Hi, I guess we get to spend an hour or so together today, and most of the time I wanted
to spend just talking about what you want to talk and answering some questions.
But I thought if you wanted, I'd take about 10 minutes or 15 minutes up front and tell
you what we're doing at Next and why the world might need another computer company.
Is that something, do you guys think about these things?
I thought I'd tell you about some of our mistakes.
Maybe that would be more useful than we have a lot of scarred tissue.
There's a really interesting book that was written by a guy named Paul Strassman.
And Paul has one of the more interesting jobs on the planet.
He's this chief information officer, CIO, a very large organization called the Pentagon.
And they really understand software there.
I had a conversation with him not too long ago.
And he said the lesson from the Gulf War was that the best software will win the war.
And so they're trying to do a lot of work in the software area.
He wrote a book though before he got this job called The Business Value of Computers.
And it's rather thick and it's not good bedtime reading.
But you can plow through it and there's some incredible stuff in it.
And he asked two questions in particular.
One was he surveyed a bunch of companies from not very successful all the way up
to really successful.
And there's somebody taking notes here.
And he asked how much they spent on information technology as a percentage of revenues.
And he got a very counterintuitive answer, right?
You'd think that the really successful companies would either spend more
or less than the not successful companies, depending on your theory.
But it was exactly the same.
They all spent about 2% of revenues on information technology.
And he found this curious.
And so he asked another question.
How do they spend their money?
And he found out that the really successful ones, actually let's start with the not so
successful ones as we success increases and dollars increase.
He found out that the not so successful ones spent the majority of their money
on management productivity.
And the more successful ones spent the majority of their money
on operational productivity applications, right?
Now, this was not very pleasant for me to read because I spent the first 10 years
of my life on management productivity, which was PCs, right?
PCs and Macs never attacked operational productivity.
They just attacked management productivity.
Why is that?
Because you can't go down to your local computer store and buy an app
that will help you do stock trading or will help you run a hospital
or will help you in whatever operational part of your business you want to automate.
Unless you're a very, very small business, then you could run some accounting packages.
But other than that, if you're a medium-sized or large business,
these things never attacked operational productivity.
So we zoom out and we say, how have people attacked operational productivity
with information technology?
Well, in the 60s, they bought a mainframe and they got some terminals
and a bunch of cobalt programmers and they wrote a few apps.
And most of them were kind of backroom apps.
And it sort of worked for the very few that could afford to do this.
In the 70s, they got a mainframe in some terminals and they did the same thing.
And a few of them got a few mini-computers and terminals and tried to do it a little cheaper.
In the 80s, nothing changed.
Mainframe and terminals, minis and terminals, until maybe about two or three years ago.
What happened two or three years ago was that the front office started to realize
that they needed operational apps so bad that they couldn't depend on the MIS folks anymore.
They started taking life into their own hands and working with,
sometimes working with the MIS folks to start downsizing and getting some servers
and running some industry standard databases like Cybas or Oracle and the servers
and making a little local area network and getting maybe some sun workstations
and spending about two years writing some mission critical operational applications
like trading apps for Wall Street, perfect example.
And it kind of worked.
And the reason that they needed to do this was because more and more they were discovering
that things like new products required a custom operational application.
An example, if you're in financial services and you come up with a new product,
it's only three things.
It's an idea, it's a sales force, and it's a custom app to bang on databases
to make the product real, to do the mortgage swaps or whatever it is you want to do.
Without the app, you don't have a product.
And so there's been an increasing buildup of demand from the front parts of corporations
to create more and more and more of these operational applications.
And I think it's going to get to the point where this becomes fairly clear
that this is the next big revolution in desktop computing is to create these,
to attack the operational productivity.
And as we start to re-engineer the way we do things to automate a lot of this
in custom applications, it sounds a little strange now to most people.
It sounds like desktop publishing did in 1985.
Nobody knew what it was.
Everybody thought it was kind of a strange vertical thing over there.
But my guess is it's pretty horizontal.
And we're attacking vertical markets now that know they want this.
And it's going extremely well.
Sun is the only company that's really had any success at this.
And we're not going to matter the box because we came up with the software called
Next Step, which lets you build apps five to ten times faster than anything
anyone's ever seen.
And after you build them, they're deployable and usable by mere mortals
because it's really easy to use, this computer.
And you can interoperate your custom app seamlessly with a bunch of off-the-shelf
productivity apps.
So we go to these companies that use suns and take two years to write their apps,
or thinking about using suns, and they can write their apps in about 90 days on the next.
Now, if you're on Wall Street and you can create a new product in 90 days versus your
competitor in two years, that's eight new products you can field for their every one.
And you can start to see the competitive advantage that can be created this way.
Now, we had no idea that we were any good at this when we started Next.
A lot of times you don't know what your competitive advantage is when you launch a new product.
Let me give you a historical example.
