EVERY SPOKEN WORD
150 min read · 30,017 words- 0:00 – 0:45
Signed Clippers jersey banter and setting the tone
- BGBen Gilbert
All right, so David, Steve gave us the signed Clippers jersey with the name Acquired on it. There's only one jersey. What are we gonna do about this? [laughing]
- DRDavid Rosenthal
[laughing] Should we rock, paper, scissors for it? What-- Well, you know what? No, no, you keep it. There's no Seattle basketball team.
- BGBen Gilbert
Oh-ho-ho.
- DRDavid Rosenthal
Keep it there, up north.
- BGBen Gilbert
All right, all right. It'll, it'll go in, uh, Acquired Museum North.
- DRDavid Rosenthal
Great.
- BGBen Gilbert
Perfect. All right, let's do it.
- DRDavid Rosenthal
Let's do it.
- SPSpeaker
Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?
- 0:45 – 4:08
Why Ballmer may be the best investor of the last 20 years (by simply holding)
- BGBen Gilbert
Welcome to episode one of the summer twenty twenty-five season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. Steve Ballmer is, among other things, arguably the very best investor of the last twenty years. It sounds a little funny to frame it that way, but here are the numbers: In twenty fourteen, when Steve left Microsoft, his net worth was $20B, almost entirely comprised of Microsoft stock. Today, eleven years later, it is a staggering $130B, according to Forbes. It is incredibly rare to reach this stratospheric level when you are, A, not the founder of the company, and B, no longer CEO or even employed by the company, and all of this comes from just one investment decision: just keep holding substantially all of his Microsoft stock.
- DRDavid Rosenthal
Incredible. We, uh, chat about it with him in the conversation to come.
- BGBen Gilbert
Now, as most of you know, we did a big two-part Microsoft series last year on the history of the company up through when Steve transitioned the CEO role to Satya Nadella. Steve listened to those episodes, and, uh, he had some thoughts that he wanted to share with his recollection of how things went down. You know, things like what made Microsoft so fabulously successful, what his missteps were as CEO. We wanted to share that as a recorded conversation with all of you, so we set up our cameras and our mics at his office, his philanthropy office, Ballmer Group, in Bellevue, Washington, and we pressed record. So we'll go into everything from the misses on mobile, search, social, the huge wins in enterprise and cloud. Steve also reflects on his business lessons learned. He goes into why he stepped down as CEO when he did, and he talks about his relationship with Bill Gates over the years. And of course, we had to talk with him a little bit about the Clippers-
- DRDavid Rosenthal
Of course
- BGBen Gilbert
... and the new arena that Steve built and personally owns, too.
- DRDavid Rosenthal
Yeah, Intuit Dome. Incredible place. A cathedral of basketball, as Steve would put it.
- BGBen Gilbert
Listeners, if you wanna know every time an episode drops, check out our email list. It's the only place where we will share a hint of what our next episode will be. We'll share episode corrections, updates, and little tidbits that we learn from all of you about previous episodes. Come and join the Slack to talk about this with us and the whole Acquired community. That is acquired.fm/slack, and the email list is acquired.fm/email. If you want more Acquired between our monthly episodes, check out ACQ2. We just released one with Zach Perret, the co-founder and CEO of Plaid.
- DRDavid Rosenthal
And we've got some banger ACQ2 episodes coming up.
- BGBen Gilbert
Yes, we do. Well, as most of you know, we are doing a massive, massive live show at the six thousand-seat Radio City Music Hall in New York City on July 15th with our friends at J.P. Morgan Payments. There are just a few seats left, so get yours before they are gone at acquired.fm/nyc. The lineup for the night is gonna be something very special, and we cannot wait to see you there.
- DRDavid Rosenthal
Yes, and speaking of, just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments is a part of so many of their journeys, from seed to IPO and beyond.
- 4:08 – 5:10
Ballmer shows up with slides: a “business lessons” interview agenda
- BGBen Gilbert
So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. On to our conversation with Steve Ballmer. Well, Steve, f- first of all, I, I noticed you, you prepared some [laughing] printed materials here for us. Listeners should know we didn't ask for this in any way, but at ten PM last night, you sent us a PowerPoint deck and said, "I, I made you some slides. Sorry it got here so late." And Dave and I are looking at each other like, we, we didn't ask you to, p- you know, prepare for this. Thank you for the materials.
- SBSteve Ballmer
Oh, it's just some stuff that I've used kind of with thoughts about how businesses work, and I kinda think of this as a time to reflect on things I've learned, primarily at Microsoft, but also at the Clippers, about business. I figured, "Eh, I'll send them to you," and they're PowerPoint. [laughing]
- DRDavid Rosenthal
Yeah. [laughing]
- BGBen Gilbert
[laughing] So you mixed a few different templates.
- SBSteve Ballmer
Paid promotional opportunity.
- DRDavid Rosenthal
Yeah, yeah, yeah. [laughing]
- BGBen Gilbert
Always a cheerleader.
- DRDavid Rosenthal
Always.
- SBSteve Ballmer
There you go. [laughing]
- DRDavid Rosenthal
I think the word cheerleader is actually in the PowerPoint deck, though.
- BGBen Gilbert
Yes. Yes.
- 5:10 – 7:54
‘Father of enterprise’—and the regret of losing Microsoft’s consumer muscle
- DRDavid Rosenthal
Great. Well, Steve, speaking of reflecting, we sit here today, Microsoft is the most valuable company in the world, almost three and a half trillion dollars in market cap, and I think everybody would agree it's an enterprise company, and that's largely thanks to you.
- BGBen Gilbert
It is reasonable to call you the founder of Microsoft's enterprise business. That is not a narrative that is often discussed, and w- we wanted to ask you, how do you feel about the fact that it basically defines the business today?
- SBSteve Ballmer
Yeah, uh, interesting, uh, very kind. Fathering something, I feel good about that, and I think there's a lot of truth to that. Of course, there are many fathers to the enterprise business at Microsoft, and I feel both good and bad about it because the truth is, Microsoft started out as a consumer company.... and we built a very important consumer business. That success translated into the opening to go build an enterprise business, and one of my regrets is we lost the consumer muscle along the way. 'Cause I think the ability to be ultra, ultra-- I mean, we're a great company. Microsoft's a great company, but to have both of those muscles totally firing, if I'd been able to sustain that consumer muscle, and, and I n- had some ideas about why, why that didn't happen. But the enterprise muscle? Ooh, muy macho. [laughing]
- BGBen Gilbert
[laughing]
- SBSteve Ballmer
It got, it got very big and very strong. [laughing] And, uh, so I'm very proud of that, and the fact that... You know, it's also funny when you say consumer and enterprise. What does it mean really to say enterprise? Sometimes it can sound just like back-end stuff, and the truth of the matter is, Microsoft Office slash M365, whatever exactly it's called today, is super important. It was the foundation for having permission to be in the enterprise, and yet it's a product that sits right there in front of users. So the question is: do you think about users or consumer, and do you think about enterprise, or do you think about IT? And then there's developers that span both, and s- that's kind of my mental model. Do you have products that appeal to consumers, that IT can handle, and a platform that lets developers build around those and based around those, whether they're building for users, users and IT, or in some instances, just for IT people? 'Cause there's a lot of tools that are just for IT people.
- 7:54 – 21:28
IBM as ‘the sun, the moon, and the stars’—and the accidental path to DOS
- BGBen Gilbert
Yep. Well, to contextualize all this, we wanna go back almost all the way to the beginning, right around the time you joined Microsoft, and talk about Microsoft's relationship with IBM. Before the IBM PC and before DOS, can you catch listeners up who weren't around at that time, what was IBM in that era?
- SPSpeaker
Yeah, I think you called it to us, uh, in, and when we were talking to you for research, the sun, the moon, and the stars. [laughing]
- SBSteve Ballmer
[chuckles] Yeah, I did, I think. Well, it's 1980, uh, when I, when I get here, and the company started obviously in 1975, and there were IBM computers. Oh yeah, and a couple others. But literally, people would say, "There's IBM and the bunch," and the bunch was Burroughs, UNIVAC, NCR, Control Data, and Honeywell, but they were just the bunch. IBM, and IBM did the mainframe, and it did the software, and it did the service. It did everything in computing. Everything. Everything. And then you had this little upstart try-again called Digital Equipment-
- SPSpeaker
Yep
- SBSteve Ballmer
... very important in our story [chuckles] because Dave Cutler, who was kind of the father of NT, Windows NT, he came from Digital Equipment, and they were, they were fighting, they were scrappy. They were minicomputers, so smaller than a room, [laughing] but definitely bigger than, bigger than a p- a PC, if you will. And, uh, all the initial Microsoft software was developed actually on DEC computers.
- SPSpeaker
Yep.
- SBSteve Ballmer
Digital Equipment equals DEC. And DEC had a nice business, but it was a lot smaller than IBM. If IBM breathed, that was the direction the computer industry would go. And IBM was the subject of an antitrust lawsuit, shockingly, in 1969, that didn't actually get settled, I think, till shortly after I got here in the term of Reagan. So 11 years they'd been living, 'cause they were that big and bad and mighty.
- BGBen Gilbert
And what was the result of that antitrust action? What did they have to do?
