• by Karlene Lukovitz , January 2, 2007

If there's a recipe for success in the relentlessly churning PC and digital entertainment industries, it may go something like this: Combine innovative, consumer-friendly technology with sleek design. Add impeccably crafted, integrated branding and marketing strategies. Stir and serve ... quickly.

Amid a formidable and growing cast of competitors, Apple has been pulling off this tricky soufflé with iron chef mastery. Steve Jobs has racked up an impressive list of feats since returning as CEO in 1996, and that list grew longer last year.

Our Marketer of the Year has defied predictions that it could not sustain the momentum of the iPod brand juggernaut, unleashed in 2001. The company's once-moribund Mac is making a comeback. Apple now boasts the world's fastest-growing retail chain. And it continues to unveil major new products and initiatives, while also feeding a steady stream of upgraded and expanded offerings into the marketplace.

Apple shareholders have reaped a 50%+ total annualized return during the company's past five fiscal years, and results for fiscal 2006 (ending September) have further polished the company's golden aura on Wall Street. Net sales jumped nearly 39%, to $19.3 billion. Profits soared 49%, to nearly $2 billion. Basic earnings per share shot to $2.36, from $1.64.

(Apple delayed filing official SEC results for fiscal fourth quarter and full-year 2006 because it discovered irregularities in some stock-option grants made between 1997 and 2002. The company charged an independent committee with investigating, and in late December, it restated its preliminary results for fiscal '06--lowering earnings by $4 million--to reflect the above number, and also lowered its earning statements for fiscal '05 and '04 by $7 million and $10 million, respectively. Wall Street's response to this announcement? Apple shares' value rose.)

The year 2006 also saw the iPod continue to make beautiful music: 8.7 million units were shipped in the fourth fiscal quarter (2 million more than in the same '05 period) and 39 million units were shipped for the year. Apple fed the fire by launching an even smaller version of the iPod shuffle and new models of the iPod nano with more storage capacity and redesigned cases. (Both devices debuted only the year before, along with the ground-breaking, video-capable iPod.) And for good measure, Apple signed a deal with Disney, adding movies to the TV shows, videos, and music downloadable from its iTunes Store.

Yet, Apple's biggest headline-grabber for the year was the Mac's increasingly strong performance. The company shipped 1.61 million Macs in its fourth quarter (out of the 5.3 million shipped for the year)--a 30% period-over-period gain and the computer's best-ever single-quarter showing.

Gartner reported that Mac shipments grew 31% in the first three quarters of calendar '06, jacking up the brand's estimated share of the U.S. PC market from 4.6% to 6.1%. While Dell and Hewlett-Packard remain the giants--with 32% and 23% market shares, respectively--Apple's performance put it a hair's-breadth behind No. 3 computer maker Gateway (with a 6.4% share), causing some analysts to hail a long-awaited tipping point from niche marketer to big-league contender.

Mac's 2006 One-Two Punch

Apple produced a one-two punch on the Mac front last year: a milestone in technology and a new advertising campaign generally considered one of the most ingenious and effective in a 30-year corporate history strewn with memorable marketing efforts.

In what was--in the words of Jobs himself--"an incredibly complex architecture transition," Apple moved the Mac OS X operating system from IBM and Freescale Semiconductor chips to Intel chips. Starting last January with the desktop iMac and MacBook Pro portable (renamed from PowerBook) and finishing in August with the Mac Pro professional desktop, Apple rolled out significantly speedier iterations of all the Mac models.

But you wouldn't know that from looking at the hardware. "One of the interesting things about this transition was that Apple deliberately chose not to change the physical look of the computers, so as not to send out a mixed message," notes Macworld Editorial Director Jason Snell. "They recognized that changing the outside of the Macs at the same time that they made this huge change to the operating system could confuse people or freak them out."

Apple and long-time agency partner TBWA/Chiat/Day laid the groundwork for the new generation of Macs with an early 2006 campaign declaring that the Intel chip had at last been freed from "dull little boxes dutifully performing dull little tasks." The way-cooler-than-Windows message was unfurled full-force in May, with the "I'm a Mac" campaign.

