Microsoft Volume I

Or you listening to before we hopped on to walk out music new Beyonce. Oh, no, I haven't heard it yet. How was it? I really like it nice.

I think it is reductionist to call it country. Oh I was appropriately not listening to start me up through the ages Of course you were but I kind of feel like David Rosenthal move is that you might have been listening to start me up Whether we were doing Microsoft or not. That's a very squarely in your genre song the stones though man like it's crazy They're in their 70s 80s amazing. Yeah, I hope we're in our 70s and 80s dancing on stage season 126.

Yeah Alright, let's do it. Let's do it. Who got the truth? Welcome to season 14 episode four of acquired the podcast about great companies and the stories and playbooks behind them I'm Ben Gilbert, David Rosenthal, and we are your hosts We often remark that selling software is the best business model of all time well today finally We tell the story of the company that created that business Microsoft.

I only we're like 10 years into a choir I finally doing it. It's been daunting. You know we wanted to do it for a while, but it takes a little bit to tackle Microsoft I'm so fired up. We're ready.

It's time. Yep. Well listeners Microsoft today is sprawling and massive is the world's most valuable company worth over three trillion dollars They have 49 years of history making software for consumers and enterprises making hardware gaming systems gaming studios windows apps iPad apps Mac apps operating systems mobile operating systems MP3 player search engines cloud computing services on cloud computing programming languages development environments The list goes on but it did not start out that way today We will tell the story of the desktop software company before the enterprise before it before the internet before being a trusted partner to Governments around the free world and really before people even knew what to do with personal computers This is the story of a bunch of ragtag geniuses in their 20s pushing what was possible welcome to Microsoft the PC era Well listeners if you want to know every time an episode drops you can get hints at the next topic and follow up You can sign up at acquired dot FM slash email come talk about this episode with the community You got acquired dot FM slash slack if you want more from David and I you should check out our second show ACQ to where we interview founders investors and experts often as a deeper dive into topics we cover on the main show So with that this show is not investment advice David and I may have investments in the companies we discuss and likely all of you if you hold any index funds and the show is for informational and entertainment purposes only David where on earth do we start the Microsoft story? We're right down the middle on this one We're gonna start in 1955 in Seattle Washington with the whoa earth of Bill Gates the third or tray as he's known Yes, growing up It's so confusing because his dad is the second but he goes by senior and bill is junior slash the third slash tray So bill in 1955 is born as the second of three children to bill and Mary Gates now Bill Gates senior This father is from Bremerton the Navy town just across the sound from Seattle where he grows up in a family that owns and runs a furniture Store there a long way from the software king of the world here now Bill Gates senior slash the second after high school He joins the army during World War two starts during World War two and then he goes I presume on the GI Bill to the University of Washington Where he's the first member of his family to go to college and there he gets an undergrad and a law degree in four years And then decides to stay in Seattle with his new family and become a practicing attorney now I say family because at the UW he meets and marries one Mary Maxwell and Mary I don't know how to put it other than that she is a force.

Yes So Mary's family had founded National City Bank and her father was a senior executive at first interstate bank Which later became a big part of Wells Fargo now married despite being the daughter of a successful business family in that Dhanage was not cast aside like so many other daughters We've talked about on the show New York Times or mez where it was sort of passed to the son-in-law to continue to run the business That was not the case with Mary Maxwell. No, so after she graduates from the UW She becomes first the president of the Seattle Junior League and she starts joining nonprofit boards in Seattle as a very young woman She joins the Seattle Symphony Board the Chamber of Commerce the Children's Hospital the King County United Way And she's such a force on these boards that she starts getting asked by her fellow board members to join their companies Boards too like the corporate boards. They're so impressed with her So first she joins the board of first interstate bank the bank that her family's part of then she joins the board of Cairo television in Seattle She even ends up joining the Pacific Northwest Bell telephone board. That's right part of the AT&T breakup Yeah, eventually she joins the Board of Regents of the University of Washington and the whole entire National United Way board So she never works full-time in the corporate setting But it is not an overstatement at all to say that Mary Gates became one of the most powerful business people in the Pacific Northwest period Absolutely, and Bill Gates senior was the prominent attorney in the region and so it's quite the power couple Then it's like you're reading my script here.

Yes. We don't want to give Bill senior the short-trip here either He becomes a superstar lawyer and he becomes a co-founding partner of the firm Preston Gates and Ellis Which today I didn't even realize this talk in the research That is K&L Gates today one of the largest law firms in the world Yep, and another fun fact that you probably know about Bill Gates senior But we got a this being acquired talk about do you know what corporate board he joins later in life? I do not Costco Course Bill Gates senior we should say to basically galvanize the entrepreneurial community in Seattle He started the Tech Alliance. He was a huge angel investor He really did organize you know angel investors people who want to put high risk capital to work into startups And you know his heart was there obviously through his law practice long before Bill Gates the third became the product He became told and that's the point we want to land here is for young Bill Trey growing up here He is growing up in like a pretty unique household He would later talk about being like nine or ten years old and most nights at dinner at his house There would be a CEO or a senator or a governor or somebody who's just over for dinner and Bill would sit there and absorb the business conversation You know, it's like they're mezz family the Dumas family that we talked about on that episode You know this whole thing makes me think of Paul the main character in the dune movies in the book Like he's kind of bred from birth to be this Incredible business mind.

I mean at age 13 with his best friend who we will talk about very soon He brought up the idea I wonder what company I will be the CEO of when I grow up what industry will I go after what problems will I tackle it wasn't a Question of if but which yes, and it just turned out that you would be the CEO and founder of the baby It's just a district ever to exist the other thing that we got to say about Bill growing up. He is Insanely competitive so he did not and does not like to lose at anything and that is putting it mildly whether it's sports or swimming or computers Or school or the classroom is a quote in one of the books We read from a childhood friend of his who says everything bill did he did competitively and never simply to relax I think this used to be more than today There's kind of this image of Bill Gates that he was a computer nerd that he was like this shy little skinny kid And the way he looks doesn't help this but that is not the case at all this guy had a competitive fire in him I'm sure still does like none other both things can be true He was the number one math student in the state of Washington He was a nerdy kid and a brilliant kid and also fiercely competitive his childhood friend and co-founder of Microsoft Paul Allen would say about him You could tell three things about Bill Gates pretty quickly. He was really smart. He was really competitive He wanted to show you how smart he was and he was really really persistent that sounds about right So famously speaking of Paul and where Bill and Paul meet when Bill is in seventh grade his parents enroll him at the Lakeside school Which now I think is internationally famous because of Bill But it is a super rigorous college prep school middle school in high school and Bill ends up writing the scheduling software for class scheduling That he puts himself in the classes with all the girls like buddy, but yeah like this bill 13 years old seventh grade Lakeside this is when it starts Obviously Microsoft doesn't start but during that year Bill is 13 years old the Lakeside Mothers Club raises money to buy the school a Teletype and connect it up and rent computer time from a deck PDP 10 that is located in downtown Seattle and owned by the branch office there Of general electric now probably a bunch of you like I have no idea what any of those words mean so we got a set some context This is 1968 1968 at the Beatles Vietnam the summer of love This is not the computer age 2001 a space Odyssey had just come out No, one Bushnell has not found a Atari yet Bob noise and Gordon Moore are only just leaving fair child semiconductor to start Intel Silicon Valley still dominated by Lockheed.

There's no such thing as a microprocessor the United States would land on the moon one year later totally the way computing Works back then it was basically still the any act days like a computer meant two things it either meant a massive Room size machine that had about the computing power of a calculator or it meant a human people talked about computers as humans Do you ever see the movie hidden figures about the black women who did the calculations? Those women were the computers they were called the computers Yes, because they would sit there and compute this was a totally different era So the idea that a 13 year old kid in this high school this middle school would get access to share computer time I can't imagine there are many other secondary schools in the country that we're doing this Yes, this is a very early place to make the point Microsoft is the result of tremendous intelligence brilliant strategy fierce competition and an unbelievable amount of luck Bill Gates was born in 1955 the same year as Steve Jobs to come into adulthood just as the personal computer wave is starting and The fact that he was at a middle school and had this much privilege where he could get access to a PDP 10 at this point in his life To help him understand how important computers would become I mean, there are dozens of people in America who are as well situated as Bill is and that might be overly generous He and Paul got a sneak peek into the future there at Lakeside now. It's funny. You said the personal computer We're not so far away from the personal computer here.

I mean we got us at the stage. What is computing? I mentioned any act in these room size things computers did not have screens even have cursors even have lights in pixels Everything was done on a teletype the kind of look like typewriters and they were wired up remotely either in the same facility or like What Lakeside is doing you could be remote I mean, it's almost like the cloud today and it called over a phone line That was the teletype. Yeah, exactly got wired over the phone line hooked up to these mainframes And so you typed commands into this teletype and then the response came back over the phone line or whatever cable from the mainframe And it got printed out on a spool of tape on the teletype But this is power that normal 13 year olds don't come anywhere near accessing.

Yeah, what is the computing market at this time? It is pretty much will come back to the pretty much in a minute a hundred percent dominated by IBM Oh, yes, IBM big blue, you know big iron is what it was referred to like the products that they would produce They were the industry. Yes, Ben Thompson has a fantastic quote on this. He has an article called what is a tech company?

And here's his comment 50 years ago. What is a tech company? Was an easy question to answer IBM was the tech company and everybody else was IBM's customers That may be a slight exaggeration, but not by much IBM built the hardware at that time the system 360 They wrote the software including the operating system and the application and provided services including training ongoing maintenance and custom line of business software Yeah, system 360 was a line of solutions I would say offered by IBM and it consisted of the thing the room size thing the mainframe and the software which was system 360 and the Consulting and the implementation, you know, you couldn't just call up UPS and forklift one of these things into a company expected to work No, you gotta operate this thing to totally take ASML machines. You don't just go ship them off to TSMC and say good luck making semiconductors Exactly, it's a full solution full-service thing But an important thing that was also happening this year 1968 was that IBM was undergoing some antitrust scrutiny over that huge bundle That I just told you about I mean doesn't it smell like antitrust?

They do everything from the hardware to the software and the operating system the service the support they are the whole market They're starting to get concerned and so proactively they unbundled hardware software and services and they started selling those separately for the first time Which was not a problem at first, but what it did was it cracked the door for customers to say? Oh, I can buy hardware from IBM and software from someone else and other people were not exploiting this but it was possible Yeah, interesting. It cracks the door for Microsoft like 15 years later 20 years later Yeah, yes, but this is where the seeds are so of what is the exploitable opportunity when Bill Gates is ready to do something interesting Now back to the timing thing for Bill and Paul and Microsoft I mentioned when we were setting this up that there's something else to talk about here IBM was facing a disruptive force at this moment I think probably for the first time in its history certainly in the computing era of IBM's history and that was the digital equipment corporation or deck Notice when we said earlier that Lakeside is renting computer time from the general electric computer in downtown Seattle I said it's a deck PDP 10. It's not an IBM product So what's deck there the mini computer company mini in quotes?

Yeah, mini quote-quote mini meaning it was the size of a closet not the size of It's all relative deck had been started by this guy Ken Olson from MIT and What they did he had this brilliant insight that would play out over and over and over again in technology that I'm not gonna go compete with IBM head On I'm not gonna make any act I'm not gonna make mainframes But computing has advanced enough that there's an opportunity to make something smaller less powerful more sort of toy like and there's enough to man out there that I think I can find some new markets for people who will buy those types of computers and its smaller businesses But in particular, it's like branch offices of the big company So I am sure general electric bought lots and lots and lots of IBM mainframes and products at their headquarters But the GE field office in Seattle, they're not gonna truck in a mainframe and in 1968 Seattle I mean this is like a provincial little town. I'm standing here right now It's a you know major city in a huge economy in the United States But at the time kind of a Poe don't forgotten sleepy faraway place totally and Microsoft would go a long way to changing that over time And we should say this is the classic low-end disruption playbook And this is what Clayton Christensen was talking about going from mainframe to many computers I'm gonna make something that's worse for most things But better for some new things that new customers and new markets are gonna care a lot about and IBM's gonna look at it and go Pfft that can't do any of the things that are important to our customers and that's exactly why it works and specifically why they're not gonna care about it I don't know exactly what an IBM mainframe system system 360 370 whatever cost I'm imagining tens of millions of dollars all in total cost Maybe hundreds of millions of total dollars to run a system like that and buy it So the first deck machine when it comes out the pdp1 a few years before this time It was priced at $120,000 so like an order of magnitude maybe to below a system that you would buy from IBM Obviously still a long long long away from the personal computer people are not buying these things for their houses But you know yeah G.E.L. Buy one for the field office in Seattle or universities will buy them for research for their students for their professors And so deck kind of creates a new market for computing and bill He's so studied in business history the founder Ken Olson Kenny's bills hero He totally looks up to deck and what decks done. Hmm now the deck in many computer ui is still the same as the mainframe You're still using a teletype.

There's no innovation in terms of what the computing is or how you use it It's just cheaper and more people have access to it. Yeah, so back to lakeside in the mother's club raising money for this access here for the school Bill rumor. He's just started He's in seventh grade and lakeside is a middle school in high school The high school is actually in a separate building the computer room that gets installed with the teletypes That's over in the high school, but Billy. He doesn't care.

He gets exposed to it. I think in a math class one day He's like oh, I'm hooked so he goes over he's hanging out with the high schoolers teaches himself how to program and pretty quickly He becomes known as one of the very best programmers there and he and three other kids form what they call themselves the lakeside Programmers group and one of his buddies we form sit with is of course the high school or I think the tenth grader at the time Paul Allen There's a fantastic photo listeners that we will tweet of bill and Paul sitting in the computer room at lakeside in bill I think he's like thirteen fourteen. He looks like he's about eight I think on the wall. There's this almost like printed out magazine thing That's the bugs layer that they hung up over the wall.

It's amazing So these high school kids they start the lakeside programmers group They call the programmers group because they are programmers This is another super important thing to learn to use a computer at this time meant to be a programmer, right? There was no package software that you bought the software that IBM was selling was the operating system to make the machines actually function And it was the programming languages that you could then program on but you weren't clicking around and using Excel or like You know pulling up apps everybody used a computer wrote their own software Right there was not this multi-sided network of you've got developers making applications and then you've got users of those applications No, everybody who used a computer was a programmer So the goal of the lakeside programmers group remember bill is this business prodigy is to use their very valuable and very rare skills as programmers at this time to You know make money. Yep, do a business. So turns out at the same time.

I mean the coincidence is here Just crazy. There is a local startup coming out of the University of Washington called the computer center corporation or C cubed and The business plan behind C cubed was that they were gonna get a bunch of decks a bunch of PDP eight tens elevens Whatever and they were gonna be like AWS. They were gonna just be a computer time sharing company So C cubed hires the lakeside programmers group these kids to come in and find and document bugs in the system And they're gonna pay them directly in computer time So when they come into C cubed they learn for Tran they learn Lisp they learn machine language for the PDPs back at lakeside They were just using basic the programming language which is reasonably high level in terms of how abstract it is Like you're not writing machine language. You don't have to know how to address memory and registers and all that it reads kind of like English You know how to add numbers together.

It's not a elegant language and it's a very verbose language But if you sort of look at it with your eyes as a person who speaks English and knows basic math You're like I kind of understand what this program does So there's a meaningful amount of translation done by a basic interpreter that takes you from the basic code You have to write to what is actually running on the machine. Yes, but basic We don't want to give the impression that it is just basic or just for kids. No, it's widely used It's gonna become hugely hugely important like it is both the gateway programming language for everybody But like it's a real programming language and a lot of stuff is done in it. It's sort of the Python of its day I think the way Python is now where you sort of joke that Python is so flexible You know, you can like accidentally write a program by writing English and it can kind of forgive a lot of mistakes And it reads kind of like English It's a reasonable parallel to draw it way back when with basic where you say look you can understand it as a layman But also it's used in a broad set of business applications Tony when Bill and Paul and their buddies come into C cubed they're now getting access to learn real hardcore systems programming Language is including machine code for the PDP 10.

They're becoming pretty prolific engineers here They're handwriting assembly code. Yes, and they're getting mentored one of the executives at C cubed is a guy named Steve Russell Did you find this? You know about this now? This is amazing.

You're gonna die Steve Russell was the guy who wrote Space War when he was at MIT on the first PDP the PDP one He's like a computer science legend. No one butchenel told us about that Yes, space war is the first video game first computer game ever written It was written as a fun side project by some MIT engineers in the early days of deck And then that became the one bush knows inspiration for starting Atari and pong and space and they're like yeah Steve Russell that guy he mentored Bill Gates and he was here at the University of Washington He had come out to the University of Washington and then left it was part of one of the execs starting this company C cubed Wow, that's like a mile from my house, right crazy Wow, so after a little while at C cubed all of this real expertise that these kids are getting leads to another opportunity at another Time-share computing company based down in Portland They ask the kids to write a real piece of software to write a payroll billing program for all their clients that are using the time-share System and Bill now who's the de facto leader of this group He negotiates a deal with the help of his dad Bill Gates senior prolific corporate attorney in Seattle that rather than just being paid hourly for their Time they're gonna get a royalty on the revenue that their client makes off the software and I can't believe it He's good to teenagers. They're figuring out the whole software business model here They end up making at least ten thousand dollars from these royalties Which the average household income in the US at the time was below ten thousand dollars these kids are rolling in money Wow, so the next year Paul graduates from Lakeside and goes off to college at Washington State But he and Bill decide to team up on a new venture that they're gonna do together called traffic Oh data they've identified a market opportunity and that opportunity is reducing traffic. Yes So the business plan is that municipalities count cars that go through intersections use that to make decisions about how they're gonna do city planning Bill and Paul are like we can take this new thing that's coming out of Intel a Microprocessor which is promising to be a full computer on one chip and we can use that we can build a machine that is gonna Be a computer and will process and analyze that data and then we can sell it to governments like great big market and listeners Are you kind of sensing what's happening here mainframe mini computer microprocessor?

We kind of have to keep using smaller and smaller words to represent the fact that the computer is getting smaller and smaller here It wasn't until we started doing research for this episode that I finally realized oh Microcomputers which is the original term for the personal computer for the PC is called microcomputers before PC caught on they're called microcomputers Because they're based on the microprocessor. Yes, absolutely It's not just that micro is smaller than many and it is funny that it costs out there They're sitting on all of our desks are microcomputers right? Yes So while they're waiting for the 8008 this new first microprocessor from Intel to come out or at least for them to get access to it They want to get a head start on programming their traffic data machine programming this microprocessor So Paul's like I got this I can find a way to make this happen He takes the PDP 10 at Washington State and he writes a whole emulator program to mimic the instruction set for the 8008 From the manual and they get a full emulator up and running and they can code even without the microprocessor actually being there and having It's just like NVIDIA, you know Like what Jensen was like no we got to build an emulator and simulate this and then we're gonna ship it site unseen They're doing the same thing It's funny in many ways at this point in history getting a manual was actually much more valuable than getting the processor itself Because the processor would arrive and unless there was documentation you would have no idea how to interact with it to take advantage of its power But if you had a manual well sure you couldn't actually test the stuff you wrote for it on the hardware But if you wrote an emulator on a bigger more powerful computer that could sort of mimic the computer that you're actually targeting You could go years before actually ever running the software on the target device and just work off of what the manual says as long as the manual is correct And matches how it actually works. Yes, and this is gonna become very important to Microsoft in just a second Yep, so traffic data is not a huge success I think I read a few places they make about $20,000 in revenue from it So like again great money for high school and college kids But you know not world-changing stuff here This is not what bill aspires to for the company's gonna start but bill and Paul are getting experience with the microprocessor Bill actually has the idea for Microsoft when they're working with it He's like oh this is a computer one and I go off and write an interpreter for basic here And we can sell the basic interpreter for the microprocessor and build a big business the ado-h just wasn't powerful enough yet to do that What's boiler alert that totally becomes Microsoft these seeds of Microsoft are selling language interpreters for new processors new hardware and new computers That enable you to write familiar programming languages on that new hardware.

Yep, and you know Bill and Paul are not the only ones having this insight here to another Seattle guy named Gary killed all who they had intersected with who they knew from C cubed in the University of Washington He kind of had the same idea here. We're gonna bring up Gary and his complete digital research a little bit later Yeah, he cared a little bit less about programming languages and a little bit more about operating systems So that's how they diverge for the few years here. Yep But Bill and Paul they absolutely see the vision for what this can grow into and become Bill has a great quote Paul And I had talked about the microprocessor and it was really his insight that because of semiconductor improvements things would just keep getting better I said to him. Oh exponential phenomena are pretty rare pretty dramatic Are you serious about this because this means in effect that we can think of computing as free It was a gross exaggeration But it was probably the easiest way to understand what it means to cut costs like that and Paul was quite convinced of it Yes, is this in the Smithsonian interview?

Yes, it's so good. It's so good This quote is incredible because basically Paul Allen brings up Moore's law to build gates They don't use that language there, but in 1971 that is what's happening and for Paul This is just an observation of hey, there's an exponential thing happening here seems like it's gonna keep happening It's been happening and Bill's shaking and he's like what exponential phenomena don't just happen That's incredibly incredibly rare and immediately gets Bill's wheels turning on what does this mean for the world if that's actually true We need to act and do something profoundly different than anyone's ever done before because this enables new things that no one ever thought could be possible This moment is the genesis of the vision for Microsoft that even though Bill doesn't say the words in this quote the vision of a computer on every desk In every home, that's the famous part and then the part that got left off later when the DOJ started sniffing around was running Microsoft software But that is the vision here and it is crazy at the time like a computer on every desk and in every home Bill sees that this is what this exponential phenomenon what Moore's law means that that is going to happen You know, we're still in the era of teletypes nobody else sees this Yeah, and it's also the reason why Microsoft is going to form into such a different type of company That's ever come before it why they can break all the rules why they can sell just software even though that's never been a thing before Why their business model can be so much different than everyone else's business model I mean in prepping for this episode We got to talk with Pete Higgins who ran excel and was an executive overseeing office for a long time in the early days And he had this great quote to us which was computer on every desk was wackadoo stuff people laughed at it was absolutely wild People thought I don't know maybe one in ten people and their finance group or something will have one at some point This is the profoundness of an exponential decrease in price or increase in power of computing is it's going to become universal So all that said even bill and Paul know the 80. Oh, wait, it's not there yet It's not powerful enough to really be a general purpose computer on a chip But they know it's coming so in the fall of 1973 bill goes off to college at Harvard famously It's like I'd hard ready to kind of like Jim Simons that we talked about at MIT on the rentech episode Bill thinks He's gonna be like a world-class mathematician and set the world on fire It's literally a quote from Paul Allen So bill was the number one math student in the state of Washington and he gets there and he does this theoretical math class math 55 And gets a B and Paul says when it came to higher mathematics He might have been one in a hundred thousand or better But there were people who were one in a million or one in ten million and some of them wound up at Harvard bill would never be the smartest guy in the room And I think that hurt his motivation. He eventually switched his major to applied math Yes, so well bills at Harvard.

