(This article originally appeared in the Mercury News on October 2, 1995.)
ON THE EVENING of Sept. 20, at precisely 6 p.m. Pacific time, about 9,000 faithful Macintosh computer users gathered in pizza parlors and schools around the country to watch a live television broadcast via satellite from a studio near Apple Computer Inc. headquarters in Cupertino.
The two-hour show, a slick production complete with a three-piece band, two bubbly hosts and a studio audience prompted to clap on cue, presented a rosy picture on the surface: The Mac is still the best PC on the market, despite the hype surrounding the new Windows 95 operating system from rival Microsoft Corp., and Apple will deliver exciting new products in the near future.
But the 200 Mac user groups, the inner circle of Apple’s customer base, also heard ideas that would have been shunned as heresy just a year or two ago.
Apple now concedes its users can’t always avoid Windows, which runs on more than 80 percent of the world’s personal computers, while the Mac is confined to a dwindling share under 10 percent. During the show, the company touted “how Apple is standing out by fitting in” — demonstrating Windows software running on a Macintosh computer equipped with a special circuit board.
Guy Kawasaki, a member of the original Macintosh development team in the early 1980s who went on to write books and recently rejoined Apple, made a guest appearance to announce, “Basically, I’m out there trying to reinvigorate the Macintosh community” — a community that once had all the vigor it needed.
Apple again finds itself in the middle of a painful and potentially dangerous transition. Since its founding by Steve Jobs and Steve Wozniak in 1976, the company has gone through a series of ups and downs, with a major crisis erupting every two or three years. Customers, competitors and industry analysts have prepared Apple’s obituary on several occasions, only to see the company bounce back.
Now, a new set of death notices are being prepared because of Apple’s continuing slide in market share, numerous rumors of the company becoming an acquisition target and questions about missteps by top management.
The most immediate problem at Apple surfaced Sept. 14, when the company surprised Wall Street by announcing earnings for the quarter that ended Friday “will be significantly below financial analyst projections” because a parts shortage is preventing the company from meeting all the demand for new Macs.
Investors were particularly rankled because Apple has been struggling with shortages for most of the year and has repeatedly said progress was being made in fixing the situation.
Apple’s stock, never a choice for the faint of heart, is bearing the brunt of Wall Street’s disdain. After peaking at close to $70 a share in 1991 and then sinking to a low of $23 in 1993, the stock had recovered to $50 in June – but has lost roughly 30 percent of its value over the summer, closing at $37.25 Friday.
Rumors about meeting
The dismay over continuing shortages unleashed a flood of rumors in the last two weeks, most centering on a meeting of Apple’s board of directors scheduled for today. The board might sack Apple President and Chief Executive Officer Michael Spindler, according to some sources, while others said Spindler would have to cede some of his authority to other managers or might be pushed into yet another major reorganization of the company’s internal structure.
But Spindler, a native of Germany known as “the Diesel” for his drive and determination, insists analysts and the news media are missing the bigger picture.
“The obsession with quarterly results . . . forces a dialogue that is sometimes very misleading, ” Spindler said during an interview last week, as he repeatedly pounded a conference table with both arms.
A “major, major portion” of the supply problem stems from vendors who haven’t been able to meet Apple’s orders, Spindler explained, rather than from Apple underestimating demand. It is these shortages that are causing Apple to lose market share, he continued, not the impact of Windows 95.
“That’s a rather disingenuous argument, ” said Eugene Glazer, a New York analyst at the brokerage firm Dean Witter Reynolds in New York. “In their attempts to keep product superiority, they often choose a supplier that is the only provider of those parts. . . . If then that supplier doesn’t deliver what’s promised, is it a supply problem or a management mistake for relying on one company?”
Spindler said today’s board meeting will consist of nothing more than a presentation by management of the company’s plans for 1996 – no upheavals.
Whatever happens, and regardless of how long it takes Apple to fill its backlog of orders, the company will remain a fascinating mixture of impressive strengths and worrisome weaknesses.
Among the strengths:
(box) A loyal and growing community of users. The market research firm Computer Intelligence Infocorp of La Jolla estimates the worldwide installed base of Macintosh users will reach 17.4 million by year’s end, up 22 percent from 1994 and more than double the figure of just three years ago. Nor is there any evidence that large numbers of Mac users are defecting to Windows.
