Report: Apple Gains 29% Share of $$$ Notebooks

Well another blowout quarter. Here’s a good piece of advice and it’s in the top quintile. BUY THE STOCK!

“I can take constructive criticism.”

No, you can’t take it!
If you did, my posts would NOT get deleted.

We are just now entering the third leg of Apple’s plan to grow market share. It’s been a long road, but to think that Apple can’t provide a low cost notebook or desktop without sactificing margins doesn’t reflect observation of what Apple has done in the MP3 player space and even more recently in the mobile phone space.

Apple covers the full price spectrum in MP3 players from the top of the line down to the cheapest entry level product. A very impressive suite.

With the recent price cut, Apple now also offers the lowest priced smart phone, feature for feature, by far.

In the laptop space, even now, Apple’s laptops are feature for feature the least expensive in the industry.
I personally have no trouble seeing Apple extend the iPod and iPhone pattern further.

Apple’s design skill includes designing-in the re-use of components to enable pricing power beyond what its market share would suggest. They could wag their way into a Flash based ultra portable market and drop prices considerably while extending battery life measurably.

The point is that Apple has more access to the lower segments of its markets than is apparent, and time is on its side with ample R&D funds to engineer cheaper, more compelling products with solid margins. What wlll the equivalent of a MacBook Nano or Mac Nano look like and cost?

Still lots of room to grow for this company.

1st Quintile: $1,433
2nd Q: $841 - $1,020
3rd Q: $1,121 - $1,174
4th Q: $1,175 - $1,433
5th Q: : >$1,433

Elmer,
The above numbers seem a bit confused. I tried to follow links to see the original Gartner report, but I couldn’t find a link to the actual report or a more accurate report of Gartner findings in your post. It would be greatly appreciated if you could share with us accurate quintile price breakdowns.

The MacBoks start at $1099, yet your quintile price breakdown omits the whole range of $1021 to $1120 priced laptops, plus $1,433 is both q#1 and q#5. (???)

I’d love to see good numbers, but otherwise, my analysis is simple.

At the bottom end, the prices of laptops keep dropping and Apple has not gone after that stripped down laptop market. Apple used to have a much wider range of pricing on their laptops that went from under $999 to quite over $3,000. Apple used to use 2 different generations of CPU processors in the consumer and Pro lines.

More recently, Apple has had less of a difference between the processing power of the CPUs between their laptop lines. Certainly true since they’ve moved over to Intel chips, but also when the iBooks moved up to G4 at the same time that the PowerBooks were also using G4 chips. But now, Apple can’t charge as little as they used to for the lowest end laptops, since they use much better processors than most other manufacturers’ lower end models. Intel charges a premium for newer, faster, lower-power consuming CPUs. Therefore since Apple chooses to use the better CPU even in their lowest end laptops, they need to charge a corresponding price that reflects the quality and cost of the components inside.

The flip side is that the higher end models are not priced as high as previously. The lowest end laptop has a 2.0 Ghz Core2 Duo and the highest end Pro laptop goes up to 2.4Ghz Core2 Duo. Since, the CPU is not as much a differentator, Apple must use other features to distinguish the Pro line from the MacBooks. The is less of a difference between the lower-end and higher-end laptops because even the lowest-end laptops are quite decent.

The good news in all this is that Apple top-end laptops are priced lower than some competitors’ high-end kit. Apple’s better pricing at the high-end is probably a big factor in their cleaning up the top quintile. Of course, I won’t overlook all the comments about Apple’s quality, impressive specs and free bundled unique software; that have already been mentioned previously.

I don’t see Apple attacking more of the lower market, which for them would be quintiles 2 & 3 until Intel comes out with another better, faster, lower power generation of laptop-friendly processors. By then the current high-end Core2 Duo will be cheaper and can live in a lower priced MacBook line; while the Pro line would get the fancy new processor line.

Until then, the Core2 Duo is the only processor that meets Apple’s standards for laptop use.

I don’t think that Apple will compete in the lowest quintile with laptops. That is, apart from the iPhone, iPod touch and possibly some sexy portable Apple device that could be a small tablet/PDA/Newton type device that may come out in the future. As far as full-featured laptops; I see Apple keeping those at he higher end and mid-range of the portable offerings. The smaller portable devices will fill in their lower price points.

Thanks for this interesting bit of news.

