Steve Ballmer
Appearances
Acquired
Microsoft Volume I
They're basically trying to co-opt the PC movement back into IBM proprietary land.
Acquired
Microsoft Volume I
Yeah, so we have to thank Brad Silverberg for helping us with this section. Brad led the Windows 3.1 team. He came in right after the 3.0 release and would eventually go on to lead the Windows 95 effort as the VP of the Personal Systems Division. So Brad comes in, Windows 3.0 has just shipped.
Acquired
Microsoft Volume I
And the first thing that is super, super obvious is as Brad sort of observed everything going on with OS2 land and everything going on with the core Microsoft culture, it was a complete clash. It was impossible for the pace of Microsoft. This is like a super young group. I mean, all in their 20s, some people in their 30s, but mostly 20s who just want to push the cutting edge ship stuff.
Acquired
Microsoft Volume I
It was almost like think about Google in the early 2000s. Just hire all the smartest people you can and set them loose and have creativity and everything. bump up against the edge of what's possible, both in terms of pushing the hardware, but also pushing, I mean, even like laws as we would later see, let's just do what users love and see what happens.
Acquired
Microsoft Volume I
Let's just do what technology enables us to do and see what happens. That's like the opposite of IBM's culture at this point. So there's this huge cultural rift between what IBM sort of needs and who Microsoft is at this point. And so what ended up happening with 3.0, it was unexpectedly loved. Microsoft was not really prepared for how much people were going to love the GUI.
Acquired
Microsoft Volume I
And with 3.1, it got really good. There was a small offsite of the executives, and Bill and Steve basically decided that it was time to bet on Windows. That was the new strategy. Windows had always been plan B, and now suddenly it was plan A. And when I say plan B, I don't mean like... thought they had a prayer of being plan A. I mean, it was 65 people that shipped Windows 3.1.
Acquired
Microsoft Volume I
These were like the misfits. It was not prestigious. I mean, the prestigious thing to work on at Microsoft was OS2 and eventually Windows NT. But the Windows team in the Windows 3 era, it's almost like the Mac team over at Apple. They were sort of flying the rebel flag. They valued creativity over bureaucracy, even if it meant they weren't working on the prestigious thing.
Acquired
Microsoft Volume I
And so suddenly there's this huge strategic opportunity to become the standard independent of IBM if the platform is good enough. And then boom, the early reception to Windows is so good. It gives this glimmer of that may seem really ambitious, but that opportunity is actually ours if we want to go seize it. So everyone took a big gulp and said, the GUI is the next big thing. Users love this.
Acquired
Microsoft Volume I
And the press is making a big deal out of Bill Gates. You know, boy wonder, he's the youngest ever billionaire at age 31. And by the way, when Bill Gates became a billionaire, there were not lots of billionaires. There were like 50 billionaires. All this lore around the company, it's like they can do no wrong. But inside the company, I think they're like, we don't know the future of technology.
Acquired
Microsoft Volume I
Any wave could break against us at any moment. And this is all tenuous. I think that chasm kept getting wider and wider and wider of internally feeling like they're screwed and externally it's seeming like this is the next great thing.
Acquired
Microsoft Volume I
Which, by the way, the way that they won that, a judge basically looked at the paper and said, Apple, you totally said in all the future versions of Windows, they can use your UI paradigms. And so for most of the counts, they're covered. And for these other things that you're trying to ask them about, those are not actually defensible.
Acquired
Microsoft Volume I
It's just widely accepted that these are UI paradigms now, and you can't enforce any ownership over those. So it basically got thrown out. Apple tried to appeal all the way up to the Supreme Court, who said no.
Acquired
Microsoft Volume I
Wow. Listeners, there's some unauthorized biographies that we tried to corroborate as many of the facts as we can, but the ones where David's saying he doesn't know a source, it's sort of these unauthorized ones.
Acquired
Microsoft Volume I
It's nuts. And so suddenly Microsoft feels the full weight of everything that you have to do to build a platform and be a steward of an ecosystem. So suddenly this huge effort began to try and make developers successful. That's how Windows would be successful if it was a great platform for application developers to thrive on.
Acquired
Microsoft Volume I
So Cameron Myhrvold led the developer relations group basically to try and figure out what do people want out of a platform and how do we provide the APIs for them and the support and everything in order to do that. All the documentation, all the help, everything.
Acquired
Microsoft Volume I
And at the same time, Microsoft basically knew establishing a platform is brutal and requires bootstrapping a multi-sided network of developers, users, and PC manufacturers. And so 3.1 had users excited, but it was still very early. They could have lost that throne. Developers were not really yet targeting Windows. Microsoft sort of had to show, we make great applications for Windows too.
Acquired
Microsoft Volume I
And in 1968, Seattle, I mean, this is like a provincial little town. I'm standing here right now. It's a major city and a huge economy in the United States. But at the time, kind of a podunk, forgotten, sleepy, faraway place. Totally.
Acquired
Microsoft Volume I
Exactly. So you've got this big developer relations group effort that spins up. Meanwhile, there's a huge push with OEMs to get them to install Windows. At this point, they were still installing DOS, or some people were actually installing nothing and requiring users to put operating systems on. So there's a conceded push there. to get the OEMs to install 3.1.
Acquired
Microsoft Volume I
Okay, so this happened from 1988 to 1994. David, explain the per-processor licensing agreement.
Acquired
Microsoft Volume I
They have 49 years of history making software for consumers and enterprises, making hardware, gaming systems, gaming studios, Windows apps, iPad apps, Mac apps, operating systems, mobile operating systems, MP3 players, search engines, cloud computing services on cloud computing, programming languages, development environments, the list goes on. But it did not start out that way.
Acquired
Microsoft Volume I
Yeah, basically, you're going to pay for two different operating systems, even though you're only putting one on if you ever load a different operating system on. So yes, it very strongly incentivizes you to never, ever, ever ship any other operating systems on your computers as a company.
Acquired
Microsoft Volume I
Now, this is, of course, the way that regulators would look at it in 1994, and that would get Microsoft in some hot water, and they had to agree to stop doing this practice. The way Microsoft would look at it is, we're just helping our customers, right?
Acquired
Microsoft Volume I
Do you really think that these companies want to keep a whole separate ledger of what machines they shipped DOS on or Windows on versus what machines they shipped period? Wouldn't it just be easier if once a month or once a quarter they could just report to us their total shipments like they have to report to their investors anyway? And then we'll just send them an invoice for all their machines.
Acquired
Microsoft Volume I
And we should say this is the classic low-end disruption playbook. I mean, this is what Clayton Christensen was talking about. Going from mainframe to midi computers, I'm going to make something that's worse for most things, but better for some new things that new customers and new markets are going to care a lot about.
Acquired
Microsoft Volume I
Right. If this had happened earlier, you could see how this would be more of a compelling way to get market share. But by the time they started doing it, they were already sort of running away with the market.
Acquired
Microsoft Volume I
Totally. They wanted to make the stuff that people wanted to use the most, and that's how they would win. Their goal was make the very best products, the best software we possibly can in the ways that people want to use and buy software, and then we'll make a bunch of money.
Acquired
Microsoft Volume I
And the thing they were sort of realizing is, well, we have made software that people like to use, so they're using it in businesses. They always kind of wanted that to be the goal, but now it was happening. People are doing their work in Excel. People are bringing PCs to the office. Maybe businesses are buying their PCs, but people are actually buying them themselves and using them in the office.
Acquired
Microsoft Volume I
And so it just made them that much more efficient. And so Microsoft really had to figure out how to sell to businesses... But we actually have no idea how to do that. And it sounds crazy today. The Microsoft you know today, as late as the mid-90s, really had no idea how to sell or build software for businesses.
Acquired
Microsoft Volume I
In part because prior to this, personal computers were not used by enterprises. It was just not an enterprise tool. So now that it was happening, Microsoft had to figure out how to be the ones that would benefit from it.
Acquired
Microsoft Volume I
And IBM's going to look at it and go, that can't do any of the things that are important to our customers. And that's exactly why it works.
Acquired
Microsoft Volume I
Right. And there really isn't yet a business server that couples nicely with the PC on the desk. And so you have this weird thing where there's a mainframe that is where the companies like real enterprise applications run, but people are bringing PCs and those PCs don't actually communicate well with anything else yet.
Acquired
Microsoft Volume I
They just are there for the employee to do their own work on a spreadsheet or something, print it out, because finally 3.1 had printer drivers, and then deliver that. But it wasn't like a system that operated with other systems in your enterprise.
Acquired
Microsoft Volume I
Right. It wasn't like, hey, let's sell something to businesses that they want to buy. It's, hey, let's convince businesses that PCs are a good idea for their workforce to adopt. Right.
Acquired
Microsoft Volume I
And all of this stuff is pretty out of scope for this episode, including all the software systems you would need to build for the enterprise, like Windows NT Server and Exchange and SQL Server and Active Directory, like the classic mid-2000s Microsoft stuff that they got known for. But that is what this would all evolve into.
Acquired
Microsoft Volume I
And it really just started with everyone kind of looking at Steve and saying, can you figure this out? We've all to date basically just been either running dev teams or running marketing or running product groups and been selling through retail or distributors in the application side or mostly through OEMs.
Acquired
Microsoft Volume I
on the systems and operating system side, but can you go figure out how to sell everything we make in a completely different way to a completely different buyer profile and keep us posted on how that needs to change all the products we make in order to do that? That's a pretty crazy change.
Acquired
Microsoft Volume I
Well, it's painfully obvious. It's Microsoft Office. And it's the fact that the whole workforce is already using Microsoft Office.
Acquired
Microsoft Volume I
And everyone loves to talk about product-led growth and how it's this new thing in the late 2010s and how Slack and Atlassian and Trello, everyone figured out PLG in this bottoms-up workforce-adopted way rather than selling to procurement or IT or the central administrator. And it's just not new. No, this has always been the case. And Microsoft invented it.
Acquired
Microsoft Volume I
All the employees wanted to use Excel and Word and they just had to figure they were doing it anyway. And at some point, Microsoft needed to figure out how to take advantage of selling it centrally and how you do business with other businesses rather than selling a zillion retail copies of people who are using it kind of illegally for their work.
Acquired
Microsoft Volume I
Yep, absolutely. And next episode is going to be all about the enormous success of becoming an enterprise company and the enterprise agreement and cloud and everything that sort of came after that. But we have two chapters left in this episode, and they happen concurrently within the systems group by two very, very different teams, and that is Windows 95 and Windows NT.
Acquired
Microsoft Volume I
So David, let's start with NT, and then our little cherry on top can be 95 to close us out. How did Windows NT happen?
Acquired
Microsoft Volume I
Even though they don't yet have an enterprise product to sell. They've got DOS and early Windows, which is essentially consumer targeted. But now they've got this guy, Dave.
Acquired
Microsoft Volume I
And we should say, Dave, this is really the first time they brought in someone who had real industry experience. I mean, in 88, Microsoft was 13 years old, so Bill Gates would have been 33. Everyone is in their late 20s and early 30s, and Dave's mid-40s. He's like, I've seen a few things.
Acquired
Microsoft Volume I
Right. It enables all of your desktop computers at the company to join and network together in a compliant way. It enables an internal server that everything communicates with. It enables a directory of all the devices on the network and all the people in your organization.
Acquired
Microsoft Volume I
So the other important takeaway on NT is it was going to take a long time to build. It was going to take a long time to test. It was going to take a long time to sell and deploy. And it was going to have really strict requirements for what it could work on because it's a power-hungry operating system built for enterprise IT administrators. And so that is... not your short-term product strategy.
Acquired
Microsoft Volume I
That is a long-term bet that a team is going to work on concurrently while you're figuring out what to do after Windows 3.1. So in 1991, Bill Gates sums this up in a memo where he says, "...our strategy is Windows. One evolving architecture, a couple of implementations, and an immense number of great applications from Microsoft and others."
Acquired
Microsoft Volume I
And every word in that sentence does a bunch of heavy lifting. So you got one architecture, okay? I think what that basically ends up meaning a few years later is one application programming interface, API, that developers can target so that when they want to write a Windows app, it works on both NT and whatever the evolution of 3.1 is.
Acquired
Microsoft Volume I
Okay, so that's one architecture, but it says one evolving architecture. So that buys Microsoft a little bit more fluidity in the one architecture that's being targeted. Then you hear a couple of implementations. So this basically says, even though developers are targeting what became the Win32 API with one way that we write applications, there's two different implementations.
Acquired
Microsoft Volume I
And so for many years, they would display very differently on NT systems versus, spoiler alert, Windows 95, the successor to Windows 3.1. Oh, yeah.
Acquired
Microsoft Volume I
Yes, I do. But it's so much sexier to say Windows 95 and name it after the year that it actually ships versus... Yes. But yes, an immense number of great applications from Microsoft and others. That sort of sheds light on the DRG, the Developer Relations Group strategy of we got to go out, be massive evangelists,
Acquired
Microsoft Volume I
And everyone in the systems group is looking over at the apps group going, did you see that? Bill Gates just said our strategy is Windows. We're now the Windows company, and that includes great applications from Microsoft and others. And so what does that mean, applications group? Like, let's go first and best on Windows. Get to it.
Acquired
Microsoft Volume I
I just think that sentence kind of says it all for what we're looking at 1991 through call it 2000 or so.
Acquired
Microsoft Volume I
Totally. I mean, even before Windows 95 shipped, they had 75 million Windows users. This is even before you get plug and play or multimedia or networking. Like this is on Windows 3.1. Yeah. Crazy. Okay. So we've been leading up to it. We've been building hype Windows 95, or should I say Chicago? Yeah.
Acquired
Microsoft Volume I
So the Chicago name, for those of you out there who were paying attention when this was under development and you were all excited about what Windows 95 would become, and it's probably 1% of our audience or something who knows the Chicago codename, they wanted to create an OS for the everyman, one that was easy to get to, a nice quality of life when you're there, it was affordable.
Acquired
Microsoft Volume I
Chicago is the perfect name in every way. And it is also kind of a contrast to what was going on in a different part of Microsoft, where there was the codename of Cairo for a very ambitious next-generation operating system. Now, mind you, NT had already come out in 1993. So Cairo is sort of this general bucket of...
Acquired
Microsoft Volume I
Maybe it's post-NT, maybe it's part of NT, but this is like a really sophisticated, crazy set of technologies that we're going to eventually bake into an operating system. It doesn't really have a release date. No one really believes in any of the release dates that are proposed.
Acquired
Microsoft Volume I
But the Windows 95 team, the Windows 4 team, the Chicago team loved contrasting this idea of like a far-flung land relationship. That's really ambitious. And who knows what it'll actually be like with this. Chicago is something we know quite well. You get on I-90 from Seattle, you drive for three days and you're there. And that is sort of like the goal. That's the spiritual thing about Windows 95.
Acquired
Microsoft Volume I
A hundred percent. We should say Cairo never shipped. So there's a lesson in that.
Acquired
Microsoft Volume I
We are getting ahead of ourselves. So, okay. Windows 95, let's start with the launch event itself. It was a huge, ridiculous, insane day in Redmond, Washington. They set up tents all over Microsoft's campus. They flew in journalists, beta testers. There was a movement around Windows 95 in a way that you would not believe. It was an operating system launch and Jay Leno launched it.
Acquired
Microsoft Volume I
It wasn't like Jay Leno did some stand-up. It was like Jay Leno for 90 minutes in a tightly scripted environment co-hosted with Bill Gates all of the fanfare and festivities.
Acquired
Microsoft Volume I
It might be like the peak moment of pure joy to celebrate technology before a lot of the sort of skepticism came in and the tech haters.
Acquired
Microsoft Volume I
Totally. It was unabashed celebration of software is probably the best way to put it. Microsoft licensed Start Me Up famously from the Rolling Stones.
Acquired
Microsoft Volume I
Totally. The other thing that's happening in 1995 is the internet hype is starting to build, but we will table that for next episode. Right at this point in history, only 14% of Americans had internet access. It was still very early. So there was no guarantee that any story posted online would actually reach the masses.
Acquired
Microsoft Volume I
And so Microsoft had really relied on traditional broadcast coverage of this event and brought in all these journalists and all these print magazines and all these newspapers to kind of build the hype.
Acquired
Microsoft Volume I
I watched the whole keynote yesterday, and at the end, they ripped down the sort of back of the tent behind the stage, and there's the entire development team in the red, yellow, green, and blue squares of the Windows logo sort of sitting outside on the big sports field on Redmond's campus.
Acquired
Microsoft Volume I
And there's only 360 people that built Windows 95, so it's still kind of a small team, but they're all there. They're fired up. They're part of the moment. Okay, so that's the launch event. In Redmond, at least. Around the world, people are lined up around the block to buy an operating system. There's a lot of news coverage of that. It was basically the iPhone launch of its day. Yes.
Acquired
Microsoft Volume I
They lit up the CN Tower, the Tower of London. This date, August 24th, 1995, they basically treated an operating system launch the way that you would launch a movie or a new Madonna album. Right. it was a marketing case study, so much so that the folks from Coca-Cola actually reached out to Microsoft to ask them, how do you do marketing this well in the new age? Oh,
Acquired
Microsoft Volume I
Yes. This is a company that freaking invented Santa Claus to sell us all sugar water. And they're calling Microsoft asking, how do you market in this new era? It was that successful. They launched concurrently worldwide in eight languages. So this thread that Microsoft had of early international continued all the way through to this moment.
Acquired
Microsoft Volume I
They invested heavily in doing all of the localization and help stuff. so that the whole world really could adopt something all at one time. It really was the perfect product at the right time. The internet, games, all of that.
Acquired
Microsoft Volume I
Yes, that's the takeaway. They thought about software in a completely different way. And yes, the start menu, while it got cluttered and complicated and messed up over time, the idea of a button that you click to start using your computer was very appealing to people.
Acquired
Microsoft Volume I
Oh, yeah. I mean, the Mac just never had any real PC penetration. From the IBM PC forward, it never had big market share.
Acquired
Microsoft Volume I
And that is how they tried to market it. They marketed it as people on job sites using Windows. They marketed it as people doing crafts. And there's like someone who's modeling something for an F1 car. It's just fun watching all these old videos and seeing all the different personas.
Acquired
Microsoft Volume I
Yep. Now, I must say, this all pains me deeply as someone who never owned a PC, grew up using a Mac, loved every bit of my Mac, was even an apologist in the sort of OS 9 era of... This isn't very good, but I'm still going to say it's good. And, you know, I was on the OS 10 public beta. I only clicked a start menu when I was like fixing a teacher's computer at school.
Acquired
Microsoft Volume I
Even though the takeaway here is everyone thought this was a great operating system and it won the market. I always looked at it like, well, it's not a Mac.
Acquired
Microsoft Volume I
The way that Apple products became mainstream always felt odd to me as someone who was using them when they weren't. But it's been interesting gaining a new appreciation for Microsoft through studying their history that I absolutely did not have as a user during this era.
Acquired
Microsoft Volume I
And it was the wrong strategy for Apple, and it was the right strategy for Microsoft. I mean, Apple has always, at least in my opinion, created a better computing experience by being completely integrated. I mean, it's the Alan Kay quote, anyone who cares about making great software needs to build their own hardware.
Acquired
Microsoft Volume I
And the complete integrated package that Apple offers, I have always found to be the best computing experience. And it doesn't scale.
Acquired
Microsoft Volume I
In that era, yeah. The way to scale is make the software that is going to get distributed on the most PCs, and then that is the most interesting to software developers, and it is the most interesting to consumers who want the software and IT buyers who want to buy the standard thing.
Acquired
Microsoft Volume I
Apple's strategy versus Microsoft's strategy in this era, Apple was always going to be a bit player rather than the sort of scale winner. And the trade-off is lots of PCs had blue screens to death. Apple never had blue screens to death. Like what do blue screens come from? It's driver problems.
Acquired
Microsoft Volume I
It's that the printer is not speaking the same language as your particular computer and what the operating system knows about your computer. And are the device drivers right for your particular version of whatever's on your motherboard? Like Apple never had those issues, but they also had very few units shipped and, you know, much more expensive product. Yeah.
Acquired
Microsoft Volume I
Yep. So a little bit more on Windows 95 before we finish the story here. It is remarkable to reflect that it took, what, five, six years to go from Windows' plan B to Microsoft being extremely right that that was the franchise, like that was the bet to bet the entire company on.
Acquired
Microsoft Volume I
There is a fantastic photo, listeners, that we will tweet of Bill and Paul sitting in the computer room at Lakeside. And Bill, I think he's like 13, 14. He looks like he's about eight. I think on the wall, there's this almost like printed out magazine thing that says The Bug Slayer that they've hung up over the wall. It's amazing.
Acquired
Microsoft Volume I
And as Brad Silverberg put it this way to me, he said, Windows 95 cemented Windows as the franchise product for Microsoft, which interestingly, it was not yet. And David, this is crazy. It would remain the franchise product for the next 20 years, perhaps five or 10 years too long, but we'll save that story.
Acquired
Microsoft Volume I
Yeah, it's crazy. From a product perspective, there was just so much that really got smoothed here. This was a user experience where they finally had time to think, what actually do users want to do with an operating system? What features should be part of the OS and what should we delegate to applications? What are modern networking technologies that we should bring in?
Acquired
Microsoft Volume I
I don't want to foreshadow too much, but how should the internet be in a modern operating system? That was a huge thing. The multimedia, the video stuff, an operating system really showed up and said, we thought about this experience for you. You're looking for where to start. You're looking for cool stuff to do, and you're looking for it to not break on you.
Acquired
Microsoft Volume I
So a couple of interesting technical notes. It was basically all new technology. If you try to look this up, it will tell you Windows 95 was DOS based. It still used DOS in fallback situations for older DOS applications or drivers. But for most of the time, it was no longer true anymore. that Windows was just an operating environment on top of the DOS operating system.
Acquired
Microsoft Volume I
Windows had now become a true 32-bit operating system of its own. Windows did all the heavy lifting. It had its own file system. It accomplished a lot of the sort of user experience magic and speed that it was praised for by rewriting a lot of this from scratch. So this was kind of the beginning of Windows as its own OS.
Acquired
Microsoft Volume I
And you can see that actually change in the marketing messages that change from operating environment to operating system. So, David, that brings us to the end of our chapter one. We've got plenty of analysis here to do, but my God, what a first 20 years for the company.
Acquired
Microsoft Volume I
Right, and there's all this stuff we miss. Like, I didn't mention Microsoft Research. Microsoft Research was a lot of people and a lot of money. Right.
Acquired
Microsoft Volume I
Actually, the start of research is interesting. I'll say this real quick. In 91, Nathan Myhrvold started Microsoft Research, and the logic is fascinating. Basically... Everything Microsoft had done until that point was taking things from mainframes and minicomputers and adapting those tasks, those jobs to be done for personal computers.
Acquired
Microsoft Volume I
And at some point, they kind of looked around and said, all right, well, we did it. All the personal and business applications can now be run on personal computers. So we have to come up with uses for future technologies in order to continue to drive the ecosystem forward. There's no more low-hanging fruit.
Acquired
Microsoft Volume I
And I thought that was an interesting thesis of why to spin up a research division at that point in history.
Acquired
Microsoft Volume I
Okay, great. So, playbook. The big interesting one that I want to start with, and it actually involves a chapter from the story that we just sort of glossed over, is capital efficiency allows founders to control their own destinies in a way that you just don't get when you're selling off huge chunks of the company in order to accomplish your mission.
Acquired
Microsoft Volume I
Let's just talk through the cap table over time and how the company went public. So we talked about the partnership being 64% Gates, 36% Paul Allen. 1980, Steve Ballbar comes in and gets 8.5%, 8.75%, something like that percent of the company. So dilutes Gates and Allen down. Then in 1981, just a year later, they take the VC investment for 5% of the company from TVI.
Acquired
Microsoft Volume I
This also, I'm guessing around 5%, trying to reverse engineer some of the numbers, they also created an option pool where they were then creating opportunity for basically rewarding management, which is how there were 10,000 millionaires created in the Seattle area from Microsoft.
Acquired
Microsoft Volume I
Right. Yes. At IPO, so even with all this dilution, so you've got the Balmer dilution, the VC dilution, and the option pool dilution, Bill Gates still owned 49% of the company. Wow. I mean, that's pretty unprecedented. And he wasn't the only one with a big chunk. Paul Allen owned 28% of the company. Steve had 7.5% of the company.
Acquired
Microsoft Volume I
This company was basically owned by the three more or less co-founders, a little tiny option pool, and then a VC who ended up with 6.1%. I think Dave got some more shares from being on the board. You just don't see companies that look like this anymore.
Acquired
Microsoft Volume I
Yeah, absolutely. I'm trying to figure out why they were able to be so capital efficient. Is it just that software was such an unbelievably good business model compared to everything else that existed? Like they didn't need a lot of working capital, everything was high margin, they could grow really fast, or it was just an era... before much competition.
Acquired
Microsoft Volume I
And so they didn't need to out-raise their competitors. Once they got a little bit ahead, there was really no way for anybody else to close the gap, assuming that they executed well.
Acquired
Microsoft Volume I
That's so, so, so insane. And there was no one else really with the knowledge either. Even if someone else came in with a big $1 million check and gave it to a competitor, in 75, like how many people could really write these language interpreters?
Acquired
Microsoft Volume I
They had an obsession and an obscure skill that turned out to be one of the most valuable in the world in an area where there was a freak law of nature in play with Moore's law that was so unintuitive that you had to think from real first principles to understand the impacts of it.
Acquired
Microsoft Volume I
Yeah, that's true. It's this like complete perfect storm that enabled them to build a highly defensible business without really any investment ever. This is the largest company in the world, the most valuable company in the world that was entirely bootstrapped.
