Microsoft Volume II: The Complete History and Strategy of the Ballmer Years (Audio)

I'm a little horse today so hopefully we don't have to do a lot of talking good luck with that all right let's do this who got the truth is it is it is it got the truth now is it you is it you is it you sit me down say it straight another story on the way welcome to season 14 episode 6 the season finale of acquired the podcast about great companies and the stories and playbooks behind them I'm Ben Gilbert I'm David renthal and we are your hosts well listeners here we are Microsoft Volume

2 at long last after the ancient history of volume 1 we now get to the stuff that you grew up with the internet Windows XP Xbox the browser search and mobile and in this era Microsoft had a lot lot of the right ideas with a lot of the wrong timing and execution on everything from the zoon to Bing but despite that from 1995 where we start our story to 2014 where we will end this episode Microsoft grew their annual revenue from 6 billion to 80 billion they became a phenomenally successful company and really cracked the

code on selling enterprise software I began the research thinking our part one episode would be about the rise and this episode would be about the fall cultural problems failed consumer products antitrust but it's really not that straightforward and after spending months unpacking it all I actually don't think that's the right framing anyway and on Microsoft's 1998 antitrust suit against the Department of Justice everyone knows of this case but most people really have no idea what actually happened did Microsoft lose well not really but the answer is nuanced finally today we dive into it all oh

and listeners we have just one announcement for you here today yes we told you before that September 10th we are doing the biggest thing in acquires history and we're doing it in the city of San Francisco we're doing a live acquired show at the chase Center which is the brand new basketball arena here in San Francisco where the Warriors play we're putting it on with our good friends at JP Morgan payments and as you can imagine they know a few people at the chase Center yeah it will be a night to remember with a few

different phases of the evening there's going to be lots of opportunities to meet other required listeners from around the world and a big show like this deserves a big special guest and that special guest is the one and only Mark Zuckerberg so in addition to being the central figure in some of the greatest Acquisitions of all time that we have covered right here on acquired Mark and meta are also playing a big role in defining the next decade of computing with AI too so it's shaping up to be a total blast we really hope you

can join us yeah tickets will be available soon and you can sign up at acquired. fmsf to get emailed as soon as they go live we're pumped we'll see you there this show is not investment advice David and I may have investments in the companies that we discuss and so do all of you if you own index funds and this show is for informational and entertainment purposes only okay David the middle chapter of Microsoft the middle chapter indeed and and boy is there a lot to discuss so Ben you covered this in your intro but

I think everybody kind of knows the narrative about what happened to Microsoft between call it 1995 and 2014 when SAA took over there's even a quote from SAA himself in the very first paragraph of the book that he wrote in 2017 called Hit refresh which I mean that title kind of gives it away right there he writes I joined Microsoft in 1992 because I wanted to work for a company filled with people who believed they were on a mission to change the world but after years of outdistancing all our competitors something was changing and not

for the better Innovation was being replaced by bureaucracy teamwork was being replaced by internal politics and we were falling behind and then he references the famous gun pointing org chart by cartoonist and software engineer Manu coret that probably listeners many of you are familiar with we will link to that in the show notes and you can sum this kind of whole narrative up as Microsoft was winning and then it sucked for a long time and then it is now winning again and that's all thanks to SAA and the question we sort of asked as we

were doing our research was is this true and what we ended up learning from the literally dozens and dozens of people that we talked to surprised us a lot and I think we'll probably surprise listeners too yeah David you're burying the lead here a little bit we talked to probably four to five times as many people as the next highest episode I'm looking at our little thank you list it's like 20 something people long all right so on the last episode we left off with the Ben as you put it unabashed celebration of software that

was the Windows 95 consumer launch in August of 1995 and it was perfect it had everything had jeno had the Rolling Stones it had the start button or actually it had almost everything there was one thing that was missing from Windows 95 at launch that if you were a consumer user of Technology of software of products of operating systems maybe you kind of wanted to have and that was an internet browser yes it's so funny cuz we sort of intentionally left all the internet components out of Windows 95 in the previous episode because once you

start talking about the internet you're really talking about the next chapter of Microsoft and you can't help but dive into it all but in retrospect the thing that mattered about Windows 95 all these years later is that's the platform that everyone started using the internet on and everything that we talked about in the last episode yeah it's all important but it's not nearly as important as it being the internet operating system so how did this come to be at the time things were changing so fast there was this phrase called internet time things happened in

weeks versus years but if you rewind just a little bit back to like 9293 94 even into early 95 going online for consumers meant using a service like Compu serve or prodigy or of course the big one AOL and these Services were not what we think of today as the internet but they were more like walled Gardens with proprietary services that were bundled with access via dialup modems yeah for consumers it was kind of a similar experience you could get content on your computer but the main difference was how to put content on that Network

it wasn't like anyone could just plug in a server and then boom you have a website it was like you had to have some negotiating power and know someone at AOL to go do a deal to get your content on their platform yep I think the best way to sum all this up is do you know who owned the compu serve service at the time no but I know it was a Columbus based company oh interesting it was owned by H&R Block the tax prep compy really yeah whoa crazy that's what online was like just

a few years or months before the Windows 95 launch so Microsoft of course as you know inheritor of the earth and all things technology they want to play in this online services Arena too so in 1993 they start sniffing around AOL and see if maybe Microsoft could acquire AOL Steve case the founder of AOL isn't interested in selling but there's this whole thing where Paul Allen goes off by himself and he buys a large stake and that creates all sorts of headaches because Microsoft is like well if we can't buy them we're going to compete

with them so they start an internal project called project Marvel to build their own online service that becomes MSN so there's a little slide of hand that you just did there you said it becomes MSN Marvel when it initially was conceived was a proprietary online service eventually when that completely failed which you're about to get to they repurpose the name MSN for their internet-based media property U complete shift and strategy at the same time many people in technology especially at Microsoft itself and lots and lots of investors on Wall Street believe that these wal Garden

online services were just temporary they were just a bridge to a more utopian networked consumer culture and economy that they called the information Super Highway and the specific vision of how this information Super Highway Utopia was going to work was interactive television all mediated by the pay television providers so like the cable and satellite companies out there you know the Comcast the charters the Time Warner Cables the direct TVs on the satellite side these were going to be the big consumer technology companies and this wasn't crazy this actually made a ton of sense because television

and in particular cable television at the time was the primary existing consumer medium the internet was not a thing well think about the number of things required to create some sort of networked entertainment interactive thing you would need screens you would need some way to control those screens to create a feedback mechanism you would need content you would need infrastructure connecting people's homes all of those already existed by the cable companies and their endpoints the televisions and if you pitched me on the idea that actually everyone's going to go buy a brand new device like

a PC like a computer and we're going to have a different set of wires that actually bring all of that to the home or maybe we'll repurpose some of the same wires but gosh we need to like bring in new networking equipment everywhere along the way oh and there's going to be completely different content companies that figure out how to create the content for their it's like all of that falls flat of course you're going to use all the existing infrastructure and content you're not going to bank on standing it all up new from Whole

cloth totally and Microsoft just like they had done in entering the PC software Market in partnership with IBM they're going to partner with these big consumer cable companies and so starting in the summer of 1993 there all these rumors flying around that Microsoft is working on a big JV with the cable companies dubbed cable soft yep you can't make this up and the idea is that Ben like you're saying the cable companies will control the pipes and the customer relationships and probably a lot of the content Microsoft will write the software both for the set

toop boxes in consumer homes and for the servers on the back end and this software project is code named tiger and then there's a third company a third piece of this sort of Unholy Alliance for the information Super Highway and that was a company called silicon Graphics that would make all the hardware cable companies are going to make the hardware themselves you're going to need pretty powerful Hardware here both at the home and on the server side and SGI as silicon Graphics was referred to was legendary they are the graphics company that enabled the CGI

in Jurassic Park and of course their founder and chairman was legendary in Silicon Valley W Jim Clark put a pin in that name so pinned so Wall Street of course like nuts over all this you know the hype is out of control it's a trillion dollar opportunity there's all these spy shots of Bill meeting with John Malone at TCI and Gerald levid at Time Warner and Bill starts spending time with Michael Ovitz talking about how Microsoft can get in on the content game too either through the MSN project or through other things they're going to

do this leads to MSNBC the cable network that people are probably familiar with well this is so interesting because we're talking about this general idea of interactive Computing involving other people and Microsoft so far has two initiatives Marvel and the information Super Highway neither of which are the internet or the web browser yes correct you're already getting this picture of Microsoft's business strategy which is until we know exactly what the future looks like start placing bets that approximate so that we're sort of in the mix even though we don't know exactly what the future is

which we talked about in part one had always worked so well for the company yep and it's going to work really well here too so Bill actually decides at this point that he needs to write a book for the public to evangelize this information Super Highway thing kind of embarrassingly given how long the book World takes to you know actually publish a book it doesn't come out until November 1995 after the Netscape IPO has already happened and Windows 95 has shipped but in this book called The Road head I have two copies of it here

on my desk the hard cover copy and the soft cover copy which was revised and came out in 1996 the hard cover copy is all about the information super highway or as Bill likes to call it information at your fingertips and then when the soft cover version comes out later basically they control left every instance of information Super Highway and replaced it with the internet and the web browser yeah this is one of these moments on an acquired episode where we have just a delightful concrete illustration of this year it was unclear the next year

it was extremely clear and David look up in the indexes of both of those books the number of references to the internet in the hard cover version there are three portions of the book where it is discussed in the soft cover version the index for the internet takes up an entire page there needs to be an index for all the sub indexes of the internet in the soft C version amazing so the hard cover version is the state of play in January 1994 when a young Windows networking engineer named James Allard or Jay as he

goes by writes a memo to Bill Gates and to the senior leadership at Microsoft entitled Windows the next killer application for the internet and in this memo he points to a new piece of software coming com out of the national Center for supercomputing applications at the University of Illinois that is spreading like wildfire and appears to be written by some like kid programmer there by the name of Mark Andre in his free time it's not even like his real job yes and it is called Mosaic and in this memo Jay argues that the internet and

this software instantiation of it in the Mosaic web browser kind of looks like it is going to become exponential phenomenon given the rate at which it is growing and that it represents an enormous opportunity for Microsoft to quote Embrace and extend the internet into Windows itself and this is the origin of the Embrace and extend Mantra and the exact words he uses are Embrace extend innovate in popular press and public opinion of Microsoft that would of course get changed to embrace extend extinguish by their effectively competitors and political enemies but the Embrace and extend thing

is actually a brilliant business strategy there's already a whole bunch of people who love this thing we want to embrace that new Behavior there's sort of no product Market fit risk because we can clearly already see it happening people want to use this browser thing to access hypertext on the internet we're going to embrace that and we're going to figure out a way to work it into our business model to extend the functionality in a way that we can make money on right the business model is we sell Windows through o and businesses and the

like and to Consumers and we can just bake this into it honestly it's pretty incredible that Jay lays out the whole winning strategy for Microsoft and the internet here in January 1994 this is a few months before Netscape is even founded yes yeah Netscape as a company does not exist yet there's just the Mosaic web browser at the University of Illinois yep then and this sort of exponential growth theme the very next month in February 1994 Bill's technical assistant/ Shadow which is a legendary role at Microsoft now exists at Amazon 2o a man named Steven

sinowski goes on a recruiting trip to his Alma moer at Cornell University and while he's there there's a big snowstorm he gets stuck on campus he has to stay on campus for a few extra days it's very Cornell story yeah most Cornell thing ever the most itha story ever he notices that all these kids especially when the campus is snowed in they're all using the internet and he knows what the internet is you know it was an academic project for years you know he was an academic guy before getting into commercial software and joining Microsoft

but it was this way for scientists to basically trade research and you're starting to get some cool entertainment use cases but there's certainly no business or business interest or commerci it's all just like the way that academics communicate with each other and this is what absolutely floes Stephen he's like I remember the internet as what you're saying Ben and now I'm here on campus and all these kids are using it for flirting registering for classes messaging each other sending email that has nothing to do with papers or work or school or academics or anything he

gets so excited that he writes another memo to Bill and the leadership team entitled Cornell is wired exclamation point it's so funny Microsoft history is told through a series of memos every Milestone is some executive publishing a companywide memo well it's so funny cuz some of these memos definitely were like internal memos for exactly what you say and some of them were like written for publication to the Press yep and bill has great quote when I heard Steven talk about what was happening at Cornell I began to take the internet quite seriously so Steven and

Bill organize an internet offsite quote unquote with all the top execs with Jay bill and everybody who's investigating this internet thing and it takes place on April 5th 1994 which is the very next day after Netscape was incorporated on April 4th amazing and at this offsite Bill totally gets religion that the internet as Jay said in his initial memo is actually an exponential phenomenon and as Bill puts it to the team gathered there and then the whole company later it is a core Microsoft company value that exponential phenomena cannot be ignored oh wow I had

no idea that was kind of the impetus of him taking it seriously I mean think back to everything we talked about in the last episode the whole concept of Microsoft is founded on the idea that mors law is a thing and therefore we can develop software that people have never dreamed of that in just a few years will be usable So speaking of Netscape being Incorporated the day before remember I said to put a pin in the name Jim Clark of course many listeners already know where we're going here Jim Clark legendary founder of SGI

Silicon Valley Legend well a couple months before that in February 94 it's crazy how fast all of this happens it's just insane Jim is still at SGI he's really frustrated with the board and the company though for not pushing even harder on this information Super Highway opportunity so what does he do he resigns from the company kind of like in protest the company he founded wow and on his very last day in February 94 at SGI he cold emails the kid in Illinois Mark Andre and so you get the opportunity to team up with an

industry Legend uh of course yeah so Jim in this email writes you know I'm impressed with Mosaic and like clearly this seems to be getting adoption um you know if there's any way that you and I Mark might be able to collaborate that would be quote of interest to me so the two of them get together and then they found this company on April 4th 1994 called electric media and the initial goal of electric media soon to be Netscape is that oh Mark is this hot shot programmer clearly the information super highway is what this

web is going to turn into we're going to do what SGI was supposed to do we're going to make set toop boxes for the information Super Highway yes in retrospect you got to be looking at them thinking how dense are you Mark andr is the person in the world who understands what a crazy exponential phenomena the internet is the web is what it can be I mean Mark had I think by this point already put the image tag into HTML so they can now send images that render in browsers and when Jim Clark emails him

they decide to go do the information superhighway and not to do the internet yeah this is amazing so the way they're going to do this as a startup this is so great one of the other big things that SGI had done besides building the graphics workstations that Hollywood ran on and did Jurassic Park and all that was they were Nintendo's technology partner for the N64 yep they made the graphics engine for the N64 and so Jim has this relationship with Nintendo the N64 is going to be coming out it's going to be this amazing box

in the living room attached to TVs and consumers homes they're going to team up with Nintendo and turn the N64 into an information superhighway box meanwhile it's hilarious that we keep talking about the information Super Highway because it never happened there were these little tests done with cable companies that would wire up 300 houses or something but it never happened anywhere at any sort of scale and so when you're listening to this and you keep trying to figure out like sorry what exactly was the information Super Highway and like what did it look like nobody

knows because it never happened right it's such a classic case of way way way too many cooks in the kitchen and just total slide wear and the fact that even Mark himself didn't pound the table for no the internet's going to be the thing that really shows you how the human brain is not wired to understand compounding theoretically this network should continue to get more nodes the technology should evolve little by little More's is happening on the compute side you know there's some reason to think that bandwidth is going to be available to homes in

the same way it's available to like universities and companies but still it just wasn't obvious enough to continue down that path it was almost like great I've made a name for myself doing this toy thing that probably isn't the future and so now we'll go do the big boy stuff because that's what all the experts are saying totally so shortly after this by late spring 1984 Mosaic now has a million active users clearly Bill Gates is paying attention here so shortly after all this Jim Clark and Mark andrees say wait a minute let's just go

do this Mosaic thing they scrap the N64 information Super Highway they go raise money from Kleiner Perkins John door invests joins the board most legendary investor of the time and by October 1994 the newly christened Mosaic Communications Corporation post the first version of its browser Mosaic navigator for free to download on the web and their business plan is that they're going to give away the consumer browser for free and they're going to charge companies for Server software so if you want to host a website you know you're a corporation or whomever you need server software

to do that they're going to charge companies for the server software great and listeners you should be paying attention to something David just said there he said it's the Mosaic Corporation and then you said it's Mosaic Navigator even though it's called Mosaic because Mark andreon wanted to draft off the success of the previous project he had done called Mosaic this is completely new code they founded a company they started writing code from scratch they had the experience of writing Mosaic the thing owned by the university and the NCSA before this is a new thing called

Mosaic that does the same thing architected for commercial use yes exactly Ben so meanwhile back at the University of Illinois even though they're a academic and government institution here they realize that they've got something valuable in the original Mosaic to pile a code millions of users Mark doesn't work there anymore but seems to be working so they license their Mosaic the original one to a local company called spy glass so the state of play is you've got the old Mosaic which spy glass has the right to license for commercial use you have a new thing

that will become Netscape called Mosaic that is totally separate code and Mosaic Mark Andre's new Mosaic keeps trying to go do deals like sell their server software and every time they find a customer spy glass they threaten to Sue and they basically blow up the deal because they keep calling each customer and saying yeah we're going to sue yep yep and so this is obviously very frustrating and technically illegal Mark Andre's Mosaic realizes that this is going to be a existential problem for them unless they do something about it they actually Sue spy glass you

guys got to stop so there is a settlement well the net of all this is that Mark and Jim's company let's call it that changes its name in the fall of 1994 to Netscape and Mark had a typically great mark quote about this to the Press at the time you go to schol you do your research you leave and then they try and your business had I known this would happen I would have gone to Stamford which of course is apocryphal because he had no means of going to Stanford at the time he lived in

the midwest he was going to go to a state school no one recognized his genius at the time so yeah yeah yeah totally it's also the most Mark ENT quote ever which is awesome y anyway okay meanwhile the online services the comp you serves you know Prodigy AOL Etc they're not blind they see that the internet and the web is also becoming a thing they want to go license a web browser and incorporate it into their platform so I think it was late 93 or early 94 but this was a seminal moment where the aols

of the world interconnected with the internet and now you could not just navigate the proprietary services but also surf the open web so Netscape isn't interested in licensing because they have their own business model selling web server software and they want to allow free downloads of the Navigator client spy glass though they start licensing that original Mosaic and they start doing deals with the online service providers and a small startup company called booklink goes and codes up another browser that they start licensing to companies as well so Bill Gates and Steven sinowski they go and

meet with booklink in May of 1994 so coming right off of this internet Retreat we're going to make this a core part of Microsoft and a core part of Windows and they're interested in licensing booklink as well they start negotiating they're talking about a call it $2 million license deal and all of a sudden AOL comes in and buys the whole company of booklink for $30 million so this now leaves Microsoft without a browser and there are basically only three real browsers on the market there's booklink that AOL just bought there's Netscape Navigator Netscape Navigator

which is not available to license and then there's Mosaic and spy glass so Microsoft goes to who else spy glass they license the source code for Mark Andre's original Mosaic browser from Spy class software for $2 million and that code base becomes the base upon which Microsoft builds Internet Explorer well David I'm glad you took the bait I am here to tell you that that is the public narrative uh and very close to the truth but there's some more Nuance here you ready to hear it well hey if you click the about menu in the

early versions of Internet Explorer oh yeah a text box pops up that says based on NCSA Mosaic distributed under a licensing agreement with spy glass Inc yes all of that technically true it is just not quite as meaningful as you think it is so as with all of these things it's not just like Bill Gates and Steven sinowski are having a think and the rest of Microsoft is sitting around waiting for the think to finish and then an edict comes down and then they go and do the work there are a lot of people with

a lot of ideas working on a lot ofu in parallel and that is why Microsoft's history is so delightfully messy is there's a zillion initiatives going on and it's never clear if your thing is going to become the next company strategy or not so here is a slightly different version of this history with different players and I want to underscore it for one big reason it will come up later in antitrust okay so some of the windows95 team in late 94 led by Thomas Reen is p off before it ships to start thinking about what

should we do after Windows 95 ships what would the next Marquee Investments be for what at the time they're calling Windows 97 which of course there was never a Windows 97 so the group's opinion is all internet all the time you know how could the next iteration of Windows be extremely internet native in a very embedded way and there's tons of proposals in this little group there's virtual meeting software think Zoom type things there's an email client specifically built for the internet rather than for your company's corporate Network which at the time was novel then

there's of course a browser but the big Vision was what if the whole Windows shell is a browser every visual thing that you interact within Windows what if that actually was like a HTML rendered server communicating online thing and the team technically kind of looked at it this way we should build HTTP Direct into the operating system since it was just another protocol on top of the tcpip protocol that the internet is based on we should provide reusable UI component to any application that wants to display HTML that's a good engineering building block to build

is this HTML renderer that any application can sort of frame in and use so of course Microsoft the strategy here is we will develop a browser application that used the building block that others could also used to render HTML so they actually go to Netscape and say hey we have this great HTTP stack we have the HTML engine we have these wrappers to go around it instead of rewriting all of it just use our off-the-shelf code that we intend to ship with Windows famously you know Netscape did not do that and so iie Internet Explorer

actually ends up being kind of the only application that used all these windows components and once they got going on the browser they convinced the the windows leadership that actually we can do this fast we should get this done as a part of Windows 95 not wait for the next big release we're going to get to this in a minute but when Windows 95 launched it had either at launch or very shortly thereafter it was called the Plus Pack yes and Internet Explorer was available as part of the Plus Pack yes so anyway how does

NCSA Mosaic and spy glass come into this well the Nuance is spy glass had actually massively changed the Mosaic code they were trying to create the spy glass browser that was sort of based on this NCSA codebase but it wasn't very good and so that is what Microsoft was able to get their hands on they could not license the original NCSA version that was gone or at least not available for license and so they sort of tried backing out a lot of the spy glass stuff ultimately it wasn't that helpful in creating Internet Explorer and

they spent just as much time trying to undo a lot of it and then build the that Explorer stuff on top so ultimately did it actually accelerate their path to Market and was it actually Mark Andre's code some of it was in there but you know it's not like they grabbed it off the shelf and now it's IE oh it makes for such a good story though it sounds like reality is a lot like the Dos acquisition yes Microsoft bought qos quick and dirty operating system from Seattle computer products was that the same thing as

mic moft dos sort of a lot of work went into it after the deal yeah as you would expect same thing here but it is definitely true that if you click that about box in the early versions of Internet Explorer holding to it it's just so delicious it is delicious and the two big takeaways here at least from this additional version of the story is one what they actually wanted to do was make Windows Web enabled in a really deep integrated way not just have this one little application called a browser and technically there was

a lot of co-mingling there a lot of what became the code underpinning Internet Explorer was actually Windows code implemented in Windows operating system to do these protocols and two still a lot of work to make iie after the deal so this brings us now to the launch preparations for Windows 95 and in the spring leading up to all this bill writes another memo this one intended for publication so to speak that is the famous internet Title Wave memo I just want to do a big quote from it here perhaps you have already seen memos from

me or others here about the importance of the internet I have gone through several stages of increasing my views of its importance now I assign the internet the highest level of importance in this memo I want to make clear that our focus on the Internet is crucial to every part of our business the internet is the most important single development to come along since the IBM PC was introduced in 1981 it is even more important than the arrival of the graphical user interface can't get any more clear than that very clear so that brings us

to the August 95 Windows 995 launch scheduled for the 24th on August 9th couple weeks beforehand Netscape goes public with a market capitalization of3 billion massive IPO massive I mean this is like 1995 we're talking about Netscape we should say goes from 1 million to 15 million users in one year I mean just instant product Market fit it was so clear that people wanted to browse the web a lot of the time in technology in this ecosystem we're always looking around like ah is that going to become a thing is that going to become a

thing that was from 1994 onward never a question about the internet never yeah in the IPO press cycle Mark andreon is quoted as saying that quote Netscape will soon reduce Windows to a poorly debugged set of device drivers it's such a good quote and there's so much behind it too if you really dwell in that quote what does it mean if one of the things he's saying is Windows is a platform upon which independent software vendors write applications so Windows is the way that currently people write software for businesses and consumers to use use and

if we are going to reduce Windows to a poorly debugged set of device drivers what I'm implying is these crappy static web pages that get served right now that is merely a step on our journey to enabling Rich web applications think JavaScript CSS eventually you know Java and Flash the web will be a way that developers write their applications that's right there implicit in the quote and so when they're saying we're going to reduce windows blah blah blah it's saying okay Windows has all this stuff right now for developers but essentially you're going to use

