Originally Posted by Mr. H
I have already suggested that my proposal would impact negatively on revenue and earnings for the first year or so, but in a minor fashion, and then start to impact positively. I don't believe iMac cannibalisation would be so severe that there would be no point producing it any more.
I got curious so I took 5 mins and ran it through excel.
- 2M desktop units a year to start
- 12%/year growth rate for desktops under Mr. H's product lineup (based on Apple's current growth which is pretty good)
- 0%/year growth rate for desktops under current product lineup
- $499 bottom end machine (vs $399)
- $1400 current avg unit price (from that article linked a few pages ago)
- 50% budget machine sale mix (from another article that said the desktop market was 50% entry machines).
- $950 new avg unit price - ($1400 + $500)/2. The assumption is that half the machines would be cannibalized but the remaining half of the machines keep Apple's current average.
So the baseline is: 2M units per year * $1400 avg price * 0.28 margin = $784M
Results: Year, # units, gross profit, delta from baseline, running delta from baseline
1 - 2.24M units, $595M, (-188M), (-188M)
2 - 2.5M units, $667M, (-116M), (-304M)
3 - 2.8M units, $747M, (-36M), (-341M)
4 - 3.14M units, $837M, 53M, (-288M)
5 - 3.52M units, $937M, 153M, (-134M)
6 - 3.9M units, $1,050M, 266M, 131M
7 - 4.4M units, $1,176M, 392M, 523M
8 - 4.9M units, $1,317M, 533M, 1,056M
9 - 5.5M units, $1,475M, 691M, 1,747M
10 - 6.2M units, $1,652M, 868M, 2,616M
So for the first 3 years you make less money after which you make up the difference. For 5 years you're negative overall but year 6 forward you make more money. Lots more money by year 10...and like all such growth patterns it accelerates.
Assuming you can maintain 12% annual growth over 10 years. Give Apple any growth with their current line up and the years gets pushed outwards a bit. About a year per percentage point of average growth. 4% growth pushes breakeven out to year 9.
Very back of the envelope via Excel but you see the general pattern. Sure, if you can maintain the growth eventually you make massive bucks. But it'll be half a decade, not one year, of running in the red. Year 3 is the worst where you are $344M in the hole. One thing is for sure...if Apple adopts this strategy sell your shares...the first year will be nothing but "Apple profits stunted despite increased sales" reports. Buy it back when the stock bottoms.
Change some assumptions, move the years and $$$ around a little. The key will be sustained growth rate.
Mmm...I dunno. I don't think Apple can maintain 12% growth even in the laptop space for 5 years. We had a banner year because of pent up demand. We'll likely get another in 2007 from iPod/iPhone halo and pent up Mac Pro demand.
It seems to require Dell, HP and Gateway not responding effectively. For a decade. Huh.
Microsoft could also impact the desktop space. Imagine if MS made a "Pro" version of the 360 and sold MS Office as a $200 "game" for it? The 360 makes a heck of a thin client. It's already a MCE.
So parents don't have to buy a desktop computer and a console...just a 360. MS can tout reduced TCO to businesses because of the "new" thin client architecture. Big Windows servers in the back, thrifty user (and virus) safe consoles in the front. Ellison gnashes his teeth as MS beats Oracle to the network computer. Intel has kittens.
Too gutsy for MS and too fraught with danger. But 10 years is a long time to not expect some paradigm shift. We're overdue I think.