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

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.

16. 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.

17. 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?

18. 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.

19. 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.

20. 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?

21. BGBen Gilbert7:34

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

22. DRDavid Rosenthal7:37

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

23. BGBen Gilbert7:40

    Really?

24. DRDavid Rosenthal7:41

    Yeah. [chuckles]

25. BGBen Gilbert7:42

    Whoa! Crazy.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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]

Episode duration: 4:51:30