Apple's Comeback

Cover Story

Apple's Comeback

With a more versatile Macintosh, John Sculley aims at corporations

By Katherine M. Hafner in Cupertino, Calif., with Geoff Lewis in New York and bureau reports
Business Week

January 19, 1987

John Sculley drives himself hard. Fighting the onset of middle age after his 47th birthday last April, he went for a long run and then took a hike on the hills above his Woodside (Calif.) home. On the tennis court that afternoon, he tore a calf muscle. Ignoring the pain, he wrapped an Ace bandage around the swelling. The next day he stood for two hours addressing a group of newspaper publishers before finally seeing a doctor. He wound up in a cast for nearly four months.

The chairman of Apple Computer Inc. is up and running again. And so is his $ 1.9 billion personal computer company. When Sculley wrested control of Apple 18 months ago from its co-founder, Steven P. Jobs, it was reeling from its first quarterly loss as a public company and a massive reorganization that included laying off 20% of its employees. Worse, shipments of the Macintosh, the innovative personal computer on which Apple had bet its future, were running only 10,000 a month vs. Apple's 80,000-a-month capacity for making the machine. Although the Mac was easy to use, business customers called it an underpowered, overpriced curiosity -- a toy. Some critics even suggested that Apple stick to the education market, where it was the leader, instead of encroaching on IBM's territory. Two earlier attempts to attract business customers with the Apple III and Lisa computers had failed miserably. Was the Mac strike three?

PERSONAL PITCH

Sculley's answer was no. "The Mac was one of the major reasons I came to Apple in the first place," he says. To save it, "I had to fall back on what I knew best." For the former Pepsi-Cola Co. president, that meant marketing. In the weeks before the introduction of an improved Mac last January, he personally pitched the machine to buyers from the likes of Du Pont, General Electric, and Eastman Kodak, and listened to their criticisms. He also implored leading software companies to write better business packages for the Mac. "I felt Apple had to succeed in business, and that meant succeeding in large corporations."

All that work is paying off. While Apple won't disclose hard numbers, Goldman, Sachs & Co. analyst Daniel C. Benton estimates that shipments of Macintoshes doubled in 1986 (chart); worldwide personal computer shipments rose only 9%. In addition to what First Boston Corp. analyst Charles R. Wolf calls "a dramatic improvement in the implementation of the Macintosh strategy," Apple got a couple of breaks. Desktop publishing, a method for printing typeset-quality documents that the Macintosh pioneered, took off faster than anyone expected (page 87). Some 50,000 Macintosh publishing systems were sold in 1986, and sales of the accompanying printers alone added about $ 150 million in revenues. Equally important was the success of Microsoft Corp.'s Excel, a spreadsheet program. It finally enabled the Mac to go head-to-head in offices with an IBM PC running Lotus' 1-2-3.

Although the Mac still has only about 7% of sales to business, the machine's "user-friendly" style at last is winning converts. Instead of typing in cumbersome commands, with a Mac you use an electronic "mouse" to point at symbols on a screen. Even "computer illiterates" can learn to use one in a few hours. And with Excel and other new software packages, the machine can do a lot.

"Everyone was saying 'IBM,' 'IBM,' 'IBM,"' says David Ranieri, an information specialist with Eastman Kodak Co.'s Graphics Imaging Systems Div. in Rochester, N.Y. "Now they're saying 'We have a job to do, and on the Mac we can do it easier, faster, with better quality."" Ranieri has installed 120 Macs in his division. Of the 15 operators who had had previous computer experience, only two wanted their IBM PCs back, he says. A data processing consultant who recently set up several dozen Macs at a major oil company, says: "I sense a pro-Mac feeling spreading." New additions to the Macintosh line, which will start appearing this month, are aimed at spreading that feeling even further.

The effect on Apple's financial performance has been startling. Slowing sales of the nine-year-old Apple II kept the company's revenues flat at $ 1.9 billion in 1985 and 1986. But higher sales of Macintoshes, plus cost-cutting, have more than compensated. While International Business Machines Corp.'s 1986 earnings sagged, Apple's surged 151%, to $ 154 million, in the fiscal year ended Sept. 30. The company now has $ 576 million in cash and no debt. Apple's shares, which had plunged to 14 in mid-1985, now trade at over 40 -- a three-year high. Sculley says that the Macintosh, combined with a new Apple II introduced last September, will push revenue growth to 20% during 1987 -- more than twice the growth rate Dataquest Inc. expects for the personal computer industry. Analysts expect a 15% rise in 1987 earnings, to around $ 2.75 a share, and some Apple fans on Wall Street are predicting that its stock will hit 60 by yearend.

