August 7, 1997

Microsoft Comes to Aid of Rival Apple

By JOHN MARKOFF

OSTON -- In a stunning alliance that could alter the map of the computer industry and help insure the survival of Apple Computer Inc., the company announced a financial and business partnership Wednesday with its archrival, Microsoft Corp.

Credit: Jim Bourg / Reuters Apple Computer's co-founder, Steve Jobs, far left, pauses in his address at the Macworld Expo in Boston to allow Microsoft's chairman, Bill Gates, on the screen, to address the crowd via satellite link.

Microsoft, whose personal computer operating system software has long been the dominant alternative to Apple's Macintosh software, agreed Wednesday to invest $150 million for a nonvoting minority stake in Apple. The companies -- whose advocates in the PC industry and user communities are divided into almost cultlike camps -- also agreed to cooperate on several sales and technology fronts.

Some of the Macintosh faithful felt so betrayed that they booed and catcalled when Apple's co-founder and acting leader, Steve Jobs, announced the Microsoft deal at the Macworld trade show in Boston.

And yet, as both companies explained the deal and as Apple announced a new board with members from other key companies, the day's developments made clear how interdependent many parts of the computer industry have become.

In the long run, Microsoft might have conceivably benefited from the demise of Apple if it meant that the one of every 10 PC users who employ Macintosh computers finally capitulated and adopted Microsoft's Windows operating system.

But in the nearer term, which is what Wednesday's deal emphasized, Microsoft cannot afford to let Apple die. Even while Microsoft's Windows over the years has relegated Apple's Macintosh software to a niche market, Microsoft is also the largest seller of word-processing, spreadsheet and other programs for Macintosh computers. The Macintosh market, in other words, is too big for Microsoft to lose.

And many other companies have an interest in Apple remaining in business because it represents an alternative to the Microsoft monolith -- even if part of the help comes from Microsoft itself.

"Apple is important, and this is good for the computer industry," said Eric Schmidt, chairman and chief executive of Novell Corp., which sells the leading brand of software for business computer networks but is facing increasing pressure from Microsoft.

But Ellison is also a friend of Jobs. And Jobs, who did not clinch the deal with Microsoft until 2 a.m. EDT, just hours before going on stage in Boston to announce it, structured the agreement in a way that gives Apple continued autonomy as it tries to recover from a plunging market share and $1.7 billion in losses over the last seven quarters.

As a giant video screen beamed in the live image of Gates from Microsoft's headquarters in Redmond, Wash., Jobs chided those in the audience who responded with catcalls while explaining the Microsoft deal.

"We want to let go of this notion that for Apple to win, Microsoft has to lose," Jobs said. "We better treat Microsoft with a little gratitude."

For Apple, there would seem to be little to lose by cooperating with Microsoft as long as Apple remains autonomous. And antitrust experts predicted the government would have no problems with the deal because it gives Microsoft only a small stake in Apple and no voice in the boardroom.

Still, the size of Microsoft's $150 million investment -- worth only about 4.5 percent of Apple's stock market value, which at the end of the day was $3.3 billion -- is not nearly as significant as the vote of confidence it represents, coming as it does from the PC industry's dominant software company. Apple did not disclose its plans for the investment.

Investors responded by sending Apple's shares up $6.5625 Wednesday, to $26.3125, their highest since May 1996, and making the stock the day's most heavily traded, with more than 37 million shares exchanged. Microsoft rose 12.5 cents, to $143.4375.

Apple is "still in the tunnel, but at least we can see the light," said Charles Wolf, an Apple financial analyst at Credit Suisse First Boston.

One of the company's big investors, Prince Walid bin Talal of Saudi Arabia, who bought more than 5 percent of Apple last April, said by telephone that he was studying Apple's announcement Wednesday and declined to comment.

Among other measures, the two companies agreed to end a year-old patent dispute by cross-licensing patents for which Microsoft will pay Apple an undisclosed amount over two to three years.

Microsoft also agreed to offer new versions of its Office software programs for the Macintosh on the same schedule as programs for use with Microsoft Windows products over five years. That would end a marketing advantage that Microsoft has long wielded.

If there were any losers Wednesday, it might be two companies that will compete with an Apple-Microsoft alliance.

Part of the deal calls for Microsoft's software for browsing on the World Wide Web, called Internet Explorer, to become the standard browser for use on Macintosh PCs.

Users could still choose to install and use the rival browser, Navigator, from Netscape Communications Corp., but Internet Explorer will now have the same built-in advantage in the Macintosh world that the Microsoft program already enjoys among many new Windows PCs.

Another facet of the Apple-Microsoft deal is the companies' plan to jointly develop a version of Java, the Internet software language. That software would compete with the variant from Java's inventor, Sun Microsystems.

Jobs spelled out these details Wednesday in speech to 2,000 Macintosh users. And the bold new directions were a striking contrast to the rudderless atmosphere that the computer maker, based in Cupertino, Calif., had evinced over the last 18 months under the former chairman and chief executive, Gilbert Amelio.

Amelio was forced out by Apple's board last month, and Jobs, as a designated "special adviser" to the board, appears to be the acting head of the company as it searches for a new chief executive, although he has indicated that he does not intend to return to the company full time.

Jobs, dressed in a white shirt and a dark sweater vest, pressed his hands together under his chin in an almost prayer-like gesture and began by telling his audience that he was now extremely confident that Apple would achieve a financial turnaround.

"Apple is the only company people feel passionate about," he said.

In one sense the Jobs-Gates alliance brings together the two men who more than any others took the personal computer from a hobbyists' pastime nearly two decades ago and turned it into an industry -- one based on the bold proposition that PC's were potent tools with world-altering potential.

Mr Jobs said the company would narrow its focus, concentrating on the educational, graphics and publishing markets.

While the two men have different backgrounds and personalities, they have been partners in the past. Microsoft was an early producer of software for the Macintosh. But Microsoft sold its software more aggressively and more successfully than Apple sold its PC's. After introducing its Windows program in 1985, which imitates the graphical Macintosh approach to computing, Gates's Microsoft grew to become the dominant force in the industry.

Gates said in a telephone interview Wednesday that discussions between Apple and Microsoft had been taking place off and on since a previous chief executive, Michael Spindler, left Apple to make way for Amelio in early 1996.

But the talks recently became serious soon after the Fourth of July holiday, Gates said, when Jobs informed him that Amelio was about to be forced out.

Gates said the call had surprised him because he had just received a letter from Amelio urging Microsoft's cooperation on several industry issues.

"Steve told me the letter was a moot point," Gates said.

He said he was initially concerned that Jobs would try to interest Microsoft in supporting a new software operating system, called Rhapsody, that Apple has been developing based on technology from Next Software Inc., which Apple acquired from Jobs earlier this year.

"I thought to myself, 'Oh no, here comes Mr. Rhapsody,' " Gates said.

But Gates said it soon became clear that Jobs was seeking a Microsoft investment in Apple.

Two days later, Gates sent Greg Maffei, Microsoft's chief financial officer, to Cupertino to enter into direct negotiations with Apple.

That eventually led to a series of phone calls between Gates and Jobs that continued through early Wednesday morning, when the two companies reached a final agreement.

Significantly, as Jobs publicly described the alliance Wednesday, he made no mention of the coming Rhapsody software, instead taking pains to extol Apple's current Mac OS 8 operating system.

Analysts speculated that Jobs was tacitly acknowledging that Rhapsody remained a distant future product for Apple, while the Mac OS 8 software package was generating revenue now.

