CES 2004: Carly Fiorina shows HP’s pale blue iPod, before Steve Jobs gives it a royal snow job. Photo Justin Sullivan/Getty Images.

How Steve Jobs Fleeced Carly Fiorina

The former HP CEO boasted of her friendship with Apple’s leader — but he took her to the cleaners with the iPod

During Carly Fiorina’s triumphant performance in the wretched carnival that was the second Republican debate, she picked the perfect moment to play the Steve Jobs card. The subject had turned to her tenure as the CEO of HP, the single aspect of her resume that vaguely qualifies her as a presidential candidate. Industry observers have contended that she did her job poorly, and, indeed, when the board dismissed her in 2005, HP’s stock price rose by seven percent. Meanwhile, Fiorina fell to earth with the aid of a $40 million golden parachute.

Her comeback to this at the debate? Steve Jobs was on her side! She shared a story — which may well be true — about how Apple’s late CEO had called to remind her that he had been fired as well, and it wasn’t the end of the world. “Been there, done that — twice,” he told her. Unlike Jobs, however, Fiorina did not go on to start a company, buy another small company and sell it for billions, or return to the place that fired her and restore it to glory. But the point of the story was that Steve was on her side, and by aligning herself with the sainted innovator, Fiorina racked up triple-bonus debate points.

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Ms. Fiorina’s trainwreck stint at HP has been well documented. But I want to address one tiny but telling aspect of her misbegotten reign: an episode that involved her good friend Steve Jobs. It is the story of the HP iPod.

The iPod, of course, was Apple’s creation, a groundbreaking digital music player that let you have “a music library in your pocket.” Introduced in 2001, it gained steam over the next few years and by the end of 2003, the device was a genuine phenomenon. So it was news that in January 2004, Steve Jobs and Carly Fiorina made a deal where HP could slap its name on Apple’s wildly successful product. Nonetheless, HP still managed to botch things. It could not have been otherwise, really, because Steve Jobs totally outsmarted the woman who now claims she can run the United States of America.

I can talk about this with some authority. Not only have I written a book about the iPod, but I interviewed Fiorina face to face when she introduced the HP iPod at the 2004 Consumer Electronics Show, and then got Steve Jobs’s side of the story.

It was at CES that year that HP announced its version of the iPod. That in itself was pathetic. The company’s motto at the time was Invent! But at the biggest event of the technology world, HP’s big newsmaking announcement was that it was selling someone else’s invention. Nonetheless in our interview on January 8, just off the show floor, Fiorina boasted about cobranding the iPod as if it were an innovative coup for her own company.

Apple chose her company, she told me, “Because HP is a company that’s an innovator. We believe innovation is our lifesblood. It’s why INVENT sits on our logo.” So why sell someone else’s product? She described her strategy as “focused innovation.” Apparently this meant throwing in the towel when a competitor came up with something really good.

It didn’t seem like a recipe for success, and indeed, HP was not successful at it, for a number of reasons. But before I get to that, let’s contemplate what Apple got in return for allowing HP to rebrand iPods and share the loot. HP agreed to pre-load Apple’s iTunes music software and store into its personal computers. This was a hugely valuable concession. Apple had only recently begun to push this key software into the Windows world. Millions of HP/Compaq customers would instantly become part of Apple’s entertainment ecosystem.

If it were a straight deal for HP to include Apple’s software, the fee might have been hundreds of millions of dollars. (Around that time, software companies were paying huge sums to have their products or services preinstalled, since people seldom deleted them and often used the default choices.) Even better, preinstalling iTunes was a way for Apple to stifle Microsoft’s competitor to the iTunes Music Store. As an Apple leader at the time puts it, “This was a highly strategic move to block HP/Compaq from installing Windows Media Store on their PCs. We wanted iTunes Music store to be a definitive winner. Steve only did this deal because of that.”

One might even argue that since Carly Fiorina wasn’t making much profit from selling computers, each machine her company sold under this deal delivered more value to Apple than it did to HP.

