STEVE’S INSTINCTIVE PROBLEMS with authority—his inability to successfully manage large teams, his failure to adapt his strengths to the needs of his admittedly weak bosses—were wreaking havoc. The launch of the Apple III was a disaster. The computer didn’t ship until May 1980—a year later than planned—and sold for a base price of $4,340, more than double its target price. Within weeks, many buyers were returning their machines and demanding refunds, after an alarming number of Apple III’s started suffering catastrophic failures due to overheating. In some cases the motherboard got so hot that the solder softened and chips popped out of their sockets. All told, 14,000 had to be replaced. (The aluminum chassis worked fine for dissipating heat; the problem turned out to be that the parts had been nestled too closely to one another on the circuit board.) Moreover, backwards-compatibility had proved so thorny that very few programs were available out of the gate, so the computers that did happen to work weren’t particularly useful. The Apple III was an unmitigated commercial failure, selling only 120,000 units before it was discontinued in 1984. During that same time, the company sold nearly two million Apple II’s.

The pressure to get things right, which was amped up considerably now that the company’s stock was widely held, fell mainly on Scotty. But Jobs undercut his boss again and again. He humiliated suppliers that Scott had wooed; he complained endlessly and publicly about little things like the color of laboratory benches; and he repeatedly interfered with Scotty’s production schedules by insisting on the completion of inconsequential details. Steve’s own failures did nothing to chasten him. In fact, they only heightened his antipathy for Scotty, who was trying to balance the competing needs of thousands of employees. Steve didn’t accept the idea of compromise when it came to his own ideas, and so he turned every decision that didn’t go his way into a confrontation. The battles between the two became known within the company as the Scotty Wars.

Having such a difficult partner was just one of Scotty’s many frustrations, and finally it all became too much. Bit by bit, he disintegrated into an unreliable leader of a company that needed a firm hand. He started to develop some physical ailments, which seemed clearly related to stress. When he finally decided to repair some of the damage resulting from the bozo period by laying off some staff, he did so at a company-wide meeting in March 1981, at which he admitted to all present that he didn’t find running Apple to be all that much fun anymore.

Soon after that the board agreed that Scotty had to go. He departed after taking one last shot with a letter that attacked what he saw as a culture of hypocrites, yes-men, and “empire builders.” Of course, the divided culture was as much his fault as anyone else’s. But Steve knew that Scotty had borne the heaviest load as Apple morphed from a startup into a real operation. After his departure, Steve reportedly experienced a sudden bout of guilt; he was quoted as saying, “I was always afraid that I’d get a call to say that Scotty had committed suicide.”

ON A SEPTEMBER day in 1981, just a couple of months after Scotty’s departure, Bill Gates visited the Apple campus in Cupertino. The twenty-six-year-old CEO of Microsoft made the trip fairly often, since his company worked closely with Apple on programming languages for software developers. At the time, Steve was far richer and far more well-known. Gates, however, was the far more precocious and astute businessman.

After dropping out of Harvard, Gates had started Microsoft in 1975 in Albuquerque, New Mexico, with his prep school programming buddy, Paul Allen. Albuquerque was home to MITS, the maker of the Altair computer that had so excited the Homebrew hobbyists. Gates and Allen wrote a piece of software called an “interpreter” that made it possible for hobbyists to write their own programs for the Altair in the simple but popular BASIC programming language. MITS opted to bundle the program with each Altair it sold, and Micro-soft was in business.

The fortunate son of a prominent Seattle attorney and an accomplished, civic-minded mother, Gates came to business naturally. After he and Allen discovered that hobbyists were giving away pirated copies of their Altair BASIC interpreter, Gates wrote a kind of manifesto, asserting that developers of software for microcomputers should be paid for their programs. If that happened, Gates predicted, an entirely new kind of software industry would arise that would benefit software developers, microcomputer makers, and users alike. This would represent a huge change: at that point, software development was mostly in the hands of the makers of computer hardware, who buried the development costs in the final price of the devices they sold. The prospect of making money by building software, Gates believed, would spur innovation and help the new microcomputer manufacturers take better advantage of the breakneck pace of improvement in semiconductor technology promised by Moore’s law.

Gates’s manifesto was every bit as significant as Moore’s law in the explosion of personal computing. Software development requires very little capital investment, since it is basically intellectual capital, pure thoughtstuff, expressed in a set of detailed instructions written in a language that machines can understand. The main cost is in the labor required to design and test it. There is no need for expensive factories or for the invention of fabrication equipment and processes. It can be replicated endlessly for practically nothing. And the prospect of hundreds of thousands of potential customers, or even more, means that developers don’t have to charge enormous prices.

Gates was right. Accepting the fact that software was worth paying for led to the emergence of a dynamic new industry. One could argue that Gates’s greatest contribution to the world was not Microsoft, or the MS-DOS or Windows operating systems, or the Office productivity applications that hundreds of millions of people use. It was his role as the first champion of the concept that software itself had value. The mind that could envision all that was a mind suited for the organizational matrixes of the corporate world. In those early days, Microsoft never lacked for enlightened leadership, unlike Apple.

On that September morning in 1981, IBM shipped its first personal computer. Steve had always derided Big Blue as a lumbering monstrosity, and truly believed that no discerning buyer would ever prefer a microcomputer from IBM to one made by Apple. Gates, on the other hand, knew this might be the beginning of something big. His MS-DOS operating system software sat on every IBM PC that went out the door, and he had witnessed the speed with which IBM’s Don Estridge and Bill Lowe had steered their PC project around IBM’s hidebound bureaucracy. In fact, their rush to market had led them to acquiesce to a historic deal with Gates, allowing him the right in the future to license MS-DOS to other computer makers. It was a decision they would forever regret, since it ultimately tilted power from hardware manufacturers to Microsoft—thereby proving the validity of Gates’s manifesto and setting the stage for virtually the entire industry to adopt MS-DOS as a standard that would marginalize Apple, which did not license its operating system. But on that fall afternoon, no one Gates spoke to at Apple seemed aware that their world was about to change, much less acted worried. Years later, Gates remembered that “I kept walking around, asking, ‘Isn’t this a big deal?’ But no one seemed concerned.”