Desktop Duel: Apple Stakes Future On Battle With IBM For the Office Market

Macintosh's New Software And Network Will Help, But a Lot Must Go Right

Foe Is Growing Entrenched

By Michael W. Miller and Erik Larson
The Wall Street Journal

March 15, 1985

At Seafirst Bank in Seattle, the office of the future will be full of Macintosh computers. The bank wants all its 3,500 desk-bound workers to have computers within three years, and it figures the easiest way to get started is with Apple Computer Inc.'s newest machine -- simple to learn and full of dazzling graphics. So this week, the bank announced it has ordered 1,000 Macintoshes.

The office of the future will look a lot different at Crown Zellerbach Corp. in San Francisco. The forest-products concern expects to buy about 2,000 personal computers in the next five years, but they will probably be International Business Machines Corp. Personal Computers, or perhaps the so-called PC clones. These are what most of the company's personal computers are now, and what the company has grown accustomed to. "Sure the Macintosh is cute," says Peter Smyth, the director of the company's computer-services division, "but we can't go scrap 100 PCs just because the Mac has great graphics."

Apple Computer has staked its future on winning deals like Seafirst's and converting skeptics like Crown Zellerbach. And now it stands on the verge of seeing whether its risky plan to win a big part of the business market for computers will work.

This week Apple began shipping a long-awaited product that links its machines and lets them communicate with one another. Next week its sophisticated laser printer, another crucial office accessory, should be available in stores. And next month, Lotus Development Corp. of Cambridge, Mass., is expected to deliver Jazz, a business software package that could at last anoint the Macintosh as a serious business machine.

But Apple is getting ready to test its office strategy -- a radical change for a company that grew big selling computers to individuals and schools -- at a time when even established business automation companies see unexpected slowdowns. This week, for instance, Wang Laboratories Inc. reported sluggish order growth. Meanwhile, new competition for the low end of the personal-computer market threatens to challenge the Apple II line, the source of much of Apple's cash.

Moreover, Apple has once again seen how acutely vulnerable it remains to moves by IBM. Last week Apple announced it would have to close its four manufacturing plants for one week each, blaming in part a Christmas-season price cut by IBM that saddled Apple dealers with unsold inventory. It shows, says John Sculley, Apple's president and chief executive officer, that even a $2 billion company "is still going to be affected by a giant corporation like IBM."

Apple's stock price has taken a beating lately, and Mr. Sculley thinks the reason is that investors are waiting to see how the company positions itself against its big rival. He figures Apple has two years to prove the Macintosh is "a serious alternative to IBM."

But not everybody gives Apple that long. "If they aren't beginning to see some inroads and some shifts in six months, then they'll have to reconsider" their strategy, contends Phil Greene, the manager of the Forsythe Computers retail chain in the St. Louis area.

Apple botched two prior forays into the business market. The company introduced its Apple III in 1980 but rushed it to market too early, with serious design flaws that forever haunted even an improved version of the machine. Apple quietly suspended production. The Lisa, introduced in 1983, arrived in stores too late to take advantage of the anticipation sparked by a media blitz, and at $10,000 it was too expensive. It has since been retooled and dubbed the Macintosh XL.

From these setbacks, says Mr. Sculley, Apple learned that technology isn't enough. "While we captured the world's imagination with Lisa technology, IBM captured the nation's desktops," he says. As for Macintosh, he says, "we knew from the start that it was going to be a long, hard effort to earn its way into the market."

Consider what Apple is up against. Future Computing Inc., a Dallas market-research concern, recently surveyed about 180 officials who make decisions about personal-computer purchases in big corporations and found that 72% of the computers they expected to buy this year would be IBMs. Just over 4% would be Apples -- in spite of an aggressive and expensive Apple promotion campaign.

IBM's hold goes beyond simple loyalty. For companies whose first wave of personal computers was IBMs, the machines have become inextricably woven into daily operations. Companies have spent hours training employees on them and built special support staffs to keep up with new programs and accessories for them. And they have spent millions on spreadsheet programs -- typically Lotus's 1-2-3 -- that run on IBMs.

