Microsoft Volume I: The Complete History and Strategy of founding through Windows 95 (Audio)

what were you listening to before we hopped on it's your walk out music new Beyonce oh new Beyonce I haven't heard it yet how is it I really like it nice I think it is reductionist to call it

country ah I was appropriately enough listening to start me up through the ages of course you were but I kind of feel like David Rosenthal move is that

you might have been listening to start me up whether we were doing Microsoft or not that's a very squarely in your genre song the stones though man like it's

crazy they're in their 70s 80s amazing man I hope we're in our 70s and ' 80s dancing on stage season 126

yeah all right let's do it let's do it who got the truth is it you is it you is it you who got the truth

now is it you is it you is it you sit it down say it straight another story on the way got the truth welcome to season

14 episode 4 of acquired the podcast about great companies and the stories and playbooks behind them I'm Ben Gilbert I'm David Rosenthal and we are

your hosts we often remark that selling software is the best business model of all time well today finally we tell the

story of the company that created that business Microsoft finally we're like 10 years into acquir here we're finally doing it it's been daunting you know we

wanted to do it for a while but it takes some hutzpah to tackle Microsoft I'm so fired up we're ready it's time yep well listeners Microsoft today is sprawling

and massive it is the world's most valuable company worth over $3 trillion they have 49 years of History making software for consumers and Enterprises

making Hardware gaming systems gaming Studios Windows apps iPad apps Mac apps operating systems mobile operating systems MP3 players search engines Cloud Computing Services on cloud computing

programming languages development environments the list goes on but it did not start out that way today we will tell the story of the desktop software

company before the Enterprise before it before the internet before being a trusted partner to governments around the Free World and really before people

even knew what to do with personal computers this is the story of a bunch of ragtag geniuses in their 20s pushing what was possible welcome to Microsoft

the PC era well listeners if you want to know every time an episode drops you can get hints at the next topic and followup you can sign up at acquired.

fmil come talk about this episode with the community at acquired. fm/ slack if you want more from David and I you should check out our second Show acq 2 where we interview Founders in investors

and experts often as a deeper dive into topics we cover on the main show and before we dive in we want to briefly thank our presenting sponsor JP Morgan payments yes just like how we say every

company has a story every company's story is powered by payments and JP Morgan payments is a part of so many Journeys from seed to IPO and Beyond so with that the show is not investment

advice David and I may have investments in the companies we discuss and likely all of you if you hold any index funds and the show is for AAL and

entertainment purposes only David where on Earth do we start the Microsoft story uh we're right down the middle on this one we're going to start in 1955 in

Seattle Washington with the birth of Bill Gates III or Trey as he's known yes growing up it's so confusing because his dad is the second but he goes by senior

and Bill is Junior the3 sltr so Bill in 1955 is born as the second of three children to Bill and Mary Gates now Bill

Gates Senior his father is from Bremerton the Navy town just across the sound from Seattle where he grows up in a family that owns and runs a furniture

store there a long way from the software king of the world here now Bill Gates Senior the2 After High School he joins the army during World War II serves

during World War II and then he goes I presume on the GI bill to the University of Washington where he's the first member of his family to go to college and there he gets an undergrad and a law

degree in four years and then decides to stay in Seattle with his new family and become a practicing attorney now I say

family because at the udub he meets in Mary's one Mary Maxwell and Mary I don't know how to put it other than that she

is a force yes so Mary's family had founded National City Bank and her father was a senior executive at First Interstate Bank which later became a big

part of Wells Fargo now Mary despite being the daughter of a successful business family in that day and age was not cast aside like so many other daughters we've talked about on the show

New York Times AES where it was sort of passed to the son-in-law to continue to run the business that was not the case with Mary Maxwell no so after she graduates from the udub she becomes

first the president of the Seattle Junior League and she starts joining nonprofit boards in Seattle as a very young woman she joins the Seattle Symphony board the Chamber of Commerce

the Children's Hospital the King County United Way and she's such a force on these boards that she starts getting asked by her fellow board members to join their company boards too like the

corporate boards they're so impressed with her so first she joins the board of First Interstate Bank the bank that her family is a part of then she joins the board of Cairo television in Seattle she

even ends up joining the Pacific Northwest Bell Telephone board that's right part of the AT&T breakup yeah eventually she joins the Board of Regents of the University of Washington

and the whole entire National United Way board so she never works full-time in a corporate setting but it is not an overstatement at all to say that Mary

Gates became one of the most powerful business people in the Pacific Northwest period absolutely and Bill Gates Senor was The prominent attorney in the region

and so it's quite the power couple Ben it's like you're reading my script here yes we don't want to give Bill Senor the short shrift here either he becomes a superstar lawyer and he becomes a

co-founding partner of the firm Preston Gates and Ellis which today I don't even realize this till I dug in the research that is K&L Gates today one of the

largest law firms in the world yep and another fun fact that you probably know about Bill Gates sen but we got a this being acquired talk about do you know

whatp board he joined later in life I do not Costco of course Bill Gates Senor we should say to basically galvanized the

entrepreneurial community in Seattle he started the tech Alliance he was a huge angel investor he really did organize you know Angel Investors people who want to put high-risk Capital to work into

startups and you know his heart was there obviously through his law practice long before Bill Gates III became The Prodigy he came totally and that's the

point we want to land here is for young Bill Trey growing up here he is growing up in like a pretty unique household he would later talk about being like 9 or

10 years old and most nights at dinner at his house there would be a CEO or a senator or a governor or somebody who's just over for dinner and Bill would sit there and absorb the business

conversation you know it's like the Hermes family the Dumas family that we talked about on that episode you know this whole thing it makes me think of Paul the main character in The Dune movies in the book like he's kind of

bred from birth to be this incredible business mind I mean at age 13 with his best friend who we will talk about very soon he brought up the idea I

wonder what company I will be the CEO of when I grow up what industry will I go after What problems will I tackle it wasn't a question of if but which yes

and it just turned out that he would be the CEO and founder of the biggest company in the biggest industry ever to exist the other thing that we got to say

about Bill growing up he is insanely competitive so he did not and does not like to lose at anything and that is putting it mildly whether it's sports or

swimming or computers or school or the classroom there's a quote in one of the books we read from a childhood friend of his who says everything Bill did he did

competitively and never simply to relax I think this used to be more than today there's kind of this image of Bill Gates that he was a computer nerd that he was like this shy little skinny kid and the

way he looks doesn't help this but that is not the case at all this guy had a competitive fire in him I'm sure still does like none other well both things can be true he was the number one math

student in the state of Washington he was a nerdy kid and a brilliant kid and also fiercely competitive his childhood friend and co-founder of Microsoft Paul Allen would say about him you could tell

three things about Bill Gates pretty quickly he was really smart he was really competitive he wanted to show you how smart he was and he was really

really persistent that sounds about right so famously speaking of Paul and where Bill and Paul meet when Bill is in seventh grade his parents enroll him at

the Lakeside School which now I think is internationally famous because of Bill but it is a super rigorous College Prep School Middle School and high school and

Bill ends up writing the scheduling software for class scheduling and he puts himself in the classes with all the girls

like funny but y'all like this bill 13 years old seventh grade Lakeside this is when it starts obviously Microsoft doesn't start but during that year bill

is 13 years old the Lakeside mother's club raises money to buy the school a teletype and connect it up and rent

computer time from a deck pdp10 that is located in downtown Seattle and owned by the branch office there of General Electric now probably a bunch of you are

like I have no idea what any of those words mean so we got to set some context this is 1968 1968 you know the Beatles Vietnam the summer of love this is not the

computer age 2001 A Space Odyssey had just come out Nolan bush has not founded Atari yet Bob noise and Gordon Moore are only just leaving Fairchild semiconductor to start Intel Silicon

Valley still dominated by locki there is no such thing as a microprocessor the United States would land on the moon one year later totally the way Computing

worked back then it was basically still the aniac days like a computer meant two things it either meant a massive room sized machine that had about the

computer power of a calculator or it meant a human people talked about computers as humans did you ever see the movie hidden figures about the black women who did the calculations those

women were the computers they were called the computers yes cuz they would sit there and compute this was a totally different era so the idea that a 13-year-old kid in this High School this

Middle School would get access to share computer time I can't imagine there were many other secondary schools in the country that were doing this yes this is a very early place to make the point

Microsoft is the result of tremendous intelligence brilliant strategy Fierce competition and an unbelievable amount of luck Bill Gates was born in 1955 the

same year as Steve Jobs to come into adulthood just as the personal computer wave is starting and the fact that he

was at a middle school and had this much privilege where he could get access to a pdp10 at this point in his life to help him understand how important computers

would become I mean there are dozens of people in America who are as well situated as bill is and that might be overly generous he and Paul got A Sneak

Peek into the future there at Lakeside now it's funny you said the personal computer era we are so far away from the personal computer here I mean we got us at the stage what is Computing I

mentioned any and these room siiz things computers did not have screens you didn't have cursors you didn't have lights you didn't have pixels everything was done on a teletype they kind of

looked like typewriters and they were wired up remotely either in the same facility or like what Lakeside is doing you could be remote I mean it's almost like the cloud today and it called over

a phone line that was the TA type yeah exactly got wired over the phone line hooked up to these main frames and so you typed command into this teletype and

then the response came back over the phone line or over whatever cable from the main frame and it got printed out on a spool of tape on the teletype but this

is power that normal 13-year-olds don't come anywhere near accessing yep what is the Computing Market at this time it is pretty much we'll come back to the

pretty much in a minute 100% dominated by IBM oh yes IBM big blue you know Big Iron is what it was referred to like the products that

they would produce they were the industry yes Ben Thompson has a fantastic quote on this he has an article called what is a tech company

and here's his comment 50 years ago what is a tech company was an easy question to answer IBM was the tech company and everybody else was IBM's customers that may be a slight exaggeration but not by

much IBM built the hardware at that time system 360 they wrote the software including the operating system and the application and provided services including training ongoing maintenance

and custom line of business software yeah system 360 was a line of solutions I would say offered by IBM and it consisted of the thing the room siiz

thing the Mainframe and the software which was system 360 and the Consulting and the implementation you know you couldn't just call up ups and forklift one of these things into a compy and it

to work no you got operate this thing too totally it's like asml machines you don't just go ship them off to tsmc and say good luck making semiconductors exactly it's a full solution full service thing but an important thing

that was also happening this year 1968 was that IBM was undergoing some antitrust scrutiny over that huge bundle that I just told you about I mean

doesn't it smell like antitrust they do everything from the hardware to the software to the operating system the service the support they are the whole Market they're starting to get concerned and so

proactively they unbundled Hardware software and services and they started selling those separately for the first time which was not a problem at first

but what it did was it cracked the door for customers to say oh I can buy Hardware from IBM and software from someone else and other people were not exploiting this but it was possible yeah

interesting it cracks the door for Microsoft like 15 years later 20 years later yeah yes but this is where the seeds are sewn of what is the exploitable opportunity when Bill Gates

is ready to do something interesting now back to the timing thing for Bill and Paul and Microsoft I mentioned when we were setting this up that there's something else to talk about here IBM

was facing a disruptive Force at this moment I think probably for the first time in its history certainly in the Computing era of IBM's history and that was the digital Equipment Corporation or

deck noticed when we said earlier that Lakeside is renting computer time from the General Electric computer in downtown Seattle I said it's a deck

pdp10 it's not an IBM product so what's deck they're the mini computer company mini in quotes yeah mini quote unquote mini meaning it was the size of a closet

not the size of like a room it's all relative deck had been started by this guy Ken Olen from MIT and what they did he had this brilliant Insight that would

play out over and over and over again in technology that I'm not going to go compete with IBM head-on I'm not going to make aniac I'm not going to make main

frames but Computing has advanced enough that there's an opportunity to make something smaller less powerful more sort of toy like and there's enough

demand out there that I think I can find some new markets for people who will buy those types of Compu comp and it's smaller buses but in particular it's

like Branch offices of the big companies so you know I am sure General Electric bought lots and lots and lots of IBM mainframes and products at their

headquarters but the GE field office in Seattle they're not going to truck in a main frame and in 1968 Seattle I mean this is like a provincial little town I'm standing here right now it's a you

know major city and a huge economy in the United States but at the time kind of a Podunk forgotten sleepy far away Place totally and Microsoft would go a

long way to changing that over time and we should say this is the classic low-end disruption Playbook I mean this is what Clayton Christensen was talking about going from Mainframe to mini

computers I'm going to make something that's worse for most things but better for some new things that new customers and new markets are going to care a lot about and IBM's going to look at it and go that can't do any of the things that

are important to our customers and that's exactly why it works and specifically why are they not going to care about I don't know exactly what an IBM mainframe system system 360 370

whatever cost I'm imagining tens of millions of dollars all in total cost maybe hundreds of millions of total dollars to run a system like that and

buy it so the first deck machine when it comes out the pdp1 a few years before this time it was priced at $120,000 so like an order of magnitude

maybe two below a system that you would buy from IBM obviously still a long long long away from the personal computer people are not buying these things for their houses but you know yeah GE will

buy one for the field office in Seattle or universities will buy them for research for their students for their professors and so deck kind of creates a

new market for computing and Bill he's so studied in business history the founder Ken olssen Ken is Bill's hero he

totally looks up to deck and what deck's done H now the deck and mini computer UI is is still the same as the Mainframe you're still using a teletype there's no innovation in terms of what the

Computing is or how you use it it's just cheaper and more people have access to it yep so back to Lakeside and the mother's club raising money for this access here for the school Bill remember

he's just started he's in seventh grade and Lakeside is a middle school and a high school the high school is actually in a separate building the computer room that gets installed with the teletypes

that's over in the high school but Bill like he doesn't care he gets exposed to it I think in a math class one day and he's like oh I'm hooked so he goes over he's hanging out with the high schoolers

teaches himself how to program and pretty quickly he becomes known as one of the very best programmers there and he and three other kids form what they

call themselves The Lakeside programmers group and one of his buddies who he forms it with is of course the high schooler I think the 10th grader at the time Paul Allen there is a fantastic

photo listeners that we will tweet of Bill and Paul sitting in the computer room at Lakeside and Bill I think he's like 13 14 he looks like he's about

eight I think on the wall there's this almost like Prett Out magazine thing that says the bug Slayer that they've hung up over the wall it's amazing so these high school kids they start the

Lakeside programmers group they call the programmers group because they are programmers this is another super important thing to Le to use a computer at this time meant to be a programmer

right there was no package software that you bought the software that IBM was selling was the operating system to make the machines actually function and it

was the programming languages that you could then program on but you weren't clicking around and using Excel or like you know pulling up apps everybody who used a computer wrote their own software

right there was not this multi-sided network of you've got developers making applications and then you've got users of those applications no everybody who used a computer was a programmer so the

goal of the Lakeside programmers group remember bill is this business Prodigy is to use their very valuable and very rare skills as programmers at this time

to you know make money yep do a business so turns out at the same time I mean the coincidences here are just crazy there is a local startup coming out of the

University of Washington called the computer center Corporation or cbed and the business plan behind cbed was that they were going to get a bunch of decks

a bunch of PDP eights 10 11s whatever and they were going to be like AWS they were going to just be a computer time

sharing company so cbed hires the Lakeside programmers group these kids to come in and find and document bugs in the system and they're going to pay them

directly in computer time so when they come into C cubed they learn Fortran they learn lisp they learn machine language for the pdps back at Lakeside they were just using basic the

programming language which is reasonably high level in terms of how abstract it is like you're not writing machine language you don't have to know how to address memory and registers and that it

reads kind of like English you know how to add numbers together it's not a uh elegant language and it's a very verbose language but if you sort of look at it with your eyes as a person who speaks English and knows basic math you're like

I kind of understand what this program does so there's a meaningful amount of translation done by a basic interpreter that takes you from the basic code you have to write to what is actually

running on the machine yes but basic we don't want to give the impression that it is just basic or just for kids no it's widely used it's going to become hugely hugely important like it is both

the Gateway programming language for everybody but like it's a real programming language and a lot of stuff is done in it it's sort of the Python of its day I think the way python is now where you sort of joke that python is so

flexible you know you can like accidentally write a program by writing English and it can kind of forgive a lot of mistakes and it reads kind of like English it's a reasonable parallel to draw it way back when with basic where

you say look you can understand it as a Layman but also it's used at a broad set of business applications totally when Bill and Paul and their buddies come

into see cubed they're now getting access to learn real hardcore systems programming languages including machine

code for the pdp10 they're becoming pretty prolific Engineers here they're handwriting assembly code yes and

they're getting mentored one of the executives at cbed is a guy named Steve Russell did you find this benen do you know about this no uhuh this is amazing

you're going to die Steve Russell was the guy who wrote space War when he was at MIT on the first PDP the pdp1 he's like a computer science Legend Nolan

Bushnell told us about that yes space war was the first video game first computer game ever written it was written as a fun side project by some MIT engineers in the early days of deck

and then that became Nolan Bushnell's inspiration for starting Atari and pong and space like yeah Steve Russell that guy he mentored Bill Gates and he was here at the University of Washington he had come out to the University of

Washington and then left and was part of one of the execs starting this company see wow that's like a mile from my house right crazy wow so after a little while

at C cubed all of this real expertise that these kids are getting leads to another opportunity at another time share Computing company based down in Portland they ask the kids to write a

real piece of software to write a payroll billing program for all their clients that are using the time share system and Bill now who's the deao

leader of this group he negotiates a deal with the help of his dad Bill Gates Senor prolific corporate attorney in Seattle that rather than just being paid hourly for their time they're going to

get a royalty on the revenue that their client makes on the software I can't believe it these kids are teenagers they're figuring out the whole software business model here they end up making

at least $10,000 from these royalties which the average household income in the us at the time was below $10,000 these kids are rolling in money wow so

the next year Paul graduates from Lakeside and goes off to college at Washington State but he and Bill decide to team up on a new Venture that they're

going to do together called tra o data they've identified a Market opportunity and that opportunity is reducing traffic yes so the business plan is that

municipalities count cars that go through intersections use that to make decisions about how they're going to do City Planning Bill and Paul are like we can take this new thing that's coming

out of Intel a microprocessor which is promising to be a full computer on one chip and we can use that we can build a machine that is going to be a computer and'll process and analyze that data and

then we can sell sell it to governments like great big market and listeners are you kind of sensing What's Happening Here Mainframe mini Computer Micro

processor we kind of have to keep using smaller and smaller words to represent the fact that the computer is getting smaller and smaller here it wasn't until we started doing research for this

episode that I finally realized oh micro computers which is the original term for the personal computer for the PC it was called micro computers before PC caught on they're called microcomputers they're

based on the micro processor yes absolutely it's not just that micro is smaller than mini and it is funny that it cut stop there the computers that are sitting on all of our desks are microcomputers right yes so while

they're waiting for the 808 this new first microprocessor from Intel to come out or at least for them to get access to it they want to get a head start on programming their traa data machine and

programming this microprocessor so Paul's like I got this I can find a way to make this happen takes the PDP 10 at Washington State and he writes a whole

emulator program to mimic the instruction set for the 808 from the manual and they get a full emulator up and running and they can code even

without the microprocessor actually being there and having access it's just like Nvidia you know and like when jensson was like no we got to build an emulator and simulate this and then we're going to ship it sight unseen

they're doing the same thing it's funny in many ways at this point in history getting a manual was actually much more valuable than getting the processor itself because the processor would arrive and unless there was

documentation you would have no idea how to interact with it to take advantage of its power but if you had a manual well sure you couldn't actually test the stuff you wrote for it on the hardware

but if you wrote an emulator on a bigger more powerful computer that could sort of mimic the computer that you're actually targeting you could go years before actually ever running the

software on the target device and just work off of what the manual says as long as the manual is correct and matches how it actually works yes and this is going

to become very important to Microsoft in just a second yep so traa data is not a huge success I think I read a few places they make about $20,000 in revenue from

it so like again great money for high school and college kids but you know not world changing stuff here this is not what bill aspires to for the company he's going to start but Bill and Paul

are getting experience with the microprocessor Bill actually has the idea for Microsoft when they're working with it he's like oh this is a computer why don't I go off and write an

interpreter for basic here and we can sell the basic interpreter for the microprocessor and build a big business the 08 just wasn't powerful enough yet

to do that what spoiler alert that totally becomes Microsoft these seeds of Microsoft are selling Lang language interpreters for new processors new

hardware new computers that enable you to write familiar programming languages on that new hardware yep and you know Bill and Paul are not the only ones

having this Insight here too another Seattle guy named Gary kildall who they had intersected with who they knew from cbed in the University of Washington he

kind of had the same idea here we're going to bring up Gary and his company digital research a little bit later yeah he cared little bit less about programming languages and a little bit more about operating systems so that's

how they diverge for the few years here yeah but Bill and Paul they absolutely see the vision for what this can grow into and become bill has a great quote

Paul and I had talked about the microprocessor and it was really his Insight that because of semiconductor improvements things would just keep getting better I said to him oh

exponential phenomena are pretty rare pretty itic are you serious about this because this means in effect that we can think of computing as free it was a gross exaggeration but it was probably

the easiest way to understand what it means to cut cost like that and Paul was quite convinced of it yes is this in the Smithsonian interview yes so good it's so good this quote is incredible because

basically Paul Allen brings up Moore's law to Bill Gates they don't use that language there but in 1971 that is what's happening and for Paul this is just an observation of of hey there's an exponential thing happening here seems

like it's going to keep happening it's been happening and Bill's shaking and he's like what exponential phenomena don't just happen that's incredibly incredibly rare and immediately gets

