Power faces financial, legal woes
Power Computing appears to be on the verge of quietly slipping into oblivion after making a name for itself as the Mac clone maker that was going to "fight back."
The company has laid off 18 employees, half of its notebook engineering and marketing team, according to company officials. The layoffs come amid lackluster response to Power's first Windows-based notebook offerings.
To make matters worse, Power today was slapped with a lawsuit by TCI Manufacturing, a Canadian-owned company based in Taiwan. The lawsuit seeks nearly $42 million in damages over an alleged breach of contract, claiming that Power Computing refused to compensate TCI for "unfairly canceled orders for large inventories of enclosure and power supply technology custom-designed for Power Computing's use." TCI alleges the orders were canceled after Power learned that it no longer would be able to manufacture Mac systems.
Steve Kahng, Power president and chief executive, described TCI's lawsuit as a "joke."
"We were one of their largest customers and when we stopped ordering supplies for our Macs, their business didn't hold," Kahng said. "We believe they owe us money. We believe they owe us $1 million for credit for returns and service."
Kahng declined to comment on whether Power was considering a countersuit.
In September, Apple interim CEO Steve Jobs curtailed Mac OS licensing for clone makers as part of a survival strategy for the company, and played an instrumental role in shutting down Power's Mac business.
Soon after being pushed out of the market for Mac-compatible systems, the company announced the debut of its "PowerTrip" notebooks, which have high-end Intel MMX Pentium processors. These products were, in effect, intended to serve as Power Computing's bridge to the Windows-Intel world, but this bridge may be starting to crumble.
Just days before the notebook announcement, Power sold Apple its "key assets"--essentially its Mac OS license and its list of 200,000 customers--in exchange for $100 million in common stock and an agreement that it would no longer sell Mac systems after the end of the year.
But as sales of Mac systems wind down, the company is having trouble finding other sources of revenue to sustain itself. Analysts estimate the $100 million in stock and a revolving credit line of $30 million will give the company about 12 months to prove its new business model.
Power officials have said that the company has been able to ship 150 notebooks out of only 1,000 orders since the systems were introduced on September 8, according to the Austin American-Statesman.
"It's looking like closeout time is around the corner," said Richard Zwetchkenbaum, an independent industry analyst based in Marlboro, Massachusetts. "Apple has taken what they wanted and left very little [in the way of] a sustaining business model for [Power]. There doesn't seem to be any underlying core to what they can offer as a company distinct from what Apple has acquired."
Sources at Power acknowledged that the company's marketing plan for the PowerTrip notebooks hasn't been effective so far. "We couldn't tell customers why buy Power Computing other than just price," one source said.
"It's not difficult to get in. It is difficult to stay in," says Katrina Dahlquist, an analyst with International Data Corporation. "Some of the smaller 'third-tier' vendors seem to be doing well in their niche, but the way we see it, the small direct guys will get drowned out by bigger vendors" that are beginning to offer build-to-order systems and direct sales as well, she says.
Power Computing had initially planned on surviving in the cutthroat PC market by relying on sales of its Mac clones, but that plan was curtailed by Apple executives who wanted to stop licensing the Mac OS.
"We were charging $50 a copy to clones on the theory that the market would be enlarged. The clone manufacturers were basically taking that license and attacking the high end of the market," said Steve Jobs, Apple's interim CEO at a recent industry conference. (See related story).
Jobs stated that he went to Power Computing and the other clone vendors and asked for more money but that they told him to "go pound sand." He has claimed that after four or five tries at negotiation, Apple decided to stop licensing. Thus, not only was Power Computing out of the Mac market, but Motorola was forced to exit as well, leaving Umax Computer as the only major producer of Mac clones.
"Any characterization that we refused to pay what they wanted cannot be [an accurate reflection of events] because we had a signed agreement. We increased royalties a lot. If Steve says it enough, people will probably start to believe it, but it isn't true. Maybe he's said it enough that he believes it now," said one source at Power Computing familiar with the negotiations.