What were you listening to before we hopped on?
It's your walkout music.
New Beyonce.
Oh, new Beyonce.
I haven't heard it yet.
How is it?
I really like it.
Nice.
I think it is reductionist to call it country.
Ah.
I was appropriately enough listening
to Start Me Up through the ages.
Of course you were.
But I kind of feel like David Rosenthal move
is that you might've been listening to Start Me Up
whether we were doing Microsoft or not.
That's a very squarely in your genre song.
The Stones though, man, like it's crazy.
They're in their 70s, 80s.
Amazing.
Man.
I hope we're in our 70s and 80s dancing on stage.
Season 126.
Yeah.
All right, let's do it.
Let's do it.
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 it down, say it straight.
Another story on the way.
Who got the truth?
Welcome to season 14, episode four of Acquired.
It's a podcast about great companies
and the stories and playbooks behind them.
I'm Ben Gilbert.
I'm David Rosenthal.
And we are your hosts.
We often remark that selling software
is the best business model of all time.
Well today, finally, we tell the story of the company
that created that business, Microsoft.
Finally, we're like 10 years into Acquired.
We're finally doing it.
It's been daunting.
We wanted to do it for a while,
but it takes some chutzpah to tackle Microsoft.
I'm so fired up.
We're ready.
It's time.
Well listeners, Microsoft today is sprawling and massive.
It is the world's most valuable company
worth over $3 trillion.
They have 49 years of history
making software for consumers and enterprises,
making hardware, gaming systems, gaming studios,
Windows apps, iPad apps, Mac apps, operating systems,
mobile operating systems, MP3 players, search engines,
cloud computing services on cloud computing,
programming languages, development environments.
The list goes on, but it did not start out that way.
Today, we will tell the story
of the desktop software company.
Before the enterprise, before IT,
before the internet, before being a trusted partner
to governments around the free world.
And really before people even knew
what to do with personal computers.
This is the story of a bunch of ragtag geniuses
in their twenties pushing what was possible.
Welcome to Microsoft, the PC era.
Well listeners, if you wanna know every time
an episode drops, you can get hints at the next topic
and follow up, you can sign up at acquired.fm slash email.
Come talk about this episode with the community
at acquired.fm slash Slack.
If you want more from David and I,
you should check out our second show ACQ2
where we interview founders, investors, and experts
often as a deeper dive into topics we cover on the main show.
And before we dive in, we wanna briefly thank
our presenting sponsor, JP Morgan Payments.
Yes, just like how we say every company has a story,
every company's story is powered by payments
and JP Morgan Payments is a part of so many journeys
from seed to IPO and beyond.
So with that, this show is not investment advice.
David and I may have investments in the companies
we discuss and likely all of you
if you hold any index funds and the show is
for informational and entertainment purposes only.
David, where on earth do we start the Microsoft story?
We're right down the middle on this one.
We're gonna start in 1955 in Seattle, Washington
with the birth of Bill Gates III
or Trey as he's known growing up.
It's so confusing cause his dad is the second
but he goes by senior and Bill is junior
slash the third slash Trey.
So Bill in 1955 is born as the second of three children
to Bill and Mary Gates.
Now Bill Gates senior, his father is from Bremerton,
the Navy town just across the sound from Seattle
where he grows up in a family that owns
and runs a furniture store there
a long way from the software king of the world here.
Now Bill Gates senior slash the second
after high school he joins the army during World War II
serves during World War II and then he goes
I presume on the GI Bill to the University of Washington
where he's the first member of his family to go to college
and there he gets an undergrad and a law degree
in four years and then decides to stay in Seattle
with his new family and become a practicing attorney.
Now I say family because at the UW
he meets and marries one Mary Maxwell and Mary
I don't know how to put it other than that she is a force.
Yes.
So Mary's family had founded national city bank
and her father was a senior executive
at first interstate bank which later became
a big part of Wells Fargo.
Now Mary despite being the daughter
of a successful business family in that day and age
was not cast aside like so many other daughters
we've talked about on the show.
New York Times, Hermes where it was sort of passed
to the son-in-law to continue to run the business
that was not the case with Mary Maxwell.
No so after she graduates from the UW
she becomes first the president of the Seattle Junior League
and she starts joining nonprofit boards in Seattle
as a very young woman.
She joins the Seattle Symphony Board,
the Chamber of Commerce, the Children's Hospital,
the King County United Way
and she's such a force on these boards
that she starts getting asked by her fellow board members
to join their companies boards too
like the corporate boards they're so impressed with her.
So first she joins the board of first interstate bank
the bank that her family is a part of
then she joins the board of Cairo Television in Seattle.
She even ends up joining
the Pacific Northwest Bell Telephone Board.
That's right part of the AT&T breakup.
Yeah, eventually she joins the board of regents
of the University of Washington
and the whole entire National United Way Board.
So she never works full-time in a corporate setting
but it is not an overstatement at all to say that
Mary Gates became one of the most powerful business people
in the Pacific Northwest period.
Absolutely and Bill Gates senior
was the prominent attorney in the region
and so it's quite the power couple.
Ben, it's like you're reading my script here.
Yes, we don't wanna give Bill senior
the short shrift here either.
He becomes a superstar lawyer
and he becomes a co-founding partner
of the firm Preston, Gates and Ellis
which today I didn't even realize this
till I dug in the research.
That is K and L Gates today
one of the largest law firms in the world.
Yep.
And another fun fact that you probably know
about Bill Gates senior,
but we got this being acquired talk about
do you know what corporate board
he joined later in life?
I do not.
Costco.
Ah, of course.
Bill Gates senior we should say to basically galvanize
the entrepreneurial community in Seattle.
He started the tech Alliance.
He was a huge angel investor.
He really did organize, you know, angel investors
people who wanna put high risk capital
to work into startups.
And you know, his heart was there obviously
through his law practice
long before Bill Gates the third
became the prodigy he became.
Totally.
And that's the point we wanna land here
is for young Bill Trey growing up here
he's growing up in like a pretty unique household.
He would later talk about being like nine or 10 years old
and most nights at dinner at his house
there would be a CEO or a Senator or a governor
or somebody who's just over for dinner
and Bill would sit there
and absorb the business conversation.
You know, it's like the Hermes family
the Dumas family that we talked about on that episode.
You know, this whole thing it makes me think of Paul
the main character in the Dune movies in the book
like he's kind of bred from birth
to be this incredible business mind.
I mean, at age 13 with his best friend
who we will talk about very soon
he brought up the idea
I wonder what company I will be the CEO of when I grow up
what industry will I go after?
What problems will I tackle?
It wasn't a question of if, but which.
Yes.
And it just turned out that he would be the CEO
and founder of the biggest company
in the biggest industry ever to exist.
The other thing that we gotta say about Bill growing up
he is insanely competitive.
So he did not and does not like to lose at anything.
And that is putting it mildly
whether it's sports or swimming or computers
or school or the classroom.
There's a quote in one of the books we read
from a childhood friend of his who says
everything Bill did, he did competitively
and never simply to relax.
I think this used to be more than today.
There's kind of this image of Bill Gates
that he was a computer nerd
that he was like this shy little skinny kid
and the way he looks doesn't help this
but that is not the case at all.
This guy had a competitive fire in him
I'm sure still does like none other.
Well, both things can be true.
He was the number one math student
in the state of Washington.
He was a nerdy kid and a brilliant kid
and also fiercely competitive.
His childhood friend and co-founder of Microsoft
Paul Allen would say about him
you could tell three things about Bill Gates pretty quickly.
He was really smart.
He was really competitive.
He wanted to show you how smart he was
and he was really, really persistent.
That sounds about right.
So famously speaking of Paul and where Bill and Paul meet
when Bill is in seventh grade
his parents enroll him at the lakeside school
which now I think is internationally famous because of Bill
but it is a super rigorous college prep school
middle school and high school
and Bill ends up writing the scheduling software
for class scheduling
that he puts himself in the classes with all the girls.
Like funny, but yeah, like this Bill 13 years old
seventh grade lakeside, this is when it starts.
Obviously Microsoft doesn't start
but during that year Bill is 13 years old.
The lakeside mothers club raises money
to buy the school a teletype
and connect it up and rent computer time
from a deck PDP 10 that is located in downtown Seattle
and owned by the branch office there of General Electric.
Now, probably a bunch of you are like
I have no idea what any of those words mean.
So we gotta set some context.
This is 1968, 1968, the Beatles, Vietnam,
the summer of love.
This is not the computer age.
2001, a space Odyssey had just come out.
Nolan Bushnell has not founded Atari yet.
Bob Noyce and Gordon Moore are only just leaving
Fairchild Semiconductor to start Intel.
Silicon Valley still dominated by Lockheed.
There is no such thing as a microprocessor.
The United States would land on the moon one year later.
Totally.
The way computing worked back then
it was basically still the any act days.
Like a computer meant two things.
It either meant a massive room sized machine
that had about the computing power of a calculator
or it meant a human.
People talked about computers as humans.
Do you ever see the movie hidden figures
about the black women who did the calculations?
Those women were the computers.
They were called the computers, yes.
Because they would sit there and compute.
This was a totally different era.
So the idea that a 13 year old kid in this high school,
this middle school would get access to share computer time.
I can't imagine there were many other secondary schools
in the country that were doing this.
Yes, this is a very early place to make the point.
Microsoft is the result of tremendous intelligence,
brilliant strategy, fierce competition,
and an unbelievable amount of luck.
Bill Gates was born in 1955,
the same year as Steve Jobs to come into adulthood
just as the personal computer wave is starting.
And the fact that he was at a middle school
and had this much privilege where he could get access
to a PDP 10 at this point in his life
to help him understand how important computers would become.
I mean, there are dozens of people in America
who are as well situated as Bill is,
and that might be overly generous.
He and Paul got a sneak peek into the future
there at Lakeside.
Now, it's funny, you said the personal computer era.
We are so far away from the personal computer here.
I mean, we got us at the stage.
What is computing?
I mentioned any act in these room size things.
Computers did not have screens.
You didn't have cursors.
You didn't have lights.
You didn't have pixels.
Everything was done on a teletype.
They kind of looked like typewriters,
and they were wired up remotely
either in the same facility or like what Lakeside is doing.
You could be remote.
I mean, it's almost like the cloud today.
And it called over a phone line that was the teletype.
Yeah, exactly got wired over the phone line
hooked up to these mainframes.
And so you typed commands into this teletype,
and then the response came back over the phone line
or over whatever cable from the mainframe.
And it got printed out on a spool of tape on the teletype.
But this is power that normal 13-year-olds
don't come anywhere near accessing.
Yeah.
What is the computing market at this time?
It is pretty much,
we'll come back to the pretty much in a minute,
a hundred percent dominated by IBM.
Oh, yes.
IBM, big blue, big iron is what it was referred to,
like the products that they would produce.
They were the industry.
Yes, Ben Thompson has a fantastic quote on this.
He has an article called,
what is a tech company?
And here's his comment.
50 years ago, what is a tech company
was an easy question to answer.
IBM was the tech company
and everybody else was IBM's customers.
That may be a slight exaggeration, but not by much.
IBM built the hardware at that time, the System 360.
They wrote the software,
including the operating system
and the application and provided services,
including training, ongoing maintenance
and custom line of business software.
Yeah, System 360 was a line of solutions,
I would say offered by IBM.
And it consisted of the thing,
the room size thing, the mainframe and the software,
which was System 360 and the consulting
and the implementation.
You couldn't just call up UPS and forklift
one of these things into a company and expect it to work.
No, you got to operate this thing too.
It's like ASML machines.
You don't just go ship them off to TSMC
and say, good luck making semiconductors.
It's a full solution, full service thing.
But an important thing
that was also happening this year in 1968
was that IBM was undergoing some antitrust scrutiny
over that huge bundle that I just told you about.
I mean, doesn't it smell like antitrust?
They do everything from the hardware to the software
and the operating system, the service, the support.
They are the whole market.
They're starting to get concerned.
And so proactively, they unbundled hardware,
software and services,
and they started selling those separately
for the first time, which was not a problem at first,
but what it did was it cracked the door for customers
to say, oh, I can buy hardware from IBM
and software from someone else.
And other people were not exploiting this,
but it was possible.
Yeah, interesting.
It cracks the door for Microsoft like 15 years later,
20 years later, yeah.
Yes, but this is where the seeds are sown
of what is the exploitable opportunity
when Bill Gates is ready to do something.
Interesting.
Now, back to the timing thing
for Bill and Paul and Microsoft.
I mentioned when we were setting this up
that there's something else to talk about here.
IBM was facing a disruptive force at this moment.
I think probably for the first time in its history,
certainly in the computing era of IBM's history,
and that was the Digital Equipment Corporation
or DEC, noticed when we said earlier
that Lakeside is renting computer time
from the General Electric computer in downtown Seattle.
I said, it's a DEC PDP-10.
It's not an IBM product.
So what's DEC?
They're the mini computer company.
Mini in quotes.
Yeah, mini, quote, unquote.
Mini meaning it was the size of a closet,
not the size of like a room.
It's all relative.
DEC had been started by this guy, Ken Olson from MIT.
And what they did, he had this brilliant insight
that would play out over and over and over again
in technology that I'm not gonna go compete
with IBM head on.
I'm not gonna make ENIAC.
I'm not gonna make mainframes.
But computing has advanced enough
that there's an opportunity to make something smaller,
less powerful, more sort of toy-like.
And there's enough demand out there
that I think they can find some new markets
for people who will buy those types of computers.
And it's smaller businesses, but in particular,
it's like branch offices of the big company.
So I am sure General Electric bought lots and lots
and lots of IBM mainframes and products
at their headquarters.
But the GE field office in Seattle,
they're not gonna truck in a mainframe.
And in 1968, Seattle, I mean,
this is like a provincial little town.
I'm standing here right now.
It's a major city and a huge economy in the United States.
But at the time, kind of a podunk,
forgotten, sleepy, faraway place.
Microsoft would go a long way to changing that over time.
And we should say,
this is the classic low-end disruption playbook.
I mean, this is what Clayton Christensen was talking about.
Going from mainframe to midi computers,
I'm gonna make something that's worse for most things,
but better for some new things that new customers
and new markets are gonna care a lot about.
And IBM's gonna look at it and go,
that can't do any of the things
that are important to our customers.
And that's exactly why it works.
And specifically, why are they not gonna care about it?
I don't know exactly what an IBM mainframe system,
system 360, 370, whatever costs.
I'm imagining tens of millions of dollars
all in total cost,
maybe hundreds of millions of total dollars
to run a system like that and buy it.
So the first deck machine when it comes out,
the PDP-1 a few years before this time,
it was priced at $120,000.
So like an order of magnitude, maybe two,
below a system that you would buy from IBM.
Obviously, still a long, long, long way
from the personal computer.
People are not buying these things for their houses.
But yeah, GE will buy one for the field office in Seattle,
or universities will buy them for research,
for their students, for their professors.
And so DEC kinda creates a new market for computing.
And Bill, he's so studied in business history.
The founder, Ken Olson, Ken is Bill's hero.
He totally looks up to DEC and what DEC's done.
Now, the DEC and mini computer UIs
is still the same as the mainframe.
You're still using a teletype.
There's no innovation in terms of what the computing is
or how you use it.
It's just cheaper and more people have access to it.
So back to Lakeside and the Mothers Club
raising money for this access here for the school.
Bill, remember, he's just started, he's in seventh grade.
And Lakeside is a middle school and a high school.
The high school is actually in a separate building.
The computer room that gets installed with the teletypes,
that's over in the high school.
But Bill, he doesn't care.
He gets exposed to it, I think, in a math class
one day and he's like, oh, I'm hooked.
So he goes over, he's hanging out with the high schoolers,
teaches himself how to program.
And pretty quickly, he becomes known
as one of the very best programmers there.
And he and three other kids form what they call themselves
the Lakeside Programmers Group.
And one of his buddies who he forms it with is, of course,
the high schooler, I think the 10th grader at the time,
Paul Allen.
There is a fantastic photo listeners that we will tweet
of Bill and Paul sitting in the computer room at Lakeside.
And Bill, I think he's like 13, 14.
He looks like he's about eight.
I think on the wall, there's this almost like
printed out magazine thing that says the bug slayer
that they've hung up over the wall.
It's amazing.
So these high school kids,
they start the Lakeside Programmers Group.
They call it the Programmers Group
because they are programmers.
This is another super important thing to learn.
To use a computer at this time meant to be a programmer.
There was no packaged software that you bought.
The software that IBM was selling was the operating system
to make the machines actually function.
And it was the programming languages
that you could then program on,
but you weren't clicking around and using Excel
or like pulling up apps.
Everybody who used a computer wrote their own software.
Right, there was not this multi-sided network
of you've got developers making applications
and then you've got users of those applications.
No, everybody who used a computer was a programmer.
So the goal of the Lakeside Programmers Group,
remember Bill is this business prodigy,
is to use their very valuable and very rare skills
as programmers at this time to make money, do a business.
So turns out at the same time,
I mean, the coincidence is here, just crazy.
There is a local startup
coming out of the University of Washington
called the Computer Center Corporation or C-Cubed.
And the business plan behind C-Cubed
was that they were gonna get a bunch of decks,
a bunch of PDP, eights, tens, 11s, whatever,
and they were gonna be like AWS.
They were gonna just be a computer time sharing company.
So C-Cubed hires the Lakeside Programmers Group,
these kids, to come in and find and document bugs
in the system and they're gonna pay them
directly in computer time.
So when they come into C-Cubed,
they learn Fortran, they learn Lisp,
they learn machine language for the PDPs.
Back at Lakeside, they were just using Basic,
the programming language.
Which is reasonably high level in terms of how abstract it is.
Like you're not writing machine language,
you don't have to know how to address
memory and registers and all that.
It reads kind of like English,
you know how to add numbers together.
It's not a elegant language
and it's a very verbose language,
but if you sort of look at it with your eyes
as a person who speaks English and knows basic math,
you're like, I kind of understand what this program does.
So there's a meaningful amount of translation
done by a basic interpreter that takes you
from the basic code you have to write
to what is actually running on the machine.
Yes, but Basic, we don't wanna give the impression
that it is just Basic or just for kids.
No, it's widely used.
It's gonna become hugely, hugely important.
It is both the gateway programming language for everybody,
but it's a real programming language
and a lot of stuff is done in it.
It's sort of the Python of its day.
I think the way Python is now,
where you sort of joke that Python is so flexible,
you can accidentally write a program by writing English
and it can kind of forgive a lot of mistakes
and it reads kind of like English.
It's a reasonable parallel to draw it way back
when with Basic, where you say, look,
you can understand it as a layman,
but also it's used in a broad set of business applications.
Totally.
When Bill and Paul and their buddies come into C cubed,
they're now getting access to learn
real hardcore systems programming languages,
including machine code for the PDP-10.
They're becoming pretty prolific engineers here.
They're handwriting assembly code.
Yes, and they're getting mentored.
One of the executives at C cubed
is a guy named Steve Russell.
Did you find this, Ben?
Do you know about this?
No, uh-uh.
This is amazing, you're gonna die.
Steve Russell was the guy who wrote Space War
when he was at MIT on the first PDP, the PDP-1.
He's like a computer science legend.
Nolan Bushnell told us about that.
Yes, Space War was the first video game,
first computer game ever written.
It was written as a fun side project
by some MIT engineers in the early days of DEC.
And then that became Nolan Bushnell's inspiration
for starting Atari and Pong and Space debate.
Yeah, Steve Russell, that guy, he mentored Bill Gates.
And he was here at the University of Washington?
He had come out to the University of Washington
and then left and was part of one of the execs
starting this company.
C cubed, wow, that's like a mile from my house.
Right, crazy.
Wow.
So after a little while at C cubed,
all of this real expertise that these kids are getting
leads to another opportunity
at another timeshare computing company
based down in Portland.
They ask the kids to write a real piece of software,
to write a payroll billing program
for all their clients that are using the timeshare system.
And Bill now, who's the de facto leader of this group,
he negotiates a deal with the help of his dad,
Bill Gates Sr., a prolific corporate attorney in Seattle,
that rather than just being paid hourly for their time,
they're gonna get a royalty on the revenue
that their client makes on the software.
I can't believe it, these kids are teenagers,
they're figuring out the whole software business model here.
They end up making at least $10,000 from these royalties,
which the average household income in the US at the time
was below $10,000.
These kids are rolling in money.
So the next year, Paul graduates from Lakeside
and goes off to college at Washington State.
But he and Bill decide to team up on a new venture
that they're gonna do together called Traf-O-Data.
They've identified a market opportunity
and that opportunity is reducing traffic.
Yes, so the business plan is that municipalities
count cars that go through intersections,
use that to make decisions
about how they're gonna do city planning.
Bill and Paul are like,
we can take this new thing that's coming out of Intel,
a microprocessor, which is promising to be a full computer
on one chip, and we can use that,
we can build a machine that is gonna be a computer
and it'll process and analyze that data,
and then we can sell it to governments,
like great, big market.
And listeners, are you kind of sensing
what's happening here?
Mainframe, mini computer, microprocessor,
we kind of have to keep using smaller and smaller words
to represent the fact that the computer
is getting smaller and smaller here.
It wasn't until we started doing research
for this episode that I finally realized,
oh, microcomputers, which is the original term
for the personal computer for the PC,
it was called microcomputers before PC caught on,
they're called microcomputers
because they're based on the microprocessor.
Yes, absolutely.
It's not just that micro is smaller than mini.
And it is funny that it kind of stopped there,
the computers that are sitting on all of our desks
are microcomputers.
Right, yes.
So while they're waiting for the AD-08,
this new first microprocessor from Intel to come out,
or at least for them to get access to it,
they want to get a head start
on programming their traffic data machine
and programming this microprocessor.
So Paul's like, I got this.
I can find a way to make this happen.
He takes the PDP-10 at Washington State
and he writes a whole emulator program
to mimic the instruction set for the AD-08 from the manual
and they get a full emulator up and running
and they can code even without the microprocessor
actually being there and having access.
It's just like Nvidia, you know,
like when Jensen was like,
no, we got to build an emulator and simulate this
and then we're going to ship it site unseen.
They're doing the same thing.
It's funny, in many ways at this point in history,
getting a manual was actually much more valuable
than getting the processor itself
because the processor would arrive
and unless there was documentation,
you would have no idea how to interact with it
to take advantage of its power.
But if you had a manual, well, sure,
you couldn't actually test the stuff you wrote for it
on the hardware.
But if you wrote an emulator
on a bigger, more powerful computer
that could sort of mimic the computer
that you're actually targeting,
you could go years before actually ever running the software
on the target device
and just work off of what the manual says
as long as the manual is correct
and matches how it actually works.
Yes, and this is going to become very important
to Microsoft in just a second.
Yep.
So traffic data is not a huge success.
I think I read a few places,
they make about $20,000 in revenue from it.
So again, great money for high school and college kids,
but not world changing stuff here.
This is not what Bill aspires to
for the company he's going to start.
But Bill and Paul are getting experience
with the microprocessor.
Bill actually has the idea for Microsoft
when they're working with it.
He's like, oh, this is a computer,
why don't I go off and write an interpreter for basic here
and we can sell the basic interpreter
for the microprocessor and build a big business.
The 8008 just wasn't powerful enough yet to do that.
But spoiler alert, that totally becomes Microsoft.
The seeds of Microsoft are selling language interpreters
for new processors, new hardware, new computers
that enable you to write familiar programming languages
on that new hardware.
Yep.
And Bill and Paul are not the only ones
having this insight here too.
Another Seattle guy named Gary Kildall,
who they had intersected with,
who they knew from CQ in the University of Washington,
he kind of had the same idea here.
We're going to bring up Gary
and his company digital research a little bit later.
Yeah, he cared a little bit less about programming languages
and a little bit more about operating systems.
So that's how they diverge for the few years here.
Yep.
But Bill and Paul, they absolutely see the vision
for what this can grow into and become.
Bill has a great quote.
Paul and I had talked about the microprocessor
and it was really his insight
that because of semiconductor improvements,
things would just keep getting better.
I said to him, oh, exponential phenomena
are pretty rare, pretty dramatic.
Are you serious about this?
Because this means in effect
that we can think of computing as free.
It was a gross exaggeration,
but it was probably the easiest way to understand
what it means to cut costs like that.
And Paul was quite convinced of it.
Yes, is this in the Smithsonian interview?
Yes, so good.
It's so good.
This quote is incredible.
Because basically Paul Allen brings up Moore's law
to Bill Gates.
They don't use that language there.
But in 1971, that is what's happening.
And for Paul, this is just an observation of,
hey, there's an exponential thing happening here.
Seems like it's gonna keep happening.
It's been happening.
And Bill's shaking and he's like, what?
Exponential phenomena don't just happen.
That's incredibly, incredibly rare.
And immediately gets Bill's wheels turning on.
What does this mean for the world?
If that's actually true, we need to act
and do something profoundly different
than anyone's ever done before
because this enables new things
that no one ever thought could be possible.
This moment is the genesis of the vision for Microsoft.
Even though Bill doesn't say the words in this quote,
the vision of a computer on every desk in every home,
that's the famous part
and then the part that got left off later
when the DOJ started sniffing around
was running Microsoft software.
But that is the vision here.
And it is crazy at the time.
Like a computer on every desk and in every home,
Bill sees that this is what this exponential phenomenon,
what Moore's law means, that that is going to happen.
We're still in the era of teletypes.
Nobody else sees this.
And it's also the reason why Microsoft is going to form
into such a different type of company
that's ever come before it.
Why they can break all the rules.
Why they can sell just software,
even though that's never been a thing before.
Why their business model can be so much different
than everyone else's business model.
I mean, in prepping for this episode,
we got to talk with Pete Higgins who ran Excel
and was an executive overseeing office
for a long time in the early days.
And he had this great quote to us,
which was, computer on every desk was wackadoo stuff.
People laughed at it.
It was absolutely wild.
People thought, I don't know, maybe one in 10 people
in their finance group or something
will have one at some point.
This is the profoundness of an exponential decrease
in price or increase in power of computing
is it's going to become universal.
