Ben & David broadcast live from the 2016 GeekWire Summit covering one of the all-time greats, Apple's 1996 acquisition of NeXT. This episode has it all: the Steve Jobs hero story, Apple, I.M. Pei, Ross Perot, Aaron Sorkin, Nobel Laureates and... Gil Amelio? Does NeXT rank atop the best acquisitions ever? Our own heroes cast their votes.
Topics covered include:
The Carve Out:
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: I feel very antiquated, my use of TextEdit now that –
David: Hey, that’s a NeXT product.
Ben: It is. It’s unbelievable. There’s so much still there.
David: For NeXT? Mail?
Ben: Totally. The screenshot icon finally changed. It was that like big camera until Yosemite and it finally changed that little thing. That was like the last asset remaining.
Ben: Hello, GeekWire.
David: Hey, GeekWire. Whoo!
Ben: Awesome. Well, welcome to Episode 23 of Acquired, the podcast about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. On today’s episode we will be covering a cornerstone of technology today: Apple’s 1997 acquisition of NeXT. I think this is one that we’ve been talking about doing for a very long time. The original tagline of our show was “technology acquisitions that actually went well” and kind of we’ve deviated from that a little bit and we’ve gotten into talking about all sorts of acquisitions, recent ones, ones where it didn’t go well, but this one is super, super true to our roots. So excited to be here and talk about today.
David: Yeah, this is going to be a blast. And a big, big thank you to GeekWire, Todd and everybody for hosting us here. This is our first live show. So, we’re streaming on Facebook. You guys will get to see how the sausage is made. Thanks for sticking with us, and we will post it on iTunes and our website Acquired.fm once we edit it. With that, we’ll dive in.
So NeXT, like Ben was saying, I’ve been looking forward to doing this one for a long time as both devoted Apple users, both of us. This is really the story of how, you know, what I love about it is kind of like this is the hero story of Steve Jobs, you know. He had initial success, the initial arc, and then he was off in the wilderness at NeXT for 10 years, then he comes back to Apple and here we are today where Apple is the most valuable company in the world. How did this happen?
Ben: And truly like a drama, right? I mean, you can’t script this stuff. They’ve literally made three movies about it because of how kind of crazy this journey is. So, we want to focus just today on kind of the part picking up at when Steve started NeXT and how that went integrating that into Apple.
David: So, we start our journey in 1984, a very good year, it was the year I was born. And Steve Jobs is still at Apple for the first time, a company he co-founded with Steve Wozniak. What’s going on at this time is the personal computer has happened, driven by Apple and the Macintosh, Apple as a public company, very valuable. But computing has entered a new wave, and we’re in the era of the “workstation” at this point. I did do a bunch of Googling and Wikipedia-ing because I really had no clue what a “workstation” was. I think there were a bunch of these in college in the computer lab somewhere and they’re made by some and I didn’t really know what they did.
Ben: This is dating us a little bit.
David: Yeah, dating us a little bit. So workstations, it turns out, are really just personal computers on steroids for the time. Now they’re pitifully underpowered. But what kind of defined a workstation was a “3M computer”, and a 3M computer had one megabyte of memory – megabyte of memory – had a megapixel display that could display 1 megapixel’s worth of content, and it had a megaflops of computing performance that is floating point operations per second, Ben. And sometimes people added a fourth M to the definition of a workstation and that was a mega penny which was how much these things cost, which was about $10,000 a pop. So, these are not personal computers. They’re mostly used at universities for research, for scientific research, for technical research, large corporations use them. But these aren’t the server mainframes of the old day. These are single-use computers that are networked so that people can log into them, but one user uses them at a time.
Ben: Got you.
David: So that’s what’s going on. And Apple is kind of in a quandary because this is the computing era of the workstation, but Apple has no offering in the workstation, they’re a PC company. And just down the street from them, Sun Microsystems has been started from Stanford. Stanford University Network, hence the Sun Microsystems. And Sun is the darling of technology. They are the fastest growing company in America in the 1980’s. They go from founding to $1 billion of revenue in six years. So, Steve is still at Apple, all this is going on. He’s no longer the CEO. John Sculley is the CEO.
Ben: And to put this in a context around times that computers have been released, this right after the Macintosh is released, right?
David: A couple of years after the Macintosh is released. So this is 1984, and Steve gets put in charge of a new division at Apple called the SuperMicro division, and that combines the Macintosh and the Lisa, and his remit is to basically start Apple’s entry into this workstation market. And so he’s working on a top secrete project codenamed the “BigMac”. And the goal, what he’s trying to do is to take a workstation powered computer, a 3M and get rid of the fourth M, and sell it for $500. He wants to put workstation-esque power into personal computers, make them affordable to everybody, students, and individuals. So that’s what he’s working on. It’s not unfortunately going so well. So, turns out, with the technology of the time it’s really hard to build these workstation computers with off-the-shelf components and cheaper components.
So, Steve isn’t doing too good a job and Sculley and the board are starting to lose faith in him. So in May of 1985, Sculley the CEO and Arthur Rock who is a venture capitalist on the board– Be wary of venture capitalists out there.
Ben: Says the VC.
David: Says the venture capitalist. So, they decide that enough is enough and they’re going to remove Steve from being in charge of this new division, the SuperMicro division. And they’re basically going to just have him be a figurehead for the company. So, they sideline him. His office gets moved across the street to essentially an empty building and he is still at Apple at this point, he’s still the chairman of Apple but he has no day-to-day responsibilities. And so, he refers to this as kind of being off– He calls it being in “Siberia”. And so, for the summer of 1985 he is just hanging out, he has nothing to do. But he’s thinking about this problem. And this goes on for the summer and an interesting thing happens.
So, over the summer, while Steve is hanging out, he ends up meeting this guy named Paul Berg, and Paul is a Nobel laureate in chemistry. He is a professor at Stanford in the chemistry department, and he’s won the Nobel Prize for chemistry. He complains to Steve and he says, “Hey, like we’ve got these workstations, you know, Sun workstations at Stanford, but they’re really, really expensive and I'm trying to teach all these undergrads about DNA and recombinant DNA. And there’s no way, like they can’t get enough time on the workstations to use them to model DNA computationally and wet labs are like even more expensive than that, they can’t work with it. Actually so they’re having a really hard time learning how to do this.”
