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Emerging Technology

EmergingTechnology/Emerging Technology/Books/Trend - Organizational Leadership/Digital Wars Apply, Google, Microsoft and the Battle for the Internet - 2nd Edition.pdf
Note on the Ebook Edition For an optimal reading experience, please view large tables and figures in landscape mode.

This ebook published in 2014 by

Kogan Page Limited 2nd Floor, 45 Gee Street London EC1V 3RS UK www.koganpage.com

© Charles Arthur, 2012, 2014

E-ISBN 978 0 7494 7204 7

Full imprint details

Contents

Introduction

01 1998 Bill Gates and Microsoft Steve Jobs and Apple Bill Gates and Steve Jobs Larry Page, Sergey Brin and Google Internet search Capital thinking

02 Microsoft antitrust Steve Ballmer The antitrust trial The outcome of the trial

03 Search: Google versus Microsoft The beginnings of search Google Search and Microsoft Bust Link to money Boom Random access Google and the public consciousness Project Underdog Preparing for battle Do it yourself Going public Competition Cultural differences Microsoft’s relaunched search engine Friends Microsoft’s bid for Yahoo Google’s identity The shadow of antitrust Still underdog

04 Digital music: Apple versus Microsoft The beginning of iTunes

Gizmo, Tokyo iPod design Marketing the new product Meanwhile, in Redmond: Microsoft iPods and Windows Music, stored Celebrity marketing iTunes on Windows iPod mini The growth of iTunes Music Store Apple and the mobile phone Stolen! Two-faced iPod in the ascendant Ecosystem: hardware and apps Scratched! Silence from Apple Apple’s best results Zune Tying the Zune to the Xbox White Christmas Twilight Rout or strategy?

05 Smartphones Mobiles and Microsoft Android ROKR and a hard place iPhone, that’s what Just walk in Disrupted Free as in data The drawer of broken dreams Developers and the iPhone Free as in lunch Apps for all Money in apps Flash? Ah Envy The losers Android rising Patently App patents Tipping Got lost The revolution will be handheld

The downward spiral

06 Tablets ‘Within five years’ Third category Apple dominant Always on Post-PC Grand unified theory

07 China Microsoft Google: ethical challenge The reset Biting a chunk from Apple’s reputation Killer fact Smartphones and tablets The definition of ‘open’ Don’t Dalai

08 2011

Epilogue The age of uncertainty

Notes References and further reading Acknowledgements Trademarks

Index

Introduction: in the beginning

The world we experience is analogue: colours, sounds, smells, all merge and mix smoothly. The digital world ushered in by computers is different: binary, on or off, yes or no. The arrival of affordable personal computing beginning in the 1970s, followed by the addition in the 1990s of the internet, began to create entirely new businesses – such as Yahoo, a website that offered up-to-the-minute news, weather and free e-mail – and to overturn existing ones, such as the music industry, at a pace that multiplied geometrically with the number of computers connected to the network.

Into this maelstrom of change came three companies: Apple, Microsoft and Google. They were radically different from each other. By the time all three arrived on the digital battlefield, the glory days of one were apparently behind it; another stood atop the computing and business world; the third was barely more than a clever idea in the minds of two very clever students.

The companies would subsequently fight a series of pitched battles for control of different parts of the digital landscape. Their weapons would be hardware, software and advertising. At stake were their reputations – but, equally, our future. Does it matter which search engine most people use? Where we buy our digital music? Who makes the software that powers our mobile phone, or the tablet that we use while waiting for a train or meeting? Some think not: that the momentum of human intentions means we will always get the correct outcomes, no matter who is overseeing our experiences. Others say that the digital landscape is covered in tollgates, and that those who control them will always determine the shape of the future.

What is certain is that to control any of them is a golden opportunity to extract tolls from the millions and millions of people passing through. The reward for winning any of the digital wars is enormous wealth – and, often, the chance to use that to build a fresh set of tollgates on another part of the landscape, or displace an existing rival.

The first time that all three found themselves sharing the same digital space was 1998. They could not know of the battles to come. But those battles would be world- changing.

Chapter One 1998

Bill Gates and Microsoft Late in 1998 the New Yorker writer Ken Auletta visited Bill Gates, then chief executive of Microsoft, at his offices in Redmond, Washington. It was, as you’d expect of a chief executive, a corner office, with trees on one side and buildings on another. Unassuming brown office chairs sat around polished pine furniture; Gates’s desk emerged from the tree-side wall, looking more like a breakfast bar than the symbol of a powerful executive. On the desktop under the window facing the trees sat three 21-inch computer monitors. Gates could move documents around their entire expanse.

