Back To The Future At Apple

Can Steve Jobs do it again with a stylish and cheap new Mac?

It was staged as a reenactment of the company's finest hour long, long ago. Steven P. Jobs, Apple Computer Inc.'s co-founder, was back in the auditorium where he stood 14 years earlier when he took the wraps off the revolutionary Macintosh computer. And, just as he did then, he pumped up the crowd of some 2,000 goose-bumped employees and customers, forgoing his trademark jeans and turtleneck to make one of his rare suited appearances. But then, this was a special occasion. With classic Jobs panache, he yanked the black cover off an ultrasecret machine.

The iMac had arrived--and with it, all the hopes and dreams of a beleaguered Apple struggling to recover its former magic. The iMac isn't a technological breakthrough. It doesn't even boast the fastest modem, the biggest monitor, or the newest software. What it struts is head-snapping style with a cheapo $1,299 price tag. Its translucent teal casing is a bold departure from the acres of putty-colored PCs on desktops everywhere. And its curvy lines and light-up mouse make it a fanciful, Space Age machine that will either be a huge hit--or a devastating dud. Gushes Jobs: "If you had just arrived back from Mars from a vacation and you saw this thing, you'd say, `Whoa, let me guess, could it be...?' And you'd hope it would be Apple Computer. Apple is back to its roots, starting to innovate again."

But is that enough? For all the glitter and Jobs's euphoria, there are still nagging doubts about the snazzy new machine and the company's comeback. For one, the iMac won't ship until August, and it's missing some key features that have become staples for PC buyers. What's more, even if the machine hits a high note with buyers, Apple continues to face a gap as wide as the distance from Silicon Valley to Redmond, Wash., in the software available for the Mac vs. what's on store shelves for rival Windows-based PCs.

Still, Jobs has bought time. The Apple faithful are hopeful again. For the first time in nearly three years, the question isn't if, but how far, the company can come back from the brink of disaster--or worse, obscurity. Since returning to Apple as interim chief executive last July, Jobs has moved quickly to stop the bleeding by slashing payroll, dumping businesses, ditching products, and refocusing the company around its core Macintosh desktop and PowerBook notebook computers.

BETTER OUTLOOK. The results have been astonishing: Apple's market share, which seemed to be gasping its final breaths before slipping into the ignominious category called "other," is up for the first time in years--to 4% in the first quarter from 3.4% at the close of 1997, according to market researcher International Data Corp. After six quarterly losses, the company has posted two consecutive quarters in the black, earning more than $100 million. And Apple's stock is at 30, a 52-week high. "Steve clearly has done an incredible job," says former Apple Chief Financial Officer Joseph Graziano. "But the $64,000 question is: Will Apple ever resume growth?"

As yet, there is no surefire answer. While Apple is expected to sell 6% more computers this year than in 1997, that's still not enough to keep pace with overall PC sales, which are growing at a 13% to 15% clip. Next year could deliver an altogether better scenario, though. With the help of the iMac, which could be a Christmas hit, Apple's shipments could surge 13% in 1999, figures analyst Louis J. Mazzucchelli of Gerard Klauer Mattison & Co. That could set the stage for Apple to nudge its U.S. market share back to 6% by the millennium.

There's just one problem: That's a far cry from the 14% peak the Mac boasted five years ago. And while Apple unveiled a new road map on May 11 for the machine's vital operating-system software, which could make it as robust as Microsoft Corp.'s rival Windows NT, that may not be enough to keep software makers in the Mac camp or bring others back into the fold. Writing Mac programs "takes a lot of time, and the user base just isn't there," says Barrett Alexander, director of business development for gamemaker id Software Inc. After selling just 50,000 copies of id's Quake for the Mac--vs. 1 million Windows copies--the company didn't bother with a Mac version of Quake II.

Worse, even if Apple does inch its way back to, say, a 6% share of the U.S. PC market, it may still have a tough time generating the funds to bankroll the kind of innovation that will make it a standout going forward. Already, Jobs has taken a heavy hand to R&D spending, pegged at $300 million in 1998, half of Apple's 1996 level. Yet developing major overhauls of operating software can cost upwards of $200 million. Rival Microsoft Corp., for example, is on track to spend nearly $2.4 billion on R&D this fiscal year.

