Why Apple’s Mac Product Segment Still Has Room For Growth

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The Mac has emerged as one of Apple’s (NASDAQ:AAPL) strongest performing products this year. Although the Mac isn’t nearly as big a driver of Apple’s valuation as the iPhone, it accounts for about 13% of the company’s stock price, according to our estimates, and remains an important component of the Apple ecosystem. During Apple’s most recent fiscal quarter, Mac shipments grew by around 18% year-over-year to around 4.4 million units, defying a shrinking global PC market and handily beating market estimates on shipments. During the same period, market research firm IDC estimated that worldwide PC shipments fell by around 1.7% year-over-year to about 74.4 million units. [1] Some of the key geographies that drove the Mac’s quarterly performance include China, where sales grew by around 39% (while the market shrank 5%), and the United States, where the education buying season bolstered results. Apple notes that Macs have gained global market share for 32 out of the last 33 quarters and we believe that this trend is likely to continue given that the company presently holds just about 5% share of the global PC market. [2] In this note, we take a look at some of the trends that will drive the Mac business.

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Better Product Differentiation: The PC industry is intensely competitive, as the market is largely commoditized with limited hardware and software differentiation among the various Windows-based manufacturers. Factors such as economies of scale and the strength of distribution channels have come to determine a vendor’s success. Apple’s Mac, on the other hand, while largely exposed to trends in the broader PC market, has significantly better product differentiation given its proprietary Mac OS software and applications, sleek design and premium build-quality. Apple also benefits from the fact that it plays in the high end of the PC market – typically focusing on the lucrative $1,000+ price points – rather than the commoditized low and mid-range where a bulk of the volumes come from.

Efficient Supply Chain Helps Keep Pricing Competitive: Apple’s strong supply chain management and its growing channel reach in emerging markets are also helping the Mac. The company has a straightforward product line-up, which consists of just two lines of notebooks and three desktop focused models, and this allows it the economies of scale required to keep costs low.  The company’s large volume commitments for fewer types of components could be allowing for better bargaining power with its suppliers. This is likely to be helping the company prune down costs for typically expensive components such as SSD storage and LCD displays. The average selling prices for Macs have been on the decline, falling to around $1,255 from around $1,300 a year ago. [3] This is making the Mac an increasingly compelling value proposition, helping to attract Windows users.

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iOS Ecosystem Can Drive Growth In Consumer Space: Apple could leverage its massive base of iDevice (iPhone, iPad, iPod Touch) users to drive growth for the Mac. The company has sold over 800 million iOS devices to date and many of these customers could be brought into the Mac fold. Apple has been trying to reinforce  integration within its ecosystem by offering features which will allow Macs and iOS devices to work together even more seamlessly. The company has also been streamlining the look and feel of the Mac OS to mimic iOS, while modifying some Mac apps borrowing design cues from their iOS versions. This should reduce the learning curve for the plethora users who are familiar with the iOS operating system.

Gaining Acceptance In Enterprise Market: The Mac is also slowly gaining acceptance in the enterprise environment. According to a survey by JAMF Software, an Apple-focused IT vendor, about three out of five businesses now support Macs. [4] Some large companies including Cisco Systems support Apple computers. Apple has been tweaking its strategy to make Macs more attractive to business users. The company now offers volume purchase programs on its Mac App store, which provides customers with a simplified experience in buying and managing software for all their Macs. The company has also been implementing a host of enterprise related security and device management features that make it easier for IT departments to deploy and manage Macs. The enterprise space could prove to be a stable source of business for the Mac, since the enterprise IT market is less prone to customer defections as companies typically plan over the long term and invest large sums of money in their technology infrastructure.

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Notes:
  1. PC Rebound in Mature Regions Stabilizes Market, But Falls Short of Overall Growth in the Second Quarter of 2014, According to IDC, IDC, July 2014 []
  2. Apple’s (AAPL) CEO Tim Cook On Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 []
  3. Q3 2014 Unaudited Summary Data, Apple, July 2014 []
  4. Mac Enterprise Adoption Grows, InformationWeek, June 2014 []