The Steve Ballmer Interview

We sit down with Steve Ballmer, the legendary former Microsoft CEO and owner of the LA Clippers, for an epic conversation covering his 34 years at Microsoft. Steve listened to our Microsoft episodes and had some thoughts to share — and boy, did he deliver. Steve takes us point-by-point through the original IBM DOS deal that started everything, how he built Microsoft's enterprise business from scratch, and offers his candid reflections on missing mobile and search. We also cover the story behind “developers, developers, developers”, the complexities of his relationship with Bill Gates (including a year where they didn't speak), and why he ultimately decided to step down as CEO. Plus, we learn why Steve has held onto his Microsoft stock through it all — giving him arguably the best investment track record in the world over the last 10 years with his net worth growing from $20B to $130B since leaving. And of course, we couldn't resist also talking about his other passion: the Clippers and Intuit Dome. Hit play and get ready to experience the patented Steve Ballmer energy and fun on full display! *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! _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.

• 0:00Ben Gilbert?

  All right. So David, Steve gave us the signed Clippers jersey with the name Acquired on it. There's only one jersey. What are we going to do about this?

• 0:12David Rosenthal?

  Should we rock, paper, scissors for it? Well, you know what? No, no. You keep it. There's no Seattle basketball team. Keep it there.

• 0:22Ben Gilbert?

  All right. All right. It'll go in Acquired Museum North.

• 0:25David Rosenthal?

  Great.

• 0:26Ben Gilbert?

  Perfect. All right. Let's do it.

• 0:28David Rosenthal?

  Let's do it.

• 0:45Ben Gilbert?

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

• 0:55David Rosenthal?

  I'm David Rosenthal.

• 0:56Ben Gilbert?

  And we are your hosts. Steve Ballmer is, among other things, arguably the very best investor of the last 20 years. It sounds a little funny to frame it that way, but here are the numbers. In 2014, when Steve left Microsoft, his net worth was $20 billion, almost entirely comprised of Microsoft stock. Today, 11 years later, it is a staggering $130 billion, according to Forbes. It is incredibly rare to reach this stratospheric level when you are A, not the founder of the company, and B, no longer CEO or even employed by the company. And all of this comes from just one investment decision. Just

• 1:40Ben Gilbert?

  keep holding substantially all of his Microsoft stock.

• 1:45David Rosenthal?

  Incredible. We chat about it with him in the conversation to come.

• 1:49Ben Gilbert?

  Now, as most of you know, we did a big two-part Microsoft series last year on the history of the company up through when Steve transitioned the CEO role to Satya Nadella. Steve, listen to those episodes and he had some thoughts that he wanted to share with his recollection of how things went down. You know, things like what made Microsoft so fabulously successful, what his Missteps were as CEO. We wanted to share that as a recorded conversation with all of you. So we set up our cameras and our mics at his office, his philanthropy office, Ballmer Group in Bellevue, Washington, and we pressed record. So we'll go into everything from the misses on mobile, search, social, the huge wins in enterprise and cloud. Steve also reflects on his business

• 2:33Ben Gilbert?

  lessons learned. He goes into why he stepped down as CEO when he did. And he talks about his relationship with Bill Gates over the years. And of course, we had to talk with him a little bit about the Clippers and the new arena that Steve built and personally owns too.

• 2:48David Rosenthal?

  Yeah, into a dome. Incredible place. A cathedral of basketball, as Steve would put it.

• 2:54Ben Gilbert?

  Listeners, if you want to know every time an episode drops, check out our email list. It's the only place where we will share a hint of what our next episode will be. We'll share episode corrections, updates, and little tidbits that we learned from all of you about previous episodes. Come join the Slack to talk about this with us and the whole Acquired community. That is acquired.fm/slash/Slack and the email list is acquired.fm/email. If you want more acquired between our monthly episodes, check out ACQ 2. We just released one with Zach Perey, the co-founder and CEO of Plaid.

• 3:27David Rosenthal?

  And we've got some banger ACQ 2 episodes coming up.

• 3:31Ben Gilbert?

  Yes, we do. So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. Onto our conversation with Steve Ballmer. Well, Steve, first of all, I noticed you you prepared some printed materials here for us. Listeners should know, we didn't ask for this in any way, but at 10:00 PM last night, you sent us a PowerPoint deck and said, I made you some slides. Sorry it got here so late. And Dave and I are looking at each other like we didn't ask you to prepare for this. Thank you for the materials.

• 4:06Speaker 02

  Oh, it's just some stuff that I've used kind of with thoughts about how businesses work. And I kind of think of this as a time to reflect on things I've learned primarily at Microsoft, but also the Clippers about business. I figured, eh, I'll send them to you.

• 4:22David Rosenthal?

  And their PowerPoint.

• 4:26Ben Gilbert?

  I saw you mixed a few different templates.

• 4:28David Rosenthal?

  Yeah, yeah.

• 4:29Ben Gilbert?

  Always a cheerleader.

• 4:30David Rosenthal?

  Always.

• 4:31Ben Gilbert?

  There you go.

• 4:32David Rosenthal?

  I think the word cheerleader is actually in the PowerPoint deck though.

• 4:34Ben Gilbert?

  Yes. Great.

• 4:35David Rosenthal?

  Well, Steve, speaking of reflecting, we sit here today, Microsoft is the most valuable company in the world. Almost three and a half trillion dollars in market cap. And I think everybody would agree it's an enterprise company. And that's largely thanks to you.

• 4:54Ben Gilbert?

  Is reasonable to call you the founder of Microsoft's enterprise business. That is not a narrative that is often discussed. And we wanted to ask you, how do you feel about the fact that it basically defines the business today?

• 5:09Speaker 02

  Yeah. Interesting. Very kind, fathering something, I feel good about that. And I think there's a lot of truth to that. Of course, there are many fathers to the enterprise business at Microsoft. And I feel both good and bad about it. Because the truth is, Microsoft started out as a consumer company. And we built a very important consumer business. That success translated into the opening to go build an enterprise business. And one of my regrets is we lost the consumer muscle along the way. Because I think the ability to be ultra, ultra, I mean, we're a great company. Microsoft's a great company.

• 5:51Speaker 02

  But to have both of those muscles totally firing, if I'd been able to sustain that consumer muscle. And I had some ideas about why, why that didn't happen. But the enterprise muscle? Muy macho. It got very big and very strong. And so I'm very proud of that. And the fact that, you know, it's also funny when you say consumer and enterprise.

• 6:19Speaker 02

  What does it mean really to say enterprise? Sometimes it can sound just like backend stuff. And the truth of the matter is Microsoft Office slash M365, whatever exactly it's called today, is super important. It was the foundation for having permission to be in the enterprise. And yet it's a product that sits right there in front of users. So the question is, do you think about users or consumer? And do you think about enterprise? Or do you think about IT? And then there's developers that span both. And that's kind of my mental model. Do you have products that appeal to consumers? That IT can handle?

• 7:04Speaker 02

  And a platform that lets developers build around those? And based around those, whether they're building for users? Users and IT? Or in some instances, just for IT people? Because there's a lot of tools that are just for IT people.

• 7:19Ben Gilbert?

  Yep. Well, to contextualize all this, we want to go back almost all the way to the beginning, right around the time you joined Microsoft, and talk about Microsoft's relationship with IBM. Before the IBM PC and before DOS, can you catch listeners up who weren't around at that time? What was IBM in that era?

• 7:40David Rosenthal?

  Yeah, I think you called it to us when we were talking to you for research, "The sun, the moon, and the stars."

• 7:45Speaker 02

  Yeah, I did, I think. Well, it's 1980. When I get here, and the company started, obviously, in 1975. And there were IBM computers. Oh, yeah, and a couple others. But literally, people would say, there's IBM and the bunch. And the bunch was Burroughs, Univac, NCR, Control Data, and Honeywell. But they were just the bunch. IBM, and IBM did the mainframe. And it did the software. And it did the service. It did everything in computing. Everything, everything. And then you had this little upstart, try again, called Digital Equipment.

• 8:29Ben Gilbert?

  Yep.

• 8:29Speaker 02

  Very important in our story because Dave Cutler, who was kind of the father of NT, Windows NT, he came from Digital Equipment. And they were fighting. They were scrappy. They were mini-computers, so smaller than a room.

• 8:43Speaker 02

  But definitely bigger than a PC, if you will. And all the initial Microsoft software was developed actually on DEC computers. Digital equipment equals DEC. And DEC had a nice business, but it was a lot smaller than IBM. If IBM breathed, that was the direction the computer industry would go. And IBM was the subject of an antitrust lawsuit, shockingly, in 1969. That didn't actually get settled, I think, to shortly after I got here in the term of Reagan. So 11 years they'd been living because they were that big and bad and mighty.

• 9:22Ben Gilbert?

  And what was the result of that antitrust action? What did they have to do?

• 9:28Speaker 02

  I don't remember. It may be when they had to unbundle. In fact, I think it was when they had to unbundle the operating system from the mainframe hardware. So people could build IBM compatible mainframes. And then one day, shortly after I got here, some guys from IBM call and they say, hey, can we come see you? And you're going to have to sign an agreement that says you can use nothing we tell you. Anything you tell us, we can use. And so these guys showed up and they told us after we signed their agreement that they wanted to build a PC. And they were hoping to get the operating system and some of our language software for it.

• 10:09Ben Gilbert?

  And they were coming to you for the language software?

• 10:11Speaker 02

  No, they came to us for the operating system.

• 10:14Ben Gilbert?

  Ah.

• 10:14Speaker 02

  Now, why? You'd say, we weren't in the operating system business. We had a card called the CPM soft card or the soft card for the Apple II. It was a card that plugged into an Apple II that ran CPM, not our operating system.

• 10:32Ben Gilbert?

  Gary Kildall.

• 10:33Speaker 02

  Gary Kildall, Digital Research was the name of the company. But we had licensed it to put on this card that plugged in the Apple II. And somehow IBM thought they could license CPM, even though it wasn't our product, they thought they could license it from us. And we said, no, no, no, but you can license our language software. But there are these guys down in Pacific Grove, California, you know, and Bill called Gary Kildall and said, there's some guys, they want to talk to you. They're important and Gary, they went down there and they didn't sign the nondisclosure agreement. And in the meantime, there was a company here in Seattle called Seattle Computer Products that had a little CPM clone.

• 11:18Ben Gilbert?

  And so the licensing of Microsoft DOS, which didn't even exist when IBM approached you about licensing some things, is the single greatest business deal in history. The licensing of that software to them.

• 11:33David Rosenthal?

  We made that contention on our episodes.

• 11:34Ben Gilbert?

  Well, I just think you look three and a half trillion dollars later at Microsoft's market cap. This kickstarted it all.

• 11:39Speaker 02

  It was pretty good. Literally, there was a company that happened to be here in town. Paul Ellen and I went down there and we met with the founder who later came to work at Microsoft, a guy named Tim Patterson. And we offered him, I think we paid 45 or 49,000 for this operating system because we told IBM, no, no, we can take care of it. There was kind of a famous meeting amongst me and Paul and Bill and this guy Kazuhiko Nishi, who ran our kind of affiliate in Japan where we were talking about this. And there was a lot of, let's just say, four-letter words thrown around. Screw 'em. Screw 'em's

• 12:23Speaker 02

  five letters, but you get the, you get the drift. Screw 'em, screw 'em. Let's just go get this operating system. Screw 'em. We can do this. Let's go. That was kind of the theme.

• 12:34David Rosenthal?

  Kaz was kind of a cowboy.

• 12:35Speaker 02

  He was kind of, yeah. Yeah. Nishi, absolutely a cowboy. So we went, we sold it to him, half of what we paid for it. We thought, we can do this 10, 20 times. 20 times 21,000, 400,000 against, you know, 50,000 we paid for. Pretty good deal.

• 12:52David Rosenthal?

  So yeah.

• 12:53Speaker 02

  It was a little better than that, as you said, Ben.

• 12:55David Rosenthal?

  Talk us through the structure and how you guys thought about this. Cause.

• 12:58Speaker 02

  Yeah, I'm sure you're right.

• 12:59David Rosenthal?

  You did not make a lot of money directly from this deal.

• 13:01Speaker 02

  No, we did not. We remember the key thing was, we didn't charge for the operating system on an ongoing basis. We charged for it one time. If you got a new version, we charged another time. And we did the same thing for BASIC and everything else because at the time, you could think we were like a substitute for an R and D department, which means we were fixed price. It was only.

• 13:30Speaker 02

  I don't know, four or five years later that we actually switched to licensing per unit as opposed to just fixed fee. Here it is. Pay us once and we're done.

• 13:40David Rosenthal?

  But the ultimate thing that you guys negotiated was a non-exclusive deal. You could sell this operating system and your language interpreters, but also mainly the operating system to other manufacturers. Like this is IBM we're talking about here.

• 13:55Speaker 02

  But IBM wanted this.

• 13:57David Rosenthal?

  Okay.

• 13:58Speaker 02

  IBM, they were experimenting with a different approach. They'd said, look, instead of us building everything all custom, we want to use some industry standard parts, components, because that'll let us be more agile, et cetera. So they didn't come in loathe to any of this. They knew that was our business. They know that was digital research's business. And, you know, they wanted to use an Intel part versus their own proprietary part. They didn't ask Intel to do them a custom part either. The notion was we'll move fast. We'll get away from the IBM bureaucracy by taking this approach. So I wouldn't say that was the hardest convincing, if you will, in the, in the story.

• 14:40Ben Gilbert?

  But what ended up happening after all these years, and I imagine it only took a few years to see it play out, was IBM sold a ton of IBM PCs and DOS was the operating system. And then everybody else adopted DOS because all the application makers, all the software vendors were targeting DOS as the platform. And so Microsoft sort of accrued a huge amount of benefit.

• 15:08David Rosenthal?

  You became the point of integration.

• 15:10Ben Gilbert?

  Yeah. In the old world, IBM would have accrued that sort of platform benefit. Did they see these?

• 15:14Speaker 02

  They were selling a lot of computers and making profit also. They would have been making more profit than we were at the time, just the way pricing worked. There was a little twisty in here, though, I should throw at you if you're curious. These things had something called the BIOS, Basic Input Output System, which was the lowest, lowest layer of firmware, sort of first level software built into the hardware. And IBM had its own BIOS. And some applications became BIOS dependent. And so then the question is, who was going to do an IBM compatible BIOS? We weren't going to get into that game. We didn't want to have that. Intellectual property, other arguments, but there were people then. Compaq ultimately became the big company.

