http://www.stern.nyu.edu/networks/ho...pple_story.htm
They Coulda Been a Contender
By Jim Carlton


Jim Carlton, on the full, inside story of Apple's biggest, most strategic
blunder.





Once upon a time, Apple Computer was the undisputed king of the computer
industry, the leader in nearly all areas of technology and innovation. The
time, actually, was not so long ago, but it sure seems like it now.

In the span of just 10 years, Apple has fallen from that lofty pedestal to a
position of near irrelevance in the industry it helped to create. Where once
it commanded nearly one-fifth the world's personal computer sales, its share
has dwindled to less than 4 percent. Where once its enormous profits were
the envy of the entire industry, the company is now struggling to reverse a
tide of red ink that has swollen to more than US$1.6 billion over the past
two years.

The question is constantly asked in business circles: How could a company
with such great technology have fallen so far and so fast? As I outline in
my book, Apple: The Inside Story of Intrigue, Egomania, and Business
Blunders, the company's fundamental problem was its dearth of effective
leadership almost from the outset.

Steve Jobs is back in the limelight while Apple searches for a new CEO, but
whoever that person is, they will still be haunted by the mistakes of their
predecessors.

The biggest of those mistakes was Apple's refusal to license its Macintosh
software to the rest of the industry, as the following excerpt from my book
reveals. Had Apple opened the Mac to all comers back in the '80s, when the
software was still light years ahead of Microsoft in terms of ease of use
and visual appeal, the hip pioneer undoubtedly would have gone on to
dominate the industry instead of Microsoft. But, Apple squandered not one
opportunity to license the Mac, but a succession of them. Ironically, Bill
Gates himself tried to help, going so far as to pen a secret memo to Sculley
and line up initial licensing prospects. Apple's lack of leadership,
however, left the decision on whether to license, ultimately, up to the
engineers. Not surprisingly, the engineers, led by the enigmatic Jean-Louis
Gassée, proved far more interested in hoarding a technology they created
than in establishing a standard the rest of the industry could follow. That
mistake sealed Apple's fate, dooming the company to a downward spiral that
it is still trying to overcome today.






The licensing debate




Steve Wozniak made a decision very early on at Apple that would prove one of
the company's most fateful ever. When "Woz," a prank-loving 26-year-old who
loved to tinker with machines, designed the very first Apple computer, he
decided to use a microprocessor called the MOS Technology 6502, based on the
design of Motorola Inc.'s 6800, essentially because it was cheaper than
anything else he could find. Intel's 8080 chip was selling for $179 at the
time, and Motorola's 6800 fetched $175. The MOS Technology chip, made by a
Costa Mesa, California, company, cost only $25. The microprocessor itself
looks insignificant. Also called a microchip, it is a tiny little piece of
equipment no larger than a silver dollar. But it is critically important to
a personal computer. Containing thousands of microscopic circuits etched
onto tiny silicon wafers, the microchip is the very brain of the personal
computer, controlling everything from the machine's processing speed to its
ability to display images on a screen. Without one, the PC would sit useless
on the desk.

The decision to go with the Motorola technology was fateful, because Intel
would gain the license from IBM to make the microchips that went into almost
every IBM-compatible computer. Motorola was a big company in its own right,
a giant in cellular phones and pagers. But Apple, which soon after that
first design by Woz began using Motorola chips exclusively, became
Motorola's only sizable customer for personal computer microprocessors.
Intel's whole life, on the other hand, revolved around microchips. In fact,
it had been a young Intel engineer named Marcian E. Hoff Jr. who had
invented the microchip in 1971, making the PC revolution possible.


Intel didn't have just one customer, it had hundreds. Not only did it supply
chips to IBM, it supplied them to all the manufacturers of IBM-compatibles.
By doing so, Intel created what is known in the industry as a "standard."
Since every company but Apple was using Intel chips, technical
specifications for all new computers would have to be designed around the
Intel standard. Intel eventually began churning out a line of
microprocessors based on the 8086 design, or x86, which competitors hoping
to carve a slice out of the widening PC pie worked to imitate. The
competitors, which included chip makers such as Advanced Micro Devices and
Cyrix Corporation, were never able to catch up, though, because Intel
controlled the standard. With so much money pouring in from the hundreds of
PC makers buying its chips, Intel could funnel the profits right back into
the labs to come up with even faster chips. Whenever there was the slightest
hint that someone might catch up, the Intel engineers would find a whip
lashed across their backs by a wiry, bug-eyed Hungarian immigrant named Andy
Grove, who was CEO and commander of the ship. No one was going to overtake
Intel, at least not as long as a pulse beat in Grove's body.

His equal in paranoia was Bill Gates, who controlled the other most
important part of the personal computer: the operating system. Just like
Intel, Microsoft had been handed the keys to a kingdom when IBM had granted
it rights to supply IBM and all the IBM-compatibles with the operating
system software that controls every other program. While the microchip is
the brain of the computer, allowing it to think, the operating system is the
rest of the body, moving into action. Each is dependent on the other. And
without an operating system, the microchip just sits there, paralyzed.

Microsoft had started out making the Basic programming language for personal
computers. That was a decent business, but nothing like the one for
operating systems. Programming languages were sold mainly to software
developers. Every computer, however, had to have an operating system. If the
majority of computers contained a company's operating system, it had one
more advantage: with all the money pouring in from sales of the operating
system, it had plenty to invest in the software programs such as
wordprocessing and spreadsheets that customers actually used.

The Microsoft empire, therefore, was built with the operating system called
MS-DOS (Microsoft Disk Operating System) as its foundation and the
programming languages and software programs on top. And just as had happened
with Intel, MS-DOS became an industry standard that everyone in the world of
IBM-compatibles had to use. Another operating system couldn't just be popped
into the box, because Apple was really the only other game in town and it
was already using Motorola chips. MS-DOS was not designed to run on Motorola
chips. Apple's operating system, which was completely different from MS-DOS,
was designed to run only on Motorola chips.

Fast forward, now, to 1985, when John Sculley was presiding over an Apple in
disarray. With a screen interface that allowed users to "point and click"
commands, the Mac was vastly superior to anything else on the PC front,
which then consisted mainly of MS-DOS, which forced the user to type arcane
commands to open a program. The main thing Sculley had to do to get Apple
back on track was to fix the obvious problems such as the Mac's low memory
capacity and scanty software. After that, the Mac could practically sell
itself. But Sculley could also have gone another route that, if taken, would
have dramatically transformed both it and the rest of the computer industry.
That route was licensing Mac software so other manufacturers could make
their own versions of the Apple computer. Licensing was the same route taken
by both Microsoft and Intel, which had allowed their standard to proliferate
so quickly.

From a 1990s hindsight, the merits of licensing a technology are obvious.
Instead of funding all research and development itself, Apple could have
reaped the benefits of having dozens, even hundreds of imitators all adding
their own unique value to the Mac. Legions of suppliers would have sprung up
all around the world to furnish the manufacturers with components such as
disk drives and memory. And since the software was light-years ahead of
everybody else's, Macs, not Windows, might have come to dominate the
personal computer market. That dominant market position would have forced
software developers to devote the bulk of their resources to Apple and its
compatibles, ensuring a plethora of programs that would meet almost any
user's needs.