"LOW-HANGING FRUIT." So, in the face of such odds, how does Jobs stoke a big comeback? The plan is surprisingly simple--almost retro: Jobs is betting on the PC. Forget whizzy products, such as information appliances, multimedia players, or handheld computers. "We're not going off into la-la land," he says. "The personal computer has been the most successful consumer product of the last 10 years. We'd all like to have a better online TV Guide in our settop box, but that does not a multibillion-dollar industry make."

For Apple, it's back to the future. That's why the introduction of the iMac was so heavy on nostalgia. It's the machine for the rest of us--updated for the Internet Age. That's central to Jobs's game plan, which hinges on harvesting pent-up demand from fence-sitting Mac loyalists who have been turned off by lackluster products and concerns about the company's viability. "The people who are already using the Mac are the low-hanging fruit," says Jobs. "But we still have to earn their business."

With the loyalists attended to, Jobs then plans to turn his attention to luring first-time PC buyers. His carrot: keeping Mac prices on a par with computers made by Dell Computer Corp. and the like. By offering a cool look, affordable prices, and the Mac's famed ease of use, Jobs is betting he can "capture more than our share" of newbies. Experts, however, are doubtful. "I just don't see them attracting new users," says Eugene G. Glazer, a technology analyst for Fortis Advisers.

Then comes Phase III of the Jobs attack: an audacious attempt to persuade rival Windows PC users to make the Mac switch. Jobs, for instance, is hoping that once Apple's machines regain momentum in the education market--where it held a 27% share in 1997, down from 47% in 1994--students will talk their parents into buying Macs for the home. But that's going to be an uphill battle. Take Ido Rosen, a 13-year-old in Tenafly, N.J., whose parents bought a Dell 266, despite his objections. "I would've wanted us to buy another Mac, but my dad said it would be better because Macs are dying," says Rosen. Concedes Jobs: "That's the hardest one. It's going to take time."

Even a lifetime spent pursuing the 90% dominance of Windows machines may not be long enough. Why? Software--or, in Apple's case, a lack thereof. True, there are some 12,000 programs available for the Mac, but as Apple's market share has declined, retailers have shrunk the shelf space given to Mac programs. Worse, the number of developers willing to crank out new Mac programs is dwindling. While 70% of software developers wrote for the Mac in early 1996, slightly over 20% do today, estimates Michael Murphy, editor of the Overpriced Stock Letter. "If [Jobs] thinks he's going to take on Dell and Compaq, good luck."

To be sure, Apple faces major hurdles--even when it comes to the iMac. By the time it ships, the $1,299 sticker price could look hefty in the face of $600 PCs ($850 including monitor) expected out by competitors for the holidays. "The iMac would have been a spectacular product in January," says Dataquest Inc. analyst Scott Miller. "It would be competitive now. But by August, it's going to look underpowered for the price."

The iMac's innards also are coming under fire. The "i" in iMac stands for Internet, but the machine will hit the market equipped with a 33.6 kilobits-per-second modem, slower than the 56 kbps modems available on other PCs. "Why position the iMac as the simplest, easiest way to surf the Net and yet put in an antiquated, slow modem?" asks IDC analyst Kevin Hause. "That's inexcusable." Apple executives argue that the iMac is better designed than PCs to accommodate future high-speed Internet connections such as cable modems and digital subscriber line (DSL) rigs.

FLOPPY FLAP. Then there's the lack of an internal floppy drive for backing up files. There has been much online teeth-gnashing about this among Mac fans. One Web surfer admitted he rarely uses floppies, "but when you need it, it's there, right? Omission of a basic hardware component like a floppy drive will kill this machine," he wrote in an E-mail. Apple also could have a problem in the education market. Few schools have sophisticated networks, and most students keep their files on floppies. "I'm nervous they've made a mistake," says Mac user Dan Hamilton, communications coordinator for Cape Cod Commission, a regulatory and planning agency.

Jobs disagrees. "People aren't thinking clearly," he shoots back. "Nobody's going to back up a 4-gigabyte drive onto 1-megabyte floppies. They'll use a Zip drive--but they're too expensive to build into a consumer product. Besides, hardly anybody backs up anyway, so why build cost into every system?"

