Byline: Cynthia L. Webb

For Apple Computer , will 2004 be remembered as a transformative year?

Yes, according to The Wall Street Journal, which said the Cupertino, Calif.-based company's fourth-quarter earnings "show how the company continues to change from a traditional computer maker to a digital-entertainment company, with a particular focus in digital music." USA Today concluded that "Apple has clearly become more than a computer company," while industry analysts told The New York Times that "Apple was transforming itself from a computer company into a digital music and entertainment company."

Fueling those declarations is that fact that Apple's iPod portable music player helped the company log $2.35 billion in revenue for the quarter -- the highest amount in nine years. Apple said yesterday that it sold 500 percent more iPods compared with last year's fourth quarter.

Apple is selling more iPods than its venerable line of Macintosh computers. The company shipped 836,000 Mac units during the quarter, compared with 2 million iPods. Only 860,000 iPods were shipped in the company's third quarter.

And the trend-setting computer maker expects robust iPod sales to continue. USA Today quoted Apple chief Steve Jobs 's remarks on the iPod: "The market shares just keeping going up. The demand for the iPod is very strong, and we're ramping up our supply as fast as we can to get ready for the holiday quarter," Jobs said. The Los Angeles Times said "there's no sign that consumers will be changing their tune with the crucial holiday shopping season approaching, analysts said. A Piper Jaffray survey of 600 high school students found that after clothes, money and a car, the thing U.S. teenagers want most is an iPod." * USA Today: Tiny iPod Hatches Mighty Quarterly Growth For Apple * The Los Angeles Times: iPod Halo Effect Lifts Apple Profit (Registration required)

According to The Wall Street Journal, Apple execs "seemed taken aback at the takeoff of its digital-music business. Steve Jobs ... said the results had exceeded his expectations. He dubbed the music products' growth 'extraordinary' and said he was looking forward to a robust holiday-sales season." The newspaper said "[s]everal factors fueled the iPod business in the quarter. Apple was able to increase supplies of the iPod mini -- the compact, candy-colored version of the device -- in the U.S. over the past few months, and that model also was introduced internationally. Orders of the iPod mini had been backlogged for weeks. Apple declined to break out what percentage of its iPod sales were iPod minis. Hewlett-Packard Co. , which has teamed up with Apple in digital music, also began distributing iPods through its world-wide network of retailers starting in late August. Apple said H-P's sales were 6% of iPod sales." * The Wall Street Journal: Apple, Paced by Sales of iPods, Sees Profit and Revenue Surge (Subscription required)

Bloomberg reported that demand for the iPod, which hit the market in Oct. 2001, "helped Apple become the third-best performing stock in the Standard & Poor's 500 Index this year. 'It's shocking. I'm shocked, even being a bull,' said Gene Munster , an analyst at Piper Jaffray & Co. in Minneapolis. 'Now I wish I had been even more bullish.'" Recall that Munster is the analyst who produced the teenager wish-list survey that showed iPods ranking high on the list of teens' must-have items. And he is getting more bullish by the day. "I believe that there's something big going on in Apple," Munster told the San Jose Mercury News. "We're at an inflection point. I think it's going to be considered a more legitimate computing platform in the coming year." * Bloomberg via The New York Post: iPod People Fuel Apple Rise * The San Jose Mercury News: Strong iPod Sales Help Apple Double Profit (Registration required)

A shortage of key iPod parts may ensure stronger sales in the current quarter, according to the San Francisco Chronicle: "Despite the huge number of iPods sold, the makers of the tiny hard disk drives for the music player are having trouble keeping up with consumer demand, said Joel Wagonfeld , an analyst at First Albany Corp . 'The good news about that is that it bodes well for the next quarter as Apple has a big backlog,' he said." * San Francisco Chronicle: Apple's Profit Doubles

Straying From the Pack

The Washington Post was one of the few media outlets to throw some cold water on the whole "Apple transformation" theme, noting that computer sales "still make up more of the company's bottom line. The iPod brought in $537 million in revenue for the quarter, compared with $1.2 billion in revenue from desktop and laptop computers such as the iMac and PowerBook. ... Sales of its desktop machines were down, largely as a result of a supply problem that pushed the debut of the latest iMac desktop past the back-to-school shopping season, but both its lines of laptops sold better." * The Washington Post: iPod Helps Lift Apple's Fourth-Quarter Profit (Registration required)

And The Wall Street Journal managed to raise some questions about the continued dominance of Apple's online iTunes service. The newspaper noted that the company "faces stiffening competition in the online-music market, however. Heavyweight rivals such as Microsoft Corp. recently have entered the arena and have deep enough pockets to duke it out with Apple over the long term. But Mr. Jobs said Apple will continue to innovate to retain its leading market share, and noted that Microsoft's online-music store, which opened for business in early September, so far has just 1% market share. NPD Group Inc ., which tracks sales of digital-music players, said Apple had a 61% share of the U.S. market for flash-based and hard-disk-based digital-music players in August."

Competitors are also eyeing Apple's success with its digital music player and want a piece of the action. Consumer electronics analyst Rob Enderle spoke to USA Today about the digital music gadget race: "Companies such as Dell , Creative Technology , Rio and Virgin have announced new MP3 products aimed at taking business from Apple with lower prices and more storage. Enderle says Apple's real test 'is going to be in the next two months. None of the new products are as good as the iPod, but collectively, they could start to eat at Apple's market share,' he says."

Not-So-Big Mac

Interestingly, Apple actually sold slightly fewer Mac units in the fourth quarter than it did in the previous quarter. Apple chief Steve Jobs "blames a shortage of G5 computer chips, which hindered sales of PowerMacs and delayed the release of the new iMac, which was released in late September," USA Today reported.

But the iPod could wind up boosting the computer line. Apple CFO Peter Oppenheimer "said the results also reflected strong sales of Apple's iBook and PowerBook notebook computers, as well as 95 per cent rise in the group's retail store business. The company attributed the increase in computer and retail sales to a 'halo effect' in which consumers drawn to the iPod are discovering other Apple products. Analysts had been waiting for signs that iPod's surging popularity would spur growth in sales of the company's personal computers," the Financial Times reported. * The Financial Times: iPod Sales Surge Boosts Apple

Apple Seeds

Wall Street was clearly happy with Apple's fourth-quarter report, sending shares up sharply in early Thursday trading.

Cheers, Mate: The bottom paragraph of The New York Times piece noted that Apple "is about to open a store in London, its first in Europe."

Jobs Report

The latest issue of Business Week has a Q-and-A with Steve Jobs about innovation. When asked about what can be learned from Apple's struggle to innovate before Jobs returned to the company in 1997, the Apple chief gave an answer that has iPod written all over it: "You need a very product-oriented culture, even in a technology company. Lots of companies have tons of great engineers and smart people. But ultimately, there needs to be some gravitational force that pulls it all together. Otherwise, you can get great pieces of technology all floating around the universe. But it doesn't add up to much. That's what was missing at Apple for a while. There were bits and pieces of interesting things floating around, but not that gravitational pull."