The memo




It would all have become one big corporate ecosystem centered around the
Mac. Put another way, Apple would have created an industry standard, a
playing field that it controlled and everyone else would have had to buy
into. This standard was envisioned by Bill Gates and outlined in one of the
most important documents in Silicon Valley history, a highly confidential
three-page memorandum from Gates to Sculley and Gassée dated June 25, 1985.
Entitled "Apple Licensing of Mac Technology," the document read:






Background:



Apple's stated position in personal computers is innovative technology
leader. This position implies that Apple must create a standard on new,
advanced technology. They must establish a "revolutionary" architecture,
which necessarily implies new development incompatible with existing
architectures.

Apple must make Macintosh a standard. But no personal computer company,
not even IBM, can create a standard without independent support. Even though
Apple realized this, they have not been able to gain the independent support
required to be perceived as a standard.

The significant investment (especially independent support) in a "standard
personal computer" results in an incredible momentum for its architecture.
Specifically, the IBM PC architecture continues to receive huge investment
and gains additional momentum ... The investment in the IBM architecture
includes development of differentiated compatibles, software and
peripherals; user and sales channel education; and most importantly,
attitudes and perceptions that are not easily changed.

Any deficiencies in the IBM architecture are quickly eliminated by
independent support ... The closed architecture prevents similar independent
investment in the Macintosh. The IBM architecture, when compared to the
Macintosh, probably has more than 100 times the engineering resources
applied to it when investment of compatible manufacturers is included. The
ratio becomes even greater when the manufacturers of expansion cards are
included.






Conclusion:



As the independent investment in a "standard" architecture grows, so does
the momentum for that architecture. The industry has reached the point where
it is now impossible for Apple to create a standard out of their innovative
technology without support from, and the resulting credibility of, other
personal computer manufacturers. Thus, Apple must open the Macintosh
architecture to have the independent support required to gain momentum and
establish a standard.






The Mac has not become a standard



The Macintosh has failed to attain the critical mass necessary for the
technology to be considered a long term contender:
a. Since there is no "competition" to Apple from Mac-compatible
manufacturers, corporations consider it risky to be locked into the Mac, for
reasons of price AND choice.
b. Apple has reinforced the risky perception of the machine by being slow
to come out with hardware and software improvements (e.g. hard disk, file
server, bigger screen, better keyboard, larger memory ...)
c. Recent negative publicity about Apple hinders the credibility of the
Macintosh as a long-term contender in the personal computer market.
d. Independent software and hardware manufacturers reinforced the risky
perception of the machine by being slow to come out with key software and
peripheral products.
e. Apple's small corporate account sales force has prevented it from
having the presence, training, support, etc. that large companies would
recognize and require.
f. Nationalistic pressures in European countries often force foreign
consumers to choose local manufacturers. Europeans have local suppliers of
the IBM architecture, but not Apple. Apple will lose ground in Europe as was
recently exhibited in France.







Recommendation:



Apple should license Macintosh technology to 3-5 significant manufacturers
for the development of "Mac Compatibles:" United States manufacturers and
contacts: ideal companies - in addition to credibility, they have large
account sales forces that can establish the Mac architecture in larger
companies: - AT&T, James Edwards - Wang, An Wang - Digital Equipment
Corporation, Ken Olsen - Texas Instruments, Jerry Junkins - Hewlett Packard,
John Young other companies (but perhaps more realistic candidates): - Xerox,
Elliott James or Bob Adams - Motorola, Murray A. Goldman - Harris/Lanier,
Wes Cantrell - NBI, Thomas S. Kavanagh - Burroughs, W. Michael Blumenthal
and Stephen Weisenfeld - Kodak European manufacturers: - Siemens - Bull -
Olivetti - Phillips [sic]

Apple should license the Macintosh technology to US and European companies
in a way that allows them to go to other companies for manufacturing. Sony,
Kyocera ... are good candidates for OEM manufacturing of Mac compatibles.

Microsoft is very willing to help Apple implement this strategy. We are
familiar with the key manufacturers, their strategies and strengths. We also
have a great deal of experience in OEMing system software.





Rationale:

1. The companies that license Mac technology would add credibility to the
Macintosh architecture.
2. These companies would broaden the available product offerings through
their "Mac-compatible" product lines:
- they would each innovate and add features to the basic system: various
memory configurations, video display, and keyboard alternatives, etc.
- Apple would lever the key partners' abilities to produce a wide variety
of peripherals, much faster than Apple could develop the peripherals
themselves.
- customers would see competition and would have real price/performance
choices.
3. Apple will benefit from the distribution channels of these companies.
4. The perception of a significantly increased potential installed base
will bring the independent hardware, software, and marketing support that
the Macintosh needs.
5. Apple will gain significant, additional marketing support. Every time a
Mac compatible manufacturer advertises, it is an advertisement for the Apple
architecture.
6. Licensing Mac compatibles will enhance Apple's image as a technological
innovator. Ironically, IBM is viewed as being a technological innovator.
This is because compatible manufacturers are afraid to innovate too much and
stray from the standard.





This heretofore unpublished document essentially provided a blueprint for
how Apple could save itself from long-term debilitation - a course that, had
it been taken, would have put Apple into the driver's seat into the 1990s
and possibly beyond.

What would possess Bill Gates to offer such a helping hand to a competitor?
Surely, it couldn't be out of the goodness of his heart. And of course it
wasn't. The idea for the memorandum actually originated with a young man
named Jeff Raikes, who had joined Microsoft in late 1981 at the age of 23 to
become one of the company's first product marketing managers. Raikes, a
Nebraska farm boy with all-American good looks, had joined Apple out of
Stanford in 1980 and eventually risen to engineering manager but jumped ship
to Microsoft a year later after he decided - correctly, as it turned out -
that software would become more important than the hardware business Apple
was focused on. Steve Jobs, who had asked Raikes to join his new Macintosh
team, was furious when Raikes announced he was leaving. "Jobs read to me
from the riot act," remembers Raikes, who went on to become one of nine
members of Microsoft's powerful Executive Committee. "He said, 'Microsoft
will go out of business.'" Right, Steve.

At Microsoft, Gates, too, had GUI on the brain in the early 1980s. MS-DOS
was becoming the workhorse of IBM-compatibles, but Gates knew that software
applications would become much more compelling when they could be presented
graphically, in a manner that users would intuitively understand. Most
people, Gates had told attendees of the Rosen Research Personal Computer
Forum at Lake Geneva, Wisconsin, in May 1981, "want things to be
user-friendly. They want a way of understanding how information is
represented in their terms. Drawers, files, folders - whatever terminology
you pick, it's got to somehow tie into something the user had used before."


In those days, in fact, it wasn't just Steve Jobs and Bill Gates thinking
GUI, it was practically the whole industry. Digital Research was working on
GUI-based software called GEM. Apple was relying on it for the ill-fated
Lisa project, which evolved into the Macintosh. And another company called
VisiCorp, which had soared to industry stardom on the success of its
VisiCalc spreadsheet, shocked the computer world - and Bill Gates - when it
demonstrated, at the fall 1982 Comdex show in Las Vegas, the VisiOn, a
graphical user interface for powerful IBM-compatible PCs. Gates, after
seeing the VisiOn demo in VisiCorp's booth, called a Microsoft technologist
named Charles Simonyi, back in Bellevue, and told him to fly down to see the
technology.

