Google Part II: Alphabet (Audio)

In its first six years from 1998 to 2004, Google built one of the greatest products of all time (and certainly the greatest business of all time) with Search. Then in its next six years from 2005 to 2011, Google built seven (!) more billion+ user products: Gmail, Maps, Drive and Docs, YouTube, Chrome, Android, and Photos — all either started from scratch internally or acquired as startups that were still in their infancy. This six-year period of wild innovation STILL stands unmatched in technology history… no other tech company counts more than four billion+ user products in its portfolio total. And of course, this “Google 2.0” era culminated in the transformation of the very company itself into Alphabet. So the question we answer today is… how did they do it?? And why? What was the strategy that led a once “pure play” search company into such far flung fields as email, mapping, funny cat videos and operating systems? We unpack the brilliant (and sometimes accidental) strategies behind each product, the simultaneous three-front war Google fought against Microsoft, Apple, and Facebook, and the spectacular failure of Google Plus that nearly destroyed the company's culture — before ultimately setting the stage for both Alphabet and the AI revolution to come. *Links:* - Jeff Dean and Sanjay Ghemawat New Yorker article: https://www.newyorker.com/magazine/2018/12/10/the-friendship-that-made-google-huge - Eric Schmidt on stage at the iPhone keynote: https://youtu.be/OxUDiS3AR0M?si=bMtVK57n1bFlBj9D - Bill Gurley’s classic “Less than Free” Android post: https://abovethecrowd.com/2009/10/29/google-redefines-disruption-the-less-than-free-business-model/ - Our recent ACQ2 episode with Bret Taylor and Clay Bavor: https://www.acquired.fm/episodes/how-is-ai-different-than-other-technology-waves-with-bret-taylor-and-clay-bavor - Worldly Partners’ Multi-Decade Alphabet Study: https://worldlypartners.com/businesshistory - Episode sources: https://www.acquired.fm/episodes/alphabet-inc#sources *Carve Outs:* - Bluey x Camp in NYC: https://camp.com/bluey-x-camp-nyc - Steam Deck vs Switch 2 (Part 2) - https://store.steampowered.com/steamdeck/ - https://www.nintendo.com/us/gaming-systems/switch-2 - Claude: https://bit.ly/claudecarveout - Sony RX100 VII: https://www.amazon.com/Sony-Premium-Compact-1-0-type-DSCRX100M7/dp/B07VPQV7BY?th=1 - Carissimi clothing: https://bit.ly/acqcarissimi *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! Chapters: 0:00 Introduction 3:50 Gmail: Revolutionary Web-Based AJAX Email 16:34 The Web: Google's Strategic Weapon Against Microsoft 32:10 Google Maps and Docs: Expanding the Web Platform 51:52 YouTube: The Early Days of User-Generated Video 1:09:40 YouTube: From Risky Acquisition to Giant Business 1:30:13 DoubleClick: Expanding the Ad Business 1:49:29 Chrome: Google's Entry into the Browser Wars 2:08:57 Chrome: Google's Browser Achieves Market Dominance 2:23:12 Android: Origins of the Mobile Operating System 2:39:43 Android: Google's Response to the iPhone Challenge 3:01:48 Android: Becoming a Global Powerhouse 3:13:23 Google Plus: The Failed Social Media Push 3:26:12 Google Plus: Its Fallout and Enduring Lessons 3:35:25 Alphabet: Laying the Foundation for the AI Era 3:44:11 Business Analysis of Google, 2004-2015 3:50:01 Google's Playbook and Personal Carve Outs _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  Are you intentionally wearing a black turtleneck for this one?

• 0:03Ben Gilbert?

  No, it is actually going to be one of my carve outs, though.

• 0:05David Rosenthal?

  Yeah, amazing.

• 0:07Ben Gilbert?

  What, you think I dress up like Steve Jobs for a Google episode?

• 0:11David Rosenthal?

  Well, I thought because of the, you know, war between Android and...

• 0:15Ben Gilbert?

  I walk in and there's this like smirk on your face.

• 0:19Ben Gilbert?

  All right, let's do it.

• 0:37Ben Gilbert?

  Welcome to the summer 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:45David Rosenthal?

  I'm David Rosenthal.

• 0:46Ben Gilbert?

  And we are your hosts. In the late 1990s, Google built the best search engine for the rapidly growing internet. With a breakthrough search algorithm, low-cost servers based on commodity hardware, and the best business model of all time, search ads, they turned that search engine into a cash gushing business and took it public in 2004. But then, curiously, they started doing some things that weren't related to search. They launched a breakthrough email service in your browser with Gmail, maps that were far superior to the current state of the art, docs and spreadsheets with real-time collaboration for the first time, of course, YouTube, then Android, and their own web browser with Chrome.

• 1:26Ben Gilbert?

  Astonishingly, today, Google has 15 products with over half a billion users. Seven of those have over 2 billion users. David, that is over 25% of humans use seven of Google's products.

• 1:41David Rosenthal?

  Just unreal. Can't wait to tell all of these stories today.

• 1:44Ben Gilbert?

  Yes. And they've also launched some colossal failures. Google Plus to try to compete with Facebook, Google Wave, Buzz, and about half a dozen messaging apps. I don't know, maybe a dozen messaging apps over the years. Hot air balloons to provide wireless internet, and of course...

• 2:01David Rosenthal?

  Oh, man, I forgot about the hot air balloons.

• 2:03Ben Gilbert?

  Google Glass.

• 2:06David Rosenthal?

  Can't forget about that one, unfortunately.

• 2:08Ben Gilbert?

  So why did they do all this? And as a business, Google was and still is the company that makes the vast majority of their money from ads on search results on the web. So today, we tell the story of Google as the innovation factory of the 2000s, their reorganization into the parent company Alphabet, and how all of these different products cleverly serve different business purposes. And also, how it feeds into Google's original core mission, to organize the world's information. And we'll end this episode's story right at the dawn of the AI era.

• 2:42David Rosenthal?

  Oh, you're giving away the end.

• 2:43Ben Gilbert?

  Oh, spoilers, sorry. So is Google a search engine? Is it the platform company of the web era? Or is it an incubator that just happens to have struck gold with search and perhaps AI? Today, we dive in. Listeners, if you want to know every time an episode drops, or get early hints at what the next episode will be, check out our email list. That's also where we share corrections and updates about previous episodes. And we are adding a new bonus. You get to help us vote on future episode topics. So the first poll is going out soon. Sign up now at acquired.fm/email. Join the Slack if you want to come talk about this with us and the whole Acquired community, acquired.fm/slash/Slack. So with that, this show is not investment advice.

• 3:28Ben Gilbert?

  David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David, where are we starting this Alphabet story?

• 3:39David Rosenthal?

  Oh, I have a very, very fun beginning for you, Ben. I want to start with a quote from Russ Haneman.

• 3:49Ben Gilbert?

  The fictional character?

• 3:49David Rosenthal?

  From Silicon Valley HBO show. Oh, yeah, from the TV show.

• 3:55Ben Gilbert?

  Awesome.

• 3:56David Rosenthal?

  And the quote is, "If you show revenue, people will ask how much, and it will never be enough. The company that was the 100xer, the 1,000xer, is suddenly the 2x dog. But if you have no revenue, you can say you're pre-revenue. You're a potential pure play. It's not about how much you earn, it's about what you're worth and who's worth the most? Companies that lose money." Immortal words of wisdom for the technology world. God, that show was so good. Why do I bring this up? Why do I start here?

• 4:25Ben Gilbert?

  Why are you talking about this? Google is a cash gushing machine.

• 4:30David Rosenthal?

  Revenue is obviously not the problem for Google. But what was the problem in 2004, 2005, 2006 was being viewed as, in Russ's terms, pure play. When Google went public in fall of 2004, the stock shot up, basically doubled in two months. Wall Street loved Google. AdWords, the search business model, everybody had to own shares. Google had cracked the code on monetizing the internet. The more people use the internet, the more they search, the more they search, the more money Google makes. Simple, easy, pure play, you might say.

• 5:08Ben Gilbert?

  Yep.

• 5:09David Rosenthal?

  That is until Google announced fourth quarter 2005 earnings. Full year 2005 revenue, $6.1 billion. That's almost double the 3.1 that it was in 2004, the first year it went public. But earnings are flat. Profitability is down. Google's now investing in all these new products and services. Gmail, Maps, the forthcoming Google Docs. Later this year, in 2006, it would buy YouTube for $1.6 billion. Wall Street hates this, hates it.

• 5:43Ben Gilbert?

  This is a huge amount of their cash they're putting back on the table and betting for the future.

• 5:48David Rosenthal?

  So this is January 2006. The stock falls 27%. Wall Street's like, God, these guys, what are they doing? They're messing it up. Stephen Levy writes in In the Plex that the perception of Google's ventures beyond search at the time was that the company was tossing balls into the air like a drunken juggler. They were pure play in investors' eyes, and now they're messing it up. They're adding all this other stuff. They don't want the other stuff.

• 6:14Ben Gilbert?

  Yeah.

• 6:15David Rosenthal?

  So then, Ben, as you teed up in the intro, the question is, why did they do all this? And I think the way to answer it is to start and just tell the stories of all the individual products.

• 6:24Ben Gilbert?

  Let's do it. Strap in. I will say, David, doing the research took me way back to early acquired grading acquisitions. This is the cornucopia of hits of iconic product launches in tech history.

• 6:36David Rosenthal?

  So the first, and probably the most important here, because it sets the stage for everything else. The first major non-search product was on April 1st, April Fool's Day, 2004. Gmail, the most famous, infamous, non-joke April Fool's Day announcement of all time.

• 6:54Ben Gilbert?

  Yes.

• 6:55David Rosenthal?

  But it sure sounded like a joke. Here's the announcement in 2004. Entirely web-based email in your browser, you can log in and access it anywhere, on any device. Google search is built in. You don't need to spend all this time sorting your mail into folders anymore. And one gigabyte of storage, free. No need to delete your mail, no need to clean up your inbox, no need to do anything, ever. And the whole thing is free.

• 7:27Ben Gilbert?

  Yep.

• 7:28David Rosenthal?

  Of course, this sounds like a joke. This is too good to be true.

• 7:32Ben Gilbert?

  The universe at the time is Microsoft sells sort of enterprise-grade mail for a lot of money, or there's all these free web-based services popping up, like Hotmail, that Microsoft would end up buying, and Yahoo Mail, and AOL. You get like, five megabytes of storage.

• 7:47David Rosenthal?

  Yeah, not even. At the time, Hotmail, which, as you said, Microsoft owns, had two megabytes of free storage. And Yahoo Mail had four megabytes. There's another great story from, in the Plex that Stephen Levy has. He's interviewing Bill Gates at the Newsweek headquarters office in New York, shortly after Gmail comes out. And they started talking about Gmail, and Bill can't believe it. He's like offended by Gmail, because he thinks that giving people all this storage is just wasteful. You're doing email wrong. It's morally repugnant to leave all of this email sitting

• 8:24Ben Gilbert?

  Right.

• 8:24David Rosenthal?

  on the servers. I was thinking about it. Until Gmail, the paradigm for email, people treated it like regular, physical mail. Sort it, you file away the important stuff, you throw out the pieces you don't need anymore. I mean, even freaking Bill Gates operates this way.

• 8:39Ben Gilbert?

  Yes.

• 8:41David Rosenthal?

  So Gmail, this is radical. This is a radical notion of how email should work. And it was also correct. I mean, if you sat and you thought about it in, say, 2001 or so, when Gmail starts getting worked on within Google. And you thought about the combination of the growth of the internet, which obviously Google has a front row seat to, and Moore's Law. You would logically come to this conclusion that the cost of sending and storing and searching email would asymptotically go to zero. And thus, as that happened, a whole lot more email was going to be sent in the world.

• 9:17Ben Gilbert?

  Yep. So can I tell you my understanding of where this story starts in 1996?

• 9:23David Rosenthal?

  Oh, I was going to go back to 99, but yeah, go for it.

• 9:25Ben Gilbert?

  All right. So I know you're about to bring up the name Paul Buchheit. Is that right?

• 9:30David Rosenthal?

  Of course. Yeah.

• 9:31Ben Gilbert?

  So Paul was kind enough to speak with me before recording this episode. Paul, famously, the inventor of Gmail. In 1996, Paul was a student at Case Western Reserve University in Cleveland, which you may also know this, David, famously was one of the-

• 9:47David Rosenthal?

  Ohio Strong.

• 9:47Ben Gilbert?

  Yes, the first campuses in the nation to have broadband internet in the dorms and all over campus.

• 9:53David Rosenthal?

  Oh, OK. I do about the Paul fascination with webmail starting in college, but I didn't realize that Case Western had broadband.

• 10:01Ben Gilbert?

  So this is why, when you're living in the universe of broadband everywhere, he was living like 15 years in the future, temporarily, for four years in college.

• 10:11David Rosenthal?

  Yeah, 1996.

• 10:12Ben Gilbert?

  Yes. So he realizes email is kind of a bummer if it's a thing that you download and lives on your computer. The information should just exist at my fingertips all the time. Bits are becoming free to move around. So he kind of gets obsessed with this idea in college that email should exist on the web in a browser without ever having to download it. And he builds a prototype for webmail when he's in college.

• 10:43David Rosenthal?

  Wow.

• 10:43Ben Gilbert?

  In 2001, famously pre-IPO at Google, Larry Page-

• 10:49Ben Gilbert?

  Feels like Google is moving a little bit too slow and gets rid of all engineering managers. So Larry and Wayne Rosing, who is leading engineering, go and meet with each engineer individually to talk about ideas that they could work on. This tells you so much about Googliness, but it also tells you a lot about the caliber of the engineers they were hiring at the time, where they would just approach them and say, what ideas are you thinking about? Here are some ideas we have. Can you just, full stack, own this product entirely yourself? And so in Paul's meeting, they knew about his previous interest in email and web-based mail, and they sort of float this amorphous idea to him, and that's where it comes from.

• 11:26David Rosenthal?

  Ah, so Larry and Wayne suggested it to him. Interesting.

• 11:30Ben Gilbert?

  Okay, so here's some other stuff that Paul said. So part of the motivation was that they were looking to make something that would make Google stickier. So you'd have sort of this ongoing relationship for if there was a next Google after Google, there was some reason why you would still have a relationship.

• 11:45David Rosenthal?

  Hmm. Which, obviously, Yahoo would have for many, many years, even though there was a next Yahoo after Yahoo in Google.

• 11:52Ben Gilbert?

  We still get emails from people with Yahoo mails.

• 11:55David Rosenthal?

  Do you know how Paul found out about Google in 1999?

• 11:58Ben Gilbert?

  Oh, no.

• 11:59David Rosenthal?

  Slash dot.

• 12:00Ben Gilbert?

  Really? That's awesome.

• 12:02David Rosenthal?

  And then he sends an email to [email protected].

• 12:05Ben Gilbert?

  Unbelievable.

• 12:07David Rosenthal?

  Fitting that he gets hired with an email.

• 12:09Ben Gilbert?

  Ew.

• 12:10David Rosenthal?

  Okay. So 2001, Paul gets to work with encouragement from Larry and Wayne.

• 12:15Ben Gilbert?

  Do you know what the original seed of the code is?

• 12:18David Rosenthal?

  Oh, no. Go for it.

• 12:19Ben Gilbert?

  Google had just bought a company called DejaNews, their first acquisition. It was the corpus of all the old Usenet posts.

• 12:27David Rosenthal?

  Oh, yeah, and then this becomes Google Groups, right?

• 12:29Ben Gilbert?

  That's exactly right.

• 12:30David Rosenthal?

  Yeah, and Paul's working on that.

• 12:31Ben Gilbert?

  And part of that was a feature to do realtime indexing of all the posts that would allow you to search the whole corpus. So Paul just applies that to his own personal inbox. The first instantiation of this is just a search box to search his personal Unix mail directory as if it is the old Usenet posts that they had just bought. That's the first version of Gmail.

• 12:57David Rosenthal?

  Amazing. As he's building on that, though, obviously, like, the first thing he needs is a web front, an interface. Okay, Hotmail's out there, Yahoo Mail's out there, Webmail's out there. It sucks. It sucks for a lot of reasons. There's got to be a way to make it better, make it more performant and better to use as a webpage. And so he's playing around with JavaScript and what he can do with JavaScript to make this application, this web application of email, better. The history of JavaScript is fascinating. Brendan Icke created it at Netscape back in 1995. We did a whole episode with Brendan years ago about this. The idea behind JavaScript was to include a programming language as part of web browsers so that people could make dynamic webpages instead of just static HTML documents.

• 13:42David Rosenthal?

  The problem was, it was kind of this casualty of the browser wars with Microsoft and Internet Explorer and everything that killed Netscape. And so up until this time, kind of 2001, JavaScript existed, but like, it wasn't super popular.

• 13:57Ben Gilbert?

  It wasn't very powerful. You could do weird stuff like animate something on the page, but I would describe it as toy-like and not a real programming language, for sure.

• 14:06David Rosenthal?

  Yep. And for what the web was up until that point in time, you didn't really need it. Static webpages are kind of fine for most of what's happened. I mean, even google.com was static. You type a search into the search box, Google's servers process the query and they send you a whole new static webpage with the results. But you'd imagine for doing something like email on the web or any application on the web, you don't want the site to reload every time you open a new email or you create a draft or you move something around in folders.

• 14:31Ben Gilbert?

  You might want to move from a website to a world of web applications.

• 14:35David Rosenthal?

  Yeah. But this is how Hotmail and Yahoo Mail worked. Every time you took an action, it reloaded the page. And so they were super slow.

• 14:42Ben Gilbert?

  Yes.

• 14:43David Rosenthal?

  And so Paul's like, maybe I can use JavaScript to make this better. He's working on it. And he discovers a little-known feature of JavaScript called the XML HTTP request, which lets a webpage fetch automatically new XML data from a server without reloading the page. And Paul's like, oh my God, this is gold. And this is the birth of Ajax, asynchronous JavaScript and XML.

• 15:18Ben Gilbert?

  So David, I assumed you were going to go here. I thought that you'd get it all laid up.

• 15:22David Rosenthal?

  You've been letting me go. You've just been feeding me rope the whole time.

• 15:25Ben Gilbert?

  You're trying to tell me that Gmail is the first Ajax application?

• 15:28David Rosenthal?

  Well, the first widely adopted around the world.

• 15:31Ben Gilbert?

  That's fair to say.

• 15:32David Rosenthal?

  That sort of set the bar for what dynamic web 2.0, you might say, websites could be.

• 15:37Ben Gilbert?

  Yes. The origin of the XML HTTP request is a part of Internet Explorer, first implemented by Microsoft, and used in this part of Outlook called Outlook Web Access.

• 15:52David Rosenthal?

  I think I did know this.

• 15:53Ben Gilbert?

  When I worked for my high school, I could log in on any computer into my Outlook through their web access, and that thing used Ajax. And I think it only worked in Internet Explorer. So that is the origin of why this API exists in the first place, ironically for another mail client.

• 16:10David Rosenthal?

  Oh, not just for another mail client. It's so deeply ironic that this originated for a Microsoft mail client.

• 16:17Ben Gilbert?

  Yes.

• 16:18David Rosenthal?

  We're going to get deep into that in just a minute here.

• 16:20Ben Gilbert?

  Yes.

• 16:21David Rosenthal?

  So, I mean, when Paul discovers this, this is almost like Google Search all over again, when people realize what you can do to create something that looks and feels and has all the functionality of a application that heretofore would have been a program that you installed on your personal computer.

• 16:41Ben Gilbert?

  A .exe or a .app on your Mac.

• 16:44David Rosenthal?

  That maybe you downloaded from the Internet, but more likely you went to a retail shop, like CompUSA or something, installed on your computer. You can now just do this in a web browser? This is incredible.

• 16:56Ben Gilbert?

  The web is the platform of the future.

• 16:58David Rosenthal?

  Yep. So Paul builds the prototype, shows it to Larry and Sergey. They're super jazzed. So supposedly Larry and Sergey become the first beta users of Gmail. They are the seed Gmail users, and they start using it exclusively as their mail service within Google. And then by the time it launches publicly, all of Google is on Gmail and using it, addicted to it. And it wasn't called this at the time, but it's in the cloud. You don't have to have your mail stored on your machine or a specific server. You can log in, access it anywhere, on any network, any device.

• 17:33Ben Gilbert?

  All this stuff sounds so boring, but it was completely breakthrough.

• 17:37David Rosenthal?

  So obviously Larry and Sergey are jazzed first because of just the incredible nature of this product. And Larry especially, he is a product person. And his view is if we can build a better product and it's on the web, then it's good for Google and we should do it. And that is a huge part of the motivation underlying Gmail and everything we're going to talk about. But there's also another reason, and that's Microsoft. Because Google was doing great, printing money, AdWords, search, greatest product, greatest business of all time. But they've got a big risk, which is that everything about Google, everything about the web right now, flows through Microsoft, flows through Internet Explorer.

• 18:20Ben Gilbert?

  Yeah, Google's entire money printing machine was built on top of Microsoft's and at two layers. So to this point, over 90% of Google search queries were done on Windows PCs. And 90% were done in Internet Explorer running on those PCs. So Google's got the killer app for the web in search. And the thing under them is a browser owned by Microsoft. And the thing under that is an operating system owned by Microsoft.

• 18:47David Rosenthal?

  Yes.

• 18:48Ben Gilbert?

  They exist at the pleasure of Microsoft at this point in history.

• 18:52David Rosenthal?

  And Microsoft has a different business model. So Google's business model, the greatest of all time is people use Google search. They discover more of the web. They spend more time online on these new sites and services that they're discovering. As they're spending more time online, they search more. Searching more leads them to discover even more new sites and services. The cycle repeats itself and Google just monetizes the whole thing.

• 19:16Ben Gilbert?

  Yes. And web usage isn't bad for Microsoft, but if the platform of the next generation becomes the web and people are writing web applications instead of Windows applications, that makes Microsoft's platform a lot less valuable versus other operating systems like, say, Mac or, say, a future where we change away from desktop computers altogether.

• 19:39David Rosenthal?

  Yes. At a minimum, Microsoft doesn't, business model wise, care about the web because they don't monetize the web. Microsoft makes money by OEM selling PCs that have Windows on them. And then Microsoft sells software that goes on those PCs. So at a minimum, they don't care. And at a maximum, like you're saying, web apps are at an existential risk to Microsoft.

• 20:03Ben Gilbert?

  Oh, my God. There's a future application platform that just doesn't really require our participation, other than the fact that we control IE. And at least for now, that's really important.

• 20:14David Rosenthal?

  And most of Microsoft hasn't realized this yet. Thank God for Google. Microsoft's distracted with the albatross that was Longhorn that would become Windows Vista.

• 20:23Ben Gilbert?

  Yes.

• 20:24David Rosenthal?

  A few people in Microsoft realize this, but Google for sure realizes this, though. Eric Schmidt for Double Shore realizes it because he was the CEO of Novell before coming to Google. And who was Novell's competitor? Microsoft. And Microsoft crushed them. So why Google's so jazzed about Gmail? They need to build up leverage with consumers, with users, that they're going to demand rich web applications so that if Microsoft ever tries to disadvantage Google or disadvantage web apps and things moving to the web, really, the only defense against that is if consumers have already adopted this stuff and love it and would revolt. And so this is what Gmail is.

• 21:03Ben Gilbert?

  Yes.

• 21:04David Rosenthal?

  So Gmail development's trucking along through 2001, 2002, 2003. It's hard to remember now. It took three years to develop Gmail.

• 21:14Ben Gilbert?

  Long development cycle. Yeah.

• 21:15David Rosenthal?

  To be ready to release publicly. And then it was in beta for like 10 years.

• 21:19Ben Gilbert?

  Yeah.

• 21:20David Rosenthal?

  I think the reason it took so long was this was all new. There wasn't a lot of depth of knowledge out there about JavaScript, certainly not about Ajax and XML dynamic refreshing.

• 21:31Ben Gilbert?

  It was really hard to program. Today, you've got all these nice abstraction layers, these frameworks that people have built to do web development. That really didn't exist to make Ajax applications.

• 21:42David Rosenthal?

  Yes. Okay, so Google's finally getting ready to launch it. We're in 2004. There's a couple of questions. One, the service, for all the reasons we just described, Google, Larry, Sergey, Eric, they want it to be so compelling that consumers demand it. It takes off like wildfire. It builds this strategic mode against Microsoft, but it will cost money.

• 22:04Ben Gilbert?

  There's a reason other people don't do this.

• 22:06David Rosenthal?

  Yeah, there's a reason that a gigabyte of free storage seems a little crazy. Even if you assume, and I think this is probably directionally correct, that because of Google's commodity infrastructure advantage, they could launch Gmail at like 1/10 of the cost that anybody else could. Also, remember, there's no public cloud at this point in time.

• 22:28Ben Gilbert?

  So you'd have to go build your own data center to do this.

• 22:30David Rosenthal?

  You can't just launch on AWS. There is no AWS. But even assume that Google has a 90% cost advantage on the infrastructure side. The state of the art is other competitors are offering four megabytes of free storage. Google's going to offer a gig. Sure, knock that down by 90%, but the effective cost is still 100 megabytes. So how do you get around being flooded with costs and infrastructure demand when you launch it? They come up with the invite system.

• 22:58Ben Gilbert?

  Yes.

• 22:59David Rosenthal?

  And this is so brilliant. I actually don't know if it was designed as this sort of prestigious growth strategy thing that it became.

• 23:07Ben Gilbert?

  Anyone got any Gmail invites? Please, I'll do anything.

• 23:09David Rosenthal?

  Yeah, yeah, please, please, please. Or if it was truly because of the infrastructure cost. Either way, it's just brilliant. When they launched it on April 1st, 2004, they send out 1,000 seed invites to Gmail. It's a private invite-only internet service. They send them out to influencers, you know, the term didn't exist back in the day, but influential people.

• 23:32Ben Gilbert?

  Yes.

• 23:33David Rosenthal?

  And journalists. And then each user has a set number of invites that they can give to other users to invite their friends.

• 23:42Ben Gilbert?

  And it was low. It was like five or something. And then it wasn't clear when they would top back up, but you'd give out your five and then at some point you'd come in and you'd have five more. You'd have three more. It was like super dynamic and very clearly whatever Google felt like they could give away from their servers at the moment.

• 23:58David Rosenthal?

  Yep. But it was so brilliant. It made it feel like you're in this special world of people in the know that it's super incentivized viral word of mouth growth. Because I'm telling you, it's a gigabyte of free storage. It's this incredible service. They're selling on eBay for 150 bucks. There was a monetary value to these things. Yes, yes, they were trading on eBay for average price of 150 bucks in the early days. And so I'm giving you this gift. Incredible.

• 24:25Ben Gilbert?

  And look, everybody wants this, but you need to have the product quality that cashes the check.

• 24:31David Rosenthal?

  Yes, it needs to be a real gift.

• 24:33Ben Gilbert?

  Right. And it was. It was just better. It wasn't just something I'd sign up for and then churn and be like, cool, I locked in my username or whatever. It was something that you actually used every day, or in the words of Larry Page, pass the toothbrush test. It was a part of your daily habit, something you do once or twice a day.

• 24:54David Rosenthal?

  I wish I could only refresh Gmail once or twice a day.

• 24:57Ben Gilbert?

  So David, was this the first software that used a waitlist like this? Because obviously it's become very popular since.

• 25:04David Rosenthal?

  I think so. So that's how they take care of the cost side of the equation is not running out of control is the invite strategy.

• 25:11Ben Gilbert?

  Well, still not making any money, though.

• 25:12David Rosenthal?

  That's question number two. How are we gonna make money from this thing? Because yeah, okay, there's all these strategic reasons to do it. It'll increase more traffic on the web, time spent, people will search more, we'll make more money indirectly, but they still don't really know that. So they think, okay, we need a monetization strategy baked into the product itself.

• 25:31Ben Gilbert?

  Yes.

• 25:31David Rosenthal?

  Well, how do you make money from anything at Google?

• 25:33Ben Gilbert?

  This actually came up during development. So even in the prototyping phase, Paul logs into the database of ads, which is just funny that at that point in time, Google's got this big database of ads.

• 25:44David Rosenthal?

  Right. Yeah, I'm just gonna access the ads database, you know, all of them.

• 25:48Ben Gilbert?

  Yes. And these are the ads that would run when you searched and landed on a search results page. And so he decided to do content matching against your inbox and just show those ads on the page next to your email. And even though they weren't meant for that, it actually turned out that these search ads were pretty relevant. It actually was a decent ad to be showing you while you're looking at your inbox about similar topics. So he just rolls this out. Even though all these people in Google are actually using it as their mail client at the time, people were pissed. I mean, people were like, are you looking at my emails? You know, all the things that would then sort of come later in the public actually happened inside Google first, but Larry and Sergey loved it. They were like, oh, this is so obviously the answer.

• 26:32Ben Gilbert?

  Interestingly, this experiment predates AdSense. So Google has the display ad offering for website publishers that's called AdSense that's different than AdWords, which is the keyword advertisements on a search results page. AdSense hasn't launched yet. And there's sort of multiple versions of history here. How much credit for AdSense does Gmail get in discovering this? But it is safe to say that the idea of display ads that are content matched against your Gmail did contribute to the idea for the first version of AdSense, which are essentially the same thing, content matched ads just on a publisher website instead of the content of your inbox.

• 27:12David Rosenthal?

  So. The product launches publicly April 2004. As you would expect, people go nuts. It is truly a revolutionary product. And Gmail grows over the next 20 years from that 1,000 initial public beta user seed base to over 2 billion today. And it's still by far the best email service. Even if you use another front end for your email, for your Gmail, like Superhuman or whatnot today, you still want Gmail on the backend, at least as a consumer.

• 27:46Ben Gilbert?

  Yes.

• 27:46David Rosenthal?

