P.A. Semi + AuthenTec

Topics covered include: P. A. Semi’s original moniker ("Palo Alto Semiconductor”) and its celebrity founder (in the semiconductor world) Dan Dobberpuhl https://en.wikipedia.org/wiki/Daniel_W._DobberpuhlHistory of the back and forth tradeoffs between Intel’s powerful x86 chips and low power alternatives like ARM processors Dobberpuhl’s technology breakthroughs throughout his career that enabled true low-power + high-performance chipsThe initial target markets https://www.cnet.com/news/start-up-plans-new-energy-efficient-processor/ for P. A. Semi’s chips (surprise: NOT mobile phones)P. A. Semi’s first foray into a potential deal with Apple https://www.engadget.com/2006/05/22/apple-considered-small-chip-startup-over-intel-sez-el-reg/, dashed by Cupertino’s surprise switch to Intel processors in 2005 https://en.wikipedia.org/wiki/AppleThe rise of mobile finally creating the huge market need for low-power / high-performance, Apple’s acquisition of P. A., and launch of the first Apple-designed chip, the “A4”, with the original iPad in 2010 https://en.wikipedia.org/wiki/Apple_A4Geekbench: the single-core performance of Apple’s latest generation of smartphone processors (A10 Fusion) has basically caught up with Intel’s laptop CPUs http://www.theverge.com/2016/9/16/12939310/iphone-7-a10-fusion-processor-apple-intel-futureAuthenTec’s beginnings in the late 90’s as a spinoff from the defense contractor Harris Corporation (named by Wired Magazine as the #2 threat to internet privacy in the US https://www.wired.com/2015/01/dangerous-people-internet-right-now/), based in Melbourne, FloridaEarly versions of the technology that became TouchID http://appleinsider.com/articles/13/10/16/authentec-cofounder-shows-off-early-prototype-of-apples-touch-id, the sensors for which were many times larger than today’s iPhones themselves! AuthenTec “not very Apple-like” website on Archive.org http://web.archive.org/web/20110222194432/http://authentec.com/ (and screenshot http://i.imgur.com/3hVq4FI.png)AuthenTec’s deal that almost was http://www.zdnet.com/article/why-apple-wanted-authentec-thwart-samsung-android-in-byod/ to put their technology and sensors into Samsung’s flagship phones http://www.businesswire.com/news/home/20120716005105/en/Samsung-Selects-AuthenTecs-VPN-Security-Enhance-Enterprise Apple’s acquisition of AuthenTec https://dealbook.nytimes.com/2012/07/27/apple-to-acquire-authentec-for-356-million/ for $356 million in July 2012, and the rapid introduction of TouchID in the iPhone 5S https://en.wikipedia.org/wiki/Touch_ID one year later in September 2013 Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 Followups: Merging of Alaska & Virgin America loyalty programs http://www.differentworks.com/#routemap (woo!)Walmart announces major reorg http://www.cnbc.com/2017/01/13/jetcom-founder-shakes-up-wal-mart-staff.html following the Jet acquisitionSnap Inc. IPO drama http://variety.com/2017/digital/news/snapchat-fake-growth-lawsuit-pompliano-1201952800/ is mounting http://www.wsj.com/articles/in-snap-ipo-new-investors-to-get-zero-votes-while-founders-keep-control-1484568034! (we can’t wait to cover this one) The Carve Out: Ben: Rands in Repose: The Situation http://randsinrepose.com/archives/the-situation/David: Daily Rituals: How Artists Work https://www.amazon.com/Daily-Rituals-How-Artists-Work/dp/0307273601 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC

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

• 0:00David Rosenthal?

  I think we should leave it in. All right. Yes, Melbourne, Florida, which Melbourne, Australia might be more of a tech hub than Melbourne, Florida.

• 0:27Speaker 01

  Welcome back to episode 30 of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:34David Rosenthal?

  I'm David Rosenthal.

• 0:35Speaker 01

  And we are your hosts. Today's episode, we're covering two acquisitions that we believe go together nicely. Apple's acquisition of P A Semi and AuthenTec. We think it's a really nice way to mark the 10th anniversary of the iPhone just a few weeks ago. These acquisitions led Apple's A series chips inside the phone and the Touch ID sensor, which which have a nice confluence where they they work together well.

• 1:00David Rosenthal?

  Indeed.

• 1:01Speaker 01

  David, how are you doing today?

• 1:03David Rosenthal?

  I am doing good. I am in cold, but sunny Boston today.

• 1:07Speaker 01

  Hey, I'm in cold, but cloudy Seattle.

• 1:11David Rosenthal?

  It's kind of crazy that this is episode 30. I feel like we need like a like a birthday party for acquired or something. We're getting old.

• 1:17Speaker 01

  I know. I know. Well, I'm marking it by being highly, highly caffeinated. And for listeners, most episodes we record in the evenings and and today I'm recording from home. David's recording from the road and sipping coffee.

• 1:31David Rosenthal?

  Morning show.

• 1:32Speaker 01

  Yeah. 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.

• 1:53David 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.

• 2:14Ben 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.

• 2:35David 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.

• 2:54Ben 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.

• 3:21David Rosenthal?

  All right, should we dive into it with the history and facts?

• 3:25Speaker 01

  I think so. I just want to throw in a quick note before we dive in. We want to say, if you've been a listener of the show for a long time, or if you're new to the show and like the episode, we would love a review on iTunes. We'd really appreciate sharing with your friends on Twitter, Facebook, LinkedIn, emailing out to your company, whatever you feel is appropriate. It's how we grow the show, and it's how we get new listeners. And also wanted to let everyone know, we have a Slack channel. We talked about it a lot at earlier episodes in the show, but haven't mentioned it in a while. There's over 400 of us in the Acquired community hanging out and talking about deals that happen in real time that are too recent to cover on the show, talking about past episodes, sharing tips, posting jobs, all sorts of things. So join us. If you go to acquired.fm, you can join the Slack there.

• 4:10David Rosenthal?

  Yeah, awesome. Look forward to seeing many of you in there. All right, let's dive in. So I'm going to start with PA Semi, which was funny when we were chatting about preparing for the show. Ben was like, oh yeah, weren't they like based in Israel or something? I was like, I don't think so. And then I looked it up and it turns out that PA Semi was founded in 2003 and it was originally called Palo Alto Semiconductor. But then like right after they were founded, they moved to Santa Clara. So rather than changing the name, they just decided to go by PA Semi because they were no longer in Palo Alto, but right down the street. So the founder of the

• 4:54David Rosenthal?

  original Palo Alto Semiconductor was actually kind of a celebrity in the chip design industry called Dan Dobberpuhl. I hope I'm pronouncing that right. But he, he had been a lead chip designer way back in the 70s and 80s for DEC and had become kind of a celebrity in the field. He actually wrote a leading textbook that, that talked about chip design that was used at colleges all across the country. And he worked on first on the DEC Alpha chip while he was there in the 70s and 80s. And then he got involved in the ARM world and built DEC's, built the team actually

• 5:36David Rosenthal?

  in, moved to California and built the team in California for DEC that made the Strong ARM processors, which were sort of higher powered versions of processors based on the ARM chipset. And they tried to commercialize it and thought maybe, you know, sort of mobile devices might be an application for this. This was in the mid 90s, couldn't make it work. They end up selling the whole division to Intel. Dan goes with it to Intel. And then that becomes the x-scale chip at Intel, which would power a lot of the BlackBerrys that RIM was putting out in the late 90s and early 2000s, which was kind of cool.

• 6:18Speaker 01

  Yeah. Do you think we should take a minute just to, for less, you know, this is an extremely technical episode, for folks not in the semiconductor world and

• 6:29David Rosenthal?

