Standard Oil Part I

So history and facts going up through 1890 Welcome to season nine episode four of acquired the podcast about great technology companies and the stories and playbooks behind them I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund at PSL ventures And I'm David Rosenthal and I am an angel investor based in San Francisco and we are your hosts today's episode is 150 years in the making David somehow we missed this IPO if or when it happened Can we still get secondary shares put together a little SPV? I think it might be of a spinoff for something like that at this point. Okay, at least the standard oil that we will cover today Never IPO'd it was privately held the whole time its financials were kept very secret. That must be why we've have missed it until now David Surely yeah, I must be must be well this episode on Standard Oil is of course the oil monopoly founded in the 1870s by John D Rockefeller The wealthiest person in modern human history Embarrassingly until I had started to do the research I didn't realize the oil and Standard Oil did not refer to gasoline at least until much much later in the life of the company Automobiles Model T was like 1910 or so totally standard oil predates the Ford Model T by like 40 years Yeah, John D becomes the wealthiest person in like modern human history before gasoline.

This is a different kind of oil Yeah, gasoline helped later turns out compounding can kind of show up especially when the second business line gets layered on top But we will get into it listeners the other thing that is crazy that I want to point out I didn't realize how much Standard Oil is very much with us today despite being famously broken up the parts What I'm to become both Exxon and mobile marathon Amaco which of course is now a part of BP Chevron and several other companies when you look at a gas station You are probably looking at some remnant of Standard Oil just wild so this one will be at least a two-parter It turns out the company responsible for creating the entire modern energy industry has a lot of wild stories All right listeners. This is a great time to think one of our favorite companies here at acquired Century. That's S-E-N-T-R-Y like someone's standing guard Yes, Century helps developers debug errors and latency issues pretty much any software problem and fix them before users get mad as their home page puts it They are considered not bad by over four million software developers today We're talking about the way Century works with another company in the acquired universe anthropic anthropic used to have some older infrastructure monitoring in place But at their massive scale and complexity they instead adopted Century to help them fix issues faster Yep, crashes can be a massive problem in AI if you're running a huge compute job like training a model and one node fails It can affect hundreds or thousands of servers. Century help them detect bad hardware So they could quickly reject it before causing a cascading problem Century also enabled them to debug massive issues in hours instead of days so they could get back to their training runs And today anthropic relies on Century to track exceptions assign errors and analyze failures in real time across all of the primary languages Used by anthropic research teams including Python Rust and C++ According to the anthropic team century gives our developers one place that will have all the information they need to debug an issue and speaking of AI Century now has an AI debugger called a seer Seer is an AI agent that taps into all the issue context from century and your codebase to not just guess but root cause gnarly issues and propose Merge ready fixes specific to your application.

We're pumped to be working with century They have an incredible customer list including not only anthropic but cursor for cell linear and more if you want to fix your broken code fast Like over a hundred and fifty thousand other organizations that use century from India hobbyist to some of the biggest companies in the world You can check out century.io slash acquired that's S E N T R Y I O slash acquired and just tell them that Ben and David sent you guess and they're offering two months free to all acquired listeners Yes, thank you century. All right. Well listeners before David takes us in as always the show is not investment advice David and I may have investments in the companies we discuss unlikely in this case This is for information Entertainment let us know if you find the standard oil stock ticker. We'd love to go check it out.

It's evaluate now without further ado Standard oil maybe pitch book has some data on them All right I just want to give a lot of love to Ron Churnau who is one of like America's greatest historians Bagelsin he wrote the book that Hamilton's based on the plate right that Hamilton is based on yep and also wrote Titan the definitive biography of John Davis and Rockefeller. That is the main source for this episode. It's so good It's so good And I think the perfect place to start is with one of turnouts quotes at the very beginning of the introduction to Titan Where he says the story of John D Rockefeller Transports us back to a time when industrial capitalism was raw and new in America and the rules of the game were unwritten Have yet I think more than anything we've covered on this show standard oil wrote the rules the way business is done The way business is done done written rules. They wrote the unwritten rules and then you know Congress rules about them The era that we should think of here, you know, this isn't the wild wild west This is the wild wild east were 30 40 years after our nation was founded here in the early 1800s the freakin Civil War hasn't even happened yet No, no, Texas, no, California.

Yeah, certainly early in corporate law But we're early in like all forms of human organization in the United States law is law Speaking of okay, so we start in 1810 in In New York, which is actually like not that far from Manhattan But back in those days was a different world we start there with the birth of William Avery Rockefeller big bill He would also go on to have another nickname his other name is devil bill She got because of his profession that he would grow up to which we're talking about John Rockefeller father here devil bill big bill Was literally a snake oil salesman, you know people use the term like oh, man He's a snake oil salesman like this is where the term comes from he sold Medicines out of his like pack that he wrote into town on a horse that like professed to be a doctor But didn't do anything and he got out of town before anybody realized So one day when he is 26 years old in 1836 He rolls into a new unsuspecting community to offload his goods on shall we say richford New York far far far away in central New York State there he encounters the Davison family the Davison's are quite unlike bill and Rockefeller clan they're upstanding They are upstanding they are devout religious Christian followers. They have different moral compass than bill. Shall we say well? Yeah, and they're wealthy That is the other thing they are quite wealthy so bills wild bills young bills big bills I is light up when he sees the Davison ranch and he So the story goes I think this is actually true one of his like sort of tricks of the trade if you will Was he would pretend to be deaf and he would carry like a chalk slate around his neck and right on it Pretend to speak and he's at the Davison house And he's either doing this little charade and he hears the second eldest daughter of the Davison's Only named Eliza pretty young girl say I would marry that man if he weren't deaf and dumb and miraculously Oh my god, the beauty of young Eliza cures bill of his affliction and he can speak and you can hear Amazing so the patriarch of the Davison family one John Davison remember that name He's a little suspicious of what's going on here, but nonetheless bill wooze Eliza and they are married shortly there after Like I married they sell down you know bill bill to house Check like literally people like built their house inspect them little ways down the road It's like what we need a housekeeper here, and I've got this old you know friend Nancy Why don't we have Nancy move in with us and be our housekeeper?

Well turns out Nancy was his girlfriend Yeah, I was old friend, you know, she helped with the kids the housekeeping Alright, so we're painting the picture here like you've got this unbelievable swirling concoction of well-to-do Religious by the book mom side of the family dad side of the family not quite as Upstanding of a human being but here they mix and one July evening all these forces swirl together and July 8th 1839 Eliza gives birth to her second child It's the first son they decide to name this child after Eliza's father. It was John Davison the name the boy John Davison Rockefeller At obeyed his little JD have a lot of both John Davison and a wild bill Rockefeller in him So on the Rockefeller side little John is like totally captivated totally notes on him He thinks he's the best even for the rest of his life Rockefeller would intensely defend his father Turn out would write that in no area did Bill impress his eldest son more or did his eldest son prove more Impressionable than in the magical realm of money big bill had an almost sensual love of cash and enjoyed flashing plump rolls of bills And indeed one of Bill's companions at the time would say of him quote the old man had a passion for money that amounted almost to a craze I never met a man who had such a love of money except of course for his son in the future And this is where we start to get into the ways in which his son would become like him But different and the like him is of course in this love for making as much money as possible The way in which it is different you know bill would come back from these trips and he would have a fat water cash And he would take the hundred dollar bill and he would put it on the outside You'd make sure that everybody knew that there was at least one maybe lots of hundreds in this fat water cash Whereas John D would grow up and detest shows of wealth I mean the smallest house on the nicest street in Cleveland He mixes his mother's side of the family into these lessons from his father Oh totally well So speaking of you know his mother the Davison's were Baptist and that was Well, not unique but pretty different than some of the original Protestant groups that had come to America You know generation or two before the Baptist you think like church revivals You think like big showy theatrical the whole point was to evangelize and to recruit They didn't think that they were like the chosen people that were going off to the new land to be by themselves like no No, we're gonna take over the world here. We want everybody on our side It was an evangelical religion. Totally.

So here's where these two sides of John's maternal and paternal sides here seem like oil and water Oil and water David They're not the Baptist are all about the money they think money is also great They just think it's great for a different reason Which is that the more money the more influence the more followers we can recruit into the fold and this also has a huge impact on JD He would say later quote I believe the power to make money is a gift from God Just as are the instincts for art music and literature to be developed and used to the best of our ability for the good of mankind Having been endowed with the gift I possess I believe it is my duty to make money and still more money and to use the money I make for the good of my fellow man Oh, I mean duty he heard the word duty in there about making money that is God has asked him to go forth and make as much money As humanly possible it is this incredibly unique thing about John D Rockefeller Where when you describe him as one of the wealthiest businessmen of all time and a philanthropist It's very different than the way that you would describe today's billionaires as wealthy people and it's not one then the other It's not career and then philanthropy John D held these things to be intertwined that he should go make as much money as possible and to be Simultaneously incredibly philanthropic and the purpose of making this money was to be philanthropic as if he were a better charitable allocator than anybody in every dimension Wealth power control philanthropy impact John D makes Bill Gates Sir Mark Zuckerberg look like children like it's wild so in 1853 when John is 14 and just on the cusp of manhood bill Swoops in comes back from one of his trips and decides announces that he is gonna move the family away from New York to Ohio Specifically to Strongville, which then is you know is right next Cleveland for sure strong spell Ohio It's one of many wonderful suburbs of the Cleveland area. Yeah, this is like your homecoming this episode It's true like a lot of this episode takes place in places that were within like a half hour drive where I grew up Oh, it's okay So the stated reason for the move is that Bill wants to go open new territories for his business But there's actually another reason which is he's got another new girlfriend back in New York named Margaret and he wants to keep The family's more separate, but he wants to marry this new girlfriend And he's kind of things like this is the world that America was back things like well I just get like a steep order between the two of them great I don't see why I can't have too much true There's no internet state registries are probably pretty hard to go look something up in a different state So they moved to Ohio and at first before Bill Mary's his second wife concurrently Margaret He sends John and his little brother William to a boarding house in Cleveland to go to like a real high school in Cleveland And that goes on for about two years and then when Bill actually Mary's Margaret he sends a letter to John and says You know this schooling thing and the well plans have changed and I can't really pay anymore for you and William to go to school So I'm basically deputizing you now as head of household and you're gonna have to drop out and get a job and find a way to support the family That's a like son I'm talking about wild thing to just hear and totally hijack your life plans Totally and this really was not what John was planning But he decides if he's got this level of money So what can I do to make money? Well, what if I stay close to the money? So he pays $40 and does a three month crash course over the summer in bookkeeping And decides that he's gonna become a bookkeeper This is gonna be his path to supporting the family ever the sensible fellow when he finishes his training He's off to cook a job He decides the way he's gonna job search is he gets a directory of all the businesses in Cleveland and He looks up what their credit ratings are and decides that he's only gonna target the ones with the best credit ratings He's smart me to the extent that he thinks that the access to capital is the thing that you know He wants to be close to you may as well only be a part of businesses with the best access to capital Strengths to strength, right?