  So, once Gmail starts to take off, Larry and Sergey and Eric see this and they're like, wow, we should do this a lot. Let's go. Like, let's build as many web applications as we possibly can imagine.

• 28:08Ben Gilbert?

  What else can go into the browser that we didn't think was possible before?

• 28:11David Rosenthal?

  This fires on every single cylinder for us. Most importantly, grow the web.

• 28:20Ben Gilbert?

  Grow usage.

• 28:21David Rosenthal?

  You grow the web, you grow time that people spend in web browsers. They will search more. We will make more money. And beyond that, with some of these products, like Gmail, we can monetize the products themselves. Great. Two, we are building our strategic moat against Microsoft. The faster that we get the internet using public to fall in love with and use web applications, the less and less leverage Microsoft has over us.

• 28:52Ben Gilbert?

  To use sort of Ben Thompson speak, Google realizes the web can become the point of integration. Maybe the OS isn't what the whole universe has to target. The hardware makers, the OEMs, the application makers, the users. If applications start living in the browser, then the web can become the point of integration. Users just need a browser and OEMs just need an operating system that can access the browser.

• 29:18David Rosenthal?

  And what's so great for Google because of their business model, sure, it's great when they build and own and operate and run and monetize web applications themselves, like they do with Gmail, like they'll do with Maps, like they'll do with Docs, like they'll do with YouTube that we're about to talk about. But if they don't, it doesn't matter, as long as anybody does it.

• 29:37Ben Gilbert?

  Right. They just need to be wind at the back of web adoption.

• 29:40David Rosenthal?

  Yes. So that leads to a whole flood of Google web products and services to come.

• 29:47Ben Gilbert?

  All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 30:06David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 30:27Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 30:49David Rosenthal?

  In half, which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 31:07Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right, David. So Gmail, we've got our existence proof of a Ajax-based web app. It's going viral. People love it. We can really build web applications now. Let's go nuts.

• 31:49David Rosenthal?

  Yes. So the next big web apps following Gmail were Maps, Docs, and Spreadsheets. All absolutely incredible.

• 31:59Ben Gilbert?

  And it was not clear that these things were possible with web technologies.

• 32:04David Rosenthal?

  These required incredible technical and product vision. So first Maps. We actually did a whole acquired episode back in the day just about Google Maps.

• 32:16Ben Gilbert?

  The three companies they acquired.

• 32:18David Rosenthal?

  Yeah. It starts in 2003, so even before the Gmail launch, when a young Associate Product Manager, APM at Google named Bret Taylor, that Bret Taylor.

• 32:28Ben Gilbert?

  Of course, of ACQ2 fame, Bret Taylor.

• 32:31David Rosenthal?

  Yes, recent ACQ2 guest, Bret Taylor. Oh, yeah. Also FriendFeed founder, Facebook CTO, co-CEO of Salesforce, Chairman of OpenAI.

• 32:43Ben Gilbert?

  Former Chairman of Twitter.

• 32:45David Rosenthal?

  Yeah, yeah. That Bret Taylor. Starts his career out of Stanford in 2003 as an Associate Product Manager at Google. He ends up going to Larry and is like, we're missing out here. AOL has MapQuest, which they've just bought for $1 billion, and I'm hearing through the grapevine that Yahoo is about to make a big push and launch Yahoo Maps. And so, as you would expect, Larry's like, oh, yeah, well, this is a web product. Yes, of course. Go do this.

• 33:16Ben Gilbert?

  For all these things that we're studying here, there's a business rationale, which might be extremely indirect, but it's there. This idea of increasing web use increases Google Search, which increases the money printer. But then there's also an abstract rationale, which is our mission is to organize the world's information and make it universally accessible and useful. And Maps is squarely in the middle of that.

• 33:40David Rosenthal?

  Yep. Now, the thing was, as big as MapQuest and Yahoo Maps were about to become at the time, and they weren't big. I remember using them. My parents used them. Everybody on the internet used these services. They weren't what you think of as Google Maps today. They were static webpages.

• 33:59Ben Gilbert?

  Yep.

• 34:00David Rosenthal?

  They didn't use Ajax. And the whole point was to get driving directions.

• 34:05Ben Gilbert?

  That you could print out.

• 34:07David Rosenthal?

  Exactly. And the business model for these services was on the printed piece of paper that people would print out. You would put ads on there.

• 34:15Ben Gilbert?

  Yep.

• 34:17David Rosenthal?

  It's like a Trojan horse newspaper business.

• 34:20Ben Gilbert?

  Right.

• 34:20David Rosenthal?

  So Brett and Larry and Marissa are looking at this like, I think we can do better than this. So they go out and they buy a little company in Australia called Where2 Technologies, which was started by these two brothers Lars and Jens Rasmussen.

• 34:36Ben Gilbert?

  Yep.

• 34:37David Rosenthal?

  Who were incredible engineers. And they had built a real time, interactive maps application, except it was a installed desktop app. And so they're meeting with them and Larry's like, okay, this is what we want, but we need it on the web. I think actually the quote was, we like the web at Google. And this is how good of engineers the Rasmussen's were. They go off and in, I think, three weeks, they rewrite and re-architect the entire application to run as a web app. And they basically independently discover and implement a lot of the JavaScript and Ajax

• 35:21David Rosenthal?

  features that Google was working on internally for Gmail. Gmail still hadn't launched yet.

• 35:26Ben Gilbert?

  Amazing.

• 35:27David Rosenthal?

  So Google ends up buying Where2. That becomes the core of Google Maps. Around the same time, they also acquired two other companies, ZipDash, that did traffic data and

• 35:37Ben Gilbert?

  Keyhole.

• 35:38David Rosenthal?

  Which would become Google Earth. Now, Google Earth was an installed desktop application. Ultimately, everything that Google Earth was building would get folded back into Maps later.

• 35:49Ben Gilbert?

  It's actually not true. I thought that. And just last night, I realized you can still go to earth.google.com and get a completely different 3D experience than Google Maps.

• 36:00David Rosenthal?

  Oh, no way.

• 36:00Ben Gilbert?

  It's all in the web now. It's unbelievably powerful.

• 36:03David Rosenthal?

  Oh, so it is a web app, but it's separate than Maps?

• 36:05Ben Gilbert?

  Yes.

• 36:06David Rosenthal?

  Oh, I didn't know that. Oh, I gotta check that out.

• 36:08Ben Gilbert?

  It's amazing.

• 36:09David Rosenthal?

  That's awesome. Yes. Keyhole and Google Earth, I think, is my favorite part of our first Google episode earlier this year, that the whole thing ended up just being a Trojan horse downloader to get Google toolbar installed on Internet Explorer on people's systems.

• 36:26Ben Gilbert?

  They're organizing the world's information and making it universally accessible and useful, but also it comes with Google toolbar.

• 36:34David Rosenthal?

  Yeah, the greatest distribution hack for Google search of all time.

• 36:37Ben Gilbert?

  Yes.

• 36:39David Rosenthal?

  Anyway, back to Google Maps and where to. February 2005, Google Maps launches. People go nuts. A live mapping, dynamic web application.

• 36:52Ben Gilbert?

  Do you want to know my favorite Easter egg for the first day launch of Google Maps? I don't know if you know this. When you loaded up maps.google.com, do you know what visually you saw?

• 37:01David Rosenthal?

  I have no recollection.

• 37:03Ben Gilbert?

  You saw a great big ocean and North America, and then floating in the middle of the Atlantic Ocean, you see the UK, and then there is nothing past it.

• 37:16David Rosenthal?

  They hadn't built it yet?

• 37:17Ben Gilbert?

  They hadn't built it yet. Europe, Asia, Africa, not included. It's not even like it's off limits. It looks like there's an ocean where Europe should be.

• 37:27David Rosenthal?

  How do you decide what the MVP is, the minimum viable product to ship on the map? That's amazing. All right. There's one more really important piece of Maps, which is the next year in 2006, they released the API, and this is what really kicks off the Web 2.0 era. Gmail and JavaScript and Ajax had inspired developers out there for sure to make richer web apps, and people were doing that. When Google releases the Maps API...

• 38:01David Rosenthal?

  This thing called mashups starts happening. Do you remember this?

• 38:04Ben Gilbert?

  Absolutely.

• 38:05David Rosenthal?

  It's now super easy to grab Google Maps and build stuff on top of it. And it's really hot. And this enables startups, so like Zillow, Uber, eventually DoorDash, Airbnb. Think about all the companies that just couldn't exist without the Google Maps API.

• 38:26Ben Gilbert?

  There was that whole web of geo-related companies too. Remember that era of mobile, social, local, most solo?

• 38:34David Rosenthal?

  Oh yeah, Foursquare and Goala. Yeah, all those.

• 38:38Ben Gilbert?

  All this existed because Google Maps existed.

• 38:41David Rosenthal?

  So back to Google's overall strategy here and adoption of web apps and sort of building this moat and defense against Microsoft. This is just incredible. I mean, here's Maps itself as a first-class, rich web application that tens, eventually hundreds today, billions, two billion plus users use and love every day. And now here's this API that's making it really easy to help other startups and other companies go build great web apps too. The lock-in just keeps getting deeper and deeper and deeper for the web.

• 39:18Ben Gilbert?

  Yep. And at first, the API was notoriously free or very inexpensive at very high limits for a long time. That's different now. But for the longest time, it was just, this is a part of the mission, so we're doing it and we'll figure out the business later. It was a very sort of founder-driven thing. Now it's popular to create Maps. I mean, Apple at some point flipped into doing it and there's these sort of other third-party companies and there's the OpenStreetMap and all this stuff. For the first five to maybe eight years, Google was kind of the only ones that had a passion for this and are willing to spend into the giant hole that you need to. Create maps of the whole world. I mean, is they incredibly hard data and engineering problem?

• 40:01Ben Gilbert?

  And, you know, they had to go draw all their own maps from scratch, acquire the data, figure out how to get fresh data all the time, create a crowdsourced crazy thing among Google, is it Google Maps explorers or something like that? All the people that would update these things. This is a extremely googly problem and a founder bet to be like, nope, we're going to go spend hundreds of billions of dollars, billions of dollars on this. Drive cars around, taking pictures of everything, figure out how to not overshare personal information on this, do it dynamically because you're capturing a huge amount. I mean, it's just, it's a wacky, wacky engineering problem that is daunting and they took it on.

• 40:38David Rosenthal?

  Yep. And we're not going to talk about this today, but put a pin in for the next episode is one of the most incredibly strategically valuable data assets for the AI era and specifically for self-driving cars.

• 40:56Ben Gilbert?

  Yes. But today, Maps has over 2 billion active users this year. They don't break out revenue, but estimates are that Maps does well over 5 billion in revenue, maybe even 10 billion in revenue. The larger part of that is ads. You see recommended places to go around you all the time, whenever you open Google Maps now that are sponsored ads, just like on Google Search. And then the smaller part of that is from the API licensing, David, that you were talking about. But this is a real business for Google today.

• 41:25David Rosenthal?

  Yep. All right. Next ones that we got to talk about, Docs and Spreadsheets. So these aren't the biggest Google apps out there today. I think if you lump them all together into Workspace and Ad Drive, it is over a billion users.

• 41:40Ben Gilbert?

  That whole suite is among their most used products.

• 41:44David Rosenthal?

  That whole, uh, we call it Office, Office Suite? Is that what you would call it? Yeah.

• 41:48Ben Gilbert?

  It sounds like an office type suite. It's a good idea. Someone should do that.

• 41:53David Rosenthal?

  So Docs and Spreadsheets hit Microsoft right where it hurts. Office. So people have tried both before Google and after Google to compete with Microsoft in productivity forever.

• 42:11Ben Gilbert?

  WordPerfect, Lotus Notes, Lotus 123.

• 42:16David Rosenthal?

  We talked all about that on our Microsoft episode. By the way, WordPerfect, acquired by and run by Novell, who is the CEO of Novell, Eric Schmidt. Eric knows all about this.

• 42:30Ben Gilbert?

  But here's what I will say, David. If you were starting on the foot of competing with Microsoft, or trying to build a word processor, or trying to build a spreadsheet, you would be doomed for failure. What Google was doing was saying, there is something that is uniquely possible with web applications and Ajax in this Web 2.0 era for the first time. And that thing is real-time collaboration.

• 42:53David Rosenthal?

  Real-time, multi-user collaboration. These were the first. I've tried to rack my brain. I talked to Sam Shilas, the founder of Rightly, which Google acquired, which became Google Docs. He believes these were the first real-time, multi-user collaborative pieces of software in history. It just wasn't possible before the web.

• 43:19Ben Gilbert?

  Yeah, Jonathan Rochelle, the founder of the company that would be acquired, that would become Google Spreadsheets, basically said the same thing. His comment was, we actually didn't know if it was possible to do this in the web. Google said, based on the success we're seeing with Gmail, I bet we could do actual spreadsheets in the browser with real-time collaboration. And when the Sheets team came in, it was truly an open question of, can we make it so you and another person can party on the same very basic spreadsheet at the same time?

• 43:47David Rosenthal?

  Hmm, interesting. The Docs team, so Docs was an acquisition. It was a company called Rightly that was founded by Sam and his two co-founders, who were great programmers. They've worked together for many years.

• 43:59Ben Gilbert?

  I used Rightly before it became a Google product.

• 44:01David Rosenthal?

  No way.

• 44:01Ben Gilbert?

  Yeah.

• 44:02David Rosenthal?

  You were like one of very few people who did that.

• 44:04Ben Gilbert?

  Yeah.

• 44:04David Rosenthal?

  Because it was not an independent company for long.

• 44:06Ben Gilbert?

  Hmm.

• 44:07David Rosenthal?

  Product launched August 2005. Google bought the company in March 2006. So you had about a six-month window.

• 44:14Ben Gilbert?

  Wow.

• 44:14David Rosenthal?

  But yeah, they built real-time collaborative word processing as a web app, inspired by Gmail and everything that was going on at Google. The whole company started as, oh, for our next project, let's explore. What we can do with JavaScript and Ajax and oh, what would it be like if we put a word processor on the web? They weren't actually even thinking about collaboration at first, but then as they were working on it together, they naturally started collaborating and thought, oh, this is the killer feature.

• 44:49Ben Gilbert?

  That's funny. That's different than the Spreadsheets team. Their whole thing at first was we're not going to make a better spreadsheet than Excel. So if we put it in the web, it has to be about sharing collaboration.

• 44:59David Rosenthal?

  Yep. And so to your earlier point, nobody can compete with Microsoft in productivity software. One, because they'd been doing it so long, they had this feature wall of so many features that people needed.

• 45:14Ben Gilbert?

  Two, proprietary file formats.

• 45:16David Rosenthal?

  They had a network effect of the file format.

• 45:18Ben Gilbert?

  You built your big model in Excel. Good luck.

• 45:21David Rosenthal?

  Other people need to be able to run it on their installed desktop applications. Good luck getting somebody to try downloading or buying a new piece of software and installing it on their machine. But three, I mean, the biggest by far, the enterprise agreement. This is Microsoft's whole entire business model.

• 45:42Ben Gilbert?

  Right. You don't have to be best in breed in any specific thing. You just have to be a platform with everything.

• 45:48David Rosenthal?

  Yep. And IT departments will buy it. And especially for productivity software, really all the money is in B2B and work applications. And so if IT departments are buying the Microsoft enterprise agreement, they're getting everything. Good luck unseating Microsoft Office.

• 46:04Ben Gilbert?

  And I'm not sure you could do this as an independent business because think about how long Google went with these things before they were adopted by bigger companies. For the longest time, it was, oh, a Google Doc, that's like a thing for either you use that for your personal life or maybe like a startup would use it, but even a medium sized company, you can't be serious. Get out of here with that. And Google was basically able to subsidize it because they had a giant existing business.

• 46:28David Rosenthal?

  You are so right. Nobody except Google could do this for a whole bunch of reasons. One, you talk about subsidizing. Imagine trying to build this software as an independent company or really even as any other company. It would require a lot of infrastructure. Real time, multi-user collaboration in a web app. Gosh, that seems like really complicated server and backend infrastructure. For Google.

• 46:56Ben Gilbert?

  It's what they do.

• 46:57David Rosenthal?

  Running docs and sheets, the incremental load to Google's infrastructure was trivial compared to search. They already had it built out. It was super cheap.

• 47:07Ben Gilbert?

  Yep.

• 47:07David Rosenthal?

  Two, they don't need to make money from it. This is the big reason why nobody else could compete. Microsoft has all the dollars completely on lockdown because of the enterprise agreement.

• 47:18Ben Gilbert?

  Big dollars. These small and medium businesses would of course pay for something, but those dollars don't add up to be nearly as big.

• 47:25David Rosenthal?

  Right, exactly. Google, though, that's fine. Microsoft can keep all the dollars. All we care about is people use the web. And in this instance, particularly with Office and productivity, really this is about putting the screws to Microsoft a little bit and distracting them. And from Google's point of view, this is a cheap distraction. If this gets Microsoft all spun up, Microsoft is now all of a sudden getting asked all the time, what's your web strategy for Office? When are you going to add collaboration to Word and Excel, et cetera, et cetera? They don't have any answers.

• 48:01Ben Gilbert?

  I literally worked on this. My internship was at Microsoft and I worked on adding headers and footers to the Microsoft Word web app. We were porting the Windows code to have perfect document fidelity to the web. So when you looked on the web and then printed from the web, the document would be laid out pixel for pixel, character for character, exactly how it would look on the printed page. When you have that requirement, that is a hard, hard engineering task and it's still not as good as Google Docs.

• 48:34David Rosenthal?

  Right. I love it that this launched your technology career.

• 48:38Ben Gilbert?

  Yes.

• 48:39David Rosenthal?

  Amazing. But yeah, from Google's perspective, this is amazing. Microsoft is now forced to bring their crown jewels to the web, which they don't want to do. And Ben, to your point, because they have to make it look and feel and function exactly like the installed desktop apps. This is going to take them a long time and be a big investment. Fantastic.

• 49:02Ben Gilbert?

  And no matter what, it's going to be more complicated because with Google, since all free, there's no licensing, someone just shares a Google Doc with you. If you have permission to view it, you view it. With Microsoft, I remember at first it was sort of antithetical. It was like, but what if I haven't bought Word? Can I just use Word for free in the web then?

• 49:16David Rosenthal?

  Right.

• 49:17Ben Gilbert?

  Is Microsoft OK with that? Am I going to hit some weird usage tier like what? So it's confusing for users. It forces the company to think about pricing and packaging. It was a masterstroke by Google.

• 49:26David Rosenthal?

  Yep. So fast forward to today. It's hard to get real, actual apples to apples data on Google Workspace versus Microsoft Office users. But basically, the way to think about the market is that Google has the vast majority of users and usage of productivity software. And Microsoft still has the vast majority of dollars. And that's fine. Google's super happy about that.

• 49:53Ben Gilbert?

  Is that true that there's more active users of Google Workspace than there is of Office?

• 49:58David Rosenthal?

  Yeah, I mean, I think if you look at users of Docs or Sheets or Slides, it's in the billion-ish, 500 million, billion range for each of those. Office, I think, has a couple hundred million users worldwide.

• 50:16Ben Gilbert?

  Whoa. Yeah, that's crazy. I didn't realize that.

• 50:20David Rosenthal?

  Pretty wild, right? But to my point about the dollars. So Microsoft's productivity and business process segment, which is mostly Office, I think LinkedIn is now part of this too. Last year generated over $120 billion in revenue. Google reports Workspace as part of the cloud segment. So all of cloud, inclusive of their infrastructure as a service, all the AI infrastructure, all that. The whole cloud segment for Google last year did about $50 billion in revenue, less than 50. So Microsoft's productivity segment, 120. Office is the big piece.

• 51:01Ben Gilbert?

  And that's high margin revenue.

• 51:03David Rosenthal?

  High margin revenue. Google's Office products are some small portion of a $50 billion revenue segment. So yeah, Microsoft's still got all the money.

• 51:10Ben Gilbert?

  Yes.

• 51:11David Rosenthal?

  Google's got all the users and everybody's happy.

• 51:13Ben Gilbert?

  But you're so right. Everyone is happy. This is exactly what Google wants.

• 51:16David Rosenthal?

  Yeah. And ultimately today, Microsoft is fine with this arrangement too.

• 51:22David Rosenthal?

  The ultimate fun coda, though, is Sam Shilis, founder of Rightly. He would go on to manage all of docs and sheets and I think he actually managed Maps at some point, too. He is now the deputy CTO of Microsoft.

• 51:37Ben Gilbert?

  Careers are long.

• 51:38David Rosenthal?

  Amazing.

• 51:39Ben Gilbert?

  The interesting thing, reflecting on Google's actual business here and comparing it against all the things that we're talking about, Google essentially won search by the mid, late 2000s. I mean, I know Bing hasn't even launched yet and we'll get to that, but search was going to continue becoming a more and more giant market. And so all this stuff they're doing, it's like, oh, we've won and this market is naturally going to become large. I guess let's just fuel it getting larger and try to do a bunch of stuff under the umbrella of our mission, but what do we really need to do? And the slightly more altruistic answer, I suspect if Larry Page was sitting next to us, he would say, what is the goal of a company? The goal of a company isn't build the largest business necessarily, it's to fulfill its

• 52:24Ben Gilbert?

  mission. And yeah, we got a money printing machine from search and we're investing a lot of money still in search and making that better, but all these things fulfill our mission, too.

• 52:32David Rosenthal?

  Yep. And I think these things are all true.

• 52:35Ben Gilbert?

  Yes.

• 52:36David Rosenthal?

  So on the back of the success of Maps, Docs, Spreadsheets, really starts to inform Google's strategy here. And specifically, they've seen, hey, we can acquire these web app, web 2.0 companies, bring them into Google, turbocharge them, offer these magical experiences to consumers. We get all this strategic value out of them, both on the offensive and defensive front. We can operate these things at a fraction of the expense that it would cost anyone else to do so, standalone company or part of other big companies.

• 53:15Ben Gilbert?

  And some of the things we could buy actually fit into our core ads business quite well.

• 53:21David Rosenthal?

  Yeah. What if we went big with this, like really big?

• 53:27Ben Gilbert?

  Like something super expensive to run that requires storage of massive videos and bandwidth for streaming these massive videos and lawsuit protection.

• 53:38David Rosenthal?

  Yep. Probably also costs a lot to buy it because it's well-funded from Sequoia. That leads us to YouTube.

• 53:47Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 54:01David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 54:15Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 54:25David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 54:43Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise: the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 54:59David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 55:16Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 55:25David Rosenthal?

  So 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/acquired and tell them that Ben and David sent you.

• 55:36Ben Gilbert?

  All right, David, the YouTube story.

• 55:38David Rosenthal?

  Ooh, the big Kahuna.

• 55:40Ben Gilbert?

  The big Kahuna.

• 55:43David Rosenthal?

  The most embarrassing thing in acquired history was our early episode on YouTube.

• 55:49Ben Gilbert?

  All right, I have got a proposal for you.

• 55:51David Rosenthal?

  OK, I'm ready for it. You want to take it out of the feed, delete it?

• 55:55Ben Gilbert?

  Today, we're setting the record straight. When we finish this section, we are regrading YouTube. We are updating the acquired canon. It's happening.

• 56:04David Rosenthal?

  Oh, let's do it. We're bringing grading back, baby.

• 56:07Ben Gilbert?

  Great. I'm glad you're into it.

• 56:08David Rosenthal?

  I love it. I love it.

• 56:09Ben Gilbert?

  Awesome.

• 56:10David Rosenthal?

  All right, YouTube, 2003. So same timeframe as everything we're talking about here. Gmail hasn't even launched yet. Google starts working on Google Video. And the idea is that there's a lot of information in video. And thus, it fits Google's mission, Ben, as you were saying earlier. And also, well, there's just so much more advertising dollars in TV than anywhere else in the global economy.

• 56:42Ben Gilbert?

  To this point in time, TV was the bulk of ad spend.

• 56:46David Rosenthal?

  Yep. If you go look at some of the old Mary Meeker Internet Trends Dex, remember from this time period? And you look at the share of global ad dollars spent on TV versus any other category, it's just so much bigger than anything else.

• 57:01Ben Gilbert?

  David, I am so glad you did this. We are brothers. I did the exact same thing to try to tee this up.

• 57:05David Rosenthal?

  Amazing.

• 57:06Ben Gilbert?

  I have the stats in front of me. For listeners, digital advertising, you know, Google's universe, would not eclipse TV until 2017, 2018.

• 57:20David Rosenthal?

  Wow. So almost 15 years in the future from when we're talking about here in 2003.

• 57:27Ben Gilbert?

  Yes, that is the wildest thing, that TV was bigger than digital for that long. Mary Meeker famously had this point that she made every single year, that the attention was all in the digital economy, but there was this gap. And the ad monetization hadn't caught up yet. And it took all the way till 2018 for the flip to finally happen, where digital overtook television.

• 57:48David Rosenthal?

  Thanks to YouTube.

• 57:51Ben Gilbert?

  Yes.

• 57:53David Rosenthal?

  And Facebook and Meta and TikTok and et cetera.

• 57:56Ben Gilbert?

  And the rest of Google, too.

• 57:58David Rosenthal?

  I know, I know. So this Google Video project actually came out of the ads org. It didn't come out of engineering and the rest of the Google product org. Yeah, it was motivated by, hey, there's a lot of money in TV. And of course, this fits the mission. There's a lot of information in video. We should totally do this.

• 58:20Ben Gilbert?

  Here's how Larry describes it. Google Video was first launched in 2005 as a search service for television content.

• 58:27David Rosenthal?

  Yes.

• 58:27Ben Gilbert?

  Because TV closed captioning made search possible and user generated video had yet to take off. But it subsequently evolved into a site where individuals and corporations alike could post their own videos. They were digitizing TV because the transcription wasn't as good as it is today. So they needed the closed captioning data to make it searchable. And they were almost like meta searching. They were looking for other websites that allowed people to upload video and including that in the search results also.

• 58:57David Rosenthal?

  Yep. Sure, you can see how this conceivably could be a product vision you could have at the time. But Google Video was the wrong product. The problem was, one, you couldn't actually watch the video. It was just search that then directed you, just like Google's main search business model, off of Google Video.

• 59:19Ben Gilbert?

  Really?

• 59:19David Rosenthal?

  To then go consume it somewhere else. Yeah. In the beginning, it didn't even have a player.

• 59:23Ben Gilbert?

  Whoa, I didn't realize that.

• 59:25David Rosenthal?

  Yeah, crazy. And the bigger problem, though, well, that's a pretty big problem. Another big problem, shall we say, was that the focus was on traditionally produced head kind of content. Not long tail, not user generated content.

• 59:41Ben Gilbert?

  It was really tied to TV. There was a press release that said that they could search the content of TV programs, find programs containing the content they're looking for and discover when and where the program will next air.

• 59:52David Rosenthal?

  Yeah. So meanwhile, obviously, here we are in 2004, 5, 6. Consumer generated digital video is becoming a thing.

• 1:00:07David Rosenthal?

  Either via standalone new devices like the Flipcam that's coming out from Flip was a startup, right? And then Cisco bought it?

• 1:00:14Ben Gilbert?

  Yeah, my other internship employer bought Flip while I was there.

• 1:00:18David Rosenthal?

  Yeah, this is like Ben Gilbert personal history. But more commonly so, I mean, there were dedicated devices like the Flipcam, but digital point and shoot cameras had gotten so good by this point in time. This is going to come back up later in the episode. People thought this was the big consumer electronic device vector before smartphones. People were really, really excited about how good and how universally adopted digital cameras were. All of a sudden, in the mid 2000s, for the first time, anybody could make a video at any time.

• 1:00:55Ben Gilbert?

  And iMovie was just becoming a thing. So you could shoot it on your point and shoot and you can edit on your computer.

• 1:01:01David Rosenthal?

  That's right. So YouTube. In early 2005, three PayPal employees, the PayPal mafia, actually fairly junior employees at PayPal, Chad Hurley, Javid Karim and Steve Chen leave PayPal and create YouTube. Okay, Ben, I have two deep cut YouTube corporate history trivia items for you. Number one, do you know what YouTube's original tagline was? The name of the company was YouTube. What was the tagline and the value prop?

• 1:01:45Ben Gilbert?

  I have no idea.

• 1:01:47David Rosenthal?

  Tune in hookup.

• 1:01:50Ben Gilbert?

  Really?

• 1:01:50David Rosenthal?

  It was a video dating service.

• 1:01:56David Rosenthal?

  And they actually posted Craigslist ads in the Bay Area for attractive women to make videos to post as profiles on the site.

• 1:02:09Ben Gilbert?

  Unbelievable.

• 1:02:10David Rosenthal?

  And they got like no responses, as you would expect. Thank goodness for them and Google, though, because then they pivoted into a general purpose video uploading site that anybody could upload anything that they made YouTube. Okay, so that's trivia question number one.

• 1:02:25Ben Gilbert?

  Okay.

• 1:02:26David Rosenthal?

  Trivia question number two. Do you know who Chad Hurley, Chad was the CEO, who Chad's father-in-law at the time was?

• 1:02:37Ben Gilbert?

  Oh, no, I have no idea.

• 1:02:39David Rosenthal?

  Jim Clark.

• 1:02:41Ben Gilbert?

  Of SGI and Netscape?

• 1:02:43David Rosenthal?

  Of Silicon Graphics and Netscape, Jim Clark.

• 1:02:46Ben Gilbert?

  Wow.

• 1:02:46David Rosenthal?

  Jim Clark.

• 1:02:47Ben Gilbert?

  Didn't know that.

• 1:02:48David Rosenthal?

  Yeah. So not only were they part of the PayPal team and PayPal Mafia, like, they had the best advisor of all time.

• 1:02:55Ben Gilbert?

  Wow.

• 1:02:56David Rosenthal?

