128k Mac - What were apple thinking!

[JDW]

Supposedly Scully raised it another $500 to $2495 to pay for extra marketing...

Sculley tacked on that extra $500/Mac to pay for the famous 1984 TV commercial. Even though the Apple II cash cow brought Apple enough funds to pay for the 1984 CM, Sculley most likely viewed the Mac product line as separate and therefore wanted the Mac line to pay for itself at some point, rather than cannibalize profits from a separate product. (The Apple II and Mac teams were NOT one in the same, nor did they collaborate so much -- watch Pirates of Silicon Valley for a glimpse of the internal strife generated by Jobs himself.)

 

[Quadraman]

Those early Macs had to have high prices to pay for the development costs as well as the advertising and promotion. If they had gone with Jobs pricing or upped the specification without a price increase, Mac would have dragged Apple down and might not have survived to 1987 when things started looking up to the point where Apple could think about dumping the Apple II and going exclusively Mac. Mac had to start recovering it's costs or the technology might have died before it achieved wide acceptance. Apple would be defunct and Macintosh would be nothing more than a blip on the timeline of computer history.

Wow. I would really like to see some citations for this hypothesis. I've read almost every book about Apple there is and none of them painted this picture. Yet all of them make pointed reference to Apple's greed. Also, more sales balance out lower prices. It's basic economics. Period. The Mac did not have to be high priced to support Apple's R&D. It just needed to sell well, as I said before they had lots of money in the bank at that time. The fact it did both for the first 4 months is irrelevant. It certainly didn't help them survive the fall that resulted in Jobs dismissal. They were essentially hoist by their own petard.

I also question the validity of your statement that the Apple II was strictly a niche computer for education only. Hard to imagine releasing the IIc after the Mac, releasing the IIGS at ALL, updating the IIe in 1987, and redesigning the IIc Plus in 88, much less continuing most of the product line into 94 ONLY to support a niche and education market when the Macintosh had almost taken over completely by 1987.

So you honestly believe that if Apple sold the Mac for $1995 with 512k that they would have survived if sales of the Apple IIe started to slow down at that point? The IIe was only a year old in 1984. Nobody knew then it would run until 1993 especially since it was obvious that 16 bit systems would become the norm within a few years. Lisa was slow selling, the Apple /// flopped, the Commodore 64 dominated home users, PC's were taking over the business environment, Mac was a huge risk. Apple's future was uncertain and they could ill afford for the Mac to fail before it paid for itself. Sculley did what he had to do to mitigate the risk by raising the price, aggressively promoting the Mac and selling it with a low specification.

 

[Mac128]

Sculley tacked on that extra $500/Mac to pay for the famous 1984 TV commercial.

That's of course one of the official justifications for doing it. However, very little written about this actually draws this conclusion from analysis of the numbers, no more than those same sources suggest Sculley does. In fact they make it appear as though Sculley arbitrarily pulled that number out of a hat. There is any number of ways to justify a price point, it doesn't necessarily make it good business.

If they had gone with Jobs pricing ... Sculley already overruled Jobs on the pricing of the Mac

Also another point of clarification. Quadraman implies that Jobs somehow was a champion of lower price for the Mac. The reality is from everything I read, if Jobs smelled profit, he found a way to maximize it. In fact he is allegedly the one who jumped in and began driving the price up. Sculley didn't know what the hell he was doing having only sold softdrinks, but one thing he and Jobs seemed to have in common was greed. Perhaps that is why they got along so well. Under Jobs supervision, the Mac price gradually creeped up to the dismay of the entire Mac team who bought into Jobs propaganda that they were building a computer for the rest of us. According to all reports he lost very little sleep in breaking the news to them that the Mac was going to sell for $2500. This is the same guy who insisted they build their own hard drives and floppy drives so they didn't have to pay anybody else and could reek all of the profits – again, decisions that nearly wrecked the company. Remember Jobs is the guy who took a job and offered to split the fee with Woz who ended up staying up all night, doing all the work. Steve told Woz it was something like $100, when in reality it was like $2,000. In fact Apple is founded on the Apple I which was used inexpensive parts he could, thanks to Woz, assemble in his garage and sell for a huge markup. And he's still doing it today. But it's a different world today, there's a disposable income market and lots of middle-class millionaires now who value style and will pay handsomely for it when combined with innovation. The same was not entirely true in 1984 as the computer wasn't really understood my most and definitely not a necessity.

