Apple Computer's Counterattack Against IBM

Information Processing

Computers

Business Week

January 16, 1984

At the shiny new red-and-white headquarters of Apple Computer Inc. in California's Silicon Valley, the atmosphere reflects a curious combination of high excitement and a state of siege. The Cupertino company is preparing to roll out no fewer than three new personal computers, beginning at its Jan. 24 annual meeting. But the tension is running especially high now because these new products are the opening salvo in an all-out counterattack against archrival International Business Machines Corp.

"This is the year Apple fights back," declares John Sculley, Apple's intense president. "We are betting the entire company and are giving up a year of our lives -- working six- or seven-day weeks."

This tough stance is something new for the seven-year-old computer maker. But as Sculley puts it: "I certainly didn't come to Apple to mind the store." Since Apple pioneered the personal computer in 1977, the company had smugly played the role of market leader. But IBM needed only two years with its phenomenally popular Personal Computer to unseat Apple as the No. 1 supplier in 1983. In the process, Apple lost close to half of its share of the U.S. personal computer market, even though its sales soared 69%, to $982.7 million, for the year ended Sept. 30. The company shipped only about 24% of all personal computers sold in the U.S. in 1983, down from 41.2% of the 1981 market, according to market researchers at Dataquest Inc. (chart).

Profits suffered even more, with net falling 80%, to $5.1 million, in the three months ended Sept. 30. The drop was a result of the major investments that Apple was making in its upcoming products, and in an automated factory in Fremont, Calif., to turn out these products, as well as some price-cutting in the face of growing competition.

NEW FAMILIES

Apple still has a firm grip on the No. 2 spot in the personal computer business. Its first model, the Apple II, is the world's most widely used personal computer: Some 1.4 million units are installed, according to Dataquest. And Future Computing Inc., a Texas market researcher, estimates Apple shipped a record 90,000 Apple IIes in December.

But just how fast Apple's business will grow in the future will depend largely on how successful the company is with the new products that it will introduce in the next few months. "Apple will remain No. 2 to IBM," predicts Egil Juliussen, chairman of Future Computing. But he adds: "If Apple can get the new product families started strongly in 1984, it won't lose the momentum to IBM that it did in 1983."

Apple will not discuss these new computers until they are announced, but industry sources expect three models:

* Macintosh. The most important new model, Macintosh, will be a less powerful, lower-price member of the easy-to use Lisa family, which Apple announced with much fanfare a year ago (BW -- Jan. 31). Macintosh is expected to have a retail price of $1,995, less than one-third of the price of the $8,000 Lisa and very competitive with the 1BM PC. Like Lisa, the 20-lb. Macintosh processes 32 bits of data at one time and comes with a "mouse" -- a pointer that makes it easier to tell the computer what to do -- and can display more than one task at a time in different "windows" of its display screen. When it is introduced on Jan. 24, "Mac" will come equipped to do word processing, drawing, and financial spreadsheets.

* Lisa II. Scheduled to be announced along with Macintosh, Lisa II is expected to replace the current Lisa. Although it will be priced $1,500 cheaper than the current model, it will process data five to six times faster. The new Lisa will be able to run most of the programs written for Macintosh, but Mac will not have the power to run current Lisa software.

* A portable Apple IIe. To be announced in April, this new computer will be a portable model of the $1,295 Apple IIe -- the current, enhanced version of the original Apple II. It will sell for less than $1,000 and will be "light enough to put in your kid's backpack so that he can take it to school," says one source. It will be able to run most of the estimated 16,000 programs that have been written to date for the Apple II family.

These three products are the first hard evidence of Apple's new strategy. Although Sculley was hired last April primarily for his skills as a marketing whiz, he has spent nearly all of his time fine-tuning the strategy for these products. He is convinced that the best way for Apple to distinguish itself in the crowded personal computer marketplace is to have technically advanced products. "Apple is going to continue to be very much a technology-driven, product-oriented company," he maintains.

To some extent this role has been forced on Apple by IBM. Industry observers agree that it was IBM's strong marketing and customer support that made the PC an enormous success. "It is very important for Apple to establish and maintain a technology leadership position," points out E. Floyd Kvamme, Apple's executive vice-president for marketing and sales. "It doesn't make any sense for us to try to outsell or outservice IBM."

