dubman@ocf.berkeley.edu (Jonathan Dubman) (02/13/90)
I've read all your responses on the Low-Cost Mac, some of which I've incorporated in this article. Here is my own urgent argument, which I invite you to critique. (The subject line is creative visualization.) Apple, hear this! * * * I. Apple's current pricing strategy The Mac pricing strategy is optimized for short-term profit. The scheme starts well: Introduce a new and improved machine, saturate the cutting-edge market, drop the price, saturate the high-end market, etc. Unfortunately, this scheme is not carried to its logical conclusion. Apple price reductions peter out; the prices level off at about twice what the masses are willing to pay, and probably over five times manufacturing cost. In trying to make as much money as possible on each type of machine, Apple management overcompartmentalizes profit and does not acknowledge the complimentary nature of the sales of the numerous members of the Mac product line. Apple's profit margins are the highest in the business. In overpricing its entry-level machines, Apple is excluding vast numbers of customers at its own peril. Apple is trying to preserve its high-quality image by artificially inflating prices rather than actually improving quality or performance on the low end. Their reputation is correspondingly shifting from premium-quality to high-price. A lot of low-end customers tend to look just at the bottom line. Snob-appeal does not apply to the low end. Look how many people bought Yugos. II. The Magic Number Apple, to lower expectations, has changed its tune from "low-cost Mac" to "low-end Mac." How much should they charge, and what should it buy? It is common wisdom in the computer industry that there are several magic numbers below which many customers sitting on the fence will rush to buy a product. $1000 is commonly considered to be such a price point, for numerous psyschological and economic reasons. While this is an overgeneralization - the price/demand curve isn't a step function - and you couldn't give away some computers - this is basically true. Exactly what this $1000 should buy you is not agreed upon. A $495 PC clone system includes monochrome monitor, disk drive, and a standard memory configuration, sans printer. $1000 is still twice as much; even this proposal is arguably too conservative. We need a list price at or below $995, with a bargain basement price of maybe $750-$800 and an educational price about $700. Someone recently posted that an SE costs under $200 to make. I am aware of Apple's large research and development costs (they are competing with IBM), so I will not suggest a ridiculously low price. With design-for-manufacturing techniques, the SE is cheaper to produce than the Plus. I am sure Apple could comfortably sell the machine under $1000. I'm aware of sticky issues like dealer relations, mail-order pros and cons, international pricing, and legalizing clone manufacturing, and these must be considered, but the bottom line is, Apple needs to drop the price. III. Benefits of the low-cost Mac. There was a rare window of opportunity from 1986-1988, when Macs began to be accepted at corporations, for Apple to gain significant market share. Instead of really dropping the price, Apple depended on a stroke of good fortune (the emergence of the desktop publishing market, a lucky break that Apple has been trying to duplicate ever since) to retain its 15% market share in the face of rapidly dropping PC prices by overseas clone manufacturers. The benefits of stuffing Macs through the channels in high volume are so many that it's _almost_ worth it to sell below cost. Not only will market share increase, but the market will widen, because truly user-friendly machines will be available to the masses. We'll sell potentially twice as many Macs to volume buyers like corporations and schools who allocate only so much money to computer purchases. Lots of customers who buy one machine will buy one for home and one for the office. We'll see an increase in the variety of third-party software and peripherals. And we'll increase the potential market for upgrades - on which Apple makes a very healthy profit. IV. Happy Dealers Whenever a computer manufacturer lowers prices, it frustrates and, in a sense punishes those who just purchased the machine at the higher price. If the manufactuer warns of a price increase in advance, sales plummet. The best scheme is to pleasantly surprise the user community and retroactively drop the price for those who purchased in, say, the last three months. This will be a pleasant surprise for recent purchasers, and only a few will be disgruntled because they bought their machine three months before a price decrease. Since the price should have been dropped three