Acquired - The Steve Ballmer Interview

0:00All right, so David Steve gave us the signed Clippers jersey with the name acquired on it. There's only one jersey. What are we gonna do about this? So we rock paper scissors for it. Well, you know what? No, no, you keep it. There's no Seattle basketball team. Oh, keep it there. All right, all right. It'll go in a acquired museum north. Great. Perfect. All right, let's do it.

0:28Let's do it. Welcome to episode one of the summer 2025 season 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.

0:59Steve Balmer is, among other things, arguably the very best investor of the last 20 years. It sounds a little funny to frame it that way, but here are the numbers. In 2014, when Steve left Microsoft, his net worth was $20 billion, almost entirely comprised of Microsoft stock. Today, 11 years later, it is a staggering $130 billion according to Forbes.

1:25It is incredibly rare to reach this stratospheric level when you are a not the founder of the company and be no longer CEO or even employed by the company and all of this comes from just one investment decision just keep holding substantially all of his Microsoft stock. Incredible. We chat about it with him in the conversation to come.

1:49Now, as most of you know, we did a big two-part Microsoft series last year on the history of the company up through when Steve transitioned the CEO role to Satya Nadella. Steve listened to those episodes and he had some thoughts that he wanted to share with his recollection of how things went down, you know, things like what made Microsoft so fabulously successful, what his missteps were as CEO.

2:12We wanted to share that as a recorded conversation with all of you. So we set up our cameras and our mics at his office, his philanthropy office, Baltimore group in Bellevue, Washington. And we pressed record. So we'll go into everything from the misses on mobile, search, social, the huge wins in enterprise and cloud. Steve also reflects on his business lessons learned. He goes into why he stepped down as CEO when he did. And he talks about his relationship with Bill Gates over the years.

2:41And of course, we had to talk with them a little bit about the Clippers and the new arena that Steve built and personally owns too. Yeah, into it, though, incredible place, a cathedral of basketball as Steve would put it. Listeners, if you want to know every time an episode drops, check out our email list. It's the only place where we will share a hint of what our next episode will be. We'll share episode corrections, updates, and little tidbits that we learn from all of you about previous episodes.

3:08Come join the Slack to talk about this with us and the whole acquired community that is acquired.fm slash Slack and the email list is acquired.fm slash email. If you want more acquired between our monthly episodes, check out ACQ2. We just released one with Zach Paray, the co-founder and CEO of Plaid. And we've got some banger ACQ2 episodes coming up. Yes, we do.

3:33So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only on to our conversation with Steve Balmer. Well, Steve, first of all, I noticed you prepared some printed materials here for us. Listeners should know, we didn't ask for this in any way, but at 10 p.m. last night, you sent us a PowerPoint death and said, I made you some slides. Sorry, it got here so late. And Dave and I are looking at each other.

4:02We didn't ask you to prepare for this. Thank you for the materials. Oh, it's just some stuff that I've used kind of which thoughts about how businesses work. And I kind of think of this as a time to reflect on things I've learned primarily at Microsoft, but also the clippers about business I figured out.

4:21I'll send him to you and their PowerPoint. That's right, you mixed a few different templates. Always a cheerleader. I think the word cheerleader is actually in the PowerPoint deck though. Well, Steve, speaking of reflecting, we sit here today, Microsoft is the most valuable company in the world, almost three and a half trillion dollars in market cap. And I think everybody would agree it's an enterprise company.

4:51And that's largely thanks to you is reasonable to call you the founder of Microsoft's enterprise business. That is not a narrative that is often discussed. And we wanted to ask you, how do you feel about the fact that it basically defines the business today? Yeah. Interesting. Very kind. Fathering something. I feel good about that. And I think there's a lot of truth to that.

5:20of course there are many fathers to the enterprise business at Microsoft and I feel both good and bad about it because the truth is Microsoft started out as a consumer company and we built a very important consumer business that success translated into the opening to go build an enterprise business and one of my regrets is we lost the consumer muscle along the way because I think the ability to be Ultra ultra I mean we're a great company Microsoft's great company But to have both of those muscles totally firing if I'd been able to sustain that consumer muscle and and I had some ideas about why why that didn't happen but the enterprise muscle And so I'm very proud of that and the fact that you know, it's also funny when you say consumer enterprise

6:19What does it mean really to say enterprise? Sometimes it can sound just like back end stuff. And the truth of the matter is Microsoft Office slash M365, whatever exactly it's called today, is super important. It was the foundation for having permission to be in the enterprise. And yet it's a product that sits right there in front of users. So the question is do you think about users or consumer?

6:48and do you think about enterprise or do you think about it? And then there's developers that span both and that's kind of my mental model. Do you have products that appeal to consumers that it can handle and a platform that lets developers build around those and based around those whether they're building for users users and it or in some instances just for it people because there's a lot of tools that are Just for IT people. Yeah. Well, to contextualize all this, we want to go back almost all the way to the beginning, right around the time you joined Microsoft and talk about Microsoft's relationship with IBM before the IBM PC and before DOS. Can you catch listeners up who weren't around at that time? What was IBM in that era? Yeah, I think you called it in when we were talking to you for research, the sun, the moon, and the stars. Yeah, I did, I think.

7:48Well, it's 1980. When I get here, the company started obviously in 1975. And there were IBM computers. Oh yeah, and a couple others. But literally people would say there's IBM and the bunch. And the bunch was Burrow's Univac, NCR, control data, and Honeywell. But there was just the bunch. IBM.

8:15and IBM did the mainframe and it did the software and it did the service it did everything in computing everything everything and then you have this little upstart try again called digital equipment yep very important in our story because Dave Cutler who was kind of the father of NT Windows NT he came from digital equipment and they were they were fighting they were scrappy they were many computers so smaller than a room but definitely bigger than a PC, if you will. And all the initial Microsoft software was developed actually on deck computers, digital equipment equals deck. And deck had a nice business, but it was a lot smaller than IBM. If IBM breathed, that was the direction the computer industry would go. And IBM was the subject of an antitrust lawsuit, shockingly, in 1969.

9:11that didn't actually get settled. I think to shortly after I got here in the term of Reagan. So 11 years they'd been living because they were that big and bad and mighty. And what was the result of that antitrust action? What did they have to do? I don't remember. Maybe when they had to unbundle. In fact, I think it was when they had to unbundle the operating system from the mainframe hardware. So people could build IBM compatible mainframes.

9:41And then one day shortly after I got here some guys from IBM call and they say hey, can we come see you? And you're gonna have to sign an agreement that says you can use nothing we tell you anything you tell us we can use And so these guys showed up and they told us after we signed their agreement that they wanted to build a PC and they were hoping to get the operating system and some of our language software for it and they were coming to you for the language software. No, they came to us for the operating system. Now, why you'd say we weren't in the operating system business. We had a card called the CPM softcard or the softcard for the Apple 2. It was a card that plugged into an Apple 2 that ran CPM, not our operating system. Gary Kildall. Gary Kildall. Digital Research was the name of the company.

10:37But we had licensed it to put on this card that plugged in the Apple too. And somehow IBM thought they could license CPM, even though it wasn't our product, they thought they could license it from us. And we said, no, no, no, but you can license our language software, but they're these guys down in Pacific Grove, California, you know, and Bill called Gary Kildall and said, there's some guys they want to talk to you. They're important. And Gary, they went down there.

11:07And they didn't sign the non-disclosure agreement. And then in the meantime, there was a company here in Seattle called Seattle Computer Products that had a little CPM clone. And so the licensing of Microsoft DOS, which didn't even exist when IBM approached you about licensing some things, is the single greatest business deal in history.

11:32The licensing of that software today. Well, I just think you look three and a half trillion dollars later at Microsoft's market cap. This takes start in a while. Pretty good. There was a company that happened to be here in town. Paul, Ellen and I went down there and we met with the founder who later came to work in Microsoft, again, named Kim Patterson. And we offered him, I think we paid 45 or 49,000 for this operating system, because we told IBM, no, no, we can take care of it. There was kind of a famous meeting amongst me and Paul and Bill and this guy, Kazahiko Nishi, who ran our kind of affiliate in Japan, where we were talking about this. And there was a lot of, let's just say four letter words thrown around. Scrooom. Scrooom's five letters. But you get the, you get the drift. Scrooom. Let's just go get this operating system. Scrooom. We can do this. Let's go.

12:30That was kind of the theme. Kazoo was kind of a cowboy. He was kind of an absolute cowboy. So we went, we sold it to him half of what we paid for it with. We can do this 10, 20 times, 20 times 21,400,000 against 50,000 we paid for it. Pretty good deal. It was a little better than that, if you said it. Talk us through the structure and how you guys thought about this.

12:58Yeah, I'm sure you're right. You did not make a lot of money directly from this deal. No, we did not. We remember the key thing was we didn't charge for the operating system on an ongoing basis. We charged for one time. If you got a new version, we charged another time and we did the same thing for basic and everything else because at the time you could think we were like a substitute for an R&D department, which means we were fixed price.

13:27It was only, I don't know, four or five years later that we actually switched to licensing per unit as opposed to just fixed fee. Here it is, past once and we're done. But the ultimate thing that you guys negotiated was a non-exclusive deal. You could sell this operating system and your language interpreters, but also mainly the operating system, to other manufacturers. This is IBM we're talking about here. But IBM wanted this.

13:58IBM, they were experimenting with a different approach. They said, look, instead of us building everything, all custom, we want to use some industry standard parts components because that'll let us be more agile, et cetera. So they didn't come in, loath to any of this. They knew that was our business. They know that was digital research as business. And you know, they wanted to use an Intel part versus their own proprietary part. They didn't ask Intel to do them a custom part either.

14:28The notion was we'll move fast, we'll get away from the IBM bureaucracy by taking this approach. So I wouldn't say that was the hardest convincing if you will in the story. But what ended up happening after all these years, and I imagine it only took a few years to see it, play out was IBM sold a ton of IBM PCs. And DOS was the operating system. And then Everybody else adopted DOS because all the application makers, all the software vendors, were targeting DOS as the platform. And so Microsoft sort of accrued a huge amount of benefit. You became the point of integration. Yeah. And the old world IBM would have accrued that sort of platform benefit. Did they see? They were selling a lot of computers and making profit also. They would have been making more profit than we were at the time, just the way pricing worked.

15:23There was a little twisty in here though I should throw at you if you're curious. These things had something called the BIOS, basic input output system, which was the lowest, lowest layer. So a firmware, sort of first level software built into the hardware. And IBM had its own BIOS. And some applications became BIOS dependent. And so then the question is, who was going to do an IBM compatible BIOS? We weren't going to get into that game. We didn't want to have that.

15:52Intellectual property, other arguments, but there were people then. Compact was ultimately became the big company. Compact became the big company. I don't remember whether they wrote their own. I think they were incompatible bias, but they were the first one to be IBM compatible. There were plenty of people who ran MS-DOS who were actually not IBM compatible because they didn't do a compatible bias. I see. So IBM sort of thought, oh, we've got some protection.

16:19from Microsoft kind of disintermediating us from all the developers and all the potential customers, because targeting our BIOS is going to be important and unreplicatable. Yeah, one thing you have to remember, because we live in the modern world now. When you say all the developers, that wasn't a luck list.

16:42There was no software industry to speak of. There were a couple of software companies that made packages for IBM mainframes, but almost everything was custom. So really, I would say we, a few other companies would say we, we defined what a modern software business looked like. And the notion that there could be lots of developers and there were some, but it's not like we think today.

17:10Oh, there was developers doing lots of standard applications. No. And there was no licensing, no business model, no, no nothing. Physicalque was around. So it would have been counterintuitive or required too many mental hops to think where IBM, waiter, we giving away the future by allowing someone to distribute a wide operating system that ends up being the target that everyone standardizes on, which eventually created All of modern Microsoft exactly and it just You sort of can't blame them because there was nothing to build off of but yeah One of the things my little PowerPoint here says is luck is important in the creation of great companies It is and a lot of people you know sort of say we're masters of the universe. We figure everything out. We never have any luck

18:04And it's because we're so talented. Sure, there are talented people and hardworking people. Most people have a little luck in their story, and this was our big luck. Clearly, but when you were negotiating this, signing it, and then those first couple of years before the clone market really took off, like, did you think that this could happen? No. I can't remember what year it would have been. But Andy Grove, who was running Intel at the time, said, Yeah, pretty soon we'll be selling 100 million PCs a year. I don't know. Sometime in the 80s, I don't think it might even been in the 90s. Bill and I laughed and said, ah, that's not going to happen. We invested big time. And if it did happen, we said, that's great. We're not going to under invest. But we thought, ah, he's crazy. This market will never grow like that.

19:02I would say we classically under forecast that was kind of our tendency. So the deal gets signed with IBM. You end up shipping DOS. It goes on the IBM PC. It's selling like gangbusters. When did you start to realize? Whoa, what we have here is actually leverage over the ecosystem. We actually are becoming the important layer that ties this whole.

19:30Computing world together with the operating system. I think by the mid to late 80s. I mean, you make it sound very strong. No, we didn't feel very strong. There was IBM, man. IBM was still the sun, the moon, and the stars. That didn't change. I would say we didn't drop that theory. Well, well, into the 2000s.

20:01into the 2000s, Lotus Notes was coming for us, and that was mid-90s and beyond. But maybe you could say late, but we were in an enterprise company. If you looked at the enterprise, the enterprise was still IBM. We used to say, we had to hang on to IBM that if we ever let go, they might trample us. We called them the bear. We called this bear. You had to stay on. And of course, graphical user interface. It's...

20:30Kind of coming out of Xerox Park at the time and you know apples doing their thing and we start That's another disruption could blow everything up. So I would say No sense of confidence about controlling the ecosystem well into the 90s before I think any of that or at least for me When did you start to feel like we're getting out from under the thumb of IBM?

21:00And maybe walk us through a little bit the OS to Windows world. So we've been staying with IBM. They decided they wanted to build something that was sort of their operating system and sort of not. This is 82.83. We and they would collectively build part of it. We would be able to license it to others. They would build a value add layer that was a database and a 32.70 emulator.

21:29crazy to say now. We were going to work on the operating system and what was called presentation manager called that the graphical user interface. And they were going to have rights equivalent to ownership in the code. We wrote. This sounds so convoluted. It was so convoluted. Man, there was a time when I made 16 trips to the East Coast in 16 weeks. Most of them to South Florida, a couple of them to New York, leave on the red eye.

21:58The Delta Dash flight at around 11. Get into Atlanta around five. Get the flight to West Palm Beach at about seven. Get in and be able to be at a meeting at nine o'clock at IBM. And then work all day, catch the seven o'clock flight home. Be here about 10, 30 or 11, 24 hours down and back because you're building something together. Remember, there's no real email at the time.

