Editorial - Apple's Top Five Business Decisions

by , 5:30 AM EST, December 22nd, 2006

Apple has managed to survive and even thrive despite some very bad leaders, products and financial results over the years. The company has survived because of a few stellar products, alliances and business decisions. In my opinion, these are the top five that allowed Apple to survive the past thirty years. Without them, Apple would not exist as we know the company today.

Buying the iPod from Tony Fadell

Tony Fadell's big break in the business world was actually marketing Microsoft-design products. He was an executive in the division of Philips designing Windows CE-based PC Companions. Philips was an early leader in the devices, introducing one of the first PC Companions to feature a color display and later, one of the first to move away from the Chiclet/membrane keyboards.

Apparently, Mr. Fadell was not content to market PDA's for the rest of his career, and left Philips. MP3 players were novelties, holding little more than an hours worth of music that was either pirated or ripped from a CD. Mr. Fadell wanted to create a high capacity music player and companion music service.

The record industry had made a few attempts at such a service, PressPlay for example, but they failed to catch on because of low quality downloads and overly restrictive DRM. With PressPlay, songs were encoded well below 128kb, and would actually expire after they were played a certain number of times. In addition, there was no way to transfer the music to a portable player.

Mr. Fadell drew up a business plan for his service and player, secured the blessings of Harry Fox (the dominant music licensing firm in the U.S.), and went to Microsoft, Real (which actually had a music subscription service in the offing), and Sony. He was turned down by everyone. If PressPlay failed, so would every other music service.

Ultimately, Mr. Fadell took his plan to Apple, where he was well received. Steve Jobs and Jon Rubinstein (one of the NeXT executives to make the transition to Apple) championed the concept, and set Mr. Fadell up with a team of engineers to start creating the product. This began one of Apple's most successful product lines ever.

Not Shooting for the Low End with the Apple II

The similarities between Commodore and Apple are stunning. Both companies' flagship products were 8-bit PCs that were widely hailed for their ease of use and graphics capabilities. Both sold decently, but twenty years later, Commodore had essentially vanished from the face of the earth while Apple is still a dominant player in the industry. The biggest reason for the radically different fates of the two companies was not product design, but strategy.

Commodore CEO Jack Tramiel's mantra was "Margins." He wanted to produce the cheapest PCs in the world. To accomplish this end, he built up the semiconductor wing of the company (MOS) to become one of the largest suppliers in the industry. At the same time, he put the screws on other suppliers, getting the lowest prices on disk drives, keyboards and CRTs. He passed this value straight to the consumer, undercutting Apple and Atari at every turn. The Commodore 64, which was typically sold in department stores, retailed for around US$595.

Apples, on the other hand, were not cheap. The Apple II typically cost upwards of $1,200, putting it beyond the reach of many home buyers. But, the higher price gave Apple the profit margins it needed to invest in itself and invest in the ecosystem.

Personal Software, the company that published VisiCalc, the first computer spreadsheet, released a chess game called MicroChess for six different platforms. Steve Jobs personally delivered a free Apple II to the company to work on VisiCalc with. As a result, the first killer app in the computer industry was released on the Apple II first, establishing the platform as a standard for small businesses.

Hiring Gil Amelio as CEO

Every ten years, Apple falls into a crisis. In 1976, Steve Jobs was trodding barefoot around Silicon Valley, buying parts on credit and assembling machines in his parents' living room. In 1986, both cofounders had left the company to John Sculley, who was forced to right off millions in unsold inventory. In 1996, Apple's CEO, Michael Spindler, had so botched sales forecasts that the company would have to write off over a billion dollars in unsold inventory, while at the same time facing shortages of PowerBooks.

Jim Buckley, then the head of sales, resigned, taking responsibility for the forecasting failures, but that wasn't enough. Mr. Spindler had been telling the board for months that Apple would have a profit of $150 million because of (the non-existent) demand for cheap Performas. A few days before the board meeting, he predicted Apple would suffer a $69 million loss, but did not mention the write-off, though he did mention that Apple was very low on cash, meaning that it would not be able to sustain extended losses without going into debt.

On December 1, 1995, the board held a regularly scheduled meeting where Mr. Spindler announced the write-off, which accounted for a full 1/6 of Apple's annual sales. This was not the worst news, however. Since mid summer of 1995, Apple had been searching for a buyer. Michael Spindler and Jim Buckley were both convinced that Apple would not be able to compete with Microsoft or the myriad of IBM cloners. Talks were initiated with Sun (somewhat ironically, in that Apple had proposed buying Sun in 1987), and Sun was ready with an offer by December 1st. It was $23 a share, $5 less than what Apple's stock was currently worth.

