How Apple will keep growth going

Information Processing

Computers

Business Week

February 8, 1982

Despite a legendary beginning, Apple Computer Inc. has been viewed in recent months as a company beset with problems. But evidence is mounting now that the five-year-old maker of personal computers, which nearly tripled its sales last year to $335 million, will be able to handle its breakneck growth, survive competition from rivals up to 100 times its size, and remain an innovative front-runner -in spite of its problems of the past 18 months.

After botching the late-1980 introduction of its second major personal computer, the Apple III, because it was so riddled with technical flaws, the company relaunched the product last November. The reaction has been surprisingly good. "I have turned very positive on Apple," says Jon D. Gruber, a partner at Montgomery Securities. "The biggest difference now is the way the dealers view the Apple III -they are mostly very optimistic about its prospects."

A shakeup

Last spring a top-level management reshuffle and the firing of 40 employees -some of them connected with the too-hasty launching of the Apple III -was accompanied by a public airing of Apple executives' differing views on how to manage the young company's galloping revenue growth. The reorganization has since increased product and profit responsibility.

Then last August, International Business Machines Corp. launched its first and widely acclaimed entry into the personal computer market that Apple had helped create (BW -Aug. 24). Overnight, the market dynamics shifted. "We are now in a market driven by IBM, not Apple," says William D. Barton, president of Datel Systems Corp., a New York retailer of personal computers.

But none of these traumatic events seems to have affected Apple's financial results. On Jan. 21, the Cupertino (Calif.) company reported sales of $133 million for the first quarter of fiscal 1982 -nearly double the amount for the first quarter of last year. Net income totaled $13.6 million, up an impressive 83%. The most bullish news on Apple, though, comes via the grapevine that the company is expected to launch three innovative computers within the next 18 months. These reports are helping put to rest fears that Apple might never come up with anything to match the product for which it has become famous -the Apple II.

Apple is tight-lipped about details of the new machines, although it is generous with tantalizing hints. The most exciting product under development is a machine code-named Lisa, which Apple's 27-year-old chairman and founder, Steven P. Jobs, has indicated will "reduce the time it takes a new user to get up to speed on a personal computer from 20 to 40 hours to 20 minutes." To provide such innovative features takes a major investment in software. More than 200 man years of basic software development will have gone into Lisa when it is introduced compared with just 25 man-years for the Apple III and a minuscule two man-years for the Apple II.

As the Lisa project has gained momentum, Apple's research and development costs have soared -from $3.6 million in 1979 to $7.3 million in 1980 and $20.9 million in 1981. This year, R&D is running at an annual rate of about $30 million. Nevertheless, "we're not really a technology-driven company," says John D. Couch, general manager of the Personal Office Systems Div., which is developing Lisa. "We're driven by the desire to build products [that] combine ideas already out there at low enough costs to make them useful." However, Trip Hawkins, division marketing manager, points out: "What the software people have been doing has never been done before."

A 'quantum jump'

Industry speculation about Lisa suggests that the new machine is in many ways a more practical, low-cost version of the remarkable Star work station introduced last year by Xerox Corp. (BW -May 11). "Lisa is the next quantum jump in [computer] technology," says Leonard Barshack, an industry analyst at Salomon Bros. Lisa should make it possible for the user to organize and even process data without having to use the keyboard, industry observers believe. The pointer on the screen is controlled by a small desk-top device located next to the computer. When a user moves the device, called a "mouse," the pointer goes in the same direction on the screen.

While the Star costs about $16,595, Lisa is expected to be priced at $7,000 to $10,000. Despite that comparatively low price, Lisa will still cost far more than current Apple computers and will take the company out of its traditional marketplace and move it into the large corporate market. Apple reportedly is considering making deals with some of its heftier rivals in this market that would involve building its technology into their machines.

Sheer bravado

Company officials insist, however, that the personal computer remains Apple's primary interest. Indeed, this year the company may announce another new product, now code-named Super-II, to capitalize on the popularity of Apple II, which it contends has the largest installed base of any personal computer. More than 350,000 units have been purchased, Apple executives claim.