• 15:58Speaker 02

  Compaq became the big company. I don't remember whether they wrote their own. I think they cleaned. IBM compatible BIOS, but they were the first one to be IBM compatible. There were plenty of people who ran MS-DOS, who were actually not IBM compatible because they didn't do a compatible BIOS.

• 16:15Ben Gilbert?

  I see. So IBM sort of thought, oh, we've got some protection from Microsoft kind of disintermediating us from all the developers and all the potential customers because targeting our BIOS is going to be important and unreplicable.

• 16:29Speaker 02

  Now, one thing you have to remember, because we live in the modern world now, when you say all the developers, that wasn't a log list.

• 16:40Speaker 02

  Remember, there was no software industry to speak of. Right. This is the creation of the software industry. There were a couple of software companies that made packages for IBM mainframes, but almost everything was custom. So really, I would say we, a few other companies, but I would say we, we defined what a modern software business looked like. And the notion that there could be lots of developers, and there were some, but it's not like we think today. Oh, there was developers doing lots of standard applications. No. And there was no licensing model, no business model, no, no nothing. Visicalc was around.

• 17:21Ben Gilbert?

  So it would have been counterintuitive or required too many mental hops to think, we're IBM. Wait, are we giving away the future by allowing someone to distribute a wide operating system that ends up being the target that everyone standardizes on, which eventually created all of modern Microsoft.

• 17:38Speaker 02

  Exactly. I mean, just, you, you sort of can't blame them because there was nothing to build off of, but yeah.

• 17:48Speaker 02

  One of the things my little PowerPoint here says is luck is important in the creation of great companies. It is. And a lot of people, you know, sort of say, we're masters of the universe. We figure everything out. We never have any luck. And it's because we're so talented. Sure, there are talented people and hardworking people. But most people have a little luck in their story. And this, this was our big luck.

• 18:15David Rosenthal?

  Clearly. But when you were negotiating this, signing it, and then those first couple of years before the clone market really took off, like, did you think that this could happen?

• 18:26Speaker 02

  No. I can't remember what year it would have been. But Andy Grove, who was running Intel at the time, said, yeah, pretty soon we'll be selling 100 million PCs a year. I don't know. Sometime in the 80s, I think. It might even been in the 90s. And Bill and I laughed and said, ah, that's not gonna happen. We invested big time. And if it did happen, we said, that's great. We're not going to under invest. But we thought, ah, he's crazy. This market will never grow like that. I would say we classically under forecast. That was kind of our tendency.

• 19:07Ben Gilbert?

  So the deal gets signed with IBM. You end up shipping DOS. It goes on the IBM PC. It's selling like gangbusters. When did you start to realize, whoa, what we have here is actually leverage over the ecosystem? We actually are becoming the important layer that ties this whole computing world together with the operating system?

• 19:32David Rosenthal?

  The personal computing layer.

• 19:32Speaker 02

  I think by the mid to late 80s, I mean, you make it sound very strong. No, we didn't feel very strong. There was IBM, man. IBM was still the sun, the moon, and the stars. That didn't change.

• 19:51Speaker 02

  You know, I would say we didn't drop that theory well, well, into the 2000s.

• 20:00Speaker 02

  Into the 2000s, Lotus Notes was coming for us and that was mid 90s and beyond. But maybe, maybe you could say, but we were in an enterprise company. If you looked at the enterprise, the enterprise was still. IBM. IBM. We used to say, we had to hang on to IBM that if we ever let go, they might trample us. We called them the bear. Called this riding the bear. You had to stay on. And of course graphical user interface, it's kind of coming out of Xerox PARC at the time and Apple's doing their thing and we start, that's another disruption, could blow everything up.

• 20:39Speaker 02

  So I would say, no sense of confidence about controlling the ecosystem well into the 90s before I think any of that, or at least for me.

• 20:53Ben Gilbert?

  When did you start to feel like we're getting out from under the thumb of IBM? And maybe walk us through a little bit the OS 2 Windows world.

• 21:03Speaker 02

  So we've been staying with IBM. They decided they wanted to build something that was sort of their operating system and sort of not. This is 82, 83. We and they would collectively build part of it. We would be able to license it to others. They would build a value add layer that was a database and a 3270 emulator. Crazy to say now, we were going to work on the operating system and what was called Presentation Manager, call that the graphical user interface. And they were going to have rights equivalent to ownership in the code we wrote.

• 21:41Ben Gilbert?

  This sounds so convoluted.

• 21:42Speaker 02

  It was so convoluted. Man, there was a time when I made 16 trips to the East Coast in 16 weeks, most of them to South Florida, a couple of them to New York, leave. On the red eye, the Delta Dash flight at around 11, get into Atlanta around 5, get the flight to West Palm Beach at about 7, get in and be able to be at a meeting at 9 o'clock at IBM, and then work all day, catch the 7 o'clock flight home, be here about 10:30 or 11:00, 24 hours down and back because if you're building something together, remember, there's no real email at the time. Right.

• 22:24Speaker 02

  We were literally shipping disks back and forth. And then they decided they were going to do the presentation manager piece in England. So there were also been a lot of flights to England. Oh, my God. And then Texas is where the database and communication. This sounds so IBM.

• 22:42Ben Gilbert?

  This sounds like Boeing.

• 22:43Speaker 02

  You know, we call it, it was the joint development agreement and it was the price of staying involved with IBM. And it was convoluted and we did then keep for, for speed of action, we kept going on Windows, which we had started. For listeners, everything we're talking about is OS 2. OS 2. Operating system that basically never comes to be. And there was OS 2 Extended Edition or something, which had their addition. And Windows was like your plan B. It was like your side. No, Windows was our plan. And then they wanted, they, they wanted to do this new operating system and we convinced them, you gotta have a graphical user interface. And we tried to sell them Windows and they were resisting.

• 23:24Ben Gilbert?

  Okay, so it almost seems like you're humoring IBM at this point with, yeah, let's do OS 2 together. We really think the future is Windows.

• 23:34Speaker 02

  Hey, humor.

• 23:36Ben Gilbert?

  It's more than lip service.

• 23:37Speaker 02

  I would say, you know, my job was managing by then system software. So I had Windows, I had shipped when I'd been the development manager for Windows 1.0. Oh, the great videos of you from the Windows 1.0 launch are so good. That's the sales side. I actually managed the engineers. Yeah. Because the guy who was doing it wasn't being successful and we had to ship the thing. And so that's when I learned some about engineering management from the engineers, basically, at the. Teach me to be effective. We're trying to keep with OS two. Bill's very frustrated with IBM. I'm frustrated, but I know my job is to ride the bear.

• 24:17Speaker 02

  And so Bill's pushing Windows hard, but we still suspected OS two could be the winner because it came from IBM. But we couldn't just like stop for three or four years. We couldn't make the mistake we sort of made in the thing that became.

• 24:33David Rosenthal?

  Vista.

• 24:33Speaker 02

  Vista. So we kept going with Windows. We kept going with OS two and then May 1990. They come along and shoot us. I was out running with my wife.

• 24:47David Rosenthal?

  Wait, IBM shot you?

• 24:49Speaker 02

  Yeah, they divorced us. They threw us out.

• 24:52David Rosenthal?

  I thought the story was you all, Windows was getting gathering strength and you all thought like, you know, maybe we can step out from the little brother.

• 25:01Speaker 02

  No, no, no, no, no. They had a new leader by then, a guy named Jim Cannavino. And he was getting frustrated with us because we were still selling Windows. We were still promoting Windows and they. I mean, look, this was our first antitrust problem. I don't know if you guys know this is the FTC at the time. But we and IBM were working to divide the market. Cause we had done some positioning. What's Windows good for? What's OS two good for? We and IBM had done that because. And then they said, no, you guys are colluding. And that's when we first got attention from antitrust authorities.

• 25:37David Rosenthal?

  This is even before the per processor licensing issue.

• 25:41Speaker 02

  Yeah, that came later. That came with the DOJ. This was an FTC case. And they started it in, in basically 90, just as we were getting, I think 90, maybe 89. As we were getting our divorce. My wife and I were remodeling our house. We were living in a condo. We stopped on a run, use a restroom or something. I pick up the Wall Street Journal and I read that IBM is divorcing us.

• 26:05Ben 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 prove 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.

• 26:24David 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.

• 26:45Ben 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.

• 27:07David 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.

• 27:25Ben 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.

• 27:53Speaker 02

  I pick up the Wall Street Journal and I read that IBM's divorcing us.

• 27:57Ben Gilbert?

  And so what does that mean? Walking away from the OS 2 collaboration? Huh?

• 28:03David Rosenthal?

  Basically, they kicked you out, kicked Microsoft out, said, we're taking OS 2 in-house.

• 28:09Speaker 02

  Exactly. Exactly.

• 28:11Ben Gilbert?

  And so you're sitting there, Windows isn't powerful, Windows yet. Windows is this fledgling kind of idea.

• 28:18Speaker 02

  We still had something called the 640K barrier. You couldn't speak to more than 640K of memory. We didn't break the 640K barrier until I think Windows 3.1, which I want to say was 91 or 92.

• 28:31Ben Gilbert?

  So you're on this run. You see IBM is divorcing us. You don't really have confidence in Windows yet. What are you feeling? And what do you think the possible?

• 28:42Speaker 02

  Mr. Wizard! Whoa, shoot. Oh, my God. We were so... We were so, you could say energized if you like. Scared also works. It's like, oh, my God. Now we have to confront the bear.

• 28:57David Rosenthal?

  You're already like a billion dollar business at this point. By 92, you end 92 at 2.8 billion in revenue.

• 29:02Speaker 02

  Now IBM, it's still...

• 29:04David Rosenthal?

  But you're still a pipsqueak.

• 29:06Speaker 02

  We're still pipsqueak to IBM. And remember, we have no enterprise presence. And IBM has all dominant enterprise presence.

• 29:15Ben Gilbert?

  So who's using Windows and how are you selling to them at this point?

• 29:18Speaker 02

  Interesting. Single copies, some hobbyists and end users, somebody who says, hey, I really want to use a spreadsheet. And a lot of users in enterprises. So it wasn't going through IT. You'd have a user that would buy a PC on the expense account, probably for the department, buy a copy of Windows, buy a copy of Excel, like at an Egghead Software, it was a software retailer at the time, and bring them in and use them. And then IT started to get nervous about that. We knew most of the copies, not most, but many of the copies were winding up in businesses. What the hell? IBM's going to stomp us like a, like a bug.

• 30:02David Rosenthal?

  You just took as a given assumption that if IBM wants to stamp out this happening, it's going to happen. So we, if we want a future, we got to play with them.

• 30:10Speaker 02

  Yeah, that's what, that's why we were quote riding the bear the whole time because they'd stomp us out and they divorce us in 90. And then we say, oh my God.

• 30:20David Rosenthal?

  Okay. So at this point, your business, even though it's, you know, billion plus scale, it's selling to retailers to sell software, copies of software, DOS, Windows languages, apps.

• 30:31Speaker 02

  Not DOS. DOS was always sold to.

• 30:34David Rosenthal?

  OEM.

• 30:35Speaker 02

  Yeah, not always, but so much the lion's share, it's worth saying it was only sold because you needed a BIOS. Remember you needed a BIOS. So you had to have the hardware vendor build the BIOS into the machine, basically.

• 30:49David Rosenthal?

  So you've got that, the OEM business, which was.

• 30:51Speaker 02

  The OEM business was the biggest part of the business.

• 30:53David Rosenthal?

  Yep.

• 30:53Speaker 02

  And then we had this retail business and there was no notion of enterprise licensing.

• 30:58David Rosenthal?

  You've got no CIO relationships, no enterprise agreement, no.

• 31:02Speaker 02

  We had a couple of CIO relationships. The Air Force was the first big Windows customer.

• 31:09Ben Gilbert?

  Your first enterprise customer was government?

• 31:11Speaker 02

  Our first big Windows customer, at least as I remember it, was the US Air Force and they were buying single copies of Windows. You know, when you say government, there's really two governments in this country. There's government and there's the military and the military is a very, is a much more disciplined, advanced user of IT. They're just, they're just better. They're more professionally run than most parts of government. So yeah, it was the Air Force.

• 31:40David Rosenthal?

  So you've got like a little bit, but.

• 31:43Speaker 02

  We had like one or two customers just to prove we could actually serve big customers.

• 31:47David Rosenthal?

  As we understand it, you kind of had this realization at this point, once the divorce happens, well, I'm going to go figure out how to do what IBM does, like you personally.

• 31:55Ben Gilbert?

  And to put a finer point on it, the thing that we said on our episode, and I'm curious if it's true or not, is this was not Bill's passion area and you sort of raised your hand and said, I'll go figure out enterprise sales.

• 32:08Speaker 02

  Oh yeah, no, no, that that's for sure true. Bill's passion, Bill had passions a lot of places, but you know, you'd say the apps group and what Windows could deliver to the apps quite, quite appropriately, I'd say that's where, where a lot of Bill's brain cycles went.

• 32:26Ben Gilbert?

  Mm hmm.

• 32:27Speaker 02

  You know, I had also hired Dave Cutler. Dave Cutler had been the architect of the VMS operating system for digital equipment. And, you know, we had DOS and Windows and when we were talking to Cutler about coming here, he says, I don't want to work any toy operating systems. And I had to say to Dave, good thing, because we have a toy operating system. But Dave is the key to getting us there. You know, we said, look, you got to build an operating system whose API looks like Windows and whose user interface looks like Windows.

• 33:03Ben Gilbert?

  So developers can be familiar with it and write apps for it.

• 33:06Speaker 02

  Yeah, and you might make some changes because you have to, but it's got to be a robust operating system. It's got to have a secure kernel. It's got to have all of these things.

• 33:14Ben Gilbert?

  The product set that you had wasn't really enterprise grade yet.

• 33:17Speaker 02

  No, we had a joint development agreement, a joint agreement on land manager with a company called 3com. It wasn't all our stuff. We had a development agreement with a company called Sybase to do the SQL database because we were trying to figure out all these pieces IBM would have. And we didn't have any of that.

• 33:38Ben Gilbert?

  An operating system alone is not going to do it. You need all these other components.

• 33:41Speaker 02

  If you want to have backend infrastructure, we started scrambling on that in the eighties. So we had all these infrastructure pieces that we had to build if we wanted to sell to, I'll say, business customers. We weren't even thinking about, when you say enterprises, sometimes people think very large companies, but we couldn't sell the companies of 20 people without some of this for 50 people.

• 34:03David Rosenthal?

