ETEC 522 The Business of eLearning
The Phoenix Effect
An Environmental Analysis of Apple Inc.
JEFF MILLER, ALAN DOREE,
DAVID VOGT, BRUCE STEWART
JERRY BLEECKER
MET PROGRAM
UNIVERSITY OF BRITISH COLUMBIA
October 22, 2004
Introduction – “As Bad as it Gets”
The year was 1985.
Apple Inc., the industry leader in the personal
computer industry was bleeding money and floundering in a market it had once
dominated. Shares in Apple were trading at an all time low of $7. The company
had just announced its first layoff in history and1200 employees were being let
go (Goodell, 1996). To make matters worse, Steve Jobs, Apple’s visionary leader
had just lost control of the company to John Scully, the former CEO of Pepsi
Cola, in a boardroom show down. Jobs was too erratic, it was claimed, and
Apple required more steady leadership.
Eleven years and two CEO’s later,
Apple had still not recovered and teetered on the brink of extinction.
It had lost
was more than half its market share, and the company now only commanded
only 16.5% of sales (Whelan, 98). In addition, it had just posted a $708 million
fourth quarter loss and announced a reduction of one-third of its workforce for
the second quarter (Goodell, 1996).
A shadow of its former self, Apple needed a miracle. It needed a strategic
vision and new direction. Ironically, this arrived with the acquisition of NeXT
Step Computers Inc. in 1997 and its CEO, Steve Jobs.
So, how did the company that invented the personal computer find itself
in this situation, and how did it recover? An environmental analysis of Apple’s
corporate history will examine the reasons including its competition with
Microsoft, leadership changes, predatorial marketing and pricing practices, and
the proliferation Intel chips and boards. Finally, to understand Apple’s recovery
it is vital to study the decision to rehire Steve Jobs, initiate production of entrylevel computer systems, introduce a new operating system, and enter the digital
music market.
Apple Falls far from the Tree
Perhaps the greatest mistake Apple made was in dropping litigation
against Microsoft over copyright infringement of the Macintosh Operating
System.
In 1985 with the release its Windows 1.0, Microsoft had seemingly
copied the Macintosh Operating System. The similarities between Windows 1.0
and the Macintosh o/s were staggering, including the use of a mouse, a drag and
drop interface, and tiled graphics. Apple viewed the move as blatant piracy and
sued Microsoft for copyright infringement.
To resolve the dispute outside of
court, a meeting was arranged between John Sculley and Microsoft Chairman,
Bill Gates. In the meeting, Sculley agreed that to drop its suit against Microsoft if
it agreed to delay its release of its new spreadsheet program, Excel. Sculley, in
turn, agreed that Microsoft could use Apple technology in the Windows
operating system. While Apple believed this agreement restricted Microsoft’s
use of Mac technology to Windows 1.0, it actually gave Microsoft a royalty-free,
perpetuating and non-terminating license to copy the Macintosh operating
system. Although Apple claimed the agreement was violated by subsequent
versions of Windows, it was unable to prove copyright infringement in its case
against Microsoft in 1997.
The Players (or) Send in the Clones
Competition Intensifies
Apple now faced competition from numerous companies using the
Windows operating system.
Companies like Dell, Hewlett Packard, Compaq
and Gateway cloned IBM’s x86 system architecture and used lower-cost Intel
chips and boards to flood the market with relatively inexpensive personal
computers. Many of the computers lacked internal hard drives, but retailed at a
fraction of their superior Mac counterparts, effectively taking command of the
consumer market.
Apple it seemed had nearly priced itself out of the market.
For example, it charged $10000 for the Mac LX (nee the Lisa) and $5500 for its
Mac II’s.
A deluxe model Mac II shipped with 1mb of RAM and a 40mb hard
drive (Goodell, 1996).
