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Hi, I guess we get to spend an hour or so together today, and most of the time I wanted

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to spend just talking about what you want to talk and answering some questions.

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But I thought if you wanted, I'd take about 10 minutes or 15 minutes up front and tell

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you what we're doing at Next and why the world might need another computer company.

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Is that something, do you guys think about these things?

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I thought I'd tell you about some of our mistakes.

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Maybe that would be more useful than we have a lot of scarred tissue.

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There's a really interesting book that was written by a guy named Paul Strassman.

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And Paul has one of the more interesting jobs on the planet.

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He's this chief information officer, CIO, a very large organization called the Pentagon.

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And they really understand software there.

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I had a conversation with him not too long ago.

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And he said the lesson from the Gulf War was that the best software will win the war.

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And so they're trying to do a lot of work in the software area.

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He wrote a book though before he got this job called The Business Value of Computers.

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And it's rather thick and it's not good bedtime reading.

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But you can plow through it and there's some incredible stuff in it.

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And he asked two questions in particular.

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One was he surveyed a bunch of companies from not very successful all the way up

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to really successful.

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And there's somebody taking notes here.

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And he asked how much they spent on information technology as a percentage of revenues.

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And he got a very counterintuitive answer, right?

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You'd think that the really successful companies would either spend more

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or less than the not successful companies, depending on your theory.

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But it was exactly the same.

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They all spent about 2% of revenues on information technology.

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And he found this curious.

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And so he asked another question.

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How do they spend their money?

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And he found out that the really successful ones, actually let's start with the not so

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successful ones as we success increases and dollars increase.

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He found out that the not so successful ones spent the majority of their money

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on management productivity.

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And the more successful ones spent the majority of their money

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on operational productivity applications, right?

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Now, this was not very pleasant for me to read because I spent the first 10 years

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of my life on management productivity, which was PCs, right?

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PCs and Macs never attacked operational productivity.

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They just attacked management productivity.

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Why is that?

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Because you can't go down to your local computer store and buy an app

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that will help you do stock trading or will help you run a hospital

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or will help you in whatever operational part of your business you want to automate.

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Unless you're a very, very small business, then you could run some accounting packages.

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But other than that, if you're a medium-sized or large business,

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these things never attacked operational productivity.

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So we zoom out and we say, how have people attacked operational productivity

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with information technology?

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Well, in the 60s, they bought a mainframe and they got some terminals

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and a bunch of cobalt programmers and they wrote a few apps.

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And most of them were kind of backroom apps.

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And it sort of worked for the very few that could afford to do this.

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In the 70s, they got a mainframe in some terminals and they did the same thing.

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And a few of them got a few mini-computers and terminals and tried to do it a little cheaper.

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In the 80s, nothing changed.

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Mainframe and terminals, minis and terminals, until maybe about two or three years ago.

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What happened two or three years ago was that the front office started to realize

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that they needed operational apps so bad that they couldn't depend on the MIS folks anymore.

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They started taking life into their own hands and working with,

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sometimes working with the MIS folks to start downsizing and getting some servers

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and running some industry standard databases like Cybas or Oracle and the servers

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and making a little local area network and getting maybe some sun workstations

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and spending about two years writing some mission critical operational applications

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like trading apps for Wall Street, perfect example.

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And it kind of worked.

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And the reason that they needed to do this was because more and more they were discovering

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that things like new products required a custom operational application.

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An example, if you're in financial services and you come up with a new product,

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it's only three things.

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It's an idea, it's a sales force, and it's a custom app to bang on databases

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to make the product real, to do the mortgage swaps or whatever it is you want to do.

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Without the app, you don't have a product.

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And so there's been an increasing buildup of demand from the front parts of corporations

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to create more and more and more of these operational applications.

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And I think it's going to get to the point where this becomes fairly clear

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that this is the next big revolution in desktop computing is to create these,

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to attack the operational productivity.

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And as we start to re-engineer the way we do things to automate a lot of this

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in custom applications, it sounds a little strange now to most people.

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It sounds like desktop publishing did in 1985.

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Nobody knew what it was.

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Everybody thought it was kind of a strange vertical thing over there.

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But my guess is it's pretty horizontal.

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And we're attacking vertical markets now that know they want this.

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And it's going extremely well.

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Sun is the only company that's really had any success at this.

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And we're not going to matter the box because we came up with the software called

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Next Step, which lets you build apps five to ten times faster than anything

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anyone's ever seen.

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And after you build them, they're deployable and usable by mere mortals

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because it's really easy to use, this computer.

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And you can interoperate your custom app seamlessly with a bunch of off-the-shelf

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productivity apps.

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So we go to these companies that use suns and take two years to write their apps,

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or thinking about using suns, and they can write their apps in about 90 days on the next.

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Now, if you're on Wall Street and you can create a new product in 90 days versus your

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competitor in two years, that's eight new products you can field for their every one.

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And you can start to see the competitive advantage that can be created this way.

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Now, we had no idea that we were any good at this when we started Next.

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A lot of times you don't know what your competitive advantage is when you launch a new product.

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Let me give you a historical example.

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How many of you guys use Max?

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How many of you have seen in Next?

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How many of you use in Next?

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No, that's not so bad.

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We'd like to change that ratio.

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We're on the right track anyway.

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When we started, when we did the Macintosh, we never anticipated desktop publishing when

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we created the Mac.

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Sounds funny, because that turned out to be the Max compelling advantage.

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The thing that it did, not one and a half or two times better than everything else,

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but four or five times better than anything else where you had to have one.

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We never anticipated it.

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We anticipated bitmap displays and laser printers, but we never thought about pagemaker

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or that whole industry really coming down to the desktop.

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Maybe we weren't smart enough.

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But we were smart enough to see it start to happen nine to 12 months later.

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And we changed our entire marketing and business strategy to focus on desktop publishing,

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and it became the Trojan horse that eventually got the Mac into corporate America,

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where it could show its owners all the other wonderful things you could do.

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Likewise, when we created Next Step, this revolutionary object-oriented software that we have,

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our target customer coming from the PC world where shrink wrap apps were king,

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was Lotus and Adobe and WordPerfect and all the shrink wrap apps developers.

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And the purpose was to let them create their apps five to ten times faster,

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these shrink wrap apps.

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And it worked.

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We have a ton of shrink wrap apps now.

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I'm the best to breed in almost every category.

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But it wasn't until early in 91, early last year, a little over a year ago,

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that some really big companies came to us and said, you don't understand what you've got.

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The same software that allows Lotus to create their apps five to ten times faster

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is letting us build our in-house mission critical apps five to ten times faster.

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And this is the biggest problem we've had.

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This is a huge problem for every big company and almost all medium-sized companies,

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and you have a solution in your hands and you dummies don't even know it.

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And it took them about three months before we finally heard it.

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And in last summer, we changed our whole sales and marketing strategy around

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to focus on that and it's taken off like a rocket.

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And we grew about four X last year and probably grow about two X this year.

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And our customer list is now very, very strong and growing like crazy.

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We just got back from spending a few days in D.C. and in New York.

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And we're talking to customers we only dreamed of talking to a year ago.

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So that's what we do.

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And our arch enemy son, they want to kill us, which is good.

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They should try to do that as soon as possible because the sooner they do it,

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the cheaper it will be for them, but they won't.

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I think it's gone past the point where it's possible.

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And the greatest thing is hardware is really hardware churns every 18 months.

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It's pretty impossible to get a sustainable competitive advantage from hardware.

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If you're lucky, you can make something one and a half or two times as good as your

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competitor, which probably isn't enough to be quite a competitive advantage.

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And it only lasts for six months.

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But software seems to take a lot longer for people to catch up with.

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I watched Microsoft take eight or nine years to catch up with the Mac and it's

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arguable whether they've even caught up.

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It takes a long time.

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We think that the soonest we're going to have a true competitor is probably four to five years.

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So we've got that amount of time to grow ourselves a one to two billion dollar

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company so that we can compete with them on scale.

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See today we can't compete with them on scale.

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We never have as many sales people as they do as Sun does.

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We don't have to add budgets that they do.

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So we've got to have a better product.

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Assuming, and I hope we always have a better product, and I think we can, but I'd also like

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to be able to at least give them a run for their money on scale.

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So we've got the next three to four years to run really fast so that by the time they

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even get close to having a competitive product, we're at a large enough scale to where we can

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start to compete with them.

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And that's what we're doing with our lives right now.

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Spending a lot of time with customers, spending a lot of time making next step better.

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And that kind of thing.

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So that's the strategic basis of what we do.

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Does that make any sense to you?

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Have you run across the concept of sort of operational custom applications at all?

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I mean, you guys, most of you have come from companies where you've had work experience, right?

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And you've all done that.

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So do you have this problem in the companies you've come from?

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You have a lot of pressure to write these operational custom applications and hardly

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anything coming out of the spigot to satisfy this thirst?

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Yeah.

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How many of you from Wall Street?

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Good.

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Good.

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How many of you are from manufacturing companies?

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Oh, excellent.

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Where are the rest of you from?

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How many of you are from consulting?

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Oh, that's bad.

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Yeah.

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A mind is too important to waste.

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You should do something.

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Wait.