  To navigate the Silicon Valley ecosystem and the internet ecosystem in Jim Clark. So the brilliance of YouTube, and it really was absolutely brilliant, was threefold. One, it was super easy for anyone to upload a video. So they had a killer content acquisition model. Anybody, anytime, anything.

• 1:03:21Ben Gilbert?

  And as soon as the servers process it, we'll put it live. No copyright checks. Unlike Google Video, which would take one to two days.

• 1:03:30David Rosenthal?

  It's all about copyright checks.

• 1:03:32Ben Gilbert?

  For humans to pour over it, make sure that it was all good and bless it, and then put it live, which of course won't scale in the UGC era. YouTube's just like, whatever, upload it.

• 1:03:43David Rosenthal?

  Yep. Two, super easy for anyone to watch a video. You need a really good viewer in the web app to view the videos. Google Video didn't have it at the beginning. So killer content consumption model. Go to youtube.com, find something, or find a link, or number three brilliant thing about YouTube, see a YouTube video embedded on another website. Boom, you're watching the video. Killer growth and distribution model. And also YouTube, pretty much from the beginning, had great search. You can search YouTube and find videos that you're looking for.

• 1:04:24David Rosenthal?

  Pretty quickly, YouTube became, and still is, Google talks about this all the time, the second largest search engine on earth, behind Google.

• 1:04:34Ben Gilbert?

  It's amazing.

• 1:04:34David Rosenthal?

  Its search is happening on YouTube.

• 1:04:36Ben Gilbert?

  That happened quickly. I always thought that was a more recent, last 10 years phenomenon.

• 1:04:41David Rosenthal?

  I think that happened very quickly. YouTube traffic scaled so fast and so big. So you can see. How YouTube here, not only are they the correct video platform for the web and just doing it much better than Google's doing it with Google Video, there's actually some version of the world where they might become a real competitor to Google's core business. If all these searches are happening, they could add search for other things on YouTube, too.

• 1:05:09Ben Gilbert?

  Right. I don't think they had any plans to do that, but it's the same rationale of Mark Zuckerberg saying, uh-oh, everyone's using WhatsApp for messaging. Whether or not they put in a social media feed, stream, they always could. And so it's really dangerous to me for them to be out there aggregating all the users and attention and habits when they always could do something like that.

• 1:05:30David Rosenthal?

  Exactly. Same dynamic. And whereas in the previous categories of apps that we talked about, Google had the advantage of uniquely being able to do it as Google in a way that startups couldn't. Here, it's a little bit the opposite. YouTube, as a small startup, has the advantage of, oh, copyright, rules, laws, I don't know, we're just a platform, we're just a startup, anybody, upload anything. Google, by this point in time, is a public company. No way they could behave like this.

• 1:06:03Ben Gilbert?

  Well, it's funny, they could, but they wouldn't. They actually could do it and stay in business, whereas YouTube can say, eh, whatever. But then they're going to go out of business because they're going to get sued out of business. So it's this really interesting sort of catch-22 of this is the way to start and get all the users because this is the best user experience. And at the same time, it will not work as a resource-constrained small company.

• 1:06:32David Rosenthal?

  Once it is started, it needs to be part of Google.

• 1:06:35Ben Gilbert?

  Right.

• 1:06:36David Rosenthal?

  Yes. Obviously, we're going to get to that. But in the beginning, though... Oh my gosh. I mean, the embeds were a beautiful distribution growth mechanic for YouTube, but people were just uploading copyrighted video that people could watch for free. I mean, it's almost like Gmail. It is so unbelievably compelling to a consumer when your friend tells you about YouTube or just sends you a link or you see an embed page of, whoa, I can go watch Lazy Sunday from Lonely Island and Saturday Night Live in my web browser anytime I want for free with no commercials.

• 1:07:11Ben Gilbert?

  Yes.

• 1:07:12David Rosenthal?

  Yes, I want that. And in fact, when users started uploading Lazy Sunday, the Lonely Island skit from Saturday Night Live to YouTube, this is in that brief phase where YouTube wasn't a send-in startup and not yet part of Google, that one skit increased YouTube traffic by 83%.

• 1:07:33Ben Gilbert?

  Wow.

• 1:07:34David Rosenthal?

  Unbelievable.

• 1:07:35Ben Gilbert?

  And so they very quickly raised money from Sequoia, is that right?

• 1:07:39David Rosenthal?

  Yep. So it was basically incubated at Sequoia. When the three founders left PayPal, Sequoia invested right away. I think it was Rulov Botha's first investment when he joined.

• 1:07:49Ben Gilbert?

  Because Rulov knew them from PayPal. He's also part of the PayPal mafia.

• 1:07:53David Rosenthal?

  Exactly. And then Sequoia led another round pretty quickly thereafter because the infrastructure costs started, as you would imagine, scaling astronomically here.

• 1:08:02Ben Gilbert?

  Yeah. So three things that are very expensive, two of which are ongoing, one is a one-time cost. The one-time cost, but still expensive, is encoding the video. This might eventually play on multiple types of devices and multiple browsers. So there's a lot of encoding that has to happen. Two then are just big, ongoing variable costs. You have to store all this video. And the biggest of all, the networking. The bandwidth becomes extremely expensive and costs you every single time someone plays the video. Your biggest cost driver scales with minutes watched. So that is eventually going to kill you unless you have an aligned business model.

• 1:08:38David Rosenthal?

  Yep. By the way, it'd also be really nice if whoever owns and operates this had its own really good, really cheap infrastructure with all of these things built into it.

• 1:08:49Ben Gilbert?

  Yep.

• 1:08:50David Rosenthal?

  So yeah, pretty quickly, within a little over a year of launching, YouTube is in way over its head. The content issues, the copyright issues, the infrastructure scaling issues.

• 1:09:02Ben Gilbert?

  It's all exactly what they wanted. It's going as well as they could have hoped, and it is in way over its head.

• 1:09:08David Rosenthal?

  Yes. And if this had happened today, you could probably raise enough capital from the private markets to address this and scale up as a company fast enough, especially with public cloud, that you could probably build this as a standalone company.

• 1:09:24Ben Gilbert?

  Yeah. I mean, today you can go raise billions of dollars as a series A startup, if you're in the right space, doing the most interesting things with the big market.

• 1:09:32David Rosenthal?

  2005, 2006, not the same kind of private capital available. And of course, there's no way the company could go public with all these issues or anything.

• 1:09:41Ben Gilbert?

  Right. In particular, there was a giant suit from Viacom.

• 1:09:44David Rosenthal?

  Yes. So because of these things, YouTube ends up basically putting itself up for sale. I mean, they have no leverage in content negotiations with rights holders and infrastructure is killing them. So in November 2006, which is less than 18 months after the product launched, Google buys YouTube for $1.65 billion in stock.

• 1:10:13Ben Gilbert?

  In stock. I'm glad you caught that, too.

• 1:10:16David Rosenthal?

  Stock. Yes, we heard in the research that after this deal, Patrick Bichette, I think was the CFO of Google at the time.

• 1:10:22Ben Gilbert?

  He said, never again, right? This was our biggest mistake.

• 1:10:25David Rosenthal?

  Said, never again. This is the last stock deal that we ever do.

• 1:10:29Ben Gilbert?

  Google's market cap has 20x since the day that this deal closed. If they had paid in cash, they would have made an extra 20 times multiple on whatever you already think the multiple is on their purchase of YouTube.

• 1:10:42David Rosenthal?

  Yep. The thing is, though, this is, we will correct the acquired record at the end of this section. Either way, even if Google paid 20x $1.6 billion for this, they got a screaming deal. YouTube is so valuable.

• 1:10:59Ben Gilbert?

  All right. I have some of the numbers from the first few years that I was able to cobble together. And then I want to talk about some of the product evolution over the years.

• 1:11:06David Rosenthal?

  Yes, great.

• 1:11:07Ben Gilbert?

  All right. So Google buys it for $1.65 billion. And interestingly, Shashir Merota, this week, went on the Grit podcast, the Kleiner Perkins podcast, and laid out a bunch of data on this. And I actually didn't have a chance to reach out to Shashir yet because it just came out. But a lot of this is from that conversation. So after the acquisition, he said, and Shashir was the head of product and basically the CPO, CTO at YouTube, not right after the acquisition, but within a year, kind of came in for four or five years. So after the acquisition, he said it was doing about 30 million in revenue.

• 1:11:42David Rosenthal?

  Okay.

• 1:11:43Ben Gilbert?

  So they did have revenue. I believe, just to foreshadow our next chapter, that was in the form of programmatic advertising that was on the DoubleClick ad exchange that they were using to make money. They were losing about $1 billion a year run rate on 30 million in revenue. The amount of money they lost was almost exactly equal to a penny per view. So just imagine, every time you loaded YouTube in those years, Google would just flush a penny down the drain. They got to figure out something to do about this. So for the first couple of years, the CFO at the time was terrified of its scaling. Like, please don't scale in its current state. But of course, there's nothing they can do. The cat's out of the bag. It's scaling. And the CFO was exploring, hey, can we sell this to one of the other companies who was bidding on it?

• 1:12:29David Rosenthal?

  That's right. Because Yahoo and the media companies also wanted to buy YouTube.

• 1:12:33Ben Gilbert?

  Yes. So Shashir says, we were broadly known as Google's first mistake.

• 1:12:37David Rosenthal?

  Well, back to my tee up in the intro, being a pure play, investors didn't like this. For a long time, this was a huge knock. I mean, geez, when we did our episode 10 years ago about YouTube, we said it was a terrible acquisition.

• 1:12:51Ben Gilbert?

  Yes. The thing we haven't talked about, music licensing was really expensive. They were one of the top revenue sources for the music industry for a long time, maybe even still one of the top few to the music industry.

• 1:13:04David Rosenthal?

  Yeah, right up there with Spotify.

• 1:13:05Ben Gilbert?

  Yep. So kind of on the product side of things, early on, as you were saying, the way that you found YouTube is you would see it embedded on a different site, you would click through, and then you may stick around to watch something after. But then you'd leave and your entry point to YouTube again was another embed. Most sessions did not start on youtube.com. So you weren't going to YouTube with the idea of that they'll recommend something to me. And then even the people who did go to youtube.com in this sort of four-year, five-year period after the acquisition, 90% of that traffic was there to search. And they just ignored anything that you recommended to them. I mean, it takes a long time, A, to build habits, and B, to build out the technology to make any sort of recommendation or browse or anything good.

• 1:13:49David Rosenthal?

  Yep. First with related videos, and then ultimately the feed. And just for a sense of scale, there was a report that estimated that YouTube that year in 2007 consumed as much bandwidth as the entire internet did in the year 2000. So just seven years before.

• 1:14:09Ben Gilbert?

  I have an extremely similar stat from Shashir, which is to later period, it's 2014, but it's apples to apples, rather than comparing that '07 to 2000. He said in 2014, YouTube was 20% of the bits on the internet.

• 1:14:22David Rosenthal?

  Wow.

• 1:14:23Ben Gilbert?

  I mean, this stat, but especially your stat, illustrates just how much this thing took off, and also just how much more bandwidth video took up than any other media type on the internet.

• 1:14:34David Rosenthal?

  Yep. But the long-term play here, obviously, is the Mary Meeker slide of, yes, video, the reason that it gets consumed so much is this is what humans want.

• 1:14:44Ben Gilbert?

  Right.

• 1:14:45David Rosenthal?

  And you can advertise against it.

• 1:14:46Ben Gilbert?

  And Google realized this. I think they were very smart to, rather than trying to continue investing in Google Video, to basically say, they got the lightning in the bottle, they have the consumer brand, they have the attention, let's just go buy that thing. And on a expected value basis, if you're making a bet, sure, you could build it on your own cheaper, but your chance of succeeding is so unlikely relative to buying that thing, that it's actually a deal to get it for 1.65 billion, plus the billion that we'll need to invest every year for a few years to run it in the red. So 2009 is the year where the business really starts working. Google actually discloses nothing about profitability, but that the ad revenue tripled in one year in 2009. 2010, 2011, they turned profitable. There was a report that in 2012,

• 1:15:30Ben Gilbert?

  they were estimated to make about $4 billion in revenue, but roughly break even. Then the 2012, 13, 14, I think they were small profitable, but profitable. Then in 2013 to 2015, that time period on the product side, that's when things really changed. So the North Star really became users should go to YouTube to be entertained for 15 minutes. And it's our job to do whatever we need to do to make that true. And a few things really helped with this. One was the shift to mobile. In mobile, and remember, they were a launch partner on the iPhone.

• 1:16:05David Rosenthal?

  Oh, we're gonna get into it.

• 1:16:06Ben Gilbert?

  Okay. There were a lot more low intent sessions. So people who opened the app rather than clicking through from an embed page.

• 1:16:15David Rosenthal?

  Low intent being low intent of watching a specific thing.

• 1:16:18Ben Gilbert?

  Yes. It's a beautiful thing on mobile that you can sort of say, I've got something to recommend to you. And obviously, short form, vertical video like TikTok and YouTube Shorts and all that these days is that on steroids. Mobile also made it the case that any given user was more likely to be logged in. That way, all the personalization and all the algorithm stuff works well. They also adjusted their core metric internally away from views and to watch time. And YouTube was very early to the concept of creator monetization. For a long time, it was the only place on the internet where creators could make money.

• 1:16:54David Rosenthal?

  Share revenue with creators.

• 1:16:56Ben Gilbert?

  And in our old episode, we sort of knocked them. We said, look, this business has to give its first 50% off the top of any revenue it makes to the creator of the video. That's a way worse business than, say, Google Search Ads or Facebook, who, you know, Facebook has influencers on their platforms too, all the meta platforms, Instagram. And their rev share, if it's anything, sure isn't 50%. It's probably closer to zero. And YouTube, right early on, said you're a 50-ish percent partner, which takes you a decade longer to get profitable, but helps you build that base.

• 1:17:30David Rosenthal?

  Just creates amazing incentives for people to build businesses and careers on this. I mean, YouTube. Is the ultimate instantiation of the internet to me and the power that it can provide to individuals to make a living. It abstracts the need at all to create or run a business. It really just simplifies it down to make content that people watch. You will get money for it. You don't have to do anything else in between.

• 1:18:01Ben Gilbert?

  There's a little sleight of hand that you did there, David, which is that people watch.

• 1:18:06David Rosenthal?

  Well, yes.

• 1:18:06Ben Gilbert?

  So YouTube internally went back and forth for years on this, and I think we're sort of in this no man's land that we've landed today. Camp one is, hey, the way to make people most engaged is by getting them to follow creators and they curate the information sources they want. Camp two is in algorithms we trust. It turns out camp two is actually correct, which is unfortunate. It's a messed up incentive. Most of the time, if you show someone something that they're subscribed to, or you show someone something that the very smart computers have figured out you will watch and then watch another video after that, usually the algorithmic approach is right.

• 1:18:49Ben Gilbert?

  And so there is sort of this internal conflict there where they say, yeah, of course you should subscribe, but your views are only loosely related to how many subscribers you have.

• 1:18:59David Rosenthal?

  Yep. This is the dark side to the YouTube economy.

• 1:19:02Ben Gilbert?

  Yes.

• 1:19:03David Rosenthal?

  But putting that aside, just the sheer concept of anybody, and everybody in the world has a video camera today, can create something. And if it's good and people watch it, and the definition of good being the algorithm likes it, you will make money.

• 1:19:21Ben Gilbert?

  Yep.

• 1:19:21David Rosenthal?

  With no other steps in between, that can only happen on the internet.

• 1:19:26Ben Gilbert?

  It's pretty interesting because it kind of has these two business models in core Google land. They have the AdWords business model where they're the first party media site. Each search result page is a form of media and they run ads on that. And then they keep approximately 100% of the revenue generated from that ad. The advertiser pays them and they share some in the form of traffic acquisition costs that we'll talk about later, but it's largely a first-party ad. And then they have this other form, AdSense and the Google Content Network, when they show display ads on other people's websites, where they share like 70% of the revenue, or most of the revenue, out to the-

• 1:20:05David Rosenthal?

  The publisher.

• 1:20:06Ben Gilbert?

  Publisher.

• 1:20:06David Rosenthal?

  The content owner.

• 1:20:07Ben Gilbert?

  Right, who actually is the reason why there's an ad there in the first place. And YouTube was sort of an interesting mix between the two. They were comfortable and familiar with the idea that we can manage a platform where we actually share a lot of the revenue with those producing the content, which is interesting. Like, if they had never gone into the AdSense world and they were purely a search engine, I think it would have probably been more of a fight to try to do this 50% split with creators. All right, so there's a thing that I mentioned earlier, this notion of people on mobile are more likely to be logged in than people who just hit a webpage on desktop.

• 1:20:47Ben Gilbert?

  Logged-in-ness is essential for YouTube's success. That is actually new to Google. Logged-in-ness is not essential to the effectiveness of a search engine, or even the monetization of a search engine. We've sort of flirted with this idea, you can kind of hear it through our episode, of things like Gmail are good because then you're logged into Google, but there's not a giant lift.

• 1:21:13David Rosenthal?

  It's sort of like a nice-to-have.

• 1:21:15Ben Gilbert?

  Yes. Search, especially on the advertising side, is already so bottom of funnel.

• 1:21:20David Rosenthal?

  Right. The intent is right there. I don't need to know what your demographics are, I know what your intent is.

• 1:21:25Ben Gilbert?

  Right. You search for a shovel, I'mma sell you a shovel.

• 1:21:28David Rosenthal?

  Yeah.

• 1:21:29Ben Gilbert?

  That's a stark contrast to YouTube, where the whole YouTube flywheel really only works with logged-in users.

• 1:21:37David Rosenthal?

  Right. Not just for serving videos and content for you to watch, but also for advertising. This is how the television advertising ecosystem works. It's about targeting. You know, why does Chevrolet advertise on football games? You need demographic data.

• 1:21:54Ben Gilbert?

  Right. All right, so David, are you ready to regrade? The acquisition of YouTube by Google.

• 1:22:00David Rosenthal?

  Yes, we got to set the context of how big it is today.

• 1:22:03Ben Gilbert?

  All right. So back in 2016, we had two knocks on YouTube. One is that it wasn't a destination site. Narrative number two was they only get to keep 50% of their total gross revenue. And then they've got these crazy infrastructure costs and they'll never be able to outrun them. Well, they sure have solved both of these issues. Clearly a destination site, actually more than anything, a destination app. You open YouTube and an algorithm we trust.

• 1:22:27David Rosenthal?

  It's what I do every night before I go to bed.

• 1:22:29Ben Gilbert?

  Yes. And, you know, it's some mix of things you're subscribed to and things you're not, but things YouTube believes will grip your attention at that moment. On the infrastructure costs, let's just start by unpacking their financials. So last year in 2024, YouTube ads alone did $36 billion in revenue. So half goes to creators. They have 18 billion left to play with. And they've had two decades to figure out how to get their variable costs down for video hosting, bandwidth, compute for encoding, music licensing, all that stuff. They now do insane feats of engineering, including doing their own custom silicon to do video encoding. They also have a whole bunch of crazy things that they do,

• 1:23:11Ben Gilbert?

  like change the video encoding that is used depending on how many views the episode has.

• 1:23:18David Rosenthal?

  Oh, interesting.

• 1:23:19Ben Gilbert?

  So they do like vanilla H264 when you first upload it. And then when it hits some number of views, it switches to a more computationally expensive to encode, but then smaller to distribute format. And then when you hit another one, when you have like 5 million views or something, then they do it yet again. They re-encode the video and make the file size even smaller. So they have figured out all these little optimizations to make any given stream as inexpensive as possible on the sort of variable cost basis.

• 1:23:51David Rosenthal?

  Brilliant.

• 1:23:52Ben Gilbert?

  On the revenue side, they have gotten much better at selling ads. And most estimates is that YouTube is actually quite profitable now. On top of the 36 billion in advertising revenue, Google reported that if you include subscription revenue, so this is things like YouTube Premium, YouTube Music, NFL Sunday Ticket, they're now doing over 50 billion in revenue.

• 1:24:13David Rosenthal?

  Wow.

• 1:24:14Ben Gilbert?

  So David, this now makes YouTube the second largest media company by revenue after only Disney.

• 1:24:21David Rosenthal?

  And Disney has so many other things contributing to that revenue, theme parks, cruise ships, merchandise, et cetera.

• 1:24:27Ben Gilbert?

  Yes. So YouTube is already bigger than Disney's media business, and this year will likely become bigger than Disney's entire business.

• 1:24:37David Rosenthal?

  The question is, how does that revenue figure compare to Netflix?

• 1:24:41Ben Gilbert?

  I'm glad you asked. Netflix annual revenue for 2024 was 39 billion. So they've already eclipsed Netflix.

• 1:24:47David Rosenthal?

  Wow. So there you go. Google doesn't release usage data for YouTube, but I'm pretty sure that YouTube is the biggest single property on the internet in terms of minutes spent by humans on it. It's not

• 1:25:05Ben Gilbert?

  I believe that.

• 1:25:06David Rosenthal?

  the biggest number of users on the internet. Both Facebook Blue app and WhatsApp are bigger in terms of total number of users, but I think YouTube probably dwarfs them in terms of time spent by users on the app. I think it is the biggest.

• 1:25:18Ben Gilbert?

  I can see that.

• 1:25:20David Rosenthal?

  Human attention time sink known to man.

• 1:25:23Ben Gilbert?

  So then the question becomes, how profitable is the 50 billion in revenue? And officially, we don't know. But there's these great things called research firms out there that make our jobs at Acquired here much easier. So storied firm Moffett Nathanson published a report earlier this year that they think YouTube does about $8 billion in operating income. Eight billion a year. So I'd want to diff that against their total investment into

• 1:25:50David Rosenthal?

  Oh, yeah. Okay, great. This is the way to grade it. Okay, here we go.

• 1:25:53Ben Gilbert?

  Yes. Now we are getting into grading here. We are landing the YouTube plane.

• 1:25:57David Rosenthal?

  The definitive acquired regrading of YouTube.

• 1:26:01Ben Gilbert?

  So as mentioned earlier, I don't think they ever lost much more than a billion a year, and I think they got break even within conservatively five years. So after the $1.7 billion purchase price and the $5 billion in additional costs, Google paid $6.7 billion, I'd bet it's closer to five and a half, six, to own something that spits off $8 billion a year in profit today, and revenues are growing 10 to 15% every year.

• 1:26:30David Rosenthal?

  By the way, also, since I think the theme of this whole episode is sort of like the dual bottom line to Google of everything they're doing of both revenue and profits and strategic insulation versus other large tech companies.

• 1:26:45Ben Gilbert?

  Oh, but David, you're forgetting the third of organizing the world's information.

• 1:26:48David Rosenthal?

  And the mission to, yeah, yeah, yeah. Okay, the triple bottom line, there we go, the triple bottom line. Google itself, not including YouTube, pretty much whiffed on social. Really, really strategically good for them that they own YouTube, isn't it? Now that Meta and TikTok exist.

• 1:27:05Ben Gilbert?

  Well, here's the crazy thing, they whiffed on social, and then what ended up happening?

• 1:27:10David Rosenthal?

  Was social became YouTube.

• 1:27:11Ben Gilbert?

  Yes.

• 1:27:12David Rosenthal?

  Yes.

• 1:27:13Ben Gilbert?

  It's the craziest thing. We don't open apps anymore to look at what our friends are posting, a place where Google has no presence, but you open Meta's most important property with Instagram and you look at Instagram's most used thing reels, or you look at TikTok, and what do you see? You see videos from people you don't know. I mean, it's crazy that the rest of social media, or almost like user-generated media, pivoted into Google's space.

• 1:27:41David Rosenthal?

  Yeah, this was, the big denouement to our Meta episode last fall was, hey, social networking, such as the conception of it existed in the mid 2000s and 2010s, is dead, it's gone. It bifurcated into private messaging and public media.

• 1:27:58Ben Gilbert?

  Yes, the sort of middle ground of wide group of people you kind of know is effectively dead. It's close friends and it's, I don't really care where it came from, but it's entertaining.

• 1:28:09David Rosenthal?

  Yep.

• 1:28:10Ben Gilbert?

  So. You could do a discounted cash flow on this thing that I just gave you, this, call it, 6 billion of investment and now 8 billion, growing at 10 to 15% every year. But there's additional strategic value, too. In addition to this thing you just said, this becoming the winner in the short-form era, they have the largest corpus of video to train on for the AI era.

• 1:28:32David Rosenthal?

  Yeah, let's go.

• 1:28:34Ben Gilbert?

  So Moffett Nathanson estimated that if this was publicly traded, it would be worth about $500 billion as a standalone company. And even conservatively, if you sort of take media company comps and do a revenue multiple and you discount all the strategic future value, it's still like $200 billion. So this is officially one of the best acquisitions of all time, and I am raising my grade from a C to an A+.

• 1:28:58David Rosenthal?

  I am obviously right there with you. This is an A++.

• 1:29:04Ben Gilbert?

  Now, it's not really fair to say that it's like turning 6 billion into 500. That initial 1.7 was largely Google stock that they traded. So that had real opportunity cost, but it's still ridiculous.

• 1:29:18David Rosenthal?

  Like I said earlier, a screaming deal either way.

• 1:29:21Ben Gilbert?

  Yes.

• 1:29:22David Rosenthal?

  All right, there we go. We have revised history, corrected the record.

• 1:29:27Ben Gilbert?

  Yes. All right, well, for our next chapter, I motion that we go back closer to Google's core business of advertising on the web.

• 1:29:34David Rosenthal?

  Hmm, and maybe also stay closer to acquired's original raison d'etre of discussing the greatest acquisitions of all time.

• 1:29:46Ben Gilbert?

  We may as well follow up YouTube with DoubleClick. All right, listeners, now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:30:02David Rosenthal?

  Yep, 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?

• 1:30:19Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:30:34David Rosenthal?

  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. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:30:58Ben Gilbert?

  And they recently launched Legora 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.

• 1:31:17David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:31:47Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty 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 legora.com/acquired and just tell them that Ben and David sent you.

• 1:32:12David Rosenthal?

  So DoubleClick, well, if buying YouTube in October 2006 for $1.65 billion was a lot, Google decided to basically double that a few months later, in April of 2007, when they bought DoubleClick for $3.1 billion in cash, this time not stock.

• 1:32:43Ben Gilbert?

  And this is on the display ad side of the house. So Google's got two advertising businesses at this point. There's AdWords, when you search and you get the blue links that show up above the blue links. And then there's the off-property or the Google network ads. And at this point in time, Google just is operating something called AdSense, which is this ad network that they've started.

• 1:33:05David Rosenthal?

  Yep.

• 1:33:06Ben Gilbert?

  So DoubleClick actually has a fascinating company history before Google that I did not know.

• 1:33:12David Rosenthal?

  Yeah, not a hot, rising startup like YouTube that they bought for a couple billion dollars.

• 1:33:17Ben Gilbert?

  Though it once was.

• 1:33:19David Rosenthal?

  Yes.

• 1:33:20Ben Gilbert?

  All right. So here's the DoubleClick story and huge thank you. There's a new book that actually just came out by Ari Papparo. The book is called Yield. DoubleClick was originally founded in 1995.

• 1:33:33David Rosenthal?

  So before Google.

• 1:33:34Ben Gilbert?

  Before Google. The founders were Kevin O'Connor and Dwight Merriman, and their headquarters were in New York City. The original idea was twofold. One, build software that could let advertisers serve ads across websites. This is called an ad server. And the network of websites and media, the advertisements, when people talk about paid media, it's the advertisements themselves that would run. Over the next five years, they end up building and acquiring their way to being the leading display ad network and ad server.

• 1:34:04David Rosenthal?

  And they went public during this time, right?

• 1:34:07Ben Gilbert?

  Yep, 1998. Shining success of the dot com industry. However, dot com crash happens. 70% of DoubleClick's customers not only churn but go out of business. A huge amount of DoubleClick's advertisers were actually VC-backed startups. Brand dollars hadn't really spread to the web yet. Like we talked about, the digital advertising was so early and so nascent.

• 1:34:32David Rosenthal?

  Yeah, it was pets.com that was advertising on other dot com properties.

• 1:34:37Ben Gilbert?

  Exactly. They're almost levered on the bubble is probably the right way to think about it. So easy come, easy go. So in 2002, after they're sort of limping along for a while, they sell that ad network division off for under $15 million with an M.

• 1:34:55David Rosenthal?

  Wow.

• 1:34:56Ben Gilbert?

  So now all they've got left is the software, the sort of ad server part of the business. So flash forward to 2004, they're this kind of sleepy, slow-growth company with a shrinking market cap. The ad server, their software was still widely used, but digital marketing on the web just wasn't actually having that much spend flow through it. They decided to put themselves up for sale. Google actually took a meeting to look at it to see if they wanted to buy it. They decided not to. And eventually they sold it to private equity, two different firms, Helman and Friedman and JMI Management, bought it in 2005 for about $1 billion. IPO day was double this final price tag that they would sell it to private equity for. And in many stories, this is kind of the end of the story.

• 1:35:41Ben Gilbert?

  This is the start.

• 1:35:42David Rosenthal?

  Yeah, it's sort of crazy, given the fact pattern that you just told us that two years later, Google's going to buy this thing for $3 billion.

• 1:35:51Ben Gilbert?

  Yes. So David Rosenblatt becomes CEO. And he has a very familiar name that all of you will probably recognize, who becomes-

• 1:36:01David Rosenthal?

  Neil Mohan.

• 1:36:01Ben Gilbert?

  Yes, the head of product and strategy at the company, Neil Mohan. Neil, of course, is the CEO of YouTube today.

• 1:36:09David Rosenthal?

  Yep.

• 1:36:10Ben Gilbert?

  So from DoubleClick originally.

• 1:36:12David Rosenthal?

  Many would argue the best thing that Google got in the DoubleClick acquisition.

• 1:36:16Ben Gilbert?

