The Copland Crisis
By August, Apple's new executive VP, R& D and chief technology officer, Ellen M. Hancock, recognized Copland for the bloated piece of inferior vaporware that it was (it didn't adequately address the Internet and lacked memory protection) and froze all aspects of its development not directly related to the Harmony and Tempo releases. The developer community, which had invested years of effort working on Copland and had stuck by Apple through tough times, freaked. Amelio promised to announce Apple's revised OS strategy at the upcoming Macworld Expo in San Francisco on January 7, 1997.
Apple executives began a frantic scramble to locate a technology partner. One of the first places they turned to was Be (www.be com, a small Menlo Park, California, company started by Jean-Louis Gassée after he resigned as president of Apple Products on September 30, 1990. Gassée had tried to sell Be to Apple's then-CEO Michael Spindler in 1995. "I told Mike that Copland might develop a flat tire on the road to greatness and they might want to buy some insurance," claims Gassée.
As predicted, Copland started bogging down, and the nimble Be began generating very favorable press. On October 3, 1995, Be introduced the BeBox, a computer powered by two 66MHz PowerPC 603 processors and up to 256MB of RAM. It boasted a SCSI II bus, 16-bit CD-quality sound, three PCI slots, four MIDI, four serial ports, and five ISA slots. The BeBox ran a multithreaded, memory-protected, object-oriented, preemptively multitasking operating system. A bare-bones box cost only $1,600, and a moderately configured model would set you back just $3,000. No doubt, the system was impressive, but analysts wondered if Be wasn't making the same mistakes as Steve Jobs' NeXT, which had failed to find a market for its own advanced, proprietary OS and hardware. Gassée begged Red Herring, "For God's sake, don't compare us to NeXT. We want to be a better tool for developers, not to be tasteful. We don't cost $10,000. We have a floppy drive. We do not defecate on developers." It was speculated that Gassée never really wanted to be in the hardware business and had always hoped to one day sell the BeOS back to Apple for a tidy profit. Now it looked like that dream might become a reality.
In August 1996, Gassée presented Apple with seven different ways of using Be's technology. During her stint at IBM, Hancock saw the effect that Microsoft's OS licensing agreements had on Big Blue and insisted that Apple was only interested in buying Be outright, not licensing any of its technology. If Apple wanted to buy Be, that was fine by Gassée, but he overplayed his hand. In October, Gassée flew to Kauai, Hawaii, for a two-hour meeting with Amelio, who was giving a speech to Apple's Asia-Pacific sales force. Gassée proposed returning to Apple with his 50-person Be team. He would report to Hancock but wanted to oversee work on all future operating systems. While Gassée offered to work for one dollar a year, his backers demanded 15 percent of Apple and a seat on Apple's board of directors. Apple's due diligence placed the value of Be at about $50 million and in early November it responded with a cash bid "well south of $100 million," according to Gassée. Be felt that Apple desperately needed its technology and Gassée's expertise. Apple noted that only $20 million had been invested in Be so far, and its offer represented a windfall, especially in light of the fact that the BeOS still needed three years of additional expensive development before it could ship (it didn't have any printer drivers, didn't support file sharing, wasn't available in languages other than English, and didn't run existing Mac applications). Direct talks between Amelio and Gassée broke down over price just after the Fall Comdex trade show, when Apple offered $125 million. Be's investors were said to be holding out for no less than $200 million, a figure Amelio considered "outrageous."
Although the BeOS excelled at many things, Apple felt it was missing several crucial features and would require considerable work to bring it up to Apple's standards.
Apple was committed to revealing its OS strategy in January 1997, so Gassée knew Apple didn't have the luxury of time. One person close to the negotiations claims that Gassée quipped, "A man in the desert doesn't bargain on the price of water." To increase the pressure on Apple, Be signed up the preeminent Mac clone maker Power Computing as a licensee for its BeOS, and Gassée intentionally leaked progress of the negotiations to the press, which infuriated Apple executives.
With Be playing hard to get, Apple decided to play hardball and began investigating other options. Hancock ordered her staff to consider Microsoft's Windows NT, Sun Microsystems' Solaris, and even the ill-fated Taligent, which Apple had handed off to partner IBM in December 1995. Hancock was partial to Unix-based Solaris, while COO Marco Landi preferred cutting a deal for Windows NT. To hedge her bets and assuage egos, on November 15, Hancock authorized Copland engineers to devise a plan to salvage their work by releasing a less-ambitious version.
Just before Thanksgiving, Steve Jobs called Amelio to discuss Apple's OS strategy, offer his advice, and urge him to steer clear of Be; he thought its software was wrong for Apple. On November 25, a mid-level manager at NeXT, Garrett L. Rice, contacted Hancock to discuss licensing the company's OPENSTEP operating system. Two days later, a couple of Apple engineers and a manager were meeting with some NeXT managers to see what they had to offer. OPENSTEP was technically elegant but had failed to make much of a dent in the market. Jobs had hired Goldman, Sachs & Company to take NeXT public earlier in the year, but the IPO never got off the ground since the firm's only profit came in 1994 when it earned $1.03 million on revenues of $49.6 million. Now it looked like maybe he could sell NeXT after all, to none other than the company he founded 20 years prior.