  You talk a lot now about this sort of management concept of building muscle. Is this where this came from of like that you should always be, you use the phrase in the weight room, building muscle ahead of what you need. Were you and Bill thinking this way in the eighties of like, hey, we need to be building up this muscle across all parts of computing and business computing?

• 34:25Speaker 02

  Well, Paul Allen.

• 34:28Speaker 02

  I mean, Paul's the key. Paul is the one who said, Bill said, we're never going to be a hardware company. And when the Altair came out, the first real sort of microprocessor based computer, Paul says, okay, let's write all the software that these things will ever need.

• 34:46Speaker 02

  So, you know, Bill and I had a lot of the execution around that. But, you know, that, that was the push. So, and Paul was cracking on me in the early eighties to start building an app group. Come on, Steve, come on.

• 34:58Ben Gilbert?

  It's not just systems. We need to have applications also. Any code that executes on a microprocessor, we should have a player in that market.

• 35:05Speaker 02

  And there was a Visicalc spreadsheet. Come on, Steve, word processor. Come on, come on, come on. Let's get the talent. Let's get going. And, you know, we were doing mostly college hiring at the time. And so, you know, okay. And then we met this guy, Simone, who'd been at Xerox PARC.

• 35:22Ben Gilbert?

  Charles Simone, right?

• 35:22Speaker 02

  Charles Simone, exactly. And he came, we met him through a mutual friend at 3com Corporation who'd been at PARC. And he really was the first leader of the apps business. But we licensed, I mean, look, we worked with other people the way IBM worked with us. Right? We went to Cybase and 3com and let's work together. And it wasn't exactly a JDA, Joint Development Agreement. But, you know, we worked with those guys the way IBM worked. I mean, look, the analogy now is a little bit Microsoft working with OpenAI. You know, when the, the big company works with the new company, how does that all play out over time?

• 36:08Speaker 02

  But, you know, I, I took over system software in 84. So that's when we're starting all this stuff. And you could say I was a little bit more enterprisy.

• 36:20Ben Gilbert?

  So, yeah, I'm looking at your chart here that you made for us. You've got 92 to 98 titled liftoff. And that's after the era where you talk about enterprise start.

• 36:30Speaker 02

  And you have your role switching from your role as OS division in the previous era to sales. The liftoff there, though, is mostly on Windows and applications.

• 36:42Speaker 02

  The liftoff isn't really enterprise. I mean, look, it was not until the late 2000s. People would say, you guys might find this funny, or maybe you even know it. Customers say, you're not an enterprise company. You're not an enterprise company.

• 36:55Ben Gilbert?

  As late as when?

• 36:56Speaker 02

  Oh, late 2000s?

• 36:58Ben Gilbert?

  Really?

• 36:59Speaker 02

  Absolutely. Absolutely. You're not enterprise green. You're not enterprise ready. Oh, I heard that so much.

• 37:07Ben Gilbert?

  And in 2005, who is? Yeah.

• 37:10Speaker 02

  You had Oracle out there. Remember, there were still mainframes and mini computers and people, you know, those things were enterprise ready. IBM had product still. You didn't have enterprise support. You know, our licensing, we had to evolve in the early 90s and then again in the late 90s. No, we didn't have those things. So, no, we weren't an enterprise software company.

• 37:33Ben Gilbert?

  Hmm.

• 37:33Speaker 02

  It was the late 2000s. You know, certainly it wasn't before 2005. It wasn't the beginning of my tenure. We were still trying to prove that we were an enterprise company. And now I just find it cuckoo that, you know, all Microsoft is characterized as is an enterprise company, which I'm not. I mean, I think it's more complicated than that, but I'm, I'm not going to say that that's not the primary muscle. For sure it is. But, you know, I, I, me, the company, I mean, I, I was hell bent and determined to prove we were an enterprise company.

• 38:06Ben Gilbert?

  Why was that? Why did you feel like this? Let's call it 92, 93, 94. Why did you feel like it's so important for us to attack that market?

• 38:16Speaker 02

  Easy, because that's where IBM could squish us like a bug.

• 38:21Ben Gilbert?

  Hmm.

• 38:22Speaker 02

  If we couldn't sell our stuff to businesses, only to consumers. We knew that by then. We'd only get so far because enterprises wanted some features and enterprise don't like, you know, okay, you can go to computer land and buy a few copies.

• 38:39David Rosenthal?

  And the consumer market, I mean, we're pre-mobile, right? So like, pre-mobile, the consumer market. Pre-internet, yeah, is big, but like, it's nowhere near IBM's market in the enterprise market. By revenue, no, for sure not.

• 38:53Ben Gilbert?

  So, we've talked a lot about the products. Let's talk about the go-to-market motion and this sort of invention of the enterprise agreement. What are the key pillars that you sort of came up with for the enterprise agreement? And why did they exist?

• 39:09Speaker 02

  Okay. Our first sort of software pricing packaging model for the enterprise was not the enterprise agreement.

• 39:18Speaker 02

  First, it was, you know, we sold you discs. Second, we came up with this notion of what we called select licensing. And you could make your own copies. And you just report how many copies you sold. Sounds rife with with challenges here. You tell us how many copies and just pay us what you what you did. The enterprise honor system.

• 39:44Ben Gilbert?

  Astonishing. And that's of Windows, that's of Office, that's.

• 39:49Speaker 02

  Windows typically by then came with the hardware.

• 39:52Ben Gilbert?

  So you're mostly using the OEM channel.

• 39:55Speaker 02

  For Windows, yeah.

• 39:56Ben Gilbert?

  Okay.

• 39:56Speaker 02

  Yeah, even to this day. You know, upgrades and stuff are sold direct to enterprises, but you know, the basic computer that comes to an enterprise would have the operating system licensed to the OEM. And so we were on, you can call it the honor system, but we just couldn't make people like buy discs from us or CDs from.

• 40:17Speaker 02

  Enterprises didn't like that. So we had this thing called select. And select had two problems with it. Number one, very hard to copies of software you print. And number two problem, we were selling upgrades and new licenses. And upgrades were like less than half the price of new licenses. So what does that mean? The company was headed to a world where its revenue was half of its existing revenue.

• 40:47Ben Gilbert?

  Yeah, unless you're growing new customers, new logos.

• 40:50Speaker 02

  Fast enough. So it was a real problem looking thing. And Bill and I, we'd always dreamed this thing where you get some recurring revenue. And then we came up to say, okay, well, why don't we just do a license? That you didn't have to count the number of licenses you printed, just the number of computers made life simpler. And we said, instead of doing sell you a new license and then God knows when we would sell you another upgrade or whatever. We'll do something that just says, hey, look, you sign up for three years. You pay us, you know, per machine and you just pay us the same amount of money each year for three years. And it sort of let us jimmy up the price of the upgrade.

• 41:34Ben Gilbert?

  Yeah.

• 41:35Speaker 02

  So we solved the upgrade price problem and. We solved the difficulty of administration problem and that was the enterprise agreement.

• 41:44David Rosenthal?

  And was it from the beginning of you get everything?

• 41:48Speaker 02

  No, that was a special enterprise agreement. So you got all the upgrades during that three year period to the products you licensed.

• 41:55David Rosenthal?

  But you were still picking and choosing, oh, I want Excel, oh, I want.

• 41:58Speaker 02

  You could, we were encouraging you to buy Office.

• 42:01David Rosenthal?

  Yep.

• 42:02Speaker 02

  But we also had this all you can eat license. I can't remember what we called that. But basically then I think you counted the number of employees and you could use any of our software for anybody. So we just tried to go simpler and simpler and simpler in the administration. Recurring revenue that didn't decline over time. And, you know, sort of as much as you wanted to eat, the upgrades, everything. We did want essentially what you have now, which is a recurring services business. But we didn't have the cloud. We weren't delivering things. But we're already on that path. I think we started the Energizer. You guys mentioned what we do with Energizer, which is where we wanted to run their IT department.

• 42:43Ben Gilbert?

  Right. They were a pilot customer for this concept, right?

• 42:46Speaker 02

  They were the first customer. I talked them into it. And this is beyond the enterprise agreement. This is where we actually want to run their stuff because we did want to get to this recurring revenue thing.

• 42:57Ben Gilbert?

  And David was referring to this concept earlier. We talked about it a lot on our Microsoft episode and then on our Epic episode. This sort of genius idea of you will get included in your license, a whole bunch of software, even if you're not ready to use it yet. So if at any point you're considering buying this different software package from this other vendor who's a, you know, they just make this one thing.

• 43:22David Rosenthal?

  Yep.

• 43:22Ben Gilbert?

  And then they look in their paperwork and they're like, oh, wait, actually we get that from Microsoft for free as a part of our, the thing we're already doing. Let's just do that. And as long as you're developing a lot of software every year, you can sort of indefinitely just make more and more and more stuff so that your customers don't need to look elsewhere as they expand their software needs. How did that come about?

• 43:44David Rosenthal?

  We'll start with Office.

• 43:47Speaker 02

  When we created Office, that Bill really drove drove that in a great, and we're selling Excel, Word, PowerPoint, and then we put these things together and people would complain. And we didn't always sell Office because people say our customers, our users don't use Excel. So we don't want Excel included. Okay, we had a licensing option for you, but it became easier and easier. People then departments, departments always and were in running IT at the time.

• 44:18Ben Gilbert?

  Still to this day.

• 44:19Speaker 02

  So we did sell you things that you might not be using, but it also, if you're trying to, you know, depart the departments, we already got it all for you. You may want something different than this department, but you know, we got it all for you. That was an attractive thing for people. And

• 44:39Speaker 02

  you know, there's an insurance aspect that I learned that IT people really want. They want peace of mind. That's part of what it means to be an enterprise. I want to make sure everything's secure. I want to make sure that everything is well managed. I want to make sure everything is well paid for. I want to make sure there's somebody to call if things go wrong. I want to make sure I bought everything. I don't want to look bad because either I paid too much or you know, I have holes in what I bought for people. So I view this and I might, I probably evolved my view to this over time. When you sell the enterprise, you have to

• 45:21Speaker 02

  provide peace of mind, which is kind of like an insurance policy. So buying more than you might be using or some users are using, it's an insurance policy.

• 45:31Ben Gilbert?

  And software has zero marginal cost and zero distribution cost. And so we're happy to mail you a few more discs if you need them.

• 45:38Speaker 02

  But we weren't even mailing discs by then because we had the enterprise agreement in place.

• 45:43David Rosenthal?

  So at a certain point along the way, you get to, well, I want to say the Holy Trinity, but I think there are more than three pieces of this, but the real killer suite in enterprises, which is Windows, Windows Server, Active Directory, Exchange, Office. And all of these pieces of software all work in orchestration to run your enterprise. You know, your users, they do their email on Outlook, which is part of Office, which runs on Windows, which uses Exchange, which uses Active Directory,

• 46:21Ben Gilbert?

  Which uses SQL Server.

• 46:22David Rosenthal?

  This SQL Server, all these things. How long did it take to get to that point? And what went into where, I mean, to my mind, that's when the enterprise is firing on all cylinders here.

• 46:35Speaker 02

  Okay, so that really comes with email boom. And email boom is late 90s slash beginning of 2000s.

• 46:46Ben Gilbert?

  Cause email is sort of the cart that pulled the whole.

• 46:49Speaker 02

  Oh yeah, no, it's the locomotive.

• 46:51Ben Gilbert?

  Enterprises wanted email.

• 46:52Speaker 02

  Yeah, when Accenture became a company, we started a joint venture called Avanad to help do essentially the Holy Trinity, to help install. Because you had, we needed support infrastructure and partners who knew how to set up the servers, provision, email, put all that in. We needed partners and we didn't have enough capacity. And that's why we started this thing Avanad with, which is a big, big company at this stage, with Accenture. And that was in the 2000s. I went on the board of Accenture.

• 47:24Ben Gilbert?

  But all this to say, the way you could kind of pitch an enterprise is rather than any of these other value propositions, David listed off a whole bunch of software. You could say, you guys want some email, right? We have the most reliable, robust way for your enterprise to adopt email, and it's going to come with all this other great stuff.

• 47:42Speaker 02

  And everything was nicely integrated. Because remember, you needed Active Directory to manage. You know, file shares to manage printers. I mean, it was used for a lot of, lot of different things. So it really did all kind of come together as kind of the integrated proposition. Like you say, you guys, you guys sort of made fun of the notion that we called all that stuff, the back office, as if that was.

• 48:09Ben Gilbert?

  Yeah.

• 48:09Speaker 02

  It was trivializing. No, no, no, so wrong, so wrong about that.

• 48:15David Rosenthal?

  We took that as a signal that Bill just didn't care about this.

• 48:17Speaker 02

  Oh, completely not right. I wanted it to call it the back office because you needed to buy the office in the back office. And the user, the consumer saw the office and the back office was the things that were in, you know, kind of the server rooms slash data centers, but a lot of them were server rooms. It's the same thing these days, but cloudized.

• 48:41Ben Gilbert?

  All right. So as we were preparing for this, there was, there's a bunch of big questions that we just desperately want your take on. A big one is around one of your most iconic moments. 1999, the developers, developers, developers speech. I've probably watched this clip 20, 30 times. Almost everyone listening has seen this clip. What is missing from this clip is all the context around Microsoft and what's going on in the world at this time and what you need to accomplish as a leader of this company. Help us set that stage and then understand why you went on stage that way.

• 49:17Speaker 02

  Well, remember by this time, we're not through our IBM competition and we got Linux competition now on the docket because Linux is competing with Windows Server. Linux is competing with Windows and there's a thing called Open Office. Open source software for Office is competing with Office. So we have all these things going on. We haven't beat Lotus Notes yet.

• 49:41David Rosenthal?

  And you've got antitrust coming.

• 49:43Speaker 02

  We have antitrust issues, of course, by then.

• 49:45Ben Gilbert?

  The culmination of the DOJ suit is happening within 12 months of this moment.

• 49:50Speaker 02

  Correct. But I mean, it's clear in all these competitions, the thing you need is third parties that reinforce what you've got, add value around what you've got. And I could say run on your platform, but I'll come to that later if you want to what a platform is and isn't, and if you want to do that, it's kind of interesting, I think.

• 50:11Ben Gilbert?

  Yeah, let's do it.

• 50:12Speaker 02

  Particularly since everything's called a platform these days. But anyway, so.

• 50:15Ben Gilbert?

  Let's take an aside here. Give us your definition of a platform.

