Steve Jobs President & CEO, NeXT Computer Corp and Apple. MIT Sloan Distinguished Speaker Serie

Good afternoon, ladies and gentlemen, and welcome to the second presentation of the Distinguished Speaker Series. We are honored to have with us today Steve Jobs, President and CEO of NeXT Computer Corporation. Steve has always been one of the most prominent entrepreneurs in the

computer

industry. Along with his partner Steve Wozniak, his entry into the industry was via the traditional entrepreneurial route of building

computer

s in a garage. However, an auspicious beginning was the creation of Apple, a formidable challenger to IBM in the personal computer market. A true visionary, Steve was known from an early age for his belief that a PC could be placed on every desk and made simple enough to use.

Educationally, he had the right credentials to succeed in the computer industry, because he dropped out of Reed College. and the growing

corp

orate culture diverged, both eventually left Apple to establish their entrepreneurial roots. In 1985, Steve founded another computer company, NeXT Corporation, to design a revolutionary computer called Cube. Targeting the high-end workstation market, NeXT has encountered difficulties against competitors such as Sun Microsystems. However, with 1991 revenues reaching $127 million, the business has grown substantially. With the backing of Ross Perot, NeXT will not be short of funds in the future. Or in a more unlikely scenario, a friendly year in the White House.

Current plans for the NeXT computer involve a public offering, possibly in the

next

14 months. We look forward to hearing today what a good investment that should be. Steve has consistently been recognized for his contributions to America's largest high-tech industry. More recently, last August he was appointed to the President's Export Council, with the role of advising on government policies and programs that affect trade performance. Outside of work, Steve is married to Laurene, formerly an MBA student at Stanford University and also the sister of one of our classmates, Brad Powell. The couple met when Steve gave a speech similar to the one this afternoon at Stanford, days before the Bay Area earthquake.

Let's hope history doesn't repeat itself. Ladies and gentlemen, we are very grateful that Steve gave us his time to be with us this afternoon. Could you warmly welcome our

distinguished

guest, Steve Jobs? Thank you. Hello. I guess we'll spend an hour or so together today. And most of the time I wanted to spend talking about what you want to talk about and answering some questions. But I thought if you wanted, I'd take about 10 or 15 minutes upfront and tell you what we're doing at NeXT and why the world might need another IT company. Is that something you guys think about these things?

OK. I thought I would tell you about some of our mistakes. Maybe that would be more helpful. We have a lot of scar tissue. There's a really interesting book written by a guy called Paul Strassmann. And Paul has one of the most interesting

jobs

on the planet. He is the chief information officer, CIO of a very large organization called the Pentagon. And they really understand the software there. I had a conversation with him not long ago and he said that the lesson of the Gulf War was that the best software will win the war. That's why they are trying to work a lot in the software area.

However, before getting this job he wrote a book called The Business Value of Computers. It's pretty thick and not a good bedtime read. But you can go through it and there are amazing things in it. And he asked two questions in particular. One was that he surveyed a group of companies, from those that weren't very successful to those that were really successful. And there's someone taking notes here. He asked how much they spent on information technology as a percentage of revenue. And he got a very counterintuitive answer, right? You would think that really successful companies would spend more or less than companies that were not successful, depending on your theory.

But it was exactly the same. They all spent about 2% of income on information technology. And this seemed curious to him, so he asked another question. How did they spend their money? And he discovered that the really successful ones...actually, let's start with the not so successful ones. As success and money increased, he found that those who were not as successful spent most of their money on management productivity, and the most successful spent most of their money on operational productivity applications. Now, this was not very pleasant for me to read, because I spent the first 10 years of my life in productivity management, which was PCs.

PCs and Macs never attacked operational productivity. They simply attacked management productivity. Why is that? Because you can't go to your local computer store and buy an app that will help you trade stocks, or help you run a hospital, or help you with any operational part of your business that you want to automate. Unless you are a very, very small company, you can run a few accounting packages. But other than that, if you were a medium or large company, these things never attacked operational productivity. So we zoom out and ask: How have people attacked operational productivity with information technology?

Well, in the '60s, they bought a mainframe computer, got some terminals and a bunch of COBOL programmers, and wrote some applications. And most of them were some kind of secret applications. And in a way it worked for the few who could afford it. In the '70s, they acquired a mainframe computer and some terminals, and did the same thing. And some of them got some minicomputers and terminals and tried to make it a little bit cheaper. In the 80s nothing changed. Mainframe and terminals, minis and terminals. Until maybe two or three years ago. What happened two or three years ago was that the front office began to realize that they needed operational applications so badly that they could no longer rely on MIS people.

They started taking over life and sometimes working with the MIS people to start downsizing and getting some servers and running some industry standard databases like Sybase or Oracle on the servers, and creating a small network local area and maybe pick up some Sun. Workstations and spent about two years writing some mission-critical operational applications. As trading applications for Wall Street, a perfect example. And in a way it worked. And the reason they needed to do this was because more and more they were finding that things like new products required a custom operating application. For example, if you're in financial services and you come up with a new product, it's just three things.

It's an idea, it's a sales force, and it's a custom application to access databases to make the product a reality, do mortgage swaps, or whatever you want to do. Without the app, you have no product. And so there has been a growing demand from the front-ends of

corp

orations to create more and more of these operational applications. And I think there will come a point where it will be quite clear that the

next

big revolution in desktop computing is attacking operational productivity. And as we start to redesign the way we do things, we'll automate a lot of this in custom applications.

It sounds a little strange now to most people. It sounds like desktop publishing in 1985. Nobody knew what it was, everyone thought it was some kind of weird vertical thing there. But I guess it's pretty horizontal. And now we're attacking vertical markets that know they want this. And it's going extremely well. Sun is the only company that has really succeeded at this and we are removing them from the box. Because we came up with software called NeXTSTEP, which allows you to create applications five to ten times faster than anything ever seen. And after building them, mere mortals can deploy and use them, because this computer is really easy to use.

