SOMETHING'S ROTTEN IN CUPERTINO AS CEO GIL AMELIO AND AN INEFFECTUAL BOARD DITHERED, APPLE COMPUTER LOST MARKET SHARE AND FADED INTO INSIGNIFICANCE. NOW STEVE JOBS HAS RETURNED, WITH A TURNAROUND STRATEGY THAT COULD MAKE APPLE HIS ONCE AGAIN.
(FORTUNE Magazine) – Here we go again. Apple Computer, Silicon Valley's paragon of dysfunctional management and fumbled techno-dreams, is back in crisis mode, scrambling lugubriously in slow motion to deal with imploding sales, a floundering technology strategy, and a hemorrhaging brand name. About all that Apple's 13,000 shell-shocked employees, its 30,000 hapless shareholders, and the 20 million queasy Macintosh faithful can do is look on in dismay, just as the company's chronically passive board seems to be doing once again. In January, Wall Street joined the crowd, horrified by results announced for the quarter that ended December 27. Apple's sales had plummeted by a frightening 32%, to just $2.1 billion, creating a stunning $120 million loss.
As they tried to glean hope from CEO Gil Amelio's vague public pronouncements, onlookers had no way of knowing that, for all the apparent turmoil, what's going on behind the scenes is even weirder. At Apple's headquarters in Cupertino, California, a power play is in progress that calls into question who's really running the company and that may very well put Apple in play once again. So thick is this plot that it reaches into the homes of some of the most powerful CEOs in Silicon Valley. The delicious irony is that what triggered the soap opera is a move Amelio hopes is his masterstroke: Apple's $400-million acquisition of Next, and the advisory services of Steve Jobs that come bundled with it.
Amelio's big deal is beginning to look more like a Next takeover of Apple. Never mind that Next Software was a boutique with revenues that would amount to less than a rounding error to Apple. Jobs, the Svengali of Silicon Valley, may have outdone himself this time: Not only did he collect $100 million and 1.5 million shares of Apple stock for his stake in Next, but his fingerprints are all over Amelio's latest reorganization plan and product strategy--even though Jobs doesn't have an operational role or even a board seat.
To the Machiavellian eye, it looks as if Jobs, despite the lure of Hollywood--lately he has been overseeing Pixar, maker of Toy Story and other computer-animated films--might be scheming to take over Apple for himself. If anyone doubts he could do it, all you have to do is ask his best friend, Oracle CEO Larry Ellison, the richest man in Silicon Valley. Says he: "Steve's the only one who can save Apple. We've talked about it very seriously many, many times, and I'm ready to help him the minute he says the word. I could raise the money in a week."
Ellison, who concedes he sometimes makes outrageous statements "just to be provocative," could be blowing smoke. But Jobs has never completely severed the emotional ties to his first and greatest creation. Anybody who knows him well will tell you that rarely a day goes by when he doesn't think about what he would do if he were running Apple.
Amelio told us: "Apple is a boat. There's a hole in the boat, and it's taking on water. But there's also a treasure on board. And the problem is, everyone on board is rowing in different directions, so the boat is just standing still. My job is to get everyone rowing in the same direction so we can save the treasure."
After he turned away, I looked at the person next to me and asked, "But what about the hole?" --A Silicon Valley CEO recalling Amelio's description of his task at Apple during a cocktail party in spring, 1996.
Chaos reigned in Cupertino in February of last year, when the board handed Amelio, a director since 1994, the keys to Apple. For two months, his predecessor, Michael Spindler, had been trying frantically to sell Apple to two potential suitors--Sun Microsystems, the hot Unix workstation-maker, and Philips, the Dutch consumer-electronics giant. Spindler had turned to them after a futile three-year effort to bring IBM to the altar. Mac sales were in a steep decline, due largely to bad forecasting and production problems.
