Business Week


Apple Computer, once the hip flagbearer of high tech, is in sad decline. There are lessons aplenty

Business Week: February 5, 1996
Department: Cover Story

The year was 1984. Apple Computer Inc. was the Magic Kingdom. It was the hip, young heart of Silicon Valley--the place where America was showing the world how the combination of technology and entrepreneurship could make a revolution. Apple created the legend of two kids in a garage inventing a computer--and then building a New Age company where the old corporate rules were scrapped. No dress codes, no formal meetings--nothing to get in the way of what really mattered: creating computers that, Apple promised, would change the world. In a building flying a pirate flag, co-founder Steven P. Jobs had spent three years with his engineers bringing such a computer to life.

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On Jan. 22, 43 million Super Bowl XVIII viewers got a glimmer of what Jobs was up to. A single 60-second commercial, which cost $1.6 million and was shown only once, crystallized the phenomenon that was Apple. The infamous Big Brother spot was a teaser for the launch of the Macintosh two days later. It showed an athlete bursting into a drab auditorium packed with corporate drones watching a figure on a huge video screen. She hurls a hammer, smashing the screen. The message: A rowdy, anti-Establishment crowd was coming to liberate Corporate America with computers for ``the rest of us''--with easy-to-use graphics and a push-button mouse. It was disturbing, in-your-face. And, yes, it was the product of Apple's well-oiled image-making machine. But it captured our collective imagination.

Today, that Apple--the very icon of a post-industrial, high-tech America--is barely recognizable in the troubled $11 billion company that bears the name. Years of overlooked opportunities, flip-flop strategies, and a mind-boggling disregard for market realities have caught up with Apple. Microsoft Corp.'s Windows 95 has seriously eroded the Mac's technology edge. A belated decision to expand the Macintosh market by licensing Apple technology to other personal-computer makers has gone almost nowhere. And now, management is in near-meltdown: Out of 45 vice-presidents, 14 have been axed or left in the past year, three more are about to decamp, and CEO Michael H. Spindler's job looks threatened. Apple is rapidly becoming a minor player in the computer business and may be swallowed up by Sun Microsystems Inc. or another rival.

Already, there are signs that Apple's troubles are spooking would-be customers (page 38). In the Christmas quarter, when record numbers of shoppers snapped up computers, Mac sales trailed the market--even after panicky last-minute price cuts. Apple's share of the world market during the fourth quarter sank to 7.1%, down from more than 8.2% a year ago.

That doesn't mean Apple is dying. The $69 million loss in the Christmas quarter and an operating loss this quarter that analysts put at $55 million won't put much of a dent in its balance sheet, which still has $1.1 billion in cash and short-term investments. Even the layoff of 1,300 workers, about 8% of its payroll, though painful, won't match the trauma of 1985, when the company axed 20% of its workforce.

But this time, Apple has lost something it's unlikely to win back: the technology leadership that made the Macintosh so different from other computers. Millions of Apple customers still insist, with justification, that the Macintosh remains a far more elegant machine than the ordinary PC. But Microsoft has aggressively updated Windows to the point where the masses of new buyers can't see much difference between a PC and a Mac--except that the Apple machine costs more. And as Apple's poor Christmas showing demonstrates, they're not interested in paying more.

All of a sudden, the model on which Apple has built its business for more than a decade looks shaky. Its plan had depended on having enough money to fund development and marketing of new Mac technology single-handedly and pay for higher-priced components that are unique to the Mac. For most of the Mac era, Apple has been able to do this by commanding a higher price than PC clones built from Intel Corp. and Microsoft technology. Periodically, Apple has also tried another approach: bringing out cheap Macs to drive up market share and improve economies of scale. But management never stuck with that strategy--or really pushed the Mac clone business that could have achieved the same ends. For now, Apple is in a lose-lose situation: It can't command top dollar or stimulate market-share growth, even with price cuts that have slashed gross margins from 28.7% to 15%. ``The jig is really up this time,'' says Chris Espinosa, a manager who has been with Apple since 1977. ``We can't do business the same way anymore.''

