The Top 10 Acquisitions of All-Time

Transcript from https://podmenti.com/t/80f185ae880cd2eb

Hey acquired listeners.
We recorded this episode a few weeks ago in what already feels like a very different era.
Obviously we live in a whole new world now with the spread of the novel coronavirus and the global health, economic and frankly emotional fallout as a result. Yeah. In that vein, we have a few announcements to make.
First and most importantly.
We're thinking about all of you right now and in the weeks and months ahead.
Many of us know people who've lost their jobs or businesses already, uh, or even worse, whose families have been affected. And that's likely just gonna grow significantly in the coming weeks.
We want you all to know that Ben, myself, and the whole acquired community are here to support each other.
True.
And uh
Related to that.
We are going to make some changes for now.
to both the community and the acquired show itself.
As for the show, we'll share more in the days ahead.
On the community side, we're changing a few aspects of our Slack to help us all do everything that we can to support each other right now. You'll find all the details in the announcement that we've pinned to the general channel. And if you haven't joined our Slack yet, now is a great time to do so. You can find a link on our website.
We think it's especially important to find ways to try to be together right now virtually
Even when physically we have to be a part.
Yeah.
Uh, one other thing, I'm a believer that when you have a voice, you should use it.
And uh David and I are fortunate to be able to talk to all of you. So in this time we are here to tell you
To stay home.
Most of you who listen to the show are already doing this, but we figure if we can touch just one person
We can make a difference.
Social distancing really works and has saved countless lives in countries across the globe.
If it's not bad in your city yet.
be the reason that it won't be.
We promise you will look like a hero later for reacting early.
And reacting quickly.
And of course
Go pick up some takeout food from local restaurants you love.
Amen on both of those.
Finally, one last thing.
Uh, some of you might be wondering why, despite everything we're saying here, we still decided to release this episode right now.
We thought about it a lot and we decided to go ahead, uh, one because even with everything going on.
Um, we think the world does still need some entertainment and most importantly to laugh.
Um, and some of the things that we say in here are pretty funny now in retrospect. Uh two though, we also thought it was a good reminder that um even as tough as things are and are likely to get right now.
At some point things will return to normal again and it will seem
completely normal to debate the top ten acquisitions of all time. So hopefully this will be a little um reminder of that. Yep.
Well thank you to everyone for being on this journey with us. Stay safe and healthy. We will get through this together and now
Onto the show.

Welcome to Season 6, Episode 3 of Acquired, the podcast about great technology companies and the stories behind them.
I'm Ben Gilbert, I'm David Rosenthal, and we are your hosts.
Today we are tackling an episode to cover the question we get asked most.
What are the best acquisitions of all time?
and what can we learn from them.
So today, here it is.
The acquired top ten.
Alright, top ten. We figure
We're over a hundred episodes in now. It's time for a greatest hits album.

Yeah, listeners, the idea originally started as a blog post, uh, which you can find linked at the top of the show notes, but we wanted to do an episode with really more of a director's cut of the list and how we thought about each one since
Even though there's lots of numbers involved, it's not quite an objective exercise.
We reserve the right to great as we see fit. As always. Alright, a few announcements before we dive in. First, we had a great limited partner episode this week with Hamilton Helmer, and you can listen to a segment of it attached at the end of this episode. For those who don't know Hamilton's name, he is the author of Seven Powers, which David recently described to me as
the best business strategy book out there.
Now David is in good company here, getting high praise from strategy master Reed Hastings at Netflix, Daniel Eck at Spotify, Peter Thiel, and many, many more.
So w we had to, of course, have the author on the LP show. Now, if you want to go deeper on company building topics you can become an acquired limited partner and get access to
all the things that come with that by clicking the link in the show notes or going to glow.fm slash acquired.
And all subscriptions come with a seven day
Free.
Trial. Hamilton was fantastic.
in speed.
All right listeners.
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So the founders did exactly what great founders do.
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They sat with the lawyers just watching how the work really gets done.
And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work.
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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 him that Ben and David sent you.
All right, David, how on earth are we structuring this episode? Well, instead of history and facts, we're gonna replace that with notes and methodology today.
It must be two things coupled by an and in the middle. Exactly. And person, not an and.
Oh.
Is it ampersand?
Do you know they're not interchangeable?
Really? Yeah.
Whoa that's shocking to me. This is like little known uh nerd facts. So
I'm not gonna get this exactly right, but it is when you are coupling two things together.
rather than when you are using and in the way that you sort of would in a in a sentence. And whatnot. Yeah. Okay. That that makes sense. That makes sense. Yeah. I also it has a cousin called ex etc.
And there's a crazy you can go sort of research the evolution of this glyph, but
If you think about uh the and sign, the ampersand sign, not the big curly one that looks like an S, but sort of the smaller one that has two curly things on the side. Yeah, yeah, yeah. It's actually an E T.
And so it sort of comes from the same root as et cetera does.
I think we could have a whole spin-off podcast about that. I think so too. Origins of odd typography and linguistics. All right. Well back to
The likes are at hand.
So first off
We thought about
All acquisitions.
out there in history.
We didn't
necessarily limit ourselves to just the technology universe, as you will see as we go through the list here.
But
The big caveat is it's based on kind of what we know in our universe and our experience. So there may be ones out there that, you know, we didn't identify that we slipped. We thought a little bit about some of the Berkshire Hathaway acquisitions. Um, obviously they are fantastic, but by some of the criteria that we look at.
don't quite compare to what we have on our list.
Big caveat that we may be missing some, and obviously please write in if you have super interesting ones and we'll have to discover them on the show in the future. Yes, please. Also the acquired Slack at uh acquired.fm would be an awesome place because I think this one is going to be a uh good fodder for for community discussion. Yeah. Okay. So that's caveat one.

Enough time has to have passed since the acquisition that we can make a definitive call. So we're not gonna be talking about like uh Visa's acquisition of Plaid here or credit karma or anything that just happened, you know, in the last few weeks or even in the last couple of years. We need to be able to say definitively
What the outcome was here.
Yep. Another thing is it must be a majority purchase. So uh there are many uh amazing pickups of minority shares in companies, better known as uh investments. Yeah um but you know uh one listener's or uh Nasper's Tencent comes to mind. One listener pointed out
Liberty media buying uh what, forty four percent of uh
Serious XM.
uh which is now worth over I think twenty billion dollars. Twenty billion. Yeah, that was incredible. I remember
being a media investment banker, investment banking analyst on Wall Street at the time.
And uh seeing this happen and just being like, Serious XM. My dad listens to serious XM. That's a dumb idea. These are good these guys gonna go bankrupt and um
Yeah, that was why I'm no longer a media investment banker. Yeah, just a world class podcaster instead.
Another one, this represents a moment in time with company market capitalizations as of the end of March third, last night, when we compiled a lot of this data.
In the midst of the US Democratic primary.
coronavirus and everything else going on in our macroeconomic world right now. And so
this, you know, episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. Uh so it it definitely represents a a moment in time, though I think directionally correct for a while. Yeah. This episode may the we may actually be the actual music that is playing on the Titanic while while deck tears are being
Rearranged, but uh we'll see. Hopefully not. Oof.
Yeah.
Well, as you know, on Acquired, the way we issue a grade is using this criteria.
How good.
of a use of capital was it for the big company to buy the small company.
So of course the way we ended up ranking our list.
Yeah.
is what is the absolute dollar return
in value to the big company.
From buying the smaller one.
So in other words, if I have a company worth a billion dollars
Like acquired.
And I buy David's piddly little startup. David, your little startup's worth a dollar and I I pick it up for that. And my company then later becomes worth two billion dollars by integrating your product. We would look at this as an acquisition that
added nearly a billion dollars of value. And that's sort of how we would rank it square. So look I'm value added you. No value added minus the acquisition price because this is going to be important in a couple of days.
Last thing is in cases where or at least the last notes of methodology that I have, in cases where
The acquired companies
product ended up becoming a component of a larger product uh within the acquired company.
We apply we
thought of some sort of subjective discount of like in our estimation what percentage
is this acquired company's product responsible for the success of
D
Ultimate product. Yeah, you could imagine if you bought maybe like a
uh way to make chips or maybe a programming language or s or something like that. Where are you finding those examples? You might uh you might say that that's not responsible for all of the company's future value or even all of that product line's future value. Yep.
Alright.
Now with all that out of the way, I think
It's time to actually start.
moving through our our top ten.
And dare I say.
Art
our top fifteen. We've got sixteen. Ah.
Adding too many to the list here. Well, we we're only gonna rank the top ten, but we have some honorable mentions to start with.
First and most
aptly given recent acquired history.
We would be completely remiss if we don't mention WhatsApp on this list.
And my estimated and as we talked about on the show.
on the episode. Definitely one of the best acquisitions of all time. However, by our criteria where we are looking at
revenue and market cap contribution to
the parent company. Oh, I don't think we said. So the way we tried to estimate
market cap contribution of uh the acquired companies into the parent companies was via the percentage of revenue that that company is now responsible at the parent company and then what the revenue multiples of the parent company are. We totally recognize that
A lot of these companies don't trade on revenue multiples, they trade on free cash flow basis, but
We can't get the cost structures of the acquired companies anymore, so this is the best we could do.
Yep. Again, I think it's directionally correct and the fun part about getting to do a show that's kinda the director's cut here is w we can talk a little bit, uh, especially in in playbook as we get into it, um, and hem and ha a little bit about uh ones that we were too generous on or not generous enough by just thinking about it as
as revenue contribution to the business. So by our screen, you know, WhatsApp essentially generates zero revenue for Facebook, so they're not gonna show up on the list. They were far low than sixteen if you definitely deserve to be mentioned.
For sure.
For sure. It's funny how that one's a I don't know, six year old acquisition that's still in camp too soon to tell.
Yeah. Seriously. Well we know that it was a as we talked about
Not too soon to tell on the defensive move front. Right.
Too soon to tell on the revenue front. Yep.
All right, well coming in at
15th, or I guess our first of our honorable mentions coming in, an episode that we have not yet done yet, uh, but a couple of listeners especially recently have been suggesting in the Slack that that we try it. So that is
VMware being acquired.
By Dell EMC.
First by w acquired by EMC and then
Later EMC was of course swallowed up by Dell.
This one is super interesting, you know.
EMC acquired VMware for six hundred and twenty five million dollars.
VMware
currently is doing right under nine billion dollars in
revenue. Um now EMC acquired eighty percent of VMware. So VMware has always had this public stub as a that trades publicly um of the rest of the equity. Super, super interesting though. The only reason this is so far down on the list is because of all the complicated EMC Dell stuff. We'll get into when we do this episode someday.
Del
is actually trading in the public markets.
at a significantly lower value than what their stake in VMware is worth.
Crazy. It's completely nuts. I think we saw this with
that holding company that owned part of what episode was that where there was like a nine person holding company based in uh um it was uh uh Altaba.
Altaba owning the stake in Alibaba. Yeah. Or it actually traded lower than what their percentage of Alibaba was for. We thought that was crazy. I mean the discount
And again, we haven't done all the math here and know the whole corporate structure and everything. Uh, but with that caveat, the discount at which Dell is trading on the public markets simply to the eighty percent they own of VMware, which is also publicly traded.
is astounding.
Yeah, so on the one hand it's it's a cheap way to pick up some uh access to VMware. On the other hand, the way the stock market is uh is sort of behaving, they're putting a massive, massive uh discount on it for its lack of being able to
escape out of Dell. Yeah. So Yeah. Okay. Next.
We have.
Are near and dear to our hearts.
And are very
First acquired episode.
Picks are
Pixar. So in 2006, Disney, which uh at some point we gotta cover Disney on this show, you know, David? Uh Disney bought Pixar in a landmark seven point four billion dollar deal.
And
I thought this one would
be a lot higher. Uh but we'd like to walk you through sort of how we how we did the math on this and the absolute dollar return that we're looking at that that
you know, from a bunch of our estimates and this methodology, um, is about two point three billion dollars to Disney's market cap.
The way we sort of thought about that is
Pixar is basically good for a film a year.
Yeah.
And as much as I wanted to do this by summing all of the profits or maybe
abstracting one layer up and summing all of the revenues from all their films.
really the right way to think about, especially as we're thinking about contribution to market cap is
How much revenue of Disney's annual revenue are they responsible for every year? Yeah. Which is effectively one film's worth. Yep. Now what is one Pixar film worth in revenue from its sort of worldwide
Gross uh after release.
It's about a billion dollars in the success case. You look at the Incredibles 2 or Toy Story 4, each brought in right around a billion dollars.
because of our Disney episode, we know that
uh you make about twice as much from parks and merch as you make from the film itself, or at least the division as a whole does. So we felt it was reasonable to say triple the uh the amount of money that any given film gets from the box office to sort of its total revenue contribution to Disney, and you get about three billion dollars.
And so contributing about three billion dollars in in revenue per year to Disney.
out of their close to seventy billion dollar market cap.
Seventy billion dollar revenue.
seventy billion dollars in revenue. You get to just just under ten billion dollars in market cap contribution from Pixar. But of course they paid seven point four billion dollars for it. So when you net those two out, you get
Incrementally about
Two point three billion in market cap contribution.
I think so.
This, you should also note, is our lowest annualized return out of anything from the entire list, uh with about two percent per year since this was a uh a 10-year-old acquisition. We're gonna have some more discussion in grading about this one. Okay, next on the list.
Another uh fun episode from Acquire's History.

