Small, Cheap, and Without a Display

Sunday, 16 January 2005

iPod Shuffle and Mac Mini — that’s pretty much this year’s Macworld Expo in a nutshell. None of the other announcements in Jobs’s keynote address compare to the iPod Shuffle or Mac Mini in terms of interest, appeal, or potential to change the industry.

Mac OS X 10.4 looks like a solid upgrade, but we didn’t learn much more than what was revealed last summer at WWDC. The UI has changed a bit, but the features haven’t, and nor has the “first half of 2005” ship date. iLife ’05 looks like a solid update, and the Pages demo made it appear to be a very fine 1.0 product. But, let’s face it, by the time Jobs left the stage, it was obvious to anyone with half a clue that this year’s Macworld Expo will be remembered years from now for two things: the introductions of the Mac Mini and the iPod Shuffle. Everything else was periphery.

In several ways, it seems appropriate that the two products were introduced at the same show. Both products are stripped-down siblings to Apple’s mid- and high-end products. Both products notably lack displays. More importantly, both products are defined by their price tags. This is not a coincidence.

The larger message from Apple’s announcements this week — the gut message, if you will — isn’t related to the products themselves, but rather to Apple as a whole, and the Apple brand, and it can’t be stated any better than David Pogue’s summation for the New York Times:

The iPod Shuffle and the Mac Mini are bold attempts to shatter the common wisdom that Apple makes gorgeous, expensive things. For the first time in its history, Apple has begun to make gorgeous, inexpensive things.

iPod Shuffle

First off, props to TheMacMind for their exclusive scoop on the iPod Shuffle form factor. Their rendered mock-up was off the mark, but clearly, you can see that description from their source at Apple was spot-on. The real Shuffle is longer, narrower, and thinner than their mock-up, but they were in the ballpark. I suspect they just misinterpreted the description from their source.

What they nailed was the lack of any display, and the circular controller with play/pause in the middle, volume on the top and bottom, and previous/next song on the left and right. They also had the laniard, and the $99 starting price. This was a major scoop.

Second, anti-props to me, for dismissing TheMacMind’s report as “not very plausible”. I wrote:

I just don’t see no screen at all as a feasible design. Without a graphical interface, the only thing left would be an audio interface — some sort of text-to-speech output to read menu items, playlist titles, and so forth through the earphones. This seems like a recipe for a frustrating experience, trying to locate a specific song that isn’t a few spots away from the one you’re currently listening to.

Part of the reason the original iPod was so successful at the outset is that its display was larger than most other competing players. I just don’t see how you could get an even vaguely decent experience without any display at all. If I’m wrong, it’d certainly be a bold decision on Apple’s part, and a hell of a scoop for TheMacMind.

Well, I was right about it being a bold decision, and right about it being a hell of a scoop for TheMacMind — but, otherwise, it looks like I was wrong, in that the iPod Shuffle indeed has no screen.

But in terms why I deemed it unlikely, I think I was right. The iPod Shuffle clearly and explicitly offers only a subset of the features offered by the rest of the iPod line-up. Things that are easy on a regular iPod — finding one particular song, or all the songs from one particular artist — aren’t even possible on an iPod Shuffle.

Pre-release rumors of a $99 iPod — including TheMacMind’s, for what it’s worth — speculated on 256 MB capacity players. Why? Because that’s what 99 bucks tends to get you in the current digital music player market. In response to this, I wrote:

Generous storage capacity is a major factor in the iPod experience. The idea that Apple would produce an iPod with only, say, 256 MB of storage strikes me as incredibly unlikely. Such a move would almost certainly generate a short-term spike in unit sales — but at the expense of the iPod brand. 256 MB just isn’t enough storage. Once you start talking about 512 MB or 1 GB of flash-memory storage, you’re looking at prices that bump up against the existing iPod Mini.

Right there is the big mistake I made in my “will there be a flash-based iPod?” analysis. I was right that 256 MB just isn’t enough storage, but I was wrong, way wrong, that 512 MB or 1 GB would push prices up into the $200 range. I based my hypothetical prices-per-megabyte on the current market for flash-memory players.

