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An Alliance Made in PC Heaven

Apple Gets Key Hardware. IBM Gets Key Software. Rivals Get Nervous

Robert D. Hof in San Francisco and Deidre A. Depke in New York, with Jonathan B. Levine in Paris and Evan I. Schwartz in New York
Business Week

June 24, 1991

It has been obvious for months that Apple Computer Inc. was no longer the company that sold personal computers ''for the rest of us.'' Nor could Apple any longer brashly compare archrival IBM to George Orwell's Big Brother. As Apple last fall unveiled inexpensive Macintosh computers, Chairman John Sculley was asked how far he would go to make his company more competitive. His reply: ''There are no sacred cows.''

He wasn't kidding. In a jaw-dropping move intended to get it into the computer biz mainstream, Apple has forged a preliminary agreement for a technology partnership with none other than Big Brother. Insiders say Apple and IBM executives developed an agreement in principle on June 10 near IBM's headquarters in Armonk, N. Y. The deal would give Apple the right to use an important IBM microprocessor, say Apple insiders and sources close to IBM. In exchange, IBM is negotiating to put its hands on Apple's crown jewel -- its proprietary software. By 1993, the venture could result in Apple and IBM workstations that could be easily linked -- and even share applications software.

NEW BALANCE

No question, a deal like this could bust up before it comes to fruition. But there's no disputing how stunning a change in strategy it represents for Apple. The PC industry's No. 2 traditionally has refused to share its technology with other computer companies. The upshot: Apples can't communicate easily with IBM PCs or their clones. Says former Apple executive Wayne E. Rosing, vice-president for research at No. 1 workstation maker Sun Microsystems Inc.: ''If you had asked me six months ago whether this would happen, I would've said the chances were zero.''

The alliance could sharply alter the personal computer world's balance of power. It's a major step forward for Apple's longtime partner, Motorola Inc. (table). That company had been relegated to selling chips to second-tier computer makers, since nearly all PC companies but Apple buy their chips from Intel Corp. Now, Motorola steps into the limelight: It will make IBM's reduced instruction-set computing (RISC) chip for Apple, and be a second supplier for IBM, sources close to the deal say (page 42 28 ).

The link is sending still more shockwaves. Software megapowerhouse Microsoft Corp. now faces its first real competitive challenge in a decade, and Intel is left to watch Motorola gain a toehold at IBM. Computer makers, particularly Compaq Computer Corp., will have the daunting task of competing against the combined forces of the industry's top two PC suppliers. And customers, who have grown used to a standard PC design shared by many manufacturers, may find themselves stuck once again with a scheme that's proprietary to Apple and IBM -- and therefore expensive.

Apple officially has refused to comment on the deal. As for IBM, its executives say only that Big Blue has considered licensing its RISC technology to others since February, 1990, when it first introduced the workstation that runs on the chip, the RS/6000.

Those close to the pact say that it germinated last September when Sculley and Michael Spindler, who was named Apple's president in March, 1990, launched a drive to integrate Apple's proprietary products with everybody else's. ''Everyone in the computer industry is rethinking strategies,'' Sculley told BUSINESS WEEK last fall. ''We've been thinking about developing relations of more substance between Apple and other companies.''

That effort was made more urgent by the phenomenal success of Apple's new low-end computers, led by the $ 999 Macintosh Classic. While sales of that machine far outpaced Apple's ability to produce them, its high-margin products languished on computer dealer shelves. One result: In April, Apple announced that revenues grew 19%, to $ 1.59 billion, in its March quarter but that profits ran flat at $ 131 million. To widen margins, Apple turned its attention to computers that yielded more profit.

Its solution was to step up efforts to build workstations based on speedy RISC technology. Apple customers were clamoring for just such a machine. ''We really need the speed that RISC can offer,'' says Mac customer Rick Christjansen, a manager at Manville Corp.'s technical center in Denver. Apple had begun working with early versions of Motorola RISC designs two years ago in a project code-named Jaguar. Sculley and Spindler accelerated the effort. They renamed it Hurricane, and it began testing a host of RISC chips, including those made by Sun Microsystems, MIPS, Hewlett-Packard, and IBM.

Back in Armonk, IBM was mired in a struggle with longtime software partner Microsoft and its chairman, William H. Gates III. Microsoft's refusal to put its marketing weight behind IBM's strategic operating system, OS/2, caused a complete split. IBM's effort to compete with Microsoft by selling its own version of OS/2 wasn't succeeding very well. And Big Blue's project to develop an operating system with Metaphor Computer Systems Inc. was years from fruition.

So when Apple paid a call on IBM a couple of months ago, IBM listened. James A. Cannavino, the IBM vice-president who heads Big Blue's workstation and PC efforts, set up a meeting with Sculley, other Apple executives, and eight IBMers in Austin, Tex., where IBM does much of its RISC development. The Apple delegation showed the IBMers an early version of new Apple software, an operating system code-named Pink, that could be made to run on both Apple and IBM machines. That was enough to persuade Cannavino to start talking in earnest with Apple.

ANXIETY

In winning access to IBM's RISC chip, Apple gets a deal Big Blue hasn't cut with any other company. If the technology swap pans out, buyers of Apple RISC-based workstations will have a ready supply of application software, since software houses all year have been writing programs for IBM's fast-selling RS/6000. IBM, meantime, would get to expand the influence of its RISC technology, even while keeping it proprietary. And with Pink, Big Blue gains the software expertise that it needs to succeed against Microsoft. Is Microsoft's chairman worried? ''I'm not jealous,'' says Gates. Computer builders may prove far more anxious. The IBM-Apple combo threatens to give No. 1 workstation maker Sun its most daunting competition yet. And the deal means that a Compaq-led workstation and software design consortium, dubbed ACE for Advanced Computing Environment, could find itself with workstations that can't run hand-in-hand with those made by IBM and Apple. If IBM and Apple end up producing similar computers, buyers will be able to link machines made by the two companies on networks, then share word processing programs and other software. But it may not be easy for those customers to make computers they already own work on the network.

Apple is taking the biggest gamble. For one thing, IBM's RISC is a complicated design using a set of five chips, and the time it will take Motorola to adapt the chip for Apple will hurt Apple's ability to compete.

Despite the development hassles and the unanswered questions, one thing is clear about the pairing of Apple and IBM: This is detente in the personal computer world's longest-running cold war.

GRAPHIC: Photograph, 'There are no sacred cows' ROBERT HOLMGREN; Photograph, I'm not jealous PHOTOGRAPH BY ROBBIE MCCLARAN; Photograph, BREAKING THE ICE, IBM'S RS/6000