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Why is that bad if a consultant can come into a company and use your system and basically

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build their applications in a ridiculously short amount of time and show a working project?

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The only consultants I've seen that I think are truly useful are the ones that help us sell our computers.

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But other than that, seriously, I don't think there's any inherently evil in consulting.

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I think that...

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I think that without owning something over an extended period of time, like a few years,

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where one has a chance to take responsibility for one's recommendations,

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where one has to see one's recommendations through all action stages and accumulate

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scar tissue for the mistakes and pick oneself up off the ground and dust oneself off,

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one learns a fraction of what one can.

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Coming in and making recommendations and not owning the results, not owning the implementation,

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I think is a fraction of the value and a fraction of the opportunity to learn and get better.

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And so what you do get a broad cut at companies, but it's very thin.

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It's like a picture of a... I could use... I'm a vegetarian, so when you stake.

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It's like a picture of a banana.

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You might get a very accurate picture, but it's only two-dimensional.

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And without the experience of actually doing it, you never get three-dimensional.

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So you might have a lot of pictures on your walls. You can show it off to your friends.

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You can say, like, I've worked in bananas, I've worked in peaches, I've worked in grapes,

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but you never really taste it. And I think that that's stuff that I think.

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You're also a variable expense, and in hard times, you find yourself...

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You find yourself variable, right? Yes?

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Right, very good question. I'm going to generalize your question.

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Why don't we just become a software company, right?

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It's a very good question. It's a subtle question.

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I'm going to try to go through several things, and I'm sorry if I jump around.

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We got a lot of requests from customers last year that they would love to see next step

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on other platforms and primarily Intel-based platforms, like the 486.

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So we decided to do just that, and we have ported next step to the 486,

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and we're finishing it now, and it'll ship in the September-October timeframe.

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And it's exactly the same stuff we run on our own computer.

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And same apps, same user interface, same training, same development environment.

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And we're going to sell it for $9.95, and we're OEMing it to a bunch of companies whose names

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you'll recognize quite easily, and OEMing it to them at a much cheaper price.

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And everybody's coming out of the woodwork to help us.

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We're getting help from Novell, we're getting help from all the developers.

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Intel's really helping us, and they really want us to succeed.

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Why is that? Right.

232
00:16:13,360 --> 00:16:17,360
They all want to make sure that there's a choice out there, and they're all really

233
00:16:17,360 --> 00:16:22,360
scared about Microsoft, and they see next step as the only thing on the horizon

234
00:16:22,360 --> 00:16:26,360
that can challenge Microsoft and system software for the next several years.

235
00:16:26,360 --> 00:16:31,360
So we're enjoying a lot of health, and boy, we need it, so that's good.

236
00:16:31,360 --> 00:16:36,360
Now, we've also had a lot of requests from companies to port next step to other platforms,

237
00:16:36,360 --> 00:16:39,360
and we're talking to some of those companies right now.

238
00:16:39,360 --> 00:16:43,360
Now, we got a lot of requests from some customers to port next step to sons.

239
00:16:43,360 --> 00:16:45,360
A lot of them are saying, look, we may not want to buy them anymore,

240
00:16:45,360 --> 00:16:47,360
but we already bought 500, and we don't throw them in the bay.

241
00:16:47,360 --> 00:16:48,360
So can we put your software on them?

242
00:16:48,360 --> 00:16:51,360
Because sons falling behind in software.

243
00:16:51,360 --> 00:16:57,360
Now, sons says they'd rather stick needles in their eyes than help us do this.

244
00:16:57,360 --> 00:16:59,360
That's a quote.

245
00:16:59,360 --> 00:17:10,360
And so we're evaluating right now which will be worse for son if we port it or if we don't

246
00:17:10,360 --> 00:17:15,360
port it. And since we're fairly customer driven,

247
00:17:15,360 --> 00:17:20,360
we'll probably end up doing what the customers ask us to do, because we want to make them happy.

248
00:17:20,360 --> 00:17:23,360
Now, this leads one into the question.

249
00:17:23,360 --> 00:17:27,360
Well, this leads one into the question, should we just be a software company?

250
00:17:27,360 --> 00:17:29,360
And we think the answer is no.

251
00:17:29,360 --> 00:17:33,360
We think we should be a software company and a hardware company.

252
00:17:33,360 --> 00:17:39,360
In making the decision to put next step on more than our own platforms,

253
00:17:39,360 --> 00:17:44,360
we clearly decided that we will sell less than 100% of the next step hardware.

254
00:17:44,360 --> 00:17:50,360
However, we think that the marketplace will grow and we will sell more absolute hardware.

255
00:17:50,360 --> 00:17:55,360
And secondly, the charter of our hardware division is to make the best next step hardware.

256
00:17:55,360 --> 00:18:00,360
Might not be the cheapest, might not be this, might not be that, but we think all in all we can make the best stuff.

257
00:18:00,360 --> 00:18:07,360
And I would love it nothing better than if someday we only sold 20 or 25% of the next step hardware.

258
00:18:07,360 --> 00:18:11,360
But I still think that's a billion dollar plus hardware business.

259
00:18:12,360 --> 00:18:15,360
And I'll get into one other hardware related reason in a minute.

260
00:18:21,360 --> 00:18:23,360
There's some things I can't talk about here.

261
00:18:28,360 --> 00:18:35,360
In addition to that, if you look at how we sell our computers right now,

262
00:18:36,360 --> 00:18:41,360
we have a sales force in the U.S. of about 130 professionals in the field

263
00:18:41,360 --> 00:18:43,360
out selling next computers.

264
00:18:43,360 --> 00:18:49,360
They spend 90% of their time selling next step software

265
00:18:49,360 --> 00:18:53,360
and then 10% of their time selling the hardware.

266
00:18:53,360 --> 00:18:57,360
In other words, if they can get the customer to buy into next step,

267
00:18:57,360 --> 00:19:02,360
then they're going to sell the hardware because right now we have the only hardware it runs on.

268
00:19:03,360 --> 00:19:06,360
So they are out there selling next step right now.

269
00:19:06,360 --> 00:19:11,360
And this is what is required to launch a new innovative product.

270
00:19:11,360 --> 00:19:17,360
The current distribution channels for the computer industry over the last several years

271
00:19:17,360 --> 00:19:20,360
have lost their ability to create demand.

272
00:19:20,360 --> 00:19:24,360
They can fulfill demand, but they can't create it.

273
00:19:24,360 --> 00:19:28,360
If a new product comes out, you're lucky if you can find somebody at the computer store

274
00:19:28,360 --> 00:19:31,360
that even knows how to demo it, right?

275
00:19:31,360 --> 00:19:35,360
So the more innovative the product is, the more revolutionary it is,

276
00:19:35,360 --> 00:19:39,360
and not just an incremental improvement, the more you're stuck

277
00:19:39,360 --> 00:19:42,360
because the existing channels only fulfilling demand.

278
00:19:42,360 --> 00:19:45,360
Matter of fact, it's getting so bad that it's getting wiped out

279
00:19:45,360 --> 00:19:48,360
because there are more efficient channels to fulfill demand,

280
00:19:48,360 --> 00:19:51,360
like the telephone and Federal Express.

281
00:19:51,360 --> 00:19:57,360
So we're seeing that the channel becomes condensed on its way to, I think, just televisions.

282
00:19:57,360 --> 00:20:01,360
So how does one bring innovation to the marketplace?

283
00:20:01,360 --> 00:20:05,360
We believe the only way we know how to do it right now is with the direct sales force,

284
00:20:05,360 --> 00:20:10,360
out there in front of customers showing on the products in the environment of their own problems

285
00:20:10,360 --> 00:20:14,360
and discussing how those problems can be made with these solutions.

286
00:20:14,360 --> 00:20:20,360
A software-only company could never afford to feel the direct sales force.

287
00:20:20,360 --> 00:20:24,360
With average selling prices of $500 a software package,

288
00:20:24,360 --> 00:20:28,360
you could never afford 130 professionals in the field.

289
00:20:28,360 --> 00:20:34,360
With an average selling price of $5,000, you can.

290
00:20:34,360 --> 00:20:41,360
And that's why I don't think we're going to see any more system software companies succeed.

291
00:20:41,360 --> 00:20:47,360
I don't think it's possible to fund the effort to educate the market

292
00:20:47,360 --> 00:20:51,360
about a revolutionary product with ASPs that low.

293
00:20:51,360 --> 00:20:56,360
And if it's not a revolutionary product, I don't think the company can succeed.

294
00:20:56,360 --> 00:21:01,360
So our strategy has been that we've got to be a hardware company

295
00:21:01,360 --> 00:21:04,360
in order to make our software business succeed.

296
00:21:04,360 --> 00:21:06,360
And we think we can do really well at both of them.

297
00:21:06,360 --> 00:21:11,360
I know that's a long answer, but it's a complex problem, too.

298
00:21:11,360 --> 00:21:15,360
Yes.

299
00:21:16,360 --> 00:21:21,360
You mentioned about the software company without having a revolutionary product.

300
00:21:21,360 --> 00:21:23,360
I think a man will have a talent.

301
00:21:23,360 --> 00:21:24,360
Uh-huh.

302
00:21:24,360 --> 00:21:26,360
Closely up and running.