Fearing that this day might come, Apple insiders say company executives began hatching a contingency plan more than a year ago: To boost Mac market share to the 20%-plus range, they realized that they might need a powerful partner or even consider a merger. So in late 1994, Apple secretly began talks to sell the company. It has approached a number of possible suitors, including Sun Microsystems, IBM, and Hewlett-Packard. At a briefing after the Jan. 23 annual meeting--where embattled CEO Spindler had listened impassively as shareholders called for his resignation--the company told reporters that it is not for sale. Yet sources close to Sun and Apple say that some sort of deal may still be cooking.

With its stock trading at $30 and below for the first time in 18 months, Apple could be takeover bait, eliciting fresh interest from companies such as Toshiba, Canon, Motorola, and Philips, in addition to Sun. Experts figure Apple would go for about $35 a share, or $4.4 billion--about half the $8 billion that investment bankers a year ago said it might fetch. That's when Spindler approached the company most likely to pay top dollar: IBM. Now, even at a bargain price, the computer giant is no longer interested.

That leaves Sun as the most likely suitor. It could be a good fit. The workstation maker would gain Apple's office desktop business as well as Apple's Macintosh software interface for a Sun ``Internet appliance''--a stripped-down PC for surfing the Net. The companies were close to a deal in December, insiders say, when Sun CEO Scott G. McNealy dropped in on Apple's board at the St. Regis Hotel in New York. The stock-swap deal would leave McNealy in charge of the combined outfit. Negotiations broke off a week later, when Apple warned of the impending quarterly loss, but they have since resumed, sources say.

A PATTERN OF UPHEAVAL. If Apple is serious about not selling, it may wind up jettisoning assets and remaking itself into a smaller, albeit more profitable, company. It already plans to narrow its focus to market segments where it is already strong--a move that means relinquishing forever the chance of regaining the mantle of industry leader. Already, the company has hinted that it might exit the low end of the PC race. Now, its eye is on the Internet, where the company claims some technical advantages. But Apple joins a long list of Web wannabes.

How did this company--that had everything going for it--come to this sorry pass? Certainly, Spindler deserves much of the blame. During his watch, Apple's technology edge eroded dangerously. The project that could have restored that edge and countered the Windows 95 onslaught--a new Mac operating system called Copland--has fallen two years behind schedule. And instead of moving toward his goal of doubling Mac's market share in five years, Spindler has let it shrink.

A Barrel of Trouble

The most alarming result of Spindler's troubled tenure is the departure of many of Apple's most talented executives. Sales chief Ian Diery quit in April, and his replacement, longtime Apple exec Daniel Eilers, left last fall--both pushed out by Spindler reorganizations. In July, Frank Sanda, the charismatic leader of Apple Japan, was forced out after a strategy dispute with headquarters. Chief Financial Officer Joseph Graziano resigned in October. Apple insiders say he left after he briefed directors on what was ailing the company--specifically, Spindler's leadership. Spindler then met with the board, and when it was over, Graziano was out.

Dismal as Spindler's record is, however, Apple's woes can't all be heaped on the current boss. Nor can they be explained by the mistakes of his predecessor, John Sculley--though there were plenty of those. The fact is, despite its glowing reputation, Apple has rarely run smoothly--at least not for more than a few years at a time. There have been massive management upheavals every few years--in 1981, 1985, 1990, and 1993--and often minor ones in between. In three of those crises, A.C. ``Mike'' Markkula Jr., an original Apple investor and now chairman, removed the boss. For months, Apple watchers have been expecting Markkula to take out Spindler, but on Jan. 23, Markkula again pledged his support, saying: ``Michael Spindler has the full support of this board.''

Until recently, Apple's gyrations hardly mattered. Rapidly growing markets and the overarching appeal of the Mac papered over almost every gaffe. But dozens of interviews with current and former executives reveal a pattern of mismanagement that caused Apple to fumble critical decisions and zigzag between strategies, bringing the company to this juncture.