First big
independent live show.
Uh Venmo.
Um pick up by PayPal in twenty twelve for twenty six
Million dollars.
PayPal uh was recently announced doing about three hundred million in annual revenue or sorry, Venmo doing about three hundred million in annual revenue within PayPal.
You do the math and that nets out to market cap contribution within PayPal of about two and a half billion dollars.
Not bad for buying it for
Twenty six million.
Yeah, and and of course this went through Braintree, so it was twenty six million that Braintree bought it for, and then less than a year later that was picked up for eight hundred million, but sort of rolled that twenty six forward, since that is the isolated number for
For Venmo alone.
Um, now David I will say still not profitable.
Indeed. But uh you know, not not a part of our analysis. Profits profits. What are you talking about? We too care about revenue here unacquired now. But they do uh it is worth noting that they did give guidance that they thought uh this that by the end of the year Venmo would be a profitable unit. So that's an interesting, interesting update to our Venmo episode. Yep. Next we have Bungie.
near and dear to my heart. My heart played so many
So many sessions of Halo over the years. Microsoft's pickup of Bungie.
in the year two thousand for an estimated thirty million dollars.
Now this one was really interesting to think about because the Halo franchise
in total has generated about five billion dollars in revenue over the life of the franchise. And of course Microsoft got that IP as part of the acquisition. But you also got to think about
How many Xboxes did Halo sell? And no Halo, what would have happened to the Xbox franchise? Um the Xbox franchise generates about eleven billion dollars in annual revenue for Microsoft. We estimated
current market cap contribution of that thirty million dollar
Halo uh bungee halo pickup in two thousand to be about eight billion dollars currently.
It's funny, like this is an honorable mention that doesn't make our top ten list, but like, oh my God, getting that thing for thirty million, even with all the work they poured into it afterward, was a friggin' steal in order to bootstrap the Xbox business. Totally, totally. I mean, it was the killer app.
Yeah.
Yeah.

Speaking of killer apps.
Yeah.
P A semi
So
long, long time listeners of the show will know that uh we did an episode early on with Apple's two thousand eight purchase of PA semi, which at the time was working on
very advanced um
ARM infrastructures. Yeah, yeah, and and developing IP for um new chips that they didn't manufacture. They like Fabulous semiconductor. Yep. Many many firms these days outsource it. But it seemed not contrarian, but a little odd for Apple to be buying this sort of like researchy CPU, you know.
Yeah. Comes right after the first iPhone had come out. Yep.
Uh people were confused. And they paid a bunch of money, too. I mean it's two hundred and seventy eight million dollars. So this isn't like some of our other ones that were like tiny little pickups. And and Apple's market cap back then, let's just say they weren't a trillion plus dollar company. And so, you know, this is a a decent sized bet for them, but as we know today.
the iPhone being as differentiated and and creating as magical of an experience as it does is in many ways attributable to Apple making their own silicon, which of course all started with PA semi.
You also look at Apple's innovations in silicon elsewhere. So be in their wearables division, being able to do the W series chips for you know the the AirPods and the Watch the what is the
There's the W chips and then there's another one. Yeah. Um even actually I think the touch bar has its own um ARM CPU in it, which probably is attributable to uh
Um and of course all the rumors are um yeah these have been rumors for years, but the rumors are this year maybe or next year we're gonna see arm based and
PSMA technology based MacBooks. Yep.
Yeah.
So this is this is like the hardest thing to figure out and this is probably the most fun
thing to sort of debate on this show or at least in in this format.
How do you account for something like this that is necessary but not sufficient to create
the product line that they have today that if you look at the
revenue contribution of
the iPhone, the iPad, and the Wearables Division, which are all sort of made possible by
Apple making their own silicon. It's a hundred and eighty eight billion dollars a year in revenue.
So n necessary but not sufficient. So what do you do? Well
David and I took some a little bit of a hack job of uh of estimates here, but basically what we said is, look.
You can probably say twenty five percent of iPhone revenue is attributable to making their own silicon. Yep.
I iPhone and wearable as an iPad. Like that's
Twenty five percent of the differentiation. Yep. Is from
The chips.
five percent then we further discounted that and said five percent
of making their own silicon is attributable to their acquisition of PA semi.
So what that basically says is well, let's take all that revenue and go grab one percent of it. Yep.
And I promise we didn't come up with that one percent number. We first came up with this twenty five percent and then that five percent. We love false precision here. It is it is false precision at its finest. Um, but that gives us a uh the funniest metric of all time that that acquired should probably trademark.
the discount adjusted current market cap contribution.
And we look at that as as contributing about eleven billion dollars uh to Apple's market cap.
Which of course is a a nice thirty six percent annualized return, absolute dollar return of over eleven billion dollars.
But somehow still not making our list because missing the top ten. My God, is this a gilded set of acquisitions that we've got in the top ten.
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All right, so we move into the official
Top ten.
Yes. Okay. Coming in at number ten.
What
We and I have uh sometimes referred to on the show as the best media acquisition of all time. Turns out it's not. There's gonna be one that's above it.
Coming later in the list, but Disney's two thousand nine acquisition of Marvel.
This was just
Brilliant. Who would buy some defunct comic company? Comic book company. That's IP is already basically leased out to everyone and cut up eleven ways for ten years.
going on a, you know, seventy, eighty year old company, was a very old company at this point, been around forever, of course, you know, Marvel Comics, one of the pioneers of the comic industry.
But
Marvel Studios, and Iron Man, the first film out of it, had only launched a year earlier. So it was actually pretty ugly.
early in this part of
the market for Marvel. So Disney, of course, paid four point two billion dollars to acquire all of Marvel.
In two thousand nine
Three billion less than Pixar.

Uh yes, three billion less than Pixar. So for Marvel
We did essentially the same thing as we did with the Pixar, but you'll note with Marvel
As opposed to Pixar where they're cranking out one feature length film per year with Marvel
They're cranking out multiple feature link films. They're cranking out T V series. They're cranking out action figures. They're doing comic books, of course, still. All sorts of stuff. So we took their
Revenue.
Since the acquisition we did that on an annualized basis. We applied the same two X multiple for Parks and Merch that would apply to the content revenue that they're creating. Yep. And that that
um revenue that you mentioned that that at at the beginning there, that we are only taking their
uh films revenue.
So you do that, you get between six to seven billion dollars of annual revenue contribution from Marvel to Disney.
out of seventy billion dollars in total revenue. Which is fascinating. So it's basically more than twice as much revenue per year from Marvel.
that it than it is from Pixar. I mean ten percent of Disney's revenue by this estimation, coming from Marvel.
Crazy. Crazy. We may not be correct on that, but like
It's a recent swag. Yeah. Yeah.
So if you look at
You know, they're they're I just wanna do this comparison to Pixar. Like they're they're making
twice over twice as much money per year. They paid almost half
As much for it originally.
And they did it.
Three years later.
And so it's sort of this like every lever that you have uh the ability to sort of pull and make this one a better acquisition, they did.
So if you just look at the stats.
We have an absolute dollar return market cap contribution minus the price they paid for the acquisition of over sixteen billion dollars.
On Marvel.
Incredible.
Fantastic.
Not quite the incredibles, but even better than the incredibles.

