The rot sets in

Apple, the pioneer of personal computers, has found that better isn't good enough. Can it survive?

ON 3 OCTOBER the board of Apple Computer met in Cupertino, California. Rumours had abounded that Michael Spindler, the chief executive, would be forced out. Instead it was Joseph Graziano, his chief financial officer and principal critic, who had to leave. Last week Mr Graziano's ally, the marketing head Dan Eilers, also left.

It was a critical victory for Mr Spindler, because it means that Apple will continue as an independent company - for the moment. Mr Graziano and his allies believed Apple's problems were so deep-rooted that it should be broken up and sold off. Mr Spindler disagreed. But the takeover rumours refuse to die: IBM almost bought Apple a year ago, and Hewlett-Packard was said to be in talks a month ago. Most depressing for Apple, some believe the chief obstacle to a takeover is that no other company would want to buy it.

It has been a dramatic fall from grace: for most of the 1980s, Apple was the whizzy personal computer company. Unlike others, it made both the hardware and software and its Macintosh operating system - the bit that makes the software programs work and provides the user with a "control panel" - was way in advance of the competition. The Apple Mac was the only computer that graphic designers would even look at, and many others shared their disdain for the machines that ran on the DOS and Windows systems produced by Bill Gates's Microsoft. For them, the Apple was more than a computer, it was a symbol of superiority to those unfortunates who relied on Mr Gates's offerings.

Even three years ago, Apple looked healthy. It made an $855m pre-tax profit on a turnover of $7.1bn. Then the slippage began. Last year profits were $500m and in the three months to this September they were just $60m, 48 per cent lower than in the previous year. When these results were announced, Apple's share price fell 15 per cent. In the past 12 months - when most technology stocks have been on a roll - Apple's shares have underperformed the Standard and Poors composite index by 27 per cent.

The company's problems are divided into the short-term and the long term. These at first appear to contradict each other. Blame for the poor current profits can be heaped on high demand, and the failure of the company to keep up with it. Last March Apple introduced a new range, the Power Macintosh, but failed to realise how popular it would be. By this summer it had a $1bn backlog of orders. "We were caught a bit by surprise by the amazing demand for the products," David Nagel, head of research and development, admits.

Observers say that this is just the latest foul-up in a long line of recent errors. The Newton, a computer launched in 1993 that was supposed to recognise handwriting, didn't. E-world, an online service that aimed to compete with the Internet and CompuServe, has flopped. And in the last couple of months, new, ultra-powerful laptops had to be withdrawn because their batteries caught fire.

But these problems are insignificant when set against Apple's long-term dilemma. In the late 1980s its share of the world personal computer market was 15 per cent. In the second quarter of this year it was 7.4 per cent. It recovered to 9 per cent in the latest three months - reflecting an easing of the supply problem - but the long-term trend is downward.

The trouble is that while the Mac system has remained almost unchanged, Microsoft's has been improving in leaps and bounds. The scorn poured by many Mac users on the new Windows 95 operating system cannot mask the fact that it has closed the gap on the Apple in most ways - and is backed by the great Microsoft marketing machine. "Knowledgeable people realise the Mac is better than Windows," says Richard Shaffer of Technologic Partners in New York. "But better isn't good enough."

If Apple has 9 per cent of the PC market, companies that make Windows- driven machines - usually called IBM-compatible - have almost 90 per cent. That means developers, who write software, almost invariably produce a Windows version before a Mac one. Sometimes they do not produce a Mac version at all.

At the Apple Expo in London last week, Mac devotees were wearing badges with "Windows 95, Apple 89" on them - they believe Apple is still six years ahead of Microsoft. But it was impossible to ignore the fact that you could not buy a Mac for less than pounds 1,000, whereas powerful IBM clones can be picked up for pounds 500. And Mac itself has implicitly conceded that its customers might well want software available only for Windows: its latest top-end machines have IBM-clone technology built into them, so they can run either Windows or Mac software.

As a result, some loyalists have been getting seriously worried. John Dvorak, a columnist for the US trade magazine Mac-User, wrote recently: "Fat and boring - that's what the Mac has become. During the past decade, I've watched the Mac community devolve from a bunch of jazzed-up fanatics into a staid bunch of conservative do-nothings. Now, with the release of Windows 95, we're about to witness the final death throes of the old empire."

It is impossible to escape the impression that Apple is in deep trouble, and no amount of Californian business-speak can hide that. "Michael [Spindler] and I have been in 100 per cent alignment," Mr Eilers insisted after leaving. "We wanted to hardwire marketing and sales together, which unfortunately eliminates my role as head of central marketing." Which would be plausible, except that he was giving enthusiastic interviews about his job only days earlier, and late in September was rumoured to be on the point of taking over some of Mr Spindler's responsibilities.

The contrast with the days of young, juicy Apple could hardly be more striking. In 1976 college drop-outs Steven Jobs and Stephen Wozniak built a computer circuit board in a garage. Jobs knocked on doors and came back with orders for 50 boards. So they decided to build a complete computer instead. This was the first Apple - some would say it was the first personal computer.