The pattern began almost at the start. Back when they were helping invent the personal-computer industry with the Apple II, Jobs and co-founder Stephen Wozniak were also concocting a notoriously renegade culture. Their credo: Create your own thing, defy the naysayers, and ignore the Establishment--one person can change the world. In its finest hour, back in the building with the pirate flag, that culture brought forth the ``insanely great'' Mac, a groundbreaking machine whose users didn't just publish newsletters or crunch spreadsheet numbers. They fell in love.

There has always been a flip side to the Apple ethos, though. ``The culture has incredibly powerful elements--Jobs's perfectionism, for one,'' says a former Apple executive. ``But the other side of that is unharnessed and uncontrolled.'' Inevitably, that led to clashes between the ``creators,'' such as Jobs and his Mac mates, and the experienced managers hired to run marketing and finance.

THE HIGH PRICE OF PEACE. The defining battle was between Jobs and Sculley, the former PepsiCo Inc. executive who was recruited in 1983 to bring depth to the management at Apple, already a billion-dollar company. Jobs, unwilling to bend his aesthetic and technical ideals to fit market realities, had made the first Mac a design statement. Dazzling to look at, it was badly underpowered and lacked the expansion capability to fix that. Within months, sales stalled, and Sculley suggested a new, more salable ``open Mac.'' But the temperamental Jobs could not agree on how to proceed. He lobbied his board to remove Sculley. Instead, Sculley won the board over, and Jobs was ousted.

What happened next would help set a pattern of behavior among Apple executives that has continued ever since. As the guy who unseated Jobs and carried out sweeping layoffs, Sculley realized that he was not Mr. Popularity. He also knew that the rank and file resented the big-company systems he was putting in place. And most important, he understood that he had to keep engineers and programmers on board if Apple was to stay ahead of the technology curve. The solution was not to tinker with the culture.

It worked better than Sculley could have hoped. By 1987, the Mac was a solid hit, and with the new CEO focused on marketing, the anti-Establishment computer made inroads into Corporate America. Apple was once again a happy, if not magical, kingdom.

Nevertheless, Sculley paid a price for peace in the Apple family. By lionizing the technical ``wizards'' (as they described themselves on business cards), it made them tough to supervise. And his feel-good management style meant endless groping for consensus. Before long, everybody around Apple knew that a decision was rarely final. The joke began circulating that ``a vote can be 15,000 to 1 and still be a tie.''

That joke has gotten less funny over time. Year after year, key decisions have been postponed, reversed, or avoided completely as various executives and factions tried to push their own agendas. As far back as 1985, for instance, Apple executives began debating the merits of licensing the Mac operating system to other computer makers--to spawn a clone industry and increase the market share for the Mac ``platform.'' Until two years ago, however, every time top management came close to giving the go-ahead, somebody scuttled the decision.

If the clone move had been made in 1992--when a secret project known as Drama explored the notion of farming out production of a low-end Mac line to Taiwan's Acer Inc.--Apple might be in a far different position today. Says one former Apple executive: ``I've never understood why somebody can't just say: `I'm the leader. This is the way it's going to be. Thanks for the discussion, but if you don't want to do it, leave.'''

Such decisive leadership might have helped Apple fend off what has ultimately proved to be its nemesis: Windows. But when the first commercially successful version of the program appeared in 1990, Apple's initial reaction was dismissive. The day Windows 3.0 was launched, Apple's executive staff--including Sculley--gathered for a demo. ``They were mocking it,'' says a former Apple manager who was there. ``They said it was awkward, clumsy, a piece of junk. They were laughing. It was complete arrogance.''

By this time, Sculley was focusing elsewhere. The buttoned-down East Coast executive who had made the tough decisions back in 1985 was on to a new career. No longer intimidated by Apple's gearheads, Sculley was determined to become one. After publishing his autobiography, Odyssey, in 1987, Sculley took on the mantle of techno-visionary.

Sculley, named chairman in 1987, anointed himself Apple's chief technology officer in 1990. He dived into the research and development labs, where he had some of Apple's best brains working on his pet project: the Newton ``personal digital assistant.'' It was aimed at the needs of a converging computer/communications/media market. By the time Newton came out--to widespread ridicule--in 1993, Sculley said the PC business was a ``cold shower'' compared with the hot new markets that convergence promised.

