Showdown in Silicon Valley

Steve Jobs in 1985. Click to view photos from our gallery, "Steve Jobs: Insanely Great." Ted Thai / Polaris

Sitting cross-legged on the floor, surrounded by five colleagues, Steve Jobs is starting over. He's doing what he likes best: war-gaming a new venture (tentative name: Next) with an eager group of smart young tekkies, mapping out strategy in hours of giddy talk, identifying potential problems but letting hope run wild. "Everyone wants to be involved in a start-up," says Bud Tribble, one member of Jobs's new team. "It's part of the dream." But this time it's a little different for Jobs. The seed money comes from the sale of $21 million in his own Apple Computer stock, not the sale of his used Volkswagen bus; and instead of huddling in Jobs's parents' garage, the company founders are sitting on an Oriental rug in Jobs's mansion in the hills above Silicon Valley. But the electricity of a start-up is there: Jobs's speech is animated, his manner confident. If occasionally a pained look flashes across his face, well, that is understandable. After all, Jobs, chairman of the board of Apple Computer, has just had to resign from the company he helped found.

Suddenly, a storm is brewing in Silicon Valley. The board of Apple Computer, accusing Jobs of betrayal, was debating whether to sue him. Even in an industry accustomed to nasty disputes over sudden departures and trade secrets, the showdown between Apple and Jobs has a special edge. For one thing, the two principals, Jobs and Apple president John Sculley, 46, had been close friends. Jobs recruited Sculley from PepsiCo in 1983, and the pair had quickly developed a relationship that was part brotherly, part father-son. But in recent months Sculley had decided that Jobs was hurting the company, and persuaded the board to strip him of power. Now it appeared that Jobs might be seeking revenge by setting out to compete with his own creation. For Apple the dispute could be a costly distraction from its efforts to recover from the current computer slump. And the prospect of a $2 billion company going to court to crush a tiny start-up threatened to chill the renegade enterprise spirit of America's premier industry.

The story of Apple Computer is not just another garage-to-gigabucks, brainstorm-to-burnout high-tech tale. It has become the success story of a generation: Two scruffy kidswhose most successful previous venture was selling equipment to make illegal telephone callscombine some technical genius and marketing flair and spawn a billion-dollar company. The company, in turn, begets a multibillion-dollar industry that for the moment, at least, seems capable of staving off both rust and the Japanese.

The two scruffy kids, though, have not survived. One, Steve Wozniak, the technical genius, in effect dropped out of the company several years ago. He finally severed all ties with Apple last February, complaining that the company had lost its soul. Jobs hung on longer, but his tenure is ending just as unhappily. In a series of interviews over three days, Jobs told his side of the story to NEWSWEEK'S Michael Rogers and Gerald C. Lubenow. "I'm not bitter, I'm not bitter," he says. But it is clear that his separation from Apple has been as painful as a divorce.

Jobs's fall began when Apple president John Scully wrested control of the company from Jobs in a bitter struggle last spring. Sculley came to the conclusion that "we could run a lot better with Steve out of operations," he says. Jobs tended to value technological "elegance" over customer needsa costly luxury at a time of slowing sales. And Jobs's intense involvement with the Macintosh project had a demoralizing effect on Apple's other divisions. But he was still chairman, and being kicked around by his own company was a shock. "The San Jose Mercury had as their banner headline, APPLE DEMOTES JOBS," Jobs recalls. "My family and everybody reads that. It's certainly not a fun thing to go through." Things would only get worse.

Jobs was exiled to an office in an auxillary building that he and his secretary nicknamed "Siberia." Sculley says he repeatedly tried to interest Jobs in researchand-development projects but that Jobs insisted on an operating position. That's not what Jobs remembers: he says he got no assignments and gradually found that important company documents no longer landed on his desk. He called every member of the executive staff to say that he wanted to be helpful in any way he could, and he made sure each had his home phone number. Few ever called back. "It was very clear there was nothing for me to do," he says. "I need a purpose to make me go."

He soon came to believe that he would find no purpose within Apple. In July Sculley had told a meeting of security analysts that Jobs would have no role in the operations of the company "now or in the future." The message got through. "You've probably had somebody punch you in the stomach and it knocks the wind out of you and you can't breathe," says Jobs, recalling his reaction. "The harder you try to breathe, the more you can't breathe. And you know that the only thing you can do is just you've got to relax and you've got to trust that if you relax you'll start breathing again. That's how I felt all summer long... If I tried to figure out what to do or sort out my life or all that stuff, it was just like trying to breathe harder."

