Computer Dating

By John Greenwald

Apple Computer is in the odd situation of scoring victories in a war that it seems well on its way to losing. On one hand, the company reported two weeks ago that profits of $114.7 million in the latest quarter were more than 40 times as high as those of a year ago. Thanks in part to its hot new Power Macintosh line, Apple shipped more than 1 million computers in a single quarter for only the second time in its history. Those signs of improvement under chief executive officer Michael Spindler, who succeeded the mercurial John Sculley last year, have helped boost the price of Apple stock 3 3/4 points, to 42 1/8 at the end of last week, since the earnings came out.

On the other hand, Apple may have to join forces with a cash-rich partner to survive in the long run. While many customers swear by their easy-to-use Apple machines, the company, based in Cupertino, California, commands just 8% to 10% of the $75 billion market for personal computers and has been stuck at that level since 1984. The market is ruled by software giant Microsoft and chipmaker Intel, whose products run IBM-compatible machines, accounting for an astonishing 80% of the personal computers used around the world. "Apple still makes the best desktop systems out there, but it doesn't matter," says Richard Shaffer, president of Technologic Partners, a computer consulting firm. "With just a 10% market share, the best isn't good enough."

It thus came as no surprise in recent weeks when reports again swept Wall Street that IBM was about to make a substantial investment in Apple, or perhaps even buy the company. As a team, Apple and IBM could develop a universal operating system for their current and future desktop computers that could lure customers from Microsoft. "Right now it's like Switzerland," says Tim Bajarin, president of Creative Strategies Research International, which studies the computer industry. "You've got four different languages -- Apple's Mac OS, IBM's OS/2 and Unix, and Microsoft's Windows NT -- all looking for a single vehicle to work on."

But for such a plan to work, Apple would have to agree to license its Macintosh operating system to IBM, a step that could lower Apple's profits in the short run -- after all, the company would lose its exclusive franchise -- and cast doubt on IBM's commitment to the much touted new version of its OS/2 operating system.

These clashing interests help explain why IBM and Apple, after spending so many years competing, now have trouble collaborating. The two agreed in 1991 to sign on with Motorola in the venture that produced the chip at the heart of both the Power Mac and IBM's long-awaited Power PC. But analysts say conflicts within IBM's personal-computer unit over whether to pursue a joint strategy have prevented the company from keeping pace with Apple: while that company has shipped some 600,000 Power Macs since March, IBM is still waiting for software companies to develop additional programs for its Power PC and is not expected to launch the machine in the general market until sometime next year.

"We've seen before where IBM signs an agreement on something but the follow-through is not there," says Barry Bosak, who watches the company for Smith Barney. "And with all the turmoil and constant changes taking place at Apple and IBM, there's some question as to whether this new deal will actually get done."

If they can pull it off, however, a healthy alliance would give Apple, which now relies solely on its own operating system, the chance to break out of its almost cultish market niche. It is stuck there largely because of its past refusal to license its system to other computer makers. As a result, software companies would rather write games, spreadsheets and other programs for Microsoft's Windows, which runs on eight times as many computers as the Apple system does. Without an abundantly growing supply of software, Apple has little chance to expand its reach. "People are abandoning ship and doing things for Windows now," says Chuck Farnum, director of product development for Digital Deviations, a California company that has written programs for Apple for the past 10 years. "It's a larger user base. More people will buy your stuff."

At long last, Apple seems to be confronting the problem. Spindler disclosed in September that Apple will soon license its Macintosh operating system to selected computer makers. The first licensed clones are expected next year. By making the "family jewels" available to others, Apple hopes to increase the number of computers that run the Macintosh system by 1 million, or 25%, within two years. "They need licensees out there," says Philippe de Marcillac, an analyst with the research firm Dataquest. "There's not much chance that they can get 15% to 20% of the market by themselves."

Microsoft, of course, is hardly standing still. The Redmond, Washington, company is pushing ahead with plans to launch Windows 95, its newest operating system, by the middle of next year. Originally scheduled for introduction by the end of 1994, the new version is designed to rival the Apple system for convenient use. Not everyone who has seen it believes it will. "It comes much closer," Shaffer says of the new system. "But it still in my opinion is not as good as the Mac." With IBM behind it, Apple may finally succeed in spreading its culture beyond a small band of devotees.

With reporting by David S. Jackson/San Francisco and Thomas McCarroll/New York