How Microsoft saved Apple from bankruptcy

Apple might be the archetype of a rags-to-riches story. From hand-made computers to iPhones and iPods, Apple seems to have done it all.

In 2018, it became the first trillion-dollar company, and along the way it has reached cult-like status. With each new release, people flock to the stores to be the first with the latest iPhone and be a part of the brand. But the story is much more than just technology. 

There are enough Apple stories to fill books, feature films and Youtube channels, but this is Company Forensics, and today we are going to talk about that time when Apple almost went out of business. 

In the late 90’s Apple was a ship without a captain. They closed the first quarter of 1997 with $708 million dollars in burn rate. That’s about $1.1Billion dollars in 2020 dollars. 

It was a defining moment in the story of the company. And seeing the way products like the iPhone have done to transform the world, a defining moment in OUR history. 

Apple became what it is today because of visionaries who clashed with one another, egos that fought against reality—and sometimes won—, stolen ideas and rivalries that have spanned decades. 

So, let's dive into Apple's history in this very special episode of Company Forensics. 

The two Steves

Like I said, we don’t have time to tell the whole Apple story. But there are parts of their story that we just can’t ignore. 

Steve Jobs and Steve Wozniak met in 1971, a time in which computers were at the molecular stage of their evolution. They met through a mutual friend, Bill Fernandez, who would eventually work at Apple. The two hit it off as both shared a passion for technology and computers.

Shortly after meeting, they became more active in social circles and Wozniak showed Jobs a project he was working on: The Blue Box. This device allowed Wozniak to have free long-distance calls. 

We spent some money in this new Forensics studio, but the reason why we don’t have a Blue Box here is because they are a collectible item these days, worth well over $50,000. 

Old phones like this one would use tones to direct calls. The Blue Box would ring those tones allowing the caller to bypass the official call routing system… letting you make long distance calls without paying the fees. 

Jobs saw potential in the device and started selling it around California. And the Blue Box wasn't a technological marvel by any means. What mattered was that both Steves meshed together effortlessly. Wozniak was the tech wiz, while Jobs, also technologically adept, was a marketing genius. 

Simple as it was, this gadget was vital in Apple's development. Jobs once said: "If it hadn't been for the Blue Boxes, there would have been no Apple. I'm 100% sure of that."

Meanwhile, at the club, the computer club, that is, Wozniak was drawing inspiration to make his computer, one that would eventually be the Apple 1. Nowadays, this doesn't look like a computer, as the first version was more of a PC board than a complete device. But back then, it was eye-catching, and people wanted it. 

Wozniak wasn’t about making millions, or changing the world. His dream was inspiring and educating others. So much so, that initially he gave the designs away for free. He just wanted to show the world that it was possible to build an inexpensive computer.

Jobs, on the other hand, saw a different path. He took the product to a computer store and tried to sell the boards, but the owner said people would rather have a complete computer. 

This is another defining moment for the company. 

It connects to a story from Steve Jobs’ childhood, when his adoptive father, Paul Jobs, took him to the family’s dairy farm in Wisconsin.

Steve recalled to Walter Isaacson that he wasn’t a fan of rural life, but one image stuck with him. He saw a calf being born, and he was amazed when the tiny animal struggled up within minutes and began to walk. 

“It was not something she had learned, but it was instead hardwired into her.”

This right there was the premise of Apple. This integration of hardware and software. Hardware built with the software in mind and software built for a specific piece of hardware. 

Translating that to today’s terms, this is the reason why you are probably not going to see a PC running MacOS, or a Samsung phone running iOS. Apple designs and seamlessly integrates both of them. This is what we’ll call a closed architecture. 

So, Jobs and Wozniak set about making them. They didn't have any money, so Jobs sold his VW Camper Van, and then convinced Wozniak to sell his HP calculator (for $500!). 

It’s around this time where history associates the Steves with the famous garage. According to Wozniak himself, the garage wasn't that important and was instead a place where they'd test products and hang out.

In a very startup-ey story, Wozniak had ties with Hewlett Packard, and he recalls trying to sell them his prototype to multiple rejections. Around this time Jobs managed to reel in Mike Markkula, who invested $250,000 and became a critical part of the company.

The fall of Steve Jobs

The Apple II was Apple’s first truly successful computer. The insides contained Wozniak's technological prowess, but the outside, the shell, was now the result of Jobs' obsession with aesthetics. The Apple II drove a big part of Apple’s initial success. 

Part of that success is attributed to the fact that the Apple II was an open architecture computer, which meant it was sold to education, small business, and home markets. All of these markets were not interesting to IBM, who was their biggest competitor at the time. 

Steve Jobs, who since the very beginning had passed the CEO hat to someone else, a guy named Michael Scott, took on the project of Apple’s future computer. The LISA., named after his daughter. 

The project was visionary: the first GUI computer aimed at personal business users. 

But LISA suffered delays and ran over budget. It brought the worst part of Steve Jobs, and many of the engineers who worked on the LISA team recall Steve Jobs with passionate hate. 

Eventually, Steve was removed from the project altogether. It might have been the first glimpse of Steve’s peculiar character. 

In 1983, another important person in the history of Apple came in: John Sculley. Jobs wooed the former Pepsi CEO with a pretty memorable quote: "Do you want to sell sugared water for the rest of your life? Or do you want to come with me and change the world?"