So the story goes that he pounds the pavement for six weeks because they're every firm on this list They all reject him, but he's undeterred and he just starts back up at the top So he goes to see all these companies like at least two some of them three times finally one Company the partnership of Hewitt and Tuttle. They probably just get so tired of this little kid the 16 year old kid banging on their door That's like all right fine. You can start you can work it in your bookkeeper This happens on September 26th 1855. I get this for the rest of Rockefeller's life He celebrates September 26th as his job day I love this like more sacred than the birthday job day was the day It's like the day he was baptized into capitalism by being able to make money in the world Absolutely, and literally it's like this is the big deal every year in his life like it's bigger than the birthday.

It's a job day Except he's you know he's starting in labor not in capital, but he makes the transition pretty quick Don't worry so he gets the work he becomes basically like the best bookkeeper that history had seen before since at least until pilot Turn out rights about this John betrayed a special affinity for accounting and an almost Indict faith in numbers for Rockefeller ledgers were sacred books that guided decisions and saved one from fallible emotion Well, of course they're secret the numbers in the books are money It's the divine you know God given path to be close to the money and get as much of it as possible absent the divinity This is very buffet ask you know a young age having this sort of respect and obsession with the numbers supposedly when John was a younger kid He would also like go to the general store and buy like a big block of candy and cut it up into little pieces and then sell the little pieces Oh, no way. Yeah, just like buffet and gum right yep sticks again So he goes to work in this farm now. What is he would in Tuttle? They are a merchant trading firm that specializes in produce commodities like foodstuffs like things that people would eat You know meat vegetables produce stuff that's coming off of the farms going into cities like Cleveland I assume they mostly dealt in foodstuffs that came into Cleveland to then be sold in stores and consumed by the newly rising urban populace So John D is rising quickly to the ranks pretty much immediately They give him a 50% raise because he's doing so well even his little kid in the beginning of 1857 So not quite two years after John joins the farm Tuttle the junior partner leaves to go see his own fortunes help from under the thumb of the senior Partner Hewitt and he was like, all right.

Well, John you're you're my new Partner not partner, but you know you're gonna take Tuttle's role here John is like well, that's nice Are you gonna pay me like a partner and he was like dude, you're like 17 years old like no John is untettered though. This is pretty crazy. So he's like head of household supporting his family He's already making a lot of money. He's got this great role, but the next year in 1858 He's like I think I'm doing the work of a partner in a merchant trading firm I'm gonna be a partner in a merchant trading firm So he hooks up with a much older gentleman named Maurice Clark that he had met doing his bookkeeping training And they go in 5050 on a new merchant firm called Clark and Rockefeller and like doing the same thing still produce and meets and Trading food stuff exactly foodstuffs produce things go like okay at first for a couple years What is it like 1859 60?

Yeah 5960 They managed between two of them to put $4,000 in capital into the firm to start the trading operations Which like was a lot of money and Rockefeller put in half of it It wasn't Rockefeller like finding ways to borrow from Devil Bill. Devil Bill definitely had his sticky fingers and all this that is for sure So things go like okay, but they have some losses actually have to bring in a third partner I think in 1860 to sort of short up some losses and bring more capital into the firm and just to put a point on that The reason the capital is so important is they basically need to have enough on hand to basically make the purchases and then hold The inventory until they can go and sell it There's a cash flow cycle there that they need to have enough capital to be able to manage that cash flow cycle yep So you know things are going okay, and then 1861 something big happens in America something very big North goes to war with the South Yeah, for it's up to the Civil War one Rockefeller doesn't fight in the Civil War despite being what would be 21 22 years old at that point time Like prime fighting agent hires a substitute there was technically a loophole He was if you were head of family you didn't have to fight you know Rockefeller's careful in how he messages the strife going on in his family He never throws his dad out of the bus he always holds everyone at least outwardly in the highest of a steam And so the way that he sort of drops a hint here at some point is he says how could I go fight in the war when the business would die? It was young it was fledgling and so many relied on it And that's sort of him alluding to like look like my whole family kind of needs this business to stay alive Yeah, so he doesn't go fight But for his business that he needs to survive The war is a pretty big boon for commodity prices specifically food stuff prices I mean you got to supply an army with food somehow yeah There are a lot more orders in demand for you know pork belly and the like coming in thanks to the war So this drives up the price of food stuffs through the roof in 1862 the first like full year of the war The firm clarken and Rockefeller they make a trading profit of $17,000 Which I believe was four times all the money that they had made in all the previous years of operations of the firm Wow They are living large like they're swimming in profits. You can't buy enough.

They got to put this money somewhere So what do they do well right around this time people in Cleveland are starting to hear about an interesting Development that's happening not too too far away in Western Pennsylvania in a tiny little hamlet called Titusville Ben's obviously smiling here some of you are maybe smiling Yeah, I just did a zillion hours of But probably most of you are like What are you talking about here like Titusville Pennsylvania like I have no idea where you're going with this Everyone knows David that the center of the oil world is not the Middle East or Russia or Alaska or Texas But Western Pennsylvania Western Pennsylvania. That's right So I had no freaking clue until reading Titan during the research for this episode for like decades the entire Center of the oil industry in the world was this small little town for like 50 years like literally there were some producers some Oil rigs elsewhere, but like very small like most of the oil in the world came from Titusville, Pennsylvania Yeah, crazy just wow and not just Titusville but oil Creek and other areas of Western PA that had oil discovers So this is all going on It's not that far away from Cleveland for the first couple years of this going on up until the Civil War The whole industry is just based their entire stuff. They drill for the oil comes out the ground. They refine the oil They make kerosene when we say they were refining like it was a pretty rough process I think pretty early they figured out you could use sulfuric acid to refine and separate the kerosene out But a crap ton of sulfuric acid and like doing this in large wooden boxes with cracks in it everywhere And it's just sloshing around and spilling all over the ground like it is a gnarly process of quote-unquote refining Yeah, super super gnarly But right as Rockefeller and Clark have all this money They need to have something to do with people come up with the idea like so that with the oil they're refining into kerosene Kerosene the main use was to burn in lamps and where do you need lamps and artificial light more than anywhere else you needed in cities People realize you don't actually have to refine the oil in the same place that you drill for the oil So all of a sudden now people like wait wait we can buy the oil that comes out of the ground crude oil from Titusville Bring it into our cities refine it in the cities and then sell the kerosene in the city That's like a really good business That's a good place to park some capital totally and at the same time all these interesting tailwinds are happening where cities are blowing up I mean you have this sort of like industrial revolution that's happening where people don't just live in rural areas and farm anymore They're starting to be a lot more industry in cities You have for a while only rich people could basically get oil to burn at night Most people with just the sun would go down and then they have no light and they go to bed But like whale oil you have a really good industry Which isn't that where half the way of Berkshire Hathaway of Berkshire Hathaway came from but Kerosene's like way cheaper than whale oil Which had a massive shortage and it's obviously terrible that we kill whales to harvest the whale oil like way cheaper way more plentiful It's a pretty clean thing to burn relative to the other stuff that people were trying to burn This is huge, you know and the key word you know, it's cheaper of course easier to drill into the ground than go like harpoon a whale Yeah, this is an infinite resource here Yeah, totally, but the plentiful is the key word so Like it's only rich people that use whaling oil that they could have light at night But the new demand like if it's civil war going on the war and then industrialization afterwards You need light for commerce for like industry like it's not just so that rich people can have light You need to like operate factories and like do all this stuff.

You need light So there's a lot of demand and Kerosene is the answer So rock fellas like oh, okay cool like this a new commodity They start trading a little bit in this at Clark and Rockefeller They start making some profits But of course Rockefeller is feeling a little hesitant to do too much of it because he's like yeah This is speculative like who knows when this will dry up and you know There's already been some like boom bus cycles in this like food stuffs are kind of our thing So I don't want to dabble too much in this speculative weird oil thing And I think initially they were treating crude but then like I said people start to realize wait a minute we can refine in the cities and This is like really like early knowledge This would be like in I don't know 2011 if somebody came to you and were like hey This is they called Bitcoin and not don't just buy it But like I know how to set up rigs to mine it You know like wait why don't we just take some old computers you have and like mine it So this is like really hard to get knowledge and it just so happens that the one guy in Cleveland Got named Samuel Andrews who knows how to refine oil is buds with Rockefeller's partner Clark Well that works out. He's like a chemist right he's a chemist yeah chemist In quotes here well But there's like real science involved in like applying the sulfuric acid and you know separating the kerosene from the gasoline another crap That's leftover that you don't have anything to do with which by the way They just pour that stuff into the river oh totally in fact this is a fun little Cleveland trivia the Cayahoga River caught fire many times There's a straight-legs brewing company beer called burning river ale oh and this is where it comes from totally because under the cover of night These refineries would have all this extra gasoline leftover cars wouldn't be a thing for 30 40 more years They thought the gasoline was like useless or they would just like trip it into the river. Yeah, oh Awful god just wild just wild so Andrews the chemist who knows how to refine kerosene He's buds with Clark he goes to Clark one day in the office the merchant office that they have and he asks He's like hey, I think it'd be a pretty good investment I know how to do this nobody else around here really knows how to do this I think it'd be a good investment why don't you invest in me and we'll set up a refinery and we'll start refining here in Cleveland So the story goes that Clark is like we're not too interested in this but Rockefeller over here is what's going on And he pipes in and he's like hey actually I think that's not a bad idea I'm interested in that And Clark of course knows that you know rock fellas really good at this stuff He's like okay fine We turn around they invest four thousand dollars on the spot to go set up a new refinery Wow so later that year They open the Excelsior works refinery and a strategically chosen spot in town you know Exactly where this is in the flats right yeah, I think in the flats It's an area that has access both to the Kaihoga River and to the terminus of new rail lines that are going into Cleveland Yeah, and like super industrial area actually the last few years It's been like an amazing amount of renovation and like cool stuff that's going on there So you have this like interesting confluence of the river and like everything left over from the standard oil days And like the steel boom that happened in Cleveland and now this redevelopment but yeah, it's totally the city area That's up against the waterfront huh. I just want to go do a field trip there for sure we'll do a trophy trip So he's like a pig in mud here.

I mean like he was a book. He was so meticulous. He loves money. He loves profit He was focused on trading before but now he's got this operation this refinery and he becomes like literally He's like the Morris Chang of oil refineries.

He's experimenting with constantly tweaking the process You know Andrews the chemist is like dude. I'm like the technical talent But rock fellies like everything around the operations how crude comes in where things are located in the factory He's a be tested like he's doing. Oh wow all sorts of stuff He's always like any efficiency and it's all with a view to it's not just like better is good But it's all the view to like profitability like we want to run this as lean as possible make as much money God told me to make a profit and I am here to make a profit by the way put a pin in that More is Chang thing because there's an interesting way that they are very much like TSM see that I want to talk about later Oh So he's focused like this is so different There are other people that are setting up refineries and Cleveland and elsewhere, but they don't care about optimization They don't care about efficiency. They're just like hey It's a gold rush like give me the gold and I'll just take as much of it as possible if it goes away tomorrow That's fine.

