Apple takes on its biggest test yet

Information Processing

Computers

Business Week

January 31, 1983

If the computer industry were a circus, Apple Computer Inc. would be a high-wire acrobat performing without a net. Against the odds, the personal computer pioneer founded in 1977 by Steven P. Jobs and Stephen G. Wozniak -- then a couple of quasi hippies in their early 20s -- has so far been a brilliant success. But voracious competition, particularly from International Business Machines Corp., has taken ever larger bites out of Apple's market share.

Now, in the riskiest phase yet of its brief history, Apple is going for broke to recapture its early lead. Amid much fanfare, the Cupertino (Calif.) company announced on Jan. 19 a new, $10,000 machine, called Lisa, that is designed primarily for computer-illiterate professionals, managers, and administrators in large corporations. "We're really banking everything on Lisa's revolutionary technology," acknowledges Chairman Jobs, now 27. "If Lisa fails," he quips, "we'll be just another half-billion- or billion-dollar computer company."

Apple's success to date has unquestionably been spectacular. From a two-person operation in Jobs's garage, it has grown into a multinational corporation with 3,391 employees. And in its latest fiscal year, ended Sept. 24, sales soared rose a striking 55% to $61 million. Nonetheless, IBM has won a 19% share of the $1.3 billion U.S. market for personal computers priced at $1,000 to $5,000 since the company entered a mere year and a half ago. And it could take even more with an upgraded version of its Personal Computer, expected out next month, and later a less expensive model dubbed "Peanut." In just the last year, Apple's share of market sales has slipped from 29% to 24%, according to market researcher Dataquest Inc.

Mantle of leadership.

To regain its balance, Apple is groping its way into a corporate market in which it has almost no direct experience. What is more, that market is already overcrowded with the giants of the U.S. computer and office-equipment industries, including IBM, Digital Equipment, and Xerox.

Perhaps even more important, with Lisa, Apple is also taking on the mantle of the personal computer industry's technology leader. "Frankly, technology leadership is Apple's only option," explains Fred M. Gibbons, president of Software Publishing Corp., a leading microcomputer software supplier. "It can't outmarket IBM, and unlike IBM, it can't get away with me-too technology." Lisa's novel computer-programming techniques make the machine so easy to use that novices can learn to run it in as little as half an hour. Typically, it takes more than 20 hours to learn to use today's Apple II personal computer -- the most widely used machine in its class, with some 600,000 units sold. "Apple is really the only company that is significantly advancing personal computer technology today," says Gibbons.

This is a brand-new role for Apple. The company has largely been built on sales of its first computer, the Apple II, whose success is generally attributed less to technical wizardry than to clever packaging, merchandising, and publicity. "The company did a great job defining a new computer market for 'personal' computers with the Apple II," notes Ralph A. Gilman, computer industry analyst at InfoCorp, a Cupertino-based market research firm.

'E. T.' is coming

Now, Apple is hoping the virtues of Lisa's computing-for-the-computer-naive technology will compensate for what the company lacks in marketing savvy in the unfamiliar corporate course it is charting. "With Lisa's technology, we have set the direction for the computer industry for the next 5 to 10 years," says a confident Jobs. Within five years, he claims, every computer sold by Apple will incorporate this technology. The first such Lisa spinoff, planned for introduction later this year, is a $2,000 machine called Macintosh, or Mac for short. And rumor has it that the next may be a product code-named "E. T." for the home market.

For Apple to succeed and recoup the $50 million it is estimated to have plowed into developing Lisa and Macintosh, however, it must over the next year answer the many questions industry observers have about its product and corporate strategies:

