One year later, Apple was not nearly as successful. Steve Jobs wanted to kick off the Macintosh Office project, essentially a Macintosh network, with a similarly grandiose Super Bowl ad titled Lemmings. The ad was a major flop and set the tone for the most disastrous year in Apple history.

Good-bye, Woz

Jobs and Wozniak flew to Washington to accept National Technology medals from President Reagan for their role in the creation of the personal computer market. By the time Jobs returned to Cupertino, he found out that Wozniak had not only quit Apple, but went to the press with complaints of Apple neglecting the Apple II.

“We had a shareholder’s meeting last week and the words ‘Apple II’ were not mentioned once.” (iCon, p 109) The dig from the other cofounder didn’t affect Jobs personally, as the two had hardly been able to conceal their animosity for each other after Wozniak found that Jobs had taken credit for (and most of the profits from) Atari Breakout, but the press got another glimpse of a troubled Apple.

The Apple II line had long been the company’s bread and butter. The Apple II and its successors financed all of Apple’s high tech projects, including the Apple III, Lisa, and Macintosh. Despite competition from companies like IBM and Commodore, the Apple II held its own.

This changed in 1985. Since Apple’s founding, manufacturing numbers were created by a single executive, Del Yokam, based on sales figures from the previous year. Apple had two major new products in 1984, the Macintosh and Apple IIc, inflating sales figures dramatically.

Unfortunately, Apple had no major product upgrades to offer in 1984, and demand dropped precipitously. Apple had hundreds of millions of dollars of unsold inventory throughout its supply chain. Dealers stopped placing new orders, and revenues dropped between 1984 and 1985.

This was at a time when companies such as Compaq and Sun Microsystems were enjoying double digit growth every year.

Jobs recognized his situation. Resources had been diverted from the Apple II division to the Macintosh/Lisa division. Apple had no new products and was facing a major sales slump, and many in the company  – especially in the Apple II division – attributed the drop to Jobs and his appropriation of resources.

Macintosh Office

After Apple spent over $1 million a minute on ad time for Macintosh Office, Jobs had only three relatively minor products to release: a rebadged Lisa 2 named the Macintosh XL, the LaserWriter, and a networking protocol, AppleTalk.

AppleTalk was actually a year late. The Macintosh XL would be assembled out of spare parts from the Lisa inventory (by now, only a few hundred Lisas were ordered a month) and would be discontinued as soon a the parts inventory was exhausted.

Though desktop publishing would become one of Apple’s most lucrative niches, the LaserWriter had a very small market in 1985, and many analysts were unimpressed by the machine, which cost more than a nearly identical HP LaserJet (which did not include Postscript or network support).

The AppleTalk announcement was no surprise. The networking hardware had been included with the original Macintosh (it used an integrated circuit from Zilog), but the software hadn’t been finished.

BigMac and FileServer

The two biggest components of the Macintosh Office, the products that would make the Macintosh a viable competitor in the business market, the BigMac and FileServer were still far off in the distance. Jobs believed that the FileServer would be complete by Fall 1985 and would go on sale in early 1986. BigMac, a “personal workstation” that would run Macintosh software, had no release date set.

Jobs reacted to the bleak sales figures by cutting luxuries for his division and not making any management changes that might accelerate some of the troubled projects in his division. The fridges would no longer be stocked with free fruit juice, catered lunches would be canceled, overtime pay would disappear, and no more consultants would be hired.

The only major plan he had to address the Macintosh/Lisa division’s shortcomings was to replace the distribution division with Federal Express. With no expensive warehouse facilities, Apple would simply overnight Macintoshes from the Fremont factory around the world. The plan didn’t really make sense, since Apple’s distribution did a very good job getting Apple IIs around the world inexpensively. Jobs tabled the idea.

John Sculley had turned a blind eye to Jobs’ eccentricities and personality flaws during the first two years of his career at Apple, but by March 1985, he had had enough. Sales of the Macintosh, while strong through 1984, had fallen way short of Jobs’ predictions of 500,000 for 1985. Worse, the project to move the Macintosh to Unix, BigMac, stalled.