Acquired
Microsoft Volume I
No, I mean, in 86, when they actually did go public, they raised $45 million and they never spent that because they generated much more free cash flow than that that year.
Acquired
Microsoft Volume I
Right. There was not this multi-sided network of you've got developers making applications and then you've got users of those applications. No. Everybody who used a computer was a programmer.
Acquired
Microsoft Volume I
And they needed to for the reason that they had been granting so many stock options from that little option pool to employees that they were going to blow the SEC's 500 shareholder cap by, they projected, 1987. So they wanted to go public on their own terms in 86, not when they sort of had to by SEC rules.
Acquired
Microsoft Volume I
Maybe. In this era, especially. Maybe. Yeah. I don't know. I'd agree with you if you had a bunch of short-term capital interests that owned your company. But if it's all founder-owned, there are great large private companies in the world. Yeah, fair, true. Coke Industries is a trusted company by a whole bunch of their customers. Cargill is even bigger than that.
Acquired
Microsoft Volume I
There's a bunch of European industrial and shipping companies. Rolex. There are privately held big important companies in the world.
Acquired
Microsoft Volume I
That's true. That's very fair. And especially getting to the stage that they eventually got to being the trusted partner to governments around the free world. That requires being a public company.
Acquired
Microsoft Volume I
that has like unique economic conditions that have never existed before to create these magical businesses you could never fathom before this new technology thing existed. It's an impossible thing to wish for. Like it may never happen again. We may never get another Google either.
Acquired
Microsoft Volume I
But how many things can you collapse to zero? I think that's the question. With Microsoft, they were able to collapse their marginal cost to zero, but they still had distribution costs. And then Google collapsed distribution costs to zero with the internet. So what's a big cost that a company has now? Maybe AI will collapse... You know, you no longer need 50,000 employees.
Acquired
Microsoft Volume I
You can have five employees. Maybe it can collapse that to zero. But you need something of that scale, which is like, where does a company spend most of its money that suddenly it can spend no money on?
Acquired
Microsoft Volume I
I suppose, actually, it is on the human capital. You just look at big, successful companies and look at what they spend money on, and those are the candidates.
Acquired
Microsoft Volume I
Yep. Other fun things on the IPO. Do you know who IPO'd the day before Microsoft did? Ooh, no. Oracle. Aha. And Oracle had a nice pop, which actually helped Microsoft price a little bit higher in their IPO. That is another episode we have to do.
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Another thing adds yet another layer to the insanity of everything that we've been talking about of why they were able to build such a successful company on such little capital. I don't think there has ever been a tailwind in history like the one that Microsoft had with the secular growth of the personal computer wave.
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And the only thing I can think of that is comparable is Amazon with the growth of the internet, sort of powering their early growth. But here's the stat. From 1975 to 1986, 11 years prior to their IPO, so founding to IPO, PCs grew at a compound annual growth rate of 98%. It grew from 4,000 units per year to 9 million units per year shipped.
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Right. They managed to make themselves the point of integration for the whole industry. Yes. So oftentimes I find myself when we're looking at these companies that are like among the most successful in the world or like Microsoft, the most successful in the world. It's basically like a multidimensional multiplication problem where you're like, okay,
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They had this unbelievable one in a zillion thing going for them, which you can sort of multiply by this other one in a zillion thing. And so it's the like zero marginal cost, zero distribution costs, unbelievable secular growth of the PC, Moore's law happening. They're the single choke point for the whole industry. It's just crazy how many things you multiply together.
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And personal computers, like creating software for desktop computers was a really good idea, and they wanted to be the best at it.
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Yeah, you're right. It's both the hedging, but also then the ability to read the world and quickly, entirely change your strategy if you need to, and having your hedge be far enough along that you can jump quickly to it and shift your whole organization to get on board with it. That's a hard leadership thing to do.
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Today, we will tell the story of the desktop software company. Before the enterprise, before IT, before the internet, before being a trusted partner to governments around the free world, and really, before people even knew what to do with personal computers, this is the story of a bunch of ragtag geniuses in their 20s pushing what was possible. Welcome to Microsoft, the PC era.
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Right. Which I think you're seeing play out with most CEOs today. There's a big difference between a founder CEO and the stuff that they can do. Zuckerberg with the metaverse or Jensen with betting the whole company and going all in again on AI versus Tim Cook or Sundar Pichai, certainly very different type of CEO. Satya is interesting.
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He's almost, despite the fact that he doesn't own half the company, he's got a lot of founder-like control, which I think is pretty interesting. Yeah.
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Moving along. Other playbook themes. A big one that jumps out to me is that new generations of technologies enable market dislocations. And unless you are in a transformational moment in terms of a new technology came out that enables something that wasn't possible before that's going to rearrange the whole value chain and open up new markets... It's pretty hard to go challenge an incumbent.
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No one was going to challenge IBM really until the microcomputer, even the minicomputer people. Did DEC really challenge IBM? Not really. It never made a dent.
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Yes. And there's these little blips of it, like the GUI, I think, meaningfully reshuffled the DECs. But those are the moments where you can have meaningful new entrants. And otherwise, you kind of have to bide your time and just build your hedges and see.
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Related, even if you are the incumbent being disrupted, it is possible to have a very, very large and durable revenue stream that can go on for a very long time. And what I'm referring to in this particular example is despite all of the dethroning that we just talked about, Microsoft would not eclipse IBM in revenue. You mentioned market cap, David, but in revenue until the year 2015. Wow.
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But I think that's the point, right? It's like Microsoft's perception by the market. I'm sure they were growing faster. I'm sure they had better gross margins. I'm sure there was a better story there. And so there's multiple that comes out of story. I'm sure there's lots of good reasons why Microsoft became more valuable than IBM very early. But IBM's revenue did not peak until 2012. Wow. What?
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It's this like long after public perception moves on, customers still get value from something created by incumbents for a very long time. And I think that's something we often forget about in the sort of buzzy Twitterverse of like, oh, that thing's over. It's like, it might still grow for another 20 years before it's over.
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Yeah, that totally comes through. I asked Brad, why did Windows 95 work? And, you know, there's lots of structural reasons, but he said we basically did two things. One, we laid out principles for product and then pushed responsibility down. Developers were often their own PMs.
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So there's sort of this idea of once you got the principles, we don't need to write a zillion specs and design something three times and pass it through three functions. Just like, you know, the principles make great software that follows the principles. And two was he said that everyone felt personally responsible for the product, and it really showed.
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Yep. Something we touched on a little bit is the benefit of scaling with OEMs. This was sort of the contrast against Apple, where I said Apple was sort of always going to be a niche player by the way that they designed and built and packaged everything themselves. Apple is in many ways like the Amex, where Microsoft is the Visa.
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Yeah, on our Visa episode, it just became so clear that Visa could sort of quickly take over the world at MasterCard by being an open network where they didn't have to do all the work to scale themselves.
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They could distribute to a bank, partner with a bank, and then boom, each of the banks that was on their network could independently scale at their own rate, which created, obviously, compounding effects for how fast Visa and MasterCard could scale. The same can be said of Windows.
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I think the Microsoft OEM team for Windows was like 20 people or something. Before the enterprise, in this era that we're talking about, the group of people responsible for go-to-market for Windows was really small. They sold some retail, but the team was just about, hey, make sure HP and... Compaq and Dell and Gateway. Exactly.
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That was their go-to-market, and it makes your scaling unbelievably efficient.
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Dude, you are getting a Dell. Yeah. Similarly, I think the fact that they went international early was this very powerful constraint where it meant that every time they shipped software, they had to make it globally ready quickly.
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Which is reasonably high level in terms of how abstract it is. Like, you're not writing machine language. You don't have to know how to address memory and registers and all that. It reads kind of like English. You know how to add numbers together.
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And so that meant that if there was any sort of network effects to your software, like anything becoming a standard, Microsoft was just way better positioned to become the standard than anyone else was. And on top of there being network effects, there's also scale economies where A word processor is a word processor.
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The fact that they forced themselves to be international early meant that every product after that also had to figure out how to do all the localization and training and all of that to get all those effects too.
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Yes, exactly. And they just realized that so early. They also realized that most people who were doing some sort of localization would do a shoddy job. They would think about it as lesser than the US market. And so they just did a good job at localization. They just cared.
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They thought of it as like, this is a strategic pillar that in every country, everyone experiences our software to the same quality because it's our brand everywhere. And I don't know, I just think that is not how the rest of the industry thought about it.
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On top of all of this, the way that they executed it through subsidiaries was pretty genius. Redmond did not control international. They spun up country managers and subsidiaries in each of these countries in a ton of countries.
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And so while Redmond did the product development and then did the engineering work to do localization to all the strings files and everything for those countries, the actual marketing messaging and the sales strategy and the sales structure... happened in country that was owned by a person who lived there.
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So they actually could think through what is the best way for people to receive this software here, which again, that's just going to yield way better results than if you're sitting there armchair quarterbacking at Redmond thinking about how a person in Chile is going to receive your marketing message.
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And one other that I have is this one that we didn't really talk about, but Microsoft famously was not first to market with basically any of their applications. They aren't even really today in most cases. I mean, you think about the strategy that they had early on, spreadsheets, word processing, all these were copycats at their outset.
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It's not an elegant language, and it's a very verbose language, but if you sort of look at it with your eyes as a person who speaks English and knows basic math, you're like, I kind of understand what this program does. So there's a meaningful amount of translation done by a basic interpreter that takes you from the basic code you have to write to what is actually running on the machine.
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I mean, sometimes they would do an acquisition, but most of the time they just look at a our software should do the same thing. And they would copy it. They had no shame in doing that. They had their eyes everywhere looking for good ideas, and they had reverence for the good ones, and then they would just incorporate them.
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And on top of that, they wanted to make the software very easy to switch to. So a lot of the keyboard shortcuts in Excel to this day are there because they were originally the Lotus 1-2-3 shortcuts, and they wanted people to have the same muscle memory that just worked. So fundamentally, what this does for you as a business is it just leads to better risk-adjusted returns.
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You already know what's going to work before you ship it. You don't really take market risk. So you're not going to be the first to the market with early adopters, but most of the time, you actually don't need to be to win. And I think Microsoft, I don't know, they sort of own that idea. Most of the time, people are sheepish about it. Steve Jobs famously said, Microsoft has no taste.
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Right. That's a good point. It's also different. I mean, the Lotus 1-2-3 multi-plan thing in that era, Microsoft just didn't have great distribution yet. And so Lotus 1-2-3 just got pretty far ahead of them and Microsoft had no way to catch up. A few years after that, that would basically never be true again.
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I will say you touched on something that's an interesting corollary to this is their first versions of software famously are not good. You look at Windows 1.0 and 2.0. They know that it's part of the strategy and they were world class at learning from customers and integrating customer feedback into subsequent versions.
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And so there's always this like saying of Microsoft doesn't have a very good first or second version, but the third version of something is typically pretty good. And I think that fact pattern definitely follows.
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I was, but it was such a different era in that 2012 to 14 era. It's not, I guess, 2011 is when I started as an intern. I'll have a lot of thoughts on it next episode.
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Which, of course, if you own the hardware, you definitely think of it more of like, well, we ship them the big cabinet of things and we install it and we fix it if it's broken, but we sold them hardware. The software is required to run it, but the thing we sold them is the hardware. And if you're a pure software company, you think about the world differently.
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You're like, well, I can always ship you another CD, another floppy disk, you know, over the internet. It's obviously very different. But because there weren't really software companies before them, of course, people didn't come from that mindset.
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Yes. So listeners who are new to the show, we do this section based on Hamilton Helmer's seven powers framework. And the question is, what is it that enables a business to achieve persistent differential returns, or to put it another way, to be more profitable than your closest competitor and do so sustainably?
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And the seven are counter-positioning, scale economies, switching costs, network economies, process power, branding, cornered resource. And David, I am pretty sure I could make a case somewhere between 1975 and 1995 at Microsoft for all seven of these.
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It's one of the most defensible businesses that they built in history. So of course they would have all seven of the powers.
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Great. Counter-positioning. I think the biggest example of this comes through where Microsoft was basically willing to jump on the microcomputer revolution before the incumbents were. IBM did not want microcomputers to happen. And then when they started to happen, IBM tried to figure out how to slow it down and reintegrate it into their old business model. And Microsoft basically had no baggage.
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It's sort of the Python of its day. I think the way Python is now, where you sort of joke that Python is so flexible, you know, you can like accidentally write a program by writing English and it can kind of forgive a lot of mistakes and it reads kind of like English.
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And I mean, this is kind of classic innovators dilemma stuff. They could say, well, we don't need to make any money on hardware. We don't need to even make hardware. We are free to become the whole point of integration for the entire ecosystem just by shipping bits. And that is crazy. Yeah.
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We keep talking about Microsoft as the point of integration or choke point or dependency or standard for the whole ecosystem. Given that, it is quite remarkable how much value they created on top of the platform versus just captured for themselves. There's that famous sort of Bill Gates line, you want your ecosystem around you to be generating more revenue than you are taking for yourself.
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They did a ton of that. It's the OEMs and it's the application developers.
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It's unbelievable. You know, when Microsoft has an install base of 100 million people using Excel, in this episode, let's just say 10 million people who were using Excel. And suddenly some up and coming spreadsheet comes out with a cool feature like auto sum or like fill down or like draw borders around the cells or whatever.
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Suddenly Microsoft does a tiny bit of dev work and they can reap tons and tons and tons of value for doing that that the tiny company cannot do.
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Yes. Switching costs. Well, funny thing about monopoly is there's nothing to switch to.
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It's a reasonable parallel to draw it way back when with BASIC, where you say, look, you can understand it as a layman, but also it's used in a broad set of business applications.
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There's not a classic network, Facebook or AT&T style network here in terms of one user can contact every other user, but more users being on Windows incentivizes more developers to make great applications for Windows, which enables Microsoft to sell more copies to more users, etc.
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Oh, you're right. I didn't even think about that. The document formats are a huge network effect thing, even before the internet, even before organizations were networked and computers were networked outside of an organization. File formats, you're right. There's huge network economies to file formats.
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It's elusive. This is a little bit later in history, but I did always think it was absolutely incredible when I was at Microsoft and we would ship a version of Office every three years. I worked on Office 15, that the entire 6,000-person organization had a process in place where we could release to manufacturing, RTM, on a date that we planned three years in advance and actually hit it.
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Like the process of the ads cuts meetings and the zero bug bounce and the testing schedule and the triage when you had things that people wanted to introduce late in the schedule. It was a remarkable product, especially with all these teams that needed all their code to interoperate. I worked on a shared experiences team that would check things in that would...
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be a dependency that Word, Excel, PowerPoint, all of them took on the shared code. And we knew our ship date three years in advance and would hit it. It's crazy.
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It's funny. The process power, I would say, is stronger in Office than Windows. Now my colors are showing. Windows always notoriously miss their ship dates. But I'm actually less sure that process power existed in that early days. I think they were a bunch of smart people, but I'm not sure that they had a unique way of creating software. But I think that got built over time. Yep, agree.
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Well, that's true. Windows 95 built a consumer brand. The idea of a consumer brand of operating systems was, you know, there was Apple, but they were tiny, and that was more around the hardware.
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But branding is probably the thing that they rely on the least. Interestingly enough, there are other structural reasons that they're entrenched where even if Microsoft had a crappy brand in this era, they probably still would have won. Yep. The magic of getting the whole deal with the IBM PC and then getting to sell licenses to all the other OEMs.
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Yeah. It didn't start as a cornered resource, but as soon as IBM started shipping it on the IBM PCs, it was over. I'll say it again. IBM's distribution created demand for DOS, and then Microsoft just got to capture value from everyone else who wanted it. All right. Well, we would do bear and bull listeners, but we kind of know what happened after this.
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So the bull case is that the party continues and Microsoft continues shipping amazing operating systems after amazing operating systems. And that stays the important thing in the world. And the bear case is something else becomes an important thing in the world. And just having this super locked in operating system is not actually the way to bet your whole company for the future.
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The IBM deal. I can't unsee it. Microsoft figured out a way to take someone else's dominance and wholesale transfer that into their dominance for the next generation. The fact that IBM called the project chess is so deeply ironic because Bill Gates was playing chess and they played checkers.
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they just didn't end up capturing any value out of it yep and if i could make a less cheeky comment on it i would say it's that a new technology generation when something becomes possible and opens up a new market it enables a shift in the point of integration in a value chain the old value chain of ibm if you shipped the mainframe you had all the power
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But in this new world of PCs, if you controlled the operating system that all the users were familiar with and all the developers wanted to target, you had all the power. I think that is not necessarily obvious unless you went through it and have the hindsight of history to be able to articulate it.
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I mean, you watch every early interview with Bill, and you read a lot of his writing, and he's a great writer. I mean, it's awesome that so many of his memos leaked, whether intentionally or unintentionally, over time.
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Yes. He really did view himself as a steward of the software ecosystem and had this steadfast belief that software was magic and was going to change the world. Over the next 20 years, from 75 to 95, software did change the world and Microsoft enabled it to happen.
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So again, good, bad, or ugly, whatever you think of the company, they were sincere in... I think the ugly part is a lot of people want to hate on the value capture because, God, did they capture value. But they were sincere in their desire and ability to create, too.
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Listeners who are new to the show, we've been iterating on how we end episodes. And we decided on this recently of, you know, how should we land the plane? It's to talk about the thing that we can't stop thinking about.
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So Dave had watched Bill present many years earlier at none other than the Homebrew Computer Club at Stanford. Yes! The very place that is part of the Apple lore with Jobs and Woz showing off the early Apple computer. Apparently, Bill also went and made a presentation there and would hang out there, and that is where Dave first came across him.
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That's cool. It's really hard because all hardware fails eventually. So, you know, at some point there will be zero computers out there that can run Windows 3.1 that will boot. And the only way to experience any of these things is through an emulator. And so it's kind of like... I don't know, to be able to capture, you know, high res footage and stuff of those machines while they still work.
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Yep. I love that. Have you ever heard the phrase, go out when the top row at the back of the auditorium is empty?
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I think it's a Seinfeld quote. I might misattribute it. Drop a note in the Slack if I did. But yeah, I think it's a Seinfeld quote. You can let one row be empty, but you don't want to wait too long.
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All right, I have three, and they're all sort of different. We've sort of had a tradition on the recent episodes of doing multiple carve-outs, and all of them sort of are different genres. So my product that I've really been loving, my physical product, is the Meta Ray-Bans.
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I bet. It's a pretty delightful product. I bought them because I was in Hawaii and with my four-month-old son, we were in the pool and stuff. My iPhone's waterproof, but I kind of want a different angle, and I don't necessarily want to be holding my phone. It's very cool to be able to take pictures and record video of what I actually see to be able to relive that moment.
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And I did a bunch of photos and video, and we were on vacation that way. And then I discovered a thing that they're actually just awesome for, I think even better than AirPods, is phone calls. The speakers are great. I wouldn't say necessarily they're the best for listening to music. The bass is obviously not as good as headphone bass. They project the sound down toward your ears.
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So unless you're standing really close to me, you can't really hear, or unless I have the volume all the way up, but the microphones are great too. So I was on a long walk on the beach with the wind whipping by on a call with my mom. And I was like, does this sound really bad and distorted to you? She's like, not at all. Wow.
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And so I was really impressed and will definitely be using them for more calls. I think that style of headphone over the ear, there's many things that it's not good for, like when you're on an airplane or something like you want to plug your ears or if you're in a super loud environment. But unless you're in one of those environments, it's a nice break for your ears versus having AirPods jammed in.
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And it's a great call experience. So They're great. The battery is great. They're like four hour battery. So it's like a low key, more subtle, augmented reality experience. There's no heads up display. You don't see anything. But when you get a text message, it'll read it to you.
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Totally. Yeah. It basically is like you have AirPods in, but you don't actually have AirPods in. And you have a pretty good photo video camera on your face.
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Yes. It's not super bright. I'm not sure everybody really knows when you are, but if you know what to look for, you know if it's on or off. Cool. So I've been loving it. I think it's a great product. I intend to wear them a lot this summer.
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My second one is a thank you to a very, very good designer, Julia Rundberg, who worked with David and I on a recent project for some design work, some of which is actually featured as we speak on Apple Podcasts. And she did a bunch of other stuff with us too, and she's really excellent.
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So if you're looking for someone who's good at visual identity, branding, slide decks, websites, I've worked with her on a few projects before, and she's just awesome. So I wanted to recommend her. My third, this is kind of community spotlight to go all the way back to like nine years ago acquired.
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It was a listener who runs a company called Summer Health reached out and said, I heard you say that you have a baby. I've got this great company that is for new parents. And here's some info on it. And I am now a paying member. It is a on-demand texting relationship with a pediatrician.
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It is like crack for parents. It's crazy. And you can hook up multiple phones. So my wife and I both have a direct line to like, something weird is going on. Will you help me through it? Including we had a 2 a.m. wake up the other night and everything ended up being fine. But as I'm sure any other new parents can relate to. You really want to make sure in the middle of the night.
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If you're not sure if everything's fine, you would like to figure out the right steps to make sure everything's fine. So having a virtual doctor on demand is totally amazing. So Summer Health, if you are a new parent, we've been loving it.
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Well, we have a lot of thank yous on this one, as you can imagine. People were really generous with their time, pointing us to different resources, explaining their recollection of history as it happened. And, you know, being in Seattle, active in the venture community here, both through PSL and David, you're in my shared history at Madrona, me working at Microsoft.
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A lot of good opportunities to learn what really happened from folks. So a huge thank you to Mike Slade, who spent the time with me. Mike spent two different stints at Microsoft and then at Next and Apple in between.
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Yep. And one of the few people in the world who both spent a ton of time with Steve and with Bill and worked closely with both of them. So, so great to get his perspective, especially about the early days of office and the applications group. Very helpful. Similarly, Pete Higgins worked closely with Mike.
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Pete, I think, ran Excel for a long time and oversaw a lot of the different stuff in the applications group. and I believe also ran Office. It's kind of funny how many different people picked up the mantle over time as these things traded around groups.
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But frankly, I think that's a huge part of the Microsoft story is the company very quickly adapted and changed its structure depending on the current needs of technology and competitors and et cetera. Huge thanks to Tren Griffin, who is actually a lifelong... Seattleite and sort of close friend to the whole Gates family. Bill Gates Sr. was his mentor.
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I'm sure you've seen Trenn's prolific tweets online about Microsoft history. So Trenn, and actually Trenn I think currently works at Microsoft in a strategy role. So thanks Trenn for your help as well. David, I know you've got a bunch.
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I read like 20 of Steven's hardcore software posts. And then when David and I were dividing up what belongs in what episode, I realized like 19 of them belong in next episode. So Steven, thank you for your early prep work for part two.
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Yeah, when I was there, Terry was EVP over, I think, Windows and Windows Phone.
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Yep. And how different the go-to-market motions were for Windows and Office. I think Terry was the one that sort of gave us the insight of Windows, especially in the early days, was basically an OEM game, small group doing an OEM thing.
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Yep. Obviously, Brad Silverberg, who we mentioned a bunch. It was very fun seeing after spending some time talking with Brad and texting a lot with him to see the end of the Windows 95 announcement after Bill and Jay Leno are done for Brad to sort of come out and finish it off. It's fun. It's like watching a time machine, watching that thing. It's really cool.
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Soma, Soma Segar at Madrona is someone that David and I love crossing paths with in the Seattle entrepreneurship ecosystem.
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Yep. And lastly, huge thank you to Steve Ballmer. To be honest, it was a little bit surreal chatting and hearing about his experience over the whole thing because, I don't know, there's nobody, including Bill Gates, that bleeds Microsoft more than Steve Ballmer. And his just unabashed, pure pride in what they built is infectious.
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Totally. And I mean, to be frank, I had a very opposite strategy in mind, but I was a new hire out of college, individual contributor PM. And, you know, it was still the Windows company then. And Steve was championing the Windows strategy. And I was a guy working on Office for iPad. Well, with that, our huge thank you to JP Morgan Payments, ServiceNow, and Pilot.
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You can click the link in the show notes to learn more about any of those great partners of Acquired. If you like this episode, I was thinking of ones to recommend. It would be pretty funny to go listen to the forethought acquisition, given all of this context. I mean, it's a short episode when David and I were not good at this yet, and we did our very best.
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But it is from our early days, and it covers overlapping source material.
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Yep. If you are new to the show and looking for great recent episodes that we've done, I highly recommend the Visa one as discussed earlier in sort of the network of networks idea, if you haven't heard that, or perhaps the Nintendo or Nvidia episodes, all of which will be right up your alley if you liked this one.
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Yep. If you want to know every time an episode drops, get hints at the next episode topic, and get episode corrections and follow-up, you can sign up at acquire.fm slash email. Come discuss this episode with everyone else who's chatting about it at acquire.fm slash Slack.
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And if you're looking for another episode, go check out our second show, ACQ2, where we will have actually some very awesome tech CEO guests coming out over the next month or so that are absolutely worth watching. listening to especially if you're interested in semiconductor and tech history. Now, if you want some sweet Acquired merch, go to acquired.fm slash store.
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They've identified a market opportunity, and that opportunity is reducing traffic.
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Of course you were. But I kind of feel like a David Rosenthal move is that you might have been listening to Start Me Up whether we were doing Microsoft or not. That's a very squarely in your genre song.
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Well, listeners, if you want to know every time an episode drops, you can get hints at the next topic and follow up. You can sign up at acquired.fm slash email. Come talk about this episode with the community at acquired.fm slash slack.
