Falling Apple's 'Next' Strategy: Restore Loyalty

Battered by steep losses and eroding consumer loyalty, Apple Computer now offers a new solution for its woes: transformation.

On Tuesday Apple presented a plan that it hopes will re-create the magical moment a dozen years ago when it unveiled the Macintosh, which changed the computer from a nerd's plaything into a consumer product. To restore the company's technological luster, Apple has brought back co-founder Steve Jobs, whose innovative vision made him an almost mythic figure in Silicon Valley.

Speaking to thousands of Apple users gathered at an annual convention here, senior executives unveiled the details of a strategy to revive the company through the purchase of Next Software, which was founded by Mr. Jobs after his acrimonious departure from Apple in 1985. The announcement was accompanied by lots of glitz from Hollywood stars to rock musicians, but the crowd's adulation was saved for Jobs, who clearly revels in what is not only a business triumph but a personal vindication.

Despite the excitement, Apple still has a long way to go to restore the confidence of both consumers and, equally vitally, the firms that develop software and other equipment for the Macintosh.

Since taking over the troubled firm a year ago, former chip-industry executive Gilbert Amelio has restored some stability, cutting costs and shaking up the cloistered corporate culture. But Apple has lost almost a billion dollars in the past year, including last week's news that it would be about $150 million in the red for the latest quarter.

"Credibility is a real problem," says Christian Gurney, the vice president of CE Software, a small Iowa-based firm. "You cannot undo what happened over the last two years with a single purchase. But I have to give them credit for taking the right steps."

From its beginnings in a Cupertino garage, Apple Computer has been more than just another company. The pioneer of personal computers is the ultimate Silicon Valley start-up, the model for countless success stories seemingly conjured out of nowhere by small bands of techno-entrepreneurs.

"Apple is a looking glass for Silicon Valley," says Paul Saffo, director of the Institute for the Future, a Valley think tank. "It was the fast track out of the garage into the international market."

Apple's success was based on the superiority of its operating system (OS), the basic software that controls all the other programs that run on a computer. The Mac OS was startling for its simplicity and its graphics, giving it an ease of use that made the computer accessible even to elementary-school children.

Apple became the symbol as well for all those worried by the dominance of Microsoft in software and Intel in chips. Microsoft's latest OS called Windows 95 largely wiped out the technological edge that Apple once enjoyed. Microsoft holds 90 percent of the market.

Meanwhile Apple failed to carry out its own project to create a new, modern OS that takes advantage of technology advances since the Macintosh was unveiled in 1984. Many analysts see a company hopelessly trapped by arrogance and loss of creativity.

"Apple is in much worse shape than a mid-life crisis," says one Silicon Valley insider who prefers to remain anonymous. "It's a dead company."

That state of desperation led Mr. Amelio to do what had been unthinkable - look outside the company for help. Even more unimaginable, he turned to the technology of Jobs, who had gone off to form a company that he believed would, as its name implied, take the 'next' step after the Macintosh. Jobs failed to get the Next computer widely adopted, but its operating system gained a following for its power and its elegance.

"Software developers love it," says Hap Nesbitt of Handmade Software. "It's the Armani suit of operating systems."

Next's software also gained some clients, including on Wall Street and among creators of the Internet's booming World Wide Web. Next offers features of a modern system that experts say match or surpass those of Windows NT, Microsoft's most advanced OS.

Officially, Jobs has turned over Next, pocketing $400 million, satisfied to remain an adviser and public salesman for the new combined effort. But some believe Jobs still harbors the desire to regain control of his creation, to finish what he started. To the industry insider, the move conjures up the image of "an aging Captain Kirk reassembling his crew and stealing the Enterprise for a spin around the universe."

For now, the focus is on convincing the marketplace that the strategy of adopting Next as the basis of a new Apple OS will actually work. Apple must reassure its established market of 26 million Mac users that existing machines and software will be compatible with the new OS.

"We're going to preserve your investment," Amelio promised those assembled at the MacWorld convention. Apple plans to improve and support the existing Mac OS during an extended transition period. The new OS, named Rhapsody, is scheduled to be fully available in a year and a half. It will run on some of today's more-advanced machines, as well as on next-generation chip hardware.

Apple officials hope this assurance, backed by on-time delivery of improvements to the current Mac OS every six months, will encourage consumers who have been holding back to go out and buy new computers.

"A lot of people are waiting, so the potential market for Macintosh is huge," says Steve Kang, president of Power Computing, which licenses the Mac OS to make Apple-clone computers.

Apple's ultimate prospects for success rest on the reaction of software developers.

Many developers who once worked only on Macintosh have moved over to Windows simply because that is where most users now are.

"We've got to get the spark back with the developers," says Jobs, who is famous for inspiring programmers.

Still, small firms cannot invest time and money without knowing they can sell what they produce.

"The big question in my mind is how soon will the new OS reach critical mass," says software developer Gurney. "Is this too little, too late to keep the market share for Apple?"

That is the question Apple must answer, and soon.