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Clone Licensing Brouhaha

by Adam C. Engst <ace@tidbits.com>

My friend Cary Lu, author of the first Macintosh book and a contributing editor to Macworld, likes to tell how he was roundly booed for suggesting at Macworld Expo San Francisco in 1986 that Apple should license the Macintosh operating system. How different the reaction would be to his suggestion today! I'm astonished by the fuss washing around the Internet regarding the rumors (and very little actual news) surrounding the licensing the Mac OS to clone manufacturers. Let me attempt to explain what is known about the situation and what it all means.

Background -- In September of 1994, Apple announced that it would license the Macintosh operating system to other manufacturers, the first of which (in December of 1994) was Power Computing. According to Apple's Mac OS Licensing White Paper, Apple's goal in licensing the Mac OS was to "contribute to the proliferation of the Mac OS platform, benefit the entire Mac OS community, and help meet the needs of more and more customers."

The white paper continues: "More specifically, [licensing the Mac OS] will provide a much broader hardware choice in terms of price, capabilities, and availability. It will also expand the reach of the unique characteristics of the Mac OS to new sets of customers, and foster continued development of innovative, leading-edge solutions to address more and more needs."

[These pages about Mac OS licensing haven't been updated in many months and given the current imbroglio, I wouldn't be surprised to see them disappear in the very near future. Similar statements may be found in Apple's 1996 Financial Results, however, which is a matter of record.]

<http://www.apple.com/licensing/strategy.html>
<http://www.apple.com/investor/96report/96financialresults.pdf>

In short, Apple intended the clone manufacturers to expand the Mac OS market in ways Apple itself hadn't, and to provide solutions that didn't fit Apple's mass market model. For instance, Apple has done well selling Macs into the education market, but Apple has done less well in niche markets, say law or real estate. Similarly, Apple hasn't been all that successful selling into large business or government installations. Apple's hope was that clone manufacturers could both fill cracks in untapped markets and offer solutions (such as custom configurations) that didn't fit Apple's business model.

Since Power Computing's introduction of the first Mac clones, we've seen some of these goals met, but clone licensing has proven problematic in other ways. For instance, a number of the clone manufacturers, including Power Computing and TidBITS sponsor APS, now allow customers to customize their configurations, as is common in the PC clone world. That's good, but Power Computing's reported targeting of some of Apple's primary markets and customers has raised hackles at Apple, since the company didn't intend clone manufacturers to steal sales from Apple.

What's Being Licensed -- Before we can analyze this situation, we must first look at what is actually in question. Apple currently has licensing agreements with the clone manufacturers for Mac OS 7.6. Gil Amelio, ex-CEO of Apple, has said that Apple charged very little for the OS license because the clone manufacturers also had to license hardware from Apple to be able to create Mac clones. This is because Apple's hardware designs use proprietary chips, preventing clone manufacturers from creating machines from industry standard parts. So, for each Mac clone manufactured, clone manufacturers must pay Apple for both the Mac OS and some hardware. It's possible Apple isn't making much on these licenses since the company wanted to jump-start the Mac clone market.

However, several things have changed since those early days. First, the licensing agreements were for Mac OS 7.x, not for Mac OS 8. All along, it was intended that Mac OS licenses would be renegotiated when OS 8 was released in (roughly) 1997. But, keep in mind that Mac OS 8, back in 1994 was to be the ill-fated Copland operating system, which was dropped in favor of Rhapsody, based on the OpenStep operating system purchased from NeXT in late 1996. So, there's some argument over whether or not the current Mac OS 8 - which, though a major update, is an evolution of Mac OS 7.x, not the complete architectural change Copland promised - should count as the Mac OS 8 mentioned in the license agreements.

Second, in an effort to eliminate the proprietary aspects of the Macintosh hardware, Apple, IBM, and Motorola created the PowerPC Platform, also known as CHRP (Common Hardware Reference Platform). The CHRP specification was designed to permit hardware manufacturers to build systems that could run multiple operating systems without requiring the OS manufacturer to tailor the OS for each new platform. However, IBM and Microsoft backed away from creating versions of OS/2 and Windows NT for CHRP, so right now, basically, all a CHRP machine can do is run the Mac OS without requiring the manufacturer to license any hardware from Apple. Therefore, if you remember what was being licensed initially (the Mac OS and Apple hardware), you see that once clone manufacturers can build CHRP machines, they must license only the Mac OS.

