Apple-Microsoft Deal Ends Rivalry


The cold war of computing thawed Wednesday when desperate Apple Computer Inc. grabbed the hand of its sworn enemy, Microsoft Corp., in an alliance that stunned the industry but elated investors.

The agreement, which includes a $150-million investment in Apple by Microsoft, capped a series of moves that, combined, represent one of the most dramatic turns in Apple’s storied history.

The struggling company, which has lost more than $1.5 billion over the last 18 months, also rebuilt its beleaguered board of directors. The company added a crop of heavyweights topped by Apple co-founder Steve Jobs and Oracle Corp. Chief Executive Lawrence Ellison while ejecting company co-founder and longtime kingmaker A.C. “Mike” Markkula.


For Apple, the deal provides a critical vote of confidence and assurance that software will continue to be available for the Macintosh. Microsoft gains access to a potentially vast group of new users of its Internet software, and also helps assure the survival of a key customer.

Analysts cautioned that the alliance and other changes are no cure for Apple’s problems. But the moves restored a degree of optimism to a company that seemed caught in a perilous fall.

Jobs delivered the news during his keynote speech at the MacWorld Expo trade show in Boston Wednesday morning. Many of the 2,000 assembled Apple loyalists gasped and booed when the Microsoft alliance was unveiled.

“We have to give up this notion that for Apple to win, Microsoft has to lose,” Jobs said, struggling to quiet the crowd. “The era of setting this up as a competition between Microsoft and Apple is over. This is about getting Apple healthy.”

The unlikely deal was crafted by two titans of the computer industry who have clashed on both style and substance for two decades. Jobs is the charming, intemperate whiz kid who talked of revolutions even when he was co-founding Apple in his Silicon Valley garage in 1976.

Microsoft Chief Executive Bill Gates is the archetypal nerd, a Harvard dropout who methodically built the most powerful empire in the computer industry.


In the past, Jobs has often publicly chided Microsoft, saying its ideas and its products are inelegant and unoriginal. But Jobs called Gates about a month ago seeking a compromise, Apple executives said.

Gates Addresses a Wary Crowd

The two men were in harmony Wednesday, with Gates--the richest man in the world, according to Forbes magazine--addressing the suspicious MacWorld crowd via satellite.

“It’s very exciting to renew our commitment to the Macintosh,” Gates said. “We think Apple makes a huge contribution to the computer industry and look forward to helping out.”

As part of the alliance, Redmond, Wash.-based Microsoft pledged to continue offering the latest version of its best-selling Microsoft Office software for Apple’s Macintosh computers for the next five years.

That pledge, and the $150-million investment in Apple nonvoting stock, is meant to reassure Apple customers and software developers who have become increasingly nervous about the Cupertino-based company’s future.

In return, Apple agreed to make Microsoft’s Internet browser, called Internet Explorer, the primary means of surfing the Net on all Macintosh computers. That portion of the deal is a coup for Microsoft in its competition with Netscape Communications for Internet supremacy.


“This is a good day for the Apple platform,” said James Staten, an analyst at Dataquest in San Jose. “But this is the day that Apple sold its soul.”

Such dark appraisals reflect a decade of conflict between the two companies and their legions of followers, whose respective devotions often seem to take on religious proportions.

Apple revolutionized computing when it introduced the Macintosh in 1984, enabling people to operate computers by pointing and clicking a mouse. But it failed to introduce a significant upgrade for years, and refused to license its software to other computer makers.

Meanwhile, Microsoft’s Windows operating system slowly caught up, and came to resemble the Macintosh interface so closely that Apple sued for copyright infringement.

Microsoft won both the legal battle and the broader conflict. Today, Microsoft is the world’s largest software company, and its Windows program runs about 90% of the world’s computers.

Meanwhile, Apple entered a downward spiral. Once the second-largest computer maker in the U.S., it now ranks ninth, according to Dataquest. The company’s worldwide market share is now 5.3%, down from 7.9% a year ago.


