That was overly harsh. Eisner had been up to Pixar a bit more than that, including visits when Jobs wasn"t with him. But it was true that he showed little curiosity about the artistry or technology at the studio. Jobs likewise didn"t spend much time trying to learn from Disney"s management.
The open sniping between Jobs and Eisner began in the summer of 2002. Jobs had always admired the creative spirit of the great Walt Disney, especially because he had nurtured a company to last for generations. He viewed Walt"s nephew Roy as an embodiment of this historic legacy and spirit. Roy was still on the Disney board, despite his own growing estrangement from Eisner, and Jobs let him know that he would not renew the Pixar-Disney deal as long as Eisner was still the CEO.
Roy Disney and Stanley Gold, his close a.s.sociate on the Disney board, began warning other directors about the Pixar problem. That prompted Eisner to send the board an intemperate email in late August 2002. He was confident that Pixar would eventually renew its deal, he said, partly because Disney had rights to the Pixar movies and characters that had been made thus far. Plus, he said, Disney would be in a better negotiating position in a year, after Pixar finished Finding Nemo. "Yesterday we saw for the second time the new Pixar movie, Finding Nemo, that comes out next May," he wrote. "This will be a reality check for those guys. I t"s okay, but nowhere near as good as their previous films. Of course they think it is great." There were two major problems with this email: I t leaked to the Los Angeles Times, provoking Jobs to go ballistic, and Eisner"s a.s.sessment of the movie was wrong, very wrong.
Finding Nemo became Pixar"s (and Disney"s) biggest hit thus far. I t easily beat out The Lion King to become, for the time being, the most successful animated movie in history. I t grossed $340 million domestically and $868 million worldwide. Until 2010 it was also the most popular DVD of all time, with forty million copies sold, and sp.a.w.ned some of the most popular rides at Disney theme parks. In addition, it was a richly textured, subtle, and deeply beautiful artistic achievement that won the Oscar for best animated feature. "I liked the film because it was about taking risks and learning to let those you love take risks," Jobs said. I ts success added $183 million to Pixar"s cash reserves, giving it a hefty war chest of $521 million for the final showdown with Disney.
Shortly after Finding Nemo was finished, Jobs made Eisner an offer that was so one-sided it was clearly meant to be rejected. Instead of a fifty- fifty split on revenues, as in the existing deal, Jobs proposed a new arrangement in which Pixar would own outright the films it made and the characters in them, and it would merely pay Disney a 7.5% fee to distribute the movies. Plus, the last two films under the existing deal-The Incredibles and Cars were the ones in the works-would shift to the new distribution deal.
Eisner, however, held one powerful trump card. Even if Pixar didn"t renew, Disney had the right to make sequels of Toy Story and the other movies that Pixar had made, and it owned all the characters, from Woody to Nemo, just as it owned Mickey Mouse and Donald Duck. Eisner was already planning-or threatening-to have Disney"s own animation studio do a Toy Story 3, which Pixar had declined to do. "When you see what that company did putting out Cinderella II, you shudder at what would have happened," Jobs said.
Eisner was able to force Roy Disney off the board in November 2003, but that didn"t end the turmoil. Disney released a scathing open letter. "The company has lost its focus, its creative energy, and its heritage," he wrote. His litany of Eisner"s alleged failings included not building a constructive relationship with Pixar. By this point Jobs had decided that he no longer wanted to work with Eisner. So in January 2004 he publicly announced that he was cutting off negotiations with Disney.
Jobs was usually disciplined in not making public the strong opinions that he shared with friends around his Palo Alto kitchen table. But this time he did not hold back. In a conference call with reporters, he said that while Pixar was producing hits, Disney animation was making "embarra.s.sing duds." He scoffed at Eisner"s notion that Disney made any creative contribution to the Pixar films: "The truth is there has been little creative collaboration with Disney for years. You can compare the creative quality of our films with the creative quality of Disney"s last three films and judge each company"s creative ability yourselves." In addition to building a better creative team, Jobs had pulled off the remarkable feat of building a brand that was now as big a draw for moviegoers as Disney"s. "We think the Pixar brand is now the most powerful and trusted brand in animation."