1985 was the year of the workstation. Apollo and the upstart Sun Microsystems were both experiencing record sales, and IBM had recently released the first RISC workstation, the RT/PC. It even appeared that inexpensive workstations based on the same 68k line of processors as the Macintosh and Lisa would soon become inexpensive enough to compete with personal computers.

Jobs didn’t want to miss out on the wave and promoted the BigMac (the center of the Macintosh Office) as Apple’s entry into the workstation market. Jobs hoped to port the Macintosh operating system to Unix and make it possible for developers to take full advantage of Unix’ multitasking and communications with the user friendly interface of the Macintosh.

Unfortunately, the project had bogged down. BigMac was supposed to be released in mid-1985, but it never shipped. Customers who were looking for “personal workstations” had to look elsewhere.

Confronting Jobs

Sculley confronted Jobs in his cubicle, explaining that his management style was ineffective and hurting the Macintosh. Sculley wanted Jobs to find another cause to champion – and leave running the Macintosh/Lisa division to grownups.

In typical Jobsian fashion, Jobs reamed Sculley. He believed Apple’s problems stemmed from Sculley’s inability to cut costs in inefficient divisions like the Apple II and marketing. Jobs also blamed Sculley for the Mac’s problems in the marketplace.

The two bickered with each other until 1:00 a.m., and Jobs said he would consider moving from the Macintosh/Lisa division.

Jobs wasn’t all opposed to the idea of leaving the Macintosh/Lisa division to the care of one of the insiders (head of manufacturing Debi Coleman, for example) and starting a think tank at Apple to investigate the future of personal computing.

Sculley had offhandedly mentioned a Jean-Louis Gassée as a successor to Jobs, which worried him. Steve had brought Gassée over from Apple France (which Gassée had built from the ground up) to replace Macintosh marketing director, Mike Murray, but he’d changed his mind at the last minute. Perhaps he was put off by the eccentric Jean-Louis, who strutted around in leather pants and spouted entendres and sexist jokes in a heavy French accent.

Jobs didn’t trust Gassée.

Crash and Burn

Sales results for the first quarter of 1985 were released on March 11, and they were not good. Macintosh revenues were only 10% of the projection, meaning that Apple would have to write off unsold inventory.

Suddenly Sculley and Gassée weren’t the only executives to speak openly of replacing Jobs. Mike Murray, the marketing chief in the Macintosh/Lisa division (the man who had championed both 1984 and Lemmings), wrote a memo saying that Jobs’ ideological bent came “at the clear expense of corporate survival.” (The Journey is the Reward, p 111) Jobs was the first person to whom Murray showed the memo.

For a month after he was shown the memo, Jobs tried to convince the board that Apple’s ails were actually due to mismanagement at the hands of Sculley. Apple, Jobs insisted, would make a full recovery if he replaced Sculley as president and CEO. Murray was unconvinced and distributed the memo around the company under the heading “DO NOT CIRCULATE, COPY OR SHARE” (iCon, p 110).

Jobs didn’t help his case when less than a month later he visited frogdesign (the firm that had created the Apple IIc case) and flew into a rage. He saw that frogdesign was working with Cloud 9 (Steve Wozniak’s new company) and demanded that frogdesign destroy all the models and drop Cloud 9 as a client. Herbert Pfeiffer, the manager of frogdesign, was not intimidated by Jobs and leaked the story to the press.

A regularly scheduled board meeting was held at the third floor of the headquarters, named Pink Palace. Jobs decided to avoid the bleak financial results and deliver a joint presentation with Steve Kitchen of Woodside Design, a company that researched flat panel displays. The presentation began outside the conference room with an Apple IIc and Apple IIe sitting on either side of the door. The Apple IIc had the infamous LCD that Apple had designed for it, and the IIe had a conventional CRT. As the board members approached the conference room, the following text appeared on the CRT:

Excuse me gentlemen--

I've seen dozens of one inch square flat panels, and everybody says the same thing:

Just give me 10 million bucks and I'll make an Apple II-sized display.

Well...

Please remove my monitor and I'll show you how to save 10 million bucks--

Underneath the CRT was a 4″ x 5″ Woodside display crisply displaying a cartoon with the text “Gotta lose weight. How? Of course – FlatMac.” (West of Eden, p 261)

Once the board members got inside, Kitchen and Jobs jointly presented a plan that they had discussed since December. Apple would invest $20 million into a factory in Menlo Park that would produce 20,000 displays a month after a year and a half.