Thoroughly dispirited, Jobs went for a lot of long walks through the Stanford University campus and its magnificent eucalyptus groves. It wasn't until late August that he began to catch his breath. To collect his thoughts one day, he took up pen and papernot computerand began to write down the things that were important to him. Along with the development of the Macintosh, he listed three educational projects he had launched: Kids Can't Wait, Apple Education Foundation and the Apple University Consortium. Around that time, Jobs had a long lunch with Paul Berg, a Nobel Prize-winning geneticist at Stanford. Jobs wondered why computer simulations of Berg's long, expensive experiments could not be distributed for teaching purposes. Berg said that most universities didn't have the necessary computers and software. "That's when I started to really think about this stuff and get my wheels turning again," says Jobs.

He began meeting with a few friends from Apple to discuss a new education-oriented computer venture. They decided that Jobs should inform the board of their plans. At a Sept. 12 meeting Jobs told the board that he had considered entering politics, returning to school or launching a new firm, ultimately deciding to combine the latter two in some enterprise that was still nebulous. He mentioned that he would take some Apple people with him, but not so many as to disrupt the company. After the board discussed the matter in private, Sculley told Jobs that he would like him to remain on the board and that Apple might be interested in buying 10 percent of the new venture. Jobs says vice chairman (and co-founder, along with Jobs and Wozniak) A. C. (Mike) Markkula suggested Jobs and Sculley should discuss it further the next week.

That night Jobs and his collaborators met as a group for the first time. Present were Tribble, Apple controller Susan Barnes, engineers George Crow and Rich Page and educational-marketing manager Dan'l Lewin. They decided it would be best if they all resigned immediately and assured Apple there would be no further resignations. "We decided to cut the umbilical cord and go as a group so there wouldn't be one hit after another," says Barnes. Jobs met with Sculley early the next morning and gave him the names of the people who would be leaving. According to Jobs, Sculley took a quick look at the list and said nothing about it. He did ask Jobs about the other two points the board had raised. Jobs replied that the group was uncomfortable with the idea of committing 10 percent of their new company to Apple. And he said he had no intention of staying on the board. As they stood and shook hands, Sculley said he really hoped they could work together, and Jobs sensed a flicker of their old friendship.

Sculley tells a very different story of that encounter. "I was absolutely taken aback when Steve walked in and handed me the list," he says. Sculley says he complained to Jobs that he was taking key people, several of them from the crucial education division. The Apple board agreed. "The board felt they had been deceived," says Sculley. "He (had) said he would take a few low-level people not involved in anything Apple considered important." Apple's successful efforts in the educational marketlargely inspired by Jobshave been one bright spot during the current computer-industry slump. And while Jobs denies it, some experts agree that any computer he produced could well find itself in competition with the next generation Macintosh.

Last Tuesday Markkula issued a statement raising the prospect that Apple would sue Jobs or his new company for theft of proprietary secrets. Late that night Jobs drove to Markkula's home and delivered his letter of resignation. "We have tried to assure them that we have absolutely no plans to use any trade secrets or technology," says Jobs. "We can't tell (them) what we're going to do because we honestly don't know. What we want to do is come to some kind of acceptable parting with Apple so we can start our company." But Sculley believes there's more to it than that. "We all understand (that breakaway start-ups are) part of the culture," he says. "But people felt this was Steve Jobs getting even, not just Steve Jobs going off to start something new."

This is one corporate clash with an intensely personal element. Early on, Jobs and Sculley enjoyed a remarkable friendship. Their closeness even provoked resentment among other top Apple executives, who referred to it as "the love affair." They spent many hours in conversation and took long walks in the woods together. "We talked two or three times a day," says Sculley. "He would call in the middle of the night. We finished each other's sentences." All that started to change last spring as the computer industry began to descend into its current slump. As Sculley sees it, Jobs's "ideas on how to sell into the office (market) didn't work and that put an incredible strain on the relationship." Sculley decided to remove Jobs from his operating position as head of the Macintosh division, and the board backed him. In late May, as Sculley was beginning a trip to China, Jobs made one final attempt to depose him, but the board remained loyal to Sculley. "We agreed then," says Sculley, "that we'd set our friendship aside."

The departure of Jobs left many Apple staffers reeling. "I had no idea Steve was forming a company," says William Campbell, executive vice president for sales and marketing. "Losing those people was a shock. But losing the chairman of the board was even more shocking." The process of replacing Jobs's recruits will cost the company valuable time. "The people who are really upset are at the vice-president level," according to one longtime Apple executive. "Their plans have really been upset. The rough estimate is delays of two to three months, due to bringing in new key people. They're the ones pushing for some kind of revenge." In some quarters, though, there is simply "a sense of relief that the other shoe has fallen," says the Apple veteran. So far there has been no sign of an exodus from the company by Jobs loyalists.