When Jobs called to give him a heads-up, Roy Disney replied, "When the wicked witch is dead, we"ll be together again."
John La.s.seter was aghast at the prospect of breaking up with Disney. "I was worried about my children, what they would do with the characters we"d created," he recalled. "I t was like a dagger to my heart." When he told his top staff in the Pixar conference room, he started crying, and he did so again when he addressed the eight hundred or so Pixar employees gathered in the studio"s atrium. "I t"s like you have these dear children and you have to give them up to be adopted by convicted child molesters." Jobs came to the atrium stage next and tried to calm things down. He explained why it might be necessary to break with Disney, and he a.s.sured them that Pixar as an inst.i.tution had to keep looking forward to be successful. "He has the absolute ability to make you believe," said Oren Jacob, a longtime technologist at the studio. "Suddenly, we all had the confidence that, whatever happened, Pixar would flourish."
Bob Iger, Disney"s chief operating officer, had to step in and do damage control. He was as sensible and solid as those around him were volatile. His background was in television; he had been president of the ABC Network, which was acquired in 1996 by Disney. His reputation was as a corporate suit, and he excelled at deft management, but he also had a sharp eye for talent, a good-humored ability to understand people, and a quiet flair that he was secure enough to keep muted. Unlike Eisner and Jobs, he had a disciplined calm, which helped him deal with large egos.
"Steve did some grandstanding by announcing that he was ending talks with us," Iger later recalled. "We went into crisis mode, and I developed some talking points to settle things down."
Eisner had presided over ten great years at Disney, when Frank Wells served as his president. Wells freed Eisner from many management duties so he could make his suggestions, usually valuable and often brilliant, on ways to improve each movie project, theme park ride, television pilot, and countless other products. But after Wells was killed in a helicopter crash in 1994, Eisner never found the right manager. Katzenberg had demanded Wells"s job, which is why Eisner ousted him. Michael Ovitz became president in 1995; it was not a pretty sight, and he was gone in less than two years. Jobs later offered his a.s.sessment:For his first ten years as CEO, Eisner did a really good job. For the last ten years, he really did a bad job. And the change came when Frank Wells died. Eisner is a really good creative guy. He gives really good notes. So when Frank was running operations, Eisner could be like a b.u.mblebee going from project to project trying to make them better. But when Eisner had to run things, he was a terrible manager.
n.o.body liked working for him. They felt they had no authority. He had this strategic planning group that was like the Gestapo, in that you couldn"t spend any money, not even a dime, without them approving it. Even though I broke with him, I had to respect his achievements in the first ten years. And there was a part of him I actually liked. He"s a fun guy to be around at times-smart, witty. But he had a dark side to him.
His ego got the better of him. Eisner was reasonable and fair to me at first, but eventually, over the course of dealing with him for a decade, I came to see a dark side to him.
Eisner"s biggest problem in 2004 was that he did not fully fathom how messed up his animation division was. I ts two most recent movies, Treasure Planet and Brother Bear, did no honor to the Disney legacy, or to its balance sheets. Hit animation movies were the lifeblood of the company; they sp.a.w.ned theme park rides, toys, and television shows. Toy Story had led to a movie sequel, a Disney on Ice show, a Toy Story Musical performed on Disney cruise ships, a direct-to-video film featuring Buzz Lightyear, a computer storybook, two video games, a dozen action toys that sold twenty-five million units, a clothing line, and nine different attractions at Disney theme parks. This was not the case for Treasure Planet.
"Michael didn"t understand that Disney"s problems in animation were as acute as they were," Iger later explained. "That manifested itself in the way he dealt with Pixar. He never felt he needed Pixar as much as he really did." In addition, Eisner loved to negotiate and hated to compromise, which was not always the best combination when dealing with Jobs, who was the same way. "Every negotiation needs to be resolved by compromises," Iger said. "Neither one of them is a master of compromise."
