John Sculley: Rising to the challenge of ‘truly disruptive innovation’

While serving as CEO of PepsiCo, John Sculley was recruited by Steve Jobs to become CEO of Apple in 1983. After a disagreement with Jobs over business strategy in which the Apple board sided with Sculley, Jobs left the company and Sculley continued at the helm of Apple until 1993. Since then, Sculley has co-founded or invested in technology-focused companies in many industries, including media marketing, financial services and health care. Knowledge@Wharton recently spoke with Sculley about working with Steve Jobs and his views on the emerging fields of artificial intelligence, cloud computing, data analytics, health care innovation and the industrial internet.

An edited transcript of the conversation follows.

Knowledge@Wharton: What is the biggest misconception people have about Steve Jobs?

John Sculley: There is Steve Jobs 1.0 and there is Steve Jobs 2.0. Most people know Steve Jobs 2.0, who was probably the most successful CEO ever. He was brilliant and created products that achieved his long term personal goal — which is to put a dent in the universe.

When I met Steve Jobs 1.0, he was 26 years old, turning 27, and was just as brilliant, just as creative, just as visionary. But it was a different time. We were still in the early days of the implications of Moore’s Law. Computers couldn’t do a lot of the things that Steve envisioned.

Steve recruited me to Apple because he was fascinated by how Pepsi had gone from being outsold 10-to-1 in about 50% of the U.S. to, by the end of the Cola Wars, passing Coca-Cola, the largest consumer packaged goods company in America.

He asked, “How did you do it?” I said, “Steve, Coke owns reality.” They were the most valuable brand in the world at that time. We realized that we couldn’t compete on their ground rules. We [recognized that] perception leads reality.

We created what we called experience marketing, part of which was the Pepsi Challenge. We said to the customer, “Let your taste decide.” No one had done that before. It had always been producers talking about messages they wanted people to remember. We flipped that and said, “It’s up to you as the customer. You get to make that decision,”

“In hindsight it probably would have been better to make Steve [Jobs] the CEO, and I could have been the COO and chairman.”

Steve said, “You’ve got to come to Apple and teach me about experience marketing. I’m creating a product that is entirely different than anything anyone has ever seen before in the high-tech world.”

Silicon Valley back in the early 1980’s was mostly engineers trying to build increasingly powerful computers. It was all about memory and storage and processor power. Steve Jobs said, “It’s not about technology for the engineering and business professionals. I want to build a personal computer for non-technical people so that they can do amazing, creative things.” He called it a bicycle for the mind.

Most people still think of Steve Jobs as a technical wizard. He wasn’t an engineer. He was more interested in design and in building products that had no compromises. Steve had an insatiable curiosity about what might be possible with consumer marketing to help him achieve his vision of this bicycle for the mind for non-technical people to do amazing, creative things.

I joined Apple. We worked on perfecting some of the ideas we started at Pepsi in what is known today as experience marketing. Probably the first example is the now famous ‘1984’ Super Bowl commercial. People were just amazed by it. We only spent a million dollars on the media for it, but it got played over and over by the television networks. We calculated it was [equivalent to] about a $45 million spend.

Knowledge@Wharton: Steve Jobs 1.0 is famous for being brilliant, but also somewhat volatile. How did you manage that relationship? What advice do you have for others who may have employees that are brilliant, but difficult?

Sculley: I would advise the boards of entrepreneurial companies that the role of the founder is the most important decision a board can make — how do you treat a brilliant founder and reinforce him to be successful?

In hindsight, I didn’t appreciate the founder’s role. I had come out of East Coast corporate America. The Apple board could have played a role to say, “There’s got to be a way that Steve and John can work together.” I wasn’t hung up on titles. In hindsight it probably would have been better to make Steve the CEO, and I could have been the COO and chairman.

For three years, Steve Jobs and I were probably as close as any two people Steve had in his life at that time. It wasn’t that we didn’t like or respect each other.

“AI is the new OS.”

