The landscape of Rain’s continued march to the top of the hill is chock full of data further indicating the ultimate demise of the desktop PC at Apple and other large manufacturers. While it has some interesting twists and turns regarding profitability versus volume on various hardware offerings from these giants, there are some relationships that are conspicuously missing or only lightly touched on.
One of these is profitability of a platform. What Apple has always done and is clearly continuing with the iPad and iPhone is creating and nurturing an entire platform. Much like HP printers, it was the ink they made their money on and that contributed the most to product loyalty (or imprisonment depending on one’s perspective). Though the iPad is certainly more fun and functional than the printer ink cartridge club, it is nevertheless the same thing. If Apple only makes about half the gross margin on the iPad as it does the Mac for an individual unit sale, what is the differential in the software sale? For after all, it is the application that makes the computing device useful, not the other way around.
The answer, ladies and gentlemen, is a lot of money. Herein lies the actual DNA of Apple’s ultimate plan to make its iPad the ink cartridge of creative content consumption. While making 40% on a computer is impressive, to make a living at it assumes the majority of users actually need a computer. Many, about 10 million in only a few months, are finding that the iPad or rather tablet platform is more than enough. With the advent of cloud computing and the fact that the majority of users both business and personal consume content rather than create it, the tablet is the new widget everyone will want and need. The day of the $500 desktop computer is all but over! It is estimated that 10% of desktop computer sales have already been cannibalized by the tablet.
This might sound on the surface as not boding well for Rain’s mission to make desktop computers its sole business. But for those of you that have been listening in on this subject, the exodus is here. Desktop computers are not disappearing, just the tier 1 manufacturers’ appeal to making them. Dell and HP will continue their atrophy from making desktops at any attractive level of price / performance. Unlike Apple that is actually using the iPad and Mac as a gateway drug to their app stores (brilliant, by the way!), Dell and HP do not have a software counterpart. While it is unclear what Dell and HP will do; HP is still in the throes of their board of directors walk out and Dell seems to be buying up storage companies and focusing on cloud computing. One thing is very clear; Desktops are not going to get much if any love from the CFOs and executive boards at any of these companies. Let us not forget the huge chasm of difference there can often be between margin percentages and margin dollars. Yes the iPad is less than the Mac in both at this point. But now that Apple is no longer giving 20% margin to their dealer channel (dealers must now use the Mac App Store to resell at an atrocious 6% to 10%), the profit of apps for both Mac and iPad/iPhone should be combined with their respective hardware. Be mindful that 65% of Apple’s gross sales for 2010 were from products that did not exist 3 years ago.
I imagine we will find that with this software sales overlay, the iPad will indeed outrun the Mac for margin dollars. Furthermore, Apple has deliberately and proactively all but alienated, if not completely prevented the dealer channel from selling Mac hardware and software. While I share Mr. Jobs’ frustration with the dealer channel, they are a large and powerful sales force that employ damn near 25% of our nation’s workforce. They cannot all be bad and certainly deserve and need to have a job. Apple laid off 10% of its own sales force last December. So clearly Apple is not creating jobs. And if we do not create jobs then how am I going to afford my iPad, iPhone or Mac? Yes, some of us are addicted and will once again rack up the credit card debt. But as Adam Smith and the rest of us that made it through 2009 and 2010 would advise that will not last for long.
Everyday Rain receives ever increasing inquiries and sales from users that are jumping off the Apple cart. Yes 350 million desktops were sold last year. Dell and HP and even Apple will not forget that. But, they have absolutely no cause or attraction whatsoever from almost every angle of business planning, to design a better, more powerful and price performing desktop. The revolution has already begun. Those 40% margins from Apple on Macs and the anemic 15% or less on HP and Dell desktops will end up becoming their toxic asset write offs of our banking bailout era. China’s economy is inflating despite its continued attempts to manipulate its currency. So how is Dell going to drop ship a $500 computer from China and still make any real profit with all these contradictory conditions? How is Apple going to maintain those 40% Mac margins with the ODMs in China and Taiwan both raising their prices and incurring higher per unit costs due to lower run rates?
Answer, get a Rain! Rain Computers are 100% designed, manufactured and supported in the United States and United Kingdom.