Does Apple Need a Cheap iMac?

A number of reports suggest the company will announce a lower-priced iMac at its developers conference next week.

May 30, 2014 at 7:23AM

Apple's (NASDAQ:AAPL) Worldwide Developers Conference begins June 2 and analysts have speculated that the company will use the occasion to introduce a cheaper version of its iMac all-in-one computer.

KGI analyst Ming-Chi Kuo has been correct in numerous previous Apple predictions and he believes the company will release a cheaper iMac "in the near future," Apple Insider reported. No details have emerged as to how much less the company might charge.

Apple will cut iMac production costs by improving panel lamination and casing yields while incorporating parts-bin components being used in the MacBook lineup, according to Kuo.

Currently Apple's iMac line starts at $1,299 for a 21.5-inch 2.7 GHz model. Windows-based all-in-ones can cost under $500 with Amazon (NASDAQ:AMZN) offering a number of models from Lenovo (NASDAQOTH: LNVGY) and Hewlett-Packard (NYSE: HPQ) in that price range.

It's hard to imagine that Apple will offer prices anywhere near $500 for an iMac, but dropping it below $1,000 seems possible. That might break a psychological barrier for some customers.

In general Apple has been able to charge a premium for its products, but loses market share when price differentials grow too great. The iPad, for example, still dominates the tablet market but Apple has had to offer lower-priced versions to keep customers from buying Android or Windows-based machines that can cost less than $200.

Apple still commands a premium for its tablets -- the cheapest iPad Mini costs $299 while the cheapest full-size iPad costs $399. Eventually the company did have to offer models below the $499 the base version cost at its 2010 launch. Clearly Apple has no intention of becoming a value play, but the company has shown in recent years that it's not as tone deaf on price as it was when Steve Jobs was CEO.

Apple cut other prices this year

The company already dropped prices on one of its computers this year, cutting the entry-level version of its MacBook Air laptop from $999 to $899. Along with the price drop Apple improved the machine's processors, increased its battery life, and bundled it with the company's iLife and iWork apps for no additional charge.

Those moves could be seen as an effort to compete with the Microsoft (NASDAQ:MSFT) Windows-based Ultrabooks (which largely copied Apple's MacBook Air design). They are also an answer to Microsoft's Surface Pro line, which offers a thin tablet/laptop hybrid that starts at $799 and comes with Microsoft Office installed for no additional charge.

Since that move happened in late April it's hard to know what impact it had on sales. Still there are many more iPhone and iPad users than there are Mac users. You have to assume that some people in Apple's phone and tablet universe are open to the idea of making the leap from a PC to a Mac. Closing up the pricing divide -- even if it's only by a small amount -- will likely tip some of those people to Apple.

Lower price, lower sales?

Despite the expected cheaper iMac, Kuo believes sales will drop for the computer line. He revised his 2014 iMac shipment forecast from 4.8 million units to between 4 million and 4.5 million units citing sluggish desktop sales. He did acknowledge that the number may have fallen further without the lower-price model, Apple Insider reported.

Apple has in some ways been its own worst enemy -- lowering the price on MacBook Air likely convinced some customers to buy the elegant, super-thin laptop over one its more expensive cousins. The iMac has a much larger screen than the 12-inch $899 MacBook but the laptop has an HDMI out, which makes it easy to connect to a bigger monitor. Apple also offers the Mac Mini line, which starts at $599. The Mini is essentially a computer in a tiny box that requires a monitor, keyboard, and mouse be added on. If you already own those things the Mini is a cheap way to get into the Mac ecosystem.

Worldwide PC shipments fell by 9.8% in 2013, slightly better than a projected decline of 10.1%, but still the most severe drop on record, according to the International Data Corporation. Sales are expected to drop again in 2014 but by a lower percentage (partially due to Microsoft no longer supporting Windows XP). The research firm pegged 2013's global desktop and mobile computer sales at 315.1 million while it predicts 295.9 for 2014 and 291.7 for 2018. 

As the market shrinks, competition for customers should grow and a lower-priced iMac model could at least help Apple hold onto existing market share in a declining overall sales environment.

Apple has to tread carefully

Apple has slowly moved from an all-premium price model to one where the company mixes in more mid-priced items. With iPhones and iPads this has often involved keeping older models on sale at lower prices. The company has largely resisted doing this with its computer lines, but the price drop on the MacBook Air shows a willingness to make moves that it would not have considered in the past.

Offering more affordable Macs that aren't cheap should broaden Apple's possible audience. But the company needs to be careful -- one of Apple's key drivers is the perception that it offers high-end products. In a market crowded with $499 and under all-in-one PCs, Apple has a lot of room to lower prices while still maintaining the perception of quality that costing more brings. A slightly cheaper iMac won't be a PC-killer but it might gain the company a few sales while keeping existing customers who need to upgrade from leaving simply because Windows machines cost so much less.

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Daniel Kline is long Microsoft. He owns an original iMac. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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