303
00:21:26,360 --> 00:21:29,360
In your end, you're pretty straightforward on how you feel about it.

304
00:21:29,360 --> 00:21:31,360
I'm wondering if you feel it.

305
00:21:31,360 --> 00:21:34,360
You're up here through feelings of talent and also for the lineup.

306
00:21:34,360 --> 00:21:36,360
Sure.

307
00:21:36,360 --> 00:21:41,360
If you ask us who our competitors are, we'll say really three things.

308
00:21:41,360 --> 00:21:43,360
One is Sun Solaris software.

309
00:21:43,360 --> 00:21:46,360
The other is Microsoft, and the third is Tallegant.

310
00:21:46,360 --> 00:21:48,360
Let's take them in that order.

311
00:21:48,360 --> 00:21:54,360
Sun, for a while, had a software value added because they had the best

312
00:21:54,360 --> 00:21:57,360
Unix in the marketplace, but the markets moved way beyond that,

313
00:21:57,360 --> 00:21:59,360
and unfortunately, Sun hasn't.

314
00:21:59,360 --> 00:22:01,360
So their software is falling further and further behind,

315
00:22:01,360 --> 00:22:06,360
and while we take them very seriously, we don't think Solaris is going to be much competition.

316
00:22:06,360 --> 00:22:10,360
It doesn't have an object in it, and it's pretty much what they have today.

317
00:22:11,360 --> 00:22:16,360
Microsoft is doing NT, which is their sort of second attempt at a Unix wannabe.

318
00:22:16,360 --> 00:22:20,360
And that's great, and I think it'll be better than the last one, which was OS2.

319
00:22:20,360 --> 00:22:23,360
But fundamentally, it's just an operating system.

320
00:22:23,360 --> 00:22:25,360
It's better plumbing for Windows.

321
00:22:25,360 --> 00:22:27,360
It's a good way of thinking of it.

322
00:22:27,360 --> 00:22:31,360
Unfortunately, you're still stuck with Windows in all of its glory,

323
00:22:31,360 --> 00:22:35,360
including the worst development environment that's ever been invented.

324
00:22:36,360 --> 00:22:40,360
And so we don't think that this is really going to present a challenge

325
00:22:40,360 --> 00:22:43,360
to what we're going after, which are these mission critical custom apps,

326
00:22:43,360 --> 00:22:45,360
because the development environment is horrendous.

327
00:22:45,360 --> 00:22:48,360
It's not object oriented, and even with the better plumbing,

328
00:22:48,360 --> 00:22:52,360
we think it will be widely rejected for what we do.

329
00:22:54,360 --> 00:22:58,360
In terms of Tallegant, Tallegant represents the first true competitor

330
00:22:58,360 --> 00:23:00,360
that we could have.

331
00:23:00,360 --> 00:23:03,360
They're going to ship a product around 1995.

332
00:23:04,360 --> 00:23:06,360
If they execute to their plans.

333
00:23:06,360 --> 00:23:10,360
And I think if they do execute to their plans and work really hard,

334
00:23:10,360 --> 00:23:14,360
by about the mid-90s, they'll have roughly what we have today.

335
00:23:14,360 --> 00:23:16,360
And that's not meant as a joke.

336
00:23:16,360 --> 00:23:20,360
It still means we have to run very hard, because they will have a lot of resources

337
00:23:20,360 --> 00:23:22,360
at their disposal.

338
00:23:22,360 --> 00:23:25,360
I think there's a lot of questions as to whether they will ever ship a product.

339
00:23:25,360 --> 00:23:28,360
I think they're a few years away from having something running,

340
00:23:28,360 --> 00:23:31,360
but we take them very seriously.

341
00:23:31,360 --> 00:23:36,360
Now, they've helped us enormously, because they've blessed object oriented programming.

342
00:23:36,360 --> 00:23:41,360
And right now, we're the only folks that have it, and will be for the next three, four years.

343
00:23:41,360 --> 00:23:47,360
So, if we can't compete with Tallegant, it's probably because we've shot ourselves in the foot.

344
00:23:47,360 --> 00:23:49,360
You couldn't ask for something better.

345
00:23:49,360 --> 00:23:53,360
IBM and Apple saying, these guys are right on track,

346
00:23:53,360 --> 00:23:56,360
and come back in five years, and we'll have a two.

347
00:23:56,360 --> 00:23:58,360
It's great.

348
00:23:58,360 --> 00:24:02,360
And so, the balls in our courts.

349
00:24:02,360 --> 00:24:04,360
Yeah.

350
00:24:04,360 --> 00:24:06,360
Yes, then.

351
00:24:06,360 --> 00:24:11,360
You described next step as an environment in an operating system, right?

352
00:24:11,360 --> 00:24:14,360
And what I hear you talking about is this great way to develop applications.

353
00:24:14,360 --> 00:24:16,360
I don't develop applications.

354
00:24:16,360 --> 00:24:18,360
I use other operating systems.

355
00:24:18,360 --> 00:24:22,360
Do you see, I mean, a fracture of the operating system marketing,

356
00:24:22,360 --> 00:24:25,360
so a specialized niche that you're describing,

357
00:24:25,360 --> 00:24:28,360
and then the general market for those of us who don't develop apps?

358
00:24:28,360 --> 00:24:33,360
Are you saying that you can bridge from an environment that allows you to develop apps into an operating system

359
00:24:33,360 --> 00:24:37,360
that'll be, like, Windows or MS docs on a lot of machines?

360
00:24:37,360 --> 00:24:40,360
Well, let's get our terminology straight.

361
00:24:40,360 --> 00:24:43,360
We look at next step as an operating environment.

362
00:24:43,360 --> 00:24:45,360
Much more than an operating system.

363
00:24:45,360 --> 00:24:50,360
The Unix, which is our operating system, is 10% of next step.

364
00:24:50,360 --> 00:24:57,360
So, in these modern operating environments, when you develop a custom app in next step,

365
00:24:57,360 --> 00:25:00,360
it doesn't run on the Mac or on Windows.

366
00:25:00,360 --> 00:25:05,360
You need all the objects that come with next step to make it work.

367
00:25:05,360 --> 00:25:07,360
And let me go into a little detail there.

368
00:25:07,360 --> 00:25:09,360
How many of you are technical here?

369
00:25:09,360 --> 00:25:10,360
A lot.

370
00:25:10,360 --> 00:25:11,360
Okay, great.

371
00:25:11,360 --> 00:25:13,360
Well, we've discovered something.

372
00:25:13,360 --> 00:25:19,360
You don't write code any faster in next step than you do in any other operating and

373
00:25:19,360 --> 00:25:21,360
development environment that we know of.

374
00:25:21,360 --> 00:25:31,360
However, to do a particular app on average, you write about 20% of the code that you do in any other development

375
00:25:31,360 --> 00:25:37,360
environment we know of, about 20% of the code than in Sun or in anything else.

376
00:25:37,360 --> 00:25:43,360
So, the code that's the fastest to write, the code that's the easiest to maintain,

377
00:25:43,360 --> 00:25:46,360
and the code that never breaks is the code you don't write.

378
00:25:46,360 --> 00:25:48,360
So, that's our strategy.

379
00:25:48,360 --> 00:25:50,360
Write a lot less code.

380
00:25:50,360 --> 00:25:57,360
And one of the ways, the way we do this is we enable the developer to use a lot of objects

381
00:25:57,360 --> 00:25:58,360
that others have written.

382
00:25:58,360 --> 00:26:01,360
We ship six years' worth of objects with next step.

383
00:26:01,360 --> 00:26:06,360
You can create your own objects for your own company and then reuse them around your developers.

384
00:26:06,360 --> 00:26:10,360
And there's now independent third-party companies not selling system software,

385
00:26:10,360 --> 00:26:13,360
not selling applications, but selling objects.

386
00:26:13,360 --> 00:26:17,360
There's about it, not quite ten of them, and it's starting.

387
00:26:17,360 --> 00:26:19,360
And I think it's going to be a very big thing.

388
00:26:19,360 --> 00:26:25,360
So, in order to deliver these apps that are created on next step, you have to have next step

389
00:26:25,360 --> 00:26:29,360
so they can run on top and take advantage of this rich community of objects.

390
00:26:29,360 --> 00:26:32,360
And that's why we're reporting next step to the 486.

391
00:26:32,360 --> 00:26:36,360
That's why you'll see next step running on several hardware platforms.

392
00:26:36,360 --> 00:26:42,360
And will there be a fracturing, if you will?

393
00:26:42,360 --> 00:26:43,360
Sure.

394
00:26:43,360 --> 00:26:47,360
To some extent, I tend to look at it as a transition.

395
00:26:47,360 --> 00:26:50,360
Was there a fracturing when Mac came out?

396
00:26:50,360 --> 00:26:51,360
Yes.

397
00:26:51,360 --> 00:26:58,360
And there's been more of a transition as people either move to Mac or, in the case of Windows,

398
00:26:58,360 --> 00:27:01,360
adopt what's good about the Mac.

399
00:27:01,360 --> 00:27:03,360
Same thing's going to happen here.

400
00:27:03,360 --> 00:27:06,360
We believe very strongly that the benefits from these object-oriented environments,

401
00:27:06,360 --> 00:27:10,360
not only just rapid development, but a much richer user environment.

