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

1. 0:00 – 5:06

   Season setup: why the Ballmer-era story is more nuanced than “rise, fall, rebirth”

   1. BGBen Gilbert0:00

      I'm a little hoarse today, so hopefully we don't have to do a lot of talking. [laughing]

   2. DRDavid Rosenthal0:05

      [laughing] Yeah, good luck with that.

   3. BGBen Gilbert0:08

      [laughing] All right, let's do this.

   4. SPSpeaker0:10

      Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Hmm. Is it you? Is it you? Is it you? Sit it down, say it straight. Another story on the way. Who got the truth?

   5. BGBen Gilbert0:27

      Welcome to season fourteen, episode six, the season finale of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

   6. DRDavid Rosenthal0:37

      I'm David Rosenthal.

   7. BGBen Gilbert0:38

      And we are your hosts. Well, listeners, here we are, Microsoft Volume Two at long last. After the ancient history of Volume One, we now get to the stuff that you grew up with: the Internet, Windows XP, Xbox, the browser, Search, and mobile. And in this era, Microsoft had a lot of the right ideas, with a lot of the wrong timing and execution on everything from the Zune to Bing. But despite that, from 1995, where we start our story, to 2014, where we will end this episode, Microsoft grew their annual revenue from six billion to eighty billion. They became a phenomenally successful company and really cracked the code on selling enterprise software. I began the research thinking our part one episode would be about the rise, and this episode would be about the fall: cultural problems, failed consumer products, antitrust, but it's really not that straightforward. And after spending months unpacking it all, I actually don't think that's the right framing anyway. And on Microsoft's 1998 antitrust suit against the Department of Justice, everyone knows of this case, but most people really have no idea what actually happened. Did Microsoft lose? Well, not really, but the answer is nuanced. Finally, today, we dive into it all. Oh, and listeners, we have just one announcement for you here today.

   8. DRDavid Rosenthal2:08

      Yes!

   9. BGBen Gilbert2:08

      We told you before that September 10th, we are doing the biggest thing in Acquired's history, and we're doing it in the city of San Francisco.

   10. DRDavid Rosenthal2:15

       We're doing a live Acquired show at the Chase Center, which is the brand-new basketball arena here in San Francisco, where the Warriors play. We're putting it on with our good friends at J.P. Morgan Payments, and as you can imagine, they know a few people at the Chase Center.

   11. BGBen Gilbert2:29

       Yeah, it'll be a night to remember with a few different phases of the evening. There's gonna be lots of opportunities to meet other Acquired listeners from around the world, and a big show like this deserves a big, special guest, and that special guest is the one and only Mark Zuckerberg. So in addition to being the central figure in some of the greatest acquisitions of all time that we have covered right here on Acquired, Mark and Meta are also playing a big role in defining the next decade of computing with AI, too. So it's shaping up to be a total blast. We really hope you can join us.

   12. DRDavid Rosenthal3:04

       Yeah, tickets will be available soon, and you can sign up at acquired.fm/sf to get emailed as soon as they go live.

   13. BGBen Gilbert3:10

       We're pumped. We'll see you there. This show is not investment advice. David and I may have investments in the companies that we discuss, and so do all of you if you own index funds, and this show is for informational and entertainment purposes only. Okay, David, the middle chapter of Microsoft.

   14. DRDavid Rosenthal3:27

       The middle chapter indeed, and boy, is there a lot to discuss. So Ben, you covered this in your intro, but I think everybody kinda knows the narrative about what happened to Microsoft between, call it, 1995 and 2014, when Satya took over. There's even a quote from Satya himself in the very first paragraph of the book that he wrote in 2017 called Hit Refresh, which, I mean, that title kind of gives it away [chuckles] right there. He writes: "I joined Microsoft in 1992 because I wanted to work for a company filled with people who believed they were on a mission to change the world. But after years of outdistancing all our competitors, something was changing, and not for the better. Innovation was being replaced by bureaucracy, teamwork was being replaced by internal politics, and we were falling behind." And then he references the famous gun-pointing org chart by, uh, cartoonist and software engineer Manu Cornet, that probably listeners, many of you are familiar with. We will link to that in the show notes. And you could sum this kinda whole narrative up as Microsoft was winning, and then it sucked for a long time, and then it is now winning again, and that's all thanks to Satya. And the question we sorta asked as we were doing our research was, "Is this true?" And what we ended up learning from the literally dozens and dozens of people that we talked to surprised us a lot, and I think will probably surprise listeners, too.

   15. BGBen Gilbert4:53

       Yeah, David, you're burying the lead here a little bit. We talked to probably four to five times as many people as the next highest episode. I'm looking at our little thank you list. It's, like, twenty-something people long.

2. 5:06 – 14:25

   From walled gardens to “Internet time”: Microsoft’s early online bets (MSN, interactive TV, Cablesoft)

   1. DRDavid Rosenthal5:06

      All right, so on the last episode, we left off with the, Ben, as you put it, "unabashed celebration of software" that was the Windows 95 consumer launch in August of 1995, and it was perfect. It had everything: had Jay Leno, had The Rolling Stones, it had the Start button, or actually, it had almost everything. There was one thing that was missing from Windows 95 at launch, that if you were a consumer user of technology, of software, of products, of operating systems, maybe you kinda wanted to have, and that was an Internet browser.

   2. BGBen Gilbert5:52

      Yes. It's so funny 'cause we sort of intentionally left all the Internet components out of Windows 95-... in the previous episode, because once you start talking about the Internet, you're really talking about the next chapter of Microsoft, and you can't help but dive into it all. But in retrospect, the thing that mattered about Windows 95 all these years later is that's the platform that everyone started using the Internet on. And everything that we talked about in the last episode, yeah, it's all important, but it's not nearly as important as it being the Internet operating system. So how did this come to be?

   3. DRDavid Rosenthal6:24

      At the time, things were changing so fast. There was this phrase called Internet time. Things happened in weeks versus years. But if you rewind just a little bit back to, like, '92, '93, '94, even into early '95, going online for consumers meant using a service like CompuServe or Prodigy, or, of course, the big one, AOL. And these services were not what we think of today as the Internet, but they were more like walled gardens with proprietary services that were bundled with access via dial-up modems.

   4. BGBen Gilbert7:03

      Yeah. For consumers, it was kind of a similar experience. You could get content on your computer, but the main difference was how to put content on that network. It wasn't like anyone could just plug in a server, and then, boom, you have a website. It was like you had to have some negotiating power and know someone at AOL to go do a deal to get your content on their platform.

   5. DRDavid Rosenthal7:26

      Yep. I think the best way to sum all this up is, do you know who owned the CompuServe service at the time?

   6. BGBen Gilbert7:34

      No, but I know it was a Columbus-based company.

   7. DRDavid Rosenthal7:37

      Oh, interesting! It was owned by H&R Block, the tax prep company.

   8. BGBen Gilbert7:40

      Really?

   9. DRDavid Rosenthal7:41

      Yeah. [chuckles]

   10. BGBen Gilbert7:42

       Whoa! Crazy.

   11. DRDavid Rosenthal7:44

       That's what online was like just a few years or months before the Windows 95 launch. So Microsoft, of course, as, you know, inheritor of the Earth and all things technology, they wanna play in this online services arena, too. So in 1993, they start sniffing around AOL and see if maybe Microsoft could acquire AOL. Steve Case, the founder of AOL, isn't interested in selling, but there's this whole thing where Paul Allen goes off by himself, and he buys a large stake, and that creates all sorts of headaches because Microsoft is like, "Well, if we can't buy them, we're gonna compete with them." So they start an internal project called Project Marvel to build their own online service. That becomes MSN.

   12. BGBen Gilbert8:25

       So there's a little sleight of hand that you just did there. You said it becomes MSN. Marvel, when it initially was conceived, was a proprietary online service. Eventually, when that completely failed, which you're about to get to, they repurposed the name MSN for their Internet-based media property, a complete shift in strategy.

   13. DRDavid Rosenthal8:46

       At the same time, many people in technology, especially at Microsoft itself, and lots and lots of investors on Wall Street, believed that these walled garden online services were just temporary. They were just a bridge to a more utopian, networked consumer culture and economy that they called the Information Superhighway. And the specific vision of how this Information Superhighway utopia was gonna work was interactive television, all mediated by the pay television providers, so, like, the cable and satellite companies out there, you know, the Comcasts, the Charters, the Time Warner Cables, the DirecTVs on the satellite side. These were gonna be the big consumer technology companies, and this wasn't crazy. This actually made a ton of sense because television, and in particular, cable television at the time, was the primary existing consumer medium. The Internet was not a thing.

   14. BGBen Gilbert9:43

       Well, think about the number of things required to create some sort of networked entertainment, interactive thing. You would need screens. You would need some way to control those screens to create a feedback mechanism. You would need content. You would need infrastructure connecting people's homes. All of those already existed by the cable companies and their endpoints, the televisions, and if you pitched me on the idea that actually, everyone's gonna go buy a brand-new device, like a PC, like a computer, and we're gonna have a different set of wires that actually bring [chuckles] all of that to the home, or maybe we'll repurpose some of the same wires, but, gosh, we need to, like, bring in new networking equipment everywhere along the way. Oh, and there's gonna be completely different content companies that figure out how to create the content for their... It's like all of that falls flat. Of course, you're gonna use all the existing infrastructure and content. You're not gonna bank on standing it all up new from whole cloth.

