Jobs Decides Music Is Apple of PC Maker's Eye - TheStreet

The guy in the black turtleneck is doing it again. The marketing of

Apple

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3.0, consumer electronics play, has begun.

Clad in the customary black pullover sweater, Apple CEO Steve Jobs kicked off this year's MacWorld exposition in San Francisco with all the customary product news. There was the new PowerMac series, loaded with new 733 megahertz G4 processors and the long-overdue feature of read/write CD drives. (The high-end model will also include read/write DVD capability.) Jobs also unveiled a new Powerbook notebook. The specs include a G4 processor, 15.2-inch screen, slot-loading DVD drive, five hours of battery life and an inch-thick frame made of titanium. "Just like the spy planes," a giddy Jobs boasted. (Yes, Steve, just like the spy planes.)

But even with all that hardware cluttering up the stage, the most prominent spot in the presentation was occupied by a new piece of software the company is giving away on its Web site:

iTunes

, an all-purpose music application that lets users play CDs and mp3 files, easily rip CDs into digital formats and burn those same digital files back onto blank CDs.

The program may not seem like much. On the surface it looks more or less like a handful of other music applications, most notably

Microsoft's

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Windows Media Player. But its importance lies in its neat integration, behind a simple user interface, of the three things young consumers want to do with music: rip, burn and play. And Jobs is pushing it, along with

iDVD

, a program that allows the user to edit and burn DVD movies, as the centerpiece of the next reinvention of Apple as a central player in the new consumer electronics boom.

"We don't think the PC is dying at all," opined Jobs. "We think it's evolving. We believe the PC, and, more importantly, the Mac, can become the digital hub of our new, emerging digital lifestyles."

Evolution

If you can't beat products like digital cameras and mp3 players, you may as well join them. And observers say that if any PC company is poised to make computing's recent trend away from the desktop work for them, it's Apple.

"They're well positioned to do that," says David Bailey, an analyst at

Gerard Klauer Mattison

. "They have excellent engineers. They implement new technologies long before other companies do. They did that with wireless, and with USB ports, which they had before the

Intel

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vendors did. Things like that give them an advantage and could allow them to more rapidly integrate consumer electronics with the consumer PC business."

One example of that phenomenon is FireWire, a data transfer protocol that allows users to rapidly move content from digital video recorders to their PCs, which, with the help of programs like Apple's iMovie, can then serve as both editing deck and video library. FireWire, also known as iLink under the Sony brand, is an Apple invention that is built into nearly every digital video camera made today.

Apple's move to highlight its proprietary software is a smart one. The company's rich portfolio of applications, which now includes names like AppleWorks, iMovie and Final Cut Pro, has long garnered rave reviews in Mac publications, to the attention of only the Mac faithful. So Apple's attempt to hitch its fortunes to the growing electronics market represents, in part, its attempt to broaden its customer base.

As always, the trick lies in the execution. And Apple risks running up against the same problem that has dogged it in the recent months of waning demand: price. Within the new PowerMac line, only the high-end model comes equipped with a read/write CD/DVD drive that will let users take advantage of the full range of features available in iTunes and iDVD. With PC demand still slack despite aggressive price-cutting, investors have reason to wonder how many people are willing to shell out $3,499 -- monitor not included -- to give their "emerging digital lifestyles" a "hub."

The Pickle

Apple may also have gotten itself in an interesting pickle concerning its new 733-megahertz G4 processors. Last summer, the company started building two G4 processors in its PowerMacs. Never mind that the operating system shipped with those G4 PowerMacs didn't have multiprocessor support. The move was an effort to mitigate a longstanding "speed-gap" problem with its microprocessors, which, largely thanks to

Motorola

(MOT)

, which develops Apple's chips, had topped out at an increasingly anemic-looking 500 megahertz. This time around, it's back to a single G4 processor, at least for starters. The 733-megahertz chips just aren't plentiful enough at this stage of the game to start shipping with dual processors, Jobs explained, adding that the company probably doesn't even have enough of them to meet demand for this quarter.

With PC makers currently struggling to rid themselves of inventory of even the cheapest PCs, it's hard to imagine a sudden explosion of demand for Apple's high-end products, suggesting the dearth of the new G4 chips is extreme indeed.

The decision to push the new PowerMacs forward despite a serious component scarcity suggests a level of aggressiveness commensurate with the gravity of the situation at Apple. It also raises the question of when Apple will revert to the dual-processor strategy, and what impact on profit margins that move will have. Bailey said his conversations with the company have given him the sense that dual-processor shipping will start in volume by midyear. It's hard to think that Apple would raise prices when that happens. So unless Apple is pricing its PowerMacs excessively high right now -- a difficult task in the current competitive environment -- processor yields will have to increase dramatically if the company's profit margins are to stay intact.

Investors should understand this. Apple-specific component shortages make it unlikely that the company will be able to move too many PowerMacs in the near future. And the new round of software products probably won't be spurring a critical amount of demand in the near future.

But the next reinvention of Apple is underway. And, sensing that there's little more to lose on a stock that's lost about 75% of its value since last March, analysts are cautiously optimistic about the new vision.

"They've gone through this whole debacle," says

SG Cowen

analyst Richard Chu. "A few months ago,

first-quarter estimates were at $2 billion in revenue. They're at a billion now. From where we are now, this seems like more than enough to get them going."