Bottom line: Charging a premium for an under-powered appliance of any kind, no matter how stylish, especially when the choice for most is not must-have but an extravagance, is ultimately a bad business move. Only arrogance and greed can explain it away. IMHO.

 

[tomlee59]

So you honestly believe that if Apple sold the Mac for $1995 with 512k that they would have survived ...

I'm not sure why you persist on raising this straw man from the dead. No one but you has suggested this combination. So, just to bury that straw man once and for all, the two alternatives that actually were discussed by others were:

1) Introduce the 128K Mac at less than 2495.

2) Sell a 512K Mac at about 2495.

And from the actual financial data I've offered, the overall answer is yes, not only would Apple have survived, they most likely would have thrived. Selling as in option 2) above would not have forced a per-unit loss (indeed, the margins would have remained healthy), but would have increased sales volume, and with it, increased market share. Needless to say, that would not have been a bad thing.

Again, it is improper to equate high per-unit margins with high company profits.

 

[Quadraman]

So you honestly believe that if Apple sold the Mac for $1995 with 512k that they would have survived ...

I'm not sure why you persist on raising this straw man from the dead. No one but you has suggested this combination. So, just to bury that straw man once and for all, the two alternatives that actually were discussed by others were:

1) Introduce the 128K Mac at less than 2495.

2) Sell a 512K Mac at about 2495.

And from the actual financial data I've offered, the overall answer is yes, not only would Apple have survived, they most likely would have thrived. Selling as in option 2) above would not have forced a per-unit loss (indeed, the margins would have remained healthy), but would have increased sales volume, and with it, increased market share. Needless to say, that would not have been a bad thing.

Again, it is improper to equate high per-unit margins with high company profits.

It is not improper at all. Anyone knows that when you have a high profit margin you don't have to sell as many units to recoup your costs. Do you really think Sculley was so stupid that he didn't know this? No, you're right. Sculley managed to become chairman of Pepsi and Apple based on his stupidity. If they had sold the Mac using your examples of 512k for $2495 or 128k for $1995 it would have taken more units to cover their investment. Units they may not have sold at all if the Mac failed. Also, the loweer profit margin would have meant no 1984 Super Bowl spot, no Steve Jobs promotional extravaganzas or any of the other clever Chiat Day advertising that got people to buy Macs. So now you have a situation where Lisa is dead, the IIe is an 8 bit computer in an emerging 16 bit world and no 16 bit machine either on shelves or in development so now what do you do? It took 5 years to develop the Mac from concept to production. Can Apple afford to wait until 1989 to produce another 16 bit machine? Microsoft will have Windows 3.x out by then and Intel will have introduced the 486 chip. 1989 is too late to be playing around with 68000's with small memory configurations.

 

[tomlee59]

Now you're just degenerating into silliness.

 

[Quadraman]

Now you're just degenerating into silliness.

No, I am not. I am looking at the situation from all possible angles, which you have failed to do and which would be required of the CEO of a large corporation. Do you think you are so much better than Sculley that you know your way would have worked for certain? What is the name of the last multinational corporation you were CEO of? Feel free to post your resume showing how you are better qualified to make those sorts of decisions than he was. Please, do.

 

[tomlee59]

As my last post on this thread, I'll point out several flaws implicit in your attempted argument-by-résumé. First, had I argued that, in Sculley's shoes, I would have made a different decision, you might have a point. However, that's not at all what I have said. It is precisely with the benefit of hindsight that we can see that Sculley's pricing strategy was indeed self-defeating. Support for that statement may be found in the historical data of saturating sales for the Mac.

As for failing to consider the situation from all points of view, I leave it to others to judge which of us has offered data in support of a position, and which of us has not.

 

[tmtomh]

Three main reasons the price of the Mac went from $500 to $2500:

(1) Raskin underestimated the cost of the basic concept he had; a more realistic price would have been $1,000 to $1,500 instead of $500.

(2) Raskin's concept initially didn't include a bitmapped GUI; adding this on increased needed resources and therefore cost, leading to a computer that would have cost about $1,500-2,000.

(3) Apple's gargantuan ad budget for the new machine added a full $500 onto the price of each unit, bringing it up to $2,500.