How many of you guys use Max?
How many of you have seen in Next?
How many of you use in Next?
No, that's not so bad.
We'd like to change that ratio.
We're on the right track anyway.
When we started, when we did the Macintosh, we never anticipated desktop publishing when
we created the Mac.
Sounds funny, because that turned out to be the Max compelling advantage.
The thing that it did, not one and a half or two times better than everything else,
but four or five times better than anything else where you had to have one.
We never anticipated it.
We anticipated bitmap displays and laser printers, but we never thought about pagemaker
or that whole industry really coming down to the desktop.
Maybe we weren't smart enough.
But we were smart enough to see it start to happen nine to 12 months later.
And we changed our entire marketing and business strategy to focus on desktop publishing,
and it became the Trojan horse that eventually got the Mac into corporate America,
where it could show its owners all the other wonderful things you could do.
Likewise, when we created Next Step, this revolutionary object-oriented software that we have,
our target customer coming from the PC world where shrink wrap apps were king,
was Lotus and Adobe and WordPerfect and all the shrink wrap apps developers.
And the purpose was to let them create their apps five to ten times faster,
these shrink wrap apps.
And it worked.
We have a ton of shrink wrap apps now.
I'm the best to breed in almost every category.
But it wasn't until early in 91, early last year, a little over a year ago,
that some really big companies came to us and said, you don't understand what you've got.
The same software that allows Lotus to create their apps five to ten times faster
is letting us build our in-house mission critical apps five to ten times faster.
And this is the biggest problem we've had.
This is a huge problem for every big company and almost all medium-sized companies,
and you have a solution in your hands and you dummies don't even know it.
And it took them about three months before we finally heard it.
And in last summer, we changed our whole sales and marketing strategy around
to focus on that and it's taken off like a rocket.
And we grew about four X last year and probably grow about two X this year.
And our customer list is now very, very strong and growing like crazy.
We just got back from spending a few days in D.C. and in New York.
And we're talking to customers we only dreamed of talking to a year ago.
So that's what we do.
And our arch enemy son, they want to kill us, which is good.
They should try to do that as soon as possible because the sooner they do it,
the cheaper it will be for them, but they won't.
I think it's gone past the point where it's possible.
And the greatest thing is hardware is really hardware churns every 18 months.
It's pretty impossible to get a sustainable competitive advantage from hardware.
If you're lucky, you can make something one and a half or two times as good as your
competitor, which probably isn't enough to be quite a competitive advantage.
And it only lasts for six months.
But software seems to take a lot longer for people to catch up with.
I watched Microsoft take eight or nine years to catch up with the Mac and it's
arguable whether they've even caught up.
It takes a long time.
We think that the soonest we're going to have a true competitor is probably four to five years.
So we've got that amount of time to grow ourselves a one to two billion dollar
company so that we can compete with them on scale.
See today we can't compete with them on scale.
We never have as many sales people as they do as Sun does.
We don't have to add budgets that they do.
So we've got to have a better product.
Assuming, and I hope we always have a better product, and I think we can, but I'd also like
to be able to at least give them a run for their money on scale.
So we've got the next three to four years to run really fast so that by the time they
even get close to having a competitive product, we're at a large enough scale to where we can
start to compete with them.
And that's what we're doing with our lives right now.
Spending a lot of time with customers, spending a lot of time making next step better.
And that kind of thing.
So that's the strategic basis of what we do.
Does that make any sense to you?
Have you run across the concept of sort of operational custom applications at all?
I mean, you guys, most of you have come from companies where you've had work experience, right?
And you've all done that.
So do you have this problem in the companies you've come from?
You have a lot of pressure to write these operational custom applications and hardly
anything coming out of the spigot to satisfy this thirst?
Yeah.
How many of you from Wall Street?
Good.
Good.
How many of you are from manufacturing companies?
Oh, excellent.
Where are the rest of you from?
How many of you are from consulting?
Oh, that's bad.
Yeah.
A mind is too important to waste.
You should do something.
Wait.
Why is that bad if a consultant can come into a company and use your system and basically
build their applications in a ridiculously short amount of time and show a working project?
The only consultants I've seen that I think are truly useful are the ones that help us sell our computers.
But other than that, seriously, I don't think there's any inherently evil in consulting.
I think that...
I think that without owning something over an extended period of time, like a few years,
where one has a chance to take responsibility for one's recommendations,
where one has to see one's recommendations through all action stages and accumulate
scar tissue for the mistakes and pick oneself up off the ground and dust oneself off,
one learns a fraction of what one can.
Coming in and making recommendations and not owning the results, not owning the implementation,
I think is a fraction of the value and a fraction of the opportunity to learn and get better.
And so what you do get a broad cut at companies, but it's very thin.
It's like a picture of a... I could use... I'm a vegetarian, so when you stake.
It's like a picture of a banana.
You might get a very accurate picture, but it's only two-dimensional.