[Again, these pages about CHRP are quite old and may not survive much longer, if Apple decides to remove information that could be used to cast aspersions on any forthcoming decisions regarding clone licensing.]

<http://chrp.apple.com/>

The Disagreements -- You can now see where the conflicts lie.

  • First, Apple is concerned that clone manufacturers are cutting into Apple's sales. That's definitely happening to some extent, but I'd be surprised if there's much Apple can do to prevent it. It's possible Apple is trying to slide some restrictions into the new licensing agreements to prevent increased cannibalization of Apple's sales.

  • Second, there's debate as to whether Mac OS 8 is covered under existing license agreements, since it's not the Mac OS 8 that was initially promised back in 1994 and 1995. This disagreement seems to be a question of the letter of the contract versus the spirit of the contract. Apple is interpreting "Mac OS 8" according to the letter of the contract (which is a little fishy, since in March 1997, Apple jumped from Mac OS 7.6.1 to 8.0 rather than 7.7 as initially planned). The clone manufacturers prefer the spirit of the contract, which says that "Mac OS 8," when initially written, was meant to be Copland, and since Rhapsody has effectively replaced Copland, "Mac OS 8" should now mean Rhapsody.

  • Third, with the advent of CHRP (Motorola and UMAX showed CHRP-based Macs at Macworld Expo in Boston a few weeks ago), clone manufacturers can now license just the Mac OS and not Apple's proprietary hardware. Apple has no problem with that but wants to raise the fees for licensing the Mac OS to make up for the artificially low fees originally charged.

In the end, it all comes down to money. Apple sees no reason why it should license the Mac OS to clone manufacturers for a pittance, especially if the clones are going to cut into Apple's sales. If Apple loses a sale to a clone and receives only a small license fee in return, that's a serious financial hit. Given Apple's recent losses, the company doesn't need new ways to lose money.

On the other side of the fence, the clone manufacturers want to pay as little as possible to license the Mac OS. The clone business is marked by razor thin margins. The clone manufacturers can easily pay any price Apple asks, of course, but they must then pass that cost on to consumers. If the license fees jack up the price of clones to the point where they're not competitive, the clone manufacturers will disappear.

Solutions -- Little of substance has happened on the clone licensing front of late, causing the Macintosh community to whip itself into state of frenzy. Considering that Apple lost its CEO and recently replaced most its board of directors, I'm not surprised that negotiations have been slow. Although some new directors are in place and Steve Jobs seems to be acting as the nominal head of the company, a new CEO has yet to be hired. It's unreasonable to expect such delicate negotiations to take place at full speed in a state of executive turmoil. That said, a few possible solutions have been proposed.

  • The solution that most people expect is that Apple and the clone manufacturers will compromise on the license fees such that Apple makes enough to justify the licensing program and the clone manufacturers pay little enough that they can keep costs down. Obviously, if it were this simple, the ink would have been dry on the contracts months ago. I suspect the price ranges (what Apple wants to charge versus what the clone manufacturers want to pay) are too far apart for the two sides to split the difference and call it a day.

  • Some reports, based on wording in an Apple SEC (Securities and Exchange Commission) filing, indicate that Apple might be considering dropping the clone licensing program entirely (although Apple would continue to honor existing contracts). Although this solution might make sense for Apple on a close-minded financial basis, the public relations nightmare it would cause would certainly be far more damaging. Apple just put a lot of effort into a positive PR move with the Microsoft announcement (see TidBITS-392); to destroy that with a move that would eliminate the clone manufacturers is asinine.

[In the text at the URL below, search for "Mac OS licensing" to find the relevant section of the 142K text file.]

<http://www.sec.gov/Archives/edgar/data/320193/0000320193-97-000014.txt>

  • Personally, I'd like to see some creative negotiation. For instance, perhaps Apple could charge less for Mac clones sold into new markets or for innovative hardware solutions that don't compete with Apple's Macs. Or, perhaps the clone manufacturers could promise not to undercut Apple's prices when selling into Apple's existing markets, allowing customers to make purchasing decisions based on other variables, such as bundled software, custom configurations, or technical support.

  • Rumors have surfaced saying that Apple plans to purchase back the Mac OS licenses from Power Computing, Motorola, and/or other licensees. I suppose it's a possibility, but one that makes little sense to me. Power Computing isn't going to close shop just because it can't make Macintosh clones any more, so why would Apple pay $100 million or so to turn Power Computing into a PC clone manufacturer? That's twisted.