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Great. Big market. And listeners, are you kind of sensing what's happening here? Mainframe, mini computer, microprocessor. We kind of have to keep using smaller and smaller words to represent the fact that the computer is getting smaller and smaller here.
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And it is funny that it kind of stopped there. The computers that are sitting on all of our desks are microcomputers.
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They're doing the same thing. It's funny. In many ways, at this point in history, getting a manual was actually much more valuable than getting the processor itself, because the processor would arrive, and unless there was documentation, you would have no idea how to interact with it to take advantage of its power. But if you had a manual...
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Well, sure, you couldn't actually test the stuff you wrote for it on the hardware.
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But if you wrote an emulator on a bigger, more powerful computer that could sort of mimic the computer that you're actually targeting, you could go years before actually ever running the software on the target device and just work off of what the manual says, as long as the manual is correct and matches how it actually works.
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If you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as a deeper dive into topics we cover on the main show. And before we dive in, we want to briefly thank our presenting sponsor, JPMorgan Payments.
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But spoiler alert, that totally becomes Microsoft. The seeds of Microsoft are selling language interpreters for new processors, new hardware, new computers that enable you to write familiar programming languages on that new hardware.
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Yeah, he cared a little bit less about programming languages and a little bit more about operating systems. So that's how they diverge for the few years here.
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It's so good. This quote is incredible because basically Paul Allen brings up Moore's law to Bill Gates. They don't use that language there. But in 1971, that is what's happening. And for Paul, this is just an observation of, hey, there's an exponential thing happening here. Seems like it's going to keep happening. It's been happening. And Bill's shaking. And he's like, What?
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Exponential phenomena don't just happen. That's incredibly, incredibly rare and immediately gets Bill's wheels turning on. What does this mean for the world? If that's actually true, we need to act and do something profoundly different than anyone's ever done before because this enables new things that no one ever thought could be possible.
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Yeah. And it's also the reason why Microsoft is going to form into such a different type of company that's ever come before it. Why they can break all the rules, why they can sell just software, even though that's never been a thing before, why their business model can be so much different than everyone else's business model.
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I mean, in prepping for this episode, we got to talk with Pete Higgins, who ran Excel and was an executive overseeing Office for a long time in the early days. And he had this great quote to us, which was, computer on every desk was wackadoo stuff. People laughed at it. It was absolutely wild.
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People thought, I don't know, maybe one in 10 people in their finance group or something will have one at some point. This is the profoundness of an exponential decrease in price or increase in power of computing is it's going to become universal.
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So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and likely all of you if you hold any index funds. And this show is for informational and entertainment purposes only. David, where on earth do we start the Microsoft story?
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It's literally a quote from Paul Allen. So Bill was the number one math student in the state of Washington. And he gets there, and he does this theoretical math class, Math 55, and gets a B. And Paul says, when it came to higher mathematics, he might have been one in 100,000 or better. But there were people who were one in a million or one in 10 million, and some of them wound up at Harvard.
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Bill would never be the smartest guy in the room, and I think that hurt his motivation. He eventually switched his major to applied math. Ha, ha, ha, ha.
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He's gregarious. Anyone who's ever met Steve or seen a video of Steve, you are well aware that this man has presence. But the thing that people don't know about him is he is so unbelievably analytical. Steve is the guy that outscored Bill Gates on the Putnam exam.
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Yeah, Steve isn't a programmer, but he is every bit the mathematician that Bill Gates is. And that is one of these things where I think when people try to set it up as, well, you know, you've got the brilliant programmer genius and the marketing guy. It's just like those are the roles they took.
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But I think when you're getting a sense of who the original crew was at Microsoft, they were all brainiacs and they were all wildly analytical.
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Yep. And this is really where Bill Gates commits to computers to be his life's work. I think what's often lost in the story is Bill, even though he was good at computers and spent tons of time programming computers, he never fancied himself a computer guy until this moment in history. He went to Harvard because he felt like
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hey, if I ever want to be a lawyer or something else, like they've got a lot of great programs there. And this was the moment where I think it really clicked for him that I'm just in the middle of the right place at the right time with the right skill set. And this is my way of having the most impact on the world.
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Well, it's so funny he thinks they're already behind because clearly they're not. History would show, I think Bill Gates even says, we might have actually started a year or two too early. The market actually hadn't materialized yet. And the funniest thing is the starting gun went off and Bill and Paul ran and everyone else is still standing around.
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Yes. Just like Bill's vision of Microsoft to put a computer on every desk and in every home, J.P. Morgan has a vision for making payments real-time, 24-7, everywhere, and in every currency. So JP Morgan has experienced a massive digital transformation and is now much more than just a global bank. They invest $15 billion a year into technology and R&D.
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So with JP Morgan Payments, you are getting their history of service, stability, and scale, but also innovation and new technology.
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It's basically a B2B marketplace that connects their clients with the broader payments and technology ecosystem, such as treasury management systems, ERPs, point-of-sale hardware solutions, payment gateways, and so much more. And given JPMorgan's scale, you can imagine the value that comes with unlocking access to their industry-leading partners and technology.
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Woo! Across any industry, the most successful companies we've talked about are the ones who think and invest strategically through a long-term lens. Like Hermes, durability and reliability are paramount for building 100-year companies that can reinvent and continue to grow. And that is the case for J.P. Morgan Payments.
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Their history of trusted solutions and investments in technology bring clients and new fintech companies together to drive innovation and growth for businesses of all sizes.
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But it's a market test. They want to know, like, what's the response if this were true? Exactly. Exactly.
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And this is a big deal for MITS, too, if this works, because right now they've just announced a machine for which you can't really do anything on it. The hardware is powerful, but they're not going to have a lot of customers unless there's stuff you can do on the machine.
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And a BASIC interpreter running on it, you know, it's quite valuable to then make the claim you can program BASIC on our computer. So they're very excited about this, even though they're kind of playing coy.
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So in order to use it, you got to hook up your own teletype. You got to get the manual. You got to hope that the manual is right. And you got to code to the machine instructions, like literally the assembly language for the chip inside for the Intel 8080.
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So he does the same thing again. They get the manual and they have an emulator and they write it against an emulator.
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On paper, by hand, he is hand-coding octal, not even assembly language instructions, like he's hand-coding in pure octal the instructions to load their basic interpreter program into memory.
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And Ed actually has more eggs in this basket than he sort of let on because when Bill and Paul call and say, hey, can you give us the teletype instructions? He reveals they're actually the only ones who called about that. So everyone else who said they were writing a basic never got far enough to ask, how do we actually interact with your computer?
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And their little gambit worked and got a couple of college kids to pounce.
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I mean, either the list price is like wildly wrong or they were cutting deals all over the place. Or one thing it could have been is just that, and I'm totally speculating, but Chips are the ultimate high fixed cost investment, low marginal costs next to software.
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You could imagine maybe Intel had already put all the money into the fixed cost of spinning up the fabs and was expecting a certain amount of market demand and they weren't seeing it. They were like, crap, we got to recoup our investment. I don't know, lower the price, let them just sell. Maybe we'll make it up in volume.
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New Beyonce. Oh, New Beyonce. I haven't heard it yet. How is it? I really like it. Nice. I think it is reductionist to call it country.
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And at decent margins too. I mean, if they're getting the processor for 72 bucks and they're selling it for, what did you say?
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So, I mean, everything else in there is much cheaper than the processor. So I don't know, depending on how much they have to give to the sales channel they're selling through, if it's retail or distributors.
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Yeah. So it's decent margin business. Unlike what the PC business would become over time, they managed to have nice margins.
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Yeah, software department of one. But, you know, he's got his buddy Bill Gates, who is not employed, but Bill's definitely working on software for the altar as well.
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And as we record this, that was 49 years and one day ago. So we are sitting here on April 5th recording. That was April 4th, 1975. And it is very funny to look back at some of the original signatures when Bill writes on letters. It's Bill Gates, the general partner of micro-soft, which is great. I think it's actually a Paul Allen name where he wants to put together microcomputer and software.
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New York Times, Hermes, where it was sort of passed to the son-in-law to continue to run the business. That was not the case with Mary Maxwell.
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And Bill's like, that's perfect. We're immediately just going to run with it. As it was a partnership, originally they were going to call it something like Allen and Gates. And then they ultimately are like, no, Microsoft is perfect.
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I will say like, it's a nice clarifying North Star because it really draws the line in the sand and says, we're in the software business. And Gates makes this really clear to Paul Allen, who is often tempted to do hardware stuff. And Bill is very hardcore about saying, no, what we're uniquely good at in the world is software and we should stick to that.
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I also suspect Bill is starting to realize there's an amazing business model here, if we can pull it off, where we don't have to make the hardware and we can charge for every copy of the software sold. But that insight, I would say, has not yet fully materialized.
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Yep. And Bill's case that he makes on that to Paul is, hey, you took a job and you were doing this on the side. I was all in. And Paul's an agreeable guy and 36 is still a nice percent. And so he says, sure.
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Which, why would they ever do any sub-licensing deals? Like, why would you give it to your competitors?
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Or phrased another way, it's we will give you $180,000 for you to hand over exclusive rights to all that cool basic stuff you just wrote to us. But if we sell fewer than X machines, we're actually going to pay it out to you on a prorated basis at $30 a pop rather than giving you the full $180,000.
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Right. Kind of a great deal for them too, given the position they're in.
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And this is a pretty interesting time to pause and say, well, are they pirating software?
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This is 1975. So piracy implies that you are running afoul of some particular legal protection for the good. And you might say, well, with today's legal frameworks and hindsight, you would say, of course, if they're copying the software and not paying the money for it, it's piracy. That was actually not established yet. And this is the craziest thing.
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So Bill basically has an opinion that it's piracy, and he writes letters to the computer community.
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Yes. And tries to basically guilt trip people. He tries to use that as a recruiting method and say, if you're so excited about pirating our software, maybe you should just come work with us. And nothing would make me happier than making the best software in the world. And please join us on this mission.
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But ultimately, the legal standing that he has to say, hey, what you're doing is illegal is not fully established. And so it would actually take a couple of years for the courts to look at software and say, What about this is protectable? And if you think about it, it is a little bit weird. So you've got source code that looks kind of like English, you know, basic, it's letters and numbers.
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It gets translated to machine code. That machine code ends up running and it's basically electrons. It's voltages that are flipped up and down. And so what about that are we trying to protect? Ultimately, the way it gets litigated through some case law from court cases is that the source code is a copyrightable creative work that is expressed through some sort of tangible medium.
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That's the important thing about copyright law. It's a creative work expressed through a tangible medium. So a book, the creative work is the words and the tangible medium is printed on paper. And so with software, it actually took until 1980, Congress...
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changed the law we'll put a link in the show notes to like the literal congressional change that happened and it is in title 17 copyrights chapter 1 subject matter and scope of copyright in 1980 they include a defined term which is a quote-unquote computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result and
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And once you have that passed by Congress, codified into law, you now have the standing legal framework that all the whole computer industry used going forward, in particular the software industry, a computer program is copyrightable work. Wow, I didn't know all that. That's awesome. It's totally crazy how recent that is.
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But when you think about it, why would that have any legal, you know, software is such an abstract idea. Before, the whole business model of computers was good luck just replicating an IBM PC and everything that comes with it. You don't need any legal standing. But if you're going to pursue this software-only business model, what's the protection around your abstract product?
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This is the first time. Right. Certainly to build like a legitimate business around it. The other thing that's useful to know is when you're selling an IBM PC, you're literally selling a PC to a customer the same way that when I'm selling you this glass from Crate and Barrel, I am selling you the glass and the glass is now yours. I've transferred property to you. Software is not that.
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So the whole world of software is built on a license agreement. So the source code, that computer program, the actual right of that is retained by the creator, and you license the copyright to your customer to be able to use that on their machine. So there's this dual idea that Computer software is copyrightable and you can grant a license under certain conditions for customers to use it.
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That is the legal framework for which the next 50 years of technology at large would operate under. For the moment, though, they got a piracy problem.
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machine right should be a royalty right the problem is that is not the deal that they had with mitts right or framed differently instead of saying hey consumer do you want to buy something else too and make a new purchase decision they should be saying hey computer manufacturer we make your thing actually useful so pay us for it yes so during 75 and 76
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Absolutely. And Bill Gates Sr. was the prominent attorney in the region. And so it's quite the power couple.
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Oh, and the press just latches on to them. Whenever Bill has a leaked memo or something where he talks about all this war terminology, those all become headlines.
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Yeah. Well, Bill Gates was just constantly underestimated, which kind of worked to his advantage in those early days. Yes, totally. This is the thing about Microsoft. People kind of forget how insanely young Bill was. He was just 20. And to put that in context, he's only seven years older than Jensen Huang.
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but they feel an entire generation apart since Microsoft was started almost 20 years before NVIDIA. When you start bending your mind around like, oh, Bill Gates is still pretty young considering what an institution Microsoft has become in the world.
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And that's the first deal that happens between the companies. I mean, there's so many deals done both directions, commercial deals, equity deals, legal disputes in both directions. And this is the very first time that they do something together.
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Of course. Bill Gates Sr., we should say, too, basically galvanized the entrepreneurial community in Seattle. He started the Tech Alliance. He was a huge angel investor. He really did organize, you know, angel investors, people who want to put high-risk capital to work into startups.
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Fascinating. I actually didn't know that started this early. And one correction there, you don't know for a fact it's only going to run on Microsoft's basic interpreter, but you do know for a fact that it will run on Microsoft's basic interpreter. And so if it's cheap enough, why would you take the chance on a clone that might have one or two things wrong with it?
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And it's interesting. In the earliest days, what was stopping someone else from writing a basic interpreter and licensing it to Apple or RadioShack? Nothing. There were other smart people out there. And so it was just a very good business decision to say, we got to close that door.
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We just got to make this a no-brainer for people to buy from us because if we're value maximizing and it's starting to feel expensive, they're going to turn elsewhere until we get a lead. Right.
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just because it's important to establish there's trade-offs for everything. If you're running a startup right now, you might think to yourself, oh, great, I'll just run that exact strategy. The important thing here is, A, most of the work was already done for the original basic. B, Bill was doing it himself, Bill and Paul.
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And, you know, his heart was there, obviously, through his law practice long before Bill Gates III became the prodigy he became.
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So the importance of technical co-founders and their overhead was crazy low. And so they could do these deals where they don't make very much money because they were, I think at the end of 77, they were five employees, right? So their overhead was just so unbelievably low that they could take a really long lens.
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Because he got, I think, three speeding tickets in one day, two of which were from the same police officer.
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Yeah, that's interesting. I also think this moment galvanized something important, which is Bill and Paul could sort of look around and see there is going to be so much value created by microcomputers and by software. They really found religion around software is magic.
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the things that people can create now that we've done this basic interpreter and these machines are cheap and plentiful, the magic will take care of itself as long as we ensure this industry can just exist and do its thing. And so they flipped from this mode of we need to bite and scratch and claw and make sure that we win in deals to, huh, how can we enable software as a thing to thrive?
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And I'm sure we can position ourselves well to capture some or a lot of that. And I think they became almost stewards of the software industry and evangelists from this point forward.
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Also, how crazy is it you've got five people, you're operating out of Albuquerque, you just finally expanded from having one customer, and you're like, you know what we should do this year? Let's open in Japan and become an international company.
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It's unbelievable. And it stayed at that very high run rate of international being a huge chunk, you know, close to half always, basically forever. This is a huge cornerstone of Microsoft's success that they were an international company from year three of their existence.
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Right. And so he's got three reasons for why Seattle in particular. And by the way, it worked. Every single person except for his secretary did make the move. So one, he grew up in Seattle. He's like, I just want to go home. And then he justifies it in two other ways, which I found pretty fascinating. This is from an interview in the early 90s that he did.
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He said it basically came down to Seattle or Silicon Valley. And in Silicon Valley, it's hard to keep secrets because there's a rumor mill. And in Seattle, we can be a little bit more removed and we can announce things when we want to announce them. And two, in Silicon Valley, people switch around companies. I don't want that. I want people to just work at Microsoft.
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There was a disadvantage to not being able to recruit from your competitors, but... For a while, they were really the only game in town in Seattle.
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Oh, and then Bill, of course, reinvested in that flywheel, donating tons of money to the university. I mean, there's buildings, there's whole new schools.
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But unlike other top computer science programs, it's a state school, so it just has huge volumes. I think more students come out of the University of Washington and go to big tech than any other program in the country. That has stayed this amazing advantage.
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I mean, at age 13, with his best friend, who we will talk about very soon, he brought up the idea, I wonder what company I will be the CEO of when I grow up. What industry will I go after? What problems will I tackle? It wasn't a question of if, but which.
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It's crazy. You have this absolute behemoth partnering with someone that's not really relevant. And if you're standing here today, it sounds like I'm talking about Microsoft partnering with IBM. But at the time, it was IBM partnering with Microsoft.
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It was the only computer company that mattered in the entire world, got themselves into a particular situation where they came to Microsoft looking for help. It's the craziest set of events that made this possible. I can't wait to dive into it.
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Yep. Employees can get answers quickly with smarter self-service like changing 401k contributions directly through AI-powered chat, or developers can build apps faster with AI-powered code generation, and service agents can use AI to notify you that someone's product needs replacing before they even chat with you about it. With the ServiceNow platform, your business is 100% ready for AI.
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Yes. David, are you going to attribute that quote or are you going to leave listeners just hanging?
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Yes, and it's hard to imagine a better person to get their perspective on what IBM meant to the world at this point in time, because 1980 was also the year that Steve joined Microsoft. So literally at the same time in 1980, you've got the management team coming together with Steve and Bill and Paul Allen, and you've got the IBM thing going on, and you've got them moving to Seattle.
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And we haven't even talked about Charles Simone yet, but this was the year he joined.
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Okay, so why is IBM, the sun, the moon, and the stars of computing, why are they getting into this PC? It's way cheaper than anything else they sell. It seems to be like a totally different business strategy, a different customer set. What's going on?
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It's effectively a bandwidth limitation, where if you're in a single clock cycle trying to do some particular instruction, it's a very, very small amount of data that you can move through the arithmetic logic unit or that you can move through the processor in that clock cycle.
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Which is why they only cost $375 or whatever for an Altair. Right. In late 1979,
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In 16 bits, you can represent numbers up to 65,536. So that's two to the 16th. You can do interesting things passing 16 bits around at once.
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The further we get in the computing world, the more abstract stuff becomes. So it's always fun to go back in history when these concepts were so grounded in our physical reality that's sort of easily observable since everything was so much bigger too.
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And the thing that they're observing about the microcomputer market is it's exploding. People in our industry know about DEC. People in the broader world never knew about DEC. But I think it's a very different rate of adoption and rate of demand with microcomputers where IBM started to kind of look at it and go, oh, this might be like a real market, like a really big computer market for people.
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Yeah, even inflation adjusted. It's interesting that the rate of growth of the most valuable companies in the world in terms of market cap has far outpaced inflation.
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Well, both things can be true. He was the number one math student in the state of Washington. He was a nerdy kid and a brilliant kid and also fiercely competitive. His childhood friend and co-founder of Microsoft, Paul Allen, would say about him, you could tell three things about Bill Gates pretty quickly. He was really smart. He was really competitive. He wanted to show you how smart he was.
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And the question is, are they playing from behind and thus have to adopt a flawed strategy? Or is this strategy of assembling with all off the shelf components actually a good strategy if it works?
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Now, interpreters are notably different than operating systems, but Microsoft definitely had sort of raised the flag and everyone could see if I want to go buy software for my computers, broadly, they're an interesting group to talk to.
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Yes. Bill really, really wanted to bring Steve on, knew him from the Harvard days, knew what an asset he could be. He is the yin to Bill's yang. Yes. And so, I mean, frankly, 8.5%, it's a big grant. Who's out there running a 30-person company and you're giving away 8.5% slugs? It just doesn't happen. Those are founder shares.
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And this is really a sort of reflection that the way that Bill thought about Steve was as a founder. In fact, it created some tension with Paul Allen where Bill asked Paul if they could go to 5%. Paul said, sure. And then Bill actually offered him 8.5%. And Paul got upset. And Bill said, I'll eat the 3.5%. It can come out of my share because I want him that bad.
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Yes. And specifically, they ask Microsoft for programming languages. They're like, we're making this great PC. We're going to need a basic. We think you guys are working on a COBOL. We'd like some COBOL.
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God, they were so bad. Every single thing that's been named to this point, except for the company Microsoft, was a horrible name. Oh, the processor is 8008, and now it's 8080, but the machine is 8800 that the processor is inside. Give me a break, everyone. It's horrible naming.
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Yeah, it does seem like very few people are thinking about their products as something they really need to build a brand around with consumers. Yes. Hence the naming schemes.
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And he signed hefty, hefty NDAs. So he cannot say who it is, but he's like, you really should take this seriously.
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Welcome to Season 14, Episode 4 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. We often remark that selling software is the best business model of all time. Well, today, finally, we tell the story of the company that created that business, Microsoft.
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And in particular, they would have to do some customizing. But part of what IBM wants is a customized version of an operating system for the IBM PC. They don't want this to be fully off the shelf. Yes.
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And just to add one more stir-the-pot of history here, there is another version of this story where Gary does actually have a conversation with IBM, and it blows up over licensing terms, that what Gary really wants is a significant royalty of every IBM PC sold, and IBM walks over that.
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So whether that happened or whether it's just an NDA issue, either way, I think we all know the IBM PC did not end up running the CPM operating system.
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Incredible. Which, of course, later they would drop the Q and call it DOS, the disk operating system. Something about dirty didn't have a ring to it when you're selling it to IBM.
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So Microsoft would eventually generate billions of dollars on DOS-based products. Now, you're exactly right in the same way that Instagram today is a much different code base than Instagram and much larger code base than Instagram when it was purchased. But my God, $75,000 to buy DOS to get this whole thing started. I mean, until Windows 95, all of the Windows operating systems were DOS-based.
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Yep. Also, David, I got to say, I just looked it up. The address of Seattle Computer Products on the original business card for Seattle Computer Products, where I presume QDOS was written, the space is available.
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Yes. So this is in Paul Allen's memoir. IBM paid Microsoft $75,000 for testing and consultation, $45,000 for DOS. $45,000 and $310,000 for an array of 16-bit language interpreters and compilers. So all told, bundled together, that is $430,000 fixed that IBM paid Microsoft with no ongoing obligation.
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And you might say, what? Didn't Bill learn his lesson? Why would he ever agree to this?
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It's so interesting because what ended up happening that Bill Gates masterminded was once we distribute our operating system through IBM's PC, that's going to become the thing everyone buys. And now in the 16-bit generation, when there are people building programs for computers, not just developers, once those application developers who are writing programs are targeting an operating system...
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then that is the operating system that every other OEM, every other computer maker is also going to want and really need. And we're going to be the ones that they have to come to to buy it. And I can't figure out Did IBM miss this fact, or did they know it? Basically, what IBM did was they were the one place where every business needed to go for their computer needs.
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And what they did in this negotiation was they actually handed that over to Microsoft. And they said, we are going to become a commodity, just like every other hardware manufacturer, and you are going to be the point of integration for the whole ecosystem. You're going to be the linchpin that everyone has to target for their applications.
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Because then they have the sort of plausible deniability of how could we possibly have a monopoly? We're buying off the shelf.
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IBM failed to see the value of software, and they certainly failed to understand what a software platform business model would be. Which makes sense. I mean, why would they? Right. It's almost like their experience... They're the computing company. Yes.
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Their experience in selling mainframes with everything bundled in was the wrong experience to go off of in understanding the way the future would unfold. And Bill's very modest experience watching the Altair and all these sort of Altair clone type machines, or even if they're not Altair clones, just more microcomputers that need more software, that actually was the useful...
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Yeah, the deal that Bill Gates made with IBM for the IBM PC is the greatest deal in at least computer industry history, if not all business history, full stop.
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IBM was right that it was by far and away the most successful personal computer on the market as soon as they released it.
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It's fascinating. And you know what? To give them a little bit more credit too, they did try to enforce that there's some amount of lock-in to the IBM PC. And they did that in two ways. One is, we're simplifying and calling it DOS. It was PC DOS, which is different than MS-DOS, which would get licensed to other computer makers.
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I don't know exactly what happened, but it basically seems like it just wasn't different enough to... to be meaningful to application developers. So that's one piece of it. The second is IBM did actually have proprietary BIOS. So that was another part where they kind of thought that that might provide them some protection where they could stay a linchpin in the ecosystem.
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And it wasn't just all off the shelf. They actually did have something that was theirs that was proprietary.
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It is basically why Compaq worked is what it comes down to. So Compaq was formed basically to clone the IBM PC. They saw the market opportunity and they realized they could buy from all the same equipment vendors. So let's go eat their margin is basically the plan. However...
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Microsoft Volume I
The one thing that was not off the shelf is the BIOS, the basic input-output system, which is effectively the thing that decides to load the operating system when you turn the machine on. And so there's some proprietary magic that happens to call upon the operating system to do its thing.
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So, Compaq reverse engineered the BIOS, and the way that they did it was very similar to Trip Hawkins and the story that he told us about his reverse engineering at Electronic Arts.
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Yes. So Compaq had two engineers and one engineer went in and fully dissected the code for the IBM PC BIOS and basically saw all the proprietary calls that it made and documented each of those calls without writing the implementation steps. Then he handed, hey, here's what the BIOS needs to interface with over to the other engineer.
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Microsoft Volume I
And the other engineer, on their own, just went through and thought of an implementation. And they have no idea if it's the same implementation. So it's not breaking any sort of infringement. They're basically saying, I'm just seeing the requirements for this product, and I'm coming up with my own implementation of that product.