And without the experience of actually doing it, you never get three-dimensional.
So you might have a lot of pictures on your walls. You can show it off to your friends.
You can say, like, I've worked in bananas, I've worked in peaches, I've worked in grapes,
but you never really taste it. And I think that that's stuff that I think.
You're also a variable expense, and in hard times, you find yourself...
You find yourself variable, right? Yes?
Right, very good question. I'm going to generalize your question.
Why don't we just become a software company, right?
It's a very good question. It's a subtle question.
I'm going to try to go through several things, and I'm sorry if I jump around.
We got a lot of requests from customers last year that they would love to see next step
on other platforms and primarily Intel-based platforms, like the 486.
So we decided to do just that, and we have ported next step to the 486,
and we're finishing it now, and it'll ship in the September-October timeframe.
And it's exactly the same stuff we run on our own computer.
And same apps, same user interface, same training, same development environment.
And we're going to sell it for $9.95, and we're OEMing it to a bunch of companies whose names
you'll recognize quite easily, and OEMing it to them at a much cheaper price.
And everybody's coming out of the woodwork to help us.
We're getting help from Novell, we're getting help from all the developers.
Intel's really helping us, and they really want us to succeed.
Why is that? Right.
They all want to make sure that there's a choice out there, and they're all really
scared about Microsoft, and they see next step as the only thing on the horizon
that can challenge Microsoft and system software for the next several years.
So we're enjoying a lot of health, and boy, we need it, so that's good.
Now, we've also had a lot of requests from companies to port next step to other platforms,
and we're talking to some of those companies right now.
Now, we got a lot of requests from some customers to port next step to sons.
A lot of them are saying, look, we may not want to buy them anymore,
but we already bought 500, and we don't throw them in the bay.
So can we put your software on them?
Because sons falling behind in software.
Now, sons says they'd rather stick needles in their eyes than help us do this.
That's a quote.
And so we're evaluating right now which will be worse for son if we port it or if we don't
port it. And since we're fairly customer driven,
we'll probably end up doing what the customers ask us to do, because we want to make them happy.
Now, this leads one into the question.
Well, this leads one into the question, should we just be a software company?
And we think the answer is no.
We think we should be a software company and a hardware company.
In making the decision to put next step on more than our own platforms,
we clearly decided that we will sell less than 100% of the next step hardware.
However, we think that the marketplace will grow and we will sell more absolute hardware.
And secondly, the charter of our hardware division is to make the best next step hardware.
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.
And I would love it nothing better than if someday we only sold 20 or 25% of the next step hardware.
But I still think that's a billion dollar plus hardware business.
And I'll get into one other hardware related reason in a minute.
There's some things I can't talk about here.
In addition to that, if you look at how we sell our computers right now,
we have a sales force in the U.S. of about 130 professionals in the field
out selling next computers.
They spend 90% of their time selling next step software
and then 10% of their time selling the hardware.
In other words, if they can get the customer to buy into next step,
then they're going to sell the hardware because right now we have the only hardware it runs on.
So they are out there selling next step right now.
And this is what is required to launch a new innovative product.
The current distribution channels for the computer industry over the last several years
have lost their ability to create demand.
They can fulfill demand, but they can't create it.
If a new product comes out, you're lucky if you can find somebody at the computer store
that even knows how to demo it, right?
So the more innovative the product is, the more revolutionary it is,
and not just an incremental improvement, the more you're stuck
because the existing channels only fulfilling demand.
Matter of fact, it's getting so bad that it's getting wiped out
because there are more efficient channels to fulfill demand,
like the telephone and Federal Express.
So we're seeing that the channel becomes condensed on its way to, I think, just televisions.
So how does one bring innovation to the marketplace?
We believe the only way we know how to do it right now is with the direct sales force,
out there in front of customers showing on the products in the environment of their own problems
and discussing how those problems can be made with these solutions.
A software-only company could never afford to feel the direct sales force.
With average selling prices of $500 a software package,
you could never afford 130 professionals in the field.
With an average selling price of $5,000, you can.
And that's why I don't think we're going to see any more system software companies succeed.
I don't think it's possible to fund the effort to educate the market
about a revolutionary product with ASPs that low.
And if it's not a revolutionary product, I don't think the company can succeed.
So our strategy has been that we've got to be a hardware company
in order to make our software business succeed.
And we think we can do really well at both of them.
I know that's a long answer, but it's a complex problem, too.
Yes.
You mentioned about the software company without having a revolutionary product.
I think a man will have a talent.
Uh-huh.
Closely up and running.
In your end, you're pretty straightforward on how you feel about it.
I'm wondering if you feel it.
You're up here through feelings of talent and also for the lineup.
Sure.
If you ask us who our competitors are, we'll say really three things.
One is Sun Solaris software.
The other is Microsoft, and the third is Tallegant.
