Five years after Accidental Empires was published in hardcover and four years after the paperback, we got a chance to do a somewhat revised paperback edition to go with Triumph of the Nerds, my Channel 4/PBS miniseries based on the book. Revision may be too strong a word, because all I was allowed to do was add two extra chapters at the end. This gave me a chance to catch up with some of the major characters, correct a few mistakes, explain what had happened in the intervening half-decade and — oh by the way — finally say something about the Internet.
BUT WAIT, THERE’S MORE!
January 1996: Five years have passed since I finished writing this book, and much to my relief the world of computing continues pretty much along the course I’ve already described. The trend toward graphical desktop computing and away from the mainframe is, if anything, accelerating as America and the world finally realizes the vision of Xerox PARC, circa 1973. Old-line makers of big computers—companies like IBM, DEC, Prime, and Wang—are desperately reinventing themselves or dead. Makers of me-too PC clones are failing by the dozen as commoditization and competition drives their profit margins toward zero. The Japanese and Koreans still aren’t making any money selling PCs and are in fact coming under siege in their own countries by leaner and far more efficient American manufacturers like Compaq and Dell. And as predicted, the companies that are doing really well are those that make software, advanced semiconductors, or leading-edge hardware.
But a few things have changed in five years, most of them for the better. Bill Gates of Microsoft has finally opened his wallet, giving more than $18 billion to charity (I take personal credit for that one). Bill married, too, defying my prediction that he would stay single. But the wedding to Microsoft product manager Melinda French, which took place on January 1, 1994, at first appeared to be more merger than marriage, since it came mainly in response to a demand by Mary Gates that she see her son married in her lifetime (she died of cancer five months after the wedding). There may be room after all for true love in a digital world, however, because 1996 saw Chairman Bill finally become a father, though he was back at work that afternoon.
Five years ago I was among the first to predict IBM’s fall and Microsoft’s subsequent rise, both of which came to pass. We’re in the Age of Microsoft and the 17,000-plus minions of Bill Gates rule the world of personal computing more completely than IBM ever did. Eighty-five percent of the computers in the world run Microsoft operating systems. More than half of the money spent on computer applications goes directly to Microsoft, which is by far the largest and most profitable software company in the world.
The Microsoft culture has changed a bit as the company and its founders age. Bill Gates has gone from gang leader to father figure to godhead. He’s rarely seen around the Microsoft campus these days, not because he isn’t working there, but just because the place is so darned big. Bill’s Lexus is still parked every day in Microsoft’s only assigned parking space—assigned not so much because Bill is supposed to be better than you or me, but because Bill is richer than anyone. The richest man in the world has four television cameras trained on his car just in case that’s where he is abducted by kidnappers. And it could happen: the 1993 abduction of Chuck Geschke from the Adobe Systems’ parking lot brought a new sense of reality to high-tech honchos everywhere.
The Age of Microsoft dates, I believe, from a moment in 1989 when executive vice-president Steve Ballmer borrowed some money. Prior to that moment, Microsoft had all the elements necessary for global digital dominance except the will to make it happen. Ballmer’s mortgage signified that there was finally a will to go with the way.
Ballmer was Bill Gates’s Harvard buddy and Microsoft’s twentieth employee. When Ballmer joined Microsoft in those early days, he didn’t even have an office, but was granted space at one end of the sofa near Bill’s desk. Ballmer, a former brand manager at Procter & Gamble, represented Microsoft’s new business orientation, an orientation that surged after 1989. By that year, Ballmer was running Microsoft’s operating system business and, just as Bill had, he came to the blinding realization that IBM no longer controlled the PC business—Microsoft did. At that moment of clarity, it was not hard to look ahead and see that careful control of the operating system business could yield enormous profits. Microsoft, which was then a $1 billion company, was poised for incredible growth—although only a few people knew it at the time.
