While its profits are real, Apple’s small rise in Mac market share has more to do with how far it had fallen.

November 17, 2005

Recent analyst reports touting the “halo effect” of Apple’s popular iPod causing a small rise in Apple’s personal computer market share are misguided at best, according to a report from Endpoint Technologies Associates.

The report, issued late Wednesday, contends that Apple’s recent rise from 1.8 percent market share worldwide to 2.5 percent in the second quarter had more to do with how far Apple had fallen rather that any belated halo cast by the iPod.

In fact, Apple’s market share has fallen slightly in the third quarter to 2.4 percent, taking even more steam out of the halo argument.

“No Sherman’s march to the sea here,” said Roger Kay, president of Endpoint. “The argument against the halo effect says that while Apple’s shipments have been up for the past four quarters, it is because they are coming off historic lows. And we are now in an upgrade cycle in which the Apple faithful buy new systems.”

Apples shares rose $0.82 to $65.77 in recent trading.

According to the report, Apple’s personal computer market share has fallen steadily from a high of 16 percent in the U.S. market and 13 percent worldwide back in 1986. By the 1990s, Apple had lost some of its shine but it was still a contender as the second-largest player behind IBM with a 10 percent market share.

“In 1993, a surging Compaq took the top spot from IBM, and Apple was bumped to number three. It was pretty much downhill after that,” said Mr. Kay. “Since 2000, Apple’s worldwide share has hovered around 2 percent.”

Mr. Kay believes that between 1997 and 2002, Apple’s products became even less competitively priced while it lost many of its technical advantages over the PC.

“Under these circumstances, if there is a halo effect… then the demand for Macintosh systems must be that much worse, since without such an effect, the company’s share would be even lower,” said Mr. Kay.

But Mr. Kay does not believe in Apple’s halo, so he attributes the Mac’s steady decline to “a lack of openness, and a price umbrella, which let the whole PC market squeeze through underneath.”

Rejected by MIT

That lack of openness caused MIT Media Lab to reject Apple’s offer to donate OS X to the consortium developing a $100 PC for buyers in developing countries (see TechSpin: Laptops for the Poor).

Members of the consortium rejected Apple’s offer because MIT Media Lab was committed to open-source software so the operating system can be tweaked. Being rejected by an organization developing PCs for the poor had to take a toll on Apple’s cachet.

According to Mr. Kay, Apple’s market share has shown tiny but steady increases since last year’s third quarter, but these increases were in the fractions of a percentage point.

“Apple’s high is generally in 2Q, based on the weighting of its business portfolio toward education, but overall, it has gained a bit more than half a point since the nadir,” said Mr. Kay.

The timing of Apple’s rise in the personal computer market does not align very well with the launch and growth in popularity of the iPod. The biggest bump in the Mac’s market share happened two years after the initial release of the iPod.

“Not exactly a direct temporal relationship,” said Mr. Kay. “In fact, Apple’s share in PCs actually sank for two years after the iPod launch.”

While the report sees Apple’s halo effect as a bit illusory, it points out that Apple’s recent success is real. Its profits are up, its shareholders are happy, and millions of Mac and iPod enthusiasts love the company and its products.

But the report sees some dark clouds hovering for Apple, and one of those clouds became evident when MIT Media Lab rejected the Mac’s operating system because it was closed.

“From the overall market’s point of view, [the halo argument is] a tempest in a teapot,” said Mr. Kay. “I believe the company continues to make suboptimal strategic decisions, even as its marketing and short-term tactical execution are astounding. What will trip it up again are the standards and pricing issues.”