Let's take them in that order.
Sun, for a while, had a software value added because they had the best
Unix in the marketplace, but the markets moved way beyond that,
and unfortunately, Sun hasn't.
So their software is falling further and further behind,
and while we take them very seriously, we don't think Solaris is going to be much competition.
It doesn't have an object in it, and it's pretty much what they have today.
Microsoft is doing NT, which is their sort of second attempt at a Unix wannabe.
And that's great, and I think it'll be better than the last one, which was OS2.
But fundamentally, it's just an operating system.
It's better plumbing for Windows.
It's a good way of thinking of it.
Unfortunately, you're still stuck with Windows in all of its glory,
including the worst development environment that's ever been invented.
And so we don't think that this is really going to present a challenge
to what we're going after, which are these mission critical custom apps,
because the development environment is horrendous.
It's not object oriented, and even with the better plumbing,
we think it will be widely rejected for what we do.
In terms of Tallegant, Tallegant represents the first true competitor
that we could have.
They're going to ship a product around 1995.
If they execute to their plans.
And I think if they do execute to their plans and work really hard,
by about the mid-90s, they'll have roughly what we have today.
And that's not meant as a joke.
It still means we have to run very hard, because they will have a lot of resources
at their disposal.
I think there's a lot of questions as to whether they will ever ship a product.
I think they're a few years away from having something running,
but we take them very seriously.
Now, they've helped us enormously, because they've blessed object oriented programming.
And right now, we're the only folks that have it, and will be for the next three, four years.
So, if we can't compete with Tallegant, it's probably because we've shot ourselves in the foot.
You couldn't ask for something better.
IBM and Apple saying, these guys are right on track,
and come back in five years, and we'll have a two.
It's great.
And so, the balls in our courts.
Yeah.
Yes, then.
You described next step as an environment in an operating system, right?
And what I hear you talking about is this great way to develop applications.
I don't develop applications.
I use other operating systems.
Do you see, I mean, a fracture of the operating system marketing,
so a specialized niche that you're describing,
and then the general market for those of us who don't develop apps?
Are you saying that you can bridge from an environment that allows you to develop apps into an operating system
that'll be, like, Windows or MS docs on a lot of machines?
Well, let's get our terminology straight.
We look at next step as an operating environment.
Much more than an operating system.
The Unix, which is our operating system, is 10% of next step.
So, in these modern operating environments, when you develop a custom app in next step,
it doesn't run on the Mac or on Windows.
You need all the objects that come with next step to make it work.
And let me go into a little detail there.
How many of you are technical here?
A lot.
Okay, great.
Well, we've discovered something.
You don't write code any faster in next step than you do in any other operating and
development environment that we know of.
However, to do a particular app on average, you write about 20% of the code that you do in any other development
environment we know of, about 20% of the code than in Sun or in anything else.
So, the code that's the fastest to write, the code that's the easiest to maintain,
and the code that never breaks is the code you don't write.
So, that's our strategy.
Write a lot less code.
And one of the ways, the way we do this is we enable the developer to use a lot of objects
that others have written.
We ship six years' worth of objects with next step.
You can create your own objects for your own company and then reuse them around your developers.
And there's now independent third-party companies not selling system software,
not selling applications, but selling objects.
There's about it, not quite ten of them, and it's starting.
And I think it's going to be a very big thing.
So, in order to deliver these apps that are created on next step, you have to have next step
so they can run on top and take advantage of this rich community of objects.
And that's why we're reporting next step to the 486.
That's why you'll see next step running on several hardware platforms.
And will there be a fracturing, if you will?
Sure.
To some extent, I tend to look at it as a transition.
Was there a fracturing when Mac came out?
Yes.
And there's been more of a transition as people either move to Mac or, in the case of Windows,
adopt what's good about the Mac.
Same thing's going to happen here.
We believe very strongly that the benefits from these object-oriented environments,
not only just rapid development, but a much richer user environment.
If you use a next, it's a lot nicer than a Mac or a PC, even if you never developed an app.
Other environments will absorb some of those breakthroughs, and more and more people will use next step.
And things will tend to balance themselves out over time.
But there will be a transition.
And our goal is to make sure we're part of it.
Yeah.
Yeah.
You spoke earlier that there was an tentative advantage.
You felt relied in the fact that these companies today were needing development in kind of the operational basis
when they're supposed to be managing it.
And then you companies, though, are some graphs of how the source they're developing.
How does this change your business strategy?
Good question.
If our business strategy says that we do a lot of things well, but the tip of our arrow,
or our Trojan horse, which is getting us into these large and medium-sized accounts,
is our custom application development ability, then our growth is going to be paced among other things
by the development community available to these companies to develop these apps.
Now, even though we have shrunk the development time down to a fraction of what it was,
still, without developers out there, we're not going to win.
Fortunately, most companies have really increased the staffs of good people in their IS departments
dramatically in the last several years, last four or five years.