Rumors, Reactions, and Events -- The primary reason that we've written almost nothing about this situation in TidBITS is that there has been almost no actual news about it. Rumors and speculation have run rampant, of course, as has overblown rhetoric. Here then are some responses to some of the more common rumors and beliefs and the few actual events.

  • Power Computing president Joel Kocher, previously of PC clone manufacturer Dell Computer, resigned last week, reportedly because he had urged that Power Computing sue Apple for breach of contract. Power Computing's board of directors seemingly disagreed, and Chairman and CEO Stephen Kahng is once again negotiating with Apple. Power Computing is known for its in-your-face marketing campaigns, but its attempts (encouraged by Kocher?) to rally the Macintosh community against Apple in this situation have met with mixed results. Other clone manufacturers have kept a much lower profile.

  • Apple has notified the clone manufacturers that it won't certify CHRP machines (or machines based on the new PowerPC 750 chip) as Mac-compatible while it reviews licensing agreements. Without certification, the clone manufacturers (notably Motorola, which is set to ship CHRP machines in September, reportedly with or without certification) cannot label their machines as Macintosh-compatible. Given Motorola's and IBM's roles in developing and manufacturing the PowerPC chip and CHRP itself, dropping CHRP certification or support wouldn't appear to be a simple decision for Apple. I can't imagine that Apple dares to anger Motorola and IBM in that way, since the companies are two of Apple's most important partners.

  • One cloudy area surrounds the issue of innovation. For the most part, clone manufacturers haven't pushed the Mac platform in interesting ways (short of using faster chips before Apple). This lack of innovation has caused conflict with Apple, but at the same time, Apple hasn't allowed the clone manufacturers to innovate in many ways, such as in the notebook computer market. Failing to certify CHRP machines would also prevent the clone manufacturers, most notably Motorola and UMAX, from creating innovative new Macs.

  • Various calls for action and petitions have circulated on the Internet. Almost all seem to come down on the side of the continuation of cloning, which is good, but many ignore the fact that there is no easy solution. Cloning both solves and creates problems for Apple, and as much as I and most Macintosh users want the clone manufacturers to survive, few people seem to have considered what would happen to the clone manufacturers if licensing harms Apple too badly. After all, the clone market dries up if Apple eliminates clone licensing, but it also dries up if clone licensing eliminates Apple.

<http://www.clone.alwaysapple.com/>
<http://www.maccentral.com/news/aug15.shtml#mandate>

  • Comparisons with the licensing of Microsoft Windows 95 to PC clone manufacturers aren't particularly relevant since Microsoft doesn't manufacture PC clones and has built its entire business model around software. In contrast, Apple is a systems company and although it makes some money from software sales (such as the 1.2 million copies of Mac OS 8 that sold in the first few weeks of distribution), most of Apple's revenues come from hardware sales.

  • I've seen numerous comments about how individual users will switch to Windows 95 if Apple eliminates clone licensing. In my view, that's an inane decision. If you have a real reason to buy a Windows machine, that's fine, but to throw away years of experience and potentially thousands of dollars of software and hardware to protest a business decision that probably doesn't have the slightest effect on you makes no rational sense. In the end, you must always buy a computer because it's the right computer for your needs, not because the salesperson is cute or because the company that makes it has a neat logo. It's like the standard rule for deciding when to buy a computer. You buy the best computer for your needs when you need it, since the price will always drop and the performance and features will always improve. If a Macintosh is still the best computer for your needs and you need a computer now, then you should buy one. If the Macintosh is not the best computer for your needs then you shouldn't buy one. You're buying a computer, not investing in a company. It's as simple as that.

  • Developers of Macintosh software have expressed serious concern regarding clone licensing, and for them, it makes perfect sense. The primary goal of clone licensing was to "contribute to the proliferation of the Macintosh platform," which translates directly to a larger potential market for software. If Apple pulls back on clone licensing, Macintosh developers will have to revaluate the potential future market for Macintosh software. Since Apple hasn't proven capable of expanding the Macintosh market by itself in recent years, developers may have trouble justifying further Macintosh development without clone manufacturers.

Conclusions -- To be honest, I don't believe there's much to conclude about the current state of clone licensing, other than it's a difficult situation and that no party is acting all that unreasonably. Both Apple and the clone manufacturers want to stay in business and continue to make money, and we can only hope that they can come to an acceptable compromise. Neither of the other options, the cessation of Mac OS licensing or Apple caving into the clone manufacturers' demands, are attractive for the long-term health of the Macintosh platform. And the health of the Macintosh platform is, after all, what everyone should have in mind.