The Second Coming of Apple Through a magical fusion of man--Steve Jobs--and company, Apple is becoming itself again: the little anticompany that could.
(FORTUNE Magazine) – A 50-foot photo of Cesar Chavez looked down from one side of the hall. John and Yoko loomed over the other, and the Grateful Dead's "Candyman" echoed from the loudspeakers. Balloons bounced through the audience. Even before Steve Jobs walked on-stage in his public uniform of faded jeans and black mock turtleneck, this mid-October meeting at the Flint Center auditorium in Cupertino, Calif., wasn't your typical corporate earnings announcement. And when Jobs started detailing the numbers, it became apparent that the old unorthodox Apple Computer is back. A year and a half ago Apple had no future; now it does.
Apple is proving again that iconoclasm pays. In its first fiscal year since Jobs took over as interim CEO in September 1997, the company made a profit of $309 million on revenues of $5.9 billion. The year before Jobs arrived, Apple had lost $1 billion on revenues of $7.1 billion. The crowd of press, analysts, and employees at the Flint Center gasped when Jobs revealed a $109 million profit for the fiscal fourth quarter ended Sept. 25. That beat Wall Street's consensus estimate by 38%. Jobs crowed about Apple's smash-hit product, the iMac, a sleek $1,299 home computer first offered in mid-August. The company sold 278,000 in six weeks, making the iMac one of the hottest computer launches ever.
Since taking over, Jobs has wrought remarkable changes, remaking Apple's products, structure, personnel, manufacturing, distribution, and marketing. As always with Jobs--just as when he co-founded Apple in 1976 and when he started Next in 1985--his business plan is about more than just business. The CEO wants to return Apple to the relevance it enjoyed years ago, before it lost focus, market share, sales, and finally profits. To do so, he'll have to show that the turnaround is no fluke. Having arrested the decline, Jobs must prove that Apple can grow.
It won't be easy. But during the last month, Jobs and his top executives paused long enough to give FORTUNE extensive interviews about what they've done and where Apple's going. For the first time in years, the company has a clear strategy. Says Jobs: "Apple's future is in the consumer market. There's no company doing a great job serving that market. Apple has that opportunity. What's that worth in the future? I don't know. It could be big." (For more from Jobs, see "The Three Faces of Steve.")
To understand why he may be right, you have to know what this company has been saved from. In December 1996, Jobs returned as a special adviser to CEO Gil Amelio, who then acquired Next for $425 million. As employees now admit, Apple was in a death spiral. Sales and market share were falling precipitously. Expenses were ballooning out of control. Departments battled one another. Some of Amelio's top managers were in denial; many of the most talented were leaving.
After dithering for months, the board, driven by former Du Pont CEO Edgar Woolard, ousted Amelio and turned to Jobs, who swiftly assembled a sympathetic core group of lieutenants. (Five of his seven top executives are Next veterans.) He then persuaded most of Amelio's board of directors to quit. Once they resigned, he appointed a six-person board, including friends like Intuit CEO Bill Campbell and Oracle CEO Larry Ellison. Woolard was one of only two holdovers. In September the new board invited Jobs to serve as interim CEO, and he agreed.
Free to act, Jobs moved with speedy intensity, addressing glaring weaknesses that he felt had accreted under Amelio. When you consider the changes in sum, they testify to a fact most observers have never noticed: Jobs is a savvy manager.
Licensing. Jobs' first big move was to terminate the licenses of several companies that had been building and selling clones of Apple's Macintosh computers. Executives now say 99% of customers who bought clones were existing Mac users. Rather than expanding the market, the clones were sapping Apple's profits.
Product lines. Apple was losing focus as it tried to support 15 product lines. Jobs decided to stop making printers and Newtons. He refocused the company on just four product categories: desktop and portable Macintoshes, for professionals and consumers. That's it. The spotlight is on consumers, but the pro models target design and publishing customers, where Apple still has 50%-plus market share.
Corporate structure. Apple had become highly decentralized and inefficient. For example, 22 marketing groups had sprung up around the company. Jobs reorganized, creating companywide departments for marketing, sales, manufacturing, and finance.