He's also doing a bunch of typical college kids stuff He's playing poker. He's cutting classes. He's making friends and one of the friends he makes there is a kid down the hall from him named Steve Steve bomber and bomber even everybody knows bomber. He's kind of everything that bill is not he's super social He's super outgoing.

He's in a final club, which is like a big thing in the social scene at Harvard He's Gregarius anyone who's ever met Steve or seen a video of Steve You are well aware that this man has presence But the thing that people don't know about him is he is so unbelievably Analytical Steve is the guy that outscored Bill Gates on the Putnam exam, which is the annual math competition for college students Yeah, Steve isn't a programmer But he is every bit the mathematician that Bill Gates is and that is one of these things where I think when people try to set it up As well, you know, you've got the brilliant programmer genius and the marketing guy It's just like those are the roles they took but I think when you're getting a sense of who the original crew was at Microsoft They were all brainiacs and they were all wildly analytical totally so them in the spring of 1974 Bill's freshman year Electronics magazine publishes big news about a new intel chip the next generation the next turn of the crank on Moore's law the 80 80 And in Bill's words here all at once we were looking at the heart of a real computer and the price was under $200 We attacked the manual. I told Paul deck can't sell any more PDP 8s now It seemed obvious to us that if a tiny chip could get so much more powerful the end of big unwieldy machines was coming Yep, and this is really where Bill Gates commits to computers to be his life's work I think what's often lost in the story is Bill even though he was good at computers and spent tons of time programming computers He never fancied himself a computer guy until this moment in history He went to Harvard because he felt like hey if I ever want to be a lawyer or something else Like they've got a lot of great programs there And this was the moment where I think it really clicked for him that I'm just in the middle of the right place at the right time With the right skill set and this is my way of having the most impact on the world So they think okay, what's clearly gonna happen here is all the big computer companies You know IBM deck the big Japanese computing companies. They see this they're gonna get into this business They're gonna make machines and they're gonna make micro computers surely they will jump on this opportunity, right? If it didn't destroy their existing business model sure they would exactly so Bill and Paul kind of sitting around waiting Through 1974 in 1975 and like hey, when are the 8080 computers gonna come out?

Where are they? It's just crickets Yep, Paul is so convinced that the revolution is coming that he actually drops out of Washington State moves to Boston to be close to Bill so they can be ready when it happens and that summer they both get summer jobs at Honeywell His programmers Paul stays on into the next school year when Bill goes back to school He's just like waiting waiting waiting and then in December 1974 Paul is walking across Harvard Square And he sees in a new stand the January issue of popular electronics on whose cover is the Altair 8800 the world's first real honest to God commercially available for sale Microcomputer and the legend has it the Paul grabs the magazine runs over to Bill's dorm throws up in the door Throws the magazine on the desk and it's like it's here and Bill's just says oh my god. It's happening without us We need to get on this right now. It's so funny He thinks they're already behind because clearly they're not history would show I think Bill Gates even says we might have actually started a year or two early the market actually hadn't materialized yet And the funniest thing is the starting gun went off and Bill and Paul ran and everyone else is still standing around and this is it This is the moment the revolution is here Microsoft is about to be founded all right listeners now is a great time to tell you about a longtime friend of the show Vanta AI has scrambled the whole security picture It used to be that you prove that you were secure once a year on audit or a static PDF then everyone would not and you're done But in an AI first world that doesn't hold up anymore.

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Well, they do the natural thing that two super excited ambitious high-octane college kids would do They call up the main phone number of Altair's manufacturer a company called MIT's and my TS and ask for the president a man named Ed Roberts and Bill and Paul they get him on the phone and they say We have a basic interpreter ready to go ready to ship for the 8080 Intel chip And we want to provide it for you for your machine, which of course they don't they don't have a single lot of code written They don't have anything, but it's a market test They want to know like what's the response if this were true exactly and he's a bit of a character himself He says okay Well guys a lot of other people are calling me and saying the same thing what I'm telling them and I'm gonna tell you too Is that anybody who can come here to my office in Albuquerque, New Mexico and demonstrate a working version of basic on my Altair? We'll get a contract with us to distribute it when they go on sale and so Bill and Paul they say okay great We'll see you soon and hang up and by see you soon. They mean let's go get to work And this is a big deal for mitts too if this works because right now They've just announced a machine for which you can't really do anything on it the hardware is powerful But they're not gonna have a lot of customers unless there's stuff you can do on the machine and a basic interpreter running on it You know, it's quite valuable to then make the claim you can program basic on our computer So they're very excited about this even though they're kind of playing coy I was gonna talk about this in a minute But let's talk about what the Altair is what did they just announce in the magazine here? This is the Altair is the first mass market commercially available personal computer again.

No screen or anything Yeah, does not have a screen does not have a keyboard doesn't have a display of any kind what it does have is it has a set of 16 lights on the front of the machine like Christmas lights and 16 switches and you can flip the switches to flip bits and then the machine will respond by lighting up different patterns of lights It doesn't come with any software. There's nothing that's all in 16 lights 16 switches So in order to use it you got to hook up your own teletype You got to get the manual you got to hope that the manuals right and you got a code to the machine instructions Like literally the assembly language for the chip inside for the Intelli8e Now back to the traffic data days and Paul writing the emulator for the 8008 at Washington State Paul's like We got this I'll just write an emulator on the Harvard PDP 10 for the 8080 instruction set So he does the same thing again They get the manual and they have an emulator and they write it against an emulator Yep, Bill writes the basic interpreter and in a couple weeks They've got it working and it's like okay come on out to Albuquerque So Bill and Paul remember Bill still looks like he's 12 at this point in time They decided that just Paul should go and just Paul have like a rock and beard at this point yet Oh Paul is super 70s He is like into it and as we'll see he's gonna fit right in at Albuquerque and mitts so Paul gets on a plane flies from Boston to Albuquerque and You know in the total like epic legend moment They didn't have a bootloader written for the basic interpreter So they had the basic it was all written They've done it on the emulator and Paul's flying out with the tape the computer tape with the code of the basic interpreter on it But he's like oh shoot We can't just feed that right into the machine There's got to be a bootloader to load up this thing So he writes the bootloader on the plane on paper by hand he is hand coding octal not even assembly language instructions Like he's hand coding in pure octal the instructions to load their basic interpreter program into memory Yeah, so he lands an Albuquerque drives out to mitts They load the bootloader onto the prototype Altair there that loads up the basic interpreter and It fails it doesn't work. I was like oh, let's try to get let's try it again So they tried again, you know, this is how early computing is like it works the second I was the first time then change anything it just didn't work the first time and it works the second time So it loads up Paul writes in the instructions print 2 plus 2 it spits out for and by spits out I mean like the lights light up and say you know for and both he and Ed the jaws are on the floor Paul's like Oh my god the basic works and it's like oh my god The Altair works like neither of them believe this was actually gonna work and Ed actually has more eggs in this basket Then he sort of led on because when bill and Paul call and say hey, can you give us the teletype instructions? He reveals they're actually the only ones who called about that So everyone else who said they were writing a basic never got far enough to ask how we actually interact with your computer Yes, so that was the time to say a few words about Ed and mitts like what is this company bill and Paul originally thought that it was Gonna be the IBM's the decks the Japanese companies who are gonna make the first micro computers Mits is about as far away from IBM as you can possibly imagine mitts basically was a model rocket company Which Albuquerque is a great place to do that Ed Roberts the founder He had been in the Air Force and stationed in Albuquerque And that's what got involved in model rocketry and the reason that they're introducing the Altair and they made this big splash in the magazine Was this is a last ditch gambit to try and save the company So you got like a bankrupt model rocketry company and their little gambit worked and got a couple of college kids to pounce Totally and like why did it work?

They had two things going for them that really and I think probably personally made happen one They got this splashy popular electronics magazine cover That was their relationship that Ed had and to the sticker price was $397 which is about $2,300 in today $20 $24. Yes, that's a lot of money But the next cheapest computer that anybody could buy at this point in time was like a deck You know like a hundred and twenty thousand dollar mini computer. So the idea that somebody could buy a computer for four hundred dollars I don't care who's selling that thing like I want that. So what did they get some kind of sweet deal from Intel?

Yes, so this is all Ed's doing the list price from Intel for the 8080 chip was three hundred and sixty dollars So like I think this is part of what was deterring the market of how would anybody sell a kit that was affordably priced when So much of the cost of goods would go to Intel with the processor deal He managed to negotiate a volume deal with Intel to get 8080 chips at 75 bucks a pop Whoa, that was the key unlock. That's like a five X price reduction. Totally. Huh?

I wasn't able to find how that negotiation went down or why like Ed Robertson Albuquerque, New Mexico got this sweetheart deal from Intel I mean either the list price is like wildly wrong or they were cutting deals all over the place Or one thing it could have been is just that and I'm totally speculating But chips are the ultimate high fixed cost investment low marginal costs next to software You could imagine maybe Intel had already put all the money into the fixed cost of spinning up the fabs and was expecting a certain amount of market demand And they weren't seeing it. They were like crap. We got a big bar investment I don't know lower the price let them just maybe we'll make it up in volume. I like that.

I have no idea But that's a totally viable. I think train a thought here Either way he gets the sweetheart deal and not only does it make computer history and enabling create Microsoft It saves the company of mitts So they were on the edge of bankruptcy after the popular electronics article comes out They get four thousand the pre-orders in the first month or two, which is one and a half million dollars in revenue cash paid upfront That is pure cash hitting the bank account that'll save the company and also just proves a four thousand people just paid cash sight unseen For 16 lights and switches. There's a lot of demand for a home computer here and at decent margins, too I mean if they're getting the processor for 72 bucks and they're selling it for what did you say? $397 yeah, so I mean everything else in there is much cheaper than the processor So I don't know depending on how much they have to give to the sales channel They're selling through if it's retail or distributors.

I think they're selling direct I think people are just sending money orders. Yeah, so it's decent margin business unlike what the PC business would become over time They managed to have nice margins So Paul and Ed they kind of hit it off Paul decides to move out to Albuquerque to be close to the action here and he actually joins myths as their vice president of software No, he's vice president of a software department of one. He is Yeah, software department of one, but you know, he's got his buddy Bill Gates who is not employed But Bill's definitely working on software for the altar as well Yes So Bill stays at Harvard but keeps cranking on enhancing the basic interpreter and adding more functions and functionality to the version of basic That they had just written for the altar and then once the school year is over He comes out to Albuquerque to for the summer now the altar is getting ready to ship with the basic the Microsoft basic included in it bill and Paul kind of need to set up a company but Paul is an employee of mids at this point So what do they do they set up a partnership? So the founding of Microsoft at this point micro dash soft is a two-person partnership between bill and Paul and as we record this That was 49 years and one day ago So we are sitting here on April 5th recording that was April 4th 1975 and it is very funny to look back at some of the original signatures when Bill writes on letters It's Bill Gates the general partner of micro dash soft Which is great I think it's actually a Paul Allen name where he wants to put together micro computer and software and bills like that's perfect We're immediately just gonna run with it as it was a partnership originally They were gonna call it something like Allen and Gates and then they ultimately are like no Microsoft is perfect Microsoft has become like Kleenex but like no It's like Microsoft means microprocessor software I will say like it's a nice clarifying North Star because it really draws a line in the sand It says we're in the software business and Gates makes this really clear to Paul Allen who is often tempted to do hardware stuff And Bill is very hardcore about saying no What we're uniquely good at in the world is software and we should stick to that I also suspect bill is starting to realize there's an amazing business model here if we can pull it off Where we don't have to make the hardware and we can charge for every copy of the software sold But that insight I would say has not yet fully materialized.

Yeah, okay Well, let's talk about business model here in one second first. No one the partnership You know again We've been saying all along that bill is clearly the leader here They set up the partnership initially it's 60 40 ownership bill is 60% Paul is 40% later gets changed to bill is 64% And Paul is 36% so like yep bill is the leader here Yep, and Bill's case that he makes on that to Paul is hey you took a job and you were doing this on the side I was all in and Paul's a agreeable guy and 36 is still a nice percent So he says sure you know in the long run here everybody gets It's all sort of a rounding error, but to that point back to the business model So once the partnership is set up they sign an exclusive licensing arrangement with myths This is super important This is a big lesson that young Bill and Paul are gonna learn here So myths gets exclusive license to the basic interpreter to the basic as they call it for the 80 And mitz is the one that can then decide whether to sub license the basic out to other companies or not Huh, essentially this is a distribution deal with mitz where mitz becomes the exclusive seller and distributor of Microsoft's basic Microsoft doesn't have any direct sales control here That's gonna become a big big big issue and the terms of the deal are Microsoft is to get $30 for each copy of basic that mitz sells Plus 50% of the revenue that comes from the sub licensing deals that mitz may or may not do with other companies who want to use the basic Which why would they ever do any sub licensing deals like why would you give it to your competitors? Well, that is a really good question then so let's just round that part of the revenue to zero Yeah, this is a big big big diverging of interest between Microsoft and mitz and the kicker on this contract is that the total Amount of lifetime revenue that Microsoft can make from the basic. Oh, it's from it's is capped at $180,000 Huh, so and admits really have the upper hand in this deal or phrased another way It's we will give you one hundred and eighty thousand dollars for you to hand over exclusive rights to all that cool basic stuff You just wrote to us, but if we sell fewer than x machines We're actually gonna pay it out to you on a pro-rated basis at $30 a pop rather than giving you the full hundred and eighty K Yeah, that is another way to frame it So definitely a great deal from it on the other hand what are Bill and Paul gonna do here?

Right kind of a great deal for them to give in the position they're in right mitz is the industry Yeah, now there is one very very important clause in the contract though Protecting Microsoft's interest and that clause is that mitz must use its best efforts to license promote and commercialize the basic Broadly in the marketplace and that any failure to do so by mitz would be grounds for termination of the contract by Microsoft Hmm. Thank God Bill's dad is a lawyer Indeed so the Altair comes out for sale later in 1975 Microsoft does $16,000 in revenue that year from there $30 pop the basics that are getting sold with the Altair Which is great especially the first year that they're starting and the next year in 1976 Everybody's so excited about this new market the vision that's happening the demand the Altair the sales that Paul Allen Resigns from mitz to join Microsoft full-time Bill drops out of Harvard officially he moves to Alba kirki there all in on this But for the year in 1976 Microsoft's revenue is still only $22,000 So it's 16,000 year before 22,000 in 1976 not a high growth company This is less than they were making in high school like what is going on here? One is sort of like mitz is the one that the controls of sales not Microsoft but two Mitz is selling a thousand computers a month. This is taking off.

This is creating a new industry despite mitz selling thousands of computers a month Only a few hundred copies of basic are selling per month People are pirating the software this is the discovery of software piracy and this is a pretty interesting time to pause and say Well, are they pirating software because that's a good question This is 1975 so piracy implies that you are running a foul of some particular legal protection for the good and you might say well With today's legal frameworks and hindsight You would say of course if they're copying the software and not paying the money for it's piracy That was actually not established yet And this is the craziest thing so Bill basically has an opinion that it's piracy and he writes letters to the computer community He writes an open letter to hobbyists Yes, and tries to basically guilt trip people he tries to use that as a recruiting method and say if you're so excited about pirating Our software maybe you should just come work with us And you know nothing would make me happier than making the best software in the world and please join us on this mission But ultimately the legal standing that he has to say hey What you're doing is illegal is not fully established And so it actually take a couple years for the courts to look at software and say what about this is protectable And if you think about it, it is a little bit weird So you've got source code that looks kind of like English You know basic its letters and numbers it gets translated to machine code that machine code ends up running And it's basically electrons its voltages that are flipped up and down And so what about that are we trying to protect? Ultimately the way it gets litigated through some case law from court cases is that the source code is a copyrightable creative work that is expressed through some sort of tangible medium That's the important thing about copyright law. It's a creative work expressed through a tangible medium So a book the creative work is the words and the tangible medium is that you know printed on paper And so with software it actually took until 1980 Congress Changed the law we'll put a link in the show notes to like the literal Congressional change that happened and it is in title 17 copyright's chapter one subject matter and scope of copyright in 1980 They include a defined term Which is a quote-unquote computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring About a certain result and once you have that passed by Congress codified into law You now have the standing legal framework that all the whole computer industry is going forward in particular the software industry a computer program is Copyrightable work. Wow, I know that's awesome.

It's totally crazy how recent that is But when you think about it, why would that have any legal, you know, software is such an abstract idea before the whole business model of computers was Good luck just replicating an IBM PC and everything that comes with it You don't need an illegal standing, but if you're gonna pursue this software only business model What's the protection around your abstract product? That's exactly what I was gonna say here. This is the other element of what's going on This is the first time software has ever been sold right other than the IBM accounting machinations to protect themselves from antitrust Which was just accounting nobody had ever sold software before this is the first time right certainly to build like a legitimate business around it The other thing that's useful to know is when you're selling an IBM PC You're literally selling a PC to a customer the same way that when I'm selling you this glass from Creighton barrel I am selling you the glass and the glass is now yours. I've transferred property to you software is not that So the whole world of software is built on a license agreement So the source code that computer program the actual right of that is retained by the creator and you license the copyright to your Customer to be able to use that on their machine So they're this dual idea that computer software is copyrightable and you can grant a license under certain conditions for customers to use it That is the legal framework for which the next 50 years of Technology at large would operate under for the moment though.

They got a piracy problem Right the law isn't gonna change until 1980 Microsoft would be dead if they didn't figure out a solution to this before 1980 So this is when bill ultimately kind of realizes shoot we did the wrong business deal with myths here Mitz has to sell and customers have to make the decision to buy Our basic is a key critical part of the value of the computer. It's like the whole thing. It makes that machine useful right without it. It is not useful It's totally setting up the wrong incentives and value equation that customers should be buying this themselves It should be included by the hardware OEM in the machine that they are selling and in the total purchase price And then if that happens we no longer have a piracy problem because we're just getting paid as part of the purchase of the machine Right should be a royalty right the problem is that is not the deal that they had with mitz Right or framed differently instead of saying hey consumer Do you want to buy something else to and make a new purchase decision?

They should be saying hey computer manufacturer we make your thing actually useful so pay us for it. Yes So during 75 and 76 Mitz pretty much had this new microcomputer market all to themselves There were a couple other competitors who sprung up but you know nothing made like the Altair and Mitz was the microcomputer company All that changes though in a big way in 1977 when what bike magazine calls the 1977 Trinity hits the market And that is three machines the Radio Shack TRS 80 Tandy slash Radio Shack TRS 80 The Commodore Personal Electronic Transactor or the acronym PET And the Apple II all three of which machines were like the Altair low-cost mass market Unlike the Altair they were not kits they were fully assembled fully functional right out of the box And they each had their own major distribution advantages and in Bill's words these three machines the 1977 Trinity Ignite volume in the market bill loves these really dramatic verbs like we attacked the manual they ignite the volume in the market Oh and the press just latches on to him whenever bill has a leaked memo or something where he talks about all this war terminology those all become headlines So great now earlier during 1976 Microsoft had started getting approached by a few of the bigger computing companies like ncr national cash register GE control data systems I want to license Microsoft your basic for the 8080 microprocessor here so that we can experiment with these things and each of these deals Would have been a revenue to Microsoft of like a hundred thousand dollars ish but add in mitz They keep dragging their feet on negotiating these they got the exclusive license everything's got to go through mitz and most of them They're turning down because Ben like you said they don't want anybody to come in and compete with them Yep, there is the misaligned incentive There's the misaligned incentive and there is the clause that bill and Microsoft and I presume bill senior put in the original Is mitz using its best efforts to commercialize the basic and gain adoption in the market and you can make a pretty strong argument that they're not So ed though unbeknownst to bill and paul he has another reason that he's dragging his feet on these deals Which is that he's about to sell the company so in may of 1977 mitz gets acquired by the tape drive manufacturer per tech for six and a half million dollars And ed kind of rides off into the sunset and per tech they know about this dispute with microsoft And they sort of come in and they figure like who is this bill gates? He's a 21 year old kid a college dropout like we're a big company We can deal with this and robert says an amazing quote later He says her tech kept telling me they could deal with this kid It was a little like roosevelt telling church that he could deal with Stalin Oh my god Boy, and I also don't think they realized that this kid's dad is one of the best corporate attorneys in the country Yeah, well bill gates was just constantly underestimated which kind of worked to his advantage in those early days Yes, totally. This is the thing about mikers off people kind of forget how insanely young bill was He was just 20 and to put that in context He's only seven years older than gents and huang But they feel an entire generation apart since microsoft was started almost 20 years before in vidya When you start bending your mind around like oh bill gates is still pretty young considering what an institution microsoft has become in the world Right.

I mean microsoft next year is gonna have its 50th anniversary And I believe that'll also be the same year that bill turns 70. That's wild Yeah So that fall in 1977 the dispute between mitz slash per tech and microsoft goes to arbitrary In albakurki and the inner a month while this arbitration is happening are the only moment in microsoft's history where like cash gets tight They're sort of running out of money because they can't really make any sales here Right, they don't control their destiny people aren't paying mitz for the basic They're quote-unquote pirating the software. They can't do deals with all the other computer companies that want to come licensed directly And so things get a little tight mikers off ends up winning the arbitration I believe in maybe like november in 1977 meaning they are now totally free to go license basic to anybody who wants to buy it On any terms that they want so they turn around they immediately license it to the trinity, you know apple Commodore ridio shackentandi they license it to all the big companies the ges the ncr's who want to experiment with microcomputers There's a really funny story with apple that apparently was had more or less written like 95 of their own basic Their own basic, but it didn't have floating point numbers It only had integer numbers and jobs is like totally writing was like the basic It's really important like can you just finish it? Can you do floating point and was just doesn't do it?

