Microsoft’s Apple investment: The worst deal of them all?

67 Comments

“Whether you’re holding an old-school 4, a tooty-fruity 5c, a Shanghai-edition gold 5s, or a Calle Ocho-jailbreak especial, it’s easy to forget how many stars had to align for any iPhone to happen at all,” Roben Farzad reports for Businessweek.

“The particular butterfly flappings that combined to create Steve Jobs’s extraordinary life and career are well-known and oft-recalled; less remembered is the $150 million lifeline Microsoft threw Apple in August 1997, when Apple was within weeks of bankruptcy,” Farzad reports. “That now-infamous investment gave Apple enough money and breathing room to consolidate control of its Mac business and parlay that momentum and cash flow into the iPod and iTunes. Then the iPhone and iPad that would go on to mortally wound the entire personal computer industry, effectively zero-sum annexing continents’ worth of market capitalization from Microsoft’s waning empire. Microsoft was worth $556 billion at its Y2K peak. It’s now worth $320 billion. Apple was worth less than $3 billion when it took Bill Gates’s money; today it commands a planet-leading $505 billion valuation.”

Farzad reports, “That — and not AOL-Time Warner ($286 billion in combined market cap loss), Bank of America-Countrywide (more than $40 billion in directly related penalties, settlements, and losses) — might qualify as the most costly investment in modern history. True, Microsoft sold its stake a few years after that bailout for a tidy profit. And as Barry Ritholtz told me: ‘The goal was not a return on invested capital, but rather, to keep Apple’s competitive operating system viable so the antitrust folks would have a harder time proving Microsoft’s monopoly.'”

Read more in the full article here.

MacDailyNews Take: As we explained on January 23, 2012:

Microsoft’s $150 million investment in non-voting shares did not “rescue” Apple Computer, Inc. per se.

The value was in the settlement of patent disputes for an undisclosed figure, a patent cross-licensing agreement, the promise of continued Office and other software for Mac development for a five-year period, and, most of all, the P.R. the deal generated.

As was usually the case, Jobs got the bang for the buck, and then some, for which he was looking.

[Thanks to MacDailyNews Reader “Winston” for the heads up.]

67 Comments

  1. THIS ARTICLE IS TOTAL RUBBISH!

    Not only did the author get the facts dead WRONG, he makes assumptions and conclusions that have NOTHING to do with reality.

    DISMISSED AS CRAP.
    Shame on you Roben Farzad reports for Businessweek. You FAIL.

    As for what that stock would be worth today, nothing was stopping Microsoft from KEEPING the shares. Nothing.

    Reply

      1. Incoherent much? Pride in what? Their crimes? That 5 year ownership of Apple stock was part of a 5 part deal Steve Jobs made directly with Bill Gates after THIS happened:

        Microsoft STOLE QuickTime code from one of Apple’s contracted developers. Apple asked for it back. Microsoft REFUSED to return the stolen code. Apple was ready to sue Microsoft’s crooked ass off.

        Instead of a lawsuit, Steve Jobs sat down with Gates and hammered out the 5 part plan, ALL of which was acquiescence of Microsoft to Apple’s wishes. ALL of it. You want the details? As I say below: GO READ A BOOK!

        Reply

        3. You’ve got a few details wrong on the QuickTime issue — but I must give you credit for getting more right than the vast majority of people do.

          Apple hired an outside firm to help with certain specific pieces of the development of QuickTime software. The general design work was all Apple, but the firm added some nuances too. Apple smartly did a “works for hire” type contract with the firm so that all code and IP developed under the contract belonged to Apple.

          Since the firm in question was one of the best in this area, Microsoft hired them too. Then in the course of developing a QuickTime equivalent for Microsoft, the company included some of the source code and such developed under the Apple contract in the software they delivered to Microsoft. Microsoft did NOT maliciously ask for nor initially, intentionally pay for Apple code. However, Microsoft did not want to have to rewrite everything. They wanted to use the code as is. The thing that neither the third party firm nor Microsoft did was proactively get a license for the code and IP from Apple.

