TIME: Almanac 1993/TIME Almanac 1993.iso/time/071591/0715201.000

Text File | 1992-08-28 | 9.6 KB | 209 lines

                                                                                BUSINESS, Page 46

ALLIANCES

Love at First Byte


Giving up their blood rivalry, Apple and IBM join forces to
develop bold new hybrids in personal computers. The chemistry
may be just right.

BY THOMAS MCCARROLL


    From opposite ends of the U.S., they carried on the
computer industry's fiercest rivalry. Based in suburban New
York, International Business Machines has long looked down on
Apple Computer, dismissing it as a ragtag bunch of
rabble-rousers. Miles away, in both distance and culture,
Silicon Valley-based Apple (1990 revenues: $5.6 billion)
attacked IBM ($69 billion) as an impersonal bureaucracy, mocking
the company in TV ads as Big Brother and depicting its customers
as lemmings. The warring companies forced computer users to
choose sides, sometimes dividing family members against one
another. Those wanting easy-to-use, almost organic software
favored Apple, while others threw their lot behind IBM because
its PCs were backed by a wider assortment of programs.

    But in a rapidly changing industry, IBM and Apple have
found much in common lately. After years of dominating their own
spheres of influence, they now face similar woes: declining
market share, relentless low-cost competitors and rapidly aging
technology. While IBM and Apple remain the biggest players, with
a combined market share of 38%, their rivalry has lost its
potency, as brand loyalty has given way to price competition.
Today IBM and Apple are more like a pair of aging prizefighters
whose bout gets second billing.

    The two companies decided last week to put away their
boxing gloves. IBM and Apple plan to join forces and share
technology in a potentially powerful partnership that could
reshape the computer industry. The culmination of weeks of
cross-country negotiations, the collaboration could help plug
large gaps in their product lines and position both companies
for the future. Among the elements:

    -- The two companies will form a joint venture to develop
an advanced operating system, the basic controlling software of
computers, which IBM and Apple will use in their machines and
sell to other companies.

    -- Apple's user-friendly Macintosh system will be
integrated into IBM's product line, including the large
computers that serve as the heart of corporate systems.

    -- Apple will gain access to IBM's advanced, high-speed
microprocessors, which will be incorporated into future editions
of the Macintosh and other machines.

    -- The two computer makers will seek to develop a new
generation of high-powered, multimedia hardware and software,
which could be marketed under both brand names.

    The deal represents a major realignment in the PC
industry. "Who would have thought these two companies could
possibly see eye to eye on anything? It's like a surfer girl
marrying a banker," declared Richard Shaffer, publisher of
ComputerLetter. If the venture is successful, adds Shaffer, "it
could create the most fearsome force in computing ever."
Machines made by the two companies could become virtual
look-alikes, which would not only eliminate the need for
consumers to choose sides but also end much of the confusion
prevalent in the industry over the lack of standards.

    None of this would have been thinkable a decade ago. Apple
founders Steven Jobs and Stephen Wozniak were riding high on the
widespread acceptance of their best seller, the Apple IIe, when
IBM launched its PC in 1981. While it was bulky, expensive
($2,600, vs. $1,395 for the Apple machine) and difficult to use,
the PC was quickly adopted as the industry standard because IBM
had a lock on the Big Business market. Apple eventually sold
nearly 3 million of its IIe's, mainly for school and home use,
but the company was largely shunned by corporations.

    When Apple unveiled the revolutionary Macintosh in 1984,
the rivalry with IBM reached full boil. Taking on Big Blue had
become an obsession for the Silicon Valley boys, who called
themselves "Bluebusters." Jobs launched Macintosh with an
evangelistic zeal, exhorting an auditorium packed with dealers,
customers and employees, "IBM wants it all and is aiming its
guns on its last obstacle to industry control, Apple. Will Big
Blue dominate the entire computer industry . . .? Was George
Orwell right?" As the frenzied crowd shouted a chorus of "No!,"
Jobs cued a now notorious TV commercial known as "1984," which
was to run only once, during the Super Bowl. The ad showed
workers staring zombie-like at a Big Brother on a viewing
screen, which a heroic female athlete smashed with a
sledgehammer.