So jobs has to go license mikers off basic Amazing and that's the first deal that happens between the companies I mean there's so many deals done both directions commercial deals equity deals legal disputes in both directions And this is the very first time that they do something together. Yep, so bill and paul and mikers off They do all these deals and they do them all is cash up front fixed cost all you companies You're gonna pay us and then you include the basic and the machines that you're selling and we're gonna get all the money up front Superpreordionately though bill does not value maximize on these deals So like the apple deal is $31,000 for eight years of whoa access for apple for the apple to to microsoft basic They're not price gouging here because bill sees he's like the play here is we want to make it a no-brainer for everybody Everybody who's selling a microcomputer to have microsoft basic on it because we want to set the standard if we are the standard Programming environment that anybody who's using these computers again Anybody who is using these computers is programming them. They're used to the microsoft version of basic We're gonna have so much power that it'll become a self-fulfilling prophecy all of our competitors will just Wither away nobody will want them because it's not gonna be compatible with the language Everybody knows and then once people start trading and then ultimately developing and selling software that they've written It's only gonna run on our basic interpreter. Not anybody else is fascinating.

I actually didn't know that started this early and one correction there You don't know for a fact It's only gonna run on microsoft basic interpreter But you do know for a fact that it will run on microsoft basic interpreter And so if it's cheap enough, why would you take the chance on a clone that might have one or two things wrong with it? Yes, basically his vision is I want to remove any oxygen from any argument anyone could have about not using microsoft basic on a micro computer He thinks about this concept as a positive spiral that he really in his mind is the reason for microsoft success He says success reinforces success in a growing market one way of doing something gets a slight advantage over its competitors This is most likely to happen with high technology products They can be made in great volume for a very little increase in cost And if you get that slight advantage it'll compound and this is what he's playing for here And it's interesting in the earliest days What was stopping someone else from writing a basic interpreter and licensing it to apple or radioshack? Nothing there were other smart people out there and so it was just a very good business decision to say We gotta close that door We just got to make this a no brainer for people to buy from us because if we're value maximizing and it's starting to feel expensive They're going to turn elsewhere until we get a lead Right the apple story is the perfect example You know the waz thing is cute and it makes for a good story and like oh he didn't finish the basic But when microsoft sold them the basic which was already getting established as the standard for $31,000 Sure, why not no brainer apple could have gone out and hired another programmer to finish the basic But they're like wait we'll do that or I could just get the standard one for $31,000 I'm gonna do that just because it's important to establish those trade-offs for everything If you're running a startup right now, you might think to yourself. Oh great I'll just run that exact strategy.

The important thing here is a most of the work was already done for the original basic B bill was doing it himself bill and Paul so the importance of technical co-founders and their overhead was crazy low And so they could do these deals where they don't make very much money because they were I think at the end of 77 They were five employees so their overhead was just so unbelievably low that they could take a really long lens So yeah, even though it takes until the very end of 1977 when the mitts dispute gets resolved that microsoft can actually You know make money again They end 1977 with $381,000 in revenue despite zero for the first like 11 months of They're just rolling in cash. This is when bill famously goes out and buys a green portion 9-11 and is Moaning around Albuquerque and all sorts of speeding tickets, you know, hilarious stuff. This is when he got his mugshot, right? Yeah, I think that's right.

This is the classic bill gates holding up there. Yeah, yes Amazing because he got I think three speeding tickets in one day two of which were from the same police officer Yeah, and there's funny stories of the Albuquerque police thought this you know How was a kid driving a portion 9-11? He must be like a drug dealer or something because even when he was about 2021 he looked 17 Right, it's like do you even have a driver's license? But back to what you're saying is a really really important point To make this dynamic work you need to be able to For the investment in the fixed cost for the software for the technology to make it that little bit superior like bill's talking about The slight advantage over the competitors and at this moment in time the industry is completely brand new like the software industry is brand new So the amount that that fixed cost takes the cost is quite low really It's just bill and paul's time and dedication to this industry that nobody else is making that investment You can't run this playbook today because in any market even a brand new market even a speculative market the minimum viable fixed cost is Billions of dollars, right?

Yeah, it's interesting. I also think this moment galvanized something important Which is bill and paul could sort of look around and see there is going to be so much value created by Microcomputers and by software and they really found religion around software is magic The things that people can create now that we've done this basic interpreter and these machines are cheap and plentiful The magic will take care of itself as long as we ensure this industry can just exist and do its thing And so they flipped from this mode of we need to bite and scratch and claw and make sure that we win and deals to huh How can we enable software as a thing to thrive? And i'm sure we can position ourselves well to capture some or a lot of that And I think they became almost stewards of the software industry in evangelists from this point forward Yes, they also do another really prescient thing the next year in 1978, which is they go global Yes, nobody else is going globally and the way that this happens is so fun bill gets a call one day Also, how crazy is that you've got five people you're operating out of albacurki You just finally expanded from having one customer and you're like, you know, we should do this year Let's open in japan and become an international company Yes Now the way this happens is one day bill gets a call from a guy named kazahiro nishi or k nishi Who's a computer enthusiast in japan has gotten a hold of microsoft basic Totally shares the same vision as bill and paul he doesn't have a paul you know nor does he technical himself He's like i'm gonna bring you guys to japan i'm gonna bring you to all the big computer companies They agree that k will become microsoft's exclusive distribution partner in japan And by the next year in 1979 half of microsoft's revenue is coming from japan which is wild It's unbelievable and it stayed at that very high run rate of international being a huge chunk, you know close to half always Basically forever. This is a huge cornerstone of microsoft success that they were international company from year three of their existence Yes, totally.

So revenue in 1977, you know that like last month of revenue was almost 400 000 1978 revenue is 1.3 million dollars They have 13 employees at this point 1979 revenue is 2.4 million dollars and at the end of that year they're like all right We gotta get out of albicurkey and they've got 25 employees i believe at that point Yeah, something like that and this is when they move to seattle and it's interesting to hear bill talk about this He actually really liked albicurkey and specifically there weren't any distractions there no distractions weather was great Yeah, everybody was happy there, but the big problem was recruiting Yeah, he's like you know if we're gonna build this into the opportunity that i see the vision that i see and that paul shares with me There's no way we're gonna do that in albicurkey We gotta move to a hub right and so he's got three reasons for why seattle in particular and by the way it worked every single person except for His secretary did make the move so one he grew up in seattle He's like i just want to go home and then he justifies it in two other ways which i found pretty fascinating This is from an interview in the early 90s that he did he said it basically came down to seattle or silicon valley and in silicon valley It's hard to keep secrets because there's a rumor mill and in seattle we can be a little bit more removed and we can announce things when we want to Announce them and to in silicon valley people switch around companies. I don't want that I want people to just work at microsoft there was a disadvantage to not being able to recruit from your competitors But for a while they were really the only game in town in seattle right but not really though because pretty quickly microsoft is such an important part of the industry They recruit from silicon valley too we're going to talk about some of the people who come up But you're totally right people stay at microsoft. They don't leave this continues right through to this day And the other thing i think is really important to say that makes it work for seattle In a way that i don't know that this could have worked in too many other places in the country is the university of washington Yes, the computer science department there was really good there were great people you know Steve russell had come out there like there was real talent and they were churning out graduates Out of the udub that would go on to populate microsoft for decades to come Oh and then bill of course reinvest in that flywheel donating tons of money to the university I mean there's buildings there's whole new schools. Yes, absolutely they played right into it And so today, I mean it's always a top 10 if not top five computer science program in the country But unlike other top computer science programs, it's a state school so it just has huge volumes I think more students come out of the university of washington and go to big tech than any other program in the country That has stayed this amazing advantage.

Yeah, I think the only thing even close to it is berkeley in the bay area with a lot of the same dynamics But there's Stanford there too, so it's kind of like a dual university system in the bay area But yeah, you cannot overstate how important the university of washington was to this decision and an ultimate success of coming to seattle Yep, so this brings us to 1980 in the beginning of the year when they move to seattle just in time for I think you can make a very strong argument the single most important deal ever done in the history of technology Absolutely the microsoft ibm. I mean it's crazy to even say it out the microsoft ibm PC partnership, it's crazy you have this absolute behemoth partnering with someone that's not really relevant And if you're standing here today, it sounds like I'm talking about microsoft partnering with ibm But at the time it was ibm partnering with microsoft It was the only computer company that mattered in the entire world got themselves into a particular situation where they came to microsoft looking for help It's the craziest set of events that made this possible and I can't wait to dive into it All right listeners now is a great time to thank our longtime friend of the show service now If you are running a large enterprise ai agents are likely spread across every team and deploying them is uh, no longer the hard part Yeah, the hard part is knowing what permissions they have what employees are using them for or what decisions ai is making AI security for an enterprise at scale is not a small concern like the risks are real exactly and the challenge with AI is governing it Securing it measuring it and making sure that actually delivers value that is why service now built the AI control tower Yep, AI control tower gives enterprises a single place to see manage govern and optimize AI across the entire business and it works with any AI Not just theirs every device on your network every permission across every system every AI agent visible and secure in one place And service now can do this because they've spent more than 20 years building the operational backbone of the enterprise the workflows governance approval security controls and institutional knowledge That power how work actually gets done across it HR customer service finance and security service now already runs more than 100 billion workflows annually and trillions of transactions for more than 85 Of the fortune 500 so when companies need a place to govern AI at enterprise scale They're building on a platform at the center of how their business already operates and in a future that isn't going to be one AI It's going to be thousands of AI agents working across every function of the company But the question is who's managing them all so if you're trying to turn AI ambition into real business outcomes and make it work safely securely at scale Go check out service now.com and tell them that Ben and David send you So the IBM PC Why is IBM getting into the personal computer here in 1980? A fun quote we heard in our research was that IBM was the sun the moon the stars of the computing industry and that meant the hardcore enterprise mainframe computing industry Yes, David are you gonna attribute that quote or you're gonna leave listeners just hanging? All right, I think it's time we talked to probably 10 early Microsoft people in research and preparation And one of those folks was Steve Palmer himself and he used those words in describing IBM Yes, and it's hard to imagine a better person to get their perspective on what IBM meant to the world at this point in time Because 1980 was also the year that Steve joined Microsoft So literally at the same time in 1980 You've got the management team coming together with Steve and Bill and Paul Allen and you've got the IBM thing going on And you've got them moving to Seattle and we haven't even talked about Charles ammonia But this was the year he joined this is the year yes I mean every year for Microsoft until this point is that year but like 1980 is big Okay, so why is IBM the sun the moon and the stars of computing?

Why are they getting into this PC? It's way cheaper than anything else they sell it seems to be like a totally different business strategy a different customer set What's going on? So all the early micro computers we were just talking about you know the altair the apple to the trs 80 These are all 8-bit machines. They're running the Intel 8080 processor or competitor making a similar 8-bit processor The problem with an 8-bit processor is that the maximum Data size for a given instruction cycle in the processor This is called a data word in computer science terminology is 256 you have two to the eighth You can't represent any number greater than 256 in any given CPU clock cycle in an 8-bit machine Right, it's effectively a bandwidth limitation where if you're in a single clock cycle trying to do some particular instruction It's a very very small amount of data that you can move through the arithmetic logic unit or that you can move through the processor in that clock cycle Totally you can think of it like an hourglass or something There's like all the data sitting there in memory at the top of the hourglass And then there's this small little you know funnel that it goes through that's the processor and then it comes out That's a good analogy.

It's gonna take forever Yeah into the application of the software that the user sees you just not really gonna process it that fast very primitive machines Yes, and so for a company like IBM They eclipsed the 8-bit computing cycle a long long long time ago Mainframes and even many computers with DAC, you know All these machines are at least 16-bit if not 32-bit computing machines So 8-bit just it's not interesting which is why they only cost 375 bucks or whatever for an altair Right in late 1979 Intel announces that they're coming out with the 80 86 processor, which is a 16-bit microprocessor With 16 bits you can really start to do some damage here in terms of the applications that you could put on this thing to eat into Business software use cases in 16 bits you can represent numbers up to 65,536 So that's two to the 16th you can do interesting things passing 16 bits around at once There's some really really fun aspects to this if you look at pictures of these processors What did the 8080 the 8-bit processor look like and then you look at what did the 8086 the 16-bit processor look like? You can see this in the 8008 processor. That's only 8 bits You see only nine pins coming off of the little chip, you know There's the 8 pins for the data bits and then I think there's one more control pin if you look at the 8086 processor It's a much longer rectangle with 16 17, you know, maybe like 20 pins coming off I mean like you see this physically represented in the chip the further we get in the computing world the more abstract stuff becomes So it's always fun to go back in history when these concepts were so grounded in our physical reality That's sort of easily observable since everything was so much bigger, too Yeah back to 1980 the 8086 has been announced 16-bit microprocessor is coming IBM has already lived through Missing a computing expansion era once with deck and the mini computer They just let deck take that market of course that didn't really hurt IBM But man, it would have been nice to also have that market too and the thing that they're observing about the microcomputer market is it's exploding People in our industry know about deck people in the broader world never do about deck But I think it's a very different rate of adoption and rate of demand with micro computers where IBM started to kind of look at and go Oh, this might be like a real market like a really big computer market for people They're finally observing the same thing that bill and paul did, you know All the way back in the traffic data days of this is an exponential cycle like Moore's law This is exponential and exponential gets real big very quickly once you get a few years in Yep, and the mini computer cycle never was bad So it's hard to remember today, but just underscore this again in 1980 IBM was the most valuable company in the entire world the highest market cap company bigger than all the oil companies in 1980 The sun the moon and the stars. Yes.

Do you know what their market cap was? In 1980 150 billion you are almost an order of magnitude off 34 billion dollars. That was the most valuable company It is a wild what a different world we live in today. Yeah, even inflation adjusted It's interesting that the rate of growth of the most valuable companies in the world in terms of market cap has far outpaced inflation So that company the most valuable in the world.

They're going to tiny little microsoft That's just moved to Seattle for this partnership. What's going on here? So when IBM decided this is just so amazing like they deserve so much credit here They got the clay Christians in disrupt yourself disruptive technology thing intuitively decades before clay writes any of this stuff The way that they decide to compete is they like All the things that clay wrote about are working against us here What we need to do is we need to create essentially a skunk works division just like our lucky episode We need to do something outside the company completely removed from the politics sure But like the business incentives not to disrupt ourselves and create a new division They call the entry-level systems division actually may have existed before but they repurpose it This is in Boca Raton in Boca Raton, Florida Very nice place we were just there a couple months ago But not a technology hotbed in the world and they create a secret project called Project Chess Secret from the rest of the company the whole world is the goal is to develop the IBM Microcomputer or the personal computer as people are starting to refer to micro computers Yeah, and this is what they're going to do an in-secret with a small team with no other IBM resources And so that means this small team the only way they can do it is to use all off-the-shelf components from technology providers Basically play on the same level playing field as all the other micro computer manufacturers out there And oh, yeah one more thing IBM leadership tells this team in Boca They have to ship the PC to customers within one year It's a crazy constraint is a total crazy constraint a couple quotes on this Don Estridge who was one of the leaders of Project Chess He would later say that the company realized that if you're going to compete against people who started in a garage Obviously a reference to Apple here. You have to start in a garage yourself And then Luke Garster who later would take over IBM would describe this whole Boca project as Quote the way you get an elephant to tap dance and the question is Are they playing from behind and thus have to adopt a flawed strategy or is this strategy of assembling with all off-the-shelf components actually a good strategy if it works?

Well, let's tell the story and then come back to it. Great. Okay. So what do they do the hardware aspect of this is trivial basically Hell and Roberts could put together the hardware to sell a micro computer and do this deal with Intel like I think IBM can do a deal With Intel the you know, not necessarily trickier But the more important part is the software and thanks to Bill's genius strategy about be the volume player Don't optimize on per unit price set the standards out there They were like a world's leading provider of programming language interpreters, right?

100% there is one game in town and one game in town only and that is Microsoft in Bellevue, Washington at this point in time Now interpreters are notably different than operating systems But Microsoft definitely had sort of raised the flag and everyone could see if I want to go buy software from my computers broadly They're an interesting group to talk to. Oh, yeah Obviously operating systems are going to become really really big here in just a sec But again, the 8-bit generation operating systems weren't that important because people were running their own software the Standardized software packaged application software doesn't happen until the 16-bit era and doesn't really really happen until the 16-bit era and the IBM PC So that's why the basic the interpreter is so important. So what happens? IBM calls up Bill Gates And by August 1980 the two companies are in serious talks to partner and work together on the IBM PC And we referenced Steve bomber a minute ago.

The timing is just crazy. Steve had just joined the company in June of 1980 He's employee number 30 the Microsoft team of 30 which the whole company of Microsoft pivots to like work on the IBM PC partnership is bigger Than the project chess team in Boa It's amazing. Wow. So okay bill is just convinced Steve to drop out of business school at Stanford and come help him and Paul run the company So mike us off to this point in time is still a partnership Steve is the first person besides bill and Paul to get equity in the company when he joins And it's eight and a half percent and it's a handshake deal at this point Yes, bill really really wanted to bring Steve on knew him from the Harvard days knew what an asset he could be He is the end to bills yank.

Yes. And so I mean frankly eight and a half percent it's a big grant You know who's out there writing a 30 person company and you're giving away eight and a half percent slugs It just doesn't happen Those are founder shares and this is really a sort of reflection that the way that bill thought about Steve was as a founder In fact, it created some tension with paul allen where bill asked paul if they could go to five percent paul said sure and then bill Actually offered him eight and a half percent and paul got upset and bill said i'll eat the three and a half percent It can come out of my share because I want him that bad But he's the perfect person for this point in time bill was like the only sales person doing these oem deals Now they're dealing with IBM they're entering the enterprise world. This needs to be a real business Yes, so back to the IBM negotiations Obviously, Microsoft is very interested. IBM is not just very interested in working with Microsoft.

They have to work with Microsoft They're the only game in town. Yes, and specifically they asked Microsoft for programming languages They're like we're making this great PC. We're gonna be sick. We think you guys working on a cobalt We'd like some cobalt yeah fortune like give us the whole thing And there's some debate on whether it was the microsoft side or the IBM side that really saw the vision of hey The 16-bit generation is gonna enable real business software use cases on the personal computer But it doesn't matter.

That's the plan here and that is absolutely what happens So these initial discussions right are for the programming language Microsoft doesn't make an operating system at this point because in the abit generation the operating system I think was kind of like a glorified bootloader to just get into the programming environment so that you could either write or load up the Basic programs that Microsoft was gonna interpret and then run and in abit generation Most if not all hardware providers of microcomputers just wrote their own operating systems Like it just wasn't a big deal now there was one off the shelf operating system out there From a company called digital research, which was run by gary kildall who I think as we talked about earlier Bill and paul had actually intersected with back in seattle Yeah, I think they were reasonably friendly. Yeah, I think they were quite friendly because they partnered You know you needed operating system to get into the programming environment It wasn't that big a deal and so yeah when everybody needed one off the shelf bill and microsoft Which is for people over to digital together. Yep, cpm right exactly cpm cpm CPM which I think is maybe control program for microprocessors. I think is the abbreviation there god They were so bad every single thing that's been named to this point except for the company microsoft was a horrible name Oh, it's the processors 8.0.8 and now it's 8.0.

8.0 But the machine is 8.0.0 that the processor is inside give me a break everyone It's horrible naming bill that i'm sure paul too But bill is the only person in this industry that has the vision for what this can become even intel and you know talks about this He doesn't think that intel even realizes what's happening here. They're just like oh, we're just making more chips You know and like people use them for stuff. Yeah, it does seem like very few people are thinking about Their products as something they really need to build a brand around with consumers guess hence the naming schemes Okay, so the IBM microsoft discussions are going along and IBM's like, oh, yeah, we need an operating system So bill and I think from everything we've read and folks we've talked to kind of in good faith Just does the standard thing he's always done in these situations. He's like, oh, yeah, go talk to Gary Go talk to digital research.

He can probably do that. Right. We don't have an operating system. So this guy does so What happens next is unclear But what is clear is however it goes down.

This is one of if not the biggest business blunder in history IBM that team from project chess flies down I think directly from Seattle and talking with bill and Steve to moderate california where digital research is based at this point To meet with gary and his wife dorothy who run the business together and bill's called them He's like hey got a big oem client coming down needs an operating system and he signed hefty hefty nda So he cannot say who it is but he's like you really should take this seriously right? So the team comes down obviously they show up there from IBM There's a big snafu where gary does not attend the meeting and there's conflicting reports about what happened Was it one of them that he's out flying an airplane? Yeah, so i'm pretty sure he was flying his personal airplane while this happens Some reports are he was just out joy riding and missed it some reports are no He was like on a business trip knew it was happening But he had another important business meeting and he didn't know that this was IBM that was coming regardless It doesn't really matter because IBM just wants the operating system Dorothy does meet with them. She's unwilling to sign their nda There's a lawyer from digital research who gets involved and he doesn't really understand what's going on The punchline is that IBM sort of leaves this interaction with the belief that gary and digital research aren't up for working with them And like aren't capable of producing here and producing is important because it's not like The existing cpm os that they made would work here They would have to write a new version a 16-bit version Yes, and they hadn't done that yet and in particular they would have to do some customizing But part of what IBM wants is a customized version of an operating system for the IBM PC They don't want this to be fully off the shelf Yes, and just to add one more stir the pot of history here There is another version of this story where gary does actually have a conversation with IBM and it blows up over licensing terms That what gary really wants is a significant royalty of every IBM PC sold and IBM walks over that So whether that happened or whether it's just an nda issue either way, I think we all know the IBM PC did not end up running the cpm operating system Oh, that's amazing.