So all that said, even Bill and Paul know the 80-08,
it's not there yet.
It's not powerful enough to really be
a general purpose computer on a chip,
but they know it's coming.
So in the fall of 1973,
Bill goes off to college at Harvard famously.
It's funny, at Harvard, kind of like Jim Simons
that we talked about at MIT on the RENTEC episode,
Bill thinks he's going to be like a world-class mathematician
and set the world on fire.
It's literally a quote from Paul Allen.
So Bill was the number one math student
in the state of Washington.
And he gets there and he does this theoretical math class,
Math 55, and gets a B.
And Paul says, when it came to higher mathematics,
he might've been one in 100,000 or better.
But there were people who were one in a million
or one in 10 million, and some of them wound up at Harvard.
Bill would never be the smartest guy in the room.
And I think that hurt his motivation.
He eventually switched his major to applied math.
Yes.
So while Bill's at Harvard,
he's also doing a bunch of the typical college kid stuff.
He's playing poker, he's cutting classes,
he's making friends.
And one of the friends he makes there
is a kid down the hall from him named Steve.
Steve, bomber.
And bomber, even everybody knows bomber.
He's kind of everything that Bill is not.
He's super social, he's super outgoing.
He's in a final club, which is like a big thing
in the social scene at Harvard.
He's gregarious.
Anyone who's ever met Steve or seen a video of Steve,
you are well aware that this man has presence.
But the thing that people don't know about him
is he is so unbelievably analytical.
Steve is the guy that outscored Bill Gates
on the Putnam exam.
Which is the annual math competition for college students.
Yeah, Steve isn't a programmer,
but he is every bit the mathematician that Bill Gates is.
And that is one of these things where I think
when people try to set it up as well,
you know, you've got the brilliant programmer genius
and the marketing guy.
It's just like, those are the roles they took.
But I think when you're getting a sense
of who the original crew was at Microsoft,
they were all brainiacs
and they were all wildly analytical.
So then in the spring of 1974, Bill's freshman year,
Electronics Magazine publishes big news
about a new Intel chip, the next generation,
the next turn of the crank on Moore's law, the 8080.
And in Bill's words here,
all at once we were looking at the heart of a real computer
and the price was under $200, we attacked the manual.
I told Paul, deck can't sell any more PDP-8s now.
It seemed obvious to us that if a tiny chip
could get so much more powerful,
the end of big unwieldy machines was coming.
Yep.
And this is really where Bill Gates commits to computers
to be his life's work.
I think what's often lost in the story is,
Bill, even though he was good at computers
and spent tons of time programming computers,
he never fancied himself a computer guy
until this moment in history.
He went to Harvard because he felt like,
hey, if I ever wanna be a lawyer or something else,
like they've got a lot of great programs there.
And this was the moment where I think
it really clicked for him that I'm just in the middle
of the right place at the right time with the right skill set.
And this is my way of having the most impact on the world.
So they think, okay, what's clearly gonna happen here
is all the big computer companies, IBM, DEC,
the big Japanese computing companies, they see this,
they're gonna get into this business.
They're gonna make machines.
They're gonna make microcomputers.
Surely they will jump on this opportunity, right?
If it didn't destroy their existing business model,
sure they would.
Exactly.
So Bill and Paul kind of are sitting around waiting
through 1974 and 1975 and like,
hey, when are the 8080 computers gonna come out?
Where are they?
It's just crickets.
Paul is so convinced that the revolution is coming
that he actually drops out of Washington state,
moves to Boston to be close to Bill
so that they can be ready when it happens.
And that summer, they both get summer jobs
at Honeywell and his programmers.
Paul stays on into the next school year
when Bill goes back to school.
He's just like waiting, waiting, waiting.
And then in December, 1974,
Paul is walking across Harvard square
and he sees in a newsstand
the January issue of popular electronics
on whose cover is the all-tier 8800,
the world's first real honest to God
commercially available for sale microcomputer.
And the legend has it that Paul grabs the magazine,
runs over to Bill's dorm, throws open the door,
throws the magazine on the desk and is like, it's here.
And Bill just says, oh my God, it's happening without us.
We need to get on this right now.
Well, it's so funny he thinks they're already behind
because clearly they're not.
History would show, I think Bill Gates even says
we might've actually started a year or two too early.
The market actually hadn't materialized yet.
And the funniest thing is the starting gun
went off and Bill and Paul ran
and everyone else is still standing around.
And this is it.
This is the moment the revolution is here.
Microsoft is about to be founded.
But first, this is a great time
to thank our presenting partner this season,
JP Morgan Payments.
Yes, just like Bill's vision of Microsoft
to put a computer on every desk and in every home,
JP Morgan has a vision for making payments,
real time, 24 seven, everywhere in and every currency.
So, JP Morgan has experienced
a massive digital transformation
and is now much more than just a global bank.
They invest $15 billion a year into technology and R&D.
So with JP Morgan Payments,
you are getting their history of service,
stability and scale, but also innovation and new technology.
And scale is really the key word here.
Every episode we talk about Hamilton Helmer's seven powers
and boy, does JP Morgan have scale economies.
What's unique about their position in payments
is that they can make massive infrastructure investments
that benefit their customers in the near term.
In addition to the long-term technology bets
like blockchain or quantum computing,
since they move $10 trillion a day in 160 countries,
these investments create a lot of shared value
across their large customer base.
Yeah, not to mention the second
of the seven powers, network economies.
Yep, if you're a JP Morgan Payments customer,
whether you're a startup or a Fortune 500,
you can access their payments partner network.
This is a set of third-party integrations
across virtually every industry and payment use case.
It makes it easy to discover what specific set of tools
are best for your business.
It's basically a B2B marketplace
that connects their clients with the broader payments
and technology ecosystem,
such as treasury management systems, ERPs,
point of sale hardware solutions, payment gateways,
and so much more.
And given JP Morgan scale,
you can imagine the value that comes with unlocking access
to their industry-leading partners and technology.
Let's take Visa, for example,
which listeners may remember.
We talked a lot on that episode about the power of a network.
Well, Visa works with JP Morgan
to provide global payment processing services.
And now through the partner network,
you can easily add Visa as an acceptance method
through a streamlined implementation
with consolidated reporting.
Other companies in the partner network include Oracle,
American Express, MasterCard, Accenture, and many more,
including friends of the show, Modern Treasury.
Whoo!
Across any industry,
the most successful companies we've talked about
are the ones who think and invest strategically
through a long-term lens.
Like Hermes, durability and reliability are paramount
for building hundred-year companies
that can reinvent and continue to grow.
And that is the case for JP Morgan payments.
Their history of trusted solutions
and investments in technology
bring clients and new FinTech companies together
to drive innovation and growth for businesses of all sizes.
So before we jump back into Bill and Microsoft,
who essentially wrote the modern playbook
on building platforms,
be sure to check out jpmorgan.com slash acquired
or click on the link in the show notes.
So David, they're like,
it's happening without us, what do they do?
Well, they do the natural thing
that two super excited,
ambitious, high octane college kids would do.
They call up the main phone number of Altair's manufacturer,
a company called MITS, M-I-T-S,
and ask for the president, a man named Ed Roberts.
And Bill and Paul, they get him on the phone
and they say, we have a basic interpreter
ready to go, ready to ship for the 8080 Intel chip
and we want to provide it for you, for your machine,
which of course they don't.
They don't have a single line of code written.
They don't have anything.
But it's a market test.
They want to know like, what's the response
if this were true?
Exactly.
And he's a bit of a character himself.
He says, okay, well, guys,
a lot of other people are calling me
and saying the same thing.
What I'm telling them, and I'm going to tell you too,
is that anybody who can come here to my office
in Albuquerque, New Mexico
and demonstrate a working version of BASIC on my Altair
will get a contract with us to distribute it
when they go on sale.
And so Bill and Paul, they say, okay, great.
We'll see you soon and hang up.
And by see you soon, they mean, let's go get to work.
And this is a big deal for MITS too, if this works,
because right now they've just announced a machine
for which you can't really do anything on it.
The hardware is powerful,
but they're not going to have a lot of customers
unless there's stuff you can do on the machine.
And a BASIC interpreter running on it,
it's quite valuable to then make the claim
you can program BASIC on our computer.
So they're very excited about this,
even though they're kind of playing coy.
I was going to talk about this in a minute,
but let's talk about what the Altair is.
What did they just announce in the magazine here?
This is, the Altair is the first mass market
commercially available personal computer.
Again, no screen or anything.
Yeah, does not have a screen, does not have a keyboard,
doesn't have a display of any kind.
What it does have is it has a set of 16 lights
on the front of the machine, like Christmas lights
and 16 switches.
And you can flip the switches to flip bits
and then the machine will respond
by lighting up different patterns of lights.
It doesn't come with any software, there's nothing.
That's all it is, 16 lights, 16 switches.
So in order to use it,
you got to hook up your own teletype,
you got to get the manual,
you got to hope that the manual is right
and you got to code to the machine instructions,
like literally the assembly language
for the chip inside, for the Intel 8080.
Now, back to the traffic data days
and Paul writing the emulator for the 8008
at Washington State, Paul's like, we got this.
I'll just write an emulator on the Harvard PDP-10
for the 8080 instruction set.
So he does the same thing again.
They get the manual and they have an emulator
and they write it against an emulator.
Yep, Bill writes the basic interpreter
and in a couple weeks, they've got it working.
And Ed's like, okay, come on out to Albuquerque.
So Bill and Paul, remember Bill still looks
like he's 12 at this point in time.
They decide that just Paul should go.
And does Paul have like a rocking beard at this point yet?
Oh, Paul is super 70s.
He is like into it.
And as we'll see,
he's gonna fit right in at Albuquerque in mitts.
So Paul gets on a plane, flies from Boston to Albuquerque
and in a total like epic legend moment,
they didn't have a bootloader written
for the basic interpreter.
So they had the basic, it was all written.
They'd done it on the emulator
and Paul's flying out with the tape, the computer tape
with the code of the basic interpreter on it.
But he's like, oh shoot,
we can't just feed that right into the machine.
There's gotta be a bootloader to load up this thing.
So he writes the bootloader on the plane.
On paper by hand, he is hand coding octal,
not even assembly language instructions.
Like he's hand coding in pure octal,
the instructions to load their basic interpreter program
into memory.
Yup.
So he lands in Albuquerque, drives out to mitts,
they load the bootloader onto the prototype Altair there
that loads up the basic interpreter and it fails.
It doesn't work.
Paul's like, oh shoot, let's try it again.
Let's try it again.
So they try it again.
You know, this is how early computing is.
Like it works the second,
like who knows what the bug was the first time.
It didn't change anything.
It just didn't work the first time
and it worked the second time.
So it loads up.
Paul writes in the instructions print two plus two.
It spits out four.
And by spits out, I mean like the lights light up
and say, you know, four.
And both he and Ed, their jaws are on their floor.
Paul's like, oh my God, the basic works.
And Ed's like, oh my God, the Altair works.
Like neither of them believed
this was actually gonna work.
And Ed actually has more eggs in this basket
than he sort of led on.
Because when Bill and Paul call and say,
hey, can you give us the teletype instructions?
He reveals they're actually the only ones
who called about that.
So everyone else who said they were writing a basic
never got far enough to ask,
how do we actually interact with your computer?
Yes.
So now is the time to say a few words about Ed
and it's like, what is this company?
Bill and Paul originally thought
that it was gonna be the IBMs, the decks,
the Japanese companies who are gonna make
the first micro computers.
MITS is about as far away from IBM
as you can possibly imagine.
MITS basically was a model rocket company.
Which Albuquerque is a great place to do that.
Ed Roberts, the founder.
He had been in the Air Force and stationed in Albuquerque
and that's how he got involved in model rocketry.
And the reason that they're introducing the Altair
and they made this big splash in the magazine was
this is a last ditch gambit to try and save the company.
So you got like a bankrupt model rocketry company.
And their little gambit worked
and got a couple of college kids to pounce.
And like, why did it work?
They had two things going for them
that really Ed I think probably personally made happen.
One, they got this splashy
popular electronics magazine cover.
That was through a relationship that Ed had.
And two, the sticker price was $397.
Which is about $2,300 in today, $20, $24.
Yes, that's a lot of money but the next cheapest computer
that anybody could buy at this point in time
is a computer, so the idea that somebody could buy
a computer for $400, I don't care who's selling that thing.
Like I want that.
So what did they get some kind of sweet deal from Intel?
Yes, so this is all Ed's doing.
The list price from Intel for the 8080 chip was $360.
So like I think this is part of what was deterring
the market of how would anybody sell a kit
that was affordably priced when so much of the cost
of goods would go to Intel with the processor deal.
He managed to negotiate a volume deal with Intel
to get 8080 chips at 75 bucks a pop.
Whoa.
And that was the key unlock.
That's like a 5X price reduction.
Totally.
Huh.
I wasn't able to find how that negotiation went down
or why like Ed Roberts in Albuquerque, New Mexico
got this sweetheart deal from Intel.
I mean, either the list price is like wildly wrong
or they were cutting deals all over the place
or one thing it could have been is just that
and I'm totally speculating, but chips are the ultimate
high fixed cost investment, low marginal costs
next to software.
You could imagine maybe Intel had already put all the money
into the fixed costs of spinning up the fabs
and was expecting a certain amount of market demand
and they weren't seeing it.
They were like, crap, we got to recoup our investment.
I don't know, lower the price,
let them just sell, maybe we'll make it up in volume.
I like that.
I have no idea, but that's a totally viable,
I think, train of thought here.
Either way, he gets the sweetheart deal
and not only does it make computer history
and enable and create Microsoft,
it saves the company of myths.
So they were on the edge of bankruptcy.
After the popular electronics article comes out,
they get 4,000 pre-orders in the first month or two,
which is one and a half million dollars in revenue,
cash paid upfront.
That is pure cash hitting the bank account.
That'll save a company.
And also just proves, hey, 4,000 people just paid cash
sight unseen for 16 lights and switches.
There's a lot of demand for a home computer here.
And at decent margins too, I mean,
if they're getting the processor for 72 bucks
and they're selling it for, what did you say?
397 dollars.
Yeah, so, I mean, everything else in there
is much cheaper than the processor.
So I don't know, depending on how much they have to give
to the sales channel they're selling through,
if it's retail or distributors.
I think they're selling direct.
I think people are just sending money orders.
Yeah, so it's decent margin business.
Unlike what the PC business would become over time,
they managed to have nice margins.
So Paul and Ed, they kind of hit it off.
Paul decides to move out to Albuquerque
to be close to the action here.
And he actually joins myths
as their vice president of software.
Now he's vice president of a software department of one.
He is the software department here.
Yeah, software department of one,
but he's got his buddy Bill Gates who is not employed,
but Bill's definitely working on software
for the Altair as well.
Yes, so Bill stays at Harvard,
but keeps cranking on enhancing the basic interpreter
and adding more functions and functionality
to the version of basic that they had just written
for the Altair.
And then once the school year is over,
he comes out to Albuquerque too for the summer.
Now the Altair is getting ready to ship with the basic,
the Microsoft basic included in it.
Bill and Paul kind of need to set up a company,
but Paul is an employee of myths at this point.
So what did they do?
They set up a partnership.
So the founding of Microsoft at this point,
Micro Dash Soft is a two person partnership
between Bill and Paul.
And as we record this, that was 49 years and one day ago.
So we are sitting here on April 5th recording.
That was April 4th, 1975.
And it is very funny to look back
at some of the original signatures
when Bill writes on letters.
It's Bill Gates, the general partner of Micro Dash Soft,
which is great.
I think it's actually a Paul Allen name
where he wants to put together a micro computer
and software and Bill's like, that's perfect.
We're immediately just going to run with it.
As it was a partnership,
originally they were going to call it something
like Allen and Gates.
And then they ultimately are like, no, Microsoft is perfect.
Microsoft has become like Kleenex, but like, no, no,
it's like Microsoft means microprocessor software.
I will say like, it's a nice clarifying North star
because it really draws the line in the sand and says,
we're in the software business.
And Gates makes this really clear to Paul Allen
who is often tempted to do hardware stuff.
And Bill is very hardcore about saying, no,
what we're uniquely good at in the world is software
and we should stick to that.
I also suspect Bill is starting to realize
there's an amazing business model here
if we can pull it off
where we don't have to make the hardware
and we can charge for every copy of the software sold.
But that insight I would say has not yet
fully materialized.
Yeah. Ooh, okay.
Well, let's talk about business model here in one sec.
First though on the partnership,
now again, we've been saying all along
that Bill is clearly the leader here.
They set up the partnership initially it's 60, 40 ownership.
Bill is 60%, Paul is 40%.
Later it gets changed to Bill is 64% and Paul is 36%.
So like, yep, Bill is the leader here.
Yep.
And Bill's case that he makes on that to Paul is,
hey, you took a job and you were doing this on the side.
I was all in and Paul's an agreeable guy
and 36 is still a nice percent.
And so he says, sure.
You know, in the long run here, everybody gets,
so it's all sort of a rounding error.
But to that point, back to the business model.
So once the partnership is set up,
they sign an exclusive licensing arrangement with MITs.
This is super important.
This is a big lesson that young Bill and Paul
are gonna learn here.
So MITs gets exclusive license to the basic interpreter,
to the basic as they call it for the 8080.
And MITs is the one that can then decide
whether to sub-license the basic
out to other companies or not.
Essentially this is a distribution deal with MITs
where MITs becomes the exclusive seller and distributor
of Microsoft's basic.
Microsoft doesn't have any direct sales control here.
That's gonna become a big, big, big issue.
And the terms of the deal are Microsoft is to get $30
for each copy of basic that MITs sells,
plus 50% of the revenue that comes
from these sub-licensing deals that MITs may or may not do
with other companies who wanna use the basic.
Which, why would they ever do any sub-licensing deals?
Like, why would you give it to your competitors?
Well, that is a really good question, Ben.
So let's just round that part of the revenue to zero.
Yeah, this is a big, big, big diverging of interest
between Microsoft and MITs.
And the kicker on this contract
is that the total amount of lifetime revenue
that Microsoft can make from the basic from MITs
is capped at $180,000.
Huh.
So, and in MITs really have the upper hand in this deal.
Or phrased another way.
It's, we will give you $180,000
for you to hand over exclusive rights
to all that cool basic stuff you just wrote to us.
But if we sell fewer than X machines,
we're actually gonna pay it out to you on a prorated basis
at $30 a pop, rather than giving you the full 180K.
Yeah, that is another way to frame it.
So definitely a great deal for MITs.
On the other hand, what are Bill and Paul gonna do here?
Right, kind of a great deal for them too,
given the position they're in.
Right, MITs is the industry.
Yeah.
Now, there is one very, very important clause
in the contract though, protecting Microsoft's interests.
And that clause is that MITs must use its best efforts
to license, promote, and commercialize the basic,
broadly in the marketplace.
And that any failure to do so by MITs
would be grounds for termination of the contract
by Microsoft.
Hmm, thank God Bill's dad is a lawyer.
Indeed, indeed.
So the Altair comes out for sale later in 1975.
Microsoft does $16,000 in revenue that year from there,
$30 a pop, the basics that are getting sold
with the Altair, which is great,
especially the first year that they're starting.
And the next year in 1976,
everybody's so excited about this new market,
the vision that's happening, the demand, the Altair,
the sales that Paul Allen resigns from MITs
to join Microsoft full-time.
Bill drops out of Harvard officially.
He moves to Albuquerque, they're all in on this.
But for the year in 1976,
Microsoft's revenue is still only $22,000.
So it was 16,000 the year before, 22,000 in 1976.
Not a high growth company.
This is less than they were making in high school.
Like what is going on here?
One is sort of like MITs is the one at the controls of sales,
not Microsoft, but two,
MITs is selling a thousand computers a month.
This is taking off.
This is creating a new industry.
Despite MITs selling thousands of computers a month,
only a few hundred copies of basic are selling per month.
What's going on?
People are pirating the software.
This is the discovery of software piracy.
And this is a pretty interesting time to pause and say,
well, are they pirating software?
Because...
That's a good question.
This is 1975.
So piracy implies that you are running a foul
of some particular legal protection for the good.
And you might say, well,
with today's legal frameworks in hindsight,
you would say, of course, if they're copying the software
and not paying the money for it is piracy.
That was actually not established yet.
And this is the craziest thing.
So Bill basically has an opinion that it's piracy
and he writes letters to the computer community.
He writes an open letter to hobbyists.
Yes.
And tries to basically guilt trip people.
He tries to use that as a recruiting method and say,
if you're so excited about pirating our software,
maybe you should just come work with us.
And nothing would make me happier
than making the best software in the world.
And please join us on this mission.
But ultimately the legal standing that he has to say,
hey, what you're doing is illegal is not fully established.
And so it would actually take a couple of years
for the courts to look at software and say,
what about this is protectable?
And if you think about it, it is a little bit weird.
So you've got source code that looks kind of like English,
basic, it's letters and numbers.
It gets translated to machine code.
That machine code ends up running
and it's basically electrons.
It's voltages that are flipped up and down.
And so what about that are we trying to protect?
Ultimately, the way it gets litigated
through some case law from court cases
is that the source code is a copywritable creative work
that is expressed through some sort of tangible medium.
That's the important thing about copyright law.
It's a creative work expressed through a tangible medium.
So a book, the creative work is the words
and the tangible medium is printed on paper.
And so with software, it actually took until 1980,
Congress changed the law.
We'll put a link in the show notes
to like the literal congressional change that happened.
And it is in title 17,
copyrights chapter one subject matter
and scope of copyright in 1980.
They include a defined term,
which is a quote unquote computer program
is a set of statements or instructions
to be used directly or indirectly in a computer
in order to bring about a certain result.
And once you have that passed by Congress,
codified into law,
you now have the standing legal framework
that all the whole computer industry used going forward.
In particular, the software industry,
a computer program is copywritable work.
Wow, I didn't know all that's awesome.
It's totally crazy how recent that is.
But when you think about it,
why would that have any legal,
you know, software is such an abstract idea
before the whole business model of computers was good luck
just replicating an IBM PC and everything that comes with it.
You don't need any legal standing.
But if you're gonna pursue this software only business model,
what's the protection around your abstract product?
That's exactly what I was gonna say here.
This is the other element of what's going on.
This is the first time software has ever been sold.
Right.
Other than the IBM accounting machinations
to protect themselves from antitrust,
which was just accounting,
nobody had ever sold software before.
This is the first time.
Right.
Certainly to build like a legitimate business around it.
The other thing that's useful to know
is when you're selling an IBM PC,
you're literally selling a PC to a customer
the same way that when I'm selling you this glass
from Crate and Barrel,
I am selling you the glass and the glass is now yours.
I've transferred property to you.
Software is not that.
So the whole world of software
is built on a license agreement.
So the source code that computer program,
the actual right of that is retained by the creator
and you license the copyright to your customer
to be able to use that on their machine.
So there's this dual idea that computer software
is copyrightable and you can grant a license
under certain conditions for customers to use it.
That is the legal framework for which the next 50 years
of technology at large would operate under.
For the moment though.
They got a piracy problem.
Right.
The law isn't going to change until 1980.
Microsoft would be dead if they didn't figure out
a solution to this before 1980.
So this is when Bill ultimately kind of realizes,
shoot, we did the wrong business deal with MITs here.
MITs has to sell and customers have to make the decision
to buy our basic is a key critical part
of the value of the computer.
It's like the whole thing.
It makes that machine useful.
Right. Without it, it is not useful.
It's totally setting up the wrong incentives
and value equation that customers
should be buying this themselves.
It should be included by the hardware OEM
in the machine that they are selling
and in the total purchase price.
And then if that happens, we no longer have a piracy problem
because we're just getting paid as part
of the purchase of the machine.
Right. It should be a royalty.
Right.
The problem is that is not the deal that they had with MITs.
Right.
Or framed differently.
Instead of saying, hey, consumer,
do you want to buy something else too
and make a new purchase decision?
They should be saying, hey, computer manufacturer,
we make your thing actually useful.
So pay us for it.
Yes.
So during 75 and 76, MITs pretty much had
this new microcomputer market all to themselves.
There were a couple other competitors who sprung up,
but you know, nothing made like the Altair
and MITs was the microcomputer company.
All of that changes though, in a big way in 1977,
when what byte magazine calls the 1977 Trinity
hits the market.
And that is three machines, the Radio Shack, TRS 80,
Tandy slash Radio Shack, TRS 80,
the Commodore Personal Electronic Transactor,
or the acronym PET, and the Apple II.
All three of which machines were like the Altair,
low cost, mass market, unlike the Altair,
they were not kits.
They were fully assembled, fully functional,
right out of the box.
And they each had their own major distribution advantages.
And in Bill's words, these three machines,
the 1977 Trinity ignite volume in the market.
Bill loves these really dramatic verbs.
Like we attacked the manual,
they ignite the volume in the market.
Oh, and the press just latches onto them.
Whenever Bill has a leaked memo or something
where he talks about all this war terminology,
those all become headlines.
So great.
Now, earlier during 1976,
Microsoft had started getting approached
by a few of the bigger computing companies
like NCR, National Cash Register, GE, Control Data Systems.
I want to license Microsoft, your basic,
for the 8080 microprocessor here
so that we can experiment with these things.
And each of these deals would have been revenue
to Microsoft of like $100,000-ish.
But Ed and Mits,
they keep dragging their feet on negotiating these.
They've got the exclusive license.
Everything's got to go through Mits.
And most of them, they're turning down
because Ben, like you said,
they don't want anybody to come in and compete with them.
Yep, there's the misaligned incentive.
There's the misaligned incentive.
And there is the clause that Bill and Microsoft,
and I presume Bill Sr. put in the original agreement,
is Mits using its best efforts to commercialize the basic
and gain adoption in the market.
And you can make a pretty strong argument that they're not.
So Ed, though, unbeknownst to Bill and Paul,
he has another reason
that he's dragging his feet on these deals,
which is that he's about to sell the company.
So in May of 1977,
Mits gets acquired by the tape drive manufacturer, Pertech,
for $6.5 million.
And Ed kind of rides off into the sunset.