Windows or any operating system just to boot it up connect to all your peripherals your screen and your mouse your keyboard and everything and you'll open your browser and you'll do everything through the browser and that scared the hell out of Microsoft not specifically this quote but Microsoft had come to the same conclusion too of oh my God if the web becomes the platform of the future all the reasons why we have all this incredible business you know people feeling the need to use our operating system to be able to get access to their favorite

software and for developers to build applications on a platform to get access to the users that could go away and in the same memo that you were quoting earlier the internet Title Wave Bill Gates famously says and when I say famously it's because the Department of Justice later grabbed this quote and used it as an exhibit Bill writes a new competitor born on the internet is Netscape their browser is dominant with a 70% usage share allowing them to determine which network extensions will catch on they are pursuing a multi-platform strategy where they move the key

API the application programming interface into the client to commoditize the underlying operating system I mean they got it immediately the web is an application platform that completely reduces our value you can see why it was so important to Microsoft to beat Netscape to bring the internet in the form of Internet Explorer into windows and have Windows maintain its role as the dominant platform so all the stuff we'll cut off their Air Supply you know it was existential and how amazing is this it's an application platform of the future that is distributed as a Windows app

I mean Windows had huge market share at this point I don't know 80 90% eventually over 90% market share the way that Netscape could get to Consumers was because Microsoft had all these computers out there running Windows it was like this ultimate trojan horse that they could build the platform of the future through Microsoft yep so Windows 95 launches couple weeks after the Netscape IPO Internet Explorer is not baked in at least not in the retail box version you can buy it for $50 as part of the Plus pack that I was referencing before and

install that and add it into windows and Microsoft will make money on the sale of that software but that of course does nothing to make a dent in the free version of Netscape Navigator that is out there right if Microsoft's goal is to cut off the air supply David as you already quoted of Netscape the goal is ubiquity instantly and we don't care about making money we just need to get this thing out so the internet doesn't kneecap our business and we can sort of embrace and control it or perhaps Embrace and extend it netscape's

run continues the Netscape stock triples over September October November net skape is now A10 billion public company insane and I don't think making very much money on their server software yet all the market cap creation is attributable to people believing they have the dominant platform of the future and not based on their current financials yeah basically all of the hype train that had been behind the information Super Highway has now completely ported over to Netscape that's true what's our tracker for the internet Netscape everybody Pile in yeah I could make an analogy to today but

I'm gonna spare us all make this episode Timeless I'm gonna make the episode Timeless okay and then on December 7th 1995 Bill Gates announces that Internet Explorer is now free and it will be bundled in with every single copy of Windows 95 going forward and on that day Netscape stock drops by about a third and never recovers that was the high watermark for Netscape it's over after that yep and for good reason I mean there's a very difficult to learn lesson but you learn it once you never forget it if your distribution decides to compete

with you and decides to make that a priority your business is over in a minute yep and that's exactly what happened I mean this is now the of Internet Explorer it doesn't happen overnight but it's inevitable by the end of the next year in 1996 Microsoft has now done deals with AOL compy serve and Prodigy all the old online services to ditch whatever browsers they were using and bundle in Internet Explorer and by the end of that year in 96 Internet Explorer passes 20% market share 97 it passes 40% market share 98 it passes 60%

market share and then by the year 2000 Internet Explorer basically has for all intents and purposes 100% worldwide browser market share if you look at the Internet Explorer market share chart over time it is the most perfectly rounded Hill that you will ever see it goes from zero in '95 to like 100 in 2000 and then all the way back down to zero in 2010 which is the next chapter of this story is how on Earth did they lose that Monopoly that they had in the browser but before that there's this interesting moment of reflection

here why did netscape's business dry up because their business was made from selling server software well the way to have the best server software is to also control the client people are very interested in making sure that their websites run perfectly using the experience that everyone has and when you can no longer claim hey a whole bunch of Internet users actually use our browser do I really want to buy my server software from you or should I just be open to buying it from anyone that I can sort of it's the lowest cost and the

best value with the most features all that so they sort of lose the Competitive Edge in the revenue side of the company on top of that it's just really hard to recover for companies that have a 80% draw down or whatever in their stock price there was a lot of excitement around the company that then goes away suddenly all these employees are undercompensated it's a company killing event and all the market cap and excitement was all on the C it wasn't because of the revenue right so to this point Microsoft has not changed their business

model they simply vanquished a potential future that was dangerous for them they're still doing the same thing as ever selling Windows licenses through oems and to Consumers at retail yep there a couple more fun little tidbits from this era in August 1997 is when the famous Mac World happens where Steve Job JS returns to the company yes and Bill Gates shows up on the satellite feed and you know of course this moment is legendary but studying it from this lens I realized there's this whole other aspect to it that I didn't know before so what

bill and Steve announced on stage it's also so telling that bill couldn't even be there in person he joins by satellite yeah so there are four points to the partnership one is the $150 million investment from Microsoft and Apple two is the 5year commitment on the part of Microsoft to ship Office for Mac yep and those are the big ones that everybody talks about which by the way saved Apple the company would have been completely out of business because it was so existentially important to anyone using an Apple computer to use office that if office

you know Microsoft decides oh we're going to stop developing office people stop buying Max and you know the company's already in such a financial position it's just over so the third deal point was they agree to end all patent disputes so this is the end of all the back and forth that we talked about in part one but then the fourth point which I didn't even remember at all was that Internet Explorer would become the default browser on the Mac displacing Netscape and that continued from 1997 until 2003 when Safari became the default browser on

and knowing now and knowing the head that bill was in I got to imagine that's the reason he did the deal well it's funny I actually do have some color on why he did the deal Steve Jobs wanted to message this as Microsoft believes in the Mac as a great way to use the office suite they believe in us and as a company and so they're investing $150 million in making this commitment to help us get through this difficult time and this money by the way just to help people understand Apple was worth about $2

billion at the time so this is Microsoft buying 8% of Apple yeah wow Steve cleverly identified this moment as a time to call Microsoft and say hey I know we're through all the patent issues that big lawsuit I have more oh I think you guys are using some of our stuff I don't want to sue you I know the OJ is sort of looking at you guys for antitrust right now Apple was aware that Microsoft would be interested in appearing collaborative with another major player in the ecosystem and so we sort of have the leverage

to say Hey what if you guys invested in us and did this big commitment to Office for Mac it's super important it help us get through this difficult time and Microsoft said back well it's really important to us to have IE everywhere and so they rolled it all into one big deal no one's going to sue anyone all the IP is cross- licensed and Microsoft gets the win with ie Apple gets the win with the investment in office and we can all walk away interesting interesting apple is saved truly Apple would have gone out of

business had Steve Jobs not seized this opportunity it was a critical business deal for both of them yeah so to close the book on Netscape in November 1998 AOL acquires Netscape in an all stock deal for just over $4 billion but again all stock and this is just a little over a year before the Time Warner merger and this moment here is just the absolute peak of Microsoft as a consumer technology company I mean I think maybe the absolute peak of any consumer technology company ever I mean think about the market power that Microsoft has

at this point in time Apple has an existential Reliance upon them they have completely crushed Netscape you know quote unquote cut off the air supply there's nobody else there is nothing else except Microsoft Google is three years from being founded Facebook is nine years from being founded yeah there's Yahoo sure there's real competition in the Enterprise at this point Sun Oracle but in terms of what your point is the consumer technology landscape yeah they had ultimate power yep yeah but David I don't know the whole thing of you can just decide to and then you

completely Vanquish your biggest existential Threat by cutting off their Air Supply like shouldn't that be illegal well so I mean to lead you a little bit into our next section yeah well listeners I think you know what is coming next based on David and I coily alluding to it but before we get there we've really been talking about this idea of development platforms we were talking about the web as a potential development platform of the future even as far back as 1994 people building web applications or you know Windows 95 in its aing but what

makes for a great development platform well this is a great time to thank our friends at JP Morgan payments to talk about their developer platform to build a great one it requires a culture focused on empowering others and investing with a longtime Horizon and JP Morgan payments knows this well we've talked about how they're much more than a global bank they're now investing $7 billion a year in technology and R&D but you may not know that they've also been investing heavily in their developer ecosystem and over the last year they've really embraced this Dev first

mentality with their API powered Payment Solutions yep and if you zoom out it's clear that traditional Finance folks aren't the only decisionmakers anymore it's also your developers your engineers your product managers and so on who now have a seat at the table when it comes to finding the best payments platform for your company many of these modern digital first categories like ride sharing e-commerce or travel couldn't exist without smooth and seamless payments built into the product experience natively yes we know that many of you listening are developers who will be excited to learn about JP

Morgan's new payments developer portal that's essentially a One-Stop shop to build solutions for your business on top of their trusted and scaled platforms while this is just a first step in a long journey for their developer portal JP Morgan is really taking a Long View in investing for the future working hand inand with their clients Dev teams beta testers and payment industry experts to launch learn and iterate and they've got a robust end to-end road map of payment apis coming in the future across treasury Commerce embedded finance and even value added services like account validation

that are going to be truly unique in the industry anyone can make an account to create projects collaborate with team members generate access tokens and try out payment apis that help accept manage or send payment in a sandbox environment which is great I can speak from my past experience as a developer that it is very nice when your head's down you can just use self-serve well-documented apis and code samples I actually read through the quick start guide and thought it was very easy to follow with JP Morgan you get to rely on their experience and

security so you can focus on your core functionality this season we've talked a lot about how they've been powering secure Innovation with an ecosystem of Payment Solutions trusted by some of the world's largest and most Innovative companies not to mention 200 years of banking experience your payments just work the first and every time you get security in huge scale we've said it before JP Morgan moves 10 trillion a day over 50% of all e-commerce transactions in the United States pass through their platform we encourage you to learn more about their API powered Solutions built for

developers at jpmorgan.com Acquired and let us know if you've tested out their new payments developer portal in the slack if any listeners are heading to fintech Devcon in August you'll be able to learn more about all of this directly from their team okay David so we've arrived the famous 1998 Microsoft versus the US Department of Justice Anti-Trust trial yes and I was thinking about it in the transition at the end of the browser Wars there well you didn't like my snarky comment yeah well we were being gled about like oh this should be illegal that's

really the question here all that power that Microsoft had it had probably never been concentrated in the hands of one company like that and probably never will be again and the question is was that illegal and did Microsoft do anything wrong right we're getting into a whole bunch of very interesting questions here and I asked it exactly to sort of pop open the can of worms but there's a question of what actually is legal in the US what actually is legal in the EU then there's this interesting question sort of emotionally for everyone who is

working on software at Microsoft the vast vast majority of people are not really focused on what is the business and competitive strategy most people who worked on any of this stuff their whole goal was I want to ship great software and make things that people love to use and I want to work with people that I love making it with and so if you ask most people who worked on any of this their opinion is I don't know we were trying to just make the best software out there which is very interesting to square with

this growing public perception that Microsoft is being a bully especially public generated by their competitors right and then the literal legal question of did they do something illegal Because the actual antitrust laws are a super different thing than oo does this feel anti-competitive in some way to me and then there's the other dimension too of as a consumer am I unhappy that I get a worldclass web browser included in my operating system well David now you're cracking open the issue of consumer harm the consumer welfare standard that the whole thing is based so take us

into the story yeah so the Microsoft antitrust Saga actually started not with the Department of Justice and not in 1998 but with the Federal Trade Commission the FTC all the way back in 1990 when they opened an investigation into the company about whether it was violating antitrust laws this centered on the notion of per process licensing which we discussed in our last Microsoft episode yep so in July 1993 the FTC Commissioners vote on whether Microsoft is a monopoly that deserves further action and penalties and they deadlock at 2 to2 which means essentially a win for

Microsoft no action would be taken against the company this is a huge Victory the antitrust case of the US federal government against Microsoft should be closed at this point in time yep theoretically they could have examined any monopolistic practice at this point and they said just the one narrow thing that we were worried about they agreed to stop doing and we in voting 2 two we see no other issues that we need to investigate yep Microsoft you are good as far as the US federal government is concerned however the very next month in August 1993

the Department of Justice picks up the case which is pretty unprecedented one Department in the US federal government essentially investigates a company about whether it is abusing its Monopoly power declines to prosecute them for it and then another department within the federal government the very next month says essentially well we don't think you did it right we're going to do it Microsoft is now all of a sudden basically standing trial for the same accused crimes twice yeah theoretically Double Jeopardy is not a thing and in fact several members of the FTC commission opposed this whole

process and tried to refuse to turn over their notes to the justice department but nonetheless the doj proceeds and the next year in July 1994 Microsoft just settles with them rather than going to trial they're like all right look we just want to be done we are going to settle with you doj we're going to be done with the US federal government here and in that settlement they agree to enter into what folks may know the famous words a consent decree and that means they consent in this case that they are not going to tie

the sale of Microsoft application products to the sale of Windows meaning they can't say like hey oems or businesses or consumers or whoever if you're buying Windows you have to also buy office or X or whatever else that we're selling in our app appli group but importantly as part of the consent degree they remain free and clear Microsoft does to integrate additional features into the Windows operating system which brings us right back to internet explore is it a product or is it a feature exactly and this is so messy because I think David you just

use the exact language which is they cannot tie these application products in a bundled sale however they absolutely can integrate new features yes so what is Internet Explorer and this also looks the other way at the whole idea of software development and platforms which is it is a continuously changing landscape where over time in the interest of users platforms do more and more and more things that applications used to do and so the whole notion that they're going to write that sentence and then call it good what is an application today might be a feature

years down the line but the law is written and we have to pay attention to that sentence constantly re-evaluated in the context of the current time yeah I mean today could you imagine purchasing a device that has an operating system and that device not having an internet browser as part of the core system no you can't even imagine that of course it's a feature well is it a feature it's actually it's literally an application it is a bundled application as it exists today so this is the gray area this is the gray area and you

know look if you ask Bill and Microsoft and Jay Allard all the way back to the original memo it was absolutely intended to be a core feature of the Windows operating system having an internet browser as part of it clearly motivated by the idea that we want our Windows platform to maintain the power it enjoys from its Monopoly market share share so there's a sympathetic view for sure of hey this is core functionality to an operating system whether it's a feature or an application that we bundle and also clearly the reason you are incentivized to

ship your own browser is to cut off the air supply of potential competitors that develop the platform of the future yes so in October 1997 the justice department files a motion in Federal District Court stating that by bundling Internet Explorer with Windows Microsoft has now violated the 1994 consent decree against product tying and it's important to know what they're basically asking is this is not about future versions you know we know you're doing some kind of Windows 98 thing we're saying right now stop shipping IE bundled into Windows Microsoft insists this is an integrated product

you cannot do that and it's not even necessarily a legal argument yet of we're allowed to do this cuz it's an integrated feature they're saying we ship a p of code and you actually cannot just rip out Explorer and if you remember at this time you could do all sorts of crazy stuff like you could paste a web address in Windows Explorer and it would render even though it wasn't Internet Explorer so there actually was like if you think back to that sort of vision of the browser is integrated into the windows shell and it

sort of happened a browser was not really at least Internet Explorer was not really its own Standalone thing it was deeply integrated now could they have pulled it apart as a different question if they really wanted to and also remember the fact pattern here isn't exactly great for Microsoft of well they did ship Windows 95 without Internet Explorer in the beginning so right so the federal judge Thomas Penfield Jackson orders them to do it anyway or more specifically he ordered Microsoft to ship a version of Windows to the PC makers the oems or original equipment

manufacturers that didn't include ie so that those oems could load those onto the PCS that they were going to ship to customers if they wanted to and Microsoft said we told you we can't do that but you're a judge and you're ordering us to so they do and surprise surprise when you just disable a bunch of code that other code depends on it doesn't work so then of course two things happen judge Jackson is not pleased since it appears Microsoft is complying with the letter of the law but violating the spirit and sort of thumbing

its nose and being arrogant so that's Thing One Thing two is obviously the PC makers don't actually ship this version of Windows so it never sees the light of day and so things get real Petty real fast the doj asks the court to hold Microsoft in contempt yeah whole bunch of back and forth Microsoft appeals judge Jackson's order and in early May 1998 the appet court rules that Microsoft can continue shipping windows with ie bundled into it and also continue to bundle any other features that they want as part of Windows as long as it

benefits consumers and this is interesting because this is when it really hammers home the idea of what we the US courts care about is consumer welfare we haven't explored the idea of if Microsoft is a monopoly or not yet but for now what we are saying is as long as what they are doing is in the consumer best interest they're not causing harm they're not raising prices then it's okay so then one week later on May 18th 1998 the doj announces a brand new enormous wide ranging antitrust lawsuit against Microsoft for violating the Sherman Antitrust

Act and abusing its Monopoly power to suppress competition and this investigation is way bigger than just is it okay if they tie Internet Explorer with the shipment of windows this is a is the company of Monopoly and B are they doing anything across their entire business to abuse that Monopoly power in the disinterest of consumers right it is not necessarily illegal to be a monopoly it is illegal to abuse your Monopoly power correct so this court is examining both of those questions one is Microsoft a monopoly two are they abusing their power this is really

bad for Microsoft really bad and it's worth decoupling did they do anything wrong from just legal strategy by holding a very firm line early of we're appealing this decision we couldn't possibly be doing anything wrong here Microsoft is starting to take this super aggressive stance and the Department of Justice is then like wait you didn't give an inch you're not open to just this one thing the tying of Internet Explorer and windows okay we're gonna look at everything yep you can see how it sort of gos them into like okay we're gonna bring the big

lawsuit right but this whole suit you can also see from Microsoft's perspective a feeling of like betrayal by their government you know like hey this is the third time we are being tried for what feels like the same crime Ben you said Double Jeopardy isn't a thing earlier you know what is this triple jeopardy come on I thought this was supposed to be a free country where we can build businesses what the hell yeah and you know Microsoft Folks at the time too are starting to get this inkling of why are they doing this are

consumers really mad at us you know who's being helped here and they're starting to realize hm there is a lot of lobbying going on behind the scenes of Netscape and everyone else we competing against trying to find a way to call us anti-competitive yep which which we should say is always true in these big antitrust lawsuits but that was certainly happening in this one yep and so for all these reasons including Ben as you say the legal strategy they started with in the first place of we're going to fight everything they say like all right

we're fighting this and we're gonna fight it hard yep so Ben you talked to a lot of people here take us through what happens in this big trial through the fall of 98 into 99 so the first question question that everyone is sort of wondering is did Microsoft have a monopoly here well the fact is that they had over 90% of PC operating system sales so you know I'm not a judge but at first glance there you think like okay they have Market power so in August of 1998 judge Jackson issues a pre-trial order that

all depositions shall be submitted during the trial only in transcript form and so for folks who aren't in this world or looked at lawsuits before a deposition is when the council goes and does a bunch of interviews beforehand you're not being called as a witness in the trial but it's basically information gathering y interview process yes so on August 27th Bill Gates is deposed by the doj's appointed prosecutor David boy for 20 hours and I think this happens over multiple days actually on YouTube which is interesting to note you can watch 12 of the 20

hours I think I've watched eight or nine of it but it's just hours and hours and hours of just some you know light bedtime viewing of uh Bill Gates being asked questions so the strategy that Gates and the Microsoft legal team used was one that was tailored for this pre-trial ruling if you watch the video you can see that the strategy is essentially never give an inch avoid saying anything that can be used against you and Microsoft walked out of it feeling like they were pretty successful in this and but when you say tailored for

the pre-trial ruling you mean tailored with the assumption that this is only going to be delivered as a written transcript right there will be no video no recording of right these depositions and yet I just watched the video on YouTube so what's going on here how did that happen yeah so if you're watching the video though it's very easy to think this guy is rude pedantic and disrespectful I'm not out on a limb saying that opinion if anybody watches this video that is just the obvious takeaway yeah at a certain point they argue over the

definition of definition is that right yes so a couple examples I'm not exaggerating here the deposition really does come across as just showing pure disdain for the prosecutor and the questions he's asking Bill Gates rat holes on things like refusing to answer questions about memorandums since they were not memos but emails so I couldn't possibly answer you on the question about the memorandum at one point he does look at David boy and ask him how he would Define the word definition of course while smirking the whole time and so the whole thing is like very

obviously tailored with this idea that I'm going to give you pages and pages and pages of which you will have nothing that can be used against me and that is the whole strategy I don't care how I come across I don't care how ticky tacky the languages you know he sits and pauses forever he'll say well you asked me what the person who sent this was referring to how should I know what they're referring to I didn't write the email you'd have to ask them I I don't know and so it's 20 hours of this

well somehow and I actually don't really know how this happened after the deposition is recorded on October 9th the judge then issued a reversal saying that videotaped depositions are indeed allowed to be used in court o yeah how did this hold up and if you give a great prosecutor like David Bo this opportunity he uses it masterfully and so throughout the trial he'd show little Clips at strategic moments in the trial where he either wanted to give the press something juicy to write about that day because there's a whole press section in the back going

and listening to all the witnesses every single day or he would play something he knows is going to get to rise out of the judge and if the judge makes an expression then the Press writes about oh the judge Jud is leaning this way or that way also he would use it anytime there was an opportunity to feel sympathetic for Gates or anyone at Microsoft and then he would show a clip that sort of clearly causes you to lose any sympathy or leaning and so it was just dripped out in this really clever way Y

and certainly went a long way towards shaping the decision but also shaping more importantly public opinion about Gates and about Microsoft Y how did this whole up though didn't Microsoft appeal the change from recordings not being allowed for depositions to recordings being allowed and is a great question David and one of the things that I read to prepare for this episode is a book called World War 3.0 which is exclusively about this trial and the author has this comment on it Microsoft feared that judge Jackson was a foe he had made a number of pre-trial

rulings deemed hostile to the company they were especially unhappy that he modified the pre-trial order that deposition shall only be submitted in transcript form issuing a new order allowing videotape depositions Microsoft suspected that Justice had somehow prevailed on Jackson to amend his earlier Court ruling Jackson categorically denied this but does not recall exactly why he issued the October 9th ruling they groused but only in the most unguarded private moments because they were terrified of offending him that Jackson was biased and would rule in favor of the government so your question of how does it hold

