Acquired - Skype

0:00Um, I got one sec. I'll lost my place in my notes. Oh wait, actually, can we go back? I wish. I really compared it. I think I... I love it. Welcome back to episode 24 of acquired the podcast about technology acquisitions. I'm Ben Gilbert. I'm David Rosenthal and we are your hosts today's episode is Microsoft's 2011 acquisition of Skype and the wild crazy journey than it took to get there. Ben, you mean eBay's 2005 acquisition of Skype and the Wild Crazy Journey it took to get there? Or perhaps the Silver Lake Partners' private equity takeover with Andrews and Horowitz? In 2009 acquisition of Skype and the Crazy Path it took to get there. All that and more as we dive into the show. Before we get started today, we want to do a community spotlight.

1:13User in slack swix swx x pointed us at his company. I believe it is sent to you secntio.com They are the kind of future of Wall Street analysts. So they have a software platform where you can save time on research, join thousands of investment professionals on a modern and intuitive platform built by former Wall Street analysts. And he lets us know that they just launched their Alexa skill. So check that out if you have an Alexa or go to their website to check it out if you're interested. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora.

1:52the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus.

2:21They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review where you...

2:34drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

2:53And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

3:46Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you.

4:07Cool. Shall we dive into the show? There's a long and rich and incredible history on this one. There is this story has more drama than something with a lot of drama. A whole lot of drama. I don't know. Will and Grace episode. Yeah. Sounds good. Bravo, whatever.

4:27All right, so our drama filled story starts all the way back in 1999 when two guys Nicholas Zenstrom who lived in Sweden and Yannis Freese who lived in Denmark were both working at the Swedish telecom company Teletoo. This was early days of the well late days of the internet bubble, but very much internet 1.0 bubble and this Telet two that's T-E-L-E number two. They wanted to launch a web portal because everybody in those days had to have a web portal and they wanted to call it every day. I don't know if it's everyday.com or whatever the Swedish domain.

5:14you know, term and ending was at that point in time. But they had just one problem and that was that nobody could develop software at the company and or at least nobody could develop good web software. And so they had a department in Estonia. Do you know where Estonia has been?

5:32I do. I do. I was, we'll totally dive into this, but when I was at Microsoft, I was fortunate to spend a bunch of time at Skype offices and spend a week in Tallinn at the Skype headquarters there. Skype headquarters in Tallinn, Estonia. Beautiful city. Former Soviet block nation on the Baltic Sea? Yeah, and it is wild being there because it is this incredible dichotomy of old and new where you have total Soviet block buildings and even the real old kind of the old city from you know before the Soviet era in talent and then these companies like Skype and a lot of this sort of new revitalization in Estonia is a totally, imagine if you had the opportunity to intelligently start a new country today, all the decisions you would make, and they kind of learned from the best and looked at what's working in. Yeah, I mean, this is a company that was part of the Soviet Union until the 1980s. And so there's so much, if you ever get a chance to check out.

6:34There's a lot of really interesting things that they do as a government that are totally tech enabled like they they have Every citizen has a smart card that they can put into their computer and you can vote online because you have a uniquely identifiable That's also electronic thing that identifies you as a citizen. It's super cool Wow, so 1999 the whole country is 10 years old this Swedish telecom wants to make a web portal. So what do they do? They take out an ad in the local newspaper saying advertising contract job to build this web portal for them. And they're going to pay 5,000 Estonian crunes per day, which is about

7:17$330 at the time. And that was more than the average Estonian earned in a month, apparently. And they were going to pay that every day. So they get a lot of interest. And they end up hiring three developers, Jan Tallinn. We're going to butcher these names. We apologize. Ati Heinjert and Prit Kanslou.

7:38We totally butchered that and we apologize They end up hiring them and there's just one more problem though They're very talented programmers, but they don't know PHP which is the language of the web at the time. Yeah, I mean that that My problem was that I didn't know PHP like sophomore year of high school. I remember that that would have been Like 2004 or 5 and I wanted to make Like this it's totally irrelevant, but like that was that was totally the language of the day, right? If you wanted to do anything on the web it was like well, you know You can if you have a PHP server running you can drop these fancy tags and to do dynamic stuff inside your HTML and wow everyone Yeah, I mean for the longest time Facebook was all ran in PHP. Yeah, no longer those days are over but

8:26Back in the day, PHP was how the internet ran. So no problem. These guys are super talented. They just learned PHP in a weekend, and they build everyday.com or whatever it was that tell a two wanted it to be called. And it was awesome. So a couple of years, not even a couple of years, go by, but Zenstrom and Freese, the guy in Sweden and the...

8:49Guy in Denmark, they decide they want to leave Teletoo and they want to become entrepreneurs. Internet bubble, and this is the heyday of Napster. So folks probably remember Napster. I certainly do, won't comment on whether I participated in the file sharing or not. I heard it was great. Yeah, although I was definitely under 18 at the time, so whatever.

9:17And so they decide that they want to start a competitor to Napster. And it's not going to be just for music. You're also going to be able to share files of any type. So movies, you know, AVI's, you know, and software programs, you'll be able to basically share and read pirate anything. And so they decide that they're going to call this Kazah.

9:46Oh my god, yeah, when I was doing the research I could not believe these were like the same guys that did the cuz literally the same guys so so again, but like they're not software developers, so what are they gonna do? Well, they call up the Estonian guys So they call up the Estonian guys are like we're doing this we're building an App Store competitor You're in they they come on board they build cuz now it's awesome And it was indeed Quite awesome. Yeah, I remember I was in always like got an epic war with my friends on what was better lime wire or Kazah because they were both sort of the they both the successors to Napster and now to get shut down And so Kazah and lime wire become like the heir apparent and and Kazah actually becomes pretty quickly the most popular application in the world

10:39Really like not it is like the biggest like the most popular application period. Yeah, it's like the biggest thing on the internet I Mean the internet is quite small at this point time, but because I basically owns the internet. They're like they're like Facebook Which is hilarious to make that that analogy cuz like thinking about you know Facebook's brief detour and and Mark Zuckerberg and those guys ended doing a wire hog and there really is a Facebook And actually being a competing priority they almost didn't do Facebook because they were focused on wire hog Yeah, P to P file sharing was the thing which sounds totally crazy now, but I mean this there actually was some justification for this

11:16I mean, because I launched in September 2000, and like I said, super quickly becomes the most popular program on the internet, and along with that massive, massive legal issues, you know, playing out once again, just like they did with Napster. Which, I mean, this will be the foreshadowing for all of the legal issues that they would go through with Skype later on. Oh, yeah. Much more to come.

11:42So Zenstrom and Freese, I mean, they're writing high, right? Like they have the biggest, you know, biggest company on the internet, but they're also terrified that they're going to get arrested. And so they actually sell Kazah on paper to some Australian businessmen with...

