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Apple: The best and worst of times

Apple Computer had a tumultuous year in 1996 that began with staggering losses and ended on an high note with the acquisition of Steve Jobs's company Next.

"It was the best of times, it was the worst of times," Charles Dickens wrote of 18th century France in his masterpiece A Tale of Two Cities. But the notable quote could just as easily describe the year 1996 for Apple Computer (AAPL).

Falling under the "best of times" category was last week's announcement that none other than the cofounder of Apple, Steve Jobs, would return to serve as an "adviser" to Apple, and that his current company, Next, would provide technology for the next-generation Mac operating system.

Apple's OS plans underwent a major strategy change this year. The company had originally planned to overhaul its operating system in a single move with the long-awaited release of the Copland OS. But when it was determined Copland wouldn't ship on time, Apple decided to take parts of that technology and place them into periodic updates of its Mac OS System 7.5, adding features such as multitasking and multithreading from another company's operating system in later releases.

As a part of the new strategy, Apple began negotiating with Be, a company founded by former Apple executive Jean-Louis Gassée for its OS technology. Those talks broke down, and it turns out that another company headed by another former Apple executive had what Apple needed.

"It's very clear Apple went into this with great deliberation. Initially, Be was the right one, but as they examined the kernel of the Next OS, it became clear it was a more robust [operating system]," says Tim Bajarin, president of market research firm Creative Strategies in San Jose, California.

"The kicker was that this already had development tools in place...and a robust OS that [had the features] that Apple's OS needs," he said.

Bajarin says that in pursuit of a processor-independent OS strategy, the Next acquisition "definitely has a lot of potential." The trouble with Apple is that in the past, their strategy has pigeonholed them, according to Bajarin. The hybrid operating system will allow Apple to overcome objections that their hardware can't run Windows applications as well as offering its own unique features.

"They determined that it wasn't just a PowerPC question. The majority of the world is going in one direction, and there needs to be a strategy where they recognize that," he said.

The good news is a major turnaround from the beginning of the year. Apple started the year by posting large losses: a first-quarter loss of $69 million, or 56 cents a share, and plans to lay off 1300 workers. Also joining the ranks of the downsized was its CEO Michael Spindler.

New CEO Gil Amelio made strategic moves in the second quarter that brought losses to a staggering $740 million; these were mainly attributed to unsold inventory sitting idle in warehouses and to restructuring charges. Amelio's plans started to pay off in the third quarter, however, shrinking the company's deficit to $32 million. In the fourth quarter, Apple pleasantly surprised Wall Street with a $20 million profit.

In 1996, the company also endured a series of humiliating blows to its reputation as consumers questioned the quality of the company's products. In May, Apple had to recall a number of models, including four PowerPC-based Performa models and the 5300-series PowerBooks. Earlier, the introduction of the 5300s was delayed when defective batteries made some prototypes catch on fire. By the end of the year, the quality problems seem to have been resolved.

Mac fans got something to rejoice about this year with news about a new PowerBook line that includes a larger screen and the first ever (for Apple) built-in CD-ROM. Also this year, Apple made a notable addition to the roster of clone makers: Motorola, which began shipping StarMax clones that include a new motherboard design and a five-year warranty. Next year, the PowerPC chip will get a morale boost with the expected debut of a 500-MHz processor from Exponential.

Apple certainly saved their biggest story of the year for last with the announced merger with Jobs's Next. But while industry pundits and investors debate if the merger is really good news, Mac users will have to wait until 1997 (when Amelio says the hybrid OS will ship) to find out for themselves.

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