Realizing Apple had nearly priced itself out of the market, competitors
seized the opportunity to sell entry-level systems. In 1986, IBM introduced its
5140 Convertible pc, with an 4.77-MHz Intel chip, enclosed monitor, no hard
drive, and keyboard for$1995 (Plosson, 2004). Competitors were quick to release
similar products. In 1987, Compaq released its first laptop pc with a 12-MHz 286
chip, 640 KB of RAM, 20-40mb hard drive, 3 ½ inch floppy drive and grayscale
LCD VGA screen for prices up to $5800 (Plosson, 2004.) In fact, it was not until
1999 with the introduction of the iBook and iMac lines that apple released a
computer system competitively priced to compete with its pc manufacturers like
Dell and Compaq.
A Competition Ban Stymies Business
and Impacts Distribution
Another key mistake was Apple’s implementation of a non-competition
ban on its K-12 distributors (Kanellos, 1995). Distributors were banned from
selling other computer systems to schools in an attempt by Apple to recapture
market dominance. The move proved to be disastrous, and Apple lost all but 19
of its original 400 dealers by 1995 (Kanellos 1995). Many dealers dropped Apple
for competitors like Compaq, HP and Dell, further eroding Apple’s market share.
Ironically, these distributors helped open access to the education market, where
the push for pc’s intensified. At much lower costs, pc’s drew the attraction of
schools across America.
Revolving Door Leadership
Another significant factor for Apple’s decline was its pattern of
appointing CEO’s that lacked a combination of creative vision and experience in
the computer industry.
Although Jobs’ was indeed a techno-visionary, he
lacked corporate experience. He was said to be a child at boardroom politics,
which explains his ousting by Sculley in 1985 (Goodell, 1996). Conversely,
Sculley lacked Jobs technical background and knack for innovation.
Sculley served as Apple’s CEO from 1985 to 1995. During that time, the
company experienced perhaps its greatest success ever with the introduction of
desktop publishing to the personal computer.
As a result of this shift in
direction, Apple’s stock price and profits soared over a two-year period.
Believing the company was on the road to recovery, Scully commissioned the
introduction of the PowerBook line, the first high quality laptop pc, sporting an
internal hard drive and monitor with 256 colors (Goodell 1996.)
Sculley’s Triumphs – Aldus, the PowerBook Line
and an Alliance with IBM
Following the departure of Jobs in 1985, Apple struggled for direction.
Sculley had relied on Jobs sense of creative direction, now gone following Jobs’
resignation from the company. Fortunately, Sculley seized a key opportunity in
1985 forming a partnership with Aldus (Adobe), which helped Apple expand
into the desktop publishing market. In an age of dot-matrix printers, gray scale
and black and white, desktop publishing was essentially non-existent.
Aldus
changed this by providing two key products to Apple: PageMaker and Post
Script.
PageMaker enabled desktop publishing, while PostScript made it
possible to print complicated graphics, and fonts on existing dot-matrix printers.
The combined software made Apple synonymous with desktop publishing, and
from 1985-1987, Apple experienced staggering growth as a result.
By 1987,
Apple was shipping 50 000 units a month. Its gross profit margins had increased
50%, and its real market value increased by $5.5 billion. Charging $3900 -$5500
for its Mac II’s (Goodell, 1996).
Unfortunately, Apple soon developed a
reputation for selling products at a premium – a criticism perpetuating to this
day. As desktop publishing software was developed for pc’s Apple readily lost
its niche environment and continued to lose market share at an alarming rate.
The table below provides a detailed account of the loss.
Tracking Apple’s Decline by Year
Percent of Market Share
1993
30.3%
1994
31.3%
1995
29.5%
1996
16.5%
1997
14.1%
( Source: “Apple Computers Shares of the Computer Desktop Sales in Education Plummeted” )
Sculley’s Greatest Mistake
Apple Unwittingly gives the Mac Operating System to Microsoft
It was under Sculley’s leadership that Microsoft gained a perpetual, nonterminating right to copy the Mac operating system in Windows and its
derivative works. Starting with the release of Windows 3.1 and culminating with
the release of Windows 95, Apple saw the loss of its operating system advantage.