And you can seamlessly interoperate your custom apps with plenty of productivity apps available on the market. So we go to these companies that use Suns and take two years to write their applications, or are thinking about using Suns, and can write their applications in about 90 days on a NeXT. Now, if you're on Wall Street and you can create a new product in 90 days versus your competitor in two years, that's eight new products you can come up with for each of them. And you can start to see the competitive advantage that can be created this way. Now, we had no idea we were good at this when we started NeXT.

Many times you don't know what your competitive advantage is when you launch a new product. Let me give you a historical example. When we created, how many of you use Mac? Any? Good. How many of you have seen a NeXT? Oh, how many of you use a NeXT? Oh, that's not so bad. We would like to change that ratio a little. We are on the right path. When we created the Macintosh, we never anticipated desktop publishing when we created the Mac. It sounds funny, because that turned out to be the compelling advantage of the Mac, right?

Which wasn't one and a half or two times better than everything else, but four or five times better than anything else, where you had to have one. We never anticipated it. We anticipated bitmap displays and laser printers, but we never thought about the page builder, that whole industry that really comes down to the desktop. Maybe we weren't smart enough. But we were smart enough to see this starting to happen nine to 12 months later. And we changed our entire business and marketing strategy to focus on desktop publishing, and it became the Trojan horse that eventually brought the Mac into corporate America, where it could show its owners all the other wonderful things it could do.

Likewise, when we created NeXTSTEP, this revolutionary object-oriented software that we have, our target customer coming from the PC world, where shrink-wrapped applications were king, was Lotus, Adobe, WordPerfect and all the wrapped application developers. in plastic. And the purpose was to allow them to build their apps five to 10 times faster for these packaged apps. And it worked. Now we have a bunch of packaged applications. The best of its breed in almost all categories. But it wasn't until early 1991, early last year, a little over a year ago, that some really big companies came to us and said, you don't understand what you have.

The same software that allows Lotus to build its applications five to 10 times faster allows us to build our internal mission-critical applications five to 10 times faster. And this is the biggest problem we have had. This is a big problem for all large companies and almost all medium-sized companies, and you have a solution in your hands and you fools don't even know it. And it took about three months until we finally heard it. And then last summer, we changed our entire sales and marketing strategy to focus on that. And it has taken off like a rocket. And we grew about 4 times last year and we will probably grow about 2 times this year.

And our client list is now very, very strong and growing like crazy. We just returned from spending a few days in DC and New York. And we're talking to clients we only dreamed of talking to a year ago. So that's what we do. And our archenemy, Sun, wants to kill us. What is good. They should try to do it as soon as possible, because the sooner they do it, the cheaper it will be for them. I think it's past the point where it's possible. And the best thing is that the hardware changes every 18 months. It is quite impossible to gain a sustainable competitive advantage from hardware.

If you're lucky, you can do something one and a half or two times better than your competitor, which probably isn't enough to be a competitive advantage. And it only lasts six months. But it seems to take people much longer to get up to speed with the software. I saw that it took Microsoft eight or nine years to catch up to the Mac, and it's debatable if they even did it. It takes a lot of time. And we think the earliest we'll have a real competitor is probably four or five years. So we have that amount of time to become a $1 billion to $2 billion company to be able to compete with them at scale.

Look, today we can't compete with them on scale. We never have as many sellers as they do, like Sun. We don't have the advertising budgets that they have. So we have to have a better product. And I hope we always have a better product, and I think we can. But I would also like to be able to at least compete with them on a scale. So we have the next three or four years to run very fast, so that when they get close to having a competitive product, we are at a large enough scale to be able to start competing with them.

And that's what we're doing with our lives right now: spending a lot of time with customers, spending a lot of time improving NeXTSTEP and that kind of stuff. That is the strategic basis of whatwe make. Does that make sense to you? Have you come across the concept of a kind of custom operational applications? I mean, most of you have come from companies where you have had work experience, right? And have you all done that? So do you have this problem in the companies you come from, with a lot of pressure to write these custom operational applications and almost nothing coming out of the tap to satisfy this thirst?

How many of you are from Wall Street? Good. Well, how many of you are from manufacturing companies? Excellent. Where are the rest of you from? Consultant. How many consulting? Oh! That's bad. A mind is too important to waste. You should do something. Why is that bad? A consultant can come into a company and use their system and basically build their applications in predictably short periods of time and show them a product that works. The only consultants I've seen that I think are really helpful are the ones that help us sell our computers. No seriously, I don't think there's anything inherently wrong with consulting.

I think without owning something, over an extended period of time, like a few years, where you have the opportunity to take responsibility for your recommendations, where you have to see your recommendations through all stages of action and accumulate scar tissue for mistakes. and getting up off the ground and dusting yourself off, you learn a fraction of what you can. Going in and making recommendations and not taking ownership of the results, not taking ownership of the implementation, I think is a fraction of the value and a fraction of the opportunity to learn and improve. And then you get a broad cut in companies, but it is very small.

It's like a picture of... I'm a vegetarian, so I won't use steak. But it's like the image of a banana. You may get a very accurate image, but it is only two-dimensional. And without the experience of actually doing it, you never become three-dimensional. Then you may have a lot of pictures on your walls. You can show it to your friends. You can say look, I've worked on bananas, I've worked on peaches, I've worked on grapes. But you never really try it. And that's what I think. You are also a variable expense. And in difficult times, you find yourself.

You find yourself variable, right? If it's software that's going to make or break your company, why are you launching a platform? Why don't you play it for Sun? They have a much larger base. Right, very good question. I'm going to generalize your question. Why don't we just become a software company, right? That is a very good question. It's a subtle question. I'm going to try to go over several things and I'm sorry if I skip. Last year we received a lot of requests from customers who would love to see NeXTSTEP on other platforms, and mainly on Intel-based platforms like the 486.

