JULY 31, 2000
COVER STORY

By: PETER BURROWS with Jay Greene in Seattle


Apple

Yes, Steve, you fixed it. Congrats! Now what's Act Two?


It's 10 days before the July 19 Macworld trade show in New York, where Apple Computer Inc. (APPL) Chief Executive Steven P. Jobs will once again try to wow the masses with his P.T. Barnum-style product introductions. I'm the reporter he has anointed to get an exclusive sneak peek at this year's lineup of new computers. Clad in shorts and a designer T-shirt, he greets me like an old pal, warmly shaking my hand and ushering me into Apple's boardroom. Scattered around are a dozen or so objects, each hidden coyly beneath a black shroud.

High-tech's premier showman doesn't disappoint. First comes the small stuff: a see-through plastic keyboard and a sleek mouse. Then, off fly the covers from new versions of Apple's popular iMac computer--now in four rich new colors, including ruby and indigo. Then comes the climax: an 8-inch, cube-shaped Mac that packs Apple's most powerful technology into a clear plastic case about the size of a toaster. Laid out on a table with cute, baseball-shaped speakers and a flat-panel display, the cube's design is a showstopper. ''Isn't that beautiful?'' he gushes like a dad over his newborn. ''It's the most beautiful thing we've ever done.'' I overcome my journalist's restraint and blurt, ''Wow, it's great.'' But that doesn't satisfy Jobs. A day later, he wants to meet again. He's not convinced that I understand just how insanely great these products really are.

I'm in the Steve Jobs zone again, but this time it doesn't feel like his fabled reality-distortion field. The $1,799 Mac Cube has all the earmarks of a machine that might give Apple's strong growth another shove uphill. And every shove counts. Since returning three years ago to the company he founded, Jobs, 44, has worked the most unlikely comeback since the 1969 Amazin' Mets. Left for dead in 1997 with mounting losses and shriveling market share, Apple is back to making the most stylish products in computerdom. That has propelled its revenues up 17%, to $1.8 billion, in the quarter reported on July 18. That fell below analysts' expectations, driving the stock down 7% on July 19, to $53. The stock is still up eight-fold since Jobs returned. And thanks to the new products, analysts expect 25%-plus revenue growth in the year that ends Sept. 30, 2001.

For years, Apple seemed to define gravity. Now it's defying it. Credit Jobs's Midas touch with design and marketing. Both Dell and Compaq recently scrapped colorful iMac knockoffs just months after they were introduced, proving that only Apple knows how to make fashion count when it comes to a computer. And, thanks to the coolness factor, Apple gets away with charging up to 25% more than its competitors for a machine with similar capabilities. That helped give it a juicy gross profit margin of 29.8% in the most recent quarter, tops in the PC segment.

But then, Apple has always been able to market circles around its rivals. Only this time, there's far more to Apple than curvy products and groovy ad campaigns. Get a load of this: The company known for its incorrigible, free-spirited, free-spending ways has become a master of operating efficiencies. Jobs has slashed expenses from $8.1 billion in 1997 to $5.7 billion in 1999 by outsourcing manufacturing, trimming inventories, shifting 25% of sales to an online store, and slicing the number of distributors from the double digits to two. That, combined with the new products, has won back allies. On July 18, three years after dropping the Apple line, retailer Circuit City Stores Inc. said it will once again carry Mac gear. Says CEO W. Alan McCollough: ''Much to Steve's credit, Apple has found its way again--and then some.''

The question now: How far can Apple go? Jobs has restored Apple to health by retreating to its comfort zone: selling Macs to consumers, schools, and creative professionals who relish its style and ease of use. Now the Apple saga enters a chapter of greater opportunity and monumental challenges. To sustain its momentum, the company must go through the onerous task of upgrading its 16-year-old Mac software to the new, more reliable MacOS X program without rankling loyal fans. And to be an industry leader once again, Apple must extend its innovation lead on the desktop while moving beyond the Mac to make the appliance-like devices and handheld gadgets people will want in the Internet Age.