Yeah, the high margin dollars just flying out of the ground all of this the behavior of the other folks This causes huge durations in price like it really is it's like the early days of it going I mean still today and crypto like things are flying around like all the time like prices could be $12 a barrel They could be 12 cents a barrel for oil and it all depends on I mean two things one is who found what and two is what do people believe people Have found recently and so like prices would be impacted by word of mouth traveling and saying hey I heard there's a big gusher going on in this city right now and people would be like well I guess I'm not gonna buy for a while cuz I heard there's a big gusher and so prices are gonna go down Yeah, so Rockefeller though He's just got this vision where he's like oh man the more profit I make the more money and more capital I can put into this The more oil I can hold the more I can produce and when the price crashes I'll just keep buying like I'll just keep it He's like he buys the dip like over and over and over again and because his operations are so much more efficient and so much more profitable He can afford to pay like more than anybody else he can afford to hold this stuff longer He's like really thinking long term in a way that none of his other competitors are oh and we should say like when we say he's tweaking stuff He's so much more profitable. He is both horizontally and vertically integrating so let's talk about vertically integrating first He's doing things like realizing geez we're hiring a lot of plumbers to come in and this is so good I love this lay this pipe every time we do a build out and so they do things like Hire their own plumber and hire their own blacksmiths and decide actually we should do this ourselves and that way we can save all this money on piping Instead of buying it from a third-party contractor later down the road He even plants a forest like buys up a forest so that they can cut down the trees themselves to build the barrels out of to make their own Barrels yeah, oh my gosh, this is saying all this money rather than buying barrels from somebody else And then of course they can innovate on the barrel making process So he figures out oh if we treat the wood in the forest then it's lighter and cheaper to ship back to the refinery So we save all this money on transportation So that's like the vertical integration side of things which would be crazy enough But he's figuring out that wait we do this process How can we sort of use the whole buffalo like what can we sell the gasoline for what I think they invent vaseline Yes, I think they buy the company that events Vaseline, but yeah, they like like petroleum jelly, which is one of the byproducts They commercialize it so rock fellers like he's like found his calling here like this is like divine passion here There's just one problem, which is the partner Clark Clark is like not so into how much capital Rock feller is tying up in the business here He's like hey, we're like merchant traders the point is profits and then we keep the profits and rock fellers like no Like reinvested R&D and like CapEx and inventory So rock fellers starts going around all the banks and all the finances in Cleveland and lining up He's not even using just the profits from their operations. He's getting more external financing to finance growth here Oh totally like when I say both vertically and horizontally integrating and the horizontal sense He is obsessed with trying to figure out how to be the sole supplier of oil to the world Like as soon as he figures out that there's economies of scale here He's like okay cool How do we start the fly we'll get as much capital as possible build out as much production as possible start having agreements with whoever's got rights To the land as possible so we can start vending to the world. Yeah, and own this super strategic Choke point of refining in cities.

So Clark is like spooked by all this turn out has this amazing quote that he finds from Rockefeller I don't know where he found this I should look up in the notes at the end of Titan This is so good Rockefeller apparently like wrote or said this at some point Clark was an old grandmother and was scared to death because we owed money to the banks So great so Rockefeller engineers who this is so good and some of Clark's brothers are also partners in the business at this point time They get into all these arguments. So John baits them one day into threatening that they should just dissolve the partnership and John's like, okay, great Let's dissolve the partnership because he knows that if he goes to them and says look first of all I don't think you're a risk tolerant enough second of all I don't think you're upstanding and so I went out like he knows that he loses leverage by doing that So that's why he baits them into doing their normal thing of getting all up and a fit and saying we're gonna back out Yep, totally So Rockefeller immediately goes to the local paper and places to notice that the partnership is dissolving and that there's gonna be an auction for The assets of the partnership including the oil refineries and it sets up this showdown where the Clark brothers and Rockefeller bid against each other for each other's 50% stake in the business Which is by the way a great way to do it Like if you've got a partnership that's blowing up all right Whoever wants to pay more to buy the other person out is the person that should get to own the whole thing And so the idea of a bidding war between the two of them to figure out how to value the business makes total sense between the two principles So Rock Valley though, we're gonna get in the relationships with all the banks and finances He lines up financing in advance of the auction So he's got basically unlimited resources, although it's still the price ends up stressing him out He buys Clark's 50% of the oil business for $72,500 and in exchange also gives Clark Rockefeller's give us Clark his 50% share of the produce trading Which by the way that's something he probably buys him out for like three to four million dollars something like that in 2021 dollars Yeah, so good chunk of change. Yeah, but that 50% that's $72,500 or you know however you want to think about it That's 50% of standard oil right there. Wow, Rockefeller would say later It was the day that determined my career probably bigger than job day I felt the bigness of it But I was as calm as I am talking to you now And this is like what we're gonna see like this man has ice not ice water like literally a solid ice running through his veins It's crazy.

So this was a big price and it was more than Rockefeller wanted to pay But this happens in 1865 in the beginning of February of 1865 back to what's going on in America two months later Generally surrenders to grant and the Civil War is over and With the Civil War over what's less important commodity produce tree and what is all of a sudden a hell of a lot more important Oil industry urbanization Everything because all these soldiers are coming back and getting jobs and factories like you sort of an industrial boom here And it's interesting how Rockefeller sort of obsessed with I'm not a speculator You know, I'm not one of these people rushing to prospect, you know various plots of land in western Pennsylvania It's funny that it's I would say a picks and shovels play I guess the point to make here is he's doing the predictable reliable Stable very strategic part of the value chain. He's not out prospecting land. Yeah to just double underscore strategic Did Rockefeller know the war was gonna end in two months and probably I think Sherman's probably marching to the sea at this point So sure now writes quote the war had stimulated growth in the use of kerosene by cutting off the supply of southern turpentine Which had yielded a rival illuminant called a campaign the war had also disrupted the whaling industry and led to a doubling of whale oil prices Moving into the vacuum kerosene emerged as an economic staple and was primed for a furious post-war boom This burning fluid extended the day in cities and removed much of the lonely darkness from rural life Soon John D Rockefeller would reign as the undisputed king of that world So he's now got the oil operations the refining business all to himself December of 1865 the wars over all this is going on he opens a second refinery in Cleveland next to the excelsior works The new name that he really he chooses he wants to let everybody know that his oil his kerosene his business his operations Is gonna be bigger than anyone else? It's gonna be the best quality and it is gonna rain from sea to sea What does he call the new operation standard oil?

Well first it's the fact there is the standard works and then it because oh really yeah the first refinery was the excelsior works and then Standard works is the name that he chooses the standard he's setting the standard and importantly yeah, it's about setting industry standards I mean for him. He was observing I know I'm hammering home on this like speculators and cowboys thing But like especially after the war you've got all these soldiers who are trying to figure out what to do with their lives And they're going and they're working and drilling and so you have all these people that have I think in the book it refers to someone with a gun and a canteen and you know their plot of land in Pennsylvania and I think Rockefeller is basically observing that the kerosene that Could power the world is volatile in price people are scared that it's not safe because it's being refined in questionable ways And so people's houses are burning down. There's not professionalization in the kerosene industry the way that he wants to bring it So this notion of standard is almost like kind of like the TSMC chip yield thing like everything that comes online is super high quality Totally that is exactly the same analogy like this is not necessarily easy stuff to do They're gonna set a standard and by the way at this point He's now figured out that he can run the factory on gasoline Oh, I didn't realize that so the standard oil factories are burning less cold than their competitors and using the gasoline by product That's so great. So they're literally feeding themselves.

Yeah, so you said something a minute ago when you're talking about this You said selling this oil this kerosene to the world So by the very next year in 1866, you know, America's a big market and is gonna grow hugely especially after the Civil War But do you know what's a bigger market the rest of the world? Especially at this point in time. I mean America is not America yet. It's probably 30 40 million people.

Yeah, maybe if that all right You keep talking about Google this. Okay, okay, great. So by the very next year in 1866 The fledgling standard oil company is already selling two-thirds of their kerosene overseas primarily to Europe It's like one third domestic two-thirds international already 31 million people in 1865 Wow So they're selling most of their oil overseas Rockefeller dispatches this little brother William who's now working in the business to New York City To go handle all of the export business for standard oil. Do you know the story about when he needed to raise?

I think it was $50,000 Ooh, I don't know. Oh, yeah, well, it's a great story So this is in churn-out's book Rockefeller has a bit of his father in him sort of a flair for showmanship and he really needs $15,000 like he needs a loan pretty quickly and he's sort of looking around for Financie years for it and he dresses very nicely and he presents himself nicely and he walks in areas where he's sure to bump into people and At some point someone stops his carriage and looks over and says oh, mr. Rockefeller Could you use a $50,000 loan and of course Rockefeller's like jackpot and he sort of looks at him like without breaking and he looks at him He goes hmm Could you give me 24 hours to think it over? Yeah, and of course by doing that he gets like the best terms on the loan It's like I'm not sure I really need this he's unbelievable at like getting his hands and way more capital at way better terms than other people would be able to Oh, so good now that Williamson, New York and the family's got the family has got operations in New York They can get like oh, mr.

Sir Rockefeller's could you use? $250,000 or $500,000 so pretty soon They're like bringing up a zuka to like a fistfight with the other refiners out there And it's kind of like this whole part of the story just reminded me so much of like the uber days You know everyone uber went out and raised all that money Oh, we're gonna flatten lift and DD and all the global competitors that like oh, it's totally was the uber playbuck except it really worked Yep, speaking of uber right after William goes to New York the sort of shall we say a meal Michael character of Standard or even I'm sorry to say far but an interesting colorful character comes into the fold in the fledgling standard oil empire I I've been posting on Twitter like all the fun stuff like just because I've been enjoying this research so much And I posted about this guy Henry Morrison flagler on Twitter and Andy Sparks replied to my tweet with I think like the best one liner about Flagler possible. He says quote flagler was savage And he was really like, you know Rockefeller. He's driven by this divine calling He's willing to go to the mat.

He's willing to do just about whatever But it was flagler and then some of the other lieutenants that he brought in that were like they're the ones who did the dirty work Oh, yeah, because Rockefeller, you know, he needed to preserve plausible deniability left right and center Especially once they figured out all the business tactics that were really gonna let them press their advantage You know, he had some very bad lieutenant so he could stay as plausibly good as possible Rockefeller was for sure the one so Flagler ends up coming into the business because he has a wealthy relative named Stephen Harkness who hears about what's going on and wants to invest Like equity dollars into this new standard operation. So he invests a hundred thousand dollars in the operation Oh my goodness, like I didn't actually find like what the net worth of the Harkness family ends up being because of this but like enormous Yeah, it has to be just generational wealth and his sort of one term that he asked for as part of investing is that he wants I think maybe Flagler was his nephew or something He wants Flagler to join the firm as treasurer to quote keep an eye on his investment As a flagly joins and literally this is why he's doing it He keeps a quote on his desk at standard oil for all the time He's working there the quote says do unto others as they would do unto you and do it first Oh My goodness, so Flagler takes over the negotiations for shipping of oil with the railroads If you know anything about standard oil you can see where this is going when Rockefeller was running negotiations with the railroads He always was able to get pretty good rates shipping rates because he had a bat now being there in Cleveland on Lake Erie Totally during the summer months in the spring and fall We can ship way cheaper by sending it out by water by water. Yep So all the crude coming in from Titus Bell to be refined in Cleveland at standard could come in over the water Or by rail and then when it was going out to then go off to the rest of the country and the rest of the world He had another option Flagler is like oh, this is nice. That's cute.