12:06Yeah, that's all I was able to find. They sell it to some Australian business. There's just no price or... Yeah, it's... I don't know exactly what happened. Cool, I lost this answer time. Yeah, I lost in the sands of time. If you know, actually, we would love to hear about that in the Slack channel or email us acquiredfm at gmail.com and be good to follow. And it may be out there somewhere in the internet. There's so much out there about...

12:31because I nearly did Skype. This show was so much fun to research. So they sell the company, but they keep the technology behind it. And that becomes foreshadows what will happen in a few years with Skype.

12:48But so they keep the technology and they start casting about for, well, what else could we do with this incredible peer-to-peer file sharing technology that we developed? And it might be worth a quick detour to just talk about how peer-to-peer technology and file sharing actually works at this point in time. So the basic structure is that whoever's on the network is connected to everyone else on the network. And so if you have a file or any kind of piece of data that you need to be transferring, rather than going and downloading that from one server in one location, which is how traditionally the internet networking have worked. And actually, once again, works mostly this way today. But this was before the cloud.

13:36quote unquote, the cloud existed. You could just download pieces of that file from everybody else, every other node on the network. So this is why on Napster and on Kaza, you know, songs that were really popular were super, super fast to download because if thousands and thousands or millions of users all had that same file on there.

13:57computers and they were connected to the network, you could just download little pieces of it from many thousands of different people instead of downloading everybody going to one spot and downloading the whole file. And that's so much more effective because then you're bandwidth constrained by that one single server. In those days, you had CDNs that weren't, that were not as established and we'll built out yet.

14:21bandwidth issues and performance issues, getting it from that one single server. So suffice to say, peer to peer was this total revolution in maybe not the highest availability. There were kind of issues with reliability and some spotiness with it. But in a full distributed peer to peer network, amazing if your neighbor had something that you wanted that you could just one off grab from them.

14:45And so, Zenzerman and Freese at this point have sold quote-unquote sold, but they've retained this technology and they're casting about for what else they can do with it. And they realize, actually, of this ingenious realization that this same peer-to-peer technology can be used for a bunch of stuff, but for transmitting voice over the internet. And if a whole bunch of computers all running the same...

15:11peer-to-peer software, just like Napster or like Kazah, were online in various geographies around the world. As long as you had enough density in particular, starting points and ending points of calls that were happening, you could transfer packets that contained voice across this peer-to-peer network instead of in singular routes between one computer and another over the internet.

15:39actually enabled really clear high quality voice calls to be done just for free over the internet. Right and they would eventually they actually develop their own protocol for this you know that's formally known as the Skype protocol that endured until I think 2014 and from there would sort of establish this hybrid model where they had these direct peer-to-peer nodes were like we're talking about and super nodes. So, you know, established servers that were always on and meant to handle that kind of traffic. Yep. So, this is now kind of late 2002, early 2003, so they team up with the Estonians again and they start working on an early alpha for what would become Skype and they decided they wanted to call it Sky Peer to Peer. Catching name. Super catching name, but they wanted to abbreviate it to

16:32Skaaper, which I think is cool. I wish they'd stuck with it, but I think the issue was they couldn't get the dot com name. Yeah, they couldn't get Skaaper dot com. So instead they decided to just drop the R at the end and The Skype was more. Totally, so clean. Incredible at that time that Skype or was not available, but Skype, a one syllable, five letter word was. Yeah, like that would never happen today that you would go down a letter and that that domain name would be available versus a higher number of letter domain name. Pining for the old days. But they do something really right at the beginning too. So we talked about how the technology

17:14was pretty amazing and that enabled them, you know, it enabled people to do voice calls over the internet as long as there was a density of people online in both where the call was starting and ending.

17:27around the whole world way better than traditional telephone networks. But the other thing they got really right is they made it really simple in the beginning. They realized that kind of just like Kazan and Napster, if you were gonna build a huge network of people doing this, you couldn't just have tech geeks doing this. You had to make the software so easy that everyday people would do it. And so there's actually an interview, a quote from early Skype employee, Laurie Tapandi at the time and she says, right from the start, we set out to write a program simple enough to be installed and used by a soccer mom with no knowledge of firewalls, IP addresses, or other technological terms. And because of that, and also probably because it was free and enabled you to call people in other countries for free when you used to pay a lot of money to do that. This is calling even domestically super expensive then.

18:24Yep. Yeah, even domestically, long distance calling was expensive. But think about in Europe where Skype is based, like calling between countries and people of friends and family that are in other countries and they have to pay ex-ordinate amounts to call them. Yeah, and the telecoms were highly, highly regulated, had a very inflated price scheme where there was, you know, not necessarily collusion but at least a set expectation of how much you would charge for long distance and routing between networks and by pioneering VoIP really coming up with this idea that you go around all that entirely. And I think the funniest thing to think about is in the history of networked computing, everybody that had a dial-up modem, we started with

19:11are data flowing over voice lines and the way that it would communicate is literally making sound over those lines so it was like IP over voice and then you have the advent of this and where we are today and how every office mostly has phones that are actually IP phones and now all of our voice goes over IP yeah it's kind of hilarious yeah I mean it's like this technology is so much better than the traditional phone system that now The traditional phone system runs on this technology, which is pretty amusing. Yeah, we're sitting here in Pioneer Square Labs. We moved into a new office a couple months ago and all of our, you know, hard-wired phones that are like our desk phones are all IP phones. So like we didn't even think to, you know, why would we like reach out to AT&T and have them set up a, yeah, totally. So, like I said, super simple.

20:00Free really compelling value prop so Skype launches officially in August 2003 on the very first day remember this is August 2003 so like the internet is orders multiple orders of magnitude smaller than it is today. On the very first day, they get 10,000 downloads. First day, they launch, get 10,000 downloads escape. By the end of the first month, they have a million users. I'm so curious on the first day, so how do they get the word out? I think that's a little lost to history, but it's like there's an app store to be featured on the front page of. They did super early growth hacking, emailed, There you know friends and friends of friends and got the word I mean they also had some benefit in that these were like the Kazaga guys, so you know there was They were known quality quantities But still this is incredible 10,000 downloads on day one a million users by the end of the first month 4.1 million users by the end of the first quarter and just a hair under 20 million users 19.8 million users that they get in their first year Wow

21:09Which is I mean those are like pretty decent numbers for even like a mobile startup today like there are no mobile phones at this point Yeah, and the fascinating thing about peer-to-peer I mean there are no smartphones at this point It's cheaper to yeah good point is cheaper to start a company with the advent of of you know Cloud hosting than it was in those days when you need really expensive data centers But with the advent of peer-to-peer they could support 20 million users without those insane infrastructure costs that it would you know any other company saying like oh, it's you know 2001 and we're launching a company and we quickly have 20 million users, it's like, well, how many millions of venture capital did they raise? Yeah, and they did raise a small amount of venture capital before they launched. Interestingly, from Bill Draper, the legendary venture capitalist and Howard Hardenbaum, who's now at August capital, they were working together at a different firm at the time. And they went over and they had heard that the Kazagas were starting a new company and they're like, we're gonna give you some money like, we don't care what you're doing, we're just gonna invest in you because you're the Kazagas.