Its competitors closed in, offering much cheaper computer systems with a
friendly and reliable operating system, replete with access to many education
and business-friendly software titles like Excel and Word. By the time Apple
replaced Sculley with Michael Spindler in 1993, the company had experienced a
drop of $8 billion in revenue (Goodell, 1996.)
Exit Sculley - Enter Spindler
Formerly Apple’s president and chief operating officer, Spindler served as
Apple’s CEO from 1993 to 1995. Under his leadership, Apple forged ahead with
key innovations such as speech recognition, text-to-speech, video and telephone
capabilities. In 1994, Spindler introduced the PowerMac line, sporting extremely
fast processors designed in partnership with Motorola and IBM. The PowerPC
chip kept Macs competitive with PC’s running the new Intel Pentium processor.
Despite the success of the line, Apple had difficulty keeping pace with demand,
creating a backlog of over $1 billion in orders. With the release of Windows ’95,
the Mac o/s had been effectively mimicked and consumers embraced the
operating system as a revolution in computing.
Following a disastrous
experiment with Power Computing Inc. to produce Mac clones, Apple posted its
worst ever financial results. In the third quarter of 1995, gross profit margins
had shrunk 25% and 2500 workers faced impending layoffs. Apple announced a
third quarter loss of $188 million, while rival Microsoft saw its profits surge by
over one billion dollars. Following a fourth quarter loss of $68 million, Apple
had seen enough and hired Gil Amelio to replace Spindler (AppleHistory.com).
Apple Stems the Bleeding and Hires another CEO
Without Vision - Gil Amelio
Amelio, former CEO of National Semi Conductor had perhaps the most
limited vision of Apple’s Chief Executive Officers but was an excellent
economist. Lasting only 500 days, he introduced stringent financial controls
across the company, including its split into distinct divisions, each responsible
for its own financial state. A conservative businessman, Amelio helped stem the
losses at Apple from their catastrophic peak of $740 million in the first quarter of
1996 to $33 million for the second quarter. By the end of the third quarter, Apple
managed to post a $30 million profit, much to the surprise of industry observers
(AppleHistory.com). However, Amelio’s greatest contribution to Apple was his
decision to acquire NeXT Step Computers and CEO Steve Jobs.
Technology
developed at NeXT Step formed the basis for Apple’s new operating system,
Rhapsody.
Following another disappointing quarterly loss in 1996, Amelio was
removed as CEO, while Jobs was given an expanded roll at Apple, ultimately
propelling him into the position in 1997.
Back to the Future
Jobs’ Creativity Breathes New Life into Apple
Soon after his return, Jobs forged an alliance with Microsoft and laid the
copyright infringement issue to rest. In exchange for this, Microsoft agreed to
produce a Macintosh version of its highly successful office suite – Office 1998.
Recognizing the power of online marketing and distribution, Apple took
control of its sales by opening the Apple Store.
The concept was wildly
successful and within one week, the Apple store was the third largest
eCommerce site on the World Wide Web(AppleHistory.com). Most importantly,
it was immensely lucrative and Apple announced two consecutive quarters of
growth that exceeded market analysts’ expectations, at $44million and $57million
respectively. Consequently, Apple stock rose above the $20 mark for the first
time in years (AppleHistory.com).
Apple Cracks the Low End Market
Following the success of the Apple store, Jobs focused his attention to the
entry level computing market. Silencing it critics, Apple introduced the Imac
line, which retailed in the $1500 range, supplying ample power affordably. With
processor speeds up to 600MHz, and a highly integrated design, the Imacs were
an instant hit, especially in education.
Entire labs could be set up in minutes,
and the o/s offered a simple, user-friendly computing environment ideal for
classroom research and presentation.
