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ATPM 3.05
May 1997

Apple Computer is showing signs of renewed life and market growth. Newspapers and magazines around the world are reporting news of Apple’s turnaround. Industry critics, Apple skeptics and computer buyers are taking note of the company’s lower prices, newer products and the expanding market being developed by the Mac clones.

Apple’s dominance in education and graphics-related industries, such as Web authoring, have anchored the company during the most turbulent time in its history. The upcoming release of OS 8 will only continue Apple’s new momentum. In what might be called “two steps forward, one step back,” the company is retrenching, rebuilding and reemerging as an important player in the personal computer industry.

There are three components to Apple’s turnaround: The further development of a healthy clone market, improvements to the manufacture and distribution of Apple hardware and the forthcoming operating systems (Tempo, Allegro, Sonata and the new OS code-named Rhapsody).

The development of a healthy clone market has led to misunderstandings about Apple’s health and the the market for Mac OS computers. Recent market share data, ranked by unit volume, has indicated that Apple Computer has slipped out of the top 5 personal computer companies. Some analysts, without looking deeper, misunderstood the significance of these numbers.

This “one step back” for Apple indicates that a healthy clone market is developing. The ascent of Motorola, Power Computing and UMax as Mac clone makers has reduced Apple’s share of the Mac OS hardware market as well as its share of the worldwide personal computer market. However, the development of the Mac OS clone market was a major factor in Apple’s restructuring strategy. Paradoxically, Apple is pinning its long-term growth on a significant reduction in short-term sales! This may seem a bit odd to some, but “one step back” may position the company for” two steps forward.”

Restructuring was needed to reduce what’s called the “break even point.” That’s the point at which revenue equals costs. To accomplish this, the company needed to reduce both fixed costs (the costs that are incurred regardless of sales activity) and variable costs (the costs that will vary based on sales and product activity). Dr. Amelio’s goal was to reduce Apple’s break even point to $8 billion.

Retrenching to an $8 billion dollar break even point (for a company that once had $12 billion in sales) indicate Apple’s acknowledgement that clone makers were “cannibalizing” much of its hardware sales. In fact, a significant portion of clone makers’ sales came at the expense of Apple’s sales. To some degree, Apple has been willing to allow this because it permitted the clone makers to establish themselves and fight for new overall market share for the Mac OS.

An important part of of an increasing the market share for Mac OS clones is that it allows Apple to eliminate less efficient products and remove itself from low margin market segments that were draining the company’s resources. Apple has trimmed their selection of hardware products, choosing to eliminate lower margin products and move away from unprofitable markets. The good news is that the new product line is meeting current consumer demand and that demand is continuing to grow. The real question is whether or not Apple can sustain operations at much lower sales levels. The answer is now being revealed. From this writer’s vantage point, it is an emphatic “Yes!”

Apple’s development time for new hardware has been dramatically reduced. Their decision to reduce the number of mother board designs and models has increased manufacturing efficiency and allowed price reductions while increasing its profit margin. In the long-run, fewer products, more clones and better management will return the company to consistent profitability. This will allow the company to reduce its break-even point while the market for Mac OS computers continues to grow.

Related to this issue, Apple will also develop more products in partnership with other companies. For example, the new Powerbook 2400c was co-developed with IBM’s Microelectronics Division. Motorola, a Power PC partner, is another significant player in the Mac OS hardware market. Adobe Systems has weighed in heavily because it wants Apple to adopt its Display Postscript technology.

The issue of market share is of significance to software developers because they need to recoup their costs to “port” a software product to a particular platform. Apple’s decision to support current Mac OS software via Rhapsody’s “Blue Box” is an assurance to developers that software written today will not be obsolete in the near future. Similarly, Apple’s decision to support the current Mac OS beyond next summer, when Rhapsody is scheduled for release, is a signal to developers and existing Mac owners that the market for Apple hardware and software will remain stable.

While a lot has been written about Rhapsody, less has been mentioned about the forthcoming release of Mac OS 8 (which will be in the stores very shortly) and the further development of the current Mac OS into the year 2000. In the short-term, this is significant because the license agreements with the clone makers were for System 7.X only. For the long-term, providing a stable, efficient and modern OS for the installed base of older Macs is simply smart business. There are millions of users who may not switch to Rhapsody until they purchase a new computer.

Apple is currently negotiating new license agreements with clone makers for Mac OS 8. These negotiations will affect the ways in which Apple, Motorola, Power Computing and UMax approach the Mac OS market. As of this writing, new licensing agreements have not been finalized. However, when all is said and done, the new license agreements will help shape the manner in which Apple and the clones makers work together and compete with one another. The new license agreements will also be indicative of Apple’s new business model and the manner in which Apple will approach the hardware and software markets.

Apple’s current business model is significantly different than the one inherited by Dr. Amelio about 18 months ago. The kinds of changes they’ve made are not easy. Some promising technologies will no longer be funded and Apple will embrace hardware and software standards set by the industry rather than “go it alone” in non-critical aspects of its core hardware and software development.

It is this writer’s view that the “old Apple” could not have responded as quickly to changing market realities. Further, the old approach to hardware development , production and distribution is incompatible with Apple’s current product mix and incremental upgrade strategy. The “old Apple’s” business practices could not have survived today’s more agile approach to the market. Much of Apple’s “red ink” in the past five fiscal quarters was from write-downs of obsolete inventory and for the change-over of its design, manufacture and distribution infrastructure.

The announcements at Apple’s World Wide Developers Conference are in-line with the company’s previously announced plans. The company is moving to further reduce the number of motherboard designs it uses. There is also extensive talk of “personality cards” which would allow Mac owners to custom equip their computers and allow Apple to further reduce prices by eliminating the cost of parts which are used by only a small fraction of Mac owners. In addition, the new chips under development for the PowerPC platform will ensure that Macs and Mac clones maintain their performance edge versus Intel-based machines. Apple’s decision to develop a version of Rhapsody that will run on Intel-based machines will be covered in a future issue of ATPM.

The recent corporate restructurings at 1 Infinite Loop have positioned Apple to return to a performance level not seen since the Macintosh was first released. The company is leaner and much more responsive to the marketplace. The next 18 months will be an extraordinary time in Apple’s history and in the personal computer industry. Please fasten your seat belts and come along for the ride. The scenery will get better!

Hardware innovation, significant OS improvements and increasing consumer demand for Apple’s products are indicators of a dynamic, forward moving company. The inclement conditions recently “weathered” by Mac enthusiasts and Apple Computer will ultimately benefit the company and Mac users everywhere. It really is “ two steps forward, one step back.” Our April showers will indeed bring May flowers. Watch for “the climate” to change rapidly for the better.

On a more personal note, I’d like to thank Michael Tsai and Robert Paul Leitao for inviting me to join ATPM. With the close of this issue I am now officially ATPM’s staff writer. Over the past several months I’ve had the opportunity to write the cover stories for our e-zine. I’m happy to say that others are coming forward to lend their knowledge and expertise to this section of our favorite Macintosh monthly.

ATPM is truly growing and changing. It is now an international e-zine with thousands of worldwide readers. I’m proud of my involvement with ATPM and I’m happy to take part in its future. I’d like to thank you for supporting ATPM by telling your friends and family about us. ATPM fits on a floppy so please feel free to pass a copy along to others. To all of ATPM’s readers, thank you for taking the time to be with us each month. Because of you, we enjoy what we do!

© 1997 H.M. Fog, HMFog@atpm.com. H.M. Fog is a west coast computer consultant who sometimes writes articles for ATPM.

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