Apple's coming notebook transition

Apple's coming notebook transition

Summary: Apple is readying a major product transition. We know because they told us so.


Apple is readying a major product transition. We know because they told us so. In the quarterly financial crime call chief financial Officer Peter Oppenheimer referred several times to a "...future product transition which I can't discuss today".

That was interesting for two reasons. First, the CFO was trying to explain why they were forecasting a large drop in Apple's gross margins for the coming quarter, from 34.8% to 31.5%. Secondly, of course because the famously secretive company does everything it can to maintain the element of surprise.

But this transition's costs are too big to bury. So it is going to be big.

Running the numbers Managing Wall Street means managing Wall Street's expectations. Successful companies - companies that deliver above expectations - have healthy stock prices. So the key is to talk down one's prospects and consistently do better.

Press reports of the call have tended to emphasize the difference between Apple's reported gross margin of 34.8% and the forecast gross margin 31.5%. But that isn't the right way to look at it.

The real difference is between what they forecast for the June quarter and what they are forecasting the September quarter. The gross margin forecast for the June quarter was a 33%. Thus the drop from the June quarter to the September quarter is a 150 basis points drop.

Starting with that and depending on how you forecast growth, Apple is looking at an investment in the current quarter's Back-To-School promotion and the "product transition" of from $120 million to as much as $400 million. The average iPod goes at the door at $150 - so if they sell 1 million BTS Macs, the promotion will cost (price less GM) on the order of $100 million, probably much less since they only sold 2.5 million Macs in the June quarter.

So the product transition has a war chest of anywhere from $60 million to - on the high side - $300 million. Let's split the difference on the conservative side and say $150 million for the transition.

What product transition could cost $150 million? While iPod and iPhone sales are big and getting bigger, Macs are still over 60% of Apple's revenue. The iPhone has just been refreshed and so have most of the iPods.

The Mac unit split is 60/40 'Books/desktops. The iMac desktop line has just been refreshed and the Mac Pro line, while the packaging is getting old, has state of the art workstation innards.

Other than the MacBook Air though, the 'Book line hasn't had a major design refresh in years. That is where the transition will be. It has the volume and the aging designs to require a change.

What will be in the new 'Books Apple doesn't play with pricing very much. They intro a product at a set price and it generally stays there until the next refresh. They use declining commodity prices to increase their margins.

When they do a refresh they add in features, such as faster processors, larger hard drives or improved backlighting. These things are all more expensive at the beginning of the refresh, but add to the perceived value.

There are several expensive features in the Mac book line that are due for significant upgrades.

  • Quad core processors. The differentiation between the Mac book pros and the vanilla MacBooks has been declining for several quarters. The easiest way to reestablish their high-end credentials is through the recently announced Intel Quad core processors.
  • Power management. Intel and others have announced a slew of more power efficient chips. Not only processors but multimedia decoding chips, networking chips, graphics, DRAM and hard drives. Maybe even solid state disks. Taken singly none of these warrant a redesign, but together a significantly more power efficient notebook can be built - either lighter or with a longer battery life.
  • Blu-ray optical drives. Macs in general are simply not with the Blu-ray program, which is odd since Apple and Pixar have been longtime supporters of the Blu-ray program. Apple codecs do not support it and there are no factory installed Blu-ray capable drives available. That will change.
  • Design. The MacBook Air points to several design themes that we can expect to see in the new Mac pros. These include larger track pads for multi-touch use and beveled edges to make the system look and feel slimmer.
  • Motherboard flexibility. Intel's current chipset architectures are reaching their limits. They have a number of new initiatives in I/O, memory, and system interconnect that Apple, with its focus on high-end notebooks, will incorporate.

The Storage Bits take Given those size of the investment, this is no ordinary product transition. Some people are forecasting a whole new product line for Apple, such as a netbook entry. But that would be out of character. Let other people establish the market. Look how long they waited to enter the smart phone market.

There is also the chance that Apple will lower prices. Portable growth has been trailing, in percentage terms, desktop growth. Since portables are more profitable than desktops Apple clearly has incentive to goose up 'book sales.

Plus they have to stay cool.

Comments welcome, of course.

Topics: Laptops, Apple, Hardware, Mobility

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  • Barking up the wrong tree?

    I think it might be something else.

    I think Hell may have frozen over (again).

    What if this 'transition' is actually Apple making MacOS X available for the general PC public as a purchasable product?

    Think about it. Everyone said Apple would never use Intel. This is the first time Hell froze over.