Building on its success with the Imac, in 1999, Apple introduced an
affordable addition, yet powerful line of laptops called iBooks. At costs under
$2000 per unit, the lure of mobile computing made the iBook especially attractive
to schools. Many ordered wireless iBook labs, complete with printer, wireless
access points (Airporters) and scanners. The concept of bringing the lab to the
students ensured the success of the iBook line (AppleHistory.com).
Shortly thereafter, it released its G4 iBooks and desktops systems,
providing users a serious performance and speed increase over older computer
models, facilitating desktop publishing, digital video editing creation and
rendering.
Continuing its successful partnership with IBM, Apple integrated the G4
processor into its computers in early 2000.
The chip was more than a match for
the Intel Pentium IV processor and uniquely positioned Apple computers and
helped Apple take command of the graphic art and design market, as well as
digital image and video processing. But more importantly, Apple computers
were now more than capable of running more powerful operating system
software.
Back to Berkley
OS X Harnesses the Power of Unix
In late 2000, Jobs introduced Mac OSX, a major shift in operating system
philosophy, founding the Mac o/s on Unix. OS X provided users an extremely
stable environment with outstanding networking technologies. Installing a Mac
in a Windows environment ceased to be a problem. Using an open source
technology called Samba, the Macs interacted seamlessly with pc’s on the
network. Taking advantage of its Unix heritage, Macs also integrated well with
Linux servers, the low cost server choice being implemented in school districts
throughout North America. And most importantly, OSX provided schools with
a nearly virus-immune operating system of choice.
In an era of malicious
viruses, like the Code Red Worm, the stability of Apple computers was a very
attractive selling point.
Apple Diversifies its Markets
Digital Music, the iPod and the iTunes Music Store
Unlike his predecessors, Jobs had an inherent ability to innovate and
penetrate key markets. Digital music was one such market. The recording
industry was beset by legions of file swapping enthusiasts and claimed it was
losing billions to piracy. Downloading sponsored by Napster, Kazaa, Limewire
and many others resulted in the illegal transfer of millions of songs each day
among users. The quality of songs was often questionable, and viruses were
being transferred at an unprecedented rate.
“Spiked songs” soon appeared.
Who can forget Madonna’s infamous “What the #$%* do you think you’re
doing?!” incorporated into many tracks exchanged online.
Recognizing an opportunity to establish a market for high quality and
legal music downloads; Apple introduced iTunes, the iTunes Music Store and
the iPod Music Player.
Although digital players had already surfaced in the
market, the iPod offered gigabyte storage capacity and communicated with
computers through iTunes software freely available for Windows and
Macintosh-based systems.
iTunes not only simplified the transfer of digital
music, but also linked purchases to the iTunes music store. Songs were available
for $0.99. Entire albums were available at a discounted rate.
By 2003, five
record labels had signed with Apple and the catalogue of songs exceeded 2000
items. In its first year alone, the iTunes store sold more than $70 million songs,
capturing 70% market share in the process. In the second fiscal quarter for 2004,
Apple shipped 807 000 iPods. Its stock rose to 45$ per share and its net profit
increased to $46 million (AppleHistory.com). Sales of its Macintosh computers
also surged, and Apple reported the sale of 750 000 units during the quarter.
The Total Cost of Ownership Debate Rages on
The Controversial Gartner Report
Gartner Inc is a leading research provider, offering analysis of the global
IT industry. In 2002, it released a study comparing the TCO for Melbourne
University’s Mac environment with its pc environment. The study concluded
that Macs were 36% cheaper to run than pc’s. The report also indicated that
Macs required significantly less hardware and software technical support,
generating direct savings of 25%. Because of increased reliability, users were
able
to
improve
productivity.
Overall, the Gartner Group recognized that use of Macintosh computers saves
25% or more in TCO "out of the box". Perhaps its strongest statement was that
"the deployment of Windows systems for unfettered knowledge [users] increases
the risk of higher technical support costs.”
It should be noted the study
examined cost savings at the university, and was considered a local study.