• 50:18Speaker 02

  You could call it anything that is extensible. And it's the extensibility that quote makes it a platform. Because you're going to get people to extend the value you add. The question is, and the reason that's important is, applications are platforms too. Not just developer platforms. And people say that, they might mean Azure, AWS, or in the old days, Windows, or Windows Server, or Unix, then Linux. Yes, those are platforms, you extend them. But you also extend Office.

• 50:57Speaker 02

  You add value, partners plug in, they write applications, they use the file formats. All of this stuff is platform. And part of the issue, I think, for Microsoft is if you see yourself as just a platform company, A, platforms need apps. You want to have the top first-party app that runs on your platform. Otherwise, your platform can't get good. Office was the best first-party app on Windows, and that's how things get good. Outlook was the best first-party app on Exchange. There were other clients at one point, by the way.

• 51:42Speaker 02

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

• 52:18Speaker 02

  I said, yes, we can do that. And, and by 2010, I was just frustrated with myself and my inability to get people out of the, we're just a platform company. And I think to this day, you have to think app with platform. You have to think extensibility of the app and the quote platform. And I think we got caught on that. Maybe I got caught on it for a while, and I certainly got caught in my inability to tell people what the company needed to do, because people had such a culture then of saying, we're a platform company, we're a platform. And so now I go back to developers, developers, developers.

• 53:02Speaker 02

  I'm trying to tell people at that time, that third parties really mattered. And you, you got different opinions inside Microsoft.

• 53:11Ben Gilbert?

  And what event was this at?

• 53:13Speaker 02

  A developer conference, I think.

• 53:14Ben Gilbert?

  So it's for external developers?

• 53:16Speaker 02

  External developers. And, you know, who's Windows number one client? Is it Office? Or is it all developers? You ask the Windows team, it's all developers. You ask the Office team, come on, you gotta do for us what we need to do. You know, you have to, you have to be able to communicate that you really care about developers who are not your own, that you really want these things, because they may think, oh, it's all about running Microsoft Office. And we just had to tell people, we want you, we want you, we want you, we want you. And I think we got caught in thinking it's all about third parties and not also about our first party apps.

• 53:58Speaker 02

  And that's where you say, are you a, the word consumer sounds like unserious. Are you for users and for enterprises, which really means IT departments? Or are you for users and not IT departments? And do you allow both, all aspects of what you do to be extended by developers? That's the frame I believe in.

• 54:24Speaker 02

  You know, we had some issues over the course of where we went in the 2000. We can talk about that if you want to, but go back to 99. You know, come on, we need you, we need you guys on Windows. IBM still selling OS 2. Linux is right there on the horizon. It's, it's coming like a freight train.

• 54:41Ben Gilbert?

  Is the web starting to enter your psyche at all?

• 54:43Speaker 02

  The web's part of that, right? We're trying to get people to write for Windows Server. Good point. We're trying to get them to extend ActiveX controls. Yeah, this is the heyday of Netscape, right? We're the part of the browser. Uh, so we were trying to get our browser to be a platform, a unique platform. I'm sorry, embrace and extend, I think is what we said. We'll embrace the internet and we'll extend with these ActiveX controls. We need developers to do ActiveX. We need them to do Windows Server. We're just sort of getting ready on .NET. And, you know, I have my own kind of wild style. And, you know, how do you, how do you end a speech? You tell people you love them, that you want them. That's sort of the call to action.

• 55:25Speaker 02

  And that's where I think the developers, developers, developers thing came. I mean, there, before that one, there was a different video that people sort of characterized.

• 55:36Ben Gilbert?

  I love this company.

• 55:38Speaker 02

  No, it was my Windows video. I don't know if you've ever seen that.

• 55:40Ben Gilbert?

  Oh, of course, but wasn't that a parody? Don't people misunderstand?

• 55:43Speaker 02

  It was for fun. It was just a fun thing. It was not a real speech.

• 55:47Ben Gilbert?

  And it was for internal consumption where you're saying.

• 55:49Speaker 02

  Yeah, it was for sales.

• 55:50Ben Gilbert?

  For this low, low price.

• 55:52Speaker 02

  Yeah, I mean, there's a lot of little nuances in there. We were trying to get our people pumped up about Windows.

• 55:58Ben Gilbert?

  So what I was looking for there is the developers, developers, developer speech is one where you feel like we haven't really won the last battle yet. We're still in this death grip for enterprise developers or this death fight against IBM. And yet there's now Linux and the web for these more sort of like independent or platform of the future looking developers. And in some ways we're desperate to sell, to win, to say, hey, we have a great platform here. You need to come use our stuff.

• 56:28Speaker 02

  Exactly. I can't remember whether we're pre-lamp or lamp by them.

• 56:32Ben Gilbert?

  Yeah.

• 56:32Speaker 02

  But I don't remember. There's some infrastructure on top of Linux that people are using to write. You know, let's say their back ends, not their user facing code. And you know, we had, we had tons of competition. You know, the interesting thing is, you know, people say only think about your customer and never think about your competitor. I actually think you have to think about both. And ironically, we were pretty consumed with our competitor, which, which I think was essential. Uh, and we were pretty consumed about doing new things. But the competitor thing wound up being very important. I mean, we, we have no business. We're not in the enterprise. We could lose windows on the client.

• 57:16Speaker 02

  We have to, you know, and in the company, we weren't like really self-confident. The DOJ was really self-confident that we were kind of a lock and there was no competition and you know, life was easy. That's not where our heads were. Now, there is some time in the 2000s where I think we do. I do, we do. We, we think that extending, we did a slide once called Windows Everywhere. We used to use this on all these devices. And we became too wed to extending what we had versus jumping to something new. Because in a sense, we were too confident. Hmm.

• 58:01Speaker 02

  We were too confident. If we only Windowsized something, you guys make a point in your, your episode on us. Uh, you guys call it sticking with Windows too long, but that may be it. But I think, I don't think we stuck with Windows too long. I think what we did is we tried to put Windows in places that it didn't, it didn't naturally go. And we tried to be too Windowsy, both in the API and the UI and some things. Mobile being an obvious. Windows Mobile, exactly. And the car and. The car, uh, we did a layer on Windows that when you hooked your PC up to the TV, it had a simplified user interface. I remember this. It wasn't just Media Center, right? It was some. Media Center. Okay. Media Center. Yeah, yeah, yeah. Exactly right.

• 58:46Speaker 02

  So we became convinced either out of.

• 58:51Speaker 02

  To some degree paranoia and some degree confidence. You know, okay, well, our birthright here comes from Windows. That's our permission to enter the area. But then we also, in some areas, it just wasn't going to be extensible. So there was both a, like a fear and a overstated confidence in trying to take Windows everywhere.

• 59:15Ben 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.

• 59:29David 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.

• 59:43Ben 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.

• 59:53David 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.

• 1:00:10Ben 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.

• 1:00:26David 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.

• 1:00:43Ben 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?

• 1:00:52David 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.

• 1:01:03Ben Gilbert?

  Let's jump to this point, but what is the generalizable lesson here? You have Windows, this amazing piece of software with this tremendous multi-sided network effect around it. The logical thing to do is to continue to try and extend it and say, geez, wouldn't it be nice if the next great technology wave was also Windows?

• 1:01:24Speaker 02

  And that worked for us on Windows Server. So it's not like we didn't have an existence proof that the thing could work. But you know, if you're gonna, my little deck I gave you.

• 1:01:36Ben Gilbert?

  Yes, please.

• 1:01:37Speaker 02

  You know, if you're trying to skate to where the puck is, if you're trying to recognize, what did I call this, about capabilities? You know, if you're a startup in something, there's an ongoing business, you just keep enhancing your products. There's a line extension. Okay, we're going to add networking to Windows. No problem, you still call it Windows. It's related, but new. SQL Server, for example, was that for a while. It was related because we had a backend platform. Dynamics, somewhat related, our accounting, et cetera, stuff. Because, you know, there was some enterprise-y sales, but it was really new. And it turned out the phone was more like a startup. The phone was more like a startup.

• 1:02:22Speaker 02

  And recognizing and thinking about things and then asking yourself, what capabilities do you need? You know, I say get in the weight room. You've got to develop capability, you know, take a look at a capability we developed that is now essential. We didn't build it for this reason. Hardware design. Microsoft's a major hardware design company now. Now, I started it out mostly on the, you know, to help client-side devices.

• 1:02:52Ben Gilbert?

  Surface.

• 1:02:53Speaker 02

  Xbox, Surface, phone. And guess what? They use that mostly now in Azure data centers. I think the guy who actually runs hardware design used to be on Xbox. You know, the backend hardware design for the data center, the chip, et cetera, infrastructure. I'm pretty sure there were a lot of talent we brought in. So building capabilities is important. We built some capability, but we didn't build enough capability. We didn't see things as different enough. Okay, let's try to keep the comfortable Windows user interface because people understand it. It wasn't right for the phone. I don't even remember what processors we started out

• 1:03:34Speaker 02

  on, but I'm pretty sure we started out on Intel. Of course, that wasn't right. We tried to keep too much consistency, both out of sort of a fear that this was our permission to exist and out of a self-confidence that, you know, we had to put Windows everywhere.

• 1:03:52Ben Gilbert?

  So when should a company that has an existing fantastic business say, no, no, no, we cannot extend our existing franchise to this new world. This new world is going to be dominated by some new paradigm where we have no advantage. How do you play that?

• 1:04:11Speaker 02

  Then do we choose to get in?

• 1:04:13Ben Gilbert?

  Exactly.

• 1:04:14Speaker 02

  Then you have to choose to get in. I would say two things were true at the time for us.

• 1:04:21Ben Gilbert?

  And this is specifically about mobile?

• 1:04:25Speaker 02

  It's also about something else. It's a little bit out of search, too. There were two things that are true. Number one, you have to be focusing consciously on the issue. It's easy to get caught up and, you know, there's innovator's dilemma. It's a little different, but you get caught up in what you have. You get caught up in what you know. You get caught up in the capabilities and, and you, that's why I say to myself, you explicitly have to think about it. And look, if we hadn't developed a bunch of capabilities we had, the company, you know, AI, if we hadn't built Bing, company wouldn't have capabilities.

• 1:05:02Ben Gilbert?

  I was gonna get into, yeah, you built some capabilities in online services that will, we'll come back to that.

• 1:05:07Speaker 02

  We built some important capabilities, but we didn't realize the businesses were enough different to harness those in the new ways. I'm proud of the capabilities we built. Didn't apply them the way we should have. You know, where did we learn to build internet-scale infrastructure? Well, some, some with Azure, some certain, even more than Azure, no, even more than Azure to get started. The Office, what's now M365, the Office backend, because that got critical mass as a cloud infrastructure before Azure did. And even more so with Bing.

• 1:05:48Speaker 02

  So we developed the capabilities, but then you look at the product and what was our strategy for Bing? Well, there's too much based upon Windows integration.

• 1:05:59Speaker 02

  You have to say this is a separate.

• 1:06:00David Rosenthal?

  Before the Bing rebranded, it was like Windows Live, right? Windows Lives search.

• 1:06:04Speaker 02

  Everything was Windows Live, OneDrive.

• 1:06:06David Rosenthal?

  You're not going to be Google with Windows Live.

• 1:06:08Speaker 02

  The file sharing. I mean, look, Google's done the same thing. And you got to ask, where do you run out of gas?

• 1:06:14Ben Gilbert?

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

• 1:06:40Speaker 02

  Yeah. We can't fight Google head on. You can tell yourself that. Look, how late were we to search? The answer is, you know, when did Google start? 98?

• 1:06:49David Rosenthal?

  88, yeah.

• 1:06:50Speaker 02

  And we jumped in in 2003, I think we pushed. Now, you'd say five years is a lot, or you could say five years isn't that much. You could say we had no birthright. I mean, it's just a completely separate thing. We had no capability. We had nobody who'd grown up in that world. And, you know, we had some guys in Microsoft Research who could sort of start getting us there. We took talent that was doing other things in Microsoft. It's hard to go get new talent because search is brand new. There were people from Ink to me. Google had sort of sucked them up. So it took us a while to get off the ground. It took us a while even, to be fair.

• 1:07:30Speaker 02

  I think this is something both, both Bill and I debated, not just with each other, but just, we kicked around too much, how much, quote, "the verticals."

• 1:07:42Speaker 02

  In online services would be important versus search and portal is generic. So, search and portal is generic, but remember, we had a thing called Expedia. We build a travel site, we build a local information site called Sidewalk. We had a car shopping site, what did we call that thing? Carpoint. How much would the verticals be worth? And there was one vertical that mattered, except it wasn't really vertical. It's called all shopping. There was all information and all shopping.

• 1:08:14Ben Gilbert?

  And you got Google and Amazon.

• 1:08:15Speaker 02

  Doing all these detailed, specific things. Remember, we did a portal. We did that. And then eventually, we all, then we did search a few years later. We were just off. We had the wrong thing stacked ranked in the wrong way. My opinion, with 2020 hindsight. And we were spread too thin. So, he said, when should you get into a new thing? Well, you probably shouldn't get into five new things if you really only have the talent for one, two new things. That's number one. You know, Scott McNeely, his son, used to have this expression, he used, we gotta get all our wood behind one arrow.

• 1:08:54Speaker 02

  You know, it's nice to try, I mean, I was listening to you guys talk about Amazon and how they, okay, we're gonna try small things. But they also put in small cost structure. We put in big cost structure because we were already all in when we got into something. And so, in this particular case, a few years later, and then what do you do? You get stuck, we have permission to come from behind in a certain way here. Cause we've got windows. It's your point, exactly your point. So, there are lessons to be learned, but for a company that's got an established business, being able to get all the way outside of yourself

• 1:09:36Speaker 02

  and say, is this really like what we're doing? Cause you really want it to be. You really want it to be. Or does this really require a different approach? That doesn't totally ignore, but doesn't take into account what you own any more than the person starting it afresh?

• 1:09:58Speaker 02

  Can you hire new capability? Or how do you build new capability? Because if it's not like what you're already doing, it must require new capability. If it's exactly like what you're doing, then you'd be doing it.

• 1:10:12Ben Gilbert?

  And you should be great at it.

• 1:10:13Speaker 02

  And you'd be great at it. So it's, it's the things, you know, just look, two models worked in phone. Build the hardware, capture the profit. Have a backend monetization system that even lets you pay the phone manufacturer. That worked, Android slash Google. So two things worked. That's it. And we weren't in either one. We needed new capability. We needed a new idea. We couldn't use the Windows user interface. I mean, there were a bunch of things, but you have to go all the way. And yet we had a Windows everywhere slide.

• 1:10:47Ben Gilbert?

  It was on the slide. I don't understand why it didn't work.

