Is Apple Mincemeat?

Maybe not, if it's willing to embrace dramatic change

Apple Computer Inc. is caught up in a desperate search for a new chief executive. But everywhere in the computer industry, executives agree that what Apple needs most is a radical new survival plan. Everywhere except at Apple, that is. "We don't expect any major changes in our strategy," says Chief Financial Officer Fred D. Anderson Jr., who took on day-to-day CEO duties after Gilbert F. Amelio was ousted on July 9. "We believe the Mac platform is still viable."

Maybe, but interested and disinterested observers, from Apple investor Prince Alwaleed bin Talal bin Abdulaziz Alsaud to Sun Microsystems Inc. CEO Scott McNealy, are concluding that a dramatic change is necessary to lure a top-flight turnaround expert and give Apple a future. "Let's forget ego. We can't just say `Apple, Apple, Apple,"' says Alwaleed, who bought a 5% stake earlier this spring for around $17 a share--only to watch it fall to a 10-year low of $13 before Amelio's resignation.

On July 13, Prince Alwaleed told BUSINESS WEEK, he fired off an angry one-page letter to Anderson. The message: "Let's consider any alliance that makes sense. I'm willing to listen to anything."

An alliance would be a start. But many experts are urging Apple to finally take the most radical step of all--stop fighting the Intel/Microsoft PC standard. That would mean continuing to make Macs for its loyal legions but also building a new business in "Wintel" PCs using Intel Corp. microprocessors and Microsoft Corp.'s Windows software. Apple would compete on its brand name and design expertise. Says McNealy, who came close to buying Apple 18 months ago: "At this point, they need somebody who will just walk in and say `We're going to be a Compaq' or we're going to be a [Sun-compatible] player. We're down to Tyson-Holyfield.... It's better to have your ear chewed on than to be sitting outside the ring."

It's not a pretty choice. But it could give Apple, which has lost $1.6 billion over the past two years, a shot at a future. For this plan to work, however, experts say Apple would also need to sell off its ailing operating-system software operation, which costs at least $250 million a year to support. "Apple has lost the OS war, and there's no point fighting it again and again," says David B. Yoffie, a professor at Harvard business school and a director of Intel.

He's not alone in that sentiment. In June, nearly all 160 industry bigwigs at a Harvard executive seminar studying Apple voted that it should be broken up and the software piece sold or spun off, according to Yoffie.

That's not necessarily bad news for Apple. It would end the conflict between Apple and makers of Mac clones, which have been luring away Apple's best customers. Selling off software would also help Apple focus on its last remaining strengths--its world-renowned brand and catchy hardware design. Yoffie figures Apple could reach a 5% share of the total PC market--it now has about 3%--and a Compaq-like valuation of $12.5 billion rather than Apple's $2 billion today.

Moving into the PC camp is just one alternative for the company. Some think Apple should retrench and sell strictly to its free-spending followers in publishing, multimedia, and graphic arts.

TIME TUNNEL. Former Apple CEO John Sculley sees a hybrid track. He thinks Apple should partner with a PC maker to attack the education market, where Apple is fast losing ground, while selling Macs to the digerati. "I propose radical surgery fast," he says. "I believe a comeback is still definitely possible."

For now, a key player is Apple director and DuPont Chairman Edgar S. Woolard Jr. He says consultants will assess the alternatives and the board may start considering some on July 21. He is also urging Apple to fill three empty board seats--hopefully with PC-industry execs. The search for a CEO is expected to continue through the summer.

Time is not on Apple's side. On July 16, the company announced a $56 million loss on a 23% slip in quarterly sales, to $1.7 billion. That was better than analysts expected. But ABN AMRO Chicago Corp. analyst David Wu looks for a 1997 loss of $350 million on revenues of just $7.1 billion, down from $9.83 billion a year ago.

If the stock, now around 15, dips below 10, Apple may not have a chance to try any of these strategies. An investor group including Microsoft director and venture capitalist David F. Marquardt would consider a run at Apple if the stock falls into single digits, according to an individual close to the group. Anderson says Apple plans to remain independent but has a fiduciary duty to evaluate any reasonable proposal. How about a reasonable strategy proposal?

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