402
00:27:10,360 --> 00:27:15,360
If you use a next, it's a lot nicer than a Mac or a PC, even if you never developed an app.

403
00:27:15,360 --> 00:27:23,360
Other environments will absorb some of those breakthroughs, and more and more people will use next step.

404
00:27:23,360 --> 00:27:26,360
And things will tend to balance themselves out over time.

405
00:27:26,360 --> 00:27:28,360
But there will be a transition.

406
00:27:28,360 --> 00:27:31,360
And our goal is to make sure we're part of it.

407
00:27:31,360 --> 00:27:32,360
Yeah.

408
00:27:32,360 --> 00:27:33,360
Yeah.

409
00:27:34,360 --> 00:27:37,360
You spoke earlier that there was an tentative advantage.

410
00:27:37,360 --> 00:27:44,360
You felt relied in the fact that these companies today were needing development in kind of the operational basis

411
00:27:44,360 --> 00:27:47,360
when they're supposed to be managing it.

412
00:27:47,360 --> 00:27:51,360
And then you companies, though, are some graphs of how the source they're developing.

413
00:27:51,360 --> 00:27:53,360
How does this change your business strategy?

414
00:27:53,360 --> 00:27:55,360
Good question.

415
00:27:55,360 --> 00:28:01,360
If our business strategy says that we do a lot of things well, but the tip of our arrow,

416
00:28:01,360 --> 00:28:05,360
or our Trojan horse, which is getting us into these large and medium-sized accounts,

417
00:28:05,360 --> 00:28:12,360
is our custom application development ability, then our growth is going to be paced among other things

418
00:28:12,360 --> 00:28:18,360
by the development community available to these companies to develop these apps.

419
00:28:18,360 --> 00:28:23,360
Now, even though we have shrunk the development time down to a fraction of what it was,

420
00:28:23,360 --> 00:28:28,360
still, without developers out there, we're not going to win.

421
00:28:29,360 --> 00:28:39,360
Fortunately, most companies have really increased the staffs of good people in their IS departments

422
00:28:39,360 --> 00:28:42,360
dramatically in the last several years, last four or five years.

423
00:28:42,360 --> 00:28:47,360
There's now really bright people who know something about computer science in IS departments.

424
00:28:47,360 --> 00:28:52,360
And most of the industries we talk to, whether they're healthcare, financial services, even law enforcement,

425
00:28:52,360 --> 00:28:56,360
places like that, have on-site developers in their IS teams.

426
00:28:56,360 --> 00:29:01,360
If not, they're starting to become a lot of vars and people out there that we're using in LA,

427
00:29:01,360 --> 00:29:05,360
or in New York where I just was, we probably have about 10 independent third-party companies

428
00:29:05,360 --> 00:29:08,360
helping parts of Wall Street develop things.

429
00:29:08,360 --> 00:29:12,360
So, I think that's not going to be a stumbling block.

430
00:29:12,360 --> 00:29:16,360
My personal opinion is the number of people in applications development is shrinking.

431
00:29:16,360 --> 00:29:21,360
It exploded in the 80s with PCs, but now that industry is consolidating.

432
00:29:21,360 --> 00:29:24,360
It's consolidating down to very few companies.

433
00:29:24,360 --> 00:29:29,360
And there's a lot of excess people out there that I think are starting to get channeled

434
00:29:29,360 --> 00:29:32,360
into some of these other areas.

435
00:29:32,360 --> 00:29:36,360
So far it hasn't been a problem, but if you want to do that, please call us and tell us

436
00:29:36,360 --> 00:29:38,360
because we always need more.

437
00:29:38,360 --> 00:29:40,360
What are you guys all going to do when you get out of here?

438
00:29:40,360 --> 00:29:42,360
You're going to go back to your companies?

439
00:29:42,360 --> 00:29:45,360
How many are you going to go back?

440
00:29:45,360 --> 00:29:47,360
How many aren't going to go back?

441
00:29:47,360 --> 00:29:50,360
What are you going to do?

442
00:29:51,360 --> 00:29:59,360
Well, yeah, I think we always have jobs for really smart technical people.

443
00:29:59,360 --> 00:30:01,360
You know, technically based people.

444
00:30:01,360 --> 00:30:03,360
And you guys are getting a great business education here.

445
00:30:03,360 --> 00:30:06,360
Yeah, we'd love to talk to a lot of you.

446
00:30:06,360 --> 00:30:09,360
Yeah, yes, sir.

447
00:30:09,360 --> 00:30:12,360
Go ahead.

448
00:30:12,360 --> 00:30:19,360
Well, these are deep questions.

449
00:30:19,360 --> 00:30:27,360
I'll tell you, I've obviously thought about this a lot.

450
00:30:27,360 --> 00:30:34,360
And I don't want to get into it too much, but I will say that I think everybody lost.

451
00:30:34,360 --> 00:30:38,360
I think I lost and I have one to spend my life there.

452
00:30:38,360 --> 00:30:40,360
I think Apple lost.

453
00:30:40,360 --> 00:30:43,360
I think customers lost.

454
00:30:43,360 --> 00:30:47,360
And having said all that, so what?

455
00:30:47,360 --> 00:30:48,360
You go on.

456
00:30:48,360 --> 00:30:51,360
You know, it's not as bad as a lot of things.

457
00:30:51,360 --> 00:30:54,360
It's not as bad as losing your arm.

458
00:30:54,360 --> 00:30:58,360
So people go on and companies go on.

459
00:30:58,360 --> 00:31:02,360
And I think Apple, I'm very happy every time Apple ships them back.

460
00:31:02,360 --> 00:31:04,360
Makes me very, very happy.

461
00:31:04,360 --> 00:31:06,360
I think the power books are decent products.

462
00:31:06,360 --> 00:31:08,360
I like them.

463
00:31:08,360 --> 00:31:11,360
But Apple has been struggling the last few years.

464
00:31:11,360 --> 00:31:14,360
They've been having a real struggle with who they want to be.

465
00:31:14,360 --> 00:31:16,360
And this is nothing new.

466
00:31:16,360 --> 00:31:17,360
I've always had that.

467
00:31:17,360 --> 00:31:20,360
That was part of what kept Apple alive, I think.

468
00:31:20,360 --> 00:31:22,360
And there were two camps with an Apple.

469
00:31:22,360 --> 00:31:26,360
Camp one wanted to be the next serious computer company.

470
00:31:26,360 --> 00:31:30,360
And camp two wanted to sort of be the Sony of computers.

471
00:31:30,360 --> 00:31:35,360
And that struggling, I think, was somewhat tearing Apple apart.

472
00:31:35,360 --> 00:31:38,360
And fortunately, the Sony guys have won.

473
00:31:38,360 --> 00:31:41,360
They've kind of decided to go be the Sony of computers.

474
00:31:41,360 --> 00:31:45,360
And so the power books are pretty good, but the quadris, you know, suck wind right now,

475
00:31:45,360 --> 00:31:46,360
buy-in stuff.

476
00:31:46,360 --> 00:31:48,360
And they're abdicating.

477
00:31:48,360 --> 00:31:54,360
They're basically not putting a lot of resources onto the power users on desktops.

478
00:31:54,360 --> 00:31:59,360
And they've put most of their best people now on the portables and on consumer

479
00:31:59,360 --> 00:32:01,360
products that they're going to be coming out with.

480
00:32:01,360 --> 00:32:03,360
And I think they'll do very well at that.

481
00:32:03,360 --> 00:32:10,360
Now there's a problem in there in that if you look at the consumer products that

482
00:32:10,360 --> 00:32:14,360
sell over a million a year, you can count them on a few hands.

483
00:32:15,360 --> 00:32:18,360
It turns out there's not, I mean, consumer electronics products, not like toothbrushes,

484
00:32:18,360 --> 00:32:20,360
but electronics products.

485
00:32:20,360 --> 00:32:24,360
And so let's assume they have one of those, right?

486
00:32:24,360 --> 00:32:25,360
Or two of those.

487
00:32:25,360 --> 00:32:28,360
Let's say they have a product that sells two million a year and at a $500 ASP to them.

488
00:32:28,360 --> 00:32:33,360
So it sells to the consumer, you know, $7.95 or something like that.

489
00:32:33,360 --> 00:32:36,360
That's a hundred, that's what, a billion dollars, right?

490
00:32:36,360 --> 00:32:38,360
Two million a year, $500 a piece.

491
00:32:38,360 --> 00:32:40,360
It's a billion dollars.

492
00:32:40,360 --> 00:32:43,360
They still have to get the other seven billion a revenue somewhere.

493
00:32:44,360 --> 00:32:50,360
So it's going to be an interesting transition as the ASPs get lower.

494
00:32:50,360 --> 00:32:56,360
The volumes have to get much, much higher and you run into some scale issues when

495
00:32:56,360 --> 00:32:58,360
you look out at the consumer electronics industry.

496
00:32:58,360 --> 00:32:59,360
Not that it's not possible.

497
00:32:59,360 --> 00:33:01,360
And I think it's going to be really interesting to watch.