There's now really bright people who know something about computer science in IS departments.
And most of the industries we talk to, whether they're healthcare, financial services, even law enforcement,
places like that, have on-site developers in their IS teams.
If not, they're starting to become a lot of vars and people out there that we're using in LA,
or in New York where I just was, we probably have about 10 independent third-party companies
helping parts of Wall Street develop things.
So, I think that's not going to be a stumbling block.
My personal opinion is the number of people in applications development is shrinking.
It exploded in the 80s with PCs, but now that industry is consolidating.
It's consolidating down to very few companies.
And there's a lot of excess people out there that I think are starting to get channeled
into some of these other areas.
So far it hasn't been a problem, but if you want to do that, please call us and tell us
because we always need more.
What are you guys all going to do when you get out of here?
You're going to go back to your companies?
How many are you going to go back?
How many aren't going to go back?
What are you going to do?
Well, yeah, I think we always have jobs for really smart technical people.
You know, technically based people.
And you guys are getting a great business education here.
Yeah, we'd love to talk to a lot of you.
Yeah, yes, sir.
Go ahead.
Well, these are deep questions.
I'll tell you, I've obviously thought about this a lot.
And I don't want to get into it too much, but I will say that I think everybody lost.
I think I lost and I have one to spend my life there.
I think Apple lost.
I think customers lost.
And having said all that, so what?
You go on.
You know, it's not as bad as a lot of things.
It's not as bad as losing your arm.
So people go on and companies go on.
And I think Apple, I'm very happy every time Apple ships them back.
Makes me very, very happy.
I think the power books are decent products.
I like them.
But Apple has been struggling the last few years.
They've been having a real struggle with who they want to be.
And this is nothing new.
I've always had that.
That was part of what kept Apple alive, I think.
And there were two camps with an Apple.
Camp one wanted to be the next serious computer company.
And camp two wanted to sort of be the Sony of computers.
And that struggling, I think, was somewhat tearing Apple apart.
And fortunately, the Sony guys have won.
They've kind of decided to go be the Sony of computers.
And so the power books are pretty good, but the quadris, you know, suck wind right now,
buy-in stuff.
And they're abdicating.
They're basically not putting a lot of resources onto the power users on desktops.
And they've put most of their best people now on the portables and on consumer
products that they're going to be coming out with.
And I think they'll do very well at that.
Now there's a problem in there in that if you look at the consumer products that
sell over a million a year, you can count them on a few hands.
It turns out there's not, I mean, consumer electronics products, not like toothbrushes,
but electronics products.
And so let's assume they have one of those, right?
Or two of those.
Let's say they have a product that sells two million a year and at a $500 ASP to them.
So it sells to the consumer, you know, $7.95 or something like that.
That's a hundred, that's what, a billion dollars, right?
Two million a year, $500 a piece.
It's a billion dollars.
They still have to get the other seven billion a revenue somewhere.
So it's going to be an interesting transition as the ASPs get lower.
The volumes have to get much, much higher and you run into some scale issues when
you look out at the consumer electronics industry.
Not that it's not possible.
And I think it's going to be really interesting to watch.
And we also see a lot of that's not quite that clarity of movement, but some movement
in the windows and PC world, again, towards taking what they have now and making it
portable, but not giving the top third of the market more power.
You know, System 7 on the Mac was supposed to be the second coming.
And it wasn't.
It turned out to be, you know, an incremental improvement.
OS 2 was supposed to take us into new dimensions and it turned out to be a complete
failure.
And they're going to throw another $100 million after it just to make sure you all
know about it.
And so there's a third of those desktops out there that the users and the people that
want to deploy more sophisticated apps are, they're in the desert wanting something
to drink.
And I think there's a tremendous opportunity to give them some solutions.
Now, that doesn't mean that Apple is not going to be successful.
It just means they're going to go off in another direction.
Who knows what would have happened, you know, had all this not happened.
So, yes, second corner.
You've talked a lot about next products.
I wonder if you've talked about the management at NEM.
And if you see it changing at all as you hope go from $120 million to a $1 billion company.
Sure.
Yeah, we've done a lot in the last year.
The most significant things we did were one.
We hired this guy right here.
Mike Slade is our VP of marketing.
He spent, stand up.
And he's cheap too.
And Mike spent seven or eight years at Microsoft.
And I originally met him.
He was the product manager for Excel when it first came out and ended up running big pieces
of marketing for Microsoft.
So, Mike runs all the marketing at next.
And Mike came in to next just about the time when we were finally hearing what these big
companies were saying about mission critical custom apps.
And so, we've worked very closely together to redefine the marketing strategy of the
company.
And Mike has done just a superb job at that.
The second big thing we did was about three months ago, a little over three months ago,
we consolidated our hardware design engineering, our manufacturing, our worldwide distribution,
and hardware service all into one chunk called the hardware division.
