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January 22, 1996

DIGITAL COMMERCE / By DENISE CARUSO

Apple Must Reinvent Its Strategy


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    T he world has been watching while Apple Computer Inc. has apparently been having a very public nervous breakdown.

    Its anemic financial performance and only vague and mostly defensive explanations from the company on solutions to its longstanding problems reportedly has the company considering selling itself at a fire-sale price.

    But while a sale or merger - pick your euphemism - might be a quick fix for shareholders, a sale to a buyer unable to capitalize on Apple's considerable assets could be a mistake for the company and its new owner.

    Sun Microsystems Inc. was said to be the most serious current suitor, and by many measures it is wrong for the job. Unlike Apple, whose business is based on a software system designed just for its Macintosh PC, Sun's computer is based on an expensive industry-standard operating system called Unix, used mostly by programmers and engineers. Sun has little experience in maintaining an operating system like Apple's and no experience in the tricky market for home computers, in which Apple must compete to remain an industry player.

    Finally, Sun is a company with a chest-thumping corporate culture, which would no doubt clash with the self-consciously mellow mode at Apple. A merger with Sun might very well worsen the exodus at Apple, which has been hemorrhaging talent for years.

    At least some of these caveats could be applied to other companies that might bid for Apple. So what should Apple do?

    Apple's problems are complex and unique, and they run very deep. Because it pioneered the mass production of personal computers, it invented almost all of its own technology, which has been geared toward the company's own software and computer parts.

    So what Apple may now need -- or has needed for years -- is a strategy that would allow it to regain its edge in operating-system software, while increasing market share and maintaining quality in a crushingly competitive market.

    A former Apple employee found a solution a few years ago that might work for Apple now. Trip Hawkins, an early Apple marketing whiz who subsequently founded the 3DO Company, saw the market crush in the video-game market in the early 1990's and figured out to preside over the design of a new game machine without having to build it.

    Mr. Hawkins set up 3DO as a licensing company, collecting fees and royalties from manufacturers like the Matsushita Electric Industrial Company, who make 3DO game stations to 3DO's exacting specifications. The machines can be as souped-up or stripped-down as the manufacturer wants, as long as 3DO approves its design and quality.

    The strategy backfired for 3DO, because it was a newcomer in a glutted market. But Apple is not an upstart. It has more than a decade's worth of loyal users who would buy the hardware from anyone, as long as it sported a "Macintosh Inside" sticker and performed as well as Apple-manufactured technology.

    Apple taken a few steps down this path, with its new Pippin consumer multimedia device. Apple does not plan to make Pippins, but has licensed the design and operating software to the Japanese toy maker, the Bandai Company, which is expected to be first to develop and manufacture Pippins worldwide.

    But Apple must go much further and abandon most of its PC hardware business to refocus on software and system design if the company is to regain its competitive edge.

    Michael H. Spindler, Apple's chief executive, has hinted at this, talking about "outsourcing" more of Apple's operations.

    After the shareholders meeting on Monday, Mr. Spindler told a group of reporters that he would even consider selling Apple's factories. "It's all under the knife," he said.

    Getting out of the hardware business would reduce Apple's revenues but it might be a way to return the company to the heftier profit margins of its past. After the company reported a $69 million loss for its fiscal first quarter, investors might welcome such a move.

    If Apple does agree to a sale or merger, the new owner would have to decide whether the company would remain in the hardware business. But if the company is "not for sale," as Apple continues to insist, then it would be up to Mr. Spindler - or whoever the board decides should be running the company - to preside over potentially the most wrenching change that Apple Computer has faced yet.


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    Copyright 1996 The New York Times Company