Top Stories of 2001, #6: Apple Fields an OS Contender, but Suffers Tough Year

From a technology standpoint, 2001 was a banner year for Apple. Last year saw the release of the company's next-generation Mac OS X, along with OS X-specific versions of Microsoft Office, iTunes, iMovie, and iDVD. But as a public company, Apple must answer to its shareholders, and even though CEO Steve Jobs remained a hot commodity at MacWorld Expo events, Apple suffered through a rough year financially. 2001 was the toughest year ever under Jobs' tutelage, although the company and its supporters put on a brave face. So Apple--despite having finally caught up, technologically, with Windows--is now clutching at straws as its market share continues to nosedive. But I have some thoughts about how the company can turn the situation around.

2001 started off with some good news, however, when Microsoft announced at MacWorld that it would port its popular Office suite to Mac OS X. Microsoft's Mac OS X support was crucial for Apple because it lent needed credibility to the fledgling OS, which was then still an unknown entity. Microsoft said the suite would ship that fall. Other important announcements from the show included the new PowerBook G4, an ultra-sexy laptop that would win design awards despite the fact that you couldn't type on it while a CD-ROM was inserted in its internal drive bay, and the 733MHz PowerMac G4, which wouldn't ship until February.

A week later, Apple dropped a bombshell--its first quarterly loss in 3 years. Dismissing the last quarter of 2000 as just a "speed bump," the company reported a loss of $247 million, but promised to return to profitability in 2001--a promise it wouldn't be able to keep.

In early March, Apple announced that it had completed development of the initial version of Mac OS X, which would ship 2 weeks later. Mac OS X is a modern OS with preemptive multitasking, memory protection, and a beautiful, liquid-inspired UI called Aqua. "We want to build a Mac OS for the next 15 years," Apple CEO Steve Jobs said at the end of March. Sadly, the initial release was dog slow and missing some much-needed features, such as DVD playback, that Apple wouldn't address for another several months, causing pundits to deride the release as "Mac OS X Preview Release Two." (Mac OS X also had the bad luck to ship in the same year as Windows XP, Microsoft's most impressive OS release ever; in the end, XP's task-based UI represented such a huge improvement over OS X's desktop-based metaphor that Apple was still playing catch-up in some areas despite the company's many innovations.)

In early May, Apple replaced its first-generation iBook (which resembled a toilet seat) with an elegant, low-cost snow-white device. Weighing less than 5 pounds, the 2001 iBook featured a 500MHz PowerPC processor, a gorgeous 12" screen, FireWire support, and a choice of optical drives. It was an instant success and, unlike its predecessor, almost universally praised. It was so good, in fact, that I bought one 2 months later. The company also announced that it would buck economic trends (the country was already in a recession at the time, although that fact wouldn't be obvious until months later) and open retail stores in an era when most high-tech companies were circling the wagons. The first Apple retail stores opened in late May; by the end of the year, the company had opened almost 30 stores across the United States.

At its annual developer conference in late May, Apple announced that all new Macintosh computers would ship with Mac OS X installed on the hard disk, although the legacy Mac OS 9 would still be the default OS for users. The company also dropped CRT monitors from its product list and went with an all-LCD line up--the first in the industry. At that summer's MacWorld show, Apple disappointed industry watchers by pushing back the release of its next-generation iMac, but its amazing iDVD 2 application drew raves.

In late July, Apple announced grim quarterly results, with income of just $61 million on sales of $1.47 billion, a 70 percent decrease compared to the same quarter a year before. The only highlight for the company: The iBook sold 182,000 units during the quarter, a runaway success.

By September, Microsoft's Mac Business Unit (MBU) announced that the Mac OS X version of its Office suite would be called Office v. X and would ship in November. Office v. X included updated versions of Word, Excel, and PowerPoint, and a substantial upgrade to Entourage, the personal information manager (PIM) client. Office v. X relied heavily on the UI widgets in OS X and was later touted as the OS X poster child for its adherence to OS X's new interface.

In late September, Apple released OS X 10.1, its first major update to OS X. The release included digital-media integration features, DVD/CD playing and burning, a much-improved UI, and several other changes. Most importantly, 10.1 was much faster than the original release and became the first version that Mac users could turn to as their day-to-day OS. In many ways, OS X 10.1 was what the original OS X release should have been.

By the time Apple released its next quarterly results in late October, 2001 was clearly going to be a wash financially. Despite posting net income of $66 million on revenues of $1.45 billion, profits were down 61 percent compared to the same time period the previous year. And although the new iBook was still selling well, the aging iMac was falling off the charts, in desperate need of a makeover. That makeover wouldn't arrive until early 2002, and the controversial iMac replacement wasn't as universally loved as its predecessor, casting doubts on the future.

In November, Apple finally got into trouble for its many product pre-announcements, which often took place several months before the products were available in quantity to consumers. Four Apple shareholders filed lawsuits against the company, each alleging that the company financially misrepresented its products. One typical lawsuit involved the 2000 pre-introduction of the G4 Cube, iMacs, and PowerMac G4s, which Apple, according to the complaint, "over-hyped" by making unrealistic claims about the products' levels of performance.

The company released its iPod MP3 player in November. The iPod features an elegant design, a 5GB hard disk, super-fast FireWire connectivity, and a whopping $400 price tag. But despite its price and its Mac exclusivity, Apple sold more than 100,000 units during the 2001 holiday season, making the iPod one of the top-five-selling MP3 players.

For fiscal 2001, however, the news was bad. Apple lost $25 million, its first yearly loss since 1997. Product sales dropped a dramatic 33 percent across the board compared to the previous year. And a Time Magazine cover story published the week of the iMac launch in January 2002 noted that the Mac's market share had actually fallen somewhat in 2001, below the 3.5 percent share recorded in 2000. Despite the advances in Mac OS X, only hundreds of thousands of users had actually switched to the system full time and several high-profile Mac users--such as the San Francisco Chronicle's Henry Norr--revealed that they had gone back to OS 9 because of its wider applications compatibility. And Apple's much ballyhooed retail stores, which the company originally expected to break even in 2002, were now expected to lose money for another year.

So what is Apple to do? The company has finally caught up with Windows after a half decade in the wilderness, sweating it out with the technologically inferior pre-OS X releases. But it seems that few people outside the often insular Mac community are listening. If Corel's handling of WordPerfect is any guide, Apple needs to target the wider Windows market, not just existing users, if it wants to win over any new converts. Jobs likes to say that Apple would double its market share if the company could just reach another 5 percent of the market, but the opposite seems to have happened in 2001, largely because the company had done absolutely nothing to woo the Windows audience. That's too bad, because many of Apple's hardware and software products are world class, and the company could easily capitalize on Microsoft's bad press and security problems. Maybe it's time for Apple to reach out beyond its private parties at MacWorld and see how it fares at the Computer Electronics Show (CES), COMDEX, PC Expo, or some of the other industry-wide events. If the company is serious about drumming up new business, it will have take a few steps out into the wider world.

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