• 1:10:50Speaker 02

  You get locked, you know, I wrote this thing down here. You get locked in your model. We're a platform company. No, we're an app and platform company.

• 1:10:59Ben Gilbert?

  On our episode, we threw out the idea that Microsoft's competitor, like the truest form that it should have taken on mobile was not actually Apple. The iPhone is not the, the bogey. It's, it's a pretty different thing. At that point, you were not a hardware company. The bogey was Android. I mean, they were monetizing it a different way through advertising and through giving away for free. And Microsoft always monetized through licensing revenue. It seems like until Android took off, Microsoft actually did have an opening to become

• 1:11:32Speaker 02

  Okay, that's the Christmas, what year Christmas was this? There was a, the Christmas of blah, blah, blah year. And it was being on time with the stuff we needed for Verizon.

• 1:11:44Speaker 02

  There was a Verizon

• 1:11:45Ben Gilbert?

  Oh, yeah.

• 1:11:45Speaker 02

  Design win because Verizon by now is really feeling like it's getting its ass kicked.

• 1:11:50Ben Gilbert?

  iPhone launches on AT&T.

• 1:11:52Speaker 02

  Right.

• 1:11:52Ben Gilbert?

  In July of 2007.

• 1:11:54Speaker 02

  And then it might have been Christmas Eve in 2008. Hmm. Yeah, cuz App Store launched next year.

• 1:11:57Speaker 02

  I think it's Christmas 2008. Yep. Uh, possibly even oh nine, but I think oh eight. Cause mobile was like this when it started. Could have been not, it could have even been oh nine. But Verizon, the emperor had, you know, the empire had to strike back against AT&T and there was a window. Yep. And they went with Android.

• 1:12:13Speaker 02

  We didn't have our stuff. Look, they would have taken our stuff. Cause they could put pressure back on the manufacturers. But we didn't have the stuff they wanted at the right time. They went Android. And then, you know, we, we kept pushing cuz that's, you know, I believe in staying hardcore and then learning and fixing. The problem was we were so locked into our model. It was hard to, to say, hey, we're gonna learn and fix. You know, would Microsoft, you know, I don't know where we would have gone with things uh on phone if I had stuck around. But I probably would have stayed at it. And maybe it, it would be an Android phone at this stage. Who knows? Hmm. Uh, and maybe not. Like a Microsoft hardware.

• 1:12:55Speaker 02

  If you think of yourself as just a platform company, you say, we can't do that. If you can think of yourself as an app and platform company with apps that are extensible, ah, then you can say, hey, we, we actually have a pretty cool user experience that can also leverage some things that we do and can leverage our software skills. And it's okay to embrace that competitor and extend. But there's so many technologies that are hard to not just popularize, but even get good at unless you have a phone these days. Just take voice. You know, if you wanna really be good at voice, you gotta get enough signal and you'll get the signal off the phone.

• 1:13:38Speaker 02

  You can't say talking to my PC is sufficient. And, and it's not the only, you know, if you wanna get good at maps, if you, there's so many things where being on phones, and there's some, some things even you can make happen by being on cars. You know, I think Tesla gets good at certain things in software because it is a different form of mobile. So they get good at different things. But we missed. Should the company have kept after it? I don't know. That's not my, you know, Satya and Amy and company, they know where they were. But to your original question, big companies deciding, well, it's not always a mistake to build off what you got, but it can be. Try to get out of

• 1:14:22Speaker 02

  the side of yourself. If you get in, do you have the ability from the top to shake the system and say, no, we started with our old model, but it ain't gonna work. That's what I did with Surface. I didn't wind up, it hasn't played out. And, you know, partly, you know, I didn't have that much as much time with it. But, you know, there were no high end PCs that would really compete with Mac. And we, I decided the only way we were going to get there, we couldn't sit there with our OEM model and have it work. If we're going to have high end PCs that appealed to users, because I wanted us to be a consumer

• 1:15:06Speaker 02

  slash user company, not just an IT company. Because ThinkPad had, you know, IBM, then, by then Lenovo had some higher end computers. But you never saw them, you never saw them in schools, you never saw them in coffee shops. We needed a high end PC. And the economics weren't going to let of marketing and romancing, it wasn't gonna, that was not going to be an option for our OEMs. And I said, we got to go do Surface. Now, we, you know, again, would we have tweaked things, done things a little bit better, you know, or part of that, I bet, sure. But the model was not going to work.

• 1:15:41Ben Gilbert?

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

• 1:16:15Speaker 02

  Yeah. So.

• 1:16:18Speaker 02

  We are in probably 2005, 2006. AWS has a little lift. I think AWS comes to market in what?

• 1:16:29David Rosenthal?

  Around then.

• 1:16:30Speaker 02

  Around then. And it's not like the cloud is some surprise to us. The Energizer, if you go all the way back to that Energizer thing from the mid 90s, it's all about the cloud. It's before it was called the cloud. It's before all the infrastructure that becomes the cloud. So it's not like we said, oh, woke up one day. So there's AWS. We didn't wake up one day and say, oh, there's backends to applications too. We've been doing that with Windows Server and SQL Server. We've been in the cloud, blah, blah, blah. But at that point, I think we might have already had Exchange in the cloud as a standard product, which you have to remember is super important because I really want to give you my sense of what Microsoft's businesses are. And but we didn't have a platform.

• 1:17:16Speaker 02

  And so I said, we got to do one. Let's go get Cutler.

• 1:17:21Speaker 02

  Let's just go get Cutler. So I say, okay, we got to get Cutler on it. And Cutler and I have a great relationship. To this day, we have a great relationship. We're personal friends.

• 1:17:29David Rosenthal?

  He's still writing code at Microsoft.

• 1:17:31Speaker 02

  He's still writing code at Microsoft. But I mean, you know, Cutler and I have been to basketball game together. We've played golf a number of times. We've done golf trips together. So, but you know, Cutler's, he's a hard ass at work. I mean, if he don't want to do something, he'll tell you if he thinks you are wrong. He'll tell you if he thinks somebody else in your organization is bad, he'll tell you.

• 1:17:51David Rosenthal?

  He's like a thoroughbred horse, you know, like he can run really fast, but you got to get him lined up.

• 1:17:56Speaker 02

  Very blunt. You know, he's a great athlete in college, two sports. I think he played maybe three even in college. But anyway, so I get Cutler and there's a guy working in MSR who I think is underutilized too. This guy, Amitab Sivastava, who you guys talk about, I thought he was underutilized doing what he's doing. So grab him, grab Cutler, bring them both onto this project. I think Bill, is Billy still with the company?

• 1:18:26David Rosenthal?

  He's about to transition out.

• 1:18:28Speaker 02

  He's about to leave, I think.

• 1:18:29David Rosenthal?

  Yeah. Yeah. I think he had probably told you that he was going to leave.

• 1:18:32Speaker 02

  He had told me, but you know, talk about that. But he had told me, but hadn't left yet. So he was involved until, until, until he left and even then, you know.

• 1:18:43Speaker 02

  Different nature of involvement, but anyway. So I get Cutler and Amitab to go do this thing. And then Cutler brings some of his, I'll call gang, his favorite guys. He brings them over because he's a magnet for talent. And we get started and we made an explicit decision. And I guess you could say it's also a function of thinking windows first. I think you guys may have talked about this in your episode. We say, we're going to build platform as a service because it's a Windows platform. Infrastructure as a service, a little bit, if you think about it. You're you're sort of by nature, accepting everybody's infrastructure. It's by nature, multi quote, multi platform.

• 1:19:28Speaker 02

  You become a different kind of a platform because you're running other people's Linux and whatever.

• 1:19:32Ben Gilbert?

  It doesn't leverage Microsoft's strength of owning the Windows franchise. If you're just going to be.

• 1:19:37Speaker 02

  It doesn't leverage our strengths in the sense that we've got great low level operating system people. So we have all the talent to go do it. But, you know, we say, hey, we're going to do. And it was explicit, we wanted to do platform as a service. We said, you know, hey, they're doing it and B, it's all about the developers. And if it's all about the developers, then you got to have platform as a service, not just infrastructure as a service.

• 1:20:01Ben Gilbert?

  Well, that assumes that the developers targeting Windows Server are still a big, strong, important, relevant developer group.

• 1:20:09Speaker 02

  Mm hmm. Which they they were and they weren't. Windows Server had a strong developer group. Unix had a strong developer group. And on the front end, Windows was definitely stronger. On the back end, Unix was definitely stronger.

• 1:20:26Ben Gilbert?

  But on the front end, by 2006, seven, the web was clearly the emerging developer platform of choice.

• 1:20:33Speaker 02

  Emerging.

• 1:20:34Ben Gilbert?

  Okay.

• 1:20:35Speaker 02

  Emerging.

• 1:20:35Ben Gilbert?

  Okay.

• 1:20:35Speaker 02

  Absolutely emerging, not fully emerged.

• 1:20:38Ben Gilbert?

  Yes.

• 1:20:38Speaker 02

  Emerging.

• 1:20:39Ben Gilbert?

  I would challenge you to say like, what in 2006, what amazing? Uh, Windows apps were coming out that would sweep the world and go get 100 million users because they were great.

• 1:20:49Speaker 02

  Hard for me to remember. I'm, I think if you, if you go to the field of productivity, the answer is yes, there were still. The problem is if you left the areas of productivity and gaming. Productivity in gaming, yes. If you leave productivity in gaming, I think the answer was no. I mean, we talked about this on the episode.

• 1:21:09David Rosenthal?

  Yeah, there was lots of.

• 1:21:10Speaker 02

  It was transition, you know, people, remember, people were, the web wasn't good for a number of things for IT because people couldn't count on, people didn't feel like they could count on the connectivity. Either the amount of bandwidth or latency or just its very existence. We were still at that point. So I'm not saying. Fair. We were right in the way we thought about, not saying that. But I'm also saying there was a Windows, there was still a great Windows sort of developer ecosystem. It didn't go from, you know, a lot in 99 to nothing by 05. Totally fair.

• 1:21:47Speaker 02

  And then on Windows Server, Unix was stronger on the backend. And of course, we're trying to make Windows strong and we're trying to get to the cloud. And then we're learning more things about the cloud from both Exchange in the cloud and Azure in the cloud. How do you make it easy to provision? What's the speed of provisioning? You know, what do you do to serve developers, the notion that you give them, you know, a number of, you know, sort of a set of free usage and then let them embrace because developers have two, two aspects too. There's developers who are not part of enterprises and there are developers who are. And the developers who are not part of enterprises need a whole different sales motion. You can call them consumer developers, not developers of consumer apps, but they are like.

• 1:22:32Speaker 02

  Independent software developers. They're not like big corporations in terms of the way they, they use. Students are an example, but there's plenty of others who are trying to do startups and blah, blah, blah.

• 1:22:45Speaker 02

  So in any event, you know, we kind of get going, we're learning, you know, how to do the things. We're building capability for sure in the cloud through both products.

• 1:22:56Speaker 02

  And, you know, by the time I leave, we have some, some, some momentum with Azure, but some momentum. The big momentum really is in the last, you know, 11 years since I left.

• 1:23:09David Rosenthal?

  I think you're bypassing and underselling here. It really struck me as you were describing the challenges around with a big company like Microsoft and attacking.

• 1:23:20David Rosenthal?

  Wildly different vectors like mobile, like search, like hardware. Azure was that, the cloud was. I mean, it's extremely disruptive to server and tools.

• 1:23:29Speaker 02

  No, it was extremely disruptive, but it wasn't. Yes and no. The things we understood were translatable. Now, getting the company, people get locked into a model.

• 1:23:42David Rosenthal?

  Yeah, I mean, you had to replace server into a leadership to make this happen.

• 1:23:46Speaker 02

  Will IT accept things that run in the cloud? That was not obvious back in 2008, 2009. It's not like, you know, Amazon was an enterprise company at the time. It was mostly for startups and, you know, that, that's who was using AWS at the time. And so, no, I agree, I do agree with you. We had to shake up our internal culture. God dang it, this was my basic message. God dang it, this is our future. We can preserve and enhance these businesses. We can take more value out of the system because other people, the customers don't have to set up their servers anymore. They don't have to do all this work.

• 1:24:29Speaker 02

  Essentially, money that would have been spent on people and, and hardware will get spent with us. Come on, we're gonna do this. And it was hard for me, even telling our people, there was still, you know, la resistance, as they say. And that's why I did the speech at UW where we talked about the fact that we're all in on the cloud. It was partly a reminder to people, you know, get with it or get out of it. You know, get out of the way.

• 1:24:58Ben Gilbert?

  Making an external speech to communicate something to your internal employees.

• 1:25:03Speaker 02

  In a big company, man, I'll tell you.

• 1:25:05Ben Gilbert?

  It's very.

• 1:25:06Speaker 02

  Some of what you have to do because people believe the newspaper more than they'll believe an internal email.

• 1:25:10Ben Gilbert?

  Well, the people always talk about how the think different campaign that Steve Jobs did was for Apple employees as much as it, in fact, way more than for the, the general public. Going back to the core initial start of Azure, I find it very interesting that Microsoft had a business called server and tools business. And that is not where Azure started. Azure started as a incubation by Ray Ozzy with a completely separate team than your existing, like, actual product group selling server and tools.

• 1:25:41Speaker 02

  But this, that's sort of a classic thing. That's not, it shouldn't be mind blowing. I mean, Windows and Windows NT were in different. Groups too. Sometimes in order to protect the sort of baby while it grows up, you can't put it with the thing that's established. I mean, you could say it's part of the issue with Windows when we tried to use Windows on things for which we probably should have started. Yeah, I was gonna ask, do you think mobile would have played out differently if you'd taken this approach with? We did break it out, but we constrained it with Windows. We broke Windows NT out and constrained it with Windows. It worked fine because Windows belonged.

• 1:26:22Speaker 02

  So, you know, how you do those incubations, and in this case, I just said, look, it'll,

• 1:26:30Speaker 02

  it'll get probably subsumed. I don't know, partly Ray wanted, you know, Ray was, Ray wanted some operating control over the thing and putting it under Muglia would have made it harder for Ray. And, you know, obviously it was less palatable. And I'm not sure Cutler would have gone to work on it. If it was all, you know, all it's server and tools, but it was the right, it was the right thing to do, even though it was quote, "part of the future of servers." It was the future of server and tools, essentially.

• 1:27:04Ben Gilbert?

  And so this is pretty lost in the common narrative. If this is 2006, that is seven, eight years before you left Microsoft.