So this just, like, doubly strikes the fire in Steve, like he can’t handle this. He sees this problem and he says, “We need to get these powerful computers into the hands of students to be able to learn and build new things, and we need to get the price point down, but we can’t compromise on the power.”
So by the end of the summer, he’s been thinking about this, he decides to resign from Apple and start a new company to pursue this vision of finally getting the workstation affordable and merging it with a personal computer.
Ben: Now of course Apple’s business had been selling into education, not necessarily into these universities that needed these for super horsepower reasons, right, of doing a lot of really complex stuff.
David: Selling to students, selling to computer labs, for undergrads and high school students to use.
David: That was a big part of their business.
Ben: Feels a little competitive.
David: So, here’s what happens. September 13, Jobs resigns and there have been books written about this and movies, all of which tells slightly different stories. So here’s as best we can figure out what happened. Jobs resigns on September 13 and he tells the board he’s going to start a new computer company and he’s going to take several people from the SuperMicro division with him. Those people are Joanna Hoffman (if you saw the Michael Fassbender movie, this is Scarlett Johannson I think plays her, she’s one of the stars of the movie), Bud Tribble, George Crow, Rich Page, Susan Barnes, Susan Kare, and Dan'l Lewin.
So he takes these employees with him and Apple board says okay, two weeks later they sue Jobs for two things: One, stealing trade secrets from Apple and employees, and two, a breach of fiduciary duty as the chairman and board member of Apple, basically resigning and then going and starting a new computer company.
Ben: So, absolutely wasting no time. I mean, for anyone who’s been in these environments, a lot of times they drag on and on and on and years later, get a cease and desist, or things like that. This is immediate action.
David: Immediate action. Like, the company Steve founded two weeks later, boom, lawsuit, that Sculley hits him with. And this is one of the things that just totally destroys his relationship with Sculley. Because it’s unclear like it was not good before then, but then he sues them. And so, Steve gives this interview at Newsweek, which is awesome, we’ll link to this in the show notes. This is right after he leaves Apple. He’s asked about this and he says: “It is hard to think that a $2 billion company with 4,300-plus people couldn't compete with six people in blue jeans."
Ben: Thus is the classic startup story, right?
David: Classic startup story. So they pretty quickly settled the case and the terms of the settlement, they settled in January 1986, are: that NeXT, the new company Steve is starting cannot compete with Apple, and Apple gets to review any products that NeXT makes and releases before NeXT releases them and if they determine them to be competitive, then they can sue again. So, Steve is okay with this but he’s just had enough. In February, he sells all of his Apple stock except one share so that he can still go to shareholder meetings. Such a Steve move. So, they get underway and Steve’s just had this wild experience at Apple and much ink has been spilled on this. But he decides he really wants to do things his own way this time, you know, not going to be beholden to an external CEO, not going to be beholden to a board.
So, what does he do? He spends $100,000. Well, first off he put $7 million of his own money into the company to get it started, and he spends $100,000 right off the bat to get a really famous graphic designer and brand consultant –
Ben: Paul Rand.
David: Paul Rand, to come up with the name and the branding and the logo of this company. Paul delivers a 100-page brochure naming the company NeXT, all capital except the lowercase “e” which stands for education, and coming up with the logo which is –
Ben: At an exact 28-degree angle.
David: At an exact 28-degree angle. So the NeXT logo is rotated at precisely 28 degrees.
Ben: Now for a lot of people who have commissioned logo work and kind of brand books before, a lot of times there’s some iterative process where you get options and you review and you pick from one of the three, things like that. This was, you know, Paul Rand goes away into a cave, comes back with one fully formed idea and says “here you go”.
David: Yeah, 100 pages on this one idea.
Ben: And the 100k was delivered upfront.
David: Yeah. But Steve loves it. So the second thing he does, he rents office space and, you know, they’re like a brand new startup, like you’re going to get a scrappy co-working space, like no, not for Steve. He finds the most expensive real estate in Palo Alto, rents a pretty big office with a staircase in it designed by I. M. Pei, the famous architect. And that’s their first office. Later on they move to Redwood City into a whole complex designed by I. M. Pei and there are like Eames chairs everywhere and $10,000 leather sofas and whatnot. So, that’s what he does on setting up the company. He also decides that he had some new management theories that he wants to test out. So, the company is not a company; it’s a community and there are members of the community that aren’t employees. This sounds very Valve-like before Valve. And so everybody can see each other’s salary in the company, there is complete transparency.
But that’s not that interesting because there are only 2 salaries in the company. If you joined before 1986, you made $75,000 a year. If you joined after 1986, you made $50,000 a year. That’s it, everybody.
Ben: It’s really interesting to think about this in the context of Apple’s secrecy now. This was Jobs sort of laying out, “Okay, we’re going to give this a chance. We’re going to let everybody know everything about other employees within the company, about all the secrets of the company. And we’re going to see if making them kind of community members allow us to not be so tight with our secrecy.” Kind of at the point that that was violated which of course it’s going to happen when you start to hit scale. That’s when he switched modes and said, “Nope. The rest of the time, you know, when we go back to Apple this is going to be an entirely top secret, very controlled top-down organization.”
David: He talks a little bit about this, like he just come from this political ouster at Apple and he’s trying to avoid politics, and that’s like the whole genesis of why he does it this way and obviously it doesn’t really work, but interesting that he does this experiment and for a long time. NeXT did eventually change this and had different salaries and everything, but he’s super idealistic at the get-go.
So the only question is kind of like, “Well, what is NeXT actually going to do?” And it’s this big secret like everybody wants to know what is NeXT doing, like they know they’re targeting education and they want to make powerful computers, but what is it exactly?
And around this time, Ross Perot of Ross Perot fame, failed presidential candidate, hears about what Steve is up to and he decides he wants to get involved. And Ross actually, some people notice but not all, he’s actually a technology entrepreneur himself. He had founded two technology companies that were acquired, one by GM and one by Dell eventually. And so he invests $20 million in NeXT at a $120 million valuation. Remember, this is 1986-1987.
Ben: So, you know, thinking about with inflation and the fact that they’re pre-product, like this is a company with –
David: They have a brand book.
Ben: Yes, exactly. Very expensive logo.
