News Analysis: Apple?s attempt to stop cloning around

The vendor?s plans to up its licensing fees have led to fears that it could kill the Mac clone market

Imagine that a company decides to license its technology because it cannot win mass market acceptance. In return the licensees pay a fee and the market expands, as there is now more choice of machines.

This is precisely what Apple did at the beginning of 1995, finally signing licensing deals with Olivetti-backed Power Computing and Radius. The move came after the manufacturer originally mooted the idea 10 years ago. Apple?s then CEO, John Sculley, rejected plans to license the Mac OS on the grounds that Mac clones might undercut Apple on price and adversely affect sales. But after a steady decline in market share and changes in management, Apple finally bit the bullet and opened up its OS technology to licensing in 1994.

Since then other companies have joined the original licensees, such as Motorola and Umax, although it is fair to say that Apple never got the big name clone partner that it really wanted.

By all accounts it seems Apple has achieved its goal of boosting market share. According to US market research firm Computer Intelligence, the Mac OS platform share grew from eight per cent in November 1996 to 11 per cent this January. The vendor collects about $50 in licensing from each clone sold. Dataquest estimates that in 1996 it collected about $6 million in licensing.

So if Apple has managed to stop the rot, why is it now looking at putting up licensing fees? And more importantly, will this adversely affect relationships with existing partners?

Two weeks ago, there was speculation that Apple was planning to hike up its licensing fees to increase revenue. While it is unclear how much prices will go up, the rise is thought to be considerable (PC Dealer, March 12).

From Apple?s point of view, the case for increasing licence fees is clear. Because the clones offer competitive prices, the vendor is forced to follow suit. So while Apple could justify the high prices when the Mac OS was available from only one source, it cannot do so now.

Guerrino De Luca, head of Apple software subsidiary Claris, is reported to have said that clones cost Apple $1 million a day. Last year, Motorola, Power Computing and Umax sold almost 300,000 clones into the vendor?s traditional customer base; this year, about 12 companies are expected to launch Mac-compatible machines, tightening the screws further. All of these machines will target Apple?s traditional sector ? the pre-press and graphics markets.

But analysts have claimed that putting up the licence fees could kill off the Mac clone market completely. US analyst Mark McGillivray, MD at H&M Consulting, said: ?Mac clones have swelled the market sector enormously. Every other industry would be saying: thank you very much, this shows the platform is vibrant and alive.

?Apple?s always been terrified of licensing, because it?s paranoid that someone can do it better. This was fine in the 80s, but now the world has voted Windows. To start punishing companies that are increasing your market share and bringing in licensing revenue is insane.?

Sukh Rayat, director at distributor Flashpoint Technologies, echoes this view: ?If Apple puts the licensing fees up, it would cut off the smaller players overnight.?

But Andrew Michie, Umax product manager for IMC distribution ? Umax? sole UK distributor ? believes it would be better for Apple to cut its losses and run, leaving the hardware market to the clones. ?If I were Apple I?d up the licensing. It is about to cut about 35 per cent of its workforce ? it could do with a revenue injection. Also, Apple resents the companies that dump cheap product on the market with low margins and next to no support, when it is picking up the R&D tab.?

Michie points out that most of the established clone manufacturers ? many of which have their own R&D departments ? will be relatively unaffected by the price hikes. Rayat also believes the established manufacturers are committed to staying in the market.

Michie stresses that much depends on the take-up of the common hardware reference platform (CHRP). ?When we release machines on the full CHRP 1.1 standard in August, we will no longer be so reliant on Apple.?

Currently, clone manufacturers have to pay Apple for the use of the OS, the licence for the reference design, the Rom chips and the Asic (peripherals) chips. Once the CHRP is widely adopted, manufacturers will only need to license the OS and buy the Rom.

Apple?s reseller base, especially the indirect dealers, feel the firm has too much control. Michie said Apple attempts to convince its direct resellers not to sell the clones by offering them more marketing funds. But many dealers look forward to a healthier, more independent clone market.

Certainly, Apple?s staunch resellers, such as the former Apple Centres, will be pleased ? anything that ups the value of Apple?s own product is to be welcomed. David Jesner, MD of Glasgow-based DAS Securities, said: ?I suspect Apple is trying to discourage small bit-players, and boost the volume market, which brings up the value of its product.?

So while Apple grapples with its entire licensing strategy, it has got a fight on its hands to ensure that current players do not perceive the hike as too expensive and that prospective licensees are not put off. Whatever happens, it is imperative that Apple protects its own hardware business, as it can?t afford any more losses.