A Juicy New Apple?Kathy Rebello
Apple is about to bet the orchard. On Mar. 14, the company will launch a new family of Macintoshes using the speedy PowerPC chip. It's a bold bid to regain the company's former glory as a maker of cutting-edge personal computers. But more than image is at stake: Should the move to the PowerPC falter, Apple could be relegated to the ranks of the also-rans in the PC business.
If the magnitude of the undertaking has rattled Apple Computer Inc.'s taciturn chief executive, Michael H. Spindler, he isn't letting on. Says the 51-year-old German who took the reins last June: "The month before and after introduction will be challenging, no doubt."
No doubt. And the month after that, and the month after that. In fact, it will take years to switch customers over to the PowerPC, and during that time, plenty can go wrong. Apple must deftly pull off what computer makers regard as the trickiest technical and marketing challenge in the business: moving customers to a new "architecture."
And Apple has no time to lose. The 10-year-old Mac architecture is running out of steam, and its Motorola 68000 processors, already incapable of matching Intel Corp.'s chips, are being phased out. A smooth move to PowerPC-based Macs "is the only strategy to save the company," says Roger Heinen, former head of Apple's software group and now a senior vice-president at Microsoft Corp.
Spindler's plan is simple. Power Macintoshes will begin as high-end additions to the product line and gradually take over. Executives say Power Macs will account for 20% to 25% of 1994 Mac shipments and ramp up from there. They're tight-lipped as to when all Macs will be PowerPC-based. Market researcher International Data Corp. figures Power Macs will comprise just 12% of shipments this year but will take over the product line by 1997 (chart, page 90).
At any speed, the switchover is fraught with peril. If Apple makes the Power Macs too attractive, sales of the older machines will crater. On the other hand, if Apple doesn't mount a forceful offensive, its customers will stick with the old machines. More important, the Power Macs have to be priced and marketed aggressively to sell in large enough volume to catch the fancy of software developers.
TUMBLING PRICE. Without innovative bew programs for the Power Macintosh, even current Mac customers won't have much reason to trade up: Power Mac will run today's Mac programs but not at significantly faster speeds than older, cheaper Macintosh models do. When the first Power Macs ship in mid-March, Apple says there will be 60 all-new packages ready--including new versions of WordPerfect, Adobe Illustrator, and Photoshop--and "hundreds" are expected within six months. That compares with thousands for the older Macs and tens of thousands for IBM PCs.
How aggressively will the Power Macintosh be marketed? Insiders say the Power Macs could be priced from $2,000 to $4,500--in the range to compete with PCs based on Intel's Pentium chip. Similarly equipped Pentium models sell for around $3,000 but are expected to drop to $2,000 by late 1994. Meanwhile, Apple has a two-pronged strategy to keep current Mac customers in the fold. For $700 to $2,000, they'll be able to buy hardware kits to upgrade their Macs to Power Macs, according to analysts. And to keep sales of older Macs humming, the company is expected to continue slashing price tags--which have already tumbled 33% since last summer.
If the mood around Apple's Cupertino (Calif.) campus is any gauge, the transition to Power Macintosh is already a success. Says PowerPC Product Manager James S. Gable: "Things are going smooth as glass." They ought to be, given the resources thrown at the Power- PC project, code-named "Rock 'n' Roll." It now has 400-plus people working 70-hour weeks to get three machines ready.
The upbeat tone is vintage Apple--and a welcome change from the gloom that has hung over the company since last summer, when Mac sales tanked and 2,500 workers were laid off. Since then, a parade of top talent has walked, including Randy Battat, a key executive overseeing the PowerPC effort who left for Motorola Corp. in December. Concedes Gable: "We lost a little momentum." Still, Gable and his developers say they have designed an architecture that will carry the Macintosh--and Apple--for at least a decade. "This is like 1984, working on the first Mac," says Brian Mellea, a member of the PowerPC team.
The Rock 'n' Roll team is particularly proud of hitting its No.1 design goal: making sure existing Mac software runs without a hitch. Without such "backward compatibility" Apple would lose its loyal customers. Not taking any chances, Apple has lavished 600 work-months, the equivalent of 50 years, on compatibility testing. Of the 750 old Mac programs tested, the company claims that 93% run error-free on the new Power Macintoshes. Andrew Block, senior data-systems specialist at Lockheed Missiles & Space Co., in Sunnyvale, Calif., says he has tested 100 Mac packages and reported only two bugs to Apple.
Across the Silicon Valley--even outside Cupertino--the buzz is that the Power Mac is a truly hot machine. The Power- PC microprocessor, the outgrowth of an Apple, IBM, and Motorola alliance announced in 1991, is based on reduced instruction-set computing (RISC) technology that promises to give Macs a two- to eightfold boost in performance when using software written expressly for the Power Mac. Adobe Systems Inc. says the programs it has rewritten for the new machine run three to four times faster than on older Macs. "It's a pretty amazing piece of technology," concludes Lockheed's Block, who is considering replacing many of the company's 8,000 Macintoshes with Power Macs.