"When you start with a sophisticated base of computers like we have, Apple's challenge is to displace IBM, not just to come in and fill some empty desks," says Charles C. Oldenburg, the head of Chevron Corp.'s computer-services department.

Even some corporate fans of the Macintosh say its technological charm doesn't outweigh practical drawbacks. "The Macintosh is probably as easy to use as any machine I've ever tried," says Bill Howard, the manager of information services at Bechtel Corp., the giant San Francisco engineering concern. The computer's graphic versatility also makes it ideal for a manager who makes lots of proposals and presentations, he says.

But then Mr. Howard rattles off a list of shortcomings: not enough business software, no way yet to hook the machine up with IBM personal computers, relative sluggishness in heavy-duty computing. Moreover, he adds, it would take a lot of time to retrain all the employees who have learned to use IBMs. Finally, Mr. Howard says, "the more vendors you have, the less purchasing power you have with any one."

Mr. Sculley says Apple is trying to play up the Macintosh's strengths as a machine suited to producing reports and client presentations, avoiding desk-to-desk combat with IBM. Prime targets are small and medium-sized businesses that haven't yet invested heavily in other computers. Mr. Sculley says he believes such companies will be using 15 million computers within five years, compared with four million now.

Apple, however, won't ignore the largest corporations. "Our strategy is to get 50 accounts in 1985 and support 'em like crazy," says Steven P. Jobs, the general manager of the Macintosh division as well as co-founder and chairman of Apple; then, he says, Apple can use such accounts (Seafirst is one) to woo others.

The company's balance sheet looks solid. Apple hasn't any long-term debt and, in fact, had nearly $200 million in cash at year-end. Apple's sales rose 54% to $1.51 billion in its fiscal year ended last Sept. 28, while profit slipped 16% to $64.1 million, or $1.05 a share. In the current quarter ending March 29, analysts expect net to rise about 67% from a year ago to 25 cents a share, and they see full-year fiscal 1985 revenue reaching $2 billion. (Mr. Sculley won't comment on the estimates.)

Yet investors are nervous. Volume in Apple's stock, traded over the counter, at times has exceeded IBM's, even though IBM has about 10 times as many shares outstanding. Yesterday the Apple stock that made millionaires of hundreds of employees closed at $21.75 a share, barely above its 52-week low.

Some analysts suggest the stock may be a victim of inflated expectations; soon after Apple reported that net income for its Christmas quarter rose eightfold to $46.1 million, Mr. Jobs said the Macintosh had been "left out in the cold" in holiday buying. And the surprise news of the plant closing "scared the hell out of people," says Otis T. Bradley, an analyst with Alex. Brown & Sons Inc.

A series of resignations from Apple, amid reports that the Apple II division was feeling put out by all the attention given the Macintosh, may also have eroded Wall Street's faith. Co-founder Steve Wozniak, central to the legends surrounding the company's garage origins, quit the company last month and sold $70 million in Apple stock. Some half-dozen other senior and middle managers have also defected from Apple, or announced plans to do so, over the last three months.

For Apple to dispel the doubts and start making progress against IBM, a lot of things need to go just right. For one thing, Lotus must deliver its Jazz software package next month. Jean Richardson, a former Apple director of marketing communications, says Apple once hoped Jazz would be available in 1984; "we didn't anticipate until late in the game that the software would lag so much," she says. Apple's Mr. Jobs says Jazz should be in stores by the third or fourth week of April.

The $595 product will handle the essential tasks that office workers do on personal computers: spreadsheets, graphics, word processing, communications and data-base organizing. All are features available on other Macintosh programs, but the introduction of a single package that handles them all -- made by the creator of the industry-standard 1-2-3 spreadsheet -- is expected to be a crucial step in developing Macintosh's image as a computer for offices.

At Chevron, Mr. Oldenburg says Jazz will make an important difference in his evaluations of Macintosh. "Right now Lotus 1-2-3 is the biggest justification for having a personal computer," he says. "When Jazz is available, we'll have to take another look at Macintosh."

Jack Bell, the chairman of the Computerease chain of stores in Connecticut, says the addition of Jazz software "makes the Macintosh a real machine" and will "change the Mac's perception in the office environment and make it fashionable there."