So we decided to do just that. And we have ported NeXTSTEP to 486 and are finishing it now. And it will be sent within September and October. And it is exactly the same thing we run on our own computer. Same application, same user interface, same training, same development environment. And we'll sell it for $9.95 and we'll provide it as an OEM to a group of companies whose names you'll recognize fairly easily, and we'll provide it to you as an OEM at a much cheaper price. And everyone is coming out of the woodwork to help us. We get help from Novell.

We are getting help from all the developers. Intel is really helping us. And they really want us to succeed. Why is that? Good. Everyone wants to make sure there are options available and everyone is very afraid of Microsoft. And they see NeXTSTEP as the only thing on the horizon that can challenge Microsoft in systems software for years to come. So we are enjoying a lot of help and we need it, so that's good. Now, we have also received many requests from companies to port NeXTSTEP to other platforms. And we're talking to some of those companies right now.

Now, we have many requests from Sun customers to migrate NeXTSTEP to Sun. So a lot of them say, look, we may not want to buy them anymore, but we already bought 500 and we don't want to throw them away. So can we put your software on them? Because Sun is falling behind in software. Now, Sun says they'd rather stick needles in their eyes than help us do this. That's a quote. And so we're evaluating right now, what will be worse for Sun, if we port it or not? And since we're pretty customer-oriented, we probably end up doing what customers ask us to do, because we want to make them happy.

Now, this begs the question: should we just be a software company? And we believe the answer is no. We believe we should be a software company and a hardware company. In making the decision to put NeXTSTEP on more platforms than our own, we clearly decided that we will sell less than 100% of NeXTSTEP hardware. However, we believe that the market will grow and we will sell more absolute hardware. And secondly, the goal of our hardware division is to make the best NeXTSTEP hardware. It may not be the cheapest, it may not be this, it may not be that.

But we believe that, ultimately, we can do better. And I would love nothing more than if one day we only sold 20% or 25% of the NeXTSTEP hardware. But I still think this is a billion-dollar-plus hardware business. And I'll address another hardware-related reason in a minute. There are some things I can't talk about here. On top of that, if you look at how we sell our computers right now, we have a US sales force of about 130 professionals in the field selling NeXT computers. They spend 90% of their time selling the NeXTSTEP software and then 10% of their time selling the hardware.

In other words, if they can get the customer to buy NeXTSTEP, then they will sell the hardware, because right now we have the only hardware it runs on. So right now they are selling NeXTSTEP. And this is what it takes to launch an innovative new product. The current distribution channels of the computer industry have lost their ability to create demand in recent years. They can satisfy demand, but they cannot create it. If a new product comes out, you're lucky if you can find someone at the computer store who knows how to demo it. So the more innovative the product is, the more revolutionary it is and not just an incremental improvement, the more stuck you are.

Because the existing channel only meets the demand. In fact, it is getting so bad that it is being eliminated, because there are more efficient channels to meet demand, such as telephone and Federal Express. So we're seeing the channel condense on its way to, I think, just telebusiness. So how can you bring innovation to market? We think the only way we know how to do it right now is with the sales force directly, in front of customers, showing them the products in the environment of their own problems and discussing how those problems can be combined with these solutions.

A company that is only dedicated to software could never afford to have a direct sales force. With average selling prices of $500 per software package, you could never afford 130 professionals in the field. With an average sales price of $5,000, you can do it. And that's why I don't think we'll see more systems software companies succeed. I don't think it's possible to fund efforts to educate the market about a revolutionary product with such low ASPs. And if it's not a revolutionary product, I don't think the company can be successful. So our strategy has been that we have to be a hardware company for our software business to be successful.

And we believe we can do very well in both. I know it's a long answer, but it's also a complex problem. Yeah? Sure. If you ask us who our competitors are, we'll actually say three things. One is Sun's Solaris software, the other is Microsoft, and the third is Taligent. Let's look at them in that order. For a time, Sun was a software value-add, because it had the best Unix on the market. But the market has moved far beyond that, and sadly, Sun hasn't. So their software is falling further and further behind, and while we take them very seriously, we don't think Solaris is going to be much competition.

It has no purpose and is more or less what they have today. Microsoft is making NT, which is sort of their second attempt at a Unix wannabe. And that's great, and I think it's going to be better than the last one, which was OS/2. But fundamentally, it's just an operating system. It is better plumbing for Windows. That's a good way to think about it. Unfortunately, you're still stuck with Windows in all its glory, including the worst development environment ever invented. So we don't think this is really going to present a challenge for what we're looking for, which is these custom mission-critical applications, because the development environment is horrendous, it's not object-oriented, and even with the best plumbing, we think that will be widely rejected for what we do.

In terms of Taligent, Taligent represents the first true competitor we could have. They will ship a product around 1995, if they execute their plans. And I think if they execute their plans and work very hard, by about the mid-90s, they will have about what we have today. And that's no joke. It still means we have to race very hard, because they will have a lot of resources at their disposal. I think there are a lot of questions about whether they will ever ship a product. I think it's a few years away from something working, in quotes.

But we take them very seriously. Now they have helped us enormously because they have blessed object-oriented programming. And right now we're the only ones who have it, and we will be the only ones for the next three or four years. So if we can't compete with Taligent, it's probably because we've shot ourselves in the foot. You can't ask for anything better. IBM and Apple say these guys are on the right track, come back in five years and we'll have it too. It's great. And then the ball is in our court. Yes, back. It describes NeXTSTEP as an environment and an operating system.

And what I hear you talking about is a great way to develop an application. I do not develop applications. I use other operating systems. Do you see a fracturing of the operating system market into a specialized niche that you're describing and then into the general market for those of us who don't develop applications? Or are you saying that you can then go from an environment that allows you to develop applications to an operating system that will be like Windows or MS DOS on many machines? Well, let's clarify our terminology. We consider NeXTSTEP as an operating environment.

Much more than an operating system. Unix, which is our operating system, is 10% of NeXTSTEP. So in these modern operating environments, when you develop a custom application in NeXTSTEP, it doesn't run on Mac or Windows. Can not. You need all the objects that come with NeXTSTEP for it to work. And let me get into a little detail there. How many of you are technicians here? A lot, okay, great. Well, we have discovered something. You don't write code any faster in NeXTSTEP than in any other development and operating environment we know of. However, to create a particular application, on average, you write about 20% of the code that is written in any other development environment we know of.