But as Apple already found out with the innovative Lisa, technological leadership alone is not enough for success. The company initially targeted Lisa primarily at professionals and managers in large corporations. The computer got rave reviews from the press and the technical community, but it sold fewer than 20,000 systems in 1983 -- less than half the number forecast internally.

Lisa missed its goal because Apple made several marketing mistakes. It introduced Lisa without three of the attributes a personal computer needs to crack the corporate market: adequate business software, a family of larger and smaller products, and the ability to communicate with other computers. And it did not move fast enough to train dealers and its own sales force. "Apple suffered from technological hubris," says Thomas J. Peters, co-author of the book In Search of Excellence and a consultant to the company. "It took the naive Silicon Valley view that Lisa would walk into the boardrooms of corporate America and sell itself."

To prevent a replay of that problem with this year's products, Sculley is tempering Apple's technology orientation with a pragmatic, market-oriented strategy. "We must make sure we don't get overwhelmed by the excitement of the technology and forget we have to put it into marketable products," he explains.

BALANCING ACT

As a first step in this direction, Sculley is rationalizing Apple's fragmented product line. When Lisa came out, the company had three products -- the Apple II, the Apple III, and Lisa -- and each could run only its own programs. Now Sculley is focusing on two groups: The Apple II family, which will include the Apple III, and the Lisa-Macintosh family. "Sculley bas brought an immense amount of practicality and more common sense [to Apple], which really balances the more visionary nature of [Chairman Steven P.] Jobs," says Mitchell D. Kapor, president of software company Lotus Development Corp.

Sculley is vague, however, about the markets in which he expects Apple to be dominant. He is the first to admit that "in the business market we have not been as successful as IBM." Because of that, he is deemphasizing the corporate market and aiming instead toward what he describes as "small businesses, small offices of large companies, and [application-specific] vertical markets." He sidesteps the question of which markets are more important by answering: "We are a company that distributes its products through the retail channel, which serves both businesses and homes."

The television advertising campaign Apple launched last fall illustrates this ambivalence. The commercials featured what appeared to be successful, individualistic young professionals at play and at work with their Apple computers. But while the commercials may have been artistically pleasing, they "did make you wonder what it was they were trying to sell," says William "Trip" Hawkins, president of software publisher Electronic Arts Inc. Retailers were especially displeased with the ads, reports Future Computing. Apple cancelled the campaign in early December.

One place where Apple has been well-received is the educational market. Future Computing estimates that well over half of the computers used in schools are Apples. And "although IBM is going to grow, it is not going to bounce Apple out [of the schools] in the short run," predicts Ken Brumbaugh, executive director of the Minnesota Educational Computing Consortium, a leading developer of instructional software. The portable version of the Apple IIe is expected to entrench the company even further in this market.

RIGHT AT HOME

The new Apple portable could also provide the company with an entry into the one market that it has not tried to enter: the home. Apple always considered its $1,295 Apple II models too expensive for the home market. But the less-than-$1,000 portable might fit right in with the new, higher-price home machines, such as Coleco Industries Inc.'s Adam and IBM's PCjr, both of which have models selling in the same price range. "The educational market is going to provide us with a bridge into the home market," asserts John C. Cavalier, vice-president and general manager of Apple's Personal Computer Systems Div.

Far more uncertain, however, are prospects for Macintosh. Industry experts speculate that the much-publicized machine is aimed at the business market because it will be launched with a financial spreadsheet program. Yet Macintosh will debut without several features that are vital in any business machine. For example, the machine will not be announced with the software that would make it possible to communicate with other computers. And although most independent software vendors are wildly enthusiastic about Macintosh, few are expected to be ready to ship applications software immediately.

Furthermore, Macintosh will not run any of the hundreds of business programs that have already been written for the IBM PC. Although the IBM software is becoming a de facto standard in the industry, some observers believe that Apple will be able to set its own standard and not have to worry about making its products compatible with IBM's PC. "Basically I think the new Apple product lines and the enhancements that Apple is offering will keep us and our customers happy for the foreseeable future," says retailer Roy T. Hoke, vice-president of Micro Computer of Denver Inc. "I don't see the lack of direct IBM compatibility a problem."