          Apple found out about the code and IP transfer and confronted Microsoft.

          Apple had Microsoft up against a wall. Microsoft could do the famous “deal” with Apple for such things as non voting stock buy (public) and guaranteeing to do such things a Office for Mac for several years (public) and pay a sum for the code and IP to Apple (private, undisclosed) or else Apple would sue Microsoft.

          Microsoft new Apple had the “smoking gun” proof that Microsoft had the code and IP and was using it without permission. Microsoft thus agreed to the deal.

          The issue really comes down to the fact that both companies used the same third party to help them. The third party cross pollinated the code and IP without prior knowledge of either Apple or Microsoft. Microsoft didn’t want to rewrite large chunks of their new software. Microsoft did not want to get sued, publicly dragged through the mud, or lose big time. Microsoft agreed to the new deal.

          That’s all there really was to it.

          Your rendition makes it sound like Microsoft maliciously went to the third party developer and demanded they use Apple’s code and IP on the Microsoft project. That was not the case.

        5. Unfortunately, Wikipedia is often not that factual. Hell, a couple years back a person I know wrote into absolute blatant falsehoods just to see how long the garbage would stay there. It lasted several months before being corrected. Always take everything posted on Wikipedia with a huge grain of salt and, if at all humanly possible, verify through first hand, independent sources.

        6. I know. *sigh* I’ve had to correct some pages about very basic physics. I had a friend who was being maligned on his Wikipedia bio page by a lunatic with a grudge. They’ve tightened up the editing freedom over the past year, which helps. It’s always wise to verify what you read there if you’re going to count on it for anything critical, like journalism (ha!).

        7. My understanding is Microsoft approach the developer with an impossible timeline to complete the specified work, resulting in the use of the already completed Apple code.

        8. The three interlocking agreements implementing all of this were unsealed several years post agreement. The lawsuit was actually filed and scheduled for trial. It was estimated that damages could top $2 billion. . . a lot of money in 1997. In essence, a confidential settlement was reached in which Microsoft admitted no wrong doing but Paid Apple lots of money including the $150 million which was disguised as the purchase of non-voting preferred stock. In addition, Apple licensed to Microsoft certain patents and copyrights for five years for an undisclosed royalty amount, Microsoft agreed to continue producing and developing MS Office for Mac for five years. Apple received rights to specific Microsoft patents and copyrights for the LIFETIME of the patents and copyrights, agreed to include MS Internet Explorer along with Netscape Navigator with all new Macs for five years, and not disclose the terms. APPLE won. Microsoft lost.

  4. The more time passes, the the more this myth of MS rescuing Apple by money infusion will continue to gain steam.

    The $150m represented barely 5% of the outstanding stock at the time. This was not really of major significance.

    The other thing, however WAS of significance. At the time when Apple was on the ropes, losing MS Office for Mac would have pretty much doomed the company, even with Steve Jobs back. He knew that, so he go MS’s written commitment to five more years of Office development. Also, those settlements for legal matter helped immensely to focus on the future.

    But such a story doesn’t sell. Much more attractive is a story where MS bails out Apple, then Apple tops MS ten years later. Never mind the inaccurate details.

    Reply

    1. At no time was Apple ever ‘close to bankruptcy’. They not only had liquid cash on hand (reportedly $4 Billion) but they had not even attempted yet to get a loan, any loan.

      So sorry Predrag, but you are STILL a victim of mythology foisting.

      I’d love to drone on for paragraphs thrashing through the detailed history yet again again again. But I’m bored with having to do it every damned month.

      So if you believe any of this garbage, as I advised Roben Farzad in the comments for his stupid article:

      GO READ A BOOK!

      (Yeah, I’m ticked off) 👿

      Reply

        1. He’s said that on more than one occasion. So did Apple’s current financial officer.

          However, at the time the word ‘bankruptcy’ was NEVER said. What was said was that Apple had $ billions on hand. At the time of the Microsoft QuickTime code robbery, Apple had not even attempted to get a loan.

          It has been pointed out frequently in the press that $150 million was NOTHING to Apple! Microsoft saved NO ONE. It’s total mythology.