About 20% of the code in Sun or anything else. So the code that is faster to write, the code that is easier to maintain, and the code that never breaks is the code that is not written. That's our strategy: write much less code. And the way we do this is to allow the developer to use many objects that others have written. We ship six years' worth of items with NeXTSTEP. You can create your own objects for your own company and then reuse them with your developers. And now there are independent third-party companies that do not sell system software or applications, but rather objects.

It's not even ten and it's just starting. And I think it's going to be something very big. So to deliver these applications built in NeXTSTEP, you must have NeXTSTEP so they can run and take advantage of this rich community of objects. And that's why we're porting NeXTSTEP to the 486. That's why you'll see NeXTSTEP running on multiple hardware platforms. And will there be a fracture, so to speak? Sure, to a certain extent. And I tend to see it as a transition. Was there a fracture when Mac came out? Yes. And there has been more transition, as people move to Mac or, in the case of Windows, adopt what is good about Mac.

The same thing is going to happen here. We firmly believe that the benefits of these object-oriented environments are not only rapid development, but a much richer user environment. If you use a NeXT, it's much better than a Mac or PC, even if you've never developed an app. Other environments will absorb some of those advances and more and more people will use NeXTSTEP. And things will tend to balance out over time. But there will be a transition. And our goal is to make sure we are a part of it. Yes. You said earlier that your competitive advantage, in your opinion, lies in the fact that these companies today need operational development and notadministrative.

However, many companies (or perhaps some) outsource their development. How does this change your business strategy? Good question. If our business strategy says that we do a lot of things well, but the tip of our arrow, or our Trojan horse, that is getting us into these large and mid-sized accounts is our custom application development capabilities, then our growth is at pace. , among other things, will depend on the development community available for these companies to develop these applications. Now, although we have reduced development time to a fraction of what it was, even without developers, we are not going to win.

Fortunately, most companies have dramatically increased the staff of good people in their IS departments in recent years (the last four or five years). There are now really bright people who know something about computing in IS departments. And most of the industries we talk to, whether it's healthcare, financial services, even law enforcement, places like that have on-site developers on their IS teams. If not, they're starting to become a lot of vars, and the people we're using in Los Angeles or New York, where I was just, we probably have about 10 independent third-party companies helping parts of Wall Street develop things. .

So I think that's not going to be an obstacle. My personal opinion is that the number of people dedicated to app development is decreasing. It exploded in the '80s with PCs, but now that industry is consolidating. It is being consolidated in very few companies. And there's an excess of people out there, which I think is starting to funnel into some of these other areas. So far it hasn't been a problem. But if you want to do that, call us and tell us, because we always need more. So what are you all going to do when you get out of here?

Will you return to your companies? How many of you are going to return? How many are not going to return? What are you going to do? Well, yeah, I think we always have

jobs

for really smart, technical people. You know, technically based people. And you guys are getting an excellent business education here. Yes, we would love to talk to you about it. Yes sir. Well, I don't want to step on anyone here. Forward. But where would Apple be if he hadn't left it? And specifically, could he have created something so revolutionary in the tech industry? Well, these are deep questions.

I'll tell you, I've obviously thought about this a lot. And I don't want to get too much into that. But I will say that I think everyone lost. I think I lost. And I wanted to spend my life there. I think Apple lost. I think the customers lost. And having said all that, so what? You continue. It's not as bad as many things. It's not as bad as losing your arm. So people move on and businesses move on. And I think Apple... I'm very happy every time Apple releases a Mac. It makes me very, very happy.

I think PowerBooks are decent products. I like them. But Apple has been struggling for the past few years. They have been having a real struggle with who they want to be. And this is nothing new. We always had that. I think that was part of what kept Apple alive. And there were two sides within Apple. Camp one wanted to be the next serious computer company, and camp two wanted to be sort of the Sony of computers. And I think that fight kind of tore Apple apart. And fortunately, the guys at Sony have won. In a way they have decided to become the Sony of computers.

And the PowerBooks are pretty good, but the Quadras suck right now, the high end ones. And they're basically not putting a lot of resources into the desktop power users, and now they've put most of their best people into the laptops and the consumer products that they're going to release. And I think they'll do very well in that. Now, there's a problem there: if you look at consumer products that sell more than a million a year, we can count them on just a few hands. Turns out there are no... I mean, consumer electronics, not like toothbrushes. But electronic products.

So let's say you have one or two of those. Let's say they have a product that sells them two million a year at an ASP of $500. Then it sells to the consumer for $795 or something like that. That's right, a billion dollars, right? two million a year, 500 dollars each. It's a billion dollars. They still have to find the other $7 billion in revenue somewhere. So it will be an interesting transition as ASPs go down. Volumes have to increase much, much more, and you run into some scale issues when you look at the consumer electronics industry. It's not that it's not possible.

And I think it will be really interesting to see. And we also see a lot of movement, not so clear, but some movement in the Windows and PC world again to take what they have now and make it portable. But without giving more power to the upper third of the market. You know, System 7 on Mac was supposed to be the second to arrive. And it was not so. It turned out to be an incremental improvement. OS/2 was supposed to take us to new dimensions and it turned out to be a complete failure. And they're going to invest another 100 million dollars later just to make sure you all know it.

And then there are a third of those desktop computers where users and people who want to deploy more sophisticated applications are in the desert wanting something to drink. And I think there's a huge opportunity to provide them with some solutions. Now, that doesn't mean Apple won't be successful. It just means that they are going to go in another direction. Who knows what would have happened if all this had not happened. Yes, up in the corner? You've talked a lot about manufacturing products. I'm wondering if you could talk about the management of NeXT and whether you see any changes, as you expect, going from a $120 million company to a $1 billion company.