Is there a large enough market for easy-to-use computers such as Lisa that have a $10,000 price tag? "Obviously there is some market," says Jon Shirley, vice-president of the Computer Div. at Tandy Corp., an Apple rival. "How large it is is pretty questionable."
Does Apple have enough of a technological lead to ensure that imitators do not grab its market?
Can Apple, relying partly on a tiny sales force and mainly on a network of independent computer dealers, succeed in selling computers to large corporations accustomed to buying machines from what one dealer calls "well-oiled computer-company salesmen in pin-striped suits?"
Can Apple get independent dealers and software writers to support Lisa?
Does Apple's product strategy make sense? Many observers fear that Macintosh, the inexpensive application of Lisa's technology, will steal Lisa's thunder -- and its market. They also worry that both of these products might damage the markets for the Apple II and III, on which Apple is counting for the bulk of its revenues until mid-1984. "This is Apple's first experience being a multiple-product-line company," says Portia J. Isaacson, president of Future Computing Inc., a Richardson (Tex.) market research firm.
Finally, are Apple's youthful managers perceived to have grown up enough so that potential corporate customers feel they can do business with them? Recounts John D. Couch, 36, who spearheaded the Lisa project: "One large customer recently confessed that he came in here expecting to find a lot of 26-year-olds wandering around in Levi's with money falling out of their pockets."

One indication of how uncertain Apple's prospects are is that expert estimates of how many Lisas the company will sell this year are all over the lot -- from 2,000 to 30,000. Apple will not disclose its own internal sales forecast, although Jobs says, "I don't think we will have any trouble selling all the Lisas we can build." However, Apple's president and chief executive, A. C. "Mike" Markkula Jr., concedes: "It's going to take time to get the message of what Lisa's all about across."

Multiple tasks

InfoCorp's Gilman estimates that the easy-to-use computer that inspired Lisa's development -- the two-year-old Xerox "Star" -- has had total sales of only 2,400 units so far. But the Star has only some of Lisa's features and initially costs customers $50,000, or five times as much as Lisa, he points out. Nevertheless, "because Apple is changing its product and its customer base with Lisa, I would expect it to get off to a slow start," predicts E. David Crockett, a computer industry analyst at Dataquest Inc.

The size of the market is uncertain, because Lisa is so novel. Until now the user has had to sit at the computer keyboard and type in arcane and often hard-to-remember commands to make his computer work. Every time he wanted to change from one job to another, he had to change program disks. And information he typed into one program had to be typed in again if he needed to use it in another program.

With Lisa, though, the user has to touch the keyboard only to feed in data, not to get the machine to work. Using a hand-held device called a "mouse" that controls an arrow on the screen, the user simply points to the command he wants and activates it by pushing a button on the mouse. Lisa's special software also lets it do many jobs at once -- such as calculating figures and then drawing a graph of the results.

Bet your company

"People use the word 'revolutionary' all the time, but this is the first thing I've seen that justifies the use of that word," says Kenneth T. Lim, a computer industry analyst at Dataquest. However, Lisa also has shortcomings. One complaint from experts is that it is somewhat slow in retrieving information from its memory. "Yes, it is a bit slow today," concedes Couch, who now heads the Office Products Div. that Apple has built around Lisa. "But we will be speeding it up over time."

Some industry experts are disturbed by the new technology's pivotal role in Apple's future. Cautions consultant Isaacson: "Although I think Lisa is a breakthrough product, I'm not sure Apple should be playing bet-your-company with it."

One danger is that corporate customers expected to account for the bulk of Lisa's sales seem to be in no hurry to buy. Granted, Apple has been swamped with requests from companies to be chosen as Lisa test sites, and those that have been running such pilots have been enthusiastic. "I was impressed and really very excited," declares Dana "Rick" Richardson, national director of computer auditing and national director of microtechnology at Arthur Young & Co. The New York-based accounting firm intends to move quickly. "We plan to be aggressive with this new technology and to purchase some [Lisa] units."

No frenzy

But most potential corporate customers are being far more cautious. "I personally like Lisa," says Gerald L. Brody, chairman of the year-old personal work station task force at Standard Oil Co. of California, which has been running a pilot test. But, he notes, "there is no frenzy to go to personal computers in our company. We may decide that this generation of machines is not the one we want for everyone's desk." Adds Don D. Smith Jr., a consultant for Atlantic Richfield Co.'s Corporate Units' Information Services Group: "We already have many big computers and terminals, and like most big companies, we are moving cautiously rather than springing ahead to invest in small computers."