Steve became very depressed when, in 1985, he introduced the first laser printer with the Macintosh and called it the Macintosh Office. It was failing in the market and Steve said it was my fault because I wouldn’t let him lower the price of the Mac from $2495 to $1995. He wanted to lower the price and shift the marketing from the Apple II to the Macintosh Office. I said, “Steve, if we do that we run the risk of bankrupting Apple.”

When I first came in, the highest priority the board asked me to work on was to turn the Apple II sales around. The Apple III had failed before I got there. The Apple Lisa had failed. The Apple II was going to be the only source of positive cash flow for Apple for probably three years.

I was focused on turning around the Apple II, which succeeded. Steve was focused on creating the Macintosh. When the Macintosh got introduced into the market, the Apple II was still the only source of cash flow. If we had cut the advertising back on Apple II and lowered the price of Mac, it would have had dire consequences for the company.

That was the issue that Steve and I brought to the board. The board studied it for about a week, talked to all of the executives in the company, and came back and said “We agree with John. We don’t agree with Steve.”

That was the basis of the break up between Steve Jobs and me. Looking back, if I had understood how important a founder’s role is on things like vision, and the brilliance which Steve had from a product standpoint, we probably could have figured out … roles for both Steve and me that would have worked. But you can’t look back and change the past.

Knowledge@Wharton: What is your view of Apple now? What advice would you give to Tim Cook?

Sculley: I think Apple is being brilliantly run by Tim Cook. They’ve increased their market cap by $246 billion in a year, they’re still the most valuable company in the world, and they still have the most admired products in the world. You have to give Tim a great deal of credit.

The challenges going forward are that so much of the innovation on new things — like artificial intelligence and driverless cars — is happening in other companies.

The question is, how does Apple want to handle that situation? Maybe Apple says that they are so successful in what they are doing and there is so much growth ahead, they can stay the course. Or maybe they’ll choose to take some of that huge cash they have on the balance sheet and start to look at other things. I don’t know what their choices will be, but I’m very complimentary to what Tim Cook has accomplished.

Knowledge@Wharton: You’ve talked in the past about “moonshot projects.” With all of Apple’s cash, might that be the kind of initiative they should be investing in?

Sculley: I have no idea. I haven’t been at Apple for two decades, so I don’t have any insight as to what Apple might be considering. What I do know is that this is probably the most interesting time to be doing truly disruptive innovation, moonshot-type projects.

When I was in Silicon Valley there was one exponential growth technology: Moore’s Law. About every 18 to 24 months the number of transistors you could put on a given area on a silicon wafer would double. That has gone on consistently now for decades, and we’re able to do things that were not even imaginable back in the 1980s.

Now we have exponential growth not only of Moore’s Law, but of storage, of cloud computing, of big data analytics, which has huge implications for new fields like artificial intelligence, precision medicine and driverless cars. There has never been a more interesting time to be in entrepreneurial capitalism than right now.

Knowledge@Wharton: Let’s talk about some of your other companies. About a decade ago you co-founded Zeta Global. The company’s website describes it as a company at “the intersection of people-based data, artificial intelligence, and omnichannel campaign management.” Can you clarify what that means?

Sculley: Think of it this way: Marketing [now] is dramatically different from the marketing I practiced when I was at Pepsi or even when I was at Apple. Today, we’re able to do very personalized messages. Every message that goes to every potential customer can be crafted with the knowledge of a lot of the behavior of that individual, the interests of that individual, and the ability to watch how they react to different messages.

“AI is going to be a foundational technology of everything that will happen.”

That’s what Zeta Global does. Zeta Global is not in the creative side of marketing. I think we’re now the largest independent marketing cloud company in the world. We have about 1,400 employees, and we have acquired a number of companies. The most recent was an artificial intelligence company called Boomtrain.

We have a large number of the Fortune 500 companies working with us on a whole range of verticals. We do what’s called lifecycle marketing, where we identify customers that can be acquired, we manage the engagement, we do retention marketing, we manage loyalty programs, and we can monetize customers over a long period of the consumer life cycle.