The impa.s.se was ended on a Sat.u.r.day night in March 2005, when Iger got a phone call from former senator George Mitch.e.l.l and other Disney board members. They told him that, starting in a few months, he would replace Eisner as Disney"s CEO. When Iger got up the next morning, he called his daughters and then Steve Jobs and John La.s.seter. He said, very simply and clearly, that he valued Pixar and wanted to make a deal.
Jobs was thrilled. He liked Iger and even marveled at a small connection they had: his former girlfriend Jennifer Egan and Iger"s wife, Willow Bay, had been roommates at Penn.
That summer, before Iger officially took over, he and Jobs got to have a trial run at making a deal. Apple was coming out with an iPod that would play video as well as music. I t needed television shows to sell, and Jobs did not want to be too public in negotiating for them because, as usual, he wanted the product to be secret until he unveiled it onstage. Iger, who had multiple iPods and used them throughout the day, from his 5 a.m.
workouts to late at night, had already been envisioning what it could do for television shows. So he immediately offered ABC"s most popular shows, Desperate Housew ives and Lost. "We negotiated that deal in a week, and it was complicated," Iger said. "I t was important because Steve got to see how I worked, and because it showed everyone that Disney could in fact work with Steve."
For the announcement of the video iPod, Jobs rented a theater in San Jose, and he invited Iger to be his surprise guest onstage. "I had never been to one of his announcements, so I had no idea what a big deal it was," Iger recalled. "I t was a real breakthrough for our relationship. He saw I was pro-technology and willing to take risks." Jobs did his usual virtuoso performance, running through all the features of the new iPod, how it was "one of the best things we"ve ever done," and how the iTunes Store would now be selling music videos and short films. Then, as was his habit, he ended with "And yes, there is one more thing:" The iPod would be selling TV shows. There was huge applause. He mentioned that the two most popular shows were on ABC. "And who owns ABC? Disney! I know these guys," he exulted.
When Iger then came onstage, he looked as relaxed and as comfortable as Jobs. "One of the things that Steve and I are incredibly excited about is the intersection between great content and great technology," he said. "I t"s great to be here to announce an extension of our relation with Apple,"
he added. Then, after the proper pause, he said, "Not with Pixar, but with Apple."
But it was clear from their warm embrace that a new Pixar-Disney deal was once again possible. "I t signaled my way of operating, which was "Make love not war,"" Iger recalled. "We had been at war with Roy Disney, Comcast, Apple, and Pixar. I wanted to fix all that, Pixar most of all."
Iger had just come back from opening the new Disneyland in Hong Kong, with Eisner at his side in his last big act as CEO. The ceremonies included the usual Disney parade down Main Street. Iger realized that the only characters in the parade that had been created in the past decade were Pixar"s. "A lightbulb went off," he recalled. "I "m standing next to Michael, but I kept it completely to myself, because it was such an indictment of his stewardship of animation during that period. After ten years of The Lion King, Beauty and the Beast, and Aladdin, there were then ten years of nothing."
Iger went back to Burbank and had some financial a.n.a.lysis done. He discovered that they had actually lost money on animation in the past decade and had produced little that helped ancillary products. At his first meeting as the new CEO, he presented the a.n.a.lysis to the board, whose members expressed some anger that they had never been told this. "As animation goes, so goes our company," he told the board. "A hit animated film is a big wave, and the ripples go down to every part of our business-from characters in a parade, to music, to parks, to video games, TV, Internet, consumer products. I f I don"t have wave makers, the company is not going to succeed." He presented them with some choices. They could stick with the current animation management, which he didn"t think would work. They could get rid of management and find someone else, but he said he didn"t know who that would be. Or they could buy Pixar. "The problem is, I don"t know if it"s for sale, and if it is, it"s going to be a huge amount of money," he said. The board authorized him to explore a deal.
Iger went about it in an unusual way. When he first talked to Jobs, he admitted the revelation that had occurred to him in Hong Kong and how it convinced him that Disney badly needed Pixar. "That"s why I just loved Bob Iger," recalled Jobs. "He just blurted it out. Now that"s the dumbest thing you can do as you enter a negotiation, at least according to the traditional rule book. He just put his cards out on the table and said, "We"re screwed." I immediately liked the guy, because that"s how I worked too. Let"s just immediately put all the cards on the table and see where they fall."