A 'SEXY' COMPUTER?

Still, Sculley seems to be taking no chances and promises that Apple products will be able to coexist with IBM machines. Apple has announced an IBM communications capability for Lisa and is expected to offer the same for Mac. "What we need is a gateway into the IBM world," says Sculley. "We don't want customers to be put in the position of having to live with two incompatible standards."

Overall, Apple hopes that Macintosh's easy-to-use software and its $1,995 price tag will prove so overwhelmingly attractive that any product shortcomings will be overlooked. Many who have had sneak previews of the machine agree. "Macintosh is very aggressively priced and is absolutely the right, user-friendly product for 1984," says Ralph A. Gilman, an industry analyst at InfoCorp. Joy McCully, a former Apple executive who is starting her own software company, agrees that people will view Macintosh as "cute and with visceral appeal which is hard to explain -- in the same way that the Corvette has sex appeal."

Some industry experts are so bullish on the product that they are forecasting that Apple could sell 300,000 Macintoshes the first year alone. Apple is reportedly preparing to sell a half-million units during 1984. As a promising start for the product, insiders say that Apple has been sewing up contracts to supply large numbers of the machines to such universities as Stanford, Carnegie-Mellon, and Drexel. Says Brian K. Reid, a professor of computer science at Stanford University: "Mac is going to be very big in the universities -- it's almost exactly the kind of machine we want."

While bulk purchases gain publicity, Apple will have to have the support of its dealer network if it is to sell as many Macintoshes as it hopes to. Last year many Apple dealers were put off by the company's attempts to sell Lisa directly to large corporations and by its unstable pricing on the Apple IIe. But Sculley says that "we have met with dealers and told them that our primary commitment is to the retail channel." Many retailers have noticed the changes. Says Houston retailer William E. Ladin Jr. of ComputerCraft: "We went from living hell to a very special relationship."

DONT LOOK BACK

As Apple under Sculley struggles to acquire unfamiliar marketing techniques and disciplines, it is also undergoing major upheavals in its internal organization. Since the start of Sculley's regime in May, almost half of the 15 people on Apple's policymaking executive staff committee have departed and been replaced. Because of the squeeze on profits, Sculley has reduced Apple's staff from 5,300 in July to about 4,600. He has also restructured the company into smaller groups organized around products.

The most dramatic change will be the upcoming merger of the Macintosh and Lisa product divisions into a single unit. Apple-watchers regard this move as necessary since Lisa and Macintosh now make up a single product family. But the reorganization has hurt morale. "There's a lot of anguish at Apple these days," reports one insider.

As Apple wrestles with putting its new organization and marketing strategies in place, some observers wonder if the computer maker could forget that as a technology leader it must develop the next major advance in computer design. As Stanford computer scientist Reid points out, both Lisa and Macintosh "are based almost completely on ideas from research done at Xerox Corp. in the 1970s." He adds that Apple still does not have a research and development laboratory of its own. "While there are lots of awfully smart people at Apple," Reid says, "research and new ideas don't come from smarts alone."

Despite Apple's many challenges and errors of omission and commission, most industry experts believe it will be able to hold on to its No. 2 position in personal computers. Says Alexander D. Stein of Dataquest: "Apple will continue to be the second-ranking company for a while because there is no other company in sight that can change that -- yet."

GRAPHIC: Picture 1, SCULLEY HAS BUILT HIS STRATEGY AROUND THE LISA AND APPLE II PRODUCT FAMILIES, SUAU/PICTURE GROUP; Chart 1, WHY APPLE NEEDS A PICK-ME-UP, ALTHOUGH SALES HAVE SOARED, DATA: APPLE COMPUTER INC.; Chart 2, ALTHOUGH SALES HAVE SOARED PROFIT MARGINS HAVE SHRUNK, DATA: APPLE COMPUTER INC.; Chart 3, ALTHOUGH SALES HAVE SOARED PROFIT MARGINS HAVE SHRUNK AND MARKET SHARE HAS SLIPPED, DATA: DATAQUEST INC.; Picture 2, APPLE FOUNDER JOBS HAD HIGH HOPES FOR LISA, BUT 1983 SALES WERE DISAPPOINTING, BOB SACHA