It's vintage Jobs. While the 43-year-old Apple co-founder is considered one of Silicon Valley's visionaries, he sometimes gets ahead of consumers. Jobs, for example, fought the idea of an expandable Mac after it was launched in 1984. And at his NeXT Inc. startup, he built a sleek black workstation that won design awards but tripped up because it didn't contain a hard drive at first. "Consumers are not going to fall in love with a computer because of what it looks like," says Oppenheimer & Co. analyst James Poyner. "Am I buying a piece of art or a computer?"

Jobs would say both. Indeed, by combining aesthetics with ease of use in both the iMac and the new PowerBook G3, Jobs thinks he has a winning combo. "We have an incredibly great shot at coming back in this market," he says. He figures that Apple can boost revenue more than 20% for every point of market share it picks up.

So far, Apple is heading in the right direction. Analysts expect it to be profitable over the next three quarters and to show year-over-year unit growth in the Christmas quarter. Already, the Power Mac G3, the model for business users, is Apple's hottest new product ever: Some 500,000 G3s shipped in the first six months. Apple could get another boost from the new PowerBook laptops, code-named Wall Street, which debuted on May 6 alongside the iMac. Jobs says $1.9 million worth of new PowerBooks were sold in the first 24 hours through its new online store.

AD ATTACK. To feed demand, Jobs is turning to his strength--marketing. With a $100 million campaign that includes heavy TV and print advertising, Apple is planning to attack the consumer market with in-your-face ads. The next one, conceived by Chiat/Day Inc., which engineered Apple's edgy "Think Different" campaign, shows a steamroller crunching rival Pentium notebooks before cutting to a picture of the new PowerBook G3s. Says Jobs: "We can be more effective at getting to consumers. Have you seen great marketing come out of Compaq and Dell? I haven't."

Maybe not. But what Compaq and Dell can claim are far more software programs that will run on their machines. Jobs has a plan to ease the yawning gap there, too. He says that when he arrived back at Apple, he was told there were 10,000 Mac developers. But when he asked for a list of the top 100, "everyone looked at me like I was from Venus."

Now, Apple is focusing on the top 100 developers to ensure that key titles keep coming out. Apple will direct half its developer support to this core group and is co-marketing with them for the first time in years. Apple also is running software "kitchens" where developers can come in for a week of product testing. "Steve and other execs have spent more time talking to Macromedia in the last 10 months than the whole exec staff did in the past 10 years," says Norman Meyrowitz, president of products at Macromedia Inc., a San Francisco-based software maker.

Even Apple's flip-flopping software strategy may finally have landed on the right side of developers. On May 11, Jobs did an about-face and decided to drop some elements of the Rhapsody operating system, which Apple acquired from Jobs for $425 million last year. Instead, Apple will take the best of Rhapsody and blend it with the Mac operating system to create the MacOS X due in late 1999. This will make it easier for software makers to create Mac programs. "Apple has realized that developers weren't willing to rewrite their applications," says Michael Sexton, chief programmer of Gloriasoft, a San Francisco-based software developer.

Apple can't afford any more software snafus, such as the recent one with Intuit Inc. The company almost lost the maker of popular financial software Quicken. In April, Intuit decided to leak word that there would be no Quicken for Mac this year. Jobs quickly called William V. Campbell, Intuit's CEO, a member of the Apple board and Jobs's across-the-street neighbor in Palo Alto, Calif. Jobs told him that he would give him a glimpse of Apple's upcoming products. Intuit got charged up after executives got a look at the iMac. Now, the company is back on board and planning to deliver a Mac upgrade next year.

Such tactics show that Jobs is clearly willing to break the old Apple mold. "It's in the genes of this company to be different," says Jonathan Ive, Apple's chief of industrial design who cooked up the iMac's look. But Jobs's biggest break with the past might be his modernizing the company's rainbow logo. Apple is keeping the same shape--an apple with a bite taken out. But the colorful stripes are on the way out. "It's a kind of '70s look," says Jobs. Instead, Apple is going to use the shape with a variety of solid colors. "The shape is our `swoosh."' he says. Now that's a shape Jobs would like to see in Apple's sales charts.

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