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IBM AND APPLE COMPUTER ALLIANCE (C)
History of Apple Computer From its start, Apple was never a mere corporation—it was a symbol. Depending on your point of view, it could symbolize the information explosion, the entrepreneurial revolution, or the maturation of post-sixties baby boomers.1
Apple’s history, described by some observers as “legendary,” was one of the biggest business success stories of the late twentieth century. Apple began in April 1976 when Steve Wozniak and Steve Jobs sold their Volkswagen van and two calculators to start developing a computer in a California garage. With only $1,300, Wozniak created the Apple I computer, which lacked both a keyboard and a power source, to be sold to a computer enthusiast club and a local merchant. The two entrepreneurs sold 150 Apple I computers for approximately $95,000. During the summer, Wozniak, with the help of other computer buffs, started building circuit boards, software, and the first disk drive for the Apple II. By June of 1977, the Apple II, priced under $1,500, had reached $1 million in sales and was the first computer to be appreciated by a wider audience than hobbyists. Within two years, the company had released a new version of the Apple II with expanded memory, a new printer, and the first software spreadsheet program for PCs. In 1979, total sales rose 400 percent from the previous year. Apple’s success continued, and in 1980 the company went public, selling 4.6 million shares in minutes. One year later, the public snatched up another 2.6 million shares.
1
Steven Levy, Insanely Great (Viking, 1994), 80.
This case was prepared by Lane Crowder and revised by Katarina Paddack under the supervision of Robert E. Spekman, Alumni Research Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Apple and IBM alliance managers are fictitious and are not based on actual people. The development of this case was made possible with the financial support of the Darden Partnership Program. Copyright © 1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
[email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. ◊
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Apple was widely considered the maverick of the computer industry. One author described Apple’s headquarters: [The] spacious lobby . . . held, among other things, a Bosendorfer grand piano, an arcade-version video game machine (Defender), a BMW motorcycle positioned like a heavy-metal work of art, and a Ping-Pong table. . . . A compact disk player, rare for its day, fed Chopin and the Rolling Stones into fierce-looking, six-foot MartinLogan speakers . . . . Each person I met was a young wizard bubbling with enthusiasm.2 In September 1980, Apple released the Apple III, which was designed to compete with IBM, but because the rush toward development led to quality problems, it never became as popular as the Apple II. Jobs claimed that Apple lost “infinite, incalculable amounts” on the Apple III: “I think if the III had been more successful, IBM would have had a much harder time entering the marketplace.”3 Nevertheless, by the beginning of 1982, Apple had sold 650,000 computers, and by the end of the year, Apple’s sales had reached $1 billion, a first for a PC company. By the mid 1980s, Apple had established itself in a niche market appealing to technical and non-technical customers for its “user friendliness.” During the 1984 Super Bowl, Apple introduced the world to its next prototype, the Macintosh. Based on a unique and revolutionary graphical user interface, the Macintosh was modeled after an earlier unsuccessful version, the LISA (Local Integrated Software Architecture) which introduced and popularized a version of Xerox’s mouse technology to the computer industry: [I]n exchange for allowing [Xerox’s] Development Corporation to buy 100,000 Apple shares for $1 million, Xerox would host a contingent of Apple engineers for a peek at the [Palo Alto Research Center’s] wonders. The number crunchers at Xerox considered this a fairly innocuous concession—they were getting a tangible stock deal in exchange for allowing Apple a brief exposure to technology that in their minds belonged more to science fiction than to future revenues . . . . By the time Xerox noticed they had the idea, it was already too late. Apple had gone off to start the revolution without Xerox.4 Jobs was convinced that Macintosh was the final showdown: Apple vs. IBM, to the death. Macintosh employees felt the same way: Macintosh’s creators viewed themselves as artists . . . The Mac creators are emblematic of a new kind of artist spawned by the protean nature of the computer. . . Macintosh makes it clear that we are now witnessing a first flowering of a new form of expression, where architects of technology create interactive software that 2
