Why Apple Leaves Low-End Computers to the Competition

Its adherence to a graceful design esthetic and a limited lineup keeps margins sky-high

By Stephen H. Wildstrom

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It's no secret that Apple (AAPL) is doing really well at the high end of the personal computer business, but the other day I got some data that cast its recent achievements in a whole new light. In September, according to market researcher NPD Group, Macs accounted for 18.9% of all laptops and desktops sold in U.S. retail outlets. For computers priced above $1,000, Apple's share was an astonishing 89%.

The NPD numbers overstate Apple's dominance to some degree. They exclude most sales to large enterprises, which strongly prefer high-end PCs to Macs. Still, the business implications are inescapable. While competitors such as Hewlett-Packard (HPQ), Acer, and Dell (DELL) sell vast volumes of $500 laptops that yield razor-thin profit margins, Apple—whose cheapest MacBook sells for $999—is raking in the lion's share of the industry's profits.

Apple is in every sense a mass marketer, but it has the soul and the strategy of a luxury-goods maker. You can see this in the design of its products, right down to the packaging. The appeal is visceral: To see the product is to want it.

I'm writing these words on a 27-inch iMac that is the most gorgeous desktop I've ever touched. In a world where the design esthetic is industrial blah, the new iMac ($1,999 for the 27-in. model, from $1,199 for the 21.5-in.) is a spare, elegant fusion of aluminum and glass that features everything you need and nothing you don't. The accompanying Magic Mouse is a curved sliver of plastic with a touch-sensitive top that lets you scroll with the flick of a finger. The wireless keyboard looks like something from the Bang & Olufsen store.

Luxury-goods makers are quirky, and Apple is no exception. It has a long-standing antipathy to multibutton mice, so the Magic Mouse comes with its right-click function disabled until you change a preference to turn it on. And the keyboard pointlessly embraces all the limitations of a laptop keyboard—no number pad, no keys for paging up and down. Fortunately, if you want to trade beauty for functionality, standard Microsoft (MSFT) and Logitech International (LOGI) keyboards and mice work just fine with Macs.

Apple also disdains the mass marketers' credo that there should be a product tailored to every taste. HP's U.S. online store offers 35 different laptop models, from a $300 netbook to $1,300-plus monster with an 18.4-in. display, each of which is available in multiple configurations. Apple offers just five laptops, and the options for configuring them are limited to disk size, amount of memory, and sometimes processor speed. Every computer Apple makes, from the $599 Mac mini to the 8-Core Mac Pro desktop, which approaches $12,000 when it's fully loaded, comes with the same version of the OS X operating system and the same set of preloaded applications.

Apple's approach causes it to neglect huge swaths of the market. For example, the company serenely ignored analysts' advice that it "had to" break into the hot netbook market. It has avoided the fast-growing segment of low-cost, lightweight consumer notebooks. Entering those markets could boost Apple's share even further. But the move would take a toll on profit margins and fight the company's commitment to choose what types of products it believes best serve its customers' needs. CEO Steve Jobs has dismissed the low end of the market, saying: "We don't know how to build a sub-$500 computer that is not a piece of junk."

Apple has clung to its retrograde philosophy, fighting a tide in which manufacturers target products at minutely sliced-and-diced subsectors of the market. But the philosophy still works, and, happily, Apple is unlikely to outgrow it.

Wildstrom is Technology & You columnist for BusinessWeek. You can contact him at techandyou@businessweek.com or follow his posts on Twitter @swildstrom.

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