Apple Computer - named by the vegetarian Mr Jobs - was formed in 1977 with the help of Mike Markkula, who was already well known in Silicon Valley. The Apple II was then launched and for four years the company had the PC market to itself. In 1980, when Apple was floated, the two founders were worth hundreds of millions of dollars each. Neither was yet 25.

In 1984 Apple launched its Macintosh, which introduced both the "mouse" to control the cursor, and "windows" which dropped down to provide choices. It was a revelation for people who were used to struggling with complex key sequences and dull screens full of text. But it was only when small businesses realised it was also an ideal tool for desk-top publishing that sales took off. By linking a Mac to a laser printer, they could produce leaflets and newsletters without going near an expensive typesetter.

But the company was already suffering. IBM had launched its personal computer in 1981, breaching Apple's monopoly and soon overtaking its sales. It had a huge advantage with company managers who were still convinced that "you could never be sacked for buying IBM". This, says Richard Schaffer, of Technologic Partners, was a shame, because the Macs were better suited for office networks. IBM also announced that anyone could make computers that followed its standard - the result was an explosion of IBM "clones". Big Blue did not benefit, but two small companies that made the operating system and the microprocessor did. They were called Microsoft and Intel.

Apple's woes were compounded by internal strife. Its casual approach to management was fine for a small fast-growing company - not for a large fast-growing one. In 1985 both Mr Wozniak and Mr Jobs left. Mr Jobs, variously described as "the boss from hell" and "charming" lost a power struggle with John Sculley, who had been brought in from PepsiCo. That year, too, Apple made the first cuts in its 4,300-strong workforce.

As the world economy picked up, so did Apple's. It established great loyalty in niche areas, notably graphic design, publishing, and education. But the Microsoft-driven hordes were piling on the pressure - prices were falling fast, and Apple knew it could not rely on the Mac's superiority for ever.

By now, the enemy was not IBM but Microsoft and Intel, which controlled the way the in-

dustry was heading . So it was not so surprising when in 1991 Apple announced it was joining up with IBM and Motorola to work on new technology to take on the Gates machines. Three years later the first fruit of that link was announced: the Power Macintosh, driven by the new Power PC processor. The venture has also been working on the Common Hardware Reference Platform - an "open architecture" that would run on a number of operating systems, and would in theory allow Macs to run all sorts of new software.

But the alliance has had more than its share of problems. Development of the CHRP has been slow, and will not now be introduced until next year, if at all. Internal strife has never been far from the surface. In 1993 Michael Spindler - a former Apple finance director who had left to join Sun Systems - became chief executive. That year, too, Apple announced layoffs and a wage freeze.

Apple decided it would take the IBM-compatibles on at their own game, and set a target 25 per cent market share. To do this it had to join the price war, and started cutting prices late in 1993. Market share held steady, but profits headed downwards: the policy was finally binned this summer.

Meanwhile, there were more ructions at the top. Last autumn the Apple board ordered Mr Spindler to find a buyer for the company. He almost came to a deal with IBM - it failed, apparently both because a big Apple shareholder wanted a higher price, and because Apple's executives wanted bigger pay- offs. Early this year the executive vice-president, Ian Diery, became the first senior man to be forced out - Graziano and Eilers have followed.

So where does that leave the company now? It has, as Kimball Brown of the Californian analyst Dataquest says, "lost the big PC war". It attempted to take the IBM clones on on their own turf, and lost. The next question is: can it continue as a specialist supplier to its traditional niches? There is no problem per se in having a small market share. Apple is still the second biggest producer of personal computers in the world, behind Compaq. It is also a large company by any standards, with 14,500 staff and $9.2bn sales last year.

But there is a real danger that as Windows 95 proves its sophistication, developers will stop writing for the Mac. "If Apple ends up with only the graphics and school markets, developer interest in Macs will wither," Mr Dvorak says. To keep developers happy, Apple decided a year ago to license other companies to build Mac "clones". It seems it is too late. So far only three have taken up the offer and one, Radius, laid off nearly half its 320 employees earlier this month.

At Apple Expo, John Taylor, Radius's product marketing manager, was pinning his hope on the CHRP, which would allow his company to build machines that would run Windows, Mac and other operating systems. But there are doubts that it will ever see the light of day. As Mr Shaffer says, by pushing the new open-architecture machines, IBM is in effect saying to customers, "Forget about your IBM-compatible machines."

Where does Apple's future lie? The Expo was a reminder that Apple is not just about building boxes. Part of it wants to be a software company, and it has some excellent products, such as Quicktime VR (virtual reality). Apple also plans to launch an upgraded operating system, known as Copland, next year. "It is probably fair to say we will become more of a software company than today," R&D chief Mr Nagel says.

Will Apple be taken over? Well, Mr Spindler does not want it to be, but he is making sure he will leave laughing if it is. In the summer "golden parachutes" for senior managers were increased - if there was a takeover he would be guaranteed three times his $990,000 salary. Mr Nagel is careful. "We don't comment on rumours about take-overs," he says. "But partnerships and strategic alliances are the key to everyone's success."

Richard Shaffer says that even if Apple wanted to be taken over, there is no good reason why anyone should want to. "If Apple is going to survive as a brand it will have to do so alone," he says. "But it's anybody's guess whether it will."

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