Microsoft Volume II

Transcript from https://podmenti.com/t/73bda65f67cf1b04

I'm a little hoarse today, so hopefully we don't have to do a lot of talking.
Good luck with that.
Alright, let's do this.
Is it you, is it you, is it you Who got
No
Is it you, is it you, is it you?
Me down
Straight!
Another story on the way
Welcome to Season 14, Episode 6, the Season Finale of Acquired.
The podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.
Well, listeners, here we are.
Microsoft Volume Two at long last.
After the ancient history of volume one, we now get to the stuff that you grew up with.
The internet.
Windows XP.
Xbox.
The browser search.
and mobile.
And in this era, Microsoft had a lot of the right ideas.
with a lot of the wrong timing and execution on everything from the Zune to Bing.
But
Despite that.
From 1995, where we start our story, to 2014, where we will end this episode, Microsoft grew their annual revenue from$6 billion.
to eighty billion.
They became a phenomenally successful company and really cracked the code on selling enterprise software.
I began the research thinking
Our part one episode would be about the rise, and this episode would be about the fall.
Cultural problems, failed consumer products, antitrust.
But it's really not that straightforward.
And after spending months unpacking it all.
I
Actually don't think that's the right framing anyway.
And on Microsoft's nineteen ninety eight antitrust suit against the Department of Justice,
Everyone knows of this case.
But most people really have no idea what actually happened.
Did Microsoft lose?
Well, not really.
But the answer is nuanced.
Finally today.
We dive into it all.
This show is not investment advice. David and I may have investments in the companies that we discuss, and so do all of you if you own index funds.
And this show is for informational and entertainment.
Purposes.
Only.
Okay, David, the middle chapter of Microsoft.
The middle chapter.
Indeed. And
Boy, is there a lot to discuss.
So
Ben, you covered this in your intro, but
I think everybody kinda knows.
the narrative about what happened to Microsoft between call it
nineteen eighty five and twenty fourteen when Satya took over.
There's even a quote from Satya himself.
In the very first paragraph of the book
That he wrote in twenty seventeen called Hit
Refresh.
Which I mean that title kinda gives it away right there.
He writes, I joined Microsoft in nineteen ninety two.
Because I wanted to work for a company filled with people who believed they were on a mission to change the world.
But after years of outdistancing all our competitors,
Something was changing, and not for the better.
Innovation was being replaced by bureaucracy.
Teamwork was being replaced by internal politics and we were falling.
Behind the five.
And then he references the
famous gun pointing org chart by uh cartoonist and software engineer Manu Corned it.
probably listeners many of you are familiar with, we will link to that in the show notes.
And you could sum this kinda whole narrative up as Microsoft was winning.
And then it sucked for a long time and then it
is now winning again and that's all thanks to Satya.
And the question we sort of asked as we were doing our research was
Is this true?
And what we ended up learning from the literally dozens and dozens of people that we talked to surprised us a lot, and I think we'll probably surprise listeners too. Yeah, David, you're burying the lead here a little bit. We talked to probably four to five times as many people as the next
highest
Episode.
I'm looking at our little thank you list. It's like
twenty something people long.
All right.
So on the last episode we left off with the Ben, as you put it, unabashed celebration of software.
That was the Windows ninety five consumer launch in August of nineteen ninety five.
And
It was
Perfect.
It had everything.
At Jay Leno.
At the Rolling Stones.
It had the start button.
Or
Actually it had
Almost everything.
There was one
Thing.
That was missing from Windows ninety five at launch.
That if you were a
consumer user of technology of
software of products of
operating systems maybe you kinda wanted to have.
And that was an internet
Browser.
Yes. It's so funny'cause
We sort of intentionally left all the internet components out of Windows ninety five.
in the previous episode because once you start talking about the internet, you're really talking about the next chapter of Microsoft and you can't help but dive into it all.
But in retrospect.
The thing that mattered about Windows ninety five
all these years later is that's the platform that everyone started using the internet on.
And everything that we talked about in the last episode, yeah, it's all important, but it's not nearly as important as it being the internet operating system.
So how did this come to be?
At the time, things were changing so fast. There was this phrase called internet time.
Things happened in weeks versus years.
But if you rewind
Just a little bit back to like ninety two.
Ninety three, ninety four, even into early ninety five.
Going online for consumers.
meant using a service like CompuServe or Prodigy or of course the big one.
A O L.
And
These services were not what we think of today as the internet, but they were more like
walled gardens with proprietary services
That were bundled with access via
Dial up modems.
Yeah, for consumers it was
Kind of a similar experience. You could get content on your computer.
But
the main difference was how to put content on that network. It wasn't like anyone could just plug in a server and then boom, you have a website. It was like you had to have some negotiating power and know someone at AOL to go do a deal.
To get your
content on their platform.
Yep. I think the best way to sum all this up is
Do you know who owned
the CompuServe service at the time.
No, but I know it was a Columbus based company.
Oh, interesting. It was owned by H and R Block.
The tax prep.
Yeah. Whoa.
Crazy. That's what online was like.
Just a few years or months before the Windows ninety five launch.
So Microsoft, of course, as you know, inheritor of the earth and all things technology, they want to play in this online services arena too.
So in nineteen ninety three
They start sniffing around AOL and see if maybe Microsoft could acquire AOL.
Steve Case, the founder of AOL, isn't interested in selling.
But there's this whole thing where Paul Allen goes off by himself and he buys a large steak and that creates all sorts of headaches because Microsoft is like, Well, if we can't buy them, we're gonna compete with them. So they start
An internal project called Project Marvel to build their own online service.
That becomes MSN.
So there's a little sleight of hand that you just did there. You said it becomes MSN.
Marvel.
When it initially
Was conceived.
was a proprietary online service.
Eventually when that completely failed, which you're about to get to.
They repurpose the name MSN for their internet based media property.
Uh
Complete shift in strategy.
At the same time, many people in technology, especially at Microsoft itself.
And lots and lots of investors on Wall Street.
believe that these walled garden online services were just
Temporary.
They were just a bridge to a more utopian networked consumer culture and economy.
That they called the information
Super highway.
And the specific vision of how this information super highway utopia was gonna work.
Well.
Interactive television.
All mediated by the pay television providers. So like the cable and satellite companies out there, you know, the Comcast, the charters, the Time Warner cables, the direct TVs on the satellite side.
These were gonna be
The big consumer.
technology companies. And this wasn't crazy. This actually made a ton of sense because
Television and in particular cable television at the time was the primary existing consumer medium.
The internet was not a thing.
Well think about the number of things required to create
some sort of networked entertainment.
Interactive thing.
You would need screens.
You would need some way to control those screens to create a feedback mechanism. You would need content.
You would need infrastructure connecting people's homes.
All of those already existed by the cable companies and their endpoints, the televisions.
And if you
pitched me on the idea that
Actually, everyone's gonna go buy a brand new device, like a PC, like a computer, and we're gonna have a different
set of wires that actually bring
all of that to the home, or maybe we'll repurpose some of the same wires, but gosh, we need to like bring in new networking equipment everywhere along the way.
Oh, and there's gonna be completely different content companies that figure out how to create the content for their it's like all of that falls flat. Of course you're gonna use all the existing infrastructure and content. You're not gonna bank on standing it all up new from whole cloth.
Totally. And Microsoft
just like they had done in entering the PC software market in partnership with IBM.
They're gonna partner with these big consumer
Cable companies.
And so starting in the summer of nineteen ninety three, there are all these rumors flying around that Microsoft is working on a big J V with the cable companies dubbed
Cable soft. Yep. You can't make this up. And the idea is that, Ben, like you're saying, the cable companies will control the pipes and the customer relationships and probably a lot of the content.
Microsoft will write the software
Both for the set top boxes and consumers' homes.
And for the servers on the back end.
And the software project is codenamed Tiger.
And then there's a third company.
A third piece of this sort of unholy alliance for the information superhighway.
And that was a company called Silicon Graphics.
That would make
Oh
The hardware.
Cable companies aren't gonna make the hardware themselves. You're gonna need pretty powerful hardware here, both at the home and on the service side. And SGI.
as Silicon Graphics was referred to. It was legendary.
They are the graphics company that enabled the CGI in Jurassic Park.
And of course their founder and chairman was legendary in Silicon Valley.
One. Jim.
Clark.
Put a pin in that name.
So pinned.
So Wall Street, of course, like nuts over all this, you know, the hype is out of control. It's a trillion dollar opportunity. There's all these spy shots of Bill meeting with John Malone at T CI and Gerald Levin at Time Warner and
Bill starts spending time with Michael Ovitz talking about how Microsoft can get in on the content game too, either through the MSN project or through other things they're gonna do. This leads to MSNBC, the cable network.
people are probably familiar with.
Well, this is so interesting because we're talking about this general idea of interactive computing involving other people. And Microsoft so far has two initiatives, Marvel.
and the information superhighway, neither of which are the internet or the web browser.
Yes, correct.
You're already getting this picture of Microsoft's business strategy, which is until we know exactly what the future looks like, start placing bets that approximate so that we're sort of in the mix, even though we don't know exactly what the future is.
Which, as we talked about in part one, had always worked so well for the company.
Yeah.
And it's gonna work really well here too.
So Bill actually decides at this point that he needs to write a book.
For the public.
To evangelize
This information super highway thing.
Kind of embarrassingly given how long the book world takes to, you know, actually publish a book.
It doesn't come out until November nineteen ninety five.
After the Netscape IPO has already happened and Windows ninety five has shipped.
But in this book called The Road Ahead, I have two copies of it here on my desk.
The hardcover copy.
And the soft cover copy, which was revised and came out in nineteen ninety six.
The hardcover copy.
Is
All about the information super highway, or as Bill likes to call it.
Information at your fingertips.
And then when the soft cover version comes out later.
Basically they control F
Every instance of Information Superhighway and replaced it with
The internet and the web browser.
Yeah, this is one of these moments on an acquired episode where we have just a delightfully concrete
illustration of
This year
It was unclear. The next year it was extremely clear. And David, look up in the indexes of both of those books the number of references to the internet.
In the hard cover version
There are three
portions of the book where it is discussed.
In the soft cover version.
The index for the internet takes up an entire page.
There needs to be an index for all the sub indexes of the internet in the soft cover version. Amazing.
So
The hardcover version is the state of play.
In January nineteen ninety four.
When a young
Windows networking engineer named James Allard, or Jay, as he goes by.
Writes a memo.
To Bill Gates and to the senior leadership.
at Microsoft entitled Windows.
The next
Killer application for the internet.
And in this memo.
He points to a
New piece of software.
Coming out of the National Center for Supercomputing Applications at the University of Illinois.
That is spreading like wildfire.
And appears to be written by some like
Kid programmer there.
By the name of Mark Andreessen.
In his free time, it's not even like his real job.
Yes.
And it is called mosaic.
And in this memo, Jay argues that
The internet and this software instantiation of it in the mosaic web browser.
kinda looks like it is going to become an exponential phenomenon given the rate at which it is growing.
And that it represents
An enormous opportunity for Microsoft to quote
Embrace
And extended
The internet.

mantra. And the exact words he uses are embrace, extend, innovate.
Yeah.
Popular.
Press and public opinion of Microsoft that would of course get changed to embrace, extend.
Extinguish.
By their effectively competitors and political enemies.
But the embrace and extend thing is actually a
Brilliant business strategy. There's already a whole bunch of people who love this thing. We want to embrace that new behavior. There's sort of no product market fit risk.
'Cause we can clearly already see it happening. People want to use this browser thing to access hypertext on the internet.
We're gonna embrace that and we're gonna figure out
a way to work it into our business model to extend the functionality in a way that we can make money on.
Right. The business model is we sell Windows through OEMs and to businesses and the like and to consumers.
And we can just bake this into w honestly.
It's pretty incredible that Jay lays out
the whole winning strategy for Microsoft and the internet.
Here in January nineteen ninety four.
This is a few months before Netscape is even founded.
Yes, yeah, Netscape as a company does not exist yet. There's just the mosaic web browser at the University of Illinois.
Yep.
Then
And this sort of exponential growth theme.
The very next month, in February nineteen ninety four.
Bill's technical assistant slash shadow, which is a
legendary role at Microsoft now exists at Amazon too.
I mean if Steven Sinovsky
goes on a recruiting trip to his alma mater at Cornell University.
And while he's there, there's a big snowstorm, he gets stuck on campus, he has to stay on campus for a few extra days.
It's very Cornell story. Yeah. Most Cornell thing ever. The most Ithaca story ever.
He notices that
All these kids, especially when the campus is snowed in.
They're all
Using the internet.
And he knows what the internet is, you know, it was an academic project for years, you know, he was an academic guy before getting into commercial software and joining Microsoft.
But it was this way for
Scientists.
to basically trade research.
And you're starting to get some cool entertainment.
use cases.
business or business interest or commercial. It's all just like
the way that academics communicate with each other.
And this is what absolutely floors
Steven, he's like
I remember the internet as what you're saying, Ben.
And now I'm here on campus and all these kids are using it for flirting.
registering for classes
messaging each other, sending email that has nothing to do with papers or work or school or academics or anything.
He gets so excited.
That he writes another memo.
To Bill and the leadership team.
Entitled Cornell is Wired.
Exclamation point.
This is so funny. Microsoft history is told through a series of memos.
Every milestone is
Some executive publishing a company wide memo.
What it's so funny'cause some of these memos
Definitely were like internal memos for exactly what you say.
And some of them were like
Written for publication to the press. Yep.
And Bill has a great quote.
When I heard Steven talk about what was happening at Cornell, I began to take the internet.
Quite seriously.
So Steven and Bill organized
An internet off site.
quote unquote.
With all the top execs, with Jay, Bill, Steven, everybody who's
investigating this internet thing.
And it takes place on April fifth.
Nineteen ninety four, which is the very next day.
after Netscape was incorporated.
On April fourth. Amazing.
And at
This I've say.
Bill.
Totally gets religion.
Yeah.
The internet, as Jay said in his initial memo, is actually an exponential phenomenon.
And as Bill puts it to the team gathered there and then the whole company later.
It is a core Microsoft company value.
That exponential phenomenon.
Cannot.
Be ignored.
Oh wow. I had no idea that was kind of the
impetus of him taking it seriously.
I mean, think back to everything we talked about in the last episode.
the whole concept of Microsoft is founded on the idea
That
Moore's Law is a thing.
And therefore
We can develop.
software that people have never dreamed of that in just a few years will be usable.
So
Speaking of Netscape being incorporated the day before.
Remember I said to put a pin in the name Jim Clark.
Of course, many listeners already know where we're going here.
Jim Clark, legendary founder of SGI, Silicon Valley legend.
Well
Couple months before that, in February ninety four.
It's crazy how fast all this happened. It's just insane.
Jim is still at SGI.
He's really frustrated with the board and the company, though.
for not pushing even harder on this information superhighway opportunity.
So what does he do? He resigns from the company.
Kind of like in protest. The company he founded. Wow.
And
On his very last day,
In February ninety four.
At SGI.
He call emails.
The kid in Illinois.
Mark Andreessen.
And so
You get the opportunity to team up with an industry legend.
Uh of course.
Yeah. So Jim in this email writes.
You know, I'm impressed with mosaic and like clearly this seems to be getting adoption. Um
You know, if there's any way that you and I, Mark, might be able to collaborate, that would be quote, of interest to me.
So the two of them get together and then they found this company on April fourth, nineteen ninety four, called Electric Media.
And
The initial goal of electric media soon to be Netscape.
is that oh, Mark is this hot shot programmer. Clearly the information super highway is what
This web is gonna turn into
We're gonna do what SGI was supposed to do. We're gonna make
Set top boxes for the information superhighway.
Yes.
In retrospect
you gotta be looking at them thinking, How dense are you?
Mark Andreessen is the person in the world who understands what a crazy exponential phenomena the internet is, the web is, what it can be. I mean, Mark had, I think, by this point already put the image tag.
into HTML. So
They can now send images that render in browsers.
And when Jim Clark emails him
They decide to go do the information superhighway and not to do the internet.
Yeah.
This is amazing.
So the way they're gonna do this as a startup, this is so great.
One of the other big things that SGI had done besides
building the graphics workstations that Hollywood ran on and did Jurassic Park and all that.
Was
They were Nintendo's technology partner.
for the N sixty four. They made the graphics engine for the N sixty four.
And so Jim has this relationship with the Nintendo. The N sixty four is gonna be coming out. It's gonna be this amazing
box in the living room attached to TVs and consumers' homes.
They're gonna team up with Nintendo and turn the N sixty four
Into an information superhighway.
Box.
Meanwhile, it's hilarious that we keep talking about the information superhighway because it never happened.
There were these little tests done with cable companies that
Would wire up three hundred houses or something.
It never happened anywhere at any sort of scale. And so when you're listening to this and you keep trying to figure out like, sorry, what exactly was the information superhighway and like what did it look like?
Nobody knows because it never happened.
Right.
It's just a classic case of way, way, way too many cooks in the kitchen and just
Total slideware.
And the fact that even Mark himself didn't
pound the table for no, the internet's gonna be the thing. That really shows you how the human brain is not wired to understand
Compounding.
theoretically this network should continue to get more nodes, the technology should evolve little by little.
Moore's law is happening on the compu side, you know, there's some reason to think that
bandwidth is gonna be available to homes in the same way it's available to like universities and companies.
But still it just wasn't.
obvious enough to continue down that path. It was almost like great, I've made a name for myself doing this.
toy thing that probably isn't the future. And so now we'll go do the big boy stuff'cause that's what all the experts are saying.
Totally.
So shortly after this, by late spring
Nineteen.
Mosaic now has a million
Active users.
Clearly Bill Gates is paying attention here.
So
Shortly after all this,
Jim Clark and Mark Andrews and say.
Wait a minute.
Let's just go do this mosaic thing.
They scrap the N sixty four information superhighway.
They go raise money from Kleiner Perkins, John Dore invests, joins the board.
Most legendary investor of the time.
And
Bye.
October
Nineteen ninety four.
T.
Newly christened Mosaic Communications Corporation.
post the first version of its browser.
Mosaic navigator.
for free to download on
The web.
And their business plan is that they're gonna give away the consumer browser for free.
And they're gonna charge
Companies.
For server software. So if you want to host a website
No, you're a corporation or
Whomever you need server software to do that.
They're gonna charge companies for the server software.
Great.
And listeners, you should be paying attention to something David just said there. He said it's the Mosaic Corporation.
And then you said it's
Mosaic.
Navigator.
Even though it's called mosaic.
because Mark Andreessen wanted to draft off the success of the previous project he had done called Mosaic.
This is completely new code.
They founded a company, they started writing code from scratch, they had the experience of writing mosaic.
the thing owned by the university and the NCSA before. This is a new thing called Mosaic that does the same thing, architected for commercial use.
Yes.
Exactly, Ben.
So
Meanwhile
Back at the University of Illinois.
Even though they're a academic and
Government institution here.
They realized that.
They've got something valuable in the original mosaic. It's a pile of code, millions of users.
Mark doesn't work there anymore, but
Seems to be working.
So
They license
Their mosaic, the original one.

Buy glass.
So
The state of play is
You've got
The old mosaic.
which Spyglass has the right to license for commercial use. You have a new thing
That will become Netscape.
called mosaic that is totally separate code.
And
Mosaic, Mark Andreessen's new mosaic.
keeps trying to go do deals, like sell their server software.
And every time they'd find a customer, spy glass
They'd threaten to sue.
And they basically blow up the deal because they keep calling each customer and saying, Yeah, we're gonna sue. Yep.
Yeah.
And so
This is obviously very frustrating.
And technically illegal.
Mark Andreessen's mosaic realizes that this is going to be an existential problem for them unless they do something about it.
They actually
Sue Spy Glass.
You guys gotta stop. So there is a settlement.
Well
The net of all of this is that
Mark and Jim's company. Let's call it that.
Changes its name.
In the fall of nineteen ninety four, too.
Netscape.
And
Mark had a
Typically great.
Mark quote about this to the press at the time.
You go to school, you do your research, you leave, and then they try and cripple your business.
Had I known this would happen, I would have gone to Stanford.
Which of course is apocrypha because he had no means of going to Stanford at the time. He lived in the Midwest. He was gonna go to a state school. No one recognized his genius at the time. So Yeah, yeah, yeah. Totally.
It's also the most Mark Anderson quote ever, which is awesome. Yep.
Anyway, okay, meanwhile
Remember the online services, the comp you serves, you know, Prodigy, AOL, et cetera.
They're not blind.
They see
That the internet and the web is also becoming a thing.
They want to go license
A web browser and incorporate it.
into their platform.
So I think it was
Late ninety three or early ninety four, but this was a seminal moment where
The AOLs of the world.
interconnected with the internet.
And now you could not just navigate the proprietary services, but also surf the open web.
So
Netscape isn't interested in licensing because they have their own business model selling web server software and they want to allow free downloads of the navigator client.
Spy glass, though.
They start licensing
That original mosaic.
And they start doing deals with the online service providers and a small startup company called Booklink.
goes and codes up another browser that they start licensing to companies as well.
So
Bill Gates and Steven Sinovsky, they go and meet with Booklink in May of nineteen ninety four. So coming right off of this internet retreat.
We're gonna
make this a core part of Microsoft and a core part of Windows.
And
They're interested in
licensing book link as well.
They start negotiating, they're talking about a call it two million dollar license deal.
And all of a sudden AOL comes in and buys
the whole company of Book Link.
For thirty million dollars.
So
This now leaves Microsoft.
Without a browser.
And
There are
Basically only three real browsers on the market. There's Booklink that AOL just bought.
There's
Netscape Navigator.
Netscape Navigator. Which is not available to license.
And then
It's mosaic.
And spyglass.
So Microsoft's
Goes to who else?
Spy glass.
They license
The source code.
For Mark Andreessen's
Original.
Mosaic browser.
From
Spy glass software.
For two million dollars.
And that code base
Becomes
The base.
Upon which
Microsoft builds.
Internet.
Explorer.
Well, David, I'm glad you took the bait.
I am here to tell you that that is the public narrative.
Uh and very close to the truth, but there's some more nuance here. You ready to hear it? Well, hey, if you click the about menu in the early versions of Internet Explorer, oh yeah, a text box pops up that says based on NCSA Mosaic.
distributed under a licensing agreement with Spyglass Inc.
Yes.
All of that technically true.
It is just not
quite as meaningful as you think it is.
So
As with all of these things,
It's not just like Bill Gates and Steven Sinovsky are having a think and the rest of Microsoft is sitting around waiting for the think to finish.
And then an edict comes down and then they go and do the work.
There are a lot of people with a lot of ideas working on a lot of stuff in parallel. And that is why Microsoft's history is so delightfully messy, is there's a zillion initiatives going on, and it's never clear if your thing is gonna become
the next company strategy or not.
So here is a slightly different version of this history with different players.
And I wanna underscore it for one big reason.
It will come up later.
In antitrust.
Okay.
So
Some of the Windows ninety five team in late ninety four, led by Thomas Reardon, is pulled off before it ships to start thinking about
What should we do after Windows ninety-five ships?
What would the next marquee investments be for what at the time they're calling Windows ninety seven?
Which of course there was never a Windows ninety seven.
So the groups.
opinion is all internet all the time.
You know, how could the next iteration of Windows be extremely internet native in a very embedded way? And there's tons of proposals in this little group. There's virtual meeting software.
Think Zoom type things. There's an email client specifically built for the internet rather than for your company's corporate network, which at the time was novel.
Then there's of course a browser.
But the big vision
Was
What if the whole Windows shell
is a browser.
Every visual thing that you interact with in Windows, what if that actually was like a HTML rendered
Server communicating.
online thing.
And the team technically kind of looked at it this way.
We should build HTTP directly into the operating system, since it was just another protocol on top of the TCP IP protocol.
that the internet is based on.
We should provide reusable UI component.
To any application that wants to display HTML. That's a good engineering building block to build is this HTML renderer.
that any application can sort of frame in and use.
So of course Microsoft, the strategy here is we will develop a browser application that used the building block that others could also use to render HTML.
So they actually go to Netscape.
And say hey
We have this great
HTTP stack, we have the HTML engine, we have these wrappers to go around it. Instead of rewriting all of it, just use our off the shelf code that we intend to ship.
With Windows.
famously, you know, Netscape did not do that.
And so I internet explorer actually ends up being kind of the only application that used all these Windows components.
And once they got going on the browser, they convinced the Windows leadership that actually
We can do this fast. We should get this done as a part of Windows ninety five, not wait for the next big release.
We're gonna get to this in a minute, but when Windows ninety five launched
It had either at launch or very shortly thereafter what was called the Plus Pack. Yes. And Internet Explorer was available as part of the Plus Pack.
Yes.
So anyway, how does NCSA, Mosaic, and Spyglass come into this?
Well, the nuance is Spyglass had actually massively changed the mosaic code. They were trying to create the spyglas browser that was sort of based on this NCSA code base.
But
It wasn't very good.
And so
That is what Microsoft was able to get their hands on. They could not license the original NCSA version. That was gone, or at least not available for license. And so they sort of tried backing out a lot of the spyglass stuff.
Ultimately.
it wasn't that helpful in creating internet explorer, and they spent just as much time trying to undo a lot of it.
And then build.
the Internet Explorer stuff on top. So ultimately, did it actually accelerate their path to market? And was it actually
Mark Andreessen's code. Uh some of it was in there, but
You know, it's not like they grabbed it off the shelf and now it's I.
No, it makes for such a good story though.
It sounds like
Reality is a lot like the DOS.
acquisition.
Yes. Microsoft bought
QDOS, quick and dirty operating system from Seattle Products.
Was that the same thing as Microsoft DOS? Sort of. A lot of work went into it after the deal. Yeah, as you would expect.
Same thing here.
But
It is definitely true.
That if you click that about box in the early versions of Internet Explorer. It's just so delicious. It is delicious. And the two big takeaways here, at least from this additional version of the story, is one
What they actually wanted to do was make Windows web enabled in a really deep integrated way, not just have this one little application called a browser. And technically there was a lot of coming there, a lot of what