David: They have an expensive logo and Steve Jobs, nothing else. So, $20 million in 1987 dollars. So, they start getting to figure out like what are they going to do, and obviously the plan is they’re just going to build the Big Mac, that Jobs was working on at Apple. So, they rent out a big factory in Fremont, California that can produce up to 150,000 machines per year, and they start getting to work. And as they start working on the computer, they’re building the hardware, they’re building the software, they have to revise the pricing a little bit. So they announced in 1987 that they’re going to launch and it’s going to launch at a $3000 price point. So, not $500 but also not $10,000 that, you know, workstations were normally at that time. So, somewhat compelling, okay.
As usual, they announced at the launch, they announced it’s going to happen. I believe they announced it was going to happen in 1987, it gets delayed – and it gets delayed a long time. So, the company basically goes dark and then late 1988, they emerge again with a big gala event called The NeXT Introduction.
Ben: Now it's interesting to kind of look at the hallmarks of Apple and looking back in this sort of DNA of where they came from. During the next days, you know, they’re announcing price points, they’re missing them. They’re announcing ship dates, they’re missing them. That’s not a thing that modern Apple does. They were very clearly scarred by this and kind of came out of it and said that’s not we’re going to be.
David: So nowadays, like Apple announces an event one week before the actual event. Okay, this is they announced years before they actually launched anything.
Ben: But the next gala, that sure sounds a lot like the modern Apple keynote.
David: Yes, and this was one of the, you know, when you look at the time, so this is one of the scenes in the Michael Fassbender movie. This is the middle scene, this keynote when Jobs launches the NeXT computer finally. Everybody has been waiting for this. It’s at the Symphony Hall in San Francisco, and it’s pretty incredible. So, they have a violinist. One of the key features of the NeXT machine, which by the way is a 1 foot cube of all black magnesium.
Ben: Of course it is.
David: Most computers at the time look super ugly and they’re huge. This is also huge but it is solid black magnesium. And they have it on stage and they bring a violinist from the Symphony up. And one of the key features like I was saying is, it has digital signal processing and it can play real audio for one of the first times on a computer.
Ben: Instead of kind of the standard 8-bit. A lot of times you turn on a computer and you’d hear a beep, it would make Nintendo-like noises. Very different than today.
David: This is real audio. And so, the violinist plays a duet with the NeXT computer onstage, and this was the whole gala. Everybody who attended it got a framed poster commemorating this monumental event, the launch of NeXT computer.
Ben: Talk about a lack of product market fit. For those of us in startups today, they are thinking, like, “What’s that killer use case that justifies a user actually shelling out from my product?”
David: Duets with violinist.
Ben: Yeah. It's a very expensive tech demo.
David: Very expensive. And also famously, also chronicled in the movie, nobody from Apple is invited to this. Three thousand people attend the event, not a single person from Apple is allowed in the doors.
Ben: That’s just vengeful.
David: Vengeful. So they announced the actual device and it's super cool. We’ll link to this in the show notes. Somebody a couple of years ago got their hands on one of these things on the initial NeXT computer and did an unboxing of it. It’s on YouTube, it’s amazing.
Ben: All right, put it on the show notes.
David: It’s in the show notes. So, what is this thing? They announced the specs: 25 MHz Motorola 68030 CPU, whatever that means. Twenty-five Megahertz was a lot at the time. Configurable from 8 megabytes up to 64 megabytes of RAM. So, like the benchmark for workstations was 1 megabyte of RAM. They have 8 to 64, so knock it out of the park on that. Seventeen-inch megapixel grayscale display, 10BASE2 Ethernet. This is a networked computer.
Ben: And that’s key, right? This is something that the Macintosh was not set up to do. I mean, what they had conceived of the Mac early on, it was standalone. I mean, the Ethernet wasn’t a thing. We were not living in a world with the internet or even precursors to the internet yet, and this was kind of a brand new idea that this computer in this operating system is going to be built to network from the ground up.
David: Yup. The internet doesn’t exist. In fact, the internet gets invented on this computer, which we’ll come to in a second.
Ben: The World Wide Web.
David: The World Wide Web, yes. But the World Wide Web did not exist.
And one of the features that they’re most proud of about this machine is it has a 256-megabyte magneto-optical drive which instead of a hard drive, they think this is better technology, except the problem is, they put that in so there’s no hard drive, there’s no floppy drive. It’s just this like big cassette thing that you put in there that’s magnetic or somehow. That’s the only storage on the computer. So you can’t transfer anything off the computer because the hard drive that the operating system runs on is the thing that you plug in and out of the computer. And Jobs is like, “Well, but you’re networked here on the Ethernet, that’s how you transfer files.” But like, nobody else is on the network, so it's kind of a chicken and egg problem.
Ben: Right. It’s like you know where you want to be skating, you know where the public is going, but there’s no ice between you and them.
David: Yeah. This is like removing the headphone jack in 1988. They realized pretty quickly after launch that that’s a bad idea. They ship a new version with an actual hard drive and a floppy disk drive. So, the fixed that.
But more importantly and here’s where we start to get into like what is the real value of NeXT, the software and the operating system that they created next over these couple of years is just incredible. I mean, there’s a moment from when Steve Jobs launches the iPhone in 2007 and in the super famous presentation he says, “It’s five years ahead of anything the competition is doing on the market.” This was at least five years ahead, NeXTSTEP. NeXTSTEP is the operating system that NeXT made for the computer. It’s at least, if not a decade ahead of anything else anyone is doing.
Ben: Yeah. So it’s worth talking about kind of the technology innovations that came out of NeXT or at least that NeXT put into production for the first time. A lot of it dates back to when Steve Jobs was at Apple and got the preview from Xerox PARC of what the research technology is that they’ve been working on. And famously, it’s the graphical user interface and the mouse.
David: This is when Steve Jobs raids Xerox PARC in Palo Alto and steals the graphical user interface and that becomes the Mac. That’s what Ben is referring to.