So Ballmer took a chance. He borrowed everything he could against his Microsoft stock, stock options, and his every other possession. In all, Ballmer was able to borrow $50 million and he used every cent to buy more Microsoft shares. This is radical behavior for a PC executive. Most of these folks are continually engaged in selling their company stock, not buying it. Bill Gates, for example, sells 1 million Microsoft shares per quarter, yielding an average of $300 million per year for outside investing, building houses, buying works of art—you know, the usual. High-tech moguls like Gates are usually concerned with the orderly diversification of their wealth; in contrast, Ballmer was betting his entire fortune on Microsoft. This is the only instance I can recall of such behavior.
There’s something about betting every penny you have in the world that helps with focus, and Microsoft has been very focused during the 1990s. As a result, Steve Ballmer is now Microsoft’s third billionaire, joining Bill Gates and Paul Allen. His shares have increased in value by twenty times since 1989.
Alas, there are hardly any other software billionaires these days and that, too, can be traced to Microsoft. Fearing the growing power of Microsoft, the PC software industry has been madly consolidating and restructuring, trying to find through alliances and mergers some way to respond to what Pete Peterson not long ago described to me as “the menace of Microsoft.”
Pete Peterson was until mid-1992, head of nearly everything at WordPerfect Corp., makers of what was then the most popular word processing software for PCs. Peterson and his wife and many, many children still live right next door to WordPerfect headquarters in Orem, Utah. From his living room, Pete can see straight into his old office. WordPerfect was late in making its jump to writing Windows software, preferring instead to stick with its immensely profitable MS-DOS word processor. By the time Peterson and his company began to pay real attention to Windows, Microsoft already had a Windows word processor on the market and Windows applications had suddenly turned into 30 percent of the world processing business.
WordPerfect for Windows finally appeared in early 1992, at a time when Microsoft was already shipping the second generation of its Word for Windows—clearly (and for the first time ever) a superior product to WordPerfect. Technically outgunned, WordPerfect founders Alan Ashton and Bruce Bastian, who each owned 49 percent of the company, proposed to spend some of the more than $100 million they had in the bank to try outmarketing Microsoft. Peterson, who owned only 1 percent of WordPerfect, wanted to put the money into further product development, arguing that not even WordPerfect could outmarket a company that had both better technology and all the money in the world with which to promote it. Peterson was right, but he lost the fight. Ashton and Bastian fumbled their attempt at running the company and were soon so intimidated by Microsoft that they sold WordPerfect to Novell in late 1993 for $850 million.
What we are seeing is just the start of a process of maturation that will take several more years to finish. It parallels what happened in the American automobile industry earlier in this century. In 1920 there were about 300 American companies building automobiles. By 1930, this number had dropped to 25. By 1940 there were 10. Today there are 3. The same thing is happening in the software business, only faster. We took seventy years to accelerate from zero to 100 million cars, but we torqued to 100 million PCs in less than twenty years. So expect the software shakeout to take five years, tops, starting back in 1993.
The shakeout in the American automobile business began when Alfred Sloan brought together a dozen car companies under one name—General Motors—creating a company so big, with such economies of scale, that the other car companies had to grow too, or else be unable to compete. In the software business of today, Microsoft is General Motors, with nearly half the industry sales. Novell is Ford. Lotus Development used to be Chrysler until they sold out to IBM in 1995. Everyone else is either a merger candidate, a maker of expensive custom cars, or doomed.
In 1993 all the smaller companies wanted to merge with Novell, because Novell was considered the only company that could stand up to Microsoft. Even Lotus wanted to merge with Novell, though Lotus CEO Jim Manzi’s ego demanded that we call it Lotus buying Novell, rather than the other way around.
Alas, after spending $850 million for WordPerfect and $150 million for Borland’s Quattro Pro spreadsheet, Novell chairman Ray Noorda seemed to lose all his smarts. Novell embraced Windows, sure, but in doing so announced that it would no longer upgrade its DOS word processor, throwing millions of customers into the arms of Microsoft. Two years of losses later, Novell put WordPerfect up for sale again. Corel bought the dregs for $150 million.
Mistakes were made by many Microsoft competitors, not just WordPerfect. Take Lotus Development, where Manzi didn’t like Gates, didn’t want Windows to succeed, and thought that having his company ignore the Windows market would simply make that market go away. It didn’t. By the time 1-2-3 for Windows hit the market, it was three generations behind Microsoft’s Excel spreadsheet and hard put to catch up.
