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Series: Clone Wars
Detailed analysis of Apple's controversial squelching of Macintosh clone makers
Article 1 of 5 in series
My friend Cary Lu, author of the first Macintosh book and a contributing editor to Macworld, likes to tell how he was roundly booed for suggesting at Macworld Expo San Francisco in 1986 that Apple should license the Macintosh operating systemShow full article
My friend Cary Lu, author of the first Macintosh book and a contributing editor to Macworld, likes to tell how he was roundly booed for suggesting at Macworld Expo San Francisco in 1986 that Apple should license the Macintosh operating system. How different the reaction would be to his suggestion today! I'm astonished by the fuss washing around the Internet regarding the rumors (and very little actual news) surrounding the licensing the Mac OS to clone manufacturers. Let me attempt to explain what is known about the situation and what it all means.
Background -- In September of 1994, Apple announced that it would license the Macintosh operating system to other manufacturers, the first of which (in December of 1994) was Power Computing. According to Apple's Mac OS Licensing White Paper, Apple's goal in licensing the Mac OS was to "contribute to the proliferation of the Mac OS platform, benefit the entire Mac OS community, and help meet the needs of more and more customers."
The white paper continues: "More specifically, [licensing the Mac OS] will provide a much broader hardware choice in terms of price, capabilities, and availability. It will also expand the reach of the unique characteristics of the Mac OS to new sets of customers, and foster continued development of innovative, leading-edge solutions to address more and more needs."
[These pages about Mac OS licensing haven't been updated in many months and given the current imbroglio, I wouldn't be surprised to see them disappear in the very near future. Similar statements may be found in Apple's 1996 Financial Results, however, which is a matter of record.]
In short, Apple intended the clone manufacturers to expand the Mac OS market in ways Apple itself hadn't, and to provide solutions that didn't fit Apple's mass market model. For instance, Apple has done well selling Macs into the education market, but Apple has done less well in niche markets, say law or real estate. Similarly, Apple hasn't been all that successful selling into large business or government installations. Apple's hope was that clone manufacturers could both fill cracks in untapped markets and offer solutions (such as custom configurations) that didn't fit Apple's business model.
Since Power Computing's introduction of the first Mac clones, we've seen some of these goals met, but clone licensing has proven problematic in other ways. For instance, a number of the clone manufacturers, including Power Computing and TidBITS sponsor APS, now allow customers to customize their configurations, as is common in the PC clone world. That's good, but Power Computing's reported targeting of some of Apple's primary markets and customers has raised hackles at Apple, since the company didn't intend clone manufacturers to steal sales from Apple.
What's Being Licensed -- Before we can analyze this situation, we must first look at what is actually in question. Apple currently has licensing agreements with the clone manufacturers for Mac OS 7.6. Gil Amelio, ex-CEO of Apple, has said that Apple charged very little for the OS license because the clone manufacturers also had to license hardware from Apple to be able to create Mac clones. This is because Apple's hardware designs use proprietary chips, preventing clone manufacturers from creating machines from industry standard parts. So, for each Mac clone manufactured, clone manufacturers must pay Apple for both the Mac OS and some hardware. It's possible Apple isn't making much on these licenses since the company wanted to jump-start the Mac clone market.
However, several things have changed since those early days. First, the licensing agreements were for Mac OS 7.x, not for Mac OS 8. All along, it was intended that Mac OS licenses would be renegotiated when OS 8 was released in (roughly) 1997. But, keep in mind that Mac OS 8, back in 1994 was to be the ill-fated Copland operating system, which was dropped in favor of Rhapsody, based on the OpenStep operating system purchased from NeXT in late 1996. So, there's some argument over whether or not the current Mac OS 8 - which, though a major update, is an evolution of Mac OS 7.x, not the complete architectural change Copland promised - should count as the Mac OS 8 mentioned in the license agreements.
Second, in an effort to eliminate the proprietary aspects of the Macintosh hardware, Apple, IBM, and Motorola created the PowerPC Platform, also known as CHRP (Common Hardware Reference Platform). The CHRP specification was designed to permit hardware manufacturers to build systems that could run multiple operating systems without requiring the OS manufacturer to tailor the OS for each new platform. However, IBM and Microsoft backed away from creating versions of OS/2 and Windows NT for CHRP, so right now, basically, all a CHRP machine can do is run the Mac OS without requiring the manufacturer to license any hardware from Apple. Therefore, if you remember what was being licensed initially (the Mac OS and Apple hardware), you see that once clone manufacturers can build CHRP machines, they must license only the Mac OS.
[Again, these pages about CHRP are quite old and may not survive much longer, if Apple decides to remove information that could be used to cast aspersions on any forthcoming decisions regarding clone licensing.]
The Disagreements -- You can now see where the conflicts lie.
