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In 1994, Apple began offering licenses to produce Macintosh cloned computers. The move came nearly 10 years late. Windows already had 80% market share then, leaving Apple with just about 7%. Apple had hoped to sign a big company. Instead they got a small startup called Power Computing. But as power quickly exploded from $0 to $130 million to nearly $400 million annual revenue, Apple started to get second thoughts. In today's video, the explosive rise and collapse of the Mac clone King. Steve Khan, nicknamed King Kang, was born in Seoul six months before the outbreak of the Korean War. Born to an educated and well to do family, Kang studied hard. He then moved to the United States to do a master's at the University of Michigan. He's described as moon faced and of few words. A guy who gets straight to the point and just does things. After graduating, he joined IBM in Silicon Valley to work on their mainframes. And that time gave him the expertise needed to produce IBM PC clones. In 1985, Kang spent four months designing a PC compatible microcomputer for the Korean chaebol Daewoo. Daewoo then brought on the American company Leading Edge to market and distribute what would eventually be called the Model D. Despite its risque name, the Leading Edge Model D was cheap and pretty good. Sold as a complete system with keyboard, graphics card, hard disk drive, monitor and two floppy drives, all for just $1,495. One of the first Korean made PC clones on the market, it sold over 100,000 units in its first year and became quite popular with residential households in the United States. Its success came as a surprise to Kang, who did the work for a lump sum of $200,000. Sales royalties, if collected, would have amounted to an estimated $50 million. Regretful, the Kahn got wealthy anyway, consulting with other PC clone makers earning up to $3 million a year. Now, let's talk Apple. For a long time, Apple managers have clashed over whether or not to license the Macintosh OS. Back in 1984, when first developed, everyone agreed that the OS was beautiful and miles ahead of its peers. But when the computer failed to take share from the IBM PC, several argued that Apple should license that OS out. Famously, Microsoft CEO Bill Gates wrote a secret June 1985 memo on this it urged Apple to license the Mac OS to several Mac compatible makers. Suggestions included Hewlett Packard ATT and Wong Labs. Gates even offered to play middleman. But then CEO John Scully opposed licensing the Macintosh OS back then, believing that would erode profit margins and eventually destroy the company. In his oral history for the Computer History museum. He the reason I refused to do it was that we had run models and it always came out with the same result, that unless we could get to about 25% market share, and unless we were able to price our operating system at a higher price than Windows and and unless we laid off what could be between 70 to 80% of our workforce, there was no way we could make money with the license model. For the reason that Bill Gates, in his brilliance of pricing, had purposefully kept the license fees for windows at about $11 a copy to OEMs. And he made all of his profits back on Microsoft Office. Not an unfair statement to make. And in the second half of the 1980s, Apple's integrated strategy, high end workstations, and strong position in schools and desktop publishing made it one of the most profitable computer companies. By the 1990s, however, things had changed. In 1990, Windows released a famous Windows 3.1 shell on top of DOS. It grew great inspiration from the Macintosh OS, attracting a lot of defectors from Apple. And then PC clone competition intensified with Dell, Compaq, Gateway, 2000, HP and IBM all putting out new products and software packages, not to mention the manufacturers in Japan, South Korea and Taiwan. Apple, as the sole provider of Macs, struggled to keep up with all this. After a major PC price war in 1992, Apple's market share fell to just 7 to 8%, as compared to the 85% held by the IBM PC ecosystem. Apple's gross margins, once as high as 51% in 1990, declined to just 25.5%. After the company turned a record quarterly loss in 1993, the board forced out Sculley and replaced him with COO Michael Spindler. Spindler had before shot down various licensing offers, but now changed his mind. Yes, the ideal time had long since passed. But Apple needed the revenue they had to lift its flagging market share. And a new Microsoft OS called Windows 95 loomed. So at the shareholders meeting in January 1994, Spindler announced Apple was actively exploring licensing options. But the program launch took time because Apple wanted to sign a big partner, like Motorola, Compaq, or IBM. Meanwhile, back in 1993, Steve Kang was 44 years old, doing consulting work and looking for his next big opportunity. In September of that year, his friend Karl Amdahl, son of the legendary Gene Amdahl of Amdahl Corporation and Amdahl's law, took him out to lunch in Cupertino. To this lunch, Amdahl had brought along El Cireno Piol, the vice chairman of the famed Italian computer company Olivetti. Olivetti wanted to fund a startup to make PCs running PowerPC, the chip architecture produced by Apple, Motorola and IBM. And they wanted Kang to run it. Kang agreed, saying that he always wanted to run a systems company and put up $4 million of his own money, along with Olivetti's $5 million to found power Computing. The key thing was the operating