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This will be my last Moore’s Views & Reviews the column of 2002, and its customary at this time of a year to take stock of the hands of the past twelve months, and look ahead to prospects in the new year.

In the Mac community, we’re also in the home stretch leading up to Apple’s biggest event of the year -- MacWorld Expo San Francisco -- and speculation on what the redoubtable Mr. Jobs will unveil in his keynote. In the past two Januarys, he has come through big time, in 2001 with the spectacular Titanium PowerBook, and then last year with the very cool flat panel G4 iMac. Also last January, for those of us who are laptop aficionados, came the release of the 14.1-inch screen “Son of Pismo” iBook.

2003 is shaping up to be a watershed year for Apple on several fronts. For one thing, it will see the end of new Mac computers that can boot into the old, Classic, Mac OS, for most of us in January, and for everybody by June. It is also much anticipated, and perhaps crucial for Apple’s continued corporate health, that we will see a new CPU chipset and motherboard design on the high end desktop machines in the coming year.

The basic Power Mac tower form factor, with its 4-handled case and “drawbridge” access to internals, is one of the most successful computer designs ever, but it’s been four years since it debuted as the G3 “Yosemite” in blue and white livery, and while its had several face lifts and many internal upgrades over the years, it is well overdue for a redesign, both internally and externally.

Getting Power Mac sales out of their current slump will be a crucial priority for Apple in 2003. In the company’s annual SEC form 10-K Report, filed December 19, Apple notes candidly that “If future unit sales of Power Macintosh systems fail to partially or fully recover, it will be difficult for the Company to improve its overall profitability.”

Unit sales of Power Macintosh systems fell 18% during 2002 as compared to 2001on the heels of a 35% decline in Power Macintosh unit sales in 2001 from 2000.

Apple believes that many of its professional users have been delaying upgrades of their Power Macintosh systems due to the Company’s ongoing transition to Mac OS X, and in anticipation of software vendors transitioning their Mac applications to run natively in Mac OS X. I would say also that anticipation that Apple is going to roll out new Power Macs soon, possibly with IBM’s new 970 PowerPC chip, is also contributing to sales resistance at the high end. As Apple concedes in the 10-K filing, many of its current and potential customers believe that the slower MHz clock speed of the G3 and G4 microprocessors in Macintosh systems compares unfavorably to those utilized by Windows-based systems and translates to slower overall system performance. I can’t imagine anyone seriously arguing anymore that the megahertz gap isn’t hurting.

It’s a mug’s game to speculate on what the fertile mind of Mr. Jonathan Ive might come up with as a new Power Mac form factor. Who could have predicted either the TiBook or especially the G4 iMac with any certainty. As for internals, we may have to wait a bit longer for something revolutionary. The IBM 970 chip will not be shipping in quantity until at least Q3, 2003, which means that Apple will likely hang on with at least one more G4 speed bump until then. Or, will Motorola be able to pull a G5 out of its hat? Whatever, it can’t happen too soon, what with Power Mac sales languishing.

Apple virtually has to announce some major changes in to its professional desktop machines at Expo. If they can’t deliver at least a solid and substantial upgrade, their credibility is going to take a hit However, now that Apple has announced that one Power Mac model capable of dual booting OS 9 and OS X will be available until June, 2003, my guess is that we’ll see speed bumped G4s at San Francisco, possibly in a new case design, but the big Macs will have to wait until later in the year for a major internal revamp. See you in two weeks on that one.

Over on the consumer front, it’s all but certain that there will be an iMac with a bigger screen announced at MacWorld Expo. The 15-inch flat panel iMacs have been end-of-lifed, and Apple’s Taiwanese iMac-building subcontractor, Quanta, pretty much blabbed about an imminent 19-inch iMac a couple months back.

With that long a production ramp-up, at least there should be no repeat of the shortages of iMac supply that kept sales of the original flat panel iMac below potential last winter and spring. I also wouldn’t be surprised to see speed bumps to at least 867 MHz and 1 GHz for the iMac. If so, the education - oriented eMac CRT all in one should also get a megahertz upgrade as well, but don’t look for any other major changes there.

As for portables, they’re now definitely the brightest star in Apple’s sales firmament, with combined unit sales of iMac and iBook systems accounting for 58% of total Macintosh unit sales in 2001 and 60% in 2000. Combined unit sales of iBook and PowerBook systems actually rose 2% during 2001 despite the negative economic climate and the overall decline in unit sales.

Overall unit sales of Macintosh portable systems grew by 92,000 units or 10% in 2002. Apple notes that not only does this increase in portable system sales reflect a general trend in the personal computer market away from desktop systems towards portable systems, but is also specifically attributable to the strong demand for redesigned iBooks introduced during the third quarter of 2001 and for the upgraded Titanium PowerBook G4 which was introduced during the second quarter of 2001.

During 2002, growth in this area has been most pronounced for the iBook, whose unit sales increased 14% in 2002 and 9% in 2001.

However, since both the TiBook and iBook got major revisions in November, I would rate the probability of any new announcements on a laptop front at San Francisco as very slim. Many people are hoping for a G4 iBook, but I wouldn’t advise them to hold their breath. ThinkSecret’s Nick dePlume reported this week that Apple has taken delivery of faster G3 chips from IBM’s PowerPC 750fx family -- sometimes referred to as “Sahara,” 700 MHz and 800 MHz versions of which power the current iBooks.