  Which includes Ben and me.

• 6:31Speaker 01

  And yeah, yeah, right. That's a, that's a great thing to start off with. Should we sort of explain the, the difference between ARM and x86? And at least at a high level?

• 6:40David Rosenthal?

  Yeah, yeah, yeah. Why don't, yeah, let's do that at a high level. Why don't you go ahead and, and also good disclaimer here that, you know, Ben, Ben and I are sort of playing experts on TV here about the semiconductor industry, but I'm sure we're going to miss a lot of stuff. So listeners, if you know about semis, jump in the Slack or email us and tell us what we got wrong. And we'll, we'll correct ourselves on a following show.

• 7:03Speaker 01

  Yeah, so without getting too into the details, typically computers, as we know, their desktop computers, laptops and servers use x86, x86 architecture from Intel. And there were efforts made kind of starting, or at least most popularized by ARM, ARM, to do a different chip architecture that with a different instruction set of, of assembly language. That was more restricted, but a lot lower power. And Intel has had attempts over the years to come up with lower power chips. The Atom processor is a great example of this. But the, the reason why ARM chips and our iPhones, iPads,

• 7:44Speaker 01

  and many other things have, have come to be extremely popular in the last few years is because as we move to mobile devices, we have stricter power requirements when we cannot plug things into the wall.

• 7:54David Rosenthal?

  Yeah, and we'll get into this in a minute when we actually get into PA Semi. But that's exactly what Dan became known for, Dan Dobberpuhl, as sort of an expert on pushing the limits of this power to performance trade off in chip design. But so this first strong arm, you know, it was kind of too early for the market in this. And so he leaves Intel in the late 90s and actually founds another company before starting PA Semi. And that's a company called CyByte. And CyByte is focused on making chips for, this is sort of like, you know, the run up of the internet bubble, making chips for routers and networking gear.

• 8:37David Rosenthal?

  Because everybody's, you know, these are like the 3com days. And everybody's obsessed with the build out of internet infrastructure. So the big market for chips is actually in, you know, Cisco 3com routers. And CyByte is sort of like hits the timing exactly right for the market. Ends up getting acquired by Broadcom, the big chip company, public chip company, before they even released their product for over $2 billion in late 2000. Wow. Talk about being in the right place at the right time. And this is great, this is where Dan's textbook, it turns out, helps in this acquisition. Because the CEO of Broadcom gave a quote to the Wall Street Journal about the acquisition.

• 9:22David Rosenthal?

  It said, if he first came across Mr. Dobberfull in college, when he studied the engineer's textbook on processor design. And he quotes, and he says, CyByte has the best engineering team he's ever seen. So there you go, write a textbook, get acquired for $2 billion, it's that simple. So Dan stays at Broadcom after the acquisition for a couple of years. But late 2003, he sort of sees mobile coming. He's ready to leave and try the low power, start a company to do low power chips again. And he starts Palo Alto Semiconductor. And they end up raising money right out of the gate and then through a couple of rounds from Bessemer, Venrock, Highland.

• 10:05David Rosenthal?

  And then later on, Texas Instruments actually invests a lot of money in the company. And they're working on these sort of like very low power, but combined with high performance chips. But they're initially using the power instruction set architecture, which is, as Ben was mentioning, x86 and ARM, that's a third instruction set that folks might remember was initially used by Macs before Steve Jobs made the famous announcement that Macs were going to switch to Intel.

• 10:39Speaker 01

  Yeah, which, which, you know, this all happened at sort of an interesting, interesting confluence of time where that was announced, I believe in 2005 on stage at Macworld. The first Macs emerged in 2006 and then in 2007, they were fully moved over to Intel.

• 10:55David Rosenthal?

  Yeah, so it was WWDC 2005 when Steve announces that the Mac had had this secret life for the last 10 years. And this was actually coming out of the next acquisition, that they, the Mac operating system in secret had been able to run on Intel chips so that Apple would be able to switch over to Intel at any point if it felt it needed to for strategic reasons.

• 11:21Speaker 01

  And this, like, I got such a good dramatic Jobsian reveal, the fact that the last two versions, or at least one version of macOS X had actually shipped with these universal binaries to, or the ability to run universal binaries on x86 architecture or the, the Power PC architecture. And he pulled up, you know, images of the CDs that are in people's homes on their computers and said, you actually have this right now, we've just disabled it.

• 11:47David Rosenthal?

  Yeah, super cool. Such a Steve Jobs moment. And like, who else but Steve Jobs? I mean, like, Ben and I geek out about all this history, but I bet a lot of listeners are like, you know. Instruction set like chip architecture like this is not why I buy products but

• 12:02Speaker 01

  Right, right.

• 12:02David Rosenthal?

  You know, when Steve made this announcement, this was like national news. Everybody was floored like who else but Steve Jobs could make switching chipset architectures into such a huge announcement?

• 12:14Speaker 01

  Well, and yeah, it's it's a you know, very similar to the the time when Bill Gates came on that gigantic screen to WWDC and and address the group. This was marking the enemy like Apple embracing the enemy. They had demonized Intel for so long and you know, grouped them into the IBM, Microsoft group of of evil companies that did not represent the interests of of Mac users and the creative professional in the future. And here they were basically signing a truce on stage.

• 12:50David Rosenthal?

  Yeah, and this is directly related to the history of PSMI and and their interactions with Apple because PSMI, it turns out, had actually been working with Apple for several months up before this announcement and they had no idea it was coming. So when when Dan and the company, you know, they were targeting, you know, the embedded market and low power devices and mobile. They weren't actually thinking about smartphones because smartphones didn't really exist yet. They were thinking about ultra portable laptops. And so they had been working with Apple behind the scenes, trying to bid for the contract to be the main provider of chips for the next set of MacBooks.

• 13:33David Rosenthal?

  And they they were convinced that they were going to win this contract from Apple and this was going to be huge and make the company. And and then WWDC rolls around, Steve goes onstage, makes this announcement, they're switching to Intel. And you know, apparently Dan and the company were just like floored and completely furious because this blew up the deal that they were working on that they thought was going to make the company.

• 13:56Speaker 01

  Wow.

• 13:58David Rosenthal?

  So at this point, this was 2005, Apple doesn't end up acquiring PSMI until 2008.

• 14:06Speaker 01

  After the launch of the iPhone.

• 14:08David Rosenthal?

  After the launch of the iPhone, right, you know, and the iPhone isn't going to debut for another two years. And a lot of people think your PSMI is kind of left for dead at this point, you know, they have this incredible technology. It really was kind of a 10x. If people, we talk in VC and startups about, you know, you need a 10x better product to, to, you know, really be disruptive in the market. And their technology really was 10x better on power savings, but they were targeting the power PC architecture. And, and that, that market just, you know, wasn't there, especially with Apple switching over to Intel.

• 14:44David Rosenthal?

  So PSMI kind of, kind of bumps along. They eventually do release a processor, 64 bit dual core processor, huge power savings comes out in 2007. But, you know, there's not a big market for it.

• 14:57Speaker 01

  That was the only, only product they ever released, right?

• 15:00David Rosenthal?

  The only, yep, that's the only, I, I believe that is the only chip they ever released into the market.

• 15:06David Rosenthal?

  And then, but then at the same time, the iPhone comes out and the iPhone initially, folks might remember the first few versions of the iPhone. The, the original one, the 3G and the 3GS all used Samsung processors. And so for a whole bunch of reasons, Apple is really interested in moving away from Samsung processors. And then in 2008, they acquire, they end up acquiring PSMI for 278 million in cash, which is, you know, a decent outcome. But the company had raised $86 million. We, we don't know at what valuation, but it must've been at least, you know, somewhere in the, you know, mid hundred millions.