Also coming in, right around sixteen billion dollars of a of an absolute dollar return.
is Google's acquisition of three companies
Where to Keyhole and Zip Dash. The Google Maps Suite. Yes. Around two thousand and four to create the Google Maps that
Yeah.
Now
Estimates are that
Google Maps does about three billion dollars in revenue. This mostly comes from the sponsored products that you see um that are that are uh basically the ad units that are shown on maps. And uh and the maps API, revenue by blue. That's right. That's right.
Um so bought for seventy billion. Uh Seven seventy million. Sorry, but
Gosh, the uh orders of magnitude here. This one's a hard one to do'cause you just keep forgetting commas everywhere and sets of three zeros all at the same time.
Bought for seventy million, doing about three billion in revenue uh sixteen years later.
So we looked at the current market cap contribution of about
sixteen billion dollars to Google's near trillion dollar market cap.
That kind of pencils. I mean if you think about it, like
Is is argument it should be a little higher. Than one point six percent of the value of the company.
Totally.
Totally. So when you look at the similar to to Marvel, you look at the uh absolute dollar return. It was about sixteen billion dollars. The funny thing is if you compare another there's another number we sort of have here that's interesting to compare, the the ROI multiple. So what uh
you know, what's what's the return on uh on the invested capital there with uh with Marvel it was five
with Google Maps, it was two hundred and forty two. Yeah. This is where, you know, we okay, we'll we'll talk about this in playbook and grading uh more, but
You know, you can become a little myopic, uh, as investor. You focus on, you know, return on investing capital or cash on cash multiples or whatnot, and like
You know, that's nice, but like uh it's it's paper money that you know feeds your family and pays the bills and uh at the end of the day, sixteen billion is sixteen billion, whether it's a two hundred and forty X, you know, ROIC or a five X ROIC, it's still sixteen billion in incremental dollars. Everything else is a vanity metric. Yep.
Uh and speaking of those vanity metrics, we are gonna publish this whole table. So if you click the link in the show notes, um you can go check out
Yeah, with probably some false precision all the numbers that we came up with, uh across all of these different measures.
Well,
Next on our list. Next highest on our list. And what are we at? That was uh that was number nine nine. So here we're at we're here at eight the actual
Best media acquisition of all time.
We're going right back to our friends at Disney.
Actually ABC capital cities, the acquisition of ESPN.
Nineteen eighty four. Is this the oldest? This is the oldest acquisition on our list.
acquisition price of just under two hundred million dollars.
ESPN currently is contributing over ten

in revenue to Disney.
Through
Obviously advertising revenue and subscription fees. Uh and including ESPN Plus in there now, too. Just
Incredible.
This even though this acquisition happened
In nineteen four.
Generated.
By our estimation, over thirty billion dollars in absolute dollar returns, hundred and sixty six ROI multiple.
We also calculated the annualized return to just try and adjust for time here a little bit.
fifteen percent annualized return since nineteen eighty four. That is just incredible. That is like Berkshire Hathaway levels of return by an acquisition within a company.
Yep.
Yeah, if you found a uh
Financial advisor who could figure out how to guarantee you a fifteen percent annualized return for what is this thirty thirty five. I was born in nineteen eighty four and I'm thirty five.
Yeah. That that would be uh
I'd happily pay whatever they need for the cash and I think that's the up management fees on that.
Yeah.
Absolutely.
Alright.
Moving on to number seven. The mafia.
eBay's acquisition of PayPal in two thousand and two.
And David, as you say, the the mafia, it is uh is not just for all the future value that would be created by all those founders starting
Every company from Tesla to Yelp to LinkedIn to
You name it.
wild group. Um, but actually the value of PayPal growing inside eBay was friggin'
Crazy.
So the way that we did this one, um, because
eBay actually did spin PayPal out in full. In two thousand fifteen. Two thousand I think s
Yeah. Fifteen, sixteen somewhere in there. This is the only one where our sort of uh exact numbers.
We do have exact numbers and uh we we know an exact annualized return and we're not pegging that to the market cap today, but rather the actual actual spin out. So when they did spin it out, the market cap of uh the independent PayPal entity was forty seven billion dollars.
Now in two thousand two they bought the company for one point five billion dollars. So no analysis needed. That was forty five point six.
billion dollars of an absolute
Dollar return.
for eBay shareholders, a twenty eight percent annualized return.
Just a unbelievable job of uh of picking something up.
relatively on the cheap, uh, both doing a nice job integrating it with PayPal to create new, dare I say, synergy value. And of course betting on a a trend that was internet payments and being spot spot on there. Yeah.
Now we're gonna get into start to get into some of the real fun stuff, not that all these aren't fun.
The next one, this acquisition was so incredible.
that the company that bought it bought this little company back in two thousand five
has now fulfits its name.
Even though this was large public company buying tiny, tiny little company.
The company is now called the name of the little company. We're of course talking about
Price lines acquisition of booking dot com. And active hotels, as we discussed about on the episode with uh with Drew. Um it was that those two companies together, even though booking is was the larger at the time and is still the larger hundred and thirty five million dollars.
In two thousand five.
Uh.
Booking.com, as best as we can tell, separating out what the core booking and active hotels revenue is within now the uh booking holdings, right? Booking Holdings. It is no longer the priceline group, but booking holdings. Booking Holdings is over ten billion dollars in annual revenue contribution.
And the the company does about fifteen billion in revenue.
At least ten point eight comes from
uh what they call the uh agency revenue, which is basically Booking's original business model. There's even more in there. There there's sort of other segments that the of their revenue that booking also contributes to, but we were conservative in our analysis here and basically said, let's just call booking dot com's contribution here the the
the agency revenue. So responsible for over two thirds of uh of booking holdings revenue now. And as David mentioned, ten ten billion dollars. So that translates to it.
An absolute return of just under fifty billion dollars. Here's a crazy thing. You know, we were talking about annualized return with the SPN a minute ago.
thirty five years of fifteen percent annual IS return.
Here we're talking about fifteen years, so not thirty five. They got a long way to go to get to thirty five. You know what the annualized return on this one is?
I'm not looking at my screen, so I don't know.
Forty eight percent annualized return compounded for fifteen years.
Man.
Insane. That is that's a good acquisition.
The other fun one about this is I think all the rest of them that we're gonna mention come up
Very, very commonly in conversations where people say, What's the best acquisition of all time? Actually, I think number two is gonna be a surprise for people. It was a surprise for me.
Okay, fair.
But yeah, with booking, like it's it's one that I think people don't realize. Yeah. You know, the booking is
I haven't checked the latest market caps, but I r remember back, you know, when we did the episode. Booking
Holdings.
you know, is worth roughly by market cap.
Several multiples of Airbnb, several multiples of Expedia.
I mean Expedia is a thirteen billion dollar company right now, um market cap. And and what's booking. Booking is seventy. Now, of course, we're doing this in the middle of the coronavirus, you know, breaks out the bookings all travel companies, you know, market.
Caps have been taking a big hit. But still I don't think particularly people in the Seattle area don't appreciate how much larger booking is than than Expedia. Yeah, absolutely. Um
This was uh
You know, I mean again like at the what happened says it all. Like the company is now called Booking Holdings.
Very true.
Okay.
The next one, number five. Next is next. How come I get both of these ones? So
Number five.
Apples nineteen ninety seven.
Aqua hire of Steve Jobs. Greatest aqua hire of all time. And all of the incredible technology that comes from next. That's the thing. It's not just Steve Jobs. Right. So this one had to be in there, right? Because Apple's a one point four trillion dollar company now that
certainly would not be, but for the next acquisition. And so this is an another situation where we have necessary but not sufficient. So Apple
Makes this move, get Steve Jobs back.
They also get
the sort of new and blooming object oriented programming. Uh the the objective C language and runtime uh next step, which turns into Mac OS ten, which then gets refactored into
iPhone OS, which then became iOS, which then forked to iPad OS, which then forked to watch OS. Like
So for as much as we wanted to attribute value to the the hardware from PA semi, the software in all of Apple's
You know
Everything that is Apple today.
comes from next. Yeah. It is not um forget Gershwin and Copeland and all these machinations of machinations? I don't think I know that word. Of Mac OS Nine. Machinations. Progressing through it was
Nope.
New thing based on next step. Yeah.
Don't forget they also got the cube.
They also got the cube. Also got the cube. So of course, how do we how do we value this one? So what we basically said, so first of all, the acquisition price, four hundred and twenty nine million dollars. Again, big freaking pickup for Apple. You think about nineteen ninety seven, that that much money for them.
Huge bet.
Huge bet.
The funny thing is
the company wouldn't do literally any of the revenue of the two hundred and sixty billion dollars in revenue that they do today zero without that acquisition. But of course, all their business
All the IOS business lines. Yep.
iPhone, iPad wearables.
None of that.
Mac, none of that. Services, none of that. Yep.
Everything.
Yeah.
Yeah.
So then how do we do the math here? So what we basically
just kinda like squinted at is we said that the discount for future dependency. So this discount that we apply where we're basically saying what percentage of the the product that ships today came from outside the assets acquired.
We're gonna say it's about ninety five percent.
That's necessary, but
Far, far, far, ninety five percent from sufficient. And so we take a ninety five percent discount on Apple's current uh market cap today. Here's the crazy thing.
Oh, what's five percent of Apple's market cap? Some tiny number. Sixty three billion dollars. Providing us with an absolute dollar return of sixty two and a half.
billion dollars that are very squinty math here, but honestly it's it's hard to come up with something better.
would yield for uh Apple buying next.
Yeah. Okay.
Number four. Just a hair's width.
Outside of our
Top three.
But
Absolutely just this is well we'll we'll get to we'll reveal what it is. This is going to win the
Prize for uh
ROI multiple here by
A long, long shot. We are talking about
Google's.
two thousand five acquisition of Android for fifty million dollars. Which one of the re one of the things this points to is
how you can get these gigantic multiples from early stage investing. Yeah I mean
when when you say this one wins the award for ROI multiple, what I really hear is must have been a really cheap pickup price. Yeah, exactly. Well exactly. Exactly. But again, like you can't eat ROI multiple. Uh so that's why this is number four and not uh number three, two or one.
But
Still a monster.
Okay.
Android fifty million dollars to buy this thing.
We tried to think about
How do you account for what Android's current
revenue contribution is to Google. And of course Google is not helpful to us at all in this segment. That when they report Android revenue, they report the
search revenue that is generated from people searching on Android phones, which is like not
Not really how you'd want to do this. You'd you really want to think about like
Google search revenue. Yeah, that's those Android. Google searches were gonna happen somewhere anyway, whether they had you know the Android or not. So how should we think about this? Well there's one there's one piece of the revenue that is actually
The much, much easier part, which is
Google Play Star revenue. Yep. That is fully attributable to Android. That was gonna happen
You know, like the there's no there's no sharing of that. It's like no Android, no Google Play Star. Yep.
Exactly.
The other component, which is a little bit harder to to sort of squint at, is what we call traffic acquisition costs. So
It is reported that Google currently pays Apple about nine billion dollars a year in order to keep Google as the default search engine on the iPhone.
That is an insane, insane number in in their cost structure. And so one
big thing that we sort of determined on the episode with Android, in addition to the Play Store, how should you think about the value of Google creating Android in-house?
You should think about it as
money they don't have to pay anyone else for that traffic.
Because if they own the operating system, then they can for free keep Google as the default search engine. And so the way that that we went about that is we compared the amount of money that is spent on the iPhone through, you know, the the the app store to the amount of money that is purchase intent. Exactly.
uh to the amount of money that is um spent on Google's Play Store.
Apple makes about twice as much money as Google does on the App Store versus the Play Store, uh, which kind of gives us a sense of there's if there's if you think about gross purchase intent or basically the value of the traffic on iPhones, it's about twice as much as the value of the traffic uh on Android phones. And so that's sort of how we backed into
let's add another four and a half billion dollars in quote revenue per year to Google for uh for owning Android, because it's basically costs they don't have to pay to.
to anyone else. Yeah. So here's the here's the surprising thing to me though, the total number that we come up with revenue contribution for Android is uh Red Mount thirteen, right?
Uh yep, thirteen and a half. Thirteen and a half billion. So four and a half that were w of that word attributing by our
you know, flawed methodology here flawed in some way, we don't know why to search.
I realized this.
There's so much revenue in the Play Store.
Like it's so big now, even though the iOS app store monetizes more and is, you know, worth more. Google is gonna do uh by estimates, Google did about just under thirty billion dollars in total gross
merchandise value in the Play Store last year in twenty nineteen. They take a thirty percent cut of that, you know, we're under slightly under ten billion in
You know, super high margin
Revenue to uh to Google. Basically infinite revenue, infinite margin revenue to Google. That's incredible. Yep.
Yep. Yeah, listeners, uh would love to hear your thoughts if you have a better way of thinking about
Google's sort of revenue contribution. We fully recognize that this this cost saving is different than revenue. We also fully recognize that taking a ratio of the app stores earnings and sort of using that as a ratio of um traffic acquisition costs. We may be vastly underestimating search value here.
It's true. Um and of course the nine billion number that they pay to Apple is not a Google disclose number, that is a reported number. Um and so uh yeah, would would love to have more conversation around that. So we net out all this when you current market cap contribution taking out the fifty million dollar acquisition price of seventy seven point six eight.
Billion dollars.
in absolute return on this acquisition.
of Android, which represents an ROI multiple of one thousand five hundred and fifty five X.
Compared to a five X for Marvel. And a and a nice little annualized return of sixty three percent.
Sixty three percent over fifteen years.
Now, of course that's not hard cash like uh booking, which is the
uh forty eight percent annualized of like yep, that's like
You can take that to the bank. Yep. Um
But still.
Gotta rank this one super high.
All right, well our Google streak continues. Gonna continue for a little while here.
Number three.
Google's two thousand six acquisition of YouTube, which uh
I think the acquired podcast called this a C when they did that episode. Those guys are
Yeah, they definitely need to revisit this one. Consider this a primer on our on our revisit.
Big.
acquisition price. I mean, this is a one point six five billion dollar acquisition and in two thousand six for a year old company. For a year old company that was basically incubated inside Sequoia. Yeah.
So
actually is I believe still to this day the only
publicly available Sequoia investment memo out there because of course it was uh part of discovery in the YouTube Viacom lawsuit. Yep.
Uh we'll link that in the show notes. If you're listening to this show and you find this interesting, you will like
love geeking out over this investment memo. So it's awesome. I think this was Rulov's first investment at Sequoia.
I mean it's real it's like remarkably cogent for someone's in first.
successful investment memo.
Yeah, you know, it's better to be lucky than good. He's good too.
So Google
Finally did us a favor and broke out YouTube in its most recent earnings a fast growing revenue segment of$15 billion a year.
I've got lots of comments on this, but I'm gonna hold it for our uh playbook section. We're gonna do a little more analysis. But you look at the acquisition price of 1.65 billion, now doing 15 billion in revenue. Google total is doing about 160 billion in revenue.
So that comes to a market cap uh of uh contribution. Market cap contribution to Google's trillion dollars.