I didn't know that we'll talk about that when we get to the business terms of the microsoft IBM deal admit Yes, but for the moment there's no deal yet because an operating system needs to be provided here So IBM goes back to microsoft and they're like hey, this guy you referred us to Ain't gonna work the way that I read some quotes from the IBM people here was like we just threw the problem back in microsoft Slap of you guys deal with this you source an operating system. Yep Well, I'd like to say that bill and steve and microsoft You don't need to give them an opportunity twice in this case you kind of did need to give them an opportunity twice because they almost flubbed it And sent IBM down to see gary this time. They don't flub it. They're like, okay We'll get you an operating system and so enter Seattle computer products Yes, so it just so happens that right down the road from microsoft in the Seattle area I think they despite being named Seattle computer products I think this company was actually based in tequil at washington a programmer named Tim Patterson had just written a 16-bit operating system For the 8086 that Intel had just announced and he was calling it the quick and dirty 16-bit operating system or qdos for short And had it ready to go now.

Why have you written this? What was this company Seattle computer products? Why did they have an operating system? They were a component provider to micro computer manufacturers They essentially made motherboards and so when intel now has announced this new 16-bit processor generation that they're coming out with Well, Seattle computer products They want to sell motherboards and have them ready for 16-bit They kind of need to test and play around with these things and their customers are asking for it So they had been going to kill all in digital research too and badgering them to like hey, right the 16-bit version of cpm And gary just didn't so tim's like fine.

I'll do a quick and dirty version myself amazing and thus doss is born incredible Which of course later they would drop the queue and call it doss the disc operating system something about dirty didn't have a ring to it When you're selling it to IBM no no no no no no no no no So bill and paul and microsoft they've learned about this. They know Seattle computer products They know roc who's the guy who owns the company they get in touch with him and they say hey, can we license qdos from you and tim? We've got a big OEM customer that wants a 16-bit operating system So they work out a deal whereby microsoft pays Seattle computer products $25,000 for the rights to adapt and sell qdos to the one unnamed original equipment manufacturer who they're working with tim actually he's jazz about this he ends up leaving scp computer products and joining microsoft and so he with the rest of the team he's part of building Doss taking his initial work and turning it into real doss later on before this all gets announced in the pc chips microsoft would pay cl computer products another $50,000 for full rights to own 86 qdos sell and license it to anybody else indefinitely So I believe the total amount of dollars that change hands here is $75,000 Unbelievable. This is doss now look one programmer wrote a quote quick and dirty operating system and microsoft bought the license to that and adapted it into doss Tim when he was at cl computer products definitely did not write doss as doss becomes It's not like microsoft bought all of doss for $75,000.

They did a lot of work on it But yeah, this is how it all goes down. So microsoft would eventually generate billions of dollars on doss based products Now you're exactly right in the same way that instagram today is a much different code base than instagram and much larger code base than instagram when it was purchased But my god $75,000 to buy doss to get this whole thing started for I mean until windows 95 All of the windows operating systems were doss based it's just crazy I mean it really illustrates how fast things were moving how much all this was getting invented and discovered real time that Even to this point bill gates isn't thinking that operating systems are that important This is just a shortcut to get the deal done with ibm to make it happen. Yep. Also, dave I gotta say I just looked it up the address of seattle computer products on the original business card for seattle computer products where I presume qdoss was written the space is available so I know where our next studio needs to be and it's intiquilla and it's intiquilla All right.

Well the rent can't be like that So let's do it correct correct. Hell yeah Well, you know, we've been joking for years about making the acquired museum. We might have a location Okay, so now we've got the operating system. They've got qdoss Das in place to license the IBM the only thing that is left to formalize the partnership is the business terms and Ben if what you said is right about the gerry kill doll ibm negotiations This is just a master stroke from bill here in the licensing with ibm Yes, because there's two really really big levers that it looks like bill is giving big time on one of them But he is winning big time on the other one.

What are they? So the one that it looks like he's giving on is he does another fixed cost oem deal with ibm Yes, so this is in paul alan's memoir ibm paid microsoft 75 000 for testing and consultation 45 000 for doss 45 And 310 000 for an array of 16-bit language interpreters and compilers So all told bundled together that is 430 000 Fixed that ibm paid microsoft with no ongoing obligation. Yes, no per Copy royalties. Yes every copy of doss that ibm sells either included as part of systems that they're selling or they're free to charge Independently for doss whatever amount they want Microsoft gets zero dollars and if it's true that this is where things fell apart with gerry kill doll crazy The bill is willing to do this and you might say what didn't bill learn his lesson Why would he ever agree to this on the one hand this is what he was doing with apple and others he was doing these fixed cost yields You would think like man ibm like this is the time people are gonna pirate ibm software Now's the time to really grab the money bags But bill saw something that no one else did in exchange I don't know if it was directly in exchange in the negotiations But the other lever that he saw that he pulled was Microsoft retained the rights to own doss and to own their languages and license it and them to anyone else They wanted at any price on any terms It's so interesting because what ended up happening that bill gates masterminded was once we distribute our operating system through ibm's PC That's going to become the thing everyone buys And now in the 16-bit generation when there are people building programs for computers not just developers once those application developers who are writing programs Are targeting an operating system?

Then that is the operating system that every other oem every other computer maker is also going to want and really need And we're gonna be the ones that they have to come to to buy it And I can't figure out did ibm miss this fact or did they know it? Basically what ibm did was they were the one place where every business needed to go for their computer needs And what they did in this negotiation was they actually handed that over to microsoft And they said we are going to become a commodity just like every other hardware manufacturer And you are going to be the point of integration for the whole ecosystem You're going to be the linchpin that everyone has to target for their applications So I think there are two things going on here one small and one big The small thing is actually related all the way back to the beginning of the episode what you said then about the antitrust concerns within ibm To hear them say it they actually didn't want ownership of the software They wanted it to be separate because it would sort of look better Because then they have the sort of plausible deniability of how could we possibly have a monopoly we're buying off the shelf part of an ecosystem blah blah blah Yeah, yeah from a vendor who can sell to anybody else we have no lock in and that may well be true I think the bigger thing that just wasn't in their consideration or mindset was They I think assumed that once they entered the pc market ibm was going to be the dominant player So it didn't matter What's ibm selling PC is gonna buy a PC from anybody else ibm is going to win this market Just like they have in every other live business they've been and what bill saw was he really made a bet that the same dynamic That played out with the altair we're also going to play out with the ibm PC that there would be a million hardware manufacturers flowers blooming here Building to the same spec and building to the same spec using the same processor Which of course they could because it was all off the shelf components And ibm either didn't see or didn't believe that that would actually happen ibm failed to see the value of software And they certainly failed to understand what a software platform business model would be which makes sense I mean why would they right it's almost like their experience they are the computing company Yes, their experience in selling mainframes with everything bundled in Was the wrong experience to go off of in understanding the way the future would unfold and bills very modest experience watching the altair and all these sort of altair clone type machines Or even if they're not altair clones just more micro computers that need more software That actually was the useful experience to pattern match off of what does the world of micro computers look like and how is that fundamentally different than the world of mainframes? Totally and in a way that you know the mini computer generation like we've been saying it was like a half generation It wasn't it wasn't actually fundamentally that different other than deck game to fold Yeah, the deal that bill gates make with ibm for the ibm pc is the greatest deal in at least computer industry history If not all business history full stop, right? So let's say a little bit about why i mean i mean it's obvious but here now is ibm most valuable company in the world They're gonna come out with the pc platform.

They are going to build the market and Microsoft is gonna own the lynch pin sort of Hamilton helmer terms like where the power is in the market and they're gonna be free To license it at whatever terms they want to any other player who wants to enter So they signed this agreement in November 1980 The ibm pc ships in august 1981 just in almost exactly a year a little more than a year from the time project's chest starts to Wait, they actually ship the pc. I mean truly incredible they pulled it off truly incredible It changes the world like that's such a trade thing to say but like everything that everybody's imagining happens ibm was right that it was By far and away the most successful personal computer on the market as soon as they release it totally they sell 13,500 ibm pcs Within the first couple months after they announce it over the next two years they sell half a million of them makes them unquestionably the largest Personal computer micro computer manufacturer market leader Everybody at ibm is celebrating the clones haven't arrived yet and maybe they won't it'll play out like they think Yeah, not exactly now before we talk about the clones This is really just a footnote because of course all the incentives are aligned for ibm to push doss as the operating system for the pc I mean they've done this whole deal with microsoft. They have a royalty-free deal with them when they launch the pc Customers actually have a choice of which operating system they want on their ibm pc They don't have to go with doss consumers can choose between doss 16-bit cpm by this point in time gary and digital research have gotten their act together They've written a 16-bit version of the cpm operating system or another 16-bit operating system called pascal They came out of the university of california at san diego And the price sheet for the operating system option is pascal is an extra four hundred and fifty dollars with your ibm pc cpm is an extra $175 with your ibm pc and doss which was developed specifically for the pc is the best way to run it is only $60 So ibm is making 60 dollars a full 100% margin on top of their hardware for the pc by selling doss because they don't have to pay Microsoft any of that and they've set up the incentive is that like obviously everybody's gonna choose doss It's fascinating and you know what to give them a little bit more credit to they did try to Enforce that there's some amount of lock-in to the ibm pc and they did that in two ways one is we're simplifying call you doss It was pc doss which is different than ms doss which would get licensed to other computer makers I don't know exactly what happened, but it basically seems like it just wasn't different enough to be meaningful to application developers So that's one piece of it. The second is ibm did actually have proprietary bios So that was another part where they kind of thought that that might provide them some protection where they could stay a lynchpin in the ecosystem And it wasn't just all off the shelf.

They actually did have something that was there as it was proprietary It just turned out that the effort required to reverse engineer the ibm bios was trivial basically Oh, do you know the story of the compact bios? Oh, well, I know the compact story, but I don't know the story of the bios specifically in lightness It is basically why compact worked is what it comes down to so compact was formed basically to clone the ibm pc They saw the market opportunity and they realized they could buy from all the same equipment vendors So let's go eat their margin is basically the plan However, the one thing that was not off the shelf is the bios the basic input output system Which is effectively the thing that decides to load the operating system when you turn the machine on and so there's some proprietary magic that happens to call upon the operating system to do its thing So compact reverse engineered the bios And the way that they did it was very similar to trip Hawkins and the story that he told us about his reverse engineering electronic arts of the sick of genesis Yes, so compact had two engineers and one engineer went in and fully dissected for the ibm pc bios and Basically saw all the proprietary calls that it made and documented each of those calls without writing the implementation steps Then he handed hey Here's what the bios needs to interface with over to the other engineer and the other engineer on their own Just went through and thought of Unimplementation and they have no idea if it's the same implementation so it's not breaking any sort of infringement They're basically saying i'm just seeing the requirements for this product and i'm coming up with my own implementation of that product They basically figured out how to exactly clone the ibm pc and buy the very same operating system And to go back to quoting ben Thompson because this is from his great piece again The result was a company that came to dominate the market compact was the fastest startup to ever hit a hundred million in revenue Then the youngest firm to break into the fortune 500 then the fastest company to hit a billion in revenue and by 1994 Compact was the largest pc maker in the world the compact story is amazing So the three people who start compact in 1982 are actually texas instruments engineers who left and they wanted to start a company And I believe as the legend goes they were like trying to decide what to start They were considering like a restaurant chain and like a bunch of different business ideas And then ibm pc comes out at the end of 1981 and they're like oh We can clone this and do everything the story you just told so yeah, it's wild They start the company in 1982 and within the first year they do 111 million dollars of revenue of selling ibm pc clone hardware Is it just cheaper like basically this is the ibm pc but for less money Yes, exactly same thing cheaper and so begins the race to the bottom of pc hardware completely undifferentiated all the value crews in the software Totally compact went public the very next year in 1983 well before microsoft which is funny But yeah compact all these other clone companies that get started microsoft licenses doss to all of them importantly critically on a per machine sold basis This is when they grab the money the operating system is so deeply embedded and needs to get shipped with the computer itself Yeah consumers can go buy operating systems to upgrade and whatnot But no hardware manufacturer is going to ship a 16-bit pc without an operating system So piracy is not an issue here microsoft can now do a per copy sold per machine sold license with all these clones My god, it's just like a geyser of money Microsoft used ibm to generate demand for their software and then they used every other pc manufacturer to capture the value that all that demand created Yeah, so I think I have these numbers and timeframes right I believe that for calendar year 1982 microsoft revenue was 25 million dollars And I think this must have been when they switched to fiscal year end and June 30th So microsoft fiscal year end starting then and up through now is June 30th So their fiscal 1984 so the year ended June 30th 1984 so 1983 midpoint to 1984 midpoint Microsoft does 98 million dollars in an 18 month period from the end of 1982 they go from 25 to 98 It's all on the back of the clones and unlike compact that you know, yeah, they did 111 million of revenue their first year They're selling hardware which has serious cogs associated with it microsoft 100 essentially gross margin software revenue more than doubling year on year That is the best business of all time. Yes, and they combined two magical principles together This infinite replicatability zero marginal costs of software and becoming the lynchpin of the ecosystem They are now the software that everyone needs to target which gives them pricing power totally So that pricing power raises your top line and you have no costs so unbelievable So meanwhile in the computing industry background while all this is going on with the launch of the ibm pc and then the clones Apple had gone public at the end of 1980 in I think the biggest and most successful IPO of all time at that point Remember we talked about genentech on the novo Nordisk episode They went public like right before apple and then apple was bigger So they're valued at 1.8 billion dollars at IPO. Steve jobs is this multi hundred million They're like media darling all this stuff the next year in 1981 Microsoft reorganizes from the partnership between bill and paul with the handshake deal that steve's going to be cut in on the partnership Into a stock company a seek corporation and as part of doing that the venture firm technology venture investors or tvI Invest 1 million dollars.

I believe for 5% of the company. Yep. This is crazy That's a 20 million dollar post money valuation It's a one on 20 post when microsoft is doing how much been revenue that year they did 17 million in revenue And they're about to do the ibm deal like this is absolutely absurd So it says a lot about this period of time that you could do a 1x revenue deal in a high margin software company I mean, I actually don't think this shows a weakness in microsoft. Oh, they didn't have leverage or something like that That wasn't it at all.

It was just the deals sucked. Yeah venture capital sucks back then. Yes, there's no other way to put it No, you know, it's only 5% so good on microsoft spoiler alert This is the only dilution that they would ever take so that's also extremely different than today But yes a 20 million dollar valuation at this stage is frankly ludicrous You know, even among people who should be in the know the beauty of the software business model still is something people don't understand That's exactly right. The hotness is the hardware.

It's like apple just IPO at apple's worth $1.8 billion like oh, that's the industry Oh, it's IBM, etc It's when microsoft itself would go public a few years later in 1986 They actually go public the same week that they move to the big campus in redman where they are to this day Their market cap at IPO is only $750 million Despite having done 200 million dollars of very high margin software revenue in the trailing 12 months up to that Growing 100% year-of-year. It's insane. Hey, that's 4x multiple expansion off the last time they raised money Right, well, it's just crazy though. People don't yet appreciate the power So bill gates and Warren Buffett today conversation at the University of Washington in 1998 So this is as late as 1998 this thing that we're talking about the magic of the software business model And how it should be reflected in a company's valuation, especially when it's a high growth company was still not understood even by bill gates himself So here's the quote bill gates says I think the multiples of technology stocks should be quite a bit lower than the multiples of stocks like coke and jalette Because we are subject to complete changes in the rules.

I know very well that in the next 10 years if Microsoft is still a leader We will have had to whether at least three crises. So bill gates is essentially making an argument now granted This is in the middle of all the antitrust stuff. So he's very prime for this at the internet and the internet He's basically making the argument that disruptive forces come at you so fast in the technology industry that Even though you can grow extremely fast and it's this extremely scalable thing distributing software at zero distribution costs and even though the margins are unbelievable Because you have zero marginal costs they still shouldn't be valued as highly as like a cpg company Which is so different than the way that people think about it today. Well, it's funny You know, I've thought about this a lot and I actually watched that interview years ago It's so good.

There are elements of truth to this too And I think it's that for most technology companies that is totally true Yep And then for a few technology companies that have true power and true scale The exact opposite is true. Microsoft is still the most valuable company in the world today Companies that are less susceptible to disruption more predictable in terms of high growth high margin revenue deserve a premium But gates is basically arguing everyone else doesn't So let's flash all the way back to 1981 and talk about this venture capital investment This one on 20 that tv i does good work if you can get a man How does this come to be so even a whole year before in the fall of 1980 dave mark wort one of the partners and the founders at tv i Flies up to seattle not to meet bill gates but to meet steve balmer because they were classmates at tsp right they weren't quite classmates But because I think they were two years apart So they didn't overlap but they had some of the same social circles and steve was effectively the screener for anyone who wanted to come and Talk to bill and try and invest in the business tasocs had been up sutter hill had been up hambrick and quis had been up zerox ventures And all of them only ever got to meet with steve balmer and never got passed on to bill gates steve Basically just bounce them off and I know all this because there's a great oral history from the computer history museum where this whole Things in a transcript with an interview with dave mark wort kind of recalling the whole thing So dave flies up to me with steve and steve says you're asking really interesting questions You're thinking about our strategy the right way you don't just want to do a transactional deal Like you really think this is something special why don't you meet with bill bill of course doesn't have any extra time to schedule He says but I am going to the udub arizona football game at as he stadium one should come and talk to me there So of course they go bill doesn't pay attention to the game at all He's just laying out the strategy and grilling dave and talk about software the whole time So this is fall of 1980 so that's a whole year before the deal gets done and days are marking at this point in 1980 They're doing five million in revenue two to three million in profit. They don't need VC money And yet he was able to get in so here's the quote I was just sort of helping them out with the business in the venture business. You're buying and you're selling at the same time You're trying to figure out are these guys crazy?

Are they ever gonna do anything really interesting? And if so, how do I get myself positioned to be able to help them do it? And so I spent a lot of time up there helping recruit people I helped to recruit charles simony who was an early key guy Charles simony would go on this is an aside to write microsoft word and charles was at Xerox park Inventing the GUI. Oh, we're talking about Charles in just a sec.

Yeah, yes And he says and I was working with Steve on business strategy They had these OEM customers the PC manufacturers and they had started to engage with IBM on this operating system And then are we just gonna become a low-cost contract programming shop for IBM an outsourced sweatshop? Or is there some way we can build a business out of this which led to the fixed fee to IBM the retention of the code Which then we could sell to other people and that's what created the PC industry basically So that is his recollection of the whole thing that he was sort of very helpful in this transformative time for the company Now at the same time you have to look at everyone else's incentives How can I be helpful then so Dave is only 29 years old but everyone else is like 23 And so he actually is kind of adult supervision at the same time The partnership was still just a partnership and there was a handshake deal for the equity And so if you're Steve balmer at this point of history It would be nice to have a forcing function to actually turn this into a corporation so that we can get some shares granted here So there's a little bit of incentive to say hey if we take on an outside investor We're gonna have to restructure and that's what I'd always read about the TVI investment Yeah, obviously Microsoft didn't need the money They liked Dave, but also a big part of it was this was a catalyzing function to do the conversion into a c-corb Yes, so this would create a little bit of board in governance. So it's not just bill all the time now bill Of course, I think it's still a controlling shareholder just by the amount of stock that he owns But there's a board it's bill and it's Dave and it's kineshi. It's a three person board Yeah, we should say to vis-a-vis Paul Tragically and I believe it was 1980 to 83 He's diagnosed with Hodgkin's disease and he ends up taking a leave but then fully leaving the company I think he did go on and off the board at various points in time Yeah, that's true, but yeah, he's no longer a full-time member of the company after his diagnosis Yeah, so on this venture investment, it's pretty fascinating None of these are terribly compelling reasons other than like I guess it would be nice to have a little bit of capital Associated with us formalizing the corporation, but they don't need money at all They're printing cash.

They've been printing cash ever since that one tight period in Albuquerque. Dave termed him I think that's kind of the answer and I've always heard wonderful wonderful things about Dave And I think everybody really did love him and see his value But man to be a venture capitalist in the 1980s and 1990s like oh man, you couldn't lose It's pretty crazy I think part of it too had to do with the fact that Microsoft was up in Seattle So the VCs just weren't traveling right and Dave was young and he was single Oh, Dodd Valentine famously had the rule they didn't invest in any company that you couldn't bicycle to from Sandhill Road It's crazy Dave Mark where I think most weekends is flying up to Seattle to hang out with Bill and Steve It was a real sell and he said I was young and I was single and I had nothing better to do and it was really fun and it'll actually interesting So I did it I bet and that resulted in depending how long TV I held one of if not the events venture capital return in history Who hard argued that one? Okay back to the story There's a couple more really really key things that happen in the PC era And particularly now once we're into the IBM PC era and the clones the 16-bit era And let's start with applications So you know kind of like we've been saying all along They've been era applications packaged software aren't really a thing In 1979 kind of the tail end of the 8-bit era two programs come out for the Apple II VisiCalc and WordStar VisiCalc is the first software spreadsheet application and WordStar is a word processor These applications by today's standards are super simple like Stone Age type stuff But they're the first of their kind particularly VisiCalc and the spreadsheet They sort of establish the potential for business applications on personal computers There's a joke at one point in the industry that the Apple II was a quote unquote VisiCalc accessory for small businesses And I think that is part of what IBM is seeing and why they're deciding to now get into the industry with a personal computer Around this time Microsoft starts the quote unquote consumer products division To compete and make application software themselves And it's quite telling it's called the consumer products division to make applications Even though they're competing to make these applications that today we would view as business tools spreadsheets and word processing That is not how they referred to it Right So one of the first people that they hire into this new division to get it going Is an engineer Ben who he referenced just a minute ago named Charles Simone And they poached Charles perhaps with Dave Markart's help Away from the legendary Xerox Palo Alto Research Center or Xerox park And I think this is one of the great misconceptions in technology history Yes, hopefully we can set the record straight a little bit here Yes, if you ask anybody in our ecosystem save for the 1% of people who actually know this What happened at Xerox park? They will tell you they invented the mouse They invented the graphical user interface and then Steve Jobs walked in and he saw it all and he said Oh my god We have to have it and then he went off and he made the Lisa which had a graphical user interface and a mouse And then that failed but what succeeded was the Macintosh and it's a wholesale ripoff of Xerox park that lives on today in apple And that is the story that you will hear from basically everyone I've heard it characterized as something like Xerox hosted a picnic in Silicon Valley And Steve Jobs attended and dined lavishly at the feast Which all of this is true Which is true that is true all of that is true But it's half the story He was not the only person who dined lavishly at the feast Microsoft did just as much directly from Xerox and Charles was one of the main vectors by which this happened So here is the list of things that were invented or basically invented at Xerox park The graphical user interface The desktop the mouse object oriented programming ethernet laser printing Along with a whole host of other things like this is everything about modern computing invented there Who were the people who were at Xerox park while there was lnk There was bob meck half who would go on to found three comm he invented ethernet You know meck half's law Yeah, the value of a network scaling proportionally to the square of the number of inputs Yeah, Bob meck half Xerox park Larry tesler who would join apple John Warnock who started Adobe Eric Schmidt worked at Xerox park everybody was there It was a lavish picnic and charlesimony and charlesimony now the thing about park And the computer that they built there to instantiate all these concepts which was named the alto Is it really was a research center So the alto go look up on Wikipedia go look at actually it's the Mac The alto is the Mac it's the Mac with the monitor turned on its side Yes, it's a vertical Mac it's a three by four display not a four by three display Now they start making it in 1973 see if I go like what's going on here the Mac doesn't come out to 94 11 years earlier How on earth is Xerox making the Mac in like the pre eight-bit era the pre microprocessor era Well, it's not a microprocessor the alto is not a microprocessor architecture It's a mini computer So what you see when you look at photos of the alto is you see the Mac what you don't see is under the table or behind it is a mini computer Oh, I never realized that so it is not a personal computer architecture at all It is a 16-bit essentially mini computer that costs tens of thousands of dollars to make each one of them Huh, it's a size project Right, so you should have a little bit more generosity for the east coast management at Xerox for failing to commercialize this Told it the time was not right.