The
code underpinning Internet Explorer was actually
Window code implemented in Windows operating system to do these protocols.
And two, still a lot of work to make I. after the deal.
So
This brings us now to the launch preparations for Windows ninety five.
And in the spring leading up to all this.
Bill.
Writes another memo.
This one.
Intended for publication, so to speak.
That is the famous Internet Tidal Wave Memo.
I just want to do a big quote from it here.
Perhaps you have already seen memos from me or others here about the importance of the internet.
I have gone through several stages of increasing my views of its importance.
Now I assign the internet the highest level of importance.
In this memo
I wanna make clear that our focus on the internet is crucial to every part of our business. The internet is the most
Important single development.
to come along since the IBM PC was introduced in nineteen eighty one, it is even more important than the arrival of the graphical user interface.
Can't get any more clear than that.
Very clear.
So that brings us
To the August ninety five, Windows ninety five.
Launch scheduled.
For the twenty fourth.
On August ninth
couple weeks beforehand, Netscape goes public.
With a market capitalization of three billion
Dollars. Massive IPO.
Massive. I mean this is like
Nineteen ninety five we're talking about.
Netscape, we should say, goes from one million to fifteen million users in one year.
I mean, just instant product market fit. It was so clear that people wanted to browse the web.
A lot of the time in technology in this ecosystem, we're always looking around like ah, is that gonna become a thing? Is that gonna become a thing? That was
From nineteen ninety four onward, never a question about the internet.
Never. Yeah.
In the
I PO
Press cycle.
Mark Andrewson is quoted as saying that
Quote, Netscape will soon reduce Windows to a poorly debugged set of device drivers.
It's such a good quote.
And there's so much behind it, too. If you really dwell in that quote, what does it mean?
If one of the things he's saying is
Windows is a platform upon which independent software vendors write applications.
So windows
is the way that currently people write
for businesses and consumers to use.
And if we are going to reduce Windows to a poorly debugged set of device drivers, what I'm implying is
These crappy static web pages that get served right now.
That is
Merely a step.
On our journey.
to enabling rich web applications.
Think JavaScript, CSS.
Eventually, you know, Java and Flash.
The web will be a way
that developers write their applications. That's right there implicit in the quote.
And so when they're saying we're gonna reduce windows, blah, blah, blah.
It's saying, Okay, Windows has all this stuff right now for developers, but
Essentially, you're gonna use Windows or any operating system just to boot it up, connect to all your peripherals and your screen and your mouse, your keyboard, and everything, and you'll open your browser and you'll do everything through the browser.
And that
Scared the hell out of Microsoft.
Not specifically this quote.
But
Microsoft had come to the same conclusion too of Oh my God
If the web becomes the platform of the future
all the reasons why we have all this incredible business, you know, people
feeling the need to use our operating system to be able to get access to their favorite software and for developers to build applications on our platform to get access to the users, that could go away.
And in the same memo that you were quoting earlier, the Internet Title Wave.
Bill Gates famously says, and when I say famously, it's because the Department of Justice
later grabbed this quote and used it as a exhibit.
Bill writes
A new competitor born on the internet is Netscape.
Their browser is dominant with a seventy percent usage share, allowing them to determine
which network extensions will catch on.
They are pursuing a multi platform strategy where they move the key API, the application programming interface.
Into the client.
to commoditize the underlying operating system.
I mean, they got it.
Immediately.
The web is an application platform that completely reduces our value.
You can see why it was so important.
To Microsoft.
Two
Be Netscape.
To bring it to the
The internet.
In the form of Internet Explorer.
into Windows and have Window maintain its role as
The dominant platform. So all the stuff will cut off their air supply, you know.
It was existential.
And
How amazing is this?
It's an application platform of the future.
that is distributed as a Windows app.
I mean, Windows had huge market share at this point. I don't know, eighty, ninety percent, eventually over ninety percent market share.
The way that
Netscape could
Get to consumers.
was because Microsoft had all these computers out there running windows. It was like this ultimate Trojan horse that they could build the platform of the future.
Through Microsoft.
Yeah.
So
Windows ninety five launches.
Couple weeks after the Netscape IPO.
Internet Explorer is
Not baked in.
At least not in the retail box version.
You can buy it.
for fifty dollars as part of the plus pack.
That I was referencing before.
uh install that and add it into Windows.
And Microsoft will make money on the sale of that.
Software. But
That of course does nothing to make a dent in the free version of
Netscape navigator that is out there. Right. If Microsoft's goal is to cut off the air supply, David, as you already quoted, of Netscape, the goal is ubiquity instantly, and we don't care about making money. We just need to get this thing out so the internet doesn't kneecap our business and we can sort of embrace and control it.
Or perhaps embrace and extend it.
Netscape's run continues. The Netscape stock
Triples.
Over
September, October.
November. Netscape is now a ten
Billion dollar.
Public company.
Insane.
And I don't think making very much money on their server software yet.
All the market cap creation is attributable to people believing they have the dominant platform of the future and not based on their current financials.
Yeah, basically all of the hype train that had been behind the information superhighway has now completely ported over to
Netscape.
That's true. What's our tracker for the internet? Netscape. Everybody file in.
Yeah.
I could make an analogy to today, but
I'm gonna spare us all. Make this episode timeless, David. I'm gonna make the episode timeless.
Okay.
And then.
On december seventh, nineteen ninety five.
Bill Gates announces
That Internet Explorer is now free.
And it will be bundled in
With every single copy of Windows ninety five.
Going forward.
And on that day, Netscape stock drops by about a third.
And
Never
recovers.
That was the high water mark for Netscape.
It's
Over.
After that.
Yep. And for good reason. I mean
There's a very
Difficult to learn lesson, but you learn it once, you never forget it.
If your distribution
decides to compete with you.
And decides to make that a priority.
Your business is over in a minute.
Yeah.
And that's exactly what happened. I mean, this is now the march of Internet Explorer. It doesn't happen overnight, but it's inevitable.
by the end of the next year in nineteen ninety six.
Microsoft has now done deals with AOL, CompuServe, and Prodigy, all the old online services.
to ditch whatever browsers they were using and bundle in Internet Explorer.
And
By the end of that year in ninety six.
Internet Explorer passes twenty percent market share.
Ninety seven it passes forty percent market share. Ninety eight it passes sixty percent market share. And then by
The year two thousand Internet Explorer basically has
For all intents and purposes, a hundred percent worldwide.
Browser.
Market share.
If you look
at the Internet Explorer market share chart over time.
It is the most perfectly rounded hill that you will ever see. It goes from zero in ninety five
To like a hundred in two thousand.
And then all the way back down to zero in twenty ten.
Which is the next chapter of this story is how on earth did they lose that
Monopoly that they had in
The browser.
But
Before that, there's this interesting moment of reflection here.
Why did Netscape's business
Dry up.
because their business was made from selling server software.
Well
The way to have the best server software is to also control the client.
People are very interested in
making sure that their websites run perfectly.
using the experience that everyone has. And when you can no longer claim, hey, a whole bunch of internet users actually use our browser.
Do I really want to buy my server software from you or should I just
Be open to buying it from
Anyone that I can sort of
uh it's the lowest cost and the best value with the most features, all that. So they sort of lose the competitive edge.
In the revenue side of the company. On top of that, it's just really hard to recover for companies that have an 80% drawdown or whatever in their stock price.
there was a lot of excitement around the company that then goes away, suddenly all these employees are undercompensated.
It's a company killing event.
And
All the market cap and excitement was all on the cum. It wasn't because of the revenue. Right.
So to this point, Microsoft has not changed their business model. They simply
Vanquished.
a potential future that was dangerous for them. They're still doing the same thing as ever selling Windows licenses.
through OEMs and to consumers at retail.
Yep.
There are couple more fun little tidbits from this era. In August nineteen ninety seven.
Is when the famous
Macworld happens, where Steve Jobs
Returned to the company. Oh yes. And Bill Gates shows up on the satellite feed.
And you know, of course this moment is
Legendary.
Studying it from this lens.
I realize there's this whole other aspect to it that I didn't know before.
So
What Bill and Steve announce on stage.
It's also so telling that
Bill couldn't even be there in person. He joins by satellite.
Yeah.
So there are four
Points.
to the partnership.
One is the hundred and fifty million dollar investment from Microsoft and Apple.
Two
Is the
Five year commitment.
On the part of Microsoft to ship Office for Mac. Yep.
And those are the big ones that everybody talks about. Which, by the way, saved
Apple.
The company would have been completely out of business.
Because
It was so existentially important.
Two
anyone using an Apple computer to use Office than if Office
You know, Microsoft decides, Oh, we're gonna stop developing Office.
People stop buying Macs and you know, the company's already in such a tenuous financial position, it's just over.
So the third deal point was
they agree to end all patent disputes. So this is the end of all the back and forth that we talked about in part one. But then the fourth point, which
I didn't even remember at all.
was that Internet Explorer would become the default browser on the Mac
Displacing
Netscape.
And that
continued from nineteen ninety seven until two thousand three.
when Safari became the default.
Browser. Oh no. I know it. And knowing this now and knowing the headspace that Bill was in
I gotta imagine that's the reason he did the deal.
Well, it's funny. I actually do have some color on why you did the deal.
Steve Jobs
Wanted to message this.
As Microsoft believes
in the Mac as a great way to use the office suite.
They believe in us and us as a company. And so they're investing$150 million and making this commitment to help us get through this difficult time.
And this money.
By the way, just to help people understand.
Apple was worth
About two billion dollars at the time.
So this is Microsoft.
Buying eight percent of Apple.
Yeah.
Wow.
Steve
cleverly identified this moment.
As a time to call Microsoft and say
Hey, I know we're through all the patent issues, that big lawsuit.
I have more.
Mm-hmm.
I think you guys are using some of our stuff.
I don't want to sue you.
I know the DOJ
is sort of looking at you guys for antitrust right now.
Apple was aware
that Microsoft would be interested
in appearing collaborative.
With
another major player in the ecosystem.
And so we sort of have the leverage to say, Hey, what if you guys invested in us and did this big commitment to uh Office for Mac? It's super important to help us get through this difficult time.
And Microsoft.

Well, it's really important to us have I everywhere.
And so they rolled it all into one big deal. No one's gonna sue anyone, all the IP is cross licensed.
And Microsoft gets the win with I, Apple gets the win with the investment in office, and we can all walk away.
Interesting. Interesting.
Apple is saved.
Truly Apple would have gone out of business had Steve Jobs not seized this opportunity.
It was
a critical business deal for both of them.
Yeah.
So
To close the book on Netscape.
In November nineteen ninety eight, AOL acquires Netscape.
in an all stock deal.
for just over four billion dollars, but
Again, all stock.
This is
Just a little over a year before the Time Warner merger.
And this moment here.
Is
Just
The absolute peak.
of Microsoft as a consumer technology company.
I mean I think maybe the absolute peak of
any consumer technology company ever. I mean think about the market power.
That Microsoft has.
At this point in time.
Apple.
has an existential reliance upon them.
They have completely crushed
Netscape, you know, quote unquote, cut off the air supply.
There's nobody else. There is nothing else except
Microsoft. Google is three years from being founded. Facebook is nine years from being founded.
Yeah.
There's Yahoo, sure.
There's real competition in the enterprise at this point, Sun, Oracle.
But in terms of what your point is, the consumer technology landscape.
Yeah.
They had ultimate power.
Yep.
Yeah, but David, I don't know, the whole thing of
You can just decide to and then you completely vanquish your biggest existential threat by cutting off their air supply, like
Shouldn't that be illegal?

Well
So I mean to lead you a little bit into our next section.
All right listeners.
Now is a great time to talk about a new partner of ours here on Acquired, Lagora.
The agentic operating system that is redefining how the world's best legal teams work.
Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chat bot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?
So the founders did exactly what great founders do.
operate with obsessive customer focus.
They embedded inside a massive law firm for months.
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If your legal team wants to check it out, whether you're a law firm or you're in house at a company,
You can learn more at Lagora.com slash acquired
And just tell'em that Ben and David sent you.
Okay, David.
So we've arrived.
The famous nineteen ninety eight.
Microsoft.
versus the US Department of Justice antitrust trial.
Yes.
And
I was thinking about it. In the transition
At the end of the browser war is there. What, you didn't like my snarky comment?
Yeah, well we were being glib about like oh this should be illegal.
That's really the question here.
All that power that Microsoft had, and it probably
Never been concentrated.
in the hands of one company like that, and probably never will be again.
And the question is, was that illegal and did Microsoft do anything wrong?
Right.
We're getting into a whole bunch of very interesting questions here. And I asked it exactly to sort of pop open the can of worms.
But there is a question of
what actually is legal in the US, what actually is legal in the EU.
Then there's this interesting question sort of emotionally for everyone who is working on software at Microsoft.
The vast, vast majority of people
Are not really focused on what is the business and competitive strategy. Most people who worked on any of this stuff, their whole goal was.
I want to ship great software and make things that people love to use and I want to work with people that I love making it with.
And so if you ask most people who worked on any of this
Their opinion is
I don't know, we were trying to just make the best software out there.
Which is very interesting to square with this growing
public perception that Microsoft is being a bully, especially public
generated by their competitors. Right.
And then the literal legal question of did they do something illegal, because the actual antitrust laws are a super different thing than ooh, does this feel anti-competitive in some way to me.
And then there's the other dimension too of as a consumer
Am I unhappy?
that I get a world class web browser included in my operating system. Well, David, now you're cracking open the issue of consumer harm, the consumer welfare standard that the whole thing is based on. So
Take us into the story.
Yeah.
So
The Microsoft Antitrust Saga.
Actually started.
Not with the Department of Justice.
And not in nineteen ninety eight.
But with the Federal Trade Commission.
The FTC.
All the way back in nineteen ninety.
When they opened an investigation.
into the company.
About whether it was violating.
Antitrust laws.
This centered.
on the notion of per processor licensing, which we discussed in our last Microsoft episode.
Yeah.
So in July.
Nineteen ninety three.
The FTC commissioners vote on whether Microsoft is a monopoly that deserves further action and penalties.
And they deadlock at two to two.
Which means essentially a win for Microsoft.
No action would be taken against the company.
This is a huge victory.
The antitrust case
of the US federal government against Microsoft.
should be closed at this point in time.
Yeah.
Because theoretically they could have examined
Any monopolistic practice at this point.
And they said just the one narrow thing that we were worried about.
They agreed to stop doing
And we
in voting two two, we see no other issues that we need to investigate.
Yeah.
Microsoft
You are good as far as the US federal government is concerned.
However.
The very next month
In August nineteen ninety three.
The Department of Justice.
Picks up the case.
Which is pretty unprecedented.
One department in the US federal government
essentially investigates a company about whether it is abusing its monopoly power.
declines to
Prosecute them for it.
And then another department.
Within the federal government. The very next month says essentially
Well, we don't think you did it right. We're gonna do it.
Microsoft is now all of a sudden basically standing trial for the same accused crimes twice.
Yeah, theoretically double jeopardy is not a thing.
And in fact, several members of the FTC commission opposed this whole process and tried to refuse to turn over their notes to the Justice Department.
Hm.
But nonetheless
The DOJ proceeds
And
the next year, in July nineteen ninety four,
Microsoft just settles with them rather than going to trial. They're like
All right. Look.
We just want to be done.
We're gonna settle with you DOJ. We're gonna be done with the US federal government here.
And in that settlement
They agree to enter into
What?
Folks may know the famous words, a consent decree.
And that means they consent in this case
That they are not going to tie the sail of
Microsoft application products.
To the sale of
Windows.
Meaning they can't say like
Hey, OEMs or businesses or consumers or whoever.
If you're buying Windows you have to also buy
Office or X or whatever else that we're selling in our applications group.
But importantly, as part of the consent degree,
They remain free and clear, Microsoft does.
To integrate
Additional features.
into the Windows operating system.
Which brings us right back.
To internet explorer.
Is it a product?
Or is it a feature? Exactly. And this is so messy. Cause I think, David, you just used the exact language, which is they cannot
Tie.
These application products.
in a bundled sale.
However.
they absolutely can integrate new features.
Yes.
So what is Internet Explorer?
And this also
Looks the other way at the whole
idea of software development and platforms, which is
It is a continuously changing landscape.
Where over time
In the interest of users.
platforms do more and more and more things.
that applications used to do.
And so
the whole notion that they're gonna write that sentence and then call it good.
what is an application today might be a feature years down the line.
But the law is written and we have to pay attention to that sentence.
constantly reevaluated in the context of the current time.
Yeah.
I mean
Today.
Could you imagine
Purchasing a device that has an operating system.
And uh
Device not
having an internet browser as part of the core
system.
No, you can't even imagine that. Of course it's a feature.
While is it a feature? It's actually it's literally an application.
It is a bundled application as it exists today. So th this is the gray area.
This is the gray area.
And you know, look, if you ask Bill and Microsoft and Jay Allard all the way back to the original memo.
It was absolutely intended to be a core feature of the Windows operating system, having an
Internet browser as part of it.
clearly motivated by
The idea that we want our Windows platform to maintain the power it enjoys from its monopoly market share. So there's a sympathetic view for sure.
of hey, this is core functionality to an operating system, whether it's a feature or an application that we bundle, and also
Clearly, the reason you are incentivized to ship your own browser is to cut off the air supply of potential competitors that develop the platform of the future.
Yes.
So
In October nineteen ninety seven.
The Justice Department files a motion in federal district court.
stating that by bundling Internet Explorer with Windows, Microsoft has now violated
The nineteen ninety four consent decree against product tying.
And it's important to know what they're basically asking is
This is not about future versions. You know, we know you're doing some kind of Windows ninety eight thing. We're saying right now.
Stop shipping.
I. e. bundled into Windows.
Microsoft insists
This is an integrated product.
You cannot do that.
And it's not even necessarily a legal argument yet of
were allowed to do this'cause it's an integrated feature.
They're saying
We ship a pile of code.
And
You actually cannot
Just rip out.
Explorer.
And if you remember at this time, you could do all sorts of crazy stuff, like you could paste a web address.
In Windows Explorer.
And it would render, even though it wasn't Internet Explorer. So there actually was like, if you think back to that sort of vision of the browser is integrated into the Windows shell, and it sort of happened. A browser was not really, at least Internet Explorer.
was not really its own standalone thing і was
deeply integrated. Now could they have pulled it apart is a different question if they really wanted to.
And also remember the fact pattern here.
Isn't exactly great for Microsoft of
Well, they did ship Windows ninety five without Internet Explorer in the beginning. So
The federal judge Thomas Penfield Jackson orders them to do it anyway, or more specifically, he ordered Microsoft to ship a version of Windows.
To the PC makers, the OEMs or original equipment manufacturers.
That didn't include IE. So that those OEMs could load those onto the PCs that they were going to ship to customers if they wanted to.
And Microsoft said we told you we can't do that, but you're a judge and you're ordering us to.
So they do, and surprise, surprise when you just disable a bunch of code that other code depends on.
It doesn't work.
So then of course.
Two things happen. Judge Jackson is not pleased, since it appears Microsoft is complying with the letter of the law, but violating the spirit and sort of thumbing its nose and being arrogant.
So that's thing one.
Thing too is obviously the PC makers don't actually ship this version of Windows, so it never sees the light of day.
And so things get real petty real fast. The DOJ asks the court to hold Microsoft in contempt.
Yeah, a whole bunch of back and forth.
Microsoft appeals Judge Jackson's order.
And in early May nineteen ninety eight.
The appellate court rules that
Microsoft can continue shipping Windows with IE bundled into it.
And also continue to bundle features that they want as part of Windows as long as it benefits consumers.
And this is interesting,'cause this is when it really hammers home the idea of
What we the US courts care about.
Is consumer welfare.
We haven't
Explore the idea of if Microsoft is a monopoly or not yet.
But for now what we are saying.
Is
As long as what they are doing is in the consumer best interest, they're not causing harm.
They're not.
Raising prices.
Then
It's okay.
So then.
One week later, on may eighteenth,
nineteen ninety eight, the DOJ announces a brand new
Enormous
wide ranging
Antitrust lawsuit.
against Microsoft for violating the Sherman Antitrust Act and abusing
It's monopoly power.
To suppress competition.
And this investigation
is way bigger than just
Is it okay if they tie Internet Explorer with the shipment of Windows? This is
A is the company a monopoly.
And B
Are they doing anything across space?
their entire business
to abuse that monopoly power.
in the disinterest of consumers.
Right.
It is not necessarily illegal to be a monopoly. It is illegal to abuse your monopoly power.
Correct. So this court is examining both of those questions. One.
Is Microsoft a monopoly?
Two, are they abusing their power?
This is
Really bad for Microsoft.
Really bad. And it's worth
decoupling.
Did they do anything wrong?
from just legal strategy.
By holding a very firm line early of
We're appealing this decision. We couldn't possibly

Microsoft is starting to take this super aggressive
Stance.
And the Department of Justice is then like, Wait, you didn't give an inch?
You're not open to just this one thing, the tying of Internet Explorer and Windows.
Okay.
We're gonna look at everything.
Yeah. You can see how it's sort of
goads them into like, okay, we're gonna bring the big lawsuit.
Right.
But
This whole scene.
You can also
see from Microsoft's perspective.
A feeling of like
betrayal by their government. You know, like hey this is the third time
We are being tried.
For what feels like the same crime.
Ben, you said double jeopardy isn't a thing earlier. You know, what is this? Triple Jeopardy?
Come on, I thought this was supposed to be a free country where we can build businesses.
What the hell?
Yeah.
And you know, Microsoft folks at the time too are starting to get this inkling of
Why are they doing this?
Are consumers really mad at us? You know, who's being helped here? And they're starting to realize
Hm.
There is a lot of lobbying going on behind the scenes.
of Netscape and everyone else we're competing against
Trying to
Find a way.
to call us anti competitive.
Yeah.
Which we should say is always true in these big antitrust lawsuits, but that was certainly happening in this one.
Yeah.
And so for all these reasons, including Ben, as you say, the legal strategy they started with in the first place of we're gonna fight everything.
They say like
All right.
We're fighting this. We're gonna fight it.
Hard.
Yep. So
Ben.
Talk to a lot of people here.
Take us through what happens in this
Big trial through the fall of ninety eight and into ninety nine.
So the first question that everyone is sort of wondering is did Microsoft have a monopoly here?
Well
The fact is that they had over ninety percent of PC operating system sales. So
You know, I'm not a judge, but at first glance there you think like, Okay.
They have market power.
So in August of nineteen ninety eight
Judge Jackson issues a pre trial order.
That all depositions
shall be submitted during the trial only in transcript form.
And so
For folks who aren't

A deposition is when the council
goes and does a bunch of interviews beforehand. You're not being called as a witness in the trial, but it's basically information gathering.
Yeah.
Interview process. Yes.
So on August twenty seventh, Bill Gates is deposed by the DOJ's appointed prosecutor, David Boys.
for twenty hours.
And
I think this happens over multiple days.
Actually on YouTube.
Which
is interesting to note. You can watch twelve of the twenty hours. I think I've watched eight or nine of it, but it's just hours and hours and hours of some, you know, light bedtime viewing of uh Bill Gates being asked questions.
So the strategy that Gates and the Microsoft legal team used was one that was tailored for this pretrial ruling.
If you watch the video
You can see that the strategy is essentially never give an inch, avoid saying anything that
can be used against you.
And Microsoft
walked out of it feeling like they were pretty successful in this.
And when you say tailored for the pre trial ruling
You mean
Tailored with the assumption that this is only going to be delivered as a written transcript.
Right.
There will be no video, no recording of the
These depositions. And yet I just watched the video on YouTube. So what's going on here. How did that happen? Yeah.
So if you're watching the video though
It's very easy to think this guy is rude, pedantic, and disrespectful.
I'm not out on a limb saying that opinion. I if anybody watches this video, that is just the
obvious takeaway.
Yeah, at a certain point they argue over the definition of definition, is that right?
Yes. So a couple examples. I'm not exaggerating here. The deposition really does come across as just showing pure disdain for the prosecutor and the questions he's asking. Bill Gates rat holes
On
things like refusing to answer questions about memorandums since they were not memos, but emails.
So I couldn't possibly answer you on the question about the memorandum.
At one point.
he does look at David Boys and ask him how he would define the word definition.
Of course, while smirking the whole time.
And so the whole thing is like very obviously
Tailored with this idea that I'm gonna give you
Pages and pages and pages.
of which you will have nothing that can be used against me.
And that is the whole strategy. I don't care how I come across. I don't care
how tikky tacky the language is.
Yeah, he sits and pauses forever.
He'll say.
Well, you asked me what the person who sent this was referring to. How should I know what they're referring to? I didn't write the email.
You'd have to ask them. I
I don't know.
And so it's
Twenty hours of this.
Well
Somehow.
And I actually don't really know how this happened.
After the deposition is recorded.
On Octob
The judge then issued a reversal saying that videotaped depositions are indeed allowed to be used in court.
Oof.
Yeah.
How did this hold up?
And if you give a great prosecutor like David Boys this opportunity
he uses it masterfully. And so throughout the trial, he'd show little clips at strategic moments in the trial where he either wanted to give the press something juicy to write about that day, because there's a whole press section in the back going and listening to all the witnesses every single day.
Or he would play something he knows is gonna get to rise out of the judge. And if the judge makes an expression, then the press writes about, oh, the judge is leaning this way or that way.
Also, he would use it any time.
There was an opportunity to feel sympathetic for Gates or anyone at Microsoft.
And then he would show a clip that sort of clearly causes you to lose any sympathy or leaning.
And so it was just dripped out.
In this really
Clever way.
Yeah.
And certainly went a long way towards
Shaping the decision, but also shaping
More importantly, public opinion about
Gates and about Microsoft.
Yeah.
How did this hold up though? Didn't Microsoft appeal the change from
recordings not being allowed for depositions to recordings being allowed.
That is a great question, David. And one of the things that I read to prepare for this episode is a book called World War Three.
which is exclusively about this trial, and the author has this comment on it.
Microsoft feared that Judge Jackson was a foe.
He had made a number of pretrial rulings deemed hostile to the company. They were especially unhappy that he modified the pretrial order that depositions shall only be submitted in transcript form and
Issuing a new order allowing videotape depositions.
Microsoft suspected that justice had somehow prevailed on Jackson to amend his earlier court ruling.
Jackson categorically denied this.
but does not recall exactly why he issued the october ninth ruling.
They grouse, but
But only in the most unguarded private moments, because they were terrified of offending him, that Jackson was biased and would rule in favor of the government.
So your question of how does it hold up?
I guess there was no formal challenge of that change in rule.
And part of it probably was just because they realized they had a long way to go with the judge and