Bill's wheels turning on what does this mean for the world if that's actually true we need to act and do something profoundly different than anyone's ever done before because this enables new

things that no one ever thought could be possible this moment is the Genesis of the vision for Microsoft that even bill doesn't say the words in this quote the

vision of a computer on every desk in every home that's the famous part and then the part that got left off later when the doj started sniffing around was

running Microsoft software but that is the vision here and it is crazy at the time like a computer on every desk and in every home Bill sees that this is

what this exponential phenomenon what Mo's law means that that is going to happen you know we're still in the era of teletypes nobody else sees this yeah and it's also the reason why Microsoft

is going to form into such a different type of company that's ever come before it why they can break all the rules why they can sell just software even though that's never been a thing before why

their business model can be so much different than everyone else's business model I mean in prepping for this episode we got to talk with Pete Higgins who ran Excel and was an executive overseeing office for a long time in the early days and he had this great quote

to us which was computer on every desk was whackadoo stuff people laughed at it it was absolutely wild people thought I don't know maybe one in 10 people in their Finance group or something will

have one at some point this is the profoundness of an exponential decrease in price or increase in power of computing is it's going to become

Universal so all that said even Bill and Paul know the 88 it's not there yet it's not powerful enough to really be a general purpose

computer on a chip but they know it's coming so in the 1973 bill goes off to college at Harvard famously it's funny at Harvard you know kind of like Jim

Simons that we talked about at MIT on the rch episode Bill thinks he's G to be like a worldclass mathematician and set the world on fire it's literally a quote from Paul Allen so bill was the number

one math student in the state of Washington and he gets there and he does this theoretical math class math 55 and gets a b and Paul says when it came to higher mathematics he might have been

one in 100 thousand or better but there were people who were one in a million or one in 10 million and some of them wound up at Harvard bill would never be the smartest guy in the room and I think that hurt his motivation he eventually

switched his major to applied math yes so while Bill's at Harvard he's also doing a bunch of the typical college kid stuff he's playing poker he's cutting classes he's making friends

and one of the friends he makes there is a kid down the hall from him named Steve Steve bomber and bomber me everybody knows bomber he's kind of everything

that bill is not he's super social he's super outgoing he's in a final club which is like a big thing in the social scene at Harvard he's gregarious anyone who's ever met Steve or seen a video of

Steve you are well aware that this man has presence but the thing that people don't know about him is he is so

unbelievably analytical Steve is the guy that outscored Bill Gates on the putb exam which is the annual math competition for college students St yeah

Steve isn't a programmer but he is every bit the mathematician that Bill Gates is and that is one of these things where I think when people try to set it up as well you know you've got the brilliant

programmer genius and the marketing guy it's just like those are the roles they took but I think when you're getting a sense of who the original crew was at Microsoft they were all brainiacs and

they were all wildly analytical totally so then in the spring of 1974 Bill's freshman year electronic magazine publishes big news about a new Intel

chip the Next Generation the next turn of the crank on Mo's law the 880 and in Bill's words here all at once we were looking at the heart of a real

computer and the price was under $200 we attacked the manual I told Paul deck can't sell any more pdp8 now it

seemed obvious to us that if a tiny chip could get so much more powerful the end of big unwieldy machines was coming yep and this is really where Bill Gates

commits to computers to be his life's work I think what's often lost in the story is Bill even though he was good at computers and spent tons of time programming computers he never fancied

himself a computer guy until this moment in history he went to Harvard because he felt like hey if I ever want to be a lawyer or something else like they've got a lot of great programs there and this was the moment where I think it

really clicked for him that just in the middle of the right place at the right time with the right skill set and this is my way of having the most impact on the world so they think okay what's

clearly going to happen here is all the big computer companies you know IBM deck the big Japanese Computing companies they see this they're going to get into this business they're going to

make machines and they're going to make microcomputers surely they will jump on this opportunity right if it didn't destroy their existing business model sure they would

exactly so Bill and Paul kind of are sitting around waiting through 1974 and 1975 being like hey when are the 880

computers going to come out where are they it's just crickets yep Paul is so convinced that the revolution is coming that he actually drops out of Washington

state moves to Boston to be close to bill so that they can be ready when it happens and that summer they both get summer jobs at Honeywell as programmers Paul stays on into the next school year

when Bill goes back to school he's just like waiting waiting waiting and then in December 1974 Paul is walking across Harvard

Square and he sees in a news stand the January issue of popular Electronics on Whose cover is the all tear

8800 the world's first real honest to God commercially available for sale micro computer and the legend has it

that Paul grabs the magazine runs over to Bill's dorm throws open the door throws the magazine on the desk and it's like it's here and Bill just says oh my

God it's happening without us we need to get on this right now well it's so funny he thinks they're already behind because clearly they're not history would show I think Bill Gates even says we might have

actually started a year or two too early the mar actually hadn't materialized yet and the funniest thing is the starting gun went off and Bill and Paul ran and everyone else is still standing around

and this is it this is the moment the revolution is here Microsoft is about to be founded but first this is a great time to thank our presenting partner

this season JP Morgan payments yes just like Bill's vision of Microsoft to put a computer on every desk and in every Home JP Morgan has a vision for making

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essentially wrote the modern Playbook on building platforms be sure to check out jpmorgan.com acquired or click on the link in the show notes so David they're

like it's happening without us what do they do well they do the natural thing that two super excited ambitious high

octane college kids would do they call up the main phone number of alter's manufacturer a company called mits mits

and ask for the president man named ed Roberts and Bill and Paul they get him on the phone and they say we have a basic

interpreter ready to go ready to ship for the 8080 Intel chip and we want to provide it for you for your machine which of course they don't they don't have a single L of code written they

don't have anything but it's a market test they want to know like what's the response If This Were true exactly and he's a bit of a character himself he says okay well guys a lot of other

people are calling me and saying the same thing what I'm telling them and I'm going to tell you too is that anybody who can come here to my office in

Albuquerque New Mexico and demonstrate a working version of basic on my altar will get a contract with us to distribute it when they go on sale and

so Bill and Paul they say okay great we'll see you soon and hang up and by see you soon they mean let's go get to work

and this is a big deal for mits too if this works because right now they've just announced a machine for which you can't really do anything on it the hardware is powerful but they're not

going to have a lot of customers unless there's stuff you can do on the machine and a basic interpreter running on it you know it's quite valuable to then make the claim you can program basic on our computer so they're very excited

about this even though they're kind of playing koi I was going to talk about this in a minute but let's talk about what the AL te is what did they just announce in the magazine here this is

the altar is the first mass Market commercially available personal computer again no screen or anything yeah does not have a screen does not have a keyboard doesn't have a display of any

kind what it does have is it has a set of 16 lights on the front of the machine like Christmas lights and 16 switches and you can flip the switches to flip

bits and then the machine will respond by lighting up different patterns of Lights it doesn't come with any software there's nothing that's all it is 16 lights 16 switches so in order to use it

you got to hook up your own teletype you got to get the manual you got to hope that the manual is right and you got to code to the machine instructions like literally the Assembly Language for the

chip inside for the Intel 880 now back to the trao data days and Paul writing the emulator for the 88 at Washington

State Paul's like we got this I'll just write an emulator on the Harvard pdp10 for the 8080 instruction set so he does the same thing again they get the manual

and they have an emulator and they write it against an emulator yep Bill writes the basic interpreter and in a couple weeks they've got it working and Ed's

like okay come on out to Albuquerque so Bill and Paul remember Bill still looks like he's 12 at this point in time they decide that just Paul should go and does Paul have like a rock and beard at this

point yet oh Paul is super 70s he is like into it and as we'll see he's going to fit right in at Albuquerque and Ms so Paul gets on a plane flies from Boston

to Albuquerque and you know in a total like epic Legend moment they didn't have a bootloader written for the basic interpreter so they had the basic it was

all written they done it on the emulator and Paul's flying out with the tape the computer tape with the code of the basic interpreter on it but he's like oh shoot we can't just feed that right into the

machine there's got to be a bootloader to load up this thing so he writes the boot loader on the plane on paper by

hand he is hand coding octal not even Assembly Language instructions like he's hand coding in pure octal the

instructions to load their basic interpreter program into memory yep so he lands in Albuquerque drives out to mits they load the bootloader onto the

Prototype alter there that loads up the basic interpreter and it fails it doesn't work PA's like sh let's try it again let's try it again so they try it again you

know this is how early Computing is like it works the second like who knows what the bug was the first time they didn't change anything it just didn't work the first time and it worked the second time

so it loads up Paul writes in the the instructions print 2 plus two it spits out four and by spits out I mean like the lights light up and say you know

four and both he and Ed their jaws are on their floor Paul's like oh my God the basic works and Ed's like oh my God the alar works like neither of them believed

this was actually going to work and Ed actually has more eggs in this basket than he sort of L on because when Bill and Paul call and say hey can you give

us the teletype instructions he reveals they're actually the only ones who called about that so everyone else who said they were writing a basic never got far enough to ask how do we actually

interact with your computer yes so now is the time to say a few words about Ed and mits like what is this company Bill and Paul originally thought that it was

going to be the ibms the decks the Japanese companies who are going to make the first micro computers mits is about

as far away from IBM as you can possibly imagine mits basically was a model rocket company which Albuquerque is a

great place to do that Ed Roberts the founder he had been in the Air Force and stationed in Albuquerque and that's how he got involved in model rocketry and

the reason that they're introducing the Altar and they made this Big Splash in the magazine was this is a last ditch Gambit to try and save the company so

you got like a bankrupt model rocketry company and their little Gambit worked and got a couple of college kids to pounce totally and like why did it work

they had two things going for them that really Ed I think probably personally made happen one they got this splashy

popular Electronics magazine cover that was through a relationship that Ed had and two the sticker price was

$397 which is about $300 in today $ 2024 yes that's a lot of money but the next cheapest computer that anybody could buy at this point in time was like

a deck you know like $120,000 mini computer so the idea that somebody could buy a computer for

$400 I don't care who's selling that thing like I want that so what did they get some kind of sweet deal from Intel yes so this is all Ed's doing the list

price from Intel for the 8080 chip was $360 so like I think this is part of what was deterring the market of how would anybody sell a kit that was

affordably priced when so much of the cost of goods would go to Intel with the processor deal he managed to negotiate a

volume deal with Intel to get 8080 chips at 75 bucks a pop and that was the key unlock that's like a 5x price reduction totally huh I wasn't able to find how

that negotiation went down or why like Ed Roberts in Albuquerque New Mexico got this sweetheart deal from Intel I mean either the list price is like wildly wrong or they were cutting deals all

over the place or one thing it could have been is just that and I'm totally speculating but chips are the ultimate High fixed cost investment low marginal

cost next to software you could imagine maybe Intel had already put all the money into the fixed cost of spending up the Fabs and was expecting a certain amount of market demand and they weren't

seeing it they were like crap we got to recoup our investment I don't know lower the price let them just s maybe we'll make it up in volume I like that I have no idea but that's a totally viable I

think train of thought here H either way he gets the sweetheart deal and not only does it make computer history and enable and create Microsoft it saves the

company of Ms so they were on the edge of bankruptcy after the popular Electronics article comes out they get 4,000 pre-orders in the first month or

two which is $1.5 million in Revenue cash paid UPF front that is pure cash hitting the bank account that'll save a company and also just proves hey 4,000

people just paid cash sight unseen for 16 lights and switches there's a lot of demand for a home computer here and at decent margins too I mean if they're getting the process for 72 bucks and

they're selling it for what did you say $397 yeah so I mean everything else in there is much cheaper than the processor so I don't know depending on how much they have to give to the sales Channel they're selling through if it's retail

or Distributors I think they're selling direct I think people are just sending money orders yeah so it's decent margin business unlike what the PC business would become over time they managed to

have nice margins so Paul and Ed they kind of hit it off Paul decides to move out to Albuquerque to be close to the action here and he actually joins mits

as their vice president of software no he's vice president of a software Department of one he is the software Department here yeah software Department of one but you know he's got his buddy Bill Gates

who was not employed But Bill's definitely working on software for the alter as well yes so Bill stays at Harvard but keeps cranking on enhancing

the basic interpreter and adding more functions and functionality to the version of basic that they had just written for the alt and then once the school year is over he comes out to Albuquerque 2 for the summer now the

alter is getting ready to ship with the basic the Microsoft basic included in it Bill and Paul kind of need to set up a company but Paul is an employee of mits

at this point so what did they do they set up a partnership so the founding of Microsoft at this point micro- soft is a

twers partnership between Bill and Paul and as we record this that was 49 years and one day ago so we are sitting here on April 5th recording that was April 4th

1975 and it is very funny to look back at some of the original signatures when Bill writes on letters it's Bill Gates the general partner of micro- soft which

is great I think it's actually a Paul Allen name where he wants to put together micro computer and software and Bill's like that's perfect we're immediately just going to run with it as it was a partnership originally they

were going to call it something like Allen and Gates and then they ultimately are like no Microsoft is perfect Microsoft has become like Kleenex but

like no no it's like Microsoft means microprocessor software I will say like it's a nice clarifying North Star because it really draws the Line in the Sand and says we're in the software

business and Gates makes this really clear to Paul Allen who is often tempted to do Hardware stuff and Bill is very hardcore about saying no what we're

uniquely good at in the world is software and we should stick to that I also suspect bill is starting to realize there's an amazing business model here if we can pull it off where we don't

have to make the hardware and we can charge for every copy of the software sold but that Insight I would say has not yet fully materialized yeah oh okay well let's talk about business model

here in one sec first though on the partnership know again we've been saying all along that bill is clearly the leader here they set up the partnership initially it's 6040 ownership bill is

60% Paul is 40% later it gets changed to bill is 64% and Paul is 36% so like yep bill is the leader here yep and Bill's case that he makes on that to Paul is

hey you took a job and you were doing this on the side I was all in and Paul's an agreeable guy and 36 is still a nice percent and so he says sure you know in

the long run here um everybody gets Rich so it's all sort of rounding error but to that point back to the business model so once the partnership is set up they

sign an exclusive licensing arrangement with mits this is super important this is a big lesson that young Bill and Paul

are going to learn here so mitz gets exclusive license to the basic interpreter to the basic as they call it

for the 8080 and mits is the one that can then decide whether to suc the basic out to other companies or not huh

essentially this is a distribution deal with mits where mitz becomes the exclusive seller and distributor of

Microsoft's basic Microsoft doesn't have any direct sales control here it's going to become a big big big issue and the terms of the deal are Microsoft is to

get $30 for each copy of basic that mits sells plus 50% of the revenue that comes from these subl licensing deals that mits may or may not do with other

companies who want to use the basic which why would they ever do any sub licensing deals like why would you give it to your competitors well that is a really good question Ben so let's just

round that part of the revenue to zero yeah this is a big big big diverging of interest between Microsoft and mits and the kicker on this contract is that the

total amount of Lifetime Revenue that Microsoft can make from the basic oh it's from mitz is capped at

$180,000 H so Ed and mits really have the upper hand in this deal or phrased another way it's we will give you

$180,000 for you to hand over exclusive rights to all that cool basic stuff you just wrote to us but if we sell fewer than x machines we're actually going to pay it out you on a pro-rated basis at

$30 a pop rather than giving you the full 180k yeah that is another way to frame it so definitely a great deal for mits on the other hand what are Bill and

Paul going to do here right kind of a great deal for them too given the position they're in right mits is the industry yeah now there is one very very

important clause in the contract though protecting Microsoft's interests and that Clause is that mitz must use its

best efforts to license promote and commercialize the basic broadly in the marketplace and that any failure to do

so by mits would be grounds for termination of the contract by Microsoft thank God Bill's dad is a

lawyer indeed indeed so the alt comes out for sale later in 1975 Microsoft does $16,000 in Revenue that year from their

$30 pop uh the basics that are getting sold with the alter which is great especially the first year that they're starting and the next year in 1976

everybody's so excited about this new market the vision that's happening the demand the alter the sales that Paul Allen resigns from mits to join Microsoft full-time Bill drops out of

Harvard officially he moves to Albuquerque they're all in on this but for the year in 1976 Microsoft's revenue is still only

$22,000 so it was 16,000 the year before 22,000 in 1976 not a high growth company this is less than they were making in high school like what is going on here

one is sort of like mits is the one at the controls of sales not Microsoft but two mitz is selling a thousand computers a month this is taking off this is

creating a new industry despite mitz selling thousands of computers a month only a few hundred copies of basic are selling per month what's going on people

are pirating the software this is the discovery of software piracy and this is a pretty interesting time to pause and say well are they pirating software

because that's a good question this is 1975 so piracy implies that you are running a fowl of some particular legal

protection for the good and you might say well with today's legal Frameworks in hindsight you would say of course if they're copying the software and not paying the money for it as piracy that

was actually not established yet and this is the craziest thing so Bill basically has an opinion that it's piracy and he writes letters to the computer Community he writes an open

letter to hobbyists yes and tries to basically Guilt Trip people he tries to use it as a recruiting method and say if you're so excited about pirating our software maybe you should just come work with us and you know nothing would make me happier than making the best software

in the world and please join us on this Mission But ultimately the legal standing that he has to say hey what you're doing is illegal is not fully established and so it would actually

take a couple of years for the courts to look at software and say what about this is protectable and if you think about it it is a little bit weird so you've got

source code that looks kind of like English you know basic it's letters and numbers it gets translated to machine code that machine code ends up running

and it's basically electrons it's voltages that are flipped up and down and so what about that are we trying to protect ultimately the way it gets

litigated through some case law from court cases is that the source code is a copyrightable creative work that is

expressed through some sort of tangible medium that's the important thing about copyright law it's a creative work expressed through a tangible medium so a book the creative work is the words and

the tangible medium is the you know printed on paper and so with software it actually took until 1980 Congress changed the law we'll put a link in the

show notes to like the literal Congressional change that happened and it is in title 17 copyrights chapter 1 subject matter and scope of copyright in

1980 they include a defined term which is a quote unquote computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a

certain result and once you have that passed by Congress codified into law you now have the standing legal framework that all the whole computer industry used going forward in particular the

software industry a computer program is copyrightable work wow I didn't know all that's awesome it's totally crazy how recent that is but when you think about it why would that have any legal you

know software is such an abstract idea before the whole business model of computers was good luck just replicating an IBM PC and everything that comes with it you don't need any legal standing but if you're going to pursue this software

only business model what's the protection around your abstract product that's exactly what I was going to say here this is the other element of what's going on this is the first time software

has ever been sold right other than the IBM accounting machinations to protect themselves from antitrust which was just accounting nobody had ever sold software

before this is the first time right certainly to build like a legitimate business around it the other thing that's useful to know is when you're selling an IBM PC you're literally

selling a PC to a customer the same way that when I'm selling you this glass from crate Barrel I am selling you the glass and the glass is now yours I've

transferred property to you software is not that so the whole world of software is built on a license agreement so the source code that computer program the

actual right of that is retained by the Creator and you license the copyright to your customer to be able to use that on their machine so there's this dual idea

that computer software is copyrightable and you can grant a license under certain conditions for customers to use it that is the legal framework for which

the next 50 years of Technology at large would operate under for the moment though they got a piracy problem right the law isn't going to change until 1980 Microsoft would be dead if they didn't

figure out a solution to this before 1980 so this is when Bill ultimately kind of realizes shoot we did the wrong

business deal with mits here mits has to sell and customers have to make the decision to buy our basic is a key

critical part of the value of the computer it's like the whole thing it makes that machine useful right without it it is not useful it's totally setting

up the wrong incentives and value equation that customers should be buying this themselves it should be included by the hardware OEM in the machine that they are selling and in the total

purchase price and then if that happens we no longer have a piracy problem because we're just getting paid as part of the purchase of the machine right should be a royalty right the problem is

that is not the deal that they had with mits right or framed differently instead of saying hey consumer do you want to buy something else too and make a new purchase decision they should be saying

hey computer manufacturer we make your thing actually useful so pay us for it yes so during 75 and

76 mits pretty much had this new microcomputer Market all to themselves there were a couple other competitors who sprung up but you know nothing made

like the AL te and mits was the microcomputer company all that changes though in a big way in 1977 when what

bite magazine calls the 1977 Trinity hits the market and that is three machines the RadioShack trs8 Tandy

RadioShack trs8 the Commodore personal electronic transactor or the acronym pet

and the Apple 2 all three of which machines were like the alter lowcost

Mass Market unlike the AL they were not kits they were fully assembled fully functional right out of the box and they each had their own Major Distribution

advantages and in Bill's words these three machines the 1977 Trinity ignite volume in the market Bill loves these really dramatic verbs like we attacked

the manual they night the volume in the market oh and the Press just latches on to him whenever bill has a leaked memo or something where he talks about all this war terminology those all become

headlines so great now earlier during 1976 Microsoft had started getting approached by a few of the bigger Computing companies like NCR National

cast register GE Control Data Systems I want to license Microsoft your basic for the 880 microprocessor here so that we can experiment with these things and

each of these deals would have been Revenue to Microsoft of like $100,000 is but Ed and mits they keep dragging their feet on negotiating these they've got

the exclusive license everything's got to go through mits and most of them they're turning down because Ben like you said they don't want anybody to come in and compete with them yep there is

the misalign incentive there's the misalign incentive and there is the Clause that bill and Microsoft and I presume Bill senior put in the original

agreement is mitz using its best efforts to commercialize the basic and gain adoption in the market and you can make a pretty strong argument that they're

not so Ed though unbeknownst to Bill and Paul he has another reason that he's dragging his feet on these deals which is that he's about to sell the company

so in May of 1977 mits gets acquired by the tape drive manufacturer pertek for $6.5 million and Ed kind of rides off into the sunset

and pertek they know about this dispute with Microsoft and they sort of come in and they figure like who is this Bill Gates he's a 21-year-old kid a College

Dropout like we're a big company we can deal with this and Roberts has an amazing quote later he says pertek kept telling me they could deal with this kid it was a little like Roosevelt telling

Churchill that he could deal with Stalin oh my god oh oh boy and I also don't think they realize that this kid's dad is one of the best corporate attorneys in the

country yeah well Bill Gates was just constantly underestimated which kind of worked to his advantage in those early days yes totally this is the thing about

