow to adopt because they're so heavily invested in Micro$lop they can't see a way out. They're also in maintenance mode right now… "If it ain't broke, don't fix it during a recession" seems to be a prevailing sentiment. Win 7 may be an improvement, but if XP is still running, why bother with an upgrade?
Apple's best products and profits are probably ahead of it. Watch the coming convergence of 4G Internet, tablet computing, the App Store, handwriting recognition, and electronic publishing to reader devices for a clue.
Philip:
Thank you for the informative graphs and this insightful report. It will aid in more accurately forecasting Mac sales growth in the near future.
Apple's continuing rise in domestic consumer shipments is due in part to the presence of the Apple retail stores. It's no wonder Apple is looking at Europe as its next big market for retail store openings. The value of the stores and the exposure they provide to Apple products can not be overstated. A few years back if I recall correctly Apple management said in a conference call with analysts it took on average six retail store visits for a Windows user to switch to the Mac. I'm assuming the number of visits needed has dropped over the past few years as consumers become more familiar with Apple products.
The iPod's halo effect on Mac sales is well documented. The iPod brought Apple-branded products into the home and the iPhone is extending the company's product reach further into the home and into the business suite as well. The fact that the Mac's dollar share of global home PC sales has reached 10% indicates in my view the iPod/iPhone halo effect, the expansion of Apple's retail store presence and Apple's recent pricing flexibility on the MacBook Pros (relatively speaking) have worked together to produce outstanding unit sales results.
As an aside, if one looks at a map of Apple's US retail store locations one would be quick to find retail store concentrations in or near major tourist centers. Apple's domestic retail stores in areas highly-trafficked by foreign tourists are an indirect way to gain mind share ahead of retail store expansion overseas.
I am NOT surprised by this news. Mac's are the best…hands down. Had one for years and just got my new 27" iMac today!!
This article seems to ignore the obvious, that Windows will maintain its dominance just like the VCR beat the Betamax! So don't worry your silly little head over a scrappy little company like Apple. They only have 2% of the market and no one makes any software for their computers! Blah blah blah!!! Oh to read articles like this now is such an out-of-body experience!
This is why smart companies chase profits, not market share. If price is the major factor, GM will be most profitable car company and Toyota is on the verge of bankruptcy (as in reverse today).
So, two days ago Wolf *thought* AAPL would sell 2.6m Macs. Now, upon learning they sold 3m Macs, he can provide explicit data explaining how he was wrong.
Yeah. Right.
gr@wl!x
ex ped: Where did you get the idea that Wolf made his 2.6 million-unit estimate two days ago? He filed that before Apple reported its September quarter earnings, not last weekend.
Mac marketshare 6% US.
Mac revenue share, 10% international, 20% US.
Given Macs have much larger margins than the majority of PCs (especially the huge segment of net books), estimate Apple has 2x margins of industry:
Mac profit share, 20% international, 40% world wide ???
Market share and revenue share are not nearly as important as growth or profit share. On both of those Apple is not only doing well, but by being high profit, low margin has much more growing room than other PC makers.
To me the strong growth in Asia is more the surprise (and Rest of World). There, there has been tremendous resistance to Macs because of cost. The Mac market has been so small that many people did not even know they existed, or had no concept at all of the Mac rationale.
There are two halo effects. First the iPod/iPhone to Mac at home effect, and then the Mac at home to Mac at work Halo effect. The USA has already seen the beginning of the later. The surge in Western Europe's home adoption rate is is a prelude to it there — soon to be followed by ROW.
"I don't see how they will get more than 12 – 15% market share by not allowing cloning. Also Apple still isn't growing the the business sector. The stock probably 1.5xs from here but after that I see a lot of challenges for this company."
This, in a nutshell, is exactly what most people don't understand about Apple's success. The reason that they've been able to legitimately sell themselves as a premium consumer brand is because they _don't_ allow sub-par clones into their ecosphere, and they _don't_ allow the consumers' experience to be ruined by all of the obtuse requirements of the business community.
"And its market share is, what, 10% or less? What happens if its market share doubles, as seems more and more likely to be the case? And then figure that we'll soon be coming out of this recession, which will increase computer sales generally. Add in the impact to the bottom line when iPhone earnings won't need to be taken over 2 years.
And that doesn't even count what other stuff Apple has up its sleeve."
I don't have any issue with what you said here, but my issue with Apple is I don't see how they will get more than 12 – 15% market share by not allowing cloning. Also Apple still isn't growing the the business sector. The stock probably 1.5xs from here but after that I see a lot of challenges for this company.
The relative growth of the consumer/home marketplace basically means businesses aren't buying. I'd assert that's in part due to the recession, and in part because there's not a lot of compelling reasons to upgrade. Contemporary computers are plenty fast enough and there are no compelling applications (not even Win 7) to drive a radical demand for more compute power. Rather, I think businesses are in a 'replace when broken' mode. And if I were Steve Ballmer, that might be scary enough to toss some more chairs around…
"In the U.S., its dollar share is more than one in five."
And its market share is, what, 10% or less? What happens if its market share doubles, as seems more and more likely to be the case? And then figure that we'll soon be coming out of this recession, which will increase computer sales generally. Add in the impact to the bottom line when iPhone earnings won't need to be taken over 2 years.
And that doesn't even count what other stuff Apple has up its sleeve.
Doesn't take a genius to see where Apple's stock price is going.
I think that many people are missing an interesting observation – Apple provides solutions for consumer entertainment and communication systems. Microsoft is still primarily a business solution provider – This is why Microsoft has spent so much on Xbox and other entertainment business proposals. Analysts should look at these two companies differently; they are not the same nor do they have similar business models. Since Apple has been able to maintain its higher quality standards (think BMW/Lexus to Chevrolet); its margins have been better. However, as consumers experience the higher Apple capabilities; they will demand more capability in the business applications area. IT managers will demand more Apple-oriented products in their purchasing programs. Unless Microsoft can re-engineer its products for a new marketplace; Apple should trounce then in a few years. Quality almost always wins.