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They basically figured out how to exactly clone the IBM PC and buy the very same operating system. And to go back to quoting Ben Thompson, because this is from his great piece again, the result was a company that came to dominate the market.
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Yes. This is a very early place to make the point. Microsoft is the result of tremendous intelligence, brilliant strategy, fierce competition, and an unbelievable amount of luck. Bill Gates was born in 1955, the same year as Steve Jobs, to come into adulthood just as the personal computer wave is starting. And...
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Compaq was the fastest startup to ever hit $100 million in revenue, then the youngest firm to break into the Fortune 500, then the fastest company to hit a billion in revenue. And by 1994, Compaq was the largest PC maker in the world.
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Is it just cheaper? Like, basically, this is the IBM PC, but for less money?
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And so begins the race to the bottom of PC hardware. Completely undifferentiated, all the value accrues to the software layer.
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Microsoft used IBM to generate demand for their software, and then they used every other PC manufacturer to capture the value that all that demand created.
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Yes. And they combined two magical principles together, this infinite replicatability, zero marginal costs of software, and becoming the linchpin of the ecosystem. They are now the software that everyone needs to target, which gives them pricing power.
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So that pricing power raises your top line, and you have no costs. It's unbelievable.
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The fact that he was at a middle school and had this much privilege where he could get access to a PDP-10 at this point in his life to help him understand how important computers would become. I mean, there are dozens of people in America who are as well-situated as Bill is, and that might be overly generous.
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Microsoft Volume I
So it says a lot about this period in time that you could do a 1x revenue deal in a high margin software company. I mean, I actually don't think this shows a weakness in Microsoft. Oh, they didn't have leverage or something like that. That wasn't it at all. It was just the deals sucked.
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Microsoft Volume I
Now, you know, it's only 5%. So good on Microsoft. Spoiler alert, this is the only dilution that they would ever take. So that's also extremely different than today. But yes, a $20 million valuation at this stage is frankly ludicrous.
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Microsoft Volume I
Hey, that's Forex multiple expansion off the last time they raised money.
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Microsoft Volume I
So Bill Gates and Warren Buffett did a conversation at the University of Washington in 1998. So this is as late as 1998. This thing that we're talking about, the magic of the software business model and how it should be reflected in a company's valuation, especially when it's a high growth company, was still not understood even by Bill Gates himself. So here's the quote.
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Bill Gates says, I think the multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette because we are subject to complete changes in the rules. I know very well that in the next 10 years, if Microsoft is still a leader, we will have had to weather at least three crises. So Bill Gates is essentially making an argument.
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Now, granted, this is in the middle of all the antitrust stuff, so he's very prime for this.
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Microsoft Volume I
He's basically making the argument that disruptive forces come at you so fast in the technology industry that even though you can grow extremely fast and it's this extremely scalable thing, distributing software at zero distribution costs, and even though the margins are unbelievable because you have zero marginal costs, they still shouldn't be valued as highly as like a CPG company, which is so different than the way that people think about it today.
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Companies that are less susceptible to disruption, more predictable in terms of high growth, high margin revenue, deserve a premium. But Gates is basically arguing everyone else doesn't. So let's flash all the way back to 1981 and talk about this venture capital investment, this one-on-20 that TVI does. Good work if you can get it, man. How does this come to be?
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Microsoft Volume I
So even a whole year before, in the fall of 1980, Dave Marquardt, one of the partners and the founders at TVI, flies up to Seattle, not to meet Bill Gates, but to meet Steve Ballmer. Because they were classmates at GSB, right? They weren't quite classmates, but because I think they were two years apart, so they didn't overlap, but they had some of the same social circles.
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Microsoft Volume I
And Steve was effectively the screener for anyone who wanted to come and talk to Bill and try and invest in the business. T.A. Associates had been up, Sutter Hill had been up, Hambrick and Quist had been up, Xerox Ventures, and all of them only ever got to meet with Steve Ballmer and never got passed on to Bill Gates. Steve would basically just bounce them off.
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And I know all this because there's a great oral history from the Computer History Museum where this whole thing's in a transcript with an interview with Dave Marquardt kind of recalling the whole thing. So Dave flies up to meet with Steve and Steve says, you're asking really interesting questions. You're thinking about our strategy the right way. You don't just want to do a transactional deal.
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Microsoft Volume I
You really think this is something special. Why don't you meet with Bill? Bill, of course, doesn't have any extra time in his schedule. He says, but I am going to the UW Arizona football game at Husky Stadium. Why don't you come and talk to me there? So of course they go. Bill doesn't pay attention to the game at all. He's just laying out the strategy and grilling Dave and
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Talking about software the whole time. So this is fall of 1980. So that's a whole year before the deal gets done. And Dave's remarking at this point in 1980, they're doing $5 million in revenue, $2 to $3 million in profit. They don't need VC money. And yet he was able to get in. So here's the quote. I was just sort of helping them out with the business.
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Microsoft Volume I
In the venture business, you're buying and you're selling at the same time. You're trying to figure out, are these guys crazy? Are they ever going to do anything really interesting? And if so, how do I get myself positioned to be able to help them do it? And so I spent a lot of time up there helping recruit people. I helped to recruit Charles Simone, who was an early key guy.
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Microsoft Volume I
Charles Simone would go on, this is an aside, to write Microsoft Word. And Charles was at Xerox PARC inventing the GUI.
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Microsoft Volume I
Yes. And he says, and I was working with Steve on business strategy, they had these OEM customers, the PC manufacturers, and they had started to engage with IBM on this operating system. And then are we just going to become a low-cost contract programming shop for IBM, an outsourced sweatshop, or is there some way we can build a business out of this?
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Microsoft Volume I
Which led to the fixed fee to IBM, the retention of the code, which then we could sell to other people, and that's what created the PC industry, basically. So that is his recollection of the whole thing, that he was sort of very helpful in this transformative time for the company. Now, at the same time, you have to look at everyone else's incentives.
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Microsoft Volume I
So Dave is only 29 years old, but everyone else is like 23. And so he actually is kind of adult supervision. At the same time, the partnership was still just a partnership and there was a handshake deal for the equity. And so if you're Steve Ballmer at this point in history...
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It would be nice to have a forcing function to actually turn this into a corporation so that we can get some shares granted here. So there's a little bit of incentive to say, hey, if we take on an outside investor, we're going to have to restructure.
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Microsoft Volume I
Yes. So this would create a little bit of board and governance. So it's not just Bill all the time. Now, Bill, of course, I think is still the controlling shareholder just by the amount of stock that he owns. But there's a board. It's Bill and it's Dave and it's Kei Nishi. It's a three-person board.
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Microsoft Volume I
Yep. So on this venture investment, it's pretty fascinating. None of these are terribly compelling reasons other than like, I guess it would be nice to have a little bit of capital associated with us formalizing the corporation, but they don't need money at all. They're printing cash. They've been printing cash ever since that one tight period in Albuquerque. Dave charmed them.
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It's pretty crazy. I think part of it too had to do with the fact that Microsoft was up in Seattle. So the VCs just weren't traveling. Right. And Dave was young and he was single.
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Microsoft Volume I
It's crazy. Dave Marquardt, I think most weekends is flying up to Seattle to hang out with Bill and Steve. It was a real sell. And he said, I was young and I was single and I had nothing better to do. And it was really fun and intellectually interesting. So I did it.
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Microsoft Volume I
And that resulted in, depending how long TV I held, one of, if not the best venture capital return in history. Hard to argue with that one.
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Microsoft Volume I
And it's quite telling. It's called the consumer products division to make applications. Even though they're competing to make these applications that today we would view as business tools, spreadsheets and word processing, that is not how they referred to it.
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Microsoft Volume I
Yes. If you ask anybody in our ecosystem, save for the 1% of people who actually know this, what happened at Xerox PARC? they will tell you they invented the mouse. They invented the graphical user interface. And then Steve Jobs walked in and he saw it all and he said, oh my God, we have to have it. And then he went off and he made the Lisa, which had a graphical user interface and a mouse.
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Microsoft Volume I
And then that failed. But what succeeded was the Macintosh. And it's a wholesale ripoff of Xerox PARC that lives on today in Apple. And that is the story that you will hear from basically everyone.
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Microsoft Volume I
Yeah, the value of a network scaling proportionally to the square of the number of inputs. Right.
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Microsoft Volume I
Right. So you should have a little bit more generosity for the East Coast management at Xerox for failing to commercialize this.
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Microsoft Volume I
In fact, the year that Microsoft went public, Lotus had more revenue than Microsoft at the IPO.
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Microsoft Volume I
Wild. Yeah, it's crazy. So Lotus 1.2.3 had some graphics, but it was still in character mode. It was a powerful spreadsheet that could start to do some graphics, even though there wasn't actually a GUI operating system yet, which is interesting. So Lotus 1.2.3 was faster, it had bigger spreadsheets, and it was just more powerful. Microsoft Multiplan was still targeting the older 8-bit.
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Microsoft Volume I
And so Multiplan, despite Microsoft's best efforts, is completely left in the dust. Microsoft's trying to figure out, what should we learn from this? And in talking with Pete Higgins and Mike Slade, who were both early leaders in the development and the marketing of the applications division—actually, Mike Slade went on to work directly for Steve Jobs at Next and Apple for many years—
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Microsoft Volume I
Yes. Ben Thompson has a fantastic quote on this. He has an article called, What is a Tech Company? And here's his comment. 50 years ago, what is a tech company was an easy question to answer. IBM was the tech company, and everybody else was IBM's customers. That may be a slight exaggeration, but not by much. IBM built the hardware, at that time the System 360.
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Microsoft Volume I
But in chatting with both of them, what basically became apparent is Microsoft learned with our applications, we should not be targeting the current platforms at all. The lesson to learn is never leave yourself open to the next generation of technology. They're learning the Moore's Law lesson again.
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Microsoft Volume I
Right. Even if that platform is not the one you own. Right. That's the interesting thing about when they're evaluating multi-plan and they say, how do we not get Lotus 1, 2, 3'd again? Basically, the applications team gets the freedom to look around and say, okay...
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Microsoft Volume I
No matter what our overall company strategy is right now, or no matter what the systems division is doing, what is the most cutting-edge platform that is going to be so interesting to people that we can develop the most envelope-pushing technology for it? And that becomes the mandate for applications.
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Microsoft Volume I
You kind of have to counter position. If 123 is the best spreadsheet out there for the current technology generation, you just can't compete with them. You need to wait for the next big leap forward in order to find a new competitive vector.
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Microsoft Volume I
And who's about to come out with the very best instantiation of a graphical user interface? Apple Computer.
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Microsoft Volume I
Yes. The next chapter of our Microsoft story is the Macintosh in 1984. So fun. But before we do that, this is the perfect time to talk about another one of our favorite companies and longtime acquired partners who are back, Pilot.com.
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Microsoft Volume I
For startups and growth companies of all kinds, Pilot handles all of your company's accounting, tax, and bookkeeping needs, and is in fact now by far the largest startup-focused accounting firm in the entire U.S.
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Microsoft Volume I
Yes. Very fun. Well, back to Pilot. And speaking of incredibly successful Seattle business people, we talk all the time on Acquired about Jeff Bezos' AWS-inspired axiom that startups should focus on what makes their beer taste better. i.e.
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Microsoft Volume I
only spend your limited time and resources on what is actually going to move the needle for you, your product, your customers, and outsource everything else that you need to do as a company but doesn't fit that bill. And accounting is example number one of what he's talking about.
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Microsoft Volume I
They wrote the software, including the operating system and the application, and provided services, including training, ongoing maintenance, and custom line-of-business software.
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Microsoft Volume I
Every company needs this, but it needs to be done by a professional, and you don't want to take any risk of something going wrong. But at the same time, it actually has zero impact on your product or your customers.
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Microsoft Volume I
Yep. These are now companies like OpenAI, Airtable, Scale, as well as large e-commerce companies. So it's not just that they have the experience across startups. They can also keep working with you as you scale to the growth phase and beyond.
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Microsoft Volume I
So if your company wants to go back to focusing on what makes your beer taste better, go on over to pilot.com slash acquired and tell them that Ben and David sent you. All right, so David, why are we talking about the Mac?
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Microsoft Volume I
Totally. Far and away, the first thing to point out is the first version of Microsoft Excel was for the Mac. It's especially crazy for all the finance people today who are like, oh, Mac Excel isn't real Excel. Excel has to happen on Windows. No, Excel was on the Mac. That was it. Yes.
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And the logic basically was Microsoft was really coming around to the idea that the next big thing in computing was the graphical user interface. And the reason they were coming around to this was because They knew from Xerox PARC just as well as Apple did, and they were rapidly trying to figure out how to get all of that Xerox PARCiness into their product line too.
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Microsoft Volume I
That's the other half of this sort of untold Xerox PARC story. And one of the first ways that they see to bring the graphical user interface to their products is launching Excel for the Mac, because they basically see... The way that we got destroyed with Lotus 1.2.3, we can't compete with Lotus on the IBM PC. So we're going to shelve multi-plan and kind of start over.
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Microsoft Volume I
And Excel is going to come out in the graphical user interface. And we're going to try to be first and best on the GUI.
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Microsoft Volume I
Yep. And of course, Apple loves this. The Macintosh came out in 1984 and everybody remembers the great intro video and the hello script. And I've watched that Steve Jobs keynote because of course I have. And it's this magical moment in computing history where finally something that's insanely great comes out. And it's like, The beginning of Steve Jobs' unbelievable presentation prowess.
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Microsoft Volume I
It's so fun to watch it. And it's, of course, a product that eventually people really loved. But at first... It doesn't have the killer app. No. It's a product that was supposed to ship in 82. It didn't. It shipped in 84. And so at the time, what they were targeting for 82 was like a pretty great set of technologies. By 84, it's kind of an aging set of technologies.
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Microsoft Volume I
So it debuts with 128K of memory, which basically isn't enough to create any interesting applications. And so developers are kind of ignoring it as an interesting platform to develop on. Within 12 months, they kind of figure it out and come out with a better version that's 512K. And that's kind of the version that people now really think about
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Microsoft Volume I
Yes, exactly. But in the meantime, Microsoft, the applications group, is working their ass off to make something really great for the Macintosh, and they come up with Excel. And so what ends up happening is Apple's really trying to promote the sales of this machine, and... they kind of view Excel and PageMaker as the killer apps, as reasons that people should buy this thing.
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Microsoft Volume I
Because once you run through a lot of the demo apps and the stuff that Apple built, you're like, okay, what else is here? It's kind of crickets.
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Microsoft Volume I
And so I'm not sure this has ever been publicly disclosed before, but Apple spent just as much marketing Excel as Microsoft did. They matched Microsoft's marketing spend with their own campaign for it and split the bill.
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Microsoft Volume I
It's been daunting. You know, we wanted to do it for a while, but it takes some chutzpah to tackle Microsoft.
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Microsoft Volume I
So you've got a couple of concurrent things going on in applications land. You've got Excel coming out for Mac to take advantage of the GUI. Meanwhile, and this strategy is just all over the place. I think that's an interesting thing to underscore about Microsoft in this era. They're trying a ton of stuff because they're paranoid. They don't want to miss the next wave.
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Microsoft Volume I
It's like ASML machines. You don't just go ship them off to TSMC and say, good luck making semiconductors. Exactly. It's a full solution, full service thing. But an important thing that was also happening this year, 1968, was that IBM was undergoing some antitrust scrutiny over that huge bundle that I just told you about. I mean, doesn't it smell like antitrust? They do...
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Microsoft Volume I
Meanwhile, also in the applications group, Charles Simone has written Word. This is about a year before in 1983. Microsoft Word comes out for DOS.
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Microsoft Volume I
Yes. So this is like, okay, we see the Xerox PARC stuff coming out in the Mac. Great. Excel will be for that. We want to develop Word. We're going to do that for DOS. Oh, but I can imagine how useful the mouse is going to be in a word processing environment. So they actually ship a mouse tied to the application that's not a part of DOS.
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Microsoft Volume I
And so this is how early we were in figuring out kind of what the split between applications and platforms were at this point in history. Microsoft thought maybe a mouse makes sense just for this one application, even though it doesn't do anything else for the rest of the command line interface.
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Microsoft Volume I
Yes. So the decision for the Excel team is to focus on GUI. The whole marketing message is Excel on a Mac is better than Lotus 1, 2, 3 on a PC.
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Microsoft Volume I
You're starting to see truly divergent cultures at Microsoft between the systems group, which is currently making DOS and will soon make Windows or soon partner with IBM or soon do something else that we're getting into here in the next chapter of the story, and the applications group, which is
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Microsoft Volume I
is also currently a bunch of disparate applications and teams targeting disparate platforms, but is also about to become unified in their next chapter. And within the applications group, that next chapter is Microsoft Office. So in 1985, in January, the bundle is released. And it was originally called the Business Pack for Microsoft. And it started on the Mac.
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Microsoft Volume I
Totally does. Now, they haven't acquired PowerPoint yet, or forethought, as we talked about eight years ago on Acquired, way back in history. So there's no PowerPoint. It's not part of the bundle. And so what you've got here on the Mac in the first version of Office is Word, which they've developed in-house, File, Chart, and Multiplan. This is this first notion of a suite.
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Microsoft Volume I
So today we're very familiar with suite, creative suite over at Adobe. Software is sold this way. This was kind of the first time. And so what was actually happening is all of the bundling was happening in pricing, in marketing, and in manufacturing. And so you sort of had a single box that that they would ship with the different applications. By 1988 or 89, it was Word, Excel, PowerPoint.
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Microsoft Volume I
They're very different things, but they're getting sort of bundled together in a way to be sold to customers. But there's no product integration. And so you don't have the ability to do this very nice copy-paste from an Excel table and just paste that into Word. That whole idea is pretty far away. So in this earliest Microsoft Office, it was just, how can we...
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Microsoft Volume I
Everything from the hardware to the software to the operating system, the service, the support, they are the whole market. They're starting to get concerned. And so proactively, they unbundled hardware, software, and services, and they started selling those separately for the first time, which was not a problem at first.
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bundle something for a cheaper price if you buy all three and make marketing easier for us to kind of have this unified message.
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Microsoft Volume I
So we've now sort of set the stage of Microsoft's doing a lot of stuff. They're hedging a lot of bets. They're not totally sure which strategy is going to win out. They're not sure which platform is going to win out. They're not sure if they're more of a systems company or an application company. But what they are unified on is we make great software for personal computers.
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Microsoft Volume I
And I think anything that fell into that purview, they were willing to explore. They didn't really have hard boundaries between we'll do anything to make our operating systems great, or we'll do anything to advantage our applications, or even we think we're an enterprise company, we think we're a consumer company. They just didn't have well-formed opinions yet.
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Microsoft Volume I
Right. Lotus Notes was crazy. It was a word processor, an email service, and it was a platform on which you could write other applications.
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Microsoft Volume I
But what it did was it cracked the door for customers to say, oh, I can buy hardware from IBM and software from someone else. And other people were not exploiting this, but it was possible.
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Microsoft Volume I
Which is so funny. I don't think at this point in history, the lines were clearly formed among the executives yet. Like Steve wasn't running the global sales force and Microsoft wasn't an enterprise company.
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Microsoft Volume I
Steve was one of the smart executives and they were a software company and someone had to manage getting the software out the door. So Windows 1.0 comes out. It's bad.
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Microsoft Volume I
Yeah, the idea of Windows overlapping on top of each other, that was a sort of uniquely Mac thing and a thing that smart engineers at Apple figured out how to do that in a performant way that offers good user experience. I would classify Windows 1.0 as like a half step between command line and an actual graphical user interface.
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Microsoft Volume I
Yes, that's right. Apple does do a deal to license a lot of, quote-unquote, their intellectual property, which of course came from Xerox, to Microsoft. Apple, I think, was under the impression that it was just for Windows 1.0, but the actual terms of the agreement are this and all future versions of Windows, which comes back to haunt Apple later. But yes, they totally get the license.
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Microsoft Volume I
Yes. But this is where the seeds are sown of what is the exploitable opportunity when Bill Gates is ready to do something.
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Microsoft Volume I
Isn't it crazy? In all of their early marketing, they referred to it as Windows, a graphical operating environment that runs on the Microsoft MS-DOS operating system. Yes. And actually, it was not until Windows 95 that Windows was its own operating system. It was in Windows 1, 2, 3, 3.1, and Windows for Workgroups. It was a graphical operating environment. Yeah. But here's the question.
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Microsoft Volume I
Why is Microsoft doing Windows? Obviously here, Microsoft knows they need to evolve DOS. They need to figure something out for the graphical world. And so, David, are you telling me that Windows is the widely agreed upon future of the company and it's just a straight line?
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Microsoft Volume I
Well, I mean, the IBM PC was such a big deal last time around, you would think that whatever IBM wants to do next is a pretty good way to ally yourself.
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Microsoft Volume I
Yep. Well, listeners, Microsoft today is sprawling and massive. It is the world's most valuable company worth over $3 trillion.
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Microsoft Volume I
This is such a crazy part of the story to me because we just talked about how Microsoft discovered this amazing business model and with everyone needing to license DOS from them, they're taking over the world and they're becoming the standard development platform. Why on earth, if all that is true, are they going to develop some software that's going to be locked to IBM computers?
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Microsoft Volume I
And so even though Microsoft's doing all these little hedges... Windows, this tiny little team, I think it's 30 people or something. It's not the most prestigious place at the company. The people in the applications division may as well be on another planet by this point from the systems division. They're trying all kinds of crazy stuff.
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Microsoft Volume I
And the company motto at this point is, the next big thing is OS2 and IBM, and we are the software vendor for that.
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Microsoft Volume I
Well, you say it was good, but not great. Bill Gates said it was brain-dead.
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Microsoft Volume I
That's right. That was like a bet the company move where Microsoft was like, hey, Compaq, go make 386 stuff because we're going to make a really great 386 software. And we need someone to be all in on that because IBM's not.
Acquired
The Steve Ballmer Interview
So, you know, yes, Clipper fans, but we're going to have the Olympics. We'll have every Olympic basketball game in Intuit. I want it to be great for those environments. We have some college games or high school games in there. Basketball, basketball, basketball. So you sit in there and you're a fan. It's a live event. Got to have energy. Got to have intensity.
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The Steve Ballmer Interview
If you're a basketball fan, come on, let's go. So you want it tight. You want to have it reverberating with people who are cheering. We built essentially a whole side of the building is structured more like a college gym, long and steep. There's no suites on the side. We even built a student section right in the middle, i.e. it's standing room only. You must stand.
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The Steve Ballmer Interview
That's what you have to agree to if you're going to sit there or be there. You have to agree to stand. You have to agree to cheer. And if you don't, we'll find you another place in the building to sit. But you can't wear visiting gear paraphernalia on that whole side. 4,000 seats will move you if otherwise. It's small. Not the number of seats. It's a little small.
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The Steve Ballmer Interview
But the way we pulled it together, there's no hockey. I didn't want hockey. Not that hockey's not a great sport. Compromises you'd have to make to the arena. You have to spread it out. You have to spread people out because the rink is bigger than the court. Very different. Basketball. We put in this, we have an acre of scoreboard. Yeah.
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The Steve Ballmer Interview
More statistics. More statistics. We went 4K from the start. I didn't realize it's an acre. You have an acre of scoreboard. Between the inside and the outside, it's almost an acre.
Acquired
The Steve Ballmer Interview
All the way up. I call it the student section. We call it the swell. Clippers, waves, get it? Swell. The swell is right in the middle. They do a chant before the game starts. They're chanting. They're making noise. A bunch of them, they'll find weird things they want to bring to games. Funny posters. And you basically sign up. First come, first serve.
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The Steve Ballmer Interview
If you're not there early, you're not in the swell that game. So we oversell the section. It's $1,000 for the year, which is only $25 a game. Hell of a price. Wow. You can't go to an NBA game for $25 a game.
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The Steve Ballmer Interview
You put it right on top of the visitor's side, so it makes noise right into the visitor's huddle. We put the swell right behind the backboard. So basically when you're shooting free throws on that end, you're looking right at the swell. And it makes a difference. I saw data that said that the- Lowest free throw shooting percentage of the league for the visiting team is against the wall.
Acquired
The Steve Ballmer Interview
Like Steve, this- I mean, it worked. That's what I wanted. What did the other owners think about this? We've had a bunch of people come through, look at the building, and would I be surprised if a number of the new arenas get built, don't have a wall? No, I would be, or at least the student section.
Acquired
The Steve Ballmer Interview
But you also have to remember, I took some financial hits on this. We have fewer suites, less revenue, and we only charge $1,000 for a season ticket. that gets you pretty close to the damn floor.
Acquired
The Steve Ballmer Interview
So in terms of the cash outlay- Yeah, in California, you can't have public funding for arenas. That's why we don't.
Acquired
The Steve Ballmer Interview
Yeah. We took a revenue. Definitely, we could have made more revenue on that side if we'd done things a little bit differently, but it's about basketball. We have a lot of toilets.
Acquired
The Steve Ballmer Interview
One thing you have to remember, because we live in the modern world now, when you say all the developers...
Acquired
The Steve Ballmer Interview
Something like that. Why? It's about basketball. Get out and get back into your seat. Don't miss the action. We started out with a lot more concession stands, and then we said, no, no, let's just do this completely frictionless. So if you register your face, you just walk in, grab what you want, and leave. If not, you can just tap your phone on the way in, grab your stuff, and leave.
Acquired
The Steve Ballmer Interview
There's no checkout. We don't serve eclectic food, little everything. Same thing everywhere. Why? We don't want you walking around having to look for your favorite food. No, you're going to get the same great stuff everywhere. It turns out 85% of what gets bought is in five items anyway. It's a hamburger. It's a...
