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Apple Store Reality Check

Apple’s much-ballyhooed online Apple Store posted impressive-sounding results in its first month of operation. However, although there’s no question that the Apple Store has been an online success, how much of a difference can it make in Apple’s overall financial situation?

The day after the Apple Store opened, Apple claimed it did $500,000 of business in 12 hours, and last week Apple issued a press release trumpeting that the Apple Store did $12 million of business in its first month of operation. Those numbers sound impressive, but a big number doesn’t necessarily equal an impressive financial return. First though, let me say I’m not trying to denigrate what Apple has achieved with the Apple Store, just pointing out that the reported numbers paint a rosier picture than is perhaps warranted. That said, let’s look at those numbers.

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Dollars Per Year? If the Apple Store had continued at its initial $500,000 per 12 hours rate, that would be $1 million per day, or $30 million in the first month. Even if you halve that amount, assuming that most people would order during a 12-hour window roughly corresponding to the business day in the U.S. (since the Apple Store doesn’t yet take international orders), you’re still talking $15 million, or $3 million more than Apple reported for that first month. (There was also some thought that the free camera promotion Apple ran in the Apple Store coincided neatly with the final week of the Apple Store’s first month, potentially bumping up the numbers.)

From these figures, it might seem as though the Apple Store hit the "splash" effect on the Internet: new resources get the most attention immediately after they appear, and attracting that much attention again is harder to do. For instance, a major new Web site will sometimes be overwhelmed immediately upon being announced, and after that, hits drop to a baseline level.

Let’s hope that hasn’t happened to the Apple Store. At $12 million per month, the Apple Store would pull in about $144 million per year; although that’s certainly not small change, it also wouldn’t even dent some of Apple’s more negative quarters. Of course, that $144 million is gross sales, not profit, and although Apple’s margin on direct sales is unknown, it’s unlikely to be more than 35 percent (gross margin has been hovering around 20 percent, and distributors and dealers may add another 15 percent before users see a price). If those figures are reasonably accurate, the Apple Store would contribute about $50 million a year to Apple’s bottom line. Or would it?

The Apple Store receives orders that – in many cases – would otherwise be handled by other Macintosh resellers. If we assume Apple makes 15 percent more on a Mac sold through the Apple Store than one sold through another channel, 85 percent of that $50 million would have come in anyway, leaving the true yearly advantage of the Apple Store at about $7.5 million (assuming the Apple Store sustains $12 million per month in business).

Is it worth it? Overall, I’d say yes, but Apple’s playing a balancing act, because unlike direct sales poster child Dell Computer, Apple has always relied on resellers and will continue to do so, because local resellers enable customers to try a Mac before buying. Dell doesn’t suffer from this problem, because you can try any PC at a store and assume that it will work much the same as a Dell you buy direct.

For the reseller view of the Apple Store, I spoke with Michael Koidahl, president of Westwind Computing, my favorite dealer in the Seattle area. He felt that the Apple Store is currently harming dealers because dealers aren’t allowed to sell built-to-order Macs. Michael said Apple has promised dealers build-to-order capabilities in the first quarter of 1998. Setting up such a system undoubtedly takes time (since dealers must stock the necessary parts) but Michael suggested Apple could leverage the existing repair infrastructure to enable dealers to order and stock parts, then use them either for building custom Macs or for repair jobs (with the added benefit of speeding up repair service that would otherwise have to wait for parts to arrive from Apple).

Number of Customers & Macs? It’s worth noting another confusion that could result from looking purely at the sales figures for the Apple Store. For instance, Apple reported that the Apple Store had $500,000 in orders in its first 12 hours. If you assume an average order of $2,500, that only equates to about 200 customers. That’s not too bad for 12 hours, but it’s a bit less impressive when you consider the Apple Store took 4.4 million hits (at perhaps 20 to 50 hits per person?) in those 12 hours. In essence, many people browsed the site, but relatively few bought products.

If you do the math for the month in which the Apple Store brought in $12 million, using the same $2,500 average order, you end up with about 4,800 customers, or 160 per day, down somewhat from that initial rush in the first 12 hours. Again, 160 customers per day is nothing to sneeze at, but if you assume each is buying a single Mac (necessary, given our $2,500 average order assumption), you end up with 58,400 Macs sold online per year. When you consider the fact that, in its heyday, Apple sold more than a million Macs per quarter (and even now Apple sells about 650,000 Macs per quarter), 58,400 machine sales in a year doesn’t seem all that high.

Third Largest? Apple’s press release also claimed that the Apple Store is the third largest electronic commerce site on the Internet. No details were given to back up this claim and Apple’s PR department didn’t respond to my queries, but ironically, some numbers came out of Dell the same day as the Apple press release. In a keynote at Internet World, Dell CEO Michael Dell said that Dell sells more than $3 million per day via its Web site with several days during this holiday season reaching $6 million. That’s about $1 billion in yearly sales. Dell expects half of its business to come from online sales by the year 2000.

In short, then, clearly the Apple Store is an unqualified online success, but at the same time, it won’t do much for Apple’s bottom line at the current sales rates. It’s also clear people are patronizing the Apple Store in large part because they can order custom Mac configurations; Apple’s inability to offer custom configurations has long been a source of frustration. The Apple Store faces challenges in the upcoming year as dealers are given the right to sell built-to-order Macs, but on the positive side, opening the Apple Store up to international sales may cause a significant upturn in sales from parts of the world where Apple dealers are few and far between. Ideally, the Apple Store will end up making real contributions to Apple’s financial results without cannibalizing sales from those dealers that Apple relies on for sales, support, and repairs.

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