So, from cradle to grave, they have hardware responsibility.
And we're in the process of forming the software division right now.
So that we're all still under the same roof.
But we have clarity about the fact that we've got to make two businesses successful.
The third thing that we did was, and we have a really great person running that rich page
who's one of the founders of Next.
He's doing a great job running that.
We hired a new CFO recently, Marcel Ghani.
He's from Intel, spent 12 years at Intel doing some pretty interesting jobs.
He ran all of finance for Europe.
He ran all of internal audit for the board.
He ran all of manufacturing, planning and scheduling for a while and things like that.
He's a pretty good guy.
I went to Cypress for a year and a half and then came to Next.
And he's great.
And then recently, as a matter of fact, last week, I hired a chief operating officer,
a guy named Peter van Kylenberg.
And Peter is someone I first met when we were looking for an executive vice president
at the sales and marketing, and he turned me down for the job.
And we subsequently decided not to hire that position.
And I've been chasing him for the last year and a half almost.
He's really good.
He spent a lot of time at TI as run Europe.
And about three years ago, went to a company called Mercury Communications in England.
They're the MCI of the UK.
And turned that company around to about $2 billion and then was promoted to run half of
Mercury's parent company, Cable and Wireless, and was running there about $6 billion.
And he went there when he thought that communications and computing were going to kind of come
together, but never happened.
And he figured out that his real love is in the computer business.
He's very, very good operationally.
So that's just happened last week.
It seems like all the good people I really want to hire, it seems to take me a year to
hire them.
And it's always been that way, even at Apple.
Some of the best technical people or whoever.
It always seemed to take me like a year to pry him out of HP or wherever.
And it took me over a year to hire him.
I think Mike has the award.
You're about a year and a half.
And they're all worth it.
What happens is I usually meet somebody that is really good.
I think it's very, very good.
And you can't get them.
And then you go try to find other people.
And nobody measures up.
When you meet somebody that good, you always compare them to this one person.
You know you're going to be settling for second best if you compromise.
I've always found it best not to compromise and just keep chipping away.
So I think we're doing quite a bit.
It feels like we're running a company a lot better now than we ever have.
We've definitely made our share of mistakes.
Yeah.
I'll give you a global answer.
Then we can descend into some details.
I believe that you can use the concept of technology windows opening.
And then eventually closing.
But what I mean by that is enough technology, usually from fairly diverse places, comes
together and makes something that's a quantum leap forward possible.
And it doesn't come out of nowhere.
If you poke around the labs and you hang around the media lab here at MIT and other places,
you can kind of get a feel for some of those things.
And usually they're not quite possible.
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.
And a window opens up.
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.
Sometimes you start before the window is quite open and you can't get through it.
You push it up and you push it up.
Sometimes just takes a lot of work.
Took that long with the Apple II.
Took that long with the Mac.
Took a Lisa along the way, $100 million.
It takes a while.
It's a lot expensive to push those windows open.
In our case, our first product failed.
We came out with this cube and we sold 10,000 of them.
Why?
Because we weren't quite there yet and we made some mistakes along the way and we had the course correct.
You know, Macintosh was a course correction off the Lisa.
So with Apple II and III, we did it in reverse.
But it takes around five years or some number of years like that to realize that window opening.
And then it seems to take about another five years to really exploit it in the marketplace.
And let me give you some examples from my life.
Apple II lasted 15 years.
15 years.
The hardware churned but basically it was the same for 15 years.
DOS, you know, DOS just passed 10 years.
I don't think anyone would disagree that it's going to easily last another five, right?
Unfortunately.
And Mac, you know, Mac is eight years old, right?
No question it's going to last another four or five years, right?
These things are hard.
They don't last because it's convenient or even because it's economic.
They last because they're really hard.
This is hard stuff to do.
And so when we are pushing that window open, I think with our current generation of products, we finally got the window open.
After six years it's open.
We've got an extremely elegant implementation and we've got five years of work to do to exploit it in the marketplace.
We'll peak in five years.
Five years we'll all sit around and say, okay, it's time to get started on the next thing.
It's time to get going on the next thing, maybe four years from now.
But we've got a lot of work ahead of us just to move this thing out and educate the market
and continue to refine it based on market feedback.
So everything I know about technology windows that are open or just about open
is in next step or we're working on it in the labs.
And these things generally don't come along independently.
They kind of clumps of them come together.
It's been my experience.
So the things that aren't in there right now that I can talk about,
there's some video stuff that's really interesting that's going to be integrated in.
There's some security stuff that's really fascinating that's integrating in.
But most of the core technologies in there, products are getting smaller and portable.
Products are getting much, much faster.
But these things are well known.
The products that we can put on, that we can give to you in the next year or two
are going to be running at speeds that I find hard to believe.
And I've been doing this for a while.
