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Wrong Turn Is Often Fatal In Computer Business

The phenomenal pace of change in the computer industry creates a business environment as unforgiving as the Sierra Nevada was to 19th-Century emigrants. Getting lost for even a little while can put a company at grave risk of a lingering, unpleasant death.

Apple Computer Inc. is the latest to demonstrate this principle, and it was evident well before the ouster earlier this summer of Gilbert Amelio as the company’s third chief executive in four years. Apple may still be alive, but you can stick a fork in it. It’s cooked.

Apple is in very good company. Remember when Wang, Wordstar and WordPerfect dominated word processing? When Ashton-Tate’s dBase controlled PC databases? When Visicalc and Lotus 1-2-3 were synonymous with spreadsheets? When Leading Edge, Everex, Northgate, and a host of others were important makers of PC clones or rival microcomputers (such as Commodore’s Amiga)?

These companies and many more are either gone, merged or exist as only a shell of their former selves. Today we watch as Apple staggers toward oblivion, Netscape and Novell battle Microsoft for their lives, and Digital opens a desperate patent struggle against mighty Intel. Most of us outside Silicon Valley are not in the computer industry, so we tend to dismiss this soap opera as inside baseball. However, the stakes for us are high, too.

Computer users bear enormous costs for orphaned hardware, dead-end software and mistaken bets on over-touted technology. Any technology investment is something of a crap shoot, but we can improve our odds if we carefully observe the industry’s stories of success and failure.

Apple’s Mistake
Apple made a classic mistake, and it made it in a big way: It either forgot, or never understood in the first place, which business gave it a unique consumer franchise.

Apple wanted to be a hardware company when it grew up. That’s what it was little, back when the personal computer was a novelty, before IBM entered the business and made it a legitimate tool in the eyes of corporate America. After IBM came along Apple watched as all the other makers of incompatible microcomputers died out. Osborne, Kaypro, Tandy and others all either switched to making IBM clones or exited the business. Apple did not, so it thought it was unique.

And it was unique — but not in the way it imagined. The 1984 introduction of the Macintosh gave Apple something nobody else had at the time, a functional, well-supported, graphical operating system with a wide range of useful business applications. Graphic artists had to have the Macintosh, and a lot of other people who could have used PCs insisted on the Apple machine anyway because it was simply more elegant.

Apple had unwittingly become a software company. Steve Jobs and, later, John Sculley, Michael Spindler and Amelio all seemed to convince themselves that the world was willing to buy more expensive, less powerful hardware from Apple just because it was from Apple. This was never true. People bought the hardware because it was the only way they could get the software, which Apple resolutely refused to port to the much larger world of Intel-based computers (which is what IBM clones now are called).

The company that understood Apple’s fabulous business franchise was Microsoft. The Macintosh must have scared the pants off Bill Gates, who had realized early on that the best way to succeed in this business was not to compete on the playing field, but to own it. His turf was the operating system, the software platform on which everything else depends, and Apple’s platform in 1984 was much, much better than Microsoft’s. Microsoft began touting its counterpart, Windows, almost immediately after the Macintosh came out, but it would need six years before it could deliver a decent version of the system. In those six years Apple could have owned the computer world through the software side, but it chose not to. Looking back to its infancy instead of forward to its future, Apple insisted on being a hardware company.

Apple never had a chance of competing with the economies of scale available to makers of Intel-based PCs. It still doesn’t. Maybe its next CEO will be the first to understand this.

Shimmy Like A Wide Receiver
Imagine you are Bill Gates a decade ago. The good news is that your operating system, MS-DOS, has a lock on the PC market, and Apple is determined not to challenge you with its superior graphical product. But you have two big problems.

Your first problem is that in applications, your software either holds a distant second place (in word processing, for example, with powerful WordPerfect far ahead of Microsoft Word), or you do not even truly compete (in spreadsheets, where graphical Excel is available only for the Macintosh while Lotus 1-2-3 controls the PC spreadsheet market). Your corporate goal is total world domination — and this is only partly tongue in cheek — so the current state of affairs simply will not do.