Microsoft people kind of forget how insanely young bill was he was just 20 and to put that in context he's only

seven years older than Jensen hang but they feel an entire generation apart since Microsoft was started almost 20 years before Nvidia when you start

bending your mind around like oh Bill Gates is still pretty young considering what an institution Microsoft has become in the world right I mean Microsoft next

year is going to have its 50th anniversary and I believe that'll also be the same year that bill turns 70

that's wild yeah so that fall in 1977 the dispute between ms/ pertek and Microsoft goes to arbitration in Albuquerque and the in a months while

this arbitration is happening are the only moment in Microsoft's history where like cash gets tight they're sort of running out of money because they can't really make any sales here right they

don't control their Destiny people aren't paying Ms for the basic they're quote unquote pirating the software they can't do deals with all the other computer companies that want to come

licensed directly and so things get a little tidy Microsoft ends up winning the arbitration I believe in maybe like November 1977 meaning they are now totally free

to go licens basic to anybody who wants to buy it on any terms that they want so they turn around they immediately license it to the Trinity you know Apple

Commodore Radio Shack and Tandy they license it to all the big companies the GES the ncrs who want to experiment with microcomputers there's a really funny

story with apple that apparently was had more or less written like 95% of of their own basic their own basic but it didn't have floating Point numbers it

only had integer numbers and jobs is like totally riding W and he's like the basic it's really important like can you just finish it can you do floating point

and was just doesn't do it so jobs has to go license Microsoft basic amazing and that's the first deal that happens between the companies I mean there's so many deals done both

directions commercial deals Equity deals legal disputes in both directions and this is the very first time that they do something together yep so Bill and Paul

and Microsoft they do all these deals and they do them all as cash upfront fixed cost all you companies you're going to pay us and then you include the basic in the machines that you're

selling and we're going to get all the money up front super prly though Bill does not value maximize on these deals

so like the Apple deal is $31,000 for8 years of whoa access for Apple for the Apple 2 to Microsoft's

basic they're not price gouging here because Bill sees he's like the play here is we want to make it a no-brainer for everybody everybody who's selling a

micro computer to have Microsoft's basic on it cuz we want to set the standard if we are the standard programming environment that anybody who's using these computers and again anybody who is

using these computers is programming them they're used to the Microsoft version of basic we're going to have so much power that it'll become a self-fulfilling prophecy all of our competitors will just wither away nobody

will want them because it's not going to be compatible with the language everybody knows and then once people start trading and then ultimately developing and selling software that they've written it's only going to run

on our basic interpreter not anybody else's fascinating I actually didn't know that started this early and one correction there you don't know for a fact it's only going to run on

Microsoft's basic interpreter but you do know for a fact that it will run on Microsoft's basic interpreter and so if it's cheap enough why would you take the chance on a clone that might have one or

two things wrong with it yes basically his vision is I want to remove any oxygen from any argument anyone could have about not using Microsoft's basic on a

microcomputer he thinks about this concept as a positive spiral that he really in his mind is the reason for Microsoft success he says success

reinforces success in a growing Market one way of doing something gets a slight advantage over its competitors this is most likely to happen with high technology products that can be made in

great volume for a very little increase in cost and if you get that slight Advantage it'll compound and this is what he's playing for here and it's interesting in the earliest days what

was stopping someone else from writing a basic interpreter and Licensing it to Apple or Radio Shack nothing there were other smart people out there and so it was just a very good business decision

to say we got to close that door we just got to make this a no-brainer for people to buy from us because if we're value maximizing and it's starting to feel expensive they're going to turn elsewhere until we get a lead right the

Apple story is the perfect example you know the was thing is cute and it makes for a good story and like oh he didn't finish the basic but when Microsoft sold them the basic which was already getting

established as the standard for $31,000 sure why not no brainer Apple could have gone out and hired another programmer to finish the basic but they're like wait we could do that or I could just get the standard one for

$31,000 I'm gonna do that just because it's important to establish there's tradeoffs for everything if you're running a startup right now you might think to yourself oh great I'll just run that exact strategy the important thing

here is a most of the work was already done for the original basic B bill was doing it himself Bill and Paul so the importance of Technical co-founders and

their overhead was crazy low and so they could do these deals where they don't make very much money because they were I think at the end of 77 they were five employees so their overhead was just so

unbelievably low that they could take a really long lens so yeah even though it takes until the very end of 19 77 when the mitz dispute gets resolved and

Microsoft can actually you know make money again they end 1977 with $381,000 in Revenue despite zero for the first like 11 months of the

year they're just rolling in cash this is when Bill famously goes out and buys a green Porsche 9911 and is motoring around Albuquerque getting all sorts of speeding tickets and you know hilarious

stuff this is when he got his mug shot right yeah I think that's right this is the classic bill Gates holding up there yeah yeah yes amazing cuz he got I think three speeding tickets in one day two of

which were from the same police officer yeah and there's funny stories of the alberquerque police thought this you know how is a kid driving a Porsche 911 he must be like a drug dealer or something cuz even when he was what 2021

he looked 17 right it's like do you even have a driver's license wild oh but back to what you're saying this a really

really important point to make this dynamic work you need to be able to afford the investment in the fixed cost

for the software for the technology to make it that little bit Superior like Bill's talking about the slight advantage over the competitors and at this moment in time the industry is

completely brand new like the software industry is brand new so the amount that that fixed cost takes the cost is quite

low really it's just bill and Paul's time and dedication to this industry that nobody else is making that investment you can't run this Playbook

today because in any Market even a brand new market even a speculative Market the minimum viable fixed cost is billions of dollars right yeah that's interesting I

also think this moment galvanized something important which is Bill and Paul could sort of look around and see there is going to be so much value

created by microcomputers and by software they really found religion around software is Magic the things that people can create now that we've done this basic interpreter and these

machines are cheap and plentiful the magic will take care of itself as long as we ensure this industry can just exist and do its thing and so they flipped from this mode of we need to

bite and scratch and Claw and make sure that we win in deals to huh how can we enable software as a thing to th dve and I'm sure we can position ourselves well

to capture some or a lot of that and I think they became almost stewards of the software industry and evangelists from this point forward yes they also do

another really preent thing the next year in 1978 which is they go Global yes nobody else was going global yet and the way that this happens is so fun Bill

gets a call one day also how crazy is it you've got five people you're operating out of Albuquerque you just finally expanded from having one customer and you're like you know what we should do this year let's open in Japan and become

an international company yes now the way this happens is one day Bill gets a call from a guy named kahiro Nishi or k Nishi

who's a computer Enthusiast in Japan has gotten a hold of Microsoft's basic totally shares the same vision as Bill and Paul he doesn't have a Paul you know

nor is he technical himself he's like I'm going to bring you guys to Japan I'm going to bring you to all the big computer companies they agree that K will become Microsoft's exclusive

distribution partner in Japan and by the next year in 1979 half of Microsoft's revenue is coming from Japan which is wild it's

unbelievable and it stayed at that very high run rate of international being a huge chunk you know close to half always basically forever this is a huge

Cornerstone of Microsoft success that they were an international company from year three of their existence yes totally so Revenue in 1977 you know that

like last month of Revenue was almost $400,000 1978 revenue is $1.3 million and they have 13 employees at this point 1979 revenue is $2.4 million and at the

end of that year they're like all right we got to get out of Albuquerque and they've got 25 employees I believe at that point yeah something like that and this is when they moved to Seattle and

it's interesting to hear Bill talk about this he actually really liked Albuquerque and specifically there weren't any distractions there no distractions weather was great yeah

everybody was happy there but the big problem was recruiting yeah he was like you know if we're going to build this into the opportunity that I see the vision that I see and that Paul shares

with me there's no way we're going to do that in Albuquerque we got to move to a hub right and so he's got three reasons for why Seattle in particular and by the way it worked every single person except

for his secretary did make the move so one he grew up in Seattle he's like I just want to go home and then he justifies it in two other ways which I found pretty fascinating this is from an

interview in the early 90s that he did he said it basically came down to Seattle or Silicon Valley and in Silicon Valley it's hard to keep secrets because there's a rumor mill and in Seattle we

can be a little bit more removed and we can announce things when we want to announce them and two in Silicon Valley people switch around companies I don't want that I want people to just work at Microsoft there was a disadvantage to

not being able to recruit from your competitors but for a while they were really the only game in town in Seattle right but not really though because pretty quickly I me Microsoft is such an important part of the industry they

recruit from Silicon Valley too we're going to talk about some of the people who come up but you're totally right people stay at Microsoft they don't leave this continues right through to this day

and the other thing that I think is really important to say that makes it work for Seattle in a way that I don't know that this could have worked in too many other places in the country is the University of Washington yes the

computer science department there was really good there were great people you know Steve Russell had come out there like there was real talent and they were churning out graduates out of the udub

that would go on to populate Microsoft for decades to come oh and then Bill of course rein invested in that flywheel donating tons of money to the university I mean there's buildings there's whole

new schools yes absolutely they played right into it and so today I mean it's always a top 10 if not top five computer science program in the country but unlike other top computer science

programs it's a state school so it just has huge volumes I think more students come out of the University of Washington and go to big Tech than any other program in the country that has stayed

this amazing Advantage yeah I think the only thing even close to it is Berkeley in the Bay Area with a lot of the same Dynamics but there's Stanford there too so it's kind of like a dual University

system in the Bay Area but yeah you cannot overstate how important the University of Washington was to this decision and then the ultimate success of coming to Seattle yep so this brings

us to 1980 in the beginning of the year when they move to Seattle just in time for I think you can make a very strong

argument the single most important deal ever done in the history of Technology absolutely the

Microsoft IBM I mean it's crazy to even say it now the Microsoft IBM PC partnership it's crazy you have

this absolute Behemoth partnering with someone that's not really relevant and if you're standing here today it sounds like I'm talking about Microsoft

partnering with IBM but at the time it was IBM partnering with Microsoft it was the only computer company that mattered in the entire world got themselves into

a particular situation where they came to Microsoft looking for help it's the craziest set of events that made this possible and I can't wait to dive into

it oh me too it but before we do this is the perfect time to talk about another one of our favorite enterprise software platforms service now who is one of our big Partners here in season 14 yes

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that Ben and David sent you so the IBM why is IBM getting into the personal computer here in 1980 a fun quote we

heard in our research was that IBM was the Sun the moon the stars of the Computing industry and that meant the hardcore Enterprise Mainframe Computing industry yes David are you gonna

attribute that quote or You Gonna Leave listeners just hanging all right I think it's time we talked to probably 10 early Microsoft people in research and preparation and one of those folks was

Steve bomber himself and he used those words in describing IBM yes and it's hard to imagine a better person to get their perspective on what IBM meant to

the world at this point in time because 1980 was also the year that Steve joined Microsoft so literally at the same time

in 1980 you've got the management team coming together with Steve and Bill and Paul Allen and you've got the IBM thing going on and you've got them moving to

Seattle and we haven't even talked about Charles Simone yet but this was the year he joined this is the year yes I mean every year for Microsoft until this

point is the year but like 1980 is Big okay so why is IBM the Sun the moon and the stars of computing why are they getting into this PC it's way cheaper than anything else they sell it seems to

be like a totally different business strategy a different customer set what's going on so all the early micro computers we were just talking about you

know the alt the Apple 2 the trs8 these are all 8bit machines they're running the Intel 880 processor or

competitor making a similar 8bit processor the problem with an 8bit processor is that the maximum data size

for a given instruction cycle in the processor this is called a data word in computer science terminology is 256 you

2 to the E you can't represent Any number greater than 256 in any given CPU clock cycle in an 8-bit machine right

it's effectively a bandwidth limitation where if you're in a single clock cycle trying to do some particular instruction it's a very very small amount of data that you can move through the arithmetic

logic unit or that you can move through the processor in that clock cycle totally you could think of it like an hourglass or something there's like all the data sitting there in memory at the top of the hourglass and then there's

the small little you know funnel that it goes through that's the processor and then it comes out that's a good analogy it's going to take forever yeah into the application of the software that the user sees you're just not really going

to process it that fast very primitive machines yes and so for a company like IBM they eclipse the 8bit Computing

cycle a long long long time ago main frames you even mini computers with deck you know all these machines are at least 16bit if not 32-bit Computing machines

so 8 bit just it's not interesting which is why they only cost 375 bucks or whatever for an alter right in late

1979 Intel announces that they're coming out with the 8086 processor which is a 16bit

microprocessor with 16 bits you can really start to do some damage here in terms of the applications that you could put on this

thing to eat into business software use cases in 16 bits you can represent numbers up to

65,536 so that's 2 to the 16th you can do interesting things passing 16 bits around at once there's some really really fun aspects to this if you look

at pictures of these processors what did the 8080 the 8bit processor look like and then you look at what did the 886 the 16bit processor look like you can

see this in the 808 processor that's only 8 Bits you see only nine pins coming off of the little chip you know there's the eight pins for the data bits and then I think there's one more

control pin if you look at the 886 processor it's a much longer rectangle with 16 17 you know maybe like 20 coming off of it like you see this physically

represented in the chip the further we get in the Computing world the more abstract stuff becomes so it's always fun to go back in history when these Concepts were so grounded in our physical reality that's sort of easily

observable since everything was so much bigger too yeah back to 1980 the 8086 has been announced 16-bit microprocessor

is coming IBM has already lived through missing a Computing expansion era once with deck and the mini computer they

just let deck take that market of course that didn't really hurt IBM but man it would have been nice to also have that market too and the thing that they're observing about the microcomputer Market

is it's exploding people in our industry know about deck people in the broader World never knew about deck but I think it's a very different rate of adoption

and rate of Demand with microcomputers where IBM started to kind of look at and go oh this might be like a real market like a really big computer market for

people they're finally observing the same thing that bill and Paul did you know all the way back in the trao data days of this is an exponential cycle

like Mo's law this is exponential and exponential gets real big very quickly once you get a few years in yep and the mini computer cycle never was that so

it's hard to remember today but just to underscore this again in 1980 IBM was the most valuable company in the entire world the highest market cap company

bigger than all the oil companies in 1980 the Sun the moon and the stars yes do you know what their market cap was in

1980 150 billion you are almost an order magnitude off $34 billion that was the most valuable company is wild what a different world

we live in today yeah even inflation adjusted it's interesting that the rate of growth of the most valuable companies in the world in terms of market cap has far outpaced inflation so that company the most valuable in the world they're

going to tiny little Microsoft that's just moved to Seattle for this partnership what's going on here so what IBM decided this is just so amazing like

they deserve so much credit here they got the Kay Christensen disrupt your self- disruptive technology thing intuitively decades before clay writes

any of this stuff the way that they decide to compete is they're like all the things that clay wrote about are working against us here what we need to do is we need to create essentially a

Skunk Works division just like our lock heat episode we need to do something outside the company completely removed from the politics sure but like the business incentives not to disrupt

ourselves and create a new division they called the entry level systems division actually it may have existed before but they repurpose it this is in boa rone in boa Ron Florida very nice place we were

just there a couple months ago but not a technology hot bed in the world and they create a secret project called project chess secret from the rest of the company the whole world and the goal is

to develop the IBM micro computer or the personal computer as people are starting to refer to microcomputers yeah and this is wild

they're going to do it in secret with a small team with no other IBM resources and so that means this small team the only way they can do it is to use all

off-the-shelf components from technology providers basically play on the same Level Playing Field as all the other microcomputer manufacturers out there

and oh yeah one more thing IBM leadership tells this team in bokeh they have to ship the PC to customers within one year it's a crazy constraint it is a

total crazy constraint a couple quotes on this Don as who was one of the leaders of project chess he would later say that the company realized that if you're going to compete against people

who started in a garage obviously a reference to Apple here you have to start in a garage yourself and then Lou gersner Who later would take over IBM

would describe this whole bokeh project as quote the way you get an elephant to to dance and the question is are they playing from behind and thus have to

adopt a flawed strategy or is this strategy of assembling with all off-the-shelf components actually a good strategy if it works well let's tell the story and then

come back to it great okay so what do they do the hardware aspect of this is Trivial basically hell Ed Roberts could put together the hardware to sell a

microcomputer and do this deal with Intel like I think I M can do a deal with Intel the you know not necessarily trickier but the more important part is

the software and thanks to Bill's genius strategy about be the volume player don't optimize on per unit price set the standards out there they were like the world's leading provider of programming

language interpreters right 100% there is one game in town and one game in town only and that is Microsoft in Belleview Washington at this point in time now interpreters are notably different than

operating systems but Microsoft definitely had sort of raised the flag and everyone could see if I want to go buy software for my computers broadly they're an interesting group to talk to

oh yeah obviously operating systems are going to become really really big here in just a sec but again the 8-Bit generation operating systems weren't that important because people were writing their own software the

standardized software packaged application software doesn't happen until the 16bit era and doesn't really really happened until the 16bit era and

the IBM PC so that's why the basic The Interpreter is so important so what happens IBM calls up Bill Gates and by

August 1980 the two companies are in serious talks to partner and work together on the IBM PC and we referenced Steve bomber a minute ago the timing is

just crazy Steve had just joined the company in June of 1980 he's employee number 30 the Microsoft team of 30 which the whole company of Microsoft pivots to

like work on the IBM PC partnership is bigger than the project chess team in bokeh it's amazing wow so okay bill has

just convinced Steve to drop out a business school at Stanford and come help him and Paul run the company so Microsoft at this point in time is still

a partnership Steve is the first person besides Bill and Paul to get equity in the company when he joins and it's 85% and it's a handshake deal at this point

yes Bill really really wanted to bring Steve on knew him from the Harvard days knew what an asset he could be he is the end to bills Yang yes and so I mean

frankly eight and a half% it's a big Grant you know who's out there running a 30 person company and you're giving away 8 and a half% slugs it just doesn't happen those are founder shares and this

is really a sort of reflection that the way that bill thought about Steve was as a Founder in fact it created some tension with Paul Allen where Bill asked Paul if they could go to 5% Paul said

sure and then Bill actually offered him 8 and a half% and Paul got upset and Bill said I'll eat the three and a half% it can come out of my share because I want him that bad but he's the perfect

person for this point in time bill was like the only salesperson doing these OEM deals now they're dealing with IBM they're entering the Enterprise world this needs to be a real business yes so

back to the IBM negotiations obviously Microsoft is very interested IBM is not just very interested in working with Microsoft they have to work with Microsoft they're

the only game in town yes and specifically they ask Microsoft for programming languages they're like we're making this great PC we're going to need a basic we think you guys are working on a Cobalt we'd like some Cobalt yeah

Fortran like give us the whole thing and there's some debate on whether it was the Microsoft side or the IBM side that really saw the vision of hey the 16-bit generation is going to enable real

business software use cases on the personal computer but it doesn't matter that's the plan here and that is absolutely what happens so these initial discussions right are for the

programming language Microsoft doesn't make an operating system at this point because in the 8bit generation the operating system I think was kind of like a glorified bootloader to just get

into the programming environment so that you could either write or load up the basic program that Microsoft was going to interpret and then run and in AIT

generation most if not all Hardware providers of microcomputers just wrote their own operating systems like it just

wasn't a big deal now there was one off-the-shelf operating system out there from a company called digital research which was run by Gary kildall who I

think as we talked about earlier Bill and Paul had actually intersected with back in Seattle yep I think they were reasonably friendly yeah I think they were quite friendly cuz they partnered you know you needed the operating system

to get into the programming environment it wasn't that big a deal and so yeah whenever anybody needed one off the shelf Bill and Microsoft would just refer people over to digital to get it

yep CPM right exactly CPM cp/m which I think is maybe control program for microprocessors I think is the abbreviation there God they were so bad every single thing that's been named to

this point except except for the company Microsoft was a horrible name oh it's the processor is 8008 and now it's 8080 but the machine is

88 that the processor is inside give me a break everyone it's horrible naming Bill and I'm sure Paul two bill is the only person in this industry that has

the vision for what this can become even Intel you know Bill talks about this he doesn't think that Intel even realizes what's happening here they're just like oh we're just making chips you know and

like people use them for stuff yeah it does seem like very few people are thinking about their products as something they really need to build a brand around with consumers yes hence

the naming schemes okay so the IBM Microsoft discussions are going along and IBM's like oh hey yeah we need an operating system so Bill I think from

everything we've read and folks we've talked to kind of in good faith just does the standard thing he's always done in these situations he's like oh yeah go talk to go talk to digital research he can

probably do that right we don't have an operating system so this guy does so what happens next is unclear but what is clear is however it

goes down this is one of if not the biggest business blunder in history IBM that team from Project chess flies down I think directly from Seattle

and talking with Bill and Steve to monter California where digital research is based at this point to meet with Gary and his wife Dorothy who run the business together and Bill's called them

he's like hey got a big OEM client coming down needs an operating system and he signed Hefty Hefty ndas so he cannot say who it is but he's like you really should take this seriously right

so the team comes down obviously they show up there from IBM there's a big snafu where Gary does not attend the meeting and there's conflicting reports about what happened

was it one of them that he's out flying an airplane yeah so I'm pretty sure he was flying his personal airplane while this happens some reports are he was

just out joy riding and missed it some reports are no he was like on a business trip and knew it was happening but he had another important business meeting and he didn't know that this was IBM

that was coming regardless it doesn't really matter because IBM just wants the operating system Dorothy does meet with them she's unwilling to sign their NDA

there's a lawyer from digital research who gets involved and he doesn't really understand what's going on the punchline is that IBM sort of leaves this

interaction with the belief that Gary and digital research aren't up for working with them and like aren't capable of producing here and producing

is important because it's not like the existing CPM OS that they made would work here they would have to write a new version 16-bit version yes and they

hadn't done that yet and in particular they would have to do some customizing but part of what IBM wants is a customized version of an operating

system for the IBM PC they don't want this to be fully off the shelf yes and just to add one more stir the pot of History here there is another version of

this story where Gary does actually have a conversation with IBM and it blows up over licensing terms that what G really

wants is a significant royalty of every IBM PC sold and IBM walks over that so whether that happened or whether it's just an NDA issue either way I think we

all know the IBM PC did not end up running the CPM operating system oh that's amazing I didn't know that we'll talk about that when we get to the business terms of the Microsoft IBM deal

in a minute yes but for the moment there's no deal yet because an operating system needs to be provided here so IBM goes back to Microsoft and they're like

hey this guy you referred us to ain't going to work the way that I read some quotes from the IBM people here were like we just threw the problem back in Microsoft's labp of you guys deal with

this you Source an operating system yep well I'd like to say that bill and Steve and Microsoft you don't need to give them an opportunity twice in this case you kind of did need to give them an

opportunity twice cuz they almost flubbed it and sent IBM down to see Gary this time they don't flub it they're like okay we'll get you an operating

system and so enter Seattle computer products yes so it just so happens that right down the road from Microsoft in the Seattle area I think they despite being named Seattle computer products I

think this company was actually based in Taquila Washington a programmer named Tim Patterson had just written a 16-bit

operating system for the 8086 that Intel had just announced and he was calling it The quick and dirty 16bit operating

system or qos for short and had it ready to go now why had he written this what was this company Seattle computer products why did they

have an operating system they were a component provider to microcomputer manufacturers they essentially made motherboards and so when Intel now has

announced this new 16-bit processor generation that they're coming out with well Seattle computer products they want to sell motherboards and have them ready for 16 bit they kind of need to test and

play around with these things and their customers are asking for it so they had been going to kild doll in digital research too and badgering them to like hey write the 16-bit version of CPM and