   15. DRDavid Rosenthal10:41

       Totally. And Microsoft, just like they had done in entering the PC software market in partnership with IBM, they're gonna partner with these big consumer cable companies. And so starting in the summer of 1993, there are all these rumors flying around that Microsoft is working on a big JV with the cable companies, dubbed Cablesoft. [chuckles]

   16. BGBen Gilbert11:02

       Yep.

   17. DRDavid Rosenthal11:02

       You can't make this up. And the idea is that, Ben, like you're saying, the cable companies will control the pipes and the customer relationships and probably a lot of the content. Microsoft will write the software, both for the set-top boxes in consumers' homes and for the servers on the back end, and this software project is codenamed Tiger. And then there's a third company, a third piece of this sort of unholy alliance for the Information Superhighway, and that was a company called Silicon Graphics, that would make all the hardware. Cable companies aren't gonna make the hardware themselves. You're gonna need pretty powerful hardware here, both at the home and on the server side. And SGI, as Silicon Graphics was referred to, was legendary. They are the graphics company that enabled the CGI in Jurassic Park, and of course, their founder and chairman was legendary in Silicon Valley, one Jim Clark. Put a pin in that name.

   18. BGBen Gilbert12:00

       So pinned.

   19. DRDavid Rosenthal12:01

       ... So Wall Street, of course, is, like, nuts over all this. You know, the hype is out of control. It's a trillion-dollar opportunity. There's all these spy shots of Bill meeting with John Malone at TCI, and Gerald Levin at Time Warner, and Bill starts spending time with Michael Ovitz, talking about how Microsoft can get in on the content game, too, either through the MSN project or through other things they're gonna do. This leads to MSNBC, the cable network-

   20. BGBen Gilbert12:26

       Hmm.

   21. DRDavid Rosenthal12:26

       -that people are probably familiar with.

   22. BGBen Gilbert12:29

       Well, this is so interesting because we're talking about this general idea of interactive computing involving other people, and Microsoft so far has two initiatives, Marvel and the Information Superhighway, neither of which are the internet or the web browser.

   23. DRDavid Rosenthal12:42

       Yes, correct.

   24. BGBen Gilbert12:44

       You're already getting this picture of Microsoft's business strategy, which is, until we know exactly what the future looks like, start placing bets that approximate, so that we're sort of in the mix, even though we don't know exactly what the future is.

   25. DRDavid Rosenthal12:58

       Which, as we talked about in part one, had always worked so well for the company.

   26. BGBen Gilbert13:03

       Yep.

   27. DRDavid Rosenthal13:04

       And it's gonna work really well here, too. So Bill actually decides at this point that he needs to write a book for the public to evangelize this Information Superhighway thing. Kind of embarrassingly, given how long the book world takes to, you know, actually publish a book, it doesn't come out until November nineteen ninety-five, after the Netscape IPO has already happened [chuckles] and Windows ninety-five has shipped. But in this book, called The Road Ahead, I have two copies of it here on my desk, the hardcover copy and the softcover copy, which was revised and came out in nineteen ninety-six. The hardcover copy is all about the Information Superhighway, [chuckles] or as Bill likes to call it, information at your fingertips. And then, when the softcover version comes out later, basically, they Control-F'd every instance- [laughing] ... of Information Superhighway and replaced it with the internet and the web browser.

   28. BGBen Gilbert13:54

       Yeah. This is one of these moments on an Acquired episode where we have just a delightfully concrete illustration of this year, it was unclear, the next year, it was extremely clear. And David, look up in the indexes of both of those books, the number of references to the internet.

   29. DRDavid Rosenthal14:12

       In the hardcover version, there are three portions of the book where it is discussed. In the softcover version, the index for the internet takes up an entire page. [laughing]

   30. BGBen Gilbert14:23

       [laughing]

3. 14:25 – 35:13

   The web browser becomes existential: Mosaic, Netscape, and Microsoft’s ‘embrace and extend’ origin

   1. DRDavid Rosenthal14:25

      There needs to be an index for all the sub-indexes of the internet in the softcover version. Amazing. So the hardcover version is the state of play in January 1994, when a young Windows networking engineer named James Allard, or Jay, as he goes by, writes a memo to Bill Gates and to the senior leadership at Microsoft entitled, "Windows: The Next Killer Application for the Internet!" And in this memo, he points to a new piece of software coming out of the National Center for Supercomputing Applications at the University of Illinois, that is spreading like wildfire and appears to be written by some, like, kid programmer there by the name of Marc Andreessen.

   2. BGBen Gilbert15:13

      In his free time, it's not even, like, his real job.

   3. DRDavid Rosenthal15:16

      Yes, and it is called Mosaic. And in this memo, Jay argues that the internet and this software instantiation of it in the Mosaic web browser kinda looks like it is going to become an exponential phenomenon, given the rate at which it is growing, and that it represents an enormous opportunity for Microsoft to, quote, "Embrace and extend the internet-

   4. BGBen Gilbert15:41

      Oh!

   5. DRDavid Rosenthal15:41

      -into Windows itself," and this is the origin of the embrace and extend-

   6. BGBen Gilbert15:47

      Oh.

   7. DRDavid Rosenthal15:47

      -mantra. And the exact words he uses are, "Embrace, extend, innovate." In popular press and public opinion of Microsoft, that would, of course, get changed to embrace, extend, extinguish.

   8. BGBen Gilbert15:59

      By their effectively competitors and political enemies. But the embrace and extend thing is actually a brilliant business strategy. There's already a whole bunch of people who love this thing. We wanna embrace that new behavior. There's sort of no product/market fit risk, 'cause we can clearly already see it happening. People wanna use this browser thing to access hypertext on the internet. We're gonna embrace that, and we're gonna figure out a way to work it into our business model, to extend the functionality in a way that we can make money on.

   9. DRDavid Rosenthal16:26

      Right. The business model is we sell Windows through OEMs, into businesses, and the like, and to consumers, and we can just bake this into it. Honestly, it's pretty incredible that Jay lays out the whole winning strategy for Microsoft and the internet here in January 1994.

   10. BGBen Gilbert16:43

       This is a few months before Netscape is even founded.

   11. DRDavid Rosenthal16:46

       Yes. Yeah, Netscape as a company does not exist yet. There's just the Mosaic web browser at the University of Illinois.

   12. BGBen Gilbert16:51

       Yep.

   13. DRDavid Rosenthal16:52

       Then, in this sort of exponential growth theme, the very next month, in February 1994, Bill's technical assistant/shadow, which is a legendary role at Microsoft, now exists at Amazon, too, a man named Steven Sinofsky, goes on a recruiting trip to his alma mater at Cornell University, and while he's there, there's a big snowstorm. He gets stuck on campus. He has to stay on campus for a few extra days.

   14. BGBen Gilbert17:17

       It's a very Cornell story. [chuckles]

   15. DRDavid Rosenthal17:18

       Yeah, [chuckles] the most Cornell thing ever-

   16. BGBen Gilbert17:20

       [laughing]

   17. DRDavid Rosenthal17:20

       ... the most Ithaca story ever. He notices that all these kids, especially when the campus is snowed in, they're all using the internet, and he knows what the internet is. You know, it was an academic project for years. You know, he was an academic guy before getting into commercial software and joining Microsoft.

   18. BGBen Gilbert17:37

       But it was this way for scientists to basically trade research, and you're starting to get some cool entertainment use cases, but there's certainly no business or business interest or commer- it's all just, like, the way that academics communicate with each other.

   19. DRDavid Rosenthal17:53

       And this is what absolutely floors Steven. He's like: I remember the internet as what you're saying, Ben, and now I'm here on campus, and all these kids are using it for flirting, registering for classes, messaging each other, sending email that has nothing to do with papers or work or school or academics or anything.... he gets so excited that he writes another memo to Bill and the leadership team entitled, "Cornell is wired!" Exclamation point.

   20. BGBen Gilbert18:23

       This is so funny. Microsoft's history is told through a series of memos. Every milestone is some executive publishing a company-wide memo.

   21. DRDavid Rosenthal18:33

       Well, and it's so funny, 'cause some of these memos definitely were, like, internal memos for exactly what you say. And some of them were, like, written for publication to the press.

   22. BGBen Gilbert18:43

       Yep.

   23. DRDavid Rosenthal18:43

       And Bill has a great quote: "When I heard Steven talk about what was happening at Cornell, I began to take the Internet quite seriously." So Steven and Bill organize an Internet offsite, quote, unquote, "with all the top execs, with Jay, Bill, Steven, everybody who's investigating this Internet thing," and it takes place on April 5th, 1994, which is the very next day after Netscape was incorporated on April 4th.

   24. BGBen Gilbert19:12

       Amazing.

   25. DRDavid Rosenthal19:13

       And at this offsite, Bill totally gets religion that the Internet, as Jay said in his initial memo, is actually an exponential phenomenon. And as Bill puts it to the team gathered there, and then the whole company later, "It is a core Microsoft company value that exponential phenomena cannot be ignored."