(In fact that was not usually Jobs"s mode of operation. He often began negotiations by proclaiming that the other company"s products or services sucked.) Jobs and Iger took a lot of walks-around the Apple campus, in Palo Alto, at the Allen and Co. retreat in Sun Valley. At first they came up with a plan for a new distribution deal: Pixar would get back all the rights to the movies and characters it had already produced in return for Disney"s getting an equity stake in Pixar, and it would pay Disney a simple fee to distribute its future movies. But Iger worried that such a deal would simply set Pixar up as a compet.i.tor to Disney, which would be bad even if Disney had an equity stake in it. So he began to hint that maybe they should actually do something bigger. "I want you to know that I am really thinking out of the box on this," he said. Jobs seemed to encourage the advances.
"I t wasn"t too long before it was clear to both of us that this discussion might lead to an acquisition discussion," Jobs recalled.
But first Jobs needed the blessing of John La.s.seter and Ed Catmull, so he asked them to come over to his house. He got right to the point. "We need to get to know Bob Iger," he told them. "We may want to throw in with him and to help him remake Disney. He"s a great guy." They were skeptical at first. "He could tell we were pretty shocked," La.s.seter recalled."I f you guys don"t want to do it, that"s fine, but I want you to get to know Iger before you decide," Jobs continued. "I was feeling the same as you, but I "ve really grown to like the guy." He explained how easy it had been to make the deal to put ABC shows on the iPod, and added, "I t"s night and day different from Eisner"s Disney. He"s straightforward, and there"s no drama with him." La.s.seter remembers that he and Catmull just sat there with their mouths slightly open.
Iger went to work. He flew from Los Angeles to La.s.seter"s house for dinner, and stayed up well past midnight talking. He also took Catmull out to dinner, and then he visited Pixar Studios, alone, with no entourage and without Jobs. "I went out and met all the directors one on one, and they each pitched me their movie," he said. La.s.seter was proud of how much his team impressed Iger, which of course made him warm up to Iger. "I never had more pride in Pixar than that day," he said. "All the teams and pitches were amazing, and Bob was blown away."
Indeed after seeing what was coming up over the next few years-Cars, Ratatouille, WALL-E-Iger told his chief financial officer at Disney, "Oh my G.o.d, they"ve got great stuff. We"ve got to get this deal done. I t"s the future of the company." He admitted that he had no faith in the movies that Disney animation had in the works.
The deal they proposed was that Disney would purchase Pixar for $7.4 billion in stock. Jobs would thus become Disney"s largest shareholder, with approximately 7% of the company"s stock compared to 1.7% owned by Eisner and 1% by Roy Disney. Disney Animation would be put under Pixar, with La.s.seter and Catmull running the combined unit. Pixar would retain its independent ident.i.ty, its studio and headquarters would remain in Emeryville, and it would even keep its own email addresses.
Iger asked Jobs to bring La.s.seter and Catmull to a secret meeting of the Disney board in Century City, Los Angeles, on a Sunday morning. The goal was to make them feel comfortable with what would be a radical and expensive deal. As they prepared to take the elevator from the parking garage, La.s.seter said to Jobs, "I f I start getting too excited or go on too long, just touch my leg." Jobs ended up having to do it once, but otherwise La.s.seter made the perfect sales pitch. "I talked about how we make films, what our philosophies are, the honesty we have with each other, and how we nurture the creative talent," he recalled. The board asked a lot of questions, and Jobs let La.s.seter answer most. But Jobs did talk about how exciting it was to connect art with technology. "That"s what our culture is all about, just like at Apple," he said.
Before the Disney board got a chance to approve the merger, however, Michael Eisner arose from the departed to try to derail it. He called Iger and said it was far too expensive. "You can fix animation yourself," Eisner told him. "How?" asked Iger. "I know you can," said Eisner. Iger got a bit annoyed. "Michael, how come you say I can fix it, when you couldn"t fix it yourself?" he asked.
Eisner said he wanted to come to a board meeting, even though he was no longer a member or an officer, and speak against the acquisition.