system. The only major OS that ran on the PowerPC architecture was the Macintosh OS. That means getting to and convincing Apple to grant them a license. In February 1994, Piole helped connect Kangaroo to Michael Spindler. Yet, like as I mentioned earlier, Spindler and Apple wanted a big name to headline their licensing program. So they had little interest in having their first big Macintosh OS licensing partner be this random, unknown company, which was then so small that Kong had to bring along people from Olivetti. So to look more legit. The Kang was serious. As he negotiated with Apple, he hired away several of their top hardware engineers, particularly those who helped produce Apple's Power Macintosh computers, like Gary Davidian, John Fitch, Bob Hollier, and Carl Hewitt. Davidian recalls liking the work. The office was nearby and they were doing things they had done before. Power Computing had the team started on a Macintosh clone prototype to show their seriousness and ability. The prototype was done by October 1994, and they supposedly got to exhibit it at the famed Las Vegas Comdex show the following month. It looked like a PC, but ran Macintosh OS to fit the Macintosh circuit board inside the PC sized chassis. The engineering team cleverly cut it in half. Apple had promised a partner announcement by the end of the year, but those big partners were iffy because demand seemed so low. So by December 1994, power computing was the only candidate with an actual product on hand. So, somewhat reluctantly, Apple granted them the first license. Power moved fast, knowing that other companies were also receiving Macintosh licenses. Radius, a company led by a former Apple executive, Steve Berger, the Pioneer Electronic, and Daystar Digital got licenses soon after Power did, and Apple said that they hoped to have a dozen licensees by the end of 1995. Power's core business strategy was to run the Dell Playbook, but for the Macintosh ecosystem. They would aggressively sell to customers via mail order, cutting out middlemen like dealers and distributors. Selling mail order would also let them build computers to order. Power, like Kang himself, was famously cheap. Rather than renting factory space, they borrowed a corner at a declining PC clone company called compuadd and started churning out computers there. The race was on Kang told the SF Chronicle in April 1995, I have to be a billion dollar company shipping a million units a year. If you look at the PC business, none of the small guys survive. You grow or you're out of business. There's nothing in between. After working seven day weeks, Power Computing's small 15 person team quickly brought its first product line to market in just four months. Reviewers found the power 80, 100 and 110 to be almost identical to Apple's own Macintoshes. They ran just as fast, had the same ports and slots, and were compatible with Mac software. The biggest difference was price. Power's computers were 20% cheaper than Apple's. In addition to selling direct, Power Computing saved more costs by using standard wind tilt components for the power supply, monitor and chassis, including shrinking the Macintosh motherboard this time to fit inside a PC box. There were also a few subtle improvements. The first Power desktops can hold slightly more RAM 200 MB compared to the 7100's max 136 MB, and they offered a CD ROM that ran at about 4x speed, slightly faster than Apple's 2x offering. Ah, maybe a less welcome addition was a bunch of preloaded software said to be worth 800 or $1200. Based on my own personal experiences with such arrangements, I'd say that bundle was worth a zip. Power got off to a hot start. By the end of 1995, they had sold about 50,000 units, half of what Kong hoped, but twice as much as analysts expected. For each unit sold, power paid Apple $50. From the very start, Apple was concerned that the Mac clones they didn't like calling it that, but that was what it was would steal revenue from them. In May 1996, Power Computing hit 100,000 total units sold. They had sold more units in their first year than Compaq, Gateway 2000 and Dell did. In their first years combined, the company had grown to 500 employees. Large Power had net sales of $131 million from June 1995 to June 1996. By 1996's end, the company was producing $100 million per quarter. Now Apple was starting to wonder whether they had made a mistake with the licensing program. Kang had to walk a fine line. After all, Power Computing relied on its license. So Kang insisted to the press that his company competed against high end Pentium powered PCs, not Apple. Yes, a little cannibalization will inevitably happen. Kang himself related that half of Power's customers would have bought from Apple, but the other half wouldn't so Power was expanding the ecosystem. Jeff Burr, Power's VP of sales and marketing, said, there's no question Apple is losing sales to us, but we're also expanding the Mac market. Burr might have had a point it Power's customers bought products at the low end of the market, between $1,500 and $2,000. The perfect example of the license program working the way it should was the Taiwan based business Umax Technologies, a former printer and scanner company. They sold a popular line of Mac clones called the SuperMac mostly to Europe and East Asia for under $1,000. Apple would never do that. But as former Apple CEO Gil Amelio related in his corporate memoirs, Power Computing quickly honed in on Apple's bread and butter high end customers. To attract