Bitten by Reality, Apple Saves Its Skin

A link between Apple and Microsoft helps one survive, the other thrive

Apple zealots," critics call them.

They believe in Apple computers with near religious fervor. And thousands of the faithful jammed into tiny seats here in Boston to witness the gospel according to Jobs - Steve Jobs, the co-founder of Apple Computer. He would, they hoped, deliver an inspirational strategy.

He did, but not what they expected. The future, Mr. Jobs explained, is with Microsoft, the zealots' arch enemy.

To many analysts, that means Apple can survive.

But to many of the faithful, it sounded like betrayal. Not only had Apple succumbed to "the dark side," as one put it, it was actually helping Microsoft in its battle for cyperspace.

Microsoft makes the software - the operating system called Windows - that competes with Apple's Macintosh system.

Some 90 percent of personal computers run on Windows, which has made Microsoft a towering monolith in the industry.

Boos erupted throughout the 40-minute speech, Wednesday, by the charismatic Jobs, who helped both invent the personal computer and make it friendly.

After 18 months of dramatic losses and dwindling market share for Apple, Jobs said Microsoft will invest $150 million in Apple and continue writing software for its Macintosh computer.

Industry analysts greeted the news with cautious optimism.

It's "a very powerful endorsement that will undoubtedly be comforting to consumers contemplating buying a Macintosh," says analyst Rick Sherlund of Goldman Sachs.

Microsoft may emerge the big winner. In return for a modest, $150 million investment, Microsoft founder Bill Gates now has a powerful weapon in the Internet wars.

All new Apple computers will include Microsoft's Internet Explorer software, which means Explorer becomes the easiest route to the Internet for anyone using a Macintosh.

Not only is that a blow to Netscape Communications and its Navigator Web browser, Mr. Sherlund says, it strengthens Microsoft against other challengers.

Microsoft, he says, wants "to preserve Apple, perhaps because Apple is not a serious risk. But there are others coming up who are."

With the rise of the Internet and computer networks, other companies such as Sun Microsystems, Netscape, and Oracle are trying to unseat Microsoft.

It's an important concession because while Microsoft dominates desktop computer technology, Apple reigns in cyberspace.

Today, Apple's Macintosh computers create some 64 percent of all World Wide Web (Internet) pages, Jobs says. And Apple and Microsoft combined control 100 percent of the desktop computer market.

So converting those Web page developers to Explorer could give Microsoft a big boost.

"Whatever Apple and Microsoft decide to do, it will be a standard," Jobs told Wednesday's gathering at the Macworld Expo convention.

It was an argument that rang true, even to the faithful.

"It's probably overdue," says Christine Naugle, who owns a small graphics design firm in Boston.

The agreement is "inevitable and disappointing," says Lester Yocum, who uses Macs as a technology director for the federal government. "But it is good to settle the camps."

Apple, Jobs said, can now focus on its core markets - among publishers, graphic designers, and in schools. Almost 84 percent of PCs in education and what Jobs calls "creative content," are Apples.

And both markets are growing 20 percent a year, according to Jobs, representing the greatest potential for Apple to recruit new users.

The company desperately needs them. It lost $1.6 billion over the past 18 months as well as stability in the executive suite. It also lost its edge in product development and market share.

Less innovation meant fewer customers, which meant fewer outside software companies developing applications for the Mac.

Apple now sells less than 3 percent of new personal computers, down from 10 percent a year ago.

The deal with Microsoft is intended to clip that downward spiral.

It also assures Macintosh buyers of up-to-date, basic programs for at least the next five years.

"I think this is a very good thing, Sandy D'Arcy, a high-tech consultant in California, says of the alliance. "I think Apple has needed to start reaching out from within its own circle and out to a much larger base. Everyone needs Apple to stay alive."

Nonetheless, the deal was difficult for many to swallow.

After Jobs made the announcement, a giant, live video image of Mr. Gates appeared on an overhead screen. The size of his image, rising to the rafters, seemed symbolic of his influence. Even the remote presence of Gates at a Macworld Expo was too much for many. The audience let go with hisses and boos, drowning out the first few sentences of his speech.

But Gates had nothing but praise for Apple.

"We think Apple makes a huge contribution in the computer industry," Gates said, noting that his company already has 8 million customers using Macintoshes.

Microsoft and Apple set aside their long-running dispute on patent infringement stemming from the introduction of Microsoft's Windows operating system, which allegedly copies many of the features once unique to Apple's Macintosh.

Microsoft reportedly paid Apple an undisclosed sum to settle its grievance.

In addition to the Microsoft partnership, Jobs announced a new, more activist and software-savvy board at Apple, which includes Jobs and his long-time friend, Oracle CEO Larry Ellison. The old board had been widely criticized for providing little direction in troubled times.

The new board has not named a chairman, and tellingly Jobs says it won't until a new CEO is chosen. Jobs himself has been widely rumored to fill that position, but has not expressed an interest in taking it.