22:24We were literally shipping desks back and forth and then they decided they were going to do the presentation manager piece in England. So there were also been a lot of flights to England. So we're trying to and then Texas is where the database and communication sub- IBM. This sounds like Boeing. It was the joint development agreement and it was the price of staying involved with IBM and it was convoluted and we did then keep for speed of action, we kept going on Windows which we had started. For listeners, everything we're talking about is OS2. OS2 rating system that basically never comes. OS2 extended edition or something which had their editions. And Windows was like your plan B. It was like your side. No, Windows was our plan. And then they wanted to do this new operating system and we convinced them. You got to have a graphical user interface. And we tried to sell them.

23:23Windows and they were resisting. Okay, so it almost seems like you're humoring IBM at this point with yeah, let's do us two together. We really think there are windows. Hey humor. It's more than I would say. You know, my job was managing by that system software.

23:43So I'd Windows, I'd Shipwin, I'd been the development manager for Windows 101. The great videos of you from the Windows 1.0 launch. But that's the sales side. I actually managed the engineers. Yeah. Because the guy was doing it wasn't being successful. And we had to ship the thing. And so that's when I learned some about engineering management from the engineers, basically, had to teach me to be effective. We're trying to keep with OS2. Bill's very frustrated.

24:13with IBM. I'm frustrated, but I know my job is to ride the bear. And so Bill's pushing Windows hard, but we still suspected OS2 could be the winner because it came from my IBM, but we couldn't just like stop for three or four years. We couldn't make the mistake we sort of made in the thing that became Vista. Vista. So we kept going with Windows, we kept going with OS2 and then May 1990.

24:42They come along and shoot us. I was out running with my wife. Wait, IBM shot you. Yeah, they divorced us. They threw us out. I thought the story was you all windows was getting gathering strength and you all thought like, you know, maybe we can step out from the little brother. No, no, no. No, they had a new leader by then. I got named Jim Canavino and He was getting frustrated with us because we were still selling Windows we were still promoting Windows and they I mean look this was our first any trust problem I don't know if you guys know this is the FTC at the time but we and IBM were working to Divide the market because we had done some positioning what's Windows good for what's always too good for we and IBM had done that because and then they said no you guys are colluding

25:35And that's when we first got attention from antitrust authority. This is even before the per-processor licensing issue. Yeah, that came later. That came with the DOJ. This was an FTC case and they started it in basically 90 just as we were getting I think 90 maybe 89 as we were getting our divorce. My wife and I were remodeling our house. We were living in in a condo.

25:59We stopped on a run, use a restroom or something. I pick up the Wall Street Journal and I read that IVF's divorce, I guess. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, LaGora, the agentic operating system that is redefining how the world's best legal teams work.

26:18Yup, 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. Legora 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. They embedded inside a massive law firm.

26:45for 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 drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed 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.

27:14And 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 LaGora 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

28:06Plenty 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.

28:32And so what does that mean walking away from? Huh? Basically they kicked you out kicked Microsoft out said where we're taking OS 2 in house Exactly Exactly And so you're sitting there windows isn't powerful windows yet windows is this fledgling kind of idea We still had something called the 640k barrier. You can speak to more than 640k of memory. We didn't break the 640k barrier Until I think Windows 3.1, which I want to say was 91 or 92. So you're on this run. You see IBM is divorcing us. You don't really have confidence in Windows yet. What are you feeling? And what do you think the past is possible? Oh, shit. Oh my god, we were so... We were so... You could say energized. If you like, scared also works. It's like, oh my god. Now we have to confront the bear.

29:32You're already like a billion-dollar business at this point. By 92, you end 92 at 2.8 billion in revenue. No, IBM, but still. But you're still the PIPsqueak. We're still PIPsqueak to IBM. And remember, we have no enterprise presence. And IBM has all dominant enterprise presence. So who's using Windows and how are you selling to them at this point? Interesting. Single copies. Some hobbyists and end users, somebody who says, hey, I really want to use a spreadsheet.

30:01and a lot of users in enterprises. So it wasn't going through IT. You'd have a user that would buy a PC on the expense account probably for the department, buy a copy of Windows, buy a copy of Excel, like at an egghead software, it was a software retailer at the time, and bring them in and use them. And then IT started to get nervous about that.

30:28We knew most of the copies, not most, but many of the copies were winding up in businesses. What the hell? IBM's gonna stop us like a bug. You just took as a given assumption that if IBM wants to stamp out this happening, it's gonna happen. So if we want a future, we got to play with them. Yeah, that's why we're quote, writing the bear the whole time because they'd stop us out and they divorce us in 90. And then we say, oh my God. Okay, so at this point, Your business, even though it's, you know, billion plus scale, it's selling to retailers, to sell software copies of, software, DOS, Windows, languages, apps. Not DOS. DOS was always sold to... Oh, yeah. Yeah, not always. But so much the lion's share, it's worth saying, it was only sold. Because you needed a BIOS. Remember. You needed a BIOS. So you had to have the hardware vendor build the BIOS into the machine, basically.

31:24So you've got that the OEM business, which was the biggest part of the business. And then we had this retail business. And there was no notion of enterprise license. You've got no CIO relationships, no enterprise agreement, no. We had a couple CIO relationships. The Air Force was the first big Windows customer. Your first enterprise customer was government? Our first big Windows customer at least as I remember it was the US Air Force. And they were buying single copies of Windows.

31:54You know, when you say government, there's really two governments in this country. There's government and there's the military. And the military's a ver is a much more disciplined, advanced user of IT. They're just, they're just better. They're more professionally run than most parts of government. So yeah, it was the Air Force. So you got like a little bit, but we had like one or two customers just to prove we could actually serve big customers.

32:22As we understand it, you kind of had this realization at this point once the divorce happens, well, I'm gonna go figure out how to do what IBM does. Like, you personally. And to put a finer point on it, the thing that we said on our episode, and I'm curious if it's true or not, is this was not Bill's passion area. And you sort of raised your hand and said, I'll go figure out enterprise sales. Oh yeah, no, no, no, that's for sure true. Bill's passion, Bill had passions a lot of places. But you know, you'd say, The apps group and what Windows could deliver to the apps quite appropriately. I'd say that's where a lot of bills, brain cycles went. I had also hired Dave Cutler. Dave Cutler had been the architect of the VMS operating system for digital equipment. We had DOS and Windows and when we were talking to Cutler about coming here, he says, I don't want to work any toy operating systems.

33:20And I had to say to Dave, good thing because we have a toy operating system. But Dave is the key to getting us there. You know, we said, look, you got to build an operating system whose API looks like Windows and whose user interface looks like Windows. So developers can be familiar with it and write apps for it. Yeah, and you might make some changes because you have to, but it's got to be a robust operating system. It's got to have a secure kernel. It's got to have.

33:48all of these things the product set that you had wasn't really enterprise grade yet now we had a joint development agreement a joint agreement on land manager with a company called three com it wasn't all our stuff we had a development agreement with a company called side base to do the sequel database because we're trying to figure out all these pieces IBM would have And we didn't have any of that. An operating system alone is not going to do it. You need all these other components. And if you wanted to have back end infrastructure, we started scrambling on that in the 80s. So we had all these infrastructure pieces that we had to build if we wanted to sell to, I'll say business customers, we weren't even thinking about it. And when you say enterprises, sometimes people think very large companies, but we couldn't sell the companies of 20 people without some of this for 50 people. You talk a lot now about

34:40this sort of management concept of building muscle. Is this where this came from? That you should always be, you used the phrase in the weight room, building muscle ahead of what you need. Were you in bill thinking this way in the 80s of like, hey, we need to be building up this muscle across all parts of computing and business computing? Well, Paul Allen, I mean, Paul's the key. Paul is the one who said, we're never gonna be a hardware company.

35:10and when the Altair came out, the first real sort of microprocessor-based computer. Paul says, okay, let's write all the software that these things will ever need. So, Bill and I had a lot of the execution around that, but that was the push. So, Paul was cracking on me in the early 80s to start building an app group. Come on, Steve. Come on, Steve. It's not just systems. We need to have applications also. Any code that executes on a microprocessor We should have a player in that market. And there was a physical expert. She, come on, stay word processor. Come on, come on, come on. Let's get the talent. Let's get going. And, you know, we were doing mostly college hiring at the time. And so, you know, okay. And then we met this guy, Simone, who had been at Xerox Park, Charles Simone, Charles Simone, exactly. And he came, we met him through a mutual friend at three comp corporation who had been at park. And he really was the first leader of the apps business.

36:09But we licensed me look, we were to the other people the way IBM worked with us. Right, we went to side base and three come and let's work together and it wasn't exactly a JDA joint development agreement, but you know, we were to those guys, the way IBM worked. I mean, look, the analogy now is a little bit Microsoft working with open AI. You know, when the big company works with the new company.

36:38How does that all play out over time? But I took over systems off for an 84. So that's when we're starting all this stuff. And you could say I was a little bit more enterprising. So yeah, I'm looking at your chart here that you made for us. You've got 92 to 98 title lift off. And that's after the era where you talk about enterprise start. And you have your role switching from Your role is OS division in the previous era to sales. The liftoff there, those mostly on Windows and applications. The liftoff isn't really enterprise. I mean, look, it was not until the late 2000s. People would say that you guys might find this funny or maybe even know it. Customers say you're not an enterprise company. You're not an enterprise company. As late as when? Oh, late 2000s? Really? Absolutely.

37:36Absolutely. You're not enterprise grade. You're not enterprise ready. Oh, I heard that so much. In 2005. Yeah. I had Oracle out there. Remember, there were still mainframes and many computers and people, you know, those things were enterprise ready. IBM had product still. You didn't have enterprise support. You know, our licensing, we had to evolve in the early 90s. And then again, in the late 90s, No, we didn't have those things. So no, we weren't an enterprise software company. It was the late 2000s. Certainly it wasn't before 2005. It wasn't the beginning of my tenure. We were still trying to prove that we were an enterprise company. Now I just find it cuckoo that all Microsoft is characterized as an enterprise company, which I'm not, I mean, I think it's more complicated than that, but I'm not going to say that that's not the primary muscle for sure it is.

38:33But, you know, me, the company, I mean, I was hellbent and determined to prove we were an enterprise company. Why was that? Why did you feel like this? Let's call it 92, 93, 94. Why did you feel like it's so important for us to attack that market? Easy. Because that's where IBM could probably squish us like a bug. If we couldn't sell our stuff to businesses, only to consumers, we knew that by then.

39:03We only get so far because enterprises wanted some features and enterprise don't like, you know, okay, you can go to computer land and buy a few copies. And the consumer market, I mean, we're pre-mobile, right? So like, pre-mobile, the consumer market, a pre-internet, yeah, is big, but like, it's nowhere near IBM's market and the enterprise market. By revenue, no, for sure not. So we've talked a lot about the products.

39:32Let's talk about the go-to-market motion and this sort of invention of the enterprise agreement. What are the key pillars that you sort of came up with for the enterprise agreement and why did they exist? Okay. Our first sort of software pricing packaging model for the enterprise was not the enterprise agreement. First, it was, you know, we sold you discs.

39:57Second, we came up with this notion of what we called select licensing. And you could make your own copies. And you just report how many copies you sold. And that's right with the challenges here. You tell us how many copies and just pass what you did. The enterprise honor system. Estonishing. And that's of windows, that's of office, that's. Windows typically by then came with the hardware.

40:27So you're mostly using the OEM channel. For Windows, yeah. Okay. Yeah. Even to this day, you know, upgrades and stuff are sold direct enterprises, but, you know, basic computer that comes to an enterprise would have the operating system license to the OEM. And so we were on, you can call it the honor system, but we just couldn't make people like buy disks from us or CDs from enterprises didn't like that. So we had this thing called select and select had two problems.

40:57with it. Number one, very hard to copy the software you print. And number two problem, we were selling upgrades and new licenses. And upgrades were less than half the price of new licenses. So what does that mean? The company was headed to a world where its revenue was half of its existing revenue. Yeah, unless you're growing new customers, new logos, fast enough.

41:27So it was a real problem looking thing. And Bill and I, we'd always dreamed of this thing where you get some recurring revenue. And then we came up and say, okay, well, why don't we just do a license that you didn't have to count the number of licenses you printed, just the number of computers made like simpler? And we said, instead of doing, say a new license, and then God knows when we would sell you another upgrade or whatever.

41:54We'll do something that just says, hey, look, you sign up for three years, you pay us, you know, per machine, and you just pay us the same amount of money each year for three years. And it sort of let us jimmy up the price of the upgrade. Yeah. Yeah. Yeah. So we're starting to get every problem. And we solve the difficulty of administration problem. And that was the enterprise agreement. And was it from the beginning of you get everything?

42:23No, that was a special enterprise agreement. So you got all the upgrades during that three-year period to the products you licensed, but you were still picking and choosing, oh, I want to sell. Oh, I want to serve encouraging you to buy office. Yep, but we also had this all you can eat license. I can't remember what we called that, but basically then I think you kind of the number of employees and you could use any of our software for anybody. So we just tried to go simpler and simpler and simpler in the administration.

42:52Recurring revenue that didn't decline over time and You know sort of as much as you wanted to eat the upgrades everything We did want essentially what you have now Which is recurring services business, but we didn't have the cloud we weren't delivering things, but we're already on that path I think we started the Energizer you guys mentioned what we do with Energizer, which is where we wanted to run their IT department Right, they were the pilot customer for this concept, right? Yeah, they were the first customer. I talked them into it and this is beyond the enterprise agreement. This is where we actually want to run their stuff because we did want to get to this recurring revenue thing. And David was referring to this concept earlier. We talked about it a lot in our Microsoft episode and then in our Epic episode, this sort of genius idea of you will get included in your license a whole bunch of software, even if you're not ready to use it yet.

43:49So if at any point you're considering buying this different software package from this other vendor who's a, you know, they just make this one thing. Yep. And then they look in their paperwork and they're like, oh wait, actually we get that from Microsoft for free as a part of our, the thing we're already doing. Let's just do that. And as long as you're developing a lot of software every year, you can sort of indefinitely just make more and more and more stuff so that your customers don't need to look elsewhere as they expand their software needs.

44:18How did that come about? Start with office. When we created office, that bill really drove that in a great way. And we're selling Excel Word PowerPoint. And then we put these things together. And people would complain. And we didn't always sell office because people say our users don't use Excel. So we don't want Excel included. OK, we had a licensing option for you, but it became easier and easier.