• 15:51David Rosenthal?

  So not a huge outcome for investors and certainly relative to Dan's previous company, Cyby, you know, that's an order of magnitude smaller.

• 15:59Speaker 01

  Yeah. And, and it's, it's, it's worth taking a quick pause here that, that 86 million figure. You, you might think, you know, how could a company? Of 150 employees that was around for four years that needs to design and manufacture microprocessors and systems on a chip like how how or I guess just microprocessors. How could they, you know, only raise that much money? And it's because they were a fabulous chip company. They were not, you know, actually making these things themselves. They were, what most people do is is they use a chip fab in China or somewhere else with, you know, less expensive labor costs to to manufacture the chips. And they themselves are designing the architecture and laying out the board.

• 16:42Speaker 01

  And actually, that there was a lot of speculation when when Texas Instruments invested in P A Semi that their fabrication plants, because T I has their own chip fabs, would be used to manufacture those those those processors. So that was kind of a big strategic investor for them.

• 16:58David Rosenthal?

  Yeah, totally. And what's funny, though, when the acquisition happened and I was going back and rereading some of the articles about the deal when it came out, you know, I don't know, Ben, you saw the same things. Most people didn't really realize that this was about the iPhone. Because this is 2008 and I believe the 3G had come out at this point, not yet the 3GS. But the iPhone was still pretty small, like it was very, you know, it had a lot of buzz, but people didn't really realize yet that, you know, the iPhone was about to become Apple and that the Mac was gonna take a take a backseat.

• 17:40David Rosenthal?

  You know, people were still thinking about the iPod as being, you know, it was still, I believe, at that point, I'm not sure, but roughly the same size or bigger than the than the iPhone.

• 17:52David Rosenthal?

  You know, and so all the all the press at the time of the deal was, they were really confused about like, why is Apple finally buying P A Semi? They switched to Intel. Are they thinking about, you know, a new ultra portable that they're bringing out that they might bring back the Power PC architecture?

• 18:08Speaker 01

  Well, I mean, it is interesting. I'd love to get your take on this. Like, what, I mean, they were clearly brilliant people there that were specifically brilliant at chip design, but, you know, they weren't working on ARM processors.

• 18:22David Rosenthal?

  No, but what did happen is, you know, right away, they basically stopped all the work that PSMI was doing on their own stuff, and they put the team on. Apple already had an existing project working on an ARM design, working on what would become the A4, the first Apple chip that they were, that they would put out, which actually launched with the iPad when the original iPad was introduced. This was a big selling point. And the whole team from PSMI got put on, got put on that. And of course, Dan is, you know, sort of this legend in, in, you know, low power performance trade off. So

• 19:01Speaker 01

  Right, right.

• 19:02David Rosenthal?

  They really accelerated the work.

• 19:03Speaker 01

  Yeah, good point.

• 19:05David Rosenthal?

  So yeah, 2010, Steve Jobs introduces the original iPad. And it was really fun doing the research, going back, watching that keynote and watching the product introduction video. Scott Forrestal takes up like half of the video of the product video, which is pretty funny.

• 19:20Speaker 01

  Yeah, poor, poor guy.

• 19:21David Rosenthal?

  And all the, all the apps, like so much, you know, skeuomorphic design. It was, it was actually sort of painful to look at.

• 19:30Speaker 01

  Yeah, yeah, I bet. It's weird how it's so like, you know, the lickability was a thing at the time in UI and you wanted to like touch it and now it's just like, it's a whole bunch of wasted rendering.

• 19:42David Rosenthal?

  Yeah. Total sidebar too. I kept thinking, you know, this was 2010 when it launched. And looking at this, you know, we're here in January 2017, which, you know, we talk about a theme on this show that things move really fast in tech and waves keep coming successively faster. But like, that was not that long ago. And both the software and the hardware of the original iPad, you know, Steve and Johnny Ive and everybody is touting it as so incredibly advanced at the product launch. And now it looks like a dinosaur.

• 20:14Speaker 01

  Right. And it was at the time. I mean, I, I had the first iPad and I, I remember thinking this thing is like

• 20:23Ben Gilbert?

  A marvel, but knowing even then that this one would be known as the heavy one. Like it was, you really couldn't hold it out in front of you with one hand for any meaningful amount of time without your arm getting tired.

• 20:34David Rosenthal?

  Yeah.

• 20:35Ben Gilbert?

  You know, the bezel around the

• 20:36David Rosenthal?

  I had it too. I bought it on launch day and lined up for it. It was, it was great. I used it so much, but now, you know, now I've got my iPhone 7 plus. I don't have an iPad anymore and it's like Waze, you know, has almost as much screen real estate, maybe not almost a significant enough screen real estate and weighs almost nothing and battery lasts forever. Amazing how technology moves.

• 21:03Ben 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.

• 21:17David 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.

• 21:31Ben 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.

• 21:41David 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.

• 21:59Ben 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.

• 22:15David 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.

• 22:32Ben 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?

• 22:41David 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.

• 22:52David Rosenthal?

  So that's the story of PA Semi. The Authentech story, we'll run through a little more quickly because it's less interesting in whole, but it's sort of new. We haven't seen something quite like this yet on Acquired, I think. Authentech was based in the technology hotbed of Melbourne, Florida, which I did not know until I started doing the research here. But there is, I believe, the largest employer in Melbourne is a company called Harris, which is a giant defense contractor. And it was actually named by Wired, the things you learn during doing research for this show, named by Wired Magazine as the number

• 23:32David Rosenthal?

  two threat to internet privacy in America in 2015, right behind the NSA.

• 23:40David Rosenthal?

  They make, the main product I believe that Harris makes now are, what are they called? I want to say Stingray, that could be wrong. They're basically like fake cellphone towers that your phone will try to connect to. And then through that, you know, the government or whoever there owns these things then can track phones. Huge privacy controversy around this company. But they, they had, in the 90s, they had a big semiconductor division. And they kind of went through, must have gone through a strategic review and decided that they were

• 24:18David Rosenthal?

  gonna change that part of their corporate structure. They end up spinning off the entire semiconductor division in 1999. But right before they do that in 1998, they spin off this company called AuthenTec. And AuthenTec was going to work on specific, you know, security and authentication technology for embedded devices. And this was back in 1998. So, you know, way before smartphones are even a concept. And there's actually this really great article that we'll link to in the show notes of the CEO of AuthenTec.

• 25:01David Rosenthal?

  After the Apple acquisition, he goes back and he gives a talk at, I believe, NC State, where he was, which was his alma mater. And he brings one of the prototypes of Authentic's first product, which is basically the Touch ID sensor that's in the iPhone. But it's like many times larger than an iPhone itself. Now, it's this huge box with like a separate box attached by a big ribbon cable that you stick your hand on and it like worked, you know, 5% of the time.

• 25:32Speaker 01

  To draw an analogy, it sure reminds me of playing with an Oculus in 2016, 2017.

• 25:38David Rosenthal?

  Yeah, definitely.

• 25:41David Rosenthal?

  So Authentic works on this technology for a long time. They actually go public themselves in 2007. We keep refining the technology and selling it to any customers along the way and applications that would find it interesting. And then finally, in 2011, they do sort of a collaboration with NXP Semiconductors and a software firm called Device Fidelity that was working on mobile payment software. And they sort of like create this suite of both hardware and software that's aimed to enable fingerprint authentication for NFC mobile payments for the Android ecosystem.

• 26:26David Rosenthal?

  So this was kind of the age of when everybody was all excited about NFC.

• 26:30Speaker 01

  Yeah.

• 26:31David Rosenthal?