Simonyi, a Hungarian refugee and computer programming whiz, was perhaps
Gates's equal in energy and intensity. He had joined Microsoft in 1980,
following years of work as one of the élite scientists developing futuristic
computer products at Xerox PARC in Palo Alto, California. Simonyi knew all
about GUIs. In fact, he had written a wordprocessing program for one at
Xerox. "The minute Charles came on, we said, 'OK, it's in our future to do
the graphical interface. The question is when,'" recalls Gates in an
interview for this book in his suite on the 29th floor of the Las Vegas
Hilton during the fall 1996 Comdex show in that city.

In 1981, at Simonyi's insistence, Microsoft procured the latest in GUI
technology: a Xerox Star computer, which was the first commercial product to
use the new technology but failed because of its prohibitive cost of
$100,000, including a printer, a data-storage server, and a network to hook
all the gear together. "We wanted people at Microsoft to understand the
future," recalls Simonyi, seated on an ergonomically correct black chair in
a room adorned with modern art originals in his mansion overlooking
Seattle's Lake Washington. "Bill knew from the outset that GUI was the
future."

Until he saw the VisiOn in action, Gates had been preoccupied with building
software applications to run on top of MS-DOS and the proliferation of
smaller computer platforms on the market. Since it was not yet clear which
of the platforms would survive, Gates - who had been an avid poker player
during his days at Harvard - covered his bets by supporting everything he
could. "Understand, you make a lot more money selling applications than you
do operating systems," Gates says, sipping from a can of Coke as he reclines
in a chair with his back to a panorama of Las Vegas sprawling below.
"Operating systems, you get a couple percent of the price of the machine [or
$40 for a $2,000 PC]. Applications, you can get hundreds of dollars.

"Remember, back then," Gates adds, "we weren't talking about Microsoft being
an $8 billion-a-year company. We were hoping we would be a $200 million [per
year] company. Well, if you could get a few million Macs to sell a year, we
would have been triple the size we were then." Microsoft's revenues in 1982
totaled just $25 million.

Upon their return from the 1982 Comdex, Gates and Simonyi set to work on a
graphically based operating system called Interface Manager, which later was
renamed Windows when the first version finally shipped in November 1985.
Windows, as originally designed, was clearly inferior to the Macintosh
system because it featured a "tiled" look as opposed to the Mac's use of
overlapping windows. If you opened three wordprocessing documents on
Windows, for example, they would appear as tiles that occupied equal amounts
of space on the screen, obscuring much of the text from view. On the Mac,
however, those same three documents overlapped one another, just as if they
were lying on a desk. Each could be maneuvered to another part of the screen
so that more of the document could be seen. The Mac, in short, mimicked the
way people really worked, which is why it was so attractive.

As impressive as VisiOn had looked in Las Vegas, the operating system proved
so clunky and filled with bugs when it finally shipped a year later that it
never gained any momentum and eventually died a quiet death. Gates, however,
began spreading the word of Windows everywhere, even as he quietly moved to
hedge his bets after taking a sneak peek at Steve Jobs's Macintosh in 1981.
At the time, Microsoft's biggest-selling application was a spreadsheet
called Multiplan, which competed against VisiCalc. With Multiplan selling
like hotcakes, Gates saw no reason why Microsoft should not support this new
machine called the Macintosh, too.


And oh, what a machine it was. Fueled by a Motorola 68000 chip that was far
more powerful than Intel's chips, the graphical displays fairly danced
across the Mac's screen. After seeing a demonstration of the Mac in
Cupertino during October 1981, "our view was that it was exactly what we
were looking for," remembers Jeff Harbers, who at the time was a Multiplan
manager. In January 1982, Microsoft signed an agreement to develop
applications for the Mac. Initially, Gates committed to delivering three
programs for the Mac's launch: a spreadsheet, a business graphics program,
and a database.

By the next year, though, Microsoft's Macintosh development effort evolved
from a "cover our bets" strategy to one of "bet the farm." The change in
emphasis came after a start-up company called Lotus Development Corporation
in Massachusetts began shipping a new spreadsheet for IBM-compatibles called
1-2-3. It was faster and more powerful than either VisiCalc or Microsoft's
Multiplan, and it went on to become the killer application that solidified
the IBM-compatible as the world's preeminent desktop computing standard.
Lotus 1-2-3 was also proving a killer to Microsoft's Multiplan, as Bill
Gates recognized with horror as sales of his spreadsheet began to wither
under the assault.

On October 25, 1983, Gates convened with his top lieutenants in a retreat at
a Red Lion Inn near Bellevue to ponder what to do about 1-2-3. In that
retreat, Gates and his strategists came up with the concept of a new
spreadsheet that featured a GUI and would later be named Excel. "In our
euphoria over the Mac and in our awe at 1-2-3, we decided we needed to focus
on GUI applications," Raikes recalls. Initially, the plan was to offer Excel
first on IBM-compatible PCs. But as the Macintosh grabbed so much industry
attention in its January 1984 launch, Gates shifted gears and decided to put
Excel onto the Mac first. "We bet on the Macintosh, hoping Windows would
come in sooner rather than later," Raikes remembers.

It was a big wager, indeed. Gates committed fully one-third of Microsoft's
programming resources to the Macintosh, putting Jeff Harbers in charge of
the project. "We were complete Mac fanatics," remembers Harbers, who along
with other engineers would joke, "I'm going to the beach" whenever they
wanted to go into a locked, windowless room at Microsoft where a Mac
prototype, or "SAND," had been stowed. Adds Gates, "We were in it together.
We bet a lot of the future on the Mac."

From the outset, though, the spirit of cooperation was not reciprocated by
Apple. "Steve was convinced that Bill would take ideas from the Mac and
incorporate them into Windows," recalls Mike Murray, who was then Apple's
Macintosh marketing manager and later became Microsoft's vice president for
human resources and administration. "Steve would call Bill and say, 'Get
down here right now.' We would go into a room at Bandley 1 [on the Apple
campus], and Bill would go to a whiteboard and sketch out everything
Microsoft was doing. He'd say, 'I shouldn't tell you this, but I'm going to
tell you everything I'm doing.'" Gates would sketch out his Windows path,
hop onto a plane, and go home.

Jobs had good reason to be paranoid. After all, Gates was on his way to
becoming king of the IBM PC and made no bones about the fact that he wanted
to push Windows as the software standard in the Intel world. Yet, Harbers
remembers, "we felt we owed it to Apple to keep the Mac secret. Only Gates,
Simonyi, and the Mac development team knew about it." Murray, who was
friends with Gates's top lieutenant and Harvard classmate, Steve Ballmer,
remembers getting frantic calls from the Microsoft chieftain. "One day, Bill
called me and said, 'Mike, what are we supposed to do? Steve keeps yelling
at us. I don't know whether to work on the Mac or not,'" Murray recalls.
"I'd say, 'Bill, just keep the pedal to the metal. We need you. I'll manage
Steve.'"

Microsoft Excel for the Macintosh would not be ready to ship until September
1985, after it was announced the previous May at that New York City press
conference at Tavern on the Green. After the Mac's launch in 1984, Gates
watched with relief as computer enthusiasts gobbled up the new machines. But
anxiety set in for himself and the others at Microsoft when the Mac's sales
tapered off in late 1984 and into 1985. "I remember having a meeting with
Ballmer and the [Microsoft] Mac team," Gates says. "We were all saying,
'Jesus, you know, Apple may not do this well.' And Ballmer said, 'Well, we
can help them. But we have to assume they're staying awake at night worrying
about these same things.'"


