Apple Computer: The Legacy Continues

Fall 1991

Apple Computer represents the classic American ideal of entrepreneurship. In six years Apple was able to grow from a couple of kids working out of a garage to be the largest supplier of personal computers in the U.S.1, with over a billion dollars in gross sales. Tremendous growth like that does not happen without growing pains. Apple had to adapt and cope with all of the rapid changes that were going on in the computer industry throughout its existence. This required better management skills that were available at Apple and eventually the entire management structure was overhauled and replaced.

Background

In the 1950s, computers were room sized monsters owned by only the largest institutional bureaucracies - the great corporations, the Pentagon, the major universities. All input to the machines came from punch cards, and output came from a teletype machine. Programmers would submit a pile of cards that were carefully punched out with their program and get a printout days or weeks later. This was called "batch processing," since the computer would only handle batches of cards.

In the 1960s Digital Equipment Corporation pioneered a revolution known as the mini-computer. The mini was a scaled down version of the mainframe. It had a cathode-ray tube and a keyboard which allowed the user to interact with the computer for the first time. Although it cost much less than a mainframe they were still very expensive and well out of reach of a single individual. This was mainly due to the fact that the main component that went into them - semi-conductor chips - were large and expensive.

Meanwhile, semi-conductor researchers were successfully shrinking the chips and bringing the price down dramatically. It was at this time that Robert Noyce of Fairchild and Jack Philby at Texas Instruments, working independently, invented the integrated circuit - a silicon chip that contains dozens of transistors, resistors, and other circuit components. This lead Gordon Moore, a founder of Fairchild, to write a paper in which he predicted that advances in microelectronics would follow a curve that would make chips about 30 percent cheaper each year into the indefinite future.2 He turned out to be right.

After flunking out of the University of Colorado, Steve Wozniak was at home living with his parents trying to build his first computer. When Woz was growing up, he always wanted a computer of his very own. He didn't have any money, so he convinced local semi-conductor companies (Fairchild, Intel, Signetics) to give him surplus chips. He was able to build a rudimentary computer with no keyboard and no screen. When he showed it to a mutual friend, Steve Jobs, Jobs was impressed.

Not long after that, in January 1975, Popular Electronics ran a cover story on the Altair 8800 - the first hobbyist computer, and the personal computer revolution had begun. The Altair was nothing more than a kit for $395 that enabled hobbyists to build their own computer. It was quickly written off by the industry leaders (most notably IBM) as a toy and not to be taken seriously.

In Berkeley, a bunch of radical techies had been publishing an underground newspaper promoting the idea of bringing computer power to the people. The concept was to transform the computer from an Orwellian instrument of oppression into a liberating force. Soon someone had the idea to form a "Homebrew Computer Club." Steve Wozniak was at the first meeting. Before long there were hundreds of members showing up - renegade engineers from local companies, researchers from Stanford University, and representatives of various counter-culture groups. Most of them either had an Altair or were working on building a computer of their own.

Wozniak didn't have the $395 for an Altair. He didn't even have $179 to buy the Intel 8080 micro-processor that the Altair was based on. A company called MOS technology was selling a new micro-processor, the 6502, for $25. He used that with a few memory chips and built a computer that was more powerful that the Altair at fraction the cost. Jobs liked the computer, and convinced Wozniak to go into business selling the computers. For capital, Wozniak sold his programmable calculator and Jobs sold his Volkswagen van and Apple was born.

It was the new age idealism of the Homebrew Computer Club that inspired them. Operating out of Job's parents garage, Wozniak worked on the next version of the computer that would come with a keyboard and be able to display color on a television screen, while Jobs worked on launching the company. He found Mike Markkula from Fairchild. Markkula came to the garage and immediately fell in love with the machine. In exchange for $91,000 of his own money and a $250,000 line of credit from the Bank of America, Wozniak and Jobs gave him one-third interest in the company.

The Apple II was such a success that Apple's sales totaled $700,000 in 1977, $7.9 million in 1978, and $49 million in 19793. The "open architecture" of the Apple II allowed third party vendors to make interface cards to expand and customize the computer. The Apple II became like the Model T of the computer industry.

The Market Changes

A program called Visicalc was soon available as one of the first spreadsheet programs. Executives were buying the Apple II to use Visicalc to forecast economic results. Apple had found its way into the American officeplace, yet it was still considered a hobbyist computer. In 1981 when IBM came out with the IBM PC it somehow legitimized the micro-computer industry. Data processing Managers now could start making company wide plans for purchasing and installation of desktop computers.