(box) A healthy bottom line. When Apple this month reports official results for the 1995 fiscal year, which ended Friday, analysts expect sales will be up 16 percent to $10.7 billion and earnings will jump 35 percent to $420 million. Apple also has managed to eliminate its onetime reputation as a spendthrift; total employment is down slightly from a peak of 14,800 four years ago to 14,600 employees today, including 4,500 people in Silicon Valley, even as sales have boomed.
(box) New technology waiting in the wings. By the end of next year, if everything stays on track, Apple will begin switching to a new hardware design that should eliminate most of its parts-supply headaches and could finally persuade other companies to start building significant numbers of Macintosh-compatible computers. Apple is also planning to release a new version of the Macintosh operating system, code-named “Copland, ” with a number of fancy features not found in Windows 95. And Apple is about to make a long-awaited push into low-priced consumer electronics.
Among the weaknesses:
(box) Declining market share. Infocorp estimates Apple will ship just 7.2 percent of all PCs manufactured in 1995, down from 7.7 percent in 1994 and 8.2 percent in 1993. International Data Corp. of Mountain View, another market research firm that calculates the numbers in a different way, says Apple’s market share has tumbled from 14.1 percent in 1991 to 11.5 percent in 1994. As Apple’s piece of the pie shrinks, the Windows market continues to grow – raising the possibility that software companies will begin neglecting the Mac in favor of chasing bigger opportunities elsewhere.
(box) Lack of a clear competitive advantage. The Macintosh of 1990 was indisputably easier to use than the PCs of 1990 that ran Microsoft’s old DOS operating system; indeed, Apple pioneered many Windows features such as using a mouse to move a cursor around the screen and the concept of a “graphical” interface that lets users see icons and files on a computer desktop rather than working with text-only commands. But Windows 3.1, first released in 1992, and Windows 95, unveiled in August, have greatly narrowed the gap. Many programs now look and function virtually the same on either a Mac or a Windows PC.
(box) Moving too slowly. Apple has a history of failing to deliver new products in time to catch the wave of opportunity. Several years ago, for example, Apple decided to enter the burgeoning field of computer on-line services.
But its eWorld service didn’t open for business until June 1994, long after America Online, Compuserve and Prodigy already had signed up millions of subscribers. With only 115,000 members today, eWorld is being repositioned by Apple as a mere pit stop on the Internet, rather than a full-service online community.
Similarly, Apple has long resisted the idea of licensing its Macintosh software to other computer makers for fear the company would suffer a drop in hardware sales. Apple now proclaims it favors allowing Macintosh clones, recognizing it needs help to regain market share, but Mac sales are so small compared to Windows that few manufacturers are rushing into Apple’s tent.
Meanwhile, the Copland operating system — Apple’s response to Windows 95 — won’t hit store shelves for another year.
Change to CHRP
How Apple performs in the next year or two depends on how these strengths and weaknesses affect two important strategic moves.
The first and biggest change is hidden behind the obscure initials CHRP, pronounced “chirp” and standing for Common Hardware Reference Platform.
Today’s Macintosh computers require a number of custom-made parts, particularly semiconductors, that are only produced for Apple. The company failed to accurately forecast the full demand for Macs this year, but couldn’t go to other suppliers because no one else makes the custom chips.
Other manufacturers, in turn, have been reluctant to build Mac clones because they didn’t want to be dependent on Apple’s suppliers. According to the trade publication Macweek, a major mail-order PC manufacturer — Gateway 2000 Inc. of North Sioux City, South Dakota — recently backed away from a proposal to build Mac clones because of the parts shortage. Spindler, in last week’s interview, said the talks with Gateway had failed for reasons other than the shortage, but declined to identify the sticking point.
CHRP will remove the entire parts-supply bottleneck. Developed by Apple, International Business Machines Corp. and Motorola Co. — the same partners who designed the speedy Power PC microprocessor at the center of Apple’s current Macintosh line — CHRP is a set of guidelines for building computers from standard, widely available parts. All three companies have pledged to begin assembling CHRP-compatible machines by the end of next year.