  This was a big selling point for a lot of Android phone manufacturers. And so this consortium actually wins contracts with Motorola, Nokia, and then finally with Samsung. And this was going to be a huge deal. Samsung was going to put this system in their coming flagship phones. This was, it was July 2012, beginning of July 2012, when Samsung announces this, that they're going to integrate this technology in their new set of phones. And then almost immediately thereafter, late July 2012, on July 27, Apple acquires the company.

• 27:06Speaker 01

  Hey.

• 27:07David Rosenthal?

  Hey, which was a big coup. I mean, we've talked about on the Android episode and a bunch of episodes in the past. This was like the height of the smartphone wars. Samsung had emerged with copying Apple, you know, feature for feature. And this was going to be a big innovative thing that Samsung was going to launch. Apple swoops in and acquires the company.

• 27:25Speaker 01

  And it's interesting that I remember hearing about this when it happened and looking it up and going, oh, fingerprint recognition and kind of being like, well, maybe they'll do that on Macs at some point or the iPhone at some point. But the thing that totally got lost in that story was the the payment stuff. And it's funny that that, you know, with with Apple Pay becoming one of the major advantages to having Touch ID, that, you know, that that had its roots all the way back in in Authentic.

• 27:50David Rosenthal?

  Yeah, in, you know, more than a decade before. And it's pretty amazing. I mean, the the that time and that amount of R and D over a decade plus that had gone into this product, I think really did make it make it differentiated in the market because, you know, Apple acquires the company end of July 2012. And it's just almost exactly a year later when, well, they announced they were acquiring the company end of July 2012. The acquisition probably doesn't close for another couple of months at least because Authentic is a public company at this point. And it was beginning of September 2013, the very next year, when the iPhone 5S comes out

• 28:33David Rosenthal?

  that has the Touch ID sensor. So the turnaround time on this is like, basically immediate in the in terms of product development when you're integrating, you know, an acquisition. So this was this was an incredibly speedy job by the Apple team. And I think speaks to the maturity of the product.

• 28:51Speaker 01

  Totally, totally. And I've got a couple of interesting tidbits here. I went to the Wayback Machine, archive.org, and looked up Authentic from from February 22, 2011. And you look at their website and it really is the whole suite of very un-Apple-like authentication methods from from that era. There's like a little banner, and we can include this link in the show notes. There's a little banner there that says, does your PC have a touch? Sensor and it's got, uh, it's got that little like swipe down thing that's on a lot of the, a lot of the PCs to log in. There's an ad for the HP Simple Pass 2011 powered by AuthenTec Identity Management System. There's, uh, there's this like, uh, this laptop.

• 29:31David Rosenthal?

  So much, you know, gar- garbage product names.

• 29:35Speaker 01

  Yeah, totally. Totally. And you look at this and you, you, the kind of high level here that, the high level point I'm trying to make is this company looks nothing like an Apple company. It's kind of the antithesis of, of, uh, from a, a go to market and product perspective of the way that Apple, um, reaches customers. I mean, they have like eight other companies logos all over this website. And what the, their little, their quote, let me pull up the Steve Dowling quote, um, you know, that they always give when they acquire a, a company is Apple buys smaller technology companies from time to time and we generally do not comment on our purposes and plans. And that's truly how they look at it, that, you know, we're buying a technology here, like we

• 30:19Speaker 01

  could not care about the way that they're going to market right now, the way that their products look or are defined. It's, it's literally like, look at all this R and D these people have done. We're buying a technology company.

• 30:29David Rosenthal?

  Yeah. Well, I think this is a perfect transition unless you have anything else, um, to go into acquisition category.

• 30:36Speaker 01

  Uh, I, I do have a couple, a couple of little things.

• 30:38David Rosenthal?

  Okay, go ahead.

• 30:40Speaker 01

  One, uh, on this show, as, as listeners know, we love when public companies acquire other public companies because we get to learn things. Apple paid a 58% premium for Authentec over their, their existing, uh, their current trading market cap. And, uh, a lot of this was powered because, uh, Samsung was, uh, one of its biggest customers and believed to be also making a play. So, uh, I don't believe there was a, a counter offer, but Apple did go in high, um, to make sure that they, uh, they got the deal. Now, what we've seen in other, um, episodes where we've reviewed public companies buying other public companies, you see

• 31:18Speaker 01

  18 to 30% as the premium that, uh, uh, existing, um, management teams and boards are willing to accept, uh, as, uh, as a acquisition bid. And this is, um, you know, dramatically higher than, than, uh, other ones we've seen. And it did come with a, a termination fee of 20 million in cl- in case there were antitrust issues and the deal didn't close.

• 31:40David Rosenthal?

  Yeah, it's interesting, though. I mean, the sticker price was three hundred and fifty six million, which I don't think we mentioned earlier. We should have. Um, so yeah, that was uh at that almost sixty percent premium. Um, three hundred and fifty six million. When you take a step back, that's a large premium, but like that's not that much money. And it's interesting that Samsung either didn't counter offer, or if they did, you know, not buy enough to win the deal. Um, for, you know, when you're talking about not that much money relative to the amount of, uh, well, we'll get into this, uh, in grading, um, grading the show, but the amount of money in the smartphone, you know, hardware sales for a really differentiating feature like this.

• 32:26David Rosenthal?

  Interesting move by Samsung not to to let this one go, especially they just announced earlier that month, this big deal that they were going to include this as a flagship feature in future smartphones.

• 32:37Speaker 01

  Yep, yep. And then before we move on to, it's worth noting, you know, we're we're covering two very big landmark deals here, but Apple spent over half a billion dollars after, uh, um, after acquiring P A Semi on on other, um, you know, semiconductor and and processor related companies, uh, in in trinity, passive semiconductors, Prime Sense, they really, uh, you know, that it wasn't just that they developed it wholly in-house then after acquiring P A Semi.

• 33:04David Rosenthal?

  Yep, yep. Uh, definitely. And they may, did they acquire other authentication, uh, companies along the way, too?

• 33:12Speaker 01

  Um, I'm actually not sure. I think smaller ones, but th- this was definitely the, um, you know, you look at an iPhone, you identify it has a screen and a button with a fingerprint sensor, and this was the fingerprint sensor.

• 33:22David Rosenthal?

  This was the main tech behind it.

• 33:24Speaker 01

  Yeah.

• 33:25David Rosenthal?

  All right. Acquisition category?

• 33:27Speaker 01

  Let's do it.

• 33:28David Rosenthal?

  I'll see it. So, yeah, Ben, what you were saying earlier, uh, what I think is interesting about these two deals is they are, um, both of them very directly related to flagship features of I O S devices, both iPhones and iPads, um, that would become differentiators in the market. So they they make sense to do together, uh, as one episode in that sense, but, um, I actually think they are two different categories based on the history of how the integration happened. You know, with PA Semi, clearly like Apple was already working on their own ARM chips that they would, that they would release with the iPad. But this was about getting

• 34:10David Rosenthal?

  sort of the best talent in the world to come and join the team and execute with them. And, and then on the AuthenTec side, so I, so I think the PA Semi acquisition was very much a people acquisition, very technically minded people.

• 34:28Speaker 01

  That's only 1.8 million per employee. I mean, it's actually not like insane if you think that if you are Apple making the bet that this is going to have tremendous business impact and there's not other people of this caliber.

• 34:41David Rosenthal?

  Yeah, I mean, this is literally the guy that wrote the book on, on low-power, high, high-performance chip design. But then AuthenTec is interesting. You know, this is a company that was a spin out from a defense contractor based in, in Melbourne, Florida. And, and I believe most of the people from the AuthenTec acquisition are no longer at Apple, or if, or if they are, perhaps have moved to Cupertino. You know, that was very clearly a specific technology in the fingerprint sensor that became Touch ID that they acquired. So they both accomplished the same goal, but it's interesting. I think they, I think they took very different routes in each acquisition.

