How Microsoft Saved Apple (And Why They Did It)

How Microsoft Saved Apple (And Why They Did It)

How Microsoft Saved Apple

Apple: hands down the most successful American company.

Between the ubiquity of their devices and the almost fanatical loyalty of their customers, it should come as no surprise that Apple recently became the first trillion-dollar company listed on the American stock market. And yet, just twenty years ago Apple was on the verge of bankruptcy and it wasn’t Steve Jobs that saved them, but rather their greatest rival at the time, Microsoft.

The Apple of 1997 was a very different company.

It wasn’t selling smartphones, they weren’t even invented yet, but what they were selling was computers. Back then Apple was a computer company and that was even reflected in their name, but by all accounts it was a company in decline. Apple’s computers were simply too expensive to be massively popular. They did have good margins, but their market share was abysmal.

You see, Apple refused to license its operating system to other companies, which had no choice but to go to the only other player in town, Microsoft. Now, keep in mind back in the 1990s the vast majority of computers were used for commercial purposes. Their main value was the software they had, and if your computer didn’t have the necessary programs developed for it, well then it was effectively useless for big companies.

In 1997 Microsoft had a staggering 90% market share, and unsurprisingly almost all the software that was being developed at the time was made for Windows. Every software developer had to make a choice: he could spend only as much money as necessary to create programs for Windows, or throw almost twice as much to also support Apple, which had less than 10% market share. It’s also worth noting that throughout this period Steve Jobs wasn’t even part of the company: the Apple board of directors had forced him out in 1985. But in 1997 the situation was truly desperate: sales were declining rapidly and after a series of unsuccessful CEOs, the Apple board actually brought Steve back.

In February they acquired next, the company Steve had started after leaving Apple. But by that point Apple’s finances were in such bad shape that Steve Jobs didn’t actually receive cash for this purchase; instead he received Apple shares, specifically 1.5 million of them.

But even that wasn’t enough. By the end of July Apple had less than 90 days’ worth of cash left in the bank. Apple was worth less than $3 billion and had lost over a billion in a single year. But then, on the 6th of August 1997, Steve Jobs made an announcement that shocked the world.

I'd like to announce one of our first partnerships today, a very very meaningful one, and that is one with Microsoft. You probably noticed that the crowd’s response was hesitant: they just could not comprehend how Apple could possibly partner with their biggest competitor, who was driving them out of business. As the announcement progressed, things got worse. Next, we have taken a look at browsers out there and Apple has decided ... Apple has decided to make Internet Explorer its default browser on the Macintosh.

Since we believe in choice. The speech was sounding like a surrender statement. And lastly, Microsoft is making an investment in Apple. Microsoft is buying $150 million worth of Apple stock at market price.

It is non-voting shares. Notice the keyword here: non-voting. Microsoft wasn’t trying to acquire Apple, instead it was just funding it. But it wasn’t just cash that Bill Gates was offering. The second part of this is Microsoft is committing to release Microsoft Office on Macintosh for the next five years. The issue with software I mentioned earlier that was basically bringing Apple down, was being solved by Bill Gates single-handedly.

No one would ever purchase an Apple computer without Microsoft Office on it and here is Bill Gates giving it away for shares at market price, which he could have just purchased off of the market.

So why did Bill Gates do it? Why save Apple on the eve of what would’ve been their death at the hands of Microsoft?

Well, as you probably guessed, Bill Gates wasn’t doing this out of the kindness of his heart.

In fact, back then Bill Gates had a rather negative reputation. He wasn’t really into philanthropy yet; instead, he was seen as a cutthroat businessman willing to do anything to succeed in his industry. And by all accounts Microsoft was successful; so successful in fact, that it was attracting the attention of antitrust regulators.

The Department of Justice had been preparing its case against Microsoft since 1993, and obviously Bill didn’t want his company broken up, so what better way to show that Microsoft isn’t a monopoly than by literally propping up his competition. Less than a year after the Apple partnership, the DOJ summoned Bill Gates for a painstaking three-day-long deposition.

By the way, you can tell a lot about someone based on how they act during these things. Did you ever have any discussions with any representative of Real Networks concerning what products Real Networks should or should not offer or distribute?

No.

Notice how long he takes before giving an answer, carefully considering how his responses could be used against him. A program designed to assist in the performance of a specific task, such as word processing, accounting or inventory management.

I’d say it’s a pretty vague definition.

Is it accurate as far as it goes?

I’d say it’s vague but accurate.

Throughout the deposition he’d attack definitions and remain as vague as possible because he knew that by saving Apple a year earlier he had really saved Microsoft. The DOJ, of course, eventually gave up and in 2001 cleared Microsoft with minimal punishments. And as to what happened with the Apple shares Microsoft had, well, Bill Gates got rid of them as soon as they had served their purpose. Once the Department of Justice had settled with Microsoft, Bill Gates converted his preferential, non-voting Apple shares into regular stock.

In total he ended up with 18.2 million shares of Apple, which he sold in 2003. Now, keep in mind this was after the dot-com bubble had crashed and in 2003 Apple’s stock price was still extremely low compared to its pre-bubble heights.

So just how much money did Bill Gates miss out on?

Well, Apple has been performing so well since 2003 that its stock has split twice in that time, once at a 2:1 ratio in 2005 and a second time at a 7:1 ratio in 2014. Thus the 18.2 million shares then would be 254 million today. As of August 2018 Apple’s stock price is roughly $210 a piece, which would make Microsoft’s former stake be worth $53.5 billion today.

So yeah, Bill Gates might have missed out on a few billion dollars.

Anyway, thanks for watching.

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Microsoft Saved Apple