22:07So they were the first investors, but then they launched and this growth is incredible. And so as this growth is happening, of course, every VC, you know, now in the world wants to invest. And so there is $18 million from index, Bessamer and DFT after they launched and have this growth. But but things are still pretty crazy. So like Most of the company is in Estonia, where these original developers are. And Estonians are crazy. If I learned one thing was there, I mean, I was there in February, so it's negative 20 degrees, and people are still going out drinking, and they get used to it, it's nothing. They cross-country ski miles and miles and miles everywhere all the time. I walked away with this impression that you do not mess with in Estonian. Yeah, so startups, there's lots of...

23:00fun and pressure and crazy times and startups you know still but like this kind of took it to a new level so I think still even to this day every new employee at Skype has to undergo an initiation and the initiation is you have to do a shot of uh tequila, sambuca, and Tabasco sauce. I did this. You did this. Yes, there's this bar right outside the old city. Yeah, this is, yeah, this is every from day one, every Skype employee did this. Oh, wait, this is on the internet. This is on the internet. Did you see what the shot was called? Uh, yeah, there's like a name for it. I didn't write it down. Yeah, I don't think like English speakers can't, it's hard to pronounce. I'll see if I can look it up while you're.

23:44So the other thing that they do is they install a pool in the boardroom in the office in Estonia not a not a pool table a pool Yeah, and apparently they have to like negotiate with the building about like yeah building management like whether the floor is gonna be able to support this You know, I think it was a kiddie pool, but it was still like a ton or two of water that was installed in the boardroom. Jesus. Okay, the drink was, it's either millimilacos or millimilacus. I heard it differently from different people, but it's like, as soon as I saw it on Google, it's like, oh yeah. That's amazing. You've been initiated. I have. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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26:12So the growth just continues as we were talking about things are growing like gangbusters in June of 2005 they add video calling Which is funny when we think of like when I say to somebody I'm going to Skype them today instead of doing a call like I mean I'm going to video chat you Right, that wasn't even added until two years after it launched. Yeah, oh five. It's interesting to think like Fast forward to today where like they're they're Making forays into text chat and they've had text chat all along but trying to make that more part of the core experience started with audio, then got into video, became ubiquitous with video, and a lot of other kind of chat platforms are competing against today that are text and photo-based. That's not their core and starting place at all. And it's funny to think about how much like with phones, how primitive text seams, and how complicated voice and video seam, but like

27:07There was calling on cell phones before there was texting on cell phones. And, you know, text was the third feature of Skype. I think this is, I'm sure this is something we'll get into more in tech themes and, you know, grading. But it is pretty funny to think about that, that text is now the dominant medium of communication, not calling even though it's more complicated and more bandwidth heavy.

27:32these days on smartphones. So they launch video calling that grows also enormously. And so a couple months later, September of 2005, there is lots of interest in Skype and from multiple acquires, big companies are interested in buying the company. They end up deciding to sell to eBay for $2.6 billion.

27:56ebay. That was the heyday for ebay too. Well, it was slightly post-heyday. I mean, this was after a couple years after the bubble internet bubble burst. But ebay is still a very large company.

28:11And people are like, why is eBay acquiring Skype and one of the rationales that they give for the deal is, well, people will be able to call each other and verify transactions. The mind-blowing thing here with this is like, when we covered PayPal, the PayPal eBay acquisition, That made so much sense because people were already using PayPal as a major source of payment on eBay. I'm very curious. Did they observe behavior where people were using Skype to do this already? Or was it literally hard to imagine? I have no idea why you would call somebody after they want an eBay auction. To me, it seems sort of like eBay's...

28:57foray into trying to become a conglomerate and like private equity style take on this high growth business that you know has a very pioneering technology and see if they can just you know grow that as an asset inside their organization and like theoretical synergies happen with their other product but to me you know hindsight's 2020 and we can look all smart here being like that was a dumb acquisition but I don't see it. Yeah, I agree. I mean it would be hard to see this being a smart acquisition. Regardless, however, it was definitely a dumb acquisition because they made one key mistake as part of the acquisition and that was much like when...

29:36When the Kizagai sold Kizagai and they kept the technology, once again, they kept the technology. And so they had a, I think it was a company called Skype Technologies that literally was just licensing it to eBay. It was actually a company called...

29:53I don't know if it's Jolt ID or Jolt ID. It's J-O-L-T-I-D. And that was Zenstrom and Freese's company. And they kept the core peer-to-peer networking technology in that company and then licensed it to eBay and Skype. And so as we'll see in a minute, that definitely comes back to buy eBay and Skype too.

30:19So the transaction happens Skype, which is this crazy European company is now part of eBay based in San Jose You know run by I think Meg Whitman was still CEO at that point in time Yeah, this is a September of O5. Yep, September of O5 You know very Silicon Valley, but very corporate as far as Silicon Valley goes, has been through the .com crash and now emerged and is a very large public company. To say there was culture clash is an understatement. In fact, in 2006, most of the eBay management goes over to Estonia to visit the Skype team there and go through the roadmap and the feature development and the integration plans. That doesn't go, the Skypeers aren't too excited about that. But then in the evening, they decided they're going to throw out the Skype team's going to throw a huge party for this, for the eBay guys coming over. And so they throw this huge party at the hotel where the eBay team is staying.

31:35The party is apparently Nicholas Zendstrom. We read this on the internet, so it must be true. He gets behind the bar, starts pouring everybody's shots, unclear if they included Tabasco or not. And then he gets on the bar, and he's pouring shots where everybody and he yells out, what happens in Estonia stays in Estonia.

31:58and the ends up like everybody ebay skipers they'll jump in the pool they're all like fully closed at this point in the end of the night well it turns out it gets caught by news crews in Estonia and it's on like local television like ebay and skip management basically trashing this hotel so then of course they have to pay for it all and you know this is not like the corporate culture that eBay signed up for. That's a good party to me. Yeah, it sounds like a pretty good party. I kind of wish I was there, but the eBay management did not. So a couple of years go by. Skype is still growing super, super fast. We get to 2009 and Wall Street. So Skype is at this point.

32:45the fastest growing part of eBay, division within eBay. But that's a story we've heard before. Paypal? Yeah, exactly. Skype has over half a billion users around the world at this point, and it is quite profitable, and making a lot of revenue. In the third quarter of 2009, they made Skype itself did 185 million in revenue.

33:14But it's just not a fit with an eBay and Wall Street is saying that they should spin it out or do something that makes no sense. And so they start working on a transaction that we referenced earlier, where a consortium of private equity firms and Andreessen Horowitz, which had just been founded by Mark and Ben, are going to invest in directly in Skype, spin it out of eBay, eBay will retain a stake, and end up valuing the company about at what eBay bought it for a few years earlier. Because I think somewhere in the middle there, October of 2007, eBay did a write down internally of the value of Skype. Yep.