Your second problem is that IBM, the partner that brought you to the PC dance in the first place, is pining for the days when it controlled the PC universe instead of continually swatting a swarm of cut-rate clone makers. IBM wants you to develop a new operating system, OS/2, that will run best on the new and much more proprietary hardware contained in IBM’s new PS/2 line of computers.

You are pretty certain that IBM is deluding itself. Buyers have shown a decided taste for the cheaper, more innovative hardware they can get for machines built on the architecture of the original PC. IBM tends to try to hold back innovation to protect its higher-margin products. Just a few years earlier, Big Blue made a laughingstock of an otherwise nice product, its PC Junior, by giving the smaller computer a toy-like "chicklets" keyboard to discourage corporate buyers from using it as a substitute for the full-size PC.

On the other hand, nobody can afford to ignore the Big Blue Gorilla. Not Microsoft. But also not Lotus, not WordPerfect, not any of the other big applications makers.

So you develop a two-track strategy. Yes, OS/2 will move forward in a joint development arrangement between Microsoft and IBM. This joint arrangement practically guarantees everyone that everyone at Microsoft will be on early retirement by the time a stable OS/2 rolls out, given IBM’s snail-like approach to innovation. But you hype OS/2 right along with IBM as the forthcoming corporate standard.

At the same time, you develop Windows as an alternative to OS/2. It’s graphical, just like the proposed OS/2 and the formidable Macintosh, but it’s incompatible enough so that software developed for either is not easily portable to Windows. Then you watch as Lotus, WordPerfect and the other category leaders throw their weight and their development efforts behind OS/2, which will not reach the market until long after Windows comes out.

You know that the move from character-based MS-DOS to a graphical environment like OS/2 or Windows will create a whole new game in the applications market. With any luck at all, the public will embrace Windows before IBM gets its act together to release OS/2. And Microsoft will have the only quality Windows applications available when the big switch comes, as Lotus, WordPerfect and the others scramble to redeploy away from OS/2. Suddenly you are the leader in the applications market.
Could it really be that simple?

Ted’s Excellent Adventure
Art Lazere made Ted Waitt a very rich man. In the late 1980s Lazere had a fine little PC company in Minnesota known as Northgate Computer Systems. Waitt and a partner were building a few systems in a barn not far away in South Dakota, but nobody had heard of them.

Northgate carved out a niche against IBM, Compaq and Dell by selling high-powered, reliable machines direct to consumers at rock-bottom prices. Northgate machines came with free, lifetime 24-hour telephone support and a keyboard so fine that Lazere sold them by the thousands to people who already had computers.

Then Northgate lost its focus. While its machines were beloved by computer cognoscenti who read the trade press and wanted to squeeze value out of every hardware dollar, the corporate market beckoned with its bigger volumes and bigger margins. Dell, the pre-eminent direct marketer, had a big presence in the corporate world. Northgate chose to compete with Dell, not to mention everyone else who wanted to own the corporate accounts.

Northgate could not pull it off. By the time it realized it had been beaten in the corporate wars, Waitt’s Gateway 2000 had staked out Northgate’s place in the SOHO (small-office home-office) and savvy-consumer market. Waitt was quick to learn from Northgate’s mistakes. Gateway never forsook the onesie-twosie computer buyer as it became one of the world’s leading computer makers. Even when the company’s service and support came under fire, Gateway made clear that the small consumer was its market and that resources were not being diverted to more lucrative corporate accounts. [Editor's Note: Uh-oh. A few weeks ago, Gateway announced an effort to sell computers to large corporate accounts.]

Today I write this column on a Gateway 2000 computer, but I use my nine-year-old Northgate keyboard, which I can’t bear to part with. They’ll probably bury me with it.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book Looking Ahead: Life, Family, Wealth and Business After 55.