Levy, 80. Levy, 80. 4 Levy, 79–80. 3
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embodies their own, sometimes radical, visions. . . . [T]he Mac team acted as if on a mission from God.5 President John Sculley observed, “it was nearly a cult environment.”6 Approximately 300,000 Macintoshes were sold during 1994, marking the largest first year sales of any computer to date. Following this success, Apple re-released an earlier version of LISA under the name Macintosh XL to target the business market. The computer failed to meet company projections, however, and resulted in a quarterly drop of $17 million, the first decrease since the company became public. “Nobody could go back to a job,” described one Apple employee. “It was postpartum depression, compounded by shock and horror at the computer’s failure to conquer the world.”7 In a board room battle, Jobs was removed as general manager of the Macintosh division in 1985, replaced by Sculley; 15 weeks later Jobs left Apple and created a new company called Next Incorporated that would compete with Apple in the business and higher-education arenas.8 Like Jobs, Sculley was described as a visionary, quick to embrace new ideas. By the late 1980s, the Macintosh had overcome many of its problems and had broken into the business market, surpassing IBM’s unit market share by a three-to-two margin.9 Enhancements to the Macintosh, such as increased memory, CD-ROM technology, and other software innovations such as PageMaker, helped Apple achieve a 65 percent gain in net income for the third quarter of 1987 and firmly establish Apple as the leader in the education, desktop publishing, and graphics markets.10 By the end of 1987, Apple controlled 13 percent of the business computers used by Fortune 500 companies.11 Unlike IBM, Apple refused to license its products, keeping tight control over hardware and software rights, which resulted in high profit margins. By 1988, sales exceeded $1 billion with profits of $400 million. Apple continued to aggressively challenge its competitors in both the software and hardware arenas: creative software innovations were developed with Microsoft; two new business models of the Macintosh were released; inexpensive computer lines were introduced; and a multi-program innovation, System 7, was developed, which would allow the Macintosh to perform functions on several programs at the same time. In 1990, Apple’s largest software developer, Microsoft, released Windows 3.0, its third version of an operating system based on the Macintosh’s graphical interface, which would run on IBM PCs. Apple accused Microsoft of stealing the graphical interface technology and charged the 5
Levy, 9. Levy, 9. 7 Levy, 201. 8 “Sculley’s,” 108. 9 “Macintosh Retail Market Share Holds Steady,” InfoWorld (15 December 1986): 9. 10 Victor F. Zonana, “Two New Programs Could Help Apple Stay Ahead of IBM; Software Expected to Spur Sales of Popular Macintosh,” Los Angeles Times, 11 August 1987, 4,1. 11 Ninamary Buba Maginnis, “Make Room for the Mac; Several Bold Strokes are Creating a Place for the Macintosh within the Context of Corporate Computing,” Computerworld (2 November 1987): S1. 6
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company with copyright piracy. During the next three years, 25 million copies of Windows 3.0 were sold, giving Microsoft 84 percent of the operating systems market share (see Table 1). Stephen Levy noted, “For all practical purposes, Windows was Macintosh. Despite the lack of key components like the trash can, the essential operations—double clicking icons to launch files, for instance—were identical. Applications written originally for Macintosh, like Excel and PageMaker, worked much the same on Windows.”12 Table 1 1994 Operating Systems Market Share Unit Shipments of PC Operating Systems
Windows (Microsoft) DOS (Microsoft) Macintosh (Apple) OS/2 (IBM) NT (Microsoft) UNIX
in millions of dollars 34.4 10.4 4.6 1.1 1.0 0.9
% of Group 64.8 19.6 8.7 2.1 1.9 1.7
Source: Market Share Reporter, 1995.
In 1991, Apple introduced the PowerBook series, three portable-computer designs based on Motorola’s microprocessors, which took control of 21 percent of the laptop market in half a year.13 By 1992, desktop Macintoshes accounted for 19 percent of PCs sold in the United States.