44:46people, then departments, departments always, and we're in running IT at the time. Still now I think. So we did sell you things that you might not be using, but also if you're trying to, you know, depart, the departments, we already got it all for you. You may want something different than this department, but, you know, we got it all for you. That was an attractive thing for people. And, you know, there's an insurance aspect that I learned that IT people really want. They want peace of mind. That's part of what it means to be an enterprise. I want to make sure everything's secure. I want to make sure that everything is well managed. I want to make sure everything is well paid for. I want to make sure there's somebody to call if things go wrong. I want to make sure I bought everything. I don't want to look bad because either I paid too much or I...

45:45You know, I have holes in what I bought for people. So I view this and I might, I probably evolved my view to this over time. When you sell the enterprise, you have to provide peace of mind, which is kind of like an insurance policy. So buying more than you might be using or some users are using, it's an insurance policy. And software has zero marginal cost and zero distribution cost. And so we're happy to mill you a few more discs if you need them.

46:13But we weren't even mailing this by then because we had the enterprise agreement in place. So at a certain point in the way, you get to, well, I want to say the Holy Trinity, but I think there are more than three pieces of this, but the real killer suite in enterprises, which is Windows, Windows Server, Active Directory, Exchange Office and all of these pieces of software, all work in orchestration to run your enterprise. You know, your users, they do their email on Outlook, which is part of office, which runs on Windows, which uses Exchange, which uses Active Directory, which is a server, Disequal Server, all these things. How long did it take to get to that point? And what went into where, I mean, to my mind, that's when the enterprise is firing on all cylinders here.

47:10Okay, so that really comes with email boom an email boom is late 90 slash beginning of 2000s because email sort of the cart that pulled the whole yeah, no, it's the locomotive Enterprises wanted email. Yeah, when Accenture became a company. We started a joint venture called Avonod to help do essentially the Holy Trinity to help install because we needed support infrastructure and partners who knew how to set up the servers, provision, email, put all that in. We needed partners, and we didn't have enough capacity. And that's why we started this thing, Avonod, which is a big, big company at this stage, with Accenture. And that was in the 2000s. I went on the board of Accenture. But all this to say, the way you could kind of pitch an enterprise is,

48:04Rather than any of these other value propositions, David listed off a whole bunch of software. You could say, you guys want some email, right? We have the most reliable robust way for your enterprise to adopt email, and it's going to come with all this other great stuff. Everything was nicely integrated because remember, you needed active directory to manage file shares, to manage printers. It was used for a lot of different things. It really did all.

48:33kind of come together as kind of the integrated proposition. Like you said, you guys, you guys sort of made fun of the notion that we called all that stuff, the back office as if that was the minute. It was trivial. No, no, no, so wrong. So wrong about that. We took that as a signal that Bill just didn't care about this. Oh, completely not right. I wanted to call it the back office because you needed to buy the office and the back office. And the user, the consumer, saw the office, and the back office was the things that were in the server rooms, slash data centers, but a lot of them were server rooms. It's the same thing these days, but cloudized. As we were preparing for this, there's a bunch of big questions that we just desperately want your take on. A big one is around one of your most iconic moments, 1999, the developers, developers, developers, speech.

49:30I probably watched this clip 20, 30 times. Almost everyone listening has seen this clip. What is missing from this clip is all the context around Microsoft and what's going on in the world at this time and what you need to accomplish as a leader of this company. Help us set that stage and then understand why you went on stage that way. Remember by this time.

49:55We're not through our IBM competition and we got Linux competition now on the docket because Linux is competing with Windows server Linux is competing with Windows and there's a thing called open office open source software for office is competing with office So we have all these things going on we haven't beat Lotus notes yet, and you've got anti-trust count We have antitrust issues of course by then the culmination of the DOJ suit is happening within 12 months of this moment Correct, but I mean, it's clear in all these competitions the thing you need is third parties that reinforce what you've got add value around what you've got and I could say run on your platform, but I'll come to that later if you want to what a platform is and isn't if you want to do that. It's kind of interesting. I think Yeah, particularly since everything's called the platform these days, but anyway, so taking a side here give us your definition of a platform. You could call it

50:54anything that is extensible. And it's the extensibility that quote makes it a platform because you're going to get people to extend the value you add. The question is, and the reason that's important is applications are platforms too. Not just developer platforms, and people say that they might mean Azure, AWS, or in the old days, Windows, or Windows Server, or Unix.

51:23Then Linux yes, those are platforms you extend them, but you also extend office You add value partners plug in they write applications. They use the file formats all of this stuff is platform and Part of the issue I think for Microsoft is if you see yourself as just a platform company A, platforms need apps. You want to have the top first party app that runs on your platform. Otherwise, your platform can't get good. Office was the best first party app on Windows. And that's how things get good. Outlook was the best first party app on exchange. There were other clients at one point, by the way. So you really do want extensibility in your apps in addition to your quote platform.

52:23You want to make sure you own first party app in addition to, quote, platform. And I think you can get stuck in the mud if you say we're just a platform company. And I think we got it into our corporate mindset that we were, quote, a platform company far more than I ever intended. I mean, there were people telling me in the mid to late 2000s, well, we can't do that. We're a platform company.

52:53I said, yes, we can do that. And by 2010, I was just frustrated with myself and my inability to get people out of the, we're just a platform company. And I think to this day, you have to think app with platform. You have to think extensibility of the app and the quote platform. And I think we got caught on that.

53:20Maybe I got caught on it for a while and I certainly got caught in my inability to tell people what the company needed to do, because people had such a culture then of saying we're a platform company, we're a platform. And so now go back to developers, developers, developers. I'm trying to tell people at that time that third parties really mattered. And you got different opinions inside Microsoft. And what event was this?

53:48at a developer conference, I think. So it's for external developers. And, you know, whose Windows number one client? Is it Office or is it all developers? You ask the Windows team, it's all developers. You ask the office team, come on, you got to do for us what we need to do. You have to be able to communicate that you really care.

54:10about developers who are not your own that you really want these things because they may think oh it's all about running Microsoft office and just had to tell people we want you we want you we want you we want you and I think we got caught in thinking it's all about third parties and not also about our first party apps and that's where you say are you a the word consumer sounds like unserious are you for users And for enterprises, which really means IT departments, or are you for users and not IT departments, and do you allow both all aspects of what you do to be extended by developers? That's the frame I believe in. We had some issues over the course of where we went in the 2000. We can talk about that if you want to. But go back to 99. Come on, we need you guys on Windows.

55:10IBM's still selling OS2 Linux is right there on the horizon. It's it's coming like a freight train is the web starting to enter your psyche at all like it's part of that right we're trying to get people to write for Windows server good point We're trying to get them to extend active x controls. I think that's right where the part of the browser So we were trying to get our browser to be a platform a unique platform Sorry, embrace and extend. I think is what we said. We'll embrace the internet and we'll extend with these active exit controls. We need developers to do active acts. We need them to do Windows Server. We're just sort of getting ready on .NET. I have my own kind of wild style. Really? How do you end to speech? You tell people you love them, that you want them. That's sort of the call to action. That's where I think the developers, developers thing came.

56:06Before that, there was a different video that people sort of characterized. I love this company. No, there was my Windows video, I don't know if you've ever seen it. Oh, yeah, yeah, yeah. But wasn't that a parody? Don't people misunderstand? It was for fun. It was just a fun thing. It was not a real speech. And it was for internal consumption, where you're saying. Yeah, it was for sales. For this low, low price. Yeah, I mean, there's a lot of little nuances in there. We were trying to get our people pumped up about Windows. So what I was looking for there is The developer's developer's developer speech is one where you feel like we haven't really won the last battle yet. We're still in this death grip for enterprise developers or this death fight against IBM. And yet there's now Linux and the web for these more sort of like independent or platform of the future looking developers. And in some ways, we're desperate to sell to win to say, hey, we have a great platform here.

57:01you need to come use our stuff. Exactly. I can't remember whether we're pre-lamp or lamp by that, but I don't remember. There's some infrastructure on top of Linux that people are using to write, let's say they're back ends, not their user facing code. We had tons of competition. The interesting thing is, people say only think about your customer and never think about your competitor. I actually think you have to think about both.

57:30ironically, we were pretty consumed with our competitor, which I think was essential. And we were pretty consumed about doing new things. But the competitor thing wound up being very important. I mean, we have no business. We're not in the enterprise. We could lose windows on the client. And the company, we weren't really self-confident.

57:57The DOJ was really self-confident that we were kind of a lock and there was no competition. You know, life was easy. That's not where our heads were. Now, there is some time in the 2000s where I think we do, I do, we do. We think that extending, we did a slide once called Windows Everywhere. We used to use this on all these devices. And we became too wet.

58:27To extending what we had versus jumping to something new because in a sense, we were too confident. We were too confident. If we only windows eyes something, you guys make a point near your episode on us. You guys caught sticking with windows too long, but that may be it, but I think I don't think we stuck with windows too long. I think what we did is we tried to put windows in places that it didn't.

58:56didn't naturally go. And we tried to be too windowsy, both in the API and the UI and some things. Mobile being an obvious. Windows mobile, exactly. And the car and the car. We did a layer on Windows that when you hooked your PC up to the TV, it had a simplified user interface for a TV. It wasn't just media center, right? It was some media center. Okay. Yeah. Yeah. Yeah. Exactly. Right. So we became convinced either out of To some degree paranoia and some degree confidence, you know, okay, well our birthright here comes from Windows. That's our permission to enter the area. But then we also in some areas it just wasn't going to be extensible. So there was both a like a fear and a you know overstated confidence in trying to take Windows everywhere. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

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1:01:38Let's jump to this point, but what is the generalizable lesson here? You have Windows, this amazing piece of software with this tremendous multi-sided network effect around it. The logical thing to do is to continue to try and extend it and say, geez, wouldn't it be nice if the next great technology wave was also Windows? And that worked for us on Windows Server. So it's not like we didn't have an existence proof that the thing could work.

1:02:08You know, if you're gonna... In my little deck, I guess. Yes, please. Yeah, if you're trying to skate to where the puck is, if you're trying to recognize, what did I call this, about capabilities. You know, if you're a startup in something, there's an ongoing business, you just keep enhancing your products. There's a line extension. Okay, we're gonna add networking to Windows. No problem. You still call it Windows. It's related, but new.

1:02:36SQL Server, for example, was that for a while? It was related because we had a back end platform. Dynamics, somewhat related, are accounting, et cetera, stuff. Because there was some enterprise-y sales, but it was really new. And it turned out the phone was more like a startup. The phone was more like a startup. And recognizing and thinking about things. And then asking yourself, what capabilities do you need?

1:03:05You know, I say getting the weight room. You've got to develop capability, you know, take a look at a capability we developed that is now essential. We didn't build it for this reason. Hardware design. Microsoft's a major hardware design company now. Now, I started it out mostly on the client, you know, to help client-side devices. Surface. Xbox, Surface, Phone. And guess what? They use that mostly now in Azure data centers.

1:03:35I think the guy who actually runs hardware design used to be on Xbox. The backend hardware design for the data center, the chip, etc. infrastructure. I'm pretty sure there are a lot of talent we brought in. Building capabilities is important. We built some capability, but we didn't build enough capability. We didn't see things as different enough. Let's try to...

1:03:59keep the comfortable Windows user interface because people understand it. It wasn't right for the phone. I don't even remember what processors we started out on, but I'm pretty sure we started out on Intel. Of course that wasn't right. We tried to keep too much consistency, both out of sort of a fear that this was our permission to exist and out of self-confidence that we had to put Windows everywhere. So when should A company that has an existing fantastic business say, no, no, no. We cannot extend our existing franchise to this new world. This new world is going to be dominated by some new paradigm where we have no advantage. How do you play that? Then do we choose to get in? Exactly. Then you have to choose to get in. I would say two things were true at the time for us. And this is specifically about mobile.

1:04:59It's also about something else. It's a little bit out search too. There are two things that are true. Number one, you have to be focusing consciously on the issue. It's easy to get caught up in, you know, there's innovators, dilemma. It's a little different, but you get caught up in what you have. You get caught up in what you know. You get caught up in the capabilities.

1:05:25And that's why I say to myself, you explicitly have to think about it. And look, if we hadn't developed a bunch of capabilities we had, the company, you know, AI, if we hadn't built Bing, company wouldn't have capable. Well, it's gonna get into you. Yeah, you built some capabilities in online services that will. We built some important capabilities. But we didn't realize the businesses were enough different to harness those in the new ways. I'm proud of the capabilities we built.

1:05:54didn't apply them the way we should have. You know, where did we learn to build internet scale infrastructure? Well, some with Azure. Some serve even more than Azure. No, even more than Azure to get started. The office, what's now in 365, the office backend, because that got critical mass as a cloud infrastructure before Azure did. And even more so with Bing.

1:06:22So we developed the capabilities, but then you look at the product and what was our strategy for Bing? Well, there's too much based upon Windows integration. You have to say this is a separate part of the Bing rebrand. It was like Windows live, right? Windows live. Everything was Windows live. One drive, one drive, one drive. And the file sharing, I mean, look, Google's done the same thing. And you got to ask where do you run out of gas? Yeah, because you could make the counter argument.

1:06:51Shoot, Google is running away with the market. It's very good technology. They've perfected the user experience. They have scale and you need scale in this business. Uh oh, it's a runaway train that we're never going to catch. Thank God we have windows to be able to have some way we can, you know, attack them from the side and with windows integration, maybe that gives us a fighting chance. That didn't end up being true, but you can paint that narrative at least. Yeah, we can't go ahead on.

1:07:18How late were we to search? The answer is, you know, when did Google start? 98, 98, okay. And we jumped in in 2003. I think we pushed. Now, you'd say five years is a lot. You could say five years isn't that much. You could say, we had no birthright. I mean, it's just a completely separate thing. We had no capability. We had nobody who'd grown up in that world. And, you know, we had some guys in Microsoft research who Could sort of start getting us there. We took talent that was doing other things in Microsoft It's hard to go get new talent. The search is brand new There were people from ink to me Google would sort of suck them up So it took us a while to get off the ground It took us a while even to be fair. I think this is something both Both Bill and I debated not just with each other, but just we kicked around too much how much?

1:08:14quote, the verticals in online services would be important versus search and portal is generic. So search and portals generic. But remember, we had a thing called Expedia. We build a travel site. We build the local information site called sidewalk. We had a car shopping site. What did we call that thing? Carpoint. How much would the verticals be worth? And there was one vertical.