Nick says that next up in the PowerPC 750fx line is a new chip code-named “Gobi,” (another desert name) with even higher speeds. -- faster than 1 GHz. A successor to Gobi is slated for release in 2004, featuring RapidIO support, says de Plume, so it appears that there’s lots of life left in the old G3 yet.

Suits me fine. I’m a G3 fan. And if de Plume’s intelligence is reliable, makes the likelihood of a G4 iBook in the near to mid-term future seem doubtful. That would square with comments by Dave Russell, Apple’s director of consumer-education mobile products, in an interview with MacCentral’s Dennis Sellers last June:

I would be very surprised if the trend toward laptops and away from desktop hardware doesn’t continue in 2003. Actually, the flat panel iMac, which incorporates many laptop style virtues, has probably slowed the laptop as desktop substitute migration to some degree, as indicated in the slight decrease in laptops as a percentage of total systems sales in 2002. But for many, including this writer, only a real portable will do.

The iPod portable jukebox MP3 player will no doubt continue to be a profitable seller for Apple in the New Year. As for OS X, we can presumably expect point upgrades every two or three months throughout 2003, and likely a version upgrade (10.3; 10.5?) In the late summer or fall, which will almost certainly come with a $129 or higher price tag. Price of innovation.

In 2003, we will also see OS X consolidate its claim to being “the” Mac OS, and OS 9’s departure will be substantially accelerated by the termination of dual booting -- for most of us in January 2003, although selected machines for the education channel and a 1.25 GHz DP Power Mac for high-end graphics and prepress customers will continue to support OS 9 booting until June, 2003.

I anticipated a significant uptick in late year Mac systems sales, because of the dual-boot finito announcement. Whether or not that materialized won’t be clear until sales figures are released for the quarter, but the price cuts on me iMac, plus substantial upgrades and price reductions on the PowerBook and iBook, would be a factor in any sales spike as well. Insanely Great Mac reported this week, citing NPD Techworld research, that Apple reeled in 5.2 percent of the retail desktop market in October, which may reflect a bit of dual boot preservation demand. I don’t doubt that even in five years time, there will still be a few folks soldiering on with elderly Mac hardware running the Classic Mac OS.

And while I would be delighted to see Apple’s market share back up around the 10-12 percent it was in the early ‘90s, so long as the company is profitable and able to keep turning out great products, we shouldn’t get to hung up on raw sales numbers.

In 1921, fully 60 percent of cars on America’s roads were not just Fords, but a single Ford model -- the legendary model T, which is a sort of historical automotive analogy to Microsoft’s dominance of the computer software market today. However, there were still dozens of other profitable automakers (as well as some not profitable ones) in the 1920s.

Perhaps a better analogy is that of BMW or Porsche, neither of which has a market share as large as Apple does in the computer market, and their products are definitely premium priced. But no one suggests that these niche auto manufacturers are in trouble.

So if Apple can get its market share above 5 percent and keep it there, that would be great. If they can’t, but can still continued to make money, that’s fine too. However there are some black clouds on Apple’s horizon in 2003. The Company continues to see weakness in its U.S. education channel, where total net sales fell 15% in 2002 and 4% in 2001, with the company losing market share percentage as well in the U.S. education market in each of the last two fiscal years in what remains a core market for Apple.

Net sales in these markets fell to 21% of the Company’s total net sales in 2002 from 26% in 2001. Although the Company has taken steps to strengthen its position in the education market, there can be no assurance that the Company will be able to increase its share of the education market or maintain its existing share of that market. Apple admits that failure to increase or maintain market share in the education market may have an adverse impact on the Company’s operating results and financial condition.

The 10-K report also warns that Apple’s ability to produce and market competitive products is dependent on the ability and desire of IBM and Motorola, its sole suppliers of the PowerPC microprocessosr for Macintosh computers, to provide the Company with a sufficient supply of microprocessors with price/performance features that compare favorably to those supplied to the Company’s competitors by Intel Corporation and other developers and producers of CPU chips for personal computers using the Windows operating systems. This doesn’t sound as if a sometimes rumored move to Intel or AMD processors is in the works.

Furthermore, Apple has higher research and development and selling, general and administrative costs, as a percentage of revenues, than many of competitors, but its ability to compete successfully and maintain attractive gross margins is heavily dependent upon its ability to ensure a continuing and timely flow of innovative and competitive products and technology to the marketplace, and successfully manage frequent product introductions and transitions. .Many of Apple’s Wintel PC competitors compete aggressively on price and maintain very low cost structures. Further, as a result of the expansion of the Company’s Retail segment and costs associated with marketing the Company’s brand including its unique operating system, the Company incurs higher selling costs as a percent of revenue than many of its competitors. If the Company is unable to continue to develop and sell innovative new products with attractive gross margins, its results of operations may be materially adversely affected by its operating cost structure.

Apple also has some fences to mend in offshore markets, as indicated in this interview from German Mac magazine MacUp with Klaus Weinmann, CEO of Europe’s largest Apple dealer, Cancom, excerpts of which were translated and posted by Powerpage’s Herbert Frei:
http://www.powerpage.org/story.lasso?newsID=10358

Whatever, 2003 will be a momentous year for Apple and for the Macintosh community.. Hang on for the ride.

Happy New Year!

Charles W. Moore

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