Analysts of the industry immediately starting making forecasts that IBM would use its immense size and resources to drive all others out of the business. It was clear that they weren't going to ignore the personal computer market like they did the mini-computer market. Everyone expected a big shakeout to come in which only 30 of the 150 companies making computers would be able to survive. There was no doubt that IBM wasn't going out of business. Wall Street analysts looked at a corporation like IBM and then looked at Apple and thought that Apple was a company with "no adult supervision."

IBM represented the cold, rigid reality of corporate conservatism. Apple represented creativity and a youthful vitality. Jobs had the idea to position Apple to appeal to a new cross-section of people who were young and upwardly mobile. To help pull this off, Jobs found John Sculley.

Sculley, Vice President of Marketing at Pespi Co., was responsible for the ad campaign called the "Pespi Generation." It showed young people having an active, exciting lifestyle and drinking Pepsi. This was one of the most successful ad campaigns in history. Jobs offered Sculley a $1 million salary, $1 million bonus the first year, $1 million severance package, and a $2 million loan for a house in Woodside. He thought it over and accepted.

The choice of Sculley to be CEO, basically Jobs' partner, was good for Apple's image. Wall Street approved of his solid pin-striped corporate background. This helped Apple maintain some confidence with their shareholders. It also fits in with the trend of eastern mammoth bureaucracies bankrolling and controlling the creative, frenzied atmosphere of California. The best example of this is over 60 years ago when southern California venture capitalists in Hollywood had corporate head offices in New York.

The bank loans are a key factor, and present-day Silicon Valley innovation is a more risky bank investment than were the movies of Chaplin or Fairbanks. Indeed, successful computer companies like Apple are prime examples of venture capital and financing paying off.4

Next, Jobs had the idea that using a computer should be as simple as using a toaster, a tool for Everyman and Everywoman, a user-transparent extension of the imagination.5 In order to do this Apple would have to give up the open architecture - design a computer that worked out of the box that was not made to be modified. The "computer as an appliance" vision was supposed to bring Apple into the mainstream consumer electronics market.

Xerox had been working on small computers for some time. The genius behind the work was Alan Kay. Kay, while working for ARPA (Advanced Research Projects Association), came up with the idea of the Dynabook. The Dynabook was supposed to be computer no larger than a notebook, so powerful it could hold an encyclopedia full of information within its circuits, and yet simple enough for a child to use. No Dynabook has ever been built.6

In the interim, Kay designed a computer called the Alto. The screen was controlled by a technique know as "bit mapping," which allowed for the first time to combine text and graphics onscreen. There was the first WYSIWYG (Kay's way of describing "What you see is what you get") word-processing program that displayed documents onscreen exactly the way they'd come out of the printer instead of being littered with special codes to indicate things like underlining or italics. There were overlapping "windows" onscreen that looked like pieces of paper lying on top of one another. There were visual "icons" little pictures onscreen that could be selected with the mouse - point and click took the place of typed commands that had to be memorized.

Xerox decided that they would like to buy into Apple. In exchange for being allowed to purchase 100,000 shares of Apple stock, Xerox agreed to open the doors of its Palo Alto Research Center to Apple's vice president of research and development, Steve Jobs. When Steve saw the Alto he flipped. He thought it made the Apple II look like an antique. He decided then to build a computer just like it. The plan for the Lisa and then the Macintosh was underway.

Industry Wide Compatibility

The problem with developing all new computer architectures is that the company creates a high degree of incompatibility between its machines and the rest of the world's computers. It runs the risk of isolating its products. If Apple were to add a 386-chip to a Macintosh so that it would be "IBM compatible," it would be a major capitulation. Apple cannot complete on the same terms as the cheap IBM clones. If you need to run MS-Dos software there are much better buys that a Macintosh. The compromise has been to build the Macintosh with a SuperDrive floppy disk that can read MS-Dos files, such as word processing documents, and convert them to its own format. There is still a big difference between being able to convert files and being completely plug and play compatible.7

There is an increasing number of cross-platform programs that help in this respect. Microsoft Word and Excel is available for both MS-Dos and Macintosh formats, and both can read each others' file structures. On a network this is especially useful. Users can freely move or share common documents from one architecture to another. This is an important step towards the blurring of the differences between the systems. Many people feel this is bad for Apple since the same job can be done on a MS-Dos computer. Apple has to keep offering new innovative features to set themselves apart. In the situation where Apple is a $5 billion company in an industry dominated by $10 billion and $50 billion giants it is important to keep their products unique.