One day in the first quarter of 1985, one of Microsoft's product managers,
Chris Larson, made an offhand comment to Jeff Raikes as they commiserated
about the declining fortunes of the Macintosh. "He said they should license
the Mac operating system," Raikes remembers. A lightbulb flashed in Raikes's
head, and he hurried to his computer to put the idea down on paper. "So I
wrote a letter to Bill saying I really think Apple should license its
operating system," Raikes remembers. "I said, 'They are competing against
all of the R&D on the IBM platform.' My conclusion was that Apple should
license the Mac. I sent the memo to Bill in May 1985." Gates took the memo
and expanded it to include a list of potential clone manufacturers Apple
could call on for help. Gates was careful, in compiling this list, to
include manufacturers that could broaden the Macintosh market, not just
cannibalize sales from Apple. Canon, for instance, was strong in Japan,
while Apple at that time was not.

Before sending the memo, Gates put in calls to the senior executives he knew
at both AT&T and Hewlett-Packard. "We talked to them about 'Well, if Apple
approached you, would you be interested?' And those were the top two on our
list," Gates says. Those companies, in fact, were interested. "If Apple
really thought licensing was a complicated thing somehow, we were glad,
because we understood licensing, to help out," Gates adds. "But the letter
was very clear that we're saying we're not trying to make money off of
licensing. If it's necessary, we'll facilitate it by being a middleman."

The memo went out, and Gates and Raikes waited. And waited. But after
several days, there was no response. "We didn't hear from John, so Bill
called him," Raikes says. "And Sculley said, 'Well, how do you do this? Do
we sell system boards to the OEMs [original equipment manufacturers]?' They
just didn't understand." Gates and Raikes had not worked out details of how
a Macintosh licensing plan would be carried out, given Apple's lack of
interest. But it quite likely would have followed the usual Microsoft model
of licensing software to manufacturers in return for royalties.

Nor did Apple want to. Apple was always a religious company, and the
religion of Macintosh made the subject of licensing Apple's most contentious
and divisive issue ever. Jean-Louis Gassée and his engineers rightfully
believed the Mac represented a quantum leap in technology, a watershed
product every bit as significant as Woz's Apple II and IBM's first PC. No
way, no how would Gassée see his precious Mac turned over to a ragtag army
of copycats. This was Apple's crown jewel, and Gassée meant to defend it
with his life. He was the guardian of the castle, the keeper of the flame.
Never mind that he tooled around town in a Mercedes with license plates that
read "open mac." By that, Gassée was only illustrating his support for
opening the Mac to hard drives, plug-in circuit boards, and other useful
accessories that Jobs had ordered kept out of the original Mac. The open mac
license plates, however, should have read closed mac, because that is really
how Gassée felt about licensing Mac technology to the clone market.

"Apple was so committed to being different from the rest," recalls Kevin
Sullivan, whose arrival in 1987 as head of Apple's human resources
department would signal a new era in the company's management. "There was a
glee, almost. We were elegant. Jean-Louis called it 'the beautiful business
we are in.'"

The furor of the licensing debate manifested itself early on, during a
meeting of Sculley's executive staff one day in 1985 after Gates's memo had
been received. A young man named Dan Eilers would present his case for why
Apple should license the Mac, a scant three years after he had joined the
company upon graduating from nearby Stanford University with a degree in
economics. Eilers, Apple's director of investor relations and then aged 30,
might have been young and inexperienced, but he was a business pragmatist
detached from the religious fervor of the engineers. He knew Apple was in
bad financial shape and simply thought the licensing plan would help out.
Sculley invited Eilers to brief the executive staff on his plan.

Eilers was about to run into a buzz saw.


Eilers was no wild-eyed radical, though from the reaction he would receive
you would have thought he was. A slight, soft-spoken man who liked to fly
private planes and take long walks in the woods, Eilers was understandably
nervous about the meeting. Although he had a fancy title, he was really a
peon in the organizational structure. And here he was, about to give his
very first presentation to the big brass, the members of Sculley's inner
circle, which besides Gassée, Campbell, Spindler, and Coleman included Jay
Elliott, head of human resources; Al Eisenstat, general counsel; and Dave
Barram, chief financial officer. The company was still in crisis mode, just
weeks after Jobs had been forced out, and executive staff was meeting with
Sculley every day at 7:30 a.m. sharp to keep tabs on cash and inventories.

Apple headquarters at the time was atop a four-story building called De Anza
4, an easy stroll from the De Anza 7 building, to which it would soon move.
Eilers took the elevator to the fourth floor and walked into the 7:30 a.m.
executive staff meeting commencing in a tiny conference room, appropriately
called the "Small Room." Seated around a rectangular table about 10 feet in
length were Sculley, Gassée, Elliott, Eisenstat, Barram, and Campbell. Most
were dressed casually, as usual, in khakis, slacks, or jeans. Gassée, who
typically looked like a biker in his trademark black leather jackets and
black leather pants, glowered as the young man stood up to begin a two-hour
presentation.

"Apple should recognize as a distinct advantage that its operating system is
superior to DOS," Eilers said, according to people familiar with the
meeting. "And the best way to make that a standard would be to put it on the
Intel platform."

As Eilers displayed slide after slide on an overhead projector to support
his argument, Gassée's face reddened and his eyes bulged. He was upset and
could contain himself no more. In his thick French accent, he began yelling
and screaming that licensing could not be done, according to those familiar
with the episode. The scheme was flawed for two reasons, Gassée asserted:
One, he did not believe it was even technically feasible for the Mac to run
on anything other than an Apple computer, because it was so closely
intertwined with Motorola's microchip. Furthermore, Gassée argued, opening
the Mac to the outside world would give competitors a license to steal sales
away from Apple itself.

Gassée did have a point. Rejiggering the Mac to run on an Intel machine
would have been a tall order. The basic problem was that the Mac had always
been designed to tie together the software of a machine with its hardware
innards. Microsoft's MS-DOS, on the other hand, was designed primarily to
tie into the Intel chip. Practically everything else needed for the
computer, such as keyboards and disk drives, could be found at the nearest
components junk lot and then plugged in to support the MS-DOS/Intel
standard. But the Mac's software and hardware were virtually inseparable.
Take away the software, and the distinctive look and feel are lost as well.
Take away the hardware, and the Mac doesn't run as smoothly. That's why the
Mac not only was far easier to use than a Microsoft-run computer but ran
much more smoothly as well.

One possibility would have been to get manufacturers to use the Macintosh
technology as is, just as Bill Gates had recommended. Another would have
been just to slap the top layer of the Mac's operating system on top of,
say, MS-DOS, and let users get a taste of the Mac. The machine would not run
as seamlessly as a Mac, because the hardware was not tied in to the software
as closely. But it would at least offer users the appealing look of the Mac,
with its graphical icons. That was not only a possibility; it was already
being done by Digital Research.


Digital Research had been founded by a software entrepreneur named Gary
Kildall, whose operating system, CP/M (Control Program for Microcomputers),
had been an early rival of MS-DOS. The success of MS-DOS eventually killed
off CP/M. By 1985, another former Xerox PARCer named Lee Lorenzen had
successfully copied the look of the Macintosh so that it could run on top of
MS-DOS with Digital Research's GEM software. GEM was essentially designed to
run a graphical user interface of any kind, no matter which. If Windows was
taking off, Lorenzen could retool GEM to look like Windows. Since the
Macintosh was the best of the GUI bunch, he designed it to look like the
Mac - actually, to "look and feel" like a Mac. It looked like a Mac, down to
containing the same trash can icon for discarding unwanted files. And it
felt like a Mac, with the same ability to use the mouse to move objects
around on the screen. Those three words, "look and feel," would become the
focus of an industrywide debate over software copyright protection.

