apple-next-deal

Revisiting The Apple-NeXT Deal And Why It Mattered

It was the year 1997. Apple was experiencing a sharp sales decline:

apple-sales-decline-1997

Compared to 1996 the company net sales decreased by 28% and even more compared to just a couple of years before.

To understand the severity of the crisis, an article from NY Times dated March 28th, 1996 said:

Apple Computer said today that it expected to report a $700 million after-tax loss for its fiscal second quarter, a sign that the nation’s third-largest personal computer maker is in even deeper financial trouble than had previously been recognized.

The company said that more than half of the loss it was projecting for the quarter, which ends March 31, would come from write-downs against more than $1 billion in unsold products. An additional 25 percent would be related to restructuring costs, the company said, indicating that another wave of layoffs is imminent.

Unsold products were a cause of the decline. As pointed out in the 1997 Apple Annual Report:

Total Macintosh computer unit sales and peripheral unit sales decreased 27% and 33%, respectively, during 1997, compared with 1996, as a result of a decline in worldwide demand for most of the Company’s product families, which the Company believes was due principally to continued customer concerns regarding the Company’s strategic direction, financial condition and future prospects, and the viability of the Macintosh platform, and to competitive pressures in the marketplace

Also, Apple had lowered its prices on many of its products. So even though the aggregate average revenue didn’t change much it still contributed to the sales decline:

The average aggregate revenue per Macintosh unit decreased slightly in 1997 compared with 1996, primarily due to continued pricing actions, including increased rebates, across most product lines, substantially offset by a shift in product mix toward the Company’s newer and higher priced PowerBook products.

The company needed a turnaround, and to make it happen, it brought in as CEO, Gil Amelio, which was supposed to be a turnaround master.

Yet a year after, in 1997, the company was still in a downfall. Apple swiftly made a move and removed Amelio as CEO, and that is when Steve Jobs joined the company again, after being ousted in 1985.

This is how Steve Jobs and Bill Gates recounted the transition from Amelio back to Jobs:

What happened there?

Jobs was going back to Apple, and it wasn’t cheap for the company. As reported on the 1997 Annual Report:

In February 1997, the Company acquired NeXT. NeXT developed, marketed and supported software that enables customers to implement business applications on the Internet/World Wide Web, intranets and enterprise-wide client/server networks. The acquisition was accounted for as a purchase and, accordingly, the operating results pertaining to NeXT subsequent to the date of acquisition have been included in the Company’s consolidated operating results. The total purchase price, including the fair value of the net liabilities assumed, was $427 million of which $375 million was allocated to purchased in-process research and development and $52 million was allocated to goodwill and other intangible assets. The purchased in-process research and development was charged to operations upon acquisition, and the goodwill and other tangible assets are being amortized on a straight-line basis over two years.

Looking back at the Apple investment in NeXT and given its financial distress, it’s easy to understand that wasn’t an easy choice. What made Apple go for it?

When Steve Jobs left Apple in 1985, it wasn’t in good terms. As soon as Steve Jobs left the company, he also announced he was going to start a new company, which would become NeXT.

As soon as Jobs made that announcement, Apple followed up with a suit!

To understand the strategic importance of NeXT for Apple as appleinsider.com pointed out “today many of us are using macOS daily and unaware that features such as the Dock were born in NeXTSTEP. We’re definitely all on the web, and even among those who know Tim Berners-Lee created the World Wide Web, few know he did it on a NeXT cube.” and it continued “If you ever develop apps for macOS or iOS, too, you can still see evidence of NeXTSTEP’s DNA: there are foundational elements in Objective-C that were created for NeXTSTEP and whose names begin with NS.”

At the time Apple was experiencing a substantial flaw in its software. Many fail to understand that the business success of Apple wasn’t just its hardware and aesthetics, but the software side played a key role.

When Steve Jobs pitched to Apple its NeXTSTEP (the software that powered NeXT computers); he won his way back to Apple.

As pointed out on macworld.com:

ump back to 1996, when Apple was looking for a replacement OS. Steve Jobs heard of this search and pitched NeXTSTEP to Apple executives. They liked what they saw, and in December of 1996, Apple announced it was purchasing NeXT with the goal of using NeXTSTEP as the foundation of a new Macintosh OS. Along with the announcement came news that Steve Jobs would be taking an advisory role in the company. In a stunning turn of events, the founder was back.

The team from NeXT that Jobs brought to Apple right away tried to adapt the software side from NeXT to the Apple OS. The project took the name of Rhapsody. 