          Why after-the-fact Jobs and the financial officer started saying ‘bankruptcy’ is something you’d have to research. Keep in mind that Jobs was a master marketeer. Examine what spin he got out of making that statement. I personally don’t know.

        2. The most important thing AT THE TIME was the guarantee of continued MS Office development & Internet Explorer for the Mac platform. Apple would have had a much tougher road without that announcement.

          Apple was in a very dire situation at the time of Jobs interim iCEO gig. Outside of places like NYC and San Francisco it was damn near impossible to buy a Mac locally or get local support for one.

          Imagine an American city with a metro of over 1 million where only one retailer carried Macs and that was in a small corner of the store otherwise devoted to everything but Macs. It was that abysmal situation that drove the launch of Apple’s retail ops a couple of years later. That city got the 4th Apple Store to open due to it’s being a desert for things Apple.

        3. There were several layers of PR coup for Apple. Roben Farzad and I were chattering about this on the phone. Apple seriously made out thanks to Microsoft’s QuickTime crime and Jobs’ negotiation skills.

          I’m hoping he writes a separate article about it to make up for his messed up article.

          Where I was living at the time, we had a thriving Mac community with three (3!) competing Mac user groups and a terrific Apple devoted shop in the city. But I watched the market share of Macs plummet over those years. It was seriously sad.

      2. Derek, you’re mistaken. At the time that Gil Amelio did his big road show for Wall Street, Apple was running out of cash, with only a month or two of operating capital left. The $4B figure you’re citing was their market cap, not their cash on hand.

        I was working at Apple in ’03 when we had an all-hands meeting where Steve announced very proudly that Apple had paid off the last of its debt.

        -jcr

        Reply

        1. The $4 billion was always and frequently stated to be liquid assets. It was most certainly NOT Apple’s market cap. Where did that come from again? Can you point me to a source please?

          I will say that Apple was vary crafty about hiding the fact that they had asked for and received loans during the down turn.

          For all I know, Jobs put up a wonderful front to hide Apple’s troubled finances at the time. However, find me any yearly or quarterly statements that EVER indicated Apple as ‘close’ to bankruptcy. Where are they? Maybe you saved one?

        2. Derek, you’re mistaken.

          Apple did not have $4 B in liquid assets at the time of the MS announcement. Apple did have a significant amount of debt. It was one of Steve’s major drives to get Apple out of debt and have considerable liquid and short term assets. At some points, people thought accomplishing these two things were Steve’s biggest drives.

          Apple’s book value, at it’s low point, was about $10 B. While I haven’t gotten into the old 10Ks to see the details, there is absolutely no way that Apple — which *was* having financial issues, has 25% of its book value in liquid assets. Hell, some of the deep pockets in the valley were voicing to the press statements about tendering offers for $6 B to $8 B for the company. Something that would never happen if the company had $4 B in liquid assets.

          Your version of history just does not add up.

        3. If Apple had ANY debt at the time of the Jobs deal with Microsoft, I WANT PROOF! I know of zero. I have plenty of proof in the other direction.

          NEVER have I done anything but point out that Apple had SEVERE financial difficulties and SEVERE public relations difficulties. I’ve stated endlessly how they blew $1 Billion on unwanted Performas that rotted in warehouses, causing a $1 Billion write down in 1997.

          My version of the story is based on FACTS, as you’ll see more of below. Where are YOUR facts? Please enlighten me when I am wrong. Please never contradict me when I SHOW you the facts. That’s ridiculous.

        4. Derek, fair is fair. Before demanding links from other people to prove their version of history, how about some links to prove yours? I’d very much like to see where Apple was stated to have $4 billion in the bank.

          ——RM

        5. Looky looky down the thread! I did exactly that! A lovely Wikipedia article, with references, that beautifully summarizes exactly what the ‘Microsoft investment in Apple’ was all about. Go on! Scan down the page to my posted titled The Microsoft QuickTime Code Robbery Scandal

          Is that acceptable? If you want more, I’ve closed down for the day. You’ll have to do your own further homework.

