By Debora Tidwell (TMF Debit)
ALEXANDRIA, VA (August 6, 1997)/FOOLWIRE/ --- Apple Computer and Microsoft Corporationheld a joint conference call to talk about the announcements made by Apple co-founder Steve Jobs during his keynote address at Macworld in Boston. Greg Maffei, CFO at Microsoft said that it is a "super-exciting time for us because we view this as a great opportunity for both companies." Microsoft and Apple have had a long partnership.
MAC OFFICE HAS HUGE INSTALLED BASE. The Mac Office is the largest single Macintosh application (not just compared to Microsoft applications, but compared to all Macintosh applications) in terms of revenue and is an important application for Microsoft as a product too. It is a several-hundred-million-dollar item. They have over 8 million customers utilizing Office for the Macintosh and the Macintosh is a great platform for Microsoft for many other kinds of applications as well.
INTERNET EXPLORER. Microsoft has invested recently in building a great Internet Explorer, obviously for Windows but for the Macintosh as well and a great virtual machine and they are excited about the opportunity to work together with Apple to extend the capabilities in that area.
TALKING OVER THE LAST YEAR. They have been talking with Apple about doing some of these things for over a year and it really didn't come together until the last week or so with Steve Jobs' renewed interest in the company. There has been a lot of thoughtful reflection about how the two companies could work together in the last month. Their overall perspective is that Apple has done so many wonderful things and Microsoft believes that Apple is going to continue to do wonderful things and that it will be a great opportunity to work with them. Steve Jobs said this morning, "We must give up the idea that for Apple to win, Microsoft must lose." Maffei indicated that Microsoft has come to the same conclusions over the past month -- that for Microsoft to win, it doesn't mean that Apple has to lose. They were asked to speak more specifically about how this investment came together. Fred Anderson answered that discussions have been going on over the past year. They were stalled when Gil Amelio resigned and Steve Jobs came aboard. Anderson's recollection is that Steve Jobs got it going in the right direction again by placing a call to Bill Gates. Maffei responded that they had been talking to Gil Amelio and several people on his team about some different initiatives. The current deal was kicked back off by the call Jobs made to Gates. Then Jobs and Maffei had several subsequent meetings and then meetings with larger groups on both sides.
DEAL STRENGTHENS APPLE'S VIABILITY. Fred Anderson, Apple's CFO, indicated that the business partnership announced today strengthens Apple's viability and is a new era in terms of Microsoft and Apple working together. Microsoft Office is very important to the Macintosh installed base and this deal provides for continued availability of the Microsoft Office product on the Mac platform for a period of five years and Microsoft will release the same number of releases on the Macintosh as they do on Windows. Maffei was asked about Office for the Rhapsody platform. They answered that they didn't address it in this agreement in any formal way. They have talked about being closer partners with Apple and working together on new initiatives and Microsoft indicated they plan to take the lead as Apple releases new operating systems as far as how they can work together in ways that are profitable to both of them.
RELEASES MAY NOT PARALLEL. Because of how these products are now developed, it may become the case that some of these things are done in a leapfrog way where certain features are brought out on the Apple platform and then the Windows platform, or vice versa. So, the versions may not be parallel. They are very excited about the Office for the Macintosh '98 version which they hope to release before the end of this year. They think it has a ton of features which are tremendous and unique to the Macintosh and unique to this product. So, rather than having it be a case of simultaneous release, they are hoping to continue to bring as many releases forward on the Mac as on Windows and have them be exciting releases of current technology.
