Cupertino, Jan 24, 2000 — Apple CEO Guy Kawasaki announced today, on the 16th anniversary of the introduction of its Macintosh computers, that the company’s operating system has managed to dethrone Microsoft’s OS king, Windows NT ’98. The revelation makes Apple’s Mac OS the dominant operating system in use today. The Mac OS now accounts for 47% of the desktop operating system market worldwide. Kawasaki attributed the company’s remarkable turnaround to a change of strategic direction when he came on board in late 1995.
I managed to catch up to Mr. Kawasaki after the press conference to ask him about the exceptional turnaround since he took over the helm at Apple in late 1995.
MacSense: Well, I guess congratulations are in order. How do you feel now that you have eclipsed Microsoft/Intel platform?
Kawasaki: Thank you. Well, I’m not sure I can give you a clear answer to that. I feel that this is just a milestone along a long road of technological innovation on the desktop. Don’t think for a second that we are going to rest on our laurels. We will push our technology relentlessly.
MacSense: Since you became CEO of Apple, you have tried to redefine the company’s strategy with respect to its technology. How were things different when you came on board?
Kawasaki: Primarily the direction. Things seemed to be somewhat out of focus. There were problems present in every aspect of how we did business. We were trying to advance so many technologies that we were loosing our technological edge in almost all of them.
MacSense: Jack-of-all-trades and master of none?
Kawasaki: Exactly. For example, prior to my decision to simplify the production process, almost every Mac model used a custom motherboard. When I saw what Power Computing was doing with their systems, I decided that their approach made a lot of business sense. It was much more elegant. We would build one motherboard with a PDS slot, a Universal slot, and three PCI slots. The PDS slot allowed any PowerPC from the 6xx series to be integrated into the system. The Universal slot was for an add-in card which was included on every Mac to allow connection to external SCSI, serial, parallel and audio-visual devices. The PCI slots, of course, were video and for add-in cards to enhance the computer’s functionality.
MacSense: How did this affect your bottom line?
Kawasaki: The area that showed the most significant change was research and development. Within a year, our R&D costs dropped by 50%. Our production increased significantly as well. Standardizing on a universal motherboard allowed us to direct our attention on other areas. In addition, we managed to shave about $100 (in 1995 dollars) off the price of the motherboard alone. And, as a result of this change, our production exceeded demand for the first time in a very long time.
MacSense: You also standardized on the desktop, mini-tower and tower cases as well.
Kawasaki: Yes. I felt that we could no longer afford what I called “the Macintosh look.” The PC industry proved that these case designs were more than adequate. No more “flat pizza” boxes. The new motherboard demanded this change. Overall, the average price of a system dropped by about 20% which we passed down to the consumer. The result was a 5% increase in market share within the first year of our having done this.
MacSense: How did this affect the clone market at the time?
Kawasaki: That was a concern for me. I didn’t want to undercut their business. Initially, we decided to license our ROMs and OS at no charge for one year to make the playing field equal and to foster growth of the platform. Then we standardized the video and cards we sold with our systems. This allowed the clone vendors to specialize their systems. Radius, for instance, differentiated their systems from ours by pushing the performance envelope as high as they could with high-performance video and SCSI. In addition, they made a deal with Adobe to bundle software. Within six months they had a very popular graphics solution.
MacSense: Did the success of Radius, DayStar and Power Computing affect your hardware market at this time?
Kawasaki: Oh yes! However, because the market share of the OS was increasing, we felt that this was an excellent opportunity, to approach independent software vendors to migrate their applications to our platform. Initially there was a lot of resistance. We had to do a lot of legwork to get our message across. Most x86 ISVs had the impression that our platform was not viable to their bottom line because of our low market share. So I decided, fine, we’ll send you a few of our engineers and assist you in porting your application to our platform. It took about six months of very hard work to sell them on the idea. Then, one-by-one, they agreed. Within a year, we were borrowing engineers from Motorola and IBM because we just couldn’t keep up with the demand. When IBM sold off OS/2 to Novell, we hired some of their OS/2 team. Along with some of our own software engineers, we formed the “Migration Team”. These guys would go in and get developers up to speed on optimizing the porting process. Then, when the developers were well on their way, the team would be off to another ISV. We had about forty teams working in three-to-six month cycles until late last year.
MacSense: How did you convince them to migrate their apps with respect to the market share issue?
Kawasaki: The old fashioned way. We approached them, sold them on the platform and paid 50% of their development costs up-front in exchange for a royalty when their apps were actually shipping. Ultimately, they usually decided that the PowerPC was a real alternative, and that, compared to the x86, it was relatively simple to create code for.
MacSense: And then “The Great Transformation.”
Kawasaki: (smiles) Yes. The Great Transformation. In mid-’96, after months of protracted discussion with the board of directors, we agreed to sell off the hardware side of Apple to Motorola and IBM. They would be allowed to use the Macintosh name in return for a small royalty for each system sold. It was a very painful decision, but I felt it had to be done if we were to be successful in our bid to become a major player in the business. The result, as you well know, was remarkable. Motorola supplied motherboards and processors to all the clone makers, and IBM sold the “Macintosh” computers.
MacSense: Why 1996 won’t be like 1984!