    Microsoft is in deep weeds with Vista right now.

    XP is off the Radar.

    What better way to kick Microsoft in the Nads but to release OSX as a purchasable OS for PC users?

    There's nothing to stop it from a technical standpoint. The only thing that has held it up for the last 2 years at Apple is culture.

    Think about it...
    • I don't think so

      "Microsoft is in deep weeds with Vista right now."

      Yet Microsoft has had record profits despite both Windows and Office being their main cash cows.
      So if Microsoft had so much troubles with Vista, how could they have such high profits ?

      "XP is off the Radar."

      Not really.
      You seem to forget the surging of Low costs PC.

      "There's nothing to stop it from a technical standpoint"

      There is at least one.
      The burden to have to support tons of different hardware configuration.Something far more difficult than to make almost flawlessly run their O.S on a very limited set of hardware configurations.

      "The only thing that has held it up for the last 2 years at Apple is culture."

      It could also be that Apple know that they can't do what Microsoft (and Linux distributors) can:
      Have their O.S run with reasonnably little trouble on so much different PC hardware.
      The hurting to their image would be hugue if Mac OS X fail to run even remotely as well as on Mac on most PC configurations.
      You don't think that most Vista troubles at launch are linked to Microsoft Engineers lack of competence, do you ?
      • What if...

        Apple could partner with a select group of OEM's such as Dell and HP and offer a version of OS X optimized to run on a select set of systems. The beauty of buying Mac has always been the no driver hassle you often go through with Windows. I can't count the hours wasted searching for a driver that would work with a this or that system model. Say you need a network driver for a Dell GX###. You go to their web site, enter the Asset Tag and they give you a list of 10 drivers. Not intuitive at all. Apples supplies every driver you could possibly need when you install the operating system on whatever Mac model you have. No other company does that. Mac's are incredibly easy for Joe Six Pack. Now with Windows or Linux, you often need the assistance of a computer geek technician which will cost you anywhere from $80.00 to $125.00 an hour. So much for all the money saved on that bargain Windows system. This is the beauty of Apple?s paradigm.
    • Never going to happen.

      There's no money in it.

      Fact: MS outsells Apple 30-1.
      Fact: Apple's revenues are 1/3 MS.

      Conclusion: Only an idiot adopts a business model that has
      1/10th the revenue power.
      • And they both just sell O.S ?

        Sure because both Apple and Microsoft sells only Operating System.
        Last time i check Microsoft also sells a wide variety of Applications,a wannabe competitor for the iPod (which could have been far better differencied compared to the iPod),a wannabe entertainment computer masked as a video console(that they manage to screw for stupid reasons),etc...
        Last time i check Apple doesn't sell O.S alone but whole computers,has a quasi monopoly on MP3 players and online music market (i am waiting to see E.U focus on the situation in this market),sells a wannabe smartphone (that some come revolutionnary but which must give headaches for many serious smartphone users because of its limitations),etc...
        So even if M.S outsells Apple for Operating Systems Licences 30-1, it is ridicullous to claims that Apple has 10 times the revenue power.

        "Conclusion: Only an idiot adopts a business model that has
        1/10th the revenue power."

        And only idiots can adopts a twice less profitable business model.
        Last time i check Apple has 14 % of profits while M.S has 30 % of profits.
        So even if Apple reach M.S size one day in terms of revenues, M.S will still be more profitable and thus significantly better money wise for shareholders.
    • Then ...

      who's going to guarantee OSX works on every hardware PC users throw at it? If you cannot, you'd run into the same driver mess Vista has been in. OSX avoids that by running on hardware preselected by Apple.
  • I've a sneaking suspicion

    the new notebook lines will integrate multitouch into their
    displays and can be used as a tablet if so desired.
  • Bad link on homepage

    The link to this story on the main zdnet page header is bad. It's cross-linked to a post about the future of linux that Jason wrote.
  • It's hard to guess what Apple will do.

    I can see new notebooks, but don't know if that
    will be the major transition in it self.

    Apple has the potential to do a lot of things. I was
    willing to bet up to 10 cents that the just released
    iPhone would have an iSight camera in the front to
    allow for iChat. Didn't happen, on this release at

    If you're looking at a major transition then
    preparing for Snow Leopard might qualify. With
    the PPC dropped from Snow Leopard Apple might
    transitioning some of their Macs to be tied in with
    the OS update.

