Ever since the unveiling of the new 16” MacBook Pro I’ve been trying to think of the future scenario in which their decisions make any financial sense and I can only think of one. Apple kills the 13” MacBook Pro. I’ve tried to war game every possible scenario for the Mac Business and there is only one path that leads to increased profitability.
Of course, I’m speaking strictly from a financial perspective without regard to Apple’s grand vision of the future. However, I’ve found more often than not, you can make some pretty good predictions on what Apple will do if you crunch the profitability models of their options. Apple executives can espouse their love for various products all that they want, but at the end of the day, if the customers won’t pay their price it doesn’t matter. Apple’s commitment to a product line extends as far as their customer’s willingness to open their wallets.
I found two aspects of last weeks MacBook Pro announcement puzzling. First, the price didn’t go up significantly. In fact, you could make a case Apple actually lowered the price. And second, there was only a replacement for the larger 15” MacBook Pro. Even though the 13” MacBook Pro suffers from the same keyboard problems, there was no new design to the rescue.
Note, everything I’m about postulate is based on the idea that Apple doesn’t want to accept lower gross margins in return for maintaining volume. If Tim Cook and company are willing to accept reduced profitability in order to service a specific market, then it’s truly a whole new world and all of my analysis is meaningless.
However, it’s a tough sell for company management to explain to the board of directors why they want to start reducing future profits. And make no mistake, Apple will present their plan to the board of directors before the next fiscal year. This gives the board a chance to voice their disagreement or find a new CEO if need be. There is no opportunity for Apple’s product teams to “ask for forgiveness rather than permission”.
MacBook Pro Future Installed Base
I used to crunch the math on Gateway Computers installed base model when I was a financial analyst assigned to the Warranty Return & Repair division. My aim was to estimate future expenditures for current sales and book those liabilities against the income statement. And we were pretty good at predicting what was going to happen to the installed base five years out.
If I try to apply some of that same methodology to Apple with my limited data set, I see trouble in the MacBook’s future. Here is the main problem. The MacBook Pro has benefited greatly from Windows switchers to the Mac product line. In fact, using an iPhone is how I and just about every Mac user I know ended up switching from Windows to using Macs.
However, we’re now in an environment where the iPhone is pulling in less and less new users. Incredibly, the iPhone installed base is headed for it’s first ever declines in the near future. That means the steady Underground Railroad which has pulled in new MacBook customers is coming to an end.
Losing new Windows switchers isn’t necessarily a bad thing, except that there is another trend occurring simultaneously. Longtime Mac fans are no longer buying as many Macs because they find that their iPads are good enough for what they want. Which makes sense of many of the MacBook buyers were only using their expensive computer to surf the web or pay bills now and then.
How do we know that the good ship MacBook has a significant leak? Because despite all of the new Windows switchers, MacBook unit volume sales has remained flat or slightly downward. This means that that the MacBook line is steadily hemorrhaging customers elsewhere at the same or greater rate than they’re gaining new customers. Once the inflow slows down, unit volume sales decreases will accelerate.
MacBook Pro Gross Margins
Which brings me to my point. If Apple were to model future unit volume decreases for the 16” MacBook Pro, cutting prices makes no sense. Lower volume means higher overhead costs. The 16” MacBook Pro could end up with both higher costs and lower revenue. What’s the point of propping up volume on a product line which greatly hurts your average gross margins? Especially, if they end up stealing sales from a more profitable iPad Pro.
But what if Apple doesn’t expect the 16” MacBook volume to shrink? The only scenario I can come up with is that Apple thinks that the larger MacBook Pro is suddenly going to get a sales uplift. If Apple is modeling a unit volume increase in the future, they could afford to effectively load up the base model 16” MacBook Pro with better specs than it’s 15” predecessor. The unit volume increase would result in lower overhead costs and maintain or increase gross margins. Suddenly, Apple’s moves make sense.
Product Line Consolidation
But what would cause a significant uptick in sales with a mature market that is shrinking? Mac fans aren’t going to want to hear this answer, but it’s product line consolidation.
If I was an analyst at Apple I could see crunching the financial models on killing the 13” MacBook Pro in order to boost iPad Pro, MacBook Air, and 16” MacBook Pros. Now, I don’t have any access to Apple’s product line income statements but based on my experience in modeling Gateway’s laptop profitability I would guess that out of all of their iPad and Macs, the 13” MacBook Pro has the smallest gross margins. The iPad Pro and MacBook Air have simplicity of manufacturing and volume advantages over the 13” MacBook Pro. And the 16” MacBook Pro has more pricing power. The 13” MacBook Pro is getting squeezed on both ends and is in kind of a no-man’s land.