Iger resisted, but Eisner called Warren Buffett, a big shareholder, and George Mitch.e.l.l, who was the lead director. The former senator convinced Iger to let Eisner have his say. "I told the board that they didn"t need to buy Pixar because they already owned 85% of the movies Pixar had already made," Eisner recounted. He was referring to the fact that for the movies already made, Disney was getting that percentage of the gross, plus it had the rights to make all the sequels and exploit the characters. "I made a presentation that said, here"s the 15% of Pixar that Disney does not already own. So that"s what you"re getting. The rest is a bet on future Pixar films." Eisner admitted that Pixar had been enjoying a good run, but he said it could not continue. "I showed the history of producers and directors who had X number of hits in a row and then failed. I t happened to Spielberg, Walt Disney, all of them." T o make the deal worth it, he calculated, each new Pixar movie would have to gross $1.3 billion. "I t drove Steve crazy that I knew that," Eisner later said.
After he left the room, Iger refuted his argument point by point. "Let me tell you what was wrong with that presentation," he began. When the board had finished hearing them both, it approved the deal Iger proposed.
Iger flew up to Emeryville to meet Jobs and jointly announce the deal to the Pixar workers. But before they did, Jobs sat down alone with La.s.seter and Catmull. "I f either of you have doubts," he said, "I will just tell them no thanks and blow off this deal." He wasn"t totally sincere. I t would have been almost impossible to do so at that point. But it was a welcome gesture. "I "m good," said La.s.seter. "Let"s do it." Catmull agreed. They all hugged, and Jobs wept.
Everyone then gathered in the atrium. "Disney is buying Pixar," Jobs announced. There were a few tears, but as he explained the deal, the staffers began to realize that in some ways it was a reverse acquisition. Catmull would be the head of Disney animation, La.s.seter its chief creative officer. By the end they were cheering. Iger had been standing on the side, and Jobs invited him to center stage. As he talked about the special culture of Pixar and how badly Disney needed to nurture it and learn from it, the crowd broke into applause.
"My goal has always been not only to make great products, but to build great companies," Jobs later said. "Walt Disney did that. And the way we did the merger, we kept Pixar as a great company and helped Disney remain one as well."
CHAPTER THIRTY-FOUR.
TWENTY-FIRST-CENTURY MACS.
Setting Apple Apart.
Clams, Ice Cubes, and Sunflow ers.
Ever since the introduction of the iMac in 1998, Jobs and Jony Ive had made beguiling design a signature of Apple"s computers. There was a consumer laptop that looked like a tangerine clam, and a professional desktop computer that suggested a Zen ice cube. Like bell-bottoms that turn up in the back of a closet, some of these models looked better at the time than they do in retrospect, and they show a love of design that was, on occasion, a bit too exuberant. But they set Apple apart and provided the publicity bursts it needed to survive in a Windows world.
The Power Mac G4 Cube, released in 2000, was so alluring that one ended up on display in New York"s Museum of Modern Art. An eight-inch perfect cube the size of a Kleenex box, it was the pure expression of Jobs"s aesthetic. The sophistication came from minimalism. No b.u.t.tons marred the surface. There was no CD tray, just a subtle slot. And as with the original Macintosh, there was no fan. Pure Zen. "When you see something that"s so thoughtful on the outside you say, "Oh, wow, it must be really thoughtful on the inside,"" he told New sw eek. "We make progress by eliminating things, by removing the superfluous."
The G4 Cube was almost ostentatious in its lack of ostentation, and it was powerful. But it was not a success. I t had been designed as a high- end desktop, but Jobs wanted to turn it, as he did almost every product, into something that could be ma.s.s-marketed to consumers. The Cube ended up not serving either market well. Workaday professionals weren"t seeking a jewel-like sculpture for their desks, and ma.s.s-market consumers were not eager to spend twice what they"d pay for a plain vanilla desktop. Jobs predicted that Apple would sell 200,000 Cubes per quarter. In its first quarter it sold half that. The next quarter it sold fewer than thirty thousand units. Jobs later admitted that he had overdesigned and overpriced the Cube, just as he had the NeXT computer. But gradually he was learning his lesson. In building devices like the iPod, he would control costs and make the trade-offs necessary to get them launched on time and on budget.