The Alliance Despite the selling success of these models, Apple’s profits continued to suffer. Apple was unable to increase the Macintosh’s market share past current levels, despite drastic price cuts. The low prices that made the computers so attractive to consumers also made them unprofitable for Apple. In the early 1990s, Apple fired almost a tenth of its staff and reorganized the corporation to reduce costs. Apple’s inability to increase market share spawned a greater concern for the future of the company: if market share could not be increased in the PC and workstation markets, and if Microsoft’s Windows proved a success, software developers might stop writing software for the Macintosh system. To combat this problem, Sculley chose an alliance strategy to reposition Apple
12
Levy, 279. Charles Whaley, “Track Ball Aside, Apple’s Latest a Winner; Apple Computer, Inc.’s, Apple Macintosh PowerBook 140 Portable Computer,” Computing Canada (5 December 1991): 36. 13
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in the computer industry, instead of a strategy that focused on increased licensing of Macintosh operating systems to drive the market. Sculley commented: The niche strategy with a premium product selling to people who love us . . . wasn’t a practical one in the 1990s. If we were going to bring out strong technologies . . . we had to have a partner. . . . We talked to every company imaginable in the world. The more we looked, the more it became clear that IBM was the only choice.14 The alliance with IBM drew criticism and debate from Apple supporters, who were concerned about the potential success and future of the company. One Mac user described his feelings about the alliance: To those of us who recalled the rhetoric surrounding Macintosh’s introduction— Steve Jobs claiming outright that “IBM is out to crush Apple”—this shift was straight out of Orwell’s 1984, when the three global superpowers would shift alliances on a dime.15 Some Apple employees felt that the alliance would aid Apple in its desire to change the world; others were dismayed, worried that Apple would become like its bureaucratic IBM partner and lose its innovative edge. MacWEEK reported, “the managers I spoke to now hope the alliance will ‘force Apple to think about the long-term focus of the company, instead of worrying so much about quarterly profits’ . . . [and] break the ‘not invented here’ syndrome that has long threatened to strangle the company’s developmental efforts.”16 Apple officials maintained that Apple would gain much-needed advantages and remain unique.17 Apple also needed an investor to continue development of the new object-oriented software, code-named “Pink,” that could control the applications of many computers. Joe Graziano, chief financial officer, acknowledged that Apple needed hundreds of millions of dollars to complete the software and that Apple “just d[id]n’t have the resources.”18
Development of the Five Goals, 1991-1994 In December 1991, Apple appointed two long-time employees to act as alliance managers and oversee the five goals outlined by the agreement. Joan Higgins, an industrial designer from MIT who helped design the Apple II and Macintosh, joined Apple in 1977. Darryl Bass joined Apple in 1984 straight out of his undergraduate work in computer programming at Stanford. Bass, whose business card job title read, “Evangelist,” was a software developer liaison. Enterprise Networking Initiative 14
Brenton Schlender, “The Future of the PC,” Fortune (26 August 1991): 42. Levy, 281. 16 “The truth of the Apple/IBM alliance,” MacWEEK (October 15, 1991). 17 Kathy Rebello, “Apple Chief Looks Ahead: Future with IBM Makes Some Blue,” USA Today, 2 August 1991, B1. 18 Rebello, “Apple Chief Looks Ahead,” B1. 15
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IBM and Apple named their goal of developing more fully integrated IBM/Apple systems the Enterprise Networking Initiative. In 1992, Apple introduced two products: AppleTalk, which would allow the Macintosh to become a client of IBM’s OS/2-based servers, and Data Access Language, which would sustain IBM’s Application System/400 set of computers. In March 1993, Apple and IBM announced plans to jointly develop software that would enable the Macintosh to operate as a client in IBM OS/2-based networks for on-line transaction processing. In June, both companies also began to market the first jointly developed product, an emulation software package that would allow the Macintosh to operate functions in IBM’s mediumsized computers. Apple’s vice president and general manager for the Enterprise Systems Division, Morris Taradalsky, announced, “the fact that the product is now being sold by both Apple and IBM only underscores our combined intent to give users the ease of use of the Macintosh computer.”19 Development of the PowerOpen/UNIX system The PowerOpen program, targeting the business workstation market, originally proposed to integrate Apple’s version of UNIX, known as A/UX, and IBM’s version of UNIX, AIX, by defining a common foundation for the two systems. IBM PCs would be able to run Macintosh software, and Macs would be able to run IBM software written for AIX. Some analysts believed that Apple’s agreement to the PowerOpen initiative represented a break from past strategy: “for the first time in its history, Apple is intimating it will license its operating system (OS) to run on hardware it did not invent.”20 One observer noted, “Apple is hoping the alignment with Big Blue will put some thrust into the marketing efforts of its heretofore-ignored UNIX system known as A/UX.” Before the alliance, Apple attempted to bolster its support of industry standards and to ensure early access to emerging UNIX technologies by joining two major consortia. Another observer added: Apple is hoping to offer customers a powerful arsenal consisting of the Macintosh computing environment combined with UNIX industry standards. The alliance with IBM further empowers that arsenal by eventually promising customers a seamless bridge via shared technologies between the low-end Classic . . . and large IBM systems.21 As of March 1992, however, IBM had allegedly begun concentrating on fostering its own AIX system, veering away from the original UNIX agreement. Analyst John Rossi, with Robertson, Stephens & Co., explained, “This is always the trouble in doing business with IBM. Their decisions are always driven by their core business.”22
19
“Apple Introduces SNA.ps 5250 Terminal Emulator for IBM AS/400 Systems; First Apple Product to be Sold by both Apple and IBM,” PR Newswire (February 16, 1993): Financial. 20 “The truth of the Apple/IBM alliance.” 21 “Apple hopes alliance with IBM will boost A/UX popularity; Apple Computer Inc.’s UNIX system,” Marketing Computers (August 1991). 22 Jonathan Weisman, “Chink in Armor of Partners IBM-Apple Spelled U-n-I-x,” Business Journal-San Jose, 16 March 1992, 1, 3.