  You could argue that. Now, here's the amazing thing. What happens under the private equity ownership is that they launch a completely different product, this new thing called an ad exchange. When the concept of an ad exchange is first invented, remember, it was very straightforward before this. There was just an ad network and some software called an ad server. The ad exchange is this sort of brilliant idea that we can cross route demand between ad networks. And at first, what this is sort of used for is like the Remnant or unsold inventory. Oh, we've got some page loads. We don't currently have a buyer in our ad network forum, so throw them up on this exchange and see if programmatically some people will bid on it and we'll get more dollars this

• 1:37:00Ben Gilbert?

  month for the same number of page views. But technically, what was going on is it was really sophisticated and it allowed for some crazy stuff to get done. You could bid in real time, including against the publisher's direct sold ads. You know, let's say the New York Times has done a specific deal with Ford, then in a real time basis-

• 1:37:17David Rosenthal?

  Right. If somebody else is willing to top Ford, then you can displace them. Yep.

• 1:37:21Ben Gilbert?

  Exactly.

• 1:37:21David Rosenthal?

  Gosh, this sounds a lot like Google, doesn't it?

• 1:37:25Ben Gilbert?

  It really created the modern programmatic display advertising, for better or for worse. That's basically what happened here. And as a publisher, when you start working with an ad exchange, you can incorporate multiple different networks, agency trading desks, because this became a big thing within ad agencies. You can stand up these complex rules engines. Effectively, what happened is you sort of jumped in front of the ad networks. You almost disintermediated them. You're the lowest level building block that everything else has to integrate with. And eventually, what started as this ad exchange that just became used for Remnant and unsold ultimately becomes the primary way that digital media is bought on the biggest advertisers with the biggest publishers and all, of course, bought and sold through these big agencies.

• 1:38:11Ben Gilbert?

  Google is running this little thing called AdSense. It's kind of for smaller publishers and it's very like DIY self-serve. It's almost like a techie Utopians version of how do you run ads on websites? Whereas this ad exchange is let's acknowledge all the complex realities that exist in all these business relationships, all these purchasing decisions, the way Madison Avenue has evolved from the Mad Men era to, you know, this moment in time in the early 2000s.

• 1:38:39David Rosenthal?

  And let's essentially construct fat pipes for money to flow through all this.

• 1:38:47Ben Gilbert?

  Yes.

• 1:38:47David Rosenthal?

  And what I mean by that is direct integrations into ad agencies' financial systems and the ad agencies control the budgets for all the big brands and all the big dollars that are flowing.

• 1:38:58Ben Gilbert?

  That's exactly right. So if only Google had a way of unlocking and now participating in these deeply integrated money flows, Google had a few other problems. The way DoubleClick worked and performed a lot of really fancy stuff like frequency capping to make sure you don't see the same ad 46 times is third-party cookies. Google was philosophically opposed to using third-party cookies, so they couldn't do stuff like that, but DoubleClick could. Google didn't have a lot of these big sales relationships since at the time, again, they're very obsessed with self-serve webpages. Advertisers just login and upload and transact. So Google ends up kind of locked out of the best ad inventory. Advertisers on Google could really only be placed on the long tail of websites, which

• 1:39:42Ben Gilbert?

  advertisers were willing to pay less to appear on those websites.

• 1:39:45David Rosenthal?

  Again, we're all in the AdSense part of the world, not search ads.

• 1:39:49Ben Gilbert?

  Yes, there's all sorts of things that make them not enterprise-grade here. So Google decided they'd like to buy DoubleClick.

• 1:39:56David Rosenthal?

  Yes, well, that's sort of the story out there. The reality is, think back to how you started when I interjected and I said, gosh, a lot of what DoubleClick is doing, it really sounds a lot like what Google is doing, right? Well, we were talking to Tim Armstrong for research for this episode. Tim, of course, was head of sales at Google for many years. And we were asking Tim about DoubleClick and he was like, well. I was close with the DoubleClick guys and I wanted to meet with them here in kind of late 2006, early 2007. And just so happened, I was going to be in Seattle for some stuff and I was emailing with them and they were like, oh, you're in Seattle. Actually, we're

• 1:40:38David Rosenthal?

  in Seattle too right now. We can get together here. Tim immediately sounds the alarm inside Google to Eric and Larry.

• 1:40:49Ben Gilbert?

  They're in Seattle. Why are they in Seattle?

• 1:40:51David Rosenthal?

  This is a New York-based company. There is only one reason why the DoubleClick guys are going to be in Seattle. And that would be if Microsoft is going to buy the company.

• 1:41:01Ben Gilbert?

  Yep.

• 1:41:02David Rosenthal?

  Now, back to everything we've been talking about all episode. What is Google absolutely not want to have happen here? Well, one is Microsoft to kneecap them by making changes to Internet Explorer or Windows or whatnot. They basically neutralized that through the whole web app, web 2.0 strategy. Now the threat is, oh, Microsoft is finally going to wake up and do what they should have done 10 years ago and compete with us. Build their own search engine.

• 1:41:32Ben Gilbert?

  Right. Be willing to be an ad-based business. Their DNA was, yeah, we'll do some ad stuff and MSN kind of has to because it's a media business, but

• 1:41:41David Rosenthal?

  We sell software.

• 1:41:42Ben Gilbert?

  We sell software. That's what we do primarily. And we would never trade our ability to sell software to make money on dirty ads.

• 1:41:48David Rosenthal?

  Yep. Well.

• 1:41:50Ben Gilbert?

  Microsoft is realizing that for some set of users, Google's actually making more money on any given PC user than Microsoft is. And they're not happy with this and they say, fine, we at least just need to be in that game too.

• 1:42:04David Rosenthal?

  Yep.

• 1:42:05Ben Gilbert?

  So the negotiations are kind of happening with Microsoft and DoubleClick. Tim told us this great anecdote where he's invited to present and he still thinks it's like a early-stage conversation in the negotiations. And somehow he gets sent to the wrong floor. The person who is escorting him into the DoubleClick building sent them to a floor and they sort of freak out when the door opens and they're like, trying to close the door, like, please go to the other floor. And Tim Is like, what's going on here? He steps out, he runs down the hall and he sees a conference room full of all the Microsoft people and their accountants and their lawyers. And he's like, oh my God, oh my God, you guys, you're about to sign this deal with Microsoft, you got it.

• 1:42:46Ben Gilbert?

  So he gets them to hold off so he can kick the tires, do his diligence, submit a counter bid. This is a crazy process that goes back and forth. Yahoo gets involved. There's a whole presentation series that happens where Yahoo, Microsoft, AOL and Google are basically all getting the pitch and DoubleClick is now showing-

• 1:43:06David Rosenthal?

  I'm imagining they're all like in an auditorium and DoubleClick is presenting on stage.

• 1:43:10Ben Gilbert?

  Dude, there was a spreadsheet called YMAG.XLS and the reason they created it is they're effectively trying to show in each of these presentations, here's how much incremental money you'll make if you own DoubleClick and you tie it into your existing ad system. And they're tweaking the numbers slightly for each one. So Google then submits their LOI for $3.1 billion. And it includes a clause where they can't shop the deal around during this diligence period. And so the whole Google team goes to New York, they rent out this big room at a hotel near DoubleClick's offices. And I'm going to read an excerpt from the book Yield. "The company's counsel," this is DoubleClick, "checked her BlackBerry and held it up for

• 1:43:54Ben Gilbert?

  David Rosenblatt to see. There was an incoming message from Microsoft's corporate development team. They were willing to match the offer for DoubleClick and the message included an email from Steve Ballmer saying that he opened the door for a much higher offer. Ballmer wrote that if the offer match was not acceptable, DoubleClick should simply mark up the paper to meet its needs and then sign it. And Microsoft would review and rapidly countersign to close the deal with minimal negotiation required. Without saying so, Ballmer was communicating, here's a blank check, tell me what closes the deal." Ultimately, a week goes by and they're in this period where they can't really respond and they're supposed to just kind of proceed with Google. And a day before the LOI is set to expire, the DoubleClick team gets an updated term

• 1:44:39Ben Gilbert?

  sheet from Google. The financial terms of the deal are unchanged, that 3.1 billion, but now the deal includes what they call a hell or high water clause, which means that Google was committed to closing the deal without any substantive diligence or any other conditions. It's just money in the bank. So, no more diligence. DoubleClick just signs it, 3.1 billion, and the private equity firm turns that 1 billion, which was levered, there was something like 300 million of equity and 700 million of debt, into a $3.1 billion sale to Google, and it's over.

• 1:45:11David Rosenthal?

  Not bad work if you can get it.

• 1:45:13Ben Gilbert?

  Nope.

• 1:45:14David Rosenthal?

  So, this was huge for Google. DoubleClick, bringing it into Google, did really help with those fat money pipes, as I was saying, of dollar flows from ad agencies.

• 1:45:27Ben Gilbert?

  Yep.

• 1:45:28David Rosenthal?

  But the biggest thing was DoubleClick was the number one player in the space. There was another company, a public company, called Aquanive, that was the number two player.

• 1:45:36Ben Gilbert?

  Which Microsoft then bought for twice as much. They were like, "We really wish we had gotten DoubleClick." And then, within months...

• 1:45:42David Rosenthal?

  It was the next month, right away. Microsoft turned around and bought Aquanive for $6 billion, so twice the price. But Microsoft getting the number two player versus the number one player slowed them down. We're heading right into Microsoft's search efforts with Yahoo and then ultimately Bing, and getting into the advertising business. Worth every penny to Google, even for the sole reason of keeping the premier number one player in the display ad space out of Microsoft's hands.

• 1:46:14Ben Gilbert?

  Yep. Okay, the one thing I will say here, David, is unlike all those other Google products, Maps, Gmail, YouTube, organizing the world's information...

• 1:46:25Ben Gilbert?

  This is not organizing the world's information and making it universally accessible. This is, we're running an ad business and we want to expand the ad business. And so we're going to expand and protect our business interests by buying this.

• 1:46:41David Rosenthal?

  And it's a chess piece on the table that it being in our hands versus other people's hands is better.

• 1:46:47Ben Gilbert?

  That's exactly right. And there's ways that it systematically advantages you to own the exchange when you also own the network. And this is only checking the box of strengthening our business without checking any of the other boxes. And you basically never heard Google executives get up on a stage where they're inspiring people about the future of the company and talk about basically anything DoubleClick is doing.

• 1:47:08David Rosenthal?

  Yes, correct. And even fast forward today, unlike YouTube, it's not like this has become a world dominating thing.

• 1:47:17Ben Gilbert?

  Right. If you're in the display ads world, or you're a publisher, or this feels like a huge deal. If you're Google, let's just look at the numbers today. Google, in total, in 2024, made $350 billion of revenue. About $200 billion of that is from Google Search. About $30 billion of that is from Google Network. This falls under Google Network.

• 1:47:45David Rosenthal?

  Plenty of which existed before and would have existed anyway in AdSense, regardless.

• 1:47:51Ben Gilbert?

  I don't know about that. I don't know that Google would have become the dominant player in display ads.

• 1:47:59David Rosenthal?

  Absent DoubleClick.

• 1:48:00Ben Gilbert?

  Without buying DoubleClick. Yeah, I don't think.

• 1:48:02David Rosenthal?

  Yeah, yeah. But AdSense was probably doing a billion plus in revenue at the time, would have kept scaling. So, all that to say, in the context of Google, this isn't a YouTube.

• 1:48:13Ben Gilbert?

  It just doesn't matter that much. Yeah, $200 billion in revenue they make from Search, where they get to keep 90-ish percent of that, after paying out traffic acquisition costs. Google Network, they pay out 70%, and they only made $30 billion. So if you start thinking about gross profit, it's comparing $9 billion to $175-ish billion.

• 1:48:38David Rosenthal?

  Yep.

• 1:48:39Ben Gilbert?

  It's just not that consequential to the story.

• 1:48:41David Rosenthal?

  All right. So speaking of search, catch us up on how the search business is doing during these years and why Microsoft finally said like, "Okay, enough. We got to enter this business ourselves."

• 1:48:52Ben Gilbert?

  Yeah. So we've been talking about kind of the sideshows, like trying to add win to the sales of the web. And search is cranking on improvements to the core product, and revenue is going up right along with it. So here's a little timeline to catch us up, '03 to '08. They start updating the index more often. So the index starts to feel not quite real time, but it used to be that when you would search, you would be getting results that were indexed three months ago. Now the web is feeling a little bit more

• 1:49:18David Rosenthal?

  Real timy.

• 1:49:19Ben Gilbert?

  Recent when you're searching it. They launch Google Images, Google News, Google Books, Google Scholar. They launch Google Suggest, which is when it starts auto completing your searches. And later, they would launch something called Google Instant, which was very cool at the time. It's actually kind of gone away now, where it would run a completely new search based on every character you typed and show you the results page updated in real time with each next keystroke, which was pretty amazing.

• 1:49:47David Rosenthal?

  I remember that being so cool when it launched.

• 1:49:49Ben Gilbert?

  Yeah. In 2005, they incorporate your search history into your results. So this is when they start doing some personalization stuff with logged in users. They go from, in '04, they had $3 billion in revenue. '05, they have $6 billion in revenue, so doubled even at that scale. In 2007, they launched Universal Search across web, images, video, whatever, maps. They try to deconstruct your query and understand which of these things are you looking for, rather than, they used to basically build a completely separate search engine for each media type and then leave it up to you to decide which thing to go search. That year, when they launched Universal Search, they do $16.5 billion in revenue. This 2007 year, this is when they become

• 1:50:34Ben Gilbert?

  the largest seller of advertisements in the world. Not just digital ads, ads. And digital ads would not overtake traditional media until 2018, as we talked about earlier.

• 1:50:46David Rosenthal?

  Yeah, I was trying to square this. So I guess that means that the market share that Google has of digital ads is so high

• 1:50:52Ben Gilbert?

  It's massive.

• 1:50:53David Rosenthal?

  That it's bigger than even in the traditional space or the TV space, what any one player has.

• 1:50:58Ben Gilbert?

  Yes. So every year, for the last 18 years, Google has been the number one seller of advertising of any kind in the world.

• 1:51:07David Rosenthal?

  Wow.

• 1:51:08Ben Gilbert?

  This, I think, helps you understand a little bit what's at stake in the era of AI. I mean, this is literally the trillion or five or $10 trillion question is can Google keep being the number one seller of advertising in the world even through this sea change? We should do a whole episode on that, probably. Maybe we'll say that for next time. But actually, there's some great corollaries with the mobile wave that we're about to talk about. And then just to pull forward a few more search improvements that they would do later in 2009, that's when they really do some real time indexing of the web. 2012, they launched the Knowledge Graph. So when you search about a, basically a thing with a Wikipedia page, you always get the kind of snapshot view on the right hand side of that entity.

• 1:51:52Ben Gilbert?

  And so all along the way, they're tweaking the algorithm in an attempt to reduce spam. That's effectively the product changes. On the people side of things, they really had solidified themselves as the preeminent computer science research company at this point. I mean, if you were to refer in 2008 to like a really smart programmer, you probably said, oh, they, you know, they're like a Google type engineer. They sort of took the mantle from Microsoft and had not yet relinquished it to Facebook or later to the Stripe or OpenAI or Anthropic or any of the sort of companies we would talk about in the future as this like dense concentration of the best engineers. And they had pulled in a lot of the people from the big research labs that had been collapsing.

• 1:52:36Ben Gilbert?

  So you had Jeff Dean and Sanjay Jemewat coming from DEC. David, we did Sanjay a total disservice on the last episode. A lot of the stuff that Jeff did, and of course, he became sort of a Google executive, Jeff and Sanjay pure programmed together.

• 1:52:50David Rosenthal?

  Yes, there's an amazing New Yorker article that was published long ago about their friendship and career partnership and everything that they accomplished together.

• 1:52:58Ben Gilbert?

  Yeah, we'll link to it in the show notes. And basically, if you look at any big research paper about giant Google infrastructure stuff that was launched from, I don't know, 2002-ish, maybe even earlier, through the 20-teens, Jeff and Sanjay are either the two authors or two of the five authors. I mean, it's amazing how much stuff these two guys invented. They also got Bill Corin and Rob Pike from Bell Labs. You had Xerox PARC and IBM's labs were sort of losing prominence. And Google's just sucking in all this generational, heavy hitter, computer science, architecture, systems programmers from all of those. And so I think that's sort of how I would describe where a lot of the technical breakthroughs

• 1:53:41Ben Gilbert?

  are really coming from, or at least the culture of technical breakthroughs.

• 1:53:45David Rosenthal?

  We talked about these incredible products, incredible innovations, development of the whole concept of a web application. But that was coming from these people that were coming into the company who were just, like you say, generational talents. Speaking of, that was very convenient for a couple of things that they needed to start doing in 2008, namely launching their own web browser, and then shortly thereafter, launching their own mobile operating system.

• 1:54:18Ben Gilbert?

  It's astonishing that they did both of these things.

• 1:54:22David Rosenthal?

  In the same year.

• 1:54:23Ben Gilbert?

  And this isn't like, oh, I'm going to start a browser the way that you can start a browser today. I mean, all these AI companies are launching browsers.

• 1:54:29David Rosenthal?

  Yeah, they're using Chromium.

• 1:54:31Ben Gilbert?

  Right. This is a giant engineering undertaking. You need amazing architects. And this is equivalent to Dave Cutler doing Windows NT. I mean, it was earth shattering when Google launched Chrome.

• 1:54:46David Rosenthal?

  Or everything Jeff Dean and Sanjay did in the early days of Google.

• 1:54:50Ben Gilbert?

  Yes.

• 1:54:51David Rosenthal?

  Yeah. And when I say people launching web browsers today are using Chromium, Chromium, of course, is the open source version of Chrome that Google just gives away for free to anybody. That didn't exist. They had to build it. So in February of 2008, the shoe that Google had been fearing would drop for many, many years, finally does drop, which is Microsoft is officially going to enter the search business.

• 1:55:19David Rosenthal?

  They make a bid, Microsoft does, to buy Yahoo for $44 billion. The giant has finally woken up. Fortunately for Google, they get a little bit of a reprieve because Jerry Yang turns it down.

• 1:55:34Ben Gilbert?

  So dumb.

• 1:55:35David Rosenthal?

  In one of the worst corporate decisions of all time, because just two years later, Bing, after Microsoft would launch Bing the next year in June of 2009, Bing would take over powering Yahoo's search for a deal that paid Yahoo $1 billion versus the $44 that two years earlier, Microsoft was willing to pay for the whole company.

• 1:55:57Ben Gilbert?

  And then Yahoo would sell itself to Verizon for...

• 1:56:00David Rosenthal?

  Like three, I think, something like that?

• 1:56:02Ben Gilbert?

  Something like that, yeah, single-digit billions.

• 1:56:04David Rosenthal?

  Yes. So, Google, though, knew this day was going to come eventually. And fortunately, by this time in 2008, Google had its competitive response all ready, ready to go, which was Chrome.

• 1:56:19Ben Gilbert?

  And they had actually been working on improving the state of browsers for years.

• 1:56:24David Rosenthal?

  Oh, yes, they had. The story of Chrome goes all the way back to 2001. Larry and Sergey wanted to build a web browser in 2001 for this very reason that we've been talking about the whole episode.

• 1:56:37Ben Gilbert?

  Hmm.

• 1:56:37David Rosenthal?

  All of Google rested on...

• 1:56:39Ben Gilbert?

  I didn't realize that.

• 1:56:40David Rosenthal?

  Internet Explorer. And also, I mean, it was Larry and Sergey. Of course, they wanted to build a web browser. It's the most Google thing. Why wouldn't we build our own web browser?

• 1:56:47Ben Gilbert?

  Right.

• 1:56:48David Rosenthal?

  But it was Eric who said in 2001, "No, we can't do this now. We can't poke the bear right now." Like, Google is too young, too vulnerable.

• 1:57:00Ben Gilbert?

  Calls like this are why Larry and Sergey brought in Eric.

• 1:57:04David Rosenthal?

  Eric, yes. The actual quote from Eric at the time this is in, in the Plex is, "I don't want to moon the giant." In 2001.

• 1:57:14Ben Gilbert?

  It's a very Eric Schmidt quote.

• 1:57:15David Rosenthal?

  But that doesn't mean that Google isn't preparing for this. Instead, what they do is they decide that they are going to become the primary major benefactor for the new Mozilla Foundation and what would become Firefox. Mozilla was the nonprofit organization that was founded and spun off

• 1:57:41Ben Gilbert?

  From Netscape?

• 1:57:42David Rosenthal?

  Yeah. When AOL bought Netscape.

• 1:57:43Ben Gilbert?

  Are they a funder? Are they actually just like giving money?

• 1:57:46David Rosenthal?

  Well, I think at first it probably was like with grants, like giving money. Because again, this is strategically important for Google. But then, once Firefox actually gets released by Mozilla and deployed out there, the way Google starts supporting Mozilla and Firefox is through paying traffic acquisition costs to them to be the default search in the Firefox browser. Spoiler alert, like they do to Apple for Safari today, to the tune of like $20 billion a year.

• 1:58:17Ben Gilbert?

  Yes.

• 1:58:18David Rosenthal?

  Firefox is where this all starts with Mozilla.

• 1:58:20Ben Gilbert?

  Actually, traffic acquisition costs originated before Mozilla because it's effectively the same thing that they were doing with software vendors to include Google toolbar.

• 1:58:31David Rosenthal?

  Right.

• 1:58:32Ben Gilbert?

  And so I think the mechanism of payment over time shifted to more of a rev share. My understanding now is that they share some of the revenue they generate from queries that originate.

• 1:58:44David Rosenthal?

  Searches that happen in the browser.

• 1:58:46Ben Gilbert?

  Exactly. Which is why it ends up being kind of variable year to year. But yes, Google has a long history of paying for distribution of their search engine. And the new form that it is now taking is the Mozilla Firefox browser.

• 1:59:02David Rosenthal?

  Yep. Starting with toolbar. So this goes on for a couple of years.

• 1:59:07Ben Gilbert?

  And by the way, I should say, Google becomes a giant contributor of source code to Firefox.

• 1:59:12David Rosenthal?

  Well.

• 1:59:13Ben Gilbert?

  Oh, is that where you're going?

• 1:59:14David Rosenthal?

  I'm going to get into this. So a couple of years, Google's paying Mozilla for default search in Firefox, basically funding Mozilla. After a little while. Google decides that they're gonna hire some of the key Firefox engineers at Mozilla to come and work at Google directly. But they position this as like, essentially, this is the same thing. We are still funding Mozilla and Firefox, just like, you know, you're Mozilla, you can't give these employees, these engineers, stock options like you're a nonprofit. How about instead, they do the same thing that they're doing, which is working on Firefox, they'll just come and work here at Google, and we'll pay their salaries and they'll get Google stock options.

• 1:59:59David Rosenthal?

  Otherwise, they're gonna get poached, you know, by all these tech companies, et cetera, et cetera.

• 2:00:03Ben Gilbert?

  Fascinating.

• 2:00:04David Rosenthal?

  You can see how this makes sense. This team that comes over from Mozilla into Google becomes the core of a new, quote, "product client group" within Google, meaning of this being products on clients, i.e. installed applications on PCs, not the web apps that the rest of

• 2:00:24Ben Gilbert?

  Interesting.

• 2:00:25David Rosenthal?

  Google is doing. And the leader of this group, Google hires, from McKinsey in 2004, Sundar Pichai.

• 2:00:36Ben Gilbert?

  Oh, I did not realize that that's where Sundar came from.

• 2:00:40David Rosenthal?

  Yep. Well, again, all of this is very strategic, because if you did someday want to build your own web browser.

• 2:00:47Ben Gilbert?

  Now you've got the bench of talent, their employees.

• 2:00:50David Rosenthal?

  So there's a quote from Eric Schmidt in The Plex. This was very clever on Larry and Sergey's part, because of course, these people doing Firefox are perfectly capable of going and doing another great web browser. So this group is sitting there within Google for a couple of years, almost like a latent sleeper cell within Google. They're just ready to activate as soon as the Microsoft threat becomes real.

• 2:01:15Ben Gilbert?

  And the way I heard it was, a lot of people are working on Google Gears, which is this browser extension that allows for offline functionality. They've built the Google Web Toolkit to make web application development even more advanced, even more sophisticated. And at some point, they kind of lost faith that Firefox was going to keep the pace and that Firefox was going to stay as high quality of a browser as they needed it. And of course, they had some divergent technical ideas, like different architecture ideas for how a browser should function that we'll talk about.

• 2:01:48David Rosenthal?

  I think all of these things are true. However.

• 2:01:53David Rosenthal?

  Having your own browser when Microsoft does launch Bing hugely, hugely, hugely important. Imagine if 90% of Google happened on Internet Explorer and all of a sudden Microsoft launches Bing.

• 2:02:09Ben Gilbert?

  Right. There's no amount of money suddenly that you could pay Microsoft where they would keep you as the default search engine because they just want all the traffic to go to Bing because they now have a great way to monetize.

• 2:02:19David Rosenthal?

  Absolutely not. Bing, default search engine, done.

• 2:02:22Ben Gilbert?

  Right. And the thing that of course, Microsoft would fail to realize with Bing is you can't be second place in search.

• 2:02:29David Rosenthal?

  Right.

• 2:02:30Ben Gilbert?

  The most liquid auction will always win and Google has already run away with the search ads auction liquidity. And so traffic on Google searches will forever be worth more than traffic on the second place browser.

• 2:02:47David Rosenthal?

  Sure. Doesn't mean that that battle wouldn't be hugely damaging to Google if they didn't have their own web browser. So 2006, they finally decide, okay, it's time to start work on Chrome.

• 2:03:03Ben Gilbert?

  Yep.

• 2:03:03David Rosenthal?

  And also it's clear web apps, JavaScript, Ajax, very important thing. And Internet Explorer isn't keeping up with the technology.

• 2:03:15Ben Gilbert?

  Yep.

• 2:03:15David Rosenthal?

  So there's two killer features, arguably maybe three, that they're going to bake into the Google browser.

• 2:03:24Ben Gilbert?

  Ooh, I've got six.

• 2:03:25David Rosenthal?

  Oh.

• 2:03:25Ben Gilbert?

  So I'm curious which ones you don't think are important.

• 2:03:28David Rosenthal?

  Okay, I'll go through my three and then I'll see what else you have to add.

• 2:03:30Ben Gilbert?

  Okay, great.

• 2:03:31David Rosenthal?

  Number one, most important, it is going to have a super fast, super modern, super performant JavaScript virtual machine called V8.

• 2:03:43Ben Gilbert?

  Yep.

• 2:03:44David Rosenthal?

  That is going to run big web apps, fast and stably.

• 2:03:49Ben Gilbert?

  We're the Ajax company, baby. We gotta speed up the J.

• 2:03:51David Rosenthal?

  We are the Ajax company.

• 2:03:54David Rosenthal?

  That's right. Two, web apps crashed a lot back in the day. They don't so much anymore, but they used to crash a lot.

• 2:04:01Ben Gilbert?

  And Larry has this quote when they're deciding that they should roll out Chrome, and he kind of explains, "We have found the web-based service delivery model to have significant advantages." You don't say, "But it also comes with its own set of challenges, primarily related to web browsers, which can be slow, unreliable, and unable to function offline."

• 2:04:21David Rosenthal?

  Mm-hmm. There you go. And so before Chrome, this is impossible to remember now, but if you had a tab or a window open and running a web app and that web app crashed, it took down your whole browser.

• 2:04:34Ben Gilbert?

  Yep.

• 2:04:35David Rosenthal?

  Everything that you had open, gone.

• 2:04:37Ben Gilbert?

  Tabs were not their own processes.

• 2:04:40David Rosenthal?

  Nope. So each tab is going to be a separate process on your machine. So if the web app running in one tab crashes, all it takes down is that one tab.

• 2:04:49Ben Gilbert?

  And it made sense that before this, they weren't their own process because, one, tabs were kind of a new thing. But, two, web applications were websites. The notion of web applications was only really four-ish years old.

• 2:05:03David Rosenthal?

  So those are my big two. I suspect one of yours is WebKit. I'm not including WebKit here because that was an Apple innovation.

• 2:05:10Ben Gilbert?

  Yeah.

• 2:05:10David Rosenthal?

  That they borrowed. I'll let you talk about that in a sec.

• 2:05:13Ben Gilbert?

  I don't have anything more to say on that. It was the best rendering engine.

• 2:05:16David Rosenthal?

  Yes. So let's say that's three, and then my sort of three and a half is the design. So of course, the web browser ultimately comes to be called Chrome, which is ironic. Chrome is a reference to all the stuff in a web browser, the toolbar, the nav bar, et cetera, that take up space around the content. The idea with Chrome is, and the Google web browser is going to be minimal Chrome, as little as possible. It's just about the content. Let the web and the web apps shine.

• 2:05:45Ben Gilbert?

  Yes. Okay. When you said UI, I thought you were going to say this. My fifth is the Omni Box.

• 2:05:51David Rosenthal?

  Ah, yes.

• 2:05:52Ben Gilbert?

  Originally, there was just the URL bar. And then when search became the killer app of the web, there's a second little input box that is for search on the right side. So we had that awkward teenage years where browsers had the URL bar on the left and then the search on the right. And it's kind of clean to think about it on its own because now that we understand that that is sponsored, that I think for the longest time, that was not in the public psyche, that whatever search engine appeared in that box in the right-hand corner was paying for that placement. That was sort of nice because you type in the URL bar and that's your organic typing. And then the other one is your, I'm willing to give a kickback to Google, probably. But it could also be Bing, could be Yahoo, could be whoever. Google is correctly, from a user experience perspective,

• 2:06:37Ben Gilbert?

  but also just think about their core business model is like, the right design for web browsers is that if you don't type in a URL, it should just search.

• 2:06:48David Rosenthal?

  Just one bar. Why have two bars?

• 2:06:51Ben Gilbert?