There is a difference, though, between WordPerfect and Lotus. Although both companies were late getting into the Windows market, WordPerfect (now Corel) has a much greater likelihood of catching up with Microsoft again, because those nice Mormon kids who hike down the road from Brigham Young University each year after they graduate are used to doing as they are told. At Lotus, not doing as you are told seems to be rewarded; that will continue to hurt the company.
According to programmers still on the job at Lotus, if you meet your deadlines for producing new applications, nobody notices. The way to generate five-figure bonuses and executive adoration is not to meet deadlines, but to miss them. Once the situation looks truly hopeless, a few weeks of all-nighters, appearing in the office sloppy and unshaven, generally produces a product that is late, often missing a few features, but is gratefully received. Company reorganizations and layoffs, which always slow product development, are seen at Lotus as a tool for bonus generation, not a means of saving money or increasing efficiency for the company.
It’s a corporate culture like this that explains how Manzi could take control of Lotus in 1985 at a time when the company was larger than Microsoft, and ten years later have the company be one quarter Microsoft’s size. In that time Lotus’s share price doubled while Microsoft’s rose fortyfold. Even in a rising industry, Manzi was a failure, which explains why IBM was willing to take a chance on a hostile takeover of Lotus in July 1995.
There’s an adage in the computer business that the hostile takeover of a software company is impossible. What is a software company, after all, but a rented office filled with nerds? Attack the company and the nerds will flee, taking with them the real corporate assets—their programming skills. So why would an old-line company like IBM—a company that had never mounted a hostile takeover in its seventy-year history and certainly wasn’t known for radical thinking of any sort—mount just such an attack on Lotus Development Corp., offering $3.3 billion for the spreadsheet pioneer?
This kind of takeover had simply never happened before. In making its tender offer for Lotus, IBM was treading new ground and, from a traditional perspective, it was taking a terrible risk. At least that’s the way things looked.
The fact that staid old IBM was mounting the first such takeover was especially odd. Oracle Systems might make such a move, or maybe even Microsoft, but IBM? This strange move suggested that there is more here than might be expected, and in fact it came down to semantics. There was a takeover in progress, that’s for sure, but IBM was counting on the technical geniuses at Lotus viewing it as a friendly takeover. The only hostility IBM wanted to express was toward CEO Manzi, who opposed the deal.
The personnel of software companies can be generally divided into two groups—techies and suits. Manzi, an M.B.A. who came to Lotus originally as a consultant from McKinsey &. Co., was a suit among suits, proud in the past to the point of arrogance about how he didn’t understand the inner workings of his company’s products—and about how he didn’t have to understand those workings. He had techies for that. This is not the sort of attitude to endear the boss to his programmers, a group that generally see suits as a necessary evil kept around mainly to count the money.
There was no doubt Lotus was for sale: Manzi was widely known to have offered the company to AT&T in 1994 for $100 per share. So the issue was not management continuity, but price. Manzi, who was also Lotus’s largest shareholder, wanted more than the $60 per share being offered by IBM.
Even at $60 per share, this would have been the biggest software merger ever, but what IBM wanted was neither Lotus 1-2-3, the venerable PC spreadsheet program, nor any of Lotus’s other PC applications. IBM wanted a Lotus product called Notes, the leading example of a new software category known as group-ware—software that allows groups of workers to communicate with one another and access the same data. Lotus and IBM were both confident that groupware would be central to businesses in the next decade.
Ironically, IBM had once owned a piece of Notes. Unsure of Notes’ success, Manzi sold to IBM in 1991 the right to a third of all Notes future revenue for $40 million. A couple of years later, when Manzi realized how strategic Notes was to Lotus’s future, he retrieved these rights from IBM by repaying the money and promising to produce applications for IBM’s OS/2 operating system.
Now IBM wanted back what it once had, along with the other two thirds. The price increase from $40 million to $3.3 billion just reflected how much the PC software market had changed in four years and how vital to its future success IBM saw Notes.
