Apple's Financial Woes Highlight Peril and Promise

Apple's scant share of the federal market may be linked to its inability to understand the government contracting business and its frequent personnel changes

P> The story of Apple's failure in the federal market is perhaps a cautionary tale. The company's inability to understand the government contracting business, as well as its propensity to change strategic plans and fire managers after short stints on the job, is symptomatic of its failures in market after market. With the exception of the education market, Apple has lost just about every major sales and marketing battle.

Thus while Sun Microsystems Inc., Mountain View, Calif., has attacked the government market and transformed it into an important, $1 billion part of its overall business, Cupertino, Calif.-based Apple too often treated the government market as an insurmountable hurdle.

Indeed, one might argue that Apple's inability to tap the $30 billion federal market -- the world's largest -- has contributed greatly to Apple's challenges. Whereas Sun has been able to withstand the Microsoft onslaught and even thrive, Apple has stumbled badly, gradually losing a percentage point of market share here, a customer there. Whereas Sun can count on a lucrative, repeat base of federal business -- including some of the most sophisticated users at intelligence agencies to try out new technology -- Apple is still trying to figure out how to win a federal contract.

"Apple is a company that did almost everything wrong," noted Terry Miller, president of Government Sales Consultants Inc., Great Falls, Va. And when the company did act -- to license its operating system or authorize new federal resellers -- it always seemed to be too little too late.

The company's failures in the federal market are legendary among contracting insiders. There was a time when Apple seemed poised to take a good chunk of the government market. In 1983, Dendy Young, chief of Landover, Md., reseller Falcon Microsystems Inc., which has since been acquired by Government Technology Services Inc., Chantilly, Va., negotiated a General Services Administration Schedule to sell Apple products. It was quite a coup for Young, who later gained the exclusive right to resell Apple products to the federal market (Young, who recently took over as CEO of GTSI, could not be reached for comment). But it also limited the number of companies selling Apple products to the federal government to one.

That decision, perhaps not coincidentally, mirrored the decision at Apple's corporate headquarters not to license the computer's operating system.

How that affected Apple's fortunes in the federal market is open to question. But other decisions definitely hurt the company. Early on, founder Steve Jobs refused to sell to the government out of fear that the military would use Apple technology to wage war against other countries.

Jobs, who is now 40, has since loosened up; his next company, NeXT Computer, based much of its strategy on cultivating customers in the defense intelligence community, just as Sun Microsystems had done earlier. That base of business has helped see NeXT through rough times, and Jobs frequently visits the area to renew and vitalize contacts.

But Jobs' belated embrace of the federal market was little help for Apple. As Apple dithered, the government market adopted DOS and UNIX -- and later Windows as its favored operating systems. PC manufacturers thrived, as did producers of workstations such as Sun, Hewlett-Packard and Silicon Graphics. Among reporters covering the industry, Apple was notorious for not being able to find an executive who could articulate a consistent federal strategy.

Meanwhile, Falcon remained Apple's exclusive GSA Schedule holder for 10 years. According to industry observers, Apple had bouts of uneasiness with this bond, but each year until 1993, it begrudgingly renewed its exclusive agreement with Young. Once again, Apple's indecision and subsequent paralysis on this issue mirrors the company's hesitancy to allow Macintosh clones.

Management miscues and endless corporate restructurings didn't help. In an attempt to make a splash in the government market, Apple opened an office in Reston, Va., in 1986 with approximately 40 employees. The staff swelled to about 110 in 1989. Falcon succeeded in fulfilling the product demand through the GSA Schedule and other procurement vehicles.

But Apple was never content with a strategy in the government market -- nor with its personnel. Industry insiders even joked about "The Apple Federal Manager du Jour," because the company had a new government sales manager almost every six months. Making matters worse, Apple alternated between running its government business out of the Reston office and corporate headquarters in Cupertino.

Lacking a cohesive strategy or a team to implement a plan, Apple never succeeded in winning a substantial number of indefinite-delivery, indefinite-quantity contracts, which allowed companies such as Compaq Computer Corp., Houston, and Zenith Data Systems Corp., Buffalo Grove, N.Y., to gain a strong foothold in the government PC market.

In combination with the GSA Schedule, these contracts are the cash cow for microcomputer makers in the federal market. Although Apple has its fans in federal agencies, including the Defense Mapping Agency and the National Institutes of Health, the company was a consistent underachiever in the government market.

Faced with declining profit margins and eager to increase revenue, Young, as CEO at Falcon, began carrying other PC manufacturers on the GSA Schedule in 1993.

Apple's decision, when it finally came, again seemed to come too late. Apple awarded its GSA Schedule in 1993 to Falcon; Government Micro Resources Inc., Manassas, Va., an 8(a) reseller; and Government Technology Services Inc., Chantilly, Va., the leading government reseller. But Apple's market share decreased because -- unlike Falcon -- neither GMR nor GTSI specialized in Apple and had particular incentives to promote it ahead of rival manufacturers.

Most estimates peg Apple's federal market share at 7 to 8 percent -- compared to the company's overall share of about 10 percent. However, a former Apple federal sales manager said that Apple's federal market share never exceeded 6 percent -- and is now about 3 percent.

Now, as rival vendors such as Compaq, Dell Computer Corp., Austin, Texas, and Gateway 2000 Inc., North Sioux City, S.D., have experienced a boom in their government business, Apple's GSA Schedule sales and overall government business remains flat. The field office in Reston now has a skeleton staff of six employees.

Apple did not provide an executive for interviews by press time.

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