On December 2, Jobs met with Amelio, Hancock, and Douglas S. Solomon (senior VP of strategic planning and corporate development), in an eigth floor conference room next door to Amelio's office. It was the first time he had set foot on Apple's Cupertino campus since leaving in 1985. Jobs pitched NeXT as Apple's only hope at getting its OS back on track. It was a radical departure from the Copland project, but OPENSTEP was a proven technology, unlike BeOS. Apparently Jobs' reality distortion field was set to stun that day, because two days later Hancock informed Apple's board that they were seriously considering buying NeXT. On December 9 and 10, teams from NeXT and Be separately conferred with eight of Apple's senior managers, including Amelio, in a technology shootout at the upstairs meeting room of the Garden Court Hotel in Palo Alto.
Avadis "Avie" Tevanian Jr., Ph. D, NeXT's VP of engineering, gave the OPENSTEP demonstration, and Jobs boasted that their OS was still five to seven years ahead of its time and perfectly suited to Internet and multimedia creation, two of the Mac's few remaining strongholds. He turned over NeXT's financial papers, which showed that NeXT suffered net losses of nearly $50 million from 1993 through mid-1996, according to The Wall Street Journal. Privately, Jobs asked Amelio if he could be on the board of directors, but the board voted down that idea and Amelio instead asked him to stay on as an advisor. Gassée miscalculated, thinking that Be had the deal already wrapped up and that this meeting was a mere formality. He had nothing new to present to the Apple contingent, and they resented it.
On December 20, Apple announced its intention to purchase NeXT Software in a friendly acquisition. When the deal went through on February 4, 1997, the total purchase price, including the fair value of the net liabilities assumed, was $427 million, which comprised $319 million in cash, 1.5 million shares of Apple stock (valued at $25 million), options on 1.9 million shares (valued at $16 million), cash payments of $56 million to the NeXT debtholders, cash payments of $9 million for closing and related costs, and $2 million of net liabilities assumed. As the largest shareholder of NeXT (he owned 45 percent), Jobs personally pocketed $100 million in cash and all 1.5 million shares of Apple stock, which he agreed not to sell for at least six months. All NeXT products, services, and technology research became part of Apple. Amelio now admits that Apple overpaid for NeXT, but it had little choice given the dire straits the company was in at the time.
Jobs assured Apple that, although his OPENSTEP had been on the market for years and had failed to gain widespread acceptance, it was still ahead of its time
Amelio told the world, "The next chapter in Apple's history begins today" with the merger of Apple and NeXT. In explaining the choice, Amelio wrote, "As we looked at various partners for our operating system development, we discovered that Apple and NeXT had surprisingly complementary products, technologies, and services. In fact, the more we looked at the two companies, the more we realized that we each were strong where the other faced challenges, and in many ways we filled in the blanks in each other's strategies. For example, Apple needed a truly modern operating system and NeXT had an exceptional operating system with modern services and APIs. At the same time, NeXT needed a high-volume installed base and Apple▀ one of the world's largest personal computer manufacturers▀ has sold more than 26 million Macintosh systems."
In a statement released the night Apple purchased NeXT, Jobs wrote, "Much of the industry has lived off the Macintosh for over ten years now, slowly copying the Mac's revolutionary user interface. Now the time has come for new innovation, and where better than Apple for this to spring from? Who else has consistently led this industry▀ first with the Apple II, then the Macintosh and LaserWriter? With this merger, the advanced software from NeXT will be married with Apple's very high-volume hardware platforms and marketing channels to create another breakthrough, leapfrogging existing platforms, and fueling Apple and the industry copy cats for the next ten years and beyond. I still have very deep feelings for Apple, and it gives me great joy to play a role in architecting Apple's future."
After the fanfare surrounding the acquisition of NeXT, Apple was surprisingly quiet about its plans for Rhapsody, the name it gave to its new NeXT-based high-end operating system. Instead of betting everything on Rhapsody, the plan called for a dual-OS strategy, with the venerable Mac OS aimed at the consumer desktop market and Rhapsody targeted at servers and enterprises, just as Microsoft has segmented the markets for Windows 98 and NT. Apple successfully released several Mac OS upgrades containing technologies originally developed for Copland, such as the multithreaded Finder and Appearance Manager that shipped in Mac OS 8. Apple was following a plan to continue improving the old warhorse as long as possible, using the periodic upgrades to fuel cash flow.
"It's not like wine; it doesn't age very well."
- Apple CEO Gil Amelio, on Copland
Like NeXT, Be started off making its own proprietary hardware, but the real value of both firms was in their operating systems
Be CEO Jean-Louis Gassée knew he had Apple in a tight spot, but he asked for too much
"I've got them by the balls, and I'm going to squeeze until it hurts."
- Be CEO Jean-Louis Gassée, describing his negotiating tactics
Steve Jobs says he initially contacted Apple simply to warn it against buying Be, but he soon had Apple interested in NeXT
In the late 1980s, Hancock's former employer, IBM, paid NeXT a reported $50 million for access to its technology but ultimately did nothing with it.
"The reality is that we live with System 7. Despite it being tarred and feathered, it will be around in some form for 10 years."
- Gil Amelio, in a San Francisco Chronicle interview conducted just days before Apple bought NeXT
"We choose Plan A instead of Plan Be." Gil Amelio, taking a potshot at
Gassée's spurned BeOS