Citing limited availability of PowerPC G4 processors from Motorola, Apple has reconfigured its Power Macintosh G4 line. The new systems are identical to those introduced on 31-Aug-99 in every way – including price – except with PowerPC G4 processors 50 MHz slower than original specifications. The low-end $1,599 model still has PCI Graphics; the two high-end models (at $2,499 and $3,499) still feature AGP Graphics, dual USB busses, faster system bandwidth, and standard DVD drives. Apple also announced that IBM will begin manufacturing G4 CPUs during the first half of 2000 for use in Apple products, which should eventually reduce Apple’s reliance on Motorola as its sole source of G4 CPUs.
How should we assess the changes? Customers get less value any way you look at it, but depending on your perspective you can think that Power Macintosh G4 purchasers are getting the shaft or are mild victims of circumstance. Let’s examine three possible views of the situation.
The Apple Perspective — Apple has two simple problems with the Power Macintosh G4 line: DRAM prices have more than doubled since July, and the processors it needs to build the originally specified machines do not exist in needed quantities. The laws of supply and demand are clearly operating here. Apple is experiencing exceptionally high demand for its Power Macintosh G4 machines at current prices, but can produce only a limited supply. That means a shortage exists, a situation that normally dictates price increases: the higher a system’s price, the fewer people will order one, reducing demand. Lower demand means smaller shortages. Doing nothing would mean continued backlogs, leaving customers dangling until Motorola gets its act in gear.
But there’s more than one way to raise prices. You can do it outright, or you can redefine the product. Apple has chosen the latter, by resetting the performance levels of the Power Macintosh models to match the three available levels of PowerPC G4 chips. Yes, that’s a speed reduction of 50 MHz, but Apple’s question to customers should be simple: Do you want to wait for months for the system that we originally announced, or do you want an identical system now, except for a decrease in clock speed of about 10 percent? It’s a good argument that gives the decision back to the customer, where it belongs. Apple says it can ship 500 MHz G4 systems in the first calendar quarter of the year 2000. In effect, the first Power Macintosh G4 "speed bump" will be to the originally announced speeds.
Apple is no more pleased about this than its customers. In some ways, however, the move is disingenuous and driven by the high end. The former mid-range 450 MHz configurations were starting to ship in reasonable quantities, and the 400 MHz low-end systems have had decent availability for a few weeks. The "do you want it now or later?" question carries less credence for these systems because you could have had them by now at the lower prices.
Letting customers decide on slower machines with faster delivery dates is a good move – and quite valid – for the high end machines that are not yet shipping. On the rest of the product line, the change just amounts to a price increase, and it’s not being received well in an industry dedicated to constantly lower prices and higher performance.
The Angry Perspective — Customers have a right to be annoyed by Apple’s reconfiguration; no matter how you look at it, customers get less machine for the same money. Last week you could walk into a CompUSA store and plunk down $1,599 for a 400 MHz Power Macintosh G4. This week, the same money will buy a 350 MHz model – 88 percent as fast in terms of raw clock speed – when the former 400 MHz models were already widely available.
As you get to the higher end, the new pricing seems ridiculous. As a MacWEEK.com editorial put it: "Users who were prepared on Monday to pay $2,499 for a 450 MHz Power Mac G4, for example, can now pay the same amount of money for an otherwise identical 400 MHz box or pony up another $1,000 for a 450 MHz system that offers the same features they were expecting (save for an additional 128 MB of RAM)."
This isn’t quite accurate. Today’s 450 MHz machine selling for $3,499 is not quite the same machine as yesterday’s 450 MHz $2,499 model. Now that the 450 MHz pre-configured model is Apple’s high-end offering, it’s substantially more beefy. The new $3,499 model has 256 MB RAM instead of 128 MB; a 27 GB Ultra ATA/66 hard drive instead of a 20 GB model, built-in DVD-RAM instead of DVD-ROM, and no 56 Kbps modem you’re unlikely to need. Configuring a former 450 MHz mid-range model to these beefier specifications would add $650 to the cost. Therefore, the comparison should be between a $3,149 system and a $3,499 system, not between vastly different configurations that happen to share the same microprocessor speed.
Declaring that the same machines now cost $1,000 more is inaccurate by two-thirds. There’s only one configuration that allows direct price comparisons – 450 MHz AGP Graphics models. The old and new configurations share only two clock rates – 400 MHz and 450 MHz – but the old 400 MHz model used PCI Graphics, and the new 400 MHz model uses AGP Graphics, frustrating direct comparison. For identically configured old and new 450 MHz AGP Graphics systems, the price differential is $350 – a 14 percent price increase. That’s nothing to sneeze at, but neither does it call for revolution.
Apple’s subsequent move last week to cancel pending G4 orders was boneheaded. The company today reversed itself, announcing it will honor Power Macintosh G4 orders placed with Apple or resellers before 13-Oct-99, provided they were secured by some form of payment (such as a deposit or purchase order). Again, a missed opportunity – the "deposit" language makes it look like Apple is just trying to avoid legal issues, taking emphasis away from Steve Jobs’s statement: "Good companies make mistakes. Great companies fix them."
Even so, Apple has already significantly damaged its perception in the eyes of G4 customers, who were justifiably angry and confused at the prospect of re-ordering machines from Apple or its resellers. It didn’t help that a system ordered months ago might now cost more simply because Apple hadn’t decided to ship that unit yet when other people had already received machines at the old prices.
