The personal computer market has been "commoditizing" itself for years - that is, becoming a commodity market rather than the high-end, high-margin business it used to be - and the pace of change has accelerated recently, as PC makers have scrambled to try and clutch whatever sales they can in a shrinking market. Dell is currently the king of that particular game, while Gateway is hanging on by its fingernails, and Compaq has more or less decided to give up altogether and merge with competitor Hewlett-Packard.
And what about Apple? Apple, as usual, has chosen to go in the opposite direction from just about everyone else. Whether it will succeed in the long term or not remains to be seen, but at least the company is doing one smart thing, and that is playing to its strengths.
Dell is the leader at the moment because of its low-cost, high-volume, just-in-time manufacturing strategy. The company has no expensive retail stores and no deals to sell through other retailers - it sells only by mail-order and on the Internet, which keeps its costs low. It assembles and ships out finished computers so quickly that it keeps hardly any inventory at all, which reduces another manufacturing expense, and it moves so quickly it can take advantage of a fall in the price of RAM chips or other components and pass that price difference on to its customers immediately.
After trying to compete with Dell on price and features for the past several years, Compaq has effectively given up on that idea and is merging with Hewlett-Packard in an attempt to take on IBM in the lucrative, high-margin computer services market (IBM has more or less lost interest in the retail PC business as well). Gateway, which began as a mail-order clone maker much like Dell, has scaled back an ill-fated and expensive experiment in running its own retail stores and is trying to compete with Dell on price alone, which many analysts expect will ultimately be a doomed strategy.
The kind of market the PC business has become forces companies to move to one extreme or another in an attempt to stay profitable: Dell has chosen to focus on its strengths by being as fast and low-cost and volume-driven as it possibly can. Apple, meanwhile, is taking the opposite road. That's not surprising, since it has always been a fairly low-volume, high-cost computer maker whose products appeal to a small, affluent niche of the overall market. It couldn't move to the Dell model even if it wanted to, and if it did it would obliterate the very thing that has made it successful.
Apple's main selling points are that its products are cool and sexy - not the same kind of bland, commoditized PCs that everyone else has. That's why it gets people to pay substantially more for its products than Dell or Gateway or Compaq, and why it will arguably continue to get them to do so. The latest Powerbook laptop, the Titanium, is significantly more expensive than a similarly-equipped PC laptop, but it is also has a cool metallic finish and a beautiful high-resolution screen. Apple computers come with cool software for music and movie-making.
The Mp3 digital music player that Apple launched this week is another good example of their strategy: The iPod is small and shiny, with a sleek and well-designed user interface - and also has cool features. In addition to storing more than 5 gigabytes of music (which it will download automatically using Apple's iTunes software) it can be used as a portable hard drive. It's also more expensive than other portable music devices such as the Creative Nomad Jukebox, which stores four times as much data, but Apple believes its loyal fans pay attention to more than just price.
Apple is also going in the opposite direction in another way: Unlike Gateway, which is closing its retail outlets, and Dell, which never had any, Apple is sticking to its strategy of opening its own retail stores. Some analysts believe this is misguided, and that it will prove to be simply a time-consuming way to lose a lot of money. Others argue, however, that it makes some sense for a niche manufacturer to have its own niche stores - in the same way that Sony, another upscale retailer, also has its own outlets.
Apple's strategy is not a guaranteed success, any more than Dell's is. One danger of basing your appeal on the style of your products is that you are vulnerable to blunders - such as the one Apple made with its G4 Cube computers, which sold poorly. In addition, a strategy based primarily on style rather than price may be more vulnerable during difficult economic times. And investors have already built a fairly ambitious view of the future into Apple's stock: It is trading at more than 40 times this year's earnings per share and more than 30 times earnings estimates for next year.
Virtually any strategy has its risks in the current environment, obviously. By taking the opposite road to the rock-bottom crowd, however, Apple stands a fairly good chance of surviving and even prospering. It has $4-billion in cash, it has little or no debt, a loyal fan base and a pretty good track record of success. All in all, not a bad combination.
E-mail Mathew Ingram at email@example.com
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