• 1:27:12Speaker 02

  Yeah, eight years. Eight years. No, we, we'd been working on the cloud since Energizer. We'd been working on Azure for eight years. You know, people think everything in tech gets popular in 10 minutes.

• 1:27:28Speaker 02

  It's kind of.

• 1:27:28Ben Gilbert?

  People think Acquired was founded two years ago.

• 1:27:31Speaker 02

  Good point. Different scale, different scale. When was OpenAI actually founded? 2016, I think. Okay. Yeah. So, seven or eight years after, it really became something. Okay, fair, fair to say, and I give them all the credit in the world, seven or eight years. Most things take a while, even things that are quote, "Oh, they just burst on the scene." People have been sweating, you know, blood, sweat and tears for years before these things get liftoff, as I call it in my little deck here. And so, yeah, we, we were starting to get to liftoff. But yeah, eight years and we had more in on exchange.

• 1:28:16Speaker 02

  Most businesses are zero trick ponies.

• 1:28:20Ben Gilbert?

  You never create a billion dollar business.

• 1:28:21Speaker 02

  You never create, yeah, you might create something that goes nowhere. You might create what's essentially a feature for somebody else's business and get acquired. Right, you might, I'll call that zero tricks. Then you get a one trick pony and one trick ponies are amazing, amazing. I mean, people should be in awe of one trick ponies.

• 1:28:43Ben Gilbert?

  They're not, one trick ponies are 50 to 100 billion dollar market cap companies.

• 1:28:48Speaker 02

  Or could be, no, could be more.

• 1:28:50Ben Gilbert?

  Yeah, or more, yeah.

• 1:28:51Speaker 02

  Could be more.

• 1:28:52Ben Gilbert?

  They're not many one trick ponies.

• 1:28:53Speaker 02

  I might argue that Google's a one to one and a half trick pony still. I mean, if you just look at its revenue.

• 1:29:00Ben Gilbert?

  80% search ad revenue, something like that.

• 1:29:02Speaker 02

  Yeah, I mean, you can call YouTube.

• 1:29:04Ben Gilbert?

  YouTube's probably another half a trick.

• 1:29:06Speaker 02

  You can call YouTube half a trick or you can call it a second trick.

• 1:29:08Ben Gilbert?

  You debate, yeah, yeah, okay.

• 1:29:09Speaker 02

  But it's, it's not clearly a second trick. And they're huge and they have great market cap. TSMC, you did an episode on them. They're one trick pony, very successful one trick pony. Nvidia is a one trick pony.

• 1:29:24Ben Gilbert?

  Well, gaming and AI.

• 1:29:25Speaker 02

  Okay.

• 1:29:26Ben Gilbert?

  Two trick pony, but the first trick was.

• 1:29:28Speaker 02

  I'll give them two tricks.

• 1:29:28Ben Gilbert?

  First trick was not that big.

• 1:29:30Speaker 02

  Yeah, you can decide whether to call it a trick or not, but I'm not taking anything away from Nvidia and I should know the company better. But, so you say one trick ponies, they're amazing. Like, everybody should be in awe of a one trick pony. Now, two trick ponies, ooh la la, those people tend to go down in business history. Especially if those tricks stay, stay alive for a long time. And IBM was a one trick pony. Microsoft, two to two and a half tricks.

• 1:30:04Ben Gilbert?

  All right, give us your trick accounting.

• 1:30:05Speaker 02

  Okay, you can do it a little differently. I'm going to call the desktop business, which I include Windows and Office, and the server slash enterprise business, back office, two tricks.

• 1:30:20Speaker 02

  Now, they both, both tricks could have died if they didn't get moved to the cloud. And I knew they could die. But there are two tricks, two different revenue models, two different licensing models, essentially different sales motions, that even the way Microsoft sells those stuff, I don't know about today, but when I left, they were kind of different muscles. One account manager, two different muscles, because one, you're selling applications and one, you're just selling, hey, this is to serve your users. You need an AD account and exchange account, it's exactly Windows. I mean, that's what you need. That's what M365, you could call the two, the, the modern translation of those two things are the Windows OEM business and M365 and Azure. And then you could say, is gaming its own trick?

• 1:31:05Speaker 02

  I call it a half a trick, just like YouTube. It's a half a trick.

• 1:31:09Ben Gilbert?

  This is an update since we last talked. I feel like we had a conversation at one point, we were, we both kind of landed in, unclear how profitable that business is for Microsoft relative to other.

• 1:31:19Speaker 02

  That's why I'm gonna call it a half trick. Or you could say it could be a trick. I mean, look, I would say, I would say Microsoft is optimistic it'll be a full-on trick.

• 1:31:29Ben Gilbert?

  Hmm.

• 1:31:30Speaker 02

  Okay.

• 1:31:31Ben Gilbert?

  I hope it is.

• 1:31:32Speaker 02

  I run into Phil Spencer at the golf course and, you know, he's a really optimistic guy and it could be.

• 1:31:37Ben Gilbert?

  All right, I'll give you this. If we call Nvidia's first trick a full trick, then Xbox is a full trick.

• 1:31:43Speaker 02

  There we go. Whatever you want to call it, you said it's a small trick and I think that's probably right. So I, that's amazing. Amazon's two-tricker. AWS and the store, they're two-tricker. Apple's two-tricks.

• 1:31:58Ben Gilbert?

  What's your trick accounting there?

• 1:32:00Speaker 02

  Mac and mobile. If you want to say it's high-power consumption and low-power consumption.

• 1:32:07Ben Gilbert?

  Is it fair to call services a third?

• 1:32:09Speaker 02

  No.

• 1:32:10Ben Gilbert?

  By my estimates, their profit dollars from services have now eclipsed iPhone hardware profit.

• 1:32:16Speaker 02

  I consider it just part of the trick.

• 1:32:17Ben Gilbert?

  If you go by your platform definition, it's part of the platform.

• 1:32:21Speaker 02

  A trick, they've just monetized it. It's kind of like us adding things to Office and redoing the EA and.

• 1:32:29Ben Gilbert?

  It's a monetization model.

• 1:32:30Speaker 02

  It's a monet- it's an additional monetization model, but it's not a new locomotive. A locomotive is the business that can pull the cabooses and the locomotive remains the phone. You know, the services business go away pretty quick if the phone volume fell apart. So I'm gonna call, I'm gonna, it's additional, very important.

• 1:32:51Ben Gilbert?

  But not uncorrelated, the way that AWS and.

• 1:32:54Speaker 02

  No.

• 1:32:54David Rosenthal?

  So I get the sense.

• 1:32:56Speaker 02

  And I think Mac, Mac versus everything iOS is also uncorrelated.

• 1:33:00David Rosenthal?

  Yep. So I get the sense you, you really wanted three tricks.

• 1:33:06Speaker 02

  Apps are frickin' lutely. Apps are frickin' lutely.

• 1:33:10Ben Gilbert?

  What's the one that eats you up inside? Which one do you think you were closest to getting that you didn't get?

• 1:33:14Speaker 02

  Not social.

• 1:33:16Ben Gilbert?

  Okay.

• 1:33:16Speaker 02

  Forget social.

• 1:33:17Ben Gilbert?

  Doesn't feel Microsoft-y.

• 1:33:19David Rosenthal?

  You wanted to buy Facebook.

• 1:33:20Speaker 02

  I'm gonna tell you why. It's either, sure, because we were still on the Paul Allen strategy. We've got to do all the software that these things will ever need. I mean, it was still of the mindset that said, and that, there's an arrogance to that, and there's a hunger to that, that says, there's just nothing we shouldn't do. And I don't think that was a good mindset by the time I took over, and yet it was still sort of baked in with Bill, baked in with me, and I think that was a mistake.

• 1:33:48David Rosenthal?

  Okay, so not focused.

• 1:33:49Speaker 02

  Social doesn't need you. But, so, you can, you know, this is like asking me to pick between negative children, I don't know. But the phone, because it was a client-side device, or search, because it was a productivity tool. Microsoft, both of those were Microsoft big businesses.

• 1:34:13Ben Gilbert?

  Yep.

• 1:34:14Speaker 02

  The desktop, the phone, or office, or, you know, client-side devices, we had done well with a certain model. Client-side devices, our mind should have been able to wrap around, but we had to tell ourselves it didn't look the same.

• 1:34:31David Rosenthal?

  It's not.

• 1:34:32Speaker 02

  Technology didn't look the same, nor did business model.

• 1:34:36Ben Gilbert?

  Then business model, astonishingly for search.

• 1:34:40Ben Gilbert?

  Advertising, call it 2005, I think Google was making more money off of a PC user than Microsoft was because their business model generated more search revenue.

• 1:34:52Speaker 02

  By 05, I don't think so, not later on, I think so, but not by 05, I would suspect not. I mean, you can go check it out.

• 1:34:59Ben Gilbert?

  But isn't that astonishing that of the pie of-

• 1:35:01Speaker 02

  And for enterprise PCs, PCs bought by businesses, it certainly wouldn't have been the case. For consumer PC, it could well have already been the case, right? I mean, it actually is a notable difference because of everything else. We, we, our post-sales monetization was with applications, theirs were with ads, but it's a new productivity app. We put Office on the Mac by then. We would have had to put productivity elsewhere. So in the sense that we missed a major productivity area and we're in the productivity business and we were in the client area and we missed a client device.

• 1:35:37Ben Gilbert?

  Yeah.

• 1:35:38Speaker 02

  Those are the two.

• 1:35:39David Rosenthal?

  So you feel like-

• 1:35:39Speaker 02

  Nothing else we met, we met, quote, missed.

• 1:35:43David Rosenthal?

  You had an opportunity for four tricks and you got two.

• 1:35:47Speaker 02

  Yeah. Part of the problem was we didn't see, particularly, we didn't see mobile as a different trick. We thought of it as underneath the Windows trick, if you will. No, but I mean, you can go through. I don't know that I could come up with a three-trick bony for you.

• 1:36:02Ben Gilbert?

  Hmm.

• 1:36:02Speaker 02

  I mean, it's possible that at the Elon level, the Musk empire could have three tricks, right? Cars, connectivity and-

• 1:36:12Ben Gilbert?

  In finance, you can do it.

• 1:36:14Speaker 02

  Finance, I don't, I don't think there are multiple tricks. And you could say asset management versus the-

• 1:36:20Ben Gilbert?

  Investment banking is different than-

• 1:36:21Speaker 02

  Maybe, maybe, I don't know. I'm not convinced, but I hear you.

• 1:36:25David Rosenthal?

  Well, possibly. I think this makes sense because Microsoft is the most valuable company in the world with two. So if anybody had three-

• 1:36:31Speaker 02

  If you look at the most valuables, you're not going to find threes.

• 1:36:34Ben Gilbert?

  That's a good point. Sony is nowhere near the market cap of these companies, but it's like pretty evenly diversified across their five segments from gaming to consumer electronics.

• 1:36:46Speaker 02

  Movies, music, finance.

• 1:36:47Ben Gilbert?

  Yeah, they have a remarkably diversified-

• 1:36:49Speaker 02

  They bought businesses in multiple areas, but I can't call Sony Pictures a trick.

• 1:36:55Ben Gilbert?

  Fair.

• 1:36:55Speaker 02

  Yeah. A, it's just not big enough. Well, you can acquire to start a trick. I mean, that, that part I have no- You know, there's no pride. There should be no pride in having a trick that starts with something small. Android is a great example. Google bought Android, but that's a trick for them. Well, Android's not a trick. Okay. As you highlighted, Android is a piece of the search trick.

• 1:37:17Ben Gilbert?

  It's a lead gen.

• 1:37:19Speaker 02

  Yeah, yeah, exactly. Lead generation for search. Yeah, that's right.

• 1:37:23Ben 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.

• 1:37:36David 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?

• 1:37:53Ben 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.

• 1:38:08David 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.

• 1:38:32Ben 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.

• 1:38:51David 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.

• 1:39:21Ben 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 lagora.com/acquired and just tell them that Ben and David sent you. Okay, so we've been dwelling here in the products and reflecting back on big wins and misses. During your tenure as CEO, can you reflect back on your non-product wins and mistakes?

• 1:40:01Speaker 02

  Look, my biggest hit, from my time running sales to president to CEO, is establishing us with IT departments, IT professionals, you can call that the enterprise, if you will, and putting in the framework from a sales and marketing perspective, the staff. It's a capability we had to develop. Nobody developed that software model but us. We invented essentially how you do that. Oracle had done some invention, but we came on and did our own invention. We took it to the cloud. We were able to successfully navigate that with, I mean, look, from a sales, there's

• 1:40:42Speaker 02

  a product part to that that you highlight, but that's a, that's a big deal. And I feel very, very proud about that. From a financial standpoint, you know, everybody likes to say we about tripled revenue and about tripled profit. The truth is, we dramatically increased profit more than a triple. Because people forget there was a major change that came along early in my tenure.

• 1:41:10Speaker 02

  And that's the move to have to expense stock options. So if you had restated our books to the time I actually took over, stock option expense would have reduced profits notably.

• 1:41:24Speaker 02

  Stock options were unaccounted for. So if you look at what starting profitability would have looked like, if stock options had, it would have been lower and the multiple over my tenure would have been much more than three.

• 1:41:38Ben Gilbert?

  Okay, so three plus.

• 1:41:40Speaker 02

  Yeah, I think you might say three in revenue and probably closer to four plus five, maybe even on profit. About the same time, the dot com bubble busts. So you have two problems. Number one, now we're showing our books, all this expense for stock options. Okay. But people don't value those things that what we have to expense. And the stock is flat, so they value them even less.

• 1:42:08David Rosenthal?

  This is a really insidious problem.

• 1:42:09Speaker 02

  You got to get rid of stock options. And we transitioned then from stock options to stock awards, which if you notice, I think we were the first to make that as a major transition, but everybody's made the same transition, you know, with the exception of a few senior executives, options are not the primary form of compensation. Little different in startups, but when you look at larger companies, everybody's.

• 1:42:31David Rosenthal?

  Even startups are now doing RSUs.

• 1:42:33Speaker 02

  RSUs. So, and we had to start that.

• 1:42:37David Rosenthal?

  I didn't realize that Microsoft started that.

• 1:42:39Speaker 02

  You can check, but I know we moved before most of the tech companies.

• 1:42:44Ben Gilbert?

  The tough thing to have to inherit right at the beginning of your tenure, coming off of an already all time high multiple of the stock price.

• 1:42:51Speaker 02

  The dot com bubble bursting meant our stock price burst into.

• 1:42:55David Rosenthal?

