Well Bill, I wouldn't try to characterize the dealer network as baggage. If they were, Apple would have dumped them during Q1 '98.
The current shakeout in the Wintel camp, while negative for dealers experiencing a profit margin squeeze, could be a positive for Apple and Apple's relationship with those dealers. Apple, so far, has been able to maintain excellent margins, even in the face of rising sector inventory pressure. As Wintel boxmakers can only compete with each other on margin due to their lack of differentiation in the marketplace, Apple's goal is to keep dealer margins higher for Macintosh than Wintel and keep buying pressure up. The dealers will love them for it, push Apple products over Wintel, and drive Apple's incursion into enemy marketshare.
Forget vertical integration as a source of cheaper processors. Apple's too small, and IBM/Motorola can do a better job anyway.
Processors are priced by OEMs using classic microeconomic formulas based on supply and demand. When a new processor is born, the supply is weak and the demand may perhaps be high since they are needed for R&D, so the chip price is rather expensive. If the OEM is trying to generate demand, he may give away the first few batches selectively. As the products from the new processor go into production, the OEM, ramping up his own production, is trying to realize a recovery on his development effort, as well as recovery of his cost of production, as well as make a profit, balanced against the 'clear the market' principal of microeconomics. Once the front end costs are recovered, it becomes a matter of cost of production and profit versus the 'clear the market' pricing model. When the 'clear the market' price drops or approaches the cost of production, the chip is discontinued or is relegated to nitch markets able to support the minimumly acceptable price. The same happens with the products made from these processors.
Every product has a cycle. Every cycle has a rider. Apple must pay to ride just as does Compaq, Dell and hundreds others. These other riders have been getting a lot of milage off of the fact that they are all the same. The end of their product cycle is nearing. The clear the market price is dipping below the cost of production. A new product cycle from the same OEM is on the horizon, but distant.
Apple's product cycle is in full bloom and will carry the company into the next millennium. Cost of production is in decline and will support a long smooth decline in the clear the market price. It's going to be a nice ride for those investors who can see it.
Good hunting,
HerbVic |
