Apple Squeezed -- Struggling Computer Maker Tackles Core Problems As It Tries To Loosen Microsoft's Grip On Market

CUPERTINO, Calif. - With its friendly software, Apple Computer made computing look easy. Now the company itself is a portrait of struggle.

Apple wanted to change the world by bringing computers "to the rest of us." But now the world is owned by Microsoft.

Microsoft was always about business, while Apple was the magic kingdom of computing. A rainbow gleamed like a talisman on every Apple computer. A happy face appeared on screen when the machine came on. Apple was about fun. Microsoft was about deals.

Apple changed personal computing twice, in 1977 with the Apple II and in 1984 with the Macintosh, both revolutionary products that brought millions of new users to computing.

Yet, Apple squandered its technological advantage. As Microsoft gained ground with Windows, a systems-enhancing program that imitated the Macintosh look and feel, Apple kept its prices high when buyers wanted bargains. Microsoft spread Windows by licensing it to clone makers, who flooded the market with low-cost PCs loaded with Microsoft software. Apple insisted on exclusivity.

The company hit bottom last year. It reported a quarterly loss of $183.3 million, its biggest ever. It released the Newton, a handheld gizmo developed at a reported cost of $100 million. People did not buy; instead they laughed. Chief Executive John Sculley left town.

Now a humbled and different Apple is trying again. But with a feeble 11 percent of the overall market, the critical question is whether anybody cares. Can Apple gain appeal?

The company lately has been a locus of rumors about a buyout (by Motorola, IBM, AT&T). As one measure of Microsoft's success, Chairman Bill Gates himself could cash in his company stock and buy all of Apple, at a market value of some $4.5 billion, leaving him with more than $4 billion in change.

The rumors are driven in part by Apple's critical need to find big partners. IBM, Apple and Motorola are expected to jointly develop a new desktop PC able to run the Macintosh operating system, as well as others.

Apple is struggling to maintain its share of the business-computing market, barely present at 6 percent, compared with Microsoft's overwhelming dominance of applications for word processing and spreadsheets. Boeing, one of Apple's larger customers, has decided to drop Macintoshes. So has Seafirst. Both are shifting to Windows, which runs poorly on a Macintosh.

Under new Chief Executive Michael Spindler, Apple recently announced that it would license its crown jewel - its operating system, the Mac O/S - to third-party computer makers. The goal is to boost market share by using clone makers in Asia, Italy and elsewhere that can sell Apple in new places.

Spindler has boldly sought to transform Apple from a high-margin, high-cost company that invented neat things and threw them into the marketplace, to a low-cost competitor driven first by what customers want. He has put the company belatedly through the basics of business planning, using diagrams and step-by-step charts.

Spindler trimmed 2,500 of the company's 16,000-person work force, killed dubious development projects and introduced the Power Macintosh, which uses an ultra-fast and cheap processor developed in an innovative alliance with IBM and Motorola.

The atmosphere used to be focused solely on making great software. Now the focus is on making money from great software, says Duncan Kennedy, product line manager for QuickTime products.

Apple's computers remain vastly easier to set up and use than Windows machines. Installing a CD-ROM player is a snap on a Mac, a frequent ordeal on Windows. Mac users can easily search their entire hard disk for a file or program; Windows users can search for a technician or buy an add-on utility program. Now the unofficial Apple corporate motto is "fit in, stand out." Translation: fit into the dreaded Windows world but retain distinguishing characteristics.

Short term, Apple looks good to Wall Street. Apple stock has been trading recently in the low-$40s range - compared with its 52-week low in July of $26.625 - following the announcement of fiscal-year profit of $310 million, compared with $86.6 million a year earlier.

Long term, Apple faces what some call an Apple killer - the spring release of Windows 95, a new Microsoft operating system that will further close the ease-of-use gap with Apple.

Apple has survived death watches before, so many observers predict the patient will be frisky again.

"Apple's continued success is proof that there is a God," says Guy Kawasaki, a former Apple executive. "Nothing else explains its survival. You can't say it's management. It's almost despite management."

Right or wrong, management has made a new Apple.

Price-cutting has made Apple's computers competitive, but it has also shrunk the company's profit margin from 50 percent or more to mid-20 percent. The old margin papered over any number of goofy ideas or mistakes and financed a large number of interesting ideas.

The smaller margins have forced managers to say no, to trim inventories, stick to schedules and think about customers, says Steve Manser, a vice president in the PC division.

"As Apple matures, the people in it have matured," he says.

You can still see the occasional dog following a programmer into a building here, but the dominant mood is seriousness about business.

Apple employees are expected "to grow up in our business skills while maintaining what makes us an innovative company," says Kennedy.

The new atmosphere may drive some away, says Chris Espinosa, an employee since 1976.

Espinosa remembers the 1988-1990 period, which he jokingly compares to the fall of Rome, when Apple was chaotically run but flush with cash. Construction workers would be hired to do something, a change would be made at the last minute and double-overtime was paid without complaint.

Espinosa says people still come to Apple out of a sense of mission. Yet, there's no hope of converting all the Windows heathens. Like others here, Espinosa does not believe Apple will achieve dominance of personal computing. For the foreseeable future, that position will be held by Microsoft, which replaced IBM as the safe choice in computing, he says.

No one is more saddened by the promise and reality of Apple than Grant Fjermedal, a former journalist and self-described Macintosh fanatic who was hired by the company in 1988 to do a book on the company's culture. After Fjermedal spent two years and conducted hundreds of interviews, the company dropped the project.

"It all makes me sad," he says. "I saw Apple at a glorious point. It's a very idealistic company, and I don't know how it will do now. I wish it well."

