Will The Apple Clones Bear Fruit?

Power Computing Corp.'s employees work at used, gunmetal-gray desks. Some have brought in their own computers. Few get business cards, which are regarded as a luxury. And when it's time for a break from the 18-hour-a-day, startup grind, they switch on the string of Hello Kitty lights looped around their cubicles and, on Thursdays, dig into free nachos and beer--although never the imported stuff. Welcome to the birthplace of the Macintosh clone industry.

This 18-month-old startup is one of a handful of Mac cloners that hope to tap demand for Macs sans the Apple logo. Others include Radius Inc., which will offer a $12,500 computer for publishing and video professionals; DayStar Digital Inc., which plans Mac-compatible publishing workstations; and consumer-electronics giant Pioneer, which will sell to the Japanese home market.

But Power Computing is not only the first--it plans to announce its clones on Apr. 17--it's the only one aiming squarely at the broad market that Apple Computer Inc. hits. The company plans to start shipping May 1 and produce 10,000 to 15,000 units a month by July, when it will add a sub-$1,000 model for the home market. Even if it hits its goal--100,000 machines in the next 12 months--Power Computing won't put a dent in Apple, which will ship 4.5 million Macs this year. But it could prove there is an appetite for Mac software without the Apple brand. Says analyst William M. Bluestein of market researcher Forrester Research Inc.: "All eyes will be on Power Computing."

They'll be on Apple, too. Apple executives say a successful clone business is key to boosting the company's market share substantially from the current 10%--and keep it among the industry's top players. Apple lost ground in 1994, and analysts say it may be losing share now because it can't build enough high-end Power Macs, and Wall Street has been paring estimates for the March quarter. PaineWebber Inc., for example, lowered its per-share earnings forecast from $1.06 to 93 cents.

AGGRESSIVE PRICING. All this puts more pressure on Apple to manage the transition to the clone era adroitly. The plan, say company insiders, is for Apple to function in a world of Mac clones the way Compaq Computer Corp. does in the PC clone market: Apple will price aggressively but slightly higher than the lowest-cost brands and will use superior research and development to bring out new features first. On Apr. 4, Apple announced a reorganization to prepare for the new push. It places all hardware and software development under David C. Nagel, formerly head of Apple's system-software unit. His job: create leading-edge products in areas such as multimedia, 3-D graphics, communications, and the Internet.

That should make Apple stand out from today's cloners and make it safe to take on powerful licensees such as IBM, Motorola, and Goldstar--all in talks with Apple. In addition, the R&D push should help fend off Microsoft Corp., which plans to ship the Mac-threatening Windows 95 in August. Says Tim Bajarin, president of Creative Strategies Research International: "This will help them stay ahead two or three steps."

Near-term, there is little to be lost and something to be gained. Altogether, Mac cloners will likely ship 280,000 units this year, predicts Mac market analyst Pieter Hartsook. Even if sales come at the expense of Apple, the company will ring up licensing fees and added sales of laser printers, monitors, and software from its Claris unit.

What are the prospects for the Power Computing clones? The machines, which resemble ordinary PC clones, consist of three models, the Power 80, 100, and 110. The company isn't disclosing prices yet but is expected to undercut Apple by 10% to 30% (table). Says CEO Stephen S. Kahng: "Basically, our goal is to make Mac affordable to a lot of people."

If the strategy seems familiar, it is. Power Computing is the brainchild of Olivetti Vice-Chairman Elsorino Piol, who wanted to build a high-volume business around the PowerPC chip used by Apple, IBM, and Motorola. He put heads together with friend and former colleague Enzo Torresi, who co-founded Businessland and Netframe Systems Inc., to find the person to run the new venture.

SIMPLE BOXES. Their choice: Kahng, an engineer who in just six months--and for just $200,000--came up with a design that made Leading Edge a top-selling IBM clone in the mid-1980s. Since then, he has designed computers for Samsung and Goldstar and consulted for Digital Equipment and Compaq. Olivetti ponied up $5 million. "We knew he was the man for us," says Piol. Torresi, who signed on as chairman, Kahng, Carlton G. Amdahl, co-founder of Netframe, and Piol put in about $500,000. And Kahng is now raising $5 million to $10 million from venture capitalists.

Kahng, 45, is pushing a two-pronged strategy: Sell Mac clones by mail and build them for other computer makers to sell. Kahng won't say which PC makers will buy, but sources close to the company say candidates are Goldstar, Olivetti, and Acorn Computers Ltd.

For now, the chief focus is cost. R&D is in Silicon Valley, where Kahng hired seven former Apple engineers, including Carl Hewitt, a key member of Apple's Power Mac team. But the factory and the mail-order facility--which is already getting 300 to 400 calls a day--are in Austin, Tex., where overhead is lower. To shave costs, Kahng used many off-the-shelf components and redesigned the motherboard in the same shape used by IBM PC clones. And his simple boxes are far cheaper than Apple's fancy cases. The result: He can be profitable at 20% gross margins--like the lowest-cost PC cloner. "We'll be competing with PC clones--price for price," Kahng says.

Will it be enough? There's little doubt that sales will surge initially. "The real test is next year, when Apple will evaluate the clone market and respond," says Bajarin. "Apple could match them in pricing." If anybody can create--and survive--the Mac clone market, Kahng may be the man. "Steve knows his stuff. He's a great engineer, and he's well-connected around the world," says Russ Irwin, a former Apple executive and now NEC Corp.'s vice-president for multimedia business development. "They have the real potential for a Cinderella story here." If not, after the ball, it's back to the drawing boards on those second-hand desks.

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