Standard Oil Part I | Acquired

So history and facts going up through 1890.

Who got the truth?

Is it you?

Who got the truth now?

Is it you?

Sit me down.

Say it straight.

Another story on the way.

Who got the truth?

Welcome to Season 9, Episode 4 of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

And I'm David Rosenthal, and I am an angel investor based in San Francisco.

And we are your hosts.

Today's episode is 150 years in the making.

David, somehow we missed this IPO, if or when it happened.

Can we still get secondary shares?

Put together a little SPV?

I think it might be of a spinoff or something like that at this point.

Okay.

At least the Standard Oil that we will cover today never IPO'd.

It was privately held the whole time.

Its financials were kept very secret.

That must be why we have missed it until now, David.

Surely.

Yeah, it must be.

It must be.

Well, this episode on Standard Oil is, of course, the oil monopoly founded in the 1870s by John D Rockefeller, the wealthiest person in modern human history.

Embarrassingly, until I had started to do the research I didn't realize the oil in Standard Oil did not refer to gasoline, at least until much, much later in the life of the company.

Automobiles?

Model T was like 1910 or so.

Totally.

Standard Oil predates the Ford Model T by like 40 years.

Yeah.

John Dee becomes the wealthiest person in modern human history before gasoline.

This is a different kind of oil.

Yeah.

Gasoline helped later.

Turns out, compounding can kind of show up, especially when the second business line gets layered on top, but we will get into it.

Listeners.

The other thing that is crazy that I want to point out I didn't realize how much Standard Oil is very much with us today.

Despite being famously broken up, the parts went on to become both Exxon and Mobil and Marathon Amoco, which of course is now a part of BP, Chevron and several other companies.

When you look at a gas station, you are probably looking at some remnant of Standard Oil.

Just wild.

So this one will be at least a two-parter.

It turns out, the company responsible for creating the entire modern energy industry has a lot of wild stories.

All right, listeners, now is a great time to thank a new friend of the show, Koifin.

And it's funny, they're new, but actually I've been using their product for years.

My research project for every single new acquired episode involves Koifin.

So when they reached out to sponsor the show, I thought, well, this is convenient.

Indeed.

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So it's kind of like a Bloomberg terminal, except without the huge price tag, right?

Yes, essentially.

It's a web app, and it's totally self-serve.

I've actually not talked to anyone at the company for the first few years that I used it.

So Koifin is a product that the broader market, like all acquired listeners, would use, not just Wall Street investment bankers.

It's where I pull things like growth rate or gross margins or the PE ratio or revenue multiples for every company we study.

And you can compare these things over time with historical graphs or against other companies.

It's often what I use when we're studying private companies too, like Rolex or Mars or Ikea, to look at the comparables, to estimate what these companies would be worth if they were public.

They also have a screener that lets you filter across thousands of stocks, so you can quickly surface investment ideas.

Yep.

So the general idea is, if you're someone who's used to living in data, you should have that at your fingertips as you think about investing.

Exactly.

It's got these great graphs for data visualization wrapped around institutional grade data.

So if you want to understand what assumptions are baked into the stock price today, Coifin is for you.

I was about to say that Acquired listeners have a great offer.

But Koifin's free product is actually already really robust.

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I know.

But indeed for Acquired listeners and also for you, Ben.

If you go to koifincom slash acquired and you end up upgrading to paid, you'll get 20 off your first year.

Our thanks to Koifin.

That's K-O-Y-F-I-N dot com slash acquired or click the link in the show notes.

All right.

Well, listeners, before David takes us in, as always, this show is not investment advice.

David and I may have investments in the companies we discuss.

Unlikely in this case.

This is for information, entertainment.

Let us know if you find the Standard Oil stock ticker.

We'd love to go check it out and evaluate.

No, without further ado, Standard Oil.

Maybe PitchBook has some data on them.

All right.

I just want to give a lot of love to Ron Chernow, who is one of America's greatest historians.

Biographer of Hamilton.

He wrote the book that Hamilton's based on, the play, right?

He wrote the book that Hamilton is based on, yep.

And also wrote Titan, the definitive biography of of John Davison Rockefeller.

That is the main source for this episode.

It's so good.

And I think the perfect place to start is with one of Chernow's quotes at the very beginning in the introduction to Titan, where he says the story of John D Rockefeller transports us back to a time when industrial capitalism was raw and new in America and the rules of the game were unwritten as yet.

I think more than anything we've covered on this show, Standard Oil wrote the rules.

The way business is done.

The unwritten rules.

They wrote the unwritten rules.

And then, you know, Congress wrote the rules about them.

We'll get to that.

The era that we should think of here, you know, this isn't the wild, wild west.

This is the wild, wild east.

We're 30, 40 years after our nation was founded here in the early 1800s.

The freaking Civil War hasn't even happened yet.

Nope.

No Texas, no California.

Yeah, certainly early in corporate law.

But we're early in, like all forms of human organization in the United States.

Law?

What is law?

Speaking of.

Okay, so we start in 1810 in Ankram, New York, which is actually like not that far from Manhattan.

But back in those days was a different world.

We start there with the birth of William Avery Rockefeller.

Big Bill.

He would also go on to have another nickname.

His other nickname was Devil Bill, which he got because of his profession that he would grow up to participate.

Of course, we're talking about John Rockefeller's father here.

Devil Bill, Big Bill, was literally a snake oil salesman.

People use the term like, oh, Ben, he's a snake oil salesman.

This is where the term comes from.

He sold medicines out of his pack, that he rode into town on a horse that professed to be a doctor but didn't do anything.

And then he got out of town before anybody realized.

So one day, when he is 26 years old in 1836, he rolls into a new town, unsuspecting community, to offload his goods on, shall we say Richford, New York far far, far away in central New York state.

There he encounters the Davison family.

The Davisons are quite unlike Bill and the Rockefeller clan.

They're upstanding.

They are upstanding.

They are devout, religious, Christian followers.

They have a different moral compass than Bill, shall we say.

Well, yeah, and they're wealthy.

Yeah, that is the other thing.

They are quite wealthy.

So bills, wild bills, young bills, big bills, eyes light up when he sees the davison ranch and he uh, so the story goes.

I think this is actually true.

One of his like sort of tricks of the trade, if you will was he would pretend to be deaf and he would carry like a chalk slate around his neck and write on it and pretend to be deaf and couldn't speak.

And he's at the davison house and he's either doing this little charade and And he hears the second eldest daughter of the Davisons, a woman named Eliza, a pretty young girl, say I would marry that man if he weren't deaf and dumb.

And miraculously, oh my God, the beauty of young Eliza cures Bill of his affliction.

And he can speak and he can hear.

Amazing.

So the patriarch of the Davison family, one John Davison, remember that name?

He's a little suspicious of what's going on here.

But nonetheless, Bill woos Eliza and they are married shortly thereafter.

They get married.

They marry.

Settle down.

You know Bill builds a house shack like literally people like built their houses back then a little ways down the road.

Bill's like, well, we need a housekeeper here.

And I've got this old, you know, friend, Nancy.

Why don't we have Nancy move in with us and be our housekeeper?

Well, it turns out Nancy was his girlfriend.

Yeah.

Oh, this old friend, you know, she could help with the kids, the housekeeping.

All right, so we're painting the picture here.

You've got this unbelievable swirling concoction of well-to-do religious by-the-book mom side of the family, dad side of the family not quite as upstanding of a human being.

But here they mix.

And one July evening, all of these forces swirl together.

And July 8th, 1839, Eliza gives birth to her second child.

It's the first son.

They decide to name this child after Eliza's father, who was John Davison.

They named the boy John Davison.

Rockefeller.

And oh boy, does little JD have a lot of both John Davison and Wild Bill Rockefeller in him.

So on the Rockefeller side, little John is like totally captivated, totally dotes on him.

He thinks he's the best.

He would even for the rest of his life, Rockefeller would intensely defend his father.

Chernow would write that in no area did Bill impress his eldest son more or did his eldest son prove more impressionable than in the magical realm of money.

Big Bill had an almost sensual love of cash and enjoyed flashing plump rolls of bills.

And indeed one of Bill's companions at the time would say of him, quote the old man had a passion for money that amounted almost to a craze.

I never met a man who had such a love of money, except of course for his son in the future.

And this is where we start to get into the ways in which his son would become like him, but different.

And the like him is, of course, in this love for making as much money as possible.

The way in which it is different.

You know, Bill would come back from these trips and he would have a fat wad of cash and he would take the hundred dollar bill and he would put it on the outside.

You'd make sure that everybody knew that there was at least one, maybe lots of hundreds, in this fat wad of cash.

Whereas John Dee would grow up and detest shows of wealth.

I mean, the smallest house on the nicest street in Cleveland.

He mixes his mother's side of the family into these lessons from his father.

Oh, totally.

Well, so speaking of his mother, the Davisons were Baptists.

And that was well not unique, but pretty different than some of the original Protestant groups that had come to America a generation or two before.

The Baptists, you think church revivals, you think big, showy, theatrical.

The whole point was to evangelize and to recruit.

They didn't think that they were the chosen people that were going off to the new land to be by themselves.

They're like, no, no, we're going to take over the world here.

We want everybody on.

It was an evangelical religion.

Totally.

So here's where these two sides of John's maternal and paternal sides here seem like oil and water.

Oil and water.

Oh, David.

They're not.

The Baptists are all about the money.

They think money is also great.

They just think it's great for a different reason, which is that the more money, the more influence, the more followers we can recruit into the fold.

And This also has a huge impact on JD.

He would say later, quote I believe the power to make money is a gift from God, just as are the instincts for art, music and literature to be developed and used to the best of our ability for the good of mankind.

Having been endowed with the gift I possess the gift to make money.

I believe it is my duty to make money and steal more money, and to use the money I make for the good of my fellow man.

Boom.

I mean, duty.

He heard the word duty in there about making money.

That is, God has asked him to go forth and make as much money as humanly possible.

It is this incredibly unique thing about John D. Rockefeller where.

When you describe him as one of the wealthiest businessmen of all time and a philanthropist.

It's very different than the way that you would describe today's billionaires as wealthy people.

And it's not one then the other.

It's not career and then philanthropy.

John Dee held these things to be intertwined, that he should go make as much money as possible and to be simultaneously incredibly philanthropic.

And the purpose of making this money was to be philanthropic, as if he were a better charitable allocator than anybody.

In every dimension wealth power control philanthropy, impact.

John Dee makes Bill Gates or Mark Zuckerberg look like children.

It's wild.

So in 1853, when John is 14 and just on the cusp of manhood, Bill swoops in, comes back from one of his trips and announces that he is going to move the family away from New York to Ohio, specifically to Strongville which, Ben as you know, is right next to Cleveland.

For sure.

Strongsville, Ohio.

It's one of many wonderful suburbs of the Cleveland area.

Yeah, this is like your homecoming this episode.

It's true.

Like a lot of this episode takes place in places that were within like a half hour drive of where I grew up.

Oh, so great.

So the stated reason for the move is that Bill wants to go open new territories for his business.

But there's actually another reason, which is he's got another new girlfriend back in New York named Margaret and he wants to keep the families more separate.

But he wants to marry this new girlfriend.

And he's like, this is the world that America was back then.

He's like, well, if I just get a state border between the two of them, great.

I don't see why I can't have two wives.

That's true.

There's no internet.

State registries are probably pretty hard to go look something up in a different state.

So they moved to Ohio.

And at first, before Bill marries his second wife concurrently Margaret, he sends John and his little brother William to a boarding house in Cleveland to go to a real high school in Cleveland.

And that goes on for about two years.

And then when Bill actually marries Margaret, he sends a letter to John and says you, you know this uh schooling thing and the well plans have changed and i i can't really pay anymore for you and william to go to school.

So i'm basically deputizing you now as head of household and you're gonna have to drop out and get a job and find a way to support the family.

Best of luck, son.

Talk about a wild thing to just hear and totally hijack your life plans.

Totally.

And this really was not what John was planning.

But he decides remember, he's got this love of money.

He's like, well, what can I do to make money?

Well, what if I stay close to the money?

So he pays 40 and does a three-month crash course over the summer in bookkeeping and decides that he's going to become a bookkeeper.

And this is going to be his path to supporting the family.

Ever the sensible fellow.

When he finishes his training and he's off to go get a job, he decides that the way he's going to job search is.

He gets a directory of all the businesses in Cleveland and he looks up what their credit ratings are and decides that he's only going to target the ones with the best credit ratings.

