Apple's risky iPad strategy

I goofed. I misinterpreted an analyst report on Apple's share of the premium PC market. I said Apple had 90% of that market, and that's wrong.

However, Apple does have a majority of the market, said the analyst, Stephen Baker, vice president for industry analysis at the NPD Group. And he also made some interesting points on why the iPad is dangerous for Apple's business.

Here's what I said Friday, in "Potbound Apple and the iPad:"

Most of us who've been in the industry for more than the decade have an image of Mac market share: They're a niche product. Love them or hate them, they're boutique merchandise, with a few percentage points of market share. Macs are 5% of all computers as of January, according to NetMarketShare. That's been true, within a few percentage points, for as long as I've been paying attention to those numbers, nearly 20 years. 

However, let's take a closer look at those numbers: Apple's sales are skewed to premium PCs, priced at over $1,000. When you look at premium PCs alone, Apple has an astonishing 90% market share. That's right: Nine out of 10 PCs priced at $1,000 or more are Macs.

About an hour later, an anonymous reader set me straight in the blog comments:

That's wrong: NPD's sales figures exclude sales on HP.com and Dell.com. In addition, if memory serves, NPD's numbers are USA-only.

If a person wants to buy a high-end HP or Dell computer, they will most likely custom order one from the manufacturer's web site.

I custom ordered an HP Pavilion Elite from hp.com. According to NPD, that sale never happened.

So I queried NPD to find out what's really going on. And, sadly, it turned out I was wrong and the anonymous reader was right. Baker, the source of the information in the original article, said in an e-mail:

Your reader is correct. We track sales through retail stores and 3rd party online retailers (like Amazon) although we also do receive data from Apple's store chain. NPD's methodology is the best since we receive sales directly from retailers and web sites and track actual sales, not shipments. However not every selling entity chooses to provide us with sales figures so we do not claim, nor are we, representing the entire market, just the portion of the market that chooses to work with us, which is most US retailers, besides Walmart.

His e-mail also politely but thoroughly chewed me out for paraphrasing an article rather than going directly to the source for the correct information. I deserved that.

But what does that do to my conclusion? I said Apple dominates the premium PC market, which is driving excellent revenue and profits, but that domination is dangerous. It doesn't leave Apple much room to grow in premium PCs. Moreover, premium PCs are a risky market to be in, because the growth is in under-$1,000 PCs and netbooks, a market in which Apple doesn't have many products.

The iPad (I said) represents Apple's entry into the sub-$1,000 PC market, where there is much more room to grow. More than that, it's an attempt to redefine that market.

Was I wrong?

No. Those conclusions still stand. While Apple doesn't have 90% of the premium PC market, it does have a "majority" of that market, Baker said.

The sub-$1,000 market is a great opportunity for Apple. Until now, Apple shunned that market because they're focused on selling high-quality -- and high-priced, high-margin -- Macs. The iPad is an attempt to sell a computer priced well under $1,000 while still maintaining Apple's quality standards.

So that's a win for Apple, right?

Not necessarily.

"If they're going to be in that market, they're doing it the right way," Baker said. "But do they really want to be there?" Low-priced PCs -- even sprinkled with the Apple magic -- have lower margins, lower revenue, and lower cost.

The iPad will inevitably cannibalize Mac sales. Even staunch Mac owners will look to iPads rather than Macs as they buy second, third, and fourth computers.

But low-priced PCs are already cannibalizing sales of high-priced brethren. Apple has so far been immune to the effects of low-priced PCs, but won't they, too, inevitably succumb? And if somebody's going to cannibalize Apple's business, isn't it better for Apple to cannibalize itself?

"That's true up to a point," Baker said. "But what ends up happening is you put pressure on your own products in terms of pricing. It creates a downdraft and makes it difficult for other products to hold their price points."

PC prices behave much like the sheep in this Monty Python sketch. Notice they do not so much fly as plummet. 

That's sound business logic -- but Apple is a company that defies the laws of business that the rest of us struggle with. Apple is a company that makes luxury products, and it's thriving during the worst economic downturn since the Great Depression. If anyone can figure out a way to defy pricing gravity, and still keep their customers happy, Apple can.

In other iPad-related news: The MercuryNews.com ran this headline: "IPad likely to be popular among business travelers and the middle-aged." It's a pretty good article, but that headline -- ouch. I'm looking forward to getting an iPad, I don't do much business travel, and as for the other thing -- I prefer to think of myself as in "the beginning of my late youth."