IBM was not the only company attracted to Notes. AT&T liked Notes, too. The only big player in the software business guaranteed not to be interested in Lotus was Microsoft, which would face antitrust problems from its head-to-head competition with Lotus in the spreadsheet, word processing, and database categories. But in fact, Microsoft had already had its chance to buy Notes: Manzi offered the whole product to Microsoft in 1989 for $20 million, but Microsoft was then willing only to pay $15 million.
The result of all this wrangling is that IBM—even an old and tired IBM—still tends to get what it wants. Manzi changed his mind in exchange for a slightly higher price per share and a golden parachute deal. He left IBM four months later with $87 million, which is a lot of money, but perhaps a tenth of what he’d have had if Lotus had been sold to Microsoft back in 1985, as detailed in chapter 8.
As for IBM, it is easy to forget, given all the bad press the company has received in the last few years, that IBM is still the biggest computer company in the world. What IBM isn’t, anymore, is the biggest personal computer company. IBM still sells around $9 billion worth of PCs and peripherals each year, but its role as a leader in the PC industry has become inconsequential. Compaq, Apple, and Packard Bell are bigger. While the people of IBM slowly realized that something has changed, their company actually lost its controlling position in the industry back in 1987. IBM is so big and so slow to come to any understanding—much like a brontosaurus that needs an extra brain at the base of its tail just to keep those nerve impulses flowing—that it took almost six years for the truth to sink in.
Bill Gates saw the failure of OS/2 1.0 in 1987 as his chance to take the technical leadership of the PC industry away from IBM. He accomplished this in the late 1980s by introducing successive versions of Windows, each better than the one before. Gates replaced a hardware standard with a software standard, which sounds odd but is actually the way these things are nearly always done.
The trend in information technologies is to first solve a problem with expensive, dedicated hardware, then with general-purpose nondedicated hardware, and finally with software. The first digital computers, after all, weren’t really computers at all: they were custom-built machines for calculating artillery trajectories or simulating atomic bombs. The fact that they used digital circuits was almost immaterial, since the early machines could not be easily programmed. The next generation of computers still relied on custom hardware, but could be programmed for many types of jobs. Today’s computers often substitute software, in the form of emulators, for what was originally done in custom hardware.
That’s what Microsoft has done to the PC business. It doesn’t matter anymore whether you have a PC, ISA, EISA, PCI, or Micro Channel bus, because the software looks the same. The real work is not accomplished, after all, by the type of computer, video card, or floppy drive you have, but by the software. And that software is generally some version of Microsoft Windows. PC users now buy more Windows applications than MS-DOS applications, so Windows is now the clear standard, a switch that Microsoft made final by dropping DOS altogether as a separate product when Windows 95 shipped. Oh, there’s a version of MS-DOS (DOS 7.0) lurking inside Windows 95, but Microsoft pretends there isn’t.
IBM didn’t learn the lesson that it no longer set the PC standards until years had passed and its market share had eroded from more than 25 percent to less than 10 percent. Over four years the company posted losses of $20 billion and its market capitalization dropped by another $30 billion. The company also changed its leadership, changed its culture, and cut itself in half, but not without a lot of kicking and screaming along the way.
In the fall of 1993, I was personally involved for a moment in the decline of IBM. At that time, the company was reeling from declines in mainframe sales and total failure in both the PC and workstation markets. Chairman John Akers decided to convene a high-level powwow of IBM’s best brains from around the world. They’d meet in a secret retreat and calculate a course out of the current dilemma. And to set the tone for the meeting without actually inviting any outsiders to join in, Akers commissioned a special video production: a TV crew was sent all over America to poll the best minds about what was wrong with IBM and what could be done about it. Somehow, that TV crew landed on my doorstep in California.
We talked for hours, then I sent them to talk with some of my friends. The TV people seemed very excited about what I had to say. But when they submitted their list of interview subjects to IBM’s top managers, the only name struck from the list as unsuitable was mine—Robert X. Cringely. Apparently I had made IBM’s enemies list. The exercise was in vain, though, because Akers was fired before the video was ever completed.