Burgeoning competition may also contribute to a slow start for Lisa. Over the next few months, several software companies are expected to introduce programs that will provide various personal computers -- including the IBM Personal Computer, Apple's archrival -- with many of Lisa's easy-to-use features. "Whereas Lisa's software can only run on the Lisa machine, [our program] is going to run on scores of machines," says Daniel H. Fylstra, chairman of VisiCorp, which last December previewed VisiOn, a software package that offers some of Lisa's features.

Apple must also recruit independent software companies to write new software for Lisa. Their programs, which can be added to six others already built into Lisa, are vital because computer buyers generally choose machines that offer the largest variety of applications. The danger for Apple is that independents may decide they would be better off spending time developing software that can run on many machines instead of on Lisa alone.

Dealer discontent

Apple's unorthodox plan for selling, supporting, and servicing Lisa seems unlikely to encourage customers to rush out and buy, however. A 100 member sales force of Lisa "account executives" will be ready by April, when Apple starts shipping Lisas in volume. It will sell the machine to large companies and coordinate the management of an account on its various sites. "The sales agreement will be between Apple and the big company," explains Barry H. Smith, Lisa's product marketing manager.

But, explains Smith, "the different branches of the company will place their orders with their local Apple dealers." For service and support, the customer will be able to choose between the local dealer -- who will be authorized to sell Lisa if he can meet certain requirements -- or RCA Corp., with which Apple has entered into a service agreement.

The plan does not thrill large companies. "We don't want to have to go through dealers," says Standard Oil's Brody, echoing the sentiments of some other target customers. "Our experience has shown that we have more leverage and get better service when we deal directly with manufacturers."

Scary price point

Some dealers are equally unenthusiastic because they worry that the machines are too expensive for their typical customer. "I'm scared to death of a $10,000 price point for a product," says Warren Winger, chairman of CompuShop Inc., a Richardson-based chain of dealerships.

There are at least two reasons why Apple is eager to stay with its dealer network rather than create a direct sales force of its own, an option it does not rule out. For one, dealers account for almost all purchases of the company's bread-and-butter products -- the Apple II and III -- as well as the upgraded Apple IIe, also announced on Jan. 19. "Apple has to balance dealer loyalty -- which it needs to sell its present product line -- against its need to sell to large companies," explains InfoCorp's Gilman. Lisa marketing manager Smith offers the other reason: "While we see the 500 [largest industrial companies] as being the key market for Lisa, we may be most successful selling it to medium and small companies that our existing dealer base reaches very effectively."

However, a portion of this dealer base -- particularly the full-service dealers who provide extensive support for Apple's products -- is acutely unhappy with Apple right now. Last summer, Apple began to encourage heavy discounting to maintain its competitiveness with IBM and to sell old Apple IIs before the new model IIes arrived. As a result, the retail price of a typical Apple II with peripheral devices has dropped from $2,500 to $2,000, and dealers' margins are estimated to have been halved.

The Mac strategy

Apple hopes to keep dealers in line with the prospect of selling not only Lisa but, better still, Macintosh. With its target price of $2,000, Macintosh is more akin to the products the dealers have been handling. A seasoned industry analyst deeply impressed by a preview of Macintosh says, "The future of Apple is going to be Macintosh, not Lisa." Adds the ebullient Jobs: "When it comes out, Mac is going to be the most incredible computer in the world -- another Apple II."

Apple executives are close-mouthed about Macintosh. However, sources close to the company say Macintosh, like the Apple II, is intended as a general-purpose machine for everybody: "It's for people who work at home, students, teachers, etc." Borrowing Lisa's features, Macintosh -- unlike the Apple II -- will be able to serve people who know nothing about computers, insiders say.

Apple's critics chide the company for poor strategic planning in announcing Macintosh and Lisa in the same year, thereby confusing customers and possibly spoiling the market for Lisa. Other critics are disturbed because Macintosh and Lisa are "incompatible," which in the industry's jargon means that the two will not run the same computer programs. "It's a serious flaw in the strategy," says InfoCorp's Gilman. "Customers like to start with an inexpensive machine and then upgrade it with the more expensive version." Such compatibility is a cherished precept of the computer industry.