  But I think to your point, what you're saying is like, this became a employee motivation cultural issue. Like, it's not just.

• 1:43:02Speaker 02

  No, we had two problems. Before the dot com bubble burst, you have everybody saying, oh, maybe we should go to a dot com company because we're earning a lot more money. Then the bubble bursts and everybody says, you know, it's sort of, you guys probably haven't seen the movie Oklahoma, but there's a song, poor Judd is dead, a candlelight is dead. And that was kind of the way people felt about sort of stock compensation. And not just in our place, people were down because, you know, everybody thought they had a ton and then they thought they had less. So yeah, it was a real employee morale issue in the early 2000s. We had to really sell this stuff in. That's a big thing I had to work on. Obviously, the antitrust.

• 1:43:50Speaker 02

  The antitrust issues.

• 1:43:51David Rosenthal?

  I mean, when you took over as CEO, what we said in our episodes was that was actually your number one priority was just end this.

• 1:44:00Speaker 02

  It was right up there. Yeah. I mean, it was up there. I mean,

• 1:44:06Speaker 02

  I think when I took over, I'm not even sure we saw a path to resolution.

• 1:44:12Speaker 02

  But having it an overhang, I'll give you, I'll give you a story because it's after I took over CEO, we had an executive retreat. We did it down in Bend, Oregon. I can't remember the name of the lodge, Sun River, I think. And we all fly down there. We rented a plane to fly everybody down there. I don't know how many people by then it was probably 80, 90, something like that. And the first session was supposed to be a report, we did this, a report from the field. What are people seeing out there? What's the environment? And this guy Orlando Ayala was running sales at the time. And he gets up and you know, this is probably oh, two ish, oh, one, oh, two, we're still in the throes of the thing. My name is

• 1:44:55Speaker 02

  Orlando Ayala. I'm a proud Colombian. I am not a proud Microsofty today. Our integrity is under assault. My personal integrity feels like it's under assault. Now, he didn't blame us for having behaved badly, but he highlighted the thing that's on everybody's mind, which is it wasn't just like a business issue that needed to be taken care of. It was a culture issue. It was bothering people, particularly senior people very personally. So I had this whole agenda, had to blow the thing up and reorient to, to, to, to address that elephant

• 1:45:37Speaker 02

  in the room. It was not where I was going with this thing, completely remapped, changed the breakout sessions, focusing on this issue. Bill was not happy.

• 1:45:48Speaker 02

  The whole thing. Bill bore the weight of the antitrust thing very hard because for him, I think it also felt like a personal attack.

• 1:45:58David Rosenthal?

  Of course.

• 1:45:59Speaker 02

  And everybody took it personally. Bill took it even more personally because, you know, he, he was the face of vilification, if you will, for this. But it's a reminder that it was a cultural issue to take care of, not just a market issue. And people focus in on the, oh, were you moving slowly? But yeah, there were some of that, too. People say, oh, I wonder if we can do this. That was an issue. The cultural issue, I think, was even bigger. So he said, yeah, we got to get this thing resolved. And then there was the order to break us up. I forget what year that was.

• 1:46:32David Rosenthal?

  You were going to run one company and Bill was going to run the other company?

• 1:46:35Speaker 02

  Yeah, we never really got to the point of really planning that through.

• 1:46:38David Rosenthal?

  But that's what the federal government like ordered.

• 1:46:40Speaker 02

  Yeah, no, they ordered it split. They didn't say, well, who had to run which company?

• 1:46:44Ben Gilbert?

  I think it was just that you couldn't be at the same.

• 1:46:46Speaker 02

  You couldn't be at the same company. I would run operating systems and Bill would take applications. So, I mean, it just gives you a sense of each, where each of us were associated with in the mind of the company.

• 1:47:00Ben Gilbert?

  So that's your starting place as you're taking over from CEO, as CEO, that the dot com bubble's bursting, antitrust is dominating the company's culture and the external narrative. You have this big accounting headache that you now have to deal with that affects the, the way your profitability is shown. But then there's a decade after that where you triple the business, but the stock price is flat. Why didn't Wall Street get?

• 1:47:27Speaker 02

  I'm going to give you three reasons. Reason number one, and it's material. Bill and I always, so Bill and I, and then me and Bill, when I became CEO, we always were trying to tell people, don't get our stock price too high. Don't have too big expectations for us. You know, we never wanted people to feel like they got cheated buying our stock.

• 1:47:54Speaker 02

  And partly, probably, we're trying to lower the expectations on ourselves. I never thought of it that way. I don't think Bill did, but essentially, that was part of it. And so we do this financial analyst meeting every July, and we'd always warn people, you know, don't get too excited. That's one. As part of that whole theme, Bill never went to a quarterly analyst call. And I never went to a quarterly analyst call. And if you really think about it, part of morale is the stock price. It is. And it took me a while to realize that, but I then never broke my pattern. You know, it's sort of like going to the newspaper every day. You don't sell stock every day, so you really should only care what the stock price is when

• 1:48:39Speaker 02

  you sell stock. But people go every day, and it's kind of like, oh, did my team win last night? It's like going to the sports section, say, how did the Clips do last night? And so talking more regularly to investors, and talking with, not a pie-eyed, but a realistic view, guidance, we gave no guidance. I had to fight people. They wanted to give guidance. I didn't want to give guidance. Why? Just deliver the results you get. I mean, you know, there was a bit of a Buffett-style Totally. I mean, this thing going on, because Bill and Warren were very good friends, and Warren didn't go to quarterly calls, I don't think, and that, but, you know, he's Warren. I don't even know if they do quarterly calls. I don't, yeah. I don't, yeah.

• 1:49:24Speaker 02

  I don't think they do, yeah. So they do the annual meeting, obviously. So that's, that's, let's call that a first reason. A second reason is, yes, I did take over when the stock was ridiculously too highly priced. Yep. But that normalized within a year or two. The bubble burst, it normalizes some, but it creates sort of another narrative about, about things. So that I'd say is, no, no, I'll give you four reasons then. Next, I was hardcore about telling people, I'm going to spend to do the things we need to do to succeed. That's not what Wall Street likes to hear. No, but I was viewed as a spender.

• 1:50:11Speaker 02

  And I was much louder on this than than Satya is on anything financial, because I'm it's kind of how I'm programmed. He's programmed a little differently. And Amy is more balanced. I mean, she'll talk about balance and I would say, we're gonna win with surface, whatever it is.

• 1:50:30Ben Gilbert?

  If I could paraphrase my view of it, you were willing to say, we're gonna spend whatever it takes. And Amy goes and says, I'm gonna count for every dollar of spend real tight and make sure that every dollar demands a return.

• 1:50:42Speaker 02

  Yeah. And so I had no credibility in terms of what some investors wanted to hear. Okay. And my actions were consistent with that. It's not like they were inconsistent. And then lastly, people did worry about the future of a couple of our franchises, most notably Windows. So you get all these things, narrative, transition from high price, some issue about franchises and me being a big spender. No wonder the stock stayed flat. And, you know, by the end of my tenure, it was even bothering me. Yeah. When did it start to bother?

• 1:51:25Speaker 02

  Towards the end. I mean, at some point, I just got too tired. But by then, it was also probably hard for me to reset that dialogue, for me to go to investors and say, I'm a changed man. I'm not gonna spend anymore. Nobody was gonna believe that shit. They just wouldn't have believed it, right? I mean, you can't come in and say, well, I've been a certain way for about 35 years, but 30 years, but I'm a, hey, I'm a new man. I'm reformed. It doesn't work that way. If you're a spender. I worship at the altar of capital allocation now. If you're a spender, you're a spender. If you're not good with investors, they're not gonna buy in overnight that you've changed.

• 1:52:09Speaker 02

  You know, there's a certain, and I didn't intend it that way, but there's a certain disrespect by not going to quarterly calls with hindsight. People aren't gonna say, oh, he's showing up. He's a changed man. He used to tell us the stock price was too high or worry about it. Now he's gonna tell us, no, the stock should be okay. It should be higher. No, there was no way to reset my. The investor view of me.

• 1:52:37Ben Gilbert?

  You need a full rebrand, full clean slate.

• 1:52:40Speaker 02

  Well, you probably need a full new CEO. I mean, when I wrote my letter of, you know, sort of goodbye to the board, I did say, hey, look, this is a unique opportunity. There's a lot of things in our brand, in our image, that would only be able to be reset by a new CEO, by having a new CEO. Because people don't walk in and say, oh, yeah, you know, guys are changing. So it's hard to change the narrative if you, without the change. Now, I'm not saying that means CEOs should go every time there's a bad narrative. That's not really my point, but it's, it just gets harder, particularly since, look, I'd been, I may have only been CEO since 2000. But it's not like I wasn't.

• 1:53:23Ben Gilbert?

  Been there since 1980.

• 1:53:24Speaker 02

  Yeah, I was there since 1980 and essentially I'd been the, you know, second voice of the company for 20 years. And then for 14, I was the first voice. Theoretically, although that, that had some complexity too.

• 1:53:37Ben Gilbert?

  I kind of get the sense by the end, it wasn't fun for you anymore too.

• 1:53:43Speaker 02

  No, that's not true.

• 1:53:44Ben Gilbert?

  No?

• 1:53:45Speaker 02

  No, it, look. The toughest time

• 1:53:52Speaker 02

  was probably the ship of Vista.

• 1:53:55Ben Gilbert?

  Yeah.

• 1:53:56Speaker 02

  That was probably the toughest time, that and the early 2000s.

• 1:54:03Speaker 02

  When I took over, on my little, my little sheet here, I highlight that 98 to 2004 were kind of tough years. Plus Xbox, because that's the antitrust, that's where I moved back to be president of the company and then CEO. And Bill and I went through a year where we didn't speak.

• 1:54:22Ben Gilbert?

  Really?

• 1:54:23Speaker 02

  Yeah, I think it was basically from sometime in about March or April of 2000 to 2001. I mean, literally, we weren't speaking. I didn't know what it meant to be his boss and he didn't know what it meant to work for me. You know, when he asked me to be CEO, I said to him, look, and I knew he was struggling with the DOJ and all this. I said, do you really want me to be CEO?

• 1:54:49Speaker 02

  Or do you just want me to be a figurehead? And he said, no, I want you to be real CEO.

• 1:54:55Speaker 02

  Okay, that meant something to me. I would probably have said yes, even if he'd said, be a figurehead. But he said what he wanted. And probably I'm saying to himself, hey, I've got to have a transition path. So I said, okay, I'll do that. Well. He didn't know how to show me a different kind of respect. I didn't know how to show him a different kind of respect. There were things that I thought, you know, where I just disagreed with him and now I expected it to go the other way. I was always happy. I was happy being a number two guy. I was fine. Salute. I don't like the decision. I either salute or I'd body punch and then salute. Or body punch and he'd agree with me. Body punch means it's a slower process.

• 1:55:37Speaker 02

  And then, you know, we didn't know how to do that. We just didn't know how to do that. And after a year, we started, we started talking and basically our wives were the ones who pushed us back together. We had a very awkward dinner at a health club down the street here. But, you know, we, we, we get back together, but we never really got the right mojo. I mean, Bill was chief software architect and I was very deferential then to, you know, sort of product direction from Bill.

• 1:56:09Ben Gilbert?

  And that he's working on Longhorn at this point because it's post XP.

• 1:56:12Speaker 02

  Which was a mistake. Longhorn was a big mistake. I have to take accountability. I was a CEO. Bill's got to take a lot of accountability. And it was the mistake of mistakes. And between the company, you know, Bill and I to the, disagreed about whether we should do hardware. That was a big one. We did, you know, Surface was a big disagreement. Uh, Phone, big disagreement. Uh, HoloLens, big disagreement.

• 1:56:46Speaker 02

  What about Azure? Were you aligned? Bill was fine with Azure. The cloud Bill and I had agreed on in the 90s, right? I mean Energizer, Energizer. I think Energizer could have been Bill's idea, not mine. Yeah, pretty sure it was Bill's idea, not mine. I executed, but Bill's idea, not mine. But, you know, we never hit it. There were places there should have been more contention. Maybe even during the late 90s, I don't know, but there were certainly places where there should have been more contention. And I, I, you know, I, my gut, I was, you know, these are the smart technical guys, Bill. And so, and I'm trusting. Vista. I'm beginning to have a pit in my stomach.

• 1:57:27Speaker 02

  But we didn't have the right contention. I mean, was it the, and this is not directed at Bill personally. It's directed at all of us. We kind of had an emperor that had no clothes. Yeah. That was long-worn. It was the emperor that had no clothes. And partly it was the centrality of Windows and the notion that Windows would say central. Therefore, people would all want this new stuff. Partly there was sort of a, there's too much change all at one time. We didn't do a new operating system, but we were kind of doing a new operating system. We would probably have been better. It may not have sold it all, but we probably would have done better just to do it. Yeah, yeah. Well, no, forget what we called it. Just starting from scratch. Hmm.

• 1:58:10Speaker 02

  Maybe keeping parts of the kernel, but otherwise starting from scratch and throw out all that cob, you know, all the, the scroff. Now, I don't think we would have popularized it. And if we'd looked at it that way, we probably wouldn't have built it. But by then, you know, we were a little cocky about Windows and it was our thing. So I don't think we had the right grind in our system there in the early 2000s. I just, between Bill and I am, you know, did we make some good decisions? Yeah, we did make a good decision to do Xbox. Were we doing too many things? Yeah, we were doing too many things. And I would say there was probably a voraciousness misplaced by Bill and me.

• 1:58:57Speaker 02

  Maybe, you know, I had to be a deal with some of the pragmatics of hiring people and stuff. So I probably, I didn't push back on it, but I, I probably felt the pain a little bit more in terms of trying to hire people.

• 1:59:12Speaker 02

  And, you know, so that's kind of 2000 to 2004. And then by oh, four, Bill was already, you know, sort of talking to me about wanting, you know, wanting to be able to go. And then oh, six, we announced that he was going to go in oh, eight. I also think we screwed that up. You can't have a long goodbye. Long goodbyes are not helpful. Yeah, yours was short. Yeah, it was goodbye.

• 1:59:41Speaker 02

  You know, I stayed on the board for one more board meeting after I left. That was it. But a long, a long goodbye, then nobody, that nobody knows their role.

• 1:59:55Speaker 02

  I think I did some of my very best work after Bill left. If you ask me, when I think I did my best work? When I started, when I was running sales and sort of evolving this enterprise business.