And Pertech, they know about this dispute with Microsoft,
and they sort of come in and they figure like,
who is this Bill Gates?
He's a 21-year-old kid, a college dropout.
Like, we're a big company.
We can deal with this.
And Robert says an amazing quote later.
He says, Pertech kept telling me
they could deal with this kid.
It was a little like Roosevelt telling Churchill
that he could deal with Stalin.
Oh, my God.
Oh, boy.
And I also don't think they realized
that this kid's dad is one of the best corporate attorneys
in the country.
Yeah.
Well, Bill Gates was just constantly underestimated,
which kind of worked to his advantage in those early days.
Yes, totally.
This is the thing about Microsoft.
People kind of forget how insanely young Bill was.
He was just 20.
And to put that in context,
he's only seven years older than Jensen Huang.
But they feel an entire generation apart
since Microsoft was started almost 20 years before Nvidia.
When you start bending your mind around like,
oh, Bill Gates is still pretty young,
considering what an institution
Microsoft has become in the world.
Right.
Microsoft next year is gonna have its 50th anniversary.
And I believe that'll also be the same year
that Bill turned 70.
That's wild.
So that fall in 1977,
the dispute between MIT's slash Pertech and Microsoft
goes to arbitration in Albuquerque.
And the interim months while this arbitration is happening
are the only moment in Microsoft's history
where like cash gets tight.
They're sort of running out of money
because they can't really make any sales here.
Right.
They don't control their destiny.
People aren't paying mitts for the basic.
They're quote unquote, pirating the software.
They can't do deals with all the other computer companies
that want to come licensed directly.
And so things get a little tight.
Microsoft ends up winning the arbitration,
I believe in maybe like November, 1977.
Meaning they are now totally free to go license basic
to anybody who wants to buy it on any terms that they want.
So they turn around, they immediately license it
to the Trinity, you know, Apple, Commodore,
Radio Shack and Tandy.
They license it to all the big companies, the GEs,
the NCRs who wanna experiment with micro computers.
There's a really funny story with Apple
that apparently was had more or less written,
like 95% of their own basic.
But it didn't have floating point numbers.
It only had integer numbers.
And Jobs is like totally riding Woz.
And he's like, the basic, it's really important.
Like, can you just finish it?
Can you do floating point?
And Woz just doesn't do it.
So Jobs has to go license Microsoft's basic.
Amazing.
And that's the first deal
that happens between the companies.
I mean, there's so many deals done,
both directions, commercial deals, equity deals,
legal disputes in both directions.
And this is the very first time
that they do something together.
Yep.
So Bill and Paul and Microsoft,
they do all these deals
and they do them all as cash upfront, fixed costs,
all you companies, you're gonna pay us,
and then you include the basic in the machines
that you're selling
and we're gonna get all the money upfront.
Superpressantly though,
Bill does not value maximize on these deals.
So like the Apple deal is $31,000 for eight years
of access for the Apple II to Microsoft's basic.
They're not price gouging here
because Bill sees he's like,
the play here is we wanna make it a no brainer
for everybody, everybody who's selling a microcomputer
to have Microsoft's basic on it.
Cause we wanna set the standard.
If we are the standard programming environment
that anybody who's using these computers,
and again, anybody who is using these computers
is programming them.
They're used to the Microsoft version of basic.
We're gonna have so much power
that it'll become a self-fulfilling prophecy.
All of our competitors will just wither away.
Nobody will want them
cause it's not gonna be compatible
with the language everybody knows.
And then once people start trading
and then ultimately developing
and selling software that they've written,
it's only gonna run on our basic interpreter,
not anybody else's.
Fascinating.
I actually didn't know that started this early.
And one correction there,
you don't know for a fact
it's only gonna run on Microsoft's basic interpreter,
but you do know for a fact
that it will run on Microsoft's basic interpreter.
And so if it's cheap enough,
why would you take the chance on a clone
that might have one or two things wrong with it?
Yes, basically his vision is
I wanna remove any oxygen from any argument
anyone could have about not using Microsoft's basic
on a microcomputer.
He thinks about this concept as a positive spiral
that he really,
in his mind is the reason for Microsoft success.
He says, success reinforces success.
In a growing market,
one way of doing something
gets a slight advantage over its competitors.
This is most likely to happen
with high technology products
that can be made in great volume
for a very little increase in cost.
And if you get that slight advantage,
it's gonna be a huge digital compound.
And this is what he's playing for here.
And it's interesting in the earliest days,
what was stopping someone else
from writing a basic interpreter
and licensing it to Apple or Radio Shack?
Nothing, there were other smart people out there.
And so it was just a very good business decision to say,
we gotta close that door.
We just gotta make this a no brainer
for people to buy from us.
Because if we're value maximizing
and it's starting to feel expensive,
they're going to turn elsewhere until we get a lead.
Right, the Apple story is the perfect example.
You know, the Woz thing is cute
and it makes for a good story.
And like, oh, he didn't finish the basic.
But when Microsoft sold them the basic,
which was already getting established
as the standard for $31,000.
Sure, why not?
No brainer.
Apple could have gone out and hired another programmer
to finish the basic.
But they're like, wait, we could do that.
Or I could just get the standard one for $31,000.
I'm gonna do that.
Just because it's important to establish
there's trade-offs for everything.
If you're running a startup right now,
you might think to yourself,
oh great, I'll just run that exact strategy.
The important thing here is A,
most of the work was already done for the original basic.
B, Bill was doing it himself, Bill and Paul.
So the importance of technical co-founders
and their overhead was crazy low.
And so they could do these deals
where they don't make very much money
because they were, I think at the end of 77,
they were five employees.
So their overhead was just so unbelievably low
that they could take a really long lens.
So yeah, even though it takes until the very end of 1977
when the MITS dispute gets resolved
and Microsoft can actually make money again,
they end 1977 with $381,000 in revenue,
despite zero for the first like 11 months of the year.
They're just rolling in cash.
This is when Bill famously goes out
and buys a green Porsche 911
and is motoring around Albuquerque
getting all sorts of speeding tickets, hilarious stuff.
This is when he got his mug shot, right?
Yeah, I think that's right.
This is the classic Bill Gates holding up the, yeah.
Yeah, yes, amazing.
Cause he got, I think three speeding tickets in one day,
two of which were from the same police officer.
Yeah, and there's funny stories
of the Albuquerque police thought this,
how is a kid driving a Porsche 911?
He must be like a drug dealer or something.
Cause even when he was what, 2021, he looked 17.
Right, it's like, do you even have a driver's license?
Wild.
But back to what you were saying,
this is a really, really important point.
To make this dynamic work,
you need to be able to afford the investment
in the fixed cost for the software, for the technology
to make it that little bit superior,
like Bill's talking about,
the slight advantage over the competitors.
And at this moment in time,
the industry is completely brand new.
Like the software industry is brand new.
So the amount that that fixed costs takes,
the cost is quite low.
Really, it's just Bill and Paul's time and dedication
to this industry that nobody else is making that investment.
You can't run this playbook today
because in any market, even a brand new market,
even a speculative market,
the minimum viable fixed cost is billions of dollars.
Right, yeah, that's interesting.
I also think this moment galvanized something important,
which is Bill and Paul could sort of look around and see
there is gonna be so much value created
by microcomputers and by software.
They really found religion around software as magic.
The things that people can create now
that we've done this basic interpreter
and these machines are cheap and plentiful,
the magic will take care of itself
as long as we ensure this industry
can just exist and do its thing.
And so they flipped from this mode of
we need to bite and scratch and claw
and make sure that we win in deals to,
huh, how can we enable software as a thing to thrive?
And I'm sure we can position ourselves well to capture
some or a lot of that.
And I think they became almost stewards
of the software industry and evangelists
from this point forward.
Yes, they also do another really prescient thing
the next year in 1978, which is they go global.
Yes.
Nobody else is going global yet.
And the way that this happens is so fun.
Bill gets a call one day.
Also, how crazy is it you've got five people
you're operating out of Albuquerque,
you just finally expanded from having one customer
and you're like, you know what we should do this year?
Let's open in Japan and become an international company.
Yes, now the way this happens is one day,
Bill gets a call from a guy named Kazuhiro Nishii
or Kei Nishii, who's a computer enthusiast in Japan,
has gotten a hold of Microsoft Basic,
totally shares the same vision as Bill and Paul.
He doesn't have a Paul, you know,
nor does he technical himself.
He's like, I'm going to bring you guys to Japan.
I'm going to bring you to all the big computer companies.
They agree that Kei will become Microsoft's
exclusive distribution partner in Japan.
And by the next year in 1979,
half of Microsoft's revenue is coming from Japan,
which is wild.
It's unbelievable.
And it stayed at that very high run rate
of international being a huge chunk,
you know, close to half always, basically forever.
This is a huge cornerstone of Microsoft's success
that they were an international company
from year three of their existence.
Yes, totally.
So revenue in 1977, you know,
that like last month of revenue was almost $400,000.
1978 revenue is $1.3 million.
They have 13 employees at this point.
1979 revenue is $2.4 million.
And at the end of that year, they're like,
all right, we got to get out of Albuquerque.
And they've got 25 employees, I believe at that point.
Yeah, something like that.
And this is when they moved to Seattle.
And it's interesting to hear Bill talk about this.
He actually really liked Albuquerque.
And specifically, there weren't any distractions there.
No distractions, weather was great.
Yeah, everybody was happy there,
but the big problem was recruiting.
Yeah.
He was like, you know, if we're going to build this
into the opportunity that I see,
the vision that I see and that Paul shares with me,
there's no way we're going to do that in Albuquerque.
We got to move to a hub.
Right.
And so he's got three reasons for why Seattle in particular.
And by the way, it worked.
Every single person except for his secretary
did make the move.
So one, he grew up in Seattle.
He's like, I just want to go home.
And then he justifies it in two other ways,
which I found pretty fascinating.
This is from an interview in the early 90s that he did.
He said it basically came down to Seattle or Silicon Valley.
And in Silicon Valley, it's hard to keep secrets
because there's a rumor mill.
And in Seattle, we can be a little bit more removed
and we can announce things when we want to announce them.
And two, in Silicon Valley, people switch around companies.
I don't want that.
I want people to just work at Microsoft.
There was a disadvantage to not being able to recruit
from your competitors, but for a while,
they were really the only game in town in Seattle.
Right.
But not really though, because pretty quickly,
Microsoft is such an important part of the industry.
They recruit from Silicon Valley too.
We're going to talk about some of the people who come up,
but you're totally right.
People stay at Microsoft.
They don't leave.
This continues right through to this day.
And the other thing that I think is really important to say
that makes it work for Seattle in a way that I don't know
that this could have worked in too many other places
in the country is the University of Washington.
Yes.
The computer science department there was really good.
There were great people.
Steve Russell had come out there.
There was real talent.
And they were churning out graduates out of the UW
that would go on to populate Microsoft for decades to come.
Oh, and then Bill, of course,
reinvested in that flywheel donating tons of money
to the university.
I mean, there's buildings, there's whole new schools.
Yes, absolutely.
They played right into it.
And so today, I mean, it's always a top 10,
if not top five computer science program in the country,
but unlike other top computer science programs,
it's a state school.
So it just has huge volumes.
I think more students come out of the University of Washington
and go to big tech than any other program in the country.
That has stayed this amazing advantage.
Yeah, I think the only thing even close to it is Berkeley
in the Bay Area with a lot of the same dynamics,
but there's Stanford there too.
So it's kind of like a dual university system
in the Bay Area.
But yeah, you cannot overstate how important
the University of Washington was to this decision
and then the ultimate success of coming to Seattle.
So this brings us to 1980 in the beginning of the year
when they move to Seattle, just in time for,
I think you can make a very strong argument,
the single most important deal ever done
in the history of technology.
Absolutely.
The Microsoft IBM, I mean, it's crazy to even say it now,
the Microsoft IBM PC partnership.
It's crazy.
You have this absolute behemoth partnering
with someone that's not really relevant.
And if you're standing here today,
it sounds like I'm talking about Microsoft partnering
with IBM, but at the time it was IBM partnering
with Microsoft.
It was the only computer company that mattered
in the entire world, got themselves
into a particular situation where they came
to Microsoft looking for help.
It's the craziest set of events that made this possible.
And I can't wait to dive into it.
Oh, me too.
But before we do, this is the perfect time
to talk about another one
of our favorite enterprise software platforms, ServiceNow,
who is one of our big partners here in season 14.
Yes, ServiceNow is the AI platform for your enterprise,
helping automate processes, improve service delivery,
and increase efficiency.
Over 85% of the Fortune 500 runs on them
and they have quickly joined the Microsofts
and the NVIDIAs as one of the most important
enterprise technology vendors in the world.
And just like those companies,
ServiceNow has AI baked in everywhere in their platform.
And they're also a major partner
of both Microsoft and NVIDIA.
I was at NVIDIA's GTC last week,
which by the way was insane.
I felt like a VIP at a Taylor Swift concert,
like it was crazy.
And Jensen brought up ServiceNow
and their partnership many times throughout the keynote.
So why is ServiceNow so important both to NVIDIA
and to Microsoft?
Well, AI in the real world is only as good
as the bedrock platform infrastructure it runs on.
And for enterprises around the world,
ServiceNow manages that infrastructure.
So all the AI applications for enterprises,
whether that's supercharging developers with generative AI,
empowering and streamlining customer service,
allowing HR to deliver better employee experiences,
ServiceNow has already done the hard technical work
to make rolling them out, not just possible,
but easy and fast.
Yep, employees can get answers quickly
with smarter self-service,
like changing 401k contributions directly
through AI powered chat,
or developers can build apps faster
with AI powered code generation,
and service agents can use AI to notify you
that someone's product needs replacing
before they even chat with you about it.
With the ServiceNow platform,
your business is 100% ready for AI.
Simply turn it on and it all works.
They've built AI directly into their platform.
So all the integration work to prepare for it
that otherwise would have taken you years
is already done.
So if you wanna learn more about the ServiceNow platform
and how it can turbocharge the time
to deploy AI for your business,
go on over to servicenow.com slash acquired,
and when you get in touch,
just tell them that Ben and David sent you.
So the IBM PC,
why is IBM getting into the personal computer here in 1980?
A fun quote we heard in our research was that
IBM was the sun, the moon, the stars
of the computing industry,
and that meant the hardcore enterprise
mainframe computing industry.
Yes, David, are you gonna attribute that quote?
Are you gonna leave listeners just hanging?
All right, I think it's time.
We talked to probably 10 early Microsoft people
in research and preparation,
and one of those folks was Steve Bomer himself,
and he used those words in describing IBM.
Yes, and it's hard to imagine a better person
to get their perspective on what IBM meant to the world
at this point in time,
because 1980 was also the year
that Steve joined Microsoft.
So literally at the same time in 1980,
you've got the management team coming together
with Steve and Bill and Paul Allen,
and you've got the IBM thing going on,
and you've got them moving to Seattle,
and we haven't even talked about Charles Simone yet,
but this was the year he joined.
This is the year.
I mean, every year from Microsoft
until this point is the year, but 1980 is big.
Okay, so why is IBM, the sun, the moon,
and the stars of computing,
why are they getting into this PC?
It's way cheaper than anything else they sell.
It seems to be a totally different business strategy,
a different customer set.
What's going on?
So all the early microcomputers
we were just talking about,
the Altair, the Apple II, the TRS80,
these are all 8-bit machines.
They're running the Intel 8080 processor
or competitor making a similar 8-bit processor.
The problem with an 8-bit processor
is that the maximum data size
for a given instruction cycle in the processor,
this is called a data word in computer science terminology,
is 256, two to the eighth.
You can't represent any number greater than 256
in any given CPU clock cycle in an 8-bit machine.
Right, it's effectively a bandwidth limitation
where if you're in a single clock cycle
trying to do some particular instruction,
it's a very, very small amount of data
that you can move through the arithmetic logic unit
or that you can move through the processor
in that clock cycle.
Totally, you can think of it like an hourglass or something.
There's all the data sitting there in memory
at the top of the hourglass,
and then there's this small little funnel
that it goes through, that's the processor,
and then it comes out.
That's a good analogy.
It's gonna take forever.
Yeah, into the application of the software
that the user sees.
You're just not really gonna process it that fast.
Very primitive machines.
Yes, and so for a company like IBM,
they eclipsed the 8-bit computing cycle
a long, long, long time ago.
Mainframes and even minicomputers with DEC,
all these machines are at least 16-bit
if not 32-bit computing machines.
So 8-bit just, it's not interesting.
Which is why they only cost 375 bucks
or whatever for an Altair.
Right, in late 1979, Intel announces
that they're coming out with the 8086 processor,
which is a 16-bit microprocessor.
With 16-bits, you can really start to do some damage here
in terms of the applications that you could put
on this thing to eat into business software use cases.
In 16-bits, you can represent numbers up to 65,536.
So that's two to the 16th.
You can do interesting things
passing 16-bits around at once.
There's some really, really fun aspects to this.
If you look at pictures of these processors,
what did the 8080, the 8-bit processor look like?
And then you look at what did the 8086,
the 16-bit processor look like?
You can see this in the 808 processor that's only 8-bits.
You see only nine pins coming off of the little chip.
There's the eight pins for the data bits
and then I think there's one more control pin.
If you look at the 8086 processor,
it's a much longer rectangle with 16, 17,
maybe like 20 pins coming off of it.
You see this physically represented in the chip.
The further we get in the computing world,
the more abstract stuff becomes.
So it's always fun to go back in history
when these concepts were so grounded
in our physical reality that's sort of easily observable
since everything was so much bigger too.
Back to 1980, the 8086 has been announced.
16-bit microprocessor is coming.
IBM has already lived through
missing a computing expansion era once with DEC
and the mini computer.
They just let DEC take that market.
Of course, that didn't really hurt IBM,
but man, it would have been nice
to also have that market too.
And the thing that they're observing
about the microcomputer market is it's exploding.
People in our industry know about DEC.
People in the broader world never knew about DEC.
But I think it's a very different rate of adoption
and rate of demand with microcomputers
where IBM started to kind of look at and go,
oh, this might be like a real market,
like a really big computer market for people.
They're finally observing the same thing
that Bill and Paul did all the way back
in the traffic data days of this is an exponential cycle,
like Moore's law, this is exponential,
and exponential gets real big very quickly
once you get a few years in.
Yep.
And the mini computer cycle never was that.
So it's hard to remember today,
but just to underscore this again.
In 1980, IBM was the most valuable company
in the entire world, the highest market cap company,
bigger than all the oil companies in 1980.
The sun, the moon, and the stars.
Yes.
Do you know what their market cap was?
In 1980, 150 billion.
You are almost an order of magnitude off, $34 billion.
That was the most valuable company.
It is a wild, what a different world we live in today.
Yeah, even inflation adjusted.
It's interesting that the rate of growth
of the most valuable companies in the world
in terms of market cap has far outpaced inflation.
So that company, the most valuable in the world,
they're going to tiny little Microsoft
that's just moved to Seattle for this partnership.
What's going on here?
So when IBM decided, this is just so amazing.
Like they deserve so much credit here.
They got the Clay Christensen
disrupt yourself disruptive technology thing intuitively
decades before Clay writes any of this stuff.
The way that they decide to compete is they're like,
all the things that Clay wrote about
are working against us here.
What we need to do is we need to create
essentially a skunk works division,
just like our Lockheed episode.
We need to do something outside the company,
completely removed from the politics, sure,
but like the business incentives,
not to disrupt ourselves and create a new division.
They call it the entry level systems division.
Actually it may have existed before, but they repurpose it.
This is in Boca Raton.
In Boca Raton, Florida.
Very nice place.
We were just there a couple of months ago,
but not a technology hotbed in the world.
And they create a secret project called Project Chess,
secret from the rest of the company, the whole world.
And the goal is to develop the IBM microcomputer
or the personal computer,
as people are starting to refer to microcomputers.
And this is wild.
They're gonna do it in secret with a small team
with no other IBM resources.
And so that means the small team,
the only way they can do it
is to use all off the shelf components
from technology providers,
basically play on the same level playing field
as all the other microcomputer manufacturers out there.
And oh yeah, one more thing.
IBM leadership tells this team in Boca,
they have to ship the PC to customers within one year.
It's a crazy constraint.
It's a total crazy constraint.
A couple quotes on this.
Don Estridge, who was one of the leaders of Project Chess,
he would later say that the company realized that
if you're gonna compete against people
who started in a garage,
obviously a reference to Apple here,
you have to start in a garage yourself.
And then Luke Garster, who later would take over IBM,
would describe this whole Boca project as,
the way you get an elephant to tap dance.
And the question is, are they playing from behind
and thus have to adopt a flawed strategy?
Or is this strategy of assembling
with all off the shelf components
actually a good strategy if it works?
Well, let's tell the story and then come back to it.
Great.
Okay, so what do they do?
The hardware aspect of this is trivial, basically.
Hell, Ed Roberts could put together the hardware
to sell a microcomputer and do this deal with Intel.
Like, I think IBM can do a deal with Intel.
The, you know, not necessarily trickier,
but the more important part is the software.
And thanks to Bill's genius strategy
about be the volume player,
don't optimize on per unit price,
set the standards out there.
They were like the world's leading provider
of programming language interpreters, right?
A hundred percent.
There is one game in town and one game in town only.
And that is Microsoft in Bellevue, Washington
at this point in time.
Now, interpreters are notably different
than operating systems,
but Microsoft definitely had sort of raised the flag
and everyone could see if I want to go buy software
for my computers, broadly,
they're an interesting group to talk to.
Oh yeah, obviously operating systems are gonna become
really, really big here in just a sec.
But again, the eight bit generation
operating systems weren't that important
because people were writing their own software.
The standardized software packaged application software
doesn't happen until the 16 bit era
and doesn't really, really happen
until the 16 bit era and the IBM PC.
So that's why the basic, the interpreter is so important.
So what happens?
IBM calls up Bill Gates and by August 1980,
the two companies are in serious talks
to partner and work together on the IBM PC.
And we referenced Steve Bomer a minute ago.
The timing is just crazy.
Steve had just joined the company in June of 1980.
He's employee number 30.
The Microsoft team of 30,
which the whole company of Microsoft pivots
to like work on the IBM PC partnership
is bigger than the project chess team in Boca.
It's amazing.
Wow, so okay, Bill has just convinced Steve
to drop out of business school at Stanford
and come help him and Paul run the company.
So Microsoft at this point in time is still a partnership.
Steve is the first person besides Bill and Paul
to get equity in the company when he joins.
And it's eight and a half percent
and it's a handshake deal at this point.
Yes, Bill really, really wanted to bring Steve on,
knew him from the Harvard days,
knew what an asset he could be.
He is the end to Bill's yang.
Yes, and so, I mean, frankly, eight and a half percent,
it's a big grant.
You know, who's out there running a 30 person company
and you're giving away eight and a half percent slugs.
That just doesn't happen.
Those are founder shares.
And this is really a sort of reflection
that the way that Bill thought about Steve was as a founder.
In fact, it created some tension with Paul Allen
where Bill asked Paul if they could go to 5%,
and Paul said, sure.
And then Bill actually offered him eight and a half percent
and Paul got upset and Bill said,
I'll eat the three and a half percent.
It can come out of my share because I want him that bad.
But he's the perfect person for this point in time.
Bill was like the only salesperson doing these OEM deals.
Now they're dealing with IBM.
They're entering the enterprise world.
This needs to be a real business.
Yes.
So back to the IBM negotiations.
Obviously Microsoft is very interested.
IBM is not just very interested in working with Microsoft.
They have to work with Microsoft.
They're the only game in town.
And specifically, they ask Microsoft
for programming languages.
They're like, we're making this great PC.
We're going to need a basic.
We think you guys are working on a COBOL.
We'd like some COBOL.
Yeah, Fortran, give us the whole thing.
And there's some debate on whether it
was the Microsoft side or the IBM side that really
saw the vision of, hey, the 16-bit generation
is going to enable real business software use cases
on the personal computer.
It doesn't matter.
That's the plan here.
And that is absolutely what happens.
So these initial discussions are for the programming language.
Microsoft doesn't make an operating system at this point.
Because in the 8-bit generation, the operating system
I think was kind of like a glorified bootloader
to just get into the programming environment
so that you could either write or load up the basic programs
that Microsoft was going to interpret and then run.
And in the 8-bit generation, most, if not all hardware
providers of microcomputers just wrote their own operating
systems.
It wasn't a big deal.
Now, there was one off-the-shelf operating system
out there from a company called Digital Research, which
was run by Gary Kildall, who I think as we talked about
earlier, Bill and Paul had actually
intersected with back in Seattle.
I think they were reasonably friendly.
Yeah, I think they were quite friendly because they partnered.
You needed the operating system to get into the programming
environment.
It wasn't that big a deal.
And so, yeah, whenever anybody needed one off-the-shelf,
Bill and Microsoft would just refer people over to Digital
to get it.
Yep, CPM, right?
Exactly, CPM, CP slash M, which I
think is maybe Control Program for Microprocessors,
I think is the abbreviation there.
God, they were so bad.
Every single thing that's been named to this point,
except for the company Microsoft, was a horrible name.
Oh, the processor is 8008, and now it's 8080,
but the machine is 8800 that the processor is inside.
Give me a break, everyone.
It's horrible naming.
Bill, and I'm sure Paul too, but Bill
is the only person in this industry that
has the vision for what this can become.
Even Intel, and Bill talks about this.
He doesn't think that Intel even realizes what's happening here.
They're just like, oh, we're just making more chips,
and people use them for stuff.
Yeah, it does seem like very few people are thinking
about their products as something they really
need to build a brand around with consumers,
hence the naming schemes.
OK, so the IBM-Microsoft discussions are going along,
and IBM's like, oh, hey, yeah, we need an operating system.
So Bill, I think from everything we've read and folks
we've talked to, kind of in good faith,
just does the standard thing he's always
done in these situations.
He's like, oh, yeah, go talk to Gary.
Go talk to digital research.
He can probably do that.
Right, we don't have an operating system, so this guy does.
So what happens next is unclear.
But what is clear is, however it goes down,
this is one of, if not the biggest business
blunder in history.