But Jobs counters: "You can't have a revolution when you are tied to the anchor of your own history." Macintosh is priced lower, he says, because hardware innovations make it less expensive. But while the machines are incompatible, anyone who can use one of them can also use the other. According to sources close to Apple, Macintosh is priced lower also because it will initially run only a few fixed programs, including word processing and financial modeling. Lisa, by contrast, with its six basic applications programs, can be infinitely expanded.

Power struggles

As Apple insiders tell it, the incompatibility of the two machines results not just from the demands of innovation but also from internecine rivalry that followed the company's split into product divisions in 1980. Although Apple will not officially confirm the details, sources say that Jobs wanted to run the Lisa division but that Michael M. Scott, Apple's president at the time, told him he lacked the necessary experience and gave the job to Couch. "Steve was furious and went off and started the Mac project," says an insider. "He was determined to prove that Mac could be a bigger success."

For Macintosh and Lisa to be compatible, Jobs would have had to let the Macintosh project fall under the Lisa division's control. Jobs won the power struggle: The Lisa division lost. He now concedes, "I am paying extra special attention to this one [Macintosh] myself."

Despite such maneuvers, however, there are some indications that "the management is becoming more seasoned," says Joan McKay, an analyst at Kidder, Peabody & Co. Earlier this month, Apple hired its first-ever vice-president for marketing, 45-year-old E. Floyd Kvamme, who has broad experience in the semiconductor, consumer electronics, and computer industries. Until then, marketing was one of Markkula's many responsibilities. Kvamme is expected to concentrate on tackling Apple's distribution problems and to rationalize the three product divisions' marketing strategies so they do not collide.

'Eccentric passion'

Fortunately for Apple, 40-year-old Markkula, who has indicated for about two years that he would like to retire as president -- "if we can find a person we think can do a better job than me" -- shows no signs of carrying out that plan. Dataquest's Crockett, expressing the view of many observers, says: "I would view it as a negative for the company if he were to leave. He has contributed balance to Apple." Markkula's pragmatic and wryly humorous approach is seen as an essential counterweight to Jobs's creative temperament and sometimes arrogant demeanor.

Yet Jobs's qualities, which engender a certain nervousness in the financial community, are to some degree mirrored in Apple's corporate culture and make the company attractive to bright young engineers and business school graduates. "Apple is seen as a dynamic and creative place to work, where you get a chance to make a contribution," says product manager Kristen A. Olson, who joined Apple after she got her MBA in 1981.

Jobs himself characterizes the Apple corporate culture as one in which "we have what you might call an eccentric passion for what we are doing." Enthusiasm of that order is certainly essential if Apple is to meet the enormous challenges it faces over the next two years. Its struggle will be closely watched by friends and foes alike. "Apple's is such a darling little story that I hope it succeeds," says Future Computing's Isaacson. "But there are also a lot of people out there waiting to give the company a good kick if it fails."

GRAPHIC: Picture 1, Lisa and developer Couch: Apple hopes its easy-to-use machine will open up a new market among computer novices, Bob Sacha; Picture 2, Jobs and Markkula: Trying to win buyer confidence by balancing creativity and pragmatism, John McDermott; Picture 3, Apple IIs on assembly: Still the company's bread and butter, Gary Bishop; Illustration, Working on Lisa is a lot like working at a desk. Lisa's software lets the user do six jobs -- graphing, word processing, calculating, drawing, list creation, and project scheduling -- at once. Like papers on a desk, the jobs can be brought to the top of a pile or placed underneath for future reference, as shown on the screen above. Data can easily be exchanged among all six jobs. The user can tell Lisa what to do by pointing to one of the commands listed across the top of the screen (here he has chosen to make a graph). The pointer arrow is moved by a "mouse," a handheld plastic box with a single button. A click of the button activates the chosen command, and a set of follow-up instructions appears. Housekeeping chores are represented by small pictures on the screen -- data, for example, can be "thrown away" when clicked into the "wastebasket" or saved on a "clipboard"; Picture 4, Kvamme: As Apple's first marketing chief, he must organize its multiproduct strategy, John McDermott