  Imagine that, generating a whole bunch more page views on search results pages and a whole bunch more opportunities for our advertisers to reach your eyeballs. But I will say, they were also correct from a user experience perspective. The fact that URLs ever leaked to the public is a mistake. That is letting an implementation detail of the technology.

• 2:07:11David Rosenthal?

  It's an accident of history that consumers type.

• 2:07:15Ben Gilbert?

  HTTPS colon slash slash. Are you kidding me? Consumers never should have known the phrase HTTP.

• 2:07:21David Rosenthal?

  They should just type New York Times.

• 2:07:23Ben Gilbert?

  Yes, which AOL tried to do, AOL Keywords.

• 2:07:26David Rosenthal?

  Hmm, yeah.

• 2:07:27Ben Gilbert?

  So this is effectively leaning into that idea. You can use this box for typing in URLs, but like really what you use this box for is kicking off the Google search. So brilliantly aligned with their business model.

• 2:07:37David Rosenthal?

  All right. So that's what I got. What else do you have that's not on my list?

• 2:07:39Ben Gilbert?

  That's five. And then lastly, sandboxing. Each tab is a sandboxed environment. This prevented a ton of malware. This was like a big breakthrough in computer security where anything that was operating in that tab was in its own sandbox and couldn't be accessed maliciously.

• 2:07:57David Rosenthal?

  Yeah, that's, I guess. Gosh, remembering back, I mean, before Chrome and modern web browsers, browsing the web was like a security threat to your PC, right?

• 2:08:07Ben Gilbert?

  Yep, that's exactly right.

• 2:08:08David Rosenthal?

  Great point. Okay, so they start work officially on this in 2006. They launch it in early September 2008, like a week before Lehman goes down. This is wild.

• 2:08:20Ben Gilbert?

  I remember that because I remember sitting in North Carolina at my Cisco office. And I remember reading the Chrome comic, which I actually just read a couple nights ago for this episode. This like amazing web comic. At the same desk where I read the news about the great financial crisis and the world falling apart and Lehman Brothers collapsing.

• 2:08:38David Rosenthal?

  Wow. So they launched it early September 2008 with, the way, this is so Google. The way they decide to launch it is they hire the famous comic artist Scott McCloud to illustrate a digital comic book as like a introduction to Chrome, explaining what it is and like a user manual in a comic book form.

• 2:09:01Ben Gilbert?

  And it's written for this weird half user who's like, kinda technical, but you don't need to be a programmer necessarily. It's written sort of for the tech enthusiast who can understand process independence, understand sandboxing, understand V8 and the JavaScript speed up, but it's not written for the general public.

• 2:09:20David Rosenthal?

  Yep. But that was exactly the right seed crystal user base to get Chrome into.

• 2:09:26Ben Gilbert?

  Yeah, it's written for the slash dot reader.

• 2:09:28David Rosenthal?

  The kind of people who are gonna go home for Thanksgiving in a couple of months and install it on all their family's computers and say, you need to stop using Internet Explorer right now for all of these reasons, Ben, that you just listed, probably security being number one amongst them. This is practically was me back in the day, like, I'm gonna go home, I'm gonna install Chrome on my parents' computers so that they don't get hacked and lose their financial information, et cetera.

• 2:09:54Ben Gilbert?

  Yep. Within 18 months, they got 40 million users. Then, let's see, they launched it in 2008. By 2010, they had 70 million users. Then 2012, they had 200 million users. Actually, what happened is it destroyed Firefox's market share. I think the launch of Chrome and the peak of Firefox are right around the same time. And then after that, then it really started eating away at Internet Explorer's market share. And today, aside from... Mostly iPhones, but Apple devices running Safari. It is the browser.

• 2:10:27David Rosenthal?

  I mean, to say it worked is like the understatement of the century. I mean, it totally liberates Google from Internet Explorer and Microsoft. When Chrome launched in 2008, Internet Explorer had almost 70% market share of browsers and Firefox had most of the rest. Two years later, like you said, Chrome had passed 100 million users. By 2012, so four years after launch, Chrome and Internet Explorer are now tied for market share with about 30% each. So Internet Explorer has gone from 70% down to 30%. And this is both Chrome on the desktop side, but you're now also well into the rise of mobile.

• 2:11:10David Rosenthal?

  And so Apple's mobile Safari is now becoming huge and Google's Android that we're going to talk about in a sec is becoming huge. Two years after that, in 2014, Chrome is now the clear leader with 40% market share. Internet Explorer is down to 15%. So.

• 2:11:29Ben Gilbert?

  It's over.

• 2:11:30David Rosenthal?

  It's over. And Internet Explorer is basically dead at this point. And today it truly is dead.

• 2:11:36Ben Gilbert?

  2013, 14?

• 2:11:38David Rosenthal?

  Yeah, 2013, 14. Today, it's not even close. Chrome has almost 70% market share, according to CloudFlare.

• 2:11:45Ben Gilbert?

  Including iPhones, which all run Safari default.

• 2:11:49David Rosenthal?

  Right. Safari in aggregate across mobile and desktop of mobile is by far the biggest share of Safari. Market share is about 20%. So Chrome has 70%. Safari has 20%. There's 10% left. You know, I think Microsoft, I don't know, has a couple of single digit percentage points. Talk about flipping the tables. Chrome was massive.

• 2:12:14Ben Gilbert?

  And it was just better. It was so much better. And it really kicked off this amazing era for the web between Apple needing to then sort of play catch up and leapfrog. In a lot of years, it was actually faster than Chrome, and they would go back and forth. And it really spurred Apple, who was already a steward of WebKit, and they sort of had their own competitive response to Microsoft after Steve Jobs hated the fact that he had to keep shipping IE as his best option on Mac.

• 2:12:42David Rosenthal?

  Because that was part of the Microsoft Apple deal, right? When Microsoft saved Apple with the investment was Internet Explorer will become default.

• 2:12:49Ben Gilbert?

  Right.

• 2:12:49David Rosenthal?

  On the Mac.

• 2:12:50Ben Gilbert?

  So Safari was created for that. But over the years, you know, Apple's incentives, especially post iPhone, were not to make it so web apps could be great. Apple's incentives were to make it so native mobile and desktop applications could be great. And so Google really pushing the envelope in the web's capabilities and what a modern browser could do forced this like good for the world race between Apple and Google to both make better browsers.

• 2:13:17David Rosenthal?

  I don't think it is an exaggeration to say that Chrome kept the web alive.

• 2:13:24Ben Gilbert?

  Yeah.

• 2:13:24David Rosenthal?

  As a viable platform for applications.

• 2:13:27Ben Gilbert?

  Yep. I mean, Microsoft certainly didn't have an incentive to do it in the business model they were in at the time, and Apple doesn't.

• 2:13:34David Rosenthal?

  They had every incentive not to.

• 2:13:36Ben Gilbert?

  Right.

• 2:13:36David Rosenthal?

  I mean, who in the world least wants the web to be a viable application platform? Microsoft.

• 2:13:42Ben Gilbert?

  Right. At that point in time, Apple now, ironically.

• 2:13:45David Rosenthal?

  So there's one more amazing, delicious part of the Chrome story, which is, do you remember the Google Chrome Frame? Google Chrome Frame was a plugin for Internet Explorer that replaced IE's JavaScript engine.

• 2:14:06Ben Gilbert?

  Oh, wow.

• 2:14:07David Rosenthal?

  And pulled in the Chrome V8 JavaScript engine, and I think also WebKit.

• 2:14:14Ben Gilbert?

  Whoa.

• 2:14:16David Rosenthal?

  And so for all the corporate users.

• 2:14:19Ben Gilbert?

  Who couldn't install a new app?

• 2:14:20David Rosenthal?

  Of America and the world who were stuck with Internet Explorer. This is the only reason that IE hung on to market share for so long was just-

• 2:14:28Ben Gilbert?

  Right, lockdown PCs.

• 2:14:30David Rosenthal?

  For all those poor souls, Google was there for you with the Google Chrome Frame plugin that let you run Chrome-quality web apps within Internet Explorer. Amazing.

• 2:14:44Ben Gilbert?

  All right, so I have a question for you on Chrome before we finish this story. Why make Chromium open source?

• 2:14:51David Rosenthal?

  The answer that I've read to that is mostly about the Google culture and trying not to be like too evil about it.

• 2:15:03Ben Gilbert?

  Yeah, I would buy that.

• 2:15:05David Rosenthal?

  Yeah.

• 2:15:05Ben Gilbert?

  They're like an open-source company, like it's in their bones to contribute to open source. There's a thin business reason I can think of of why they would want to make it open source.

• 2:15:17David Rosenthal?

  Well, the reason I can think of is like, it doesn't need to be closed source. They make their money from searches.

• 2:15:22Ben Gilbert?

  Right. That's the like, it can't hurt, here's the way it could help. At first I was thinking, well, wait, Google wants to own as many of the browsers that its searches originate from as they can, so they don't have to pay out distribution costs in the form of traffic acquisition. So if someone takes Chromium and then builds a better browser, it's kind of bad because now you have to pay that browser maker. But in practice, as long as it's not Microsoft and as long as it's more fragmented, that's probably a trade they're perfectly happy with. If they need to go and split some rev share and pay, you know, someone who makes some variant of Chrome based on Chromium and

• 2:16:05Ben Gilbert?

  that gets really big and it gets 30% of the market, great, Google's delighted because they, it's not Microsoft.

• 2:16:10David Rosenthal?

  I mean, look, except for traffic acquisition cost, Google's incremental gross margin on search revenue is like 98% or something like that. They're still going to be an 87% gross margin business.

• 2:16:22Ben Gilbert?

  Because the whole point of this was to prevent a existential risk. And so if they have to do some light rev sharing, even in their worst-case scenario where someone builds a successful thing based on their open-source project.

• 2:16:34David Rosenthal?

  Oh, so horrible. We go down to 87% gross margin.

• 2:16:38Ben Gilbert?

  Right, right. It's still perfectly acceptable. Which actually may be the way it plays out if any of these new AI browsers work out.

• 2:16:46David Rosenthal?

  Yeah.

• 2:16:47Ben Gilbert?

  Maybe.

• 2:16:47David Rosenthal?

  Well, not sure any of these AI browsers would be willing to let Google to pay them to be the

• 2:16:51Ben Gilbert?

  Right, big chess game to consider there.

• 2:16:53David Rosenthal?

  Yes. That is, the one catch is the owner of the browser still has to be willing to accept the payment from Google.

• 2:17:00Ben Gilbert?

  Yes. I have one analogy for all of this that is a little far afield, but I think is actually the right way to think about this.

• 2:17:09David Rosenthal?

  Okay, laid on me.

• 2:17:11Ben Gilbert?

  Walt Disney creates Disneyland, goes great, very handcrafted, curated, auteur-driven thing, but ultimately he has to play within the rules of things like city government.

• 2:17:26David Rosenthal?

  Okay.

• 2:17:27Ben Gilbert?

  They go big and get a huge plot of land in Florida to build Walt Disney World. It would be nice if we controlled our underlying foundation a little bit more, so they build their own government district around the park.

• 2:17:43David Rosenthal?

  Right.

• 2:17:43Ben Gilbert?

  And they say, "We make the rules here."

• 2:17:49David Rosenthal?

  This is not totally dissimilar.

• 2:17:51Ben Gilbert?

  Yep. I've been reflecting a little bit on like, why, basically from 1998 onward, Google's biggest threat was Microsoft. And not because of Bing, not because of building advertising, because of this kind of destabilizing thing. There's sort of a fine point on it, which is that spiritually, Microsoft was the platform of the PC era. And with this platform shift, it would be like, very convenient to just be like, "Oh, Google's the platform of the web era." But even though Google is the platform company of the web era, they aren't necessarily the ones building the platform.

• 2:18:29David Rosenthal?

  Right. Yeah, yeah. They still existed at Microsoft's pleasure.

• 2:18:33Ben Gilbert?

  And no one owns the web as a platform. So there's this kind of funky thing where like Microsoft built and owned Windows and then dominated the PC era because of that. Google operates a search engine that generates advertising revenue. They don't charge anyone for anything. They benefit from the web's growth. And so they're doing this like strange indirection.

• 2:18:54David Rosenthal?

  Yeah, it's an ecosystem building exercise.

• 2:18:56Ben Gilbert?

  Yeah, exactly. They're trying to build the ecosystem. They're trying to be the steward of the open web as a platform. And they like put their finger on the scale where they need to and take a little bit more control and ownership, like with Chrome or like with some of these standards bodies to push the web forward to make sure that the place where they live, their neighborhood, the web is in good shape. But it's not their platform in the way that it was Microsoft's platform in that era.

• 2:19:20David Rosenthal?

  All right, maybe the Disney World analogy is even better than we gave it credit for a minute ago.

• 2:19:25Ben Gilbert?

  That's sort of, I don't know, it's a little bit loose, but that's what I've been kicking around.

• 2:19:28David Rosenthal?

  I like it, I like it. Well, no doubt, Chrome was a huge success. Hell, Sundar becomes the CEO of the company. No better sign of how successful it was than that.

• 2:19:40Ben Gilbert?

  Right. It shored up their future. We could do a classic acquired, what would have happened otherwise, just for a minute or two here. What if Google didn't launch Chrome? Let's say Bing launches in 2009 and there is no Chrome and Microsoft still has 70% share and will for a while.

• 2:19:56David Rosenthal?

  Yep.

• 2:19:56Ben Gilbert?

  And they make Bing the default. Let's see, mobile would get big three, four years later in the 2012-ish timeframe.

• 2:20:03David Rosenthal?

  Yep, still small.

• 2:20:05Ben Gilbert?

  So they basically would have like four years of 70% of people using browsers on any devices being defaulted to Bing.

• 2:20:15David Rosenthal?

  Now, obviously, a lot of people would still want Google. They were used to it, they'd switch back, but like, I don't know, man, defaults are powerful.

• 2:20:20Ben Gilbert?

  Defaults are powerful. I think you're right.

• 2:20:23David Rosenthal?

  This is why Google pays Apple $20 billion a year.

• 2:20:27Ben Gilbert?

  Yeah. To your point, maybe without Chrome, Bing would have been a serious competitor to Google.

• 2:20:33David Rosenthal?

  There is no more important distribution point for search than the web browser.

• 2:20:38Ben Gilbert?

  It is the way to monetize a browser, basically the single way to monetize a browser.

• 2:20:43David Rosenthal?

  Yep.

• 2:20:43Ben Gilbert?

  Which, let's make this relevant to today and stop dancing. If the DOJ's ruling is that Google has to divest Chrome, there is one way that Chrome is a business, and that is getting paid by Google to drive traffic to Google as a search engine. It's the only way to operate a business of a browser. And like, maybe in the AI era, it's the AI company having it drive traffic, but it's the same exact thing. And so, one of two things has to be true. Google owns Chrome, or someone else owns Chrome, and then Google pays them.

• 2:21:15David Rosenthal?

  A lot of money.

• 2:21:16Ben Gilbert?

  Definitely can't make it legal, or I don't really understand what the goal is if you make it illegal, is if you say they both can't own Chrome, and they can't pay web browsers to drive traffic. Chrome has no potential of being a business if that's the case.

• 2:21:30David Rosenthal?

  Yep. So, Chrome, huge win. In fact, it's so much of a win that after a couple of years, Google starts thinking, well, gosh, maybe we should build Chrome into an operating system in and of itself. Let's go attack Windows. Let's take it to Microsoft where it really hurts. Chrome OS. You know, but it became successful in schools and education.

• 2:21:52Ben Gilbert?

  Yeah, Chromebooks.

• 2:21:53David Rosenthal?

  Yeah, Chromebooks have major market share there, but it's not a major player in the overall PC operating system market. It is wild how much the PC computer operating system market is still dominated by Windows. That has never changed. You and I live in this world where like, everybody uses a Mac. Mac has like 15% market share.

• 2:22:15Ben Gilbert?

  Yeah.

• 2:22:16David Rosenthal?

  Windows has like 70% market share of computer operating systems. Well, speaking of operating systems.

• 2:22:24Ben Gilbert?

  It's time.

• 2:22:25David Rosenthal?

  I think it's probably time to talk about Google's big one.

• 2:22:29Ben Gilbert?

  Yes.

• 2:22:30David Rosenthal?

  Which is actually the biggest operating system in the world.

• 2:22:34Ben Gilbert?

  Over 3 billion active Android devices now.

• 2:22:37David Rosenthal?

  Totally freaking wild. That they bought for $50 million.

• 2:22:42Ben Gilbert?

  Well, that's a red herring. They've invested so much more. But just to make the point, it is hit after hit after hit. These things are not predicated on Google's distribution.

• 2:22:56Ben Gilbert?

  If you're a company that launches a new widget and you can just distribute it with your old widget, it's not that impressive when your new widget gets dominance. But Google Chrome, I mean, they could do a little thing, and they did push it on Google Search pages, but they managed to get a lot of distribution just by being a great product on the market with viral adoption that everyone told their friends to use. And it was the David Rosenthal's going home to Thanksgiving that were sort of like the seat of it. And then, within three or four years, they just ran the table. And it's not just Chrome. Gmail was that way. Google Docs and Spreadsheets were that way. I mean, Maps was that way.

• 2:23:35David Rosenthal?

  It's everything.

• 2:23:36Ben Gilbert?

  All these things are independent, great products that became dominant on their own merits, just like Google Search did.

• 2:23:46David Rosenthal?

  Yes, I 100% agree. And also helped by the fact that they were all free.

• 2:23:52Ben Gilbert?

  Yes. Yes, fair. And massively subsidized, at least in the early years before they were able to be businesses on their own by the old money printing machine in the basement of Google.

• 2:24:03David Rosenthal?

  Good old Uncle AdWords.

• 2:24:04Ben Gilbert?

  Yes.

• 2:24:06David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:24:12Ben Gilbert?

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:24:23David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you ship next.

• 2:24:43Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:24:56David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started. All right. Android.

• 2:25:11David Rosenthal?

  So Google's office spaces are legendary. The first one, of course, being Susan Wojcicki's garage in Mountain View, company's first office. And then today, the Googleplex, the old SGI Silicon Graphics Campus in Mountain View. In between, Google had another office. Hmm. For a couple of years in downtown Palo Alto, at 165 University Avenue. Would also later be the office that PayPal was started in. Oh, really? Very lucky building, yeah.

• 2:25:53David Rosenthal?

  August 1999, when Google moved out of that office. Do you know who moved in? Based on the direction this is going, is it Danger? Yes, it is. Yes. Danger.

• 2:26:08David Rosenthal?

  The company started by Andy Rubin. And Andy, of course, had been an engineer at Apple. And then left Apple with a group of rebels. I don't know, were they rebels? That went to go start General Magic. General Magic, of course, legendary failed startup in Silicon Valley in the early 90s. Basically was trying to create the iPhone, just 15 years too early. Yep. After General Magic, after it falls apart, he starts Danger. Now, Andy's initial idea for Danger was he wanted to make a wireless version of the Q Cat scanner. What is a Q Cat scanner?

• 2:26:51David Rosenthal?

  This was a device that plugged into your computer that looked like a cat, but it scanned barcodes. And so Andy's idea was, okay, well, we had all this General Magic stuff we were trying to do. That was too far ahead. What if we think simpler and we just make a wireless version of this to scan barcodes? Okay, not a big idea. His first employee at Danger, a guy named Hiroshi Lockheimer convinces him that, hey, actually, you know, a couple of years have gone by. Maybe we should revisit this general magic stuff.

• 2:27:21Ben Gilbert?

  Wait, Hiroshi was with him at Danger?

• 2:27:24David Rosenthal?

  He was the first employee.

• 2:27:26Ben Gilbert?

  I did not know that.

• 2:27:27David Rosenthal?

  Yep. Yes, he was.

• 2:27:28Ben Gilbert?

  I mean, of course, is instrumental in the Android story later. I did not realize the two of them were at Danger together, too.

• 2:27:34David Rosenthal?

  I spoke to Hiroshi in research. He told me these stories. Great, great guy. Hiroshi led Android and Chrome at Google for many, many years and would be the authority on this. So Hiroshi's like, hey, hey, maybe let's revisit this general magic stuff. And that led to Danger building the Sidekick and launching it in partnership with T-Mobile. This thing was amazing.

• 2:27:58Ben Gilbert?

  That thing was so sick. I was jealous of all my friends that had one.

• 2:28:01David Rosenthal?

  It was a messaging focused, sort of rich application cellphone. I think it was, along with BlackBerry's, the first vision of a cellphone where the primary thing you do on it is not talk to somebody.

• 2:28:16Ben Gilbert?

  Is messaging.

• 2:28:17David Rosenthal?

  These things were freaking awesome. They were really big with celebrities. I think it was a plot of an Entourage episode at some point in time.

• 2:28:24Ben Gilbert?

  So they end up selling this company to Microsoft, right?

• 2:28:28David Rosenthal?

  Yes. Microsoft does end up acquiring the company, but not until 2008, which is the same year that Android launches. Andy actually had left Danger in 2003 and started a new company, Android.

• 2:28:43Ben Gilbert?

  Which, in the earliest days, it was kind of like an open source competitor to effectively BlackBerry software?

• 2:28:50David Rosenthal?

  Yes, in its earliest, earliest days, the first version of Android, the company.

• 2:28:58David Rosenthal?

  Remember I was talking about point and shoot cameras and digital cameras back in the YouTube section?

• 2:29:02Ben Gilbert?

  Yeah.

• 2:29:03David Rosenthal?

  Was actually to build a cross-platform, open-source operating system for point and shoot digital cameras.

• 2:29:11Ben Gilbert?

  Oh, wow.

• 2:29:12David Rosenthal?

  Yeah, that was Andy's vision was like, oh, hey, these point and shoot devices, like hundreds of millions of consumers have them now. What if there were a powerful operating system? Could that be a Trojan horse to get an operating system? You could sort of imagine it.

• 2:29:27Ben Gilbert?

  Right. If cameras became phones instead of phones becoming cameras, then yes.

• 2:29:31David Rosenthal?

  Yep, exactly. But pretty quickly, it does become clear that phones are going to become cameras. So, good thing is, though, the software they're writing still works just as well on phones. So Andy pivots the company and has the delivery vector shift from cameras to smartphones. And at the time, the smartphone market such that it existed, and it did exist.

• 2:29:56Ben Gilbert?

  BlackBerry Windows Mobile?

• 2:29:58David Rosenthal?

  Well, yeah, so here are the players. Basically, phone companies either were full stack, like Apple and the iPhone is today, where they made the phone and the operating system. So that was Nokia. And then the big player in the smartphone market at least was BlackBerry, made their own software, made their own devices, huge in the enterprise market. Or you did have OEMs, device makers, who made devices and then they bought an operating system, either from Palm, which made their own devices, but then also started selling the operating system to other vendors. Or the big player was Microsoft with Windows Mobile.

• 2:30:36Ben Gilbert?

  And this was a license model, as we talked about in our Microsoft Part Two. This was you pay Microsoft single-digit dollars and you get an operating system and then you build the phone stuff on top of the operating system.

• 2:30:52David Rosenthal?

  Exactly. And this was a good business for Microsoft. Obviously, it wasn't as big as the desktop market, but you can totally understand why this is their strategy. We are the main desktop operating system provider. This is our business model there. Let's just do the same thing here. It seems to be working.

• 2:31:09Ben Gilbert?

  Yep.

• 2:31:10David Rosenthal?

  And as far as the phone manufacturers, the OEMs and the carriers are concerned.

• 2:31:18David Rosenthal?

  Things are also pretty good. These phones that they're making, they can't really do that much, but because of that, they don't actually cost that much to make. And the consumers, meanwhile, are paying through the nose for these things. You have a smartphone on a carrier contract, you're paying like a hundred bucks a month. And they don't consume that much data either because they're not that capable. Everybody is fat and happy. Yep. So into this morass that also Steve Jobs is of course looking at the same thing and saying this sucks. Enter Andy and Android. And he goes around and he starts pitching the phone manufacturers and the carriers. Hey, stop buying an operating system from Microsoft or from Palm.

• 2:32:03David Rosenthal?

  I'll give you a great one for free. And oh, by the way, it's going to be open source and there'll be third party applications that can be written to it and these devices will be super powerful. The ecosystem's like, no, I don't want this. One, there's just no way in hell that A startup. AT&T or Verizon is going to work with a little rinky dink startup that's valued at like $10 million and has eight employees. There's billions and billions of dollars at stake here. But the other part of it too, I think the reason that the smartphone market had stagnated for so long was this, everybody was happy. Right. It's a non priority to upset the apple cart. Right.

• 2:32:46David Rosenthal?

  It's almost like a version of enterprise software and IT, right? The users don't like it, but the users aren't actually the customers here. It's the carriers who are the customers. Yep. So 2005 rolls around, Andy's now two years into the company with Android. He's managed to convince HTC, the Taiwanese manufacturer, to make a prototype with him. He's showing it to carriers, he's showing it to other OEMs. But for all the reasons we just discussed, it's tough sledding out there. The company's running out of money. As Andy is going around trying to gin up investment for another round, he ends up meeting with Larry Page.

• 2:33:30David Rosenthal?

  Larry immediately is like, forget raising another round. What if I buy you right now? So July 2005, Google buys Android for $50 million. Five zero million dollars for Android. Oh, my goodness.

• 2:33:46Ben Gilbert?

  But of course, that's a fallacy because they would pour billions in in development.

• 2:33:51David Rosenthal?

  Yeah, yeah, yeah, yeah. They put billions. Yeah, yeah, yeah. Oh, I know, I know, I know. But like to your point, this episode, Google is the hit factory here. This is the hit parade.

• 2:34:00Ben Gilbert?

  Right. The correct way to think about Android is that Google built it in-house with a little kick in the pants from this startup kind of got far enough along with the idea that forced them to do it now.

• 2:34:14David Rosenthal?

  But they needed the kick in the pants.

• 2:34:16Ben Gilbert?

  Yes.

• 2:34:16David Rosenthal?

  Because why was Larry so excited? Why did they buy Android right away? Eric and Larry and Sergey, they all knew that they were late to mobile. Here we are, it's now mid 2005.

• 2:34:28Ben Gilbert?

  Hmm.

• 2:34:29David Rosenthal?

  We're 18 months away from the reveal of the iPhone. Apple and Google are very close.

• 2:34:35Ben Gilbert?

  Why do you think they knew that they were late?

• 2:34:37David Rosenthal?

  I'm sure they were starting to get wind from Apple of what was going on.

• 2:34:43Ben Gilbert?

  That's true. Eric's on the board at this point, right, of Apple?

• 2:34:45David Rosenthal?

  He's not yet on the board, but he's about to join the board. But the companies are very close.

• 2:34:49Ben Gilbert?

  Okay.

• 2:34:50David Rosenthal?

  There's that. But even, let's say they don't know about the iPhone. BlackBerry is a thing.

• 2:34:56Ben Gilbert?

  Yep.

• 2:34:57David Rosenthal?

  Big adoption.

• 2:34:58Ben Gilbert?

  Yep.

• 2:34:58David Rosenthal?

  Smartphones, you know, and even Windows Mobile, as bad as it was, proved that there is demand, there is clearly consumer demand for this.

• 2:35:07Ben Gilbert?

  Right. They had a version of Google.com for these devices to access and they could see the traffic.

• 2:35:12David Rosenthal?

  And they really knew it, especially from Maps. Google Maps on mobile devices, smartphones was a killer application. Google is maintaining. I kid you not, 350 different versions of Google Maps for mobile for all the just sea of phones out there. And so like, they know.

• 2:35:35Ben Gilbert?

  We have built our local government district on the desktop around our Disney World and uh oh, looks like mobile needs a district too.

• 2:35:44David Rosenthal?

  Yep. So sure, you know, like you're right. They would have done this anyway, but they were starting to feel already like, oh shoot, we should have started this two years ago. Buying Android kickstarts things and like, from the Google perspective, thank God they did because we're 18 months away from the iPhone launch. And if they are starting from a cold start in January 2007, good luck. We're not telling this story right now.

• 2:36:11Ben Gilbert?

  If they don't buy Android and they don't get started, basically in the month that they did, this market belongs to Microsoft.

• 2:36:17David Rosenthal?

  Or Apple.

• 2:36:18Ben Gilbert?

  No, Microsoft.

• 2:36:19David Rosenthal?

  Oh, why do you say Microsoft?

• 2:36:20Ben Gilbert?

  There's going to be two players in this market.

• 2:36:24David Rosenthal?

  I see what you're saying.

• 2:36:24Ben Gilbert?

  There's going to be a fully integrated player, which Apple was going to be. And then there's going to be an OEM plus licensed operating system. And the model would have just been that Microsoft sells operating systems, a mobile operating system.

• 2:36:39David Rosenthal?

  Great point.

• 2:36:39Ben Gilbert?

  To the OEMs who were freaking out that Apple was going to run away with it.

• 2:36:43David Rosenthal?

  Great point. So now, back to Android and why Android was especially so attractive. Andy already had the right business model for Google. It's just that as Android, the startup, OEMs and carriers are like giving it to me for free. Like that makes you less attractive to me. But now all of a sudden within Google, they can run the playbook that they run everywhere. They go to carriers, the OEMs.

• 2:37:04Ben Gilbert?

  It's funny how giving it away for free as a startup is counter signal. It makes you look desperate. But if you're Google, it's like, oh, they must have a really good plan here.

• 2:37:14David Rosenthal?

  Exactly. So they start work on Android as part of Google here in summer of 2005. And the plan initially is that there are going to be two versions of Android. There's a prototype and a device that'll be more near term to launch called the quote unquote "sooner," sort of the more BlackBerry-like device, not a touchscreen device. And then there was a longer term, advanced research project codenamed "The Dream" for a touchscreen smartphone device. Summer of 2006, that next year, Eric Schmidt joins the Apple board.

• 2:37:59Ben Gilbert?

  Ah, sees how far along and how good the iPhone is.

• 2:38:03David Rosenthal?