First, Apple is concerned that clone manufacturers are cutting into Apple's sales. That's definitely happening to some extent, but I'd be surprised if there's much Apple can do to prevent it. It's possible Apple is trying to slide some restrictions into the new licensing agreements to prevent increased cannibalization of Apple's sales.
Second, there's debate as to whether Mac OS 8 is covered under existing license agreements, since it's not the Mac OS 8 that was initially promised back in 1994 and 1995. This disagreement seems to be a question of the letter of the contract versus the spirit of the contract. Apple is interpreting "Mac OS 8" according to the letter of the contract (which is a little fishy, since in March 1997, Apple jumped from Mac OS 7.6.1 to 8.0 rather than 7.7 as initially planned). The clone manufacturers prefer the spirit of the contract, which says that "Mac OS 8," when initially written, was meant to be Copland, and since Rhapsody has effectively replaced Copland, "Mac OS 8" should now mean Rhapsody.
Third, with the advent of CHRP (Motorola and UMAX showed CHRP-based Macs at Macworld Expo in Boston a few weeks ago), clone manufacturers can now license just the Mac OS and not Apple's proprietary hardware. Apple has no problem with that but wants to raise the fees for licensing the Mac OS to make up for the artificially low fees originally charged.
In the end, it all comes down to money. Apple sees no reason why it should license the Mac OS to clone manufacturers for a pittance, especially if the clones are going to cut into Apple's sales. If Apple loses a sale to a clone and receives only a small license fee in return, that's a serious financial hit. Given Apple's recent losses, the company doesn't need new ways to lose money.
On the other side of the fence, the clone manufacturers want to pay as little as possible to license the Mac OS. The clone business is marked by razor thin margins. The clone manufacturers can easily pay any price Apple asks, of course, but they must then pass that cost on to consumers. If the license fees jack up the price of clones to the point where they're not competitive, the clone manufacturers will disappear.
Solutions -- Little of substance has happened on the clone licensing front of late, causing the Macintosh community to whip itself into state of frenzy. Considering that Apple lost its CEO and recently replaced most its board of directors, I'm not surprised that negotiations have been slow. Although some new directors are in place and Steve Jobs seems to be acting as the nominal head of the company, a new CEO has yet to be hired. It's unreasonable to expect such delicate negotiations to take place at full speed in a state of executive turmoil. That said, a few possible solutions have been proposed.
The solution that most people expect is that Apple and the clone manufacturers will compromise on the license fees such that Apple makes enough to justify the licensing program and the clone manufacturers pay little enough that they can keep costs down. Obviously, if it were this simple, the ink would have been dry on the contracts months ago. I suspect the price ranges (what Apple wants to charge versus what the clone manufacturers want to pay) are too far apart for the two sides to split the difference and call it a day.
Some reports, based on wording in an Apple SEC (Securities and Exchange Commission) filing, indicate that Apple might be considering dropping the clone licensing program entirely (although Apple would continue to honor existing contracts). Although this solution might make sense for Apple on a close-minded financial basis, the public relations nightmare it would cause would certainly be far more damaging. Apple just put a lot of effort into a positive PR move with the Microsoft announcement (see TidBITS-392); to destroy that with a move that would eliminate the clone manufacturers is asinine.
[In the text at the URL below, search for "Mac OS licensing" to find the relevant section of the 142K text file.]
Personally, I'd like to see some creative negotiation. For instance, perhaps Apple could charge less for Mac clones sold into new markets or for innovative hardware solutions that don't compete with Apple's Macs. Or, perhaps the clone manufacturers could promise not to undercut Apple's prices when selling into Apple's existing markets, allowing customers to make purchasing decisions based on other variables, such as bundled software, custom configurations, or technical support.
Rumors have surfaced saying that Apple plans to purchase back the Mac OS licenses from Power Computing, Motorola, and/or other licensees. I suppose it's a possibility, but one that makes little sense to me. Power Computing isn't going to close shop just because it can't make Macintosh clones any more, so why would Apple pay $100 million or so to turn Power Computing into a PC clone manufacturer? That's twisted.
Rumors, Reactions, and Events -- The primary reason that we've written almost nothing about this situation in TidBITS is that there has been almost no actual news about it. Rumors and speculation have run rampant, of course, as has overblown rhetoric. Here then are some responses to some of the more common rumors and beliefs and the few actual events.
Power Computing president Joel Kocher, previously of PC clone manufacturer Dell Computer, resigned last week, reportedly because he had urged that Power Computing sue Apple for breach of contract. Power Computing's board of directors seemingly disagreed, and Chairman and CEO Stephen Kahng is once again negotiating with Apple. Power Computing is known for its in-your-face marketing campaigns, but its attempts (encouraged by Kocher?) to rally the Macintosh community against Apple in this situation have met with mixed results. Other clone manufacturers have kept a much lower profile.