It was not possible It wasn't even conceived of in the microprocessor architecture because the microprocessor basically didn't exist when they made it interesting So in 1980 I got the mine this year from Microsoft same year Microsoft joined same year They signed the IBM partnership Charles Simone comes up from Xerox park and he's of course bringing all this same knowledge all this same experience that Steve Jobs is bringing into Apple He's bringing all that right into Microsoft too And the first thing that he gets tasked with is working with this new consumer products division to build Application software to compete with VisiCalc and WordStar to compete with spreadsheets and compete in word processing And so he leads the teams that create word and multi-play on Microsoft's first spreadsheet Now remember we're still at the end of the eight-bit era the graphical user interface doesn't exist yet other than on the alto in Xerox park No, these are DOS applications. It's all character mode. Yes, it is command line interface So the vector that they think they're gonna compete at least in spreadsheets with VisiCalc is that they're gonna be on every platform out there VisiCalc I believe was more or less basically only on the Apple too Well, that doesn't end up working too well and then the next generation the IBM PC era They sort of make the same mistake The application business stays focused on being on lots of machines making software that's compatible with everything A new company pops up called Lotus Lotus makes the radical decision that they are gonna make a spreadsheet Only for the IBM PC and this was genius. This is the one two three spreadsheet and it goes on to become At that point in time the most successful software ever.

This is wild. I can't even believe I'm about to say this I believe my mind when I found it in research. There are a couple years in the late 80s where Lotus has more revenue than Microsoft and is valued higher Yep In fact, the year that Microsoft went public Lotus had more revenue than Microsoft at the IPO. Yes wild.

Yeah, it's crazy So Lotus one two three had some graphics but it was still in character mode It was a powerful spreadsheet that could start to do some graphics even though there wasn't actually a GUI operating system yet Which is interesting so Lotus one two three was faster and had bigger spreadsheets and it was just more powerful Microsoft multi-plan was still targeting the older 8-bit and so multi-plan despite Microsoft's efforts is completely left in the dust Microsoft's trying to figure out what should we learn from this and then talking with Pete Higgins and Mike's laid who were both early leaders in the Development and the marketing of the applications division actually Mike's laid went on to work directly for Steve Jobs at next and Apple for many years But in chatting with both of them what basically became apparent is Microsoft learned with our applications We should not be targeting the current platforms at all The lesson to learn is never leave yourself open to the next generation of technology. They're learning the Moore's law lesson again Yes, and how it applies to applications. Yes, you always got to target the next platform Right, even if that platform is not the one you own right That's the interesting thing about when they're evaluating multi-plan and they say how do we not get Lotus one two three again Basically the applications team gets the freedom to look around and say okay No matter what our overall company strategy is right now or no matter what the system division is doing What is the most cutting edge platform that is going to be so interesting to people that we can develop the most Enveloped pushing technology for it and that becomes the mandate for applications This is the dawn of horizontal software You can have a whole company or a whole division of a company in Microsoft's case that makes this tool And that tool will be so much better than anything that even the largest companies can have their own software developers, right? General electric isn't going to write a better spreadsheet than one two three right and then so I think that the technology Compliment to this sort of law is the killer app kind of have to counter position If one two three is the best spreadsheet out there for the current technology generation You just can't compete with them You need to wait for the next big leap forward in order to find a new competitive vector You need to be the killer app on the next platform And that's what Lotus one two three did with the spreadsheet on the IBM PC and IBM compatible PC And that's what Microsoft decides.

Hey, we got to do this in the graphical interface And who's about to come out with the very best instantiation of a graphical user interface Apple computer? Well, that would be Steve jobs. Yes, the next chapter of our Microsoft story is the Macintosh in 1984 So fun. All right listeners now is a great time to talk about one of our favorite companies legora the agent operating system for legal work Yes, most of you have dropped a contract into a chatbot by now But as a lawyer how far can that really take you?

It's never senior firms precedence It doesn't respect confidentiality and you can't check where it's answer came from So legora's founders approached this the way that great founders do early on the team moved into the office of a big law firm in Stockholm and learned Four months how the work actually gets done a couple of thousands of enterprise customers and a hundred thousand users later They still work that way they employ a hundred legal engineers on staff These are lawyers sitting inside of firms and legal departments to deploy legora onto live situations like the deal closing this week or the policy review do Friday The product has gotten very powerful in a short period of time a year ago The goal was a good answer from a chatbot with a legora agent you hand it the work and it comes back with a plan tasks like running diligence on a Data room or reviewing any vendor contracts get completed inside the tool you use every day like microsoftward and against your own precedence and playbooks Every finding is sourced the lawyer directs the work and signs off before the system executes any steps Every legal team can get access to the same AI models So the models themselves do not give you an edge what you can do with your own data people playbooks That's the whole game today over a hundred thousand legal professionals at more than 1,800 law firms and in-house legal teams in over 50 markets use legora And when legora goes head to head with its top competitor in a pilot it wins 70 percent of the time A demo is one thing But what matters most is an associate who reaches for it at two in the morning during a closing or whether a general counsel trusts What it says before the board meeting so if your legal team wants to check it out whether you're at a firm or in-house go to legora.com Slash acquired and be sure to tell them that Ben and David sent you Alright, so David why are we talking about the Mac because I think it's fair to say that the Mac made Microsoft Office and Microsoft Office made the Mac I don't think that is actually a controversial statement No, although it probably sounds crazy to many of you listening totally far and away The first thing to point out is the first version of Microsoft Excel was for the Mac It's especially crazy for all the finance people today who are like oh Mac excel isn't real excel excel has to happen on Windows No Excel was on the Mac that was it yes and the logic basically was Microsoft was really coming around to the idea that the next big thing in computing was the graphical user interface And the reason they were coming around to this was because they knew from Xerox park just as well as apple did and they were rapidly trying to figure out How to get all of that Xerox parkiness into their product line too That's the other half of this sort of untold Xerox park story And one of the first ways that they see to bring the graphical user interface to their products is launching excel for the Mac Because they basically see the way that we got destroyed with Lotus one two three We can't compete with Lotus on the iBm PC So we're gonna shelve multi-plan and kind of start over and excel is gonna come out in the graphical user interface So we're gonna try to be first and best on the GUI and one thing just underscore here excel is the world's first graphical spreadsheet program And that's why it wins and that's why it's so important like imagine trying to use excel in the command line interface That's what visit Calcouas. That's what even one two three was yeah useful better than nothing but graphical charts sells visual relationships This is so important and excel is where it all starts. Yep And of course apple loves this the Macintosh came out in 1984 and everybody remembers the great intro video and the hello script And i've watched that steve jobs keynote because of course i have and it's this magical moment in computing history where finally something that's insanely great comes out And it's like the beginning of steve jobs is unbelievable Presentation prowess. It's so fun to watch it and it's like of course a product that eventually people really loved but at first It doesn't have the killer app.

No, it's a product that was supposed to ship in 82 It didn't it shipped in 84 and so at the time what they were targeting for 82 was like a pretty great set of technologies by 84 Kind of an aging set of technologies so it debuts with 128k of memory Which basically isn't enough to create any interesting applications and so developers are kind of ignoring it as an interesting platform to develop on Within 12 months they kind of figure it out and come out with a better version that's 512k and that's kind of the version that people now Really think about that gets kind of rechristened as like that's the original Mac right and the original original is the Mac 128 or something like that Yes, exactly But in the meantime, Microsoft the applications group is working their ass off to make something really great for the Macintosh and they come up with excel And so what ends up happening is apples really trying to promote sales this machine And they kind of view excel and page maker as the killer apps as reasons that people should buy this thing because once you run through a lot of the demo apps and the stuff that apple Bill you're like, okay, what else is here? It's kind of crickets right writing hello in script is you know cool But kind of like a lot of VR stuff you're like, oh, that's a cool demo But like you can do that every day like no, right? No, and so I'm not sure this has ever been publicly disclosed before but apple spent just as much marketing excel as Microsoft did They matched Microsoft's marketing spend with their own campaign for it and split the bill That's amazing. So you've got a couple concurrent things going on in applications land You've got excel coming out for Mac to take advantage of the GUI meanwhile and this strategy is just all over the place I think that's an interesting thing to underscore about Microsoft in this era They're trying a ton of stuff because they're paranoid.

They don't want to miss the next wave meanwhile Also in the applications group charlesimony has written word. This is about a year before in 1983 Microsoft word comes out for doss Right and they ship it with a mouse. Yes. So this is like, okay We see the Xerox part stuff coming out in the Mac great excel be for that.

We want to develop word We're gonna do that for doss Oh, but I can imagine how useful the mouse is gonna be in a word processing environment So they actually ship a mouse tied to the application that's not a part of doss And so this is how early we were in figuring out kind of what the split between applications and platforms were at this point in history Microsoft thought maybe a mouse makes sense just for this one application even though it doesn't do anything else for the rest of the command line Right. Yeah, it was all being figured out. I think it is also really fair to say Microsoft was right there with apple in the Mac development phase Obviously they're working on excel working on other you know what would become the office suite applications, you know together for Mac Steve jobs shows bill gates the Mac project in 1981 Three years before it ships and Microsoft and apple sign an agreement to work together on applications for it in 1982 They work very deeply embedded on this. It's amazing.

Which is gonna make the lawsuit and what comes up in a minute here all the more sort of funny Yes, so the decision for the excel team is to focus on gooey the whole marketing message is excel on a Mac is better than lotus One two three on a PC. You're starting to see truly divergent cultures at Microsoft between the systems group Which is currently making doss and will soon make windows or soon partner with idm or soon do something else that we're getting into here in the next chapter of the story And the applications group which is also currently a bunch of disparate applications and teams targeting disparate platforms But is also about to become unified in their next chapter and within the applications group that next chapter is Microsoft office So in 1985 in January the bundle is released and it was originally called the business pack for Microsoft And it started on the Mac rolls off the tag totally does now They haven't acquired PowerPoint yet or forethought as we talked about eight years ago on acquired way back in history So there's no power points not part of the bundle and so what you've got here on the Mac and the first version of office is word Which they've developed in house file chart and multi-plan. This is this first notion of a suite So today we're very familiar with suite creative suite over idob Software is sold this way. This was kind of the first time And so what was actually happening is all of the bundling was happening in pricing in marketing and in manufacturing And so you sort of had a single box that they would ship with the different applications by 1988 or 89 It was word excel PowerPoint.

They're very different things But they're getting sort of bundled together in a way to be sold to customers But there's no product integration And so you don't have the ability to do this like very nice copy paste from an excel table and just paste that into word That whole idea is pretty far away So in this earliest Microsoft office It was just how can we bundle something for a cheaper price if you buy all three and make marketing easier for us to kind of have this unified message Yep And soon to come I'm gonna go to windows here in a second And one of the big killer app for productivity in particular for business productivity With a graphical user interface like windows and true multitasking You can get copy paste from like excel into powerpoint You know, lotus and the world back in the command line interface where you've got these programs running on top of DOS That is like a completely foreign concept. Right. None of those verbs exist exactly So we've now sort of set the stage of Microsoft doing a lot of stuff. They're hedging a lot of bets They're not totally sure which strategy is gonna win out.

They're not sure which platform is gonna win out They're not sure if they're more of a systems company or an application company But what they are unified on is we make great software for personal computers And I think anything that fell into that purview they were willing to explore They didn't really have hard boundaries between we'll do anything to make our operating systems great Or we'll do anything to advantage our applications or even we think we're an enterprise company We think we're a consumer company They shouldn't have well-formed opinions yet It was just we make software for personal computers And at this point in time the actual boundary between an operating system and an application is very fluid You've got a mouse that works for one program Totally, you know lotus would really go down a dead-end evolutionary path with notes You know later in its life in its final chapter where the application was going to be the operating system Right lotus notes was crazy It was a word processor an email service and it was a platform on which you could write other applications Yes, and it itself was an application. It's crazy. Not an operating system So yeah, it was all kind of dynamic Speaking of though, Microsoft here is in bed with Apple working on the Mac Bill and the company are big believers in the future of the graphical user interface Starting in 1983. They're like we got to do our own graphical operating system or at least user interface And this is the origins of the windows product and I actually announced it in November 1983 before the Mac ends up shipping Which their partner Apple is of course not happy about Yep, no just like development of the Mac was rocky Development of windows was super freakin rocky within Microsoft too This is around that same time when Paul Allen gets Hodgkin's disease and leaves the company So his presence as sort of great technical leader is very much missed But they bring in someone from Xerox to manage the development of windows that person ends up not working out He gets fired Steve bomber gets drafted to come in and be the dev manager for the final push to release windows 1.0 Which is hilarious You can find amazing YouTube videos from the launch and all joking about how like non-technical Steve coming in to save the day and dev manage windows to launch Which is so funny I don't think at this point in history The lines were clearly formed among the executives yet like Steve wasn't running the global sales force and Microsoft wasn't an enterprise company No, no, we're gonna get to that later.

Steve was one of the smart executives and they were a software company and someone had to manage getting the software out the door So windows 1.0 comes out. It's bad. It's bad November 1985 windows 1.0 is a very very different thing Than you imagine a graphical user interfaces today. You know of its windows It was tiled It was not overlapping windows that you can drag around and like have one over the other when you opened a program in windows 1.0 The system created a literal window of it on your screen and then it dynamically resized the windows as you open other applications And so nothing could ever be on top of each other.

So as you open more and more stuff that windows get smaller and smaller and smaller It's very bizarre. Yeah, the idea of windows overlapping on top of each other That was a sort of uniquely Mac thing and a thing that smart engineers at Apple figured out how to do that in a performant way that offers good user experience I would classify windows 1.0 as like a half step between command line and an actual graphical user interface Yes 100% and so I believe Microsoft and Apple actually did like a licensing agreement while they were working to Together during this time that said hey Microsoft can use a lot of the stuff that's being developed for Mac for Windows 1.0 Yes, that's right Apple does do a deal to license a lot of quote unquote their intellectual property Which of course came from Xerox to Microsoft Apple I think was under the impression that it was just for Windows 1.0 But the actual terms of the agreement are this and all future versions of Windows which comes back to haunt Apple later But yes, they totally get the license also by the time that this agreement actually happens I think Steve Jobs has been ousted and so it's skelly who does this agreement and people in Apple would look back on this for years And be like this was a huge error. The other important thing about Windows during this sort of awkward teenage phase is it's not an operating system It's just a graphical interface on top of DOS. Yes, the original name for Windows was interface manager Isn't it crazy in all of their early marketing?

They referred to it as Windows a graphical operating environment that runs on the Microsoft MS DOS operating system Yes, and actually it was not until Windows 95 that Windows was its own operating system It was in Windows 1 2 3 3.1 and Windows for work groups. It was a graphical operating environment Yep, but here's the question. Why is Microsoft doing Windows? Obviously here Microsoft knows they need to evolve DOS They need to figure something out for the graphical world and so David Are you telling me that Windows is the widely agreed-upon future of the company and that's just a straight line?

Well, obviously that's a set up there Here's the other thing that's happening in the company at this time and it's the bigger thing It's the next phase of the IBM relationship. Yeah windows the Mac all of this these are hedges for the company Microsoft and bill in particular were masters of hedging their bets in an uncertain technology future He was so great the company was so great at making sure that whichever way the Apple fell from the tree is just a bon put it to us in our interview Microsoft was gonna be positioned to catch it a lot of people including bill and Microsoft themselves believe that the way that Well was gonna fall from the tree here was IBM and OS 2 well I mean the IBM PC was such a big deal last time around you would think that whatever IBM wants to do next is a pretty good way to Ally yourself, right? So what's going on here? IBM obviously the PC was a huge success But losing dominance of the ecosystem to the clones This was bad and so IBM wants to find a way to evolve the PC ecosystem back to being more IBM proprietary And they're gonna make Microsoft come along for the ride here And the way that they're gonna do this is with the next generation of the PC ecosystem They are gonna make a whole new modern operating system I'm gonna get rid of DOS I'm gonna make this operating system in partnership with Microsoft and it's gonna be called fittingly OS 2 And they are gonna lock Microsoft up that they can't license it to anybody else OS 2 is gonna be proprietary to IBM hardware just like the Mac operating system is proprietary to Apple hardware bada bada bada and as Powerful as Microsoft's become here.

They're still the little brother to IBM and this is not great news for Microsoft on the other hand It's much better for them to be like on the inside here with IBM working in bed with them Then it would be to be on the outside looking in if IBM's vision comes true and they recapture control of the PC ecosystem Yeah, so bill and Microsoft in the company and Steve too as sort of the manager of the account with IBM Commit themselves to Microsoft is all in on this vision of the future of OS 2 and IBM is our horse in the race This is such a crazy part of the story to me Just talked about how Microsoft discovered this amazing business model and with everyone eating the license dollars from them They're taking over the world and they're becoming the standard development platform Why on earth if all that is true? Are they gonna develop some software that's gonna be locked to IBM computers? This is a recent realization attempt bomber has this great great great quote about it He says this IBM partnership at this time It was what we used to call riding the bear You just had to try to stay on the bears back and the bear would twist and turn and try to throw you off But we were gonna stay on the bear because the bear was the biggest the most important you just had to be with the bear Otherwise, it would be under the bear That was IBM at this point in time I mean really I think it was IBM essentially putting a gun to Microsoft's head and being like well You can be in bed with us on this future that we're gonna resentralize everything or you can be like everybody else And not be and you'll lose and so even though Microsoft's doing all these little hedges You know windows is tiny little team that's what I think it's 30 people or something Yes It's not the most prestigious place of the company the people in the applications division may as well be on another planet by this point from the systems division they're trying all kinds of crazy stuff and The company kind of motto at this point is the next big thing is OS 2 and IBM and we are the software vendor for that And certainly Bell and I think Steve too They needed to tow the party line politically of expressing them No OS 2 is the future and what we're doing with windows and with the Mac is you know Those are small things within the company. It's a super bizarre period in history But IBM had also kind of made a bit of a power play too with the later generations of 16-bit era a product they called the PC AT they use the Intel 286 chip instead of the Intel 386 chip and the 286 chip this was an intentional decision on IBM's part the 286 chip was good But it wasn't great.

Well, you say it was good, but not great Bill Gates said it was brain dead Yes, Bill Gates called it a brain dead chip. So I think you might be being charitable I mean I think it certainly was more powerful than the 80 86 88 but it was nowhere near what the 386 could do You know There's a bunch of technical aspects to this But the most important takeaway is that the 286 was not really powerful enough to do a graphical user interface or to power True multitasking in a way that the 386 and then later the 486 would be and so a big part of actually the compact story about how Compact and the clones leap ahead of IBM is they're not deterred from coming out with 386 machines Which are way more powerful can run windows can do all this stuff and so that's how they start to separate from IBM That's right That was like a bet the company move where Microsoft was like hey compact go make 386 stuff because we're gonna make really great 386 software and we need someone to be all in on that because IBM's not this is the thing Bill and Stephen company They're coming to tow the party line of expressing commitment to IBM But really they really know about compact go do the 3d6 right do windows Exactly they are the rebels versus the Empire here. So anyway IBM of course sees all this They made the decision not to go to 386 and to discourage it in the marketplace because they didn't want PCs to start creeping into the core Enterprise, you know mainframe IBM workloads their core business if that was gonna happen They wanted it to be IBM proprietary closed system So I think that was a big part of the impetus for this OS 2 initiative I see this is the Empire strikes back here They're basically trying to co-op the PC movement back into IBM proprietary land. Yes exactly So when OS 2 finally does come out in December 87 Predictably as you can imagine here.

It's not very good. The market does not like it Thank God for Microsoft and I think that again This probably was bill strategy along that they hedged with windows with the Mac That's clearly the future like the market is not gonna accept OS 2 in a re centralization on IBM Microsoft is crushing it on the revenue side even though OS 2 is a failure I mean DOS and the applications were both great businesses by 87. Yes, so fiscal 87 Microsoft is 350 million in revenue fiscal 88 They do 600 million in revenue basically none of this is from OS 2 and the IBM world And then towards the end of 1988 is when the wind starts really blowing away from IBM here in June of 1988 Microsoft hires Mike Naples who was IBM's director of software strategy away from IBM to come head Microsoft's application software and What is Microsoft's application software strategy right now? It's the graphical user interface.