The presentation didn’t go well. The Macintosh factory had gone way over budget and wasn’t operating anywhere near capacity. Less than a year earlier, Apple actually had to close a factory outside Austin and lay off 800 employees.

After Sculley received the financials on March 11, he decided that Jobs would have to leave the Macintosh/Lisa division and announced as much during the meeting.

Following a brief speech by Sculley, the board decided to talk to each man privately. While the board met with Sculley, Jobs stayed outside in the hallway and sobbed with Del Yokam. When it was Jobs’ turn, the board creamed him, telling him he was a “punk kid” who should “shut-up and let John run the company.” (West of Eden, p 263) The board ultimately decided to leave Jobs as head of the Macintosh/Lisa division, but it would not tolerate poor results.

Jobs was crushed. He went straight home after the meeting and didn’t show up to work again until after a scheduled trip to Japan to research flat panel displays. After he returned, he won a few small victories as demand for the Macintosh XL grew (though only a few weeks later, the parts ran out and the Macintosh XL was discontinued) and after Federal Express had placed a $5 million Macintosh order.

Reorganization

Sculley began to develop a brand new corporate structure for Apple, one without Steve Jobs in any serious management position. Apple would be split up according to function. The major divisions would be Product Development, Marketing, and Manufacturing. Sculley had Apple’s HR director, Jay Elliot, start talking to Gassée about taking over marketing in the Macintosh/Lisa division – and eventually the new Product Development division. Gassée tentatively accepted Elliot’s offer and started work on Saturday, May 11.

Elliot had forgotten to tell Murray that he’d been replaced. That Saturday, Murray found Gassée sitting in his office. The two were at a loss. Ultimately, Murray was appointed director of business development, where he would investigate startups Apple might invest in (like Woodside).

Both Sculley and Jobs personally apologized for the mistake. Jobs and Sculley met with Murray at the Jackling House. Sculley was a few minutes late, so while Jobs and Murray walked the grounds, Jobs confided that Sculley would have to leave Apple.

Murray’s last official act as marketing director would be the annual review, essentially a presentation by the Macintosh/Lisa division to Sculley’s staff. The review was full of bad news. The FileServer, the central component of the Macintosh Office, would be delayed until Spring 1986, moving the projected release date back by months. This upset Sculley, since he had been assured in the weeks before the annual review that the FileServer would be ready on time. He’d been lied to.

Eager to end with a positive note, Jobs rehashed his Federal Express idea, but the executives would have none of it.

On May 20, Sculley released his brand new organization plan for Apple. Del Yokam (who was almost universally popular inside the company, despite the inventory snafu) would become Apple’s first COO, Bill Campbell would head marketing, and another unnamed executive would head product development. Jobs would become a vice president of the division, working in the AppleLabs think tank.

Bob Belleville (former head of the Lisa, now head of the Macintosh/Lisa engineering staff), the man who had to break the news on the FileServer’s slipping ship date, spent much of the following weeks walking around the Apple campus, scheming with Jobs, who was alarmed by the reorganization plan.

Loyalties

Apple had recently gotten permission from the US State Department to export computers to China. Apple had negotiated to supply the Chinese government with Apple IIs for use in schools and universities. Jobs was invited to a signing ceremony in the Great Hall of the People, but he convinced Sculley to go instead. While Sculley was away, Jobs would woo the (still very hostile) board to his side and oust Sculley. Elliot said of the situation, “Steve was trying to pull off a palace coup and John was acting like a spoiled child. The two of them were going to take Apple under.” (iCon, p 113)

Jobs then made a major mistake: He told Gassée.

Gassée had sat in on the review board and was disgusted by the results. Nobody but Debi Coleman, the able director of manufacturing, had good news, and even then, it just meant that Apple had more Macintoshes that it couldn’t sell. Perhaps as a result of the disappointing review, Gassée felt far more loyalty to Apple than to Jobs.

Gassée had been invited earlier to a barbecue at the home of Apple’s chief counsel, and Sculley loyalist, Al Eisenstat. During the dinner, Gassée told Eisenstat of Jobs’ plan. Eisenstat immediately called Sculley, who scrapped his China trip and returned to Cupertino to call an emergency board meeting.