• 35:24Speaker 01

  Yep. David, I couldn't agree with you more. That's exactly what I had in my notes. And I want to just make a, drill in a little bit further on one point that you made that of why it makes sense to do these, these two companies together. The ability of Apple to integrate these two products creates an advantage that other manufacturers don't have. So the A Series chip have something that Apple markets as the secure enclave, which means that there is, it has the ability to do processing specifically of, of security applications in an isolated way from other things going on, on the, on the chip itself.

• 36:09David Rosenthal?

  Yeah. And importantly, locally on the device.

• 36:12Speaker 01

  Yes, yes. So not only, so when you do your Touch ID fingerprint, not only does it not round trip to the server, it doesn't get to memory and it doesn't even get to the main CPU. So you're, or I guess the main core of the processor. So the Touch ID sensor operates, you know, fully in an isolated way. And, and, you know, we've seen, we've seen that really paid dividends for, for Apple going toe to toe with, you know, the FBI.

• 36:43David Rosenthal?

  Yeah, and the San Bernardino shooting case.

• 36:45Speaker 01

  Yeah. And I, I think, you know, it, when Apple plants a flag in the ground and says, we're serious about device security and that, you know, I don't want to get into the morality and politics of that, because I think that's a different discussion. But they, they really are able to say that, you know, all the security vectors that, that people would normally do to get into devices by, you know, rooting it or having direct, direct hardware access. Like, you just, those fingerprints and, you know, the, the, you know, ghosts in, in memory of those fingerprints don't even ever exist to, to be able to go and get them later. So I think that, that the integration of these two technologies is, is something that,

• 37:26Speaker 01

  as, as Tim Cook would put it, quote unquote, only Apple would, would be able to take this approach.

• 37:32David Rosenthal?

  Yeah. And this is, well, this is definitely going to be one of my tech themes, which we can, we can talk a little bit more about later. But I'm thinking back to the next episode and Steve Jobs, you know, quoting that, if you're really serious about software, you need to make your own hardware.

• 37:46Speaker 01

  Which, which I think he ripped off from Alan Kay, right?

• 37:49David Rosenthal?

  Yes, exactly, exactly. And, and he attributed the quote to Alan Kay when he said it. But, but the, you know, classic case of that here. And it really is, I mean, no, this is a key differentiator of the iOS ecosystem and devices now for a lot of people, especially in the, you know, in the Post-privacy, post-truth world we live in.

• 38:12Speaker 01

  Oh, man.

• 38:13David Rosenthal?

  That, that, that no other, you know, the Android ecosystem can't make these claims. No other device manufacturer can. Also, I find it incredibly ironic that Authentic is a spin out from a major defense contractor, ranked by Wired Magazine and right behind the NSA in terms of, you know, decreasing privacy on the internet and then becomes a cornerstone of Apple's privacy strategy.

• 38:42Speaker 01

  Yeah. The irony is thick.

• 38:46David Rosenthal?

  It is thick.

• 38:49Ben Gilbert?

  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.

• 39:02David 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. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 39:18Ben 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.

• 39:33David 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. Logora'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.

• 39:57Ben Gilbert?

  And they recently launched Logora 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.

• 40:16David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora 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.

• 40:46Ben 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 logora.com/acquired and just tell them that Ben and David sent you.

• 41:11David Rosenthal?

  All right. Should we move on to what would have happened otherwise?

• 41:14Speaker 01

  Yeah. And I think one thing that I want to raise now, but not talk about until we're grading it is, I talked about this, you know, Tim Cook marketing speak, only Apple and the advantage that, you know, these two technologies combined together under the same roof and the same engineering team give. I think it's interesting for us later to examine, what was the actual business impact of that?

• 41:36David Rosenthal?

  Yeah.

• 41:38Speaker 01

  What would have happened otherwise? You know, I have two sort of notes here. One is who else could Apple have bought? Or how else could Apple have gotten here? And I look, let's look at PSMI first. It was basically a builder buy decision for Apple. And then clearly they were working on building anyway, but this just rapidly, rapidly accelerated their pace. And then with Authentic, you know, it truly was competitive. Like Samsung was very clearly skating in the same place and they were already, Authentic was already sort of in the Android ecosystem. So it wouldn't have surprised me if somebody in the Android ecosystem that was budding and becoming the, at this point, I think it was kind of overtaking Apple and becoming the more

• 42:21Speaker 01

  popular, not the more profitable, with the more popular operating system. And I could see that one going to a different company. And then the question for Apple is, you know, how would they have been able to build out the feature that they wanted to build without bringing Authentic in-house?

• 42:39David Rosenthal?

  Yep. Spot on. And I think this whole

• 42:44David Rosenthal?

  That discussion, especially Samsung's

• 42:49David Rosenthal?

  failure to either submit a competitive bid for Authentic or a compelling one. I think this really reflects the difference in perspective about products at Apple versus many of their competitors in the ecosystem. You know, Apple really, say what you will about them, and I think they, as we move further into the maturity, the maturing phase of mobile devices and people start to look to the next generation, there are a lot of legitimate questions about Apple's future right now. But they really think about products

• 43:30David Rosenthal?

  from a whole product sense and from a user-centric and compellingness to a user perspective.

• 43:40David Rosenthal?

  And they realized that they had a vision of what this integrated product that we were just talking about, you know, about not only the convenience of unlocking your phone and paying with your fingerprint for mobile devices, but the security and the necessity of doing that with in-house technologies versus their competitors in the Android ecosystem. And, you know, I really don't think any of them can make the same claims around both security and privacy and also seamlessness that Apple can in this arena.

• 44:15Speaker 01

  Nope, totally agreed. There's one other thing I just, I don't think it's insightful. I just find it hilarious that in 2008, CNET wrote this article that was pointing out that Apple made a choice here with ARM with the iPhone, and yet Intel, their, you know, their partner for all their Mac computers had a low-power chip they were developing called the Atom. And they write this whole article analyzing why it's, it seems like Apple's not going to go with the Atom chip, but the title of the article is "Apple Unlikely to Get Up in Atom."

• 44:52Speaker 01

  And I just read it and it was like boo.

• 44:56David Rosenthal?

  That's like a dad joke if I ever heard one. All right. Tech themes?

• 45:00Speaker 01

  Tech themes. You know, I don't know if this was apparent to them at the time, but when you look at the proliferation of

• 45:08Speaker 01

  applications that Apple has been able to go into with first party hardware that, you know, they never would have dreamed of 10 years ago. It's incredible and it's all powered by the, the work that they did on the, the A series chips. So we look at the, the Apple Watch, which has the, the S2 chip, which is the system. They call it the system in a package. So not just the, you know, system on a chip, but they actually package other, other sensors with it. The EarPods have custom silicon, the, the W1 chip. The touchbar has the T1, which basically is a forked version of watch OS that it runs and, and is a similar

• 45:49Speaker 01

  architecture. It's incredible that Apple's been able to so finely tune their products because they've been able to control the underlying chip and, and surrounding pieces of that rather than buying it from a third party. And, and Apple, we view as a vertically integrated company. And they're really, you know, they're, they're modular in so many ways. They have tons of suppliers. They negotiate fiercely. They combine, you know, hundreds of other companies' products into their own and then, you know, put a, put a nice case on it. But for the things that they think can, can really differentiate them and really provide a strategic advantage for the long term, they, they bring it in house and, and doing that with the silicon and vertically integrating the silicon into

• 46:34Speaker 01

  all their products really enabled all these new product categories that they're trying to go after today. And I don't think any of them will be as, as successful or profitable as the iPhone. I think that was a unique moment in history, but it, it sure is allowing them to go, go new places.