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Nevertheless, in March 1993, IBM and Apple formed a consortium with Bull, Motorola, Thomson-CSF, Tadpole Technology, and Harris Computer Systems known as the PowerOpen Association to promote the new PowerOpen, RISC-based environment. Tom Halfhill, senior news editor for Byte, reported, “If PowerOpen delivers on its promises, it will achieve the Holy Grail of hardware independence—high-performance compatibility with the world’s most popular software on a single platform.23 IBM and Apple planned to release PowerOpen by the end of 1994.24 One year after the formation of the PowerOpen Association, some of the 150 participants began sending out PowerPC developments created by the Association.25 In July 1994, however, Macweek reporter Henry Norr asserted that “the promised joint [IBM-Apple] version of UNIX keeps being pushed to the back burner and no one seems to care.”26 In late July 1994, IBM introduced its AIX 4.1, but it did not contain most of the innovations that were expected from the first PowerOpen compatible system.27 Industry officials asserted that the PowerOpen section of the alliance had wandered off its original course and had not yet provided any tangible new products. The development of the PowerPC In order to develop and manufacture the RISC-based chips needed for the PowerPC, IBM and Motorola created a facility in Austin, Texas, consisting of 300 highly skilled microprocessor designers. Within one year, in October 1992, Motorola released the first PowerPC microprocessor to be used in Apple’s new PowerPC Macintosh line. A spokesperson for IBM, Judy Radlinsky, declared, “A year later, right on schedule, we had the creation of the first prototype chip, the first chip from this alliance. A year is seen as a very aggressive schedule.” In November 1993, IBM introduced specifications for its PowerPC Reference Platform design, a generic PowerPC-based computer guaranteed to run the same software as IBM’s future PowerPC computers. “[IBM] has embarked on an aggressive campaign to make its designs the foundation of a new industry standard,” reported MacWeek.28 Apple was the only PowerPC developer that did not declare its support for the design specifications; while some observers believed that incompatibility with Apple’s System 7 operating system was the reason behind the rejection, others believed that Apple was concerned that compliance with the standard would eliminate advantages that the Apple PowerPC computers would have over IBM’s PowerPC line.