        7. Thank you! I believe it was in 1998 when Jobs sought loans from Apple. But I think we could all do with some details about that era. The nifty Wikipedia article I dug up pointed out a lot more than I ever knew.

        8. Apple had about $2.2 billion in cash and short term liquid assets, not $4 billion. In addition there was a large inventory of unsold performa Macs in warehouses.

      3. Where on Earth did you read that Apple was “close to bankruptcy”??? Most certainly NOT in my post.

        You have every right to be ticked off at all the others here professing some myth as truth, but I don’t think I gave you any ammo for that.

        Apple WAS on the ropes in the late 90’s. They DID lose massive amounts on the eve of Steve’s return, and more importantly, their corporate strategy was moribound. They had no vision, the OS situation was dire (Copeland was to be imminent, but never panned out), hardware became bland and stale, so one would have to be a true fanboi not to qualify the situation as on the ropes. Much like Blackberry today, Apple of 90s lost practically all of its market share in five years, with no clear plan of getting it back. They just kept burning through cash, and they would have burnt all that was left, had there not been Steve’s strategic deal with MS.

        Reply

        1. Apologies for maybe reading into what you wrote.

          But again, no. Microsoft saved no one. ‘…had there not been Steve’s strategic deal with MS’ is total rubbish. BUT I will say that Jobs pulled a brilliant move with Microsoft just happening to have pulled the worst boner of their careers, playing right into Jobs’ hand.

          This wasn’t any ‘worst deal’. This was one of the greatest, wisest retribution moves in corporate history. Jobs had Gates by the dangly bits and squeezed them with perfect precision, entirely in Apple’s favor. And Microsoft lost NOTHING publicly from the deal. It was Apple WINNING, Microsoft saved their ass. That is all.

          Again: Microsoft saved NO ONE.

        2. I am not sure I totally agree. The deal was mutually necessary, but if it hadn’t happened, it was practically certain that MS would have stopped development of Office for Mac, and this would have made it practically impossible for Jobs to turn things around. The significance of the presence of Office on the Mac platform remains to this date, despite of alternative solutions, none of which existed fifteen years ago.

          The way I see it, Jobs was there, at the perfect time and place, for Gates to fend off the DOJ, when they desperately needed them off their back. Gates was there at the perfect time to promise development of Office when Mac desperately needed it. As Steve said, for Apple to win, MS doesn’t have to lose. At the time, both won about the same. It was inept Ballmer who failed to capitalize on that win and let Jobs capitalize on his, leading Apple to eat Ballmer’s lunch in the 2000s.

          I think we both agree that the article is just wrong.

        3. √ I like your point about Office. I always dismiss Office as I went Microsoft-Free ages ago. But it remains critical to this day in many business situations.

          √ I also can’t disagree with fending off the DOJ and EU as a useful Microsoft strategy. It’s speculation, but makes sense.

          Steve Jobs and Bill Gates had always been contemporary cohorts in coding and had depended upon each other in the early days. I know full well that Jobs took full advantage of the situation and put Bill Gates up on the Big Brother Screen as an obvious metaphorical joke.

          Microsoft made out just fine, lost nothing. It was frequently said at the time that Office for Mac made Microsoft $ Millions in profit and they’d have been stupid to kill it. But it certainly could have happened.

        4. “Steve Jobs and Bill Gates had always been contemporary cohorts in coding…”

          Where do you get this stuff? Steve Jobs was not a programmer and may not have written a single line of code in his entire life.

          Gates started out programming and moved over to the business side. Jobs was into business and overall design esthetics from day one.

          “I know full well that Jobs took full advantage of the situation and put Bill Gates up on the Big Brother Screen as an obvious metaphorical joke.”

          Again, where do you get this stuff? I guess you’ve never read any of the several accounts where Jobs explicitly said it was the dumbest marketing move he’d ever done and it was NOT to paint Gates as Big Brother. I guess you’ve never personally talked to any person to whom Jobs made these comments. Jobs said it was a mistake. It was no joke. It was a mistake.