JAVA AND VIRTUAL MACHINES. Apple thinks that the technology collaboration is good for both companies particularly to ensure the compatibility between the VMs for Java for both companies. Anderson was asked what Apple's current commitment with Microsoft regarding Java does to their commitments with Sun to the Java Foundation Classes. They answered that they have agreed to work together to ensure compatibility in terms of the virtual machines for both Microsoft's and Apple's Java. It will be a collaborative effort. They did not want to speculate in terms of what that would mean in terms of 100% pure Java. They were asked, with regard to Java, why is there a necessary need for the two companies to collaborate to ensure compatibility if everyone is getting the source code and the technology from JavaSoft itself. They responded that it is not only what everyone is getting from JavaSoft, it is what JavaSoft is telling everyone they can't get from anyone else that Microsoft and Apple worry about. They want to work on building the best virtual machine that extends to the most logical set of platforms and not be dictated to by JavaSoft as they don't believe they are required to be dictated to by JavaSoft what those should be. They understand the needs of their customers, Apple's and Microsoft's.
INTERNET EXPLORER BECOMES MAC DEFAULT BROWSER. Internet Explorer will become, under this agreement, the default browser for the Mac OS. They were asked if the distribution deal for Internet Explorer 4.0 means that Netscape will no longer be available on the Macintosh operating system. They responded that it doesn't mean that, it means that the default browser will be Internet Explorer. Someone who doesn't want Internet Explorer is not precluded from using a competitive browser. The first choice on the Mac platform will be Internet Explorer. The distribution deal Apple currently has with Netscape will continue but they haven't had the opportunity to discuss the new Microsoft deal with Jim Barksdale at Netscape because the parties at both Apple and Microsoft were under nondisclosure related to their deal. Answering a question about Internet Explorer on the Macintosh, Maffei indicated that they are going to deliver Internet Explorer 4 as an exciting browser. They are going to continue to work with the Mac folks about ways to have it enhanced and run particularly well on the Mac but they have not committed to merge those interfaces in any way. They are committed to work together to bring the best browser technology and the best user experience to customers. Fred Anderson said that he doesn't see making the Internet Explorer the default browser is going to constrain the Macintosh OS in any way in terms of optimizing it for the major markets they are focused on such as creative content and education.
STANDARD PATENT CROSS-LICENSES TO AID COLLABORATION. The patent cross-licenses pave the way for the companies to continue to work more closely together. They were asked to talk about what technology was of interest to both parties that they needed to cross-license patents. They responded that it is very typical with companies in their industry as they work with companies who are partners that you share ideas and have development teams looking jointly at problems to share information. That flow of information is made far more difficult if the companies have not cross-licensed patents. Specifically, in the deal today, they have not cross-licensed any technologies, they have cross-licensed patents. They have done what is typical for the industry, licensed for all existing patents and licensed in this case for a five-year period to grant each other the rights to cross-license the patents you file and have extensions on in the next five years.
MICROSOFT INVESTS $150 MILLION. The investment of $150 million further strengthens Apple's cash position. At the end of the last quarter Apple had around $1 billion in cash so they were asked what the need was for the Microsoft investment. Apple answered that last quarter they ended with $1.2 billion in cash but they plan to get a higher percentage of their revenues from both software and services in their core markets and education and creating content. So, they view the enhancement of their cash position with the $150 million investment as not only strengthening their cash position, but also giving them the funds to invest in those two core markets going forward. Microsoft answered that Steve Jobs wanted Microsoft to make a visible commitment to Apple and to the Macintosh and wanted Microsoft to become an investor. Microsoft agreed to do that because an investment seemed to make sense.
STOCK PURCHASE. They were asked what price they paid for the stock and answered that they bought at an average of the recent trailing trading days which had been pre-negotiated, so they are at slightly below the market because the stock as run over the past few trading days. They were asked about rumored additional investments and responded that they have released all material financial elements of the deal. Greg Maffei was asked what the restriction or lock-up on the shares is. Maffei said that Microsoft has agreed to hold their shares for a 3-year period.
ADDITIONAL BOARD MEMBERS. Apple is authorized up to 9 board members and with today's announcements they have 6. They are holding one board seat for the new CEO when they select one. That would leave two possible additional slots. They would like to bring someone onto the board that has a strong education background because of their focus on the education marketplace. Also, if they decided to add the ninth board member beyond that, it would be nice to have someone from a strong marketing and maybe even a consumer products background.