Agitate too much.
Wow.
Interesting. It also sounds like maybe they didn't realize yet how
Disastrous.
These tapes getting out was gonna be for Bill and for the company. Yeah.
I think that's right.
Mm.
Interesting.
Well,
Okay.
All of this
Starts to culminate.
In november nineteen ninety nine, these trials take forever.
When
Judge Jackson.
Issues of finding of fact.
That Microsoft is indeed
A monopoly.
in the operating systems.
business. Now remember, it's okay to be a monopoly.
It's not okay to abuse the power.
But simply the fact that the judge has now
Issued his opinion that
It is a monopoly.
Everybody knows.
This probably means the other shoe is
About to drop.
And more specifically, the finding was that the network effects from the large installed base.
So that's users.
and large body of applications.
So apps.
makes it prohibitively expensive for a competitor to develop its PC operating system into an acceptable substitute for Windows.
Which
Yeah.
Of course.
Obviously. That's what our whole episode one was about. Correct. Right. So the finding of fact.
Is
Hey, it's Monopoly. But again.
Not necessarily illegal to be a monopoly.
Only illegal to abuse monopoly power.
Right.
So
couple months go by after the finding of fact and then
On June seventh.
Two thousand.
Judge Jackson issues.
The final judgment.
In the case
And he rules.
That Microsoft
Did
Indeed,
Abuse its monopoly power.
And as a remedy.
For having done so.
He orders.
That Microsoft be broken
Up.
into at least two
Separate companies.
Separate operating system company and a separate applications company.
Just like
The standard oil.
Breakup order.
However many years it was before.
Ninety, I think.
Also
What?
This is completely lost to history unless you are a tech old timer.
Microsoft was ordered
That was the ruling by the court.
Too split up.
Yes.
It wasn't just that.
Oh, Microsoft lost the DOJ case.
No, the ruling was Microsoft will be split up.
By order of the United States government.
And there's a whole bunch of additional provisions in this. Steve Ballmer
had to work at one company and Bill Gates had to work at the other. They could not work at the same company.
each of those two, after they picked their companies, had to divest all of their shares from the one that was not their employer. So they couldn't have this conflict of interest.
It is crazy imagining this world that could have been.
I mean clearly this didn't happen.
But for a moment in time, this was the position of the United States government.
It's
Totally well. I mean, can you imagine if there was like
The Gates company and the bomber company? I mean
Sort of, as we're gonna talk about in the rest of this episode.
That is what happened, but in a very different way.
It's also worth pointing out from late nineteen ninety nine
When the findings of fact came out.
Over the next twelve months, Microsoft's market cap dropped.
from six hundred billion to two hundred and seventy billion.
Which was a fifty five percent drop.
Now this coincided with the dot com bubble and the CEO change that we're gonna talk about shortly, but
The perception of Microsoft
the super high flyer
completely fell off a cliff from this ruling.
Imagine if a ruling comes out tomorrow that Apple needs to be broken up.
And IOS needs to be separated from the devices.
And you need to be able to buy a phone without iOS.
What do you think that's gonna do to the company's market cap?
Yeah. Not exactly the same thing, of course, because this is not about devices. Well, right, but I'm just I'm making a similar type of scale analogy. Right.
Like
What the impact would be. Yes.
So
Do you know the technicality that was discovered?
No, I don't. I know that Microsoft immediately appeals.
Of course.
It was discovered.
later in June two thousand, that Judge Jackson had secretly been meeting with reporters in his chambers before the rulings were delivered. It's not allowed. And so Judge Jackson was removed from the case.
Yes.
the reporters all had these embargoed stories they could drop immediately afterwards and
Everyone was like, Well how did you what?
Wow.
That's wild. Yeah.
What a freaking crazy
Escapade here. Like there's no other way to put it.
So this is June of two thousand, by the way.
The appeal then
takes a long time. So there's a meaningful moment in history
I think
Balk.
fifteen, sixteen months.
where the official ruling is Microsoft should be going through the preparations to do their breakup.
Right.
beliefs, as far as anyone knows. Yep.
So
The appeals court.
removes Judge Jackson.
They install a new judge to readjudicate the matter.
She
gets up to speed. We're now in
The year two thousand one.
She starts pushing
the parties toward a settlement.
Especially nine eleven happens, and then I think that's a
galvanizing factor to pull the parties into the room and say, Hey, this has gone on too long and
We need to put this behind us.
Yeah.
Also there was
A political administration change from the Clinton administration to the Bush administration?
Yeah.
So then
In November two thousand one
Just a couple of weeks after the Windows XP launch.
The DOJ and Microsoft.
Finally.
Completely
Settle the case.
Also, can we just say
This case is brought against Windows ninety five.
Windows ninety eight comes out.
And then before we have a resolution, Windows XP comes out.
Windows ninety eight, you mean the uh marketing update to sell back to school PCs? Yes.
But like
Insane, right? And the whole time
Internet Explorer shipping with Windows.
Right.
The whole time. So November second, two thousand and one, the settlement is proposed
At this moment in time.
Internet Explorer has right around ninety percent market share.
Right.
If you are in the camp of
Microsoft was a monopoly, was abusing its monopoly power.
Yeah, like
Well, this was a complete failure of process. The damage is done.
Yeah. Meanwhile, also if you're in the Microsoft camp of
What the hell is our government doing?
You're also like, What the hell? Nobody is happy here.
Right, an innovative company that built the most important product for that technology phase. Meanwhile, there's this whole new thing going on with the internet.
And like
We need to figure out
how to legally navigate that transition.
Right.
Yeah, we have enough
Existential threat to our business from
Technology trends happening. Yeah.
that to try and navigate that with our hands tied behind our back because of these legal proceedings. Like
Come on.
Right.
So two thousand two, the settlement is finally approved.
It reverses the order to be split up.
Obviously, Microsoft is still one company.
Officially.
the ruling that Microsoft did indeed have a monopoly is upheld.
They
put in place a five year consent decree.
And the terms are that Microsoft is not allowed to enter into contracts with PC makers that excluded competitors.
I mean
Fine.
Two, Windows had to be interoperable with non-Microsoft software.
Which of course it does. It always was. Yeah. It's a developer platform.
They have to write API documentation.
And make their APIs
such that developers can build applications on top of them. That is the purpose of the company.
So
Okay.
Three.
An independent technical committee.
was created to field complaints from competitors.
Okay. They created a call line. That is it.
Wow.
That's it.
Am I missing something, David? That's my understanding of what it is.
Yeah. I no. I don't have anything else.
But
Okay. That is the letter of

Resolution here.
The actual cost of this.
Was immense.
Nothing could have been bigger.
I mean, we spent the whole first section of this episode talking about how
Microsoft was so powerful.
had never been
more powerful
And there probably never will be a more powerful company than Microsoft in the late nineteen nineties.
This is what destroyed it.
Oh, that is a take right there. I think that we will debate at the end of the episode.
Oh well.
The back half of the episode is about
The incredible story about how Microsoft rebuilt itself.
In a completely new market into
Now again the most valuable company in the world.
But
Let's just talk about what the actual cost was, not in terms of money.
It certainly didn't actually impact
Internet Explorer or Windows, XP was a huge success.
Sells over half a billion copies.
gets used over its lifetime on probably a billion PCs. It unifies Windows under the NT architecture.
Has the bliss wallpaper. Amazing.
But the true cost
Is what it did culturally and emotionally.
To Microsoft.
I mean, we talked to all these people and
God, it was like death.
Being there.
I mean to believe for sixteen months that the company was gonna be broken up for Bill to have this
Really?
embarrassing video of him all over the press and to have the narrative

Change about the company, change about for
Every employee working at the company to like
Oh, you're the best and brightest in America too.
You guys are evil and why are you working at this company?
Yet it exposes the difference too in the legal strategy of both sides where
Microsoft's strategy was to refute
Point by point.
every allegation brought against them.
To the point where they were trying to refute
Netscape.
We don't view Netscape as an existential threat to us.
And they should have just probably acknowledged
You know.
Bill literally wrote a letter that got
Published.
A memo saying.
that Netscape is a competitive threat born on the internet.
But they wanted to refute every single point and not give an inch. Meanwhile, all David Boyce and the DOJ wanted to do was destroy Microsoft's credibility so that every time they brought a witness
there were emails or there was uh deposition that basically called into question
Are they really telling the truth on the stand? Can they really not remember that? And it just
blow by blow made Microsoft look like they were duplicitous.
And that has to leak into the company culture. That has to make you
On the one hand, feel like your government is attacking you, but on the other hand, start to question and say, why did we do this again? I thought we were just trying to make the best software. Were we trying to do something illegal and I just didn't know about it?
Right.
It's worth talking about some of the other pieces of Fallout.
It did slow Microsoft down. There were huge amounts of protocol documentation that needed to happen. So if anyone's running a software company, you know that if your iteration times are slower and you just have permanent new drag on your development process, you are gonna fall behind.
And I think that was one that was felt by a lot of employees and managers who suddenly can do less with the same amount of resources that they have.
There was also a bunch of private lawsuits.
Sun, AOL, Real Networks. Microsoft was paying out billions of dollars in these private settlements that followed the DOJ, their civil suits.
Not to mention state attorney generals were also suing Microsoft left and right and international
Many of the state AGs for years who brought the suit together with the DOJ did not accept
This
Reversal.
And so they tried to continue independently suing Microsoft, which was
Painful for another five ish years.
We made it all the way to two thousand and nine before they settled their EU version of this antitrust case.
I mean, that's another what, seven years after
The
Reversal.
And
In
May twenty eleven, that is when the final consent decree finally expired.
So basically from nineteen ninety until twenty eleven, twenty one years of the company's life.
the majority of the company's life.
had been spent under some sort of antitrust scrutiny or active litigation.
Wow.
And obviously the company.
Thrived through
Much
You know, if not all that.
But were consumers ever harmed? I continue to wonder this.
It was horrible for Microsoft.
Even though there were any real material changes they had to make.
But effectively they won.
Which I guess they should've,'cause it's not clear that there was negative impact to consumers. There was all kinds of negative impact to existing competitors.
or future potential competitors, but that is not the US standard for antitrust law, especially at this point in history.
And so
I guess the right answer is
the right thing happened eventually, but it was awful to get there.
And
It had all sorts of
indirect negative impact on the company.
Yep.
So I said a minute ago I think it
Killed.
Microsoft's
Immense.
Dominant.
Consumer technology.
Power.
And the biggest reason I say that
We didn't talk to Bill Gates as we were preparing for this, but
Is what this whole thing clearly.
Did to Bill Gates.
Yeah.
Yeah, Microsoft had one competitive advantage that no other company had, and that was Bill Gates.
And for whatever sets of reasons.
I mean, I can imagine so many.
thinking about like if I were in that seat going through that.
Bill at Microsoft was never the same person after this.
In fact.
Bill step down.
Before the
final ruling from Judge Jackson.
Yeah.
So in July ninety eight, right as this
Big huge DOJ antitrust suit is heating up.
Steve Bomber gets promoted to president of the company. Bill is still CEO, but Steve is now promoted to president and is the clear number two.
And then
They go through the trial, the deposition, the November ninety nine finding of fact that Microsoft is a monopoly.
And then Ben is your
Referring to on January thirteenth,
Two thousand.
Bill Gates announces that he is handing the CEO role of Microsoft over to Steve.
And that he is moving to a newly created position as chief software architect.
And he will remain chairman of the company, but he is
No longer gonna be.
CEO.
And then of course it's just a few months later that the
Breakup verdict.
Comes down.
Yeah, going through something like this has to feel personal and has to change you forever. I can't imagine how it wouldn't.
Totally.
Especially
When
Again.
It's not clear to me how consumers were harmed.
So this constant
battle this war that was waged on forever and ever and ever and ever
It totally distracted Microsoft, and as anybody can attest, especially in the tech industry.
If you are distracted, you just fail because you need to have all of your best resources.
making stuff, building stuff focused on a firing on all cylinders, clear North Star strategy.
And so if you
tie up a company for five years.
And you lose your leader through it.
I mean, somebody we talked to characterized this period as like a mental breakdown for the whole company.
And I think that's kind of the best.
Way to characterize it.
Yeah. It's not fair to blame everything we're about to talk about, all the future consumer failings.
On this.
But it is helpful to keep this in mind.
And say, Okay, why perhaps did they not fully have their wits about them?
Yes.
And so.
The transition to Steve Bomber happens.
This is the context.
Under which Steve Bomber became the CEO of Microsoft.
So
I talked to a whole bunch of people who are at Microsoft in this era.
And

Every
single
Person.
Brought up.
Yeah.
Never gets talked about.
Is how much Steve was the emotional rock for the company.
When this was happening.
All the stuff everybody thinks about Steve, you know, the running around on stage, the yelling, the screaming. Developers, developers, developers. When do you think all this happened?
The crazy dancing on stage. I love this company.
That was in September of two thousand.
When they thought they were gonna get broken up.
And Steve
Was there.
Trying to keep everybody moving forward. Everybody we talked to is like
I don't know how he did it.
And it meant so much.
It's actually shocking they held on to as much talent as they did.
in a fifteen month period of people assuming the company was about to be split.
Right?
Knowing that context, for me at least.

completely changed.
My perception of
Steve and of the company during this time.
Fascinating.
So when Steve takes over, his agenda is
Three things. And I think in
Basically priority order.
Number one.
hold the company together emotionally.
I love this company.
That was job number one, just like keep everybody
Coming to work.
Job number two.
Clean up this antitrust mess.
And then job number three, I think, was
Hey, let's keep this company like growing and winning.
And I think it's kind of fair to say he did all three.
So we just talked about
One emotionally holding the company together.
Two.
One of the very first things Steve does when he becomes CEO
Is he promotes Brad Smith.
To general counsel.
Who?
Brad Smith is still, of course.
Leading all this at Microsoft.
To this day.
And Steve tells Brad
Go make peace.
So actually
This is amazing.
Brad's
final interview with
The Microsoft Board of Directors.
I was wondering if you found this.
Yeah, for his job, you know, to be promoted to general counsel.
His PowerPoint presentation to the board.
Is just one slide.
That has one sentence on it.
It's time to make peace.
And that is totally what he goes and does and he says
Okay.
I'm gonna figure out what settlements we can live with.
And I am gonna go settle
Everything.
And this company just needs to move forward and it doesn't matter that we all feel it wasn't fair. It doesn't matter that we all feel this was
A sham of a process. We just have to move on and we have to live in a new reality. And you kind of need a new set of people to do that.
It's kind of amazing that Steve was part of the old guard and the new guard to do this because how can you say, I'm gonna put
How unfair I feel this was aside.
and just focus on moving forward.
That is an extremely difficult compartmentalization exercise. And so for Brad to come in and say, like, I'm gonna be the guy who is able to disregard the past.
and figure out how we and I use this phrase in the first episode, become a trusted partner to governments around the free world.
I mean, how crazy is it?
That this Microsoft
That we just talked about for the last hour.
became the Microsoft
That can do no wrong from a regulatory perspective. The only one that's not under active antitrust investigation today by the federal government, the one that is a massive provider of software and services.
to the US and its allies at the government level.
It doesn't get talked about enough.
What an amazing job.
Brad and the company did to reverse this perception.
So then that leaves job number three on Steve's agenda of be successful.
continue to have Microsoft be a leading technology company and
hopefully still grow revenue and profits.
And Bill Gates is still chairman of the board. Like not only is he a full time employee being the chief software architect.
It's not that it's like a sham that he's not the CEO, but
He is a
Very
present voice at the table in these big decision making
Moments.
And so for how do we become
A company that
continues to innovate and make great products despite all this, he still has Bill as the technical leader of the future products.
Yes.
And absolutely
Bill was still there.
And Steve had Bill and they were running the company together.
Absolutely.
But what's so interesting is
Microsoft
right at this time basically starts a transformational journey from
A technology company writ large
a consumer and sort of enterprise technology company to
The
Enterprise technology company. And that is a muscle that, as we talked about last episode, Steve had been building for a while, but
Boy, does he really come into his own here and Microsoft
The entire enterprise juggernaut that it
Builds.
The bulk of it really is post DOJ. It is like new business and new markets that they are getting into.
Yeah.
So then the question becomes, how did Microsoft build this phenomenal enterprise business?
And
Along with that.
release XP the most successful Windows operating system ever.
And then we're gonna talk about Vista. And then we're gonna talk about Zune and Search and Bing and Windows Mobile and Windows eight and
Yeah, all that.
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All right. So to contextualize how this enterprise business was built, it is worth understanding the shape of Microsoft's business. Like
the divisions, what products generated what revenue
Even before all this DOJ stuff. So if we go back to nineteen ninety six, Bill Gates gave a great interview where he was talking about
The kind of four businesses that they're in today.
Oh, this is the Wired interview with Kevin Kelly, right? Uh huh. Yes, it's on YouTube. It's great. It is great.
So there's windows.
Which he calls one business. There's N T slash back office.
There's office.
which he calls a four billion dollar a year business.
And those three businesses together are over ninety percent. So you can think about it as Windows, and he said NT slash back office, but this is the enterprise.
an office.
Yeah.
Which is so funny that Bill thought of it as
N T slash back office. It really exposes that Steve was the one who had the passion for the enterprise. Yes. Bill was like, it's like this stuff that businesses buy.
But I'm gonna refer to it by its
Microsoft product name of one of the products we sell, which is NT.
And then the last ten percent is everything else. So there's MSN.
E commerce, games.
Encyclopedia, Maps, Joint Ventures, DreamWorks, and NBC.
So he's talking about the interesting thing, the server business.
Which is a different way he refers to N T slash back office.
all the way back in ninety six it's the fastest growing business, even faster than Windows or Office.
So they sort of know they're on to something.
Yeah.
But
They haven't quite cracked the
go to market motion, the pricing, the service.
organizationally, how do they sort of fit it in?
That all comes later.
Or the products either, really. Yes, that's a great point.
The fact that he calls it back office, this is so telling. Okay.
So we did talk last time about
N T and Dave Cutler and the heroics that
He performed to
Right N T.
Windows N T though
was still a
client operating system architecture for a user to use a personal computer with.
NT basically was enterprise ready. It was like very networked for work groups. It ran on only the most high power PCs.
But you're right, David.
It was
Designed for the thing that
you know, the first twenty five years of Microsoft was all about, which is
PCs.
It's not like, oh we're a systems company that makes
stuff for all use cases all over your enterprise. It's no, we make stuff
that runs on a box sitting in front of you.
Yes.
And
Discovering this distinction
is what Microsoft in this next era
really, really nailed. And they
Discovered.
That the enterprise
Is not
About users.
It's about IT.
And it's about systems.
For better or for worse.
Yes.
And discovering that and the products and the sales motions that Microsoft could then go use to
sell to enterprise IT and sell systems.
Was a new, you know, multi hundred billion dollar market.
That Microsoft could now go attack and play offense in in this post DOJ landscape, whereas they're playing defense everywhere else.
Hey, here our market share is zero. We can do whatever we want here. Well, it wasn't zero, but
They were fighting Sun, IBM, Oracle. Yes, really IBM. But Sun, yeah, too.
Oracle, et cetera. And it was
Perfectly suited.
To Steve's strengths.
So Ben if you've ever heard of

Now sort of strange sounding Microsoft products. SQL Server.
Active directory.
Exchange.
Dynamics.
SharePoint. SharePoint was technically within office, but it is one of these systems types products. These are
All every single one of those names I just mentioned.
become multi billion dollar revenue.
Enterprise IT server products.
That are built and sold.
during the Steve Bomber era of Microsoft.
And
What's so like
Honestly beautiful about this is they work
In concert.
with Windows and Office.
on the PC client side.
So like this is the client server era that Microsoft really dominates here.
And
Microsoft within enterprises
All these new server products.
Work best.
with
Windows operating system devices.
running Microsoft Office applications on them.
And
those Windows operating system devices and those office applications work best with the Microsoft server products.
You now have a full system.
solution from one technology vendor
as a major enterprise.
It's like the most incredible three sided
technology flywheel ever built.
And
One benefit from this
Which of course if you're Microsoft, you don't want to lean on this benefit, but they end up doing it is
If you make everything
integrated together.
work well and come from one vendor.
Nothing actually has to be best of breed.
And so you're no longer competing with any point solutions.
You offer the whole thing.
Sure, yeah, you can consider going and buying that other vendor's directory service or that other vendor's
email server.
But are you really? Because you buy everything from us and it all works pretty well together.
Yeah.
the very, very, very best example of this that
Most listeners can probably
tangibly relate to as well.
Is
Exchange.
Email and calendaring service.
And Microsoft Outlook.
And Windows.
It all has active directory that syncs.
Across everything.
In doing all this research, it seemed to me that
Once a
Enterprise
Adopted.
Active directory.
they were gonna tip and they were gonna buy the rest of the software too because
Whoever manages the source of truth for who are all the people and what are all the resources, you know, devices and everything.
that my company owns.
Everything else.
needs to reference that canonical set of proper nouns, whether it's email, whether it's calendar. So that was this incredible sticky product.
That then you could just keep attaching more and more stuff to. Any enterprise need, oh, we got you covered. And hey, it works with Active Directory.
Yeah.
And
The whole product effort here.
Started
With database.
In nineteen ninety eight.
Microsoft takes SQL server
And it was
The first real enterprise ready
database that can rival
IBM and mainframe databases, Oracle databases.
And
Of course
Unlike IBM.
It runs on
X eighty six.
Intel architecture. So the pitch now to enterprise IT is
Everything we just said about why working with Microsoft server products is better for the whole ecosystem reasons.
Also, total cost of ownership. Don't pay IBM tons of money for their mainframes. Just go buy.
Cheap X eighty six Windows boxes from Dell or whomever.
And use that as your IT server architecture.
Fascinating. I don't think I quite understood that. And so basically
You then have N T as the operating system.
SQL is the database and then you've got
all these other applications that basically run on that stack.
And here's where exchange and outlook and everything comes in.
This is right.
There's email is
taking off as like the killer application.
In
Enterprises.
And so now Microsoft shows up and says
We've got this great new product for you.
It's called exchange.
And like maybe you were using Lotus Notes before, which of course
developed by the legendary Ray Ozzy. He's gonna come back up here in a minute.
And Lotus gets acquired by IBM for three and a half billion in nineteen ninety five. You're buying Lotus Notes from
IBM.
Come take a look at exchange.
Exchange.
Has
Email.
Exchange has calendaring.
Exchange has address book.
Exchange.

Outlook.
It is a first class included in the bundle.
A Microsoft Office.
office application that you, you know
Mr. and Mrs. Enterprise are now gonna get for all your users.
And it works just beautifully and perfectly.
With our
Exchange email calendaring and address book service.
It sells itself, basically.

Uh, and then you were talking about active directory.
That led to active directory of
Oh, okay. Well now
You've got
Your
whole database architecture running on Microsoft.
You've got your email and your calendaring architecture running on Microsoft. You've got your Windows machines out there.
Well you've got all these
employees within your company, all these users.
With all these devices, you kinda need to manage them and you need to know who has what security access and how to find each other and where should the mail get routed and all that.
Well, we've got this great new product for you. It's called Active Directory.
Yeah.
It's pretty incredible.
That's all on the sort of
Why it's good for customers.
On the why it's good for Microsoft.
Steve also pioneered this bundling idea.
Which is once you sign the enterprise agreement.
You get access to all of this.
And
If you're a customer that's only using thirty percent of the things in the bundle
If you have business needs that involve
some Microsoft product that comes for free in your bundle.
you're gonna adopt that. And guess what?
You just became a stickier Microsoft customer.
I feel like this often goes overlooked in the like, oh, Microsoft's a big boring enterprise company right now. There was a tremendous amount of business model innovation in figuring out
That bundling like that.
with additional products.
can create stickiness.
Which eventually creates more enterprise value for your company because you've got these long, durable compounding revenue streams. Oh, and all your customers are growing. So you have the whole land and expand thing there.
And
The thing underpinning it all is
The software
itself has zero marginal costs. So you can bundle in all this stuff for free because it actually doesn't cost you anything.
I know it's enterprise software, so it's not as sexy or exciting or thought about as much as consumer software, but
Truly the innovation that was happening here.
was
among the most that has ever happened at a technology company because Microsoft was figuring all this out. Again
These were not lessons that people knew.
In the IBM era that came before this in the enterprise
There were no users.
Microsoft is now figuring out how to build and sell enterprise
Technology systems.
in this new era to businesses where there are users of the technology.
And on the business side, yeah, what you just said, like this is crazy.
Microsoft said, Okay.
We're not going to just sell you the software.
We're gonna
introduced this thing called an enterprise agreement.
Where
You based on the size of your company will pay us a certain dollar amount per year.
per employee. Actually I think it was per device.
But in these days it was like, you know, most employees just had one device.
And
We've got you covered.
everything that you would want access to.
Yeah.
our whole suite of software products. Inclusive of Windows and Office. I mean it's not just, you know, a salesman comes to you and sells you Windows. This is Microsoft amoritizing
They're
go to market costs across all of their products because when you show up at an enterprise, you've got lots of stuff to sell them.
Yep.
So
Now
Microsoft has turned
A one time sale of software into an annual annuity.
That is gonna keep growing every year and is gonna grow with headcount.
And a key feature of the EA.
Is that
It is a three year agreement.
Which means
That's
You really need everything to be aligned to pull this off.
There's something pretty convenient that you may have noticed about Windows and Office.
They both tend to release
an operating system or a new package of office.
Once every three years or so. And so every customer, no matter when they sign the agreement,
is essentially guaranteed one upgrade during their lifetime.
Totally.
Here's something else that you get.
Now as a
enterprise IT buyer in the enterprise agreement world with Microsoft.
Your
needs
Yeah.
are actually pretty different than your users.
They're actually very different.
So like if you are an employee of a large company at this time.
You are using a Windows
P C at your office.
What are the set of things that you want from that device?
Well, you probably want to be able to procrastinate.
You might be able to wanna play some games. You probably wanna poke around the internet.
And you definitely want it to be easy to use and you definitely don't want
restrictions on there.
Yeah, you're willing to make tradeoffs like uh if you can get a little bit more efficiency, but trade off some security, that's fine.
if you can, you know, maybe use some pirated software.
But it makes you better at your job.
That's also fine.
You're acting with your own agency, not necessarily the company's best interests in mind.
Right.
You wanna run some VBA macros, you know, et cetera, et cetera.
Okay. Now you are a corporate IT administrator.
And all of a sudden you have to manage all these rogue agents all over your systems. Rogue agents called your employees.
You want the ability to restrict your users from doing what they can do.
You wanna say like no, you cannot upgrade this software without us doing it.
You cannot install anything. You cannot run these macros. You cannot visit these websites. Et cetera, et cetera, et cetera.
And part of that is productivity, but a large part of that, Ben, as you said, is security.
Yeah.
Security, privacy, legal compliance.
Am I gonna get hacked? Am I gonna get sued? Are we gonna lose data?
Well, Microsoft's got a beautiful solution that they can sell you, and with the enterprise agreement, you can customize all of this and we will give you exactly what you want.
Yes.
But now, David, you're starting to expose a couple features.
of enterprise adoption
Which
Have trade offs if you're Microsoft. Oh yes.
Oh yes they do.
First of all
If you are a user, you want the latest and greatest software with all the most innovative features.
Your IT administrator
has a lot of incentive to say, I don't really want to go train everyone on anything new.
So if the software never confused anyone
That's a win.
even if it means we never get any new features.
And so suddenly, and I have a direct quote from someone who is an executive in office.
Told me.
When I was in office, I always thought we could stop bundling new features for ten years and it would be fine.
No one would notice.
I think people would probably pay more for it. Office got to this point where
And I think Steven Sanovski even writes about this in hardcore software in his book and on his sub stack that at some point
They were trying to
Ship.
features that the PMs thought were great and users would love. They would do this user research. They would hear that people want them. And then the sales force would run back to them and say, no, no, no.
No do not include that! Are you kidding me?
I'm gonna have all these objections in my sale.
If you make me take this new feature or take this ribbon or take this, you know, any big UI change, everything has to be small.
and iterative and not add any training or confusion.
I joined the corporate workforce in two thousand seven when I graduated from college, and I was an investment banking analyst on Wall Street at UBS.
I started
Mid summer two thousand seven.
And
R
corporate IT systems.
my Windows laptop.
was so locked down. We were using XP, of course.
In two thousand and seven you were using XP.
Yes. We are using Office two thousand three.
Of course.
And like
Over it.
Everyone's dead bodies would any of that change.
Everything was firewalled. We could not access we couldn't install anything. We couldn't access tons of websites.
I remember when I first started, we could still access mini clip dot com. And so the analysts were playing tons of games and like
Pretty quickly IT caught on and you know, that got the Kaibosh. So
Yeah. And I'm sure UBS as a customer loved every single bit of that. The other big thing that you are talking about, which you were hinting at with uh VBA macros.
The key to enterprise is backward compatibility.
Saying
Look.
We don't necessarily need to promise you anything.
too groundbreaking. We need to meet your needs today.
And be the most cost
efficient, you know, total cost of ownership.
driven system.
That
meets your needs and your employees are fine with.
And from here on out.
Everything's gonna stay compatible. Any modifications you make, enterprise, or software you use and rely on.
We won't break no matter what.
And we will continue to support those versions you are using. Yes.
And enterprises love that.
And we're gonna put a pin in this right now and we're gonna bring it back toward the end of this episode in an really illustrative way that it can deeply