CONTINUING CAMELOT

The importance of Mac's success, Sculley insists, goes far beyond that. He argues that the machine is finally living up to the expectations that Jobs had for it: To be a viable alternative in businesses to the IBM PC and its clones. Sculley also feels that he has dispelled any doubts about his ability to manage a high-tech company. "Lots of people wondered if I was part of the problem instead of part of the solution. People said after Jobs left that there wouldn't be any more innovation . . . that Camelot was a thing of the past."

Apple still faces big risks. It now relies on the Mac for more than half its revenues and earnings. Although computer experts give the new Apple IIGS high marks for speed and graphics, production problems slowed sales during the Christmas quarter, when the company usually earns more than one-third of its annual profit.

Moreover, questions loom about Apple's future. The Macintosh won't be unique for long. Graphics options for the IBM PC are improving fast, and dozens of companies are finding ways to adapt PCs for desktop publishing. Sometime this year, sales of desktop publishing systems based on IBM and IBM-compatible computers will start to exceed sales of those based on the Macintosh, Dataquest predicts. Even though the market is growing so quickly that Apple's own desktop publishing sales will increase by 70% in 1987, the Mac will have lost some of its edge.

The competition has its eye on other Macintosh features, too. William C. Lowe, president of IBM's personal computer unit, the Entry Systems Div., recently told an industry gathering that future PCs will stress "a new level of user-friendliness." Apple could wind up watching as IBM co-opts the Macintosh's best points just as Big Blue took control of the personal computer movement in 1981 after it saw the success of the Apple II. Then, IBM quickly dislodged a toehold Apple had won in large business.

"The risk is that IBM adopts enough of Mac's features to reduce the differentiation that Mac has," says Harvey C. Allison of Wertheim & Co. By most accounts, new versions of the IBM PC that use Intel Corp.'s powerful new 32-bit 80386 microprocessor chip will arrive in late 1987, though software to make them as easy to use as a Mac may not appear for another year.

BIGGEST BEEFS

"In the meantime," Sculley says, "we aren't standing still. We're working on products for the 1990s." Apple's long-awaited Open Mac, which uses a 32-bit chip made by Motorola Inc., should be on the market this spring. Jean-Louis Gassee, Apple's vice-president for product development, promises that this machine will outperform IBM's 32-bit PC. "The 386 is a great exercise in public relations," he sniffs.

The Open Mac heads a list of new models and improvements that are intended to eliminate the objections that business customers still have. One of the biggest beefs has been that the Macintosh is a "closed" system that can't be easily modified to do tasks other than those it was originally designed to perform. Jobs wanted the Mac closed in part to save money and in part to keep custsomers from altering his design. This made the machine far less flexible than the IBM PC. With the PC's "open" architecture, for example, a computer owner can customize a machine by plugging in circuit cards to give it new functions such as high-resolution graphics. By contrast, customizing the original Mac was nearly impossible. To add a hard disk, for example, General Computer Corp. in Cambridge, Mass., had to partly rebuild a customer's machine.

The year-old Mac Plus is a bit more flexible: It has a high-speed socket that provides a limited means of connecting hardware options. So now Apple is eagerly courting companies whose add-on options can help sell the Mac. Radius Inc., a Sunnyvale (Calif.) startup headed by former Macintosh wizards Mike Boich and Burrell Smith, has scored with a 15-in. screen for the Mac Plus. Even though it still requires "brain surgery" to install, the Radius screen is so popular that most of Apple's top executives -- including Sculley -- own one. The Open Mac, with several card slots, will multiply the possibilities. But because Apple alone owns the rights to the Macintosh's built-in programs, the machine still cannot be cloned the way IBM PCs can.

Apple will also try to overcome the ultimate corporate objection to the Macintosh: that it is incompatible with the IBM PC. Apple will market a card that lets an Open Mac use the IBM PC software that most businesses already have. Gassee, who has midwifed the new Macintoshes and sports "Open Mac" on the license plate of his Mercedes-Benz, crows that "the new products look so good, I don't think I'll retire the license plate anytime soon." Even though they will cost two to three times as much as the basic Mac Plus -- from $ 4,000 to $ 6,000 -- Sculley says customer previews of the machine have yielded "overwhelmingly" favorable results.