Microsoft’s stock was roaring, making the company worth around $250 billion and Gates, then 43, the richest man in the world, based on his share of the business. Microsoft’s Windows ran about 95 per cent of the PCs in the world, with 100 million being sold annually in a market that was growing by 15–20 per cent. A year earlier, a Microsoft press release had boasted about its new search engine, MSN.com, proclaiming that its goal wasn’t just to be the best search site on the net: ‘Our goal is to make MSN.com the number one site on the internet, period.’ Its server operating system was winning contracts. So who, Auletta asked, did he fear? An existing rival such as Sun Microsystems, or database maker Oracle, or web browser company Netscape? No, none of those, said Gates: ‘I fear someone in a garage who is devising something completely new.’ Obviously, he didn’t know where, or what, or who; as Auletta noted, ‘He just knew that innovation was usually the enemy of established companies.’1

Why a garage? Because Silicon Valley garages are famous breeding grounds for innovative, disruptive companies that could react faster to conditions and use the newest technology, buoyed by venture capital funding and not burdened with bureaucracy and quarterly earnings reports.

Gates is the classic example of what the writer Malcolm Gladwell calls ‘outliers’:2 people who have spent enormous amounts of time learning and then refining their skills – in Gates’s case, programming. The clever workarounds that he used to program the very first versions of Basic that his company wrote are legendary among (older) programmers, who recall the days when a spare kilobyte of memory was as precious as water on a desert trek. By contrast with what Gates grew up with, today’s programmers have endless reservoirs of storage and memory.

But Gates also brought an animal-sharp business sense and ability to unravel complex problems, while being able to spot the ‘gotchas’ (the little bugs that might come back to bite you). He had stamped his hard-driving personality on Microsoft, which was known as the 800-pound gorilla of software: if you were setting up a business in the late 1990s then your aim was either to be acquired by it or to steer well clear of anything it did, because it would crush smaller competitors pitilessly.

The tactics Microsoft used were often questionable; for example undercutting rivals on price, because it could, to drive them out of the market. That sort of approach had gained Microsoft another name around the technology industry: the Evil Empire.

In 1998 Microsoft was crushing yet another upstart – Netscape, which had had the temerity to suggest that the browser could become the basis for doing work anywhere, so that Windows itself would become irrelevant; all you’d need would be a computer that could run a browser, and you’d be able to do everything for which you presently needed a PC.

Steve Jobs and Apple Microsoft had reached the pinnacle by besting Apple – the company co-founded by Steve Jobs, a charming, brilliant, tempestuous, iconoclastic, unique businessman who had been thrown out of it in 1985 but returned, triumphantly, at the end of 1996 when another company he had set up, NeXT Computer, was bought by the then ailing Apple, which was bleeding cash. He forced out the incumbent chief executive in July 1997 and became ‘interim’ chief executive that September – at which point the company had made a loss of a billion dollars for the financial year.

Jobs, in his early 40s (born, like Gates, in 1955), was no programmer. It’s unlikely that any analysis would discover any Gladwell-qualifying immersion in a particular skill. His talents instead lay in his personal, design and social skills: he could discern the weaknesses and desires of the people across a negotiating table to navigate to a deal, and use a combination of excoriation, wheedling and charm to drive subordinates and even equals into producing better products than they ever expected they could. In Apple’s earliest days he negotiated excellent deals on semiconductors because he could memorize entire price lists. Yet he could also scream at staff who he thought had done less than they could. Designers, meanwhile, found his constant demands for another little change maddening. (The designer of the Calculator application on the first Macintosh grew so weary of Jobs’s constant demands for changes that he wrote a program that would let Jobs design it.)