Sure. Yes, we have done a lot in the last year. The most important things we did was, first of all, hire this guy right here. Mike Slade is our VP of Marketing. He spent... you can stand up. No. And he's also stingy. And Mike spent seven or eight years at Microsoft. And I met him originally, he was the Product Manager for Excel when he first came out and he ended up leading big marketing efforts for Microsoft. Mike heads up all marketing at NeXT. And Mike came to NeXT just as we were finally hearing what these big companies were saying about mission-critical custom applications.

That's why we have worked very closely to redefine the company's marketing strategy. And Mike has done an excellent job at that. The second big step we made was, about three months ago, a little over three months ago, we consolidated our hardware design engineering, our manufacturing, our global distribution and hardware service, all into one part called the hardware division . So from the cradle to the grave, they have the responsibility for the hardware. And we are in the process of forming the software division right now, so we are still all under the same roof, but we are clear about the fact that we have to make two businesses successful.

The third thing we did was... and we have a great person in charge of that, Rich Page, who is one of the founders of NeXT. And he's doing a great job managing it. We recently hired a new CFO, Marcel Gani. He's from Intel, he spent 12 years at Intel doing some pretty interesting work. He ran all the finances of Europe. He directed the entire internal audit of the Board. He ran all the manufacturing, planning and scheduling for a while, and things like that. He's a pretty good guy, he was in Cyprus for a year and a half and then he came to NeXT.

And he's great. And then recently, in fact, about last week, I hired a COO, a guy named Peter van Cuylenburg. And Peter is someone I met when we were looking for an Executive Vice President of Sales and Marketing. And he turned me down for the job. And we subsequently decided not to hire that position. And I've been chasing him for almost a year and a half. He's really good. He spent a lot of time in IT in Europe, and about three years ago, he went to a company called Mercury Communications in England (they're the UK's MCI) and built that company into about $2 billion, and then he was promoted to run half of it. of Cable &, or half of Mercury's parent company, Cable & Wireless, and was managing, is about $6 billion.

And that's when he thought communications and computing were going to come together, but it never happened. And he discovered that his true love is in the computer business. He's very, very good operationally, so that happened last week. It seems like all the good people I really want to hire take me a year to hire. And it has always been that way, even at Apple. Some of the best technicians, or whoever they are, it always took me like a year to get them out of HP, or wherever, and it took me more than a year to hire them.

I think Mike has the prize. You are about a year and a half old. And they are all worth it. The thing is, I usually meet someone who's really good...I think he's really, really good. And you can't get them. And then you try to find other people. And no one is up to it. You know, when you meet someone that good, you always compare them to that person. And you know you'll settle for the second best option if you compromise. And I've always found it's best not to compromise and just keep working. So I think we're doing quite a bit.

We seem to run the company much better now than ever before. We've definitely made our share of mistakes. Yeah? What technological advances do you think will occur in the next five to ten years? And how is NeXTSTEP structured to take advantage of them? I will give you a global answer. Then we can dig into some details. I think the concept of window opening and eventually closing technology can be used. And what I mean by this is that enough technology, usually from quite diverse places, comes together and makes something possible that is a quantum leap forward. And it doesn't come out of nowhere.

If you poke around the labs and stop by the Media Lab here at MIT and elsewhere, you can get a sense of some of that stuff. And usually they are not entirely possible. But suddenly you start to feel that things are coming together and the planets are aligning, to the point that this is now possible, or barely possible. And a window opens. And it usually takes about... my experience anyway, my life has been, it takes about five years to create a commercial product that takes advantage of that technical window that opens. Sometimes you start before the window is fully open.

And you can't get over it. And you push it up. And you push it up. Sometimes it just takes a lot of work, so much time with the Apple II, so much time with the Mac. You know, Lisa took 100 million dollars. It takes a while. It's expensive to open those windows. And in our case, our first product failed. We left with this cube. And we sold 10,000 of them. Because? Because we hadn't gotten to that point yet. And we made some mistakes along the way. And we had to correct course. You know, Macintosh was a course correction of the Lisa.

So with the Apple II and III we did it the other way around. It takes about five years, or whatever number of years, to get that window open. And then it seems like it takes another five years to really exploit it in the market. And let me give you some examples. of my life. Apple II lasted 15 years, 15 years. The hardware shook. But it was basically the same for 15 years. TWO... you know, TWO, it's just been 10 years. I don't think anyone would disagree that it will easily last another five, right? Unfortunately. And Mac, you know, Mac is eight years old, right?

There's no doubt he'll last another four or five years, right? These things are difficult. They don't last because it's convenient, or even because it's cheap. They last because they're really... this is a hard thing to do. And so when we open that window, I think with our current generation of products, we finally get the window open. After six years, it is open. We have an extremely elegant implementation. And we have five years of work to do to exploit it in the market. You know, we'll peak in five years. Five years, we'll all sit back and say: Okay, time to start the next thing.

It's time to move on to the next thing, maybe four years from now. But we have a lot of work ahead of us just to get this out there, educate the market and continue to refine it based on market feedback. So everything I know about the technology windows that are open, or almost open, is in NeXTSTEP, or we are working on it in the labs. And these things usually don't happen independently. They, like...groups of them get together, that's been my experience. So the things that aren't there right now that I can talk about, there are some video things that are really interesting, that will be integrated.

There are some really exciting security things that are being integrated. But most of the core technologies in there products are becoming smaller and more portable. The products are becoming a lot,much faster. But these things are well known. You know, the products that we can offer, that we can offer you in the next year or two, will work at speeds that I find hard to believe. And I've been doing this for a while. Then I think the windows open. And I think object-oriented technology is the biggest technical advance I've seen since the early '80s, with graphical user interfaces.

And I think it's bigger, actually. Over time it will turn out to be larger. Yeah? I have a question. If value and things like operational applications, and NeXTSTEP is a tool to help you build them, where do you draw the line to capture the most value between developing applications, something like Word or Excel, and becoming a creator of tools to support them? People who can capture a little more of the value? Where do you want to draw the line there? If you are a software company? If you are a software company. Well, Microsoft has made it easy.