It's everything that IBM isn't The writing is starting to be on the wall here though Divorce is coming between IBM and Microsoft and then finally year and a half later in 1990 Windows 3.0 comes out and this is when they get it right This is when there's enough installed base of 386 and 486 machines out there in the open PC ecosystem That you can have a really good true multitasking good UI Graphical user interface running on top of DOS so Windows 1.0 and Windows 2.0 only ever achieved 5% penetration of the DOS install base Windows 3.0 doubles that in the first six months PC computing magazine writes about Windows 3.0 May 22nd 1990 Will mark the first day of the second era of IBM compatible PCs Microsoft released Windows 3.0 And on that day the IBM compatible PC a machine hobbled by an outmodded character based operating system and 70 style programs was Transformed into a computer that could soar in a decade of multitasking graphical operating environments aka everything OS 2 is not Windows 3.0 gets right what its predecessors got wrong It drives adequate performance it accommodates existing DOS applications and it makes you believe that it belongs on a PC as awesome That's what the press thought Ben. I know you talked to a really important person in the Windows ecosystem in Microsoft Internally at this time what you have for us. Yes We have to thank Brad Silverberg for helping us with this section Brad led the Windows 3.1 team He came in right after the 3.0 release I would eventually go on to lead the Windows 95 effort as the VP of the personal systems division So Brad comes in Windows 3.0 is just shipped and the first thing that is super super obvious is as Brad sort of observed everything going on with OS 2 land and everything going on with the core Microsoft culture It was a complete clash. It was impossible for the pace of Microsoft.

This is like a super young group I mean all in their 20s some people in their 30s But mostly 20s who just want to push the cutting edge ship stuff It was almost like think about Google in the early 2000s Just hire all the smartest people you can and set them loose and have creativity and bump up against the edge of what's possible both in terms of Pushing the hardware, but also pushing even like laws as we would later see Let's just do what users love and see what happens. Let's just do what technology enables us to do and see what happens It's like the opposite of IBM's culture at this point So there's this huge cultural rift between what IBM sort of needs and who Microsoft is at this point And so what ended up happening with 3.0. It was unexpectedly loved Microsoft was not really prepared for how much people were gonna love the GUI and with 3.1 It got really good There was a small off-site of the executives and Bill and Steve basically decided that it was time to bet on Windows That was the new strategy Windows had always been planned B and now suddenly it was plan A and when I say plan B I don't mean like thought they had a prayer of being plan A I mean it was 65 people that shipped Windows 3.1. These were like the misfits.

It was not prestigious I mean the prestigious thing to work on at Microsoft was OS 2 and eventually Windows NT But the Windows team in the Windows 3 era is almost like the Mac team over at Apple They were sort of flying the rebel flag they valued creativity over bureaucracy even if it meant they weren't working on the prestigious thing And so suddenly there's this huge strategic opportunity to become the standard Independent of IBM if the platform is good enough and then boom the early reception to Windows is so good It gives this glimmer of that may seem really ambitious But that opportunity is actually ours if we want to go seize it So everyone took a big gulp and said the gooey's the next big thing users love this Let's take the ragtag group and promote them. This was I think the moment when Microsoft started to believe in themselves like Like you look at the facts as we told the story is like oh yeah Like build it this great business deal with IBM and anticipated the rise the clones in the first PC and one And then like Microsoft now was the thing and IBM was like the old thing But it wasn't until this when like in this whole OS 2 thing I think you can see like they sort of felt like they were still a little brother They had to go along with what IBM dictated and now they're like whoa Why do we again? Yeah, we're in control and the press is making a big deal out of Bill Gates, you know boy wonder He's the youngest ever billionaire at age 31 and by the way when Bill Gates became a billionaire There were not lots of billionaires. There were like 50 billionaires all this lore around the company It's like they can do no wrong, but in the side the company I think they're like we don't know the future of technology any wave could break against us at any moment And this is all tenuous I think that chasm kept getting wider and wider and wider of internally feeling like they're screwed and externally It's seeming like this is the next great thing totally I've got some fun stats on like money and revenue around all this so in fiscal 1990 the year that Windows 3.0 shipped Microsoft does 1.2 billion dollars in revenue making them the first software company ever to pass a billion dollars in revenue Fiscal 91 they do 1.8 billion fiscal 92.

They finally win the Apple copyright lawsuit around the GUI Which by the way the way that they won that a judge basically looked at the paper and said Apple you totally said in all the future versions of Windows They can use your UI paradigms And so for most of accounts They're covered and for these other things that you're trying to ask them about those are not actually defensible It's just widely accepted that these are UI paradigms now and you can't enforce any ownership over those So basically got like thrown out Apple tried to appeal all the way up to the Supreme Court who said no That's right. I like we've been saying to you like they both stole from Xerox Yes, fiscal 92 though. This is when Microsoft just blows the doors off They do 2.8 billion dollars in revenue in fiscal 92 up from 1.8 the year before and that year 1992 in October is when Gates finally passes John Cluji Back to the LVMH episode Gates passes John Cluji of Metro Media fame media mogul to become the wealthiest person in America And so everything you're talking about all the press comes around and then January 93 the crowning moment It happens Microsoft passes IBM in market cap and it's like they have inherited the earth. They have inherited computing Yeah, supposedly I don't know if this is 100% shoot.

This is written in one of the books I read I read this the folks involved will have to confirm or deny Supposedly the next month after Microsoft passes IBM in market cap So we're now in February 1993 the IBM board is in disarray the Empire is going down They fired the CEO Tom Murphy of capital cities fame who is on the IBM board supposedly He comes out to Redmond to sit down with Bill and personally ask him to come and be the next CEO This is my right. I don't know if this actually happened, but this is what I read is that in hard drive? That's a hard drive. Yeah, wow listeners There's some unauthorized biographies that we try to corroborate as many of the facts as we can but the ones where David saying He doesn't know a source.

It's sort of these unauthorized ones Yes, Gates obviously declines that but whether or not that actually happened spiritually you could believe that happened Bill and Microsoft Know the new emperor here. I mean this carries through to this day We're gonna tell him the next episode here They had trust in the fallen on but not really Microsoft still the most valuable company in the world They inherited the throne from IBM happens right here nuts and so suddenly Microsoft feels the full weight of everything that you have to do to build a platform and be a steward of an ecosystem So suddenly this huge effort began to try and make developers successful That's how windows would be successful if it was a great platform for application developers to thrive on so Cameron Miravol led the developer relations group basically to try and figure out what do people want out of a platform and how do we provide the APIs for them and the support and everything in order to do that all the documentation all the help everything and at the same time Microsoft basically knew establishing a platform is brutal and requires bootstrapping a multi-sided network of developers users and PC manufacturers And so three-dot-one had users excited, but it was still very early They could have lost that throne developers were not really yet targeting windows Microsoft sort of had to show we make great applications for windows too So that applications group really had to start doing windows three-ot-one right because developers were targeting DOS at this point They were probably preparing for OS 2 some of them were targeting the Mac like Microsoft itself, but nobody was targeting windows Exactly So you've got this big developer relations group effort that spins up meanwhile There's a huge push with OEMs to get them to install windows at this point They were still installing DOS or some people were actually installing nothing and requiring users to put operating systems on so there's a conceited push to get the OEMs to install three-dot-one Well, yeah, and there's some people installing nothing we should mention here around this same time this arrow They move a lot of their OEM deals to a per processor licensing fee arrangement Which gets them in a lot of hot water with antitrust a few years later Okay, so this happened from 1988 to 1994 David explain the per processor licensing agreement Well, here's how Microsoft I think would position it to their OEM partners You could pay us, you know a license fee for every machine you ship with DOS installed on it or DOS and Windows And you know you can offer other OSes too But rather than that arrangement we'll give you a cheaper per unit deal because you're gonna ship DOS on everything DOS is the standard and we want windows to be the standard and windows is gonna be the standard We'll make it more economically attractive to you give you a lower per unit rate If we just kind of change the terms and say instead of every unit you ship with DOS or with Windows every machine you ship period Every microprocessor based machine that you ship no matter what operating systems installed on us Just pay us a per processor rate So if you do that you'll be paying us for every machine whether you ship DOS or Windows on it or not But you're gonna ship DOS and Windows anyway, so you may as well take the cheaper range I'll take the cheaper option right and obviously what effect does this have on competition? Well, there's now a very very very strong incentive never to ship any other operating system Yeah, basically you're gonna pay for two different operating systems even though Here all they putting one on if you ever load a different operating system on so yes It very strongly incentivizes you to never ever ever ship any other operating systems on your computers as a company now This is of course the way that regulators would look at it in 1994 And that would get Microsoft in some hot water and they had to agree to stop doing this practice The way Microsoft would look at it is we're just helping our customers Do you really think that these companies want to keep a whole separate ledger of what machines they shipped DOS on or Windows on versus what machines? They shipped period wouldn't it just be easier if once a month or once a quarter They could just report to us their total shipments like they have to report to their investors anyway And then we'll just send them an invoice for all their machines totally and well antitrust in the government would seize on to this as like a smoking And like I think the reality is this was kind of irrelevant in terms of the forces that made DOS and Windows the winners They were already the winners by the time they started doing this so right if this had happened earlier You could see how this would be more of a compelling way to get market share But by the time they started doing it they were already sort of running away with the market Yes, no speaking of this sort of new customer friendly buyer friendly business practice from Microsoft I think is how they thought about it totally They wanted to make the stuff that people wanted to use the most and that's how they would win their goal was make the very best Products the best software we possibly can in the ways that people want to use and buy software and then we'll make a bunch Yeah, as this changing of the guard is happening from IBM to Microsoft I think part of this new self-confidence from Microsoft is wait a minute Why can't we go win the enterprise to and take that from IBM?

We don't have to get in bed with them to sell to the enterprise We should sell to the enterprise and the thing they were sort of realizing is well We have made software that people like to use so they're using it in businesses They always kind of wanted that to be the goal But now it's happening people are doing their work in Excel people are bringing PCs to the office Maybe businesses are buying their PCs But people actually buying them themselves and using them in the office And so it just made them that much more efficient And so Microsoft really had to figure out how to sell to businesses But we actually have no idea how to do that and it sounds crazy today The Microsoft you know today as late as the mid 90s really had no idea how to sell or build software for businesses Totally and then this is the first half of the original Microsoft business statement coming to a PC on every desk and in every home Desk means work means enterprise. Yeah, and this era everybody we talked to gives 100% the credit to Steve bomber Steve took it on his shoulders at this point in time when Microsoft is passing IBM to say I am gonna build and we are gonna learn as a company how to sell to enterprises and Then like you're saying it's impossible to imagine now Microsoft not like this But there's so much that they needed to do that they didn't have in part because prior to this personal computers were not used by enterprises It was just not enterprise tool So now that it was happening Microsoft had to figure out how to be the ones that would benefit from it Yeah And that meant selling to the C suite at global fortune 500 companies Most of whom did not use computers correct and certainly didn't want to buy operating systems one at a time Right and to the extent members of the C suite like CIOs, you know or the proto IT organizations used computers or where the computing centers in the company They hated the PC It made their life hard This was like when employees would bring a PC to work and plop it down on their desk and start mucking around with stuff It made things hard right and there really isn't yet a Business server that couples nicely with the PC on the desk And so you have this weird thing where there's a mainframe that is where the companies like real enterprise applications run But people are bringing PCs and those PCs don't actually communicate well with anything else yet They just are there for the employee to do their own work on a spreadsheet or something print it out because finally three Not one had printer drivers and then deliver that but it wasn't like a system that operated with other systems in your enterprise Right. There's no email. So this really was like a business transformation task for the global fortune 500 Right.

It wasn't like hey Let's sell something to businesses that they want to buy it's hey Let's convince businesses that PCs are a good idea for their workforce to adopt right this was partnering with the consulting firms This was building a direct sales force within Microsoft This is building an indirect sales force within Microsoft to partner with distribution partners with channel partners with independent software vendors This is building a customer service organization This is building the executive briefing center on the Microsoft campus and bringing CEOs and other C-suite folks there to Microsoft It's building solutions for them. It's becoming a partner. It's everything that Steve is frankly just born to do and all of this stuff Is pretty out of scope for this episode including all the software systems You would need to build for the enterprise like Windows NT server and exchange and SQL server and active directory Like the classic mid 2000s Microsoft stuff that they got known for but that is what this would all evolve into and it really just started with Everyone kind of looking at Steve and saying can you figure this out? We've all to date basically just been either running dev teams or running marketing or running product groups and been selling through retail or Distributors in the application side or mostly through OEMs on the systems and operating system side But can you go figure out how to sell everything we make in a completely different way to a completely different buyer profile and keep us Posted on how that needs to change all the products we make in order to do that.

That's a pretty crazy change Yeah, and how it actually goes down and we sort of heard this from Stephen You heard it from other people is so fitting so by the end of 1990 the Microsoft IBM divorce is official IBM takes full control of OS 2 development Back from Microsoft Microsoft ceases involvement the breakup is official This now gives Microsoft and Steve hunting license in the enterprise to go compete against IBM But they have a secret weapon that is gonna enable them to come take the enterprise from IBM and Then tell us what it is. Well, it's painfully obvious It's Microsoft office and it's the fact that the whole workforce is already using Microsoft office And everyone loves to talk about product-led growth and how it's this new thing in the late 2010s and how Slack and Atlassian and Trello everyone figured out PLG and this bottoms up Workforce adopted way rather than selling to procurement or IT or the central administrator and it's just not new No, this has always been the case and Microsoft invented it All the employees wanted to use Excel and Word and they just had to figure they were doing it anyway And at some point Microsoft needed to figure out how to take advantage of selling it centrally Then how you do business with other businesses rather than selling a zillion retail copies of people who are using it kind of illegally for their work There's so many things that are beautiful about this one It's the legacy of this bet on the Mac bet on Excel and you know that on Windows You know shortly thereafter that enables Microsoft to go into the enterprise because yeah, even though they've just broken up with IBM I know it's too isn't going anywhere It's not like Steve can just go knock on the door of some banking CEO or you know C suite and be like I Microsoft come talk to me About how you use Microsoft products in your organization, but rather it's like hey thousands of people in your organization are already using Excel Right. Let's have a conversation about how we can make that work better for your organization and what else Microsoft can do for you? Yeah, absolutely And next episode is gonna be all about the enormous success of becoming an enterprise company and the enterprise agreement and cloud And everything that sort of came after that But we have two chapters left in this episode and they happen concurrently within the systems group by two very very different teams And that is Windows 95 and Windows NT so David Let's start with NT and our little cherry on top can be a 95 to close us out How did windows NT heaven perfect and it's intertwined with the beginning of all this enterprise of vacation of Microsoft.

Okay, so Windows NT Remember IBM's whole goal with OS two was that they saw the trajectory of the PC was gonna eat into traditional Mainframe type applications in the enterprise and they wanted to re-centralize and own the PC Enterprise of vacation of workloads NT is after the divorce Microsoft being like screw that We're gonna do the same thing and eat lunch and so the initial work kind of starts out of the work They had been doing on OS two with IBM But then in October 1988 as they're heading towards divorce Microsoft hires Dave Cutler away from deck and Dave is an absolute just beast and legend like he's still writing code at Microsoft today Which is amazing. It's not crazy. It's like in his 80s amazing Dave at deck wrote The whole operating system that deck ran on backs and so poaching him away to come work at Microsoft Both like he's the guy that's gonna build an enterprise ready take share away from the way traditional enterprise computing is done Onto the PC, you know, he's got the shops to do this. He's also got the credibility to do this He's written a widely deployed enterprise operating system Yes, him coming to Microsoft him leading and building this effort gives Steven the sales force so much legitimacy When they're going in and talking to the C suites and the CIOs and the IT departments and enterprises Even though they don't yet have an enterprise product to sell they've got Dawson early windows Which is essentially consumer targeted, but now they've got these guy Dave Yes, now they've got Dave.

Hey, and we should say Dave. This is really the first time they brought in someone who had real industry experience I mean in 88 Microsoft was 13 years old so Bill Gates would have been 33 everyone is in there like late 20s and early 30s And Dave's like mid 40s, you know, he's like I've seen a few things I think it was Dave and also Mike Maples coming from IBM to Mike obviously wasn't a technical leader But you know on the business and strategy side too. Yeah, so NT we'll talk a lot more about it on the next episode But spoiler alert it is the vision of what IBM wanted OS to be but it's Microsoft's version of it right it enables all of your Desktop computers that the company to join a network together in a compliant way it enables an internal server that everything communicates with It enables a directory of all the devices on the network and all the people in your organization Yeah, soon with the internet coming into a label servers that face externally from your company the punchline here is that NT becomes the seeds of windows server the business line which become the seeds of Azure today So the other important takeaway on NT is it was gonna take a long time to build It was gonna take a long time to test it was gonna take a long time to sell and deploy And it was gonna have really strict requirements for what it could work on because it's a power-hungry operating system built for enterprise IT administrators and so that is not your short-term product strategy that is a long-term bet that a team is gonna work on concurrently While you're figuring out what to do after windows 3.1 So in 1991 Bill Gates sums this up in a memo where he says our strategy is Windows one evolving architecture a couple of implementations and an immense number of great applications from Microsoft and others and every word in that sentence does a bunch of heavy lifting So you got one architecture, okay I think what that basically ends up meaning a few years later is one application programming interface API that developers can target So that when they want to write a Windows app it works on both NT and whatever the evolution of 3.1 is okay So that's one architecture, but it says one evolving architecture So that buys Microsoft a little bit more fluidity in the one architecture that's being targeted then you hear a couple of implementations So this basically says even though developers are targeting what became the Win32 API with one way that we write applications There's two different implementations And so for many years they would display very differently on NT systems versus spoiler alert Windows 95 the successor to Windows 3.1 Oh by Windows 95 you mean Windows 4 that was supposed to ship in 1983 yes I do but it's so sexy or say Windows 95 and name it after the year that actually ships versus yes But yes an immense number of great applications from Microsoft and others that sort of sheds light on the DRG the developer relations group strategy We got to go out be massive evangelists and everyone in the systems group is looking over at the apps group going Did you see that Bill Gates just said our strategy is Windows? We're now the Windows company and that includes great applications from Microsoft and others and so what does that mean applications?

We'd like let's go first invest on Windows get to it I just think that sentence kind of says it all for what we're looking at 1991 through call it 2000 or so yep And you know we just spend a bunch of time talking about the enterprise evocation and all that amazing enterprise stuff that the seeds Get sewn from Microsoft at this point in time. This area is also the heyday of the consumer PC, right? 93 Jensen starts in video graphics cards are becoming a thing PC gaming is becoming an industry You know that goes all the way back to even like a minesweeper was being a seminal moment in terms of the consumerization these Devices these personal computers becoming companions to people's lives like the phone is today I mean you've got CD ROM technology multimedia and carda the heyday of the consumer PC is here in this era Totally. I mean even before Windows 95 shipped they have 75 million Windows users This is even before you get plug-and-play or multi-media or networking like this is on Windows 3.1.

Yeah crazy Okay, so we've been leading up to it. We've been building hype Windows 95 or should I say Chicago? So the Chicago name for those of you out there who are like paying attention, you know And this was under development and you're all excited about what Windows 95 would become and I you know It's probably one percent of our audience or something who knows the Chicago code name They wanted to create an OS for the every man one that was easy to get to a nice quality of life when you're there It was affordable Chicago is the perfect name in every way and it is also kind of a contrast to what was going on in a different part of Microsoft Where there was the code name of Cairo for a very ambitious next-generation operating system now mind you Nt had already come out in 1993 So Cairo is sort of this general bucket of maybe it's post-NT Maybe it's part of NT But this is like a really sophisticated crazy set of technologies that we're gonna eventually bake into an operating system It doesn't really have a release date No one really believes in any of the release dates that are proposed But the Windows 95 team the Windows 4 team the Chicago team loved contrasting this idea of like a far-flung land That's really ambitious and who knows what it'll actually be like with this Chicago something we know quite well You get on I-90 from Seattle you drive for three days and you're there and that is sort of like the goal That's the spiritual thing about Windows 95 pizza the bears the Cubs a hundred percent We should say Cairo never shipped so there's a lesson in that might as well been called a hose or Longhorn Okay, all right, we get ahead of ourselves. We are getting ahead of ourselves So okay Windows 95 let's start with the launch event itself.

It was a huge ridiculous insane day in Redmond, Washington They set up tents all over Microsoft's campus. They flew in journalists beta testers There was a movement around Windows 95 in a way that you would not believe it was an operating system launch and J Leno launched it. It wasn't like J Leno did some stand up It was like J Leno for 90 minutes in a tightly scripted environment co-hosted with Bill Gates all of the fanfare infestivities There is no other word to describe the Windows 95 Launch besides glorious. I am so glad that this stuff is preserved on the Internet and on YouTube and that we could experience it ourselves over the past month It might be like the peak moment of pure joy to celebrate technology before a lot of the sort of skepticism came in and the tech haters The DOJ you know, yeah, totally.

It was unabashed Celebration of software is probably the best way to put it Microsoft license start me up famously from the Rolling Stones It's amazing a software company licensed start me up by the Rolling Stones as the official theme song of an operating system Yes, that idea that this would be happening certainly back in 1975 when they were moving to Albuquerque But even just a couple years earlier, this is breaking new ground totally the other thing that's happening in 1995 is the Internet hype is starting to build But we will table that for next episode right at this point in history only 14% of Americans had internet access It was so very early So there was no guarantee that any story posted online would actually reach the masses and so Microsoft had really relied on Traditional broadcast coverage of this event and brought in all these journalists and all these print magazines and all these newspapers to kind of build the hype I watched the whole keynote yesterday and at the end they ripped down the sort of back of the tent behind the stage And there's the entire development team in the red yellow green and blue squares of the windows logo So sitting outside on the big sports field on Redmond's campus and there's only 360 people that built Windows 95 So it's still kind of a small team, but they're all there They're fired up. They're part of the moment. Okay, so that's the launch event in Redmond at least around the world People are lined up around the block to buy an operating system There's a lot of news coverage of that. It was basically the iPhone launch of its day Yes, they lit up the CN tower the tower of London the state August 24th, 1995 They basically treated an operating system launch the way that you would launch like a movie or a new Madonna album It was a marketing case study so much so that the folks from Coca-Cola actually reached out to Microsoft to ask them How do you do marketing this well in the new age?

