Jackasses of the Week: Gartner Analysts Mark Stahlman and Charles Smulders

Thursday, 19 October 2006

Yesterday Apple announced its financial results for the fourth quarter of fiscal year 2006, which included the following tidbits:

• the most Macs ever sold in a single fiscal quarter (1.6 million)
• the most Macs ever sold in a fiscal year (5.3 million)
• strong quarterly profits ($546 million)
• high gross margins (29.2 percent)

Two days ago, Gartner “analysts” Mark Stahlman and Charles Smulders issued a report recommending that Apple abandon the computer hardware business and license Mac OS X to Dell.

Hello, Gartner? 1997 called and they want their advice for Apple back.

Now there are jackasses, and there are jackasses. I’m occasionally hesitant to bestow Jackass of the Week honors on muckraking columnists and webloggers, because I suspect it’s exactly what they want. Not necessarily Daring Fireball Jackass of the Week honors in particular, but notoriety — and page views — for saying jackassed things. “Any publicity is good publicity”, that sort of thing. Cf. John Dvorak, who happily admitted to Dave Winer, on camera, that he purposely writes things “in a weaselly sort of way” to anger Mac users and get them to link to his columns. (He’s had the same M.O. since his days as the back-page columnist in the old MacUser magazine.) Or take this week’s previous jackass,¹ Larry Bodine, who wallowed gleefully in all the attention his jackassed Law.com opinion piece garnered.

These Gartner analysts are supposed to be for real, though, which makes this all the more crazy. A columnist or weblogger might reasonably decide to keep score based on the attention they bring upon themselves (and the page views they ring up for their site). These clowns from Gartner aren’t running a weblog, though. Their reputations are built solely upon the quality of their analysis.

It was one thing when analysts were calling for Apple to get out of the hardware business a decade ago, when the company was struggling for profitability. It was bad advice, but if you’re not profitable something has to change, and getting out of the hardware business would certainly have been a change.

But now? When Apple is selling more Macs than ever before? When Gartner’s own market share research indicates that Apple is gaining on the rest of the industry? It boggles the mind.

From Andrew Donoghue’s story on their report for ZDNet:

However, Apple will not be able to substantially increase this growth on its own because of increasing pricing pressure, Gartner warns.

Apple’s margins for its Mac business, currently around 40 percent, are only sustainable because component makers such as Intel choose to prop up the business, Gartner claimed.

The argument here seems to be that Apple’s current success isn’t because Apple is doing a great job designing and producing computer hardware, but rather because Intel is “propping them up”. Like Intel is some sort of charity. I have no idea what the details are of Apple’s deal with Intel (and neither do these Gartner analysts, apparently), but I’ll eat a Core 2 Duo if Intel is selling chips to Apple at a loss.

Does Apple have a good deal with Intel? I’ll bet. But why shouldn’t they? In terms of market share, Apple is #4 in the U.S. (and gaining fast on #3 Gateway). And that’s just raw market share, not taking into account the fact that all of Apple’s share is in the mid-range and high-end of the market. Apple isn’t selling any Celerons or Pentium M processors — and even better from Intel’s perspective, they’re not selling any from AMD, either. The slowest computer you can buy from Apple today comes with a 1.66 GHz Core Duo — a very decent processor.

I’ve said it before and will say it again: the interesting “share” number for Apple’s computer business isn’t their share of the total units sold; it’s their share of the total profits in the PC hardware industry. For example, Apple trails Gateway by three-tenths of a percent in U.S. market share, but Gateway reported a loss of nearly $8 million in net income for its most recent quarter. Apple just reported a quarterly net profit of $546 million. Now, sure, a few hundred million of that comes from iPod sales, but whatever Apple’s profit from Mac sales, it’s a lot better than an $8 million loss.

Or look at Gartner’s beloved Dell. Their PC market share is at least five times higher than Apple’s. And their most recent net income? $502 million. Five times the market share, but less profit. And counting Apple’s iPod profits seems fair to me in this comparison, because Dell’s number includes all that money they’re making from those DJs.

And speaking of iPods, consider this: If Apple had listened to similar jackasses who told them to get out of the computer hardware business a decade ago, would they have been able to do the iPod? The iPod isn’t a Mac, but it is a computer, and its initial success was largely based on Apple’s hardware design and manufacturing expertise.

It’s hard to get a handle on the magnitude of the jackassery here. Thought experiment: Try to think of advice for Apple that’s an even worse idea than Stahlman and Smulders’s recommendation that Apple abandon its Mac hardware business, but which might still be taken seriously. I.e. you can’t say “Apple should pile up their $10 billion in cash and light it on fire” — that’d be a worse idea, but it couldn’t be taken seriously.

I’ve been trying since last night and can’t come up with one. The closest I’ve come is the converse of Stahlman and Smulders’s advice, which would be that Apple should get out of the software business and switch to Windows (or Ubuntu). That’s pretty horrible advice, and there’s existence proof that it could be taken seriously — but my gut says Apple would be better off financially doing that than they would by abandoning their hardware business.²

Telling Apple to abandon their computer hardware business might just be the worst possible advice Gartner could plausibly offer.