1:08:43that mattered except it wasn't really vertical. It's called all shopping. There was all information and all shopping and you can Google all these detailed specific things. Remember we did a portal. We did that and then eventually we all then we did search a few years later. We're just off. We had the wrong thing. Stack ranked in the wrong way. My opinion with 2020 hindsight.

1:09:11And we respect two things. So you said when should you get into a new thing? Well, you probably shouldn't get into five new things if you really only have the talent for one to two new things. That's number one. You know, Scott McNeely its son used to have this expression he used. We got to get all our wood behind one arrow. You know, it's nice to try them and I was listening to you guys talk about Amazon and how they okay, we're gonna try small things, but they also put in small cost structure.

1:09:39We put in big cost structure because we were already all in when we got into something and so in this particular case a few years later and then what do you do you get stuck on what we have permission to come from behind in a certain way here because we've got windows. Exactly your point so there are lessons to be learned but for a company that's got an established business being able to get.

1:10:07all the way outside of yourself and say, is this really like, because you really want it to be? You really want it to be? Or does this really require a different approach that doesn't totally ignore, but doesn't take into account what you own any more than the person starting it afresh. Can you hire new capability or how do you build new capabilities?

1:10:38If it's not like what you're already doing, it must require new capability. If it's exactly like what you're doing, then you'd be doing it. And you should be great at it. And you'd be great at it. So it's, it's the things, you know, just look, two models worked in phone, build the hardware, capture the profit, have a backend monetization system that even let you pay the phone manufacturer that worked Android slash Google. So two things work. That's it.

1:11:08And we weren't in either one. We needed new capability. We needed a new idea. We couldn't use the Windows user interface. I mean, there were a bunch of things, but you have to go all the way. And yet, we had a Windows everywhere slide. It was on the slide. I don't understand why it didn't work. You get locked. You know, I wrote this thing down here. You get locked in your model. We're a platform company. No, we're an app and platform company. On our episode, we threw out the idea that Microsoft's competitor, like the truest form that it should have taken on mobile, was not actually Apple. The iPhone is not the bogey. It's a pretty different thing. At that point, you were not a hardware company. The bogey was Android. I mean, they were monetizing it a different way through advertising and through giving it away for free. And Microsoft always monetized through licensing revenue. It seems like until Android took off.

1:12:03Microsoft actually did have an opening to become okay that's what your Christmas was this there was a the Christmas of blah blah blah year and it was being on time with the stuff we needed for Verizon hmm there was a Verizon oh yeah design win because Verizon by now is really failing like it's getting its ASCIC iPhone launches on AT&T right July of 2007 And I might have been Christmas, even 2008. Yeah, because I think it's Christmas 2008. Yeah. Possibly even oh nine, but I think oh eight. The mobile was like this when it started. It could have been not a kid could have even been oh nine, but Verizon, the emperor had, yeah, the empire had to strike back against AT&T and there was a window. Yeah. And they went with stuff. Look, they would have taken our stuff because they could put pressure back on the manufacturers. But we didn't have the stuff they wanted at the right time. They went Android.

1:12:57And then, you know, we kept pushing because that's, you know, I believe in staying hardcore and then learning and fixing. The problem was we were so locked into our model. It was hard to say, hey, we're going to learn and fix. You know, would Microsoft, you know, I don't know where we would have gone with things on phone if I stuck around, but I probably would have stayed at it. And maybe it...

1:13:25It would be an Android phone at this stage, who knows? And maybe not. Like a Microsoft hardware. If you think of yourself as just a platform company, you say we can't do that. If you can think of yourself as an app and platform company with apps that are extensible, ah, then you can say, hey, we actually have a pretty cool user experience that can also leverage some things that we do and can leverage our software skills. And it's okay to embrace that.

1:13:53competitor and extend, but there's so many technologies that are hard to not just popularize, but even get good at unless you have a phone these days. Just take voice. If you want to really be good at voice, you got to get enough signal and you'll get the signal off the phone. You can't say talking to my PC is sufficient. And it's not the only, you know, if you want to get good at maps, if you want to, there's so many things where being...

1:14:23on phones. There's some things even you can make happen by being on cars. I think Tesla gets good at certain things in software because it's a different form of mobile so they get good at different things. But we missed should the company have kept after it? I don't know. That's not my, you know, Sachin and Amy and company they know where they were. But to your original question, big companies deciding.

1:14:51Well, it's not always a mistake to build off what you got, but it can be try to get out inside of yourself. If you get in, do you have the ability from the top to shake the system and say, no, we started with our old model, but it ain't gonna work. That's what I did with surface. I didn't wind up, it hasn't played out. And partly...

1:15:20You know, I didn't have that much as much time with it, but you know, there were no high-end PCs that would really compete with Mac and we I decided the only way we were gonna get there we couldn't sit there with our OEM model and have it work if we're gonna have high-end PCs that appealed to users because I wanted us to be a consumer slash user company not just an IT company because Thinkpad had IBM then by then Lenovo had some higher-end computers But you never saw him in schools, you never saw him in coffee shops. We needed a high-end PC and the economics weren't going to let of marketing and remancing. It wasn't going to, that was not going to be an option for our OEMs and I said we got to go do surface. Now we, you know, again, would we have tweaked things done things a little bit better, you know, or part of that? I bet sure. But the model was not going to work.

1:16:16Okay, so we've spent a lot of time talking about all these bets that sound very reasonable to make in mobile, in search. We didn't talk about social, but in social and all the dancing you did with Mark Zuckerberg over the years, in Yahoo, in all these things that ended up not panning out and these were trillion dollar companies that were built not inside of Microsoft. We talked about one multi trillion dollar thing that did work with the enterprise. There's another one with Azure.

1:16:45Can you tell us the story of how Azure really got started? Yeah, so we are in probably 2005, 2006. AWS has a little lift, I think AWS comes to market, what? Around then, around then. And it's not like the cloud is some surprise to us. The Energizer, if you go all the way back to that Energizer thing from the mid 90s, it's all about the cloud it's before it was called the cloud it's before all the infrastructure that becomes the cloud so it's not like we say oh woke up one day there's a WS we didn't wake up one day and say oh there's back ends to applications too we've been doing that with Windows Server and SQL Server we've been in the cloud blah blah blah but at that point I think we might have already had exchange in the cloud as a standard product which you have to remember is super important because

1:17:42I really want to give you my sense of what Microsoft's businesses are. But we didn't have a platform. So I said, we've got to do one. Let's go get Kotler. Let's just go get Kotler. So I say, okay, we've got to get Kotler on it. And Kotler and I have a great relationship. To this day, we have a great relationship with personal friends. He's still writing code at Microsoft. He's still writing code at Microsoft. But I mean, you know.

1:18:08Cutler and I have been a basketball game together. We've played golf a number of times. We've done golf trips together. But you know, colors. He's a hard asset work. I mean, if he don't want to do something, he'll tell you if he thinks you are wrong, he'll tell you if he thinks somebody else in your organization is bad, he'll tell you. He's like a thoroughbred horse. He's very fast, but you got to get him lined up. Very blunt. You know, his great athlete in college, two sports. I think he played maybe three even in college.

1:18:38But anyway, so I get Cutler. And there's a guy working an MSR, who I think is underutilized to this guy, Amitabh, Sarvastava, who you guys talk about. I thought he was underutilized doing what he's doing. So grab him, grab Cutler, bring him both on to this project. I think Bill is still with the company. He's about to transition out. He's about to leave, I think. Yeah. I think he had probably told you that he was leaving.

1:19:08Talk about that, but he told me but hadn't left yet so he even like he was involved until until until he left and even then You know different nature of involvement but anyway So I get cutler and on the top to go do this thing and then cutler brings Some of his I'll call gang his favorite guys he brings them over because he's a magnet for talent and we get started And we made an explicit decision and I guess you could say it's also a function of thinking Windows first. I think you guys may have talked about this in your episode. We say we're going to build platform as a service because it's a Windows platform. Infrastructure is a service a little bit if you think about it. You're sort of by nature accepting everybody's infrastructure. It's by nature multi.

1:20:01Quote multi-platform. You become a different kind of a platform because you're running other people's Linux and whatever. It doesn't leverage Microsoft's strength of owning the Windows franchise. If you're just going to be infrastructure. It does leverage our strengths in the sense that we've got great low-level operating system people. So we have all the talent to go do it. But, you know, we say, hey, we're going to do, and it was explicit we wanted to do platform as a service. We said, hey, they're doing it and be. It's all about the developers.

1:20:30And if it's all about the developers, then you've got to have platform as a service, not just infrastructure as a service. Well, that assumes that the developers targeting Windows Server are still a big, strong, important, relevant developer group. Which they were and they weren't. Windows Server had a strong developer group. Unix had a strong developer group. And on the front end, Windows was definitely stronger. On the back end, Unix was definitely stronger. But on the front end by 2006, seven, the web was clearly the emerging developer platform choice. Emerging. Okay. Okay. Absolutely emerging, not fully emerged. Yes. Emerging. I would challenge you to say like what in 2006, what amazing Windows apps were coming out that would sweep the world and go get 100 million users because they were great. Hard for me to remember. I think if you

1:21:27If you go to the field of productivity, the answer is, yes, there were still. The problem is, if you left the areas of productivity and gaming, productivity and gaming, yes, if you leave productivity and gaming, I think the answer was no. I mean, we talked about this in the episode. There were lots of, it was interesting. You know, people, remember, people were, the web wasn't good for a number of things for IT, because people couldn't count on.

1:21:54People didn't feel like they could come on the connectivity. Either the amount of bandwidth or latency or just it's very existence. We were still at that point. So I'm not saying fair. We were right in the way we thought about. Not saying that. But I'm also saying there was a windows. There was still a great windows sort of developer ecosystem. It didn't go from a lot 99 to nothing by O5. Totally fair.

1:22:21And then Windows Server Unix was stronger on the back end. And of course, we're trying to make Windows strong and we're trying to get to the cloud and then we're learning more things about the cloud from both Exchange in the cloud and Azure in the cloud. How do you make it easy to provision? What's the speed of provisioning? What do you do to serve developers? The notion that you give them a number of set of free usage and then let them embrace because Developers have to two aspects to there's developers who are not part of enterprises and there's developers who are and the developers are not part of enterprises need a whole different sales motion you can call them consumer development not Developers of consumer apps, but they are like and you depend on software not like a big corporations in terms of the way they they use students are an example, but there's plenty of others who are trying to do startups and blah blah blah So

1:23:21In any event, we kind of get going. We're learning how to do the things. We're building capability for sure in the cloud through both products. By the time I leave, we have some momentum with Azure, but some momentum. The big momentum really is in the last 11 years. I think you're bypassing and underselling here. It really struck me as you were describing.

1:23:49The challenge is around with a big company like Microsoft and attacking wildly different vectors like mobile like search like hardware Azure was that the club was I mean it's extremely disruptive Don't worry. It was extremely disruptive, but it wasn't yes, and no the things we understood were translatable now getting the company People get locked into a model. You have to replace serving two leadership to make this happen. Well, he accept things that run in the cloud. That was not obvious back in 2008, 2009. It's not like, you know, Amazon was an enterprise company at the time. It was mostly for startups and, you know, that's who was using AWS at the time. And so no, I agree, I do agree with you. We had to shake up our internal culture. God.

1:24:45Dang it. This was my basic message. God dang it. This is our future. We can preserve and enhance these businesses. We can take more value out of the system because other customers don't have to set up their servers anymore. They don't have to do all this work. Essentially, money that would have been spent on people and hardware will get spent with us. Come on! We're going to do this!

1:25:13And it was hard for me even telling our people. There was still, you know, la résistance, as they say. And that's why I did the speech at UW, where we talked about that fact that we're all in on the cloud. It was partly to reminder to people, you know, get with it or get out of it, you know, get out of the way. Making an external speech to communicate something to your internal employees. In a big company, man, I'll tell you.

1:25:40It's very- Some of what you have to do because people believe the newspaper more than they'll believe in internal email. Well, people always talk about how the think different campaign that Steve Jobs did was for Apple employees as much as it, in fact, way more than for the general public. Going back to the core initial start of Azure, I find it very interesting that Microsoft had a business called Server and Tools Business, and that is not where Azure started.

1:26:05Azure started as a incubation by Ray Ozzy with a completely separate team. Then you're existing like actual product group selling server and tools. But this is that's sort of a classic thing. That's not it shouldn't be mind blowing. I mean windows and windows and T were in different groups too. Sometimes in order to protect the sort of baby while it grows up.

1:26:33You can't put it with the thing that's established. I mean, you could say it's part of the issue with Windows when we tried to use Windows on things for which we probably should have started. Yeah, I was going to ask you. There's still a lot differently if you've taken this approach with. We did break it out, but we constrained it with Windows. We broke Windows NT out and constrained it with Windows. It worked fine because Windows belong. So, you know, how you do Those incubations and in this case, I just said like it'll it'll get probably subsumed. I don't know partly Ray wanted, you know, Ray was Ray wanted some operating control over the thing and putting it under muggly would have made it harder for Ray and You know, obviously it was less palatable and I'm not sure Cutler would have gone over it If it was all, you know, all I'd server in tools, but

1:27:30It was the right thing to do, even though it was part of the future of service. It was the future of server and tools essentially. And so this is pretty lost in the common narrative. If this is 2006, that is seven, eight years before you left Microsoft. Yeah, eight years. Eight years. No, we'd been working on the cloud since Energizer. We'd been working on Azure for eight years. People think, everything in tech gets popular in 10 minutes. It's kind of people think acquired was founded two years ago. Good point. When it's open AI actually founded. 2016 I think. Okay. So seven or eight years after it really became something. Fair to say and I give them all the credit in the world. Seven or eight years. Most things take a while.

1:28:26even things that are quote, oh, they just burst on the scene. People have been sweating, you know, blood, you know, blood sweat in tears for years before these things get liftoff as I call it my little deck here. And so yeah, we were starting to get to liftoff. But yeah, eight years. And we had more in on exchange. Most businesses are zero trick ponies.

1:28:54You never create a billion dollar business. You never create, you might create something that goes nowhere, you might create what's essentially a feature for somebody else's business and get acquired. You might, I'll call that zero tricks. Then you get a one trick pony. And one trick pony's are amazing, amazing. I mean, people should be in awe of one trick pony. One trick pony's are...

1:29:2050 to 100 billion dollar market cap companies or could be no could be more. Yeah, we're more. Yeah, could be more. There's not many. I might ask you that Google's a one to one and a half trick pony. Still, I mean, if you just look at its revenue, 80% search ad revenue. I mean, you call YouTube is probably another half a trick. You could call it a second trick, but it's not clearly a second trick. And they're huge and they have great market cap.