The enthusiasm hasn't infected Wall Street, however. Analysts see no near-term improvement in earnings, and Apple shares now trade at around 37, down from nearly 60 last spring. The company has hung onto its market share--hovering between 10% and 12%--by pumping out more and more boxes at lower and lower prices, plunging gross margins from 55% a couple of years ago to 24% in the first quarter, ended Dec. 31. That pared earnings to a skimpy $40 million, vs. $161 million a year ago. And, Apple executives have warned, there's no reason to expect a big rebound in margins with Power Macs. Prudential Securities Inc. analyst Marianne Wolk predicts several rocky quarters and 1994 net income of $147 million, vs. $285.2 million for 1993, not including the restructuring charge. She rates the stock a "sell."
BREATHING LESSONS. Indeed, until software arrives to really show off the potential of the Power Mac, Apple will be in the business of selling futures. And that won't convert skeptics. "There will be an air bubble here," warns analyst Bill Ablondi of market researcher BIS Strategic Decisions. "Apple will just have to hold its breath and get through it."
No problem, say Apple executives. "Maybe it will get rough. Maybe we won't get [the mix of old and new Mac models] quite right, in terms of volume," says Joseph A. Graziano, Apple's chief financial officer. "I don't mean to be cavalier about this, but so what? The real important thing is the long term. If we can get through this thing, and I think we will definitely get through it, we're going to be a lot stronger."
If he's wrong, Apple has little else to fall back on. The overhyped Newton handheld computer has been a disaster, and even with a smaller, improved "Lindy" model due in March, the company can't expect substantial revenue or profits from the new line anytime soon. Nor can it count on forthcoming products such as cable-TV converter boxes. At the moment, the most promising non-Mac business is Claris, Apple's application-software subsidiary. But Claris is tiny--with sales of just $154.4 million for fiscal 1993. All told, new businesses will account for only 10% of Apple's forecasted 1994 revenues of $9.3 billion.
Still, as the Mar. 14 launch for the Power Mac nears, Apple executives are growing more confident. They're talking of a Power Mac-led buying binge that will not only help the company hold onto its customer base but will cut into sales of Intel-based machines running Microsoft's Windows and MS-DOS software. The Power Mac's extra performance, Apple executives say, will make it possible for even low-cost models to offer sophisticated multimedia, full-motion video, voice recognition, and three-dimensional modeling. That should expand Apple's market. But by how much? Ian W. Diery, Apple's executive vice-president for worldwide sales and marketing, is now predicting a jump of five percentage points in the next three to five years.
Needless to say, outsiders aren't quite so bullish. Eric Lewis, manager of PC hardware research at International Data Corp., figures that, at best, Apple could nab two points of market share in the next two years. "This is not enough of a revolutionary product to shake the Intel-Windows market," he says. Microsoft, of course, concurs. "All the hoopla about PowerPC is way out of scope," says Carl Stork, Microsoft's director of Windows platforms. "People think this is like magic fairy dust."
NO INTEREST. Microsoft and Intel aren't standing still, either. Microsoft will up the Windows ante with an update known as "Chicago" this summer. It's intended to match or surpass Apple's System 7 operating system in speed and "ease of use." With new software and a flood of computers based on its speedy Pentium chip, Intel sees the chance to grab Mac customers and has launched an ad campaign aimed at getting Apple users to switch to the PC.
Apple, too, has a plan to invade its enemy's camp--by recruiting other computer makers to license the Macintosh operating system for use on PowerPC-based machines. A licensing task force has been established that reports directly to Spindler. Insiders say Apple had hoped to announce licensing deals on Mar. 14. But talks are dragging on, perhaps because of Apple's selectivity. Says Graziano: "What we don't want to do is just license to somebody that is going to try and undercut us in the same market."
So far, no would-be cloners have stood up to be counted--though analysts say Apple has approached Compaq Computer, Dell, and Sun Microsystems--all of which say they aren't ready for the Mac move. "We have zero interest," says Robert W. Stearns, Compaq Computer Corp.'s vice-president for corporate development. "Every application of significance that runs in the Mac environment runs in ours. And while it's attractive in terms of ease of use, Chicago will blow the doors off of the Mac operating system." And despite speculation that PowerPC partner IBM might be a licensee, Big Blue says it has other priorities.
Apple could have takers in Asia, however. John Floisand, president of Apple Pacific, says Apple is talking with dozens of Asian companies, such as Taiwan's Acer. He says Asian-based computer makers are keen on the idea, thanks to Apple's success in Japan, where it's No.2 in the market. "We can basically pick our licensees," says Floisand.
With or without clones, the Power Macintosh is the light of Apple's future--after a dreary year that included the ouster of Chairman John F. Sculley, the embarrassment of Newton, and painful cost-cutting moves. Says analyst David Wu of S.G. Warburg: "Apple hasn't turned into golden delicious yet. But it's looking more respectable. I had thought it was going to rot."