- SBSteve Ballmer
Ah, I don't remember. It may be when they had to unbundle-- In fact, I think it was when they had to unbundle the operating system from the mainframe hardware so people could build IBM-compatible mainframes. And then one day, shortly after I got here, some guys from IBM call, and they say, "Hey, can we come see you? And you're gonna have to sign an agreement that says you can use nothing we tell you. Anything you tell us, we can use." And so these guys showed up, and they told us after we signed their agreement that they wanted to build a PC, and they were hoping to get the operating system and some of our language software for it.
- SPSpeaker
And they were coming to you for the language software?
- SBSteve Ballmer
No, they came to us for the operating system.
- SPSpeaker
Ah.
- SBSteve Ballmer
Now, why? You'd say, "We weren't in the operating system business." We had a card called the CPM Softcard or the, uh, Softcard for the Apple II. It was a card that plugged into an Apple II that ran CPM, not our operating system.
- BGBen Gilbert
Gary Kildall.
- SPSpeaker
Gary Kildall, yeah.
- SBSteve Ballmer
Gary Kildall. Digital Research was the name of the company. But we had licensed it to put on this card that plugged in the Apple II, and somehow IBM thought they could license CPM. Even though it wasn't our product, they thought they could license it from us, and we said: "No, no, no, but you can license our language software, but there are these guys down in Pacific Grove, California..." You know, and Bill called Gary Kildall and said, "There's some guys, they wanna talk to you. They're important." And Gary, they went down there, and they didn't sign the nondisclosure agreement, and in the meantime, there was a company here in Seattle called Seattle Computer Products that had a little CPM clone.
- BGBen Gilbert
And so the licensing of Microsoft DOS, which didn't even exist when IBM approached you about licensing some things, is the single greatest business deal in history, the licensing of that software to them. [laughing]
- SBSteve Ballmer
We need that contention on our episodes.
- BGBen Gilbert
Well, I just think you look $3.5 trillion later at Microsoft's market cap-
- SBSteve Ballmer
[laughing] It was pretty-
- BGBen Gilbert
... this, this kick-started it all.
- SBSteve Ballmer
It was pretty good. [laughing] ... But then we had, there was a company that happened to be here in town. Paul, uh, Allen and I went down there, and we met with the founder, who later came to work at Microsoft, a guy named Tim Paterson, and we offered him, I think we paid forty-five or forty-nine thousand for this operating system. 'Cause we told IBM, "No, no, we can, uh, take care of it." There was kind of a famous meeting amongst me and Paul, uh, and Bill, and this guy, Kazahiko Nishi, who ran our kind of affiliate in Japan, uh, where we were talking about this, and there was a lot of, let's just say, four-letter words thrown around. "Screw 'em! Ugh." Screw 'em is five letters, but you get the- [laughing] ... you get the drift. "Screw 'em, screw 'em. Let's just go get this operating system. Screw 'em, we can do this. Let's go!" [laughing] Uh, that was kind of the, the theme.
- DRDavid Rosenthal
Kaza was kind of a cowboy.
- SBSteve Ballmer
He was kinda... Yeah, yeah, Nishi, absolutely a cowboy. So we went, we sold it to him, half of what we paid for it, and we thought, "Ah, we can do this 10, 20 times." Um, 20 times twenty-one thousand, four hundred thousand, against, you know, fifty thousand we paid for it, pretty good deal. [chuckles]
- DRDavid Rosenthal
So yeah, okay-
- SBSteve Ballmer
It was a lot better than that, as you said, Ben.
- DRDavid Rosenthal
Talk, talk us through the structure and how you guys thought about this, 'cause-
- SBSteve Ballmer
Yeah, I'm sure you're right.
- DRDavid Rosenthal
You did not make a lot of money directly from this deal.
- SBSteve Ballmer
Nope, we did not. We remember the key thing was we didn't charge for the operating system on an ongoing basis. We charged for it one time. If you got a new version, we charged another time, and we did the same thing for Basic and everything else, because at the time, you could think we were like a substitute for an R&D department, which means we were fixed price. It was only, I don't know, four or five years later that we actually switched to licensing per unit, as opposed to just fixed fee, here it is, pay us once and we're done.
- 21:28 – 33:05
Riding the bear: OS/2, Windows as the real plan, and IBM’s surprise ‘divorce’
- BGBen Gilbert
When did you start to feel like we're getting out from under the thumb of IBM?
- SBSteve Ballmer
[chuckles]
- BGBen Gilbert
And maybe walk us through a little bit, the OS/2 Windows world.
- SBSteve Ballmer
So [chuckles] we've been staying with IBM. Uh, they decided they wanted to build something that was sort of their operating system and sort of not. This is '82, '83. We and they would collectively build part of it. We would be able to license it to others. They would build a value-add layer that was a database and a 3270 emulator. [laughing] Crazy to say now. We were gonna work on the operating system and what was called Presentation Manager, call that the graphical user interface, and they were gonna have rights equivalent to ownership in the code we wrote.
- BGBen Gilbert
This sounds so convoluted.
- SBSteve Ballmer
It was so convoluted. Man, there was a time when I made 16 trips to the East Coast in 16 weeks, most of them to South Florida, a couple of them to New York. Leave on the red-eye, the Delta Dash flight at around 11, get into Atlanta around 5, get the flight to West Palm Beach at about 7, get in and be able to be at a meeting at nine o'clock at IBM, and then work all day, catch the seven o'clock flight home, be here about 10:30 or 11:00. Twenty-four hours [mimics flying] down and back because you- if you're building something together, remember, there's no real email at the time.
- BGBen Gilbert
Right.
- SBSteve Ballmer
We were literally shipping disks back and forth, and then they decided they were gonna do the Presentation Manager piece in England. So there were also then a lot of flights to England-
- BGBen Gilbert
Oh, my God.
- SBSteve Ballmer
So we were trying to... And then Texas is where the database and, and, uh, communication subset-
- SPSpeaker
This sounds so IBM.
- BGBen Gilbert
This sounds like Boeing.
- SBSteve Ballmer
You know, we called it... It was, you know, i- you know, a joint development agreement, and it was the price of staying involved with IBM, and it was convoluted, and we did then keep for, for speed of action, we kept going on Windows, which we had started.
- SPSpeaker
For listeners, everything we're talking about is OS/2.
- SBSteve Ballmer
OS/2.
- SPSpeaker
This operating system that basically never comes to be.
- SBSteve Ballmer
OS/2, and there was OS/2 Extended Edition or something, which it had their edition stuff.
- SPSpeaker
And Windows was, like, your plan B. It was, like, your side-
- SBSteve Ballmer
No, Windows was our plan, and then they wanted, they, they wanted to do this new operating system, and we convinced them, "You gotta have a graphical user interface," and we tried to sell them Windows, and they were resisting.
- BGBen Gilbert
Okay, so it almost seems like you're humoring IBM at this point with, "Yeah, let's do OS/2 together. We really think the future is Windows."
- SBSteve Ballmer
The ride's the bear. Eh, humor-
- BGBen Gilbert
It's more than lip service
- SBSteve Ballmer
... I would say-... you know, my job was managing, by then, system software. So I had Windows, I had shipped Win- I'd been the development manager for Windows 1.0 when it shipped.
- DRDavid Rosenthal
Oh, the, the, the great videos of you from the Windows 1.0 launch are so good. [chuckles]
- SBSteve Ballmer
But no, that's the sales side. I actually managed the engineers-
- DRDavid Rosenthal
Yeah
- SBSteve Ballmer
... because the guy who was doing it wasn't being successful, and we had to ship the thing, and so that's when I learned something about engineering management, from the engineers, basically, had to teach me to be effective. We're trying to keep with OS/2. Bill's very frustrated with IBM. I'm frustrated, but I know my job is to ride the bear, and so Bill's pushing Windows hard, but we still suspected OS/2 could be the winner because it came from IBM, but we couldn't just, like, stop for three or four years. We couldn't make the mistake we sort of made, uh, in the thing that became-
- DRDavid Rosenthal
Vista
- SBSteve Ballmer
... uh, Vista. So we kept going with Windows, we kept going with OS/2, and then May 1990, they come along and shoot us. [chuckles] I re- I was out running with my wife. I stopped-
- DRDavid Rosenthal
Wait, IBM shot you?
- 33:05 – 40:11
From retail software to real enterprise: building NT and the enterprise go-to-market
- DRDavid Rosenthal
As we understand it, you kinda had this realization at this point, once the divorce happens, "Well, I'm gonna go figure out how to do what IBM does," like, you personally.
- BGBen Gilbert
And to put a finer point on it, the thing that we said on our episode, and I'm curious if it's true or not, is this was not Bill's passion area, and you sort of raised your hand and said, "I'll go figure out enterprise sales."
- SBSteve Ballmer
Oh, yeah. No, no, that, that's for sure true. [laughing] Bill's passion... Look, Bill had passions a lot of places, but, you know, you'd say the apps group and what Windows could deliver to the apps, quite, quite appropriately, I'd say that's where, where a lot of Bill's brain cycles went.
- BGBen Gilbert
Mm-hmm.
- SBSteve Ballmer
You know, I had also hired Dave Cutler. Dave Cutler had been the, uh, architect of the VMS operating system for digital equipment, and, you know, we had DOS and Windows, and when we were talking to Cutler about coming here, he says, "I don't wanna work any toy operating systems." [chuckles] And I had to say to Dave, "Good thing, 'cause we have a toy operating system." [laughing]
- BGBen Gilbert
[laughing]
- SBSteve Ballmer
But Dave is the key to getting us there. You know, we said, "Look, you gotta build an operating system whose API looks like Windows and whose user interface looks like Windows."