According to Apple board insiders, as early as December 1995 another director--Spindler appointee Jurgen Hintz, a former Procter & Gamble executive--volunteered to take over. Amelio, meanwhile, started quietly lobbying directors to give him the job. Spindler's fate was sealed when the merger talks fell apart in January amid a storm of financial bad news and mistaken newspaper reports about the terms and likelihood of the potential Sun deal. When the board acted, it did so in a highly unusual fashion, hiring Amelio without conducting an executive search.
Amelio brought a reputation as a turnaround artist. He outlined his philosophy in /.Profit from Experience, a book chronicling his deeds at National Semiconductor. It espouses an approach Amelio calls "transformation management"; his fellow directors hoped he would put his tactics right to work.
Recalls Amelio: "When I walked in the door, I was facing five crises: We were dangerously low on cash; the quality of our products was poor; the development of our next generation [software] was behind schedule and in disarray; Apple's famously contrarian corporate culture was almost impossible to manage; and our product line and development efforts were fragmented to the point that the company was completely unfocused."
The new CEO took immediate action on the financial front, bringing in a CFO, Fred Anderson, from Automatic Data Processing, the Roseland, New Jersey, computer-services company. They cleaned up the balance sheet by writing off inventories, and hastily pulled together a new business plan. It assumed that Apple's weakening revenues would stop falling once annual sales had shrunk to $9 billion, from $11.1 billion in fiscal 1995. (Apple's fiscal year ends in September.) To maintain a gross margin of 20%, Apple announced that it would cut costs and eliminate 2,800 of its 17,000 jobs. All this became grim reality by the time Apple announced March-quarter results. Net sales slipped 18% to $2.2 billion; Apple took big charges for inventory write-downs and restructuring, resulting in a lurid $740 million net loss.
Amelio started addressing the quality crisis in the June quarter, recalling a line of balky Macs. He also firmed up his management team.
That's where the cracks in his recovery plan started to show. Aside from Anderson, Amelio's lieutenants all hailed from the semiconductor industry. Two--George Scalise, who heads operations, and chief technologist Ellen Hancock, a former IBM heavyweight--were colleagues from National Semiconductor. Amelio also elevated Marco Landi, a Texas Instruments veteran who had joined Apple in 1995 as head of European operations.
Neither Amelio nor the others had substantial experience in the PC business. While the chip business is a process-oriented industry that churns out discrete components, the PC business is more like a cross between Procter & Gamble and Bell Labs. It entails the design of complex systems in which software and hardware components from dozens of suppliers must mesh perfectly. Customer relationships differ too. The typical chip buyer is a purchasing agent for an electronics manufacturer--someone to do business with on the golf course. Apple's core customers, by contrast, are fickle consumers.
Inexperience helps explain why Amelio has had such a tough time addressing the other crises he spoke of, and why the company's products and sales and marketing efforts still seem chaotic. Apple appeared to find its legs in the fiscal fourth quarter ended in September, when it posted a $25 million net profit, largely as the result of reversed restructuring charges and a flurry of last-minute shipments. Still, sales slipped 23%, to $2.3 billion. At that rate of erosion, Amelio's $9-billion-a-year break-even target began to look like a fantasy.
Apple insiders also say Amelio and his team were slow to see that managing at Apple is more art than science. "Gil seemed to think that management training would take care of most operational problems," says a senior staffer. "He set up training sessions for mid-level managers that would end up canceled because business was in disarray. He also assumed that if he issued an order, things would get done. But it doesn't work that way here."
Amelio acknowledges that passive/aggressiveness often prevails: "Apple's culture has a contrarian nature that goes right back to its founding. There are some positive aspects--we got twice as many patents last year as Microsoft, as an illustration. But the negative is that when you're in a little bit of trouble, it's a lot harder to herd the cats."
Another senior official says that Amelio has shown little sense of urgency. "It's as if Gil was a microprocessor running at 25 megahertz when the rest of the industry, and many people in Apple, have clock speeds of 200 megahertz. He takes six weeks to make a decision that should take only one. The net result is that he is slowing down other decisions that people are itching to act on. The critical resource for Apple now isn't cash or brains, but time."