498
00:33:01,360 --> 00:33:09,360
And we also see a lot of that's not quite that clarity of movement, but some movement

499
00:33:09,360 --> 00:33:16,360
in the windows and PC world, again, towards taking what they have now and making it

500
00:33:16,360 --> 00:33:22,360
portable, but not giving the top third of the market more power.

501
00:33:22,360 --> 00:33:25,360
You know, System 7 on the Mac was supposed to be the second coming.

502
00:33:25,360 --> 00:33:26,360
And it wasn't.

503
00:33:26,360 --> 00:33:28,360
It turned out to be, you know, an incremental improvement.

504
00:33:28,360 --> 00:33:32,360
OS 2 was supposed to take us into new dimensions and it turned out to be a complete

505
00:33:32,360 --> 00:33:33,360
failure.

506
00:33:33,360 --> 00:33:36,360
And they're going to throw another $100 million after it just to make sure you all

507
00:33:36,360 --> 00:33:37,360
know about it.

508
00:33:38,360 --> 00:33:46,360
And so there's a third of those desktops out there that the users and the people that

509
00:33:46,360 --> 00:33:51,360
want to deploy more sophisticated apps are, they're in the desert wanting something

510
00:33:51,360 --> 00:33:52,360
to drink.

511
00:33:52,360 --> 00:33:56,360
And I think there's a tremendous opportunity to give them some solutions.

512
00:33:56,360 --> 00:33:58,360
Now, that doesn't mean that Apple is not going to be successful.

513
00:33:58,360 --> 00:34:00,360
It just means they're going to go off in another direction.

514
00:34:00,360 --> 00:34:06,360
Who knows what would have happened, you know, had all this not happened.

515
00:34:07,360 --> 00:34:09,360
So, yes, second corner.

516
00:34:09,360 --> 00:34:12,360
You've talked a lot about next products.

517
00:34:12,360 --> 00:34:15,360
I wonder if you've talked about the management at NEM.

518
00:34:15,360 --> 00:34:23,360
And if you see it changing at all as you hope go from $120 million to a $1 billion company.

519
00:34:23,360 --> 00:34:24,360
Sure.

520
00:34:26,360 --> 00:34:30,360
Yeah, we've done a lot in the last year.

521
00:34:30,360 --> 00:34:34,360
The most significant things we did were one.

522
00:34:34,360 --> 00:34:36,360
We hired this guy right here.

523
00:34:36,360 --> 00:34:38,360
Mike Slade is our VP of marketing.

524
00:34:38,360 --> 00:34:40,360
He spent, stand up.

525
00:34:51,360 --> 00:34:52,360
And he's cheap too.

526
00:34:54,360 --> 00:34:57,360
And Mike spent seven or eight years at Microsoft.

527
00:34:57,360 --> 00:34:59,360
And I originally met him.

528
00:34:59,360 --> 00:35:03,360
He was the product manager for Excel when it first came out and ended up running big pieces

529
00:35:03,360 --> 00:35:04,360
of marketing for Microsoft.

530
00:35:04,360 --> 00:35:06,360
So, Mike runs all the marketing at next.

531
00:35:06,360 --> 00:35:11,360
And Mike came in to next just about the time when we were finally hearing what these big

532
00:35:11,360 --> 00:35:13,360
companies were saying about mission critical custom apps.

533
00:35:13,360 --> 00:35:18,360
And so, we've worked very closely together to redefine the marketing strategy of the

534
00:35:18,360 --> 00:35:19,360
company.

535
00:35:19,360 --> 00:35:21,360
And Mike has done just a superb job at that.

536
00:35:21,360 --> 00:35:28,360
The second big thing we did was about three months ago, a little over three months ago,

537
00:35:28,360 --> 00:35:35,360
we consolidated our hardware design engineering, our manufacturing, our worldwide distribution,

538
00:35:35,360 --> 00:35:39,360
and hardware service all into one chunk called the hardware division.

539
00:35:39,360 --> 00:35:42,360
So, from cradle to grave, they have hardware responsibility.

540
00:35:42,360 --> 00:35:45,360
And we're in the process of forming the software division right now.

541
00:35:45,360 --> 00:35:50,360
So that we're all still under the same roof.

542
00:35:50,360 --> 00:35:55,360
But we have clarity about the fact that we've got to make two businesses successful.

543
00:35:56,360 --> 00:36:01,360
The third thing that we did was, and we have a really great person running that rich page

544
00:36:01,360 --> 00:36:03,360
who's one of the founders of Next.

545
00:36:03,360 --> 00:36:05,360
He's doing a great job running that.

546
00:36:05,360 --> 00:36:10,360
We hired a new CFO recently, Marcel Ghani.

547
00:36:10,360 --> 00:36:15,360
He's from Intel, spent 12 years at Intel doing some pretty interesting jobs.

548
00:36:15,360 --> 00:36:17,360
He ran all of finance for Europe.

549
00:36:17,360 --> 00:36:19,360
He ran all of internal audit for the board.

550
00:36:19,360 --> 00:36:23,360
He ran all of manufacturing, planning and scheduling for a while and things like that.

551
00:36:23,360 --> 00:36:24,360
He's a pretty good guy.

552
00:36:24,360 --> 00:36:28,360
I went to Cypress for a year and a half and then came to Next.

553
00:36:28,360 --> 00:36:29,360
And he's great.

554
00:36:29,360 --> 00:36:36,360
And then recently, as a matter of fact, last week, I hired a chief operating officer,

555
00:36:36,360 --> 00:36:38,360
a guy named Peter van Kylenberg.

556
00:36:38,360 --> 00:36:44,360
And Peter is someone I first met when we were looking for an executive vice president

557
00:36:44,360 --> 00:36:46,360
at the sales and marketing, and he turned me down for the job.

558
00:36:46,360 --> 00:36:49,360
And we subsequently decided not to hire that position.

559
00:36:49,360 --> 00:36:53,360
And I've been chasing him for the last year and a half almost.

560
00:36:53,360 --> 00:36:54,360
He's really good.

561
00:36:54,360 --> 00:36:59,360
He spent a lot of time at TI as run Europe.

562
00:36:59,360 --> 00:37:04,360
And about three years ago, went to a company called Mercury Communications in England.

563
00:37:04,360 --> 00:37:07,360
They're the MCI of the UK.

564
00:37:07,360 --> 00:37:13,360
And turned that company around to about $2 billion and then was promoted to run half of

565
00:37:14,360 --> 00:37:20,360
Mercury's parent company, Cable and Wireless, and was running there about $6 billion.

566
00:37:20,360 --> 00:37:25,360
And he went there when he thought that communications and computing were going to kind of come

567
00:37:25,360 --> 00:37:27,360
together, but never happened.

568
00:37:27,360 --> 00:37:30,360
And he figured out that his real love is in the computer business.

569
00:37:30,360 --> 00:37:32,360
He's very, very good operationally.

570
00:37:32,360 --> 00:37:34,360
So that's just happened last week.

571
00:37:34,360 --> 00:37:38,360
It seems like all the good people I really want to hire, it seems to take me a year to

572
00:37:38,360 --> 00:37:39,360
hire them.

573
00:37:39,360 --> 00:37:41,360
And it's always been that way, even at Apple.

574
00:37:41,360 --> 00:37:43,360
Some of the best technical people or whoever.

575
00:37:43,360 --> 00:37:47,360
It always seemed to take me like a year to pry him out of HP or wherever.

576
00:37:47,360 --> 00:37:51,360
And it took me over a year to hire him.

577
00:37:51,360 --> 00:37:52,360
I think Mike has the award.

578
00:37:52,360 --> 00:37:54,360
You're about a year and a half.

579
00:37:54,360 --> 00:37:57,360
And they're all worth it.

580
00:37:57,360 --> 00:38:00,360
What happens is I usually meet somebody that is really good.

581
00:38:00,360 --> 00:38:02,360
I think it's very, very good.

582
00:38:02,360 --> 00:38:03,360
And you can't get them.

583
00:38:03,360 --> 00:38:05,360
And then you go try to find other people.

584
00:38:05,360 --> 00:38:07,360
And nobody measures up.

585
00:38:07,360 --> 00:38:10,360
When you meet somebody that good, you always compare them to this one person.

586
00:38:10,360 --> 00:38:14,360
You know you're going to be settling for second best if you compromise.

587
00:38:14,360 --> 00:38:22,360
I've always found it best not to compromise and just keep chipping away.

588
00:38:22,360 --> 00:38:24,360
So I think we're doing quite a bit.

589
00:38:24,360 --> 00:38:28,360
It feels like we're running a company a lot better now than we ever have.

590
00:38:28,360 --> 00:38:31,360
We've definitely made our share of mistakes.

591
00:38:31,360 --> 00:38:32,360
Yeah.

592
00:38:32,360 --> 00:38:44,360
I'll give you a global answer.

593
00:38:44,360 --> 00:38:50,360
Then we can descend into some details.

594
00:38:50,360 --> 00:38:57,360
I believe that you can use the concept of technology windows opening.

595
00:38:57,360 --> 00:38:59,360
And then eventually closing.

596
00:38:59,360 --> 00:39:08,360
But what I mean by that is enough technology, usually from fairly diverse places, comes

597
00:39:08,360 --> 00:39:13,360
together and makes something that's a quantum leap forward possible.

