May 14, 2002 4:30 PM PDT

Steve Jobs: Rolling with the punches

CUPERTINO, Calif.--After polishing Apple Computer's lineup with the new flat-panel iMac, the school-oriented eMac, and now a rack-mounted server, CEO Steve Jobs still has an adjustment to make. He'd like to remove one item: the bad economy.

"The economy remains tough," Jobs said in an interview with CNET News.com. "I don't see any improvement this year."

The effect has been greatest on business spending and on schools, whose budgets are starting to feel the pinch as they head into the annual computer-buying season.

Consumer spending, however, hasn't been hit as hard, and a larger portion of Apple's future hinges on that market. Like other PC makers, the company is in the midst of a strategy to get consumers to use their PCs as an entertainment center. Not only does this plan open the door for more computer sales, it also allows Apple to sell add-ons such as digital cameras, digital camcorders and MP3 players.

Sales of those devices "have slowed a bit, but not that much," Jobs said.

The entertainment-hub effort relies on Mac users upgrading to Mac OS X, since many of the "iApps" that Apple has created--such as iPhoto--require the latest operating system.

At the start of the year, Apple had only 1 million of its 25 million Mac owners actively using OS X. That number is now in the range of 1.5 million to 2 million, although about 3 million Macs have been sold with the new OS on the hard drive.

However, Jobs remains confident the company can end the year with 5 million OS X users. Already he feels most of the hard work is over in terms of spurring customers to move to the operating system.

Some Mac software companies and other industry watchers, however, have lamented the fact that Apple is not convincing enough Mac users to move to OS X.

David Bailey, an analyst at Wall Street firm Gerard Klauer Mattison, said that Apple could get to 5 million active OS X users just from the number of machines it will sell pre-installed with the operating system. Reaching that level won't mean Apple has gained ground versus Windows.

"It doesn't necessarily imply there will be market-share gains," Bailey said.

Bailey said that OS X, with its Unix base, along with the company's new server and its digital-hub strategy, is enough to give Apple an opportunity to attract new users.

"They need to capitalize on those opportunities to gain market share," Bailey said. "Otherwise they become increasingly dependent on a constant stream of substantial product enhancements in order to achieve consistent growth."

Apple is also giving the business market a stab with its latest foray into servers. Although the company has traditionally fared poorly in the general business market, and has tried to market servers before, analysts say the Xserve, introduced Tuesday, is a more serious effort, at least for specific markets such as graphic arts and entertainment.

"At first glance it looks like a competitive product," said Technology Business Research analyst Tim Deal. "It looks like it will raise some eyebrows."

The Mac maker has made several attempts at the server market, most recently selling a slightly modified version of its Power Mac G4.

Even Jobs poked fun at some of Apple's previous efforts, particularly one that predated his return to Apple.

"I look at that as a dream when Apple was in a coma," Jobs said.

Jobs said the first market for Xserve is among existing Mac customers who have been taking their server business elsewhere. But Jobs notes that the same IT managers who will manage those initial Xserve products also are responsible for maintaining other servers.

If Apple can convince those IT folks that its servers are faster, cheaper and easier to manage, there is the opportunity to win business.

"They are going to see how powerful this server is," Jobs said, noting that it is the fastest Apache server of its size. "It could spread."

Deal agreed that Apple has an opportunity to gain some business if its servers deliver on their promise.

"It might prove to be a Trojan Horse," Deal said.

Although Apple faces hurdles in convincing customers it is a server company, it has an advantage in the server arena given the strong Unix underpinnings of Mac OS X, which make the Xserve suitable for serving not only Macs, but also for dishing up e-mail, Web pages and Windows files.

"It's still about credibility and perception for Apple because they've never been perceived as an enterprise player," Deal said.

Jobs declined to say how much revenue Apple could make from the product, telling reporters, "We don't predict revenue, but we'll let you know" how we do.

 

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