opportunity cost (wired, nov 1996)

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Opportunity Cost

How a deep-seated corporate obsession with the education market bakedApple.

By Lewis J. Perelman

In recent months, market analysts and industry observers have recited a litany of blunders to explain the decline and fall of Apple Computer. What they left out was anunderlying force that led four generations of Apple management to make moves at

every juncture that dissipated Apple's leadership of the personal computer industrythe company created. And that underlying force is none other than Apple's longest-standing, most deeply held commitment: education.

Privately, I found that industry analysts agree that Apple's obsession witheducational sales was a significant contributor to the company's problems. How big acontributor? "Fifty percent sounds right," says Tim Bajarin, president of the Santa

Clara-based market research firm Creative Strategies. Steve Tirone, an analyst atInternational Data Corp. in Framingham, Massachusetts, puts it this way: "Apple'salmost religious devotion to the education segment insulated the company from

having to compete in the mainstream market. Avoiding competition made Appleincreasingly uncompetitive.''

True, Apple's dominance in education - still roughly half of all school sales - is one of

the few things the company's new management has to boast about in its currentcome-back ads. But that only proves the relevance of economist Kenneth Boulding'srule that "nothing fails like success."

At the heart of that rule - and the core of Apple's problem - is the inadequatelyappreciated economic concept of opportunity cost, in effect the cost of not doingsomething. Apple "lost" big on education because the resources spent pursuingschool customers could have been deployed more profitably elsewhere. And Apple's

education sales force became a kind of tumor that spread throughout the corporate

body ,steadily sapping the company's overall strength. The result: Apple lost theopportunity to become a global force like the Wintel complex that dominates morethan 80 percent of the world's computer market. Here's how:

Apple's early and ongoing dependence on education for a large share of its sales andincome led the company to commit too much of its resources to a market that willnever be more than a niche in the overall computer industry, much less in the whole"information'' sector.

4.11 November 1996



This persistent, misplaced focus devoured resources that might have been targeted

on the "mainstream" market that Apple never really reached for, much less grasped.

Worse, education progressively stifled Apple's core business competency byentrenching an unholy alliance of customers, vendors, and staffers, who promotedand rewarded technological sloth and cultist delusion.

Even the supposed legion of loyal future buyers failed to materialize. "Apple'sstrategy was based on the belief that kids hooked on one brand of computer would

become devoted customers," says Harvey Long, a former IBM education industryconsultant. "The problem is you have to wait far too long for a payoff."

Throughout the 1980s, schools and colleges accounted for about half of Apple sales;more recently, education provided nearly one-third of the company's revenues. Andthat doesn't count parents buying Apple products for their kids to use at home orsales to corporate training departments.

To protect and cultivate what seemed to be its base, Apple not only tailored its

product line to its scholastic customers, but assembled a massive education sales

force, which quickly became the tail that wagged the dog. "You have to understandthat sales has always been the power base at Apple," one of the battalion of recentlydeparted Apple executives says. "And education was by far the biggest power insales."

How big? Right up until the end of the Michael Spindler era in February 1996, some

30 percent of Apple's total sales force was committed to education (and more to K-12 schools than to colleges). That was augmented by a roughly equal number of Apple-authorized "sales agents," who were guaranteed exclusive rights and agenerous cut off the top.

For a long time, there was plenty of profit to go around. "In the mid-'80s, Apple wasgetting margins from 35 to 45 percent," says Bajarin, a widely respected Apple

watcher. And back then Apple's sales were doubling nearly every year.

But rising sales and fat profits, short-term indicators of success, were leading Appledown the wrong strategic path. It's another aspect of opportunity cost: winning thebattle and losing the war.

Well, the war clearly has been lost. Apple's overall market share has shriveled tosingle digits. In the first quarter of this year, unit sales fell 22 percent while the rest

of the PC industry's sales leaped 15 percent. In the second quarter, Apple's 6 percentmarket share declined to 5.3 percent. And Apple diehards who shrugged off a US$60million loss in January 1996 as a minor bump in the road were stunned by new chief executive Gilbert Amelio's subsequent opening act: a massive $700 million write-off and a huge recall of defective products.

Apple's faithful may not understand opportunity cost, but the company's investorshave had their faces rubbed in it: over the last five years, Apple's market valuation

has drifted slowly down - and occasionally dropped calamitously - while the value of every other major vendor in the PC market has grown at least 25 percent.

It didn't have to be that way. The introduction of the Macintosh in 1984 gave Appleits best chance to escape the scholastic quagmire and rejoin the commercialmainstream of the PC market. And the Mac did in fact give Apple a powerfulpresence in another market niche that the Mac did much to create: desktop



publishing, along with the graphic, video, and audio design and productionapplications that eventually congealed as "multimedia." Indeed, if there is anystrength left in Apple's business, design and publishing is it. But as in the schools,Apple's competitors are making inroads here, too. And whatever its worth, thepublishing market is and will remain a niche.