So I think the windows open and I think object-oriented technology
is the biggest technical breakthrough I have seen since the early 80s with graphical user interfaces.
And I think it's bigger, actually.
It will prove to be bigger over time.
Yes?
I have a question.
If you look at the diagram, things like operational applications,
and next step is a tool to help you build those,
where do you draw the line in capturing the most value between actually developing applications,
something like Word or Excel, and becoming a tool builder
to support those people who may capture a little bit more of the value?
Where do you want to draw the line there?
If you're a software company?
Well, Microsoft's made it easy.
The question is, if you're a software company,
should you develop apps or should you develop objects and tools?
And see, the software industry with Microsoft and Lotus and Word Perfect
made it real easy.
Unless you've got 20 or 30 million dollars burning a hole in your pocket,
so you can go out and hire a few hundred people to develop what it takes to develop one of these
polished shrink-wrapped apps on Mac or on Windows,
then you don't have much of a choice.
There's not a real opportunity there.
If you, assuming you had the best spreadsheet today,
you could easily spend 50 million dollars marketing it
before you'd be breaking even, selling it.
Because of just how expensive it is to market a product today.
That's only for existing spreadsheets.
If you're going to develop a next level generation of different types of products.
Well, assume that you have a breakthrough spreadsheet.
Again, on mainstream platforms,
it'll take you 50 million dollars to just rise above the noise level and market it.
So, what the brightest people I know of today are doing is they're writing objects.
They're writing hunks of things that other developers are going to use to build apps.
And they're going where everybody isn't.
And that's, I think, going to be the next new thing.
Yeah?
You mentioned that a possible problem for X is the lack of developer to
install themselves there to recommend it.
Based on that view, what's the next view of how to market self-academic institutions?
I think your question is, what is our philosophy on marketing our products to higher education?
Well, we started off selling only to higher education,
which arguably was a mistake.
But we've done really well there and our hearts are there.
And we sold a lot of Macintoshs there too when we were at Apple.
And I think it's a no-brainer.
I think you take your products.
You discount them as heavily as you can.
You sell them into higher education.
Higher education is a wonderful place to give you great feedback about how to make your products better and what's wrong with them.
And it's a great place to educate bright people that you can hire
and that your customers can hire when they graduate.
So we do exactly that.
We have, I think we're sold on about 350 campuses in the United States.
We are clearly the number one selling workstation across the U.S.
And we're the number two selling computer of any type at campuses like here MIT or Stanford right behind the Macintosh.
We sell more computers at MIT than PCs through the institutional resale engines.
So we do as much as we can.
And I think it's been pretty effective.
What do you think?
For example, Project Athena is going away.
Like those who work by being in debt is going.
I mean, I'm talking about not just selling computers.
I'm talking about establishing a network of an institutionalized system next.
Well, what's happening is the project the Theneas didn't succeed for a reason.
They didn't succeed because they had a lot of good ideas as a research project.
But the people necessary to commercialize those things and make them into real products
aren't necessarily the same people that are going to pioneer the ideas at a university like MIT.
And so those projects never quite get baked.
The recipes kind of developed and you make a few samples and it's pretty good.
But the computer industry is pretty advanced.
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.
If the researchers drop research and start trying to commercialize stuff.
And I can point to 100 examples of that in higher education.
So it's probably good that Project Athena has a beginning, a middle, and an end.
So that those people don't get stuck trying to do commercial software in an academic environment.
It's kind of a mismatch.
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
and we're winning almost every one of those.
And we really go hard after the lab so that people that can't afford the computers have public access.
And most universities now have fairly elaborate campus wide networks.
It's no longer a new cutting edge thing.
And we plug right into those.
So I think life's moved beyond where it was a few years ago where those kind of projects were really important.
And the knowledge to do that exists fairly widespread.
A few more in it.
What's the most important thing that you personally learned in Apple that you're doing in next?
Good question.
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.
And that is I now take a longer term view on people.
In other words, when I see something not being done right, my first reaction isn't to go fix it.
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.
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?
And that's painful sometimes.
And I still have that first instinct to go fix the problem.
But that's taking a longer term view on people is probably the biggest thing that's changed.
And then I don't know that's, you know, maybe the part that's biological.
But yes.
What's our management style? How do we resolve conflict?
I've never believed in the theory that if we're on the same management team and a decision has to be made,
and I decide in a way that you don't like.
And I say, come on, buy into the decision.
You know, buy into it. We're all on the same team. You don't agree, but buy into it.
Let's go make it happen.
Because what happens is sooner or later, you're paying somebody to do what they think is right.
But then you're trying to get them to do what they think isn't right.
And sooner or later it outs and you end up having that conflict.
So I've always felt that the best way is to get everybody in a room and talk it through until you agree.
Now that's not everybody in the company.
But that's everybody that's really involved in that decision that needs to execute it.
And so that's how we try to run next.
The way we run next is we have a team at the top. We call the policy team.
