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Apple learns to live with Microsoft

Since Apple first took the forbidden fruit from Microsoft's helping hand, the companies have developed an intimate--albeit controversial--relationship.

Since Apple Computer (AAPL) first took the forbidden fruit from Microsoft's (MSFT) helping hand, the two companies have developed an intimate--albeit controversial--relationship.

From an office in San Jose, California, dubbed "MS-Bay," the two companies that were once bitter rivals meet weekly to collaborate on Microsoft's development of Macintosh products. Apple interim CEO Steve Jobs has called Microsoft's $150 million investment in the company he founded, announced seven months ago, a key element in the expansion of the Mac platform. The collaboration still is being scrutinized by regulators, however, and Apple loyalists continue to battle mixed emotions about it.

In the latest example of teamwork, Microsoft unveiled an updated Java development tool today and disclosed plans for unifying Java applications on Windows and Macintosh systems. The software giant announced that it is working with Apple to create a Java Virtual Machine for the Mac OS. News of the deal helped push up Apple's stock as much as 2 points in morning trading, before closing at 26-1/8, up about 9 percent from yesterday's close of 24-1/16. (See related story)

Last August's investment calls for the two companies to jointly develop and ship future versions of Microsoft Office, Internet Explorer, and development tools for the Macintosh. At the time, Microsoft also pledged to offer the Office business productivity software suite for the Mac platform for the next five years. Microsoft Office 98 Macintosh Edition, Internet Explorer 4.0 for Macintosh, and Mac OS 8.1 all debuted in January at Macworld Expo, and Office 98 is expected to roll out on March 23, Rick Holzli, Apple's manager of worldwide developer relations, said today.

Holzli is Apple's point man for the Microsoft deal, sitting in on at least one conference call a day with Microsoft developers and spending at least one day a week at "MS-Bay," which houses Apple's Mac development operations for the Internet. Between 60 and 80 developers work there, and Microsoft also has a team of more than 100 engineers in Redmond, Washington, dedicated to Office development for the Mac.

"My sole responsibility is to manage the Microsoft relationship. We call it 'partnership management,'" Holzli said, pointing out that his position has existed for about two years but "took a heightened role in August."

In an effort to smooth over any bad feelings toward Microsoft and to show Apple customers that the companies are indeed working cooperatively, the two have teamed up at recent trade shows. Microsoft executives have delivered keynote speeches at Macworld--including a satellite appearance by CEO Bill Gates--and the company has staffed Apple product-demo booths, and vice versa.

"We want to show our customers that the companies are working together," Holzli said. "This partnership is positive, and it is creating great solutions for the Mac."

On certain levels, however, the two companies are still competitors, he conceded.

Deanna Meyer, a product manager for Mac Office development at Microsoft since August, added that, from development to marketing, the companies "have become much tighter."

"The days of competing had to change, and there really has been a new era of cooperation," said Daniel Ries, an analyst at Nomura International Equity Research. "They have ventured into an area of cooperation, and if they can lean on Microsoft, then they will. They can look toward Microsoft for help, and it will help Apple's bottom line in a time of need."

Despite the companies' claims of cooperation, some are skeptical. Critics of the collaboration wonder whether the closer ties are for the best.

Apple loyalists have been torn over the company's growing relationship with Microsoft, and Mac fans have expressed concern over Microsoft's investment in the company. Many have said, however, that while they wish it wasn't necessary, the continued existence of Apple is a must, at whatever cost--even if it means accepting cash from the software giant.

Dwight Davis, a Microsoft analyst at Summit Strategies, is among those who have their doubts about the true cost of the relationship.

"You can have a nice-sounding partnership, but to the degree that Apple was going to proceed into NT's territory [with the competing Rhapsody operating system], I was not optimistic about that being a good strategy for Apple," said Davis. "I don't think that Microsoft has been cooperative in working with Apple on Rhapsody, so that leaves me wondering where they are open to working together."

He added that, aside from work on Java, the other obvious area of collaboration was development of Mac-compatible versions of Microsoft's Internet Explorer browser and its Office software suite.

Mac Office 98 will have features that the Windows equivalent will not have. Holzli expressed enthusiasm that the upgrade will be available for the Mac before it will be available for Windows, especially in light of the fact that Apple did not even have an Office 97 equivalent for the Mac.

Microsoft has pledged to offer the Office business productivity software suite for the Macintosh platform for the next five years. Up to this point, though, there has been no commitment made by Microsoft with regard to Rhapsody.

Shortly after Microsoft's $150 million investment in Apple was announced, the Justice Department confirmed that it was investigating the deal for potential anticompetitive effects. A DOJ official said that the investigation was continuing but declined to comment on today's announcement that the two companies are collaborating on a Java Virtual Machine for the Mac OS.

On a separate legal front, it remains unclear exactly how the collaboration may affect a lawsuit that Sun Microsystems brought against Microsoft last October. The suit accuses Microsoft of deliberately trying to splinter Java by creating a Windows implementation that is not compatible with versions that run on other platforms.