HOLLYWOOD HOBNOBBING. Apple's board, led by Markkula, was not amused: In June, 1993, its members showed Sculley what a cold shower really feels like. According to an account in a breach-of-contract suit later filed by former corporate counsel Albert A. Eisenstat, the board--which had asked Eisenstat that spring to approach Spindler about stepping into the CEO slot--thought Sculley was ignoring day-to-day operations. He was often seen that year hobnobbing with the Clintons and politicos in Washington or with Hollywood glitterati. Caught totally off guard, Sculley was canned as CEO in a board meeting on June 17.

Spindler's emphasis on ``Business 101'' seemed like the long-awaited voice of reason in Apple's chaotic culture. He quickly grappled with the problems: overpriced products, sclerotic product development, and bloated costs. He laid off 2,500 workers, canned blue-sky projects, cutting R&D costs by more than $100 million a year, and flawlessly launched an entirely new product line around the speedy PowerPC microprocessor. What followed were four quarters of strong growth and a rebound in Apple's stock price--from a low of $22 to $43.

But Apple's cult of consensus and Spindler's inconsistency would prove a deadly mixture. Within a year, the hard-charging executive, who had earned the nickname Diesel in Europe, was enmeshed in a cycle of delay, reversal, and missed opportunities. Says one insider close to Spindler: ``It was fine for a while. But the system converts people. People don't convert the system.''

If Spindler gets the ax for Apple's dismal 1995, he can probably trace his downfall to what he did during the planning meeting for fiscal 1995. Things were looking rosy. The economy was recovering, and the new PowerPC-based Macs were in hot demand. What's more, Microsoft's ``Mac killer''--Windows 95--had fallen behind schedule, giving Apple until the following August to grab market share--before the Microsoft juggernaut hit. Says an Apple executive: ``We were going to make hay while the sun shined.''

Then Spindler blinked. Insiders say that Ian Diery, now president of AST Research Inc., prepared a 1995 forecast of about 15% growth--the same as analysts were predicting for the industry. But CFO Graziano argued that was not aggressive enough if Apple still hoped to expand market share. The combative Diery insisted on a less ambitious agenda, according to insiders, saying the company hadn't hit its plan in years, and employees needed to ``feel like they could win.'' A former Apple executive says: ``Spindler waffled.'' Diery won.

When the PC market boomed, Apple couldn't keep up. Three quarters of product shortages peaked last September with what Apple said was a $1 billion backlog. Apple executives were hard-pressed to find supplies--of the Mac's custom parts and of commodities such as memory chips, disk drives, and CD-ROM drives, which all PC makers were scrambling for.

It didn't help, of course, that the boss launched a major marketing reorganization, and then reversed himself later in the year. In April, Spindler ordered up a new worldwide sales and marketing organization. But by November, money was tight, and Spindler pulled the plug. Instead, he ordered an all-out bid for market share. The component shortages had eased, and in November, dealers were awash in Macs. But there was a new hitch. Apple marketing execs had misread consumers: Apple had too many low-end models and too few of the powerhouses that buyers were snapping up. When the wrapping paper settled, Apple was left with $80 million worth of inventory write-offs, while IBM, Compaq Computer, and HP had cleaned up.

Another Spindler casualty has been the Mac clone business. After years of debate, he blessed a plan to license Apple's operating system to clonemakers in mid-1994. By then, Windows-based PCs were everywhere. But Apple executives insisted that they could push Mac's world market share to 20% in five years. Apple would add 1% each year and the clones the rest.

But it turned out to be a classic Apple nondecision. Even though Apple execs said they would ``aggressively'' pursue licensees, there was internal debate over who qualified. Insiders say that last spring, Gateway 2000 was negotiating with Apple's licensing team about cloning the Mac--but Spindler and his top executives had the final say. Sales executives, concerned that Gateway might erode rather than complement Apple's position, gave it a thumbs-down. ``They just did not want to take on heavyweight competition,'' says an Apple executive.