Additional Findings Support the Gartner Report
In a similar study, Applelinks, cited significant cost savings in Ohio school
districts. According to the article, Ohio’s eighth largest district running 4400
Macs to 400 pc’s indicated the TOC of pc’s was $253.86 compared with $53.25 per
annum (Moore, 2000.)
Similarly, Lynda Nichol, Director of Technology for cross-platform
Shawnee Public Schools stated that pc maintenance costs was one third greater
than maintaining Mac computers in that district (Moore, 2000.)
In a 2002 study of AEC organizations, Architosh reported that although
initial hardware costs were 12% higher than pcs, firms were able to keep
hardware
six
months
longer
than
pc
based
firms,
delaying
costly
upgrade/purchasing cycles. In addition, Mac-only firms spent 15-50% less on IT
management expenses. Much of the savings arose because fewer technicians
were required (Architosh, 2002.)
Julene Reed, director of Technology at St. George’s Day School in
Germantown, Tennessee, waded into the TCO debate in a recent article in
MacCentral. She points out "Our research has brought us to the Dell laptops
and the Apple laptops as the systems of choice. While I do think students should
be able to maneuver in any operating system environment, I recommend that we
maintain the Apple platform for the majority of our computers, including any
laptops we would utilize in a laptop program."
Reed cites her 31 years of
experience as an educational technologist, stating that Apple computers have a
proven track record of reliable service and experience little downtime due to
viral attacks or hardware problems. She also states that Apple computers require
less technical support than their pc counterparts, helping reduce technical
expenditures (Sellers, 2001.)
Final Analysis and Predictions
This report examines many mistakes Apple made following the departure
of Steve Jobs in 1995. Principally, these included a lack of vision, confounded by
changes in leadership, predatorial pricing practices and an inability to crack the
low-end computer market. Today, Apple can no longer rely on its dominance in
the educational market to support sales. Competitors such as Dell, Compaq and
smaller vendors like Seanix have made strong inroads into Apple’s traditional
territories.
To amplifying the problem, many districts are calling for
standardization, in a time when misconceptions about Apple computers are
strong. Despite its efforts to refute myths about its products, their reliability and
affordability, the company will continue to suffer an image problem in the
foreseeable future. Apple is still viewed by many as an expensive choice in
modern computing. Many parents believe that pc’s should be the sole choice in
schools because pc’s are the principal computers used in industry (Salkever,
2003.)
However, today Apple is making a powerful resurgence in the industry.
Its return to profitability through the introduction of its iMac/iBook lines and
introduction of the iPod / iTunes music store represent a dramatic opportunity
for the company to increase its appeal with younger users.
By using its
newfound financial resources to increase production of entry-level computers
that provide superior digital music support, Apple is positioned to expand its
user base.
Apple should also not overlook the importance of appealing to
gamers by ensuring its computers are available in the $1000 - $2000 market
range. With its recent release of the iMac G5 64 bit processor, Apple offers users
unprecedented power combined with the simplicity of its new operating system.
In focusing on the entry-level market, Apple will continue to re-assert its
dominance in the educational market, with powerful authoring tools like iMovie.
Offering educational incentives such as free OSX upgrades (as done in 2002), and
reduced cost software such as Garage Band and Final Cut Pro would be key
steps in this regard. For Apple, maintaining its corporate presence in schools
through training and district presentations is especially important at this time in
getting the word out to educators that Apple is open for business and has the
best product available at the best price, with the lowest TCO.
In a 1997 interview with Rolling Stone Magazine, Jobs stated, “Apple
Didn’t Fail … it succeeded beyond its wildest dreams … succeeded so well it
[we] got everyone to dream the same dream.” (Goodell, 1996.)
In 2004, Apple
has the vision, the products and the pricing to retake its position as the dominant
computer provider in North America. It is simply a matter of showcasing its
impressive product lines and getting the message out about success stories in
education and business. Apple has indeed risen from its own ashes.
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