Repeat the question. Yes, sorry, the question is: if you are a software company, should you develop applications or should you develop objects and tools? And look, the software industry, with Microsoft, Lotus, and WordPerfect, made it really easy. Unless you have $20 or $30 million burning a hole in your pocket so you can go out and hire a few hundred people to develop what it takes to build one of these polished, packaged applications on Mac or Windows, then I don't have much of a choice. There's no real opportunity to do that: Assuming you have the best spreadsheet today, you could easily spend $50 million marketing it before you break even selling it, given how expensive it is to market a product today.

But that's only for existing spreadsheets. If you're trying to develop a next-level generation, a different type of product. Well, let's say you have an innovative spreadsheet. Again, on conventional platforms, it will take $50 million to overcome the noise level and get it to market. So what the brightest people I know today do is write objects. They are writing a lot of things that other developers will use to create applications. And they go where not everyone goes. And I think that will be the next big thing. Yeah? You mentioned that a possible problem for Mac is the lack of developers and consultants to recommend it.

Based on that point of view, what is NeXT's vision for how to market itself to academic institutions? I think your question is: What is our philosophy when it comes to marketing our products in higher education? MMM. Well, we started out selling only to higher education, which was arguably a mistake. But we have done very well there. And our hearts are there. And we also sold a lot of Macintoshes there, when we were at Apple. And I think it's obvious. I think you take your products. You discount them as much as you can. You sell them to higher education.

Higher education is a wonderful place to give you great feedback on how to improve your products and what's wrong with them. And it's a great place to educate brilliant people that you can hire and that your clients can hire when they graduate, so we do exactly that. We have... I think they were sold on about 350 campuses in the United States. We are clearly the number one selling workstation in the US and we are number two in selling computers of any type on campuses, like MIT or Stanford, right behind the Macintosh. We sell more computers at MIT than PCs through institutional resale engines.

So we do everything we can. And I think it's been quite effective. What do you think? I mean, for example, it's leaving. Support is running out. Good. I mean, I'm not just talking about selling computers. I'm talking about establishing a network of institutionalized system... Well, what's happening is... look, the Athens Project was not successful for a reason. They weren't successful because they had a lot of good ideas as a research project, but the people needed to commercialize those things and turn them into real products are not necessarily the same people who will pioneer the ideas at a university. like MIT.

And that's why those projects never come to fruition. The recipes, more or less, were developed. And you make some samples. And it's pretty good, but the computer industry is pretty advanced. And so, other people pick up those ideas and turn them into real products. And in some ways, they leave research projects in the dust if researchers abandon research and start trying to commercialize things. And I can point to 100 examples of that in higher education. So it's probably good that Project Athena has a beginning, middle, and end, so that those people don't get stuck trying to create commercial software in an academic environment.

It's a kind of mismatch. As far as we are concerned, what we are doing is that many laboratories are being set up in higher education. And we are winning almost all of them. And we really put a lot of effort into getting the lab, so that people who can't afford computers have public access. And most universities now have fairly elaborate campus-wide networks. It is no longer something new and cutting-edge. And we connect directly to them. So I think life has moved beyond where it was a few years ago, where those kinds of projects were really important.

And the knowledge to do so is quite widespread. I think a little more and... yes? What is the most important thing you personally learned at Apple that you are doing at NeXT? Good question. I'm not sure I learned this when I was at Apple, but I learned it based on data when I was at Apple. And now I have a longer-term vision about people. In other words, when I see something not being done right, my first reaction is not to fix it. I mean, we're building a team here. And we're going to do great things over the next decade, not just the next year, so what do I do to help the person who's screwing up learn, not how do I fix the problem?

And that is sometimes painful. And I still have that first instinct to solve the problem. But this requires a longer-term view and people are probably the most important thing that has changed. And then and I don't know. Maybe that's the biological part, but... Yeah? To answer that question, I wanted to ask you about your management style and specifically, how do you resolve conflict in your organization? What is our management style? How do we resolve conflicts? I've never believed in the theory that if we're on the same management team and a decision has to be made, and I decide in a way that you don't like, and I say, come on, buy into the decision.

You know, buy it. We are all on the same team, you don't agree, but you accept it. Let's make it happen. Because what happens is, sooner or later, you pay someone to do what they think is right, but then you try to get them to do what they think is wrong. And, sooner or later, it comes to light. And you end up having that conflict. That's why I've always felt that the best way is to get everyone in a room and talk about it until they agree. Now, it is not about everyone in the company, but it is about everyone who is really involved in that decision and who needs to execute it.

And that's how we try to run NeXT. The way we run NeXT is that we have a team at the top that we call the Policy Team. There are eight people. Mike is on it. I'm on it. We have six other people on it. And the key: we have two things we try to do. One is that we try to differentiate between the really important decisions and the ones we don't have to make. And on the really important ones, we work on it until we all agree, because we pay people to tell us what to do.

In other words, I don't think we pay people to do things. That's easy, finding people to do things. What's harder is finding people to tell you what to do, right? That's what we are looking for. That's why we pay people a lot of money and expect them to tell us what to do. And so when that's your attitude, you shouldn't run out and do things if not all people feel good about them. And the key to making that work is realizing that there aren't many things a team really has to decide. And we may have 25 really important things to decide in a year, not many.

That's how we try to execute it. Sometimes it works. And sometimes we're still working on it. I can't think of a single time... I can't... maybe there was a time or two, but I can't even remember a time where I said, damn, I'm the CEO. And we're doing it this way, you know? I remember a moment when I said: we don't agree and you're off the team. Know? I've had to say that once or twice, over an extended period of time, when one person hasn't wanted to go in the same direction that we wanted to go as a team.

It's my job to say from time to time: Hey, do you want to go this way? We want to go down this path. It does not work. But when there are people on the team, we solve it. Yeah? You, in a way, chose this direction, this niche towards the premium product, rather than talking about the portability of the Macintosh and a lot of these portability issues. Do you think portability is exclusive? Can you do that and still do some of the market-driven things as well? I want to go back to your characterization of premium products, because our products actually cost about half of what Sun's do.