   26. BGBen Gilbert19:35

       Oh, wow, I had no idea that was kind of the impetus of him taking it seriously. I mean, think back to everything we talked about in the last episode. The whole concept of Microsoft is founded on the idea that Moore's Law is a thing, and therefore, we can develop software that people have never dreamed of, that in just a few years will be usable.

   27. DRDavid Rosenthal19:56

       So speaking of Netscape being incorporated the day before, remember I said to put a pin in the name Jim Clark? Of course, many listeners already know where we're going here. Jim Clark, legendary founder of SGI, Silicon Valley legend. Well, a couple months before that, in February '94, it's crazy how fast all this happened. It's just insane. Jim is still at SGI. He's really frustrated with the board and the company, though, for not pushing even harder on this information superhighway opportunity. So what does he do? He resigns from the company, kinda like in protest, the company he founded.

   28. BGBen Gilbert20:33

       Wow!

   29. DRDavid Rosenthal20:34

       And on his very last day, in February '94, at SGI, he cold emails the kid in Illinois, Marc Andreessen.

   30. BGBen Gilbert20:43

       And so you get the opportunity to team up with an industry legend, uh, of course.
4. 35:13 – 52:54

   Internet Explorer’s path to dominance: licensing, integration into Windows, and ‘cut off the air supply’

   1. DRDavid Rosenthal35:13

      So this brings us now to the launch preparations for Windows 95. And in the spring, leading up to all this, Bill writes another memo, this one intended for publication, so to speak. That is the famous Internet Tidal Wave memo. I just wanna do a big quote from it here. "Perhaps you have already seen memos from me or others here about the importance of the Internet. I have gone through several stages of increasing my views of its importance. Now I assign the Internet the highest level of importance. In this memo, I want to make clear that our focus on the Internet is crucial to every part of our business. The Internet is the most important single development to come along since the IBM PC was introduced in 1981. It is even more important than the arrival of the graphical user interface." Can't get any more clear than that.

   2. BGBen Gilbert36:06

      Very clear.

   3. DRDavid Rosenthal36:07

      So that brings us to the August '95, Windows 95 launch, scheduled for the 24th. On August 9th, a couple weeks beforehand, Netscape goes public with a market capitalization of three billion-... dollars.

   4. BGBen Gilbert36:23

      Massive IPO.

   5. DRDavid Rosenthal36:24

      Massive. I mean, this is like 1995 we're talking about.

   6. BGBen Gilbert36:28

      Netscape, we should say, goes from one million to fifteen million users in one year. I mean, just instant product market fit. It was so clear that people wanted to browse the web. A lot of the time in technology, in this ecosystem, we're always looking around like, "Ah, is that gonna become a thing? Is that gonna become a thing?" That was, from 1994 onward, never a question about the internet. Never.

   7. DRDavid Rosenthal36:49

      Yeah. In the IPO press cycle, [laughs] Marc Andreessen is quoted as saying that, quote, "Netscape will soon reduce Windows to a poorly debugged set of device drivers." [laughing]

   8. BGBen Gilbert37:04

      It's such a good quote.

   9. DRDavid Rosenthal37:05

      Oh.

   10. BGBen Gilbert37:05

       And there's so much behind it, too. If you really dwell in that quote, what does it mean? If one of the things he's saying is, Windows is a platform upon which independent software vendors write applications. So Windows is the way that currently people write software for businesses and consumers to use. And if we are going to reduce Windows to a poorly debugged set of device drivers, what I'm implying is, these crappy static web pages that get served right now, that is merely a step on our journey to enabling rich web applications. Think JavaScript, CSS, eventually, you know, Java and Flash. The web will be a way that developers write their applications. That's right there implicit in the quote. And so when they're saying, "We're gonna reduce Windows," blah, blah, blah, it's saying, "Okay, Windows has all this stuff right now for developers, but essentially, you're gonna use Windows or any operating system just to boot it up, connect to all your peripherals, and your screen, and your mouse, your keyboard, and everything, and you'll open your browser, and you'll do everything through the browser." And that scared the hell out of Microsoft. Not specifically this quote, but Microsoft had come to the same conclusion, too, of, "Oh, my God, if the web becomes the platform of the future, all the reasons why we have all this incredible business," you know, "people feeling the need to use our operating system to be able to get access to their favorite software, and for developers to build applications on our platform to get access to the users, that could go away." And in the same memo that you were quoting earlier, the Internet Tidal Wave, Bill Gates famously says, and when I say famously, it's because the Department of Justice later grabbed this quote and used it as an exhibit. Bill writes, "A new competitor born on the internet is Netscape. Their browser is dominant, with a seventy percent usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key API," the application programming interface, "into the client to commoditize the underlying operating system." I mean, they got it immediately. The web is an application platform that completely reduces our value.

   11. DRDavid Rosenthal39:24

       You can see why it was so important to Microsoft to beat Netscape, to bring the internet, in the form of Internet Explorer, into Windows, and have Windows maintain its role as the dominant platform. So all the stuff, we'll cut off their air supply, you know. It was existential.

   12. BGBen Gilbert39:44

       And how amazing is this? It's an application platform of the future that is distributed as a Windows app. I mean, Windows had huge market share at this point, I don't know, eighty, ninety percent. Well, eventually, over ninety percent market share. The way that Netscape could get to consumers was because Microsoft had all these computers out there running Windows. It was like this ultimate Trojan horse, that they could build the platform of the future through Microsoft.

   13. DRDavid Rosenthal40:12

       Yep. So Windows 95 launches a couple of weeks after the Netscape IPO. Internet Explorer is not baked in, at least not in the retail box version. You can buy it for fifty dollars as part of the Plus! pack that I was referencing before, uh, install that, and add it into Windows, and Microsoft will make money on the sale of that software. But that, of course, does nothing to make a dent in the free version of Netscape Navigator that is out there.

   14. BGBen Gilbert40:42

       Right. If Microsoft's goal is to cut off the air supply, David, as you already quoted, of Netscape, the goal is ubiquity instantly, and we don't care about making money. We just need to get this thing out, so the Internet doesn't decap our business, and we can sort of embrace and control it or perhaps embrace and extend it.

   15. DRDavid Rosenthal40:59

       Netscape's run continues. The Netscape stock triples over September, October, November. Netscape is now a ten billion dollar [chuckles] public company. Insane.

   16. BGBen Gilbert41:12

       And I don't think making very much money on their server software yet. All the market cap creation is attributable to people believing they have the dominant platform of the future and not based on their current financials.

   17. DRDavid Rosenthal41:23

       Yeah. Basically, all of the hype train that had been behind the information superhighway has now completely ported over to Netscape.

   18. BGBen Gilbert41:31

       That's true. What's our tracker for the internet? Netscape. Everybody, pile in.

   19. DRDavid Rosenthal41:35

       Yeah. I could make an analogy to today, but I'm gonna spare us all. [chuckles]

   20. BGBen Gilbert41:38

       Make this episode timeless, David. [chuckles]

   21. DRDavid Rosenthal41:39

       I'm gonna make the episode timeless. Okay, and then on December 7th, 1995, Bill Gates announces that Internet Explorer is now free, and it will be bundled in with every single copy of Windows 95 going forward. And on that day, Netscape stock drops by about a third and never recovers. That was the high-water mark for Netscape. It's over after that.

   22. BGBen Gilbert42:08

       Yep, and for good reason. I mean, there's a very difficult-to-learn lesson, but you learn it once, you never forget it. If your distribution decides to compete with you and decides to make that a priority, your business is over in a minute.

   23. DRDavid Rosenthal42:23

       ... Yep, and that's exactly what happened. I mean, this is now the march of Internet Explorer. It doesn't happen overnight, but it's inevitable. By the end of the next year, in 1996, Microsoft has now done deals with AOL, CompuServe, and Prodigy, all the old online services, to ditch whatever browsers they were using and bundle in Internet Explorer. And by the end of that year, in '96, Internet Explorer passes twenty percent market share. '97, it passes forty percent market share. '98, it passes sixty percent market share, and then by the year 2000, Internet Explorer basically has, for all intents and purposes, one hundred percent worldwide browser market share. If you look at the Internet Explorer market share chart over time, it is the most perfectly rounded hill that you will ever see. [chuckles] It goes from zero in '95 to, like, a hundred in 2000, and then all the way back down to zero [laughing] in 2010. Uh-

   24. BGBen Gilbert43:23

       Which is the next chapter of this story, is how on earth did they lose that monopoly that they had in the browser? But before that, there's this interesting moment of reflection here. Why did Netscape's business dry up? Because their business was made from selling server software. Well, the way to have the best server software is to also control the client. People are very interested in making sure that their websites run perfectly using the experience that everyone has, and when you can no longer claim, "Hey, a whole bunch of internet users actually use our browser," do I really wanna buy my server software from you, or should I just be open to buying it from anyone that I can sort of, uh... It's the lowest cost and the best value with the most features, all that. So they sort of lose the competitive edge in the revenue side of the company. On top of that, it's just really hard to recover for companies that have a eighty percent drawdown or whatever in their stock price. There was a lot of excitement around the company that then goes away. Suddenly, all these employees are undercompensated. It's a company-killing event.

