BUSINESS

A computer war game

Internal problems and an old ally confront Apple

JOHN DALY March 12 1990
BUSINESS

A computer war game

Internal problems and an old ally confront Apple

JOHN DALY March 12 1990

The stage was stark and spare—a compact black personal computer on a simple table next to a spotlit vase of white tulips. And as Steven Jobs gave a European audience its first formal look at his NeXT computer at the London Palladium late last month, he too fit into the scene, soberly dressed in a dark-grey suit, white shirt and dark tie. Now 35, Jobs rarely appears in public anymore in the blue jeans that he favored as the legendary co-founder of upstart Apple Computer Inc. in 1976. But, despite his understated appearance, the onlookers in London clearly were just as intrigued by the man as by his machine. Five years after he was forced out of Apple, the mercurial Jobs has re-emerged as a key figure in its battle against giant International Business Machines Corp. (IBM). Now, however, he is an ally of IBM, Apple’s bitter rival. And as the battle for a $360-billion worldwide market plays itself out—like an intricate computer war game—the personalities of the combatants are once again threatening to overshadow the futuristic technology that they have developed and nurtured.

In addition to facing off against industry leader IBM, Apple is also struggling with internal problems. Since January, the Cupertino, Calif.-based company has been ravaged by an embarrassing power struggle between chairman John Sculley and some of his leading executives. That dispute climaxed last Friday, when Jean-Louis Gassée, the flamboyant, French-born vice-president who headed Apple’s new product development until Sculley demoted him last month, announced that he will leave the company in September. The internal bickering arose at an inopportune time. Last month, the company announced that it will lay off 400 of the 12,000 employees at its headquarters because of slowing sales. And while it was widely hailed for its breathtaking technological innovations under Jobs, Apple has not introduced a major new product since its hugely successful line of Macintosh II computers in 1987.

But Jobs’s five-year-old NeXT Inc., just 40 km away in Redwood City, is also struggling. Sales of its powerful personal computer, which starts at $12,000 and which Jobs unveiled in October, 1988, but did not begin shipping until last September, have been disappointing. In order to generate cash and enhance NeXT’s credibility with buyers and investors, Jobs has sold some of NeXT’s state-of-the-art technology to Apple’s archrival, Armonk, N.Y.-based IBM. And last month, IBM unveiled the first product of that pivotal alliance—a new line of machines for engineers and product designers known as workstations, which sell for $18,000 and up and which IBM is counting on to help revive its own lacklustre sales and profits. The workstation screens and keyboards resemble those of personal computers, but they can be linked together, or to a larger central computer. And the $7-billion workstation market is growing by about 30 per cent per year.

The turmoil in Apple’s executive ranks is the company’s first major crisis since Jobs departed in 1985. It follows five years of astonishing sales growth during which the company steadily—until 1989—ate into IBM’s share of the personal computer market. For the fiscal year ending last Sept. 30, Apple’s worldwide revenues, based largely on the Macintosh II computer, climbed to $3.4 billion, up 21 per cent over 1988 and up from $1.5 billion in 1984.

But, despite the continued revenue growth, there are signs that Apple is facing a slowdown. The company’s share of U.S. personal computer sales slipped to 18.4 per cent from 23.7 per cent the previous year. At the same time, IBM and its PS/2 line reversed its decline and captured 34.7 per cent of the personal computer market, compared with 31.4 per cent in 1988.

To prepare for a slowdown, Sculley began slashing costs in January by announcing a major reorganization as well as the layoffs—the first at Apple’s headquarters in five years. The job losses have spilled over into Canada, where Apple announced in December that it would cut 60 employees from its workforce of 420 in anticipation of slower sales. Meanwhile, Sculley also obtained the resignation of Allan Loren, the president of Apple USA, and took control himself of the firm’s new product design from Gassée.

Many of Apple’s employees, however, quickly rushed to the defence of Gassée, 46, who, like Jobs, dropped out of university to enter the computer industry and who is fond of leather jackets and wears a diamond-studded earring. On Feb. 9, about 150 employees picketed Apple headquarters, carrying signs supporting Gassée, including one that read “J.L.G. 4 CEO.” But last week, Gassée said that he now plans to start or run a computer-related company of his own. Said Gassée: “It’s probably a good time to run my own show.” Many employees have also assailed Sculley for not controlling costs and for rewarding senior executives with lavish perks and severance packages.

Industry analysts say that the cutbacks and the personality clashes within Apple are largely the result of an overall slowdown in computer sales. Says Andrew Toller, vice-president of the Toronto-based computer market research firm Miller, Toller & Evans Inc.: “Computer companies have a tendency to get ruthless when they have to cut back.”