Gary just didn't so Tim's like fine I'll do a quick and dirty version myself amazing and thus dos is born incredible which of course later they would drop

the queue and call it Doss the dis operating system something about dirty didn't have a ring to it when you're selling it to IBM no no no no no no so Bill and Paul and Microsoft they've

learned about this they know Seattle computer products they know Rod Brock who's the guy who owns the company they get in touch with him and they say hey can we license qos from you and Tim

we've got a big OEM customer that wants a 16-bit operating system so they work at a deal whereby Microsoft pays Seattle computer products $25,000

for the rights to adapt and sell qos to the one unnamed original equipment manufacturer who they're working with Tim actually he's jazzed about this he

ends up leaving SCP computer products and joining Microsoft and so he with the rest of the team he's part of building dos taking his initial work and turning

it into real dos later on before this all gets announced and the PC ships Microsoft would pay Seattle computer products another $50,000

for full rights to own 86 qos sell and license it to anybody else indefinitely so I believe the total amount of dollars that change hands here is

$75,000 unbelievable this is Dos now look one programmer wrote a quote quick and dirty operating system and Microsoft bought

the license to that and adapted it into dos Tim when he was at Seattle computer products definitely did not right dos as dos becomes it's not like Microsoft

bought all of Dos for $75,000 they did a lot of work on it but yeah this is how it all goes down so Microsoft would

eventually generate billions of dollars on dos based products now you're exactly right in the same way that Instagram today is a much different codebase than

Instagram and much larger codebase than Instagram when it was purchased but my God 70 $5,000 to buy dos to get this

whole thing started for I mean until Windows 95 all of the Windows operating systems were dos based it's just crazy I mean it really illustrates how fast

things were moving how much all this was getting invented and discovered real time that even to this point Bill Gates isn't thinking that operating systems are that important this is just a

shortcut to get the deal done with IBM to make it happen yep also David I got to say I just looked it up the address of Seattle computer products on the

original business card for Seattle computer products where I presume qos was written the space is available so I know where uh our next Studio needs to

be and it's in Taquila and it's in Taquila all right well the rent can't be like that expensive then so like let's do it correct correct hell

yeah well you know we've been joking for years about making the qu ired Museum we might have a location okay so now they've got the

operating system they've got Qs or dos in place to license IBM the only thing that is left to formalize the

partnership is the business terms and Ben if what you said is right about the Gary kildall IBM

negotiations this is just a master stroke from bill here in the licensing with IBM yes because there's two really really big levers that it looks like

Bill is giving big time on one of them but he is winning big time on the other one what are they so the one that it

looks like he's giving on is he does another fixed cost OEM deal with IBM yes so this is in Paul Allen's Memoir IBM

paid Microsoft $775,000 for testing consultation $45,000 for Doss 45 and $310,000 for an array of 16bit language

interpreters and compilers so all told bundled together that is $430,000 fixed that IBM paid Microsoft

with no ongoing obligation yes no per copy royalties yes every copy of Doss that IBM sells either incl included as

part of systems that they're selling or they're free to charge independently for dos whatever amount they want Microsoft gets zero dollar and if it's true that

this is where things fell apart with Gary kildall crazy that bill is willing to do this and you might say what didn't Bill learn his lesson why would he ever

agree to this on the one hand this is what he was doing with apple and others he was doing these fixed cost deals you would think like man IBM like this is the time people aren't going to Pirate

IBM Now's the Time to really grab the money bags but Bill saw something that no one else did in exchange I don't know if it was directly an exchange in the

negotiations but the other lever that he saw that he pulled was Microsoft

retained the rights to own dos and to own their languages and license it and them to anyone else they wanted at any

price on any terms it's so interesting because what ended up happening that Bill Gates masterminded was once we distribute our operating system through

IBM's PC that's going to become the thing everyone buys and now in the 16-bit generation when there are people building programs for computers not just

developers once those application developers who are writing programs are targeting an operating system then that is the operating system that every other

OEM every other computer maker is also going to want and really need and we're going to be the ones that they have to come to to buy it and I can't figure out

did IBM miss this fact or did they know it basically what IBM did was they were the one place where every business needed to go for their computer needs and what they did in this negotiation

was they actually handed that over to Microsoft and they said we are going to become a commodity just like every other Hardware manufacturer and you are going to be the point of integration for the

whole ecosystem you're going to be the Lynch pin that everyone has to Target for their applications so I think there are two things going on here one small

and one big the small thing is actually related all the way back to the beginning of the episode what you said Ben about the antitrust concerns within

IBM to hear them say it they actually didn't want ownership of the software they wanted it to be separate cuz it would sort of look better oh cuz then they have the sort of plausible

deniability of how could we possibly have a monopoly we're buying off the shelf part of an ecosystem blah blah blah yeah yeah yeah from a vendor who can sell to anybody else we have no lock

in and that may well be true I think the bigger thing that just wasn't in their consideration or mindset was they I

think assumed that once they entered the PC market IBM was going to be the dominant player so it didn't matter ah once IBM is selling PCS who's going to

buy a PC from anybody else IBM is going to win this Market just like they have in every other L of business they've been in and what Bill saw was he really made a bet that the same dynamics that

played out with the alter were also going to play out with the IBM PC that there would be a million Hardware manufacturers flowers blooming here building to the same spec and building

to the same spec using the same processor which of course they could because it was all off the shelf components and IBM either didn't see or

didn't believe that that would actually happen IBM failed to see the value of software and they certainly failed to understand what a software platform

business model would be which makes sense I mean why would they right it's almost like their experience the Computing company yes their experience in selling mainframes with everything

bundled in was the wrong experience to go off of in understanding the way the Future Would unfold and Bill's very modest experience watching the alt and

all these sort of alter clone type machines or even if they're not alter clones just more microm computers that need more software that actually was the

useful experience to pattern match off of of what does the world of micro computers look like and how is that fundamentally different than the world of mainframes totally and in a way that

you know the mini computer generation like we've been saying it was like a half generation it wasn't it wasn't actually fundamentally that different other than deck gained a foothold yeah the deal that Bill Gates made with IBM

for the IBM PC is the greatest deal in at least computer industry history if not all business history full stop right so let's say a little bit about why I mean maybe it's obvious but here and now

is I most valuable company in the world they're going to come out with the PC platform they are going to build the market and Microsoft is going to own the

lynchpin sort of Hamilton Helmer terms like where the power is in the market and they're going to be free to license it at whatever terms they want to any other player who wants to enter so they

signed this agreement in November 1980 the IBM PC ships in August 1981 just incredible almost exactly a year a little more than a year from the time project chess starts to when they

actually ship the PC I mean truly incredible they pulled it off truly incredible it changes the world like you know that's such a trait thing to say but like everything that everybody's imagining happens IBM was right that it

was by far in way the most successful personal computer on the market as soon as they released it totally they sell 13,500 IBM PCS within the first couple

months after they announce it over the next two years they sell half a million of them makes them unquestionably the largest personal computer micro computer

manufacturer market leader everybody at IBM is celebrating the Clones haven't arrived yet and maybe they won't it'll play out like they think not exactly now before we talk

about the Clones this is really just a footnote because of course all the incentives are aligned for IBM to push dos as the operating system for the PC I

mean they've done this whole deal with Microsoft they have a royaltyfree deal with them when they launch the

PC customers actually have a choice of which operating system they want on their IBM PC they don't have to go with

DOs consumers can choose between dos 16bit CPM by this point in time Gary and digital research have gotten their act together they've written a 16-bit version of the CPM operating system or

another 16-bit operating system called Pascal that came out of the University of California at San Diego and the price sheet for the operating system option is

Pascal is an extra $450 with your IBM PC CPM is an extra $175 with your IBM PC and dos which was

developed specifically for the PC is the best way to run it is only $60 so IBM is making $60 of full 100% margin on top of their hardware for the

PC by selling dos because they don't have to pay Microsoft any of that and they've set up the incentives that like obviously everybody's going to choose Doss it's fascinating and you know what to give them a little bit more credit

too they did try to enforce that there's some amount of lock in to the IBM PC and they did that in two ways one is we're simplifying and calling it dos it was PC

Doss which is different than Ms Doss which would get license to other computer makers I don't know exactly what happened but it basically seems like it just wasn't different enough to

be meaningful to application developers so that's one piece of it the second is IBM did actually have proprietary bios mhm so that was another part where they

kind of thought that that might provide them some protection where they could stay a Lynch pin in the ecosystem and it wasn't just all off the shelf they actually did have something that was

theirs that was proprietary it just turned out that the effort required to reverse engineer the IBM bios was trivial basically oh do you know the

story of the compact bios ooh well I know the compact story but I don't know the story of the BIOS specifically in lightness it is basically why compact

worked is what it comes down to so compact was formed basically to clone the IBM PPC they saw the market opportunity and they realized they could buy from all the same equipment vendors

so let's go eat their margin is basically the plan however the one thing that was not off the shelf is the BIOS the basic input output system which is

effectively the thing that decides to load the operating system when you turn the machine on and so there's some proprietary magic that happens to call upon the operating system to do its

thing so compact reverse engineered the BIOS and the way that they did it was very similar to trip Hawkins and the story that he told us about his reverse

engineering at Electronic Arts of the S of Genesis yes so compac had two

engineers and one engineer went in and fully dissected the code for the IBM PC bios and basically saw all the

proprietary calls that it made and documented each of those calls without writing the implementation steps then he handed hey here's what the BIOS needs to

interface with over to the other engineer and the other engineer on their own just went through and thought of un implementation and they have no idea if it's the same implementation so it's not

breaking any sort of infringement they're basically saying I'm just seeing the requirements for this product and I'm coming up with my own implementation

of that product they basically figured out how to exactly clone the IBM PC and buy the very same operating system and to go back to quoting Ben Thompson

because this is from his Great Piece again the result was a company that came to dominate the market compac was the fastest startup to ever hit 100 million in Revenue then the youngest firm to

break into the Fortune 500 then the fastest company to hit a billion in revenue and by 1994 compact was the largest PC maker in the world the

compact story is amazing so the three people who start compact in 1982 are actually Texas Instruments Engineers who left and they wanted to start a company

and I believe as the legend goes they were like trying to what to start they were considering like a restaurant Chade and like a bunch of different business ideas and then the IBM PC comes out at

the end of 1981 and they're like oh we can clone this and do everything you know the story you just told so yeah

it's wild they start the company in 1982 and within the first year they do 111 million dollar of Revenue of selling IBM

PC clone Hardware is it just cheaper like basically this is the IBM PC but for less money yes exactly same thing cheaper and so Begins the race to the bottom of PC Hardware completely

undifferentiated all the value acres to the software layer totally compact went public the very next year in 1983 well before Microsoft which is funny but yeah compact all these other clone companies

that get started Microsoft licenses dos to all of them importantly critically on a per machine sold

basis this is when they grab the money the operating system is so deeply embedded and needs to get shipped with the computer itself yeah consumers can

go buy operating systems to upgrade and whatnot but no Hardware manufacturer is going to ship a 16-bit PC without an operating system so piracy is not an

issue here Microsoft can now do a per copy sold per machine sold license with all these clones my it's just like a geyser of money Microsoft used IBM to

generate demand for their software and then they used every other PC manufacturer to capture the value that all that demand created yeah so I think I have these numbers and time frames

right I believe that for calendar year 1982 Microsoft's Revenue was $25 million and I think this must have been when they switched to fiscal year end in June

30th so Microsoft's fiscal year end starting then and up through now is June 30th so their fiscal 1984 so the year

ended June 30th 1984 so 1983 midpoint to 1984 midpoint Microsoft does $98 million in an 18-month period from the end of

1982 they go from 25 to 98 it's all on the back of the Clones and unlike compact that you know yeah they did 111 million of Revenue their first year

they're selling Hardware which has serious cogs associated with it Microsoft 100% essentially gross margin

software Revenue more than doubling year onye it's the best business of all time yes and they combined two magical principles together this infinite replicability zero marginal costs of

software and becoming the lynchpin of the ecosystem they are now the software that everyone needs to Target which gives them pricing power totally so that pricing power raises your top line and

you have no costs it's unbelievable so meanwhile in the Computing industry background while all this is going on with the launch of the IBM PC and then

the Clones Apple had gone public at the end of 1980 in I think the biggest and most successful IPO of all time at that point remember we talked about jentech

on the Novo Nordisk episode they went public like right before apple and then Apple was bigger so they're valued at one .8 billion at IPO Steve Jobs is this

one .8 billion at IPO Steve Jobs is this multi-hundred millionaire like media darling all this stuff the next year in

1981 Microsoft reorganizes from the partnership between Bill and Paul with the handshake deal that Steve's going to be cut in on the partnership into a stock company a C corporation and as

part of doing that the Venture firm technology Venture investors or tvi invests $1 million I believe for five % of the company Yep this is crazy that's

a $20 million post money valuation it's a one on2 post when Microsoft is doing how much in Revenue that year they did 17 million in revenue and they're about

to do the IBM deal like this is absolutely absurd so it says a lot about this period in time that you could do a 1x Revenue deal in a high margin

software company I mean I actually don't think this shows a weakness in Microsoft oh they didn't have leverage or something like that that wasn't it at all it was just the deals sucked yeah

Venture Capital sucked back then yes there's no other way to put it now you know it's only 5% so good on Microsoft spoiler alert this is the only delution that they would ever take so that's also

extremely different than today but yes a $20 million valuation at this stage is frankly ludicrous you know even among people who should be in the know the

beauty of the software business model still is something people don't understand that's exactly right the hotness is the hardware it's like apple just ipoed Apple's worth $1.8 billion like o That's the industry o it's IBM

etc etc when Microsoft itself would go public a few years later in 1986 they actually go public the same week that they moved to the big campus in Redmond

where they are to this day their market cap at IPO is only $750 million despite having done $200 million of very high margin software Revenue in the trailing

12 months up to that growing 100% year-over year it's insane hey that's Forex multiple expansion off the last time they raised money right but it's just crazy that

people don't yet appreciate the power so Bill Gates and Warren Buffett did a conversation at the University of Washington in 1998 so this is as late as 1998 this thing that we're talking about

the magic of the software business model and how it should be reflected in a company valuation especially when it's a high- growth company was still not understood even by Bill Gates himself so

here's the quote Bill Gates says I think the multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette because we are subject to complete changes in the rules I know

very well that in the next 10 years if Microsoft is still a leader we will have had to weather at least three crises so Bill Gates is essentially making an argument now granted this is in the middle of all the antitrust stuff so

he's very Prime for this and the internet and the internet he's basically making the argument that disruptive forces come at you so fast in the

technology industry that even though you can grow extremely fast and it's this extremely scalable thing Distributing software at zero distribution costs and even though the margins are unbelievable

because you have zero marginal costs they still shouldn't be valued as highly as like a cpg company which is so different than the way that people think about it today well it's funny you know

I've thought about this a lot and I actually watched that interview years ago it's so good there are elements of truth to this too and I think it's that for most technology companies that is

totally true yep and then for a few technology companies that have true power and true scale the exact opposite is true Microsoft is still the most

valuable company in the world today companies that are less susceptible to disruption more predictable in terms of high growth

high margin Revenue deserve a premium but Gates is basically arguing everyone else doesn't so let's flash all the way back to 1981 and talk about this venture capital investment this one on 20 that

tvi does good work if you can get it man how does this come to be so even a whole year before in the fall of 1980 Dave Mart one of the partners and the

founders at tvi flies up to Seattle not to meet Bill Gates but to meet Steve Balmer because they were classmates at GSB right they weren't quite classmates but because I think they were two years

apart so they didn't overlap but they had some of the same Social Circles and Steve was effectively the screener for anyone who wanted to come and talk to Bill and try and invest in the business ta Associates had been up Sutter Hill

had been up ham brick and Quist had been up Xerox Ventures and all of them only ever got to meet with Steve Balmer and never got passed on to Bill Gates Steve would basically just bounce him off and I know all this because there's a great

oral history from the Computer History Museum where this whole thing's in a transcript with an interview with Dave marquart kind of recalling the whole thing so Dave flies up to meet with Steve and Steve says you're asking

really interesting questions you're thinking about our strategy the right way you don't just want to do a transactional deal like you really think this is something special why don't you meet with Bill Bill of course doesn't

have any extra time in his schedule he says but I am going to the udub Arizona football game at Husky Stadium why don't you come and talk to there so of course they go bill doesn't pay attention to

the game at all he's just laying out the strategy and Grilling Dave and talking about software the whole time so this is fall of 1980 so that's a whole year before the deal gets done and Dave's remarking at this point in 1980 they're

doing five million in Revenue two to three million in profit they don't need VC money and yet he was able to get in so here's the quote I was just sort of helping them out with the business in

the Venture business you're buying and you're selling at the same time you're trying to figure out are these guys crazy are they ever going to do anything really interesting and if so how do I get myself positioned to be able to help

them do it and so I spent a lot of time up there helping recruit people I helped to recruit Charles Simone who was an early key guy Charles Simone would go on is in aside to write Microsoft Word and

Charles was at Xerox Park inventing the goey oh we're gonna talk about Charles in just a sec yeah yes and he says and I was working with Steve on business strategy they had these OEM customers the PC manufacturers and they had

started to engage with IBM on this operating system and then are we just going to become a lowcost contract programming shop for IBM an outsourced sweat shop or is there some way we can build a business out of this which led

to the fixed fee to IBM the retention of the code which then we could sell to other people and that's what created the PC industry basically so that is his recollection of the whole thing that he

was sort of very helpful in this transformative time for the company now at the same time you have to look at everyone else's incentives how can I be helpful then so Dave is only 29 years

old but everyone else is like 23 and so he actually is kind of adult supervision at the same time the partnership was still just a partnership and there was a handshake deal for the equity and so if

you're Steve Balmer at this point in history it would be nice to have a forcing function to actually turn this into a corporation so that we can get some shares granted here so there's a little bit of incentive to say hey if we

take on an outside investor we're going to have to restructure and that's what I had always read about the tvi investment yeah obviously Microsoft didn't need the money they like Dave but also a big part

of it was this was a catalyzing function to do the conversion into a C Corp yes so this would create a little bit of board and governance so it's not just bill all the time now bill of course I

think is still the controlling shareholder just by the amount of stock that he owns but there's a board it's Bill and it's Dave and it's Kishi it's a three-person board yeah we should say

too Vis A V Paul tragically in I believe it was 1982 83 he's diagnosed with Hotchkins disease and he ends up taking a leave and then fully leaving the

company I think he did go on and off the board at various points in time yeah that's true but yeah he's no longer a full-time member of the company after his diagnosis yep so on this Venture

investment it's pretty fascinating none of these are terribly compelling reasons other than like I guess it would be nice to have a little bit of capital

associated with the US formalizing the corporation but they don't need money at all they're printing cash they've been printing Cash ever since that one tight

period in Albuquerque Dave Charmed them I think that's kind of the answer and I've always heard wonderful wonderful things about Dave and I think everybody really did love him and see his value

but man a to be a venture capitalist in the 1980s and 1990s like oh man you couldn't lose pretty crazy I think part of it too had to do with the fact that

Microsoft was up in Seattle so the VCS just weren't traveling right and Dave was young and he was single oh Don Valentine famously had the rule they didn't invest in any company that you

couldn't bicycle to from Sand Hill Road It's Crazy Dave maror I think most weekends is flying up to Seattle to hang out with Bill and Steve it was a real cell and he said I was young and I was

single and I had nothing better to do and it was really fun and intellectually interesting so I did it I bet and that resulted in depending how long tvi held one of if not the best Venture Capital

return in history hard to argue with that one okay back to the story there's a couple more really really key things that happen in the PC era and

particularly now once we're into the IBM PC era and the Clones the 16bit era and let's start with applications so you know kind of like we've been saying all

along the apid era applications package softare where aren't really a thing in 1979 kind of at the tail end of the 8bit

era two programs come out for the Apple 2 visal and wordstar visal is the first software spreadsheet application and

wordstar is a word processor these applications by today's standards are super simple like Stone Age type stuff but they're the first of their kind particularly viitala and the spreadsheet

they sort of establish the potential for business application on personal computers there's a joke at one point in the industry that the Apple 2 was a quote unquote visal accessory for small

businesses and I think that is part of what IBM is seeing and why they're deciding to now get into the industry with the personal computer around this

time Microsoft starts the quote unquote consumer products division to compete and make application software themselves and it's quite telling it's called the consumer products division to make applications

even though they're competing to make these applications that today we would view as business tools spreadsheets and word processing that is not how they referred to it right so one of the first

people that they hire into this new division to get it going is an engineer Ben who you referenced just a minute ago named Charles Simon and they poach