And you have built an entire brand and reputation around your backwards compatibility.
Yep.
one stat and then one point I want to make to highlight all this.
By two thousand seven.
Analysts estimated.
That
Forty percent four zero.
Of
All of Microsoft's revenue.
Which I think was about fifty one billion dollars that year.
So forty percent of fifty one billion dollars.
Came.
From multi year.
Enterprise agreements.
So these three year agreements that you're talking about, Ben.
That covered Windows, that covered Office, that covered all the products that Microsoft offered, except like Xbox.
Forty percent of all dollars were flowing from
Multi year EAs.
And then another
Fifteen percent.
Of all dollars.
That Microsoft was earning his revenue.
We're flowing from
Single year.
Yes.
Wow. So more than half the company's revenue. Fifty five percent. Yes.
More than half the company's revenue is all from this.
By two thousand and seven. So I mean it was really
the first seven years of Steve's tenure as CEO
Yes.
already tip the balance into majority.
And
The vast, vast majority of the rest.
of Microsoft revenues, you know, the other forty five percent of the company.
was the OEM Windows business.
That was thirty percent. So if you look at Microsoft revenue in fiscal two thousand seven.
Fifty five percent is this new enterprise motion.
Thirty percent is the old
Windows business, you know, Dell and Lenovo and whoever like, you know
Selling.
laptops to consumers and paying Microsoft for the operating system. Yep. And only fifteen percent of the company's revenue
Is anything else.
Yeah, it's funny, I wasn't gonna bring this up here, but since you brought up OEMs.
The OEM business model
Is completely transformational for Microsoft when they figured out
Actually, we shouldn't be just selling software directly to consumers. Instead we should be selling them
to the PC maker and the PC maker should do our distribution.
So here's a couple of stats. In the nineties, the box software
That Microsoft
would use to sell windows.
Their gross margin.
On a copy of Windows.
was twenty nine percent.
Oof.
That's not good.
Which had actual real costs.
Especially on floppies, you had to put it in the box, you had to ship it to the retailer, you had to split profits with the retailer, you had to pay the sales and marketing costs.
I mean, it's like real material. This is not a zero distribution cost, zero marginal cost business in the box software retail world.
But when they're selling through an OEM channel, their gross margin was seventy five percent.
'Cause you just ship the bits to the OS once.
And then the PC manufacturer and
Takes it from there.
Not only is it amazing because you get that seventy five percent versus twenty nine percent of gross margin,
It's also an amazing way to scale.
Because
You do a deal with every OEM, you know, as you're going down the line, it's the Visa Networks of Networks thing that I think we alluded to this last episode too.
You just get
each of them scaling on their own can accrue to you without you doing additional work to do the scaling yourself.
And so David
It's interesting. You're talking about how eighty five percent of the business by two thousand and seven was either
enterprise sales of the EA or OEM.
I mean, they'd basically kick the can to the curb on that crappy retail box software model, and they're just doing
the whale hunting with their
Salesforce.
And doing these enterprise agreements, which of course have great margin structures, and the
OEMs.
And our annuities, annual annuities. Exactly. Way better business model in every way.
They pivoted the whole business to the two best ways to sell software and completely eliminated the bad way to sell software.
Yes. And one of which they figured out.
post DOJ and it became
Yeah, by two thousand seven over half of the
revenue of the company, which is crazy. Now
Ben, when you said put a pin in a minute ago, and I know we're gonna come back to this after all the consumer failures we're about to talk about.
There is a downside to this.
When I T becomes your customer.
When you become an enterprise business.
the quality of the software, especially the user facing software, is no longer priority number one.
And this
wasn't a problem for the company.
Until
In two thousand seven.
With the iPhone.
But let's rewind and talk about
Everything that happened in consumer software at Microsoft until then.
Yeah.
what was going on with Windows releases during that time. And I think through storytelling the Windows releases, we can then understand the state of the company.
So
Windows XP.
Why was Windows XP such a big deal?
Well it was a big deal.
Technologically.
It was a big deal for users.
And it was a big deal.
Because
It's pretty wild that Microsoft
Amidst all the antitrust stuff we were just talking about.
During the nineteen ninety eight to nineteen ninety nine, the rulings in two thousand, the settlement proposal in two thousand one.
They developed
and released an operating system.
I'm it's
All of that.
And an awesome one.
Yeah, so what was Windows XP technically?
Well
For the previous
Better part of a decade.
They had two parallel
Development efforts going on.
There was Windows N T
For
The enterprise.
And there was
Windows nine X, you know, Windows ninety five, Windows Ninety eight.
for consumers.
And both of these had the same API that developers could write their applications for.
But ultimately, the way they were implemented, the way interoperability worked, compatibility worked, user experience, everything about it was actually completely different.
'Cause it was a completely different implementation.
Of
those APIs.
And so the knock against
N T was always, well, you need really beefy enterprise grade PCs to run it.
And it's not as nice and intuitive and the knock against
The Windows nine X call it ninety five.
was that yeah, it looks pretty, but it's not powerful. I can't actually do anything
It was like a friendly interface, but not a
powerful set of functionality.
that came with the operating system.
And so XP
Did the impossible
Where they
figured out how to take the ease of use of the nine X interface.
And
Make it
run on top of N T.
The whole thing is built on the NT kernel and it has the friendly, approachable ease of use that you are used to.
In Windows ninety five and ninety eight.
Amazing.
Amazing.
So the lineage of that nine X code base that came all the way from Windows three. Interface manager.
Right.
Exactly.
is now dead. And so you had the N T lineage of I guess
Maybe even you could say it started with OS two, but
Windows N T
Windows two thousand and then Windows XP.
So
Everybody's running XP now. There's two editions.
There's home and there's professional. No.
Gotta get the professional. I always got the professional. Did you?
Every time I built a new PC, I've gotta go pro.
I didn't even know what pro meant. I definitely didn't need pro because I was not a corporate office worker, but gotta go pro.
It came with all kinds of great stuff. They've got this great slide. It's a fun announcement to watch.
The
Emphasis on digital photography, digital music, digital video, home networking.
It ushered us into this age of you probably have media that you're using on your computer.
Apple famously owned this as a corporate identity with their digital hub strategy.
But you know, Windows XP
Plenty of people were importing digital photos off their camera to Windows XP. That was a a sort of big exciting use case for it. Lot of Napster clients running on.
Windows XP machines. Lot of Napster clients.
Yes.
So
Like I did for
Every Microsoft
Windows release, I went and watched the keynote.
The keynote.
Is
Extremely strange.
Think about what a
Steve Jobs keynote was back in the day, or what a WWDC keynote is like today, or a Google I.O.
This keynote.
Opens.
With a gospel choir singing America the beautiful.
And is followed
By Bill Gates and Rudy Giuliani.
Walking out on stage together.
And talking about
How bad terrorism is.
And of course the thing you need to know about this keynote is
The date.
Yes.
So this happens one month after nine eleven.
In New York City.
And it really underscores what a strange time it was in the US.
If you had
This once in three years product release.
And it was gonna be in New York.
October of two thousand and one.
You probably have this question, should we even do it? Should we
Make it all about
The first responders.
It grounds the whole thing in a very specific moment in history.
when you're watching it. In a way that no other
tech event really ever has been
grounded in history before.
So a few other things that jump out during the keynote.
Bill Gates.
is not the CEO. Steve Ballmer is.
And yet
Bill Gates is the one walking out with Rudy Giuliani to kick things off and
That's a strange and somewhat telling
element of what Bill's role at the company was.
Now you could argue he was the public facing figure.
He was the founder of the company, it seems very natural.
But also at some point
Why isn't the CEO the one doing the keynote?
Another thing about Windows XP
There was a new release of Office.
Right at the same time.
as XP.
This is a classic Microsoft move. They are able to create great applications available on day one, which makes the OS more valuable.
And so from the application's perspective, they're able to ensure that they get great market share since they're always adopting the latest and greatest Windows platform right away. So Windows success begets Office success.
And it's important to remember that that
worked for many, many years.
And if you remember back to the last episode.
Lotus one two three and word perfect.
Smoked Microsoft.
In Microsoft's own backyard.
During the DOS era, Microsoft's productivity apps
Did not get real adoption.
in DOS, which is crazy.
So when they were making Windows, they basically swore never again. They ensured that they were going to be very early with applications on those platforms. And so as Windows took off,
Office also got huge market share.
And it's smart to remember this lesson and carry it forward for years, maybe a decade.
But again, I think.
They may have been on this strategy.
A few years too long.
Forever it kinda became gospel at Microsoft.
So with Windows goes the company.
And so you need to
do things to make sure that Windows is gonna continue to succeed because that is our
company's platform and livelihood. It's almost like the old Disney adage.
So with animation goes the company. And until
Twenty fourteen, Microsoft felt the same way.
Yep.
And
Yes, that is true for all the traditional reasons in the XP timeframe. The reason it was
Also true in part one of our Microsoft series.
It's
Even more true as Microsoft becomes an enterprise company because
Windows is at the heart of the enterprise agreement.
the whole value prop of all of our server technologies is they work great with your Windows devices on your network.
Right. And so there's strong incentives everywhere for Microsoft to ensure
that Windows is the standardized platform that everyone wants to have on their PCs.
because it kind of makes everything else work.
And so of course they're gonna release a new version of Office that shows off the latest and greatest of Windows. And I think this XP timeframe.
Is
the showcase moment of when that was a a great strategy and we'll contrast that later.
Yeah.
The other thing to know about this XP time frame is last episode we talked about the incredible secular growth trend of the PC. That was this crazy tailwind for Microsoft.
one of the greatest tailwinds you could ride in business history. PC shipments, I believe the stat, David, was that they grew 98%
per year.
over the eleven years between the founding in nineteen seventy five and the IPO in nineteen eighty six.
The crazier thing is
Even as late as two thousand and one with Windows XP
They were still
riding this tailwind.
The US household penetration of personal computers, again flashing back pre IPO.
was only eight percent.
So that whole doubling year over year over year
by Microsoft's IPO, they still only got to around ten percent of penetrating the US.
By nineteen ninety seven, thirteen years later, it grew to thirty seven percent.
And after a couple years of XP being in market, two thousand and three
It had grown to sixty two percent.
So I think the craest stat is actually that last one.
Two thousand and three feels like a modern moment in history, but PCs were still only in sixty two percent of US homes.
Wow.
That's crazy.
The P C wave is just one of the greatest secular trends in history.
Particularly if
you have a monopoly share of that market.
Yeah.
And
They as defined by the US government did.
Been define define for me.
As this market grows, are you going to be able to continue to participate in it? It's like, yeah, we basically are a tracker for that market. Like it grows, we grow with it.
Jop.
And now might be a good time.
certain Microsoft fans have probably been listening to this episode and gripping their phones with all their strength like
When are you gonna talk about Xbox? We're gonna talk about Xbox briefly right now.
We will do a whole nother episode on Xbox someday.
Maybe, David. Well make your case and then
Let's talk about it.
My case is I love my Xbox.
Well
It's important to know Microsoft didn't start in gaming with
The Xbox.
Windows ninety five, they ship direct next, that
changed the world, they became a real gaming platform.
Because of that, is this unbelievably clever
set of APIs that went entirely around Windows.
Amazing piece of technology. You put Microsoft on the map and you have the whole rise in PC gaming for the next six years, even before the Xbox.
Yes, totally.
Microsoft is so huge but
This is one of the things that kinda gets lost to history, but you are absolutely right.
Direct X.
was so important in that
Late nineties era for PC gaming, you know, quake.
Counter strike everything that happened half life later.
That was
enabled, you know, Doom came before and was
really just like the genius of Carmac as a programmer to enable a first person shooter to hap on a
PC hardware without something like Direct X and hardware acceleration.
But yes, everything that came after that, the birth of the first person shooter genre.
Huge.
Story to tell another day, but
You're right, that leads into
Xbox and Microsoft's
Entry into the home.
Console.
Crazy, that happened in November two thousand one. So
Just like a couple of weeks after the XP launch. It was a big time for Microsoft.
And how crazy is this?
They thought they were getting broken up.
Right, as they're launching a video game console.
And this operating system that they've been working toward for like eight years.
Yeah.
This is also part of my argument of
Microsoft was such a dominant consumer technology company.
Before DOJ.
Because even though all this stuff comes out right after, it's the momentum still from before that's carrying Microsoft through to it.
Yeah.
Okay, while we're in X Box Land, should we finish our X Boxiness right now for this episode? Sure.
Xbox has become an important
Part.
Of our world.
But not an important part of Microsoft's business.
Agree.
David and I sort of heard people utter things in our research like Xbox has kind of been a lifetime breakeven business, or it's never meaningfully contributed to Microsoft. So I tried to figure out as much as I could from financial statements. And I gotta thank Alex at the science of hitting. It's a great sub stack.
For helping me with this.
If you look, there was a division called entertainment and devices.
that was part of their old reporting structure.
And
If you look at the E and D
reporting over time.
Let's start back in two thousand and six.
They generated
Four billion dollars in revenue?
lost one point four billion dollars.
operating loss. So this is five years after the Xbox has come out.
Loss making.
Two thousand and eight.
They do
eight billion dollars in revenue.
Four hundred million dollars in profit.
So like even as it's becoming
A real business at steady state. Yeah, as three sixty is yeah.
Coming into teeny margins.
Yeah, totally.
Two thousand nine.
Eight billion dollars in revenue.
A hundred million in operating income.
Two thousand and ten, another eight billion in revenue.
Seven hundred million.
This is seven hundred million dollars to Microsoft.
In this time frame, they do call it twenty billion dollars of profit.
Yeah.
What's six hundred, you know, seven hundred million.
There's a great quote. Oh we'll bring it up again later, but
We got to talk to Steve again, uh to Bomber as we were preparing for this episode, and he had this amazing quote to us about
Some of his acquisitions that didn't go well.
We only lost money.

It's such an important point.
In the context of Microsoft, money is not the scarce resource.
The scarce resources, time and talent and focus.
Yes, David, that is exactly the right point. Microsoft since year two or three has never been capital constrained. And Bill Gates says this in an interview.
Any time we've thought about
Making
investment, it's just do we have enough
talented people to pull that off.
on any given year, I can't deploy all of the dollars available.
as a CEO, as a capital allocator.
because I'm constrained by the amount of smart people we have to pull it off.
That is a
much different position than most businesses are in.
Yes.
But is absolutely
the case not just for Microsoft but for
All the at scale tech companies these days, you know, the top five market cap companies in the world. Yep.
Money is not the issue. Right.
In fact, you're making my point for me. If I had to make the case of why Xbox has been somewhat of a folly,
And perhaps not worthy of a full acquired episode, it would be
There was a lot of Microsoft's best
People worked on Xbox.
This is a group of people that went and created Xbox Live that by 2012 had 40 million subscribers. So people who built a core competency of running a big online service.
I mean this are some of the best product people the aesthetics.
Of Xbox.
from a physical perspective, but also the software.
I just think
It
was a sinkhole of some of Microsoft's
Best product people.
And just hardest working people. The culture at Xbox was so hard driving.
To produce
At least in this point in history, up to the two thousand ten time frame.
very little in the way of contributing to Microsoft's business.
But
soaking up a huge amount of the talent. Imagine if that sort of product
design.
sensibility was deploy across the rest of Microsoft.
Yeah.
Totally.
I think Xbox Live is debatable. We'll come back to this with Azure. Yes.
Xbox Live was
One of the
original pioneering
Internet services, subscription services.
Across any category of
Software and technology.
And the DNA and experience that Microsoft built from that served it extremely well.
I mean yes.
I think there are two gigantic benefits. Look.
The gaming market
is massive and important. And if you could try to own one market in the world today in the world of entertainment, it's gaming. I'm just saying Microsoft
Didn't
Up until that, at least this point in history.
But
It's the right market to go after.
They were not successful in
Capturing value.
From it at this moment in history.
But you're right, the two big things that they were able to do is build out a core competency of running a big online service, which totally
led to Azure.
Which we'll talk about later.
And two
It really did make Microsoft relevant with a whole new set of consumers.
when Microsoft was completely irrelevant in their lives.
Should we talk about Vista? Yes.
Oh boy.
There's a little tail off of XP that'll lead to Vista. We gotta talk about the code names too. Yes. So the Windows XP code name.
David was what?
Whistler.
Of course, like the beautiful ski mountain.
Real close to Vancouver.
Lot of Seattleites go there. It's a favorite of many a Microsoft employee.
And
Black um.
The ski mountain right next to Whistler is yes, Blackcomb, which became the name for the theoretical release that they wanted to do like just a year or two after Vista. We're gonna follow hot on the heels.
Of that.
Oh boy.
But
Black home started becoming pretty technically hairy.
So they decided to push the date out. Another reason they had to push the date out was
Windows XP for all of its usability and reliability was very insecure. And so Microsoft had a whole thing where they thought they were gonna spend like three months putting out a service pack. They spent
the better part of two years.
iterating on Windows XP to come out with a release that really people at enterprises could trust as no viruses, you know, this is safe to deploy in your enterprise. This was service pack two, I think was what ultimately
Yeah.
Windows XP S P two is the stuff of legend. Like that's the good one.
So that pushes Blackcomb's date out.
And
It also ties up a lot of the talent that Microsoft needs to start working on the next generation operating system.
Which again they thought was gonna be a fast follow.
For anyone who skied up there, there's this great
ski lodge restaurant right between the two mountains.
Called the Longhorn Saloon.
Yep.
Longhorn, baby. That sounds like a great name for a modest release to follow XP before we get to the big hard changes that are gonna come in Black Home.
Yeah.
Boy.
David, the look on your face.
So I remember being like a teenager in high school at this point in time and
Reading.
All about
Longhorn.
Black um.
All the stuff on the internet, you know, on these new tech sites.