Sculley was beside himself with rage. “I’m running this company, Steve, and I want you out for good. Now!” (iCon, p 113) Sculley proceeded to ask each executive and board member about their loyalties. They would have to pick one, Sculley or Jobs. Everybody but Elliot complied; he told Sculley he was acting like an “ass” and “thought they should both get out.”

The meeting closed without any conclusive decision, and the long Memorial Day weekend began.

On Saturday, Jobs drove out Sculley’s stylish home on the other side of Woodside. His reality distortion field was on at full strength as the men walked through Sculley’s property and adjacent country club – just as they had done when Jobs courted Sculley to become Apple’s CEO.

Jobs insisted that his actions were not because he disliked Sculley, but because he wanted what was best for Apple. Sculley, as far as Jobs was concerned, was still a close friend and mentor.

Amazingly, Sculley bought the explanation. Jobs would be stripped of any operational authority but would be allowed to remain chairman and act as a spokesman for Apple. Jobs and his supporters had dinner at the Jackling House and discussed how they could convince the most senior board member, Mike Markkula, to allow Jobs to keep the Macintosh division. Markkula showed up later in the evening, and Jobs’ supporters explained why he was right for Apple and should retain control of the Macintosh.

Dutifully, Markkula reported Jobs’ machinations to Sculley. That night Sculley called each board member and asked whether they supported him or Jobs. The body unanimously supported Sculley.

The next morning, Sculley called Jobs and told him that he knew of Jobs’ latest plot and that he had the votes to kick Jobs out completely. His new reorganization would be implemented despite Jobs’ opposition.

Jobs went back home, and at 7:30 he called Mike Murray and broke the news. Murray was so worried that Jobs might commit suicide that he went to the Jackling House at 10:30, where he found Jobs sitting on a mattress in his unfurnished bedroom. Murray stayed with Jobs for most of the night.

After about an hour of silent weeping, Jobs announced that he wanted to see Patton, but he had loaned the videodisk copy to his father. After the two drove all the way to Los Gatos to retrieve the copy from Jobs’ parents (who still lived in Jobs’ childhood home), they found an empty and locked house. Eventually, Jobs picked up a Hitchcock movie instead and watched it at Murray’s.

Sculley was not dealing with the stress well, either. He confided in his wife, Leezy, that he wanted to resign from Apple and return to the East Coast.

Jobs and Leezy bumped into each other in the parking lot of the Sun & Soil, where Leezy screamed at Jobs, then sped away while Jobs was in tears.

Resignations

The news of Jobs’ demotion and Sculley’s supposed resignation spread around the company like wildfire, resulting in resignations from Jobs loyalists and Sculley loyalists alike. Bob Belleville felt that the “vision thing” (a favorite phrase of Jobs) had disappeared from Apple and resigned the day of the meeting. When Jay Elliot found out that Sculley, the man who had convinced him to turn on the cofounder of the company, wanted to quit, he resigned in disgust of both men.

Sculley decided to stay at Apple, and he began to implement his reorganization on June 5. The executives and the board both agreed on the basic structure (though Markkula wanted another vice president to handle administration, legal, and human resources) but differed on who would head the divisions.

The upper echelon of executives were not controversial. Del Yokam would be the COO, and Bill Campbell would head sales and marketing. It was Product Development that was divisive. Gassée would head the division, but Sculley didn’t decide if he would report to Yokam or to Sculley and the board. Debi Coleman was the favorite of the Macintosh/Lisa division and universally recognized as competent and fair, but Yokam wanted an outsider.

By Thursday, the executives and the board had reached a consensus. Debi was given manufacturing, Gassée would report to Yokam, and Belleville had been wooed to come back and head engineering in Product Development. It seemed that everyone had been satisfied, except for Jobs, who was still despondent over his token position as chairman. His only official duty was to chair the five board meetings every year.

NASA had approached him about being the civilian astronaut on the ill-fated Challenger mission, but Jobs balked at the six months of intense physical training required.