   25. DRDavid Rosenthal44:27

       And all the market cap and excitement was all on the come. It wasn't because of the revenue.

   26. BGBen Gilbert44:31

       Right. So to this point, Microsoft has not changed their business model. They simply vanquished a potential future that was dangerous for them. They're still doing the same thing as ever, selling Windows licenses through OEMs and to consumers at retail.

   27. DRDavid Rosenthal44:47

       Yep. There are a couple more fun little tidbits from this era. In August 1997 is when the famous Macworld happens, where Steve Jobs returns to the company-

   28. BGBen Gilbert44:58

       Oh, yes

   29. DRDavid Rosenthal44:59

       ... And Bill Gates shows up on the satellite feed. And, you know, of course, this moment is legendary, but studying it from this lens, I realized there's this whole other aspect to it that I didn't know before. So what Bill and Steve announced on stage, it's also so telling that Bill couldn't even be there in person. [chuckles] He joins by satellite.

   30. BGBen Gilbert45:20

       Yeah.
5. 52:54 – 1:26:12

   Antitrust collision course: consent decree ambiguity and the IE ‘feature vs product’ fight

   1. BGBen Gilbert52:54

      be able to learn more about all of this directly from their team. Okay, David, so we've arrived, the famous 1998 Microsoft versus the U.S. Department of Justice antitrust trial.

   2. DRDavid Rosenthal53:08

      Yes, and I was thinking about it, in the transition at the end of the browser wars there-

   3. BGBen Gilbert53:13

      What, you didn't like my snarky comment?

   4. DRDavid Rosenthal53:15

      Yeah, well, we were being glib about, like, "Oh, this should be illegal." That's really the question here. All that power that Microsoft had, it had probably never been concentrated in the hands of one company like that and probably never will be again, and the question is: Was that illegal, and did Microsoft do anything wrong? [chuckles]

   5. BGBen Gilbert53:35

      Right. We're getting into a whole bunch of very interesting questions here, and I asked it exactly to sort of pop open the can of worms. But there's the question of: What actually is legal in the U.S.? What actually is legal in the EU? Then there's this interesting question, sort of emotionally, for everyone who was working on software at Microsoft, the vast, vast majority of people are not really focused on what is the business and competitive strategy. Most people who worked on any of this stuff, their whole goal was, "I wanna ship great software and make things that people love to use, and I wanna work with people that I love making it with." And so if you ask most people who worked on any of this, their opinion is, "I don't know. We were trying to just make the best software out there," which is very interesting to square with this growing public perception that Microsoft is being a bully, especially public, generated by their competitors.

   6. DRDavid Rosenthal54:27

      Right.

   7. BGBen Gilbert54:27

      And then the literal legal question of: Did they do something illegal? Because the actual antitrust laws are a super different thing than, "Ooh, does this feel anti-competitive in some way to me?"

   8. DRDavid Rosenthal54:41

      ... And then there's the other dimension, too, of, as a consumer, am I unhappy that I get a world-class web browser included in my operating system? [chuckles]

   9. BGBen Gilbert54:50

      Well, David, now you're cracking open the issue of consumer harm, the consumer welfare standard the whole thing is based on, so take us into the story.

   10. DRDavid Rosenthal54:58

       Yeah. So the Microsoft antitrust saga actually started not with the Department of Justice and not in 1998, but with the Federal Trade Commission, the FTC, all the way back in 1990, when they opened an investigation into the company about whether it was violating antitrust laws.

   11. BGBen Gilbert55:22

       This centered on the notion of per-processor licensing, which we discussed in our last Microsoft episode.

   12. DRDavid Rosenthal55:29

       Yep. So in July 1993, the FTC commissioners vote on whether Microsoft is a monopoly that deserves further action and penalties, and they deadlock at two to two, which means essentially a win for Microsoft. No action would be taken against the company. This is a huge victory. The antitrust case of the U.S. federal government against Microsoft should be closed at this point in time.

   13. BGBen Gilbert55:55

       Yep, 'cause theoretically, they could have examined any monopolistic practice at this point, and they said, "Just the one narrow thing that we were worried about, they agreed to stop doing, and we, in voting two-two, we see no other issues that we need to investigate."

   14. DRDavid Rosenthal56:12

       Yep. Microsoft, you are good as far as the U.S. federal government is concerned. However, the very next month, in August 1993, the Department of Justice picks up the case, which is pretty unprecedented. One department in the U.S. federal government essentially investigates a company about whether it is abusing its monopoly power, declines to prosecute them for it, and then another department within the federal government, the very next month says, essentially, "Well, we don't think you did it right. We're gonna do it." Microsoft is now all of a sudden basically standing trial for the same accused crimes twice.

   15. BGBen Gilbert56:56

       Yeah, theoretically, double jeopardy is not a thing.

   16. DRDavid Rosenthal56:59

       And in fact, several members of the FTC commission opposed this whole process and tried to refuse to turn over their notes to the Justice Department.

   17. BGBen Gilbert57:07

       Hmm.

   18. DRDavid Rosenthal57:08

       But nonetheless, the DOJ proceeds, and the next year, in July 1994, Microsoft just settles with them, rather than going to trial. They're like, "All right, look, we just wanna be done. We're gonna settle with you, DOJ. We're gonna be done with the U.S. federal government here." And in that settlement, they agree to enter into what folks may know in famous words, a consent decree, and that means they consent, in this case, that they are not going to tie the sale of Microsoft application products to the sale of Windows, meaning they can't say, like, "Hey, OEMs or businesses or consumers or whoever, if you're buying Windows, you have to also buy Office or X or whatever else that we're selling in our applications group." But importantly, as part of the consent decree, they remain free and clear, Microsoft does, to integrate additional features into the Windows operating system, which brings us right back to Internet Explorer. Is it a product or is it a feature?

   19. BGBen Gilbert58:14

       Exactly, and this is so messy, 'cause I think, David, you just used the exact language, which is they cannot tie these application products in a bundled sale. However, they absolutely can integrate new features.

   20. DRDavid Rosenthal58:29

       Yes. So what is Internet Explorer?

   21. BGBen Gilbert58:32

       And this also looks the other way at the whole idea of software development and platforms, which is it is a continuously changing landscape, where over time, in the interest of users, platforms do more and more and more things that applications used to do. And so the whole notion that they're gonna write that sentence and then call it good, what is an application today might be a feature years down the line, but the law is written, and we have to pay attention to that sentence, constantly reevaluated in the context of the current time.

   22. DRDavid Rosenthal59:08

       Yep. I mean, today, could you imagine purchasing a device that has an operating system and that device not having an Internet browser as part of the core system? No, you can't even imagine that. Of course, it's a feature.

   23. BGBen Gilbert59:26

       While is it a feature? It's actually, it's literally an application. It is a bundled application as it exists today. So this is the gray area.

   24. DRDavid Rosenthal59:32

       This is the gray area. And, you know, look, if you ask Bill and Microsoft and Jay Allard all the way back to the original memo, it was absolutely intended to be a core feature of the Windows operating system, having an Internet browser as part of it.

   25. BGBen Gilbert59:47

       Clearly motivated by the idea that we want our Windows platform to maintain the power it enjoys from its monopoly market share. So there's a sympathetic view, for sure, of, hey, this is core functionality to an operating system, whether it's a feature or an application that we bundle, and also, clearly the reason you are incentivized to ship your own browser is to cut off the air supply of potential competitors that develop the platform of the future.

   26. DRDavid Rosenthal1:00:12

       Yes. So in October 1997, the Justice Department files a motion in federal district court stating that by bundling Internet Explorer with Windows, Microsoft has now violated the 1994 consent decree against product tying.

   27. BGBen Gilbert1:00:29

       And it's important to know what they're basically asking is, this is not about future versions. You know, we know you're doing some kind of Windows 98 thing. We're saying right now, stop shipping IE bundled into Windows. Microsoft insists this is an integrated product.... You cannot do that. And it's not even necessarily a legal argument yet of, "We're allowed to do this 'cause it's an integrated feature." They're saying, "We ship a pile of code, and you actually cannot just rip out Explorer." And if you remember at this time, you could do all sorts of crazy stuff, like you could paste a web address in Windows Explorer, and it would render even though it wasn't Internet Explorer. So there actually was like, if you think back to that sort of vision of the browser is integrated into the Windows shell, and it sort of happened. A browser was not really, at least Internet Explorer, was not really its own standalone thing. It was deeply integrated. Now, could they have pulled it apart is a different question, if they really wanted to.

   28. DRDavid Rosenthal1:01:30

       And also, remember, the fact pattern here isn't exactly great for Microsoft of, well, they did ship Windows 95 [chuckles] without Internet Explorer-

   29. BGBen Gilbert1:01:39

       Right

   30. DRDavid Rosenthal1:01:39

       ... in the beginning, so [chuckles]
6. 1:26:12 – 1:28:11

   Trial drama and fallout: Gates deposition tapes, breakup order, and the cultural ‘mental breakdown’

   1. BGBen Gilbert1:26:12

      In fact, Bill stepped down before the final ruling from Judge Jackson.