- BGBen Gilbert
So developers are- can be familiar with it and write apps for it.
- SBSteve Ballmer
Not- yeah, and you might make some changes 'cause you have to, but it's gotta be a robust operating system. It's gotta have a secure kernel. It's gotta have all of these things.
- BGBen Gilbert
The product set that you had wasn't really enterprise-grade yet.
- SBSteve Ballmer
No, we had a joint development agreement, a, a joint agreement on LANManager with a company called 3Com. It wasn't all our stuff. We had a, a development agreement with a company called Sybase to do-
- BGBen Gilbert
Oh, yeah
- SBSteve Ballmer
... the SQL database, 'cause we were trying to figure out all these pieces IBM would have, uh, and we, we didn't have any of that, so-
- BGBen Gilbert
An operating system alone is not gonna do it.
- SBSteve Ballmer
No.
- BGBen Gilbert
You need all these other components.
- SBSteve Ballmer
And if you wanna, to have backend infrastructure, we started scrambling on that in the '80s. So we had all these infrastructure pieces that we had to build if we wanted to sell to, I'll say, business customers. We weren't even thinking about en- when you say enterprises, sometimes people think very large companies, but we couldn't sell to companies of 20 people without some of this stuff, or 50 people.
- DRDavid Rosenthal
You talk a lot now about, um, this sort of management concept of building muscle. Is this where this came from? Of like, that you should always be, you use the phrase, "in the weight room," building muscle ahead of what you need. Were you and Bill thinking this way in the '80s, of like, "Hey, we need to be building up this muscle across all parts of computing and business computing?"
- SBSteve Ballmer
Well, [chuckles] Paul Allen, I mean, Paul is the key. Paul is the one who said, Bill said, "We're never gonna be a, be a hardware company," and when the Altair came out, the first real sort of microprocessor-based computer, Paul says, "Okay, let's write all the software that these things will ever need."
- BGBen Gilbert
[laughing]
- SBSteve Ballmer
So you know, Bill and I had a lot of the execution around that, but P- you know, that, that was the push. So, and Paul was cracking on me in the early '80s to start building an apps group. "Come on, Steve! Come on, Steve."
- BGBen Gilbert
It's not just systems. We need to have applications also. Any code that executes on a microprocessor-... we should have a player in that market.
- SBSteve Ballmer
And there was a VisiCalc spreadsheet. Come on, Steve, word processor. Come on, come on, come on, let's get the talent. Let's get going! And, you know, we were doing mostly college hiring at the time, and so, you know, okay. And then we met this guy, Simoni, who'd been at Xerox PARC.
- BGBen Gilbert
Charles Simonyi, right?
- SBSteve Ballmer
Charles Simonyi, exactly.
- BGBen Gilbert
Yeah.
- SBSteve Ballmer
And he came-- M- we met him through a mutual friend at 3Com Corporation who'd been at PARC, and he really was the first leader of the apps business. But we licensed-- I mean, look, we worked with other people the way IBM worked with us, right? We went to Sybase and 3Com, and let's work together, and it wasn't exactly a JDA, joint development agreement, but, you know, we worked with those guys the way IBM worked... I mean, look, the analogy now is, is a little bit Microsoft working with OpenAI. You know, when a-- the big company works with the new company-
- BGBen Gilbert
Mm-hmm.
- SBSteve Ballmer
[chuckles] How does that all play out over time? [laughing] Uh, but, you know, I, I took over system software in '84, so that's when we're starting all this stuff, and you could say I was a little bit more enterprisey.
- BGBen Gilbert
So yeah, I, I'm looking at your chart here that you made for us. You've got '92 to '98 titled Lift Off, and that's after the era where you talk about enterprise start.
- 40:11 – 47:01
Inventing enterprise licensing: from ‘Select’ honor system to the Enterprise Agreement
- BGBen Gilbert
So we've talked a lot about the products. Let's talk about the go-to-market motion and this sort of invention of the enterprise agreement. What are the key pillars that you sort of came up with for the enterprise agreement, and why did they exist?
- SBSteve Ballmer
Okay. Our first sort of software pricing packaging model for the enterprise was not the enterprise agreement. [laughing]
- DRDavid Rosenthal
[laughing]
- SBSteve Ballmer
First, it was, you know, we sold you disks. Second, we came up with this notion of what we called select licensing, and you could make your own copies. And you just report how many copies you sold [chuckles] and-
- DRDavid Rosenthal
Sounds rife with, with challenges here.
- SBSteve Ballmer
You tell us how many copies, and just pay us what you, what you did.
- DRDavid Rosenthal
The enterprise honor system.
- SBSteve Ballmer
Mm-hmm. Mm-hmm.
- BGBen Gilbert
Astonishing.
- SBSteve Ballmer
Uh-
- BGBen Gilbert
And that's of Windows, that's of Office, that's of-
- SBSteve Ballmer
Windows typically by then came with the hardware.
- BGBen Gilbert
So you were mostly using the OEM channel?
- SBSteve Ballmer
For Windows, yeah.
- BGBen Gilbert
Okay.
- SBSteve Ballmer
Yeah. Even to this day, you know, upgrades and stuff are sold direct to enterprises, but, you know, b- basic computer that comes to an enterprise would have the operating system licensed to the OEM. And so we were on, you can call it the honor system, but we just couldn't make people, like, buy disks from us or CDs from us. [chuckles] Enterprises didn't like that. So we had this thing called Select, and Select had two problems with it. Number one, very hard to copy the software you print. And number two problem, we were selling, uh, upgrades and new licenses, and upgrades were, I can't re- less than half the price of new licenses. So what does that mean? The company was headed to a world where its revenue was half of its existing revenue.
- BGBen Gilbert
Yeah, unless you're growing new customers, new logos at a phenomenal clip.
- SBSteve Ballmer
Fast enough. So it was a real problem-looking thing, and, uh, Bill and I, we'd always dreamed of this thing where you get some recurring revenue, and then we came up and say: "Okay, well, why don't we just do a license?"... that you didn't have to count the number of licenses you printed, just the number of computers. It made life simpler. And we said, instead of doing sell you a new license, and then God knows when we would sell you another upgrade or whatever, we'll do something that just says: "Hey, look, you sign up for three years, you pay us, you know, per machine, and you just pay us the same amount of money each year for three years." And it sort of let us jimmy up the price of the upgrade. [chuckles]
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Yeah, I bet. And importantly, you said, and you get, you get everything-
- SBSteve Ballmer
So we solved the upgrade price problem, and we solved the difficulty of administration problem, and that was the enterprise agreement.
- DRDavid Rosenthal
And was it from the beginning of you get everything?
- SBSteve Ballmer
No, that was a special enterprise agreement. So you got all the upgrades during that three-year period to the products you licensed.
- BGBen Gilbert
Hmm. But you were still picking and choosing, "Oh, I want Excel. Oh, I want, you know, Server."
- SBSteve Ballmer
You could. We were encouraging you to buy Office.
- BGBen Gilbert
Yep.
- SBSteve Ballmer
But we also had this all-you-can-eat license. I can't remember what we called that, but basically, then I think you counted the number of employees, and you could use any of our software for anybody. So we just tried to go simpler and simpler and simpler in the administration, recurring revenue that didn't decline over time, and, you know, sort of as much as you wanted to eat, the upgrades, everything. We did want essentially what you have now, which is a recurring services business, but we didn't have the cloud. We weren't delivering things, but we were already on that path. I think we started the Energizer. You guys mentioned what we do with Energizer, which is where we wanted to run their IT department. And so we-
- BGBen Gilbert
Right. They were a pilot customer for this concept, right?
- SBSteve Ballmer
Yeah, they were the first customer. I talked them into it, and this is beyond the enterprise agreement. This is where we actually want to run their stuff because we did want to get to this recurring revenue thing.
- BGBen Gilbert
And David was referring to this concept earlier. We talked about it a lot on our Microsoft episode and then on our Epic episode, this sort of genius idea of you will get included in your license, a whole bunch of software, even if you're not ready to use it yet. So if at any point you're considering buying this different software package from this other vendor who's a, you know, uh, they just make this one thing-
- 47:01 – 49:58
The integrated back office era: email as the locomotive and partners as force multipliers
- DRDavid Rosenthal
So at a certain point along the way, you get to, well, I wanna say the Holy Trinity, but I think there are more than three pieces of this. But the real killer suite in enterprises, which is Windows, Windows Server, Active Directory, Exchange, Office, and all of these pieces of software all work in orchestration to run your enterprise. You know, your users, they do their email on Outlook, which is part of Office, which runs on Windows, which uses Exchange, which uses Active Directory-
- BGBen Gilbert
Which uses SQL Server-
- DRDavid Rosenthal
... which integrates with the SQL Server, all these things. How long did it take to get to that point, and what went into where-- I mean, to my mind, that's when the enterprise is firing on all cylinders here.
- SBSteve Ballmer
Okay, so that really comes with email boom. And email boom is late '90s/beginning of 2000s.
- BGBen Gilbert
Because email is sort of the cart that pulled the whole thing.
- SBSteve Ballmer
Oh, yeah. No, it's the locomotive.
- BGBen Gilbert
Enterprises wanted email.
