STEVE JOBS' NEXT BIG GAMBLE The legendary entrepreneur aims to survive by turning a hardware maker into a major player in software.
By Alan Deutschman REPORTER ASSOCIATE Alicia Hills Moore

(FORTUNE Magazine) – SOMETIMES it's hard to tell whether Steve Jobs is a snake-oil salesman or a bona fide visionary, a promoter who got lucky or the epitome of the intrepid entrepreneur. What's indisputable is that he possesses consummate charm, infectious enthusiasm, and an overdose of charisma. Jobs is so mesmerizing, in fact, that under his spell you might even believe that his struggling company, Next Computer Inc. of Redwood City, California, is poised to become a powerhouse in the Nineties. You'd forget, at least momentarily, that he has sold only 50,000 of his beautiful black boxes, or that Next accounts for under 2% of the $9-billion-a-year workstation market, way behind the likes of Sun Microsystems, Hewlett-Packard, and IBM. You'd even believe that Japan's Canon, an equity investor and strategic partner that extended a $55 million line of credit last year, is perfectly happy with the company's progress. In reality, these are daunting, dangerous days for Next. Jobs' dream of building another great computer manufacturer like Apple, which he co-founded, is dead, dead, dead. Obsessed for years with hardware, Jobs, 37, now recognizes that Next's ''crown jewel'' is not its sleek computer but the operating-system software it comes with, NextStep, which incorporates a hot technology. It's called object-oriented programming, and it lets programmers write software in a fraction of the usual time. So now Jobs is making a bold and desperate move to save Next by transforming it into a publisher of software that runs on other companies' computers. Having gone up against Sun Microsystems with his workstations and barely scored, this time he's taking on mighty Microsoft, where folks seem bemused by his bravado. Still, Jobs is a survivor. ''It's always taken me twice to get it right,'' he says. ''You never heard of the Apple I'' -- but the Apple II, of course, opened the microcomputer era. Jobs' Lisa personal computer flopped -- but its successor, the Macintosh, was a triumph. JOBS' handpicked colleague, John Sculley, pushed him out of Apple. Another smooth, shrewd, take-charge outsider is helping Jobs run Next. Last year Jobs recruited an Englishman, Peter van Cuylenburg, 44, as his No. 2. Van Cuylenburg spent 16 years with Texas Instruments and then became CEO of Mercury Communications, a sort of British MCI. During his two-year tenure there, revenues shot from $400 million to $2 billion. Could he be John Sculley reincarnate? Both Jobs and van Cuylenburg deny rumors that they have clashed, saying in separate interviews that they see ''eye to eye.'' One expert Next-watcher says it sometimes seems as if van Cuylenburg is really working for Canon, not Jobs -- that he's ''Canon's man.'' There's even a rumor that Canon insisted that van Cuylenburg's contract bar Jobs from firing him. Not so, says van Cuylenburg, although he does claim that he can be removed only by a vote of the board -- which consists of himself, Jobs, and a Canon representative. In mid-January, Jobs and van Cuylenburg hastily rejiggered their schedules, usually planned well in advance, to fly to Tokyo and meet with Canon. A Next spokesperson said the trip concerned a major redefinition of the company's business. She confirmed that it involved the shift from making hardware to making software, but said details couldn't be announced until February. Jobs, however, assured FORTUNE it was a routine visit to discuss fourth-quarter results. Who's right, guys? One clear sign of turmoil at Next: The company's management has been decimated. In the past few months virtually all of Next's vice presidents have quit. Marketing VP Mike Slade went to work for Asymetrix, a software outfit run by Microsoft co-founder Paul Allen. Sales VP Todd Rulon-Miller moved to Software Alliance in Berkeley. Co-founder Bud Tribble, a software expert, and Jeff Spirer, a key marketing manager, defected to Sun. Rich Page, another co- founder, general manager of the hardware division, left in January with no announced plans. Van Cuylenburg seizes on the defections to suggest that he's been a tough guy: ''I've put pressure on the company, and not everyone was willing or able to accept it.'' Next had too many vice presidents when he arrived, he says, so he and Jobs decided to eliminate some. Jobs admits to regretting a few of the departures, among them Page's. ''Seven years is a long time, and Rich is just tired,'' Jobs says. ''The first thing he's going to do is probably sit on a hilltop.'' Asked about his propensity for inspiring followers and then burning them out, he replies, ''History would say I'm not totally innocent of that. Building a company takes strength, but it also takes endurance. Peoples' lives change. The business changes, and sometimes the people you hired five years ago aren't the right ones to take it forward. It's nothing personal.'' With Page gone, the hardware division's fate is uncertain at best. For one thing, Next isn't likely to release NRW, its projected workstation using RISC technology, as Sun's Sparc machines do. That means Jobs and van Cuylenburg are clearly betting the company on selling NextStep software to run on other companies' boxes. ''Our primary mission is to establish NextStep as a leading operating system in the Nineties,'' says van Cuylenburg. Later this year, Next will release a version of NextStep for PCs equipped with Intel's 486 microprocessor and loaded with memory and capacious hard disks. (Next recommends a whopping 200 megabytes.) It will probably list for $1,000, with discounts of up to 50% for big orders. Next says it has 50,000 prospective orders -- some firmer than others -- for NextStep 486. The company has been talking with Hewlett-Packard, Sun, and others about licensing NextStep to run on their machines. But why should Sun, H-P, IBM, or DEC endorse Next's software if Next acrimoniously competes against them in hardware? Van Cuylenburg admits that the scenario makes sense only if Next's hardware business is small enough that the major players don't see it as a threat. Of