   2. DRDavid Rosenthal1:26:18

      Yeah. So in July '98, right as this big, huge DOJ antitrust suit is heating up, Steve Ballmer gets promoted to president of the company. Bill is still CEO, but Steve is now promoted to president and is the clear number two, and then they go through the trial, the deposition, the November '99 finding of fact that Microsoft is a monopoly. And then, Ben, as you're referring to, on January 13th, 2000, Bill Gates announces that he is handing the CEO role of Microsoft over to Steve, and that he is moving to a newly created position as chief software architect, and he will remain chairman of the company, but he is no longer gonna be CEO. And then, of course, it's just a few months later that the breakup verdict comes down.

   3. BGBen Gilbert1:27:07

      Yeah. Going through something like this has to feel personal and has to change you forever. I can't imagine how it wouldn't.

   4. DRDavid Rosenthal1:27:13

      Totally.

   5. BGBen Gilbert1:27:14

      Especially when, again, it's not clear to me how consumers were harmed. So this constant battle, this war that was waged on forever and ever and ever and ever, it totally distracted Microsoft. And as anybody can attest, especially in the tech industry, if you are distracted, you just fail, 'cause you need to have all of your best resources making stuff, building stuff, focused on a firing-on-all-cylinders, clear North Star strategy. And so if you tie up a company for five years-

   6. DRDavid Rosenthal1:27:46

      And you lose your leader through it. I mean, somebody we talked to characterized this period as, like, a mental breakdown for the whole company, uh, I think that's kinda the best way to characterize it.

   7. BGBen Gilbert1:27:57

      Yeah. It's not fair to blame everything we're about to talk about, all the future consumer failings, on this, but it is helpful to keep this in mind and say, "Okay, why, perhaps, did they not fully have their wits about them?"

7. 1:28:11 – 1:36:08

   Ballmer’s new agenda: hold the company together, ‘make peace,’ and pivot harder to enterprise

   1. DRDavid Rosenthal1:28:11

      Yes. And so the transition to Steve Ballmer happens. This is the context under which Steve Ballmer became the CEO of Microsoft. So I talked to a whole bunch of people who were at Microsoft in this era, and one thing that every single person brought up that never gets talked about is how much Steve was the emotional rock for the company when this was happening. All the stuff, everybody thinks about Steve, you know, the running around on stage, the yelling, the screaming-

   2. BGBen Gilbert1:28:47

      "Developers, developers, developers."

   3. DRDavid Rosenthal1:28:49

      When do you think all this happened? The crazy dancing on stage, "I love this company!" That was in September of 2000, when they thought they were gonna get broken up, and Steve was there trying to keep everybody moving forward. Everybody we talked to was like, "I don't know how he did it, and it meant so much."

   4. BGBen Gilbert1:29:12

      It's actually shocking they held on to as much talent as they did in a 15-month period of people assuming the company was about to be split.

   5. DRDavid Rosenthal1:29:20

      Right? Knowing that context, for me at least, it completely changed my perception of Steve and of the company during this time.

   6. BGBen Gilbert1:29:30

      Fascinating.

   7. DRDavid Rosenthal1:29:31

      So when Steve takes over, his agenda is three things, and I think in basically priority order. Number one, hold the company together emotionally. [chuckles] "I love this company." That was job number one, to, like, keep everybody coming to work. Job number two, clean up this antitrust mess. And then job number three, I think, was, "Hey, let's keep this company, like, growing and winning." And I think it's kind of fair to say he did all three. So we just talked about, one, emotionally holding the company together. Two, one of the very first things Steve does when he becomes CEO is he promotes Brad Smith to general counsel, who, Brad Smith is still, of course, leading all this at Microsoft to this day.

   8. BGBen Gilbert1:30:16

      He's now president.

   9. DRDavid Rosenthal1:30:17

      And Steve tells Brad, "Go make peace." So actually, this is amazing. Brad's final interview with the Microsoft board of directors-

   10. BGBen Gilbert1:30:27

       Oh, I was wondering if you found this.

   11. DRDavid Rosenthal1:30:30

       Yep, for his job, you know, to be promoted to general counsel, his PowerPoint presentation to the board is just one slide that has one sentence on it: "It's time to make peace." And that is totally what he goes and does, and he says, "Okay, I'm gonna figure out what settlements we can live with, and I am gonna go settle everything. [chuckles] And this company just needs to move forward, and it doesn't matter that we all feel it wasn't fair. It doesn't matter that we all feel this was a sham of a process. We just have to move on, and we have to live in a new reality."

   12. BGBen Gilbert1:31:06

       And you kind of need a new set of people to do that. It's kind of amazing that Steve was part of the old guard and the new guard to do this, because how can you say, "I'm gonna put how unfair I feel this was aside?"... and just focus on moving forward. That is an extremely difficult compartmentalization exercise. And so for Brad to come in and say, like: "I'm gonna be the guy who is able to disregard the past and figure out how we..." And I use this phrase in the first episode, become a trusted partner to governments around the free world. I mean, how crazy is it that this Microsoft, that we just talked about for the last hour, became the Microsoft that can do no wrong from a regulatory perspective? The only one that's not under active antitrust investigation today by the federal government, the one that is a massive provider of software and services to the US and its allies at the government level.

   13. DRDavid Rosenthal1:32:00

       Right. The reversal here is, it doesn't get talked about enough, what an amazing job Brad and the company did to reverse this perception. So then that leaves job number three on Steve's agenda of be successful. [chuckles] Continue to have Microsoft be a leading technology company and hopefully still grow revenue and profits.

   14. BGBen Gilbert1:32:21

       And Bill Gates is still chairman of the board. Like, not only is he a full-time employee, being the chief software architect, it's not that it's like a sham that he's not the CEO, but he is a very present [chuckles] voice at the table in these big decision-making moments. And so for, how do we become a company that continues to innovate and make great products despite all this? He still has Bill as the technical leader of the future products.

   15. DRDavid Rosenthal1:32:48

       Yes, and absolutely, Bill was still there, and Steve had Bill, and they were running the company together. Absolutely. But what's so interesting is Microsoft, right at this time, basically starts a transformational journey from a technology company writ large, a consumer and sort of enterprise technology company, to the enterprise technology company.

   16. BGBen Gilbert1:33:11

       Yes.

   17. DRDavid Rosenthal1:33:11

       And that is a muscle that, as we talked about last episode, Steve had been building for a while, but, boy, does he really come into his own here. And Microsoft, the entire enterprise juggernaut that it builds, the bulk of it really is post-DOJ. It is, like, new business and new markets that they are getting into.

   18. BGBen Gilbert1:33:30

       Yep. So then the question becomes: How did Microsoft build this phenomenal enterprise business and, along with that, release XP, the most successful Windows operating system ever? And then we're gonna talk about Vista, and then we're gonna talk about Zune, and Search, and Bing, and Windows Mobile, and-

   19. DRDavid Rosenthal1:33:50

       Windows 8 and... Yeah, all that.

   20. BGBen Gilbert1:33:52

       But before we do, we would like to thank huge partners of ours here in this season of Acquired, ServiceNow.

   21. DRDavid Rosenthal1:34:00

       Yep, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency. Over eighty-five percent of the Fortune five hundred runs on them, and over the past few years, they've joined companies like Microsoft as one of the most important enterprise technology vendors in the world.

   22. BGBen Gilbert1:34:18

       And speaking of Microsoft and ServiceNow, they just announced a huge expansion of their partnership, specifically integrating the two companies' enterprise AI assistants. Starting in the fall, customers will be able to interact with ServiceNow's Now Assist AI assistant directly within Microsoft Copilot.

   23. DRDavid Rosenthal1:34:35

       Yeah, it's telling for the magnitude of this partnership to see Satya Nadella appearing in the keynote at ServiceNow's big annual event, Knowledge, last month. It had echoes of that Bill Gates nineteen ninety-seven Macworld video that put Apple back on the map, not that ServiceNow needed putting back on the map.

   24. BGBen Gilbert1:34:52

       Yes, and like that historic announcement from Bill committing to Microsoft Office for the Mac, this partnership is also huge. ServiceNow's Now Assist will be integrated with Microsoft Copilot and will be available directly from Office apps, starting with Microsoft Teams in August. The AIs are integrated into one seamless user experience without actually sharing data. So if, for example, a user asks Copilot in Teams about how the company's laptop policy works, behind the scenes, Copilot shares that request and context with Now Assist, and Now Assist accesses internal company policy with the right permissions for that user and returns the answer to Copilot in a rich card with options for the user to kick off a workflow via Now Assist. In the future, Microsoft Copilot will also be integrated the other way into Now Assist, so it can automatically generate Office files, like PowerPoint presentations and Excel spreadsheets, directly from assets and knowledge in the ServiceNow platform.

   25. DRDavid Rosenthal1:35:52

       It's pretty awesome for both companies, and especially awesome for enterprise users. So if you wanna learn more about the ServiceNow platform and how it can work with your company's Microsoft services, go over to servicenow.com/acquired, and when you get in touch, just tell them that Ben and David sent you.