Let's exercise our power a different way. Yeah. What about if we go to the railroads? I'm really K guys.

It's really expensive to operate these railroads What would you say if we were to guarantee a really really really large amount of minimum shipments of oil that will do with you An exchange for us guaranteeing you guys like an unbelievable amount of volume that will do on your railroads You give us an equally unbelievable shipping rate like cost of doing this the railroads like yeah, that sounds good Except the railroads are like wait a minute, but you don't make that much oil Where's all this oil gonna come from? Well, specifically the railroads think this sounds really good because with the amount of volume that they're talking about This means they can run dedicated lines of just oil tank cars So not mixed trains with like box cars and oil cars like just oil tanks between Titusville and Cleveland with no stops So if you think about operating a railroad if you have different types of product that you're loading on to the train that takes more time and money They were like being forced to stop to pick up like one car and add it to the train exactly and then all these stops That just adds up for you know cost money right? You know time is money here So they they love this but as you said Ben They're like well how head me like this is a great idea of how you gonna do it You don't have enough capacity and two other things before we answer that question one is just to give like the magnitude of how much This helped them it lets them own way less cars also like the railroad They get to go from something like needing to have 150 cars to be able to like make the same amount of money on like 40 or something Just like dramatically smaller and the other thing is standard oil has started to like really build up some credibility here because when people were putting oil on trains before They were sloshing around in like open wood boxes and like standard oil pioneer Hey, we're gonna put him in like tanks and eventually metal tanks and it really like professionalize though And eventually we're gonna make railroad cars that are like the car itself is just a tank Yep, and fast-forwarding a little bit like oh railroads. What if we made those tanks for you?

We're gonna get ourselves so like it was like don't worry guys. I got this So he goes around to all the other refiners like everybody else and Cleveland and he's like hey guys I have negotiated a great rate for all of us Do you all want to come on board together and we'll all like pool our Shepments that we're all getting in for planas bill and by doing this all together. We've got this great great This is an offer that they can't refuse and not only can they sort of not refuse it because What happens if we say no, but this is their major cost driver They're in a commodity industry at this point and so distribution of the oil is actually the big driver of the business yep So okay everybody said well, this is fantastic. Okay, great.

Let's do this, but you know one thing. Let's not write any of this down Okay Let's just keep this all as little gentlemen's agreement between all of us and the railroads Nobody knew we don't need any feds, you know sniffing around here Feds couldn't quote if they're even warning them well basically if anybody ever asks us if we have an agreement There's no agreement everybody can look at each other and go. I haven't seen the agreement. Yep, totally.

So this agreement Comes to be known as the Lakeshore agreement because that was the Lakeshore railroad was the main railroad that they did this with and this is huge So by doing this until this point in time Cleveland as a city So if you forget the individual companies which standard is one with in Cleveland But just think about refining production of oil in America Cleveland was actually the number two largest center for oil refining behind Pittsburgh at this time once they do this deal Cleveland is like fast-track and becomes number one and Standard and Rockefeller and Flagler and flag with the guy found that they like they just brought all the other families in Cleveland Like to heal like they run the collective now And this starts a playbook of like if there's oil leaving the city either It's ours or we have some agreement in place where like it's good for us even if it's not actually ours and maybe it'll eventually become ours Yep, so they dominate Cleveland Cleveland becomes the number one oil refining center in America, but you know That's not enough for young Rockefeller. He's got his sights set on the whole industry like Pittsburgh, Philadelphia There is some refining happening in Titusville some in West Virginia some of New York He wants all of it so how's he gonna do this as you alluded to at the top of the show? There actually is no legal framework at this point in time for businesses to operate outside their own states Importantly, they cannot own property in other states. Yeah, they can't own property.

They can't have operations Literally, this you know the United States was like this is all changing after the Civil War But it was United States like the states where the sovereign you know or near sovereign entities here totally And it's really only recently that you could just sort of incorporate your own business as you please at all without getting express written consent from the government I mean in the days of England and early in the US like Incorporating a company a corporation was like the government's granting you a special right to operate this business and so already the doors are Needed a charter literally blown wide open that you can just start a company But we're not yet to the era of like oh I can start a national corporation. Yep So they think for a while this whole little crew and standard oil and cleaving about how they're gonna do this They know that if they want to consolidate the whole industry in the whole country They need a lot of capital and be an ability to operate outside the borders of Ohio So flagler Comes up with this idea. It's financial and corporate law innovation innovation Did you read about how he comes up with a new structure that they use or I guess was an old structure That they wasn't very popular but they turned to the joint stock company Did you read about how flagler who was not a lawyer drew up the actual like incorporation? Oh wasn't it on like a yellow legal path?

Yeah, like the equivalent of a yellow legal path. No letterhead. Yeah, totally Which partially I think was just because that's how like this was still you know Wild West type stuff, but also I think they didn't want anybody really know about this They wanted this to be super secret so flagler comes up with the idea's like these joint stock companies Which I mean I think like wasn't the Dutch East India company? I think stock company takes this idea but not many other companies were doing it He says if we were a joint stock company then we could buy shares in other joint stock companies We could also sell shares in ourselves to raise money or to strategic partners who we might want to have a vested interest in our Success is interesting.

This might solve some of the capital requirements Okay, well, that's interesting and also this like selling shares to raise equity capital thing rocket phones like my god That is brilliant. How did I not think of this before totally? It's flagler that comes up with this amazing so on January 10th, 1870 They abolish the old partnership and they pour all of its assets into the new joints Company the standard oil company of Ohio boom it's born they capitalize this new joint stock corporation with one million dollars of liquid assets Like that is how enormous this had become already unheard of I don't think that there was any other organized enterprise in America with that amount of capital period Any other industry like already that's how big this is and we're still just getting started So this doesn't solve the interstate commerce issue though, so they come up with another Absolutely brilliant and diabolical plan to solve this which is the trust And what they decide to do is they say like okay technically Companies can't own shares and other companies outside the state, but what if we create a trust? Then this trust holds shares in companies all around the country the trust could have some trustees that sort of get to Decide what happens with maybe all the companies that roll up to the trust We can sort of make sure that these corporations each of which are nicely situated inside their own state and don't own any property outside their own state But like we the trustees sort of get to decide how those companies might work together Yeah, and there's no law that says that Officers of you know and given company can't be trustees of trust that owns shares and other companies So this is the loophole around it's they create this trust and the trustees just a dictate to the other companies that they purchase what to do But also be this is important all the dividends from all the other companies the trustees Designate the beneficiaries as the individual shareholders of standard oil of Ohio So nothing ever touches the actual company standard oil of Ohio it all goes to the trustees and then to the individual shareholders and that's how they get around this interesting so the individuals who own the corporation Yeah, literally everybody on the cap table ha end up being the sort of puppeteer controller and beneficiaries of all these other entities So Rockefeller is like oh this is amazing.

He comes up with the idea that none of them are gonna take a salary They're gonna focus solely on these dividends that are coming in as like a source of value and income But also even more importantly focus on the appreciation of the value of you know this whole enterprise This was new thinking like now people listening about like yeah, like equity Why else would you start? Nobody had ever thought this way before like the idea that equity and dividend could like that that could be your primary source of Income and wealth generation and that you could use that to incentivize new people who you're bringing into the organization as employees or partners or companies You're buying yeah The idea that like your competitors could become your friends by being able to offer them ownership in the joint combined company where as we win In this industry and this industry gets bigger. We all win by holding shares of this thing together. Yep Sure now right whatever the debates about his ethics economists and historians have unanimously extolled Rockefeller's role as a pioneer of the modern corporation And then quoting from another biographer Rockefeller Rockefeller must be accepted as the greatest business administrator America has ever produced And it's this so this is how well this works in the very first year of the trust 1970 first year of all this getting set up remember There's one million dollars in total capital that gets put into this structure They pay a 105 percent dividend at the end of the year Including also reinvesting tons of cash flow back into the business and expanding and buying other companies So like the million dollars that was in there They pay over a million dollars out to the shareholders and have many other millions of dollars to go to other things It's crazy.

They're extremely profitable and they're growing like crazy Yeah, and let's talk about this Rockefeller's argument to the societal benefit for a moment Which is like a it's silly that the state borders are preventing up Like why should that really be a thing like to the extent that I've been able to rapidly expand in Cleveland And we've been able to create great product for consumers at a low price quality of life for people has gotten better And like that has all happened because we've expanded here Why shouldn't we just be able to do that for people everywhere and his argument is really like this is for the betterment of Consumers now my competitors when I move into these states probably don't like it but like ultimately the American public wins and He's right. He's totally right. Just like Jeff Bezos and probably say the same thing today Okay listeners now is a great time to tell you about a new friend of the show. We are very excited about work OS Yes, yes work OS is the enterprise ready platform used by open AI cursor perplexity for cell plaid and literally hundreds of other winning companies So what are all these companies using work OS for?

Imagine you're a fast-growing startup You've got product market fit and you're getting inbound interest from big enterprise customers very exciting But then they send you their security questionnaire Yep, and it's like 47 pages long with requirements that kind of sound like alphabet soup Do you support SAML 2.0? Can you integrate with our octa? Do you have skim provisioning SDIM what about RBAC and you're thinking I have no idea what these acronyms even mean Let alone how to implement them. So here's the thing these are not nice to have These are deal blockers without SSO without skim without RBAC without audit logs You simply cannot close enterprise deals period But none of these features make your core product better They don't make your beer taste better to use our favorite analogy here on acquired So if you're building like a design tool spending six months building SAML authentication doesn't make your design tool more powerful So this is where work OS comes in they've built stripe four enterprise features work OS turns enterprise authentication requirements into drop-in APIs abstracting away as much unnecessary complexity as possible So instead of your team spending months reading SAML specs you can implement enterprise SSO in minutes WorkOS handles user provisioning permissions audit logs all the checkbox items that enterprise IT requires So whether you are a seed stage company trying to land your first enterprise customer or already big and expanding globally WorkOS is the fastest path to becoming enterprise ready Just visit workOS.com or just message their Slack support They have real engineers in there who answer questions fast and when you get in touch just tell them that it's on you So David they've now got the structure in place to become a national trust and Expand here.

How do they do that? What happens? This is so great from just like this story the smile on my face is so right now whether it's juicy Yeah, we'd great great is up for debate So you know the structure the joint stock company they come by and hold stock and other companies like an issue shares Hold it in them. What are they gonna do here?

Remember? We said the railroads are the most strategic important supplier and show point for the industry Standard goes to the three biggest railroads the Pennsylvania Railroad the storied huge enormous Pennsylvania Railroad I think that's on a monopoly board. It is literally on a monopoly board. It's like that is how Pennsylvania the New York Central and the Erie railroads and they say so we got this new thing This new thing lets us do things with other companies Do you want to cooperate as a part of our new thing?