1:29:50TSMC, you did an episode out there, one trick pony, very successful one trick pony. In video, is it one trick pony? Well, gaming an AI. Okay, two trick pony, but the first trick, I'll give them two tricks. First trick was not that big. Yeah, you can decide whether to call it a trick or not, but I'm not taking anything away from Nvidia and I should know the company better. But so you say, one trick pony, they're amazing. Like everybody should be an awful one trick pony.

1:30:19Now, two trick parties. Ooh, la la, those people tend to go down to business history. Especially those tricks stay alive for a long time. The idea was one trick pony. Microsoft? Two to two and a half tricks. Give us your trick accounting. You can do it a little differently. I'm going to call the desktop business, which I include Windows and Office.

1:30:48and the server slash enterprise business back office, two tricks. Now, they both, both tricks could have died if they didn't get moved to the cloud. And I knew they could die, but they're two tricks, two different revenue models, two different licensing models, essentially different sales motions, the even the way Microsoft sells those stuff. I don't know about today, but when I left, they were kind of different muscles, one account manager, two different muscles because one you're selling, applications and one, you're just selling, hey, this is to serve your users. You need an AD account, an exchange account, it's exactly a Windows. I mean, that's what you need. This is what M365. You could call the two, the modern translation of those two things are the Windows OEM business and M365 and Azure. And then you could say is gaming its own trick? I call it a half a trick just like you do. It's a half a trick. This is an update since we last talked.

1:31:45I feel like we had a conversation at one point. We were, we both kind of landed in unclear how profitable that business is for Microsoft relative. I'm going to call it a half trick. You could say it could be a trick. I mean, look, I would say, I would say Microsoft is optimistic. It'll be a full on trick. Okay. I hope it is. I run into Phil Spencer at the golf course and he's a really optimistic guy and it could be.

1:32:13I'll give you this. If we call Nvidia's first trick a full trick, then Xbox is a full trick. There we go. Whatever you want to call it, you said it's a small trick, and I think that's probably right. So that's amazing. Amazon's two tricker. AWS and the store, they're two tricker. Apple's two tricks. What's your trick accounting there? Mac and mobile. If you want to say it's high power consumption and low power consumption.

1:32:41Is it fair to call services a third? And by my estimates, their profit dollars from services have now eclipsed iPhone hardware profit. I consider it just part of the trick. If you go by your platform definition, it's part of the platform. A trick they've just monetized it. It's kind of like us adding things to office and redoing the EA. It's a monetization model. It's an additional monetization model, but it's not a new locomotive.

1:33:10A locomotive is the business that can pull the cabooses and the locomotive remains the phone. The service is business to go away pretty quick if the phone volume fell apart. So I'm going to call, it's additional, very important. But not uncorrelated, the way that AWS and so I get the sense, and I think Mac versus everything iOS is also uncorrelated. So I get the sense, you really want it three tricks.

1:33:40That's a frickin' loopley. That's a frickin' loopley. What's the one that eats you up inside? Which one do you think you were closest to getting that you didn't get? Not social. Okay. Forget social. Doesn't feel Microsoft-y. You wanted to buy things up. I'm gonna tell you why. It's either... Sure, because we're still on the Paul Allen strategy. We've got to do all the software that these things will ever need. I mean, it was still of the mindset that said, and that there's an arrogance to that, and there's a hunger to that.

1:34:10That says there's just nothing we shouldn't do and I don't think that was a good mindset by. The time I took over and yet it was still sort of baked in with bill baked in with me. And I think that was some state. So not focus social doesn't but but so you can you know this is like asking me to pick between. Negative children I don't. The phone. Because it was a client side device.

1:34:40or search, because it was a productivity tool. Microsoft, both of those were Microsoft big businesses. The desktop, the phone, or office, or, you know, client-side devices, we had done well with a certain model. Client-side devices, our mind should have been able to wrap around, but we had to tell ourselves it didn't look the same. It's not weird. Technology didn't look the same, nor did business model.

1:35:11then business model astonishingly for search advertising call it 2005. I think Google was making more money off of a PC user than Microsoft was because their business model generated more search. 5.05 I don't think so. Not later on. I think so, but not by 0.5. I would suspect not. I mean, you can go check. But is that astonishing that of the pie? And for enterprise PCs, PCs bought by businesses, it certainly would have been the case.

1:35:40for consumer PC, it could well have already been the case. It actually is a notable difference because of everything else. Our post sales monetization was with applications. There were with ads, but there was a new productivity app. We put office on the Mac by then. We would have to put productivity elsewhere. So in the sense that we missed a major productivity area and we were in the productivity business and we were in the client Area and we missed a client device. Yeah, those are the two see feeling nothing else. We met we met quote missed you had an opportunity for four tricks And you got to yeah part of the problem was we didn't see Particularly we didn't see mobiles a different trick. We thought of it is underneath the windows trick if you will But I mean you can go through I don't know that I could come up with a three trick pony for you Hmm, I mean, it's possible that at the Elon level

1:36:40the musk empire could have three tricks right cars connectivity and in finance you can do it finance I don't I don't think they're multiple tricks and you could say asset management versus the investment banking is different maybe maybe I don't know I'm not convinced but I hear you well possible I think this makes sense because Microsoft is the most valuable company in the world with two so if anybody Yeah, if you look at the most valuables, you're not going to find. Right. That's a good point. Sony is nowhere near the market cap of these companies, but it's like pretty evenly diversified across their five segments from gaming to consumer electronics, movies, music, finance. Yeah, they have a remark. They bought businesses in multiple areas, but I can't call Sony pictures. Yeah, fair.

1:37:31It's just not big enough. Well, you can acquire to start a trick. I mean, that part, I have no, you know, I, there's no pride. There should be no pride in having a trick that starts with something small. But that's a trick for them. Well, Android's not a trick. Okay. You highlighted it. Android is a piece of the search trick. It's a lead gen. Yeah. Yeah. Exactly. Lead generation for searching. Yeah. That's right. All right. Listeners.

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1:39:35So 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. Okay, so we've been dwelling here in the products and reflecting back on big wins and misses. During your tenure as CEO, can you reflect back on your non-product wins and mistakes? My biggest hit from My time running sales to president to CEO is establishing us with IT departments, IT professionals, you can call that the enterprise, if you will, and putting in the framework from a sales and marketing perspective, the staff, it's a capability we had to develop. Nobody developed that software model, but us, we invented essentially how you do that.

1:40:29Oracle had done some invention, but we came on and did our own invention. We took it to the cloud. We were able to successfully navigate that with, I mean, look, from a sales, there's a product part to that, but that's a big deal. And I feel very, very proud about that. From a financial standpoint, everybody likes to say we about triple revenue and about triple profit. The truth is, we dramatically increase profit more than a triple. Because people forget there was a major change that came along early in my tenure. And that's the move to have to expense stock options. So if you had restated our books to the time I actually took over, stock option expense would have reduced profits notably. Stock options were unaccounted for. So if you look at what starting profitability would have looked like,

1:41:31if stock options had, it would have been lower and the multiple over my tenure would have been much more than three. Okay, so three plus times in revenue. Yeah, I think you might say three in revenue and probably closer to four plus in five, maybe even on profit. About the same time, the dot com bubble busts. So you have two problems. Number one, now we're showing our books, all this expense for stock options. Okay.

1:42:01But people don't value those things at what we have to expense. And the stock is flat, so they value them even less. This is a really insidious problem. You gotta get rid of stock options. And we transition then from stock options to stock awards. Which if you notice, I think we were the first to make that as a major transition, but everybody's made the same transition. You know, with the exception of a few senior executives, options are not the primary form of compensation.

1:42:29Little different in startups, but when you look at larger companies everybody even startups are now doing our issues are issues. Yep, so and we had to start that I didn't realize that Microsoft started that you can check but I know we move before most of the tech companies the tough thing to have to inherit right at the beginning of your tenure coming off of an already all-time high multiple of the stock price the dot com bubble bursting Man our stock price burst into but I think to your point what you're saying is like this became a Employee motivation cultural issue like it's not just so we had two problems before the dot com bubble burst You have everybody saying. Oh, maybe we should go to a dot com company because we're gonna like a lot more money than the bubble burst and everybody says You know, you guys I'm on a lot of the Oklahoma, but there's a song poor Judd is dead absolutely

1:43:24And that was kind of the way people felt about sort of stock compensation. And not just in our place, people were down because, you know, everybody thought they had a ton and then they thought they had less. So yeah, it was a real employee morale issue in the early 2000s. We had to really sell this stuff in. That's a big thing I had to work on. Obviously, the antitrust, the antitrust issue. I mean, when you took over as CEO, What we said in our episodes was that was actually your number one priority was just end this. It was right up there. Yeah. I mean, it was up there. I mean, I think when I took over, I'm not even sure we saw path to resolution, but having it an overhang, I'll give you a story because it's after I took over to see you. We had an executive retreat. We did it down in Bend, Oregon. I can't remember the name of the Lodge. Sunriver, I think.

1:44:25And we all fly down there. We rented a plane to fly everybody down there. I don't know how many people by then it was probably 80 90 something like that. And the first session was supposed to be a report. We did this a report from the field. What are people seeing out there? What's the environment? And this guy Orlando Ayala was running sales at the time. And he gets up and you know, this is probably a two ish a 102. We're still in the throws of the thing.

1:44:55My name is Aura Lando-Alla. I am a proud Colombian. I am not a proud Microsofty today. Our integrity is under assault. My personal integrity feels like it's under assault. Now you didn't blame us for having behaved badly, but he highlighted the thing that's on everybody's mind, which is it wasn't just...

1:45:20like a business issue that need to be taken care of. It was a culture issue. It was bothering people, particularly senior people very personally. So I had this whole agenda, did it, had to blow the thing up and reorient to address that elephant in the room. It was not where I was going with this thing. Completely remapped. Change the breakout sessions. Focus in on this issue. Bill was not happy with the whole thing.

1:45:50You know, Bill bore the weight of the antitrust thing very hard. Because for him, I think it also felt like a personal attack. Of course. And everybody took it personally. Bill took it even more personally because, you know, he was the face of vilification, if you will, for this. But it's a reminder that it was a cultural issue to take care of, not just a market issue.

1:46:15And people focus in on the, oh, were you moving slowly? Yeah, there were some of that too. People say, oh, I wonder if we can do this. That was an issue. The cultural issue, I think, was even bigger. So he said, yeah, we got to get this thing resolved. And then there was the order to break us off. I forget what year that was. You were going to run one company and Bill was going to run the other company. Yeah, we never really got to the point of really planning that through. But that's what the federal government like ordered. Yeah, no, they ordered it split. They didn't say who had to run, which

1:46:44I think it was just that you couldn't be at the same. You couldn't be at the same place. I would run operating systems and Bill would take applications. So let me just give you a sense of where each of us were associated with in the mind of the company. So that's your starting place as you're taking over from CEO as CEO. The dot com bubbles bursting antitrust is dominating the company's culture and the external narrative. You have this.

1:47:11big accounting headache that you now have to deal with that affects the way your profitability is shown. But then there's a decade after that where you triple the business but the stock price is flat. Why didn't Wall Street get? I'm going to give you three reasons. Reason number one and it's material. Bill and I always, so Bill and I and then me and Bill when I became CEO.

1:47:43We always were trying to tell people don't get our stock price too high. Don't have too big expectations for us. You know, we never wanted people to feel like they got cheated buying our stock. And partly probably we were trying to lower the expectations on ourselves. I never thought of it that way. I don't think Bill did, but essentially that was part of it. So we do this financial analyst meeting every July and we do always more in people. You know, don't get too excited. That's one.

1:48:12As part of that whole theme, Bill never went to a quarterly analyst call. And I never went to a quarterly analyst call. And if you really think about it, part of morale is the stock price. It is. And it took me a while to realize that, but I then never broke my pattern. You know, it's sort of like going to the newspaper every day. You don't sell stock every day. So you really should only care what the stock price is when you sell stock.

1:48:41But people go every day and it's kind of like, oh, did my team win last night? It's like going to the sports section and say, how did the clips do last night? And so talking more regularly to investors and talking with, not a pie-eyed, but a realistic view, guidance, we gave no guidance. I had to fight people. They wanted to give guidance. I didn't want to give guidance. Why just deliver the results you get? I mean, you know, there was a bit of a buffet style Totally. I mean, this thing going on because Bill and Warren were very good friends and Warren didn't go to quarterly calls. I don't think and but you know, he's warned. I don't even know if they do quarterly calls. I don't think they do. Yeah. I don't think they do. Yeah. So if they do the annual meeting, obviously. Um, so that's a, that's a, let's call that a first reason. A second reason is yes, I did take over when the stock was ridiculously too highly priced. Yeah.

1:49:42but that normalized within a year or two. The bubble burst that normalizes some, but it creates sort of another narrative about things. So that I'd say, no, no, I'll give you four reasons then. Next, I was hardcore about telling people I'm going to spend to do the things we need to do to succeed. That's not what Wall Street likes to hear. No, but I was viewed as a spender.

1:50:11And I was much louder on this than Satya is on anything financial because I'm just kind of how I'm programmed. He's programmed a little differently and Amy is more balanced. I mean, she'll talk about balance and I would say we're gonna win with surface. I mean, whatever it is. If I could paraphrase my view of it, you were willing to say, we're gonna spend whatever it takes and Amy goes and says, I'm gonna count for every dollar of spend real tight.

1:50:40and make sure that every dollar demands a return. And so I had no credibility in terms of what some investors wanted to hear. And my actions were consistent with that. It's not like they were inconsistent. And then lastly, people did worry about the future of a couple of our franchises, most notably Windows. So you get all these things. Narrative transition from high price.

1:51:10Some issue about franchises and me being a big spender no wonder the stock stayed flat and You know by the end of my tenure it was even bothering me Yeah, when did it start to bat towards the end? I mean at some point I just got too tired But by then it was also Probably hard for me to reset that dialogue for me to go to investors and say I'm a changed man, I'm not gonna spend anymore. I was gonna believe that shit. You just wouldn't believe it, right? I mean, you can't come in and say, well, I've been a certain way for about 35 years, but 30 years. But I'm a new man, I'm reformed. If you're a spender. I worship at the altar of capital allocation now. If you're a spender, if you're not good with investors,

1:52:06They're not gonna buy in overnight that you've changed You know, there's a certain and I didn't intend it that way, but there's a certain disrespect by not going to quarterly calls With hindsight people are gonna say oh he's showing up. He's he's a changed man. You know, he used to tell us the stock price was too high or worry about it Now he's gonna tell us no the stock should be okay. It should be higher. No, there was no way to reset my the investor view of me. You need a full rebrand, full clean slate. You need a full new CEO. When I wrote my letter of sort of goodbye to the board, I did say, look, this is a unique opportunity. There's a lot of things in our brand, in our image, that would only be able to be reset by a new CEO, by having a new CEO, because people don't walk in and say, oh yeah.