Ben: Yeah. So you know, the Mac gets that, right? For the first time, Bill Gates famously kind of freaked out at the demo watching the drawing-on screen where the Mac is moving the mouse and it’s moving around slowly. And Steve is saying, “You know, yes, we got this from Xerox PARC.” What they didn’t kind of pull from that was object-oriented programming. So, in traditional programming like you look at the way that DOS was running, there’s routines and it’s moving, it’s kind of advancing linearly. There is branching to subroutines and for the first time with object-oriented programming, you have the ability for software to model real world objects. And so, you know, this dog has properties and has methods you can call on those properties. Like bark, or like back up, or like walk forward. And this was only really embodied in small talk at the time which was not a very popular language.
David: To not dive too deep into the technical details here, but essentially, this is like all modern software is not written this way.
David: And the idea of creating software technology using non Object Oriented Programming like, you just wouldn’t do it. That would be trying to drive across country in like a golf cart, you wouldn’t do it.
Ben: So the kind of breakthrough here is by using Objective-C which is incredible how long that has actually lived, licensed at NeXT and then eventually became kind of the core toolset that’s used to now develop Mac applications and iOS applications, you know, but Objective-C is still the bread and butter of Apple software development. It enabled NeXT to move much faster than traditional programming methods and for people to build much more complex programs than they would otherwise.
David: And Steve has this great quote. So when he finally comes back to Apple after the acquisition a couple years later, the first time he’s on stage at the first Apple keynote right after Apple acquires NeXT –
Ben: This was January ’97.
David: January ’97, he says, “I want to tell you guys a story.” Steve’s famous for telling a story, and he says, this is a quote from him: “When I went to Xerox PARC in 1979 and saw the original genesis of the Graphical User Interface, they actually showed me three things. And I was so blinded by the first that I didn't hang around to find out about the other two. It took me years to rediscover them. The first was of course the Graphical User Interface… But the other two things -- the second was Object Oriented Programming. They had it all running back in 1979. And the third was networking. They had several hundred Altos–” Alto was the concept computer that Xerox PARC had designed, “They had several hundred Altos hooked up to networked printing, network file servers, email, all in 1979. If I had only stayed for another twenty minutes...” He’s making a joke, but what he realizes and this kind of goes back to what he was trying to do with the Big Mac, it’s the combination of those three things. It’s the graphical user interface, it’s Object Oriented Programming that allows software developers to develop really powerful, very useful graphical programs for the first time, and then it's networking. And that’s what’s going to enable this new wave of computing.
Ben: It's probably worth fast forwarding at this point.
Ben: So, NeXT kind of cuts their losses. There comes a point where NeXT says, “You know what, this hardware thing, it's hard. We have extremely expensive computers that aren’t selling very well.” They only ever sold 50,000 units in total and they were –
David: By the way, when the thing finally came out to retail, guess how much it costs?
Ben: 10 grand?
David: $10,000, which was the price that all workstations cost at the time. So, nobody buys these things.
Ben: Yeah. So NeXT decides “okay, we're going to be a software company.” And what they do is, they kind of separate out NeXTSTEP which was the operating system and then they had kind of the mach_kernel underneath which they sort of brought in-house. They separated that out and they said okay, we’re just going to start selling this thing to other computer manufacturers, right? What we know of Apple today is an entirely vertically integrated software and hardware company. They’re moving away from that. It’s just software. That was kind of in vogue during that time because that’s when the Mac was in the era of the clones. I mean, the Mac OS ran on other people’s hardware, which is totally mind-blowing for those of us today who know, “Well, what do you mean? iOS only runs on iPhones.”
David: Yup. But it's super important and because of the power of this operating system and we mentioned earlier, but just to give a sense of like what is the real implication of this power, the World Wide Web is invented on this operating system on a NeXT computer actually. So Tim Berners-Lee at CERN invents the World Wide Web and it's possible because of Object Oriented Programming and networking obviously.
And also, other history of this computer, John Carmack at id Software, John’s now the CTO I believe of Oculus, John wrote the video games Doom, Quake, and Wolfenstein 3D all on NeXT.
Ben: All on NeXT? Wow.
David: Which is amazing.
Ben: Wow. I didn’t know that.
David: Those were the first 3D games ever. You know, equally revolutionized the game. So that’s the power that this enables.
Ben: Yeah, and it’s interesting kind of taking a step back and realizing, okay, so very clear recognition of the technologies that were going to be transformational and really like the foundation of what the future of computing will be, really unable to bring it to market in a meaningful way at NeXT. I mean, all the ideas were right. All the way that they brought a product to customers, you can chalk it up to timing, you can chalk it up to price, like just wrong, just poorly executed. And so, they needed an out.
David: Yup, they needed an out. So they pivoted eventually to just selling software. They stopped selling hardware. They do that in 1993. It’s funny, one of the pieces of software they come out with is this thing called WebObjects which is one of the first internet application servers, and Dell actually builds their e-commerce site on it, so when you bought a Dell, like, “Dude, you’re getting a Dell?” like that was powered by NeXT.
Ben: Basically what WebObjects do is they make it so that you know how you go to a website and it’s not always the same as every other time you go to that website? And it’s got dynamic content on it. WebObjects was like the first ever system to do that.
David: And this thing is like still in use. So the iTunes Store, people wonder why iTunes is so clunky and slow and crappy today, it still runs on WebObjects, which is insane.
Ben: Yeah. For any of the iOS developers and the Mac developers listening, for better or for worse, a lot of these technologies have stayed with us for a very, very long time.
David: For a very long time. So, finally, meanwhile while this is going on, Apple is just like, they have lost their way. They are getting creamed in the market. On the PC front, this is the era of Windows in the early ’90s and to mid-‘90s, Windows 3.0 then Windows 95.
Ben: Just absolute dominance.
David: Apple’s getting decimated. They have no offering for enterprises in the workstation market, which is cooling down but like still a huge market.
Ben: And all of NT was doing phenomenally well. Steve Jobs in ’97 stands up on stage in January and praises the incredible advancements brought by Microsoft and NT. And says, “Apple? What’s Apple been doing? We’ve fallen behind.” And of course, easy for him to blame while he’s not at the company, but incredible to be –
David: But he was totally right.
David: So Apple’s asking about, they’re trying to create a nextgeneration operating system. By this point in time everybody has recognized the power of what we’re talking about and Apple just can’t do it. They have two competing projects, three at various points, trying to build a modern operating system. They all fail.