What about we all do something together and the railroads like oh, yeah, we like doing stuff. This sounds pretty good So they get together. They set up a shell corporation called the South Improvement Company Oh, this is so juicy which is intentionally nebulously named yes And in fact a leader in life when Rockefeller would be getting grilled in federal depositions He would be asked if he was ever a director or involved in the southern Improvement Company, which of course is not a thing No, no, I was never involved in the southern My good is so great obviously he was not purging himself by saying that because the questioner got the name wrong Though I think he did purger himself in other SIC related Yeah, I think he did so here's the deal Standard oil is gonna set up and control most of the South Improvement Company through their new trust and joint sack corporation structure the railroads will own a token amount but The railroads and the principal you know owners of the railroads the individuals They're gonna issue some standard oils can issue them some sock so that you know these guys now have a little Skin in the game with standard oil all the interests are aligned here Well and the railroads had a problem that they need solved which was that because of the boom bus nature of everything that's going on Their cars especially oil and the sort of remember that thing that I mentioned earlier where people are deciding not to buy because they hear It's gonna be cheaper soon because they know there's a big gusher like this whole thing is like totally screwing with the railroads Not to mention the fact that with intense competition among the railroads Just like there was intense competition among all of the non sort of standard oil oil companies a lot of the profits are just being arbitraged away And so they've got unpredictable demand they've got booms and busts They've got this situation especially with oil where like certain types of oil in certain areas were so insanely cheap that like everybody's going out of Business because no one can make any money the same sort of thing is happening in the railroad industry And so if there's like a cooperation opportunity for the railroads and you know rockerfellers offering them I can kind of solve your problem here and we can sort of smooth out business then it really comes down to like it's really Hard to run a business when prices are fluctuating and they're not fixed. So clearly the answer is to fix the prices We ascribe no virtue to this I think the jury on this whole thing and we'll get to this later in the episode and certainly in part two of like what parts of this We're good and what parts of this were bad.

It's both There's lots of both that happened all through this story. Yep the three biggest railroads and standards They get together in this southern improvement company and they say here's what we're gonna do all the railroads We're gonna set a new fixed price There's now a fixed literally a fixed price for shipping oil on railroads to everybody out there all anybody shipping oil There's one single fixed price and it's really high whatever it was before like it's got multiple of that. It's really high except For anybody who's a member with us of the south improvement company y'all get a 50% discount That fixed price and it goes even further. This is just like I'll just twisting the knife here anybody who's a member of our little Our little company here one might say a little cartel little cartel Also, they will receive a little dividend a little kickback They call it technically a drawback from any revenue that any other oil producers that are not part of this that ship on the railroads Part of that revenue from the really high price that they're charging They're just gonna give some of their revenues at the competitors that are part of this little cabal here This is the most mind-blowing part of the deal not only do you get a rebate for shipping with us?

So that way the price is actually way cheaper But you also get a rebate even when you're not the shipper I mean they call it this straw back But like other people ship stuff with us and thank you because you are a nice member of our organization You're gonna get some of that money and so your competitors are just paying you it's the craziest system ever I don't know what the formal definition of the crime of racketeering is but this sounds like Whatever it is. I think this fits the case Well, there's a couple different ways that this story draws parallels to Microsoft But this reminds me so much of that CPU licensing thing that they did Do you remember this in the early Windows days the deal that Microsoft cut with I think it was IBM was yeah You guys can use Windows and that's great and any computers that have a CPU in them that aren't running Windows You're also gonna pay us for those CPUs and that's the deal they signed and so Microsoft basically Ended up with you know the monopoly the entire industry because IBM's like well wait a minute Whether we're putting Windows on the machines were not we're paying for it And so I think Windows is and actually I don't know if it was Windows Yeah, I've been DOS if only Gates and bomber and Jeff Rakes and all the like if they'd had our episodes You're on state or old I'll listen to you before they but that stuff in writing history could have been different it turns out Yes, this may have been a flashpoint once the public realized how egregious this sort of agreement sounded I'll say there is literal writing in the streets in Titus Bell in reaction to this once word gets out like literally like people I like fighting in the streets they're like banging up and destroying you know standard tanks and property and like I mean It's truly heads I win tails you lose for standard oil versus their competitors Yep This is the point where public opinion really starts to get concerned about standard oil in particular informed by the competitors because the public Public is like great like we're getting so much stuff so reliably for so cheap. This is awesome. Yep So the railroads they know they may be gone a little bit too far and they're like guys I don't know that we can actually do this and rock feller flag like they're like Okay, let's just like hold out for a couple weeks.

I think we're gonna be fine We're gonna go do some stuff and we'll get back to you So during these few weeks when this deal has not yet gone into effect yet, but rumors of it are spreading throughout the industry Flagler and Rockefeller go around to all the other refiners in Cleveland Keep in mind many of them are in very rough shape right now because a the fluctuations But be oil prices are getting driven down so far that like people are trying to produce and make profit on this But like because of this crazy inflation then deflation thing that happens like a lot of these companies are slowly on their way to going out of Business anyway, yeah And they're already kind of brought to heel by standard by the lakes or deal where they're already sharing capacity So now flagler and Rockefeller go to them and say like you know that great that we organized for you It's over. You'll heard about this a Southern Cleveland company thing It's happening. So the way we see it you basically have two choices You can stay nominally independent and you can die or you can just sell your operations to us come in and join the fold Get some standard oil shares will even give you stock and then we can all profit from this amazing deal that we have and there's something Larry says like rock feller says own shares of standard oil and your family will Never go hungry. Yep.

So as I to tar Bell who we're gonna talk much about next time wrote in her investigative reporting on Standard oil. This is what she claimed that the standard pitch was to other folks about joining the scheme quote You see this scheme is bound to work It means an absolute control by us of the oil business There is no chance for anyone outside But we are gonna give everybody a chance to come in you are to turn over your refinery to my appraisers And I will give you standard oil company stock or cash as you prefer for the value that we put on your business I advise you to take the stock it will be for your own good So they're literally just saying like they're deciding what value they're gonna pay for all these refiners And of course the offer that they put in is like 25 to 50 percent of book value Yeah What the refiners even paid to build the factories in the first place and Rockefeller's argument is like well We're just gonna shut most of these down anyway I mean we're actually doing them a favor by taking this thing that's just gonna go out of business over the next few years Giving them some shares in our company as like a you know We don't want to be too terrible to these guys there are fellow country men and they're also in our industry and we're just bringing them in We're giving them some shares and you know I'm gonna write the whole thing off anyway, so it's a crap factory So over a period of six weeks from February 1872 to April 1872 Standard oil buys 22 of the 26 other refineries that are operating in Cleveland and this comes to be known as the Cleveland Massacre And then once they already own all the refineries and Cleveland like all right We're done, you know, we don't really even need this a self-improvement company thing anyway And I guess the public doesn't like it so we're not gonna do it and apparently not a single barrel was ever shipped Using the South Improvement Company. They never documented anything but structure It was all set up and agreed upon but then they didn't actually ever need to do it because they used it as leverage to just go and roll Everyone up anyway, and this was the tipping point So obviously this was Cleveland's refiners first, but then immediately after they go to Pittsburgh They go to Philadelphia. They go to West Virginia They don't even have to set up some ploy shell corporation like the South Improvement Company They just go to all the other refiners in these cities and they're like y'all heard about what happened in Cleveland We're coming here next so you want some shares you want some shares?

Yep By 1877 standard oil controls 90% of the oil business in America 90% as Barons put it Consumers of kerosene had no choice but to purchase the product from a standard company not that they complained standards policy was to upgrade the product Continuously while lowering the costs in order to frighten away potential competitors and increase sales I just want to say David like just like TSMC It's like yep I think it's something like 70% of the leading edge CPUs flow through the island of Taiwan and you know 50% are actually TSMC manufactured by TSMC And like we're all better for it as consumers And I think it's just fascinating this notion of like we're gonna keep lowering prices the products gonna keep getting better And at the end of the day it actually is good for consumers Oh, and we're gonna get huge and super profitable on the way Yeah, well and you know ASML and you know all the equipment manufacturers. They're kind of like the railroads here Right, although amazingly this cooperation with the railroads really didn't lead to standard oil squashing the railroads Like they stayed really good business for a lot of time. Well, they did for other industries Or at least I think they did I don't know enough to say about the railroads They certainly stayed independent But you know Rockefeller and Flagler and this whole crew like these guys paranoid as well Right like they do realize after they've just gone in consolidated the whole oil industry They know that the railroads do have strategic leverage over them and again I'm really the oil refined they let the other refinder stay in business They just you know bottom and gave them standard oil shares. They're worried about the railroads like we don't want them having strategic leverage over us How can we co-opt them so I mentioned earlier tank cars?

Yeah, what was the deal here? So right around this time standard starts going to all the big railroads and they're like, you know We've saved you all this money on op-ex now you get to run trains directly, you know, no stops no box cars This is great for you But these tank cars these modern tank cars You know me to steal and the like that's a lot of cab-ex for you to keep it and we just keep sucking up all this shipping volume with y'all What if we just make these cars for you and we lease them back to you We'll take on the cab-ex to make the cars and we'll lease them to you at a really low rate So what's the play here? So sure now we're right about this He says as the owner of almost all the Erie and New York Central tank cars standard oils position grew unassailable At a moment's notice it could crush either railroad by threatening to withdraw its tank cars don't take our business You can keep running this great business for y'all But you know you mess with us we can withdraw our tank cars Wow and so now they've got 90% market share of kerosene and they've got This relationship with the railroad where they basically are going to get the most favorable rates without a railroad going out of business And then they take it one step further again So by the way David you laughing through this like maniacal plan you're like the nicest It's so scary because I'm like I have implicit trust in you like you're so kind and you're so warm and you're like and then they take it one step further And then they stab the knife in the back again, and it's so great. Oh, this is such a good story I love it not condoning this behavior by any stress of imagination an important pillar of American history a critical part of American history So okay, they take it one more step further and this is really the kudagrassier so As they're doing all these deals and setting up and standard oil is becoming this octopus as it would be known Dragatory term by its critics octopus, you know, like you think the golden sex vampire squid sucking on America was bad Like literally the standard oil octopus is bigger than 10 vampires quids So there's a new Technology that people are thinking about with regard to oil not gasoline not yet That's coming later But all of the you know the oil is being moved around either by water or on railroads People are thinking that like there might be a way to move oil Much much much more efficiently so the concept of pipelines already existed but really short distance pipelines literally from the derricks from the wells To the railroad depot so this would be like, you know a mile at most They would pump oil through pipes to the railroad depots or to the shipping depots or whatever to then load it up and cars and get it out of there Some people start thinking like well I wonder if we could pump oil a lot farther than just a mile or two and Meanwhile the remnants of the industry that haven't yet been consolidated by standard They're looking for any kind of you know hail mary pass to get some leverage back in the industry So they decided they're all gonna go in together against standard in the railroads They know they can't get any concessions out of the railroads.

