Apple's 'product transition' comment fuels speculation

But lower prices unlikely, say analysts

Apple Inc.'s statement this week that an upcoming "product transition" will affect future profit margins has prompted intense speculation about whether the company will launch new products, refresh existing lines or cut prices.

On Monday, during the company's quarterly conference call with Wall Street analysts to discuss its latest earnings, Chief Financial Officer Peter Oppenheimer repeatedly said Apple would make moves before the end of September that would affect its bottom line.

Oppenheimer announced that Apple's profit margin would likely shrink from 34.8% in the just-concluded quarter to 31.5% in the quarter ending in September. "Second, we've got a future product transition that I can't discuss with you today," Oppenheimer said during the conference call as he spelled out the reasons for the anticipated profit reduction. "One of the reasons that we see gross margin being down sequentially is because of a product transition."

He declined to get specific about the transition, citing Apple's policy of not discussing future product plans.

Analysts, pundits and bloggers, however, haven't been afraid to prognosticate. Several, including Ezra Gottheil, an analyst at Technology Business Research Inc. (TBR), predicted that Apple will soon significantly revamp its existing MacBook and MacBook Pro laptop lineups.

On a component level, Gottheil said he believes that Apple will incorporate the latest Intel Corp. processors, the Centrino 2 quad-core CPU code-named Montevina, in the upper-end MacBook Pro. He also said that Apple would boost hard drive capacity and memory in all its laptops and insert a new model sporting a larger screen into its MacBook line.

"Apple also may add multi-touch touchpads to MacBooks," Gottheil said in a research note he issued Wednesday. "Multi-touch is an important differentiator for Apple, and the company said that it would defend its multi-touch patents aggressively." Currently, Apple offers its multi-touch technology only in its iPhone and iPod touch, MacBook Pro systems, and ultrathin MacBook Air.

The "product transition" phrase Oppenheimer used, said Gottheil, is Apple code for a refresh of existing hardware rather than a hint that the company will roll out something completely different. "For the refresh to affect the entire company's gross margin, the product must contribute a significant percentage of Apple's revenue," he argued. "The single model with the greatest revenue is the MacBook, which TBR estimates generated $1.3 billion in sales in [the second quarter]."

Mike McGuire, an analyst at Gartner Inc., echoed Gottheil in saying that "product transition" is Apple-speak for a refresh, but he questioned the thinking that it would be a notebook revamp.

"Certainly, there are some things you could do with the MacBook line, either something with its aesthetics or something more radical, maybe solid-state drives, that would affect the margin," said McGuire. "But maybe it's the Apple TV."

McGuire reasoned that Apple TV is coming because of the continued presence of the product -- which Apple CEO Steve Jobs at one time virtually dismissed as a "hobby" product -- in the company's line, building competition by set-top box makers, and Apple's emphasis on the consumer market.

Or, he added, perhaps Apple will aggressively lower prices in an attempt to wrangle more market share, though he gave that move much longer odds. "I don't buy that they'll all of a sudden get the religion of the cheap PC," said McGuire. "That would be a more fundamental change for them."

According to McGuire's fellow Gartner analysts, Apple was the third-largest seller of computers in the U.S. during the second quarter, behind only Dell Inc. and Hewlett-Packard Co.

Gottheil agreed that it's unlikely Apple would drop prices dramatically, though it might trim the price of the MacBook Pro. "What Apple won't do, until the market forces it, is lower the price on the entry-level machines," he said.

Some analysts simply refused to play the game of "Guess what Apple will do?"

"They could have been talking about anything," said Michael Gartenberg, an analyst at JupiterResearch. "All it is is guesswork at this point."

What Apple regularly does -- and did this time -- is get people to talk about its products, Gartenberg continued. "[Oppenheimer's statements] had the desired effect, didn't they?" he said. "They got a lot of people talking about the company."

"That's their genius," McGuire noted. "Now they've put a couple of different markets on alert. Is it the iPhone, the [iPod] touch? The Apple TV? MacBook? They've essentially caused some concern in several quarters about what they might do."

Copyright © 2008 IDG Communications, Inc.

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