8. 1:36:08 – 1:58:30

   Enterprise flywheel engineering: SQL Server, Exchange/Outlook, Active Directory, and the Enterprise Agreement

   1. BGBen Gilbert1:36:08

      All right, so to contextualize how this enterprise business was built, it is worth understanding the shape of Microsoft's business, like the divisions, what products generated what revenue, even before all this DOJ stuff. So if we go back to 1996, Bill Gates gave a great interview where he was talking about the kind of four businesses that they're in today.

   2. DRDavid Rosenthal1:36:29

      Oh, this is the Wired interview with Kevin Kelly, right?

   3. BGBen Gilbert1:36:31

      Uh-huh.

   4. DRDavid Rosenthal1:36:32

      Yes, it's on YouTube. It's great.

   5. BGBen Gilbert1:36:33

      It is great. So there's Windows, which he calls one business. There's NT/BackOffice. There's Office, which he calls a four billion dollar-a-year business. And those three businesses together are over ninety percent. So you can think about it as Windows, and he said NT/BackOffice, but this is the enterprise, and Office.

   6. DRDavid Rosenthal1:36:53

      Yeah, which is so funny that Bill thought of it as NT/BackOffice. [chuckles]

   7. BGBen Gilbert1:36:57

      It really exposes that Steve was the one who had the passion for the enterprise.

   8. DRDavid Rosenthal1:37:01

      Yes!

   9. BGBen Gilbert1:37:01

      Bill was like-

   10. DRDavid Rosenthal1:37:02

       Yes

   11. BGBen Gilbert1:37:02

       ... "It's like this stuff that businesses buy, but I'm gonna refer to it by its Microsoft product name of one of the products we sell, which is NT." And then the last ten percent is everything else, so there's MSN, e-commerce, games, encyclopedia, maps, joint ventures, DreamWorks, and NBC. So he's talking about the interesting thing, the server business-... which is a different way he refers to NT/BackOffice. All the way back in '96, said, "It's the fastest growing business, even faster than Windows or Office." So they sort of know they're onto something-

   12. DRDavid Rosenthal1:37:36

       Yep.

   13. BGBen Gilbert1:37:37

       -but they haven't quite cracked the go-to-market motion, the pricing, the service. Organizationally, how do they sort of fit it in? That all comes later.

   14. DRDavid Rosenthal1:37:48

       Or the products either, really.

   15. BGBen Gilbert1:37:50

       Yes, that's a great point.

   16. DRDavid Rosenthal1:37:51

       The fact that he calls it BackOffice, this is so telling. Okay, so we did talk last time about NT and Dave Cutler and the heroics that he performed to write NT. Windows NT, though, was still a client operating system architecture for a user to use a personal computer with.

   17. BGBen Gilbert1:38:13

       NT basically was enterprise-ready. It was, like, very networked for work groups. It ran on only the most high-power PCs. But you're right, David, it was designed for the thing that, you know, the first twenty-five years of Microsoft was all about, which is PCs. It's not like, "Oh, we're a systems company that makes stuff for all use cases all over your enterprise." It's, "No, we make stuff that runs on a box sitting in front of you."

   18. DRDavid Rosenthal1:38:43

       Yes, and discovering this distinction is what Microsoft, in this next era, really, really nailed. And they l- discovered that the enterprise is not about users, it's about IT, and it's about systems.

   19. BGBen Gilbert1:39:04

       For better or for worse.

   20. DRDavid Rosenthal1:39:05

       Yes. And discovering that, and the products, and the sales motions that Microsoft could then go use to sell to enterprise IT and sell systems, was a new, you know, multi-hundred billion dollar market that Microsoft could now go attack and play offense in, in this post-DOJ landscape, whereas they're playing defense everywhere else. "Hey, here, our market share is zero. We can do whatever we want here."

   21. BGBen Gilbert1:39:32

       Well, it wasn't zero, but they were fighting Sun, IBM, Oracle.

   22. DRDavid Rosenthal1:39:38

       Yes, really IBM, but Sun, yeah, too, Oracle, et cetera, and it was perfectly suited to Steve's strengths. So Ben, if you've ever heard of these now sort of strange-sounding Microsoft products, [chuckles] SQL Server, Active Directory, Exchange, Dynamics, SharePoint. SharePoint was technically within Office, but it is one of these systems-types products. These are all-- every single one of those names I just mentioned, become multi-billion dollar revenue, enterprise IT server products that are built and sold during the Steve Ballmer era of Microsoft. And what's so, like, honestly, beautiful about this, is they work in concert with Windows and Office on the PC client side. So, like, this is the client-server era that Microsoft really dominates here. And Microsoft, within enterprises, all these new server products work best with Windows operating system devices running Microsoft Office applications on them, and those Windows operating system devices and those Office applications work best with the Microsoft Server products. You now have a full system solution from one technology vendor as a major enterprise. It's, like, the most incredible three-sided technology flywheel ever built.

   23. BGBen Gilbert1:41:09

       And one benefit from this, which, of course, if you're Microsoft, you don't wanna lean on this benefit, but they end up doing it, is if you make everything integrated together, work well, and come from one vendor, nothing actually has to be best of breed. And so you're no longer competing with any point solutions, you offer the whole thing. Sure, yeah, you can consider going and buying that other vendor's directory service or that other vendor's email server, but are you really? Because you buy everything from us, and it all works pretty well together.

   24. DRDavid Rosenthal1:41:41

       Yep. The very, very, very best example of this, that most listeners can probably tangibly relate to as well, is Exchange email and calendaring service, and Microsoft Outlook, [chuckles] and Windows.

   25. BGBen Gilbert1:41:58

       It all has Active Directory that syncs across everything. In doing all this research, it seemed to me that once a enterprise adopted Active Directory, they were gonna tip, and they were gonna buy the rest of the software, too. Because whoever manages the source of truth for who are all the people and what are all the resources, you know, devices and everything, that my company owns, everything else needs to reference that canonical set of proper nouns, whether it's email, whether it's calendar. So that was this incredible, sticky product that then you could just keep attaching more and more stuff to. Any enterprise need? "Oh, we got you covered, and hey, it works with Active Directory."

   26. DRDavid Rosenthal1:42:38

       Yep, and the whole product effort here started with database. In 1998, Microsoft takes SQL Server, and it was the first real enterprise-ready database that can rival IBM and mainframe databases, Oracle databases, and of course, unlike IBM, it runs on x86 Intel architecture.

   27. BGBen Gilbert1:43:06

       Mm.

   28. DRDavid Rosenthal1:43:06

       So the pitch now to enterprise IT is everything we just said about why working with Microsoft Server products is better for the whole ecosystem reasons. Also, total cost of ownership. Don't pay IBM tons of money for their mainframes, just go buy cheap x86 Windows boxes from Dell or whomever, and use that as your IT server architecture.

   29. BGBen Gilbert1:43:29

       ... fascinating. I don't think I quite understood that. And so basically, you then have NT as the operating system, SQL as the database, and then you've got all these other applications that basically run on that stack.

   30. DRDavid Rosenthal1:43:41

       And here's where Exchange and Outlook and everything comes in. This is right as email is taking off as, like, the killer application in enterprises. And so now Microsoft shows up and says, "We've got this great new product for you. It's called Exchange." And, like, maybe you were using Lotus Notes before, which of course, developed by the legendary Ray Ozzie. He's gonna come back up here in a minute. And Lotus gets acquired by IBM for three and a half billion in 1995. You're buying Lotus Notes from IBM. "Come take a look at Exchange. Exchange has email, Exchange has calendaring, Exchange has address book. Exchange has Outlook. It is a first-class, included in the bundle of Microsoft Office, Office application that you, you know, Mr. and Mrs. Enterprise, are now gonna get for all your users, and it works just beautifully and perfectly with our Exchange email, calendaring, and address book service." It sells itself, basically. [laughing] Uh, and then you were talking about Active Directory. That led to Active Directory of, "Oh, okay, well, now you've got your whole database architecture running on Microsoft. You've got your email and your calendaring architecture running on Microsoft. You've got your Windows machines out there. Well, you've got all these employees within your company, all these users with all these devices. You kinda need to manage them, and you need to know who has what security access and how to find each other, and where should the mail get routed, and all that. Well, we've got this great new product for you. It's called Active Directory."
9. 1:58:30 – 2:38:24

   Windows XP high point to Vista collapse: the OS that unified NT—and the release that drained Microsoft’s talent

   1. BGBen Gilbert1:58:30

      Yeah. What was going on with Windows releases during that time? And I think through storytelling the Windows releases, we can then understand the state of the company. So Windows XP. Why was Windows XP such a big deal? Well, it was a big deal technologically, it was a big deal for users, and it was a big deal because it's pretty wild that Microsoft, amidst all the antitrust stuff we were just talking about, during the 1998 to 1999, the rulings in 2000, the settlement proposal in 2001, they developed and released an operating system amidst all of that.

   2. DRDavid Rosenthal1:59:09

      And an awesome one.