Indeed, so far Apple has taken only small steps toward regaining ground lost during the mid-1990s. It has eked out a 2-percentage-point share increase in the U.S. home market, to 7%. Yet its overall worldwide share is just 3.8%, down from its peak of almost 10% in 1993, according to market researcher Dataquest Inc. And to make what gains he has, Jobs has had to prop up short-term fortunes by slashing research and development from $604 million in 1996 to $314 million last year. That's just 5% of sales, a tad more than rival Compaq Computer Corp., which has the luxury of relying on Microsoft Corp. (MSFT) for its costly operating system.

FASHION SLAVE? All told, it's hard to see how Apple can hold its innovation lead. ''The big thing that Apple is providing now is leadership in colors. It won't take us long to catch up with that,'' quipped Microsoft Chairman William H. Gates III last year. Even Jef Raskin, the ex-Apple manager who conceived the original Mac, isn't terribly optimistic about Apple returning to its glory. ''I think they can remain what they are: a well-loved, influential bit player, the late Walter Matthau of the computer industry. But not the top star.''

Jobs insists it isn't so. While he doesn't expect Apple to be the overall PC market-share champ any time soon, Jobs says the company can deliver years of sizzling growth and hefty profits. His goal: to make top-quality products for consumers, schools, and the artsy set--Apple's core buyers. Setting aside the corporate market, he aims to gain 1 to 2 percentage points of share a year; each share point is equal to $1.3 billion in additional revenue. Jobs says the company's product pipeline is bulging with goodies that will make this possible so there's no need for R&D costs to skyrocket now. ''We may start looking at this next year, but we're not there yet,'' says Jobs. ''There are so many exciting things in our headlights that will take us through the next two to three years. Only after that will we start to send people out into the darkness.''

Now that Jobs has replaced Apple's dysfunctional culture with a speedy organization, he says the company is ready to rise to the next level. His plan: to take the personal computer where it has never gone before--and faster than rivals. Unlike other computer makers, Apple develops much of the the underlying technology, both hardware and software. Jobs wants to exploit this advantage to rush innovations to market quicker than rivals who must rely on software from Microsoft and chips from Intel Corp. (INTC). While he won't give any details, Jobs says Apple is working on a handful of Internet appliances that could start appearing next year. And he intends to build new computers that are far easier to use and that help people make the most of what the Net has to offer--whether it's making home movies or making home pages.

MAD FOR MOVIES. Jobs' announcements on July 19 provide a peek into where Apple is headed. Along with the Cube, it upgraded its HomePage Web-site creation program, which Mac owners can use to easily set up shop online and share digital photos, resumes, or home movies with friends and family. Apple also launched an improved version of its iMovie software, which lets Spielberg wannabes add slick tricks like slo-mo and ''fade to black and white'' to their home flicks. ''We think desktop movies will be bigger than desktop publishing,'' says Jobs of the market that put Apple on the map in the 1980s. ''How many people want to make home movies compared to how many want to do newsletters?''

Apple is counting on such whizzy software to help drive sales of its Macs. The Cube, for example, is aimed at high-end consumers and creative professionals who want its power and its style but don't need to expand their Mac with lots of add-in cards. The entry-level iMac, formerly $999, will now start at $799--well within the booming sub-$1,000 market. At the high end, Apple pumped up its G4 line with two PowerPC processors and superfast networking. And the mouse has all-new insides. Based on optical technology, it can work on any surface and has no trackball to get gummed up over time.

All told, Apple execs figure this lineup will goose market share. The company already has jumped from a 3.8% share in 1997 to 6% in the combined markets of consumer, education, and artistic professionals. Now Apple execs figure they can hit 10% in five years--growing from $6.1 billion last year to $20 billion. ''I see no reason why it can't get back towards 10% market share,'' says Donaldson, Lufkin & Jenrette Inc. analyst Kevin McDonald.

