Can John Sculley Clean Up the Mess at Apple?

Information Processing

Computers

With Steve Jobs on the sidelines, the company will no longer go it alone

By Deborah C. Wise in Cupertino, Calif.
Business Week

July 29, 1985

The teddy bear in the corner of John Sculley's office at Apple Computer Inc. wears a T-shirt that reads: "I'd rather be anywhere else." Apple's president says he understands the bear's sentiments -- life at Apple is no picnic right now. Six weeks after Sculley wrested day-to-day control from Chairman Steven P. Jobs (BW -- June 17), Apple suffered its first quarterly loss as a public company. To halt its sudden and frightening slide, Sculley has idled three factories and 20% of his 6,000 workers, and is revamping Jobs's stalled plans for selling Apple's flagship Macintosh computer. He is also putting together a new strategy to ensure Apple's survival.

All Sculley's actions, Apple watchers say, are long overdue. "But the real question," says Gordon Casey, a Merrill Lynch & Co. securities analyst, "is whether moves like this made at the 11th hour will work."

LOTS OF CASH

Already, Sculley is making Apple a leaner, more pragmatic company than the one Jobs hired him to help run in 1983. Now that Jobs is out of daily decision-making, "I've been able to get more done in the past few weeks than perhaps in the whole two years since I've been here," says the 46-year-old Sculley. One result: Apple will no longer go it alone. The company will let outsiders develop and supply key products, an idea that was anathema to Jobs. "We must indicate," says Sculley, "that Apple is a lot more open and a lot more dependent on third parties."

Apple's balance sheet is strong enough to weather more rough times: At the end of March, the company had $194 million in cash and virtually no long-term debt. Still, Apple predicted that the close-downs and layoffs could contribute to a pretax charge of up to $35 million for the third quarter ended June 30, leaving it with losses of 25 cents to 35 cents a share. Revenues in that period fell some 10% to about $380 million, analysts say.

The problem behind these gloomy numbers is serious: Both of Apple's product lines are in trouble. The Apple II, which brings in the bulk of Apple's revenues, is showing signs of winding down after a remarkable eight-year run. Jobs's brainchild, the 18-month-old Macintosh, is disappointing so far. Apple's new automated factory can turn out 80,000 Macs a month. But demand has never topped 30,000. Worse, Macintosh has failed to become a leading alternative to International Business Machines Corp.'s Personal Computer for business buyers. In that market, Future Computing Inc. expects the company's share to slide from 11% in 1984 to 9.5% this year.

Sculley now admits that the marketing plan for Mac and Apple II actually tended to limit sales of both machines. In an effort to sell the Mac to businesses, the company tried to relegate its popular Apple II to the home and education markets. But a discouraging thing happened. Many companies still wanted the Apple II instead of the Mac -- which sold best to individuals. Moreover, Apple trumpeted its head-to-head competition with IBM for the business market. And even though no one expected it to win that David-and-Goliath contest, the humiliation has hurt Apple's image. Sculley says the mistake won't be repeated. "I will be a lot closer to the advertising decisions now," he asserts.

Some critics contend that management practices will have to change, too. One former Apple II executive says that Sculley, Jobs, and William V. Campbell, head of sales and distribution, emasculated middle managers by pushing decision-making to the top. "One of the hardest things was watching all the important decisions being taken away," the ex-manager says.

Whatever the causes, Sculley must act fast to solve these problems. The youthful Jobs believed that only Apple could make "insanely great" personal computer products. Thus, critics say, Apple squandered millions developing disk drives, printers, and other items it could have bought from suppliers.

GOING OUTSIDE

In retrospect, one of the most important ramifications of Jobs's philosophy was that the Macintosh and the IIc, a portable offshoot of the Apple II, were built with a "closed architecture." This made it difficult for anybody except Apple to alter these machines or build accessories for them. By contrast, the original Apple II and the IBM PC owed much of their success to an "open architecture" that let other companies invent hundreds of add-ons -- and thus increase the appeal of those machines.

The drawbacks of Jobs's strategy were compounded by Apple's inability to develop add-on products quickly for the Mac -- particularly accessories that would let it communicate with IBM machines. Because of the Mac's closed architecture, few other companies make such accessories. Now, Sculley has set up a team to work with suppliers and is accepting bids to build such Apple-logo products as a hard disk for data storage and a file server, which allows several Macs to share information.

Sculley also plans to redesign the Mac so it will be easier for other companies to build products that are compatible with it. A recent Apple memo to software developers implies that a new Mac, due in January, will have plug connections to facilitate this process.

To spur Macintosh sales in the short term, Sculley is offering retailers $1,500 for every six Macs they order this summer. Many dealers applaud the idea, which Apple says is aimed at restoring retailer margins and financing marketing programs. But others worry that the rebate will turn into a price cut instead. "I will guarantee you'll see the advertised price of Macs cut by $250," says James Crimaldi, vice-president at Future Information Systems, a New York City computer store chain.

Outright price cuts in both the Mac and Apple II lines may be essential to build volume. Last quarter, Apple sold far fewer than the 200,000 IIs and 80,000 Macs analysts say were needed to break even. A new Apple II, with more power, won't be out until 1986. This leaves the current model to compete against high powered new models from Atari Inc. and Commodore International Ltd. in the home market this Christmas -- traditionally the best selling time for computers. The II will also face IBM PC-compatible machines selling for around $1,000. So Apple has few options. Some analysts expect it to sell the basic IIc, now priced at $1,295, for well under $1,000.

NO MERGER

Even if it can crank up sales at Christmas, Apple faces a very uncertain 1986. The computer slump has hit Apple harder than its competitors because of its limited product line, says Eugene G. Glazer, an analyst with Dean Witter Reynolds Inc. He thinks Apple can earn $1.55 a share in l986 -- far below the $3.22 he predicted six months ago. And, Glazer adds, "if there isn't an upturn [in the computer market], there's no way they can make these numbers."

For the longer run, Sculley is considering a revolutionary step for Apple: allowing another major manufacturer to build computers that can use Mac software. A second supplier of Mac-like machines -- some observers say American Telephone & Telegraph Co. is a likely candidate -- would give Macintosh credibility with large companies.

Nevertheless, Sculley still refuses to consider two other radical options that jobs has always opposed: a version of the Macintosh that can use the same software as the IBM PC, and merging with another company. IBM compatibility would make the Mac more palatable to big companies. But it would also eliminate much of the Mac's distinctiveness. Moreover, a merger apparently remains out of the question for the fiercely independent Apple, despite persistent rumors on Wall Street. Takeover talk grew louder in June when the price of Apple's stock tumbled to a four-year low of $14 from a high of $63 in 1983. But insiders own 25%, making any unfriendly bid unlikely.

Can Apple make it? Survival as an independent company won't be easy. But Apple doesn't lack supporters. A personal computer industry without this pioneer -- an industry dominated by IBM -- could well produce more expensive but less innovative machines. Says Fred M. Gibbons, president of Software Publishng Corp.: "We all need the competition. We all want them to succeed."

GRAPHIC: Picture, SCULLEY WILL LET OUTSIDERS DEVELOP AND SUPPLY KEY PRODUCTS -- AN IDEA JOBS HATED, ED KASHI