The ads' ostensibly simple premise: Two comic actors--respectively playing the hip, young Mac guy and the middle-aged, nerdish PC guy--engage in friendly comparisons of what each computer can do. In one of the spots, for instance, PC guy brags that his computer has a calculator and clock; Mac guy helpfully points out that the iMac boasts the entire iLife suite of applications, including iTunes, iWeb, iMovie, and iPhoto.

The ads' cleverly implied "Which guy would you rather be?" message and visceral punch have created love-'em/hate 'em camps, probably roughly split between people who consider themselves innovators versus those struggling to keep up with new technology. In other words, precisely the dynamic that Apple--renowned for keeping its marketing strategies as close to the vest as its product plans--presumably had in mind. The instantly iconic campaign quickly spawned satiric takeoffs ("The Lost Mac Ads") on VH1.

"The PC guy versus the Mac guy campaign demonstrates once again that Apple is the best youth marketer in the business today," declares marketing strategist Jack Trout. Others detect aspirations beyond merely capturing a whole new generation of computer users before they have a chance to get accustomed to Windows.

"Instead of trying to appeal to everyone--which never works--they've moved to clearly conveying that the Mac is not for everyone," says Laura Ries, co-partner in the Ries & Ries marketing consultancy. "The Mac has never been embraced by businesses, with the exception of ones that are graphically oriented, like advertising. Apple is in essence acknowledging that Windows is the standard for numbers, Excel sheets, accounting, basic business functions, and saying, 'We're the more user-friendly experience for people who want to use their computers for photos and videos and visual graphics.'"

The piece de resistance, says Ries, is that this somewhat narrower message is in fact aimed at a rapidly growing market: average consumers--spanning several generations--now using their home computers to whip up and distribute their own multimedia creations. "Apple recognized that technology is redefining what a 'graphic artist' is," she says. "Today, anyone with the urge can be a graphic artist."

How much of Mac's '06 sales gains are attributable to the Intel conversion, and how much to the marketing? "Apple knows that even with computers, decisions in the consumer marketplace are mostly emotional, not rational," observes brand consultant Robert Passikoff. "They've done a superb job over the years of differentiating themselves as the technological innovator. But at the same time, they understand that you don't connect with people by comparing gigabytes. They're masters at creating messages based on a brand's engagement with consumers--meaning how and why a technological innovation connects with people on a meaningful level. In an increasingly commoditized world, they know how to imbue a brand with attributes that people value."

In Passikoff's opinion, the current Mac campaign is a clear example of Apple's marketing intelligence. "Plenty of companies do a lot of consumer research, then spend a lot of money grinding out [advertising] that's ultimately meaningless and ineffective," he says. "Not Apple. It would've been so easy to just show their machines; instead, they used people. Viewers get a clear sense that you can do more with a Mac--videos, whatever you want. The ads are believable and entertaining, and they leave you feeling better about the brand. You can't ask much more than that from a TV commercial."

Indeed, some admirers rate the latest Mac campaign as Apple's best since the "1984" Super Bowl commercial that introduced the Mac and made the world sit up and take notice. In it, a mesmerized population is liberated by a fearless female warrior (read: Macintosh) who hurls a hammer through the giant communications screen used by an evil dictator (read: IBM).

The "I'm a Mac" campaign demonstrates Apple's commitment not only to getting the creative for its major product innovations right, but to supporting it with media saturation. To drive home the Intel-enhanced message, Apple upped its ad spend for the full Mac line to $85.4 million in last year's first nine months (compared with $7.4 million for the same period in '05).

iPod Phenomenon Keeps Growing

The creation and nurturing of the iPod brand is a marketing case study all on its own. "Apple wasn't first-to-market, but they came out with a better product that was brilliantly designed and marketed, and they became first-to-mind," sums up Ries. "Everyone else was doing convergence, adding applications. Apple offered a simple, easy-to-use music player."

"They took the concept of a Walkman and moved it to the next generation--catching Sony asleep at the switch," adds Trout.

iPod's catchy name, and its white case and earphones, added to its cachet and further set it apart from existing MP3 players.

Jobs' marketing instincts being equal to his instincts for product design and the next must-have application, iPod's advertising was in perfect pitch--suggesting rather than stating the message that you could no longer be hip unless you owned an iPod.