He's smart.

I mean to the extent that he thinks that the access to capital is the thing that he wants to be close to.

You may as well only be a part of businesses with the best access to capital.

Strength leads to strength, right?

So the story goes that he pounds the pavement for six weeks.

He goes to every firm on his list.

They all reject him, but he's undeterred and he just starts back up at the top.

So he goes to see all these companies, like at least two, some of them three times.

Finally, one company, the partnership of Hewitt and Tuttle.

They probably just get so tired of this little kid, the 16-year-old kid, banging on their door that they're like all right, fine.

You can start.

You can work here.

You can be a junior bookkeeper.

This happens on September 26th, 1855.

And get this, for the rest of Rockefeller's life, He celebrates September 26th as his job day.

I love this.

Like more sacred than the birthday.

Job day was the day.

It's like the day he was baptized into capitalism by being able to make money in the world.

Absolutely.

And literally, it's like this is the big deal every year in his life.

Like it's bigger than the birthday.

It's job day.

Except he's starting in labor, not in capital.

But he makes the transition pretty quick.

Don't worry.

So he gets to work.

He becomes basically like the best bookkeeper that history had seen before or since, at least until Pilot.

Chernow writes about this.

John betrayed a special affinity for accounting and an almost mystic faith in numbers.

For Rockefeller, ledgers were sacred books that guided decisions and saved one from fallible emotion.

Well, of course they're sacred.

The numbers in the books are money.

It's the divine, you know, God-given path to be close to the money and get as much of it as possible.

Absent the divinity, this is very Buffett-esque.

I mean, at a young age, having this sort of respect and obsession with the numbers.

Supposedly, when John was a younger kid...

He would also go to the general store and buy a big block of candy and cut it up into little pieces and then sell the little pieces around to other kids.

Yeah, just like Buffett and gum, right?

Yep.

Sticks of gum.

Yep.

So he goes to work in this firm.

Now, what is Hewitt and Tuttle?

They are a merchant trading firm that specializes in produce commodities like foodstuffs, like things that people would eat meat vegetables produce, stuff that's coming off of the farms going into cities like Cleveland.

I assume they mostly dealt in foodstuffs that came into Cleveland to then be sold in stores and consumed by the newly rising urban populace.

So John Dee is rising quickly through the ranks.

Pretty much immediately, they give him a 50% raise because he's doing so well, even as a little kid.

In the beginning of 1857, so not quite two years after John joins the firm Tuttle, the junior partner leaves to go seek his own fortunes out from under the thumb of the senior partner Hewitt.

And Hewitt's like all right well John, you're my new partner partner, not partner, but you know you're gonna take tuttle's role here.

John is like well, that's nice, are you gonna pay me like a partner?

And uh, he was like dude, you're like 17 years old, like no, John is undeterred though.

This is pretty crazy.

So he's like head of household supporting his family.

He's already making a lot of money.

He's got this great role.

But the next year, in 1858, he's like.

I think I'm doing the work of a partner in a merchant trading firm.

I'm going to go be a partner in a merchant trading firm.

So he hooks up with a much older gentleman named Maurice Clark that he had met doing his bookkeeping training.

And they go in 50-50 on a new merchant firm called Clark and Rockefeller.

And like doing the same thing, still produce and meats and trading foodstuff.

Exactly.

Foodstuffs, produce.

Things go like okay at first for a couple of years.

What is this, like 1859, 60?

Yeah, 59, 60.

They managed, between the two of them, to put 4000 in capital into the firm to start the trading operations, which was a lot of money.

And Rockefeller put in half of it.

It wasn't Rockefeller finding ways to borrow from Devil Bill.

Devil Bill definitely had his sticky fingers in all this.

That is for sure.

So things go like, okay, but they have some losses.

They actually have to bring in a third partner, I think in 1860, to sort of shore up some losses and bring more capital into the firm.

And just to put a point on that, the reason the capital is so important is they basically need to have enough on hand to basically make the purchases and then hold the inventory until they can go and sell it.

There's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle.

Yep.

So, you know, things are going okay.

And then 1861, something big happens in America.

Something very big.

The North goes to war with the South.

Yeah.

Fort Sumter, the Civil War.

One Rockefeller doesn't fight in the Civil War, despite being what?

Would he be 21, 22 years old at that point in time like prime fighting age?

He hires a substitute.

There was technically a loophole.

He was, if you were head of family, you didn't have to fight.

You know, Rockefeller is careful in how he messages the strife going on in his family.

He never throws his data to the bus.

He always holds everyone at least outwardly in the highest of esteem.

And so the way that he sort of drops a hint here at some point is he says how could I go fight in the war when the business would die?

It was young, it was fledgling, and so many relied on it.

And that's sort of him alluding to like look like my whole family kind of needs this business to stay alive.

Yeah.

So he doesn't go fight.

But for his business that he needs to survive the war is a pretty big boon for commodity prices, specifically foodstuff prices.

I mean, you got to supply an army with food somehow.

Yeah, there are a lot more orders in demand for pork belly and the like coming in, thanks to the war.

So this drives up the price of foodstuffs through the roof.

In 1862, the first full year of the war, the firm Clark and Rockefeller.

They make a trading profit of 17000, which I believe was four times all the money that they had made in all the previous years of operations of the firm.

Wow.

They are living large, like they're swimming in profits.

They can't buy enough.

They got to put this money somewhere.

So what do they do?

Well, right around this time, people in Cleveland are starting to hear about an interesting development that's happening not too too far away in Western Pennsylvania, in a tiny little hamlet called Titusville.

Ben's obviously smiling here.

Some of you are maybe smiling.

Yeah, I just did a zillion hours of...

But probably most of you are like, what are you talking about here?

Like Titusville, Pennsylvania?

Like, I have no idea where you're going with this.

Everyone knows David, that the center of the oil world is not the Middle East or Russia or Alaska or Texas, but Western Pennsylvania.

Western Pennsylvania.

That's right.

So I had no freaking clue until reading Titan, doing the research for this episode for like decades.

The entire center of the oil industry in the world was this small little town.

For like 50 years.

Literally, there were some producers, some oil rigs elsewhere, but very small.

Most of the oil in the world came from Titusville, Pennsylvania.

Yeah, crazy.

Just wild.

And not just Titusville, but Oil Creek and other areas of Western PA that had oil discovers.

So this is all going on.

It's not that far away from Cleveland.

Yeah.

For the first couple years of this, going on up until the Civil War.

The whole industry is just based there in Titusville.

They drill for the oil.

The oil comes out of the ground.

They refine the oil.

They make kerosene. when we say they were refining, like it was a pretty rough process.

I think pretty early they figured out you could use sulfuric acid to refine and separate the kerosene out.

But a crap ton of sulfuric acid and like doing this in large wooden boxes with cracks in it everywhere.

And it's just sloshing around and spilling all over the ground.

Like it is a gnarly process of quote unquote refining.

Yeah.

Super, super gnarly.

But yeah Right, as Rockefeller and Clark have all this money that they need to have something to do with, people come up with the idea.

So with the oil, they were refining it into kerosene.

Kerosene, the main use was to burn in lamps.

And where do you need lamps and artificial light more than anywhere else?

You need it in cities.

People realize you don't actually have to refine the oil in the same place that you drill for the oil.

So all of a sudden now people are like wait wait, we can buy the oil that comes out of the ground crude oil from Titusville, bring it into our cities, refine it in the cities and then sell the kerosene in the city.

That's like a really good business.

That's a good place to park some capital.

Totally.

And at the same time, all these interesting tailwinds are happening where cities are blowing up.

I mean, you have this sort of like industrial revolution that's happening, where people don't just live in rural areas and farm anymore.

They're starting to be a lot more industry in cities.

You have for a while only rich people could basically get oil to burn at night.

Most people would just the sun would go down and then they have no light and they'd go to bed.

But like whale oil.

And they would use whale oil.

Yeah, for the whaling industry.

Right.

Which isn't that where Hathaway of Berkshire Hathaway came from?

But kerosene is like way cheaper than whale oil, which had a massive shortage.

And it's obviously terrible that we kill whales to harvest the whale oil like way cheaper, way more plentiful.

It's a pretty clean thing to burn relative to the other stuff that people were trying to burn.

This is huge.

And the key word you said it's cheaper, of course easier to drill into the ground than go harpoon a whale.

Yeah, this is an infinite resource here.

Yeah, totally.

But the plentiful is the key word.

So like you said, it was only rich people that used whaling oil that they could have light at night.

But the new demand, like with the Civil War, going on the war and then industrialization afterwards.

You need light for commerce, for industry.

It's not just so that rich people can have light.

You need to operate factories and do all this stuff.

You need light.

So there's a lot of demand.

And kerosene is the answer.

So Rockefeller is like, oh, okay, cool.

This is a new commodity.

They start trading a little bit in this at Clark and Rockefeller.

They start making some profits.

But of course Rockefeller is feeling a little hesitant to do too much of it because he's like this is speculative.

Who knows when this will dry up?

And there've already been some boom bust cycles in this.

Foodstuffs are kind of our thing.

So I don't want to dabble too much in this speculative weird oil thing.

And I think initially they were trading...

But then, like I said, people start to realize, wait a minute, we can refine in the cities.

And this is really early knowledge.

This would be like in I don't know 2011, if somebody came to you and were like hey, there's this thing called Bitcoin.

Now, don't just buy it, but I know how to set up rigs to mine it.

Why don't we just take some old computers you have and mine it?

So this is like really hard to get knowledge.

And it just so happens that the one guy in Cleveland, a guy named Samuel Andrews, who knows how to refine oil, is buds with Rockefeller's partner Clark.

Well, that works out.

He's like a chemist, right?

He's a chemist.

Yeah.

Chemist in quotes here.

Well, but there's like real science involved in, like applying the sulfuric acid and, you know, separating the kerosene from the gasoline and other crap that's left over that you don't have anything to do with.

Which, by the way, they just pour that stuff into the river.

Oh, totally.

In fact, this is a fun little Cleveland trivia.

The Cuyahoga River caught fire many times.

There's this Great Lakes Brewing Company beer called Burning River Ale.

And this is where it comes from.

Totally.

Because under the cover of night, these refineries would have all this extra gasoline left over.

Cars wouldn't be a thing for 30, 40 more years.

They thought the gasoline was useless and they would just drip it into the river.

Yeah.

Oh, awful.

God, just wild.

Just wild.

So Andrew's the chemist who knows how to refine kerosene.

He's buds with Clark.

He goes to Clark one day in the office, the merchant office that they have.

And he asked if he's like, hey, I think it'd be a pretty good investment.

I know how to do this.

Nobody else around here really knows how to do this.

I think it'd be a good investment.

Why don't you invest in me and we'll set up a refinery and we'll start refining here in Cleveland.

So the story goes that Clark is like look, I'm not too interested in this, but Rockefeller overhears what's going on and he pipes in and he's like hey, actually I think that's not a bad idea.

I'm interested in that.

And Clark, of course, knows that Rockefeller is really good at this stuff.

And he's like, okay, fine.

They turn around and they invest $4,000 on the spot to go set up a new refinery.

Wow.

So later that year, they open the Excelsior Works Refinery in a strategically chosen spot in town.

Ben, you'll probably know exactly where this is.

In the flats, right?

Yeah, I think in the flats.

It's an area that has access both to the Cuyahoga River and to the terminus of new rail lines that are going into Cleveland.

Yeah.

And like super industrial area.

Actually, in the last few years has been like an amazing amount of renovation and like cool stuff that's going on there.

So you have this like interesting confluence of the river and like everything left over from the standard oil days and like the steel boom that happened in Cleveland and now this redevelopment.

But yeah, it's totally the city area that's up against the waterfront.

Huh.

Interesting.

We'll have to go do a field trip there.

For sure.

We'll do a trova trip.

So he is like a pig in mud here.

I mean, he was a bookkeeper.

He's so meticulous.

He loves money.

He loves profit.

He was focused on trading before, but now he's got this operation, this refinery, and he becomes like Literally he's like the Morris Chang of oil refineries.

He's experimenting with constantly tweaking the process.

Andrews, the chemist, is like...

Dude, I'm the technical talent, but Rockefeller's everything around it.

The operations, how crude comes in, where things are located in the factory.

He's A-B testing.

He's doing all sorts of stuff.

He's always looking at any efficiency, and it's all with a view to it.

It's not just better is good, but it's all with a view to profitability.

We want to run this as lean as possible, make as much money possible.