Demonstrating the market’s respect for a blessing from Microsoft, shares of Apple surged $6.56 to $26.50 on Nasdaq, a 33% rise. Microsoft added 13 cents to $143.44 on Nasdaq.

Despite the flurry of announcements, a number of critical questions remained unanswered.

Apple did not name a new chairman or chief executive, positions that have been vacant since Gilbert Amelio was ousted last month. Jobs, rumored to have turned down both posts in recent weeks, said a chairman would not be named until a CEO is selected, a process that could take months.

Also, Apple did not settle a simmering feud with companies that make clones of Apple’s flagship Macintosh computers.

And analysts said that even with Microsoft’s backing, Apple’s return to health is far from certain.

Apple Faces Added Competitive Pressures

Thousands of talented Apple employees have been laid off or left the company in recent years. And Apple faces ever greater pressure from rivals, such as Compaq Computer Corp., that have made huge strides in bringing down production costs.

“Apple is still too large in terms of operating expenses,” Staten said. “Whoever comes in will have to make some further cuts.”


But those troubles were barely a distraction from the MacWorld event, where Jobs’ speech was seen by some as the public return of Apple’s prodigal son.

Jobs, the creative force behind the Macintosh before he was fired, returned as an advisor last year when his company, Next Software, was purchased by Apple for $425 million.

For his speech, Jobs wore a long-sleeve T-shirt and vest that seemed to underscore a departure from the more button-down approach of Amelio. The main message was that Apple will no longer go it alone in the PC wars.

“Apple lives in an ecosystem,” Jobs said, “and it needs help from other partners.”

Ironically, as leader of Apple in the late 1970s and early 1980s, Jobs adopted the independent approach that later led to its dramatic decline. That history seemed to confer on Jobs the perfect credentials to break the news of the alliance with Microsoft.

His views found support on the MacWorld show floor where, even among Macintosh loyalists, Microsoft-bashing was little in evidence.

“There are still some people who think that Apple can evangelize the world, but those days are past,” said Jonathan Kurtzman, a Boston-based management consultant and Macintosh user group volunteer.


Going forward, Jobs said Apple would focus on its traditional strongholds: education and content creation, including desktop publishing and Web site design. Company executives said Microsoft’s $150-million investment would probably be used to reinforce Apple’s position in those markets.

While the Microsoft alliance captured the bulk of the attention Wednesday, Apple’s overhaul of its board of directors may have even more long-term impact.

Gone are three members of a board that had been criticized for lacking understanding of the computer industry, and being unable to hire an effective chief executive.

Among the casualties was Markkula, a former chairman and the only one of the three co-founders to have remained with Apple throughout its 21-year history. Markkula and former Apple chief John Sculley--whom many blame for the company’s long-term decline--fired Jobs in a legendary boardroom fight in 1985.

The new board members include Jobs, Ellison, plus Jerome York, former chief financial officer at Chrysler Corp. and IBM Corp., and William Campbell, a former Apple executive who is now chief executive of Intuit Corp., maker of best-selling personal finance software.

With that combination, analysts said, the board will have a plentiful supply of leadership and ideas, and no shortage of egos.


Ellison Is Fierce Critic of Gates

Ellison will be watched with particular attention by Silicon Valley observers. A close friend of Jobs, Ellison earlier this year publicly toyed with the idea of a buyout of Apple. He is also a fierce critic of Microsoft’s Gates.

But Campbell dismissed suggestions that the new board could be troubled by the various agendas of its members.

“The ax they have to grind is only that of trying to make the company better,” Campbell said in a telephone interview. “I think this will work very well.”

Two members of the old board will remain: Gareth Chang, vice president of Hughes Electronics, and Edgar Woolard, chairman of DuPont.

Woolard, rumored to be a top candidate for board chairman, ruled that out in an interview.

“I’m not interested in the job, and I don’t think I’m the best person,” he said.

* WIDE IMPACT: How the deal helps Microsoft and Macintosh users. D1, D10