This is gonna be amazing. I remember
Downloading like new shells for Windows XP to mimic the longhorn UI with the sidebar and the clock of the side.
Oh man, what a disaster. Well this was part of
the belief behind Longhorn
They wanted to market.
all the cool stuff they were doing for it.
through these sort of like developer blogs and fan blogs.
even though the product didn't have a ship date yet.
And so everyone
got really well versed in what was coming in Longhorn.
And then everyone was kind of sitting on their hands like
Where's Longhorn?
They've been really telling us about Longhorn.
In a way that you would never see today. No one's dripping out the features of something that is potentially still years away.
From a release.
And ultimately then
Years go by.
Five years go by.
Yeah.
Could you imagine if Apple on their developer site, Apple were just like, Hey, here's you know iOS twenty three. Here's all the great new features we're building.
I mean the funny thing is they actually kinda did that this year with all the AI features. All of those are coming soon over the next year. Dot dot dot.
Which I'm not saying that's a bad strategy in the current environment, but it is a different strategy for Apple.
Anyway.
Longhorn is teased for five years. All the David Rosenthal's out there are kind of like
What the heck, Microsoft? I've been excited for all this crazy stuff you're showing me.
What's going on?
Well
What happened behind the scenes?
David.
What was the
Initial
Technical
Spark.
That was supposed to be
The cornerstone
Of
Longhorn.
Well, there were
Three
Pillars of I think it was all originally supposed to be black comb.
And then they're like, No, no, we're gonna pare it down to Longhorn, but it all ended up getting added
Back into Longhorn.
The first of which was called Avalon.
And it was a new graphics engine that used direct hardware acceleration. So I think the vision for this was kind of like, hey, we're gonna take Direct X.
And bake it into the operating system and allow the operating system to use
GPU hardware acceleration.
Yeah, that's more or less it. All these codenames ended up referring to
multiple things because
it was emblematic of the organizational disarray inside the Windows development team.
But anyway, it sounds great, right we can render all these really great graphics as a part of the operating system.
'Cause it's GPU accelerated. Who doesn't want better graphics? Of course, right?
The thing that
ultimately happened is the OEMs were all trying to make netbooks. And so they're furious at Microsoft about
saying the next new release of Windows, which is five years since Windows XP.
they really, really are counting on
a new version of Windows to drive PC sales and the one that they're getting
requires pretty good GPUs.
Like a gaming PC. Yeah.
So it was like a kind of a total miss with what their OEM partners
We're looking for.
But
If you did buy a nice PC and you did eventually end up with a copy of Windows Vista, this is why.
You got to see the new what w uh
What did they call the Oh the arrow interface. Arrow, that's right. The blue shiny sort of thing that was like kinda ripping off Mac OS's aqua. I mean call spade a spade over here. We can tell where your true loyalty lies.
Well, I'm just saying, like if you run a company where you make all your own hardware and your own software, then it's much easier for you to hardwacerate all the graphics in the operating system. But when you're counting on OEM partners,
You need really good communication there.
Yes.
Yeah, that was one. The other one was a new web services framework called Indigo, which
I don't know. I did a lot of research and I couldn't figure out what it was supposed to be. I think it was kind of a
fever dream of like, let's stuff the internet.
Fully into Windows?
Ultimately, there was a very fundamental architecture shift that just did not pan out. If you remember from the last episode, we talked about Chicago, Windows ninety five, and Cairo, this theoretical thing that never shipped that was gonna be the next generation operating system.
Well,
They basically tried it again. Did the same thing again. Yeah. I I think Bill Gates was a big fan of this vision,'cause it was really technically ambitious.
Where they had an object oriented file system where the file system
could specify data types.
And then every
application would plug directly into
the data types that the
File system.
knew about.
standards like a calendar invite's a calendar invite.
And the operating system has its own
Fields.
for date and time and notes
And that means you're not always traversing directory trees whenever you're trying to search through stuff.
And also
it meant that the operating system could actually reach into the data within files that were being stored by applications. So it was sort of a standard way of storing files in an easy to search way.
What you're talking about here is
The third pillar of Longhorn slash Black Home, which is Win FS, right? Yes.
Ultimately When F S
They tried to build it.
Many times.
There was a lot of offsites and architecture reviews.
And
Talking about how great it was.
when in practice there was never any pull from application developers that they wanted this in the first place.
And this was a huge part of the wheel spinning of well, we can't
do all this other stuff in the operating until we figure out the spec and the implementation for WinFS.
And then once we have that, then we can start to do all this other stuff.
Part of the other stuff was the.NET development team wanted to bake.NET directly into the bits of the operating system that shipped in the box and on your PCs. So dot net was everywhere.
So ultimately
What happened here is and I heard this from a developer
there was many different groups who were all compiling their own sub projects and they could sort of run them, but when it came time to try to actually
do a build of this operating system.
And say
Hey, we've had too many offsites and architecture reviews and restarts and this is in, this is out. Let's just try to do like a build of the OS.
that we could deliver.
They never built Longhorn. Like it did not compile. They could not integrate
all the different projects into one.
And they ended up reforking.
from an old Windows server version or something.
And
adding things in one by one piecemeal.
to try to figure out, you know, in year four, how can we get something shippable?
out to consumers so we can say this is our next generation operating system. And what is the minimum acceptable set of stuff that we can put in such that it looks and feels new?
Yeah.
So
Okay.
Longhorn Vista. This is truly a disaster for the company.
Well so
A hundred percent it is, but they were trying
To
Talk about it like it wasn't.
So I watched the launch announcement for this too. They kind of have to.
They can't really say like nobody should upgraded this. So they come out.
First of all.
It's Bill Gates again in two thousand and six, six years after Steve Ballmer has become CEO.
My opinion on this is they clearly had no idea what to talk about in the keynote.
Because
The one feature that I can kind of really remember as a flagship feature is that
alt tab switcher that was three D that kept bringing the windows closer and closer and closer to you. You know, they've got the widgets, they've got the sidebar, it's arrow.
They had one feature that
people hated there was a revolt called user access control.
Which
The theory makes sense protecting users from running malicious if blah, blah, blah. But in practice, it would just overwhelm you with dialogue boxes all the time and everyone's just trying to figure out how do I turn off the dialogue boxes.
So
They're standing up there at the keynote.
The
Whole thing.
The marketing message is the wow starts now.
Oh boy.
Oh boy. It's a completely incohesive, incoherent set of
things they're launching.
Consumers didn't like it. Businesses tried not to upgrade even as late as two thousand and nine.
So
three and a half years after launch, something like that.
Three quarters of corporate PCs are still running XP.
And had never upgraded to Vista.
Oh, it's even worse than that. You may have this in your notes, but
Microsoft.
OEMs were so unhappy because consumers didn't want to buy Vista machines. Microsoft had to
extend the ability for their OEM partners to keep selling XP
machines to consumers for another two years after this.
Just brutal. This was kind of the Windows culture at its worst.
I worked in office, so I have a bias here when I was at Microsoft, but
They weren't super ship date driven, whereas Office would set a ship date three years in advance and then they would hit it exactly.
Office had all these really robust
procedures for shipping.
You know, a triage process, an escalation process, a zero bug bounce.
Everything was run in this dev test PM triads.
The excuse was this general guise that
This is
too hard to use your processes. Like we're doing alchemy over here. And because we're doing
systems level programming.
None of your
software development principles work on us.
And so
Ultimately, this was the failure mode of
a process that really did work for a while, really did enable technical genius, really did enable solving hard computer science problems.
And this is effectively the company smoking their own supply.
and just believing they were smarter than everyone else and what consumers wanted didn't matter and if they could come up with some
hallucinated cool technical thing.
then that is what they should spend years doing and fighting about and then force into the market. And the market just didn't take it one bit.
Yeah.
And
A couple other things on this.
One so when Vista actually ship just sort of you know process wise.
It was, Ben, as you're saying, a complete reset.
So
Brian Valentine comes over from Exchange, you know, in Windows server in the enterprise world to
Take over managing.
getting something out the door. Just cut all the features, cut all the pillars of the
Windows longhorn vision.
It still takes two years in that process.
to get it out. And then immediately afterwards Brian leaves the company.
Lots of other
Great engineers leave the company too.
they go down the street to Amazon and then Brian ends up leading the entire
Engineering platform team for Amazon.com.
Wow. Oh, I didn't know that's where Brian went. Interesting. Yep.
Yep, he went to Amazon. He was like a named top senior level executive at Amazon for a long time. Wow.
You know, and then the other thing about this whole
Process.
That this is purely my own speculation. Like nobody said this, but just
As I've been thinking and reflecting on
How
seminal a moment the antitrust stuff was to Microsoft after
the height of their consumer power.
Right beforehand.
I think this might be a case where
Bill no longer being CEO and just being chief software architect.
really impacted this process.
When you're a CEO, you have to engage with your OEM partners. You have to engage with
Enterprises. You have to engage with customers. And
Not that it's all Bill's fault by any means, but
This
Long horn black home disaster.
That as you say was a case of getting high on your own supply within the company.
And if he's only spending his time on technicals.
You need some introduction into that feedback loop.
some governor on how deep to go in re architecting windows for rearchitecting Windows's sake.
Right.
And you know
Remembering back to part one, too, it's not just that
Bill was a great engine. He was a great business person, one of the greatest of all time. He trained from birth. It's like what company am I going to be CEO of, right?
The issue
with Microsoft is that there is only one Bill Gates.
Bill was the best engineer, Bill was the best lawyer.
Bill was the best.
deal negotiator to figure out what the right B D situations were.
Bill was not the best
enterprise relationship builder. I don't think Bill had a passion for empowering the enterprise.
And you know, making sure that businesses succeeded the way that
Steve was.
But
Nobody should ever sell Bill Gates short and say he was just the technical genius. That would be wrong.
Totally.
Yeah.
Anyway.
This is really bad.
At the same time as Vista actually is coming out in late two thousand six.
This is when Apple starts running the Mac versus PC ads. Which is just brutal.
And
Oh
Boy, if you're Microsoft does that hurt. And like
Mac sales are irrelevant even today in twenty twenty four.
Max sales are eight percent of the market.
And what were they at this point in time? Like two or three percent?
Zero. I don't even know. Like, you know, it doesn't matter. But
The point is not
that Apple is taking massive amounts of market share from
Windows it's that's the one.
They are hitting a nerve.
with consumers, with enterprises, and within Microsoft itself, most importantly, of
Shoot, we are way behind here.
And the part that really hurt about all those Mac versus P C ads is so many were just straight up true.
Yep.
You know, I'm a PC and I crashed again.
To be in the halls at Apple when they're firing at all cylinders, Steve Jobs is back.
The iPod was a smash hit.
You're developing the digital hub strategy.
Macs are starting to sell because of that. Your iPod
attach rate with Macs is actually working. People are buying Macs
Macs are becoming the option that students are starting to pick.
as they're picking their college computer.
Market share's rising.
And Microsoft comes out with Vista.
You just have to be beside yourself with this gift you've been giving. Like, Oh my God, look at this opening.
Here's where it mattered. And the timing mattered so much too.
This sets the stage for the iPhone.
Because
Apple now.
In stark contrast to Vista and with these ads is training consumers with the benefits and the joy of it just works.
Yeah.
What did the Mac do? It just worked. And what did the iPod do? It just works. And what did the iPhone do? It just worked.
Right. Yeah. Cause there was this pent up demand. I remember people in two thousand and five and six when the rumors started
There was this almost like glint in people's eyes. What if Apple made a phone?
Wouldn't that be awesome? And it is remarkable. Like the iPhone delivered on all that promise, but there actually was
Wow, what if we had technology as good as the stuff that Apple makes?
in the form of a phone. Wouldn't that be great because phones are so crappy.
So I think, yeah, you're right. There's something there. There was a training of associating the Apple brand with Well, it was really a setting of the Apple brand promise.
At this moment in time. Yes.
That's a great point.
And
I think we gotta call it here.
the death of Microsoft as a relevant consumer technology company.
They never recovered from this.
As a leader.
Well
Yeah, I think that's correct.
There's a lot to talk about in their consumer technology offerings.
I also think
This is the death of Microsoft as an interesting platform for developers.
Who is writing Vista apps?
the Win 32 API as a potential target for my new interesting innovative application.
It's just not a thing anymore.
You have to write a Windows app at this point in history.
Because it's where
a bunch of the users are. If you need a desktop app for real, for real, but probably you're just writing a web app.
You've lost developer hearts and minds, which is the
Path to losing relevance.
I think with one exception, I think you were totally right. Nobody is writing Vista apps.
But the only people left who are writing Windows apps, period, are enterprise developers writing custom software for enterprises. Yep.
That's a great point. That is the exception. And of course
Anyone that had a lot of the same thing.
big legacy applications for Mac and Windows. So Adobe is a great example of
They're going to keep that up forever.
But where these
new disruptive software players are coming from.
They're just not gonna have Windows apps.
Facebook is not writing a uh Windows Vista app.
Correct.
So the biggest
things to hurt Microsoft coming out of Vista.
R
What we just talked about losing developers.
What we just talked about losing
users, I mean consumers who are excited to buy a computer, they're just not excited to buy a Windows Vista PC.
But the biggest thing is they lost
years of their very best talent.
I mean, Vista was a black hole. As it just kept growing and growing and growing, it would suck in more teams. And as it sucked in more teams,
you would get the talent that it would suck in, but then it also would suck in executive and
distinguish engineer talent from elsewhere to come
Fix it.
And so
Microsoft is about to be in a place where they need to compete.
And understand a changing landscape in social, in mobile.
In search
They still have to fight the browser war. I mean, IE is peaking and about to start falling off a cliff and are completely consumed by Vista.
So
I think a lot of the consumer stuff can be answered by
Steve Ballmer wasn't really a consumer oriented technologist.
That seems fair.
I think that is true.
Sure, true.
But that's not the whole answer.
Vista consumed a bunch of the smartest people, even if they had the right vision to be chasing.
And the DOJ had just crippled.
The culture among many other things.
And they were still recovering from that.
A hundred percent. In that conversation,
That we had with Steve where he, you know, made the comment about
My acquisitions, my mistakes, we just lost money on the bad ones.
The genesis of that conversation was about Vista. You know, he was reflecting, he said
That probably was the worst moment.
Actually in my tenure as CEO. That's right. Because all of that best talent, everything you just said, Ben.
It was off the field. It wasn't playing. It was out of commission.
Right.
Money's not a scarce resource, so bad acquisitions, whatever. Who cares? It's just money, but
consuming a huge percentage of Microsoft's most talented engineers.
That's company killing.
Yeah. I mean hell, even
Taking Brian Valentine off of Exchange. Exchange was freaking killing it.
In the enterprise.
And
He goes and spends two years
getting Vista out the door and then goes to Amazon.
Oof.
That sucks.
Brutal.
It hurt so bad.
That
A bunch of our best systems people.
were leaving the company
Driving across the lake.
going to work for an online bookseller.
And then building that online bookseller.
into the market leading
Enterprise Compute Company.
That is a black eye right there.
Yeah.
Oh, I can't wait to talk about that.
Okay, Ben, I'm too excited for Azure. Let's
do search, let's do mobile, Windows eight, Zune.
Let's get all that. Oh, yeah. And then let's talk cloud, baby. And David, unexpectedly, there is a through line through all of them. There's a cohesive story that leads to Azure here. Oh yeah.
All right listeners.
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Okay.
So
Search.
And
The alternate title of this chapter could be
An acquisition that wasn't.
Think that's a uh
Lost to history moment is the acquisition that almost happened here for forty seven billion dollars.
Ooh, okay.
So
I'm just actually curious, do you know the company I'm referring to?
Do you know the the deal?
Well, it's funny, the way you phrase that, I'm thinking like Oh, did Microsoft try and buy Google and I don't know about it? But the number, of course, you're talking about Yahoo.
Yes.
Yes. Okay. So let's set some context before we get to this
Two thousand and eight.
Yahoo attempted acquisition.
So there were two companies that had developed
programmatic advertising technology to serve and target
online ads, especially in search.
There was double click, the market leader.
And there was a quanive.
Microsoft had lost the double click acquisition to Google.
They bought a Quadev and that didn't go well. It was seven billion dollars and they ended up declaring basically the whole thing a write-off.
So
Microsoft is desperate for search market share, and between their internal efforts with MSN search and
I believe it was called Windows Live Search.
Yep.
They were not making much progress there.
And at the same time
Internet Explorer had totally languished.
Microsoft
had completely taken their eye off the ball of the browser wars from ten years earlier.
And
IE was just widely regarded as a garbage browser.
And web developers hated it'cause it made you
Write a bunch of weird custom stuff. So randomly things wouldn't work in I.
users hated it because basically nothing new was coming. Every time a new version of the operating system would ship, it just felt like it's the same old internet explorer over and over again.
And you have Firefox coming on the scene starting around two thousand and seven.
Where it was really making a dent and Google was the default search.
From Firefox.
Yeah.
Firefox.
Was awesome. It had tabs.
IE didn't have tabs at the time. That's right. Oh my God.
you know, Safari I don't think Safari had tabs either. Chrome wasn't a thing yet.
And so
I know I'm on the one hand talking about search, on the other hand talking about the browser, but it's the same pot of gold. But it's the same thing.
Right.
Yeah.
It turned out search was the business for the browser. Yes.
So the thing that you kinda have to realize
Is
The browser
Is
The front door
To search.
Search is heavily, heavily monetizable.
And if you're Google and you can monetize it directly, that's great.
But let's say you're not Google. Let's say you're Firefox or Microsoft or Apple.
And you don't have this incredible
business model of people bidding on the keywords for search and all the RD to go into making search good.
But you actually do have the user attention, the front door.
Well you get to monetize it too.
The rumors are that Apple makes something on the order of twenty billion dollars a year today in twenty twenty four from Google as being
the front door to Google, sending all of the iPhone search traffic
to Google.
This is the traffic acquisition cost in Google's financial statements. Absolutely. And so if you can be in the business of operating a scale search engine,
Or you can be in the business of directing traffic.
to a scaled search engine who is willing to pay you for that traffic.
It's gonna be a great business.
So David, as you just said.
The way to monetize the browser.
Is
owning and operating or directing to a search engine.
So
Search isn't going well at Microsoft.
At first it was sort of because they just didn't take it seriously enough.
When Google first started in nineteen ninety eight
I think there was a lot of scepticism that the auction based
advertising business would really work.
And then there was skepticism that it would really scale. And then when it went public.
people are sort of looking at it almost freaked out at how profitable it was.
And then even after that, people didn't really realize that
Being the market leader at search was way better than being number two. There's these massive, massive returns to scale.
And the reason for that is just pure marketplace liquidity. If you have the most
Searches.
You can create the best data.
from the searches and you can return all the best results because you have the most data.
And on the advertiser side, you have the most advertisers who are willing to come in and bid to the highest possible price.
You just get to make the most money by a country mile.
versus other search engines.
And then it locks in even further because you can spend more capex on the data centers and more on R and D and make the search better and more performant and faster and all that. Google is search as monetized by a ad based auction is
one of the world's true marvels.
It's one of capitalism's greatest discoveries.
We may or may not do an episode on Xbox someday, Ben. That's for Ben and I to discuss, you know, privately for the parents to discuss after the kids go to bed.
But we're definitely gonna do an episode on Google.
Yeah, it's criminal that we haven't.
So
Microsoft is really nowhere to be seen.
in search and
Part of it was just thinking, oh, well, search is just a feature of MSN, but there's all these other reasons to come to MSN.
Or hey, this is a product in the portfolio of Windows Live and
you know, we can kind of do it with the talent that we have here.
Ultimately.
Someone needed to grab leadership at Microsoft early, 2002, 2003, shake them and say nothing else matters.
In the next
Five years.
except you figuring out how to meaningfully participate in search revenue, cause that is just the next
Big wave.
in technology and it's a fantastic business. Yeah.
You need a D
Equivalent of the Jay Allard Windows the Next Killer application on the internet or the Sinovsky Cornell is wired memo.
So
In two thousand and eight.
Microsoft puts a deal on the table.
that gets a bid all the way up to forty seven billion dollars.
To buy
Yahoo
This was effectively their last Hail Mary.
to become relevant in search.
They actually didn't launch Bing until two thousand and nine.
Google was started in nineteen ninety eight.
And went public in two thousand and four.
And
Microsoft
got serious about a branded search engine in two thousand and nine.
But
Clearly.
before that they're starting to realize
This is a big deal. We need to participate in it.
you know, what do we do? So they'd been negotiated by Yahoo two thousand and eight, after a bunch of negotiating and flying back and forth.
Finally, both David Philo and Jerry Yang fly up to Seattle.
And Steve Ballmer goes to Boeingfield and they have a meeting at the airport.
This is one of the great
What F scenarios.
This feels like a uh episode of Entourage. Right.
It's totally right.
There's conflicting reports of what happened.
From what I can tell.
Bill and Steve
kinda looked the Yahoo guys in the eye.
And decided.
These guys are kind of jerking us around. They really don't actually want to be a part of Microsoft at all.
And this has gotten so expensive.
That
If we
Execute the transaction.
Or God forbid they even
try to negotiate up even higher, it's just not gonna go well because it's gonna be an organ rejection here.
So
The deal completely falls apart.
It's interesting to try to look at the deal and figure out
Even at that high price of forty seven billion dollars.
Was it a good deal for Microsoft?
So here's how to pull it apart.
Of laughing here. I was hoping I could surprise you and be at the end of it, like
have something to say here, but I think you're gonna take my thunder.
Let me know when I do and tell me if it rhymes with Schmalybaba.

Yes. Yes.
'cause I'm just loving I'm smiling the whole time. I'm imagining, you know, all of you listening being like Forty seven billion dollars for Yahoo.
What are they smoking?
Keep going.
So here's how to pull it apart.
Yahoo had about 15% market share of search, which I think was number two. Google was way, way, way ahead.
And so
On the face of it, you're thinking, wait, forty seven billion dollars to buy fifteen percent market share in search.
But there's actually two other assets in here.
There's
Yahoo Japan.
Yeah.
And there's a stake.
Yeah.
Alibaba.
Not just a steak. Which famously
Is one of the greatest investments of all time. Forty percent stake.
four zero percent of Alibaba.
So collectively, those two assets together are worth over thirty billion dollars.
So if you back it out, it's really only like fifteen billion dollars to buy fifteen percent of the search market.
Yeah.
David, what is Google's revenue today?
Alphabet's annual revenue in twenty twenty three was over three hundred billion dollars.

So
Would you want to pay
A billion dollars per percent.
of market share.
of that market.
Yeah.
Sure, it's just money, why not?
I mean it's the craziest thing this would have been ludicrously profitable.
To spend only fifteen dollars to buy
fifteen percent.
of the search market.
Which is
way bigger than a hundred billion dollars and still growing.
This is the thing people just always
continually underestimate and under appreciate about the search market.
Is it's just so large and so profitable.
Yes.
Now, because this is counterfactual and we actually don't know what would have happened.
Yahoo.
completely went away. They sold for five billion dollars in their most recent transaction to be co-owned by Verizon and Apollo
So there's this real question of like
Okay, if Microsoft bought all that traffic.
Would they actually have been able to harness it and build a Google like business?
Or
would it have just gone the way that Yahoo was gonna go anyway.
But
to make the bull case on that.
Bing.
is a good business. It just has a small market share. Microsoft succeeded finally in two thousand and nine at attracting all the right talent and taking it really seriously and building
A
super viable search engine.
That
does I don't know, something like a billion a year in profit.
Well,
you know, then they do go on and launch Bing and they actually sign a commercial deal with Yahoo to provide the search on the back. So they're not getting the Yahoo traffic. Yahoo's still monetizing the traffic.
But Bing is getting all the data from
Doing performing the searches for Yahoo.
And
I know you know this, but most listeners will not remember.
You know who the leader of Bing was for a brief period in its early days here.
Satyan Adela.
Satya Nadella, that's right.
Other piece of Satya trivia that I very much suspect you do not know.
Satya joined Microsoft first in nineteen ninety two from Sun Microsystems, and he joined as an evangelist for Windows N T.
He joined as an evangelist?
An evangelist. Huh. And then he got his first product job.
Do you know
What product?
It would never ship.
But a product in development.
That job was.
Ooh, no I don't.
Tiger server.
The cable soft information super highway.
Fever dream.
Where did you find that?
It's in his book.
Oh my gosh. You shouldn't hit refresh.
Was he actually I always thought he was in the marketing side. Well, it's a little Microsoft
Product managers are marketers.
They don't live in the engineering org.
Yeah.
Fascinating. There's so many things about his history that are not a part of the common narrative. Like
He I think
worked in Dynamics, their Salesforce competitor, their CRM for a while.
Which they had acquired.
And then he I think ran BizTalk server, which was another one of these enterprise server products.
And then bang.
Wow.
And then they plucked him out of Bing to go run Azure, right?
And go around server and tools, which Oh we we will get to that in a minute.
Pause. Pause.
Okay, some of the other fun
Tidbits of this Yahoo deal.
So
Bing Powers Yahoo search.
Microsoft
does the ad sales for both sides. So while Microsoft doesn't get the user
you know, they don't have the direct relationship with the users.
They do get to build up
their marketplace liquidity on the advertiser side.
And as you mentioned
There's a huge data advantage.
Uh
actually powering the search.
While Yahoo gets eighty eight percent of the revenue in the deal for the first five years.
Arguably.
The
value from this basically all accrued to Microsoft.
because they ended up building out not only a proper
Advertising.
Business which now
is used on a number of different sites, I think even in partnership with Netflix for their ad supported tier.
But also
Bing.
Once it had all the Yahoo traffic.
needed to be a
scaled web service.
Yes. Like a distributed computing system.
That operated at
twenty four seven uptime with super low latency, fast response time, and huge scale.
God, that sure sounds like the cloud.
It sure sounds like the cloud. So you've got
Xbox Live, where they have 40 million users, you have a scale search engine, which is like the number one.
Most
Difficult.
distributed computing problem that if you get good at that, you can get good at lots of other stuff. The ingredients are really starting to come together for the right
talent and DNA at the company to
Do well in building out the cloud.
So funny. The other big piece of it, honestly, maybe even the biggest piece of it from
Talking to folks.
was hot mail.
Yes. Microsoft had acquired Hotmail back in nineteen ninety seven and ran it the whole time. It eventually became Outlook dot com, I think.
But you know, it's running a consumer web service for
Decades at scale.
Yep.
But
Oh my God.
It's
So unfortunate that they didn't.
By Yahoo.
Just because of the Alibaba stake.
Nothing else would have mattered. Forty percent of Alibaba at IPO in twenty fourteen when Alibaba IPO debt stake was worth ninety two billion dollars. Well obviously Microsoft is not a hedge fund, but like these things are hard, because how long would Microsoft have held that?
Yeah, totally.
But
Man, if they did.
That'd be crazy.
It's so funny.
Yeah.
One of the greatest venture investments of all time.
Yeah.
Okay, so at the end of all this, you might be wondering, why was search so important?
How did Microsoft get so obsessed with the search engine? Why are they still running Bing today?
Why has it been this sort of white whale for them where they continue to try over and over and over again to do search deals or acquisitions or things like that?
Well,
Search.
monetizes incredibly well.
So Microsoft is sitting there realizing
Okay, we're a technology company.
Historically, what we've done is sell licenses of our software, and people have paid us directly.
But there's this new business model emerging.
That appears to
Just scale infinitely.
where you can make three times or more
off of each user.
Again, using software, but not selling the software to them.
That's a much better business.
If I could take seven billion people in the world and sell them windows
Or I can take seven billion people in the world and have them use my search engine.
for free and then make the money from the advertisers.
I'm gonna make three to five X more money.
From the advertisers.
that I actually would selling them software.
So suddenly this kind of becomes existential where
The Windows revenue isn't going away.
But actually the next generation of
Economics generated from software.
is not selling the licenses.
It is monetizing via advertising.
It's funny, I never thought about it this way, but
Really?
What search.
And what Google does is
You go from selling software as a technology company
Yeah.

Yep.
And the offline economy is much bigger
than the software economy. And so everyone has to acquire customers, whether you make
Software or tents.
Or airline tickets.
And there's only a small set of dollars that goes to software. So if I just pull up my credit card statement each month.
How much software am I paying for versus how much everything else am I paying for?
And even if you say, Well, that's not really fair because it's advertising for everything else. It's not everything else directly.
Even a small percentage of my everything else turns out to be way bigger than my software budget.
So at the end of the day.
Microsoft made a browser.
They didn't monetize that browser.
They monetized.
using it to defend an operating system.
that they sold licenses to.
Eventually Google comes along and creates a browser. They also don't sell that browser.
but they monetize all the traffic coming through that browser and they do it.
way better than Microsoft does at monetizing
Selling.
licenses.
Maybe put it more simply.
Microsoft built a browser, had a bunch of share, and then kinda looked around and said,
We don't really know what to do with it.
I guess we'll use it for defense.
And Google built a browser and said, We know exactly what to do with this, and they used it for offense.
Yeah, such a good point.
Well
While we're talking about using software to sell
Everything and not software.
That sure makes me think a lot about social and Facebook. Microsoft has some history there during this period too, doesn't it?
They do, David.
Should we take a brief aside to talk about Microsoft's intertwined history with Facebook?
Absolutely.
So
It's October of two thousand and seven.
Microsoft is
Missing search.
And they're realizing
Social seems to be a wave that's coming five, six years after search.
Also a great online advertising business.
We now deeply understand and regret not being
A bigger player in that business.
We can't let it happen again.
So what do we do?
We're not gonna build one of these internally. We know better than to do Google Plus.
And so
We are not capital constrained.
And so we are very willing to try to
do large acquisitions because we've got money lying around, but we don't have talent lying around.
And we don't have DNA and brand to be able to do this. Right, exactly.
So what do you do?
You try to buy Facebook.
Microsoft puts an offer on the table.
It's a very complex deal structure.
But effectively what it does.
is it lets Facebook shareholders cash out over a long period of time.
as the company's value grew. So you're not taking all your money off the table today.
And so
The important thing to take away though is a very big dollar valuation.
news outlets reported it to be worth twenty-four billion dollars. And again, this is way back in two thousand and seven.
Three years after the founding of Facebook.
Right.
We're not that long after the Yahoo one billion dollar offer.
Exactly.
Facebook's not interested.
I'm pretty sure Zuck doesn't even respond to the offer.
Some Zuck's lieutenants had been meeting with Microsoft people saying if you get the number in this range, blah, blah, blah, blah, blah. They sent in an offer. We'll have to ask Mark about it in J said.

We will.
No dice.
So instead they work out an investment and a commercial deal.
So the terms of the deal are in October two thousand seven, Microsoft invests two hundred and forty million dollars for one point six percent of Facebook.
So for those trying to do the math at home, that is a fifteen billion dollar
Valuation on the deal.
Microsoft
Will get the exclusive right to sell banner ads on Facebook internationally.
until twenty eleven.
So again, Microsoft cleverly is using this as a way to bootstrap the advertiser side of their marketplace now that they have all this inventory to sell.
Now
It's interesting to think about
much David like your comment about Alibaba. If Microsoft sold
All of it at IPO.
Which I don't think it did.
That would be a seven X.
Okay.
That's a pretty good growth investment in, you know, a few years. Not bad.
Right, from two thousand seven to Facebook's IPO in twenty twelve.
Yeah, five years, seven X, that's good for growth investment. That's great.
I'll take that.
If they held for another two years and sold in twenty fourteen, that would have been a fourteen X.
I actually don't know when they sold, but I feel like these are helpful guardrails.
to understand what this
appreciation could have been
Either way, it's not really relevant to Microsoft.
As I said earlier, they're not a hedge fund and money is the least important thing to them. Right.
They're constrained by
Talent.
Execution ability.
Focus. DNA to pull it off, focus, but they're not constrained by cash. So who cares if you 10x your 240 million over five to seven years?
So it seems like the actual interesting part of this deal is the fact that they had the right to sell Facebook's international ads for four years and the compan became friendly. So Facebook
On the
pages for businesses would use Bing Maps. And there was all this sort of reciprocal
things that the company did together.
And a lot of it.
Microsoft people went to
Facebook, like
Friend of the show V J Raji, CO at Statsake now. Lotta
Great early.
Facebook folks came from Microsoft.
Yeah.
So right around this time.
June of two thousand and eight, Bill Gates leaves the company full time. It is an actual retirement. I'm no longer chief software architect.
I am still chairman of the board.
But I'm gonna go be the full time at the foundation. Exactly, at the Bill Melinda Gates Foundation.
Which of course
is right at the time the iPhone, you know, of course came out in two thousand seven.
But
Two thousand eight.
was when
I think it was IOS two point oh, right, with the uh app store opening up and SDK
Comes out and
The world.
completely transforms. There's a
Pretty rough quote.
in Time magazine from Bill's retirement that you know
We've obviously written about Bill here, but I think it's just kind of more applicable to
All of Microsoft DNA.
This point in time.
Gates is probably getting out of technology at the right time.
Funnily enough
It's not really a business for nerds anymore.
Gates was at the center of the personal computer revolution and the internet revolution.
But now the big innovations are about exactly the things he's bad at.
The iPod was an aesthetic revolution.
MySpace was a social revolution. YouTube was an entertainment revolution. This is not what Gates does.
Technology doesn't need him anymore.
That's a stupid quote.
That's just too reductionist.
Yeah.
It is totally too reductionist and it's too personally about
Bill, and that's just completely not right. But that was sort of the view at the time. I mean, this really shows you how irrelevant people thought Microsoft was.
Yes.
That is
Why we included it.
No one would have been saying this about Microsoft in the Windows ninety five time frame, but after the obsession with enterprise
the complete failure in consumer markets, but importantly
the complete ignoring of what the exciting developer platforms were at the time.
Опен сорс
The web
I mean, if you think about where all the development efforts were going, it was the lamp stack, the uh Linux Apache, MySQL PHP, the stuff Facebook was written on.
that's in a different universe from Microsoft's enterprise developer customers. So I just think you need developer excitement if you're gonna have consumer excitement. I mean, or you need to develop every interesting app on your platform yourself, but that's just not how it goes. So that consumer and developer excitement goes hand in hand.
Right.
I said to put a pin.
in the iPhone and the downside of Microsoft becoming
The enterprise juggernaut when we were telling that story.
And
All of the huge advantages in lock in that Microsoft had
Built up.
The iPhone changed that calculus because the iPhone kicked off.
Shadow IT and bring your own device and it kicked off the user revolt.
Against
I T.
And this is what this quote encapsulates.
Yeah, I think that's right. I think a set of technologies
We're breaking through.
People are just gonna use those devices and that software no matter what.
The era today is one where users have way more choice.
in what they use at work.
than they did in that early two thousands era and the iPhone sort of forced that door open. Yeah.
Choice and expectations of what that software and hardware is gonna be like.
And
Microsoft
for all of its great victory in the enterprise over this period.
Just
fundamentally did not have any of that DNA in the company anymore.
And that's what this quote from Time is pointing out. They were all over an Xbox.
Okay, fair enough. Or they were developing cool new stuff that would then get killed because it's not a part of the Windows machine. I mean, you look at Courier, you look at Kin in Mobile, you look at all these things that they would let them get so far
And then they'd be like uh
You guys don't get it.
Windows
is the center of everything. And if it doesn't
make Windows look great or it competes with Windows.
That's not what we're doing.
And I think that DNA was
too strong to overcome
Disruptive innovations.
Exactly.
So let's talk about
those things and what's happening in
Mobile. Okay.
So let's rewind.
What was Microsoft doing in mobile?
So far.
A lot, actually.
A lot actually is right.
Microsoft
Was obsessed with all sorts of things.
And particularly Bill Gates.
for decades before they became true.
One of which was Bill Gates was always talking about mobile computing, so much so that in the
Key slide in the Windows XP presentation.
One of the
big bullet points is mobile computing.
Mm.
All the way back in two thousand and one.
And
Gates thought natural user interfaces was gonna be a thing, multi-touch.
Tablet computing, pen computing. Yeah.
I had a tablet I had a Microsoft
XP tablet edition, I think is what it was called PC in college. Yeah. From the early two thousands and sometimes even before that, these were Bill Gates's visions of the future that he thought were pretty close. And so
In the world of
I suppose they were early smartphones.
Microsoft had developed Windows Mobile.
So what was this? Is like iOS?
Not really. No.
What Windows Mobile was was an operating system for handset makers.
to adopt and put on
Their handsets.
And you know, these things kinda looked like blackberries or mostly
Keys with a little screen.
And when you looked at it, it looked like Windows.
It had a little start menu.
And
It was much like the rest of the enterprise strategy, David.
Designed around
All working seamlessly together with
Your Windows PC, an exchange, and your corporate network. Cause surely
People at home consumers were not
using smartphones. These were for business people who you know, these were issued by their enterprise.
So it fits pretty squarely into the enterprise category.
Now
How did Microsoft think about this product?
They thought about it.
as an ingredient.
Into
the handset maker's product.
Microsoft
was somewhat at the whim of an OEM in the computer.
Ecosystem. You know, they
Dell could install some more stuff on top of Windows and customize the installation, but it was still
Windows XP.
No matter who the PC was from, it was a pretty standard thing.
That really wasn't the case with Windows mobile phones.
The handset makers could modify the code.
of Windows Mobile.
So
When you bought a handset, first and foremost, you were trusting the product quality of the people at the handset maker. And
They had several OSs that they could buy and effectively start from.
One of which was Microsoft.
We're handset makers. We make a phone.
And we know how to interconnect and do all the carrier stuff with the carriers because they're our partners.
And we kinda needed to do a bunch of computer stuff too, like email and stuff. So can you guys do all that?
And then we'll make sure when we get that from you that we'll start changing your code to make it work with
Our phone.
And we'll do all the phony stuff.
Not an iPhone.
What was Microsoft's position in mobile? Yes, they had Windows Mobile.
But no, it was nothing like
what smartphones would become because of the way that the iPhone
Reset everything.
Yeah.
And
At some point in this journey here
post iPhone, but still in this sort of weird Windows mobile era.
Microsoft buys danger.
The company that made the T Mobile sidekick. You remember that? Which was awesome. You like pushed a button and then it would like flip around and suddenly go on a sideways keyboard. Oh yeah. I mean it was in Entourage. I remember watching Entourage. Turtle had one, I think. That's right.
And that was Andy Rubin before he started Android. Oh, you got me. I was hoping I could stump you. I was gonna say, Do you know who co founder of Danger was? It was Andy Rubin. What do you think I do for a living?
What do you think I do for a living?
Amazing. Andy had already left Danger and started Android.
Which would be

