2007: Apple's Biggest Year Ever?

Apple (Nasdaq: AAPL) has delivered some amazing and successful products over the years, beginning with the groundbreaking Macintosh in the 1980s. 2007, however, may very well be Apple's biggest and most influential year yet.

In January, Apple's CEO Steve Jobs set the tone for the next 12 months with the announcement of the now iconic iPhone, a device that had consumers drooling for months before it ever saw the light of day. Just about everyone believes Apple will enjoy an enormous holiday selling season with its revolutionary phone.

While the iPhone's success might be more than enough for most companies in a single year, Apple still managed to provide refreshes to every major line of hardware that the company makes: new Macbooks, new iMacs and new iPods like the iPod touch and iPod nano lead the list.

Oh yeah, and what about software? Apple delivered Leopard, the 10.5 version of OS X, with 300 new features. It sold more than two million copies in its first weekend -- not bad for a niche computer manufacturer like Apple. In fact, that brings up the question: "Is Apple really a niche company anymore?" Maybe "technology powerhouse" is a more apt description.

The company has been doing well financially, too. Its latest quarter was its best non-holiday quarter ever, and its products appear to hold market-leading profit margins. Industry estimates put the iPhone's gross profit margin at over 50 percent when it launched. Even after the iPhone price cut, margins appear to be holding strong at over 30 percent, which is superb for cell phones and consumer electronic devices.

Missteps Along the Way

Naturally, any company making so many big plays in a single year is bound to step on some toes. The iPhone price cut, for example, rankled the feathers of some early adopters who thought they were gouged when Apple shaved US$200 off the sticker mere weeks after the device hit the shelves.

As for the Apple TV ... what's that? It's a connect-your-computer-and-iTunes-to-a-high-definition-TV box, but consumers have largely ignored it. The problem is, Mac enthusiasts know it could be so much more than it is. Why no real Internet access? Why no digital video recording capabilities? Why the skimpy hard drives? It hasn't exactly made much of an impact on anybody. Perhaps, however, it's been so thoroughly overshadowed by the iPhone and Leopard that people can hardly tell it exists.

There have been shakeups in the music and entertainment worlds as well. Earlier in the year, Steve Jobs penned a manifesto calling for the death of digital rights management (DRM) technology in music files. Later, iTunes dropped DRM in some of the music it sells. While DRM hasn't been sent to the guillotine yet, it's got a terminal illness and a nasty cough.

Of course, the apparent impending death of DRM has opened the door for some heavy-hitting players to chip away at Apple's music-selling lead. The biggest is Amazon.com (Nasdaq: AMZN), which is busy selling millions of DRM-free songs. Apple, of course, has its share enemies in the beleaguered music business, which has seen its profitable CDs being shunned by consumers year after year in favor of downloads. Major labels that have previously given Apple's iTunes store top billing have retained the rights to launch and suppomissteprt all sorts of competing endeavors.

Finally, what about Jobs' personal problems with backdated stock options that dogged him most of the year? It took until November for a federal judge to rule no harm, no foul -- because Apple's stock has been rising so much -- and let him off the backdating hook.

So, has 2007 really been Apple's biggest year ever? In what ways is Apple capitalizing on its iPhone success? How is the company changing? What challenges has 2007 brought to the Cupertino, Calif., company's table?

Apple Is Everywhere

One important metric of success is market share, and Apple's been shipping new Macs at better rates than PC manufacturers.

"The raw number of Mac units has been growing at 35 percent year over year," Piper Jaffray analyst Gene Munster told MacNewsWorld. "You've got a PC industry that's growing at anywhere between 9 and 18 percent a quarter, and Apple's growing at 35 percent -- so they've basically doubled the industry's growth rate."

Sales of desktops to new customers isn't the only place Apple has been dominating. The company has been on top of minds too.

"The thing about 2007, it was the year that everything in digital media, even the Internet, Apple has been part of that conversation, where before it was just computers and music players in 2006. In 2007, it entered the living room with AppleTV, and obviously the mobile world," Munster explained.

"Not only was 2007 financially a big year, but it was also a year where Apple graduated to being a part of every conversation. We had an Internet conference last week, and the number of times that Apple came up was surprising. They are in the center of this digital media storm of four major markets -- computers, music, home entertainment and mobile," he added.

