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. 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 (MSFT) threw Apple (AAPL) in August 1997, when Apple was within weeks of bankruptcy.
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.
The investment was announced as part of a “broad patent cross-licensing agreement” in which Microsoft, among other things, said it would “develop and ship future versions of its popular Microsoft Office productivity suite, Internet Explorer and other Microsoft tools for the Mac platform.”
Microsoft’s move looked smart at the time. 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.”
“By traditional metrics,” adds Ritholtz, the chief investment officer of Ritholtz Wealth Management (and a columnist for Bloomberg View), “it was a long-shot investment in a damaged competitor. From a proactive legal perspective, it was a temporary stroke of genius.”
The emphasis should be on “temporary.” Today, the deal—and not AOL (AOL)-Time Warner ($286 billion in combined market cap loss), Bank of America (BAC)-Countrywide (more than $40 billion in directly related penalties, settlements, and losses)—might qualify as the most costly investment in modern history.
“We have to let go of the notion that for Apple to win Microsoft has to lose,” a diminished Jobs said at the Orwellian-staged MacWorld trade show in Boston where he announced Microsoft’s stake to a chorus of boos. “The era of us thinking that we compete with Microsoft is over.’”
(Of course he believed that.)
At the time, Apple was hat-in-hand. It had sustained losses of more than $1.5 billion in the prior year-and-a-half. It especially needed a public guarantee from Microsoft that it would keep providing and supporting software for Macs; Apple’s share of the then-booming PC market had dwindled to about 5 percent from about 15 percent in 1992.
Microsoft, which had glad-handed Netscape and bundled everything and then some onto its Windows and Office floppies, needed an insurance protection against a Department of Justice that was wising up to the company’s dark competitive arts.
“Microsoft is looking after its best interests,” remarked Richard Scocozza, an analyst at Brown Brothers Harriman, to Bloomberg News of the August 1997 announcement. “Bill Gates comes out smelling like a rose.”
For all of three or four years, at least.
Ritholtz professes no love lost for Microsoft’s sedentary, Fat Elvis 2000s. Last year he called the now chronically cheap stock a value trap. Still, he says: “In all fairness to them, who could have perceived back then that Steve Jobs was going to disrupt a dozen or so industries—not just Microsoft’s lucrative PC business?”
If Bill Gates didn’t make that fateful deal with Apple, would there ever have been an iPhone? You might well be lugging a Pentium Zune and Surface around now—or, more likely, in the year 2019.