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APPLE: IS IT TIME TO REBOOT? Computer maker is in deep trouble

THE BALTIMORE SUN

San Jose, Calif.--The oohs and aahs wafting out of the main ballroom at the Convention Center here mean the whiz kids from Apple Computer Inc. just took center stage with their latest high-tech gizmo, the Newton.

Just as their company was announcing huge layoffs, wage freezes and an executive shake-up intended to remake Apple from its core, the developers demonstrated what some say is the $7 billion company's future: a hand-held wonder that can, among other things, recognize handwriting and instantly transform anyone's scrawly cursive into typewritten text. Push another button and the message is sent to a fax machine anywhere in the world via a wireless cellular telephone link.

"This is just the beginning," said Scott Petry, a proud product manager from Apple's Personal Interactive Electronics division. Mr. Petry said the Newton also holds a 10,000-word dictionary, a stylebook, a scheduler, telephone directories, maps, calendars and more.

The show was classic Apple. A stunning new technology, elegantly cast and brilliantly packaged, literally being readied for the hands of consumers who aren't yet convinced they even need such a thing.

Mr. Petry and the other developers want to focus on the Newton and its great leap forward into the age of "personal digital assistants." The past and the present condition of the industry in which Apple competes is far less fuzzy and warm. In fact, it's a blood bath.

Despite the Newton, or maybe partly because of it, Apple is a company in trouble. No longer able to ignore the realities of a vicious and prolonged personal computer price war, Apple has to either join the fray or watch its share of the market, which has held steady at about 12 percent, get squeezed on one side by low-cost specialists such as Dell Computer Inc. and on the other by giants like IBM and Microsoft.

Morale inside Apple's Cupertino headquarters has slumped to an all-time low. Pink slips by the thousands are about to be handed out as disgruntled former employees and other company critics are already lamenting how the world's second-largest personal computer maker gave away its competitive advantages.

Apple's earnings in the second half of this year will fall far below last year's, company executives concede. Some analysts expect ple to report a fourth-quarter loss and rack up its worst financial year since 1985, when it also announced huge losses and layoffs.

On Friday, Apple's shares plunged $8.25, to $27.50, after the company reported a loss of $188.3 million, or $1.63 a share, for the third quarter.

Last month, Apple's board of directors, apparently impatient with Chairman John Sculley's tub-thumping for his vision of the "digital future" and his public schmoozing of Bill and Hillary Clinton, installed a 50-year-old German named Michael Spindler as Apple's new chief executive officer. Although the 54-year-old Mr. Sculley remains chairman, he will have little involvement in day-to-day operation, and there has been speculation that he could leave altogether later this year.

'End of an epoch'

Mr. Spindler has swung an ax through Apple, cutting more than 15 percent of its worldwide work force, or about 2,500 people. The cuts went deeper than some analysts and employees had expected. It signaled that he is serious about remaking Apple.

"This is the end of an epoch," said Mansoor Zakaria, publisher of California Business Magazine and chairman of MZ Group, a San Francisco data base company that does work for Apple. "What (( we're seeing is the end of the personal computer industry as we know it."

Cutting its work force was the first step, but now comes the hard part. To truly achieve his goals, company insiders believe Mr. Spindler will have to reinvent Apple and completely change the way it delivers its products and services. Associates say Mr. Spindler is convinced that the direct-marketing approach of such low-cost upstarts as Dell is the way to go. But that will mean bypassing Apple's army of salespeople, dealers, distributors and service representatives that it spent years building.

Furthermore, it appears Mr. Spindler is ready to license Apple's proprietary Macintosh computing system to other makers, a move critics say should have been done years ago when Apple was gorging itself on near-40 percent profit margins. Licensing the Mac operating system, the way IBM and Microsoft license their MS-DOS system, could flood the market with low-cost Macintosh clones that will compete circuit-to-circuit with Dell, Compaq and the other companies eating Apple's lunch.

Some Apple employees think the newfangled technologies could shelved while Apple reboots.

"The digital future can wait while we try to figure out what the company is going to look like in a year or two," said an Apple executive last week, who asked not to be identified. "We don't know anymore if we're a hardware company, a software company or a vaporware company."