- SBSteve Ballmer
Yeah. When Accenture became a company, we started a joint venture called Avanade to help do essentially the Holy Trinity, to help install, because you had-- we needed support infrastructure and partners who knew how to set up the servers, provision, email, put all that in. We needed partners, and, uh, we didn't have enough capacity.... uh, and that's why we started this thing, Avanade, with, uh, which is a big, big company at this stage, with Accenture, and that was in the two thousands. I went on the board of Accenture-
- BGBen Gilbert
But all this to say, the way you could kind of pitch an enterprise is, rather than any of these other value propositions, David l- listed off a whole bunch of software, you could say: "You guys want some email, right? We have the most reliable, robust way for your enterprise to adopt email, and it's gonna come with all this other great stuff."
- SBSteve Ballmer
And everything was nicely integrated. Because remember, you needed Active Directory to manage, you know, file shares, to manage, um, uh, printers. I mean, it was used for a lot of, lot of different things, so it, it really did all kind of come together as kind of the integrated proposition, like you say. You guys, you guys sort of, uh, I don't know, made fun of the notion that we called all that stuff the back office, as if that was diminutive.
- BGBen Gilbert
Yeah. Bill gave this wired interview in ninety-six.
- SBSteve Ballmer
No, no, no!
- BGBen Gilbert
He called it the back office.
- SBSteve Ballmer
So wrong. So wrong about that.
- BGBen Gilbert
Ah. We took that as a signal that Bill just didn't care about this stuff.
- SBSteve Ballmer
Oh, completely not right.
- BGBen Gilbert
Ah.
- SBSteve Ballmer
I wanted it to call it the back office, because you needed to buy the office and the back office, and the user, the consumer, uh, saw the office, and the back office was the things that were in, you know, kind of the server rooms-
- BGBen Gilbert
Hmm
- SBSteve Ballmer
... slash data centers, but a lot of them were server rooms. It's the same thing these days, but cloudized.
- 49:58 – 58:51
Developers, developers, developers: platform definition and Microsoft’s cultural trap
- BGBen Gilbert
All right, so as we were preparing for this, there was-- there's a bunch of big questions that we just desperately want your take on. A big one is around one of your most iconic moments, nineteen ninety-nine, the developers, developers, developers speech. I've probably watched this clip twenty, thirty times. Almost everyone listening has seen this clip. What is missing from this clip is all the context around Microsoft and what's going on in the world at this time, and what you need to accomplish as a leader of this company. Help us set that stage and then understand why you went on stage that way.
- SBSteve Ballmer
Well, remember, by this time, we're not through our IBM [chuckles] competition, a- and we got Linux competition now on the docket, `cause Linux is competing with Windows Server, Linux is competing with Windows, and there's a thing called OpenOffice, open-source software for Office, that's competing with Office. So we have all these things going on. We haven't beat Lotus Notes yet.
- BGBen Gilbert
And you've got antitrust going on.
- SBSteve Ballmer
We have antitrust issues, of course, by then.
- BGBen Gilbert
The culmination of the DOJ suit is happening within twelve months of this moment.
- SBSteve Ballmer
Correct. But, I mean, it's clear in all these competitions, the thing you need is third parties that reinforce what you've got, add value around what you've got. And I could say run on your platform, but I'll come to that later if you want to, what a platform is and isn't, and if you want to do that. It's kind of interesting, I think-
- BGBen Gilbert
Yeah, let's do it
- SBSteve Ballmer
... uh, particularly since everything's called a platform these days. But anyway, so-
- BGBen Gilbert
Let's take an aside here. Give us your definition of a platform.
- SBSteve Ballmer
You could call it anything that is extensible, and it's the extensibility that, quote, "makes it a platform," because you're gonna get people to extend the value you add.
- BGBen Gilbert
Mm-hmm.
- SBSteve Ballmer
The question is, and the, the reason that's important is, applications are platforms, too, not just developer platforms. When people say that, they might mean Azure or AWS, or in the old days, Windows or Windows Server or Unix, uh, then Linux. Yes, those are platforms. You extend them, but you also extend Office. You add value. Partners plug in, they write applications, they use the file formats. All of this stuff is platform, and part of the issue, I think, for Microsoft, is if you see yourself as just a platform company, i- i- a, platforms need apps. You wanna have the top first-party app that runs on your platform. Otherwise, your platform can't get good. Office was the best first-party app on Windows, and that's how things get good. Outlook was the best first-party app on Exchange. There were other clients at one point, by the way. So you really do want extensibility in your apps in addition to your, quote, "platform." You wanna make sure you own first-party app in addition to, quote, "platform," and I think you can get stuck in the mud if you say, "We're just a platform company." And I think we got it into our corporate mindset that we were, quote, "a platform company," far more than I ever intended. I mean, there were people telling me in the later-- in the mid to late two thousands, "Well, we're a-- We can't do that. We're a platform company." I said, "Yes, we can do that." [chuckles] And, and by twenty ten, I was just frustrated with myself and my inability to get people out of the "We're just a platform company." And I think to this day, you have to think app with platform. You have to think extensibility of the app and the, quote, "platform," and I think we got caught on that. Maybe I got caught on it for a while, and I certainly got caught in my inability to tell people what the company needed to do, `cause people had such a culture then of saying: "We're a platform company. We're a platform" And so now go back to y- uh, uh, developers, developers, developers. I'm trying to tell people at that time that third parties really mattered, and you, you got different opinions inside Microsoft.
- BGBen Gilbert
And what event was this at?
- SBSteve Ballmer
A developer conference, I think.
- BGBen Gilbert
So it's for external developers. That's-
- SBSteve Ballmer
External developers, and, you know, who's Windows' number one client?... Is it Office or is it all developers? You ask the Windows team, it's all developers. You ask the Office team, "Come on, you gotta do for us what we need to do." You know, you have to, y- you have to be able to communicate that you really care about developers who are not your own, that you really want these things, because they may think, "Oh, it's all about running Microsoft Office." And we just had to tell people: We want you, we want you, we want you, we want you. And I think we got caught in thinking it's all about third parties and not also about our first-party apps, and that's why you say, are you a... The word consumer sounds, like, unserious. Are you for users and for enterprises? Slash- which really means IT departments, or are you for users and not IT departments, and do you allow both all aspects of what you do to be extended by developers? That's the frame I believe in.
- DRDavid Rosenthal
Hmm.
- SBSteve Ballmer
You know, we had some issues [chuckles] over the course of where we went in the 2000. We can talk about that if you want to. But go back to '99, you know, come on, we need you, we need you guys on Windows. IBM's still selling OS/2. Linux is right there on the horizon. It's, it's coming like a freight train.
- BGBen Gilbert
Is the web starting to enter your psyche at all, like-
- SBSteve Ballmer
The web's part of that, right? We're trying to get people to write for Windows Server. Good point. We're trying to get them to extend ActiveX controls, I think.
- DRDavid Rosenthal
This is the heyday of Netscape, right?
- SBSteve Ballmer
We're the part of the browser. Uh, so we were trying to get our browser to be a platform, a unique platform. Uh, sorry, embrace and extend, I think, is what we said. We'll embrace the internet, and we'll extend with these ActiveX controls. We need developers to do ActiveX. We need them to do Windows Server. We're just sort of getting ready on .NET, and, you know, I have my own kind of wild style, and- [laughing]
- DRDavid Rosenthal
Oh, really, really?
- SBSteve Ballmer
... How do you, how do you end a speech? You tell people you love them, that you want them. That's sort of the call to action, and that's where I think the developers, developers, developers thing came. I mean, [chuckles] there- before that one, there was a different video that people sort of characterized.
- BGBen Gilbert
"I love this company?"
- SBSteve Ballmer
No, it was my Windows video. I don't know if you've ever seen that.
- DRDavid Rosenthal
Oh, yeah, yeah, yeah.
- BGBen Gilbert
Oh, of course. But wasn't that a parody? Don't people misunderstand?
- SBSteve Ballmer
It was for fun. It was just a f- fun thing. It was not a real speech.
- BGBen Gilbert
And it was for internal consumption, where-
- 58:51 – 1:17:15
‘Windows Everywhere’ and the misses: why extending the franchise failed in mobile/search
- SBSteve Ballmer
time in the 2000s where I think we do... I do, we do, we, we think that extending- We did a slide once called Windows Everywhere. We used to use this on all these devices, and we became too wed to extending what we had versus jumping to something new, because in a sense, we were too confident.
- BGBen Gilbert
Hmm.
- SBSteve Ballmer
We were too confident. If we only Windows-ized something... You guys make a point in your, your, uh, episode on us. Uh, you guys call it sticking with Windows too long, but that may be it, but I think, I don't think we stuck with Windows too long. W- I think what we did is we tried to put Windows in places that it didn't, it didn't naturally go, and we tried to be too Windowsy, both in the API and the UI in some things.
- BGBen Gilbert
Mobile being an obvious-
- SBSteve Ballmer
Windows Mobile, exactly.
- BGBen Gilbert
And the car, and-
- SBSteve Ballmer
The car. Uh, we did a layer on Windows, that when you hooked your PC up to the TV, it had a simplified user interface for the TV.
- DRDavid Rosenthal
Oh, yeah, I remember this.
- BGBen Gilbert
It wasn't just Media Center, right? It was some ex-
- SBSteve Ballmer
Media Center.
- BGBen Gilbert
Okay.
- SBSteve Ballmer
Media Center.
- DRDavid Rosenthal
Yeah, yeah, yeah.
- SBSteve Ballmer
Media Center, exactly right. So we became convinced, either out of, to some degree, paranoia, and some degree, confidence. You know, okay, well, our birthright here comes from Windows. That's our permission to enter the area. But then we also, in some areas, it just wasn't gonna be extensible, so there was both a, like, a fear and a, you know, overstated confidence in trying to take Windows, uh, everywhere.