Ironically, what ended Akers’s career and cost IBM so much money was not, as many people suggest, the responsibility of Microsoft. Sure, IBM lost its advantage to Microsoft in the PC business, but that would never have been enough, by itself, to bring down a CEO. Remember, IBM was an enormous company with many business lines—the PC business never accounted for more than 25 percent of total sales for Big Blue, even in the best years.
The truth was that IBM had doomed itself years before. What almost killed IBM was an enormous accounting error. In the early 1980s, a very clever chief financial officer decided that the way to enhance revenue for IBM’s mainframe computer business would be to switch customers from leasing their computers to buying them. As leases ended, customers bought either their mainframes outright or the replacement machine outright, with the result that IBM had an enormous increase in revenue. Sounds great, except IBM finance people made the stupid assumption that these high revenue levels would continue forever. They never anticipated the time when every lease was converted into a purchase. That unanticipated day, which came in the early 1990s, was doomsday for Big Blue.
Still, IBM had plenty of nightmares reacting to the very real menace of Microsoft. Predestined or not, IBM focused intently on the threat posed by Bill Gates. Under Jim Cannavino, who replaced Bill Lowe as head of IBM’s PC operation, Big Blue tried to do a Microsoft-like introduction of OS/2 2.0, its next-generation operating system (actually, this was a case of IBM imitating a Microsoft imitation of Apple). Cannavino also tried to sell OS/2 direct to users over the telephone, but no provision was made initially for accepting payment by check or purchase order (an oversight that any company might have made, but then any other company would have quickly fixed the problem; for months, IBM didn’t). Cannavino and Akers also came up with a plan over lunch one day to have IBM employees sell OS/2 to their friends and neighbors in a kind of digital Amway operation. Though I asked my 500,000 InfoWoild readers about this several times, nobody ever reported buying OS/2 from his or her neighbor.
Covering your ass became the watchword at IBM, where Cannavino was awed by chairman John Sculley’s setup at Apple. Sculley had been able to make mistakes for years with impunity, sending a new squadron of subordinates down in flames, instead, at each misstep. Cannavino once asked in an IBM meeting, “How do I get a setup like that?”
Cannavino’s imitation of Apple was called the IBM Personal Computer Company. In mid-1992, IBM effectively spun off its $9 billion personal computer division, giving it greater autonomy to do whatever it would take to compete in the cutthroat PC business, even if that meant taking actions that might hurt other IBM divisions. While Cannavino headed the total operation, he carefully Sculleyfied the new company by placing himself at the top as a kind of holding company chairman, with most of the heat being taken by the new president, a thirty-year IBMer named Robert Corrigan. Cannavino was carefully insulated from his own plan. And it worked. Or rather, when it didn’t work—when the IBM Personal Computer Company didn’t meet early goals for production and profitability—it was Corrigan who initially took the fall, not Cannavino. Corrigan survived for only eighteen months; Cannavino lasted thirty. When I interviewed him after his departure from IBM, Cannavino spoke for ninety minutes about his experiences, referring to IBM throughout as “they,” never “we.” A little bitter, perhaps?
What Cannavino had to be bitter about was watching new IBM chairman Louis Gerstner dismantle the company Cannavino had worked at for twenty-nine years. Worse still, from Cannavino’s perspective, Gerstner didn’t consider the IBM veteran a suitable heir. After Cannavino’s departure, Gerstner replaced him as chief strategist with one of the founders of Boston Chicken, a New England restaurant chain. This sort of hire signified Gerstner’s total commitment to change. The old IBM was forever dead. When I visited IBM intergalactic headquarters at Armonk, New York, in the summer of 1995, I couldn’t find a single person wearing a suit and tie.
Turmoil was happening at Apple Computer, too. Despite his carefully crafted layers of protection, John Sculley finally lost his job in 1993. After a decade of bad management and not really understanding the technology he was trying to sell, Sculley was finally killed by his only real attempt at technical leadership—the Newton handheld computer. Newton was Sculley’s baby and absorbed more than $200 million of Apple’s cash before it finally shipped to resoundingly bad reviews early that year.