I’d guess that killing the 13” MacBook Pro could have significant upside in driving up sales of the iPad Pro, MacBook Air, and 16” MacBook Pro. Profitability would most certainly go up. Unit sales would go down. But the Mac Business would be healthier and stronger going forward.
The Mac Business is in a similar position to a mainstream automaker. Ford and GM have to deal with changing consumer preferences with driving sedans vs small SUVs or traditional gas vs electric. The inevitable result is the culling of some of the lesser profitable product lines to put the company on a stronger financial footing.
Now the Mac business is facing competition from tablets which has siphoned off the lighter Mac users. I heard Marco Arment the other day triumphantly proclaim that for all the talk of Tablets being the future everyone is still using good old laptops. Marco is dead wrong. As I mentioned earlier, if he was right, the Mac business would have grown significantly over the past five years. But Macs have been flat because they’re steadily losing users to tablets.
It’s too soon to say what Apple will do with their 13” MacBook Pro line. It’s normal for Apple to launch the larger model first and follow up with the 13” variant a few months later. The only reason I was surprised at the absence of a new smaller Pro is because I expected that once Apple had a suitable keyboard replacement, they would want to stop selling the old keyboard on both sizes.
Again, financial analysis would leave me to believe that it makes no financial sense for Apple to stick to their guns with their typical staggered MacBook larger/smaller launch schedules. The butterfly keyboard replacements that Apple is footing the bill for on customer laptops must be significant. Apple has every financial incentive to replace the 13” MacBook Pro as soon as possible. And yet they haven’t. Why?
Perhaps the 3rd generation of the butterfly keyboard really did minimize the problem? But if it did, why ditch the butterfly design completely for new MacBook Pros? I keep coming back to that question.
And what of the 13” Airs? They continue to use the butterfly keyboard. Could those be on the chopping block as well? I could easily see a scenario where Apple eventually makes the 13” screen space the domain of the iPad Pro or some new convertible form factor powered by new Apple ARM chips. That would leave the Pro with the clearly defined hard core user who wants a big Intel powered laptop. That makes a lot of sense from a product differentiation perspective.
Conclusion
Even though Apple has been non-committal about bringing the new design to the smaller MacBook Pro, Apple could continue to produce the MacBook Pro line as it always has without dropping any models. However, like a financial Doctor Strange looking into the future, I don’t see any scenario where that doesn’t lead to reduced gross margins for Apple. The question is whether Apple is willing to simply accept reduced profitability or are they going to proactively get ahead of the situation? Because if they are, killing the 13” MacBook Pro is the obvious answer.
I found two aspects of last weeks MacBook Pro announcement puzzling. First, the price didn’t go up significantly. In fact, you could make a case Apple actually lowered the price. And second, there was only a replacement for the larger 15” MacBook Pro. Even though the 13” MacBook Pro suffers from the same keyboard problems, there was no new design to the rescue.
Note, everything I’m about postulate is based on the idea that Apple doesn’t want to accept lower gross margins in return for maintaining volume. If Tim Cook and company are willing to accept reduced profitability in order to service a specific market, then it’s truly a whole new world and all of my analysis is meaningless.
However, it’s a tough sell for company management to explain to the board of directors why they want to start reducing future profits. And make no mistake, Apple will present their plan to the board of directors before the next fiscal year. This gives the board a chance to voice their disagreement or find a new CEO if need be. There is no opportunity for Apple’s product teams to “ask for forgiveness rather than permission”.
MacBook Pro Future Installed Base
I used to crunch the math on Gateway Computers installed base model when I was a financial analyst assigned to the Warranty Return & Repair division. My aim was to estimate future expenditures for current sales and book those liabilities against the income statement. And we were pretty good at predicting what was going to happen to the installed base five years out.
If I try to apply some of that same methodology to Apple with my limited data set, I see trouble in the MacBook’s future. Here is the main problem. The MacBook Pro has benefited greatly from Windows switchers to the Mac product line. In fact, using an iPhone is how I and just about every Mac user I know ended up switching from Windows to using Macs.
However, we’re now in an environment where the iPhone is pulling in less and less new users. Incredibly, the iPhone installed base is headed for it’s first ever declines in the near future. That means the steady Underground Railroad which has pulled in new MacBook customers is coming to an end.
Losing new Windows switchers isn’t necessarily a bad thing, except that there is another trend occurring simultaneously. Longtime Mac fans are no longer buying as many Macs because they find that their iPads are good enough for what they want. Which makes sense of many of the MacBook buyers were only using their expensive computer to surf the web or pay bills now and then.