up I guess there was no formal challenge of that change in Rule and part of it probably was just because they realized they had a long way to go with the judge and didn't want to agitate too much WoW interesting it also sounds like maybe they didn't realize yet how disastrous these tapes getting out was going to be for Bill and for the company yeah I think that's right interesting well okay all of this starts to culminate in November 1999 these trials take forever when judge Jackson issues a finding a fact that Microsoft is indeed

a monopoly in the operating systems business now remember it's okay to be a monopoly it's not okay to abuse the power but simply the fact that the judge has now issued his opinion that it is a monopoly everybody knows this probably means the other shoe is about to drop and more specifically the finding was that the network effects from the large installed base so that's users and large body of applications so apps makes it prohibitively expensive for a competitor to develop its PC operating system into an acceptable substitute for Windows which yeah of course obviously

that's what our whole episode one was about correct right so the finding of fact is hey it's Monopoly but again not necessarily illegal to be a monopoly only illegal to abuse Monopoly power right so couple months go by after the finding of fact and then on June 7th 2000 judge Jackson issues the final judgment in the case and he rules that Microsoft did indeed abuse its Monopoly power and as a remedy for having done so he orders that Microsoft be broken up into at least two separate companies separate operating system company and a separate applications

company just like the Standard Oil breakup order however many years it was before 90 I think also what this is completely lost to history unless you are a tech Oldtimer Microsoft was ordered that was the ruling by the court to split up yes it wasn't just that oh Microsoft lost the doj case no the ruling was Microsoft will be split up by order of the United States government and there's a whole bunch of additional Provisions in this Steve Balmer had to work at one company and Bill Gates had to work at the other they could

not work at the same company each of those two after they picked their companies had to divest all of their shares from the one that was was not their employer so they couldn't have this conflict of interest it is crazy imagining this world that could have been I mean clearly this didn't happen but for a moment in time this was the position of the United States government it's totally w i mean can you imagine if there was like the Gates company and the bomber company I mean sort of as we're going to talk about in

the rest of this episode that is what happened but in a very different way it's also worth pointing out from late 1999 when the findings of fact came out over the next 12 months Microsoft's market cap dropped from 600 billion to 270 billion which was a 55% drop now this coincided with the dot bubble and the CEO change that we're going to talk about shortly but the perception of Microsoft this super high flyer completely fell off a cliff from this ruling imagine if a ruling comes out tomorrow that Apple needs to be broken up and

iOS needs to be separated from the devices and you need to be able to buy a phone without iOS what do you think that's going to do to the company's market cap yeah not exactly the same thing of course because this is not about devices well right but I'm just I'm making a similar type of scale analogy right like what the impact would be yes so do you know the technicality that was discovered no I don't I know that Microsoft immediately appeals of course it was discovered later in June 2000 that judge Jackson had secretly

been meeting with reporters in his chambers before the rulings were delivered it's not allowed and so judge Jackson was removed from the case yes the reporters all had these embargoed stories they could drop immediately afterwards and everyone was like how did you what wow that's wild yeah what a freaking crazy Escapade here like there's no other way to put it so this is June of 2000 by the way the appeal then takes a long time so there a meaningful moment in history I think about 15 16 months where the official ruling is Microsoft should be

going through the preparations to do their breakup right that is what the world believes as far as anyone knows yep so the appeals court removes judge Jackson from the case they install a new judge to readjudication the parties toward a settlement especially 9911 happens and then I think that's a galvanizing factor to pull the parties into the room and say hey this has gone on too long and we need to put this behind us yep also there was a political Administration change from the Clinton Administration to the Bush Administration yep so then in November 2001

just a couple weeks after the Windows XP launch the doj and Microsoft finally completely settled the case also can we just say this case is brought against Windows 95 Windows 98 comes out and then before we have a resolution Windows XP comes out Windows 98 you mean the uh marketing update to sell back to school PCS yes but like insane right and the whole time Internet Explorer shipping with Windows right the whole time so November 2nd 2001 the settlement is proposed at this moment in time internx expor has right around 90% market share right if

you are in the camp of Microsoft was a monopoly was abusing its Monopoly power you're like well this was a complete failure of process the damage is done right yeah meanwhile also if you're in the Microsoft camp of what the hell is our government doing you're also like what the hell nobody is happy here right an Innovative company that built the most important product for that technology phase meanwhile there's this whole new thing going on with the internet and like we need to figure out how to legally navigate that transition right yeah we have enough

existential threat to our business from technology Trends happening yeah that to try and navigate that with our hands tied behind our back because of these legal proceedings like come on right so 2002 the settlement is finally approved it reverses the order to be split up obviously Microsoft is still one company officially the ruling that Microsoft did indeed have a monopoly is upheld they put in place a 5-year consent decree and the terms are that Microsoft is not allowed to enter into contracts with PC makers that excluded competitors I mean fine two windows had to be

interoperable with non-microsoft software which of course it does it always was yeah it's the developer platform they have to write API documentation and make their apis such that developers can build applications on top of them that is the purpose of the company so okay three an independent technical committee was created to field complaints from competitors okay they created a call line that is it wow that's it am I missing something David that's my understanding of what it is yeah I no I don't have anything else but okay that is the letter of the resolution here

the actual cost of this was immense nothing could have been bigger I mean we spent the whole first section of this episode talking about how Microsoft was so powerful had never been more powerful and there probably never will be a more powerful company than Microsoft in the late 1990s this is what destroyed it oh that is a take right there I think that we will debate at the end of the episode oh well the back half of the episode is about the incredible story about how Microsoft rebuilt itself in a completely new market into now

again the most valuable company in the world but let's just talk about what the actual cost was not in terms of money it certainly didn't actually impact Internet Explorer or Windows XP was a huge success sells over half a billion copies gets used over its lifetime on probably a billion PCS it unifies Windows under the NT architecture has the Bliss wallpaper amazing but the true cost is what it did culturally and emotionally to Microsoft I mean we talked to all these people and God it was like death being there I mean to believe for 16

months that the company was going to be broken up for Bill to have this really embarrassing video of him all over the press and to have the narrative change about Bill change about the company you change about for every employee working at the company to like oh you're the best and brightest in America to you guys are evil and why are you working at this company yeah it exposes the difference too in the legal strategy of both sides where Microsoft's strategy was to refute Point by point every allegation brought against them to the point where

they were trying to refute Netscape we don't view Netscape as an existential threat to us and they should have just probably acknowledged you know Bill literally wrote a letter that got published a memo saying that Netscape is a competitive threat born on the internet but they wanted to refute every single point and knock of an inch meanwhile all David boy and the doj wanted to do was Destroy Microsoft's credibility so that every time they brought a witness there were emails or there was a deposition that basically called into question are they really telling the truth

on the stand can they really not remember that and it just blowby blow made Microsoft look like they were licus and that has to leak into the company culture that has to make you on the one hand feel like your government is attacking you but on the other hand start to question and say why did we do this again I thought we were just trying to make the best s where were we trying to do something illegal and I just didn't know about it right it's worth talking about some of the other pieces of Fallout

it did slow Microsoft down there were huge amounts of protocol documentation that needed to happen so if anyone's running a software company you know that if your iteration times are slower and you just have permanent new drag on your development process you are going to fall behind and I think that was one that was felt by a lot of employees and managers who suddenly can do less with the same amount of resources that they have there was also a bunch of private lawsuits Sun AOL real networks Microsoft was paying out billions of dollars in these

private settlements that followed the doj their civil suits not to mention state attorney generals were also suing Microsoft left and right and international many of the state AGS for years who brought the suit together with the doj did not accept this reversal and so they tried to continue independently suing Microsoft which was painful for another fiveish years we made it all the way to 2009 before they settled their EU version of this antitrust case I mean that's another what seven years after the reversal and and in May 2011 that is when the final consent decree

finally expired so basically from 1990 until 2011 21 years of the company's life the majority of the company's life had been spent under some sort of antitrust scrutiny or active litigation wow and obviously the company thrived through much you know if not all of that but were consumers ever harmed I continue to wonder this it was horrible for Microsoft even though there weren't any real material changes they had to make but effectively they won right which I guess they should have because it's not clear that there was negative impact to Consumers there was all kinds

of negative impact to existing competitors or future potential competitors but that is not the US Standard for antitrust law especially at this point in history and so I guess the right answer is the right thing happened eventually but it was awful to get there and it had all sorts of indirect negative impact on the company yep so I said a minute ago I think it killed Microsoft's immense dominant consumer Technology power and the biggest reason I say that we didn't talk to Bill Gates as we were preparing for this but is what this whole thing

clearly did to Bill Gates yeah yeah Microsoft had one competitive advantage that no other company had and that was Bill Gates and for whatever sets of reasons I mean I can imagine so many thinking about like if I were in that seat going through that bill at Microsoft was never the same person after this in fact Bill stepped down before the final ruling from Judge Jackson yeah so in July 98 right as this big huge doj antitrust suit is heating up Steve bomber gets promoted to president of the company bill is still CEO but Steve

is now promoted to president and is the clear number two and then they go through the trial the deposition the November 99 finding of fact that Microsoft is a monopoly and then Ben as you're referring to on January 13th 2000 Bill Gates announces that he is handing the CEO role of Microsoft over to Steve and that he is moving to a newly created position as Chief software architect and he will remain chairman of the company but he is no longer going to be CEO and then of course it's just a few months later that the

breakup verdict comes down yeah going through something like this has to feel personal and has to change you forever I can't imagine how it wouldn't totally especially when again it's not clear to me how consumers were harmed so this constant battle this war that was w on forever and ever and ever and ever it totally distracted Microsoft and as anybody can attest especially in the tech industry if you are distracted you just fail because you need to have all of your best resources making stuff building stuff focused on a firing on all cylinders clear North

Star strategy and so if you tie up a company for five years and you lose your leader through it I mean somebody we talked to characterized this period as like a mental breakdown for the whole company and I think that's kind of the best way to characterize it yeah it's not fair to blame everything we're about to talk about all the future consumer failings on this but it is helpful to keep this in mind and say okay why perhaps did they not fully have their wits about them yes and so the transition to Steve bomber

happens this is the context under which Steve bomber became the CEO of Microsoft so I talked to a whole whole bunch of people who were at Microsoft in this era and one thing that every single person brought up that never gets talked about is how much Steve was the emotional Rock for the company when this was happening all the stuff everybody thinks about Steve you know the running around on stage the yelling the screaming developers developers developers when do you think all this happened the crazy dancing on stage I love this company that was in

September of 2000 when they thought they were going to get broken up and Steve was there trying to keep everybody moving forward everybody we talked to was like I don't know how he did it and it meant so much it's actually shocking they held on to as much talent as they did in a 15-month period of people assuming the company was about to be split right knowing that context for me at least it completely changed my perception of Steve and of the company during this time fascinating so when Steve takes over his agenda is three

things and I think in basically priority order number one hold the company together emotionally I love this company that was job number one just like keep everybody coming to work job number two clean up this antitrust mess and then job number three I think was hey let's keep this company like growing and winning and I think it's kind of fair to say he did all three so we just talked about one emotionally holding the company together two one of the very first things Steve does when he becomes CEO is he promotes Brad Smith to general

counsel who Brad Smith is still of course leading all this in Microsoft to this day he's now president and Steve tells Brad go make peace so actually this is amazing Brad's fin interview with the Microsoft board of directors oh I was wondering if you found this yep for his job you know to be promoted to General counsil his PowerPoint presentation to the board is just one slide that has one sentence on it it's time to make peace and that is totally what he goes and does and he says okay I'm going to figure out what

settlements we can live with and I going to go settle everything and this company just needs to move forward and it doesn't matter that we all feel it wasn't fair it doesn't matter that we all feel this was a sham of a process we just have to move on and we have to live in a new reality and you kind of need a new set of people to do that it's kind of amazing that Steve was part of the Old Guard and the new guard to do this because how can you say I'm going to

put how unfair I feel this was aside and just focus on moving forward that is an extremely difficult compartmentalization exercise and so for Brad to come in and say like I'm going to be the guy who is able to disregard the past and figure out how we and I use this phrase in the first episode become a trusted partner to governments around the Free World I mean how crazy is it that this Microsoft that we just talked about for the last hour became the Microsoft that can do no wrong from a regulatory perspective the only

one that's not under active antitrust investigation today by the federal government the one that is a massive provider of software and services to the US and its allies at the government level right the reversal here is it doesn't get talked about enough what an amazing job Brad and the company did to reverse this perception so then that leaves job number three on Steve's agenda of be successful continue to have Microsoft be a leading technology company and hopefully still grow revenue and profits and Bill Gates is still chairman of the board like not only is he

a full-time employee being the chief software architect it's not that it's like a sham that he's not the CEO but he is a very present voice at the table in these big decision-making moments and so for how do we become a company that continues to innovate and make great products despite all this he still has Bill as the technical leader of the future products yes and absolutely bill was still there and Steve had Bill and they were running the company together absolutely but what's so interesting is Microsoft right at this time basically starts a transformational

journey from a technology company RIT large a consumer and sort of Enterprise technology company to the Enterprise technology company and that is a muscle that as we talked about last episode Steve had been building for a while but boy does he really come into his own here and Microsoft the entire Enterprise Juggernaut that it built the bulk of it really is post doj it is like new business and new markets that they are getting into yep so then the question becomes how did Microsoft build this phenomenal Enterprise business and along with that release XP the

most successful Windows operating system ever and then we're going to talk about Vista and then we're going to talk about zoom and search and Bing and Windows mobile and Windows 8 and yeah all that but before we do we would like to thank hugee partners of ours here in this season of acquired service now yep service now is the AI platform for business transformation helping automate processes improve Service delivery and increase efficiency over 85% of the forun 500 runs on them and over the past few years they've joined companies like Microsoft as one of the

most important Enterprise technology vendors in the world and speaking of Microsoft and service now they just announced a huge expansion of their partnership specifically integrating the two companies Enterprise AI assistant starting in the fall customers will be able to interact with service now's now assist AI assistant directly within Microsoft co-pilot yeah it's telling for the magnitude of this partnership to see SAA nadela appearing in the keynote at service now's big annual event knowledge last month it had Echoes of that Bill Gates 1997 macw World video that put apple back on the map not that service

now needed putting back on the map yes and like that historic announcement from Bill committing to Microsoft Office for the Mac this partnership is also huge service now's now assist will be integrated with Microsoft co-pilot and will be available directly from office apps starting with Microsoft teams in August the AIS are integrated into one seamless user experience without actually sharing data so if for example a user asks co-pilot in teams about how the company's laptop policy Works behind the scenes co-pilot shares that request and context with now assist and now assist accesses internal company policy

with the right permissions for that user and Returns the answer to co-pilot in a rich card with options for the user to kick off a workflow via now assist in the future Microsoft co-pilot will also be integrated the other way into nsis so it can automatically generate office files like PowerPoint presentations and Excel spreadsheets directly from assets and knowledge in the service now platform it's pretty awesome for both companies and especially awesome for Enterprise users so if you want to learn more about the service now platform and how it can work with your company's Microsoft

Services go over to servicenow.com Acquired and when you get in touch just tell them that Ben and David sent you all right so to contextualize how this Enterprise business was built it is worth understanding the shape of Microsoft's business like the divisions what products generated what Revenue even before all this doj stuff so if we go back to 1996 Bill Gates gave a great interview where he was talking about the kind of four businesses that they're in today oh this is the wired interview with Kevin Kelly right yes it's on YouTube it's great it is

great so there's Windows which he calls one business there's NT slack office there's office which he calls a $4 billion do a year business and those three businesses together are over 90% so you can think about it as Windows and he said NTB back office but this is the Enterprise an office yeah which is so funny that bill thought of it as NTB back office it really exposes that Steve was the one who had the passion for the Enterprise yes bill was like it's like this stuff that businesses buy but I'm going to refer to

it by its Microsoft product name of one of the products we sell which is NT and then the last 10% is everything else so there's MSN e-commerce games encyclopedia Maps joint ventures DreamWorks and NBC so he's talking about the interesting thing the server business which is a different way he refers to NTB back office all the way back in '96 said it's the fastest growing business even faster than Windows or office so they sort of know they're on to something yeah but they haven't quite cracked the go to market motion the pricing the service organizationally

how do they sort of fit it in that all comes later or the products either really yes that's a great point the fact that he calls it back office this is so telling okay so we did talk last time about NT and Dave Cutler and the heroics that he performed to right NT Windows NT though was still a client operating system architecture for a user to use a personal computer with NT basically was Enterprise ready it was like very networked for work groups it ran on only the most high power PCS but you're right David

it was designed for the thing that you know the first 25 years of Microsoft was all about which is PCS it's not like oh we're a systems company that makes stuff for all use cases all over your Enterprise it's no we make stuff that runs on a box sitting in front of you yes and discovering this distinction is what Microsoft in this next era really really need nailed and they discovered that the Enterprise is not about users it's about it and it's about systems for Better or For Worse yes and discovering that and the products

and the sales motions that Microsoft could then go use to sell to Enterprise it and sell systems was a new you know multi hundred billion dollar market that Microsoft could now go attack and offense in in this post doj landscape whereas they're playing defense everywhere else hey here our market share is zero we can do whatever we want here well it wasn't zero but they were fighting Sun IBM Oracle yes really IBM but Sun yeah to Oracle Etc and it was perfectly suited to Steve's strengths so Ben if you've ever heard of these now sort

of strange sounding Microsoft products SQL Server active directory exchange Dynamics SharePoint SharePoint was technically within office but it is one of these systems types products these are all every single one of those names I just mentioned become multi-billion doll Revenue Enterprise it server products that are built and sold during the Steve bomber era of Microsoft and what's so like honestly beautiful about this is they work in concept with Windows and office on the PC client side so like this is the client server era that Microsoft really dominates here and Microsoft within Enterprises all these new

server products work best with Windows operating system devices running Microsoft Office applications on them and those Windows operating system devices and those office applications work best with the Microsoft server products you now have a full system solution from one technology vendor as a major Enterprise it's like the most incredible three-sided technology flywheel ever built and one benefit from this which of course if you're Microsoft you don't want to lean on this benefit but they end up doing it is if you make everything integrated together work well and come from one vendor nothing actually has to

be best of breed and so you're no longer competing with any point Solutions you offer the whole thing sure yeah you can consider going and buying that other vendor's directory service or that other vendor's email server but are you really because you buy everything from us and it all works pretty well together yep the very very very best example of this that most listeners can probably tangibly relate to as well is exchange EMA and calendaring service and Microsoft Outlook and windows it all has active directory that syncs across everything in doing all this research it

seemed to me that once a Enterprise adopted active directory they were going to tip and they were going to buy the rest of the software too because whoever manages the source of Truth for who are all the people and what are all the resources you know devices and everything that my company owns everything else needs to reference that canonical set of proper nouns whether it's email whether it's calendar so that was this incredible sticky product that then you could just keep attaching more and more stuff to any Enterprise need oh we got you covered and

hey it works with active directory yep and the whole product effort here started with database in 1998 Microsoft takes SQL server and it was the first real Enterprise ready database that can Ral IBM and Mainframe databases Oracle databases and of course unlike IBM it runs on x86 Intel architecture so the pitch now to Enterprise it is everything we just said about why working with Microsoft server products is better for the whole ecosystem reasons also total cost of ownership don't pay IBM tons of money for their main frames just go buy cheap x86 windows boxes from

Dell or whomever and use that as your it server architecture fascinating I don't think I quite understood that and so basically you then have NT as the operating system SQL is the database and then you've got all these other applications that basically run on that stack and here's where exchange and Outlook and everything comes in this is right as email is taking off as like the killer application in Enterprises and so now Microsoft shows up and says we've got this great new product for you it's called exchange and like maybe you were using Lotus Notes

before which of course developed by the legendary Ray Azie he's going to come back up here in a minute H Lotus gets acquired by IBM for three and a half billion in 1995 you're buying Lotus Notes from IBM come take a look at exchange exchange has Email exchange has calendaring exchange has address book exchange has Outlook it is a first class included in the bundle of Microsoft Office Office application that you you know Mr and Mrs Enterprise are now going to get for all your users and it works just beautifully and perfectly with our exchange

email calendaring an address book service it sells itself [Laughter] basically and then you were talking about active directory that led to active directory of oh okay well now you've got your whole database architecture running on Microsoft you've got your email and your calendaring architecture running on Microsoft you've got your windows machines out there well you've got all these employees within your company all these users with all these devices you kind of need to manage them and you need to know who has what security access and how to find each other and where should the mail

get routed and all that well we've got this great new product for you it's called active directory yeah it's pretty incredible that's all on the sort of why it's good for customers on the why it's good for Microsoft Steve also pioneered this bundling idea which is once you sign the Enterprise agreement you get access to all of this and if you're a customer that's only using 30% of the things in the bundle if you have business needs that involve some Microsoft product that comes for free in your bundle you're going to adopt that and guess

what you just became a stickier Microsoft customer I feel like this often goes overlooked in the like oh Microsoft's a big boring Enterprise company right now there was a tremendous amount of business model innovation in figuring out that bundling like that with additional products can create stickiness which eventually creates more Enterprise value for your company because you've got these long durable compounding revenue streams oh and all your customers are growing so you have the whole land and expand thing there and the thing underpinning it all is the software itself has zero marginal costs so you

can bundle in all this stuff for free because it actually doesn't cost you anything I know it's Enterprise software so it's not as sexy or exciting or thought about as much as consumer software but truly The Innovation that was happening here was among the most that has ever happened in a technology company because Microsoft was figuring all this out again these were not lessons that people knew in the IB M era that came before this in the Enterprise there were no users Microsoft is now figuring out how to build and sell Enterprise technology systems in

this new era to businesses where there are users of the technology and on the business side yeah what you just said like this is crazy Microsoft said okay we're not going to just sell you the software we're going to introduce this thing called an Enterprise agreement where you based on the size of your company will pay us a certain dollar amount per year per employee actually I think it was per device but in these days it was like you know most employees just had one device and we've got you covered everything that you would want

access to in our whole Suite of software products inclusive of Windows and office I mean it's not just you know a Salesman comes to you and sells you Windows this is Microsoft amortizing their go to market C across all of their products because when you show up at an Enterprise you got lots of stuff to sell them yep so now Microsoft has turned a one-time sale of software into an annual annuity that is going to keep growing every year and is going to grow with headcount and a key feature of the EA is that it

is a threeyear agreement which means that you really need everything to be aligned to pull this off there's something pretty convenient that you may have noticed about Windows and office they both tend to release an operating system or a new package of office once every three years or so and so every customer no matter when they sign the agreement is essentially guaranteed one upgrade during their lifetime totally here's something else that you get now as a Enterprise it buyer in the Enterprise agreement world with Microsoft your needs as it are actually pretty different than your

users they're actually very different so like if you are an employee of a large company at this time you are using a Windows PC at your office what are the set of things that you want from that device well you probably want to be able to procrastinate you might be able to want to play some games you probably want to poke around the internet and you definitely want it to be easy to use and you definitely don't want restrictions on there yeah you're willing to make tradeoffs like uh if you can get a little bit

more efficiency but trade off some security that's fine if you can you know maybe use some pirated software but it makes you better at your job that's also fine you're acting with your own agency not necessarily the company's best interests in mind right you want to run some VBA macros you know etc etc okay now you are a corporate it administrator and all of a sudden you have to manage all these Rogue agents all over your systems Rogue agents called your employees you want the ability to restrict your users from doing what they can do

you want to say like no you cannot upgrade this software without us doing it you cannot install anything you cannot run these macros you cannot visit these websites etc etc etc one part of that is productivity but a large part of that Ben as you said is security yeah security privacy legal compliance am I going to get hacked am I going to get sued are we going to lose data well Microsoft's got a beautiful solution that they can sell you and with the Enterprise agreement you can customize all of this and we will give you

exactly what you want yes but now David you're starting to expose a couple features of Enterprise adoption which have trade-offs if you're Microsoft oh yes oh yes they do first of all if you are a user you want the latest and greatest software with all the most Innovative features your it administrator has a lot of incentive to say I don't really want to go train everyone on anything new so if the software never confused anyone that's a win even if it means we never get any new features and so suddenly and I have a direct

quote from someone who is an executive in office told me when I was in office I always thought we could stop bundling new features for 10 years and it would be fine no one would notice I think people would probably pay more for it office got to this point where and I think step soski even writes about this in hardcore software in his book and on his substack that at some point they were trying to ship features that the PMS thought were great and users would love they would do this user research they would hear

that people want them and then the Salesforce would run back to them and say no no no no no no no do not include that are you kidding me I'm going to have all these objections in my sale if you make me take this new feature or take this ribbon or take this you know any big UI change everything has to be small and iterative and not add any training or confusion I joined the corporate Workforce in 2007 when I graduated from college and I was an investment banking analyst on Wall Street at UBS I

started Midsummer 2007 and our corporate it systems my windows laptop was so locked down we were using XP of course in 2007 you were using XP yes we were using Office 2003 of course and like over everyone's dead bodies would any of that change everything was firewalled we could not access we couldn't install anything we couldn't access tons of websites I remember when I first started we could still access miniclip.com and so the analysts were playing tons of games and like pretty quickly it caught on and you know that got the kibos so yeah and