Partly because of the poor sales of the Cube, Apple produced disappointing revenue numbers in September 2000. That was just when the tech bubble was deflating and Apple"s education market was declining. The company"s stock price, which had been above $60, fell 50% in one day, and by early December it was below $15.
None of this deterred Jobs from continuing to push for distinctive, even distracting, new design. When flat-screen displays became commercially viable, he decided it was time to replace the iMac, the translucent consumer desktop computer that looked as if it were from a Jetsons cartoon. Ive came up with a model that was somewhat conventional, with the guts of the computer attached to the back of the flat screen. Jobs didn"t like it. As he often did, both at Pixar and at Apple, he slammed on the brakes to rethink things. There was something about the design that lacked purity, he felt. "Why have this flat display if you"re going to glom all this stuff on its back?" he asked Ive. "We should let each element be true to itself."
Jobs went home early that day to mull over the problem, then called Ive to come by. They wandered into the garden, which Jobs"s wife had planted with a profusion of sunflowers. "Every year I do something wild with the garden, and that time it involved ma.s.ses of sunflowers, with a sunflower house for the kids," she recalled. "Jony and Steve were riffing on their design problem, then Jony asked, "What if the screen was separated from the base like a sunflower?" He got excited and started sketching." Ive liked his designs to suggest a narrative, and he realized that a sunflower shape would convey that the flat screen was so fluid and responsive that it could reach for the sun.
In Ive"s new design, the Mac"s screen was attached to a movable chrome neck, so that it looked not only like a sunflower but also like a cheeky Luxo lamp. Indeed it evoked the playful personality of Luxo Jr. in the first short film that John La.s.seter had made at Pixar. Apple took out many patents for the design, most crediting Ive, but on one of them, for "a computer system having a movable a.s.sembly attached to a flat panel display,"
Jobs listed himself as the primary inventor.
In hindsight, some of Apple"s Macintosh designs may seem a bit too cute. But other computer makers were at the other extreme. I t was an industry that you"d expect to be innovative, but instead it was dominated by cheaply designed generic boxes. After a few ill-conceived stabs at painting on blue colors and trying new shapes, companies such as Dell, Compaq, and HP commoditized computers by outsourcing manufacturing and competing on price. With its s.p.u.n.ky designs and its pathbreaking applications like iTunes and iMovie, Apple was about the only place innovating.
Intel Inside.
Apple"s innovations were more than skin-deep. Since 1994 it had been using a microprocessor, called the PowerPC, that was made by a partnership of IBM and Motorola. For a few years it was faster than Intel"s chips, an advantage that Apple touted in humorous commercials. By the time of Jobs"s return, however, Motorola had fallen behind in producing new versions of the chip. This provoked a fight between Jobs and Motorola"s CEO Chris Galvin. When Jobs decided to stop licensing the Macintosh operating system to clone makers, right after his return to Apple in 1997, he suggested to Galvin that he might consider making an exception for Motorola"s clone, the StarMax Mac, but only if Motorola sped up development of new PowerPC chips for laptops. The call got heated. Jobs offered his opinion that Motorola chips sucked. Galvin, who also had a temper, pushed back. Jobs hung up on him. The Motorola StarMax was canceled, and Jobs secretly began planning to move Apple off the Motorola-IBM PowerPC chip and to adopt, instead, Intel"s. This would not be a simple task. I t was akin to writing a new operating system.
Jobs did not cede any real power to his board, but he did use its meetings to kick around ideas and think through strategies in confidence, while he stood at a whiteboard and led freewheeling discussions. For eighteen months the directors discussed whether to move to an Intel architecture.
"We debated it, we asked a lot of questions, and finally we all decided it needed to be done," board member Art Levinson recalled.
