Why You Won’t Be Seeing a “Headless” Mac

by Chris Seibold Sep 30, 2004

If you’re on the board of Apple Computer you’ve got be thinking that life is pretty sweet right now. The iPod is a monster hit, the new G5 iMacs were unveiled and the critics fell in love, the stock price is way up, iTunes defined legal music downloads and anecdotal evidence suggests people are switching to Mac faster than any time in recent memory. Sure not every little thing has been a home run, changing the rules of iTunes was a foul tip, but other than the very small stuff it’s days of wine and roses at Apple. Right?

Well perhaps these are the new halcyon days but people are still worried about the anemic market share and no worry about Apple’s market share can be presented without a ready made solution. The solution in the past was always a headless iMac. You know the drill: Apple should just sell something cheap enough to compete with the lowliest Wintels and watch the Mac’s market share skyrocket. It’s an argument that’s been around for quite sometime but recently it’s taken on a new, if predictable, twist. People are now suggesting that Apple release a $599 monitor unencumbered G5 desktop machine.

The easy thing to do at this point is dismiss the idea as laughably inane. It is an obvious thing to do, after all the people who buy the $500 Costco computer aren’t exactly gamers who simply must live on the bleeding edge. To the contrary, the folks who opt for a Wal-Mart box are not interested in the best processor they can possibly get, no these people are after any solution as long as it is cheap and sold in the general vicinity of Toughskins. To the low end consumer a computer is little more than a toaster. The toaster either toasts bread or it does not, to the value minded computer shopper a computer either surfs and e-mails or it doesn’t, there is no room for vagaries of performance. Hence to the Sam’s Club shopper a G5 chip is meaningless, for this type of buyer you could write “Powered by Pringles” in bold letters on the side of the box and it would make no difference. Now that we have dismissed the notion of a very low end G5 we are left to wonder about the viability of a very low end G4, an all together more interesting proposition.

First we must ask: Why should Apple build a low-end headless eMac? Proponents will argue vociferously that by not including the monitor Apple could sell a box for a mere 5 c-notes (or less). When pressed the same group of people will also opine that offering a really cheap Mac solution will help Apple’s market share get back to where it should be (a fictional point that varies person to person). That’s what they say, but if you follow their arguments carefully you will note that the real reason they think that Apple should introduce a rock bottom computer is so they can get their next Mac more cheaply. A notion I sympathize with, I like every other person that has ever purchased a computer have never walked away from the purchase thinking “Man, I wished I could have paid a little bit more!”

Reasons for advocating a very low priced Mac aside we should first wonder if it is actually possible for Apple to produce a machine that could sell for four or five hundred dollars. The answer is easy: Of course they could. Trust me when I say that Apple computers are no longer made of Apple only parts, they’re generally full of pretty generic stuff. Hence I conclude a $499 Mac box would be absolutely no problem. Apple would probably be forced to shave off a hefty chunk of profit margin and the model would lack some features that every other Mac has, say a dedicated video card and firewire but it could be done. Of course the model would be largely derided as too limited (something else the people who crave a headless Mac don’t tell you, they want a really good really cheap Mac. No compromises please) and would only be a halfway usable, but it would at least exist.

So once we’ve reached the conclusion that it can be done we have to decide if it is actually something that Apple should do. Here the waters get a little murky. The most obvious answer is as follows: A cheaper Mac means more people will buy a Mac. This is based on fundamental economics, the less item X costs the more units will be sold. It’s known as a demand curve and without getting into the hazy area of maximization and opportunity cost let me note that the argument is sound. Cheaper headless Macs will sell better than the more expensive all in one jobs.