Newton, which used pen input and handwriting recognition, didn’t do a very good job of recognizing its owner’s handwriting. Worse still, there was no compelling Newton application—no program that, all by itself, justified the purchase of a Newton. Of course there was no compelling application at first for the Macintosh either, which also began its life as a spectacular failure. And just like the Mac, Newton probably will find its compelling application and a certain level of success. But John Sculley won’t be there to see it. Back in 1985, when the Macintosh was Apple’s sales embarrassment, Steve Jobs had taken the fall. But there was no Steve Jobs to be sacrificed in 1993, so Sculley was finally held accountable.
As big companies are wont to do, Apple tried to play Sculley’s departure as a positive event, the retirement of an honored executive who wanted new challenges. First, Sculley gave up his CEO position to Mike Spindler, who had done so much to build Apple’s European organization. Sculley stayed on a few months as chairman, then later retired from that position too. But some Apple shareholders didn’t like the $4 million severance payment Sculley received and filed a lawsuit to regain the money. They also didn’t like the fact that Apple bought back Sculley’s California house and even purchased the Learjet Sculley used on company business (Sculley owned the plane and Apple had leased it from him). Why did Sculley get such a generous settlement, the shareholders demanded to know?
Sculley got such a good deal because he didn’t “retire” at all. Court documents show Sculley was “terminated for cause.” He was fired.
Ironically, Sculley was fired at a time when Apple finally seemed to be succeeding in the overall personal computer business. After the fall of Jean-Louis Gassee, Apple moved from a selling a small number of high-priced computers to selling a larger number of lower-priced computers. It was the right move to have made, but the resulting layoff of 1,100 workers showed that, as usual, Apple was winging it. Most other companies that drastically cut their margins would expect to have to lower costs to keep pace, but this need came as a surprise to Apple. They didn’t really expect the cheap computers to sell so well.
The bright spot was the introduction of Apple’s PowerBook series of notebook computers, which weren’t really so low priced and sold 400,000 units ($1 billion!) in their first year on the market. Apple had simply jumped onto another wave—the notebook computer—that was already mature in the MS-DOS world. Once again with the PowerBooks, Apple has managed to get the same customer to buy yet another computer. PowerBooks are not the future—they are part of the past.
Spindler’s job, when he took over from Sculley, was to reengineer Apple, turning it from a computer hardware company to a computer software company. As a computer hardware company, Apple faced (and faces) insurmountable odds. One problem was Wall Street, with its inexorable demand for improved earnings per share. Wall Street compares Apple to Compaq, since both companies are of comparable size, and wonders why Apple doesn’t make as much profit as Compaq. That’s easy: like Compaq, Apple has to design and build computer systems, but unlike Compaq, Apple also has to design and build all its own operating system software. Compaq leaves that part up to Microsoft. So the extra $800 million Apple spends each year on system software hurts their profits in comparison to Compaq, which doesn’t have to develop any software. And Apple can’t make tons of money on software like Microsoft does, because there is a limit on the number of copies it can sell: Apple can only sell as many copies of its software as there are Macintosh computers and there just aren’t that many Macs in use, compared to Windows machines.
Apple would be much better off and certainly more profitable if it could just jettison its hardware business and compete with Microsoft in software. But that’s easier said than done, since Apple’s hardware business—factories and all—has hardly any real value. Who wants to buy the right to build and sell computers that can’t be sold at a profit? Nobody. Who wants to even buy Apple’s state-of-the-art factories? Almost nobody.
A decade ago, if a company like Apple or IBM wanted to sell a factory, potential buyers lined-up, checkbooks in hand. That was because the factories were known for their high quality work. But today we have the International Standards Organization running around the world certifying the quality of factories. Today an ISO 9001 certification means some factory in Malaysia or Mexico is precisely as good as an Apple factory in California or an IBM factory in New York. So these big buildings, which are carried on the company books as having such and such a value, aren’t really worth that much. And no CEO wants to take the earnings hit that inevitably comes from throwing the factory away and paying-off all those manufacturing employees. Certainly Spindler didn’t want to do it.
Spindler had to go. It’s not just that he was paralyzed and unable to make the bold moves needed to save Apple. He had to go just to make it obvious that Apple was doing something to solve its problem. This is a common technique to use on baseball teams. The players are good, yet the team keeps losing, so the owner fires the manager. This gets the attention of the players (in Apple’s case, it gets the attention of the workers, customers and, most importantly, the press) and provides motivation. Firing the manager—no matter who the replacement manager is—always wins a few ballgames.