Economies of Scale

My mistake was not realizing that a low-cost iPod wouldn’t entail Apple joining the current market for low-end players, so much as Apple redefining the market for low-end players. Not because the iPod Shuffle has amazing new features (it doesn’t), but because Apple is going to sell so damned many of them, and everyone knows it.

I mean, does anyone doubt that the iPod Shuffle will soon be the best-selling sub-$200 music player in the world? If not by the end of this month, certainly by the end of this quarter. This means Apple is able to purchase components — specifically, flash-memory chipsets — in quantities that their competitors can’t. Which means Apple gets a lower price on components, which means Apple can afford to put 512 MB of memory into a $99 player, a price point where the competition only has 256.

This is worth restating: Megabyte-for-megabyte, the iPod Shuffle is cheaper than its competition. To my memory, this is the first product in Apple’s history where this is so. With the iPod, the tables have turned and Apple is on the right side of the volume discounts that come with majority market share.

It’s a premium player at a non-premium price. They’re going to sell zillions.

Brief Digression on iPod Sales Per Model

Jobs announced during the keynote that Apple sold about 4.5 million iPod during the holiday quarter, and Apple reiterated this figure in its quarterly financial statement released last week. For competitive reasons, however, Apple does not break down iPod sales by model; we know they sold 4.5 million total, but not how many of each model.

But they do publish the total revenue from iPods, which we can divide by unit sales to derive the average selling price (ASP), which for last quarter was $264. The ASP is based on the price Apple charges per unit; for products sold via Apple stores (including their online store), this is the retail price. But for for products sold through resellers, the ASP is based on the wholesale price resellers pay to Apple — which is obviously less than retail.

Because we don’t know Apple’s wholesale prices (and I’m guessing those wholesale prices vary depending on the size of the reseller), we can’t use this $264 ASP as the basis for any sort of conclusive derivation of iPod sales per model. But I think we can make some very rough guesses.

For example, only considering retail prices, and only considering sales conducted in U.S. dollars, for every $599 iPod Photo, Apple would need to sell 24 $249 iPod Minis to result in an average price of $264. That is not to say that we know that the iPod Mini sold 24 times better than the 60 GB iPod Photo, but I think it’s a fair guess. Given that the iPod Mini was the only iPod model whose retail price was below $264, I think it’s fair to assume they sold well over the holidays. The $299 20 GB iPod is close to the $264 ASP, and its wholesale price is probably very close. The remaining iPods in the line-up, however, cost quite a bit more than $264.

I suspect the high-end iPods are selling well, but the lower-priced iPods are selling great. Price is a huge factor in mass market consumer electronics, so, display-be-damned, expect to see next quarter’s iPod ASP dip way below $200. As the saying goes, they’ll make it up on volume.

Cashing in on the Brand

The cost to Apple for this bold move? Well, without question, it comes at a price of diminishing the iPod brand. What it means to be an iPod is less now than it was a week ago. All previous iPods had three things the iPod Shuffle lacks:

• Storage capacity for at least 1,000 songs.
• Scrollwheel input device.
• A display big enough to see where you’re going.

This isn’t criticism; there’s just no such thing as a free lunch. A big part of the iPod Shuffle’s appeal in the mass market is that it says “iPod”. There’s a reason Apple waited until now to enter the low-end market — and don’t forget that many people expected to see $100-150 iPods at last year’s Macworld Expo. 2004 was the year when the iPod reached the phenomenon status. The “iPod” brand is now so strong and so well known that I think there’s very little risk in the fact that the Shuffle is much less of a player than all previous iPods.

Even if the iPod Shuffle becomes the best-selling player in the iPod line-up (and, hence, the best-selling player in the world), the word “iPod” is already firmly established in the public consciousness as a high-quality, high-capacity player. Apple has cashed in a bit of the iPod brand value in exchange for a shot to dominate the entire digital music player spectrum, from top to bottom.