Knowledge@Wharton: You’ve mentioned artificial intelligence a couple of times. It’s a term we hear a lot about these days, but it’s used to cover a broad range of applications — from human-level intelligence to merely clever computer algorithms. What are the practical business applications of artificial intelligence?

Sculley: I had my first introduction into Bayesian statistics when I was at Wharton. I worked at the Management Science Institute founded by professor Wroe Alderson and professor Russ Ackoff. We were doing Bayesian statistical modeling. It was just probability theory, which is at the basis of machine learning.

After I graduated from Wharton, I went to the Interpublic Group of Companies, doing market research with what was called Markov Chain Analysis and Monte Carlo Game Theory. Back in those days, the 1960s, these mathematical algorithms were more of a curiosity than something that was terribly useful, because we didn’t have massive data, we didn’t have massively powerful computers.

But everything we’re doing today in machine learning — machine learning being the first step in artificial intelligence — goes back to probability math, the stuff I have been involved with all through my business career.

I’ve been very interested in where artificial intelligence is going. The kinds of things we do at Zeta Global or at another company I’m working on in the fintech space, Lantern Credit, where we have a technology called Beam AI, goes beyond machine learning. We’re using deep learning, which is when you are looking at more layers of data and are trying to determine patterns out of chaos.

At Lantern Credit, we’re taking the whole world of consumer credit scoring and applying deep learning, so we can be much more accurate and can give a clear audit trail, which is important to regulators.

Most people of the tech world believe that AI is the new OS. The operating system, the OS, is a fundamental foundational element to everything we do in the high-tech industry. AI is going to be a foundational technology of everything that will happen, not just in high tech, but in the way that high tech is an enabler in changing many industries around the world. AI probably has as long a run ahead of it as Moore’s Law has had over the past 46 years.

Knowledge@Wharton: You’ve mentioned some of the ad campaigns you’ve worked on. A lot of advertising, particularly online advertising, is hitting a crisis point. People are blocking ads because they’re so intrusive. Ads respond by getting more aggressive. Is there a way out of this cycle?

Sculley: I think there is a way out. It helps to be a good observer of what smart people are doing.

One of the smartest companies out there, which will not be a surprise to anyone, is Amazon. Jeff Bezos doesn’t start with the technology, he starts with the customer. He says, “What’s in it for the customer?” To unwrap of all of the issues in marketing that make it so oversaturated, Amazon created Amazon Prime. They have 80 million members who get special rewards, incentives and all kinds of services, and they build loyalty. Bezos has figured out how to look at the entire experience that a consumer has with a product or a service.

As Jeff Bezos is famous for saying, “My customers are entirely loyal until someone else comes along and gives them a better offer.”

Back when I was in consumer big brand marketing, we didn’t have the tools to deal with that, nor, quite frankly, were we even thinking about it. We built big mega brands with massive advertising. We couldn’t differentiate between the individual interests of people. We were doing big image campaigns using mass media — television and print — with large audiences.

We have never seen so much concentrated power in the hands of so few media marketing companies as we have today. If you look at Facebook and Google, and you can probably add Amazon to that list as well, there is an incredible amount of power that these companies have. How are they thinking about that power? How are they adapting to both the reality of their success and the reality of the criticisms they have, being in the spotlight?

Fortunately, there are some really smart people running these companies, and they are each learning from each other.

We are all working in an exponential time. Back in my era, most of the world was working in linear time. In 2007, when Steve Jobs was putting a phone chip in the iPod and launching the first iPhone, Eastman Kodak had just doubled down on their investment in vertical integration to compete with Walmart’s single-use film camera. Kodak was the company that invented the digital camera; they were the largest photo film printer in the world. Here was a $26 billion [company], and then four years later Kodak filed for bankruptcy and Apple ruled the world.