  Uh huh. And then, January of 2007, the iPhone is revealed in the greatest corporate presentation keynote of all time.

• 2:38:13Ben Gilbert?

  Yeah.

• 2:38:14David Rosenthal?

  Eric is in the freaking keynote. Steve Jobs invites Eric Schmidt onstage.

• 2:38:20Ben Gilbert?

  And Android hasn't been announced yet, right?

• 2:38:21David Rosenthal?

  Nope, nope. Nobody knows about Android.

• 2:38:23Ben Gilbert?

  This is in January of '07, and then July of '07 is when it shipped?

• 2:38:28David Rosenthal?

  July of '07, yes, is when the iPhone shipped. Now, I believe Eric had disclosed to Steve about the "sooner" project, because obviously it was public that Google had acquired Android. And I believe that Steve Jobs knew that Google was working on like a BlackBerry-style phone. But he did not know about the "dream" prototype. So Eric comes onstage, and you go watch this. We'll link to this in this clip in the show notes. It's crazy. It's about a three-minute-long total thing. Eric comes onstage. He makes a joke about merging the companies, that like Apple and Google

• 2:39:10David Rosenthal?

  are so close, they should merge. He says the company should be called "Applegoo." And then he jokes and he says, "Well, but here's the way with the iPhone that we can merge the companies without actually merging."

• 2:39:21Ben Gilbert?

  He's making these jokes, and the camera is focused on Steve Jobs, and he just has the ick. I mean, that's the best way to describe. He's like trying to be a good sport and smile and be like, yeah. But he has the ick.

• 2:39:36David Rosenthal?

  It is unbelievable to watch this, knowing everything that would happen over the next 10, 15 years.

• 2:39:44Ben Gilbert?

  This incredibly close collaboration. There are two apps that launch in the very first version of the iPhone. Remember, it didn't have an App Store. It was not open to third-party developers. There is a YouTube app and a Maps app, both of which are Google services. Now, the apps are written by Apple. The icons are designed by Apple. They're basically just consuming Google's data as APIs.

• 2:40:07David Rosenthal?

  The only icons and apps on the phone are the ones that Apple puts there. And two of the, yeah, I don't know how many there were, 10, 12, 13 apps are Google apps. It's wild. By the way, the YouTube icon with the wood green TV, so awesome.

• 2:40:24Ben Gilbert?

  So awesome. I heard the YouTube team absolutely detested it.

• 2:40:29David Rosenthal?

  They hated it. Yeah, they hated it. Well, because it wasn't the YouTube logo and they knew already. I mean, it was obvious this was not going to work because the YouTube team is like, Apple didn't put our logo on there. Of course, they're going to start bringing in other video content over time.

• 2:40:42Ben Gilbert?

  It was a little bit pre-algorithm, but it was, the thinking was there of we have to make YouTube a destination and then control the experience when they're in. And making the app icon reminiscent of an old-school CRT TV was also just like deeply antithetical to YouTube inventing the video of tomorrow.

• 2:41:01David Rosenthal?

  Yes, yes. It still looked great, though.

• 2:41:04Ben Gilbert?

  It fit in with that first iPhone for sure.

• 2:41:06David Rosenthal?

  It totally did. Do you know who was the leader of the Google mobile teams that developed the backends for these apps?

• 2:41:17Ben Gilbert?

  Oh, no.

• 2:41:17David Rosenthal?

  Vic Gendotra.

• 2:41:19Ben Gilbert?

  Really?

• 2:41:20David Rosenthal?

  Yes, that was his first job, I think, within, within Google, first or second job within Google. Vic is gonna come back up here in a minute. So the iPhone keynote, truly world-changing historic event. The Android team, of course, is watching this. And yeah, that whole Sooner prototype thing.

• 2:41:41Ben Gilbert?

  Right in the trash.

• 2:41:42David Rosenthal?

  The next day, right in the trash can, directly in the trash can. The dream is no longer a dream. It's happening now.

• 2:41:52Ben Gilbert?

  Get in, kid. You're the A-team now.

• 2:41:54David Rosenthal?

  Yep. Clearly, touchscreens are the future of mobile devices.

• 2:42:01Ben Gilbert?

  And a capacitive touchscreen at that.

• 2:42:03David Rosenthal?

  Yeah. So remember, Eric Schmidt is on the Apple board. Once Steve Jobs finds out about what the Android team at Google is now doing, he goes ballistic.

• 2:42:15Ben Gilbert?

  Or perhaps, to use his word, thermonuclear.

• 2:42:17David Rosenthal?

  Yes. Yeah, yeah, yeah. Full-on, classic Steve Jobs. Supposedly, at an Apple All-Hands meeting, this is actually a little later, but he's overheard and leaked to the press as saying, "We did not enter the search business. They entered the phone business. Make no mistake, Google wants to kill the iPhone. We won't let them."

• 2:42:40Ben Gilbert?

  Wow. Which is, I mean, to this day, fair. Apple has been happy to just take a spiff of all the traffic that they send to Google and not compete in Google's core business.

• 2:42:51David Rosenthal?

  Yep.

• 2:42:52Ben Gilbert?

  Now, I will say, I believe, Apple reputation launders a little bit. They get a lot of the value of being in the search business without having to do all the stuff that they demonize from a privacy and data sharing and all that ickiness perspective. But, fine, whatever. It's doing business.

• 2:43:08David Rosenthal?

  That's fair. Apple did not enter the search business.

• 2:43:11Ben Gilbert?

  So in Walter Isaacson's book, Steve Jobs says, "I'm going to destroy Android because it's a stolen product. I'm willing to go thermonuclear war on this."

• 2:43:22David Rosenthal?

  Yes.

• 2:43:23Ben Gilbert?

  He also says, "I will spend my last dying breath if I need to, and I will spend every penny of Apple's $40 billion in the bank to right this wrong."

• 2:43:33David Rosenthal?

  He was pissed. He was really pissed. Now, interestingly, he doesn't actually kick Eric Schmidt off the board until 2009.

• 2:43:41Ben Gilbert?

  Yeah, it's interesting.

• 2:43:42David Rosenthal?

  So I think it took Steve a little while to realize what the dream was.

• 2:43:49David Rosenthal?

  Within Google.

• 2:43:50Ben Gilbert?

  And there's also a reasonable argument back. Look, both companies took stuff from each other. A lot of the stuff that, you know, Apple touts that they were the first company to ever do multi-touch and they own the, there were predecessor companies that did multi-touch before them too. The iPhone debuted a lot of technologies for the first time and a lot of them were also just at the right time in history. And I think Android arrived at a lot of similar conclusions at the same time.

• 2:44:16David Rosenthal?

  True. It's interesting you said multi-touch. So multi-touch actually becomes the battleground.

• 2:44:22Ben Gilbert?

  Cause that's the patent that they go to war over.

• 2:44:23David Rosenthal?

  That's the patents that Apple has. So Steve Jobs threatens to sue Google over implementation of multi-touch gestures. And so as a result, Android for several years doesn't have things like pinch to zoom or the sort of swipe operating system UI navigation gestures. And I'm pretty sure if you remember early Android phones for the first couple of years, every single one of them had four physical buttons at the bottom of the phone to navigate the operating system. I think this is why.

• 2:44:55Ben Gilbert?

  Huh. But let's take the Google side of this argument for a minute. When Android does launch, they have the market, which today is the Play Store. Apple didn't have an App Store.

• 2:45:06David Rosenthal?

  Yep.

• 2:45:07Ben Gilbert?

  Android had, when you swipe down a notification center with all the notifications from each of your individual apps, you could-

• 2:45:14David Rosenthal?

  Took Apple years to get that.

• 2:45:15Ben Gilbert?

  Drag to rearrange apps on the home screen. I mean, these are things that Apple then directly copied as well. So-

• 2:45:22David Rosenthal?

  Right.

• 2:45:22Ben Gilbert?

  Yeah.

• 2:45:24David Rosenthal?

  All right. So yeah, let's get into the-

• 2:45:26Ben Gilbert?

  Great artist steal.

• 2:45:27David Rosenthal?

  Exactly. Let's get into the launch and the competition. So November 2007. So what's that 10 months after the iPhone reveal and five months after the launch?

• 2:45:39David Rosenthal?

  Remember Android launches in 2008. Google announces the formation of the Open Handset Alliance.

• 2:45:45Ben Gilbert?

  That's right.

• 2:45:46David Rosenthal?

  And this is a partnership with HTC Motorola, Samsung, LG, T-Mobile, Sprint, Qualcomm, Intel, Broadcom and Texas Instruments. And this was so confusing at the time. I and everybody else was like,

• 2:45:59Ben Gilbert?

  What does it mean?

• 2:46:00David Rosenthal?

  What is this? Is Google making a phone? Is Google not making a phone? So then a whole year goes by with basically nothing. And then in September of 2008, a lot of things happened in September of 2008. Chrome, Android, Lehman Brothers. Google announces the T-Mobile G1 phone. The G phone. And the T-Mobile G1 is manufactured by HTC. Remember Andy and Android's original partner in the prototype. And the product name, the HTC product name for it is the HTC Dream.

• 2:46:35Ben Gilbert?

  Ew.

• 2:46:36David Rosenthal?

  This is the dream. This was what they were working on. And in the US, it's called the G1. It actually is a super interesting little device.

• 2:46:45Ben Gilbert?

  I wrote an app in it. I had a class in college. It was like a capstone class or something where I could like pick my own project to do. And we had a four person team and one of the guys had a T-Mobile G1. And we wrote, I think it was like a Java thing for it. But he then founded the company DailyBooth after that.

• 2:47:05David Rosenthal?

  Oh, wow. Yeah.

• 2:47:07Ben Gilbert?

  In fact, it may have even been like a DailyBooth for Android app.

• 2:47:10David Rosenthal?

  You had a lot of founders come out of your crew at Ohio State. Awesome. So it has a touchscreen on the front with the physical navigation buttons, like I was talking about. It has a slide out horizontal query keyboard, sort of reminiscent of the Sidekick back in the days. Unlike the iPhone, it has multitasking. So you can run multiple apps at once and it has third party applications. Now, that's a little bit unfair to the iPhone because by the time the G1 actually launched, Apple had indeed just shipped the App Store. The event where they launch it is like T-Mobile event in New York City.

• 2:47:51David Rosenthal?

  In a commercial kitchen, it's a haphazard, random launch. You can't even find video of it today. There's like little clips you can find and still images. What is widely reported and you can actually see in photos. Larry and Sergey do show up, they roller blade into the building. They roller blade onstage. There are all these T-Mobile and HTC executives there in suits. And here come Larry and Sergey on roller blades onstage.

• 2:48:17Ben Gilbert?

  Listeners, join the acquired email list. We'll throw this in the next email that goes out.

• 2:48:21David Rosenthal?

  Yeah, it was haphazard, to say the least. But the G1 slash Dream becomes a pretty decent success. It sells over a million units in the US. And just this one device, this one phone, gets 6% smartphone market share, which puts it roughly on par with Palm, like all of Palm. The G1 kind of matches in market share. But the smartphone market is still very small.

• 2:48:49Ben Gilbert?

  Yeah, it's important to remember, mobile really wasn't a thing until 2011 of very obviously the next wave and the next computing paradigm.

• 2:48:59David Rosenthal?

  Yep, but to be fair to Apple and the iPhone, it is starting to run away with the market. And this is the point of, man, if Google had not bought Android when it had, it would have been too late. So the whole lifetime of the G1, they sell about a million units. The iPhone sold 11 million units in 2008 alone, 20 million in 2009. So basically overnight, Apple and the iPhone goes from not in the smartphone market at all to over 50% market share of smartphones. But as great as the iPhone was, it did have a few weaknesses.

• 2:49:37Ben Gilbert?

  No copy paste.

• 2:49:39David Rosenthal?

  No copy paste, yep.

• 2:49:40Ben Gilbert?

  No multitasking.

• 2:49:41David Rosenthal?

  As mentioned before, it didn't multitask, not very customizable. I think we're still in the era of you can't even change your wallpaper on the iPhone. Pretty sure we are. I think it's still just the black background.

• 2:49:54Ben Gilbert?

  Yep, you can't put your own apps on it from anywhere but the App Store, even after it launches.

• 2:49:58David Rosenthal?

  Yep, a big knock at the time, people love that it's a touchscreen. People really wanted the physical keyboards.

• 2:50:05Ben Gilbert?

  Yep.

• 2:50:06David Rosenthal?

  And the biggest problem with the iPhone, at least in the US, you can only get it on AT&T.

• 2:50:12Ben Gilbert?

  And you could only get it with the edge network. It was unusable.

• 2:50:16David Rosenthal?

  That's right, it didn't have 3G.

• 2:50:18Ben Gilbert?

  It was so terrible. I mean, eventually the iPhone 3G came out within a year. But even that was really slow. It was, the network had not caught up to what you wished the device could do for a few years.

• 2:50:28David Rosenthal?

  Yep. So that brings us to holiday 2009 and the Motorola Droid.

• 2:50:36Ben Gilbert?

  Changed everything.

• 2:50:37David Rosenthal?

  It's sort of funny to say now, like, oh, the Motorola, like, the Motorola Droid. This changed everything. Yes, the Motorola. I mean, when we interviewed Steve Ballmer a couple of months ago, he brought it up. When the Droid launched, it was holiday 2009. And I think you and I were like, was it really that late? Wasn't it early? And he was like, nope. Christmas 2009, I will never forget it. That is when Android won the market. This was the moment.

• 2:51:00Ben Gilbert?

  And Google was really willing to put their brand second. Now, were they really putting their brand second? It's Android versus Droid. So very convenient. But like, if you were to go survey the American public in 2009, 10, 11, 12, maybe even 13, and say, do you know about Android? The mobile operating system? No. Do you know about Droid? Oh, yeah, I have a Droid phone.

• 2:51:24David Rosenthal?

  Well, and then there are a couple of years after that where it was like, do you know about Google and Android? Yeah, maybe. Do you know about Samsung and Galaxy? Oh, yeah, I know about that.

• 2:51:35Ben Gilbert?

  Yep, exactly.

• 2:51:36David Rosenthal?

  So we'll get into that in a sec. The Droid.

• 2:51:38Ben Gilbert?

  Droid does, baby.

• 2:51:40David Rosenthal?

  Verizon, at this point, is getting pummeled by AT&T. It's been two years since the iPhone launch. AT&T isn't just stealing a lot of subscribers from Verizon because of the iPhone. They're stealing the best subscribers, the people that are willing to pay the most money for the biggest-priced data plans for smartphones. Verizon finally decides like, we gotta change the game here. We gotta be able to compete with the iPhone. We're gonna go all in on Android. We are going to buy a device and make this our flagship smartphone, positioned against the iPhone, and we're going to invest hugely behind this thing.

• 2:52:26David Rosenthal?

  So the device itself, the actual Droid made by Motorola, it was a great device. It had a big screen, big screen for the time, a slide-out keyboard. It had a 5-megapixel camera, removable battery, all of these things the iPhone didn't have. Probably the most important feature it had, though, the killer, killer app.

• 2:52:50David Rosenthal?

  Was on the software side. It was the first Android device launched with Google Maps turn by turn.

• 2:52:58Ben Gilbert?

  Hmm.

• 2:52:59David Rosenthal?

  Navigation.

• 2:53:00Ben Gilbert?

  I didn't realize that.

• 2:53:01David Rosenthal?

  So before the Droid, there was this whole consumer electronics product category of dedicated GPS devices. People old enough to remember might remember this. Tom Toms, Navtechs, people would buy.

• 2:53:17Ben Gilbert?

  Garmin.

• 2:53:17David Rosenthal?

  These devices, Garmin, yep. They would put them in their cars and you also paid a monthly subscription fee for the service of the turn by turn navigation. Overnight, this entire product category gets obsoleted, sherlocked, gone. Because Google Maps is a better product with better navigation and it's free. No more monthly fees. Just baked in in your phone and the device you already have with you. Why on earth would anybody buy, let alone pay monthly for a standalone GPS product again?

• 2:53:57Ben Gilbert?

  Yep.

• 2:53:57David Rosenthal?

  And you know what doesn't have it? The iPhone. The Apple version of Google Maps, you had to manually advance the steps. So it would pull up the route and then you could tap the button to be like, I've made this turn, now show me the next.

• 2:54:14Ben Gilbert?

  That's right.

• 2:54:15David Rosenthal?

  Part of it.

• 2:54:16Ben Gilbert?

  That's such a funny, you're exactly right. I remember that too.

• 2:54:18David Rosenthal?

  Not really what you want to do while you're driving.

• 2:54:20Ben Gilbert?

  Man.

• 2:54:21David Rosenthal?

  Yeah. It's crazy how not that long ago this was.

• 2:54:25Ben Gilbert?

  Totally.

• 2:54:25David Rosenthal?

  That was the killer feature. But even more important than the features was the marketing and the muscle that Verizon put behind this. So they licensed the Droid name from Lucasfilm.

• 2:54:37Ben Gilbert?

  That's right. And I think Lucasfilm was mentioned at the bottom in the credits of every commercial.

• 2:54:41David Rosenthal?

  Yes, every commercial. And they did these series of commercials that we've been referencing. Man, if you lived in the US and you are older than like 12 at this time, this is burned in your memory. It was so great. The first 80% of the ad, 90% of the ad, was an Apple-style ad knockoff with the like bright, happy upbeat music and the white background. And it had the fading Apple-style text and it said, "I don't multitask. I don't have a removable battery," you know, et cetera, et cetera. And then the very last, you know, five seconds of the ad, there was like a hard cut and like static noise and it was black and it was edgy. And then it said, "Droid does."

• 2:55:27David Rosenthal?

  It was so good. So the CMO of Verizon, so Verizon did all of this, said that the campaign was designed to quote, "Wake up the market."

• 2:55:39David Rosenthal?

  And boy, did it ever. So that original droid, I think it sold a quarter million units the first weekend it was on sale. And then it sold a million units faster than the original iPhone had. Like, there was just so much pent-up demand for a real smartphone on the Verizon network. Plus all the, you know, yeah, this has turn-by-turn navigation. But if you even like, put aside whether it was better or not, it just was a real smartphone on Verizon. Time Magazine named the droid its product of the year for 2009.

• 2:56:13Ben Gilbert?

  Wow.

• 2:56:13David Rosenthal?

  The bigger thing, though, is that like Verizon going all in behind it, even though they would add the iPhone later, it creates sort of this seed of what the Android user base would become today, at least in America, because Verizon went all in on Android, all in on droid. Over the next couple of years, they followed the original droid up with, let's see, there was the HTC Droid Incredible, the Droid X, the Droid 2, the Droid Bionic, the Droid Max. All of these had major marketing campaigns behind it.

• 2:56:45Ben Gilbert?

  Game over for the, the segment of the market that is not Apple, this different OEM from operating system. Google just runs away with it. And before this, Microsoft had a shot.

• 2:56:56David Rosenthal?

  They really did.

• 2:56:56Ben Gilbert?

  They were a systemic disadvantage because they were going to carriers and saying, "Why don't you pay us five bucks, 10 bucks?" And Google was going to them and saying, "Here you go. This is free." You can have the source code and you can modify it as you see fit. Even today, I think Samsung has their own OS, Samsung One or something like that, that looks different. I mean, it's Android, but it's the open source version of Android that they've customized. That's the thing that's on, I don't know, a billion phones. And three, we aren't Microsoft.

• 2:57:29David Rosenthal?

  Yeah, you guys don't want to be Compaq.

• 2:57:31Ben Gilbert?

  Right. Microsoft managed to suck up all the profit and that entire value chain. And handset makers, you currently make money. So why would you go work with Microsoft who did that to the PC makers? And then as a little sweetener on top of all this, you know how I mentioned it was free and open source?

• 2:57:46David Rosenthal?

  It's actually less than free.

• 2:57:48Ben Gilbert?

  We're actually going to pay you.

• 2:57:49David Rosenthal?

  Yeah.

• 2:57:50Ben Gilbert?

  For searches that originate on your phone, we will give a little rev share to both the carrier and the OEM, the handset maker.

• 2:58:03David Rosenthal?

  Yep. So this was not widely publicized at the time, as you can imagine. But Bill Gurley wrote a blog post where he had heard from friends that Google was paying carriers and OEMs to use Android, even though Android was free. And he wrote this incredible blog post about it called "The Less Than Free Business Model." And he basically predicted that like Android's going to run away with this here. If you're a carrier or an OEM, sure, there's a segment of the market that's going to demand Apple, that's fine. But Microsoft is dead, Palm is dead, BlackBerry is dead. There's no way you can compete with free, let alone less than free, where they are paying you to take something of value for free.

• 2:58:47Ben Gilbert?

  Yep. And from Google's side, it's the exact same thing as that thing we talked about with open sourcing Chromium. They're happy to give a few percentage points in traffic acquisition costs of their search revenue to people who are ensuring that the platform underneath them doesn't belong to someone else. I mean, there were some risks that it was all Apple. And then that creates two problems for Google. One, they pay Apple a lot more money than they pay the combination of the carrier and the OEM maker. Those get a much smaller spiff. Two, this means that Google controls more of the underlying environment that they operate in. Imagine how terrible it would be for them if Mobile Safari was the new Internet Explorer

• 2:59:31Ben Gilbert?

  and their entire franchise was at risk of Apple saying, "And we're going to point traffic over here now." Google is happy to toss a couple of points over to these guys.

• 2:59:42David Rosenthal?

  I can't think of another example of a dominant technology, business and business model that has successfully survived and transitioned a major platform shift.

• 2:59:58Ben Gilbert?

  Yes.

• 2:59:59David Rosenthal?

  And thrived in that next platform as well. Mobile was a platform shift, a huge one. I mean, going from PC to the web was a platform shift. Going from PC and web to mobile was an even bigger platform shift.

• 3:00:13Ben Gilbert?

  Oh, play it out even back further in history than this. IBM was dominant in mainframes and then lost their dominance in the PC era. Microsoft was dominant in PCs and then lost their dominance in the web era. Google was dominant on the web and stayed dominant in the mobile era. I mean, they didn't derive giant profits from the mobile, like directly off of selling phones or selling the OS or, you know, they make somebody on the Play Store, but not giant amounts relative to the rest of their money and what other players like Apple make.

• 3:00:43David Rosenthal?

  But they kept search going.

• 3:00:44Ben Gilbert?

  But they managed to stay relevant to consumers with these, you know, hundreds of millions, billions of devices that they shipped and their business was doing better than ever.

• 3:00:54David Rosenthal?

  I mean, all of these Android phones that are shipping, especially in the earlier years, what is the most prominent part of the UI on the touchscreen? Giant freaking Google search bar right there at the top.

• 3:01:07Ben Gilbert?

  Right. The state of play of being a big tech company, and this dates back 80 years, is technology moves fast and the new paradigms disrupt everyone that came before you. So you get one era and you gotta make the absolute most of the one era that you grew up in. And after that, you're probably going to lose relevance. You might keep your money machine going for a long time. Famously IBM made more revenue than Microsoft for a lot longer than people think.

• 3:01:34David Rosenthal?

  Or even take Microsoft and Windows, like Windows is still big today.

• 3:01:37Ben Gilbert?

  Yep. But the importance of that platform is going to fade and fade and fade.

• 3:01:41David Rosenthal?

  But yeah, you won't be able to transition your business model into

• 3:01:44Ben Gilbert?

  Right.

• 3:01:44David Rosenthal?

  the next era. Google did it.

• 3:01:46Ben Gilbert?

  And occasionally someone, you know, misses the second era, but comes back for the third, like Apple figured out mobile. They never won a previous era. They were a player in PCs, but they didn't win. Almost no one gets two and almost no one gets two successive ones. And that is the really impressive thing that Google figured out how to do here.

• 3:02:07David Rosenthal?

  Yeah. I mean, guys, like we said, this episode is the hit parade. Android, basically from end of 2009 onward, just washes over the world like a tidal wave. In holiday 2009, when the Droid comes out, total Android market share of the smartphone market is still in the, you know, the G1 range, like 5%, 6% global market share. One year later, 30%. They go from 5% to 30% in one year. They announced that over 200,000 Android devices are shipping every day around the world. The next year, in 2011, Android's market share is 50%.

• 3:02:52David Rosenthal?

  And two years after that, by the end of 2013, it is 80% market share.

• 3:02:58Ben Gilbert?

  In many ways, it's sort of the Visa network of networks thing where they don't have to make every phone, they don't have just one horse in the race, they're getting leverage by having two, three, four, five major manufacturers of these devices that are all independently doing their own marketing. And there's a very clever arrangement where you can just have the Android open source project and you can build your own mobile phone and, you know, you can launch it and you don't have our app store and you don't have to default to Google search and you don't get Google Maps, like you just have the operating system and it's great, anyone can do that. But why wouldn't you want to have our app store? It's where all the apps are.

• 3:03:39Ben Gilbert?

  And if you do that, then you get all the great Google services, all the apps, you get the native Gmail and the native Maps and all this great stuff we've written. And if you do that, then Google's the default search and we'll pay you for that.

• 3:03:51David Rosenthal?

  And then you make money.

• 3:03:52Ben Gilbert?

  Yeah. But by the way, if you want all this stuff that your consumers are going to demand, you are going to default to Google search. Like, it's a very...

• 3:04:00David Rosenthal?

  That's the payment.

• 3:04:03David Rosenthal?

  That's the offer you can't refuse. Yes. Now, here's the actual sort of crazy thing. As I said, by 2013, Android global market share is 80%. That's actually higher than it is today. Today, it's down to like, I think, 72%. And Apple is, you know, 27.999%. Apple's share has really grown. No question, Android pushed iPhone to be better on many dimensions. Things like cheaper iPhones, bigger screens, better cameras. I mean, on and on and on and on of things that I don't think Apple would have done if Android hadn't been pushing them.

• 3:04:46David Rosenthal?

  Probably not big, cheap screens, but some of the cameras, I think so. Maybe. I don't know. I mean, for years, the iPhones did not have good cameras. A big part of that Droid marketing push was the five-megapixel camera. That's right. The original few iPhones had a two-megapixel camera, I think. Like, it was crappy. Yeah. They've definitely pushed each other. Yep. So then the other quick thing to mention on Android history. There was one interesting moment and tension with Samsung. In the early to mid 2010s, Samsung basically said, oh, okay. The iPhone is the premium device. Android is this incredibly flexible platform. What if we just take Android and copy the iPhone with Android?

• 3:05:30David Rosenthal?

  And they got really good at it. The Galaxy devices were just shipping in huge, huge numbers. And then Samsung started stripping out Google services and putting their own Samsung services in on some of their devices. That was a bridge too far for Google. So this is when Google started the Pixel program. Google had done the Nexus program, making their own hardware before. The Pixel, though. Was and is a sort of reference device that, yeah, consumers could buy, but more so to show the rest of the OEM market, the non-Samsung market. Hey, here are reference designs essentially for great premium devices,

• 3:06:13David Rosenthal?

  great cameras, all the features you want. Here, copy these. It's the same thing as the Microsoft Surface strategy. Why Bomber was so adamant, we gotta make a Surface. We gotta show the OEMs how to do this.

• 3:06:26Ben Gilbert?

  Right. It's funny. So I have been trying to think about what is the business of Android? Google having Android versus Google not having Android? And I tried to pull up the most credible numbers I possibly could. There's basically two things that you just have to add together to create the value. One is how much money they make from the Play Store, which has become significant, didn't used to be, but is now. And then the second is how much money are they saving by not having the searches originate from a platform that they don't own? I used to think, oh, because it's Android, they don't have to pay money. They have to pay $20 billion to Apple? It's not zero. They do actually have to pay, like we talked about.

• 3:07:10Ben Gilbert?

  David and I sort of figured out as we were going through the financial disclosures and stuff, they do pay the OEMs and they do pay the carriers. And the question is how much? Because the, once you can kind of figure out how much, then you can do a little bit of napkin math to figure out, okay, well, how much are they still saving by it not being Apple? So Google paid out last year, and I'm just using the current numbers to try to figure out what the splits have always been. They paid out last year $55 billion in total traffic acquisition costs. Now, traffic acquisition costs are actually the sum of two different numbers from two different businesses, because they love to obfuscate things. One, it's what we're actually looking for, the acquisition of traffic to Google Search.

• 3:07:51Ben Gilbert?

  And the other component is money that we paid to publishers where our ads show up in the sort of double-click AdSense world.

• 3:08:02David Rosenthal?

  Yep.

• 3:08:03Ben Gilbert?

  Now, we know that that averages about a 70/30 split, and we know that they made $30 billion last year gross in the Google network. So you could say, okay, they probably paid out about $21 billion of that $55 billion in the AdSense double-click Google network world. So that backs our $55 billion down to $34 billion. Okay, that's 34 billion in actual traffic acquisition for Google Search.

• 3:08:31David Rosenthal?

  And we know 20 was iPhone.

• 3:08:33Ben Gilbert?

  Right, for Safari searches. So that means there's 14 billion that gets distributed to non-Apple traffic acquisition distribution partners, which in their annual report, they define as browser providers, mobile carriers, original equipment manufacturers, and software developers. It's basically 14 billion to the Android mobile carriers and OEMs, plus Firefox?

• 3:09:02David Rosenthal?

  Yep.

• 3:09:03Ben Gilbert?

  What am I missing? I'm gonna guess Firefox is less than a billion, call it somewhere around half a billion-ish.

• 3:09:10David Rosenthal?

  Yep. There's probably some version of the old portal deals that still exist, properties on the web that have Google Search baked into it.

• 3:09:21Ben Gilbert?

  Okay, so let's cut 4 billion off for Firefox and the other web properties, and other.

• 3:09:27David Rosenthal?

  Yep. Okay, so 10 billion going to the carriers and OEMs.

• 3:09:32Ben Gilbert?

  It's actually pretty significant, that 10 billion going to carriers and OEMs. It's half of what they're paying Apple.

• 3:09:38David Rosenthal?