I’d love to see the quintile price breakdown not just for the most current data period but also for the earlier comparison periods in 2000 and 2004. If you can, please post the quintile breakpoints for all 3 periods here. Thanks.

ex ped: There was a typo in that table I posted. The third line should be:
3rd Q: $1,021 - $1,174
Sorry for the confusion.
There is no link to the Bernstein report; it’s a piece of proprietary research that was sent to Bernstein’s clients. –Philip Elmer-DeWitt

I must disagree somewhat with the overall tenor of most of the comments on this blog post. I am a Macintosh software developer, and thus am invested in Apple — though somewhat differently, I imagine, than most other posters. From my perspective I found this blog posting accurate, perceptive and helpful. Many of the comments seem to result from a misunderstanding of these specific statistics, or of statistics in general.

What the statistics indicate is that Apple’s notebook sales have become highly concentrated in the premium price quintile. This is not pricing in absolute terms, but in terms relative to the actual marketplace. Part of the question Mr Elmer-DeWitt is asking is whether this is the best strategy to ensure future growth continues apace.

That question itself can be broken down into two further questions: How will the notebook market change in 2008; and is Apple positioned to adapt to changing market conditions in general?

In terms of the notebook market, it does seem to me quite likely that there will be a significant change during 2008. The Core2 Duo has been somewhat expensive to implement in notebooks, but that will change soon. Microsoft launched a poor version of Vista, and this will likely be improved by March 2008.

This is not a “doom” scenario. It means that Apple has successfully positioned itself to do well in the laptop market at minimum expense during 2007, but will face slightly more significant challenges during 2008.

In terms of the second question, Apple’s ability to adapt, there is some room for concern. Apple’s product line consists of three platforms: laptop, MacPro and Xserve. (The mini and the iMac are both derivatives of the laptop.) It seems quite possible to me that during the second half of 2008 there could be a swing away from laptops, and towards desktops. There would be three main drivers to this:
1) Laptop design advanced dramatically over the past 3 years, but is unlikely to advance much in 2008 (beyond the addition of a smaller size; flash drives that replace HDDs will likely be expensive until 2009), so there will be less reason to upgrade them;
2) Other complex mobile devices have grown in capability (iPhone) or declined sharply in price (Palm Centro) making the need to take a laptop everywhere less pressing; and
3) The growth in use of dual-monitor systems. It seems likely that by the end of 2008, twin 19″ or 20″ monitors will have become more standard among middle-level managers. (You can use a second monitor with a Mac laptop as well, but you will usually end up with different screen sizes, which is not optimal.)

So, is Apple positioned to take advantage of a swing back to desktops? Not currently. Which doesn’t mean that it won’t be in six months from now. Adding twin monitor ports to the MacBook Pro would help, as would introducing a second, more cost-competitive version of the MacPro.

@David Werling:

I agree with your observations, if not your syntax, except for one glaring thing: where are you seeing Apple as selling this “15 inch 8 lb Mac Pro Laptop”? If you mean the most popular seller, the 15″ MacBook Pro, it comes in at a much more svelte 5.4 pounds.

Quick: What do you call an 8 lb Mac Pro Laptop?
Answer: Dell

To Mel and RT: A quintile is 20 percent of the market in units sold. Always has been and always will be. Exactly twenty percent of the laptops sold are in the top quintile, exactly twenty percent in the lowest quintile, and in every other quintile.

There are some serious issues with the interpretation of the data. Apple does not break out notebooks sales by price, and they do not break out the sales of each line of notebooks. So, it is not possible for these analysts to determine the number of notebooks Apple sells in each quintile. I also find it hard to imagine how these analysts obtained such data from other vendors.

So this analysis is basically a “guesstimate” at best. Personally, I like Apple, but I do not believe that Apple has 30% of notebook market share of any quintile. Maybe 10-15%, but 30%–with Dell/HP/etc sharing the rest–no way.

“Accordingly,” Sacconaghi concludes, “we believe Apple faces a trade-off in its Mac business over the next 2 - 3 years: either lower price (and margin percentage) to sustain share gains, or retain its current price premiums and face slowing unit growth.”

That statement is not accurate as if fails to factor in some important facts. Component prices are dropping all the time, to the point where the makers of computer components are living on a sliver of an ever-shrinking margin pie. And because there is so much competition in the Windows world, component price savings must be passed on to the consumer. Not so at Apple. They don’t compete in that world. Apple can add features, increase speed, throw in iLife and other free apps, and even lower prices somewhat, all without losing a dime or sacrificing market share.

And the entire concept of market share when speaking about Apple seems flawed. It always compares (pardon the expression), Apples and orangutans. Steve Jobs has always seemed singularly unimpressed with attaining market share at the expense of margins. That’s why he doesn’t license his products or operating system. He is, however, obsessed with squeezing every cent of margin out of every machine sold.