Ben: It’s wild to think about it. I mean, you can chalk it up to organizational politics or you can chalk it up to the technology just being incredibly hard, but they were building an operating system codenamed I think Copland was the first version and they were going to have a second release called Gershwin. There was kind of projects going on in parallel for how are we going to build a next generation operating system, and they just couldn’t do it. Honestly, it kind of reminds me of the Longhorn days at Microsoft.
David: Oh God.
Ben: It turns out operating systems are hard and organizations are even harder. So you look at Apple and eventually they kind of said, “Okay, enough is enough. We’re going to look elsewhere to try and buy,” and they had a couple of options.
David: They had a couple of options for a modern operating system they could buy to replace Mac OS 9.
Ben: It was System 7 at the time.
David: Right, right.
Ben: The future operating system was supposed to be Mac OS 8, which ended up just being an incremental bump and then OS 9 which was another incremental bump, and then finally, what they were envisioning for years did not even until 2001, was Mac OS 10.
David: So just before Christmas 1996, they buy NeXT for $429 million, that go to NeXT shareholders including Ross Perot. And separately, $1.5 million shares of Apple stock that go to Steve Jobs.
Ben: Yeah. So David, you want to talk about that? As a VC, based on a return on invested capital, how was the NeXT exit?
David: Well, over its lifetime, NeXT raised… so they raised the money from Jobs, they raised the money from Ross Perot. Canon, the large camera, printer, computer manufacturer ends up investing another kind of $100 to $130 million in the company as well. So, they got sold for more money than they raised, but not that much more money. This was not a homerun, like nobody was getting rich off NeXT. And Steve gets $1.5 million shares of Apple stock because he’s going to come onboard at Apple as a consultant. So he’s going to come and help Apple with this transition is the official plan.
David: And so the acquisition closes in February 1997. Steve’s a consultant and some of these events that we’re talking about, he comes on stage and clearly the dichotomy between how Steve talks about the future and his vision and how Gil Amelio who was the CEO of Apple at the time who looked like– He actually was quite technical and had been at Fairchilds Semiconductor and all that, but he looked like he had never met a developer in his life.
Ben: Yeah. When you watch their keynotes, just kind of going back and watching a lot of these old keynotes over again, and in preparing for this podcast, it is incredible to see the dichotomy between Gil standing up there and not really commanding the audience’s attention and saying things that –
David: Like it’s so important for Apple to court our core audience and developers.
Ben: Right. It’s not taking a position on anything. You know, we’ve all seen managers like that or leaders like that that, you know, don’t really take a side and you walk out and you’re like, “Well, I didn’t disagree with any of that, but I wasn’t inspired.” Then Steve comes on stage for just a few minutes to say like, “Hey, here’s where I think we’re going,” and it’s just captivating.
David: Like huge applause. So pretty quickly, the acquisition closes in February. Over the July 4th weekend, Steve convinces the board of Apple that Gil has no idea what he’s doing and he needs to go. The next week, the board fires Gil, so the company doesn’t have a CEO. They start a CEO search and really, there’s only one candidate. In September of 1997, Steve Jobs is instated as the interim.
Ben: The ICEO.
David: The ICEO, the interim CEO of Apple. And he remained interim CEO until 2000. So for 3 years, he was interim CEO.
Ben: Now, while he’s interim CEO, the board doesn’t exactly stay intact, right?
David: Yeah. He takes those three years and then ultimately takes 5 years from the time Apple acquires NeXT for OS 10 to come out. So he spent 5 years building, taking the NeXT operating system and baking it into the full product of the Mac. But during that time, I mean, Steve, there’s the technical and product challenges of shipping that, but he cleans house and completely revamps Apple.
Ben: I looked up the article that came up on CNET the day that the acquisition was announced and kind of how people were building it at the time.
David: Kind of awesome that when this acquisition happened, CNET existed, it was a website, was a news organization –
Ben: And there are still archives.
David: And the World Wide Web was invented on NeXT computers five years early.
Ben: Yeah, I know, I know. So the thing that they say in the article: “NeXT's cross-platform development environments in the enterprise and Internet and intranet space allow developers to write once and deploy across a range of Internet and client-server platforms. Amelio said Apple expects to ship products with the NeXT operating system in 1997.” That’s the same year that the acquisition closed. So, the way that Amelio was looking at this is, you know, we’re going to get this company, we’re going to start kind of integrating their technologies, we’re going to keep shipping our products.
David: Yeah, we’ll just slap this OS into our hardware, like no big deal.
Ben: Yeah. And what we know today is it didn’t ship in ’97 or ’98. It shipped in 2001 and by that point, Apple had dramatically less products. I mean, this is the time where there’s developers at 1997 Worldwide Developer Conference in July, six months after the acquisition closed, saying to Steve, “Hey, so you know, I worked on OpenDoc for many years and we’ve invested a lot in it. What about OpenDoc?” and Steve says, “Yeah, yeah. A lot of you worked on things that we had to put a bullet in the head of, and I feel your pain,” and continues to go on and paint the story of like Apple has no focus, focus is about saying no; we’re doing all these different things; it’s not iterative improvements that we need to do, it’s like dramatic, dramatic changes.
So what’s really interesting is to look at screenshots from NeXT or NeXTSTEP or actually OPENSTEP, the operating system that they ended up implementing. And you look at OS 10 today or even steps along the way, it is incredible how many pieces of NeXT you can find or of NeXTSTEP you can find in Mac OS 10. I mean, you look NeXT had a dock. Nothing else had a dock at the time. That was like a new UI paradigm.
David: It's amazing how many pieces of NeXT you can find in your iPhone.
David: In your Apple Watch.
David: It’s there.
Ben: In ’97 Steve is demoing the NeXTSTEP development tool chain and he’s like, “Here’s interface builder and here’s all these tools that people still use today to develop iPhone apps.” So the very core fundamentals of what made the iPhone possible came from the NeXT acquisition.
David: Yup. So, at this point, you know, wrapping up the history and facts which is very long, but these stories are – We love stories on this show and like…
Ben: This is one of the best ones.
David: This is one of the greatest of all time. And so we all know what happens. Steve comes back. In 2001 they launched OS 10. They launched the iPod. When did they launch the iPod? Was it also 2001, I think, when they launched the iPod?
David: They launched the iPod, then they launched the iPhone, then they launched the iPad, then they launched the Apple, you know, all this stuff.