IBM, that team from Project Chess,
flies down, I think, directly from Seattle
and talking with Bill and Steve to Monterey, California,
where digital research is based at this point,
to meet with Gary and his wife, Dorothy,
who run the business together.
And Bill's called them.
He's like, hey, got a big OEM client coming down,
needs an operating system.
And he signed hefty, hefty NDAs,
so he cannot say who it is.
But he's like, you really should take this seriously.
Right, so the team comes down.
Obviously, they show up there from IBM.
There's a big snafu where Gary does not attend the meeting.
And there's conflicting reports about what happened.
Wasn't one of them that he's out flying an airplane?
Yeah, so I'm pretty sure he was flying his personal airplane
while this happens.
Some reports are he was just out joyriding and missed it.
Some reports are, no, he was on a business trip,
knew it was happening, but he had another important business
meeting, and he didn't know that this was IBM that was coming.
Regardless, it doesn't really matter,
because IBM just wants the operating system.
Dorothy does meet with them.
She's unwilling to sign their NDA.
There's a lawyer from digital research who gets involved,
and he doesn't really understand what's going on.
The punchline is that IBM sort of leaves this interaction
with the belief that Gary and digital research
aren't up for working with them,
and aren't capable of producing here.
And producing is important, because it's not
like the existing CPM OS that they made would work here.
They would have to write a new version, a 16-bit version.
Yes.
And they hadn't done that yet.
And in particular, they would have to do some customizing.
But part of what IBM wants is a customized version
of an operating system for the IBM PC.
They don't want this to be fully off the shelf.
Yes.
And just to add one more stir the pot of history here,
there is another version of this story
where Gary does actually have a conversation with IBM,
and it blows up over licensing terms,
that what Gary really wants is a significant royalty
of every IBM PC sold, and IBM walks over that.
So whether that happened, or whether it's just an NDA issue,
either way, I think we all know the IBM PC did not end up
writing this CPM operating system.
Oh, that's amazing.
I didn't know that.
We'll talk about that when we get to the business terms
of the Microsoft IBM deal in a minute.
Yes.
But for the moment, there's no deal yet,
because an operating system needs to be provided here.
So IBM goes back to Microsoft, and they're like, hey,
this guy you referred us to, ain't going to work.
The way that I read some quotes from the IBM people
here were like, we just threw the problem back
in Microsoft's lap of, you guys deal with this.
You source an operating system.
Yep.
Well, I'd like to say that Bill and Steve and Microsoft,
you don't need to give them an opportunity twice.
In this case, you kind of did need to give them
an opportunity twice, because they almost flubbed it
and sent IBM down to see Gary.
This time they don't flub it.
They're like, okay, we'll get you an operating system.
And so enter Seattle Computer Products.
Yes.
So it just so happens that right down the road
from Microsoft in the Seattle area,
I think they, despite being named Seattle Computer Products,
I think this company was actually based
in Tequilla, Washington.
A programmer named Tim Patterson had just written
a 16-bit operating system for the 8086
that Intella just announced.
And he was calling it the quick and dirty
16-bit operating system, or QDOS for short,
and had it ready to go.
Now, why had he written this?
What was this company Seattle Computer Products?
Why did they have an operating system?
They were a component provider
to microcomputer manufacturers.
They essentially made motherboards.
And so when Intel now has announced
this new 16-bit processor generation
that they're coming out with,
well, Seattle Computer Products,
they want to sell motherboards
and have them ready for 16-bit.
They kind of need to test and play around
with these things, and their customers are asking for it.
So they had been going to Kildall and Digital Research too
and badgering them to like,
hey, write the 16-bit version of CPM,
and Gary just didn't.
So Tim's like, fine,
I'll do a quick and dirty version myself.
And thus, the DOS is born.
Incredible.
Which of course, later, they would drop the queue
and call it DOS, the Disk Operating System.
Something about dirty didn't have a ring to it
when you're selling it to IBM.
No, no, no, no, no, no.
So Bill and Paul and Microsoft,
they've learned about this.
They know Seattle Computer Products.
They know Rod Brock, who's the guy who owns the company.
They get in touch with him and they say,
hey, can we license QDOS from you and Tim?
We've got a big OEM customer
that wants a 16-bit operating system.
So they work at a deal
whereby Microsoft pays Seattle Computer Products $25,000
for the rights to adapt and sell QDOS
to the one unnamed original equipment manufacturer
who they're working with.
Tim actually, he's jazzed about this.
He ends up leaving SCP Computer Products
and joining Microsoft.
And so he, with the rest of the team,
he's part of building DOS, taking his initial work
and turning it into real DOS.
Later on, before this all gets announced
and the PC ships, Microsoft would pay
Seattle Computer Products another $50,000
for full rights to own 86QDOS,
sell and license it to anybody else indefinitely.
So I believe the total amount of dollars
that change hands here is $75,000.
Unbelievable.
This is DOS.
Now, look, one programmer wrote a quote,
quick and dirty operating system
and Microsoft bought the license to that
and adapted it into DOS.
Tim, when he was at Seattle Computer Products,
definitely did not write DOS as DOS becomes.
It's not like Microsoft bought all of DOS for $75,000.
They did a lot of work on it.
But yeah, this is how it all goes down.
So Microsoft would eventually generate billions of dollars
on DOS-based products.
Now, you're exactly right in the same way
that Instagram today is a much different code base
than Instagram and much larger code base than Instagram
when it was purchased.
But my God, $75,000 to buy DOS
to get this whole thing started for, I mean,
until Windows 95,
all of the Windows operating systems were DOS-based.
It's just crazy.
I mean, it really illustrates how fast things were moving,
how much all this was getting invented
and discovered real time that even to this point,
Bill Gates isn't thinking
that operating systems are that important.
This is just a shortcut to get the deal done
with IBM to make it happen.
Yep.
Also, David, I gotta say,
I just looked it up the address
of Seattle Computer Products
on the original business card
for Seattle Computer Products
where I presume QDOS was written, the space is available.
So I know where our next studio needs to be.
And it's in Tequilla?
And it's in Tequilla.
All right, well, the rent can't be like that expensive then.
So like, let's do it.
Correct.
Hell yeah.
Well, you know, we've been joking for years
about making the acquired museum.
We might have a location.
Okay, so now they've got the operating system,
they've got QDOS or DOS in place to license IBM.
The only thing that is left to formalize the partnership
is the business terms.
And Ben, if what you said is right
about the Gary Kildall IBM negotiations,
this is just a masterstroke from Bill here
in the licensing with IBM.
Yes.
Because there's two really, really big levers
that it looks like Bill is giving big time on one of them,
but he is winning big time on the other one.
What are they?
So the one that it looks like he's giving on
is he does another fixed cost OEM deal with IBM.
So this is in Paul Allen's memoir.
IBM paid Microsoft $75,000 for testing and consultation,
$45,000 for DOS,
45 and $310,000 for an array
of 16-bit language interpreters and compilers.
So all told bundled together,
that is $430,000 fixed that IBM paid Microsoft
with no ongoing obligation.
Yes.
No per copy royalties.
Yes.
Every copy of DOS that IBM sells
either included as part of systems that they're selling
or they're free to charge independently for DOS,
whatever amount they want, Microsoft gets zero dollars.
And if it's true that this is where things fell apart
with Gary Kildall, crazy that Bill is willing to do this.
And you might say, what?
Didn't Bill learn his lesson?
Why would he ever agree to this?
On the one hand, this is what he was doing
with Apple and others.
He was doing these fixed cost deals.
He would think like, man, IBM, like this is the time,
people aren't gonna pirate IBM software.
Now's the time to really grab the money bags.
But Bill saw something that no one else did.
In exchange, I don't know if it was directly in exchange
in the negotiations, but the other lever
that he saw that he pulled was Microsoft retained the rights
to own DOS and to own their languages
and license it and them to anyone else they wanted
at any price on any terms.
It's so interesting because what ended up happening
that Bill Gates masterminded was once we distribute
our operating system through IBM's PC,
that's going to become the thing everyone buys.
And now in the 16-bit generation,
when there are people building programs for computers,
not just developers, once those application developers
who are writing programs are targeting an operating system,
then that is the operating system that every other OEM,
every other computer maker is also going to want.
And really need and we're gonna be the ones
that they have to come to to buy it.
And I can't figure out, did IBM miss this fact
or did they know it?
Basically what IBM did was they were the one place
where every business needed to go for their computer needs.
And what they did in this negotiation
was they actually handed that over to Microsoft
and they said, we are going to become a commodity
just like every other hardware manufacturer
and you are going to be the point of integration
for the whole ecosystem.
You're gonna be the linchpin
that everyone has to target for their applications.
So I think there are two things going on here,
one small and one big.
The small thing is actually related
all the way back to the beginning of the episode,
what you said Ben, about the antitrust concerns within IBM.
To hear them say it,
they actually didn't want ownership of the software.
They wanted it to be separate
cause it would sort of look better.
Cause then they have the sort of plausible deniability
of how could we possibly have a monopoly?
We're buying off the shelf.
Part of an ecosystem, blah, blah, blah, yeah, yeah.
Yeah, from a vendor who can sell to anybody else.
We have no lock-in.
And that may well be true.
I think the bigger thing
that just wasn't in their consideration or mindset
was they, I think assumed
that once they entered the PC market,
IBM was going to be the dominant player.
So it didn't matter.
Once IBM is selling PCs,
who's gonna buy a PC from anybody else?
IBM is going to win this market.
Just like they have in every other
line of business they've been in.
And what Bill saw was he really made a bet
that the same dynamics that played out with the Altair
were also gonna play out with the IBM PC.
That there would be a million hardware manufacturers,
flowers blooming here.
Building to the same spec.
And building to the same spec.
Using the same processor.
Which of course they could
because it was all off the shelf components.
And IBM either didn't see
or didn't believe that that would actually happen.
IBM failed to see the value of software
and they certainly failed to understand
what a software platform business model would be.
Which makes sense.
I mean, why would they?
Right.
It's almost like their experience.
They are the computing company.
Yes.
Their experience in selling mainframes
with everything bundled in
was the wrong experience to go off of
in understanding the way the future would unfold.
And Bill's very modest experience watching the Altair
and all these sort of Altair clone type machines.
Or even if they're not Altair clones
just more microcomputers that need more software.
That actually was the useful experience
to pattern match off of
what does the world of microcomputers look like?
And how is that fundamentally different
than the world of mainframes?
And in a way that the mini computer generation
like we've been saying,
it was like a half generation.
It wasn't.
It wasn't actually fundamentally that different
other than DEC gained a foothold.
Yeah.
The deal that Bill Gates made with IBM for the IBM PC
is the greatest deal in at least computer industry history.
If not all business history, full stop.
Right.
So let's say a little bit about why.
I mean, maybe it's obvious,
but here now as IBM,
most valuable company in the world,
they're going to come out with the PC platform.
They are going to build the market
and Microsoft is going to own the linchpin
sort of Hamilton-Helmer terms
like where the power is in the market.
And they're going to be free to license it
at whatever terms they want to any other player
who wants to enter.
So they signed this agreement in November, 1980.
The IBM PC ships in August, 1981,
just incredible, almost exactly a year,
a little more than a year
from the time projects chess starts
to where they actually ship the PC.
I mean, truly incredible.
They pulled it off.
Truly incredible.
It changes the world.
Like, you know, that's such a trade thing to say,
but like everything that everybody's imagining happens.
IBM was right that it was by far and away
the most successful personal computer on the market
as soon as they released it.
They sell 13,500 IBM PCs
within the first couple months after they announce it.
Over the next two years,
they sell half a million of them,
makes them unquestionably the largest personal computer,
microcomputer manufacturer, market leader.
Everybody at IBM is celebrating.
The clones haven't arrived yet and maybe they won't.
It'll play out like they think.
Yee, not exactly.
Now, before we talk about the clones,
this is really just a footnote
because of course all the incentives are aligned
for IBM to push DOS as the operating system for the PC.
I mean, they've done this whole deal with Microsoft.
They have a royalty-free deal with them.
When they launch the PC,
customers actually have a choice
of which operating system they want on their IBM PC.
They don't have to go with DOS
consumers can choose between DOS, 16-bit CPM.
By this point in time,
Gary and digital research have gotten their act together.
They've written a 16-bit version
of the CPM operating system
or another 16-bit operating system called Pascal
that came out of the University of California at San Diego.
And the price sheet for the operating system option
is Pascal is an extra $450 with your IBM PC.
CPM is an extra $175 with your IBM PC.
And DOS, which was developed specifically for the PC
is the best way to run it, is only $60.
So IBM is making $60 a full 100% margin
on top of their hardware for the PC by selling DOS
because they don't have to pay Microsoft any of that.
And they've set up the incentives that like,
obviously everybody's gonna choose DOS.
It's fascinating.
And you know what?
To give them a little bit more credit too,
they did try to enforce
that there's some amount of lock-in to the IBM PC.
And they did that in two ways.
One is we're simplifying and calling it DOS.
It was PC DOS, which is different than MS-DOS,
which would get licensed to other computer makers.
I don't know exactly what happened,
but it basically seems like it just wasn't different enough
to be meaningful to application developers.
So that's one piece of it.
The second is IBM did actually have proprietary BIOS.
So that was another part where they kind of thought
that that might provide them some protection
where they could stay a linchpin in the ecosystem.
And it wasn't just all off the shelf.
They actually did have something that was theirs
that was proprietary.
It just turned out that the effort required
to reverse engineer the IBM BIOS was trivial, basically.
Oh, do you know the story of the compact BIOS?
Ooh, well, I know the compact story,
but I don't know the story of the BIOS specifically
enlighten us.
It is basically why Compaq worked is what it comes down to.
So Compaq was formed basically to clone the IBM PC.
They saw the market opportunity
and they realized they could buy
from all the same equipment vendors.
So let's go eat their margin is basically the plan.
However, the one thing that was not off the shelf
is the BIOS, the basic input output system,
which is effectively the thing that decides
to load the operating system when you turn the machine on.
And so there's some proprietary magic that happens
to call upon the operating system to do its thing.
So Compaq reverse engineered the BIOS
and the way that they did it was very similar
to Trip Hawkins and the story that he told us
about his reverse engineering at Electronic Arts.
Of the sake of Genesis.
Yes, so Compaq had two engineers
and one engineer went in and fully dissected the code
for the IBM PC BIOS and basically saw
all the proprietary calls that it made
and documented each of those calls
without writing the implementation steps.
Then he handed, hey, here's what the BIOS needs
to interface with over to the other engineer
and the other engineer on their own just went through
and thought of an implementation and they have no idea
if it's the same implementation.
So it's not breaking any sort of infringement.
They're basically saying, I'm just seeing the requirements
for this product and I'm coming up
with my own implementation of that product.
They basically figured out how to exactly clone the IBM PC
and buy the very same operating system.
And to go back to quoting Ben Thompson,
because this is from his great piece again,
the result was a company that came
to dominate the market.
Compaq was the fastest startup
to ever hit a hundred million in revenue
then the youngest firm to break into the fortune 500
then the fastest company to hit a billion in revenue.
And by 1994 Compaq was the largest PC maker in the world.
The Compaq story is amazing.
So the three people who start Compaq in 1982
are actually Texas Instruments engineers who left
and they wanted to start a company.
And I believe as the legend goes,
they were like trying to decide what to start.
They were considering like a restaurant chain
and like a bunch of different business ideas.
And then the IBM PC comes out at the end of 1981
and they're like, oh, we can clone this
and do everything, you know, the story you just told.
So yeah, it's wild.
They start the company in 1982 and within the first year,
they do a hundred and $11 million of revenue
of selling IBM PC clone hardware.
Is it just cheaper?
Like basically this is the IBM PC, but for less money?
Yes, exactly.
Same thing, cheaper.
And so begins the race to the bottom of PC hardware.
Completely undifferentiated,
all the value accrues to the software layer.
Totally.
Compaq went public the very next year in 1983,
well before Microsoft, which is funny.
But yeah, Compaq, all these other clone companies
that get started, Microsoft licenses DOS
to all of them, importantly, critically,
on a per machine sold basis.
This is when they grab the money.
The operating system is so deeply embedded
and needs to get shipped with the computer itself.
Yeah, consumers can go buy operating systems
to upgrade and whatnot, but no hardware manufacturer
is gonna ship a 16-bit PC without an operating system.
So piracy is not an issue here.
Microsoft can now do a per copy sold,
per machine sold license with all these clones.
My God, it's just like a geyser of money.
Microsoft use IBM to generate demand for their software,
and then they used every other PC manufacturer
to capture the value that all that demand created.
Yeah, so I think I have these numbers and timeframes right.
I believe that for calendar year 1982,
Microsoft's revenue was $25 million.
And I think this must've been when they switched
to fiscal year end and June 30th.
So Microsoft's fiscal year end starting then
and up through now is June 30th.
So their fiscal 1984, so the year ended June 30th, 1984.
So 1983 midpoint to 1984 midpoint.
Microsoft does $98 million.
In an 18-month period from the end of 1982,
they go from 25 to 98.
It's all on the back of the clones.
And unlike Compaq that, yeah,
they did 111 million of revenue their first year,
they're selling hardware,
which has serious cogs associated with it.
Microsoft, 100% essentially gross margin,
software revenue, more than doubling year on year.
I mean, it's the best business of all time.
Yes, and they combined two magical principles together.
This infinite replicatability,
zero marginal costs of software
and becoming the linchpin of the ecosystem.
They are now the software that everyone needs to target,
which gives them pricing power.
Totally.
So that pricing power raises your top line
and you have no costs.
It's unbelievable.
So meanwhile, in the computing industry background,
while all this is going on with the launch of the IBM PC
and then the clones,
Apple had gone public at the end of 1980
in I think the biggest and most successful IPO
of all time at that point.
Remember we talked about Genentech
on the Novo Nordisk episode.
They went public like right before Apple
and then Apple was bigger.
So they're valued at $1.8 billion at IPO.
Steve Jobs is this multi-hundred millionaire,
like media darling, all this stuff.
The next year in 1981,
Microsoft reorganizes from the partnership
between Bill and Paul with the handshake deal
that Steve's going to be cut in on the partnership
into a stock company, a C corporation.
And as part of doing that,
the venture firm Technology Venture Investors or TVI
invests $1 million,
I believe for 5% of the company.
This is crazy.
That's a $20 million post money valuation.
It's a one on 20 post
when Microsoft is doing how much in revenue?
That year they did 17 million in revenue
and they're about to do the IBM deal.
Like this is absolutely absurd.
So it says a lot about this period of time
that you could do a 1X revenue deal
in a high margin software company.
I mean, I actually don't think this shows
a weakness in Microsoft.
Oh, they didn't have leverage or something like that.
That wasn't it at all.
It was just the deals sucked.
Yeah, venture capital sucked back then.
Yes.
There's no other way to put it.
Now, you know, it's only 5%.
So good on Microsoft.
Spoiler alert,
this is the only dilution that they would ever take.
So that's also extremely different than today.
But yes, a $20 million valuation at this stage
is frankly ludicrous.
You know, even among people who should be in the know,
the beauty of the software business model
still is something people don't understand.
That's exactly right.
The hotness is the hardware.
It's like Apple just IPO'd.
Apple's worth $1.8 billion.
Like, ooh, that's the industry.
Ooh, it's IBM, et cetera, et cetera.
When Microsoft itself would go public
a few years later in 1986,
they actually go public the same week
that they moved to the big campus in Redmond,
where they are to this day,
their market cap at IPO is only $750 million
despite having done $200 million
of very high margin software revenue
in the trailing 12 months up to that,
growing 100% year over year.
It's insane.
Hey, that's 4X multiple expansion
off the last time they raised money.
Right?
Well, it's just crazy
that people don't yet appreciate the power.
So Bill Gates and Warren Buffett did a conversation
at the University of Washington in 1998.
So this is as late as 1998,
this thing that we're talking about,
the magic of the software business model
and how it should be reflected in a company's valuation,
especially when it's a high growth company,
was still not understood even by Bill Gates himself.
So here's the quote.
Bill Gates says,
I think the multiples of technology stocks
should be quite a bit lower
than the multiples of stocks like Coke and Gillette,
because we are subject to complete changes in the rules.
I know very well that in the next 10 years,
if Microsoft is still a leader,
we will have had to weather at least three crises.
So Bill Gates is essentially making an argument.
Now granted, this is in the middle
of all the antitrust stuff.
So he's very primed for this.
And the internet.
And the internet.
He's basically making the argument
that disruptive forces come at you so fast
in the technology industry,
that even though you can grow extremely fast
and it's this extremely scalable thing,
distributing software at zero distribution costs,
and even though the margins are unbelievable
because you have zero marginal costs,
they still shouldn't be valued as highly
as like a CPG company,
which is so different than the way
that people think about it today.
Well, it's funny, you know,
I've thought about this a lot
and I actually watched that interview years ago.
It's so good.
There are elements of truth to this too.
And I think it's that for most technology companies,
that is totally true.
And then for a few technology companies
that have true power and true scale,
the exact opposite is true.
Microsoft is still the most valuable company
in the world today.
Companies that are less susceptible to disruption,
more predictable in terms of high growth,
high margin revenue deserve a premium,
but Gates is basically arguing everyone else doesn't.
So let's flash all the way back to 1981
and talk about this venture capital investment,
this one on 20 that TVI does.
Good work if you can get it, man.
How does this come to be?
So even a whole year before in the fall of 1980,
Dave Marquart, one of the partners and the founders at TVI,
flies up to Seattle, not to meet Bill Gates,
but to meet Steve Ballmer.
Because they were classmates at TSP, right?
They weren't quite classmates,
but because I think they were two years apart,
so they didn't overlap,
but they had some of the same social circles.
And Steve was effectively the screener
for anyone who wanted to come and talk to Bill
and try and invest in the business.
TA Associates had been up, Sutter Hill had been up,
Handbricked and Quiz had been up, Xerox Ventures,
and all of them only ever got to meet with Steve Ballmer
and never got passed on to Bill Gates.
Steve would basically just bounce him off.
And I know all this because there's a great oral history
from the Computer History Museum
where this whole thing's in a transcript
with an interview with Dave Marquart
kind of recalling the whole thing.
So Dave flies up to meet with Steve
and Steve says you're asking really interesting questions.
You're thinking about our strategy the right way.
You don't just want to do a transactional deal.
Like you really think this is something special.
Why don't you meet with Bill?
Bill, of course, doesn't have any extra time in his schedule.
He says, but I am going to the UW Arizona football game
at Husky Stadium.
Why don't you come and talk to me there?
So of course they go,
Bill doesn't pay attention to the game at all.
He's just laying out the strategy and grilling Dave
and talking about software the whole time.
So this is fall of 1980.
So that's a whole year before the deal gets done.
And Dave's remarking at this point in 1980,
they're doing 5 million in revenue,
2 to 3 million in profit.
They don't need VC money.
And yet he was able to get in.
So here's the quote.
I was just sort of helping them out with the business.
In the venture business,
you're buying and you're selling at the same time.
You're trying to figure out, are these guys crazy?
Are they ever going to do anything really interesting?
And if so, how do I get myself positioned
to be able to help them do it?
And so I spent a lot of time up there
helping recruit people.
I helped to recruit Charles Simone,
who was an early key guy.
Charles Simone would go on, this is an aside,
to write Microsoft Word
and Charles was at Xerox PARC, inventing the GUI.
Oh, we're going to talk about Charles in just a sec.
Yes.
And he says, and I was working with Steve
on business strategy.
They had these OEM customers, the PC manufacturers,
and they had started to engage with IBM
on this operating system.
And then are we just going to become
a low cost contract programming shop for IBM,
an outsourced sweatshop,
or is there some way we can build a business out of this,
which led to the fixed fee to IBM,
the retention of the code,
which then we could sell to other people.
And that's what created the PC industry, basically.
So that is his recollection of the whole thing,
that he was sort of very helpful
in this transformative time for the company.
Now, at the same time,
you have to look at everyone else's incentives.
How can I be helpful, Ben?
So Dave is only 29 years old,
but everyone else is like 23.
And so he actually is kind of adult supervision.
At the same time, the partnership
was still just a partnership
and there was a handshake deal for the equity.
And so if you're Steve Ballmer at this point in history,
it would be nice to have a forcing function
to actually turn this into a corporation
so that we can get some shares granted here.
So there's a little bit of incentive to say,
hey, if we take on an outside investor,
we're going to have to restructure.
And that's what I had always read about the TVI investment.
Yeah, obviously Microsoft didn't need the money.
They liked Dave, but also a big part of it
was this was a catalyzing function
to do the conversion into a C corp.
Yes.
So this would create a little bit of board and governance.
So it's not just Bill all the time.
Now Bill, of course,
I think is still the controlling shareholder
just by the amount of stock that he owns,
but there's a board it's Bill and it's Dave
and it's Kay Nishi.
It's a three person board.
Yeah, we should say to vis-a-vis Paul tragically,
and I believe it was 1982, 83,
he's diagnosed with Hodgkin's disease
and he ends up taking a leave
and then fully leaving the company.
I think he did go on and off the board
at various points in time.
Yeah, that's true.
But yeah, he's no longer a full time member
of the company after his diagnosis.
Yep.
So on this venture investment, it's pretty fascinating.
None of these are terribly compelling reasons
other than like, I guess it would be nice
to have a little bit of capital associated
with us formalizing the corporation,
but they don't need money at all.
They're printing cash.
They've been printing cash ever since that one tight period
in Albuquerque.
Dave charmed him.
I think that's kind of the answer.
And I've always heard wonderful, wonderful things
about Dave and I think everybody really did love him
and see his value.
But man, to be a venture capitalist in the 1980s
and 1990s, like, oh man, you couldn't lose.
It's pretty crazy.
I think part of it too had to do with the fact
that Microsoft was up in Seattle.
So the VCs just weren't traveling.
And Dave was young and he was single.
Oh, Don Valentine famously had the rule.
They didn't invest in any company
that you couldn't bicycle to from Sand Hill Road.
It's crazy.
Dave Markhor, I think most weekends is flying up to Seattle
to hang out with Bill and Steve.