Apple has notified the clone manufacturers that it won't certify CHRP machines (or machines based on the new PowerPC 750 chip) as Mac-compatible while it reviews licensing agreements. Without certification, the clone manufacturers (notably Motorola, which is set to ship CHRP machines in September, reportedly with or without certification) cannot label their machines as Macintosh-compatible. Given Motorola's and IBM's roles in developing and manufacturing the PowerPC chip and CHRP itself, dropping CHRP certification or support wouldn't appear to be a simple decision for Apple. I can't imagine that Apple dares to anger Motorola and IBM in that way, since the companies are two of Apple's most important partners.
One cloudy area surrounds the issue of innovation. For the most part, clone manufacturers haven't pushed the Mac platform in interesting ways (short of using faster chips before Apple). This lack of innovation has caused conflict with Apple, but at the same time, Apple hasn't allowed the clone manufacturers to innovate in many ways, such as in the notebook computer market. Failing to certify CHRP machines would also prevent the clone manufacturers, most notably Motorola and UMAX, from creating innovative new Macs.
Various calls for action and petitions have circulated on the Internet. Almost all seem to come down on the side of the continuation of cloning, which is good, but many ignore the fact that there is no easy solution. Cloning both solves and creates problems for Apple, and as much as I and most Macintosh users want the clone manufacturers to survive, few people seem to have considered what would happen to the clone manufacturers if licensing harms Apple too badly. After all, the clone market dries up if Apple eliminates clone licensing, but it also dries up if clone licensing eliminates Apple.
Comparisons with the licensing of Microsoft Windows 95 to PC clone manufacturers aren't particularly relevant since Microsoft doesn't manufacture PC clones and has built its entire business model around software. In contrast, Apple is a systems company and although it makes some money from software sales (such as the 1.2 million copies of Mac OS 8 that sold in the first few weeks of distribution), most of Apple's revenues come from hardware sales.
I've seen numerous comments about how individual users will switch to Windows 95 if Apple eliminates clone licensing. In my view, that's an inane decision. If you have a real reason to buy a Windows machine, that's fine, but to throw away years of experience and potentially thousands of dollars of software and hardware to protest a business decision that probably doesn't have the slightest effect on you makes no rational sense. In the end, you must always buy a computer because it's the right computer for your needs, not because the salesperson is cute or because the company that makes it has a neat logo. It's like the standard rule for deciding when to buy a computer. You buy the best computer for your needs when you need it, since the price will always drop and the performance and features will always improve. If a Macintosh is still the best computer for your needs and you need a computer now, then you should buy one. If the Macintosh is not the best computer for your needs then you shouldn't buy one. You're buying a computer, not investing in a company. It's as simple as that.
Developers of Macintosh software have expressed serious concern regarding clone licensing, and for them, it makes perfect sense. The primary goal of clone licensing was to "contribute to the proliferation of the Macintosh platform," which translates directly to a larger potential market for software. If Apple pulls back on clone licensing, Macintosh developers will have to revaluate the potential future market for Macintosh software. Since Apple hasn't proven capable of expanding the Macintosh market by itself in recent years, developers may have trouble justifying further Macintosh development without clone manufacturers.
Conclusions -- To be honest, I don't believe there's much to conclude about the current state of clone licensing, other than it's a difficult situation and that no party is acting all that unreasonably. Both Apple and the clone manufacturers want to stay in business and continue to make money, and we can only hope that they can come to an acceptable compromise. Neither of the other options, the cessation of Mac OS licensing or Apple caving into the clone manufacturers' demands, are attractive for the long-term health of the Macintosh platform. And the health of the Macintosh platform is, after all, what everyone should have in mind.
Article 2 of 5 in series
by Jeff Carlson
Clones Stood Up by Apple for "Date" -- Last week Apple restricted the terms of its Mac OS Up-to-Date program, offering discounted OS 8 upgrade paths only to people who purchase Apple Macintosh computersShow full article
Clones Stood Up by Apple for "Date" -- Last week Apple restricted the terms of its Mac OS Up-to-Date program, offering discounted OS 8 upgrade paths only to people who purchase Apple Macintosh computers. Previously, anyone who bought a machine that wasn't running the latest version of the OS (for instance, many models currently ship with Mac OS 7.6 preinstalled) could upgrade for as little as $9.95. Now, users who bought machines from clone vendors after 01-Aug-97 must contact the manufacturer to find out if there is a discounted upgrade plan (although Apple will apparently still honor orders postmarked 01-Aug-97 and earlier). [JLC]
Article 3 of 5 in series
Based on rumors, we believe that the clone licensing fracas will come to a head this week, possibly by the time you read this article. For news junkies and those who believe that clone licensing is a key issue, during the next week we will be posting updates on our Web site should solid, verifiable information become available. Last week's article about licensing issues between Apple and the clone manufacturers brought in more messages than any article in recent historyShow full article
Based on rumors, we believe that the clone licensing fracas will come to a head this week, possibly by the time you read this article. For news junkies and those who believe that clone licensing is a key issue, during the next week we will be posting updates on our Web site should solid, verifiable information become available.