- BGBen Gilbert
All right, listeners, it's time to talk about another one of our favorite companies, Statsig. Since you last heard from us about Statsig, they have a very exciting update. They raised their Series C, valuing them at $1.1 billion.
- DRDavid Rosenthal
Yeah, huge milestone. Congrats to the team, and-
- DRDavid Rosenthal
... Timing is interesting because the experimentation space is, uh, really heating up.
- BGBen Gilbert
Yes. So why do investors value Statsig at over a billion dollars? It's because experimentation has become a critical part of the product stack for the world's best product teams.
- DRDavid Rosenthal
Yep. This trend started with Web 2.0 companies like Facebook and Netflix and Airbnb. Those companies faced a problem: How do you maintain a fast, decentralized product and engineering culture while also scaling up to thousands of employees? Experimentation systems were a huge part of that answer. These systems gave everyone at those companies access to a global set of product metrics, from page views to watch time to performance, and then every time a team released a new feature or product, they could measure the impact of that feature on those metrics.
- BGBen Gilbert
So Facebook could set a company-wide goal, like increasing time in app, and let individual teams go and figure out how to achieve it. Multiply this across thousands of engineers and PMs and boom, you get exponential growth. It's no wonder that experimentation is now seen as essential infrastructure.
- DRDavid Rosenthal
Yep. Today's best product teams, like Notion, OpenAI, Rippling, and Figma, are equally reliant on experimentation. But instead of building it in-house, they just use Statsig. And they don't just use Statsig for experimentation. Over the last few years, Statsig has added all the tools that fast product teams need, like feature flags, product analytics, session replays, and more.
- BGBen Gilbert
So if you would like to help your team's engineers and PMs figure out how to build faster and make smarter decisions, go to statsig.com/acquired or click the link in the show notes. They have a super generous free tier, a fifty thousand dollar startup program, and affordable enterprise contracts for large companies. Just tell them that Ben and David sent you. Let's jump to this point, but what is the generalizable lesson here? You have Windows, this amazing piece of software with this tremendous multi-sided network effect around it. The logical thing to do is to continue to try and extend it and say, "Geez, wouldn't it be nice if the next great technology wave was also Windows?"
- SBSteve Ballmer
And that worked for us on Windows Server. So it's not like we didn't have an existence proof that the thing could work. But, you know, if you're gonna... In my little deck I gave you-
- BGBen Gilbert
Yes, please.
- SBSteve Ballmer
You know, if you're trying to skate to where the puck is, if you're trying to recognize, what did I call this? About capabilities. You know, if you're a startup in something, there's an ongoing business, you just fig-- keep enhancing your products. There's a line extension. Okay, we're gonna add networking to Windows. N- no problem. You still call it Windows. It's related, but new. SQL Server, for example, was that for a while. It was related 'cause we had a back-end platform. Dynamics, somewhat related, our accounting, et cetera, stuff, uh, because, you know, there were some enterprise-y sales, but it was really new. And it turned out the phone was more like a startup.
- BGBen Gilbert
Hmm.
- SBSteve Ballmer
The phone was more like a startup. And recognizing and thinking about things and then asking yourself, what capabilities do you need? You know, I say get in the weight room. You've got to develop capability. You know, take a look at a capability we developed that is now essential. We didn't build it for this reason: hardware design. Microsoft's a major hardware design company now. Now, I, I started out mostly on the cl-- you know, to help client-side devices.
- BGBen Gilbert
Surface.
- SBSteve Ballmer
Xbox, Surface, phone, and guess what? They use that mostly now in Azure data centers. I think the guy who wor- r- actually runs hardware design used to be on Xbox.
- BGBen Gilbert
Hmm.
- 1:17:15 – 1:41:38
How Azure started: capability building, PaaS-first bets, and early cloud momentum
- BGBen Gilbert
Okay, so we've spent a lot of time talking about all these bets that sound very reasonable to make in mobile, in search. We didn't talk about social, but in social and all the dancing you did with Mark Zuckerberg over the years, in Yahoo, in all these things that ended up not panning out, and these were trillion-dollar companies that were built not inside of Microsoft. We talked about one multi-trillion-dollar thing that did work with the enterprise. There's another one with Azure. Can you tell us the story of how Azure really got started?
- SBSteve Ballmer
Yeah. So we are in probably 2005, 2006. Uh, AWS has a little lift off. I think AWS comes to market in what?
- BGBen Gilbert
Around then.
- SBSteve Ballmer
Around then. And it's not like the cloud is some surprise to us. The Energizer, if you go all the way back to that Energizer thing from the mid-'90s, it's all about the cloud. It's before it was called the cloud, it's before all the infrastructure that becomes the cloud. So it's not like we say, "Oh, woke up one day and said, 'Oh, there's AWS.'" We didn't wake up one day and say, "Oh, there's back ends to applications, too." We've been doing that with Windows Server and SQL Server. We've been in the cloud, blah, blah, blah. But at that point, I think we might have already had Exchange in the cloud as a standard product, which you have to remember is super important because I really wanna give you my sense of what Microsoft's businesses are, and... But we didn't have a platform. And so I said, "We've gotta do one. Let's go get Cutler. [chuckles] Let's just go get Cutler." So I say, "Okay, we gotta get Cutler on it." And Cutler and I have a great relationship. We- to this day, we have a great relationship. We're personal friends.
- BGBen Gilbert
He's still writing code at Microsoft, right?
- SBSteve Ballmer
He's still writing code at Microsoft.
- BGBen Gilbert
Unbelievable.
- SBSteve Ballmer
But, I mean, you know-... Cutler and I have been to a basketball game together. We've played golf a number of times. We've done golf trips together, so... But, you know, Cutler's, he's a hard ass at work. I mean, if he doesn't want to do something, he'll tell you. If he thinks you are wrong, he'll tell you. If he thinks somebody else in the organization is bad, he'll tell you. I mean-
- DRDavid Rosenthal
He's like, he's like a thoroughbred horse, you know, like-
- SBSteve Ballmer
He's very blunt.
- DRDavid Rosenthal
He can run really fast, but you got to get him lined up properly.
- SBSteve Ballmer
He's very blunt. You know, he was a great athlete in college, uh, two sports. I think he played maybe three even in college. Uh, but anyway, so I get Cutler, and there's a guy working in MSR who I think is underutilized, too, this guy Amitabh Srivastava, who you guys talk about. I thought he was underutilized doing what he was doing, so grab him, grab Cutler, uh, bring them both onto this project. I think Bill... Is Bill still with the company?
- DRDavid Rosenthal
He's about to transition out.
- SBSteve Ballmer
He's about to leave, I think.
- DRDavid Rosenthal
Yeah.
- SBSteve Ballmer
Yeah.
- DRDavid Rosenthal
I think he had probably told you that he was going to leave, but hadn't-
- SBSteve Ballmer
He had told me, but, you know, talk about that. But he had told me, but hadn't left yet, so he, like, he was involved until, until, until he left, and even then, you know, different nature of involvement. But anyway, um, so I get Cutler and Amitabh to go do this thing, and then Cutler brings some of his, I'll call gang, his favorite guys, he brings them over 'cause he's a magnet for talent. And we get started, and we made an explicit decision, and I guess you could say it's also a function of thinking Windows first. I think you, you guys may have talked about this in your episode. We say we're going to build platform as a service because it's a Windows platform. Infrastructure as a service a little bit if you think about it, you're ex- you're sort of by nature accepting everybody's infrastructure. It's by nature multi, quote, "multi-platform." You become a different kind of a platform because you're running other people's Linux and whatever.
- BGBen Gilbert
It doesn't leverage Microsoft's strength of owning the Windows franchise if you're just-
- SBSteve Ballmer
No
- BGBen Gilbert
... gonna be infrastructure.
- SBSteve Ballmer
It doesn't leverage our strengths in the sense that we've got great low-level operating system people, so we have all the talent to go do it. But, you know, we say, "Hey, we're gonna do pl-" And it was explicit, we wanted to do platform as a service. Uh, we said, you know, A, hey, they're doing it, and B, it's all about the developers! And if it's all about the developers, then you got to have platform as a service, not just infrastructure as a service.
- BGBen Gilbert
Well, that assumes that the developers targeting Windows Server are still a big, strong, important, relevant developer group.
- SBSteve Ballmer
Mm-hmm. Which they, they were and they weren't. Windows Server had a strong developer group, Unix had a strong developer group, and on the front end, Windows was definitely stronger. On the back end, Unix was definitely stronger.
- BGBen Gilbert
But on the front end, by 2006, '7, the web was clearly the emerging-
- SBSteve Ballmer
Mm
- BGBen Gilbert
... developer platform of choice.
- SBSteve Ballmer
Emerging. Emerging.
- BGBen Gilbert
Okay.
- SBSteve Ballmer
Emerging.
- 1:41:38 – 2:09:33
CEO-era wins and mistakes beyond products: talent, antitrust, compensation, Wall Street, and Vista
- BGBen Gilbert
During your tenure as CEO, can you reflect back on your non-product wins and mistakes?
