HEAD-TO-HEAD
Mac Death Match, Round Three: Chaffin vs. Enderle

Today in Round Three, Chaffin and Enderle take on another Mac topic sure to generate debate on both sides of the Mac coin. Tomorrow's Round Four will feature both tech warriors' rebuttals to the other's assertions on the following topic:

MacNewsWorld: Is Apple a hardware company that sells software, or a software company that sells hardware?

Chaffin: This is an oft-asked question -- one that many people simply don't understand for the most part because they can't understand any other business model besides Microsoft's (Nasdaq: MSFT) .

Apple (Nasdaq: AAPL) is both a hardware and software company. This comes back to the "whole widget" issue I mentioned earlier. Apple sells hardware that uses an OS that Apple makes, and Apple makes software to help sell that hardware. It's not that it's a vicious circle. It's that the two are interrelated.

More importantly perhaps, Apple funds its software development largely through its hardware sales. If you take away one, you lose the other, and there is no way around this.

As an example of how these issues are tied together, Tim Bajarin of Creative Strategies told me recently in a Mac Observer article that his group found that customers were buying Macs in order to run iLife. Apple sells iLife for US$49, a price that would not support development of such an excellent suite were it not for the fact that Apple knows that it is making a profit from hardware sales relating to iLife use as well.

The Mac platform is such a joy to use in part because of this synergy. The whole is greater than the sum of its parts.

Enderle: Apple is increasingly a company that sells software, services and accessories. It is exiting from the traditional PC hardware business.

When was the last time you saw an Apple PC ad? How about an ad for iTunes, the iPod, Final Cut Pro or Garage Band? Apple has been pulling support from traditional hardware marketing ever since its "switcher" campaign failed.

Dell (Nasdaq: DELL) is a hardware company. It doesn't sell much software, and it outsources most of its services. When you think of Dell -- "Hey, dude!" -- you typically think of a PC, server or workstation.

Microsoft is a software company. It sells applications, services and develops its own OS.

When you think of Apple, do you think of PCs, or products like iTunes, Garage Band, Final Cut Pro and Panther?

Apple has the most powerful and capable marketing organization in the segment and it put every resource it had on moving Windows users to Apple machines. It failed miserably. The company did slow its erosion of market share dramatically, but it failed to reverse or even eliminate it. This must have shown Apple's executive team that the market simply wasn't going to get pushed to a non-standard platform, regardless of testimonials and clear usability benefits.

Apple then took a fraction of its PC budget and used it on iTunes and the iPod. The company is now the dominant player in music services and MP3 players. It isn't number 10, 11, 15 or 20. It is number one.

This message has clearly taken hold at Apple corporate. At the last Macworld, there was virtually no new Apple desktop hardware. Instead, Apple showcased the iPod Mini, touted improvements to its software applications, introduced Garage Band and then a network attached storage device that it had no business to make. (Storage is a really difficult market to get into. Ask Dell).

Apple just hasn't fully Groked the change yet and now has somewhat of an identity crisis. Because it hasn't been able to move to industry standard hardware, it still has to sell the Apple stuff, which remains very attractive. However, it just isn't putting the same resources into improving and marketing hardware as it used to. Increasingly the hardware is pulled by the software and services.

How this works is: you get sold on a product like Final Cut Pro and discover that you need to have Apple hardware to run it. Of course, eventually, Apple will discover that firms like Adobe (Nasdaq: ADBE) will kick its butt because Adobe software runs on the platform the customer wants to use and doesn't have the same hardware lock-in.

This is very similar to the way it was, and continues to be, in the UNIX market. You lead with the application, often CAD/CAM, and then follow with the best hardware for the money that can run it. Increasingly, that means Intel (Nasdaq: INTC) hardware, but it is the application, not the hardware itself, that leads the sale. In this market, the traditional UNIX vendors are finding that software, most often based on Linux now, is where the effort needs to be made. Hardware is commoditized and devalued.

In the iPod/iTunes segment, the majority of sales have nothing to do with Apple hardware because the products interact with Windows machines. Apple's successful financial performance was, in the recent CEO call to financial analysts, tied directly to these sales, further supporting the argument that it is simply no longer the hardware company it once was.

If it looks like a duck and walks like a duck it probably is a duck, and Apple increasingly looks and acts like a company that is in the software, services and accessories business. In other words, it more resembles a Microsoft than a Dell, and Dell is a hardware company.

Check back May 12th for Round Four.