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For six years, the Internet Nexus served as my technology blog, but I've since started blogging at the SuperSite Blog instead. If you're looking for the blog, please head there. --Paul

Wednesday, March 17, 2004

Why iPod can't save Apple

Money (subscription required): "The buzz on its wildly popular digital music box and swank storefronts masks an ebbing bottom line ... Behind the hype and buzz surrounding the iPod and Jobs, there are problems stewing at Apple. Its core computer business, which still accounts for 70 percent of the company's sales, is withering. Apple sold just over 3 million computers in its last fiscal year, which ended in September -- 900,000 less than it sold in fiscal 1996, the year before Jobs returned. Meanwhile, Apple's share of the worldwide personal-computer market has shrunk to 2 percent from 3.2 percent five years ago. What's more, despite their soaring sales, iPods are depressing profitability because of their lower profit margin.

The result: While Apple's sales of $6.2 billion last fiscal year were nearly unchanged from 1999, profits plummeted 90 percent to $69 million, from $601 million four years ago. It's unclear what Jobs can do or plans to do to turn around Apple's fortunes -- he refused to talk to MONEY about its future ... The question is whether the trade-off between buzz and the bottom line is worth it. In other words, should Apple's shareholders be any happier with Jobs' higher-profile, lower-profit Apple?

Part of the motivation to develop the iPod and digital media software is to drive computer sales. But so far that hasn't worked. In order to make the iPod a success, Apple had to make it compatible with Windows-based PCs. So there is no reason for an iPod lover to buy a Mac ... As for the iTunes music service, Apple makes little on downloads. Of the 99¢ it charges for each song, it has to pay the record labels 65¢. Another 25¢ covers the cost of distribution and credit-card processing. So even if you sell an impressive 30 million songs, as Apple claims, that adds up to only a paltry $2.7 million. Jobs' other strategy to boost market share is Apple retail outlets ... Apple calls the venture, which lost $5 million in 2003, a form of advertising. But so far the stores have done little to increase market share, and they could be bleeding a lot more red ink than Apple is letting on. Over the past year and a half, four of Apple's former authorized resellers have sued the company, asserting that its stores competed unfairly with them. Among their claims: Apple cuts sweetheart deals with its own stores to mask losses, such as charging them less for hardware and warranties than it does Apple's resellers. Tom Santos, one of the plaintiffs, estimates that Apple's stores would have lost as much as $80 million in 2003 had they been paying the same prices for inventory as the resellers paid. An Apple spokeswoman says the company won't comment on pending litigation.

This much is certain: Jobs' mass-appeal strategy has crimped the company's historically high profit margins. Apple's net profit margin is just 1 percent. That's down from 10 percent four years ago. And Apple's earnings would have been worse had it not been for $4.8 billion the company has in cash and short-term securities. In fact, the cash hoard made more money last year than Apple's operations -- which lost $1 million while the computer maker booked a $69 million gain on interest income. Even when you factor in Apple's $13 a share in cash and almost no debt, the company's stock, at a recent $23, trades at 20 times estimated 2004 earnings. Dell's shares, on the other hand, go for 26 times projected 2004 earnings -- but its business is three times as profitable as Apple's."

So the reality of Apple's financials is finally revealed. My, my, my: How will the Apple advocates warp this one into good news?

[ Posted at 10:57 PM | Permalink ]