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Three Steps to a Stronger Apple

By Alex Salkever No doubt about it, 2003 was a good year for Apple Computer (AAPL). Steve Jobs took the digital music world by storm with sales of 25 million songs at the iTunes Music Store. He introduced a Windows version of the download software and iTunes store to spur iPod music player sales to the other 95% of the PC world not using Macs.

Apple also launched the G5 chipset, a much needed and long-awaited improvement over the creaky G4 set made by Motorola (MOT). In the G5, Apple has hitched itself to a much faster wagon because IBM (IBM), the builder of those chips, has committed to major speed improvements in part to fuel sales of its own servers that rely on a version of these chips. And Apple's iChat software set a new standard for no-hassle, plug-and-play audio- and videoconferencing.

Jobs declared 2003 to be the year of the laptop, and indeed it was. A new version of the iBook adds upgraded features and some zest to this long-running winner. Apple now holds from 5% to 7% of all new laptop sales, more than twice its percentage of desktop computer sales.

ONE MAN'S WISH LIST. Perhaps most important, Jobs unveiled the Panther operating system. This latest iteration of Apple's Unix-based OS X added significant polish as well as new features that have reviewers raving. Apple's share price climbed from the $15 range to well above $20, and Wall Street finally seemed to be smiling again on it after years of stock declines.

Despite these highlights, Apple can do much to improve its products and its prospects. Since I'm sure the folks at One Infinite Loop are anxious to hear from me, here's my personal wishlist for what I'd like to see Apple do in the coming year:

Better Corporate Governance

Although Apple has improved on this aspect in the past five years, corporate governance remains a sore spot for investors who watch Apple. The board of directors is generally perceived to be a bit of a lap dog for the charismatic Jobs. Its members certainly never dressed him down for Apple's lousy performance in 2002, a year that competitor Dell (DELL) managed to weather far better. The appointment of former Vice-President Al Gore to the board this past March did nothing to dispel those concerns. Its propensity to give huge stock-option awards to Jobs regardless of his performance has likewise rankled the investing community.

Apple should add a couple of truly independent directors to its board and take a harder look at compensation and management issues. No one doubts that Jobs in the right man for the job, but a bit more scrutiny and constructive criticism could help Apple become a stronger company. After all, study after study has shown that companies with more independent boards tend to perform better. And by making itself a tighter-running ship, Apple will be looked upon more favorably on Wall Street, which will help when it comes to raising needed capital.

Improved Quality Control

Surprisingly, one technical problem after another befell Apple users this year. Purchasers of dual-processor PowerMacs in early 2003 found that the internal cooling system on their machines was so loud that talking on the phone anywhere nearby was difficult. The logic boards on iBooks began to die out with surprising rapidity, forcing Apple to replace scores of machines. Bugs in Panther and backup software caused many Mac users to lose critical portions of backup data they had saved on external devices. Displays on the revamped PowerBook laptops contained mysterious white spots.

In general, Apple has made a name for itself with rock-solid industrial design and industry-leading quality control. Thus far the damage from these snafus appears minimal, but Apple definitely needs to watch its Ps and Qs more closely in the coming year.

More Hardware Upgrades

I can understand why Apple chose not to push a lot of new product upgrades out the door during the tech downturn of 2002. Creative types were more concerned about looking for work rather than a faster system bus. The general economy was lousy. So rather than try going against a steep headwind, Apple chilled out.

That continued into 2003, when many of the product upgrades were decidedly modest. The speed and component improvements in the eMacs and iBooks, while welcome, could hardly be called earth-shattering. The PowerBook upgrades look nice, but they failed to live up to expectations in a number of fields such as screen resolution, chip speed, and internal data-transfer speeds.

And the slow-moving development of the G4 chipset has undoubtedly held Apple back. That should change as it switches over to faster-moving IBM in the transition to G5 chips.

The bottom line: If Apple wants to keep its sales growing smartly, Jobs needs to upgrade each product line every year. Waiting more than 24 months for some new versions is simply unacceptable and will exacerbate the kind of fall-off in sales of once-hot lines such as the floating screen iMac.

No, consumers shouldn't expect a big new product offering each year such as an iPod or a floating iMac. That's too much to expect. And yes, I realize that asking for more upgrades puts more pressure on quality control. But I still think Apple definitely needs to bring more new stuff to the table more often to make sure the customers keep coming back.

These are three fairly modest wishes. Apple clearly had a bang-up year and should be commended for positioning itself well going into the nascent tech upturn. Despite what doomsayers have intoned for years, Apple remains a vibrant niche player and the foremost technology innovator in the PC game. But it could still improve its game quite a bit. Better corporate governance, fewer bugs, and a more upgrades could go a long way to making that Apple shine even more brightly. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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