Why Mac sales are up, when PCs are down

On May 15, 2001, while previewing the first Apple Store to analysts and journalists, then CEO Steve Jobs boasted: "Apple has about 5 percent market share today", but the remainder "don't even consider us". Jobs exaggerated, and not for the first time, seeing as how Mac global share was more like 2 percent. But the ambition, to use the retail shops to "double our market share", was achievable. Three years following his death, with 10-percent long ago reached in the United States, something more startling occurred: During calendar Q3 2014, Apple moved into fifth place for global PC shipments, according to IDC. The question is why?

I have wondered for weeks, and waited until Apple's quarterly earnings report before writing an analysis. By my math, the average selling price of Macs was about $1,200 -- that in a PC market where sales are sluggish, at best, except below $300 selling price. Yet, according to financial disclosures, Apple shipped a record 5.5 million Macs, with units up 21 percent annually and 25 percent sequentially and generating $6.625 billion revenue; that's an increase of 18 percent and 20 percent, respectively, for the same time periods. Who in the hell is buying these things, and for so much money? The answer may surprise you.

Storm Warning

A perfect storm aligned with Macintosh during Q3:

• Declining tablet shipments
• Windows 8.1 dissatisfaction
• Surging emerging market sales
• Apple's success unifying user experience across devices

I will start with the first in the list before going into a broader state of the Mac market, because declining iPad shipments was my first hypothesis, which in interviews analysts confirm. The reason also defies popular convention that presumes larger-screen smartphones -- e.g., phablets -- suck sales from iPad. Truth perhaps, but there is another, too.

During calendar third quarter, iPad shipments fell 13 percent year over year and 7 percent sequentially, while revenue declined by 14 and 10 percent, sequentially, according to Apple. The sudden downturn aligns with global tablet forecasts from Gartner and NPD DisplaySearch. iPad's growth reversal isn't as bad as some punditry claims. What Apple loses in one form factor goes to another.

Starting with iPad's release in April 2010, IDC observed perceptible impact on personal computer sales -- as people put off upgrades to buy tablets, Rajani Singh, senior research analyst, tells me today. "We did see cannibalization of PC sales by tablets", Singh says.

Wind in Apple's Sails

However, many people who got a tablet "instead of buying a new PC in 2012", are purchasing computers now. Apple is a surprising benefactor of a delayed refresh cycle, and the surging winds pushing Mac shipments aren't likely to abate in future quarters. The big rush of tablet buyers bought companions to their personal computers, which upgrades the pads delayed. Users are ready to buy new computers, finding tablets to be able adjuncts rather than replacements.

Strangely, or not, Mac is a beneficiary, and halo sales are a factor. "Apple has built a virtuous circle between iPhone, Mac, and iPad", Stephen Baker, NPD's vice president of industry analysis, tells me. "Each feeds on the other in its turn, and it appears to be the Mac's turn".

Singh agrees, praising Apple's push -- particularly with iOS 8 and OS X Yosemite -- to make the user experience familiar across devices. "It's like a family, where everyone can speak together", the IDC analyst asserts. People using iPad or iPhone and a Windows PC won't have "as strong a learning curve" going to the Mac, and those devices pull them Apple's way.

Learning curve is a big deal, particularly because of Windows 8's tile-oriented touch interface. Some of "my customers tell me: If I have to learn a new operating system, I would rather learn a Mac", Singh says.

Baker agrees. "Consumers dislike Windows 8. Do they want touch in a clamshell form factor? It appears they don't really and maybe some are moving away from Windows because of it. Microsoft's strategy is highlighting the differences between Windows and OSX/iOS and that isn't working".

The differences benefit Apple's unified user experience strategy, with iPad and iPhone the hook to Mac sales.

7-Percent Solution

Mac's sudden strength cannot be overstated, or overestimated. For example, 19 days ago, IDC estimated U.S. shipments of 2.25 million and global of 5.1 million, with real numbers later being 2.32 million and 5.5 million, respectively. Worldwide, Apple laptops reached 4.5 million units, or about 82 percent of total shipments.