Last week's article about licensing issues between Apple and the clone manufacturers brought in more messages than any article in recent history. This week I want to share some of the responses to last week's article, and then offer a stronger case for why Apple must continue to license clones.
Two Heads Better than One? Back in TidBITS-372, I proposed Apple should split into different companies, with each free to do whatever was best for that company. I suggested a hardware company, an operating system company, and an applications and utilities company. Although my suggestions haven't come to pass, Apple has spun out the Newton division into Newton, Inc. (see TidBITS-381).
At that time, clone licensing wasn't at the forefront of the Apple soap opera. But, as several readers reminded me, the fact that Apple is a systems company ensures that issues like clone licensing will always be a source of internal conflict. Mel Martinez <firstname.lastname@example.org> commented:
Your comment, "Cloning both solves and creates problems for Apple..." points at the crux of the matter. Apple's current business model is fundamentally in conflict with the way the modern personal computer industry has evolved. You call Apple a "systems company" (as opposed to Microsoft being a software company). However, you cannot be a systems company and also try to be an open platform company that licenses its platform for sale by other systems vendors. Doing so creates inherent conflict within the company. Cloning is good for Apple's software division. Cloning is bad for Apple's hardware division. Thus Apple's two sides are in conflict, and it is always bad business to be in conflict with yourself. As one solution, consider separating Apple's hardware division from the software division so that their interests are independently realizable. Clones have shown that to the customer base, the hardware side of the business is replaceable. Apple's software is the true coin of the company business, current revenue distributions aside.
In addition, Rob Gvozden <email@example.com> commented:
As I see it, you have come close to the heart of the issue in your contrast of Apple and Microsoft in terms of their respective business activities. Publishing computer software and mass producing computer hardware are very different activities in terms of market structure. Publishing an operating system, thanks to some protection from patent laws, is pretty much a monopoly business insofar as competitors should only be able to offer less-than-perfect substitutes. Building a box with a CPU in it is more like "monopolistic competition," where Compaq and Dell are identifiably different computers but both can run the same software with only minor variances in performance due to the different system designs.
The implication in terms of pricing is clear: the monopolistic competitor is forced - by the competition - to reduce prices to a level that just covers the average cost of production. The monopolist, however, can look forward to juicy margins, because as long as he gets a handle on the size of the market for his product, he will be able to sell his product above its average cost due to the lack of competition.
When Apple started, it had a monopoly in both hardware and software: you couldn't run one without the other. Opening up the hardware side to clones means coming to terms with a shift in the company's business model, because the hardware business by definition will see a contraction in margins due to competition.
The implication of this is that Apple would do well to split itself into separate hardware and software businesses if it wants to survive. If Apple stays a single company, the antics of its hardware business put the entire operation in jeopardy. As two separate companies, the software side could survive unmolested and profitable, regardless of who made the hardware it ran on. The hardware side would have to learn how to compete under slimmer margins or else pass the way of the dodo.
I hope Apple resolves its identity crisis, because I think that this, and not squabbles over how best to grow the market for the Mac OS platform, is what will ultimately bring down the unified Apple we know today.
Those Who Do Not Learn... Speaking of Rhapsody for Intel machines, Karen Nakamura <firstname.lastname@example.org> raised an interesting point that hasn't received much attention. She noted that when NeXT ported NeXTSTEP to Intel chips, the market for NeXT's proprietary Motorola 680x0-based hardware dried up. Although NeXT made generally well-received and innovative hardware, the fact that it was proprietary and came from a single source ensured most people purchased cheap PC clones to run NeXTSTEP. Karen wrote:
It seems Apple is heading down this road as well - but deliberately shooting itself in the foot in the process. If Apple is serious about Rhapsody, then now is not the time to shut the door on clones and revert to a not-invented-here attitude. Clones are coming, but Apple's hardware division should be most worried about the Intel clones, not the Mac clones. I'm not optimistic about the future of Apple's hardware division, but the only way it can survive past Rhapsody is if it has sufficient market share (as a percentage of total workstations; not versus Mac clones) to ensure that developers will still support it.
The parallels are striking, but the primary difference is that Apple has a much larger installed base of Macs than NeXT ever enjoyed, and many of those users won't switch to the industrial-strength Rhapsody (in fact, many won't be able to, because Rhapsody will minimally require recent PowerPC-based machines). But Karen's point stands: will Macintosh hardware be sufficiently more attractive than lower PC clone prices to keep Rhapsody users on the Mac? And, to bring the discussion back to clone licensing, would a thriving clone market help the position of the Macintosh in the Rhapsody world?
The Real Deal -- I missed a couple of facts surrounding the entire situation in my previous article - most notably that terms for continued clone licensing had been agreed upon (but not on signed contracts) between Apple and the clone manufacturers just before Gil Amelio stepped down. Amelio has commented on this in several interviews.