To keep him occupied, Al Eisenstat invited Jobs to come with him to Russia, where Apple had recently secured permission to sell Apple IIs, but not Macs or printers (in fact, photocopiers were kept under lock and key in that era). It was in Russia, a country virtually untouched by the microcomputer revolution, where Jobs decided that he had to stay in the computer industry.

Jobs was amused by the Russian government’s attempts to monitor him. A television repairman had showed up three times, even though his television was fine. Despite the government’s paranoia, Eisenstat was awakened in the middle of the night by a shifty eyed engineer who thrust a disk into his hands, then disappeared. The man had created a handwriting recognition system, but he feared his software would never get on the market in Russia, so he wanted to see if Apple was interested. The software would eventually be implemented in the Newton MessagePad.

Exiled to Siberia

Since Jobs had no real role in the company, his office was moved out of Bandley 3, long the headquarters of the Macintosh/Lisa division, and into a small, anonymous building occupied only by his secretary and a security guard. He called it Siberia.

Mike Murray moved in after he was disgusted by executive staff’s attitude to the massive layoffs Sculley’s plan called for (almost a fifth of the company). To his dismay, it took Jobs’ secretary three days to find him.

A week later, an unknown figure, Michael Spindler, delivered a speech titled “Two Apples” at an analysts meeting. Spindler headed the marketing efforts in Apple Europe and was one of Sculley’s pet executives.

Spindler, a native German, delivered the speech like a southern revival meeting. The climax of the speech, “Apple beats with two hearts – our Californian heart and the heart of the local company.” (Apple: The Inside Story, p 21), got a standing ovation.

Aside from Spindler’s impassioned speech, the meeting was depressing. When asked, Sculley said flat out that Jobs would never again have an operational role at Apple.

Jobs’ status in Siberia was now public knowledge. Jobs filed with the SEC to sell 85,000 shares of Apple stock (after Apple’s stock tanked from over $20 to less than $14), meaning that he now owned 9% (rather than 14%) of the company – still enough to launch a hostile takeover bid if he got backing from a big institutional investor.

Jobs spent less and less time at Siberia. After a three month long tour of Europe (ostensibly to make sales calls for Apple Europe, the one bright spot for Apple), Jobs returned to Apple, determined to find a role for himself.

Seeds of NeXT

He was still interested in the debunked BigMac concept. He had mentioned the BigMac to Paul Berg, a Stanford biochemist, while he was attending a luncheon thrown in French President’s François Mitterrand’s honor.

Jobs had dinner with Berg, who (according to Jobs) explained that he wanted to make recombinant DNA (a process that modifies DNA by replacing segments using a modified virus) accessible to undergraduate students. However, the requisite wet labs were too expensive to be made available to undergraduates.

Jobs suggested that workstations could emulate a wet lab, but Berg had already attempted such a solution and found that it would take far too much time to create a realistic simulation. Besides, workstations would cost tens of thousands of dollars for years to come.

Jobs laid out a grandiose plan to create a “personal workstation” that would be cheap enough for college students to buy one for their dorm room and be powerful enough to do full wet lab simulations.

Jobs was inspired. He started making phone calls to executives who he worked with on education initiatives (like the “kids can’t wait” project that gave away Apple IIs to California classrooms, and the Apple University Consortium, which had a lot of success selling the Mac at deep discounts in college bookstores).

Jobs told them that he was interested in starting a new company to create a personal workstation, like the BigMac. By late August, Jobs had decided that he would leave Apple with five executives – Susan Barnes, former controller in the Macintosh project; Dan’l Lewin, who headed the Apple University Consortium; Rich Page; George Crow; and Bud Tribble – and found a new company. He would give up his chairman title and would hopefully license the design to Apple to sell under the Macintosh brand.

The September 12 board meeting consisted of presentations from Sculley’s staff explaining how the Apple recovery was a huge success (though sales had not improved much). The last item on the agenda was the chairman’s report.

Jobs had not told anyone what he was going to say, so there was a sense of suspense in the room. Jobs shocked the board with his plan to leave the company to create a workstation for higher education. He said he would resign from the board and create a complementary product to the Macintosh.

The board asked him to leave the room.