• 46:49David Rosenthal?

  Yeah, thi- this was my, one of my two that, you know, talked about, you know, sort of the, this idea that, you know, if you care about software, you make your own hardware, the Alan Kay concept. But I think it's, I wanted to talk about it in the lens of, there's very, very few technology companies that really take that to heart and they tend to be, you know, the giant, most successful enduring companies that do, you know, the Apple, you know, Google with what they're doing with, with, with their data centers and with, you know, and then slightly, you know, one level up the stack with TensorFlow and all the machine

• 47:30David Rosenthal?

  learning, you know, tools and, and technology they're creating. Amazon, certainly with Amazon Web Services. And I think, you know, that balance, i- if you really want to build an enormous and sustaining technology franchise, you know, certainly Microsoft does this too, and Facebook is beginning to, you have to make that transition, but you can't do that as a startup, right? Like, it would be a fool's errand, you know?

• 48:00Speaker 01

  Xiaomi tried.

• 48:01David Rosenthal?

  Yeah, well, right. And, and they are, you know, at this moment in time, I think, I think struggling a little bit relative to expectations.

• 48:09Speaker 01

  Yeah.

• 48:09David Rosenthal?

  But, you know, like Baidu does the same thing, Alibaba. But, you know, the question of when to make that transition in the lifecycle of the company is an important strategic one, you know, certainly, I don't think I would recommend baby startups doing it, you know, as a startup, you want to embrace standing on the shoulders of giants. But at some point, if you really want to compete with the big boys, you kind of have to become a giant yourself.

• 48:33Speaker 01

  That's true. That's true. Another interesting data point on this. So, according to Geek Bench, and this is from a Verge article we can link to, called "The iPhone 7, 8, 10 Fusion Processor and Intel's Future."

• 48:49Speaker 01

  The single core performance of Apple's latest generation of smartphone processors, the A10 Fusion, has basically caught up with Intel's laptop CPUs.

• 48:58David Rosenthal?

  Wow.

• 48:59Speaker 01

  And actually rivals the single core performance of the Mac Pro. I mean, I'll be at a few years old, but like the the the single core performance of the chip in my phone is is rivaling Intel's laptop chips. And of course, you know, there's all sorts of advantages to being in a tower. You can put in GPUs and as much RAM as you want and, you know, a lot, a lot more complexity without having to worry about storage. But, you know, the market for those really high end, that really, that that high end power is shrinking and the or the market for low power chips is is growing dramatically.

• 49:36David Rosenthal?

  Yeah.

• 49:37Speaker 01

  Has grown dramatically.

• 49:38David Rosenthal?

  What I think, I mean, I've found since upgrading to the 7 Plus, I had the 6 Plus, you know, not the S, the sort of two, two and a half year old model at this point before upgrading, like I've noticed a dramatic difference in performance.

• 49:54Speaker 01

  Yeah, yeah. If we really want to go tech trends and themes, how much does all this matter going forward? It's clearly been super important in the last decade to have all this power on our phones, but are we going to shift back toward the the TikTok of, of, you know, powerful on the client, powerful on the server, powerful on the client, powerful on the server? Like in this world of of cloud and machine learning and relying on a lot of remote infrastructure for our computing.

• 50:27David Rosenthal?

  Yeah.

• 50:28Speaker 01

  Is this going to be less of a competitive differentiator? And, you know, how much does this world of our matter in the land of machine learning and cloud?

• 50:38David Rosenthal?

  Yeah, 100%. This actually, two other tech themes I wanted to lump together and cover quickly, this sort of. I don't think answering that question, but furthering the context for it, you know, one is sort of market timing and waves. And I think, you know, the PSMI history illustrates this so perfectly, right? You know, like, and we talk about on the show so often, we covered in our 2016 review episode, you know, the key to startup and venture capital is, you know, targeting the big market at the right time and the right time of the wave. And, you know, Apple with the iPhone just got it so, you know, so right, probably the

• 51:20David Rosenthal?

  most right of any, you know, sort of combination of size and timing of waves in history with the smartphone market, like, technology had just gotten to the point and consumer willingness to adopt had just gotten to the point where it was possible. You know, the first processor in the first iPhone was like, I think it was 416 megahertz, I believe, from Samsung. And like, it was just barely enough to make the thing work, you know?

• 51:49Speaker 01

  Yeah.

• 51:50David Rosenthal?

  But it was just barely enough. And, but, but now as the market has matured and we've got, you know, a chip in our iPhones that literally is as powerful as a Mac Pro a couple of years ago, how much more power do we need? You know, we're, we're out of mature point, at least maturing point in the smartphone market. And then the other theme I wanted to tie that to is just like, both of these acquisitions are total Clayton Christensen sustaining innovations, not disruptive innovations. You know, they are sustaining this wave that Apple's on. But, but as you pointed out with your question, the critical question for the tech industry,

• 52:31David Rosenthal?

  for us as investors, as startups, as people working in it right now is, what is the next wave? You know, because the, this past wave that we've been riding of mobile and smartphones, while being the largest and most prolific in history, you know, it's mature now. It's cresting.

• 52:49Speaker 01

  Yeah. And the, you know, the title of that book and the phrase, what got you here won't get you there starts to come to mind where we're going to get into grading here in a minute. But, you know, having their own, their own in-house silicon and to the lesser extent, security features.

• 53:08Speaker 01

  Gave Apple a lot of advantages to to keep their experience lead over Samsung and other Android manufacturers and to to really like be able to produce the the best quality, most differentiated experience phones. And I think, you know, that that was, you know, hundreds of billions of dollars in revenue that that we can attribute to that. But looking around and as the dust starts to settle today and looking at what's next, I am not convinced it actually sets Apple up for the future in a way that matters in the next wave of experiences.

• 53:45David Rosenthal?

  Yep, completely agree, especially if the next wave of experiences are primarily machine learning driven, data and data science driven, and and and most importantly, as a result of that, service driven innovations, you know, not hardware, not software, but service driven innovations. You know, that is not in Apple's DNA.

• 54:12Speaker 01

  No, it's not. And and they um, they, I forget what they called it, differential, differential, what's the thing where they do the machine learning on the device for the photos that they touted at WWDC?

• 54:24David Rosenthal?

  Oh, I don't remember.

• 54:25Speaker 01

  Differential privacy? Yeah, well, you do that, listeners, Apple is taking the position that they can do a lot of this really advanced machine learning and cool applications that you're seeing from from Google and others, that they can do it on the device and they can do it without, you know, sending your identifiable information into the cloud and and potentially compromising your security at a request in the future. And they're publishing papers on it and they're actually, they're using a lot of methods that were were published by Google engineers years ago. And I, you know, it's it's interesting. I fundamentally don't think that that the on-device way of doing this will win out

• 55:07Speaker 01

  in the long run relative to having all of your data in close proximity to each other that's not bandwidth constrained, all in, you know, data centers.

• 55:15David Rosenthal?

  Yeah, I mean, we're still in early, early innings of, you know, this wave. So we don't know. But I I do tend to agree with you. I mean, to the extent that the the quality of machine learning and data science is driven by the volume and the quality of data that you have. Siloing that data to just what the storage available on your local device and your own data generated from it versus, you know, a Google-like approach where it's, you know, unfathomable amounts of data across the entire world interacting with your product

• 55:57David Rosenthal?

  in real time, you know, in all their data centers across the world. You know, I think Google's gonna win that. So we'll see.

• 56:06Speaker 01

  I think so too. Google, Amazon, Microsoft, like one of these, not, not Apple, I don't think.

