The Mac in the Gray Flannel Suit
Soon after Michele Goins became chief information officer at Juniper Networks (JNPR) in February, she decided to respond to the growing chorus of Mac lovers among the networking company's 6,100 employees. For years, many had used Apple's (AAPL) computers at home and clamored for them in the office as well. So she launched a test, letting 600 Juniper staffers use Macs instead of the standard-issue PCs that run Microsoft's (MSFT) Windows operating system. As long as the extra support costs aren't too high, she plans to open the floodgates. "If we opened it up today, I think 25% of our employees would choose Macs," she says.
Funny thing is, she has never received a single sales call from Apple. While thousands of other companies scratch and claw for the tiniest sliver of the corporate computing market, Apple treats this vast market with utter indifference. After a series of failed offensives by the company in the 1980s and 1990s, Chief Executive Steve Jobs decided to focus squarely on consumers and education customers when he returned to Apple in 1997. As a result, the company doesn't have ranks of corporate salespeople or armies of repairmen waiting to respond every time a hard drive fails. Nothing that could divert his minions from staying focused on Apple's core calling: creating the next cool thing for the world's consumers.
And why not? In the March quarter, Mac sales blew away all forecasts, soaring 51% over the previous year, or more than three times the rate for the personal-computer industry. Throw in the iPod and iPhone, and Apple's total sales have surged from $5.2 billion in fiscal 2002 to $24 billion last year. Its share price has risen 2,300% over the past five years, giving the company a market capitalization, at $154 billion, that tops those of tech giants Hewlett-Packard (HPQ), Dell (DELL), and Intel (INTC).
Millions of consumers are seeing the Mac in a new light. Once an object of devotion for students and artists, the Mac is becoming the first choice of many. Surging demand for the machines led Apple to predict revenues will rise 33% in the second quarter, to $7.2 billion, even in the face of an economic slowdown.
What's less obvious is that the enthusiasm is starting to spill over into the corporate market. It's a people's revolution, of sorts, with workers increasingly pressing their employers to let them use Macs in the office. In a survey of 250 diverse companies that has yet to be released, the market research firm Yankee Group found that 87% now have at least some Apple computers in their offices, up from 48% two years ago. "There's always been this archipelago of Macintosh use" among graphic artists and advertising managers, says Scott Teissler, chief information officer of Turner Broadcasting System (TWX). "My sense is that CIOs are more willing to see that expand without putting up as much resistance as in the past."
Mac fanboys have been singing Apple's praises for years, of course. But now the call is coming from mainstream users, people who may have started off with an iPod, then bought a Mac at home and no longer want a "Windows-by-day, Mac-by-night" existence. At Sunnyvale (Calif.)-based Juniper, CEO Scott Kriens is one of the people with a new MacBook laptop. "Everybody told me I should get one," he says. "It's not anything to do with negative perceptions about Microsoft. It's just that Macs are cool." IBM (IBM) and Cisco Systems (CSCO) are running similar tests on whether to let Macs into the office. Google (GOOG) has allowed employees pick their machine of choice for years.
Others are sure to follow suit. Mark Slaga, chief information officer of Dimension Data , a large computer services firm based in suburban Johannesburg, says he has received 25 e-mails recently from employees who want permission to use Macs at work. So far he has refused, because he doesn't want to hire people to provide Mac tech support, but "it'll happen someday," he concedes. "Steve Jobs doesn't need a sales force because he already has one: employees like the ones in my company."
Jobs declined to comment for this story. In the past he has said Apple is better off focusing on the consumer market. He believes it's difficult for any company, including his, to be effective at satisfying both corporate buyers and consumers.
E-MAIL ON IPHONES
Apple's current approach of letting workers lead the charge into the workplace isn't a bad one. The market for PCs sold to businesses was $150 billion last year, and Apple held a measly 2.19% of that, according to market research firm IDC. For every percentage point that the $24 billion company picks up, it gains $1.5 billion in sales on top of its existing growth. Not bad for a company that's not really trying. And the bottom line would benefit as well. If Apple were to gain one point of share in the corporate market this year, that could boost expected earnings for fiscal 2008 by 11.5%, to more than $5 billion.
The iPhone may be Jobs' entrée into corporate offices. It's the one product for which Apple has created an explicit plan for reaching corporations. And it plans to deliver a software upgrade in June that will let the iPhone work with popular corporate e-mail systems such as Microsoft Exchange and allow customers to create their own customized iPhone programs, say, for checking inventory or logging expenses. Apple says more than 160 major corporations are testing the software.