Jobs’s lust for design has no obvious roots; he was the adopted son of working parents. But he was able to enunciate it very clearly. ‘Design is a funny word. Some people think design means how it looks’, he said in an interview with Wired in 1995.3 ‘But of course if you dig deeper, it’s really how it works… to design something really well, you have to get it. You have to really grok [deeply understand] what it’s all about. It takes a passionate commitment to really, thoroughly, understand something, chew it up, not just quickly swallow it.’ John Sculley, the former chief executive of Apple (who had been hired by Jobs and helped fire him), recounted in a separate interview with Leander Kahney how ‘from the moment I met him [Steve] always loved beautiful products, especially hardware. He came to my house and he was fascinated because I had special hinges and locks designed for doors… Steve in particular felt that you had to begin design from the vantage point of the experience of the user.’4

Yet it was those negotiation skills that so often came in useful. Jobs was not strictly a salesperson, in that he wouldn’t try to sell something he didn’t completely believe in or use himself. However, when he needed something, his negotiating skills came to the fore. Not even Gates was immune from them. In 1997, and with the company (by his

later admission) just 90 days from bankruptcy, Jobs spoke to Gates. Microsoft was infringing some of Apple’s patents, and Apple needed money; more than that, it needed a commitment that Gates’s company would keep making its Office suite available for the Mac. Otherwise businesses would abandon it, and that would be that: Apple could turn off the lights.

If Jobs had been confrontational, Gates could have let any legal battle over the patents stretch out and let Apple’s weakening cash position drown it. But if he had been too weak, Gates might have ceded nothing, with the same result. Jobs knew this and acknowledged it to Gates, saying ‘We need help.’ But then he framed the situation not as confrontation, but cooperation. ‘Bill,’ he said, ‘between us, we own 100 per cent of the desktop!’ He made it sound as though Microsoft would be shaping the destiny of technology by investing in Apple’s future. Gates wasn’t taken in – though he did agree to buy $150 million of non-voting stock and to continue developing Office for the Mac. Afterwards, says Alan Deutschman, who recounted the tale in The Second Coming of Steve Jobs, about his return, Gates remarked: ‘That guy is so amazing. He is a master at selling.’5

The Jobs who returned was completely unlike the one who had left. That one had been willing to spend huge amounts on trivial details that nobody would see, been unwilling to work inside a rigorous corporate framework, and hired someone – Sculley – who ended up unseating him. The Jobs who returned had seen NeXT Computer fail at making hardware because it couldn’t get the volume to turn a profit, while Pixar, a company he bought from George Lucas, had sucked up huge amounts of the cash raised from selling his Apple shares, while requiring him to be a careful manager both of people – because they were that company’s principal resource – and of money. He had learnt that it wasn’t enough to offer great hardware; people needed a reason to really, really want it. Not enough of them had really wanted the NeXT Cube or the Pixar Image Computer.

The Jobs who returned, in short, already knew the truth that many businesspeople learn: you only get smart after you’ve gone bust three times. Jobs had flirted with it twice; the parlous state of the Apple he returned to made it three times. He brought a renewed focus and refreshed outlook.

Jobs began by killing surplus products in a bonfire of Apple’s past vanities, such as the Newton – a futuristic touchscreen portable handheld computer created by Sculley. He later said the company had fallen into ‘a coma’ during his absence; it had chased profit instead of market share, and become greedy instead of focusing on its customers’ desires. Many staff were fired and internal projects axed. Jobs justified that to worried developers in a 1997 speech: ‘Focus is about saying no, and the result is going to be some really great products where the total is much greater than the sum of its parts.’6

A total of 350 products was cut to just 10. There were 15 different computers, with meaningless names such as the 6500 and 8600. The average person, who was meant to be Apple’s prime market (since the business market had been conquered by Windows PCs), had no way to know which were desktops or laptops, high- or low-end. Jobs sliced the product line into a two-by-two matrix – consumer and business; and portable and desktop. Apple’s teams would focus on producing a really good product in each category rather than spreading itself across an untenably wide range, each with its own upgrade cycle, user base, fans and flaws. ‘If we have four great products, that’s all

we need,’ he explained.7 (The matrix for computers has remained almost unchanged since Jobs set it out in May 1998.)

Even so, Apple’s destiny looked like a foregone conclusion. Why buy one of its products rather than a cheaper PC running Windows, which offered a broader range of software? In October 1997, Michael Dell, chief executive and founder of Dell Computer, was asked what he would do if he were in Jobs’s position, leading a company that had just lost $1 billion on revenues of $7 billion. Dell could shrug off Apple’s existence: his business was more than five times bigger, was based in Texas rather than Silicon Valley, spent comparatively little on research and development, was not known for innovation, and sold PCs using Windows. Dell was the anti-Apple, Michael Dell the anti- Jobs.