God told me to make a profit and I am here to make a profit.

By the way, put a pin in that Morris Chang thing, because there's an interesting way that they are very much like TSMC that I want to talk about later.

Ooh.

So he's focused.

This is so different.

There are other people that are setting up refineries in Cleveland and elsewhere, but they don't care about optimization.

They don't care about efficiency.

They're just like, look, hey, it's a gold rush.

Give me the gold and I'll just take as much of it as possible.

If it goes away tomorrow, that's fine.

Yep.

High margin dollars just flying out of the ground.

All of this, the behavior of the other folks, this causes huge gyrations in price.

It really is.

It's like the early days of Bitcoin.

I mean, still today in crypto, things are flying around all the time.

Prices could be $12 a barrel.

They could be 12 cents a barrel for oil.

And it all depends on, I mean, two things.

One is who found what?

And two is what do people believe people have found recently?

And so like prices would be impacted by word of mouth, traveling and saying hey, I heard there's a big gusher going on in this city right now.

And people would be like well, I guess I'm not going to buy for a while, because I heard there's a big gusher.

And so prices are going to go down.

Yep.

So Rockefeller, though, he's just got this vision where he's like, oh, man.

The more profit I make, the more money, the more capital I can put into this, the more oil I can hold, the more I can produce.

And when the price crashes...

I'll just keep buying.

He buys the dip over and over and over again.

And because his operations are so much more efficient and so much more profitable, he can afford to pay more than anybody else.

He can afford to hold this stuff longer.

He's really thinking long term in a way that none of his other competitors are.

Oh, and we should say like, when we say he's tweaking stuff, he's so much more profitable.

He is both horizontally and vertically integrating.

So let's talk about vertically integrating first.

He's doing things like realizing, geez, we're hiring a lot of plumbers to come in.

Oh, this is so good.

I love this lay this pipe every time we do a build out.

And so they do things like hire their own plumber and hire their own blacksmiths and decide, actually we should do this ourselves and that way we can save all this money on piping instead of buying it from a third party contractor later down the road.

He even plants a forest, like buys up a forest so that they can cut down the trees themselves to build the barrels out of, to make their own barrels.

Yeah oh, my gosh, this is so great and they save all this money rather than buying barrels from somebody else.

And then, of course, they can innovate on the barrel making process.

So he figures out oh, if we treat the wood in the forest, then it's lighter and cheaper to ship back to the refinery, so we save all this money on transportation.

So that's like the vertical integration side of things, which would be crazy enough.

But he's figuring out that wait, we do this process.

How can we sort of use the whole buffalo like what can we sell the gasoline for what?

I think they invent Vasa, Vaseline.

Yes.

I think they buy the company that invents Vaseline.

But yeah, they like petroleum jelly, which is one of the byproducts.

They commercialize it.

So Rockefeller has found his calling here.

This is divine passion here.

There's just one problem, which is... the partner, Clark.

Clark is not so into how much capital Rockefeller is tying up in the business here.

He's like, hey, we're merchant traders.

The point is profits.

And then we keep the profits.

And Rockefeller's like, No, like reinvest in R&D and like CapEx and inventory.

So Rockefeller starts going around all the banks and all the financiers in Cleveland and lining up.

He's not even using just the profits from their operations.

He's getting more external financing to finance growth here.

Oh, totally.

When I say both vertically and horizontally, integrating in the horizontal sense.

He is obsessed with trying to figure out how to be the sole supplier of oil to the world.

As soon as he figures out that there's economies of scale here, he's like, okay, cool.

How do we start the flywheel?

Get as much capital as possible, build out as much production as possible, start having agreements with whoever's got rights to the land as possible so we can start vending to the world.

And own this super strategic choke point of refining in cities.

So Clark is spooked by all this.

Chernow has this amazing quote that he finds from Rockefeller.

I don't know where he found this.

I should look up in the notes at the end of Titan.

This is so good.

Rockefeller apparently wrote or said this at some point.

Clark was an old grandmother and was scared to death because we owed money to the banks.

Yeah, so great.

So Rockefeller engineers a coup.

This is so good.

And some of Clark's brothers are also partners in the business at this point in time.

They get into all these arguments, so John baits them one day into threatening that they should just dissolve the partnership and And John's like okay, great.

Let's dissolve the partnership.

Because he knows that if he goes to them and says, look first of all, I don't think you are risk tolerant enough.

Second of all, I don't think you're upstanding.

And so I want out.

Like he knows that he loses leverage by doing that.

So that's why he baits them into doing their normal thing of getting all up in a fit and saying we're going to back out.

Yep.

Totally.

So Rockefeller immediately goes to the local paper and places a notice that the partnership is dissolving and that there's going to be an auction for the assets of the partnership, including the oil refineries.

And it sets up this showdown where the Clark brothers and Rockefeller bid against each other for each other's 50 stake in the business.

Which is, by the way, a great way to do it.

Like, if you've got a partnership that's blowing up, all right.

Whoever wants to pay more to buy the other person out is the person that should get to own the whole thing.

And so the idea of a bidding war between the two of them to figure out how to value the business makes total sense between the two principles.

So Rockefeller though, remember he's been going and getting the relationships with all the banks and financiers.

He lines up financing in advance of the auction.

So he's got basically unlimited resources, although it's still the price ends up stressing him out.

He buys Clark's 50% of the oil business for $72,500.

And in exchange also gives Clark, Rockefeller gives Clark his 50% share of the produce trading.

Which, by the way, that's something.

He probably buys them out for like 3 to 4 million, something like that, in 2021 dollars.

Yeah.

So good chunk of change.

Yeah.

But that 50, that 72500 or however you want to think about it, that's 50 of Standard Oil, right there.

Wow.

Rockefeller would say later, it was the day that determined my career.

Probably bigger than job day.

Yeah.

I felt the bigness of it, but I was as calm as I am talking to you now.

And this is like what we're going to see.

Like this man has ice, not ice water, like literally like solid ice running through his veins.

It's crazy.

So this was a big price.

It was more than Rockefeller wanted to pay.

But this happens in 1865, in the beginning of February of 1865.

And Back to what's going on in America.

Two months later, General Lee surrenders to Grant and the Civil War is over.

And with the Civil War over, what's less important?

Commodity produce trading.

And what is all of a sudden a hell of a lot more important is Oil industry urbanization, everything.

Because all these soldiers are coming back and getting jobs in factories.

Like you have sort of an industrial boom here.

And it's interesting how Rockefeller is sort of obsessed with I'm not a speculator.

I'm not one of these people rushing to prospect various plots of land in Western Pennsylvania.

It's funny that it's, I would say, a picks and shovels play.

I guess the point to make here is he's doing the predictable reliable stable, very strategic part of the value chain.

He's not out prospecting land.

Yeah.

To just doubly underscore strategic, did Rockefeller know the war was going to end in two months?

I mean, probably.

I think Sherman's probably marching to the sea at this point.

So Chernow writes, quote the war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine, which had yielded a rival illuminant called a campene.

The war had also disrupted the whaling industry and led to a doubling of whale oil prices.

Moving into the vacuum.

Kerosene emerged as an economic staple and was primed for a furious post-war boom.

This burning fluid extended the day in cities and removed much of the lonely darkness from rural life.

Soon, John D. Rockefeller would reign as the undisputed king of that world.

Yeah.

So he's now got the oil operations, the refining business all to himself.

December of 1865, the war is over, all this is going on.

He opens a second refinery in Cleveland next to the Excelsior Works.

The new name that he really chooses.

He wants to let everybody know that his oil, his kerosene, his business, his operations is going to be bigger than anyone else, it's going to be the best quality and it is going to reign from sea to sea.

What does he call the new operation?

Standard Oil.

Well, at first, the factory is The Standard Works, and then it becomes... Oh, really?

Yeah.

The first refinery was The Excelsior Works, and then The Standard Works is the name that he chooses, The Standard.

He's setting The Standard up.

And importantly, yeah, it's about setting industry standards.

I mean for him.

He was observing.

I know I'm hammering home on this speculators and cowboys thing, but especially after the war you've got all these soldiers who are trying to figure out what to do with their lives and they're going and they're working and drilling.

And so you have all these people that have.

I think in the book it refers to someone with a gun and a canteen and their plot of land in Pennsylvania.

And I think Rockefeller is basically observing that...

The kerosene that could power the world is volatile in price.

People are scared that it's not safe because it's being refined in questionable ways.

And so people's houses are burning down.

There's not professionalization in the kerosene industry the way that he wants to bring it.

So this notion of standard is almost like kind of like the TSMC chip yield thing.

Like everything that comes off of our line is super high quality.

Totally.

That is exactly the same analogy.

This is not necessarily easy stuff to do.

They're going to set the standard.

And by the way, at this point, he's now figured out that he can run the factory on gasoline.

Oh, I didn't realize that.

So the standard oil factories are burning less coal than their competitors and using the gasoline byproduct.

Oh, that's so great.

So they're literally feeding themselves.

Yep.

So you said something a minute ago when you're talking about this.

You said selling this oil, this kerosene to the world.

So by the very next year, in 1866.

America is a big market and is going to grow hugely, especially after the Civil War.

Yeah.

But do you know what's a bigger market?

The rest of the world.

Especially at this point in time.

I mean, America is not America yet.

It's probably 30, 40 million people.

Yeah, maybe if that.

All right.

You keep talking.

I'm going to Google this.

Okay.

Great.

So by the very next year, in 1866, the fledgling standard oil company is already selling two thirds of their kerosene overseas, primarily to Europe.

So like one third domestic, two thirds international already.

31 million people in 1865.

Wow.

So they're selling most of their oil overseas.

Rockefeller dispatches his little brother William, who's now working in the business, to New York City to go handle all of the export business for Standard Oil.

Do you know the story about when he needed to raise, I think it was $50,000?

Ooh, I don't know.

Oh, yeah.

Well, it's a great story.

So this is in Chernow's book.

Rockefeller has a bit of his father in him, sort of a flair for showmanship.

And he really needs $15,000.

He needs a loan pretty quickly.

And he's sort of looking around for financiers for it.

And he dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people.

And at some point someone stops his carriage and looks over and says oh, Mr Rockefeller, could you use a 50000 loan?

And of course, Rockefeller is like, jackpot.

And he sort of looks at him like without breaking, and he looks at him, he goes.

Could you give me 24 hours to think it over?

Yeah.

And of course, by doing that, he gets like the best terms on the loan.

It's like, I'm not sure I really need this.

He's unbelievable at like getting his hands on way more capital at way better terms than other people would be able to.

So good.

Now that William's in New York and the family has got operations in New York, they can get like oh Mr, Sir Rockefeller's, could you use 250000 or 500000.

Yeah, pretty soon.

They're like bringing a bazooka to a, like a fistfight with the other refiners out there and it's kind of like.

This whole part of the story just reminded me so much of like the uber days.

You remember when uber went out and raised all that money and totally oh, we're gonna flatten lyft and dd and all the global competitors.

That like oh, it was totally, it was the uber playbook, except it really worked.

Yep, speaking of uber, right after william goes to new york, the sort of um, shall we say, emile michael character of uh, of standard oil metaphor.

I'm stretching, all right, i'm stretching it too far, but an interesting uh, colorful character comes into the fold in the fledgling standard oil empire.

I uh, I've been posting on Twitter like all the fun stuff, like just because I've been enjoying this research so much.

And I posted about this guy, Henry Morrison Flagler on Twitter.

And Andy Sparks replied to my tweet with, I think, like the best one liner about Flagler possible.

He says, quote, Flagler was savage.

And he was really like, you know, Rockefeller, he's driven by this divine calling.

He's willing to go to the mat.

He's willing to do just about whatever.

But it was Flagler and then some of the other lieutenants that he brought in that were like they're the ones who did the dirty work.

Oh yeah, because Rockefeller, he needed to preserve plausible deniability left, right and center, especially once they figured out all the business tactics that were really going to let them press their advantage.

He had some very bad lieutenants, so he could stay as plausibly good as possible.

Rockefeller was for sure the one pulling the strings.

Yeah.

So Flagler ends up coming into the business because he has a wealthy relative named Stephen Harkness who hears about what's going on and wants to invest, like equity dollars, into this new standard operation.

So he invests 100000 in the operation which, oh my goodness, like I didn't actually find, like what the net worth of the Harkness family ends up being because of this, but like enormous.

Yeah, it has to be just generational wealth.

And his sort of one term that he asked for as part of investing is that he wants.