A protracted lawsuit could cause further divisions within the company, and even cast a pall over the entire valley. "This has been a growing problem for the past couple of years," says Richard Carlson, an economist with Q.E.D. Research, "the old spinoffs trying to limit the new spinoffs." At one time, existing companies would sue former employees only for the theft of specific trade secrets, but the scope of such suits has expanded. "Now, simply the threat of legal action from someone very large is enough to prevent people from getting venture capital."

From the comfortable distance of Wall Street, the bloody battle looked like a healthy jog around the park: the news of Jobs's resignation sent Apple stock up. "Most professional investors are happy to see Jobs out of Apple," said Don Sinsabaugh, a partner in Swergold Chefitz & Sinsabaugh. "He ruffled a lot of feathers on Wall Street with his brashness and self-confidence." More importantly, CEO John Sculley will now be able to run the company with a free hand.

There is a question, though, of whether the ordeal will dampen Apple's innovative flair. "It was really Steve's vision, his drive, his charisma, his relentless championing of the personal computer (that made Apple a success)," says venture capitalist Benjamin Rosen, chairman of Compaq Computer Corp., an Apple competitor. "When Jobs left active management last spring, there was concern that his change in roles would result in loss of spirit," says Barbara Isgur, an analyst with D.H. Brown & Associates. "But that doesn't seem to have happened." Isgur believes that while Apple may have lost a certain wild energy, it is now in a position to proceed "in a more deliberate fashion."

It will take more than hard work to get Apple back on track. For the immediate future, Apple can get by offering incremental improvements on its current lines. But over the long run it will need to dazzle the market with something sexy and new. "Their new-product release rate has slipped badly in the past two years," says Sinsabaugh.

In the business market, which accounts for 65 percent of all desk-top personal-computer purchases, Apple has been especially weak. Apple once dominated the business market by default. But it was slow to respond to the challenge of IBM's extraordinarily successful PC, introduced in 1981. In January 1984 Apple renewed its bid for the business community with the Macintosh. But the Mac had several crippling drawbacks as a business machine. Jobs's insistence that the Macintosh be easy to use made the machine's internal software complicated. Thatslowed the Mac down and limited its memory. It could not be customized, had little useful software and, worst of all, it was not IBM-compatible. The Mac has sold well to individuals but has not gained Apple the hoped-for access to the business market.

The flap has already had one negative side effect: it obscured the announcement this week of several significant upgrades in the Apple II, by far the company's most successful product. There may be a measure of mischievous satisfaction in that for Jobshe has long been known to hate the Apple II, which he considers a "boring" and technologically clumsy machine. But Jobs may have hurt himself, too. "Steve really had the opportunity to show the business community that he had grown up," says Ida Cole, a former Apple employee and now vice president for applications software at Microsoft in Bellevue, Wash. "He didn't do that."

But for Steve Jobs, growing up has always been something of a problem. In many ways he is a child of the '60s. A college dropout, he journeyed to India in search of enlightenment. He stopped eating meat, and he still feels a kinship with the East: one of the things he admires about his Japanese competitors is that, like him, they "believe in the ultimate importance of the journey," not just specific goals. In the early days of Apple his sandals, long hair and beard alarmed a number of potential investors. His mansion is almost monastic: he sleeps on a mattress on the floor. Most characteristically '60s of all, however, is his devotion to youth, which comes through in his determination to produce educational products. That the drama in his life now revolves around control of a billion-dollar corporation and not kitchen duty in a commune is merely testament to his drive.

Jobs was also a child of Silicon Valley; both he and Wozniak grew up there. Like the rest of the valley, he was deeply influenced by two conservative businessmen who couldn't have been further from the '60s in style: Dave Packard and Bill Hewlett. At the company they built, Hewlett-Packard, human values commanded the same respect as profitsand HP has plenty of both. Jobs was exposed to HP early on. During his freshman and sophomore years of high school he attended lectures at HP every Tuesday night, along with about 20 other students. They got thrilling glimpses of the future at technology's cutting edge. "I think it is fair to say there wouldn't have been an Apple if there hadn't been a Hewlett-Packard and if Hewlett-Packard hadn't had the values that included caring and nurturing the young people in technical directions," said Jobs.

While proficient, Jobs was never really a technical star. In the early days of Apple it was Wozniak who came up with the technical innovations that made the Apple II the first practical "computer on a circuit board." Jobs's contribution was conceptualizing what the machine ought to be able to doand what it should look like. Jobs coaxed money out of investors, cajoled suppliers to extend credit, encouraged Wozniak to keep trying. Most of all, he was a visionary, sensing that personal computers could be attractive not just to nerdy hobbyists, but to everyone. "My motivation was to make a showoff product to take down to the computer club," says Wozniak. "Jobs's was to make a product and sell it."

