Apple's attention shifts to Mac as iPod growth slows

In the last few weeks, its biggest news has been the deals it's made with movie studios for streaming content over iTunes, and its having deflated the bulk of a notebook computer to a razor-thin profile. Didn't Apple used to sell those little song gadgets?

A public corporation always puts its best foot forward for its quarterly earnings report, and in that case, Apple Inc. is no different. But when a seasoned performer has become accustomed to always entering the stage with his right foot, as many have trained themselves to do for whatever reason, you take notice when one enters the stage with his left.

Late yesterday afternoon, the company that last year took the bold step of removing the "Computer" from its corporate name, entered the stage on its left foot for a change. The iMac and Mac Pro lines have sold 53% greater units, earning 59% greater revenue, for the quarter ending last December than in Apple's previous fiscal first quarter 2007. Unlike almost any other computer company in the world, Apple's desktop unit growth is outpacing its notebook growth, with 38% more MacBooks sold this last quarter than in fiscal Q1 2007, and growth over the previous quarter literally flat.

"We are extremely pleased with the very successful launch of Leopard on October 26th and the response from both customers and reviewers has been terrific," Apple CFO Peter Oppenheimer told analysts yesterday (via transcript provided by SeekingAlpha.com). "Total Leopard revenue was about $170 million during the quarter, a significant increase from about $100 million in revenue generated by the Tiger release in its first quarter. We believe that 19% of the Mac OS 10 installed based is already using Leopard."

The other "foot" that holds up Apple these days, for the first time, started to lag a bit. Growth of sales in the iPod segment are slowing, and this time not because the same number of new customers quarter after quarter constitutes a lower percentage of the base. Annual unit sales growth is now down to 5%.

It's not because people don't want iPods all of a sudden. The company did, after all, sell 22.1 million iPods (not counting iPhones) in the last quarter alone, which by any measure of consumer electronics analysis -- especially in the modern era -- is astonishing. Apple's biggest competitors in this space can still be counted as "Other." But there's only so many people, and 5% growth is an indication that the market for portable media devices may be saturated.

"We set out to achieve three things in the December quarter with the iPod business," Apple CFO Timothy Cook told a UBS analyst yesterday. "The first was we wanted to hold our already high share that we enjoy in the United States. We wanted to continue to grow share internationally and as we've already said...we are very pleased to report that we did both of those...

"The second thing we wanted to do was to sell at least the number of iPod units that were comprehended in our guidance," Cook continued, "and we are pleased to report that the sales of over 22 million iPods not only set a company record but were also consistent with what we had contemplated in our guidance."

The third thing Cook mentioned, however, is hard not to pay attention to: It's a move by Apple to migrate the iPod out of its...well, its "iPod-ness," for lack of a better word. One big reason may be to build a differentiated enough new product line that can sell to a fresh new market all over again. That is evidently what the iPod Touch is really all about.

"The iPod Touch has the potential to grow the iPod from being just a music and video player into being the very first mainstream Wi-Fi mobile platform running all kinds of mobile applications," said Cook, "and we overwhelmingly met this goal. Introducing the Touch at the high end of the line may have traded off a bit of unit volume but it was the right decision to achieve the strategic goal of establishing a platform."

There was some question as to whether the iPhone may have cut a bit into iPod sales as well...and actually, the converse was also considered. A little over 2.3 million iPhones were sold in the last quarter, generating $241 million of revenue for the company. The iPod segment, meanwhile, generated just under $4 billion of revenue.

So the question deserves to be asked again: Is Apple a computer company or a CE company? Two years ago, the shift toward the latter was a modern business phenomenon. Last quarter, however, there may actually have been more of a move to balance the two segments out, as the Mac division produced revenue of $3.55 billion.

It still belongs in the "phenomenon" category, however, as the company most had written off in the early 1990s reaped $9.6 billion in revenue in the last quarter, with earnings of $1.58 billion -- up 57% over the year-ago quarter. Microsoft's earnings come out tomorrow, but for comparison, in its quarter ending last September, it earned nearly $4.3 billion on revenue of $13.76 billion.

The big problem may come down the road for Apple: The US may be entering a recession period, which means discretionary spending may be reduced, and those iPod purchases may get put off. CFO Oppenheimer gave slightly lower guidance for the upcoming quarter, and then made the mistake of attributing that guidance to "seasonality" (the fact that it's not Christmas any more) and a settling down of sales of Mac OS X Leopard.

Leopard? Suddenly Apple's a software company? Analysts couldn't help but note Leopard only generates $170 million in revenue when it's a successful product. By late morning trading on the NASDAQ exchange, Apple stock had plunged over $20 in value, or almost 13%, to over $135 per share.

With the upcoming downturn in the economy, Apple may need to find a way to enter the upcoming few quarters on both feet in order to weather the storm.