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Mac Sales May Benefit from iPhone, OS X Upgrade

Apple Inc.'s (AAPL) computer business may seem like it's taken a back seat lately to its flashy younger siblings, the iPod and iPhone, but Macs are still a key part of the family. Apple CEO Steve Jobs is expected to use his speech at the Apple Worldwide Developers Conference on Monday to highlight the upcoming release of Mac OS X, showing that Apple remains a computer company even after dropping "Computer" from its name in January.

The slickness of its designs notwithstanding, the key to Apple's success and reputation for ease of use is its software and how well it integrates with its hardware.

Millions of Microsoft Windows users who don't own a Mac have now experienced Apple's touch by using iPods and managing their music through the iTunes jukebox program.

If it weren't for his iPod, Andy Ahmed would have never bought a MacBook Pro laptop last winter — his first Macintosh.

"The iPod opened my eyes," said Ahmed, of Foster City.

The wildly popular portable player cracked open the door for many like Ahmed to a computing platform they would have never considered in the past. Along with Apple's growing number of gleaming retail stores and its catchy "I'm a Mac, I'm a PC" ads splashed across TV and the Internet, the attraction to Macs has never been stronger.

It's not all hype either.

After years of relatively flat sales, the number of Macs sold started to grow significantly in 2005. Mac shipments jumped 38 percent from 3.3 million units in Apple's fiscal 2004 to 4.5 million in 2005. Then they climbed 17 percent to 5.3 million in 2006.

Analysts predict Macs will continue a double-digit growth rate, outpacing the industry, as Apple gets a boost from at least two more product debuts this year: the iPhone on June 29 and the operating system upgrade due to be released in October.

The availability of the upgrade to Mac OS X, dubbed Leopard, was pushed back from this spring because Apple diverted some resources instead to the iPhone.

But Jobs made it clear he wasn't ignoring it either: "We think it will be well worth the wait," Apple said in announcing the delay.

Apple won't discuss the "top-secret" features or other products it might announce at the Worldwide Developers Conference, but it's already known that Leopard's features will include Boot Camp, which lets users of Macs with Intel Corp. chips install Windows on their machines.

What remains unclear is how Apple will integrate Boot Camp and how much flexibility it will give users to toggle between the competing operating systems.

A test version of Boot Camp was introduced as a free download a year ago and appears to have contributed to Mac sales already. Its planned inclusion in Leopard could lead Apple to more prominently market the feature and win yet more converts, said Charlie Wolf, who tracked Apple as a Wall Street analyst for two decades and now is president of Wolf Insights Inc., an investment consultancy.

Already, Apple says about half of the computers sold at its retail stores are to people new to the Mac platform.

"Boot Camp removes a barrier to switching," Wolf said. "It's like an insurance policy for Windows users."

It certainly was for Ahmed, a clinical research manager.

"I really had no idea Apple products were so cool until I started using the iPod," Ahmed said. But it was Apple's switch to using Intel chips, which made the Boot Camp feature possible, that clinched the Mac sale for Ahmed.

But Ahmed never even got around to using Boot Camp. He bought a Mac version of Microsoft Corp.'s Office and Apple's presentation software program, Keynote, and found he was able to do all his work that he used to do on his old Windows-based computers.

"The interoperability is great," he said. "I don't need Windows anymore."

At the San Mateo County Community College District's three campuses, faculty aren't completely shunning their Windows habits, but more of them are signing up for Mac laptops running Boot Camp because it allows them to work in either a Mac or Windows environment, said Brad Whitham, a supervisor of information technology at the district. In the past eight months or so, the number of Macs purchased for faculty increased to about 50, up from the typical 20 to 30 in previous periods, he said.

Apple's computer sales have risen despite often being overshadowed by the spotlight on the company's soaring iPod sales, and more lately, the highly anticipated iPhone — a hybrid cell phone, widescreen iPod and wireless Web-browsing device that will run Mac OS X.

Though iPod sales sizzled, Macs still grew 18 percent in revenue and accounted for 38 percent of Apple's overall revenue in its fiscal year 2006, ending in September.

"Macs are still central to what they do, and I imagine it'll continue to be that way," said Richard Shim, a senior research analyst at IDC, a market research firm.

The release of Apple's last operating system upgrade in 2005 followed by new designs and innards for its computers helped push Apple's Mac sales from a single-digit growth rate to double-digits starting in 2005, he said.

"They've meticulously designed their products, their retail stores are exciting to go into, and their services are designed to really help you," Shim said. "They've nailed down the overall experience."

Windows still dominates the personal computer market, led by PC makers Hewlett-Packard Co. and Dell Inc., but Apple's slice of desktop and notebook shipments has grown, particularly in the United States, its strongest market. Apple's share in the U.S. rose from 3.5 percent in 2004 to 4.9 percent in 2006, according to IDC.

Wolf said the continued success of Macs will hinge largely on Apple stores, where computers prominently line one side and iPods line the other, allowing customers to easily give the products a test drive.

"The stores are playing a really subtle but important role in Mac growth in providing assurance to Apple switchers," he said.

Piper Jaffray analyst Gene Munster expects the iPhone to accelerate Mac sales by introducing more people to Apple's software and featuring easy connectivity to a computer, possibly including its Apple TV video-streaming set-top box. He raised his target stock price for Apple on Thursday and predicted it could sell 45 million iPhones in 2009. His report sent shares of the Cupertino-based company to an all-time high of $127.61 before closing that day at $124.07, up 43 cents.

"When people get exposed to Apple products, their interest in other products goes up," Munster said. "And the iPhone is going to get into the hands of lots of first-time Apple customers."