The Super-II, which will have an uptially lower manufacturing cost, should enable the Apple II computer line to compete well with any of the lower priced opposition, says Vern L. Raburn, president of Microsoft Consumer Products, an independent software supplier. Commodore Ltd., for instance, in January announced a model listing for $600 that compares, admittedly with far less software, with the $1,500 now being charged for a no-frills Apple II.

To avoid drawing attention away from the relaunched Apple III, Apple has been even more secretive about Super-II than it has been with Lisa. "Unless Apple positions the II against the III very carefully, the competition is going to hurt [the Apple III]," Raburn says. In an act of sheer bravado, Jobs recently predicted that the Apple III would outsell the new IBM machine this year. Most industry sources say they will be surprised if Apple III sales exceed 50,000 units this year, while they expect IBM to sell at least 200,000, provided the computer giant can make that many.

Apple has learned several important lessons from its problem-filled launching of the Apple III. The company has tried to keep the wmps on its new computers to defiect the kind of pressure from its dealers and Wall Street that led to the premature introduction of Apple III. Both the restructuring of the company in August, 1980, and the decentralization of its management last March were moves intended to prevent the recurrence of such a disaster.

'Camp Run Amok'

In the management shake-up, a top-level team of vice-presidents took over the running of the company from Michael M. Scott, who was demoted from president to vice-chairman soon after he fired the 40 Apple employees. Scott's management style has been described as "decisive, but also authoritarian and insensitive." His demotion -he later resigned -"was a clear signal that we were not pleased with the way he dealt with the problems," says Ann S. Bowers, Apple's human resources vice-president.

Because of Apple's relative immaturity, however, industry observers continue to be more worried about its management abilities than about the competition it faces. Apple's style of operations is certainly unusual. Says one executive recruited when Apple doubled its ranks to nearly 2,500 last year: "There seems to be so little control and so much chaos that I can't believe the company isn't flying off into space in a thousand pieces. On the other hand, it does seem to keep pulling off its plans." A more seasoned manager, who is a veteran of the semiconductor industry, describes the company as "Camp Run Amok."

The temperamental but never dull Steve Jobs, who started Apple in 1977 in a garage with a friend, Stephen Wozniak, has encouraged a creative, risktaking spirit at Apple, where the average age of all employees is 28. But more mature Apple executives such as 40year-old President and Chief Executive A.C. "Mike" Markkula will determine how Apple grapples with three crucial issues affecting the company's future: product distribution, vertical integration, and long-term product strategy.

Head-on competition

In distribution, Apple has neither the massive direct sales force of IBM nor the large chain of retail stores of Tandy Corp.'s Radio Shack Div., although it acquired its wholesale distributors in 1980. To sell its machines, it depends on independent dealers. Markkula rules out the possibility that Apple might start up its own chain of dealers. "We believe that customers want stores carrying more than one personal computer, and we do not think it would be practical for Apple to own that store," Markkula says. He also rules out a direct sales force.

The company also is doing more of its own software development -and not only for the new products in the pipeline. Markkula denies that these products indicate a move toward vertical integration in software. Nonetheless, Apple is entering into head-on competition with the independent software vendors on which it has depended for most of its business applications software.

One of the biggest decisions that Apple has to make in the next couple of years is when to enter the potentially vast home market for personal computers. Some observers believe that a product now in Apple's labs code-named Mackintosh will be an inexpensive version of the user-friendly Lisa for this market. Until now Apple has focused its efforts on the professional and educational markets, but its TV ad campaign with Dick Cavett has prepared the way for such a move. Says Edward E. Faber, president of the ComputerLand Corp. chain of retail stores: "Thanks to their advertising, Apple has an awareness-level among the general public that is mindboggling for a company so young."

GRAPHIC: Picture 1, Apple's Jobs and Markulla: Upcoming products and a staff shuffle are boosting the company's fortunes. Marty Katz; Picture 2, Couch and Hawkins with a design for "Lisa", which will train a user in 20 minutes instead of 20 hours