23
Tom R. Halfhill, “PowerOpen Gives Users Freedom of Choice,” Byte (September 1993): 58. “IBM/Apple/Motorola: An Industry Alliance Bears Fruit,” Byte (August 1993): 72. 25 Barry Slawter, “PowerOpen Celebrates First Birthday; PowerOpen Association Ships PowerPC Products,” LAN Computing (March 1994): 29. 26 Henry Norr, “Time for Apple, IBM to Get Serious about Partnership; The Second Decade,” Macweek (July 11, 1994): 28. 27 Tom Quinlan and Cate Corcoran, “IBM Unveils PowerOpen-Compliant AIX OS,” InfoWorld (July 25, 1994): 8. 28 “IBM PREPs PowerPC Design Spec,” MacWeek (November 15, 1993). 24
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In March 1994, Apple advanced a new line of Apple PowerMacs and began to contemplate developing a family of PowerPC-based computers separate from the PowerMac and not based on IBM’s platform design. IBM’s own first PowerPC workstation, released in September 1993, was also not compliant with the platform. “Apple [is] apparently resistant to changing the design of its Power Macintosh computers and IBM equally determined to make its PowerPC designs the industry standard,” described one observer.29 Another analyst commented, “they’re both in danger of making PowerPC as a standard almost meaningless.”30 Meanwhile, IBM announced that the company would spend as much as $500 million to market and advertise its new OS/2 operating system, Warp.31 IBM’s own release of the PowerPC computer line, which was not compatible with OS/Warp, was postponed until 1995. Analysts wondered which operating system IBM would license for use on its PowerPC computer. The New York Times reported, “in fact, the two companies are so far apart that Apple has not yet disclosed whether it will include IBM among the computer makers it allows to license Apple’s new System 7.5 software operating system for the PowerPC.”32 Apple also announced that it would meet its projections of selling one million PowerPC Macintoshes by the end of the year. “The new computers have helped Apple to recover from shrinking sales and profits,” stated one report.33 By September, despite several alleged IBM concessions, observers believed that IBM and Apple were on the verge of a divorce over disagreements surrounding the platform design. Some analysts suggested that IBM and Apple would eventually compete against one another with incompatible networks of PowerPC hardware and software. “Apple’s Power Macintosh computers are not compatible with PowerPC computers designed by IBM and Motorola,” explained one observer. “Despite sharing common microprocessor technology, the companies’ computers cannot run the same software.”34 Development of Taligent The joint venture Taligent developed directly out of Apple’s object-oriented technology, Pink. Apple’s programmers were trying to develop software units that could be manipulated as a whole; these units were known as “objects.” By using these objects, software developers could organize information in blocks, reducing the time and the effort needed to write software and allowing thousands of different object combinations.35 Apple devoted three years of research, approximately $50 million, and 150 employees to the development of object technology. The project managed to write about 10 million lines of code,36 only one-third of the code needed to
29
“Working on Unity.” Michael Fitzgerald, “Apple, IBM Divided on PowerPC,” Computerworld (24 January 1994). 31 “Computing’s Bold Alliance Falters,” New York Times, 14 September 1994. 32 “Computing’s Bold Alliance Falters.” 33 “Working on Unity.” 34 “Working on Unity.” 35 “Starched Collars, Pink People,” U.S. News & World Report (December 23, 1991): 50. 36 Rebello, “Apple Chief Looks Ahead,” B1. 30
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complete the project. Because Apple had devoted so much energy to the effort, the bulk of Taligent’s employees would be from Apple, and Apple would have greater decision-making power. In July 1992, IBM and Apple officials warned consumers not to expect anything too soon from Taligent. IBM’s vice president Richard Guarino cautioned that “Taligent will not do everything . . . It will take time for Taligent to mature and it will not replace OS/2, System 7, or AIX anywhere in this decade.” Guarino commented that some of the expectations for Taligent included natural speech recognition, voice synthesization, virtual reality, and real-time 3-D manipulation.37 Taligent’s CEO, Joseph Guglielmi, described why Taligent’s frameworks could be more versatile than Microsoft’s object-oriented technology: “Microsoft is constrained by introducing object technology into Windows [which limits] the way they can implement the technology. We, on the other hand, are starting with a design . . . that has fully ‘architected’ objects from top to bottom.”38 Two years later, although both IBM and Apple had announced plans to incorporate some of the joint venture frameworks into their own separate operating systems, Taligent had yet to release specifications for the new operating system. In January 1994, IBM sold 15 percent of its stake in Taligent to Hewlett-Packard. Guglielmi explained, “with the unique market leverage of Apple, HP, and IBM, the Taligent Application Environment (TalAE) is poised to become the industry standard application system for the enterprise.”39 The resignations of Taligent’s chief operating officer, Edward Birss, and chief technologist, Mark Vickers, in May 1994 created speculation that the joint venture was in trouble. In August, Taligent released an early version of the TalAE to its three investors and to a few developers. Many of the developers were impressed with Taligent’s potential, but commented on its complexity. The joint venture announced that TalAE would be released to a wider audience by the end of 1994 and would be released on the investors’ main platforms in the first half of 1995.40 Critics remained skeptical of the promise: [T]aligent, the IBM-Apple joint venture created to develop a common software operating system, has yet to finish the software tools that third-party software developers will need to create the applications—word processors, spreadsheets, and the like—without which an operating system is useless.41
37
Grace Casselman, “IBM, Apple Not Promising the Moon with Taligent; Taligent, Inc., Joint Venture,” Computing Canada (July 20, 1992): 9. 38 “Taligent Head Speaks; Interview with Taligent, Inc., Chairman and CEO Joseph Guglielmi,” Software Magazine (April 1994): 31. 39 “Apple, Hewlett-Packard, IBM Lay Out Road Map for Taligent Products; Partners Deliver Target Product Deliveries for 1995,” Business Wire (27 July 1994). 40 Nancy Nicolaisen, “Taligent Products to Debut on Partners’ Key Platforms; TalAE Promises Open, Cross-Platform Framework; Apple/HP/IBM’s Taligent Application Environment,” Computer Shopper (November 1994): 66. 41 “Computing’s Bold Alliance Falters.”