After the waves of bad news, Gil Amelio, the newest member of the board, verbally lashed Mr. Spindler for being a coward. Mr. Amelio was widely credited with piloting the (short lived) recovery of National Semiconductor. Before he became an executive, he was a researcher. When he was earning his doctorate at Georgia Tech, his team was awarded a patent for the CCD.

Board-member Peter Crisp, one of Apple's original investors, started talks with Amelio to replace Mr. Spindler as CEO. Eight days later, after someone had leaked news of the offer to the Wall Street Journal, Mr. Amelio indicated that he was interested, but only if it was going to be worth his while. Mike Markkula, the chairman of Apple, began negotiations with Mr. Amelio over salary. Eventually, they agreed on a very generous offer. Mr. Amelio would receive a $200,000 dollar raise from his salary at National, would receive a million shares outright, and options on a million more.

Mike Markkula called a board-meeting on January 31, supposedly so the board could vote on Sun's offer. Mr. Spindler did not take the rumors in the Wall Street Journal seriously, and thought that he was actually going to discuss Sun. The meeting was held in New York, so Mr. Spindler brought his wife so the pair could sightsee after the meeting was over.

Mr. Markkula broke the news to a devastated Spindler, who left abruptly. The next day, Gil Amelio showed up for work with his Power Macintosh from National in hand.

Mr. Amelio had two goals for Apple. The first was to stop hemorrhaging money; the company was running out of cash reserves, and would have to start borrowing money. The second was to focus on the high margin markets where Apple did best, and to stop sacrificing profit margins for volume.

He was resoundingly successful. Not only did he secure $500 million through a convertible debenture, but he had Apple start releasing the high end machines required by publishers and other creative professionals. Were it not for the billion dollar right-off, Apple would have been profitable during the 1996 fiscal year.

Mr. Amelio was not perfect, however. His salary was one of the highest in the computer industry, at a time when Apple could least afford it. Also, his strategy of pursuing the high end caused sales to drop by a billion dollars, but Apple had breathing room again. Over the coming year, he would cut dozens of pie in the sky projects, including the infamous Copland.

On November 26, Mr. Amelio made his biggest contribution to Apple when he started negotiations with Steve Jobs to adopt NeXTSTEP as Apple's next operating system. Fewer than 200 days later, Mr. Amelio would be out of a job, ousted by Steve Jobs.

Releasing the iMac

When Steve Jobs returned to Apple, he audited every single project going on at Apple and cut 90% of them, creating the famous "product matrix" strategy for Apple. When he was interviewing members of the industrial design group, he encountered Jonathan Ive, who had been at Apple for five years. Mr. Ive had created a number of foam models for a possible Macintosh-based network appliance (presumably as a result of the omnipresent rumors of a Larry Ellison takeover of Apple) that were reminiscent of the old ADM dumb terminals crossed with a gum drop.

Mr. Jobs was immediately enamored with the design, though he had little interest in a network appliance. Mr. Jobs made the design the basis of the new consumer Macs, replacing the Performas, named the iMac. Until the iPod, the iMac was Apple's most popular product, and helped resuscitate Apple's dismal public image.

Allowing Microsoft to Invest $150 Million

Gil Amelio was desperate to get two things from Microsoft. First, was a commitment to develop Office for the next version of Mac OS. Second, he wanted Microsoft to make some sort of investment in the company to demonstrate that Microsoft was interested in Apple's long-term survival. Microsoft balked at being required to develop Office, and never reached an agreement with Apple under Mr. Amelio.

Steve Jobs presented an investment as a way to insure that Windows' biggest competitor didn't disappear, turning Microsoft into a true monopoly. The terms the two companies eventually agreed to also made Internet Explorer and Microsoft's Java defaults on every new Macintosh sold. Ultimately, Microsoft agreed to invest $150 million in Apple and to agree to develop Office for at least five years. During a press conference, Bill Gates even suggested that the next version of Office would be released on the Mac first (it wasn't).

The investment was a vote of confidence in Steve Jobs's de facto leadership at Apple (he had not yet been named CEO), and it didn't hurt Apple's bottom line either. Microsoft's commitment on Office also reassured business customers that they wouldn't get abandoned on the Mac.