Sculley is also trying to make the Mac appealing to a wider range of business customers. Later this year, a version of the 32-bit Open Mac will be sold as an engineering workstation, a kind of high-powered personal computer. Analysts expect Apple to undercut prices of workstations sold by Digital Equipment, Apollo Computer, and Sun Microsystems. Sculley also wants Apple to extend its reach beyond individual desktop computers to building networks that will connect Apple computers to IBM PCs and mainframes, as well as to popular minicomputers. This way he hopes to elevate Apple from a maker of personal computers to a full-fledged computer systems company. Sculley has taken to citing Digital Equipment Corp.'s success in building computer networks and describes its president, Kenneth H. Olsen, as one of his heroes.

To keep the new products coming, Apple plans to increase its research budget by 30%, to $ 166 million, or about 7% of projected sales in fiscal 1987. The company has bought a $ 15 million supercomputer to cut three months to a year off product development, says Lawrence G. Tesler, Apple's vice-president for advanced technology. That should keep projects from slipping the way the Apple II replacement and many Macintosh improvements did.

FOOT IN THE DOOR

More than new products, for now Apple's biggest challenge is to convert an underground Macintosh movement in corporations into a mainstream trend. IBM's various PCs still outsell the Mac by 5 to 1 in all businesses. In the largest corporations, IBM and IBM-compatible machines account for more than 75% of personal computers in use, according to Forrester Research Inc., a Cambridge (Mass.) consulting firm. Overcoming that won't be easy.

Desktop publishing is helping. Although Sculley had little idea how quickly it would take off, he pushed it because it was something the IBM PC couldn't do. "It was the only way we could get in the door," he says. Jobs had started the desktop publishing campaign back in 1985 when Apple brought out the LaserWriter printer. But he "kept talking about this 'documents with impact' mumbo-jumbo," recalls Wertheim's Allison. "Nobody believed it." There are believers now.

One that took to the idea quickly was Siegel & Gale Inc., a New York consulting firm that designs corporate logos and "simplifies" forms such as utility bills or tax returns. Before desktop publishing, an S&G designer would work with text prepared by a typesetting service. Each page cost $ 250 to $ 400 and took a day or more to arrive from the typesetter. By the time a client approved a form, typesetting fees could be several thousand dollars, says Executive Vice-President Kenneth M. Morris. The Macintosh eliminated these costs, speeded up the work, and let S&G take on more jobs. "What could take two or three weeks before, we can do in a day," Morris says.

In large companies, desktop publishing enthusiasts have helped Apple sell the Macintosh for other uses. Passersby would see what was happening in the graphics department and wonder what else the Mac could do. At McDonnell Douglas Corp.'s Federal Health Systems Div. in St. Louis, for example, 42 Macs were brought in to prepare training and documentation materials for a computerized medical records system that the company hopes to sell to the Defense Dept. But once the machines were installed, says training manager Greg A. Factor, people began trying other Macintosh software, including the Excel spreadsheet. Since then, "a lot of dyed-in-the-wool Lotus users have transferred their files to Excel," he says.

Some customers even claim that because the Macintosh is easier to master it increases productivity faster than other computers do. Peter Stranger, president of Della Femina, Travisano & Partners of California Inc., says his 23 Macs have "cut down on secretarial turnover because they make the work experience more satisfactory."

That may be because Apple's practice of making software developers conform to a single set of commands means that once an operator masters those commands, it is relatively simple to learn another Macintosh software package. For example, the command to print a file is the same for Excel as it is for Mac-Write, Apple's word processing program. IBM imposed no such rules on software developers, who are free to dream up whatever commands they prefer. "The enforced uniformity is what makes Apple more attractive," says Richard J. Stuckey, a partner at Arthur Andersen & Co. who works in the accounting firm's computer consulting group.

Mac's user-friendly approach has another benefit: Although it sounds corny, the machine inspires tremendous enthusiasm. "With an IBM PC, when you approach it, it says 'work." When you approach the Mac it says 'play,"' observes Rudolf Blay, assistant controller for Reiss Media Enterprises Inc., a New York supplier of pay-television programming. "It's fun to use, and then you get hooked on it."

One important audience that hasn't gotten hooked is corporate data processing managers, the people who buy computers for big companies. "It's a great machine for a kid to play with on the weekends," says Joseph F. Anastasio, a data processing manager at Warnaco Inc. in Bridgeport, Conn. "I do not feel it is a business machine."