• 56:11David Rosenthal?

  I don't think so.

• 56:13Speaker 01

  Yeah, differential privacy is, is the name of that feature.

• 56:16David Rosenthal?

  Got it.

• 56:16Speaker 01

  Yeah. You want to move on to grading it?

• 56:18David Rosenthal?

  I think so. So for me, you know, this really is kind of a, as we were talking about, sort of a tale of, a tale of two cities, a tale of two acquisitions, you know, was the best of, best of acquisitions was the worst of acquisitions for, for Apple, you know. On these two companies, they spent a combined $634 million. And then as Ben pointed out, they acquired many other smaller companies in the same, also in, in silicon design. So let's call it another half a billion-ish. Let's say they spent around a billion dollars on this, on, on these, these teams and technologies. From the time they launched the A4 in the iPhone,

• 57:01David Rosenthal?

  which was with the iPhone 4, and, and let's just only look at iPhone and look at the generations from iPhone 4 to iPhone 6. So not the 6S, not the most recent 7. You know, it's roughly four-ish years. And let's just say as a proxy that that's sort of the competitive advantage period granted by these acquisitions and the speed with which they were able to deploy these differentiating features versus the market. Those, just those generations of iPhones sold about 720 million-ish units at roughly a $600 average selling price. It's a little higher. So that's over $400 billion of revenue. And let's assume about a 40-ish percent

• 57:46David Rosenthal?

  Gross margin, it's actually a little higher. You know, you're at sort of $170 billion of gross margin generated by units during that time. And then so, you know, trying to do the math, you're like, okay, how much of that is attributable? How much of those sales are attributable to these differentiated features? I don't know, 10%, 5%, let's take 5%. That's still almost $10 billion in incremental sort of contribution margin from these acquisitions. So versus a billion dollars spent 10 to one, you know, that's great. At the same time, these are, as we just talked about, sustaining acquisitions. You know, I compare them versus, you know, our, our benchmarks of what great acquisitions are in Instagram and in Next.

• 58:31David Rosenthal?

  You know, those are, those are acquisitions that generated entirely new, you know, business lines and categories for their companies, you know, in Next's case, you know, over a trillion dollars worth of, you know, worth of business. I don't think those fall into that category. So for me, I think I give, I think I give a B plus slash A minus with a leaning more towards the A minus side, because these were incredibly executed sustaining innovation, you know, acquisitions. And had they fallen into competitors' hands, I think would have changed, impacted the trajectory of, of, you know, Apple's profits versus the competition in this space.

• 59:18Speaker 01

  Man, David, that's, this is why I love having you as a co-host.

• 59:23David Rosenthal?

  Thanks, because you had done the same math and were about to do the same thing and I just stole your thunder.

• 59:28Speaker 01

  No, because I didn't do the math and I had this like, I was going to arrive at an A minus conclusion through a much more hand wavy method, but like the, the actual analysis to come up with that, you know, 10 billion compared to 600 ish million, it's like a, you know, it's a 16, 17x return. And you, you know, using all sorts of assumptions and, and sort of generalities in that model. But I totally, this, here's going to be my A minus. They made hundreds of billions of dollars of revenue. Some amount of that attributable to these acquisitions. It was tremendous for them getting here, but didn't set them up going forward. So I was going to discount my A to an A minus for not being convinced that it meaningfully differentiated them in the future.

• 1:00:13David Rosenthal?

  Yeah, well, I think we probably both, you know, together, we're both at the right combination of like database analysis and big picture gut feel here. And I think you're told like, I just can't. These were incredibly well executed acquisitions, but I just can't put them in the same league as Instagram and Nest. Nest, not Nest, next.

• 1:00:37David Rosenthal?

  We'll have to do Nest at some point. I just bought one. I actually really like it. But anyway.

• 1:00:42Speaker 01

  Yeah. And, and you know, the counter argument, I'm going to stick with my grade, but the counter argument would be that let's say we move to a world where there's not all this heavy compute going on in the phones and we, rather than having a single device, we have this networked

• 1:00:58Speaker 01

  confluence of sensors around us. So we have ear pods and we have a watch and we have a screen, but it may not have the, you know, the, all the innards of the iPhone in it. And maybe that screen just appears in our glasses or it appears wherever we're looking or, you know, there's all sorts of interesting sci fi futures about what the display could be like, but let's say we decouple all these things. Even though a lot of that intelligence is going to be done in the cloud. We still live in a world that's kind of, that, that's more bandwidth constrained than it is compute constrained or storage constrained. And I think that as bandwidth continues to be the issue, that's going to be the, the gating factor and how much we can push off of our bodies versus actually have with us at all times.

• 1:01:43Speaker 01

  And, and Apple, you know, bringing all of this silicon design and production in-house, or at least design in-house, does allow them to, to create the, the best possible experience of, of this several device ecosystem talking to each other. As we've seen with the ear pods, providing a meaningfully better experience than pairing most Bluetooth headphones.

• 1:02:05David Rosenthal?

  Yep, I completely agree. And I think that, you know, the truth lies somewhere in the middle. And the reality is, um, you know, as we talked about, we are still, this is what makes, you know, our jobs fun and technology as an industry fun. Like, we're still early enough in the next wave or waves, uh, you know, whatever they will be, whether it's, you know, machine learning driven services, or sensor and very intimately personal device driven technologies. But we're still early enough to, that these stories haven't been written yet. And, and these waves come so fast in technology that, you know, both of us have been in this industry less than 10 years and we've already experienced, you know, multiple waves. It's what keeps it fun.

• 1:02:47Speaker 01

  Yep, yep. All right, moving on to follow up.

• 1:02:49David Rosenthal?

  Yeah.

• 1:02:50Speaker 01

  We got, we got three things. So, uh, we covered in our first non-technical episode, the merger of Alaska Airlines and, and Virgin, and, or Virgin America. And, uh, I, I sent David a picture recently of, uh, I was flying back, um, from vacation, had a, uh, a little insert in, in my Alaska seat in front of me. And they really, really, really embraced, um, messaging to all of their, uh, their customers that, that they're merging. In the, the seat back pocket, there's little information things. All the flight attendants were wearing these like really well-designed, um, shirts that blend the, the Virgin brand into the Alaska brand, and extremely informative, uh, information on how all the, um, all the

• 1:03:33Speaker 01

  point stuff gets, gets combined. And so I think they're, they're just rolling that out now to combine all of their, uh,

• 1:03:40David Rosenthal?

  The loyalty programs?

• 1:03:41Speaker 01

  Yeah, yeah, yeah.

• 1:03:42David Rosenthal?

  Yeah, I'm, uh, as a self-proclaimed quote, "West Coast resident," uh, Jenny and I, uh, we hardly think of ourselves as living in one city and more just up and down the West Coast at this point. And, uh, I'm- So excited. I think this is taking the great Seattle service that Alaska has and Virgin from SFO and LAX and Oakland. Super excited to merge these point programs and keep getting incremental status tiers.

• 1:04:16Speaker 01

  Absolutely. Number two, Mark Laurie is starting to make moves at Walmart. They just had a big reorg, created new positions, eliminated others. One thing that we talked about in the Jet episode was if they're going to be serious about rebuilding their organization as a true internet company at Walmart, and if they're going to be able to move that almost reverse-acquired DNA of Jet and infuse that in Walmart. And we're starting to really see the first steps now.

• 1:04:49David Rosenthal?

  Yeah. News just came out in a memo from Mark Laurie, basically reorging most of the e-commerce operations at Walmart.com. And unsurprisingly, it's mostly Jet folks who are taking over. And I think this, we talked about this on the Jet episode, but just even more firmly positions this as sort of a very, very expensive talent acquisition that Walmart did.