And they haven't. So far, Apple has licensed the Mac design to just Pioneer, Power Computing, Umax, and Daystar. Together, they shipped about 200,000 units last year, a smidgen compared with Apple's 4.5 million. In his Jan. 17 restructuring announcement, Spindler promised ``much broader'' licensing initiatives. But with Apple's market share dipping, it may be a hard sell.

Perhaps Spindler's biggest misstep was botching the chance to sell Apple before its current funk. Spindler and IBM CEO Louis V. Gerstner Jr. began serious talks in September, 1994. The companies had recently collaborated with Motorola Inc. on the PowerPC chip, which was based on an old IBM chip design. Apple and IBM were both committed to using the chip in their products. In addition, the onetime rivals had thrown in their lot together against Microsoft with two software joint ventures: Kaleida Labs and Taligent--both now defunct.

Sources at both companies say Apple and IBM executives holed up for two weeks near San Francisco International Airport and hashed out what the merged company would look like. IBM would bring out a new line of PCs based on the PowerPC chip already used in Power Macs. IBM would go downmarket with its Intel-based PCs. And the two companies would use Apple's software, beefed up with IBM's OS/2, for the merged PowerPC line.

On paper, it looked good. The picture immediately dimmed when Spindler met with Gerstner near Chicago's O'Hare International Airport for a second session. As an opener, Spindler presented a golden-parachute proposal for himself and top managers. ``They had written documents--a legalistic-looking wish list of compensation and severance demands,'' says an insider. That put Gerstner off, but IBM proceeded to offer $40 a share for Apple--and privately was willing to go as high as the mid-40s. Insiders say Spindler and Markkula rejected it as too low and suggested $60, thinking Gerstner would make a counterbid. He didn't. Talks collapsed.

TRAILING TO THE INTERNET. In May 1995, at the urging of his board, Spindler made a second overture. Again, the chemistry was bad. Spindler ``ranted and raved'' for the first half-hour about how Gerstner, who was not at this meeting, had misunderstood his position in the prior go-round, say insiders. That rattled negotiators, who began to wonder if Spindler was sincere about a deal. Back in Cupertino, according to insiders, Spindler was saying in management meetings that the deal ``made no sense.'' One former Apple exec says he concluded that ``Michael wanted no part of it.'' Last summer, Markkula made a last-ditch attempt to pitch Apple to Gerstner. By then, however, IBM was in the middle of its $3.5 billion acquisition of Lotus Development Corp. and passed.

Then, insiders say, Apple homed in on HP and Sun. Spindler proposed a merger over dinner with Lewis E. Platt, CEO of HP, last summer. But Platt's lieutenants concluded there was no fit, given HP's thriving PC business. Regis McKenna, Apple's original public-relations man and now a consultant, approached Sun, arranging a meeting between Spindler and L. John Doerr, a Sun director. While the two companies are said to have resumed talks recently, neither company is confirming the speculation.

Can Apple help itself out of this jam? So far, investors and industry watchers are still scratching their heads. If Apple's Mac is destined never to rise to a double-digit market share, the company needs a radical overhaul--not the minor tune-up that Spindler laid out on Jan. 17. In the meantime, the company that once hoped to lead the world with its technology is now a follower--as the industry crowds onto the Net. ``Any project that doesn't have the word Internet in it doesn't get approved anymore,'' says one Apple manager. Apple is selling Web servers for $3,000--that's $2,000 less than the cheapest models from Sun, Apple claims. At the Jan. 23 shareholder meeting, Spindler unveiled plans to use Newton and Pippin--a multimedia Mac player for the TV that it's licensing to others--as Internet devices.

One hopeful sign for Apple on the Net is its strong following in media and entertainment, where ``content providers'' are moving to the Web. ``This whole Internet explosion is a real opportunity for Apple,'' says Eugene Wang, just-departed executive vice-president of Symantec Corp. ``It's not so much an advantage for them, but it takes away some of their disadvantages.'' To rebound, Spindler will need to come up with some insanely great Internet products. Maybe he should rout around in the attic for that pirate flag.

By Kathy Rebello and Peter Burrows in Cupertino, Calif., and Ira Sager in New York

Copyright 1996 The McGraw-Hill Companies. All rights reserved.

This page was updated by the Webmaster on January 29, 1996

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