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ATPM 4.04
April 1998

Dear Readers:

This month I'm departing from my regular format to talk to you about an exciting new computer company. This company has an extraordinary product-line and a seasoned management team that's hell-bent on establishing itself in key markets. The company is willing to go head-to-head with Microsoft and Intel in order to gain customers and become profitable.

This new company is Apple Computer. Does this surprise you? Let's take a few moments and look at why I believe this is true and why I call Apple Computer a "new" company. To start, let's look at today's personal computer market. I think the conventional desktop computer market is entering what's called a "mature" phase. Most of the homes that can afford conventional desktop computers already have one. Very few consumers are urgently running to the store or waiting in long lines to buy a new PC. In order to motivate first-time PC buyers into the market or entice existing owners to upgrade their PCs, companies need to be offering something special. The "MMX" moniker isn't enough to do it and the lure of "multimedia" capabilities has been overplayed and exhausted. To many people multimedia means nothing more than the ability to play popular computer games. American consumers will no longer spend $2,500 - $3,000 for this privilege.

Intel, the company which makes the Pentium processor, has recently seen it's stock sink about 20% in value and the company now has competition from AMD for chip sales in the lower-priced PC market. Overall, the profit margin on desktop PCs has become razor-thin and sales (or sales growth) have begun to slow. In fact, Compaq has announced targeted price cuts in order to clear its existing inventory.

The fastest growing area in the personal computer industry is the sub-$1,000.00 market. There are two ways to try and exploit this market. You can strip your existing product line of features and/or cheapen the quality of components to reduce your costs or you can design hardware products that effectively deliver specific functionality at a particular price (more on this a little later).

Today there are too many PC makers. Because margins on PCs are razor thin, volume means everything. In markets where sales growth is in decline, companies can only grow by acquiring or cannibalizing their competitors. If US economic growth should stall, PC manufacturers would be among the first companies to feel the effects. Despite the hype, most computer users are not graphic designers or Web content creators. Few people make their living using their home PC. In a slower-growth economy, hardware upgrades and software purchases will be among the first items put on the personal financial "back burner." You don't need a 300 MHz Pentium II processor and the latest copy of Photoshop to access the Internet or do your homework.

But this all sounds like bad news...where's Apple in all of this?

It's a reasonable question with a very interesting answer. Let's look at Apple's recent history. Two years ago Apple Computer was on the fast track to oblivion. The company hired a new CEO to try and turn things around. The previous CEO, Michael Spindler, miscalculated and bet the company's future on the wrong end of the personal computer market. People are willing to pay a small premium for Apple's best technology. People are not willing to pay Apple a premium for two-year old technology. With the ascent of the clones, Apple was losing its market and its margin.

To stop the financial hemorrhaging, Gil Amelio immediately canceled outdated products and destroyed huge piles of inventory that would never become part of computers sold to consumers. The company had already lost its footing in the home PC market and was left to focus on its three primary markets - education, graphic design and content creation. But Apple had to share its shrinking market with the makers of Mac OS clones.

The company had invested billions of research dollars in a next generation OS and seemed no closer to producing a finished product than the day the research began. Dr. Amelio made many brave decisions but Apple continued to operate like it was an island unto itself. His new book may say more on the matter, but I don't think Dr. Amelio would have had the backing from the board of directors and the confidence of institutional investors to make the hard decisions recently made by Steve Jobs. I don't look at Dr. Amelio's departure from Apple as a failure. I look at it as the natural progression of events that he set in motion. The acquisition of NeXT Software was a very shrewd move for Apple. The WebObjects technology gave the company a badly needed presence in the enterprise market and the foundation of Apple's next generation OS needed to be replaced.

By early summer of 1997 Power Computing was "knocking on the door" of Apple's much coveted education market and the company seemed unable to bring new hardware products to market as quickly as the clone makers. In my view, Steve Jobs had little choice but to cancel the clones if for no other reason than to give the company a "breather."

Ironically, what Power Computing was doing to Apple is very similar to what Apple is now doing to Intel. Power Computing's operations were wrecking havoc with Apple's product plans. The "shelf life" of Apple's products (the time between a product's introduction and its replacement) was being cut from six months to less than three. It was virtually impossible for Apple to develop a coherent marketing plan when the clone makers were able to offer faster, newer products to the same customers. Today, Apple is forcing Intel to bring faster products to market. Although Apple and the PowerPC technology have a very small percentage of the overall PC market, the fact that Apple can deliver faster, better products so quickly is forcing Intel to change its market plans. Because of Apple and the Apple-IBM-Motorola alliance, faster Intel chips will be coming to market more quickly than if Apple no longer existed.

