August 2, 2000 5:00 AM PDT

Apple misses the tune on CD-RW drives

Apple Computer may claim to have the coolest computers on the planet, but it missed out on the market for Internet music.

Apple, which is often credited for making style and design a factor in PC purchasing, has not been able to effectively capitalize on one of the hottest options for PCs today: the CD-RW drive.

The drives, which can be used to burn-write CDs, have become a hot-ticket item for consumers who want to record MP3 files or download tunes from the Internet. Hewlett-Packard, among others, has helped jump-start consumer PC sales by incorporating CD-RW drives into a wide range of systems.

By contrast, Apple does not offer any computers with a built-in CD-RW drive. Instead, it offers computers with recordable DVD drives. DVD drives can read regular CDs as well as DVDs, but they are more expensive, less popular, and can't record discs that can be read by CD players.

Consumers can buy a separate CD-RW drive for a Mac. That option means spending a few hundred dollars more and turning the all-in-one iMac into a two-part affair.

"This is a peripheral boat Apple has missed," Dataquest analyst Chris Le Tocq said. "Here, at least, Apple was not an innovator."

Just a year ago, CD-RW seemed insignificant, with only 1.7 percent of systems sold at retail shipping with the drives, according to PC Data. But by October, the figure had jumped to 19 percent. By January, it was up to 40 percent, an average that has consistently held throughout the year.

Apple failed to respond to repeated requests for comment. Analysts, however, agreed that the company failed to latch onto the trend.

"When Apple refreshed iMac last year, it makes sense they did nothing with CD-RW. But with the new...iMacs (announced last month), it would have made a lot of sense," said PC Data analyst Stephen Baker.

CD-RW has caught on so quickly that those companies who caught onto the trend early have reaped big profits. Dataquest estimates that this year consumers will buy 29 million CD-RW drives--many of them in new PCs--up from 12.5 million in 1999.

"HP in many of their configurations has CD-RWs in consumer (PCs), and that's leading edge in consumer and proved to be very popular," International Data Corp. analyst Roger Kay said. "Since a large number of iMacs are going to consumers, any configuration that doesn't have CD read-write is behind the curve."

Both Compaq Computer and Dell Computer have also caught the digital music bug, with Compaq offering CD-RW drives as well as speakers with digital audio ports for MP3 players on some models. Dell, meanwhile, partnered with S3 on an MP3 audio system. Compaq will come out with MP3 players, too.

"I'm surprised Apple didn't go with CD-RW, because their users are probably more in tune with that kind of thing," Baker said. "It's an easy solution for the user, and that's something you want to be in the market there with."

Analysts say it's hard to gauge how many sales Apple has lost by not offering CD-RW.

Year-to-date, Apple has 9.8 percent retail market share, a decline of 6 percent from 1999, according to PC Data. In June, Apple came in fourth, with 9.4 percent retail share, behind top-ranked HP, Compaq and Emachines. But sales dropped 15 percent year-over-year, in part because of slowing iMac sales in preparation for new products announced last month at the Macworld Trade Expo.

CD-RW pros and cons
Though CD-RW might make a lot of sense to consumers, Apple may have good reason for avoiding it.

"If you look at Apple's margin picture, it's clear where their margin comes from--the notebooks and the high-end systems," Le Tocq said. "They may ship a lot of iMacs, but that's not where they make their margins. Apple's second-quarter numbers were OK, but they're under a little pressure."

Because of Apple's cost structure, it picks up most of its margins on the back end of a product's life cycle, Le Tocq explained. The longer the company can continue using CD-ROM and DVD drives and other components in its products, the more profits it can squeeze from the systems. This is one reason the company has not moved iMac to 17-inch displays, as long expected by Apple watchers, he said.

Baker agreed. "You have to ask, 'Do I need to add extra expense to my systems, to my cost of goods, at this time?' The answer is 'no,' particularly with iMac sales slowing down."

Rather than music, Apple has pushed hard into digital imaging, touting mid- and high-tier iMacs with DVD drives and FireWire ports for attaching digital camcorders. But in reality, consumers are more interested in CD-RW than DVD, analysts say. In June, for example, while more than 40 percent of systems sold included CD-RW drives, said Baker, only about 20 percent had DVD-ROM drives. And most of those computers also came with a CD-RW drive.

"The digital imaging thing is nice, but it's obvious it's a high-end thing that most people are not going to be doing," Baker said. "It's an expensive marketing gimmick, and I don't think there's a big opportunity there. CD-RW is a great marketing opportunity going forward."

Apple does offer DVD-RAM, a drive that allows people to record DVDs. DVD-RAM comes as an option on PowerMacs and as standard fare on its highest-end system. But DVDs and players are geared for video rather than music.

DVDs are also expensive, costing around $25. Blank CDs sell for as little as 50 cents.

Consumers buying iMacs must rely on third parties for external CD-RW drives, using either FireWire or USB connectors. But the drives are expensive, typically costing more than $250 for USB and $350 for FireWire models. The limitation in part is because of iMac's design.

"When you have an all-in-one system, you're locked into a configuration," IDC's Kay said. "For the most part, you want that configuration to be exactly what the consumer would buy, so they don't feel locked in...Apple may have missed on this one."

 

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