Kawasaki: (laughs) I had to bite my tongue on those jokes. Initially, the reaction to IBM selling Macintosh was quite negative. However, we mounted a significant marketing campaign, along with IBM, to reinforce in the minds of consumers, that Microsoft and Intel were the “Big Brothers”, not IBM.
MacSense: When Dell and Gateway started selling Mac clones, did they not diminish this message as they were also x86 vendors?
Kawasaki: There was a lot of confusion in the desktop market in ’96-97 because consumers just could not understand exactly what was going on. As a result, many of them decided to take a wait and see approach. The result was a downtrend for the entire industry. As you will recall, there was quite a shakeout in the industry. The number of hardware manufacturers in early ’98 was almost half the number that were around in ’96.
MacSense: Do you think that the high-cost of memory and the P6’s sluggish performance with Windows 95 had something to do with the downturn in the x86 market?
Kawasaki: Oh, certainly. At that time, the Pentium was the mainstream processor. It ran Windows 95 very well compared to 486 systems. However, the performance benefit that the P6 offered over the Pentium with Windows 95 was not nearly as dramatic. I guess consumers, and in particular businesses, were unable to make the decision to migrate to Win 95 or a P6 running NT. Consumers couldn’t justify the 16 MB entry-level of a P6 system, and businesses were left wondering how they would manage Win 95 and NT. That’s when we made a big push into business. We offered them a viable solution. PowerPC 604 systems with the Mac OS could run their existing Windows 3.xx apps at near Pentium speeds, and when they had the budgets, they could upgrade to native versions of the same software and get another performance boost. That’s an attractive mid-life option when considering a computer system for business.
MacSense: So, essentially, they had two upgrades when they opted for a system running the Mac OS.
Kawasaki: That’s how we sold it to them. As you will recall, at that time many businesses were still using late generation 386 or early generation 486 PCs running Windows 3.xx. We gave them a very attractive option. We marketed systems running the Mac OS as an upgrade that would take them to the end of the century, and beyond. The fact that more and more applications were becoming available for the Mac OS certainly helped to establish a beachhead in the business community. Having IBM aggressively push the PowerPC platform with our OS certainly didn’t hurt either. We had, and continue to have, a great relationship with IBM. Every time they sell a PowerPC system, we increase our market share.
MacSense: How long did it take before this initiative into the business market became successful?
Kawasaki: Again, it was a tough battle all the way. We had to fight tooth and nail to climb to where we are today. As with our other initiatives, we went out of our way to market the platform as a viable platform for business. There were times when I was frustrated with the stubbornness of businesses in their insistence to stay with the x86 platform. With a lot of hard work, marketing and evangelizing the platform, we finally managed to break into the Wintel fortress.
MacSense: What did the market share picture look like at that time?
Kawasaki: As I recall, we were at roughly 18% of the market at the beginning of ’97. With massive advertising on the part of IBM, Motorola, and ourselves, we managed to hit 26% by the end of the same year. The migration from the x86 platform began in earnest in 1998. People were upgrading from their Pentium-based systems to PowerPC 620 based systems because we were finally beating the x86 platform on price and performance. In addition, Intel just couldn’t make as much noise as we could when it came to marketing product.
MacSense: Obviously, your purchase of Insignia Solutions served to accelerate this trend.
Kawasaki: Absolutely. Prior to our taking them over, they were selling SoftWindows for an extraordinary markup. After, we just bundled SoftWindows as a part of the Mac OS. I don’t recall the specific amount, but I don’t think we were marking up SoftWindows too much beyond what Microsoft was licensing Windows to us for. It proved to be a very popular selling point. In addition, IBM was also helping to win the battle over the x86 with their x86 compatible PowerPC 615 and later 625 processors. IBM’s systems based on the 615 and 625 running the Mac OS and Windows 95 were very popular. The decision, on the part of IBM, to sell them to clone manufacturers was a stroke of genius. IBM had trouble keeping up with the demand for them.
MacSense: Why do you think there was such are large consumer migration of Windows 96 applications to Mac OS applications in 1997?
Kawasaki: Well, it goes back to the P6’s performance with Windows 96. Although Microsoft had given Win 96 a boost over Win 95 running on a P6, it still was bogged down by legacy 16-bit code. The newly debuted Mac OS 10.0 and a PowerPC system simply offered a better solution, delivering significantly more performance that the x86, and at the same price. As a result, by the end of ’98, we had managed to capture 36% of the market worldwide. The trend to migrate to the Mac OS/PowerPC platform has not showed any signs of slowing.
MacSense: How do you think Intel and HP’s new P7 processor will fare considering that they are quickly pushing it into the desktop market?
Kawasaki: Well, they face the same struggle that we did in migrating their x86 software base. I don’t think Intel can manage what we did because Microsoft has lessened its OS ties to the x86. In addition, I’m not sure Intel has the capital to finance such a venture at this point. Microsoft, on the other hand, has somewhat divorced itself from Intel. Although its big push for the last few years has been to help vendors migrate to Window NT for the PowerPC, its main thrust is in the applications market. The Mac OS is a very lucrative market for its applications.
MacSense: Thank you for you time, Mr. Kawasaki.
Kawasaki: You’re quite welcome.
 
Mr. Chartier is a marketing consultant and graphic designer with an interest in the high-technology and communications industries. His views are his own, and only occasionally represent the sentiments of MacSense's editorial staff. Mr. Chartier welcomes comments by email at ubik@sonetis.com.