In linear time, we’re used to things happening over decades or longer. Kodak knew digital photography was coming. No one was expecting it to happen that quickly.

“We have never seen so much concentrated power in the hands of so few media marketing companies.”

It’s not just Kodak exposed to these types of changes. Walmart had to buy Jet.com to respond to Amazon. General Motors has had to rethink their business and invest $500 million into Lyft. In the first 10 years in his tenure as CEO at GE, Jeff Immelt said he didn’t realize that his whole industry was going to radically change. In the last six years GE has been racing, in exponential time, to completely reinvent their company as a software company on the industrial internet.

This is going to go on in industry after industry. It’s what I’m working as chief marketing officer and chairman of RxAdvance, in the health care space.

Knowledge@Wharton: Speaking of health care, is the U.S. government helping or hurting business opportunities in that area?

Sculley: I think I can say without being arrogant that the government leaders are focused on issues that are not significant to how to build a sustainable health care system in the United States. They are debating the ideology of whether we replace or repair the Affordable Care Act. They are debating whether the states should have more authority or whether the federal government should be given a stronger role in the future of how we deliver health care.

None of those issues is going to make health care sustainable. Health care is a more than $3 trillion spend a year. It’s about 17% of the GDP. Health care is incredibly inefficient. McKinsey Global Institute has done studies that show about $900 billion of this $3-plus trillion [market] is a fraudulent, abused, avoidable cost. It’s an industry that has been shaped by special interests more than logic. That’s one of the reasons you haven’t seen the big high-tech companies move into it — you have to have deep domain expertise in all of the complexities that make up our health care system.

Our founder and CEO, Ravi Ika, has been in this industry for 16 years and is one of the most successful entrepreneurs building cloud-based platforms. At RxAdvance, we’re focused on what’s called the “avoidable drug-impacted medical cost.” That’s $350 billion every year in the U.S. health care system that could be avoided if you had a way to manage this huge amount of expense, particularly that the chronically ill spend. Five percent of the population spend $1.5 trillion a year — that’s half of the health care spend in the U.S.

What we call the “noble cause” that we’re focused on at RxAdvance is how to bring cloud-based automation into the RX ecosystem anywhere that prescription drugs touch the health industry — from patients all the way through health professionals, physicians and formularies, to the pharmacies and the health plans.

How can we take billions of dollars of cost out of the delivery of prescription medications? How can we significantly improve the quality of life, particularly of the most expensive patients, the chronically ill?

We started RxAdvance in 2013. We believe we can get to about $10 billion in revenue by 2020. We’re already at break even and growing incredibly fast. It’s a very exciting sector to be involved with. We have a terrific leader and management team, and I love being the chief marketing officer.

Knowledge@Wharton: How does moving to a cloud-based architecture lower costs? Can you provide more detail on that aspect?

Sculley: Absolutely. Let’s take that 5% of the population [responsible for] roughly half of the health care spend in the U.S. They typically have nine chronic care diseases. The only source of the medications that are being prescribed to these patients comes from what is known as the PBM, the Pharmacy Benefit Management system.

RxAdvance is the first Pharmacy Benefit Management system that has been built on cloud computing and uses sophisticated data science to automate the process across the entire continuum of care. It’s a gigantic industry, with hundreds and hundreds of billions of dollars highly concentrated into about four companies.

All of the other PBM’s are still running on technology that was designed and built 30 years ago — mainframe computers with green screens and COBOL programming.

RxAdvance is built on cloud computing. We can dramatically lower the cost. We can give complete transparency into all of the drug economics. We take no spreads — the controversial moneys that go back and forth between payers and pharmaceutical companies and Pharmacy Benefit Managers like us. We just take a little flat fee on every claims transaction.

Patients who have nine chronic care diseases may typically take 15 to 25 pills a day. Somewhere between 30% to 40% of the medications are duplicates of each other because different specialists are writing the prescriptions. They’re perfectly competent, they just don’t have the data on all of the drugs the other specialists are writing. They don’t know which drugs are known to have interactions with each other.