In return, HP got the right to sell iPods. But not in a way that could possibly succeed. Fiorina boasted to me that she would be able to sell the devices in thousands of retail outlets; up to that point Apple mostly sold them online and in its own stores. But by the time in mid-2004 that HP actually began selling its branded iPods, Apple was expanding to multiple retail outlets on its own. And soon after HP began selling iPods, Apple came out with new, improved iPods — leaving HP to sell an obsolete device. Fiorina apparently did not secure the right to sell the most current iPods in a timely fashion, and was able to deliver newer models only months after the Apple versions were widely available.

So it was no wonder that even at the program’s peak, it represented no more than about five percent of total iPod sales.

Even with a detail like the color of the iPod, Jobs totally rolled over Fiorina. When I spoke to Fiorina at CES, she crowed that HP’s iPods would be distinctive in their look; unlike Apple’s pristine white, the Pod would be a fetching shade of blue. Presumably, this would distinguish its iPod from Apple’s and provide a reason, however slight, for a consumer to choose it over the Cupertino model. She was adamant that HP had the right to determine what color the HP iPod would be. Knowing Steve Jobs and his protectiveness about all things design, this sounded dubious to me. I got on the phone with him that very day, and asked him if HP would be producing blue iPods. There was a significant pause. “We’ll see,” he finally said with a bit of ice in his voice.

Indeed, when the HP iPod appeared seven months later, it was exactly the same bright white as Apple’s version. The main difference was that a small HP logo was etched on the rear, underneath the usual Apple logo.

Fiorina got canned in February 2005. And HP ended the iPod deal that July. But the aftereffects of Fiorina’s incompetence in this instance lingered. The deal she struck with Jobs banned HP from selling a competitor to the iPod until August 2006. And until January of that year it still sold computers with iTunes preinstalled. (At that point HP made a deal with the music service Rhapsody to preinstall its software. Rhapsody Co-chair Rob Glaser, who had observed the drama from his Seattle base, now says, “Steve and Apple fleeced HP in that deal — HP’s version of the iPod was a failure, and Apple was able to grow the iPod.”)

The ultimate irony is that if Fiorina had been familiar with the assets of the company she ran, she might have had much more leverage to cut a better deal with Jobs. When she made her disastrous 2002 acquisition of Compaq, HP took possession of its patents, including those generated by the research division of the Digital Equipment Corporation, the iconic minicomputer company that Compaq itself bought in 1998. It turns out that researchers in DEC’s Palo Alto lab had created a hard-disk MP3 player — essentially inventing key parts of the iPod several years before Apple did. The project never got any love, though a clunky version of it had actually been announced at CES in 2000. Still, among the patents DEC secured were some very broad ones regarding the way music was drawn from the disk drive while conserving battery power. Had Fiorina known this, she might have been able to get a much better deal with Apple — because she could have credibly claimed that the iPod infringed on HP’s intellectual property. Perhaps she was too deep inside her bubble to understand what assets were buried in her own corporation. Instead, she expended a lot of energy trying to convince her board to buy five corporate jets.

In short, Fiorina’s “good friend” Steve Jobs blithely mugged her and HP’s shareholders. By getting Fiorina to adopt the iPod as HP’s music player, Jobs had effectively gotten his software installed on millions of computers for free, stifled his main competitor, and gotten a company that prided itself on invention to declare that Apple was a superior inventor. And he lost nothing, except the few minutes it took him to call Carly Fiorina and say he was sorry she got canned.

Those considering pulling a ballot lever for Fiorina should consider what she told me in January 2004 about why she thought Apple went to her for the iPod deal: “I think what Apple saw is an innovative company that they respected.” But Jobs and Apple apparently had a different view. As that aforementioned source told me, “We knew we were snowing them the entire time!”

Not an encouraging precedent for a person who wants to deal with Vladimir Putin.

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