   3. BGBen Gilbert1:59:10

      Yeah. So what was Windows XP, technically? Well, for the previous better part of a decade, they had two parallel development efforts going on. There was Windows NT for the enterprise, and there was Windows 9X, you know, Windows 95, Windows 98 for consumers. And both of these had the same API that developers could write their applications for. But ultimately, the way they were implemented, the way interoperability worked, compatibility worked, user experience, everything about it was actually completely different 'cause it was a completely different implementation of those APIs. And so the knock against NT was always, well, you need really beefy enterprise-grade PCs to run it, and it's not as nice and intuitive, and the knock against the Windows 9X, call it 95, was that, yeah, it looks pretty, but it's not powerful. I can't actually do anything. It was like a friendly interface, but not a powerful set of functionality that came with the operating system. And so XP did the impossible, where they figured out how to take the ease of use of the 9X interface and make it run on top of NT. The whole thing is built on the NT kernel, and it has the friendly, approachable ease of use that you are used to in Windows 95 and 98.

   4. DRDavid Rosenthal2:00:39

      Amazing.

   5. BGBen Gilbert2:00:40

      Amazing. So the lineage of that 9X code base that came all the way from Windows 3.0, or maybe even 1 or 2, I don't know of how long code lived, but-

   6. DRDavid Rosenthal2:00:47

      Interface Manager.

   7. BGBen Gilbert2:00:49

      Right. Exactly, is now dead. And so you had the NT lineage of, I guess, maybe even you could say it started with OS 2, but Windows NT, Windows 2000, and then Windows XP. So everybody's running XP now. There's two editions: there's Home and there's Professional.

   8. DRDavid Rosenthal2:01:08

      Oh, gotta get the Professional. I always got the Professional.

   9. BGBen Gilbert2:01:11

      Did you?

   10. DRDavid Rosenthal2:01:12

       Every time I built a new PC, oh, gotta go Pro.

   11. BGBen Gilbert2:01:14

       All right.

   12. DRDavid Rosenthal2:01:14

       I didn't even know what Pro meant. I definitely didn't need Pro 'cause I was not a corporate [both chuckling] office worker, but gotta go Pro.

   13. BGBen Gilbert2:01:20

       It came with all kinds of great stuff. They've got this great slide. It's a fun announcement to watch. The emphasis on digital photography, digital music, digital video, home networking. It ushered us into this age of, you probably have media that you're using on your computer. Apple famously owned this as a corporate identity with their digital hub strategy, but, you know, Windows XP, plenty of people were importing digital photos off their camera to Windows XP. That was a, a sort of big, exciting use case for it.

   14. DRDavid Rosenthal2:01:51

       Lot of Napster clients running on Windows XP machines. [chuckles]

   15. BGBen Gilbert2:01:55

       Lot of Napster clients. Yes. So-...Like I did for every Microsoft Windows release, I went and watched the keynote. The keynote is extremely strange. Think about what a Steve Jobs keynote was back in the day, or what a WWDC keynote is like today, or a Google I/O. This keynote opens with a gospel choir singing America the Beautiful, and is followed by Bill Gates and Rudy Giuliani walking out on stage together and talking about how bad terrorism is.

   16. DRDavid Rosenthal2:02:35

       And of course, the thing you need to know about this keynote is the date.

   17. BGBen Gilbert2:02:39

       Yes. So this happens one month after 9/11 in New York City, and it really underscores what a strange time it was in the US. If you had this once in three years product release and it was gonna be in New York, October of 2001, you probably have this question: Should we even do it? Should we make it all about the first responders? It grounds the whole thing in a very specific moment in history when you're watching it, in a way that no other tech event really ever has been grounded in history before. So a few other things that jump out during the keynote: Bill Gates is not the CEO, Steve Ballmer is, and yet Bill Gates is the one walking out with Rudy Giuliani to kick things off. And that's a strange and somewhat telling element of what Bill's role at the company was. Now, you could argue he was the public-facing figure, he was the founder of the company. It seems very natural, but also, at some point, why isn't the CEO the one doing the keynote? Another thing about Windows XP, there was a new release of Office right at the same time as XP. This is a classic Microsoft move. They are able to create great applications available on day one, which makes the OS more valuable. And so from the applications perspective, they're able to ensure that they get great market share since they're always adopting the latest and greatest Windows platform right away. So Windows' success begets Office success, and it's important to remember that. That worked for many, many years. And if you remember back to the last episode, Lotus 1-2-3 and Word Perfect smoked Microsoft in Microsoft's own backyard. During the DOS era, Microsoft's productivity apps did not get real adoption in DOS, which is crazy. So when they were making Windows, they basically swore never again. They ensured that they were gonna be very early with applications on those platforms, and so as Windows took off, Office also got huge market share. And it's smart to remember this lesson and carry it forward for years, maybe a decade. But again, they may have bet on this strategy a few years too long. Forever, it kinda became gospel at Microsoft, so with Windows goes the company, and so you need to do things to make sure that Windows is gonna continue to succeed, because that is our company's platform and livelihood. It's almost like the old Disney adage, "So with animation goes the company." And until 2014, Microsoft felt the same way.

   18. DRDavid Rosenthal2:05:15

       Yep, and yes, that is true for all the traditional reasons in the XP timeframe, the reason it was also true in part one of our Microsoft series. It's even more true as Microsoft becomes an enterprise company, because Windows is at the heart of the enterprise agreement. The whole value prop of all of our server technologies is they work great with your Windows devices on your network.

   19. BGBen Gilbert2:05:41

       Right. And so there's strong incentives everywhere for Microsoft to ensure that Windows is the standardized platform that everyone wants to have on their PCs, because it kinda makes everything else work. And so, of course, they're gonna release a new version of Office that shows off the latest and greatest of Windows. And I think this XP timeframe is the showcase moment of when that was a, a great strategy, and we'll contrast that later.

   20. DRDavid Rosenthal2:06:09

       Yep.

   21. BGBen Gilbert2:06:10

       The other thing to know about this XP timeframe is, last episode, we talked about the incredible secular growth trend of the PC that was this crazy tailwind for Microsoft. One of the greatest tailwinds you could ride in business history. PC shipments, I believe the stat, David, was that they grew 98% per year over the 11 years between the founding in 1975 and the IPO in 1986.

   22. DRDavid Rosenthal2:06:36

       Oof.

   23. BGBen Gilbert2:06:36

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

   24. DRDavid Rosenthal2:07:25

       Wow, that's crazy.

   25. BGBen Gilbert2:07:27

       The PC wave is just one of the greatest secular trends in history, particularly if you have a monopoly share of that market.

   26. DRDavid Rosenthal2:07:36

       Yep.

   27. BGBen Gilbert2:07:37

       And they, as defined by the US government, did.

   28. DRDavid Rosenthal2:07:40

       Ben, define "define" for me. [laughing]

   29. BGBen Gilbert2:07:43

       [laughing] I mean, there's just no question of, as this market grows, are you gonna be able to continue to participate in it? It's like, yeah, we basically are a tracker for that market. Like, it grows, we grow with it.

   30. DRDavid Rosenthal2:07:53

       Yep, and now might be a good time... Certain Microsoft fans have probably been listening to this episode and gripping their phones with all their strength like, "When are you gonna talk about Xbox?" [chuckles] We're gonna talk about Xbox briefly right now.... We will do a whole 'nother episode on Xbox someday.
10. 2:38:24 – 2:56:37

    Search as the new profit engine: the Yahoo near-acquisition and Bing’s strategic role

    1. BGBen Gilbert2:38:24

       ...And when you say thousands of startups, Pilot has done this for OpenAI, Airtable, Scale, as well as large e-commerce and other companies. So it's not just that they have experience across startups, they can also keep working with you as you scale to the growth phase and beyond. So if your company wants to start focusing on what makes your beer taste better, go to pilot.com/acquired and tell them that Ben and David sent you. Thank you to Pilot. Okay, so search, and the alternate title of this chapter could be "An Acquisition That Wasn't." I think that's a, uh-

    2. DRDavid Rosenthal2:38:58

       Ooh!

    3. BGBen Gilbert2:38:59

       "Lost to History" moment is the acquisition that almost happened here for forty-seven billion dollars.

    4. DRDavid Rosenthal2:39:05

       Ooh, okay.

    5. BGBen Gilbert2:39:06

       So I'm just actually curious, do you know the company I'm referring to? Do you know the, the deal?

    6. DRDavid Rosenthal2:39:11

       Well, it's funny, the way you phrase that, I'm thinking like, "Oh, did Microsoft try and buy Google, and I don't know about it?" But the number, of course, you're talking about Yahoo.

    7. BGBen Gilbert2:39:19

       Yes, yes. Okay, so let's set some context before we get to this 2008 Yahoo attempted acquisition. So there were two companies that had developed programmatic advertising technology to serve and target online ads, especially in search. There was DoubleClick, the market leader, and there was a aQuantive. Microsoft had lost the DoubleClick acquisition to Google. They bought aQuantive, and that didn't go well. It was seven billion dollars, and they ended up declaring basically the whole thing a write-off. So Microsoft is desperate for search market share, and between their internal efforts with MSN Search and I believe it was called Windows Live Search-

    8. DRDavid Rosenthal2:40:03

       Yep

    9. BGBen Gilbert2:40:04

       ... They were not making much progress there. And at the same time, Internet Explorer had totally languished. Microsoft had completely taken their eye off the ball of the browser wars from ten years earlier, and IE was just widely regarded as a garbage browser. And web developers hated it 'cause it made you write a bunch of weird custom stuff, so randomly, things wouldn't work in IE. Users hated it because basically nothing new was coming. Every time a new version of the operating system would ship, it just felt like it's the same old Internet Explorer over and over again. And you have Firefox coming on the scene, starting around 2007, where it was really making a dent, and Google was the default search from Firefox.