But Apple Canada Inc. vice-president of marketing, Norman Kirkpatrick says that media reports of the internal dissension at Apple headquarters have been greatly exaggerated. Said Kirkpatrick: “If someone sneezes there, the public thinks they’ve got pneumonia.”

Still, analysts say that a more relevant concern is Apple’s failure to introduce a major new product since it began marketing the Macintosh II personal computer in 1987. Says Richard Shaffer, editor and publisher of an influential New York City-based weekly, The Computer Letter: “In this business, if you don’t get new products out quickly enough, you’re in trouble.” Added Randy Brophy, a senior research analyst with the Gartner Group Inc., a Stamford, Conn.-based market research firm: “Jobs was feeding Apple some of its best product innovations, and when he left there was a drop-off.”

Indeed, Jobs unveiled the original version of Apple’s Macintosh in 1983. With its revolutionary hand-held electronic control, the so-called mouse, it was then easily the most technologically advanced and easiest-to-use personal computer. But it also had several important drawbacks that shut it out of the critical business market, which accounts for roughly two-thirds of all personal computer purchases. Indeed, it had little business-oriented software, and it could not communicate with other manufacturers’ computers in a network.

As a result, Sculley—whom Jobs recruited as Apple president in 1983 from soft-drink giant Pepsico Inc., where he was president— decided it was necessary to open up the Macintosh and make it more compatible with other manufacturers’ systems. That led to a showdown with Jobs, who wanted to protect the machine’s unique features.

The struggle ended in September, 1985, when Jobs resigned as Apple chairman to pursue his own business. Sculley then installed Gassée, the former head of Apple’s French operations, as the new head of product development. Together, they concentrated on business customers by building more powerful and expensive versions of Apple’s existing computers.

But as they tried to capture more of the lucrative business market, Sculley and Gassée began losing Apple’s traditional source of support—its committed following of individual users. Last year, sales of the small Apple II computer fell by a startling 52 per cent, as IBM and other lower-priced competitors continued to adopt many of Apple’s user-friendly features. Says William Bryant, president of LOGIC, a Toronto-based, Apple-users group with about 1,000 members: “All of the new machines Apple is bringing out are too expensive. Nobody’s going to spend $6,500 to do some word processing on the kitchen table.” He added that Sculley lacks Jobs’s vision. Says Bryant: “Most users think that Sculley should go back to selling sugar water. Apple seems to have lost its sense of being part of a social revolution.”

Meanwhile, since he founded NeXT with $7 million of his own money in 1985, Jobs has generated a flood of publicity and raised more than $130 million from investors to support his new computer. But so far, NeXT has not made a significant dent in the marketplace. Although Jobs declines to disclose NeXT’s sales because it is a private company, analysts estimate that NeXT has sold, at most, only a few thousand of its black, cube-shaped machines.

Jobs now faces the same criticisms that contributed to his problems at Apple. NeXT was to provide a middle ground between small, easy-to-use personal computers and engineering workstations, which draw on a larger computer for programs and additional power. But NeXT requires unique software, and critics say that it interconnects poorly with other machines. Meanwhile, NeXT is earning substantial royalties from IBM’s new workstations, which analysts estimate could amount to $60 million this year alone.

Still, analysts also say that Jobs’s alliance with the world’s largest computer-maker is risky because the NeXT computer and the IBM workstations are targeted at similar users. Says Toller: “Giving the user interface to IBM, while legitimizing NeXT, is also giving away a possible competitive advantage.”

IBM, meanwhile, is counting on office workstations to help reverse its disappointing profit performance over the past four years. Last year, even though IBM’s worldwide revenues increased by five per cent to $62.7 billion, its profit fell by 35 per cent to $3.76 billion. And although IBM is roughly 10 times the size of Apple, the 75-year-old giant captured only about two per cent of the workstation market.

When IBM unveiled its new workstations last month, analysts quickly praised the machines’ performance and relatively low price. They added that the workstation is proof that a painful four-year restructuring program at IBM is paying off. Since 1986, the company has reduced its worldwide staff to 387,000 from 405,500 by offering employees generous benefits for early retirement. But IBM Canada Ltd. has remained largely immune to its parent’s downturn, and currently employs 13,000 people across Canada, up from 11,725 in 1984.

And now, IBM—the Goliath of the computer industry—has secured the assistance of Jobs, the technological visionary who provided its much smaller but still bothersome rival with its most powerful ammunition.