Charles perhaps with Dave marquart's help away from the legendary Xerox poo

Alto Research Center or Xerox Park and I think this is one of the great misconceptions in technology history yes hopefully we can set the record straight

a little bit here yes if you ask anybody in our ecosystem save for the 1% of people who actually know this what happened at Xerox Park they will tell

you they invented the mouse they invented the graphical user interface and then Steve Jobs walked in and he saw it all and he said oh my God we have to have it and then he went off and he made

the Lisa which had a graphical user interface and a mouse and then that failed but what succeeded was the mosh and it's a wholesale ripoff of Xerox Park that lives on today in apple and

that is the story that you will hear from basically everyone I've heard it characterized as something like Xerox hosted a picnic in Silicon Valley and

Steve Jobs attended and dyed lavishly at the feast which all of this is true which is true that is true all of that is true but it's half the story he was

not the only person who dined lavishly at the feast Microsoft did just as much directly from Xerox and Charles was one of the main vectors by which this

happened so here is the list of things that were invented or basically invented at Xerox Park the graphical user interface the desktop the mouse

object-oriented programming ethernet laser printing along with whole host of other things like this is everything about modern Computing invented there who are the people who were at Xerox

Park well there was alen K there was Bob meaf who would go on to found 3om he invented ethernet you know meta's law yeah the value of a network scaling

proportionally to the square of the number of inputs yeah Bob metf Xerox Park Larry Tesla who would join Apple

John waro who started Adobe Eric Schmidt worked at Xerox Park everybody was there it was a lavish picnic and Charles Simone and Charles Simone now the thing

about Park and the computer that they built there to instantiate all these Concepts which was named the alto is it really was a research center so the alto

go look it up on Wikipedia go look at picture like it's the Mac the alto is the Mac it's the Mac with the monitor turned on its side yes it's a vertical Mac it's a 3x4 display not a 4x3 display

now they start making it in 1973 so you might be like wait a what's going on here the Mac doesn't come out till 1984 11 years earlier how on Earth

is Xerox making the Mac in like the pre- 8bit era the pre microprocessor era well it's not a microprocessor the alto is

not a microprocessor architecture it's a minicomputer so what you see when you look at photos of the alto is you see the Mac what you don't see is under the table or behind it is a mini computer oh

I never realized that so it is not a personal computer architecture at all it is a 16-bit essentially mini computer that cost tens of thousands of dollars

to make each one of them huh it's a science project right so you should have a little bit more generosity for the East Coast management at Xerox for failing to commercialize this totally

the time was not right it was not possible it wasn't even conceived of in the microprocessor architecture cuz the microprocessor basically didn't exist

they made it interesting so in 1980 again went this year for Microsoft same year Microsoft joins same year they sign the IBM partnership Charles Simone comes

up from Xerox Park and he's of course bringing all this same knowledge all this same experience that Steve Jobs is bringing into Apple he's bringing all that right into Microsoft too and the

first thing that he gets tasked with is working with this new consumer products division to build application software to comp compete with vizel and word star to compete with spreadsheets and to

compete in word processing and so he leads the teams that create word and multiplan Microsoft's first spreadsheet now remember we're still at the end of

the 8bit era the graphical user interface doesn't exist yet other than on the alto in Xerox Park no these are DOs applications it's all character mode

yes it is command line interface so the vector that they think they're going to compete at least in spreadsheets with viakal is that they're going to be on

every platform out there viakal I believe was more or less basically only on the Apple 2 well that doesn't end up working too well and in the Next

Generation the IBM PC era they sort of make the same mistake the application business stays focused on being on lots of machines making software that's

compatible with everything a new company pops up called Lotus oh yes and Lotus makes the radical decision that they are going to make a

spreadsheet only for the IBM PC and this was genius this is the 123 spreadsheet and it goes on to become at that point

in time the most successful software ever this is wild I can't even believe I'm about to say this and it blew my mind when I found it in research there are a couple years in the late late 80s

where Lotus has more Revenue than Microsoft and is valued higher yep in fact the year that Microsoft went public Lotus had more Revenue than Microsoft at

the IPO yes wild yeah it's crazy so Lotus 123 had some graphics but it was still in character mode it was a powerful spreadsheet that could start to

do some graphics even though there wasn't actually a gooey operating system yet which is interesting so Lotus 123 was faster it had bigger spreadsheets and it was just more powerful Microsoft

multi plan was still targeting the older 8bit and so multipl despite Microsoft's best efforts is completely left in the dust Microsoft's trying to figure out what should we learn from this and in

talking with Pete Higgins and Mike Slade who were both early leaders in the development and the marketing of the applications division actually Mike Slade went on to work directly for Steve Jobs at next and Apple for many years

but in chatting with both of them what basically became apparent is Microsoft learned with our app we should not be targeting the current platforms at all the lesson to learn is never leave

yourself open to the next generation of Technology they're learning the Moors law lesson again yes and how it applies to Applications yes you always got to Target the next platform right even if

that platform is not the one you own right that's the interesting thing about when they're evaluating multiplan and they say how do we not get Lotus 123

again basically the applications team gets the freedom to look around and say okay no matter what our overall company strategy is right now or no matter what the systems division is doing what is

the most Cutting Edge platform that is going to be so interesting to people that we can develop the most envelope pushing technology for it and that

becomes the Mandate for applications this is the dawn of horizontal software you can have a whole company or a whole division of a company in Microsoft's

case that makes this tool and that tool will be so much better than anything that even the largest companies could have their own software developers write General Electric isn't going to write a

better spreadsheet than 123 right and then so I think that the technology complement to this sort of law is the killer app you kind of have to counter position if one 123 is the

best spreadsheet out there for the current technology generation you just can't compete with them you need to wait for the next big leap forward in order to find a new competitive Vector you need to be the killer app on the next

platform and that's what Lotus 123 did with the spreadsheet on the IBM PC and IBM compatible PC and that's what Microsoft decides hey we got to do this

in the graphical interface and who's about to come out with the very best instantiation of a graphical user interface Apple computer well that would

be Steve Jobs yes the next chapter of our Microsoft story is the Macintosh in 1984 for so fun but before we do that this is the perfect time to talk about

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Acquired and tell them that Ben and David sent you all right so David why are we talking about the Mac because I

think it's fair to say that the Mac made Microsoft Office and Microsoft Office made the Mac I don't think that is actually a controversial statement No although it

probably sounds crazy to many of you listening totally Far and Away the first thing to point out is the first version of Microsoft Excel was for the Mac it's especially Crazy for all the finance

people today who are like oh Mac Excel isn't real Excel Excel has to happen on Windows no Excel was on the Mac that was it yes and the logic basically was

Microsoft was really coming around to the idea that the next big thing in Computing was the graphical user interface and the reason they were coming around to this was because they

knew from Xerox Park just as well as Apple did and they were rapidly trying to figure out how to get all of that Xerox Parkin into their product line too

that's the other half of this sort of Untold Xerox Park story and one of the first ways that they see to bring the graphical user interface to their

products is launching Excel for the Mac because they basically see the way that we got destroyed with lotus 123 we can't compete with lotus on the IBM PC so

we're going to shelf multiplan and kind of start over and Excel is going to come out in the graphical user interface and we're going to try to be first and best on the guey and one thing just to

underscore here Excel is the world's first graphical spread sheeet program and that's why it wins and that's why it's so important like imagine trying to use Excel in the command line interface

that's what viakal was that's what even 123 was yeah useful better than nothing but graphical charts cells visual

relationships this is so important and Excel is where it all starts yep and of course Apple loves this the Macintosh came out in 1984 and everybody remembers

the great intro video and the hello script and I've watched that Steve Jobs keynote because of course I have and it's this magical moment in Computing history where finally something that's

insanely great comes out and it's like the beginning of Steve Jobs's unbelievable presentation prowess it's so fun to watch it and it's of course a product that eventually people really

loved but at first it doesn't have the killer app no it's a product that was supposed to ship in 82 it didn't it shipped in ' 84 and so at the time what

they were targeting for 82 was like a pretty great set of Technologies by 84 kind of an aging set of Technologies so it debuts with 128k of memory which

basically isn't enough to create any interesting applications and so developers are kind of ignoring it as an interesting platform to develop on within 12 months they kind of figure it out and come out with a better version

that's 512k and that's kind of the version that people now really think about yeah that gets kind of Rec christened as like that's the original Mac right and the original original is

the Mac 128 or something like that yes exactly but in the meantime Microsoft the applications group is working their ass off to make something really great for the Macintosh and they come up with

Excel and so what ends up happening is Apple's really trying to promote the sales of this machine and they kind of view Excel and pag maker as the killer apps as reasons that people should buy

this thing because once you run through a lot of the demo apps and the stuff that Apple built you're like okay what else is here it's uh kind of crickets right writing hello in script is you

know cool but kind of like a lot of VR stuff you're like oh that's a cool demo but like you g to do that every day like right no and so I'm not sure this has ever been publicly disclosed before but

Apple spent just as much marketing Excel as Microsoft did they matched Microsoft's marketing spend with their own campaign for it and split the bill that's amazing so you've got a couple

concurrent things going on in applications land you've got Excel coming out for Mac to take advantage of the gooey meanwhile and this strategy is just all over the place I think that's an interesting thing to underscore about

Microsoft in this era they're trying a ton of stuff because they're paranoid they don't want to miss the next wave meanwhile also in the applications group Charles Simone has written word this is

about a year before in 1983 Microsoft Word comes out for dos right and they ship it with a mouse yes so this is like

okay we see the Xerox Park stuff coming out in the Mac great Excel will be for that we want to develop word we're going to do that for Doss oh but I can imagine how useful the mouse is going to be in a

word processing environment so they actually ship a mouse tied to the application that's not a part of Doss and so this is how early we were in

figuring out kind of what the split between applications and platforms were at this point in history Microsoft thought maybe a mouse makes sense just for this one application even though it

doesn't do anything else for the rest of the command line interface right yeah it was all being figured out I think it is also really fair to say Microsoft was

right there with apple in the Mac development phase obviously they're working on Excel working on other you know what would become the office suite applications you know together for mac

Steve Jobs shows Bill Gates the Mac project in 1981 3 years before it ships and Microsoft and apple signed an agreement

to work together on applications for it in 1982 they were very deeply embedded on this it's amazing which is going to make the lawsuit and what comes up in a

minute here all the more sort of funny yes so the decision for the Excel team is to focus on guy the whole marketing message is Excel on a Mac is better than

Lotus 123 on a PC you're starting to see truly Divergent cultures at Microsoft between the systems Group which is Curr making Doss and we'll soon make Windows or soon partner with IBM or soon do

something else that we're getting into here in the next chapter of the story and the applications Group which is also currently a bunch of disparate applications and teams targeting

disperate platforms but is also about to become unified in their next chapter and within the applications group that next

chapter is Microsoft Office so in 1985 in January the bundle is released and it was originally called The Business Pack for Microsoft and it started on the Mac

really rolls off the tongue totally does now they haven't acquired PowerPoint yet or forethought as we talked about eight years ago unacquired way back in history so there's no PowerPoint it's not part

of the bundle and so what you've got here on the Mac in the first version of office is word which they've developed in house file chart and multiplan this

is this first notion of a suite So today we're very familiar with sweet creative weet over at Adobe software is sold this way this was kind of the first time and so what was actually happening is all of

the bundling was happening in pricing in marketing and in manufacturing and so you sort of had a single box that they would ship with the different

applications by 1988 or ' 89 it was word excel PowerPoint they're very different things but they're getting sort of bundled together in a way to be sold to customers but there's no product

integration and so you don't have the ability to do this like very nice copy paste from an Excel table and just paste that into word that whole idea is pretty

far away so in this earliest Microsoft Office it was just how can we bundle something for a cheaper price if you buy all three and make marketing easier for

us to kind of have this unified message yep and soon to come get into Windows here in a second you one of the big this killer app for productivity in

particular for business productivity with a graphical user interface like Windows and true multitasking you can get copy paste from like Excel into

PowerPoint you know Lotus and the world back in the command line interface where you've got these programs running on top of Dos that is like a completely foreign

concept right none of those verbs exist exactly so we've now sort of set the stage of Microsoft's doing a lot of stuff they're hedging a lot of bets they're not totally sure which strategy is going to win out they're not sure

which platform is going to win out they're not sure if they're more of a systems company or an application company but what they are unified on is we make great software for personal

computers and I think anything that fell into that purview they were willing to explore they didn't really have hard boundaries between we'll do anything to

make our operating systems great or we'll do anything to Advantage our applications or even we think we're an Enterprise company we think we're a consumer company they just didn't have

well-formed opinions yet it was just we make software for personal computers and at this point in time the actual boundary between an operating system and an application is very fluid you've got

a mouse that works for one program totally you know Lotus would really go down a deadend evolutionary path with notes you know later in its life in its

final chapter where the application was going to be the operating system right Lotus Notes was crazy it was a word processor an email service and it was a platform on which you could write other

applications yes and it itself was an application it's crazy not an operating system so yeah it was all kind of dynamic speaking of though Microsoft

here is in bed with apple working on the Mac bill and the company are big Believers in the future of the graphical user interface starting in 1983 they're like

we got to do our own graphical operating system or at least user interface and this is the origins of the Windows product and they actually

announced it in November 1983 before the Mac ends up shipping which their partner apple is of course not happy about yep now just like development of the Mac was

Rocky development of Windows was super freaking Rocky within Microsoft too this is around that same time when Paul Allen gets hodkin's disease and leaves the

company so his presence as sort of great technical leader is very much missed but they bring in someone from Xerox to manage the development of Windows that

person ends up not working out he gets fired Steve bomber gets drafted to come in and be the dev manager for the final

push to release Windows 1.0 which is hilarious you can find amazing YouTube videos from the launch and all joking about how like non-technical Steve coming into

save the day and Dev manage Windows to launch which is so funny I don't think at this point in history the lines were clearly formed among the executives yet like Steve wasn't running the global

sales force and Microsoft wasn't an Enterprise company no no no we're going to get to that later Steve was one of the smart Executives and they were a software company and someone had to manage getting the software out the door

so Windows 1.0 comes out it's bad it's bad November 1985 Windows 1.0 is a very very different thing than you

imagine a graphical user interface is today or what you know of as Windows it was tiled it was not overlapping windows that you can drag around and like have

one over the other when you opened a program in Windows 1.0 the system created a literal window of it on your screen and then it

dynamically resize the windows as you open other applications and so nothing could ever be on top of each other so as you open more and more stuff the windows get smaller and smaller and smaller it's

very bizarre yeah the idea of Windows overlapping on top of each other that was a sort of uniquely Mac thing and a thing that smart engineers at Apple figured out how to do that in a

performant way that offers good user experience I would classify Windows 1.0 as like a half step between command line and an actual graphical user interface

yes 100% And so I believe Microsoft and Apple actually did like a licensing agreement while they were working together during this time that

said hey Microsoft can use a lot of the stuff that's being developed for Mac for Windows 1.0 yes that's right Apple does do a deal to license a lot of quote unquote their intellectual property

which of course came from Xerox to Microsoft Apple I think was under the impression that it was just for Windows 1.0 but the actual terms of the

agreement are this and all future versions of Windows which comes back to haunt Apple later but yes they totally get the license also by the time that this agreement actually happens I think

Steve Jobs has been ousted and so it's Scully who does this agreement and people in apple would look back on this for years and be like this was a huge error the other important thing about

Windows during this sort of awkward teenage phase is it's not an operating system it's just a graphical interface on top of Dos yes the original name for

Windows was interface manager isn't it crazy in all of their early marketing they referred to it as Windows a graphical operating environment that runs on the Microsoft MS DOS operating

system yes and actually it was not until Windows 95 that Windows was its own operating system it was in Windows 1 2 3

3.1 and windows for work groups it was a graphical operating environment yep but here's the question why is

Microsoft doing Windows obviously here Microsoft knows they need to evolve Doss they need to figure something out for the graphical world and so David are you

telling me that Windows is the widely agreed upon future of the company and it's just a straight line well obviously that's a setup there here's the other thing that's

happening in the company at this time and it's the bigger thing it's the next phase of the IBM relationship yep Windows the Mac all of this these are

hedges for the company Microsoft and Bill in particular were masters of hedging their bets in an uncertain technology future he was so great the

company was so great at making sure that whichever way the Apple fell from the tree as jeten Hong put it to us in our interview Microsoft was going to be positioned to catch it a lot of people

including Bill and Microsoft themselves believe that the way Apple was going to fall from the tree here was IBM and os2 well I mean the IBM PC was such a big

deal last time around you would think that whatever IBM wants to do next is a pretty good way to Ally yourself right so what's going on here IBM obviously

the PC was a huge success but losing dominance of the ecosystem to the clones this was bad and so I IBM wants

to find a way to evolve the PC ecosystem back to being more IBM proprietary and they're GNA make Microsoft come along for the ride here and the way that

they're going to do this is with the next generation of the PC ecosystem they are going to make a whole new modern operating system they're going to get rid of Doss I'm going to make this

operating system in partnership with Microsoft and it's going to be called fittingly os2 and they are going to lock Microsoft up that they can't license it to anybody else os2 is going to be

proprietary to IBM Hardware just like the Mac operating system is proprietary to Apple Hardware bana

B and as powerful as Microsoft's become here they're still the little brother to IBM and this is not great news for Microsoft on the other hand it's much

better for them to be like on the inside here with IBM working in bed with him than it would be to be on the outside looking in if IBM's Vision comes true

and they recapture control of the PC ecosystem yep so Bill and Microsoft and the company and Steve to as sort of the

manager of the account with IBM commit themselves to Microsoft is all in on this vision of the future of os2 and IBM is our horse in the race this is such a

crazy part of the story to me because we just talked about how Microsoft discovered this amazing business model and with everyone needing to license Doss from them they're taking over the world and they're becoming the standard

development platform why on Earth if all that is true are they going to develop some software that's going to be locked to IBM computers this is a

recentralization attempt bomber has this great great great quote about it he says this the IBM partnership at this time it was what we used to call riding the bear

you just had to TR to stay on the Bear's back and the bear would twist and turn and try to throw you off but we were going to stay on the bear because the bear was the biggest the most important

you just had to be with the bear otherwise you would be under the bear and like that was IBM at this point in time I mean really I think it was IBM essentially putting a gun to Microsoft's

head and being like well you can be in bed with us on this future that we're going to recentralize everything or you can be like everybody else in not be and you'll lose and so even though

Microsoft's doing all these little Hedges you know Windows this tiny little team that's what I think it's 30 people or something yes yes it's not the most prestigious place of the company the

people in the applications division may as well be on another planet by this point from the systems division they're trying all kinds of crazy stuff and the

company kind of motto at this point is the next big thing is os2 and IBM and we are the software vendor for that and certainly bill and I think Steve 2 they needed to tow the party line politically

of expressing that nope os2 is the future and what we're doing with Windows and with the Mac is you know those are small things within the company it's a

super bizarre period in history but IBM had also kind of made a bit of a power

play too with the later generations of the 16bit era a product they called the PCAT they used the Intel 286 chip

instead of the Intel 386 chip and the 286 chip this was an intentional decision on IBM's part the 286 chip was good but it wasn't great well you say it

was good but not great Bill Gates said it was brain dead yes Bill Gates called it a brain dead chip so I think you might be being charitable I mean I think it certainly was more powerful than the

8086 888 but it was nowhere near what the 386 could do you know there's a bunch of technical aspects to this but the most important takeaway is that the 286 was not really powerful enough to do

a graphical user interface or to power true multitasking in a way that the 386 and then later the 486 would be and so a big part of actually the compact story

about how Compact and the Clones leap ahead of IBM is they're not deterred from coming out with 386 machines which are way more powerful can run Windows

can do all this stuff and so that's how they start to separate from IBM that's right that was like a bet the company move where Microsoft was like Hey compact go make 386 stuff because we're going to make really great 386 software

and we need someone to be all in on that because IBM's not this is the thing Bill and Steve and the company they're having to tow the party line of expressing commitment to IBM but really they're

like no no comp go do the 386 we're going to do windows they're like riling up the rebels exactly they are the Rebels versus the Empire here so anyway IBM of course sees all this they made

the decision not to go to 386 and to discourage it in the marketplace because they didn't want PCS to start creeping into the core Enterprise you know

Mainframe IBM workloads their Core Business if that was going to happen they wanted it to be IBM proprietary closed system so I think that was a big part of the impetus for this os2

initiative I see this is The Empire Strikes Back here they're basically trying to co-op the PC movement back into IBM proprietary land yes exactly so

when os2 finally does come out in December 87 predictably as you can imagine here it's not very good the market does not like it thank God for Microsoft and I think again this

probably was Bill strategy all along that they hedged with windows with the Mac that's clearly the future like the market is not going to accept os2 and a

recentralization on IBM Microsoft just crushing it on the revenue side even though os2 is a failure I mean dos and the applications were both great

businesses by 87 yes so fiscal 87 Microsoft does 350 million in Revenue fiscal 88 they do 600 million in Revenue basically none of this is from os2 and

the IBM world and then towards the end of 1988 is when the wind starts really blowing away from IBM here in June of

1988 m moft hires Mike Maples who was IBM's director of software strategy away from IBM to come head Microsoft's application software and what is Microsoft's application software

strategy right now it's the graphical user interface it's everything that IBM isn't the writing is starting to be on the wall here that divorce is coming

between IBM and Microsoft and then finally year and a half later in 1990 Windows 3.0 comes out and this is when they get it right this is when there's

enough installed base of 386 and 486 machines out there in the open PC ecosystem that you can have a really good true

multitasking good UI graphical user interface running on top of Dos so Windows 1.0 and windows