34:01But there's still one problem again, which is that Skype doesn't own the IP and And they're they're just licensing it back from from jolted from from Zenstrom and freeze and so what happens Zenstrom and freeze actually sue both eBay and the investor consortium, so to stop them using the technology, and there's this whole big, and this is all playing out in public, eBay's a public company, so that's totally roadblocking any of them. Totally roadblocking. There's a chance that Skype could just die. One very real path was that they couldn't use the technology anymore, that they would just have to shut the whole thing down.

34:46I don't that's not realistic right they're gonna settle well right so the other another potential path with that the eBay and the Skype team was furiously working on is develop an alternative technology to power Skype but Again really hard to do that because the peer-to-fear technology is kind of the core of how this works and And then the third option is settle with them and that's really I think you know what was going on was was the founders were Basically trying to trying to you know, they wanted to invest in the deal and they did end up investing in the spin-out But so they do eventually end up settling and it's interesting what happens so they give jolted 10% in Skype as part of the settlement Skype gets so they get 10% equity stake Skype gets the technology so finally the actual technology becomes part of

35:44Skype the company. And the founders also get an $85 million cash payment. But what's interesting is they then also invest $80 million into the spin-out. So I guess net the cash comes out about even for them, but they then get another roughly 4% of the company. So they end up with 14% of Skype post spin-out. eBay retains 30%.

36:10And the investor group gets 56% of Skype. Also interesting as part of the deal, Skype itself, at this point, Nicholas has a venture firm in Europe, which is quite a good venture firm called Automaco. Skype ends up investing in Automaco's second fund, and investing in audio, the streaming music service that was also started by them.

36:37Both of these as part of the settlement. Wait, it was Ardeo, an Atomika company, or it was Ardeo, who started, what's the connection there? Zenstrom and Frey started Ardeo. No way! They had a third act with Ardeo.

36:49Yeah, they had a third act and they had a fourth act a company called juiced which was gonna be a peer-to-peer video streaming, you know Tele basically disrupting television and Skype didn't invest in that but they agreed as part of the settlement to promote juiced on Skype I don't know how that they would promote juiced on Skype, but it was a part of the settlement Wow Super interesting. This is a crazy deal But it works out so the spin-out happens October of 2010, Skype hires Tony Bates, who was a star at Cisco to come in and be the CEO. And before that, in June of 2010, Mark Gillette.

37:27Who was an operating partner at Silver Lake became the chief development officer so those guys You know, this is where the folks at Microsoft's at Microsoft start to become familiar with these names people who are there now and been there for the last five years or so both played huge roles and sort of the integration and leading the Skype division inside Microsoft. Yeah huge roles and and so in these couple years in the interim Tony and and and the new management team basically focuses on like totally restructuring Skype. So integrating the technology that is now finally part of Skype into the company, modernizing it. Classic and super well executed private equity play, incredibly well executed. I mean, I don't know if we're going to disaggregate the grades of all of these acquisitions here, but you know, I think this definitely is making a case for getting the highest marks. They also

38:24realize at this point, it's obvious that mobile is going to be a thing. So they really push Skype for mobile, getting on iOS, getting on Android. And the business does great. And then just a couple of years later in May of 2011, so actually less than two years after the spinout happens for me, Bay. Microsoft shows up. And finally, we get to the end of the story.

38:50eight and a half billion dollars acquisition. Microsoft announces in May of 2011 that they're acquiring Skype. At that point was their largest acquisition ever. Just until LinkedIn. Just until LinkedIn. And looking at just to recap, September of 2009, their valued Skype is valued at 2.75 billion in the private equity takeover. And then when you look at this Microsoft acquisition, May of 2011, so under two years. Under two years later, essentially $6 billion, almost $6 billion of value creation. Now, granted, I mean, there was a lot of paying that they had to go to to get that, but hey, that's a pretty good payout for everybody. Yeah, and I mean, value creation defined in the terms of, which I guess is how you define value, but value is whatever the highest bidder is willing to pay.

39:44because if you truly look at the intrinsic value, I mean, it grew tremendously in terms of user growth under, under, silver lake, but boy, Microsoft paid 32 times Skype's operating profits. Yeah. So when Microsoft acquired Skype, had 700 million users, and in 2010, the full year of 2010 had done 860 million in revenue, and 264 million in operating profit.

40:14So it's still, I mean, a very rich price paid by Microsoft. But it's something that I think kind of gets lost in this. All of the ups and downs in roller coasters of this story and all of these transactions were reported so much in the press is Skype is actually a really, really good business.

40:32Yeah, absolutely. I mean, we focus on the valuation play of basically eBay sold it for what they bought it for after some tumultuous years. The private equity days, they tripled it in less than two years. But you're right. As an independent business, I don't know if it's actually worth $8.5 billion in 2011, but fantastic business. Yep, fantastic business.

40:59We've been pretty hard on them, I think, justifiably so thus far, but they did make quite a bit of money on Skype because they sold a 65% share at the spin-out, but then they retained 30%. Great point. So when Microsoft bought Skype, they made...

41:19roughly back, you know, the same value that they, even just from that, pretty close to the same value that they paid for Skype in 2005. That's totally lost to the narrative. I mean, the intelligence of eBay to hold on to that much that it had had future growth ahead of it outside of eBay. Yeah, I mean, it was never a question that, A, this was a great business, and B, was growing super fast, even through all of this tumult. Yep.

41:47And so to be clear, there's no more partial ownership after this. Microsoft really, I mean, they clean out the cap table. They're the full owner. They have an entire, which usually is what happens in an acquisition. But I guess third time is the charm for Escape. Yeah, yeah. Well, I mean, we're used to, yeah, kind of shocking what happened with eBay. I was going to say like what we normally see with the tech company is they want full and complete control because they're going to integrate the product and it's going to become like, you know, As we're doing research we look into Skype today and it's impossible to get clear numbers on how the Skype business is doing because it's been so integrated into every fiber of what Microsoft's doing and That's kind of the the normal story people look at it like an asset that they've acquired that they move into all these pieces of their business not this like independent private equity own thing that another tech company kind of owns and the founder is kind of own like

42:40There's management put in place to clean it up and get it ready for us. That's why, part of the reason why Wall Street was clamoring so hard for eBay to spin Skype off in the late 2000s because they reported it as a separate division. It was a completely separate company. There were no synergies with eBay, despite whatever they may have said at the time of the deal. But it was really clear that there was a lot of value locked up in that company.

43:08Yep, so at this point, Skype's former CEO Tony Bates is now the president of Skype reporting directly to Microsoft's CEO, Steve Balmer. They have 663 million global users, and it's time to do the integration. I remember this vividly when one Microsoft memo came out that we...

