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  Struggling Apple Gets Boost From Microsoft

By Rajiv Chandrasekaran and Victoria Shannon
Washington Post Staff Writers
Thursday, August 7, 1997; Page A01

Apple Computer Inc. yesterday accepted what amounts to a $150 million aid package from its historic rival, software giant Microsoft Corp. The surprise move was a dramatic concession in the technological Cold War that has divided the computing world for more than a decade and a half.

The two companies unveiled an alliance in which Microsoft agreed to invest $150 million in financially faltering Apple, jointly develop new technologies with it and expand the lineup of Microsoft software for Apple's Macintosh computers.

Announced by Apple co-founder Steve Jobs at an Apple trade show in Boston, the deal prompted catcalls from loyal Macintosh users in the audience, who feared it marked the start of the enemy – Microsoft and its Windows software – swallowing up their beloved Macintosh technology.

But Jobs stood firm, using his status as the father of the Macintosh to argue for new thinking among Apple's devotees. "We have to let go of the notion that in order for Apple to win, Microsoft has to lose," he told the shocked crowd at the MacWorld Expo show. "The era of setting this up as a competition between Apple and Microsoft is over as far as I'm concerned."

The deal elicited cheers from Wall Street, where Apple's shares rose by almost a third – $6.56 1/4 – to close at $26.31 1/4 a share on the Nasdaq Stock Market, the highest point since May 1996. The alliance gave investors hope that Apple, whose Macintosh technology is the only significant competitor to Microsoft's Windows in the desktop computer business, has some life, perhaps even profitability, left in it.

More important than the money Apple will get, analysts said, is the official endorsement of Microsoft, the world's largest software company and de facto industry leader, that Apple has a future. Microsoft's pledge to continue making Macintosh software also could blunt a trend of people giving up their Macs, analysts suggested.

In another move designed to bolster Apple, the company yesterday named the charismatic Jobs, who left the company 11 years ago in a management dispute, to its board of directors, along with Oracle Corp. founder Lawrence Ellison and two other respected computer industry executives. Three board members, including Vice Chairman A.C. "Mike" Markkula Jr., who helped fund Apple at its inception, resigned yesterday.

Founded in a Silicon Valley garage 20 years ago, Apple helped make the personal computer a mass-market product. Its whimsical on-screen symbols and graphics won raves from users, but inept marketing and strategic blunders by Apple left it vulnerable to Windows.

Last year, sales of Apple's computers fell 31 percent in the United States, according to a study by market research firm Dataquest Inc. of San Jose. In the first quarter of this year, Macs accounted for 2.9 percent of all PCs sold through retail stores, compared with 10.2 percent a year ago, according to Computer Intelligence, a La Jolla, Calif.-based market research firm. In the past seven quarters, the company has lost nearly $1.5 billion.

Under the arrangement with Microsoft, Macintoshes will continue to use the Apple "operating system" software that defines the Mac's identity as a computer, and will compete with Windows-based computers.

Microsoft is perfectly happy with that situation, said several industry analysts. That's because though it competes with Apple on operating systems, it also has a nice business making applications software such as word processors and spreadsheets for Macs. Those sales are expected to generate about $300 million in revenue for Microsoft this year, said David Wu, an analyst with ABN AMRO Chicago Corp. in New York. "Put simply, it's a very good business move for them" to shore up Apple, he said.

Having a viable and competitive Apple also will prevent some customers from turning to a new breed of low-cost "network computing" devices being pushed by such Microsoft rivals as Oracle, Sun Microsystems Inc. and International Business Machines Corp., other analysts said.

"It's better to have Apple as a competitor than those guys," said Richard G. Sherlund, an analyst with Goldman Sachs & Co. in New York.

The $150 million investment will give Microsoft a 7 percent stake in Apple but no voting rights on the board of directors. Microsoft has promised not to sell the shares for at least three years.

Legal specialists do not expect the investment to run into opposition from federal regulators, who have been investigating whether Microsoft's joint sale of operating system software and Internet browsing software violates antitrust laws. "This is going to be seen as neutral or as a win for consumers," said Steven C. Sunshine, a former director of merger enforcement at the Justice Department. "Microsoft's commitment to help [the Apple] platform can only help Apple, and that can only be viewed as a positive."

In a speech at the Boston trade show, Jobs emphasized that Microsoft now "has a vested interest" in Apple's success. "Microsoft is going to be part of the game with us as we restore this company back to health," he said.

But many show attendees were skeptical of Microsoft's new role with Apple. For years, Macintosh loyalists have criticized Microsoft for co-opting many features of Windows from the Mac operating system. When Microsoft Chairman Bill Gates appeared on a large video screen at the show after Jobs' speech, he was greeted with another round of jeers and indignant shouts.

"I think it's just another way for Bill Gates to take over the world," said Steve Ferlazzo, a longtime Macintosh user who attended the event.

Others were more sanguine. Peter Hanson, a partner in Sienna Software Inc., a Toronto company that makes a popular astronomy program for the Mac, said any news from Jobs that helps to turn around Apple is welcome, even if it involves Microsoft. "We've been with the Mac since 1984 and will keep with it," he said. "It's just been a tough couple of years."

Gates, in his speech, said he believes Apple "makes a huge contribution to the computer industry."

"Some of the most exciting work that I've done in my career has been the work that I've done with Steve [Jobs] on the Macintosh," Gates said. "It's very exciting to renew our commitment to the Macintosh."

Apple and Microsoft executives had been talking for more than a year about a collaboration. The secretive talks broke down after Gilbert F. Amelio, Apple's chief executive for 18 months, resigned last month at the request of the company's board, but were restarted shortly thereafter when Jobs telephoned Gates, officials of both companies said.

Apple also agreed to make Microsoft's Internet Explorer program, software for browsing on the World Wide Web, the standard browser on new Macintoshes. Apple still will ship browsing software made by Microsoft rival Netscape Communications Corp., but using it will require the customer to take special steps to call it up.

Joining Jobs and Ellison on the board are Jerome York, former chief financial officer of IBM and Chrysler Corp., and Bill Campbell, a former Apple sales executive who now is chief executive of Intuit Inc., the maker of the popular Quicken personal finance software.

Apple's board has been criticized by analysts and some investors for failing to step in as the company has foundered and being too deferential to the company's chief executives. The new members won widespread praise yesterday. "They're a cast of all-stars," said Wu, the ABN AMRO Chicago analyst. "It's exactly who Apple needs."

Tim Bajarin, president of market research firm Creative Strategies Research International Inc. in Santa Clara, Calif., singled out York as "a hard-nosed superstar in the world of money management" who helped the turnarounds at IBM and Chrysler.

In addition to Markkula, Katherine Hudson, president and chief executive of W.H. Brady Co., and Bernard Goldstein, managing director of investment banking firm Broadview Associates, resigned from the board.

Despite widespread rumors last week that Jobs would assume the chairmanship of the company, no board chairman was named yesterday.

Shannon reported from Boston; Chandrasekaran from Washington. Staff writer Elizabeth Corcoran contributed to this report.

© Copyright 1998 The Washington Post Company

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