March 21, 2002 8:30 AM PST

Regret, ire greet pricier iMacs

If Apple Computer CEO Steve Jobs was looking for a good place to deliver bad news, Tokyo may have been just far enough away from the company's California headquarters.

Mac enthusiasts and analysts generally responded negatively to word that Apple would raise the price of its hot-selling flat-panel iMac by $100. Apple jacked up the price on all three iMac models in response to rising component costs. Liquid-crystal display (LCD) panels are in short supply, causing prices to spike after more than a year of declines and contributing to a backlog of new iMac orders.

Memory prices have also been on a rare upward trajectory after selling at or below cost for substantial periods in 2001. "Our costs have tripled since January on memory," said Greg Joswak, senior director of hardware product marketing at Apple.

Jobs delivered the news during his Macworld Tokyo keynote address, which started around 4:30 p.m. PST on Wednesday.

Apple also gave an accounting of iMac shipments--about 125,000 units to date. That means the company must plow through its backlog and ship about another 100,000 new iMacs in the last two weeks of the quarter to meet many financial analysts' projections for the trend-setting computer, which joins a flat-panel display to a half-dome base with a pivoting arm.

"They said they're producing about 5,000 iMacs a day," said IDC analyst Roger Kay. "That would certainly get them closer to clearing away the backlog."

As of Monday, distributor Ingram Micro had a backlog on some Macs going out to June.

Several financial analysts on Thursday lowered their expectations for Apple's 2002 second fiscal quarter, which ends March 31, in response to the price increase and news on units shipped.

J.P. Morgan analyst Daniel Kunstler lowered his second-quarter estimates to earnings of 6 cents a share and $1.35 billion in revenue from 11 cents and $1.45 billion. A consensus of analysts polled by First Call projected earnings per share of 11 cents and $1.43 billion in sales.

Salomon Smith Barney analyst Richard Gardner trimmed his revenue expectations to $1.46 billion from $1.5 billion but maintained his earnings estimates of 11 cents per share.

"While it is a good thing that Apple is taking steps to protect its margins, we believe that Apple did this very reluctantly as rising prices are a rarity in the PC industry," Kunstler wrote. Given the iMac shortage's effect on January and February sales, he warned that "profitability on the new machines may have come close to evaporating in the quarter."

Still, Apple's accounting of units shipped was "not as bad as we were bracing for," Kunstler said. But he raised the question of whether the company could continue producing 5,000 iMacs a day. "We are not convinced this is necessarily going to remain consistent," he wrote. "If certain components are expensive, then that means they are in short supply."

Price increases are rare in the computer industry, where cutthroat competition has historically led to rapid-fire price declines. But Apple has been quick to protect profit margins when a component shortage necessitates a price increase.

Soon after releasing the Power Mac G4, Apple in October 1999 raised prices on the computers because of a processor shortage. The company also made the unpopular decision to cancel orders at the old price, a position it later partly backed away from. With the new iMac price increase, Apple plans to fulfill existing orders at the original price.

"They had no choice but to bite the bullet," Kay said. "Apple said that if this had been a short-term problem, they could have sucked it up. In the end, they felt they had no choice but to pass those cost increases on to their customers."

Dealers, customers speak out
Apple introduced the new iMac in early January but didn't start shipping the computer for another three weeks. Right from the start, the new Macs were hard to come by, with the Apple online store warning of three- to five-week delays about 10 days before units started shipping.

As the situation worsened, Apple also ran afoul of Mac dealers, many of which complained that the company was giving preferential treatment to its own 28 retail stores.

During his keynote address, Jobs said that Apple had moved only about 12,500 new iMacs through the Apple retail stores, with 90 percent going through other sales channels.

"Jobs admitted each Apple retail store has gotten a little less than 900 flat-panel iMacs since the end of January," said one angry dealer in the northeastern United States. "I have gotten nine high-end units and two midrange models. You do the math. Does this look fair to you? Apple retail stores are getting preferential treatment."

Besides selling directly through Apple online and retail stores, the company sells Macs through nearly 200 independent dealers and more than 220 CompUSA stores.

Another dealer, who said she had received about 30 iMacs but had been getting more than 150 calls a week, bristled at the price increase. "This is so unfair. I had to turn people away at the original prices--and now this."

The new iMac comes in three models: an 800MHz PowerPC G4 with 256MB of RAM, a 60GB hard drive and a DVD recording drive; a 700MHz model with 256MB of RAM, a 40GB hard drive and a CD-RW/DVD combo drive; and another 700MHz, this one with 128MB of RAM, a 40GB hard drive and a CD-RW drive. Apple originally priced the iMacs at $1,799, $1,499 and $1,299, respectively. New prices are $100 more apiece.

"The price hike is ill-timed," said Rich Whiffen, a Mac user from Arlington, Va. "Apple already has a bit of a black eye from not being able to deliver the machines as fast as they claimed. Now they're not going to offer the prices they claimed either."

Whiffen said he understands that the price increases make sense "from a business perspective, but it could be disastrous from a PR point of view."

"Computers rarely, if ever, increase in price...I'm just glad I bought mine before the price increase," he said.

Diane Brown, a Mac user from Nashville, Tenn., said it would have been better for Apple to have priced the iMac higher when it came out. "The increase gives more fuel to the old 'Macs are too expensive' line," she said.

Kent Pribbernow, a PC user from Fort Wayne, Ind., is exactly the kind of customer Apple wants to buy the iMac. The iMac's design and the lure of Mac OS X convinced him to order the new computer.

"I had placed an order on the base model iMac thee weeks (ago), and I was considering canceling my order, waiting a couple months for any bugs to be worked out of the design," he said. "(I am) glad I waited now. This is my first Mac, and I'm excited as hell."

Pribbernow said he could "appreciate Apple's need to adjust pricing to offset component costs, but a price increase of this scale so early in a new product line is always a bad sign...At $1,400 and up, I pray Apple plans on keeping the previous generation iMacs around for a while."

 

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