I think maybe Flagler was his nephew or something.

He wants Flagler to join the firm as treasurer to quote, keep an eye on his investment.

And so Flagler joins and literally, this is what I tweeted.

He keeps a quote on his desk at Standard Oil for all the time he's working there.

The quote says, do unto others as they would do unto you and do it first.

Right.

Oh my goodness.

So Flagler takes over the negotiations for shipping of oil with the railroads.

If you know anything about Standard Oil, you can see where this is going.

When Rockefeller was running negotiations with the railroads, he always was able to get pretty good rates shipping rates because he had a BATNA being there in Cleveland on Lake Erie.

Totally.

During the summer months and the spring and fall.

We can ship way cheaper by sending it out by water.

By water.

Yep.

So all the crude coming in from Titusville to be refined in Cleveland at standard could come in over the water or by rail.

And then, when it was going out to then go off to the rest of the country and the rest of the world, he had another option.

Flagler is like, oh, this is nice.

That's cute.

Let's exercise our power a different way.

Yeah.

What about if we go to the railroads?

And we're like, hey, guys, it's really expensive to operate these railroads.

What would you say if we were to guarantee a really really, really large amount of minimum shipments of oil that we'll do with you in exchange for us guaranteeing you guys like an unbelievable amount of volume that we'll do on your railroads?

You give us an equally unbelievable shipping rate like cost of doing this.

The railroads are like, yeah, that sounds good.

Except the railroads are like, wait a minute, but you don't make that much oil.

Where's all this oil going to come from?

Well, specifically the railroads think this sounds really good because with the amount of volume that they're talking about, this means they can run dedicated lines of of just oil tank cars.

So not mixed trains with box cars and oil cars, just oil tanks between Titusville and Cleveland, with no stops.

So if you think about operating a railroad, if you have different types of product that you're loading on to the train, that takes more time and money.

They were being forced to stop to pick up one car and add it to the train.

Exactly.

And then all these stops, that just adds up.

It costs money, right?

Time is money here.

Yeah.

So they love this.

But as you said, Ben, they're like, well, how?

Henry, this is a great idea, but how are you going to do it?

You don't have enough capacity.

And two other things before we answer that question.

One is just to give the magnitude of how much this helped them.

It lets them own way less cars also.

The railroad.

They get to go from something like needing to have 150 cars to be able to make the same amount of money on 40, or something just dramatically smaller, to.

And the other thing is Standard Oil has started to really build up some credibility here, because when people were putting oil on trains before they were sloshing around in open wooden boxes.

And Standard Oil pioneered, hey, we're going to put them in tanks and then eventually metal tanks.

And it really professionalized the- And eventually we're going to make railroad cars that are like the car itself is just a tank.

Yep.

And fast forwarding a little bit like, oh, railroads, what if we made those tanks for you?

But we're getting ahead of ourselves.

So Flago is like, don't worry, guys, I got this.

So he goes around to all the other refiners like everybody else in Cleveland.

And he's like, hey, guys, I have negotiated a great rate for all of us.

Do y'all want to come on board together?

And we'll all like pool our shipments that we're all getting in from Titusville.

And by doing this all together, we've got this great rate.

This is an offer that they can't refuse.

And not only can they sort of not refuse it, because what happens if we say no?

But this is their major cost driver.

They're in a commodity industry at this point.

And so distribution of the oil is actually the big driver of the business.

Yep.

So, okay.

Everybody's like, well, this is fantastic.

I was like, okay, great, great.

Let's do this.

But, uh, you know, one thing, let's not write any of this down.

Okay.

Let's just keep this all as a little gentleman's agreement between all of us and the railroads.

Nobody knew.

We don't need any feds, you know, sniffing around.

Feds, quote unquote, if there even were any then.

Well, basically, if anybody ever asks us if we have an agreement, there's no agreement.

Everybody can look at each other and go, I haven't seen an agreement.

Yep, totally.

So this agreement comes to be known as the Lakeshore Agreement, because the Lakeshore Railroad was the main railroad that they did this with.

And this is huge.

So by doing this until this point in time, Cleveland as a city.

So if you forget the individual companies, of which Standard is one within Cleveland?

But just think about refining production of oil in America, Cleveland was actually the number two largest center for oil refining behind Pittsburgh at this time.

Once they do this deal, Cleveland is fast-tracked and becomes number one.

And Standard and Rockefeller and Flagler, they're like the godfather.

They just brought all the other families in Cleveland to heal.

They run the collective now.

And this starts a playbook of if there's oil leaving the city, either it's ours or we have some agreement in place where it's good for us, even if it's not actually ours.

And maybe it'll eventually become ours.

Yep.

So they dominate Cleveland.

Cleveland becomes the number one oil refining center in America.

But that's not enough for young Rockefeller.

He's got his sights set on the whole industry, like Pittsburgh, Philadelphia.

There is some refining happening in Titusville, some in West Virginia, some in New York.

He wants all of it.

So how's he going to do this?

As you alluded to at the top of the show, There actually is no legal framework at this point in time for businesses to operate outside their own states.

Importantly, they cannot own property in other states.

Yeah, they can't own property.

They can't have operations.

Literally, the United States was like this is all changing after the Civil War.

But it was United States.

The states were the sovereign or near sovereign entities here.

Totally.

And it's really only recently that you could just sort of incorporate your own business as you please at all without getting express written consent from the government.

I mean in the days of England and early in the US.

Incorporating a company, a corporation, was like the government's granting you a special right to operate this business.

And so already the doors are- blown wide open that you can just start a company.

But we're not yet to the era of like oh, I can start a national corporation.

Yep.

So they think for a while this whole little crew at Standard Oil in Cleveland, about how they're going to do this.

They know that if they want to consolidate the whole industry in the whole country, they need A a lot of capital and, B an ability to operate outside the borders of Ohio.

Right.

So Flagler comes up with this idea.

It's financial and corporate law innovation.

Innovation.

Did you read about how he comes up with a new structure that they use?

Or I guess was an old structure, but that they wasn't very popular but they turned to the joint stock company.

Did you read about how Flagler, who was not a lawyer, drew up the actual like incorporation?

Oh, wasn't it on like a yellow legal pad?

Yeah, like on like the equivalent of a yellow legal pad.

No letterhead.

Yeah.

Yeah, totally.

Which partially, I think, was just because that's how like this was still, you know, Wild West type stuff.

But also I think they didn't want anybody to really know about this.

They wanted this to be super secret.

So Flagler comes up with the ideas, like these joint stock companies, which I mean I think like wasn't the Dutch East India company a joint stock company?

So he takes this idea, but not many other companies were doing it.

He says, if we were a joint stock company, then we could buy shares in other joint stock companies.

We could also sell shares in ourselves to raise money or to strategic partners who we might want to have a vested interest in our success.

This is interesting.

This might solve some of the capital requirements.

Okay.

Well, that's interesting.

And also this selling shares to raise equity capital thing.

Rockefeller is like my God.

That is brilliant.

How did I not think of this before?

Totally.

It's Flagler that comes up with this.

It's amazing.

So on January 10th 1870 they abolish the old partnership and they pour all of its assets into the new joint stock company, the Standard Oil Company of Ohio, which boom it's born.

They capitalized this new joint stock corporation with one million dollars of liquid assets like that is how enormous this had become already unheard of.

I don't think that there was any other organized enterprise in america with that amount of capital period, any other industry like already.

That's how big this is.

And we're still just getting started.

So this doesn't solve the interstate commerce issue though.

So they come up with another absolutely brilliant and diabolical plan to solve this, which is the trust.

And what they decide to do is they say, well like OK, technically companies can't own shares in other companies outside the state.

But what if we create a trust that then this trust holds shares in companies all around the country.

The trust could have some trustees, that sort of get to decide what happens with maybe all the companies that roll up to the trust.

We can sort of make sure that these corporations, each of which are nicely situated inside their own state and don't own any property outside their own state.

But like we, the trustees sort of get to decide how those companies might work together.

Yeah.

And there's no law that says that officers of any given company can't be trustees of a trust that owns shares in other companies.

So this is the loophole around it.

So they create this trust and the trustees just A dictate to the other companies that they purchase what to do.

But also B this is important all the dividends from all the other companies.

The trustees designate the beneficiaries as the individual shareholders of Standard Oil of Ohio.

So nothing ever touches the actual company, Standard Oil of Ohio.

It all goes to the trustees and then to the individual shareholders.

And that's how they get around this.

Interesting.

So the individuals who own the corporation... Yep.

Literally everybody on the cap table end up being the sort of puppeteer, controller and beneficiaries of all these other entities.

So Rockefeller, he's like, oh, this is amazing.

He comes up with the idea that none of them are going to take a salary.

They're going to focus solely on these dividends that are coming in as a source of value and income, but also, even more importantly, focus on the appreciation of the value of, you know, this whole enterprise.

This was new thinking.

Like now people are listening to public.

Yeah.

Duh.

Like equity.

Like why else would you join a startup?

Why else would you start a company or join a startup?

Nobody had ever thought this way before.

Like the idea that equity and dividend could like, that that could be your primary source of income, income and wealth generation, and that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies you're buying.

Yeah.

The idea that your competitors could become your friends by being able to offer them ownership in the joint combined company where, as we win in this industry and this industry gets bigger we all win by holding shares of this thing together.

Right.

Yep.

Chernow writes.

Whatever the debates about his ethics, economists and historians have unanimously extolled Rockefeller's role as a pioneer of the modern corporation.

And then quoting from another biographer of Rockefeller Rockefeller must be accepted as the greatest business administrator America has ever produced.

And it's this.

So this is how well this works in the very beginning.

First year of the trust, 1870.

First year of all this getting set up.

Remember, there's $1 million in total capital that gets put into this structure.

They pay a 105 dividend at the end of the year, including also reinvesting tons of cash flow back into the business and expanding and buying other companies.

So the million dollars that was in there.

They pay over a million dollars out to the shareholders and have many other millions of dollars to go do other things.

It's crazy.

They're extremely profitable and they're growing like crazy.

Yeah.

And let's talk about this Rockefeller's argument to the societal benefit for a moment, which is like a it's silly that the state borders are preventing, like why should that really be a thing?

Like to the extent that I've been able to rapidly expand in Cleveland.

And we've been able to create great product for consumers at a low price.

Quality of life for people has gotten better.

And like that has all happened because we've expanded here.

Why shouldn't we just be able to do that for people everywhere?

And his argument is really like this is for the betterment of consumers.

Now, my competitors, when I move into these states, probably don't like it.

But like ultimately, the American public wins.

And he's right.

He's totally right.

Just like Jeff Bezos would probably say the same thing today.

All right, listeners, it's time to talk about another one of our favorite companies, Statsig.

Since you last heard from us about Statsig, they have a very exciting update.

They raised their Series C, valuing them at $1.1 billion.

Yeah, huge milestone.

Congrats to the team.

And Timing is interesting because the experimentation space is really heating up.

Yes.

So why do investors value StatSeg at over a billion dollars?

It's because experimentation has become a critical part of the product stack for the world's best product teams.

Yep.

This trend started with Web 2.0 companies like Facebook and Netflix and Airbnb.

How do you maintain a fast, decentralized product and engineering culture while also scaling up to thousands of employees?

Experimentation systems were a huge part of that answer.

These systems gave everyone at those companies access to a global set of product metrics, from page views to watch, time to performance.

And then every time a team released a new feature or product, they could measure the impact of that feature on those metrics.

So Facebook could set a company-wide goal like increasing time in app and let individual teams go and figure out how to achieve it.

Multiply this across thousands of engineers and PMs, and boom, you get exponential growth.

It's no wonder that experimentation is now seen as essential infrastructure.

Yep today's best product teams like Notion OpenAI, Rippling and Figma are equally reliant on experimentation.

But instead of building it in-house, they just use Statsig.

And they don't just use Statsig for experimentation.

Over the last few years, Statsig has added all the tools that fast product teams need, like feature flags, product analytics, session replays and more.

So if you would like to help your team's engineers and PMs figure out how to build faster and make smarter decisions, go to statsigcom slash acquired or click the link in the show notes.

They have a super generous free tier, a 50000 startup program and affordable enterprise contracts for large companies.

Just tell them that Ben and David sent you.

Now is a great time to thank good friend of the show, ServiceNow.

We have talked to listeners about ServiceNow's amazing origin story and how they've been one of the best performing companies the last decade.

But we've gotten some questions from listeners about what ServiceNow actually does.

So today, we are going to answer that question.