43:34the company was going to reorient to more of a functional organization under, under Steve, since then obviously Satya has come in. Microsoft's taking a little bit of a different or tremendously different direction. But what's interesting, and then we'll move on to, I feel like we've talked a little bit about acquisition category already, but I don't know if you remember, there was a lot of when Bomber announced that he was going to retire.

44:02There was a lot of speculation about who the next CEO of Microsoft was going to be. Oh, Tony Bates was. Tony Bates was pretty at the top of the list. You know, it was Tony Bates. It was Alan Malali from Ford until he went and joined the board of Google. Yeah, right. Good way to disqualify yourself from becoming CEO of Microsoft.

44:23and unclear that he ever wanted the job. Maybe that was how he stated he did more job. And Satya, but Tony was a very legitimate candidate to potentially become the next CEO of Microsoft. Yeah, that's right. He's actually a GoPro now. He's the president of GoPro. It's probably worth talking a little bit about what's happened at Microsoft since the acquisition. So for a long time, Let's talk about what's going on at Microsoft during the period of the Skype years. So they had office communicator that was part of the office suite when you subscribed and you entered an enterprise engagement. And you got word, Excel, PowerPoint, Visio, the entire Microsoft office suite. There's obviously varying levels of that that would come with communicator, which I believe in 20...

45:18I'm gonna get the date wrong but at some point was rebranded as Link which was something that never I mean that was an enterprise offering that People who had a communicator in their workplace then knew okay, we got Link and that was not never a brand that was on on consumers the tip of consumers tongues and In acquiring Skype then there was this like very interesting, you know dichotomy of what we've been building this thing called MSN Messenger, which was our consumer offering for a while. There was office communicator, which became link. Now we have Skype. So there's sort of these like three different chat looking things that all seem to sort of do the same thing. And it's taken probably three or four years to really start to narrow that. So MSN Messenger has been killed.

46:04Link is dead, is formally changed into and then using kind of a mesh code base but Skype for business. So there's Skype for consumers and Skype for business for businesses.

46:16And you know, this is in Outlook.com. When you log into your consumer mail offering, you see Skype automatically is there. There's all sorts of apps for every platform. It's baked into Windows. It's really kind of like across the whole Microsoft ecosystem at this point. Yep. And let's not forget a year later, Microsoft acquires Yammer. Yes. And then all of its glory. All of its glory. You know, enterprise.

46:45Social or enterprise mask communication that transcends email is and will be a thing It just was not in the form of Yammer. Yeah, that was just Is it yeah, it's kind of an interesting product in the early days Well, it's interesting go for it You know, I feel like we're bleeding a little bit into tech teams here, but You know Skype was really well, I'm just gonna say we'll talk about a more in tech names later Skype was really the first both business and consumer internet product, and really in many ways both foreshadowed and was the wrong instantiation of Slack to come. Slack is a business product.

47:37but very also used by consumers. Super user friendly. Super user friendly and Skype's very similar. I think it was more a consumer product and the business model was more for consumers than enterprises, but it was the first, I don't know if it was the first, but it was a great example of a crossover product that businesses, I mean, I do many calls with startups, I do as Skype video chats.

48:08I wouldn't say that it was the wrong product. Like I think that video, audio, I'm sort of a different purpose than what Slack is or glorified the IRC chat. Slack is expanding to become communication and the fiber that exists between employees that's more than just chat, but that's really their core competency. And the question is, who will own...

48:33communication in enterprises going forward and what form will it be, and will these things be combined? Are we going to see a Skype product and a Slack product merge, and are we going to see that happen? Are we going to see Let me see this right, Slack gets Skypeified and Skype gets Slackified at the same time. Well, I think these things are both happening. But it's interesting, the path that Microsoft has taken since the acquisition with Skype, we were talking about this before the show, is not a unified path. I mean, there's Skype for X, Skype for Y, Skype product, derivative Z.

49:17It's very confusing, whereas unclear what product that Microsoft and Skype are offering today that I would use for what use case. Whereas you look at Slack, on the other hand, it's just Slack. There is one product. There's no Slack for. One front door and everything is integrated into Slack, but it is one user experience. Then you can do everything from within that one user experience. And I think that is just speaking on personal preference, but I think also speaking for most users out there, it's so much rather have one superior user interface and customer experience that I can accomplish many things from. Then I would, oh, am I stealing your thunder here? It always comes back to vent housing, come on. It's integrated versus modular.

50:14It just like it's gonna ebb and flow and it's gonna be advantageous to be bundled and then it's gonna be advantageous to be unbundled and then it's gonna bundle in a new way and it's gonna keep going back and forth and like we're about to see bundling I think and these you know we'll see this stuff get recombined and then we'll see get rebroken out again when that's appropriate but yeah all right listeners Now is a great time to thank our longtime friend of the show ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part. Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like the risks are real.

51:01Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower. Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible, and secure in one place. And ServiceNow can do this.

51:30because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approval, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. Service now already runs more than 100.

51:47billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

52:10So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. I want to move on to acquisition category. Okay, let's move on to acquisition category. So I'm going to call this a product acquisition.

52:28There is technology in there. Well, it very definitively was not a technology acquisition a couple times. Yes. Yeah. It certainly was more of a technology acquisition this time than it was the eBay time around. The reason I don't think it's business line is because...

52:45They bought it at such a high multiple of what their operating profit was that they weren't just gonna buy and cash flow this thing Yep, they were buying a product to integrate into the rest of their ecosystem and create a stronger You know a stronger offering across the board. This was an acquisition done where this product was being greatly sought after By by both Google and Facebook there are acquisition rumors swirling for about half the price of of what they got bought by Microsoft for months before this. And so, you know, in a competitive environment where video streaming technology is not yet, or video chat technology is not yet commoditized, we're still two years away from Google launching Hangouts. You know, this is a product that has a lot of users growing fast and can really be integrated to beef up somebody's offering. And Microsoft decided it needed to be them. Yep. I totally agree.

53:40It's interesting. I think the eBay acquisition really was a business line acquisition. I mean, it was totally separate. It was reported separate. It was a very different product. But the Microsoft acquisition, I think, is very clearly a product acquisition and now with the integration that you've seen into all parts of the office suite and other areas within the business. What would have happened otherwise?

54:07It sort of is interesting to look at the rise of Hangouts and competing video chat and VoIP products. It doesn't feel like Skype is the sort of one and only the way that it used to be. I don't know if you feel that way too. I definitely feel that way. That way anecdotal. When someone says we should hop on a Skype call, it...

54:31ends up being a Google Hangout pretty often or in an enterprise case often a zoom call oh yeah blue jeans yeah blue jeans or zoom I found that zoom actually tends to work the best out of everything but I think this is interesting, and I want to talk about this in the context of what would have happened otherwise, because yes, you're right. There were lots of rumors that Google and Facebook were looking at Skype as well when Microsoft bought them, which I just think is super interesting, and also comes back to this crossover nature of Skype. Microsoft primarily acquired Skype, I think, for the enterprise side of the business, more so than the consumer side of Microsoft's business.