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Development of Kaleida Unlike Taligent, which was founded on Apple’s existing research efforts, Kaleida did not have an existing technology base on which to build. Both companies agreed to decide on the technology platform before putting together the actual business structure. Sculley explained Kaleida’s vision: Kaleida is a technology resource. It will create some baseline software technologies that will be important to multimedia regardless of which markets we’re thinking of, from consumer products through business markets. Kaleida will also set benchmarks for a set of tools that will allow authors to create multimedia content. Finally, Kaleida will develop a technology architecture that can cross platforms and is indifferent to the hardware that it runs on.42 In March 1992, IBM formed a separate alliance between Texas Instruments (TI) and Intermetrics to form a new digital processing chip and operating system for multimedia applications. “The IBM/TI venture does raise questions about the future direction of Kaleida,” commented one reporter, “[and] if Apple and IBM fail to reach agreement on a common platform, the result may well be to create competing alliances.”43 Electronic News also suggested difficulties in the Kaleida joint venture: “Reports have suggested that Kaleida. . . has been plagued by wrangling over who will control it and even what role it will play in the two companies’ strategies. Reports suggest that both companies wish to invest the joint venture with their own versions of a multimedia system.”44 In June 1992, Apple and IBM agreed upon Nathaniel Goldhaber, a venture capitalist and principal at Cole, Gilburne, Goldhaber and Ariyoshi Management Inc., to lead the joint venture as the president and CEO. Goldhaber had founded a Macintosh local area networking company that was later sold to Sun Microsystems. Kaleida’s first task was to create system software to be used by Apple and Toshiba’s miniature CD-ROM multimedia machine, known as Sweet Pea. To create this software, Kaleida would need to develop three products: Script X, a multimedia scripting language; Consumer Operating System, a real-time media operating system; and a multiplatform runtime engine. Kaleida needed to complete these three projects by mid-1993 to ensure that Apple and Toshiba could use the technology for Sweet Pea. By the end of 1993, none of the three Kaleida projects had been completed and Michael Braun of IBM had replaced Goldhaber as CEO of the joint venture.
42
“A Bum Rap? Apple CEO Sculley defends IBM/Apple Alliance, Explains Plans for Multimedia,” InformationWeek (January 20, 1992). 43 “Will IBM, Apple Alliance for Multimedia Split Over TI Digital Chip-set Deal?” Electronic News (March 23, 1992). 44 “Will IBM, Apple Alliance for Multimedia Split?”
