Apple Will Launch Independent Firm To Develop Software for Its Computers

By Brenton R. Schlender
The Wall Street Journal

April 29, 1987

Apple Computer Inc., looking for a way to spur development of programs for its personal computers, plans to launch an independent software company.

Neither the new company nor its products will sport the Apple name, mainly to avoid conflicts with the company's existing third-party software developers. And Apple plans to spin off the new company to the public within a year or two, retaining only a minority interest.

Nevertheless the new company -- to be headed by William V. Campbell, Apple's executive vice president of U.S. sales and marketing -- will be one "whose primary interest is to create and market innovative software for Apple's Macintosh and Apple II" personal computers, Apple's chairman and chief executive officer, John Scully, said in an interview. He said the company won't concentrate on creating software for competing machines made by International Business Machines Corp. and others.

Apple's unexpected move comes a day after Lotus Development Corp. announced a joint software development agreement with IBM to design new database and spreadsheet programs for IBM and compatible personal computers. IBM also has a joint software development agreement with Microsoft Corp., which provides operating systems software for IBM personal computers.

Both Lotus and Microsoft also develop and sell software for Apple computers, with Microsoft's word processing and spreadsheet programs topping best-seller lists for Macintosh software.

"With Microsoft and now Lotus firmly in the IBM camp, you have some clearly strategic alignments of hardware and software developers. Apple is just doing the same thing in its own way," said David Readerman, a software and personal computer industry analyst for Smith Barney, Harris Upham Co. in New York.

Mr. Sculley said establishing the new software company is one of "several investment steps Apple is taking to give us some assurance of having the competitive advantages two or three years from now that we enjoy today." He said he didn't know how much it would cost Apple to start the company, but with more than $700 million in cash, Apple shouldn't have any problems financing the start-up.

Initially, the new company will draw some of its employees and software engineers from Apple's own ranks. However, Mr. Sculley emphasized that the new company will be on the lookout for programs developed by other third-party companies in need of marketing muscle.

The company has had its conflicts in the past with third-party software developers when Apple spotted products it wanted to bring to market itself.

For example, Apple recently dropped plans to market a database program developed in France out of deference to Ashton-Tate Co., which is in the midst of adapting to the Macintosh its own big-selling database for IBM personal computers.

That decision prompted two Apple employees recently to quit to distribute the product, called 4th Dimension, on their own. "We were in an extremely difficult position," Mr. Sculley said. "Either we could compete with one arm tied behind our back in the software business with the Apple name, or do something that would frustrate our third-party developers. So we decided to take this third approach" and not use the Apple name, and eventually spin off the company.

Even so, the new company clearly is a high priority for Apple, judging from the decision to name Mr. Campbell to head it. Mr. Campbell is one of Apple's top five executives and has played an important role in reviving sales of the company's Macintosh computer in the past 18 months. Analysts estimate that last quarter, Apple shipped 125,000 Macintoshes, up more than 30% from the year earlier.

And there is money to be made if the company can win a big chunk of the software market. Last year, personal computer software sales world-wide totaled about $2.3 billion. Software for Apple computers accounted for about 25% of that amount, according to Infocorp, a Cupertino, Calif., market research concern.

"It's not easy to start a software company from scratch," said Richard Sherlund, a software analyst for Goldman, Sachs & Co. in New York. "But once one makes it, it's a cash cow. Look at the profit margins Microsoft and Lotus are reporting," he added. Microsoft has consistently had after-tax profit margins in excess of 20% in recent years.

It would appear Microsoft has the most to lose if Apple's software company makes a splash in the market, because according to Mr. Sherlund, about 20% of the company's revenue comes from Macintosh software alone. It is ironic, as well, because Microsoft's spreadsheet and word processing software helped the Macintosh break into the business world as a serious tool for executives.

But Microsoft officials don't foresee much "bumping of heads," according to Jeffrey Raikes, director of applications software marketing. That is because it is unlikely that the Apple unit would choose to compete directly with popular existing programs for the Macintosh.

Mr. Sculley hinted, however, that Apple was concerned about the stronger dependence Microsoft and other third party developers have on IBM, and the conflicts of interest they pose. "The problem has been that the three largest developers -- Microsoft, Lotus and Ashton-Tate -- get most of their revenue from their IBM product lines. We would like to work with companies that aren't so interested in porting their software for the Macintosh back over to the IBM world."

Mr. Raikes said he thinks that requiring the new company to develop only Apple software would be a mistake, and "goes against Apple's very successful strategy of coexistence" with the rest of the industry. "It would seem in Apple's interest to encourage programs that can be shared or can communicate with both worlds."

Other analysts say Apple could run into problems if the new company isn't truly independent. "Initially you'll have to expect a certain amount of allegiance to the parent company's wishes in picking which software to promote," said William Higgs, director of software research services at Infocorp. "But eventually the company will have to let the market decide which programs win, not Apple."

In national over-the-counter trading yesterday, Apple shares jumped $2 to close at $77. Microsoft soared $7.25 to close at $106.25 a share. Lotus shares closed yesterday at $31, up $2.50, and Ashton-Tate stock was unchanged at $21 a share.