598
00:39:13,360 --> 00:39:15,360
And it doesn't come out of nowhere.

599
00:39:15,360 --> 00:39:20,360
If you poke around the labs and you hang around the media lab here at MIT and other places,

600
00:39:20,360 --> 00:39:23,360
you can kind of get a feel for some of those things.

601
00:39:23,360 --> 00:39:25,360
And usually they're not quite possible.

602
00:39:25,360 --> 00:39:33,360
But all of a sudden you start to sense things coming together and the planets lining up to where this is now possible or barely possible.

603
00:39:33,360 --> 00:39:35,360
And a window opens up.

604
00:39:35,360 --> 00:39:51,360
And it usually takes around, my experience anyway, my life has been, it takes around five years to create a commercial product that takes advantage of that technical window opening up.

605
00:39:51,360 --> 00:39:54,360
Sometimes you start before the window is quite open and you can't get through it.

606
00:39:54,360 --> 00:39:56,360
You push it up and you push it up.

607
00:39:56,360 --> 00:39:58,360
Sometimes just takes a lot of work.

608
00:39:58,360 --> 00:40:00,360
Took that long with the Apple II.

609
00:40:00,360 --> 00:40:02,360
Took that long with the Mac.

610
00:40:02,360 --> 00:40:06,360
Took a Lisa along the way, $100 million.

611
00:40:06,360 --> 00:40:07,360
It takes a while.

612
00:40:07,360 --> 00:40:09,360
It's a lot expensive to push those windows open.

613
00:40:09,360 --> 00:40:14,360
In our case, our first product failed.

614
00:40:14,360 --> 00:40:17,360
We came out with this cube and we sold 10,000 of them.

615
00:40:17,360 --> 00:40:18,360
Why?

616
00:40:18,360 --> 00:40:23,360
Because we weren't quite there yet and we made some mistakes along the way and we had the course correct.

617
00:40:23,360 --> 00:40:26,360
You know, Macintosh was a course correction off the Lisa.

618
00:40:26,360 --> 00:40:31,360
So with Apple II and III, we did it in reverse.

619
00:40:31,360 --> 00:40:41,360
But it takes around five years or some number of years like that to realize that window opening.

620
00:40:41,360 --> 00:40:46,360
And then it seems to take about another five years to really exploit it in the marketplace.

621
00:40:46,360 --> 00:40:49,360
And let me give you some examples from my life.

622
00:40:49,360 --> 00:40:53,360
Apple II lasted 15 years.

623
00:40:53,360 --> 00:40:55,360
15 years.

624
00:40:55,360 --> 00:40:58,360
The hardware churned but basically it was the same for 15 years.

625
00:40:58,360 --> 00:41:01,360
DOS, you know, DOS just passed 10 years.

626
00:41:01,360 --> 00:41:07,360
I don't think anyone would disagree that it's going to easily last another five, right?

627
00:41:07,360 --> 00:41:09,360
Unfortunately.

628
00:41:09,360 --> 00:41:14,360
And Mac, you know, Mac is eight years old, right?

629
00:41:14,360 --> 00:41:17,360
No question it's going to last another four or five years, right?

630
00:41:17,360 --> 00:41:19,360
These things are hard.

631
00:41:19,360 --> 00:41:23,360
They don't last because it's convenient or even because it's economic.

632
00:41:23,360 --> 00:41:25,360
They last because they're really hard.

633
00:41:25,360 --> 00:41:27,360
This is hard stuff to do.

634
00:41:27,360 --> 00:41:36,360
And so when we are pushing that window open, I think with our current generation of products, we finally got the window open.

635
00:41:36,360 --> 00:41:38,360
After six years it's open.

636
00:41:38,360 --> 00:41:45,360
We've got an extremely elegant implementation and we've got five years of work to do to exploit it in the marketplace.

637
00:41:45,360 --> 00:41:47,360
We'll peak in five years.

638
00:41:47,360 --> 00:41:51,360
Five years we'll all sit around and say, okay, it's time to get started on the next thing.

639
00:41:51,360 --> 00:41:54,360
It's time to get going on the next thing, maybe four years from now.

640
00:41:54,360 --> 00:41:59,360
But we've got a lot of work ahead of us just to move this thing out and educate the market

641
00:41:59,360 --> 00:42:02,360
and continue to refine it based on market feedback.

642
00:42:02,360 --> 00:42:08,360
So everything I know about technology windows that are open or just about open

643
00:42:08,360 --> 00:42:12,360
is in next step or we're working on it in the labs.

644
00:42:12,360 --> 00:42:14,360
And these things generally don't come along independently.

645
00:42:14,360 --> 00:42:16,360
They kind of clumps of them come together.

646
00:42:16,360 --> 00:42:18,360
It's been my experience.

647
00:42:18,360 --> 00:42:23,360
So the things that aren't in there right now that I can talk about,

648
00:42:23,360 --> 00:42:27,360
there's some video stuff that's really interesting that's going to be integrated in.

649
00:42:27,360 --> 00:42:31,360
There's some security stuff that's really fascinating that's integrating in.

650
00:42:31,360 --> 00:42:36,360
But most of the core technologies in there, products are getting smaller and portable.

651
00:42:36,360 --> 00:42:38,360
Products are getting much, much faster.

652
00:42:38,360 --> 00:42:40,360
But these things are well known.

653
00:42:40,360 --> 00:42:45,360
The products that we can put on, that we can give to you in the next year or two

654
00:42:45,360 --> 00:42:50,360
are going to be running at speeds that I find hard to believe.

655
00:42:50,360 --> 00:42:52,360
And I've been doing this for a while.

656
00:42:52,360 --> 00:42:58,360
So I think the windows open and I think object-oriented technology

657
00:42:58,360 --> 00:43:07,360
is the biggest technical breakthrough I have seen since the early 80s with graphical user interfaces.

658
00:43:07,360 --> 00:43:09,360
And I think it's bigger, actually.

659
00:43:09,360 --> 00:43:11,360
It will prove to be bigger over time.

660
00:43:11,360 --> 00:43:12,360
Yes?

661
00:43:12,360 --> 00:43:13,360
I have a question.

662
00:43:13,360 --> 00:43:18,360
If you look at the diagram, things like operational applications,

663
00:43:18,360 --> 00:43:21,360
and next step is a tool to help you build those,

664
00:43:21,360 --> 00:43:25,360
where do you draw the line in capturing the most value between actually developing applications,

665
00:43:25,360 --> 00:43:28,360
something like Word or Excel, and becoming a tool builder

666
00:43:28,360 --> 00:43:31,360
to support those people who may capture a little bit more of the value?

667
00:43:31,360 --> 00:43:34,360
Where do you want to draw the line there?

668
00:43:34,360 --> 00:43:37,360
If you're a software company?

669
00:43:37,360 --> 00:43:40,360
Well, Microsoft's made it easy.

670
00:43:40,360 --> 00:43:42,360
The question is, if you're a software company,

671
00:43:42,360 --> 00:43:46,360
should you develop apps or should you develop objects and tools?

672
00:43:46,360 --> 00:43:50,360
And see, the software industry with Microsoft and Lotus and Word Perfect

673
00:43:50,360 --> 00:43:51,360
made it real easy.

674
00:43:51,360 --> 00:43:54,360
Unless you've got 20 or 30 million dollars burning a hole in your pocket,

675
00:43:54,360 --> 00:43:58,360
so you can go out and hire a few hundred people to develop what it takes to develop one of these

676
00:43:58,360 --> 00:44:02,360
polished shrink-wrapped apps on Mac or on Windows,

677
00:44:02,360 --> 00:44:04,360
then you don't have much of a choice.

678
00:44:04,360 --> 00:44:06,360
There's not a real opportunity there.

679
00:44:06,360 --> 00:44:09,360
If you, assuming you had the best spreadsheet today,

680
00:44:09,360 --> 00:44:12,360
you could easily spend 50 million dollars marketing it

681
00:44:12,360 --> 00:44:15,360
before you'd be breaking even, selling it.

682
00:44:15,360 --> 00:44:20,360
Because of just how expensive it is to market a product today.

683
00:44:20,360 --> 00:44:22,360
That's only for existing spreadsheets.

684
00:44:22,360 --> 00:44:26,360
If you're going to develop a next level generation of different types of products.

685
00:44:26,360 --> 00:44:30,360
Well, assume that you have a breakthrough spreadsheet.

686
00:44:30,360 --> 00:44:34,360
Again, on mainstream platforms,

687
00:44:34,360 --> 00:44:40,360
it'll take you 50 million dollars to just rise above the noise level and market it.

688
00:44:40,360 --> 00:44:45,360
So, what the brightest people I know of today are doing is they're writing objects.

689
00:44:45,360 --> 00:44:52,360
They're writing hunks of things that other developers are going to use to build apps.

690
00:44:52,360 --> 00:44:56,360
And they're going where everybody isn't.

691
00:44:56,360 --> 00:44:59,360
And that's, I think, going to be the next new thing.

692
00:44:59,360 --> 00:45:00,360
Yeah?

693
00:45:00,360 --> 00:45:04,360
You mentioned that a possible problem for X is the lack of developer to

694
00:45:04,360 --> 00:45:05,360
install themselves there to recommend it.

