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Power Computing braces itself

Amid buyout rumors, the clone maker scales back plans due to licensing snags with Apple.

Power Computing continues to smart from Apple Computer's (AAPL) reluctance to license the Macintosh operating system and certify new computer designs, amid rumors that Apple may buy the clone maker.

Apple has not yet granted licenses to any of the clone vendors for shipping the Mac OS 8 operating system (OS), which would allow them to market systems that are even more competitive against Apple's product offerings.

Also, in a letter sent last week to the clone vendors, Apple says it will "not be scheduling nor accepting CHRP-based Mac OS systems" for certification. The letter states that the reason is "Apple is currently evaluating the future directions of Mac OS licensing."

The Common Hardware Reference Platform (CHRP) and Mac OS 8 go hand in hand because the OS supports CHRP. The latter is technology which would allow Mac clone vendors to make system modifications and improvements independent of Apple's traditional oversight, and thereby compete even more effectively against Apple.

"It's hard for a licensee to ship product unless Apple has certified the design," says Pieter Hartsook, a Mac industry analyst. Power Computing, for one, wants to sell a Mac-compatible notebook but can't release the product without the CHRP-compatible OS. Sources at the company say has no plans for desktop systems with CHRP technology because "Apple has missed six straight deadlines for delivering CHRP software."

While the impact will be felt by all clone vendors if they are unable to ship systems with the new technology, Power is in a more precarious position because it is the only company solely dependent on sales of Mac-compatible products. The licensing and certification impasse is having a ripple effect on the company's fortunes.

For its part, Apple wants to recover lost hardware revenues by charging higher licensing fees. Power Computing has been particularly vocal about the higher fees because they would make the company less profitable and less competitive.

An unexpected development today could fundamentally change that antagonistic relationship. Several industry sources said the two parties have been in possible buyout negotiations but that no definitive agreement has been reached. Power Computing declined to comment today on what it classified as rumors, and Apple could not immediately be reached.

An acquisition of Power would benefit Apple on several fronts. First, it would gain a manufacturing arm in Austin, Texas, that could build Mac computers, while Apple's Cupertino, California, headquarters could be turned into a software development center. The company could effectively separate into hardware and software divisions that might be able to compete more effectively against other Mac clone vendors.

Second, the company would gain an infrastructure for selling computers directly to consumers. "Apple has been exploring going to a direct sales model, and clearly Power has been successful in doing that. That is the biggest thing Power would do for Apple, but I'm not sure why Apple would need to buy Power to do that," Hartsook said.

In the meantime, Power Computing continues to reel. Late last week, the clone maker said it was scaling back plans for expanding its operations and had halted work on its new headquarters in Georgetown, Texas, as a result of its inability to license the Macintosh operating system.

In July, Power had started developing a 260-acre tract that would serve as home to its new $28 million headquarters. Now, the company is cutting expenditures.

Power Computing has also put a brake on staff expansion and will only be hiring to fill positions that are already open, as first reported by the Austin American-Statesman newspaper.

Power blames Apple for its position because it has yet to license the Mac OS 8. Apple, most likely, will end up licensing the operating system, but will charge clone vendors much higher fees based on a sliding scale, in which greater fees are paid for higher performance systems, sources close to Apple have said.

Any large increase in fees could make the clone business financially unviable in the long run and cause the clone vendors to wither away.

The companies are continuing licensing discussions, and a temporary agreement is expected to be reached later this week. (NEWS.COM incorrectly reported previously that Power Computing's board of directors was meeting with Apple last Friday at the latter's headquarters in Cupertino, California. Power's board regularly meets in Cupertino as a matter of course.)

"We remain very hopeful that Power and Apple will be able to work things out. We want and need Apple to not only survive but prosper in the long term. It's a win-win partnership," says Mike Rosenfelt, director of marketing for Power Computing about the licensing talks.

Power Computing's predicament has also affected the company's initial public stock offering. The company tried to make the stock offering more attractive by announcing that it will make machines based on the Windows operating system, as a way to reduce its dependency on sales of Apple-compatible products. But the IPO appears to be delayed as the licensing issue gets sorted out, and Power Computing now has to make sure it can continue to sell Mac compatible machines while it prepares to sell Windows machines.