Acquired
The Steve Ballmer Interview
a hot dog it's uh nachos uh chicken tenders and i don't know i'm not remembering off the top of my head is part of the calculus of this for attracting players too sure if you look at our back end spaces like our practice facility i think most people think that but i'm thinking even like if you know your opponent's gonna have a lower free throw shooting percentage in your home arena sure i think people think players have said they think it's really cool now
Acquired
The Steve Ballmer Interview
And that's good. That's good. Players' offices are also good, i.e. the training facility. I mean, the training area, the practice area, our outdoor pool and sauna and cold plunge, our weight room, our sports performance center. So that stuff's all, I would say, pretty... Pretty good as well. Very good. So we've done a bunch of things. We have the best refs room, I think, in the league.
Acquired
The Steve Ballmer Interview
We called the refs union and said, what do you guys need? The media area, we said, look, if we're going to build a new arena, our visiting locker room is the best in the league. Best weight room. That's your sales pitch to Visiting Stars. Exactly. Yeah. We say, hey, we care. And we care about everybody. And then we make it about the basketball in and out. Oh, what's our artwork?
Acquired
The Steve Ballmer Interview
I mean, we have public art that is required, some of which is basketball oriented. But our major piece of public art? is a clipper ship whose masts are backboard, replicas of basketballs from around the world. Basketball, basketball, basketball. Our art inside the building? We have a high school basketball jersey from every high school in the state of California.
Acquired
The Steve Ballmer Interview
It looks like art almost because it's nice colors on the wall. Basketball, man.
Acquired
The Steve Ballmer Interview
There were a couple of software companies that made packages for IBM mainframes, but almost everything was custom. So really, I would say we, a few other companies, but I would say we defined what a modern software business looked like.
Acquired
The Steve Ballmer Interview
Yeah, it is. Look, you know how oftentimes startups come about because the founder is in love with some topic and builds the product they wanted to use? I think that happens a lot. I don't think people start back and look at the market. They say, oh, I think Zuckerberg did that. Bill did that. Programming. Everybody does it, right? Yeah. That's what you did. I didn't try to go out and survey.
Acquired
The Steve Ballmer Interview
We could have designed for the, let me call it the contemporary audience. We would have had more lounge space. We could have designed for what I'd call traditional, long-term. That's kind of how I think about it. We could have designed in a lot of ways. I designed for me in some large measure, guys like me. And it turns out Clipper fans are a little bit
Acquired
The Steve Ballmer Interview
are like me because some of them are long-suffering. The team wasn't good there for a number of years. People are diehards. They'll come up to you and say, I'm 89, which really means they bought their season tickets in 1989, and they've been there. Now we've exploded in the last, whatever, 14 years. We haven't had a losing season.
Acquired
The Steve Ballmer Interview
You know there are battles in tech where you just have to be patient and long-term. Our goal in LA, it's weird to have a town with two teams. Our goal is to be long-term grinders on that. And we want to beat them every time on the court. It's okay to have two popular teams. Los Angeles County, for gosh sakes, has the same number of people as the state of Ohio pretty much.
Acquired
The Steve Ballmer Interview
So there's plenty of people to be fans. We don't want to be, quote, little brother. We don't want to be the team with a nice 20% market share. No. We want to get our fair share. We're never going to get 100. The Lakers have tradition. So just like at Microsoft, patient, long-term, hardcore approach. And if we don't do that, no. The Lakers have the position. They've earned it.
Acquired
The Steve Ballmer Interview
They got a lot of championships. I don't mean we're not going to keep coming and coming and coming. Steve, thank you so much. Thanks, man.
Acquired
The Steve Ballmer Interview
And the notion that there could be lots of developers, and there were some, but it's not like we think today, oh, there was developers doing lots of standard applications. No. And there was no licensing model, no business model, no nothing.
Acquired
The Steve Ballmer Interview
I mean, you sort of can't blame them because there was nothing to build off of. But yeah. Yeah. One of the things my little PowerPoint here says is luck is important in the creation of great companies. It is. And a lot of people sort of say we're masters of the universe. We figure everything out. We never have any luck. And it's because we're so talented.
Acquired
The Steve Ballmer Interview
Sure, there are talented people and hardworking people. Most people have a little luck in their story. And this was our big luck.
Acquired
The Steve Ballmer Interview
No. No. I can't remember what year it would have been. But Andy Grove, who was running Intel at the time, said, yeah, pretty soon we'll be selling 100 million PCs a year. Sometime in the 80s, I think. It might have even been in the 90s. And Bill and I laughed and said, ah, that's not going to happen. We invested big time. And if it did happen, we said, that's great. We're not going to underinvest.
Acquired
The Steve Ballmer Interview
But we thought, ah, he's crazy. This market will never grow like that. I would say we classically under-forecast. That was kind of our tendency.
Acquired
The Steve Ballmer Interview
The personal computing layer. I think by the mid to late 80s, I mean, you make it sound very strong. No, we didn't feel very strong. Yeah. There was IBM, man. IBM was still the sun, the moon, and the stars. That didn't change. I would say we didn't drop that theory well into the 2000s. Into the 2000s, Lotus Notes was coming for us, and that was mid-'90s and beyond.
Acquired
The Steve Ballmer Interview
But maybe you could say late, but we weren't an enterprise company. If you looked at the enterprise, the enterprise was still- IBM. IBM. We used to say we had to hang on to IBM that if we ever let go, they might trample us. We called them the bear. Called this riding the bear. You had to stay on. Then, of course, graphical user interface. It's-
Acquired
The Steve Ballmer Interview
kind of coming out of Xerox PARC at the time, and Apple's doing their thing, and we start... That's another disruption. Could blow everything up. So I would say no sense of confidence about controlling the ecosystem well into the 90s before, I think, any of that.
Acquired
The Steve Ballmer Interview
So we've been staying with IBM. They decided they wanted to build something that was sort of their operating system and sort of not. This is 8283. We and they would collectively build part of it. We would be able to license it to others. They would build a value add layer that was a database and a 3270 emulator. Crazy to say now.
Acquired
The Steve Ballmer Interview
We were going to work on the operating system and what was called presentation manager, call that the graphical user interface. And they were going to have rights equivalent to ownership in the code we wrote. This sounds so convoluted. It was so convoluted.
Acquired
The Steve Ballmer Interview
Man, there was a time when I made 16 trips to the East Coast in 16 weeks, most of them to South Florida, a couple of them to New York, leave California.
Acquired
The Steve Ballmer Interview
On the red-eye, the Delta Dash flight at around 11, get into Atlanta around 5, get the flight to West Palm Beach at about 7, get in and be able to be at a meeting at 9 o'clock at IBM, and then work all day, catch the 7 o'clock flight home, be here about 10, 30, or 11. 24 hours. Down and back. Because if you're building something together, remember, there's no real email at the time. Right.
Acquired
The Steve Ballmer Interview
We were literally shipping disks back and forth. And then they decided they were going to do the presentation manager piece in England. So there were also then a lot of flights to England. Oh, my God. And then Texas is where the database and communication subs- This sounds so IBM. This sounds like Boeing. Yeah, we call it, it was the joint development agreement.
Acquired
The Steve Ballmer Interview
And it was the price of staying involved with IBM. And it was convoluted. And we did then keep, for speed of action, we kept going on Windows, which we had started. For listeners, everything we're talking about is OS2. OS2. This operating system that basically never comes to me. OS2 and there was OS2 Extended Edition or something, which had their edition stuff.
Acquired
The Steve Ballmer Interview
And Windows was like your plan B. It was like your side. No, Windows was our plan. And then they wanted to do this new operating system. And we convinced them, you got to have a graphical user interface. And we tried to sell them Windows, and they were resisting.
Acquired
The Steve Ballmer Interview
Humor. It's more than lip service. I would say... My job was managing by then system software. So I had Windows. I had Shipwind. I'd been the development manager for Windows 1.0.
Acquired
The Steve Ballmer Interview
But that's the sales side. I actually managed the engineers. Yeah. Because the guy who was doing it wasn't being successful, and we had to ship the thing. And so that's when I learned some about engineering management from the engineers, basically, had to teach me.
Acquired
The Steve Ballmer Interview
to be effective we're trying to keep with os2 bill's very frustrated with ibm i'm frustrated but i know my job is to ride the bear and so bill's pushing windows hard but we still suspected os2 could be the winner because it came from ibm but we couldn't just like stop for three or four years We couldn't make the mistake we sort of made in the thing that became Vista.
Acquired
The Steve Ballmer Interview
So we kept going with Windows. We kept going with OS 2. And then May 1990, they come along and shoot us. I was out running with my wife. Wait, IBM shot you? Yeah, they divorced us.
Acquired
The Steve Ballmer Interview
No, no, no, no, no. They had a new leader by then, a guy named Jim Canovino, and he was getting frustrated with us because we were still selling windows. We were still promoting windows. I mean, look, this was our first antitrust problem. I don't know if you guys know this, is the FTC at the time thought we and IBM were working to divide the market. Because we had done some positioning.
Acquired
The Steve Ballmer Interview
What's Windows good for? What's OS 2 good for? We and IBM had done that. And then they said, no, you guys are colluding. And that's when we first got attention from antitrust authorities.
Acquired
The Steve Ballmer Interview
That came with the DOJ. This was an FTC case, and they started it in basically 90, just as we were getting, I think 90, maybe 89, as we were getting our divorce. My wife and I were remodeling our house. We were living in a condo. We stopped on a run, used a restroom or something. I pick up the Wall Street Journal, and I read that IBM's divorcing us.
Acquired
The Steve Ballmer Interview
I pick up the Wall Street Journal and I read that IBM's divorcing us.
Acquired
The Steve Ballmer Interview
We still had something called the 640K barrier. You couldn't speak to more than 640K of memory. We didn't break the 640K barrier. Until I think Windows 3.1, which I want to say was 91 or 92.
Acquired
The Steve Ballmer Interview
We're still pipsqueak to IBM. And remember, we have no enterprise presence. And IBM has all dominant enterprise presence.
Acquired
The Steve Ballmer Interview
Interesting. Single copies. Some hobbyists and end users. Somebody who says, hey, I really want to use a spreadsheet. And a lot of users in enterprises. So it wasn't going through IT. You'd have a user that would buy a PC on the expense account, probably for the department, buy a copy of Windows, buy a copy of Excel, like at an Egghead Software. It was a software retailer at the time.
Acquired
The Steve Ballmer Interview
nervous about that we knew most of the copies not most but many of the copies were winding up in businesses what the hell ibm's gonna stomp us like a like a bug you just took as a given assumption that if ibm wants to stamp out this happening it's gonna happen so we oh yeah if we want a future we got to play with them yeah that's what that's why we were quote riding the bear the whole time because they'd stomp us out and they divorce us in 90 and then we say oh my god
Acquired
The Steve Ballmer Interview
DOS was always sold to- OEM. Yeah, not always. But so much the lion's share, it's worth saying it was only sold because you needed a BIOS. Remember? You needed a BIOS. So you had to have the hardware vendor build the BIOS into the machine, basically. Right. So you've got that, the OEM business, which was already going strong. The OEM business was the biggest part of the business. Yep.
Acquired
The Steve Ballmer Interview
And then we had this retail business, and there was no notion of enterprise licensing.
Acquired
The Steve Ballmer Interview
Our first big Windows customer, at least as I remember it, was the US Air Force. And they were buying single copies of Windows. When you say government, there's really two governments in this country. There's government and there's the military. And the military is a much more disciplined, advanced user of IT. They're just better. They're more professionally run than most parts of government.
Acquired
The Steve Ballmer Interview
So yeah, it was the Air Force. So you got like a little bit, but.
Acquired
The Steve Ballmer Interview
No, no, that's for sure true. Bill's passion, Bill had passions a lot of places. But you'd say the apps group and what Windows could deliver to the apps, quite appropriately, I'd say that's where a lot of Bill's brain cycles went. I had also hired Dave Cutler. Dave Cutler had been the architect of the VMS operating system for digital equipment. We had DOS and Windows.
Acquired
The Steve Ballmer Interview
And when we were talking to Cutler about coming here, he says, I don't want to work any toy operating systems. And I had to say to Dave, good thing, because we have a toy operating system. But Dave is the key to getting us there. You know, we said, look, you got to build an operating system whose API looks like Windows and whose user interface looks like Windows.
Acquired
The Steve Ballmer Interview
Yeah, and you might make some changes because you have to, but it's got to be a robust operating system. It's got to have a secure kernel. It's got to have all of these things. The product set that you had wasn't really enterprise grade yet. No, we had a joint development agreement, a joint agreement on land manager with a company called 3Com. It wasn't all our stuff.
Acquired
The Steve Ballmer Interview
We had a development agreement with a company called Sybase to do the SQL database because we were trying to figure out all these pieces IBM would have. And we didn't have any of that. An operating system alone is not going to do it. You need all these other components. And if you want to have backend infrastructure, we started scrambling on that in the 80s.
Acquired
The Steve Ballmer Interview
So we had all these infrastructure pieces that we had to build if we wanted to sell to, I'll say, business customers. We weren't even thinking about, when you say enterprises, sometimes people think very large companies. But we couldn't sell the companies of 20 people without some of this stuff, or 50 people.
Acquired
The Steve Ballmer Interview
Well, Paul Allen. I mean, Paul's the key. Paul is the one who said, Build said, we're never going to be a hardware company. And when the Altair came out, the first real sort of microprocessor-based computer, Paul says, okay, let's write all the software that these things will ever need. Yeah. So Bill and I had a lot of the execution around that, but that was the push.
Acquired
The Steve Ballmer Interview
And Paul was cracking on me in the early 80s to start building an apps group. Come on, Steve. Come on, Steve.
Acquired
The Steve Ballmer Interview
And there was a VisiCalc spreadsheet. Come on, Steve. Word processors. Come on, come on, come on. Let's get the talent. Let's get going. And, you know, we were doing mostly college hiring at the time. And so, you know, okay. And then we met this guy, Simone, who had been at Xerox PARC. Charles Simone, right? Charles Simone, exactly. And he came.
Acquired
The Steve Ballmer Interview
We met him through a mutual friend at 3Com Corporation who had been at PARC. And he really was the first leader of the apps business. But we licensed. I mean, look, we worked with other people the way IBM worked with us. We went to Sybase and 3Com and let's work together. It wasn't exactly a JDA, joint development agreement, but we worked with those guys the way IBM worked.
Acquired
The Steve Ballmer Interview
I mean, look, the analogy now is a little bit Microsoft working with OpenAI. When the big company works with the new company, right? How does that all play out over time? But I took over system software in 84. So that's when we're starting all this stuff. And you could say I was a little bit more enterprise-y.
Acquired
The Steve Ballmer Interview
The liftoff there, though, is mostly on Windows and applications, right? The liftoff isn't really enterprise. I mean, look, it was not until the late 2000s. People would say, you guys might find this funny or maybe even know it. Customers say, you're not an enterprise company. You're not an enterprise company. As late as when? Oh, late 2000s. Really?
Acquired
The Steve Ballmer Interview
Yeah. Our licensing, we had to evolve in the early 90s and then again in the late 90s. No, we didn't have those things. So no, we weren't an enterprise software company.
Acquired
The Steve Ballmer Interview
That's how you viewed it. Certainly, it wasn't before 2005. It wasn't the beginning of my tenure. We were still trying to prove that we were an enterprise company. And now I just find it cuckoo that all Microsoft is characterized as an enterprise company, which I'm not – I mean, I think it's more complicated than that, but I'm not going to say that that's not the primary muscle. For sure it is.
Acquired
The Steve Ballmer Interview
But, you know, me, the company, I mean, I was hell-bent and determined to prove we were an enterprise company.
Acquired
The Steve Ballmer Interview
Easy. Because that's where IBM could squish us like a bug. If we couldn't sell our stuff to businesses, only to consumers... We knew that by then. We'd only get so far because enterprises wanted some features and enterprise don't like, you know, okay, you can go to computer land and buy a few copies.
Acquired
The Steve Ballmer Interview
Our first sort of software pricing packaging model for the enterprise was not the enterprise agreement. First, it was, you know, we sold you disks. Second, we came up with this notion of what we called select licensing. And you could make your own copies. And you just report how many copies you sold.
Acquired
The Steve Ballmer Interview
You tell us how many copies and just pay us what you did. The Enterprise Honor System.
Acquired
The Steve Ballmer Interview
Windows typically by then came with the hardware. So you were mostly using the OEM channel? For Windows, yeah. Okay. Yeah. Even to this day. upgrades and stuff are sold direct to enterprises, but the basic computer that comes to an enterprise would have the operating system licensed to the OEM.
Acquired
The Steve Ballmer Interview
And so we were on, you can call it the honor system, but we just couldn't make people buy discs from us or CDs from us. Enterprises didn't like that. So we had this thing called Select, and Select had two problems with it. Number one, Very hard to copy the software you print. And number two problem, we were selling upgrades and new licenses.
Acquired
The Steve Ballmer Interview
And upgrades were less than half the price of new licenses. So what does that mean? The company was headed to a world where its revenue was half of its existing revenue.
Acquired
The Steve Ballmer Interview
So it was a real problem-looking thing. And, uh, bill and I, we'd always dreamed of this thing where you get some recurring revenue and then we came up and say, okay, well, why don't we just do a license? that you didn't have to count the number of licenses you printed, just the number of computers. It made life simpler.
Acquired
The Steve Ballmer Interview
And we said, instead of doing, sell you a new license, and then God knows when we would sell you another upgrade or whatever, we'll do something that just says, hey, look, you sign up for three years, you pay us per machine, and you just pay us the same amount of money each year for three years. And it sort of led us...
Acquired
The Steve Ballmer Interview
So we solved the upgrade price problem and we solved the difficulty of administration problem. And that was the enterprise agreement. And was it from the beginning of you get everything? No, that was a special enterprise agreement. So you got all the upgrades during that three-year period to the products you licensed.
Acquired
The Steve Ballmer Interview
But we also had this all-you-can-eat license. I can't remember what we called that. But basically then I think you counted the number of employees and you could use any of our software for anybody. So we just tried to go simpler and simpler and simpler in the administration. recurring revenue that didn't decline over time and sort of as much as you wanted to eat, the upgrades, everything.
Acquired
The Steve Ballmer Interview
We did want essentially what you have now, which is a recurring services business, but we didn't have the cloud. We weren't delivering things, but we're already on that path. I think we started the Energizer. You guys mentioned what we do with Energizer, which is where we wanted to run their IT department.
Acquired
The Steve Ballmer Interview
They were the first customer. I talked them into it. And this is beyond the enterprise agreement. This is where we actually want to run their stuff because we did want to get to this recurring revenue thing.
Acquired
The Steve Ballmer Interview
When we created Office, Bill really drove that. And we're selling Excel, Word, PowerPoint. And then we put these things together. And people would complain. And we didn't always sell Office because people say, our users don't use Excel. So we don't want Excel included. Okay, we had a licensing option for you. But it became easier and easier.
Acquired
The Steve Ballmer Interview
People, then departments, departments always were in running IT at the time. Still now, I think.
Acquired
The Steve Ballmer Interview
So we did sell you things that you might not be using. But it also, if you're trying to, you know, the departments, we already got it all for you. You may want something different than this department, but we got it all for you. That was an attractive thing for people. And there's an insurance aspect that I learned that IT people really want. They want peace of mind.
Acquired
The Steve Ballmer Interview
That's part of what it means to be an enterprise. I want to make sure everything's secure. I want to make sure that everything is well managed. I want to make sure everything is well paid for. I want to make sure there's somebody to call if things go wrong. I want to make sure I bought everything. I don't want to look bad because either I paid too much or I have holes in what I bought for people.
Acquired
The Steve Ballmer Interview
So I view this, and I probably evolved my view to this over time. When you sell the enterprise, you have to provide peace of mind, which is kind of like an insurance policy. So buying more than you might be using or some users are using. It's an insurance policy.
Acquired
The Steve Ballmer Interview
But we weren't even mailing disks by then because we had the enterprise agreement in place.
Acquired
The Steve Ballmer Interview
Okay, so that really comes with email boom. And email boom... It was late 90s slash beginning of 2000s.
Acquired
The Steve Ballmer Interview
And I kind of think of this as a time to reflect on things I've learned primarily at Microsoft, but also the Clippers about business. I figured, eh, I'll send them to you. And their PowerPoint.
Acquired
The Steve Ballmer Interview
No, it's the locomotive. Enterprises wanted email. Yeah. When Accenture became a company, we started a joint venture called Avanade to help do, essentially, the Holy Trinity.
Acquired
The Steve Ballmer Interview
help install because you had we needed support infrastructure and partners who knew how to set up the servers provision email put all that in we needed partners and we didn't have enough capacity uh and that's why we started this thing avanad with uh which is a big big company at this stage with accenture and that was in the 2000s i went on the board of accenture
Acquired
The Steve Ballmer Interview
And everything was nicely integrated. Because remember, you needed Active Directory to manage email. you know, file shares to manage printers. I mean, it was used for a lot of different things. So it really did all kind of come together as part of the integrated proposition, like you say.
Acquired
The Steve Ballmer Interview
You guys sort of made fun of the notion that we called all that stuff the back office, as if that was diminutive.
Acquired
The Steve Ballmer Interview
We took that as a signal that Bill just didn't care about this stuff. Oh, completely not right. I wanted to call it the back office because you needed to buy the office in the back office. And the user, the consumer, saw the office and the back office was the things that were in kind of the server rooms slash data centers, but a lot of them were server rooms.
Acquired
The Steve Ballmer Interview
Well, remember, by this time... We're not through our IBM competition. And we got Linux competition now on the docket because Linux is competing with Windows Server. Linux is competing with Windows. And there's a thing called OpenOffice. Open source software for Office is competing with Office. So we have all these things going on. We haven't beat Lotus Notes yet.
Acquired
The Steve Ballmer Interview
Correct. But I mean, it's clear in all these competitions, the thing you need is third parties that reinforce what you've got, add value around what you've got. And I could say run on your platform, but I'll come to that later if you want to, what a platform is and isn't, if you want to do that. It's kind of interesting, I think. Yeah, let's do it.
Acquired
The Steve Ballmer Interview
Particularly since everything's called a platform these days. But anyway, so- Let's take an aside here. Give us your definition of a platform. You could call it anything that is extensible. And it's the extensibility... That quote makes it a platform because you're going to get people to extend the value you add.
Acquired
The Steve Ballmer Interview
The question is, and the reason that's important is, applications are platforms too, not just developer platforms. When people say that, they might mean Azure, AWS, or in the old days, Windows or Windows Server or Unix, then Linux. Yes, those are platforms. You extend them. But you also extend Office. You add value. Partners plug in. They write applications. They use the file formats.
Acquired
The Steve Ballmer Interview
All of this stuff is platform. And part of the issue, I think, for Microsoft is if you see yourself as just a platform company, A, platforms need apps. You want to have the top first party app that runs on your platform. Otherwise your platform can't get good. Office was the best first party app on Windows and that's how things get good. Outlook was the best first party app on exchange.
Acquired
The Steve Ballmer Interview
There were other clients at one point, by the way. So you really do want extensibility in your apps. In addition to your quote platform, you want to make sure you own first party app in addition to quote platform. And I think you can get stuck in the mud if you say we're just a platform company. And I think we got it into our corporate mindset that we were, quote, a platform company.
Acquired
The Steve Ballmer Interview
Far more than I ever intended. I mean, there were people telling me in the mid to late 2000s, well, we can't do that. We're a platform company. I said, yes, we can do that. Right? And by 2010, I was just frustrated with myself and my inability to get people out of the, we're just a platform company. And I think to this day, you have to think app with platform.
Acquired
The Steve Ballmer Interview
You have to think extensibility of the app and the quote platform. And I think we got caught on that. Maybe I got caught on it for a while, and I certainly got caught in my inability to tell people what the company needed to do because people had such a culture then of saying we're a platform company, we're a platform. And so now I go back to developers, developers, developers.
Acquired
The Steve Ballmer Interview
I'm trying to tell people at that time. that third parties really mattered. And you got different opinions inside Microsoft. And what event was this at? A developer conference, I think.
Acquired
The Steve Ballmer Interview
External developers. And who's Windows' number one client? Is it Office or is it all developers? You ask the Windows team, it's all developers. You ask the Office team, come on, you got to do for us what we need to do. You have to...
Acquired
The Steve Ballmer Interview
You have to be able to communicate that you really care about developers who are not your own, that you really want these things because they may think, oh, it's all about running Microsoft Office. And we just had to tell people, we want you, we want you, we want you, we want you. And I think we got caught in thinking it's all about third parties and not also about our first party apps.
Acquired
The Steve Ballmer Interview
And that's where you say, are you a... The word consumer sounds like unserious. Are you for users and for enterprises, which really means IT departments? Or are you for users and not IT departments? And do you allow both all aspects of what you do to be extended by developers? That's the frame I believe in. You know, we had some issues over the course of where we went in the 2000.
Acquired
The Steve Ballmer Interview
We can talk about that if you want to, but go back to 99, um, You know, come on. We need you guys on Windows. IBM's still selling OS2. Linux is right there on the horizon. It's coming like a freight train. Is the web starting to enter your psyche at all? The web's part of that, right? We're trying to get people to write for Windows Server. Good point.
Acquired
The Steve Ballmer Interview
We're trying to get them to extend ActiveX controls. This is a heyday of Netscape, right? We're the part of the browser. So we were trying to get our browser to be a platform, a unique platform. Sorry, embrace and extend, I think is what we said. We'll embrace the internet and we'll extend with these ActiveX controls. We need developers to do ActiveX. We need them to do Windows Server.