2.0 only ever achieved 5% penetration of the Dos installed base Windows 3.0 doubles that in the first 6 months

PC Computing magazine writes about Windows 3.0 May 22nd 1990 will Mark the first day of the second era of IBM

compatible PCS Microsoft released Windows 3.0 and on that day the IBM compatible PC a machine hobbled by an outmoded character-based operating

system and 70 style programs was transformed into a computer that could soar in a decade of multitasking graphical op ating environments AKA

everything os2 is not Windows 3.0 gets right what its predecessors got wrong it drives adequate performance it accommodates existing dos applications and it makes you believe that it belongs

on a PC that's awesome that's what the Press thought Ben I know you talked to uh a really important person in the windows ecosystem in Microsoft internally at this time what do you have for us yes so we have to thank Brad

silverberg for helping us with this section Brad led the windows 3 one team he came in right after the 3.0 release and would eventually go on to lead the

Windows 95 effort as the VP of the personal systems division so Brad comes in Windows 3.0 has just shipped and the

first thing that is super super obvious is as Brad sort of observed everything going on with os2 land and everything

going on with the core Microsoft culture it was a complete Clash it was was impossible for the pace of Microsoft this is like a super young group I mean

all in their 20s some people in their 30s but mostly 20s who just want to push The Cutting Edge ship stuff it was almost like think about Google in the early 2000s just hire all the smartest

people you can and set them loose and have creativity and bump up against the edge of what's possible both in terms of pushing the hardware but also pushing I mean even like laws as we would later

see let's just do what users love and see what happens let's just do what technology enables us to do and see what happens that's like the opposite of IBM's culture at this point so there's

this huge cultural Rift between what IBM sort of needs and who Microsoft is at this point and so what ended up happening with 3.0 it was unexpectedly

loved Microsoft was not really prepared for how much people were going to love the gooey and with 3.1 it got really good there was a small offsite of the executives and Bill and Steve basically

decided that it was time to bet on Windows that was the new strategy Windows had always been Plan B and now suddenly it was plan a and when I say Plan B I don't mean like thought they

had a prayer of being plan a I mean it was 65 people that shipped Windows 3.1 these were like the Misfits it was not prestigious I mean the prestigious thing

to work on at Microsoft was os2 and eventually Windows NT but the windows team and the windows 3 era it's almost like the Mac team over at Apple they were sort of flying the rebel flag they

valued creativity over bureaucracy even if it meant they weren't working on the prestigious thing and so suddenly there's this huge strategic opportunity

to become the standard independent of IBM if the platform is good enough and then boom the early reception to Windows is so good it gives this glimmer of that may seem really ambitious but that

opportunity is actually ours if we want to go seize it so everyone took a Big Gulp and said the gooey is the next big thing users love this let's take the

ragtag group and promote them this was I think the moment when Microsoft started to believe in themselves like really

like you look at the facts as we told the story it's like oh yeah like Bill did this great business deal with IBM and anticipated the rise of the Clones in the first PC and won and then like

Microsoft now was the thing and IBM was like the old thing but it wasn't until this when like in this whole os2 thing I think you can see like they sort of felt like they were still little brother and

they had to go along with what IBM dictated and now they're like whoa why do we again yeah we're in control and the Press is making a big deal out of

Bill Gates you know boy wonder he's the youngest ever billionaire at age 31 and by the way when Bill Gates became a billionaire there were not lots of billionaires there were like 50 billionaires all this lore around the

company it's like they can do no wrong but inside the company I think they're like we don't know the future of technology any wave could break against us at any moment and this is all tenuous

I think that Chasm kept getting wider and wider and wider of internally feeling like they're screwed and externally it's seeming like this is the next great thing totally I've got some

fun stats on like money and revenue around all this so in fiscal 1990 the year that Windows 3.0 shipped m roft does $1.2 billion in Revenue making them

the first software company ever to pass a billion dollar in Revenue fiscal 91 they do 1.8 billion fiscal 92 they finally win the Apple copyright lawsuit

around the gooey which by the way the way that they won that a judge basically looked at the paper and said Apple you totally said in all the future versions of Windows they can use your UI

paradigms and so for most of the counts they're covered and for these other things that you're trying to ask them about those are not actually defensible it's just widely accepted that these are UI paradigms now and you can't enforce

any ownership over those so basically got like thrown out Apple tried to appeal all the way up to the Supreme Court who said no that's right and like we've been saying too like they both

stole from Xerox yes fiscal 92 though this is when Microsoft just blows the doors off they do $2.8 billion in

Revenue in fiscal 92 up from 1.8 the year before and that year 1992 in October is when Gates finally passes

John clui acquired fans back to the lbmh episode Gates passes John clui of metr media Fame media Mogul to become the

wealthiest person in America and so all everything you're talking about all the Press comes around that and then January 93 the crowning moment it happens

Microsoft passes IBM in market cap and it's like they have inherited the Earth they have inherited Computing yep supposedly I don't know if this is 100%

true this is written in one of the books I read I read this the folks involved will have to confirm or deny supposedly the next month after Microsoft passes

IBM in market cap so we're now in February 1993 the IBM board is in disarray the Empire is going down they

fired the CEO Tom Murphy of capital City's Fame who is on the IBM board supposedly he comes out to Redmond to sit down with Bill and personally ask

him to come and be the next CEO of IBM way yes this is what I read I don't know if this actually happened but this is what I read is that in hard drive that's an hard drive yeah wow listeners there's

some unauthorized biographies that we tried to corroborate as many of the facts as we can but the ones where David's saying he doesn't know a source it's sort of these unauthorized ones yes Gates obviously declines that but

whether or not that actually happened spiritually you could that happened Bill and Microsoft are the new emperor here I mean this carries through to this day we're going to tell in the next episode

here the antitrust and the fall and all but not really Microsoft's still the most valuable company in the world they inherited the throne from IBM happens

right here it's nuts and so suddenly Microsoft feels the full weight of everything that you have to do to build a platform and be a steward of an

ecosystem so suddenly this huge effort began to try and make developers successful that's how Windows would be successful if it was a great platform for application developers to thrive on

so Cameron mirol led the developer relations group basically to try and figure out what do people want out of a platform and how do we provide the apis for them and the support and everything in order to do that all the

documentation all the help everything and at the same time Microsoft basically knew establishing a platform brutal and requires bootstrapping a multi-sided

network of developers users and PC manufacturers and so 3.1 had users excited but it was still very early they could have lost that Throne developers

were not really yet targeting Windows Microsoft sort of had to show we make great applications for Windows 2 so the applications group really had to start

doing Windows 3.1 right cuz developers were targeting dos at this point they were probably preparing for OS 2 some of them were targeting the Mac like

Microsoft itself but nobody was targeting Windows exactly so you've got this big developer relations group effort that spins up meanwhile there's a huge push with oems to get them to install Windows at this point they were

still installing dos or some people were actually installing nothing and requiring users to put operating systems on so there's a conceited push to get

the oems to install 3.1 well yeah and there some people installing nothing we should mention here around this same time this era they move

a lot of their OEM deals to a per processor licensing fee Arrangement which gets them in a lot of hot water with antitrust a few years later okay so

this happened from 1988 to 1994 David explain the per processor licensing agreement well here's how Microsoft I think would position it to their OEM

Partners you could pay us you know a license fee for every machine you ship with dos installed on it or dos and windows and you know you can offer other

os's too but rather than that Arrangement we'll give you a cheaper perun deal because you're going to ship dos on everything Doss is the standard and we want Windows to be the standard and windows is going to be the standard

we'll make it more economically attractive to you give you a lower perun rate if we just kind of change the terms and say instead of every unit you ship

with DOs or with Windows every machine you ship period every microprocessor based machine that you ship No matter what operating system is installed on us

just pay us a per processor rate so if you do that you'll be paying us for every machine whether you ship Doss or Windows on it or not but you're going to ship Doss and windows anyway so you may as well take the cheaper rate may as

well take the cheaper option right and obviously what effect does this have on competition well there's now a very very very strong incentive never to ship any other operating system yeah basically

you're going to pay for two different operating systems even though you're only putting one on if you ever load a different operating system on so yes it very strongly incentivizes you to never

ever ever ship any other operating systems on your computers as a company now this is of course the way that Regulators would look at it in 1994 and that would get Microsoft in some hot

water and they had to agree to stop doing this practice the way Microsoft would look at it is we're just helping our customers do you really think that these companies want to keep a whole

separate Ledger of what machines they shipped dos on or Windows on versus What machines they shipped period wouldn't it just be easier if once a month or once a quarter they could just report to us their total shipments like they have to

report to their investors anyway and then we'll just send them an invoice for all their machines totally and while antitrust and the government would seize on to this as like a Smoking Gun like I

think the reality is this was kind of irrelevant in terms of the forces that made dos and Windows the winners they were already the winners by the time they started doing this so right if this

had happened earlier you could see how this would be more of a compelling way to get market share but by the time they started doing it they were already sorted running away with the market yes

now speaking of this sort of new customer friendly buyer friendly business practice from Microsoft which I think is how they thought about it totally they wanted to make the stuff

that people wanted to use the most and that's how they would win their goal was make the very best products the best software we possibly can in the ways that people want to use and buy software and then we'll make a bunch of money yep

as this Changing of the Guard is happening from IBM to Microsoft I think part of this new self-confidence from

Microsoft is wait a minute why can't we go win the Enterprise too and take that from IBM we don't have to get in bed with them to sell to the enterprise we

should sell to the Enterprise and the thing they were sort of realizing is well we have made software that people like to use so they're using it in businesses they always kind of wanted that to be the goal but now was

happening people are doing their work in Excel people are bringing PCS to the office maybe businesses are buying their PCS but people are actually buying them themselves and using them in the office

and so it just made them that much more efficient and so Microsoft really had to figure out how to sell to businesses but we actually have no idea how to do that and it sounds crazy today

the Microsoft you know today as late as the mid90s really had no idea how to sell or build software for businesses totally and then this is the first half of the original Microsoft vision

statement coming true a PC on every desk and in every home desk means work means Enterprise yeah in this era everybody we talk to gives 100% of the credit to

Steve balber Steve took it on his shoulders at this point in time when Microsoft is passing IBM to say I am

gonna build and we are GNA learn as a company how to sell to Enterprises and Ben like you're saying it's impossible to imagine now Microsoft not like this

but there's so much that they needed to do that they didn't have in part because prior to this personal computers were not used by Enterprises it was just not

an Enterprise tool so now that it was happening Microsoft had to figure out how to be the ones that would benefit from it yeah and that meant selling to

the seite at Global Fortune 500 companies most of whom did not use computers correct and certainly didn't want to buy operating systems want at a

time right and to the extent members of the SE Suite like CIO you know or Proto it organizations used computers or were the Computing centers in the company

they hated the PC it made their life hard this was like when employees would bring a PC to work and plop it down on their desk and start mucking around with

stuff it made things hard right and there really isn't yet a business server that couples nicely with the PC on the desk and so you have this weird thing

where there's a Mainframe that is where the companies like real Enterprise applications run but people are bringing PCS and those PCS don't actually communicate well with anything else yet

they just are there for the employee to do their own work on a spreadsheet or something print it out cuz finally 3.1 had printer drivers and then deliver that me but it wasn't like a system that

operated with other systems in your Enterprise right there's no email so this really was like a business

transformation task for the global Fortune 500 right it wasn't like hey let's sell something to businesses that they want to buy it's hey let's convince businesses that PCS are a good idea for

their Workforce to adopt right this was partnering with the consulting firms this was building a direct Salesforce within Microsoft this is building an indirect Salesforce within Microsoft to

partner with distribution partners with Channel partners with independent software vendors this is building a customer service organization this is building the executive briefing Center

on the Microsoft campus and bringing CEOs and other cite folks there to Microsoft it's Building Solutions for them it's becoming a partner it's everything that Steve is frankly just

Bor to do and all of this stuff is pretty out of scope for this episode including all the software systems you would need to build for the Enterprise

like Windows NT server and exchange and SQL server and active directory like the classic mid 2000s Microsoft stuff that

they got known for but that is what this would all evolve into and it really just started with everyone kind of looking at Steve and saying can you figure this out we've all to

date basically just been either running Dev teams or running marketing or running product groups and been selling through retail or distributors in the application side or mostly through oems

on the systems and operating system side but can you go figure out how to sell everything we make in a completely different way to a completely different buyer profile and keep us posted on how

that needs to change all the products we make in order to do that that's a pretty crazy change yeah and how it actually goes down and you know we sort of heard

this from Steve and you heard it from other people is so fitting so by the end of 1990 the Microsoft IBM divorce is

official IBM takes full control of os2 development back from Microsoft Microsoft sees his involvement the breakup is official this now gives

Microsoft and Steve hunting license in the Enterprise to go compete against IBM but they have a secret weapon that is going to enable them to come take the

Enterprise from IBM and Ben tell us what it is well it's painfully obvious it's Microsoft Office and it's the fact that the whole Workforce is already using

Microsoft Office and everyone loves to talk about product-led growth and how it's this new thing in the late 2010s

and how slack and it Ian and Trello everyone figured out plg in this Bottoms Up Workforce adopted way rather than

selling to procuran or it or the central administrator and it's just not new no this has always been the case and Microsoft invented it all the employees wanted to use Excel and Word and they just had to figure they were doing it

anyway and at some point Microsoft needed to figure out how to take advantage of selling it centrally and how you do business with other businesses rather than selling a zillion retail copies of people who are using it

kind of illegally for their work there's so many things that are beautiful about this one it's the legacy of this bet on the Mac bet on Excel and you know bet on

Windows you know shortly thereafter that enables Microsoft to go into the Enterprise because yeah even though they've just broken up with IBM and os2 isn't going anywhere it's not like Steve

can just go knock on the door of some banking CEO or you know seite and be like I Microsoft come talk to me about how you're going to use Microsoft products in your organization but rather

it's like hey thousands of people in your organization are already using Excel right let's have a conversation about how we can make that work better for your organization and what else

Microsoft can do for you yep absolutely and next episode is going to be all about the enormous success of becoming an Enterprise company and the Enterprise agreement and cloud and everything that

sort of came after that but we have two chapters left in this episode and they happen concurrently within the systems Group by two very very different teams

and that is Windows 95 and Windows NT so David let's start with NT and then our little cherry on top can be uh 95 to close us out how did Windows NT happen

perfect and it's intertwined with the beginning of all this Enterprise ification of Microsoft okay so Windows

NT remember IBM's whole goal with os2 was that they saw the trajectory of the PC was going to eat into traditional Mainframe type applications in the

Enterprise and they wanted to recentralize and own the PC enterpris ification of workloads NT is after the divorce Microsoft being like screw that

we're going to do the same thing and eat your lunch and so the initial work kind of starts out of the work they had been doing on os2 with IBM but then in

October 1988 as they're heading towards divorce Microsoft hires Dave Cutler away from

deck and Dave is an absolute just beast and Legend like he's still writing code at Microsoft today which is amazing it's not crazy it's like in his 80s amazing

Dave at deck wrote the whole operating system that deck ran on back and so poaching him away to come work at Microsoft

both like he's the guy that's going to build an Enterprise ready take share away from the way traditional Enterprise Computing is done onto the PC you know

like he's got the chops to do this he's also got the credibility to do this he's written a widely deployed Enterprise operating system yes him coming to

Microsoft him leading and building this effort gives Steve and the Salesforce so much legitimacy when they're going in talking to the SE Sues and the cios and

the IT departments at Enterprises even though they don't yet have an Enterprise product to sell they've got dos and early Windows which is essentially consumer targeted but now they've got

this guy Dave yes now they've got Dave and we should say Dave this is really the first time they brought in someone who had real industry experience I mean

in 88 Microsoft was 13 years old so Bill Gates would have been 33 everyone is in their like late 20s in early 30s and Dave's like mid 40s you know he's like I

you know I've seen a few things I think it was Dave and also Mike Maples coming from IBM too and Mike obviously wasn't a technical leader but you know on the business and strategy side too yep so NT

we'll talk a lot more about it on the next episode but spoiler alert it is the vision of what IBM wanted os2 to be but it's Microsoft's version of it right it

enables all of your desktop computers at the company to join and network together in a compliant way it enables an internal server that everything

communicates with it enables a directory of all the devices on the network and all the people in your organization yeah soon with the internet coming it'll enable servers that face externally from

your company the punchline here is that NT becomes the seeds of Windows Server the business line which become the seeds

of azure today so the other important takeaway on N is it was going to take a long time to build it was going to take a long time to test it was going to take a long time to sell and deploy and it was going to have really strict

requirements for what it could work on because it's a power hungry operating system built for Enterprise it administrators and so that is not your

short-term product strategy that is a long-term bet that a team is going to work on concurrently while you're figuring out what to do after windows

3.1 so in 1991 Bill Gates sums this up in a memo where he says our strategy is Windows one evolving architecture a couple of implementations and an immense

number of great applications from Microsoft and others and every word in that sentence does a bunch of heavy lifting so you got one architecture okay

I think what that basically ends up meaning a few years later is one application programming interface API that developers can Target so that when they want to write a Windows app it

works on both NT and whatever the evolution of 3.1 is okay so that's one architecture but it says one evolving architecture so that buys Microsoft a

little bit more fluidity in the one architecture that's being targeted then you hear a couple of implementations so this basically says even though developers are targeting what became the

win32 API with the one way that we write applications there's two different implementations and so for many years they would display very differently on NT systems versus spoiler alert Windows

95 the successor to Windows 3.1 Oh by Windows 95 you mean Windows 4 That was supposed to ship in 1993 yes I do but it's so much sexier to say Windows 95

and name it after the year that it actually ships versus yes but yes an immense number of great applications from Microsoft and others that sort of sheds light on the drg the developer

relations group strategy of we got to go out be massive evangelists and everyone in the systems group is looking over at the apps group going did you see that Bill Gates just said our strategy is

Windows we're now the windows company and that includes great applications from Microsoft and others and so what does that mean applications group like

let's go first and best on Windows get to it I just think that sentence kind of says it all for what we're looking at 1991 through call it 2000 or so and you

know we just spent a bunch of time talking about the Enterprise ification and all the amazing Enterprise stuff that the seeds get sewn for Microsoft at

this point in time this era is also the Heyday of the consumer PC right 93 Jensen starts Nvidia graphics cards are becoming a thing PC gaming is becoming

an industry you know that goes all the way back to you can even look at mind sweeper was being a seminal moment in terms of the consumerization these devices these personal computers

becoming companions to people's lives like the phone is today I mean you've got cdrom technology multimedia and

carda the Heyday of the consumer PC is here in this era totally I mean even before Windows 95 shipped they had 75

million Windows users this is even before you get plug-in play or multimedia or networking like this is on

Windows 3.1 yeah yeah crazy Okay so we've been leading up to it we've been building hype Windows 95 or should I say Chicago so the Chicago name for those of

you out there who were like paying attention you know when this was under development and you were all excited about what Windows 95 would become and I you know it's probably 1% of our audience or something who knows the

Chicago code name they wanted to create an OS for the every man one that was easy to get to a nice quality of life when you're there it was a for

Chicago is the perfect name in every way and it is also kind of a contrast to what was going on in a different part of Microsoft where there was the code name

of Cairo for a very ambitious Next Generation operating system now mind you NT had already come out in 1993 so Cairo is sort of this General

bucket of maybe it's post NT maybe it's part of NT but this is like a really sophisticated crazy set of techn Oles that we're going to eventually bake into an operating system it doesn't really

have a release date no one really believes in any of the release dates that are proposed but the Windows 95 team the windows 4 team the Chicago team loved contrasting this idea of like a

far-flung land that's really ambitious and who knows what it'll actually be like with this Chicago is something we know quite well you get on I90 from Seattle you drive for three days and you're there and that is sort of like

the goal that's the spiritual thing about Windows 95 Pizza the Bears the Cubs 100% we should say Cairo never

shipped so there's a lesson in that might as well been called Oz or Longhorn yeah right okay all right we getting ahead of ourselves we are getting ahead of ourselves so okay Windows 95 let's

start with the launch event itself it was a huge ridiculous insane day in Redmond Washington they set up tents all

over Microsoft's campus they flew in journalists ba a test there was a movement around Windows 95 in a way that you would not believe it

was an operating system launch and Jay Leno launched it it wasn't like Jay Leno did some standup it was like Jay Leno for 90 minutes in a tightly scripted

environment co-hosted with Bill Gates all of the Fanfare and festivities there is no other word to describe the Windows