billion dollars in market cap contribution for YouTube, which of course then is an eighty four billion dollar absolute return on Google's uh cash. We're just getting into silly numbers at this point.
Yeah, if you can get a fifty two X ROI multiple on
a billion and a half dollar investment, you're doing pretty good. Doing pretty good.

There's lots more I wanna say here.
Alright, here number two.
I was shocked by this. I'm just shocked. We have not covered this as an episode. I mean, listeners, you're listening along.
What would you think number two is gonna be?
This is not what you think it's gonna be. And you probably know what number one's gonna be based on the number of times we reference it. Yeah, what is two.
Okay, so
Big caveat here. We haven't done this episode. We need to dig in more. This is this episode is like
coming right up to the top of the list now of like we need to do the work here.
Another Google acquisition.
And and and let's pause. It's another Google acquisition. So listeners, take take five seconds and think about like what else did Google buy?
Two thousand eight.
When it happened.
Double click.
Man, I was like w Ben, when you first put this on like the first draft of our list, I was like double click, come on, no. Like that's not like yeah, I mean there's revenue and stuff in there, but like a bunch of that was already in Google and then they did other stuff.
And so we almost took it off the list.
Yeah, and then we went and we actually like dug in a little bit and we're like
Wow.
No.
Double click contributes.
The former double click assets now contribute.
A massive amount of revenue.
to Google. Google Ad Manager, uh that business line and the business unit that it's within, which is
almost all double click and admob. They acquired ad mob.
Uh in when was that? Twenty
Somewhere in there for uh seven hundred and fifty million dollars. So you put those two together.
That's about twenty two billion dollars of revenue within Google today. Now obviously that's not search revenue, that's like display revenue. Right. Listeners, the way to think about this is uh of of the
sort of two big Google ad segments. Um and we're excluding YouTube here and
There's the stuff they own. So there's search engine ads that come up, and that used to be called AdWords. It may still actually be called AdWords. I think they just changed it to Google Ads. Google Ads. Okay. And that's the larger segment. And then there's this other, still very large segment that's the
stuff they don't own. So the the ads that they're showing on other people's websites, which used to be called AdSense. Yeah. And that predates the the double click acquisition. And that's why initially I thought like, Oh yeah, AdSense been around forever. That wasn't double click. Yeah. But AdSense, that product line is actually
quite small these days. Almost all of what is in
Uh, what are they called now? It's like Google Network. Um
Ads or something like Google Network advertising maybe something like that.
Almost all of it is double click and add mob.
It's wild. And so of course this requires a much more nuanced understanding of sort of the digital ad serving ecosystem and, you know, understanding double click for publishers and understanding what's an ad network versus, you know
Double clicks.
Is it a d D S P a
Double click for publishers and then there's double click for advertisers. And that's
You know, I believe again we're not ad tech experts, but I I believe that's like the standard
you know, rails that all kind of third party ad tech runs on these days. Yep. I know I know every publisher for sure still has DFP as the
sort of main container that all the all the ad network plug into on their site. So
The T L D R on this one is
They created an unbelievable amount of value. It's still
a massively value creator for Google and and we're excited to do a an episode on it. Yeah.
So they bought it for three point one billion dollars in two thousand eight.
current revenue contribution of uh of this segment within Google is just a hair under twenty two billion dollars.
Multiply that out by the market cap, uh, and you get a hundred and twenty six billion dollars of market cap contribution.
Net out the acquisition price, hundred and twenty three billion dollars of value creation.
You know
Anyone should be trepidation spending three billion dollars, but when you have any sort of uh guess that a hundred and three billion could pop out the other end, or I guess a hundred and a hundred and twenty six billion could pop out the other end.
Yeah, have a little more faith.
All right. Well, number one on our list.
No surprises here.
The king.
The goat.
So after three Googles in a row, we have Facebook buying Instagram in twenty twelve
They bought it for a billion.
Recent estimates.
Say that.
There's about twenty billion dollars in revenue that comes from
Advertisers going into the very same portal on Facebook that they use to buy Facebook ads and instead buying Instagram ads. Or in addition, probably most often.
Yep.
So Facebook's current market cap
Around five hundred and forty billion dollars.
they do about seventy billion in revenue. So twenty of this seventy
comes from Instagram. Yeah, that's nuts. Two sevenths.
Of
Facebook's Revenue.
Instagram. Yep.
So uh
Not ridiculous to say that they contribute somewhere around 150 billion to Facebook's current market cap.
Which, you know, let's just round and say somewhere around a hundred and fifty billion dollars in absolute value return.
nuts. And you think about how recent that was too, twenty twelve.
That puts it at an eighty eight percent annualized return for Facebook. So on our whole list, this is the highest annualized return. Now only eight years, but still eight years of annualized return of eighty eight percent
Wow, eighty eight percent compounded annualized return.
It it's funny. These percentages really force you to understand for for folks who aren't used to looking at like IRRs or
um you know annualized returns, like it you'll notice like even the best one isn't a hundred percent. And so it really forces you to to sort of like uh
Think exponentially. Think exponentially, which humans are bad at. Yeah. Well it's um you know, there's the Warren Buffett and Charlie Munger
requote of I believe it was Albert Einstein
That said.
Compounding interest is the eighth wonder of the world. Like if you can compound something at eighty eight percent per year.
Four.
Even just eight years?
You get the greatest acquisition of all time.
It's true.