How Apple got in this soup is also classic. Since 1985, when Mr. Sculley replaced Apple's two pioneering founders, Steve Wozinak and Steve Jobs, it seemed Apple could do no wrong. Mr. Sculley, a former marketing executive for Pepsi, presided over a series of successful product launches, all based on Apple's acclaimed Macintosh series of computers. Apple's stock rose to record levels along with revenue and profitability. With the October 1991 release of The PowerBook, Apple's first portable notebook computer, the company sold computers just as fast as it could make them.

) But that was the problem.

'Sitting on cash'

"We were sitting there on a pile of cash, and using it to fund the research and development," said the Apple executive. "And we had a $1 billion backlog of orders for the PowerBook and Macintosh computers. We did what a lot of companies would do in that situation."

Mr. Zakaria sums it up more bluntly: "They got lulled into complacency," he said.

While winning accolades for the Mac, the PowerBook and his futuristic vision of products yet to come, Mr. Sculley either missed or misjudged what was happening in the personal computer industry.

"Computers became a commodity, and the real money was in the licensing of software," said Tim Bajarin, a computer industry analyst for Creative Strategies Inc., in nearby Santa Clara. "Yet .. Apple stuck with its tradition of keeping its boxes proprietary."

The Macintosh operating system -- the computerized set of instructions and tools that let users operate the computer -- has long been considered the most elegant and easy-to-use computer system in existence. The point-and-click "Mac environment," as it is sometimes called, frequently is the top choice among educators, students, graphic designers and other non-techy types who don't want to learn complex computer commands.

Yet, unlike the Microsoft-IBM operating system that any computer maker could buy for a price, Apple kept its system to itself.

Apple's failure to capitalize opened a huge window for Microsoft which, in 1986, released a software program called Windows. The program gives IBM-type computers a Macintosh-like look and feel. Apple's response to Windows was to sue Microsoft, a fight it lost after five years.

"Someone in Apple should be horsewhipped for that decision," said Mr. Bajarin. "They gave Microsoft five years to get the product right. And now Apple is having to play catch-up with a system it once owned."

Proof in the numbers

The proof is in the numbers. While it took Apple 10 years to sell 10 million Macintosh computers, 22 million copies of Windows were sold in the first two years after its release. The program is still selling at a 1.3 million-a-month clip.

Windows may lack the grace of a true Mac, but it's close enough for millions of users. Installed invisibly inside a cut-rate PC from Dell computers, it gives consumers a computer that performs very much like a Mac -- and in some categories better -- for about two-thirds the price.

Meanwhile, computer makers such as Dell and Compaq learned to succeed in the fledgling industry on bare-boned profit margins of between 15 percent and 25 percent of revenue. They also spent less than one-third what Apple routinely spent on research, development, sales and marketing. (Last year Apple spent more than $600 million on R&D; and $1.6 billion on sales and administration, together more than 33 percent of its total sales.)

Mr. Spindler -- who, according to those close to the company, has had de facto control of the company for more than a year -- is readying a blizzard of realignment moves, new product introductions and strategic announcements to get Apple back on its feet, possibly within a year. Most of the personnel cuts will be made in Apple's sales force, although software engineers in the vaunted PIE Division where the Newton was developed aren't entirely immune, either.

Sources at Apple, however, said Mr. Spindler is calling a halt to projects that won't be ready for market for more than a year, but he hasn't yet said which ones.

Recently, Apple confirmed that Mr. Spindler had frozen wages and instituted a 5 percent pay cut for top executives. Apple spokeswoman Kate Paisley said wages will be frozen for all employees for an indefinite period while executives at the vice presidential level and higher will take the 5 percent cut.

Company insiders said that, along with the Newton products the company hopes will become a standard in hand-held digital computers, Apple will soon release a Mac operating system that works on IBM-like computers. The executive committee is now evaluating whether the company should license the original Mac technology; sources predict the board will OK it.

But Apple isn't going to have an easy time of it. The Newton, while interesting, is not going to save the company. Its profit margins are believed to be razor-thin, and Microsoft is right behind Apple with a similar device it calls WinPad. IBM, meanwhile, recently released a notebook computer called ThinkPad that is getting rave reviews and could seriously cut into sales of Apple's PowerBook.

"I think Apple can rebound," said Mr. Bajarin. "The big question is whether they can stay an innovator and grow."

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