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ATPM 6.05
May 2000

As a parent of young children, I’m beginning to believe that timeless children’s stories were originally written with adults in mind. It’s too bad most of us fail to revisit the wisdom in these classics until our children or grandchildren clamor for a night time story. Tragically, King Midas is as alive today as when the author of that fabled story first brought him to life centuries ago. Greed takes many forms but the results are almost always the same.

I remember the month Windows 95 was introduced to consumers. It was the same month I purchased my Power Mac 7500/100. It’s the computer that’s now on loan to my son’s first grade classroom. Almost five years from its original purchase, the hearty little machine is still delighting its users. What’s interesting to note is although Windows 95 has done well with consumers, most Windows 95 equipped computers purchased at the same time I bought my 7500/100 are no longer in service.

Critics of Apple Computer often tout the Mac’s single digit market share as the number one reason not to buy the company’s products. But market share is not always the best way to determine a product’s popularity, especially when one company’s product has traditionally lasted far longer than the product made by its competitors. If one has to replace product “b” twice as often as one has to replace product “a,” it doesn’t mean the consumers like product “b” more, or that it’s twice as popular as product “a.” When it comes to market share, the Mac’s popularity with users hasn’t been fully reflected in the numbers. Historically Macs have remained in service much longer than PCs manufactured by other companies. I’m not about to claim that more people use Macs than use Windows based PCs, but there are far more Macs in service than you might think if market share reports were your only guide.

What happened to Apple in the wake of the release of Windows 95 has been well documented by computer industry historians. What’s interesting to note is that at the time of the release of Windows 95 and in the quarter that followed, Apple continued to ship record numbers of Macs. Apple’s subsequent problems stemmed less from the common notion that Windows 95 is more “popular” than the Mac OS, than from a fundamental flaw in Apple’s former business strategy. The strategy was based on greed rather than an effort to meet the needs of or satisfy the desires of users.

I remember being in the book store at USC that fateful August in 1995 when Apple released a new line of PowerPCs and Microsoft released Windows 95. College students and other consumers were buying all the Power Macs Apple could produce. Unfortunately, the company had chosen to dedicate much of its manufacturing capacity to producing non-PowerPC Macs at a time when users were clamoring for the latest in desktop technology. Apple could make more money per unit on the older technology than they could on the newer, PowerPC products. In the end Apple had too many computers that consumers didn’t want and not enough of the products that consumers were eager to buy. The company lost sales, had an expensive inventory of unsold products, and eventually lost its footing.

Apple’s inability to meet consumer demand for Power Macs gave consumers little choice but to look at PC alternatives equipped with Windows 95. Consumers en masse chose Windows 95-equipped computers over the non-PowerPC Macs that were available for sale. Many users would have preferred Macs but the latest in Apple technology could not be found in stores and the company lost hundreds of millions of dollars due to unfilled orders. Drastic price reductions on the non-PowerPC Macs that Apple couldn’t sell hurt the company’s image as a purveyor of premium quality products. The image problems remained until the release of the iMac three years later.

What exacerbated Apple’s market share tumble from the beginning of 1996 until the Summer of 1998 was the fact that many loyal Mac owners waited until the release of the iMac before replacing their older machines. Again, the popularity of Macs continues to be underrepresented in market share statistics. For example, there are thousands and thousands of pre-PowerPC Macs still in service in elementary schools across America.

There’s no doubt that some of the original iMac’s success was due to pent-up demand from loyal Mac owners who were replacing older systems. But the iMac’s biggest triumph is that it restored consumer confidence in Apple and appealed to a large group of people who never before owned a personal computer. The fact that it won converts to the Mac platform only adds to its legacy as a breakthrough product.

It took Apple Computer three years to undo the almost catastrophic damage done to the company’s image by the efforts of former Apple executives to sell older technology at high prices to consumers. In my view it was a thinly veiled effort at corporate greed that resulted in consumers losing confidence in the value of Apple’s brand name. History shows that Apple paid an almost tragic price for this mistake.

The success of Windows 95 helped to make Bill Gates a household name and until about now the wealthiest man on the planet. Although Microsoft had a lucrative business before the release of Windows 95, the success of their desktop OS added luster to the company’s image. A luster that, until the recent antitrust case brought Microsoft’s way of doing business into the limelight, had remained mostly untarnished in the minds of consumers.

A federal judge has recently ruled that Microsoft has operated a monopoly in an illegal way, stifling competition and thwarting innovation. In my view Microsoft is living on borrowed time. I believe Windows 2000 will be the last major operating system product released from Redmond, Washington. Whether or not Microsoft is broken up by court decree or disassembled by market forces, the Windows era is over. Microsoft has tried to force too many people to buy too many of its products by leveraging its monopoly position to eliminate potential rivals, thereby forcing consumers to accept its products, whether or not they were the best products that could be brought to market.