I'm sure UBS as a customer loved every single bit of that the other big thing that you are talking about which you were hinting at with h VBA macros the key to Enterprise is backward compatibility saying look we don't necessarily need to promise you anything to groundbreaking we need to meet your needs today and be the most cost efficient you know total cost of ership driven system that meets your needs and your employees are fine with and from here on out everything's going to stay compatible any modifications you make Enterprise or software you use and

rely on we won't break no matter what and we will continue to support those versions you are using yes and Enterprises love that and we're going to put a pin in this right now and we're going to bring it back toward the end of this episode in an really illustrative way that it can deep deeply deeply hold you back if you are Microsoft and you have built an entire brand and reputation around your backwards compatibility yep one stat and then one point I want to make to highlight all this by 2007 analysts estimated that 40%

for zero of all of Microsoft's Revenue which I think was about $51 billion that year so 40% of $51 billion came from multi-year Enterprise agreements so these threeyear agreements that you're talking about Ben that covered windows that covered office that covered all the products that Microsoft offered except like Xbox 40% of all dollars were flowing from multi-year EAS and then another 15% of all dollars that Microsoft was earning as Revenue were flowing from single year EAS wow so more than half the company's Revenue 55% % yes more than half the company's revenue is all from

this by 2007 so I mean it was really the first seven years of Steve's tenure as CEO yes already tipped the balance into majority and the vast vast majority of the rest of Microsoft revenues you know the other 45% of the company was the OEM Windows business that was 30% so if you look at Microsoft Revenue in fiscal 2007 50 55% is this new Enterprise motion 30% is the old windows business you know Dell and Lenovo and whoever like you know selling laptops to Consumers and paying Microsoft for the operating system Y and only 15%

of the company's revenue is anything else yeah it's funny I wasn't going to bring this up here but since you brought up oems the OEM business model is completely transformational for Microsoft when they figured out actually we should be just selling software directly to Consumers instead we should be selling them to the PC maker and the PC maker should do our distribution so here's a couple stats in the 90s the Box software that Microsoft would use to sell Windows their gross margin on a copy of Windows was 29% oof that's not good they had to

print the disc which had actual real cost especially on floppies you had to put it in the Box you had to ship it to the retailer you had to split profits with the retailer you had to pay the sales and marketing costs I mean it's like real material C this is not a zero distribution cost zero marginal cost business in the Box software retail world but when they're selling through an oem Channel their gross margin was 75% because you just ship the bits to the OS once and then the PC manufacturer and takes it from

there not only is it amazing because you get that 75% versus 29% of gross margin it's also an amazing way to scale because you do a deal with every OEM you know as you're going down the line it's the Visa networks of networks thing that I think we alluded to this last episode too you just get each of them scaling on their own can ACR to you without you doing additional work to do the scaling yourself and so David it's interesting you're talking about how 85% of the business by 2007 was either Enterprise sales of

the EA or OEM I mean they'd basically Kick the Can to the curb on that crappy retail box softare model and they're just doing the whale hunting with their Salesforce and doing these Enterprise agreements which of course have great margin structures and the oems and our annuities annual annuities exactly way better business model in every way they pivoted the whole business to the two best ways to sell software and completely eliminated the bad way to sell software yes and one of which they figured out post doj and it became Yeah by 2007 over half the

revenue of the company which is crazy now Ben when you said put a pin in a minute ago and I know we're going to come back to this after all the consumer failures we're about to talk about there is a downside to this when it becomes your customer when you become an Enterprise business the quality of the software especially the user facing software is no longer priority number one and this wasn't a problem for the company until in 2007 with the iPhone but let's rewind and talk about everything that happened in consumer software at Microsoft

until then yeah what was going on with Windows releases during that time and I think through storytelling the windows releases we can then understand the state of the company so Windows XP why was Windows XP such a big deal well it was a big deal technologically it was a big deal for users and it was a big deal because it's pretty wild that Microsoft amidst all the antitrust stuff we were just talking about during the 1998 to 1999 the rulings in 2000 the settlement proposal in 2001 they developed and released an operating system amidst all

of that and an awesome one yeah so what was Windows XP technically well for the previous better part of a decade they had two parallel development efforts going on there was Windows NT for the Enterprise and there was Windows 9x you know Windows 95 Windows 98 for consumers and both of these had the same API that developers could write their applications for But ultimately the way they were implemented the way interoperability worked compatibility worked user experience everything about it was actually completely different because it was a completely different implementation of those apis and so the

knock against NT was always well you need really beefy Enterprise grade PCS to run it and it's not as nice and intuitive and the knock against the windows 9x call it 95 was that yeah it looks pretty but it's not powerful I can't actually do anything it was like a friendly interface but not a powerful set of functionality that came with the operating system and so XP did The Impossible where they figured out how to to take the ease of use of the 9x interface and make it run on top of NT the whole thing

is built on the NT kernel and it has the friendly approachable ease of use that you are used to in Windows 95 and 98 amazing amazing so the lineage of that 9x code base that came all the way from Windows 3.0 or maybe even one or two I don't know how long code lived but interface manager right exactly is now dead and so you had the NT lineage of I guess maybe even you could say it started with os2 but Windows NT Windows 2000 and then Windows XP so everybody's running XP now there's two additions

there's home and there's professional oh got to get the professional I always got the professional did you every time I built a new pc oh gotta go pro I didn't even know what Pro meant I definitely didn't need Pro because I was not a corporate office worker but got to go pro it came with all kinds of great stuff they've got this great slide it's a fun announcement to watch the emphasis on digital photography digital music digital video home networking it ushered us into this age of you probably have media that you're using on your

computer Apple famously owned this as a corporate identity with their digital Hub strategy but you know Windows XP plenty of people were importing digital photos off their camera to Windows XP that was a a sort of big exciting use case for it lot of Napster clients running on Windows XP machines lot of Napster clients yes so like I did for every Microsoft Windows release I went and watched the keynote the keynote is extremely strange think about what a Steve Jobs keynote was back in the day or what a WWDC keynote is like today or a

Google IO this keynote opens with a gospel choir singing America the Beautiful and is followed by Bill Gates and Rudy Giuliani walking out on stage together and talking about how bad terrorism is and of course the thing you need to know about this keynote is the date yes so this happens one month after 911 in New York City and it really underscores what a strange time it was in the US if you had this once in three years product release and it was going to be in New York October of 2001 you probably have this

question should we even do it should we make it all about the First Responders it grounds the whole thing in a very specific moment in history when you're watching it in a way that no other Tech event really ever has been grounded in history before so a few other things that jump out during the keynote Bill Gates is not the CEO Steve is and yet Bill Gates is the one walking out with Rudy Giuliani to kick things off and that's a strange and somewhat telling element of what Bill's role at the company was now you

could argue he was the public facing figure he was the founder of the company it seems very natural but also at some point why isn't the CEO the one doing the keynote another thing about Windows XP there was a new release of office right at the same time as XP this is a classic Microsoft move they are able to create great applications available on day one which makes the OS more valuable and so from the applications perspective they're able to ensure that they get great market share since they're always adopting the latest and greatest Windows

platform right away so Windows success begets office success and it's important to remember that that worked for many many years and if you remember back to the last episode Lotus 123 and Word Perfect smoked Microsoft in Microsoft's own backyard during the Dos era Microsoft's productivity apps did not get real adoption in DOS which is crazy so when they were making windows they basically swore never again they ensured that they were going to be very early with applications on those platforms and so as Windows took off office also got huge market share and it's smart to

remember this lesson and carry it forward for years maybe a decade but again they may have been on this strategy a few years too long forever it kind of became gospel at Microsoft so with Windows goes the company and so you need to do things to make sure that Windows is going to continue to succeed because that is our company's platform and livelihood it's almost like the old Disney adage so with animation goes the company and until 2014 Microsoft felt the same way yep and yes that is true for all the traditional reasons in the

XP time frame the reason was also true in part one of our Microsoft series it's even more true as Microsoft becomes an Enterprise company because Windows is at the heart of the Enterprise agreement the whole value prop of all of our server Technologies is they work great with your windows devices on your network right and so there's strong incentives everywhere for Microsoft to Ure that Windows is the standardized platform that everyone wants to have on their PCS because it kind of makes everything else work and so of course they're going to release a new version

of office that shows off the latest and greatest of Windows and I think this XP time frame is the Showcase moment of when that was a great strategy and we'll contrast that later yep the other thing to know about this XP time frame is last episode we talked about the incredible secular growth trend of the PC that was this crazy Tailwind for Microsoft one of the greatest Tailwinds you could ride in business history PC shipments I believe the stat David was that they grew 98% per year over the 11 years between the founding in 1975

and the IPO in 1986 the crazier thing is even as late as 2001 with Windows XP they were still riding this Tailwind the US household penetration of personal computers again flashing back pre-ipo was only 8% so that whole doubling year over year over year by Microsoft's IPO they still only got to around 10% of penetrating the US by 1997 13 years later it grew to 37% and after a couple years of XP being in Market 2003 it had grown to 62% so I think the craziest stat is actually that last one 2003 feels like a

modern moment in history but PC's were still only in 62% of us homes wow that's crazy the PC wave is just one of the greatest secular Trends in history particularly if you have a monopoly share of that market yeah and they as defined by the US government did Ben Define define for me I there's just no question of as this Market grows are you going to be able to continue to participate in it's like yeah we basically are a tracker for that market like if grows we grow with it yep and now might be a

good time certain Microsoft fans have probably been listening to this episode and gripping their phones with all their strength like when are you gonna talk about Xbox we're going to talk about Xbox briefly right now we will do a whole another episode on Xbox someday maybe David well make your case and then let's talk about it my case is I love my Xbox so well it's important to know Microsoft didn't start in gaming with the Xbox Windows 95 they shipped DirectX X that changed the world they became a real gaming platform because of that is

this unbelievably clever set of apis that went entirely around windows amazing piece of technology you put Microsoft on the map and you have the whole rise in PC gaming for the next six years even before the Xbox yes totally that's funny Microsoft is so huge that this is one of the things that kind of gets lost to history but you are absolutely right DirectX was so important in that late '90s era for PC gaming you know Quake Counter Strike everything that happened halflife later that was enabled you know Doom came before and was really just

like the genius of carac as a programmer to enable a first-person shooter to happen on a PC Hardware without something like direct X and Hardware acceleration but yes everything that came after that the birth of the first person shooter genre huge story to tell another day but you're right that leads into Xbox and Microsoft's entry into the Home console crazy that happened in November 2001 so just like a couple weeks after the XP launch it was a big time for Microsoft and how crazy is this they thought they were getting broken up right as they're

launching a video game console and this operating system that they've been working toward for like eight years yeah this is also part of my argument of Microsoft was such a dominant consumer technology company before doj because even though all this stuff comes out right after it's the momentum still from before that's carrying Microsoft through to it yeah okay while we're in Xbox land should we finish our Xbox right now for this episode sure Xbox has become an important part of our world but not an important part of Microsoft's business agree David and I sort of

heard people utter things in our research like Xbox has kind of been a lifetime Breaky business or it's never meaningfully contributed to Microsoft so I tried to figure out as much as I could from financial statements and I got to thank Alex at the science of hitting it's a great substack for helping me with this if you look there was a division called entertainment and devices that was part of their old reporting structure and if you look at the end reporting over time let's start back in 2006 they generated $4 billion doll in Revenue lost

$1.4 billion operating loss so this is five years after the Xbox has come out loss making 2008 they do 8 billion in Revenue $400 million in profit so like even as it's becoming a real business at steady state yeah as 360 is yeah coming into teeny margins yeah totally 2009 8 billion in Revenue 100 million in operating income 2010 another 8 billion in Revenue 700 million this is $700 million to Microsoft in this time frame they do call it 20 billion do of profit yeah what's 600 you know 700 million there's a great quote we'll

bring it up again later but we got to talk to Steve again to bomber as we were preparing for this episode and he had this amazing quote to us about some of his Acquisitions that didn't go well he said we only lost money it's funny but it's such an important point in the context of Microsoft money is not the scarce resource the scarce resource is time and talent and focus yes David that is exactly the right Point Microsoft since year two or three has never been Capital constrained and Bill Gates says this in an interview

anytime we've thought about making an investment it's just do we have enough talented people to pull that off on any given year I can't deploy all of the dollars available as a CEO as a capital allocator because I'm constrained by the amount of smart people we have to pull it off that is a much different position that most businesses are in yes but is absolutely the case not just for Microsoft but for all the atale tech companies these days you know the top five market cap companies in the world yep money is not the issue

right in fact you're making my point for me if I had to make the case of why Xbox has been somewhat of a Folly and perhaps not worthy of a full acquired episode it would be there was a lot of Microsoft's best people worked on Xbox this is a group of people that went and created Xbox Live that by 2012 had 40 million subscribers so people who built a core competency of running a big online service I mean these are some of the best product people the Aesthetics of Xbox from a physical perspective but also

the software I just think it was a sinkhole of some of Microsoft's best product people and just hardest working people the culture in Xbox was so hard driving to produce at least in this point in history up to the 2010 time frame very little in the way of contributing to Microsoft's business but soaking up a huge amount of the talent imagine if that sort of product design sensibility was deployed across the rest of Microsoft yeah totally I think X Box live is debatable we'll come back to this with Azure yes Xbox Live was one of

the original pioneering internet services subscription Services across any category of software and technology and the DNA and experience that Microsoft built from that served it extremely well I mean yes I think there are two gigantic benefits look the gaming Market is massive and important and if you could try to own one market in the world today in the world of entertainment it's gaming I'm just saying Microsoft didn't up until that at least this point in history but it's the right Market to go after they were not successful in capturing value from it at this moment

in history but you're right the two big things that they were able to do is build out a core competency of running a big online service which totally led to Azure which we'll talk about later and two it really did make Microsoft relevant with a whole new set of consumers when Microsoft was completely irrelevant in their lives should we talk about Vista yes oh boy so there's a little taale off of XP that'll lead to Vista we got to talk about the code names too yes so the Windows XP code name David was what Whistler

of course like the beautiful ski mountain real close to Vancouver lot of seattleites go there it's a favorite of many a Microsoft employee and blackhome the ski mountain right next to Whistler is yes blackhome which became the name for the theoretical release that they wanted to do like just a year or two after Vista we're going to follow hot on the heels of that oh boy but black home started becoming pretty technically hairy so they decided to push the date out another reason they had to push the date out was Windows XP for all of

its usability and reliability was very insecure and so Microsoft had a whole thing where they thought they were going to spend like 3 months putting out a service pack they spent the better part of two years iterating on Windows XP to come out with a release that really people at Enterprises could trust as no viruses you know this is safe to deploy in your Enterprise this was Service Pack 2 I think was what ultimately yeah Windows XP SP2 is the stuff of Legend like that's the good one so that pushes black holm's date out and

it also ties up a lot of the talent that Microsoft needs to start working on the Next Generation operating system which again they thought was going to be a fast follow for anyone who skied up there there's this great Ski Lodge Restaurant right between the two mountains called the Longhorn Saloon yep Longhorn baby that sounds like a great name for a modest release to follow XP before we get to the big hard changes that are going to come in Black home boy oh boy David the look on your face so I remember being like a

teenager in high school at this point in time and reading all about Longhorn blackhome all this stuff on the internet you know on these new tech sites these blogs like this is g to be amazing I remember downloading like new shells for Windows XP to mimic the longhorn UI with the sidebar and the clock on the side oh man what a disaster well this was part of the belief behind Longhorn they wanted to Market all the cool stuff they were doing for it through these sort of like developer blogs and fan blogs even though the

product didn't have a ship date yet and so everyone got really well-versed in what was coming in Longhorn and then everyone was kind of sitting on their hands like where's Longhorn they've been really telling us about Longhorn in a way that you would never see today no one's dripping out the features of something that is potentially still years away from a release and ultimately then years go by five years go by yeah could you imagine if apple on their developer site Apple were just like hey here's you know iOS 23 here's all the great new

features we're building I mean the funny thing is they actually kind of did that this year with all the AI features all of those are coming soon over the next year dot dot dot which I'm not saying that's a bad strategy in the current environment but it is a different strategy for Apple anyway Longhorn is teased for 5 years all the David rosenthals out there are kind of like what the heck Microsoft I've been excited for all this crazy stuff you're showing me what's going on well what happened behind the scenes David what was the

initial technical spark that was supposed to be the Cornerstone of Longhorn well there were three pillars of I think it was all originally supposed to be black home and then they were like no no we're going to pair it down to Longhorn but it all ended up getting added back into Longhorn the first of which was called Avalon and it was a new graphics engine that used direct Hardware acceleration so I think the vision for this was kind of like Hey we're going to take direct X and bake it into the operating system and allow

the operating system to use GPU Hardware acceleration yeah that's more or less it all these code names ended up referring to multiple things because it was emblematic of the organizational disarray inside the windows development team but anyway it sounds great right we can render all these really great graphics as a part of the operating system because it's GPU accelerated who doesn't want better graphics of course right the thing that ultimately happened is the oems were all trying to make netbooks and so they're furious at Microsoft about saying the next new release of Windows which is

5 years since Windows XP they really really counting on a new version of Windows to drive PC sales and the one that they're getting requires pretty good gpus like a gaming PC yeah so it was like a kind of a total Miss with what their OEM Partners were looking for but if you did buy a nice PC and you did eventually end up with a copy of Windows Vista this is why you got to see the new what uh what did they call the oh the arrow interface Arrow that's right the blue shiny sort of

thing that was like kind of ripping off Mac os's Aqua I mean call Spade is Spade over here we can tell where your true loyalty lies well I'm just saying like if you run a company where you make all your own hardware and your own software then it's much easier for you to Hardware accelerate all the graphics in the operating system but when you're counting on OEM Partners you need really good communication there yes yeah that was one the other one was a new web services framework called Indigo which I don't know I did a

lot of research and I couldn't figure out what it was supposed to be I think it was kind of a fever dream of like let's stuff the internet fully into Windows ultimately there was a very fundamental architecture shift that just did not pan out if you remember from the last episode we talked about Chicago Windows 95 and Cairo this theoretical thing that never shipped that was going to be the next Generation operating system well they basically they tried it again did the same thing again yeah I think Bill Gates was a big fan of this

Vision because it was really technically ambitious where they had an objectoriented file system where the file system could specify data types and then every application would plug directly into the data types that the file system knew about so there was these sort of Standards like a calendar invitees a calendar invite and the operating system has its own fields for date and time and notes and that means you're not always traversing directory trees whenever you're trying to search through stuff and also it meant that the operating system could actually reach into the data within files that

were being stored by applications so it was sort of a standard way of storing files in an easy to search way and what you're talking about here is the third pillar of Longhorn blackhome which is winfs right yes ultimately wifs they tried to build it many times there was a lot of offsites and architecture reviews and talking about how great it was when in practice there was never any pull from application developers that they wanted this in the first place and this was a huge part of the wheel spinning of well we can't do all

this other stuff in the operating system until we figure out the spec and the implementation for wfs and then once we have that then we can start to do all this other stuff part of the other stuff was the development team wanted to bake net directly into the bits of the operating system that shipped in the box and on your PCS so net was everywhere so ultimately what happened here is and I heard this from a developer there was many different groups who were all compiling their own sub projects and they could sort of run

them but when it came time to try to actually do a build of this operating system and say hey we've had too many offsites and architecture reviews and restarts and this is in this is out let's just try to do like a build of the OS that we could deliver they never built Longhorn like it did not compile they could not integrate all the different projects into one and they ended up reking from an old Windows Server version or something and adding things in one by one piece meal to try to figure out you know

in year four how can we get something shippable out to Consumers so we can say this is our next generation operating system and what is the minimum acceptable set of stuff that we can put in such that it looks and feels new yep so okay Longhorn vist this is truly a disaster for the company well so 100% it is but they were trying to talk about it like it wasn't so I watched the launch announcement for this too they kind of have to they can't really say like nobody should upgraded this so they come out

first of all it's Bill Gates Again in 2006 six years after Steve Balmer has become CEO my opinion on this is they clearly had no idea what to talk about in the keynote because the one feature that I can kind of really remember as a flagship feature is that alt tab switcher that was 3D that kept bringing the windows closer and closer and closer to you you know they've got the widgets they've got the sidebar it's Arrow they had one feature that people hated there was a Revolt called user access control which the theory makes

sense protect users from running malicious blah blah blah but in practice it would just overwhelm you with dialog boxes all the time and everyone's just trying to figure out how do I turn off the dialog boxes so they're standing up there at the keynote the whole thing the marketing message is the wow starts now oh boy oh boy it's a completely incohesive incoherent set of things they're launching consumers didn't like it businesses tried not to upgrade even as late as 20 9 so three and a half years after launch something like that three qus of

corporate PCS are still running XP and had never upgraded to Vista oh it's even worse than that you may have this in your notes but Microsoft oems were so unhappy because consumers didn't want to buy Vista machines Microsoft had to extend the ability for their OEM Partners to keep selling XP machines to Consumers for another two years after this just brutal this was kind of the windows culture at its worst I worked in office so I have a bias here when I was at Microsoft but they weren't super ship date driven whereas office would set

a ship date three years in advance and then they would hit it exactly office had all these really robust procedures for shipping you know a triage process an escalation process a zero bug bounce everything was run in this Dev test PM Triads the excuse was this General guise that this is too hard to use your processes like we're doing Alchemy over here and because we're doing systems level programming none of your software development principles work on us and so ultimately this was the failure mode of a process that really did work for a while really

did enable technical genius really did enable solving hard computer science problems and this is effectively the company smoking their own Supply and just believing they were smarter than everyone else and what consumers wanted didn't matter and if they could come up with some hallucinated cool technical thing then that is what they should spend years doing and fighting about and then Force into the market and the market just didn't take it one bit yep and a couple other things on this one so when Vista actually shipped just sort of you know process-wise it was Ben as

you're saying a complete reset so Brian Valentine comes over from exchange you know in Windows server in the Enterprise world to take over managing getting something out the door and just cut all the features cut all the pillars of the windows Longhorn Vision it still takes two years in that process to get it out and then immediately afterwards Brian leaves the company lots of other great Engineers leave the company too they go down the street to Amazon and then Brian ends up leading the entire engineering platform team for amazon.com wow oh I didn't know that's

where Brian went interesting y yep he went to Amazon he was like a named top senior level executive at Amazon for a long time wow you know and then the other thing about this whole process that this is purely my own speculation like nobody said this but just as I've been thinking and reflecting on how seminal a moment the antitrust stuff was to Microsoft after the height of their consumer power right beforehand I think this might be a case where Bill no longer being CEO and just being Chief software architect really impacted this process when

you're a CEO you have to engage with your OEM Partners you have to engage with Enterprises you have to engage with customers and not that it's all Bill's Fault by any means but this Longhorn black home disaster then as you say was a case of getting high on your own Supply within the company and if he's only spending his time on technical decisions you need some introduction into that feedback loop some governor on how deep to go in rearching Windows for rearching windows's sake right and you know remembering back to part one too it's not

just that bill was a great engineer he was a great business person one of the greatest of all time he trained from birth it's like what company am I going to be CEO of right the issue with Microsoft is that there is only one Bill Gates Bill was the best engineer bill was the best lawyer bill was the best deal negotiator to figure out what the right BD situations were bill was not the best Enterprise relationship Builder I don't think Bill had a passion for empowering the Enterprise and you know making sure that businesses succeeded

the way that Steve was but nobody should ever sell Bill Gates short and say he was just the technical genius that would be wrong totally yeah anyway this is really bad at the same time as Vista actually is coming out in late 2006 this is when Apple starts running the Mac versus PC ads which is just brutal and oh boy if you're Microsoft does that hurt and like mac sales are irrelevant even today in 2024 Max sales are 8% of the market and what were they at this point in time like two or 3% zero