Organizational Changes

After several major product failures, most notably the Apple III, Mike Scott, then Apple's president, decided to reorganize. Instead of having a division for all hardware, a division for all the software, and all of marketing in a third, Scott reorganized the company along product lines. Now there would be a division for the Apple II and III, one for Lisa, one for "peripherals" (floppy-disk drives and other input/output devices), one for manufacturing, and one for sales and service.

Later, Sculley also restructured the product teams to remedy a problem that has nagged Apple from the beginning: its inability to execute simultaneously the development of more than one major product. In the old setup, engineers reported to the heads of their particular technology units - disk drives, video circuitry, or system software. For a product to be born, its manager had to get all the technology chiefs to agree. In Sculley's new arrangement, engineers report directly to the product's manager.8

Critics have suggested that Apple should push marketing decisions out into the regional offices. There would be some loss of coordination, but that should be balanced by people who are closer to the customers making better decisions about support. Apple spends $30 million on a typical national ad campaign. $30 million would could buy a lot of sales seminars, loaner units, donated equipment to schools, and developer comarketing projects, all initiated by Apple evangelists in the field.9

New Strategies

Many employees thought Apple, in its emphasis on expensive, high-performance computers for business, had forsaken the company's original customers - schools and individuals. To correct this and properly position Apple in the marketplace, last year John Sculley worked out the latest corporate strategy and technological priorities.

Priority 1: The low cost Mac strategy is the first and most immediate priority. Besides making Macs affordable to more customers and more attractive to businesses, he hopes that the anticipated higher unit sales will attract software developers, who lately had begun shifting programming resources to Windows projects.

Priority 2: To come up with innovative laptop and notebook computers, where Apple has obviously been behind the power curve. Sculley believes that in a few years portable computers will be as ubiquitous as calculators.

Priority 3: Pumping up Apple's software prowess. The debut of System 7, the new operating system for the Macintosh, was postponed many times. The delays have convinced Sculley that Apple needs to rethink how it manages software development.

These priorities were made up over a year ago. Since then Apple has dealt with the low end computers. They have lowered the price of the Macintosh Classic, the entry level machine, to $999. Apple also has priced the Macintosh LC, a low cost color mac, at less that $3000. The Macintosh Classic is expected to break records in sales this year.

People have compared his strategy of packing the Macs into bigger bundles to his successful scheme at PepsiCo in the early 1970s of packaging soda in eight-packs, instead of six, and 32-ounce bottles, rather than 24.

Apple has unveiled three new notebook computers. The notebooks are state of the art in portable computer technology. The Macintosh Powerbook 170 is the top of the line and comes with an active matrix LCD display, 4 Megabytes of RAM, 40 Megabyte hard disk, built in Fax/Modem, and weighs about 6 lbs. Since it is a Macintosh it has all the WYSIWYG software. This is the closest thing to the Dynabook yet.

The Powerbook's biggest problem is going to be getting delivery. The International Trade Commission has imposed a 62.67% tariff on all active matrix LCD displays imported from Japan. Apple built a large manufacturing plant in Colorado Springs to assemble the notebook computers. Since there are no American manufacturers who make a comparable product, Apple will have to move its manufacturing facilities out of the country. This is an unfortunate development just when Apple was introducing it new computers.

As far as improving software development, Apple still has a long way to go. System 7 is out, but it took almost 2 years and there is more work to be done. Sculley has not announced what changes will be made to the software development.

Apple is not the same company that it was 15 years ago. Technological advances and a changing market have blurred the original Apple vision of "one person/one computer" and "computer power to the people." Sculley is aware of this and is determined to return to the original goals. The legacy will continue.


Footnotes

1 Julie Pitta,"Computers and Communications," Forbes, 8 January 1990, p. 135.

2 Frank Rose, West of Eden - The End of Innocence at Apple Computer, (New York: Viking Penguin, 1989), P. 30.

3 Frank Rose, West of Eden - The End of Innocence at Apple Computer, (New York: Viking Penguin, 1989), P. 47.

4 Jeremy Tunstall, Communications Deregulation, p. 57.

5 Neil L. Shapiro, "Stating the Obvious," v4, MacUser, September 1988, p. 41.

6 Stephen Kindel, "Water into Wine," Financial World, 30 May 1989, p. 32.

7 Gretchen Morgenson,"Can Apple go it alone?", Forbes, September 1990, p. 196.

8 Benton R. Schlender,"Yet another strategy for Apple", Fortune, 22 October 1990, p.84.

9 Guy Kawasaki,"Stand by your Managers", MacUser, December 90, p. 48.


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