All through the fall, Amelio and Hancock dithered over what to do about Apple's chronically delayed next-generation Macintosh operating system, endlessly debating whether to license technology from Sun or Microsoft, or buy a company like Be Inc., a startup run by Jean-Louis Gassee, Apple's onetime technology czar.
Hancock liked the idea of linking with Sun, especially since the two companies are Silicon Valley neighbors and have complementary product lines. Landi preferred to connect with Microsoft, figuring that an alliance would help leverage the Apple brand in the market for conventional Wintel PCs. But Amelio couldn't decide, prompting independent developers of Mac applications to worry that he might never offer a sense of direction. Says Heidi Roizen, Apple's point person for dealing with the developers: "Our developers were getting really impatient. We hadn't lost many, but more were putting more emphasis on Windows work than on Mac applications, and that was really beginning to hurt."
Meanwhile, the financial picture was bleak. U.S. retailers had stocked too many low-end Macs at the end of that profitable September quarter. Not even sharp price cuts could move them off the shelves. By Thanksgiving, it was clear Apple's Christmas quarter would be a disaster. Moreover, Macworld, the annual confab of Apple faithful, was set for January, and Amelio had to have a new operating-system strategy or lose all credibility. It was time to act. As if on cue, Steve Jobs entered the picture.
Here's how Steve views the current situation at Apple: It's as if Apple is an old fiancee from college that Steve met again at a 20-year class reunion. Steve is happily married now with children, and has a great life. When he meets his old girlfriend again, she's an alcoholic and is running around with a bad crowd and has made a mess of her life. Even so, in his mind's eye, he still sees the beautiful woman he once thought was the love of his life. So what's he supposed to do? Of course, he doesn't want to marry her anymore, but he can't just walk away, because he still cares about her. So he puts her in a detox program and tries to help her meet a better class of friends and hopes for the best. --LARRY ELLISON, CEO of Oracle
Steve Jobs may be brash and impulsive, but he is also stubborn. While he abruptly sold all but one of his Apple shares after being ousted in 1985, he invested some of the resulting $100-million-plus in two startups that he has stuck with through many, many lean years--Next and Pixar.
In both cases, perseverance paid. In 1995, during the smash run of Toy Story, the world's first full-length computer-animated film, he took Pixar public and briefly joined the rarefied ranks of Silicon Valley billionaires. (The stock peaked at $40 during its first week, then fell back to the teens, where it remains. Jobs's stake currently is worth $450 million.) "Ask about Pixar and I'll talk all day," he said recently, as he refused to grant an interview about what he's up to at Apple.
Next was a problem child. Started as a builder of computer systems, Next developed a distinctive, black desktop machine that looked as exotic as the software inside. But the hardware, which was incompatible with IBM PCs, flopped: In over four years, Next shipped just 50,000 units. In 1993, Jobs laid off half his employees and refocused Next on software for Intel-based machines and Sun workstations. Since then, revenues have hovered around $50 million a year, and Next has posted an annual profit just once.
Why didn't Jobs pull the plug? It's simple--he treasures his reputation. Over the years, he told friends he feared he would never again be able to rustle up financing for any future "insanely great" idea if Next failed. It was as though Next was a 30-year-old son with a Ph.D. who was still living at home. Other CEOs say Jobs shopped the company around Silicon Valley for years.
Then along came Apple. Last October, newspapers reported that it was in discussions to acquire Be, which had a nifty, if untested, operating system that could run on Mac hardware.
Jobs has told friends he wasn't even trying to sell Next to Apple when he first contacted Hancock in November. He called to urge her to steer clear of Be--he thought its software was all wrong for Apple. Hancock invited him to visit Amelio to make his case.