    Apple also has been getting a lot of patents lately
    and quite a few are related to touch screens. this
    would be a hefty transition, bit is the technology
    available to do it on a financially viable basis?
  • RE: Apple's coming notebook transition

    Robin Harris read about the GM (gross margin) forecast for Apple, and figured that in the MacBooks' upcoming refresh, they will be equipped with Blue-ray drives, Quad-Core CPUs, and more advanced power management.

    You are kidding me! New MacBooks using the latest chips, optical drives and motherboard technologies? But this is so unexpected! Doesn't Apple always try to use the older ones first, just to be sure the users aren't ticketed for exceeding wireless speed limits?

    On the other hand, the foam on my morning latte confirmed Robin's fearful predictions. I better break the news to my cats.
    Alex Gerulaitis
  • Macbooks and Macbook Pros?

    ...uh... there's plenty of differentiation. One has a graphics card. One doesn't. That's plenty of differentiation.
    • re: MacBooks and MacBook Pros

      I think Robin might be on the right track with at least some of his
      guesswork; my best guess as a longtime Apple user is that we will
      see technology introduced by the iPhone applied to their notebook
      line. The Air and Pro have done exactly that, adopting the Multi-
      Touch interface on their larger trackpads; but Apple may finally be
      ready to go with a complete touch-screen environment based on
      Multi-Touch with *all* their next-gen notebooks -- MacBooks and
      Pros alike. This would require a complete revamping of their display
      infrastructure, entailing major changes to both hardware and
      software. It's also quite conceivable that Apple's notebooks could
      adopt location services from the iPhone, which is not strictly a
      phone function -- to wit, the iPod touch has many of the iPhone's
      features, without the phone part. Apple's notebooks could also
      employ the iPhone's accelerometer for a whole new set of functions
      never seen on notebooks before.

      One thing that could have caused a much larger stir (but tended to
      peter out because of its prohibitive early-adopter tax) at the time
      the Air was introduced was the solid state drive (SSD). A 64GB SSD
      simply didn't have enough bang for the buck at $1 grand a pop. But
      if Apple decides it can afford to assume the risk and investment
      required, and if the SSD price/performance equation dramatically
      improves (i.e., if Apple dramatically improves capacity while
      lowering SSD prices), Apple could make another quantum leap
      toward popularizing and adopting a new technology in its

      The tough thing for Apple (which they manage to accomplish with
      astonishing aplomb and stunning regularity) is that they're
      constantly expected to lead out with innovation in the computer
      industry, while somehow also maintaining a competitive face toward
      other companies that would just as soon follow rather than lead and
      treat their products as commodities. In recent years Apple's
      products, including the MacBook line, have actually staked out
      pretty acceptable price points when compared to like-equipped PCs.
      However, market pressure may force Apple to reduce prices on all
      their lines, including MacBooks, and accept somewhat lower
      margins, in hopes that encouraging signs on market share and
      public mind-share will build more volume to offset that percentage
      decrease. It's a gamble that Apple, flush with recent successes and
      reserves, may feel it's now prepared to take.
  • RE: Apple's coming notebook transition

    They're probably going to drop hard drives altogether and
    get some new overall shape.
  • RE: Apple's coming notebook transition

    I suspect that this won't be about laptops at all. In the
    conference call, the word "transition" was emphasized. As
    was reference to utilizing features the competition couldn't
    bring to market. And there was also the emphasis on
    bringing a change to the market in order to shut out

    Look for a major price drop in the iPod Touch for the
    following reasons:

    1) it will expand the consumer base for the App store,
    further motivating developers.

    2) it will keep iPod momentum strong, frustrating rivals
    such as Sony or other media player makers.

    3) it will provide all new iPod Touch customers with further
    incentive to eventually move over to the iPhone: all of
    their apps, software, personal data, and media content will
    easily make the jump.

    Look for a new, cheaper iPod Touch with GPS.
    Richard Rowe
  • RE: Nope, it will be desktops

    With iPhone Exchange support
    and other business-friendly
    elements in iPhone 3G, Apple is
    making a serious play for a chunk
    of the corporate world. They
    need it to keep growing at 30+%
    annually without sinking to
    bargain basement PCs. That's
    also what Snow Leopard is all
    about, especially Snow Leopard
    Server (Apple's first real
    alternative to MS Exchange
    Server). So, what is the gaping
    hole in Apple's product line-up
    (that business would care about)?
    The mid-range headless desktop.
    Especially in iffy economic times,
    business does not just hand out
    laptops to all employees. A mid-
    range tower will depress margins
    because it will cannibalize iMac
    and Mac Pro sales. Apple, of
    course, hopes to make this up in
    increased volume/market share.
    But they can't include that in their
    projection because taking a
    serious bite out of MS territory is
    a high-risk proposition, even in
    the time of Vista. Steve Jobs is
    going for it!
    • Desktops and the Enterprise