“There has never been a more interesting time to be in entrepreneurial capitalism than right now.”

With our cloud-based platform, we’re able to track all of that prescription data, personalized down to those individual patients. At the same time, we can go out to their point of care and can track whether they are actually taking the medications or are exercising. We can track all of these vitals electronically and bring it back to our cloud platform, which means we’re able to avoid having chronic care patients, who have been dismissed from the hospital, being readmitted within 30 days after discharge, which typically has penalties of $10,000 to $20,000 a night.

The costs that we can take out of the health care system with just that 5% of the population is literally billions of dollars, which is why we’re growing so fast, and are optimistic that we can be one of the role models for how you can disrupt health care.

Even if we are wildly successful, we’re still going to be a relatively small business in the context of a $3 trillion health care industry. We think that eventually we can get RxAdvance up to a $40 billion — or $60 billion business by the mid-2020s. Even then, that’s not a significant part of the entire health system. We expect there will be other companies that will see from our experience things they may be able to do.

Hopefully there will be a revolution in health care just as we’re now seeing a revolution in precision medicine with the ability, for instance, with CRISPR-Cas9 to edit the human genome, or the work I’m doing with another one of my companies called Cellularity, the largest source of placenta-based stem cells, working on regenerative medicine.

There are so many different fields that I was lucky enough to be exposed to over decades in the high-tech industry that are now becoming incredibly practical. What we’re doing with RxAdvance in health care, or Lantern Credit in fintech, or Cellularity with regenerative medicine are examples of the power of data science.

Knowledge@Wharton: While this aggregation of data improves efficiency, doesn’t it also raise privacy issues?

Sculley: Absolutely. I was around in the early days of the internet. It was originally a way for government labs to be able to communicate with the major technical universities. That evolved into the World Wide Web. Tim Berners-Lee created HTML and HTTP, Hypertext Mark-up Language and Hypertext Transport Protocol, and adapted the internet to the kinds of things that we can do with the World Wide Web.

But it is still the same internet that was created for scientists back in the 1970s. There is a lot of serious discussion that maybe we have to build an entirely new internet that has significantly different architecture from a security standpoint.

It’s going to be fundamental as we move into cybersecurity for cryptocurrency alternatives to cash. It’s obviously a huge issue as we can see with the Equifax breach that happened this past year.

We may have to build an entirely new internet — which doesn’t mean we stop using the one that we have now. We would probably build it in parallel and it would take several decades to be fully effective. Some call it the “industrial internet.”

Knowledge@Wharton: Who is the “we” here? The internet was initially built by the government and then later employed by private businesses. How do you see this next generation internet being created?

Sculley: It’s certainly beyond anything I have an answer for. The internet was built for a different purpose in the U.S. We then had an independent group called ICANN, which was not [run by] the government, [but] it was concerned technologists [behind it] who said we have to find governing rules for the internet. Today, you have every major country saying, “We don’t like the idea that the U.S. is controlling all of the innovation on the internet.” China has hived off their internet and is running an entirely different internet set of rules.

My guess is it’s going to be much more global. When you bring the government in to try and figure these things out, we don’t necessarily get the best technical solutions. We get the most accommodating political decisions.

I honestly don’t know who is going to figure all of this out. I suspect that if it’s going to be successful, the private sector is going to have to be at the lead of determining what the internet of 2030 really looks like. But it has to be realistic. We’re in a global economy today. It would be naïve to think that we can make all of those decisions alone in the United States.

Knowledge@Wharton: What continues to motivate you?

Sculley: I am still insatiably curious. Most people of my generation in high tech are no longer active. I’m still at it. I don’t run companies anymore; I invest in and mentor companies.

I love mentoring talented entrepreneurial founders. That’s what motivates me. I work in some incredibly exciting industries that are in the early days of what these industries will look like 20 or 30 years from now. I feel extremely lucky to be able to be involved in as many interesting things as I am currently working on.