  Half of what they're paying Apple, but for many, many, many more devices.

• 3:09:42Ben Gilbert?

  Right. And so clearly, the rev share to the carriers and OEMs is a much smaller percent than what they have to pay Apple. I'd guess a quarter? Either way, I actually think, after walking all the way through it, the bigger component of this is just de-risking their future. It's not how many billions. They don't care about giving 10 billion up for this.

• 3:10:03David Rosenthal?

  Yeah. As we've been saying all episode, Google is more than happy to pay traffic acquisition costs to any and everyone.

• 3:10:10Ben Gilbert?

  Yes. And so then, direct value that they make from the Play Store, it actually came out in a lawsuit. In 2019, Play Store revenue was 11.2 billion. Then gross profit was 8.5 billion and 7 billion in operating income. Now, 7 billion, not nothing, but still a far cry from Google's core business of ads from search, Gmail and Maps. And that same year, the core business did almost 100 billion in revenue. So something like 85 billion in gross profit is my best estimate and around 30-ish billion in operating income. So even though the Play Store made 7 billion in 2019, the important thing is that Android is still primarily protecting the core search ads business and making sure that traffic doesn't go elsewhere.

• 3:10:54David Rosenthal?

  This levered Google's web business into the mobile era. How amazing is that?

• 3:11:00Ben Gilbert?

  Yeah, that's true. It probably generated several hundred billion dollars, profit dollars, that they may not have had those years otherwise.

• 3:11:11David Rosenthal?

  Yep.

• 3:11:12Ben Gilbert?

  So I guess what I'm saying is, obviously, Android was a giant success and the biggest reason, even though they save, I don't know, 10, 15 billion a year from not having to pay it to Apple, and even though they generate 8 billion, I'm sure at this point it's bigger, I don't know, 10, 15 billion a year, really, it's about just protecting the core, not about saving costs.

• 3:11:33David Rosenthal?

  Yep. And this one, they almost missed it. They hadn't bought Android when they had, like, that window was closing fast.

• 3:11:41Ben Gilbert?

  And Microsoft did miss it.

• 3:11:42David Rosenthal?

  Fast, fast, fast. Yep.

• 3:11:44Ben Gilbert?

  And so at some point, Andy Rubin leaves and Sundar actually takes over the combined teams. So our hero here, who is starting to gather more responsibilities, it was just the application clients and then it was Chrome, and in 2013, it becomes Chrome and Android. And whenever you see Sundar on stage, he is very proud of Google's two open platforms.

• 3:12:07David Rosenthal?

  Yep.

• 3:12:08Ben Gilbert?

  So today, there are more than 3 billion active Android devices. I think it's even higher than that now.

• 3:12:13David Rosenthal?

  This is silly. There's like 7 billion people in the world. They're

• 3:12:17Ben Gilbert?

  Active.

• 3:12:17David Rosenthal?

  You know, over 3 billion active Android phones.

• 3:12:21Ben Gilbert?

  Yes. So you're probably thinking, coming into this 2010, 2011 era, they're really feeling themselves over there at Google. You know, we've jumped over some failures, but it's been hit after hit after hit in a lot of these areas that really matter. Just like we talked about on the Microsoft episodes. It really doesn't matter when you fail and how many times you fail, even the size of your failures. If your hits are these giant, world-changing, platform-type tech businesses that endure for decades. And that's what they had on their hands.

• 3:12:56David Rosenthal?

  Yep. And it sure looked at this time like there was another big technology category out there.

• 3:13:05Ben Gilbert?

  Of social.

• 3:13:06David Rosenthal?

  That Google should be playing in of a similar size called social.

• 3:13:11Ben Gilbert?

  Yes.

• 3:13:12David Rosenthal?

  And this is the Google Plus story. I'd say rest in peace, but I don't think anybody misses it.

• 3:13:18Ben Gilbert?

  Yeah. All right, well, I want to start this story the way that people expect us to start this story. And I have a little bit of a different take on it as we get partway in.

• 3:13:28David Rosenthal?

  Great.

• 3:13:29Ben Gilbert?

  So Google had been interested in social for a long time. They weren't blind, blind to it. In 2007, they tried to do Open Social, and they basically failed at that because Facebook didn't participate. And Facebook was social, so everything else combined didn't really matter.

• 3:13:42David Rosenthal?

  Oh, you didn't start where I thought you were gonna start. The craziest thing is that Google had Facebook before Facebook. Orket.

• 3:13:50Ben Gilbert?

  Yeah, that's true, which I think was like a 20% time project that then blew up in Brazil.

• 3:13:55David Rosenthal?

  Totally. No, yeah, okay. So there was a Turkish engineer who worked for Google named Orket Bukokten. And his passion was social networking. And Friendster was a thing at the time. And so January 2004, before Gmail, before the Google IPO, before Facebook launches on the Harvard campus, in his 20% time, he launches a social network within Google called Orket. And it didn't become that big in America, but it got at its peak, I think, 300 million users. It was the biggest social network in Brazil, the biggest social network in India.

• 3:14:31Ben Gilbert?

  Wow.

• 3:14:32David Rosenthal?

  And Google was like, I don't know, it doesn't seem that important.

• 3:14:37Ben Gilbert?

  All right, so Open Social then in 2007, Google Wave in 2009. By the way, can we just pause and say 2009, this is like right after Chrome, right after Android. Google is a big place and Google is a siloed place at this point. I mean, it's kind of crazy that Android is happening over in this other building and there's this like fight with Apple and that's the same time that they're doing Google Wave. Like, it's weird that this is all sort of concurrent. The company was focused in a lot of different directions.

• 3:15:06David Rosenthal?

  But it was so decentralized that it actually worked.

• 3:15:08Ben Gilbert?

  Well, it worked early.

• 3:15:10David Rosenthal?

  Yeah.

• 3:15:10Ben Gilbert?

  It worked really well to get all the stuff off the ground.

• 3:15:12David Rosenthal?

  It was so interesting doing the research for this episode because so many of the people we talked to, even people who were leaders of a lot of these products, because Google was so decentralized and so siloed, they were focused on their thing, on Android, Chrome, whatever. And so we'd ask, you know, what was the overall strategy? What was the through line to all of this? And we kept getting answers of like, well, it was just Googly. People worked on what they thought was cool and it was good for the web. And like, that is absolutely true, but there was this all overlay of this very, very thin layer of strategy that held the whole web together.

• 3:15:50Ben Gilbert?

  I think that the strategy was pretty tight at the top level and they just didn't actually need to communicate it down very far. Most people that I talked to said, I don't know, I was just trying to build great products that people love.

• 3:16:01David Rosenthal?

  Right, right, right. I think it was a feature, not a bug, is what I'm saying, that it didn't communicate down because it let the teams below build really, really great products.

• 3:16:08Ben Gilbert?

  Yep, and never really think about how is this going to help the ads business? And that was okay.

• 3:16:13David Rosenthal?

  Yep.

• 3:16:13Ben Gilbert?

  So Wave failed because really nobody knew what to use it for despite a dazzling and wonderful first introductory video. Buzz then in 2010, that created this big privacy debacle right at launch. It was super short-lived, that shut down. So then in 2010, Erz Holza, very senior Google, at this point probably distinguished engineer, senior vice president.

• 3:16:37David Rosenthal?

  Yeah, the guy who created the distributed infrastructure.

• 3:16:40Ben Gilbert?

  Right after the Buzz failure, he is inspired to write this memo, kind of like the Bill Gates 1995 internet memo. There's a sea change going on. The internet is becoming more people-oriented, social media could be a problem for us. The social media challenge requires a decisive and substantial response involving a significant deployment of personnel right away. Essentially, the internet was now starting to organize around people in this web 2.0 era, not just pages and applications, where the things that were sort of the domain of Google. And so here's why I want to pause, David, and I'm going to take it in a little bit different direction than I think you're probably expecting, which is so, therefore,

• 3:17:21Ben Gilbert?

  they went after Facebook. I think it's a little bit more related to the palace intrigue at Google and a little bit less on the nail strategic. So if you zoom out and look at the company right now, it's pretty fragmented. It's got different fiefdoms with big personalities at the top of each of these fiefdoms. Android, Chrome, search, YouTube, developer relations, trying to sort of will a Google platform into existence. Different products with kind of competing goals. Ultimately, they all help Google's overarching mission, but there's a lot of elbows starting to come out. Android was its own fiefdom, totally

• 3:18:03Ben Gilbert?

  off on its own island, fighting an existential battle. Chrome is starting to do the same stuff as Android. They're building their own operating system. It's not clear what belongs in an Android camp versus a Chrome camp, and Sundar hasn't unified them yet. Search, very protected, separate team, especially the core people doing search ranking and monetization. No one touches them. YouTube is totally separate. Gmail is massive, and it really is the only one in 2009, 10 at the company that owns identity, since it's the only Google property that you actually have to log into. YouTube has its own entirely different username and password system. It's a mess, right? It's a complete mess.

• 3:18:45Ben Gilbert?

  So Larry is sensing this. He's not CEO at the time, but he's realizing the company's all over the place. He decides he's just going to come back and get the company on track. And so I think Google Plus is kind of just the thing he picked as the single thing to try to galvanize and unify the company around. And no matter what they picked and how they executed it, it was going to create a lot of carnage.

• 3:19:10David Rosenthal?

  I can buy that.

• 3:19:12Ben Gilbert?

  There was a big shift that needed to happen in one way, shape or form. And Google Plus ended up kind of being the ugly thing they did.

• 3:19:19David Rosenthal?

  Yeah, a recentralizing of authority, so to speak, within the company.

• 3:19:23Ben Gilbert?

  Right. So in May 2010, they get the top 50 people at Google's leadership assembled to discuss what to do.

• 3:19:29David Rosenthal?

  The argument for this is this is more of a convenient crisis.

• 3:19:33Ben Gilbert?

  Yeah.

• 3:19:33David Rosenthal?

  Model.

• 3:19:34Ben Gilbert?

  And it might be a real crisis also, but it's also exactly what you're saying, David. So officially then in January 2011, Google announces Larry Page will return as CEO in a few months. That April, right away Larry moves his office into what would become the Google Plus building.

• 3:19:51David Rosenthal?

  Wow.

• 3:19:52Ben Gilbert?

  Yep. So they had just come out of this chapter. They've got this amazing business. The whole Chrome and Bing thing was defense against Microsoft. Android was defense against Apple and Microsoft. And Google Plus is now defense against Facebook.

• 3:20:07David Rosenthal?

  Yep.

• 3:20:07Ben Gilbert?

  And legitimately, you could imagine a world where social ends up becoming way more important. And the only places to put ads and the places where people are asking for information. And there was rumors for a long time, Facebook was going to build a search engine. You have the attention, you can hijack it and do other stuff with it.

• 3:20:24David Rosenthal?

  These were walled gardens. Facebook was a walled garden. Google search couldn't index what happened inside of Facebook.

• 3:20:31Ben Gilbert?

  Right.

• 3:20:32David Rosenthal?

  And so, yeah, you could see how this is an existential threat. You said like the traffic is growing like, oh my gosh, what if this becomes AOL all over again?

• 3:20:39Ben Gilbert?

  Right. And that's the main thing. One tier down from that is Facebook doesn't even allow other ad servers.

• 3:20:44David Rosenthal?

  At least with AOL, we could do a deal with them.

• 3:20:46Ben Gilbert?

  Right.

• 3:20:46David Rosenthal?

  Power their monetization. Facebook just hired Sheryl Sandberg. They're doing this themselves.

• 3:20:50Ben Gilbert?

  They're doing it all in-house, closed loop system.

• 3:20:53David Rosenthal?

  Yep.

• 3:20:54Ben Gilbert?

  So Google Plus, what was Google Plus and how did it get built? So it was a one-year sprint following this point, the 50 getting together. And it was built in a very, very un-Google-y way. It was not organic, David, like these passion projects you're talking about.

• 3:21:11David Rosenthal?

  It was instilled from on high down upon all of the products.

• 3:21:16Ben Gilbert?

  It was not based on a core technical insight. It was not consensus driven. It was top-down, command and control style, led by the person that you mentioned earlier, Vic Gendotra. Now, who was Vic Gendotra?

• 3:21:28David Rosenthal?

  Vic was this interesting character. Like we said earlier, he had been leading Google's developer efforts in the pre-Android days.

• 3:21:37Ben Gilbert?

  And he was sort of the front man. He was the emcee at Google I/O.

• 3:21:40David Rosenthal?

  Right. If you were looking for somebody to communicate and push down this new top-down vision across the company, he would be a logical choice.

• 3:21:49Ben Gilbert?

  Yes. I don't know if he raised his hand. I don't know if Larry said, hey, I really think you should do this on our behalf. But what is definitely true is it became Vic's thing. And Eric and Larry and Sergey stepped back and let Vic run with it. And he was given an enormous amount of institutional authority.

• 3:22:10David Rosenthal?

  And we should say too, you alluded to this earlier. What was Google Plus? It wasn't just a social product in and of itself. It was baked into all of Google. It was inserted into every other product that Google had. There's a quote from Vic to the press at the time about this, about what Google Plus is. He says, "This is the next generation of Google. It is Google plus one." Oh, boy. Oh, boy.

• 3:22:38Ben Gilbert?

  There's a lot of these really corny.

• 3:22:39David Rosenthal?

  I'm glad you even saying that. Gives me the heebie-jeebies.

• 3:22:42Ben Gilbert?

  So, yeah, it was a Facebook-style thing, but its goal, in addition to being a Facebook-style thing, was to leverage all of Google's assets and make all Google things, Google Plus things. So they moved big headcounts out of each team and on to the Google Plus team. They reached deep to integrate with these other products. And it's very clear who the boss was in all these negotiations. You had a clear mandate, like your job. This half year, this year, is do these Google Plus integrations.

• 3:23:09David Rosenthal?

  Yeah, your OKR.

• 3:23:10Ben Gilbert?

  Yes.

• 3:23:10David Rosenthal?

  Google famously ran on OKRs was now all about plus, pluses.

• 3:23:14Ben Gilbert?

  And Danny Crichton, who would go on to become the managing editor at TechCrunch, at this point in time was a Google intern and he wrote about it later. And he said, due to this integration, much of it was forced. The culture around the company at Google had become deeply poisonous by the time I started. I still remember talking to one member of the Picasa team, who was at Google's photo repository that they bought, who told me to F off when I asked about integrating Google Plus into the product. He was hardly the only one. Company-wide bonuses were based on the success of Google Plus. They even went so far as to put little plus one buttons on mobile advertisements, like those little banner ads at the bottom.

• 3:23:50David Rosenthal?

  Yes, this is the best. Google had bought AdMob.

• 3:23:54Ben Gilbert?

  Yes.

• 3:23:54David Rosenthal?

  And the mobile display ad units.

• 3:23:57Ben Gilbert?

  You could plus one it. Who the hell wants to plus one an ad? I mean, this is like Facebook's like button, but Google Plus's version. And they're like, any Google thing should be plus wannable. So they even reached into YouTube comments and YouTube comments became Google Plus posts.

• 3:24:15David Rosenthal?

  Oof.

• 3:24:16Ben Gilbert?

  I mean, they almost killed the golden goose.

• 3:24:18David Rosenthal?

  Right. They almost killed all of these golden gooses that they had.

• 3:24:22Ben Gilbert?

  Yes. And so Google Plus, from a product perspective, it wasn't just Facebook. They brought a lot of really interesting ideas. Google Hangouts came out of this. Google Photos came out of this. There were these things called Sparks. I mean, they really rethought a lot of social networking. The issue is, nobody really wanted to rethink social networking. That was a Google priority to get people to use this, not a user-driven one. And they tried to essentially put rocket fuel on to scale something that really didn't have product market fit.

• 3:24:55David Rosenthal?

  Well, I really think the key huge mistake with Google Plus, one of the huge mistakes with Google Plus was.

• 3:25:03Ben Gilbert?

  You don't need a Facebook when there's already Facebook?

• 3:25:06David Rosenthal?

  Not even that. Facebook was already dying. Mark Zuckerberg had already realized that the future of social was not what it looked like at this point in time.

• 3:25:16Ben Gilbert?

  Hmm.

• 3:25:17David Rosenthal?

  As Google is launching Google Plus.

• 3:25:19Ben Gilbert?

  In 2011, June 2011.

• 3:25:21David Rosenthal?

  2011, 2012, 2013, these were the big years for Google Plus. What is Mark Zuckerberg doing? He's buying Instagram. He's buying WhatsApp. And he's remaking essentially, you know, Facebook into what Meta would become of like, hey, what we used to think of as social networking has bifurcated into two things. Public media, i.e. YouTube, Instagram, UGC, and private messaging. And here's Google.

• 3:25:50Ben Gilbert?

  Launching, I kid you not, this is the craziest thing, desktop first.

• 3:25:56David Rosenthal?

  That's right.

• 3:25:56Ben Gilbert?

  With a desktop-only UI to arrange your friends into circles.

• 3:26:01David Rosenthal?

  Circles, that's right, circles.

• 3:26:03Ben Gilbert?

  Which is on its own, it's such a computer science way of thinking about it. Oh, my friends are in sometimes overlapping, sometimes not overlapping groups that I want to carefully label so that I can identify deterministically who I want to share what with.

• 3:26:18David Rosenthal?

  Right, nobody wants to do that.

• 3:26:20Ben Gilbert?

  Yeah.

• 3:26:20David Rosenthal?

  Here's the thing that just leapt out to me about Google Plus. This was Google's Windows Longhorn slash Windows Vista. In our Microsoft saga, we talked about how Vista slash Longhorn was the most damaging thing to the company because of the distraction and the siphoning of resources and the best talent away from working on what really mattered. Now, the question I was asking myself and others in research of, okay, what were the negative consequences of that? So like with Microsoft, it was clear. Google was the negative consequence. Like, the whole reason Microsoft let Google fester from their perspective for all these years and didn't kneecap them was they were

• 3:27:03David Rosenthal?

  tied up with all the distraction from Vista.

• 3:27:06Ben Gilbert?

  And losing relevance with developers because they keep selling them a platform that kept not shipping, and then when it eventually did ship, it wasn't good.

• 3:27:13David Rosenthal?

  Right. So then I was sort of trying to figure out, like, okay, what are the similar consequences for Google of the Plus era? And at first, I couldn't really think of any. I was like, oh, well, Android's pretty good. YouTube's pretty good. Chrome's pretty good. Search is still pretty good. Gemini AI comes out later. It's all pretty good. But there were two things.

• 3:27:33Ben Gilbert?

  Messaging, probably. I bet in a non-plus world, WhatsApp, something like that could be owned by Google.

• 3:27:39David Rosenthal?

  Yeah, two things. One is messaging, totally miss messaging. So when I was a business school student at Stanford, Eric was now executive chairman, and he started co-teaching a class at GSB, and I took his class. I was one of his students during these years. It was awesome. It was one of the best classes I ever took. And the quarter when I was taking the class was when Facebook bought WhatsApp. And I remember Eric coming into class right after it happened and just being like, "God damn it, we missed it. We totally missed it. It's because Google was distracted." So that was one thing. And then I realized the other as bigger or bigger thing is cloud. Google should have been massively investing in cloud. And there were all sorts of reasons that they didn't. We're going to save this for the next episode.

• 3:28:24David Rosenthal?

  But I was like, yeah, especially think about where the impetus for this came from, from ers, from this memo, the ers quake memo, as it's known. Er should have been focused on cloud. He should not have been focused on social. And Google had the wrong strategy in cloud for many years. And as a result, that's why their cloud business is way behind Amazon and Microsoft.

• 3:28:49Ben Gilbert?

  And maybe they churned some talent. Maybe there was some good people that got burned by the culture sort of souring. You could argue this destroyed product velocity.

• 3:28:58David Rosenthal?

  Yep.

• 3:28:59Ben Gilbert?

  So like, people complain today that Google's always working on really interesting technology and they just never get cool products out the door.

• 3:29:06David Rosenthal?

  That is by far the biggest complaint you hear about Google from.

• 3:29:10Ben Gilbert?

  Slow and big and bureaucratic and.

• 3:29:12David Rosenthal?

  Yep. Focus on the inside and outside these days is just like too slow. And yeah, yeah, that's probably the biggest negative consequences.

• 3:29:18Ben Gilbert?

  Maybe you could trace that here.

• 3:29:20David Rosenthal?

  I bet you can. Because think about it, before this, we just spent this whole episode talking about all these amazing things they were building and shipping and acquiring and transforming.

• 3:29:29Ben Gilbert?

  Until Gemini, and arguably that's a, I actually don't know where Gemini stacks. Is it a third place product?

• 3:29:35David Rosenthal?

  Still a question mark.

• 3:29:36Ben Gilbert?

  Until Gemini, what great breakthrough consumer service did they launch after Google Plus?

• 3:29:43David Rosenthal?

  I got nothing.

• 3:29:44Ben Gilbert?

  Oof.

• 3:29:44David Rosenthal?

  Yeah.

• 3:29:45Ben Gilbert?

  That's pretty wild.

• 3:29:46David Rosenthal?

  After having this incredible 10 year run.

• 3:29:49Ben Gilbert?

  And there was a lot of stuff they tried. I think some things for Android users. Think about Google Now, that predated Google Assistant. Maybe Google Home.

• 3:29:58David Rosenthal?

  These are not world-changing products.

• 3:30:00Ben Gilbert?

  Right. It's funny. The thing that I keep thinking about from the Google Plus failure is this big existential Facebook threat they were worried about. I mean, there was a strategy memo in 2013 where Neil Mohan said, "There is a risk that Facebook becomes the starting point of the internet." Google knew social was the future and tried to win it, but interestingly, they didn't, and they've been fine.

• 3:30:23David Rosenthal?

  Right, right, right. It was all totally fine.

• 3:30:25Ben Gilbert?

  And Facebook was really freaked out, too, that Google was going to come in and win it. I mean, Google was like this giant, and Facebook was recently public, going through their own problems. So even though it was kind of like a nothing burger and Google Plus was a footnote in history, both companies were completely all in on this is the big battle. And ultimately, Google wasn't a credible threat to Facebook, and...

• 3:30:50David Rosenthal?

  Facebook went in a different direction, anyway.

• 3:30:52Ben Gilbert?

  Facebook went in a different direction, yeah. So it's almost like the end of Burn After Reading. Have you ever seen that movie?

• 3:30:58David Rosenthal?

  No.

• 3:30:58Ben Gilbert?

  I won't spoil anything, but the feeling you have at the end is you just watched all this crazy stuff happen and you're like, "Whoa. Wait. Did any of that matter?" That's how Google Plus feels to me.

• 3:31:10David Rosenthal?

  Yeah.

• 3:31:11Ben Gilbert?

  Funny. Google Plus did have two great surviving products: Hangouts, which became Meet, and Photos.

• 3:31:17David Rosenthal?

  Yep. Photos is a billion-user product today.

• 3:31:21Ben Gilbert?

  Wow. Huge. The biggest thing, and I think this is like, kind of getting back to my original postulate of never waste a crisis. You know what we have today? Google accounts.

• 3:31:34David Rosenthal?

  Hmm. Yep.

• 3:31:36Ben Gilbert?

  You know what Google is today? It's one company. It's not these little fiefdoms here and there of different people amassing power and building things in different ways. I mean, I'm sure there's still plenty of that. Everything about Google got more unified from this era. They have a failed product and a smoking crater to show for it, but a unified look across all their products, a unified login, that would, I think, be pretty important for them going forward. Anyway, my snarky finish on all this is, it's tempting to say Google lost in social because Google Plus was this giant smoking crater, but actually, all of social ended up pivoting to either look like messaging, or like YouTube, anyway. YouTube is kind of the winning paradigm in quote-unquote "social media" and UGC media.

• 3:32:20David Rosenthal?

  Yep.

• 3:32:21Ben Gilbert?

  So they should have just done nothing and just watched the money printer go brr.

• 3:32:26David Rosenthal?

  Yep. To put a bow on it, Vic ends up leaving the company in 2014. In 2019, they finally shut Google Plus down. There's a blog post about it. They cite like a big security breach as the reason of like, oh no, we've discovered this is this huge security vulnerability. Thus, we need to shut down all of Google Plus.

• 3:32:46Ben Gilbert?

  Dude, it's so bad. There's been 50 Google products that all sound kind of the same. They launched this one called Currents at one point. And when they shut Google Plus down, this is horrible. Many people wrote like articles as posts on Google Plus and they're just gone.

• 3:33:04David Rosenthal?

  Yeah, that's right. Actually, it was sort of an impediment to doing some of the research for this episode because these posts are gone.

• 3:33:10Ben Gilbert?

  So if you go to plus.google.com/anything, it just redirects you to Google Currents. However, Google Currents has now been shut down. So it is a Google Workspace blog post announcing the Currents shutdown. Every time you click any Google Plus link anywhere on the web, you go to a blog post that tells you about the shutdown of Currents. That's the most googly thing.

• 3:33:34Ben Gilbert?

  They gotta do a better job with those.

• 3:33:36David Rosenthal?

  Well, by 2015.

• 3:33:38Ben Gilbert?

  It's our last section, the bridge to Alphabet.

• 3:33:41David Rosenthal?

  Yeah. It's clear it's time for a new era at Google. The company announces that it is reinventing itself, is becoming an entirely different company. Google is becoming Alphabet in August of 2015. And Larry Page will be the CEO of this new Alphabet holding company. Sundar Pichai will be the CEO of Google, which will be by far the largest and really primary operating company within Alphabet. Interestingly, they didn't at all decide to split up YouTube or any of the various products. Right, that's all still Google. Yeah, they just spent all these years unifying it all. That's all Google.

• 3:34:24Ben Gilbert?

  They broke out Google X.

• 3:34:26David Rosenthal?

  Yes, Google X, they broke out. Waymo is still part of X at this point in time. That would later spin out as now part of Alphabet on its own. But the other bets, including an Alphabet, really quite clever, the nomenclature here.

• 3:34:39Ben Gilbert?

  Yes.

• 3:34:39David Rosenthal?

  Were Nest that they had just acquired, Google Fiber, Calico and Verily, their two health companies, Google X Lab, and then Google Ventures in capital G, the two investing entities that they had. So, you know, then really the question is like, okay, well, why did they do this? Why did Larry become CEO of Alphabet? Why did Sundar become CEO of Google? I think this kind of had to happen as like a healing after Google Plus. Sundar was a leader who had real cred going back to the early days and with Chrome and with Android, like the core great products, two of these core great products, platforms that we've talked about the whole episode that have really driven the Google flywheel all along.

• 3:35:23Ben Gilbert?

  Interestingly, he had never worked in search or ads.

• 3:35:26David Rosenthal?

  Right, but these are the platforms that had shoehorned Google into the mobile era and protected it from its greatest existential threat. And just also Sundar's personality, I think, was a way to reunify the company and bring everybody back together.

• 3:35:41Ben Gilbert?

  Definitely strikes me as a peacemaker among big egos.

• 3:35:45David Rosenthal?

  Yes. And that is where we're going to leave Alphabet slash Google for the moment. Ben, give us a sense of how big this company had gotten.

• 3:35:57Ben Gilbert?

  So at the end of 15, it's gotten huge. It's 75 billion in revenue. 52 billion of that is first-party sites, Google websites, AdWords, Gmail, Maps. 15 billion, the smaller part, is over in DoubleClick AdSense land. And actually, that's pretty low margin revenue. So again, the lion's share in Google websites. YouTube is profitable at this point. And their bottom line operating income, Google did about $23 billion in operating income. And their other bets at this point lost about $3.5 billion. Their other bets are extremely interesting and will be the focus of our next episode.

• 3:36:36Ben Gilbert?

  But the big takeaway here, the business was still in 2015 and essentially is still today, search ads.

• 3:36:44David Rosenthal?

  Yep. And what so strikes me, listening to you say those numbers in 2015, A, they're huge, but also Google is so much bigger today on these same businesses with this same business model.

• 3:36:58Ben Gilbert?

  Right.

• 3:36:59David Rosenthal?

  There was another 5X scaling to go over the next 10 years.

• 3:37:03Ben Gilbert?

  Yes, it's crazy.

• 3:37:04David Rosenthal?

  Google back then was like 20% the size of Google now. And nothing has basically changed when it comes to the business model and products.

• 3:37:12Ben Gilbert?

  I mean, nothing's changed since 2002.

• 3:37:15David Rosenthal?

  Right. Well, I think this era, what we talked about all the episode, all the hits were stewarding that business.

• 3:37:21Ben Gilbert?

  Yes.

• 3:37:22David Rosenthal?

  Through these sea changes.

• 3:37:24Ben Gilbert?

  But nothing has changed about what the core business is. It just turned out that that seed of that search ads actually scaled to the biggest market in the world.

• 3:37:33David Rosenthal?

  Yep. All right. Just like the last episode with Gmail at the end. I've got one little coda, one little teaser for next time.

• 3:37:41Ben Gilbert?

  Great.

• 3:37:42David Rosenthal?

  Ben, what if I told you that between 2015 and 2016, so this next year, this next 12 months after the alphabet transition, all of the following people were Google employees. Alex Krzyzewski of AlexNet.

• 3:38:06David Rosenthal?

  Dawn of machine learning AI. His PhD advisor, Jeff Hinton, godfather of AI. His collaborator on the AlexNet paper, Ilya Sutskever, founding scientist of OpenAI. Dario Amadei, co-founder with his sister of Anthropic. Andre Karpathy, until recently, chief AI scientist at Tesla. Chris Ola, Noam Shazier, Ian Goodfellow, and of course, the co-founders of DeepMind, which Google acquired in 2014, Demis Hassabis, Shane Legg, and Mustafa Suleyman.

• 3:38:49David Rosenthal?

  Mustafa runs AI at Microsoft today. Andrew Ng from Stanford, Kwak Lee, Oriol Vinyalas. And oh, yeah. In addition to all of those people, the authors of the transformer paper because Google invented the transformer and published the paper in June of 2017.