          With regard to Office on Mac at the time, Microsoft was making more profit on Office for Mac PER COPY than they were on Office for Windows for several reasons (many, many fewer multi seat site licenses for one). However, on a total revenue and profit basis for each product, Office for Mac made a very small fraction of what Office for Windows made for Microsoft. On a purely financial basis Microsoft could have killed Office for Mac at the time and the difference would not have been enough to show up in the lowest significant digit on their 10K.

        5. Where do I get this stuff. I’m not even going to bother to read what else you wrote. I don’t have the patience for crap tonight. Go read about Jobs’ and Gates’s relationship AND both of their backgrounds in coding. If you don’t think Jobs was a coder, you’re not even trying. Good night!

  5. Usually, you can tell the idiots by seeing who quotes Pirates of Silicon Valley as pure fact. As enjoyable as that movie was at times, it ended by suggesting Microsoft owns Apple. At no point does it state that the $150,000,000 was in NON-VOTING shares. I still deal with MS douchebags who believe MS owns Apple.

    Reply

  6. I bet 100% Android iHaters will believe this as if it came from the mouth of GOD himself! We will soon see post of quotes from the tool that wrote this article in the near future!

    Reply

  9. For insights into the early history of Apple and MS in the context of a novel, read “Micro-serfs”, by Canadian author, Douglas Coupland. Fun book. Incidentally, DG is the guy who coined the term “generation X”…

    Reply

  10. I think that was one of Microsofts better investments, I sure wish I had bought Apple stock in 1997. If my calculations are correct I think their investment is now worth about 1.5 billion. If I remember I think an Saudi sheik bought a million dollars worth of stock then as well.

    Reply

  11. what people are forgetting is that apple sued microsoft for 1 billion dollars for copying the Mac OS when microsoft rolled out windows 95. this investment is part of a settlement deal which also includes microsoft guaranteeing to release a mac version of MS Office for 5 years and microsoft investing in apple stock.

    Reply

  12. Microsoft defeated themselves with poor leadership. Built in internal competition, where ineptitude was rewarded and politics gave us Windows Vista and Windows 8.

    Microsoft has shown that they can do well, when well enough is left alone, as in the Xbox. It at least without Metro, is a pretty nice device.

    Reply

  13. The Microsoft-Apple deal was about several important issues.
    1. It was at a time when there was serious attention being paid to the de facto monopoly Microsoft could not afford to spiral out of control as had happened with AT&T. Microsoft could not afford to have Apple disappear.
    2. It was about reassuring the business community would continue to have MS Office available for the Mac.
    3. It was about eliminating the serious distraction and cost of litigation over the look and feel of Windows vs Mac. (btw I still believe Apple could have won given Polaroid beat Kodak in their lawsuit over instant print film and cameras EK4 and 6 vs SX-70).
    4. It was about Microsoft in a desperate struggle with Netscape over browser technology and market share. Apple killed Cyberdog and agreed to install Internet Explorer as the default browser.
    5. The $150M in non-voting shares was a rather insignificant placement of MS cash and was not a factor in Apple’s continued survival – and would not have hurt MS bottom line significantly had Apple failed at the time (or even now given the write-off they have already taken on Surface lol)
    6. It provided cross licensing in a number of areas that may have been of advantage to Microsoft but Apple certainly gained in some aspects as well.

    I was there. The general mood of attendees was disturbed and unhappy at the big brother-like appearance of Gates on the screen. The truly faithful Apple users understood that Steve Jobs was doing what he thought best for the Mac. It was a painful time in many respects. For my part, I believed (at the time as I do now) that Steve was in a far better position to judge what needed to be done than the attendees or exhibitors at MacWorld.