- SBSteve Ballmer
Look, my biggest hit from my time running sales to president to CEO is establishing us with IT departments, IT professionals, you can call that the enterprise, uh, if you will, and putting in the framework from a sales and marketing perspective, the staff. It's a capability we had to, to develop. Nobody developed that software model but us. We invented essentially how you do that. Um, Oracle had done some invention, but we came on and, and did our own invention. Uh, we took it to the cloud. We were able to successfully nag- navigate that with... I mean, look, from a sales, there's a product part to that, which you highlight, but, but that's a, that's a big deal, and I feel very, very proud about that. From a financial standpoint, you know, everybody likes to say we about tripled revenue and about tripled profit. The truth is we dramatically increased profit more than a triple. 'Cause people forget there was a major change that came along early in my tenure, and that's the move to have to expense stock options.
- DRDavid Rosenthal
Ah.
- BGBen Gilbert
Hmm.
- SBSteve Ballmer
So if you had restated our books to the time I actually took over, stock option expense would have reduced profits notably. Stock options were unaccounted for. So if you look at what starting profitability would have looked like if stock options had, it would have been lower, and the multiple over my tenure would have been m- much more than three.
- BGBen Gilbert
... Okay, so three-plus times in revenue-
- SBSteve Ballmer
Yeah, I think, I think you might say three in revenue and probably closer to four-plus-
- BGBen Gilbert
In, in profit
- SBSteve Ballmer
-five, maybe even on profit. About the same time, the dot-com bubble busts. So you have two problems: number one, now we're showing our books all this expense for stock options. Okay, but people don't value those things that what we have to expense, and the stock is flat, so they value them even less.
- BGBen Gilbert
This is a really insidious problem.
- SBSteve Ballmer
You gotta get rid of stock options, and we transition then from stock options to stock awards, which, if you notice, I think we were the first to make that as a major transition, but everybody's made the same transition. You know, w- with the exception of a few senior executives, options are not the primary form of compensation. Little different in startups, but when you look at larger companies, everybody-
- BGBen Gilbert
E- even startups are now doing RSUs, like-
- SBSteve Ballmer
RSUs.
- BGBen Gilbert
Yep.
- SBSteve Ballmer
So... And we had to start that.
- BGBen Gilbert
Hmm.
- SBSteve Ballmer
That-
- BGBen Gilbert
I didn't realize that Microsoft started that.
- SBSteve Ballmer
You can check, but I know we moved before m- most of the tech companies.
- BGBen Gilbert
It's a tough thing to have to inherit right at the beginning of your tenure, coming off of an already all-time high multiple of the stock price.
- SBSteve Ballmer
Yeah. The dot-com bubble bursting meant our stock price bursted, too.
- BGBen Gilbert
Yeah.
- SBSteve Ballmer
Burst.
- BGBen Gilbert
But I think to your point, what you're saying is, like, this became a employee motivation, cultural issue.
- SBSteve Ballmer
Oh, yeah.
- BGBen Gilbert
Like, it's not just stock price, like-
- SBSteve Ballmer
No, we had two problems. Before the dot-com bubble bursts, you have everybody saying, "Oh, maybe we should go to a dot-com company 'cause we're gonna make a lot more money!" Then the bubble bursts, and everybody says, you know, sort of... You guys probably haven't-
- BGBen Gilbert
I'm water on my options
- SBSteve Ballmer
... seen the movie Oklahoma!, but there's a song, "Poor Judd is Dead."
- BGBen Gilbert
"Poor Judd is Dead," absolutely.
- 2:09:33 – 2:18:15
Why Ballmer resigned: the phone hardware fight, board process, and timing the cloud transition
- BGBen Gilbert
Yeah, if you're ready to stop switching between tools and start using AI as your business hub, get started at claude.ai/acquired. That's C-L-A-U-D-E.ai/acquired, and just tell them that Ben and David sent you. We want to talk a little bit about your post-Microsoft term, but let's sort of leave Microsoft with a, a final question of, why did you resign?
- SBSteve Ballmer
Yeah, I-- a couple things. Um, a cou-- two or three things. Uh, number one, the phone was very on my brain. When you said, "Are you having fun?" Um, that was the thing that was eating at me the most, was the phone. And I decided we needed to flip the model around. Your episode's pretty good about all that happened, so I'm not gonna go through all that, but I knew we had to do hardware. I knew it. There was just no question. We weren't gonna be, uh, be able to play the search game, the Android/Search game, because we just didn't have the power of monetization that they did. And Apple's Apple, but there are gonna be two phones. It's not like there'd only be one phone that was popular in the world. And, you know, this is something you guys didn't put in the episode. I'd been trying to buy hard-- I had talked about buying a phone company for years, a number of years before the Nokia deal. I forget what year it was. I flew to Taiwan, and we were try-- looking at buying HTC.
- BGBen Gilbert
Hmm.
- SBSteve Ballmer
They were the biggest Windows phone OEM at the time. Nokia wasn't signed up. I finally just decided I... Terry Myers and I, we, wow, had three, four trips to Taiwan to, to talk to Peter, look at the organization, and I just decided it would be too tough to buy a Taiwanese company, that it would be-- I would worry too much about the integration. I liked Peter Chou, who run- ran HTC. I don't know if that name means anything to you guys.
- BGBen Gilbert
Yeah, of course.
- SBSteve Ballmer
But I'd been looking at that thing for two or three years, maybe, before. And, you know, Bill and I had had all-- continued to have all the tension we had about anything that had hardware in it. Uh, so, you know, it's not like our relationship was calm and is, is clear. It had, it had always been bumpy. I mean, even back to the beginning, I almost quit after four weeks 'cause we were in it. [laughing]
- BGBen Gilbert
[laughing] Oh, wow!
- SBSteve Ballmer
Five weeks, maybe. Uh, [chuckles] so it's not like it had ever been linear.
- DRDavid Rosenthal
That would've been a very poor economic decision. [chuckles]
- SBSteve Ballmer
It had never been linear. Uh, we had another big fight a year after about financial stuff, so it had never been linear. It had been-- it had helped build Microsoft, but that didn't mean it had always been easy for him or me. Uh, so the hardware thing was exacerbating our, our relationship. I thought we really needed to do a phone, and, um, then the board said, "No, we don't want to do a phone." And, and I was very transparent with everybody. Look, here's... You know, we brought the manage-- you got this right. We brought the management team in, and I don't know if it was more wanted to buy or didn't want, but I let everybody speak. I mean, it's a big decision to be in the phone hardware business. And then the process from... We do the presentation, and the process from there to the time the board says no, I didn't find very respectful. [laughing] The board didn't ask me to leave. The board-- I just didn't find the process very respectful, a- and I, and I probably won't go into the detail of that. So... And, and a lot of it has to do, again, with my relationship [chuckles] with Bill, 'cause, you know, we're-- and, and look, I knew Bill didn't love the idea, and I was willing to sort of accept whatever the board decided. I was, no, no question about that, but the process wasn't very good. Uh, and, and I, I was not happy [chuckles] with the process, and, um, but they wanted me to stay. But the pro- I just decided two things: If we're not gonna buy phones, that's kind of my best shot for a consumer future for the company. Right now, that's my best shot. I tried to fire the Yahoo shot, the phone shot. Those were my two things, remember, mobile and search. And so I said, "Look, this might be, this might be the right time."... we can't, we can't make my play here. N- n- not out of pique. It's just, hey, I thought about this in advance and said: "Look, if it doesn't work, it doesn't work. If the board doesn't wanna do it, fine." Uh, and so I said, "This is a good time." It's also a good time 'cause the cloud's just coming on, and I'm saying to myself: Look, we're gonna have to build new capabilities. Even the way you- we're moving to a gross margin- to a non, you know, h- something, uh, below 100% gross margin business.
- DRDavid Rosenthal
Right, non-software gross margins.
- SBSteve Ballmer
We have whole new capabilities we need to build up around that. I even think of it through the lens of the accounting system. Like, h- how do you... We had these revenue and cost reports. They have to change in the world of the cloud because you really have to get tight on gross margin, not on, not on revenue. Revenue, I, I don't really pay much attention to Microsoft's revenue. Uh, I pay attention to the gross margin growth.
- BGBen Gilbert
Hmm. These days, you're saying?
- SBSteve Ballmer
Those days. When I said the move to the cloud, I used to say this to analysts: "You should expect us-- You want us to have lower gross margins going forward, but we'll make it up in volume." [chuckles] Right? I mean, that-
- DRDavid Rosenthal
Yeah.
- SBSteve Ballmer
That is the whole proposition-
- DRDavid Rosenthal
Well, yes, that's the cloud
- SBSteve Ballmer
... of the cloud.
- DRDavid Rosenthal
Yeah, yeah.
- SBSteve Ballmer
You know, lower gross margins. You know, it's like Walmart's an okay company, even though it's, you know, net margins, whatever, percent and a half, two percent. You just gotta make it up in volume. So I knew it was a good time to let the new person sort of build from what we had to sort of the next generation of all the machinery that would have to happen to make cloud happen. Phone was... I never lost my desire to be an end-user company. I bemoaned the fact that I couldn't keep us focused on being an end-user company slash consumer. Uh, it, it killed me. And it's sort of you don't just: "Uh, I wanna be a consumer company." No, you've gotta find the locomotive, not just a bunch of cabooses. You know, at the end of the day, Zune was a caboose. A lot of the things we inve- invested in were cabooses. We had to find the locomotive, and there are only two possible locomotives that made any sense. And I didn't have a play that I thought was gonna break through anytime soon in search. Mobile was gonna be really hard, but I knew in my heart of hearts that without physical hardware, we weren't gonna break through there either because of search. Board said no. I said, "Okay." Bill and I are... It's not really the board being d- disrespectful, like, uh, maybe it is, but it's mostly b- me and Bill. We're grinding, grinding, and that's never fun when we grind. And I said: "Okay, we're grinding." Uh, I know it's frustrating for him. It's frustrating for me. We're grinding. Here goes my id- [chuckles] here goes my idea, and oh, by the way, this is a great juncture point. Um, so I said: "Okay, um, I'll, I'll pass." And then the board changed, [chuckles] changed its mind.