IDC's most current Apple data differs from the preliminary numbers released October 8 -- although still not final. Singh says the Mac's global share is "over 7 percent", emphasizing this is the "first time after 1995 that Apple had over 7 percent market share in the global market". Sobering perspective: 2 percent in 1998. Macintosh "highly out-performed the rest of the PC market", Singh explains further. Apple's market share grew by 20 percent during Q3, up from 5.7 percent a year earlier.

Other measures: By IDC's reckoning, Mac shipments rose 13 percent in mature markets and by stunning 50 percent in emerging ones, where Windows PCs struggle -- surprising considering Apple's considerably higher selling prices. Apple's success in emerging markets "does not align with the rest of the PC market", Singh says.

During last week's earnings call, Luca Maestri, Apple CFO, highlighted the "impressive performance in emerging markets where Mac sales were up 46 percent". Emerging markets now account for about one-quarter of Apple revenues.

ASPers Syndrome

However, the United States is Apple's most-important market -- for the three months ending in September, accounting for 42.3 percent of Mac shipments, according to IDC. Q3 U.S. retail Mac sales are the highest in 7 quarters, according to NPD, up 16 percent year over year and they even exceed Holiday 2013. During the third quarter, by comparison, Windows PC sales plummeted by 21 percent.

Mac ASP in the United States closely aligns with the global market: $1,277, compared to $458 for Windows PCs, by NPD's reckoning. The Apple figure fell $176 from first quarter and $79 from the second.

One reason for the change, and with it boost for Apple computer sales: "Clearly MacBook Air has become much more competitive in the $700-$1000 price range", Baker says. The entry-level model is $899 for the general populace and $849 for students and educators.

"Windows has been competing more in that area but mostly with 2-in-1s and Ultrabooks and high-end Windows products that appear to be struggling in a value proposition vs their low cost brethren", Baker emphasizes. "By bringing more attention to this price range, consumers are looking at it and finding Windows products wanting".

The United States is a microcosm -- what IDC calls "test market" -- for the world, and Mac's performance foreshadows the future. So there is no misunderstanding, for the blogosphere obsessing over Asia: "The U.S. is bigger than China -- it's a huge market for PCs", Singh says. IDC typically sees sales slowdowns or upticks start in the United States and follow in other countries over subsequent quarters.

Unified Theory

That brings us back to iPad, declining global tablet shipments, and a reason other than phablets for the trends. The PC refresh cycle that contributes to slowing pad sales starts in the United States and spreads across the globe. The question isn't so much will consumers and small businesses buy but what. Chromebook? MacBook? Windows notebook?

There, Apple's unified theory of personal computing -- similar user experience across devices -- is huge advantage, starting with iPhone users and continuing with iPad owners. Their numbers are legion. "We've sold 237 million in just over four years", Apple CEO Tim Cook said about iPad during last week's earnings call. "That's about twice the number of iPhones that we sold over the first four years of iPhone. If you look at the last 12 months of iPad, we sold 68 million in '13, in fiscal year '13 we sold 71 million".

All those people who put off PC upgrades since 2010 to buy iPads are potential -- and many likely -- Mac buyers. If you look at where Microsoft heads with Windows 10 or Google with Android/Chrome OS, the destination is a unified user experience. But Apple is there now, with hundreds of millions of satisfied customers.

There is nothing in the data to suggest that suddenly Mac will own the personal computing market; Windows shipments are so much greater. However, there is clear evidence that as tablet shipments decline, PCs will go up. That's the takeaway often overlooked in the rush to give all the credit to phablets.

What Apple doesn't capture in units, it recovers in revenue, if ASPs are any measure, and demonstrates that many people will pay much more -- nearly three times the average PC price in the United States. During calendar Q3, Mac generated about 16 percent of Apple revenues. Sales were up $1 billion, or about the same as Microsoft Surface Pro generated during the same quarter.

Thirteen years ago, during the first Apple Store briefing, Jobs asserted: "Macintosh users are early adopters for portable digital devices". How funny if early adopters of portal digital devices like iPad, and also iPhone, become Macintosh users.

Photo Credit: Joe Wilcox