Gartner Group (IT) analyst Ken Dulaney says all the discussion of iPhones is causing tech buyers to ponder whether to bring in Macs as well. At the least, more Macs will be appearing in some companies' research and development labs. That's because the software required to create iPhone applications runs only on Macs. "The iPhone is creating enough interest that people are starting to talk about whether Macs ought to be permitted, both here at Gartner and with our clients," says Dulaney.
Apple is getting help from an unlikely rival: Microsoft. Vista, the latest version of the software giant's Windows operating system, looks like it could turn out to be one of the great missteps in tech history. Not only does it lack compelling new features, but analysts say Vista requires companies to buy more expensive PCs, incur hefty training costs, and to deal with maddening glitches. About 90% of office workers still use its previous operating system, XP. "Microsoft has let this happen," says David B. Yoffie, a Harvard Business School professor and Intel board member. "They've created a huge opening for Apple."
Corporate customers are in open revolt. Microsoft plans to stop PC makers from shipping machines with XP on June 30, but there has been an outcry from customers who don't want to switch to the troubled Vista. "We are being forced to upgrade," says the CIO at one Midwest manufacturer, who could not speak for attribution because of his company's press policies. "There is no business reason to upgrade." Dell has worked out an alternative whereby customers can still get XP, but only if they pay full fare for Vista and then "downgrade" to its less problematic predecessor.
Microsoft CEO Steve Ballmer concedes Vista is still a "work in progress," but he adds that many companies are happy with the new operating system. Mike Nash, corporate vice-president for Windows product marketing, says companies often take years to move to a new operating system and sales are right on track, with more than 140 million copies of Vista sold so far. As for complaints about the software, Nash says Microsoft has an opportunity in getting people to give it a try. "The thing that can best help perceptions is more and more people using Vista," says Nash.
Microsoft argues that it is highly doubtful Apple will make substantial progress with corporations. Nash points out there's tremendous expense in building a corporate sales and support staff, and Apple's secretive culture would probably hamper the communications necessary to develop strong relationships with corporate tech buyers. What's more, Apple isn't likely to modify product designs to satisfy the numerous, often conflicting, requests from corporate clients. "There's a high level of conservatism [among corporate tech buyers]," says Nash. "Their job is to not be paged."
Microsoft is already hard at work on its next operating system, Windows 7. While details are scant, experts think it might be late 2010 or 2011 before it's on the market. And that's assuming there won't be any major distractions if Microsoft wins its fight to buy Internet giant Yahoo! (YHOO) Certainly, Apple's ad team seems to smell blood. Most of the company's "I'm a Mac" ads are aimed at taking Vista's rep even lower, including one in which a yoga instructor gets stressed out about how Vista screwed up her billing system.
By the start of the next decade, the competition between Windows and Mac may be far less relevant. Gartner analyst Michael Silver points out that many companies are shifting from old-style software programs that run on a particular type of computer to software services doled out over the Web. And many departments may be able to do without Windows-specific applications sooner, since day-to-day programs such as word processing and sales management are moving to the Web first. "This is the new world—the Internet has replaced Windows as the platform," says Marc Benioff, chief executive of Salesforce.com (CRM), a Microsoft rival and a pioneer in software delivered over the Net. "Now we are free to choose the best technology for the job."
Currently, Apple is making progress with corporations almost in spite of itself. Werner Enterprises (WERN), a trucking company based in Omaha with $2 billion in sales, decided to start letting employees use a variety of computers a few years ago. When they began to choose Macs, the company reached out to Apple. "They all but told us to take a hike," says Anthony Decanti, vice-president for technology. But Decanti persisted, and Apple eventually sent an account rep.
Today, Decanti is happy about his relationship with Apple, and Werner has 150 employees using Macs out of 2,000 total computer users. Its policy is that as traditional PCs are retired, employees can choose Macs if they wish. Decanti expects the trucking concern will add 25 or 30 Macs this year.
For companies like Werner, moving to the Mac isn't nearly as difficult as it used to be. Since Apple adopted Intel's microprocessors as the brains of its computers in 2006, Macs have been able to run Windows just like any Intel-based PC. In addition, Macs can run what's known as "virtualization" software, which lets people use the Mac operating system and Windows at the same time and switch easily between them. Such improvements are a key reason the New Museum in Manhattan recently switched to all Macs. The organization used to have about half of its employees on Windows machines because they had to tap into databases that worked only with that operating system. But in December it made the switch. "The ability to run Windows made the Mac the perfect solution for us on a very practical operational level," says John Hatfield, the contemporary art museum's deputy director.
