A publication by Gavin Gregor Young.
The purpose of this publication is to create and recommend strategic suggestions to help Apple Computer recover, as well as report signs of a recreated Apple Computer that is arising like the phoenix. This publication also seeks to analyze news and rumors in a manner that enlightens investors. The articles are written from the perspective of someone who is both a Wintel and a Macintosh owner, and an investor in stocks. Prior to November 2, 1997, this publication was known as "PowerPC Platform/Common Hardware Reference Platform (PPCP/CHRP) News Analysis - Your Source for Hard to Find News Analysis Regarding CHRP, Apple Computer and its Licensees, Mac OS, NEXTSTEP/OPENSTEP, Rhapsody, BeOS, AIX, Solaris for PowerPC, and WindowsNT 4.0 for PowerPC."
Do you have news, rumors, or general comments that you would like to send to the author? If so, then send e-mail to: gyoung2@homemail.com.
It seems to me that an Apple Mac NC would be very similar to the orginal Macintosh in that they both would likely have the Mac OS reside on ROM and have no hard drive. This is because they are both virtually appliances. Even the Macintosh, before Jobs took over the project, was originally going to sell for only about $1000. When you think about it, the only real differences are the modern components and the networking features. Then again Steve Jobs plans could be very different than what has been said publicly and via rumors, they might even involve the E-mate.
This web website, inconjunction with "Gavin Young's Investment Information (formerly called Advisory) Service" announce that a merger of the Mac OS and Windows 98/NT might be announced by Apple in January 1998. We also issue a Speculative Buy Signal on Apple Computer's (AAPL) stock. For the full report, go to Gavin Young's Investment Information Service! The article was revised on December 25, 1997.
Many Mac users have a need to run applications (primarily games and Windows 3.1) written for MS-DOS. As a result, many people have purchased "Virtual PC" with MS-DOS or "Real PC with MS-DOS. Likewise many IBM-standard PC users use MS-DOS along with Windows 3.x (some use it instead of Windows). Might Caldera's OpenDOS be a better solution than MS-DOS (in addition to reducing dependence on Microsoft)?
Consider the history of MS-DOS and OpenDOS. In the 1970's CP/M, by Digital Research, was a leading command line interface style Disk Operating System. It ran on Intel's 8080 chips and Z80 chips and ran on many different computer brands. Later a Seattle company made a clone of CP/M called "Quick and Dirty Operating System" or "Q-DOS." Later, Microsoft was asked by IBM to write an operating system for the IBM Personal Computer which used the Intel 8088 chip (the 8088 was backwards compatible with the 8080). Microsoft didn't have enough time to write an OS from scratch, so they bought Q-DOS and adapted it to the IBM PC. The new OS was called IBM PC-DOS and later Miscrosoft released their version called MS-DOS (Microsoft Disk Operating System). Along the way, CP/M was ported to Intel 8086 and Motorola 68000 (perhaps Macs can run CP/M provided they can read the disk format).
Digital Research saw their market share vanishing, so they made an upgrade to CP/M called DR-DOS which was compatible to MS-DOS but with advanced features. This shouldn't be too surprising because MS-DOS was derived from CP/M. Later DR-DOS was sold to Novell and became Novell-DOS. Later Novell-DOS was sold to Caldera and became OpenDOS.
Caldera still developes OpenDOS and claims that it is fully compatible with MS-DOS and more advanced than MS-DOS (they have also reopened a lawsuit against Microsoft!). OpenDOS can be downloaded from Caldra's web site. Because I know that DR-DOS and Novell-DOS are more advanced than MS-DOS, I'm convinced that OpenDOS is also more advanced than MS-DOS. However I'm not sure if drivers written for MS-DOS will work for OpenDOS. I'm also not sure if OpenDOS drivers are widely available. If OpenDOS drivers are widely available, or unneeded when MS-DOS drivers are in use, then OpenDOS is definitely a better solution when running MS-DOS compatible applications on Macs (with PC emulator) and IBM-standard PCs.