Mac Mini

The short version of the entire Expo keynote is “Pretty much exactly what Think Secret reported”. This includes the blockbuster new Mac Mini, about which Think Secret accurately reported both the specs and the starting price ($499).

The one surprise Jobs still had for the keynote was the astonishing Mac Mini form factor: a 6.5-inch square, 2-inch-high box with a finish very much similar to the iPod Mini (echoing the similarities of the iMac G5 to the white iPods). How small is the Mini? It’s about the same footprint as the PowerMac G4 Cube — but it’s about one-fifth the height. It’s downright tiny. (Although it is worth noting that the power supply is in an external brick.)

(Also, in the midst of pointing out all the things I was wrong about pre-Expo, I’d like to just point out here that I did toss out the name “iMac Mini” a week ago. If you conveniently forget the leading ‘i’ — and I have — I correctly guessed the name.)

What’s to like about the Mac Mini, other than the price and adorable form factor? For one thing, it’s a nice computer. Spec-wise it’s pretty much an eMac, but $300 cheaper. It stands up well compared against any single-processor G4 Mac Apple has ever made.

One performance gripe is the hard disk — according to Jason Snell’s first-look report for MacCentral, the Mini uses 2.5-inch 4,200 RPM laptop drives, which are relatively slow.

The eMac, in fact, which up until this week was the lowest-cost Mac in Apple’s line-up, suddenly looks overpriced. You can get a Mac Mini and a brand-new standalone 17-inch CRT display (not from Apple, mind you, but, say, from Amazon) for over $100 less than the cost of an eMac. You could even get a 19-inch CRT display and still come out $100 ahead. There’s still something to be said for the all-in-one form factor, but there’s no way the eMac’s built-in display is worth $300.

Memory

The only other significant gripe is memory. The Mini ships with only 256 MB of RAM by default — which everyone knows simply isn’t enough RAM to run Mac OS X comfortably. Apple has been selling Macs with too little memory ever since the original model rolled out with a mere 128 KB. Today, 256 MB is the default memory allotment across the lower end of Apple’s entire Mac product line — but 512 MB is the baseline for a reasonable Mac OS X experience. (The Mac Mini’s slow hard disk makes the prospect of virtual memory swapping even more dreadful.)

Most experienced and semi-experienced Mac users buy their Macs with the minimum allotment of memory from Apple, and buy upgrades from third party dealers — because factory-installed memory upgrades from Apple will cost you upwards of two or even three times the going market rate for RAM chips. E.g. with the Mini, an upgrade to 1 GB costs about $425 from Apple, almost doubling the price of a $499 Mini. Whereas 1 GB chips from third party dealers can be found for well under $200.

The hitch is with installation. The level of difficulty of installing your own RAM in Apple hardware generally ranges from “really easy” to “somewhat easy”. (The hardest part, especially the first time you do it, is working up the gumption to apply sufficient force to snap the chip into place; the clips that hold the chips in place are generally a bit stiff, in my experience.) But as I first saw noted by Nat Irons, footnote 5 on Apple’s Mac Mini tech specs page states:

Memory, AirPort Extreme and internal Bluetooth upgrades must be performed by an Apple Authorized Service provider; fees may apply.

The reason for this restriction is that the Mac Mini case is not easily opened. Henry Norr, reporting for MacInTouch, asked an Apple representative at the show about the upgradability of the Mini:

Apple “does not recommend” that users upgrade the memory themselves — you’re supposed to have a service provider do it if you want to add more after purchase — but doing it yourself does not void the warranty unless you damage something. A booth person told me the memory slot is easily accessible once you get the case open.

Judging by this photo of the Mac Mini’s innards, the RAM slot is indeed easily accessible once the case is opened.