Marketing. Jobs rehired Lee Clow, the TBWA Chiat/Day exec who created ads for the original Macintosh, including the famous 1984 TV spot. Clow and Jobs created product and image ads that evoked their striking campaigns from the mid-1980s. The message: Buy a Mac and join a pantheon of creative geniuses--like Albert Einstein, Miles Davis, and John Lennon--who "think different." Apple boosted its 1998 ad budget to well over $100 million.
Distribution. Jobs and sales chief Mitch Mandich decided they would sell Macs only through resellers and stores that were committed to Apple, including CompUSA, the nation's largest computer retailer. Thousands of less enthusiastic outlets were dumped.
Inventory. PCs lose value almost as fast as eggs on a supermarket shelf, so reducing inventory can save millions of dollars. Jobs brought in as operations chief Tim Cook, a Compaq veteran who calls himself the "Attila the Hun of inventory." Turns out that's true. At the mid-October meeting, Jobs announced that Apple's inventory on hand--including components and finished products--fell from $400 million last December to only $78 million as of Sept. 25.
Apple's relationship with Microsoft. In August 1997, Jobs announced an agreement with Microsoft. For starters, Microsoft would invest $150 million in the company. The deal came across as such a coup that it landed Jobs on the cover of Time magazine. It also sent a clear message: If Bill Gates thought Apple would survive, maybe it did have a chance. Even more important was Microsoft's five-year commitment to launch new versions of its Office suite of applications for the Mac as often as it introduces new versions of Office for Windows. Given that Office is the de facto standard for writing and spreadsheets, Apple needs current versions to ensure that its machines are competitive with Windows PCs. Crows Ben Waldman, general manager of Microsoft's Macintosh business unit: "People say Office saved Apple, and I do believe it played a role in Apple's return to viability."
The relationship with programmers. Adobe Systems sells about $300 million in Macintosh software annually. But, says Bruce Chizen, who runs Adobe's products and marketing, "In the last few years it was impossible for any developer to work with them. We couldn't rely on anything they said." What's more, Apple had announced an operating-system strategy that would have required programmers to totally rewrite their applications for new Macs. Many were unwilling to do so. Alienating programmers was suicidal. The more programmers focused exclusively on Windows, the further behind Apple would fall. Says Chizen, "We were absolutely convinced they were going to die."
Under Jobs and Clent Richardson, the new head of developer relations, software makers are assigned an "evangelist" responsible for their every need. Says Chizen: "It's a 180-degree turnaround." Richardson and Jobs are also actively wooing computer-game developers, since about 80% of home-PC users play. One coup: Apple recruited Eidos Interactive, publisher of Tomb Raider, the hot game that features curvaceous digital daredevil Lara Croft. "They never called us before," says Eidos President Keith Boesky. "Now they're bending over backwards."
Many of these programmers are enthused about Apple because of the iMac, the hot computer that offers the clearest indication of how Jobs plans to attack the consumer market. "Look at which companies go after the consumer market--Compaq, Gateway, Hewlett-Packard," says Jobs. "None have assets anywhere near what Apple has for that market." In fact, the iMac is the first desktop computer to get the whole industry excited since...well, since the original Macintosh.
Jobs says that when he arrived "it was really a shocker" to learn that Apple wasn't selling a good consumer machine for under $2,000. He initiated plans for the iMac almost immediately after taking over, and the entire process was completed in just ten months. Crack designers sweated endless details to achieve iMac's small size and visual elegance. Consider the way Jonathan Ive, Apple's 31-year-old vice president of industrial design, describes his team's approach to the cable that links the mouse to the computer: "You know how, when you take a shower, condensation forms on the glass? We wanted that same kind of exquisite matte surface finish on the cable." Ive is equally poetic about the labels on the bottom of the mouse and the handle atop the monitor.
Apple has often produced fabulously designed products, including its PowerBook laptops--it's just that the company would often lose hundreds of millions of dollars in sales by failing to fill demand. Jobs won't let that happen. "We haven't slept since August," says operations boss Cook. "We're meeting the demand." Apple used to manufacture each product at a single location, but it makes iMacs in all three of its plants--in Sacramento, Singapore, and Cork, Ireland. Shortages have been minimal, though Jobs says he worries that if demand keeps up, it will be impossible to keep stocked as Christmas approaches. For the first time in years, Apple's sales are growing faster than the industry average. Research firm IDC, in Framingham, Mass., projects that iMac sales will hit 800,000 this year.