Paul Otellini, who was then president and later became CEO of Intel, began huddling with Jobs. They had gotten to know each other when Jobs was struggling to keep NeXT alive and, as Otellini later put it, "his arrogance had been temporarily tempered." Otellini has a calm and wry take on people, and he was amused rather than put off when he discovered, upon dealing with Jobs at Apple in the early 2000s, "that his juices were going again, and he wasn"t nearly as humble anymore." Intel had deals with other computer makers, and Jobs wanted a better price than they had. "We had to find creative ways to bridge the numbers," said Otellini. Most of the negotiating was done, as Jobs preferred, on long walks, sometimes on the trails up to the radio telescope known as the Dish above the Stanford campus. Jobs would start the walk by telling a story and explaining how he saw the history of computers evolving. By the end he would be haggling over price.
"Intel had a reputation for being a tough partner, coming out of the days when it was run by Andy Grove and Craig Barrett," Otellini said. "I wanted to show that Intel was a company you could work with." So a crack team from Intel worked with Apple, and they were able to beat the conversion deadline by six months. Jobs invited Otellini to Apple"s T op 100 management retreat, where he donned one of the famous Intel lab coats that looked like a bunny suit and gave Jobs a big hug. At the public announcement in 2005, the usually reserved Otellini repeated the act. "Apple and Intel, together at last," flashed on the big screen.
Bill Gates was amazed. Designing crazy-colored cases did not impress him, but a secret program to switch the CPU in a computer, completed seamlessly and on time, was a feat he truly admired. "I f you"d said, "Okay, we"re going to change our microprocessor chip, and we"re not going to lose a beat," that sounds impossible," he told me years later, when I asked him about Jobs"s accomplishments. "They basically did that."
Options.
Among Jobs"s quirks was his att.i.tude toward money. When he returned to Apple in 1997, he portrayed himself as a person working for $1 a year, doing it for the benefit of the company rather than himself. Nevertheless he embraced the idea of option megagrants-granting huge bundles of options to buy Apple stock at a preset price-that were not subject to the usual good compensation practices of board committee reviews and performance criteria.
When he dropped the "interim" in his t.i.tle and officially became CEO, he was offered (in addition to the airplane) a megagrant by Ed Woolard and the board at the beginning of 2000; defying the image he cultivated of not being interested in money, he had stunned Woolard by asking for even more options than the board had proposed. But soon after he got them, it turned out that it was for naught. Apple stock cratered in September 2000-due to disappointing sales of the Cube plus the bursting of the Internet bubble-which made the options worthless.
Making matters worse was a June 2001 cover story in Fortune about overcompensated CEOs, "The Great CEO Pay Heist." A mug of Jobs, smiling smugly, filled the cover. Even though his options were underwater at the time, the technical method of valuing them when granted (known as a Black-Scholes valuation) set their worth at $872 million. Fortune proclaimed it "by far" the largest compensation package ever granted a CEO. I t was the worst of all worlds: Jobs had almost no money that he could put in his pocket for his four years of hard and successful turnaround work at Apple, yet he had become the poster child of greedy CEOs, making him look hypocritical and undermining his self-image. He wrote a scathing letter to the editor, declaring that his options actually "are worth zero" and offering to sell them to Fortune for half of the supposed $872 million the magazine had reported.
In the meantime Jobs wanted the board to give him another big grant of options, since his old ones seemed worthless. He insisted, both to the board and probably to himself, that it was more about getting proper recognition than getting rich. "I t wasn"t so much about the money," he later said in a deposition in an SEC lawsuit over the options. "Everybody likes to be recognized by his peers... . I felt that the board wasn"t really doing the same with me." He felt that the board should have come to him offering a new grant, without his having to suggest it. "I thought I was doing a pretty good job. I t would have made me feel better at the time."
His handpicked board in fact doted on him. So they decided to give him another huge grant in August 2001, when the stock price was just under $18. The problem was that he worried about his image, especially after the Fortune article. He did not want to accept the new grant unless the board canceled his old options at the same time. But to do so would have adverse accounting implications, because it would be effectively repricing the old options. That would require taking a charge against current earnings. The only way to avoid this "variable accounting" problem was to cancel his old options at least six months after his new options were granted. In addition, Jobs started haggling with the board over how quickly the new options would vest.
