Apple's Daring Leap Into The All Digital Future

Apple Computer Inc. Chairman John Sculley has a knack for viv id imagery. His latest: For personal-computer makers, "the 1990s are a cold shower." After a decade of 30% and 40% annual gains in shipments, growth has slowed to a 7% annual stroll. Instead of awaiting the next sales boon from some whizzy new technology, most PC makers are trying to streamline quickly enough to turn a profit next quarter.

Apple has been more successful than most at figuring out how to prosper in this environment. It has slashed costs and, thanks to a series of hot-selling Macintoshes, has increased market share while maintaining profits, despite far lower retail prices. Still, Sculley says Apple's future will be severely limited unless it moves beyond personal computers. "I was concerned Apple didn't have a sustainable business in the '90s that was very exciting," he says. "We would still be around, but nobody would care."

The solution? Apple isn't going to be just a personal-computer maker. Sixteen years after helping to pioneer the industry, Apple plans to move beyond it--to become a global electronics holding company overseeing multiple businesses. Sculley's vision for 2000 and beyond is of a vast market taking shape as all sorts of information is converted into digital form. Everything from high-definition TV pictures to local phone calls will be reduced to the zeros and ones that computers already use. Sculley is betting that when that happens, several industries will converge into a $3 trillionmegamarket (chart, page 122). His goal is to grab an early lead by using Apple's renowned ability to paint a user-friendly face on complex digital machines.

SNEAK PREVIEW. Sculley says the company will build and sell consumer electronics, all sorts of software, telecommunications devices, and, oh yes, computers. As computer technology invades everything from TVs to electronic newspapers, the list may grow. "We won't get into mainframes or PBXs, and we won't print telephone books," says Chief Operating Officer Michael H. Spindler. "From there on, everything is possible."

The first machine to test Sculley's new strategy will make its debut on May 29 at the summer Consumer Electronics Show in Chicago. Apple will use this sprawling showcase to take the wraps off a gadget code-named Newton. At its most basic, it's an electronic Filofax that helps track appointments, phone numbers, and addresses. It's a bit like Sharp Electronics Corp.'s Wizard. But it also recognizes hand printing, has a built-in fax and data modem, and runs faster than any handheld organizer.

The product won't be on store shelves until January, 1993, and analysts don't expect significant sales until the mid-1990s. But it's the start of the new Apple that Sculley says will include not only consumer electronics but digital communications. Telecommunications, he predicts, will be as important to Apple in the 1990s as the Mac's graphics technology was in the 1980s.

To prepare, Apple is undergoing what Sculley calls the most important transformation in its history. Sculley and Spindler are moving Apple from a one-product company with a simple distribution system to a multibusiness conglomerate that will sell new types of products through new channels to new customers. Some of these businesses, such as consumer electronics, have radically different cost structures and product cycles than Apple is used to. To manage the change, Apple has broken itself into new divisions (table), subsidiaries, and joint ventures. Each has been told to think and act like an independent company, hungry for sales and profits.

Lawrence Tesler, vice-president of the Advanced Products group, is known around Apple as the father of Newton. David Nagel is acting general manager of the new division launching it. To share the costs of development, Apple in the past year has forged partnerships with former rival IBM as well as with two Japanese technology giants: Sharp, which will build the Newton, and Sony Corp., which now builds some of Apple's PowerBook portable Macintoshes.

Sculley is also busy courting potential partners in Japan and Hollywood. In Tinseltown, Sculley says he is building relationships with entertainment, media, and publishing companies that have programming for Apple's new gadgets. "These industries are going to bump into each other, so it's important to start building relationships today," he says. One example is Apple's recent deal with Random House to put an electronic version of the Modern Library books on PowerBook portables.

Handling all this will be tricky for a company with Apple's history of whipsaw changes in management and strategy. Since 1985, when Sculley threw out co-founder Steven P. Jobs, the company seems to have a new strategy with each new year. "Over time, they haven't really managed their business well," says analyst Michele Preston of Cowen & Co., "although they have in the past two years."