Well, to start, a phrase that has been used often here recently in the press is that ServiceNow is the quote-unquote AI operating system for the enterprise.

But to make that more concrete, ServiceNow started 22 years ago focused simply on automation.

They turned physical paperwork into software workflows, initially for the IT department within enterprises.

That was it.

And over time, they built on this platform going to more powerful and complex tasks.

They were expanding from serving just IT to other departments like HR finance, customer service, field operations and more.

And in the process, over the last two decades, ServiceNow has laid all the tedious groundwork necessary to connect every corner of the enterprise and enable automation to happen.

So when AI arrived, well, AI kind of just by definition is massively sophisticated task automation.

And who had already built the platform and the connective tissue within enterprises to enable that automation.

ServiceNow.

So to answer the question, what does ServiceNow do today?

We mean it when they say they connect and power every department.

IT and HR use it to manage people, devices, software licenses across the company.

Customer service uses ServiceNow for things like detecting payment failures and routing to the right team or process internally to solve it.

Or the supply chain org uses it for capacity planning, integrating with data and plans from other departments to ensure that everybody's on the same page.

No more swivel chairing between apps to enter the same data multiple times in different places.

And just recently ServiceNow launched AI agents so that anyone working in any job can spin up an AI agent to handle the tedious stuff.

Freeing up humans for bigger picture work.

ServiceNow was named to Fortune's World's Most Admired Companies list last year and Fast Company's Best Workplace for Innovators last year.

And it's because of this vision.

If you want to take advantage of the scale and speed of ServiceNow in every corner of your business, go to servicenowcom slash acquired and just tell them that Ben and David sent you.

Thanks, ServiceNow.

So, David, they've now got the structure in place to become a national trust and expand here.

How do they do that?

What happens?

Oh, this is so great from just like this story.

The smile on my face is so wide right now.

Whether it's juicy.

Yeah.

Great.

Great is up for debate.

So you know the structure of the joint stock company.

They come by and hold stock in other companies that can issue shares older than them.

What are they going to do here?

Remember we said the railroads are the most strategic, important supplier and choke point for the industry right.

Standard goes to the three biggest railroads the Pennsylvania Railroad, the storied huge, enormous Pennsylvania Railroad.

I think that's on a Monopoly board.

It is.

It is literally on a Monopoly board.

Like that is how uh pennsylvania, the new york central and the erie railroads.

And they say uh, so we got this new thing.

This new thing lets us do things with other companies.

Do you want to cooperate as a part of our new thing?

Want to cooperate?

How about we all do something together?

And the railroads are like oh yeah, we like doing stuff.

This sounds pretty good.

So they get together.

They set up a shell corporation called the south improvement company oh this is so juicy Which is intentionally nebulously named.

Yes.

And in fact later in life, when Rockefeller would be getting grilled in federal depositions, he would be asked if he was ever a director or involved in the Southern Improvement Company.

Which of course is not a thing.

Nope.

I have no idea.

Standard Oil was never involved in the Southern Improvement Company.

Oh my goodness.

So great.

Obviously, he was not perjuring himself by saying that because...

The questioner got the name wrong.

Though I think he did perjure himself in other SIC-related... Yeah, I think he did.

So here's the deal.

Standard Oil is going to set up and control most of the South Improvement Company through their new trust and joint stock corporation structure.

The railroads will own a token amount, but the railroads and the principal owners of the railroads, the individuals, they're going to issue some Standard Oil, is going to issue them some stock.

So that you know, these guys now have a little skin in the game with Standard Oil.

All the interests are aligned here.

Well, and the railroads had a problem that they need solved, which was that, because of the boom-bust nature of everything that's going on their cars, especially oil, and the sort of Remember that thing that I mentioned earlier where people are deciding not to buy because they hear it's going to be cheaper soon, because they know there's a big gusher.

Just like there was intense competition among all of the non-standard oil companies, a lot of the profits are just being arbitraged away.

And so they've got unpredictable demand.

They've got booms and busts.

They've got this situation, especially with oil, where certain types of oil in certain areas were so insanely cheap that everybody's going out of business because no one can make any money.

The same sort of thing is happening in the railroad industry.

And so...

If there's like a cooperation opportunity for the railroads and Rockefeller's offering them, I can kind of solve your problem here and we can sort of smooth out business.

Ben, it really comes down to like it's really hard to run a business when prices are fluctuating and they're not fixed.

So clearly the answer is to fix the prices.

Oh my goodness.

We ascribe no virtue to this.

I think the jury on this whole thing and we'll get to this later in the episode and certainly in part two of like what parts of this were good and what parts of this were bad.

It's both.

There's lots of both that happened all through this story.

Yep.

The three biggest railroads and Standard.

They get together in this South Improvement Company and they say here's what we're going to do.

All the railroads, we're going to set a new fixed price.

There is now a fixed, literally a fixed price for shipping oil on railroads.

To everybody out there, anybody who's shipping oil.

There's one single fixed price and it's really high.

Whatever it was before, it's a multiple of that.

It's really high.

Except for anybody who's a member with us of the South Improvement Company, y'all get a 50 discount.

At fixed price.

And it goes even further.

This is just like, oh, just twisting the knife here.

Anybody who's a member of our little company here?

One might say a little cartel.

Little cartel, yeah.

Also, they will receive a little dividend, a little kickback.

They call it technically a drawback from any revenue that any other oil producers that are not part of this that ship on the railroads part of that revenue from the really high price that they're charging.

They're just going to give some of that revenue to the competitors that are part of this little cabal here.

This is the most mind-blowing part of the deal.

Not only do you get a rebate for shipping with us, so that way the price is actually way cheaper, but you also get a rebate even when you're not the shipper.

I mean they call it this strawback but, like other people, ship stuff with us and thank you because you are a nice member of our organization.

You're going to get some of that money.

And so your competitors are just paying you.

It's the craziest system ever.

I don't know what the formal definition of the crime of racketeering is, but this sounds like.

Whatever it is, I think this fits the case.

Well, there's a couple different ways that this story draws parallels to Microsoft, but this reminds me so much of that CPU licensing thing that they did.

Do you remember this in the early Windows days?

I do.

The deal that Microsoft cut with I think it was IBM was yeah, you guys can use Windows, and that's great.

And any computers that have a CPU in them that aren't running Windows.

You're also going to pay us for those CPUs.

And that's the deal they signed.

And so Microsoft basically ended up with the monopoly, the entire industry, because IBM's like well, wait a minute.

Whether we're putting Windows on these machines or not, we're paying for it.

And so I think Windows it is.

And actually, I don't know if it was Windows yet.

It might have been DOS.

If only Gates and Bomber and Jeff Rakes and all the like if they'd had our episodes here on Standard Oil to listen to before they put that stuff in writing, history could have been different.

It turns out.

Yes, this may have been a flashpoint, once the public realized how egregious this sort of agreement sounded.

I'll say there is literal rioting in the streets in Titusville.

Like literally, like people are like fighting in the streets.

They're like banging up and destroying, you know, standard tanks and property.

I mean, it's truly heads I win, tails you lose for Standard Oil versus their competitors.

Yep.

This is the point where public opinion really starts to get concerned about Standard Oil.

In particular, informed by the competitors, because the public, public is like great, we're getting so much stuff so reliably for so cheap.

This is awesome.

Yep.

So the railroads, they know they've maybe gone a little bit too far.

And they're like, guys, I don't know that we can actually do this.

And Rockefeller and Flagler, they're like, It's OK.

Let's just like hold out for a couple of weeks.

I think we're going to be fine.

We're going to go do some stuff and we'll get back to you.

Flagler and Rockefeller go around to all the other refiners in Cleveland.

Keep in mind.

Many of them are in very rough shape right now because, A the fluctuations, but B oil prices are getting driven down so far that people are trying to produce and make profit on this.

But because of this crazy inflation then deflation thing that happens, a lot of these companies are slowly on their way to going out of business anyway.

Right.

And they're already kind of brought to heel by standard by the Lakeshore deal, where they're already sharing capacity.

So now Flagler and Rockefeller go to them and say, like you know, that great rate that we organized for you, it's over.

Y'all have heard about this South Improvement Company thing.

It's happening.

So the way we see it, you basically have two choices.

You can stay nominally independent and you can die.

Or you can just sell your operations to us.

Come in and join the fold.

Get some Standard Oil shares.

We'll even give you stock.

And then we can all profit from this amazing deal that we have.

And there's something Larry says, like Rockefeller says, own shares of Standard Oil and your family will never go hungry.

Yeah.

So, as Ida Tarbell, who we're going to talk much about next time, wrote in her investigative reporting on Standard Oil this is what she claimed that the standard pitch was to other folks about joining the scheme.

Quote, you see, this scheme is bound to work.

It means an absolute control by us of the oil business.

There is no chance for anyone outside.

But we are going to give everybody a chance to come in.

You are to turn over your refinery to my appraisers and I will give you Standard Oil Company stock or cash as you prefer, for the value that we put on your business.

I advise you to take the stock.

It will be for your own good.

So they're literally just saying, like they're deciding what value they're going to pay for all these refiners.

And of course, the offer that they put in is like 25 to 50% of... Book value.

Yeah, what the refiners even paid to build the factories in the first place.

And Rockefeller's argument is like, well, we're just going to shut most of these down anyway.

I mean, we're actually doing them a favor by taking this thing that's just going to go out of business over the next few years, giving them some shares in our company as, like a We don't want to be too terrible to these guys.

There are our fellow countrymen and they're also in our industry and we're just bringing them in, we're giving them some shares and i you know i'm gonna write the whole thing off anyway.

So it's a crap factory.

So over a period of six weeks, from February 1872 to April 1872, Standard Oil buys 22 of the 26 other refineries that are operating in Cleveland.

And this comes to be known as the Cleveland Massacre.

And then once they already own all the refineries in Cleveland, they're like, all right, we're done.

You know, we don't really even need this South Improvement Company thing anyway.

And I guess the public doesn't like it.

So...

We're not going to do it.

And apparently not a single barrel was ever shipped using the South Improvement Company.

They never documented anything but structure.

It was all set up and agreed upon, but then they didn't actually ever need to do it because they used it as leverage to just go and roll everyone up anyway.

This was the tipping point.

Obviously, this was the Cleveland refiners first, but then, immediately after they go to Pittsburgh, they go to Philadelphia, they go to West Virginia.

They don't even have to set up some ploy shell corporation like the South Improvement Company.

They just go to all the other refiners in these cities and they're like y'all heard about what happened in Cleveland.

Yeah.

We're coming here next.

You want some shares?

Yep.

By 1877, Standard Oil controls 90% of the oil business in America.

Nine zero percent.

As Barron's put it, consumers of kerosene had no choice but to purchase the product from a standard company.

Not that they complained.

Standard's policy was to upgrade the product continuously while lowering the costs in order to frighten away potential competitors and increase sales.

I just want to say David, just like TSMC, it's like yep, I think it's something like 70 of the leading edge CPUs flow through the island of Taiwan and 50 are actually TSMC manufactured by TSMC.

And we're all better for it as consumers.

And I think it's just fascinating this notion of we're going to keep lowering prices.

The product's going to keep getting better.

And at the end of the day, it actually is good for consumers.

Oh, and we're going to get huge and super profitable along the way.

Yeah.

Well, and you know ASML and you know all the equipment manufacturers.

They're kind of like the railroads here.

Right.

Although amazingly, this cooperation with the railroads really didn't lead to Standard Oil squashing the railroads.

Like they stayed really good businesses for a long time.

Well, they did for other industries, or at least I think they did.

I don't know enough to say about the railroads.

They certainly stayed independent.

But Rockefeller and Flagler and this whole crew, these guys are paranoid as well.

They do realize, after they've just gone and consolidated the whole oil industry, they know that the railroads do have strategic leverage over them.

And again, remember, the oil refiner, they let the other refiners stay in business.

They just bought them and gave them standard oil shares.

They're worried about the railroad.

So we don't want them having strategic leverage over us.

How can we co-opt them?

So I mentioned earlier tank cars.

Yeah.

What was the deal here?

So right around this time, standard starts going to all the big railroads and they're like We've saved you all this money on OPEX.

Now you get to run trains directly, no stops, no box cars.

This is great for you.

But these tank cars, these modern tank cars made of steel and the like, that's a lot of capex for you to keep building.

And we just keep sucking up all this shipping volume with y'all.

What if we just make these cars for you and we lease them back to you?