It was a real sell.
And he said, I was young and I was single
and I had nothing better to do.
And it was really fun and intellectually interesting.
So I did it.
I bet.
And that resulted in, depending how long TV I held,
one of, if not the best venture capital return in history.
Who hard to argue with that one.
Okay, back to the story.
There's a couple more really, really key things
that happen in the PC era.
And particularly now, once we're into the IBM PC era
and the clones, the 16-bit era.
And let's start with applications.
So, you know, kind of like we've been saying all along,
the 8-bit era applications package software
aren't really a thing.
In 1979, kind of at the tail end of the 8-bit era,
two programs come out for the Apple II,
VisiCalc and WordStar.
VisiCalc is the first software spreadsheet application.
And WordStar is a word processor.
These applications by today's standards are super simple,
like Stone Age type stuff.
But they're the first of their kind,
particularly VisiCalc and the spreadsheet.
They sort of established the potential
for business applications on personal computers.
There's a joke at one point in the industry
that the Apple II was a, quote unquote,
VisiCalc accessory for small businesses.
And I think that is part of what IBM is seeing
and why they're deciding to now get into the industry
with the personal computer.
Around this time, Microsoft starts the,
quote unquote, consumer products division
to compete and make application software themselves.
And it's quite telling it's called
the consumer products division to make applications.
Even though they're competing to make these applications
that today we would view as business tools,
spreadsheets and word processing,
that is not how they referred to it.
So one of the first people that they hire
into this new division to get it going
is an engineer, Ben, who he referenced just a minute ago
named Charles Simony.
And they poach Charles, perhaps with Dave Marquardt's help,
away from the legendary Xerox Palo Alto Research Center,
or Xerox PARC.
And I think this is one of the great misconceptions
in technology history.
Hopefully we can set the record straight a little bit here.
Yes, if you ask anybody in our ecosystem,
save for the 1% of people who actually know this,
what happened at Xerox PARC?
They will tell you they invented the mouse,
they invented the graphical user interface,
and then Steve Jobs walked in and he saw it all
and he said, oh my God, we have to have it.
And then he went off and he made the Lisa,
which had a graphical user interface and a mouse,
and then that failed.
But what succeeded was the Macintosh
and it's a wholesale ripoff of Xerox PARC
that lives on today in Apple.
And that is the story that you will hear
from basically everyone.
I've heard it characterized as something like,
Xerox hosted a picnic in Silicon Valley
and Steve Jobs attended and dined lavishly at the feast.
Which all of this is true.
Which is true, that is true, all of that is true.
But it's half the story.
He was not the only person who dined lavishly at the feast.
Microsoft did just as much directly from Xerox
and Charles was one of the main vectors
by which this happened.
So here is the list of things that were invented
or basically invented at Xerox PARC.
The graphical user interface, the desktop,
the mouse, object-oriented programming,
ethernet, laser printing,
along with a whole host of other things.
This is everything about modern computing invented there.
Who were the people who were at Xerox PARC?
Well, there was Alan Kay.
There was Bob Metcalf who would go on to found 3Com.
He invented ethernet, Metcalf's law.
Yeah, the value of a network scaling proportionally
to the square of the number of inputs.
Yeah, Bob Metcalf, Xerox PARC.
Larry Tesler who would join Apple.
John Warnock who started Adobe.
Eric Schmidt worked at Xerox PARC.
Everybody was there.
It was a lavish picnic.
And Charles Simone.
And Charles Simone.
Now, the thing about PARC and the computer
that they built there to instantiate all these concepts,
which was named the Alto,
is it really was a research center.
So the Alto, go look it up on Wikipedia,
go look it picturely, it's the Mac.
The Alto is the Mac.
It's the Mac with the monitor turned on its side.
Yes, it's a vertical Mac.
It's a three by four display, not a four by three display.
Now they start making it in 1973.
So you might be like, wait, what's going on here?
The Mac doesn't come out till 1984.
11 years earlier.
How on earth is Xerox making the Mac
in like the pre 8-bit era, the pre-microprocessor era?
Well, it's not a microprocessor.
The Alto is not a microprocessor architecture.
It's a mini computer.
So what you see when you look at photos of the Alto
is you see the Mac.
What you don't see is under the table or behind it
is a mini computer.
Oh, I never realized that.
So it is not a personal computer architecture at all.
It is a 16-bit essentially mini computer
that costs tens of thousands of dollars
to make each one of them.
It's a science project.
Right, so you should have a little bit more generosity
for the East coast management at Xerox
for failing to commercialize this.
Totally, the time was not right.
It was not possible.
It wasn't even conceived of in the microprocessor architecture
because the microprocessor basically didn't exist
when they made it.
Interesting.
So in 1980, again, I mean this year for Microsoft,
same year Microsoft joins,
same year they signed the IBM partnership,
Charles Simone comes up from Xerox Park
and he's of course bringing all this same knowledge,
all this same experience that Steve Jobs
is bringing into Apple.
He's bringing all that right into Microsoft too.
And the first thing that he gets tasked with
is working with this new consumer products division
to build application software
to compete with VisiCalc and Wordstar
to compete with spreadsheets
and to compete in word processing.
And so he leads the teams that create Word
and multi-plan Microsoft's first spreadsheet.
Now remember, we're still at the end of the eight-bit era.
The graphical user interface doesn't exist yet
other than on the Alto in Xerox Park.
No, these are DOS applications.
It's all character mode.
Yes, it is command line interface.
So the vector that they think they're gonna compete
at least in spreadsheets with VisiCalc
is that they're gonna be on every platform out there.
VisiCalc I believe was more or less
basically only on the Apple II.
Well, that doesn't end up working too well.
And then the next generation, the IBM PC era,
they sort of make the same mistake.
The application business stays focused
on being on lots of machines,
making software that's compatible with everything.
A new company pops up called Lotus.
Oh yes.
And Lotus makes the radical decision
that they are gonna make a spreadsheet
only for the IBM PC.
And this was genius.
This is the one, two, three spreadsheet.
And it goes on to become at that point in time
the most successful software ever.
This is wild.
I can't even believe I'm about to say this
and it blew my mind when I found it in research.
There are a couple of years in the late eighties
where Lotus has more revenue than Microsoft
and is valued higher.
Yup.
In fact, the year that Microsoft went public,
Lotus had more revenue than Microsoft at the IPO.
Yes, wild.
Yeah, it's crazy.
So Lotus one, two, three had some graphics
but it was still in character mode.
It was a powerful spreadsheet
that could start to do some graphics
even though there wasn't actually
a GUI operating system yet, which was interesting.
So Lotus one, two, three was faster.
It had bigger spreadsheets and it was just more powerful.
Microsoft multi-plan was still targeting the older eight bit.
And so multi-plan despite Microsoft's best efforts
is completely left in the dust.
Microsoft's trying to figure out
what should we learn from this?
And in talking with Pete Higgins and Mike Slade
who were both early leaders in the development
and the marketing of the applications division,
actually Mike Slade went on to work directly
for Steve Jobs at Next and Apple for many years.
But in chatting with both of them,
what basically became apparent is Microsoft learned
with our applications,
we should not be targeting the current platforms at all.
The lesson to learn is never leave yourself open
to the next generation of technology.
They're learning the Moore's law lesson again.
Yes, and how it applies to applications.
Yes, you always got to target the next platform.
Right, even if that platform is not the one you own.
Right.
That's the interesting thing about
when they're evaluating multi-plan and they say,
how do we not get Lotus one, two, three'd again?
Basically the applications team gets the freedom
to look around and say, okay,
no matter what our overall company strategy is right now
or no matter what the systems division is doing,
what is the most cutting edge platform
that is going to be so interesting to people
that we can develop the most envelope pushing technology
for it.
And that becomes the mandate for applications.
This is the dawn of horizontal software.
You can have a whole company
or a whole division of a company in Microsoft's case
that makes this tool.
And that tool will be so much better than anything
that even the largest companies
can have their own software developers, right?
General Electric isn't going to write a better spreadsheet
than one, two, three.
Right.
And then so I think that the technology compliment
to this sort of law is the killer app.
You kind of have to counter position.
If one, two, three is the best spreadsheet out there
for the current technology generation,
you just can't compete with them.
You need to wait for the next big leap forward
in order to find a new competitive vector.
You need to be the killer app on the next platform.
And that's what Lotus one, two, three did
with the spreadsheet on the IBM PC and IBM compatible PC.
And that's what Microsoft decides,
hey, we got to do this in the graphical interface.
And who's about to come out with the very best
instantiation of a graphical user interface?
Apple computer.
Well, that would be Steve Jobs.
Yes, the next chapter of our Microsoft story
is the Macintosh in 1984.
So fun.
But before we do that,
this is the perfect time to talk about
another one of our favorite companies
and long time acquired partners who are back.
Pilot.com.
For startups and growth companies of all kinds,
Pilot handles all of your company's accounting, tax,
and bookkeeping needs.
And is in fact, now by far the largest startup focused
accounting firm in the entire US.
Also, we have to give our good buddy and Pilot CEO,
Wasim Dahar, a special shout out here
because I think he is now the only acquired sponsor CEO
who is also a source for an episode.
Because back when Wasim was a student at MIT,
he interviewed Bill Gates for the school paper
and he dug up the PDF and sent it to us
and we're going to link to it in the episode sources.
Yes, very fun.
Well, back to Pilot.
And speaking of incredibly successful
Seattle business people,
we talk all the time unacquired about Jeff Bezos'
AWS inspired axiom that startups should focus
on what makes their beer taste better.
I.e. only spend your limited time and resources
on what is actually going to move the needle
for you, your product, your customers,
and outsource everything else that you need to do
as a company but doesn't fit that bill.
And accounting is example number one
of what he's talking about.
Every company needs this,
but it needs to be done by a professional
and you don't want to take any risk of something going wrong.
But at the same time, it actually has zero impact
on your product or your customers.
Yep, so enter Pilot.
Pilot both sets up and operates your company's
entire financial stack.
So finance, accounting, tax,
even CFO services like investor reporting
from your general ledger all the way up to budgeting
and financial sections of your board decks.
And they've been doing this now for years
across thousands of startups in Silicon Valley and elsewhere.
There's nobody better who you can trust
to both get finance right and make it easy
and painless for your company.
Yep, these are now companies like OpenAI, Airtable, Scale,
as well as large e-commerce companies.
So it's not just that they have the experience
across startups, they can also keep working with you
as you scale to the growth phase and beyond.
So if your company wants to go back
to focusing on what makes your beer tastes better,
go on over to pilot.com slash acquired
and tell them that Ben and David sent you.
All right, so David, why are we talking about the Mac?
Because I think it's fair to say
that the Mac made Microsoft Office
and Microsoft Office made the Mac.
I don't think that is actually a controversial statement.
No.
Although it probably sounds crazy to many of you listening.
Totally.
Far and away the first thing to point out
is the first version of Microsoft Excel was for the Mac.
It's especially crazy for all the finance people today
who are like, oh, Mac Excel isn't real Excel.
Excel has to happen on Windows.
No, Excel was on the Mac, that was it.
Yes, and the logic basically was
Microsoft was really coming around to the idea
that the next big thing in computing
was the graphical user interface.
And the reason they were coming around to this
was because they knew from Xerox PARC
just as well as Apple did.
And they were rapidly trying to figure out
how to get all of that Xerox PARCiness
into their product line too.
That's the other half of this sort of untold
Xerox PARC story.
And one of the first ways that they see
to bring the graphical user interface to their products
is launching Excel for the Mac.
Because they basically see the way that we got destroyed
with Lotus one, two, three.
We can't compete with Lotus on the IBM PC.
So we're gonna shelve multi-plan and kind of start over
and Excel is gonna come out
in the graphical user interface.
So we're gonna try to be first and best on the GUI.
And one thing just to underscore here,
Excel is the world's first graphical spreadsheet program.
And that's why it wins.
And that's why it's so important.
Like imagine trying to use Excel
in the command line interface.
That's what VisiCalc was.
That's what even one, two, three was.
Yeah, useful better than nothing,
but graphical charts, cells, visual relationships.
This is so important.
And Excel is where it all starts.
Yep.
And of course, Apple loves this.
The Macintosh came out in 1984
and everybody remembers the great intro video
and the hello script.
And I've watched that Steve Jobs keynote
because of course I have.
And it's this magical moment in computing history
where finally something that's insanely great comes out.
And it's like the beginning of Steve Jobs
is unbelievable presentation prowess.
It's so fun to watch it.
And it's of course a product
that eventually people really loved.
But at first.
It doesn't have the killer app.
No, it's a product that was supposed to ship in 82.
It didn't.
It shipped in 84.
And so at the time what they were targeting for 82
was like a pretty great set of technologies.
By 84, it's kind of an aging set of technologies.
So it debuts with 128K of memory,
which basically isn't enough
to create any interesting applications.
And so developers are kind of ignoring it
as an interesting platform to develop on.
Within 12 months, they kind of figure it out
and come out with a better version that's 512K.
And that's kind of the version
that people now really think about.
Yeah, that gets kind of rechristened as like,
that's the original Mac, right?
And the original original is the Mac 128
or something like that.
Yes, exactly.
But in the meantime, Microsoft, the applications group
is working their ass off
to make something really great for the Macintosh.
And they come up with Excel.
And so what ends up happening is Apple's really trying
to promote the sales of this machine.
And they kind of view Excel and PageMaker
as the killer apps,
as reasons that people should buy this thing.
Because once you run through a lot of the demo apps
and the stuff that Apple built,
you're like, okay, what else is here?
It's kind of crickets.
Right, writing hello in script is, you know, cool,
but kind of like a lot of VR stuff.
You're like, oh, that's a cool demo,
but like, you're gonna do that every day?
Like, no.
And so I'm not sure
this has ever been publicly disclosed before,
but Apple spent just as much marketing Excel
as Microsoft did.
They matched Microsoft's marketing spend
with their own campaign for it and split the bill.
That's amazing.
So you've got a couple of concurrent things going on
in applications land.
You've got Excel coming out for Mac
to take advantage of the GUI.
Meanwhile, and this strategy is just all over the place.
I think that's an interesting thing to underscore
about Microsoft in this era.
They're trying a ton of stuff because they're paranoid.
They don't wanna miss the next wave.
Meanwhile, also in the applications group,
Charles Simone has written Word.
This is about a year before in 1983.
Microsoft Word comes out for DOS.
Right, and they ship it with a mouse.
Yes.
So this is like, okay, we see the Xerox PARC stuff
coming out in the Mac.
Great, Excel will be for that.
We wanna develop Word.
We're gonna do that for DOS.
Oh, but I can imagine how useful the mouse is gonna be
in a word processing environment.
So they actually ship a mouse tied to the application
that's not a part of DOS.
And so this is how early we were in figuring out
kind of what the split between applications and platforms
were at this point in history.
Microsoft thought maybe a mouse makes sense
just for this one application,
even though it doesn't do anything else
for the rest of the command line interface.
Right, yeah, it was all being figured out.
I think it is also really fair to say,
Microsoft was right there with Apple
in the Mac development phase.
Obviously they're working on Excel, working on other,
what would become the Office Suite applications
together for Mac.
Steve Jobs shows Bill Gates the Mac project in 1981,
three years before it ships.
And Microsoft and Apple signed an agreement
to work together on applications for it in 1982.
They were very deeply embedded on this.
It's amazing.
Which is gonna make the lawsuit
and what comes up in a minute here
all the more sort of funny.
Yes, so the decision for the Excel team
is to focus on GUI.
The whole marketing message is Excel on a Mac
is better than Lotus one, two, three on a PC.
You're starting to see truly divergent cultures
at Microsoft between the systems group,
which is currently making DOS and will soon make Windows
or soon partner with IBM or soon do something else
that we're getting into here in the next chapter
of the story and the applications group,
which is also currently a bunch of disparate applications
and teams targeting disparate platforms,
but is also about to become unified in their next chapter.
And within the applications group,
that next chapter is Microsoft Office.
So in 1985, in January, the bundle is released
and it was originally called the business pack
for Microsoft and it started on the Mac.
It really rolls off the tongue.
Totally does.
Now they haven't acquired PowerPoint yet or forethought
as we talked about eight years ago on acquired
way back in history.
So there's no PowerPoint, it's not part of the bundle.
And so what you've got here on the Mac
in the first version of Office is Word,
which they've developed in house, file, chart,
and multi-plan.
This is this first notion of a suite.
So today we're very familiar with suite,
creative suite over at Adobe.
Software is sold this way.
This was kind of the first time.
And so what was actually happening
is all of the bundling was happening in pricing,
in marketing and in manufacturing.
And so you sort of had a single box
that they would ship with the different applications.
By 1988 or 89, it was Word, Excel, PowerPoint.
They're very different things,
but they're getting sort of bundled together
in a way to be sold to customers.
But there's no product integration.
And so you don't have the ability to do this
like very nice copy paste from an Excel table
and just paste that into Word.
That whole idea is pretty far away.
So in this earliest Microsoft Office,
it was just how can we bundle something
for a cheaper price if you buy all three
and make marketing easier for us
to kind of have this unified message?
Yep.
And soon to come and get into Windows here in a second,
in one of the big, this killer app for productivity
in particular for business productivity,
with a graphical user interface like Windows
and true multitasking, you can get copy paste
from like Excel into PowerPoint.
Lotus and the world back in the command line interface
where you've got these programs running on top of DOS,
that is like a completely foreign concept.
Right, none of those verbs exist.
So we've now sort of set the stage
of Microsoft's doing a lot of stuff.
They're hedging a lot of bets.
They're not totally sure which strategy is gonna win out.
They're not sure which platform is gonna win out.
They're not sure if they're more of a systems company
or an application company, but what they are unified on
is we make great software for personal computers.
And I think anything that fell into that purview,
they were willing to explore.
They didn't really have hard boundaries
between we'll do anything to make our operating systems great
or we'll do anything to advantage our applications
or even we think we're an enterprise company.
We think we're a consumer company.
They just didn't have well-formed opinions yet.
It was just we make software for personal computers.
And at this point in time, the actual boundary
between an operating system and an application
is very fluid.
You've got a mouse that works for one program.
Lotus would really go down a dead-end evolutionary path
with Notes later in its life, in its final chapter,
where the application was going to be the operating system.
Lotus Notes was crazy.
It was a word processor, an email service,
and it was a platform
on which you could write other applications.
Yes, and it itself was an application.
It's crazy.
Not an operating system.
So yeah, it was all kind of dynamic.
Speaking of though, Microsoft here is in bed with Apple,
working on the Mac.
Bill and the company are big believers
in the future of the graphical user interface.
Starting in 1983, they're like,
we got to do our own graphical operating system,
or at least user interface.
And this is the origins of the Windows product.
And they actually announced it in November 1983
before the Mac ends up shipping,
which their partner Apple is, of course, not happy about.
Yep.
No, just like development of the Mac was rocky.
Development of Windows was super freaking rocky
within Microsoft too.
This is around that same time
when Paul Allen gets Hodgkin's disease
and leaves the company.
So his presence as sort of great technical leader
is very much missed,
but they bring in someone from Xerox
to manage the development of Windows.
That person ends up not working out.
He gets fired.
Steve Bomer gets drafted to come in
and be the dev manager for the final push
to release Windows 1.0, which is hilarious.
You can find amazing YouTube videos from the launch
and all joking about how non-technical Steve
coming in to save the day
and dev manage Windows to launch.
Which is so funny.
I don't think at this point in history,
the lines were clearly formed among the executives yet.
Like Steve wasn't running the global sales force
and Microsoft wasn't an enterprise company.
No, no, no, we're gonna get to that later.
Steve was one of the smart executives
and they were a software company
and someone had to manage getting the software out the door.
So Windows 1.0 comes out, it's bad.
It's bad, November, 1985.
Windows 1.0 is a very, very different thing
than you imagine a graphical user interface is today
or what you know of as Windows.
It was tiled.
It was not overlapping windows that you can drag around
and like have one over the other.
When you opened a program in Windows 1.0,
the system created a literal window of it on your screen
and then it dynamically resized the windows
as you open other applications.
And so nothing could ever be on top of each other.
So as you open more and more stuff,
the windows get smaller and smaller and smaller.
It's very bizarre.
The idea of windows overlapping on top of each other,
that was a sort of uniquely Mac thing
and a thing that the smart engineers at Apple figured out
how to do that in a performant way
that offers good user experience.
I would classify Windows 1.0 as like a half step
between command line and an actual graphical user interface.
Yes, a hundred percent.
And so I believe Microsoft and Apple
actually did like a licensing agreement
while they were working together during this time
that said, hey, Microsoft can use a lot of the stuff
that's being developed for Mac for Windows 1.0.
Yes, that's right.
Apple does do a deal to license
a lot of quote unquote their intellectual property,
which of course came from Xerox to Microsoft.
Apple, I think was under the impression
that it was just for Windows 1.0,
but the actual terms of the agreement are this
and all future versions of windows,
which comes back to haunt Apple later.
But yes, they totally get the license.
Also, by the time that this agreement actually happens,
I think Steve Jobs has been ousted.
And so it's Scully who does this agreement
and people in Apple would look back on this for years
and be like, this was a huge error.
The other important thing about Windows
during this sort of awkward teenage phase
is it's not an operating system.
It's just a graphical interface on top of DOS.
Yes.
The original name for Windows was Interface Manager.
Isn't it crazy?
In all of their early marketing,
they referred to it as Windows,
a graphical operating environment
that runs on the Microsoft MS-DOS operating system.
Yes.
And actually it was not until Windows 95
that Windows was its own operating system.
It was in Windows 1.2, 3.1 and Windows for work groups.
It was a graphical operating environment.
Yup.
But here's the question.
Why is Microsoft doing Windows?
Obviously here, Microsoft knows they need to evolve DOS.
They need to figure something out for the graphical world.
And so David, are you telling me that Windows
is the widely agreed upon future of the company
and that's just a straight line?
Well, obviously that's a setup there.
Here's the other thing that's happening
in the company at this time.
And it's the bigger thing.
It's the next phase of the IBM relationship.
Yup.
Windows, the Mac, all of this,
these are hedges for the company.
Microsoft, and Bill in particular,
were masters of hedging their bets
in an uncertain technology future.
He was so great.
The company was so great at making sure
that whichever way the Apple fell from the tree,
as Jetson Hwang put it to us in our interview,
Microsoft was gonna be positioned to catch it.
A lot of people, including Bill and Microsoft themselves,
believe that the way the Apple was gonna fall
from the tree here was IBM and OS too.
Well, I mean, the IBM PC was such a big deal.
Last time around you would think
that whatever IBM wants to do next
is a pretty good way to ally yourself.
Right.
So what's going on here?
IBM, obviously the PC was a huge success,
but losing dominance of the ecosystem to the clones,
this was bad.
And so IBM wants to find a way
to evolve the PC ecosystem back to being more IBM proprietary
and they're gonna make Microsoft come along
for the ride here.
And the way that they're gonna do this
is with the next generation of the PC ecosystem,
they are gonna make a whole new modern operating system.
They're gonna get rid of DOS,
they're gonna make this operating system
in partnership with Microsoft
and it's gonna be called fittingly OS two.
And they're gonna lock Microsoft up
that they can't license it to anybody else.
OS two is gonna be proprietary to IBM hardware,
just like the Mac operating system
is proprietary to Apple hardware.
Ba na na.
Ba na na.
Ha ha ha.
And as powerful as Microsoft's become here,
they're still the little brother to IBM.
And this is not great news for Microsoft.
On the other hand,
it's much better for them to be like on the inside here
with IBM working in bed with them
than it would be to be on the outside looking in
if IBM's vision comes true
and they recapture control of the PC ecosystem.
So Bill and Microsoft and the company
and Steve too as sort of the manager of the account
with IBM commit themselves to Microsoft is all in
on this vision of the future of OS two
and IBM is our horse in the race.
This is such a crazy part of the story to me
because we just talked about how Microsoft discovered
this amazing business model
and with everyone needing to license DOS from them,
they're taking over the world
and they're becoming the standard development platform.
Why on earth if all that is true,
are they gonna develop some software
that's gonna be locked to IBM computers?
This is a re-centralization attempt.
Bomer has this great, great, great quote about it.
He says, this, the IBM partnership at this time,
it was what we used to call riding the bear.
You just had to try to stay on the bear's back
and the bear would twist and turn and try to throw you off
but we were gonna stay on the bear
because the bear was the biggest, the most important.
You just had to be with the bear,
otherwise you would be under the bear.
And like that was IBM at this point in time.
Really, I think it was IBM essentially putting a gun
to Microsoft's head and being like,
well, you can be in bed with us on this future
that we're gonna re-centralize everything
or you can be like everybody else and not be
and you'll lose.
And so even though Microsoft's doing
all these little hedges, Windows is tiny little team.
I think it's 30 people or something.
Yes, yes.
It's not the most prestigious place of the company.
The people in the applications division
may as well be on another planet by this point
from the systems division.
They're trying all kinds of crazy stuff
and the company kind of motto at this point is
the next big thing is OS2 and IBM
and we are the software vendor for that.
And certainly Bill and I think Steve too,
they needed to tow the party line politically
of expressing that, nope, OS2 is the future
and what we're doing with Windows and with the Mac is,
you know, those are small things within the company.
It's a super bizarre period in history
but IBM had also kind of made a bit of a power play too
with the later generations of the 16 bit era product.
They called the PC-AT, they used the Intel 286 chip
instead of the Intel 386 chip.
And the 286 chip, this was an intentional decision
on IBM's part.
The 286 chip was good but it wasn't great.
Well, you say it was good but not great.
Bill Gates said it was brain dead.
Yes, Bill Gates called it a brain dead chip.
So I think you might be being charitable.
I mean, I think it certainly was more powerful
than the 8086, 8088 but it was nowhere near
what the 386 could do.
You know, there's a bunch of technical aspects to this
but the most important takeaway is that the 286
was not really powerful enough to do a graphical
user interface or to power true multitasking
in a way that the 386 and then later the 486 would be.
And so a big part of actually the Compaq story
about how Compaq and the clones leap ahead of IBM
is they're not deterred from coming out with 386 machines
which are way more powerful, can run Windows,
can do all this stuff.
