In the mid-’80s, if you’ll recall, there was a massive rivalry between Bill Gates and Steve Jobs. Gates decided early on that he would license his operating system to every manufacturer who wanted it. In a matter of years he got 97 per cent of the PC market. On the other hand, Jobs said, “I’m never going to license the Mac operating system to anybody. I am going to control the hardware and the software and package it to consumers.” He lost huge. He ended up with two per cent of the market.
At the time, The Learning Company was the largest provider of educational software. I’m the guy that’s providing 80 per cent of the market for reading and math software in schools and for consumers, with brands like Reader Rabbit, Carmen Sandiego and Oregon Trail. It cost about $500,000 a title to develop software for Windows and $500,000 for Mac. It was very easy for me to find my Windows user—97 per cent of people who have a computer can use the software. But my cost of acquiring the Mac customer keeps going up the more share Jobs loses in the market. I’m losing about $50 million a year doing that and my board is squeezing my head saying, “What the hell are we supporting Mac for?”
We were working closely with teams at Apple and I finally said, “I’ve got to go see the big guy. We can’t go on like this.” I planned to ask him for $50 million, but was willing to accept $12 million [to continue making software for Mac]. I got there and sat down at a boardroom table; there were five or six of us on each side. It started with the pleasantries of the product management teams and then probably half an hour into it, Jobs walked in and the whole room shut down. It went silent. Nobody would say anything when Steve was in the room. He was the king.
I opened with some pleasantries. Talked about the weather and he said, “Look, I don’t have time for anything else. What’s on the agenda?”
“I can’t live with this loss of share,” I said. “Your strategy isn’t working.” He’s under tremendous pressure from his board at this time, unbeknownst to me, for the same reason. He said, “What do you want?”
“I want you to give me $50 million to pay to keep my brand in the market supporting your hardware.”
He looked at me for 10 seconds—a very uncomfortable pause. And then he went absolutely nuts. He berated me: “The aura of the Apple brand is worth $50 million to you. You are nothing. Your brand is nothing compared to my brand.” I said, “Excuse me, Steve, I own 80 per cent of the market. I am the educational market. You need me more than I need you.”
But he didn’t stop. He continued to go nuts. “You’re out of your mind,” he said, along with a number of foul words. I was trying to not lose face in front of my people and he was doing the same thing. He was yelling at me all the way to my Hertz rental car.
I had no idea I’d leave with nothing. It made no sense. Jobs didn’t care. He just believed in what he was doing. When I got back to the office I said to my team, “I want you to cut 50 per cent of the Mac titles. Just keep the big ones in case this guy survives.”
Jobs was not easy to work with. But you can’t deny why this strategy was, ultimately, sheer genius on his behalf. Months later he left Apple, which started trying to license the OS. But Jobs kept saying to anybody who would listen that if they could just control the hardware as a bundle, they’d control the margins. Snap forward 20 years. Windows has stopped growing. Microsoft stock has been dead money for 10 years. Apple has gone from $11 to $400. Jobs was right. He has the highest margin ever in the computer business. The same thing you buy in Windows today at $600 is $2,300 for the Apple.
The whole thing started when he proved his model with the iPod. He said, “You can’t use it without my software. You have to buy it as a bundle.” Of course, the strategy was brilliant. But it took him 20 years to prove it out and it was at the end of his life when he was right.
Kevin O’Leary heads the investment firm O’Leary Funds and appears on CBC’s Dragons’ Den. His new book, Cold Hard Truth, was released in September. As told to Maclean’s.