    Offering stunning graphics and a stylish design, the
Macintosh caught on well in the home and school markets, where
Apple's machines now outsell IBM's by a two-to-one margin. Big
Blue has always been frustrated in those markets. In the
mid-'80s, IBM offered the PCjr, a stripped-down version of its
best seller, but the machine flopped because it couldn't operate
many of the heavy-duty software programs designed for the PC.
Yet IBM has virtually locked Apple out of the office market,
mainly because IBM's operating software has been adopted for 90%
of the PCs now in operation. Apple has never been able to match
its rival's marketing clout either. The California company's
sales force is about a tenth the size of IBM's.

    Lately, changes in industry taste have reduced the
relevance of the IBM-Apple rivalry. Rather than choose sides,
customers now insist that computers work together in networks,
regardless of the make or model. That has harmed Apple, since
its operating software is not the most compatible. But it has
been no blessing for IBM either, because its operating system
is so common that customers often prefer to buy clone machines
that work like IBM's but cost less. Customers have become more
concerned about price than brand names or even high performance.
That has turned things upside down for IBM and Apple, which find
themselves struggling to make their products less distinctive
and more compatible with their other rivals. Apple has developed
desktop computers that not only run its Macintosh software
system but also use the same disk operating system -- or DOS --
used by IBM models. And Big Blue has countered with desktop
computers that are more user friendly, in the spirit of
Macintosh.

    Yet neither IBM nor Apple has been able to halt customer
defections. IBM's market share in PCs has dropped by half, to
23%, while Apple's has declined to 15%, from 18%. The changing
marketplace has forced both companies to make some painful
adjustments. In the largest layoff in the company's history,
Apple will pare 1,500 jobs from its payroll this summer, a
reduction of about 10%. The company is expected to post an
earnings decline for the past quarter, largely because of price
cutting. IBM, which during the January-March period reported the
first quarterly loss in its 80-year history, plans to reduce its
labor force by some 14,000 workers this year, a 4% cut.

    Another problem that drove IBM and Apple into each other's
arms is their growing friction with some powerful partners,
most notably Microsoft, the suburban Seattle software giant run
by wunderkind billionaire William Gates III. Microsoft was the
creator of MS-DOS, the software that runs the IBM PC, but the
two companies have had a falling out over the next generation,
called OS/2, which runs IBM's line of PS/2 computers. Microsoft
developed OS/2 as well, but IBM believes the software company
has undermined sales of that software by pushing a highly
successful program called Windows 3.0, which enables old MS-DOS
software to work much like a Macintosh. That has also alienated
Apple, which contends that Microsoft stole elements of Windows
from Macintosh programs. The new IBM-Apple venture, which will
develop its own software, could spell the end of OS/2 and any
remaining relationship with Microsoft. "We're flabbergasted,"
says Steven Ballmer, Microsoft's senior vice president. "This
does not bode well for future cooperation between IBM and
Microsoft."

    The new alliance scorns another powerful company, Intel,
which has supplied the microprocessors for IBM's machines and
has commanded an almost monopoly position as a maker of
IBM-compatible chips. Possibly to foster more competition, the
new partnership says it will buy advanced processors from
Illinois-based Motorola, whose chip business has been suffering
lately because some of its big customers, including Unisys, have
been in decline. IBM has been busy lining up other partnerships
as well. Only a day after announcing its deal with Apple, IBM
said it would join forces with Germany's Siemens A.G. to produce
a powerful new 16-megabit memory chip, which will hold four
times as much data as current models. The collaboration could
give IBM-Siemens a leg up in the race against Japanese companies
to bring the new chip to market.

    The IBM-Apple combination has its risks. Most PC joint
ventures have foundered, and this one will have to stand the
test of vastly differing corporate cultures. Consumers could be
disillusioned with both companies at first, viewing Apple as
selling out and IBM as consorting with free spirits from the
West Coast. But if the collaboration works as well in practice
as it is planned on paper, the biggest winners will be the
customers. Consumers will no longer have to worry about divided
loyalties and incompatible programs. They won't be in Apple's
orbit or IBM's, but in the best of both computer worlds.