Why You Won’t Be Seeing a “Headless” Mac

If you’re on the board of Apple Computer you’ve got be thinking that life is pretty sweet right now. The iPod is a monster hit, the new G5 iMacs were unveiled and the critics fell in love, the stock price is way up, iTunes defined legal music downloads and anecdotal evidence suggests people are switching to Mac faster than any time in recent memory. Sure not every little thing has been a home run, changing the rules of iTunes was a foul tip, but other than the very small stuff it’s days of wine and roses at Apple. Right?

Well perhaps these are the new halcyon days but people are still worried about the anemic market share and no worry about Apple’s market share can be presented without a ready made solution. The solution in the past was always a headless iMac. You know the drill: Apple should just sell something cheap enough to compete with the lowliest Wintels and watch the Mac’s market share skyrocket. It’s an argument that’s been around for quite sometime but recently it’s taken on a new, if predictable, twist. People are now suggesting that Apple release a $599 monitor unencumbered G5 desktop machine.

The easy thing to do at this point is dismiss the idea as laughably inane. It is an obvious thing to do, after all the people who buy the $500 Costco computer aren’t exactly gamers who simply must live on the bleeding edge. To the contrary, the folks who opt for a Wal-Mart box are not interested in the best processor they can possibly get, no these people are after any solution as long as it is cheap and sold in the general vicinity of Toughskins. To the low end consumer a computer is little more than a toaster. The toaster either toasts bread or it does not, to the value minded computer shopper a computer either surfs and e-mails or it doesn’t, there is no room for vagaries of performance. Hence to the Sam’s Club shopper a G5 chip is meaningless, for this type of buyer you could write “Powered by Pringles” in bold letters on the side of the box and it would make no difference. Now that we have dismissed the notion of a very low end G5 we are left to wonder about the viability of a very low end G4, an all together more interesting proposition.

First we must ask: Why should Apple build a low-end headless eMac? Proponents will argue vociferously that by not including the monitor Apple could sell a box for a mere 5 c-notes (or less). When pressed the same group of people will also opine that offering a really cheap Mac solution will help Apple’s market share get back to where it should be (a fictional point that varies person to person). That’s what they say, but if you follow their arguments carefully you will note that the real reason they think that Apple should introduce a rock bottom computer is so they can get their next Mac more cheaply. A notion I sympathize with, I like every other person that has ever purchased a computer have never walked away from the purchase thinking “Man, I wished I could have paid a little bit more!”

Reasons for advocating a very low priced Mac aside we should first wonder if it is actually possible for Apple to produce a machine that could sell for four or five hundred dollars. The answer is easy: Of course they could. Trust me when I say that Apple computers are no longer made of Apple only parts, they’re generally full of pretty generic stuff. Hence I conclude a $499 Mac box would be absolutely no problem. Apple would probably be forced to shave off a hefty chunk of profit margin and the model would lack some features that every other Mac has, say a dedicated video card and firewire but it could be done. Of course the model would be largely derided as too limited (something else the people who crave a headless Mac don’t tell you, they want a really good really cheap Mac. No compromises please) and would only be a halfway usable, but it would at least exist.

So once we’ve reached the conclusion that it can be done we have to decide if it is actually something that Apple should do. Here the waters get a little murky. The most obvious answer is as follows: A cheaper Mac means more people will buy a Mac. This is based on fundamental economics, the less item X costs the more units will be sold. It’s known as a demand curve and without getting into the hazy area of maximization and opportunity cost let me note that the argument is sound. Cheaper headless Macs will sell better than the more expensive all in one jobs.

Of course if cheaper is always better was the sum total of economic and marketing knowledge you could get a college degree in either discipline in roughly two minutes. The real world is a bit more complicated (economists worldwide are grateful) so let us factor profit into our models. This a key area for Apple, after all their 25% profit margins are the stuff e-Machines executives dream of at night. Still, it can be argued, that selling more computers at a lower profit margin is just as good, if not better, than selling fewer computers at a higher profit margin. So it is now necessary to consider the demand side of the equation. Will a cheaper Mac with a lower profit margin result in increased cash in Apple’s bank account? The answer is easy and the answer is no. But what if Apple could maintain current profit margins? Before we consider that question let us pause for a moment and remember that Apple is a business and businesses aren’t there to do anything but make money. Increasing market share only benefits Apple if it is associated with an increase in profits (either now or in the future).

Say, for the sake of illustration, that Apple sells one million eMacs and iMacs per year (we will say the ratio is fifty-fifty) with twenty five percent profit margin. That gives Apple a sweet $287,250,000 in profits off the eMac and iMacs. Now suppose Apple introduces a really low cost Mac, the fabled $499 model called, from now on, the “LC Mac.” This is going to eat into the sales of the existing product lines certainly but just how much? Here we’ll have to go with pure conjecture and just guess half. That is to say half the people that would’ve bought eMacs will buy the LC Mac and half the people who would’ve bought iMacs will buy the LC Mac. How many more of the LC Macs will Apple have to sell to make up for the profits lost on the eMac and iMac? If you run the numbers you realize that Apple will need to sell an astonishing 1.1 million of the LC Macs to make up for the income lost on the cannibalized sales of the eMac and iMac. Remember they’re not making any more money, that’s just to get back to the current profit levels. Remember I have assumed that the profit margins on the new models mirror the profit margins on the current offerings, but when you get into products priced that low that particular assumption is probably pure fantasy.

At this point let us reflect on the bigger picture: Apple sells roughly 1 million consumer level desktops per year. To offer a LC Mac and keep current profits stable Apple will have to sell a combined total of 1.6 million consumer oriented desktops a year. That is a pretty big increase, roughly six hundred thousand computers. I doubt even the most fervent headless Mac adherent would maintain that the introduction of a very inexpensive Mac would boost sales by sixty percent. In all likelihood introducing a LC Mac would be a huge financial liability for Apple even if they maintained the same levels of profitability. All this to explain why you’re not likely to see a headless Mac (other than the awe inspiring PowerMacs) any time in the near future, it’s just not in Apple’s best financial interest.

A note on the numbers: The numbers are mostly guess work, the million unit a year mark is roughly correct but the rest of the figures used are purely illustrative. Instead of wholesale costs I used full retail price, hence an iMac sells for $1299 etc.  The actual calculations are straightforward and there is some fun to be had in adjusting the parameters to find the point at which a LC Mac results in enough profit to justify the cannibalization of sales of more expensive models.