Long story short, Adobe (at the time a critical third-party developer for Apple at the time) didn’t support this project until Apple changed its plans. Until in 1998, Apple started to develop a new graphical interface for Rhapsody, called “Aqua,” which as pointed out by macworld.com during that project “the philosophical shift from Rhapsody to OS X took place.”

The shift to Aqua was critical to winning over the consensus of developers, that were and are a key ingredient to Apple success.

When Steve Jobs presented Aqua, the audience was stunned as it showed many new elements of the graphical interface. Apple understood it needed to release it and put it in the hands of as many people as possible.

What did Apple do? As macworld.com pointed out: 

Apple set the price of “Mac OS X Public Beta,” as it was called, at $29.95—low enough for anyone could get it if they wanted, but high enough to exclude folks who might not be constructive to the beta testing process. The beta sold through Apple’s online store; the company later offered a $30 discount on the first full release of OS X (v10.0) when it shipped in 2001.

The way the company launched its beta is quite impressive. Rather than release a free version, Apple released its beta with a low price point, yet high enough to exclude those that would not be constructive sufficient to the future development.

However, what mattered was that finally, Apple had won over the consensus of developers, which started to test and report bugs, which made the software grow and improve quickly.

To understand the importance of that development, Apple entire software ecosystem has been built on top of that. Not only desktops devices, but also iPhone and iPods devices.

Therefore, Steve Jobs entered again in Apple as Interim CEO never left the company again.

To have a bit of context of the impact that Jobs brought to Apple. In 1998 the company was profitable again. However, Apple would gain momentum in sales again in the 2000s when Apple laid out a strategy that saw the launch of new products that hooked the consumers.

apple-revenues-2002-2004

By 2004 the iPod would be a hit which fueled and got fueled by other music products consisting of iTunes Music Store sales, iPod-related services, and Apple-branded and third-party iPod-related accessories.

The rest is history!

Key takeaways

In 1985 Steve Jobs was ousted by Apple, and he started a new company called NeXT. In the next decade, Apple would fall in a negative spiral of declining sales.

Until 1996, it brought in a new CEO (Amelio) to turn it over. Yet, by 1997 as numbers weren’t getting better, and Apple was facing a few flaws in its software, Jobs pitched his NeXTSTEP to the management.

The Apple management was hooked, and Steve Jobs was back to Apple after the company bought NeXT. NeXT primary feature that helped Apple build the ecosystem that would be critical to its success was NeXTSTEP (its software side) which eventually turned in a graphical interface, called Aqua.

It finally won the consensus of developers that made it become OS, the software that would become the backbone of all the Apple devices. By 2004 Apple got back on track on its sales. And its first mass-market product, the iPod, fueled by iTunes was a massive success already.

What lessons, if any, can we learn?

  • hardware without software doesn’t go far, and vice-versa: When Apple finally got all the pieces in place with the right software in a beautifully crafted hardware, that is when the success came. The same applies to software companies that enter the hardware space. When Google has a plan for the hardware it isn’t like Google is trying to compete with Apple. Rather Google wants to gain access to data, which is the core asset of its business. Thus, instead of relying on data via a third distribution channel, Google completes its vertical integration by entering the hardware space and by putting its devices in the hands of as many people as possible
  • don’t leverage on pricing: instead of leveraging on its brand, Apple lowered its prices in a moment of declining sales. That made things even worse. Lowering prices in most cases (unless you’re building your whole business model on it) is not a winning strategy
  • the lack of a compelling value proposition: when Apple finally came up with Aqua, developers were hooked. In any company success, there is a side and key partner that will help the company grow quickly. You need to understand what motivates them and how to craft a compelling value proposition to bring them onboard
  • build ecosystems, not products: one of the mistakes we all make when we look at Apple success is about how its products were successful. However, the iPod took off in tandem with iTunes, and the iPhones took off in tandem with the Apple Store. It’s not the single product but the ecosystem you create that makes the company successful
  • network effects: a key element of any company’s success is its ability to tap into network effects. Which means that the more people use a product or service the better it gets for the next people joining it. The more people handled Apple devices, the more its ecosystem got stronger, better and more reliable. Thus, by making it even better for larger and larger audiences
  • don’t give it for free, not even in beta: it’s interesting to see how Apple launched a beta test, and instead of making it free, it made the developers really interested in it to purchase it. For a minimum price, yet they had to pay. In a world where most businesspeople believe that free is better, always. Seeing how Apple executed this beta test was quite compelling! Of course, Apple had already a large audience and a known brand. So if you’re starting from scratch that might not be realistic. However, the concept of launching a paid beta is interesting as it allows to work only with people that might be genuinely interested in it

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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