At the time, Lorenzen remembers, IBM was negotiating with Digital Research
to license GEM for use on all its MS-DOS-based machines. That's when the
Apple lawyers showed up at Digital's door in Pacific Grove, a village set in
an idyllic setting of pine trees and crashing ocean waves on California's
Monterey Peninsula. They pointed out, in no uncertain terms, that Digital
was illegally copying Apple's technology. Digital had thought it was in the
clear by borrowing just the Mac's look, not the actual technology. But
software copyright law was still a very murky area, and IBM, for one, wanted
no part of any litigation. "IBM was ready to acquire GEM, but Apple showed
up and threatened suit," recalls Lorenzen, who is now CEO of a small
software developer, Altura Software Inc. "IBM chickened out." And that was
the end of GEM. Apple stopped this particular threat in its tracks, but it
missed another opportunity. It could just as easily have acquired the GEM
technology itself, to proliferate the Mac's look all over the place.

Years later, Apple would attempt what Digital had done, and the results
would hold the potential for breathtaking implications across the whole
industry.

Gassée was also correct in worrying that Apple would cannibalize its sales
by opening itself to voracious competition from cloners, many of whom would
consist of two guys and a screwdriver in a garage, who could seriously
undercut the mothership on price. Indeed, an all-out licensing plan would
have required a fundamental change in Apple's whole business model. Gassée's
biggest fear was that the company would have to undergo wrenching layoffs,
perhaps on the order of half the workforce. And he had good reason to be
afraid.

Apple was pulling in about $2 billion a year in revenues by selling roughly
700,000 computers at $3,000 each. If Apple were to license its Mac software
to all 4 million of the Intel computers being sold per year at a premium
rate of about $100 each, that would bring in about $400 million in sales.
Assuming that sales of Apple computers would fall by half, as Gassée feared,
Apple would shrink to a $1.4 billion company almost overnight. Bill Gates
believes, however, that Apple could have structured its licensing in such a
way as to protect itself. "They wouldn't have had to open it wide open,"
Gates says. "Let's just say they licensed HP, or just AT&T or somebody in
Europe, you know, like Olivetti, or somebody in Japan, like Sony or whoever.
It would have made all the difference. Momentum creates momentum. If you
have volume, then people write apps. If people write apps, you get
momentum."

In any case, no one ever said it would be easy. The end reward, as Eilers,
Gates, and the other licensing advocates all argued, was the creation of a
standard that, in the end, would provide more profit to Apple than to
anybody else because it held the keys to a kingdom. Both Microsoft and Intel
proved that theory true. With combined revenues only slightly higher than
Apple's by the mid-1990s, Microsoft and Intel became so profitable that
together they would account for fully half the entire PC industry's
profits - an amazing feat in a $100 billion industry with thousands of
competitors.

The great minds in the Small Room, however, were lost in small thought that
day, far more concerned with the here and now than anything that might
happen down the road. Gassée had done most of the arguing against Eilers's
plan while the other executives sat and listened. It was clear Eilers had
little support, because no one in the room, not even Sculley, rose to defend
him. So when his presentation was over, Eilers simply scooped up his slides
and papers and saw himself out. The licensing plan had died by lack of an
endorsement. But this was not the end of the debate, not by a long shot.


It wasn't that Sculley didn't recognize the merits of licensing. After all,
it was he who had put Eilers in charge of strategic investments to explore
the possibilities of Apple forming various alliances. At Pepsi, he had
learned the importance of forming strategic partnerships with outside
companies, such as the legion of Pepsi bottlers. And he could certainly
appreciate the significance of market share, since careers at Pepsi had been
made or broken on as little as a tenth of a percentage point fluctuation
between it and Coca-Cola. In point of fact, Sculley came to realize, the
hostility directed at Eilers was really aimed at him.

"Dan was incredibly unpopular in engineering because they knew he was my
agent," Sculley says. "Every time Dan would come in with an outside idea,
not only would the idea be shot down, but he would be lucky to get out
alive."

Sculley was having Eilers play around with some other wild ideas, such as
Apple buying another company. Sculley had a gleam in his eye, especially,
for Silicon Graphics and Sun Microsystems, small but thriving makers of big
computer workstations, as well as Novell, a small company that was then
pioneering a new form of software to link networks of computers together.
Sculley saw great strategic opportunities in each of these companies, since
all were focused on the big corporate market he wanted to crack. "But the
engineers felt Apple didn't need anyone else," Sculley says. "Just because
you had the title of anything did not mean they would do what you asked."

This attitude, which had originated in the Steve Jobs days, came to be known
in Silicon Valley circles as NIH, or "not invented here." If it wasn't
invented at Apple, the smartest place in the universe, Apple's engineers
wanted no part of it.

Unbeknown to many people in the company at the time, Sculley had also set up
a strategic sales group to study, among other things, the possibility of
putting the Mac's look and feel - the top layer of the software, which the
user sees - on top of other computers, just as Digital Research had done.
This was a less radical step than Eilers's plan to license the Mac
technology with all its bells and whistles to clone manufacturers. Allowing
others to use just the "look and feel" was more like an outpatient
alternative to open-heart surgery on the Mac. It would not be necessary to
ditch Motorola altogether. Using the Trojan horse approach, the Mac
interface could be sneaked into corporations on another company's computer.
Once the workers saw for themselves how great it was, they would refuse to
use anything else. Named to head that venture was Chuck Berger, an
outdoorsman who loved to water-ski on northern California lakes. He and
Eilers were kindred spirits and would become equally despised at Apple.

Berger, vice president of Apple's new strategic sales group, had been given
the green light by Sculley to talk to as many manufacturers as he could
about this particular scheme. Over a 12-month period beginning in 1985,
Berger and Sculley's former technical aide, Mike Homer, who was named to
assist Berger, crisscrossed the United States, drumming up outside interest
in the plan. There was more than enough to keep them hopping. Dr. An Wang,
the founder of Wang Laboratories outside Boston, wanted to put the Mac
software on top of his company's wordprocessing machines. Digital Equipment,
Wang's neighbor down the Massachusetts Turnpike in Maynard, planned to
incorporate the Mac's look into a line of new desktop computers. AT&T was so
interested in putting the Mac onto the company's Unix workstations that
approvals had been made all the way up to Bob Allen, then AT&T's CEO.
Silicon Graphics, which would go on to fame as creator of the digital
special effects in 1990s movie blockbusters such as Jurassic Park, was also
profoundly interested.

"All of these had either a handshake agreement or letters of intent," says
an industry executive intimately familiar with the discussions. "John and
Chuck flew to AT&T twice and had them in the bag."

Sculley, however, would go on to reject all deals on the table. Gassée was
yelling and screaming again, and Sculley just could not bear to hear it.
Like Eilers, Berger was left to fall on his own sword. As of late 1985,
Sculley was on track with a plan that would inflate Apple's profit margins
above 50 percent on forthcoming sales of the souped-up Mac Plus. In a series
of executive staff meetings at which Berger presented his case for
licensing, Gassée railed against going through with anything that would rob
those profits.


