Inside Steve's Brain - Leander Kahney [11]
But Jobs argued that Apple should be selling premium computers: well-designed, well-made machines for the top end of the market, like luxury cars. Jobs would argue that all cars did the same thing—they went from A to B—but lots of people paid top dollar for a BMW over a Chevy. Jobs acknowledged that the analogy wasn’t perfect (cars run on anyone’s gas, but Macs couldn’t run Windows software) but argued Apple’s customer base was big enough to earn Apple good margins.
To Jobs, this was a key point. There was—and always has been—pressure on Apple to sell dirt-cheap computers. But Jobs insisted that Apple would never compete in the commodity computer market, which is a race to the bottom. Between Dell, Compaq, and Gateway, there were half a dozen computer makers, all making essentially the same product, distinguished only by price. Instead of taking on Dell with the cheapest possible computer, Apple would make first-class products to make enough profit to keep developing more first-class products.
There are much greater profits to be made selling a $3,000 machine than a $500 machine, even if you sell fewer of them. By aiming at the middle and high ends of the market, Apple enjoys some of the best profit margins in the business: about 25 percent. Dell’s profit margins are only about 6.5 percent, while Hewlett-Packard’s are even lower, about 5 percent.
In the summer of 2007, Dell was the biggest PC manufacturer in the world, with a whopping 30 percent share of the U.S. market. Apple trailed third, with a much smaller 6.3 percent market share.20 Yet in the third quarter of 2007, Apple reported a record profit of $818 million, while Dell, which sells more than five times as many machines, earned only $2.8 million in profit. Yes, a big chunk of Apple’s profit came from the sale of iPods, and Dell was going through a restructuring, but Apple clearly makes much more money on the sale of a $3,500 high-end MacBook Pro laptop (as much as $875) than Dell makes on a $500 system (about $25). This is why Dell bought Alienware, a boutique gaming-machine manufacturer, in 2006—to compete in the high end of the computer market and not sell only the cheapest computers possible.
It’s been clear for years that Apple doesn’t compete in the same market as PC companies, but for many years its health as a business was measured by the number of machines it sold, not the value of those machines. Success in the PC market has traditionally been measured by quantity rather than quality. Pundits and industry-watch Gartner Inc. made repeated calls for Apple to exit the hardware business because its market share in the 2000s slipped into low single digits. But Apple goes after the most profitable segment of the market, not the highest number of machines.
This is Jobs’s definition of Apple’s business model, which survives today across multiple products and product categories: sell well-designed, well-made technology products that aren’t the cheapest on the market, but command dependable loyalty from customers because the Apple brand is a mark of quality.
Cutting back the number of products was a good move operationally. Fewer products meant less inventory, which had an immediate impact on the company’s bottom line. Jobs was able to cut Apple’s inventory from more than $400 million to less than $100 million in one year.21 Previously, the company had been forced to take write-downs of millions of dollars in unsold machines. By cutting the products back to a minimum, Jobs minimized the risk of getting hit with expensive write-offs, the kind of hit that might have sunk the company.
The cutbacks and reorganization weren’t easy on Jobs, who put in long, grueling hours. “I’d never been so tired in my life,” Jobs told Fortune in 1998. “I’d come home at about ten o’clock at night and flop straight into bed, then haul myself out at six the next morning and take a shower and go to work. My wife deserves all the credit