APPLE OF SUN'S EYE

By STEWART ALSOP

DID SUN BUY APPLE? THAT WAS the loudest buzz question in Silicon Valley last week, as insiders tried to guess the outcome of talks over the possible merger of two icons of the digital revolution. Apple Computer and Sun Microsystems, two vastly different companies, were haggling over the buyout of Apple even as an Apple executive insisted that their company was "not for sale." But it was. Last Tuesday, Sun was said to be offering $33 a share, about the price at which Apple is trading on the stock market, or roughly $4 billion. By Thursday, Sun was reportedly offering $23 a share--nearly a slap in the face for one of the originators of personal computing.

One day Apple was a major technology company with assets to make any self-respecting techno-conglomerate salivate. The next day Apple was a chaotic mess without a strategic vision and certainly no future. Sun Microsystems was clearly trying to get Apple for a cheap price: something between $3 billion and $4 billion for a company that sold $11.1 billion worth of computers in its last fiscal year and is generally ranked as No. 2 or No. 3 in shipments of personal computers worldwide.

Apple lost $69 million in its latest quarter and has an uneven history of making money over its lifetime. But for Sun, a $5.9 billion maker of workstations and network computers, the acquisition would make considerable sense. It would nearly triple the size of the company and give Sun a major position in three key markets for computer systems: workstations, networking and personal computers. It would introduce Sun to a commercial field it knows very little about: namely, making and selling computers for both business and ordinary consumers.

It would also satisfy Sun CEO Scott McNealy's strong desire to compete eyeball to eyeball with Microsoft in personal-computer operating systems and software. Indeed, Sun has won glowing reviews for its new Java programming language, which the company pitches as a way to write new kinds of programs that work best on the World Wide Web. Sun might be able to use Java, which does not depend on any one computing system for its success, to reinvigorate the Macintosh line.

But the acquisition would also give Sun a major headache, because Apple is arguably one of the worst-managed companies in the industry. Apple has a host of problems that need to be addressed immediately to ward off the doom that many people have predicted for years. Cleaning up that mess would tax Sun's management team, possibly beyond its capabilities, and could distract it from Sun's own successful business. Even if Sun could figure out how to solve the short-term problems, it would inherit all the bigger conundrums that have bedeviled Apple for most of its brilliant, exasperating life. So the bet for Sun is monstrous: acquiring Apple could destroy either or both companies.

What is not clear is what Apple hopes to gain from the negotiations. But that's nothing new, because Apple's aims have not been clear for years. That is precisely the problem that has landed the company in a fix where it is apparently negotiating to sell itself for a bargain-basement price.

Apple faces several crises. First, its operating software is very old. Most customers believe that Microsoft's Windows 95, available since last August, now matches the general capabilities of Apple's System 7.5. The last major overhaul of the Macintosh operating system--System 7.0, which laid the groundwork for the current version--was late when it was delivered more than five years ago and even then just barely met expectations. The next major overhaul of the Macintosh system, code-named Copland, is due later this year. But many industry experts aren't sure if Apple will be able to deliver the revision on time or even if it will make a big difference when it does.

The common wisdom is that a computing innovation like Macintosh cannot survive without some magical but undefined percentage of the overall market. And Apple has never had that magic number. It once sold about 12% of all the computers marketed around the world. Now it sells less than 9%, and its machines seem to be disappearing from offices (except in the publishing business). Without market share, the worry goes, software companies will not write programs that entice more users, and market share will shrink further. Such uncertainties overshadow Apple's success last year at introducing an entire new line of computers, the Power Macintosh, which is elegantly designed and performs well and dependably compared with similar machines from other companies.

Apple also has strategic marketing problems. Japan accounted for nearly a third of the company's 1995 revenues, but last year a price war erupted, sparked by rival Fujitsu. Apple had climbed to No. 2 in sales in Japan, a remarkable accomplishment for an American company, but then switched local managers and virtually self-destructed. In just a few months it cut prices so dramatically that it could not protect its profit margins in what was supposed to be its best quarter of the year. And even then, Apple wasn't able to sell all the computers it produced for Japan.

In fact, Apple seems incapable of forecasting sales for its products. Over the past two years the company has consistently underestimated demand for its hottest PowerBook and Quadra models. It has just as consistently overestimated demand for less popular machines. Between October and December, the value of Apple's inventories of unsold computers rose more than 50%, to nearly $1 billion; the company made more than $350 million worth of computers it could not sell. Already losing money, Apple is not in a good position to hold a sale. Meanwhile, the surplus drags further on the bottom line.

Most important, Apple needs to decide what kind of company it is, and be that company consistently. It has never done so.

When Apple was run by co-founder Steve Jobs from 1977 until '85, it was a self-consciously maverick firm that lived to be different (not entirely dissimilar from Sun Microsystems today). Its idiosyncrasies created a revolution. The benefit of its attitude started with the Apple II, which defined the fundamental elements of a personal computer: hard drive, monitor, key board. Then Apple invented Macintosh, and desktop publishing. The company was a premium maker of first-class personal computers. When Apple succeeded, it made lots of money but saw its market share shrink drastically. Eventually the shrinkage caught up with it, and profits dwindled too.

When Apple was run by John Sculley, from 1985 through '93, it lived to be noticed: dramatic commercials, dramatic products. But Sculley decided to become a maker of cheaper computers for everyone as well as a high-performance manufacturer. Apple had to change its cost structure drastically to accomplish that goal, severely undercutting profits. And the idea didn't work.

Under Michael Spindler, the current chief executive, Apple has tried to reinvent itself as a profitable company--but that goal has its perilous side. Most recently, Spindler decided that Apple must license its software to other companies to enable them to make those cheap computers. But the company's market share is so small that it risks undercutting itself further.

Every time the company has shifted its focus and its strategy it has lost ground, and also some of its identity. Now it is very difficult to identify what Apple Computer really stands for. Once, the company personalized the computer age. The Apple value system and design philosophy that led to Macintosh computers placed a greater emphasis on the needs of individuals rather than institutions--what Apple designers once called the user experience. Indeed, Apple's continuing problem of how to find a strategy for success and prosperity is a reflection of the conflict between the company's original maverick attitude and its current need to be successful in the corporate market. Apple has to stand for something.

The company turns 20 next year--if it survives. The greatest legacy of all those years is not its machines but the community of 15 million people around the world who have bought its products and continue to use them. The company's stewardsw--hoever they turn out to be--will be challenged to remember that their destiny is still to offer that community the difference that made them swear by Apple in the first place. Steve Jobs was once asked, early on in Apple's life, what would happen if the company failed to make its latest product successful. He replied, "I guess we'll be just another billion-dollar computer company." Now Apple might be just another $11 billion computer company.

Stewart Alsop is editorial director of InfoWorld, a weekly for computer professionals published in San Mateo, California.