And so that's how they start to separate from IBM.
That's right, that was like a bet the company move
where Microsoft was like, hey Compaq, go make 386 stuff
because we're gonna make a really great 386 software
and we need someone to be all in on that
because IBM's not.
This is the thing, Bill and Steve and the company,
they're having to tow the party line
of expressing commitment to IBM.
But really they're like, no, no, Compaq, go do the 386.
We're gonna do Windows.
They're like riling up the rebels.
Exactly, they are the rebels versus the empire here.
So anyway, IBM of course sees all this.
They made the decision not to go to 386
and to discourage it in the marketplace
because they didn't want PCs to start creeping
into the core enterprise,
mainframe IBM workloads, their core business.
If that was gonna happen,
they wanted it to be IBM proprietary closed system.
So I think that was a big part of the impetus
for this OS2 initiative.
I see.
This is the empire strikes back here.
They're basically trying to co-op the PC movement
back into IBM proprietary land.
Yes, exactly.
So when OS2 finally does come out in December 87,
predictably as you can imagine here, it's not very good.
The market does not like it.
Thank God for Microsoft.
And I think again, this probably was Bill's strategy all along
that they hedged with Windows, with the Mac.
That's clearly the future.
Like the market is not gonna accept OS2
and a re-centralization on IBM.
Microsoft's just crushing it on the revenue side
even though OS2 is a failure.
I mean, DOS and the applications
were both great businesses by 87.
Yes.
So fiscal 87, Microsoft has 350 million in revenue.
Fiscal 88, they do 600 million in revenue.
Basically none of this is from OS2 and the IBM world.
And then towards the end of 1988
is when the wind starts really blowing away from IBM here.
In June of 1988, Microsoft hires Mike Maples,
who was IBM's director of software strategy away from IBM
to come head Microsoft's application software.
And what is Microsoft's application software strategy right now?
It's the graphical user interface.
It's everything that IBM isn't.
The writing is starting to be on the wall here
that divorce is coming between IBM and Microsoft.
And then finally, year and a half later in 1990,
Windows 3.0 comes out and this is when they get it right.
This is when there's enough installed base
of 386 and 486 machines out there
in the open PC ecosystem
that you can have a really good true multitasking,
good UI, graphical user interface running on top of DOS.
So Windows 1.0 and Windows 2.0
only ever achieved 5% penetration
of the DOS installed base.
Windows 3.0 doubles that in the first six months.
PC Computing Magazine writes about Windows 3.0,
May 22nd, 1990 will mark the first day
of the second era of IBM compatible PCs.
Microsoft released Windows 3.0
and on that day, the IBM compatible PC,
a machine hobbled by an outmodded
character-based operating system and 70s style programs
was transformed into a computer that could soar
in a decade of multitasking,
graphical operating environments, AKA everything OS2 is not.
Windows 3.0 gets right what its predecessors got wrong.
It drives adequate performance,
it accommodates existing DOS applications
and it makes you believe that it belongs on a PC.
That's awesome.
That's what the press thought.
Ben, I know you talked to a really important person
in the Windows ecosystem and Microsoft
internally at this time.
What do you have for us?
Yes, we have to thank Brad Silverberg
for helping us with this section.
Brad led the Windows 3.1 team.
He came in right after the 3.0 release.
I would eventually go on to lead the Windows 95 effort
as the VP of the personal systems division.
So Brad comes in, Windows 3.0 has just shipped.
And the first thing that is super, super obvious
is as Brad sort of observed everything going on
with OS2 land and everything going on
with the core Microsoft culture, it was a complete clash.
It was impossible for the pace of Microsoft.
This is like a super young group.
I mean, all in their 20s, some people in their 30s
but mostly 20s who just want to push
the cutting edge ship stuff.
It was almost like, think about Google in the early 2000s,
just hire all the smartest people you can
and set them loose and have creativity
and bump up against the edge of what's possible
both in terms of pushing the hardware,
but also pushing, I mean, even like laws
as we would later see, let's just do what users love
and see what happens.
Let's just do what technology enables us to do
and see what happens.
That's like the opposite of IBM's culture at this point.
So there's this huge cultural rift
between what IBM sort of needs
and who Microsoft is at this point.
And so what ended up happening with 3.0,
it was unexpectedly loved.
Microsoft was not really prepared
for how much people were gonna love the GUI.
And with 3.1, it got really good.
There was a small offsite of the executives
and Bill and Steve basically decided
that it was time to bet on Windows.
That was the new strategy.
Windows had always been plan B
and now suddenly it was plan A.
And when I say plan B, I don't mean like
thought they had a prayer of being plan A.
It was 65 people that shipped Windows 3.1.
These were like the misfits.
It was not prestigious.
I mean, the prestigious thing to work on at Microsoft
was OS2 and eventually Windows NT,
but the Windows team in the Windows 3 era,
it's almost like the Mac team over at Apple.
They were sort of flying the rebel flag.
They valued creativity over bureaucracy,
even if it meant they weren't working
on the prestigious thing.
And so suddenly there's this huge strategic opportunity
to become the standard independent of IBM
if the platform is good enough.
And then boom, the early reception to Windows is so good.
It gives this glimmer of that may seem really ambitious,
but that opportunity is actually ours
if we want to go seize it.
So everyone took a big gulp and said,
the GUI is the next big thing.
Users love this.
Let's take the ragtag group and promote them.
This was, I think, the moment
when Microsoft started to believe in themselves, like really.
Like you look at the facts and as we told the story,
it was like, oh yeah,
like Bill did this great business deal with IBM
and anticipated the rise of the clones in the first PC
and one and then like Microsoft now was the thing
and IBM was like the old thing.
But it wasn't until this when,
like in this whole OS2 thing,
I think you can see like they sort of felt
like they were still little brother
and they had to go along with what IBM dictated.
And now they're like, whoa.
Why do we again?
Yeah, we're in control.
And the press is making a big deal out of Bill Gates.
Boy wonder, he's the youngest ever billionaire at age 31.
And by the way, when Bill Gates became a billionaire,
there were not lots of billionaires.
There were like 50 billionaires.
All this lore around the company,
it's like they can do no wrong, but inside the company,
I think they're like,
we don't know the future of technology.
Any wave could break against us at any moment.
And this is all tenuous.
I think that chasm kept getting wider and wider and wider
of internally feeling like they're screwed
and externally it's seeming like
this is the next great thing.
Totally.
I've got some fun stats on like money
and revenue around all this.
So in fiscal 1990, the year that Windows 3.0 shipped,
Microsoft does $1.2 billion in revenue,
making them the first software company ever
to pass a billion dollars in revenue.
Fiscal 91, they do 1.8 billion.
Fiscal 92, they finally win the Apple copyright lawsuit
around the GUI.
Which by the way, the way that they won that,
a judge basically looked at the paper and said,
Apple, you totally said in all the future versions
of Windows, they can use your UI paradigms.
And so for most of the accounts they're covered,
and for these other things that you're trying
to ask them about, those are not actually defensible.
It's just widely accepted that these are UI paradigms now
and you can't enforce any ownership over those.
So it basically got like thrown out.
Apple tried to appeal all the way up to the Supreme Court
who said no.
That's right.
And like we've been saying too,
they both stole from Xerox.
Yes.
Fiscal 92 though, this is when Microsoft
just blows the doors off.
They do $2.8 billion in revenue in fiscal 92,
up from 1.8 the year before.
And that year, 1992 in October,
is when Gates finally passes,
John Clugey acquired OG fans back to the LVMH episode.
Gates passes John Clugey of Metro Media fame,
media mogul to become the wealthiest person in America.
And so everything you're talking about,
all the press comes around that.
And then January 93, the crowning moment it happens,
Microsoft passes IBM in market cap.
And it's like, they have inherited the earth.
They have inherited computing.
Supposedly, I don't know if this is a hundred percent true.
This is written in one of the books I read.
I read this.
The folks involved will have to confirm or deny.
Supposedly, the next month after Microsoft
passes IBM in market cap.
So we're now in February, 1993.
The IBM board is in disarray.
The empire is going down.
They fired the CEO.
Tom Murphy of Capital Cities fame,
who is on the IBM board.
Supposedly he comes out to Redmond to sit down with Bill
and personally ask him to come and be the next CEO of IBM.
No way.
This is what I read.
I don't know if this actually happened,
but this is what I read.
Is that in hard drive?
That's in hard drive, yeah.
Wow.
Listeners, there's some unauthorized biographies
that we tried to corroborate as many of the facts as we can.
But the ones where David's saying he doesn't know a source,
it's sort of these unauthorized ones.
Yes.
Gates obviously declines that,
but whether or not that actually happened,
spiritually, you could believe that happened.
Bill and Microsoft are the new emperor here.
I mean, this carries through to this day.
We're going to tell in the next episode here,
the antitrust and the fall and all, but not really.
Microsoft is still the most valuable company in the world.
They inherited the throne from IBM.
Happens right here.
It's nuts.
And so suddenly Microsoft feels the full weight
of everything that you have to do to build a platform
and be a steward of an ecosystem.
So suddenly this huge effort began
to try and make developers successful.
That's how Windows would be successful.
If it was a great platform
for application developers to thrive on.
So Cameron Mirvold led the developer relations group,
basically to try and figure out
what do people want out of a platform
and how do we provide the APIs for them
and the support and everything in order to do that.
All the documentation, all the help, everything.
And at the same time, Microsoft basically knew
establishing a platform is brutal
and requires bootstrapping a multi-sided network
of developers, users, and PC manufacturers.
And so 3.1 had users excited,
but it was still very early.
They could have lost that throne.
Developers were not really yet targeting Windows.
Microsoft sort of had to show
we make great applications for Windows too.
So the applications group really had
to start doing Windows 3.1.
Right.
Cause developers were targeting DOS at this point.
They were probably preparing for OS two.
Some of them were targeting the Mac, like Microsoft itself,
but nobody was targeting Windows.
Exactly.
So you've got this big developer relations group effort
that spins up.
Meanwhile, there's a huge push with OEMs
to get them to install Windows.
At this point, they were still installing DOS
or some people were actually installing nothing
and requiring users to put operating systems on.
So there's a conceded push to get the OEMs
to install 3.1.
Well, yeah.
And the some people installing nothing.
We should mention here around this same time, this era,
they move a lot of their OEM deals
to a per processor licensing fee arrangement,
which gets them in a lot of hot water
with antitrust a few years later.
Okay.
So this happened from 1988 to 1994.
David, explain the per processor licensing agreement.
Well, here's how Microsoft I think would position it
to their OEM partners.
You could pay us, you know, a license fee
for every machine you ship with DOS installed on it
or DOS and Windows.
And you know, you can offer other OS's too,
but rather than that arrangement,
we'll give you a cheaper per unit deal
because you're gonna ship DOS on everything.
DOS is the standard and we want Windows to be the standard
and Windows is gonna be the standard.
We'll make it more economically attractive to you,
give you a lower per unit rate.
If we just kind of changed the terms and say,
instead of every unit you ship with DOS or with Windows,
every machine you ship, period,
every microprocessor based machine that you ship,
no matter what operating system is installed on us,
just pay us a per processor rate.
So if you do that,
you'll be paying us for every machine,
whether you ship DOS or Windows on it or not,
but you're gonna ship DOS and Windows anyway.
So you may as well take the cheaper rate.
You may as well take the cheaper option, right?
And obviously what effect does this have on competition?
Well, there's now a very, very, very strong incentive
never to ship any other operating system.
Yeah, basically you're gonna pay
for two different operating systems,
even though you're only putting one on
if you ever load a different operating system on.
So yes, it very strongly incentivizes you
to never, ever, ever ship any other operating systems
on your computers as a company.
Now, this is of course the way that regulators
would look at it in 1994,
and that would get Microsoft in some hot water
and they had to agree to stop doing this practice.
The way Microsoft would look at it is,
we're just helping our customers.
Do you really think that these companies
wanna keep a whole separate ledger
of what machines they shipped DOS on or Windows on
versus what machines they shipped period?
Wouldn't it just be easier if once a month
or once a quarter, they could just report to us
their total shipments, like they have to report
to their investors anyway,
and then we'll just send them an invoice
for all their machines.
Totally, and while antitrust and the government
would seize onto this as like a smoking gun,
I think the reality is this was kind of irrelevant
in terms of the forces that made DOS and Windows the winners.
They were already the winners
by the time they started doing this, so.
Right, if this had happened earlier,
you could see how this would be more of a compelling way
to get market share, but by the time they started doing it,
they were already sort of running away with the market.
Yes, now, speaking of this sort of new
customer-friendly, buyer-friendly business practice
from Microsoft, which I think is how they thought about it.
Totally, they wanted to make the stuff
that people wanted to use the most,
and that's how they would win.
Their goal was make the very best products,
the best software we possibly can,
in the ways that people wanna use and buy software,
and then we'll make a bunch of money.
Yeah, as this changing of the guard
is happening from IBM to Microsoft,
I think part of this new self-confidence from Microsoft
is, wait a minute, why can't we go win the enterprise too,
and take that from IBM?
We don't have to get in bed with them
to sell to the enterprise.
We should sell to the enterprise.
And the thing they were sort of realizing is,
well, we have made software that people like to use,
so they're using it in businesses.
They always kind of wanted that to be the goal,
but now it was happening.
People are doing their work in Excel.
People are bringing PCs to the office.
Maybe businesses are buying their PCs,
but people are actually buying them themselves
and using them in the office.
And so it just made them that much more efficient.
And so Microsoft really had to figure out
how to sell to businesses,
but we actually have no idea how to do that.
And it sounds crazy today, the Microsoft you know today,
as late as the mid-90s really had no idea
how to sell or build software for businesses.
Totally.
And then this is the first half
of the original Microsoft vision statement coming true,
a PC on every desk and in every home.
Desk means work, means enterprise, yeah.
And this era, everybody we talked to
gives a hundred percent of the credit to Steve Ballmer.
Steve took it on his shoulders at this point in time
when Microsoft is passing IBM to say,
I am gonna build and we are gonna learn as a company
how to sell to enterprises.
And Ben, like you're saying,
it's impossible to imagine now Microsoft not like this,
but there's so much that they needed to do
that they didn't have.
In part because prior to this,
personal computers were not used by enterprises.
It was just not an enterprise tool.
So now that it was happening,
Microsoft had to figure out how to be the ones
that would benefit from it.
And that meant selling to the C-suite
at global fortune 500 companies,
most of whom did not use computers.
Correct.
And certainly didn't wanna buy operating systems
one at a time.
Right.
And to the extent members of the C-suite like CIOs
or the proto IT organizations used computers
or were the computing centers in the company,
they hated the PC.
It made their life hard.
This was like when employees would bring a PC to work
and plop it down on their desk
and start mucking around with stuff.
It made things hard.
Right.
And there really isn't yet a business server
that couples nicely with the PC on the desk.
And so you have this weird thing
where there's a mainframe that is where the company
is like real enterprise applications run,
but people are bringing PCs
and those PCs don't actually communicate well
with anything else yet.
They just are there for the employee
to do their own work on a spreadsheet or something,
print it out.
Cause finally 3.1 had printer drivers
and then deliver that map.
But it wasn't like a system that operated
with other systems in your enterprise.
Right.
There's no email.
So this really was like a business transformation task
for the global fortune 500.
Right.
It wasn't like, hey, let's sell something to businesses
that they wanna buy.
It's, hey, let's convince businesses
that PCs are a good idea for their workforce to adopt.
Right.
This was partnering with the consulting firms.
This was building a direct sales force within Microsoft.
This is building an indirect sales force
within Microsoft to partner with distribution partners,
with channel partners, with independent software vendors.
This is building a customer service organization.
This is building the executive briefing center
on the Microsoft campus and bringing CEOs
and other C-suite folks there to Microsoft.
It's building solutions for them.
It's becoming a partner.
It's everything that Steve is frankly just born to do.
And all of this stuff is pretty out of scope
for this episode,
including all the software systems you would need
to build for the enterprise,
like Windows NT Server and Exchange and SQL Server
and Active Directory,
like the classic mid-2000s Microsoft stuff
that they got known for.
But that is what this would all evolve into.
And it really just started
with everyone kind of looking at Steve
and saying, can you figure this out?
We've all to date basically just been
either running dev teams or running marketing
or running product groups
and been selling through retail or distributors
in the application side,
or mostly through OEMs on the systems
and operating system side.
But can you go figure out how to sell everything we make
in a completely different way
to a completely different buyer profile
and keep us posted on how that needs to change
all the products we make in order to do that?
That's a pretty crazy change.
And how it actually goes down
and we sort of heard this from Steve
and you heard it from other people,
is so fitting.
So by the end of 1990,
the Microsoft IBM divorce is official.
IBM takes full control of OS2 development
back from Microsoft.
Microsoft ceases involvement.
The breakup is official.
This now gives Microsoft and Steve
hunting license in the enterprise
to go compete against IBM.
But they have a secret weapon
that is going to enable them
to come take the enterprise from IBM.
And Ben, tell us what it is.
Well, it's painfully obvious.
It's Microsoft Office.
And it's the fact that the whole workforce
is already using Microsoft Office.
And everyone loves to talk about product-led growth
and how it's this new thing in the late 2010s
and how Slack and Atlassian and Trello,
everyone figured out PLG
and this bottoms up workforce adopted way
rather than selling to procurement or IT
or the central administrator.
And it's just not new.
No, this has always been the case
and Microsoft invented it.
All the employees wanted to use Excel and Word
and they just had to figure,
they were doing it anyway.
And at some point, Microsoft needed to figure out
how to take advantage of selling it centrally
and how you do business with other businesses
rather than selling a zillion retail copies of people
who are using it kind of illegally for their work.
There's so many things that are beautiful about this.
One, it's the legacy of this bet on the Mac,
bet on Excel,
and bet on Windows shortly thereafter
that enables Microsoft to go into the enterprise
because yeah, even though they've just broken up with IBM
and OS2 isn't going anywhere,
it's not like Steve can just go knock on the door
of some banking CEO or C-suite
and be like, I'm Microsoft,
come talk to me about how you're gonna use Microsoft products
in your organization.
But rather it's like,
hey, thousands of people in your organization
are already using Excel.
Let's have a conversation about how we can make that work
better for your organization
and what else Microsoft can do for you.
Yep, absolutely.
And next episode is gonna be all about
the enormous success of becoming an enterprise company
and the enterprise agreement and cloud
and everything that sort of came after that.
But we have two chapters left in this episode
and they happen concurrently within the systems group
by two very, very different teams.
And that is Windows 95 and Windows NT.
So David, let's start with NT
and then our little cherry on top can be a 95
to close us out.
How did Windows NT happen?
Perfect, and it's intertwined with the beginning
of all this enterprise-ification of Microsoft.
Okay, so Windows NT.
Remember, IBM's whole goal with OS2
was that they saw the trajectory of the PC
was gonna eat into traditional mainframe type applications
in the enterprise and they wanted to re-centralize
and own the PC enterprise-ification of workloads.
NT is after the divorce,
Microsoft being like, screw that,
we're gonna do the same thing and eat your lunch.
And so the initial work kind of starts out of
the work they had been doing on OS2 with IBM.
But then in October, 1988,
as they're heading towards divorce,
Microsoft hires Dave Cutler away from DEC.
And Dave is an absolute just beast and legend.
Like he's still writing code at Microsoft today,
which is amazing.
It's not crazy, it's like in his 80s.
Dave at DEC wrote the whole operating system
that DEC ran on, VACs.
And so poaching him away to come work at Microsoft,
both like he's the guy that's gonna build
an enterprise-ready take share away
from the way traditional enterprise computing is done
onto the PC, like he's got the chops to do this,
he's also got the credibility to do this.
He's written a widely deployed enterprise operating system.
Yes, him coming to Microsoft,
him leading and building this effort
gives Steve and the sales force so much legitimacy
when they're going in and talking to the C-suites
and the CIOs and the IT departments and enterprises.
Even though they don't yet have
an enterprise product to sell,
they've got DOS and early Windows,
which is essentially consumer targeted,
but now they've got this guy, Dave.
Yes, now they've got Dave.
And we should say, Dave,
this is really the first time they brought in
someone who had real industry experience.
I mean, in 88, Microsoft was 13 years old,
so Bill Gates would have been 33.
Everyone is in their like late 20s and early 30s,
and Dave's like mid 40s.
He's like, I've seen a few things.
I think it was Dave and also Mike Maples coming from IBM.
Mike obviously wasn't a technical leader,
but on the business and strategy.
Yeah.
So NT, we'll talk a lot more about it on the next episode,
but spoiler alert,
it is the vision of what IBM wanted OS2 to be,
but it's Microsoft's version of it.
Right, it enables all of your desktop computers
at the company to join a network together
in a compliant way.
It enables an internal server
that everything communicates with.
It enables a directory of all the devices on the network
and all the people in your organization.
Yeah, soon with the internet coming,
it'll enable servers that face externally from your company.
The punchline here is that NT becomes the seeds
of Windows Server, the business line,
which become the seeds of Azure today.
So the other important takeaway on NT is
it was gonna take a long time to build.
It was gonna take a long time to test.
It was gonna take a long time to sell and deploy,
and it was gonna have really strict requirements
for what it could work on,
because it's a power-hungry operating system
built for enterprise IT administrators.
And so that is not your short-term product strategy.
That is a long-term bet
that a team is gonna work on concurrently
while you're figuring out what to do after Windows 3.1.
So in 1991, Bill Gates sums this up in a memo
where he says our strategy is Windows.
One evolving architecture, a couple of implementations,
and an immense number of great applications
from Microsoft and others.
And every word in that sentence
does a bunch of heavy lifting.
So you got one architecture, okay?
I think what that basically ends up meaning
a few years later is one application programming interface,
API, that developers can target
so that when they wanna write a Windows app,
it works on both NT and whatever the evolution of 3.1 is.
Okay, so that's one architecture,
but it says one evolving architecture.
So that buys Microsoft a little bit more fluidity
in the one architecture that's being targeted.
Then you hear a couple of implementations.
So this basically says even though developers
are targeting what became the Win32 API,
the one way that we write applications,
there's two different implementations.
And so for many years,
they would display very differently on NT systems
versus, spoiler alert, Windows 95,
the successor to Windows 3.1.
Oh, by Windows 95, you mean Windows 4
that was supposed to ship in 1993?
Yes, I do.
But it's so much sexier to say Windows 95
and name it after the year that it actually ships versus,
yes.
But yes, an immense number of great applications
from Microsoft and others,
that sort of sheds light on the DRG,
the Developer Relations Group strategy.
We got to go out and be massive evangelists.
And everyone in the systems group
is looking over at the apps group going,
did you see that?
Bill Gates just said our strategy is Windows.
We're now the Windows company
and that includes great applications
from Microsoft and others.
And so what does that mean, applications group?
Like let's go first and best on Windows, get to it.
I just think that sentence kind of says it all
for what we're looking at 1991 through call it 2000 or so.
And then we just spent a bunch of time
talking about the enterprise-ification
and all the amazing enterprise stuff
that the seeds get sown for Microsoft
at this point in time.
This era is also the heyday of the consumer PC, right?
93 Jensen starts Nvidia, graphics cards are becoming a thing,
PC gaming is becoming an industry.
That goes all the way back to,
you can even look at Minesweeper
as being a seminal moment in terms of the consumerization,
these devices, these personal computers
becoming companions to people's lives
like the phone is today.
I mean, you've got CD-ROM technology,
multimedia and Cardo.
The heyday of the consumer PC is here in this era.
I mean, even before Windows 95 shipped,
they had 75 million Windows users.
This is even before you get plug and play
or multimedia or networking.
Like this is on Windows 3.1, crazy.
Okay, so we've been leading up to it.
We've been building hype, Windows 95,
or should I say Chicago.
So the Chicago name for those of you out there
who were like paying attention
when this was under development
and you were all excited about what Windows 95 would become
and it's probably 1% of our audience or something
who knows the Chicago code name.
They wanted to create an OS for the every man,
one that was easy to get to,
a nice quality of life when you're there.
It was affordable.
Chicago is the perfect name in every way.
And it is also kind of a contrast
to what was going on in a different part of Microsoft
where there was the code name of Cairo
for a very ambitious next generation operating system.
Now, mind you, NT had already come out in 1993.
So Cairo is sort of this general bucket
of maybe it's post-NT, maybe it's part of NT,
but this is like a really sophisticated,
crazy set of technologies
that we're gonna eventually bake into an operating system.
It doesn't really have a release date.
No one really believes in any of the release dates
that are proposed.
But the Windows 95 team, the Windows 4 team,
the Chicago team loved contrasting this idea
of like a far flung land that's really ambitious
and who knows what it'll actually be like
with this Chicago something we know quite well.
You get on I-90 from Seattle,
you drive for three days and you're there.
And that is sort of like the goal.
That's the spiritual thing about Windows 95.
Pizza, the bears, the cubs.
A hundred percent.
We should say Cairo never shipped.
So there's a lesson in that.
Might as well have been called Oz.
Or Longhorn.
Okay, all right, you're getting ahead of ourselves.
We are getting ahead of ourselves.
So, okay, Windows 95,
let's start with the launch event itself.
It was a huge, ridiculous, insane day
in Redmond, Washington.
They set up tents all over Microsoft's campus.
They flew in journalists, beta testers.
There was a movement around Windows 95
in a way that you would not believe.
It was an operating system launch and Jay Leno launched it.
It wasn't like Jay Leno did some standup.
He was like Jay Leno for 90 minutes
in a tightly scripted environment,
co-hosted with Bill Gates,
all of the fanfare and festivities.
There is no other word to describe
the Windows 95 launch besides glorious.
I am so glad that this stuff is preserved on the internet
and on YouTube and that we could experience it ourselves
over the past month.
It might be like the peak moment of pure joy
to celebrate technology
before a lot of the sort of skepticism came in
and the tech haters.
The DOJ and yeah.
Totally.
It was unabashed celebration of software
is probably the best way to put it.
Microsoft licensed Start Me Up famously
from the Rolling Stones.
