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Microsoft is Jobs #1

Life is never dull in the computer industry, and last week Apple and Microsoft made sure that the few who weren’t paying attention sat up and took notice. At Steve Jobs’s keynote address at Boston’s Macworld Expo, Jobs and Microsoft CEO Bill Gates announced a wide-ranging technology agreement. The highlights of the agreement include:

  • Microsoft will purchase $150 million of non-voting Apple stock (a new class of stock created expressly for this purpose).

  • Microsoft will continue to ship Microsoft Office, Microsoft Internet Explorer, and other Macintosh programs for at least five years.

  • Apple will bundle Microsoft Internet Explorer with the Mac OS and make it the default Web browser in future releases.

  • The companies agreed to a broad patent cross-licensing agreement.

  • The companies plan to collaborate to ensure compatibility between their respective Java virtual machines.

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Reality Check — Much of this announcement is pure public relations, nothing more. The money sounds good, but $150 million is pocket change for Microsoft, and although Apple’s finances don’t compare with Microsoft’s, Apple still has about $1 billion in cash, so $150 million won’t make a significant difference in the long run.

Don’t assume that a public relations ploy is pointless though, because it’s precisely the shot in the arm that Apple has needed for some months. Many people believe that ex-CEO Gil Amelio did a good job of putting Apple back on a firm business footing, and the success of Mac OS 8 sales (Apple claims that over 1.2 million copies were purchased by 08-Aug-97, quadruple Apple’s expectations) show that Apple still has a customer base willing to spend money with Apple.

Despite Amelio’s efforts, press coverage of Apple has remained heavily negative, or more accurately, coverage has remained heavy and negative. Macintosh sales have been down, but it seems clear that the damaging press coverage about how Macintosh sales were down in large part created the public perception that buying a Mac would be a bad idea. You see the feedback loop – the press may not have been so much reporting the news as creating it.

This announcement of support from Microsoft could break the loop and create some positive press coverage, which would in turn improve public perception of Apple’s condition. The announcement had the immediate effect of driving Apple’s stock price up six points, and several analysts raised their ratings of Apple’s stock, which, in the equally feedback-driven world of the stock market, may help Apple’s stock in the near future.

Apple’s Reasons — It’s obvious why Apple wanted this announcement. The public relations impact was a big reason, as was the commitment from Microsoft on Office and Internet Explorer. Apple’s not so foolish as to believe the Mac could thrive without Microsoft Office. Love them or hate them, Office mainstays Word and Excel are a big reason the Macintosh is still alive today. Without Word and Excel, the Mac simply wouldn’t have stood a chance at competing in the business market, where interoperability is of tremendous importance. That Microsoft makes hundreds of millions of dollars a year selling Office for the Macintosh is proof enough of this fact.

Microsoft’s Reasons — Less clear are Microsoft’s motivations. Keep in mind that Microsoft is as driven by the bottom line as any company. You can assume that Microsoft doesn’t feel that it’s wasting its money. This is the company that’s losing hundreds of millions of dollars a year on MSN, with the assumption that sooner or later, there will be a big payback from Internet services of some sort. That said, here are my thoughts on why Microsoft offered its support to Apple.

  • By bolstering Apple’s fortunes in this relatively minimal way, Microsoft helps assuage anti-trust concerns. If Apple were to disappear, the U.S. Justice Department would look more closely at allegations of monopolistic practices on Microsoft’s part. By investing the $150 million in non-voting stock, Microsoft has no control over Apple, which would have made the Justice Department take note as well. In addition, it’s unclear how much more money Microsoft would make even if every Mac user converted to Windows. In the past, Microsoft made more money per Mac user than Windows user, and although that’s no longer true, Microsoft doesn’t have nearly as much financial incentive to eliminate Apple as many people assume.

  • Apple CFO Fred Anderson said that in addition to the previously mentioned $150 million investment, Microsoft will pay Apple an undisclosed sum over the next few years as part of the patent cross-licensing agreement. In the computer industry, patents are used like trading cards. The additional payments may account for Apple’s patents being worth more than Microsoft’s in the cross-licensing agreement; alternately, the money may settle patent squabbles between the two companies.

  • In my opinion, Microsoft needs competition, and it’s possible that someone within the company has recognized that fact. Competition prevents stagnation, which serves no one because users don’t benefit from added functionality and companies don’t earn upgrade money. Microsoft is in the enviable position of being able to reap the rewards of having competition from Apple while having little to fear from even a healthy Apple.

  • Finally, Microsoft gets another leg up on its Internet strategy by Apple making Internet Explorer the default Web browser in future versions of the Mac OS. Some version of a Netscape Web browser (it’s difficult to talk about Netscape’s Web browsers by name, because the names keep changing and the Web browser is now part of the Netscape Communicator suite) will probably continue to be bundled with the Mac OS, but it won’t get top billing.

The Mac Faithful — There are undoubtedly many Macintosh users who feel that Apple has sold out to the Evil Empire. I think that’s an overreaction. There isn’t much new in the announcement, other than the $150 million investment, which doesn’t even give Microsoft any voting power. Microsoft was already developing Office 98 and Internet Explorer 4.0 for the Mac, and Apple was already bundling Internet Explorer with Mac OS 8. It’s just a ploy to regain the confidence of the press and Wall Street, and if it works, it’s good for the Mac, which is what we all want.

There are a few other twists in all this that should reassure Mac loyalists. First, Bill Gates and Microsoft don’t always share the same opinions. Bill has supported the Mac personally for quite some time and is probably the primary reason why other forces at Microsoft haven’t eliminated Mac development. Strange as it may sound, Bill and a relatively small group of Macintosh supporters within Microsoft have probably been one of the most important factors in keeping the Mac alive all these years. The fact that Mac support within Microsoft is on an upswing can only be a good thing.

Second, Steve Jobs also announced sweeping changes to Apple’s board of directors. It’s hard to say much interesting about the specifics, since the names won’t mean much to most people. However, new to the board are Pixar CEO Jobs (who reportedly sold $22 million in Apple stock several months ago), Bill Campbell, president of Intuit (previously a long time Apple and Claris executive); Jerry York, former CFO of IBM and Chrysler (said to have been instrumental in the financial turnarounds of both companies); and Larry Ellison, the chairman of Oracle. Ellison is a bit scary, because he’s made some statements about what he thinks Apple should do that betray a seeming ignorance of the existing Mac community, if not the entire personal computer industry. However, Ellison is also one of Microsoft’s most outspoken opponents, so his vote in board decisions will always be something of a wildcard.

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