We'll take on the capex to make the cars and we'll lease them to you at a really low rate.

So what's the play here?

So Chernow writes about this.

He says as the owner of almost all the Erie and New York Central tank cars, Standard Oil's position grew unassailable.

At a moment's notice, it could crush either railroad by threatening to withdraw its tank cars.

No tank cars, no business.

You can keep running this great business for y'all, but you mess with us.

We can withdraw our tank cars.

Wow.

And so now they've got 90 market share of kerosene and they've got this relationship with the railroad where they basically are going to get the most favorable rates without a railroad going out of business.

And then they take it one step further again.

So, by the way david, you laughing through this like maniacal plan, you're like the nicest.

It's so scary because i'm like oh, i just have implicit trust in you, like you're so kind and you're so warm, and you're so and like, you're like, and then they take it one step further and then they stab the knife in the back again and it's so great.

Oh, This is such a good story.

I love it.

Not condoning this behavior by any stretch of the imagination.

An important pillar of American history. critical part of American history.

So, okay, they take it one more step further.

And this is really the coup de grace here.

So, as they're doing all these deals, and Standard Oil is becoming this octopus, as it would be known, a derogatory term by its critics.

Octopus, you think the Goldman Sachs vampire squid sucking on America was bad.

Literally, the Standard Oil octopus is bigger than 10 vampire squids.

So there's a new technology that people are thinking about with regard to oil.

Not gasoline.

Not yet.

That's coming later.

But all of the oil is being moved around either by water or on railroads.

People are thinking that there might be a way to move oil much, much, much more efficiently.

So the concept of pipelines already existed, but really short distance pipelines, literally from the derricks, from the wells to the railroad depots.

So this would be like a mile at most.

They would pump oil through pipes to the railroad depots or to the shipping depots or whatever, to then load it up in cars and get it out of there.

Some people start thinking like well, I wonder if we could pump oil a lot farther than just a mile or two.

And meanwhile the remnants of the industry that haven't yet been consolidated by Standard.

They're looking for any kind of Hail Mary pass to get some leverage back in the industry.

So they decide that they're all going to go in together against Standard and the railroads.

They know they can't get any concessions out of the railroads.

They're going to try and develop a pipeline, a long distance pipeline.

So in 1877, they do this.

They band together and they form the Tidewater Pipeline Company.

This just sounds like a scandal right off the bat, like the name Tidewater Pipeline Company.

Why would you name it that?

I mean, it's 1877.

I have no idea.

And first, the goal is that they're going to pipe oil from Titusville directly to Baltimore on the seafront.

They then shorten it to Williamsport, Pennsylvania, which is still 110 miles.

This would be like an amazing proof of concept that this would work.

Isn't that where like the Little League World Series is?

It is.

Yeah.

I don't know why Williamsport was where they wanted to pipe this stuff to, but they do end up piping it.

So Standard, though, fights them tooth and nail on this.

A bunch of the execs want to go hire thugs to go like smash the pipeline and do all this stuff.

Rockefeller is like he reigns in his exuberant execs on this and says no no, we're going to fight it with every, like you know, political leverage that we have, which they do, but they don't succeed in 1879.

The pipeline turns on and it works.

And I think a bunch of people in standard like probably like pissed at John or like don't understand why he let this happen.

And you know, how could this be terrible?

And Rockefeller is like, Oh, don't worry.

I have a plan.

Now remember, this is just one route that this new pipeline has opened up, from Titusville to Williamsport.

Rockefeller's like, I got all the railroads in my pocket.

They go around to the railroads and they tell the railroads, they instruct the railroads to cut shipping rates so far down on this line that literally, they're basically paying anybody who's willing to ship by railroad on this line to ship.

So it's actually the pipeline, even though they invested all this money in building it, and it's so much more efficient, so much cheaper than running a rail car because, at Standard Oil's pressure, the railroads have now lowered prices so far in response, it's not economic to use the pipeline.

So they starve them out.

This is like the Bezos versus diaperscom thing, where Bezos is like oh, I can sell diapers at a loss forever.

You don't understand.

That is totally what happens.

So the Tidewater Pipeline Company is like up against the wall.

They're about to go bankrupt.

They can't compete.

And by March of 1880, they sell a minority stake in the pipeline to Standard Oil.

Standard assumes control of the pipeline, takes all the technology, immediately turns around and goes and builds out four more major pipelines from Titusville to Cleveland, to Manhattan, to Philadelphia, to Buffalo.

So they build these pipelines that are huge.

Do you know what land they build the pipelines on?

This is the most cold-blooded thing in the whole freaking episode.

No.

Okay, so who would have land rights in straight lines between cities?

Standard Oil goes to the railroads and they're like my friends.

We've got this really exciting new thing that we're working on.

We're friends.

We help you.

You help us.

How about we use your land?

How about we build our pipelines right along next to your railroads?

And then it'll just be a little reminder sitting to you right there.

Reminder to y'all that we don't need you, that we've built on your land.

You're looking at your competition every single time you glance out of a train car.

So if you ever want to try and screw us on prices, just remember we've got an alternative.

Right there.

Wow.

Oh, my God.

By the way, do you know the deal with Sprint?

Random business trivia fact.

I may have said this on another acquired episode.

I think we've talked about this before.

Yeah, that telephone lines were laid along rail lines.

Yeah, it's the Southern Pacific Railroad, SPR.

Oh, yeah, that's right.

That's right.

And exactly for this reason like hey, we need someone who's already eminent domain to bunch of land that we can go directly in a straight line from one city to another.

Boom.

Yeah.

Crazy.

Now I don't know for sure, but I didn't see anywhere that the railroads got any like equity stake in these pipelines.

Wow.

All right.

So I fully take back my comment earlier that it seems like the railroads made it out OK.

Well, I think they actually did.

I mean, this was kind of Rockefeller style and Standard Oil style is like we're going to let you live.

We're going to be benevolent dictators.

We're going to let you continue.

You're just going to remember that.

You know our knife is pressed against your back at all at all times.

Okay, so after this, it's done.

I mean, this is the story of how standard oil became standard oil, like rockefeller standard, like they have won, on a scale that nobody has ever won before or since.

Their competitors are obliterated, new upstart technologies are co-opted.

All of the suppliers, you know, are reduced to total lackeys.

We didn't talk about the customers.

Uh, this is great.

So Most kerosene was sold at retail in America, in grocery stores.

So, right in the sort of early 1880s Standard, decides to run the same playbook that they've run with the railroads, with the grocery stores in America.

They go to them and they say hey uh, you know it's expensive for you to um, set up and give shelf space and everything to all of these cans that are, all you know, non-standardized of standard oil kerosene in your stores.

From now on, all standard kerosene needs to be sold in standard canisters that we set the terms on and we fix the price.

And we tell you where you're going to put it in your stores.

So some stores, you just sort of bristle at this and say they're not going to do it.

Standard sends out a letter in Mississippi.

They had a particular problem with this.

They send out a letter to all the grocers in Mississippi.

They say if you do not buy our oil, we will start a grocery store chain to compete with you and sell goods at cost and put you all out of business.

This is in writing, sent to all of them.

You can just feel the American public and Washington getting stirred up about like okay, monopolies are pretty bad.

We really need some legislation about this.

Yeah.

As Chernow writes, by this point in time, Rockefeller's creation could only be discussed in superlatives.

It was the biggest and richest, the most feared and most admired business organization in the world.

Wow, wow.

In 1883, official standard oil headquarters moves to manhattan, to new york city, and rockefeller himself 26 broadway to manhattan, to 26 broadway.

Uh, do you know which is the building that they have constructed for the standard oil headquarters?

26 broadway, right on wall street.

Do you know what is right outside of 26 broadway today?

No, The bull, the charging bull on Wall Street is literally right outside 26 Broadway.

You know, the bull was only put there in like 1989, I think.

Oh, no, I would have assumed it was there through the 80s.

It was put there after the 1987 stock market crash.

Ah, interesting.

So Rockefeller and his brother and all of their lieutenants.

They moved to New York also around this time.

They just buy up Midtown.

So Rockefeller moves to right off Fifth Avenue in the 50s.

Was it 54th Street, maybe?

I actually don't have it written down.

It was either 53rd or 54th Street, right off Fifth Avenue.

He buys a house, moves in there.

Really right there between the park and between Rockefeller Center.

Yeah no, there is no rockefeller center.

They build freaking rockefeller center, which he had nothing to do with.

That was uh, it was being endowed by his son.

But yeah, we'll probably talk about this more next time.

I didn't realize it was columbia university's campus there and uh, when junior decided to get in and start building, developing building rockefeller center, they lease it from columbia and then they ultimately buy it.

Fascinating, yeah.

Well, part two.

I mean we'll have a lot to say about universities and Rockefellers in New York.

And we haven't touched a lot on the personal side of Rockefeller other than saying he was deeply religious and believed he should make a lot of money and then do interesting things with it.

There's a lot of very good things he does with it that I think we'll save for part two.

And a lot of his idiosyncratic things around being afraid of death and wanting to live a long time, and his health obsessions.

And I think a lot of that especially starts to show up in his old age.

David, bring us home here to 1890.

Yeah.

I mean, it's funny.

We're going to recount now what will ultimately become the beginning of the downfall of Standard Oil.

But I don't know.

It's weird being at this moment in the story because they've literally won.

I don't think we've ever had this before.

The only thing that can bring them down is... government.

Or a paradigm shift.

I'm referring to electricity and lights in houses.

But they very quickly were saved by the fact that conveniently, right around the same time, any thirst that we had for oil before, once you have the car Rockefeller got so much richer in his retirement from his shares of Standard Oil, which became the things that powered us moving around the country in cars, than he ever got from kerosene.

So it was like a paradigm shift could have disrupted and did disrupt the core kerosene business.

But like the thing that happened at the same time was so much bigger than anything they ever could have imagined.

I think that Standard was also making some investments into electricity and electrical utilities.

I don't know how deep they got into the business.

But all I'm saying is monopolies even if you don't trust bust them are always at risk of being disrupted by a paradigm shift.

Totally fair point.

Not in this case, though.

Not in this case.

So it's funny.

I always assumed what I knew of the Standard Oil story before doing all the research was that it was the 1890 Sherman Antitrust Act that brought down Standard Oil.

It wasn't for another 21 years.

Indeed, it was.

Yes, it was the Sherman Antitrust Act, but it was not for 21 years.

So we'll close with the wild story of the Sherman Antitrust Bill.

So Ohio Senator John Sherman. brother of General William Tecumseh Sherman.

No way.

The great hero of the Civil War.

Wow.

Unbelievable.

You know how we joke about, how there must have been 10 people in Silicon Valley in the 1970s and 1980s.

Right.

I think there must have been 10 people in America at this point in time.

So Senator John Sherman, in 1889 as like, the sort of public sentiment is starting to shift against this huge octopus monopoly, proposes an anti quote unquote, antitrust bill in the us and the federal senate.

It turns out that just a few years earlier, when sherman was running for office in ohio, guess who one of his biggest campaign supporters was uh, rockefeller yes, that would be correct.

So this is like Like hmm, you're biting the hand that feeds you here.

Yeah.

So the act does pass.

But Sherman makes the political gamble that, like the political power and stature that he's going to get from doing this, is going to be worth more than the money that he's going to get from Rockefeller and Standard going forward.

The act ends up passing in July of 1890, outlawing all trusts and business combinations in the United States of America that were this is the key modifier, quote unquote in restraint of trade.

But they don't define what in restraint of trade means.

It's up to some judge to set precedent.

And everybody thinks, oh, well, there's no legal precedent for what that means.

So that's never really going to become an issue.

And in fact, Rockefeller and Standard Oil viewed this as a win.

They were like, oh, great.

The public is now going to feel like the U.S. government has taken action.

They have heard them.

They're going to curtail standards of power, but they're not actually going to curtail anything that we do.

We're going to keep doing exactly what we've been doing.

And in fact, when Sherman runs for reelection in Ohio the very next year, in 1891, do you know who, once again, one of his biggest donors was?

Is it Rockefeller again?

It is John D. Rockefeller once again.

Fascinating.

How funny is that?

The act that ends up bringing them down.

He is the biggest, or one of the biggest donors after the act passes to the senator that introduces it.

Huh?

Fascinating.

So in 1896, Rockefeller is like, well, I guess it's been a good run.

I'm going to hang it up.

I'm going to retire.

I'm going to focus on my philanthropy and I'm going to leave one of my lieutenants, John Archbold, and my son, John Rockefeller Jr, who's about to graduate from Brown University.

