Apple's future in the hands of Newton: Larry Black looks at the progress of the computer company's technological breakthrough - a 'digital assistant'

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The Independent Online
VAPOURWARE is what Silicon Valley calls a new technology that is hyped to the public long before it can actually be applied to a useful product.

While Newton, the long-promised 'digital assistant' that Apple Computer will unveil today, is not quite that ethereal, the label is sticking - an unfortunate debut for a product on which the company is apparently staking its future.

Newton - a 'personal communicator' that can not yet communicate, a mass-market consumer product hastily repackaged as a business tool - is in fact a technological breakthrough, the latest in a long line of innovative designs that have allowed Apple to insulate itself from the cruel realities and tight profit margins of the greater computer marketplace. But it is nonetheless a product that is being rushed to market prematurely, despite several delays that have cost Apple its lead in a business that many believe will be the future of computing.

Apple has made marketing mistakes in the past, but this time around it appears to have had little choice but to get some sort of digital assistant into the stores. Apple's chance to define the market is rapidly disappearing, as rivals converge on it from other angles: personal organisers are getting more sophisticated, cellular phones are adding bigger displays, palm-top computers are becoming smaller and more user-friendly.

Time is also running out for Apple in other ways. Like IBM before it - which saw its core business, mainframes, collapse long before successors were ready - Apple has seen its protected niche in personal computers evaporate in the past 18 months, and its profits with it. Advances in Microsoft's Windows operating system have virtually eliminated the 'easy-to-use' edge its Macintosh long enjoyed over IBM clones, exposing it directly to the price wars raging elsewhere in the PC market.

Its hugely successful Powerbook portable was to have eased the transition foreseen for Apple some time ago by the chairman, John Sculley, from being a manufacturer of hardware in an increasingly competitive, low-margin market to becoming a software and information network designer that sees devices like Newton simply as a gateway to its businesses. But the pace of change in the computer business has accelerated logarithmically; after selling dollars 1bn worth of Powerbooks in a year, Apple finds its notebook already being supplanted by IBM's Thinkpad and Hewlett- Packard's Omnibook.

Too late did Mr Sculley - who resigned as chief executive in June - realise that Apple's products were no longer so unique that they could command profit margins twice that of companies like Compaq, Dell or IBM, now its direct rivals in the PC market. As early as 1991, Apple shifted strategy, from premium pricing to one aimed at grabbing market share, but to date, its price-cutting has not generated enough new volume to offset the lost revenues.

Sales fell 7 per cent in the most recent quarter, forcing Apple to cut its worldwide staff by 16 per cent in an effort to save dollars 250m a year - and thus bring its costs into line with its cut-throat competition.

Apple's president, Michael Spindler, who took over from Mr Sculley as chief executive, says he is confident Apple's PC business 'can be put back on a growth path by aggressively pursuing market share. But at the same time, we must significantly - and permanently - lower our cost of doing business.'

But in this new reality, its niche is now a serious liability. Microsoft's operating systems outsell the Mac's eight-to-one, and boast four times as many software applications. Where Mac versions are available, they're often more expensive. So after rising three points in as many years, Apple's share of the worldwide PC market has levelled off at about 12 per cent, far below the 20 per cent it is shooting for; in the first six months of the year, it fell to third in the rankings bethind IBM and Compaq in the number of units shipped.

'They are going to have to be much more aggressive price cutters than the IBM-compatible makers,' says Eugene Glazer, an industry analyst with the Dean Witter securities firm in New York. Many investors doubt Apple can; since the beginning of the year, Apple's share price has been cut in half, and dollars 4bn has been lopped off its market valuation.

But the last place a company like Apple ultimately wants to find itself in the 1990s 'is stuck in a rut in the commodity PC business,' Mr Sculley said in an interview with the Independent earlier this year. 'The personal computer business as we have known it is not a very attractive place.'

Apple believes its future is not as a competitor to Compaq and Dell, but in racing for the same ground Microsoft hopes to occupy, programming all the new digital devices that are supposed to replace everything from the television, telephone and computer to the local bank, library and school.

Newton and its Personal Interactive Electronics (Apple PIE) division are part of that shift, as is EZTV - its answer to Cablesoft, Microsoft's alliance with America's biggest cable companies - and Kaleida, the Apple- IBM joint venture that is trying to set new standards for multimedia programming. Meanwhile, Mr Sculley's new job entails striking alliances with information-network owners like AT&T and database sources ranging from Time Warner to Random House, the big publishing house.

The ability to pay for this, however - Apple spends almost dollars 700m a year on research and development - will depend on its ability to sell good old- fashioned computer hardware: ie Macs, upgraded with the new PowerPC chip that Apple designed in conjunction with IBM and Motorola, and priced competitively thanks to last month's cost-cutting.

Apple continues to predict that Newton and other new businesses will account for 10 per cent of its 1994 sales. But the company has also tried to lower expectations for the over- hyped digital assistant, forecasting sales of only 7,000 units a month - a rate of penetration which suggests that the global lifestyle change the device is supposed to herald may be some years off.

But sales of the Newton itself are not meant to be a profit centre for Apple; the devices are to serve mainly as ways for consumers to access its proprietary networks, services and databases. So in a sharp departure from its past, Apple has licensed the Newton technology to as many big consumer-products manufacturers as it can - including Sharp, Motorola and Siemens - in the hope of popularising its standard and thus widening the customer base for its information network.

Indeed, by the year 2000, Mr Sculley has said, Apple may be giving hardware away and making all its money elsewhere - a far cry from the Apple that fought cloners every inch of the way, jealously guarding its easy- to-use franchise.

The products may eventually be disposable, but success of the Newton concept is obviously critical to Apple's future. Yet many Silicon Valley veterans remain sceptical, comparing Newton to earlier ill-fated ventures that almost killed off industry pioneers. 'We haven't had a good Atari- style bust for a while, but I think there is a chance it will happen with Netwon,' says John Dvorak, a PC magazine columnist, referring to the collapse of the computer-game market in the early 1980s.

But Mr Sculley says early indications suggest Newton will be an unqualified success. Appearing on talk shows late last week in an attempt to counter the 'vapourware' tag, Mr Sculley reminded viewers that the same sceptics counted Apple out of the notebook business in 1991, and it came up with the Powerbook.

'I'm more and more convinced that Newton is going to be Apple's home run for the 1990s,' he said.

'Nobody would argue that Apple isn't a home-run kind of company.'

(Photographs and graph omitted)