Apple's return to profitability has been a very painful journey. Gone are two of my favorite technologies--OpenDoc and the Newton OS-based eMate. I was a few weeks away from ordering an eMate when Apple canceled further development the Newton OS and decided to stopped manufacturing the eMate and Message Pad. I'm sorry to see them go, but they are a necessary casualty of a war that Apple must win.

Figuratively speaking, Apple Computer has been dragged kicking and screaming into the mainstream personal computer market. It no longer commands the market share clout that allowed it to operate as if it were its own industry. Apple's biggest problem is that it wanted to continue to make its own rules. Steve Jobs is changing all that. Apple needed to be a better-focused and more efficient company in order to survive in today's personal computer world. In my view, not only has the company learned to survive, it's begun to thrive.

Because of the recent changes, Apple Computer is well on its way to sustained profitability and should attain increased revenue on a sequential basis in the quarter that begins April 1, 1998. The company will accomplish this by reducing costs, eliminating most of its products and ceasing to spend money on "go it alone technologies." The company has also focused its design, marketing and distribution systems on delivering fewer products to more customers.

The "Think Different" campaign is intended to reestablish Apple Computer's image as an innovative, forward-thinking and unorthodox company. Most people might miss the main point of the campaign unless they think about Apple's largest markets--education, graphic design and content creation. It's a natural fit. The company has eliminated all national accounts except those that are willing to feature Apple's products and highlight the company's advertised message.

The successful introduction of the G3 technology is almost mind-numbing when one considers that a full product line is just now coming into place. MacOS8 is so popular it compelled the company to change its OS strategy. No longer do company executives talk publicly about replacing the Mac OS. What's going on behind the scenes is even more extraordinary. Gradually the underpinnings of the Mac OS will be replaced with the same core technology that's used in Rhapsody. It will happen seamlessly and without most users realizing it. In the end, Mac users will have the advanced look-and-feel of the Mac OS combined with the underlying strength of a modern and robust operating system.

The decision to cancel further development of the Newton OS will allow the company to focus its efforts on extending the reach of the Mac OS to a new series of products. It will also permit the company to more effectively apply its R&D resources in developing products that can successfully compete in the sub-$1,000.00 market.

By September of this year, I expect Apple Computer to announce products specifically geared to the sub $1,000.00 market. Unlike products offered by many of its competitors, these products will not be cheapened or stripped-down versions of Apple's conventional desktop PCs. Rather, the products will be designed with specific features and functionality in mind. The products will be uniquely Apple and draw on the strengths of the Mac and the Mac OS.

Apple's cross licensing agreement with Microsoft will allow the company to further reduce its own R&D expenses. Fewer products, lower costs and the development of a modern OS are Apple's foundation for success.

I don't understand how all this will help Apple grow...please explain

Unlike the overall market for Apple's competitors, the company's primary markets offer it attractive gross margins on sales and an opportunity for steady and continued growth. Apple's challenge is to "lock down" its market share in these markets. Once firmly reestablished, Apple can grow at a pace equal to or greater than that of its primary markets. Apple reached more parents through schools than it ever did by simply having a booth at Sears. The computers people use at work are quite often the computers they prefer to use at home. By firmly reestablishing itself in it core markets, it will again build momentum in the home market. The education, graphic design and content creation markets will "hold their own" should the US economy begin to slow. By focusing on these markets Apple Computer can meet its internal gross profit goals.

How does all this make Apple a "new" company?

A new line of hardware products, an ever-improving OS and much lower cost structure will help Apple better serve its primary markets. The company is planning to reenter the home market with products designed specifically to meet the needs of home users. The company's distribution systems have been overhauled and computer buyers can purchase products either from resellers or they can "build-to-order" a computer directly from Apple via the Web.

Apple Computer is now a "market driven" company. It's hardware products are the best in the world and by reducing costs the company is able to realize a healthy margin on it products while offering those products to customers at very attractive prices.

The "turnaround" of Apple Computer is an amazing story! Better products, lower sales, higher profits. Apple's new found success should cause buyers to "Think Different" about their next computer.

"Apples, Kids and Attitude[TM]" is © 1998 Robert Paul Leitao, <rleitao@atpm.com>.

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