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Apple's Uncertain Harvest


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APPLE'S UNCERTAIN HARVEST

Apple Computer Inc. badly needs some good news and hopes to generate a lot of it on Aug. 2, when it launches its much delayed "personal digital assistant," the Newton MessagePad. Apple is counting on the MessagePad to reassert the company's identity as a technology leader--and help critics and investors forget for a moment the problems in the core personal-computer business. To get the happy news out, the company is furiously booking interviews for Chairman John Sculley with every major newspaper, magazine, and talk show--including MTV.

Back at headquarters in Cupertino, Calif., however, the MessagePad blitz is not likely to raise morale for long. The shock of a record $188.3 million quarterly loss and pink slips for 2,100 colleagues, with another 400 expected in coming months, has made employees apprehensive about the company's future and their own. The latest bit of gallows humor on Apple's computer networks is a screen-saver program that pops up when computers aren't in use showing the killer dinosaur from Jurassic Park. Only, in Cupertino cubicles, the title reads "Jurapple Park."

The message isn't subtle: Apple is being trampled in the marketplace in a Darwinian struggle for survival in its existing business. The company is in the worst shape since 1985, when it encountered slow sales, wrenching changes, and the ouster of co-founder Steven P. Jobs. For the June quarter, revenue growth was in the single digits, and even before the $320.9 million restructuring charge, weak Mac sales plunged operating income to $14 million, from $201 million a year before. Apple's stock hovers around $26, less than half what it was in early June. As in 1985, the board has put a new man in charge.

There's a big difference, however. Back then, when Sculley took control from Jobs, he staged a stunning turnaround using the Macintosh. The revolutionary, "user-friendly" Mac had been introduced in January, 1984, but sales had been slow. Sculley figured out how to sell Macs by the millions. Nine years later, however, "the Mac isn't unbelievably better anymore," says William Y. Tauscher, chief executive of ComputerLand Corp. Now, there are 26 million PCs running Microsoft Corp.'s Windows and looking for all the world like Macs.

UNKNOWN MARKET. This time, CEO Michael H. Spindler doesn't have something as dazzling as the Mac up his sleeve. Sculley insists that Newton, his brainchild, "can be potentially as important to Apple as the Macintosh has been." But other computer executives doubt he'll be around to see it: They expect Sculley to leave the company entirely by yearend.

Even if Sculley remains as chairman, nobody at Apple is betting the farm on Newton, at least any time soon. The MessagePad shipping in August falls short of what analysts had once expected. For example, instead of wireless communications, the initial version will only be able to send electronic-mail messages via an external modem. Moreover, the market for such a device is still unknown, and with prices ranging from $699 to $899, sales aren't likely to take off quickly. Says Gaston Bastiaens, vice-president of the Personal Interactive Electronics Div. that will sell MessagePads: "I am very confident of success. I have no doubts. The one thing I can't say is how big and how fast it will happen."

Most analysts predict sales of only 150,000 Newtons the first year, generating a mere $75 million to $100 million of Apple's projected $8.9 billion in revenues for fiscal 1994. "In Apple's scheme of things, it's peanuts," says Tim Bajarin, president of market researcher Creative Strategies Research International.

Still, Newton and other products that take Apple beyond the PC business are key to Spindler's long-term strategy. The new businesses will include consum-er electronics, services, software, and servers--powerful PCs that can control networks. Together, all these businesses will contribute about 10% of Apple's revenues in fiscal 1994, Apple executives told analysts at a July 20 meeting. Equally important, says Spindler, "now we will have these businesses stand on their own feet, financing themselves."

In other words, Bastiaens and the other Apple execs pursuing new markets can no longer count on Mac profits to fund their efforts. For good reason: Because Apple is now duking it out with IBM and all the clone makers, there won't be much money to throw around. Even after slashing operating expenses by 15% in July, Apple is still likely to post a $3 million loss in the current quarter, says analyst Eugene Glazer of Dean Witter Discover & Co. He and other analysts expect a return to "modest" profitability in December but don't foresee a return to Apple's old profit levels. Says analyst Marianne R. Wolk of Prudential Securities Inc.: "I don't see Apple going out of business. But it's going to be a rough battle for the next year."

