Apple peels to the core

The new chairman's strategy for reviving the personal computer pioneer is more quality and less quantity

Apple Computer is pinning its hopes of survival on making a premium, high-quality product and on culling the product range aggressively. So says Dr Gil Amelio, its new chairman, interviewed on tonight's Money Programme on BBC2.

He also says he will need a year to restore the loss-making operation in California's Silicon Valley to profitability, but does not expect it to be taken over or merged with another company. "The fundamental strategy", he explains, "is to add more value to the product and have the user buy us because they see more inherent value in the machine."

The range would be stripped down to "a handful of models". "Today we have dozens and dozens of different models and our customers are telling us they don't want that much variety. It's confusing and it's costly," he says.

Dr Amelio, who was appointed in February when the board fired chief executive Michael Spindler, is guaranteed $10m (pounds 6.6m) if the company is sold, on top of a salary and share option package that could net him $10m a year for five years. Influential shareholders are already suing the company over Dr Amelio's remuneration. He will have to perform.

Apple's is an ironic plight. It has just announced its worst ever quarterly loss of $740m and is laying off 2,800 staff. The share price has halved in nine months; Apple's debt has been downgraded to "with negative implications". The company lost the chance of making its Macintosh computer operating system the industry standard years ago; Bill Gates's Microsoft designs the operating system for 90 per cent of the world's personal computers.

Yet Apple virtually founded the personal computer industry, when Steve Jobs and Stephen Wozniak built the first one in a garage. They became multi-millionaires when the company was floated in 1977, and world renowned when the Apple Macintosh was launched in 1984, with its mouse and picture icons putting a friendly face on impenetrable operating systems.

But Apple's early success was undermined by two fatal commercial mistakes. One was allowing Mr Gates to copy the Mac operating system's key ideas and use them in the arch-rival system, Windows. This was the result of poorly drafted confidentiality contracts between Apple and Mr Gates in the mid 1980s.

Once Apple's then boss, former Pepsi-Cola head John Sculley, realised how similar Windows was to the Mac system, he sued Microsoft for copyright infringement. He genuinely thought he could stop the advance of Mr Gates and Microsoft, but he miscalculated. The case dragged on but was thrown out in 1992. Mr Gates triumphed then and ever since.

The second big mistake was Apple's refusal to license its operating system to other manufacturers. There are hundreds of computer models based on the IBM standard with an Intel processor and Windows software. Hence "Wintel" dominates the marketplace.

Apple had ample warning of the dangers of its exclusivity. But former Apple senior executive Jean-Louis Gassee says Wall Street would not stomach the short-term earnings drop that would have resulted from Apple's licensing. In hindsight, Wall Street acknowledges that Apple should have licensed 10 years ago.

Last year was a disaster for Apple. Mr Spindler misread the market and over-produced cheap machines, while there were long waiting-lists for the upmarket Power Macs. Dr Amelio has had to write off $300m from the value of unsold computers sitting in warehouses. The smell of failure could undermine customer confidence and hurt sales still further. Dr Amelio cheerfully acknowledges his predecessors' mistakes and disowns them.

Apple has undeniable strengths. Its system really is more advanced: "Windows 95: Apple 89" read the stickers in Silicon Valley, and there's some justice in that. Apple dominates the market in graphic design and education. And it has fanatical customer loyalty, unlike any other computer maker. Millions of users worldwide get emotional about their Macs.

Apple's latest TV commercial in the United States links the computer to BMW cars, a signal of Dr Amelio's likely strategy. He admits that Apple can never compete on price at the low end of the market. The company's computers are unique in that the hardware and software are designed seamlessly together. Investment in research and development is around twice as much as its competitors'.

Dr Amelio plans to position Apple computers as a premium product; to keep up the pace of innovation that makes Apples so easy to use; and to exploit new fads like the Internet to the full.

Apple's scientists are still miracle-workers. Take their Chinese dictation kit. The user talks Mandarin to the computer and Chinese script appears, ready to be printed. It is five times faster than any existing means of typing Chinese into a computer. The huge Chinese-language market awaits and with a device as ingenious and cheap - at $299 - Apple deserves to conquer it.

Less certain of success is the Pippin, trading as the Atmark, or @. It is a box that enables the user to access the Internet, and play CD-Roms, through a TV set. It is designed for the two-thirds of the public who won't buy a personal computer, and resembles a CD-player. But the problem is the poor legibility of Internet text on a tv screen.

Gil Amelio is a distinguished computer scientist with several patents to his name, but as a manager he has a reputation for turning round ailing companies. He accepts that he must tackle head-on the loose decision- making that grew from Apple's jeans-and-sneakers, try-it-and-see corporate culture.

"We need discipline," he says, "in the sense of being more businesslike. I think we have too much shot from the hip, rather than making investment decisions on carefully reasoned strategy."

He seems genuinely to thrive on facing a challenge. Reviving the seemingly commercially defeated Apple will be just that.