55:15And you see that, you know, it was actually, it was our friend Kurt Delbeni, who, when he was president of office, who led the acquisition. So it was actually being done through office at Microsoft. And then think about, like, what if Facebook had acquired Skype? Like, and then it would be primarily a consumer-facing product. And the fascinating thing about it is, Facebook had just launched, like, a Skype, a white label version of Skype inside of...

55:45Facebook Messenger. So, Philip Sue, I think, led this project, which is the overlap in people, and this is incredible. So, when I was doing the garage at Microsoft, Phil up had started one of the most legendary projects of all time and he was like a, you know, constant garage tinker guy and it worked on all kinds of cool stuff. He ended up leaving to go to Facebook. He runs engineering in the Facebook London office now but before that, did a...

56:16did led the project to integrate Skype calling, which wasn't called Skype calling, it was just like video calling. I remember this, yeah. Into newsfeed. But it was Skype that powered us, right? Yes. Yes. And so then, I mean, that left all these questions of like, well, is this their first like, are they just doing a little bit of a deal now so that, you know, they can acquire them, which, you know, didn't quite end up happening. But interesting proof of concept there. Totally.

56:41Now that we're here in what would have happened otherwise, I think it's worth bringing up the issue of repatriating of capital and what that currently looks like for US corporations. We've been hearing a lot about it in the news recently in this kind of political race that we're in about companies can't bring. You mean this national travesty that we're in? Yes. God, I can't even think. Sorry about that.

57:09In thinking about what could have Microsoft done with a lot of this capital that had overseas? It had been a long climate of not being able to bring it back to the US without paying huge taxes. Skype is a Luxembourg corporation. It's a great point. Pretty great way to, in looking at what foreign businesses could we buy that would integrate well into our products and give us...

57:32this boost into communication. They needed a consumer and to boost their enterprise offering in video chat and calling. It makes total sense when there's not a lot of better things you can do with that capital. Yeah, I think this is a great point. Also, we don't know exactly how Microsoft thought about this and how much this played into it, but Ben, as you pointed out, some of the rumors that were circling about other players Google and Facebook acquiring Skype the rumors were at a much lower price right um was Microsoft willing to pay a lot more because they had all this cash overseas that they needed to uh that they needed to put to work certainly at a much healthier balance sheet and then uh then Facebook at least at that point yeah that I mean this is uh was Facebook public Facebook was public at this point I think it was just been

58:26Let's see it's an easy no Facebook was yeah Facebook was a private company at this point Not public so Would have been certainly possible for them to do an acquisition of this size but quite difficult right and Honestly, that's one thing I'm going to keep in mind with when grading this acquisition. I mean, I think that the super skeptical lens that I had on coming into today was Microsoft spent $8.5 billion with Skype and seriously, how are they going to earn that back? It's so far from being something that they can just cash flow.

59:11growing, but it was already a pretty huge business with a massive percent of the VoIP calls that were made globally going through it. It wasn't something that I thought had that much more growth left in it. Nor did I believe Microsoft was going to accelerate that. It's done well. It's grown the way that you would expect it to grow.

59:40When you think about like in the context of what else could they do with that cash and was this the best thing they or one of the better things they could have done with it? Certainly better than buying treasury bills Yep Great point really great point I guess the other thing we should we should cover on before we move out of what would have happened otherwise You know, I think there was a path and a very viable path for escape to go public and be a standalone public company again. That's right That's right. And then what is this? In 2010, Skype filed with the SEC to raise $100 million. Yep, they had actually filed to go public, filed an S1. And I think that was probably the plan at a spinout when Silver Lake and Andrewson and the other folks invested in Skype at a spinout was that, you know, with some cleanup led by Tony Bates and others that this could be a standalone public company. Yeah.

1:00:37On detect trends, I think that it's interesting, there's a good foray from what we were just talking about. It's interesting to note for listeners that we keep seeing this pattern over and over again where a company gets bought right when it was about to raise a bunch of money, like Instagram.

1:00:55or somebody's looking to do a roll-up strategy and then they get bought because an offer was put down on the table to stop them from doing that roll-up strategy. And in this case, it was they were preparing an IPO and that made them a really great takeover target. And it's really interesting to see as my first tech theme is that a lot of times whether it's you're about to make acquisitions, you're about to IPO or you're about to get bought, there's a There's a little bit of like a leverage game going on where you pursue concurrent tracks at the same time in order to make sure that the pressure is on for whichever one you want to happen to happen. Back when I was an investment banker, we used to call this a, quote, dual track process, dual track being one track, an IPO and one track being an acquisition. And you're absolutely right. These things totally play off one another and

1:01:51The fact that you are, it is known that you are preparing to go public. You've filed your S1. It's out there. That has a way of drawing buyers out of the woodwork. Yep. Yep. Another tech trend is the rise of the mega acquisition. Yes, yes. This seemed absolutely insane at the time. I mean, 8.5. I worked around a lot of, there were a lot of cynical people in my group.

1:02:21when I worked with Microsoft and I like a lot of lunch conversation was the people like counting the number of things that you like how many Skype's something was like oh this is an eighth of a Skype or you know putting out like making like crazy jokes about what a huge number this was and how it was never going to pay off for the company. And it turns out it's actually less than half of a WhatsApp. It's so true. It's less than half of what's a WhatsApp. You know consumer consumer chat broadly defined also includes Snapchat and you know like yeah they weren't gonna become Snapchat they're in a very different path for that but like could they have become WhatsApp I mean WhatsApp's value prop is that you could very inexpensively communicate across it's amazing it's the exact same value prop yeah it's just for text not for voice exactly inexpensively communicate across political boundaries

1:03:13And avoid the tax of the telecom and like it is exactly that and you look at you know that that what 22 billion dollar Just fully valued given everything that went into that deal future episode coming soon at some point. I just don't think we have enough to decide. I think we need to wait a little bit. But anyway, looking at, could Skype have become WhatsApp? Did they falter by not becoming WhatsApp? Or was it just a different era? Yeah, I mean, it was totally a different era. So my tech theme, this may be a good second to it, it is...

1:03:56You know, Skype, on the one hand, it's kind of sad that I feel like this is a company that has never fully realized its potential given this crazy corporate history that it has. However, the growth of this company and the like...

1:04:12Product market fit that happened is pretty incredible especially when you go back to the context of when Skype was started in 2003 and launched in 2003 and the kind of growth that it experienced and like what were you doing until like I was in I was I was graduating from high school and starting my freshman year of college in 2003, and I owned a tablet PC. Like, you know, nobody had ever heard, like there were palm pilots, you know, like, but there was no, there were no smartphones, you know, the global internet. Most people in America didn't even, you know, I don't know if it was most, but certainly a large portion didn't even have broadband. Right.