Many in the industry applaud Apple's vision but remain unconvinced that the company can carry it out. "Apple might be getting too scattered," says Reese M. Jones, president of Farallon Computing Inc., which makes networking software. "It's a very difficult strategy," says Bernard R. Gifford, an Apple vice-president who left in March to start a software company. "But I don't see an alternative."

Nor does Sculley. He got his wake-up call in 1990 when Apple's strategy of charging top dollar for Macintoshes began to unravel. The Mac's easy-to-use graphics were no longer unique, and customers balked at paying Apple prices. The long-term trend in PCs became clear: less differentiation, lower margins, and slower growth.

Sculley quickly cleared out top management, bringing in Spindler, the former head of Apple Europe, to run day-to-day operations. The CEO took over research and development and turned up the heat. In October, 1990, the low-cost Macintosh Classic and LC arrived and were instant hits. In October, 1991, they were followed by the PowerBook notebooks, also hits.

Lower prices fueled record shipments. Desktop Macs now account for 19% of PCs sold through U.S. computer dealers, up from 11% in 1990, according to StoreBoard Channel Tracking. In notebooks, Apple has gone from nowhere to a 21% market share--second only to Compaq Computer Corp.--in just two quarters. In fiscal 1991, ended Sept. 30, revenues climbed 14%, to $6.3 billion. But a $224 million charge for restructuring and laying off 1,500 employees cut profits by 35%, to $309.8 million. Now, the lower cost structure is paying off: In the March quarter, Apple profits increased 3%, to $135.1 million, on a 7% revenue gain, to $1.7 billion.

KILLERS ALL. With the payoff from such products as Newton far off, Apple still needs growth from existing products. So the Mac Hardware Div. must churn out more hit Macs--and do so faster while keeping costs down. The goal: In 1993, new products are due every six months instead of once a year, says General Manager G. Fred Forsyth. This fall comes a Classic with a CD-ROM drive, followed by a color Classic next year.

To keep up that pace, Forsyth has broken his division into small units, each with its own budget. For the first time, engineers weigh in on business decisions, helping analyze what products to tackle or abandon. "They actually kill their own products now," Forsyth says.

To get the most out of the slowing PC market, Apple has also lifted some old taboos, such as the one against selling Apple technology for IBM-compatible PCs. Last month, it began shipping laser printers and scanners that work with PC clones. It's even writing software for Microsoft Corp.'s Windows, the graphics "environment" over which Apple is fighting a bitter copyright-infringement suit. A Windows version of the Mac's QuickTime video software is due out any day. The company is already rewriting parts of the Mac software for other computers and is weighing the risks of doing so for IBM-compatible PCs.

All this has Wall Street smiling. Sales of printers and scanners for IBM PCs and clones may generate $200 million in sales, and selling Mac software for other computers could add $100 million, says analyst Charles Wolf of First Boston Corp. That's not huge, but software is highly profitable--80% gross margins, vs. 44% for Macintoshes. Analysts now expect Apple revenues to jump 16% this fiscal year, to $7.3 billion. Similar growth is expected in 1993.

But even the most bullish Wall Street analysts aren't ready to predict how things will shape up in 1994, when Sculley's new strategy will start to play out. Afalysts were enthusiastic about the Newton when Sculley and Spindler showed off a prototype on May 6. They estimate that Apple will sell 250,000 Newtons in 1993, generating just $125 million, but predict that "personal electronics" sales could double in 1994, when Apple adds more handheld gadgets. "The issue is execution," says Bruce Lupatkin of Hambrecht & Quist Inc. "Apple has wonderful opportunities. They have only themselves to blame if they fail."

Nobody knows that better than Sculley. He describes his ambitious plan as a leap from "the sandbox to the beach." If he fails, Apple's future will be circumscribed by the limits of the personal-computer market. And the 1990s will remain a long, cold shower.

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