I t was not until mid-December 2001 that Jobs finally agreed to take the new options and, braving the optics, wait six months before his old ones were canceled. But by then the stock price (adjusting for a split) had gone up $3, to about $21. I f the strike price of the new options was set at that new level, each would have thus been $3 less valuable. So Apple"s legal counsel, Nancy Heinen, looked over the recent stock prices and helped to choose an October date, when the stock was $18.30. She also approved a set of minutes that purported to show that the board had approved the grant on that date. The backdating was potentially worth $20 million to Jobs.
Once again Jobs would end up suffering bad publicity without making a penny. Apple"s stock price kept dropping, and by March 2003 even the new options were so low that Jobs traded in all of them for an outright grant of $75 million worth of shares, which amounted to about $8.3 million for each year he had worked since coming back in 1997 through the end of the vesting in 2006.
None of this would have mattered much if the Wall Street Journal had not run a powerful series in 2006 about backdated stock options. Apple wasn"t mentioned, but its board appointed a committee of three members-Al Gore, Eric Schmidt of Google, and Jerry York, formerly of IBM and Chrysler-to investigate its own practices. "We decided at the outset that if Steve was at fault we would let the chips fall where they may," Gore recalled. The committee uncovered some irregularities with Jobs"s grants and those of other top officers, and it immediately turned the findingsover to the SEC. Jobs was aware of the backdating, the report said, but he ended up not benefiting financially. (A board committee at Disney also found that similar backdating had occurred at Pixar when Jobs was in charge.) The laws governing such backdating practices were murky, especially since no one at Apple ended up benefiting from the dubiously dated grants. The SEC took eight months to do its own investigation, and in April 2007 it announced that it would not bring action against Apple "based in part on its swift, extensive, and extraordinary cooperation in the Commission"s investigation [and its] prompt self-reporting." Although the SEC found that Jobs had been aware of the backdating, it cleared him of any misconduct because he "was unaware of the accounting implications."
The SEC did file complaints against Apple"s former chief financial officer Fred Anderson, who was on the board, and general counsel Nancy Heinen. Anderson, a retired Air Force captain with a square jaw and deep integrity, had been a wise and calming influence at Apple, where he was known for his ability to control Jobs"s tantrums. He was cited by the SEC only for "negligence" regarding the paperwork for one set of the grants (not the ones that went to Jobs), and the SEC allowed him to continue to serve on corporate boards. Nevertheless he ended up resigning from the Apple board.
Anderson thought he had been made a scapegoat. When he settled with the SEC, his lawyer issued a statement that cast some of the blame on Jobs. I t said that Anderson had "cautioned Mr. Jobs that the executive team grant would have to be priced on the date of the actual board agreement or there could be an accounting charge," and that Jobs replied "that the board had given its prior approval."
Heinen, who initially fought the charges against her, ended up settling and paying a $2.2 million fine, without admitting or denying any wrongdoing. Likewise the company itself settled a shareholders" lawsuit by agreeing to pay $14 million in damages.
"Rarely have so many avoidable problems been created by one man"s obsession with his own image," Joe Nocera wrote in the New York Times. "Then again, this is Steve Jobs we"re talking about." Contemptuous of rules and regulations, he created a climate that made it hard for someone like Heinen to buck his wishes. At times, great creativity occurred. But people around him could pay a price. On compensation issues in particular, the difficulty of defying his whims drove some good people to make some bad mistakes.
The compensation issue in some ways echoed Jobs"s parking quirk. He refused such trappings as having a "Reserved for CEO" spot, but he a.s.sumed for himself the right to park in the handicapped s.p.a.ces. He wanted to be seen (both by himself and by others) as someone willing to work for $1 a year, but he also wanted to have huge stock grants bestowed upon him. Jangling inside him were the contradictions of a counterculture rebel turned business entrepreneur, someone who wanted to believe that he had turned on and tuned in without having sold out and cashed in.
CHAPTER THIRTY-FIVE.
ROUND ONE.
Memento Mori.
Cancer.
Jobs would later speculate that his cancer was caused by the grueling year that he spent, starting in 1997, running both Apple and Pixar. As he drove back and forth, he had developed kidney stones and other ailments, and he would come home so exhausted that he could barely speak.