Apple-IBM Linkup Shows Pressures Facing Industry

A NEW deal between IBM and Apple Computer - the United States' largest and second-largest computermakers - is a sign of things to come.Economics and rapidly changing technology are pushing computer companies into strategic alliances - a sharp change from a decade ago. "These kinds of relationships will probably continue to form for the foreseeable future," says Bruce Lupatkin, managing director of technology development at Hambrecht and Quist, a San Francisco brokerage house. Some of these alliances are more tactical than strategic and won't last long, he says. But even the biggest companies are struggling with thinner profit margins and the demand of consumers for industry-wide standards. This means more partnerships. In April, 21 companies, including No. 3 computermaker Compaq, announced that they would work together to offer machines with standard central software (operating systems) and hardware (microprocessor chips). The consortium is known as ACE, for Advanced Computing Environment. Last week, International Business Machines Corporation and Apple Computer Inc. signed a wide-ranging pact that, if successful, could boost the fortunes of both companies. Specifically, the deal would: * Form a joint company that would create a new software platform based on object-oriented programming. This kind of programming breaks up computer programs into building blocks that can be reconfigured to suit the need. The operating system would be open, meaning that it could run on a wide variety of hardware. This move could help both companies shake the competition from Microsoft Corporation, an ACE member whose Windows operating system has gained widespread favor. * Build products that would make it easier for Apple's Macintosh computers to work in networks with IBM machines. The two companies will also develop and market an enhanced version of IBM's UNIX operating system. * Allow both companies to build new personal computers using IBM's RISC microprocessor architecture. RISC, which stands for reduced instruction set computing, is an alternative to the chip architecture used by industry leader Intel. Motorola, which makes its own RISC chips for Apple, will work with IBM to design and manufacture the new version of the IBM chip. * Create software platforms that incorporate multimedia technology - the merging together of text, graphics, video, and sound. Analysts are not sure the deal will work, since the companies have not laid out how they'll solve the technological problems. "Obviously, there's been a lot of buildup toward the Great Promise," says an analyst whose company prefers anonymity. But it will be two to three years before Apple and IBM come out with products based on the agreement. "What it does reflect is a fundamental change in support and collaboration" within the industry, he adds. Computer companies realize they can't go it alone anymore. Technology explains part of the shift. In the the early 1980s, companies like Apple and IBM sold proprietary machines. IBM changed this when it brought out a desktop computer whose operating system was available to anyone. New companies built IBM-compatible hardware and software. As the technology developed, companies moved away from using mainframe machines and began to build networks of personal computers. Buyers demanded open systems that can link them up. Meanwhile, IBM stumbled because Microsoft, which was producing IBM's next-generation operating system, pushed ahead with its own next-generation system (Windows). IBM's new standard OS/2 lost popularity. The result is that the industry has lost its market leaders - such as IBM - and is casting about for the right combination of software and hardware that will produce the next generations of leaders. Microsoft seemed well-positioned to be part of that leadership. The Apple-IBM linkup challenges its position. It could also challenge Intel, whose popular computer chips compete against the RISC chip technology. While strategic alliances are not new (IBM has more than 43 joint ventures in Japan alone), the computermaker expects more such agreements. "It's a question of turning the screws a few notches," says an IBM spokesman. "Today, the scale of investments that are required to stay competitive in technology ... are huge. That's what's driving IBM's alliance strategy. It's a way of sharing costs. It's a way of spreading risks. And it's a way of bringing solutions to our customers." Last month alone, IBM announced new alliances with Wang Laboratories Inc. and Lotus Development Corporation. Such partnerships may also help answer the broader question of US competitiveness. For the past year or so, computer executives and legislators in Washington, D.C., have grown increasingly concerned that US companies aren't big enough to invest the necessary funds into research and development. In Japan, tightly woven business groupings known as keiretsu provide the financial base for companies to make huge investments. One Senate staffer coined the phrase "Euretsu" to describe possible competition from European consortia.