If drivers are not an issue, it may be advisable for people to install "System Commander" and then OpenDOS in a dual boot configuration with MS-DOS (if they already use MS-DOS). This way they won't have to worry about the possibility of completely crashing their system while trying out OpenDOS. I'm seriously considering such an installation. I would like to see OpenDOS bundled with various PC emulators for the Macintosh.
Apple's 10-K report filed on December 5, 1997 with the Securities and Exchange Commission (SEC) provides useful information about Apple's financial condition, Mac OS licensing plans, PowerPC Platform and restructuring plans,and general outlook. Notice the following excerpts.
"PART I ITEM 1. BUSINESS", under the subheading "OPERATING SYSTEM SOFTWARE AND APPLICATION SOFTWARE," says on page 2:
"The Company previously entered into agreements to license its Mac OS to other personal computer vendors (the "Clone Vendors") as part of an effort to increase the installed base for the Macintosh platform. The Company recently determined that the benefits of licensing the Mac OS to the Clone Vendors under these agreements were more than offset by the impact and costs of the licensing program. As a result, the Company agreed to acquire certain assets, including the license to distribute the Mac OS, of Power Computing Corporation ("PCC"), a Clone Vendor, and has no plans to renew its other Mac OS licensing agreements."
"PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", under the subheading "OVERVIEW," says on page 9:
"The Company had previously entered into agreements to license its Mac OS to other personal computer vendors (the "Clone Vendors") as part of an effort to increase the installed base for the Macintosh platform. The Company recently determined that the benefits of licensing the Mac OS to the Clone Vendors under these agreements were more than offset by the impact and costs of the licensing program. As a result, the Company agreed to acquire certain assets, including the license to distribute the Mac OS, of PCC, a clone vendor, and has no plans to renew its other Mac OS licensing agreements."
Notice that the phrase "has no plans to renew its other Mac OS licensing agreements," is twice used. UMAX's Mac OS license expires in mid-1998, and apparently Apple has no intention to renew that license. In light of Apple's 10-K filing it looks like ALL Mac OS licensing will come to an end in mid 1998, about same the time that Rhapsody Unified is due. Though this is distressing, Apple will likely aggressively market the Intel version of Rhapsody. Therefore total Apple OS licensing should increase. Notice that on September 28, 1997 I said under the heading "My Revised Speculation of What May Be Apple's Grand Plan," "(6) Apple's Rhapsody/OPENSTEP licensing program will likely be structured to grow the total Apple OS market (and applications for the Apple OS market), with very little loss of Apple's hardware sales. Expect to see Apple aggressively market the Intel version of Rhapsody."
Does it make you upset that Apple is ending Mac OS licensing? Do other policies of Apple upset you? If so, then keep in mind that consumers can not dictate business strategies to a corporation. However, people who own stock in the company are part owners of the company, as such they can collectively dictate business strategies to the corporation. They can do this via shareholder proposals to be voted upon at a future shareholders meeting. They can also vote out the board of directors. They can also bring up issues at the shareholders meeting if they appear in person. Apple's next Annual Meeting of Shareholders will be held on February 3, 1998.
Of course Apple stock price is currently falling rapidly. In fact it hasn't acheived a new all-time high since early 1991. The stock has been struggling since late 1987. It is currently the lowest its been since mid-1986 (stock split-adjusted), with the exception of July 1-10, 1997 (where it traded below $14 and reached an intra-day low of $12.75). See Bidwell/Quote.com and Yahoo for stock quotes and news. As a result, buying stock in Apple is a very risky venture. However non-shareholders of Apple intending to take control of Apple must buy Apple's stock. Otherwise they have no voting power, can't instigate a proxy fight, and can't participate in a proxy fight. Might this be a good time to buy Apple (on 12-12-97 the stock closed at $14 1/8 per share), and if not, when?
In the interest of helping people make wise investing decisions about Apple Computer and other companies (even non-high tech companies), I have now begun Gavin Young's Investment Information Service. Use of this service should help you determine if and when to buy stock in Apple Computer.