After an hour of discussion, Jobs was ushered back inside. Sculley told him that he should stay on the board (though not as chairman) and that Apple would probably be willing to buy as much as 10% of the new venture as a sign of goodwill, under the condition that Jobs did not raid Apple’s executive ranks. (Sculley didn’t yet know that Jobs had gotten the heads of the Apple University Consortium and several very senior engineers.) Jobs agreed to wait a week before he resigned so Apple could create an investment offer.

After the meeting was over, Jobs bolted, eschewing the customary catered meal held after board meetings. The four other cofounders met him at the Jackling House, where he served them dinner while the respected corporate law attorney, Al Sonsini, explained what the new company would have to do to avoid a lawsuit. The cofounders decided that to avoid causing a panic (and soliciting a lawsuit), they would resign a week at a time.

The next day, Jobs showed up at Apple and gave Sculley a list of people who were leaving with him. Sculley didn’t realize the magnitude of the list, but when he shared it with the executive staff, they were irate.

The cofounders showed up to work like normal, and their supervisors were all shocked by the defection. Every cofounder was asked to make their resignation immediate. Later that day, Jobs hired a new lawyer.

On Friday, September 13, 1985 Jobs handed his resignation letter to fellow Apple cofounder Mike Markkula, and forwarded a copy to Newsweek, hoping to garner sympathetic press for his new ventures:

Dear Mike,

This morning’s papers carried suggestions that Apple is considering removing me as Chairman. I don’t know the source of these reports, but they are both misleading to the public and unfair to me.

You will recall that at last Thursday’s board meeting I stated that I had decided to start a new venture, and tendered my resignation as Chairman.

The board declined to accept my resignation and asked me to defer it for a week. I agreed to do so in light of the encouragement the Board offered with regard to the proposed new venture and the indications that Apple would invest in it. On Friday, after I told John Sculley who would be joining me, he confirmed Apple’s willingness to discuss areas of possible collaboration between Apple and my new venture.

Subsequently the Company appears to be adopting a hostile posture toward me and the new venture. Accordingly, I must insist upon the immediate acceptance of resignation. I would hope that in any statement it feels it must issue, the Company will make it clear the decision to resign as Chairman was mine.

I find myself both saddened and perplexed by the management’s conduct in this matter which seems to me contrary to Apple’s best interests. Those interests remain a matter of deep concern to me, both because of my past association with Apple and the substantial investment I retain in it.

I continue to hope that calmer voices within the Company may yet be heard. Some Company representatives have said they fear I will use proprietary Apple technology in my new venture. There is no basis for any such concern. If that concern is the real source of Apple’s hostility to the venture, I can allay it.

As you know, the company’s recent reorganization left me with no work to do and no access even to regular management reports. I am but 30 and want still to contribute and achieve.

After what we have accomplished together, I would wish our parting to be both amicable and dignified.

Yours sincerely,
Steven P. Jobs

(iCon, pp 128-129)

Steve Jobs’ first career at Apple was at an end. During a press conference, he made reconciliation even more remote when he derided the current management as making Apple “a place where computers are a commodity item, where the romance is gone, and where people forget that computers are the most incredible invention that man has ever invented”.

A few days later, Jobs announced that he had decided on a new name for the company, NeXT.

Jobs’ gamble of releasing the letter to the press backfired. Not only was he met with scorn by the national media, but Apple decided to sue NeXT for secretly planning a “nefarious scheme” (West of Eden, p 320) to take advantage of insider information the cofounders had access to.

An era was over at Apple. Two cofounders had left the company, a major reorganization cut over a fifth of the workforce, and the company still had no successor to the Macintosh in the pipeline.

NeXT was no better. It was being sued even before it had a product (or even a specification for a product), and it had no customers and no outside support.

It would be 11 years before Jobs set foot on the Apple campus again.

This article was originally published on 2006.10.02.

Further Reading

• iCon Steve Jobs: The Greatest Second Act in the History of Business, Jeffrey S. Young and William L. Simon
• West of Eden: The End of Innocence at Apple Computer, Frank Rose
• Steve Jobs: The Journey is the Reward, Jeffrey S. Young
• Apple Confidential 2.0, Owen W Linzmayer
• Apple: The Inside Story of Intrigue, Egomania, and Business Blunders, Jim Carlton
• Infinite Loop, Michael Malone