Those qualities were essential to a start-up, but it has been harder for Jobs to find an outlet for them in a more developed organization. As Apple grew largerand it did so with astonishing speedJobs began to lose his sense of purpose. Launching the project to develop the Macintosh in 1982 was a way of returning to his roots. "The Macintosh team was what is commonly known now as intrapreneurship," he says. "A group of people going in essence back to the garage, but in a large company." For Jobs it meant the chance once again to be directly, intimatelyand dictatoriallyinvolved in every aspect of a new product.

Like any strong leader, Jobs has alienated many friends. One casualty was Wozniak, who maintains an oddly mixed view of his partner in history. For one thing, he does not think Jobs can be trusted to give a straight answer. "Even in personal conversations with the guy," says Wozniak, "you could never really tell what he was thinking. You might ask him a yes-or-no question, and the answer said 'no' to anyone who heard it but really means 'maybe yes, maybe no'." And Wozniak believes Jobs always put his own interests ahead of anyone else's. "Aside from not being able to trust him," he says, "he will use anyone to his own benefit." Yet Silicon Valley is still filled with people who would love to work for Jobs. He gets a daily stream of letters, phone calls, even people who call at the gates of his house bearing letters requesting an audience.

Idolatry can be subversive. As Silicon Valley publicist Regis McKenna sees it, Jobs suffered from the way people deferred to him. "I've told him that people were not honest with him," says McKenna, who has been involved with Apple since the early days. "(He needed people to say,) 'No, Steve, that isn't the way the world works'." People encouraged him to go into politics, for example, telling him he could be a senator or even president. But Jobs has never even registered to vote, an act of benign neglect that would surely hinder any political career. Data-processing managers, who are responsible for buying computers for large companies, would tell Jobs that they admired him for refusing to conform to the standards set by IBM. But when it came time to put in their purchase orders, they played it safe, going with Big Blue.

As the Macintosh project unfolded, it began to appear that Jobs was listening only to himself. For one thing, he did not provide the Mac with a letter-quality printer, an essential for any computer aimed at the office market. "There was no in-house cynic to stand up to Steve Jobs and say, 'It's incredibly stupid to sell a business machine that doesn't support a letter-quality printer'," says Tom Warrick, a Washington lawyer and president of a large Apple users' club who has recently visited the company. Jobs also refused to put a fan inside any Apple computer. Fans, he has said, are required to correct inelegant design. But without a fan, no hard-disc drive can be included in the machine, a further drawback for business users. Jobs's obsession created problems within the company, too. To protect his pet Macintosh, which was aimed at the office market, he refused to allow the company to advertise the Apple II as a business computer. Finally, he estranged himself from Apple staffers who worked for other divisions.

As McKenna sees it, the rift between Jobs and Sculley ultimately stems from the sudden, dramatic change in the marketplace in the last two years. No longer can a company simply hope to dazzle customers with gee-whiz gadgetry or innovations. Companies must go to the customers first, finding out what their needs are and what kinds of computers can solve their problems. "Apple designed and built computers like a consumer-products company," says McKenna. "But there's been a very rapid change. The (personal computer)market is more like the traditional computer marketplace." That makes IBM's service-oriented approach and its careful consideration of how new products fit into the existing family of products more effective. "Ironically, it was John Sculley, with his background in consumer products, who realized that," says McKenna. "Steve, the one with the technical background, didn't recognize that soon enough."

Like Jobs, Silicon Valley has been experiencing growing pains. As technology has grown more sophisticated, the costs of starting a new firm have soared and the freewheeling process of entrepreneurship has become institutionalized. "If you want to start a company now," says Jobs, "there are companies that help you start a company." And slowly, executives from outside the computer industry, like Sculley, have begun taking charge of technology companies. Jobs understands that the switch to a more professional kind of management may be necessary for a large business. But there is danger in that. "To me," he says, "Apple exists in the spirit of the people that work there and the sort of philosophies and purpose by which they go about their business." He believes that may be his greatest legacy. "If I'm a million miles away and all those poeple still feel those things and they're still working to make the next great personal computer, then I will feel that my genes are still in there. If Apple just becomes a place where computers are a commodity item and where the romance is gone ... then I'll feel I have lost Apple."

And so at 30, Jobs is starting over. He carries an extraordinary burden: he may have already authored his greatest work. But he is still driven, and he believes he has a responsibility to keep working. "If I just ... went and laid on the beach the rest of my lifewhich I couldn't do anywaythat would send a pretty ridiculous message to people who are thinking about starting their own companies, thinking about risking everything they have on an idea," Jobs says. He is also pretty sure he can pull off something spectacular. "I did it in the garage when Apple started, and I did it in the metaphorical garage when Mac started," he says. "So I have a certain degree of confidence that I can do that again." No one who knows Steve Jobs would expect anything less.

By Carolyn Friday, Gerald C. Lubenow, Eric Gelman, William J. Cook, William D. Marbach and Michael Rogers.