I'm going to leave them in charge.

I'm going to go retire to my estate, and I'm going to focus on doing good works.

But key mistake, he didn't fully leave.

No, no, he did not.

He's like, well, just in title only, I'll kind of stick around as president, right?

Or as chairman.

But of course, that's not how the public would view it.

They're like, no, your name's still on the door.

Oh, he's going to get dragged back to the witness stand in the years to come.

So no, no sunset ride off for him.

Yeah.

What a story.

I want to talk a little bit about like that.

We used to do these narrative sections when we do IPOs.

I want to talk about like the public sentiment versus Rockefeller's defense.

So like the public sentiment here.

There's this really big company.

They provide things kerosene mostly that I use in my life and it gets to me in a consistent way at a stable price.

It is good for consumers.

If you think about the consumer welfare standard of antitrust, this really isn't bad for consumers.

It could get there if Standard Oil is the only company and they sort of wield that power to raise prices and stuff like that.

But at this point, it's really like their competitors hate their guts.

And especially anybody who's sort of been coerced to cooperate with them.

The railroads, the pipelines, like anyone in their orbit.

The retailers like it sucks for them too.

And so you've got this beginnings of like really stirred up public sentiment against this company that's like, By some views you know, the most evil capitalist structure of all time.

Americans ever since we got here from England and you know my family immigrated at some point, so I certainly didn't come from England.

But ever since the original Anglo people came over from Europe and settled America, there's been this incredible hatred of monopolies, in particular because our country was founded on equality and people having the right to be free and the free market.

The government was a monopoly in England, and that's what we were running from.

Well, and still to this day, there's huge skepticism amongst Americans of centralized government power.

Right.

So even there's this interesting like very American stripe that runs through people that is.

I can't quite put my finger on why, but I don't like big stuff and I don't like concentration of power.

And I didn't like it when it was concentrated in a government.

And I don't like it now when it's concentrated in the rich people.

And that shows up all the way through to today.

I mean, that's the defining characteristic of the national conversation now.

Right.

And of course, Rockefeller's defense to all this is saying, look, social Darwinism is bad.

Without Standard Oil rolling everyone up, you just have all these people producing non-standard products that consumers can't trust.

They're going to kill this industry that could make everything great, because consumers won't trust it.

All these businesses will go out of business because the prices are so low, because every time there's a gusher the prices drop so much.

These people are all going to go out of business anyway.

And Standard Oil is the antidote to social Darwinism, which is bad, which is killing the golden goose here.

And so the way he sort of makes this argument is it was a cooperative success.

It was for the general good.

It was our moral imperative.

It was downright Christian for me to do this and provide this service.

And certainly any of the competitors or suppliers or partners or the like who ended up taking Standard Oil stock.

Got fabulously wealthy by doing so.

How could you argue that that was bad for them?

He really seems to have deeply believed that this invisible hand, the Adam Smith concept of the invisible hand, that sort of guides the free market, that it kind of just takes too long.

And there's a lot of bad stuff that happens along the way.

Academically, sure, it makes sense. that the free market will work itself out.

But when you actually look at the businesses today and the people running those businesses today, there's going to be a bunch of hardships and dirt along the way.

You might have whole industries that die out because they never reach their full potential.

It's not communist and it's not social.

It's this interesting like uniquely American viewpoint on actually social Darwinism and free market capitalism is a bad thing.

And everybody just eating each other's lunch and eliminating all the profit in every industry and potentially to our own detriment is bad.

Chernow even talks about this like in some ways what Rockefeller was trying to do and what standard became shared.

Just as much intellectual grounding as with like Marx and communism as it did with Adam Smith and capitalism.

It was this view that, like Hey, pure individual competition is is not actually the most ideal status.

And some form of collectivism.

In this case, collectivism in the form of a company.

Standard Oil was the best path.

Yeah.

And the place where it kind of falls down is where he sort of says look, if we just knife fight to the death, someone's going to win.

And ultimately, that one is going to be me because I'm the best at this.

And he's probably right.

But But this notion of like.

So therefore everyone should allow me to save them in like a very evangelical Christian way, like I'm going to go and save and bring them into my business church is very much how he sort of thought about it.

He'd come into the light and embrace the standard oil.

Literally the light.

I love it.

And just dripping with irony in the way that I'm drawing these parallels here it kind of falls down where, like him accelerating the death of all of these businesses and saying eh, it was inevitable, and at least they're getting some upside now.

The benevolence argument does seem to fall down there a little bit.

Perhaps maybe the most blatant example to me is the grocers, right?

That letter sent out in writing to grocers saying if you don't do what we want, we're going to metaphorically burn down your houses.

It's unreal.

Right.

There are places where like, it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers.

But those places are far more limited than the number of places where they actually reached and exerted their power.

Yep.

Sidebar on the logo because it's so great.

We'll see if we can link to it in the show notes.

You'll recognize it when you see it.

It's this red, white, and blue.

Oh, it's the Amoco logo now.

Yeah, it's the Amoco logo.

Yeah, yeah.

Amoco was a set standard of Ohio.

No, California was Chevron.

Is that their Ohio or New Jersey?

I think it was Ohio that became Amaco.

I could be wrong on that.

I think you're right.

I'll fact check that.

But yeah, it's this red, white and blue oval with in the middle of the oval this like Grecian column looking torch, like Olympic torch looking.

Indiana.

Oh, interesting.

Like Olympic torch looking column with a fire burning on top of it.

And interestingly, I think the Standard Oil of Indiana company adopted a different logo.

But then, when they turned into Amoco, they adopted something that looks a lot more like the original Standard Oil logo.

Interesting.

The other thread I want to talk about here in narratives is Rockefeller and standard oil as a organization.

But Rockefeller as a person is really like the prototype of so much of American culture today.

Like he was simultaneously viewed as this like you know sinister villain and as this great hero.

And People hated him, but people wanted to be him.

Is that a rap lyric?

I feel like it must be.

I mean, Jay-Z would name his label Rockefeller Records.

There's a reason for that.

But everything that I feel, like the public feels about Bezos Zuckerberg Musk everybody, all these billionaires today.

This was the prototype.

This was the first time that Americans felt this way.

There's this great quote in Titan that says the general public was of two minds and viewed the new entrepreneurs, of which Rockefeller was the foremost, as alternatively sinister and heroic.

By 1888, Rockefeller began to pop up in fawning magazine features about rich Americans."

But he was also singled out as a notorious trust king in Joseph Pulitzer's World and other papers.

The press kept up an editorial drumbeat against Standard Oil, demanding vigorous state and federal antitrust action.

At the same time that he's in the equivalent of Vanity Fair as the new elite.

And I think he started embracing that later.

For a while, his policy was don't talk to the press.

And then sort of later started opening up to this idea of, like geez, maybe it's probably a good idea for me to have a positive image out there.

Like silence is not doing me any favors.

Yeah.

All right.

Power.

Ooh, power.

Okay, so what are what are our power categories here?

So, as Hamilton Helmer would put forth in his wonderful book Seven Powers, counter-positioning scale economies, switching costs, network economies, process power branding and cornered resource.

And what I would put forth here is I think and I haven't rigorously looked at each one I think Standard Oil, at various points in its first 20, 25 years of existence, has exerted every single one of these, but the domineering one, the one that enabled them to do everything.

That they did was scale economies.

No argument from me on scale economies being the most important one here.

I mean literally.

That was all the machinations with the competitors, with getting the volume in the Lakeshore deal, with doing the deals with the railroads.

It was all about economies of scale, so for sure.

What's your thought on counter-positioning?

I think, in being a pure play refinery that was located in a different location than the like, is there a reason that no one else should have done an offsite refinery because they had too much vested interest in an onsite refinery?

I'm not sure.

I'm not sure that it was there was any reason why they couldn't.

But I think all the folks who are in the producing world, like the drilling and the crude world, they were just so.

It was just such a gold rush mentality that like it was not professionalized.

Yeah. they were just chasing the quick profits and like they were distracted.

They weren't thinking longterm, but I I don't think there was any reason why they couldn't have set up refining businesses in other locations.

The counter positioning feels a little thin.

Yeah.

All the others that like switching costs for sure.

Uh, with the, all the railroad deals and then the tank cars and all that network economies.

Yeah.

I mean they build the retail distribution with the standard cans, and uh Actually, is that all scale economies though?

Is there any network effect here where it's better for one customer that other customers exist?

Does anybody ever sort of have a relationship between customers?

That's a good question.

Maybe not.

I mean, network economies were certainly less common in a pre-telephone era.

Yeah, maybe not.

Maybe that's more of a stretch.

Process power, certainly, especially over time as it got more and more complicated.

Branding, I mean, they named themselves Standard, and then they became that.

Yep.

And then, yeah, I mean, they had lots of cornered resources.

Eventually, they cornered the resource on all the crude in the eastern United States.

Because they eventually actually owned all the land rights, right?

To actually produce the... Yeah, they did eventually get into exploration and production.

I think when it was...

You know, it was much later.

I want to say it was in the 1880s, 1890s maybe, when big oil deposits started being discovered elsewhere in America.

Yeah.

And then they got into that in bigger ways.

Fascinating.

Cool.

Let's move into playbook.

Let's do it.

So I have one playbook theme that we didn't touch enough the rest of the episode.

And I have sort of a long quote.

And this is in particular around the period where there's a lot of fluctuation in prices.

There's a race to the bottom.

Lots of people are going out of business.

And this is sort of Rockefeller talking about how they're going to weather the storm and swallow everyone else up.

What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he borrowed heavily to build gigantic plants so that he could drastically slash his unit costs.

Even his first partner, Maurice Clark, remembered that the volume of trade was always what he regarded as paramount importance.

Early on, Rockefeller realized that the capital-intensive refining business in this business, sheer size mattered greatly because it translated into economies of scale.

Once describing the foundation principle of Standard Oil, He said it was the theory of the originators.

The larger the volume, the larger the opportunities for the economies and consequently the better the opportunities for giving the public a cheaper product without the dreadful competition of the late 60s ruining the business.

During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from the gospel of industrial efficiency.

Hmm.

There's so much tied up here, but one of them is this is kind of the first venture capital business.

Like we talked a lot on the TSMC episode about these massive fixed costs.

I mean, they're investing $100 million in fabs over the next three years.

And then it's all a volume game.

Like how much can you get the plants at full capacity as fast as possible?

Because the unit costs can be super small, because your variable costs are super low.

But it's all about that gigantic capital investment of the fixed costs.

I love it.

There's the TSMC payoff.

I love it.

Two hours later.

The other thing that I was just thinking the whole time as you were reading that quote was Andreessen, Mark Andreessen, strength leads to strength, right.

This is the original strength leads to strength business.

Totally.

And this is him justifying, rolling up all these other producers, where he's basically like look, the best thing for consumers is to run as much consumer demand through one capital structure as possible, so we can just absorb all the fixed costs and then make the variable costs as low as possible.

Yeah.

It'd be fun to think about.

We're on such a kick here with these types of businesses that Is there ever a kind of business or industry where like not scale economies per se, but this broader maxim of strength leads to strength?

Is that ever not the case?

It's always the case, I think, but it's like in varying strokes, especially where industries where there's not fixed costs or where there's low fixed costs.

Like think about a restaurant business.

Assuming that you don't own the building and you're leasing everything, and you even lease the equipment.

Then you're like geez, what is really the capex?

You're kind of just like at the whim of can you produce a better product and get a little bit more margin than you're the person down the street.

Maybe this is kind of similar to that.

It also would apply to the restaurant business.

Like anytime where, if you're competing on like the highest end of quality, like I'm thinking like a fine dining restaurant that's a kid where strength might lead to strength in terms of its brand.

But if it were to like, raise a bunch of capital expand, go have a you know a bunch more restaurants?

Oh, if your value is scarcity, then yeah, it's value destructive.

Yeah.

Okay.

That's a case where strength wouldn't lead to strength in the same way, but so many venture capital businesses and businesses that scale as large as we're talking about in the last few episodes we've been talking about like the largest businesses the world has ever known.

Yeah.

It's amazing how this dynamic applies.

Totally.

Well for grading on this one listeners, we are going to combine value creation, value capture and grading.

We already talked a lot about the component of this value creation section where how does the value created for the world compare to value destruction?

I think we've talked a lot about that in this episode.

But we haven't spent a lot of time on like how does the value that Standard Oil created compare to the value that they captured for themselves, which I think is sort of the interesting one to look at here.