It's amazing.
A software company licensed Start Me Up
by the Rolling Stones as the official theme song
of an operating system.
Yes.
The idea that this would be happening
certainly back in 1975 when they were moving to Albuquerque
but even just a couple of years earlier,
this is breaking new ground.
Totally.
The other thing that's happening in 1995
is the internet hype is starting to build
but we will table that for next episode.
Right at this point in history,
only 14% of Americans had internet access.
It was still very early.
So there was no guarantee that any story posted online
would actually reach the masses.
And so Microsoft had really relied
on traditional broadcast coverage of this event
and brought in all these journalists
and all these print magazines
and all these newspapers to kind of build the hype.
I watched the whole keynote yesterday
and at the end they ripped down the sort of back
of the tent behind the stage
and there's the entire development team
in the red, yellow, green and blue squares
of the Windows logo sort of sitting outside
on the big sports field on Redmond's campus
and there's only 360 people that built Windows 95.
So it's still kind of a small team
but they're all there, they're fired up,
they're part of the moment.
Okay, so that's the launch event in Redmond at least.
Around the world, people are lined up around the block
to buy an operating system.
There's a lot of news coverage of that.
It was basically the iPhone launch of its day.
Yes.
They lit up the CN Tower, the Tower of London.
This date, August 24th, 1995,
they basically treated an operating system launch
the way that you would launch like a movie
or a new Madonna album.
It was a marketing case study, so much so
that the folks from Coca-Cola actually reached out
to Microsoft to ask them,
how do you do marketing this well in the new age?
Coca-Cola.
To the Bill Gates quote with the Warren Buffett talk.
Yes, this is a company that freaking invented Santa Claus
to sell us all sugar water.
And they're calling Microsoft asking,
how do you market in this new era?
It was that successful.
They launched concurrently worldwide in eight languages.
So this thread that Microsoft had of early international
continued all the way through to this moment.
They invested heavily in doing all of the localization
and help stuff so that the whole world really
could adopt something all at one time.
It really was the perfect product at the right time.
The internet, games, all of that.
And there's so much about Windows 95 too
that I'm sure you're gonna get into,
but like the start menu, it was so perfect
because this was the peak of the PC going fully mainstream.
Nobody had ever treated software like this before.
Yes, that's the takeaway.
They thought about software in a completely different way.
And yes, the start menu, while it got cluttered
and complicated and messed up over time,
the idea of a button that you click
to start using your computer was very appealing to people.
The Mac obviously shared a lot of these elements,
but it was at so much a smaller scale.
Oh yeah.
I mean, the Mac just never had any real PC penetration.
From the IBM PC forward, it never had big market share.
Yeah.
This was like your grandmother
coming into the digital world.
And that is how they tried to market it.
They marketed as people on job sites using Windows.
They marketed it as people doing crafts.
And there's like someone who's modeling something
for an F1 car.
It's just fun watching all these old videos
and seeing all the different personas.
Computer companies love F1 cars for demos.
It's the ultimate aspirational demo.
Yep.
Now I must say this all pains me deeply
as someone who never owned a PC, grew up using a Mac,
loved every bit of my Mac, was even an apologist
in the sort of OS 9 era of this isn't very good,
but I'm still gonna say it's good.
And I was on the OS 10 public beta.
I only clicked a start menu
when I was like fixing a teacher's computer at school.
Even though the takeaway here is everyone thought
this was a great operating system and it won the market.
I always looked at it like, well, it's not a Mac.
Right.
Well, that's how Mac users always look at Windows.
The way that Apple products became mainstream,
always felt odd to me as someone
who was using them when they weren't,
but it's been interesting gaining a new appreciation
for Microsoft through studying their history
that I absolutely did not have as a user during this era.
Having this discussion now makes me think
what Microsoft in this area, Windows 95,
like they did what Apple tried to do in bringing Scully in.
Scully came from Pepsi.
Obviously that didn't work,
but Microsoft, they're the ones who did it.
They're the ones who mass marketified the computing vision.
And it was the wrong strategy for Apple
and it was the right strategy for Microsoft.
I mean, Apple has always, at least in my opinion,
created a better computing experience
by being completely integrated.
I mean, it's the Alan Kay quote.
Anyone who cares about making great software
needs to build their own hardware.
And the complete integrated package that Apple offers,
I have always found to be the best computing experience.
And it doesn't scale.
Or it didn't in that era, for sure.
In that era, yeah.
The way to scale is make the software
that is going to get distributed on the most PCs.
And then that is the most interesting
to software developers.
And it is the most interesting to consumers
who want the software and IT buyers
who want to buy the standard thing.
Apple's strategy versus Microsoft's strategy in this era,
Apple was always gonna be a bit player
rather than the sort of scale winner.
And the trade-off is lots of PCs had blue screens to death.
Apple never had blue screens to death.
Like, what do blue screens come from?
It's driver problems.
It's that the printer is not speaking the same language
as your particular computer
and what the operating system knows about your computer
and are the device drivers right
for your particular version of whatever's
on your motherboard.
Like, Apple never had those issues,
but they also had very few units shipped
and a much more expensive product.
Sidebar, that Alan Kay quote about
if you really care about software,
you do your own hardware,
makes so much more sense to me now having done this episode
because he's coming from having made the Alto
and the graphical inner user face there.
The only way that he could have made the GUI on the Alto
was basically building a mini computer.
Yeah, isn't that crazy?
Makes so much more sense now.
Yep, so a little bit more on Windows 95
before we finish the story here.
It is remarkable to reflect that it took, what,
five, six years to go from Windows's plan B
to Microsoft being extremely right
that that was the franchise,
like that was the bet to bet the entire company on.
And as Brad Silverberg put it this way to me,
he said, Windows 95 cemented Windows
as the franchise product for Microsoft,
which interestingly, it was not yet.
And David, this is crazy.
It would remain the franchise product for the next 20 years,
perhaps five or 10 years too long,
but we'll save that story.
Yeah, and just to put some numbers on this.
So August 24th, 1995 is the launch event,
the glorious day Windows 95 comes out,
sells a million copies in the first week,
seven million copies in the first month.
Fiscal 95, so this is the 12 months ending in June
before Windows 95 comes out.
Microsoft did $5.9 billion in revenue.
Fiscal 96, they did 8.7.
Fiscal 97, when Windows 95 is really going,
they do $12 billion in revenue.
First software company to pass $10 billion in revenue,
already the most valuable company in the world.
I mean, they are a monster.
There is no other way to put it.
Yeah, it's crazy.
From a product perspective,
there was just so much that really got smoothed here.
This was a user experience
where they finally had time to think,
what actually do users wanna do with an operating system?
What features should be part of the OS
and what should we delegate to applications?
What are modern networking technologies
that we should bring in?
I don't wanna foreshadow too much,
but how should the internet be in a modern operating system?
That was a huge thing.
The multimedia, the video stuff,
an operating system really showed up and said,
we thought about this experience for you.
You're looking for where to start.
You're looking for cool stuff to do,
and you're looking for it to not break on you.
We now finally have a complete story around all of that.
Yup.
So a couple of interesting technical notes.
It was basically all new technology.
If you try to look this up,
it will tell you Windows 95 was DOS-based.
It still used DOS in fallback situations
for older DOS applications or drivers,
but for most of the time, it was no longer true
that Windows was just an operating environment
on top of the DOS operating system.
Windows had now become a true 32-bit operating system
of its own.
Windows did all the heavy lifting.
It had its own file system.
It accomplished a lot of the sort of user experience magic
and speed that it was praised for
by rewriting a lot of this from scratch.
So this was kind of the beginning
of Windows as its own OS.
And you can see that actually change
in the marketing messages
that change from operating environment to operating system.
So David, that brings us to the end of our chapter one.
We've got plenty of analysis here to do,
but my God, what a first 20 years for the company.
I mean, we knew this was gonna happen, right?
This is why we waited 10 years
into acquired life to cover Microsoft.
It's the most important company in the world still today.
Yeah.
It was so fun researching, going back and doing all this
because A, there's so many different perspectives
and so much has been written,
but I don't know if we've gotten it right here,
but I feel like every other major attempted storytelling
at this has not gotten it right.
And so getting to go talk to all the people
who were part of this.
Well, yeah, living in Seattle is quite helpful.
Yeah, like we really got that sense of like,
there's still a story to be told here
and it's never been more relevant again than today.
All that to say, I'm glad we waited 10 years.
Right, and there's all this stuff we miss.
Like I didn't mention Microsoft Research.
Microsoft Research was a lot of people and a lot of money.
Right, Microsoft tried to buy into it too
along the way that got canned.
Actually, the start of research is interesting.
I'll say this real quick.
In 91, Nathan Mirvold started Microsoft Research
and the logic is fascinating.
Basically, everything Microsoft had done until that point
was taking things from mainframes and mini computers
and adapting those tasks,
those jobs to be done for personal computers.
And at some point, they kind of looked around and said,
all right, well, we did it.
All the personal and business applications
can now be run on personal computers.
So we have to come up with uses for future technologies
in order to continue to drive the ecosystem forward.
There's no more low hanging fruit.
And I thought that was an interesting thesis
of why to spin up a research division
at that point in history.
Yes, let's move into analysis.
Okay, great.
So playbook, the big interesting one
that I want to start with,
and it actually involves a chapter from the story
that we just sort of glossed over,
is capital efficiency allows founders
to control their own destinies
in a way that you just don't get
when you're selling off huge chunks of the company
in order to accomplish your mission.
Oh, yes, I love this.
Let's just talk through the cap table over time
and how the company went public.
So we talked about the partnership being 64% Gates,
36% Paul Allen, 1980, Steve Ballbar comes in
and gets eight and a half, 8.75, something like that,
percent of the company.
So dilutes Gates and Allen down.
Then in 1981, just a year later,
they take the VC investment for 5% of the company from TVI.
This also, I'm guessing around 5%,
trying to reverse engineer some of the numbers.
They also created an option pool
where they were then creating opportunity
for basically rewarding management,
which is how there were 10,000 millionaires created
in the Seattle area from Microsoft.
Right, that's the amazing thing.
The option pool doesn't get created
until so late in Microsoft's life.
All those Microsoft millionaires only came from that,
whatever size that was, 5% of the company or whatever.
Right, yes, at IPO, so even with all this dilution,
so you've got the Ballmar dilution,
the VC dilution and the option pool dilution,
Bill Gates still owned 49% of the company.
I mean, that's pretty unprecedented.
And he wasn't the only one with a big chunk.
Paul Allen owned 28% of the company.
Steve had 7.5% of the company.
This company was basically owned by the three
more or less co-founders.
A little tiny option pool,
and then a VC who ended up with 6.1%.
I think Dave got some more shares from being on the board.
You just don't see companies that look like this anymore.
Yeah, this is Bill's company.
This is their company in a way
that no other company is these days.
No venture-backed company going through the modern era
is like that.
By the time you get to be public,
you may still be the largest shareholder as a founder or CEO,
but it's not your company, far from it.
Yeah, absolutely.
I'm trying to figure out why they were able
to be so capital efficient.
Is it just that software
was such an unbelievably good business model
compared to everything else that existed?
Like they didn't need a lot of work in capital.
Everything was high margin.
They could grow really fast.
Or it was just an era before much competition.
And so they didn't need to out-raise their competitors.
Once they got a little bit ahead,
there was really no way for anybody else to close the gap
assuming that they executed well.
I totally think it's the latter.
And I think it's that the minimum fixed cost threshold
to be that in Bill's words,
slightly better than your competitors
and get the positive spiral going
was low enough that it could be paid for
just in Bill and Paul's time and effort.
And it was that unique moment at the beginning
of the software industry where that was true.
And that would never be true again.
That's so, so, so insane.
And there was no one else really with the knowledge either.
Even if someone else came in with a big $1 million check
and gave it to a competitor in 75,
like how many people could really write
these language interpreters?
You couldn't buy the experience
having written emulation software
for microprocessors that Paul had.
They had an obsession and an obscure skill
that turned out to be one of the most valuable in the world
in an area where there was a freak law of nature in play
with Moore's law that was so unintuitive
that you had to think from real first principles
to understand the impacts of it.
Well, I think there are two freak laws of natures.
One, there was Moore's law that they were benefiting from,
but then two, there was the zero marginal cost of software.
Yeah, that's true.
It's just like complete perfect storm
that enabled them to build a highly defensible business
without really any investment ever.
This is the largest company in the world,
the most valuable company in the world
that was entirely bootstrapped.
Yes, even though they raised money,
not a single dollar of investment
actually happened at this company.
No, I mean, in 86, when they actually did go public,
they raised $45 million
and they never spent that
because they generated much more free cashflow
than that that year.
Right, it was just a means to an end of getting public.
And they needed to for the reason that
they had been granting so many stock options
from that little option pool to employees
that they were gonna blow the SEC's 500 shareholder cap
by they projected 1987.
So they wanted to go public on their own terms in 86,
not when they sort of had to by SEC rules.
Also, Microsoft needed to be a public company.
If you're gonna be an important company in the world
at this scale, if you're gonna first ride the bear with IBM
but then inherit the earth from IBM,
you gotta be a public company.
You can't be a private partnership.
You're not gonna go have conversations with C-suites
and CEOs of Fortune 500 companies
if you are a private partnership.
Maybe. In this era especially.
Maybe, I don't know.
I'd agree with you if you had a bunch
of short-term capital interests that owned your company,
but if it's all founder owned,
there are great large private companies in the world.
Yeah, fair true.
Coke Industries is a trusted company
by a whole bunch of their customers.
Cargill is even bigger than that.
There's a bunch of European industrial
and shipping companies, Rolex.
There are privately held big important companies
in the world.
Oh yeah, for sure.
But none of those companies are Microsoft.
That's true.
That's very fair.
Especially getting to the stage
that they eventually got to being the trusted partner
to governments around the free world,
that requires being a public company.
Yeah, it's funny.
This playbook theme, this was a moment in time
and a set of factors where this worked.
I mean, I guess the lesson is find an industry
in its infancy and be capital efficient and run the table.
And that has like unique economic conditions
that have never existed before
to create these magical businesses.
You could never fathom before
this new technology thing existed.
It's an impossible thing to wish for.
Like it may never happen again.
We may never get another Google either.
That's what I was gonna say.
It did happen again.
It happened with Google.
But how many things can you collapse to zero?
I think that's the question.
With Microsoft, they were able to collapse
their marginal cost to zero,
but they still had distribution costs.
And then Google collapsed distribution cost to zero
with the internet.
So what's a big cost that a company has now?
Maybe AI will collapse.
You no longer need 50,000 employees.
You can have five employees.
Maybe it can collapse that to zero.
But you need something of that scale,
which is like where does a company spend most of its money
that suddenly it can spend no money on?
I suppose actually it is on the human capital.
You just look at big successful companies
and look at what they spend money on.
And those are the candidates.
Good point.
Still, unlikely we'll ever find
another Microsoft opportunity.
Yep.
Other fun things on the IPO.
Do you know who IPO'd the day before Microsoft did?
Ooh, no.
Oracle.
Aha.
And Oracle had a nice pop,
which actually helped Microsoft price
a little bit higher in their IPO.
That is another episode we have to do.
Another thing adds yet another layer
to the insanity of everything that we've been talking about
of why they were able to build such a successful company
on such little capital.
I don't think there has ever been a tailwind in history,
like the one that Microsoft had
with the secular growth of the personal computer wave.
And the only thing I can think of that is comparable
is Amazon with the growth of the internet,
sort of powering their early growth.
But here's the stat.
From 1975 to 1986, 11 years prior to their IPO,
so founding to IPO,
PCs grew at a compound annual growth rate of 98%.
It grew from 4,000 units per year
to 9 million units per year shipped.
You can almost not mess up
when you have a tailwind like that.
Yes, especially when you are like the linchpin player.
Right, they managed to make themselves
the point of integration for the whole industry.
So oftentimes I find myself
when we're looking at these companies
that are like among the most successful in the world
or like Microsoft, the most successful in the world,
it's basically like a multi-dimensional,
multiplication problem.
We were like, okay,
they had this unbelievable one in a zillion thing
going for them,
which you can sort of multiply
by this other one in a zillion thing.
And so it's the like zero marginal cost,
zero distribution costs,
unbelievable secular growth of the PC,
Moore's law happening.
They're the single choke point for the whole industry.
It's just crazy how many things you multiply together.
And of course it should end up in a number over 3 trillion.
Yeah, which I'll jump in with a playbook theme
that we referenced a little bit in the episode,
but we really got a highlight here.
Bill and Steve and Paul and everybody at Microsoft,
they were incredibly talented, incredibly smart.
They saw the future in a way nobody else did,
but they also were willing to hedge their bets.
And it's not like they just got everything right.
I mean, they were gonna get things wrong with OS2,
but they hedged the bets with Windows.
I think that is such a key lesson of
when you're in a really dynamic market like this,
in our ecosystem right now,
in tech, venture capital startups, whatnot,
people put so much value on conviction.
I have conviction.
This is what the future is gonna be like.
And I think the Microsoft story is the opposite of that.
They had conviction that-
Software.
Software was gonna be big.
And personal computers,
like creating software for desktop computers
was a really good idea
and they wanted to be the best at it.
But beyond that-
But the exact path of how that was gonna play out,
they had very little conviction
and were willing to be very flexible.
Yeah, you're right.
It's both the hedging,
but also then the ability to read the world
and quickly, entirely change your strategy if you need to.
And having your hedge be far enough along
that you can jump quickly to it
and shift your whole organization to get on board with it.
That's a hard leadership thing to do.
Totally.
Ooh, I can't wait in the next episode
to talk about the internet title wave memo.
But that's related to your playbook theme too.
You can't really do that if you don't own 49% of the company,
if it's not your company.
Right.
Which I think you're seeing play out with most CEOs today.
There's a big difference between a founder CEO
and the stuff that they can do.
Zuckerberg with the metaverse
or Jensen with betting the whole company
and going all in again on AI
versus Tim Cook or Sundar Pichai,
certainly very different type of CEO.
Satya is interesting.
Despite the fact that he doesn't own half the company,
he's got a lot of founder-like control,
which I think is pretty interesting.
Well, all right, don't get ahead of ourselves.
Moving along.
Other playbook themes.
A big one that jumps out to me
is that new generations of technologies
enable market dislocations.
And unless you are in a transformational moment
in terms of a new technology came out
that enables something that wasn't possible
before that's gonna rearrange the whole value chain
and open up new markets,
it's pretty hard to go challenge and incumbent.
No one was gonna challenge IBM really
until the microcomputer, even the many computer people,
did DEC really challenge IBM?
Not really, never made a dent.
It wasn't a full platform shift in the same way.
Yes.
And there's these little blips of it, like the GUI,
I think meaningfully reshuffled the DECs.
But those are the moments
where you can have meaningful new entrants.
And otherwise you kind of have to bide your time
and just build your hedges and see.
Related, even if you are the incumbent being disrupted,
it is possible to have a very, very large
and durable revenue stream
that can go on for a very long time.
And what I'm referring to in this particular example
is despite all of the dethroning that we just talked about,
Microsoft would not eclipse IBM in revenue,
you mentioned market cap, David,
but in revenue until the year 2015.
Wow.
Isn't that nuts?
I sort of intentionally didn't look up revenue
because it made the story muddier,
but wow, yeah, there you go.
But I think that's the point, right?
It's like Microsoft's perception by the market,
I'm sure they were growing faster.
I'm sure they had better gross margins.
I'm sure there was a better story there.
And so there's multiple that comes out of story.
I'm sure there's lots of good reasons
why Microsoft became more valuable than IBM very early.
But IBM's revenue did not peak until 2012.
Wow.
What?
It's this like long after public perception moves on,
customers still get value from something created
by incumbents for a very long time.
And I think that's something we often forget about
in the sort of buzzy Twitter verse of like,
oh, that thing's over.
It's like, hmm, it might still grow
for another 20 years before it's over.
Well, that also just speaks to the nature
of the enterprise business too.
Yes, that's a good point.
IBM was the enterprise business.
Today Microsoft is the enterprise business.
Right, that's true.
Peloton revenue can dry up a lot faster
than contracts for mainframes.
Right.
What do you got?
A playbook theme that I wanna highlight
that really, really came out in our conversations
is Microsoft was not just a talent magnet,
the talent magnet during the PC era.
If you were an ambitious young person,
this is where you wanted to be.
And it was on every dimension.
If you were an ambitious young technical person,
that's where you wanted to be.
If you were an ambitious young salesperson,
if you were an ambitious young marketing person,
that's where you wanted to be.
And they just had this culture there, which is so funny.
We'll talk in the next episode of how that culture
really fell apart for a while there.
But I asked a lot of these early people
that we talked to, like, what was it like being there?
I mean, you guys worked yourselves half to death.
Were you mad about that?
Did you resent it?
Were you like, we're just making Bill rich?
They're all like, no.
Yeah, we neglected every other part of our life,
but that was the good old days.
This was the magic.
We were making it happen.
Yeah, that totally comes through.
I asked Brad, why did Windows 95 work?
And there's lots of structural reasons,
but he said we basically did two things.
One, we laid out principles for product
and then pushed responsibility down.
Developers were often their own PMs.
So there's sort of this idea of once you got the principles,
we don't need to write a zillion specs
and design something three times
and pass it through three functions,
just like you know the principles,
make great software that follows the principles.
And two was he said that everyone felt personally responsible
for the product and it really showed.
Anybody you talked to from this era at Microsoft,
this was their life's work, no doubt about it.
Yep, something we touched on a little bit
is the benefit of scaling with OEMs.
This was sort of the contrast against Apple
where I said Apple was sort of always gonna be a niche player
by the way that they designed and built
and packaged everything's themselves.
Apple is in many ways like the Amex
where Microsoft is the Visa.
Yeah, on our Visa episode, it just became so clear
that Visa could sort of quickly take over the world
at MasterCard by being an open network
where they didn't have to do all the work
to scale themselves.
They could distribute to a bank, partner with a bank
and then boom, each of the banks that was on their network
could independently scale at their own rate
which created obviously compounding effects
for how fast Visa and MasterCard could scale.
The same can be said of Windows.
Totally, the OEMs, yeah.
I think the Microsoft OEM team for Windows
was like 20 people or something.
Before the enterprise in this era that we're talking about,
the group of people responsible for go-to-market for Windows
was really small.
They sold some retail, but the team was just about,
hey, make sure HP and Compaq and Dell and Gateway.
Exactly, that was their go-to-market
and it makes your scaling like unbelievably efficient.
Dude, you're getting a Dell.
Dude, you are getting a Dell.
Similarly, I think the fact that they went international
early was this very powerful constraint
where it meant that every time they shipped software,
they had to make it globally ready quickly.
And so that meant that if there was any sort of network
effects to your software, like anything becoming a standard,
Microsoft was just way better positioned
to become the standard than anyone else was.
And on top of there being network effects,
there's also scale economies.
A word processor is a word processor.
And so the extent that you have customers in every country
who can buy your one piece of software,
you can amortize the development costs
over a huge user base so much more quickly.
A hundred percent.
The fact that they forced themselves to be international
early meant that every product after that
also had to figure out how to do all the localization
and training and all of that to get all those effects too.
I mean, no matter how much time and money and resources
you have to spend to localize Microsoft Word into Kanji,
it's a lot less time and resources and money
than developing Microsoft Word.
Yes, exactly.
And they just realized that so early.
They also realized that most people who were doing
some sort of localization would do a shoddy job.
They would think about it as lesser than the US market.
And so they just did a good job at localization.
They just cared.
They thought of it as like, this is a strategic pillar
that in every country, everyone experiences our software
to the same quality because it's our brand everywhere.
And I don't know, I just think that is not how the rest
of the industry thought about it.
Definitely not.
On top of all of this, the way that they executed it
through subsidiaries was pretty genius.
Redmond did not control international.
They spun up country managers and subsidiaries
in each of these countries in a ton of countries.
And so while Redmond did the product development
and then did the engineering work to do localization
to all the strings files and everything for those countries,
the actual marketing messaging and the sales strategy
and the sales structure happened in country
that was owned by a person who lived there.
So they actually could think through what is the best way
for people to receive this software here,
which again, that's just gonna yield way better results
than if you're sitting there armchair quarterbacking
at Redmond thinking about how a person in Chile
is gonna receive your marketing message.
Yup.
And one other that I have is this one
that we didn't really talk about,
but Microsoft famously was not first to market
with basically any of their applications.
They aren't even really today in most cases.
I mean, you think about the strategy
that they had early on, spreadsheets, word processing,
all of these were copycats at their outset.
I mean, sometimes they would do an acquisition,
but most of the time they just look at a product and say,
huh, our software should do the same thing.
And they would copy it.
They had no shame in doing that.
They had their eyes everywhere looking for good ideas
and they had reverence for the good ones.
And then they would just incorporate them.
And on top of that,
they wanted to make the software very easy to switch to.
So a lot of the keyboard shortcuts in Excel to this day
are there because they were originally
the Lotus one, two, three shortcuts.
And they wanted people to have the same muscle memory
that just worked.
So fundamentally what this does for you as a business
is it just leads to better risk adjusted returns.
You already know what's going to work before you ship it.
Like you don't really take market risk.
So you're not going to be the first to the market
with early adopters,
but most of the time you actually don't need to be to win.
And I think Microsoft, I don't know,
they sort of own that idea.
Most of the time people are sheepish about it.
Steve Jobs famously said, Microsoft has no taste.
I think that's another way to put it,
that it's copycatting.
Well, so I do agree with your premise with all of this.
I think doing this episode though,
has made me think there's a little more nuance to it.
Yes.
And in broad strokes,
you can say that's what Microsoft strategy was
with applications over the years.
But the Microsoft versions never actually won
until there was a platform shift
that they could take advantage of to beat the company.
Like Microsoft wasn't going to beat Lotus one, two, three,
until the graphical paradigm came along
and then Excel being graphical
was just obviously so much better.
They tried with multi-plan, they failed.
Multi-plan was fine, but one, two, three was the winner.