- BGBen Gilbert
Yeah, so why did they end up buying Nokia then, after your decision was final, you were out?
- SBSteve Ballmer
[sniffs] Oh, I don't know.
- BGBen Gilbert
Maybe you don't know, yeah.
- SBSteve Ballmer
I don't, I don't really know. I mean, I'm not sure they really understood what I had told them about... You know, we had a deep partnership with Nokia, and I'm not really sure maybe guys really understood. I hadn't done a good job explaining how close the partnership was, so there was really no go back to Nokia and see if we can have a bigger partnership. [chuckles] The problem with the partnership with Nokia is they didn't have the money to invest in marketing. We did. We did. They didn't have the market to go-- They did not have the ability to go deep pockets. We did. But if we didn't have the monetization capability back through the phone, we weren't gonna be able to make it work as a partnership because we had to put in the cash, and therefore, we had to get the return, and it, it wasn't-
- DRDavid Rosenthal
Yeah
- SBSteve Ballmer
... gonna work. It was splitting-
- DRDavid Rosenthal
It had reached a point where you had to buy the company or, or just cut bait totally on the whole-
- SBSteve Ballmer
Yeah
- DRDavid Rosenthal
... phone thing.
- SBSteve Ballmer
Just because the, the, the money, the math wouldn't work. What we had to do to be successful was beyond their financial capacity, but if we were gonna do what it took to be successful, we couldn't do it on, like, four dollar-
- 2:18:15 – 2:31:25
Post-Microsoft investing: emotional detachment, loyalty, dividends, and philanthropy funding
- DRDavid Rosenthal
So you left. You did a pretty incredible thing, or, or really, you didn't do an incredible thing. [laughing] You held everything. You're still the largest individual shareholder in Microsoft.
- SBSteve Ballmer
I think I might be, other than index funds, the largest-
- DRDavid Rosenthal
Yeah, yeah
- SBSteve Ballmer
... institutional investor, too. [laughing]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
And basically, besides Vanguard.
- SBSteve Ballmer
I'm not sure of that part, but yeah, it could be.
- DRDavid Rosenthal
On the one hand, I imagine it was very simple, and you've given reasons in other interviews in the past. You're a loyal guy, et cetera. Just talk us through, like, the emotions, thinking about that. Like, I imagine that was not so simple. [chuckles]
- SBSteve Ballmer
No, not. I leave, and then what does it mean to emotionally detach? 'Cause if you're, if you're not there, you have to emotionally detach. You can't say... Because you don't emo- you can't control anything anymore, so it's hard. You don't wanna stay quite that emotionally attached because it's like, "Oh, I gotta get back in and fix everything!" Uh, but I said: I'm gonna be the best investor. We're gonna know everything about this company. We're gonna go to... I'm gonna read everything just like I used to. We're gonna go to conferences just like we used to. I went to one shareholder meeting, and I was kind of a dick, in my opinion. [chuckles] I mean, literally one of the shareholder, shareholder meetings, and I just... Yeah, I was too emotionally attached. [chuckles] And so, you know, it took me about a year to say, I, I, I just have to emotionally detach. So it took some work, but I kind of was able to get there, but I'm still loyal. Didn't wanna sell. There's one... Then we get our philanthropy started, and then I do need to do something 'cause we do need some of the asset value to give away. So I went through a, a bit where, um-... we gave some away, i.e., we put it into our donor-advised fund. Uh, and I also, you know, sold a little bit at the time, and I was thinking- This is, like, 2015-ish? Yeah. F- might've been even '16, something like that. And then, you know, uh, because our philanthropy was just ramping up, uh, I mean, Connie had been giving away money, but the dollar value was ramping up. And, and then I said, "Maybe I should just sell it all." Hmm. Full emotional detachment. Wow! Let's do full emotional detachment because, look, it was my, it was my baby. It's my baby. I mean, I'm not a founder, but I think of myself as a founder. I was there so early, and I hired basically everybody, and, you know, [chuckles] everybody was a senior leader I'd recruited, and, you know, it's not true anymore. Now, things have changed. Yeah. You know, there's probably only 10% of the people who are there now were there when I was there or something, higher at the senior levels. I mean, I can go through the math of why that's true. But that would've been a very understandable decision of- Just emotional detach- You know, it's time to just, just, just put it all in ... It had nothing to do with money. Yeah. Yeah, yeah, yeah. Yeah. My only thought process was emotional detachment, and I was, I was, [sighs] I was wrestling, and- You're ready to hit the button. You're ready to hit the, the sell button. I was wrestling. Yeah, yeah. I was wrestling. And then lady who works here, uh, ex-Microsoftie, in f- who works here in finance, who's the woman who sort of really charts what's going on financially at Microsoft, uh, she and her boss, who's another ex-Microsoftie, who used to work with me most closely on the financial stuff, but she says, "You can't sell. You can't sell. This is gonna be worth a lot more. You can't sell. You can't." So she effectively made a Microsoft stock pick. Mm, she made a s- and sh- she was recommending... She had some, she has loyalty, too. It's not like, you know, we have a bunch of Microsofties here, and it's not like they lack loyalty either, but it was a little bit loyalty and a lot a pick. And I, I said: Look, my loyalty trumps my emotional attachment. Hmm. I can get through my emotional attachment, but my loyalty... And look, I think of the thing as, I think of the thing as like a two-headed hydra. I thought about this the whole way. Things could go to nothing, or things could explode, and that's partly why we tamped down the stock because we always saw the possibility for either of two radically different outcomes. And then finally I say: Look, I don't really-- I'm not gonna sweat whether we're gonna get the downside or the upside. I'm just gonna be loyal, and I'm gonna be enough emotionally detached for this to be okay. 'Cause for you, it kind of doesn't matter. There, there's not a downside that could be so bad that it would actually impact- No, I had enough money off the table that, uh, it's not like my family's gonna- You could still run one of the best philanthropies of all time, even if the- We could be great- ... stock cratered ... in our fa- uh, I hear you on the NBA team. No, I mean, Connie, Connie would've been okay with it. I mean, she finds it difficult to give away as much money as we have. Every- So she wouldn't have minded a smaller problem to start with. She would've been okay. I've been charting it over the last three years. You guys are giving away almost somewhere in the neighborhood of a billion dollars a year. Cash out the door. But your net worth is ballooning every year way faster than you can give money away because of the Microsoft hold. Yeah, and one other thing that... Yeah, Microsoft hold, but you may be missing one thing on the Microsoft hold that's important, and that's the size of the dividend check. Ah. [chuckles] The dividend. Between Microsoft and the other stuff I own, the dividend checks are pretty close to what we give away. [chuckles] So you can look at the appreciation, but, you know, we're, we're, we're just above the dividend checks now. You're just trying to shovel the money that is coming in the door, out the door. [chuckles] So you can fund the whole philanthropy without selling additional shares? Well, there's two things that are going on: one, the dividend checks are pretty good, and number two, uh, I do have stuff that's not in Microsoft, so- You hold, I think, mostly index funds outside of the Clippers. Is that right? Yeah. Clippers/arena index funds. I have one business I invested in with a guy who I went to college with, who worked at Microsoft. Uh, it's called Stagwell Media. It's a marketing services company, call it a modern-day ad agency, but it's not really an ad agency. Uh, a guy named Mark Penn. So I do have some money that's not in index funds, but mostly I'm in index funds, and, uh, um- Which, I mean, then, uh, anybody else, you know, in your, um, the same couple top pages of, you know, lists that you're on, you must be the only one that operates like this. Yeah. You know, everybody else, huge family offices, lots of investments, private equity, funds. Yeah, but if you look at the guy... I mean, look, uh, uh, I would say you probably would find that Zuckerberg is pretty concentrated. I, I don't know this, but I'm gonna guess you would find, I don't know about Ellison, but, you know, obviously, some of the guys who own more privately held businesses- I'd- ... pretty concentrated - require to be concentrated. Yeah. You know, uh- Yeah ... who else? The Google guys, I imagine, are concentrated, but I don't know that. I mean, I, I can't speak for anybody else. Uh, obviously, Bloomberg is concentrated. Right. Right. So, well, I think in practice, it all works out the same way of like, there's one thing that- Yeah ... is everything. And look, if you sell it, you're just gonna pay capital gains taxes. So you really-- if you're really just being a financial monster about it, you've gotta decide, will Microsoft underperform the index by enough to- [chuckles] Right. Right, right. To offset- [chuckles] Right ... the capital gains taxes? I don't need the money. I got plenty to live on without selling anything. That's number one. Financially, where's that money gonna go? Some will go to my kids, but most of it's gonna go to the government or to philanthropy. So why would I sell, so we have left- less to give to philanthropy someday? Unless I really think Microsoft's gonna underperform the market-... by essentially the capital gains rate. So-
- BGBen Gilbert
I feel like I'm watching a live USA Facts-
- SBSteve Ballmer
Yeah. [laughing]
- BGBen Gilbert
-uh, video right here.
