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Apple's New Chapter in the Classroom

By Alex Salkever Has Apple (AAPL) fallen back into a school daze? It sure seems that way from a recent series of bad tidings. The Mac folks just lost a massive one-to-one computing deal for the state of Michigan to tech giant Hewlett-Packard (HPQ). These state programs, which seek to give every student a laptop and tightly integrate the machines' use into the curriculum, are seen as the holy grail of the now stumbling K-12 education business. And the Michigan contract was the proverbial mother lode. Worth $68 million over four years, it calls for HP to provide laptops to as many as 132,000 middle-school students in the Wolverine State.

Apple desperately wanted to win this contact, as did Dell (DELL), Apple's archrival in the education market. Worse, the Mac folks have aggressively courted exactly these types of deals -- execs go out of their way to mention one-to-one computing as a key driver for education sales, which make up 25% of Apple's total revenues. Its school sales are expected to hit nearly $1.75 billion in 2004.

In that light, the Michigan loss looks particularly bad. But wait, that's not all. Apple also disclosed in its 10K form filed with the Securities & Exchange Commission for fiscal 2003 that it had laid off staff in its education division. The exact number wasn't disclosed, but Apple has had high management and sales staff turnover in its education unit for some time.

UPWARD CURVE. Then came another piece of bad news, this time out of Pennsylvania, where a suburban Pittsburgh school district is trying out Apple iBooks in a one-to-one computing initiative. A study of that effort by the Rand Corp. gave it a mixed review, citing poor tech support and computer malfunctions that in some cases disrupted classes. The district does plan to continue using the machines, but the study contrasts markedly with the glowing reviews coming out of big Apple one-to-one programs in Maine and Henrico County, Va.

Combine these dark spots with the continued implosion of state and local budgets, and the school crew from One Infinite Loop looks like it may be plunging back into the abyss.

In this case, however, looks are deceiving. Losing a big deal definitely stinks, but it's a single point on the curve. And the curve's slope turned up in the last quarter of 2003, as Apple's overall education market share rose by 2.7%, according to numbers from tech tracker IDC cited by Apple executives at a Mar. 1 analyst briefing.

Better still, Apple's share of the K-12 laptop market climbed by 2%, to 20.2%, in the last calendar quarter of 2003. That's important because laptop sales in the education market will surpass desktops in three years, according to IDC. Clearly, Apple is gaining share in a fast-growing market.

HEAD OF THE CLASS. While sales figures are good, in education test scores are paramount. And Apple has something to crow about there. The Henrico County initiative, one of the two largest one-to-one computing deals on Apple's list, recently reported significant improvements in test scores for students participating in the program, which gives laptops to students in grades 6 through 12.

Henrico also reported a significant decrease in high school dropout rates. Apple executives cite similar results in a statewide computing initiative in Maine, their other one-to-one poster child.

That doesn't mean no one has criticized these programs. In Henrico, some parents have claimed the computer-centric curriculum replaces critical thinking with training for multiple-choice tests. But test scores are still one of the most reliable ways to judge relative achievement. And these positive results will give Apple's sales staff solid ammo in its education quest.

LOTS OF HOMEWORK. On the college front, Apple looks even better. It posted record higher-education sales in the all-important fourth-quarter period of 2003, which covered the three months previous to Sept. 27. That's when college kids heading back to school pony up for PowerBooks, and university departments outfit their labs and offices.

In higher ed, the lure of the iPod could prove a strong impetus for sales growth should Apple offer an attractive bundle that links a Mac purchase to a cut-rate deal on the popular digital music players. Apple execs are noticeably bullish on this front: Academic geeks are expected to snap up G5 PowerMacs, and the competitively priced iBook line continues to sell well on campus.

Not that Apple doesn't still have plenty of work to do in education. Losing the Michigan deal was a bad sign. Anecdotally, Apple's sales effort still lacks focus and a compelling message of differentiation when facing off against Windows-based competitors. And laying off staff while trying to build market share seems like a bit of a tactical oxymoron.

Further, the problems Rand found in the Pennsylvania installation suggests that though Henrico Country and Maine are relatively happy campers, Apple still needs to work on its follow through and support in big one-to-one initiatives. Even so, something good is happening for Apple in education. The proof is in the market share and test-score numbers. Salkever is Technology editor for BusinessWeek Online. Follow his Byte of the Apple column, only on BW Online

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