1:53:04you know, guys are changing. So it's hard to change the narrative without the change. No, I'm not saying that means CO should go every time there's a bad narrative. That's not really my point, but it's just gets harder. Particularly since, look, I'd been, I made it only been CO since 2000, but it's not like I wasn't there since 1980. Yeah, it was there since 1980. And essentially, I'd been the, you know, second voice of the company for 20 years. And then for 14, I was the first voice theoretically.

1:53:35Although that had some complexity, too. I kind of get the sense by the end. It wasn't fun for you anymore, too. No, that's not true. No. No. Look, the toughest time was probably the ship of Vista. Yeah. That was probably the toughest time. That in the early 2000s, when I took over on my little sheet here.

1:54:07I highlight that 98 to 2004 were kind of tough years plus Xbox because that's the any trust That's where I move back to be president of the company and then CEO and Bill and I went through a year where we didn't speak really Yeah, I think it was basically from some time in about March or April of 2000 to 2001. I mean literally we weren't speaking I didn't know what it meant to be his boss and he didn't know what it meant to work for me. You know, when he asked me to be CEO, I said to him, look, and I knew he was struggling with the DOJ and all this. I said, do you really want me to be CEO? Or do you just want me to be a figurehead? And he said, no, I want you to be real CEO. Okay, that meant something to me. I would probably have said, yes, even if he said to be a figurehead, but he said, what do you want it?

1:55:03And probably I'm saying to myself, hey, I've got to have a transition path. So I say, okay, I'll do that. Well, he didn't know how to show me a different kind of respect. I didn't know how to show him a different kind of respect. There were things that I thought, you know, where I just disagreed with him. And now I expected it to go the other way. I was always happy. I was happy being a number two guy. I was fine.

1:55:28Salute I don't like the decision. I either salute or I body punch and then salute or body punch a knee degree with me body punch means it's a slower process and then You know we didn't know how to do that we just didn't know how to do that and After a year we started started talking and basically our wives were the ones who pushed us back together We had a very awkward dinner to health club down the street here, but yeah, we we get back together But we never really got the right mojo. I mean, Bill's chief software architect and I was very deferential then to, you know, sort of product direction from Bill. And that he's working on longhorn at this point because it's post XP, which was a mistake. Longhorn was a big mistake. I have to take accountability. I have a CEO. Bill's got to take a lot of accountability. And it was the mistake of the mistakes. And between

1:56:26The company, Bill and I, to the disagreed about whether we should do hardware, that was a big one. Surface was big disagreement, phone, big disagreement, hollow lens, big disagreement. What about Azure? Were you aligned? Bill was fine with Azure. The cloud, Bill and I had agreed on in the 90s, right?

1:56:54Energizer energizer. I think Energizer could have been Bill's idea not mine. Yeah, pretty sure it was Bill's idea not mine. I executed but Bill's idea not mine. But you know, we never hit it. There were places there should have been more contention. Maybe even during the late 90s, I don't know, but there were certainly places where there should have been more contention. And I, you know, my God, I was, you know, these are the smart technical guys, Bill, and I'm trusting.

1:57:23Vista. I'm beginning to have a pit in my stomach, but we didn't have the right contention. I mean, it was at the, and this is not directed at Bill personally. It's directed at all this. We kind of had an emperor that had no clothes. Yeah. That was long. It was the emperor that had no clothes. And partly it was the centrality of windows and the notion that windows would say central. Therefore, people would all want this new stuff. Partly, there was sort of a.

1:57:52There's too much change all at one time. We didn't do a new operating system, but we're kind of doing a new operating system. We probably have been better. It may not have sold at all, but we probably would have done better just to do it. Just starting from scratch. Maybe keeping parts of the kernel, but otherwise starting from scratch and throw out all that, you know, all the scruff. Now, I don't think we would have popularized it.

1:58:20And if we'd looked at that way, we probably wouldn't have built it. But by then, you know, we're a little cocky about Windows and it was our thing. So, I don't think we had the right grind in our system there in the early 2000s. I just, between Bill and I, you know, did we make some good decisions? Yeah, we did make a good decision to do Xbox. Were we doing too many things? Yeah, we were doing too many things.

1:58:50I would say there was probably a voraciousness misplaced by Bill and me. Maybe, you know, I had to deal with some of the pragmatics of hiring people and stuff, so I probably, I didn't push back on it, but I probably felt the pain a little bit more in terms of trying to hire people. And, you know, so that's kind of 2000 to 2004. And then by 04, Bill was already you know, sort of talking to me about wanting, you know, wanting to be able to go. And then O6, we announced that he was going to go in O8. I also think we screwed that up. You can't have a long goodbye. Long goodbyes are not helpful. Yeah, yours was short. Yeah, it was goodbye. You know, I stayed on the board for one more board meeting after I left. That was it. But a long, a long goodbye, then nobody.

1:59:52that nobody knows their role. I think I did some of my very best work after Bill left. He asked me, when do I think I did my best work? When I started, when I was running sales and sort of evolving the center prize business, someone I ran system software, and then the last six years I was there. That's cloud, that's surface, that's some of the improvements in Windows.

2:00:23I feel really good about my last last six years. Bing, that's when we hire, I think that's when we hired Chilu. Chilu, yeah. Do you guys know the story of Chilu at Microsoft? Chilu is one of the most pivotal things at Microsoft. Okay, why? I knew it was important, but tell us the story. In a way you, in a way you may not even know. First of all, a brilliant guy, great guy.

2:00:50So she's talking about leaving Yahoo, he's at Yahoo at the time and she I think went to graduate school with Harry Shum who had been in Microsoft research and Harry was now working on search and he was working for Satya who was running Bing. And Harry says that's an amazing sentence all in itself. Oh Satya the guy who was running Bing. He was running Bing and Harry says Cheese a genius. We've got a higher cheat or you know we and we yeah, I don't know if she really wants to work or Well, we got to pick cheese brain. We got to we just have to learn from Chilu Okay, so Satya, me, Harry fly down to California and we meet with Chilu and we talked to cheese and cheese brilliant We're learning all this stuff about Chi and Chi leaves the room. God, there's a lot

2:01:45I don't know who throws the idea out at first, maybe Sasha. We should hire Chi and I should work for her. Whoa! So Harry and Harry was all in. Harry worked for Sasha who worked for Chi. Now, we flipped it around. So you flipped the whole reporting structure to hire Chi in the room. After Chi walked, we talked for about 15 minutes. And then Harry calls Chi and said, do you mind coming back?

2:02:15Wow, wow. I forget where Qi was thinking he'd take his next job. He had a next job in mind. Maybe it was with Baidu, I can't remember. Some place. Wow. So then what did he do at Microsoft that made him so impactful? It's the story I just told you. It's what he told me about Satya. I mean, I love Satya. We were giving him more and more responsibilities anyway. But it told me, this guy will do the right thing for the company. He'll prioritize that.

2:02:47He doesn't have an ego that gets in the way. And she did great work. I mean, she knew about sir, she could bring in a different, you know, he was an old pro at it. And it started like cash flowing billions of dollars eventually. Eventually. I mean, and she's in, I mean, such is not an engineer by training. She's an engineer and he's a PhD in computer science. And he had a lot to bring.

2:03:14not such as been great at managing product development, that's for sure. But, you know, she's like that meeting, digging the bits and bytes kind of thing. So, but the meeting is the thing that was important. She was important, sure, but what Sacha and Harry did that day where they just found a guy and said, will I please Steve go hire him as our boss? Yeah, you don't hear that very often. No. And I was so impressed.

2:03:43Let's see what year would you have come. Oh, it was probably it was after Yahoo's. Yeah. Oh, we don't know. I'm here six years before. Oh, nine. Yeah. Satya became CEO five years. And that let me then be able to also say now I can give Satya more responsibility doing something else. Why did you move them to server and tools? I thought it would be great to get we had Chi. So we could probably move him. I thought it would be important to give him other experiences to try to get him right.

2:04:13to, you know, be able to BCO because he was on a list of three or four internals at that time who he said, we'd been on a list of guys we'd been talking about because we did an annual succession plan thing. You know, succession plan is two candidates. It's what happens if you get hit by a bus and what happens if you get served a term, whatever term feels like. And though, they're different people, right? If you get, such a gets a, by bus, if such a serves another five years, it's probably a different person.

2:04:42I think that's true in most most companies you got to think about it differently anyway So I said hey, we'll get him another experience You know, he hasn't worked in apps hasn't worked in server and tools and it was kind of a good time to sort of switch things around you know Bob on up obviously being super successful because Bob was running server and tools at the time and I love Bob. Bob's one of my favorite guys I've ever worked with on to be CEO Snowflake. Yeah, absolutely. Worked out for everybody. He's done done fantastically well, but we moved such into that job, but you know, and then that was he was on a great path and she's higher made search as strong or stronger showed just how.

2:05:31Right, Satya was, we talked about this in basketball. You know, he said all about team first or not. All about team first, which is essential. And we were able to give him the additional experiences, which were super helpful in terms of him then taking over CEO. That's why he was turbo-charging. Yeah. All right, listeners.

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2:06:53We want to talk a little bit about your post Microsoft term, but let's sort of leave Microsoft with a final question of why did you resign? Yeah, a couple things. Two or three things. Number one, the phone was very on my brain. When you said are you having fun, that was the thing that was eating at me the most was the phone. And I decided we needed to flip the model around your episodes.

2:07:23pretty good about all that happened. So I'm not going to go through all that. But I knew we had to do hardware. I knew it. There was just no question. We weren't going to be able to play the search game, the Android slash search game because we just didn't have the power of monetization that they did. And Apple's Apple, but they're going to be two phones. It's not like there'd only be one phone that was popular in the world. And this is something you guys didn't put in the episode. I've been trying to buy a hard, I had talked about buying a phone company for years, a number of years, before the Nokia deal. I forget what year it was. I flew to Taiwan and we were looking at buying HTC. They were the biggest Windows phone OEM at the time. Nokia wasn't signed up. I finally just decided, Terry Meierson, I had three, four trips to Taiwan to talk to Peter, look at the organization.

2:08:21And I just decided it would be too tough to buy a Taiwanese company that it would be. I would worry too much about the integration. I liked Peter Cho who ran HDC. I don't know if that name means anything to you guys. Of course. But I'd been looking at that thing for two or three years maybe before. And Bill and I had continued to have all the tension. We had about anything that had hardware in it.

2:08:49You know, it's not like our relationship was calm and is clear. It had, it had always been bumpy. I mean, even back to the beginning, I almost quit after four weeks because we were in it. Five weeks maybe. So it's not like it had ever been a very poor economic decision. It had never been linear. We had another big fight a year after about financial stuff. So it had never been linear. It had been It had helped build Microsoft, but that didn't mean it had always been easy for him or me. So the hardware thing was exacerbating our relationship. I thought we really needed to do a phone. And then the board said, no, we don't want to do a phone. And I was very transparent with everybody. Okay, here's, you know,

2:09:44We brought the manager. You got this right. We brought the management team in and I don't know if it was more wanted to buy or didn't want. But I let everybody speak. I mean, it's a big decision to be in the phone hardware business. And then the process from we do the presentation and the process from there to the time the board says, no, I didn't find very respectful.

2:10:10Board didn't ask me to leave the board. I just didn't find the process very respectful and I probably won't go into the detail that so and a lot of it has to do again with my relationship with Bill because you know we're and and look I knew Bill didn't love the idea and I was willing to sort of accept whatever the board decided I was no no question about that but the process wasn't very good and I I was not happy with the process, but they wanted me to stay, but I just decided two things. If we're not gonna buy phones, that's kind of my best shot for a consumer future for the company. Right now, that's my best shot. I tried to fire the Yahoo shot, the phone shot, those were my two things. Remember, mobile and search. And I said, look, this might be the right time.

2:11:07We can't we can't make my play here not not out of peak It's just hey, I thought about this in advance and said look if it doesn't work it doesn't work if the board doesn't want to do it fine And so I said this is a good time It's also good time because the clouds just coming on and I'm saying to myself look we're gonna have to build new capabilities even the way you were moving to a gross margin to a non you know Something below 100% growth. Not software business. We have whole new capabilities. We need to build up around that. I even think of it through the lens of the accounting system. Like, how do you, we had these revenue and cost reports. They have to change in the world of the cloud because you really have to get tight on gross margin, not on revenue. Revenue, I don't really pay much attention to Microsoft's revenue. I pay attention to the gross margin growth.

2:12:04These days, you're saying. Those days. When I said the move to the cloud, I used to say this to analysts, you should expect us, you want us to have lower gross margins going forward, but we'll make it up in volume. Right? I mean, that is the whole problem. That's the cloud. Yeah, yeah. Lower gross margins. It's like Walmart's an okay company, even though it's, you know, that margins, whatever, percent and half, two percent, you just got to make it up in volume. So I knew it was a good time to let the new person sort of build from what we had to sort of the next generation of all the machinery that would have to happen to make cloud happen. Phone was, I never lost my desire to be an end user company. I bemoan the fact that I couldn't keep us focused on being an end user company slash consumer. It killed me.

2:13:01And sort of you don't just, I want to be a consumer company. No, you got to find the locomotive, not just a bunch of cabooses. You know, at the end of the day, Zoom was a caboose. A lot of things we invested in were cabooses. We had to find the locomotive. They're only two possible locomotives that made any sense. And I didn't have a play that I thought was going to break through anytime soon in search. Mobile was going to be really hard. But I knew in my heart of hearts that without physical hardware, we weren't going to break through there either because of search.

2:13:31Board said no, I said okay Bill and I are it's not really a board being this respectful like maybe it is, but it's mostly me and Bill we're grinding grinding and that's never fun when we grind and I said okay, we're grinding I Know it's frustrating for him. It's frustrating for me. We're grinding here goes my idea it goes my idea and oh by the way, this is a great juncture point So I said okay, I'll pass and then the board changed Yeah, so why did they end up buying Nokia then after your decision was final you were out Maybe you don't know yeah, I don't I don't really know I mean, I'm not sure they really understood but I told them About you know, we had a deep partnership with Nokia and I'm not really sure maybe guys really understood I had done a good job explaining how close the partnership was so there was really no go back to Nokia and see if we can have a bigger partnership

2:14:31The problem with the partnership with Nokia is they didn't have the money to invest in marketing. We did. We did. They didn't have the market to go. They did not have the ability to go deep pockets. We did. But if we didn't have the monetization capability back through the phone, we weren't going to be able to make it work as a partnership because we had to put in the cash and therefore we had to get the return.

