End the Apple death watch

The applause has been hot and heavy for Apple's second-quarter performance, announced Wednesday, when the company earned an unexpetedly high $55 million on sales of $1.4 billion.

When the hosannas die down, however, let's consider what it has taken Apple to make $102 million over the past two quarters, and what that portends for the future.

On the upside, Apple has focused on what it does best. It now sells PowerMac G3s, color displays, PowerBook G3s, WebObjects, the Mac OS, and a limited selection of very profitable software through its newly-reconstituted FileMaker Pro, Inc. It develops future versions of its operating systems (Mac OS and Rhapsody), plus WebObjects, as well as critical system software technologies like QuickTime, ColorSync and AppleScript.

And that's it.

What it does not do is waste resources on anything else outside these redefined corporate boundaries. That has meant painful separations for Newton customers, and other deep cuts to kill products like scanners, digital cameras, hard disk drives, CD-ROM drives, color printers, as well as the other miscellaneous flotsam and jetsam that used to crowd the Apple price list.

Even within its newly focused product lines, Apple has cut, cut, cut. The number of Mac models has been dramatically reduced, with the number of motherboards required by these models dropping from 16 or more down to three. Across the board, Apple has made similar reductions in its manufacturing operations to squeeze out costs.

Overhead is over and out
Apple's also chopped its overhead costs by dumping its expensive Cupertino City Center executive digs, eliminating some questionable marketing programs and consolidating still more operations.

In addition, Apple has cut, cut, cut its human resources. The total corporate headcount is down to under 8,000, the lowest in 10 years.

The upshot of all of these reductions, coupled with strong sales, is easy to see. Apple is now a profitable company with rising Wall Street equity.

But what about next quarter, next year, and ten years from now?

It's hard to argue with success, but we must remember that today's success is tomorrow's strategic failure. Let's look at the structural changes Apple has made as a predictor of the future.

Where have all the people gone?
First, Apple has lost a lot of sterling engineering talent that will be hard to replace.

Second, Apple has lost a lot of sterling sales and marketing talent (don't laugh) that will be hard to replace. And the company still lacks a marketing chief.

Third, Apple has lost a lot of sterling operations talent that will be hard to replace. Fortunately, though, they've been able to attract a new Senior VP for worldwide operations, Timothy D. Cook, a former vice president of corporate materials at Compaq Computer Corp. So further repairs to Apple's Ops ought to be coming soon.

Net-net on the lost staffing issue, then, Apple has some seriously shaky time ahead of it. But if it can continue to show quarterly profits (and assuming it shares that wealth with employees), it should do well enough in the cutthroat Silicon Valley job recruiting market to push ahead internal development.

A bigger strategic threat to sustained profitability, however, is Apple's revised sales model. While it certainly looks like the model is working (recall those 102 million reasons), the changes have created some serious problems that need to be addressed by Cupertino.

The value-added problem
Those problems mostly manifest themselves with Apple's non-storefront value added resellers -- companies you have never heard of that sell a ton of Macs -- especially to corporations who supposedly don't buy them.

These VARs are being squeezed hard -- intentionally I believe -- with sales being poached by Apple directly (through the Apple Online Store and by Apple's direct sales reps) and indirectly (by Apple recommending to customers to buy via Web sites, through mail order, from Frys, or from CompUSA).

In addition, Apple won't sell VARs the right class of machines they need (e.g., G3s without hard drives or RAM) so they can build out to their customers specs. Apple, instead, wants that piece of the action all to itself.

Now you can easily say, "screw the VARs, Apple doesn't need them."

But you'd be wrong. You'd be missing their strategic role in keeping Apple in small and large corporate accounts, and keeping Apple from losing established publishing accounts to the hungry new NT vendors. Accounts that Apple's own inept sales people couldn't sell to.

The bottom line: survival
What does all of this mean? Well, Apple has survived, for one. It's time to end Apple DeathWatch 2000. And Apple has trimmed down to a size that it can sustain future profits for at least several quarters to come, especially with new cheaper, yet faster G3s on the horizon.

But Apple's got a longer term problem because of the treatment of its VARs that may derail future profit expectations by the end of 1999, just when the company ought to be licking its chops over Rhapsody sales, G4s, Mac NCs, and even a palmtop Mac to challenge Windows CE and the 3Com Palm.

Because the fact remains that Apple can't sell these corporate goodies alone. They need their VARs.

Because Apple needs those corporate sales. In a big way.