So
We're gonna do a little bit of a
modified version here of acquisition category.
So David, how are you thinking about this? So I went through our top ten, so only the top ten that qualify.
Um and I categorize for me, this may be slightly different than what we did on the episodes of the show, maybe different than what you think.
each I categorized each real quick. So Instagram has a business line, double click business line, YouTube business line, Android product. Next people plus technology.
Booking.com business line, PayPal business line, ESPN business line.
The Google Maps Suite, I said product and then Marvel.
business line. So

We have two products.
One
People plus technology and all the other seven business lines for me.
Wow. You agree? Yeah. I would not change a single categorization there.
Did you call Instagram a product or did you call it a business line? I call it a business line. It was not generating the revenue when they bought it. I think it's a product that plugs into Facebook's existing business line. Yeah. That that's that's that's debatable on that one. I c I could see that that kind of straddles the line. Yeah.
'Cause we define business line as like it it is a
If not sustainable, then having a path to sustainability business on its own. Right. Yep. So like
Booking.com.
Course. ESPN, of course. Yeah. Um YouTube, of course.
I guess that's not that important because they're pretty state like the same way that Instagram would have implemented some sort of yeah.
Um
wouldn't have been successful as successful because it wouldn't have been aggregated on the back end with all of either Google's existing advertisers or Facebook's existing advertisers in either of those. Android is definitely a product because
You know, Android got integrated into so much. What are they getting Windows style sell licenses to the voice?
There's no way Android.
business model could have existed except within Google. And and same with the suite of Google Maps acquisitions. Like that was not Where to was not going to build uh
They were building Google Maps, so they weren't gonna build the business of Google Maps. Right.
It's funny, like I I so I generally agree with your thesis that the dominant
Tech theme here is uh
is business line acquisitions. And if you had asked me a hundred episodes ago or a hundred and ten, you know, when we started the show, like
w what what do you think your takeaways might be? And I think we had
this categorization thing within the first few episodes. I don't think I would have told you that the m most successful ones would be the business line positions. What kinda makes me think
It's kind of a uh justification for venture capital for me, right? Like'cause
kinda you could maybe make an argument that what these some of these super, super successful acquisitions
that our business lines are is just like oh well the parent company at the bottom of the kinda like a venture capitalist like they funded Google funded YouTube
For a long time.
And YouTube turned out to be an amazing business.
And it's a separate kind of standalone business.
You can say the same thing about Instagram.
I think probably Zuck and Facebook, you know, we'll talk about uh in just a sec about
acquisition philosophies of different companies. I think that's kinda how they think about things, like the like the Facebook quote unquote style acquisition of we're gonna buy you and we're gonna leave you alone.
It's kinda like what it would be like if you're operating as a
Stand alone venture back company.
Yeah.
That's a great point.
You know, it's funny, as you talk about the companies that show up here, uh, and then we're drifting into playbook and and themes here a little bit.
Notably missing is Amazon.
Yeah. Nowhere in the top fifteen. I mean you've got Microsoft, Google, Facebook, Apple
Yep.
You don't have
Amazon.
Yeah.
Well, let's talk about this. So
The other thing I wanted to talk about in in category section is use this to talk about the acquirers.
W let's talk about each of these. So
Maybe can we start with Google? Google has four of the top ten. Yeah, it's amazing.
Like I mean people know like I think yeah, Google's like in a well driven I mean like this is
Google has the best MA track record.
In history.
Right? Like four of the top ten.
And
Three of the top four.
Uh that that's pretty good.
And they were in a bidding war for
That for Instagram.
So That's right. It would have been four oh four.
It could have been it could have been four of the top four and five of the top ten.
You know, if you think about Google, you know, maybe Eric Schmidt I can see this, but like Larry and Sergey, you don't like they don't scream like Mine A genius to to me. Yeah, I mean I was tempted to blame it on the sort of MA spree that they were on in the sort of like
late uh two thousand. Yeah, but like those ended up being the sort of like
twenty to hundred million dollar pickups. They were doing it's a bunch of Y C companies, a bunch of Google alums. Those were aquires. They were just buying employees. Like these were bets. I mean if you look at 1.65 billion, you look at three billion
Like these are these are big strategic bets that they were making out of the company, you know, i in what, two thousand
Five and six. It it's not like
I mean, how much was Google worth in two thousand six? One point six billion was very real money. I remember my investment banking
Interview uh one of my interviews uh
was the Google YouTube acquisition had just happened and the question was what do you think about this? And I remember saying like
Oh man, they spent so much money. This seems crazy. Yeah.
Well here okay, here's my sort of thesis on it is when you say like Larry and Sergey don't strike me as M<unk>A geniuses. Obviously Eric Schmidt was very active in the company at this point. Was he CEO during all of these acquisitions, I think. So you know, very seasoned executive there, technology executive. But the way I sort of think about Google is
At their founding they were
tech geniuses. They figured out something very disruptive but didn't really realize it. They didn't know what to use it for. This sort of like as Daglioni said, it took them a couple of years to figure out
They knew they had something.
Yeah.
They didn't know. And they kind of fell backward into a business model. I mean they they kind of like realized that oh my gosh, this thing that we're doing by having the fastest and most accurate search results with the lowest cost structure because of our distributed compute infrastructure, like
Oh my God, we can do that thing that Overture's doing and and have incredibly high margin, incredibly defensible revenue. Oh, okay, I guess we'll start doing that. But then I think the thing that they did realize was
the power of that and then
like uh I think it's a billions quote that Bobby Axelrod says, when you when you have an advantage, press it. Yeah. It's I think they g they became very good at figuring out, uh, hey, how do we leverage our existing strategic position to
just widen the moat and create more business lines or or create things that just add tremendous high margin revenue to our existing business lines. Here's here's something interesting though.
All of these fantastic acquisitions
happened.
Ten to fifteen years ago for Google.
Now you could argue, as we said at the top of the show, we're not going to include recent acquisitions in this'cause it's too early to tell. So maybe Google has made some recent acquisitions that are going to
turn into this. But I kinda don't think so. I think two things happen to Google, maybe three things.
in the period after when they were making these incredible acquisitions.
One.
Facebook showed up and started making some of these acquisitions. So like whereas before Google was kind of the only scale tech acquirer. Now all of a sudden Facebook's on the same. The whole Facebook ads team was the original Google ads team. Cheryl moving over. Yep.
So Facebook gets Instagram, Facebook gets WhatsApp, you know, Facebook gets Oculus, which obviously of course it's not on this list, but like, you know, it was a big bet to make. Um you know, you should be making these bets is like takeaway here. Playbook, you know, news flash, make these bets. Two, though, maybe in response to that, Google starts shifting to this
Strategy of like oh we're gonna
build stuff in house with like Google X and whatnot and
I just don't think that works as well. That's a good point. Um, you know, I see sort of the rationale, but like the incentives are wrong, you know?
You're an entrepreneur and you're gonna build a company.
You're like gonna be all in and aligned. If you're making a Google salary and you're building a company, it's not
I mean we sit here the day after Waymo finally took
external capital. Right, right. I mean maybe Waymo will become this, but like anyway, that's two. And then I think three, related to both of these,
Was the leadership change at Google, you know?
Eric Schmidt steps back, Larry Page becomes CEO.

Larry and Surge both like incredible entrepreneurs, incredibly, you know, steward ship of Google and everything, but this isn't their MO, uh you know, making these acquisitions.
Yeah. Yeah, Google X is in very I mean
I don't know as much lore around the founding of Google X, but it does strike me as trying to recreate the conditions
upon which Larry and Sergey invented Google search. Yeah.
I'm sure there's many business school professors who study this professionally, but it strikes me that
You can kind of
do that once and then when you hit your tipping point and what you need to do is grow and defend, MA is um a much more
a high likelihood of hit rate strategy than trying to replicate those initial conditions. Which brings us to
I think the next company to talk about, which is Facebook.
Yep.
Yeah.
So I thought
coming into this, that my takeaway would be that Facebook is the greatest acquirer of all time. Well they got number one. Yeah. And ultimately the value from number one
over like as it continues forward in the future may actually prove that
Uh nothing else matters. Power law. Yeah. Number one beats two through ten combined. Yep. Maybe. Maybe.
Um but at the end of the day there's two very different like
holding my comments about online advertising, there's two very different modalities of
sort of this traffic. There's intent based and then non intent based, or I don't know what you call Facebook, but
mess around on your fine basically.
Yeah.
They both ha serve an incredibly
different and incredibly powerful
Purpose.
And they haven't really stepped on each other yet. Like they've tried in different ways. Google Plus tried and actually Facebook hasn't launched a search engine, even though they index most of the web, which is kind of interesting. Interesting. I do think
both of those will continue as independent enduring juggernauts because they serve very different purposes for
the types of advertising that they serve people in the moment in which they catch them. Yep.
Yep.
It's interesting to think about you know Facebook is we were just talking about Google in this era of this incredible era
And then sort of seeding that
Definitely not intentionally to Facebook.
But Facebook is also kinda like they haven't made
acquisitions like this in quite a while.
I wonder if that's because the venture capital industry is so
has been so robust over the past few years. Like where it used to be like, Oh yeah, Facebook wants to buy you for billion dollars, couple of billion dollars, twenty million dollars. We have a small fund. That sounds great to us. Now you can raise money at ten billion dollar valuation. So Yeah it's a great point. Yeah. Interesting. One of my big tech themes is like oh my gosh, these have all happened largely in the last
twenty to twenty five years.
And
based on your comment there.
Yeah.
may be the case that there was a twenty to twenty five year window where the best MA of all time existed. Yeah. And if this ability to to
both stay private longer and raise huge amounts of capital.
And there are people with huge funds to support you to do that, or as you said, robust venture capital infrastructure.
Like maybe we don't see this kind of thing as much anymore because if YouTube was started five years ago
Actually what would happen is if be a competitor to
Facebook. Facebook at this point. And it would be a large independent company. I mean TikTok is the sort of what would have happened otherwise if if uh YouTube was ten years old. It's it's two country is a counterfactual and a counterfactual counterfactual is in that they both musically. Musically's too early to tell.
If that's gonna make the list. But it could. There's a world in which it could, and that's a recent acquisition. Super I I'm it makes me very glad.
that we broadened acquired from just acquisitions to you know first IPOs and now just great technology companies. Cause yeah, this the era of these type of acquisitions may be
It's never gonna be over, but like
that that fertile window from, you know, two thousand five to
Two thousand twelve.
I don't think it's gonna come again.
Yeah.
Like you needed the right overlap of a technology wave and a capital wave. Yeah.
And I think the interesting thing about the technology wave is these are all internet companies. And so we you alluded to this at the beginning where you said, Hey, we are going to cover
non tech companies too, and we're thinking with a lens of covering non tech companies. But when you think about it,
It software being distributed over the internet. Zero marginal cost. Yeah, like
I like holding my comments about YouTube, like you look at
Instagram's gross margins.
Right.
They don't have to pay anything for the content.
the advertisers are all aggregated anyway from their big stable with Facebook and even more people coming for the combined Facebook and Instagram and the bandwidth cost to serve it out to the billion plus users on the platform now zero, but not zero, but much, much lower than, you know, the the revenue that they're generating off of this. So
Well it's not just it's not just um cost structure, but it's also I think even maybe even more important in why
at least by our, you know, biased lens, we kinda only had tech and a few media companies in here.
is just the ability to scale. If you're making widgets
You can't go from
A million people buying your widgets to ha one out of every two people in the world buying your widgets within ten years. You just can't do that. Unless you're Apple, I guess.
Yeah, that's a that's a fair point. So there's there's uh margin, there's there's scale, and there's defensibility that all sort of come. I mean, you're you're not gonna unseat Instagram at this point. Yeah try a snap mite.
All right listeners.
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Let's go run through quick the other big tech companies. So Apple's on this list. But it's interesting. Apple's just whole approach and MO to this is so different. You know, they make hardware, right? Like Apple buy components. Technolog Small technology companies from time to time. We thought about that as a name for the show originally. That's right.
Yeah. Um
Microsoft.
What do we think?
So they have none in the top ten.
Uh we've got Bungie as an honorable mention.
Yeah.
Microsoft famously bungled MA for most of the Ballmer era.
Yeah. Which is interesting given they had such
A robust team. They had probably a bigger, more robust team than than maybe they overthought things. It's a couple things. Well, actually they all stem from the same thing. It's Microsoft's culture. Either the not invented here syndrome just crushed.
anything that came in to the point where they weren't gonna play nice. Right. Or Microsoft bougan if at the same time Google bought DoubleClick.
And like I mean that's the counterfactual. Yeah.
Or
the crony culture or the cronyism that emerge from the the the culture there.
people would make these acquisitions for political reasons within the organization.
And then
Mm.
refer to point one for wouldn't end up playing nice when they tried to get integrated. Yeah. And I think frankly, like, for as dominant as Microsoft was and as much as the culture
help them get to that position, I think it was pretty value destructive for being able to grow meaningfully through MA.
Yeah.
Yeah, that makes sense to me.
Under the
Satiya now with the new Microsoft. Microsoft is
Is is Microsoft the current the currently the largest
I think they may be above a apple.
went up fifty percent between December thirtieth
twenty eighteen and twenty nineteen.