Acquired
The Steve Ballmer Interview
We're just sort of getting ready on .NET. And, you know, I have my own kind of wild style. And how do you end a speech? You tell people you love them, that you want them. That's sort of the call to action. And that's where I think the developers thing came. I mean, before that one, there was a different video that people sort of characterized. I love this company. No, it was my Windows video.
Acquired
The Steve Ballmer Interview
It was just a fun thing. It was not a real speech. And it was for internal consumption, where you're saying... Yeah, it was for sales.
Acquired
The Steve Ballmer Interview
Yeah. I mean, there's a lot of little nuances in there. We were trying to get our people pumped up about Windows.
Acquired
The Steve Ballmer Interview
Yeah. Interesting. Very kind. Fathering something. I feel good about that. And I think there's a lot of truth to that. Of course, there are many fathers to the enterprise business at Microsoft. And I feel both good and bad about it. Because the truth is, Microsoft started out as a consumer company. And we built a very important consumer business.
Acquired
The Steve Ballmer Interview
Exactly. I can't remember whether we're pre-LAMP or LAMP by then, but I don't remember. There's some infrastructure on top of Linux that people are using to write, let's say, their backends, not their user-facing code. And we had tons of competition. The interesting thing is people say only think about your customer, never think about your competitor. I actually think you have to think about both.
Acquired
The Steve Ballmer Interview
And ironically, we were pretty consumed with our competitor, which I think was essential. And we were pretty consumed about doing new things. But the competitor thing wound up being very important. I mean, we have no business. We're not in the enterprise. We could lose windows on the client. We have to, you know, and in the company, we weren't like really self-confident.
Acquired
The Steve Ballmer Interview
The DOJ was really self-confident that we were kind of a lock and there was no competition and life was easy. That's not where our heads were. Now, there is some time in the 2000s where I think we do – I do. We do. We, we think that extending, we did a slide once called windows everywhere.
Acquired
The Steve Ballmer Interview
We used to use this on all these devices and we became too wed to extending what we had versus jumping to something new because in a sense we were too confident. Hmm. We were too confident. If we only Windowsized something, you guys make a point in your episode on us. You guys call it sticking with Windows too long, but that may be it. But I don't think we stuck with Windows too long.
Acquired
The Steve Ballmer Interview
I think what we did is we tried to put Windows in places that it didn't naturally go. And we tried to be too Windows-y, both in the API and the UI in some things. Mobile being an obvious. Windows Mobile, exactly. And the car. The car. We did a layer on Windows that when you hooked your PC up to the TV, it had a simplified user interface for the TV.
Acquired
The Steve Ballmer Interview
Media Center, exactly right. So we became convinced either out of... to some degree, paranoia and some degree confidence. You know, okay, well, our birthright here comes from windows. That's our permission to enter the area. But then we also, in some areas, it just wasn't going to be extensible. So there was both like a fear and a overstated confidence in trying to take windows everywhere.
Acquired
The Steve Ballmer Interview
That success translated into the opening to go build an enterprise business. And one of my regrets is we lost the consumer muscle along the way. Because I think the ability to be ultra, ultra. I mean, we're a great company. Microsoft's a great company. But to have both of those muscles totally firing, if I'd been able to sustain that consumer muscle.
Acquired
The Steve Ballmer Interview
And that worked for us on Windows Server. So it's not like we didn't have an existence proof that the thing could work. But, you know, if you're going to, in my little deck I gave you. Yes, please. You know, if you're trying to skate to where the puck is, if you're trying to recognize, what did I call this, about capabilities. If you're a startup in something, there's an ongoing business.
Acquired
The Steve Ballmer Interview
You just keep enhancing your products. There's a line extension. Okay, we're going to add networking to Windows. No problem. You still call it Windows. It's related, but new. SQL Server, for example, was that for a while. It was related because we had a backend platform. Dynamics, somewhat related, our accounting, et cetera, stuff, because there was some enterprise-y sales, but it was really new.
Acquired
The Steve Ballmer Interview
And it turned out the phone was more like a startup. The phone was more like a startup. And recognizing and thinking about things and then asking yourself, what capabilities do you need? I say get in the weight room. You've got to develop capability. Take a look at a capability we developed that is now essential. We didn't build it for this reason. Hardware design.
Acquired
The Steve Ballmer Interview
Microsoft's a major hardware design company now. Now, I started it out mostly to help client-side devices. Surface. Xbox, Surface, phone. And guess what? They use that mostly now in Azure data centers. I think the guy who actually runs hardware design used to be on Xbox. The backend hardware design for the data center, the chip, et cetera, infrastructure.
Acquired
The Steve Ballmer Interview
I'm pretty sure there are a lot of talent we brought in. So building capabilities is important. We built some capability, but we didn't build enough capability. We didn't see things as different enough. Okay, let's try to keep the comfortable Windows user interface because people understand it. It wasn't right for the phone.
Acquired
The Steve Ballmer Interview
I don't even remember what processors we started out on, but I'm pretty sure we started out on Intel. Of course that wasn't right. We tried to keep too much consistency, both out of... sort of a fear that this was our permission to exist and out of a self-confidence that, you know, we had to put windows everywhere.
Acquired
The Steve Ballmer Interview
And I have some ideas about why that didn't happen. But the enterprise muscle?
Acquired
The Steve Ballmer Interview
I would say two things were true at the time for us. And this is specifically about mobile. it's also about something else. It's a little bit out of search too. There are two things that are true. Number one, you have to be focusing consciously on the issue. It's easy to get caught up in, you know, there's innovators dilemma. It's a little different, but you get caught up in what you have.
Acquired
The Steve Ballmer Interview
You get caught up in what you know. You get caught up in the capabilities. And that's why I say to myself, you explicitly have to think about it. And look, if we hadn't developed a bunch of capabilities we had, AI, if we hadn't built Bing, company wouldn't have capability.
Acquired
The Steve Ballmer Interview
We built some important capabilities, but we didn't realize the businesses were enough different to harness those in the new ways. I'm proud of the capabilities we built. Didn't apply them the way we should have. Where did we learn to build internet scale infrastructure? Well, some with Azure, some even more than Azure. Bing and Xbox. No, even more than Azure to get started.
Acquired
The Steve Ballmer Interview
The Office, what's now M365, the Office backend, because that got critical mass as a cloud infrastructure before Azure did, and even more so with Bing. So we developed the capabilities, but then you look at the product and what was our strategy for Bing? Well, there's too much based upon Windows integration.
Acquired
The Steve Ballmer Interview
And so I'm very proud of that. And the fact that, you know, it's also funny when you say consumer and enterprise, what does it mean really to say enterprise? Sometimes it can sound just like backend stuff. And the truth of the matter is Microsoft office slash N three 65, whatever exactly it's called today is super important. It was the foundation for having permission to to be in the enterprise.
Acquired
The Steve Ballmer Interview
Windows Live Search, right? Everything was Windows Live. OneDrive was now OneDrive. You're not going to beat Google with Windows Live. But the file sharing. I mean, look, Google's done the same thing. And you've got to ask, where do you run out of gas?
Acquired
The Steve Ballmer Interview
88, yeah. And we jumped in in 2003, I think we pushed. Now, you'd say five years is a lot, or you could say five years isn't that much. You could say we had no birthright. I mean, it's just a completely separate thing. We had no capability. We had nobody who'd grown up in that world. And we had some guys in Microsoft Research who could sort of start getting us there.
Acquired
The Steve Ballmer Interview
We took talent that was doing other things in Microsoft. It's hard to go get new talent because search is brand new. There were people from Inc. to me. Google had sort of sucked them up. So it took us a while to get off the ground. It took us a while even, to be fair.
Acquired
The Steve Ballmer Interview
I think this is something both Bill and I debated, not just with each other, but just we kicked around too much how much, quote, the verticals in online services would be important versus search and portal is generic. So search and portal is generic. But remember, we had a thing called Expedia. We built a travel site. We built a local information site called Sidewalk. We had a car shopping site.
Acquired
The Steve Ballmer Interview
What did we call that thing? Carpoint. How much would the verticals be worth? And there was one vertical that mattered, except it wasn't really vertical. It's called all shopping. There was all information and all shopping. And you got Google and Amazon. And doing all these detailed, specific things. Remember, we did a portal. We did that. And then eventually, then we did search a few years later.
Acquired
The Steve Ballmer Interview
We were just off. We had the wrong thing stack ranked in the wrong way, my opinion, with 20-20 hindsight. And we were spread too thin. So he said, when should you get into a new thing? Well, you probably shouldn't get into five new things if you really only have the talent for one, two new things. That's number one. Scott McNeely, his son, used to have this expression.
Acquired
The Steve Ballmer Interview
He goes, we got to get all our wood behind one arrow. You know, it's nice to try, I mean, I was listening to you guys talk about Amazon and how they, okay, we're going to try small things, but they also put in small cost structure. We put in big cost structure because we were already all in when we got into something. And so in this particular case, a few years later, and then what do you do?
Acquired
The Steve Ballmer Interview
You get stuck. We have permission to come from behind in a certain way here because we've got windows. That's your point. Exactly your point. So there are lessons to be learned, but for a company that's got an established business, being able to get all the way outside of yourself and say, is this really like what we're doing? Because you really want it to be. You really want it to be.
Acquired
The Steve Ballmer Interview
Or does this really require a different approach that doesn't totally ignore, but doesn't take into account what you own any more than the person starting it afresh? Can you hire new capability or how do you build new capabilities? If it's not like what you're already doing, it must require new capability. If it's exactly like what you're doing, Then you'd be doing it.
Acquired
The Steve Ballmer Interview
And you should be great at it. And you'd be great at it. So it's the things, you know, just look, two models worked in phone. Build the hardware, capture the profit, have a backend monetization system that even lets you pay the phone manufacturer. That worked, Android slash Google. So two things worked. That's it. And we weren't in either one. We needed new capability. We needed a new idea.
Acquired
The Steve Ballmer Interview
We couldn't use the Windows user interface. I mean, there were a bunch of things, but you have to go all the way. And yet we had a Windows Everywhere slide.
Acquired
The Steve Ballmer Interview
You get locked. I wrote this thing down here. You get locked in your model. We're a platform company. No, we're an app and platform company.
Acquired
The Steve Ballmer Interview
And yet it's a product that sits right there in front of users. So the question is, do you think about users or consumer? And do you think about enterprise or do you think about IT? And then there's developers that span both. And that's kind of my mental model. Do you have products that appeal to consumers?
Acquired
The Steve Ballmer Interview
What year Christmas was this? There was the Christmas of blah, blah, blah year, and it was being on time with the stuff we needed for Verizon. There was a Verizon design win because Verizon by now is really feeling like it's getting its ass kicked by AT&T. iPhone launches on AT&T. Right. In July of 2007. And then it might have been Christmas Eve in 2008. Yeah, because App Store launched next year.
Acquired
The Steve Ballmer Interview
I think it's Christmas 2008. Yep. Possibly even 09, but I think 08. Because mobile was like this when it started. It could have even been 09. But Verizon, the empire had to strike back against AT&T, and there was a window.
Acquired
The Steve Ballmer Interview
We didn't have our stuff. Look, they would have taken our stuff because they could put pressure back on the manufacturers. But we didn't have the stuff they wanted at the right time. They went Android. And then, you know, we kept pushing because that's, you know, I believe in staying hardcore and then learning and fixing. The problem was we were so locked into our model.
Acquired
The Steve Ballmer Interview
It was hard to say, hey, we're going to learn and fix. You know, would Microsoft, you know, I don't know where we would have gone with things on phone if I had stuck around, but I probably would have stayed at it. And maybe it would be an Android phone at this stage. Who knows? And maybe not.
Acquired
The Steve Ballmer Interview
Because if you think of yourself as just a platform company, you say we can't do that. If you can think of yourself as an app and platform company with apps that are extensible... then you can say, hey, we actually have a pretty cool user experience that can also leverage some things that we do and can leverage our software skills. And it's okay to embrace that competitor and extend.
Acquired
The Steve Ballmer Interview
But there's so many technologies that are hard to not just popularize, but even get good at unless you have a phone these days. Just take voice. If you want to really be good at voice, You got to get enough signal and you'll get the signal off the phone. You can't say talking to my PC is sufficient.
Acquired
The Steve Ballmer Interview
And, and it's not the only, you know, if you want to get good at maps, if you, there's so many things where being on phones and there's some, some things even you can make happen by being on cars. I think Tesla gets good at certain things in software because it is a different form of mobile, so they get good at different things. But we missed. Should the company have kept after it? I don't know.
Acquired
The Steve Ballmer Interview
That's not my – Satya and Amy and company, they know where they were. But to your original question, big companies deciding – Well, it's not always a mistake to build off what you got, but it can be. Try to get outside of yourself.
Acquired
The Steve Ballmer Interview
That IT can handle and a platform that lets developers build around those and based around those, whether they're building for users, users and IT, or in some instances just for IT people because there's a lot of tools that are just for IT people.
Acquired
The Steve Ballmer Interview
That's what I did with Surface. I didn't wind up, it hasn't played out. And, you know, partly, you know, I didn't have that much, as much time with it. But, you know, there were no high-end PCs that would really compete with Mac. And I decided the only way we were going to get there, we couldn't sit there with our OEM model and have it work.
Acquired
The Steve Ballmer Interview
If we're going to have high-end PCs that appealed to users, because I wanted us to be a consumer slash user company, not just an IT company. Because ThinkPad had, IBM by then, Lenovo had some higher-end computers. But you never saw them in schools. You never saw them in coffee shops. We needed a high-end PC. And the economics weren't going to let of marketing and romancing.
Acquired
The Steve Ballmer Interview
That was not going to be an option for our OEMs. And I said, we got to go do Surface. Now, again, would we have tweaked things, done things a little bit better, or part of that iPad? Sure. But the model was not going to work.
Acquired
The Steve Ballmer Interview
Yeah. So we are in probably 2005, 2006. AWS has a little lift off. I think AWS comes to market what? Around then. Around then. And it's not like the cloud is some surprise to us. The Energizer, if you go all the way back to that Energizer thing from the mid-90s, it's all about the cloud. It's before it was called the cloud. It's before all the infrastructure that becomes the cloud.
Acquired
The Steve Ballmer Interview
So it's not like we say, oh, woke up one day, oh, there's AWS. We didn't wake up one day and say, oh, there's backends to applications too. We've been doing that with Windows Server and SQL Server. We've been in the cloud, blah, blah, blah. But at that point, I think we might have already had Exchange in the cloud as a standard product.
Acquired
The Steve Ballmer Interview
What you have to remember is super important because I really want to give you my sense of what Microsoft's businesses are. But we didn't have a platform. And so I said, we've got to do one. Let's go get Cutler. Let's just go get Cutler. So I say, okay, we've got to get Cutler on it. And Cutler and I have a great relationship. To this day, we have a great relationship. We're personal friends.
Acquired
The Steve Ballmer Interview
But I mean, Cutler and I have been to basketball game together. We've played golf a number of times. We've done golf trips together. So But Cutler, he's a hard ass at work. I mean, if he doesn't want to do something, he'll tell you. If he thinks you are wrong, he'll tell you. If he thinks somebody else in your organization is bad, he'll tell you.
Acquired
The Steve Ballmer Interview
He's very blunt. He was a great athlete in college, two sports. I think he played maybe three even in college. But anyway, so I get Cutler. And there's a guy working in MSR who I think is underutilized too, this guy Amitabh Srivastava, who you guys talk about. I thought he was underutilized doing what he's doing. So grab him, grab Cutler, bring them both onto this project.
Acquired
The Steve Ballmer Interview
He had told me, but, you know, talk about that. But he had told me, but hadn't left yet. So he was involved until he left. And even then... you know, different nature of involvement. But anyway, so I get Cutler and Amitabh to go do this thing. And then Cutler brings some of his, I'll call gang, his favorite guys. He brings them over because he's a magnet for talent.
Acquired
The Steve Ballmer Interview
And we get started and we made an explicit decision. And I guess you could say it's also a function of thinking windows first. I think you guys may have talked about this in your episode. We say we're going to build platform as a service because it's a windows platform. Infrastructure is a service a little bit if you think about it. You're sort of by nature accepting everybody's infrastructure.
Acquired
The Steve Ballmer Interview
It's by nature multi, quote, multi-platform. You become a different kind of a platform because you're running other people's Linux and whatever.
Acquired
The Steve Ballmer Interview
It doesn't leverage our strengths in the sense that we've got great low-level operating system people. So we have all the talent to go do it. But we say, hey, we're going to do – and it was explicit. We wanted to do platform as a service. We said, hey, they're doing it. And B, it's all about the developers.
Acquired
The Steve Ballmer Interview
Which they were and they weren't. Windows Server had a strong developer group. Unix had a strong developer group. And on the front end, Windows was definitely stronger.
Acquired
The Steve Ballmer Interview
Hard for me to remember. I think if you go to the field of productivity, the answer is, yes, there were still. The problem is if you left the areas of productivity and gaming. Productivity and gaming, yes. If you leave productivity and gaming, I think the answer was no.
Acquired
The Steve Ballmer Interview
Yeah, there was lots of, it was enterprise developers. You know, people, remember, people were, the web wasn't good for a number of things for IT because people couldn't count on, people didn't feel like they could count on the connectivity. Either the amount of bandwidth or latency or just its very existence. We were still at that point. So I'm not saying, fair.
Acquired
The Steve Ballmer Interview
We were right in the way we thought about it. I'm not saying that. But I'm also saying there was a Windows thing There was still a great Windows developer ecosystem. It didn't go from a lot in 99 to nothing by 05. Totally fair. And then on Windows Server, Unix was stronger on the back end. And of course, we're trying to make Windows strong, and we're trying to get to the cloud.
Acquired
The Steve Ballmer Interview
And then we're learning more things about the cloud from both Exchange in the cloud and Azure in the cloud. How do you make it easy to provision? What's the speed of provisioning? You know, what do you do to serve developers? The notion that you give them, you know, a number of, you know, sort of a set of free usage and then let them embrace. Because developers have two aspects too.
Acquired
The Steve Ballmer Interview
Yeah, I did, I think. Well, it's 1980. When I get here, the company started obviously in 1975, and there were IBM computers. Oh, yeah, and a couple others. But literally people would say there's IBM computers. And the bunch. And the bunch was Burroughs, Univac, NCR, Control Data, and Honeywell. But they were just the bunch. IBM. And IBM did the mainframe. And it did the software.
Acquired
The Steve Ballmer Interview
There's developers who are not part of enterprises and there's developers who are. And the developers who are not part of enterprises need a whole different sales motion. You can call them consumer, not developers of consumer apps, but they are like developers They are not like big corporations in terms of the way they use.
Acquired
The Steve Ballmer Interview
Students are an example, but there's plenty of others who are trying to do startups and blah, blah, blah. Um, so in any event, you know, we kind of get going, we're learning, you know, how to do the things we're building capability for sure in the cloud through both products. Uh, and, uh, you know, by the time I leave, we have some, some, some momentum with Azure, but some momentum.
Acquired
The Steve Ballmer Interview
No, it was extremely disruptive, but it wasn't. Yes and no. The things we understood were translatable. Now, people get locked into a model. You had to replace server into a leadership to make this happen. Will IT accept things that run in the cloud? That was not obvious back in 2008, 2009. It's not like Amazon was an enterprise company at the time.
Acquired
The Steve Ballmer Interview
It was mostly for startups, and that's who was using AWS at the time. And so, no, I agree. I do agree with you. We had to shake up our internal culture. God dang it. This was my basic message. God dang it. This is our future. We can preserve and enhance these businesses. We can take more value out of the system because other people, the customers don't have to set up their servers anymore.
Acquired
The Steve Ballmer Interview
They don't have to do all this work. Essentially, money that would have been spent on people and hardware will get spent with us.
Acquired
The Steve Ballmer Interview
We're going to do this. And it was hard for me, even telling our people, There was still, you know, la resistance, as they say. And that's why I did the speech at UW where we talked about the fact that we're all in on the cloud. It was partly a reminder to people, you know, get with it or get out of it.
Acquired
The Steve Ballmer Interview
It's very... Some of what you have to do because people believe the newspaper more than they'll believe an internal email.
Acquired
The Steve Ballmer Interview
But that's sort of a classic thing. It shouldn't be mind-blowing. I mean, Windows and Windows NT were in different groups too. Sometimes in order to protect the sort of baby while it grows up, You can't put it with the thing that's established. I mean, you could say it's part of the issue with Windows when we tried to use Windows on things for which we probably should have started.
Acquired
The Steve Ballmer Interview
Yeah, I was going to ask. Mobile would have played out differently if you'd taken this approach with mobile. We did break it out, but we constrained it with Windows. We broke Windows NT out and constrained it with Windows. It worked fine because Windows belonged. So how you do... Those incubations. And in this case, I just said, look, it'll get probably subsumed. I don't know.
Acquired
The Steve Ballmer Interview
Partly, Ray wanted some operating control over the thing. And putting it under Muglia would have made it harder for Ray. And obviously, it was less palatable. And I'm not sure Cutler would have... If it was all, you know, all in server and tools. But it was the right thing to do, even though it was, quote, part of the future of servers. It was the future of server and tools, essentially.
Acquired
The Steve Ballmer Interview
Eight years. No, we'd been working on the cloud since Energizer. We'd been working on Azure for eight years. People think everything in tech gets popular in 10 minutes. It's kind of- People think Acquired was founded two years ago. Good point. Different scale. When was OpenAI actually founded?
Acquired
The Steve Ballmer Interview
And it did the service. It did everything in computing. Everything. Everything. And then you had this little upstart try again called digital equipment. Yep. Very important in our story because Dave Cutler, who was kind of the father of NT, Windows NT, he came from digital equipment. And they were fighting. They were scrappy. They were mini computers.
Acquired
The Steve Ballmer Interview
Okay. So seven or eight years after, it really became something. Okay, fair to say. And I give them all the credit in the world, seven or eight years. Most things take a while. Even things that are, quote, oh, they just burst on the scene. People have been sweating, you know, blood, sweat, and tears for years before these things get liftoff, as I call it, my little deck here.
Acquired
The Steve Ballmer Interview
And so, yeah, we were starting to get to liftoff. But, yeah, eight years. And we had more in on exchange. Most businesses are zero-trick ponies. You never create a billion-dollar business. You never create – you might create something that goes nowhere. You might create what's essentially a feature for somebody else's business and get acquired. You might. I'll call that zero tricks.
Acquired
The Steve Ballmer Interview
Then you get a one-trick pony. And one-trick ponies are – Amazing. Amazing. I mean, people should be in awe of one-trick ponies.
Acquired
The Steve Ballmer Interview
It could be more. There are not many one-trick ponies. I might argue that Google is a one to one and a half trick pony. Still. I mean, if you just look at its revenue. It's 80% search ad revenue, something like that.
Acquired
The Steve Ballmer Interview
You either call YouTube half a trick, or you can call it a second trick. But it's not clearly a second trick. And they're huge, and they have great market cap. TSMC, you did an episode on them. They're a one-trick pony, very successful one-trick pony. NVIDIA. Is a one-trick pony.
Acquired
The Steve Ballmer Interview
First trick was not that big. Yeah. You can decide whether to call it a trick or not. But I'm not taking anything away from NVIDIA, and I should know the company better. But... So you say, one-trick ponies, they're amazing. Like, everybody should be in awe of a one-trick pony. Now... Two-trick ponies... Ooh la la. Those people tend to go down in business history.
Acquired
The Steve Ballmer Interview
Especially if those tricks stay alive for a long time. IBM was a one-trick pony. Microsoft, two to two and a half tricks.
Acquired
The Steve Ballmer Interview
Give us your trick accounting. Okay. You can do it a little differently. I'm going to call the desktop business, which I include Windows and Office. and the server slash enterprise business, back office, two tricks. Now, both tricks could have died if they didn't get moved to the cloud, and I knew they could die.
Acquired
The Steve Ballmer Interview
But there are two tricks, two different revenue models, two different licensing models, essentially different sales motions. Even the way Microsoft sells those stuff, I don't know about today, but when I left, they were kind of different muscles. One account manager, two different muscles, because one, you're selling applications, and one, you're just selling, hey, this is to serve your users.
Acquired
The Steve Ballmer Interview
You need an AD account, an exchange account, it's exact, a Windows. I mean, that's what you need. This is what M365, you could call the two, the modern translation of those two things are the Windows OEM business in M365 and Azure. And then you could say, is gaming its own trick? I'd call it a half a trick, just like YouTube.
Acquired
The Steve Ballmer Interview
So smaller than a room, but definitely bigger than a PC, if you will. And all the initial Microsoft software was developed actually on DEC computers. Digital equipment equals DEC. And DEC had a nice business, but it was a lot smaller than IBM. If IBM breathed, that was the direction the computer industry would go. And IBM was the subject of an antitrust lawsuit, shockingly, in 1969.
Acquired
The Steve Ballmer Interview
So I'm going to call it a half trick. Or you could say it could be a trick. I mean, look, I would say Microsoft is optimistic it'll be a full-on trick. Mm-hmm. OK? I hope it is. I run into Phil Spencer at the golf course, and he's a really optimistic guy. It could be.
Acquired
The Steve Ballmer Interview
There we go. Whatever you want to call it, you said it's a small trick, and I think that's probably right. So that's amazing. Amazon's two-tricker. AWS and the store, they're two-tricker. Apple's two-tricks. What's your trick accounting there? Mac. And mobile, if you want to say it's high power consumption and low power consumption.
Acquired
The Steve Ballmer Interview
I consider it just part of the trick. If you go by your platform definition, it's part of the platform. I call it really a trick. They've just monetized it. It's kind of like us adding things to Office and redoing the EA and It's a monetization model. It's an additional monetization model, but it's not a new locomotive.