He blames Sculley for many of the company's blunders, mainly waiting too long to reduce prices.

"There was this arrogance that the Mac technology was so great, people would buy it at any price," says Fjermedal.

Now Fjermedal works as a writer for Microsoft, where he sees a different culture. Everyone at Microsoft is tightly focused on tasks, reflecting Gates' own personality, he says. At Apple, he found people who were proud of the fact that they could wander around looking for interesting projects to join.

Apple's most significant move in years was to decide to license its operating system, an initiative announced last month.

Critics say the move was too little, too late. It should have been done years ago to blunt Microsoft's Windows, they say. Apple scuttled licensing plans in 1985, 1989 and 1992. Ironically, Gates himself was among those in 1985 who argued for licensing, but the idea was killed out of fears that clone makers would damage the company's own hardware sales.

Now that Apple has decided to license its operating system, critics have focused on the company's measured approach: picking just a handful of clone makers. The company has not announced the names of any licensees, though the companies are expected to be IBM, Motorola, Japan's Toshiba and Fujitsu, Germany's Vobis Microcomputer and Italy's Olivetti.

Don Strickland, Apple vice president for licensing, argues that licensing could not have been done until now, when costs are low enough to give the hardware division a reasonable chance of being competitive. Moreover, Apple is looking for clone makers who will complement rather than cannibalize the company's own sales.

Strickland predicts that clone makers will make an additional million or more Macs within three years and boost Apple's market share by about 3 percent by 1997. Few will buy those machines, however, if users do not see desirable software written for the Macintosh. Apple's share of personal-computer software has fallen to 14 percent from about 17 percent five years ago.

Lotus Development Corp., maker of the popular 1-2-3 spreadsheet program, announced that it would no longer write software for the Mac. Lotus was a weak player on the Macintosh platform, but the abandonment by one of the largest software companies was taken as an ominous sign for Apple.

The new licensing policy dramatically affects the company's hardware division. Manser is about to get a whole new group of competitors, but he insists he's not worried because he can manage his costs to compete with clone makers.

"Maybe naively, but we feel confident about our ability to compete," he says.

The problem for Apple's hardware division is easy to spot. Apple spends 6.3 percent of its sales dollars on research, compared with 2 percent by Dell, for example. Moreover, continued spending on money-losers such as Newton further weaken Apple's competitiveness in the desktop market. Don Young, an analyst with Lehman Brothers, estimates that such losers add $75 to the price of every Macintosh.

Young says Apple should be harvesting Macintosh profits to finance future products. But, instead, that harvest has been thinned by price competition. The result could be the "long-term decline of the Macintosh product line and an inability to develop new growth business," he says.

Michael Kwatinetz, an analyst with PaineWebber, says Apple's tentative licensing reflects the company's desire to protect hardware sales. If Apple loses one of its own sales to a licensee, it has to see five or six sales by licensees to recoup that income.

"It's a real tough game for them," he says.

As might be expected, Apple's new licensing policy causes no worries at Microsoft.

"I don't think it's going to affect me much at all," says Brad Chase, Microsoft's general manager of personal operating systems. "I don't expect much of their market share to change significantly."

He compares Apple's operating system to the rotary engine or Beta format video recorders - noble also-rans in the technology wars.

Apple replies that it is poised to grab share from Microsoft. The rollout of Windows 95, so goes the argument, will be a major disruption for Microsoft's customers, who will be faced with costly changes in their hardware to take advantage of the new operating system. Furthermore, Apple has guided its customers smoothly to what it sees as the next generation of microprocessors, a move Microsoft will have to make, Apple officials say. Apple's new machines use what's called reduced instruction set computing, or RISC, that's cheaper and faster than traditional microprocessors.

"They are on a fundamentally broken architecture," Espinosa says of Microsoft.

Chase replies that customers don't worry about microprocessors, but instead what they can do with their computers. If the world wants a system software that works on RISC, Windows NT can do it, he says.

Apple, meanwhile, is preparing a secret marketing plan aimed at disrupting Microsoft's Windows 95 rollout. Part of that effort, no doubt, will be to draw attention to Apple's own new system software, code-named Copland, expected next year.

Apple faces tremendous skepticism, but it is still a place that attracts software visionaries such as Frank Casanova II, a pony-tailed guitar player who happens to be manager of advanced technology. From that post, Casanova sees the dreams of software engineers becoming reality.

Casanova demonstrates Apple's newest product, QuickTime VR, a program that stitches together simple photographs into a seamless 360-degree panorama. The program could transform virtual-reality games and suggest new applications such as virtual travel. He's now working with new techniques, such as three-dimensional cursors and software that gives sound cues, that someday may transform how people interact with machines.

"I very much want to have a conversation with my computer, so bad that it hurts," says Casanova.

But as always, there's the promise and the reality of Apple. Some Mac users have described Apple as a company with great products but poor management.

Both the Power Mac and the PowerBook laptop have drawn great reviews and, priced competitively, buyers want them.

But the company can't meet demand.

John Vito, president of Computer Stores Northwest, a six-store chain, says he could sell 10 times as many PowerBooks, but he can't get them.

"Apple needs market share," he says. "How do you get that? You produce."

His Corvallis, Ore.-based chain has handled Apple exclusively for 16 years. But now his stores are about to start selling Windows machines as well.

It's nice catering to 11 percent of the marketplace, he says. And he loves Macintoshes. But like so much of the computer industry, he can't ignore that 89 percent.

--------------------------- TOMORROW IN BUSINESS MONDAY ---------------------------

The Power Mac is the centerpiece of a totally changed Apple Computer - and it's selling.