It Just May Be The Year Of The AppleKathy Rebello
Will 1995 be Apple Computer Inc.'s year? A lot could go wrong between now and next December, but the once-beleaguered computer maker is starting out with the brightest prospects in years. Taking a more liberal approach to licensing its technology, Apple has just signed the first two Macintosh clone makers and is negotiating with nearly a dozen more. It's positioned to cash in on the boom in home and school markets. And fate has been kind: A technical snafu in Intel Corp.'s Pentium chip gives buyers a new reason to consider Power Macs, which use the speedy (and so far flawless) PowerPC chip. Even better: Microsoft Corp.'s Windows 95 operating system--regarded by industry watchers as a potential "Mac Killer"--has been delayed.
Apple's new year began early with the Dec. 28 announcement of the first clone: A Silicon Valley startup called Power Computing Corp. Then, on Jan. 4, Radius Inc. a maker of Macintosh displays and software, disclosed plans for high-end Mac clones. More deals could soon follow. Insiders at Apple say the company is knee-deep in talks with Toshiba and Olivetti. And discussions are progressing with Motorola, Hitachi, Goldstar, Zenith Electronics, and German PC giant Vobis Microcomputer. FirePower Systems, a startup backed by Japan's Canon, is also eyeing the MacClone business, and consumer-electronics giant Pioneer could be making Mac compatibles by mid-1995, say sources close to Apple.
BOOSTER SHOT. Apple officials aren't confirming anything beyond Radius and Power Computing. But, says Don Strickland, Apple's vice-president for licensing: "The good news is we have licensees signed, sealed, and delivered."
How good? The known Mac-maybes represent nearly 7% of the global PC market. That, in itself, could greatly aid Apple's goal of doubling the market share for Mac and Mac-compatibles, to 20%, in five years. Mac clones would not only bring in licensing fees but would broaden the Mac base, giving software developers greater incentive to create Mac applications. Also, more Mac-compatible computers will mean more sales of highly profitable Apple peripherals such as laser printers.
But there are risks, too. The biggest is that the cloners will overwhelm Apple the way PC cloners swamped IBM in 1980s--undercutting its pricing and stealing market share. Also Apple is notorious for laying out ambitious plans, then failing to execute. If the clone strategy doesn't work, Apple has almost no chance of hitting its 20% market-share goal. Instead, it would languish in a market increasingly dominated by Microsoft Windows. So Wall Street remains leery: Of 25 top analysts, only five have a buy on the stock, which now trades at around 39--far from its high in the 60s. "This is impressive. Is Apple moving in the right direction? Yes, unambiguously so," says analyst William M. Bluestein of Forrester Research Inc. "Should it have been done sooner? Yes, unambiguously so."
To be sure, Apple has had a rough-and-tumble journey in the 18 months since the board replaced Chief Executive John Sculley with Chief Operating Officer Michael H. Spindler. After suffering its largest quarterly loss and shedding 16% of its workers, Apple turned itself into a lean fighting machine. For the quarter ended Sept. 30, revenues hit a record $2.5 billion, up 16% over 1993. Profits were $114.7 million--strong but shy of the pre-turmoil era. Eugene Glazer of Dean Witter Reynolds Inc., who recently went bullish on Apple, expects sales to jump 19%, to $10.9 billion, and profits to rise 53%, to $475 million. Glazer says Apple's stock should hit 50 by yearend.
The picture could grow brighter if the Wintel camp (comprising PC makers using Microsoft Windows and Intel chips) loses momentum. So far, buyers are still snapping up Wintel machines. And at Apple's Cupertino (Calif.) headquarters, the official stand is to take the high ground. Says Spindler: "It happens to the best." But privately, workers are gloating and hoping to capitalize on Wintel woes. Says David C. Nagel, general manager of AppleSoft, the division that develops Apple operating systems: "Any time a competitor makes a boneheaded move, one can only applaud that."
Such mistakes could produce more momentum for the Power Macs. Introduced last March, Power Macs are selling so well that analysts now say the company will ship 1.2 million units the first year, 20% above Apple's target. For year two, Apple has a bunch of new PowerPC-based machines, starting in May or June with a PowerBook laptop. More second-generation Macs are due by mid-1995. Now in development under a series of colorful code names--TNT, Tsunami, and Nitro--some use the most powerful PowerPC chip yet, the new 604.
JUGGERNAUT. The new year will also bring a Newton revival plan. The much-maligned handheld communicator got a boost on Jan. 4 with the introduction of Motorola Inc.'s Marco, a $900 to $1,400 personal communicator that uses Newton technology and actually does what Apple advertised two years ago: send and receive all types of electronic messages wirelessly. On Jan. 30, Apple is set to unveil its updated Newton, code-named Gelato, to be followed midyear by "Dante," a software update with improved handwriting recognition.
Apple has a turnaround plan for eWorld, its online service, too. So far, it has only 55,000 subscribers. In mid-1995, the Mac-only system will be offered to Windows users and--more important--Apple plans to spin it off into a separate company, perhaps as early as this month. That would bring a big capital infusion, most likely from a Baby Bell. Apple is in talks with U S West Inc., according to sources close to the PC maker.
Despite all the plans, Apple could find itself back on the defensive before the year is out. The delay of Windows 95 gives Apple a breather, but the new operating system is still a huge threat. Software testers say it finally gives Windows Mac-like ease. Even if it does not appear until late 1995, it will be on the market well ahead of "Copland," the Mac operating system update slated for mid-1996. Copland has such advances as software "agents" that automatically perform tasks. But by the time customers see this stuff, the Windows juggernaut may have done its damage.
That makes Apple's bid to license the Mac technology even more critical. Its plan calls for licensees to sell over 1 million Mac compatibles by 1997. That would give the Mac camp approximately 3 more percentage points of market share. Pieter Hartsook, a Mac market analyst, predicts 500,000 Mac clones for 1995 and 1.6 million in 1996.
Power Computing alone says it can sell 100,000 Mac clones this year--all by mail order. That would sound nuts for a startup if not for President Stephen Kahng. He's the engineer behind the Leading Edge Model D, a mid-1980s PC clone that helped pioneer the mass-market PC business. Besides selling Mac clones under its own brand, Power Computing will build clones for other PC makers to sell. One likely candidate: Olivetti, its largest outside investor.
But, analysts say, Apple still needs a deal with an industry megaplayer, such as IBM or Compaq. A Mac clone from IBM could "bust the market wide open," says analyst Richard J. Zwetchkenbaum of International Data Corp. IBM, which has toyed with licensing the Mac software for the common PowerPC hardware design the two companies agreed to in November, would be ideal. But Big Blue is unlikely to jump soon: The Windows 95 delay gives IBM a fresh shot at making inroads with its OS/2 operating system in the coming months. Laments one Apple insider: "We need at least one major company and one strong in business."
Meanwhile, the clone game begins. Kahng vows to be "very competitive with Intel machines." That could mean Mac compatibles retailing for $1,000--vs. $1,800 for the cheapest Power Mac now. Apple execs aren't losing sleep, though. They concede there could be a "little" market-share erosion, but they expect clone makers to expand the market and Apple's slice with it. Besides, they say, they've learned how to cut prices and stay profitable. With 27% gross margins, they're ready to go toe-to-toe with the likes of Compaq and Dell. Says Nagel: "We're in much better shape today than we've been in, well, forever." That's why 1995 may truly be Apple's year.