Other analysts aren't so sold. While Apple insiders believe first-year sales of the Cube could approach 800,000, analysts think that's overly optimistic. Many had hoped for the debut of a wireless device based on the popular Palm handheld that would attract new customers instead of another desktop computer that could replace older Macs. And some critics say Apple needs to crack the lucrative $80 billion corporate market, which accounts for nearly 40% of all PCs sold. That's something Jobs says he won't try because corporate buyers are more interested in low-cost PCs than in nifty features--Apple's forte. By selling to Mac loyalists, ''it'll be a big year for them in market share,'' says Salomon Smith Barney analyst Richard E. Gardner. He looks for Apple unit sales to grow 34%, vs. 15% for the PC industry. ''But from here on out, gaining share gets tougher.''

Still, Apple can now go keyboard-to-keyboard with PC rivals when it comes to nuts-and-bolts management. It's a startling notion when you think back on Jobs's past. In the 1970s and '80s, he was Apple's twentysomething chairman--infamous for temper tantrums that earned him a reputation as the enfant terrible of the computer industry. He squirreled the Macintosh team away in a skunkworks that flew a pirate's flag while lavishing its staffers with massages and beer busts. After being booted from Apple, he spent an eye-popping $250 million of investors' money on his second startup, NeXT Computer Inc., but only sold about 50,000 computers. And Jobs sunk $60 million of his own fortune into Pixar Animation Studios before it hit the jackpot with the computer-animated films Toy Story and A Bug's Life.

Yet today, Jobs is a steady day-to-day manager who toes the bottom line. And what a cost-cutter. In his first few months back at the helm, Jobs slashed Apple's mind-boggling lineup of 15 product families back to just a handful that share common components. Even after adding the iMac, new Powerbook laptops, and the iBook sub-notebook, the company tries to use the same technology in all three. And Apple has just a few hundred people working on its MacOS X software. That compares with the thousands of Microsofties that developed Windows 98. The difference: Apple focuses on key features--say, video playback--rather than throwing in all the bells and whistles. ''We have a true focus on shipping,'' says software Senior Vice-President Avie Tevanian. ''Everyone here works on a deadline that's not too far off, usually within a year.''

DAUNTING TASK. The most striking change has been in operations. When Jobs took over, Apple ended each quarter with some 70 days' worth of finished products sloshing around its factories and warehouses, a $500 million-plus drag on profits that was the worst in the industry. Jobs quickly streamlined. He outsourced manufacturing of half of Apple's products to contractors who could do it far more efficiently, say analysts. That got inventory down to about a month by early 1998. Jobs still wasn't satisfied. He hired former Compaq (CPQ) procurement executive Timothy D. Cook to meet a higher goal: to get more efficient than Dell (DELL), the industry's best.

It was a daunting challenge. Cook recalls drawing a flowchart of Apple's operations, with all the linkages from suppliers to manufacturing to distributors, that ''looked like a printed circuit board.'' And not a very fast one. Because many of the transactions between suppliers weren't processed in real time, it could take days for a parts order to be delivered to a factory. And Cook knew he would be facing an inventory management nightmare when Jobs unveiled five different colors of iMacs.

Cook wasted no time. In his first month on the job, he outsourced production of the printed circuit cards inside Macs, easing the complexity of the manufacturing job. He closed more than 10 warehouses for finished products, making do with nine regional sites. With fewer places for stuff to sit, the less stuff there would be, he reasoned. ''If you have closets, you'll fill them up,'' says Cook.

Simplicity was the key. Cook trimmed Apple's list of key suppliers from more than 100 to just 24. That further eased the job of keeping track of all the parts used in Apple's products. And since it meant more business for each supplier, Apple wielded more influence with each--and better prices. Finally, his team scrapped an off-the-shelf software program for managing manufacturing and inventories that had been limping along. Instead, Apple devised its own build-to-order system for handling online purchases.

