Apple's and Microsoft's Secret Pact for Tech Domination

15 years ago, Steve Jobs and Bill Gates agreed to let Apple own the client and Microsoft the back end to thwart antitrust probes, newly discovered emails say.

Microsoft, Apple, Bill Gates, Steve Jobs
Bill Gates backing Steve Jobs at the summer 1997 Macworld Expo (Source: Reuters)

In August 1997 at the Macworld Expo in Boston, Microsoft's then-CEO Bill Gates appeared via satellite on the main stage, shocking the Apple faithful. He joined Apple's then-returned CEO Steve Jobs, announcing a $150 million investment into the then-struggling Apple and committing to maintain Office for Mac, in return for some licensing around Apple's famous UI.

The two CEOs had long been rivals, but also respected each other's successes. Jobs even told the Mac faithful it was time to stop bashing Microsoft, that Apple could win without Microsoft losing. Microsoft had its own reason to support Apple: What we know as Office today started on the Mac with Excel, where Microsoft perfected its graphical interface before porting it to the PC and wiping out competitors like Lotus 1-2-3, WordPerfect, and Ami Pro. Apple's Mac remained a valuable testbed for Microsoft outside its Windows world.

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That is established history. But in the Internet archives have surfaced fragments of emails between the two CEOs that the deal involved much more. Ironically, the leaked emails were found by Google in its research to fight the coordinated Apple and Microsoft patent wins against Google's Android mobile OS. (All three companies deny the existence of the email fragments, which Julian Assange of WikiLeaks fame has published.) For several years, Google has fought a shadow war with Apple and Microsoft using patent claims by Samsung, HTC, and Motorola Mobility. But the tide has turned against the Android alliance in the courts, prompting Google to find other lines of attack.

At the time, Microsoft was accused of being a monopoly and abusing monopoly power, and the feds were going after the company with unusual vigor. So Gates and Jobs hatched a plan that would quietly change the competition over time so that Microsoft would lose its PC monopoly to Apple, defusing the specter of harsh antitrust regulations while consolidating Microsoft's hold on the back end, such as its Windows Server and Exchange platforms.

The plan required Apple to regain strength at Microsoft's expense at the client side, where the antitrust probe was focused. But it had to appear to be an organic shift, so as not to rouse suspicion. "It has to look as if we acted like self-confident idiots," a Gates email fragment reveals. Jobs replied that then-sales chief Steve Ballmer would be the perfect foil, given his bombastic nature and lack of technology savvy. "Don't tell him; he'll screw it up the way we need it screwed up on his own anyhow if you 'retire,'" Jobs suggested.

It's not clear how involved the two CEOs were in setting the plan in motion, as the uncovered email fragments were from 1997 and 1998, but the history of the two companies since bears out the strategy.

For example, when Apple took over the MP3 player market with its iPod, Microsoft was slow to respond, and when it did, its Zune player was clearly inferior, certain not to threaten the iPod. Microsoft didn't bother to compete with the iTunes Store for nearly a decade either. That pattern of belated, inferior competitive response by Microsoft on the client side followed in other key areas:

  • Apple's Mac OS X Tiger in 2005 solidified the Mac OS and supported Intel processors, setting in motion a wave of Macs that appealed to a broad market. Microsoft's response, Windows Vista, came 18 months later and was highly disliked by users and IT alike, flopping badly. In the meantime, Apple refined Tiger with its Leopard update in 2007, then Snow Leopard update in 2009, with Microsoft belatedly unveiling the solid Windows 7 only in 2009.
  • Apple also pushed the basic Intel technology in its MacBook Air and MacBook Pro lines beyond what PC vendors did, again with no meaningful response from the Wintel community for a couple years. The belated but highly hyped Ultrabook effort went nowhere, worsened by the strangely self-sabotaging Windows 8.
  • Although Microsoft had long dabbled with tablet PCs, none really worked as tablets; their pen interface was not well integrated with Windows, and there was no touch capability. Apple's 2010 iPad redefined the tablet the way that Microsoft never did. Microsoft didn't respond until 2012, with its Surface tablet that gave a passing nod to touch but required the traditional input methods unsuited to a tablet. Microsoft had licensed Apple's mobile technology previously -- but only under the proviso it would not use it to compete with Apple. The Surface tablets satisfied that promise, again appearing to compete but not really doing so.

At the same time, Apple licensed key back-end technology from Microsoft, adopting Exchange ActiveSync in both iOS and OS X, instantly making Exchange servers the preferred security and management system for mobile devices. Apple competitors like Google's Android and, in early 2013, BlackBerry adopted EAS, as did Microsoft Exchange rivals IBM Lotus and Novell GroupWise, cementing Microsoft's monopoly server monopoly. Also, Microsoft held back from exploiting EAS fully on Windws Phone for sveeral years, again giving Apple devices the client-side advantage while preserving its back-end dominance.

Apple has also cleared the path for Microsoft's dominance in office productivity software, providing its iWork suite that is cheaper than Office but not as full-functioned. Office remains the main productivity suite for OS X, and Apple has not provided a significant update to iWork in four years. Apple's iWork dominates on iOS (though, perhaps complicating the Apple-Microsoft arrangement, Google's Quickoffice has provided a major challenge), while Microsoft has been absent with a good version of Office on even its own Windows Phone platform. Perhaps that suggests any agreement on preserving Office's dominance didn't extend to mobile devices, or the shoe has yet to drop. After all, the latest version of Office 365 now works reasonably well on the iPad, and some pundits have suggested that the lack of Office on iOS lets it appear as if Microsoft has at least one competitive advantage for its Windows 8 tablets.

The pattern is very clear: Microsoft's competitive responses to Apple client technology has been both late and inadequate, marketing hype aside, enabling the shift now under way from Windows PC to Macs and iPads. Apple's adoption of Microsoft back-end technology and limited competition with Office has not only neutralized Microsoft's back-end competitors but given Microsoft nearly full control of that market.

This pattern supports the apparent intent of the secret Jobs-Gate agreement. Antitrust concerns around Microsoft in the United States have evaporated, while Apple and Microsoft have solidified their positions in complementary segments of the technology industry. That's not proof of a secret agreement to divide the market, but it makes for a convincing argument.

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This story, "Apple's and Microsoft's secret pact for tech domination," was originally published at InfoWorld.com. Follow the latest developments in April Fools' Day at InfoWorld.com. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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This story, "Apple's and Microsoft's Secret Pact for Tech Domination" was originally published by InfoWorld.

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