So Spindler was fired, replaced by Gil Amelio, who had done a very good job of turning-around National Semiconductor, a maker of microprocessors and semi-custom integrated circuits. Amelio succeeded at National Semiconductor by getting the company to concentrate on its core businesses, which is exactly what Apple needs to do. So now the Apple workers know that the company is serious about change. They also know that the new leader has no particular friends or political allies among the management groups: every job is equally at risk. The result is that the bad workers are scared away and the good workers are motivated. At least that’s the way it is supposed to work.
But not even a new president can quickly change the direction of 17,000 workers. It will take a year for any changes to have real effect on Apple’s products. So Amelio’s much bigger concern has to be with appearance: how does he make Apple look better to its customers and to the press. This is vitally important because of Apple’s perilous inventory situation. At the time I am writing this, Apple has almost $2 billion worth of computers stored in its warehouses. That’s $2 billion at today’s prices. But computers are always going down in price, so those computers are going down in value. That declining value has to be reflected as a loss on Apple’s books. This explains, then, just how bad Apple’s 1995 Christmas sales really were.
Normally, Apple would have expected to make 45 percent of its annual profit in the Christmas quarter. They were hoping to make something in excess of $500 million in Christmas 1995, but instead lost $69 million. Worse still, Apple had all those unsold computers in the warehouse. In January the inventory was marked-down by an average of 15 percent as Apple tried to sell it. That 15 percent reduction on a $2 billion inventory means Apple had already accepted another $300 million loss, which means the total hit for the bad Christmas of 1995 was close to $400 million.
But wait, it gets worse! Now consumers are worried about whether Apple will survive. When consumers are worried, they stop buying. Apple had $1.1 billion in cash in January, but more than $300 million of that will now be lost to marked-down inventory. Another mark-down, along with a couple more bad quarters of sales, and Apple is out of cash. That’s the fear in Cupertino, and that’s why Spindler had to go.
In his last days at Apple, Spindler was trying mightily to sell the company. IBM and Motorola both turned him down. Only Sun Microsystems was at all interested in buying Apple. There were many stories in the American press about these negotiations, explaining why Sun wanted Apple. These stories showed that Apple’s sales volume could help Sun get parts cheaper and so make their Unix workstations more price competitive. Having Apple was also supposed to give Sun an advantage in building a $500 network appliance—a stripped-down computer used strictly to communicate on the Internet. All these reasons had some small bearing on Sun’s decision to negotiate with Apple, but they weren’t the major reason, not even close.
Sometimes business decisions are very personal and this was the case with Sun’s interest in Apple. John Doerr is a member of the Sun board of directors. He is also one of the venture capitalists who helped finance Sun in its early days. Doerr is a very smart and legendary venture capitalist. He also wants to run a computer company.
John Doerr has been long critical of Apple’s strategy. He has told me many times that he could turn Apple around in six months. If Doerr was willing to tell me that, he was also willing to say the same thing to Scott McNealy, Sun’s CEO. And that’s where Sun’s interest in Apple found its greatest strength. Doerr told McNealy, “Buy Apple, give it to me, and I’ll have it running like a watch in six months.”
It almost happened, too, but the Sun bid was just too low, so Apple chairman Mike Markkula hired Gil Amelio to do exactly what Doerr would have done: cut costs, focus the company on its core businesses, and finally start an extensive (and profitable) software licensing program.
If Amelio succeeds and Apple survives, it will probably have more to do with the efforts of IBM and Motorola than Amelio. Both companies have now taken Macintosh software licenses that allow them to sublicense the software to other companies. The companies plan to sell all the parts to make a Macintosh, along with the Mac ROMS and system software. This will flood the market with cheap Mac clones by the end of 1997, squeezing Apple out of the hardware business while simultaneously making the company successful in software. At least that’s the plan. But Apple’s real future, and the future of the entire PC business, lies in finding new customers—millions of them—through selling whole new types of computers. More about that in the next chapter.