PART I ITEM 2. PROPERTIES of the SEC filing says on page 7:
"Certain of the Company's office, manufacturing and distribution facilities owned by the Company in Sacramento, California, Singapore and the United Kingdom are currently being held for sale as part of the Company's restructuring plan, which includes increasing the proportion of the Company's products manufactured and distributed under outsourcing arrangements. Further information regarding the Company's restructuring plan may be found in Part II, Item 7 of this Form 10-K under the subheadings "Restructuring of Operations " included under the heading "Factors That May Affect Future Results and Financial Condition," and in Part II, Item 8 on this Form 10-K in the Notes to Consolidated Financial Statements under the heading "Restructuring of Operations," which information is hereby incorporated by reference."
Though Apple claims that these actions are done to reduce fixed cost, and perhaps raise cash, it appears that Apple might also be increasing outsourcing as a means of preparing to exit the hardware business and sell the company. Companies often sell off assets in preparation of solicting buyout offers. The news report that some analysts believe that Apple is dressing itself up for eventual sell. Notice what is further said under the heading "INVENTORY AND SUPPLY" on page 22:
"Certain of the Company's products are manufactured in whole or in part by third-party manufacturers, either pursuant to design specifications of the Company or otherwise. As part of its restructuring actions, the Company sold its Fountain, Colorado, manufacturing facility to SCI and entered into a related manufacturing outsourcing agreement with SCI; sold its Singapore printed circuit board manufacturing assets to NatSteel Electronics Pte., Ltd., which is expected to supply main logic boards to the Company under a manufacturing outsourcing agreement; entered into an agreement with Ryder Integrated Logistics, Inc. to outsource the Company's domestic operations transportation and logistics management; and has entered into other similar agreements to outsource the Company's European operations transportation and logistics management. As a result of the foregoing actions, the proportion of the Company's products produced and distributed under outsourcing arrangements will continue to increase. While outsourcing arrangements may lower the fixed cost of operations, they will also reduce the direct control the Company has over production and distribution. It is uncertain what effect such diminished control will have on the quality or quantity of the products manufactured, or the flexibility of the Company to respond to changing market conditions. Furthermore, any efforts by the Company to manage its inventory under outsourcing arrangements could subject the Company to liquidated damages or cancellation of the arrangement. Moreover, although arrangements with such manufacturers may contain provisions for warranty expense reimbursement, the Company remains at least initially responsible to the ultimate consumer for warranty service. Accordingly, in the event of product defects or warranty liability, the Company may remain primarily liable. Any unanticipated product defect or warranty liability, whether pursuant to arrangements with contract manufacturers or otherwise, could adversely affect the Company's future consolidated operating results and financial condition."
"PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", under the heading "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION," with the subheading of "RESTRUCTURING OF OPERATIONS," says on page 17-18:
"During 1996, the Company began to implement certain restructuring actions aimed at reducing its cost structure, improving its competitiveness, and restoring sustainable profitability. During 1997, the Company announced and began to implement supplemental restructuring actions, including significant headcount reductions, to meet the foregoing objectives. There are several risks inherent in the Company's efforts to transition to a new cost structure. These include the risk that the Company will not be able to reduce expenditures quickly enough to restore sustainable profitability and the risk that cost-cutting initiatives will impair the Company's ability to innovate and remain competitive in the computer industry."
