Apple Faces Challenge To Its Role as Innovator

By John Markoff
The New York Times

BOSTON, Aug. 9, 1990 -- Apple Computer Inc., the Silicon Valley company that defined inventiveness and creativity in the personal computer industry, is engaged in an unfamiliar round of soul searching. Can the computer maker, both employees and supporters wonder, prove that it is still capable of innovation?

Invincible in the past in providing the business market with personal computers that were both easy to learn how to use and easy to operate, Apple has in recent months found itself increasingly on the defensive. Its mainstay Macintosh computer is six years old and beset by competing machines that now offer a similar style of computing, often at significantly lower cost.

At Macworld, a major industry show here this week of products made by other companies for use with the Macintosh, the most dramatic example is Windows 3.0. This software, made by the Microsoft Corporation, gives users of personal computers made by the International Business Machines Corporation, and compatible models, a mouse-controlled system, access to files and command symbols similar to the Macintosh's.

From Leader to Trailer

But Apple's potential problems run deeper than the challenge from Microsoft, many industry analysts and executives say. The company, based in Cupertino, Calif., has increasingly found that it is trailing, not leading, the computer industry in innovation. Executives close to Apple said that while the company has no shortage of innovative technology, it has not been able to translate the technology into commercial products.

''I'm disappointed,'' said Esther Dyson, publisher of Release 1.0, a computer industry newsletter. ''It's simple - the company didn't get its act together and it spent too much time on internal battles.''

''Their uniqueness has turned from innovation to isolation,'' said Mark Stahlman, a computer industry analyst at Alex. Brown & Sons, a brokerage.

Such talk has dampened Wall Street's enthusiasm for Apple stock. It closed in over-the-counter trading today at $39.50 a share, down 62.5 cents and lower than its high in the last year of more than $50.

Executives at companies that are Apple's partners said they were not planning to desert the computer maker. But in industry forums and on the exhibition floor here the consensus is that Apple must act quickly.

Focus on Margins

In order to compete effectively in the personal computer market, Apple needs to slash a full 5 percentage points off its gross profit margins to be more price competitive and increase market share, argues Stewart Alsop, editor of PC Letter, a newsletter. Last year's gross margin's were 54 percent, almost 9 points higher than those of the Compaq Computer Corporation, even though Apple outspends the Houston computer maker in research and development.

Most alarming, analysts said, is that Apple's woes are visible in the two fastest growing areas in the computer industry: portables and engineering work stations.

The company was embarrassed last year when it badly misjudged the portable market. Its long-awaited Macintosh Portable weighed 18 pounds - far heavier than most customers apparently want. Shortly after Apple's portable was introduced, Compaq announced its LTE, a six-pound machine with many of the same features as the Macintosh Portable. The LTE became a best seller.

Apple has since reportedly approached the Sony Corporation, its largest parts supplier, to make a more competitive laptop to market under the Apple brand name.

Overtaken by Sun

In the hot market for engineering work stations, Apple's IIfx has received positive reviews but industry executives say it was overtaken by Sun Microsystems' Sparcstation IPC, which was introduced recently. The Sun computer has more than twice the speed of Apple's fastest comparable computer and it fits in a box less than half the size of the most capable Macintosh.

New questions about Apple's ability to innovate were also raised last month when two principal engineers on the original Macintosh development team, Bill Atkinson and Andy Hertzfeld, left to create a company to develop a portable computer. Although Apple invested in their new venture, their departure was a sharp contrast to how Apple developed the Macintosh under Steven P. Jobs, Apple's co-founder, who created a small group of self-styled ''pirates'' inside the company to build the Mac.

''It's a recognition that Apple has gotten too big to nurture some ideas,'' said Richard Shaffer, editor of Technologic, an industry newsletter.

New Licensing Urged

Mr. Shaffer, as well as a number of industry executives, have been urging Apple to begin licensing its software technology or to convert its software so that it would run on computers based on microprocessors made by the Intel Corporations, like I.B.M. and Compaq machines.

In the past, Apple has rejected such moves. Its executives now acknowledge, without being specific, that many options rejected in the past are being reconsidered, like the marketing of computers using the advanced RISC hardware.

Apple's chairman, John Sculley, professed to be unconcerned about the tightening technology competition. Referring to the success of Windows, he said in a speech here Wednesday, ''The Macintosh is a lot more than what you see on the screen.''

Apple's principal strength has and will continue to be consistency, he said. Programs designed to run on the original Macintosh in 1984 will run on Apple's most advanced machines, he said, which is something that is not true of I.B.M. and compatible machines.

Assuming a New Role

Mr. Sculley, who does not have an engineering background, recently assumed the duties of Jean-Louis Gassee, the head of research and development who left earlier this year. Mr. Sculley's first job will apparently be to reverse the company's eroding market share.

Apple is planning to introduce as many as three lower-cost Macintoshes in the fall, including a less expensive color machine that brings new strength in educational and home markets. Apple will also introduce its least expensive Macintosh, to be called the Macintosh Classic, at a price of less than $1,000, several trade publication have reported.

But the strategy entails some risks. At a May meeting for analysts, the company warned that product transitions could significantly hurt second-half earnings, although it earned $119.8 million in its last quarter on $1.36 billion in revenues, both increases over the period a year earlier. The drain on earnings could be compounded if the new low-cost color computer is delayed and not available for the Christmas market.

Despite the evident loyalty of Apple's most important software developers, analysts and industry executives said the company must demonstrate that the most interesting new software packages will appear first on the Macintosh, instead of the on machines of competitors.

William Campbell, head of Apple's Claris software subsidiary, acknowledged the challenge this week, saying the company was considering new arrangements. ''It is obvious that there were some products that would have great opportunities on other platforms,'' he said.

GRAPHIC: Photo: Increasing market share is one of the challenges analysts say is facing John Sculley, chairman of Apple Computer Inc. (George Rose/Gamma-Liaison)

Copyright 1990 The New York Times Company