Ben: Apple TV.
David: And it’s all NeXT.
Ben: The incredible thing is, yeah, when they first launched the iPhone, they say “and it runs OS 10.” That was a big selling point. This is not a phone like we know phones today with an embedded operating system. This is a computer in your pocket and to prove, it’s running a variant of the operating system that exists on your computers. That was like huge and ridiculous, and like people at Blackberry didn’t believe it. They’d look at the scroll performance and say “you can’t do that on a phone. We just don’t believe you.” And so I think that when you look at– This was before it was dubbed iOS, okay, it was a variant of OS 10. And then when they launched the iPad, they say, “And we’re renaming it iOS. It runs on the iPhone and the iPad.” Then they launched the watch, then they launched the TV. All these things are kind of built off that same Darwin kernel and the core of what they acquired in NeXT.
David: Yeah. And there we go, the rest, as they say, is history. So with that, let’s move on to our next segment of the show which is acquisition category. This will be a fun one. What do you think? And what we do is we categorize the acquisition, and we’ve got a couple of categories and we decide which it represents.
Ben: Yeah. So we normally decide if something’s a product acquisition; a business line acquisition; a people acquisition which oftentimes happens in kind of like acquihires; a technology acquisition, is it a core piece of technology that’s not productized; or is it other, is it some new thing.
When you look at this, Apple had been trying to create a technology that they really couldn’t create. It was a next generation operating system with multitasking, with networking, with protected memory, all these different things. But, it’s not the technology they acquired. You’d be silly to make the case that this was anything but Steve Jobs. I mean, this is like–
David: This is a great slide.
Ben: The ultimate people acquisition. Oh yeah, Gil Amelio is listing all the reasons they acquired NeXT.
David: The CEO at the time literally at, is it at Macworld I think?
David: Has this slide on stage, he’s presenting these slides about rationale for the NeXT acquisition and he has all this stuff that they’re getting. Then he flips through the next slide…
Ben: And it just said Steve Jobs, it’s like the only thing on the slide.
David: It’s the only thing on the slide.
Ben: Reasons we acquired NeXT. So I mean, yes, we're still using NeXT technologies today. Yes, they were incredibly forward-thinking but the company needed Steve back.
David: Yup. I mean, it’s hard to argue with that. I’m just surprised. I’ve read all the books about him. I’ve watched so many of I’ve watched so many of his keynotes. I’ve watched all the movies about him. Every time I read, and this is just like going and doing a lot of this primary source research, and this is going to be my tech theme later, but I am just so struck by his level of thinking. It is so rare that you find something like that and when you watch this keynote with Gil on stage and Steve on stage at the same time. Gil, he was a Fairchild semiconductor, he had been a long-time technology CEO.
Ben: He turned around National Semiconductor. He is credited with –
David: Yeah, he turned around National Semiconductor. You know, he looks like a child compared to– Like, Steve was just a man among boys, or a person among small people.
Ben: Yeah, special guy. We miss him.
Ben: So you want to go and do what would have happened otherwise?
David: Yeah, this is fun. So, what would have happened otherwise, I think it would be fun to talk about the other option that Apple had.
Ben: Yeah. So, Jean-Louis Gassée was an Apple employee who kind of opened Europe to Apple. He came in the early days, knew Steve Jobs well. Left Apple to start his own company.
David: Well before he left Apple. When Steve got fired and left Apple, Jean took over the SuperMicro division. He literally replaced Steve Jobs.
Ben: I didn’t know that.
David: Yeah, he literally replaced. So he’s French, Jean-Louis. Great guy. He has a blog now which is awesome, Monday Note. And he replaced Steve Jobs. But then he left and started his own company.
Ben: Wow. So two people that both kind of walked through that revolving door of that division of Apple, both went and started very, very similar companies.
Ben: And Be, which created BeOS was kind of the other candidate that they were vetting other than NeXT. And ultimately, the reason that Apple didn’t end up making that acquisition of Be, you know, number one, I continue to go back to the fact that they all sort of knew they needed Steve back, but they just couldn’t come to the same agreement on price. Jean-Louise wanted $300 million for the company, Apple I think was willing to shell out $120 to $125 million, somewhere in there.
David: Something like that, yeah.
Ben: And they just couldn’t get the deal done as with many other deals, I’m sure a lot of our listeners have been involved with.
David: Yeah. But kind of amazing that there were these two operating systems that Apple could have acquired.
Ben: And should have built in-house, right, like both of those leaders –
David: Had been at Apple.
Ben: Right. They were chartered with building this and the organizational politics at Apple at the time didn’t let it happen.
David: Didn’t let it happen. This is why Steve Jobs hated politics.
Ben: Did you see that NeXT was planning an IPO?
David: Yes, that was one of kind of bargaining chips on the table.
Ben: Yeah. So this company that finally had actually has a product out there, this operating system that is not the business that they were hoping to build but is a decent business, is planning to IPO later in the year and we don’t know if that actually would have happened, but it is interesting that that’s an alternate future.
David: I think there must have been a little bit of Steve Jobs reality distortion field there too, like how they could have gone public, I mean they eventually became profitable as a software-only business but they were not making a lot of money.
David: But it was Steve Jobs.
David: Anyway, so they ended up getting acquired obviously by Apple not going public, but that would have been interesting.
Ben: Yeah, I’m going to paint this picture as NeXT had a fighting chance but probably would not have done very well in the long term, and I don’t think Apple would be in business.
David: Yeah, no. Like they were getting creamed. There was that famous quote, right? Who said it, was it Michael Dell?
Ben: Michael Dell, yeah.
David: Michael Dell said that they should just shut down the company and give the money back to shareholders. They were just getting creamed.
So all right, tech themes?
