Apple's chip shuffle upsets some customers

Apple's earnings report Wednesday is sparking a schizophrenic reaction, with thumbs up from Wall Street and thumbs down from many customers angry about what amounts to a price increase on some Mac computers.

The good news for Apple was that the company managed to beat lowered analysts' estimates, posting earnings from operations of 51 cents per share.

What really cheered Wall Street, though, were Apple's moves to make sure the company can reduce a US$700 million backlog in orders. The company said it will resolve a delay surrounding new versions of its Power Mac G4 systems by using processors that are slightly slower than originally planned. The 500-MHz system, for example, now will contain a 450-MHz chip, but sell at the same price.

The company only shipped 64,000 G4 systems during the quarter, less than half the number Apple had predicted, because of Motorola's inability to make enough of the fast versions of the processor. Apple also is enduring a shortage of iBook notebooks.

A number of financial analysts reiterated their optimistic view that Apple will be able to fulfill demand in the next quarter. As a result, Apple's stock has shot up seven points to 71.06 in afternoon trading, a gain of almost 11 percent.

Customers who already ordered G4 systems shortly after the products were first announced, however, are steamed.

Apple surprised dealers and customers alike by canceling these orders and telling consumers that new Power Mac G4 systems would come with PowerPC G4 processors running at 350, 400, and 450 MHz, rather than with chips running at 400, 450, and 500 MHz. A G4 processor running at 500 MHz will not be available until the first calendar quarter of next year.

The product revision, however, did not come with a price cut. A customer that previously ordered a 450-MHz system for US$2,499 would have to reorder a 450-MHz system and pay US$350 more. Conversely, he can get a 400-MHz system, but at the price Apple originally planned to charge for the 450-MHz box.

During a conference call Wednesday, Fred Anderson, Apple's chief financial officer, said Apple wasn't going to make more money because of the change. He told financial analysts: "We're not getting a windfall here because of the big increase in memory prices." (See related story.) Apple could not be reached for comment today.

Apple has initially told customers who bought from the Apple online store that their orders had been canceled; resellers too, have started calling customers to tell them of the changes in their orders.

Apple's stance is of little consolation to customers.

"If they had to reduce the speed for the whole line then at least they could have made a symbolic US$100.00 reduction per unit. Whatever it [would have taken] out of the margin now is nothing to what it's taking out Apple's goodwill for some time to come," said one customer in an email to CNET News.com.

"Certainly it's not ethical to force backordered customers to reorder at a higher price and then go to the end of the line on the waiting list," said another on one Web site.

One reseller was a bit more circumspect in his response to the issue.

"Once customers get over their gut reaction, it boils down to whether they want the machine now or if they want a machine that's 50 MHz faster four months from now. Four months from now, there's always going to be a faster machine in this industry," the reseller said.

Apple aims to ease crunch
According to Apple, the whole problem started when it learned Motorola would be unable to ship enough of the 450- and 500-MHz chips used in Apple systems.

The company decided the only way to rectify the situation was to make sure that they had another chip supplier. Wednesday, Apple said IBM would join Motorola in supplying G4 chips.

Motorola declined to comment beyond what it said Wednesday in a statement: "We are disappointed that we have not been able to meet all of Apple's demands to date and are working diligently to rapidly remedy the shortfall.

"We view IBM's licensing of Motorola's G4 processor for sale to Apple in the first half of next year as further endorsement of Apple's long-term strategic direction as a company."

The news doesn't represent a new commitment by IBM to develop new PowerPC chips for Apple's desktop computers--Motorola is essentially outsourcing production to IBM--but the move does have significant implications for Apple.

Aside from increasing the supply of chips for desktop computers, the move could help Apple as it puts the G4 chip in PowerBook notebooks sometime late next year.

Apple needs chips designed for use in notebooks, where heat dissipation and energy consumption are key issues. Although the G4 as it is currently designed does use less energy on average than the older G3 processor, its maximum power consumption means it is not well suited for use in notebooks, according to Motorola executives.

One way to solve the problem is to make the same chip in even smaller sizes, something that analysts say IBM excels at. (See related story.) Motorola also plans on making some internal changes to the design of the G4 next year that will make it better suited for use in notebooks.