Hell Hath No Fury Like A Mac Cloner Scorned?

Apple's shifting stance has an $800 million business in disarray

Officially, Steven P. Jobs is running the show at Apple Computer Inc. only until a new chief executive arrives. It's up to the new CEO to execute a comeback strategy. But in the meantime, Jobs has been making scores of decisions the new boss will have to live with. Some moves, such as beefing up the lackluster board and cementing an alliance with Microsoft Corp., are clearly pluses.

Others, however, could make a comeback more difficult. The most dangerous may be Apple's changing policy toward clonemakers. Jobs, who personally supervised development of the Macintosh, is now reversing policies that helped launch the $800 million clone business. The problem, say Apple execs, is that Mac compatibles didn't boost the market--they only took share from Apple. "The original objective was to expand the Mac customer base," explains Chief Financial Officer Fred D. Anderson Jr. "We don't believe the licensing program has been successful in doing that."

But reversing the clone strategy could create fresh problems. Some customers might abandon the Mac altogether. Many Mac fans now profess loyalty to cloners, which typically offer better performance at lower prices than Apple does. And Apple could even find itself in a legal battle with cloners and its chip suppliers, Motorola Inc. and IBM, who have all built businesses around Apple's licensing plan.

The top Mac clonemaker, Power Computing Corp., is already hamstrung by the changing policies--and trying to figure out how to navigate in the confusion. The company spent heavily to build up production--and grabbed 9.5% of the Mac market. Low on cash, Power planned an initial public offering for this summer. But now, analysts say the IPO can't proceed because of uncertainty over arrangements with Apple. Power has halted construction of a $25 million headquarters in Georgetown, Tex., and its president, former Dell Computer Corp. marketing honcho Joel Kocher, quit abruptly on Aug. 19 after directors rejected his plan to fight Apple in court and in the market with a price war. At an Aug. 15 board meeting, Kocher urged a "war" against Apple, using high-tech intellectual-property-rights law firm McCutchen Doyle Brown & Enersen to sue for breach of contract. Now, Chairman and CEO Stephen S. Kahng is heading talks with Apple.

Apple says it will honor existing contracts, and Anderson says Apple is open to new deals that expand the Mac market. But cloners are suspicious. In an Aug. 11 filing with the Securities & Exchange Commission, Apple wrote: "The benefits to the company from licensing the Mac OS to third parties may be more than offset by the disadvantages of competing with them." Says an Apple insider: "Steve's not about to let clones eat any more of [Apple's] lunch."

AWKWARD SPOT. On Aug. 15, Apple sent a shiver through the clone market when it notified companies that while it reviews licensing policies, it is neither "scheduling nor accepting" machines for certification as Mac-compatible machines based on a hardware specification known as CHRP. The spec was created with Motorola and IBM to let cloners build machines using parts from various suppliers.

That puts Motorola in a particularly awkward spot. The company is set to launch a new line of Mac-compatible business computers using the CHRP format. A spokesman says Motorola plans to ship the machines beginning in September with or without Apple's imprimatur--a key selling point for Macintosh buyers.

Motorola won't say whether it's planning legal action, but it's clear the cloners won't go quietly should Jobs disinvite them from the Mac fold. Umax Technologies Inc., a $3 billion Taiwanese computer-products maker, has spent $200 million on the Mac clone market, and Chairman Frank Huang suggests that Apple may have to buy out cloners who were led to believe there would be a market for CHRP machines.

It's easy to see why Apple thinks quashing clones will help. CFO Anderson figures that sales of all Macs, from Apple and cloners, should total just 3.5 million this year, from 4.5 million in 1995. Helping rivals to a slice of a shrinking pie won't help. "Apple has taken it on the chin and lost a lot of sales to cloners," says Jean J. Belanger, chief executive of Metrowerks Inc., an Apple software vendor.

WRONG MESSAGE? In some ways, though, cloning helped the Mac market. Dataquest Inc. analyst James B. Staten says competition from Power Computer and Motorola has led to lower prices for buyers. And rivalry is giving buyers more choices. Apple and Power, for instance, use different versions of PowerPC chips now. "It has brought technological choice in the marketplace," says Staten.


Cutting off cloners could throw Apple's image with customers right back into reverse. "The message to the marketplace would be: `We can't compete; our only chance is to sell to people who are so fanatical that they're willing to buy overpriced boxes,"' says Eric Lewis, an analyst at International Data Corp. The demise of clones would hasten defections, adds Bob Waller, CEO of Education Access Inc., a distributor that sells PCs to schools. "If they refuse to give customers a choice, I think they'll lose customers quicker," he says. His company had peddled Apples exclusively until June, when it switched to Power Computing and added Intel PCs.

In Jobs's view, Waller's switch to Power Computing is an example of what's wrong with cloners: The upstarts aren't creating new Mac customers. They are boring into Mac strongholds that Jobs feels Apple must defend to survive. His position, according to a clonemaker exec who has met with Jobs recently: Either stay out of Apple's core markets or fork over licensing fees of more than $200 per machine, up from $50 or less today. As long as he's in charge, cloners must play by Jobs's rules.

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