Changing the Rules

"In 2007, Apple changed the rules in the mobile world," Munster said. "This whole concept of a revenue share with a carrier ... it's unheard of, and not only is it unheard of, the payments [from AT&T] to Apple are high -- $18 a month per subscriber is our guess, and they are basically changing the physics of the mobile world. People thought these things could never be changed, and Apple's changing it," he added.

"You could argue that this was the year that Apple truly stopped being a niche player and moved solidly into the spotlight as a mainstream provider of technology," Rob Enderle, principal analyst for the Enderle Group, told MacNewsWorld.

"Their iPhone stole CES (the massive Consumer Electronics Show) and woke up the entire cell phone industry -- but it didn't capture enough volume to dominate it," he added.

The iPhone, of course, has spawned imitators and sent the mobile phone industry scrambling, but the low-cost, feature-rich phone space is still up for grabs -- and the iPhone isn't it (just yet).

Still, Apple has seen success in other areas, and that has pushed the industry at large. Years ago, the first iMac came in snazzy colors like blueberry, grape and tangerine, and Apple's design team became the catalyst that brought color to all sorts of consumer products.

"The success of the Mac drove huge focus on design into the PC segment, and we saw products like the Gateway One and Dell (Nasdaq: DELL) One as a result," Enderle said, alluding to Apple's popular iMac line. "Even Microsoft (Nasdaq: MSFT), which has resisted movements to simplify its OS, was moved -- and there is now a massive focus there to simplify," he noted.

Big Impact, Big Trouble?

Does wild and rollicking success, however, bring with it new challenges? You bet it does.

"Virtually every technology company and consumer electronics company is trying to recruit Apple employees -- who can often write their own ticket -- and take a bite out of Apple next year," Enderle noted. "I've never seen this much competitive pressure focused on one company in my entire life. Even Google is using the iPhone as a design point for their Gphone [project]."

In addition, by becoming so successful, the company has become a target for lawsuits. From consumers who cried foul over paying $600 for a device they coveted in late June to consumers angry about Apple's lock-in agreement with AT&T (NYSE: T) -- not to mention a brand-new lawsuit over a patent infringement claim focusing in on the iPhone's visual voicemail feature -- litigants have been crawling out of the woodwork. While many iPod and iPhone owners also own Macs, millions do not. This new kind of customer hasn't become the kind of true Apple enthusiast that defends and rationalizes the company's every move.

"They don't seem to be getting the velvet glove or Teflon treatment the company is famous for," Enderle explained. "Folks got really upset with how they were treated with the iPhone in particular, and Apple is starting to be portrayed broadly in a negative fashion for once. In effect, one of their big historic advantages -- being seen as the underdog that needed special treatment -- may have evaporated."

Enderle noted that, while 2007 has been an incredible year for Apple, "it sets up a 2008 and 2009 which will put that company under more pressure than any firm has likely ever faced by itself."

Bumping Into the Future

"I don't mind that Apple has had some bumps this year -- the range of innovation it's demonstrating is impressive by any standard," James McQuivey, a Forrester analyst and vice president of research, told MacNewsWorld. "Better that they risk big than rest on their laurels, in my opinion."

The biggest problem Apple faces, McQuivey noted, is deciding which kind of company it wants to be when it grows up. This is critical because none of its likely paths will be nearly as profitable as its current, relatively small-scale, business model.

"Media companies have lower margins and multiples than Apple," McQuivey explained. "Consumer electronics manufacturers like Sony have far lower margins and multiples -- it would seem that all the paths Apple could take to grow into a bigger company lead it to a position where it has to serve more average consumers instead of the elite base it currently serves."

While average consumers bring volume, they also come with more average tastes and budgets -- issues that don't let Apple's design prowess command the premium prices it does now.

"This may very well lead Apple to decide it doesn't want to grow up -- and instead remain a comfortable niche player with a premium brand, much the way Bang & Olufsen or Dunhill or any number of niche brands have chosen to remain upscale and exclusive," McQuivey noted.

The future aside, today's Apple is a long way from yesterday's Apple: "Two years ago, if you bought a Mac, you would have had some explaining to do to your friends," Munster said. "Today, if you buy a PC, you've got some explaining to do."