IF YOU CAN'T BEAT 'EM...

By MICHAEL KRANTZ

They'd been dueling for more than a decade, the binary wonders of the computer age: Steve Jobs, the flower-child dreamer whose Apple Computer brought the world the Mac's cheerful desktop icons, and Bill Gates, the brilliant and ruthless competitor whose Microsoft tamed the world with Windows after sneaking in behind those scary columns of DOS code. Their battle for control of the home computer suggested '60s barricades re-erected for the corporate '80s: Yin vs. Yang. Luke vs. Vader. Kennedy vs. Nixon. Jeans vs. Pinstripes. Art vs. Commerce.

And the winner is? We're so conditioned to Hollywood's underdog victories that it came as a shock last week for Commerce to whip Art, hands down and forevermore. The end came at the MacWorld Expo in Boston, with what will surely go down as one of our era's iconic images: Gates' tousle-haired grin looming from a giant video screen over the tiny figure of Apple "adviser" Jobs, who stood on the podium watching his strange bedfellow confirm Microsoft's decision to bail out the seminal Silicon Valley start-up.

The lesson? Art may cast a brighter light in the short term, but Commerce generally wins big in the final tally. The high-tech world had spent the past month wondering which Apple-preserving rabbit Jobs would pull from his hat during his MacWorld speech. Now we know: the plan is to backstab Apple's friends by embracing their mutual enemy in one naked grasp for survival. The era of "competition between Apple and Microsoft is over," Jobs told the stunned conclave, announcing Microsoft's $150 million investment and software promises. They could all just get along.

Then Gates' smug smile blossomed on that vast Orwellian screen (a Stalinesque edifice uncannily resembling the one that got shattered in the famous first Mac ad in 1984), and the Microsoft leader regaled the Apple masses with his boundless affection for the operating system (OS) whose commercial viability he had spent much of his adult life systematically undermining. "We think Apple makes a huge contribution to the computer industry," Gates assured the room, respectfully observing the taboo against speaking ill of the dead--or, ahem, the gravely ailing. Let's put it this way: you sure didn't hear the man extolling the wonders of Apple a few years ago, when the Mac still had market relevance. Gates celebrating Apple today is like the Department of the Interior celebrating the spotted owl by fencing in its nesting grounds and trying not to let the last ones die.

The faithful's reaction to the Gates-Jobs duet was pretty much what anyone conversant with the Apple cult would have expected. "Mass suicide planned tonight in Silicon Valley," read a typical posting to the newsgroup alt.destroy.microsoft. And the MacWorld crowd booed Gates' image even more than Jobs' turncoat words. But there were cheers too. "Everybody was booing Microsoft," says attendee Mark Lilback, 24, "and then they were like, 'Oh, Bill Gates is listening to this,' and they started to applaud." Who could blame them? They knew the truth: they were a conquered kingdom's starving partisans. Booing Gates meant biting the only hand left with the wherewithal to feed them.

Wall Street, by contrast, showed little concern over Apple's dire predicament, bumping the company's stock up by more than half in the days following Jobs' canny capitulation. What change in Apple's circumstances justified this startling re-evaluation? Besides buying stock, Microsoft propped up the tottering Macintosh platform by pledging three years' worth of Mac versions of its office software and cooperation with Apple on upcoming products. Apple's richest boon, though, may be psychological; by promising to publish Mac software into the next century, Microsoft lets Mac customers and developers alike trust the platform to exist that long. And Apple cultists don't need much encouragement to stay psyched. "Macintosh customers have proved to be incredibly stubborn," says Roger McNamee, co-founder of the high-tech investment firm Interval Partners, "and where there are stubborn customers, there is hope." Sales of the recently released Mac OS 8, for instance, the first major Mac update in a decade, have been four times Apple's expectations. And the company can still point to considerable leads in the education and graphics arenas.

But the wide-angle view is grim. A decade of bungled opportunities and misguided investments has left Apple in an intractable negative spiral: lower market share means fewer developers, which means less software, which means fewer customers, which means still lower market share. Not pretty. Even the belated decision to license the Mac OS to clonemakers only drained Apple of hardware revenue.

What now? Microsoft's bear hug buys Apple a few months' breathing room, and replacing most of the company's reviled board of directors with bold-faced techies like Oracle's Larry Ellison and Intuit's Bill Campbell was a necessary--and possibly helpful--housecleaning. Now Jobs must recruit some dynamic marketing-minded luminary as CEO to get the company moving forward.