It has worked beautifully. Pundits snickered when Jobs predicted Dell-like online efficiency at a 1997 event. ''We're coming after you, buddy,'' Jobs said, referring to founder Michael Dell. Today, Apple's online store is shipping 75% of orders on the day they're placed, up from 5% for the Apple of old. ''That's as good or better than Dell or Gateway,'' says Salomon Smith Barney analyst Gardner.

But Cook's biggest claim to fame is getting the inventory of parts down to less than a day--obliterating the record in an industry where weeks or even months is the norm. One reason: Apple has persuaded key suppliers to set up shop close to Apple facilities, for just-in-time delivery. Another benefit of the new system: The entire production process has dropped from almost four months to just two, so Apple can more quickly move to the latest, fastest parts.

SUPPLIER HARDBALL. It's not all logistical rocket science that has made this possible. Jobs's hardball business tactics have played a role, too. In 1998, for example, Jobs decided that Airborne Logistics Services, a division of Airborne Express that maintained a parts warehouse for Apple in Grove City, Ohio, wasn't delivering spare parts quickly enough. According to Jeff Cooke, who ran Apple's customer-service department at the time, Jobs ordered him to find a replacement for ALS. When Cooke resisted, citing concerns that ALS would sue for breach of contract, he says Jobs told him that ''there won't be any lawsuit. Just tell them if they f--- with us, they'll never get another f---ing dime from this company, ever,'' Cooke recalls. Jobs says he does not remember making the comment, but confirms that he was determined to drop ALS.

Sure enough, Apple became embroiled in a lawsuit with ALS, which was settled in mid-1999. Cooke resigned after just 100 days at Apple. ''My stock options would be worth $10 million had I stayed, but I knew I couldn't have stood it--and he'd have fired me anyway,'' says Cooke. If some of Jobs's methods are distasteful, they do get results. After dumping ALS, Apple gave its spare-parts business to PC ServiceSource and demanded it slash the inventory by 75% in a matter of weeks, says former PC ServiceSource CEO Mark Hilz, now head of a Dallas real estate management company. ''They got very, very, very results-oriented once Jobs got back there,'' says Hilz. ''Under Steve Jobs, there's zero tolerance for not performing.''

Can Apple really be that much better than its rivals? To be sure, it has an advantage. The company churned out only half as many machines as Dell did in their most recent quarters. What's more, some industry veterans wonder if Apple is creating the illusion of near-zero inventory by refusing to take delivery of parts at quarter's end and by pushing finished goods out to retailers on the other end. ''They probably have a lot more than a day's worth of parts in the middle of the quarter and do some balance-sheet dressing at the end to make it look like that,'' says one Wall Street analyst. Cook denies this is even possible. And most analysts could care less, given how well Apple is operating.

Jobs now runs every aspect of the company with a quintet of trusted top executives--all of them handpicked by him except for Chief Financial Officer Fred D. Anderson, the lone survivor of the previous regime. Jobs quickly stripped out vestiges of bureaucracy, eliminating the chief administrative officer and chief technologist. Now, each exec is responsible for everything related to his specialty rather than a narrow product group or market segment. Hardware chief Jon Rubinstein, for example, can make sure every new Mac is built with parts that can be leveraged across as many models as possible.

This tight-knit management structure is crucial. Since almost all big decisions are made at Monday morning executive committee meetings, it's easy for various parts of the company to work closely together. And it lets Jobs easily impose his perfectionism on everything the company produces, from press releases to software to new PCs. Says hardware chief Rubinstein: ''We don't sit around talking about how to drive up the stock or how to stick it to the competition. It's always about the products.''