Price cuts on desktop Macs and laptop PowerBooks in June have boosted demand. But to break even after the cuts--which ran as high as 35%--Apple must increase shipments at a 20% to 25% annual rate. Gross margins have already dropped from 45% two years ago to 32.5%. Insiders expect more price cuts in the fall, and analysts figure gross margins could hit 25% by yearend.

SIMPLER LINEUP. Simply to survive in this new environment, Spindler must keep cutting costs and streamlining the Mac business (table). Spindler is cutting quarterly operating expenses to about $500 million, down from $600 million.

Apple execs also hope to save money and boost Mac sales by simplifying the Mac lineup. Last year, Apple introduced more models than it had in the preceding three years. There are now six different Mac families: Performa, PowerBook, Classic, LC, Centris, and Quadra. That has not only added to internal overhead but also has confused distributors and buyers. Says Joe Popper, president of the Computer Gallery store in Cathedral City, Calif.: "Apple customers walk in the door and don't know which model they want anymore." Joseph A. Graziano, Apple's chief financial officer, says the Mac line will be scaled down, but he won't elaborate. Insiders say the Classic and Centris lines are likely to go.

That's the simple part. The harder job--some say the impossible dream--is to once again put technological distance between the Mac and the PC crowd. It's becoming harder to wring big improvements out of the Mac design. The newest Macs, the Centris 660av and the Quadra 840av, due out on July 29, will have special circuitry and a software program called Casper to recognize simple spoken commands such as "open file." It's impressive, but not the type of innovation to spur major sales. "Are they dramatic steps forward? No. Are they enough to boost Apple? No," says Bruce Lupatkin of Hambrecht & Quist Inc.

The technology that might give the Mac a real boost won't come until next February. That's when, insiders say, the company will bring out the first Macs to use the PowerPC chip. The product of a partnership between Apple, IBM, and Motorola, the PowerPC runs twice as fast as the microprocessors in today's fastest Macs. The plan is to shift the entire Mac line to the PowerPC chip.

But even the PowerPC chip may not give Apple much of an edge. By next winter, dozens of PC makers will be shipping computers based on Intel's superfast Pentium chip, which is on a performance par with the PowerPC and runs a new Microsoft operating system called Windows NT. Worse, moving from one hardware architecture to another is risky business: Unless the new machines run existing Mac software perfectly, customers are likely to jump ship. Concedes Graziano: "PowerPC is going to be a big transition to manage."

SMART PHONES. While it makes the transition to the PowerPC, Apple is also expected to begin a more profound shift: building up software and other businesses that will help it survive shrinking hardware profits. Claris, the subsidiary that makes and markets applications programs, has been one of the few bright spots for Apple this year and was spared layoffs. In June, Apple created another software division. The company also is cutting deals to license Newton technology: Five hardware makers will pay licensing fees to build Newton clones and other products. Apple is talking to phone companies interested in using Newton technology in "smart phones." By seeding the market now, Apple figures it will profit later by selling Newton software to these companies. In addition, Apple is selling programs to help create Newton applications programs and is negotiating for royalties on every application that's sold.

Insiders say that Spindler may use the Newton model for the rest of Apple's business. When the first PowerPC Macs arrive next year, the company is expected to announce plans to license its software to other computer companies that adopt the new chip. Apple executives aren't talking publicly, but insiders say it already is shopping the idea around. "This will dead-on happen in 1994," says one Apple executive.

Every little bit will help. Until he begins to see some results from Newton and other new products, Spindler must seek profits wherever he can--just like those other PC makers in Jurapple Park.Kathy Rebello in Cupertino, Calif., and Peter Burrows in Dallas


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