I Warned You About Apple


There were some legitimate disappointments in Apple's earnings last night. One of the most prominent ones was total Mac units, which came in at 4.06 million. Apple no longer breaks down the Mac business into desktops and laptops, but instead now only reports cumulative totals. Those Mac units were big drops both sequentially and year over year.

Q1 2013 Mac Units

Q4 2012 Mac Units

Sequential Change

Q1 2012 Mac Units

Change (YOY)

4.06 million

4.9 million


5.2 million


Source: Earnings releases.

This breaks a long streak of consecutive quarters where Mac growth has outpaced the broader PC market, which is a figure that Tim Cook likes to boast about. Apple was up to 26 consecutive quarters, or 6.5 years, of trouncing the Microsoft Windows competition. That time has now come to an end, and Apple severely underperformed the broader PC market in the fourth quarter.

That's particularly discouraging considering how weak the PC market is right now, and Windows 8 also isn't doing much to stem the declining units. The 22% drop in Mac units from a year ago is far worse than the 6% decline that IDC estimated. While I didn't think it would hurt this much during the quarter, I did warn you that Apple's obsession could be a liability.

Cook warned you, too
The newly redesigned iMacs have been controversial in some ways. The ambitious manufacturing processes used in the all-in-one desktop have never been applied to consumer electronics, and while they are incredibly thin, that has less value in a desktop machine that sits stationary all the time. Using friction-stir welding on the chassis and applying full display lamination on such large displays is no easy task.

In October, Cook warned that iMacs would be "significantly constrained" throughout the quarter, particularly with the 27-inch model. Those constraints are primarily what decimated total Mac units this quarter, with iMac units falling 700,000. In addition to that, Cook said that channel inventory was down from the beginning of the quarter by over 100,000 units.

Without these constraints, Cook would have expected Mac sales to be "materially higher."

Unveiling an unfinished product
The new iMacs were introduced in late October at Apple's iPad Mini event, among other product unveilings. The whole timing of when Apple began shipping them also points to how much difficulty the company is having in making them. For example, the prior generation iMac was introduced in the summer of 2011, making it an incredibly long product cycle until late 2012 -- twice as long as most previous iMac cycles.

Apple must have been working for several months trying to overcome the hurdles, which is why it took so long in the first place to update. Even after unveiling, it took almost two more months to even begin shipping the 27-inch model, and shipping times quickly slipped into January.

That suggests that Apple was forced to unveil the new iMacs knowing full well that the production ramp wasn't fully prepared to accommodate sufficient volumes, but it didn't want to risk waiting even longer since the outgoing generation was already aging. It wouldn't have been prudent to not upgrade the iMac at all in 2012.

When the new models were unveiled, Apple no longer offered the previous generation. That means it was already ramping down production of the 2011 model heading into the tail end of 2012. For a notable portion of the quarter, Apple simply wasn't selling iMacs at all. As its flagship desktop, that was bound to hurt total Mac units.

Did it have to be this way?
Theoretically, Apple could have kept the older models in production to at least offer something to prospective desktop buyers while awaiting the new models. The risk there is that Apple knows demand drops off for older products as soon as new products are announced, a phenomenon known as the Osborne Effect. Continuing to produce the older model after unveiling the new model risks unsold inventory that would eventually need to be written down or discounted heavily.

The new iMacs are incredibly difficult to manufacture, which is directly related to Apple's obsession with quality and design. Those characteristics definitely drive demand, but unmet demand due to insufficient supply is a liability.

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The article I Warned You About Apple originally appeared on Fool.com.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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