years ago, Apple should be able to afford the retroactive price decrease. Dealers agreements often include price protection, so if everything is done properly there should be no backlash. There are not one, but two critical figures: The wholesale and retail price. When a price decrease takes effect, one would expect the dealer margin to decrease proportionally, though this isn't a necessity. Dealers will be pleased about the increased volume the lower prices will bring but may be angered by lower margins. This is a political issue, and I don't know the nature of the current arrangements, so I won't suggest any specific numbers. The lower prices should undercut the current second-hand market and drive used Mac prices way down. I would expect Mac Plus prices to drop down to the under $800 range. IV. Send in the Clones The chance of this is about zero, so it's merely an academic issue. In the early to mid '80s, IBM permitted clone manufacturers to produce equivalent, if not better machines at lower cost. At first, clones were met with compatability problems and a degree of public mistrust, but they were eventually accepted. I don't know the most current figures, but PC- compatible computers, including IBM's own, have roughly an 85% market share, with over 35 million computers in the U.S. (What's my operational definition of market share? Is it current sales or existing inventory? I think both are on the order of 85%.) Is this a phenomenal coup for IBM? They quickly and firmly established themselves as King of the Mountain, the standard of standards. However, they steadily lost market share and have fallen below Apple in sales. (What's my operational definition of sales? Number of units or total revenue? I believe the figures I saw related to number of units.) We keep hearing rumors about Brazilian and Taiwanese Mac clone manufacturers. It is certainly technically feasible. We would all like competition to bring the price of a Mac Plus down to $495, but I'm not convinced that it wouldn't be a mistake for Apple to permit clones. It's a risky move, and I'm not sure what it would accomplish. It might increase market share of Mac-compatibles, but I am not sure even in the long run how much revenue this would generate for Apple, however indirectly. It might have been a good idea earlier on in the Mac's career, to encourage developers. There already is a Mac compatible - an Atari ST or Amiga running the appropriate software and hopefully legally- obtained Mac ROMS. These have their niches (those who know about this are in the niche) but many potential customers are more concerned with compatibility headaches than with the increased flexibility of these other computers. (Both have excellent games; ST sales have dropped off but the Amiga is going strong with over a million units sold worldwide. Many of those could have been Macs...) Since a standard box is supposedly (supposedly) one of the Mac's strengths, a stampede of near-Macs with various incompatibilities might hurt the Mac's image. V. Low-cost means low-cost Low-cost Mac IIcx: Problem is, it can't be under $1000. It can't even be $1500. Drop the price, maybe, but this is not the low-end machine. (Does it even run Dark Castle?) Little box sans monitor: Problem is, most end users want a cheap monochrome monitor anyway. Apple can't compete with Amiga and Atari in games, so color is of limited use. A A monitor costs about $20 raw, which means $50 on the sticker. Mac Jr: What can you remove? A Plus with 1 meg and 800K drive is barely acceptable, and I think it's wiser to standardize on 2 meg and FDHD. You need a keyboard, keypad, mouse, etc. Basically, you can't get rid of anything to lower the cost. And it should have an SE slot and provide an upgrade path to the SE/30. I read all your arguments, and this is the one I find the most convincing: Just lower the price on the SE and deep-six the Plus. It's already made, it's cheap to produce, it's already got a public image, it's already on the shelves. Just ship it with two meg standard so everyone can run system 7, like Chris Espinoza would like us all to do. * * * But what do I know about the low-end? I just bought a NeXT machine... (Apple II Plus, Apple IIc, Amiga, Mac Plus, NeXT, ...) ----- "We're not going to play that low-end game" Jean-Louis Gassee, about 1987 Jonathan Dubman UC Berkeley
sobiloff@agnes.acc.stolaf.edu (Chrome Cboy) (02/18/90)