• 3:39:12Ben Gilbert?

  Right. Which is the novel mechanism that all LLMs today from every big foundational model research lab is based on.

• 3:39:20David Rosenthal?

  When I was talking to folks in the research for this episode and AI came up, one of them said, you know, I have to remind people when I'm talking to partners out in the ecosystem that the T in ChatGPT stands for transformer and that we invented that.

• 3:39:38David Rosenthal?

  Because it is also during this time while Ilya is working at Google that he poses the question to his research colleagues and the Google Brain team that is working on all of this.

• 3:39:50David Rosenthal?

  Gosh, what do you guys think if we just built one really, really, really big neural network? And we set it loose with training data on the entire internet? Which, by the way, of course, we can do here at Google because, you know, thanks to the combination of the search index, we index the entire internet and all the products that we just talked about on this whole episode. We have all this data and all of this content out there. If we did that, do you think it would learn everything?

• 3:40:20Ben Gilbert?

  Well, David, that feels like quite the groundwork for the next episode.

• 3:40:23David Rosenthal?

  That feels like a story for next time. Yeah. But through that lens, there is another way to view everything that happens at Google during this 10-year period we just discussed, which is that they're just collecting all the access, all the information and all the talent for AI.

• 3:40:42Ben Gilbert?

  It's nuts. There's this whole other world of research who would be the people that would drive the next decade or five decades of change. And they basically had them all in one place at one time.

• 3:40:54David Rosenthal?

  They were all employees of Google. So I want to end with one more quote, this time from Larry Page. All the way back in the year 2000, this is Larry talking in the year 2000. Artificial intelligence would be the ultimate version of Google. So if we had the ultimate search engine, it would understand everything on the web. It would understand exactly what you wanted and it would give you the right thing. That's obviously artificial intelligence to be able to answer any question. Basically because almost everything is on the web, right? We're nowhere near doing that now. However, we can get incrementally closer to that. And that is basically what we work on.

• 3:41:38David Rosenthal?

  And that's tremendously interesting from an intellectual standpoint. We have all this data. If you printed out our index, it would be 70 miles high now. We have all this computation. We have about 6,000 computers.

• 3:41:50Ben Gilbert?

  This is 25 years ago.

• 3:41:52David Rosenthal?

  We have enough disk space to store like 100 copies of the whole web. So you have a really interesting confluence of a lot of different things. A lot of computation, a lot of data that didn't used to be available. And from an engineering and scientific standpoint, building things that make use of this is a really interesting intellectual exercise. So I expect we'll be working on that for a while.

• 3:42:17David Rosenthal?

  Incredible. This is 25 years ago that he said this.

• 3:42:20Ben Gilbert?

  Amazing.

• 3:42:21David Rosenthal?

  All right.

• 3:42:22Ben Gilbert?

  Should we do some analysis?

• 3:42:23David Rosenthal?

  Let's do some analysis.

• 3:42:24Ben Gilbert?

  All right. Let's do power. And for those who are new listeners, power is the section where we analyze which of the seven powers does Google have from Hamilton-Helmers framework that enables a business to achieve persistent differential returns or be more profitable than their nearest competitor and do so sustainably. Google is very, very weird to analyze for this because most of the way you think about Google is actually not where the economic transaction is. If you want to analyze the business, it is why are advertisers spending a marginal dollar with Google versus spending it elsewhere? And Google has the seven powers that show up in numerous instances all over their business. But I think the interesting way for us to do this analysis, David, is let's look at

• 3:43:08Ben Gilbert?

  each one, just assume Google has them all, and say, where is the biggest or a very large example in our mind of where each of them show up?

• 3:43:15David Rosenthal?

  Great. I like that.

• 3:43:17Ben Gilbert?

  So counter positioning typically doesn't show up for incumbents, for large companies.

• 3:43:22David Rosenthal?

  This is the exception, though, with Google.

• 3:43:25Ben Gilbert?

  Right. Where you just look at their sort of new businesses. For example, in this episode, talking about Android, they massively counter positioned against Microsoft, the less than free business.

• 3:43:36David Rosenthal?

  Less than free business model. I mean, this is the clearest example of counter positioning, I think, that has ever existed. Oh, hey, my competitors require you to pay them. How about I pay you instead?

• 3:43:46Ben Gilbert?

  Right. And my competitors can't do that because they don't have the business model of advertising based on search such that they can justify doing this.

• 3:43:56David Rosenthal?

  Right. Scale economies, especially as they're adding all these apps, all these users across all this surface area. Now, if you're an advertiser and you want to reach users across search or display or video, Google is a one-stop-shop.

• 3:44:11Ben Gilbert?

  Right. You don't have to sort of independently spend operational time and headcount on all these different platforms. You sort of get the one.

• 3:44:18David Rosenthal?

  And that's not even to mention the scale economies on the infrastructure side. We talked about last time, or like, I mean, they show up in every business here, but like, that's just one example.

• 3:44:26Ben Gilbert?

  And the fact that the more advertisers there are and the more users there are, the more profit Google makes because each little individual auction on every individual search finds a maximal price.

• 3:44:38David Rosenthal?

  Yes. Network economies, YouTube, hello. More creators, more viewers, creators make money from having views of their videos.

• 3:44:51Ben Gilbert?

  Application developers on Android and users on Android, the two-sided network economies there. Yes, everywhere. Not to mention, in the core business too, in search, more users searching is more valuable to me as an advertiser because I have a deeper pool of people I can advertise to. So I can just deploy more dollars on your channel if it's working.

• 3:45:10David Rosenthal?

  Yep. Switching costs. How about Gmail? Oh, I've got my last 20 years of email history in Gmail, all stored for free. Yeah, I'm not switching.

• 3:45:23Ben Gilbert?

  In the core business, there's not as much switching costs. I suppose there's a little bit of, oh, because I've spent a lot of money, the targeting is very good at allocating my spend. But the switching costs in the core business for an advertiser are not as prominent as other powers. I don't think I continue to spend on Google because it's hard to switch. I continue to spend on Google because they have all the high-intent users for products other than, you know, Amazon. That's one of the two big search boxes in the world where people type in when they want to buy a product. So I'm going to advertise there. Has little to do with switching costs, I think.

• 3:46:00David Rosenthal?

  Yep. But for users of Gmail.

• 3:46:03Ben Gilbert?

  Oh.

• 3:46:03David Rosenthal?

  And several of the other products, like, enormous.

• 3:46:05Ben Gilbert?

  For users all across the board, yeah. I won't leave YouTube at this point. The algorithm's dialed to my interests.

• 3:46:12David Rosenthal?

  Oh, yeah. That's a great point of switching costs of the algorithm on YouTube.

• 3:46:16Ben Gilbert?

  Yep.

• 3:46:17David Rosenthal?

  Branding, I think. In the heyday of Google that we're talking about in this episode, when they're launching all these incredible products, yes, these products, one, because they're incredible and because they were free, but also like there was such a halo around the company. Like if there was a new Google product, I would be chomping at the bit to go try it.

• 3:46:36Ben Gilbert?

  Yeah, that's super true. I remember I was desperate for Google Wave invites. The product completely failed, but I was completely dazzled by it and I was desperate to get invite and access. The Google name meant something.

• 3:46:47David Rosenthal?

  Yep.

• 3:46:47Ben Gilbert?

  And still does, by the way, which I think held them back in AI for a while. They know the Google name means something, so they are reticent to, to throw their name on it until they got kind of shoved off the cliff.

• 3:46:58David Rosenthal?

  Yep. Cornered resource. Yes, well, certainly heading into the AI era now. YouTube, the YouTube catalog you can train on.

• 3:47:10Ben Gilbert?

  Yeah.

• 3:47:11David Rosenthal?

  All the data they have.

• 3:47:12Ben Gilbert?

  Yeah, it's funny, I was about to say their infrastructure, but I think that's actually a scale economy that they've built out, the infrastructure they have, so they can run all their products as cheaply as they can.

• 3:47:23David Rosenthal?

  Yep. I think the infrastructure is also a process power.

• 3:47:27Ben Gilbert?

  Yeah.

• 3:47:27David Rosenthal?

  In that, in the era we've been talking about, they could launch all these products on their infrastructure just way cheaper than anyone else.

• 3:47:34Ben Gilbert?

  You know what's a cornered resource? They have built internal software and systems that is better than what is available outside of Google.

• 3:47:41David Rosenthal?

  Hmm, great point.

• 3:47:43Ben Gilbert?

  A lot of the time, they even create open source projects that are similar to their internal stuff, but they don't actually give away the internal stuff. Inside Google, they still run Borg. They run far less Kubernetes than they run Borg. And Borg is part of the secret sauce.

• 3:47:58David Rosenthal?

  Yeah, when you talk to engineers who've left Google, they miss the infrastructure.

• 3:48:05Ben Gilbert?

  So, Google has it all.

• 3:48:06David Rosenthal?

  Yeah, all of them.

• 3:48:07Ben Gilbert?

  And we can name a lot more examples, but we gotta go.

• 3:48:10David Rosenthal?

  All right, playbook.

• 3:48:11Ben Gilbert?

  All right, I tried to get most of them in as we are going in the story. The first is that Google really wanted to become a platform company. And I was sort of noodling on, did they ever do this successfully? And David, we sort of touched on this idea that they are advancing the platform of the web without owning the platform of the web. So if they didn't have Android, how would you answer the question, is Google a platform company?

• 3:48:40David Rosenthal?

  Yeah, yeah, yeah. I'd say it's sort of like a shadow platform company. It's like an ecosystem company.

• 3:48:46Ben Gilbert?

  Right. And even with Android, okay, great. They own the target development platform. Their money is still made elsewhere. It's not a platform business. They may have a platform orientation as a company. They build a bunch of stuff that for developers to build their applications on top of. But where their bread is butter is really as an advertising company. It's important when push really comes to shove on big strategic decisions the company has to make.

• 3:49:13David Rosenthal?

  Yep.

• 3:49:14Ben Gilbert?

  Like Apple, pure play platform company. Microsoft, pure play platform company. They either sell software or hardware and then they need the platform around it to bolster their sales. Google's very indirect.

• 3:49:27David Rosenthal?

  Yep.

• 3:49:27Ben Gilbert?

  All right, so that was one. The other one is they make tons of small acquisitions. Famously, I mean, that run in the 2010s, aside from the big ones, from YouTube, from Android, from DoubleClick, from AdMob, there was also what became Google Groups, Spreadsheets, Docs, Blogger. They bought Applied Semantics with the patents and some of the tech for AdSense. They bought the technology for Google Maps. They bought Urchin for Google Analytics, Dodgeball, Feedburner, Recaptra, Slide, Jamboole, Like.com, Widevine, Admeld, Punchd, Zagat, Sparrow, Wavy. I mean, like, I could just keep going.

• 3:50:02David Rosenthal?

  Oh, yeah, there are hundreds of companies they bought. In talking to folks in the research, there was this amazing part of Google culture that also fit the strategy perfectly of help the web and the rich web and web apps bloom. Come work at Google with these incredible people. Meet your co-founders. Go start a startup. Leave Google.

• 3:50:23Ben Gilbert?

  Right.

• 3:50:23David Rosenthal?

  We will then reacquire you back into Google in a couple of years.

• 3:50:28Ben Gilbert?

  It happened dozens or hundreds of times.

• 3:50:30David Rosenthal?

  I remember seeing this happen from the outside and thought, Google is nuts to let this happen. But I realize now, no, this was all part of the strategy.

• 3:50:38Ben Gilbert?

  Yeah.

• 3:50:38David Rosenthal?

  It's all good for the web.

• 3:50:40Ben Gilbert?

  Yep. You can run very indirect, generous, long-term strategies like that with a money printer like Adprints.

• 3:50:48David Rosenthal?

  Yes.

• 3:50:49Ben Gilbert?

  I know I keep coming back to that, but that is at the core of what drives everything. This one's a little bit less playbook, but just an observation. I watched the Google I/O keynote with Glass and I watched a bunch of Glass content. I even, back in the day, at a startup weekend, launched a Google Glass app.

• 3:51:06David Rosenthal?

  Oh, nice.

• 3:51:08Ben Gilbert?

  So after watching all this Glass content, and it's the butt of every joke now, Meta Ray-Bans and Google Glass are the same thing, feature-wise.

• 3:51:19David Rosenthal?

  Yep.

• 3:51:20Ben Gilbert?

  The gestures on the side, the fact that it could take a photo. I mean, Google Glass was a little more advanced. It could run these like very basic text-based apps. But I'm sure when Meta launches their little hologram version of the glasses, that's going to be eerily similar. So like, of course, you could say, oh, it's just timing. But here's the thing, Google's made you look like a cyborg. Meta's is for normal people and there is no better metaphor for the cultural difference between Facebook and Google than this.

• 3:51:51Ben Gilbert?

  Google's a bunch of wacky academics who did not really understand why this would make the product fail. Facebook is founded on the idea that you're trying to be cool.

• 3:52:00David Rosenthal?

  Yeah, and went and did a partnership with SLR Luxottica to get the tech

• 3:52:05Ben Gilbert?

  Yes.

• 3:52:05David Rosenthal?

  into glasses that normal people wear.

• 3:52:09Ben Gilbert?

  Yes. It was crazy watching these demos because I'm like, these are the Meta AR demos. It just happens to have a cool factor versus not.

• 3:52:19David Rosenthal?

  Yep.

• 3:52:19Ben Gilbert?

  And then my last one is this idea that they did figure out a way culturally to get people amped about just build great products. Figure out how to do something really hard from an engineering perspective that ends up being really useful and ship things that people love. It's not that you didn't have to think about a business model, but a lot of the time, for many years after launching a product, you really didn't.

• 3:52:44David Rosenthal?

  Yep, it's like we talked about earlier. There was this thin layer of really, really, really tight, really great strategy that was just like a few people at the top of the company. But below that, it was just make a great product.

• 3:52:58Ben Gilbert?

  Yes.

• 3:52:59David Rosenthal?

  All right, I've got two for playbook. One that I'm gonna make my quintessence. This is what I underscore again. We said this in the Android chapter, but like Android was the mother of all wins. It was so big to win with Android.

• 3:53:18David Rosenthal?

  Nobody stretches a business model across technology eras, nobody, and Google did it.

• 3:53:26Ben Gilbert?

  In a dominant way, where they are, they are the dominant company in the next era as well.

• 3:53:30David Rosenthal?

  Yep. It is the Google version of Azure from our Microsoft series. It absolves any and all sins, not that there were many at Google. The only one was Google Plus.

• 3:53:39Ben Gilbert?

  The only way it could have gone better is if instead of launching Android, they launched the iPhone and they also got the iPhone profits rather than just some small dollars that protected their core business.

• 3:53:52David Rosenthal?

  Yep. That was my playbook. And then my quintessence is it is wild that this one company has eight products with over a billion users and started this era with just one, search, that didn't even have a billion users yet. But search, Android, Chrome, YouTube, Gmail, Maps, Drive, Photos, and then if you count the Play Store as separate from Android, which Google does, I think that's a bit of a stretch. But if you do, then they have nine products with over a billion users. And just for context, Meta is the next highest count of products in one company with over a billion users. They have four, the Blue App, WhatsApp, Instagram and Messenger.

• 3:54:38David Rosenthal?

  Meta likes to claim they have five. They like to say that Meta AI in aggregate has over a billion users embedded across all their products.

• 3:54:45Ben Gilbert?

  Yeah, but this whole superintelligence thing is an admission that the active users of Meta AI is a little stretchy.

• 3:54:52David Rosenthal?

  If the Play Store doesn't really count on its own, then Meta AI for sure doesn't really count on its own. So Meta has four. Apple, I think, only has three, maybe four. So the three Apple has for sure are iPhone, iMessage and Safari.

• 3:55:10David Rosenthal?

  iPad, maybe. I don't think so. Mac, definitely not.

• 3:55:15Ben Gilbert?

  I basically don't count any iPhone app because they all come for free when you get the phone.

• 3:55:19David Rosenthal?

  Okay, so by your definition, Apple has one with iPhone.

• 3:55:23Ben Gilbert?

  I think Apple has one.

• 3:55:24David Rosenthal?

  Okay, all right.

• 3:55:26Ben Gilbert?

  Let's take that same definition. How many of these came for free at Google? Google Search, Android, those are two completely different distribution channels. Chrome.

• 3:55:35David Rosenthal?

  Yep. I don't think any of these came for free.

• 3:55:38Ben Gilbert?

  I mean, Google helped Chrome.

• 3:55:39David Rosenthal?

  No, yeah, these are all independently have achieved billion plus users.

• 3:55:45Ben Gilbert?

  Gmail and Google Drive sort of advantage each other. So I think you can sort of subtract one of those out.

• 3:55:50David Rosenthal?

  Yeah, but it's not to the extent that iMessage is default with an iPhone.

• 3:55:54Ben Gilbert?

  Right. Maps is advantaged by Android. They ship a whole lot of maps. So but probably whatever the phone was would have a great Google Maps app.

• 3:56:02David Rosenthal?

  Yep. Okay, all right. I buy it. Apple has one. Microsoft has two, Windows and LinkedIn. Amazon doesn't have any billion user products. Google's got eight. Like, that's incredible.

• 3:56:15Ben Gilbert?

  Call it seven or six. I think it's reasonable to subtract.

• 3:56:18David Rosenthal?

  Okay, fine.

• 3:56:19Ben Gilbert?

  But still, that's exactly right.

• 3:56:21David Rosenthal?

  Whatever. That's my point. This is my quintessence. This period at Google is a run like nobody's ever had.

• 3:56:30Ben Gilbert?

  Yeah, absolutely right.

• 3:56:33David Rosenthal?

  All right. What you got?

• 3:56:34Ben Gilbert?

  So quintessence for me is the thing that I sort of can't stop thinking about from the episode. And I decided this time, I knew what it was going in, and I decided to hide it all the way until the end. So we haven't talked about this thing yet.

• 3:56:46David Rosenthal?

  Oh, okay.

• 3:56:47Ben Gilbert?

  Almost all of Google's successful products are based on a core technology insight that is underneath the whole thing. The type of insight that could be in an academic journal.

• 3:57:01David Rosenthal?

  Yep.

• 3:57:02Ben Gilbert?

  Someone told me this, and I've been using it as a little litmus test for will a product work or not? And as you look through, I mean, you look at the original search. That is by definition, the PageRank algorithm is a core technology insight.

• 3:57:19David Rosenthal?

  I mean, they published it as an academic paper.

• 3:57:21Ben Gilbert?

  The way that the ad-based auction works is a core, it's almost mechanical in its elegance and its brilliance and its simplicity. It is a technology insight that in everything we talked about in Google Part One, our first episode. Then you look at everything that succeeded this episode. Gmail, the way that they are able to do the gigabyte of storage, Ajax, fast responsive web application. You look at Maps and Docs with real-time collaboration, breakthrough core technology insight.

• 3:57:52David Rosenthal?

  Yeah.

• 3:57:52Ben Gilbert?

  YouTube.

• 3:57:54David Rosenthal?

  Yeah, totally.

• 3:57:55Ben Gilbert?

  Yep.

• 3:57:55David Rosenthal?

  Serving video on demand to the entire world. Absolutely.

• 3:57:58Ben Gilbert?

  Being able to scale that and make it a real going concern. Chrome, four core technology insights, maybe six, maybe seven in the original comic.

• 3:58:08David Rosenthal?

  Yep.

• 3:58:09Ben Gilbert?

  Android. I can't name one magical core insight. This one may kind of be the exception because like, yeah, that's technically hard and all that, but there's not like an elegant thing that's the reason that Android succeeded. It was perfect execution in a lot of ways, strategically, distribution, marketing, partnerships.

• 3:58:30David Rosenthal?

  Okay, wait, no, no, I got what it is. It's the same thing as the iPhone. It was an incredible achievement to wrestle OS X into iOS and to get it to run on a battery-powered mobile device that fit in your pocket. And Android did the same thing with Linux. They wrestled Linux into a battery-powered mobile device that fits in your pocket.

• 3:58:54Ben Gilbert?

  Yep. Less of an elegant, satisfying core insight, I think, and not the reason that it worked. I mean, not the reason why Android, unlike these other ones, there's a clear line between the, it's almost like the Google products that succeed wildly, organically.

• 3:59:10Ben Gilbert?

  Except for Android are ones where there's almost no product. The technology solution is just so incredible that it is directly the user experience and you get the technology breakthrough as the experience.

• 3:59:24David Rosenthal?

  Yeah.

• 3:59:25Ben Gilbert?

  Yeah, I sort of see where you're going. But then look at the other ones. Google Plus, Google Wave. These are like products. These are like user experiences that people come up with that don't necessarily have a breakthrough technology underneath them. Google Photos is actually quite the opposite. All of the AI stuff that's been happening on Google Photos for a very long time, that's why it worked. Like, people wanted all these incredible magic features that come with Google Photos. It's funny, as someone told me this in the research, it's been sort of batting around in my head, and then I'm reading Eric Schmidt's book. And Eric Schmidt said he would ask PMs, what is your core technical insight that makes it all work? And if there wasn't a good answer, he wouldn't fund the project. They figured this out at Google, too.

• 4:00:10Ben Gilbert?

  It's a Googly thing that this genius technology is the product itself. And if you try to craft some cool idea that you have that is not just directly translating tech breakthrough, it's not going to be the type of product that succeeds at Google. They don't know how. Some people can make an Instagram, and those people are not Google.

• 4:00:36David Rosenthal?

  Yep. Ironic that Kevin Systrom was a erstwhile Google employee who left to start a startup.

• 4:00:42Ben Gilbert?

  Yes. Anyway, I think that has made it extremely clear to me when Google products succeed and when they fail.

• 4:00:49David Rosenthal?

  Love it. Spot on.

• 4:00:51Ben Gilbert?

  All right. Carvouts?

• 4:00:53David Rosenthal?

  Carvouts. I've got one, and then I've got my long-awaited follow-up.

• 4:00:58Ben Gilbert?

  Oh, my God. We've been waiting with bated breath. Listeners, what game console did David buy?

• 4:01:06David Rosenthal?

  I'm gonna make everybody wait for one more minute. My actual carve out for the episode is when we were in New York for Radio City. My whole family came, the girls came, and we stayed for the rest of the week after the show. And we took the girls to the Bluey experience at the camp store in New York City. And it was awesome. Lived up to expectations, lived up to the hype. They basically have recreated the Bluey house in this physical space in New York City. The house is almost a character in the show and they have recreated it.

• 4:01:49David Rosenthal?

  And they just let you and your kids in to roam free in the house. Then you have a magical moment at the end of the experience. It was cool. Highly, highly recommend if you're in the Bluey demographic and happen to be in New York. Okay, what game console did you pick? I bought the Steam Deck. The Steam Deck. I bought the Steam Deck and it's great, although I haven't, truth be told, had much time to play it this past month with everything we've had going on at Radio City and then preparing this episode. But it's great. How'd you pick? What was the ultimate? It ultimately came down to as much as I desperately wanted my older daughter to be ready to play Mario Kart with me, she's just not.

• 4:02:32David Rosenthal?

  And so if you're buying a console for just you to enjoy, you went with the Steam Deck? Yeah, I was like, I would probably enjoy the Steam Deck more. Do you endorse it? Do you recommend it? Yeah, what Valve has done with the Steam Deck, I didn't realize until buying it and using it is incredible. They have abstracted a PC gaming machine into a console experience. So I've always liked PC type games, but I haven't been a PC gamer in many, many years. Cause like, I'm not gonna build a gaming machine or even you could just buy one, but like, I don't need another PC. Where am I gonna put it? What am I gonna do with it? I want the console simplicity of just buy the damn thing, turn it on, buy the games, play them. Right. Valve has created that in handheld form. It's awesome.

• 4:03:17David Rosenthal?

  You don't have to worry about any of the drivers or specs. It's really, really impressive. All right. Good to know. So I will buy a Switch two at some point, probably in the next year or so.

• 4:03:30David Rosenthal?

  But for now, Steam Deck. All right. What are your carve-outs?

• 4:03:33Ben Gilbert?

  I've got three.

• 4:03:34David Rosenthal?

  Oh, great.

• 4:03:35Ben Gilbert?

  My first one, and I swear to God, this is unrelated to their sponsorship, is Claude.

• 4:03:40David Rosenthal?

  Amazing. It's so great.

• 4:03:41Ben Gilbert?

  It's so good. Using AI has completely changed the way that I prepare for these episodes now, and I cannot imagine going back.

• 4:03:47David Rosenthal?

  I hear AI is a thing.

• 4:03:48Ben Gilbert?

  I hear AI is a thing. So that's the first one. I just find myself in it all day now. Two is the Sony RX 100 VII, or VII. So I recently bought a different camera, the Fuji X100 VI, or the VI.

• 4:04:08David Rosenthal?

  Yeah, that's what you had in New York.

• 4:04:10Ben Gilbert?

  Yeah, and it's great. It's like the internet's favorite camera. It has these amazing film simulation color profiles. It's like a camera, though. I carry it around my neck because it's like, it's a camera that you hold and use, and it's very fun shooting 35mm equivalent. It feels like I'm taking pictures the way that pictures were meant to be taken.

• 4:04:28David Rosenthal?

  It's not a full DSLR, but it is like a big thing.

• 4:04:31Ben Gilbert?

  Exactly. It's a handheld, but I wouldn't call it a pocket camera. Now, the funny thing is, the thing that I'm actually talking about as my carve-out is the Sony camera. Shiel Monat tweeted, actually this morning, I should have been preparing for this episode, and I was like replying to him on Twitter instead, that he's been considering getting the Sony or another point-and-shoot camera. And I just kind of remembered how much I love this camera. The Sony RX 107 fits in my pocket. It's very small. It has a giant zoom lens for its size. And I was just looking at some of the pictures that I've taken with it. It's like the perfect thing to bring with a phone. Whenever I am space constrained, which is usually, I mean, I just don't really want a camera around my neck. The perfect combo is bring a phone and bring the Sony.

• 4:05:16Ben Gilbert?

  I am aware that it's not a full-frame camera. I'm aware that it's not as photographer-y as my Fuji, but it is the most practical one for most things that I want to do. And for many, many shots, it is far superior to shooting on a camera phone. So I don't know. I just love it. It's a 2019 camera, and they really need to come out with one that has USB-C because it's annoying to charge. But other than that, it's just awesome. So I highly recommend it.

• 4:05:41David Rosenthal?

  There you go. You're bringing it full circle on this episode. A point and shoot camera.

• 4:05:44Ben Gilbert?

  Point and shoot camera, especially paired with Lightroom has this great AI feature called D Noise that they launched and is now rolled out in production. It is incredible.

• 4:05:53David Rosenthal?

  What?

• 4:05:54Ben Gilbert?

  Then I have one more last one. A listener recently sent me, he started a clothing company called Karasimi, and it is an incredible garment. It is just this like really, really nice cashmere shirt. I've been wearing it all recording. It's great on a cool day. It's great on a warm day. It's my current favorite shirt. And so I wanted to thank the listener that sent it to me and say, you have built a very, the prices are high. So very nice clothing company, but just excellent products.

• 4:06:24David Rosenthal?

  Well, I've been staring at you for the past seven and a half hours here. And I've been thinking the whole time, God, Ben is looking good.

• 4:06:31Ben Gilbert?

  My normal thing, if I could just wear it every day, is a long sleeve dark crew neck. Just like, I don't have to think about it. You can look nice in it. It just goes with everything. It's, you know, the sort of capsule wardrobe idea. And this is the sort of finest version of that that I've worn. It's really great. Karasimi.

• 4:06:48David Rosenthal?

  Nice.

• 4:06:48Ben Gilbert?

  All right. With that, listeners, we have a bunch of people to thank for contributing to this episode.

• 4:06:56David Rosenthal?

  Yes, yes, we do. Hiroshi Lochheimer, Tim Armstrong, Sam Schillus, Hunter Walk, Nick Fox, Shona Brown, Clay Bavore, a bunch of folks who helped a little bit here, but more are going to be for the next episode. Max Ross, Greg Carrato, Demis Asabas, and then Ben, you had a bunch of folks who you spoke to as well.

• 4:07:18Ben Gilbert?

  Yeah. As always, I want to thank Arvind Navarotnam from Worldly Partners for his excellent write-up, which you can find linked in the show notes. And also Paul Buchheit, creator of Gmail, Bill Corin, Jonathan Rochelle, Bradley Horowitz, John Henke, Ben Idelson, Isar Lipkowitz, and Ben Lebald.

• 4:07:37David Rosenthal?

  And that is in addition to, as always, the many folks who helped us, whose names we can't say here, but know you are appreciated.

• 4:07:44Ben Gilbert?

  Yes.

• 4:07:45David Rosenthal?

  And thanks to all of you for listening.

• 4:07:47Ben Gilbert?

  Seriously. If you liked this episode and you're like, oh, wait, there's a Google episode before this? Most of you have probably listened, but if you have not, go check out our first episode on the origin of Google and the creation of the search engine and the search business. And of course, our Microsoft series, part one, part two, and an interview with Steve Ballmer.

• 4:08:08David Rosenthal?

  If you want the other side of the story to everything we talked about here.

• 4:08:12Ben Gilbert?

  In addition, our giant episode on Meta is probably pretty relevant, and we reference it several times. After this episode, check out ACQ2, our second show where we talk to founders and CEOs building businesses in areas that we have covered on the show. Our last one was with Google legends, really industry legends, Bret Taylor and Clay Bavor, about the current state of AI and where we are headed. So, search ACQ2 in any podcast player. Come chat with us in the Slack, that's acquired.fm/slash/Slack, and join the email list for all the excellent email goodies, including voting on episodes for this fall.

• 4:08:49David Rosenthal?

  Woo-hoo.

• 4:08:50Ben Gilbert?

  With that, listeners, we'll see you next time.

• 4:08:52David Rosenthal?

  We'll see you next time.