Apple declares war on the entire PC industry

There is absolutely nothing coincidental about Apple launching new products today. The big product launch is Apple's first preemptive marketing strike against Microsoft, Windows 7 and the entire PC industry. It's a bold move exploiting a position of strength against an industry weakened by low-margin, low-priced netbooks.

Windows 7 officially launches in two days. Best Buy already has Windows 7 PCs on sale, but not for purchase. Dell started taking Windows 7 over the weekend. Gartner is telling businesses they must upgrade to Windows 7, despite any hardships migrating from Windows XP. Microsoft is priming the marketing pumps. The PC industry is collectively turning its attention to Windows 7, which Microsoft is trying to launch with some bang rather than a whimper.

But what has the geek world been babbling about for the last 24 hours? Apple. Firstly, there were rumors of new iMac, revamped white MacBook, new Mac mouse and updated Mac mini -- all products Apple unveiled early this afternoon. Secondly, late yesterday, there were Apple's blow-out fiscal 2009 fourth-quarter results: $1.67 billion profit and 3.05 million Macs shipped, the majority notebooks. Apple outperformed Wall Street's consensus, blasting past the econolypse's effects like it was business as usual.

Exactly who is talking about Windows 7 today or will tomorrow? Or gasp, on launch day -- Oct. 22nd?

Netbooks are a Plague

Apple's new product release timing is clearly deliberate, designed to pull attention away from Windows 7. But Apple also is looking to pull away Windows PC sales at the high end, where Macs are strongest and PCs are weakest. Surely, Apple executives realize that the PC industry is hoist with its own netbook petard.

I've complained about netbooks for months. They are cannibalizing Windows PC sales at an alarming rate. By comparison, laptops commanded higher margins and average selling prices when their popularity started to increase. PC manufacturers -- and even Microsoft -- benefited from notebooks' reversing the trend of falling computer ASPs; for a time. By comparison, netbooks are a plague, because they dramatically lower ASPs and margins and pull away sales from real laptops.

Last week, Gartner and IDC issued preliminary PC shipment data for third quarter. Both analyst firms once again identified netbooks as driving portable and overall PC shipments. Gartner observed the negative impact on ASPs. Mikako Kitagawa, Gartner principal analyst, said in a statement:

The consumer mobile PC market drove US shipment growth in the third quarter of 2009, fueled by back-to-school sales. However, the results came with a revenue loss because of very steep declines in average selling prices...Consumers were comfortable buying PCs, but they were relentlessly looking for bargains. Our preliminary research shows consumer mobile PC ASPs declined more than 20 percent compared to a year ago.

On October 8, DisplaySearch explained netbook's derisive impact on PC ASPs. Laptop ASPs fell to $688 in second quarter from $704 in first quarter and $849 in Q2 2008. Netbook prices fell to $361 from $371 and $506, respectively, during the same time period. Additionally, netbooks accounted for 22.2 percent of overall PC sales and 11.7 percent of revenues. Netbook sales jumped a staggering 264 percent year over year, while overall laptop sales (without counting netbooks) declined 14 percent.

Netbooks remain the Windows PC industry's huge Achilles tendon, exposed and ready to be cut by an aggressive Apple. Windows 7 isn't going to lessen demand for netbooks. Consumers might find them even more appealing because of Microsoft's new operating system.

The "Pay More" Principle

Apple positioned Macs as the alternative for people willing to pay more, which is a surprising number of buyers given the gloomy economy. Today's new Mac product announcements give potential shoppers more reasons to look Apple's way -- even with Windows 7 launching on Thursday. For Betanews readers frothing to comment, I want to be absolutely clear: I am not suggesting Windows 7 won't sell well. But I am asserting that many new Windows 7 sales will be on netbooks, not the high-priced, margin-rich systems Microsoft and PC partners need to sell.

Something else -- and this is hugely important: Last week, there was speculation that PC and peripheral manufacturers may have overproduced for the holiday quarter in big anticipation of Windows 7 demand. Based on my own quiet channel checks, I have the same concern. I'll predict now that Windows 7 PC supply will be greater than consumer or small business buying demand during fourth quarter. If OEMs anticipated big demand for netbooks, then the bigger problem will be for Microsoft, which makes less on Windows 7 Starter Edition than other 7 versions. But if OEMs bet big on pricer systems, they will stuff the retail channel this holiday season.

The resulting price war would be good for consumers looking for bargains, but further sap tight OEM margins. Macs have remained largely immune to the economic gloom or even the potential threat of lower-priced Windows PCs. But Macs have competed against Windows Vista PCs. Can Macs defy Windows 7 gravity? Because of the netbook scourge, I must say yes. Few Windows PC manufacturers are competing where Apple sales are strongest: Computers selling for $1,000 or more. But all major OEMs are fighting for sales in the segment for the smallest, least powerful, lowest-cost and least profitable portables. Are their executives insane?

I'm on record as asserting that Windows 7's release will stall Mac market share gains. My reasoning: Windows 7 netbooks are sure to drive up PC unit volumes. But market share is but one measure of success. Yesterday there was an interesting Twitter discussion about market volume versus sales margins. Jason Snell, Macworld editorial director tweeted: "Apple sold 2.3M laptops at an average price of $1,265 per unit. Imagine how much money it could have lost if it had a netbook!" He's absolutely right, and so is Apple for choosing not to compete in a portable segment where brands and margins are lost to lowest price.

Mind Share versus Market Share

Apple has got geekdom's attention, and that of Wall Street and even consumer and trade publications. For today and tomorrow and quite possibly Thursday, which otherwise should belong to Microsoft and Windows 7. Some enthusiasts will be quick to point out many apparent Mac shortcomings. Windows PC defenders will rightly observe that:

• "The new MacBook packs less RAM and storage than comparably priced Windows PCs." Maybe, but the $999 price will appeal to enough buyers, who will get a sturdy, attractive new enclosure and big battery life.
• "The 27-inch iMac is too big and too pricey at $1,699." Maybe, but the screen size makes the desktop a potential computer and TV, when streaming or playing programs or when attached to a tuner from companies like El Gato.
• "The updated Mac mini remains pricey at $599." Maybe, but price is low enough for many people thinking of adding a Mac as second PC. The $999 Snow Leopard Server Mac mini has huge potential appeal to small or home-based businesses.

There seems to be a blind spot when it comes to understanding Macs in relationship to Windows PCs, and I don't understand why. Many analysts, computer enthusiasts and reporters miss something simple: Macs compete against Windows PCs, while Windows PCs compete against, well, Windows PCs. Apple can compete differently because Macs are the alternative to a big, saturated Windows PC market. Macs are the new thing, while another Windows PC is just another old thing. Macs will compete against PCs, but in the PC market Windows XP (and some Vista) will compete against Windows 7.

Yesterday with record Mac sales and today with new Mac products, Apple has declared -- at least for holiday 2009 -- war on the entire PC industry. To win, Apple just needs to make more money off lower volumes. Apple doesn't need to gobble up market share. A few points of share here or there are huge to Apple but losses to Macs have little impact on PC OEMs. It's an unfair battle in some ways, because the PC industry isn't fighting Macs but a civil war of Windows old against Windows new. Sadly, netbooks will scorch the earth behind every sale.