Jobs' great challenge is to build on this strong start. Odyssey, a consumer-research firm in San Francisco, reports that in 1994, 18% of U.S. households that owned a computer had Macs; by this July the figure had plunged to 6%. That translates to just 2.7 million U.S. homes with Macs, says Odyssey CEO Nick Donatiello. Jobs counters with research conducted for Apple, which found that more than 40% of iMac purchasers are new to Apple--more than 12% are PC refugees, and a stunning 29% have never owned a computer.
Persuading more Wintel users to switch will be tough, though. Says Donatiello: "There is no good reason to own an Apple rather than a Wintel machine. Apple's onetime advantages of ease of use, flexibility, the quality interface--they're gone. Consumers buy computers to run software. Apple's real challenge is the consumer who walks into CompUSA and sees that the majority of the store is devoted to software that doesn't run on Apple."
Apple machines still cost more. Add a printer and a floppy drive to the price of an iMac, and you'll spend around $1,600. Many stores sell Compaqs with similar setups for $1,000. Says Michael Gale of Intelliquest, an Austin, Texas, research firm: "About a third of the time when people consider Apple, they also consider Gateway. Gateway's prices are significantly lower than iMac."
Apple executives respond that value is a more complicated calculation. Says designer Ive: "This industry focuses on product attributes you can measure empirically. It's obsessed with chip size and speed because it's easy to communicate that five is better than two. And therein lies the bankruptcy of this industry." Adds sales chief Mandich: "We are not more expensive. The iMac is simpler to set up and administer, and there's a design and fashion element that really appeals to people."
Mandich would like that to be true, because if economics alone determine Apple's fate in a world dominated by the Wintel PC, Apple loses. The scale advantages generated by "Win" (Microsoft's Windows operating system) and "tel" (Intel's microprocessors) give PC makers an overwhelming edge--one that sways almost every software programmer. Microsoft's Waldman brags that his 200 developers working on Mac software may be the "largest Macintosh software organization on Earth outside of Apple." Sounds impressive. How many people at Microsoft, we ask, work on Windows software? "The rest of the company," he answers.
The economics of hardware are equally unpropitious for Apple. Its machines use the PowerPC processor, which it buys from Motorola and IBM. Michael Slater, editor of Microprocessor Report, estimates that annual sales of PowerPC chips total less than $1 billion, while sales of so-called x86 chips from Intel and others exceed $20 billion. Says Slater, "There just can't be comparable R&D. PowerPC will slip further and further behind."
Jobs defends Apple's prospects in both hardware and software: "Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It's not about money. It's about the people you have, how you're led, and how much you get it." Besides, he insists, there must be room for competition. "Rarely do I find an important product or service in people's lives where you don't have at least two competitors. Apple is positioned beautifully to be that second competitor."
Apple is generating renewed respect in the Wintel world, but it doesn't scare anyone. Intel Chairman Andy Grove says he actually welcomes the iMac. "Product-design originality from Apple may stimulate a new cycle of innovation that will grow the entire personal-computer industry," he writes in an E-mail. "That will be far more significant than whatever loss our part of the industry may experience to Apple, if any."
Many Apple fans see what might be called a bounded opportunity--room for growth, but no chance of dislodging the PC giants. Says Daniel Kunstler, who follows Apple's stock for J.P. Morgan and was an early believer in the Jobs resurgence: "It could be that Apple's market share continues to stagnate, but if they grow the pie, even if some of it accrues to Intel's advantage, so what?" Says researcher Andy Bose of New York's Access Media International: "I see Apple's future as a profitable, good-sized niche player. Apple might be the Saab or Volvo of the computer industry."
Jobs thinks there's a huge opportunity in being viewed as the primary alternative to Wintel. "We own one of only two high-volume operating systems in the world. Everyone completely overlooks this. Microsoft has come to believe that offering an operating system is like printing money. Well, Dell can't print money. Compaq can't print money. But Apple can print money."