them, Power offered extra services and integrated faster PowerPC microprocessors faster than Apple itself could. For instance, in April 1996, Power launched new Power Tower Pros with PowerPC chips running at speeds of 166 and 180 MHz. Apple, to compare, topped out at 150. The Power Tower sold for a very high $4,000 to $6,300. Amelio recalled Power Computing sales reps crawling all over Apple's traditional customers. Apple's own salespeople, already losing clients to IBM PC clones, were now losing them to Mac clones, too. In July 1996, Lockheed Martin astronautics, a big Apple corporate client, announced that it would buy 3,000 power computing Mac clones instead of Apple's own computers. A spokesman for Lockheed we felt that the proposal from Power Computing provided more service and hardware for the same cost as Apple. Power Computing won the six million dollar deal in part because the they agreed to load in certain special software extras that Apple wouldn't. Kang told the press that had Power not won the deal, Lockheed would have gone to Windows. In 1997, Kang hired Joel Kohr, Dell's former president, to be his number two and do the same thing for Macs that dell did for PCs. At the same time, they had started to Prepare for an IPO, forecasting revenues of $700 million, the company was also preparing to eliminate their single biggest risk by working on computers running Windows and beos, the OS made by former Apple executive Jean Louis Gassier. But as Power Computing's star rose, it became increasingly clear to Amelio and Apple that they were indeed losing profit on clone sales despite the $50 per unit license fee. In fact, CFO Fred Anderson estimated that the fee had to be 10 times higher just to be profit neutral for Apple. Amelio decided to use the forthcoming Release of Macintosh OS 8 as a chance to renegotiate the licensing deals. And indeed, they got Power and Motorola, the second largest cloner, to quadruple their fees. But then, in July 1997, Amelio was removed in a corporate couple and Steve Jobs returned. Whereas Amelio was ready to allow the program to continue, jobs wouldn't license macOS at any price. In a late July 1997 meeting, he bluntly told Power Computing that their license would be terminated. At Macworld the following month, the tensions were clear. Power ran adverts and messaging saying that they were counterattacking the Wintel PCs and fighting to put the macOS on top, seeking to prove their worth. While Power's license agreement would not expire until 2001, Apple still owned the technology. It was Nothing like the IBM PC situation when IBM owned neither the chip nor the OS. So in September 1997, Power sold the assets of their Macintosh division to Apple for $100 million in stock. There had been rumors that Jobs considered buying the whole company outright, but those were never confirmed. This decision had been controversial. Piohl, the former vice chairman of Olivetti, later recalled that the $100 million was diplomatic on Jobs part, saving both sides from a long legal battle. I reckon the Olivetti side advocated for the settlement, but the aforementioned corps wanted to go to court and resign prior to the announcement. He later told the press that Apple's closing down of the Macintosh platform would turn it into a Galapagos island of uncompetitive products, not an unpopular view at the time. After selling the Macintosh assets, Power tried to pivot by producing Wintel PC clones, but they had grown too fast. Within two years, it had gone from 15 to 500 people and beyond, and. And that caused mistakes. Core had been brought in to fix these operations issues, but he then added his own people into the mix. And that caused a bit of an internal clash. The biggest problem was that Power had bought some 30 to 50 million dollars of inventory in expectation of massive growth. And following the classic Dell model, they delayed in paying their suppliers, intending to pay them after the products were sold. But now the computers were not going to be sold, and a crash effort to make a Wintel laptop with them failed. In January 1998, power abruptly shut down and sold its assets at auction. Former workers attended, hoping to buy a cheap laptop for themselves. From $400 million of revenue in 1996 to gone. The loss of a fast growing computer assembler like Power hit the local economy hard, particularly the town of Georgetown which gave power computing a 40 acre lot worth $2.2 million and a 15 year tax break to build their next computer factory there. That all went poof after Power Computing was taken out. IBM, Motorola and all the others closed their Mac cloning programs too. The sole survivor was the aforementioned Taiwanese maker umax. They agreed to Apple's conditions that they avoid to United States and sell at a price point under $1,000. Even so, they were granted just a one year extension to their license. That license expired in mid-1998 and all inventory was sold and they returned to making scanners. In case you are wondering, $100 million of Apple stock in 1997 would be worth about $200 billion today. Kang himself was reported by the Korea Herald to have personally received the 3% stake in Apple. After Power Computing, Kang went into venture capital and philanthropy through a family foundation. From IBM PC pioneer to Mac clone kingpin to an Apple buyout, the Mac clone era was a heck of a three year ride. Alright everyone, that's it for tonight. Thanks for watching. Subscribe to the channel, sign up for the Patreon and I'll see you guys next time.