There's eight people.
Mike is on it. I'm on it. We have six other people on it.
And the key, we have two things we try to do.
One is we try to differentiate between the really important decisions and the ones that we don't have to make.
And the really important ones, we work on it till we all agree.
Because we're paying people to tell us what to do.
In other words, I don't view that we pay people to do things.
That's easy to find people to do things.
What's harder is to find people to tell you what should be done.
That's what we look for. So we pay people a lot of money.
And we expect them to tell us what to do.
And so when that's your attitude, you shouldn't run off and do things if people don't feel good about them.
And the key to making that work is to realize there's not that many things that any one team really has to decide.
We might have 25 really important things we have to decide on a year.
Not a lot.
So that's how we try to run it.
Sometimes it works and sometimes we're still working on it.
I can't think of once, maybe there's once or twice, but I can't even recall a time when I've said,
damn it, I'm the CEO and we're doing it this way.
I can recall a time when I've said, we don't see eye to eye and you're off the team.
I've had to say that once or twice over a prolonged period of time
when a person has not wanted to go in the same direction we've wanted to go in as a team.
It's my job every once in a while to say, hey, you want to go this way?
We want to go this way. It's not working.
So, but when people are on the team, then we work it out.
Yeah?
Yeah.
I want to come back to your premium product characterization.
Our products actually cost close to half of what suns do.
And the reason they do is we have the most automated factory in the industry.
And we have a great VLSI design group, which designs stuff in a lot less part.
Do you guys, manufacturing, do you care about that?
Yes, yes.
We should talk about that in a minute.
The industry is bifurcating right now.
And what's happening is that the max and the PCs, as you know them today,
are all going to be just like this, hold up your power book.
All going to be just like this, only lighter and smaller, before very long.
And they're taking the technology we have today, not particularly changing it,
and getting it off the desktop in portable forms.
And they're giving up a few things for that, but nothing terribly profound.
However, we're getting all sorts of signals from certain parts of the markets
that they want things that are the enemy of that.
Right? Well, what are they? Well, speed.
Speed is the enemy of portability because speed takes power.
Right? So the kind of speed that our customers want,
it would run for three and a half minutes on batteries.
That's useless.
The second thing they want is they want a lot more storage on their disk drives
and a lot more memory. Again, the enemy of portability for power
and size reasons.
Another thing they want is really high-speed networking.
Right? The radio lands on these things.
At best, they're going to go 92 kilobits per second.
Our customers want 100 megabits per second and higher.
You're not going to do that with a radio land any time in the next five years.
Another thing our customers want is our mix is shifted to like 80% color
and they want true color to do photographs.
There is no flat panel color display today that will do photographic quality color.
And they want big ones because once you have multitasking
and you run a bunch of things, once you need a bigger window into this electronic world.
When you're using your computer for two or three hours a day,
you don't want to be looking through blinders this big.
You want something bigger.
So these are all the enemy of that today.
And we're working on smaller products for sure, but it's really tough to get both.
And we're optimizing for the power because we see a giant hole there
for running these mission critical custom apps
and what people are doing needs more power.
So that's what we're optimizing for.
Let's talk about manufacturing.
How many of you have a manufacturing background?
Oh, that's great.
I love manufacturing.
And what kinds of things?
What kinds of companies?
Pharmaceuticals.
Pharmaceuticals.
Any auto people here?
Auto.
Electronics.
Which?
TI.
Motorola.
Motorola.
Is a trigger senior a managing overseas?
I heard that rumor too.
No, it couldn't be further from the truth.
We love manufacturing it next.
And when I was at Apple, I had the good fortune to leave the effort
to build the Mac factory.
And we designed and built and operated that factory.
And it was a real breakthrough.
It was the best factory in the industry until we built the one at next.
And we made a lot of mistakes, though.
As an example, I remember walking through it.
One of the things you learn when you start building factories
is that warehouses are really bad.
Right?
Wearhouses are bad because you tend to put things in them.
And inventory is really bad.
Inventory is really bad because if it's defective,
you don't find out about it for a while.
And you don't close the quality feedback loop with a vendor
and correct the problem until they've made a zillion of them.
What you want to do is find the problem, the first one that comes in the door
and stop them from making more until you fix the problem.
So, warehouses also cost money because you put all this stuff in them
and the stuff you have to go borrowing from the bank or use money.
They could be used in a more productive purpose.
So, warehouses are bad.
And you want to go to JIT.
I'm sure you've studied this all and studied examples.
I was walking through the Mac factory one day and the two biggest pieces of automation
we put in were a giant small part storage and retrieval system.
It was these totes that ran around.
And the second one was this giant burn-in system at the end.
And a few tens of millions of dollars worth of equipment.
And I realized, unfortunately, too late, that both of them are warehouses.
They're just high-tech warehouses.
And so, when we looked at next, we said...