that would sort of destroy their mobile business.
Yes.
But
Let's get there.
So two thousand seven
In January.
The iPhone is announced. It won't come out until July.
The iPhone comes out. It's
The most spectacular technology demo since
The mother of all demos, the old Doug Engelbart one way back in the day. It
consumers are all in awe.
the existing mobile industry people can't really believe it's real.
The founder of Blackberry
Basically said, I think his exact quote is
How did they do that?
then later says we'll be fine.
You have Palm, who was already saying things like, I believe the CEO even before the announcement said the PC guys are not just gonna figure this out, they're not just gonna walk in.
Famously, David, I know you have it, Steve Ballmer has a quote after the announcement. Yes.
He says
No, it's never gonna work.
Uh.
Five hundred dollars, which is the full quote.
Um
You could totally see that.
Phones at this point in time, flagship phones were costing like a hundred dollars.
with carrier subsidies and Steve's like
Five hundred dollars that price? Like who's gonna buy that? Right. There is actually two quite interesting things about this quote. One
Steve is being the company salesperson. If a competitor drops this amazing bomb and you're interviewed and you have a whole bunch of enterprise customers who are sort of looking to you.
What do you say? You say, Are things still great?
Their thing's really expensive.
Of course you say that. You are literally always selling all the time.
And so I always take some issue with that.
Two.
Apple legitimately had a business model innovation there with the carrier subsidy. Yeah.
When it wasn't the original the original iPhone didn't have it. It was then
Later.
I think the three G
I mean the mob industry to this point had been how do I make the cheapest possible phone? It's certainly not a scaled down version of a Mac, which is what the
iPhone was.
So that was a completely different paradigm. This is a tiny computer, not a
kind of crappy embedded system that is optimizing for pennies. And Apple basically said
We don't care if it's really expensive.
we just think this is the user experience bar and we will figure the business model out. And eventually
My God, did they figure the business model out and the carrier subsidies
were that innovation.
But
Windows Mobile was that old paradigm.
Embedded systems.
cheap as possible hardware where a couple cents either way determines whether your phone's gonna sell or not.
And so it was pretty shocking.
So
iPhones start selling.
They're selling well.
It's
Two thousand and eight.
apps start coming out.
It's two thousand and nine.
sales start really picking up.
And finally
Microsoft.
decides hey what we're gonna do is
We have this old asset.
Windows Mobile.
We can repurpose some of that to make this new thing called Windows Phone.
But
Unfortunately.
Everything we're optimizing for is different.
the new ecosystem expectation is a super high quality user experience.
Yeah.
And so
There's
this way that we used to work with all of our hardware partners, which basically said, We will make the software work on whatever.
you can come up with the crappiest hardware you can think of and we'll make it work.
It's kinda like the Roku strategy, the way that they work with all the embedded T V
Makers.
And
the new strategy had to be
we will dictate really intense hardware requirements because
now with Windows Phone
We are making a promise to users to compete with the iPhone.
where Microsoft is backing that up. The Microsoft brand is first, and you know, we're defining a really
break through new user interface.
called Metro that actually came from the Zune.
Which is funny that that's its lineage.
Now, how did it actually play out?
Microsoft tried to use their existing business model.
We will sell you an operating system.
We will charge you a royalty.
We will sell
You OEM manufacture an operating system. Correct.
And you sell that phone.
People want good phones now, so you can probably generate some nice margins on that good phone because the iPhone really set the bar.
There's just one problem.
with trying to maintain your old business model.
It's that you don't have the same competitive set.
That you used to.
You now have Google.
Google has acquired Android.
Google has transformed Android from a Blackberry clone into an iPhone.
The software
Is open source.
And so Google's value proposition is they go to all those same manufacturers that Microsoft used to work with.
HTC, Motorola
And say
Hey, how about a deal for zero dollars? Yep.
Deal point number one.
Here you go.
It's free.
Deal point number two.
You can even have the source code.
Deal point number three.
We aren't Microsoft.
look at what they did to the PC makers.
Do not let them do that to you.
You know those PC makers, they make no money.
zero to profit dollars in the value chain accrue to these PC makers. They all accrue to the software vendor.
It's literally the same people who did that to the PC makers. Why would you let them do that to you?
And remember
In this
Mobile world.
Every cent matters. And so Microsoft is trying to ask for, you know, whatever it is, some single digit number of dollars.
for a licensing fee to the OS.
I mean
I think I'm undershooting, but let's even say it's five bucks.
That is
a mountain of difference between zero dollars and five dollars in a low margin business. In the total bill of materials of these things. Exactly.
And
Google
also only really cares about
their services that they monetize through advertising.
So one of the deal points in there. I think this may be varied by geography, but is
Oh yeah, you gotta use Google services on there too.
But by the way, they're best in class and they're free. You don't have to pay anything for that either. Yeah, I think at first it was you can have
it open source, but you don't get any of our
services or you can take the whole thing
And
you take all of our services, but our services are great. And guess what? The Play Store
is one of our services. So if you want all the apps, then you have to take all the other Google services too. Right, right, right.
Now
Keep in mind.
How does Google make money?
They make money.
On search.
So Google
From the moment
They figure it out.
Hey, we can run a
Call it two thousand and two, when Google's
search business model.
was really
Hardened.
And it was evident.
This will scale. It's ludicrously profitable. It's very high value per user. Google's going to be the number one at it.
It's almost like if you really thought about it.
You
could have figured out that Microsoft wouldn't win in mobile.
Hm. Yeah.
It's a really circuitous path.
But
If step one is
Google makes a ton of money on search.
Then step two is
Google should try to get all the searches.
So then step three is
Google needs to have the front door.
to search and so you have to count on Google
Being
the actor that figures this all out.
Step four is
Google figures out what the next platform is and makes sure that they are guaranteeing
All the search volume.
comes to Google from them. So what do they do? They invent or buy
A mobile operating system.
What do they do after that, the next step? They give it away for free because again, all they care about is all the search volume.
And so therefore, unless Microsoft adopts Google's business model
They're immediately screwed.
This is such a
Good point.
Microsoft's competitor
Was not
Apple and the iPhone. It was Android.
Yeah.
It's a little bit butterfly flaps its wingsy.
But
There is a direct line over a ten year period.
From
Google finds its web based search business model and Microsoft.
Cannot employ
it's traditional business model and win in mobile. Like Microsoft will lose in mobile.
And
There's some pivots in there.
I think the biggest moment when the door really shut is when Verizon freaked out after the Apple and ATT deal.
and said, we need an answer, and they decided that answer was droid.
And they put like a gajillion dollars behind the
droid advertising campaign. The Moto Droid. Yep. Yeah.
And so I think at that point it was sort of a two horse race. Microsoft probably could have figured out a way to get in before that, but
It is all related to Google finding that orthogonal business model.
Yeah.
And it's funny you know, Microsoft did have Bing at this point in time. So they did have a business model that they could have used if they've been willing to go free on Windows Phone. And it would have taken a big culture shift at Microsoft to say we're an advertising company. Right.
Microsoft is not a company that is
At least at this point in time, comfortable
with their bread being buttered from advertising.
I mean, they're the P C company. They want to sell software to people using PCs. They're the software company. Yeah. They sell software.
Might be via enterprise agreements, but they sell software.
Yeah.
So then.
If you really believe this step by step by step thing.
Then actually what Google should keep doing
is finding
Things that Microsoft sells.
And
figure out which ones are the cheapest per user to run.
and then give those away for free.
And so
Outlook.
Exchange.
Geez, Gmail.
Hmm, Word Excel PowerPoint. Oh, G Suite, Workspace.
And all they're doing is they're just looking at Microsoft's core value propositions they charge money for. And Google says, would it really be that expensive if we just gave that away for free?
And the more of those that they do
A
It's good for Google's business model because they just get more data, a closer relationship with you. You're doing either more queries or you're interacting on their platforms in ways where they have other ways to show you ads. Maybe while you're off platform, now they know a lot about you from data they've collected, blah, blah, blah.
But even if it doesn't
actually make more money for Google.
They make so much money in their core business.
Then if it hampers Microsoft, then it's a good thing to do.
Yeah.
Interesting.
And that is totally true. I totally buy it in the consumer world.
And in the enterprise world.
Microsoft lock in.
Is still as strong as it ever has been. Yes. And Google has
Really not.
figure out how to
be an enterprise company.
Excel.
is still the main way that spreadsheets are done around the world.
I bet a lot of listeners use Google Sheets.
We do too.
We love it.
Also use Excel, but
If you do use Google Sheets, you are in the minority.
Global, you think.
Yeah.
I guess'cause most consumers don't actually use spreadsheet. Yeah, yeah.
Enterprise spreadshew work is done in Excel.
Full stop.
Yep.
That

Tinoa.
But I think let's save Nokia for the end here. Yeah, the Nokia is our coda.
What it does bring us to
Is
A realization from the very top of Microsoft.
that the profit pools in mobile are changing.
And this is a thing that I think Steve Ballmer also doesn't get credit for.
Bill Gates was obsessed.
Correctly.
with being the software company.
It was
Yeah.
brilliant business strategy to be the software platform.
And then everything around you
had to interoperate with you. And again.
the profit pools in the PC world
just accrued to software vendors. It was remarkable how the PC manufacturers over time had no profits, and Microsoft had tremendous profits.
Steve Ballmer realized pretty early
I think because of the Google Android thing.
Mobile was gonna shake out differently.
Future hardware platforms were not guaranteed to have the same profits in the value chain the way that the PC did.
And so he was pretty aggressive about
Actually, we need to be in the hardware business.
And I know that seems really unattractive to us as a company because we've been in the software business.
There's this great
general rule that it's really hard for any business to enter a lower margin business than the one they are currently in.
Yeah, Amazon can go from e commerce to AWS. Right.
Amazon can go anywhere, but for Microsoft, you know, you're selling software licenses.
It's hard to even get into cloud.
Because cloud is a lower margin business, you know, you have to operate those data centers than just selling the licenses. So
If you're Microsoft
And you've been making software all these years and you've been enjoying those margins.
And suddenly
you're realizing, uh oh, we have to be in the hardware business.
Or at least if we're not in the hardware business or the search business, we're not going to enjoy

in the mobile era.
That's a difficult conundrum.
Yeah.
But
To Steve's credit, he acted.
They released Surface, they tried to buy Nokia.
Yeah.
Let's talk about let's start with
Surface in Windows eight.
Which we gotta talk briefly about Windows seven before that. Windows seven was awesome. So
Steven Sinavsky
He ends up running off his product management.
After the Vista disaster, he gets drafted to come over and run.
Windows.
And Ben, like you're saying, the office culture was known as we ship. We ship product.
That's what you were part of. That was the culture that Steven set. Mind bending that three years in advance a date is set and then six thousand people ship on that date no matter what.
Yeah. So he comes in.
For Windows seven.
And he
Does that for Windows.
We were talking to him and
Yeah, this
Great analogy of
Windows at this point in time
didn't need technical vision. It was trying to be the Dodge Viper.
That's what Longhorn was.
It needed to be the Toyota Camry.
And
He comes in and he makes Windows seven.
The Toyota Camry of PC operating system. I love that analogy. That's exactly right. So good. It's exactly what it was, and it's exactly what everyone
Wanted.
It's what
the consumers who were still using Windows wanted, they wanted it to just work. And most importantly, it's what the enterprises wanted.
Everyone's like, Hey, it's like X P but modern, or it's like Vista without all that random stuff and all the
regressions that Vista had.
Yes. Do not crash my devices or my network.
Thank you.
Nice easy start button in the lower corner, normal predictable menu, fast search, fast file system.
I honestly can't tell you a feature.
that launched in Windows seven.
I have no idea, but I remember I had a Window seven laptop when I first joined Madrona and it was
Great.
Yep, it ran everything the way you expected it to. And so the product that Sanofsky shipped there was just as much the new organization as it was the.
actual product that customers experienced. It was a much more slimmed down team. It was dev test PM, it was ability to hit a ship date. It was a proper planning and vision process.
A lot of what the team was doing with Window seven was, yeah, yeah, yeah, we feel like we can do seven with our arms tied behind our back.
But
Let's start thinking.
about the future about what we're really gonna do now that we have all the infrastructure in place to really ship a interesting product.
And then
Apple comes out with the iPad.
twenty ten.
Yeah, so it's
Windows eight
vision had kicked off. The planning process for what it's gonna be had kicked off.
And they're starting to play actually, Steven puts these videos on YouTube. They're awesome to watch the original vision of what Windows eight should be.
And they're kind of out on a limb.
They're saying the future is touch, the future is tablets.
We think that's gonna be a dominant computing paradigm.
And
On the one hand, Bill Gates has been saying this for years, so there's sort of like a
cultural acceptance with the idea.
On the other hand
It really hasn't manifested in the market. So it's a little bit dangerous to say But the iPhone has now come out and multi-touch has shown this is the way to do it.
But you're right, the iPad coming out really validates Whoa.
Big tablets.
with multi-touch.
Actually
might be the computing paradigm for the future. And oh my God, we've been in planning, we've been in development for
you know, a year or two already.
This thing hits the market.
We're right.
We are so right. We've been validated.
It validates the product vision.
And it
Terrifies
Bomber.
And
Microsoft leadership.
Because they just watched what happened, what Apple did to the phone market.
The iPad sure as hell looks like it's gonna try and come do that too.
Microsoft's core
P C market. I mean the original jobs keynote introducing
The iPad.
lays out his vision, right? Of like the PC is gonna become the pickup truck.
And the iPad is gonna become the car.
And
That would be a truly terrible thing for Microsoft, especially if that goes into the enterprise, as the iPhone is clearly going into the enterprise on the phone side.
Now, there was a little bit of a follow in believing that the iPad was the PC of the future. Standing here today.
We all
can look at unit sales and realize, oh
The iPad was not the PC of the future.
It had its place.
But it did not.
In any way replace PCs.
And it turns out that
Apple scaling up the iPhone.
was good for tablets, but that never was gonna take over most PC use cases today.
In fact, the phone has far more replaced the PC than the tablet has.
A hundred percent.
Yes.
But back in twenty ten, that sure looked pretty terrifying as a prospect to Microsoft.
The other thing that's happening around this time is
Is
I've said this a number of times, but Windows
Despite having
Great revenue.
Great profits.
Massive penetration in the enterprise and momentum almost just like staying power in consumers because people were just used to it.
It was not relevant.
for the next frontier.
Totally not. It did not have hearts and minds. It was not where the excitement was. It was not what people were building for.
So
There's sort of a two birds with one stone attempt with Windows eight.
One.
Touch.
Tablets.
We are going to
Get out ahead of Apple.
I mean, we're gonna try to out apple apple here.
And we're not gonna let
what happened in phone happened to us in our core market of PCs.
Two.
We need a new developer platform.
Yeah.
We need to bring developers back.
Everyone's building for the web.
Web is agnostic to what operating system it runs on.
Can we create a platform that is so exciting?
For developers.
that they're gonna use it.
And we should lean into the technologies people are already using. So the Windows eight.
Touch.
mode.
metro UI development environment.
was HTML five.
because all these web developers are already writing their web apps.
We wanna support that too. And we're gonna build a whole new tool chain so that their
HTML five, Windows eight apps.
run really well on
ARM processors because these tablets are gonna run on ARM processors.
And we're gonna make our own surface RT. Yes.
So that's the two headed dragon of Windows eight is
new developer platform and
Touch first.
And the way the touch first manifests
in the operating system itself is
The desktop is now just an app. And when you boot up Windows eight,
You are presented with a tablet.

Start screen.
And if you're looking for a desktop.
Oh, you gotta go find it. Now in practice, it's not hard to find the desktop. You learn it in like five seconds. You're like, Oh, okay, I see. The start screen is actually the start menu, but full screen. So if I click in the bottom left corner, I can collapse it.
I can enter the desktop mode and then it's like it doesn't even exist. I can run my one thirty two apps, blah, blah, blah.
But
There is a learning curve.
There's also just the shock value though of
I bought
a Toyota Camry, expecting it to be a Toyota Camry and
I don't even know what this is. It's like a scooter. Yeah. And it is a little confusing. I used it for a long time when I worked at Microsoft and
Figuring out how to app switch between things that are part of the metro modern UI versus the legacy apps and what's sitting on my desktop and what's sitting in the
tablet optimized app switcher.
It makes two metaphors.
Now the question is
Why did it mix two metaphors? And it took me a while to figure this out.
But
What ended up happening was
The original vision for the Windows eight
Touch.
thing that we're all talking about, these live tiles.
That was supposed to only ship for tablets.
as it was originally dreamed up. And
There was a version of Windows eight that did not have that that was gonna ship for desktop PCs.
Hm, that was gonna look like Window seven, probably.
Word comes down from on high
Windows.
is Windows. We need to ship Windows across all devices.
So what happens, all this effort has gone into and momentum and political capital and betting your career.
Has gone into this
HTML five developer community.
The
Metro UI
And so
That
is the desktop version that ships.
Well we gotta put both of these babies in here.
Yep.
And what you have
Is not as bad as Vista.
But man.
The roll out was pretty bungled. It's confusing.
The reception was poor.
Interestingly, not by the tech pundits, like the tech pundits who actually spent some time and figured it out were trained up pretty quickly, but the cat was out of the bag even before they got to review it on
People who were
Angry.
What do the w Microsoft people refer to as people that uh Oh, the basement. The basement.
Yes.
The point oh one percent power users.
who are the loudest, of course, on the internet. And so that kind of taints the product.
OEMs hate it because
Frankly, OEMs
weren't signed up to make these touch devices, but now Microsoft's putting all this energy behind
Touch optimized.
operating. So there's this mixed message to consumers. It's like are there even good
Laptops available.
Am I supposed to use touch on my desktop?
They have to run arm.
They can't run X eighty six.
They gotta run ARM processors, they gotta run mobile processors.
But you're asking these devices in twenty twelve
To also
be able to function as laptops and the technology just wasn't there. There's a reason why the iPad was a scaled up version of the iPhone, not a scaled down
Version of the Mac.
Today I think it might be a very different
proposition and the public might be much more ready to accept something like this.
I wish Apple would do this with the iPad.
Oh, yeah. I don't want to have a MacBook and an iPad. I just want an awesome
paint of glass that can do everything. And Apple Silicon totally can do everything.
Yeah, my dream machine is
You know those Lenovo yoga?
that can flip all the way around. Yes, yeah, yeah, yeah.
My complete dream machine is
My
13 inch M3 MacBook Air that when I flip it all the way around.
they do something like universal binary with the apps where all the same apps that I had installed on my Mac, they now run their iOS counterpart. They grab all the data that's stored in the same places. So all my apps, you know, it knows which Google sheet I'm looking for. It has the YouTube videos cached, it, you know, does whatever, but it just turns into an iPad.
with an iOS
UI.
That is the dream. I can't figure out if I'm like a super nerd for wanting that and most people wouldn't actually want that, but
I travel with an iPhone and an iPad and a MacBook.
And I think I could just do two.
I think a lot of people would want it.
Yeah, so one takeaway may just be, hey, it was too early. The other takeaway might be
Look.
It turns out that
Tablets should have been a scaled up phone, not a scaled down PC.
That was certainly true at the time.
Yeah.
Certainly at the time.
So complete commercial failure.
The
ecosystem of Windows eight apps did not really galvanize.
And where we're left is
the state of the Windows app developer ecosystem
in the twenty thirteen, fourteen time period is right back where we started.
No one's
terribly interested in targeting that as a developer platform.
All the energy's actually just gonna go into the web app. Yeah. And then all the energy is gonna go into the mobile app.
Yeah.
None of which is in the
Microsoft ecosystem.
Okay.
Yeah.
I mean, this is the death of Microsoft as a consumer company.
No doubt.
Undeniably.
Zune failed.
Bing small market share, Windows phone.
Lost to Android. Yeah.
Lost mobile.
Windows eight, you know, this whole thing didn't work.
The stock price has languished.
Hasn't moved in ten years. Stock stuck at thirty bucks.
This is dark.
This twenty
twelve thirteen time period this is dark.
And at the same time.
Well, it's funny. It's dark.
And
Revenues and profits have grown tremendously.
The enterprise motion of Microsoft.
has basically never had a down year.
I mean two thousand and eight.
in the great recession. But other than that
Like
Chug, chug, chug, chug, chug, even through the bad Windows releases.
It's dark.
And yet the light is shining so bright on the financial statements of this company.
And what is going on here?
Obviously it's the enterprise, but it's even more than that.
It's Azure.
It's the cloud. It's already humming.
It's going.
Microsoft did reinvent itself.
Microsoft.
Did position itself to be
At the forefront of technology.
It just did it all within the enterprise context of the company. And the Azure story is
Absolutely incredible. And I think nobody knows how it really happened.
Yes.
As the general public is concerned.
Steve Ballmer was obsessed with Windows.
He built the enterprise business, he left, Satya Nadella came in and launched Azure, and Azure's been great. Like not exactly. That's not really what happened.
So when Bill
Was planning
To fulfrom the company, to retire from his chief software architect role.
This is all the way back in two thousand four, two thousand five.
He and Steve know
That
There needs to be a successor in this role. Even Steve will be the first person to tell you.
He is not a technologist. He can't do both roles. He needs
A Bill. He needs a chief software architect.
And
Realistically.
You can't replace Bill Gates with one person. So we need two bills.
Yeah.
So they're casting a bow.
Craig Mundy becomes one of those two bells internally.
And they also know who
Probably the perfect person is to take
The other job.
And that is Ray
A Z.
Ray, of course.
Being the author.
Of
Lotus notes.
Ray is a legendary developer.
And
He has great relationships within Microsoft.
Because
Ray built Lotus Notes not at Lotus.
But at his own software studio startup and Lotus was just his publisher.
So he's known all the Microsoft guys for years. This is so fascinating.
I never put two and two together, but
Lotus one two three and Lotus Notes were not like
peers together. Lotus one two three was developed by Lotus.
Lotus notes.
is actually raise company. It's almost like the way a game studio works.
Ray and his company are building it.
Their publisher
is Lotus.
But
Ray can have agreements with Microsoft where he's privy to information that Lotus is not.
And so raised like really close in the fold.
With the Microsoft folks.
I think he was even a contractor working on
maybe the project was Landman, but he was actively contributing to other Microsoft
Products.
Right.
Software company. Yeah, he was almost like Switzerland in the middle.
Yeah.
So
By this era now, two thousand four, two thousand five, Ray has a new startup called Groove Networks.
And Microsoft.
Just acquires the company.
And
They get Ray.
So in June two thousand six, when Bill announces his
Coming retirement.
Ray gets named as his successor.
In the official chief software architect role.
And essentially what's going on is
Bill and Steve kinda look at Ray and they say
You figure out the vision.
We've got all these assets. We've got a killer business. Got all this great talent.
In the coming world.
The next generation of technology
Why don't you figure out how Microsoft fits in and what our play is.
So Ray writes the Internet Services Disruption Memo in October two thousand five.
And
To quote from it.
This is Ray writing the environment has changed yet again.
This time around services.
Computing and communications technologies have dramatically and progressively improved to enable the viability of a services based model.
The ubiquity of broadband and wireless networking has changed how people interact.
And they're increasingly drawn toward the simplicity of services and service enabled software that
Just works.
Businesses.
are increasingly considering what services based economics of scale
might do to help them reduce infrastructure costs.
or deploy solutions as needed and on a subscription
Basis.
businesses may want to basically
rent capacity from big data centers to just deploy their applications and not worry about the capex of buying the servers and racking them all and maintaining the data center and handling the privacy and blotty bladdy blah.
I'm telling you that.
And I'm telling you
They might
Not even just want to buy
The infrastructure.
They might just want to buy the solution.
As a service.
Hosted
By us.
All right, so this is Ray in two thousand and five.
And so
In January two thousand six.
Ray with Steve Bomber's full blessing.
Goes and starts recruiting for a secret project.
within Microsoft incubated outside any of the existing divisions.
And
This is super important.
This should have come within server and tools.
Like that whole big new business that we talked about that was like the key linchpin of
Microsoft's Steve Bomber era enterprise strategy.
Of course Azure should have come from within.
There. Microsoft has a group that produces a product called Windows Server.
And that is an operating system that runs on other people's servers.
And that group is not the group
That produced
Azure, the cloud service that runs at the time, Window server.
Yes.
The reason for that is that this is completely disruptive to the whole
Window server and server and tools.
business model.
Their go to market and their business model is
We sell
These solutions to be operated.
in your data centers, in your infrastructure, where Accenture and all the consulting firms and all the value added resellers, they're all our partners. They're all our go to market. They're all gonna go implement that on prem for you.
And so if we were now to say like wait a minute, all of a sudden we're gonna do that as a service and we're gonna sell it to you.
Separately.
That is a huge issue, risking a lot of my go to market motion. Not to mention these end enterprises
in some ways are actually the
OEM's customers.
Yeah, these Dell servers are running Windows server, but Dell sold a bunch of servers.
Probably through Accenture.
to the end customer.
There's
That whole
Issue of upsetting the Apple cart. There's also the internal
rewards issue and KPI issue.
Everyone in
Windows and Enterprise Land
ultimately their KPI is.
How many copies of Windows can we sell to end customers and generate the licensing revenue on Windows?
And this
new thing if we actually pursue a cloud strategy is how can we spend a whole ton of money
Building out a data center, buying other people's servers.
generating zero licensing dollars
And hoping people use the servers so we can charge them later.
Yeah, Windows is nowhere in this equation.
Yeah, we're gonna build out a gigantic server firm and rent
Usage to people.
That doesn't fit into anyone's current KPI or compensation.
So
Ray's recruiting for this project, codenamed Red Dog. And he brings in
The biggest.
Of big guns.
That's right.
The legend himself.
Dave Cotler.
No one builds hardcore
Enterprise ready.
Close to the metal.
Code then.
Dave.
Dave was the architect on Windows N T.
We talked about him a lot on part one.
Also another guy named Amitav Shrivastava.
Amitabh had also come from DEC, which is where Dave came from.
Total beast of an engineer.
He had experience both in the enterprise server and tools products and
Amitov was also a big part of getting Vista out the door with Brian Valentine.
Before you know.
Brian left.
For Amazon.
And the two of them recruit a team.
And they build
Azure.
Cutler.
Builds a new hypervisor.
that Azure runs on from scratch without using open source.
Like himself.
Hypervisor, of course, is the piece of software that virtualizes
underlying hardware and allows, you know, multiple software tenants to run on a single piece of hardware.
It's like VMware was a hypervisor company. It was a whole company building hypervisors.
And
Dave just
It's like yeah, I got this.
It's crazy.
So great.
And Steve Bomber.
supported this whole thing.


