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Apple Faces Its Biggest Test

NPD’s recently-released January PC sales figures showed some disturbing trends for Apple.

And while no one, least of all me is ready to call it a crisis the numbers appear to cry out for some creative product development from Apple. If we look back to the release of Leopard we can trace a continuing growth in sales from Apple without any price degradation at all. As the economy has collapsed around us Apple has been delivering and selling desktops and notebooks with average prices of $1500, into a market where the average Windows PC is less than half of that. Bravo to them, as maintaining sales velocity, brand integrity, and pricing has been a trick very few consumer technology companies have been able to pull off. Continuing to make it work appears, after the sales results of the last three months, a much bigger challenge.

January sales volumes showed the iMac delivering its fourth consecutive month of negative 30 percent year-over-year growth. Of more concern to Apple is its Macbook and Macbook Pro business, which, after generating high double-digit volume increases throughout 2008 on the strength of the great reception Leopard received, saw sales growth in December and January match, or fall below, that of Windows notebooks. Of course Windows notebooks had the tailwind of the start of the netbook phenomenon behind them, but even without netbooks Mac notebook sales growth fell below that of Windows in January.

With this weakening coming as netbooks have begun to finally appear on store shelves and the economy’s decline has reached epic proportions, it is prudent to question Apple’s pricing philosophy. Is it possible to maintain prices double the industry average in the face of a savage recession, in a market that is highly penetrated (more than 50 percent of all households have notebooks and 85 percent have computers), while the competition is actively lowering prices and delivering new low cost product concepts to the marketplace? 

In October, as Apple was poised to introduce the latest revision to its Macbook line, the industry was abuzz as to whether Apple would release a netbook, and how reduce prices on the Macbooks. The answer: no netbooks and Macbook price reductions to only $999, which seemed reasonable at the time, but it is now apparent that the economic events have changed the value paradigm and $999 is not low enough. Apple has dominated the above $1000 notebook market even as sales there have declined Apple has raised its share of that segment from 40 percent in January 2007 to 77 percent in January 2009. But that share gain has stagnated with share little changed from the 75 percent posted in May. And while the introduction of a $999 product has been beneficial it appears to have been mostly cannibalistic to sales in Apple’s $1000-$1500 price band. Sales share in the $1000-$1500 price band now account for 45 percent of sales volume, versus 60 percent earlier in the year. Sales above $1500 have remained at approximately 40 percent and have actually risen since earlier in 2008. .

With evidence like this it does appear that Apple needs to deliver a new low-cost notebook to the marketplace. While a netbook-like product seems a far stretch given the likelihood it would heavily cannibalize other products, a $799 Macbook is both prudent and thoughtful. It offers a more mainstream price at a time of economic distress yet offers enough sales dollars to support the value equation Apple has worked so hard to develop. Let’s hope we see something in that price range real soon.