    Reply

  14. The Microsoft QuickTime Code Robbery Scandal:

    Since I’m offering to provide the author of the article some research, I am going to provide it here as well. This is the best summary article of the situation I have ever seen on the Internet. It goes well beyond my meagre knowledge and memories of the occasion. Yes, it’s Wikipedia and therefore is conveniently trashed by critics. And yet, it’s correct. I’m posting the last paragraph:

    http://en.wikipedia.org/wiki/San_Francisco_Canyon_Company

    Later testimony in the United States v. Microsoft case revealed that, at the time, Apple was threatening Microsoft with a multi-billion dollar lawsuit over the allegedly stolen code, and in return Bill Gates was threatening with the cancellation of Office for the Mac. In August 1997, Apple and Microsoft announced a settlement deal. Apple would drop all current lawsuits, including all lingering issues from the “Look & Feel” lawsuit and the “QuickTime source code” lawsuit, and agree to make Internet Explorer the default browser on the Macintosh unless the user explicitly chose the bundled Netscape browser. In return, Microsoft agreed to continue developing Office, Internet Explorer, and various developer tools and software for the Mac for the next 5 years, and purchase $150 million of non-voting Apple stock. The companies also agreed to mutual collaboration on Java technologies, and to cross-license all existing patents, and patents obtained during the five-year deal, with one another.

    The point Roben Farzad would like to make is how this deal, which was entirely beneficial to Apple, was used by Jobs and company to bolster Apple’s image to the public. Roben considers it a key ‘turnaround point’ for Apple. Indeed it was, and brilliantly done. It didn’t stop the incessant ‘Apple is Doomed’ FUD mongering, as can be seen at the Mac Observer’s Apple Death Knell Counter. Good press spreads at leisure . Bad press spreads at the speed of electrons.

    Reply

    1. Fascinating. I perused the article. Nowhere did I see a mention of Apple having $4 billion in cash on hand at the time. Point it out if I missed it. So I don’t really see how this rebuts any of the arguments of the posters you’ve been knocking heads with.

      ——RM

      Reply

        1. This from a guy who screams at people to “SHOW ME A LINK” whenever he doesn’t like someone’s argument. (For examples, scroll up.)

          But when I request the same courtesy from you that you demand of others, you call me “lazy” and tell me I need to research your utter bullsh*t myself.

          No. If you’re unable to prove your argument with same links you stomp your feet and demand from everyone else, I’m not about to do your work for you. Proving your argument is your job.

          ——RM

        5. ROFLMAO!! If you’re so above this fight, why do you keep replying? You’ve got two choices:

          1. Provide a link to a source stating that Apple had $4 billion dollars of cash on hand when Microsoft made their investment. If you’re so certain, this should take you all of a couple of minutes. Or…

          2. Walk away from this discussion and stop replying.

          But if you keep giving daily replies about how this thread is beneath you, I’m just going to keep asking you to show your work.

          For all I know, you’re right and Apple did have the money. But no one else in this thread seems to think so, and I’d think you’d have provided the proof by now, instead of your daily updates about how you don’t have time for my “cretinous crap” (you’re a funny guy, Derek).

          Ball’s in your court. What’ll it be?

          ——RM

        7. Bull puckey. If that were the case, you wouldn’t be replying. You clearly have a fragile ego and can’t bear to see anyone else get the last word.

          So, how about that link, Derek? I’ll be back tomorrow morning to check.

          ——RM

        10. Still no link, huh? Guess you were full of sh*t all this time. I’ll be reminding you of that the next time you scream at somebody demanding evidence.

          Tell you what, I’ll let you have one more post so you can pretend you won the argument. I will ignore it (actually ignore it, not just pretend to, like you do), and we can let it die. Deal?

          Unless you want to show me that link you swear is out there? No? Didn’t think so.

          ——RM

  15. Apple debt in 1998: $951 million
    http://www.wikinvest.com/stock/Apple_(AAPL)/Data/Long-Term_Debt/1997

    Apple ended FY 98 third quarter with $1.2 billion in cash
    http://news.cnet.com/2100-1001-202143.html

    “What wasn’t widely reported about the July 1997 agreement was the subtle mention of other payments Microsoft agreed to make[…]. That amount was never publicly disclosed, but Apple’s financial records suggest it was substantial.”
    http://www.roughlydrafted.com/RD/RDM.Tech.Q1.07/592FE887-5CA1-4F30-BD62-407362B533B9.html

    Reply

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