Apple's success in the consumer market is attracting renewed interest from computer-industry players. That's a big turnabout from just three years ago when companies, from PC game developers to retailers, had decided the Mac platform wasn't worth pursuing. Mousemaker Logitech, which made almost no Mac products two years ago, now has Mac versions of almost every model, says CEO Guerrino DeLuca. Microsoft, which invested $150 million in Apple in 1997, confirmed its commitment on July 19 by announcing a new Mac version of its Office desktop productivity suite. It's similar with other software developers.

Oh sure, major obstacles remain. The biggest: making the transition to the new MacOS X. It's a necessary step--maybe the biggest upgrade of the Mac OS since it rocked the computer world in 1984 with its graphical user interface. Based on the NeXTStep program purchased when Apple bought Jobs's NeXT Computer Systems in 1997, MacOS X is designed to make Macs crash far less often and let them speedily do more than one thing at a time. Plus, MacOS X features a new user interface, dubbed Aqua, that's classic Jobs. Besides a delicious marine blue color, it's heavy on neato graphical tricks. Close a window in MacOS X, and it whooshes into a tiny icon on the bottom of the screen rather than simply disappearing and leaving the user wondering how to get it back.

Still, there are as many risks with the MacOS X as advantages. For starters, many observers doubt it will be ready by the January deadline Apple announced. Apple already has missed a summer target date. And while Apple has vowed that it'll retain most of the feel so beloved by Mac loyalists, it adds a three-dimensional look that changes the way you navigate between programs--which could alienate the faithful. Even if successful, MacOS X won't reestablish the huge lead Apple used to have in ease of use. Indeed, Microsoft plans to upgrade its consumer version of Windows in September. ''MacOS X just keeps Apple up with the status quo,'' says Raskin.

Another potential glitch for Apple: a paucity of retail outlets. It needs to expand distribution if it hopes to reach out beyond its loyal fans. Apple now has only 11,000 outlets, compared with 20,000 at its peak three years ago. And it has gone all-out to improve the buying experience at chains such as Sears and CompUSA, including sending out armies of Apple staffers to tidy up the aisles. Yet, market researcher Allison Boswell of The Boswell Report says that Mac sales at these major chains have flagged in recent quarters. Sales at Apple-only boutiques and at the online store have picked up the slack.

POSTER BOYS. Some analysts are calling on Jobs to imitate PC maker Gateway Inc. (GTW) by opening its own stores. Apple has taken baby steps in that direction. At a CompUSA store in downtown San Francisco, Apple's business jumped from 15% to 35% of sales after Apple set up a special Mac section and a cybercafe outfitted with iMacs. Apple denies there are plans to build Apple-only stores of its own, but CFO Anderson does say that ''we're going to do what's necessary to improve the buying experience.''

Jobs is determined to stick to the strategy that has brought Apple back this far--one that has his personal stamp on it. Rarely has a company been more the product of one man than Apple. His style permeates even the company's iMac factory in Singapore, where huge ''Think different'' posters featuring Jobs's personal heroes such as Einstein and Bob Dylan hang from the ceiling.

Jobs has even managed to impose his insistence on total secrecy at a company where leaks were once rampant. When a Web site called Mac OS Rumors got close to breaking news of the Cube, Apple threatened to sue. Indeed, only a few hundred of Apple's 10,000 staffers had heard of the machine when Jobs took the stage for his July 19 keynote. ''We have cells, like a terrorist organization,'' laughs Rubinstein. ''Everything is on a need-to-know basis.''

But with so much of its future resting on the power--and instincts--of one person, Apple is vulnerable. What if Jobs gets distracted or falls off his game? While he has guessed right of late, he hasn't always been perfect. He was ousted from Apple in 1985 in part because his original Mac couldn't be expanded. His cube-shaped computer at NeXT was one of the great bombs in high-tech history. And now, his new Cube is as much a product of his personal taste as any he has done. ''There have been two products that really brought a smile to Steve's face: the iMac and the Cube,'' says Anderson. If Jobs can keep clicking on all the keys, there will be plenty of reasons for Mac fans and investors to grin, as well.



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