"Implementation of this restructuring involves several risks, including the risk that by simplifying and modifying its product line the Company will increase its dependence on fewer products, potentially reduce overall sales, and increase its reliance on unproven products and technology. Another risk of the restructuring is that by increasing the proportion of the Company's products to be manufactured under outsourcing arrangements, the Company could lose control of the quality or quantity of the products manufactured and distributed, or lose the flexibility to make timely changes in production schedules in order to respond to changing market conditions. As part of its restructuring, the Company announced and opened its on-line store, which makes available most of its products to end-users in the U.S., in November 1997. There can be no assurance the on-line store will result in greater sales. The Company also began manufacturing products on a build-to-order basis in November 1997. There can be no assurance this manufacturing process will result in decreased costs or increased gross margins. The Company is also reducing the number of wholesale and retail channel partners, particularly in the Americas, which places a greater volume of sales through fewer partners. There can be no assurance that this will not adversely impact the Company. In addition, the actions taken in connection with the restructuring could adversely affect employee morale, thereby damaging the Company's ability to retain and motivate employees. Also, because the Company contemplates relying to a greater extent on collaboration and licensing arrangements with third parties, the Company will have less direct control over certain of its research and development efforts, and its ability to create innovative new products may be reduced. In addition, there can be no assurance that the technologies acquired from NeXT will be successfully exploited, or that key NeXT employees and processes will be retained and successfully integrated with those at Apple. Also, the restructuring includes the winding down of the Company's Mac OS licensing program. There can be no assurance that the winding down of this program will result in greater sales, market share, and increased gross margins to the Company. In addition, there can be no assurance that this action will not result in the availability of fewer application software titles for the Mac OS, which may result in a decrease to the Company's sales, market share and gross margins. Finally, even if the restructuring is successfully implemented, there can be no assurance that it will effectively resolve the various issues currently facing the Company. Although the Company believes that the actions it is taking in connection with the restructuring, including its acquisition of NeXT and the winding down of its Mac OS licensing program, should help restore marketplace confidence in the Company, there can be no assurance that such actions will enable the Company to achieve its objectives of reducing its cost structure, improving its competitiveness, and restoring sustainable profitability. The Company's future consolidated operating results and financial condition could be adversely affected should it encounter difficulty in effectively managing the restructuring and new cost structure."
The heading "FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION," with the subheading of "COMPETITION," says on page 20:
"The Company had previously entered into agreements to license its Mac OS to other personal computer vendors (the "Clone Vendors") as part of an effort to increase the installed base for the Macintosh platform. The Company recently determined that the benefits of licensing the Mac OS to the Clone Vendors under these agreements were more than offset by the impact and costs of the licensing program. As a result, the Company agreed to acquire certain assets, including the license to distribute the Mac OS, of PCC, a Clone Vendor, and has no plans to renew its other Mac OS licensing agreements. Although the Company believes that this winding down of its licensing program will help reduce the adverse impact of the licensing program on the Company's sales, market share and gross margins, there can be no assurance that this will occur. In addition, there can be no assurance that this winding down of the licensing program will not result in the availability of fewer application software titles for the Mac OS, which may result in a decrease to the Company's sales, market share and gross margins."
Page 20 of the SEC filing further says:
"As a supplemental means of addressing the competition from Windows and other platforms, the Company had previously devoted substantial resources toward developing personal computer products capable of running application software designed for the Windows operating systems. These products include an add-on card containing a Pentium or 586-class microprocessor that enables users to run applications concurrently that require the Mac OS, Windows 3.1 or Windows 95 operating systems. The Company plans to transition the cross-platform business to third-parties during 1998. There can be no assurance that this transition will be successful."
"The Company, International Business Machines Corporation and Motorola, Inc. had agreed upon and announced the availability of specifications for a PowerPC microprocessor-based hardware platform (the "Platform"). These specifications defined a "unified" personal computer architecture that would have given the Clone Vendors broad access to the Power Macintosh platform and would have utilized standard industry components. The Company had intended to license the Mac OS to manufacturers of the Platform. However, the Company has decided it will no longer support the Platform based upon its decision to wind down its Mac OS licensing program, and because of little industry support for the Platform. The decision not to further develop this Platform may affect the Company's ability to increase the installed base for the Macintosh platform."
Apple's decision to stop making cross-platform products was discussed on September 11, 1997 in the article "Speculation by the Editor."
Page 21 of the filing says:
"In August 1997, the Company and Microsoft entered into patent cross licensing and technology agreements. Under these agreements, the companies provided patent cross licenses to each other. In addition, for a period of five years from August 1997, Microsoft will make future versions of its Microsoft Office and Internet Explorer products for the Mac OS, and the Company will bundle the Internet Explorer product with Mac OS system software releases and make that product the default Internet browser for such releases. In addition, Microsoft purchased 150,000 shares of Apple Series 'A' non-voting convertible preferred stock for $150 million. While the Company believes that its relationship with Microsoft will be beneficial to the Company and to its efforts to increase the installed base for the Mac OS, the Microsoft relationship is for a limited term and does not cover many of the areas in which the Company competes with Microsoft, including the Windows platform. In addition, the Microsoft relationship may have an adverse effect on, among other things, the Company's relationship with other partners. There can be no assurance that the benefits to the Company of the Microsoft relationship will not be offset by the disadvantages."