- SBSteve Ballmer
Yeah, I got this question once. I'm a member of a country club in LA, and one of the things country clubs do sometimes is they'll do Q&A with members to entertain. And I did a Q&A, uh, with a f- friend of mine at the club, and who'd been president of the club, actually, and also is a- kind of knows Charlie Munger pretty well, and Charlie Munger's, uh, there as well. And Charlie Munger comes up to him beforehand, and to me, I know Charlie through Bill and Warren, and says, "If you call on me, I have a question." [laughing]
- DRDavid Rosenthal
[laughing] As only Charlie can.
- SBSteve Ballmer
So, so you did a Charlie episode, so you know... So we do the Q- we do our panel thing, the two of us, and then Q&A, and Charlie, you know, gets up to the mic. He's not moving super well, but he gets up to the mic, and, "Oh, Charlie, we can call on you." [laughing] And Charlie says, "Steve, you know, I'm wondering why you held onto your Microsoft stock when your partners over there didn't. I know you're not that smart." [laughing] I said, "No, Charlie, but I'm not loyal!"
- DRDavid Rosenthal
Wow.
- SBSteve Ballmer
I don't know why, uh, why Paul and Bill didn't hang on. I don't know. You'd have to ask them, but for me, it's, you know, it's sort of a from the heart kind of thing. And, you know, I think it'd be fine finan- it's not gonna, like, screw anything up financially. I mean, what's the worst thing that happens? You know, Microsoft goes to zero? Probably not. But even if Microsoft goes to zero, me and my family, we can live, we can give away money, we... You know, it's not gonna go to zero, and, and I'm okay either way. Any, any way it goes, I'm fine.
- BGBen Gilbert
And are the Clippers and the Intuit Dome fully paid off at this point?
- SBSteve Ballmer
Uh, the Clippers are fully paid off. I paid them off the day I bought them. Uh, that's not true. Uh, I didn't wanna sell stocks at the time, so I borrowed some money, which is long paid off. Intuit Dome, we borrowed some money against Intuit Dome, so I don't owe any money on it. Oh, that's not true. I owe some... I have some margin debt, uh, that I used to- but again, it's just a timing thing. I didn't wanna sell stock, so took some margin debt, which, as dividends come in, I'm reducing the margin debt. [chuckles] Uh, but the building itself has debt on it. Why? Because to sell the building, let's say something was to happen to me and Connie, uh, my wife, had to sell, sell it, it obviously has a lower val- uh, the buyer would have to come up with less cash because it has debt on it.
- DRDavid Rosenthal
Mm.
- SBSteve Ballmer
So call it worth X billion-
- DRDavid Rosenthal
Right, you just roll the debt over
- SBSteve Ballmer
... and it's got Y billion on debt on it, you're only selling it for X minus Y. You're not selling it for X, meaning the universe of buyers is bigger because it has debt on it. And oh, by the way, I happened to get the debt at a very good time, at a very good rate, so it's sort of a double value to a poten- you know, to a future buyer. So that's the reason we put debt on the building. Uh, and the margin debt was just a timing issue, if you will.
- BGBen Gilbert
I feel like I've done you, or we've done you, a great disservice by going into the Clippers-
- SBSteve Ballmer
Yeah
- BGBen Gilbert
... and Intuit Dome through the element of-
- DRDavid Rosenthal
The financial lens. [chuckles]
- BGBen Gilbert
Yeah. Uh, can I ask you-
- SBSteve Ballmer
Now, that I do not own for financial reasons. [laughing]
- DRDavid Rosenthal
Well, hey, I mean, it's-
- 2:31:25 – 2:48:42
Owning the Clippers: extreme accountability, business-model parallels, and Intuit Dome as a ‘product’
- DRDavid Rosenthal
It's a nice retirement fund. What's been the most surprising thing in your Clippers journey?
- SBSteve Ballmer
I'll give you two parts to the answer. First is, how the- I relate to that business versus the businesses I've known. Number one, there are more similarities than I ever thought. I mean, we do version upgrades just like you do. What's a version upgrade? You do major, major version upgrades over the summer. That's the draft and free agency [chuckles] and trades, and you do a minor version upgrade at the time of the trade deadline. [laughing] So that, you- it's, it's very similar.
- DRDavid Rosenthal
You got a six-month ship cycle.
- BGBen Gilbert
It's your, your service pack.
- SBSteve Ballmer
Yeah, a major-
- DRDavid Rosenthal
Service pack [laughing]
- SBSteve Ballmer
... and a minor release every year.
- DRDavid Rosenthal
SP1 and SP2.
- SBSteve Ballmer
And oh, by the way, you know how people like agile now development? Guess what? That's called changing the game plan. Per... You know, the coaches are always modifying in that sense, so it- it's a little bit similar. Ah, I never thought about that!... uh, the business is just like Microsoft. We sell both advertising, and that's called sponsorship, and we sell tickets.
- DRDavid Rosenthal
Mm-hmm. Software licenses.
- SBSteve Ballmer
Software li- oh, no, that's like software licenses, and we have an OEM business. That's called broadcast revenue. It's a hundred percent [laughing] it's called-
- SPSpeaker
Actually, it's more similar.
- DRDavid Rosenthal
Yeah, remarkably similar, yeah.
- SBSteve Ballmer
I mean, just in terms of business modeling. Um, we do have a union, that's very different. What that means in terms of the complexity through the collective bargaining agreement, it also covers things like what's max salary, what trades can you make, all that, very different. Uh, you actually, you're kinda re- you really are business partners with your, with your competitors. That's, uh, dis- different. I mean, you actually get together and talk to them. I never did that [chuckles] when I was at Microsoft. Uh, but you, you get together, and you talk to them, but you're trying to compete. Um, if you have somebody who wants to advance through their career, oftentimes the best way for them to advance, they have to go to another team. And we have a president of basketball. It's not an open job, and I don't plan for it to be an open job. I don't wanna lose anybody, but if, you know, uh, a lot of the career moves people make would be to other, other organizations. We, we don't like that, but we wanna have the talent everybody loves.
- DRDavid Rosenthal
Right. At Microsoft, your domain is always growing, and so there's always a-
- SBSteve Ballmer
The domain is growing or number of people. You can move people. Oh, you're an engineer, you, you- you're bored, you've worked on X, we'll move you to work on a different product, for example. It's different, the way you think about people, because primarily because of the union, but also, you know, just there's only 30 head coaching jobs. There just are. So if somebody wants to be a head coach, and they're not our head coach, they have to find a job someplace else. Again, not what we want, but the reality is we don't want people held back in their career. It's not like Microsoft, where I felt like I could always find a job that somebody should want. Uh, so that's, that's different. I'll give you, I'll give you another one to think about. You know, business likes to say, "Oh, we're accountable, we're agile, we're this, we're that." I've-- sports is so much more accountable-
- DRDavid Rosenthal
Hmm
- SBSteve Ballmer
... than business.
- SPSpeaker
Hmm.
- SBSteve Ballmer
It's like a joke. I'm being a bit extreme for f- for fun, but every 24 seconds, you get a report card. Basketball, shot clock. Every 48 minutes, and you can't say, "I'm gonna make it up next quarter. We missed, but I, I got it next quarter!" No, you lost that game, that game is on your loss column for the rest of the season. You cannot dig yourself out of that one-game loss hole. You can't. It's gone.
- DRDavid Rosenthal
And you can probably also be reasonably confident about each individual's contribution to that win or loss.
- SBSteve Ballmer
Well, now let, now let me get to that. Your customers know everything you know. [laughing]
- DRDavid Rosenthal
[laughing]
- SBSteve Ballmer
It's not like you can say, "Well, back in the lab, [chuckles] you wait till you see what we got in the lab." [laughing]
- DRDavid Rosenthal
[laughing]
- SBSteve Ballmer
No! You- every statistic we have, our customers have. You wanna know how many miles, uh, uh, James Harden ran last game? Comes out of the statistical systems. You can, you can find that out. If you wanna know how many pick and rolls we ran of a certain type and how they were guarded and how we did scoring against them, don't worry! You can read about it. You wanna look and see what the dynamics look like on the sidelines? You can just sit there and watch our players and say, "Oh, I don't know everything. I don't know what they're saying, but I can see their body language. Oh, so-and-so seemed really charged up. Oh, that's great. So-and-so cheers for their teammate. So-and-so seemed down." There's almost nothing. [chuckles] I mean, we get to watch practice. Our fans don't. But the level of accountability is so high. The speed is high. Think of teamwork. Teamwork, man, the... it's all on display. Not only is it on display, but you absolutely know you need teamwork. One star does not-- can't bail you out. You may have one star, but then the pieces have to fit around the star. You know, it's just, it's just kind of the way it is. You can't ta- you know how businesses, you say, "Okay," everybody wants to talk about teamwork, and in a lot of places, that would mean: "Hey, Ben, you know, I, I don't know. We could work better on this." And then Ben can say, "Uh, your team's doing things wrong," and then we can get back together and talk a little more, and then a month later, we can talk about it some more. Uh, probably you've seen this in some organizations.
- SPSpeaker
And then at some point, we'll talk about it as if it were a great collaboration-
- SBSteve Ballmer
Right
- SPSpeaker
... between our two teams.
- SBSteve Ballmer
And you know what has to happen in our business? Every minute.
Episode duration: 2:59:19
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Transcript of episode CYC49_aeop0