Regaining traction will require what Jobs last week called "a new paradigm." Just what this might consist of, though, is unclear. Build low-cost network computers? Split up into hardware and software siblings? Or just rely on next year's expected release of the post-Mac operating system, Rhapsody, based on Jobs' NeXT technology, which Apple shelled out $424 million for last winter? True believers call Rhapsody the greatest OS ever and Apple's savior (Tim Berners-Lee did invent the Web on it); skeptics call NeXT a marketplace failure and an albatross Apple should have left around Steve Jobs' neck. Regardless, it's hard--very, very hard--to see any OS other than Windows--probably the powerful NT version--flourishing under digital networks' natural tendency toward monopoly.

That last word, of course, still obsesses the Justice Department's antitrust warriors, whose raison d'etre lies in putting asunder that which the free market hath joined. Industry wags swiftly dubbed Microsoft's Apple alliance "antitrust insurance," and with good reason: spending millions to ensure his rival's very survival should stymie the feds' urge to halt Gates' long march toward market dominance.

But that's just the most obvious illustration of Gates' unequaled strategic genius. His $150 million has also won him several subtler victories. Saving the Mac maintains his $300 million share of the 20 million-strong Mac-user base while increasing Apple's reliance on Microsoft software to keep the public hooked on its computers. The deal, says Mike Homer, a Netscape executive vice president, "puts the whole application base in Microsoft's hands. And if they control that, they control the Macintosh."

And there's plenty about Macintosh that's worth controlling. Gates' richest prize may be Apple's intellectual property, both silicon-and carbon-based. The graphic designers, software gurus and other artsy types who constitute the Mac's most fervent cadres are a disproportionately influential market niche. Some two-thirds of all Websites are thought to have been created on Macs. "It's very attractive to Microsoft to have access to cutting-edge Mac developers," says Kurt King, an analyst with San Francisco-based Montgomery Securities, "particularly in areas like video streaming and other graphics technologies that represent the likely future of Internet content." Ditto Apple's technology patents, which under the new cross-licensing agreement will go from causing endless litigation (the Mac faithful will surely consider Microsoft's undisclosed payment to Apple to settle infringement claims de facto proof that Gates knows he stole their OS) to becoming weapons for Microsoft coders to wield when the time comes.

And the time is now; the turf is the Web; and the enemy is Netscape, whose browser market share still dwarfs Microsoft's. The Apple deal makes Microsoft's Internet Explorer the default browser for all future Macs, yet another coup for Gates, who is painfully aware what a threat the Web poses to the OS standards whose implacable rigidity led to Microsoft's rise in the first place. Gates spent the Web's first two years pretending it didn't matter and the next two frantically refocusing his company on the Net and snapping up anything that might further that goal (see chart).

The direst threat to Windows hegemony may be Java, the Web-minded programming language created at Sun Microsystems in the early '90s. Java's great strength is its "portability"; in a Java-centric future, developers could write programs not for one OS at a time but for the Java Virtual Machine, the software that could run numerous next-wave computers: PCs, smart cell phones, personal digital assistants, stripped-down network computers and so on. "What should Apple do next?" asks Sun CEO and Java evangelist Scott McNealy. "Put 100% energy behind Java. Innovate, compete and add value. That's so obvious to me that I can't pretend there's another strategy."

McNealy will need all the allies he can get. Last week's deal, which commits Apple to developing a Java platform with Microsoft (Apple is also free to partner elsewhere), was an attack on the Sun/Netscape/Apple alliance that would use Java to fight Microsoft for control of the Web. Gates wants a proprietary Java platform optimized for Windows. This deal moves him closer to that goal while nudging his rivals further from their own. "Netscape could have shored up the Macintosh situation," says Dave Winer, an early Mac developer. "Same with Sun. They could have given Apple $150 million. They just weren't playing strategically. Microsoft was."

Microsoft always is, and that's why Microsoft almost always wins. Whether Jobs can flourish by bargaining with the master is very much open to question. Can Apple survive? Sure, and the spotted owl will probably hang in there too. The Mac remains the most usable, intuitive operating system around (this writer still loyally totes his ultra-light Powerbook Duo on any trip that's going to strand him overnight within crouching distance of a phone jack), and it will never disappear entirely. As long as there are wild-eyed digital artists and idealistic undergrads whose Macs mean to them what Abbey Road did to their parents, there will be a place--albeit a small one--for the company from Cupertino, Calif. Still, it must be a comedown for Jobs and his old pals to slip from visionary champions to fringy cultists in a mere decade. Oh, well. As shooting stars from Madonna to Newt Gingrich could tell you, that's the coolest thing about being a cultural icon: by the time the market goes south on you, you've already changed the world.

--With reporting by Daniel Eisenberg/New York and Janice Maloney/San Francisco

With reporting by DANIEL EISENBERG/NEW YORK AND JANICE MALONEY/SAN FRANCISCO