To Jobs and other executives, the Macintosh operating system is the company's crown jewel. And they can't boast about it without putting down Microsoft, their supposed partner. Avie Tevanian, a Next veteran and Jobs confidant, is Apple's top software engineer. He is working on the company's next-generation operating system, called OS X, which may be out in 1999. OS X promises to be highly flexible, with numerous safeguards against system crashes and other snazzy features. Tevanian suggests it will completely outdo Windows. "The rate of innovation in the Wintel market is very stagnant," he says. "It's not that difficult to do things that are vastly better than what you see today. What Apple is doing is building better computers." Responds Waldman of Microsoft, with a hint of dismay: "Steve said last August that the era of competition between Apple and Microsoft is over."
Jobs and company also apparently intend to use the Internet and Sun's Java programming language to challenge the software giant. Explains Jobs: "The Internet and Java are the great levelers. If we have a fantastic Internet and Java platform that also happens to run core productivity applications like Microsoft Office, we've got something pretty interesting." Enthusiastic board member Ellison spells out the opportunity: "At Apple we're working on a project called Ferrari so you can do more with Java applications and services stored in servers on the Internet. We're talking about developing an Internet-standards-based platform. Which makes more sense? Windows everywhere or the Web everywhere? After all, the Web is already everywhere."
Asked to reply, Microsoft's Waldman abandons any Mac boosterism. "For them to think that the Internet will save them is misplaced, and I hope that's not their corporate strategy," he says. Then he gets a bit brutal. "Java runs better on Windows. Macs just run slower." Retorts Jobs: "Ben works for Microsoft, and if I were Bill, I'd appreciate his saying that."
Many observers expected Jobs to look for growth by extending Apple's brand into noncomputer products. But he hasn't done so. "So many in the personal-computer industry are off searching for a consumer product that's going to redefine the business," he says. "We're already sitting on the product that's going to redefine the business. It's called the personal computer."
Personal computers aren't just boxes on a desktop anymore. Jobs says that last year he tried to buy the PalmPilot from 3Com, but CEO Eric Benhamou wasn't selling. Jobs is undaunted. "Believe me," he says, "there are lots of exciting things going on inside Apple that aren't mere refinements of the Mac. You'll see within a year." Ellison elaborates: "At Apple we're going to build Internet information appliances with a Macintosh foundation." He says those devices may include laptops selling for just a few hundred dollars, and palm computers.
Still, there's a question around Apple that just won't go away: Will Steve Jobs stay long enough to take the company into these new realms? His celebrity is a tremendous business advantage, given his mythical stature. Says game developer Boesky of Eidos: "They sat me down in a room with Steve Jobs. I've always been a fan. I said, 'Cool, I met Steve Jobs. I'll do whatever he says.'"
Jobs refuses to shed the "interim" in his CEO title, and says the question no longer interests him. "People were hounding me on this, and I woke up one morning and looked in the mirror and said, 'Steve, this is not your problem.' I didn't know then and I don't know now. But for the past six or seven months, I haven't thought about it. I'm going to be here until certain things get done." Says Ellison, his close friend: "I believe he'll stay...Apple is an expression of Steve Jobs that is fundamental to him."
Apple could use the continuity. In the short term, the company seems a good bet; the stock, which bottomed at $12.75 a share, now trades at $37. Over the long term, however, Apple's prospects are harder to gauge. Apple has always been both a company and a faith. It's not just an enterprise for delivering shareholder value; it's an organization that aims to have, as Jobs repeatedly states, a "soul." Other PC makers have customers; Apple still has fans, believers even. People hate to give up on it. After reciting a litany of challenges facing Apple, Softletter editor Jeffrey Tarter adds, "Look--Steve gets it. There's no question. It's wonderful to watch. I suspect it's too late, but geez, who knows?" Intelliquest's Gale, whose research shows declining interest in the Mac, himself owns Apple stock that he bought at $17. "I have a great love for the company," he admits.
As long as Jobs remains, that kind of faith will stay alive. Moribund, aimless, invisible Apple is no more. But the people who finally make companies win--people with money--seek more than the pleasure of witnessing underdogs make beautiful things that teach the big lugs of the industry a thing or two. For once, they'd like to see consistency from this company, which has, for more than 20 years, shown the capacity for both magic and self-destruction.
REPORTER ASSOCIATE Tyler Maroney