(FORTUNE Magazine) – THESE DAYS, THAT bite out of the side of Apple Computer's well-known logo suggests that the company's days in the Garden of Eden are over. Plummeting prices and copycat competition are threatening to turn Apple's core business rotten, forcing the company into a strategic volte-face. After more than a decade of making high-priced personal computers, Apple has trimmed profit margins and is going for market share. Soon it will bring out cut-price versions of its bread-and-butter Macintosh -- and stoop to selling them at Sears. Chief Executive John Sculley has already thrown Apple into a series of liaisons with the company's starchy former archrival, IBM, to work on new kinds of computer chips and software that Apple can't -- or can't afford to -- develop by itself. Looking even further out, the company is staking its future on new products that could take electronics and computing power ever deeper into the everyday lives of consumers. What a shock all the alliances are to formerly devil-may-care Apple. From its founding in 1977 by upstarts Steve Jobs and Stephen Wozniak, the Cupertino, California, company had sailed apart from every other contestant in the PC business, using operating software it refused to share with anyone. But that approach was no longer working. The company was mired in a pattern of starts and stops: Until last year it had introduced four major products -- two hits (Apple II and Macintosh) and two duds (Lisa and Apple III). Apple's earnings bounced up and down accordingly -- off 35% last year, though the company still made a larger profit than any other U.S. computer maker except Hewlett-Packard. The company was slow getting into laptop computers, the ) fastest-growing segment of the industry. Apple's phenomenally successful notebook computer, the PowerBook, made its splashy debut late last year -- two years behind the laptop leaders. Recognizing his plight, last year Sculley cut Macintosh prices 30%, producing a 60% increase in unit volume. That put pressure on profits, so Sculley reduced the staff 10%, mostly in sales, and trimmed the salaries of top managers (including his own) as much as 15%. In March he performed that most utterly predictable of housecleaning chores, a reorganization. To make his executives more accountable, he created a new level of managers in charge of different markets -- education, large business, small business, and consumers -- and pushed R&D and finance down into the product groups.

Sculley explains: ''We looked at ourselves in the mirror and wondered if we had a justifiable business strategy for the 1990s. Our model was one of high margins with huge product differentiation. But growth was slowing. Computers were becoming more of a commodity. And we lost differentiation because of Microsoft's Windows,'' which Apple says markedly resembles its own software. (Flattery or no, Apple is suing Microsoft and Hewlett-Packard, which brought out a similar product, claiming damages of $5.55 billion.) BROADENING the reach of the Macintosh is only a part of what Apple sees as its assault on what could be a $3 trillion market ten years from now. This megamarket will coalesce over the next decade as the borders dissolve between telecommunications, office equipment, computers, consumer electronics, and media and publishing. Starting next year, Apple plans to bring out a slew of digital-technology gadgets focused on the intersections of those industries -- electronic books, electronic organizers, electronic note takers, display telephones, personal communicators. Sculley argues that software is the key to making digital products useful and easy to use -- and software is Apple's forte. Apple got to be a $6 billion company by selling $2,000 machines, so electronic gadgets that might bring in, say, $250 apiece may seem an odd basis for further growth. Apple would have to sell eight million of them a year to add $2 billion in revenues. Sculley admits, ''The core business for Apple today, and five years from now, and ten years from now, will be the Mac.'' Still, Richard Shaffer, editor of the Computer Letter, believes the personal electronics devices could eventually help Apple double its revenues. He says the size of the manufacturing job isn't the problem, because others can do it for Apple (which is Apple's plan). The question mark is marketing. He asks, ''How do they identify and deliver products to customers at prices under $1,000?'' Before Apple launches its electronic gadgetry, it wants to strengthen its position in the consumer market. Apple's wedge into the home will be the new cut-rate Macintoshes, due out later this year. Macs for the home won't be as fast or have as much memory as the standard line, but Sculley insists they won't be half-baked do-nothing variants of the real thing, like IBM's disastrous PCjr. They will come with software already loaded, and probably cost less than $1,000. In Apple's grand plan for the future, as the borders blur between computing and other industries, new classes of products and services will be born. Apple is now designing single-purpose electronic devices that are really computers in disguise. The devices will be small, making use of what Apple has learned about miniaturization from its PowerBook computer launch. They will manipulate images or data or words or sound in digital form, and many will be able to communicate over a wireless telephone network. The new digital devices will show up in the workplace before hitting it big in the home market. One likely product: a multimedia reader, the size of a compact tape recorder and weighing a pound or two. It will consist of a CD drive, a flat-panel video display, a microprocessor, a memory, and other chips that vary with the application. An aircraft technician, for example, could use the device to study and interact with a video on how to repair an engine. Other machines that Apple might develop: an electronic scratch pad with a built-in cellular phone that can record handwriting and transmit it to any fax machine, and a phone with the innards of a personal computer that serves as an electronic Rolodex. Apple sees yet another opportunity in its software, which the spread of digital technology could help make more profitable. As