Rogue Missives Tuesday, Feb. 04, 1997

Last year was an impressive one for the American personal computer industry. Buoyed in no small part by the expansive growth of the Internet, the industry grew 17.8%, according to a report issued last week by the market research company DataQuest. The company that in many respects created the idea of the personal computer, though, did not share in this growth. Instead, APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> saw its U.S. shipments drop 30 percent, and less than a month ago reported unexpectedly large first-quarter losses of $120 million, nearly twice as large as those from a year before. Even more troublingly, perhaps, revenue for the quarter was down 32 percent.

There are now nine computers running Windows sold for every one Macintosh. Apple has announced that revenue for the current fiscal year, which ends in September, should be down 20 percent, to just $8 billion. The company is now only the fourth-largest computer manufacturer in the world. And last Friday Apple cut prices on most of its product line by 27 percent. While these cuts do bring the prices of Power Macs and Performas more in line with the price of IBM clones, the price cuts seem to have as much to do with Apple's need to clear inventory before shipping new models next month as with any coherent market strategy.

Of all the pieces of information about Apple's future that have come out over the last three months, though, the most disturbing may have been a newspaper piece that had nothing to do with the company's bottom line or its business strategy, but with Mac users' devotion to their machines. Walter Mossberg's January 24 column in the Wall Street Journal was, in a certain sense, a watershed, because for the first time Mossberg wrote that he could not recommend that consumers buy a Mac. With the confusion about the new operating system that the company plans to introduce, uncertainty about the company's follow-through, and the fact that it could be as long as half a decade before the real Apple operating system is unveiled, Mossberg suggested that the technical superiority of the Mac over computers operating Windows was no longer clear.

Given the fact that Apple laid off 1500 employees last year and is on the verge of unveiling a restructuring plan that may call for another 2500-3000 layoffs, putting too much emphasis on the defection of one Mac user is undoubtedly foolish (and not in a good way). But Mossberg's column, taken in conjunction with recent pieces by other technology writers and with the general mood of disarray at the Mac World convention, speaks to an essential fact about Apple's current plight: The company has lost not only market share and profits, but has also lost the cachet and reputation for quality that sustained it for so long as Microsoft's one real rival.

For years, after all, the Macintosh has thrived as the computer of choice for people doing high-level graphics and audio work (and it will likely remain the computer of choice for these people in the foreseeable future). It was the computer of choice for college students. And it was the computer of choice for technology writers. The Mac's "intuitive" operating system, the smoothness and self-evidence of its interface, and its liberation from DOS combined to make it the highest-quality machine on the market. Macs cost considerably more but they were supposedly worth it.

It's certainly true, as more than enough columnists have pointed out, that Apple erred grieviously in adopting a closed-architecture model for its system. By preventing other companies from building Mac clones, Apple sealed itself into a self-enclosed environment. While this contributed to the cultish aura that surrounded the company, and while it also helped Apple's bottom line in the short term by allowing it to keep prices high, in the long run it made the Mac too much of a hothouse flower. The closed-architecture model simultaneously kept Apple from expanding market share for its products, while also -- and more importantly -- isolating the company from much of the dynamism that has pervaded the Windows-based world in the 1990s.

The problem of isolation has been magnified in recent years, of course, by Apple's very troubles. As the company has struggled, and as its future has grown increasingly uncertain, Mac users have had to worry about the possibility that their access to the best new software will be cut off. If, for example, Apple were to evolve into a company focused on the high end of the market, along the lines of SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>, would personal computer users be abandoned? Other than in college towns, it's already much harder to find Mac versions of software than it is to find Windows versions. Moreover, every bit of bad news about Apple makes it less likely that new programmers will be doing all they can to create Mac-ready programs. Apple has always depended on other companies' belief in its future to develop applications for the Mac.