Coca-Cola to the Bill Gates quote with the word Buffett talk you know, yes Yes, this is a company that freakin invented Santa Claus to sell us all sugar water and they're calling Microsoft asking How do you market in this new era? It was that successful? They launched concurrently worldwide in eight languages So this thread that Microsoft had of early international continued all the way through to this moment They invested heavily in doing all of the localization then help stuff So the whole world really could adopt something all that one time It really was the perfect product at the right time the internet games all that and there's so much about Windows 95 to that I'm sure you're gonna get into but like the start menu It was so perfect because this was the peak of the PC going fully mainstream Nobody had ever treated software like this before. Yes, that's the takeaway They thought about the software in a completely different way And yes the start menu while it got cluttered and complicated and messed up over time The idea of a button that you click to start using your computer was very appealing to people totally the Mac obviously shared a lot of these elements But it was it's so much a smaller scale.

Oh, yeah I mean the Mac just never had any real PC penetration from the IBM PC forward it never had big market share Yeah, this was like your grandmother coming into the digital world and that is how they try to market it They market it as people on job sites using Windows they marketed as people doing crafts And there's like someone who's modeling something for an F1 car It's just fun watching all these old videos and seeing all the different personas computer companies Love F1 cars for demos totally it's the ultimate aspirational demo. Yeah now I must say this all pains me deeply as someone who never owned a PC grew up using a Mac loved every bit of my Mac was even an Apologist in the sort of OS 9 era of this isn't very good But I'm still gonna say it's good and you know I was on the OS 10 public beta I only clicked a start menu when I was like fixing a teacher's computer at school even though the takeaway here is everyone thought This was a great operating system and it won the market. I always looked at it like well It's not a Mac well that's how Mac users always look at it Yes, the way that Apple products became mainstream always felt odd to me as someone who was using that when they weren't but it's been interesting Gaining a new appreciation for Microsoft through studying their history that I absolutely did not have as a user during this era I'm having this discussion now makes me think what Microsoft in this area Windows 95 like they did what Apple tried to do in bringing Scully and Scully came from Pepsi obviously that didn't work But Microsoft they're the ones who did they're the ones who mass-marketified the computing vision and it was the wrong strategy for Apple And it was the right strategy for Microsoft. I mean Apple has always at least in my opinion created a better computing experience by being Completely integrated.

I mean it's Alan cake What anyone who cares about making great software needs to build their own hardware and the complete integrated package that Apple offers I have always found to be the best computing experience and it doesn't scale or it didn't in that era for sure in that era Yeah, the way to scale is make the software that is going to get distributed on the most PCs And then that is the most interesting to software developers And it is the most interesting to consumers who want the software and I see buyers who want to buy the standard thing Apple's strategy versus Microsoft strategy in this era Apple was always going to be a bit player rather than the sort of scale winner and the trade-off is Lots of PCs had blue screens of death Apple never had blue screens of death Like what if blue screens come from its driver problems? It's that the printer is not speaking the same language as your particular Computer and what the operating system knows about your computer and are the device drivers right for your particular version of whatever's on your motherboard Like Apple never had those issues But they also had very few units shipped and you know much more expensive product sidebar that Alan cake quote about if you really care About software you do your own hardware makes so much more sense to me now having done this episode because he's coming from having made The Alto and the graphical interviews are faced there the only way that he could have made the GUI on the Alto was basically building a mini computer Yeah, it's not crazy makes so much more sense now Yeah, so a little bit more on Windows 95 before we finish the story here It is remarkable to reflect that it took what five six years to go from Windows is plan B to Microsoft being extremely right that That was the franchise like that was the bet to bet the entire company on and as Brad Silverberg put it this way to me He said Windows 95 cemented Windows as the franchise product for Microsoft Which interestingly it was not yet and David this crazy it would remain the franchise product for the next 20 years perhaps five or ten years too long But we'll save that story. Yeah, I just put some numbers on this So August 24th 1995 is the launch event the glorious day Windows 95 comes out sells a million copies in the first week Seven million copies in the first month fiscal 95 So this is the 12 months ending in June before Windows 95 comes out Microsoft did five point nine billion dollars in revenue fiscal 96 they did eight point seven fiscal 97 when Windows 95 is really going to do twelve billion dollars in revenue First software company to pass ten billion dollars in revenue already the most valuable company in the world I mean they are a monster. There is no other way to put it.

Yeah crazy from a product perspective There was just so much that really got smoothed here This was a user experience where they finally had time to think what actually do users want to do with an operating system? What feature should be part of the OS and what should we delegate to applications? What are modern networking technologies that we should bring in? I don't want to force out too much But how should the internet be in a modern operating system?

That was a huge thing the multimedia the video stuff an operating system really showed up and said We thought about this experience for you. You're looking for where to start You're looking for cool stuff to do and you're looking for it to not break on you We now finally have a complete story around all of that. Yep So a couple of interesting technical notes It was basically all new technology if you try to look this up It will tell you windows 95 was DOS based it still used DOS in fallback situations for older DOS applications or drivers But for most of the time it was no longer true that Windows was just an operating environment on top of the DOS operating system Windows had now become a true 32-bit operating system of its own Windows did all the heavy lifting it had its own file system It accomplished a lot of the sort of user experience magic and speed that it was praised for by rewriting a lot of this from scratch So this was kind of the beginning of Windows as its own OS and you can see that actually change in the marketing messages that change from operating environment to operating system All right listeners now is a great time to talk about one of our favorite companies Statsick yes There is a reason why the best product teams rely on statsick whether they are iterating on their core product features or shipping AI powered Experiences at scale yep in a crazy speed of today's AI world shipping fast is just table stakes now It's basically trivial to build and deploy your app constantly the real advantage is how quickly you learn what changes actually created value for customers And how fast you can use that signal to guide what you ship next This is where statsick comes in it brings experimentation feature flags and product analytics into one unified system So teams can ship safely test rigorously and directly link what they changed to how users actually behave So if you want to make learning your competitive advantage whether you're building new AI experiences or just evolving your existing core product Go to statsick.com slash acquired to get started. So David that brings us to the end of our chapter one We've got plenty of analysis here to do but my god what a first 20 years for the company I mean we knew this was gonna happen right?

This is why we waited 10 years into acquired's life to cover Microsoft. It's the most important company in the world still today Yeah, it was so fun researching going back and doing all this because either so many different perspectives and so much has been written But I don't know if we've gotten it right here But I feel like every other major attempted story telling it this has not gotten it right and so getting to go talk to all the people who were Part of this well, yeah living in Seattle is quite helpful. Yeah, like we really got that sense of like There's still a story to be told here and it's never been more relevant again Then you know today all that say I'm glad we waited 10 years right and there's all this stuff We missed like I didn't mention Microsoft research Microsoft research was a lot of people and a lot of money right Microsoft tried to buy into it too along the way That got canned actually the start of research is interesting I'll say this real quick in 91 Nathan your vial started Microsoft research and the logic is fascinating basically Everything Microsoft had done until that point was taking things from mainframes and many computers and adapting those tasks Those jobs to be done for personal computers and at some point they kind of looked around and said alright Well, we did it all the personal and business applications can now be run on personal computers So we have to come up with uses for future technologies in order to continue to drive the ecosystem forward There's no more low-hanging fruit I thought that was an interesting thesis of why to spin up a research division at that point in history Yes, let's move into analysis. Okay, great So playbook the big interesting one that I want to start with it actually involves a chapter from the story that we just sort of glossed over is Capital efficiency allows founders to control their own destinies in a way that you just don't get when you're selling off huge chunks of the company In order to accomplish your mission.

Oh, yes. I love this. Let's just talk through the cap table over time and how the company went public So we talked about the partnership being 64 percent gates 36% Paul Allen 1980 Steve Balbarr comes in and gets eight and a half eight point seven five something like that percent of the company So dilutes gates and Allen down then in 1981 just a year later They take the VC investment for five percent of the company from TVI this also I'm guessing around five percent turn of reverse engineer some of the numbers They also created an option pool where they were then creating opportunity for basically rewarding management Which is how there were 10,000 millionaires created in the Seattle area from Microsoft right? That's the amazing thing the option pool doesn't get created until he only in Microsoft's life all those Microsoft millionaires Only came from that you know whatever size that was five percent of the company or whatever right?

Yes at IPO so even with all this dilution So you've got the Bulmer dilution the VC a dilution and the option poll dilution bill gates still owned 49% of the company I mean that's pretty unprecedented and he wasn't the only one with a big chunk Paul Allen owned 28% of the company Steve had seven point five percent of the company this company was basically owned by the three more or less co-founders a Little tiny option pool and then a VC who ended up with six point one percent I think Dave got some more shares from being on the board You just don't see companies that look like this anymore. Yep. This is Bill's company This is their company in a way that no other company is these days no venture backed company going through the modern era is like that by the time You get to be public you may still be the largest shareholder as a founder CEO But it's not your company far from it. Yeah, absolutely I'm trying to figure out why they were able to be so capital efficient is it just that software was such an unbelievably good business model compared to Everything else that existed like they didn't need a lot of working capital Everything was high margin they could grill really fast or it was just an era before much competition And so they didn't need to out raise their competitors once they got a little bit ahead There was really no way for anybody else to close the gap assuming that they executed well I totally think it's the latter and I think it's that the Minimum fixed cost threshold to be that you know in bills where it's slightly better than your competitors and get the positive spiral going Was low enough that it could be paid for just in bill and Paul's time and effort And it was that unique moment at the beginning of the software industry where that was true You know and that would never be true again That's so so so insane and there was no one else really with the knowledge either Even if someone else came in with a big one million dollar check and gave it to a competitor in 75 Like how many people could really write these language interpreters You couldn't buy the experience having written emulation software for microprocessors that Paul had they had an obsession and an obscure skill That turned out to be one of the most valuable in the world in an area where there was a Freak-law of nature in play with Moore's law that was so unintuitive that you had to think from real first principles to understand the impacts of it Yeah, well, I think there are two freak laws of natures one There was more is law that they were benefiting from but then two there was the zero marginal cost of software Yeah, that's true It's just like complete perfect storm that enabled them to build a highly defensible business without really any investment ever This is the largest company in the world the most valuable company in the world that was entirely bootstrapped Yes, even though they raised money not a single dollar of investment actually happened at this company No, I mean 86 when they actually did go public they raised $45 million and they never spent that because they generated much more freak cash flow than that that year Right, it was just a means to an end of getting public and they needed to for the reason that they had been granting so many Stock options from that little option pool to employees that they were gonna blow the SEC's shareholder cap by they projected 1987 so they wanted to go public on their own terms in 86 not when they sort of had to buy SEC rules also Microsoft needed to be a public company if you're gonna be an important company in the world at this scale if you're gonna first ride the bear with IBM But then inherit the earth from IBM.

You gotta be a public company You can't be a private partnership You're not gonna go have conversations with C suites and CEOs of Fortune 500 companies if you are a private partnership Maybe in this era especially maybe I don't know I'd agree with you if you had a bunch of short-term capital interests that owned your company But if it's all found or owned there are great large private companies in the world Yeah, but your coke industries is a trusted company by a whole bunch of their customers Cargill is even bigger than that There's a bunch of European industrial and shipping companies Rolex There are privately held big important companies in the world. Oh, yeah for sure, but none of those companies are Microsoft That's true. That's very fair and especially getting to the stage that they eventually got to being a trusted partner to governments around the free world That requires being a public company. Yeah, it's funny This was a moment in time and a set of factors where this worked I mean, I guess the lesson is find an industry in its infancy and be capital efficient and run the table And that has like unique economic conditions that have never existed before to create these magical businesses You could never fathom before this new technology thing existed.

It's an impossible thing to wish for like it may never happen again We may never get another Google either. That's what I was gonna say it did happen again It happened with Google, but how many things can you collapse to zero? I think that's the question with Microsoft they were able to collapse their marginal cost to zero But they still have distribution costs and then Google collapse distribution cost to zero with the internet So what's a big cost that a company has now like maybe AI will collapse, you know You no longer need 50,000 employees. You can have five employees Maybe it can collapse that to zero But you need something of that scale which is like where does a company spend most of its money that suddenly it can spend no money on?

Right, I suppose actually it is on the human capital You just look at big successful companies and look at what they spend money on and those are the candidates Good fun. So unlikely we'll ever find another Microsoft opportunity. Yep. Other fun things on the IPO Do you know who IPO'd the day before Microsoft did?

Oh, no oracle. Ah-ha And oracle had a nice pop which actually helped Microsoft price a little bit higher in their IPO That is another episode we have to do another thing adds yet another layer to the insanity of everything that we've been talking about of why they were Able to build such a successful company on such little capital I don't think there has ever been a tailwind in history like the one that Microsoft had with the secular growth of the personal computer wave And the only thing I can think of that is comparable is Amazon with the growth of the internet sort of powering their early growth But here's the stat from 75 to 1986 11 years prior to their IPO So founding IPO PCs grew at a compound annual growth rate of 98% It grew from 4,000 units per year to 9 million units per year shipped You can almost not mess up when you have a tailwind like that. Yes, especially when you are like the linchpin player Right. They managed to make themselves the point of integration for the whole industry Yes, so oftentimes I find myself and we're looking at these companies that are like among the most successful in the world are like Microsoft The most successful in the world.

It's basically like a multi-dimensional multiplication problem We were like, okay, but they had this unbelievable one in a zillion thing going for them Which you can sort of multiply by this other one in a zillion multi-think and so it's the like zero marginal costs zero distribution costs unbelievable secular growth of the PC More's law happening. They're the single choke point for the whole industry It's just crazy how many things you multiply together and of course it should end up in a number of three trillion Yeah, which I'll jump in with the playbook thing that we referenced a little bit in the episode But we really got to highlight here Bill and see even Paul and everybody at Microsoft They were incredibly talented incredibly smart. They saw the future in a way. Nobody else did but they also Were willing to hedge their bets.

It's not like they just got everything right I mean they were gonna get things wrong with OS 2 but they hedge the bets with Windows I think that is such a key lesson of when you're in a really dynamic market like this in our ecosystem right now You know in tech venture capital startups what not people put so much value on conviction. I'm conviction This is what the future is gonna be like and I think the Microsoft story is the opposite of that they had conviction though software software was gonna Be big and personal computers like creating software for desktop computers was a really good idea and they wanted to be the best at it Yeah, but beyond that the exact path of how that was gonna play out They had very little conviction and we're willing to be very flexible Yeah, you're right It's both the hedging but also then the ability to read the world and quickly Entirely change your strategy if you need to and having your hedge be far enough along that you can Jump quickly to it and shift your whole organization to get on board with it That's a hard leadership thing to do totally. Oh, I can't wait in the next episode to talk about the internet title wave memo Yes, but that's related to your playbook theme to it You can't really do that if you don't own 49% the company You know if it's not your company right which I think you're seeing play out with most CEOs today There's a big difference between a founder CEO and the stuff that they can do Zuckerberg with the metaverse or Jensen with betting the whole company going all in again on AI versus Tim Cook or Sundar Pichai certainly very different type of CEO. It's not just interesting.

He's almost despite the fact He doesn't own half the company's got a lot of founder like control Which I think is pretty interesting well, I don't get out of ourselves moving long other playbook themes a big one that jumps out to me is that new generations of technologies enable market dislocations and unless you are in a Transformational moment in terms of a new technology came out that enables something that wasn't possible before this gonna rearrange the whole value chain and open up new markets It's pretty hard to go challenge and incumbent. No one was gonna challenge IBM really until the micro computer Even the many computer people did deck really challenge IBM not really never made a dent It wasn't a full platform shift in the same way. Yes, and there's these little blips of it like the GUI I think meaningfully reshuffle the decks, but those are the moments where you can have Meaningful new entrance and otherwise you kind of have to buy your time and just build your hedges and see yep related Even if you are the incumbent being disrupted it is possible to have a very very large and durable revenue stream that can go on for a very Long time and what I'm referring to in this particular example is despite all of the dethroning that we just talked about Microsoft would not eclipse idm in revenue you mentioned market cap David in revenue until the year 2015 Wow Isn't that nuts I sort of intentionally didn't look up revenue because it made the story money here, but wow yeah, there you go But I think that's the point right it's like Microsoft's perception by the market. I'm sure they were growing faster I'm sure they had better gross margins.

I'm sure there was a better story there and so there's multiple that comes out of story I'm sure there's lots of good reasons why Microsoft became more valuable than IBM very early But IBM's revenue did not peak until 2012 Wow, what it's like long after public perception moves on Customers still get value from something created by incumbents for a very long time I think that's something we often forget about in the sort of buzzy Twitter verse of like oh That things over so they might still grow for another 20 years before it's over well That also just speaks to the nature of the enterprise business to yes, that's a good point No, I mean was the enterprise business right today Microsoft is the enterprise business right that's true Peloton revenue can dry up a lot faster than contracts for mainframes, but what do you got a playbook theme that I want to highlight that really really came out in our conversations is Microsoft was not just a talent magnet the talent magnet yes during the PC era if you were an ambitious young person This is where you wanted to be and it was on every dimension if you were an ambitious young technical person That's where you wanted to be if you were an ambitious young salesperson if you're an ambitious young marketing person That's where you wanted to be and they just had this culture there Which is so funny. We'll talk in the next episode of how that culture really fell apart for a while there But I asked a lot of these early people that we talked to like what was it like being there? I mean you guys worked yourselves half to death. We mad about that.

Did you resent it? We're like we're just making Bill Rich. They're like no, yeah, we neglected every other part of our life But that was the good old days. This was the magic we were making it happen.

Yeah, that totally comes through I asked Brad why did Windows 95 work and you know, there's lots of structural reasons But you said we basically did two things one we laid out principles for product and then pushed responsibility down developers were off in their own PMs So there's sort of this idea once you got the principles We don't need to write a zillion specs and design something three times and pass it through three functions Just like you know the principles make great software that follows the principles And two was he said that everyone felt personally responsible for the product and it really showed anybody you talked to from this era Microsoft this was their life's work no doubt about it Yeah, something we touched on a little bit is the benefit of scaling with OEMs This was sort of the contrast against Apple where I said Apple was always gonna be a niche player by the way that they designed and built and packaged Everything's themselves Apple is in many ways like the Amex where Microsoft is the visa. Yes. Yeah on our visa episode It just became so clear that visa could sort of quickly take over the world at MasterCard by being an open network where they didn't have to do all the work to scale Themselves they could distribute to a bank part of the bank and then boom each of the banks that was on their network could independently scale at their own rate Which created obviously compounding effects for how fast visa and MasterCard could scale the same can be set of Windows totally the OEMs Yeah, I think the Microsoft OEM team for Windows was like 20 people or something before the enterprise in this era that we're talking about the group of people Responsible for go to market for Windows was really small they sold some retail But the team was just about hey make sure HP and compact and deli gateway Exactly that was their go to market and it makes your scaling like unbelievably efficient. Do you get a deal?

Do you are getting a Dell? Similarly, I think the fact that they went international early was this very powerful constraint where it meant that every time they shipped software They had to make it globally ready quickly And so that meant that if there was any sort of network effects to your software like anything becoming a standard Microsoft was just way better Position to become the standard than anyone else was and on top of there being network effects There's also scale economies a word processor is a word processor And so the extent that you have customers in every country who can buy your one piece of software you can amortize the development costs over a huge User base so much more quickly a hundred percent the fact that they forced themselves to be International early meant that every product after that also had to figure out how to do all the localization and training and all that to get all those effects to I mean no matter how much time and money and resources you have to spend to localize Microsoft Word into Kanji It's a lot less time and resources and money than developing Microsoft Word. Yes, exactly And they just realized that so early they also realized that most people who were doing some sort of localization would do a shoddy job They would think about it as lesser than the US market and so they just did a good job at localization They just cared they thought of it as like this is a strategic pillar that in every country everyone experiences our software to the same Quality because it's our brand everywhere and I don't know I just think that is not how the rest of the industry thought about it Definitely on top of all of this the way that they executed it through subsidiaries was pretty genius Redmond did not control international they spun up country managers and subsidiaries in each of these countries in a ton of countries And so while Redmond did the product development and then did the engineering work to do localization to all the strings files Everything for those countries the actual marketing messaging and the sales strategy and the sales structure Happened in country that was owned by a person who lived there So they actually could think through what is the best way for people to receive the software here Which again, that's just gonna yield way better results than if you're sitting there I'm sure quarterbacking in Redmond thinking about how a person in Chile is gonna receive your marketing message Yep, and one other that I have is this one that we didn't really talk about but Microsoft famously was not first-to-market with basically any of their Applications they aren't even really today in most cases if you think about the strategy that they had early on spreadsheets word processing All these were copycats at their outset I mean sometimes they would do an acquisition but most of the time they just look at a product and say huh our software should do the same Thing and they would copy it they had no shame in doing that They had their eyes everywhere looking for good ideas And they had reverence for the good ones and they would just incorporate them and on top of that They wanted to make the software very easy to switch to so a lot of the keyboard shortcuts and excel to this day are there because they were originally the Lotus one two three shortcuts and they wanted people to have the same muscle memory that just worked So fundamentally what this does for you as a business is it just leads to better risk adjusted returns You already know what's going to work before you ship it like you don't really take market risk So you're not gonna be the first to the market with early adopters But most of the time you actually don't need to be to win and I think Microsoft I know they sort of own that idea most of the time people are sheepish about it Steve Jobs famously said Microsoft has no taste I think that's another way to put it that it's copycatting well So I do agree with your premise with all of this I think doing this episode though has made me think there's a little more nuance to it Yes, and in broad strokes You can say that's what Microsoft strategy was with applications over the years But the Microsoft versions never actually won until there was a platform shift that they could take advantage of to be becoming like Microsoft wasn't gonna be Lotus one two three Until the graphical paradigm came along and then excel being graphical was just obviously so much better They tried with multiplayer they failed multiplayer was fine But one two three was the winner so the nuance to me is yes But it's more like with the resources of Microsoft and the time frame that Microsoft can afford to have They can afford to like start building the application start building a product getting into markets start learning be positioned that then when the paradigm shift comes leave Ahead, right? That's a good point.