      While I agree with you that Apple is making a move
      towards the enterprise, I do not feel that their immediate
      goal will be via the way you describe with a mid-range

      Going up against Microsoft in the Enterprise is far, far
      more complicated than the offering of a single product.
      Microsoft's strengths are inertia, a well-establish base of
      trained and certified IT/admin people, custom software
      written for Windows, and proprietary formats. You don't
      take this on overnight because it's not merely Jobs vs.
      Ballmer, it's Jobs versus all those IT people and employees
      who are already vested in Microsoft.

      Secondly, Apple lacks any "killer app" that would make
      many business want or need to switch. If they are just
      interested in a new way to run traditional office suite
      applications, Linux already has them covered for a far
      lower price than Apple (or even Microsoft, for that matter.)

      So currently Apple does not provide some specialized
      software that businesses feel compelled to by and doesn't
      provide adequate enterprise level support through an
      establish population of trained Apple system engineers,
      administrators, and deployment people. Lacking such
      resources, there's little to compel the enterprise other than
      a prettier user interface.

      Apple fanboys tend to be obsessed with a fantasy of the
      destruction of Microsoft in Microsoft's arena and on
      Microsoft's terms. The dream about the idea of a glorious,
      full-frontal assault on Microsoft's apparently impregnable
      citadel, which will presumably be made possible by a few
      simple moves.

      Hence we frequently hear ridiculous notions about how
      Apple could do something like make a general release of
      OS X which wouldn't require a Mac. Which for some
      inexplicable reason, many people feel will instantly cause
      people to switch.

      But ever since Jobs' return to Apple, we've not seen Apple
      make a direct assault on Microsoft's territory. No, we've
      seen just the opposite. Apple has staked its claim on
      territory that Microsoft didn't see the value of or was
      otherwise unwilling or unable to seize; the iMac and the
      iPod and iTunes being perfect examples of that. The real
      encroachment on Microsoft territory has tended to be more

      This is where the iPhone comes in. It's an oblique assault
      on the enterprise. Sure, Microsoft has Windows Mobile,
      but it's not Microsoft's bread and butter. To the
      Enterprise, the iPhone represents a new capability to invest
      in. A new desktop would simply represent a jettisoning of
      that which they've already heavily invested in.

      Businesses can buy iPhones without having to replace their
      existing PCs or software. Consumers can buy iPhones,
      much like iPods, without having to give up their investment
      in their PCs. Since an iPhone is, for all practical purposes,
      OS X, Apple is able to use the iPhone to expand the base
      of OS X users without getting into a direct fight with one
      of the wealthiest companies in the world and without
      requiring businesses or consumers to spend as much as
      they would have to on a new computer.

      The iPhone, and the iPod Touch, is about growing the user
      base of OS X. As that userbase expands, there is ever
      more incentive for software developers to develop for the
      platform. In order to develop applications for the iPhone,
      you need to use Xcode. Xcode is also used to develop
      general Mac applications. Increasing the number of Xcode
      savvy developers increases the OS X developer base.
      Increasing the developer base increases the number of
      software titles available.

      These are the territories that need to be conquered before
      trying to grab the corporate desktop. And, quite frankly,
      if done right, they might even offer higher profit margins.
      It's not about getting a Mac where a PC currently is. It's
      about getting Macs where they currently are not. Which
      are not exactly the same.
      Richard Rowe
      • Wow!

        Mr. Rowe, that was the best market and marketing analysis of
        Apple I have seen in a long, long time. Well done!
        • Thank you

          Thank you for your kind words.
          Richard Rowe
      • iPhone

        So Apple is using the iPhone and iPod
        touch as a sort of Trojan Horse? That's
        cool that developing iPhone apps uses
        Xcode. Apple had 25,000 developers
        apply to the iPhone program and as of
        WWDC 08 had accepted 4,000.
        Partners in Grime
  • Why oh why do people

    think that you have to have some new and shiny to sell??
    Apple is selling MacBooks and Pros left and right. And
    people are happy with them.

    Apple does not sell to last years buyers. Apple Macs seem
    to last 4-6 years. So just natrual development seems to
    make the computers worth buying new.

    Dell and HP want and NEED you to buy a new computer
    every 2 years min. So glitter and new specs.

    Just a thought.