    10. DRDavid Rosenthal2:40:47

        Yep.

    11. BGBen Gilbert2:40:48

        Firefox was awesome. It had tabs. IE didn't have tabs at the time.

    12. DRDavid Rosenthal2:40:52

        That's right. Oh, my God.

    13. BGBen Gilbert2:40:55

        You know, Safari, I don't think Safari had tabs either. Chrome wasn't a thing yet. And so I know I'm on the one hand, talking about search, on the other hand, talking about the browser, but it's the same pot of gold.

    14. DRDavid Rosenthal2:41:05

        But it's the same thing.

    15. BGBen Gilbert2:41:06

        Right.

    16. DRDavid Rosenthal2:41:07

        Yeah. It turned out search was the business for the browser.

    17. BGBen Gilbert2:41:10

        Yes. So the thing that you kinda have to realize is the browser is the front door to search. Search is heavily, heavily monetizable. And if you're Google and you can monetize it directly, that's great. But let's say you're not Google. Let's say you're Firefox or Microsoft or Apple, and you don't have this incredible business model of people bidding on the keywords for search and all the R&D to go into making search good, but you actually do have the user attention, the front door. Well, you get to monetize it, too. The rumors are that Apple makes something on the order of twenty billion dollars a year today, in 2024, from Google as being the front door to Google, sending all of the iPhone search traffic to Google.

    18. DRDavid Rosenthal2:41:59

        This is the traffic acquisition cost in Google's financial statements.

    19. BGBen Gilbert2:42:04

        Absolutely. And so if you can be in the business of operating a scale search engine, or you can be in the business of directing traffic to a scaled search engine, who is willing to pay you for that traffic, it's gonna be a great business. So David, as you just said, the way to monetize the browser is owning and operating or directing to a search engine. So search isn't going well at Microsoft. At first, it was sort of because they just didn't take it seriously enough. When Google first started in 1998, I think there was a lot of skepticism that the auction-based advertising business would really work, and then there was skepticism that it would really scale, and then when it went public, people were sort of looking at it, almost freaked out at how profitable it was. And then, even after that, people didn't really realize that being the market leader at search was way better than being number two. There's these massive, massive returns to scale. And the reason for that is just pure marketplace liquidity. If you have the most searches, you can create the best data from the searches, and you can return all the best results 'cause you have the most data. And on the advertiser side, you have the most advertisers who are willing to come in and bid to the highest possible price. You just get to make the most money by a country mile versus other search engines.

    20. DRDavid Rosenthal2:43:27

        And then it locks in even further 'cause you can spend more CapEx on the data centers and more on R&D and make the search better and more performant and faster and all that.

    21. BGBen Gilbert2:43:34

        Google is search as monetized by a ad-based auction is one of the world's true marvels. It's one of capitalism's greatest discoveries.

    22. DRDavid Rosenthal2:43:44

        We may or may not do an episode on Xbox someday, Ben. That's for Ben and I to discuss-

    23. BGBen Gilbert2:43:49

        [chuckles]

    24. DRDavid Rosenthal2:43:49

        ... You know, privately, for the parents to discuss after the kids go to bed, but we're definitely gonna do an episode on Google.

    25. BGBen Gilbert2:43:55

        Yeah, it's criminal that we haven't. So Microsoft is really nowhere to be seen in search, and part of it was just thinking, "Oh, well, search is just a feature of MSN, but there's all these other reasons to come to MSN." Or, "Hey, this is a product in the portfolio of Windows Live, and, you know, we can kinda do it with the talent that we have here." Ultimately, someone needed to grab leadership at Microsoft early, 2002, 2003, shake them, and say, "Nothing else matters.... in the next five years, except you figuring out how to meaningfully participate in search revenue, 'cause that is just the next big wave in technology, and it's a fantastic business.

    26. DRDavid Rosenthal2:44:39

        Yeah. You needed the equivalent of the Jay Allard Windows, the next killer application on the Internet, or the Sinofsky/Cornell's Wired memo.

    27. BGBen Gilbert2:44:48

        So in 2008, Microsoft puts a deal on the table that gets bid all the way up to forty-seven billion dollars to buy Yahoo! This was effectively their last Hail Mary to become relevant in search. They actually didn't launch Bing until 2009. Google was started in 1998 and went public in 2004, and Microsoft got serious about a branded search engine in 2009. But clearly, before that, they're starting to realize, "This is a big deal. We need to participate in it. You know, what do we do?" So they'd been negotiating to buy Yahoo in 2008. After a bunch of negotiating and flying back and forth, finally, both David Filo and Jerry Yang fly up to Seattle, and Steve Ballmer goes to Boeing Field, and they have a meeting at the airport. This is one of the great what if scenarios.

    28. DRDavid Rosenthal2:45:43

        This feels like a, uh, episode of Entourage.

    29. BGBen Gilbert2:45:45

        Right? It's totally right. There's conflicting reports of what happened. From what I can tell, Bill and Steve kinda looked the Yahoo guys in the eye and decided, "These guys are kinda jerking us around. They really don't actually wanna be a part of Microsoft at all, and this has gotten so expensive that if we execute the transaction, or God forbid, they even try to negotiate up even higher, it's just not gonna go well, 'cause it's gonna be an organ rejection here." So the deal completely falls apart. It's interesting to try to look at the deal and figure out, even at that high price of forty-seven billion dollars, was it a good deal for Microsoft? So here's how to pull it apart.

    30. DRDavid Rosenthal2:46:30

        I'm, I'm laughing here. I was hoping I could surprise you at the, the end of it, like, have something to say here, but I think you're gonna take my thunder.
11. 2:56:37 – 3:35:07

    Mobile and hardware battles: Windows Phone vs Android’s ‘less-than-free’ strategy, Surface/Windows 8 misfire, and Nokia’s endgame

    1. BGBen Gilbert2:56:37

       ... They do, David. Should we take a brief aside to talk about Microsoft's intertwined history with Facebook?

    2. DRDavid Rosenthal2:56:43

       Absolutely.

    3. BGBen Gilbert2:56:45

       So it's October of 2007. Microsoft is missing search, and they're realizing social seems to be a wave that's coming five, six years after search. Also, a great online advertising business. We now deeply understand and regret not being a bigger player in that business. We can't let it happen again. So what do we do? We're not gonna build one of these internally. We know better than to do Google Plus. And so we are not capital constrained, and so we are very willing to try to do large acquisitions because we've got money lying around, but we don't have talent lying around, and we don't have-

    4. DRDavid Rosenthal2:57:29

       DNA and brand to be able to do this.

    5. BGBen Gilbert2:57:31

       Right. Exactly. So what do you do? You try to buy Facebook. Microsoft puts an offer on the table. It's a very complex deal structure, but effectively what it does is it lets Facebook shareholders cash out over a long period of time as the company's value grew. So you're not taking all your money off the table today. And so the important thing to take away, though, is a very big dollar valuation. News outlets reported it to be worth twenty-four billion dollars. And again, this is way back in 2007, three years after the founding of Facebook.

    6. DRDavid Rosenthal2:58:06

       Right. We're not that long after the Yahoo! one billion dollar offer. [chuckles]

    7. BGBen Gilbert2:58:11

       Exactly. Facebook's not interested. I'm pretty sure Zuck doesn't even respond to the offer. Some of Zuck's lieutenants had been meeting with Microsoft people, saying, "If you get the number in this range, blah, blah, blah, blah, blah." They sent in an offer.

    8. DRDavid Rosenthal2:58:25

       We'll have to ask Mark about it in Chase Center. [laughing]

    9. BGBen Gilbert2:58:29

       We will. No dice. So instead, they work out an investment and a commercial deal. So the terms of the deal are, in October 2007, Microsoft invests two hundred and forty million dollars for one point six percent of Facebook. So for those trying to do the math at home, that is a fifteen billion dollar valuation on the deal. Microsoft will get the exclusive right to sell banner ads on Facebook internationally until 2011. So again, Microsoft cleverly is using this as a way to bootstrap the advertiser side of their marketplace. Now, they have all this inventory to sell. Now, it's interesting to think about, much, David, like your comment about Alibaba, if Microsoft sold all of it at IPO, which I don't think it did, that would be a seven X.

    10. DRDavid Rosenthal2:59:16

        Okay. That's a pretty good growth investment in, you know, a few years. Not bad.

    11. BGBen Gilbert2:59:21

        Right, from 2007 to Facebook's IPO in 2012?

    12. DRDavid Rosenthal2:59:25

        Yeah, five years, seven X. That's good for a growth investment. That's great. I'll take that.

    13. BGBen Gilbert2:59:30

        If they held for another two years and sold in 2014, that would have been a fourteen X. I actually don't know when they sold, but I feel like these are helpful guardrails to understand what this appreciation could have been. Either way, it's not really relevant to Microsoft.

    14. DRDavid Rosenthal2:59:46

        As I said earlier, they're not a hedge fund, and money is the least important thing to them. [chuckles]

Episode duration: 4:51:30