Apple's Time to Grow; Computer Maker Expanding In Downturn

     True to its contrarian style, Apple Computer Inc. in recent months has had an entirely different idea about how to weather the economic downturn that has prompted its competitors to retrench and hunker down.
     While Gateway Inc. is closing some of its namesake computer outlets, Apple is sticking to plans to launch 25 stores; the latest opened last weekend in Clarendon, its second in Northern Virginia. The chipmaker Intel Corp. may be getting out of the business of making PC cameras and digital music players, but Apple decided to do the opposite, releasing its first portable MP3 player.
     Analysts say the strategy can be risky at a time when home computers are increasingly regarded as commodities, and buyers have lost some of their enthusiasm for purchasing cutting-ed ge gadgets. But then, Apple has never been one to follow convention.
     "You've got two choices here with the slump in the PC market," said Brett Miller, a computer hardware analyst with A.G. Edwards & Sons. "One, you can get really aggressive in price and just be cutthroat and steal whatever business you can, but you're cannibalizing next year's sales. . . . The other alternative that you have, which is slower, is to use technology, develop technology to power your way through a slump."
     Apple's gamble is part of a plan to reinstill its product line with the pizazz that gained the quirky personal-computer manufacturer a cult following back in the 1980s. The Cupertino, Calif.-based business caters to a loyal, niche market of students and professionals who are willing to pay more to use a powerful computer for graphic-design work or entertainment purposes. Its share of the U.S. market hovers at about 5 percent, or 5 million households.
"When consumers think of Apple, they think of rich content, they think of rich video, they think of graphic design," said Tim Deal, an analyst with Technology Business Research. Apple's line of Mac computers is "a counterculture phenomenon."
     Apple's innovations quickly began to be copied by competitors. By the 1990s, it became clear that Apple had lost some of the spunk, market share and leadership that had turned it into an icon the previous decade.
     In 1997, Steve Jobs returned to Apple as chief executive of the company he co-founded 23 years earlier. A year later he brought back the "oohs and aahs" to Apple with the introduction of the iMac, the line of curvy and colorful computers that made PCs look like boring beige boxes. The company soon followed suit with the sleekly designed iBook laptops.
The iPod, a pricey but powerful digital music player, is Apple's latest attempt to captivate a larger audience with stunning design and savvy features. But analysts say it is unclear whether the gear will be a hit. They recall how Apple announced earlier this year it was pulling the plug on a desktop computer called the Cube, a minimalistic machine that won high marks for design but proved unpopular with users concerned about its $1,799 price tag and limited ability to upgrade.
     "You just can't predict consumer appeal. You can't predict consumer activity," Deal said. "Apple's had some wins and losses in that department. For the most part, Apple's done a fine job. Then we have some examples of where they came out with some great ideas, like the Cube, but consumers didn't buy enough of them for it to make sense for Apple to continue to sell them."
     Apple executives are not deterred by those experiences, nor are they scared off by the weak economy.
     "We're not stopping and waiting for things to change," said Phil Schiller, Apple's vice president of worldwide product marketing. "The simple truth is no one can predict the future. I'm not sure what we would be waiting for. We have a great device right now, something that no one else has.
     "We are continuing to grow and expand those efforts so whenever the economy does turn around, we will come out stronger than we went in," Schiller said.
     Apple has hardly been immune from the economic downturn that has gripped the rest of the technology industry. It reported a loss of $25 million (11 cents a share) for the fiscal year ended Sept. 29, compared with earnings of $786 million ($2.18 a share) for the prior year. The company brought in $5.36 billion in revenue in 2001, 33 percent less than the $7.98 billion in revenue it realized in 2000.
     Still, the manufacturer moved ahead with plans to spend $85 million opening its first 25 stores this year after it had become clear the computer sector was beginning to sag and a weak earnings report had chopped Apple's stock price in half in a single day. The price closed at $21.05 on the Nasdaq exchange yesterday, down 1.17 percent.
      The downturn, though, has made leases more affordable, making it easier for Apple to establish a bigger retail presense.
     "What Apple's doing is really trying to look for a better way to sell its product," said Stephen Baker, an analyst with NPD Intelect. "What they suffer from, which is unique, is their products in the traditional retail setting tend to get lost. They're a small vendor at this point with a product that's a pretty much of a niche. In a store like Circuit City or CompUSA, it's hard for them to get a lot of attention because they're in there among all the other big players, the HPs and Compaqs." 
     The Apple stores also give salespeople a chance to "show off the best of what Apple products can do," Baker said.
     "Prior to that, the only way we had to demonstrate our products were trade shows, like MacWorld [Expo], which were only four times a year," said Ron Johnson, Apple's senior vice president of retail. "Not many people got to attend those. Now every hour of the day there is a mini-MacWorld for our customers at our stores." 
     On Saturday, the company inaugurated a new store at the new Market Common development in Clarendon, its 24th retail location in the United States and its second in metropolitan Washington. In May, Apple opened a store at Tysons Corner Center.
     The pair of Northern Virginia stores located about 12 miles apart will allow Apple to test which type of shopping environment its retail outlets do better in, Johnson said. Tysons, nestled in an affluent, high-tech community, is a suburban shopping mall. Clarendon, accessible to the Washington region by Metrorail, is located in a more urban development of street-front stores and upscale apartments.
      Michael Mazis, a marketing professor at American University's Kogod School of Business, thinks Clarendon is an odd choice.
     "I don't think it's going to have nearly the traffic that Tysons does," Mazis said. Apple should instead open stores at the Mall of America in Minnesota or Times Square in New York, which are "high visibility places where there's just a lot of consumer browsing," he said.
     Others say visibility is only part of Apple's challenge. Winning over people accustomed to using personal computers powered by Microsoft Corp's Windows software has not been easy.
     "Once someone starts using Apple or starts using Windows, they tend to stay fairly loyal," a big problem given that Windows runs 90 percent of personal computers, said Jed Kolko, a senior analyst for Forrester Research Inc.
     Earlier this year, Apple predicted its retail unit would break even by the end of December and produce a small profit by fiscal 2002. But in a conference call in October, Chief Financial Officer Fred Anderson lowered the forecast to a small loss in the current quarter due to the "weak economy and uncertain political environment" following Sept. 11.
     Apple's strategy of opening stores in high-visibility, affluent areas is different from Gateway's approach of picking spots where it would have to drum up its own customer traffic. And the company's entry into the digital-music market may also make sense even though it comes on the heels of Intel's exit from the same market, said Rob Enderle, a research fellow at Giga Information Group.
     "The reason they're doing appliances, like the iPods, is it's something that draws people into the stores," Enderle said. "They'll go into the store to look at the MP3 player, and that gives the salesperson a chance to tell them about the computers."