95 launch besides glorious I am so glad that this stuff is preserved on the internet and on YouTube and that we could experience it ourselves over the past month it might be like the peak

moment of pure joy to celebrate technology before a lot of the sort of skepticism came in and the tech haters the doj you know and uh yeah totally it

was unabashed celebration of software is probably the best way to put it Microsoft licensed Start Me Up famously

from the Rolling Stones it's amazing a software company licensed Start Me Up by The Rolling Stones as the official theme song of an operating system yes the idea

that this would be happening certainly back in 1975 when they were moving to Albuquerque but even just a couple years earlier this is breaking new ground totally the other thing that's happening

in 1995 is the internet hype is starting to build but we will table that for next episode right at this point in history only 14% of Americans had internet access it was

still very early so there was no guarantee that any story posted online would actually reach the masses and so Microsoft had really relied on traditional broadcast coverage of this

event and brought in all these journalists and all these print magazines and all these newspapers to kind of build the hype I watched the whole keynote yesterday and at the end they rip down the sort of back of the

tent behind the stage and there's the entire development team in the red yellow green and blue squares of the windows logo sort of sitting outside on

the big Sports field on red men's campus and there's only 360 people that built Windows 95 so it's still kind of a small team but they're all there they're fired

up they're part of the moment okay so that's the launch event in Redmond at least around the world people are lined up around the block to buy an operating system there's a lot of news coverage of

that it was basically the iPhone launch of it day yes they lit up the CN tower the Tower of London this date August 24th 1995 they basically treated an

operating system launch the way that you would launch like a movie or a new Madonna album it was a marketing case study so much so that the folks from

cocacola actually reached out to Microsoft to ask them how do you do marketing this well in the New Age Coca-Cola oh to the Bill Gates quote

with the Warren Buffett talk at you yeah yes this is a company that freaking invented Santa Claus to sell us all sugar water and they're calling Microsoft asking how do you Market in

this new era it was that successful they launched concurrently worldwide in eight languages So This Thread that Microsoft had of early International continued all

the way through to this moment they invested heavily in doing all of the localization and help stuff so that the whole world really could adopt something

all at one time it really was the perfect product at the right time the internet games all that and there's so much about Windows 95 too that I'm sure

you're going to get into but like the start menu it was so perfect because this was the peak of the PC going fully mainstream nobody had ever treated

software like this before yes that's the takeaway they thought about software in a completely different way and yes the start menu while it got cluttered and complicated and messed up over time the idea of a button that you click to start

using your computer was very appealing to people totally the Mac obviously shared a lot of these elements but it was at so much a smaller scale oh yeah I

mean the Mac just never had any real PC penetration from the IBM PC forward it never had big market share yeah this was like your grandmother coming into the

digital world and that is how they tried to Market it Market it as people on job sites using Windows they marketed it as people doing crafts and there's like someone who's modeling something for an

F1 car it's just fun watching all these old videos and seeing all the different personas computer companies love F1 cars for demos totally it's the ultimate

aspirational demo y now I must say this all pains me deeply as someone who never owned a PC grew up using a Mac loved

every bit of my Mac with even an apologist in the sort of os9 era of this isn't very good but I'm still going to say it's good and you know I was on the

OS 10 public beta I only clicked a start menu when I was like fixing a teacher's computer at school even though the takeaway here is everyone thought this was a great operating system and it won

the market I always looked at it like well it's not a Mac right well that's how Mac users always looked at with yes the way that Apple products became mainstream always felt odd to me as someone who was using them when they

weren't but it's been interesting gaining a new appreciation for Microsoft through studying their history that I absolutely did not have as a user during this era having this discussion now

makes me think what Microsoft in this a Windows 95 like they did what Apple tried to do in bringing Scully in Skully

came from Pepsi obviously that didn't work but Microsoft they're the ones who did it they're the ones who Mass Market ifed the Computing vision and it was the wrong strategy for apple and it was the

right strategy for Microsoft I mean Apple has always at least in my opinion created a better Computing experience by being completely integrated I mean it's the Alan K quote anyone who cares about

making great software needs to build their own hardware and the complete integrated package that apple offers I have always found to be the best Computing experience and it doesn't

scale or it didn't in that era for sure in that era yeah the way to scale is make the software that is going to get distributed on the most PCS and then that is the most interesting to software

developers and it is the most interesting to Consumers who want the software and it buyers who want to buy the standard thing Apple's strategy versus Microsoft strategy in this era

Apple was always going to be a bit player rather than the sort of scale winner and the trade-off is lots of PCS had blue screens to death Apple never had blue screens to death like what did

blue screens come come from it's driver problems it's that the printer is not speaking the same language as your particular computer and what the operating system knows about your computer and are the device drivers

right for your particular version of whatever's on your motherboard like apple never had those issues but they also had very few units shipped and you know much more expensive product sidebar that Alan Kay quote about if you really

care about software you do your own Hardware makes so much more sense to me now having done this episode because he's coming from having made the alto and the graphical interiew user face

there the only way that he could have made the guey on the alto was basically building a mini computer yeah isn't that crazy makes so much more sense now yep

so a little bit more on Windows 95 before we finish the story here it is remarkable to reflect that it took what five six years to go from windows's Plan

B to Microsoft being extremely right that that was the franchise like that was the BET to bet the entire company on and as Brad silverberg put it this way

to me he said Windows 95 cemented Windows as the franchise product for Microsoft which interestingly it was not yet and David this is crazy it would remain the franchise product for the

next 20 years perhaps five or 10 years too long but we'll save that story yeah and just to put some numbers on this so August 24th 1995 is the launch event the

Glorious Day Windows 95 comes out sells a million copies in the first week 7 million copies in the first month fiscal 95 so this is the 12 months ending in

June before Windows 95 comes out Microsoft did $5.9 billion in Revenue fiscal 96 they did

8.7 fiscal 97 when Windows 95 is really going they do12 billion in Revenue first software company to pass $10 billion in

Revenue already the most valuable in the world I mean they are a monster there is no other way to put it yeah it's crazy from a product perspective there was

just so much that really got smoothed here this was a user experience where they finally had time to think what actually do users want to do with an operating system what features should be

part of the OS and what should we delegate to Applications what are modern networking technologies that we should bring in I don't want to foreshadow too much but how should the internet be a

modern operating system that was a huge thing the multimedia the video stuff an operating system really showed up and said we thought about this experience for you you're looking for where to

start you're looking for cool stuff to do and you're looking for it to not break on you we now finally have a complete story around all of that yep so a couple of interesting technical notes

it was basically all new technology if you try to look this up it will tell you Windows 95 was dos based it still used dos in fallback situations for older

Doss applications or drivers but for most of the time it was no longer true that Windows was just an operating environment on top of the Dos operating system Windows had now become a true

32-bit operating system of its own Windows did all the heavy lifting it had its own file system it accomplished a lot of the sort of user experience magic and speed that it was praised for by

rewriting a lot of this from scratch so this was kind of the beginning of Windows as its own OS and you can see that actually change in the marketing messages that change from operating

environment to operating system so David that brings us to the end of our chapter one we've got plenty of analysis here to do but my God what a first 20 years for

the company I mean we knew this was going to happen right this is why we waited 10 years into acquired life to cover Microsoft it's the most important

company in the world still today yeah it was so fun researching going back and doing all this because a there's so many different perspectives and so much has

been written but I don't know if we've gotten it right here but I feel like every other major attempted storytelling at this has not gotten it right and so

getting to go talk to all the people who were part of this well yeah living in Seattle is quite helpful yeah like we really got that sense of like there's

still a story to be told here and it's never been more relevant again than you know today all that to say I'm glad we waited 10 years right and there's all this stuff we miss like I didn't mention

Microsoft research Microsoft research was a lot of people and a lot of money right Microsoft tried to buy into it too along the way that got canned actually the start of research is interesting

I'll say this real quick in 91 Nathan mirval started Microsoft research and the logic is fascinating basically everything Microsoft had done until that

point was taking things from Main frames and Min computers and adapting those tasks those jobs to be done for personal computers and at some point they kind of

looked around and said all right well we did it all the personal and business applications can now be run on personal computers so we have to come up with uses for future Technologies in order to

continue to drive the ecosystem forward there's no more lwh hanging fruit and I thought that was an interesting thesis of why to up a research division at that

point in history yes let's move into analysis okay great so Playbook the big interesting one that I want to start with and it actually involves a chapter

from the story that we just sort of glossed over is capital efficiency allows Founders to control their own Destinies in a way that you just don't

get when you're selling off huge chunks of the company in order to accomplish your mission oh yes I love this let's just talk through the cap table over

time and how the company went public so we talked about the partnership being 64% Gates 36% Paul Allen 1980 Steve

balar comes in and gets 8 and a half 8.75 something like that percent of the company so dilutes Gates and Allen down then in 1981 just a year later they take

the VC investment for 5% of the company from tvi this also I'm guessing around 5% trying to reverse engineer some of the numbers they also created an option

pool where they were uh then creating opportunity for basically rewarding management which is how there were 10,000 millionaires created in the

Seattle area from Microsoft right that's the amazing thing the option pool doesn't get created until so late in Microsoft's life all those Microsoft

millionaires only came from that you know whatever size that was 5% of the company or whatever right yes at IPO so even with all this dilution so you've got the Balmer

dilution the VC dilution and the option pull dilution Bill Gates still owned 49% of the company I mean that's pretty

unprecedented and he wasn't the only one with a big chunk Paul Allen owned 28% of the company Steve had 7.5% of the

company this company was basically owned by the three more more or less co-founders a little tiny option pool and then a VC who ended up with 6.1% I

think Dave got some more shares from being on the board you just don't see companies that look like this anymore Yep this is Bill's company this is their company in a way that no other company

is these days no venture-backed company going through the modern era is like that by the time you get to be public you may still be the largest shareholder as a founder or CEO but it's not your

company far from it yeah absolutely I'm trying to figure out why they were able to be so Capital efficient is it just that software was such an unbelievably

good business model compared to everything else that existed like they didn't need a lot of working capital everything was high margin they could grow really fast or it was just an era

before much competition and so they didn't need to out raise their competitors once they got a little bit ahead there was really no way for any else to close the gap assuming that they

executed well I totally think it's the lad and I think it's that the minimum fixed cost threshold to be that you know in Bill's words slightly better than

your competitors and get the positive spiral going was low enough that it could be paid for just in Bill and Paul's time and effort and it was that unique moment at the beginning of the

software industry where that was true you know and that would never be true again that's so so so insane and there was no one else really with

the knowledge either even if someone else came in with a big $1 million check and gave it to a competitor in 75 like how many people could really write these

language interpreters you couldn't buy the experience having written emulation software for microprocessors that Paul had they had an obsession and an obscure

skill that turned out to be one of the most valuable in the world in an area where there was a freak law of nature in

play with Mor's law that was so unintuitive that you had to think from real first principles to understand the impacts of it yeah well I think there are two freak laws of natures one there was more law that they were benefiting

from but then twoo there was the zero marginal cost of software yeah that's true it's just like complete perfect storm that enabled them to build a highly defensible Business Without

Really any investment ever this is the largest company in the world the most valuable company in the world that was entirely bootstrapped yes even though they raised money not a single dollar of

investment actually happened at this company no I mean in ' 86 when they actually did go public they raised $45

million and they never spent that because they generated much more free cash flow than that that year right it was just a means to an end of getting public and they need needed to for the

reason that they had been granting so many stock options from that little option pool to employees that they were going to blow the sec's 500 shareholder

cap by they projected 1987 so they wanted to go public on their own terms in 86 not when they sort of had to by SEC rules also Microsoft needed to be a public company if you're G to be an

important company in the world at this scale if you're going to first ride the bear with IBM but then inherit the Earth from IBM you got to be a public company you can't be a private partnership you're not going to go have

conversations with SE Sues and CEOs of Fortune 500 companies if you are a private partnership maybe in this era especially maybe I don't know I'd agree

with you if you had a bunch of short-term capital interests that owned your company but if it's all found or owned there are great large private

companies in the world yeah Fair true Coke Industries is a trusted Company by a whole bunch of their customers Cargill is even bigger than that there's a bunch of European industrial and shipping

companies Rolex there are privately held big important companies in the world oh yeah for sure but none of those companies are

Microsoft that's true that's very fair especially getting to the stage that they eventually got to being the trusted partner to governments around the Free World that requires being a public company yeah it's funny this Playbook

theme this was a moment in time and a set of factors where this worked I mean I guess the lesson is find an industry in its infancy and be Capital efficient

and run the table that has like unique economic conditions that have never existed before to create these magical businesses you could never fathom before this new technology thing existed it's an impossible thing to wish for like it

may never happen again we may never get another Google either that's what I was going to say it did happen again it happened with Google but how many things can you collapse to zero I think that's the question with Microsoft they were

able to collapse their marginal cost to zero but they still had distribution costs and then Google collaps distribution cost to zero with the internet so what's a big cost that a

company has now like maybe AI will collapse you know you no longer need 50,000 employees you can have five employees maybe it can collapse that to zero but you need something of that

scale which is like where does a company spend most of its money that suddenly it can spend no money on right I suppose actually it is on the human capital you just look at big successful companies and look at what they spend

money on and those are the candidates good point still unlikely we'll ever find another Microsoft opportunity yep other fun things on the IPO do you know

who ipoed the day before Microsoft did oh no Oracle ah and Oracle had a nice pop which actually helped Microsoft

price a little bit higher in their IPO that is another episode we have to do another thing adds yet another layer to the insanity of everything that we've been talking about of why they were able

to build such a successful company on such little capital I don't think there has ever been a Tailwind in history like the one that Microsoft had with the secular growth of the personal computer

wave and the only thing I can think of that is comparable is Amazon with the growth of the internet sort of powering their early growth but here's the stat from

1975 to 1986 11 years prior to their IPO so founding to IPO PCS grew at a compound annual

growth rate of 98% it grew from 4,000 units per year to 9 million units per year shipped you can almost not mess up when you have a

Tailwind like that yes especially when you are like the lynchpin player right they managed to make themselves the point of integration for the whole industry yes so often times I find

myself when we're looking at these companies that are like among the most successful in the world or like Microsoft the most successful in the world it's basically like a multi-dimensional multiplication problem

where you're like okay they had this unbelievable one in a zillion thing going for them which you can sort of multiply by this other one in a zillion mult thing and so it's the like zero marginal cost zero distribution costs

unbelievable secular growth of the PC Mor's law happening they're the single choke point for the whole industry it's it's just crazy how many things you multiply together and of course it should end up in a number over three

trillion yeah which I'll jump in with a Playbook theme that we referenced a little bit in the episode but we really got to highlight here Bill and Steve and Paul and everybody at Microsoft they

were incredibly talented incredibly smart they saw the future in a way nobody else did but they also were willing to hedge their bets it's not

like they just got everything right I mean they were going to get things wrong with os2 but they hedge The Bets with Windows I think that is such a key lesson of when you're in a really

Dynamic market like this in our ecosystem right now you know in Tech Venture Capital startups whatnot people put so much value on conviction I have conviction this is what the future is going to be like and I think the

Microsoft story is the opposite of that they had conviction that software software was going to be big and personal computers like creating software for desktop computers was a

really good idea and they wanted to be the best at it yeah but beyond that but the exact path of how that was going to play out they had very little conviction

in and we're willing to be very flexible yeah you're right it's both the hedging but also then the ability to read the

world and quickly entirely change your strategy if you need to and having your hedge be far enough along that you can jump quickly to it and shift your whole

organization to get on board with it that's a hard leadership thing to do totally oh I can't wait in the next episode to talk about the internet Title Wave memo yes but that's related to your

playbook theme too you can't really do that if you don't own 49% of the company you know if it's not your company right which I think you're seeing play out with most CEOs today there's a big

difference between a Founder CEO and the stuff that they can do Zuckerberg with the metaverse or Jensen with betting the whole company and going all in again on AI versus Tim Cook or Sundar prai

certainly very different type of CEO SAA is interesting he's almost despite the fact that he doesn't own half the company he's got a lot of founder like control which I think is pretty interesting well all right don't get

ahead of ourselves moving along other Playbook themes a big one that jumps out to me is that new generations of

Technologies enable market dislocations and unless you are in a transformational moment in terms of a new technology came out that enabled something that wasn't

before this going to rearrange the whole value chain and open up new markets it's pretty hard to go challenge an incumbent no one was going to challenge IBM really until the microcomputer even the mini

computer people did deck really challenge IBM not really never made a dent it wasn't a full platform shift in the same way yes and there's these little blips of it like the gooey I

think meaningfully reshuffled the decks but those are the moments where you can have meaningful new entrance and otherwise you kind of have to bide your

time and just build your Hedges and see yep related even if you are the incumbent being disrupted it is possible to have a very very large and durable

Revenue stream that can go on for a very long time and what I'm referring to in this particular example is despite all of the dethroning that we just talked

about Microsoft would not Eclipse IBM in Revenue you mentioned market cap David but in Revenue until the year 2015 wow isn't that nuts I sort of

intentionally didn't look up Revenue because it made the story muddier but wow yeah there you go but I think that's the point right is like Microsoft's perception by the market I'm sure they were growing faster I'm sure they had

better gross margins I'm sure there was a better story there and so there's multiple that comes out of story I'm sure there's lots of good reasons why Microsoft became more valuable than IBM

very early but IBM's Revenue did not Peak until 2012 wow what it's just like long after

public perception moves on customers still get value from something created by incumbents for a very long time and I think that's something we often forget about in the sort of Buzzy Twitter verse

of like oh that thing's over it's like it might still grow for another 20 years before it's over well that also just speaks to the nature of the Enterprise business too yes that's a good point you

know IBM was the Enterprise business right and today Microsoft is the Enterprise business right that's true pelaton Revenue can dry up a lot faster than contracts for main frames right what do you got a Playbook theme that I

want to highlight that really really came out in our conversations is Microsoft was not just a talent magnet

the talent magnet yes during the PC era if you were an ambitious young person this is where you wanted to be and it was on every Dimension if you an

ambitious young technical person that's where you wanted to be if you were an ambitious young salesperson if you were an ambitious young marketing person that's where you wanted to be and they

just had this culture there which is so funny we'll talk in next episode of how that culture really fell apart for a while there but I asked a lot of these early people that we talked to like what

was it like being there I mean you guys worked yourselves half to death were you mad about that did you resent it were you like we're just making Bill rich they were like no yeah we neglected

every other part of our life but that was the good old days this was the magic we were making it happen yeah that totally comes through I asked Brad why did Windows 95 work and you know there's

lots of structural reasons but he said we basically did two things one we laid out principles for product and then pushed responsibility down developers were often their own PMS so there's sort of this idea of once you got the

principles we don't need to write a zillion specs and design something three times and pass it through three functions is just like you know the principles make great software that follows the principles and two was he

said that everyone felt personally responsible for the product and it really showed anybody you talk to from this era at Microsoft this was their life's work no doubt about it yep

something we touched on a little bit is the benefit of scaling with oems this was sort of the contrast against Apple where I said Apple was sort of always going to be a niche player by the way

that they designed and built and packaged everything themselves apple is in many ways like the AMX where Microsoft is the

Visa yes yeah on our Visa episode it just became so clear that Visa could sort of quickly take over the world and MasterCard by being an open network where they didn't have to do all the

work to scale themselves they could distribute to a bank partner with a bank and then boom each of the banks that was on their Network could independently scale at their own rate which created

obviously compounding effects for how fast visa and MasterCard could scale the same can be said of Windows totally the oems yeah I think the Microsoft OEM team for Windows was like 20 people or

something before the Enterprise in this era that we're talking about the group of people responsible for go to market for Windows was really small they sold

some retail but the team was just about hey make sure HP and Compact and Dell Gateway exactly that was their go to market and it makes your scaling like

unbelievably efficient dude you're getting a Dell dude you are getting a Dell similarly I think the fact that they went International early was this

very powerful constraint where it meant that every time they shipped software they had to make it globally ready quickly and so that meant that if there was any sort of network effects to your

software like anything becoming a standard Microsoft was just way better positioned to become the standard than anyone else was and on top of there being Network effects there's also scale

economies a word processor is a word processor and so the extent that you have customers in every country who can buy your one piece of software you can amortize the development costs over a

huge user base so much more quickly 100% the fact that they force themselves to be International early meant that every product after that also had to figure

out how to do all the localization and training and all of that to get all those effects too I mean no matter how much time and money and resources you

have to spend to localize Microsoft Word into kanji it's a lot less time and resources and money than developing Microsoft Word yes exactly and they just

realized that so early they also realized that most people who were doing some sort of localization would do a shoddy job they would think about it as lesser than the US market and so they

just did a good job at localization they just cared they thought of it as like this is a strategic pillar that in every country everyone experiences our software to the same quality because it's our brand everywhere and I don't

know I just think that is not how the rest of the industry thought about it definitely not on top of all of this the way that they executed it through subsidiaries was pretty genius Redman

did not control International they spun up country managers and subsidiaries in each of these countries in a ton of countries and so well Redmond did the

product development and then did the engineering work to do localization to the all the strings files and everything for those countries the actual marketing messaging and the sales strategy and the

sales structure happened in country that was owned by a person who lived there so they actually could think through what is the best way for people to receive this software here which again that's

just going to yield way better results than if you're sitting there armchair quarterbacking in Redmond thinking about how a person in Chile is going to receive your marketing message yeah and one other that I have is this one

that we didn't really talk about but Microsoft famously was not first to Market with basically any of their applications they aren't even really today in most cases I mean you think

about the strategy that they had early on spreadsheets word processing all these were copycats at their outset I mean sometimes they would do an acquisition but most of the time they just look at a product and say huh our software should do the same thing and

they would copy it they had no shame in doing that they had their eyes everywhere looking for good ideas and they had reverence for the good ones and then they would just incorporate them and on top of that they wanted to make

the software uh very easy to switch to so a lot of the keyboard shortcuts in Excel to this day are there because they were originally the Lotus 123 shortcuts and they wanted people to have the same

muscle memory that just worked so fundamentally what this does for you as a business is it just leads to better risk adjusted returns you already know what's going to work before you ship it

like you don't really take Market risk so so you're not going to be the first to the market with early adopters but most of the time you actually don't need to be to win and I think Microsoft I

don't know they sort of own that idea most of the time people are sheepish about it Steve Jobs famously said Microsoft has no taste I think that's another way to put it that it's

copycatting well so I do agree with your premise with all of this I think doing this episode though has made me think there's a little more Nuance to it yes

and then broad Strokes you can say that's what Microsoft strategy was with applications over the years but the Microsoft versions never actually won until there was a platform shift that

they could take advantage of to beat the com like Microsoft wasn't going to beat lootus 123 until the graphical Paradigm came along and then Excel being graphical was

just obviously so much better they tried with multiplan they failed multiplan was fine but 123 was the winner to the Nuance to me is yes but it's more like

with the resources of Microsoft and the time frame that Microsoft can afford to have they can afford to like start building the application start building the product get it into Market start learning be positioned that then when

the Paradigm Shift comes leave ahead right that's a good point it's also different I mean the Lotus 123 multiplan thing in that era Microsoft just didn't have great distribution yet and so Lotus