Ben: Tech themes, yeah. So, I mean the big one for me is you hear this all the time in investor pitches. It’s all about the people. I think this is one that’s just so clearly illustrative of we often talk about like 10x engineers, sometimes there’s just 10x leaders and people that are truly inspiring. Then the other part of that is how much of a difference it makes to have the founder of a company leading that company, that they command a different level of respect from employees and when they say this is our strategy, people believe it and people do crazy things and march to those orders. And the other thing that I was kind of thinking about in this is, Steve makes a plea to developers to start building on this new operating system through building that will eventually sort of in some forked way become Mac OS 10. As Microsoft can see with Windows Phone recently or a lot of people trying to start sort of like competing app stores and things like that, it's really hard to win over a developer ecosystem. And it’s really hard to say, you know, “Developers we’re open for business, this is a platform for you.” And Steve managed to make the plea in a very authentic way and say, “Hey, everyone who is a Mac developer, why don’t you come and you’re going to have to rewrite a lot of stuff because this is very different. But, make a bet on us and develop your applications for –“
David: We could give you this power in this operating system that you couldn’t have otherwise.
Ben: Right. But to me, it's like the power of a founder there, and then once you have like a tipping point in the network effects that come from building an ecosystem on a platform that you can kind of just keep rolling with that and the big bargaining chip that affords you.
David: Yup. That perfectly dovetails with– I have two tech themes on the show. This is actually my favorite segment of the show. We talk about having gone through this whole history, like, what are some eternal truths about just the way business technology startups have, you know, operate that we can kind of pull out of this? And, I have two. The first one is just what you were saying, Ben, is that or related to what you’re saying, in technology there’s this concept of iteration, not just iteration but like you’re kind of standing on the shoulders of giants, and a lot of the history and facts, like we talked about a lot of pretty deeply technical stuff like Object Oriented Programming and networking and workstations, and like, think about tech companies today, it’s like Snapchat and messaging and interaction with your friends, and like Spectacles and doing this amazing stuff and flying drones. But all that is only possible because of these building blocks at the operating system level at the deep geeky stuff that needed to be built and installed first. So, that’s one.
But two is something I’ve been thinking a lot about, also related to your first one. Like what made Steve what he was, right? And we haven’t released our last episode yet but we interviewed Kathleen Philips who is the CFO of Zillow talking about the Trulia acquisition. And in a followup on that, we talked about Snapchat Spectacles and I referenced this tweet that we both read that I thought was super cool that Bill Gurley had retweeted and commented on when Snapchat announced Spectacles, and John Collison who is one of the brothers who’s the co-founder of Stripe, he tweeted “I’m always impressed by how flamboyantly original Snapchat are. Ghostcodes, invisible UI, filters… sunglasses?” And Gurley responds and he says, “That’s a really great thing to identify and recognize.” And I’ve been thinking about that because I totally agree, like what is that originality and it’s not really exactly originality, like there were QR codes before Snapchat did them, there were glasses –
Ben: In fact Snapchat acquired a company to do that.
David: They acquired a company doing it. There were glasses you wore on your face and that took video before Snapchat Spectacles. You know, there were messengers before them. They weren’t first, but they were the first thus far and we’ll see how Spectacles perform. The first to make like a real product that just works and is delightful and solves a need for a user, and I think that’s what this originality means and that’s what Steve was, right? Like Object Oriented Programming, all this stuff existed at Xerox PARC before NeXT. Object Oriented Programming and networking, like all this stuff was out there, workstations, blah, blah. But, like, it was technology; it wasn’t a product. It wasn’t something that you plugged it in and it just worked and it delighted you and it solved your need. I think that, I don’t know, especially like as a VC this is what we look for. So many times we meet founders, we meet companies, and they’re doing something cool that’s hard technically and the question is just like, okay, like the question I always ask is, like: What data do you have, what signal do you have that people want this? And so many times you get this blank stare back.
Ben: Like, “Well, what do you mean? This was never possible before?” That’s not what I asked.
David: That’s not what I asked. Like, why are people going to use this? And I think that whether it’s Evan Spiegel at Snapchat, whether it’s Steve Jobs, whether it’s Mark Zuckerberg or Instagram, right? Like Instagram was not the first app that made your photos look good. Hipstamatic made your photos look good, but that’s not Instagram, you know. It’s building this whole solution and having the vision to do that.
Ben: I think it's a famously difficult task to take hard complicated problems that are solved in sort of research lab-like environments and get those into a mass market product. Let’s take two super famous examples. Microsoft has hundreds or a thousand of PhD’s at Microsoft Research that do incredible work and do pioneering research. And they try their best to partner with product teams, but it’s not super often that one of those things get surfaced in a product in a big way. And, you know, the company is growing and it's getting way better at that, but it's like a famously difficult problem to sit in the organization in the right way to make your kind of very forward-looking things that may dangerously obsolete your current thing. You know, something that you bring back into product. And in fact, when Apple– My second example is when Steve went back to Apple, they had kind of an advanced technology division. And it was a research lab. As people that were kind of playing around with like, “What if we could get this into a computer at some point?” And you know, dismantle that.
David: Yeah, Steve killed that. Because that’s totally the opposite of what we’re talking about.
Ben: Right. You want to get those things into product and kind of reorganize and said, “Look, everybody who is doing that pioneering research, you need to be doing it with the lens of how are we going to build this into this product and how does fit into the story of this product that we’re trying to ship?”
David: Yup. And I think that is what is so scarce in technology, in startups, and in business like the ability to take a potentiality whether it's technology or something else and turn that into a product that just works and that people want, it’s so scarce. I think that’s what for all of Steve’s foibles and all of his craziness, he was just so good at that and it's impressive.
Okay. Should we wrap this one up?
Ben: You want to grade it?
David: Let’s grade it. We were going back and forth on techs over just last night.
Ben: Yeah. So, a couple of episodes ago we did the Android acquisition by Google. And you look and you can kind of figure out the main reason for Android to be there is to make it so that when people are searching on mobile, they’re not always searching from iPhones and Google doesn’t have to pay Apple for all those searches. So that gives them like $4 billion a year in revenue. They otherwise would have had to give up. Big number, right? Like for kind of a small acquisition. So I want to talk about the NeXT acquisition and what it did for Apple in the context of that being an A+, of kind of like saving the company $4 billion a year. There were leaked things in the Oracle trial that Android as a division has made about $31 billion since being acquired. When you look at the things that have happened at Apple since the NeXT acquisition, it’s like a sci-fi story compared to those numbers. If that was our bar for A+, Apple does $250 billion a year in revenue now. And probably would have gone out of business, number one, if this acquisition didn’t happen. They are the most valuable company in the world, as David said. Not only would they have gone out of business and now this reverse course, the technology that they acquired in NeXT is core and fundamental to every single product that they ship today. It's the core of the Mac, the core of all the iOS devices, everything we’ve been talking about. And developers who are listening to this, like, you use Interface Builder and Steve demoed Interface Builder as a feature of the NeXT development platform in 1997. These things continue to ship. And, we were talking about this before the show, Apple has done approximately a trillion dollars in revenue.
