Apple's New Years Hangover: Lawsuits, Hackers

Company's 2007 starts with legal woes, hackers

Apple Computer in the past decade has risen, phoenix-like, from the ashes of its own managerial incompetence to attain new heights of profitability (up 27 percent in fourth-quarter 2006 to $546 million), market capitalization ($74 billion at last count) and plain old street cred (traffic to Apple’s iTunes music store beat Microsoft’s Zune 30 to 1 on Christmas Day.)

But the ball hadn’t even started its descent in Times Square before CEO Steve Jobs and other Apple execs were facing a New Year’s hangover of antitrust lawsuits, software holes, and a nagging SEC investigation into stock-option irregularities. Together, the lawsuits and hacks threaten to undermine longtime strengths for the company. But one expert says pressure to innovate, rather than courtroom challenges, are the biggest threat to Apple’s future.

The glum news about Apple started well before the holidays, when the company announced on June 29 that an internal review had discovered irregularities related to the issuance of stock-option grants made between 1997 and 2001, including a grant to CEO Jobs.

In an SEC filing on Dec. 29, Apple said its internal investigation had cleared Jobs of wrongdoing (he didn’t materially profit from his backdated options). But the company warned that two other executives might not be so lucky: former CFO Fred Anderson and former general counsel Nancy Heinen, according to published reports.

That same day, Apple disclosed that it was facing several lawsuits. One, Tucker v. Apple Computer filed in July, challenges the copy-protection technology that ties its iPod player to the iTunes music store. A second, filed by PhatRat Technology in October, alleges patent infringement around technology Apple recently announced with shoemaker Nike that lets athletes track performance data on their iPods. A third, Vitt. v. Apple Computer, filed in November, is a class-action suit alleging problems with the iBook G4.

Adding insult to injury, in January Apple became the focus of the latest “bug of the month” project by two well-known hackers: LMH and Kevin Finisterre. The Month of Apple Bugs, or MOAB, project is modeled on LMH’s successful “Month of Kernel Bugs,” and promises to release each day in January a previously unknown hole in Apple software, or products that run on Apple’s OS X operating system. So far, the project has dredged up a serious, remotely exploitable hole in the Apple Quicktime player software, and the VLC open source media player, which runs on OS X.

Still, with Macworld and the CES consumer electronics show due up next week, Apple was unbowed, its Web page prominently featuring a message welcoming 2007, and promising that “the first 30 years were just the beginning,” a reference to the company’s 30th birthday, celebrated in March.

Josh Bernoff, a senior analyst at Forrester Research, said Apple could be ready to launch the next killer gadget, like a rumored Apple iPhone cell phone, or iTV, a Tivo-like digital recorder and home media center that the company has prototyped.

Although legal woes are unlikely to slow Apple down, the company could stumble if it fails to continue innovating as well in the next five years as it has in the previous five, Bernoff said.

“I think the real story is not the options or the antitrust or the bugs. The real question is: ‘Will the stuff they announce at Macworld be any good?’”