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Apple Signals Probable End of Mac Clones

Technology: Firm to buy Power Computing's Mac-based operations. Other deals are unlikely to be renewed.

September 03, 1997|GREG MILLER | TIMES STAFF WRITER

SAN FRANCISCO — Apple Computer Inc. signaled an end to its stormy relationship with makers of Macintosh clone computers Tuesday by buying the business of the largest clone maker and indicating that licensing agreements with others will not be renewed.

Increasingly convinced that clone makers' success has come at its expense, the struggling computer manufacturer agreed to buy the core Macintosh-based business of Power Computing Corp. for $100 million in stock.

Austin, Texas-based Power Computing is among a handful of companies that have been licensed to sell computers that use Apple's Macintosh operating system. Since the licensing program began in 1994, Power Computing's sales have surged to nearly $400 million, accounting for 12% of the Macintosh market.

But Apple, which has lost $1.5 billion over the last 18 months and has seen its market share decline, is now backpedaling from those licensing agreements.

Apple founder and de facto leader Steve Jobs complained Tuesday that the terms of the licensing deals--in which Apple collects a royalty of about $50 per machine--have sapped the Cupertino, Calif., company's profitability.

"We cannot continue to subsidize the clones," said Jobs, adding that licensing revenues don't compensate for costs borne solely by Apple, including development of Macintosh software, marketing and maintenance of relationships with developers of Macintosh-based programs.

Shares of Apple closed at $22.38, up 63 cents on Nasdaq.

Apple will honor its existing contracts with clone manufacturers, Jobs and other executives said, but the company does not expect to expand or extend them.

"I don't want to say that's not possible," said Fred Anderson, Apple's chief financial officer. "We're always open for a licensee to agree to economic terms that would benefit Apple. But we haven't been able to develop an agreement on any program that would meet Apple's objectives."

Analysts said the moves will strengthen Apple's financial position by eliminating competitors that squeeze Apple's profit margin and now account for about 21% of the Macintosh market.

But experts warned that Apple could face a backlash from customers and software developers who have come to expect choices and aren't confident of the company's ability to expand the Macintosh market single-handedly.

"It's good for Apple because it will allow them to return to profitability quicker," said James Staten, an analyst at Dataquest in San Jose. "But is it good for the overall Macintosh market? No, it can't be."

Ironically, many industry experts trace Apple's declining fortunes back to its decisions in the 1980s not to allow others to license its Macintosh software, then considered vastly superior to any other operating system.

Apple relented in 1994, but by then Microsoft Corp.'s Windows operating system had caught up technologically and was licensed to computer makers that accounted for about 85% of the market.

Tuesday's news appeared to be a blow to a number of companies, including Motorola Corp. and Umax Computer Corp., that have spent millions of dollars creating businesses around selling Macintosh clones. Anderson and Jobs said Apple does not plan to purchase the Macintosh business units of any other clone makers.

But Umax executives clung to the hope that there is still room to negotiate a deal that would allow the company to build the clones for certain markets overseas or for the low-price segments of the market.

Umax, a subsidiary of Umax Data Systems of Taiwan, derives two-thirds of its sales from models priced below $2,000.

Phil Pompa, vice president of marketing at Umax, said the company is scheduled to meet with Apple later this week. "Certainly the timing is concerning," Pompa said. "But we remain optimistic."

Meanwhile, the crux of Tuesday's deal is that Power Computing has agreed to leave the Macintosh market and turn over to Apple exclusive rights to the clone maker's list of more than 200,000 Macintosh customers.

Power Computing keeps its brand name, its employees and its manufacturing operations, presumably to be used in the company's efforts to move into the market for computers that use Intel Corp. microprocessors and Microsoft's Windows operating system.

Apple executives also said they hope to hire as many as 25 key Power Computing employees, particularly those who can help Apple replicate Power Computing's success in direct sales.

The dispute over licensing had clouded Power Computing's plans for an initial public offering. The company on Tuesday withdrew its IPO request with the Securities and Exchange Commission.

While Apple's move ended weeks of uncertainty about its position toward clone manufacturers, other matters--including the company's search for a chief executive--remain unresolved.

Jobs said Apple is preparing to interview a number of CEO candidates but that it could be months before a selection is made.

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