For now Microsoft remains a formidable competitor. The company has about $30 billion in cash and large investments in established and emerging companies. But Microsoft’s position as an industrial tyrant, devouring or killing any potential competitor that stands in its way is over. The coming fall of Microsoft is analogous to the way Apple tried to control all aspects of the Macintosh market, only to disenfranchise potential partners and remove almost all incentives to produce products for its computers. Apple has wisely chosen to stop manufacturing hardware peripherals and other ancillary products that added little to the company’s bottom-line but forced others to abandon the Macintosh market. Few companies could compete against Apple for a fair slice of the Mac platform pie. Ironically, Microsoft is now trapped by a similarly outdated and anti-competitive strategy that was once the linchpin of its success.

One reason Microsoft is fighting so hard against the Justice Department and the States is because its corporate structure and culture rely on control in order to sell products. Microsoft’s products don’t necessarily need to be the best; they just need to meet the minimum requirements of users. Microsoft has relied on its unbridled domination of the operating system market to eliminate competition using both legal and illegal means.

Like the fabled story of King Midas, Bill Gates’ desire to build wealth and market control has come at great cost to Microsoft and the world in which it operates. It’s true that Microsoft continues as a profitable company, but more and more organizations are planning to move away from Microsoft in the same way that associates of King Midas learned to stay clear of his “golden touch.”

I give Gil Amelio more credit than most (but probably less than he claims) for the turnaround at Apple Computer. Until he ascended to the top spot at Apple the company was lost in time with a mindset that although Macs cost more than PCs made by the company’s competitors, they were still attractive to buyers because they lasted much longer. That might be true for some buyers, but most people in the market for a PC don’t look beyond two or three years time. Gil Amelio opened to doors to the adoption of more common and less expensive PC parts—a move than Steve Jobs accelerated upon his return to the company.

Adopting more common PC parts may shorten the useful life of today’s Macs when compared to the products the company made a few years ago. I doubt that an iMac purchased today will be in service five years from now. In contrast, my PowerPC 7500/100 will finally be retired soon after the release of OS X, not because it’s no longer working but because the requirements of OS X Consumer will demand the processing power of a less vintage machine. In order to gain market share Apple has had to reduce its prices and decrease costs. But consumers are no longer willing to pay a premium for a computer’s longer life anymore than they are willing to pay more for a car because they think it will last them for 20 years or a television that will last them for more than ten years.

Today’s buyers want the latest in technology at the lowest possible price. The iMac’s low price will continue to induce more Mac users to upgrade their computers and continue to appeal to new computer owners and people looking for an alternative to Windows. Shortly, market share data will begin to more closely reflect the true popularity of Macs among computer users. I expect Apple’s market share to continue to rise as more consumers become convinced that Apple Computer is here to stay. This year’s educational buying season should be a boon for Apple as schools work to replace Macs purchased five, six or even seven years ago.

It’s taken Apple Computer almost four years to undo the damage done—not so much the damage done by the release of Windows 95, but by an ill-fated effort by company executives to make money at the expense of consumers by flooding the market with older products when buyers wanted the latest technology the company had to offer. Apple accepted this lesson about greed only when the company was brought to the brink of oblivion. The executives at Microsoft should have taken note.

The fall of Microsoft will be fast and furious. It’s an empire, in my view, that has been built like the proverbial house of cards. The winds of change have begun to blow and very little of Microsoft’s empire will remain standing. The federal court’s decision in the Microsoft anti-trust case is only the beginning. Like King Midas, Microsoft’s stock rooms are filled with gold, but few friends can be found.

It’s ironic that the extended life that was built into every Mac may have hurt the company’s market share numbers more than it helped. But perhaps it’s justice that the accelerated obsolescence built into Wintel boxes will hasten Microsoft’s demise as the leader in PC software. Most Wintel PCs purchased today have a useful life of about eighteen months to two years. In less than that time institutional customers (the ones Microsoft covets the most) will be stampeding to find non-Microsoft alternatives. Properly positioned, Mac OS X with its Unix derivative core and its open source foundation may provide institutional customers with the solutions they need. Keep your eyes on Oracle and Sun Microsystems. At the same time keep your eyes on Apple. Watch for major announcements at the World Wide Developers’ Conference to be held later this month, and in the lead up to the release of Mac OS X Consumer and Macworld Expo New York.

I admire the decision makers at Apple Computer who had the courage and the foresight to make the difficult choices that were needed to turn the company around and restore its image. I also respect many of the engineers and developers at Microsoft. The Redmond campus is home to many of our nation’s brightest software artists. It’s not their fault that the company’s leaders have encouraged a culture and developed a way of doing business that a federal court has determined to be illegal. In doing so the executives have set the company upon a dangerous path toward self-destruction.

While we await for events to unfold, I recommend that readers spend some time revisiting some of the great children’s classics such as the story of King Midas. They’re fun for bedtime reading. I also recommend them to many computer industry executives who arrive at work dressed as adults but prefer to spend their days acting more like spoiled children. Why is it that children immediately understand the moral of these stories but adults seem to relish giving the characters in these tragic fables new life?

“Apples, Kids, & Attitude” is copyright © 2000 Robert Paul Leitao, rleitao@atpm.com.

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