695
00:45:05,360 --> 00:45:12,360
Based on that view, what's the next view of how to market self-academic institutions?

696
00:45:12,360 --> 00:45:20,360
I think your question is, what is our philosophy on marketing our products to higher education?

697
00:45:20,360 --> 00:45:25,360
Well, we started off selling only to higher education,

698
00:45:25,360 --> 00:45:27,360
which arguably was a mistake.

699
00:45:28,360 --> 00:45:31,360
But we've done really well there and our hearts are there.

700
00:45:31,360 --> 00:45:34,360
And we sold a lot of Macintoshs there too when we were at Apple.

701
00:45:34,360 --> 00:45:37,360
And I think it's a no-brainer.

702
00:45:37,360 --> 00:45:39,360
I think you take your products.

703
00:45:39,360 --> 00:45:40,360
You discount them as heavily as you can.

704
00:45:40,360 --> 00:45:42,360
You sell them into higher education.

705
00:45:42,360 --> 00:45:48,360
Higher education is a wonderful place to give you great feedback about how to make your products better and what's wrong with them.

706
00:45:48,360 --> 00:45:54,360
And it's a great place to educate bright people that you can hire

707
00:45:54,360 --> 00:45:56,360
and that your customers can hire when they graduate.

708
00:45:56,360 --> 00:45:57,360
So we do exactly that.

709
00:45:57,360 --> 00:46:02,360
We have, I think we're sold on about 350 campuses in the United States.

710
00:46:02,360 --> 00:46:06,360
We are clearly the number one selling workstation across the U.S.

711
00:46:06,360 --> 00:46:13,360
And we're the number two selling computer of any type at campuses like here MIT or Stanford right behind the Macintosh.

712
00:46:13,360 --> 00:46:22,360
We sell more computers at MIT than PCs through the institutional resale engines.

713
00:46:22,360 --> 00:46:24,360
So we do as much as we can.

714
00:46:24,360 --> 00:46:26,360
And I think it's been pretty effective.

715
00:46:26,360 --> 00:46:28,360
What do you think?

716
00:46:28,360 --> 00:46:30,360
For example, Project Athena is going away.

717
00:46:30,360 --> 00:46:32,360
Like those who work by being in debt is going.

718
00:46:32,360 --> 00:46:34,360
I mean, I'm talking about not just selling computers.

719
00:46:34,360 --> 00:46:40,360
I'm talking about establishing a network of an institutionalized system next.

720
00:46:40,360 --> 00:46:46,360
Well, what's happening is the project the Theneas didn't succeed for a reason.

721
00:46:46,360 --> 00:46:51,360
They didn't succeed because they had a lot of good ideas as a research project.

722
00:46:51,360 --> 00:46:56,360
But the people necessary to commercialize those things and make them into real products

723
00:46:56,360 --> 00:47:02,360
aren't necessarily the same people that are going to pioneer the ideas at a university like MIT.

724
00:47:02,360 --> 00:47:06,360
And so those projects never quite get baked.

725
00:47:06,360 --> 00:47:10,360
The recipes kind of developed and you make a few samples and it's pretty good.

726
00:47:10,360 --> 00:47:13,360
But the computer industry is pretty advanced.

727
00:47:13,360 --> 00:47:18,360
And so other people pick up those ideas and make them into real products and they kind of leave the research projects in the dust.

728
00:47:18,360 --> 00:47:22,360
If the researchers drop research and start trying to commercialize stuff.

729
00:47:22,360 --> 00:47:26,360
And I can point to 100 examples of that in higher education.

730
00:47:26,360 --> 00:47:30,360
So it's probably good that Project Athena has a beginning, a middle, and an end.

731
00:47:30,360 --> 00:47:35,360
So that those people don't get stuck trying to do commercial software in an academic environment.

732
00:47:35,360 --> 00:47:37,360
It's kind of a mismatch.

733
00:47:37,360 --> 00:47:44,360
As far as we're concerned, what we're doing is there's a lot of labs that are being put in in higher education

734
00:47:44,360 --> 00:47:46,360
and we're winning almost every one of those.

735
00:47:46,360 --> 00:47:51,360
And we really go hard after the lab so that people that can't afford the computers have public access.

736
00:47:51,360 --> 00:47:56,360
And most universities now have fairly elaborate campus wide networks.

737
00:47:56,360 --> 00:47:58,360
It's no longer a new cutting edge thing.

738
00:47:58,360 --> 00:48:00,360
And we plug right into those.

739
00:48:00,360 --> 00:48:06,360
So I think life's moved beyond where it was a few years ago where those kind of projects were really important.

740
00:48:06,360 --> 00:48:10,360
And the knowledge to do that exists fairly widespread.

741
00:48:10,360 --> 00:48:12,360
A few more in it.

742
00:48:13,360 --> 00:48:18,360
What's the most important thing that you personally learned in Apple that you're doing in next?

743
00:48:18,360 --> 00:48:20,360
Good question.

744
00:48:20,360 --> 00:48:47,360
I'm not sure I learned this when I was at Apple, but I learned it based on the data when I was at Apple.

745
00:48:48,360 --> 00:48:56,360
And that is I now take a longer term view on people.

746
00:48:56,360 --> 00:49:04,360
In other words, when I see something not being done right, my first reaction isn't to go fix it.

747
00:49:04,360 --> 00:49:14,360
It's to say we're building a team here and we're going to do great stuff for the next decade, not just the next year.

748
00:49:15,360 --> 00:49:25,360
And so what do I need to do to help so that the person that's screwing up learns versus how do I fix the problem?

749
00:49:25,360 --> 00:49:29,360
And that's painful sometimes.

750
00:49:29,360 --> 00:49:33,360
And I still have that first instinct to go fix the problem.

751
00:49:33,360 --> 00:49:38,360
But that's taking a longer term view on people is probably the biggest thing that's changed.

752
00:49:38,360 --> 00:49:42,360
And then I don't know that's, you know, maybe the part that's biological.

753
00:49:42,360 --> 00:49:46,360
But yes.

754
00:49:53,360 --> 00:49:56,360
What's our management style? How do we resolve conflict?

755
00:49:56,360 --> 00:50:03,360
I've never believed in the theory that if we're on the same management team and a decision has to be made,

756
00:50:03,360 --> 00:50:06,360
and I decide in a way that you don't like.

757
00:50:06,360 --> 00:50:09,360
And I say, come on, buy into the decision.

758
00:50:09,360 --> 00:50:13,360
You know, buy into it. We're all on the same team. You don't agree, but buy into it.

759
00:50:13,360 --> 00:50:15,360
Let's go make it happen.

760
00:50:15,360 --> 00:50:23,360
Because what happens is sooner or later, you're paying somebody to do what they think is right.

761
00:50:23,360 --> 00:50:27,360
But then you're trying to get them to do what they think isn't right.

762
00:50:27,360 --> 00:50:31,360
And sooner or later it outs and you end up having that conflict.

763
00:50:31,360 --> 00:50:40,360
So I've always felt that the best way is to get everybody in a room and talk it through until you agree.

764
00:50:40,360 --> 00:50:43,360
Now that's not everybody in the company.

765
00:50:43,360 --> 00:50:51,360
But that's everybody that's really involved in that decision that needs to execute it.

766
00:50:51,360 --> 00:50:55,360
And so that's how we try to run next.

767
00:50:55,360 --> 00:50:59,360
The way we run next is we have a team at the top. We call the policy team.

768
00:50:59,360 --> 00:51:01,360
There's eight people.

769
00:51:01,360 --> 00:51:04,360
Mike is on it. I'm on it. We have six other people on it.

770
00:51:04,360 --> 00:51:07,360
And the key, we have two things we try to do.

771
00:51:07,360 --> 00:51:13,360
One is we try to differentiate between the really important decisions and the ones that we don't have to make.

772
00:51:13,360 --> 00:51:18,360
And the really important ones, we work on it till we all agree.

773
00:51:18,360 --> 00:51:22,360
Because we're paying people to tell us what to do.

774
00:51:22,360 --> 00:51:25,360
In other words, I don't view that we pay people to do things.

775
00:51:25,360 --> 00:51:27,360
That's easy to find people to do things.

776
00:51:27,360 --> 00:51:31,360
What's harder is to find people to tell you what should be done.

777
00:51:31,360 --> 00:51:34,360
That's what we look for. So we pay people a lot of money.

778
00:51:34,360 --> 00:51:37,360
And we expect them to tell us what to do.

779
00:51:37,360 --> 00:51:43,360
And so when that's your attitude, you shouldn't run off and do things if people don't feel good about them.

780
00:51:44,360 --> 00:51:51,360
And the key to making that work is to realize there's not that many things that any one team really has to decide.

781
00:51:51,360 --> 00:51:57,360
We might have 25 really important things we have to decide on a year.

782
00:51:57,360 --> 00:51:59,360
Not a lot.

783
00:51:59,360 --> 00:52:02,360
So that's how we try to run it.

784
00:52:02,360 --> 00:52:06,360
Sometimes it works and sometimes we're still working on it.

785
00:52:07,360 --> 00:52:13,360
I can't think of once, maybe there's once or twice, but I can't even recall a time when I've said,

786
00:52:13,360 --> 00:52:16,360
damn it, I'm the CEO and we're doing it this way.