I don't even know like you know it doesn't matter but the point is not that apple is taking massive am of market share from Windows it's that they are hitting a nerve with consumers with Enterprises and within Microsoft itself most importantly of shoot we are way behind here and the part that really hurt about all those Mac versus PC ads there so many were just straight up true oh you know I'm a PC and I crashed again to be in the Halls at Apple when they're firing at all cylinders Steve Jobs is back the iPod

was a Smash Hit you're developing the digital Hub strategy Macs are starting to sell because of that your iPod attach rate with Max is actually working people are buying Mac Mac are becoming the option that students are starting to pick as they're picking their college computer Market Shar is rising and Microsoft comes out with Vista you just have to be besides yourself with this gift you've been giving like oh my God look at this opening here's where it mattered and the timing mattered so much too this sets the stage for the iPhone because Apple now

in STK contrast to Vista and with these ads is training consumers with the benefits and the joy of it just works yeah and what did the Mac do it just worked and what did the iPod do it just works and what did the iPhone do it just worked right yeah because there was this pent up demand I remember people in 2005 and six when the rumor started there was this almost like glint in people's eyes what if Apple made a phone wouldn't that be awesome it is remarkable like the iPhone delivered on all that promise

but there actually was wow what if we had technology as good as the stuff that Apple makes in the form of a phone wouldn't that be great because phones are so crappy so I think yeah you're right there's something there there was a training of associating the Apple brand with well it was really a setting of the Apple brand promise at this moment in time yes that's a great point and I think we got to call it here the death of Microsoft as a relevant consumer techn company they never recovered from this as a leader

well yeah I think that's correct there's a lot to talk about in their consumer technology offerings I also think this is the death of Microsoft as an interesting platform for developers who is writing Vista apps the win32 API as a potential Target for my new interesting Innovative application it's just not a thing anymore you have to write a Windows desktop app at this point in history because it's where a bunch of the users are if you need a desktop app for real for real but probably you're just writing a web app you've lost developer hearts

and Minds which is the path to losing relevance I think with one exception I think you were totally right nobody is writing Vista apps but the only people left who are writing Windows apps period are Enterprise developers writing custom software for Enterprises y that's a great point that is the exception and of course anyone that had big applications for mac and windows so Adobe is a great example of they're going to keep that up forever but where these new disruptive software players are coming from they're just not gonna have Windows apps Facebook is not writing

a uh Windows vist app correct so the biggest things to hurt Microsoft coming out of Vista are what we just talked about losing developers what we just talked about losing users I mean consumers who are excited to buy a computer they're just not excited to buy a Windows Vista PC but the biggest thing is they lost years of their very best talent I mean Vista was a black hole as it just kept growing and growing growing it would suck in more teams and as it sucked in more teams you would get the talent that it

would suck in but then it also would suck in executive and distinguished engineer Talent from elsewhere to come fix it and so Microsoft is about to be in a place where they need to compete and understand a change landscape in Social in Mobile in search they still have to fight the browser War I mean IE is peing and about to start falling off a cliff and are completely consumed by Vista so I think a lot of the consumer stuff can be answered by Steve Balmer wasn't really a consumer oriented technologist that seems fair I think

that is true sure true but that's not the whole answer Vista consumed a bunch of the smartest people even if they had the right Vision to chasing and the doj had just crippled the culture among many other things and they were still recovering from that 100% in that conversation that we had with Steve where he you know made the comment about my Acquisitions my mistakes we just lost money on the bad ones the Genesis of that conversation was about Vista you know he was reflecting he said that probably was the worst moment actually right in

my tenure as CEO because all of that best talent everything you just said Ben it was off the field it wasn't playing it was out of commission right money is not a scarce resource so bad Acquisitions whatever who cares it's just money but consuming a huge percentage of Microsoft's most talented Engineers that's company killing y I mean hell even taking Brian Valentine off of exchange exchange was freaking killing it in the Enterprise and he goes and spends two years getting Vista out the door and then goes to Amazon o that sucks brutal one other mic

Micosoft exact put it to me it hurt so bad that a bunch of our best systems people were leaving the company driving across the lake going to work for an online book seller and then building that online book seller into the market leading Enterprise compute company that is a black eye right there yeah oh I can't wait to talk about that okay Ben I'm too excited for azer let's do search let's do Mobile Windows 8 Zoom let's get all that oh yeah and then let's talk Cloud baby and David unexpectedly there is a through line

through all of them there's a cohesive story that leads to Azure here oh yeah but before we do that this is the perfect time for another one of our favorite companies and longtime acquired partners pilot.com for startups and growth companies of all kinds pilot handles all of your companies accounting tax and bookkeeping needs and is by far the largest startup focused accounting firm in the entire us also as on our first Microsoft episode we have to give pilot CEO Wasim daher a special shout out here because he is the only acquired sponsor CEO who is

also a research source for us on the same episode back when Wasim was a student at MIT he interviewed Bill Gates for the school paper and he dug it up and sent it to us Bill talked about Microsoft's fourth coming 40 gbyte portable media center and it was a pretty fun time cap we will link to the PDF in the episode sources yep so back to Pilot and speaking of Bill we talk all the time on acquired about one of his Seattle neighbors Jeff Bezos and the AWS inspired Axiom that startups should focus on what

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curious do you know the company I'm referring to do you know the the deal well it's funny the way you phrase that I'm thinking like oh did Microsoft try and buy Google and I don't know about it but the number of course you're talking about Yahoo yes yes okay so let's set some context before we get to this 2008 Yahoo attempted acquisition so there were two companies that had developed programmatic advertising technology to serve and Target online ads especially in search there was double click the market leader and there was a quantive Microsoft had lost

the doubleclick acquisition to Google they bought a quantive and that didn't go well it was $7 billion and they ended up declaring basically the whole thing of write off so Microsoft is desperate for search market share and between their internal efforts with MSN search and I believe it was called Windows Live search yep they were not making much progress there and at the same time Internet Explorer had totally languished Microsoft had completely taken their eye off the ball of the browser Wars from 10 years earlier and iie was just widely regarded as a garbage browser

and web developers hated it because it made you write a bunch of weird custom stuff so randomly things wouldn't work in IE users hated it because basically nothing new was coming every time a new version of the operating system would ship it just felt like it's the same old Internet Explorer over and over again and you have Firefox coming on the scene starting around 2007 where it was really making a dent and Google was the default search from Firefox y Firefox was awesome it had tabs iie didn't have tabs at the time that's right oh

my God you know Safari I don't think Safari had tabs either Chrome wasn't a thing yet and so I know I'm on the one hand talking about search on the other hand talking about the browser but it's the same pot of gold but it's the same thing right yeah it turned out search was the business for the browser yes so the thing that you kind of have to realize is the browser is the front door to search search is heavily heavily monetizable and if you're Google and you can monetize it directly that's great but let's

say you're not Google let's say you're Firefox or Microsoft or apple and you don't have this incredible business model of people bidding on the keywords for search and all the R&D to go into making search good but you actually do have the user attention the front door well you get to monetize it too the rumors are that Apple makes something on the order of $20 billion a year today in 2024 from Google as being the front door to Google sending all of the iPhone search traffic to Google this is the traffic acquisition cost in Google's

financial statements absolutely and so if you can be in the business of operating a scale search engine or you can be in the business of directing traffic to a scaled search engine who is willing to pay you for that traffic it's going to be a great business so David as you just said the way to monetize the browser is owning and operating or directing to a search engine so search isn't going well at Microsoft at first it was sort of because they just didn't take it seriously enough when Google first started in 1998 I think

there was a lot of skepticism that the auction-based advertising business would really work and then there was skepticism that it would really scale and then when it went public people are sort of looking at it freaked out at how profitable it was and then even after that people didn't really realize that being the market leader at search was way better than being number two there's these massive massive returns to scale and the reason for that is just pure Marketplace liquidity if you have the most searches you can create the best data from the searches and

you can return all the best results because you have the most data and on the advertiser side you have the most advertisers who are willing to come in and bid to the highest possible price you just get to make the most money by a country mile versus other search engines and then it locks in even further because you can spend more cacks on the data centers and more on R&D and make the search better and more performant and faster and all that Google is search as monetized by a ad-based auction is one of the world's

true Marvels it's one of capitalism's greatest discoveries we may or may not do an episode on Xbox someday Ben that's for Ben and I to discuss you know privately for parents to discuss after the kids go to bed but we're definitely going to do an episode on Google yeah it's criminal that we haven't so Microsoft is really nowhere to be seen in Search and part of it was just thinking oh well search is just a feature of MSN but there's all these other reasons to come to MSN or hey this is a product in the

portfolio of Windows Live and you know we can kind of do it with the talent that we have here ultimately someone needed to grab leadership at Microsoft early 20022 2003 shake them and say nothing else matters in the next 5 years except you figuring out how to meaningfully participate in search Revenue because that is just the next big wave in technology and it's a fantastic business yeah you needed the equivalent of the J Allard Windows the next killer application on the Internet or the sinowski cornellis wired memo so in 2008 Microsoft puts a deal on

the table that gets bid all the way up to $47 billion to buy Yahoo this was effectively their last Hail Mary to become relevant in search they actually didn't launch Bing until 2009 Google was started in 1998 and went public in 2004 and Microsoft got serious about a branded search engine in 2009 but clearly before that they're starting to realize this is a big deal we need to participate in it you know what do we do so they'd been negotiating to buy Yahoo 2008 after a bunch of negotiating and flying back and forth finally both

David Philo and Jerry Yang fly up to Seattle and Steve Balmer goes to Boeing field and they have a meeting at the airport this is one of the great what if scenarios this feels like a episode of Entourage right it's totally right there's conflicting report of what happened from what I can tell Bill and Steve kind of looked the Yahoo guys in the eye and decided these guys are kind of jerking us around they really don't actually want to be a part of Microsoft at all and this has gotten so expensive that if we execute

the transaction or God forbid they even try to negotiate up even higher it's just not going to go well because it's going to be an organ rejection here so the deal complet completely falls apart it's interesting to try to look at the deal and figure out even at that high price of $47 billion was it a good deal for Microsoft so here's how to pull it apart I'm laughing here I was hoping I could surprise you and be at the end of it like have something to say here but I think you're going to take

my thunder let me know when I do and tell me if it rhymes with schib Baba yes yes yes it's because I'm just loving I'm smiling the whole time I'm imagining you know all of you list being like $47 billion for Yahoo what are they smoking keep going so here's how to pull it apart Yahoo had about 15% market share of search which I think was number two Google was way way way ahead and so on the face of it you're thinking wait $47 billion to buy 15% market share in search but there's actually two

other Assets in here there's Yahoo Japan yep and there's a state in Alibaba not just a steak which famously is one of the greatest Investments of all time 40% stake 40% of Alibaba so collectively those two assets together are worth over 30 billion so if you back it out it's really only like $15 billion to buy 15% of the search Market yeah David what is Google's revenue today alphabet's annual revenue in 2023 was over $300 billion so would you want to pay a billion dollar per percent of market share of that market yeah sure it's

just money why not I mean it's the craziest thing this would have been ludicrously profitable to spend only $15 to buy 15% of the search Market which is way bigger than100 billion and still growing this is the thing people just always continue underestimate and underappreciate about the search Market is it's just so large and so profitable yes now because this is counterfactual and we actually don't know what would have happened Yahoo completely went away they sold for5 billion and their most recent transaction to be co-owned by Verizon and Apollo so there's this real question of

like okay if Microsoft bought all that traffic would they actually have been able to harness it and build a Google like business or would it have just gone the way that Yahoo is going to go anyway but to make the bull case on that Bing is a good business it just has a small market share Microsoft succeeded finally in 2009 at attracting all the right talent and taking it really seriously and building a super viable search engine that does I don't know something like a billion a year in profit well you know then they do

go on in launch bang and they actually sign a commercial deal with Yahoo to provide the search on the back so they're not getting the Yahoo traffic yaho is still monetizing the traffic but Bing is getting all the data from doing performing the searches for Yahoo and I know you know this but most listeners will not remember you know who the leader of Bing was for a brief period in its early days here Satia Nadella Satia Nadella that's right other piece of SAA trivia that I very much suspect you do not know SAA joined Microsoft

first in 1992 from Sun micro and he joined as an evangelist for Windows NT he joined as an evangelist an evangelist H and then he got his first product job do you know what product it would never ship but a product in development that job was o no I don't tiger server the cable soft information Super Highway fever dream where did you find that it's in his book oh my gosh it's in hit refresh was he actually I always thought he was in the marketing side well it's a little Microsoft product managers are marketers they

don't live in the engineering org yeah fascinating there's so many things about his history that are not a part of the common narrative like he I think worked in Dynamics their Salesforce competitor their CRM for a while which they had Acquired and then he I think ran bis talk server which was another one of these Enterprise server products and then Bing wow and then they plucked them out a bing to go run Azure right and go run server and tools which oh we we will get to that all right pause pause okay some of the

other fun tidbits of this Yahoo deal so Bing powers Yahoo search Microsoft does the ad sales for both sides so while Microsoft doesn't get the user you know they don't have the direct relationship with the users they do get to build up their Marketplace liquidity on The Advertiser side and as you mentioned there's a huge data advantage of actually powering the search while Yahoo gets 88% of the revenue in the deal for the first five years arguably the value from this basically all acred to Microsoft because they ended up building out not only a proper

advertising business which now is used on a number of different sites I think even in partnership with Netflix for their ad supported tier but also being once it had all the Yahoo traffic needed to be a scaled web service yes like a distributed computing system that operated at 247 uptime with super low latency fast response time and huge scale God that sure sounds like the cloud it sure sounds like the cloud so you've got Xbox Live where they have 40 million users you have a scale search engine which is like the number one most difficult

distributed computing problem that if you get good at that you can get good at lots of other stuff the ingredients are really starting to come together for the right talent and DNA at the company to do well in building out the cloud so funny the other big piece of it honestly maybe even the biggest piece of it from talking to folks was hot mail yes Microsoft had acquired hot mail back in 1997 and ran it the whole time it eventually became outlook.com I think but you know it's running a consumer web service for decades at

scale yep but oh my God it's so unfortunate that they didn't buy Yahoo just because of the Alibaba stake nothing else would have mattered 40% of Alibaba at IPO in 2014 when Alibaba IPO that stake was worth $92 billion well obviously Microsoft is not a hedge fund but like right these things are hard because how long would Microsoft have held that yeah totally but man if they did that'd be crazy it's so funny yeah one of the greatest Venture Investments of all time yep okay so at the end of all this you might be wondering

why was search so important how did Microsoft get so obsessed with the search engine why are they still running Bing today why has it been this sort of white whale for them where they continue to try over and over and over again to do search deals or Acquisitions or things like that well search monetizes incredibly well so Microsoft is sitting there realizing okay we're a technology company historically what we've done is sell licenses of our software and people have paid us directly but there's this new business model emerging that appears to just scale infinitely where

you can make three times or more off of each user again using software but not selling the software to them that's a much better business if I could take 7 billion people in the world and sell them windows or I can take 7 billion people in the world and have them use my search engine for free and then make the money from the advertisers I'm going to make 3 to 5x more money from the advertisers that I actually would selling them software so suddenly this kind of becomes existential where the windows Revenue isn't going away

but actually the next generation of Economics generated from software is not selling the licenses it is monetizing via advertising it's funny I never thought about it this way but really what search did and what Google does is you go from selling software as a technology company to selling everything yep and the offline economy is much bigger than the software economy and so everyone has to acquire customers whether you make software or tents or airline tickets and there's only a small set of dollars that goes to software so if I just pull up my credit card

statement each month how much software am I paying for versus how much everything else am I paying for and even if you say well that's not really fair because it's advertising for everything else it's not everything else directly even a small percentage of my everything else turns out to be way bigger than my software budget so at the end of the day Microsoft made a browser they didn't monetize that browser they monetized using it to defend an operating system that they sold licenses to eventually gole Google comes along and creates a browser they also don't

sell that browser but they monetize all the traffic coming through that browser and they do it way better than Microsoft does at monetizing selling licenses maybe put it more simply Microsoft built a browser had a bunch of share and then kind of looked around and said we don't really know what to do with it I guess we'll use it for defense and Google built a browser and said we know exact what to do with this and they used it for offense yeah such a good point well while we're talking about using software to sell everything

and not software that sure makes me think a lot about social and Facebook Microsoft has some history there during this period too doesn't it they do David should we take a brief aside to talk about Microsoft's intertwined history with Facebook absolutely so it's October of 2007 Microsoft is missing search and they're realizing social seems to be a wave that's coming five six years after search also a great online advertising business we now deeply understand and regret not being a bigger player in that business we can't let it happen again so what do we do we're

not going to build one of these internally we know better than to do Google+ and so we are not Capital constrained and so we are very willing to try to do large Acquisitions because we've got money lying around but we don't have talent lying around and we don't have DNA and brand to be able to do this right exactly so what do you do you try to buy Facebook Microsoft puts an offer on the table it's a very complex deal structure but effectively what it does is it lets Facebook shareholders cash out over a long

period of time as the company's value grew so you're not taking all your money off the table today and so the important thing to take away though is a very big dollar valuation news outlets reported it to be worth $24 billion and again this is way back in 2007 3 years after the founding of Facebook right we not that long after the yahoo1 billion offer exactly Facebook's not interested I'm pretty sure Zuck doesn't even respond to the offer some of Zuck lieutenants have been meeting with Microsoft people saying if you get the number in this

range they sent in an offer we'll have to ask Mark about it in Jas we will no dice so instead they work out an investment and a commercial deal so the terms of the deal are in October 2007 Microsoft invests $240 million for 1.6% of Facebook so for those trying to do the math at home that is a $15 billion value on the deal Microsoft will get the exclusive right to sell banner ads on Facebook internationally until 2011 so again Microsoft cleverly is using this as a way to bootstrap The Advertiser side of their marketplace

now they have all this inventory to sell now it's interesting to think about much David like your comment about Alibaba if Microsoft sold all of it at IPO which I don't think it did that would be a 7x okay that's a pretty good growth investment in you know a few years not bad right from 2007 to Facebook's IPO in 2012 yeah 5e 7x that's good for growth investment that's great I'll take that if they held for another two years and sold in 2014 that would Adit a 14x I actually don't know when they sold but

I feel like these are helpful guard rails to understand what this appreciation could have been either way it's not really relevant to Microsoft as I said earlier they're not a hedge fund in money is the least important thing to them right they're constrained by Talent execution ability Focus DNA to pull it off focus but they're not constrained by cash so who cares if you 10x your 240 million over five to seven years so it seems like the actual interesting part of this deal is the fact that they had the right to sell Facebook's International ads

for four years and the companies kind of became friendly so Facebook on the pages for businesses would use Bing Maps and there was all this sort of reciprocal things that the company did together and a lot of Microsoft people went to Facebook like friend of the show VJ Raji coo at stat Sig now a lot of great early Facebook folks came from Microsoft yep so right around this time June of 2008 Bill Gates leaves the company full-time it is an actual retirement I'm no longer Chief software architect I am still chairman of the board but

I'm going to go be the full-time at the foundation exactly at the bill Melinda Gates Foundation which of course is right at the time the iPhone you know of course came out in 2007 but 2008 was when I think it was iOS 2.0 right with the uh SDK app store opening up and SDK comes out and the world completely transforms there's a pretty rough quote in Time Magazine from Bill's retirement that you know was obviously written about bill here but I think it's just kind of more applicable to all of Microsoft DNA at this point

in time Gates is probably getting out of Technology at the right time funnily enough it's not really a business for nerds anymore Gates was at the center of the personal computer Revolution and the internet Revolution but now the big Innovations are about exactly the things he's bad at the iPod was an aesthetic Revolution Myspace was a social Revolution YouTube was an entertainment Revolution this is not what Gates does techology doesn't him anymore that's a stupid quote that's just too reductionist yeah it is totally too redu and it's too personally about Bill and that's just completely

not right but that was sort of the view at the time I mean this really shows you how irrelevant people thought Microsoft was yes that is why we included it no one would have been saying this about Microsoft in the Windows 95 time frame but after the obsession with Enterprise the complete failure in consumer markets but importantly the complete ignoring of what the exciting developer platforms were at the time open source the web I mean if you think about where all the development efforts were going it was the lamp stack the uh Linux Apache MySQL