Sculley and Jobs would clash, big time. 

The Macintosh was selling well, but it couldn't dethrone notable brands like IBM, and the new Windows was now a threat. The Macintosh was a closed architecture computer, by the way. This meant that the market was more limited. 

This is part of that philosophical clash, you see. Steve Jobs believed in this hardware-software integration. Closed architecture. Sculley believed in open architecture. 

In 1985 Steve Jobs attempted what can only be described as a coup. He tried to get the board to oust Sculley, but the move backfired. The board ended up removing Steve Jobs, who left the company through the backdoor, 

He sold all of his 6.5 million shares in the company, keeping only one, so that he could still receive company reports and attend shareholder meetings. 

Apple was a public company in 1985. The 6.5 million shares Steve Jobs sold netted some $70M. He used $5M to acquire a small visual effects company called Pixar. 

Yeah, that Pixar. 

Then he started another company, NEXT. 

Steve Wozniak also left around the same time. He didn't believe in Apple's new direction and also sold almost all his shares.  

With these two gone, Sculley had a free hand at Apple. And it seemed he was doing the right at first. 

The Apple falls

Apple’s strongest suit was always their GUI: the graphical user interface. It’s what made them better than IBM at the time. 

But IBM started to catch up in the early 90’s, partly because of Windows, an OS that could run on multiple computers. Once again, open architecture. 

Apple also struggled by launching products that were too similar to each other, and not marketing them well. They became such an underdog that both IBM and Sun Microsystems made bids to acquire them. Neither deal happened. 

Sculley was also removed from the company around this time. 

In a desperate effort to generate revenue, Apple began licensing MacOS so it could be installed on any computer. That’s right. In 1995 you could purchase MacOS to install it on your non-Apple computer. 

By 1996 Apple changed CEOs one again, Gil Amelio, a well-known corporate rehabilitator came in. He fired a lot of people in an attempt to reach profitability, but it was also not enough.

Weeks from bankruptcy

While Apple struggled, Steve Jobs’ did as well. Pixar was on the verge of bankruptcy many times, a story for another day…. And NEXT, who was originally a hardware company, making workstations for higher education and for the business market… failed on that approach and had to pivot to software. 

NEXT focused on operating systems. An innovative object-oriented OS called NeXTSTEP, which is highly influential to the software we use today. 

NeXTSTEP ended up being the operating system for the Swiss Bank Organization and for the NSA, but most importantly, it caught the attention of Apple itself. 

Apple was looking to replace an outdated MacOS and aimed to acquire a third party company to do so. Plan B was a BeOS, an operating system developed by a company called Copland. 

There was little BeOS could do against NeXTSTEP, because acquiring NeXT had an extra bonus for Apple, Steve Jobs himself. 

Apple purchased NeXT in 1997 for $429 million  and 1.5 million shares of Apple stock. Very intentionally Steve Jobs didn’t get any cash out of this deal, all of his compensation was in stock. 

While Amelio, the CEO at the time intended to remain as CEO after Jobs returned, the board sided with Steve. It was very clear to him that if Apple was to be saved, it was him the one to do it. 

A more mature Jobs returning to the company he founded. It’s the corporate fairytale, isn’t it? 

It’s around this time that he discovered another iconic talent inside the company ranks: an aluminum-loving british industrial designer called Jonathan Ive. 

Apple was still struggling, though. Cash was short and Jobs turned to his frenemy Bill Gates for help. “We need all the help we can get”, he said. Apple took a $150M investment in non-voting stock, from Microsoft. 

Not everybody at Microsoft agreed, though. Dell CEO and founder Michael Dell, one of Microsoft's biggest partners, famously said that if he were in Jobs' shoes, he'd "shut it down and give the money back to the shareholders."

They also partnered to bring Microsoft Office to the Mac, a key integration that led to the success of the iMac, which was released one year later. That colorful iMac is the first computer released under Steve’s (new) leadership. 

By the way, Steve’s original name for the Mac was MacMan. It was their marketing team that suggested going with an i, which was to stand for the ease of access to the internet. 

Behind the scenes, some changes also happened in the company ecosystem. From much better food at the cafeteria to banning pets. He wanted everybody focused on Apple. A guy named Tim Cook was also hired this year. 

In 1998, Steve Jobs stood at the Macworld Expo in San Francisco and famously announced his first ‘One More Thing’. Not a sexy product, but $45M in profits, the first profits Apple had seen in years.

The rest is.. Not history. It’s the story that we live today. It’s the story of my generation’s first Apple Device, an iPod. 

It’s the story of a revolution in how we interact with our day today lives. It’s the story of millions of developers building software for a product that didn’t exist 15 years ago. The stories of other unicorns built on the backbone of a fundamental transformation in the way hardware and software interact together. 

It’s the story of the crazy ones at Apple that inspired most of us, entrepreneurs, to become who we are today. 

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A note from Caya: We worked very passionately on this video. I’ve been dying to have the experience, the team and the know-how to make a proper video about one of my favorite stories. Certainly one that inspired me. 

We poured our hearts into the production of this video. If you enjoyed it, please share it around, or just take a look at the other videos in our channel. We’ve explored 50+ stories of failed and successful companies, and we intend to keep doing it.

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This video contains information from various sources, including Walter Isaacson's book: Steve Jobs.