By guest writer, industry analyst David Keppelmeyer. David is CEO of The Keppelmeyer Group

In the last few years Apple has been the darling of the gadget press. Profits and sales are reported to be sailing higher than ever, and at a glance, the company's success would seem to be assured. Under the surface however, there is little to be happy about for followers of the Macintosh, Apple's aged platform, and the iPod. While the iPod is a solid if limited music player, it's an offering without the backing of Microsoft, and missing several killer features of the Redmond giant's new Zune music player.

Financial health.

Much has been made of Apple's profits in the last several years going to their cash reserves, but looking more closely at apple's figures shows a worm. This last quarter's results show a drop of $1.621 billion, or more than 20% since the previous quarter. A loss like this could kill a smaller company, but the mainstream press, starry eyed from the release of the shiny Macbook Pro and Mac Pro has passed on reporting these figures.

While stock value represents a highly variable change, the picture is not so rosy here either. In early January this year, Apple's stock slid from an impressive high over $85 per share to only just hold its position above $50 in July, wiping almost 41% of Apple's value off the sheets.

Costs also accrued due to recent fixes for iPod manufacturing issues in overseas production areas, where investigators found "violations of established codes of conduct". With falling Mac market share, more of Apple's business has relied on the venerable iPod, and increasing iPod production costs are cause for concern.

Legal woes

Fresh from losing its action against Creative Technology, Ltd, resulting in a payment of $100 million plus ongoing licensing to Creative takes Apple's value down even further. Several class action suits, both lost (such as that over iPod batteries) and pending regarding exploding Powerbook batteries, Macbook shutdown issues and defective cinema displays eat even further into cash reserves. Expect each of these to restrain the company from adapting as quickly to moving market pressures, vital to Apple's long term survival.

Microsoft's new strategy of inserting itself in the Unix market via a contract for Linux support with Novell should be a concern to Apple. With the Unix based Mac OS X struggling to take more than 3% of the worldwide market, Microsoft could win the hearts of geeks everywhere and help strengthen the Linux hold on Unix installations. Currently, Novell's SuSE Linux is the only system indemnified against legal action by Microsoft. Criticism of the deal aside, this does leave other Linux and Unix based systems vulnerable, and Apple is the next biggest after Linux.

While it may be a long shot, keep an eye out on possible action against Apple from The SCO Group, currently challenging IBM for unlicensed use of SCO IP. When CEO of SCO, Darl McBride, was asked in 2004 if SCO would be seeking royalties and damages from Apple (among others) over infringing Unix code use, his response that SCO would pursue all avenues for monetizing their intellectual property left no doubts that other companies were on the SCO radar. After the finalising of the SCO vs IBM suit in 2007, be on the lookout for SCO's next target.

Competition

Apple's switch to Intel has helped prop up the company since the Macbook was released at Macworld 2006, and initial sales surged ahead of the market. Macintosh notebook users, long held back by the anemic Powerbook G4 speeds which never climbed above 1.6GHz made a rush for the new machines, and Intel's Core Duo processor gave a new lease of life to a long suffering line of notebooks. In relative terms, the new Macbooks were impressively faster, but in an absolute sense Apple was only catching up to norm in the Windows world, and only offering half the performance possibility - where PC manufacturers may choose between Intel and AMD processors, Apple has restricted itself to only one side of the equation, running 100% Intel. If a buyer wants AMD performance, they can't get it from a Mac.

The Intel switch leads to other problems. Beginning in 1984, Apple always had the marketing advantage of selling something different, first with the uniqueness of the first popular mass market mouse-driven GUI, then later Macs were differentiated by the power of RISC based PowerPC chips. Now however, there is no difference between a PC and a Mac. Both of them can run Windows, both use the same processors; even the mother boards and graphics are designed by Intel. Performance savvy individuals who want performance from a Mac will soon find that building their own PC from commodity parts will give equal performance for a quarter of the price. A Core 2 Duo processor and supporting motherboard can be had for under $300, where a new Mac pro, even a Mac mini, is substantially more expensive. An already shrinking Mac market share looks even more tenuous.

On the operating systems scene, Microsoft's Vista is available to professionals now, and expected to be released to the public more than 3 months before Apple's Mac OS X 10.5 Leopard, which should arrive a full two years after the ageing Tiger. For those computer owners who are looking for a new operating system, the first one off the block will have the lion's share (big cat pun intended) of the market.

Macintosh is only half of Apple's worries, and the iPod is facing stiffer competition. Before the iPod debuted, the mp3 player market consisted of little more than hardware that played songs, leaving the acquisition and management of music up to the user. Then Apple released iTunes to complement the iPod, and through the integration of hardware, software and their online store, Apple turned a simple peripheral into a complete platform. In the 5 years since, this has worked well for the Cupertino giant, but they're no longer the only kid on the block.

Microsoft's backing of the Zune project is a gigantic blow to Apple. Zune's music store sells over two million songs, a hit to Apple who has spent the last few years gradually building up to their current offerings, and Zune looks to take the market by storm. Where the iPod is just a music player, the Zune offers more in every facet. Zune has a larger screen, plays more video formats, and even plays AAC format tunes (AAC is Apple's audio codec, designed to play on iPods). If you want to trade files with another iPod user on the road, you can't. There are ways of 'hacking' the iPod to allow transfers when connected to a computer, but these are not practical for most users, even if they carried their Macbooks everywhere. With Zune's easy wireless networking, you can share your music, movies, photos and files to other mp3 players, no messing around. A quality FM radio is included with Zune, but not with iPod - it's an extra cost accessory, and not available on all models. Cultural preferences aside, the iPod may have marketing momentum, but that can be a faddish in a fickle market dictated by fashion, and the Zune has Microsoft's backing - hardly something to ignore, considering the success of the XBox series of games consoles over Sony's playstation, which just a few years ago owned the market.

The future

I don't see bright times ahead for Apple. Since the early 1990s and a market share already dwindling down from 20% to under 3% today, a reversal of fortunes looks unlikely even in what seems good times. Unless the beleaguered Cupertino company can spring a magic goose from its hat, it would seem this Apple is cooked.

Apple's best choice for staying in business would be to milk the iPod for what it's worth over the next two years, and concede the music player market to Microsoft. With the profits from the last of the iPods, force a change in the company from hardware to software, while licensing out hardware manufacturing to others. Apple's iLife suite remains one of the gems in the software world, and a second option of licensing Mac OS X with iLife to a PC manufacturer with the experience of providing cheap volume produced computers such as Dell or HP could save them. There's no reason for Apple to keep sinking dollars after hardware when it spends so much on R&D, for a product that's no different to any other PC on the market. Even if the big three hardware manufacturers didn't go for Mac OS X, porting iLife to Windows would be a success all on its own, given the inroads made with iTunes on Windows.

The future is never set in stone, but if Apple continue the way they are it won't be two years until they're shutting up shop, closing the doors on a long but very expensive history.

David Keppelmeyer is a guest writer and head of The Keppelmeyer Group based in Lindon, UT. The Keppelmeyer Group can provide your business with the expertise that only our eighteen years combined industry experience can bring.