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In May 1993, Hitachi Ltd., Toshiba Corp., Mitsubishi Electric Corp. of Japan, and Creative Technology Ltd. of Singapore agreed to become charter members of the joint venture.45 In February 1994, Kaleida announced an alliance with Oracle Corp., whereby ScriptX and another proposed project, the Kaleida Media Player, would be combined with Oracle Media Server products. Braun described the new alliance: Kaleida will enable the economic creation and playback of quality multimedia content, Oracle will provide the technology for managing and storing that content, and Kaleida, working with Motorola and Scientific-Atlanta on set-top terminals, will ensure the low-cost delivery of that content directly to consumers.46 In May 1994, IBM and Apple decided to cut Kaleida’s staff by twenty percent and slash funding by up to fifty percent. The San Francisco Chronicle reported that Apple and IBM were increasingly frustrated that Kaleida had not been able to produce its major potential product, Script X.47 News of the cutbacks appeared simultaneously with news of IBM’s and Apple’s intention to work with cable-box producer Scientific Atlanta on consumer-interactive TV products. In August, Braun announced that Kaleida was hoping to complete and prepare ScriptX for the general market by the end of the year, and explained, “Unfortunately for Kaleida, the company’s products and availability dates were announced before the first employee was hired. Therefore, when a team was finally hired, it inherited all these schedules and commitments, and they did their damn best to meet them. But it was a little bit of ‘too much, too soon’.”48
At a Crossroads By the end of September, both companies felt that the alliance was at a crossroads. The New York Times reported: Executives at both companies declined to speak on the record about the troubled alliance. But they have confirmed privately in recent weeks that it may be years—if ever—before IBM and Apple fulfill their promise of giving computer users, and the computer industry itself, a true alternative to the Intel-Microsoft standard that accounts for 85 percent of the personal computers now in use.49
45
Sebastian Moffett, “Japanese Heavyweights Back IBM-Apple’s Kaleida Multimedia System,” Reuter Business Report (25 May 1993). 46 “Kaleida Labs and Oracle Sign Cooperative Development and Marketing Agreement,” Business Wire (15 February 1994). 47 Laura Evenson, “Apple, IBM to Cut Venture; Kaleida’s Staff to be Trimmed by 20%,” San Francisco Chronicle, 10 May 1994, B1. 48 Erica Schroeder, “Braun’s Charter: Getting Refocused Kaleida on Track,” PC Week (13 June1994): 143. 49 “Computing’s Bold Alliance Falters.”
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Compaq provided a further blow to the alliance as it captured 12.8 percent of the PC market, surpassing both Apple and IBM (see Table 2). Table 2 1994 PC Market Leaders Share (%) Compaq Apple Packard Bell IBM Gateway 2000 Dell AST Toshiba Acer Hewlett-Packard
12.8 12.2 10.8 10.2 5.1 4.2 4.0 3.7 2.5 2.4
Source: Market Share Reporter, 1995
Some observers believed that the 1993 resignations of the alliance champions at both IBM and Apple had a great impact on the current status of the alliance: President Kuehler resigned following IBM’s devastating 1992 annual loss of $4.97 billion; and President Sculley left Apple due to the company’s flattening revenues and slipping market share. Other analysts pointed to incompatible market strategies, corporate cultures, and the selfinterested dedication of both companies to their own agendas as reasons for the alliance’s inability to follow through on original plans. The alliance matured for three full years, and IBM and Apple had little to show. Tensions erupted in all five segments of the alliance. Only Apple had begun implementing the PowerPC chip manufactured by Motorola, and although IBM hoped to introduce a computer that used the PowerPC chip in 1995, neither had yet to support nor produce a combined PC or workstation operating system that would make their products fully compatible. Taligent was moving too slowly and Kaleida suffered budget cuts, staff reorganizations, and continued delays in getting products to the market. Alliance managers Higgins and Bass were frustrated with IBM’s, and sometimes their own company’s, reluctance to fully embrace the alliance structure and goals. Apple based its future strategy around development of open systems to support software development and ensure that the Mac would remain one of the leaders in setting industry standards. IBM appeared intent on following its own agenda on the PowerOpen initiative, ignoring the original goal of integrating Apple’s A/UX into the architecture, an attitude that enraged Apple’s senior management. IBM also refused to embrace Apple as a full partner on the PowerPC platform design and stubbornly refused to abandon its failing OS/2 operating system. IBM’s own agenda also threatened the fruition of the innovative technologies brought to the alliance by brilliant Apple creators.
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However, Higgins and Bass remained hopeful that some of the differences could be worked out to reinvigorate the partnership. Apple had benefited from the alliance: the PowerPC line had sold well; their share of the business market had increased; and they had gained access to new technologies at a shared cost. What would Higgins and Bass say to their counterparts at the Miami review? How should the problems in each of the five areas of the alliance be dealt with? What goals should the alliance managers set with each other to ensure that the alliance continued and succeeded? How would they see the agenda for that meeting?