They're gonna try and develop a pipeline a long distance pipeline So in 1877 they do this they band together and they form the tide water pipeline company This just sounds like a scandal right off the bat like the name tide water pipeline company Why would you name it that I mean it's 1877. I have no idea And first the goal is that they're gonna pipe oil from Titusville directly to Baltimore on the seafront They then shorten it to Williamsport Pennsylvania, which is still 110 miles This would be like an amazing proof of concept that this would work. Isn't that where like the little league world series is it is? Yeah, I don't know why Williamsport was where they wanted to pipe this stuff, too But they do end up piping it so standard though fights them tooth and nail on this A bunch of the execs want to go hire thugs to go like smash the pipeline and do all this stuff Rockefeller's like he rains in his exuberant execs on this and says no no We're gonna fight it with every like, you know political leverage that we have which they do But they don't succeed in 1879 the pipeline turns on and it works And I think a bunch of people in standard like probably like pissed at John I don't understand why he let this happen and they don't how could this terrible and rock fellers like oh don't worry I have a plan.

I remember this is just one route that this new pipeline has opened up You know from Titusville to Williamsport rock fellers like I got all the railroads in my pocket They go around to the railroads and they tell the railroads they instruct the railroads to cut shipping rates So far down on this line that literally like they're basically paying anybody who's willing to ship by railroad on this line To ship so it's actually the pipeline Even though they invested all this money in building it and it's so much more efficient so much cheaper than running a railcar Because at standard oils pressure the railroads have now lowered prices so far in response It's not economic to use the pipeline so they starve them out So this is like the Bezos versus diapers calm thing where Bezos is like I can sell diapers at a loss forever You understand that is totally what happens so the tidewater pipeline company is Like up against all their about to go bankrupt They can't compete and by March of 1880 they sell a minority stake in the pipeline to standard oil Standard assumes control of the pipeline takes all the technology Immediately turns around and goes and builds out four more major pipelines from Titusville to Cleveland to Manhattan to Philadelphia to Buffalo So they build these you know now pipelines that are huge Do you know what land they build the pipelines on? This is the most cold-blooded thing in the whole freakin episode. No, okay, so who would have land rights in straight lines The railroads Standard oil goes to the railroads and they'll like my friends We've got this really exciting new thing that we're working on We're friends. We help you help us.

How about we use your land. How about we build our pipelines right along next to your railroads And then there'll be a little reminder sitting to you right there reminder to y'all that we don't need you That we've built on your land You're looking at your competition every single time you glance out of a train car So if you ever you know want to try and scare us on prices Wow, just remember we've got an alternative right there Wow, oh my god, so you know the deal was sprint random business trivia fact I may have said this on another required episode I think we've talked about this before yeah that telephone lines were laid along real lines Yeah, it's the southern Pacific railroad SPR. Oh, yeah, that's right That's right and exactly for this reason like hey We need someone who's already eminent domain to bunch of land that we can go directly in a straight line from one city to another boom Yep, crazy now I don't know for sure, but I didn't see anywhere that the railroads got any like equity stake in these pipelines Wow, all right, so I fully take back my comment earlier that it seems like the railroads made it out, okay Well, I think they actually did I mean this was kind of Rockefeller style and standard oil style is like we're gonna let you live We're gonna be benevolent dictators. We're gonna let you continue You're just gonna remember that you know our knife is pressed against your back at all at all times Okay, so after this it's done I mean this is the story of how standard oil became standard oil like Rockefeller standard like they have one on a scale that Nobody has ever won before since their competitors are obliterated new upstart technologies are co-opted all of the suppliers You know I reduced a total lackeys.

We didn't talk about the customers. This is great So most kerosene of sold at retail in America and grocery stores So right or in the sort of early 1880s standard decides to run the same playbook that they've run with railroads Who with the grocery stores in America they go to them and they say hey You know it's expensive for you to Set up and give self space and everything to all of these cans that are all you know non-standardized of standard oil kerosene In your stores from now on all standard kerosene needs to be sold in standard Canisters that we set the terms on and we fixed the price and we tell you where you can put it in your stores So some stores you just sort of bristle at this and say they're not gonna do it Standard sends out a letter in Mississippi data particular problem with this They send out a letter to all the groceries in Mississippi They say if you do not buy our oil we will start a grocery store chain to compete with you and sell goods at cost and put you all out of Business You can just feel the American public and Washington getting stirred up about like okay monopolies are pretty bad We really need some legislation about this. Yeah as turnout rates by this point in time Rockefeller's creation could only be discussed in superlatives It was the biggest and richest the most feared and most admired business organization in the world Wow, well in 1883 official standard oil headquarters moves to Manhattan to New York City and Rockefeller himself 26 Broadway to Manhattan to 26 Broadway Do you know which is the building that they have constructed for the standard oil headquarters 26 Broadway right on Wall Street? You know what is right outside of 26 Broadway today?

No the bowl the charging bowl. No way literally right outside 26 Broadway You know the bowl was only put there in like 1989 I think oh no I would have assumed it was there for the 80s it was put there after the 1987 stock market crash Interesting so Rockefeller and all his brother and all of his their lieutenants know they moved to New York also around this time They just like buy up midtown so Rockefeller moves to write off Fifth Avenue in the 50s It was a 54th Street. Maybe I should don't ever written down I was like 53rd or 54th Street right off Fifth Avenue you buy house moves in there really right there between the park and Between Rockefeller Center, you know, like no, there's no Rockefeller Center They build freakin Rockefeller Center, which he had nothing to do with that was a day in dad by son But yeah, we'll talk about this more next time I didn't realize it was Columbia University's campus there and when junior decided to get in and start building developing Building Rockefeller Center, they lease it from Columbia and then they ultimately buy it fascinating Yeah, well part two I mean we'll have a lot to say about universities and Rockefellers in New York and we haven't touched a lot on the personal side of Rockefeller Other than saying he was deeply religious and believe he should make a lot of money and then do interesting things with it There's a lot of like very good things He does with it that I think we'll say for part two and a lot of his idiosyncratic things around like being afraid of death and wanting to live A long time and his health obsessions. I think a lot of that especially starts to show up in his old age But David bring us home here to 1890.

Yeah, so I mean, this is like it's like we're gonna you know recount now What will ultimately become the beginning of the downfall of standard oil? But like I don't know like it's weird being at this moment in the story because they've literally won like I don't think we've ever had this before The only thing that can bring them down is government or a paradigm shift I'm referring to like electricity and lights and houses But they very quickly were saved by the fact that conveniently right around the same time any thirst that we had for oil before Once you have the car Rockefeller got so much richer in his retirement from his shares of standard oil Which became you know the things that powered us moving around the country in cars Then he ever got from kerosene So it's like a paradigm shift could have disrupted and did disrupt the core kerosene business But like the thing that happened at the same time was so much bigger than anything they ever could have imagined I think that standard was also making some investments into electricity and electrical utilities I don't know how deep they got into the business But I'll say this monopolies even if you don't trust us them are always at risk of being disrupted by a paradigm shift Totally fair point not in this case though Not in this case so you know, it's funny I always assumed you know what I knew of the standard oil story before doing all the research was that it was the 1890 Sherman antitrust act that brought down standard oil. It wasn't for another 21 years indeed. It was yes It was the Sherman antitrust act.

It was not for 21 years So the we'll close with a wild story of the Sherman antitrust bill so Ohio Senator John Sherman brother of general William Tecumseh Sherman No way great hero of the Civil War. Wow. Yeah, unbelievable You know how we joke about how they're like must have been 10 people in Silicon Valley in like the 1970s and 1980s Right. I think there must have been like 10 people in America at this point in time So senator John Sherman in 1889 as like the sort of public sentiment is starting to shift against this huge octopus monopoly proposes an anti quote-unquote anti-trust bill in the US and the federal Senate It turns out that just a few years earlier when Sherman was running for office, you know, Ohio Guess who one of his biggest campaign supporters was rock feller?

Yes That would be correct. So this is like Like hmm. You're biting the hand that feeds you here Yeah, so the acts you know does pass But Sherman makes the political gamble that like the political power and stature that he's gonna get from doing this is gonna be worth more than the money that he's gonna get from Rockefeller and standard going forward The act ends up passing in July of 1890 Outlawing all trusts and business combinations in the United States of America that were this is the key modifier Quote-unquote in restraint of trade, but they don't define what in restraint of trade meets It's up to some judge to set president and everybody thinks oh well There's no legal precedent for what that means so that's never really gonna become an issue and in fact Rockefeller and standard oil viewed this as a win. They're like, oh great The public is now gonna feel like the US government has taken action.

They have heard them. They're gonna curtail standards How about you gonna curtail anything that we do we're gonna keep doing exactly what we've been doing and in fact when Sherman runs for reelection In Ohio the very next year in 1891. Do you know who once again one of his biggest owners was is it rock feller again? It is John D.

Rockefeller How funny is that the act that ends up bringing them down? He is the biggest or one of the biggest donors after the act passes to the senator that introduces it huh? Fascinating so in 1896 Rockefeller is like well guess it's been a good run I'm gonna hang it up. I'm gonna retire I'm gonna focus on my philanthropy and I'm gonna leave one of my lieutenants John Archbold and my son John Rockefeller Jr Who's about to graduate from Brown University?

I'm gonna leave them in charge I'm gonna go retire to my estate and I'm gonna focus on doing good works But key mistake he didn't fully Leave no no he did not he's like well just in title only I'll kind of stick around as president right or as chairman Yeah, of course, that's not how the public would view it. They're like no your name's still on the door Oh, he's gonna get dragged back to the witness stand in the years to come so no no sunset right off for him Yeah, what a story all right listeners now is a great time to thank one of our favorite companies and one that has become essential to how we make Acquired anthropic and their newest flagship model Claude 4.6 which we have been making heavy use of here at acquired HQ I actually just leave some space for the required studio here in Seattle We win the landlord sent over a pretty simple lease. I thought oh, this is totally something I can review myself I looked at it, but then I also thought okay I could use a sandy check so I uploaded it to Claude and asked if there was anything that I should be mindful of or Inconsistencies or anything I should push back on and Claude actually found three things that I totally missed on my own review It's amazing. You told me about that I've actually been using a lot here for writing show notes I end up with so much detail in my like 50 60 70 page script documents that I'm like way too close to the material And I need a fresh set of eyes for what the big points are as I write up the show notes for each episode And I use it for something similar to when we were preparing for our Super Bowl innovation summit I had Claude go back through our old NFL episode and search the web for what numbers had actually changed since then then go through it with me and Figure out if that changed any of our older conclusions.