‘What would I do? I’d shut it down and give the money back to the shareholders,’ Dell replied bluntly.8 The shareholders at the time would have received $5.49 per share – a total of $2.7 billion.

Dell’s comment rankled with Jobs, who privately phoned him to remonstrate, calling his response disrespectful. Beating Dell – somehow, anyhow – became a minor obsession. In future speeches, Jobs would compare how many days’ sales of computers Apple had in its warehouses against Dell’s, and better it.

He set about Apple’s dysfunctional supply chain, the part of a computer business that nobody sees, where factories build components that have to be ready for assembly at the right time, volume and price and run through quality assurance and shipped. As armies march on their stomachs, hardware businesses live or die on their supply chains.

The man who made that possible was recruited in March 1998. Tim Cook, who turned 38 in November that year, had previously spent four years at Compaq – then a ruthlessly effective PC manufacturer – and before that at IBM. Jobs and Cook clicked; the job interview simply worked where others had failed. Early on Cook held a meeting to try to sort out the many kinks in the supply chain in Asia. ‘This is really bad,’ he said in the meeting. ‘Someone should be in China driving this.’ Later in the same meeting, he looked over at Sabih Khan, then a key operations executive. ‘Why are you still here?’ he asked calmly. Khan got up, and headed for the airport.9

Cook’s no-nonsense approach snapped Apple’s manufacturing and supply chain into line. Inventory dropped from five weeks’ worth of products to two days’, as Cook shut factories and warehouses and tore up Apple’s decade-old middleware. Its former method of quarterly ordering and building was abandoned: ‘We plan weekly and execute daily,’ he explained in 1999. ‘I’m relentless on that.’ He knew that the modern PC manufacturing business demanded the leanest possible operation; he saw inventory as ‘fundamentally evil’ – a drag on the company’s balance sheet that falls in value by 1 to 2 per cent per week. ‘In the business we’re in, the product gets stale as fast as milk,’ he said, adding that in a year or two ‘I’d prefer to be able to talk inventories in terms of hours, not days.’10

Cook’s effect on the company’s balance sheet was immediate – and lasting. It began to accrue, instead of bleed, cash. But by June 1998 it was still a minnow, in computing terms, selling perhaps a couple of million computers a year.

Bill Gates and Steve Jobs

Gates and Jobs were long-time friends as well as rivals: a couple of decades earlier, they had taken girlfriends on double dates together. So what did Gates think of the threat from Cupertino? Speaking in June 1998 to another journalist, Mark Stephens (who writes under the more arresting moniker of Robert X Cringely), he grew ruminative. ‘What I can’t figure out is why he is even trying,’ Gates said to Stephens. ‘He knows he can’t win.’11

(Typically, Gates was being accommodating; typically, Jobs wasn’t. Stephens had been commissioned by Vanity Fair magazine to write an article about the relationship between Gates and Jobs. Jobs had insisted that Stephens talk to Gates first. He then never quite got around to his interview. The profile was never published. The late Chris Gulker, who worked at Apple during its downslide and had some experience with Jobs, once told me that ‘Steve basically regards the press as insects.’)

Gates was absolutely right: there was no way that Jobs, or Apple, could win the war to be the dominant operating system on personal computers. Microsoft had won that years before. When Apple’s previous set of executives had tried to mimic Microsoft, and licensed the Mac OS – the set of programs that makes a computer behave as it does, its binary DNA – to other computer makers, it had been as effective as slitting their wrists. The ‘clones’ undercut Apple’s prices, taking revenue and profit from hardware sales; the revenue from software licences didn’t cover the lost profits. Apple had begun losing money uncontrollably. Almost the first thing Jobs did on retaking the reins was to end the cloning deal, despite the lawsuits and costs it invited. Apple, he understood, couldn’t survive by licensing its software. It was fine for Microsoft, which benefited from the scale of PC manufacturing. But Apple had to make physical things; it couldn’t make money from selling software untethered from hardware.

