Apple Computer's biggest mistake - and what might have been

What if the Macintosh operating system predominated on PCs? It's not such a fanciful question - if Bill Gates had got his way in 1985, it almost certainly would have happened.

Charles Arthur explains what went wrong.

With another Apple Expo looming, as usual boasting more exhibitors than ever before, there's only one topic of conversation among the would- be delegates: the damned US Justice Department, and in particular its head, Janet Reno. She's issued another anti-trust warning. Doesn't the woman sleep?

What the delegates to the Expo want to know is: why is she picking yet again on Apple, which simply happens to produce the operating system of choice among 80 per cent of personal computer users?

All right; you can wake up now. That's a mild bit of fantasy. But it has a solid basis in fact - at least, as much as any fantasy can. Let me explain.

Last week, a memo written in July 1985 by Bill Gates to John Sculley, then head of Apple Computer, was published on the Internet (at http://www. scripting.com/specials/gatesLetter/text.html). It is genuine; it was sent by a Microsoft representative.

In it, Gates proposed a radical departure in order to gain a mutual edge for both Apple and Microsoft: that Apple license its operating system to any PC manufacturer that wanted it, and get into bed with Microsoft - which would help by persuading manufacturers to take up the offer, and using its systems software expertise to make the OS work on different platforms. Indirectly, Microsoft would benefit by having a headstart on moving its applications over to those new machines: that would put it ahead of rivals in the word processing and spreadsheet markets. It looked like a win-win offer.

Sculley turned Gates down, and we all know where that has left them. Apple has a vanishing share of the desktop market, and struggles to make a quarterly profit. Microsoft keeps getting bigger and bigger.

But why did Sculley turn it down? Why did Gates write the memo in the first place? And what would have happened if Apple had listened?

Let's go back to those hazy days of 1985. It was a very different world at the PC level. IBM had only introduced its PC three years ago, and only brought it to the UK in 1984. Apple had come up in 1982 with the innovative, mouse-driven Lisa, but then killed it off to replace it with the Mac - launched by the stunning "smash the system" ad during the 1984 Superbowl. PC manufacturers were popping up all over the place, among them an upstart called Compaq, which had developed a "portable" PC. (Only weightlifters agreed with its definition.)

Microsoft had quite an investment in Mac software, with versions of Word and the Excel spreadsheet programs, the Basic programming language (very popular among amateurs at the time) and even a Mac version of its feted Flight Simulator program.

But it was fighting on a number of fronts. On the plus side, the deal with IBM to provide the MS-DOS operating system generated steady revenues: "nobody got fired for buying IBM", as the saying went in those days. But it faced strong competition from Gary Kildall's company Digital Research, whose DR-DOS offered better functionality than MS-DOS and was being bundled with some cloned PCs. Seeing that popularity of the Lisa and the Mac, Microsoft began developing a graphical user interface (GUI) that ran on top of DOS; it called it Windows. DR-DOS developed one, too. Lotus was chewing away at profits with its integrated 1-2-3 package. Microsoft was feeling squeezed.

IBM meanwhile was developing a new generation of PCs, called PS/2, which would break with the standards used by the clones. It wanted Microsoft to write a new operating system for them, to keep it ahead of the competition.

Gates was dubious. His vision was of a diversity of machines which would have common standards, and so be able to run lots of different bits of software. Manufacturing diversity would keep costs down, ensuring a big consumer market, and thus bigger software revenues. But IBM wanted exclusivity, just as it had always had in its mainframes and midrange computers.

To cap it all, Microsoft had no great love for Intel, which made the IBM chips. IBM had a stake in the company, for one thing, and for another his programmers complained that the data structures imposed by Intel chips made programs bulky and hard to design.

So Gates wrote his memo to Sculley. He didn't dissemble. "Apple must make Macintosh a standard. But no personal computer company, not even IBM, can create a standard without independent support."