And the reason they do that is because we have the most automated factory in the industry. And we have a large VLSI design group, which designs things in many fewer parts. Do you... manufacturing, do you care about that? Yes. Yes. Yes. Yes. We should talk about that in a minute. The industry is bifurcating right now. And what's happening is that Macs and PCs as you know them today will all be like this: Pick up your PowerBook. They will all be like this, only lighter and smaller, in a long time. And they're taking the technology we have today, without particularly changing it, and taking it off the desktop into portable forms.

And so they're giving up some things, but nothing terribly profound. However, we are getting all kinds of signals from certain parts of the markets that they want things that are inimical to that, right? Well, what are they? Well, speed... speed is the enemy of portability, because speed requires power, right? So the kind of speed that our customers want, it would run for 3 and a half minutes on batteries. And that's useless. The second thing they want is a lot more storage on their drives and a lot more memory, again the enemy of portability for reasons of power and size.

Another thing you want is a high-speed network connection, right? Radio LANs on these things will, at best, run at 19.2 kilobits per second. Our customers want 100 megabits per second and more. You're not going to do that with a radio LAN anytime in the next five years. Another thing our customers want is for our mix to have changed to about 80% color. And they want true color to take photographs. Today there is no flat color display that offers photo-quality colors. And they want big ones, because once you're multitasking and running a bunch of things at once, you need a bigger window into this electronic world.

When you use your computer for two or three hours a day, you don't want to look through such big blinders. You want something bigger. So all of these are enemies of that today. And we're working on smaller products, no doubt, but it's very difficult to get both. And we're optimizing for power, because we see a giant hole there to run these custom mission-critical applications. And what people do needs more power, and that's what we're optimizing. Let's talk about manufacturing. How many of you have manufacturing experience? Oh, that's great. I love manufacturing. And what kind of things?

What type of companies? You have... Pharmaceuticals. Drugs? Are there car people here? Yes. To him. Car? Electronics? What IT? IT, huh. Motorola. Motorola? Is it true that you are going to send your manufacturing abroad, or just... I heard... Yes, I heard that rumor too. No, it couldn't be further from the truth. At NeXT we love manufacturing. And when I was at Apple, I had the good fortune to lead the effort to build a Mac factory. And we designed, built and operated that factory. And it was a real breakthrough. It was the best factory in the industry until we built the NeXT factory.

And we made many... Although we made many mistakes. As an example, I remember walking through it. You know, one of the things you learn when you start building factories is that warehouses are really bad, right? Warehouses are bad because you tend to put things in them. And the inventory is really bad. Inventory is really bad, because if it's defective, you don't know about it for a while. And you don't close the quality feedback loop with the supplier and correct the problem until you've made a million of them. What you want to do is find the problem whoever walks in first.door and prevent them from manufacturing more until you solve the problem.

So warehouses also cost money, because they put all these things in them. And all that... you have to borrow money from the bank or use money that could be used for a more productive purpose, which is why warehouses are bad. And you want to go to JIT. I'm sure you've studied all of this and studied examples. I was walking through the Mac factory one day and the two most important pieces of automation we installed were a giant small parts storage and retrieval system. It was the bags that were running around. And the second was this giant system burned at the end.

And equipment worth a few tens of millions of dollars. And I realized, unfortunately too late, that they are both warehouses. They're just high-tech warehouses. That's why when we looked at NeXT, we said there were no warehouses of any kind. We have a real JIT factory. The material arrives and is delivered directly to the point of use in the factory. There is no warehouse. Deliveries are made daily, sometimes more frequently. There is no departure warehouse. Everything is visible. And the reason we've been able to do a lot of what we've done is because we looked at... well, I'll give you an example.

When we were learning about manufacturing at Mac, we hired a professor from Stanford Business School at the time named Steven Wheelwright, who Harvard has since poached, I think. And he did something great. The first time I met him, he drew a little graph on the board. He said this way you can look at all companies from a manufacturing perspective. It can be said that there are five stages: one, two, three, four, five. Everyone has these things. And the first stage is companies that see manufacturing as a necessary evil. They wish they didn't have to, but damn, they do.

And up to stage five, what are the companies that see manufacturing as a competitive opportunity to gain a competitive advantage, right? We can achieve better time to market and launch new products faster. We achieve lower costs. We obtain higher quality. And in general, you know, you can put the American flag here and the Japanese flag here. And that is changing, however. That is changing. And it's changing, because people like you are in manufacturing. Companies are starting to realize that we were cool right now. And then we took it for granted. And now people are starting to pay good salaries and get good people.

And that's why we want to be one of them. And we try very hard. By the way, going back to software for a minute, I often apply this scale to IT companies and how they view software. Look, I think most IT companies are in stage one. They wish software had never been invented. I put Compaq in that category. And IBM is maybe in stage two and things like that. And I think there's just... you know, the Suns maybe, kind of in the middle, maybe here. I think there are only three companies here, and that's us, Apple and Microsoft, in stage five.

We start everything with the software and work backwards. But anyway, getting back to manufacturing, we started to see the factory as a software problem. And the first people we hired in the factory were some software engineers. We convinced them to move from R&D to software, which was not easy. We had to give them bonuses. We had to cajole them. We had to promise them they could come back if they hated it. And they went there. And we said that this is really just a software problem with interesting I/O devices called robots. That's all. And then we started building the software first.

And the first robots we got, we specified them. And we bought them completely turnkey, with the robotic arms, all the electronics and the software to control them. And we specify it, but we don't write it. And they didn't...they worked fine. Some of them are still in use, but they were not great. And being software people, we weren't very happy. They were not elegant. We couldn't do what we wanted with the robots. We couldn't link them with a quality information system and all those other things we wanted. So in the second generation, we specified the hardware and asked someone to build it for us, but we wrote all the software on our own computers.