123 just got pretty far ahead of them and Microsoft had no way to catch up a few years after that that would basically never be true again yeah could be true too I will say you touched on

something that's an interesting Cory to this is their first versions of software famously are not good you look at Windows 1.0 and 2.0 they know that it's part of the strategy and they were

worldclass at learning from customers and integrating customer feedback into subsequent versions and so there's always this like saying of Microsoft doesn't have a very good first or second version but the third version is something is typically pretty good

and I think that fact pattern definitely follows yeah I'm curious your thoughts on this I'm so surprised one thing that you have not brought up yet on this episode is you were a PM at Microsoft

for several years I was but it was such a different era in that 2012 to 14 era it's not I guess 2011 is when I started as an intern I'll have a lot of thoughts on it next episode okay great I've got

one more Playbook theme before we move on to power and that's that well Microsoft figured out software before anybody else and they figured out so many asp ects of what it means to be a software business before anybody else

but they figured out that software is never done yes I do think a lot of their competitors you know we did obviously didn't study Lotus to the same degree

that we studied Microsoft here we didn't study Word Perfect you know Etc but I think there was a mindset of a lot of other folks that like you ship software and then the software was done and that

was not the culture of Microsoft this is related to what you were just saying shipping software is the beginning you are always working on that software yeah you're working on next versions and stuff but even before the next version

the work of software is never done which of course if you own the hardware you definitely think of it more of like well we ship them the big cabinet of things and we install it and we fix it if it's

broken but we sold them Hardware the software is required to run it but the thing we sold them is the hardware and if you're a pure software company you think about the world differently you're like well I can always ship you another

CD another floppy disc you know over the internet's obviously very different but because there weren't really software companies before them of course people didn't come from that mindset and I think you still see the legacy of this

right to this day in apple versus Microsoft Apple still is on a yearly software release Cadence which is kind of ridiculous whereas micros is all in

the cloud it's all constant it's all constantly shipping and like look at AI look at open AI the software is never done is so deeply in the software business model y that's true all right

so we move on to power yes so listeners who are new to the show we do this section based on Hamilton helmer's seven Powers framework and the question is what is it that enables a business to

achieve persistent differential returns or to put it in another way to be more profitable than your closest competitor and do so sustainably and the Seven are

counter positioning scale economies switching costs Network economies process power branding cornered resource

and David I am pretty sure I could make a case somewhere between 1975 in 1995 at Microsoft for all seven of these totally

yep it's one of the most defensible businesses that they built in history so of course they would have all seven of the powers all right let's run through each of them and do a quick 45 seconds

on each great counter positioning I think the biggest example of this comes through where Microsoft was basically willing to jump on the microcomputer

Revolution before the incumbents were IBM did not want microcomputers to happen and then when they started to happen IBM tried to figure out how to slow it down and reintegrate it into

their old business model and Microsoft basically had no baggage and I mean this is kind of classic innovators dilemma stuff they could say well we don't need to make any money on Hardware we don't

need to even make Hardware we are free to become the whole point of inte ation for the entire ecosystem just by shipping bits and that is crazy yep and you know actually related to that I

can't believe we haven't talked about this in the episode until now Microsoft could enable other companies to be successful you talk to Microsoft people they always talk about themselves as a platform like we're a platform other

companies grow on the back of Microsoft that was not true for IBM totally not true right but Microsoft could make compact successful Microsoft could make Lotus successful Microsoft could make

into it successful Microsoft can make Netscape successful we keep talking about Microsoft as the point of integration or choke point or dependency or standard for the whole ecosystem

given that it is quite remarkable how much value they created on top of the platform versus just captured for themselves there's that famous sort of Bill Gates line you want your ecosystem

around you to be generating more Revenue than you are taking for yourself they did a ton of that it's the oems and it's the application developers yep that's major counter positioning okay so that's

one scale economies that's everything we just talked about in Playbook it's unbelievable you know when Microsoft has an install base of a 100 million people

using Excel in this episode let's just say 10 million people who were using Excel and suddenly some upand cominging spreadsheet comes out with a cool feature like Auto Su or like fill down

or like draw borders around the cells or whatever suddenly Microsoft does a tiny bit of dead work and they can reap tons and tons and tons of value for doing that that the tiny company cannot do y

great so fixed amount of Dev work amortized across a large customer base I don't think we need to say any more on this the whole episodes about scale economies yes switching costs well funny thing about Monopoly is there's nothing

to switch [Laughter] to that's a good one yeah this one's pretty related to network economies for

me with this one of okay sure you can switch to another operating system like good luck other applications that you love know and love to run on that yeah that's the answer yep speaking of

network economies developers applications oems yep there's not a classic Network Facebook or AT&T Style

Network here in terms of one user can contact every other user but more users being on Windows incentivizes more developers to make great applications

for Windows which enables Microsoft to sell more copies to more users Etc although actually I think once they start getting into the Enterprise workplaces in general organizations in

general there is the user Network effect like I want this Microsoft Word document that I just worked on for you to be able to open it and use it too oh you're right I didn't even think about that the document formats are a huge Network

effect thing even before the internet even before organizations were networked and computers were networked outside of an organization file formats you're right there's huge Network economies to file form

yeah and it's interorganizational too if I'm a law firm you know I want my clients to be able to open my word docs right okay next process power this might

be the weakest as it so often is it's elusive this is a little bit later in history but I did always think it was absolutely incredible when I was at Microsoft and we would ship a version of

office every 3 years I worked on office 15 that the entire 6,000 person organization had a process in place where we could

release to manufacturing RTM on a date that we planned three years in advance and actually hit it like the process of

the ads Cuts meetings and the zero bug bounce and the testing schedule and the triage when you had things that people wanted to introduce late in the schedule

it was a remarkable product especially with all these teams that needed all their code to interoperate you I worked on a shared experiences team that would check things in that would be a

dependency that word excel PowerPoint all of them took on the shared code and we knew our ship date three years in advance and would hit it it's crazy yeah totally this exists especially by the

time you get to the Windows 95 era at the end of this episode it's like rentech the amount of stuff and process within Microsoft you know the device

drivers the middleware the programming languages the dev tools the the machine there to make all this Computing work it was like a miracle that this stuff

worked you know you couldn't just recreate that it's funny the process power I would say is stronger in office than Windows now my colors are showing like Windows always notoriously miss

their ship dates but I'm actually less sure that process power existed in that early days I think they were a bunch of smart people but I'm not sure that they had a unique way of creating software

but I think that got built over time yep agree okay branding for sure for sure don't get fired for buying Microsoft well that's true Windows 95 built a consumer brand the idea of a consumer

brand of operating systems was you know there was Apple but they were tiny and that was more around the hardware yeah it's both fronts it's the brand in the Enterprise that is an amazing store that they built they were branding consumer

that was the easiest to point to instantiation is like the Rolling Stones and J Leno but they had a software brand that yeah nobody had that but branding is probably the thing that they rely on

the least interestingly enough there are other structural reasons that they're entrenched where even if Microsoft had a crappy brand in this era they probably

still would have won yep the magic of getting the whole deal with the IBM PC and then getting to sell licenses to all

the other oems yeah well that brings us to the last one which I think is a super strong one at least in this era cornered resource Doss full stop yeah it didn't

start as a cornered resource but as soon as IBM started shipping it on the IBM PCS it was over I'll say it again IBM's distribution created demand for Doss and

then Microsoft just got to capture value from everyone else who wanted it all right well we would do Baron bull listeners but we kind of know what happened after this so the bull case is

that the party continues and Microsoft continues shipping amazing operating systems after amazing operating systems and that stays the important thing in the world and the bare case is something else becomes an important thing in the

world and just having this super locked in operating system is not actually the way to bet your whole company for the future the dramatic tension for you all to come back for our next episode on

Microsoft here is not because you want to find out what happens right right that's true okay takeway Splinter we've spent the last probably six weeks deep

in this we've talked to everybody what are you thinking about in the middle of the night the IBM deal I can't unsee it Microsoft figured out a way to take

someone else's dominance and wholesale transfer that into their dominance for the Next Generation the fact that IBM called the project chess is so deeply

ironic because Bill Gates was playing chess and they played Checkers maybe bill was playing 3D chess I mean this is the thing about it though we got to give

IBM so much credit for chest in the PC that they even did what they did was huge that a big entrenched corporation

like that could ship a Skunk Works project in a year revolutionize the industry they just didn't end up capturing any value out of it Y and if I could make a less cheeky comment on it I

would say it's that a new technology generation when something becomes possible and opens up a new market it enables a shift in the point of

integration in a value chain the old value chain of IBM if you shipped the Mainframe you had all the power but in this new world of PCS if you controlled

the operating system that all the users were familiar with and all the developers wanted to Target you had all the power I think that is not

necessarily obvious unless you went through it and have the hindsight of History to be able to articulate it yeah I think you might be right I think that

might be the single best business deal negotiation of all time it arguably created like three trillion dollar of value so right right right well no a lot more than that because this is the point about Microsoft being a platform

Microsoft is worth three trillion but how much value has been created on top of Microsoft no matter what you think good bad or ugly of Microsoft you can't deny that yep absolutely at least twice

as much probably much much more I mean you watch every early interview with Bill and you read a lot of his writing and he's a great writer I mean it's awesome that so many of his memos leaked

whether intentionally or unintentionally over time is that so many of his memos were issued for publication yes he really did view himself as a steward of the software ecosystem and had this

steadfast belief that software was Magic and was going to change the world over the next 20 years from 75 to 95 software did change the world and Microsoft enabled it to happen so again good bad

or ugly whatever you think of the company they were sincere in I think the ugly part is a lot of people want to hate on the value capture because God did they capture value but they were

sincere in their desire and ability to create too yep totally that's super related to my kind of takeaway here you know the moment for me in the research

and then when we were telling the story along the way is when they start to believe in themselves that they don't need IBM just the audacity and I mean

that in a pure good way of these kids these kids they Chang the world that's so trait to say my book we read my daughter at bedtime somebody gave us it's like the most Silicon Valley tropy thing ever it's like what do you do with

an idea and the punchline at the end of it is you change the world and like it's become such a Trope but these kids in the 70s they did it you know and they like believed in themselves in the

beginning and then more and more and more over time and then there's just this moment that I think where they started to like really truly believe that they were going to change

the world and again good bad and ugly come out of that mostly good I think but yeah just the level of ambition and

audacity of these people is staggering yep is that your Splinter the Splinter in your mind that's my splinter yeah listeners for who are new to the show we've been iterating on how we end

episodes and we decided on this recently if you know how should we land the plane it's to talk about the thing that we can't stop thinking about yeah I mean here this company's 49 years old and it's still the most valuable company in

the world crazy all right David I have some trivia for you oh I love it trivia before carve outs do you know where Dave

Mart from tvi first encountered Bill Gates oh wellow no I just assumed it was through Steve so Dave had watched Bill

present many years earlier at none other than the Homebrew Computer Club at Stanford yes the very place that is part of the Apple lore with jobs and W

showing off the early Apple computer apparently Bill also went and made a presentation there and would hang out there and that is where Dave first came across him ah amazing well when we were talking about the letter that bill

writes to the hobbyist community decrying piracy and software he's basically runting it to the home brw computer club like he believed that those were the people who were ripping

off his software it's amazing all right carve outs all right carv outs for new listeners at the end of every episode Ben and I just chat about one or two things that we've been enjoying

personally lately that usually have nothing to do with the episode in my case I have two the first one has a lot to do with the episode I have discovered

rediscovered the lgr YouTube channel are you into this Ben no Clinton lgr it stands for uh lazy game reviews which I think is how it started that it became so much more now it's just lgr Clint is

this awesome dude and I think he lives in North Carolina he is dedicated to basking in the glory and restoring and

reliving and preserving Computer History hardware and software from this era the YouTube channel is all like unboxing uh compact PC from

1992 like restoring a Windows 3.1 machine oh that's awesome so good he's got like the best most soothing voice in the world he just seems like such a nice

dude and he's dedicated to preserving the era of computing that we are talking about on this episode it's so fun that's cool it's really hard cuz all Hardware fails eventually so you know at some

point there will be zero computers out there that can run Windows 3.1 that will Boot and the only way to experience any of these things is through an emulator and so it's kind of like I don't know to to be able to capture you know highres

footage and stuff of those machines while they still work it's cool yep super cool my other carve out is Andre 3000 from Outcast do you know what Andre

3000 is up to these days not at all no oh my God okay so GQ just did a big interview with Entre 3000 because he

just released a new album this is not what you think oh so Andre you know a lot of people say consensus top five rappers of all time and boy and his

counterpart in Outcast you know also great too but they basically went out on top so they did speaker box the love below yeah of course which was their double album I think it came out like

2004 maybe I was a freshman in college hey ya was on that right hey ya yeah everything we saw that they did one more album and then they stopped and Andre would like be featured on some other

rappers tracks over the years but didn't put out another album for close to 20 years he just put out an album and he just did this big interview video

interview with GQ the album is a flute album he got really into like woodwind instruments whoa this has been his life he reveals in the interview that he has

put out other songs and other albums over the years under pseudonyms and it's like this interview is so great it's so unexpected because the interviewer keeps asking like you know you're under 3000

you didn't why did you stop rapping he's like I don't have anything to say like what am I going to wrap about getting a colonoscopy like this is where my life is right now and I never wanted to put out any work that wasn't both authentic

and great I just I didn't have anything to say anymore yep I love that if you ever heard the phrase go out when the top row at the back of the auditorium is

empty yeah yeah and that's kind of what they did Idol wild which was the album that came out after speaker boox the love below like I you know was great but

it wasn't that and yeah that's exactly what he did I think it's a Seinfeld quote I might misattribute it drop a note in the slack if I did but yeah I think it's a Seinfeld quote you can let

one row be empty but you don't want to wait too long yeah it's same thing as what Seinfeld did fascinating yeah super fun we'll link to it in the show notes all right I have three and they're all

sort of different we've sort of had a tradition on the recent episodes of doing multiple carve outs and all of them sort of are different genres so my product that I've really been loving my

physical product is the meta Ray bands oh yes I was talking with the team at meta about them they're doing great I bet it's a pretty delightful product I

bought them because I was in Hawaii and with my four-month-old son we were in the pool and stuff you know my iPhone's waterproof but like I kind of want a different angle and I don't necessarily want to be holding my phone like it's

very cool to be able to take pictures and record video of what I actually see to be able to relive that moment and I did a a bunch of photos and video and we were on vacation that way and then I

discovered a thing that they're actually just awesome for I think even better than airpods is phone calls the speakers are great I wouldn't say like necessarily they're the best for

listening to music the bass is obviously not as good as headphone bass they project the sound down toward your ears so unless you're standing really close to me you can't really hear or unless I

have the volume all the way up but the microphones are great too so I was on a long walk on the beach with the wind whipping by on a call with my mom and I was like does this sound really bad and

distorted to you she's like not at all wow and so I was really impressed and we'll definitely be using them for more calls I think that style of headphone over the ear there's many things that

it's not good for like when you're on an airplane or something like you want to plug your ears or if you're in a super loud environment but unless you're in one of those environments it's a nice break for your ears versus having ear

pods jammed in and it's a great call experience so they're great the batter is great they're like 4-Hour battery so it's like a lowkey more subtle augmented

reality experience there's no heads up display you don't see anything but when you get a text message it'll read it to you oh so there's more than just the camera system totally yeah it basically

is like you have airpods in but you don't actually have airpods in and you have a pretty good photo video camera on your face does it have an indication when you're taking photo or recording

video yes it's not super bright I'm not sure everybody really knows when you are but if you know what to look for you know if it's on or off cool so I've been

loving it I think it's a great product I intend to wear them a lot this summer my second one is a thank you to a very very

good designer Julia Rundberg who worked with David and I on a recent project for some design work some of which is actually featured as we speak on Apple podcast and she did a bunch of other

stuff with us too and she's really excellent so if you're looking for someone who's good at visual identity branding slide decks websites I've worked with her on a few projects before

and she's just awesome so wanted to recommend her my third this is kind of community Spotlight to go all the way back to like nine years ago acquired it

was a listener who runs a company called Summer Health reached out and said I heard you say that you have a baby I've got this great company that is for new

parents and here's some info on it and I am now a paying member it is a on demand texting relationship with a pediatrician

oh wow this is like crack for new parents it is like crack for parents it's crazy and you can hook up multiple phones so my wife and I both have a direct line to like something weird is

going on will you help me through it including we had a 2 am wake up the other night and some you know everything ended up being fine but as I'm sure any other new parents can relate to you really want to make sure in the middle

of the night if you're not sure if everything's fine you would like to figure out the right steps to make sure everything's fine so having a a virtual doctor on demand is uh totally amazing

so summer health if you are a new parent we've been loving it amazing well I'm going to have to subscribe we've referred to this before I think this will probably be the last episode that

comes out while I'm still the parent of just one child we have number two coming soon so if it may take a little longer than usual for uh the next Microsoft episode to come out our next you know

6our Opus on Microsoft don't get too mad that is the reason why yep well we have a lot of thank yous on this one as you can imagine people

are really generous with their time pointing us to different resources explaining their recollection of history as it happened and you know being in Seattle active in the Venture Community

here both through PSL and David you're in my shared history at madona me working at Microsoft a lot of good opportunities to learn what really happened from folks so a huge thank you

to Mike Slade who spent the time with me Mike spent two different stints at Microsoft and then at next and and apple in between yeah he worked for Steve at next right yep and one of the few people

in the world who both spent a ton of time with Steve and with Bill and work closely with both of them so so great to get his perspective especially about the early days of office and the

applications group very help helpful similarly Pete Higgins worked closely with Mike Pete I think ran Excel for a long time and oversaw a lot of the different stuff in the applications

group and I believe also ran office it's kind of funny how many different people picked up the mantle over time as these things traded around groups but frankly I think that's a huge part of the Microsoft story is the company very

quickly adapted and changed its structure depending on the current needs of technology and competitors and Etc huge thanks to Tren Griffin who is

actually a lifelong seattleite and sort of close friend to the whole Gates family Bill Gates senr was his mentor I'm sure you've seen tren's prolific tweets

online about Microsoft history so Tren and actually Tren I think currently works at Microsoft in a strategy role so thanks Tren for your help as well David

I know you've got a bunch yes also speaking of former Microsoft folks who are very active on and prolific on Twitter we talked to to Steven sinowski who had lots and lots of great

perspective and we can't wait to share more of it on the next episode I read like 20 of Steven's hardcore software posts and then when David and I were dividing up what belongs in what episode

I realized like 19 of them belong in next episode so Stephen thank you for your um early prep work for part two yeah so much fun internet stuff to talk with that Stephen was right there for I

spoke with other people who ran Windows Terry Myerson who's a great friend and uh supporter of the show Terry ran windows for quite a long time right yeah

when I was there Terry was uh EVP over I think windows and Windows phone yeah Terry was very generous and he was actually the first person that clued us

into to just how key Steve's role was in building the Enterprise for Microsoft yep and how different the goto Market motions were for Windows and office I think Terry was the one that sort of

gave us the Insight of Windows especially in the early days was basically an oem game small group doing an oem thing right there were like 10 people selling that right and it's still I don't think a very big team even today

yep speaking of strategy Charles Fitzgerald who's OG OG Microsoft and a great platform strategy guy prolific angel investor in Seattle now spun

chatting with him about the early days yep obviously Brad silverberg who we mentioned a bunch it was very fun to seeing after spending some time talking with Brad and texting a lot with him to

see the end of the Windows 95 announce after Bill and Jay Leno are done for Brad to sort of come out and finish it off it's fun it's like watching a time machine watching that thing it's really

cool s s sear at Madrona is a someone that David and I love crossing paths with in the Seattle entrepreneurship ecosystem yeah s's just such a legend at

Microsoft and in the industry too there's so many people who s made their careers plucked them out of school saw something in them that maybe they didn't even see in themselves and then they

went on to be big Executives or Venture capitalists at Microsoft or elsewhere yep and lastly huge thank you to Steve Balmer to be honest it was a little bit surreal chatting and hearing about his

experience over the whole thing because I don't know there's nobody including Bill Gates that bleeds Microsoft more than Steve Balmer and his just unabashed

pure pride in what they built is infectious absolutely it was so fun talking to Steve he was so gracious with his time and it must have been just super special for you too like he was

the CEO when you worked there totally and I mean to be frank I had a very opposite strategy in mind but I was a new hire out of college individual contributor pm and you know it was still

the windows company then and Steve was championing the windows strategy and I was a guy working on Office for iPad well with that our huge thank you to JP Morgan payments service now and pilot

you can click the link in the show notes to learn more about any of those great Partners have acquired if you like this episode I was thinking of ones to recommend it would be pretty funny to go

listen to the forethought acquisition given all of this context I mean it's a short episode when David and I were not good at this yet and we did our very best but it is from our early days and

it covers overlapping Source material yeah four thought was the company that made PowerPoint Microsoft acquired first major acquisition for the company yep if

you are new to the show and looking for great recent episodes that we've done I highly recommend the Visa one as discussed earlier and sort of the network of networks idea if you haven't

heard that or perhaps the Nintendo or Nvidia episodes all of which will be right up your alley if you liked this one and if you're not at all interested in technology or software but if somehow

managed to get through all these hours with us go listen to our lvmh and heres episodes even if you do love technology and software which obviously you do if you're still here there's so much to

learn from that world yep if you want to know every time an episode drops get hints at the next episode topic and get episode Corrections and followup you can sign up at acquire.

fmil come discuss this episode with everyone else who's chatting about it at acquire. fm/ slack and if you're looking

acquire. fm/ slack and if you're looking for another episode go check out our second Show acq 2 where we will have actually some very awesome Tech CEO

guests coming out over the next month or so that are AB absolutely worth listening to especially if you're interested in semiconductor and Tech History now if you want some sweet

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and with that listeners we'll see you next time we'll see you next time who got the truth is it you is it you is it you who

got the truth now huh [Music]