So what's the holdup? Most fingers are pointing at Steve Jobs, who appears to believe that the clones are significantly hurting Apple. That may be true, and it would imply that even the renegotiated terms weren't satisfactory to the post-Amelio Apple. The question remains: does Jobs want to eliminate clone licensing or is this a power play to squeeze yet more dough from the clone manufacturers? Is the overall reason that, as Gil Amelio says in those interviews, that Apple is afraid of competition? I don't know, but it's hard to discount Gil's opinions.
I said last week and I'll say again here that the license agreements must be acceptable to both sides. (Obviously, they were a short time ago.) Apple needs Macintosh clones, and either eliminating clone licensing altogether or requiring such usurious license fees as to make clone pricing non-competitive is self-destructive.
In short, I still believe the situation is complex and in many ways incomprehensible because of the limited quantity (and quality) of information that's been made public. However, I believe even more strongly that Apple must find a way to continue to support clone manufacturers. The elimination of clone licensing could be tantamount to corporate suicide. Consider these negatives, should Apple eliminate clone licensing altogether:
Elimination of consideration of the Mac OS from large government and corporate installations whose purchasing policies require multiple suppliers.
An exodus of development effort from the Mac OS. Even now, trying to get venture capital for a Macintosh product is next to impossible. If even venture capitalists who are major Macintosh fans aren't willing to risk their money on the Mac, can you imagine the repercussions if Apple were to do what many believe would shrink the Mac market?
Tremendous damage to Apple's business reputation. What sane company would choose to partner with Apple after such an action against clone manufacturers?
Potentially significant damage to Apple's relationship with Motorola and IBM, both of which have clone licenses and produce the PowerPC chips on which Apple relies. Talk about biting the hand that feeds you.
A significant loss of loyalty from of long-time Macintosh users, particularly in business and educational settings (to judge from the comments I received from readers last week). Even worse would be the opinions of the people who have purchased clones.
A conceivably disastrous series of breach-of-contract lawsuits filed by clone manufacturers. This is the "war" referred to by ex-Power president Joel Kocher, who was pushing this option on an accelerated schedule.
A potential increase in Mac prices and slowing of hardware development efforts because of the elimination of competition. Although I think the low-price genie has been released from the bottle, without clones Apple would have even less reason to keep hardware prices low.
On the positive side, all Apple would seem to gain by eliminating clone licensing would be those sales that would have been cannibalized by clones. That's real money, but I can't imagine that it's enough to solve Apple's overall financial problems. I suppose a case could be made for Apple wanting to regain complete control over Macintosh hardware development, but that sounds utterly childish. No matter what, the negatives of eliminating clone licensing as I see them so far outweigh the positives that one wonders what Jobs or others at Apple could possibly think tips the scales in the another direction.
Article 4 of 5 in series
Once again, Apple Computer has looked competition squarely in the face and, to borrow an American football metaphor, punted on third and long. The Power of Apple's Eye -- Apple last Monday announced its acquisition of leading Mac OS clone manufacturer Power Computing's "core assets," including the customer database, key personnel, and Power Computing's Mac OS licenseShow full article
Once again, Apple Computer has looked competition squarely in the face and, to borrow an American football metaphor, punted on third and long.
The Power of Apple's Eye -- Apple last Monday announced its acquisition of leading Mac OS clone manufacturer Power Computing's "core assets," including the customer database, key personnel, and Power Computing's Mac OS license. In return, the private investors who bankrolled Power Computing get $100 million in Apple common stock. That's more than half of what Power Computing valued itself at - in late June, the company announced now-withdrawn IPO plans to sell three million shares of stock at $8 to $10 per share, out of an authorized 17,720,000 shares, giving an initial total market value of between $142 million and $177 million.
Power's investors may think that the $100 million in Apple stock is a good deal, considering how difficult Apple was making their future business plans. Apple's Mac OS licensing has all but ground to a halt under the xenophobic administration of Steve Jobs - and more seriously, the company has also stopped all licensing that would let clone makers design their own motherboards. Monday's announcement is the latest sign that Apple is reliving the past, choosing any route feasible to avoid the most fundamental task of a public corporation: competition.
Chip Wars -- Power Computing, although suffering some initial quality and timeliness problems, has been kicking Apple's six-colored posterior in both performance and public opinion. Using blazingly fast state-of-the-art PowerPC chips that aren't available in the quantities Apple needs for global manufacturing, Power Computing has built a reputation for making the fastest computers on the planet, offering 225 MHz and 250 MHz models that beat Pentium Pro speeds earlier this year. The company's latest offerings include systems based on the new "third-generation" PowerPC 750 processor from Motorola, and preliminary results show that these systems, which start at 275 MHz, may be twice as fast as the older 250 MHz machines thanks to the incredible performance gains in the PowerPC family over the past two years, including the new chip's advanced cache architecture.