The hothouse phenomenon damaged the company in more than just the consumer market. One of the astonishing things about Apple in the 1990s is that it has never worked with INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> in any meaningful sense. Intel has been ahead of the curve throughout the decade, and has been instrumental in developing not only faster chips, but also the demand for those chips. In other words, Intel has played a crucial role in fostering the development of projects that require greater and greater speed to work successfully. At the same time it has improved the performance of Windows-based PCs enormously, to the point that they are lightning-quick compared to most Apple machines.

Intel's microprocessors are now in more than 80% of the world's PCs. As tech writer Michael Slater told Fortune, at the beginning of this decade the PC was very weak next to the Mac. "But those differences have narrowed -- very much because of Intel's attention to the platform." The great irony here is that Intel's Andy Grove and Apple's founder, Steve Jobs, are friends, and it was Job's new company, NEXT, that gave Grove the inspiration to make normal computers today as powerful and effective as the highest-priced models were in 1991. But Apple missed out on all of the potentially enormous benefits it might have reaped from an alliance with Intel. (One might, of course, say the same thing about Apple and MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, but Microsoft does make programs for Apple, and in any case the companies' operating systems were direct competitors.)

Apple has gone ahead and allowed partners to build clones, but in this case it appears to be a case of too little, too late. And no partnership with Intel is in the offing, since Apple's chips are made by Exponential Technology and, oddly enough, IBM. In any case, even Apple's partners have their doubts. According to a new story in Business Week, four Mac clone makers recently met with IBM and Exponential to figure out how to strengthen their machines in case Apple leaves them high and dry. Power Computing, one of the clone makers, has gone so far as to license a separate operating system. What's more, IBM and Exponential are talking about licensing Intel's MMX technology, which is already creating a real buzz in computer stores across the country.

In the face of all this, Apple's stock has dropped to 16 5/8, just above its 52-week low. By Wednesday, when the company holds its annual shareholder meeting, Apple will issue a formal restructuring plan. At the heart of it will be an attempt to cut costs by 25%, in line with the company's anticipated drop in revenue. That cost-cutting will most likely center around layoffs, and analysts predict that close to a quarter of the company's 13,000 employees will be let go. Even this may not be enough to move the stock's price, though. CEO Gilbert Amelio, who was brought in to turn things around, has found the task more difficult than he imagined. Last year, Apple unveiled a strategy that predicted small losses in the quarter that just ended and a complete turnaround by mid-1997. After the disastrous first quarter, though, Amelio has said that the company won't be profitable until the fourth quarter of this fiscal year. That said, it's possible that Amelio's plans won't amount to much improvement in Apple's stock until investors see a dramatic improvement in the bottom line.

After last year's 1500 layoffs, the spectacle of Apple firing its workers is no longer as shocking as it once was, but it's worth remembering that this was the prototypical Silicon Valley company, where no one got fired and where the only emphasis was on being "1.0," which is to say introducing a new version of some new product. Microsoft was the company obsessed with profit. Apple was the company that was fighting Big Brother, and bringing a 'Bell Labs' attitude to the real world. The company's demise -- and even if it does re-imagine itself successfully, its demise is what we have witnessed -- testifies to the unbelievable pace of change in 1990s capitalism, and to the ceaseless imperative to be faster and better.

Part of Apple's attempt to be a new company, of course, involves going back to the company it once was. By bringing in Steve Jobs as a part-time adviser, and by acquiring Next and making its software the basis of the new Mac operating system, Apple is attempting to affirm, both to itself and to its users, that it remains devoted to the idea of a non-Microsoft world and to an independent vision. But Jobs is not the man a restructuring company needs, because he's not a manager so much as a visionary. Even if he were, it's far from clear that there's any future in the hothouse. The Internet has altered our conceptions of proprietary technology, of ownership, and of communication. Consumers want everything to be accessible to everything else. If Apple wants to compete in that market, it needs to figure out how to combine an open architecture with independent technology. It's not an enviable task.

-- Jim Surowiecki (Surowiecki)

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