The nuance to me is yes,
but it's more like with the resources of Microsoft
and the timeframe that Microsoft can afford to have,
they can afford to like start building the application,
start building the product, getting into market,
start learning, be positioned
that then when the paradigm shift comes, leave ahead.
Right, that's a good point.
It's also different.
I mean, the Lotus one, two, three multi-plan thing,
in that era, Microsoft just didn't have
great distribution yet.
And so Lotus one, two, three just got pretty far ahead
of them and Microsoft had no way to catch up.
A few years after that,
that would basically never be true again.
Yeah, that could be two, two.
I will say you touched on something
that's an interesting corollary to this
is their first versions of software famously are not good.
You look at Windows 1.0 and 2.0,
they know that it's part of the strategy
and they were world-class at learning from customers
and integrating customer feedback into subsequent versions.
And so there's always this like saying of
Microsoft doesn't have a very good first or second version,
but the third version of something
is typically pretty good.
And I think that fact pattern definitely follows.
Yeah, I'm curious your thoughts on this.
I'm so surprised.
One thing that you have not brought up yet
on this episode is you were a PM
at Microsoft for several years.
I was, but it was such a different era
in that 2012 to 14 era.
It's not, I guess 2011 is when I started as an intern.
I'll have a lot of thoughts on it next episode.
Okay, great.
I've got one more playbook theme
before we move on to power.
And that's the, well,
Microsoft figured out software before anybody else.
And they figured out so many aspects
of what it means to be a software business
before anybody else.
But they figured out that software is never done.
Yes.
I do think a lot of their competitors,
you know, we didn't obviously didn't study Lotus
to the same degree that we studied Microsoft here.
We didn't study WordPerfect, et cetera.
But I think there was a mindset,
a lot of other folks that like you ship software
and then the software was done.
And that was not the culture of Microsoft.
This is related to what you were just saying.
Shipping software is the beginning.
You are always working on that software.
Yeah, you're working on next versions and stuff,
but even before the next version,
the work of software is never done.
Which of course, if you own the hardware,
you definitely think of it more of like,
well, we ship them the big cabinet of things
and we install it and we fix it if it's broken,
but we sold them hardware.
The software is required to run it,
but the thing we sold them is the hardware.
And if you're a pure software company,
you think about the world differently.
You're like, well, I can always ship you another CD,
another floppy disk, you know, over the internet.
It's obviously very different,
but because there weren't really software companies
before them, of course people didn't come from that mindset.
And I think you still see the legacy of this
right to this day in Apple versus Microsoft.
Apple still is on a yearly software release cadence,
which is kind of ridiculous.
Whereas Microsoft is on the cloud.
It's all constant.
It's all constantly shifting and like, look at AI,
look at open AI.
The software is never done,
it's so deeply in the software business model.
Yeah, that's true.
All right, should we move on to Power?
Yes, so listeners who are new to the show,
we do this section based on Hamilton Helmer's
Seven Powers framework.
And the question is, what is it that enables a business
to achieve persistent differential returns
or to put it another way, to be more profitable
than your closest competitor and do so sustainably?
And the seven are counter positioning, scale economies,
switching costs, network economies, process power,
branding, cornered resource.
And David, I am pretty sure I could make a case
somewhere between 1975 and 1995 at Microsoft
for all seven of these.
Totally, yeah.
It's one of the most defensible businesses
that they built in history.
So of course they would have all seven of the powers.
All right, let's run through each of them
and do a quick 45 seconds on each.
Great, counter positioning.
I think the biggest example of this comes through
where Microsoft was basically willing to jump
on the microcomputer revolution
before the incumbents were.
IBM did not want microcomputers to happen.
And then when they started to happen,
IBM tried to figure out how to slow it down
and reintegrate it into their old business model.
And Microsoft basically had no baggage.
And I mean, this is kind of classic innovators dilemma stuff.
They could say, well,
we don't need to make any money on hardware.
We don't need to even make hardware.
We are free to become the whole point of integration
for the entire ecosystem just by shipping bits.
And that is crazy.
Yeah, and you know, actually related to that,
I can't believe we haven't talked
about this in the episode until now.
Microsoft could enable other companies to be successful.
You talked to Microsoft people,
they always talk about themselves as a platform.
Like we're a platform.
Other companies grow on the back of Microsoft.
That was not true for IBM.
Totally not true.
But Microsoft could make compact successful.
Microsoft could make Lotus successful.
Microsoft could make Intuit successful.
Microsoft could make Netscape successful.
We keep talking about Microsoft as the point of integration
or choke point or dependency or standard
for the whole ecosystem.
Given that it is quite remarkable how much value
they created on top of the platform
versus just captured for themselves.
There's that famous sort of Bill Gates line.
You want your ecosystem around you
to be generating more revenue
than you are taking for yourself.
They did a ton of that.
It's the OEMs and it's the application developers.
Yep, that's major counter-precisioning.
Okay, so that's one.
Scale economies.
Oh, that's everything we just talked about in Playbook.
It's unbelievable.
You know, when Microsoft has an install base
of a hundred million people using Excel,
in this episode, let's just say 10 million people
who were using Excel.
And suddenly some up and coming spreadsheet
comes out with a cool feature like AutoSum
or like fill down or like draw borders
around the cells or whatever.
Suddenly, Microsoft does a tiny bit of dev work
and they can reap tons and tons and tons of value
for doing that that the tiny company cannot do.
Yep, great.
So fixed amount of dev work
amortized across a large customer base.
I don't think we need to say anymore
on this whole episode about scale economies.
Yes, switching costs.
Well, funny thing about Monopoly
is there's nothing to switch to.
Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha.
That's a good one.
Yeah, this one's pretty related to network economies
for me with this one of, okay, sure,
you can switch to another operating system.
Like good luck getting other applications
that you love, know and love to run on that.
Yeah, that's the answer.
Yep, speaking of network economies,
developers, applications, OEMs.
Yep, there's not a classic network Facebook
or AT&T style network here
in terms of one user can contact every other user,
but more users being on Windows
incentivizes more developers
to make great applications for Windows,
which enables Microsoft to sell more copies
to more users, et cetera.
Although actually I think once they start getting
into the enterprise workplaces
in general, organizations in general,
there is the user network effect
I want this Microsoft Word document
that I just worked on for you to be able to open it
and use it too.
Oh, you're right, I didn't even think about that.
The document formats are a huge network effect thing
even before the internet,
even before organizations were networked
and computers were networked outside of an organization.
File formats, you're right,
there's huge network economies to file formats.
Yeah, and it's inter-organizational too.
If I'm a law firm, I want my clients
to be able to open my Word docs.
Right.
Okay, next.
Process power, this might be the weakest.
As it so often is.
It's elusive.
This is a little bit later in history,
but I did always think it was absolutely incredible
when I was at Microsoft
and we would ship a version of Office every three years.
I worked on Office 15,
that the entire 6,000 person organization
had a process in place where we could
release to manufacturing RTM on a date
that we planned three years in advance and actually hit it.
Like the process of the ads cuts meetings
and the zero bug bounce and the testing schedule
and the triage when you had things
that people wanted to introduce late in the schedule.
It was a remarkable product,
especially with all these teams
that needed all their code to interoperate.
And I worked on a shared experiences team
that would check things in that would be a dependency
that Word, Excel, PowerPoint,
all of them took on the shared code.
And we knew our ship date three years in advance
and would hit it.
It's crazy.
Yeah, totally.
This exists, especially by the time you get
to the Windows 95 era, the end of this episode,
it's like rent tech.
The amount of stuff and process within Microsoft,
the device drivers, the middleware,
the programming languages, the dev tools,
the machine there to make all this computing work.
That was like a miracle.
That this stuff worked.
You couldn't just recreate that.
It's funny, the process power,
I would say is stronger in office than Windows.
Now my colors are showing,
like Windows always notoriously missed their ship dates,
but I'm actually less sure
that process power existed in that early days.
I think they were a bunch of smart people,
but I'm not sure that they had a unique way
of creating software.
But I think that got built over time.
Yep, agree.
Okay, branding for sure.
For sure.
Don't get fired for buying Microsoft.
Well, that's true.
Windows 95 built a consumer brand.
The idea of a consumer brand of operating systems was,
you know, there was Apple, but they were tiny
and that was more around the hardware.
Yeah, it's both fronts.
They have a brand in the enterprise
that is an amazing story that they built.
They were branding consumer that was,
the easiest to point to instantiation
is like the Rolling Stones and Jay Leno,
but they had a software brand.
Yeah, nobody had that.
But branding is probably the thing
that they rely on the least, interestingly enough.
There are other structural reasons that they're entrenched
where even if Microsoft had a crappy brand in this era,
they probably still would have won.
The magic of getting the whole deal with the IBM PC
and then getting to sell licenses to all the other OEMs.
Yep, well, that brings us to the last one,
which I think is a super strong one,
at least in this era, Cornered Resource, DOS, full stop.
Yep, it didn't start as Cornered Resource,
but as soon as IBM started shipping it on the IBM PCs,
it was over.
I'll say it again.
IBM's distribution created demand for DOS
and then Microsoft just got to capture value
from everyone else who wanted it.
All right, well, we would do bear in bull listeners,
but we kind of know what happened after this.
So the bull case is that the party continues
and Microsoft continues shipping amazing operating systems
after amazing operating systems
and that stays the important thing in the world.
And the bear case is something else becomes
an important thing in the world.
And just having this super locked in operating system
is not actually the way to bet your whole company
for the future.
The dramatic tension for you all to come back
for our next episode on Microsoft here is
not because you find out what happens.
Right, right, that's true.
Okay, takeaway splinter.
We've spent the last probably six weeks deep in this.
We've talked to everybody.
What are you thinking about in the middle of the night?
The IBM deal.
I can't unsee it.
Microsoft figured out a way to take someone else's dominance
and wholesale transfer that into their dominance
for the next generation.
The fact that IBM called the project chess
is so deeply ironic because Bill Gates was playing chess
and they played checkers.
Maybe Bill was playing 3D chess.
I mean, this is the thing about it though.
We got to give IBM so much credit for project chess
and the PC that they even did what they did was huge.
That a big entrenched corporation like that could ship
a skunkworks project in a year, revolutionize the industry.
They just didn't end up capturing any value out of it.
Yep, and if I could make a less cheeky comment on it,
I would say it's that a new technology generation
when something becomes possible and opens up a new market,
it enables a shift in the point of integration
in a value chain.
The old value chain of IBM, if you shipped the mainframe,
you had all the power.
But in this new world of PCs,
if you controlled the operating system
that all the users were familiar with
and all the developers wanted to target,
you had all the power.
I think that is not necessarily obvious
unless you went through it
and have the hindsight of history
to be able to articulate it.
Yeah, I think you might be right.
I think that might be the single best business deal
negotiation of all time.
Arguably created like $3 trillion of value, so.
Right, right, no, a lot more than that
because this is the point about Microsoft being a platform.
Microsoft is worth 3 trillion,
but how much value has been created on top of Microsoft?
No matter what you think,
good, bad or ugly of Microsoft, you can't deny that.
Yup, absolutely.
At least twice as much, probably much, much more.
I mean, you watch every early interview with Bill
and you read a lot of his writing and he's a great writer.
I mean, it's awesome that so many of his memos leaked
whether intentionally or unintentionally over time.
Is that so many of his memos were issued for publication.
Yes, he really did view himself as a steward
of the software ecosystem and had this steadfast belief
that software was magic and was gonna change the world.
Over the next 20 years, from 75 to 95,
software did change the world
and Microsoft enabled it to happen.
So again, good, bad or ugly,
whatever you think of the company,
they were sincere in, I think the ugly part is
a lot of people wanna hate on the value capture
because God did they capture value,
but they were sincere in their desire
and ability to create too.
Yup, totally.
That's super related to my kind of takeaway here.
The moment for me in the research
and then when we were telling the story along the way
is when they start to believe in themselves
that they don't need IBM, just the audacity.
And I mean that in a pure good way of these kids.
These kids, they changed the world.
That's so trite to say.
My book, we read my daughter at bedtime
and somebody gave us,
it's like the most Silicon Valley trophy thing ever.
It's like, what do you do with an idea?
And the punchline at the end of it is,
you change the world.
And like, it's become such a trope,
but these kids in the 70s, they did it.
You know, and they like believed in themselves
in the beginning and then more and more and more over time.
And then there's just this moment that I think
where they started to like really truly believe
that they were gonna change the world.
And again, good, bad and ugly come out of that.
Mostly good, I think.
But yeah, just the level of ambition and audacity
of these people is staggering.
Yep.
Is that your splinter, the splinter in your mind?
That's my splinter, yeah.
Listeners who are new to the show,
we've been iterating on how we end episodes
and we decided on this recently of, you know,
how should we land the plane?
It's to talk about the thing
that we can't stop thinking about.
Yeah, I mean, here, this company's 49 years old
and it's still the most valuable company in the world.
All right, David, I have some trivia for you.
Ooh, I love it.
Trivia before carve outs.
Do you know where Dave Marquart from TVI
first encountered Bill Gates?
Oh, well, no, I just assumed it was through Steve.
So Dave had watched Bill present many years earlier
at none other than the Homebrew Computer Club
at Stanford.
Yes.
The very place that is part of the Apple lore
with jobs and was showing off the early Apple computer.
Apparently Bill also went and made a presentation there
and would hang out there
and that is where Dave first came across him.
Ah, amazing.
Well, when we were talking about the letter
that Bill writes to the hobbyist community,
decrying piracy and software,
he's basically writing it to the Homebrew Computer Club.
Like he believed that those were the people
who were ripping off his software.
Amazing.
All right, carve outs.
All right, carve outs for new listeners.
At the end of every episode,
Ben and I just chat about one or two things
that we've been enjoying personally lately
that usually have nothing to do with the episode.
In my case, I have two.
The first one has a lot to do with the episode.
I have discovered slash rediscovered the LGR YouTube channel.
Are you into this Ben?
No.
Clinton LGR.
It stands for Lazy Game Reviews,
which I think is how it started,
but then it became so much more now.
It's just LGR.
Clint is this awesome dude.
And I think he lives in North Carolina.
He is dedicated to basking in the glory
and restoring and reliving
and preserving computer history,
hardware and software from this era.
The YouTube channel is all like unboxing a compact PC
from 1992.
Like restoring a Windows 3.1 machine.
That's awesome.
It's so good.
He's got like the best, most soothing voice in the world.
He just seems like such a nice dude
and he's dedicated to preserving the era of computing
that we are talking about on this episode.
It's so fun.
That's cool.
It's really hard because all hardware fails eventually.
So, you know, at some point there will be zero computers
out there that can run Windows 3.1 that will boot.
And the only way to experience any of these things
is through an emulator.
And so it's kind of like, I don't know,
you know, high-res footage and stuff of those machines
while they still work.
It's cool.
Yup, super cool.
My other carve out is Andre 3000 from Outcast.
Do you know what Andre 3000 is up to these days?
Not at all, no.
Oh my God.
Okay.
So GQ just did a big interview with Andre 3000
cause he just released a new album.
This is not what you think.
So Andre, you know, a lot of people say consensus
top five rappers of all time.
And big boy in his counterpart now cast, you know,
also great too, but they basically went out on top.
So they did Speaker Box Love Below.
Yeah, of course.
Which was the double album.
I think it came out like 2004 maybe
I was a freshman in college.
Hey, y'all was on that, right?
Hey, yeah, yeah, everything was on that.
They did one more album and then they stopped
and Andre would like be featured on some other rappers tracks
over the years, but didn't put out another album
for close to 20 years.
He just put out an album and he just did this big interview
video interview with GQ.
The album is a flute album.
He got really into like woodwind instruments.
Whoa.
This has been his life.
He reveals in the interview that he has put out other songs
and other albums over the years under pseudonyms.
And it's like, this interview is so great.
It's so unexpected because the interviewer keeps asking like,
you're Andre 3000, you stopped rapping.
He's like, well, I don't have anything to say.
Like what am I gonna rap about getting a colonoscopy?
Like this is where my life is right now.
I never wanted to put out any work that wasn't both authentic
and great.
I just, I didn't have anything to say anymore.
Yep.
I love that.
If you ever heard the phrase, go out when the top row
at the back of the auditorium is empty.
Mm, yeah, yeah.
And that's kind of what they did.
Idlewild, which was the album that came out
after a speaker box, the love below.
Like I, you know, this was great, but it wasn't that.
And yeah, that's exactly what he did.
I think it's a Seinfeld quote.
I might misattribute it, drop a note in the Slack if I did,
but yeah, I think it's a Seinfeld quote.
You can let one row be empty,
but you don't want to wait too long.
Yeah, it's same thing as what Seinfeld did.
Fascinating.
Yeah, super fun.
We'll link to it in the show notes.
All right, I have three and they're all sort of different.
We've sort of had a tradition on the recent episodes
of doing multiple carve outs
and all of them sort of are different genres.
So my product that I've really been loving,
my physical product is the Meta Ray Bands.
Oh, yes.
I was talking with the team at Meta about them.
They're doing great.
I bet.
It's a pretty delightful product.
I bought them because I was in Hawaii
and with my four month old son,
we were in the pool and stuff.
You know, my iPhone's waterproof,
but like I kind of want a different angle
and I don't necessarily want to be holding my phone.
Like it's very cool to be able to take pictures
and record video of what I actually see
to be able to relive that moment.
And I did a bunch of photos and video
and we were on vacation that way.
And then I discovered a thing
that they're actually just awesome for.
I think even better than AirPods is phone calls.
The speakers are great.
I wouldn't say like necessarily
they're the best for listening to music.
The bass is obviously not as good as headphone bass.
They project the sound down toward your ears.
So unless you're standing really close to me,
you can't really hear
or unless I have the volume all the way up,
but the microphones are great too.
So I was on a long walk on the beach
with the wind whipping by on a call with my mom.
And I was like, does this sound really bad
and distorted to you?
She was like, not at all.
Wow.
And so I was really impressed
and we'll definitely be using them for more calls.
I think that style of headphone over the ear,
there's many things that it's not good for.
Like when you're on an airplane
or something like you want to plug your ears
or if you're in a super loud environment,
but unless you're in one of those environments,
it's a nice break for your ears
versus having AirPods jammed in
and it's a great call experience.
So they're great.
The battery is great.
They're like four hour battery.
So it's like a low key,
more subtle augmented reality experience.
There's no heads up display.
You don't see anything.
But when you get a text message,
it'll read it to you.
Oh, so there's more than just the camera system.
Totally, yeah.
It basically is like you have AirPods in,
but you don't actually have AirPods in.
And you have a pretty good photo video camera on your face.
Does it have an indication
when you're taking photo or recording video?
Yes, it's not super bright.
I'm not sure everybody really knows when you are,
but if you know what to look for,
you know if it's on or off.
Cool.
So I've been loving it.
I think it's a great product.
I intend to wear them a lot this summer.
My second one is a thank you
to a very, very good designer, Julia Rundberg,
who worked with David and I on a recent project
for some design work.
Some of which is actually featured
as we speak on Apple Podcast.
And she did a bunch of other stuff with us too,
and she's really excellent.
So if you're looking for someone
who's good at visual identity, branding,
slide decks, websites,
I've worked with her on a few projects before
and she's just awesome.
So I wanted to recommend her.
My third, this is kind of community spotlight
to go all the way back to like nine years ago acquired.
It was a listener who runs a company
called Summer Health reached out and said,
I heard you say that you have a baby.
I've got this great company that is for new parents.
And here's some info on it.
And I am now a paying member.
It is a on demand texting relationship with a pediatrician.
Oh, wow.
This is like crack for new parents.
It is like crack for parents.
It's crazy.
And you can hook up multiple phones.
So my wife and I both have a direct line
to like something weird is going on.
Will you help me through it?
Including we had a 2 a.m wake up the other night
and some, you know, everything ended up being fine.
But as I'm sure any other new parents can relate to,
you really want to make sure in the middle of the night,
if you're not sure if everything's fine,
you would like to figure out the right steps
to make sure everything's fine.
And so having a virtual doctor on demand is totally amazing.
So Summer Health, if you are a new parent,
we've been loving it.
Amazing.
Well, I'm going to have to subscribe.
We've referred to this before.
I think this will probably be the last episode that comes out
while I'm still the parent of just one child.
Wow.
Number two coming soon.
So if it may take a little longer than usual
for the next Microsoft episode to come out,
our next six hour opus on Microsoft,
don't get too mad.
That is the reason why.
Yep.
Well, we have a lot of thank yous on this one,
as you can imagine.
People are really generous with their time,
pointing us to different resources,
explaining their recollection of history as it happened.
And, you know, being in Seattle,
active in the venture community here,
both through PSL and David,
you're in my shared history at Madrona,
me working at Microsoft,
a lot of good opportunities to learn
what really happened from folks.
So a huge thank you to Mike Slade,
who spent the time with me.
Mike spent two different stints at Microsoft,
and then at Next and Apple in between.
Yeah, he worked for Steve at Next, right?
Yep.
And one of the few people in the world
who both spent a ton of time with Steve and with Bill,
and worked closely with both of them.
So, so great to get his perspective,
especially about the early days of office
and the applications group, very helpful.
Similarly, Pete Higgins worked closely with Mike.
Pete, I think ran Excel for a long time
and oversaw a lot of the different stuff
in the applications group.
And I believe also ran office.
It's kind of funny how many different people
picked up the mantle over time
as these things traded around groups.
But frankly, I think that's a huge part
of the Microsoft story is the company very quickly adapted
and changed its structure,
depending on the current needs of technology
and competitors and et cetera.
Huge thanks to Tren Griffin,
who is actually a lifelong Seattleite
and sort of close friend to the whole Gates family.
Bill Gates senior was his mentor.
I'm sure you've seen trends,
prolific tweets online about Microsoft history.
So Tren, and actually Tren,
I think currently works at Microsoft in a strategy role.
So thanks Tren for your help as well.
David, I know you've got a bunch.
Yes, also speaking of former Microsoft folks
who are very active on and prolific on Twitter.
We talked to Steven Sinofsky,
who had lots and lots of great perspective
and we can't wait to share more of it on the next episode.
I read like 20 of Steven's hardcore software posts.
And then when David and I were dividing up
what belongs in what episode,
I realized like 19 of them belong in next episode.
So Steven, thank you for your early prep work for part two.
Yeah, so much fun internet stuff to talk with
that Steven was right there for.
I spoke with other people who ran Windows,
Terry Myerson, who's a great friend
and a supporter of the show.
Terry ran Windows for quite a long time, right?
Yeah, when I was there, Terry was EVP over,
I think Windows and Windows Phone.
Yeah, Terry was very generous.
And he was actually the first person that clued us
into just how key Steve's role was
in building the enterprise for Microsoft.
Yep, and how different the go-to-market motions were
for Windows and Office.
I think Terry was the one that sort of gave us
the insight of Windows, especially in the early days,
was basically an OEM game,
small group doing an OEM thing.
Right, there were like 10 people selling that.
Right, and it's still, I don't think,
a very big team even today.
Yep, speaking of strategy, Charles Fitzgerald,
who's OG, OG Microsoft and a great platform strategy guy,
prolific angel investor in Seattle now,
spun chatting with him about the early days.
Yep, obviously Brad Silverberg, who we mentioned a bunch.
It was very fun seeing, after spending some time
talking with Brad and texting a lot with him,
to see the end of the Windows 95 announcement
after Bill and Jay Leno are done for Brad
to sort of come out and finish it off.
It's fun, it's like watching a time machine,
watching that thing, it's really cool.
Soma, Soma Segar at Madrona is someone that David and I
love crossing paths with
in the Seattle entrepreneurship ecosystem.
Yeah, Soma's just such a legend at Microsoft
and in the industry too.
There's so many people who Soma made their careers,
plucked them out of school, saw something in them
that maybe they didn't even see in themselves
and then they went on to be big executives
or venture capitalists at Microsoft or elsewhere.
Yep, and lastly, huge thank you to Steve Ballmer.
To be honest, it was a little bit surreal chatting in,
hearing about his experience over the whole thing
because I don't know, there's nobody,
including Bill Gates, that bleeds Microsoft more
than Steve Ballmer and his just unabashed pure pride
in what they built is infectious.
Absolutely, it was so fun talking to Steve,
he was so gracious with his time
and it must have been just super special for you too,
like he was the CEO when you weren't there.
Totally, and I mean, to be frank,
I had a very opposite strategy in mind,
but I was a new hire out of college,
individual contributor, PM,
and it was still the Windows company then
and Steve was championing the Windows strategy
and I was a guy working on Office for iPad.
Well, with that, our huge thank you
to JP Morgan Payments ServiceNow and Pilot,
you can click the link in the show notes to learn more
about any of those great partners have acquired.
If you like this episode, I was thinking of ones
to recommend, it would be pretty funny to go listen
to the forethought acquisition, given all of this context.
I mean, it's a short episode when David and I
were not good at this yet and we did our very best,
but it is from our early days
and it covers overlapping source material.
Yeah, forethought was the company that made PowerPoint,
Microsoft acquired, first major acquisition for the company.
Yep, if you are new to the show and looking
for great recent episodes that we've done,
I highly recommend the Visa one as discussed earlier
and sort of the network of networks idea
if you haven't heard that or perhaps the Nintendo
or Nvidia episodes, all of which will be right up your alley
if you liked this one.
And if you're not at all interested in technology
or software, but if somehow managed to get through
all these hours with us, go listen to our LVMH
and Hermes episodes, even if you do love technology
and software, which obviously you do if you're still here,
there's so much to learn from that world.
Yep, if you wanna know every time an episode drops,
get hints at the next episode topic
and get episode corrections and follow up,
you can sign up at acquired.fm slash email,
come discuss this episode with everyone else
who's chatting about it at acquired.fm slash Slack.
And if you're looking for another episode,
go check out our second show, ACQ2,
where we will have actually some very awesome
tech CEO guests coming out over the next month or so
that are absolutely worth listening to,
especially if you're interested in semiconductor
and tech history.
Now, if you want some sweet acquired merch,
go to acquired.fm slash store and with that listeners,
we'll see you next time.
We'll see you next time.
Who got the truth?
Is it you?
Is it you?
Is it you?
Who got the truth now?
