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From: dubman@ocf.berkeley.edu (Jonathan Dubman)
Newsgroups: comp.sys.mac
Subject: Macintosh LC
Message-ID: <1990Feb13.084617.8468@agate.berkeley.edu>
Date: 13 Feb 90 08:46:17 GMT
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I've read all your responses on the Low-Cost Mac, some of 
which I've incorporated in this article.  Here is my own 
urgent argument, which I invite you to critique.
(The subject line is creative visualization.)

Apple, hear this!

* * *

I.  Apple's current pricing strategy

The Mac pricing strategy is optimized for short-term profit.  
The scheme starts well:  Introduce a new and improved 
machine, saturate the cutting-edge market, drop the price, 
saturate the high-end market, etc.  Unfortunately, this 
scheme is not carried to its logical conclusion.  Apple 
price reductions peter out; the prices level off at about 
twice what the masses are willing to pay, and probably over 
five times manufacturing cost.  In trying to make as much 
money as possible on each type of machine, Apple management 
overcompartmentalizes profit and does not acknowledge the 
complimentary nature of the sales of the numerous members of 
the Mac product line.

Apple's profit margins are the highest in the business.  In 
overpricing its entry-level machines, Apple is excluding 
vast numbers of customers at its own peril.

Apple is trying to preserve its high-quality image by 
artificially inflating prices rather than actually improving 
quality or performance on the low end.  Their reputation is 
correspondingly shifting from premium-quality to high-price.

A lot of low-end customers tend to look just at the bottom 
line.  Snob-appeal does not apply to the low end.  Look how 
many people bought Yugos.

II.  The Magic Number

Apple, to lower expectations, has changed its tune from 
"low-cost Mac" to "low-end Mac."  How much should they 
charge, and what should it buy?

It is common wisdom in the computer industry that there are 
several magic numbers below which many customers sitting on 
the fence will rush to buy a product.  $1000 is commonly 
considered to be such a price point, for numerous 
psyschological and economic reasons.  While this is an 
overgeneralization - the price/demand curve isn't a step 
function - and you couldn't give away some computers - this 
is basically true.

Exactly what this $1000 should buy you is not agreed upon.  
A $495 PC clone system includes monochrome monitor, disk 
drive, and a standard memory configuration, sans printer.  
$1000 is still twice as much; even this proposal is arguably 
too conservative.  We need a list price at or below $995, 
with a bargain basement price of maybe $750-$800 and an 
educational price about $700.  Someone recently posted that 
an SE costs under $200 to make.  I am aware of Apple's large 
research and development costs (they are competing with 
IBM), so I will not suggest a ridiculously low price.  With 
design-for-manufacturing techniques, the SE is cheaper to 
produce than the Plus.  I am sure Apple could comfortably 
sell the machine under $1000.

I'm aware of sticky issues like dealer relations, mail-order 
pros and cons, international pricing, and legalizing clone
manufacturing, and these must be considered, but the bottom
line is, Apple needs to drop the price.

III.  Benefits of the low-cost Mac.

There was a rare window of opportunity from 1986-1988, when 
Macs began to be accepted at corporations, for Apple to gain 
significant market share.  Instead of really dropping the 
price, Apple depended on a stroke of good fortune (the 
emergence of the desktop publishing market, a lucky break 
that Apple has been trying to duplicate ever since) to 
retain its 15% market share in the face of rapidly dropping 
PC prices by overseas clone manufacturers.

The benefits of stuffing Macs through the channels in high 
volume are so many that it's _almost_ worth it to sell below 
cost.  Not only will market share increase, but the market 
will widen, because truly user-friendly machines will be 
available to the masses.  We'll sell potentially twice as 
many Macs to volume buyers like corporations and schools who 
allocate only so much money to computer purchases.  Lots of 
customers who buy one machine will buy one for home and one 
for the office.  We'll see an increase in the variety of 
third-party software and peripherals.  And we'll increase 
the potential market for upgrades - on which Apple makes a 
very healthy profit.