David: Since Steve came back.
Ben: Since Steve came back.
David: Give or take a billion, you know, a trillion. It's like GDP style.
Ben: I know. And I wish we have nothing higher to give than an A+, but this is by far the best acquisition we’ve ever looked at and I think probably ever will look at.
David: Yeah. It is hard to argue with. What’s funny, this illustrates like it’s better to be lucky than good, you know. Gil Amelio completed the single greatest acquisition of all time. Gil Amelio? Who is Gil Amelio, you know?
Ben: He’s the George Lazenby of Apple CEOs.
David: Exactly. Nothing that gets Gil Amelio, but like, what’s so funny is he didn’t see any of this. This was not some brilliantly crafted move on his part, like brilliantly crafted on Steve’s part. But, yeah, I mean just the sheer numbers, you cannot argue. I don’t think you can argue that this isn’t the greatest acquisition of all time. I mean, it literally created a trillion dollars in revenue. That’s just goofy.
Ben: That’s like a fake number.
David: That’s a fake number. We were texting last night, I texted Ben, I was like –
Ben: You mean we iMessaged last night?
David: Yeah, we iMessaged last night and it’s like, Steve changed the game on the field and it’s like, yeah, like they’re playing football and Apple was behind by 30 points in the fourth quarter and Steve ran a play that scored a thousand-point touchdown. So yeah, A+ for sure, no doubt.
Ben: Well, you want to talk about Carve Outs?
David: Yeah, let’s do Carve Outs quickly.
David: Go ahead.
Ben: This really made me think it was a great podcast I listened to in the last week. The Ezra Klein Show is one of my favorite podcasts. He interviews people. He is the creator and editor-in-chief at Vox, I believe, and he has great guests on that range from all different walks of life. And of course, I listen to the episodes that are particularly nerdy. And so he had Stewart Butterfield on who is the creator of Flickr and now Slack. Stewart is just a phenomenally interesting character with a philosophy background and raises a lot of really interesting points about Slack, about how they got there, about the founder journey, a lot about the similarities and differences of, you know. He started two companies that started as kind of “crazy, out there never-ending game” and ended up being a super widely used consumer product. And talking about sort of how they got there, and one of the interesting points that he brought up was that when they were building what would eventually become Slack, they used IRC and then built all kinds of tools on top of IRC.
David: I didn’t know they used IRC.
Ben: Yeah, they actually did. So all this criticism of like, “It’s just IRC,” like it actually is just IRC. So, when they were starting out building that –
David: Snapchat’s just QR codes.
Ben: I know, right?
David: This is the point.
Ben: They had a team of developers and there were three technical co-founders and someone else they hired. And they would encounter these problems with chat when it was like okay, we should build something to make this chat thing a little better. So they pull those developers off of product and they spend a couple cycles and make their thing that would become Slack a little bit better and then they’d go back. Then it had a lot of bake time. They used it for 3 or 4 months. Then, they’d go in and say, “Ah, we actually need to make it a little bit better.” And they go and make it a little bit better. When you compare that sort of product development where a person is solving their own need very, very directly at an acute pain point, with the way that product organizations often work which is like the PM will propose the product and all the spec and there will be diversion ideas and people will argue over it. There’s a lot more ego in the room. And what Stewart is throwing out there is when we’re just trying to solve our own problems and nobody wins by having our internal tool be better except that sort of everyone wins, there’s a lot less ego in the equation, and it’s kind of an interesting way to develop software. And you know, we’re not all going to go and set out to start very expensive never-ending games to create a different product, but it is interesting to think about how can we kind of spoof that environment where we’re all users of the product, we’re all using it to solve our own pain point internally and take the ego out of the equation.
David: That’s super cool. I got to listen to that. The Ezra Klein Show?
Ben: Ezra Klein Show with guest, Stewart Butterfield.
David: Awesome. Mine for the week is this super fun and eye-opening Verge article, big investigative piece that they did last week or the week before on DJI, the drone company. DJI released or announced their new product, the Mavic Pro. This thing is amazing. It’s the size of a water bottle and it's a drone and it flies for 27 minutes. You can fly it 4 ½ miles away from you with rock solid 1080-p video. It fits in your pocket. It’s amazing. But they went and they did this profile, like what is DJI? It’s this company, it’s based in Shenzhen, and who are they? How do they hire? It turns out that DJI runs this robot wars competition. Have you ever seen like Battle Bots?
David: They do a university competition in China. That’s like the coolest Battle Bots you've ever seen and they get teams from 200 universities in China to create teams, and this is like NCAA football in China. And then they work forever and then they come to compete. And the winners, DJI just hires them. And so they get the smartest people. This is all about robotics and machine vision and autonomously operated robots, so the rules of the game are that you can’t see what’s happening on the field, you have to rely on your robot sensors and most of it’s autonomously driven. They fight each other and there are goals and stuff. So as a result, DJI now has, I don’t know, over a thousand PhD’s working on computer vision and machine understanding, and that’s all baked into stuff like enabling this drone the size of a water bottle that you can do stuff like you can just tap on your self on the image and then it will track you. It knows who you are and it can follow you as you run around and it won’t crash into anything, it has sense and avoid. All of this done with computer vision, and it was like this glimpse of the future.
And when they interviewed Frank Wang, the CEO of DJI, he’s like, “This is about robotics. Drones are our first product but we’re going to build robots that are going to do agriculture and serve you in restaurants, all this stuff. This is the future of robotics.” It felt a little bit like Steve Jobs’ Xerox PARC moment. It was pretty cool.
David: So we’ll link to it in the show notes.
Ben: We will. Well, thank you so much for joining us today. Thanks especially to the GeekWire folks for having us and for setting this all up, really appreciate it. And if you’re new to the show and would like to subscribe, find us on iTunes or your favorite podcast client, tweet out, add us @AcquiredFM, and yeah, have a good one.
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