"He made a strong stand that it was stupid to give up 55 percent margins for
what would be, at best, 45 percent margins," says an executive close to all
the discussions. "Jean-Louis said there would not be enough money left to
fund the 'insanely great' technology and that the engineers would probably
leave." Berger argued that it was clear that closed, or "proprietary,"
standards did not work. The best example of that, he said, was Sony's
failure in the early '80s to set a standard in the videocassette recording
industry with its Betamax machine. While Betamax was widely regarded as
technically superior to the rival VHS machines, VHS was an open standard
that other manufacturers could copy. Since Betamax was not, VHS went on to
take over the VCR market.

Berger, in one of the meetings, also said, "Eventually someone will catch up
with the [Mac's] GUI." Rolling his eyes in disgust, Gassée snapped back, "No
one will ever catch up to the GUI." Gassée could not have been more blind if
he had had a blindfold on.

Gassée may have been the most outspoken person at Apple against licensing,
but he was certainly not alone. Indeed, when looking back on it all, Sculley
says he is not so sure the board itself would have backed any kind of
licensing scheme, even if he had pursued it full tilt. "Remember, at the
time the board was interested in one thing: gross margin," he said to me in
our first of several discussions for this book, sipping from a cup of black
coffee as he mused on the situation a decade later in his lawyer's office in
Palo Alto, California. By gross margin, Sculley was referring to the gross
profit margin, measured as a percentage of sales, which serves as a key
barometer of a manufacturer's profitability. "The engineers wanted
innovation. You had to fuel the innovation and manage the profits. So you
had to stay within this envelope."

Others in the industry empathize with Sculley's situation, given the time
and circumstances. "There was no question they should have licensed the
software. It was leadership technology in the marketplace," says retired IBM
president Jack Kuehler. "[But] it would have required an unusual person to
do that early on. And you would never know if it was the right thing to do,
because detractors would shoot you down. If it had not worked out according
to plan, it probably would have cost Sculley his job."

Even Gassée, shockingly enough, now admits he was flat-out wrong. "I am
aware that I am known as the Great Satan on licensing," he says. "My mistake
was, I got into a debate that I should not have gotten into. I thought,
financially, it didn't make sense. I was never for or against licensing. I
just did not see how it would make sense. But my approach was stupid. We
were just fat cats living off a business that had no competition."

Just as Gassée was vowing to Berger that no one would overtake Apple's lead,
Gates was hard at work on Windows 1.0, the prototype of a successor to
MS-DOS that would grow to envelop the planet. Gates badly wanted it to have
the same look as the Mac and already planned to include some Mac-like
features in the graphics, including Mac-like control panels and Mac-like
pulldown menus. Actually, Gates was also influenced in this approach by the
graphical user interface work at Xerox PARC, as well as other early
implementations of the technology such as VisiOn. But it was the Mac that
became the first commercially successful version of this concept and the one
he most wanted to emulate.

This incensed Sculley, who began contemplating a lawsuit. One day in the
fall of 1985, an Apple lawyer named Jack Brown showed up on Microsoft's
doorstep. It was a scene reminiscent of the one at Digital Research a few
months earlier. Only this time Apple was not dealing with a pushover. "He
[Brown] came in and made incredible threats about patents, copyrights, and
trade secrets," Gates remembers, indignation still rising in his voice years
later. "And he said he is a lawyer who has never lost a trade secret
lawsuit. And we said, 'But Apple's being very careful not to give us any of
their trade secrets.' Everything Apple gave us, Apple was being very careful
about because Apple knew exactly what we were doing. We didn't need a
license at all, in any way, and that is very clear."


Gates was hopping mad. He had not stolen anything from Apple, he insisted
then and continues to insist now. The whole idea of GUIs had originated not
with Apple, he points out, but with Xerox. "The father of the Mac is Xerox.
The father of Windows is Xerox," Gates says. Charles Simonyi, Microsoft's
in-house GUI maestro, compares the similarities between Windows and the
Macintosh to those found in different automobile models. "When you decide to
build an automobile, you're not going to change the steering wheel," Simonyi
says. "They all have common ancestry. This was such a silly and pointless
argument that they were falling into."

After Jack Brown's threats, Gates and Bill Neukom, Microsoft's chief
counsel, arranged to fly down to Cupertino to meet with Sculley and his top
legal gun, Al Eisenstat. In a phone conversation beforehand, Gates,
according to Sculley, put a gun to his head. "If we're on a collision
course, I want to know it because we'll stop all development on Mac
products," Gates told Sculley. "I hope we can find a way to settle this
thing. The Mac is important to us and to our sales." Gates denies ever
making that threat, calling Sculley's statement "the most unfair
characterization of anything I've ever heard."

Physically, Gates was hardly an imposing figure. Tall and thin, his hair was
often tousled in those days, and, with his big glasses, he appeared to be
little more than a teenager. But when it came to business, Gates was a
Muhammad Ali, the dude you didn't want to mess with. And he most certainly
would have had the gumption to carry out his threat, if in fact he made it.
It was true that he needed Apple, but Apple needed him a lot more. At that
time, Gates was rolling out Microsoft Excel, the spreadsheet program that
would significantly increase the appeal of the Mac to business customers.
The original Mac had no numeric keys to run a spreadsheet, much less the
memory to do so. The forthcoming Mac Plus would. Along with other programs,
including Basic and Multiplan, Gates controlled roughly two-thirds of all
the software then available on the Mac. This was no guy to shove around.

Before Gates arrived for the meeting in the De Anza 4 boardroom on October
24, 1985, Sculley's executive staff pleaded with him not to cave in. But,
mindful of Gates's power, Sculley was convinced that a war between Apple and
Microsoft would seriously disrupt the company's resurgent momentum,
stripping the Mac of its most important software ally at a critical
juncture. In their meeting in Apple's boardroom, where Gates remembers
enough sushi being brought in "for 50 people," he and Sculley haggled.

"I went to Sculley, and I said, 'We don't need a license. Steve and I talked
explicitly about us doing graphical applications. You've seen Windows every
step of the way,'" Gates remembers. "Sculley said, 'I understand what you're
saying, but isn't there some concession you can make to us?' I said, 'OK,
we'll do Excel first on the Mac and have a period of exclusivity.' And
Sculley said, 'Well, what's going to happen if you don't perform on that?'
And I said, 'Why don't you give us a license so this dispute doesn't come up
again?'"

So Sculley instructed Eisenstat's legal team to draw up a contract allowing
Microsoft to license the look and feel of the Mac - or "visual displays," as
they were referred to in legal terms - but only in Windows 1.0. Gates and
Neukom, however, refused to sign that agreement, believing Microsoft had the
right to use those visual displays in its Macintosh applications as well as
other present and future products. Neukom drafted a revised three-page
contract and sent it to Eisenstat on November 14. Eisenstat shrugged and
made a few minor changes, sending it on to Gates and Sculley, who signed it
on November 22. With this contract, Apple thus agreed that Gates was free to
come up with his own take on the graphical technology that had originated
with Xerox, from which Microsoft had already obtained a license to certain
GUI technology. "We were buying peace with Microsoft," Eisenstat recalls.