The section "INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION," says on page 56:
.......................................................1997............. 1996 ........ 1995
......................................................--------- ........ ---------.... ---------
..................................................... (IN MILLIONS)
Operating income (loss):
United States................................... $ (913) ... $ (1,198) $ ... (74)
EMEA................................................ (129) ......... (186) ...... 245
Japan.................................................. (86) ............. (4) ....... 47
Asia Pacific......................................... 104 ................3 ....... 388
Other................................................... (29) .............. -- ........ 48
Eliminations.......................................... (17) .............. 2 ........ 30
Corporate income (expense), net............. 25 ............. 88 .......(10)
....................................................... --------- ..... --------- .. ---------
Income (loss) before provision (benefit)
for income taxes........................... $ (1,045) ... $ (1,295) ....$ 674
' "EMEA" is an abbreviation for Europe, the Middle East, and Africa. "Asia Pacific" does not include Japan. "Other" is comprised of all North and South America sites excluding the United States. Prior year amounts have been restated to conform to the current year's presentation. "Net sales to unaffiliated customers" is based on the location of the customers.'
During last month and this month the Asian economies and stock markets have been extremely weak. A lot of US companies receive a large part of their sales from Asia. As a result, several of these companies have begun to report a drop in earnings. The stock prices of high tech companies with large Asian sales have also plummeted, including Apple. This is especially of concern regarding Apple, since Asia was Apple's only profitable region during fiscal 1996 and 1997.
It seems to me that Apple under Steve Jobs' rule is no better than under Gil Amelio's rule, when it comes to increasing sales, making profits, and instilling investor confidence. If Apple doesn't have any encouraging news to report by MacWorld in January 1998, or at least by the shareholders meeting in February 1998, there will be a lot of upset shareholders demading that Apple make major changes (like splitting hardware and software, reestablishing the Newton, Inc., licensing both hardware and software, creating full Wintel compatibility, etc.).
A $1000 Apple NC (even at 300Mhz) with a 17" monitor isn't good enough when a full PC (supporting the industry standard platform) with monitor can be had for the same price or less. Also NCs will become obsolete, just like Pcs and Macs, when larger software is created, otherwise why not use a slower proceesor with a lower cost in the NC? Apple Mac OS based NCs won't solve any of Apple's chronic problems, unless Oracle lends much support to them.
The Newton would be a more successful product if it came with a modem (perhaps wireless) as standard, instead of an add on. With a wireless modem included along with the web browser software, the Newton could truly be a wireless communication device/pocket computer. A way also needs to be found to reduce the price to $500.00 in order for this to be a mass market item.
ARM designs and licenses processors. ARM's webbsite also mentions that ARM was created by the efforts of Acorn and Apple Computer in November 1990. Currently Apple owns 43% of ARM's issued shares. The StrongARM general purpose microprocessor was jointly developed by ARM and Digital Equipment. Available as Digital SA-110 and SA-1100. Information is per the web site at: StrongARM developers.
I guess this means Intel and Apple will be partners, since Intel will now be making the StrongARM chips instead of Digital Equipment. ARM also says that revenues have grown 75% a year since 1990, maybe it is a good investment.
It's a good sign if it means that Apple will be selling Intel-based hardware, aggressively licensing Rhapsody for PC Compatibles, including a fast software PC emulator in each MAC, and/or including a PC emulator in Rhapsody for PowerPC. Otherwise I don't see how Apple can be a threat to a Wintel manufacturer like Dell.
A potential danger is that it could prevent Apple from forming some sort of partnership with Dell in the future and possibly blind Apple from seeing certain opportunities. It could also make them act stupid. One of the problems with viewing Microsoft as the enemy is that Apple didn't recognize that they were their own worst enemy. Microsoft had even tried to help Apple (in regards to licensing) but Apple's management wouldn't listen.
Michael Dell of Dell Computer was approached by Apple about shipping Star Trek on Dell's computers (Star Trek was the code name for a top secret project to get the Mac OS running on Intel chips) and he was impressed by the technology. But he said he would only ship it if it was free. This is because Dell once said that regardless of the OS shipped, by contract Dell Computer still pays Microsoft for every computer shipped, even without any Microsoft operating systems on it.