Acquired
The Steve Ballmer Interview
A locomotive is the business that can pull the cabooses, and the locomotive remains the phone. The services business would go away pretty quick if the phone volume fell apart. So I'm going to call. It's additional. Very important. but not uncorrelated the way that AWS and- No. I get the sense. And I think Mac versus everything iOS is also uncorrelated. Yeah.
Acquired
The Steve Ballmer Interview
You wanted to buy Facebook. I'm going to tell you why. It's either... Sure, because we were still on the Paul Allen strategy. We've got to do all the software that these things will ever need. I mean, it was still of the mindset that said, and there's an arrogance to that, and there's a hunger to that that says, there's just nothing we shouldn't do. And I don't think that was a good mindset by...
Acquired
The Steve Ballmer Interview
The time I took over, and yet it was still sort of baked in with Bill, baked in with me, and I think that was a mistake. Social doesn't get you. This is like asking me to pick between negative children, I don't know. But the phone, because it was a client-side device, or search, because it was a productivity tool. Microsoft, both of those were Microsoft big businesses. Yep.
Acquired
The Steve Ballmer Interview
The desktop, the phone, or office, or client-side devices, we had done well with a certain model. Client-side devices, our minds should have been able to wrap around, but we had to tell ourselves it didn't look the same. It's not what it is. Technology didn't look the same, nor did business model.
Acquired
The Steve Ballmer Interview
By 05? I don't think so. Not later on? I think so. But not by 05. I would suspect not. I mean, you can go check it out. But isn't that astonishing that of the pie of- And for enterprise PCs, PCs bought by businesses, it certainly wouldn't have been the case. For consumer PC, it could well have already been the case, right? I mean, it actually is a notable difference because of everything else.
Acquired
The Steve Ballmer Interview
Our post-sales monetization was with applications. Theirs were with ads. But it's a new productivity app. We put Office on the Mac by then. We would have had to put productivity elsewhere. So in the sense that we missed a major productivity area, and we're in the productivity business, and we were in the client area, and we missed a client device. Those are the two. Nothing else we missed.
Acquired
The Steve Ballmer Interview
and you got to yeah part of the problem was we didn't see uh particularly we didn't see mobile as a different trick we thought of it as underneath the windows trick if you will no but i mean you can go through i don't know that i could come up with a three trick pony for you i mean it's possible that at the elon level the musk empire could have three tricks right cars connectivity and um
Acquired
The Steve Ballmer Interview
In finance, you can do it. Finance, I don't think there are multiple tricks. And you could say asset management versus the- Investment banking is different. Maybe, maybe. I don't know. I'm not convinced, but I hear you. Well, possibly.
Acquired
The Steve Ballmer Interview
That didn't actually get settled, I think, until shortly after I got here in the term of Reagan.
Acquired
The Steve Ballmer Interview
Yeah, they have a remarkably diversified- They bought businesses in multiple areas.
Acquired
The Steve Ballmer Interview
But I can't call Sony Pictures a trick. Fair. A, it's just not big enough. You can acquire to start a trick. I mean, that part I have no- You know, there's no pride. There should be no pride in having a trick that starts with something small. Android's a great example. Google bought Android, but that's a trick for them. Well, Android's not a trick. Okay.
Acquired
The Steve Ballmer Interview
Yeah. Yeah, exactly. Lead generation for search. Yeah, that's right.
Acquired
The Steve Ballmer Interview
Ah. I don't remember. It may be when they had to unbundle. In fact, I think it was when they had to unbundle the operating system from the mainframe hardware so people could build IBM compatible mainframes. And then one day, shortly after I got here, Some guys from IBM call and they say, hey, can we come see you?
Acquired
The Steve Ballmer Interview
Look, my biggest hit from my time running sales to president to CEO is establishing us with IT departments, IT professionals. You can call that the enterprise, if you will, and putting in the framework from a sales and marketing perspective, the staff. It's a capability we had to develop. Nobody developed that software model but us. We invented essentially how you do that.
Acquired
The Steve Ballmer Interview
Oracle had done some invention, but we came on and did our own invention. We took it to the cloud. We were able to successfully navigate that with, I mean, look, from a sales, there's a product parts of that that you highlight, but that's a big deal. And I feel very, very proud about that. From a financial standpoint, Everybody likes to say about tripled revenue and about tripled profit.
Acquired
The Steve Ballmer Interview
The truth is we dramatically increased profit more than a triple. Because people forget there was a major change that came along early in my tenure. And that's the move to have to expense stock options. So if you had restated our books to the time I actually took over, stock option expense would have reduced profits notably. stock options were unaccounted for.
Acquired
The Steve Ballmer Interview
So if you look at what starting profitability would have looked like if stock options had, it would have been lower. And the multiple over my tenure would have been much more than three. Okay.
Acquired
The Steve Ballmer Interview
I think you might say three in revenue and probably closer to four plus five, maybe even on profit. About the same time, the dot-com bubble busts. So you have two problems. Number one, now we're showing our books all this expense for stock options. Okay. But people don't value those things, what we have to expense. And the stock is flat, so they value them even less.
Acquired
The Steve Ballmer Interview
And you're going to have to sign an agreement that says you can use nothing we tell you, anything you tell us we can use. And so these guys showed up and they told us after we signed their agreement that they wanted to build a PC and they were hoping to get the operating system and Some of our language software for it. And they were coming to you for the language software?
Acquired
The Steve Ballmer Interview
This is a really insidious problem. You got to get rid of stock options. And we transition then from stock options to stock awards. Which, if you notice, I think we were the first to make that as a major transition, but everybody's made the same transition. With the exception of a few senior executives, options are not the primary form of compensation.
Acquired
The Steve Ballmer Interview
Little different in startups, but when you look at larger companies, everybody's- Even startups are now doing RSUs. RSUs. And we had to start that. I didn't realize that Microsoft started that. You can check, but-
Acquired
The Steve Ballmer Interview
No, we had two problems. Before the dot-com bubble bursted, You have everybody saying, oh, maybe we should go to a dot-com company because we're going to make a lot more money. Then the bubble bursts, and everybody says, you know, I'm underwater on my options. We haven't seen the movie Oklahoma, but there's a song. Poor Judd is dead. Poor Judd is dead. Absolutely.
Acquired
The Steve Ballmer Interview
And that was kind of the way people felt about sort of stock compensation. And not just in our place. People were down because, you know, everybody thought they had a ton, and then they thought they had less. So yeah, it was a real employee morale issue in the early 2000s. We had to really sell this stuff in. That's a big thing I had to work on. Obviously, the antitrust issues.
Acquired
The Steve Ballmer Interview
It was right up there. Yeah. I mean, it was up there. I mean, it- I think when I took over, I'm not even sure we saw a path to resolution. But having an overhang, I'll give you a story because it was after I took over as CEO. We had an executive retreat. We did it down in Bend, Oregon. I can't remember the name of the lodge. Sun River, I think. And we all fly down there.
Acquired
The Steve Ballmer Interview
We rented a plane to fly everybody down there. I don't know how many people. By then, it was probably 80, 90, something like that. And the first session was supposed to be a report. We did this, a report from the field. What are people seeing out there? What's the environment? And this guy, Orlando Ayala, was running sales at the time. And he gets up and, you know, this is probably 02-ish, 01, 02.
Acquired
The Steve Ballmer Interview
We're still in the throes of the thing. My name is Orlando Ayala. I am a proud Colombian. I am not a proud Microsofty today. Our integrity is under assault. My personal integrity feels like it's under assault. Now, he didn't blame us for having behaved badly, but he highlighted the thing that's on everybody's mind, which is it wasn't just a business issue that needed to be taken care of.
Acquired
The Steve Ballmer Interview
It was a culture issue. It was bothering people, particularly senior people, very personally. So I had this whole agenda, had to blow the thing up. And reorient to address that elephant in the room. It was not where I was going with this thing. Completely remap, change the breakout sessions, focus in on this issue. Bill was not happy with the whole thing.
Acquired
The Steve Ballmer Interview
Bill bore the weight of the antitrust thing very hard. Because for him, I think it also felt like a personal attack. Of course. And everybody took it personally. Bill took it even more personally because he was the face of vilification, if you will. for this, but it's a reminder that it was a cultural issue to take care of, not just a market issue.
Acquired
The Steve Ballmer Interview
No, they came to us for the operating system. Ah. Now, why? You'd say, we weren't in the operating system business. We had a card called the CPM soft card or the soft card for the Apple II. It was a card that plugged into an Apple II. that ran CPM, not our operating system.
Acquired
The Steve Ballmer Interview
And people focus in on the, oh, were you moving slowly? Yeah, there was some of that too. People say, oh, I wonder if we can do this. That was an issue. The cultural issue, I think, was even bigger. So he said, yeah, we got to get this thing resolved. And then there was the order to break us up. I forget what year that was.
Acquired
The Steve Ballmer Interview
You were going to run one company and Bill was going to run the other company. Yeah, we never really got to the point of really planning that through. But that's what the federal government ordered. Yeah, no, they ordered it split. They didn't say who had to run which company. I think it was just that you couldn't be at the same company.
Acquired
The Steve Ballmer Interview
So... I mean, it just gives you a sense of where each of us were associated with in the mind of the company.
Acquired
The Steve Ballmer Interview
I'm going to give you three reasons. Reason number one, and it's material. Bill and I always, so Bill and I, and then me and Bill, when I became CEO, we always were trying to tell people, don't get our stock price too high. Don't have too big expectations for us. We never wanted people to feel like they got cheated buying our stock.
Acquired
The Steve Ballmer Interview
Partly, probably, we're trying to lower the expectations on ourselves. I never thought of it that way. I don't think Bill did, but essentially, that was part of it. We do this financial analyst meeting every July. We always warn people, don't get too excited. That's one. As part of that whole theme, Bill never went to a quarterly analyst call, and I never went to a quarterly analyst call.
Acquired
The Steve Ballmer Interview
If you really think about it, part of morale is the stock price. It is. And it took me a while to realize that, but I then never broke my pattern. It's sort of like going to the newspaper every day. You don't sell stock every day, so you really should only care what the stock price is when you sell stock. But people go every day and it's kind of like, oh, did my team win last night?
Acquired
The Steve Ballmer Interview
It's like going to the sports section and say, how did the Clips do last night? And So talking more regularly to investors and talking with not a pie-eyed, but a realistic view, guidance, we gave no guidance. I had to fight people. They wanted to give guidance. I didn't want to give guidance. Why? Just deliver the results you get. I mean, you know, there was a bit of a Buffett style. Totally.
Acquired
The Steve Ballmer Interview
I mean, this thing going on because Bill and Warren were very good friends and Warren didn't go to quarterly calls, I don't think. But, you know, he's Warren. I don't even know if they do quarterly calls. I don't think they do. Yeah. So they do the annual meeting, obviously. Yeah. Um, so that's a, that's a, let's call that a first reason.
Acquired
The Steve Ballmer Interview
Gary Kildall Digital Research was the name of the company. But we had licensed it to put on this card that plugged in the Apple II. And somehow IBM thought they could license CPM even though it wasn't our product, they thought they could license it from us.
Acquired
The Steve Ballmer Interview
A second reason is yes, I did take over when the stock was ridiculously too highly priced. Yep. But that normalized within a year or two. The bubble burst that normalizes some, but it creates sort of another narrative about, about things. Yeah. Um, so that I'd say is, well, no, I'll give you four reasons then.
Acquired
The Steve Ballmer Interview
Next, I was hardcore about telling people I'm going to spend to do the things we need to do to succeed. That's not what Wall Street likes to hear. No, but I was viewed as a spender. And I was much louder on this than Satya is, on anything financial, because that's kind of how I'm programmed. He's programmed a little differently. And Amy is more balanced.
Acquired
The Steve Ballmer Interview
And so I had no credibility in terms of what some investors wanted to hear. And my actions... We're consistent with that. It's not like they were inconsistent. And then lastly, people did worry about the future of a couple of our franchises, most notably Windows. So you get all these things, narrative, transition from high price, some issue about franchises and me being a big spender.
Acquired
The Steve Ballmer Interview
no wonder the stock stayed flat. And by the end of my tenure, it was even bothering me. Yeah. When did it start to bother you? Towards the end. I mean, at some point, I just got too tired. But by then, it was also probably hard for me to reset that dialogue, for me to go to investors and say, I'm a changed man. I'm not going to spend anymore. Nobody was going to believe that shit.
Acquired
The Steve Ballmer Interview
It just wouldn't have believe that, right? I mean, you can't come in and say, well, I've been a certain way for about 35 years, or 30 years, but I'm a, hey, I'm a new man.
Acquired
The Steve Ballmer Interview
If you're a spender, you're a spender. If you're not good with investors, they're not going to buy in overnight that you've changed. There's a certain, and I didn't intend it that way, but there's a certain disrespect by not going to quarterly calls with hindsight. People aren't going to say, oh, he's showing up. He's a changed man.
Acquired
The Steve Ballmer Interview
He used to tell us the stock price was too high or worry about it. Now he's going to tell us, no, the stock should be okay. It should be higher. No, there was no way to reset the investor view of me. You need a full rebrand, full clean slate.
Acquired
The Steve Ballmer Interview
And we said, no, no, no, but you can license our language software, but there are these guys down in Pacific Grove, California, and Bill called Gary Kildall and said, there's some guys, they want to talk to you. They're important. And Gary, they went down there and they didn't sign the non-disclosure agreement.
Acquired
The Steve Ballmer Interview
I mean, when I wrote my letter of sort of goodbye to the board, I did say, hey, look, this is a unique opportunity. There's a lot of things in our brand, in our image that would only be able to be reset by a new CEO, by having a new CEO. Because people don't walk in and say, oh, yeah, guys are changing. So it's hard to change the narrative without the change.
Acquired
The Steve Ballmer Interview
Now, I'm not saying that means CEOs should go every time there's a bad narrative. That's not really my point. But it just gets harder, particularly since I'd been, I may have only been CEO since 2000, but it's not like I wasn't there since 1980. Yeah, I was there since 1980. And essentially, I'd been the second voice of the company for 20 years. And then for 14, I was the first voice.
Acquired
The Steve Ballmer Interview
Look, the toughest time was probably the ship of Vista. Yeah. That was probably the toughest time. That and the early 2000s Uh, when I took over on my little, my little sheet here, I highlight that 98 to 2004 were kind of tough years plus X-Box. Because that's the antitrust. That's where I moved back to be president of the company and then CEO.
Acquired
The Steve Ballmer Interview
And Bill and I went through a year where we didn't speak. Really? Yeah. I think it was basically from sometime in about March or April of 2000 to 2001. I mean, literally we weren't speaking. I didn't know what it meant to be his boss and he didn't know what it meant to work for me. You know, when he asked me to be CEO, I said to him, look, and I knew he was struggling with the DOJ and all this.
Acquired
The Steve Ballmer Interview
I said, do you really want me to be CEO? Or do you just want me to be a figurehead? And he said, no, I want you to be real CEO. That meant something to me. I would probably have said yes, even if he'd said, be a figurehead. But he said what he wanted and probably him saying to himself, hey, I've got to have a transition path. So I said, okay, I'll do that.
Acquired
The Steve Ballmer Interview
Well, he didn't know how to show me a different kind of respect. I didn't know how to show him a different kind of respect. There were things that I thought, you know, where I just disagreed with him and now I expected it to go the other way. I was always happy. I was happy being a number two guy. I was fine. Salute. I don't like the decision.
Acquired
The Steve Ballmer Interview
I either salute or I'd body punch and then salute or body punch and he'd agree with me. Body punch means it's a slower process. And then, you know, we didn't know how to do that. We just didn't know how to do that. And after a year, we started talking again. Basically, our wives were the ones who pushed us back together. We had a very awkward dinner at a health club down the street here.
Acquired
The Steve Ballmer Interview
But we get back together. But we never really got the right mojo together. I mean, Bill was chief software architect and I was very deferential then to sort of product direction from Bill. And he's working on Longhorn at this point because it's post XP. Which was a mistake. Longhorn was a big mistake. I have to take accountability. I was the CEO. Bill's got to take a lot of accountability.
Acquired
The Steve Ballmer Interview
And in the meantime, there was a company here in Seattle called Seattle Computer Products that had a little CPM clone.
Acquired
The Steve Ballmer Interview
And it was the mistake of mistakes. And between the company, you know, Bill and I to the disagreed about whether we should do hardware. That was a big one. Surface was a big disagreement. Phone, big disagreement. HoloLens, big disagreement.
Acquired
The Steve Ballmer Interview
bill was fine with azure the cloud bill and i had agreed on in the 90s right i mean energizer energizer i think energizer could have been bill's idea not mine yeah pretty sure it was bill's idea not mine i executed but bill's idea not mine but you know we never hit it there were places there should have been more contention maybe even during the late 90s i don't know but there were certainly places where there should have been more contention and i i you know
Acquired
The Steve Ballmer Interview
My gut, I was, you know, these are the smart technical guys, Bill, and I'm trusting.
Acquired
The Steve Ballmer Interview
I'm beginning to have a pit in my stomach. But we didn't have the right contention. I mean, was it the, and this is not directed at Bill personally, it's directed at all of us. We kind of had an emperor that had no clothes. Yeah, in the long run. It was the emperor that had no clothes.
Acquired
The Steve Ballmer Interview
And partly it was the centrality of windows and the notion that windows would stay central, therefore people would all want this new stuff. Partly there was sort of a, there's too much change all at one time. We didn't do a new operating system, but we were kind of doing a new operating system. We would probably have been better.
Acquired
The Steve Ballmer Interview
It may not have sold at all, but we probably would have done better just to do it.
Acquired
The Steve Ballmer Interview
Well, no, forget what we called it. Just starting from scratch. Maybe keeping parts of the kernel, but otherwise starting from scratch and throw out all the scruff. Now, I don't think we would have popularized it. And if we'd looked at it that way, we probably wouldn't have built it. But by then, we were a little cocky about Windows, and it was our thing.
Acquired
The Steve Ballmer Interview
So I don't think we had the right grind in our system there in the early 2000s. Between Bill and I, did we make some good decisions? Yeah, we did make a good decision to do Xbox. Were we doing too many things? Yeah, we were doing too many things. I would say there was probably a voraciousness misplaced by Bill and me. Maybe I had to deal with some of the pragmatics of hiring people and stuff.
Acquired
The Steve Ballmer Interview
So I probably didn't push back on it. But I probably felt the pain a little bit more in terms of trying to hire people. And so that's kind of 2000 to 2004. And then by 04, Bill was already sort of talking to me about wanting to be able to go. And then in 06, we announced that he was going to go in 08. I also think we screwed that up. You can't have a long goodbye. Long goodbyes are not helpful.
Acquired
The Steve Ballmer Interview
Yeah, yours was short. Yeah, it was goodbye. I stayed on the board for one more board meeting after I left. That was it. But a long goodbye, then nobody knows their role. I think I did some of my very best work after Bill left. If you ask me, I think I did my best work when I started.
Acquired
The Steve Ballmer Interview
When I was running sales and sort of evolving this enterprise business, some when I ran system software, and then the last six years I was there. That's cloud. That's Surface. That's some of the improvements in Windows. I feel really good about my last six. last six years. Bing, that's when we hire, I think that's when we hire Chi Lu. Chi Lu, yeah.
Acquired
The Steve Ballmer Interview
Chi Lu is, do you guys know the story of Chi Lu at Microsoft? Chi Lu is one of the most pivotal, pivotal things at Microsoft. Okay, why? I knew he was important, but tell us the story. Pivotal, in a way you may not even know. First of all, brilliant guy, great guy. So Chi's talking about leaving Yahoo. He's at Yahoo at the time.
Acquired
The Steve Ballmer Interview
It was pretty good. There was a company that happened to be here in town. Paul, Ellen, and I went down there. And we met with the founder, who later came to work at Microsoft, a guy named Tim Patterson. And we offered him, I think we paid $45,000 or $49,000 for this operating system because we told IBM, no, no, we can... uh, take care of it.
Acquired
The Steve Ballmer Interview
And Chi, I think, went to graduate school with Harry Shum, who had been in Microsoft Research, and Harry was now working on Search, and he was working for Satya, who was running Bing.
Acquired
The Steve Ballmer Interview
And Harry says, Chi's a genius. We've got to hire Chi. I don't know if Chi really wants to work.
Acquired
The Steve Ballmer Interview
Okay, so Satya, me, Harry fly down to California and we meet with Chi Lu. And we talked to Chi and Chi's brilliant. We're learning all this stuff about Chi and Chi leaves the room. God, there's a lot. I don't know who throws the idea out at first. Maybe Satya. We should hire Chi and I should work for him. Whoa. So Harry and Harry was all in. Harry worked for Satya who worked for Chi. No.
Acquired
The Steve Ballmer Interview
We flipped it around. So you flipped the whole reporting structure to hire Chi in the room. After Chi walked, we talked for about 15 minutes. And then Harry calls Chi and said, do you mind coming back? Wow. Wow. I forget where Chi was thinking he'd take his next job. He had a next job in mind. Maybe it was with Baidu. I can't remember. Someplace.
Acquired
The Steve Ballmer Interview
It's the story I just told you. It's what it told me about Satya. I mean, I love Satya. We were giving him more and more responsibilities anyway. But it told me this guy will do the right thing for the company. He'll prioritize that. He doesn't have an ego that gets in the way. And she did great work. I mean, she knew about search. She could bring in a different – The product got a lot better.
Acquired
The Steve Ballmer Interview
He was an old pro at it. And it started cash-flowing billions of dollars eventually. Eventually. I mean, Sach is not an engineer by training. She's an engineer. I mean, he's a PhD in computer science, and he had a lot to bring. Such has been great at managing product development. That's, that's for sure. But, um, you know, she's like that meeting digging the bits and bytes kind of thing.
Acquired
The Steve Ballmer Interview
So, but the meeting is the thing that was important. She was important. Sure. But what Satya and Harry did that day where they just found a guy and said, we'll hire, please, Steve, go hire him as our boss. Yeah. You don't hear that very often. No. What year was that? Let's see, what year would she have come? Oh, it was probably, it was after Yahoo. Yeah, 08, 09.
Acquired
The Steve Ballmer Interview
Six years before Satya became CEO, five years. And that let me then be able to also say, now I can give Satya more responsibility doing something else. Why did you move him to server and tools? I thought it would be great to get, we had Chi. So we could probably move him.
Acquired
The Steve Ballmer Interview
I thought it would be important to give him other experiences to try to get him right to be able to be CEO because he was on a list of three or four internals at that time. He'd been on a list of guys we'd been talking about because we did an annual succession plan thing. Uh, you know, succession plan has two candidates.
Acquired
The Steve Ballmer Interview
It's what happens if you get hit by a bus and what happens if you get served a term, whatever term feels like. And they're different people, right? If you get, Satya gets by bus, if Satya serves another five years, it's probably a different person. Um, no, I think that's true in most, most companies. You got to think about it differently anyway. Uh, so I said, Hey, get them another experience.
Acquired
The Steve Ballmer Interview
You know, he hasn't worked in apps, hasn't worked in server and tools. And it was kind of a good time to sort of switch things around. You know, Bob wound up obviously being super successful because Bob was running server and tools at the time. And I love Bob. Bob's one of my favorite guys I've ever worked with.
Acquired
The Steve Ballmer Interview
There was kind of a famous meeting amongst me and Paul, uh, and Bill and this guy, Kazuhiko Nishi, who ran our kind of affiliate in Japan, uh, where we were talking about this. And there was a lot of, let's just say four letter words thrown around, uh, Scroom's five letters, but you get the drift.
Acquired
The Steve Ballmer Interview
Worked out for everybody. He's done fantastically well, but we moved Satya into that job. Yeah. You know, he was on a great path and Cheese Hire made search as strong or stronger, showed just how right Satya was. We talk about this in basketball. You know, is it all about team first or not? All about team first, which is essential.
Acquired
The Steve Ballmer Interview
And we were able to give him the additional experiences, which were super helpful in terms of him then taking over as CEO.
Acquired
The Steve Ballmer Interview
Um... Two or three things. Number one, the phone was very on my brain. When you said, are you having fun? That was the thing that was eating at me the most was the phone. And I decided we needed to flip the model around. Your episode's pretty good about all that happened, so I'm not going to go through all that. But I knew we had to do hard work. I knew it. There was just no question.
Acquired
The Steve Ballmer Interview
We weren't going to be able to play the search game, the Android slash search game, because we just didn't have the power of monetization that they did. And Apple's Apple, but they're going to be two phones. It's not like there'd only be one phone that was popular in the world. And this is something you guys didn't put in the episode.
Acquired
The Steve Ballmer Interview
I had talked about buying a phone company for years, a number of years, before the Nokia deal. I forget what year it was. I flew to Taiwan and we were looking at buying HTC. They were the biggest Windows Phone OEM at the time. Nokia wasn't signed up. I finally just decided, Terry Meyers and I, we had three, four trips to Taiwan to talk to Peter, look at the organization.
Acquired
The Steve Ballmer Interview
That was kind of the theme. Kaz was kind of a cowboy. He was kind of, yeah. Yeah, Nishi, absolutely a cowboy. So we went, we sold it to him. Half of what we paid for it, we thought, we can do this 10, 20 times. 20 times 21,000, 400,000 against 50,000 we paid for it.
Acquired
The Steve Ballmer Interview
And I just decided it would be too tough to buy a Taiwanese company. That it would be, I would worry too much about the integration. I liked Peter Cho who ran HDC. I don't know if that name means anything to you guys. Yeah, of course. But I'd been looking at that thing for two or three years maybe before.