And like a terrible example is Wikipedia, where there's no company that creates any more value in the world but captures so little of it.

Whereas you look at a Google and they create a lot of value, but they're enormously profitable based on it.

And so some interesting numbers with Standard Oil.

So we know that they were responsible for this sort of like kerosene boom in the United States and the world.

And I think let's save the gas car conversation for the next episode.

And I absolutely want to have a conversation around climate.

And I think we should save that for the next episode, too.

But in this one, let's just look at the shape of the business by this period of time.

So Standard Oil in the mid-1880s employed 100000 people, which that's probably the first time a company ever employed 100000 people.

Governments probably did, but did corporations?

It would be hard to imagine, especially in a world where there are only 30 million people in the United States.

Totally.

They had dividends of between 50 and 200 to all shareholders per year which, of course, were private shareholders.

It was mostly Rockefeller and his partners.

I just want to underline that again.

That's balling out of control.

Yeah.

That's a very, very profitable business.

Oh my God.

The amount of capital invested in the business literally anywhere from half to two times that, being dividended out to shareholders every single year, while you continue investing capital and growing.

Ball so hard.

They want to find you.

And then the last thing I want to throw out is this period between 1890 where we're ending this episode to 1900.

They grew tremendously, so they had annual earnings where we're leaving the story off of somewhere between 10 and 20 million dollars which, inflation adjusted, is like a 30x.

So it's really like 3 to 500 million in terms of the amount of earnings, profit that they were generating per year in today's dollars.

By 1900 they 6x'd that, So over a decade they actually grew tremendously.

So it sort of depends whether we're thinking about the business in this 10 to 20 million era or in the 60-plus million era by the turn of the century.

But I think that gives you a good shape of like...

This is a business that was spitting off cash David, the way that you were just describing for us.

That employed 100000 people, that kept America and Europe's lights on.

And because it's been so long since this happened, we don't have SEC filings telling us here's literally the amount of value they were able to capture versus create.

But I think the way I would look at this one and talk about this is You can tell from the business practices that we've harped on this entire episode that every time they created value, they looked around to capture every single scrap of it that they possibly could, rather than let consumer surplus exist or their competitors participate in the upside that they were creating or partners.

Well, and I think even the numbers that we have scant, data such as it is again wish we had PitchBook back in the day.

But the numbers that we have, I think, are also misleading.

They do seem a little small.

You're like wait a minute.

You guys are talking about how this is a business on the scale that no other business in America has ever been before.

But inflation adjusted even by 1900.

You're talking about a few billion dollars of cash flow that's dwarfed by companies today.

But I don't think these numbers tell the whole story, because so much of the capital in this business was A being recycled and B not accounted for because of the crazy decentralized trust structure.

We'll talk about this much more in the next episode.

But when it ultimately gets broken up.

You know, it wasn't until the rise of the Fang era.

In the last 10 to 15 years before that, ExxonMobil was by far the largest market cap company in the world.

And that was just one of the children that came out of this company.

The value that was tied up here was immense.

That's a much better way to look at it.

You're right.

I also think inflation adjusting these things is probably the wrong way to look at it.

I was thinking about this more in the context of Rockefeller's personal wealth, which we'll dissect in depth on the next installment here.

But sure, you can inflation adjust wealth and you can inflation adjust profits, but really what you should be doing is looking at them as a percentage of the GDP at that time.

Right.

Let's look at 1900.

Standard oil in 1900 produced $60 million in earnings.

Rather than inflation adjust that.

Let's look at it relative to the total GDP, which was 24 billion.

Okay, so $60 million divided by $24 billion.

So 0.25% of the entire country's GDP is Standard Oil's profits.

And I suppose GDP really would be based on revenue.

So, you know, assuming they had, I don't know, 33% operating margins.

I'm kind of pulling a number out of thin air, but that feels reasonable.

Well, I don't know how they're defining profits here.

I don't think this is GAAP accounting.

GAAP accounting doesn't even exist at this point in time.

That might be the dividend, the annual dividend.

Oh, the earnings being the... Yeah.

No, the dividend, because the data source we pulled this from had dividends differently.

Let's assume that Standard Oil's revenue represented something like 1 of America's GDP.

Probably a little bit shy, but something like that.

That, I think, is the right way to frame the amount of money that was flowing through this one company at the time.

Yeah.

Wow.

That is a significant scale.

Yep.

So I think the question is that we wanted to ask on grading is like standard oil becoming a monopoly in this way, versus if the industry were to have played out with unfettered individual competition?

Which of course is a counterfactual that we have no idea.

But how can we get a sense of what the shape of that could have looked like?

It's interesting.

This makes me think about China and what's going on in China right now.

I think the Chinese political economic philosophy is really aligned with the Standard Oil view of the world, which is that unfettered competition is fine in the early days of an industry.

But then you got to come in and you got to consolidate it.

You can consolidate it through the government's hand in the case of China.

In this case, it was through Rockefeller's hand.

But that's what you need to enter a phase of maturity in an industry.

And as we were just saying, Rockefeller's argument is like, all of this was good for consumers.

This was great for consumers.

This was great for America.

Yeah.

It's like in the most recent Amazon letter to shareholders, when Jeff Bezos calculates the amount of consumer surplus.

He's like if you look how much Amazon shareholders have profited on us, existing Amazon employees have profited and Amazon customers it's by far the customers who have won.

Yes.

Ah, so good.

Bezos, student of history.

But yeah, Rockefeller is making the same point here.

I think it's really interesting.

Yeah, well, again, counterfactual, impossible to know.

But there is definitely a world where the kerosene industry doesn't develop in anywhere near the same scale or impact or size.

I'm going to throw this out there and say, I think the world would end up no different of a place.

I think it would have been totally net even.

And the only difference would be that the Rockefeller Family Foundation wouldn't be as large.

I think give or take a few years, I think the whole thing would have played out pretty similarly.

And we would have ended up in the same sort of major players in the oil world that we have today.

Yep.

And maybe all of the Standard Oil children, the Exxons, the Mobils, the Chevrons, etc.

Would have developed anyway.

That could have been independent Cleveland refiner, growing on their own and not being a part of Standard Oil and then having to get spun out.

That's a really good point.

I mean, Rockefeller was a genius in so many levels.

He brought the Morris Chang level of thought and discipline to the business.

But eventually other people would have done that too.

Yep.

I mean it might have been a little more annoying where you had to get those two types of kerosene sitting next to each other on the shelf and you had to go make sure to buy the compatible one for whatever apparatus lamp you had at home, and that would have been a slight bummer.

I don't know.

I think, net net, we would have consumed about the same amount of oil between then and now.

Consumers would have spent about the same amount of money on oil between then and now.

And we would have about the same number of players we have today.

So let's see if I can translate right.

It sounds like you're arguing for like a grade of like a C, like a passing grade.

Oh, well, it depends what we're grading.

In terms of creating a bunch of value and capturing as much as he possibly could, A+.

Right, right, right.

In terms of the grade of the development of this industry in America, as it did, versus a non-standard oil path.

Yeah, I guess that is what I'm arguing.

What do you think?

I'm not feeling strongly any different way.

I think that's a really good argument.

You know, it's funny.

I feel like if Peter Thiel were here as a guest with us, he would be vehemently arguing the opposite that you know it's the zero to ones.

It's the like, yes, anybody could have done this.

Yes.

You know, other people might have, but like Rockefeller did it.

And in the absence of somebody doing it, that it might not have happened.

And without all this standardization in the oil industry, then we wouldn't have had all the unbelievable lifestyle upgrades that we've all had over the last 150 years because of the advent of unified oil ecosystem.

Yeah.

You like your electric cars and Teslas and the like?

Well, no kerosene back in the day, no gasoline thereafter.

We don't advance to the level of technology and development that we're at now.

Oh, if the car was much more inconvenient to drive or that waited another 30 years to develop.

I mean, then there's a zillion knock-on effects of America doesn't innovate in all sorts of other ways and people don't have a lot of other products that we all take for granted in our lives now.

Yep.

All right.

So I think my answer, I don't have a strong point of view.

I think I'm going to go a notch higher than you to be just because I really do see both sides here.

One side being the argument that like this all would have happened the same way anyway.

And the other side being, yeah, but like you need Rockefeller, like no Rockefeller doesn't happen.

Mostly, though, the other reason I'm going to go with B is I just really love telling this story.

Well, that I could tell.

That I could tell.

All right.

Carve-outs?

Carve-outs.

Let's do it.

Two for me.

Both are related.

The first more related than the second.

The first one is the movie There Will Be Blood with Daniel Day-Lewis.

If you are jonesing for some good old-fashioned, extremely violent early oil days.

I think it's like I mean, I wasn't there so I have no idea but unbelievable articulation of what it would be like to go and prospect an oil field and the risks involved in that and the personalities involved in that and the deception and the way that rogue entrepreneurs were organizing labor and capital to make these things happen.

I saw the movie maybe six months ago, but I thought about it so many times, especially in regards to like Titusville and some of those in researching this.

And my second is only tangentially related, because it is actually about a gold rush.

Not the oil rush, but the TV show Deadwood with Timothy Oliphant.

I've heard that that's very good.

It's excellent.

I am one of three seasons in right now.

I just finished the first season.

It's so good.

The characters are so compelling.

The acting's great.

I actually got tipped to it when I was doing the research for the Andreessen Horowitz episode.

Mark, I think, mentioned that it was his favorite TV show.

And so I was like, I should check that out if it's Mark Andreessen's favorite TV show.

And sure enough, it's awesome.

It used to be the Halt and Catch Fire show.

Oh, really?

Which is also great.

Yeah, he talks.

I've never seen it.

But which I mean, given what we do here, I need to watch it.

You do.

So go watch Deadwood.

It's awesome.

Nice.

Love it.

And there will be blood.

I've never seen it.

I'm like, so living under a rock.

Oh, man, you need to see that and Gangs of New York.

Yeah, which I also have never seen.

My carve out is completely unrelated.

I'm sure I could think of some.

The standard oil octopus tentacles reach so far that I probably could think of some connection.

But I'm not going to.

Is the secret base YouTube channel, which is part of SB Nation, the sports news website.

It's So good.

And in particular, I've liked this channel, their work for a long time.

These guys are so they just do like irreverent histories of like sports moments and teams.

In particular, they just did a seven part series on the Atlanta Falcons.

It's probably like five or six hours in total.

And it's so good.

It's so funny.

And just like.

So the whole like premise of the history is they do a lot of great graphics on the channel.

So they take a visual representation of the win loss differential for the team where, like you know, if the horizontal X axis is a 500 record and then going down below is losing and then going up above is a winning overall record.

And basically the whole history of the Atlanta Falcons.

Their wing, as they call it, because it's all losses down into the red, almost exactly mirrors the Falcons logo.

And if you tilt it up on its side so that the X axis becomes vertical, it really looks like the Falcons logo.

Brutal.

It's so funny.

But yeah, very, very well done.

Highly recommend.

Sorry to any Falcons fans out there.

Oh, but it's like a love letter to Atlanta and the Falcons.

Like it's so fun.

I don't think I made this my carve out, but they did one on the Mariners a year or two ago.

That was equally, equally good.

We'll link to that one too.

All right, well, listeners, thank you for joining us on part one of this epic journey.

We are excited to take you on part two here.

We are very interested in your feedback in between episodes and I think we're going to leave ourselves enough time to make sure we have this out in the wild before recording the next one.

So join us in the Slack to come talk about it, acquired.fm slash Slack.

Email us at acquiredfm at gmail.com or tweet at us at acquiredfm on Twitter.

And listeners, we'll see you next time.

We'll see you next time.

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[Standard Oil: The Birth of the Modern Industrial Monopoly]-[Standard Oil Part I]

📋 Summary

The Rise of Standard Oil: Rewriting the Rules of Business

The Roots of an Empire

The Strategic Pivot to Oil

The Playbook: Consolidation and Control

The Octopus and Public Sentiment

The Legacy of the First Monopoly

🎯Key Sentences

📝Key Phrases

📖 Transcript

[Standard Oil: The Birth of the Modern Industrial Monopoly]-[Standard Oil Part I]

📋 Summary

The Rise of Standard Oil: Rewriting the Rules of Business

The Roots of an Empire

The Strategic Pivot to Oil

The Playbook: Consolidation and Control

The Octopus and Public Sentiment

The Legacy of the First Monopoly

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🎯Key Sentences

📝Key Phrases

📖 Transcript

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