Apple Loses Some Shine as Mac Sales Slow

By YUKARI IWATANI KANE and JUSTIN SCHECK

Even Apple Inc. is beginning to suffer in this year's dismal holiday season, and worries are mounting the recession will weigh on its business next year.

Apple, which has outpaced the overall personal computer market this year despite its strategy of eschewing discounts, showed its first signs of weakness in November.

Sales of Macs in U.S. stores last month declined 1% from a year ago, while industry-wide PC sales rose 2%, according to research firm NPD Group Inc., which tracks retail sales.

NPD analyst Steve Baker blamed a 35% drop in sales of desktop Macs, noting growth in Apple's laptops still outpaced rivals.

The decline marks a sharp reversal for Apple, which has enjoyed robust demand this year for its Macs, even as spending on Windows-based PCs slowed along with sales of other electronics like flat-panel TVs. To drive sales of its iPhone, analysts expect Apple to begin selling it at Wal-Mart Stores Inc., possibly at a discount.

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Shoppers at an Apple store in October try out MacBook laptops. U.S. retail Mac sales, which had surged this year, fell 1% in NovemberSome analysts are worried that sales will slow after the holidays as consumers pull back. On Monday, Goldman Sachs analyst David Bailey cut his estimate for Apple's 2009 profit, warning "some nicks have started to emerge." Mr. Bailey warned the company faces "a tougher environment" in the first two quarters of next year, when he believes consumer demand will further deteriorate.

Until last month, Apple's premium-pricing strategy seemed to be paying off, as the company boosted profit and gained market share from Windows-based PC rivals like Hewlett-Packard Co. and Dell Inc. at a steady rate. In October, for example, Apple shipments grew 28% from a year earlier-four times the growth rate of the overall market, according to NPD.

An Apple spokesman said the Cupertino, Calif., company doesn't comment on monthly sales. The company's shares, which were above $150 in September, closed Monday at $94.75, down 3.6% for the day.

The November data indicate that falling prices for Windows-based PCs, and the rise of low-priced computers like netbooks -- mini notebooks that cost as little as $300 -- have finally tripped Apple, said Gene Munster, an analyst at Piper Jaffray, who still expects Apple to continue outpacing the market over the next year. "What you're seeing in the numbers is price sensitivity with the consumer," he said.

Steve Jobs

Apple Chief Executive Steve Jobs told analysts in October the company wasn't cutting prices on Macs, which make up 46% of the company's revenue, because "we're not tremendously worried" the downturn will drive customers to cheaper PCs.

Apple has steered away from the low-margin netbook market in favor of higher-end computers. "We don't know how to make a $500 computer that's not a piece of junk," Mr. Jobs said in October when the company reported earnings.

Apple rivals like H-P and Dell offered discounts weeks earlier than usual this holiday season, dropping some prices by as much as 50%. Mr. Munster said since last December, the average Windows PC price is down 35% to 45%; in contrast, Apple has offered only modest discounts of 5% to 10% on its PCs, analysts said.

The strategy translates to a big bite into consumers' wallets. On Amazon.com last week, an H-P Pavilion laptop with a 14.1-inch screen was marked down from $1,074 to $760. In contrast, an Apple MacBook with a 13.3-inch screen, less memory and less storage capacity was $966, just $33 below its list price.

Apple has also held the line on its desktop iMac lineup, which starts at $1,199. Meanwhile, Dell's all-in-one XPS One desktop machines start at $899.

In October, Apple lowered the price of its entry-level white MacBook laptop to $999 from $1,099 and refreshed its main MacBook line by packing higher-end features -- like an aluminum frame and better graphics performance -- into models starting at $1,299.

NPD's data tracks in-store sales, including Apple's own outlets, but doesn't include data from Wal-Mart, which doesn't sell Macs. Retail sales account for at least 70% of consumer PC purchases, said Needham & Co. analyst Charlie Wolf.

The withering economy has weighed heavily on PC sales. Earlier this month, research firm IDC lowered its 2009 PC growth forecast, saying revenue would fall 5.3% from this year. Earlier, IDC had estimated 4.5% revenue growth.

Piper Jaffray's Mr. Munster said he expects the company to recover in coming months, and said he is maintaining his prediction that Apple next year will increase shipments by 10%, while the rest of the industry falls 5%.

Shaw Wu, an analyst at Kaufman Brothers, expects Apple to sell 2.7 million computers in the current quarter ending in late December, a 17% increase from a year ago. He expects industry-wide PC shipments this quarter to be about 85 million.

Despite short-term weakness, analysts expect Apple's products to remain more profitable than many rivals' computers. The MacBooks are forecast to deliver close to 20% profit margins, compared with 6% or less for competitors, said Toni Sacconaghi, an analyst at Sanford Bernstein & Co.

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