The US Department of Justice said that Microsoft made many of these licensing agreements. See Anticompetitive Practices. One paragraph says: "Beginning in 1988, and continuing until July 15, 1994, Microsoft induced many OEMs to execute anticompetitive "per processor" licenses. Under a per processor license, an OEM pays Microsoft a royalty for each computer it sells containing a particular microprocessor, whether the OEM sells the computer with a Microsoft operating system or a non-Microsoft operating system. In effect, the royalty payment to Microsoft when no Microsoft product is being used acts as a penalty, or tax, on the OEM's use of a competing PC operating system. Since 1988, Microsoft's use of per processor licenses has increased. In fiscal year 1993, per processor licenses accounted for an estimated 60% of MS-DOS sales to OEMs and 43% of Windows sales to OEMs. [3] Collectively, the OEMs who have such per processor contracts are critical to the success of competing operating system vendors, but those OEMs effectively are foreclosed to Microsoft's competitors."
By July 16, 1994 Microsoft agreed to stop using these practices, see Consent Decree. The terms expire around December 31, 2000.
It thus appears that Apple should now have an easier time getting OEMs to license operating systems.
The e-mails shown below are after corrections of minor typos.
In previous correspondence I recommended that Rhapsody be named Apple OS Millennium. Another good name would be Apple Universal OS. This is because the new OS will be universal in the sense of being able to run Rhapsody, NEXTSTEP/OPENSTEP, Mac OS, Pure Java, and BSD Unix 4.4/MACH applications and be able to run on both PowerPC and Intel (PC Compatible) hardware. It is also rumored to be able to run PC/MS-DOS, Windows 3.x, Windows 95/98, Windows NT, and possibly OS/2 applications. If it does all of these things, then the name "Universal OS" is certainly appropriate.
In the case of companies that sell OSs that compete with those of Microsoft, it seems to always fare out badly when they license those systems to Microsoft (at least when done for a one time fee). Apple licensed some elements of the Mac OS GUI to Microsoft in the 80's. Their terms were vauge however, as a result Microsoft copied more of the Mac GUI than Apple expected. Apple later sued Microsoft. Apple lost, largely because of the terms of the license. Microsoft sales later decimated Mac OS sales.
SGI licensed OpenGL to Microsft for use with WindowsNT, now they are are having problems with their IRIS graphics workstations competing with Wintel machines.
I fear that if Apple licenses their Rhapsody technologies to Microsoft, they will regret it. Unless, Microsoft pays Apple a fee for EACH piece of software using the technology. It would be better if the license must be periodicaly renewed, for this enables Apple to increase the fees. It also enables Apple to write other more favorable terms, if they find that Microsoft discovered loop holes in the previous contract. It would be even better if Apple required that Microsoft software products say that it is using software licensed from Apple, each time that software loads into memory. That way a customer is aware that they are using Apple technology. This is a form of free advertising for Apple and will help Apple to create a positive image with Wintel users.
Please express your views about these comments.
The Phoenix Arises - News Analysis of Apple Computer
/SiliconValley/Drive/3664/index.html
There is a way that Apple can sell Mac OS for Intel and not hurt PowerPC Mac sales. Market it only to people and compaines that already have Wintel machines. More precisely, make it available for only existing Wintel systems! Mac users won't qualify, unless they already have a Wintel system (granted some may decide to make their next computer a Wintel, but chances are they would have already decided that anyway). Wintel users are not likely to buy a Mac anyway. Few Wintel users will probably ever buy a Mac to run Rhapsody (except former Mac users) anyway (especially because the system demands much in the way of hardware). However, many Wintel users would be willing to pay $75 to install the Mac OS on their computers. Apple could try this for a short time period, to see whether or not it significantly hurts Mac sales. If the damage is minimal, Apple could discontinue the offer to Wintel owners.
Since Apple already has the technology, why not try to get some money (and publicity) from it?
Do you have news, rumors, or general comments that you would like to send to the author? If so, then send e-mail to: gyoung2@homemail.com.