But Gates got an unexpected bonanza, after he successfully pushed Eisenstat
to modify that agreement, in a way that would grant Microsoft a de facto
license to copy the Mac at will. A phrase in the three-page contract,
written by Microsoft, granted to Microsoft "a non-exclusive, worldwide,
royalty-free, perpetual, nontransferable license to use these derivative
works in present and future software programs, and to license them to and
through third parties for use in their software programs." By agreeing to
include the phrase "in present and future software programs," Apple had
unwittingly given Gates carte blanche to use virtually any visual features
borrowed from the Mac in Windows 1.0 and all future versions. The courts, in
fact, in a case that would carry mammoth implications for the entire
computer industry, would later interpret the phrase "in present and future
software programs" to mean all Windows versions deriving from the one at
issue in this agreement.

Sculley and Eisenstat had just given away the store. "If I knew then what I
know now," says Eisenstat, sighing deeply as he recounts the blunder a
decade later, "I would have said, 'Don't do it.'" Gassée and the other
members of the executive staff had not wanted Sculley to give in to Gates in
any way, much less by granting a license.

Gates himself downplays the significance of the licensing agreement, saying
he had the right to pursue Windows anyway. What could have derailed Windows,
Gates believes, is if Apple had followed the advice from him and Jeff Raikes
to license the Mac widely. If the Mac had become the standard, Gates says,
"We would have sold less Windows. But the key thing is, we could have sold
more applications."

The matter of Apple cloning its beloved Macintosh had been shelved for now.
Sculley was too busy tending to details of the turnaround to pay the subject
more than passing attention. And as the first few years went by, it appeared
that keeping the Mac in-house wasn't so dumb, after all. The industry slump
of 1985 had decimated many PC manufacturers and crimped IBM's performance as
well. Gassée and his engineers would point merrily to IBM and say, "Thank
God we didn't listen to Eilers and Berger." IBM, however, was not exactly a
textbook case on how to license. It had given up control of its computer
when it had turned over the operating system to Microsoft and the
microprocessor to Intel. The fortunes of Apple, in any event, had never
looked brighter. So the timing could hardly have been worse when Berger
presented his next case for licensing in 1987.

This time, Berger, whose strategic sales group had been renamed "business
development," steered away from using the "L" word. He rejoined with his old
colleague Mike Homer to explore the possibility of putting the Mac's
software onto just a workstation, a much bigger version of the PC that was
used heavily in data-intensive jobs such as engineering. Sculley saw great
merits in putting the Mac onto a workstation. One of Apple's problems in
landing big corporate accounts was that its computers did not "scale," or
run the spectrum from bare-bones secretaries' desktops all the way up to a
high-performance workstation that a rocket scientist could use. A big reason
IBM's computers had become so popular in corporate America was that its
computers did scale: all needed equipment could be bought from the same
company, simplifying employee training and technical support. Apple had the
desktops covered, all right, but it didn't have diddly for anything more
powerful.

That's where a Mac workstation would enter the picture: If Apple were to put
its software onto workstations manufactured by other companies, it might not
be an Apple computer these corporations would be buying, but it would walk
and talk like a Mac. That would make it a lot easier for a chief technology
officer to recommend outfitting the whole corporation with Macintoshes,
since the workers could all be trained the same. "John thought it would be a
great marriage between us and a low-end workstation," says an executive
familiar with the situation. Unlike the previous broadscale licensing
effort, though, Sculley wanted this deal limited to just one outside
company. Berger's natural inclination was to approach Sun Microsystems
first, since that company was around the corner in Mountain View,
California, and in the past had negotiated with Apple in a buyout deal.


Sun, which specialized in workstations, was run by an amateur hockey player
named Scott McNealy. With his boyish face and mouthful of large teeth,
McNealy resembled a large chipmunk when he smiled. Like most Silicon Valley
executives, he hardly ever wore a suit. Even at big meetings with industry
analysts, he would trot onstage in a uniform of pullover shirt and faded
jeans. But McNealy was a tough, voracious competitor like Gates, a veritable
pit bull whose company was starting to give fits to big rivals in the
workstation market such as Hewlett-Packard and Digital. Scott McNealy was an
up-and-comer, and, sure, he wouldn't mind getting into bed with Apple if he
could come out ahead.

But McNealy's ego got in the way. He was insistent, for one thing, that any
Mac/Sun computer use his company's new chip, called SPARC. This was a major
stumbling block, because Apple had already decided to remain joined at the
hip with Motorola. Sculley and McNealy also discussed, again, the
possibility of Apple buying Sun and combining Sun's workstation line with
Apple's Macintosh line. McNealy, though, insisted he be named president and
chief operating officer of the combined companies, according to an
individual involved with those talks. That would necessitate the demotion of
Del Yocam, however, and Sculley wasn't yet in a mood to emasculate the guy
who had stood up with him in the confrontation with Jobs.

Things were getting nowhere, so Berger and Homer packed their bags and
headed east in the spring of 1986 to Boston, where they found a friendlier
audience in the executive suite of Apollo Computer, a rival workstation
maker based in suburban Chelmsford that, in fact, was still leading the
market for workstations at the time. One reason Apollo was receptive was
that its business was heading south, even as Sun's was on the way up.
Apollo's executives were also concerned about the potential threat of
personal computers becoming powerful enough to encroach into the low end of
the workstation market, and Sun was also moving into that market fast.
Apollo had just introduced the low-end DN 3000 for $10,000 in a bid to shore
up that part of the market from attack when Apple came calling.

"We wanted to go down to five thousand dollars, but to get that far down we
needed a cheaper architecture and a cheaper operating system," recalls
Cheryl Vedoe, who was then manager of Apollo's low-end marketing. And that
was where Apple could help. The two companies actually had a lot in common.
Apollo, with its Domain operating system, was considered technically
superior to its competition, just as Apple was with its Mac. And both Apollo
and Apple maintained proprietary, or closed, systems that were not licensed
to others.

Sun, however, had an open system that it licensed to others. In fact, Sun's
very openness was the secret of its success. Founded in 1982 by Stanford
graduate students McNealy, Andy Bechtolscheim, and Vinod Khosa, along with a
man named Bill Joy from the University of California at Berkeley, Sun
virtually gave away its software while letting other companies help
manufacture its SPARC chip. This unleashed a licensing fury that overwhelmed
workstation competitors such as Apollo, with their closed systems. McNealy,
who ran Sun, gained a reputation as a butt kicker, because he kicked the
butt not only of the competition but of employees to keep costs down while
producing more.

So, in April 1986, Apple and Apollo sat down to talk. There were Chuck
Berger and Mike Homer on one side of the table, representing Apple. On the
other side were Cheryl Vedoe and Ed Zander, Apollo's vice president of
marketing. At the time, Apple was developing the Macintosh II, which was
going to be twice as fast as and far more powerful than the Macintosh Plus.
At a retail price of up to $5,500, it was a high-end machine for Apple but
ideal, Vedoe and Zander thought, to put onto the low end of the Apollo line.
The idea, according to Vedoe and Homer, was for Apollo to buy the Macintosh
II and repackage it as an Apollo workstation, with minor adjustments such as
melding it with Apollo's Domain operating system. Over the next 10 months,
Apple and Apollo worked together to make prototypes of Apollo Macs. In all,
remembers Homer, Apollo planned to buy 40,000 Macintosh IIs over a two-year
period for the initial stage of the cloning project.

All was going well, or so thought nearly everyone associated with the
hush-hush project. Near the end, the Apple bigwigs got in on the act as
Chief Operating Officer Del Yocam accompanied Sculley on a trip to Apollo.
"When we were in Boston, we toured the facility and went into the lab to see
the Mac OS running on Apollo boxes," Yocam recalls. "I remember leaving
there thinking, 'Everything is positive.'"