2:14:58And it wasn't going to work. It reached a point where you had to buy the company or just cut bait totally on the whole thing. Yeah, just because the money, the math wouldn't work. What we had to do to be successful was beyond their financial capacity. But if we were going to do what it took to be successful, we couldn't do it on like $4. Royal margin dollars from the hardware too. Exactly. So you left. You did a pretty incredible thing or really you didn't do.

2:15:28an incredible thing. You held everything. You're still the largest individual shareholder in Microsoft. I think I might be other than index funds, the largest institutional investor too. Basically besides Vanger, on the one hand, I imagine it was very simple. You've given reasons in other interviews. In the past, you're a loyal guy, et cetera. Just talk us through the emotions thinking about that. I imagine that was not so simple.

2:15:57No, not I leave and then what does it mean to emotionally detach because if you're not there you have to emotionally detach you can't say Because you know what you can't control anything anymore So it's hard you don't want to stay quite that emotionally attached because it's like oh I gotta get back in and thanks everything But I said I'm gonna be the best investor. We're gonna know everything about this company. We're gonna go to I'm going to read everything just like I used to. We're going to go to conferences just like we used to. I went to one shareholder meeting and I was kind of a dick in my opinion. I mean, literally one of the shareholder shareholder meetings. And I just, yeah, I was too emotionally attached. And so it took me about a year to say I just have to emotionally detach. So it took some work, but I kind of was able to get there, but I'm still loyal.

2:16:56Didn't want to sell there's one then we get our philanthropy started and Then I do need to do something because we do need some of the asset value to give away So I went through a bit where We gave some away i.e. We put it into our donor advice fund and I also, you know sold a little bit at the time and I was thinking this is like 2015-ish Yeah, it might have been even 16, something like that. And then, you know, because our philanthropy was just ramping up. I mean, kind of even giving away money, but the dollar value was wrecked. And then I said, maybe I should just sell it all. Full emotional detachment. Wow. Let's do full emotional detachment. Because look, it was my baby. It's my baby.

2:17:51I mean, I'm not a founder, but I think of myself as a founder. I was there so early and I hired basically everybody and, you know, everybody was a senior leader. I'd recruited and, you know, it's not true anymore. Now things have changed. You know, I should probably only 10% of the people who are there now were there when I was there or something higher at the senior levels. I mean, I can go through the math of why that's true, but that would mean it.

2:18:16Very understandable decision. You know, it's emotional to touch. It had nothing to do with money. Yeah, yeah, yeah. My only thought process was emotional detachment. I was, I was, I was wrestling and you're ready to hit the button. You're ready to hit the, the self wrestling. And then lady who works here, ex-microsofty, and who works here in finance, who's the woman who sort of really charts what's going on financially at Microsoft. She and her boss.

2:18:44Who's another ex-Microsoft who used to work with me most closely on the financial stuff. But she says, you can't sell. You can't sell. This is going to be worth a lot more. You can't sell. You can't. So she effectively made a Microsoft stock pick. She made a, and she was recommending, she had some, she has loyalty too. It's not like, you know, we have a bunch of Microsoft's here. And it's not like they lack loyalty either, but it was a little bit loyalty and a lot of pick.

2:19:14And I said, look, my loyalty trumps my emotional attachment. I can get through my emotional attachment, but my loyalty, and look, I think of the thing as I think of the thing as like a two-headed hydrant. I thought about this the whole way. Things could go to nothing or things could explode. And that's partly why we tamped on the stock because we always saw the possibility for either of two radically different outcomes.

2:19:43And then finally I say look I don't really, I'm not going to sweat whether we're going to get the downside or the upside. I'm just going to be loyal and I'm going to be enough emotionally detached for this to be okay.

2:19:56Cause for you, it kind of doesn't matter. There's not a downside that could be so bad. I had enough money on the pack table. It's not like my family's gonna... You could still run one of the best philanthropies of all time, even if the... We could be great. I hear you on the 18th. No, I mean, Connie would have been okay with it. I mean, she finds it difficult to give away as much money as we have.

2:20:16She wouldn't mind a smaller problem to start with. She would have been okay. I've been charting it over the last three years. You guys are giving away almost somewhere in the neighborhood of a billion dollars a year. Cash out the door. But your net worth is ballooning every year way faster than you can give money away because of the Microsoft hold. Yeah, I'm one other thing that yeah, Microsoft told that you may be missing one thing on the Microsoft hold that's important. And that's the size of the dividend check. Ah.

2:20:44between Microsoft and the other stuff I own, the dividend checks are pretty close to what we give away. So you can look at the appreciation, but we're just above the dividend checks. You're just trying to shovel the money. It's coming in the door out the door. So you can fund the whole philanthropy without selling additional shares. Well, there's two things that are going on. One, the dividend checks are pretty good. And number two, I do have stuff that's not in Microsoft.

2:21:18You hold mostly index funds outside of the Clippers. Is that right? Clippers, Lash Arena, index funds. I have one business I invested in with a guy who I went to college with who worked at Microsoft. It's called Stagwell Media. It's a marketing services company called Modern Day at agency, but it's not really an ad agency. A guy named Mark Penn. So I do have some money that's not in index funds, but mostly I'm in index funds.

2:21:46Which, I mean, anybody else in your, the same couple top pages of lists that you're on, you must be the only one that operates like this. Everybody else, huge family offices, lots of investments, private equity, funds. But if you look at the guy, I mean, I would say probably would find that Zuckerberg is pretty concentrated. I don't know this, but I'm gonna guess you would find, I don't know about Ellison.

2:22:14but obviously some of the guys who own more privately held businesses. Pretty concentrated. Who else? The Google guys, I imagine are concentrated but I don't know that. I can't speak for anybody else. Obviously Bloomberg is concentrated. Right. In practice, it all works out the same way. There's one thing that is everything. Look, if you sell it, you're just going to pay capital gains taxes.

2:22:43If you're really just being a financial monster about it, you got to decide, will Microsoft underperform the index by enough to, right, right, right, right, right. The capital gains taxes. I don't need the money. I got plenty to live on without selling anything. That's number one. Financially, where's that money going to go? Someone go to my kids, but most of it's going to go to the government or to philanthropy.

2:23:12So why would I sell so we have left less to give to philanthropy someday unless I really think Microsoft's gonna underperform the market by essentially the capital gains rate So I feel like I'm watching a live USA facts. Yeah video right here Yeah, I got this question once I'm a member of a country club in LA and one of the things country clubs do sometimes is they'll do Q&A with members to entertain And I did a Q&A with a friend of mine at the club and who'd been president of the club actually and also as a Kind of knows Charlie Munger pretty well Charlie Mungers there as well and Charlie Munger comes up to him beforehand and to me I know Charlie through Bill and Warren and says If you call on me, I have a question as a leads early kid so

2:24:08So you did a Charlie episode. You know, so we do the queue. We do our panel thing, the two of us. And then Q and A Charlie, you know, gets up to the mic. He's not moving super well, but he gets up to the mic. And oh, Charlie, we can call on you. And Charlie says, Steve, you know, I'm wondering why you held on to your Microsoft stock when your partner is over there. It didn't.

2:24:39I know you're not that smart. I said no Charlie, but I'm not loyal. Wow. I don't know why Paul and Bill didn't hang on. I don't know. You'd have to ask them. But for me, it's sort of a from the heart kind of thing. And I think it'll be fine. It's not going to screw anything up financially. I mean, what's the worst thing that happens? You know, Microsoft goes to zero, probably not.

2:25:09But even if Microsoft goes to zero, me and my family, we can live. We can give away money. We, you know, it's not going to go to zero. And, and I'm okay. Either anyway, anyway, it goes. I'm fine. And are the Clippers and the Intuit dome fully paid off at this point? Uh, the Clippers are fully paid off. I paid them off the day I bought them. Uh, that's not true. Uh, I didn't want to sell stocks at the time. So I borrowed some money, which is long paid off.

2:25:38Into a dome we borrowed some money against into a dome. So I don't know any money on it. Oh, that's not true. I owe some I had some margin debt that I used to but again, it's just a timing thing. I didn't want to sell stock so took some margin debt which as dividends come in I'm reducing the bargain debt But the building itself has that on it why because To sell the building, let's say something was to happen to me and my wife had to sell it. It obviously has a lower value. The buyer would have to come up with less cash because it has debt on it. So call it worth the X billion. Right. You just rolled it. And it's got Y billion on debt on it. You're only selling it for X minus Y. You're not selling it for X. Meaning the universe of buyers is bigger because it has debt on it. And no, by the way, I happen to get the debt at a very

2:26:31good time at a very good rate. So it's sort of a double value to a future buyer. So that's the reason we put that on the building. And the margin debt was just a timing issue if you will. I feel like we've done a great disservice by going into the clippers and into it through the elemental lens.

2:26:53Can I ask you? No, that I do not own that. Well, and I will also tell you, unlike Microsoft, it cannot go to zero. Yeah. Like the asset value. Not a chance. It is far more secure than Microsoft. Why? Not making more of them. They're not making more of them. And as long as anybody in the world's getting richer.

2:27:22The buyer pool will only go up and people don't buy them for their earnings. I wish we had more earnings, but the end of the day, people are buying them because almost more like a piece of art. I mean, not everybody, some people don't like negative cash flow, blah, blah, blah. But at the end of the day, and I have, you know, the clippers, we have the best market in the world. Maybe you want to want to own a basketball team.

2:27:51Other than maybe Miami, the only place players want to play is LA. And if you look at buyers, you know, if you're a buyer and you, where do you want to go? You care about where you live in LA. Where do you want to go? Well, you want to go to LA or you want to go to Miami. You don't want to go to New York in the winter time. And if you're a foreign buyer, you know, potentially, you want to go to LA. So that asset value, I mean, we should get on to something other asset value.

2:28:21and I'm not selling the thing, my estate may sell it. I don't know what the Connie and the kids will want, but at the end of the day, that would just not have a lot of volatility. It's a nice retirement fund. What's been the most surprising thing in your clipage journey? I'll give you two parts of the answer. First is how I relate to that business versus the businesses I've known. Number one, there are more similarities than I ever thought. I mean, we do version upgrades just like you do.

2:28:51what's a version upgrade. You do major version upgrades over the summer. That's the draft and free agency and trades. And you do a minor version upgrade at the time of the trade deadline. So yeah, it's very simple. You got a six month shift cycle. So you're a service pack. You have a major supply to rely on SPT. And by the way, you know how people like agile now development. Guess what? That's called changing the game plan.

2:29:19per, you know, the coaches are always modifying in that sense. It's a little bit similar. Wow, I never thought about that. The business is just like Microsoft. We sell both advertising and that's called sponsorship. And we sell tickets, software licenses, software like, oh, no, that's like software licenses and we have an OEM business. That's called broadcast revenue. That's 100%.

2:29:46It's completely similar. Yeah. Remarkably similar. Yeah. I mean, just in terms of business modeling, we do have a union. That's very different. What that means in terms of the complexity through the collective bargaining agreement, it also covers things like what's max salary, what trades can you make, all that, very different. Yeah, actually, you're kind of, you really are business partners with your, with your competitors. That's different.

2:30:16I mean, you actually get together to talk to him. I never did that. It's a Microsoft, but you get together and you talk to him, but you're trying to compete. If you have somebody who wants to advance through their career, oftentimes the best way for them to advance, they have to go to another team. And we have a president of basketball. It's not an open job. And I don't plan for it to be an open job. I don't want to lose anybody, but if you know, A lot of the career moves people make would be to other other organizations We we don't like that, but we want to have the talent everybody loves right Microsoft your domain is always growing and so there's always the main is growing or number of people You can move people you're an engineer you your board you've worked on acts will move you to work on a different product for example It's different the way you think about people because primarily because of the union, but also you know just

2:31:13There's only 30 head coaching jobs. There just are. So if somebody wants to be a head coach and they're not our head coach, they have to find a job someplace else. Again, not what we want. But the reality is we don't want people held back in their career. It's not like Microsoft where I felt like I could always find a job that somebody should want. So that's different. I give you another one to think about. Business likes to say, oh, we're accountable, we're agile, we're this, we're that.

2:31:45Sports is so much more accountable than business. It's like a joke. I'm being a bit extreme for fun, but every 24 seconds, you get a report card, basketball, shot clock, every 48 minutes.

2:32:03You can't say I'm gonna make it up next quarter. We missed, but I got it next quarter. No, you lost that game. That game is on. Your loss come for the rest of the season. You cannot dig yourself out of that one game loss hole. You can't. It's gone. And you can probably also be reasonably confident about each individual's contribution to that winner loss. Now let me get to that. Your customers.

2:32:28No, everything you know. It's not like you could say back in the lab. You wait till you see what we got in the lab. Every statistic we have, our customers have. You want to know how many miles James Harden ran last game? Comes out of the statistical systems. You can find that out. If you want to know how many pick and rolls we ran of a certain type.

2:32:55and how they were guarding how we did scoring against them. Don't worry, you can read about it. You want to look and see what the dynamics looked like on the sidelines. You can just sit there and watch our players and say, oh, I don't know everything. I don't know what they're saying, but I can see their body language. Oh, so and so seem really charged up. Oh, that's great. So and so cheers for their teammates. So and so see down. There's almost nothing. I mean, we get to watch practice. Fans don't.

2:33:23but the level of accountability is so high. The speed is high. Think of teamwork. Teamwork, man. It's all on display. Not as on display, but you absolutely know you need teamwork. One star does not campail you out. You may have one star, but then the pieces have to fit around the star. It's just kind of the way it is.

2:33:54You can't take, you know, how businesses, you say, okay, everybody wants to talk about teamwork. And in a lot of places, that mean, hey, Ben, you know, I don't know, we could work better on this and then Ben can say, your team's doing things wrong and then we can get back together and talk a little more and then a month later, we can talk about it some more.

2:34:22Probably you've seen this in some organizations. And then at some point we'll talk about it as if it were a great collaboration. Right. Between our two teams. And you know what has to happen in our business? Every minute. You actually have to actually say it, pass the ball. Yeah. Or, you know, hey, this isn't working. You got to do X. You got to give real-time feedback. You can't lolly gag or I will, you know. Let's rub each other's belly. No, if you want that team to be better.

2:34:51You have to hold one another accountable not just the coach. The best teams the players hold each other accountable and not just the best player holds everybody else accountable but. The guys who are not stars have to be able to hold. Everybody's got to hold everybody accountable which means. Really means give the feedback. Microsoft we got rid of the value called teamwork I didn't want that one I said.