By the time Jobs showed up in the CEO's office in the first week of December, he had raised his sights. Rather than simply bash Be, he pitched Next as an alternative. What he ultimately offered Amelio was a whole new strategy built around Next.
Jobs claimed that Next, not Be, had the software to shore up the Macintosh. What's more, he said, Next technology would enable Apple to make Mac software work on standard PCs, which in turn would let Apple tap into a much larger potential market.
Apparently Jobs was at his charismatic best. Just one week later, the board gave Amelio the go-ahead to try to strike a deal with Jobs. On December 20, the companies came to terms. Apple agreed to buy Next for $377.5 million in cash, plus 1.5 million Apple shares, then worth about $22.5 million, that went to Jobs. In under a month, Jobs had clinched the kind of deal Apple had been considering for nearly 10 years.
Jobs has told friends that he offered to serve on the board, but that Amelio demurred. Amelio knew, however, that having the golden-tongued founder around might boost morale. The CEO proposed that Jobs become his special adviser, and Jobs agreed. Perhaps he could help his old girlfriend after all.
I'm giving Gil the best advice I know, and I'll keep doing so until he stops listening or tells me to go away. --Steve Jobs
On January 7, when Jobs appeared with Amelio at Macworld in San Francisco to tout the Next-Apple marriage, their speeches were a study in contrasts. Jobs, garbed in a svelte Eisenhower jacket, delivered a crisp and entertaining demo of Next's operating system, explaining why it was just what the doctor ordered.
Amelio, looking uncomfortably pseudo-casual in a sport jacket and banded-collar shirt, hadn't bothered to practice his speech. He rambled. Occasionally he stopped to show off arcane software from Apple's labs. He droned on for hours.
To be sure, the CEO had a lot on his mind. Just four days before, Apple had let the world know just how awful its Christmas quarter had been, hinting that sales would decline at least 30% from the year-earlier quarter, and that net losses would exceed $100 million. Amelio also knew he'd soon have to devise yet another restructuring plan, lopping at least $400 million from the company's budgets to get the break-even point down to $8 billion. That, of course, would mean more layoffs.
After Macworld, Jobs visited or phoned Amelio several times a week, associates say. He apparently advised Amelio not only on how to integrate Next people and products into Apple, but also on how to cut costs and redraw the organization chart.
Although Hancock had been Jobs's first contact at Apple, their relationship quickly grew rancorous. Even after the Next deal, Hancock pressed Amelio to dump Next's operating system and replace it with Sun's Solaris. Several Apple insiders say Jobs was incensed by the suggestion.
Amelio sided with Jobs. Not only did he opt to focus solely on the Next technology, but he also sharply curtailed Hancock's responsibilities. When the reorganization was announced February 4, most people who had reported to Hancock got two new bosses: Next chief engineer Avie Tevanian took over software engineering, and Jon Rubinstein, who'd once headed Next's hardware unit, took over hardware engineering. Others had their wings clipped as well. Chief operating officer Landi was stripped of marketing and operations responsibilities and left in charge of Apple's worldwide sales.
Jobs also helped Amelio compile a "Hit List" and "Hot List" of product-development and cost-cutting priorities. Among other things, Jobs suggested that Amelio dump the Newton hand-held computer, a John Sculley favorite that last year lost at least $40 million. Amelio says only that eliminating Newton is "on the table."
Altogether, the Hit List calls for cutting R&D by 33%, or $200 million, and sales, general, and administrative costs by 9%, or $260 million. The cuts seem to anticipate a break-even point of around $7.5 billion. Among the top priorities on the Hot List: development of Pentium-based Apple computers that will be able to run both Windows and the next-generation Macintosh operating system (code-named Rhapsody).
Already Apple seems sensitive to the suggestion that Jobs is wielding power. Director and former chairman Mike Markkula, while welcoming Jobs's return, downplays his influence on the reorganization. And Apple recently announced it had asked its other co-founder, Steve Wozniak, to join Jobs as an adviser to Amelio. That appointment, however, is largely cosmetic--"Woz," as he is called, spends most of his time teaching in a Silicon Valley high school.