course, it would make even more sense if Next abandoned hardware completely. Reports of impending licensing deals with H-P and others are bound to put a chill on Next's hardware sales. Potential customers will conclude that they may soon be able to run NextStep on workstations they already own, so why pay $5,000 and up for a Next machine? Next's dilemma: It still needs the hardware business. Until it releases NextStep 486 -- perhaps around July -- its software revenues will be essentially zilch. In any case, industry experts think it's hard to justify the expense of Next's highly automated but underutilized factory across the bay in Fremont. One scenario has Canon taking over the plant to assemble circuitboards for its own products. Jobs claims that ''the factory has all been paid off long ago'' and that its employees are working weekends. But then he confesses, ''We could do a few times more ((volume)) than we're doing now.'' By Jobs' account, ''Next is moving slowly but surely to being a software company that makes great 'reference hardware' '' -- that is, the machine that provides a benchmark of quality. ''It should be the BMW of NextStep hardware,'' he says. Jobs claims he would be happy if Next makes 25% of the computers that run NextStep. The NextStep program itself, he says, is in a three-way race for the object-oriented operating system of the Nineties against Microsoft's Cairo project and Taligent, a joint venture of Apple and IBM. Considering that object-oriented software has become the key to Next's future, it's ironic that Jobs committed the company to it almost by accident. When Next's first machine, the Cube, appeared in 1988, it was incompatible with existing computers -- so there was virtually no software to run on it. Jobs needed outside software developers to write programs for the Cube -- and fast. He found the basis for his operating system in Carnegie Mellon University software called Mach, which happened to use object-oriented programming (OOP for short). Jobs' goal wasn't to ease programmers' lives; he just wanted to get some programs written and shrink-wrapped pronto so he could sell his black boxes. NEXT'S ADVERTISING boasted about its hardware -- disk storage, chip technology -- but gave no compelling reason for businesses to buy a NextStation. Jobs finally called on CKS Partners, a San Francisco advertising agency founded by a bunch of his old Apple colleagues. CKS conducted focus groups of FORTUNE 500 managers in charge of information systems. Says partner Paul Pruneau: ''There was little perception in the marketplace about Next.'' But a number of hardcore information-systems geeks had discovered Next on their own and become real fanatics. They found that NextStep made it much easier and faster for companies' in-house programmers to customize software to handle important parts of their businesses. Rather than start from scratch, programmers using OOP can do much of the job by drawing on a library of prewritten software modules. O'Connor & Associates, a Chicago options and futures firm, claims its engineers can write a complex trading program in three months with NextStep -- vs. over two years on a Sun workstation. The outsiders told Next, ''You guys have one of the best products ever, but you don't even know it and you're not trying to sell it to us,'' Pruneau recalls. Jobs himself admits, ''Companies came to us and said, 'You're idiots, you just don't get it.' '' So Next took off after Sun, the No. 1 workstation maker. The company commissioned a study by management consultants Booz Allen & Hamilton that showed that corporate programmers worked two to nine times faster on Next machines, thanks to NextStep, than on Suns and others. When SunWorld magazine gave its highest rating not to a Sun machine but to the NextStation Turbo, a Next ad proclaimed: NEXT CASTS SHADOW OVER SUN.

Next's custom applications pitch has shown modest success so far but hasn't been the godsend Jobs needs. The company turned its first operating profit in the last quarter of 1992 but still lost money for the year. Sales rose 10% last year to $140 million -- vs. a 10% increase in workstation revenues at Sun, 13% at Hewlett-Packard, 21% at IBM, and 34% at Silicon Graphics, a mid- Eighties startup that proves newcomers can still make it big. As sales have plodded along, Next has been forced to turn to its Japanese partner for cash infusions. Canon originally invested $100 million in 1989 and added another $10 million to $20 million in 1991 before extending that $55 million credit line last July. It holds an 18% equity stake. Industry analysts say that the Japanese are increasingly scrutinizing their investment. The heat is on. How successful can Next be as a software company? Jobs is at his most spellbinding when he attacks his formidable rivals. He doesn't think the Apple-IBM linkup will work: ''Apple has a thousand software engineers, who have realized that Taligent is their enemy.'' If Apple adopts Taligent's software, Jobs explains, they're out of a job. Instead, he argues, Apple will stick with its own System 8, under development in-house, leaving IBM as Taligent's primary advocate in the marketplace -- ''and IBM can't evangelize its way out of a paper bag.'' Jobs admits that Microsoft has ''market power'' and sees Cairo as his main competitor -- but proclaims, ''We'll beat them with better software.'' Few others in Silicon Valley dismiss Taligent so quickly. And the people at Microsoft don't seem afraid of Jobs. Says Nathan Myhrvold, Microsoft's director of research and advanced technology: ''A number of hardware companies have found software appealing because the headaches do not appear to be as severe. Well, the system software business is very tough as well.'' Jobs will continue to relax by rollerblading through Palo Alto, where he lives with his wife, Laurene, and their son, Reed, 1 1/2. He says he spends 20 hours of his 80-hour workweek at home, using the phones and Next's E-mail network. Through a window, passersby can see Jobs clearly, seated at his NextStation. Neighbors like to jog by the house and try to gauge Next's prospects by Jobs' facial expression. In the coming months, there's likely to be more traffic than usual.