So I would say that a Macintosh built under Raskin's leadership would have cost about $1,500, give or take.

But - with all due respect to Mr. Raskin and the revolutionary ideas he had - I very much doubt the Mac would have caught on with customers, or inspired the industry, had it come to market as he intended - see for example the Canon Cat, which was much closer to what Raskin had in mind for the Mac.

Finally, the thing that really saved the Mac's bacon was the advent of the Laserwriter, Postscript, and Pagemaker. That, combined with the release of the Mac 512k, made the platform viable for getting real work done in a number of graphics, ad, and publishing-related fields.

Best,

Matt

 

[tomlee59]

Ok, I lied. One more post.

Yes, the standard histories cite, inter alia, the ad campaign's expense as the reason for Sculley's adding $500 to the Mac's price. But the numbers are curiously inconsistent with that standard recounting.

The print ads + the Superbowl spot cost around $3M (source: Wikipedia). If the $500 story is to be believed, then Apple expected to sell fewer than 10,000 Macs in 1984. However, Jobs had already cranked out several times that number, from a gigantic factory in Fremont capable of manufacturing 1,000,000 units a year. They actually managed to sell 250,000 Macs that first year.

The arbitrariness of the $500 figure, the inconsistency of the official recountings with the actual data, and knowledge of the personalities in charge, all point to an alternative hypothesis for the introductory price.

 

[JDW]

Three main reasons the price of the Mac went from $500 to $2500... Raskin...

The "$500" SRP was a dream price rather than something rooted in reality. For Raskin was never in control at Apple, even in his own little section. The very fact that Jobs took over the Mac project is evidence of that. Had Jobs not been at Apple while Raskin was overseeing the project, $500 may well have been a goal set by the company and the Mac may have been something very different (e.g., the Canon CAT) than what we saw debut in 1984.

 

[trag]

I read some Apple history book or other back around '93. It was written by one of the well known columnists, such as Pogue or Kawasaki. It's probably in a box in the attic somewhere.

In that book it said that the Mac team believed they were working on a computer which would cost about $500 to make and that they would sell for $1000. $500 was the production cost target.

I do not believe that it was ever their intent to build a computer that would sell for $500.

IIRC, the book implied that they got very close to the $500 production cost, but (again, IIRC) then the book states that Jobs hiked the selling price up to $2000 without telling/consulting the Mac team and many of them were quite disillusioned when they became aware of this. Then I guess Scully added the extra $500 on top of that.

 

[JDW]

Quote from the bottom of page 97 in Apple Confidential 2.0, by Owen W. Linzmayer:

Until the last moment before introduction, Apple executives argued over the Mac's price. Jobs had hoped that the Mac could sell for $1,495. As it turned out, the Mac cost $500 to build (83 percent materials, 16 percent overhead, 1 percent labor), and with Apple's standard markup, the price should have been $1,995. But president John Sculley had ordered an aggressive $15 million, 100-day advertising blitz, which kicked off with the 1984 commercial during Super Bowl XVIII. To pay for this campaign, Sculley tacked on a hefty premium, and the list price for the original Mac was set to $2,495.

Also be sure to see the table on page 90 of Apple Confidential 2.0, which shows a target price point of $500 was set several times during the Mac's development, varying by spec (May 1970, September 1979 and October 1979). Target prices set from 1980 and later were $1,000 and higher.

Quote from the bottom of page 325 in The Little Kingdom, by Michael Moritz:

Mac's introduction also revealed Apple's embrace for the sort of advertising budgets familiar to breweries and soft-drink makers. Apple budgeted $15 million for the first hundred days of the Macintosh's formal existence. The scope of the effort became clear the week before the computer was announced -- with a teaser commercial that looked like a rock video. Devised by Chiat-Day (which had survived Apple's management shakeup) and produced by the director of the futuristic films Blade Runner and Alien, the lavish sixty-second commercial cost $400,000 and had an Orwellian theme.

Quote from the bottom of page 181 in Revolution in the Valley, by Andy Hertzfeld:

Macintosh marketing manager Mike Murray and Steve Jobs loved it [1984], but they needed to get new CEO John Sculley's approval for such a large expenditure. Sculley was a bit apprehensive (after all, the commercial hardly mentioned the Macintosh), but he gave his OK for an unprecedented production budget of over $750,000 to make the one-minute commercial.