Pressure and incentives.
From inside the company.
From windows.
from partners, from the whole go to market motion that he built.
you know, Microsoft's enterprise go to market motion.
Steve
He didn't get it right away.
But he started talking to enough customers and realizing that this was the future of enterprise computing.
That he just
Flipped a switch and said.
I'm all in. We're doing this.
whatever resources we need. I mean, we're talking billions and billions of dollars of capital expenditure to build up these data centers.
This is not just a like, oh, some little incubation project, you know, sure, we'll see what happens. This is like
No, we kinda gotta like bet the company on this.
Well
It's funny.
I disagree.
That it's about the company move.
Because
Of two reasons.
One.
It's only money that they're spending.
Cash is never a resource constraint.
the bigger concern is Rayazi and Dave Cutler are working on this. That is why it would be bet the company.
Two.
In its initial incarnation,
Azure did not
threaten.
the Windows centric approach.
If you remember when Azure launched, it was Windows Azure.
And it ran Windows server and it was platform as a service and Microsoft
In no way changed its tune on open source. I mean to this point in history.
Microsoft thought that open source was a complete cancer.
And
For good reason. I mean, at the end of the day, basically Microsoft charged for things that open source was giving away for free from operating systems to programming languages to development environments to servers. I mean everything about it. It was like
Oh my God.
Is there a future where everyone just expects all of our value to be free?
And
they managed to combat that and build a great business despite that, but they never embraced
Open source they never at all
wanted to be a part of anything that open source developers were doing until a couple of years into Azure.
Not until
twenty fourteen fifteen.
And
Why I would say this is bet the company, you're right.
They didn't go full infrastructure as a service and embrace open source and let people use Azure to run
Linux and the Lamp Stack on top of it.
That was not day one.
But they knew they had to and they were going to.
And it was just uh
Hey, we're not gonna do this right away.
Because
the company would organ reject this so hard, but we are moving in that direction and
We will be
AWS.
We will
offer everything they offer.
And more to our enterprises who trust Microsoft.
Yep.
That's a fair pushback.
But Azure came in with a
aggressive point of view.
We are platform as a service, which was distinctly different than AWS, which was we are infrastructure as a service.
Now interestingly
office and applications and software as a service actually came pretty quickly thereafter too.
Famously they did a pilot program with Energizer, like the battery company selling
To sort of
I don't think it was like the office productivity suite, but it was like SharePoint and stuff, I think.
As
A service, a software is a service.
Right.
So
In twenty ten
Ray Ozzy actually leaves the company.
But as he's doing he and Steve
Roll Red Dog, by this point in time renamed Azure.
back into the server and tools business and
Two of them go.
to the University of Washington and Steve gives a speech at the University of Washington.
We are all in and we are betting the company on cloud and on Azure.
The intended audience, of course, was Microsoft internally, of like
Hey, we are sending a message to the server and tools team.
This is the future.
And after that
Steve
replaces
the division head of the whole server and tools division, who was Bob Mooglia at the time.
Bob Wood.
later go on to be the CEO of Snowflake before Frank Slootman came in. So
He did fine.
Bob was great. Bob was crushing it as
Head of server and tools. Revenue was growing, I don't know, thirty, forty percent a year. It's a twelve billion dollar business.
But
The reason that Steve
made the change was he said
We need a new leader who's gonna come in and change this organization and make it
A cloud first organization.
And not carry the baggage of all the success from the previous iteration.
And the person
That Steve
Taps to do that.
From
Bing.

And Satya Nadella.
Yep.
to come in and lead that transformation.
And from what I can tell
It's just as motivated by
Azure is the future and it needs a new leader as it is Satya is a really talented rising executive in this company and needs to be put on an important project.
Absolutely.
Almost like
Bing's not enough for this guy, where can we put him?
Totally. It was
Let's get this guy.
the right exposure to the right important things.
That he could be.
CO of this company.
Some day in the not very distant future.
Yep.
To say that this goes well.
Is an understatement.
Obviously.
But just to put some numbers on this.
Microsoft has three reporting segments.
Productivity and business process.
AKA office and that includes Office three sixty five as part of that segment.
The more personal computing segment, that's Windows and Surface and their hardware efforts.
And then the intelligent cloud segment, and that's
Azure.
And I think LinkedIn is part of the office segment.
If that right. I think that's right. I don't think LinkedIn is in the cloud segment.
Intelligent cloud today.
Is
By far.
The largest
Segment.
in the company by both revenue
And profit.
And
By very, very far.
The fastest growing.
Within the company.
Windows is declining. It's the largest business now and the fastest growing.
Largest business, most profitable, fastest growing. In fiscal twenty twenty-three, Intelligent Cloud did eighty-eight billion dollars.
In revenue.
Wow.
Crazy. It is worth not to pour cold water at all because I think the high level point stands. I was gonna say this too. I know where you're going.
Intelligent cloud includes SQL Server and Window Server.
So these are big legacy businesses.
Yes, I think that is
Both a especially in the early days when Microsoft and Satiya was hyping up how much cloud revenue the company was doing.
being able to report the legacy
server business as part of that revenue helped a lot.
On the other hand, the counterargument to that is
This is actually Microsoft's competitive advantage versus AWS.
Totally agree. Microsoft can go to enterprises and say, we are hybrid cloud.
Less so today, but in the earlier days of
The Azure transition. Saying like, hey, you need to be on cloud. We have a world class public cloud for you.
And
It works great.
with our on prem server offerings and we can be hybrid for you.
Yep, totally agree.
We'll talk about this a little more in conclusion. We have
One more chapter.
in Nokia and the end of Steve's tenure to talk about here. But
It turned out
Actually.
That the cloud market
was so big
That nothing else really mattered.
All the missteps, all the losses.
It makes sense, right?
Cloud powers everything.
Cloud powers tech.
Cloud powers all the consumer services, they all run on the cloud.
So every consumer service
That is not owned by Microsoft or Meta or Google or Amazon.
Runs on one of their clouds.
Yeah. And some portion of that revenue accrues to Microsoft.
And increasingly
the offline economy.
Yeah.
becoming some sort of cloud dependent service. I mean, it's crazy to just see
Cars rely on the cloud and restaurants rely on the cloud. Like anything that you interface with in the physical world, you expect to have some digital component. At the very least, take credit cards and
All of these things, point of sale systems, all of these things.

routed through the cloud at some point. And so
David, I think you're making the same
point about the cloud today that I was about Microsoft.
In the P C era.
Microsoft was lucky to own ninety percent market share and in cloud they own, you know
meaningfully less than that. Right. But it's still basically a tracker on the growth of an insane
secular tailwind that
is just an inevitability in the world. It's probably a thirty, forty year
wave that they get to keep writing.
And
Again, this is outside the scope of this episode, but
It's sure looking like
to the extent AI is the next computing wave, that is also happening in the cloud in the data center. So like that's just gonna turbocharge everything.
Yeah.
So

Interestingly, it was Ray Ozzy in an incubation group doing it outside the bounds of the business units.
Beginning in two thousand six. Beginning in two thousand and six.
with Steve's buy in.
And the air cover from Steve.
To make it happen organizationally.
You look at
Where all the talent came from.
Bing taught them how to do distributed systems.
Xbox Live was a always on cloud service, real time, zero latency.
with forty million subscribers.
MSN was a super high traffic web property with 750 million registered users. Hotmail was a web application that hundreds of millions relied on. They had SharePoint and Exchange. There was knowledge of how to do server based application software.
For the enterprise.
I mean
There was some conflict business model wise with Windows server, since Azure would be an orthogonal business model, but the technical chops were there. I mean, these are hardcore.
Server OS people.
Of course.
that group is going to be capable of doing things like hypervisors. So
I just think
The ingredients were remarkably there.
From all these other
things that Microsoft had been doing over the years.
They
Kind of.
The only one
who could pull this off at this scale with this set of enterprise relationships to
migrate all these people to the cloud as they built out the product suite.
I mean really kinda like
We got, I don't know, halfway ish through our research for this and this just hit me of
Holy crap.
This era.
For Microsoft.
That everybody thinks of is like the loser era.
This is the era where they won, you know? Or they built the foundation to win.
Yeah. There was
Seven years.
Before
Steve Ballmer handed the reins to Satya.
Where
Azure development was happening under him.
Yes.
That is nowhere near the public narrative.
And Steve is the one who handpicked Satya.
To lead it.
And get
All the credit.
And the narrative and the win, and then become the CEO.
Pretty wild.
That is definitely not the public narrative out there.
Yeah.
I could see if you were
an Azure Douber and you were sitting there at the top of Microsoft enjoying
The Windows monopoly, the tremendous business that is Windows and Office.
And thinking, why would I do anything
To jeopardize this.
I mean, Window has self reinforcing network effects everywhere.
Huge switching costs for the enterprise, super profitable, high margin, one of the greatest businesses of all time.
And now
There's this idea that you want me to spend the money to run servers.
People can run their own software on my servers, even if it's open source, so it's not feeding into my
you know, Windows centric ecosystem.
There's a chance they're not paying for Windows licenses.
Right. There's a chance they're not even paying for
my enterprise software services like Exchange or like you know Window Server or whatever, like you're saying, Ben, they might be running Linux on there.
Or my competitors' products.
It's not even as good a business.
It's not zero marginal costs.
Running servers, running these big data centers has huge costs.
And even if you say, Oh, those are fixed costs to rack them and you amortize them over a course of but like
Energy has a real cost.
It's kinda shocking that they
eventually did embrace
This
very unproven new business that could potentially be way worse than their current business.
Totally.
And without taking anything away from Satya, because I think he does absolutely deserve a ton of credit for knocking it out of the park on
Execution.
I kinda think
All of the credit for the vision for it and the
Championing it for
the initial seven years within Microsoft goes to Steve and to Ray.
Yep.
Now I will say
The company stayed the Windows Centric Company for too long.
Oh, for sure.
Yeah, no doubt.
I mean Azure was being built so it was successful enough that it sort of erases everything else.
But a lot of listeners know this, but I worked at Microsoft from twenty eleven to twenty fourteen.
My internship in twenty eleven was on the Word web app.
in the office three sixty five suite, but before it was called three sixty five. And then my real job was I worked on when I came back
Office for iPad.
Which was super secret at the time.
It was really counter strategy because we were the Windows company, but at the same time
What users wanted in this world in twenty twelve.
Was
I want to access my documents.
on any device that I'm on.
We have moved to a world where I have multiple devices.
I just want to be able to use
your application on my device.
Please.
And
Absolutely 100% something that happened.
Is
All two hundred of us worked for multiple years to get these things ready. We had a ship date.
Well we had what we thought was a ship date.
Actually what happened was
We were told that
Actually we're gonna shelve it.
And instead of a ship party, we had a shelf party.
'Cause the product got canceled.
Oh, that's brutal.
Oh I'm sorry. Cancelled.
What time frame is this?
Twenty thirteen.
Okay.
And
Basically it was
Hey.
We just released Windows eight.
We just released the surface.
And we want the marketing message for those things to be
That
Office is first and best on Windows and the only tablet in the world.
That
Can run real office.
It is the surface.
And
I of course am too biased and too personal to really think through this.
But
I was like, oh.
This company has its head in the sand.
Like this is ridiculous. What users want is we have a good version.
Of
Word Excel PowerPoint that
people can run on their iPads and we've decided not to ship it.
To try an advantage.
surface and other Windows eight devices.
Yes.
The year later.
We did ship it actually right after Satya became CEO. That was one of the first things he did.
So
Ultimately, that decision didn't happen that much later than it would have otherwise. And kind of an open question of whether it was a mistake. Like did Microsoft ever lose a dollar
For
deciding to hold office for iPad another year? Probably not.
Yeah.
At the time I held this belief we have stayed the Windows company for far too long.
and need to embrace users where they are.
Now with all this hindsight.
I understand why you wouldn't make the decision.
when you feel like the iPad could be the end of you.
why would we go all in on that now and put our finest products
to advantage.
that thing when we don't know if that thing is gonna kill us or not.
There's the
Big downside.
There's
Not much.
Upside.
to launching it, what am I gonna renew a few more enterprise agreements because of it? Probably not.
Perhaps
young Ben working at Microsoft at that period of time.
Failed.
to understand how important it is to think like an incumbent when you are the incumbent.
Hm.
And this was a
Low upside to doing it right away, plenty of downsides to doing it right away, really no risk on sitting on it.
It really did it was an easy win for Satya during his first year to say
Culture has changed here. We are shipping office on iPad. We have shifted from a devices and services company.
To a
Cloud first, mobile first company. I believe that was the message. Yes, that was the message. And that was a great
Supporting point.

Yeah.
Well, speaking of transitions and transitioning, I think it is time
To wrap up our history of this period of Microsoft.
And mobile and everything, and Steve's tenure.
And talk about Nokia as we end things here.
Who bought Nokia?
Oh, that's a good question.
Okay.
In twenty eleven
After
Microsoft had released
This Windows phone.
Which
Like we said, was really
kinda doomed to fail against Android. Like you just
Couldn't compete.
with free I think Bill Gurley had a blog post about Android back in the day about the less than free business model and why you can't compete with it.
Yeah. In fact it's not that they were giving away for free.
They were
willing to pay people to take it.
I mean if you think about it.
I'm sure there was money that they spent on the droid marketing campaign. I'm sure there was money that they
paid to the carriers to pay to their salespeople to incentivize people to buy it versus the iPhone in stores.
That was a common practice in the mobile industry. So I think less than free is actually the correct way to frame
Android.
Totally.
So there was one
Phone OEM.
That was willing
To play ball with Microsoft and Windows phone.
And that was Nokia.
Well
Sort of.
I mean
Nokia.
Basically had Symbian.
As it's OS.
They tried to start
another OS because Symbion was sort of reaching the end of its life. That wasn't going well.
And so they were kind of left without a platform.
And so they either needed to pick Windows Phone or Android as their platform of the future, despite being
what used to be the dominant
Phone maker.
For all cell phones.
And
The then CEO of Nokia.
was a guy named Stephen Elop.
Fox will
almost certainly remember that name. He was a former Microsoft guy. And he had come over
To run. Nokia. So there were deep relationships there.
In February twenty eleven.
Nokia agrees to adopt the Windows Phone operating system as its primary
Smartphone.
O S.
For its devices.
Like you said, Ben, it didn't have a lot of options.
Wasn't willing yet to go.
Android.
Pretty quickly though, as we get into
Twenty twelve, twenty thirteen.
It's clear.
Windows phone
Ain't really working and Android is
The future.
So as we get into twenty thirteen, Nokia comes
Microsoft.
And says
Hey.
We gotta talk. We're gonna go Android.
Unless you make it.
worth our while or you know, something.
Happens here and changes.
And as Steve put it to us.
It was only money.
That is actually the right way to think about it.
We've been joking about it's only money, but honestly, what was Microsoft's market cap at this time?
Call it.
Three hundred billion.
And what was the
forthcoming acquisition offer for Nokia.
Seven.
So that is two point three percent of the company.
You're willing to give up two point three percent of your company.
For
some particular bet.
I actually think that's a very reasonable way.
To think about
This a quanev.
Skype, which we didn't talk about, which actually was a pretty good deal, especially because of the tax treatment.
you know, Yahoo, Facebook, you should think of these things as a percentage of market cap.
And sometimes
Things could go really, really right.
It's even less consequential than that.
It's not even a percentage of market cap at all.
Microsoft's operating income in twenty thirteen was twenty seven billion dollars.
So it's seven billion dollars out of twenty seven billion dollars in just
Cash that they don't know what to do with and that they aren't getting credit for. But your cash is valued.
as a part of your market cap.
I mean sure, but Microsoft stock is in the dumps here.
The cash flow geyser is not appreciating the stock price here. Wall Street does not appreciate what's going on. It's funny. I delivered you a technically correct answer and you delivered me back a very pragmatic one. Yes, right, right. Which is that's not accruing to your market cap anyway, so you may as well spend it.
And I think it's probably in Steve's mind here of like
I'm not getting any credit for this all this cash I'm generating, like eff it.
When it doesn't cost you focus or your best people
Or whatever the scarce resources are and it only costs you cash.
then you should totally think about it as am I willing to bet 2.3% of my company
or whatever percent of the cash that I'm not getting any credit for.
If something could go really right.
It's a venture capital bet.
You know?
Yeah.
Well and
Nokia is basically holding a gun to my head.
Right, there's actual downside to it also. There's actual downside here, right.
So
That's how the deal comes together.
It was
super controversial within the company and on the board.
Obviously.
At one point that Satya talks about in the book.
There's a straw pole taken of all the
Division heads.
all the top leaders in the company.
Whether they're for or against the acquisition.
The majority are against the acquisition. Satya is against the acquisition.
The board basically
says to Steve, Like clearly there's not support for this.
And so my understanding of the timeline is
There's a seven and a half billion dollar offer on the table.
Steve Mulls it over, plays with it, is for it.
Proposes it to the board.
And exactly the board comes back and says, Hey, there's not support for this.
Okay.
After that happens.
A series of discussions
Start.
And culminate we're in kind of late summer, early fall twenty thirteen, when all this goes down.
And on August twenty third, twenty thirteen
Microsoft and Steve Bomber.
announced that he is retiring.
Within the next twelve months.
And that the board and the company have started
The search for a successor.
As
See you.
That was August twenty third, twenty thirteen.
Yep.
On September third
So ten days later.
Microsoft agrees to buy
Nokia's mobile unit for seven billion dollars.
We heard a bunch of different stories.
How it went down.
We don't know exactly.
But
The fact pattern is
Steve announced that he was leaving.
Ten days later, Microsoft agreed.
To buy.
No, yeah.
The question kind of remains
Who bought Nokia?
We don't really know.
In any event.
Here's what happens next, February fourth, twenty fourteen. Satya Nadella is introduced as the next CEO of Microsoft. Steve Bomber steps down.
On that same day, Bill also steps down as chairman of the board, and John Thompson becomes chairman of the board. So it is a
wholesale changing of the guard within Microsoft.
Bill
Steve.
The original folks.
We're retiring.
We're done. It is a new day.
And that needed to happen.
The office for iPad.
Discuss ago.
No, I think it was emblematic. Like there is truth to what Satya wrote in his book that we said at the very beginning of the episode of
Hey, this company culture needed a reset.
Yeah, it's kinda like a bigger version of
Brad Smith's presentation to the board of it's time to make peace. Yeah, it's time to make peace internally.
And there just needed to be a reset.
Yeah, there was a lot of baggage.
I mean it's just
What forty years of
Baggage.
Bill, Steve.
Old wars, antitrust, bad releases of windows, like you just gotta get it out to move on.
And it was Bill and Steve leaving in one fell swoop to clear the path.
And at the same time, everybody knew that
Hey, there is a huge win that we are sitting on right here.
Like a huge, huge, huge win.
in Azure.
And it is gonna be
Really good for everybody's personal net worth, if nothing else.
If we can just let that be appreciated and let a new day dawn here.
So
On February fourth, twenty fourteen, on that day.
Microsoft stock price was thirty dollars and fifty cents.
And as we said a minute ago, the market cap was, I don't know, call it three hundred billion dollars, slightly below.
Today
Ten years later.
Whoa, whoa, whoa. This is volume three, David. Don't Yeah, yeah, yeah. Well, you know, just to for shadow show that this was the right decision.
Ten years later.
Stock is at four hundred and sixty five dollars.
Market cap is three and a half.
Trillion dollars.
Probably like
I don't know, I haven't done a sum of the parts analysis, but I think you can say probably
At least
Half is
Azure?
Propping up that market cap.
They are currently the most valuable company in the world.
The once and future king.
Microsoft.
That's our story.
For part two.
We still have a lot to talk about in analysis. I'm sure someone's looking down at their podcast player right now, like
Why why are they acting like they're done? There's so much time after this. Are they just gonna like play some music or lots to talk about.
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Okay.
I have got some start and finish stats.
on Steve's tenure as CEO.
Ooh, great.
This episode we started a little bit before Steve took over'cause we wanted to
put the internet chapter in and the antitrust chapter in, but I think everyone kind of feels it by this point.
The question really is like what happened when Steve was running the company?
And so
Here are the numbers.
And this is the time frame from two thousand when he was announced as CEO until twenty fourteen when Satya was announced. So a fourteen year period.
Revenue went from twenty three billion to eighty four billion.
That's a three and a half X over fourteen years.
operating income went from twelve billion to thirty billion.
So
Almost a three X.
Important to pay attention to.
Is
The price to earnings ratio.
When Steve was announced as CEO,
was a seventy five X.
That's high.
It was real close to an all time high, which was in the month prior at an eighty X.
So it is worth pointing out.
It still has not been that high to this day.
Even today with all the excitement around Microsoft, AI, everything going on.
Forty X.
Right. So Steve comes in at an all time high multiple
And
Right before
The D O J verdict and the breakup of the company.
And the dot com bubble is exploding.
Yes.
And
You're taking over from Bill Gates.
All the things.
Essentially if you're doing an analysis of what happened in Steve's tenure and you're trying to grade that.
You are implicitly saying
Did Steve make a good investment?
To be honest, I think Steve took one for the team.
in taking over as CEO in that moment.
He was handed a bit of a impossible situation. Garbage sandwich inheriting something
When it is valued that highly.
Not to mention as we
Talked about during that.
Period.
All the frankly shit going on at the company.
Completely.
So
I worked at Microsoft during this period.
I was a big open source guy, I was a big Apple guy, I was all these things.
And I
hated Steve's Windows strategy. And frankly, I didn't like using any Windows products. I felt like they were all crap.
And
It is still true.
That it's totally insane.
to evaluate
How did someone do with an asset that they were sort of forced into buying at seventy five X earnings?
Yeah.
So
At the end of his term, it was fourteen X.
The PE multiple went from seventy five X to fourteen X.
The market cap.
when he was announced went from six hundred billion to when he left at three hundred and thirty billion.
A lot of that
is basically the
price to earnings multiple rationalizing in that first year.
And then after it did that, the stock price was basically flat.
for his entire tenure, no matter how much the revenue or the profits grew.
And so one crazy stat on this is
You could have bought Microsoft in two thousand and nine.
For two point one X
Annual revenue.
Oh my god.
I mean everything was on sale back then, but like wow.
listeners are sleight of hand here. We switch from
earnings to revenue.
But David, I thought that too. I was like two thousand nine, come on.
In twenty thirteen
you could have bought Microsoft stock for three X revenue.
Mm.
Wow.
And
So the question is why?
Why
Did investors.
give Steve zero credit for any of this growth.
Cut off that first year when the
multiple was coming down.
Why is it that
effectively what happened from two thousand and one to two thousand fourteen is for any gains that they got in
revenue or profits, it was offset by multiple compression coming down and saying the assets still worth the same thing.
One is
very legitimately, the investors had little belief in Microsoft's long term relevance.
Not the place for user excitement, not the place for developers.
They doubted that there was real vision.
from leadership.
I mean you went from Gates, this guy who created it all to
someone that everyone was chalking up to be the sales and marketing guy and there's the product strategies all over the place and
Windows isn't getting any more relevant. We're trying all these new things that are failing. Search passes you by, social passes you buy, blah, blah, blah.
But the interesting thing
Is
Investors basically didn't think Windows and Office businesses were sticky.
And they were only valuing
the newer bets.
Which was super wrong.
Windows and Office have proven to be these ridiculously durable franchises generating more revenue today than ever.
So I mean it is ultimately on the CEO to help shareholders understand where the value is, but shareholders obviously did not price in the retention and growth within the existing Windows and Office customers.
through a new era of technology. I think people were just betting that Microsoft would lose it.
And they didn't. They held on to these durable franchises.
You know
It's funny. When you asked this
Question a minute ago.
prepared for it ahead of time,'cause as listeners know we don't share notes.
the first thing that popped into my mind about
Why?
Wall Street.
did not appreciate the revenue and profit growth during this time.
was just simply like Microsoft.
did not do a good job telling its story. And I think you're saying the same version here. Like
It's so funny. I mean, it's part of why
I love doing acquired
Part of why I think
The show resonates with people.
Telling stories.
Is the most important thing.
If you cannot tell your story
Right, and in a compelling fashion.
This is what's gonna happen to your stock price, even if you triple revenues and profits and build Azure and all these things.
Yeah.
I mean consumers had no idea what Microsoft's strategy was, and neither did developers, so neither did
Investors.
Yeah.
CIOs probably did.
Sort of, but they were probably like, What's going on in search and what's going on in Yeah.
Sorry, what's Zune? Is it winning against iPod? Oh, it's losing. Oh mobile, it's losing two, huh?
And it's for another episode, but
It really was
Brilliant. What
Satya did and the company did when he came in.