787
00:52:16,360 --> 00:52:23,360
I can recall a time when I've said, we don't see eye to eye and you're off the team.

788
00:52:28,360 --> 00:52:32,360
I've had to say that once or twice over a prolonged period of time

789
00:52:32,360 --> 00:52:38,360
when a person has not wanted to go in the same direction we've wanted to go in as a team.

790
00:52:38,360 --> 00:52:42,360
It's my job every once in a while to say, hey, you want to go this way?

791
00:52:42,360 --> 00:52:45,360
We want to go this way. It's not working.

792
00:52:45,360 --> 00:52:51,360
So, but when people are on the team, then we work it out.

793
00:52:54,360 --> 00:52:55,360
Yeah?

794
00:52:55,360 --> 00:52:56,360
Yeah.

795
00:53:13,360 --> 00:53:16,360
I want to come back to your premium product characterization.

796
00:53:16,360 --> 00:53:20,360
Our products actually cost close to half of what suns do.

797
00:53:20,360 --> 00:53:23,360
And the reason they do is we have the most automated factory in the industry.

798
00:53:23,360 --> 00:53:27,360
And we have a great VLSI design group, which designs stuff in a lot less part.

799
00:53:27,360 --> 00:53:29,360
Do you guys, manufacturing, do you care about that?

800
00:53:29,360 --> 00:53:30,360
Yes, yes.

801
00:53:30,360 --> 00:53:34,360
We should talk about that in a minute.

802
00:53:34,360 --> 00:53:37,360
The industry is bifurcating right now.

803
00:53:37,360 --> 00:53:40,360
And what's happening is that the max and the PCs, as you know them today,

804
00:53:40,360 --> 00:53:42,360
are all going to be just like this, hold up your power book.

805
00:53:42,360 --> 00:53:47,360
All going to be just like this, only lighter and smaller, before very long.

806
00:53:47,360 --> 00:53:52,360
And they're taking the technology we have today, not particularly changing it,

807
00:53:52,360 --> 00:53:55,360
and getting it off the desktop in portable forms.

808
00:53:55,360 --> 00:54:01,360
And they're giving up a few things for that, but nothing terribly profound.

809
00:54:01,360 --> 00:54:06,360
However, we're getting all sorts of signals from certain parts of the markets

810
00:54:06,360 --> 00:54:09,360
that they want things that are the enemy of that.

811
00:54:09,360 --> 00:54:12,360
Right? Well, what are they? Well, speed.

812
00:54:12,360 --> 00:54:17,360
Speed is the enemy of portability because speed takes power.

813
00:54:17,360 --> 00:54:20,360
Right? So the kind of speed that our customers want,

814
00:54:20,360 --> 00:54:23,360
it would run for three and a half minutes on batteries.

815
00:54:23,360 --> 00:54:25,360
That's useless.

816
00:54:25,360 --> 00:54:29,360
The second thing they want is they want a lot more storage on their disk drives

817
00:54:29,360 --> 00:54:32,360
and a lot more memory. Again, the enemy of portability for power

818
00:54:32,360 --> 00:54:34,360
and size reasons.

819
00:54:34,360 --> 00:54:37,360
Another thing they want is really high-speed networking.

820
00:54:37,360 --> 00:54:40,360
Right? The radio lands on these things.

821
00:54:40,360 --> 00:54:43,360
At best, they're going to go 92 kilobits per second.

822
00:54:43,360 --> 00:54:46,360
Our customers want 100 megabits per second and higher.

823
00:54:46,360 --> 00:54:49,360
You're not going to do that with a radio land any time in the next five years.

824
00:54:49,360 --> 00:54:53,360
Another thing our customers want is our mix is shifted to like 80% color

825
00:54:53,360 --> 00:54:55,360
and they want true color to do photographs.

826
00:54:55,360 --> 00:54:59,360
There is no flat panel color display today that will do photographic quality color.

827
00:54:59,360 --> 00:55:02,360
And they want big ones because once you have multitasking

828
00:55:02,360 --> 00:55:06,360
and you run a bunch of things, once you need a bigger window into this electronic world.

829
00:55:06,360 --> 00:55:09,360
When you're using your computer for two or three hours a day,

830
00:55:09,360 --> 00:55:12,360
you don't want to be looking through blinders this big.

831
00:55:12,360 --> 00:55:14,360
You want something bigger.

832
00:55:14,360 --> 00:55:18,360
So these are all the enemy of that today.

833
00:55:18,360 --> 00:55:24,360
And we're working on smaller products for sure, but it's really tough to get both.

834
00:55:24,360 --> 00:55:30,360
And we're optimizing for the power because we see a giant hole there

835
00:55:30,360 --> 00:55:33,360
for running these mission critical custom apps

836
00:55:33,360 --> 00:55:36,360
and what people are doing needs more power.

837
00:55:36,360 --> 00:55:38,360
So that's what we're optimizing for.

838
00:55:38,360 --> 00:55:39,360
Let's talk about manufacturing.

839
00:55:39,360 --> 00:55:41,360
How many of you have a manufacturing background?

840
00:55:41,360 --> 00:55:43,360
Oh, that's great.

841
00:55:43,360 --> 00:55:45,360
I love manufacturing.

842
00:55:45,360 --> 00:55:46,360
And what kinds of things?

843
00:55:46,360 --> 00:55:49,360
What kinds of companies?

844
00:55:49,360 --> 00:55:51,360
Pharmaceuticals.

845
00:55:51,360 --> 00:55:52,360
Pharmaceuticals.

846
00:55:52,360 --> 00:55:54,360
Any auto people here?

847
00:55:54,360 --> 00:55:55,360
Auto.

848
00:55:55,360 --> 00:55:56,360
Electronics.

849
00:55:56,360 --> 00:55:57,360
Which?

850
00:55:57,360 --> 00:55:58,360
TI.

851
00:55:58,360 --> 00:55:59,360
Motorola.

852
00:55:59,360 --> 00:56:00,360
Motorola.

853
00:56:00,360 --> 00:56:03,360
Is a trigger senior a managing overseas?

854
00:56:03,360 --> 00:56:04,360
I heard that rumor too.

855
00:56:04,360 --> 00:56:06,360
No, it couldn't be further from the truth.

856
00:56:07,360 --> 00:56:09,360
We love manufacturing it next.

857
00:56:09,360 --> 00:56:14,360
And when I was at Apple, I had the good fortune to leave the effort

858
00:56:14,360 --> 00:56:15,360
to build the Mac factory.

859
00:56:15,360 --> 00:56:18,360
And we designed and built and operated that factory.

860
00:56:18,360 --> 00:56:20,360
And it was a real breakthrough.

861
00:56:20,360 --> 00:56:23,360
It was the best factory in the industry until we built the one at next.

862
00:56:23,360 --> 00:56:27,360
And we made a lot of mistakes, though.

863
00:56:27,360 --> 00:56:30,360
As an example, I remember walking through it.

864
00:56:30,360 --> 00:56:33,360
One of the things you learn when you start building factories

865
00:56:34,360 --> 00:56:36,360
is that warehouses are really bad.

866
00:56:36,360 --> 00:56:37,360
Right?

867
00:56:37,360 --> 00:56:39,360
Wearhouses are bad because you tend to put things in them.

868
00:56:39,360 --> 00:56:41,360
And inventory is really bad.

869
00:56:41,360 --> 00:56:44,360
Inventory is really bad because if it's defective,

870
00:56:44,360 --> 00:56:46,360
you don't find out about it for a while.

871
00:56:46,360 --> 00:56:49,360
And you don't close the quality feedback loop with a vendor

872
00:56:49,360 --> 00:56:51,360
and correct the problem until they've made a zillion of them.

873
00:56:51,360 --> 00:56:54,360
What you want to do is find the problem, the first one that comes in the door

874
00:56:54,360 --> 00:56:56,360
and stop them from making more until you fix the problem.

875
00:56:56,360 --> 00:57:00,360
So, warehouses also cost money because you put all this stuff in them

876
00:57:00,360 --> 00:57:02,360
and the stuff you have to go borrowing from the bank or use money.

877
00:57:02,360 --> 00:57:04,360
They could be used in a more productive purpose.

878
00:57:04,360 --> 00:57:06,360
So, warehouses are bad.

879
00:57:06,360 --> 00:57:08,360
And you want to go to JIT.

880
00:57:08,360 --> 00:57:11,360
I'm sure you've studied this all and studied examples.

881
00:57:11,360 --> 00:57:15,360
I was walking through the Mac factory one day and the two biggest pieces of automation

882
00:57:15,360 --> 00:57:19,360
we put in were a giant small part storage and retrieval system.

883
00:57:19,360 --> 00:57:22,360
It was these totes that ran around.

884
00:57:22,360 --> 00:57:26,360
And the second one was this giant burn-in system at the end.

885
00:57:26,360 --> 00:57:29,360
And a few tens of millions of dollars worth of equipment.

886
00:57:29,360 --> 00:57:34,360
And I realized, unfortunately, too late, that both of them are warehouses.

887
00:57:34,360 --> 00:57:37,360
They're just high-tech warehouses.

888
00:57:37,360 --> 00:57:42,360
And so, when we looked at next, we said...