As for opening the case, someone who has seen one opened sent the following report via email:

I had the pleasure of watching one be disassembled tonight. There are six clips on three sides (none in the back) that latch onto a lip in the top cover. A standard issue putty knife and some assistance from a jack knife were all that was needed to crack the case. The RAM slot is on the side. I counted 12 screws removed to get to the Airport and Bluetooth modules on the very bottom. It looks like you have to remove the fan to swap the hard drive but we did not try that. No visible signs of entry were evident.

Piece of cake.

Once Mac Minis start shipping, I’m looking forward to seeing more field reports on getting the case apart — hopefully including photos.

What Got Stripped in the Stripped-Down Mac

Everyone — from Wall Street analysts to long-time Apple customers — has been badgering Apple to create a low-cost Mac for years. Apple’s stated reason for not having done so was not that they didn’t think there was demand for such a machine. Rather, they didn’t think they could turn a profit by doing so.

For all the hand-wringing over Apple’s market share, what’s notable about Apple’s computer business over the past five or six years is that it’s been fairly consistently profitable. Whereas most PC manufacturers have been taking regular baths in red ink, with the lone exception being Dell. (And it’s a big exception, because Dell has been quite profitable indeed during this period.)

For example, despite its five percent market share and world-famous brand name, IBM lost money on its PC unit three years in a row, prompting the company to sell its PC business to the Chinese company Lenovo.

It’s a challenging market, as Jason Snell reports:

It’s clear that Apple used the design and engineering skills that have crammed lots of computer power into the iMac G5, Apple’s laptops, and the iPod to make the Mac Mini a solid block of a system. But to hear Apple representatives tell it, the company’s real goal was not just to make a tiny Mac, or a low-cost Mac. It was, to paraphrase one Apple executive, to solve the problem of how to make a $499 computer without it being a piece of junk.

To achieve such low prices, corners needed to be cut. Most PC manufacturers cut corners inside the box, selling low-end PCs that generally lack such niceties as DVD-playing/CD-burning combo drives, FireWire, and high-speed networking ports. What Apple has done, rather ingeniously, is cut corners outside the box: no display, no keyboard, no mouse.

This is clever because many prospective Mac Mini purchasers really do have spare keyboards, mice, and displays. And if they don’t, they can be purchased cheaply. (Apple, in fact, quietly cut the prices of their own standard keyboards and mice to $29 each.) Plus, these are things anyone can easily plug in; as opposed to say, upgrading from a plain-jane CD-ROM to a combo drive, which is way beyond the ken of a typical user.

The margins on the Mac Mini may well be so tight that leaving off the keyboard and mouse is the difference that allows Apple to turn a profit. In addition to saving on the cost of those components, Apple also saves on packaging and shipping — the Mac Mini package is small.

Reaction

The Mac Mini is exactly what everyone hoped it would be: a pretty good Mac for only $499 — hundreds of dollars lower than any previous computer Apple has ever sold. That it comes in an astonishingly small, elegant case is the icing on the cake.

Well, it’s almost what everyone hoped for, that is. In what can only be described as one of the most wrong-headed pieces of Mac commentary ever written — which is saying a lot — Bill Palmer has declared the Mac Mini “groundbreakingly stupid”. Apparently Mr. Palmer spent the entirety of early January adamantly arguing against rumors of a $499 Mac, not on the basis that Apple couldn’t produce such a box, but that they shouldn’t. When Apple did just that, Mr. Palmer came unhinged, going so far as to argue that the Mac Mini is in fact a “barrier” to switching:

But regardless of whether today’s debacle is the result of Steve’s absence from the company or the absense [sic] of Steve’s brain from his body, the result will be the same: egg all over Apple’s face, public embarrassment, bad PR for the brand, and opportunity wasted. People were getting ready to line up around the block to Switch [sic] to the Mac in 2005, and up until today Apple was ready to embrace them with a product line that was understandable, honest, and made sense. But instead they’ll be greeted with a train-wreck of a line-up that’s going to make them less likely, not more likely, to actually buy a Mac.

It’s enough to make one wish that Mr. Palmer were accepting wagers on Mac Mini unit sales for 2005. Although the prospect of that seems akin to placing “end-of-the-world-coming-soon” bets with a street-corner lunatic.