Apple, on the other hand, has no systems ready to go using these new chips, often still referred to by the code-name Arthur. Instead, Apple's latest systems are based on the Mach 5 PowerPC processor, the latest incarnation of the PowerPC 604e, with speeds up to 350 MHz. The Mach 5 chips are fast - faster on a per-megahertz basis in systems than the 604e chips they replace thanks to better caches - but they're not as fast as Arthur processors, and they're more expensive. That leaves Apple's fastest systems, historically those with the fattest profit margins, in extreme danger of irrelevance at the hands of Apple's own licensees.
Licensing Theory and Reality -- Theoretically, Apple shouldn't care, because licensing should be a profitable business that grows the Mac OS market and makes the platform healthier. In reality, Apple's licensing agreements, spanning the terms of the last two CEOs (Michael Spindler and Gil Amelio), give Apple fees based only on Apple's cost to produce and support the Mac OS, not based on the value it has to the clone makers. Apple was apparently trying to match the relatively low per-computer charges that Microsoft charges for Windows, but in the process Apple virtually guaranteed that only by expanding the Mac OS market could licensing be profitable. If a clone manufacturer went after existing Apple customers, instead of into the areas Apple couldn't reach but felt other companies might, then the lost hardware profits would more than offset the licensing revenue.
To Apple's ongoing annoyance, this is in large part what Power Computing was doing. In an effort to build a reputation, Power Computing focused its marketing efforts on existing Apple and Macintosh customers. Once Apple had done the relatively difficult job of selling customers on the Mac OS instead of Windows, Power Computing went for the jugular and convinced these folks to buy the Mac OS systems from them instead of Apple - especially the high-end systems, using those speedy chips Apple couldn't get in sufficient quantities. Four months ago, Apple was selling 180 MHz machines with 512K Level 2 caches for more than Power Computing was selling 210 MHz machines with 1 MB of Level 2 cache.
With Apple losing money faster than ice melts in an Austin summer, the company had to take remedial steps. Apple's average unit price hovers around $2,000, and the company enjoys a relatively steady 20 percent profit margin, so each sale lost to licensing cost around $400 in normal revenue (complete with all the risks, like building a bunch of machines and hoping someone buys them) and brought in around $50 of risk-free revenue (and perhaps three times that much in hardware royalties for motherboard licensing fees). It would seem obvious that licensing would never be as profitable as Apple's own hardware sales, so the logical course of action for Apple would be to produce highly competitive machines that forced clone manufacturers scramble to keep up, while boosting licensing fees enough to at least accommodate cannibalized sales.
What About Competition? That, of course, is the logical way, not the Apple way. For a while, the two coincided under the reign of recently deposed CEO Gil Amelio. In a recent interview with MacAddict magazine, Amelio explained one reason he expressed support for Mac OS licensing was that Apple had to learn to compete. "Apple does not know how to compete. It knows how to innovate, but it doesn't know how to compete, and they're different. ... [Apple's] things are great, but in the final analysis, if you can't compete, you can't make it attractive in the marketplace, and if you can't have people lusting after buying it, it doesn't matter." Amelio intended that the company would learn, by fire if necessary, how business actually works.
Time and again, Apple's products have been challenged by similar entries from competitors, and time and again Apple has either lost the battle or refused to show up for the fight. When Microsoft's Windows brought many of the graphical Macintosh advantages to the DOS-based market for the first time, Apple focused less on improving than they did on avoiding competition by suing Microsoft, an ultimately unsuccessful strategy. When Windows 95 blurred the lines further, Apple responded with smug "Been there, done that" ads that did little to encourage any new computer purchaser to buck the Windows trend. Apple's latest effort, Mac OS 8, includes "innovations" like pop-up windows, but those same windows were awarded patent protection for Apple four years before. A company that knows how to compete, as Amelio puts it, would not have waited so long to reap the benefits of innovation.
It's easy to see why Amelio was asked in July to resign as Apple's CEO and Chairman. The man makes far too much sense to survive in Apple management. In a late Monday press conference discussing the Power Computing asset purchase, Apple CFO and stand-in leader, Fred Anderson, made it clear that licensing is over as far as Apple is concerned. The company will honor existing agreements for Mac OS 7.6 (and clone manufacturers PowerTools and Umax have renegotiated licenses so they can distribute Mac OS 8) and existing motherboard designs that Apple has chosen to license. Apple has no intention of authorizing system manufacturers to use the CHRP specification to, for the first time, design their own motherboards instead of using Apple's designs. Apple doesn't even intend to release a version of the Mac OS capable of running on CHRP machines. The company insists that licensing was unprofitable, which is clearly the case, but rather than face the competitive market head on, they're ending the game so they can declare themselves the winners.
