Two Apples aren't better than one

Woe to the technology scribe who writes ill of Apple Computer, Inc.

Every published writer who's run afoul of the sensibilities of the Mac community rapidly learns the consequences.

Vitriol-laden e-mail (known on the Internet as "flames") questioning the author's line of reasoning, intelligence, journalistic ability and worse floods the offender's electronic inbox.

Two months ago Joshua Jaffe, writing for the Web site, incurred the wrath of Mac users for raising a historically volatile issue: the notion of splitting Apple into two companies.

The idea is that Apple suffers by designing and producing both hardware and software while competitors such as Microsoft Corp. and Dell Computer Corporation concentrate on one or the other. If Apple were split in two, so the theory goes, each unit would benefit from the ability to focus its energies in one area.

Jaffe quotes several well-known analysts to support this theory and cites statistics illustrating Apple's declining market share and poor stock performance relative to the rest of the computer industry through the 1980s and 1990s.

According to Jaffe, Apple is in a death spiral and can survive only through radical change, even suggesting that CEO Steve Jobs has a secret committee sequestered somewhere in Apple's Cupertino, Calif., headquarters studying the plausibility of the idea.

Needless to say, Mac users disagreed.

Jaffe received so many responses he ran a follow-up piece two weeks later consisting almost entirely of e-mails from outraged readers, mostly Mac users, determined to set him straight.

They argued that far from a handicap, Apple being both a hardware and software maker is the company's greatest advantage, affording a level of integration impossible in the Windows world. It's one of the things that makes a Mac a Mac.

Examples of how Apple leverages its vertical integration abound. Perhaps the best example is digital music, where Apple operates an online music store, provides the software to access the store (as well as play and organize the music), and builds a portable hardware device, the iPod, so users can listen to their music anywhere.

Not only do each of the components integrate seamlessly with each other, but each is acclaimed individually as being among the best, if not the best, available.

So why, then, is the absurdity of dividing Apple apparently obvious only to Mac users? Are they arguing from emotion rather than reason? Or is the Mac community's oft-repeated battle cry, "They just don't get it!" an accurate accusation?

In an attempt to dig a bit deeper into this issue, I contacted Jaffe and several of the analysts he cited (as well as a few he didn't) for further insight on the subject.

First, Jaffe isn't anti-Apple, an accusation he said many respondents leveled at him. He's a business journalist critiquing Apple's business strategy and offering what he honestly feels is a valid option for Apple.

"I just wish the feedback had more effectively refuted the arguments I laid out in the story," Jaffe said. "Not one letter offered a viable alternative to the breakup plan I put forward."

But even if one accepts that Apple is in trouble and needs a dramatic new strategy to reverse the trend, a breakup plan hardly seems the appropriate remedy. It simply has too many pitfalls.

Peter Kastner, an analyst with Boston-based Aberdeen Group, Inc., was quoted in the article to affirm the technical feasibility of creating a version of Mac OS X that could run on Intel-based PCs. He was not, however, aware of the article's central premise and quickly dismissed it.

"Splitting the company up would doom the hardware side of the business to a quick and probably painful death," said Kastner. "The software business would have a hard time not starving in a commoditized Unix/Linux marketplace."

Analysts not mentioned in article also found fault with the notion of splitting Apple. Charles Wolf, a research analyst with Needham & Company in New York, called the idea "intriguing" but ultimately discounted it.

Wolf said the proposal to have an Apple Software company make the Mac operating system available for Intel-based PCs would be "risky." He pointed to the disaster Apple experienced in the mid-1990s when it tried to license the Macintosh operating system to clone makers such as Power Computing, Motorola and Umax.

Rather than following Apple's script and going after low-end consumers, the clone-makers went after the fatter margins of the high-end Mac market. Apple's flat licensing fee meant it got no more money from the sale of a pricey clone than it got from a cheap one. Steve Jobs quickly axed licensing upon his return in 1997.

"I question whether any company would be interested in licensing OS X," Wolf said, "if the license fees reflected the gross margin opportunities of each line."

Similarly, Wolf envisioned dim prospects for an Apple Hardware company.

"What I fear is that Apple's brand equity could be dissipated if the company were to build Wintel machines," Wolf warned. "Many current Mac users might be tempted to switch to Wintel Macs."

Tim Bajarin, president of Campbell, Calif.-based Creative Strategies, also didn't envision prosperity for a cloven Apple.

"It is a terrible idea," Bajarin said. "Apple has an edge on its competitors because it controls the OS as well as industrial design, and as they have shown, this is a powerful mix of technology that allows them to be extremely innovative."

Only one analyst offered unwavering support for the notion of splitting Apple in two: Rob Enderle, a research fellow with Giga Information Group, Inc., a subsidiary of Forrester Research, Inc., of Cambridge, Mass. Notorious in the Mac community for his consistently gloomy pronouncements on Apple, Enderle also advocated the idea in Jaffe's article.

"When you are down to 2 percent share and the trend is still in the wrong direction you need to do something before someone asks you to turn out the lights," Enderle said.

Like Jaffe, he doesn't view Apple's ability to integrate its hardware and software as an advantage.

"You could argue the same thing with IBM, but IBM has lost most every standards war against Microsoft and they came to the table with substantially more assets," Enderle said.

As for the risks and disadvantages the two Apples would face, Enderle said the company now already suffers from many of them. On the hardware side, for example, Enderle pointed to how Dell has snatched a significant chunk of the education market from Apple by beating it on price. An Apple Hardware company building Intel-based boxes, he says, would be better equipped to compete with the Dells and Hewlett-Packards.

Another voice in Jaffe's article, Andrew Neff of Bear Stearns & Co. of New York, declined to takes sides on the prospect of dividing Apple. He did, however repeat his prediction, cited by Jaffe and echoed by Enderle, that Apple eventually would migrate to Intel processors from the Power PC.

This prediction is ever more puzzling in the wake of the revelation at the Worldwide Developers Conference last month that Apple's Power Mac G5 was the result of 18 months of collaboration with IBM, and was a key motivation for IBM to build a new $3 billion chip fabrication facility in East Fishkill, N.Y.

Both IBM and Apple said the collaboration is ongoing, with a clear "road map" outlining future advances in the Power PC architecture. If this indeed is true, then a separate Apple Hardware company would make no sense.

But if splitting up Apple as a strategy to grow Apple's business won't work, what will? Are Jaffe and Enderle correct that Apple can't endure if it stays on its present course?

Apple does, in fact have a strategy for growing its business, though it hasn't borne much fruit yet. The company's plan is to appeal to disgruntled Windows users who haven't seriously considered the Mac in the past.

Pieces of that strategy include the "Switch" ad campaign, the "digital hub" concept that aims to make using digital media such as photos, music and home movies as easy as plugging in a wire or clicking on a button.

In short, Apple is selling ease of use, made possible by its hardware/software integration.

The only hitch was getting consumers exposed to the products so they could sell themselves. That's the role of Apple's growing chain of retail stores strategically located in upscale shopping malls.

And there is some evidence this is working. Apple has said that about half of the customers buying Macs in its stores do not already own a Mac.

It's not a radical plan or a quick fix, but over time a continuous stream of innovative products placed in retail stores where non-Mac users can see and touch them could well nudge Apple's market share back up a point or two.

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