Even Paul Thurrott likes the Mini, which shows you how far out in left field Mr. Palmer is. Thurrott’s reaction:

So does it suck? Oh no. It does not suck. It does not suck at all. The Mac Mini is a revolutionary product, one whose ramifications will be felt around the PC industry for months to come. I love it. I love that they did this.

The Mac Mini is drool-worthy. The Mac Mini is beautiful. The Mac Mini is affordable. The Mac Mini is small, quiet, and elegant. Like an iPod, it has trade-offs when compared to similarly-priced PC products. But you know what? I don’t care. They’re going to sell millions of these things. PC people will be able to get into a Mac for next to nothing. And Mac market share will grow. Mark my words. This is big stuff.

It’s the Price Point, Stupid

Both the iPod Shuffle and Mac Mini are defined by their price points. What kind of iPod can we do for $99? What kind of Mac for $499?

In both cases, Apple is attempting three things:

1. Gain a foothold in the low end of the market
2. Avoid cannibalizing sales from Apple’s mid- and high-end products
3. Bring in new customers who have never purchased Apple products before

With the iPod Shuffle, they seem almost certain to succeed at all three. It’s hard to imagine a scenario in which the iPod Shuffle won’t sell like hotcakes. With their current momentum and pop culture status, anything labeled “iPod” and sold for only $99 is likely to succeed.

Rather than offer a player with a display that’s too small and navigation controls that don’t work well, Apple has produced a player with the bare minimum of functionality: play/pause, volume, next/previous. The thinking being that it’s better not to offer a feature at all than to offer a frustrating implementation. They come out ahead by packing in double the storage capacity of competing players at the same prices.

As for bringing in customers new to the Apple brand, the consumer equation clearly favors Apple: What would you rather buy for a hundred bucks: an elegant 512 MB iPod, or a 256 MB Brand-X player?

With the Mac Mini, #1 and #2 seem like sure bets. #3, however, is uncertain.

The Mac Mini is certainly going to sell. The G4 Cube redux this is not, although a few surface similarities are apparent. But the differences are vast: the Cube offered mid-range performance at high-end prices; customers rejected the Cube simply because it was too expensive. For the same $1,600, you could get a PowerMac that was significantly faster.

The Mac Mini, on the other hand, offers mid-range performance (lower-end of mid-range, admittedly) at low-end prices. You simply can’t get more Mac than this for $500.

A few years ago, when the G4 was Apple’s processor for the flagship PowerMac line, the chip was a huge disappointment. This was Motorola’s fault, but Apple paid the price, with top-of-the-line hardware that stayed at the same MHz for an entire year, while the rest of industry continued to follow Moore’s Law. Now that the G4 has become Apple’s lower-power-consumption, lower-cost processor, however, the chip is serving Apple very well.

While offering adequate performance for its price, the Mac Mini strikes me as very unlikely to steal away sales that would have otherwise gone to high-end Apple products such as PowerMacs, PowerBooks, or iMac G5s. Apple is going to sell plenty of Mac Minis to existing Mac users, but I think they’re usually going to serve as second or even third computers, not primary workstations.

The uncertainty is whether the Mac Mini is enough to sway switchers. Apple’s original “Switch” campaign, backed by a series of high-profile TV and magazine advertisements, fizzled out without making a dent in Apple’s overall market share.

But for all Apple’s previous failed attempts to gain significant market share against the Wintel duopoly — and for Apple, even just a one or two percent gain in the overall PC market would be quite significant — they’ve never before made a concerted push by releasing a machine that’s within everyone’s budget.

With millions of happy iPod users new to the Apple brand, and millions of unhappy Windows users fed up with crapware security issues, there’s never been a better time for Apple to make a move into the low end of the market.

The one-two punch of the Mac Mini and iPod Shuffle comprise the most aggressive, boldest venture in the Jobs 2.0 era at Apple.