Apple sees it differently. Executive vice-president of marketing Guerrino de Luca told the press conference that licensees were not expanding the Mac OS market and were not paying fees high enough to cover Apple's entire cost of producing and marketing the Mac OS, including R&D, developer support and platform marketing. However, de Luca bristled at the suggestion that Apple is once again backing away from competition. "If you look at the economic consideration, every time a licensee shipped a clone, we were subsidizing that clone with several hundred dollars. We want to, and we will, compete fiercely in the marketplace (and in the PC marketplace as well), but we're not planning to subsidize anybody in this competitive space. Actually, it is because we want to be able to compete that we're taking this position."
The idea that Apple is subsidizing clone makers by charging low fees comes from looking in the mirror through rose-colored glasses. Apple is only subsidizing Mac OS licensees in that clone sales earn less for the company than Apple hardware sales, but there is no guarantee that the inability to purchase a Mac OS clone will return a customer to Apple: there are reasons why those customers left in the first place. Arrogantly, Apple is implying that Power Computing's direct marketing and build-to-order sales system that are mainly responsible for defections from the mother ship; Apple discounts the idea that the well-received Power Computing machines had anything to do with it, and confirms as much when they say they have no plans to bring any in-progress Power Computing products to market.
Anderson says that Power Computing's database of 200,000 Mac OS customers is a key asset in the purchase, and Apple expects to get a fair number of those purchasers back as customers. Yet Anderson also said that licensing was not expanding the Mac OS market, and that "99 percent" of clone purchasers were former Apple customers. If that's the case, Apple already has their names, but hasn't been building products strong enough to attract their sales dollars; purchasing updated name and address listings isn't likely to change this situation.
The Source of the Problem -- The real motive behind all this is far more suspect, and far less encouraging for Apple aficionados and Macintosh users. Henry Norr of MacWEEK magazine pointed out statements, on the record, that Apple had in June reached financial agreements on Mac OS 8 and CHRP licensing fees with Power Computing and other major clone makers, to be finalized by 28-Sep-97. These are the same agreements that Anderson and de Luca said Monday could not be achieved while still providing "shareholder value" to Apple. Norr asked what changed between June and July to make these term sheet agreements unprofitable, and Anderson confirmed most rumors on the subject: it was a "change in leadership."
Read that as "Steve Jobs." The Apple co-founder is now a "special advisor" to the board of directors, where he also has a seat, and is spending up to half his time setting directions and strategies for Apple, even though he turned down the job of Chairman and CEO. Jobs has reason to avoid the captain's chair - with his current arrangement, he's effectively running the show without a title and can exercise power without any responsibility... or any blame in case his vintage-1982 strategies turn sour. Jobs was always against licensing the Mac OS and was opposed even to having expansion slots in the machines.
Jobs's product vision is a matter of fact - he foresaw the entire personal computer business; he foresaw the utility of a graphical interface; and he today foresees a day when ubiquitous high-speed Internet connections mean you don't have to take information with you to access it. It's his business savvy that's a matter of fiction. Microsoft could have dominated entire continents with an operating system as advanced as Jobs's NeXTstep and OpenStep (on which Rhapsody will be based), but Jobs couldn't get more than a small but loyal following for the system in ten years, even after abandoning an expensive hardware business and making OpenStep run on standard Intel-based computers. He has twice sold large blocks of Apple stock at low prices; just last month, Jobs confirmed for Time Magazine that he sold 1.5 million shares he acquired as part of Apple's purchase of NeXT at record low prices. He has changed personnel policies at Apple (at the cost of losing the company's head of human resources) and lectures the employees about being more "entrepreneurial" when he, as the putative head of the company, has no personal investment in it whatsoever. An employee who wrote a biting satire of Jobs's sanctimonious preaching is lucky he or she did so anonymously, because Jobs told the entire rank and file the culprit will be fired if discovered.
Now Jobs is again leading Apple's retreat from the battles it must win to return as a major force in personal computing. Jobs's field of dreams still whispers in his ear: "If you build it, they will come." Never mind that Apple is building some of the best computers on the planet, and the customers are not coming. Instead of building better, or competing better, Apple hopes to keep others from building. Never mind that Apple's systems wouldn't be as strong today as they are if competition, specifically from Power Computing, hadn't raised the standards.
Past comments from Jobs include remarks about how Apple should "milk" the Mac OS until it's dry and then move on to the next big thing, perhaps board member Larry Ellison's beloved network computers based on the reabsorbed Newton technology. If this is what Jobs is doing, while telling the public exactly the opposite (not exactly a new move for him, as Apple II owners can attest), he may think that the Mac OS has less than two years of useful life left because the single-source strategy he's now adopted for Apple won't win new converts for the platform. Frittering away what could be a viable platform in favor of using your customer's money for something potentially unrelated doesn't build customer confidence.