1:04:54And so you couldn't use Skype if you didn't have broadband. And like think about that and did a dressable market and yet how fast it still clearly grew. And so the tech theme that I had is there was a really great, actually ironically, right at the same time that the Microsoft acquisition of Skype happened. Bill Gurley wrote this great blog post called the, I believe the title is All Revenue.

1:05:21is not created equal the keys to the 10X revenue club. It's a great post and it goes through 10 points of like what is it that makes companies that are valued highly by public companies valued by Wall Street at 10 times revenues or higher sort of these elite companies like what are the factors that separate them from other companies. And he includes a slide from an early Skype pitch deck in one of his points. And this slide is just amazing. The point that GERLY is making is that companies that tend to be valued very highly, they grow on the back of organic demand versus heavy marketing demand is what he says. And so a lot of companies you think about this and we see it and start up all the time.

1:06:08You know, your unit economics quote-unquote may be working, but if you're paying a lot of money to acquire every user that you get to your product, you're going to have to pay spend a lot of money to build that market and win that market. Skype never spent any money on customer acquisition. It was all organic. It was just pure product market fit. And so the slide from the Skype pitch deck, they're comparing themselves to Vonage.

1:06:35If you remember Vonage, you know, was the Skype competitor in the day. And Vonage advertised all over, you know, national television in the US. And the slide just compares, Skype's cost cack to acquire a new user. And Vonage is $400 that they were spending per new user. And Skype was one tenth of one cent.

1:06:56And because they had no costs for every call, it was a complete peer-to-peer model. They had no server costs. And they were spending no marketing. And so this thing could just grow and grow and grow. And there were no limits to it. Which is pretty amazing. It's super rare to find these kind of businesses.

1:07:16And again, like I said, Skype, I don't think it's the credit it deserves as a product and as a business because of this corporate history, but the growth is just impressive. Yeah, yeah. All right, on to grade the acquisition. I'm giving it a B minus. I thought I was going to be much faster. Which acquisition are we grading here? I'm grading the Microsoft acquisition. Yeah, I thought I was going to be way, way, way harsher. And in fact, Yeah, I didn't know I was gonna do this episode years ago, but like I would have called it like a D in 2012 and it seems like Over time it actually is getting integrate it takes a long time because it's a big ship to maneuver but like

1:08:04It's the right move to have Skype and Skype for Business and not have, you know, versions of Link and NSM Messenger and totally deprecate communicator. Like, it's the right move. It was an amazing use of that capital considering other options that they could have done with it. And unless, of course, we see some kind of like big break where all the US companies in the next few years are allowed to bring the cash home. But I don't really foresee that happening. Bringing home in a reduced tax rate.

1:08:32And on top of all that, I think having this consumer offering and a little bit of that consumer DNA with all the Skype teams that have built this product, leaves them fairly well positioned for whatever is about to happen in the enterprise communication market that Slack has pioneered. I'm sure they wish it looked more like Slack right now and less like the slow, steady growth of Skype.

1:09:01You know, if Skype teams is a real thing, I'm excited to see it. Yep, yep. I definitely agree with that. Yeah, it's interesting to think about, you know, think back to one of our early episodes with Kurt Delbeni talking about a complete and wonder list and sort of recreating the office suite in a particular outlook on mobile. And I got a wonder if, you know, and Kurt led the Skype acquisition when he was at Microsoft the first time.

1:09:29I got a wonder if the experience with Skype informed some of the things they did differently with a company. And in particular, making Javier, who is the CEO of a company, head of all of Outlook, not just Outlook Mobile, but empowering him within the organization to really remake, and it's still a work in progress and will be for a long time. But I think Outlook has made huge strides from the massively bloated super old school piece of software it was.

1:09:59before the acquisition to the still really bloated but much nicer designed and clearly making strides and it's my most open-app on my iPhone where it is today. Compare that to Skype where yes Tony stayed at Microsoft for a little while and was in the running to perhaps become CEO, but then he left and also ultimately not like a product guy also also ultimately not a product Yeah, he was like a turnaround guy. Yeah, and I think the lack of any real leaders, you know corporate leaders within Skype that could come in and champion that, and champion a product vision for Skype as part of Microsoft has really hurt them. Yeah, the heroes of Skype are gone, and the heroes that are talked about in Skype and the talent offices and otherwise are the original founders. Yeah. And like the dudes from the newspaper ad. Yeah, and I mean, you even go, yeah, right. You even go and you look at the way that it's structured and the org now, like, it's under Redmond leadership.

1:11:07I mean, it's all over. It's these distributed offices in like six or eight places around the globe, but like long time Microsoft people that they report up to, that, you know, they're running it like the next evolution of Link, which, you know, makes a lot of sense, but it's, you know, it's very different than the Accompli acquisition. Yeah, so, and thinking back to what Kurt was saying, you know, that realizing that, Ultimately a lot of these things really are about the people. You know, that's what was not there in this guy's acquisition as good as the product is and the product market fit and even the financials So I think I actually net out at the same B minus like Would have been a bad acquisition but for some of these other factors we mentioned like finding a use for foreign cash It actually being a good business, but just

1:11:59So relative to the potential that it has, not yet realized. Okay, let's move on and do some quick follow-ups and hot takes. So follow-ups from our Android episode. Google recently held a big event and launched the Google iPhone. Otherwise known as the Google Pixel. Sort of unapologetically so. Their marketing copy mentions the iPhone or at least their press release copy does.

1:12:30It looks really good like all the reviews are super encouraging someone someone here at PSL got one The earlier today is so I'm excited to like play around with it tomorrow But like looking at the pictures to compare it against the iPhone 7 Not counting the portrait mode stuff all the flaws that I notice in the iPhone Photography over the years where it like it flattens things too much and it like loses some details and it doesn't have like the incredible high contrast in the textures like the Pixel's phone looks really, really good. And I'm excited to play around with it. And aside from all that, there's like, there's a niceness to that hardware that we haven't seen in non-Apple devices. And Android devices, yeah, and all the time. It's interesting.

1:13:16A couple of things for me. One, in our Android episode, the mobile wars are over. Google and Apple are not fighting each other anymore. And then a month later, Google comes out with the most direct shot at Apple that they've taken in a long time. But I still think the mobile wars are over.