PHP the stuff Facebook was written on that's in a different Universe from Microsoft's Enterprise developer customers so I just think you need developer excitement if you're going to have consumer excitement I mean or you need to develop every interesting app on your platform yourself but that's just not how it goes so that consumer and developer excitement goes hand in hand right I said to put a pin in the iPhone and the downside of Microsoft becoming the Enterprise Juggernaut when we were telling that story and all of the huge advantages in lock in that Microsoft had

built up the iPhone changed that calculus because the iPhone kicked off Shadow it and bring your own device and kicked off the user revolt against it and this is what this quote encapsulates Yeah I think that's right I think a set of Technologies were breaking through people were just going to use those devices and that software no matter what the era today is one where users have way more choice in what they use at work than they did in that early 2000s era and the iPhone sort of forced that door open yeah choice and expectations

of what that soft Ware and Hardware is going to be like and Microsoft for all of its great victory in the Enterprise over this period just fundamentally did not have any of that DNA in the company anymore and that's what this quote from time is pointing out they were all over an Xbox okay fair enough or they were developing cool new stuff that would then get killed because it's not a part of the Windows machine I mean you look at Courier you look at kin in Mobile you look at all these things that they would

let him get so far and then they'd be like ah you guys don't get it Windows is the center of everything and if it doesn't make Windows look great or it competes with Windows that's not what we're doing and I think that DNA was too strong to overcome disruptive Innovations exactly so let's talk about those things and what's happening in Mobile okay so let's rewind what was Microsoft doing in Mob mobile so far a lot actually a lot actually is Right Microsoft was obsessed with all sorts of things in particularly Bill Gates for decades before

they became true one of which was Bill Gates was always talking about mobile Computing so much so that in the key slide in the Windows XP presentation one of the big bullet points is mobile Computing all the way back in 2001 and Gates thought natural user interfaces was going to be a thing multi-touch tablet Computing pen Computing yeah I had a tablet I had a Microsoft XP tablet edition I think is what it was called PC in college yeah from the early 2000s and sometimes even before that these were Bill Gates's visions of the future

that he thought were pretty close and so in the world of I suppose they were early smartphones Microsoft had developed Windows mobile so what was this is like iOS not really no what Windows mobile was was an operating system for handset makers to adopt and put on their handsets and you know these things kind of looked like blackberries or mostly keys with a little screen and when you looked at it it looked like Windows it had a little start menu and it was much like the rest of the Enterprise strategy David designed around all working

seamlessly together with your Windows PC and exchange and your corporate Network because surely people at home consumers were not using smartphones these were for business people who you know these were issued by their Enterprise so it fits pretty squarely into the Enterprise category now how did Microsoft think about this product they thought about it as an ingredient into the handset makers product Microsoft was somewhat at the whim of an oem in the computer ecosystem you know that Dell could install some more stuff on top of Windows and customize the installation but it was still Windows

XP no matter who the PC was from it was a pretty standard thing that really wasn't the case with Windows mobile phones the handset makers could modify the code of Windows mobile so when you bought a handset first and foremost you were trusting the product quality of the people at the handset maker and they had several ossos that they could buy and effectively start from one of which was Microsoft we handset makers we make a phone and we know how to interconnect and do all the carrier stuff with the carriers because they're our partners and

we kind of needed to do a bunch of computer stuff too like email and stuff so can you guys do all that and then we'll make sure when we get that from you that we'll start changing your code to make it work with our phone and we'll do all the phony stuff not an iPhone what was Microsoft's position in Mobile yes they had Windows mobile but no it was nothing like what smartphones would become because of the way that the iPhone reset everything yeah and at some point in this journey here post iPhone but still

in this sort of weird Windows mobile era Microsoft buys danger the company that made the T-Mobile Sidekick you remember that which was awesome you like pushed button and then it would like flip around and suddenly you were on a sideways keyboard oh yeah it was in entourage I remember watch an Entourage Turtle had one I think that's right and that was Andy Rubin before he started Android oh you got me I was hoping I could stump you I was going to say do you know who of course co-founder of danger was it was Andy Ruben

what do you think I do for a living what do you think I do for a living amazing Andy had already left danger and started Android which would be the very thing that would sort of destroy their mobile business yes but let's get there so 2007 in January the iPhone is announced it won't come out until July the iPhone comes out it's the most spectacular technology demo since the mother of all demos the old Doug angle B one way back in the day consumers are all in awe the existing mobile industry people can't really believe

it's real the founder of blackberry basically said I think his exact quote is how did they do that then later says we'll be fine you have Palm who was already saying things like I believe the CEO even before the announcement said the PC guys are not just going to figure this out they're not just going to walk in famously David I know you have it Steve Balmer has a quote after the announcement yes he says it's never going to work at $500 which is the full quote and you could totally see that phones at this

point in time Flagship phones were costing like $100 with carrier subsidies and Steve's like $500 that price like who's GNA buy that right there is actually two quite interesting things about this quote one Steve is being the company salesperson if a competitor drops this amazing bomb and you're interviewed and you have a whole bunch of Enterprise customers who are sort of looking to you what do you say you say are things still great there's things really expensive of course you say that you are literally always selling all the time and so I always take some

issue with that two apple legitimately had a business model Innovation there with the carrier subsidy yeah well it wasn't the original the original iPhone didn't have it it was then later I think the 3G I mean the mobile industry to this point had been how do I make the cheapest possible phone it's certainly not a scaled down version of a Mac which is what the iPhone was so that was a completely different Paradigm this is a tiny computer not a kind of crappy embedded system that is optimizing for pennies and apple basically said we don't

care if it's really expensive we just think this is the user experience bar and we will figure the business model out and eventually my god did they figure the business model out and the carrier subsidies were that Innovation but Windows mobile was that old Paradigm embedded systems cheap as possible Hardware were a couple cents either way determines whether your phone's going to sell or not and so it was pretty shocking so iPhones start selling they're selling well it's 2008 apps start coming out it's 2009 sales start really picking up and finally Microsoft decides hey what

we're going to do is we have this old asset Windows mobile we can repurpose some of that to make this new thing called Windows phone but unfortunately everything we're optimizing for is different the new ecosystem expectation is a super high quality user experience yeah and so there's this way that we used to work with all of our Hardware Partners which basically said we will make the software work on whatever you can come up with the crappiest Hardware you can think of and we'll make it work it's kind of like the Roku strategy the way that

they work with all the embedded TV makers and the new strategy to be we will dictate really intense Hardware requirements because now with Windows phone we are making a promise to users to compete with the iPhone where Microsoft is backing that up the Microsoft brand is first and you know we're defining a really breakthrough new user interface called Metro that actually came from the zoom which is funny that that's its lineage now how did it actually play out Microsoft tried to use their existing business model we will sell you an operating system we will charge

you a royalty we will sell you OEM manufacturer an operating system correct and you sell that phone people want good phones now so you can probably generate some nice margins on that good phone because the iPhone really set the bar there's just one problem with trying to maintain your old business model it's that you don't have the same competitive set that you used to you now have Google Google has acquired Android Google has transformed Android from a Blackberry clone into an iPhone clone the software is open source and so Google's value proposition is they go

to all those same manufacturers that Microsoft used to work with HTC Motorola and say hey how about a deal for 0o yep deal Point number one here you go it's free deal Point number two you can even have the source code deal Point number three we aren't Microsoft look at what they did to the PC makers do not let them do that to you you know those PC makers they make no money zero to profit dollars in the value chain ACR to these PC makers they all acre to the software vendor it's literally the same

people who did that to the PC makers why would you let them do that to you and remember in this mobile world every scent matters and so Microsoft is trying to ask for you know whatever it is some single number of dollars for a licensing fee to the EOS I mean I think I'm unders shooting but let's even say it's five bucks that is a mountain of difference between $0 and $5 in a low margin business in the total bill of materials of these things exactly and Google also only really cares about their services that

they monetize through advertising so one of the deal points in there I think this may be varied by geography but is oh yeah you got to use Google services on there too but by the way they're Best in Class and they're free you don't have to pay anything for that either yeah I think at first it was you can have it open source but you don't get any of our services or you can take the whole thing and you take all of our services but our services are great and guess what the Play Store is

one of our services so if you want all the apps then you have to take all the other Google services too right right right now keep in mind how does Google make money they make money on search so Google from the moment they figured out hey we can run a call it 2002 when Google's search business model was really hardened and it was evident this will scale it's ludicrously profitable it's very high value per user Google's going to be the number one at it it's almost like if you really thought about it you could have

figured out that Microsoft wouldn't win in Mobile H yeah it's a really circuitous path but if Step One is Google makes a ton of money on search then step two is Google should try to get all the searches so then step three is Google needs to have the front door to search and so you have to count on Google being the actor that figures this all out step four is Google figures out what the next platform is and makes sure that they are guaranteeing all the search volume comes to Google from them so what do

they do they invent or buy a mobile operating system what do they do after that the next step they give it away for free because again all they care about is all the search volume and so therefore unless Microsoft adopts Google's business model they're immediately screwed this is such a good point Microsoft's competitor was not apple and the iPhone it was Android yeah it's a little bit butterfly flaps its wingsy but there is a direct line over a 10year period from Google Finds Its web-based search business model and Microsoft cannot employ its traditional business model

and win in Mobile like Microsoft will lose in Mobile and there's some pivots in there I think the biggest moment when the door really shut is when Verizon freaked out after the apple and AT&T deal and said we need an answer and they decided that answer was Droid and they put like a gajillion dollars behind the Droid advertising campaign the Moto Droid yep yeah and so I think at that point it was sort of a two-horse race Microsoft probably could have figured out a way to get in before that but it is all related to

Google finding that orthogonal business model yep and it's F you know Microsoft did have B at this point in time so they did have a business model that they could have used if they've been willing to go free on Windows phone and it would have taken a big culture shift at Microsoft to say we're an advertising company right Microsoft is not a company that is at least at this point in time comfortable with their bread being buttered from advertising I mean they're the PC company they want to sell software to people using PCS they're the

software company yeah they sell software might be via Enterprise agreements but they sell software yep so then if you really believe this step by step by step thing then actually what Google should keep doing is is finding things that Microsoft sells and figure out which ones are the cheapest per user to run and then give those away for free and so Outlook Exchange gez Gmail hm word excel PowerPoint oh G Suite workspace and all they're doing is they're just looking at Microsoft's core value propositions they charge money for and Google says would it really be

that expensive if we just gave that away for free and the more of those that they do a it's good for Google's business model because they just get more data a closer relationship with you you're doing either more queries or you're interacting on their platforms in ways where they have other ways to show you ads maybe while you're off platform now they know a lot about you from data they've collected blah blah blah but even if it doesn't actually make more money for Google they make so much money in their Core Business that if it

hampers Microsoft then it's a good thing to do yeah interesting and that is totally true I totally buy it in the consumer world and in the Enterprise World Microsoft lockin is still as strong as it ever has been yes and Google has really not figured out how to be an Enterprise company Excel is still the main way that spreadsheets are done around the world I bet a lot of listeners use Google Sheets we do too we love it also use Excel but if you do use Google Sheets you are in the minority globally you think

yeah I guess because most consumers don't actually use spreadsheets yeah yeah Enterprise spreadsheet work is done in Excel full stop yep that brings us to Nokia but I think let's save Nokia for the end here yeah Nokia is our Koda what it does bring us to is a realization from the very top of Microsoft that the profit pools in Mobile are changing and this is a thing that I think Steve Balmer also doesn't get credit for Bill Gates was obsessed correctly with being the software company it was a brilliant business strategy to be the software

platform and then everything around you had to interoperate with you and again the profit pools in the PC World just acred to software vendors it was remarkable how the PC manufacturers over time had no profits and Microsoft had tremendous profits Steve Balmer realized pretty early I think because of the Google Android thing mobile was going to shake out differently future Hardware platforms were not guaranteed to have the same profits in the value chain the way that the PC did and so he was pretty aggressive about actually we need to be in the hardware business and

I know that seems really unattractive to us as a company because we've been in the software business there's this great general rule that it's really hard for any business to enter a lower margin business than the one they are currently in yeah Amazon can go from e-commerce to AWS right Amazon can go anywhere but for Microsoft you know you're selling software licenses it's hard to even get into Cloud because cloud is a lower margin business you know you have to operate those data centers than just selling the licenses so if you're Microsoft and you've been

making software all these years and you've been enjoying those margins and suddenly you're realizing uhoh we have to be in the hardware business or at least if we're not in the hardware business or the search business we're not going to enjoy any of the profits in the mobile era that's a difficult conundrum yeah but to Steve's credit he acted they released surface they tried to buy Nokia yep let's talk about let's start with surface and Windows 8 which we got to talk briefly about Windows 7 before that because Windows 7 was awesome so Steven sinowski

he ends up running office product management after the Vista disaster he gets drafted to come over and run Windows and Ben like you're saying the office culture was known as we ship we ship product that's what you were part of that was the culture that Steven said mindbending that 3 years in advance a date is set and then 6,000 people ship on that date no matter what y so he comes in for Windows 7 and he does that for Windows we were talking to him and he had this great analogy of windows at this point

in time didn't need technical Vision it was trying to be the Dodge Viper that's what Longhorn was it needed to be the Toyota Camry and he comes in and he makes Windows 7 the Toyota Camry of PC operating system I love that analogy that's exactly right it's so good it's exactly what it was and it's exactly what everyone wanted it's what the consumers who were still using Windows wanted they wanted it to just work and most importantly it's what the Enterprises wanted everyone's like hey it's like XP but modern or it's like Vista without all

that random stuff and all the regressions that Vista had yes Do Not Crash my device or my network thank you nice easy start button in the lower corner normal predictable menu fast search Fast file system I honestly can't tell you a feature that launched in Windows 7 I have no idea but I remember I had a Windows 7 laptop when I first joined madona and it was great yep it ran everything the way you expected it to and so the product that sinowski shipped there was just as much the new organization as it was the

actual product that customers experienced it was a much more slim down team it was Dev test PM it was ability to hit a ship date it was a proper planning and vision process a lot of what the team was doing with Windows 7 was yeah yeah we feel like we can do seven with our arms TI behind our back but let's start thinking about the future about what we're really going to do now that we have all the infrastructure in place to really ship a interesting product and then Apple out with the iPad in 2010

yeah so Windows 8 Vision had kicked off the planning process for what it's going to be had kicked off and they're starting to play actually Stephen puts these videos on YouTube they're awesome to watch the original vision of what Windows 8 should be and they're kind of out on a limb they're saying the future is touch the future is tablets we think that's going to be a dominant Computing Paradigm and on the one hand Bill Gates has been saying this for years so there's sort of like a cultural acceptance with the idea on the other

hand it really hasn't manifested in the market so it's a little bit dangerous to say but the iPhone has now come out and multi-touch has shown this is the way to do it so but you're right the iPad coming out really validates whoa big tablets with multi-touch actually might be the Computing Paradigm for the future and oh my God we've been in planning we've been in development for you know a year or two already this thing hits the market we're right we are so right we've been validated it validates the product vision and it terrifies

bomber and Microsoft leadership because they just watched what happened what Apple did to the phone market the iPad sure as hell looks like it's going to try and come do that too Microsoft's core PC market I mean right the original jobs keynote introducing the iPad lays out his vision right of like the PC is going to become the pickup truck and the iPad is going to become the car and that would be a truly terrible thing for Microsoft especially if that goes into the Enterprise as the iPhone is clearly going into the Enterprise on the

phone side now there was a little bit of a Folly in believing that the iPad was the PC of the future standing here today we all can look at unit sales and realize oh the iPad was not the PC of the future it had its place but it did not in any way replace PCS and it turns out that Apple scaling up the iPhone metaphor was good for tablets but that never was going to take over most PC use cases today in fact the phone has far more replaced the PC than the tablet has 100%

yes but back in 2010 that sure looked pretty terrifying as a prospect to Microsoft the other thing that's happening around this time is I've said this a number of times but Windows despite having great Revenue great profits massive penetration in the Enterprise and momentum almost just like staying power in consumers because people were just used to it it was not relevant for the next Frontier totally not it did not have hearts and Minds it was not where the excitement was it was not what people were building for so there's sort of a two birds with

one stone attempt with Windows 8 One Touch tablets we are going to get out ahead of Apple I mean we're going to try to out apple apple here and we're not going to let what happened in phone happened to us in our core Market of PCS two we need a new developer platform yeah we need to bring developers back everyone's building for the web web is agnostic to what operating system it runs on can we create a platform that is so exciting for Developers that they're going to use it and we should lean into the

Technologies people are already using so the Windows 8 Touch mode Metro UI development environment was HTML 5 because all these web developers are already writing their web apps we want to support that too and we're going to build a whole new tool chain so that their HTML 5 Windows 8 apps run really well on arm processors because these tablets are going going to run on arm processors yep and we're going to make our own the Surface RT yes so that's the two-headed dragon of Windows 8 is new developer platform and touch first and the way

the touch first manifests in the operating system itself is the desktop is now just an app and when you boot up Windows 8 you are presented with a tablet tiled start screen and if you're looking for a desktop oh you got to go find it now in practice it's not hard to find the desktop you learn it in like five seconds you're like okay I see the start screen is actually the start menu but full screen so if I click in the bottom left corner I can collapse it I can enter the desktop mode and

then it's like it doesn't even exist I can run my 132 apps blah blah blah but there is a learning curve there's also just the shock value though of I bought a Toyota Camry expecting it to be a Toyota Camry and I don't even know what this is It's like a scooter yeah and it is a little confusing I used it for a long time when I worked at Microsoft and figuring out how to app switch between things that are part of the Metro modern UI versus the Legacy apps and what's sitting on my desktop

and what's sitting in the tablet optimized app switcher it mixed two metaphors now the question is why did it mix two metaphors and it took me a while to figure this out but what ended up happening was the original vision for the Windows 8 Touch thing that we're all talking about these live tiles That was supposed to only ship for tablets as it was originally dreamed up and there was a version of Windows 8 that did not have that that was going to ship for desktop PCS that was going to look like Windows 7 probably

word comes down from on high Windows is Windows we need to ship Windows across all devices so what happens all this effort has gone into and momentum and political capital and betting your career has gone into to this HTML 5 developer Community the Metro UI and so that is the desktop version that ships I see yeah there can only be one windows and so we got to put both of these babies in here yep and what you have is not as bad as Vista but man the roll out was pretty bungled it's confusing the reception

was poor interestingly not by the tech pundits like the tech pundits who actually spent some time and figured it out were trained up pretty quickly but the cat was out of the bag even before they got to review it on people who were angry what do the Microsoft people refer to him as people that uh oh the basement the basement yes the 0.001% power users who are the loudest of course on the internet and so that kind of taints the product oems hate it because frankly OEM weren't signed up to make these touch devices but

now Microsoft's putting all this energy behind touch optimized operating system so there's this mixed message to Consumers it's like are there even good laptops available am I supposed to use touch on my desktop they have to run arm they can't run x86 they got to run arm processors they got to run mobile processors but you're asking these devices in 2012 to also be able to function as laptops and the technology just wasn't there there's a reason why the iPad was a scaled up version of the iPhone not a scaled down version of the Mac today

I think it might be a very different proposition and the public might be much more ready to accept something like this I wish Apple would do this with the iPad oh yeah I don't want to have a Macbook and an iPad I just want an awesome paint of glass that can do everything and apple silicon totally can do everything yeah my dream machine is you know those Lenovo yogas that can flip all the way around yes yeah yeah yeah my complete dream machine is my 13in M3 MacBook Air that when I flip it all the

way around they do something like universal binary with the apps where all the same apps that I had installed on my Mac they now run their iOS counterpart they grab all the data that's stored in the same places so all my apps you know it knows which Google sheet I'm looking for it has the YouTube videos cached it you know does whatever but it just turns into an iPad with an iOS UI that is the dream I can't figure out if I'm like a super nerd for wanting that and most people wouldn't actually want that

but I travel with an iPhone and an iPad and a Macbook and I think I could just do two I think a lot of people would want it yeah so one takeaway may just be hey it was too early the other takeaway might be look it turns out that tablets should have been a scaled up phone not a scaled down PC that was certainly true at the time y certainly at the time time so complete commercial failure the ecosystem of Windows 8 apps did not really Galvanize and where we're left is the state of the

Windows app developer ecosystem in the 20134 time period is right back where we started no one's terribly interested in targeting that as a developer platform all the energy is actually just going to go into the web app yeah and then all the energy is going to go into the mobile app yep none of which is in the Microsoft ecosystem okay yeah I mean this is the death of Microsoft as a consumer company no doubt undeniably Zoom failed Bing small market share Windows phone lost to Android yep lost Mobile Windows 8 you know this whole thing

didn't work the stock price has languished hasn't moved in 10 years stock stuck at 30 bucks this is dark this 2012 13 time period this is dark dark and at the same time well it's funny it's dark and revenues and profits have grown tremendously the Enterprise motion of Microsoft has basically never had a down year I mean 2008 in the Great Recession but other than that like chug chug chug chug chug even through the bad Windows releases it's dark and yet the light is shining so bright on the financial statements of this company and what

is going on here obviously it's the ENT price but it's even more than that it's Azure it's the cloud it's already humming it's going Microsoft did reinvent itself Microsoft did position itself to be at the Forefront of Technology it just did it all within the Enterprise context of the company and the Azure story is absolutely incredible and I think nobody knows how it really happened yes as the general public is concerned Steve Balmer was obsessed with Windows he built the prise business he left satanella came in and launched Azure and Azure has been great like

not exactly that's not really what happened so when Bill was planning to fully retire from the company to retire from his chief software architect role this is all the way back in 2004 2005 he and Steve know that there needs to be a successor in this role even Steve would be the first person to tell you he is not a technology he can't do both roles he needs a bill he needs a chief software architect and realistically you can't replace Bill Gates with one person so we need two bills yeah so they're casting about Craig

Mundy becomes one of those two bills internally and they also know who probably the perfect person is to take the other job and that is Ray Azie Ry of course being the author of Lotus Notes Ray is Alle legendary developer and he has great relationships within Microsoft because Ray built Lotus Notes not at Lotus but at his own software Studio startup and Lotus was just his publisher so he's known all the Microsoft guys for years this is so fascinating I never put two and two together but Lotus 123 and Lotus Notes were not like peers

together Lotus 123 was developed by lotus Lotus Notes is actually raise company it's almost like the the way a game Studio Works Ry and his company are building it their publisher is lotus but Ry can have agreements with Microsoft where he's privy to information that Lotus is not and so Ray is like really close in the fold with the Microsoft folks I think he was even a contractor working on maybe the project was landman but he was actively contributing to other Microsoft products right cuz he had his own software company yeah he was almost like

