Jim, I think the iMac does not sell on performance.
The bottom line is, well, the bottom line. iMac needs to make a certain price point. I think $800 is a compelling price for an iMac, given it's cleaner and easier OS, nice small all-in-one design, and sharp monitor. My 233 Mhz iMac (I mean my wife's...) is going to run ClarisWorks and browse the web just as fast as a 333Mhz iMac. Since I upgraded the ram to 64MB on day one, she's sitting pretty.
A big speed bump allows Apple to sell "discontinued" lower speed iMacs, without loss of face. People pressed for cash could care less about going Warp 4 instead of Warp 7. After all, most people are just going to the store to buy milk.
On the other hand, max speed is important to gamers. Kids, really. (Or kids at heart.) This is an important market to cultivate. It creates an environment where it is OK to buy a mac again. Very big deal, imo. And how many folk would pay another $300 just for the kewelest new iMac color, let alone a mega speed bump?
So, having a supply of just-barely-obsolete macs is important to supply the price concious with. For most people, 233MHz G3 is like swatting a fly with a shotgun.
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