Jobs anyway thought computing was in a sort of dead end too. ‘The desktop computer industry is dead,’ he said in 1995. ‘Innovation has virtually ceased. Microsoft dominates with very little innovation. That’s over. Apple lost. The desktop market has entered the dark ages, and it’s going to be in the dark ages for the next 10 years, or certainly for the rest of this decade.’12

Why had Apple lost? Serried ranks of economists and management theorists were sure why: its model of ‘vertical integration’ – designing both the machines and the software – couldn’t work in the computer industry. ‘Vertically integrated companies can’t compete! The oxymoron of “internal customers” is poison to a competitive culture. That is the lesson of the computer industry,’ wrote Tom Evslin, an experienced tech entrepreneur.13 Management and economic theory said that horizontal integration – PC makers building PCs, Microsoft writing the software – meant that the market optimum, of the maximum possible production volume and the lowest possible prices for consumers, would be reached much more quickly.14

While that’s true, it overlooks other elements that are harder to quantify: user experience and collateral costs. Certainly Microsoft’s brilliance and success at opening up the Windows platform by taking a standard hardware reference (created initially by IBM) and ensuring that its software would run on that platform, while making it easy for developers to write programs that would run on top of Windows, drove standardization and so drove down hardware prices. But it’s hard to argue that Windows is optimal – that is, the best possible operating system that can be written for personal computers. People found it confusing, with mundane usability questions, such as why you would

click on a button marked ‘Start’ when you want to turn the computer off (an observation that has become so hackneyed that it’s only when you are explaining it to a first-time user that you notice its incongruity). Or why, having clicked that button, you’re presented (in Windows Vista) with 15 routes (via physical buttons and menu items) to turn the machine off in four subtly different ways: sleep, hibernate, power off, suspend.

The collateral risk wasn’t trivial either. Windows 95, 98, Me and XP had horrendous security holes; the latter had a protective firewall, but it was turned off by default, leaving domestic users (a particular target of its marketing) open to virus attacks – which came in huge numbers, as hackers had discovered that Windows was a happy hunting ground. The number and severity of the security holes would in 2002 force Microsoft to halt work in order to retrain its programmers in how to write more secure code, as part of a new ‘Trustworthy Computing’ initiative. The cost of the viruses and other malware to Windows users, plus the collateral damage in terms of bank accounts looted, runs to tens of billions of dollars.

Even so, by the time Gates met Auletta, the horizontal system was taken as business gospel, an immutable truth that might as well have been included as the 11th Commandment.

The idea that you could command a computing market by designing everything yourself – the hardware and the software – was simply laughable. Management theory said you couldn’t. Windows was the proof.

Steve Jobs knew it, of course. As one former Apple employee told me, about being in a meeting with Cook: ‘He said that, “If you’ve lost the battle, one way to win is to move to a new battlefield.”’ What Jobs needed was a new battlefield – or two – where he could restart the fight against Gates on different terms: ones that he would set.

Larry Page, Sergey Brin and Google In 1998, around the time Cringely and Gates were meeting, things were happening in Silicon Valley – the 1,500 square miles stretching south-east of San Francisco bay, from Palo Alto at its northerly point down to Santa Clara. It was the dot-com boom, and two people who had recently decided to give up their postgraduate studies were running their company from a garage in Menlo Park. Larry Page and Sergey Brin, both 25 (both were born in 1973, 18 years after both Gates and Jobs), had become friends at Stanford University while doing their doctorates. They fitted Gladwell’s template perfectly: brilliant thinkers who had honed their computing skills through endless hours of study. But that 18-year gap between them and Gates and Jobs meant they had come of age in a world where the internet was already a background hum, and computing resources and mobile connectivity were becoming ubiquitous. They were primed for a world where the internet would be as easy to come by as electricity from a socket, and where the idea that you might be contacted by anyone anywhere at any time via mobile phone was becoming normal. Their vision was of a very, very different world from the one in which Gates and Jobs had grown up. Their big idea was about finding stuff on the internet: together they had built a ‘search engine’. They had wanted to call it ‘Googol’ (an enormous number –10 to the hundredth power – to represent the vastness of the net, but also as a mathematical in-joke; Page and Brin love maths jokes). But that was taken. They settled on ‘Google’.

Had Gates known about them, he might have worried, briefly. But there was no way Gates could have easily known about it – except by spending lots and lots of time surfing the web. The scientific paper describing how Google chose its results wasn’t formally published until the end of December 1998; a paper describing how ‘PageRank’, the system used to determine what order the search results should be delivered in – with the ‘most relevant’ (as determined by the rest of the web) first – wasn’t deposited with Stanford University’s online publishing service until 1999.15 The duo incorporated Google as a company on 4 September 1998, while they were renting space in the garage of Susan Wojcicki.