How do we know that the good ship MacBook has a significant leak? Because despite all of the new Windows switchers, MacBook unit volume sales has remained flat or slightly downward. This means that that the MacBook line is steadily hemorrhaging customers elsewhere at the same or greater rate than they’re gaining new customers. Once the inflow slows down, unit volume sales decreases will accelerate.
MacBook Pro Gross Margins
Which brings me to my point. If Apple were to model future unit volume decreases for the 16” MacBook Pro, cutting prices makes no sense. Lower volume means higher overhead costs. The 16” MacBook Pro could end up with both higher costs and lower revenue. What’s the point of propping up volume on a product line which greatly hurts your average gross margins? Especially, if they end up stealing sales from a more profitable iPad Pro.
But what if Apple doesn’t expect the 16” MacBook volume to shrink? The only scenario I can come up with is that Apple thinks that the larger MacBook Pro is suddenly going to get a sales uplift. If Apple is modeling a unit volume increase in the future, they could afford to effectively load up the base model 16” MacBook Pro with better specs than it’s 15” predecessor. The unit volume increase would result in lower overhead costs and maintain or increase gross margins. Suddenly, Apple’s moves make sense.
Product Line Consolidation
But what would cause a significant uptick in sales with a mature market that is shrinking? Mac fans aren’t going to want to hear this answer, but it’s product line consolidation.
If I was an analyst at Apple I could see crunching the financial models on killing the 13” MacBook Pro in order to boost iPad Pro, MacBook Air, and 16” MacBook Pros. Now, I don’t have any access to Apple’s product line income statements but based on my experience in modeling Gateway’s laptop profitability I would guess that out of all of their iPad and Macs, the 13” MacBook Pro has the smallest gross margins. The iPad Pro and MacBook Air have simplicity of manufacturing and volume advantages over the 13” MacBook Pro. And the 16” MacBook Pro has more pricing power. The 13” MacBook Pro is getting squeezed on both ends and is in kind of a no-man’s land.
I’d guess that killing the 13” MacBook Pro could have significant upside in driving up sales of the iPad Pro, MacBook Air, and 16” MacBook Pro. Profitability would most certainly go up. Unit sales would go down. But the Mac Business would be healthier and stronger going forward.
The Mac Business is in a similar position to a mainstream automaker. Ford and GM have to deal with changing consumer preferences with driving sedans vs small SUVs or traditional gas vs electric. The inevitable result is the culling of some of the lesser profitable product lines to put the company on a stronger financial footing.
Now the Mac business is facing competition from tablets which has siphoned off the lighter Mac users. I heard Marco Arment the other day triumphantly proclaim that for all the talk of Tablets being the future everyone is still using good old laptops. Marco is dead wrong. As I mentioned earlier, if he was right, the Mac business would have grown significantly over the past five years. But Macs have been flat because they’re steadily losing users to tablets.
It’s too soon to say what Apple will do with their 13” MacBook Pro line. It’s normal for Apple to launch the larger model first and follow up with the 13” variant a few months later. The only reason I was surprised at the absence of a new smaller Pro is because I expected that once Apple had a suitable keyboard replacement, they would want to stop selling the old keyboard on both sizes.
Again, financial analysis would leave me to believe that it makes no financial sense for Apple to stick to their guns with their typical staggered MacBook larger/smaller launch schedules. The butterfly keyboard replacements that Apple is footing the bill for on customer laptops must be significant. Apple has every financial incentive to replace the 13” MacBook Pro as soon as possible. And yet they haven’t. Why?
Perhaps the 3rd generation of the butterfly keyboard really did minimize the problem? But if it did, why ditch the butterfly design completely for new MacBook Pros? I keep coming back to that question.
And what of the 13” Airs? They continue to use the butterfly keyboard. Could those be on the chopping block as well? I could easily see a scenario where Apple eventually makes the 13” screen space the domain of the iPad Pro or some new convertible form factor powered by new Apple ARM chips. That would leave the Pro with the clearly defined hard core user who wants a big Intel powered laptop. That makes a lot of sense from a product differentiation perspective.
Conclusion
Even though Apple has been non-committal about bringing the new design to the smaller MacBook Pro, Apple could continue to produce the MacBook Pro line as it always has without dropping any models. However, like a financial Doctor Strange looking into the future, I don’t see any scenario where that doesn’t lead to reduced gross margins for Apple. The question is whether Apple is willing to simply accept reduced profitability or are they going to proactively get ahead of the situation? Because if they are, killing the 13” MacBook Pro is the obvious answer.
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