It's also different I mean the Lotus one two three multi-plan thing in that era Microsoft just didn't have great distribution yet And so Lotus one two three just got pretty far ahead of them and Microsoft had no way to catch up a few years after that That would basically never be true again. Yeah, they could be too too I will say you touch on something that's an interesting corollary to this is their first version software famously are not good You look at Windows 1.0 and 2.0 They know that it's part of the strategy and they were world-class at learning from customers and integrating customer feedback into subsequent versions And so there's always this like saying of Microsoft doesn't have a very good first or second version But the third version is typically pretty good and I think that fact pattern definitely follows Yeah, I'm curious your thoughts on this. I'm so surprised one thing that you have not brought up yet on this episode is you were Up-M at Microsoft for several years. I was but it was such a different era in that 2012 to 14 era It's not I guess 2011 so I started as an intern I'll have a lot of thoughts on an episode Okay, okay I've got one more playback theme before we move on to power and that's that well Microsoft figured out software before anybody else and they figured out so many aspects of what it means to be a software business before anybody else But they figured out that software is never done.

Yes. I do think a lot of their competitors You know We didn't obviously didn't study Lotus to the same degree that we studied Microsoft here We didn't study word perfect, you know, etc But I think there was a mindset a lot of other folks that like you ship software and then the software was done and that was not The culture of Microsoft this is related to what you were just saying shipping software is the beginning you are always working on that software Yeah, you're working on next versions and stuff but even before the next version the work of software is never done Which of course if you own the hardware you definitely think of it more of like well We ship them the big cabinet of things and we install it and we fix it if it's broken But we've sold them hardware the software is required to run it But the thing we sold them is the hardware and if you're a pure software company you think about the world differently You're like well, I can always ship you another CD another floppy disk, you know over the internet It's obviously very different but because there weren't really software companies before them Of course people didn't come from that mindset And I think you still see the legacy this right to this day in Apple versus Microsoft Apple still is on a yearly software release cadence Which is kind of ridiculous whereas my guess is on the cloud. It's all constant It's all constantly shipping and like look at AI look at open AI the software is never done is so deeply in the software business model Yeah, that's true. All right should we move on to power?

Yes So let's start to our new to the show we do this section based on Hamilton Helmer's seven powers framework and the question is what is it that enables a business to achieve persistent differential returns or to put another way to be more profitable than your closest competitor and do so sustainably and The seven are counter positioning scale economies switching costs network economies process power branding cornered resource and David I am pretty sure I could make a case somewhere between 1975 and 1995 at Microsoft for all seven of these totally Yeah, it's one of the most defensible businesses that they built in history So of course they would have all seven of the powers. All right, let's run through each of them and do a quick 45 seconds on each great Counter positioning I think the biggest example of this comes through where Microsoft is basically willing to jump on the microcomputer revolution before the incumbents were IBM did not want micro computers to happen and then when they started to happen IBM tried to figure out how to slow it down and reintegrated into their whole business model and Microsoft basically had no baggage And I mean this is kind of classic innovators dilemma stuff. They could say well We don't need to make any money on hardware. We don't even make hardware We are free to become the whole point of integration for the entire ecosystem just by shipping bits and that is crazy.

Yeah And you know actually believe that I can't believe we haven't talked about this in the episode until now Microsoft could enable other companies to be successful you talk to Microsoft people they're talking about themselves as a platform Like we're platform other companies grow on the back of Microsoft that was not true for IBM Totally not true, right, but Microsoft could make compact successful Microsoft could make lotus successful Microsoft could make into it successful Microsoft can make that's successful We keep talking about Microsoft is the point of integration or choke point or dependency or standard for the whole ecosystem given that it is quite remarkable How much value they created on top of the platform versus just captured for themselves? There's that famous sort of Bill Gates line you want your ecosystem around you to be generating more revenue than you are taking for yourself They did a ton of that. It's the OEMs and it's the application developers. Yep.

That's major counter-possessing. Okay, so that's one scale economies That's everything we just talked about in playbook. It's unbelievable You know when Microsoft has an install base of a hundred million people using Excel in this episode Let's just say ten million people who were using Excel and suddenly some up-and-coming spreadsheet comes out with a cool feature like Auto-sum or like fill down or like draw borders around the cells or whatever suddenly Microsoft does a tiny bit of dead work And they can reap tons and tons and tons of value for doing that that the tiny company cannot do Yep, great. So fixed amount of dev work amortized across a large customer base I don't think we need to say anymore.

This is the whole episode. Yeah, we got to be yes Switching costs well funny thing about monopoly is there's nothing to switch to That's a good one. Yeah, this one's pretty related to network economies for me with this one of okay Sure, you can switch to another operating system like good luck getting other applications that you love no one love to run on that Yeah, that's the answer. Yep, speaking of network economies developers applications.

Oh, yeah, there's not a classic network Facebook or AT&T style network here in terms of one user can contact every other user but more users being on Windows incentivizes more developers to make great applications for Windows which enables Microsoft to sell more copies to more users etc Although actually I think once they start getting into the enterprise workplaces in general organizations in general There is the user network effect like I want this micro software document that I just worked on for you to be able to open it and use it Oh, you're right I even think about that the document formats are a huge network effect thing even before the internet even before organizations were networked and computers were networked outside of an organization file formats You're right. There's huge network economies to file formats. Yeah, and it's inter organizational to if I'm a law firm You know, I want my clients to be able to open my word docs, right? Okay, next process power This might be the weakest as it so often is Delusive this is a little bit later in history But I did always think it was absolutely incredible when I was at Microsoft and we would ship a version of office every three years I worked on office 15 that the entire 6,000 person organization had a process in place where we could release a Manufacturing RTM on a date that we planned three years in advance and actually hit it like the process of the ads cuts meetings and the zero bug bounce and the testing schedule and the triage when you had things that people wanted to introduce late in the schedule it was a remarkable product especially with all these teams that needed all their code to Interoperate and I worked on a shared experiences team that would check things in that would be a dependency that word excel power point all of them took on the shared Code and we knew our ship date three years in advance.

It would hit it. It's crazy. Yeah, totally This exists especially by the time you get to the windows 95 era at the end of this episode It's like rent tech the amount of stuff and process within Microsoft, you know, the device drivers the middleware the programming languages the dev tools The machine there to make all this computing work. There was like a miracle that this stuff worked, you know You couldn't just recreate that it's funny the process power I would say a stronger in office than windows Now my colors are showing like windows always notoriously miss their ship dates But I'm actually less sure that process power existed in that early days I think they were a bunch of smart people, but I'm not sure that they had a unique way of creating software But I think I got built over time.

Yep, agree branding for sure for sure. Don't get fired for buying Microsoft Well, that's true windows 95 built a consumer brand the idea of a consumer brand of operating systems was you know There was apple but they were tiny and that was more around the hardware Yeah, it's both fronts. It's they're brand in the enterprise that was an amazing story that they built their brand in consumer that was The easiest to point to instantiation is like the rolling stones and J. Leno, but they had a software brand Yeah, nobody had that but branding is probably the thing that they rely on the least interestingly enough There are other structural reasons that they're entrenched where even if Microsoft had a crappy brand in this era They probably still would have won.

Yeah, the magic of getting the whole deal with the IBM PC And then getting to sell licenses to all the other OEMs. Yeah Well, that brings us to the last one, which I think is a super strong one at least in this era cornered resource DOS full stop. Yeah, it didn't start as cornered resource, but as soon as IBM started shipping it on the IBM PCs It was over. I'll say it again IBM's distribution created demand for DOS and then Microsoft just got to capture value from everyone else who wanted it All right Well, we would do bear and bowl listeners But we kind of know what happened after this So the bulk case is that the party continues and Microsoft continues shipping amazing operating systems after amazing operating systems And that stays the important thing in the world and the bear case is something else becomes an important thing in the world And just having this super locked in operating system is not actually the way to bet your whole company for the future The dramatic tension for you all to come back for our next episode of Microsoft here is not because you find out what happens Right, that's true.

Okay, take away splinter. We've spent the last probably six weeks deep in this We've talked to everybody. What are you thinking about in the middle of the night? The IBM deal.

I can't unsee it Microsoft figured out a way to take someone else's dominance and wholesale transfer that into their dominance for the next generation The fact that IBM called the project chess is so deeply ironic because Bill Gates was playing chess and they played checkers Maybe Bill was playing 3d chess I mean, this is the thing about it though We got to give IBM so much credit for project chess and the PC that they even did what they did was huge that a big entrenched corporation like that could ship A skunk works project in a year revolutionizing the industry. They just didn't end up capturing any value out of it Yep, and if I could make it less cheeky comment on it I would say it's that a new technology generation when something becomes possible it opens up a new market It enables a shift in the point of integration and a value chain the old value chain of IBM if you shipped the mainframe You had all the power But in this new world of PCs if you controlled the operating system that all the users were familiar with and all the developers wanted to target You had all the power. I think that is not necessarily obvious unless you went through it and have the hindsight of history to be able to articulate it Yeah, I think you might be right. I think this might be the single best business deal negotiation of all time I arguably created like three trillion dollars of value so right No a lot more than that because this is the point about Microsoft being a platform Microsoft is worth three trillion but how much value has been created on top of Microsoft?

No matter what you think good better ugly at Microsoft. You can't deny that. Yep, absolutely At least twice as much probably much much more I mean you watch every early interview with bill and you read a lot of his writing and he's a great writer I mean, it's awesome that so many of his memos leaked whether intentionally or unintentionally over time Is that so many of his memos were issued for publication? Yes He really did view himself as a steward of the software ecosystem and had the steadfast belief that software was magic It was gonna change the world over the next 20 years from 75 to 95 software did change the world and Microsoft enabled it to happen So again, good, bad or ugly whatever you think of the company They were sincere in I think the ugly part is a lot of people want to hate on the value capture because god Did they capture value but they were sincere in their desire and ability to create too?

Yep, totally That's super related to my kind of takeaway here You know the moment for me in the research and then when we were telling the story along the way Is when they start to believe in themselves that they don't need IBM Just the audacity it. I mean that in a pure good way of these kids these kids they changed the world That's so trite to say like book we read my daughter at bedtime and somebody gave us It's like the most Silicon Valley trophy thing ever It's like what do you do with an idea and the punchline at the end of it is you change the world and like it's become such a trope But these kids in the 70s they did it You know and they like believed in themselves in the beginning and more and more and more over time And then there's just this moment that I think where they started to like really truly believe that they were gonna change the world And again good bad and ugly come out of that mostly good I think but yeah The level of ambition and audacity of these people is staggering. Yep. Is that your splinter splinter splinter in your mind?

That's my splinter. Yeah listeners who are new to the show we've been Iterating on how we end episodes and we decided on this recently and you know, how should we land the plane? It's to talk about the thing that we can't stop thinking about yeah I mean it's completely 49 years old and it's still the most valuable company in the world crazy all right David I have some trivia for you. Oh, I love it trivia before carve outs Do you know where Dave Markwort from TVI first encountered Bill Gates?

Oh? No, I just assumed it was received so Dave had watched Bill present many years earlier at none other than the homebrew computer club at Stanford Yes, the very place that is part of the apple lore with jobs and wands showing off the early apple computer Apparently bill also went and made a presentation there and would hang out there and that is where Dave first came across him Amazing. Well when we were talking about the letter that bill writes to the hobbyist community decrying piracy and software He's basically running it to the homebrew club. He believes that those were the people who were ripping off his software amazing All right carve outs all right carve outs for new listeners at the end of every episode Ben and I just chat about one or two things that we've been enjoying personally lately that usually have nothing to do with the episode In my case, I have two the first one has a lot to do with the episode I have discovered slash rediscovered the lgr youtube channel.

Are you into the spend now clinton lgr? And it stands for lazy game reviews, which I think it's how it started but that it became so much more announced just lgr Clint is this awesome dude. I think he lives in North Carolina He is dedicated to basking in the glory and restoring and reliving and preserving computer History hardware and software from this era the youtube channel is all like unboxing a compact pc from 19 18 Or like restoring a windows 3.1 machine. Oh, that's awesome It's so good.

He's got like the best most soothing voice in the world He seems like such a nice dude and he's dedicated to preserving the era of computing that we are talking about on this episode It's so fun. That's cool. It's really hard because all hardware fails eventually So, you know at some point there will be zero computers out there that can run windows 3.1 that will boot and the only way to Experience any of these things is through an emulator and so it's kind of like I don't know to be able to capture You know high res footage and stuff of those machines while they still work. It's cool.

Yep. Super cool My other carve out is Andre 3000 from outcast Do you know what Andre 3000 is up to these days? Not at all. No.

Oh my god. Okay, so gq just did a big interview with Andre 3000 Because he just released a new album. This is not what you think So Andre, you know a lot of people say consensus top five rappers of all time And big boy in his counterpart now cast you also great too, but they basically went out on top So they did speaker box of love below. Yeah, of course, which was the double album.

I think it came out like 2004 Maybe I was a freshman in college. Hey, I was on that right? Yeah. Yeah everything was on that They did one more album and then they stopped and Andre would like be featured on some other rapper's tracks over the years But didn't put out another album for close to 20 years He just put out an album and he just did this big interview video interview with gq The album is a flute album.

He got really into like woodwind instruments Whoa, this has been his life He reveals in the interview that he's put out other songs and other albums over the years under pseudonyms At his like his interview is so great It's so unexpected because the interviewer gets asked like you know You didn't run away. You stopped rapping. That's what I think to say like what do I rap about getting a cold noscopy? This is where my life is right now and I never wanted to put out any work that wasn't both authentic and great I just I didn't have anything to say anymore.

Yep. I love that If you heard the phrase go out when the top row at the back of the auditorium is empty. Mm. Yeah Yeah, and that's kind of what they did idol wild, which was the album that came out after a speaker box of love below like I You know, this was great, but it wasn't that and yeah, that's exactly what he did I think it's a sign felt quote.

I might miss attributed drop a note in this lack if I did but yeah, I think it's a sign felt quote You let one row be empty, but you don't wait too long Yeah, it's same thing as what sign felt did fascinating. Yeah, super fun. We'll link to it in the show notes All right, I have three and they're all sort of different We've sort of had a tradition on the recent episodes of doing multiple carve outs and all of them sort of different genres So my product that I've really been loving my physical product is the meta Ray bands. Oh, yes I was talking with the team at meta about them.

They're doing great. I bet it's a pretty delightful product I bought them because I was in Hawaii and with my four month old son We were in the pool and stuff, you know, my iPhone's waterproof But like I kind of want a different angle and I don't necessarily want to be holding my phone like it's very cool to be able to take pictures and record Video of what I actually see to be able to relive that moment And I did a bunch of photos and video we were on vacation that way and then I discovered I think that they're actually just Awesome. I think even better than AirPods is phone calls. The speakers are great I wouldn't say like necessarily they're the best for listening to music.

The bass is obviously not as good as headphone bass They project the sound down toward your ears So unless you're standing really close to me, you can't really hear or unless I have the volume all the way up But the microphones are great too So I was on a long walk on the beach with the wind whipping by on a call with my mom And I was like does this sound really bad and distorted to you? She's like not at all Wow, and so I was really impressed and will definitely be using them for more calls I think that style of headphone over the ear There's many things that it's not good for like when you're on an airplane or something like you want to plug your ears or if you're in all super loud environment But unless you're in one of those environments, it's a nice break for your ears versus having your pods jammed in and it's a great call experience So they're great the batteries great. They're like four hour batteries. So it's like a low key more subtle augmented reality experience There's no heads up display.

You don't see anything but when you get a text message or read it to you Oh, so there's more than just the camera system. Totally. Yeah, it basically is like you have AirPods in but you don't actually have AirPods in And you have a pretty good photo video camera on your face. Does it have an indication when you're taking photo recording video?

Yes, it's not super bright I'm not sure everybody really knows when you are but if you know what to look for, you know if it's on or off Cool. So I've been loving it. Thanks for your product. I intend to wear them a lot this summer My second one is a thank you to a very very good designer Julia Rundberg who was with David and I on a recent project For some design work Some of which is actually featured as we speak on Apple podcast and she did a bunch of other stuff with us too And she's really excellent.

So if you're looking for someone who's good at visual identity branding slide decks websites I worked with her on a few projects before and she's just awesome So I wanted to recommend her my third This is kind of community spotlight to go all the way back to like nine years ago acquired It was a listener who runs a company called summer health reached out and said I heard you say that you have a baby I've got this great company that is for new parents and peers from info on it And I am now a paying member. It is a on-demand texting relationship with a pediatrician. Oh, wow This is like crack for new parents. It is like crack for parents It's crazy and you can hook up multiple phones So my wife and I both have a direct line to like something weird is going on Will you help me through it including we had a two a m wake up the other night and some you know Everything ended up being fine But as I'm sure any other new parents can relate to you really want to make sure in the middle of night If you're not sure if everything's fine You would like to figure out the right steps to make sure everything's fine So I have a gay a virtual doctor on demand is uh totally amazing So summer health if you are a new parent, we've been loving it amazing well, I'm gonna have to subscribe We've referred to this before I think this will probably be the last episode that comes out while I'm still the parent of just one child Number two coming soon So if it may take a little longer than usual for the next Microsoft episode to come out our next you know Six hour opus on Microsoft don't get too mad that is the reason why Yep, well, we have a lot of thank yous on this one as you can imagine people are really generous with their time pointing us They're different resources explaining their recollection of history as it happened And you know being in Seattle active in the venture community here both through psl and david You're my shared history at medrona and be working at microsoft a lot of good opportunities to learn what really happened from folks So a huge thank you to mike slayed who spent the time with me mike spent two different stints at microsoft And then at next and apple in between yeah, he worked for seva next right Yep And one of the few people in the world who both spent a ton of time with steve and with bill and work closely with both of them So so great to get his perspective especially about the early days of office and the applications group very helpful Similarly piet higgins worked closely with mike piet I think ran excel for a long time and oversaw a lot of the different stuff in the applications group And I believe also ran office it's got a funny how many different people picked up the mantle over time as these things traded around groups But frankly, I think that's a huge part of the microsoft story is the company very quickly adapted and changed its structure Depending on the current needs of technology and competitors and etc huge thanks to tren griffin who is actually a lifelong Seattleite and sort of close friend to the whole gates family bill gates senior was his mentor I'm sure you've seen tren's prolyphic tweets online about microsoft history So tren and actually tren I think currently works at microsoft in a strategy role So thanks tren for your help as well.

David. I know you've got a bunch Yes, also speaking of former microsoft folks who are very active on and prolific on twitter We talked to stephenson off ski who had lots and lots of good perspective We can't wait to share more of it on the next episode I read like 20 of stephen's hardcore software posts and then when david and i were dividing up what belongs in what episode i realized like 19 of them Belong it next episode so stephen thank you for your early prep work for part two Yeah, so much fun internet stuff to talk with that stephen was right there for I spoke with other people who ran windows tary meierson who's a great friend and supporter of the show tary ran windows for quite a long time, right? Yeah, when I was there tary was evp over I think windows and windows phone Yeah, tary was very generous and he was actually the first person that Clued us in to just how key steves role was in building the enterprise for microsoft Yeah, and how different the go-to market motions were for windows in office I think tary was the one that sort of gave us the insight of windows especially in the early days Was basically an OEM game small group doing an OEM thing right there like ten people selling that right and it's still I don't think a very big team even today. Yep speaking of strategy charles vid's Gerald who's oh gog microsoft at a great platform strategy guy Prolific angel investor in seattle now a sponge at him about the early days.

Yep. Obviously brad silverberg who we mentioned a bunch It was very fun seeing after spending some time talking with brad and texting a lot with him to see the end of the windows 95 announcement after bill and Jay Leno are done for brad to sort of come out and finish it off Fun it's like watching time machine watching that thing it's really cool So much so much cigar at medrona is a someone that David and I love crossing paths with in the seattle entrepreneurship ecosystem Yeah, someone's just such a legend at microsoft and in the industry too There's so many people who so much made their careers Flucked them out of school saw something in them that maybe they didn't even see in themselves and then they went on to be Big executives at microsoft or elsewhere. Yeah, and lastly huge. Thank you Steve bomber To be honest, it was a little bit surreal chatting and hearing about his experience over the whole thing because I don't know There's nobody including bill gates that bleeds microsoft more than steve bomber and he's just unabashed Pure pride in what they built is infectious.

Absolutely. It was so fun talking to see if he was so gracious with his time It must have been super special for you too like he was the co when you work there totally and i mean to be frank I had a very opposite strategy in mind But I was a new hire out of college individual contributor p.m And you know it was still the windows company then and steve was Championing the windows strategy and I was a guy working on office for ipad if you like this episode I was thinking of ones to recommend it would be pretty funny to go listen to the forethought acquisition given all of this context I mean it's a short episode when david and I were not good at this yet and we did our very best But it is from early days and it covers overlapping source material Yeah, forethought was the company that made powerpoint by a soft acquired first major acquisition for the company Yep If you are new to the show and looking for great recent episodes that we've done I highly recommend the visa one as discussed earlier in sort of the network of networks idea if you haven't heard that Or perhaps the nintendo or nvity episodes all of which will be right up your alley if you liked this one And if you're not at all interested in technology or software But if somehow managed to get through all these hours with us go listen to our lvm h and ermez episodes Even if you do love technology and software which obviously you do if you're still here There's so much to learn from that world Yeah If you want to know every time an episode drops get hints at the next episode topic and get episode corrections and follow up You can sign up at acquiring dot fm slash email come discuss this episode with everyone else who's chatting about it at acquired dot fm slash slack And if you're looking for another episode go check out our second show acq 2 where we will have actually some very awesome Tech ceo guests coming out over the next month or so that are absolutely worth listening to especially if you're interested in semiconductor and tech history Now if you want some sweet acquired merch go to acquired dot fm slash store and with that listeners. We'll see you next time