In January 1987, Apollo's chief financial officer, Roland Pampel, signed an
agreement to license the Mac IIs from Apple. Back in Cupertino, Berger and
Homer put together a presentation for the executive staff at which they
fully expected Sculley to give the deal the thumbs-up. "Apollo was there. It
had licensed the Mac," recalls Homer, who is now senior vice president of
marketing for Netscape Communications. "That would have been the first of
many such deals."

The contract was in Sculley's hands. Excited about the new opportunity that
lay ahead, Vedoe and an Apollo attorney went to Boston's Logan International
Airport to catch a flight out west to finalize the deal. It would be a
glorious day, or so they thought. That same morning, in Cupertino, Sculley
was presiding over his regular executive staff meeting. With the contract in
front of him and Berger and Homer waiting anxiously for a signature, Sculley
pushed it to one side and shook his head. "He said he had decided not to do
the deal because Apollo was a declining star and Sun was a rising star,"
says an executive intimately familiar with the meeting. When they got over
their shock, Berger and Homer looked at each other and dashed out of the
conference room to the phones. They had Vedoe paged at the Boston airport
and stopped her and the attorney from boarding just as their plane was about
to take off.

"We were in the boarding area when Mike Homer paged us," Vedoe recalls. "He
said, 'Don't get on the airplane. We need to talk about it.' It did come as
a shock." Actually, there was nothing to talk about, except that the whole
deal was finis.

The ironic thing was Gassée, the Great Satan of licensing, had nothing to do
with killing this deal. This was just Sculley, acting on a whim. He ended up
like the dog that lost its bone by trying to snatch the reflection it saw in
the water. After that, Sun expressed no more interest than before, quashing
any hope of a deal there. Apple was again alone, just as it had always been.
For poor Apollo, meanwhile, this was the beginning of the end. Having
devoted much of its time and resources to getting out the new Apollo Mac,
the company was left so far behind in the development of its own Apollo
systems that it could not catch up when Sun moved in with its new low-end
workstations. Apollo hemorrhaged more market share and was soon acquired by
Hewlett-Packard. Both Vedoe and Zander packed up and joined Sun.

OK, forget licensing, Berger thought. With IBM-compatible computers
proliferating like rabbits throughout the corporate world, could Apple at
least do something to make the Mac fit in with all the others? As early as
1985, in the Macintosh office, the Macs had been rigged so that they could
communicate with one another over the AppleTalk phone lines. But if you were
a Mac person in an IBM office, you were on your own. "Everyplace we went,
people were telling us, 'We love the Mac, but we can't even consider them
unless you can hook into the networks of IBM computers,'" Berger later
confided to a colleague. So Berger came up with a plan to help remedy that:
put some extra software into the Mac so it could act like MS-DOS software
and tap into the whole IBM network.

It was now almost 1988, and there was a clear trend in corporations to
decentralize away from the huge, $1 million mainframe computers that had
dominated the workplace in the past. In their place, corporations were
deploying fleets of cheaper, sub-$5,000 desktop computers that could all be
interconnected via smaller in-house networks. These new networks gave much
more flexibility to employees and their managers, allowing files to be
swapped and changed at will. The network was the way of the future, and it
was time for Apple to get on board.

With Sculley's blessing, Berger got outside contractors to design and make
these so-called IBM emulators. When an operating system emulates something,
it looks and acts like another system. It doesn't run as fast as the system
it is emulating, though, because it has to take extra time to translate that
system's code. Companies such as Du Pont and Aetna expressed great interest
in the Apple equipment and even started putting in large orders. The
corporate appeal: office employees would be able to work on an easier-to-use
Mac while still being hooked in to the rest of the IBM network. Gassée,
however, didn't like this plan one bit. Just as he had dismissed the
importance of licensing, Gassée never saw the need for Apple's computers to
communicate with anything except other Apple computers. This philosophy had
been demonstrated early on, in 1985, when he had addressed an Apple sales
meeting in Hawaii and someone had had the audacity to ask what Apple's
strategy would be in communicating with IBM-compatibles.


"Gassée stood up in front of the audience and held up a cutoff piece of a
telephone wire and said, 'This is our communications strategy,'" recalls
John Ziel, a sales manager in the Portland district who was in the
auditorium. In other words, if you need to communicate with your IBM
coworker, dial him or her through your computer modem. This was a terrible
strategy, of course, because it did not seamlessly link Macintoshes with
IBM-compatibles. "We looked at Gassée and said, 'Who is this guy?'"

Gassée elaborated on this novel concept in an encounter that same year with
Peter Hirshberg, who was in charge of a fledgling program to develop
networking and communications products. Hirshberg's group had already
committed to a bunch of so-called connectivity products for corporate
customers when Gassée sent word down that he was canceling them. Stunned,
Hirshberg requested an explanation, and Gassée invited him to meet for lunch
at Vivi's, a popular falafel eatery in Cupertino.

Over their falafels, Gassée repeated his telephone strategy. "He said, 'You
must convince your customers that all they need is a simple telephone
line,'" Hirshberg recalls. When asked, pray tell, how do you do that? Gassée
smiled slyly and leaned forward to say, "Public relations. You must use
public relations, not advertising." Whenever Gassée wanted to drive home a
point, he would slip into a French accent even more pronounced than usual.
This is when he explained to Hirshberg the difference between public
relations and advertising.

"With advertising, I, Jean-Louis, say, 'I am the most wonderful lover in the
world.' Of course, this would not work in attracting the woman." By now,
Hirshberg had forgotten the networking argument and listened in fascination.
"But if two of the most beautiful women in the world say they spent the
evening with Jean-Louis, this would work. This is the difference between
advertising and public relations."

Three years later, though, Gassée was in no mood to use sexual analogies in
attacking Berger's latest scheme. Headquarters had by now moved to De Anza
7, and he was still telling Sculley and everyone else who would listen that
putting Mac/IBM machines into corporations would be tantamount to "another
Vietnam War." "He said Apple could never win in this battle because IBM
would keep changing the rules," says an executive who heard the discussions.
Berger would counter, "We can never sell a computer in big business unless
we can hook into a business computer."

The tensions boiled over at a third-floor conference room in De Anza 7
during early 1988. Before approximately 100 people in the room, including
Sculley and the entire executive staff, Gassée and Berger almost came to
blows. "Jean-Louis was trying to make everyone believe we should return the
engineers to engineering," recalls an executive in that meeting. "Chuck
began screaming at Gassée. At one point, he jumped up out of his chair and
slammed his notebook on the table so hard it broke the back of it." As
usual, Gassée prevailed. The IBM emulators were tossed out. By this point,
Berger had had his fill of Gassée and Apple. He quit soon after to sign up
with Sun and the McNealy butt-kickers.

Jean-Louis Gassée had won nearly every fight. He was the undisputed master
of engineering, the person who had almost always gotten his way. Now he
would put another indelible stamp on Apple, one that would have
repercussions as grave as the decision not to license. He wanted to keep
those profit margins up - way up - and if that meant sacrificing market
share, so be it. Sculley and the board could hardly have cared less at this
point, since profits, revenues, and the stock price were all soaring to new
heights. The gravy train was still chugging happily along, and John Sculley
was still the apple of everyone's eye.