Why Apple Can’t Chase the Low End

Steve Wildstrom / July 22nd, 2011

In a post here earlier today, Ban Bajarin dismissed the frequent criticism of Apple for failing to serve the low end of the computer market. Ben focused on consumers’ willingness to perceive, and pay for, value in Apple’s relatively expensive products.

But in wondering why otherwise knowledgable people keep hammering Apple on this point, it’s worth considering just how the company’s business model is working. Everyone else in the PC business depends on selling enormous volumes of product at razor-thin margins. This has steadily driven the average selling price of PCs downward, though NPD data show that the average retail ASP in the U.S. has stabilized a bit at around $600. Apple has exactly one product close to that price point, the $599 bottom-of-the-line Mac mini. In a world of $500 to $700 notebooks, the entry point for a Mac is $999 and goes up quickly from there.

And what has the refusal to chase the mass market done to Apple? It absolutely owns the market for computers selling for more than $1,000. As a result, with about 10% of the U.S. market and less worldwide, it is grabbing the lion’s share of industry profits. Apple’s operating margin from all products in the most recent quarter was 32.8% compared to 5.7% for Hewlett-Packard’s Personal Systems Group. HP, with total revenues of $127 billion a year, has a market capitalization of $76 billion. Apple, with just over $100 billion in revenue, is valued by the market at $362 billion.

With numbers like that, it’s just silly to argue that Apple should be chasing the profitless low end of the market (or, for that matter, offering low-cost, lower-margin versions of the iPhone and iPad.) The history of the tech business is full of companies that won large market share by cutting margins to the bone, or sometimes further. Apple is in the sweetest of all possible spots, and it would be lunacy to change the business plan.

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Anonymous

    As Steve Jobs said, Apple doesn’t know how to make a cheap PC that meets Apple’s standards.

    Look at the iPad. It costs $499. Apple’s rivals can’t even make iPad copies that are cheaper than the iPad. Only much lower quality tablets cost less.

  • Anonymous

    Apple has already shown it is willing to chase the low end in consumer electronics. Look at the iPod line, they started at the high end, but eventually had a product at every price point. Not sure they will go that far, but do believe they will chase the market down.

    All they need is an iPod touch class hardware with 2g voice capabilities (wifi only), selling $50 unlocked more than an iPod and they would sell millions. They could even drop the iPod touch all together. This device would not sell at razor thin margins, but rather some of the best margins in the industry.

    • Anonymous

      $50 more than the cheapest iPod touch (8 GB) would price this device at $279. not exactly bargain basement. And I don’t think any carrier would be interested in handling a 2G-only phone.

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