Swit in the middle yeah so by this era now 2004 2005 Ry has a new startup called Groove networks and Microsoft just acquires the company and they get ray so in June 2006 when Bill announces his coming retirement Ray gets named as his successor in the official Chief software architect role and essentially what's going on is Bill and Steve kind of look at Ray and they say you figure out the vision we've got all these assets we've got a Killer Business got all this great talent in the coming world the next generation of Technology why

don't you figure out how Microsoft fits in and what our play is so Ry writes the internet services disruption memo in October 2005 and to quote from it this is Ry writing the environment has changed yet again this time around Services Computing and communication technologies have dramatically and progressively improved to enable the viability of a services-based model the ubiquity of broadband and wireless networking has changed how people interact and they're increasingly drawn toward the Simplicity of services and service enabled software that just works businesses are increasingly considering what services-based economics of scale might do to

help them reduce infrastructure costs or deploy Solutions as needed and and on a subscription basis wait David you're telling me that businesses may want to basically rent capacity from Big Data Centers to just deploy their applications and not worry about the capex of buying the servers and racking them all and maintaining the data center and handling the privacy and blahy blahy blah I'm telling you that and I'm telling you they might not even just want to buy the infrastructure they might just want to buy the solution as a Serv hosted by us all right so

this is Ray in 2005 and so in January 2006 Ray with Steve bomber's full blessing goes and starts recruiting for a secret project within Microsoft incubated outside any of the existing divisions and this is super important this should have come within server and tools like that whole big new business that we talked about that was like the key Lynch pin of Microsoft's Steve bomber era prise strategy of course azer should have come from within there Microsoft has a group that produces a product called Windows server and that is an operating system that runs on other

people's servers and that group is not the group that produced Azure the cloud service that runs at the time Windows Server yes the reason for that is that this is completely disruptive to the whole Windows server and server and tools business model their go to market and their business business model is we sell these solutions to be operated in your data centers in your infrastructure where Accenture and all the consulting firms and all the value added resellers they're all our partners they're all our go to market they're all going to go Implement that on Prem

for you and so if we were now to say like wait a minute all of a sudden we're going to do that as a service and we're going to sell it to you separately that is a huge issue risking a lot of my go toet Market motion not to mention these end Enterprises in some ways are actually the oem's customers yeah these Dell servers are running Windows server but Dell sold a bunch of servers probably through Accenture to the End customer there's that whole issue of upsetting the apple cart there's also the internal rewards issue

and kpi issue everyone in Windows and Enterprise land ultim their kpi is how many copies of windows can we sell to end customers and generate the licensing revenue on Windows and this new thing if we actually pursue a cloud strategy is how can we spend a whole ton of money building out a data center buying other people's servers generating zero licensing dollars and hoping people use the servers so we can charge them later yeah Windows is nowhere in this equation yeah we're going to build out a gigantic server farm and rent usage to people that

doesn't fit into anyone's current kpi or compensation so Ray is recruiting for this project code named Red Dog and he brings in the biggest of big guns that's right the legend himself Dave Cutler no one builds hardcore Enterprise ready close to the metal code than Dave Dave was the architect on Windows NT we talked about him a lot on part one also another guy named amitab Shava amitab had also come from deck which is where Dave came from Total Beast of an engineer he had experience both in the Enterprise server and tools products and amav

was also a big part of getting Vista out the door with Brian Valentine before Brian left for Amazon and the two of them recruit a team and they build Azure Cutler builds a new hypervisor that Azure runs on from scratch without using open source like himself hypervisor of course is the piece of software that virtualizes underlying hardware and allows you know multiple software tenants to run on a single piece of Hardware it's like VMware was a hypervisor company it was a whole company building hypervisors and Dave just like yeah I got this it's crazy so

great and Steve bomber supported this whole thing pushed it all through despite heavy pressure and incentives from inside the company from Windows from Partners from the whole go to market motion that he built you know Microsoft's Enterprise go to market motion Steve he didn't get it right away but he started talking to enough customers and realizing that this was the future of Enterprise Computing that he just flipped a switch and said I'm all in we're doing this whatever resources we need I mean we're talking billions and billi ions of dollars of capital expenditure to build

up these data centers this is not just a like oh some little incubation project you know sure we'll see what happens this is like no we kind of got to like bet the company on this well it's funny I disagree that it's a bet the company move because of two reasons one it's only money that they're spending cash is never a resource constraint the bigger concern is Ray Ai and Dave Cutler are working on this that is why it would be bet the company two in its initial Incarnation Azure did not threaten the windows Centric

approach if you remember when Azure launched it was Windows Azure and it ran Windows server and it was platform as a service and Microsoft in no way changed its tune on open source I mean to this point in history Microsoft thought that open source was a complete cancer right and for for good reason I mean at the end of the day basically Microsoft charged for things that open source was giving away for free from operating systems to programming languages to development environments to servers I mean everything about it it was like oh my God is

there a future where everyone just expects all of our value to be free and they managed to combat that and build a great business despite that but they never embraced open source they never at all wanted to be a part of anything that open source Developers were doing until couple years into Azure not until 20145 and why I would say this is bet the company you're right they didn't go full infrastructure as a service and embrace open source and let people use Azure to run Linux in the lamp stack on top of it that was

not day one but they knew they had to and they were going to and it was just uh hey we're not going to do this right away because the company would organ reject this so hard but we are moving in that direction and we will be AWS we will offer everything they offer and more to our Enterprises who trust Microsoft yep that's a fair push back but Azure came in with a aggressive point of view we are platform as a service which was distinctly different than AWS which was we are infrastructure as a service now

interestingly office and applications and software as a service actually came pretty quickly thereafter too famously they did a pilot program with Energizer like the battery company selling just sort of I don't think it was like the office productivity site but it was like SharePoint and stuff I think as a service as software as a service right so in 2010 Ray Azie actually leaves the company but as he's doing he and Steve Roll Red Dog by this point in time renamed Azure back into the server and tools business and two of them go to the University

of Washington and Steve gives a speech at the University of Washington we are all in and we are betting the company on cloud and on Azure the intended audience of course was Microsoft internally of like hey we are sending a message to the server and tools team this is the future and after that Steve replaces the division head of the whole server and tools division who was Bob muglia at the time Bob would later go on to be the CEO of snowflake before Frank slutman came in so he did fine Bob was great Bob was

crushing it as head of server and tools Revenue was growing I don't know 30 40% a year it's a 12 billion business but the reason that Steve made the change was he said we need a new leader who's going to come in and change this organization and make it a cloud first organization and not carry the baggage of all the success from the the previous iteration and the person that Steve Taps to do that from Bing is none other than SAA Nadella yep to come in and Lead that transformation and from what I can tell

it's just as motivated by Azure is the future and it needs a new leader as it is SAA is a really talented Rising executive in this company and needs to be put on an important project absolutely almost like Bing's not enough for this Guy where can we put him totally it was let's get this guy the right exposure to the right important things that he could be CEO of this company someday in the not very distant future yep to say that this goes well is an understatement obviously but just to put some numbers on this

Microsoft has three reporting segments productivity and business process AKA office and then includes Office 365 as part of that segment the more personal Computing segment that's windows and surface and their Hardware efforts and then the intelligent Cloud segment and that's Azure and I think LinkedIn is part of the office segment if I have that right I think that's right I don't think LinkedIn is in the cloud segment intelligent Cloud today is by far the largest segment in the company by both revenue and profit and by very very far the fastest growing within the company Windows

is declining it's the largest business now and the fastest growing largest business most profitable fastest growing in fiscal 2023 intelligent Cloud did $88 billion in Revenue wow crazy it is worth not to Pork cold water at all because I think the high level point stands I was gonna say this too I know where you're going intelligent Cloud includes SQL server and Windows Server so these are big Legacy businesses yes I think that is both a especially in the early days when Microsoft and Satia was hyping up how much Cloud Revenue the company was doing being

able to report the Legacy server business as part of that Revenue helped a lot on the other hand the counterargument to that is this is actually Microsoft's competitive Advantage versus AWS totally agree Microsoft can go to Enterprises and say we are hybrid Cloud less so today but in the earlier days of the Azure transition saying like hey you need to be on cloud we have a world class public Cloud for you and it works great with our on-prem server offerings and we can be hybrid for you yep totally agree we'll talk about this a little

more in conclusion we have one more chapter in Nokia and the end of Steve's tenure to talk about here but it turned out actually that the cloud Market was so big that nothing else really really mattered all the missteps all the losses it makes sense right Cloud Powers everything Cloud Powers Tech Cloud Powers all the consumer services they all run on the cloud so every consumer service that is not owned by Microsoft or meta or Google or Amazon runs on one of their clouds yeah and some portion of that Revenue acrise to Microsoft and increasingly

the offline economy is becoming some sort of cloud dependent service I mean it's crazy to just see cars rely on the cloud and restaurants rely on the cloud like anything that you interface with in the physical world you expect to have some digital component at the very least take credit cards and all of these things Point of Sales Systems all of these things are routed through the cloud at some point and so David I think you're making the same point about the cloud today that I was about Microsoft in the PC era Microsoft was lucky

to own 90% market share and in Cloud they own you know meaningfully less than that right but it's still basically a tracker on the growth of an insane secular Tailwind that is just an inevitability in the world it's probably a 30 40 year wave that they get to keep riding and again this is outside the scope of this episode but it's sure looking like to the extent AI is the next Computing wave that is also happening in the cloud in the data center so like that's just going to turbocharge everything y so to review how

it came to be interestingly it was Ray azi in an incubation group doing it outside the bounds of the business units beginning in 2006 beginning in 2006 with Steve's buyin and the air cover from Steve to make it happen organizationally you look at where all the talent came from Bing taught them how to do distributed systems Xbox Live was a always on cloud service Real Time Zero latency with 40 million subscribers MSN was a super high-traffic web property with 750 million registered users Hotmail was a web application that hundreds of millions relied on they had

SharePoint and exchange there was knowledge of how to do server-based application software for the Enterprise I mean there was some conflict business model wise with Windows Server since Azure would be orthogonal business model but the technical chops were there I mean these are hardcore server OS people of course that group is going to be capable of doing things like hypervisors so I just think the ingredients were remarkably there from all these other things that Microsoft had been doing over the years they were kind of the only one who could pull this off at this scale

with this set of Enterprise relationships to migrate all these people to the CL Cloud as they built out the product Suite I mean really kind of like we got I don't know halfway is through our research for this and this just hit me of holy crap this era for Microsoft that everybody thinks of is like the loser ERA this is the era where they won you know or they built the foundation to win yeah there was seven years before Steve Balmer handed the Reigns to SAA where azure development was happening under him yes that is

nowhere near the public narrative and Steve is the one who handpicked SAA to lead it and get all the credit and the narrative and the win and then become the CEO pretty wild that is definitely not the public narrative out there yep I could see if you were an Azure doubter and you were sitting there at the top of Microsoft enjoying the windows Monopoly the tremendous business that is Windows and office and thinking why would I do anything to jeopardize this I mean Windows has self-reinforcing Network effects everywhere huge switching costs for the Enterprise super

profitable high margin one of the greatest businesses of all time and now there's this idea that you want me to spend the money to run servers people can run their own software on my servers even if it's open source so it's not feeding into my you know Windows Centric ecosystem there's a chance they're not paying for Windows licenses right there's a chance they're not even paying for my enterprise software services like exchange or like you know Windows server or whatever like you're saying Ben they might be running Linux on there or my competitor's products it's

not even as good a business it's not zero marginal costs running servers running these Big Data Centers has huge costs and even if you say oh those are fixed costs to Rack them and you amortise them over the course of but like energy has a real cost it's kind of shocking that they eventually did Embrace this very unproven new business that could potentially be way worse than their current business totally and without taking anything away from SAA because I think he does absolutely deserve a ton of credit for knocking it out of the park on

execution I kind of think all of the credit for the vision for it and the championing it for the initial seven years within Microsoft goes to Steve and to Ray yep now I will say the company stayed the windows Centric company for too long oh for sure yeah no doubt I mean Azure was being built so it was successful enough that it sort of erases everything else but a lot of listeners know this but I worked at Microsoft from 2011 to 2014 my internship in 2011 was on the word web app in the Office 365

Suite but before it was called 365 and then my real job was I worked on when I came back off Office for iPad which was super secret at the time it was really counter strategy because we were the windows company but at the same time What users wanted in this world in 2012 was I want to access my documents on any device that I'm on we have moved to a world where I have multiple devices I just want to be able to use your application on my device please and absolutely 100% something that happened is

all 200 of us worked for multiple years to get these things ready we had a ship date well we had what we thought was a ship date actually what happened was we were told that actually we're going to shelf it and instead of a ship party we had a shelf party because the product got cancelled o oh that's brutal oh I'm sorry canceled what time frame is this 2013 okay and basically it was hey we just released Windows 8 we just released the surface and we want the marketing message for those things to be that

office is first and best on Windows and the only tablet in the world that can run real office is the surface and I of course I'm too biased and too personal to really think through this but I was like oh this company has its head in the sand this is ridiculous what users want is we have a good version of Word Excel PowerPoint that people can run on their iPads and we've decided not to ship it to try and Advantage surface and other Windows 8 devices yes the year later we did ship it actually right

after SAA became CEO that was one of the first things he did so ultimately that decision didn't happen that much later than it would have otherwise and kind of an open question of whether it was a mistake like did Microsoft ever lose a dollar for deciding to hold Office for iPad another year probably not yeah at the time I held this belief we have stayed the windows company for far too long and need to embrace users where they are now with all this hindsight I understand why you wouldn't make the decision when you feel like

the iPad could be the end of you why would we go all in on that now and put our finest products to Advantage that thing when we don't know if that thing is going to kill us or not so there's the big downside there's not much upside to launching it what am I going to renew a few more Enterprise agreements because of it probably not perhaps young Ben working at Microsoft at that period of time failed to understand how important it is to think like an incumbent when you are the incumbent and this was a

low upside to doing it right away plenty of downsides to doing it right away really no risk on sitting on it it really it was an easy win for Satia during his first year to say culture has changed here we are shipping office on iPad we have shifted from a devices and services company to a cloud first mobile first company I believe that was the message yes that was the message and that was a great supporting point to example of the message yep well speaking of Transitions and transitioning I think it is time to wrap

up our history of this period of Microsoft and mobile and everything and Steve's tenure and talk about Nokia as we end things here who bought Nokia oh that's a good question okay in 2011 after Microsoft had released this Windows phone which like we said was really kind of doomed to fail against Android like you just couldn't compete with free I think Bill Gurley had a blog post about Android back in the day of the less than free business model why you can't compete with it yeah in fact it's not that they were giving away for

free they were willing to pay people to take it I mean if you think about it I'm sure there was money that they spent on the Droid marketing campaign I'm sure there was money that they paid to the carriers to pay to their sales people to incentivize people to buy it versus the iPhone and stores that was a common practice in the mobile industry so I think less than free is actually the correct way to frame Android totally so there was one phone OEM that was willing to play ball with Microsoft and Windows phone and

that was Nokia well sort of I mean Nokia basically had Symbian as its OS they tried to start another OS because Symbian was sort of reaching the end of its life that wasn't going well and so they were kind of left without a platform and so they either needed to pick Windows phone or Android as platform of the future despite being what used to be the dominant phone maker for all cell phones and the then CEO of Nokia was a guy named Steven elop folks will almost Surly remember that name he was a former Microsoft

guy and he had come over to run Nokia so there were deep relationships there in February 2011 Nokia agrees to adopt the Windows phone operating system as its primary smartphone OS for its devices like you said Ben it didn't have a lot of options and it wasn't willing yet to go Android pretty quickly though as we get into 2012 2013 it's clear windows phone ain't really working and Android is the future so as we get into 2013 Nokia comes to Microsoft and says hey we got to talk we're going to go Android unless you make

it worth our while or you know something happens here and changes and as Steve put it to us it was only money that is actually the right way to think about it we've been joking about its only money but honestly what was Microsoft's market cap at this time call it 300 billion and what was the forthcoming acquisition offer for Nokia seven so that is 2.3% of the company you're willing to give up 2.3% of your company for some particular bet I actually think that's a very reasonable way to think about this aquantive Skype which we

didn't talk about which actually was a pretty good deal especially because of the tax treatment you know Yahoo Facebook you should think of these things as a percentage of market cap and sometimes things could go really really right it's even less consequential than that it's not even a percentage of market capit all Microsoft's operating income in 2013 was $27 billion so it's $7 billion out of $27 billion in just cash that they don't know what to do with and that they are getting credit for but your cash is valued as a part of your market

cap I mean sure but Microsoft stock is in the dumps here the cash flow geyser is not appreciating the stock price here Wall Street does not appreciate what's going on it's funny I delivered you a technically correct answer and you delivered me back a very pragmatic one yes right right which is that's not acre to your market cap anyway so you may as well spend it and I think it's probably in Steve's mind here of like I'm not getting any credit for this all this cash I'm generating like right f it when it doesn't cost

you focus or your best people or whatever the scarce resources are it only costs you cash then you should totally think about it as am I willing to bet 2.3% of my company or whatever percent of the cash that I'm not getting any credit for if something could go really right it's a venture capital bet you know y well and Nokia is basically holding a gun to my head right there's actual downside to it also there's actual downside here right so that's how the deal comes together it was super controversial within the company and on

the board obviously at one point SAA talks about in the book there's a straw poll taken of all the division heads all the top leaders in the company whether they're for or against the acquisition the majority are against the acquisition SAA is against the acquisition the board basically says to Steve like clearly there's not support for this and so my understanding of the timeline is there's a seven half billion dollar offer on the table Steve mulls it over plays with it is for it proposes it to the board and exactly the board comes back and

says hey there's not support for this okay after that happens a series of discussions start and culminate we're in kind of late summer early fall 2013 when all this goes down and on August 23rd 2013 Microsoft and Steve bomber announced that he is retiring within the next 12 months and that the board and the company have started the search for a successor as CEO that was August 23rd 2013 yep on September 3rd so 10 days later Microsoft agrees to buy Nokia's mobile unit for S billion doar we heard a bunch of different stories how it

went down we don't know exactly but the fact pattern is Steve announced that he was leaving 10 days later Microsoft agreed to buy Nokia the question kind of remains who bought Nokia right we don't really know in any event here's what happens next February 4th 2014 Satia Nadella is introduced as the next CEO of Microsoft Steve bomber steps down on that same day Bill also steps down as chairman of the board and John Thompson becomes chairman of the board so it is a wholesale Changing of the Guard within Microsoft Bill Steve the original folks were

retiring we're done it is a new day and that needed to happen The Office for iPad discussion we had a minute ago you know I think it was emblematic like there is truth to what Satia wrote in his book that we said at the very beginning of the episode of hey this company culture needed a reset you it's kind of like a bigger version of Brad Smith's presentation to the board of it's time to make peace yeah like it's time to make peace internally and there just needed to be a reset yeah there was a

lot of baggage I mean it's just what 40 Years of baggage Bill Steve old Wars anti trust bad releases of Windows like you just got to get it out to move on and it was Bill and Steve leaving in one Fell Swoop to clear the path and at the same time everybody knew hey there is a huge win that we are sitting on right here like a huge huge huge win in Azure and it is going to be really good for everybody's personal net worth if nothing else if we can just let that be appreciated

and let a new day Dawn here so on February 4th 2014 on that day Microsoft stock price was $30.50 and as we said a minute ago the market cap was I don't know call it $300 billion slightly below today 10 years later whoa whoa whoa this is volume three David don't yeah yeah yeah well you know just to foreshadow show that this was the right decision 10 years later stock is at $465 market cap is $3.5 trillion dollar probably like I don't know I haven't done a sum of the parts analysis but I think you

can say probably the least half is azure propping up that market cap they are currently the most valuable company in the world The Once and Future King Microsoft that's our story for part two we still have a lot to talk about in analysis I'm sure someone's looking down at their podcast player right now like why why are they acting like they're done there's so much time after this are they just gonna like play some music or lot to talk about okay I have got some start and finish stats on Steve's tenure as CEO oh great

this episode we started a little bit before Steve took over because we wanted to put the internet chapter in and the antitrust chapter in but I think everyone kind of feels it by this point the question really is like what happened when Steve was running the company and so here are the numbers and this is the time frame from 20 000 when he was announced as CEO until 2014 was SATA was announced so a 14year period Revenue went from 23 billion to 84 billion that's a 3 and a2x over 14 years operating income went from

12 billion to 30 billion so almost a 3X important to pay attention to is the price to earnings ratio when Steve was announced as CEO was a 7 5x that's high it was real close to an all-time high which was in the month prior at an 80x so it is worth pointing out it still has not been that high to this day even today with all the excitement around Microsoft AI everything going on 40x right so Steve comes in at an all-time high multiple and right before the doj verdict and the breakup of the company

and the dot bubble is exploding yes and you're taking over from Bill Gates all the things essentially if you're doing an analysis of what happened in Steve's tenure and you're trying to grade that you are implicitly saying did Steve make a good investment to be honest I think Steve took one for the team in taking over as CEO in that moment he was handed a bit of a impossible situation garbage sandwich inheriting something when it is valued that highly not to mention as we talked about during that period all the frankly going on at the

company completely so I worked at Microsoft during this period I was a big open source guy I was a big Apple guy I was all these things and I hated Steve's Windows strategy and frankly I didn't like using any Windows products I felt like they were all crap and it is still true that it's totally insane to evaluate how did someone do with an asset that they were sort of forced into buying at 75x earnings y so at the end of his term it was 14x the PE multiple went from 75x to 14x the market

cap when he was announced went from 600 billion to when he left at 330 billion a lot of that is basically the price to earnings multiple rationalizing in that first year and then after it did that the stock price was basically flat for his entire tenure no matter how much the revenue or the profits grew and so one crazy stat on this is you could have bought Microsoft in 2009 for 2.1x annual revenue oh my God I mean everything was on sale back then but like wow listeners are slight of hand here we switch from

earnings to revenue but David I thought that too I was like 2009 come on in 2013 you could have bought Microsoft stock for 3 x-ray Revenue wow and so the question is why why did investors give Steve zero credit for any of this growth cut off that first year when the multiple was coming down why is it that effectively what happened from 2001 to 2014 is for any gains that they got in revenue or profits it was offset by multiple compression coming down and saying the asset's still worth the same thing one is very legitimately

the investors had little belief in Microsoft's long-term relevance not the place for user excitement not the place for developers they doubted that there was real vision from leadership I mean you went from Gates this guy who created it all to someone that everyone was chalking up to be the sales and marketing guy and there's the product strategies all over the place and windows isn't getting any more relevant we trying all these new things that are failing search passes You by social passes You by blah blah blah but the interesting thing is investors basically didn't think

windows and office businesses were sticky and they were only valuing the newer bets which was super wrong windows and office have proven to be these ridiculously durable franchises generating more Revenue today than ever so I mean it is ultimately on the CEO to help shareholders understand where the value is but shareholders obviously did not price in the retention and growth within the existing windows and office customers through a new era of technology I think people were just betting that Microsoft would lose it and they didn't they held on to these durable franchises you know it's

funny when you asked this question a minute ago I hadn't prepared for it ahead of time because as listeners know we don't share notes the first thing that popped into my mind about why Wall Street did not appreciate the revenue and profit growth during this time was just simply like Microsoft did not do a good job telling it story and I think you're saying the same version here like it's so funny I mean it's part of why I love doing acquired part of why I think the show resonates with people telling stories is the most

important thing if you cannot tell your story right and in a compelling fashion this is what's going to happen to your stock price even if you triple revenues and profits and build Azure and all these things yeah I mean consumers had no idea what Microsoft strategy was and neither did developers so neither did investors yep cios probably did sort of but they were probably like what's going on in Search and what's going on yeah sorry what's Zoom is it winning against iPod oh it's losing oh mobile what losing too huh and it's for another episode

but it really was brilliant What SAA did and the company did when he came in of they got the story right the messaging reset this is a mobile first Cloud first company yep that was it that was the key just saying those words over and over and over again yeah anyone who's listening who's a leader at a company right now knows that the right amount of repeating yourself to do is about 10 times more than you think it is you need to just keep delivering the same message over and over and over again and uh