2:35:19Open and respectful and dedicated to making others better. Because teamwork could sound like a treat everybody nice, nice, open, yes. Gotta say what's on your mind? Respectful, yes. But number one dedicated to making each other better, which I think is what the purpose of teamwork is, as opposed to the word team. Oh, that's interesting. Teamwork is like an implementation detail, but that's not actually the goal.

2:35:47We don't seek to have an organization full of teamwork. It's teamwork because we want some output. Exactly. And, you know, I think back to the old HP team, you know, I'm okay. You're okay. Let's all be nice to each other. And, you know, there's a little bit of that that's kind of come back into the general narrative of culture today and, you know, generations, much younger than me. But at the end of the day, if you want to succeed, you're right. The goal is succeeding.

2:36:16Yeah. And in an NBA team play well together and in the NBA team, you're going to know. And two and a half hours or so, two hours, you're going to know. It's interesting. Yeah. Professional sports is kind of like maybe like the last bastion of there's not room for the I'm okay. You're okay. Let's talk this out. Oh, your team's talked to mites. It's like extreme accountability, extreme accountability, extreme.

2:36:42Teamwork, I learned some things that would have been very helpful for me to understand at Microsoft. I'll give you another one. Reference checking. Everybody does reference checking, right? How good is the reference checking in most businesses? Not good. Most people call a front of sheet references, which has never made sense to me. Or you call somebody who probably doesn't feel like they can give you an honest answer because they don't want to get sued. Basketball? You should see.

2:37:12the amount of reference material we have on a guy before we draft them. I mean, people have talked to their old coaches. They've talked to their teammates. Right. Yeah. And it's not just, I mean, that's kind of how it's due. They've watched them play. They've been to practices. They kind of know what they've.

2:37:33Talk to references about work. I don't know if you could scout your future employees. You could just go hang out at their current job. Yeah, or you, you know, you talked to their parents. I mean, there's so many things. The draft choices are such a crucible decision, right? Because free agency, I mean, you mostly know what you're getting, right? Like they have a body of work. You can see the body of work. You may know what happens behind the scenes. You may not. Right.

2:38:00So there's some risk to it. But there's a body of work. Yeah, a draft, you get two choices every year. Well, we traded some away, but yes, right, right, right, right. Yeah, yeah, yeah, yeah. Yeah, you're just David. You know, in aggregate, every team gets two choices every year. And you could choose to deal those choices. But like, that's, uh, and that's hugely, hugely impactful. And you, well, and you're dealing with one other thing. Uh, my wife reminds me.

2:38:27Boys brains don't fully develop until they're what 25 and we're drafting guys who are 19 20 21. Yeah, so you're also having to say by everything I know what do I project that guy looks like as they get into their You know, you could say you enter your prime around 27. What do you start looking at though? You're gonna look pretty good or not by 23 24 25 so you have to sort of have a progression of what you think happens to the young man When you draft them and so the more so reference checking bigger much bigger deal I found and You know people say oh well, you know, it's simple. It sports the strategy decks I get 35 power points 40 power points easily To go through. Okay. Here's our strategies. What about this? What if what about this? What do we do here the complex we have a PhD physicist?

2:39:28Who, you know, is a key part of our analytics group, focuses on our analytics systems and it's not like, you know, the stuff's not complicated, it is. Analytics has become this really big buzzword in sports. Where do you see real alpha actually happening in data science in sports versus what's just like table stakes at this point? There are two ways to use analytics. One is for gain planning.

2:39:57Literally, what does this tell us about the best way to guard Anthony Edwards in this situation or these situations? Very helpful for that. I'd say the data is probably table stakes, honestly. The way you use it, not so much. Do you ask the right questions? Maybe not. You know, does coach really understand an embrace? Are the analytics people really able to mind meld?

2:40:27with coach so that coaches you know get the insights they can for game planning the second is what about for drafting and trading analytics are actually a little less important in that in that instance because they don't really tell you how if you mix Charlie with Harry it's different than if you mix Charlie with Bobby and Charlie and Harry haven't played together before so it's a little different they are helpful We have analytics, for example, and all the kids we're going to draft, less valuable than on pros because you're playing against a different level of competition. Do people have differential data? Not much. I mean, the same camera is in the ceiling and recording the same games. Most of the analytics data now gets processed through standard software packages that get licensed everybody.

2:41:24So there's a company called Hawkeye, Second Spectrum, and basically, you know, they built machine learning layers on top of the raw motion data, et cetera. So every team winds up with the same tools. Doesn't mean you don't need smart guys. It doesn't mean you don't do analysis on top of it. Has anyone had a breakthrough form of measurement? Is there an example in the last five years of a team that's had a great data source emerge?

2:41:54A different data source than other people have. No, I don't think so at all. It's the things people emphasize in terms of what they look like, look at, could be different, I think, very much by teams. There are teams at the draft who just have you take a psychological test. You get to interview with set of kids and they might just have you take a test. Other teams, it's all about the interview. Some people, I don't know if they have them see psychologists, I don't know.

2:42:22People will use different techniques to try to do some of that. It's a little different than analytics, but it gives you the sense of what is important. How do you assess what's important? Fascinating, interesting. How does Intuitum fit into all this? I love Intuitum. Since we talked a lot about products, and I've been involved in, you know, I'll say the, the visioning.

2:42:49and I call myself a visionary, but what should this product look like? And particularly those, you know, a number of them, both windows, but also certainly on the backend products, backend meaning they're not customer visible. But I'd say into it, Dom's probably the product for which I had the clearest vision I've ever had. I knew what I wanted. It evolved some because we went and looked at a bunch of other arenas.

2:43:16But I had a point of view. I know what user I wanted to make. Make happy. So I bet a lot of people aren't familiar. What is the thesis behind into it, Dome? I wanted to make into it, Dome. The best place for the hardcore basketball fan. And particularly the hardcore clippers fan, right? Sure. Sure. Sure. Of course, because we're the only team that plays there.

2:43:42You got another team who plays there every night. You're visiting team. Yeah, I guess not trying to help you not trying to help them. So, you know, yes, Clipper fans, but I wanted you we're gonna have the Olympics. We'll have every Olympic basketball game and into it. I wanted to be great for those environments. We have some college games or high school games in their basketball basketball basketball. So you sit in there and you're a fan. You want it's a live event. I have energy. I have intensity. If you're a basketball fan, come on.

2:44:12Let's go. And so you want it tight. You want to have it reverberating with people who are cheering. We built essentially a whole side of the building is structured more like a college gym, long and steep. There's no, there's no sweets on the side. We even built a student section right in the middle, i.e. at standing room only. You must stand. That's what you have to agree to if you're going to sit there.

2:44:40Be there. You have to agree to stand. You have to agree to cheer. And if you don't, we'll find you another place in the building to sit. But you can't wear visiting gear paraphernalia on that whole side. 4,000 seats. We'll move you if, you know, otherwise, it's small. Not the number seats is a little small, but the way we pulled it together, there's no hockey. I didn't want hockey. Not that hockey's not a great sport, but Compromises you'd have to make to the arena. You have to spread it out. You have to spread people out because the ring is bigger than the court. Very different. Basketball. We put in this, we have an acre of scoreboard. Yeah. The Halo board is unreal. More statistics. More statistics. We did, we went 4K from the start. I didn't realize it's an acre. You have an acre. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard. Of scoreboard.

2:45:34Yeah, for sure. For sure. And what you were describing before is the wall. So for any fans that haven't or listeners who haven't seen a game there or seen anything you've done interviews about this, it's an unbroken 51 rows unbroken. All the way up student, I call it the student section. We call it the swell. Clippers, waves get it swell. The swell is right in the middle. They do a chant before the game starts. They're chanting. They're making noise.

2:46:04a bunch of them find weird things they want to bring to games funny posters but every and You you basically signed up first come first serve if you're not there early You're not in the swell that game. So we oversell the section It's a thousand bucks for the year which is only 25 bucks a game hell of a price Wow, we're expecting an NBA game for 25 you're expected to deliver the goods you have to bring the value you got to bring the value and the thesis behind the wall if I'm sort of understanding correctly is it should be easy to be a clipper player, but hard to be an opposing player. Put it right on top of the visitor side. So it makes noise right into the visitor's huddle. We put the swell right behind the backboard. So basically when you're shooting free throws on that end, you're looking right at the swell. And it makes a difference. I saw data that said that the lowest free throw shooting percentage of the league for the visiting team is against the wall.

2:47:00Like Steve, I mean, that's what I wanted. What did the other owners think about this? We've had a bunch of people come through look at the building and would I be surprised if a number of the new arenas get built don't have a wall? No, I would be or at least the least you've got a duration of your advantage because not every other team is doing builder remodel in arena. But you also have to remember I took some financial hits on this. We have your sweet less revenue.

2:47:29And we only charge a thousand bucks for a season ticket that gets you pretty close to the damn floor. And you didn't have any public funding for it. So in terms of the cash out there, you can't have public funding for arenas. That's why we don't. So you paid for the whole arena at and you're going to have slower payback on that because you have less revenue opportunity. Yeah. I mean, we took a revenue. Definitely we could have made more revenue on that side if we'd done things a little bit differently, but it's about basketball. We have a lot of toilets.

2:47:57Three times the average or something like that. I'm like that. Why it's about basketball Get out and get back into your seat. Don't miss the action We we started out with a lot more concession stands and then we said no, no, let's just do this completely frictionless So if you register your face you just walk in grab what you want and leave If not you could just tap your phone on the way in grab your stuff and leave There's no check out we don't serve eclectic food little everything. Same thing everywhere. Why? We want you walking around having to look for your favorite food. No, you're going to get the same great stuff everywhere. Turns out 85% of what gets bought is in five items. Anyway, it's a hamburger. It's a hot dog. It's nachos, chicken tenders, and I don't know, I'm not remembering off the top of my head. Part of the calculus of this for attracting players too. Sure. If you look at our back,

2:48:54And spaces like our practice facility. I think most people think, but I'm thinking even like, if you know your opponent's gonna have a lower free throw shooting percentage in your home arena. Sure. I think people think players have said they think it's really cool. Now, and that's good. That's good. Players offices are also good. IE the training facility. I mean, the training area, the practice area, our outdoor pool.

2:49:23sauna and cold plunge, our weight room, our sports performance center, so that stuff's all, I would say, pretty good as well. Very good. So we've done a bunch of things. We have the best breaths room I think in the league. We called the Refs Union and said, what do you guys need? The media area? We said, look, if we're going to build a new arena, Our visiting locker rooms the best in the league. Best weight room. That's your sales pitch to visiting stars. Exactly. Yeah. We say, hey, we care. And we care about everybody. And then we make it about the basketball in and out. Oh, what's our artwork? I mean, we have public art that is required. Some of which is basketball oriented. But our major piece of public art is a clipper ship.

2:50:18whose masks are backboard replicas of basketballs from around the world basketball basketball basketball our art inside the building we have a jury high school basketball jersey from every high school in the state of California it looks like art almost because it's nice colors on the wall basketball man it's about the basketball this building feels like your personality into a physical structure like the competitiveness, the loyalty, the like fixation on what matters on the customer. Yes. Yeah. I knew you know how oftentimes startups come about because the founder like is in love with some topic and builds the product they wanted to use. I think that happens a lot. I don't think people start back and look at the market. They say I think

2:51:08You know, I think Zuckerberg did that bill, did that programming. Everybody does it, right? That's what he did. I didn't, I didn't try to go out and survey. We could have designed for the, let me call it the contemporary audience. We would have had more lounge space. We could have designed for what I call traditional, long term. That's kind of how I think about it. We could have designed in a lot of ways. I designed for me in some large measure, guys like me.

2:51:36And it turns out Clipper fans are a little bit are like me because some of them were long-suffering. The team wasn't good there for a number of years. People are die hard. So come up to you and say, I'm 89, which really means they bought their season tickets in 1989 and they've been there. Now we've exploded in the last whatever 14 years we haven't had a losing season. So hopefully a championship here at some point. When are you going to take the Lakers?

2:52:06You know, there are battles in tech where you just have to be patient and long term. Our goal in LA, it's weird to have a town with two teams. Our goal is to be a long term grinders on that. And we want to beat them every time on the court. It's okay to have two popular teams. Los Angeles County, for God's sakes, has the same number of people as the state of Ohio pretty much. So there's plenty of people to be fans. We don't want to be quote, little brother, we don't want to be the team with 20, a nice 20% market share. No, we want to get our fair share. We're never going to get a hundred. The Lakers have tradition. So, you know, just like at Microsoft, patient, long term, hardcore approach. And if we don't do that, no, we, we, the Lakers have the position. They've earned it. They got a lot of championships. I don't mean we're not going to keep coming. You're coming in common and coming. Steve, thank you so much.

2:53:08Thanks, man. Thanks, David. Thanks, Steve. Appreciate it. Oh, David, that was fun. Yes, it was. I've always wanted to interview Steve Balmer. In fact, when I was at Microsoft, you know, I wasn't a podcaster then, but at the time I was such a junior employee, but man, there was a complicated landscape that Steve was navigating between, you know, the products set between developer relevance between the sort of shifting landscape underneath him and will windows be the interesting bet to make going forward, you know, personnel stuff, board stuff, eventually CEO transition. That is not a job I want. It's kind of fun for us as a show too. I mean, obviously this is meaningful for you personally, but when we started the show in Seattle in 2015, I mean, Microsoft, the Microsoft transition, Steve Satya, this is what was

2:54:04In the water, this is what we all talked about at my Jonah Seattle in the tech ecosystem. And it's not clear that Microsoft was going to be this amazing juggernaut that it turned into. I mean, obviously Steve had planted some seeds in enterprise and what would become the juggernaut of Azure. But we were early in Satya's tenure when we started the show. Everyone had high hopes. He had started to transform the culture, but this come a long way. Steve knew how great Azure was going to be.

2:54:33but the rest of the world didn't yet. Yep, so fun. If you like this episode, go check out our two big episodes on the history of Microsoft. Part one is basically the era where Bill Gates was CEO. Part two is basically the era where Steve was CEO. And if you want more acquired between the monthly episodes, check out ACQ2, our interview show where we talk with founders building their businesses today, often in spaces that we've covered on the show.

2:54:58If you want to know more, every time an episode drops, check out our email list. It's acquired.fm slash email, get updates, get corrections, get hints at what the next episode will be. We announce all kinds of cool stuff in there. When you finish this episode, come discuss it with the other smart members of the acquired community at acquired.fm slash slack. And with that, listeners, we'll see you next time. We'll see you next time.