Of course if cheaper is always better was the sum total of economic and marketing knowledge you could get a college degree in either discipline in roughly two minutes. The real world is a bit more complicated (economists worldwide are grateful) so let us factor profit into our models. This a key area for Apple, after all their 25% profit margins are the stuff e-Machines executives dream of at night. Still, it can be argued, that selling more computers at a lower profit margin is just as good, if not better, than selling fewer computers at a higher profit margin. So it is now necessary to consider the demand side of the equation. Will a cheaper Mac with a lower profit margin result in increased cash in Apple’s bank account? The answer is easy and the answer is no. But what if Apple could maintain current profit margins? Before we consider that question let us pause for a moment and remember that Apple is a business and businesses aren’t there to do anything but make money. Increasing market share only benefits Apple if it is associated with an increase in profits (either now or in the future).

Say, for the sake of illustration, that Apple sells one million eMacs and iMacs per year (we will say the ratio is fifty-fifty) with twenty five percent profit margin. That gives Apple a sweet $287,250,000 in profits off the eMac and iMacs. Now suppose Apple introduces a really low cost Mac, the fabled $499 model called, from now on, the “LC Mac.” This is going to eat into the sales of the existing product lines certainly but just how much? Here we’ll have to go with pure conjecture and just guess half. That is to say half the people that would’ve bought eMacs will buy the LC Mac and half the people who would’ve bought iMacs will buy the LC Mac. How many more of the LC Macs will Apple have to sell to make up for the profits lost on the eMac and iMac? If you run the numbers you realize that Apple will need to sell an astonishing 1.1 million of the LC Macs to make up for the income lost on the cannibalized sales of the eMac and iMac. Remember they’re not making any more money, that’s just to get back to the current profit levels. Remember I have assumed that the profit margins on the new models mirror the profit margins on the current offerings, but when you get into products priced that low that particular assumption is probably pure fantasy.

At this point let us reflect on the bigger picture: Apple sells roughly 1 million consumer level desktops per year. To offer a LC Mac and keep current profits stable Apple will have to sell a combined total of 1.6 million consumer oriented desktops a year. That is a pretty big increase, roughly six hundred thousand computers. I doubt even the most fervent headless Mac adherent would maintain that the introduction of a very inexpensive Mac would boost sales by sixty percent. In all likelihood introducing a LC Mac would be a huge financial liability for Apple even if they maintained the same levels of profitability. All this to explain why you’re not likely to see a headless Mac (other than the awe inspiring PowerMacs) any time in the near future, it’s just not in Apple’s best financial interest.

A note on the numbers: The numbers are mostly guess work, the million unit a year mark is roughly correct but the rest of the figures used are purely illustrative. Instead of wholesale costs I used full retail price, hence an iMac sells for $1299 etc.  The actual calculations are straightforward and there is some fun to be had in adjusting the parameters to find the point at which a LC Mac results in enough profit to justify the cannibalization of sales of more expensive models.

Comments

  • Not everyone wants a headless i/eMac because they want to pay less. Some just want a headless machine that costs less than $2,000, and are unwilling to delve into the (warranty-less) pre-owned market. What if I want a cheap but modern machine to use as some kind of home server, or I value big screens but not powerful processors? eMacs are very big and very heavy. They are not easy to stuff under a desk or TV. I say, why not introduce a headless eMac for the SAME price as the current eMac. I think it would still increase sales, and the margins would be even higher. Design it to be fairly upgradeable, like the new iMac, and that’s added value that in customers’ minds would make up for the lost monitor.

    Apple’s a creative company - why aren’t they thinking creatively at the low end?

    silas had this to say on Sep 30, 2004 Posts: 2
  • One area that this fine economic analysis neglecs is the question of market share.  Surely increasing the market for OS X by 600,000 units per year must worth something?

    bystander had this to say on Sep 30, 2004 Posts: 1
  • I recently wrote about the same topic on my blog here: http://innerexception.blogspot.com/2004/09/apple-needs-xmac-or-imac-g5-mini.html

    But I disagree with your conclusions. The point of a low cost Mac is not to maintain profit margins, those will have to be sacrified somewhat, but to grow market share at the expense of profits. Growing share diffuses one of the main criticisms from PC partisans, and it’s also a defensive strategy as Linux desktop share grows. If Apple can get their share above 5%, the positive feedback loop of share driving software development decision efforts will guarantee the continued existance of the Mac platform. Apple needs to maintain existing app develeopers and expand the pool. A large percentage of growth in the PC market is coming from the low-end, and though a $1299 iMac is close, sub-$1000 is the magic number. I am not saying Apple is doomed if they don’t get into the low-end market with a more PC-like headless machine, but I don’t see them achieveing significant share gains without it.