that wins the other way to sort of look at Steve balmer's tenure is comparing against what else was going on in technology from 2000 to 2014 so on the one hand like we've been talking about you have the rise of Google in Search and you have social networking with Facebook and yes you absolutely can compare a CEO to these category defining startups that are in adjacent Fields but that's a little bit of an odd way to evaluate a CEO like how did you do against they aren't even really competitors of yours in your exact market

and by the way they created the best businesses in history that were also the fastest growing and capital efficient how did you do versus those two particular sort of related outliers I think this is sort of a funny measure even though this is the measure we kind of all use but if you actually just look at the peer set what other big companies were there in 2000 in Tech you had Yahoo AOL the whole cable and media sector you had HP Nortel I mean so many of the Great companies of the previous era completely fell

apart the three who actually survived and potentially thrived where Microsoft Dell and only Apple after Microsoft bailed them out and Steve Jobs came back personally yeah I would throw Oracle in there too but yeah yeah Oracle but I mean surviving puts you in the top 5% against the PE set of that era so even if you overlook all the revenue and profit growth and you just look at pure Enterprise Value and relevance there is actually a success in that the core asset was preserved this whole whole notion you have David that SAA came in and

we were great and then we sucked for a while and then we were great again even just setting up we preserved the talent asset and that we had continuity in our businesses for another 15 years on what is already a 30-year-old business I don't know that's way better than anybody else does yep totally so anyway this is all kind of analyzing the tenure from a business perspective I am very amenable to the idea that products completely languish like I had no interest in using any Microsoft products during this period despite being an employee of the

company yeah I'm very amenable to arguments of like yeah but they didn't make anything good yep and that is I think particularly resonant to me at least to my history because they used to they totally used to they used to be the consumer technology leader Windows 95 Windows XP everything we talked about at the beginning of the episode Internet Explorer the browser Wars they were the leaders and they did make some good you know Xbox is good actually thought Windows Phone particularly Windows Phone 8 was a beautiful new crack at what do a phone look

like I thought it worked well but I guess what I'm saying is the products that ended up being their big profit drivers were never their good products right well they were their good products just the Enterprise products they weren't the good consumer products right they weren't good for me as a user they met the needs of customers yes all right move into analysis great let's do it seven power course so listeners this is the part of the show analysis broadly where we analyze the business sort of after we've completed the story and the first one

is a section called seven Powers which is named after Hamilton helmer's book and the question that he sort of poses is what is it that enables the business to achieve persistent differential returns or put it in another way to be more profitable than their closest competitor and do so sustainably and there are seven different Powers sort of categories that it can fall into there's counter positioning scale economies switching costs Network economies process power branding and cornered resource and I think on part one we said Microsoft in that era had all of these right I feel

like there were one or two that I was shaky on but most yeah well in this era they definitely don't have counter positioning that's for sure right that's the interesting thing once you're an incumbent you can almost never have counter positioning yep actually I would say they had some of it in the development of azure because they could say to Fortune 500's we will do hybrid cloud with you and we can be your trusted partner in a way that AWS couldn't counterposition against AWS yeah yep but broadly as a company like no way yeah they

were getting counterposed in Mobile I mean Google was saying we'll give it to you free yeah less them free y yeah all right perhaps the single greatest asset they have is scale economies with the number of users and customers they have any investment that they make gets amortized over such a massive user base that it's worth it if they can charge a dollar more on EAS they should do almost any amount of incremental R&D or Acquisitions right and that translates directly into the cloud era too yeah the cloud even more I think there's crazy returns

to scale on cloud economics yep I think process power I would argue they actually lost during this era I mean the blackc longhorn Vista thing illustrates that yeah they went from knowing how to ship the most beloved operating system of all time with Windows 95 managing to pretty much do it again even during the antitrust thing with Windows XP with I think zero blunders in between I mean they had me but that wasn't a blunder as much as like a I don't know Fresh coat of paint that wasn't really real and then yeah with Longhorn

and Windows 8 separate problems but completely forgot why those franchises have economic value yep I think they also definitely lost branding power in the consumer world yeah the question is that they become more trusted by the Enterprise where if you're offered the exact same service from Microsoft and AWS are you more willing to pay Microsoft for it definitely so yes they gained it in the Enterprise world yeah Microsoft has unbelievable switching costs the EA you just can't switch now you have to switch sometime in the future and when that time comes you're probably not going

to switch then either because that XDA is going to offer even more value it's funny to the extent that the doj and governments were concerned about Microsoft being a monopoly when it came to product tying on the consumer side the uh really should have been concerned about product tying on the Enterprise side where you pay us a dollar amount per device on your network and you get all of our software for sure there would be way better Point solution software for any one of the hundreds of things that Microsoft is providing for you but there's

no way you're going to switch yep you're so right it's so funny you reflected it back to the doj it's been so long now since we covered that hours ago I kind of forgot about it in that era there were literal switching costs to getting a different browser the one that came with your computer was the one you were going to use because a different browser was going to take like 5 to 24 hours to download over your internet connection in the dial up days it was good for consumers to receive a browser with their

computer because getting another one was almost prohibitively difficult yep Network economies it's actually a little thin yeah I mean they had the great Network economies with windows that we talked about last time but that starts to a road here as interoperability becomes a thing as file format standardized and I can open the same documents on Macs and PCs it's like okay file formats stop being a network economy that acrs only to the operating system yeah I'm trying to think are there any other like if you were an Enterprise and become a Microsoft customer and I'm

an Enterprise and I become a Microsoft customer do we really benefit from each other being I don't think so yeah I don't either that just leaves cornered resource yep no I don't think they have that meaningfully no I don't think so I guess this power I mean the fact that we came up with They Don't Really counterposition they have great scale economies they have a lot of switching costs and that's kind of it that's pretty illustrative of why you kind of feel like this is the Lost era of Microsoft and I think it also illustrates

that sounds like an Enterprise company to me yep okay Playbook Playbook well the first one that talks to mind that I want to address a little bit more specifically is this idea of a cultural shift because we've mentioned it many times on the episode oh at the doj there was a cultural shift oh with the new leadership there was a culture shift but what does it actually mean and how do you go about quantifying that the thing that I kept hearing in all the research interviews we were doing was that when the stock price was

flat and flat for a long time people became convinced it's just going to stay flat Yeah so basically whatever the cause of that was it created a zero sum environment nothing I do is going to make the company more valuable so therefore my value the only way to grow value accur to me is to win at the expense of someone else at this company I'm going to get promoted over them my product's going to eat their product my teams going to eat their team I get kudos and at the expense of them looking like an

idiot that's the kind of incentive this is the cartoon org chart of all divisions of Microsoft guns at one another right and of course it's Amplified by Stack ranking which I don't have a problem with stack ranking generally but famously at the company everybody was ranked one to five every manager was only allowed so many ones and so many twos and so ultimately it was an environment where everyone every six or 12 months sometimes over midye check-ins was kind of being baked off against your immediate peers in your group and because the company wasn't growing

in value you had to outcompete your friends to win right the P was not growing right so why was the P not growing we talked a lot about that there's a lot of reasons you could argue why it wasn't but the culture is an effect of that there's a big one I've been thinking on which is how to go about placing your bets for the future as a company and I think in the 2000s Microsoft was viciously trying to fight against the tide there was open source there was the WB there's always things people wanted

to do ultimately over time you cannot fight what people want to do as a company you can put up all these barriers you can steer them back into your ecosystem but ironically The Playbook that Satya is now running is a return to a classic Microsoft One Embrace and extend yes rather than fight what users are doing I want to use open source software whatever I want to make web apps I want to host a web app you just figure out what people want you embrace it and then you figure out what product you can build

with a business model that extends that existing user Behavior but it does require you to be clever and outcompete a lot of other people to invent that new business model that you know is created on top of new user Behavior I just want to double underline and highlight this one because I think also this same Dynamic played out in the building and evolution Microsoft's Enterprise business really it just wanted to control the network and prevent users from messing it up right eventually when the iPhone came out that dam broke and it could no longer hold

back users within their company from doing what they want and having what they wanted and this is where the shift to the cloud was another reason it was so strategically important shifting to the cloud is what enabled it to say okay and become a partner to their users in a way that they you know paid lip service to before but they were really antagonistic to their users yep and it works exactly with what you're saying for Microsoft as a company and its products too like you want to use an iPhone great you want to use

open source great we can still serve you yep and the trick is figuring out how to make money when you lean into what people want because ultimately like if you just reduce it all to economics what people want is free value but you can't actually build a business on giving away free value yes you know I can give you a dollar for 90 but ultimately I'm just going to go out of business and so I need to figure out some way that you're happy from value creation and willing to pay me more than it cost

me to anyway the trick is getting the business model right yes there's this other one of what was going on given that the ideas were good and this is going to sound harsh but timing implementation and taste at Microsoft from call it Windows 98 on were just terrible or maybe put another way they had the right ideas but late timing and bad execution strategically correct but tactically misguided I mean bill was super right that touch Computing was going to be a thing he referred to this idea of a natural user interface very often bill was

super right that interactive TV was going to be a thing I mean think about how I watch Netflix I will watch Netflix tonight after we record on my Apple TV upstairs bill was right on mobile that that was going to be a huge part of of the Computing landscape and yet all of these started at Microsoft 5 to 20 years before the tech was actually ready and they would often bet on the wrong standard or Paradigm I mean touch Computing ended up being capacitive not resistive with a stylus tablets have proven to be a cousin

of phones scaled up not PCS scaled down interactive TV came after the internet not before and only once there was a tremendous amount of bandwidth I mean think about how much more bandwidth it consumes for all of us to ad hoc start NetFlix streams versus there's one broadcast happening and we all just tune in when we tune in and we just catch whatever part of the broadcast is over anyway not to mention interactive TV looked like YouTube and Netflix and not like you know a layer on top of Comcast totally mobile was 5 years early

and it was more akin to embedded devices than it was to scale down PCOS so something was off in Microsoft's ability to leverage their future predicting into creating the right products right which is weird because historically they have been good at it yeah well they at least employed the one Microsoft employee referred to it as bracketing you basically develop two products concurrently one aimed below what the current technical capabilities are and one aimed above and as you get closer to shipping or as you get closer to like letting the market play out you kind of

pick what whether you're going to make the low-end one better or you're going to sort of start reducing functionality of the high-end one and so in the IBM days you know you had windows and os2 and in the internet era you had like the web browser versus all the interactive TV stuff or Longhorn which was supposed to be little and iterative versus black home which was so ambitious it actually got cancelled yeah the problem was during this era that sort of optionality in multiple bits kind of collapsed down to like no we're make one bet

in each of these yeah or like the bets somehow couldn't continue to flourish internally I don't really know why but it seems like for some reason bracketing worked well for a while and then eventually their ability to take a good idea and implement it at the right time the right way fell apart yep my next one is the idea of positive sum leadership this one's a little bit more personal than our Playbook themes typically are but I think it's an important takeaway Bill Gates plus Steve Balmer in the right roles with the right level of

respect for each other and who made which decisions when that was all humming that was way more valuable than Bill alone or Steve alone y it was like one plus one equals five yes they were so great together this is actually pretty common among teams the most high- performing teams are so much better together than they could possibly be a part yeah well hell look at you and me right I totally agree I was going to make that analogy but is too much there is no way we could do this on our own yes too

much Naval gazing but yes Bill alone at least in this era was totally at risk of getting too excited about theoretical Technologies like win FS that's the perfect illustration of this and you know Steve needs a great technology partner and one who kind of has the extreme loyalty of the thousands of brilliant engineers at the company so they'll sort of align and follow the vision and Steve also needed someone willing to change their mind in the face of new data bill was constantly processing new information and as new things came in he would say I

don't care how in motion things are if you're right which is rare usually Bill's right but if you're right and you're arguing something to me like screw it we got to change everything new data new thing the internet Title Wave and Steve was much more like we have to align an entire aircraft carrier in the company and then all the aircraft carriers outside the company so we are going to make a decision and then we are going to implement and execute and I think together there was some magic where there was just the right amount

of stick tutiven versus adaptability yep my next one is being extremely partner focused is a gift and a curse Microsoft is an extremely partner oriented company there are far more profits who have accured to Microsoft's independent software vendors resellers Retail Partners than just to Microsoft itself but it basically makes it impossible to reset I mean Apple when jobs came back hit a full reset all new developer tools all new products all new software all new platforms but when you have all these externalities depending on you you actually can't really hit a set button to adapt

for a new era you have a whole ecosystem to preserve and I think this is the more nuanced view of the idea that well if you miss one wave then you're actually well suited for the next wave people often say the only reason Apple was able to win in Mobile is because they totally lost in desktop or whatever and I think really what the answer is is the more externalities you have depending on you the more difficult it is to reset and usually a Next Generation the more switching costs you have right a Next Generation

technology requires you to hit a big reset button that's all I had for my playbook great I have just one big one but I'm going to save it for take away and Landing the plane let's do that now listeners we've been trying out this new way of ending episodes how do we land the plane what is the one takeaway that is really sitting with me after having done all this research talked through it with David hardened our Thinking by counting ideas off of each other what is the thing that you can't get out of your

mind so for me this only came to me just a few minutes ago but I think it's the right and most complete version of what I've been feeling about this part of the Microsoft story for a long time since we've been doing the research and the feeling started with as we were talking to people and digging in we were just like this story is not understood right and this narrative about these were the losing years of Microsoft yes there were a lot of L's during this time but that's not complete by any stretch of the

imagination and as we were preparing I really felt a lot of weight on this one of like man we really have a responsibility to try and get this right here and I think what I realized ized a few minutes ago as we were talking is this was the biggest failure of the company during this period they did not tell their story right and so much of what we think of as the losses from this time frame and certainly everything baked into the stock price not moving was because of that yes Steve came to the CEO

role at an all-time high multiple and like it was the tech bubble and you know all that stuff sure that's a big thing but why did the stock price stay in the 30s for his whole tenure they just couldn't tell the story right and there are all sorts of reasons for that but the story does not have to be so negative because there is so much positive that happened during this time and yet the narrative became this self-reinforcing Microsoft sucks narrative yeah irrelevant failing can't do consumer the counterfactual is Amazon if they had a consistent

message that they went forward with such as we are a company who invents and wanders Amazon has failed at so many things so many things publicly huge bets that have totally failed and yet huge consumer failures the phone people are like what a beautiful thing that Jeff Bezos has imbued into this company this idea that we invent and wander we make these bold bets we Embrace failure I mean Kindle Fire or I guess Kindle Fire kind of counts certainly the phone I mean at this point I feel like standing here today we can say Alexa

maybe if llms hadn't become a thing I'd be with you it turns out it might be good distribution for a good llm if they actually yeah sure but the thing itself anyway it's an option on llms there's so many there's too many to count there's grocery Amazon Go Local I mean all the restaurant stuff it's a narrative problem and yet the Nar Nar about Amazon is H what a beautiful thing Jeff andb and the company yes and the narrative about Microsoft was they can't get anything right yep you're right I think yours is better than

mine now that's my new land the plane oh do you want to hear what mine was before yeah tell me what was on your mind all right ultimately Bill Gates is Right technology companies are always extremely at risk of disruption even if you won the battle today even if you're the most dominant company today it is so easy for you to lose and become irrelevant tomorrow you may keep a great business because these things are sticky as we know IBM made a lot of money for a long time but even without the whole doj thing

Microsoft probably would have visted themselves Microsoft almost certainly would have missed mobile because there's no chance they would have realized that the business model that Google had meant that they were going to win in Mobile when they came in from the side and gave away the software for less than free Microsoft was going to have these huge Downstream misses because technology moves so fast and is such a dynamic landscape yep and I think this is why I feel so adamant that Microsoft during this era and Steve deserve so much more credit than they get because

Microsoft is not IBM today it is not large but irrelevant it is very relevant and what they have done with Azure and incloud and now with AI is I mean hell they're the most valuable company in the world if all this era did was give them a free option to play in the cloud and AI era or even just say the AI era that would have been great but also what they did was they tripled revenue and profits right yeah they did that while building this whole new great business yeah it's a great takeaway carve

outs let's do it okay I have two Hardware technology products one is a recar out from you past carve out the Rayband metas oh yeah finally got a pair they're great they're awesome the use case of the audio ambient audio in my ears without earbuds is great particularly for a baby monitor when I am talking to my wife or other family members or friends or whatnot and I want to be able to hear what is going on in the baby crib and not wear earphones in my ears great that is great they're also just a

great product in general another related Hardware carve out is they startup called Oslo and the Oslo sleep buds in the last couple years I have slowly and then pretty much every night gotten into using some form of audio to help fall asleep or if I wake up in the middle of the night get back to sleep and I used airpods for years and years and they're great but you know if you sleep on your side or do anything we like you know you got the airpod jamming into your ears these are little sleep buds that

are made for sleeping and if you lie on your side on your ear they don't stick out and so you can lie text me a link I'm buying this immediately yeah they're great so this is the team that was at Bose that made the Bose I don't even know what the product was called but Bose had this product they killed it the team left started a startup and so it's all like Bose engineering anyway it's great I love them I'm buying this as soon as we get off yeah they're fantastic awesome I have two and

they're like the most absolutely basic products of all time and I'm okay with that the first I mentioned earlier M3 MacBook Air it's the finest computer I've ever owned which I say every time I get a new Mac if only you could turn it around and touch the screen I know I'm rocking the M1 MacBook Pro at home and it's a 16inch and gosh that thing is just a beast to fly with and so for all the travel we've been doing recently David it has been awesome to have this incredibly lightweight incredibly fast just beautiful

machine for flights and all sorts of travel stuff nice so it's my on the go and then sticking with this theme of staying incredibly basic and predictable the Tesla Model Y is an awesome car oh yes that's right you are finally joining the club yeah we just took a weekend and drove up to orcus Island and it was so sweet I never once charged it you know drove multiple hours took a ferry were on an island that's sparsely populated hung out for the weekend drove all over the island did the whole thing back got back

with 18% battery and had you needed to charge it there'd be a supercharger Network yeah and it's unbelievably fast and fun to drive and I finally get the it's an iPhone with wheels like it just feels whenever I drive my other car it feels kind of icky and this one feels clean it's perfect yeah it's amazing I get it I get it Tesla people all right we got a lot of thank yous here yeah we have a huge set of thank yous first of course is our sponsors JP Morgan payments service now and pilot you

can click the link in the show notes to learn more and tell them that Ben and David sent you when you get in touch I was trying to count David it's definitely over 20 people that we talked with this time so on my end thanks so much to Brad silverberg Brad LED windows for a while notably the development of the Windows 95 product and that team Thomas Reen who was one of the original team members on Internet Explorer and actually went on years later to start control Labs which sold to meta and as a part

of meta's effort now to do the um neural interface you can sort of twitch your hands and I don't know we haven't actually seen a product yet so we'll have to to see what that looks like but that was Thomas rear in in his next ACT Steven sinowski who led windows in Windows 7 and8 and led office before that and David you read quite a bit of Steven's words to prepare for this yeah his blog hardcore software he published in book form it's a thousand page book it's like a textbook sitting on my desk it's

awesome we talked to Stephen for a few hours he's great he's a board partner in in Jason horlitz now that was super fun yep Julie Larson green was also great she worked closely with stevenh in office and also on Windows my old cooworker anen rajas swaren who worked with me on Office for iPad helped refresh my memory on what the blowby blow was like in those days where we almost shipped the product then didn't then got a new CEO then did huge thank you to Fritz lman who worked in some strategy and Corp Dev roles

at Microsoft just an awesome guy actually now he is the CEO of the combined company class pass and mindbody and talk about a person with multiple lives and careers he was great someone that he worked closely with at Microsoft Charlie songhurst Charlie's one of the smartest people I've ever met I mean that could go for a lot of people on this list didn't Charlie do a great invest like the best interview with Patrick a couple years ago did he I got to go listen I think he did yeah absolutely brilliant mind expanding person John Rubenstein

who LED engineering at Apple and actually went on to lead Palm it was fun talking with him about what was it like from the Apple side from the competitive perspective competing against Microsoft all these years huge thank you to Ray Azie Who David and I both spoke with yeah Ray is so damn delightful he's such a legend delightful the right way to put it Ray is now running another startup new one called Blues Wireless and was just so generous to give us a couple hours he had some amazing you know things that belong in a

museum in his office that he showed us over Zoom like old computers and Hardware from the 70s the 80s the 90s it was super cool yeah more on my side to Rob Glazer who worked at Microsoft in the 90s and founded and ran real networks to Joe belfiore who played a large role in Windows and Windows phone and actually he demoed Windows XP in the way back when 2001 the launch announ reg Filman that's like how the second half of the keynote works as Joe is demoing features to Regis it was J Leno for Windows

95 and rist for Windows XP yes so Joe's got this beautiful long history at Microsoft and was just really great to VI Vara who was at Microsoft deeply involved in sort of the comms and legal stuff during the antitrust era of course to Steve Balmer being very generous with his time and helpful in helping us sharpen some of our thinking and especially being generous with his time as we were entering free agency here he's got a busy day job these days at the clips that's right our good friend who runs the science of hitting it's

a great substack that does investment analysis and just was very generous sharing a large spreadsheet of historical data from Microsoft it's very easy to parse and look things up Live while we're doing the episode and finally last one from me to Todd Bishop at Eire Todd has these unreleased recordings from when he was covering Microsoft at the Seattle PI way back in the early 2000s and he sent me the raw recordings you know when he was standing there with Bill and Steve just being a reporter and it's very fun to hear their voices in ways

that I don't think were ever released or publicly heard yeah super cool yeah a few more on my end Terry Myerson the CEO of tretta Seattle Terry ran windows and Windows phone at Microsoft for a long time to s s sear who is a managing director at madona but is a legend in the server and tools business at Microsoft so we talked about him on part one but he's wonderful to Mary Joe Foley it was so fun to talk to Mary Joe Mary Joe dedicated her career probably the last 20 plus years to solely covering

Microsoft and she is the best in the business today she's the editor and chief at directions on Microsoft it's a research firm like Gartner except it only covers Microsoft she was super kind and generous and then the last one Dave Mart it was so fun to talk to Dave Dave was a 33-year board member at Microsoft the only outside Capital the only outside Capital into the company before IPO from tvi and then Dave went on to co-found August Capital where he's a partner Meritus these days I think Dave was the longest serving Microsoft board member

besides Bill Gates three decades plus wow oh and I have one more thanks to good friend Arvin at worldly partners for some of the research that he provided as well so thanks arvand well with that you should check out our previous episode Microsoft volume 1 if you've already heard that check out our AWS episode we also recommend our Nvidia series part one intersects nicely with this era of Microsoft and we tell some of the PC gaming story from the Nvidia angle lastly of course if you are sitting around right now and you're thinking oh no

what should I do next the answer is acquired. fmsf we cannot wait to see you at the chase Center Mark freaking Zuckerberg is going to be there it's going to be the event of the century in the acquired world so if you've always thought like a I've always wanted to go to something like Omaha you know for the Berkshire hathway annual meeting where I've just wanted to celebrate with other business and technology nerds who also like acquired this is going to be the greatest way you could ever imagined to do that yes if you are

wondering what you should be doing on September 10th 20124 there is only one acceptable answer and that is to be in San Francisco at the chase Center celebrating with us it's going to be awesome Yep and with that listeners we'll see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now huh [Music]