Apple has bombarded the marketplace for years with variations on the streamlined ads featuring "dancing silhouettes," white earphones, and precious few words. Like virtually all of Apple's campaigns over the years, the iPod ads reflect Apple's genius for associating the brand and its products with coolness and innovation while rarely showing the hardware itself.

One thing's for certain: Even with the iPod's application and design strengths, it could not have sold 68 million units worth $14 billion in revenue and captured an estimated 75% market share in the space of a few years without the astute marketing and Apple's aggressive expansion of the brand.

"There used to be a thing called an MP3 player; now it's an iPod," sums up Passikoff.

"They had a lot of running room to make the iPod a generic brand, and they made the most of it," adds Trout. "In everyone's minds, everything else now coming out is 'iPod-like.'"

Indeed, the Mac's resurgence aside, the iPod franchise still accounts for nearly 40% of Apple's revenue, and is generally viewed as the linchpin of the company's future fortunes. Apple is clearly focused on fending off Microsoft's Zune (which debuted in November) and a growing list of other competitors. Apple continues to cement users' bond with the iPod via continual releases of new iterations of the player--and thus far is also holding fast to what some label a "proprietary" iTunes strategy.

The decision to make content purchased online from iTunes compatible only with iPods (with stress on a seamlessly compatible user experience) was hardly surprising. Jobs set this direction almost from the day that Apple opened its doors, and paved the way for the personal computer revolution with the Apple I and its more successful successor, the Apple II.

Michael Gartenberg, vice president and research director at JupiterResearch, maintains that Apple's '90's slump came down to failure to introduce innovative new products and mishandling some existing ones--not from any failure to license its operating technology. "It's wrong to say that the iPod is 'proprietary,'" he adds. "People can and do play their existing music collections on their iPods. Zune is basically an uphill battle for Microsoft. To make any headway, they'll have to provide a compelling reason for consumers to switch to Zune. But for most consumers, iPod is the answer. It's not like people are dissatisfied and looking for something else."

In addition to driving iPod sales, the iTunes Store is a profit center. According to analyst Piper Jaffray, the number of songs sold on iTunes jumped 78% in the first nine months of last year, to 695 million (averaging 18.5 million per week). Apple reports having sold more than 1.5 billion music tracks, and tens of millions of TV shows and movies, since iTunes launched in 2003. Its fiscal fourth quarter '06 results included $452 million in "other music-related products and services" (which include iTunes, iPod services, and Apple-branded and third-party iPod accessories).

Third Act Begins

How can Jobs possibly follow this amazing Second Act? For starters, Apple will keep expanding The Apple Store. The chain had more than 170 stores as of year-end 2006, including 18 in the UK, Japan, and Canada. (Apple may have only about 2% of the world computer market at the moment, but some think the retail strategy could move that needle over the next several years as well.)

The stores reportedly bring in nearly $2,500 per square foot--far better than the performance of mass retailers such as Best Buy. Existing stores showed 40%+ sales growth between 2004 and 2005, and Apple is now busily redesigning every store to replicate the particularly successful format of its showcase New York City store. In fiscal '06, the retail stores sold 886,000 computers and did $3.3 billion in business, generating $198 million in profit. Little wonder that Dell is emulating Apple's retail strategy--although Dell had just two stores as of year-end 2006.

"The Apple stores are more proof of Apple's understanding of the need to surround the consumer," says Passikoff. "The retail model allows them to build a personal relationship with the customer with an easy support system and a face-to-face experience."

And, of course, those stores will be selling a raft of more new products. In fact, in October, Jobs declared that 2007 "is likely to be one of the most exciting new product years in Apple's history." Breaking with Apple's policy of staying mum about new offerings before their actual release, Jobs last fall announced Apple's next big thing: The early 2007 launch of the iTV. Attached to TVs or other entertainment devices, iTV will enable consumers to enjoy music, movies, and other content from computers in a home-theater environment.

"Apple is in your den, Apple is in your living room," says Jobs. "Apple is in your car, and of course, Apple is in your pocket with iPods."

Increasingly, Apple is also in Microsoft's face. "Apple controls not just the music player, but a growing number of other critical end points," observes JupiterResearch's Gartenberg. "It all adds up to a long-term threat for Microsoft."