We're object-oriented, so we started writing robotic objects, quality objects, you know, all kinds of objects to control this factory. And we found that our computer was great for it. And that's why our entire factory now works with this object-oriented factory and quality system. The latest generation of our latest generation of robots, which we deployed this year, we actually built the hardware. I've been to Japan maybe... oh, many times... maybe 30, 40 times. And I love having factories there. They always surprise me, because they built everything themselves. They were not afraid of anything. They needed a robot. They tried to buy one.

But if they couldn't, they would design and build it. And you would think this would be very expensive, but we found it to be quite cheap. In fact, it's cheaper than buying them. And so now we've designed our... and we've specified our own robots. We don't mill the metal or anything. We do it all. We put them all together. And we make the software from top to bottom. And now we have some extraordinarily advanced robots in the factory. And our computers are built, from start to finish, with key components, completely intact by the human hand. So we are pretty convinced that we are the low-cost producer.

We do it in Fremont, California, right under our noses. And we export them to Japan and all kinds of other places. And Canon is our partner in Japan. And they do very, very thorough quality audits. And now we're at the point where they ship directly to us to warehouse with them. And they say we are a very high quality supplier. How do your lines relate to your research, your development team? Because I had heard that they could change the line from their own computers. If you can. Well, we don't give everyone permission to do that, but yes, they can do it.

Is that how it works. One of the things we do is, when we want to build an engineering prototype, we see what happens in the majority. One of the key things that manufacturing can contribute to competitive advantage is time to market. Why is that? Because the way most things work is that you design your product here. And when you're done, you throw it over the wall. And you design your manufacturing process here, sorting through a bunch of things that maybe weren't made here, fixing them, changing them, and then completing the process design. What you want to do is do this and ship it here while your competitors are still here.

And that is what we have been able to do in many cases. What we do is extract data from our CAD systems in engineering. We communicate them through local networks via a T1 to the factory, which is about 15 minutes away. And on our own computers, we calculate the fully optimized path of all robot placement programs. We calculate all vision system programs. We compare it with the bill of materials in the IS system. And we download it to the robots. And we are ready to build a board, batch size of one, between two production CPU boards on the line, complete surface mount with all of our automation technology.

Now, the key is that manufacturing worked so well for engineering, that we haven't built a prototype in engineering in two years. We haven't built a wire wrap or any other type of prototype in engineering for two years. Everything has been built in a factory. Now, what does that mean? What that means is that manufacturing is involved from day one. Because the... the engineering guys call manufacturing and say, hey, we want to build a prototype. We're going to need these special parts on that thing. Look at this. Tell us what you think. We would like to do it tomorrow.

Let us know if it's okay, blah blah blah. They get involved from day one. And what it also means is... then we get this parallel. Secondly, many times, when you build prototypes, it is not exactly the same technology that you are going to use in production. And thus, all the accumulated knowledge that you obtain when building your prototypes is wasted when you change technology to go to production. And you start again in that accumulation process. Because we don't change the technology, we don't throw anything away. We don't waste time. And it has led to one of the healthiest relationships between an engineering and manufacturing group I've ever seen.

They all work with the same databases. Everyone is working on the same processes. They all work in a very disciplined process environment, where when a process is changed, everyone gets together, reviews the proposals, and everyone accepts them. And it is not so difficult. The key to it all, however, was that we didn't go out and hire a bunch of manufacturing people. We went out and hired engineers. And we convinced them that we were going to be different. We were going to pay them exactly the same as... in fact, we paid them a little more in the beginning.

But we pay exactly the same as R&D, not different. There is migration in both directions, not only from manufacturing to R&D, but in both directions. And they are not second class citizens. They have the same offices. They have the same test equipment. They have the same computers on their desks. And it took us a while to convince them that we were serious. For the first few years, we had more PhDs in manufacturing than in design engineering, until design engineering stole some of them from us. So it's really been worth it for us and I think it's one of our real opportunities for competitive advantage.

Yes, I think one or two more and we have to run. And probably you too. Yes, up there. So you don't have warehouses, is that true? Are you doing true JIT? Yes. How are you sourcing your products or raw materials? How do we obtain our raw materials? Yes. Do you mean what truck line carries them? Or what do you mean? Is it air? Is it a truck? I mean, how are you cramming everything in so quickly? The key is that this is not our problem. That is the problem of our suppliers. That is why we agree with our supplier when the material will arrive at our factory.

And if they can... if they're close enough together to ship it by truck, that's fine. If they have to ship it by air, that's a shame. If they want to have a warehouse next to ours, because they are not good enough, then they have to do it. Now, we're not giants, so we can't order people to do things. But what's happened is we have a pretty narrow supply base. We don't have three billion suppliers. And they see enormous advantages in working with us. We are giving them back our quality information systems. For example, Motorola is one of our key suppliers.

Almost all key vendors have NeXT computers. And we send them quality statistical information, sometimes daily, from our automated quality information systems on their part. And those kinds of things are extremely valuable to them. So while we are no Goliath, we are a very valuable David to work with. And so they really go out of their way to work with us. And we try to bring the problems where they belong. If they are our problems, we take full responsibility for them. We own our process. But they... it's their job to get us defect-free material on time, according to the agreements.

And our philosophy is that our money does not break after we give it to you, so its parts should not break after they are given to us. Yeah? Do you see any possibility of bringing NeXT to portable Macs? And do you think the future of Macs is dying out or what? You know, I think Macs will continue to grow. It depends on what Apple does. I think certain segments of the Mac market will continue to grow. I think certain segments of the Mac market will not be targeted for future growth. And I think Macs are good computers for doing certain things.

But to do the things that I think people will want to do in a few years, I don't think you can do them on a Mac. I don't think you can do them on DOS and Windows. That's why I think some new technology is needed. Like, you know, there were a lot of things you could do in DOS when the Mac came out, but there were some new things you just couldn't. And it would take a long time. And I think it's the same with Mac. Hey, we have to get back to California towards sunset, but thanks for the opportunity to be with all of you for a while.