STEVE JOBS' STOCK. They were asked to comment on Steve Jobs' registered 1.5 million shares and whether he sold those shares. They answered that they don't comment on the personal investment decisions of outsiders or their board members. Steve, as a new board member, will be receiving stock options along with all of their other board members. None of their board members going forward will receive any cash compensation so they will be in the same boat as Apple shareholders.
WINDOWS NT AND WINDOWS CE. Both companies were asked if there was any commitment to NT as a part of this deal. They responded that they have had several conversations going back awhile about how Apple might interoperate better with NT and how they might work more closely on NT, but nothing has come of that at this time. They were asked a follow-up question about Windows CE and their interest in licensing it and responded that they had no plans to do so at this time.
ANTITRUST ISSUES. Greg Maffei was asked whether this wasn't at least in part a $150 million antitrust insurance policy in the sense that even a much weakened Apple is still, in the eyes of the government, providing some competition in the OS arena. Maffei responded that he probably wouldn't want to speculate on antitrust initiatives. He has the advantage or disadvantage of not being a lawyer. Many might speculate on the other side of that, that investing in Apple causes problems as well. Microsoft wasn't driven as much by those kinds of considerations as looking at it as a platform for their applications, a platform to deliver Internet Explorer, a platform to deliver other technologies for them, and somebody to add a lot to the PC marketplace. They were asked if there were any antitrust hurdles to clear to make this deal official. They answered that because of the non-voting nature of the stock they will be filing an HSR. The government has always had the ability to come in and look at any transaction. But the normal procedure they take for certain kinds of investments is to have a review period under the Hart-Scott-Rodino Act. Because of the structure of this deal, they are not required to make that kind of filing. They will be closing the deal in the next couple of days as they work out the logistics of filing some papers with the state governments, but they don't anticipate any regulatory challenges or hurdles.
ACTIVE-X. Microsoft and Gates personally have been concerned that Apple has not supported Ole or Active-X sufficiently as a technology. Now that Microsoft has signed this deal, a question was asked if that means they will more actively embrace Active-X. Apple indicated that it is true that through their last restructuring where they cut $500 million in annual operating expenses out of Apple, they had to narrow their focus in the R&D area and they did cut out both OpenDoc and CyberDoc. Part of the reason was not only that they needed to cut some expenses and narrow their focus on the areas of core competency but recognition that those two were not going to become industry standards no matter how good they may be. Whether they will embrace Active-X is not something they have discussed with their technical people so they prefer not to answer that.
REACTION TO NEGATIVE INITIAL RESPONSE AT MACWORLD. They were asked to respond to the people in Boston who responded to the news with "boos" and disbelief. Fred Anderson replied that you have to remember that this is a rather unique group of rabid Mac supporters that still remember the history going back 20 years ago when oftentimes Microsoft and Apple were adversaries. They think that is what was behind the initial reaction. As the keynote went on, they think that Steve Jobs pointed out that this was in both companies' interests and that Apple needed a good business relationship with Microsoft to turn itself around and become a successful company again. Maffei added that as Steve was finishing up the discussion about their partnership, there was mostly applause and excitement from the crowd. Steve Jobs did a good job explaining what they are trying to achieve and the audience at Macworld seemed to respond.
P&L IMPACT OF DEAL. They were asked if there will be any P&L effect of the deal and responded that there will be, but it will not be material enough to require disclosure. Whatever other consideration there might be will be taken in the income over a two-to-three-year period. They have not finalized the specific accounting for it yet.
SYNERGIES. They were asked to talk about areas where synergies could immediately begin to be leveraged. They responded that they don't have anything specific. The cross-license of the patent portfolio certainly lays the foundation for future potential collaboration in the technology area.
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