After nailing its third-quarter earnings last night, Apple left investors with a funny taste: The company issued a surprisingly weak outlook for its fourth-quarter revenues and gross margin, and said margins would be even thinner next fiscal year. Shares tumbled 10%.
It's hard to imagine that people are simply going to stop buying Macs and iPods. So what is Apple hinting at? New products, no doubt. But also, we think, slashing prices to rapidly grow market share.
First, the specifics: After reporting $7.46 billion in Q3 revenue -- 38% year-over-year growth, Apple guided to $7.8 billion of Q4 revenue -- just 26% year-over-year growth. Finance chief Peter Oppenheimer said he expects Q4 margins around 31.5%, down from 34.8% last quarter, and down from 33.6% during Q4 2007. He also said margins would continue to fall to around 30% in fiscal 2009, which begins in October.
But Apple's Mac business is firing on all cylinders, the iPhone 3G is in short supply, and even the iPod is selling better than expected. So what could cause that drop? New toys, of course, which require spending on R&D, components, marketing, etc. But unless Apple is building a spaceship, it's hard to see how a few new products alone would decimate Apple's margins to rates the company hasn't seen since 2006. And increased spending on new products wouldn't explain the slower projected revenue growth.
More likely: Apple is also going to slash prices to accelerate the rate it's stealing market share from rivals. Oppenheimer even hinted at it:
"We’re delivering state-of-the-art products at price points that our competitors can’t match, which has resulted in market share gains in each of our products. We plan to continue this strategy and to deliver great value to our customers while making a reasonable margin but not a margin so high as to leave an umbrella for our competitors."
This would have been unthinkable just a few years ago, but now it seems like a great time to make a real run against Windows-running rivals like Dell (DELL) and HP (HPQ). Microsoft's (MSFT) Vista has a tiny fan club, PC manufacturers continue to churn out uninspiring machines, and as more software moves to the Web, companies (and individuals) have fewer reasons not to buy a Mac.
Except for their price tag. Yes, Apple's computers are pretty much as cheap as they've ever been, especially relative to comparable PCs. But you can still build a PC workstation for a few hundred dollars. And you can still buy a PC laptop for less than a grand. You can't do that with a Mac.
So we can't think of a better time for Apple to go on a market-share land grab. Cut the Mac mini to $400 as a toy for home-theater enthusiasts. Come out with a new, all-purpose "Mac" workstation for $600. And/or knock a few hundred off the MacBook and iMac, and keep the MacBook Pro and Mac Pro as high-end workhorses. Sell more computers to companies, and in turn, get their employees to buy Macs, iPhones, and Apple TVs at home.
Apple managed to steal 2.1% of the U.S. PC market in the last year with its current prices, ending up with 8.5% of the U.S. market at the end of June, according to Gartner. Imagine what it'd be able to do after knocking a few hundred bucks off its price tags.
See Also:
Apple Smashes Q3 On Huge Mac Sales, But Weak Outlook Crushing Stock
What's Apple's Mystery 'Future Product Transition'?
iPhone App Store: 25M Downloads In 10 Days