Wow. So obviously Satya's doing an incredible job leading the company.
It would be interesting. Give what we were just saying, the era of the g the great golden age of M and A
Maybe over.
If it weren't over though.
Would Microsoft and can Microsoft even in this era make some some I mean you look at like what, Minecraft
Yeah. What else have they bought in the last few years? Well they bought LinkedIn, of course. LinkedIn. LinkedIn's new qualify'cause it was already so large. Like so much of the value had already been created. Yep.
Which to your point, like this sort of like robust capital environment be Although LinkedIn was the same era of as Facebook. It was but they went but they w they went public. They were
LinkedIn went public right before Facebook.
And they were kinda the first there was a huge drought of tech IPOs.
after the financial crisis and LinkedIn kinda broke the log dam.
Um
Anyway.
The only other one I want to mention, you know, that we have to
Disney.
Got two of the top ten media company.
You know? Yeah. So I've had this like blog post that I've wanted to write for a long time that might be just better as an L P show, but what is the same and what is different between content and software? Yeah.
Because both are I mean, if you look at software, it's really just content.
Like it's I mean it executes. But it's copyrightable, you know, it's words ish.
And it's a set of instructions that is processed by some brain, just like
Yeah.
And so
It has the same characteristic where you create it once and then you can create an infinite number of copies, so zero marginal costs.
This era it has
basically the same distribution costs as software does. Putting 4K video out there, obviously, is a little bit more expensive to host and uh and distribute YouTube than uh other forms of you know, than than SaaS, for example.
So there's like these things that are the same.
But then the things that are different are
Like
You have to create the constant
next thing in content in the way that you don't in software.
When was the last time Slack added a new feature that was meaningful to your life? Never. Whereas we go three weeks without making an episode and we start getting like really antsy. It's nothing. It's like uh what Douglione say, like w without uh uh without the next great investment, we just got the chickens. And that's how it feels. I mean that's the difference between more often that's
Totally. I mean it's the difference between sort of building an enduring thing that has a snowball effect and grows over time versus
You know, ha having to start from square one each time. Yeah.
So to me it's like the reason why these content things are on here
Is
because they have zero marginal and low distribution costs. So they can sort of have this high gross margin characteristic. Yep. Um where you sink a ton of money into making it and then you can amortize that over tons and tons and tons and tons of people.
But the reason why they're not in the top
You know?
One, two, three, four, five, yeah. Is and the reason why Pixar didn't make the top ten is because it's all about your next hit. That's so funny. And like uh uh just think riffin on this for a minute.
Pixar didn't make the top ten.
Marvel and ESPN did. Marvel and ESPN are more predictable and repeatable than you know, Pixar is dependent on the brain trust coming up with something great every year.
And sometimes they don't.
Whereas, you know, yeah, like sports are gonna get played every every day of every year. That's true. The content kinda creates itself, too. And with marvel, like the depth of the bench and existing libraries, like yeah, you gotta make good content, the movies gotta be good and whatnot, but like
You're you're taking a lot less risk than you are on like, okay, brain trust, go
Make me something good, you know? Yeah.
Yeah, that's a great point.
Yeah.
Okay.
Playbook.
Yeah, can we talk about the fact that
the top three
Are all
Online advertising.
Yeah, let's talk about that. I have this as my uh what I think you're gonna say is also my number one theme here.
Yeah, I mean
There's a few different ways to attack this.
One is a defensibility perspective.
Which I think is interesting. Like once you already have all the advertisers and you already have all the users, it's
A far cry to ever break that.
that bond that's created.
And and so the other side of that coin is being anti competitive. So, you know, the i the fact that our top three are all online advertising network effect businesses that were bought by other online advertising network effect businesses, like that may pay some credence to the drum that Ben Thompson has been meeting around
Do we need a new regulatory framework for the internet? Yeah. Regulation. Yeah. So hugely, hugely value creative for the companies that bought them.
open question of whether it's net positive for the world for this combination to exist. Yeah.
What other angles do you have on my angle on this, I agree totally with everything you said.
My angle on this though.
Certainly for this insight that the top three are all online advertising markets, but also the whole list and and all the honorable mentions.
This comes back to me like
This is another
beat yourself over the head with a hammer moment of like
You want to build a big company, target a big market. You know? Like you're not gonna build a big company if you don't target a big market, you know? And there's lots of big markets out there, but
But this top three all being online advertising.
You know, like think about it for a minute.
Online advertising is probably the biggest market in the history of markets.
So so it's interesting. Uh advertising all up, at least in the US, consistently tracks as one percent of GDP.
Yeah. Now, okay, you could argue that um residential real estate is larger. I'd buy that argument. But those two, I can't think of anything bigger because it like
Advertising
And online advertising. Like
You're taking a
Uh a Vagon.
Everything that is sold. All of it. So get a vag on the economy. You're getting a vague on the economy. Yep. And um

And so like it's so big that it can support the three biggest acquisitions of all time. I think yeah, I don't know if you should say it's the
Like if you look at
household consumer spend.
There's like a
big chunk, I think like thirty percent is like their housing and then like ten to twenty percent is their car and like ten to twenty percent is food.
So like
I I guess the what I would think about all of those, even housing.
advertising. Yeah. But I guess the point I'm making is like maybe it's the single largest high margin
addressable market by a number of consumers perspective, but from an absolute dollars perspective, I bet those other
Markets are.

The only difference being one
You actually have to do the hard stuff, like bringing making the food, bringing the food, whatever it is.
Cars, you know, make it car margins, um segments. Like online advertising knows no segments. Everybody Google everybody has a social network account. It's it's crazy. Um and and ease of scale. Yep. So like
I don't think the amount of revenue available in online advertising compares to the on the amount of revenue available in residential real estate.
However.
the reason these market caps. Yeah, the reason these market caps are the way that they are, and the reason these multiples are the way that they are is gross margin, lack of segmentation, and growth characteristics.
Well we're talking about w at the end of this episode with you know in our clips with Hamilton, as we talked about in the whole episode with him.
the mistake that VCs always make is you only look at market size. That's only one half the equation. The other half of the equation is your ability to create defensibility within that market. And we haven't talked about that on this episode. This is not the time and place for it, but um
Yeah, all of the top
companies on this list were able to do that. The other two quick
kind of sub bullets of that that I want to say are
One
If you look at all these acquisitions on the list with a couple notable exceptions, DoubleClick being a really notable one.
These acquisitions were done
early in that mar particular market's development uh in the life cycle of the market. And um you know, Hamilton also talks about this. Like it's the
the growth phase of a market, that's when you can create
power, you can create defensibility.
If you wait too long, you can enter markets later, but you're never gonna dominate a market. Uh if you enter later. Now double click is
interesting in that Google bought that in two thousand eight. I think Double Click was founded in nineteen ninety five. Um so that was that w th you could argue that was an evolution of the market. Anyway. And then my other sub bullet is like
If this if you're big game hunting, you know, if you're big elephant hunting, uh price doesn't matter. You know, bring a big gun. You can spend one point six five billion for YouTube and like
Still end up number three on the list.
All right, David. So in this final section, most commonly known as greeting in every other episode, uh
We're gonna use this to sort of
Talk about things we we might want to adjust in this list.
Acquired adjusted ranking. Acquired adjusted ranking. And we're not going to actually change the rankings at all, but the there's some things like you can't serve all masters, and there's some masters we didn't serve, namely
Profit contribution. Um
you know, gross margin.
strategic value. Yep.
that that deserve to be talked about here. And so the this is sort of our opportunity, I think, in in in this to grade
entries on this list that we are like I
You know, maybe that should be higher or lower.
Yeah.