Apple will find it more difficult to gain ground in large companies, which tend to have more complicated information technology systems and fixed rules for tech practices. CIOs have long had objections to Macs, and those still apply. Complexity is one. Just as having Macs and PCs in your home creates headaches, supporting both in corporations means extra training for employees and extra outlays for Mac support staff. Then there are software limitations. Some industrial-grade programs won't run on Macs. Getting Microsoft's Exchange e-mail to run on the Apple machines is often a huge hassle, which makes them a nonstarter in some offices.
Apple's culture is another challenge. Like Jobs, the Cupertino (Calif.) company is secretive and solitary. Yet corporate customers need cooperation. For example, most CIOs insist on knowing how a particular product is going to evolve in years to come. Yet Apple won't share that information, except with a handful of need-to-know partners. Instead, Jobs tells corporate buyers about new products the same way he tells the general public—with dramatic unveilings, often at the annual Macworld convention.
Plus, many CEOs like to sign up big services companies, such as Electronic Data Systems (EDS), that can buy and deploy the full range of tech gear so they don't have to. Apple doesn't have close partnerships with these companies. Instead, almost all of its sales are made through its online store, retailers such as Best Buy, (BBY) or its own chain of more than 200 retail stores.
Then there's price. While the average cost of PCs has dropped from $1,046 in mid-2005 to $963, according to IDC, the average price of a Mac has risen to $1,526 because of new high-end products such as the razor-thin MacBook Air. Apple's more affordable desktop model, the iMac, comes with a built-in screen. That's a problem for budget-conscious buyers, since monitors usually last far longer than the computer itself.
Yet none of these concerns has prevented Apple from succeeding in the consumer market. In 2000, Jobs had a plan to gain a point of market share a year. For years, it didn't happen. But now, bolstered by the popularity of its stores and the attention generated by the iPod and iPhone, Apple has been gaining ground steadily in the computer market. It's on track to hit 7% share this year in the U.S., according to Minneapolis- based investment bank Piper Jaffray (PJC), up from 4% in 2005. It has done so with a mere six computer models, compared with the dozens available from major rivals. Its only stumble has been its most affordable model, the Mac mini, a relatively plain box sold without a monitor that lacks the sex appeal and power of its Apple siblings.
THE REAL CORPORATE STRATEGY?
Demographic trends may be on Apple's side. All those college kids wielding iPods have created a deep pool of potential Mac users. According to a survey of 1,200 undergrads by researcher Student Monitor this year, 43% of college students who intend to buy a laptop plan to buy a Mac, up from 8% in 2003. "Many of today's technology decision-makers will ultimately be replaced by Mac users," says Eric Weil, managing partner of Student Monitor.
Of course, how far Apple gets in the corporate market depends largely on Jobs. Industry and financial experts don't expect Apple to make any of the major strategic moves that would signal a substantial new focus on selling Macs to the corporate market. Jobs almost certainly won't license his software to others to create a second potential Mac hardware supplier, as most corporate buyers would like. And he's just as unlikely to introduce some bare-bones cheapo desktop model to satisfy cost-conscious CIOs. "Apple is happy about its price points as they stand today," says IDC analyst David Daoud.
Truth be told, a full-scale corporate assault probably wouldn't serve Apple's near-term financial interests. Its lucrative profits stem from its focus on consumers and students who are willing to pay for Apple panache. Corporate customers are far more frugal. While Apple's net margin in the last four quarters was 15.1%, those at Hewlett-Packard and Dell were 7.3% and 4.8%, respectively. To grab chunks of share in the corporate market, Jobs would likely need to spend heavily on sales and support organizations and his team would have to work much more closely with customers and software partners. None of that seems to hold much appeal for him. He has long argued that he wants to sell to people who spend their own cash and who therefore will appreciate quality and style. And his Gulfstream jet seems to be reserved for trips to store openings and Hawaiian vacations, rather than corporate sales calls.
Then again, Jobs' public proclamations are by no means an indication of his future direction. He said Apple wouldn't sell videos on iTunes or get into the cell-phone business— before he changed his mind on both counts. And while Apple can afford to ignore the corporate market now, that field may look far more appealing as the company searches for growth in the years ahead. Harvard's Yoffie sees some opportunity. He teaches a course on the company to top executives each year and always asks how many have a Mac. In the past, a half-dozen usually raised their hands. This year, it was 16 or so out of 160. "Suddenly, the Mac is acceptable among these folks, and it all happened in the last year," he says.
Editor's note: A previous version of this story incorrectly said that SAP's operations software does not run on the Mac platform. It does. In fact, Apple uses the software internally to run its own business.