Unfortunately, by the time the Mac débuted, the power center of Apple's dominanteducation division had become rooted in the company's organization and culture:

half or more of the huge education sales force had been recruited directly out of educational institutions, mostly public schools. Educators were not just outside reps,they spread throughout the organization - up to and including Apple's head of American sales operations, James Buckley.

The company's education sales force was able to move product and make thenumbers that assuaged Wall Street. It also stymied management's ability to reorient

the company to pursue the vast "real world" market outside the classroom walls. Butin that pseudomarket of heavily bureaucratized school systems, the competitive andconsumer forces that drove innovation and growth in the PC mainstream weremissing.

In contrast to school buyers and PTA donors, the industry-standard PC cus-tomersgenerally spend their own precious money for tools to do their own work. What theywant from vendors is not love or charity but solid value and practical "solutions." In

the IBM-compatible, Microsoft/Intel maelstrom, intense competition and savvycustomers shrank product life cycles from less than three years down to as little assix months. Meanwhile, Apple continued supplying classrooms with mountains of increasingly obsolete Apple II products for more than 12 years.

Ironically, the labor-intensive and bureaucratic nature of Apple's education salesmachine made it slightly less profitable than its corporate counterpart and several

percentage points less profitable than the publishing/media segment. So, as good asApple's financial performance may have seemed with its big education push, it could

have been doing better - both in the long range and in the short - if the companyhad found the will to reallocate resources that were being squandered on theacademic niche.

Moreover, critics often blame Apple's dire straits on management's failure to

overcome "internal resistance" to licensing the Mac OS. Where did that come from?"The education sales group killed licensing every time it came up," an Appleexecutive says, "because it meant more competition and lower margins for them."

But of all the ironies of academia's corrosive influence on Apple - a companyfounded, after all, by college dropouts - perhaps none is more definitive than thefamous TV commercial that launched the Macintosh during the 1984 Super Bowl,portraying IBM as an Orwellian Big Brother. Its punch line: The Computer for the

Rest of Us.

Who were the Rest of Us? Presumably the independents, the artistes, the radicals,the cool - the Cult. In reality, though, it turned out to be the leftovers, the margin,the fringe, the niche - the 6 percent that Apple's overall market share has witheredto now.

The Mac was supposed to be the symbol of independence and individualism. But, inreality, it was the horde of competitors in the IBM-PC world that unleashed a flood of



ever-evolving boxes, peripherals, gadgets, and software that the individual usercould select, cobble together, and tweak to meet personal needs and tastes.

And however lumbering the IBM Corporation may have been, it was a paragon of lithe, entrepreneurial enterprise compared with the authoritarian, conformist, andarrogant quasi-socialist bureaucracy of academia, where the lion's share of Apple's

sales and its own corporate cadre had their roots.

Can Amelio turn this around? Maybe. For starters, he has to stop using learning and

education interchangeably and realize that they are two drastically and strategicallydifferent things.

The key to that distinction is the ongoing rush into on-demand learning, what authorand consultant Stan Davis calls the "knowledge for profit'' revolution. Collectively, Icall these new processes kanbrain, from the Japanese for just-in-time delivery.Kanbrain learning includes new technologies with names like performance support,

groupware, knowledge-based systems, and intranet. They are designed to create,move, and apply knowledge to help workers serve customers' needs. Not to deliverinstructional courses or churn out diplomas.

Perelman's Law of Knowledge-Age Management holds that it is a debilitating, maybefatal error to confuse kanbrain learning with institutionalized education and training,as companies like Apple have defined them. Indeed, Apple's decline and fall areExhibit A.

Spindler blew a recent chance for Apple to have a role in this revolution. More thantwo years ago, training director Lucy Carter had replaced most of Apple's corporateclassrooms with on-demand, kanbrain-style systems. Carter went on to help form a"learning systems market" group, with the aim of refocusing Apple's whole marketposition. (Full disclosure: I was a consultant to that group.) In December 1996,Spindler jettisoned the project in one of his dumber 11th-hour downsizing moves.

By this summer, Amelio had in fact substantially shrunk Apple's educationalmarketing force, subordinated all sales to the various product divisions, and replacedsome of the education cadre's capos, including Buckley.

Constructive steps, but not enough. Amelio should outplace "educational" salesentirely to third-party vendors or perhaps a spin-off company. That would at leastgive what's left of Apple a second chance. Building on the company's remaining coreof technology and creativity, with its potent brand name and significant base in

multimedia design and production, Apple might yet be reborn as a powerful, evenpremier builder of the engines that are driving the knowledge revolution. Tools, notschools, are the key to Apple's future.

Lewis J. Perelman ([email protected]) is executive editor of Knowledge Inc.(www.knowledgeinc.com/) , a newsletter from which this is adapted.

Copyright © 1993-2004 The Condé Nast Publications Inc. All rights reserved.

Copyright © 1994-2003 Wired Digital, Inc. All rights reserved.

opportunity cost (wired, nov 1996)

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