Is it just me or are people struggling with the concept of quintile? The top quintile is the most expensive 20% of all notebooks sold - the bottom quintile is the cheapest 20% of all notebooks sold. The only thing moving is the THRESHOLDS of where the top and bottom 20% lie. If the premium notebook segment grows, it will move the pricepoints of the quintiles - you just may be paying more to be in the top quintile.

After reading this site every day for the last six months I expect every article to have an anti Apple slant.

Oh look, an article by Elmer with a headline talking about Apple’s stellar growth in laptop sales. Then when you read the article it says Apple has grown as far as they can in the market without lowering prices. They have been adding market share the last 10 out of 11 quarters wirh none as dramatic as this last one yet, according to Elmer they have just hit a wall and won’t be able to increase market share any more. You did post an impressive graph though. I have no way of telling what it means though since there is no information connected with it.

Bottom line, Apple’s market share is growing in computer sales thanks to the popularity of the iPod. I have been using Macs for many year so the iPod trend had no effect on my owning a Mac computer. Now with the iPhone taking off, even more people are coming around to Apple as their choice for computers.

There isn’t much room to grow in the mp3 market since they are already dominant but, with a 6.7% market share of computers and the iPhone just starting out, the sky is the limit as far as growth is concerned for those two sectors and judging by Apple’s stock surge I am not the only one that thinks Apple is heading for bigger and better days ahead.

Btw, shares of Apple have gone up roughly $48 a share since the iPhone went on sale.

“While other PC makers have been lowering their average selling price, Apple has been steadily increasing its price premiums relative to the rest of the market….”

I’m not sure if your definition of ‘price premium’ is the same as mine. To me, a price premium means charging a higher price for the same thing, but I haven’t seen any evidence of that in Apple’s pricing based on a feature-for-feature comparison.

I also don’t see a direct correlation between ASPs and premiums. Aren’t ASPs for a broad category such as laptops driven almost entirely by product mix and feature sets?

I believe that Apple stays out of the lower quintiles because the margins are not high enough to justify the additional costs for the engineering, marketing, etc. required to create a product to address it. As an investor, why would I fault them for that (especially given that their market share is the fastest-growing in the industry)?

David R. asks: “What are the price ranges of each quintile? You aslo see a big drop in quin3, so have Apple’s prices just shifted upward compared to rest of market?”

ex ped: Good question. It’s not easy to discern what exactly what the price quintiles represents, since the Berstein report seems to draw on two different sets without explaining the difference. The one complete set I was able to glean may represent worldwide rather than U.S. prices, but they’re the best I’ve got:

1st Quintile: $1,433
2nd Q: $841 - $1,020
3rd Q: $1,121 - $1,174
4th Q: $1,175 - $1,433
5th Q: : >$1,433

“But if you look at the high-priced markets Apple chooses to play in, says Sacconaghi, you see that it already has a surprisingly dominant market share — without much room for growth.”

Uhm, did it occur to you that maybe Apple is GROWING the HIGH END market? Just like Dell grew the low end, Apple will grow the high end.

What are the price ranges of each quintile? You aslo see a big drop in quin3, so have Apple’s prices just shifted upward compared to rest of market?

In any case, its quite impressive to have market-share grow at a higher price point. Seems to clearly indicate a value/quality advantage, no?

Elmer keeps deleting my posts.

What? Can’t take criticism?

ex ped: I can take constructive criticism. Meanwhile, maybe you can do me the courtesy of learning how to spell my name correctly. –Philip Elmer-DeWitt.

RE: Sacconaghi concludes, “we believe Apple faces a trade-off in its Mac business over the next 2 - 3 years: either lower price (and margin percentage) to sustain share gains, or retain its current price premiums and face slowing unit growth.”

Sacconaghi keeps getting it WRONG!

A $3,000 computer has been the same U.S. price for the last 15 years in the U.S. Each year Apple adds more capability, i.e. bigger drives, more RAM, faster CPU etc., and sells the computer for approximately the same price. The consumer is spending the same absolute dollars and getting A LOT MORE CAPABILITY.

Sacconaghi is always LOOKING BACK to where the market WAS, and fails to see ahead to where the market WILL BE,. The middle class luxury market has been exploding: more Mercedes, more BMWs, more expensive homes, designer kitchens etc, etc, are being sold to upwardly buying consumers. The low priced computers and $10 cell phones will always have a market somewhere in the world; however, Apple is supplying the rapidly expanding market for high quality, high performance, “It just works” market.

