The spring and summer of 1996 was an important period of transition for Steve Jobs. Pixar, which had gone public the previous November, had lost half its market cap. NeXT was collapsing. And in a matter of months Jobs would sell what was left of the company — its NextSTEP operating system — to Apple (AAPL), where it became the foundation of OS X.

The late Louis Rukeyser had no way of knowing what was brewing when he invited Jobs to appear on PBS’ Wall $treet Week that spring. In retrospect, his first question seems almost comically beside the point: “What can we expect next … from Pixar?”

But his second question is a doozy:

Rukeyser: You first came to public attention with Apple. In recent weeks it’s been one of the failure stories of Wall Street, and indeed of the American economy. What went wrong at Apple?

Jobs: Oh gosh. You know I haven’t been there in a long time. My perception may not be complete. But from the way I see it, Apple was a company that was based on innovation. When I left Apple ten years ago, we were ten years ahead of anybody else. It took Microsoft ten years to copy Windows.

The problem was that Apple stood still. Even though it invested cumulatively billions in R&D, the output has not been there. People have caught up with it, and its differentiation has eroded, in particular with respect to Microsoft.

And so the way out for Apple — and I think Apple still has a future; there are some awfully good people there and there is tremendous brand loyalty to that company — I think the way out is not to slash and burn, it’s to innovate. That’s how Apple got to its glory, and that’s how Apple could return to it.

Below: The four-minute Rukeyser interview. The full nine-minute segment, which begins with a long pre-taped intro, is available here.

Via AAPLSanity’s aaplwatcher.