the telephone network installs fiber-optic cable and begins sending messages in digital code, it will increasingly speak the language of computers. David Nagel, head of Apple's advanced technology group, says, ''Ten years from now we might distribute all our software electronically. People could try it before buying. Or we might support a home-shopping system where users look at merchandise on a monitor.'' < BUT BACK to current reality, at the heart of which are questions about the company's new pal, IBM, and what the friendship means for Apple's soul. ''We call it the deal of the century,'' says the director of Macintosh software, Roger Heinen Jr. Actually it is not one deal but several: -- An alliance to create the ''PowerPC,'' which will let Apple use IBM's superfast RISC technology (for reduced instruction set computing). A RISC chip will help the Macintosh do new things, like reading scribbles. -- A joint venture called Taligent to develop a new operating system that will enable independent software companies to write programs more easily. That could increase sales of the Macintosh. -- A joint venture called Kaleida (pronounced like ''collider,'' in Brooklynese) to develop multimedia technology that will merge sound, data, graphics, and video in one new supergadget. -- The PowerOpen project, which will develop a new version of the Unix operating system used in most workstations and in other high-end computers. Apple wants to start making machines for those markets. -- A project to help Apple and IBM machines work together better, which will help Apple with business customers. Apple also wants to make servers, medium- size computers that act as nodes connecting desktop computers. The RISC chip brings Apple the most tangible benefit. If all goes according to plan, in time it will be the microprocessor at the heart of every Mac. The chip, which won't be ready for a couple of years, should eventually be cheap enough to use in personal computers. Motorola, the current supplier of all of Apple's chips, will work on the development of the RISC chip and manufacture it. Taligent (the name is a combination of talent and intelligent) is a continuation of an Apple project, code-named Pink, that aims to streamline the writing of software and make it easier for users to customize their own programs. The so-called object-oriented operating system will let software writers plug standard commands into a program, like books into a library shelf. Today the command for sending a file to a printer in a particular way might entail writing 30,000 or 40,000 lines of computer code. With an object- oriented system, once a software writer specifies a common operation, the program itself writes the code. Why an alliance? Apple could have bought a RISC chip from any of a number of producers, including Sun Microsystems, MIPS, and Motorola. The Taligent project was Apple's idea. Nearly all of the 150 software engineers now working for Taligent, which put up its nameplate in March, are former Apple employees working in their old offices. Apple's singular strength is its software, which makes its computers such a pleasure to use. Why share this expertise with Big Blue? ''Taligent was much too risky for Apple to undertake alone,'' Sculley argues. ''It will cost hundreds of millions of dollars. And we thought that if we were alone, we wouldn't be able to grow fast enough to attract content providers'' -- the independent software writers without whom even the fanciest hardware is useless. The IBM deal helps Apple show the business customers it is courting that you don't have to be a renegade to buy Apple. In other words, Apple is saying, ''We're working with IBM. Our machines can too, right in your office.'' One former Apple executive says, ''It's a brilliant political maneuver.'' So Sculley is looking pretty smart, yes? But that doesn't mean he has outmaneuvered IBM. Far from giving up something by bringing in a pair of partners on the RISC project, IBM locks in a big user in Apple, while Motorola bears the cost of tooling up for production of the chip. At Taligent, the engineers may be from Apple, but IBM could control the board. The swing vote belongs to Taligent CEO Joseph Guglielmi, who put in 30 years at IBM. That doesn't necessarily mean he will side with IBM, of course, but Blue blood is Blue blood. If IBM does have the greater clout, Taligent may feel pressure to produce an operating system that favors developers of software for corporate applications rather than individual users. A lingering question: How will Apple's new way of doing business affect the special qualities that inform the company's culture? Employee after employee extols ''Apple magic.'' They speak of the sense of empowerment felt by almost everyone who works there, and say that even lower-level workers on a development team can delay release of a product if they don't think it is ready. The good feeling is palpable in the relaxed atmosphere and easygoing enthusiasm that fills the headquarters in Cupertino. David Nagel, for one, doesn't think the IBM alliance will change this sensibility. ''When we get together with the IBM guys, they look more like Apple people than we do like IBM people. Culturally, IBM will be moving a lot closer to Apple.'' But Sculley sounds like an IBMer when he summarizes the reasons for his new strategy: ''Our cost structure was out of line. We didn't know how to meet schedules. We were a benevolent company that sponsored people to work on things they were interested in.'' If Sculley's strategy works, ten years from now Apple could have an impressive piece of the new-computerized-devices pie by building on its enviable gift for making machines that are easy and fun to use. This summer Apple's lawsuit against Microsoft and H-P should finally go to trial; if the court accepts that the ''look and feel'' of computer software can be copyrighted, Apple should win. And a new operating system that helps make software easier to produce could keep the polish on Apple's computer business too, by making its desktop machines ever more versatile. With luck, Apple could hold on to the magic -- even as it sups with the company it once looked on as the Devil.

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