The core of Apple is returning

With the intense -- some would say obsessive -- scrutiny of Steve Jobs and his health, what is sometimes overlooked is the company he founded and built: Apple Inc.

After taking a six-month medical leave that involved a liver transplant, Jobs, 54, will return this week to a place that hasn’t skipped a beat since he left it.

Although such prominent investors as Warren Buffett fretted last week about the company’s future without its charismatic chief executive, longtime observers say Jobs has built an institutional mirror of himself in Apple with senior executives who share many of his values and outlook.

“When Apple goes to hire somebody, the No. 1 criteria isn’t how much experience you have or who you know,” said Van Baker, an analyst at Gartner Inc., a technology consulting firm. “It’s whether they think you will fit into the culture.”


The cult of Jobs’ personality is ingrained in the corporation, more so perhaps than almost any executive’s in other public companies. From the original operating system through the iMac and iPod to the iPhone, Jobs has put his stamp on the main mission: Make technology seamless to the customer, and make it better than anyone else could envision.

“Jobs has driven into the DNA of Apple that they want to make products that are very well-built and very easy to use. Everyone I’ve met at Apple, from the clerk to the chief financial officer, gets that,” said Daniel Ernst, an analyst at Hudson Square Research. “If Jobs were to disappear permanently tomorrow, it wouldn’t change this company one iota.”

Following Jobs’ road map, the Cupertino, Calif., company’s stock has surged since he went on medical leave Jan. 14. Despite a tough economy and Apple’s pricey products, shares have soared 66%. On Friday, they gained $2.58, or 1.8%, to $142.44. Jobs will return by the end of the month, Apple spokesman Steve Dowling said Sunday without specifying a day.

But Jobs has hardly been bulletproof, and a strategy to walk in his footsteps also could have drawbacks as Jobs’ perceived flaws, including his demand for absolute secrecy and insistence on control, are also diffused into the company culture.


The challenges Apple faces include some that Jobs helped create.

His emphasis on quality over price, for example, is a potential sticking point with consumers who have become less willing to pay for the type of discretionary products the company makes.

And Jobs’ intolerance for leaks has bred a culture of secrecy that, although effective in thwarting competitors, has also led some to criticize the company’s lack of transparency about who will succeed Jobs and, more recently, the severity of his illness.

His stubborn stance against relinquishing control over such things as content pricing at Apple’s iTunes store also has bruised many egos in the entertainment business, including those of the very partners he needs to succeed as consumers increasingly look for entertainment in all manner of devices.


“Their extraordinary focus on controlling their own destiny makes them a difficult company to work with,” said Baker of Gartner. “It’s led to issues with several media companies.”

One such power struggle with NBC Universal in 2007 over the pricing of TV shows on iTunes led to a one-year boycott that left Apple without some popular shows, including “The Office,” “Heroes” and “30 Rock.”

NBC, whose videos had accounted for 30% of TV show sales on iTunes, wanted the ability to charge a range of prices for its shows. Apple argued that pricing each episode at $1.99 would make things simpler and less costly for consumers.

Apple relented in September by introducing a tiered pricing structure -- from 99 cents for older shows to $2.99 for high-definition versions of newer episodes.


But the delay cost Apple, Baker said. During the yearlong hiatus from iTunes, NBC struck a deal with Inc. to distribute its shows. It also teamed with News Corp. last year to launch Hulu, an ad-supported service that lets viewers watch TV shows online free of charge.

“Hulu has clearly become a threat to Apple for TV shows,” Baker said.

Another challenge is Apple’s emphasis on premium pricing, a tradition that comes from Jobs’ long-standing belief that consumers will pay more for products that are better designed and easier to use. Some analysts are wondering whether that pricing model is out of tune with the current recession.

“The economy remains their No. 1 challenge,” Ernst said. “They produce products that are largely discretionary. You can pick up a cellphone now for $9.99. Or you can spend a couple hundred bucks on an iPhone. Both make calls. By no means is the iPhone necessary.”


That didn’t prevent more than 1 million people from snapping up the company’s newest iPhone 3G S within three days after the device hit stores June 19. Like the previous two iPhone releases, the latest was met with long lines of eager buyers such as Dennis Martin.

The 42-year-old Web developer from North Hills waited more than four hours to get his phone the morning it came out.

“It replaces the guitar as the one thing I would take to a desert island,” Martin said of his iPhone. “It just makes life so much easier.”

While the market for high-priced smart phones such as the iPhone is expected to grow nearly 12% this year, according to projections from ISuppli Corp., the $244-billion market for personal computers is going the opposite direction.


Average prices for laptops plunged 23% in the first quarter of this year compared with a year earlier, while desktop computers slipped 11%, according to technology consulting firm IDC.

The emergence of lightweight laptops, called netbooks, priced as low as $250 each, has been responsible for much of the price erosion, said Richard Shim, an IDC analyst.

“Apple has no answer to that,” Shim said. “Their laptops start at $999.”

Shim noted that Apple has been able to buck trends in the past and could continue to do so now. The company has managed to grow its narrow slice of the home computer market from 3.3% in the first quarter of 2008 to 3.6% in the first three months of this year.


“Apple tends to defy convention,” he said. “More often than not, it works out for them.”

Being unconventional is a trait that Jobs has drilled into his company.

“Steve lives by the mantra ‘Think different,’ ” said Tim Bajarin, a longtime Apple analyst. “It makes it impossible for us to predict with any level of accuracy what the company will do next.”

That hasn’t stopped legions of websites devoted to propagating the latest rumors about Apple from trying. The speculation has been particularly hot over an Apple tablet computer with a touch screen similar to the iPhone but larger. Fueling that chatter is Apple’s purchase last year of P.A. Semi, which designs high-powered semiconductors that use less energy and could be used in mobile devices.


Another set of rumors revolves around Apple TV, a box that connects to TV sets and lets people buy TV shows or rent movies from iTunes. But the device has not caught on.

“Right now, game consoles are the de facto platform for bringing digital services to the TV,” IDC analyst Danielle Levitas said. “There is a role for a more robust Apple TV experience.”

Apple, which declined to comment for this story, has been characteristically tight-lipped about its upcoming product lineup.

“Apple believes in that Silicon Valley axiom,” Bajarin said, “which is if you want to predict the future, invent it.”


Bajarin says that belief stems from Jobs’ “Think different” mantra.

Therein lies the last and perhaps most vexing challenge for Apple -- figuring out a long-term future without a man who is thought to be synonymous with the company.

“Once you remove him, there’s a danger it could become more like a traditional company,” said Rob Enderle, a technology analyst in San Jose. “Without Steve Jobs, can they still create magic?”