First, let's just talk about
how unbelievable Instagram is again.
So instability. Can we make it higher than number one?
The the there's a defensibility amazingness to it that that I think gets harped on over and over and over again. There's another thing that is
They don't pay the creators for the content on it.
Yeah.
Like
Instagram generates twenty billion dollars in revenue from content that they get for free.
It's incredible.
Yeah.
It is like And the content is like what's interesting, you know, we're gonna talk about YouTube in a sec. They gotta pay for the content. They gotta pay the creators. Then you look at like Facebook, you're like, Oh, Facebook gets their content for free. But the nature of the content on Instagram is like super high like it's art. Like there's there's high like that content has value. Whereas like the Facebook content, does that have value?
If it does, you know, like me typing out a status update, you know, like whatnot. You haven't been on Facebook in a while. It's kinda the same as Instagram. It's video. But like, you know, professional photographers and brands and people creating incredibly free. Yeah, highly produced content. Yeah.
that they could y you could go spend a million dollars to make a film that you release on Instagram for free. Like
Crazy. Crazy.
A million might be high hundred thousand.
So then compare that against YouTube.
Where
Of course, they pay something like half of their revenue out to creators. So when Google says we generated fifteen billion dollars in in revenue in our YouTube segment last year, it's like
I I would there's an argument about if that's even revenue. And and like they they chose to report it as revenue and have a higher revenue, lower gross margin percentage.
business line there rather than I think what you could have done is said, you know, we have seven, eight billion in revenue. Exactly.
That is what it is.
It also YouTube is s serving four K content. And so their bandwidth and hosting costs.
Gotta be.
I don't know, at least three ish billion dollars.
And YouTube's I'm sure I'm sh or uh Instagrams I'm sure are high too, but you think about
the the level of compression that people are totally happy with.
on uh on mobile screens and the fact that like oh they haven't released an iPad app I
Feels of course like they're they're they're resource constrained, but like gosh, you you might want much higher quality
Stuff if you're having it shipped down to uh
You know, Retna iPad Pro and so
I guess the the macro point here is I think
It's always worth comparing two similar companies like this, YouTube and Instagram. Instagram doesn't pay for a lick of their content. YouTube has half their their revenue going out the door. And I think
probably significantly higher hosting and bandwidth costs. Yeah.
It's important to note too, like we we're not gonna do value creation, value capture on this episode. But they're like a bunch. We're we're not talking about like what's good for the world, what's not good for the world, like all this stuff. I've got a lot of arguments that Instagram is like bad for the world and like how it is right now. But purely as a shareholder from a like investor economic perspective.
If I could hold shares in Instagram versus YouTube, I would put all of
all hundred percent of my dollars between those two into Instagram and zero into YouTube, even though I love YouTube.
Burn.
Well it's just like Instagram is just totally it's everything we were just talking about.
Yeah.
Yeah, the other thing that's worth
Talking about YouTube now that we've denigrated it is
It is
Th is talk about the strategic value, which we didn't talk about anywhere in here. Yep. So YouTube is the second most I think this is still true, the second highest trafficked search engine in the world.
Yeah.
And they're owned by the highest trafficked search engine in the world.
And so it is worth
in the same way that with WhatsApp we said, was it worth Google
Oh, was it worth Facebook paying twenty percent of their value to go and make sure that
their core
isn't threatened.
It's it's hard to put a price on Google owning
Al also owning the second most valuable search engine in the world. Yep.
So the you know, I think it deserves to be up there probably for that reason alone.
Albeit.
That's not how we made this list.
Yep.

Another one that I wanna discuss here.
And again, we're a little bit out of school because we haven't done the episode on it yet, and we absolutely need to, is VMware. Like the only reason VMware is as low as it is is because of this
crazy thing going on with EMC and Dell right now. Like to acquire
Eighty percent of VMware for six hundred and twenty five million dollars. Like uh man, if I could go do that again, I would go like mortgage, you know, my house a million times over to do that. Like, turned out virtual machines were a were a thing. And and and also reflects all the playbook we were talking about. Like
early in a big market like
Also interesting that it's the I believe yeah it's the only kind of enterprise company on this list. Oh that's interesting. When you're talking about it attacking big markets, I thought that was a direction you were gonna go earlier of like Consumer is the big market, yeah. Yeah, double click is arguably
D to be but but it's it's serving cons it the end customers, consumers. Right.
And like it kinda makes sense that the biggest companies would be consumer companies because the consumers
businesses serve consumers. You know you that you pay retail price for something and then there's
eleven businesses that are chopping up all the revenue that you gave to the retailer along the way to power the back end of the retailer, and that all has to add up to less than what you bought it for. Otherwise
You know, so they're losing the retailer's losing money. And so it sort of makes sense that like
the biggest companies would be consumer companies and the most successful acquisitions would be consumer acquisitions. Make sense. But
Yeah.
Do you want to uh
Pixar uh apology statement. Not not apology, but uh
Yeah, apologies not in that you're sorry, but like a justification for Pixar here.
Of why it's uh all the way down at fourteen.
Why to why why it's worth more than we say than we say it is. Yeah, yeah. So there's there's a that's right, we talked about this last night.
So picks are
A thing that we didn't do is also count the Disney animations value that it created.
And revitalization of the whole company. Totally. Like I I think what's the phrase from the Iger book, so with animation goes the company. Yeah.
You know, Jeffrey Katzenberg did an incredible job with Aladdin and what Beauty and the Beast and Lion King. And then we had sort of him leave, and then we had the Lilo and Stitch era, and we had Tarzan, and we had uh and those are the good ones. Yeah, those are the good ones. Um and so, you know, you have Disney animation falling off a cliff, which of course
So as well. Everything.
And so
Uh in acquiring
John Lasseter, Ed Ed Catmole and the rest of Pixar, you know, they revitalized. Totally. They revitalized
Disney in a way that
it's it's kind of hard to put a value on.
the easy way to put a value on it is just multiply the number of basically that that value that we said that
Um it contributed by two and basically say for every Pixar movie, you get one Disney animation movie and Exactly.
And that's been largely true. They've both both studios have basically done one big mega hit per year. Some sometimes they try to, but
Sometimes you get frozen.
Like it it it worked.
You know, I I and so I do think it go, Ben. Let it go. It's it's if we were considering sort of strategic value, uh, then I do think you'd probably want to say Pixar contributed not
What what did we say, three billion a year, but six billion a year? Something like that. Yeah. Um, but that wouldn't materially put it up with some of these other ones. It wouldn't, you know.
Software is hard to beat.

Yep.
Any other any other comments?
I don't
Think so.
The only other cave that we said in the beginning, I'll say again.
We're probably missing some in here, so
Please.
Write us and acquire F M at Gmail dot com, join the Slack, hit us up in there.
But I
Can't
Wait to do a double click episode.
Yeah. Yep.
Um
Gonna be super fun. I think this just pointed out the the sort of need to do both of those, if not this season then soon. Yeah.
Alright, carve outs. We haven't done in a while. Oh, we haven't done them in a while.
I got two.
First is the
Yeah.
Uh to doist.
Uh I'm loving it. Me too. Uh my to do list. Apple reminders just like I just finally couldn't take it anymore. It got buggy. It was so
So icky. And uh even though my whole life ran on it for years.
So I tried a whole bunch of
Different.
You know.
Options and um
Finally landed on to doist and I I just love it.
It's
Great. It's everything I want in a
You know, to do lists.
And I can assure you, as someone who's built a to do list thing over the years, is is is uh
It's actually harder.
And this is any piece of software, but it's actually harder to make it feel
Simple than it actually is to make it feel janky. Everything should be as simple as it can be, but no simpler. Simple but not simplistic? Yes, that's right. Simple but not simplistic. Uh which you'll hear from Hamilton in a minute here.
My other carve out is uh you know, been a couple I was on the WhatsApp episode, your uh carve out was computer glasses. Yep. Um
Our uh friends
Not a sponsorship, but uh at Felix Gray, uh direct to consumer computer glasses brand.
Fans of the show listened uh reached out to us and um they sent us uh uh pairs of computer glasses and uh I've been using'em they're awesome.
I love'em. Like Welcome to the party. I and and the best part is I finally uh
I'm very lucky my vision is normal. Um, but when I wear glasses I look very aerodite. But I'm I was like, I'm not gonna be that guy that wears like, you know, glasses that don't actually have prescriptions just to look aerudite. Now I have an excuse to look aerudite.
I love it. I don't actually know what that word means. Uh you know, like um knowledgeable, intelligent, I see uh
I think you look that way anyway.
Alright, my carve out is
The master class taught by Dead Mouse.
So if an for anyone out there who's a a master class subscriber, um or wants to give it a shot, I I spent a weekend, a couple of weekends ago, uh doing the watching and then experimenting a little bit on my own with producing some music and watching the the dead mouse class. And it was awesome.
It's cool that he agreed to do it'cause with that many hours
Of just like
Somebody
talking about their craft, you really get a sense of
how his creativity works. It's interesting from a learning perspective, learning the software. It's interesting from
watching the ways in which he is resistant to using um a lot of like out of the box software or cookie cutter loops and he's lit like it's a massive wall of things that he's actually plugging into and dials and doing it all sort of analog and then recording the analog sounds.
Acquired goals.
Dude, it's it's it's really cool and it's it's really creative.
For anyone who sort of likes to watch the creative process in action, I I highly recommend it.
That sounds awesome. Whether you're an E DM fan or not.
So
Can't can't recommend it enough.
Do you think uh D Saw?
Uh watched it and learned from it.
Probably not. I don't know if that guy has the kind of time on his hands to probably not.
Yeah.
All right.
Well, listeners.
If you aren't subscribed and you like what you hear, you should.
This particular episode uh is different in that it has a accompanying blog post that we're gonna publish sort of the full data table and a little probably short paragraph on each company.
We gotta write it. So
Who knows exactly what it will be, but the hope is to create kind of the first um enduring piece of acquired, um kind of acquired artifact um outside of just these hundred plus episodes that we've done.
that is is a little bit more sort of referenceable and and I think discoverable for folks who
aren' aren't already big fans of the show. Feel free to uh click the link in the show notes to check it out, uh to share it with your friends. And we'd love to have a conversation about it both on Twitter.
at acquire.fm and in the Slack.
By the way, you can join the Slack, go to our website acquire dot Fm and there'll be a big button to get an invite.

Going on five thousand people hanging out there.
All sorts of great stuff going on.
It's true.

Well stay tuned after this for an excerpt of our uh our LP episode with Hamilton Helmer, who is the author of Seven Powers.
If you'd like to become an acquired limited partner, subscribing gets you access to our LP show, where we dive deeper into the nitty-gritty of building companies in real time.
To listen, you can click the link in the show notes or go to glow.fm slash acquired.