Why do I feel like it's my fiduciary responsibility to see a negative story about my own company? --A senior Apple official
Is Apple really any better off with Jobs and Next? There are a few bright spots. Apple is readying a host of new products, including a high-powered laptop, an inexpensive network server, and a supercharged workstation. Also coming are cheap plug-in cards to make Macs compatible with Windows PCs. Moreover, the operating-system strategy seems to be settled. Ironically, it's an approach very similar to Microsoft's: Rhapsody will target power users and the network-server market, much like WindowsNT, while traditional Mac software will be sold to schools and consumers, like Windows 95.
But Apple still faces daunting problems. Morale has never been lower, and many of the best employees are leaving. Amelio hasn't helped matters by seeming to blame the troops for Apple's problems. In a broadcast to employees, as he reviewed the woeful first-quarter numbers and announced the likelihood of more layoffs and cost cutting, he stopped at one point, stared into the camera, and said: "Don't put me in this position again, dammit."
Worse, Apple has lost the confidence of its customers, and its woes are turning off potential buyers. Landi concedes that in recent quarters only a tiny portion of Mac sales have been to first-time buyers.
Apple's worst enemy is time. It must shore up its position before it runs out of cash. At the end of December, the company still had $1.8 billion in cash, but nearly $400 million of that will go to Next's shareholders, and layoffs will likely consume a considerable sum. Analysts expect the company to post a loss next quarter, which will deplete the hoard even further.
The key question now is: "Where's the bottom?" According to internal projections, the company anticipates a $1.7 billion second quarter. While it's hard to predict annual sales from any one quarter, Apple may be headed for a $7 billion year. Sales were $11 billion just two years ago.
While Amelio states publicly that Apple might break even by the fourth quarter, pessimists say the company could well run low on cash by then--and who knows what that would trigger?
For now, Apple isn't looking for a sugar daddy. Sun is no longer interested in buying the company, although it remains willing to work out a technology partnership.
A lot of Apple employees, however, are hoping that Jobs and his pal Larry Ellison will ride to the rescue. Jobs and Ellison almost made a run at Apple last year, around the time the Sun and Philips merger talks collapsed. According to Ellison, he was ready to go, but Steve balked because he didn't want to take on Apple as a full-time job just as Pixar was starting to be fun.
Ellison says the two even have a technology plan, which involves building ultra-cheap Macs and selling networks of the devices to schools, small businesses, and perhaps even consumers. Jobs, however, has said he really, really doesn't want to run Apple again--he loves what he's doing with Pixar. Fine. But consider the position he's in, and what he's done in the few weeks since Apple bought Next. First of all, of course, there's the fact that Larry Ellison, his rich, rich friend, has publicly declared he'd bankroll a Jobs takeover. Then there's the power play Jobs has run on Ellen Hancock, an industry veteran close to Amelio, who's essentially been replaced with Next veterans Tevanian and Rubinstein. Then there's the board, that passive group of mostly inexperienced observers. In the past year, two veterans have left--Hintz and venture capitalist Peter Crisp. Aside from Markkulla, the board now boasts one year of collective experience in the PC industry--Amelio's reign at Apple. This crew is unlikely to push for a change as drastic as asking Jobs to replace Amelio. Other boards might, but not this one. While it stands by, Apple looks more and more like a corpse.
If the situation doesn't improve, Jobs may feel that he has to make a move. Yet Ellison thinks there's only about a 30% chance that he and Jobs will team up to take over Apple. "It's totally up to Steve," he says. "I wouldn't think of doing it without him. But you never know. Steve may not want to marry his old girlfriend, but he might just be willing to save her life."
Her pulse is getting weak.
REPORTER ASSOCIATE Wilton Woods