Apple fans can continue to hope that Jobs will one day understand that bizarre repetition of failed strategies is less often recognized as a sign of genius than as evidence of dementia. Until then, the company is again pulling defeat from the jaws of victory in its struggle to become profitable, alienating the most intense Mac OS supporters. Now that customers have seen the benefits of free-market Mac OS competition, they're unlikely to accept Apple's word that the company's products are the best that could exist.
Apple, which still aspires to be a champion, still hasn't learned that winning the title belt requires staying in the ring, not fleeing when you're behind at the end of the fourth round, or the eighth, or the fourteenth. The real question is if Apple will figure it out before receiving a knockout punch or running out of time.
[Matt Deatherage publishes the Macintosh newsletter MDJ, which is currently on hiatus.]
Article 5 of 5 in series
Despite the disbelief I expressed in some of my previous articles about the clone licensing situation, Apple has done what I then thought unlikely - eliminated at least two major players in the clone gameShow full article
Despite the disbelief I expressed in some of my previous articles about the clone licensing situation, Apple has done what I then thought unlikely - eliminated at least two major players in the clone game. Two weeks ago, Apple purchased Power Computing's Mac assets, including the company's Mac OS license. Last week, the Motorola Computer Group announced plans to discontinue its Mac OS clone system business. Motorola will continue to sell its StarMax systems until the end of 1997, after which Motorola will provide warranty and technical support to its customers. Motorola also will provide all existing and new StarMax owners with a full year of telephone support instead of the previous 90 days of support.
As with Power Computing, the amount of money paid by the clone manufacturers to Apple didn't seem to be the final sticking point. Motorola was reportedly willing to pay a higher licensing fee to Apple, but according to a Reuters story, "Apple was not willing to give up the designs necessary for cloners to develop systems based on the Common Hardware Reference Platform (CHRP)." I suspect that means Apple wasn't willing to license a version of the Mac OS for CHRP to Motorola, since UMAX successfully renegotiated a deal with Apple to ship Mac OS 8 with computers that don't have CHRP motherboard designs.
What About Sub-Licensees? Remember that Motorola also sub-licenses the Mac OS to other companies, including TidBITS sponsor APS. Paul McGraw of APS noted:
Though it appeared to be inevitable considering the present licensing climate at Apple Computer, we find the decision of Motorola Computer Group (MCG) to eliminate its Mac OS compatible computer program to be extremely disappointing. The decision is detrimental to the market as a whole and the businesses of its sub-licensees in particular. We will be forced to make a number of difficult business decisions over the next few months as a result of this decision. At the least, one would have hoped that MCG would have felt it incumbent upon themselves to notify their sub-licensees in advance of a general release to the public. The fact that they chose not to do so seems disappointingly consistent with the extent of their commitment to their sub-licensee partners.
Industry sources say IBM has also decided drop its Mac OS business. Although IBM never manufactured a Macintosh clone (IBM helped design the PowerBook 2400 and was reportedly waiting for Apple to certify CHRP and portable designs before it started producing Macintosh clones), it sub-licensed the Mac OS to Tatung of Taiwan and Akia of Japan. Both Tatung and Akia had designed CHRP-based Macs using IBM's CHRP designs.
It remains to be seen how these situations will play out, since the existing clone licensing contracts are still in effect. Motorola has not ruled out the possibility of filing a lawsuit against Apple. Sources have said that it cost Motorola $140 million to start its Macintosh clone business, and the company is taking a $95 million charge to discontinue that business - I have to believe that Motorola will attempt to minimize its financial loss. IBM has less of a financial stake, since it never manufactured machines, but the various sub-licensees fall into an awkward position that may confuse the issue for weeks to come. For instance, according to a report on MacInTouch, PowerTools continues to manufacture machines based on Motorola's motherboards but has also signed an agreement with UMAX for motherboards.
Is the Sky Falling? Needless to say, Apple's moves (seemingly driven by Steve Jobs) have had some of the negative results predicted in TidBITS-395. A number of Macintosh developers are talking about moving projects to other platforms, and companies are pulling back on Mac-specific advertising and trade shows. Apple's actions have more subtly damaged its overall business reputation, its relationship with PowerPC suppliers Motorola and IBM, and its standing in the eyes of previously loyal Macintosh users.
The counter-argument being put forth by Apple executives is that Apple was losing too much money to survive. It's hard to evaluate this claim accurately, since only Apple knows all the numbers. Even if we give Apple the benefit of the doubt, I think there's no question that Apple and Steve Jobs botched this situation badly. It makes one wonder who, if anyone, is in charge of PR at Apple these days.
The only public information from Apple has been a telephone conversation Jobs had with Ric Ford of MacInTouch. Based on that conversation, Ric believes that Jobs is centering his strategy on the Mac OS and the PowerPC chip. Ric also believes Jobs has a viable plan for expanding the Macintosh market in 1998. I hope Jobs is telling the truth and that his plans succeed. I wish he hadn't seen the elimination of clone licensing as necessary, since I believe the negatives involved in doing so have overwhelmingly dangerous consequences.