Yeah as anthropic puts it Claude is the AI for minds that don't stop at good enough It's the collaborator that actually understands your entire workflow and thinks with you whether you're debugging code at midnight or strategizing your next business Move Claude extends your thinking to tackle the problems that matter to you So whether you are shipping the next great product or tackling problems that need deep thinking Claude opus 4.6 Thanks through complexity with you not for you. It's your intelligent thinking partner So if you're ready to tackle bigger problems get started with Claude today at Claude.ai Acquired and if you want to explore their enterprise offerings, just tell them to Ben and David send you I Want to talk a little bit about like that. We see these narrative sections we do IPOs I want to talk about like the public sentiment versus Rockefeller's defense So like the public sentiment here and we say public it's less at this point in history the actual public and more about their competitors Who are sort of making a bigger deal out of this because all the public knows is there's this really big company? They provide things kerosene mostly that I use in my life and it gets to me in a consistent way at a stable price Like it is good for consumers Like if you think about the consumer welfare standard of antitrust this really isn't bad for consumers It could get there if Stair oils the only company and they sort of wheeled that power to raise prices and stuff like that But at this point it's really like their competitors hate their guts and especially anybody who's sort of been coerced to cooperate with them The railroads the pipelines like anyone in their orbit the retailers like it sucks for them, too And so you've got this beginnings of like really stirred up public sentiment against this company That's like by some views, you know the most evil capitalist structure of all time Americans ever since we got here from England And you know my family immigrated at some point So I certainly didn't come from England But ever since the original Anglo people came over from Europe and settled America There's been this incredible hatred of monopolies in particular because our country was founded on Equality and people having the right to be free and the free market like the government was a monopoly in England And that's we were running from well and still to this day There's like huge skepticism amongst Americans of centralized government power Right, so even there's this interesting like very American stripe that runs through people that is I can't quite put my finger on why but I don't like big stuff and I don't like concentration of power And I didn't like it when it was concentrated in a government and I don't like it now when it's concentrated in the rich people And that shows up all the way through to today I mean that's a defining characteristic of the national conversation now And of course Rockefeller's defense to all this is saying looks social Darwinism is bad Without standard oil rolling everyone up you just have all these people producing non-standard products that consumers can't They're gonna kill this industry that could make everything great because consumers won't trust it all these businesses will go out of business because the prices are so low because Every time there's a gusher, you know, the prices drop so much these people are all gonna go out of business anyway and Standard oil is the antidote to social Darwinism, which is bad Which is killing the golden goose here and so the way he sort of makes this argument is it was a cooperative success It was for the general good it was our moral imperative It was downright Christian for me to do this and provide this service and certainly any of the competitors or suppliers or partners with the like Who ended up taking standard oil sock got fabulously wealthy by doing so like how could you argue?

That that was bad for them. He really seems to have deeply believed that this like invisible hand the Adam Smith concept of you know That the invisible hand that sort of guides the free market that it kind of just takes too long And there's a lot of bad stuff that happens along the way like academically sure it makes sense that the free market will work itself out But when you actually look at the businesses today and the people running those businesses today There's gonna be a bunch of hardships endured along the way You might have whole industries that die out because they never sort of reach their full potential. It's not Communist and it's not social it's this interesting like uniquely American viewpoint on actually social Darwinism and free market capitalism is a bad thing and everybody just eating each other's luncheon Eliminating all the profit in every industry and potentially to our own detriment is bad turn I even talks about this like in some ways what Rockefeller was trying to do and what standard became shared just as much intellectual grounding as with like Marx and communism as it did with I was making capitalism. It was this view that like hey pure Individual competition is not actually like the most ideal status and like some form of collectivism in this case collectivism in the form of a Company standard oil was the best path.

Yeah, and the place where it kind of falls down is where he sort of says look If we just knife fight to the death someone's gonna win and ultimately that one is gonna be me because I'm the best at this And like he's probably right But this notion of like so therefore everyone should allow me to save them at truly like a very evangelical Christian way Like I'm gonna go and save you know and bring them into my Business church is very much how he sort of thought about it He come into the light and embrace the state of oil literally the light I love it and just dripping with iron you know I'm drawing these parallels here. It kind of falls down where like Him accelerating the death of all of these businesses and saying it was inevitable at least they're getting some upside now The benevolence argument does seem to fall down there a little bit perhaps maybe the most blatant example to me is the gristers Right like that letter sent out totally writing to grossers saying like if you don't do what we want We're gonna metaphorically burn down your houses like it's unreal right? There are places where like it made sense for him to exert his power to reorganize the industry for the betterment of all the producers involved and all the consumers But those places are far more limited than the number of places where they actually reached an exerted their power Yep side by on the on the logo because it's a secret. We'll see if you can link to it in the show notes.

You'll recognize it when you see it It's this red white and blue. Oh, it's the amico logo. Yeah, yeah, yeah, amico was a Standard of Ohio. Oh, wait, I'll find you a chevron.

That's Ohio or New Jersey. I think it was Ohio that became amico I could be wrong on it. Thank you're right. I'll fact check that But yes, this red white and blue oval with in the middle of the oval this like Grecian column looking torch like a lippic torch looking Indiana Indiana.

Oh interesting like a lippic torch looking column with a fire burning on top of it And interestingly, I think the standard oil of Indiana company adopted a different logo But then when they turned into amico they adopted a somebody that looks a lot more like the original standard oil logo Interesting. The other thread I want to talk about here in narratives is Rockefeller and standard oil as a organization But Rockefeller as a person is really like the prototype of so much of American culture today Like he was simultaneously viewed as this like, you know, sinister villain and as this great hero You know people hated him, but people wanted to be Is that a rap lyric? I feel like it must be I mean JZ would name uh, you know his uh his label Rockefeller records Like you know, there's a reason for that but like everything that like I feel like the public feel is about Bezos Zuckerberg musk he'll like everybody all these billionaires today like this was the prototype This was the first time that Americans felt this way. There's this great quoted in Titan That says the general public was of two minds and viewed the new entrepreneurs Which Rockefeller was the foremost as alternatively sinister and heroic by 1888 Rockefeller began to pop up in fawning magazine features about rich Americans But he was also singled out as a notorious trust king in Joseph Paulister's world and other papers The press kept up an editorial drum beat against standard oil demanding vigorous state and federal antitrust action At the same time that he's in like the equivalent of you know Like vanity fair is like the new elite and I think he started embracing that later for a while his policy was don't talk to the press And then sort of later started opening up to this idea of like geez Maybe it's probably good idea for me to have a positive image out there like silence is not doing any favors.

Yeah, all right power Who power? Okay, so what are what are our categories here? So as Hamilton Halmer would put forth in his wonderful book seven powers counter positioning scale economies switching costs network economies Process power branding and cornered resource and what I would put forth here is I think and I haven't rigorously looked at each one I think standard oil at various points in its first 20 25 years of existence exerted every single one of these but the Domineering one the one that enabled them to do everything that they did with scale economies No argument from me on scale economies being the most important one here I mean literally that was all the machinations with the competitors with getting the volume in the lakeshore deal With doing the deals with the railroads it was all about economies of scale so for sure What's your thought on counter positioning? I think in being a pure play refinery that was located in a different location than the Like is there a reason that no one else should have done an off-site refinery because they had too much vested interest in an onsite refinery?

I'm not sure I'm not sure that it was there was any reason why they couldn't but I think all the folks who are in the producing world Like the drilling and the crude world they were just so it was just such a gold rush mentality that like it was not professionalized Yeah, they were just tasting the quick profits and like they were distracted They weren't thinking long-term, but I don't think there was any reason why they couldn't have set up refining businesses in other locations The counter positioning feels a little thin. Yeah, all the others like switching costs For sure with all the railroad deals and the tank cars and all that network economies Yeah, I mean they build the retail distribution with the standard cans and actually is that all scale economies though? Is there any network effect here where it's better for one customer that other customers exist? Does anybody ever sort of have a relationship between customers?

That's a good question. Maybe not we network economy is certainly less common in a pre-telephone era. Yeah, maybe not Maybe that's more of a stretch process power certainly especially over time as it got more and more complicated branding I mean they named themselves standard and then they became that yep And then yeah, I mean they had lots of cornered resources eventually they cornered the resource on all the crude in the eastern United States Cuz they eventually actually owned all the land rights, right? It's actually produced the yeah, they did eventually get into exploration and production I think when it was you know, it was much later I want to say it was in the 1880s 1890s maybe when big oil deposits started being discovered elsewhere in America Yeah, and then they got in into that in bigger ways fascinating cool with moving to playbook Let's do it so I have one playbook theme that we didn't touch enough the rest of the episode And I've sort of a long quote and this is in particular around the period where there's a lot of fluctuation prices There's a race to the bottom lots of people going out of business And this is sort of Rockefeller talking about how they're gonna weather the storm and you know swallow everyone else up What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he borrowed heavily to build gigantic plants so that he could drastically slash his unit costs Even his first partner Maurice Clark remembered that the volume of trade was always what he regarded as paramount importance early on Rockefeller realized that the capital intensive refining business in this business sheer size mattered greatly because it translated into economies of scale Once describing the foundation principle of standard oil He said it was the theory of the originators the larger the volume the larger the opportunities for the economies and Consequently the better the opportunities for giving the public a cheaper product without the dreadful competition of the late 60s ruining the business During his career Rockefeller cut the unit costs of refined oil almost in half and he never deviated from the gospel of industrial efficiency There's so much tied up here But one of them is this is kind of the first venture capital business like we talked a lot on the TSMC episode about these massive fixed costs I mean they're investing a hundred million dollars in fabs over the next three years And then it's all a volume game like how much can you get the plants at full capacity as fast as possible because the unit costs can be super small Because your variable costs are super low, but it's all about that gigantic capital investment of the fixed costs I love it.

There's the TSMC payoff Two hours later, you know the other thing that uh that I was just thinking the whole time as you were reading that quote was And reason mark and reason strength leads to strength right? This is the original strength leads to strength business totally and this is him justifying rolling up all these other producers where he's basically like look The best thing for consumers is to run as much consumer demand through one capital structure as possible So we can just absorb all the fixed costs and then make the variable costs as low as possible Uh, it'd be fun to think about we're on such a kick here with these like types of businesses Is there ever a kind of business or industry where like not scale economies per se but this broader maximum of strength leads to strength? Is that ever not the case? It's always the case I think but it's like in varying strokes Especially where industries where there's not fixed costs or where there's low fixed costs like think about a restaurant business Assuming that you don't own the building and you're leasing everything and you even lease the equipment then you're like jeez What is really the you know the cap X you're kind of just like at the whim of can you produce a better product and get a little bit More margin than you're you know the person down the street And maybe this is kind of similar to that You also apply to the restaurant business like anytime where if you're competing on like the highest end of quality Like I'm thinking like a fine dining restaurant That's a kid where strength might lead to strength in terms of its brand But if it were to like raise a bunch of capital expand go have a you know a bunch more restaurant Oh, if you value is scarcity then yeah, it's value destructive.

Yeah, okay That's a case where strength wouldn't lead to strength in the same way, but so many venture capital Businesses and businesses that scale as large as we're talking about in the last few episodes We've been talking about like the largest businesses in the world has ever known Yeah, it's amazing how this dynamic applies totally well for grading on this one listeners We are gonna combine value creation value capture and grading We already talked a lot about the component of this value creation section where how does the value created for the world compared to value destruction? I think we talked a lot about that in this episode But we haven't spent a lot of time on like how does the value that standard oil created compared to the value that they captured for themselves Which I think is sort of the interesting one to look at here and like a terrible example is Wikipedia where there's no company That creates any more value in the world but captures so little of it whereas you look at a Google and they create a lot of value But they're enormously profitable based on it and so some interesting numbers with standard oil So we know that they you know we're responsible for this sort of like kerosene boom in the United States and the world And I think let's save the gas car conversation for the next episode And I absolutely want to have a conversation around climate and I think we should save that for the next episode too But in this one let's just look at the shape of the business by this period of time So standard oil in the mid 1880s employed a hundred thousand people Which that's probably the first time a company ever employed a hundred thousand people Governments probably did but did corporations? It'd be hard to imagine especially in a world where there are only 30 million people in the United States Totally they had dividends of between 50 and 200% to all shareholders per year Which of course were private shareholders it was mostly Rockefeller and his partners I just want to underline that. That's bawling out of control.