Some office users maintain that Jazz won't significantly alter Macintosh's image. Bechtel's Mr. Howard says his company and others are looking at the Macintosh for workers who will use its graphics for proposals and presentations -- a different group of employees from regular spreadsheet users.

But on the day Lotus introduced Jazz last November, Apple's stock jumped 87 1/2 cents, and Alex. Brown's Mr. Bradley thinks investors now "are going to measure Macintosh's potential quite heavily on the success of Jazz. If the product stinks, then the bears would have a field day with Lotus as well as Apple."

Apple also needs to deliver the accessory products, dubbed the Macintosh Office, that were announced in January. The $7,000 LaserWriter printer has already won raves from dealers and companies testing it. But businesses are anxious to see how well Apple's networking product, which can tie as many as 32 Macintoshes together and let users share such products as the printer, will work.

They also await Apple's planned file server, a central data-storage machine that Macintoshes can share. Businesses see such a device as a key component of any office network. Most crucial of all for big businesses is a series of products due later this year that Apple says will let the Macintosh and Macintosh network hook up to the IBM PC and IBM's own as yet undelivered network.

"We're taking a show-me attitude," says Bechtel's Mr. Howard. Next month, he says, he is going to a presentation at Apple to see what these products look like. "Based on what we see and learn there, we'll probably be making some decisions on whether to support the Macintosh or not," he says.

Apple's battle for the office could be complicated by a skirmish shaping up in the home-computer marketplace -- one that could undermine the Apple II's continuing strength there. And Apple can't afford to see revenues from the II line shrivel up right now, when it needs them to help finance the campaign for the Macintosh. By Future Computing Inc.'s estimate, the Apple II Division provided 66% of Apple's revenue last year.

Later this year the preeminent makers of low-priced home computers, Commodore International Ltd. and Atari Corp., both plan to extend their product lines upward with Macintosh look-alikes, to be mass-marketed in the $1,000 price range. The new computers, Commodore's Amiga and Atari's ST, may not take off, but their very presence in stores will almost certainly force Apple to make significant changes in the way it sells the Apple II -- if only to avoid the damaging perception that shoppers can buy considerably fancier machines for the same price.

One option for Apple would be to meet Commodore and Atari on their own ground: Cut the price of the II and start selling it through mass-merchants like K mart and Toys "R" Us, where Apple computers aren't currently available. "Apple has to recognize that their primary market for the II is in the home -- and expand their distribution to address the home," contends Trip Hawkins, the president of Electronic Arts, a San Mateo, Calif., home software maker. He thinks Apple may start selling the II in Sears Department stores later this year, although Apple denies it. If Apple ignores the big chains altogether, Mr. Hawkins warns, "then you've got Apple in the castle with the drawbridge up and Commodore assaulting with some pretty fantastic weaponry."

But a deal with big mass-market stores could backfire for Apple if it alienated the specialty dealers the company relies on. "With their emphasis on Macintosh as the cornerstone of their future, Apple can't afford to get dealers angry by yanking the II from them and putting it in the mass-merchandise channels," says William Bowman, the chairman of Spinnaker Software Corp. of Cambridge, Mass. "They're absolutely, totally dependent on the dealers in their battle against IBM."

Like others in the industry, Mr. Bowman guesses that Apple will keep the II alive by revamping it in a few important ways, such as giving it more memory, a bigger disk drive and possibly a more powerful microchip at its heart.

At the other end, however, looms American Telephone & Telegraph Co., also preparing to bring out office personal computers. "AT&T is the type of company that has such vast financial resources that they will eventually get it right," says Doug Antone, the vice president of sales for Byte Shops Northwest Inc., a Portland, Ore., computer-store chain. "Apple is already one step ahead there. But when the three of them go head to head in the business market, that will be a very strong competition."

Mr. Sculley's answer is that people underestimate how difficult it is for AT&T to transform itself from a utility to a competitive computer maker. "I think that's an issue of someone equating size with strength," he says. As for Atari's and Commodore's plans to use Mac-like technology on a home computer, he says: "I think it's like putting Bearnaise on a hot dog."

Copyright (c) 1985, Dow Jones & Co., Inc.