INDUSTRY ANALYSIS
The Rebirth of Apple as a Multimedia Company

We may be watching the demise of Apple (Nasdaq: AAPL) as a PC company and its rebirth as a cross-platform multimedia company. This has been going on for some time, but it just became obvious to me when I had a chance to review Apple's latest financials. The PC market grew at a good rate -- at least compared with previous years -- with 16 to 20 percent growth, depending on who provided the numbers. Apple grew its PC business at a near-flat 5 percent and lost share, again.

On the other hand, the MP3 player business grew an impressive 87 percent. Now this is a hot market. Apple grew its MP3 player business better than 900 percent. That's a nine followed by two zeroes. I'd love to see anyone argue that Apple isn't kicking the proverbial butts of the other player makers, including old stalwarts like Creative Labs and Sonic Blue as well as giants like Phillips, Thompson Electronics, GE and Samsung.

Next time you are watching an Apple ad or looking at an Apple billboard, see if you even can find a personal computer. The ads are almost all about the iPod or iTunes. Head-to-head comparisons between Apple and Napster, RealNetworks (Nasdaq: RNWK) and MusicMatch almost always favor Apple as number one. And, clearly, the iPod has taken all comers, slapped them around and spit them out. While the new mini-iPod has had some initial issues, it remains one of the hottest retail products on the market as well, making kicking butt a new Apple tradition.

Decline of PCs

If you think about it, on the PC side, Apple really is little more than a brand and some nice shells. The company, like most other PC makers, has gone to offshore manufacturers for most of its products. Underneath, the hardware is mostly IBM (NYSE: IBM) now, and the software is based on an open-source version of Unix developed by others, called FreeBSD. The actual intellectual capital invested by Apple in the platform itself seems to be in decline, and, as much as I personally like FreeBSD, the hot alternative to Microsoft (Nasdaq: MSFT) these days is Linux.

What I personally find fascinating is that the SCO-Linux-IBM fight hasn't really benefited Windows as much as it has FreeBSD. I'm convinced there is a much stronger play here that could be made by Apple and others, but after seeing what IBM did to Linux, I'm not sure I even want to suggest that any company get more involved than it is today with FreeBSD for fear of spoiling that platform as well.

Apple did try a massive switcher campaign, but sales numbers didn't move much, which suggests that if the company hadn't done this campaign, its market-share decline would have been much more dramatic. Further, this lack of movement indicates a market that, outside of Apple loyalists who undoubtedly will be writing to disagree, is really no longer interested in Apple as a platform.

Not that I think this is a good thing. Apple has historically made design important to the PC industry, and it continues to build products the rest of us lust after, even though we increasingly can't use them. It also has been the leader in effective marketing, but I have to admit this marketing failed badly when it came to growing PC market share, even though the company exceeded its wildest dreams when it came to the iPod.

Defining Apple's Strengths and Weaknesses

In looking at Dell (Nasdaq: DELL), which is once again the market leader in the PC business, you realize Dell's strength isn't really PCs. It is a technology follower and tends not to be first in much of anything. However, Dell is incredibly good at managing costs, logistics and sales channels, which works for the company across an ever-increasing group of products. Some industry observers are projecting that, at some point, Dell and companies like Amazon (Nasdaq: AMZN) will become competitors as Dell slowly looks more and more like a channel in and of itself and less and less like a manufacturer.

Apple's strength is design excellence and its innate grasp of the importance of well-funded, good-quality marketing. Its PC platform is actually a weakness right now, not because it isn't well done but because the market likes standards and Apple isn't one.

This has forced the company to build more and more of the applications that reside on its hardware because it has been increasingly hard to capture developers who want to develop on Apple. And, as the company builds more and more of the applications its customers use, software developers look at Apple more and more like a competitor and start to position themselves against both the Apple applications and the Apple platform.

Once on this slope, there are few successful ways I know of to get off.

Apple as an ODM

For years, I've pointed out that I think Apple could do very well in the Wintel market, but it wasn't until the iPod was released that I could prove it. In that first holiday season, Apple sold out, and what was not widely known is that after the holiday season the company had more returns than I've ever seen before. These returns were from Windows users who had bought the iPod but hadn't realized that it didn't yet work on their PCs, which showcased a demand that Apple wouldn't actually realize until months later.

Apple did have a belief that the iPod would pull Apple hardware sales. Unfortunately, that belief didn't pan out, but, as I noted above, iPod sales have been phenomenal and mostly on Wintel hardware and against entrenched Wintel vendors like Creative Labs, which showcases just how powerful Apple's advantages are in this market.

Recently, Apple even cut a deal with HP (NYSE: HPQ) to rebrand the iPod, allowing HP to tie the device to the company's Media Center PC line and make it part of the broader converged market that is emerging. This is Apple as a multimedia original device manufacturer (ODM) and clearly a new role for the company. The possibility that Apple could work with HP on PC design as well is likely on the table. Both companies clearly could benefit from a much broader collaboration focused on a future they apparently both can see.

The Future for Apple

I see Apple's future role as more of a cross-platform vendor, moving from the Mac OS to Windows and possibly even to Linux as the company broadens its base for products that potentially could have a much larger audience, such as Final Cut Pro, GarageBand, iLife, iPhoto, Motion, Shake and Logic Pro. In fact, given the interest in Linux and the similarities between FreeBSD and Linux, an OS X user interface for Linux is a possibility and one that a large number of Linux users probably would like better than the mess they currently have.

How fast this happens depends on the Apple leadership and their willingness to step away from the crutches of a niche hardware-software platform and embrace the broader market with their solutions. The execs are getting daily wake-up calls that the general PC market wants to buy Apple stuff if the company will simply make it available to that market -- and that their own PC market is in trouble.

This market is defined by companies that, like HP, take big risks like massive mergers and make them work. The market also is defined by companies like IBM, which failed to spin off its software, thereby avoiding risks but giving the related markets to others. Apple is on the cusp of an important decision that either will take it to a position of dominance or will doom it to the declining niche of companies that could have been contenders. The iPod has shown the way, and my bet is Apple will eventually follow.