    Dave Murdock had this to say on Sep 30, 2004 Posts: 2
  • You contradicted yourself by saying that low-budged users see computers as a toaster and at the same time saying that Mac users, who are not toaster buyers, will buy the new Mac toaster. 

    I can see some users opting to purchase a low cost Mac, but for the most part, Apple users buy the real thing.

    So I think people like my girlfriends mom, and my cousin - who just purchased a $400 dell, will be the market for the Toaster Mac.  I am trying to sell my girlfriends mom on the new iMac G5, but at $1500 with printer, after adding much needed RAM, a $500 Dell that includes the printer looks pretty good for her 75 y/o mom who just needs Word and Excel.

    In my mind, there is no doubt that Apple needs a low cost toaster for those who like toast.  Apple may be easier to use, but at 3 times the cost, it’s hard to swallow for a 75 y/o lady.

    No pun intended…

    Doriansmatter had this to say on Sep 30, 2004 Posts: 2
  • I wish I could read more than a few paragraphs of each article here. It’s awful nice writing but I like to use Firefox.

    piecetogether had this to say on Sep 30, 2004 Posts: 13
  • Apple will eventually move to a nice low cost integrated computer on the low end. But this computer is not going to arise to placate the “cheap Mac” klan.  Apple will develop a headless Mac that is inexpensive when they are ready for a full frontal attack on the biz sector.  Sure Dell and HP sell low cost headless PCs to consumers. They know they aren’t going to make money off of these sales. They use these low cost PCs and entry into education facilities and biz. The thing is to hook the administration on low cost PCs and them sell them the whole Server/Router packagages.  It’s value added selling. Sure I’ll give you the razor cheap so that I can sell the profitable blades.

    Apple needs to be here in a couple of years.  Apple should buy out Asante or some other networking company. They need to start getting Xserves sold outside of clustering situation(which don’t use OSX anyways).  They need an Office Suite, CRM and Groupware. 

    Once that happens Apple can sell headless low cost computers to consumers as an adjunct to a nice edu/biz sector sales.

    It’s coming but consumers need to realize they aren’t the focus for these low cost computers but they benefit anyways.

    hmurchison had this to say on Sep 30, 2004 Posts: 145
  • Lot’s of great points. Though I will note that trading profits for market share is generally a bad idea. That’s not to say it doesn’t work on occasion just that, in this case, Apple is better off keeping profits high.

    chrisseibold had this to say on Oct 01, 2004 Posts: 48
  • I would like to see Apple increase market share, at their pace and style.  If you look at mass retailer offerings you will see an included monitor.  A headless Mac isn’t necessary.  I always thought Apple would do well in a partnership, with Target, to sell eMacs, iMacs, and bundles to include 20GB iPods.  Using the assets already in place, and just “ramping up production” could be beneficial with both market share and profits.  I know a decent eMac could be sold for $599 of $598 with some minor upgrades, and maybe $798 with an iPod.

    I see the Apple and Target cultures, potentially, working well together, with now additions to the Apple Catalog necessary.

    JeffyC had this to say on Oct 02, 2004 Posts: 18
  • the background bug we’re seeing with Gecko is due to declaring the ID “weblog” as a class.

    here are the relevant DIVs:

    <div id=“weblog”>
        <div class=“weblog”>

    Just make a new class name for weblog and put that in the style sheet.

    I don’t think this is a Gecko issue =)

    -N

    Nathan had this to say on Oct 04, 2004 Posts: 219
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