Exhibit 10 actually disproves your thesis. It shows that as Apple has moved its market to Quintile 5, its overall marketshare has grown.
It seems more people are willing to pay a permium (relatively speaking, because notebook PC prices have been dropping since 2000) for good quality products, than they did seven years ago.
So, in order to increase market share, Apple show sell more notebooks in Quintile 5 price range.

it is your contention that steve jobs and apple have not been working on a new low cost macbook . well will you be surprised at the second quater meeting of next year.

What is driving up Mac sales are youthful early adapters– Mac sales are up 40 % at many colleges. Teenagers that are locking into iPod Touchs and adults that are locking into iPhones are also establishing the Apple OSX as the key platform for the must-have Apple brand.

This phenomina is reflective of the post PC world that Steve Jobs talked about in January. Apple is the first to the table with key products. This puts Apple is in a whole different category in consumer minds –that of being the unPC, and the unbox even among laptops.

Unlike Dell and Sony of recent years, Apple will not disappoint its customers. Expect Apple to deliver ASAP on the rumored slim Mac Books and/or touchscreen Mac Tablets, by 2008. Even the 15 inch 8 lb Mac Pro Laptops are likely to be slimmed down.

The inherent cost savings of Apple touch screen books and tablets will draw new customers like the students who really don’t want to be stenographers in a classroom–notes and audio copies of lectures are downloadable over their Apple’s built in WiFi from iTunes U anyway . They will start buying Mac tablets and keep their slim wireless keyboard at the dorm. And as these early post Pc adopters go, so will the public in mass.

Interesting information. And a partly good conclusion. …… BUT:

Remember, the race to the bottom of the barrel is a loosing game. Apple should drop prices ONLY so long as it gets a reasonable gain in profits. There is little profit, if any, in building and selling a laptop that costs more to build and service than you make in sales. :-)
en.

Building Apples brand at the high end is strategically wise. Down the road, it is a lot easier to capitalize on a high Brand Image then capitalizing on a low value Brand Image.
There will be lots of room to grow.
Good thinking Steve.

The results, or at least the presentation of this analysis is incomplete. Since you presented the price action in quintiles, but made no indication as to overall population shifts from quintiles over time, you have left out key data.

For example in Apple’s favor… if in 2000, Quintile 1 represented 35% of the total notebooks sold in the market; then in 2004 that Quintile only represented 10% of the market, the loss of share is less significant as the market quintile was shrinking while the quintiles with share gains were growing.

Naturally this same argument can disfavor Apple if the lowest price quintiles are growing in population over time and the higher quintiles are shrinking. I have a sneeky feeling that the numbers were selected to fit the argument and all scienced up with statistic lingo in order to add credibility to your report to those who may not otherwise question the validity or authority of the report. Next time, please post enough information to critically examine the data objectively.

I as well wonder about the analysis. A laptop/notebook from Apple as with any of their line, is getting 2 computers for the price. You get a mac and a pc (if you want) to many that is worth a price premium.

This guy’s a nut. He concedes Apple has been incredibly successful selling notebooks, and then concludes it can’t be successful without making changes. There seem to be an unending number of people anxious to comment on Apple who do not understand Apple in the slightest.

So by this analysis Apple is in the enviable business position to have enough profit margin in their product to adjust those levels to continue increasing market share, while still balancing yields. It’s not just market share. Most notebook manufacturers today are working on thin margins and only risk giving away market share because they can reduce no further. Apple is at the top of that heap, with preceptively to those that own them, a superior product. It would be interesting to know who the majority owners of the top quintile are from a demographic perspective. My guess would be 25 and younger college students. They grew up with iPods moved on to entertainment rich MacBooks and are soon to be corporate Americas computer choice decision makers. They are the consumers who demanded mobility while the 40 somethings were chained to their desktop Dells in the living room. Apple markets to new money; parents buying the next coolest thing for their kids (yes, that is new money) and young workers with money burning a hole in their pocket. The quintile progression will trickle down to the lower levels just like the iPod to the Nanos. It’s all part of the plan.

Yes, it’s important to know the size of the quintiles. The premium notebook segment itself could grow, and Apple sales as a consequence. The computer market seems to be changing as consumers redefine value from price to features like simplicity, security and design–where Apple clearly dominates.

Interesting Analysis. However, I wonder how the price quintiles correlate with total notebooks sold. I.e., is the top price quintile correlate with 1%, 5%, or more of the US notebooks sold? That would help interpret the significance of this data. I can’t imagine that Apple’s strongest computer product line, the MacBook, is in the top quintile. I would suspect it is in the second quintile, where there is more room to grow.