1:13:35The but it's interesting in that episode we talked about the days when Samsung was just like unabashedly copying the iPhone and the design wise I'm ripping this off from everybody needs to go listen to the most recent episode of the talk show with John Gruber with host spent or with guest Ben Thompson of course we can't go an episode without mentioning Ben Thompson of course, but This is John Groober's line, but it's like it's like Samsung always acted like Apple never exists like oh Apple never heard of them, but look at the new phone that we invented Like it looks like sound like a beautiful new design that we came up with Yeah And Google's just not treating it like that, right? Yeah, and the really interesting thing and again totally Totally go listen to the that podcast episode, but Ben and John point out this really great point that This is a

1:14:25Potential change in business model for Google not only because like they're selling hardware and they normally are the you know, they just make the software and then the OEMs make the hardware but Google Assistant right now appears to be only available on Yes, and not on not it's actually not part of Android the Google Assistant is part of the phone and not part of Android So I think this is by far the most interesting part of Yeah, so so walk through this in a world where you use an AI. The AI is there to give you answers, not options. And Google's business model is predicated upon Giving you options some of which are sponsored options and in this voice world like the user experience of this we're shifting to you know when banner ads didn't work on mobile and we had to figure out what we had Like now we're shifting to this world where like search result ads don't work when people are asking their phone stuff so Google had this incredibly profitable business model

1:15:27And now there's a chance they might need a new one, if this thing that they happen to be very good at, which like this is like the Googleiest piece of technology of all time is creating this Google Assistant. This thing they happen to be incredibly good at is incredibly bad for their business model. Yeah, man, this is technology cycle disruption at work here. Right, right. So then they look to Apple for like, okay, what's a good business model where we can leverage the things that we're good at? And it just so happens that it might be that the things are good at being Google Assistant.

1:15:56Maybe they just have a really high marginal phone that include the Google Assistant. Yeah. Super interesting. So go listen to that podcast because I'm totally ripping those ideas from there and that is like such a good astute analysis. Various student analysis. Hot takes. Interestingly to me, I think the, interestingly, the least interesting thing to me that we are going to talk about today is AT&T and Time Warner.

1:16:23Yeah, I mean, it's 1999 again. What's all new and my senior research paper was about net neutrality, 42 pages of arguing why that is the most relevant and terrifying aspect of this. It just keeps coming back and every time we get closer to the telecom and the content and a gigantic content provider being aligned like this, you know, it scares the crap out of me. Yeah, but I mean, I think a little bit like God I hope knocking on wood. You know, it's a little bit like this election cycle like it's like you can't fight the forces of history and like you have these Wait, same more about that. How does that well like that? politically like we're moving towards a much more progressive Society like that's the direction that history is moving And if you're gonna fight that you're gonna be on the wrong side of history and just like

1:17:21that in this case, you know, net neutrality is the future and content will be unbundled, and Facebook is worth more than every old traditional media company combined, and that is the future. But what's interesting is that even though, you know, we can sit here and say like, that's the, you know, the right side of history, at times like these...

1:17:46Forces pop up that are total reactionary conservative You know go back in time make America great again And like, hopefully they will lose, right? But, uh... I love that you just compared, like, AT&T and TimeWorks merger to Donald Trump. I did that. I just did that, yes. Yeah, the slogan of this, like, year-long process of FCC approval of this thing is going to be Make America Great again. Yes. All right, we should just leave it at that. Let's talk about the Wirecutter. Oh, wait, um...

1:18:18We'll link to this in the show notes, but I tweeted a link to this article the other day that had an awesome graphic of baby, basically the baby bells getting built back together. It is so interesting to look at like the AT&T breakup and kind of the reassembly of the Terminator 2 robot into its form or glory. And it's super interesting to see how that works. I feel like I should say one more word about what I meant by make America great again.

1:18:48Time Warner has many good businesses within it, and it will continue to be decent businesses, especially HBO, probably a really good one. But like, by the minute, that world just becomes less and less relevant, like who watches linear television programming anymore, you know, movies are also undersea, like, there's the old world media companies and the types of content they produce, like, just don't have as important a place in a Snapchat world, you know. I like it. Okay. The Wirecutter, New York Times. Yeah. Great for them. God, the Wirecutter is awesome. And I don't think I've bought anything of significance that was not researched on the Wirecutter of the Sweet Home in years. Yeah. So awesome. It's a great site. And I'm an unabashed fan of the New York Times and it's great to see them land in one of the media.

1:19:41Institutions that has figured out how to come into the modern era and like to your point earlier go with the the version of the future and I think like The New York Times had a lot easier than many smaller regional papers because they were truly a destination site They had a brand built up people were gonna go there without having someone without someone needing to share content with them They you just go to the New York Times because it's the freaking New York Times, but like Love seeing how progressive they are in, you know, experimenting in VR and buying sites like the WireCutter. And there's just watching before we were diving into the show. There's a great interview with Brian Lamb, right? Yeah. Yeah. With Brian Lamb talking about how he loves doing what they do with the WireCutter because rather than writing news, he's writing something that just helps people. He's like,

1:20:35This is a thing that people find continual value in over and over again. We figured out when to refresh it, what to refresh it with, how to tell people that we've refreshed the guides, and we just build a solid, long, like, many multiples of hours longer than anybody would ever take to write a piece. And it's a...

1:20:58phenomenal piece of content that's super engaging that actually helps people and You know, I think it's interesting. We'll see as they start to bundle it in more with the New York Times coupling some of these buyers guides with More investigatory pieces and the example he uses is like It's like, why can't anyone make a good Wi-Fi router? Is the investigatory piece that someone writes? What happened with the Samsung Galaxy Note 7? Right, right. But then coupling that with a buyer's guide for wireless routers or phones, like what is actually the one that you should go by? And I think we're gonna see, you know, the continued evolution of digital journalism. All right, with that, should we do a carve out? We should. Although I feel like I'm just sitting here doing carve outs for the last few minutes.

1:21:46I read, finally got around to reading the super long form piece from the New Yorker called Sam Altman's Manifest Destiny. Oh, it's a great article. Yeah, it's like, it's interesting. So for a little background, Sam took over a Y Combinator from Paul Graham and sort of like revamped the whole thing, made it significantly larger, opened up new divisions, hired a whole bunch more people, and frankly expanded the scope of the ambition significantly. Hugely, yeah.

1:22:15And you either really buy into it, or you think the pieces of Megapuff piece, but no matter what, reading it leaves you with this mindset of a widened ambition and thinking about, like, uh-oh, I've been thinking too small. I love when things reset my perspective like that, so highly recommend it.

1:22:37Yeah, really really good piece also highly recommended regardless of what you think about YC or about Sam and I fall on the side of like I think Everything Sam's done is is I'm on team Sam. So yeah, I agree like The not everything he's doing will work and that's the point right that you can't be to have that scale of ambition You know, you need to be comfortable with failure and that's Eminently laudable. May the failures be colossal and the success is even more so. Yeah, totally. Great piece, go read it. My car about for the week. Super fun one. One of my...

1:23:15Really good friends from business school Jake Saper who is a venture capitalist at emergency capital is the star of the hottest thing to hit the Bay Area and Silicon Valley Since Silicon Valley and that is so much the musical no way yes, which ironically Jake is the star of the show and he plays the entrepreneur in the musical opened and ran in San Francisco last week and was a huge success so big shout out to lots of articles you can go read about it we'll link to some big shout out to Jake and very very well done Hopefully coming to a Broadway stage near you soon. That's awesome. Yeah, if you want to see a great show or you know talk about Enterprise SaaS, go talk to Jake. Yeah, totally. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yep. In the

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