BIG BLUE BOND

This attitude is a major problem for Apple. To make their jobs easier, many data processing managers have already decided that their companies should buy only IBM or IBM-compatible machines. Only the most compelling advantages would persuade these people to make an exception. "We're pretty much locked into IBM," says Thomas J. Jent, manager of management information systems at B. F. Goodrich Co.'s aircraft wheel and brake business unit in Troy, Ohio. Supporting Apple equipment in addition to IBM's "would just crank in an additional cost," adds Erik G. Johnsson, an MIS manager at Westinghouse Electric Corp.'s energy and advanced technology group in Sunnyvale.

But with the option of using the same software as the IBM PC, corporate holdouts may reconsider the Macintosh. IBM PC compatibility, predicts Benton of Goldman Sachs, "is going to be a real watershed." But Apple may have to do more than just change its computers: It may have to change its sales approach. "Apple is up against the direct-sales forces of IBM and DEC," says William D. Easterbrook, an analyst at Kidder, Peabody & Co. in San Francisco. "I don't think it's possible to sell successfully in the business market without a direct-sales force."

Sculley disagrees. By carefully selecting dealers and restricting Apple's more complex products to the most sophisticated outlets, he argues, the company can attract business customers. For instance, Apple has cultivated an unusually strong relationship with Businessland Inc., the San Jose chain that is a major conduit for both Apple and IBM products to large corporations. Macintosh sales at Businessland have doubled in each of the past two quarters. Sculley says "the single overriding issue" for Apple is to make sure dealers can market its machines effectively.

To reach corporate customers more efficiently, Sculley is hiring a vice-president of sales from a major minicomputer company and is scouting for a new vice-president for marketing with a similar background. He's also taking a half-step toward a direct-sales force by placing 40 salespeople throughout the nation to pair up dealers with corporate customers. That way, Apple can make sure that dealers aren't missing big opportunities. A separate 30-person government sales group hopes to snare some of the estimated $ 1.6 billion federal microcomputer market.

With Apple's comeback well in hand, one might expect Sculley to ease up. He has turned over day-to-day operations to Delbert W. Yocam, an eight-year Apple veteran whom he promoted to chief operating officer. And when he sold 97% of his Apple shares -- for $ 4.3 million -- to qualify for the better tax treatment, Silicon Valley buzzed with speculation that he was ready to move on. Sculley scoffs at the rumor, pointing out that he still has options on 400,000 shares at about 17. Although he's cut his workweek to 50 hours, he is still masterminding Apple's progress. Much of his time goes to giving Apple its first dose of long-range planning. He spends hours talking with Apple's resident visionary, computer scientist Alan Kay. A favorite topic: figuring out how Apple computers can be used to simplify the way data are culled from electronic information services.

Apple's renewed success may even have helped mellow Sculley, who is at once shy and intense. At least that's the view of his longtime mentor Donald M. Kendall, the retired chairman of PepsiCo Inc. and the stepfather of Sculley's first wife. Kendall, who diverted Sculley from a career in architecture to one in business, says: "He thinks things over more than he used to, and his people relationships have improved." Certainly, Sculley seems more comfortable in his role than ever before. "I'm at a point where I feel I'm at peak performance," he says, "and that's something you work at for years and years."

GRAPHIC: Cover Photograph, no caption, ROBERT HOLMGREN; Picture 1, A DIGITIZED IMAGE OF A PHOTO OF CHAIRMAN SCULLEY SHOWS OFF THE GRAPHICS CAPABILITY OF THE MACINTOSH -- A BIG REASON FOR APPLE'S SUCCESS IN DESKTOP PUBLISHING, FREED PICTURE GROUP, SCULLEY BY ED KASHI; Illustration and Chart, APPLE HAS REVIVED THE MACINTOSH BY CONCENTRATING ON SALES TO BUSINESS AND THIS HAS HELPED ITS MARGINS BOUNCE BACK, ILLUSTRATIONS BY ROGER GORMAN, CHART BY HAYES COHEN/BW; Picture 2, ON THE JOB AT DELLA FEMINA: THERE'S LESS SECRETARIAL TURNOVER BECAUSE MACS "MAKE THE WORK EXPERIENCE MORE SATISFACTORY", MAX AGUILERA-HELLWEG; Picture 3, BOICH AND SMITH OF RADIUS: THEIR BIG, 15-IN. SCREEN MAKES THE MAC MORE FLEXIBLE, ROBERT HOLMGREN