• 1:05:16Speaker 01

  Yeah. And it's interesting how, it's funny, the price tag actually may make it command more respect internally. Like, if they had bought it for $1 billion, you could see like people inside being like, eh, we don't have to listen to this guy. But with like a more expensive price tag comes a more necessary adherence.

• 1:05:35David Rosenthal?

  Man, that is some dysfunctional organizational behavior, as they would put it in business school. But I actually, I can totally see that being true.

• 1:05:47Speaker 01

  Yeah. And then one other thing that's kind of a tech theme we can pull out of this is when we originally started doing the show, it was for David and I to understand why successful acquisitions went well, what were the characteristics? And as we started companies in the future that would, if not IPO, hopefully sell to larger companies, how to make those more successful within the company?

• 1:06:08Speaker 01

  One theme that we immediately identified that Facebook does very well is this keep the teams separate mantra where you let teams exist on their own for a long time. This is a big part of change management, just sort of like message what's changing, message what's not, and allow the good things to continue for as long as possible from the smaller organization. A second big one that we're now seeing that I think we saw first in the Accomplice episode where Javier Soltero took the lead for all of Outlook at Microsoft is when you acquire the company, promote their leader to be the leader of the organization that they're coming into and allow all the goodness from the company that you acquired to actually

• 1:06:49Speaker 01

  grow in that much larger tree of the organization chart rather than existing just down in their little thing.

• 1:06:56David Rosenthal?

  Yep. Well, and I think it really, it really depends on what the acquiring organization's sort of goals and needs and realities are. Facebook can take the luxury with a lot of their acquisitions of letting them flourish and operate on their own because the core Facebook business at this point, we talked about on the IPO episode, at one point it was quite challenged, but at this point it's doing so well versus a Walmart where they're just battening down the hatches versus Amazon. And I gotta think, if I'm at Walmart right now and I see Amazon Go and Prime Air and drone deliveries, like I've got to be just

• 1:07:38David Rosenthal?

  terrified of what that's going to do to my business. They don't have that luxury.

• 1:07:44Speaker 01

  Right, right, right.

• 1:07:45David Rosenthal?

  Third and last follow-up we wanted to do is the news to be expected. Drama is mounting around the Snap Inc. IPO that is hotly expected in a few months. There was an article, a series of articles, I believe right at the end of 2016 about potential fraud at the company and overstating their growth numbers. And then news just came out this week that unsurprisingly there Evan Spiegel and Bobby Murphy are going to have super voting shares and control the vast majority of the voting shares of the company. This is going to be, this is going to make for an excellent acquired episode when the IPO

• 1:08:27David Rosenthal?

  finally does happen later this year. We can't wait to get all these issues at least resolved in the context of the IPO and dig in.

• 1:08:35Speaker 01

  Yep, I can't wait either.

• 1:08:36David Rosenthal?

  All right. With that, should we wrap up with carve outs?

• 1:08:38Speaker 01

  Yeah. So mine, I was going to recommend a whole blog, but I want to save more posts on this blog for future carve outs because there's so many good ones. There's a guy named Michael Lopp, who was a longtime engineering manager at Apple and then Pinterest. And now I believe he runs engineering at Slack. And he writes under the pseudonym Rans and he writes at randsinrepose.com. And there's a great, a great piece that he wrote late last year called "The Situation." And it's about that situation where something bad happened at your company. You need to have a meeting about it. Everybody is sitting there in the meeting and kind of the, all looking at each other like, uh oh, what's the right

• 1:09:23Speaker 01

  protocol for this? Like, who's on the line? What do we need to do? What are the steps? And it's, it's all about the way that you feel in that moment and a really beautiful writing style and a pretty good actual means of dealing with escalation like this and understanding, you know, what are the logical steps that need to be taken in varying types of situations? So just love his writing style. Obviously, the content is super applicable for, for anyone in a tech or engineering organization and highly recommend it.

• 1:09:56David Rosenthal?

  Yeah, probably even beyond tech and engineering organizations, the number of quote unquote situations I come across on a monthly, if not weekly basis. I need to read that post.

• 1:10:11Speaker 01

  It's great. He wrote, it's, it's part of a, a lot of his posts are basically the pre writing for a book called Managing Humans that he's got. So I think, I haven't read the book yet. It'll probably be my carve out when I actually do read it, but highly recommend it.

• 1:10:26David Rosenthal?

  It reminds me of, total aside, but when I, when I first, when I came back from business school to Madrona and first started working on, on, on boards as a venture capitalist, I asked Sudhul Patel, who was the founder and CEO of iSolan, who's a very successful storage company and former Madrona portfolio company in Seattle, you know, sort of what advice he had as a successful CEO and having worked with lots of VCs, you know, Madrona and Sequoia and many others on his board and, you know, what advice would he give me? He said, you know, the biggest thing, just don't freak out. And I've tried to take that to heart, you know, it's like, things are gonna happen in any journey.

• 1:11:08David Rosenthal?

  And if you freak out as a board member, then you make me as a CEO freak out. And then that makes everyone else at the company freak out. And then that leads to bad decisions, you know. I love that. Keep a steady hand. Cool, cool. My carve out is a fun one. Jenny and I were staying at Airbnb for a wedding this weekend in New York. And there was, they had this, the host had this, this book on a bookshelf there called Daily Rituals. And I thought, that sounds interesting. I'll pick it up and see what's in it. And it's this, it's this cool book. It's a collection of sort of one to two pages each on really famous artists and thinkers from the last couple hundred years. And just what their daily routine was like, like, what did they do?

• 1:11:54David Rosenthal?

  How did they get their work done? You know, how, what, how did they spend their time? And super interesting in the wide variety of, you know, some people like Benjamin Franklin and others like very, very disciplined. You know, very, you know, very regimented in their lives and, you know, devoted hours to work and really good health habits and those things. And then others are like, you know, Voltaire, Voltaire like spent most of his time just lounging in bed and he would write in bed and dictate and like, you know, drink, cope massive amounts of alcohol. And then other, you know, people would do all sorts of drugs and like, it was the doubly interesting thing about it is, you know,

• 1:12:37David Rosenthal?

  each title of each person had their birth year. And then if they were deceased, their death year, there seemed to be no correlation between longevity and, and degree of hard living. You know, people who were the most disciplined like would die in their 50s and people who led the craziest lives would live into their 90s. Like, just interesting. I'm not sure that that justifies living a crazy life, but. Yeah, David would be recommending here. Yeah.

• 1:13:08David Rosenthal?

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

• 1:13:15Ben 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.

• 1:13:25David 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.

• 1:13:46Ben 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.

• 1:13:58David 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.

• 1:14:09Ben Gilbert?

  That's it for today, guys. If you aren't subscribed and you want to hear more, you can subscribe from your favorite podcast client. And if you feel so inclined, we'd love a review on iTunes or any sharing you could do with your friends, family, coworkers, social media, whatever you feel is appropriate.

• 1:14:25David Rosenthal?

  Yeah, and just a quick preview. We've got some great episodes in the works with some really special guests. So we're looking forward to the next few months here at Acquired. We also have some new stuff coming on the show, and we can't wait to share it with all you guys.

• 1:14:41Ben Gilbert?

  True that.

• 1:14:42David Rosenthal?

  That's a teaser, but stay tuned. We've got exciting stuff coming soon.

• 1:14:47Ben Gilbert?

  Well, how about this? Join the Slack and we'll tease a little more.

• 1:14:51David Rosenthal?

  Yeah.

• 1:14:52Ben Gilbert?

  Awesome.

• 1:14:53David Rosenthal?

  All right. Talk to you guys soon.

• 1:14:54Ben Gilbert?

  Later.