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Wednesday, October 22, 2008, 02:00 pm PT (05:00 pm ET)

An $800 MacBook would be 'the height of folly' - report

Had Apple succumb to calls from industry watchers to release a new MacBook at or below the $800 price point, it would have amounted to "a value-destroying event of epic proportions," according to a newly published analysis.

In a report released Wednesday, Needham & Co's Conor Irvine and Charles Wolf, one of the more colorful analysts covering Apple today, commended Apple for avoiding the "folly in pricing for market share," and instead sticking to its roots as a value-driven organization that produces world class, differentiated products a cut above the rest of the industry.

That differentiation has recently set Apple apart from the pack and kept Mac growth on a pace well above the industry average. But as the analysts noted, an "increasing choir of pundits" under-appreciate the company's fundamentals and have called for the Mac maker to introduce a notebook computer priced in the $600 to $800 range so it can hit the "sweet spot" of the market and keep its business growing through the looming recession. Apple has ignored that advice to instead pursue what it calls a "winning strategy."

"There are some customers which we choose not to serve," CEO Steve Jobs stated in the company's earnings reports conference call yesterday. "We don't know how to make a $500 computer that's not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve. And there's a lot of them.

"We've seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continue to try to add more and more value to those products in those customer bases we choose to serve."

Demand elasticity in a tough economic environment

The Needham report added, "The observers arguing for Mac price cuts point out that during a recession, users who might otherwise buy a Mac, may opt for an entry level Windows notebook instead. However, this argues against price cuts even more strongly because it implies that the price elasticity of demand between Macs and Windows PCs is lower and the value destruction is greater than we assumed in our analysis," pointing to its projection for sales at both $800 and $900 low end targets.

Demand elasticity relates to the willingness of buyers to stretch their options and switch vendors, in this case based entirely on price. Many analysts compare Macs with similarly equipped generic PCs as if both were equal commodity products, just as HP and Dell compete primarily on price in selling wholly interchangeable, generic PC products.

That isn't how Apple views the situation. Jobs indicated that his company views its Mac, iPhone, iPod, and software products as unique, insisting that "none of our competitors can deliver products in this class." Speaking of customers on a budget due to lean economic conditions, including education buyers, Jobs said, "while they might postpone purchases, they are more likely to delay than switch."

Apple's Mac sales figures bear that out. The company has consistently outpaced the sales growth of generic PC makers in every quarter over the last four years apart from the first quarter of 2006, at the height of Apple's Intel transition. Over the last two years, Apple's sales growth has ranged between 30% to 50% every quarter, compared to less than 20% growth among generic PCs in general.

Needham's analysts point out that Apple's unique circumstances of having products that are clearly differentiated from generic Windows PCs gives the company the opportunity to sell to markets Dell and HP can't compete in, and that misguided efforts to become a generic PC vendor, something many pundits have long insisted Apple do, would only erode the company's profits as well as its image and allure.

"In short," the Needham analysts reported, "Apple has demonstrated that there are a significant percentage of Windows users who recognize the value of a Mac and are willing to pay more for comparable configurations of Macs and Windows PCs. This argues that Apple should focus its resources on making the Mac even more unique as it did with the recent introduction of the MacBook, which features an all-in-one design and a versatile, multi-function track pad that no Windows competitor will be able to emulate for the foreseeable future."

Chasing Apple's runaway success

Microsoft has recently scrambled to deride Apple's added value approach to building desirable, distinguished computers that people are willing to pay a premium for; the company's $300 million ad campaign has sought to insist that generic PCs are not actually suffering from the problems related to the latest version of Windows Vista, which Apple has dubbed the "V-word" in its own ads, while also presenting a series of users who appear happy using generic PCs that are not made by Apple.

Microsoft has also tried to shed the negative connotation of the "Windows tax," which refers to the added cost Microsoft contributes to the price of generic PCs as allowed by its position of monopoly control over the generic PC operating system, and attach the "tax" idea to Apple instead, complaining that customers of Apple's premium hardware and lower priced software would be better suited to buying cheaper, generic PCs running Microsoft's more expensive software instead.

At the same time, Apple is also under assault from PC maker Psystar, which insists that Apple's Mac OS X software is so much better than Microsoft's Windows or open source Linux that the Mac OS must legally be viewed as a separate market, and has demanded that the courts force Apple to license its software to Psystar so it can benefit from Apple's software technology without spending the efforts to develop its own operating software.

Apple has insisted that Psystar already competes against the company's Macintosh systems with both Windows and Linux PCs, and insists it has the legal right to decide for itself who it chooses to do business with, including the licensing of its operating system software.

Outside of the relatively minor Psystar, Microsoft's top PC makers have all been influenced by Apple's industry leading growth to investigate the use of alternative operating systems, with Dell and Acer shipping new Linux-based PCs, and both HP and Sony rumored to be working on operating systems of their own.