Seven day free trial for all new listeners.
With that, thank you to Silicon Valley Bank and Wilson Cincinnati, and we will see you next time. See you next time.
Welcome, LPs. I am here in lovely Los Altos, California, with a very, very special guest that we've been wanting to have on the show for a long time, Hamilton Helmer, the author of a book called Seven Powers, which is just spectacular.
And probably the best kept secret in Silicon Valley. We and I first heard about your book on uh Patrick's and Best Like the Best Podcast on the episode with Keith Roboy, where he said basically the same thing.
And so I ordered it on Amazon and I look at the blurb uh in the inside of the jacket
The people who
agree that this is the best kept secret in Silicon Valley.
uh the list of them is just kind of staggering. So Reed Hastings, who also wrote the foreword for your book, Daniel Eck, Michael Moritz, Peter Thiel.
Former CEO of Adobe Bruce Bruce Chizen, uh Patrick Collison from Stripe, Daphne Culler from Coursera, Jonathan Levin, who's the dean of Stanford GSP.
Pete Doctor from Pixar, who dragged Monsters Inc and up and inside out.
The list goes on and on and on. Um
We are so excited to have you with us here to talk about the book, talk about your work. Um
Yeah, I would say uh we're we're sorry to blow your cover, but it's sounding like that's uh pretty well blown as uh no longer the best kept secret in Silicon Valley. I was gonna say that that the fact that it's a best kept secret says something about my acuity as a good marketer.
All right listeners.
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So
Okay, let's get into the the fun stuff.
Seven powers.
You know, when I read it, I th uh to me at least
the thing that was so
enlightening about it was
I see this mistake all the time in in Silicon Valley and in venture investing of like everybody's like, Tell me about the TAM. Gotta target their big market.
But that's kinda only half of the equation of what makes for
Uh great enduring
company is targeting a big market. Of course you have to have a big market, but you also have to have
um, you know, what you call power in the book within that market, you have to have defensibility. You have to have, you know, something that makes
your company and your business uh stand out. Can can you tell us a little bit about how you define power and
How you came up with it.
Yeah.
Yeah, sure. So
As I consulted with more and more companies'cause I I
ran my own consulting firm for decades.
Three things started to become evident to me.
One was that
really strong performance is persistent.
If you look at Intel's results this year and Intel's results next year, the fact that they have high profit margins will probably be true next year. And it turns out there's a lot of empirical work that verifies that, that that there's a per s there there's persistence.
Uh or or mutual fund managers. You know, there's there's no persistence in mutual fund managers. Now, interestingly as you probably know there is persistence in venture capital.
Yeah. Um and uh and then the next thing, if you've done a lot of valuation work, I'm sure you've done a ton and I've no I've done a ton and I've even taught it.
Uh what you learn is it's all in the future.
Yeah. So if you take a ten per a company's growing about ten percent, uh do a standard
evaluation model, what you find is
Eighty five percent of the value is after year three.
Yeah. So so persistence
And in the future.
If you can understand
The issues uh that drive persistence, you're gonna understand what drives value.
Right.
But then as I did more and more consulting work, a another thing came into focus, which was
the the path to establishing that kind of persistence
It's not linear. There's a step change. So there's a period
When a company can establish that
And uh that window often closes, if you will.
And it's the kind of business that all that you are so familiar with. It's in the earlier stage. I think you call it in the book the the takeoff phase of the market. Yes, yes. So there's this so if you think of a founder, there's this period of uh where the
Th there's tremendous flux going on. They don't know who the customers are. Technologies can't change you like crazy. They have all
of wide variety of different types of competitors.
And in that there are all kinds of degrees of freedom about how you how you move. You know, the the fact that people even talk about pivoting is just suggesting that it is possible, in fact, to pivot.
Yeah, ask Intel to pivot and it won't happen very easily, you know. And then they've certainly been trying for a long time. So what that says is the there's this moment
But
But then the problem is from a strategist point of view is that
All the information is changing so radically that the the person or the group that has to process that
is the the founder and his team. Right.
And and and it's not hiring somebody like me and making a recommendation or strategic planning or something like that. It's it's it's actually processing all this time and as you move through space and time
understanding.
Okay, this direction looks a little better than that direction. Yeah.
Silicon Valley founders and the venture capital ecosystem identify here's a big large market opportunity
Hundreds of companies get fronted and rush in. And only one or two of them make it out. Right. And so it's these decisions that guide what's gonna create power.
Was
That what people needed
uh was not advice from an expert.
But rather teaching to fish.
Trying to s assemble.
a a way of looking at strategy so that the people on the ground who are really making these decisions
have a way of thinking about it that will it's not never perfect, but guide them in the right direction.
But the problem in doing that for me was that providing a mental model like that, as I say in the book, it has to be simple but not simplistic. Simple so that you can retain it, not simplistic so that it's relatively complete. You don't miss a lot. That's a really high bar in strategy. And that's what took me so long. I mean I wrote the book, it took me twenty years of writing it, basically.
Yeah. And Hamilton, I'll tell you, like having read a bunch of business books and having an even larger pile of business books I've bought but haven't read and then probably even bigger than that of recommendations I've had but haven't made it to, there's so many different mental models for how to think about this stuff.
Uh I I will say like
Thank you for taking the twenty years to do it because the the fact that there is a one page reference card that sort of like assembles this whole thing in grid. It actually does make it so you can
reference the seven powers and sort of make decisions in real time. And it takes I I think I've read the book very recently. I'm sure it will take me some time to sort of like
make that uh system one thinking instead of system two thinking, but it it's certainly much more accessible than uh
I think trying to weave your own fabric of lots of different theories.
Let's talk about a few of them. We won't have time to go through all seven, but um
They're all fantastic. Maybe a good one to start with since most of our audience is in technology and and most of those folks are entrepreneurs or aspiring entrepreneurs. Counter positioning. This is such a fun one. I know it's your favorite power, and particularly such a fun one because it's in many ways the most relevant for startups and entrepreneurs.
In a lot of markets. Yeah, yeah. Uh I I do have a special place in my heart for counter positioning, I have to say, because because it's so contrarian and I'm sort of a contrarian person, I guess.
A counter positioning occurs if
a a company comes up with a new business model
And challenges often a powerful incumbent with it.
And uh but for the incumbent to mimic this model.
they would incur or at least think they would incur
So much immediate financial d damage.
That they just say, I can't go there.
even though maybe long term it would be good, they just can't they can't do it. So
And that provides
you know, a powerful disincentive for them to to respond quickly.
And if something's happening in the kind of flux that you guys deal with very fast.
responding late may mean that you don't do it. So uh I'll give you some examples. So Netflix versus Blockbuster. So Late fees. Yeah, yeah, yeah. Late fees. So late fees accounted for half of Blockbuster's income. Netflix says we're not doing that.
And Blockbuster eventually
Mimicked.
Netflix.
And who knows, but my suspicion is if they'd done it a year earlier, I'm not sure Netflix would exist, you know. Um and so and and the the place I got to kinda cut my teeth in this was I was a um a big investor, big for me, not big for them, a big investor in Dell in the nineties, right?
And my investment hypothesis was the Compact couldn't respond quickly to them because Dell was going direct.
Um and Compact had these lucrative arrangements going going through stores. But there was nothing in the literature that sort of I I kind of
looking at his investor, I could see that was true, but w uh w you know, wh why, you know? And so so that kind of got me thinking about it from sort of a ground up and and eventually I was able to to formalize it. Hamilton, one thing to to push on there. So it seems like and I I'm remembering from your book
Yeah.
this new thing is both a good business, but
net negative for the big incumbent because of the cannibalization that would occur. Are there any other things you would sort of add to to find out?
So there uh there are a few
flavors of counter positioning. One is that is that it's a
a net negative and and therefore um
because their current model is so lucrative that actually even if they did a net present value they would end up
with uh deciding not to do it.
even though they'll eventually the business will go to to the challenger. And these are not mutually exclusive. It's
Very often true. I'd say almost always true.
that there's uh there's uh cognitive bias involved, which is that the the incumbent
They've done just great. Their model has worked for years. I mean Blockbuster saying, Oh, you know, we got all these stores, you know, people love it. They come in, they can browse, you know, what's wrong with that? You know, and they think they just and and the idea of somebody doing
this uh rough and ready group sending out red envelopes in the mail, they say, What the hell, you know, they're th this is just not going anywhere. So they're very cognitively biased towards thinking that their model works.
Uh and then there are also agency issues, uh what economists call agency issues, which means that the the person
uh who controls the business may not be an uh uh have a l interest aligned with the long term interest of the business. So so for example, CEO comp is often about you know this year's performance or the next few years' performance and and so you you uh so
to upset the Apple cart for a gain that will happen four years out, you may say, uh, you know, I I just don't know.
Hard to do if you are a
hired CEO of a large long lasting company because if you're not a fa if you're a founder, then most of your worth is in the equity of the company. And so the long term matters. Right. It also reminds me, as you were talking, I hadn't thought about this, but um
Obviously for startups, counter positioning can be great and Netflix is a fantastic example. But even um remembering a a blog post Bill Gurley wrote a number of years ago in the beginning of when Android was starting to take off. And I think the title of it was like um Less Than Free, the new, like the most disruptive business model ever of you know, you had Android.
Which was less it cost less than free. Like they would
pay you to use if you're a carrier to put it if you're a hand type manufacturer to put it on your phones. Uh versus like Nokia that's trying to make money or sell their stuff. Like uh even as Google and a staff, because they had the separate business model of search, they're able to enter this adjacent market with a completely counter positioned business model. Right.
Right.
Right.
Uh Hamilton, listeners uh who have read The Innovator's Dilemma, this is gonna sound vaguely familiar and and like this would be the power that's sort of most similar to that concept. How do you think about in the same way that we asked earlier, what's the difference between power and moat, how do you think about
counter positioning relative to sort of the that that sort of grand theory.
I recommend everybody to read that book, Innovator's Dilemma. It's a brilliant book, you know, and and Christianson is just uh you know a scholar of innovation, you know, and and deeply researched. I have great admiration for his book. But it's pretty different. Uh so if you if you want to get sort of
mathematical about it. There's a many to many mapping between the two concepts, which is to say that counterpositioning doesn't imply you know uh doesn't uh apply disruptive technology. Disruptive technology doesn't uh imply counterposition. Give you some examples. So so
I would argue that in and out progresses counterposition against McDonalds, there's no technology involved particularly at all.
But it's counterposition, so that's one case. And it's not disruptive in terms of Christensen's
Philosophy was low end. This is like a
Objectively worse product. Right. Right, right. So you're going back to Christian's original book, which I think is the more interesting one, where where there's a product that's kinda doesn't you know satisfy everybody. I mean you you could argue that
Tesla's first cars were like that, right? Yeah. Uh okay. And so and then the other the other direction is that if something is a disruptive technology, it may not be counterposition. So that's straightforward. And and and the fact that they don't map to each other.
And the fact that power maps directly to value, or there's a one to one mapping between power and value.
it means that uh disruptive technology does not map to value.
And so as an investor.
Uh so and and and the the simple
The thing about that is
You can disrupt something and it can be a really lousy business. Yeah. Right. You you may not be able to realize
You poison the differential margins. You poison the well, but there's no good endpoint for it. Something along the lines of there is an infinite amount of product market fit for selling
Dollars for ninety cents.
Yeah, yeah, yeah. Right. So yeah, I mean and and you see this model all the time of of uh so uh yeah, so just pricing something so that people are attracted to it uh and losing money is is not there's no power there.
Yeah.