Rot in Apple spreads through industry

LONDON - Steve Jobs, chief executive of Apple Computer, stood in front of an eager San Francisco audience last week and made a series of announcements that may be the key to his company's survival - or death.

As expected, he announced a brace of new machines, with the additional rider of a date for the release of the company's new operating system, the Unix-based OS X.

The audience was delighted, of course, but for Mr Jobs, and everyone else at Apple, delight isn't enough.

The company will post a loss for the quarter for the first time since Mr Jobs took over two years ago, and what he and his colleagues badly need is for people to buy a lot more of its machines.

But Mr Jobs and Apple are not alone. A swath of PC companies, including Gateway, Compaq and Dell, have said that their earnings will be down this quarter, although only Apple expects to fall into the red.

Software companies relying on those companies for business have also said times will be bad.

The rot has spread so far and wide that Microsoft, the behemoth of the software industry, and Intel, its chipmaking equivalent, which dominate the PC world, have also said they will not expand as fast this year as they did last. And many people are worried for the longer-term future.

But why? Mr Jobs was characteristically acerbic in his analysis of the causes during a conference call with analysts when Apple issued its profits warning last month.

"I've been in this business for 20 years," he said. "And you know what? It's called the cycle."

This pithy reply raises the question: why is there a cycle, and why is it hitting now, when more and more companies are offering even better hardware and software to get even more things done?

Mr Jobs insisted Apple consumers were holding back from buying because they knew newer products, including OS X, were coming.

Mr Jobs' insistence on unveiling new hardware himself means savvy consumers, a very significant proportion of Apple's buyers, will not buy before a Jobs headline speech - as at San Francisco.

But that does not explain Gateway's problems, or Compaq's, or Dell's, or Microsoft's; though Intel's are the culmination of its buyers, the PC companies, facing tighter times. Overall, PC sales that were running at 20 per cent growth in 2000 are expected to fall to single digits, perhaps about 8 per cent, this year.

What can explain that? Though some people say there was a boost in buying by companies worried about the millennium bug in 1999, that boom was in 1998. Many companies slowed purchases in 1999. Last year, many bigger companies did buy e-commerce systems to jump aboard the online bandwagon - but those would be larger systems, not the PCs which have suffered a sales slump.

Rob Enderle at the Giga Consulting Group thinks four factors are at work here.

They are the cost of putting new systems into companies (which can be triple the cost of the hardware), the low reliability of software, which can crash many times a day, marketing that implies that complexity, rather than usability, is good, and that in many cases what exists already is "good enough" for the job in hand.

Mr Enderle does not pull his punches, saying the cost of deployment affects nearly 80 per cent of the potential consumer market.

"The surveys are chilling, and they tell one story - it is far too expensive to deploy new PC technology."

While companies installing new machines rely on full-time IT support staff, even they have hair-tearing times trying to get new machines to do what they ought to do as well as the systems they replace.

For consumers, the tales of woe are legion.

A factor that Mr Enderle does not comment on - though James Paulsen of Wells Capital Management does - is that PC sales, especially to consumers, may have had their day.

"Just as the explosion of PC buying was weakening in the mid-1990s, the PC mutated to being used to connect to the internet," said Mr Paulsen.

"The whole boom started again. But that is largely behind us now. Unit growth of consumer technology sales has fallen way off."

He believes that the US is heading for a "hard landing" in economic terms, which will leave companies and techno-consumers, who may have lost a lot of their capital investing in tech stocks, unwilling to spend money on something they do not absolutely need.

And in many cases the PC market is now a replacement market.

Mr Enderle points out that many things are putting people off buying another computer.

Windows keeps crashing, and despite being the dominant computer interface, "the usability is broken as well ... We have to get too deeply involved in the operating system."

In essence, it's like having to fix your car yourself.

Bruce Tognazzini, who developed the interface for the Apple operating system in 1984 (which Microsoft has extensively duplicated in Windows), says: "It's like it's 1920, and your car breaks down all the time."

Marketing is another area where the PC makers are completely at odds with their target market.

Mr Enderle says: "Vendors seem to waste incredible sums of money ... Take the current national Intel [ad] campaign that has blue-painted men playing with the Pentium III logo.

"For a fraction of that budget, Intel could have bought Tranxition [a company which produces tools to transfer one PC's 'personality' seamlessly to another] and kick-started the slowing consumer market."

Despite years of advertising, consumer reaction demonstrates that the average consumer still understands only three things about a PC - its price, the amount of RAM, and the central chip's speed.

But Mr Enderle says: "The argument that people will buy new PC technology because it's faster goes against the market perception that what has been deployed is fast enough.

"The promise of newer technology being more reliable has proven untrue so often that the audience is extremely untrusting of this particular 'value'."

- HERALD CORRESPONDENT