That's a very very profitable business. Oh my god the amount of capital invested in the business Literally anywhere from half to two times that being dividend it out to shareholders every single year While you continue investing capital and growing also hard They want to find you. Yep. Uh and then the last thing I want to throw out is this period between 1890 where we're ending this episode to 1900 They grew tremendously so they had annual earnings where we're leaving the story off of somewhere between 10 and 20 million dollars Which inflation adjusted is like a 30x So it's really like three to five hundred million in terms of the amount of earnings profit that they were generating per year in today's dollars By 1900 they sixxed that so over a decade they actually grew tremendously So it sort of depends whether we're thinking about the business in this 10 to 20 million Era or in the like 60 plus million dollar era, you know by the turn of the century But I think that gives you a good shape of like this is a business that was spitting off cash David the way that you were just describing for us That employed a hundred thousand people that kept America and Europe's lights on And because it's been so long since this happened We don't have like SEC filings telling us here's literally the amount of value They were able to capture versus create But I think the way I would sort of look at this one and talk about this is You can tell from the business practices that we've harped on this entire episode that every time they created value They looked around to capture every single scrap of it that they possibly could rather than let consumer surplus exist or Their competitors participate in the upside that they were creating or partners.

Well, and I think even um The numbers that we have uh scant uh data such as it is again, which we had pitch book back in the day But uh the numbers that we have I think are also misleading they do seem a little small I go like wait a minute you guys are talking about how this is a business on the scale that no other business in America has ever been before But inflation adjusted, you know, even in by 1900 you're talking about a few billion dollars of cash flow That's dwarfed by companies today, but I don't think these numbers tell the whole story because so much of The capital in this business was a being recycled and be not accounted for because of the crazy decentralized trust structure We'll talk about this much more in the next episode, but when it ultimately gets broken up, you know You said at the top of the show the children companies that come out of standard oil exxon mobile chevron the bulk of bp British petroleum now like Amco like all of these companies, you know, it wasn't until the rise of the fang era in the last 10 to 15 years before that exxon mobile Was by far the largest market company in the world and that was just one of the children that came out of this company The value that was tied up here was immense. That's a much better way to look at it. You're right I also think inflation adjusting these things is probably the wrong way to look at it I was thinking about this more in the context of rocket followers personal wealth which will dissect in depth on the next installment here But sure you can inflation adjust wealth And you can inflation adjust profits But really what you should be doing is looking at them as a percentage of the gdp at that time Right and so like let's look at 1900 so standard oil in 1900 produced 60 million dollars in earnings and rather than inflation adjust that Let's look at it relative to the total gdp which was 24 billion dollars Okay, so 60 million dollars divided by 24 billion dollars So 0.25 percent of the entire country's gdp is standard oil profits And I suppose gdp really would be based on revenue. So, you know assuming they had I don't know 33 operating margins.

I'm kind of pulling a number out of thin air, but that feels reasonable Well, I don't know how they're defining profits here. I don't think this is gap account. That doesn't even exist at this point That might be the dividend the annual dividend. Oh the earnings being the yeah No the dividend because the data source we pulled this from had dividends differently Let's assume that standard oils revenue represented something like 1% of america's gdp probably a little bit shy But something like that that I think is the right way to frame the amount of money that was flowing through this one company at the time Wow That is a significant sale.

Yep. So I think the question is that you know that we wanted to ask on grading is like standard oil becoming a monopoly in this way Versus if the industry were to have played out with unfettered individual competition Which of course is counterfactual that we have no idea But how can we get a sense of what the shape of that could have looked like, you know, it's just this really like this makes me think about What's going on in China right now? You know, I think the Chinese political economic philosophy is Really aligned with the standard oil view of the world right which is that like unfettered competition is fine Early days of an industry, but then you got to come in and you got to like consolidate it You can consolidate it through the government's hand in the case of China In this case it was the Rockefeller's hand But that's what you need to enter a phase of maturity in an industry and as we were just saying you know, Rockefeller's argument is like all of this was good for consumers This was great for consumers. This was great for america It's like in the most recent Amazon letter to shareholders when Jeff Bezos calculates the amount of consumer surplus He's like if you look how much Amazon shareholders have profited on us existing Amazon employees have profited and Amazon customers It's by far the customers who have won yes.

Oh, so good. Bezos student of history But yeah, Rockefeller's making the same point here. I think it's really interesting Yeah, well again counterfactual impossible to know but there's definitely a world where the kerosene industry doesn't develop in anywhere near the same scale or impact or size I'm gonna throw this out there and say I think the world would end up a no different of a place I think it would have been totally net even and the only difference would be that the you know, Rockefeller family foundation wouldn't be as large I think give or take a few years I think the whole thing would have played out pretty similarly We would have ended up in the same sort of major players in the oil world that we have today. Yep and maybe all of the Standard oil children decks on some ovals the chevrons etc would have developed anyway That could have been independent cleveland refiner You know growing their own and not being a part of standard oil and then having to get spun out That's a really good one.

I mean Rockefeller was a genius in so many levels He brought the like Morris Chang level of thought and discipline to the business But eventually other people would have done that too. Yep I mean it might have been a little more annoying where like you had to get Those two types of kerosene sitting next to each other on the shelf and you need to go make sure to buy a compatible one for whatever Aper Oh It will it depends what we're grading like to do it in terms of creating a bunch of value and capturing as much as you possibly could A plus right right right in terms of the grade of like the development of this industry in america As it did versus a non-standard oil path. Yeah, I guess that is what I'm arguing. What do you think?

I'm not feeling strongly any different way. I think that's a really good argument You know, it's funny. I feel like if Peter teal were here as a guest with us He would be vehemently arguing the opposite that you know, it's the zero to ones It's the like yes, anybody could have done this Yes, you know other people might have but like rock and fell and did it and in the absence of somebody doing it That it might not have happened and without all this standardization in the oil industry Then we wouldn't have had all the unbelievable lifestyle upgrades that we've all had over the last 150 years because of the advent of unified oil ecosystem Yeah, like you like your electric cars and Tesla's in the like well, you know, no kerosene back in the day No gasoline thereafter, you know, we don't advance to the level of technology and development that we're at now Oh, like if the car was much more inconvenient to drive or that weighed another 30 years to develop I mean, then like there's a zillion knock-on effects of american doesn't innovate in all sorts of other ways And people don't have a lot of other products that we all take for granted in our lives now Yep. All right.

So I think my answer uh I don't have a strong point of view. I think I'm gonna go a notch higher than you to a be Just because I really do see both sides here Once I being the argument that like this all would have happened the same way anyway in the other side being Yeah, but you like you need rock feller like no rock feller doesn't happen Mostly though, the other reason I would go with bees. I just really loved telling the story That I could tell All right car bouts car bouts Let's do it too for me both are related the first more related than the second The first one is the movie there will be blood with daniel de luis If you are jonesing for some good old fashioned extremely violent early oil days I think it's like I mean I wasn't there so I have no idea but unbelievable articulation of what it would be like to go and prospect in oil field and the Risks involved in that and the personalities involved in that and the deception and the the way that rogue entrepreneurs were organizing Labor and capital to make these things happen I saw the movie maybe six months ago, but I thought about so many times Especially in regards to like Titus phil and some of those in uh in researching this and my second is Tindallie tingentially related because it is actually about a gold rush not the oil rush But the tv show deadwood with timothy lefant. I've heard that that's very good.

It's excellent I am one of three seasons in right now. I just finished the first season It's so good the characters are so compelling the acting's great I actually got tipped to it when I was doing the research for the andries and harrow's episode mark I think mentioned that it was his favorite tv show and so I should check that out if it's working to see your tv show and sure enough It's awesome. It used to be um the hauten cast fire show. Oh really which is also great.

Yeah, he talked I've never seen it, but which I mean given what we do here. I need to watch it you do so go watch deadwood It's awesome nice love it and uh there will be blood. I've never seen it. I'm like so living under a rock Oh, man.

You need to see that in gangs of new york. Yeah, which I also never seen huh My car is completely unrelated. I'm sure I could think of some The standard oil octopus tentacles reach so far that I probably could think of some connection But i'm not going to is the secret base youtube channel, which is part of sb nation the sports news website It's so good and in particular. I've liked this uh, this channel they work for a long time These guys are so they just do like irreverent histories of like sports moments and teams In particular, they just did a seven part series on the alanaphalkins It's probably like five or six hours in total and it's so good It's so funny and just like so The whole like premise of the history is they do a lot of great graphics on the channel So they take a visual representation of the win loss differential for the team Well, like you know if the the horizontal x-axis is a 500 record and then going down below is losing and going up above is a winning overall record And basically the whole history of the alanaphalkins their wing as they call it because it's all you know losses down into the red Almost exactly mirrors the falcons logo And if you like tilt it up on its side so that the x-axis becomes vertical it really looks like the falcons logo Brittle, it's so funny, but yeah very very well done highly recommend Sorry to any falcons fans out there.

Oh, but it's like a love letter to the alanaphalkins like it's so fun I don't think I made this my car, but they did one on the mariners a year or two ago. That was equally equally good Oh, we'll link to that one too All right listeners now is a great time to talk about one of our favorite companies Statsig yes long time acquired partner There is a reason why the best product teams at companies like open AI and notion Atlassian figma rippling bricks and more rely on statsig Whether they are iterating on their core product features or shipping AI power 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 whether it's a feature tweak a pricing change a performance improvement or an AI Update like a model change or prompt adjustment.

They're not relying on instincts They're measuring what actually move engagement retention and ultimately revenue and as more teams build with AI that learning loop becomes even more important Building with LLM's introduces non-determinism into your product experience the same input doesn't always produce the same output and behavior can shift in subtle ways in real world use So doing offline evals will give you part of the picture But you can really only understand the impact once your product is live with real users and then you can measure how their behavior actually changes It's very different than the way that you would ship features in a pre AI world where you knew exactly what the software was going to do Yeah, exactly. So this is where stats it 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 behaved The result is a tighter feedback loop and learning that compounds over time. So you don't just ship more you ship better 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 stats.com slash acquired to get started Alright, well listeners, thank you for joining us on part one of this epic journey We are excited to take you on part two here We are very interested in your feedback in between episodes and I think we're gonna leave ourselves enough time to make sure we have This out in the wild before recording the next one So join us in the slack to come talk about it acquire dot fm slash slack email us at acquired fm at gmail.com or tweet us at acquired fm on twitter And listeners, we'll see you next time. We'll see you next time