[Many good arguments] [Make a price reduction retroactive] Retroactive price decrease is a bad idea because it does not eliminate what you had hoped it would-namely, the anger over having bought something only to see its price drop shortly thereafter. The people who bought the computer four months ago will be upset because the aren't being given a break like their neighbor who bought three months ago. Just have a price reduction without the retroactive clause. [Send in the clones...] I strongly believe that Apple is in a position where clones should become an essential part of Macintosh. Just as Apple currently relies very heavily on its connections with the third-party hardware and software manufacturers, Apple should begin to rely on clone manufacturers to take care of the low-end of the market. Everyone agrees that Apple desperately needs to beef-up its installed base. Apple *could* make a no/low-profit Mac, but that's not Apple. This isn't a fault, it's just Apple Corporate Culture--"Macintosh is the Mercedes of the computer market." I believe that Apple should continue to focus on the segment of the market that ranges from the middle-of-the-road to the high-end in power/price demands. This will keep Apple's profits high enough to further Macintosh technology. *BUT*, most importantly, Apple needs to realize that this strategy, by itself, will not work--it must be done in conjunction with a proper focus on the low-end. Apple should/will not spend its resources on the low-end (as defined as the $1000 market). Thus Apple should work in conjunction with a few, select manufacturers who can prove to Apple that they understand Macintosh and are willing to put out high-quality hardware. If such a manufacturer is impossible to find, Apple could spin-off such a company, such as they are doing with Claris. Apple should then sell the 256K ROMs and System Software to the manufacturer(s) as a package. This low-end manufacturer (LEM) would be constrained by agreement to only produce at the low-end (currently 68000-based performance (and Apple // class, which could be integrated into a hybrid low-end machine)), thus not threatening Apple's domain. The ideal initial product for these LEMs would be a cheap version of the SE. Since these companies are relatively unconstrained by the need for large amounts of R&D money, they could price the SE much lower than Apple could. Apple would then drop the Plus (which they should have done a while back, IMHO) the SE, and the // series, and replace them with a new baseline Apple Macintosh computer. Based on a 68020, this new Mac (the IIe, "e" for entry-level) would be "headless," but come with expandable, built-in 4-bit color capability (able to drive an Apple Color Monitor as is), a Processor-Direct Slot, a NuBus slot, 2 megs of RAM, 512K ROM, a SCSI port able to handle data transmission at a 1:1 interleave, AppleTalk*, ADB, 2 internal FDHDs, 2 serial ports, and 1 parallel port. This is the System Seven baseline of technology, but is easily expandable to handle virtual memory (with a 68881), increased storage (with external hard drives), increased performance (with a cache card), or larger/more colorful (16-bit max) displays (with the addition of more video RAM), and full use of the NuBus slot. Such expansions would be standard in a IIei, announced sixth months later. *AppleTalk would be on a removable card so that it could be upgraded to EtherTalk. Six to twelve months later, announce a revamped lineup of Macintosh computers, composed of the old II series. The IIcx/ci would form a medium-expandability computer line based on the 68030, with the cx being similar to the IIe: expandable 4-bit color*, PDS, 2 regular NuBus slots, 1 high-speed NuBus slot (NuBus II?), 2 megs RAM, 512K ROM, SCSI @ 1:1, AppleTalk, ADB, 1 FDHD, 1 internal SCSI II HD without DMA chip (can be installed later), 2 serial ports, 1 parallel port. The ci would have built-in EtherTalk, 4 megs of RAM, 16-bit color*, and DMA for the SCSI II port. *The key changes here are: 1) Expandable to 24-bit color, and 2) the ability to add an AMD29000 chip dedicated to driving the display (as is rumored for the "real" IIxi). The IIx would cease to be 68030-based; instead, it would be 68040-based, and split into two models, just like the other two lines. The IIx would have: expandable 24-bit color, PDS, 3 NuBus II/3 NuBus III slots, 4 megs RAM, 512K (1 meg?) ROM, DMA SCSI II, ADB with independent processor, 1 FDHD, 1 internal HD, 2 serial ports, 1 parallel port. The IIxi would add 32-bit color, 6 NuBus III slots, 16 megs RAM. This would create a balanced, powerful lineup of computers that would expand the power of Macintosh and be profitable enough to provide the R&D money that Apple needs. As the 68050 gets underway (or if Apple decides that the 88000 is the way to go), the bottom-line would be transferred to the LEM. Thus, when the 68050 is used in the IIx/xi lineup, the 68040 would be used in the IIc/ci lineup, the 68030 would be used in the IIe/ei lineup, and the 68020 would be given to the LEM to play with. Comments (besides "It'll never happen... " :-( ? -CCb sobiloff@stolaf.edu