Acquired
The Steve Ballmer Interview
And, you know, Bill and I had all continued to have all the tension we had about anything that had hardware in it. Uh, so, you know, it's not like our relationship was calm and it's, it's clear it had, it had always been bumpy. I mean, even back to the beginning, I almost quit after four weeks because we were in it. Five weeks, maybe. So it's not like it had ever been linear.
Acquired
The Steve Ballmer Interview
We had another big fight a year after about financial stuff. So it had never been linear. It had been, it had helped build Microsoft, but that didn't mean it had always been easy for him or me. So the hardware thing was exacerbating our relationship. I thought we really needed to do a phone. And then the board said, no, we don't want to do a phone. And I was very transparent with everybody.
Acquired
The Steve Ballmer Interview
Okay, here's. You know, we brought the manager. You got this right. We brought the management team in. And I don't know if it was more wanted to buy or didn't want. But I let everybody speak. I mean, it's a big decision to be in the phone hardware business. And then the process from we do the presentation. And the process from there to the time the board says no, I didn't find very respectful.
Acquired
The Steve Ballmer Interview
Right. The board didn't ask me to leave. The board, I just didn't find the process very respectful. And I probably won't go into the detail of that. And a lot of it has to do, again, with my relationship with Bill. And look, I knew Bill didn't love the idea. And I was willing to sort of accept whatever the board decided. I was. No question about that. But the process wasn't very good.
Acquired
The Steve Ballmer Interview
And I was not happy with the process. But they wanted me to stay. I just decided two things. If we're not going to buy phones, that's kind of my best shot. for a consumer future for the company. Right now, that's my best shot. And I tried to fire the Yahoo shot, the phone shot. Those were my two things, remember, mobile and search. And so I said, look, this might be the right time.
Acquired
The Steve Ballmer Interview
We can't make my play here. Not out of pique. It's just, hey, I thought about this in advance and said, look, if it doesn't work, it doesn't work. If the board doesn't want to do it, fine. And so I said, this is a good time. It's also a good time because the cloud's just coming on. And I'm saying to myself, look, we're going to have to build new capabilities.
Acquired
The Steve Ballmer Interview
Even the way we're moving to a gross margin, to a non... Something below 100% gross margin business. We have whole new capabilities we need to build up around that. I even think of it through the lens of the accounting system. How do you... We have these revenue and cost reports. They have to change in the world of the cloud because you really have to get tight on gross margin, not on revenue.
Acquired
The Steve Ballmer Interview
Revenue, I don't really pay much attention to Microsoft's revenue. I pay attention to the gross margin growth. These days, you're saying? Those days. When I said the move to the cloud, I used to say this to analysts. You should expect us. You want us to have lower gross margins going forward, but we'll make it up in volume. Right? I mean, that is the whole proposition of the cloud.
Acquired
The Steve Ballmer Interview
Lower gross margins. It's like Walmart's an okay company, even though that margin's whatever, a percent and a half, 2%. You just got to make it up in volume. So I knew it was a good time to let the new person sort of build from what we had to sort of the next generation of all the machinery that would have to happen to make cloud happen. Phone was...
Acquired
The Steve Ballmer Interview
I never lost my desire to be an end-user company. I bemoan the fact that I couldn't keep us focused on being an end-user company slash consumer. It killed me. And you don't just, I want to be a consumer company. No, you've got to find the locomotive, not just a bunch of cabooses. At the end of the day, Zune was a caboose. A lot of things we invested in were cabooses.
Acquired
The Steve Ballmer Interview
We had to find the locomotive, and there were only two possible locomotives that made any sense. I didn't have a play that I thought was going to break through anytime soon in search. Mobile was going to be really hard, but I knew in my heart of hearts that without physical hardware, we weren't going to break through there either because of search. Board said, no. I said, okay.
Acquired
The Steve Ballmer Interview
No, we did not. Remember, the key thing was we didn't charge for the operating system on an ongoing basis. We charged for it one time. If you got a new version, we charged another time. We did the same thing for BASIC and everything else because... At the time, you could think we were like a substitute for an R&D department, which means we were fixed price. It was only...
Acquired
The Steve Ballmer Interview
Bill and I are, it's not really the board being disrespectful. Like maybe it is, but it's mostly me and Bill. We're grinding, grinding, and that's never fun when we grind. And I said, okay, we're grinding. I know it's frustrating for him. It's frustrating for me. We're grinding. Here goes my idea. And oh, by the way, this is a great juncture point. So I said, okay, I'll pass.
Acquired
The Steve Ballmer Interview
I don't really know. I mean, I'm not sure they really understood, but I had told them. About, you know, we had a deep partnership with Nokia and I'm not really sure maybe guys really understood. I hadn't done a good job explaining how close the partnership was. So there was really no go back to Nokia and see if we can have a bigger partnership.
Acquired
The Steve Ballmer Interview
The problem with the partnership with Nokia is they didn't have the money to invest in marketing. We did. We did. They didn't have the market to go – they did not have the ability to go deep pockets. We did.
Acquired
The Steve Ballmer Interview
But if we didn't have the monetization capability back through the phone, we weren't going to be able to make it work as a partnership because we had to put in the cash and therefore we had to get the return and it wasn't going to work. And it reached a point where – You had to buy the company or just cut bait totally on the whole phone thing. Yeah, just because the math wouldn't work.
Acquired
The Steve Ballmer Interview
What we had to do to be successful was beyond their financial capacity. But if we were going to do what it took to be successful, we couldn't do it on like $4.
Acquired
The Steve Ballmer Interview
No, not. I leave. And then what does it mean to emotionally detach? Because if you're not there, you have to emotionally detach. You can't say – because you can't control anything anymore. So it's hard. You don't want to stay quite that emotionally attached because it's like, oh, I got to get back in and fix everything. But I said, I'm going to be the best investor.
Acquired
The Steve Ballmer Interview
I went to one shareholder meeting and I was kind of a dick in my opinion. I mean, literally one of the shareholder shareholder meetings. And I just, yeah, I was too emotionally attached. And so it took me about a year to say, I just have to emotionally detach. So it took some work, but I kind of was able to get there. But I'm still loyal. Didn't want to sell.
Acquired
The Steve Ballmer Interview
There's one, then we get our philanthropy started. And then I do need to do something because we do need some of the asset value to give away. So I went through a bit where we gave some away, i.e. we put it into our donor advised fund. And I also sold a little bit at the time. And I was thinking- This is like 2015-ish? Yeah. Yeah, it might have been even 16, something like that.
Acquired
The Steve Ballmer Interview
And then, because our philanthropy was just ramping up. I mean, kind of even giving away money, but the dollar value was ramping up. And then I said, maybe I should just sell it all. Hmm. Full emotional detachment. Wow. Let's do full emotional detachment. Because look, it was my baby. It's my baby. I mean, I'm not a founder, but I think of myself as a founder. I was there so early.
Acquired
The Steve Ballmer Interview
I don't know, four or five years later that we actually switched to licensing per unit as opposed to just fixed fee. Here it is. Pay us once and we're done.
Acquired
The Steve Ballmer Interview
And I hired basically everybody. And everybody was a senior leader. I'd recruited. You know, it's not true anymore. Now things have changed. There's probably only 10% of the people who are there now were there when I was there or something. Higher at the senior levels. I mean, I can go through the math on why that's true.
Acquired
The Steve Ballmer Interview
My only thought process was emotional detachment. I was wrestling. You're ready to hit the button. You're ready to hit the sell button. I was wrestling. I was wrestling. Yeah.
Acquired
The Steve Ballmer Interview
And then the lady who works here, ex-Microsofty, who works here in finance, who's the woman who sort of really charts what's going on financially at Microsoft, she and her boss, who's another ex-Microsofty who used to work with me most closely on the financial stuff, but she says, you can't sell. You can't sell. This is going to be worth a lot more. You can't sell. You can't.
Acquired
The Steve Ballmer Interview
So she effectively made a Microsoft stock pick. She made us, and she was recommending, she had some, she has loyalty too. It's not like, you know, we have a bunch of Microsofties here and it's not like they lack loyalty either, but it was a little bit loyalty and a lot a pick. And I, I said, look, my loyalty is, trumps my emotional attachment.
Acquired
The Steve Ballmer Interview
I can get through my emotional attachment, but my loyalty, and look, I think of the thing as, I think of the thing as like a two-headed hydra. I thought about this the whole way. Things could go to nothing or things could explode. And that's partly why we tamped down the stock because we always saw the possibility for either of two radically different outcomes.
Acquired
The Steve Ballmer Interview
And then finally I say, look, I don't really, I'm not going to sweat whether we're going to get the downside or the upside.
Acquired
The Steve Ballmer Interview
I had enough money off the table. It's not like my family's going to... You could still run one of the best philanthropies of all time, even if the stock... We could be great in our... I hear you want to... No, I mean, Connie would have been okay with it. I mean, she finds it difficult to give away as much money as we have. So she wouldn't have mind a smaller problem to start with.
Acquired
The Steve Ballmer Interview
Yeah, and one other thing. Yeah, Microsoft hold, but you may be missing one thing on the Microsoft hold that's important, and that's the size of the dividend check. Ah. Between Microsoft and the other stuff I own, the dividend checks are pretty close to what we give away.
Acquired
The Steve Ballmer Interview
So you can fund the whole philanthropy without selling additional shares. Well, there's two things that are going on. One, the dividend checks are pretty good. And number two, I do have stuff that's not in Microsoft.
Acquired
The Steve Ballmer Interview
Clippers slash Arena index funds. I have one business I invested in with a guy who I... went to college with, who worked at Microsoft. It's called Stagwell Media. It's a marketing services company. You'd call it a modern-day ad agency, but it's not really an ad agency. A guy named Mark Penn. So I do have some money that's not in index funds, but mostly I'm in index funds.
Acquired
The Steve Ballmer Interview
Yeah, but if you look at the guy, I mean, look, I would say you probably would find that Zuckerberg is pretty concentrated. I don't know this, but I'm going to guess you would find, I don't know about Ellison, but obviously some of the guys who own more privately held businesses, pretty concentrated.
Acquired
The Steve Ballmer Interview
But IBM wanted this. Okay. IBM, they were experimenting with a different approach. They'd said, look, instead of us building everything all custom, we want to use some industry standard parts, components, because that'll let us be more agile, et cetera. So they didn't come in. loathe to any of this. They knew that was our business. They know that was digital research's business.
Acquired
The Steve Ballmer Interview
Who else? Yeah. The Google guys, I imagine, are concentrated, but I don't know that. I mean, I can't speak for anybody else. Obviously, Bloomberg is concentrated.
Acquired
The Steve Ballmer Interview
And look, if you sell it, you're just going to pay capital gains taxes. So if you're really just being a financial monster about it, you've got to decide, will Microsoft underperform the index by enough to offset the capital gains taxes? I don't need the money. I got plenty to live on without selling anything. That's number one. Financially, where's that money going to go?
Acquired
The Steve Ballmer Interview
Some will go to my kids, but most of it's going to go to the government or to philanthropy. So why would I sell so we have less to give to philanthropy someday? Unless I really think Microsoft's going to underperform the market by essentially the capital gains rate.
Acquired
The Steve Ballmer Interview
I got this question once. I'm a member of a country club in LA. And one of the things country clubs do sometimes is they'll do Q&A with members to entertain. And I did a Q&A with a friend of mine at the club who'd been president of the club, actually. And also kind of knows Charlie Munger pretty well. And Charlie Munger's there as well. And Charlie Munger comes up to him beforehand and to me.
Acquired
The Steve Ballmer Interview
As only Charlie can. So you did a Charlie episode. So we do our panel thing, the two of us. And then Q&A, Charlie gets up to the mic. He's not moving super well, but he gets up to the mic. And, oh, Charlie, we can call on you. And Charlie says, Steve! Steve! You know, I'm wondering why you held on to your Microsoft stock when your partners over there didn't. I know you're not that smart.
Acquired
The Steve Ballmer Interview
I don't know why Paul and Bill didn't hang on. I don't know. You'd have to ask them. But for me, it's sort of a from the heart kind of thing. And I think it'd be fine. It's not going to screw anything up financially. I mean, what's the worst thing that happens? Microsoft goes to zero, probably not. But even if Microsoft goes to zero, me and my family, we can live, we can give away money.
Acquired
The Steve Ballmer Interview
It's not going to go to zero. And I'm okay either way. Any way it goes, I'm fine.
Acquired
The Steve Ballmer Interview
I paid them off the day I bought them. That's not true. I didn't want to sell stocks at the time. So I borrowed some money, which is long paid off. Intuit Dome, we borrowed some money against Intuit Dome. So I don't owe any money on it. Oh, that's not true. I have some margin debt. that I used to, but again, it's just a timing thing. I didn't want to sell stock.
Acquired
The Steve Ballmer Interview
So took some margin debt, which as dividends come in, I'm reducing the margin debt. But the building itself has debt on it. Why? Because to sell the building, let's say something was to happen to me and Connie, my wife had to sell it. it obviously has a lower value. The buyer would have to come up with less cash because it has debt on it. So call it worth X billion.
Acquired
The Steve Ballmer Interview
And they wanted to use an Intel part versus their own proprietary part. They didn't ask Intel to do them a custom part either. The notion was, we'll move fast. We'll get away from the IBM bureaucracy by taking this approach. So I wouldn't say that was the hardest convincing, if you will, in the story.
Acquired
The Steve Ballmer Interview
And it's got Y billion on debt on it. You're only selling it for X minus Y. You're not selling it for X, meaning the universe of buyers is bigger because it has debt on it. And oh, by the way, I happen to get the debt at a very good time at a very good rate. So it's sort of a double value to a future buyer. So that's the reason we put debt on the building.
Acquired
The Steve Ballmer Interview
And I will also tell you, unlike Microsoft, it cannot go to zero.
Acquired
The Steve Ballmer Interview
Not a chance. It is far more secure than Microsoft. Why? Not making more of them. They're not making more of them. And as long as anybody in the world is getting richer, the buyer pool will only go up. And people don't buy them for their earnings. I wish we had more earnings. But at the end of the day, people are buying them because almost more like a piece of art. I mean, not everybody.
Acquired
The Steve Ballmer Interview
People don't like negative cash flow, blah, blah, blah. But at the end of the day, and I have the Clippers, we have the best market in the world. I mean, you don't want to own a basketball team other than maybe Miami. I mean, the place players want to play is LA. And if you look at buyers, if you're a buyer and you – where do you want to go if you don't live in LA? Where do you want to go?
Acquired
The Steve Ballmer Interview
Well, you want to go to LA or you want to go to Miami. You don't want to go to New York in the wintertime. And if you're a foreign buyer, potentially – You want to go to LA. So that asset value, I mean, we should get on to something other than asset value. And I'm not selling the thing. My estate may sell it. I don't know what the Connie and the kids will want.
Acquired
The Steve Ballmer Interview
But at the end of the day, that one does not have a lot of volatility.
Acquired
The Steve Ballmer Interview
I'll give you two parts of the answer. First is how I relate to that business versus the businesses I've known. Number one, there are more similarities than I ever thought. I mean, we do version upgrades just like you do. What's a version upgrade? You do major version upgrades over the summer. That's the draft and free agency and trades.
Acquired
The Steve Ballmer Interview
And you do a minor version upgrade at the time of the trade deadline. So it's very similar. You've got a six-month ship cycle. It's your service pack. You have a major and minor release every year.
Acquired
The Steve Ballmer Interview
And oh, by the way, you know how people like agile now development? Guess what? That's called changing the game plan. The coaches are always modifying in that sense. So it's a little bit similar. I never thought about that. The business is just like Microsoft. We sell both advertising and that's called sponsorship. And we sell tickets. Software licenses. Oh, no, that's like software licenses.
Acquired
The Steve Ballmer Interview
And we have an OEM business. That's called broadcast revenue. It's 100%. It actually is remarkably similar. I mean, just in terms of business modeling. We do have a union. That's very different. What that means in terms of the complexity through the collective bargaining agreement, it also covers things like what's max salary, what trades can you make, all that. Very different.
Acquired
The Steve Ballmer Interview
You actually are kind of, you really are business partners with your competitors. That's different. I mean, you actually get together and talk to them. I never did that when I was at Microsoft. But you get together and you talk to them, but you're trying to compete.
Acquired
The Steve Ballmer Interview
If you have somebody who wants to advance through their career, oftentimes the best way for them to advance, they have to go to another team. We have a president of basketball. It's not an open job. And I don't plan for it to be an open job. I don't want to lose anybody. A lot of the career moves people make would be to other organizations.
Acquired
The Steve Ballmer Interview
We don't like that, but we want to have the talent everybody loves. Right. At Microsoft, your domain is always growing, and so there's always— The domain is growing, or number of people. You can move people. You're an engineer. You're bored. You've worked on X. We'll move you to work on a different product, for example. It's different, the way you think about people, primarily because of the union.
Acquired
The Steve Ballmer Interview
But also, there's only 30 head coaching jobs. There just are. So if somebody wants to be a head coach and they're not our head coach, they have to find a job someplace else. Again, not what we want. But the reality is we don't want people held back in their career. It's not like Microsoft where I felt like I could always find a job that somebody should want. So that's different.
Acquired
The Steve Ballmer Interview
I'll give you another one to think about. Business likes to say, oh, we're accountable, we're agile, we're this, we're that. Sports is so much more accountable than business. It's like a joke. I'm being a bit extreme for fun. But every 24 seconds, you get a report card. Basketball, shot clock. Every 48 minutes.
Acquired
The Steve Ballmer Interview
That game is on. Your loss come for the rest of the season. You cannot dig yourself out of that one game loss hole. You can't. It's gone.
Acquired
The Steve Ballmer Interview
Now let me get to that. Your customers know everything you know.
Acquired
The Steve Ballmer Interview
No. Every statistic we have, our customers have. You want to know how many miles James Harden ran last game? Comes out of the statistical systems. You can find that out. If you want to know how many pick and rolls we ran of a certain type and how they were gardened and how we did scoring against them, don't worry. You can read about it.
Acquired
The Steve Ballmer Interview
You want to look and see what the dynamics look like on the sidelines? You can just sit there and watch our players and say, oh, I don't know everything. I don't know what they're saying, but I can see their body language. Oh, so-and-so seemed really charged up. Oh, that's great. So-and-so cheers for their teammates. So-and-so seemed down. There's almost nothing. I mean, we get to watch practice.
Acquired
The Steve Ballmer Interview
Our fans don't. But the level of accountability is so high. The speed is high. Think of teamwork. Teamwork, man. It's all on display. Not only is it on display, but you absolutely know you need teamwork. One star can't bail you out. You may have one star, but then the pieces have to fit around the star. It's just kind of the way it is.
Acquired
The Steve Ballmer Interview
You can't, you know how businesses, you say, okay, everybody wants to talk about teamwork. And in a lot of places that would mean, hey, Ben, you know, I don't know, we could work better on this. And then Ben can say, your team's doing things wrong. And then we can get back together and talk a little more. And then a month later, we can talk about it some more. Yeah.
Acquired
The Steve Ballmer Interview
Probably you've seen this in some organizations. And then at some point we'll talk about it as if it were a great collaboration. Right. Between our two teams. And you know what has to happen in our business? Every minute.
Acquired
The Steve Ballmer Interview
You have to actually say it, pass the ball. Yeah. Or, you know, hey, this isn't working. You got to do X. You got to give real-time feedback. You can't lollygag or, ah, well, you know, let's rub each other's belly. No, if you want that team to be better, you have to hold one another accountable, not just the coach. The best teams, the players hold each other accountable.
Acquired
The Steve Ballmer Interview
And not just the best player holds everybody else accountable, but... The guys who are not stars have to be able to hold, everybody's got to hold everybody accountable, which means, really means, give the feedback. In Microsoft, we got rid of the value called teamwork. I didn't want that one. I said open and respectful and dedicated to making others better.
Acquired
The Steve Ballmer Interview
They were selling a lot of computers and making profit also. They would have been making more profit than we were at the time, just the way pricing worked. There was a little twisty in here, though, I should throw at you if you're curious.
Acquired
The Steve Ballmer Interview
Because teamwork could sound like a treat everybody, nice, nice, open, yes. Got to say what's on your mind. Respectful, yes. But number one, dedicated to making each other better, which I think is what the purpose of teamwork is, as opposed to the word teamwork.
Acquired
The Steve Ballmer Interview
Exactly. And, and, you know, I think back to the old HP team, you know, I'm okay. You're okay. Let's all be nice to each other. And, you know, there's a little bit of that. That's kind of come back into the general narrative of culture today. And, you know, generations, not much younger than me, but at the end of the day, if you want to succeed, you're right. The goal is succeeding. Yeah.
Acquired
The Steve Ballmer Interview
And getting people to play well together. And in an NBA team, you're going to know, right? In two and a half hours or so, two hours, you're going to know.
Acquired
The Steve Ballmer Interview
Extreme accountability, extreme teamwork. I learned some things that would have been very helpful. For me to understand at Microsoft. I'll give you another one. Reference checking. Everybody does reference checking, right? How good is the reference checking in most businesses?
Acquired
The Steve Ballmer Interview
Or you call somebody who probably doesn't feel like they can give you an honest answer because they don't want to get sued or blah, blah, blah. Basketball? You should see the amount of reference material we have on a guy before we draft him. I mean, people have talked to their old coaches. They've talked to their teammates. Right. And it's not just – I mean, that's the kind of scouts do.
Acquired
The Steve Ballmer Interview
These things had something called the BIOS, basic input output system, which was the lowest, lowest layer of firmware, sort of first level software built into the hardware. And IBM had its own BIOS. And some applications became BIOS dependent. And so then the question is, who was going to do an IBM compatible BIOS? We weren't going to get into that game. We didn't want to have that.
Acquired
The Steve Ballmer Interview
They've watched them play. They've been to practices. They kind of know what they've – Talk to references about work ethic.
Acquired
The Steve Ballmer Interview
They have a body of work. You can see the body of work. You may know what happens behind the scenes. You may not.
Acquired
The Steve Ballmer Interview
And you're dealing with one other thing. My wife reminds me. Boys' brains don't fully develop until they're, what, 25? And we're drafting guys who are 19, 20, 21? Yeah. So you're also having to say, by everything I know, what do I project that guy looks like as they get into their – You could say you enter your prime around 27. What do you start looking at, though?
Acquired
The Steve Ballmer Interview
You're going to look pretty good or not by 23, 24, 25. So you have to sort of have a progression of what you think happens to the young man when you draft him. So reference checking, much bigger deal, I found. And people say, oh, well, it's simple. It's sports. The strategy decks, I get. 35 PowerPoints, 40 PowerPoints, easily to go through, okay, here's our strategies. What about this? What if?
Acquired
The Steve Ballmer Interview
What about this? What do we do here? We have a PhD physicist who is a key part of our analytics group, focuses on our analytics systems. It's not like this stuff's not complicated. It is.
Acquired
The Steve Ballmer Interview
There are two ways to use analytics. One is for game planning. Literally, what does this tell us about the best way to guard Anthony Edwards in this situation or these situations? Very helpful for that. I'd say the data is probably table stakes, honestly. The way you use it, not so much. Do you ask the right questions? Maybe not. Does coach really understand and embrace?
Acquired
The Steve Ballmer Interview
Are the analytics people really able to mind meld with coach so that coaches get the insights they can for game planning? The second is, what about for drafting and trading? Analytics are actually a little less important in that instance because they don't really tell you how if you mix Charlie with Harry, it's different than if you mix Charlie with Bobby.
Acquired
The Steve Ballmer Interview
And Charlie and Harry haven't played together before. So it's a little different. They are helpful. We have analytics, for example, on all the kids we're going to draft, less valuable than on pros because you're playing against a different level of competition. Do people have differential data? Not much. I mean, the same cameras in the ceiling are recording the same games.
Acquired
The Steve Ballmer Interview
Most of the analytics data now gets processed through standard, you know, sort of software packages that get licensed to everybody. So there's a company called Hawkeye Second Spectrum. And basically, you know, they've built machine learning layers on top of the raw motion data, et cetera. So every team winds up with the same tools. It doesn't mean you don't need smart guys.
Acquired
The Steve Ballmer Interview
intellectual property, other arguments, but there were people then. Compaq ultimately became the big company. Compaq became the big company. I don't remember whether they wrote their own IBM-compatible BIOS, but they were the first one to be IBM-compatible. There were plenty of people who ran MS-DOS who were actually not IBM-compatible because they didn't do a compatible BIOS.
Acquired
The Steve Ballmer Interview
A different data source than other people have? No, I don't think so at all. It's the things people emphasize in terms of what they look like, look at could be different, I think, very much by teams. There are teams at the draft who just have you take a psychological test. You get to interview a set of kids and they might just have you take a test. Other teams, it's all about the interview.
Acquired
The Steve Ballmer Interview
Some people, I don't know if they have them see psychologists. I don't know. But people will use different techniques to try to do some of that. It's a little different than analytics, but it gives you the sense of how do you assess what's important.
Acquired
The Steve Ballmer Interview
And I've been involved in, you know, I'll say the visioning, and I call myself a visionary, but what should this product look like? And particularly those, you know, a number of them, both windows, but also certainly on the backend products, backend meaning they're not customer visible. But I would say Intuitome is probably the product for which I have the clearest vision. Yeah.
Acquired
The Steve Ballmer Interview
It evolved some because we went and looked at a bunch of other arenas, but I had a point of view. I know what user I wanted to make happy.
Acquired
The Steve Ballmer Interview
I wanted to make Intuit Dome the best place for the hardcore basketball fan. And particularly the hardcore Clippers fan, right? Sure, sure, sure, of course, because we're the only team that plays there.