He suggested Apple should license the technology and offered a list of 20 companies and contacts in the US and the rest of the world. "Licensing Mac compatibles will enhance Apple's image as a technological innovator. Ironically, IBM is viewed as being a technological innovator. This is because compatible manufacturers are afraid to innovate too much and stray from the standard," he concluded.

He didn't enunciate what the benefits to him would be - apart from a telling sentence saying "Microsoft is very willing to help Apple implement this strategy. We are familiar with the key manufacturers, their strategies and strengths. We also have a great deal of experience in OEMing [porting between makes] systems software."

Sculley, the man from Pepsi-Cola, declined the offer. In the business model he grew up in, companies made money by having a USP - a unique selling point. Apple could not have a USP if it spread itself around.

It was a flawed vision, of an emerging industry that simply did not behave by the rules that the old guard were used to. (Interestingly, only one of those 22 companies mentioned in the memo - if you include Apple and Microsoft - still has the same chief executive. Only one guess, now.)

But let's assume Sculley had had a brainstorm and gone ahead. Assume Gates managed to sweet talk the rivals into licensing Macs. What would have happened? Imagine.

Apple abruptly discovers that its problems in supplying hardware disappear as clone makers turn to its operating system. Microsoft, eager to get a step ahead of Lotus, bundles applications for free with the Apple OS to get market share; small companies love it. Good computing done dirt cheap.

Microsoft backs away from IBM's new PC initiative. IBM carries on regardless, and develops OS/2, but the launch of the PS/2 in 1987 prompts a rush away from these more expensive IBM machines, towards what is becoming an industry standard for both its ease of use and software availability. Apple rules. DR-DOS struggles, squeezed by the shrinking pool of old IBM clones and the costs of defending a "look and feel" lawsuit brought by Apple against its GUI operating system. (Microsoft, originally on the list of defendants, has been let off after stopping development of Windows.)

But even though Apple is the face that greets you when you switch on a PC, the company is stretched financially. Licensing an operating system doesn't provide the capital cashflow that you need to keep a manufacturing base going. Apple has to concentrate on premium, high-end systems incorporating new wrinkles in its operating system to attract buyers. The lower ground of the cheap PC is lost long ago to the clone makers, who proliferate and die off in the normal business cycle. Motorola's chips dominate; Intel struggles to keep its chip fabrication plants open. "Motorola = Magic" say the TV adverts for PCs.

Gates's vision comes true. But what about the operating system Microsoft helped to write for the PS/2, to which it still has some rights? It could be developed for the high-end Apples, perhaps.

In time, the two companies' aims become indistinguishable. Microsoft wants to enhance its applications portfolio with a high-end, network server operating system; Apple wants to enhance the dominant operating system for which so many applications are being written.

The solution: spin off the hardware company (which is quickly bought up by a larger clone maker) and merge the software operations, to create a single company offering a seamless set of software.

The only fly in the ointment to the latter is the US Justice Department, which complains that such a move constitutes a restrictive practice. With Microsoft enjoying almost 50 per cent of the applications software market (after Lotus failed to think of a follow-up to 1-2-3) and Apple offering 80 per cent - and growing - of the desktop, it would be anti-competitive for them to merge.

Which leads to an American solution: the lawyers. Solemn undertakings are given. In 1993 Apple and Microsoft merge.

And then in 1994 the Internet emerges and suddenly all those solemn undertakings look daft. Netscape arrives with its Web browser. In autumn 1995, a revolutionary event: Apple OS version 6 is released. Soon afterwards, Apple's applications division (Applet Inc) releases the MS Internet browser.

Not long after that clone companies complain that they are being forced to include the MS browser with OS 6, or face having their licence cut off. Bill Gates, head of Apple after the boardroom putsch the year before, complains that these people lack vision. The Internet is part of the operating system. It just happened to be a little late arriving. But it will be in OS 7, to be released next year.

That doesn't stop Janet Reno threatening him with legal action - $1m a day if the threats don't stop. Gates, and Apple, stand defiant. Lawyers are briefed...

Wake up. It's the present day. Microsoft dominates. John Sculley is forgotten. Apple is struggling. The man with the vision thing won. Did we?