A CHRP computer will be a jack of all trades — capable of running the Macintosh operating system, IBM’s OS/2, the Unix system used in the faster, more powerful work stations and even Microsoft’s high-end Windows NT software. What’s more, any manufacturer will be able to obtain the specifications to build a CHRP computer without paying any royalties or licensing fees, or even seeking permission from Apple, IBM or Motorola.
Apple has pledged to sell the Macintosh operating system on the open market, so competitors should be able to build CHRP-based Mac clones without any help — or interference — from Cupertino.
This is a classic “good news, bad news” dilemma for Apple. The good news: The Macintosh standard finally could reclaim market share from Microsoft if CHRP induces manufacturers to crank out lots of Mac clones. The bad news: Apple makes almost all its profit selling hardware, not Mac software. If clone makers can beat it at its own game, Apple could shrink dramatically.
Differing profits
Kurt King, a technology analyst with the investment firm Montgomery Securities in San Francisco, estimates Apple’s profit from selling a license for the Mac operating system is only $40, compared to a profit of $300 to $400 for selling an Apple computer.
Microsoft, according to other analysts, makes only a marginal profit on Windows itself; most of the company’s earnings come from related applications software such as its Office suite of word processing and spreadsheet programs. But Apple doesn’t have a strong presence in Macintosh applications.
“Life with CHRP is different than today, we know that, ” Spindler said.
Some analysts are suggesting Apple can’t survive the transition as an independent company. They’re pushing the idea that IBM should acquire Apple, because IBM will profit from Mac clones — each CHRP computer will need a Power PC microprocessor made by either IBM or Motorola. As a part of IBM, they explain, Apple could put its emphasis on developing software without worrying about selling hardware and sustain itself through profits from the Power PC.
IBM, too, may be considering a bite into Apple. IBM Chairman Louis Gerstner reportedly met with Spindler and other top Apple executives in September 1994 at a Chicago hotel to discuss a takeover. IBM was said to have offered $40 a share, or about $4.5 billion, but the talks fell apart when Spindler demanded $60 or more. Spindler declined to comment on the story.
And other suitors could be waiting in the wings. Larry Ellison, chairman of Oracle Corp., said earlier this year the Redwood City software company has toyed with the idea of buying Apple.
Apple’s other big opportunity is in consumer electronics. The company is planning to take advantage of its reputation for cutting-edge design and widely recognized brand name to sell low-cost consumer-electronic devices.
The first product is a CD-ROM player called Pippin that will attach to a television set and should sell for about $500 to $600. Apple has a deal with Bandai Co. Ltd. of Japan, calling for Bandai to fund development of games and other software for a Pippin player as well as arrange for manufacturing. The system will be introduced in Japan in the first half of 1996, Spindler said, although many details haven’t been finalized yet – including whether the device will carry the Apple name.
The goal, according to Spindler, is finding a niche between expensive home PCs, costing $2,000 or more, and inexpensive video game players under $300. It’s a gamble – others have tried to sell similar devices and failed to attract a significant number of customers. The most notable example is Philips CD-I, a CD-ROM player introduced in 1991 for just under $1,000 that flopped. In a partial concession of defeat, Philips is now rewriting many CD-I titles for Macintosh and Windows.
Apple also continues to seek out new markets for its handheld Newton, a pocket-sized $700 device introduced with much fanfare and little consumer interest in 1993. Instead of functioning as a personal organizer, as first envisioned by the company, Spindler said Newton could be repositioned as an inexpensive, portable link to the Internet.
Indeed, the Internet will be a major focus for Apple in the coming months. The company will introduce a series of products intended to establish the Macintosh as the machine of choice for surfing the Net.
“This Internet thing is a freight train, and we’re going to jump on it, ” Spindler said.
If Apple manages to hitch a ride on the Internet and make the other new ventures a success, the company may narrowly escape being flattened by the Windows express.
“The reality is, this (company) isn’t going to implode over night, but vis-a-vis Windows, it’s just going to get tougher, ” said Kimball Brown, a technology analyst with the San Jose research firm Dataquest.
“This remains their biggest challenge — to figure out how to differentiate themselves from a Windows machine, ” said Pieter Hartsook, editor of a Macintosh newsletter in Alameda. “What Apple is very good at is making state-of-the-art technology easy to use, but they need to start branching out soon.”