IV.  Happy Dealers

Whenever a computer manufacturer lowers prices, it 
frustrates and, in a sense punishes those who just purchased 
the machine at the higher price.  If the manufactuer warns 
of a price increase in advance, sales plummet.  The best 
scheme is to pleasantly surprise the user community and 
retroactively drop the price for those who purchased in, 
say, the last three months.  This will be a pleasant 
surprise for recent purchasers, and only a few will be 
disgruntled because they bought their machine three months 
before a price decrease.  Since the price should have been 
dropped three years ago, Apple should be able to afford the 
retroactive price decrease.  Dealers agreements often 
include price protection, so if everything is done properly 
there should be no backlash.

There are not one, but two critical figures: The wholesale 
and retail price.  When a price decrease takes effect, one 
would expect the dealer margin to decrease proportionally, 
though this isn't a necessity.  Dealers will be pleased 
about the increased volume the lower prices will bring but 
may be angered by lower margins.  This is a political issue, 
and I don't know the nature of the current arrangements, so 
I won't suggest any specific numbers.

The lower prices should undercut the current second-hand 
market and drive used Mac prices way down.  I would expect 
Mac Plus prices to drop down to the under $800 range.

IV.  Send in the Clones

The chance of this is about zero, so it's merely an academic 
issue.

In the early to mid '80s, IBM permitted clone manufacturers 
to produce equivalent, if not better machines at lower cost.  
At first, clones were met with compatability problems and a 
degree of public mistrust, but they were eventually 
accepted.  I don't know the most current figures, but PC-
compatible computers, including IBM's own, have roughly an 
85% market share, with over 35 million computers in the U.S.  
(What's my operational definition of market share?  Is it 
current sales or existing inventory?  I think both are on 
the order of 85%.)

Is this a phenomenal coup for IBM?  They quickly and firmly 
established themselves as King of the Mountain, the standard 
of standards.  However, they steadily lost market share and 
have fallen below Apple in sales.  (What's my operational 
definition of sales?  Number of units or total revenue?  I 
believe the figures I saw related to number of units.)

We keep hearing rumors about Brazilian and Taiwanese Mac 
clone manufacturers.  It is certainly technically feasible.  
We would all like competition to bring the price of a Mac 
Plus down to $495, but I'm not convinced that it wouldn't be 
a mistake for Apple to permit clones.  It's a risky move, 
and I'm not sure what it would accomplish.  It might 
increase market share of Mac-compatibles, but I am not sure 
even in the long run how much revenue this would generate 
for Apple, however indirectly.  It might have been a good 
idea earlier on in the Mac's career, to encourage 
developers.

There already is a Mac compatible - an Atari ST or Amiga 
running the appropriate software and hopefully legally-
obtained Mac ROMS. These have their niches (those who know 
about this are in the niche) but many potential customers 
are more concerned with compatibility headaches than with 
the increased flexibility of these other computers.  (Both 
have excellent games; ST sales have dropped off but the 
Amiga is going strong with over a million units sold 
worldwide.  Many of those could have been Macs...)

Since a standard box is supposedly (supposedly) one of the 
Mac's strengths, a stampede of near-Macs with various 
incompatibilities might hurt the Mac's image.

V.  Low-cost means low-cost

Low-cost Mac IIcx:  Problem is, it can't be under $1000.  It 
can't even be $1500.  Drop the price, maybe, but this is not 
the low-end machine.  (Does it even run Dark Castle?)

Little box sans monitor:  Problem is, most end users want a 
cheap monochrome monitor anyway.  Apple can't compete with 
Amiga and Atari in games, so color is of limited use.  A
A monitor costs about $20 raw, which means $50 on the
sticker.

Mac Jr: What can you remove?  A Plus with 1 meg and 800K 
drive is barely acceptable, and I think it's wiser to 
standardize on 2 meg and FDHD.  You need a keyboard, keypad, 
mouse, etc.  Basically, you can't get rid of anything to 
lower the cost.  And it should have an SE slot and provide 
an upgrade path to the SE/30.

I read all your arguments, and this is the one I find the 
most convincing:

Just lower the price on the SE and deep-six the Plus.  It's 
already made, it's cheap to produce, it's already got a 
public image, it's already on the shelves.  Just ship it 
with two meg standard so everyone can run system 7, like 
Chris Espinoza would like us all to do.

* * *

But what do I know about the low-end?  I just bought a NeXT 
machine... (Apple II Plus, Apple IIc, Amiga, Mac Plus, NeXT, 
...)

-----

"We're not going to play that low-end game"
	Jean-Louis Gassee, about 1987
	
Jonathan Dubman
UC Berkeley