Customers who ordered 400 MHz or 450 MHz systems will now receive those systems, with specifications matching the original orders, at the original price. Folks who ordered 500 MHz G4 systems will be offered an otherwise identically configured 450 MHz system at a discount of $350 – the exact price differential noted above. Apple is not accepting orders for 500 MHz systems at this time, so there are no waiting lists as reported earlier, according to a conversation today with Apple spokesperson Matt Hutchison.
The Analytical Perspective — Somewhere between the rock and the hard place are the difficult problems Apple is trying to solve with its non-intuitive moves. The company faces huge demand for machines it can’t produce. If it sits on the existing configurations, it delays revenue for another quarter and potentially loses sales from customers who want high-end performance now. The only way to fill the orders is to eliminate the supply problem and switch to chips it can buy.
Apple can’t afford to reduce demand artificially by de-emphasizing Power Macintosh G4 models, since market share is still key to Apple’s public perception. Yet rising DRAM prices are also squeezing the company. If Apple reduced price with processor speed, it would have a huge backlog of low-cost machines with expensive RAM that don’t generate the profits it needs to meet its business plan. Apple can’t afford to turn its highest-margin product line into a low-margin system for which it can’t meet orders.
From a customer service standpoint, Apple wants to prevent backlog, give customers what they want, and sell a ton of machines. They can’t accomplish any of these with the former configurations. The 450 MHz PowerPC G4 chip is the fastest chip Apple can buy, and it’s not nearly as available as slower models. But Apple had the 450 MHz chip in its mid-range model. That’s a problem. Apple planned for a three-tiered strategy, with the most expensive and least-available processors in the most expensive systems. The price-based self-selection reserves those models for those who both need and can afford the power. Motorola’s problems, however, put the actual high-end processor in the mid-range system.
Apple was stuck for a high-end system and had to adjust the product plan accordingly. If 450 MHz machines are the fastest the company can build, it can’t very well sell a $3,499 high-end machine and a $2,499 mid-range machine with the same processor speed. The differences may be worth the money to some, but the major perceptual differentiator is megahertz. To keep the mid-range 450 MHz system at or near $2,499, Apple would have needed to introduce a 350 MHz machine for $1,299 or less. That would interfere with iMac purchases, horribly confuse entry-level purchasers, and shatter margins. It’s no wonder Apple doesn’t want to talk about this.
MacWEEK.com notes analyst Lou Mazzucchelli working through similar thought processes. If Apple had reduced pricing on the systems, it would have stimulated demand as well. That, in turn, might maintain the same manufacturing backlog Apple very much wants to clear.
MacWEEK’s editorial asks rhetorically, "Does Apple expect anyone to like these options?" It’s the wrong question – the right question is "What better choices could Apple offer?" Lower prices mean lower margins. Analysts are obviously still very high on Apple’s business plan, but a quarter of significantly lower margins could change that and create the perception that people are unwilling to pay the "premium" prices which Wall Street loves to associate with Apple. Apple CFO Fred Anderson might be able to manage that perception in three months, but it’s a risk – and a risk to the bottom line as well. If Apple introduces Power Macintosh G4 systems in iMac price ranges, many people will want such an offering to stick around. That’s not good for Apple.
Neither do critics offer a reasonable alternative on the technical front. If Apple can’t lower prices, should they have kept the existing configurations and let people wait? Hardly. The real problem is that Apple failed to manage expectations well. Apple seems to believe that nothing it could have said would make people feel better about the change so it let the announcement stand alone. MacWEEK’s editorial didn’t like that: "By vacillating about this relatively minor specification change, however, Apple is in real danger of alienating its core of professional users and losing the market momentum that the announcement of G4 systems provided the company in the first place."
Apple’s vacillation was less important than its lack of framing the change as a way to get the high-powered machines to customers faster at prices that match supply and demand. Everyone understands that rare products cost more. Apple could simply have said, "These prices not only compensate for exorbitant DRAM prices, but also provide nearly identical systems priced so that those who need the fastest systems can be assured of getting them reasonably quickly. As PowerPC G4 production problems are solved, we look forward to increased availability driving lower prices and even more outstanding price-performance ratios, though these systems are still the fastest available in the industry."
In fact, Apple’s announcement contains similar statements – the new configurations "match PowerPC G4 chip availability from Motorola," and are here "in response to Motorola’s delays in reaching volume production of its 500 MHz G4 processor chip, which is now scheduled for availability early next year." But by linking the change just to the 500 MHz G4 chip, Apple missed the chance to frame the issue of supply and demand for all the G4 systems, leading to customer outrage.
No matter how you look at it, Apple has a losing hand – they announced G4 systems based on chips Motorola can’t supply while DRAM prices skyrocketed. They have to both cover higher costs and reduce demand, and that means effective price increases. Framing it as a 500 MHz issue, however, missed the point for the other configurations, which have customers the most annoyed. Apple was going to take a hit for this from professional customers no matter how it was announced.
The hit just didn’t have to be this big.
[Matt Deatherage is the publisher of MWJ, the Weekly Journal for Serious Macintosh Users, and is busily preparing the reintroduction of the daily MDJ. Next week’s issue of MWJ will include complete Mac OS 9 coverage: you can learn more about MWJ and check out a free three-issue trial subscription at the URL below.]