They got the story right. The messaging reset. This is a mobile first, cloud first company.
Yep. That was it.
Yeah.
Was the key.
Just saying those words over and over and over again.
Yeah, anyone who's listening who's a leader at a company right now knows that the right amount of repeating yourself to do is about 10 times more than you think it is.
You need to just keep
delivering the same message over and over and over again.
And uh
That wins.
The other way to sort of look at
Steve Ballmer's tenure.
Is
comparing against what else was going on in technology from two thousand to twenty fourteen.
So on the one hand, like we've been talking about, you have the rise of Google and search and you have social networking with Facebook.
And yes, you absolutely can compare a CEO to
these category defining startups that are in adjacent fields.
But that's a little bit of an odd way to evaluate a CEO. Like how did you do against
They aren't even really competitors of yours in your exact market.
And by the way, they created the best businesses in history that were also the fastest growing and capital efficient.
How did you do versus those two particular sort of related outliers?
I think this is sort of a funny
measure, even though this is the measure we kind of all use.
But if you actually just look at the peer set.
What other big companies were there in two thousand in tech?
You had Yahoo.
AOL
the whole cable and media sector
Your HP
Nortel.
I mean, so many of the great companies of the previous era completely fell apart.
The three who actually
survived and
potentially thrived where Microsoft, Dell
And
Only Apple after Microsoft bailed them out and Steve Jobs came back personally.
Yeah.
I would throw Oracle in there too, but yeah. Yeah, Oracle.
But
I mean surviving puts you in the top five percent.
against the Pier set of that era.
So
Even if you overlook all the revenue and profit growth and you just look at pure enterprise value and relevance.
There is actually a success in that the core asset was preserved.
This whole notion you have, David, that Satya came in and
We were great and then we talked for a while and then we were great again.
Even just setting up we preserved the talent asset.
And that we had continuity in our businesses for another fifteen years.
on what is already a thirty year old business.
I don't know, that's way better than anybody else does.
Yeah.
Totally.
So anyway, this is all kind of analyzing the tenure from a business perspective. I am very amenable to
The idea that products completely languished. Like I had no interest in using any Microsoft products during this period. Despite being an employee of the company. Yeah.
I'm very amenable to arguments of like, Yeah, but they didn't make anything good.
Yep.
And that is
I think particularly
Resonant.
To me, at least, in my history, because they used to. They totally used to. They used to be the consumer technology leader. Windows ninety five, Windows XP, everything we talked about at the beginning of the episode, Internet Explorer, the browser wars, they were the leaders. And they did make some good, you know, Xbox is good. I actually thought Windows Phone, particularly Windows Phone eight, was a beautiful new crack.
At what does a phone look like?
I thought it worked well, but I guess what I'm saying is
the products that ended up being their big profit drivers were never
They're good products.
Right.
Well they were there.
Good products, just the enterprise products. They weren't the good consumer products. Right. They weren't good for me as a user. They met the needs of customers. Yes.
All right, moving to analysis.
Great, let's do it.
Seven powers.
So listeners, this is the part of the show.
analysis broadly where we analyze the business sort of after we've completed the story. And the first one is a section called Seven Powers, which is named after Hamilton Helmer's book.
And the question that he sort of poses is
What is it that enables the business to achieve persistent differential returns?
Or put it another way, to be more profitable than their closest competitor.
and do so sustainably.
And there are seven different
powers, sort of categories that it can fall into.
There's counter positioning.
Scale economies.
Switching costs.
network economies.
Process power.
Branding.
And cornered resource.
And I think on part one we said
Microsoft in that era.
had all of these, right?
I feel like there are one or two that I was shaky on, but most, yeah.
Well, in this era, they definitely don't have counter positioning.
That's for sure.
Right. That's the interesting thing. Once you're an incumbent, you can almost never have counter positioning.
Yeah.
Actually I would say they had
Some of it in the development of Azure.
Because they could say to Fortune five hundreds
We will do hybrid cloud with you and we can be your trusted partner.
In a way that AWS couldn't. Counterposition against AWS.
Yeah.
Yeah.
But
Broadly as a company, like no way.
Yeah, they were getting counter positioned in mobile. I mean Google was saying we'll give it to you free.
Yeah. Less than free, yeah.
Yeah.
All right.
Perhaps.
The single greatest asset they have is scale economies.
With the number of
Users and customers they have any
investment that they make.
gets amoritized over such a massive user base.
Yeah.
It's worth it.
If they can charge a dollar more on EAs.
they should do almost any amount of incremental R D or acquisitions.
Right.
And that translates directly into the cloud era too.
Yeah.
The cloud era even more. I think there's crazy returns scale on cloud economics.
Yeah.
I think
Process power, I would argue they actually lost.
During this era. I mean the black comb longhorn Vista.
Thing.
Illustrates that.
Yeah. They went from knowing how to ship
The most beloved operating system of all time with Windows Nighty Five.
Managing to pretty much do it again, even during the antitrust thing with Windows XP with
I think zero blunders in between. I mean they had M E, but that wasn't a blunder as much as like a
I don't know, fresh coat of paint that wasn't really real.
And then yeah, with Longhorn in Windows Eight.
Separate problems.
But completely forgot why.
those franchises have economic value.
Yeah.
I think they also
Definitely lost branding power.
In the consumer
World.
Yeah, the question is did they become more trusted?
by the enterprise, where if you're offered the exact same service from Microsoft and
AWS are you more willing to pay Microsoft for it?
Definitely. So yes, they gained it in the enterprise world.
Yeah.
Microsoft has unbelievable switching costs. The EA
You just can't switch now. You have to switch sometime in the future. And when that time comes, you're probably not going to switch then either because
that X DA is gonna offer even more value.
It's funny.
The DOJ and governments were concerned about Microsoft being a monopoly when it came to product tying on the consumer side. They uh really should have been concerned about product tying on the enterprise side, where
You pay us a dollar amount.
per device on your network and you get all of our software.
For sure. There would be way better point solution software for any one of the
hundreds of things that Microsoft is providing for you, but there's no way you're gonna switch.
Yep, you're so right.
It's so funny you reflected it back to the DOJ. It's been so long now since we covered that.
hours ago, I kinda forgot about it.
In that era.
There were literal switching costs to getting a different browser.
The one that came with your computer was the one you were gonna use because a different browser was gonna take like five to twenty four hours to download over your internet connection.
in the dial up days.
It was good for consumers to receive a browser with their computer because getting another one was
almost prohibitively difficult.
Yeah.
Network economies.
It's actually a little thin.
Yeah, I mean they had the great network economies with Windows that we talked about last time, but that starts to erode here.
as interoperability becomes a thing.
as file format standardized and I can open the same documents on Macs and PCs.
It's like okay.
File format stop being
a network economy that accrues only to the operating system.
Yeah.
I'm trying to think, are there any other like if you are an enterprise and become a Microsoft customer and I'm an enterprise and I become a Microsoft customer, do we really benefit from each other being
I don't think so.
Yeah, I don't either.
That just leaves cornered resource.
Yeah.
No, I don't think they have that meaningfully. No, I don't think so.
I guess this power I mean the fact that we came up with they don't really counter position, they have great scale economies.
They have a lot of switching costs.
And that's kind of it.
That's pretty illustrative of why
You kind of feel like this is the lost era of Microsoft.
And I think it also illustrates
That sounds like an enterprise company to me.
Yeah.
Okay.
Playbook?
Playbook.
Well the first one that talks to mind that I wanna address a little bit more
specifically is this idea of a cultural shift because we've mentioned it many times on the episode. Oh, with the DOJ, there was a cultural shift. Oh, with the new leadership, there was a culture shift.
But what does it actually mean and how do you go about quantifying that?
The thing that I kept hearing in
All the
research interviews we were doing.
was that
When the stock price was flat.
And flat for a long time.
People became convinced it's just going to stay flat.
Yeah.
So basically
Whatever the cause of that was
It created a zero sum environment.
Nothing I do is going to make the company more valuable.
So therefore my value, the only way to grow value accruing to me is
is to
Win at the expense of someone else at this company.
I'm gonna get promoted over them. My product's gonna eat their product. My team's gonna eat their team.
I get kudos and at the expense of them looking like an idiot.
That's the kind of incentive.
This is the cartoon org chart of
All divisions of Microsoft pointing guns at one another. Right.
And of course it's amplified by stack ranking, which I don't have a problem with stack ranking.
generally.
But
famously at the company, everybody was ranked one to five. Every manager was only allowed so many ones and so many twos. And so
Ultimately.
It was an environment where
Everyone every six or twelve months, sometimes there were mid year check-ins, was kind of being baked off against
your immediate peers in your group.
And because the company wasn't growing in value, you had to outcompete.
Your friends to win.
Right. The pie was not growing. Right.
So
Why was the pine not growing? We talked a lot about that. There's a lot of reasons you could
argue why it wasn't, but the culture is an effect of that.
There's a big one I've been thinking on, which is
how to go about placing your bets for the future.
as a company.
And I think in the two thousands, Microsoft was viciously trying to fight against the tide.
There was open source, there was the web, there's always things people wanted to do.
Ultimately over time.
You cannot fight.
what people want to do as a company. You can put up all these barriers, you can steer them back into your ecosystem.
But
Ironically, the playbook that Satya is now running is a return to a classic Microsoft One.
Embrace and extend.
Yes. Rather than fight what users are doing, I want to use open source software or whatever.
I wanna make web apps. I wanna host a web app.
You just figure out what people want, you embrace it.
And then you figure out what product you can build with a business model that extends that existing user behavior.
But it does require you to be
clever and out compete a lot of other people to
Invent that new business model.
That
you know, is created on top of new user behavior.
I just want to double underline and highlight this one.
Because I think
Also
this same dynamic played out.
Yeah.
The
building an evolution of Microsoft's enterprise business.
Really
IT just wanted to control the network and prevent users from messing it up.
Right. Eventually when the iPhone came out.
That damn broke.
And IT could no longer hold back users within their company from doing what they want and having what they wanted.
And this is where the shift to the cloud was
Another reason it was so strategically important.
Shifting to the cloud is what enabled IT to say, okay.
And
become a partner to their users in a way that they, you know.
Paid lip service too before, but they were really
Antagonistic to their users.
Yep.
And it works exactly with what you're saying for Microsoft as a company and its products too. Like
You wanna use an iPhone?
Great.
You wanna use open source?
Great.
We can still serve you.
Yep.
And the trick is figuring out how to make money.
when you lean into what people want.
'Cause ultimately, like, if you just reduce it all to economics.
What people want is free value.
But you can't actually build a business on giving away free value.
Yes.
you know, I can give you a dollar for ninety cents, but ultimately I'm just gonna go out of business. And so I need to figure out some way that you're happy from value creation and willing to pay me more than it cost me to.
Anyway.
The trick is getting the business model right.
Yes.
There's this other one of what was going on given that the ideas were good.
And
This is gonna sound
Harsh, but
Timing, implementation, and taste.
At Microsoft from
Call it.
Windows ninety eight on
We're just terrible.
Or maybe put another way, they had the right ideas.
but late timing and bad execution.
strategically correct, but tactically misguided.
I mean
Bill was super right that touch computing was going to be a thing.
he referred to this idea of a natural user interface very often. Bill was super right that interactive TV was gonna be a thing. I mean, think about how I watch Netflix. I will watch Netflix tonight after we record.
On my Apple TV upstairs.
Bill is right on mobile.
That that was going to be a huge part of the computing landscape.
And yet
All of these started at Microsoft five to twenty years before the tech was actually ready.
And they would often bet on the wrong standard or paradigm. I mean, touch computing ended up being capacitive, not resistive with a stylus.
Tablets have proven to be a cousin of phones scaled up, not PCs scaled down.
Interactive T V
Came after the internet, not before.
And only once there was a tremendous amount of bandwidth
I mean, think about how much more bandwidth it consumes for all of us to ad hoc start Netflix streams versus there's one
broadcast happening and we all just tune in when we tune in and we just catch whatever part of the broadcast is over
Anyway.
Not to mention interactive TV.
looked like YouTube and Netflix and not like, you know, a layer on top of Comcast.
Totally.
Mobile was five years early and it was more akin to embedded devices than it was to scaled down PCOS. So something was off.
In Microsoft's ability to
Leverage
They're
Future predicting.
into creating the right products.
Right.
Which is weird because historically they have been good at it.
Yeah.
Well
They at least employed the
one Microsoft employee referred to it as bracketing.
You basically
develop two products concurrently, one aimed below what the current technical capabilities are.
and one aimed above. And as you get closer to shipping or as you get closer to like
letting the market play out. You kind of pick
whether you're gonna make the low end one better or you're gonna sort of
start reducing functionality of the high end one.
And so in the IBM days, you know, you had Windows and OS two.
And in the Internet era you had like the web browser versus
All the interactive TV stuff.
Or
Longhorn, which was supposed to be little or an iterative versus black home.
Which was so ambitious it actually got canceled.
Yeah, the problem was during this era that sort of optionality and multiple bets
Kinda collapsed down to like, no we're gonna make one bet. Need to these
Yeah.
Or like the bets somehow couldn't continue to flourish internally.
I don't really know why.
But

For some reason, bracketing worked well for a while.
And then eventually
There are
Ability.

take a good idea and implement it at the right time the right way fell apart.
Yeah.
My next one is the idea of positive sum leadership.
This one's a little bit more
personal than our playbook themes typically are.
But I think it's an important takeaway.
Bill Gates plus Steve Ballmer.
In the right roles.
with the right level of respect for each other and who made which decisions. When that was all humming
That was way more valuable.
Than Bill alone or Steve alone.
Mm. Yeah.
It was like one plus one equals five.
Yes.
They were so great together.
This is actually pretty common among
Teams.
the most high performing teams
Are so much better together.
Then they could possibly be apart.
Yeah.
Well hell.
Look at you and me, right? I totally agree. I was gonna make that analogy, but is too much naval. Yes. Too much navel gazing, but
Yes.
Bill alone, at least in this era, was totally at risk of getting too excited about theoretical
technologies like WinFS. That's the perfect illustration of this.
And
You know, Steve needs a great technology partner.
And
one who kind of has the extreme loyalty of the thousands of brilliant engineers at the company, so they'll sort of align and follow the vision.
And
Steve also needed someone willing to change their mind in the face of new data.
Bill was
constantly processing new information and as new things came in,
he would say I don't care how in motion things are.
If you're right, which is rare, usually Bill's right, but if you're right and you're arguing something
To me, like
Screw it. We gotta change everything.
New data, new thing.
The Internet Tidal Wave.
And Steve was much more like
We have to align an entire aircraft carrier.
in the company and then all the aircraft carriers outside the company.
So we are gonna make a decision and then we are going to implement and execute.
And I think
Together there was some magic.
Where
There was just the right amount of stick to this versus adaptability.
Yeah.
My next one is being extremely partner focused is a gift and a curse.
Microsoft is an extremely partner oriented company. There are far more profits who have accrued to Microsoft's independent software vendors.
resellers, retail partners.
than just to Microsoft itself.
But
It basically makes it impossible to reset.
I mean Apple when jobs came back
hit a full reset. All new developer tools, all new products, all new software, all new platforms.
But when you have all these
Externalities depending on you.
You actually can't really
Hit a reset button to adapt for a new era.
You have a whole ecosystem to preserve. And I think this is the more nuanced view of the idea that well
If you miss one wave, then you're actually well suited for the next wave.
People often say the only reason Apple was able to win in mobile is because they totally lost in desktop or whatever.
And
I think really what the answer is is the more externalities you have depending on you, the more difficult it is to reset. And usually a next generation The more switching costs you have. Right. A next generation technology requires
You to
hit a big reset button.
That's all I had for my playbook.
Three.
I have just one big one, but I'm gonna save it for
Take away and landing the plane.
Let's do that now.
Listeners, we've been trying out this
New way of ending episodes.
How do we land the plane?
What is the one takeaway?
that is really sitting with me.
After having done all this research, talked through it with David,
hardened our thinking by bouncing ideas off of each other.
What is the thing that you can't get out of your mind?
So
For me.
This only came to me.
Just a few minutes ago.
But
I think is the right and most complete
version of what I've been
feeling about this part of the Microsoft story for a long time since we've been doing the research. And the feeling started with
As we were talking to people
Taking in
We're just like
This story is not
Understood right.
And
This narrative
about these were the losing years of Microsoft.
Yes, there were a lot of L'habitant.
But
That's not complete.
By any stretch of the imagination.
And
As we were preparing, I really felt
a lot of weight on this one of like
Man.
We really have a responsibility to try and get this right here.
And I think what I realized

This was the biggest
failure of the company.
During this period.
They did not tell their story, right?
Um
So much of what we think of as the losses from this time frame, and certainly everything baked into the stock price not moving.
was because of that.
Yes.
Steve.
came to the CEO role at an all time high multiple and like it was the tech bubble and you know all that.
Stuff.
Sure.
That's a big thing.
Why did the stock price stay in the thirties for his whole tenure?
They just couldn't tell the story, right? And there are all sorts of reasons for that. But
The story does not have to be.
So negative.
because there is so much positive that happened during this time.
And yet the narrative became
This self reinforcing
Microsoft sucks narrative. Yeah, irrelevant, failing, can't do consumer.
The counterfactual is Amazon.
If they had a consistent message that they went forward with, such as
We're a company.
Who invents and wanders.
Amazon has failed at so many things. So many things. Publicly huge bets that have totally failed.
And yet huge consumer failures. The phone. People are like, What a beautiful thing.
that Jeff Bezos has imbued into this company this idea that
We invent and wander, we make these bold bets, we embrace failure. I mean
Kindlefire or I guess Kindle Fire kinda counts. Certainly the phone. I mean, at this point I feel like standing here today, we can say Alexa
Maybe if LLMs hadn't become a thing, I'd be with you. It turns out it might be good distribution for a good LM if they actually it's an option on LLMs. There's so many. There's too many to count. There's grocery, Amazon Go, Local. I mean, all the restaurant stuff. It's a narrative problem. And yet the narrative about Amazon is
Ah, what a beautiful thing. Jeff and Bute in the company. Yes. And the narrative about Microsoft was they can't get anything right.
Yep.
You're right.
I think yours is better than mine.
Now that's my new Land the Plane.
Uh huh.
Do you want to hear what mine was before?
Yeah, tell me here.
W what was on your mind?
Right.
Ultimately, Bill Gaze is right.
Technology
Companies.
are always extremely at risk of disruption.
Even if you won the battle today.
Even if you're the most dominant company today.
It is so easy.
for you to lose and become irrelevant tomorrow.
You may keep
A great business.
Because these things are sticky, as we know. IBM made a lot of money for a long time.
But
Even without the whole DOJ thing.
Microsoft probably would have vistad themselves
Microsoft
Almost certainly would have missed mobile because there's no chance they would have
Realized that the
business model that Google had.
Mant
that they were gonna win in mobile when they came in from the side and gave away the software for less than free.
Microsoft was gonna have these huge downstream misses.
Because technology moves so fast and is such a
Dynamic landscape.
Yeah.
And I think this is why
I feel so adamant that
Microsoft during this era and Steve deserve so much more credit than they get.
Because Microsoft is not IBM today.
It is not large but irrelevant. It is very relevant.
And what they have done with Azure and in cloud and now with AI is
I mean, hell, they're the most valuable company in the world.
If all
This era did.
Was
give them a free option.
to play in the cloud and AI era or even just say the AI era, that would have been great.
But also what they did was they tripled revenue and profits.
Right.
Yeah, they did that while building this whole new great business.
Yeah.
It's a great takeaway.
Carvouts.
Let's do it.
Okay, I have two.
Hardware technology products. One is a recarve out from you.
Past Carve Out.
The Ray Ban Meta's.
Oh yeah. Finally got a pair.
They're great.
They're awesome. The use case of
The audio
Ambient audio in my ears without earbuds.
is great, particularly for a baby monitor.
When
I am talking

my wife or other family members or friends or whatnot, and I wanna be able to
Hear what is going on.
In the baby.
Crib.
And
Not wear earphones in my ears.
Great.
That is great. They're also just a great product in general.
Another related hardware carval.
Is a startup called Oslo and the Oslo Sleep Buds.
In the last couple years.
I have slowly and then pretty much every night gotten into
Using some form of audio
To help fall asleep or if I wake up in the middle of the night get
Back to sleep.
And I used AirPods for years and years and
They're great.
But
You know, if you sleep on your side or do anything really like, you know, you got the air pot jamming into your ears.
These are little sleep buds.
That are made for
Sleeping.
And if you lie on your side on your ear, they don't stick out and so you can lie. Text me a link. I'm buying this immediately. Yeah.
So
This is the team that was at Bose that made the Bose, I don't even know what the product was called, but Bose had this product.
They killed it. The team left, started a startup, and so it's all like Bose engineering.
Anyway.
It's great. I love them.
I'm buying this as soon as we get off. Yeah.
They're fantastic.
Awesome.
I have two and they're like the most absolutely basic products of all time.
And I'm okay with that.
The first I mentioned earlier.
M three MacBook Air.
It's
The finest computer I've ever owned, which I say every time I get a new Mac.
If only you could turn it around and touch the screen.
I know.
I'm rocking the
M1 MacBook Pro
at home and
It's a sixteen inch and gosh, that thing is just a beast to fly with. And so for all the travel we've been doing recently, David.
It has been awesome to have this
Incredibly lightweight, incredibly fast.
just beautiful machine for flights and
All sorts of travel stuff.
Nice.
So it's my on the go.
And then
sticking with this theme of staying incredibly basic and predictable.
The Tesla Model Y is an awesome car. Oh, yes, that's right. You are finally
Joining the club.
Yeah.
We just took a weekend and drove up to Orcas Island.
And it was so sweet.
I never once charged it, you know, drove multiple hours, took a ferry, were on an island that's sparsely populated.
hung out for the weekend, drove all over the island, did the whole thing back.
got back with 18% battery.
And had you needed to charge it, there'd be a supercharger network.
Yeah, and it's
unbelievably fast and fun to drive and
I finally get the
It's an iPhone with wheels. Like it just feels
Whenever I drive my other car, it feels kinda icky and this one feels clean.
It's perfect.
Yeah.
It's amazing. I get it.
I get it, Tesla People.
All right, we got a lot of thank yous here. Yeah, we have a huge set of thank yous.
I was trying to count, David. It's definitely over twenty people that we talked with.
this time. So on my end, thanks so much to Brad Silverberg.
Brad led Windows for a while, notably the development of the Window ninety five.
Product and that team.
Thomas Reardon.
who was one of the
original team members on Internet Explorer and actually went on years later to start control labs.
Which sold to Meta and as a part of
Meta's effort now to do the um
Neural interface. You can sort of
twitch your hands and I don't know. We haven't actually seen a product yet, so we'll have to see what that looks like. But that was
Thomas Reardon in his next act.
Steven Sinovsky, who led Windows in Windows seven and eight.
and led office before that.
And David, you read
quite a bit of Steven's words to prepare for this. Yeah.
His blog Hardcore Software he published in book form.
It's a thousand page book. It's like a textbook sitting on my desk. It's awesome.
We talked to Steven for a few hours. He's great. He's a board partner in Andreas and Horowitz now.
That was super fun.
Yeah.
Julie Larson Green was also great.
She worked closely with Steven in office and also on Windows.
My old coworker Anin Rajaswaran, who worked with me on Office for iPad.
helped refresh my memory on what the blow by blow was like in those days.
where we almost shipped the product, then didn't, then got a new CEO, then did.
Huge thank you to Fritz Landman.
who worked in some strategy and corp dev roles at Microsoft.
Just an awesome guy. Actually now he is the CEO
of the combined company
Class pass.
And mind body.
And
Talk about a person with multiple lives and careers. He was great.
someone that he worked closely with at Microsoft, Charlie Songhurst.
Charlie's one of the smartest people I've ever met. I mean, that could go for a lot of people on this list. Didn't Charlie do a great invest like the best interview with Patrick a couple of years ago. Did he? I gotta go listen. I think he did, yeah. Absolutely brilliant, mind expanding person.
John Rubinstein, who led engineering at Apple and actually went on to lead Palm.
It was fun talking with him about what was it like
From the Apple side, from the competitive perspective.
competing against Microsoft all these years.
Huge thank you to Ray Ozzy, who David and I both spoke with. Yeah. Ray is so damn delightful.
He's such a legend.
Delightful.
The right way to put it. Ray is now
Running another startup, a new one called Blues Wireless. And
was just so generous to give us a couple of hours. He had
Some amazing
You know, things that belong in a museum in his office that he showed us over Zoom, like old
computers and hardware from
The seventies, the eighties, the nineties. It was super cool.
Yeah.
More on my side to Rob Glazer, who worked at Microsoft in the nineties.
and founded and ran real networks.
to Joe Belfiore, who played a large role in Windows and Windows Phone.
And actually he demoed Windows XP in the way back when, 2001, in the launch announcement to Regis Fieldman. That's like how the second half of the keynote works is Joe is demoing features to Regis.
It was Jay Leno for Window ninety five and Redis for
Windows XP.
Yes.
So Joe's got this beautiful long history of Microsoft.
And was just really
Great.
To Vivek Varma?
who was at Microsoft deeply involved in sort of the comms and legal stuff.
During the antitrust era.
Of course, to Steve Ballmer being very generous with his time.
And helpful in helping us
Sharpen some of our thinking.
And especially being generous with his time as we were entering
Free agency here. He's got a busy day job these days at the clips.
That's right.
Our good friend who runs the science of hitting
It's a great sub stack that does investment analysis.
And just was very generous sharing a large spreadsheet of historical data from Microsoft. It's very easy to parse and look things up live while we're doing the episode.
And finally, last one from me to Todd Bishop at GeekWire.
Todd has these unreleased recordings from when he was covering Microsoft
at the
Seattle PI
way back in the early two thousands, and he sent me
the raw recordings, you know, when he was standing there with Bill and Steve.
Just being a reporter and it's very fun to hear their voices.
In ways that I don't think were ever released or publicly heard.
Yeah. Super cool.
Yeah, a few more on my end. Terry Meyerson, the CEO of True Veta in Seattle.
Terry ran Windows and Windows Phone at Microsoft for a long time.

legend in the server and tools business at Microsoft. So we talked about him on part one, but he's wonderful.
To Mary Joe Foley. It was so fun.
To talk to Mary Joe.
Mary Joe dedicated her career at probably the last.
Twenty plus years.
To solely covering Microsoft and she is
The best in the business. Today she's the editor in chief at Directions on Microsoft.
It's a research firm like Gardner.
Except it only covers Microsoft.
Two is
Super kind and generous.
And then the last one, Dave Marquard. It was so fun.
Yeah.
Dave was a thirty three year board member at Microsoft.
The only outside capital. The only outside capital into the company before I PO.
from TVI and then Dave went on to co found August Capital, where he's a partner emeritus these days.
I think Dave was the longest serving Microsoft board member.
Besides Bill Gates.
Three decades plus.
Wow.
Oh, and I have one more.
Thanks to good friend Arvind at
worldly partners for some of the research that he provided as well. So thanks, Arvind.
Well, with that you should check out our
Previous episode, Microsoft Volume 1, if you've already heard that, check out our AWS episode. We also recommend our NVIDIA series. Part one intersects nicely with this era of Microsoft, and we tell some of the PC gaming story from the NVIDIA angle.
And with that listeners.
We'll see you next time.
See you next time.
Who got the truth?
Is it you, is it you, is it you Who got the truth now