• 2:00:10Speaker 02

  Some when I ran system software and then the last, last six years I was there. That's cloud, that's surface, that's some of the improvements in Windows. I feel really good about my last, last six years. Bing, that's when we hire, I think that's when we hired Chi Lu. Chi Lu, yeah. Chi Lu is, do you guys know the story of Chi Lu at Microsoft? Chi Lu is one of the most pivotal. Pivotal things at Microsoft.

• 2:00:40David Rosenthal?

  Hmm.

• 2:00:41Speaker 02

  Okay, why?

• 2:00:42David Rosenthal?

  I knew it was important, but tells the story.

• 2:00:44Speaker 02

  Pivotal, in a way, you, in, in a way, you may not even know. First of all, brilliant guy, great guy. Uh, so Chi's talking about leaving Yahoo. He's at Yahoo at the time. And Chi, I think, went to graduate school with Harry Schum, who had been in Microsoft Research, and Harry was now working on Search, and he was working for Satya, who was running Bing. And Harry says-

• 2:01:08Ben Gilbert?

  Which, that's an amazing sentence all in itself. Oh, Satya, the guy who was running Bing.

• 2:01:12Speaker 02

  He was running Bing. And, um, Harry says, Chi's a genius. We've got to hire Chi. Or, you know, we, we, and we, yeah, I don't know if Chi really wants to work for, uh, but we gotta pick Chi's brain. We gotta, we just have to learn from Chi Lu. Okay, so Satya, me, Harry, fly down to California and we meet with Chi Lu. And we talked to Chi, and Chi's brilliant. We're learning all this stuff about Chi, and Chi leaves the room. God, there's a lot, and I don't know who throws the idea out at first. Maybe Satya. We should hire Chi and I should work for him.

• 2:01:51David Rosenthal?

  Whoa.

• 2:01:55Speaker 02

  So Harry, and Harry was all in. Harry worked for Satya, who worked for Chi.

• 2:02:01Speaker 02

  Now-

• 2:02:01David Rosenthal?

  We flipped it around. You flipped the whole reporting structure to hire Chi in the room.

• 2:02:06Speaker 02

  After Chi walked, we talked for about 15 minutes.

• 2:02:11Speaker 02

  And then Harry calls Chi and said, do you mind coming back?

• 2:02:15David Rosenthal?

  Wow, wow.

• 2:02:16Speaker 02

  I forget where Chi was thinking he'd take his next job. He, he had a next job in mind. Maybe it was with, uh, Baidu, I can't remember. Someplace.

• 2:02:25David Rosenthal?

  Wow, so then what did, what did he do at Microsoft that made him so impactful?

• 2:02:29Speaker 02

  It's the story I just told you. It's what it told me about Satya.

• 2:02:33David Rosenthal?

  Ah.

• 2:02:34Speaker 02

  I mean, I loved Satya. We were giving him, you know, more and more responsibilities anyway.

• 2:02:40Speaker 02

  But it told me, this guy will do the right thing for the company.

• 2:02:45Speaker 02

  He'll prioritize that. He doesn't have an ego that gets in the way.

• 2:02:51Speaker 02

  And she did great work. I mean, she knew about search. He could bring in a different, you know, he was a pro at it.

• 2:02:59Ben Gilbert?

  And it started like cash flowing billions of dollars eventually.

• 2:03:02Speaker 02

  Eventually. I mean, and she's in it. I mean, Sacha is not an engineer by training. She's an engineer and he's a PhD in computer science. Uh, and he had a lot to bring. Uh, Sacha's been great at managing product development. That's, that's for sure. But, um, you know, she's like digging the bits and bytes kind of thing. So, but the meeting is the thing that was important. She was important. Sure. But what Sacha and Harry did that day where they just found a guy and said, we'll hire, please Steve, go hire him as our boss.

• 2:03:39Ben Gilbert?

  Yeah. You don't hear that very often.

• 2:03:40Speaker 02

  No.

• 2:03:40Ben Gilbert?

  What year was that?

• 2:03:43Speaker 02

  See what year would she have come? Oh.

• 2:03:46Ben Gilbert?

  It was probably, it was, it was after Yahoo. See, oh, eight, oh, nine.

• 2:03:48Ben Gilbert?

  Six years before.

• 2:03:49Speaker 02

  Oh, nine.

• 2:03:50Ben Gilbert?

  Yeah. Satya became CEO for five years.

• 2:03:53Speaker 02

  And that let me then be able to also say, now I can give Sacha more responsibility doing something else.

• 2:04:00Ben Gilbert?

  Why did you move him to server and tools?

• 2:04:02Speaker 02

  I thought it would be great to, we had Chi. So we, we could probably move him. I thought it would be important to give him other experiences to try to get him right to, you know, be able to be CEO because he was on a list of three or four internals at that time who said, he'd been on a list of guys we'd been talking about because we did an annual succession plan thing. Uh, you know, succession plan has two candidates. It's what happens if you get hit by a bus and what happens if you get served a term, whatever term feels like. And they're, they're different people, right? If you get, Sacha gets hit by a bus, if Sacha serves another five years, it's probably a different person. Um, no, I think that's true. In most, most companies, you've got

• 2:04:45Speaker 02

  to think about it differently. Anyway, uh, so I said, hey, we'll get them another experience. You know, he hasn't worked in apps, hasn't worked in server and tools. And it was kind of a good time to sort of switch things around. You know, Bob wound up obviously being super successful because Bob was running server and tools at the time. And I love Bob. Bob's one of my favorite guys I've ever worked with.

• 2:05:10Ben Gilbert?

  Went on to be CEO of Snowflake.

• 2:05:11Speaker 02

  Snowflake, yeah, absolutely.

• 2:05:13David Rosenthal?

  Worked out for everybody.

• 2:05:14Speaker 02

  He's done fantastically well, but we moved Satya into that job. But, you know.

• 2:05:20David Rosenthal?

  And then now he was on a great path.

• 2:05:23Speaker 02

  And Cheese Hire made search as strong or stronger. Showed just how right Satya was. We talk about this in basketball. You know, is it all about team first or not? All about team first, which is essential. And we were able to give him the additional experiences, which were super helpful in terms of him then taking over as CEO.

• 2:05:49David Rosenthal?

  As Azure was turbocharging.

• 2:05:51Speaker 02

  Yeah.

• 2:05:52David Rosenthal?

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• 2:05:59Ben Gilbert?

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• 2:06:09David Rosenthal?

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• 2:06:30Ben Gilbert?

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• 2:06:42David Rosenthal?

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• 2:06:53Ben Gilbert?

  We want to talk a little bit about your post-Microsoft term, but let's sort of leave Microsoft with a final question of why did you resign?

• 2:07:03Speaker 02

  Yeah, a couple of things.

• 2:07:07Speaker 02

  Two or three things. Number one, the phone was very on my brain. When you said, are you having fun? That was the thing that was eating at me the most was the phone. And I decided we needed to flip the model around. Your episode's pretty good about all that happened, so I'm not going to go through all that. But I knew we had to do hardware. I knew it. There was just no question. We weren't going to be able to play the search game. The Android slash search game because we just didn't have the power of monetization that they did. And Apple's Apple, but there are going to be two phones. It's not like there'd only be one phone that was popular in the world.

• 2:07:47Speaker 02

  And this is something you guys didn't put in the episode. I'd been trying to buy a hard. I had talked about buying a phone company for years, a number of years. Before the Nokia deal. I forget what year it was. I flew to Taiwan and we were looking at buying HTC. They were the biggest Windows phone OEM at the time. Nokia wasn't signed up.

• 2:08:12Speaker 02

  I finally just decided Terry Meyerson and I had three, four trips to Taiwan to talk to Peter, look at the organization. And I just decided it would be too tough to buy a Taiwanese company that it would be, I would worry too much about the integration. I liked Peter Cho, who ran HTC. I don't know if that name means anything to you guys. Yeah, of course. But I'd been looking at that thing for two or three years maybe before. And, you know, Bill and I had all continued to have all the tension we had about anything that had hardware in it.

• 2:08:48Speaker 02

  So, you know, it's not like our relationship was calm and is clear. It had, it had always been bumpy. I mean, even back to the beginning, I almost quit after four weeks because we were in it. Five weeks, maybe. So it's not like it had ever been. That would have been a very poor economic decision. It had never been linear. We had another big fight a year after about financial stuff. So it had never been linear. It had been, it had helped build Microsoft, but that didn't mean it had always been easy for him or me. So the hardware thing was exacerbating our, our relationship. I thought we really needed to do a phone.

• 2:09:32Speaker 02

  And then the board said, no, we don't want to do a phone. And, and I was very transparent with everybody. Here's, you know, we brought the manager, you got this right. We brought the management team in and I don't know if it was more wanted to buy or didn't want, but I let everybody speak. I mean, it's a big decision to be in the phone hardware business. And then the process from, we do the presentation and the process from there to the time the board says no, I didn't find very respectful. Board didn't ask me to leave the board. I just didn't find the process very respectful and I, I probably won't go into the detail of that.

• 2:10:16Speaker 02

  So, and, and a lot of it has to do again with my relationship with Bill. Cause you know, and, and look, I knew Bill didn't love the idea. And I was willing to sort of accept whatever the board decided. I was no, no question about that. But the process wasn't very good. Uh, and I, I was not happy with the process and, um, but they wanted me to stay. But the, I just decided two things. If we're not going to buy phones, that's kind of my best shot for a consumer future for the company. Right now, that's my best shot. And I tried to fire the Yahoo shot, the phone shot.

• 2:11:01Speaker 02

  Those are my two things, remember mobile and search. And so I said, look, this might be, this might be the right time. We can't, we can't make my play here, not, not out of peak. It's just, hey, I thought about this in advance and said, look, if it doesn't work, it doesn't work. If the board doesn't want to do it, fine. Uh, and so I said, this is a good time. It's also a good time because the cloud's just coming on. And I'm saying to myself, look, we're going to have to build new capabilities. Even the way you, we're moving to a gross margin, to a non, you know, something below a hundred percent gross margin business. We have whole new capabilities. We need to build up around that. I even think of it through the lens of the accounting system.

• 2:11:46Speaker 02

  Like, how do you?

• 2:11:49Speaker 02

  We had these revenue and cost reports. They have to change in the world of the cloud because you really have to get tight on gross margin, not on, not on revenue. Revenue, I don't really pay much attention to Microsoft's revenue. I pay attention to the gross margin growth. Hmm, these days, you're saying? Those days. When I said the move to the cloud, I used to say this to analysts, you should expect us, you want us to have lower gross margins going forward, but we'll make it up in volume. Right? I mean, that, that is the whole proposition. Yeah, yeah. You know, lower gross margins. You know, it's like Walmart's an okay company, even though it's, you know, net margins, whatever, percent and a half, 2%, you just

• 2:12:29Speaker 02

  got to make it up in volume. So I knew it was a good time to let the new person sort of build from what we had to sort of the next generation of all the machinery that would have to happen to make cloud happen. Phone was, I never lost my desire to be an end user company. I bemoan the fact that I couldn't keep us focused on being an end user company slash consumer. It killed me. And it's sort of, you don't just, I want to be a consumer company. No, you've got to find the locomotive, not just a bunch of caboose's. You know, at the end of the day, Zoom was a caboose. A lot of the things

• 2:13:11Speaker 02

  we invested in were caboose's. We had to find the locomotive. And there are only two possible locomotives that made any sense. And I didn't have a play that I thought was going to break through anytime soon in search. Mobile was going to be really hard. But I knew in my heart of hearts that without physical hardware, we weren't going to break through there either because of search. Board said, no. I said, okay. Bill and I are, it's not really the board being disrespectful. Like, maybe it is, but it's mostly me and Bill. We're grinding, grinding. And that's never fun when we grind. And I said, okay, we're grinding. I know it's frustrating for him. It's frustrating for me. We're grinding. Here goes my idea. Here goes my idea. And oh, by the way, this is a great juncture point.

• 2:13:54Speaker 02

  So I said, okay, I'm, I'll, I'll pass.

• 2:14:00Speaker 02

  And then the board changed. Changed its mind.

• 2:14:03Ben Gilbert?

  Yeah. So why did they end up buying Nokia then after your decision was final? You were out.

• 2:14:10Speaker 02

  Oh, I don't know.

• 2:14:11Ben Gilbert?

  Maybe you don't know. Yeah.

• 2:14:12Speaker 02

  I don't, I don't really know. I mean, I'm not sure they really understood, but I had told them about, you know, we had a deep partnership with Nokia and I'm not really sure. Maybe guys really understood. I hadn't done a good job explaining how close the partnership was. So there was really no go back to Nokia and see if we can have a bigger partnership.

• 2:14:32Speaker 02

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

• 2:15:00David Rosenthal?

  And it reached a point where you had to buy the company or, or just cut bait totally on the whole thing.

• 2:15:05Speaker 02

  Just because the, the money, the math wouldn't work. What we had to do to be successful was beyond their financial capacity. But if we were going to do what it took to be successful, we couldn't do it on like $4.

• 2:15:16Ben Gilbert?

  Right. You needed the margin dollars from the hardware too.

• 2:15:18Speaker 02

  Exactly. Exactly.

• 2:15:20David Rosenthal?

  So you left.

• 2:15:24David Rosenthal?

  You did a pretty incredible thing or really you didn't do an incredible thing.

• 2:15:31David Rosenthal?

  You held everything. You're still the largest individual shareholder in Microsoft.

• 2:15:35Speaker 02

  I think I might be other than index funds, the largest institutional investor too.

• 2:15:41David Rosenthal?

  Basically besides Vanguard.

• 2:15:42Speaker 02

  Part, but yeah, it could be.

• 2:15:44David Rosenthal?

  On the one hand, I imagine that was very simple and you've given reasons in other interviews in the past. You're a loyal guy, et cetera. Just talk us through like the emotions, thinking about that. Like I imagine that was not so simple.

• 2:15:57Speaker 02

  No, not. I leave.

• 2:16:00Speaker 02

  And then what does it mean to emotionally detach? Cause if you're not there, you have to emotionally detach. You can't say, because you don't, you can't control anything anymore. So it's hard, you don't want to stay quite that emotionally attached because it's like, oh, I gotta get back in it. Fix everything. Uh, but I said, I'm going to be the best investor. We're going to know everything about this company. We're going to go to, I'm going to read everything just like I used to. We're going to go to conferences just like we used to. I went to one shareholder meeting and I was kind of a dick in my opinion. I mean, literally one of the shareholder shareholder meetings. And I just, yeah, I was too emotionally attached.

• 2:16:43Speaker 02

  And so, you know, it took me about a year to say, I, I just have to emotionally detach. So it took some work, but I kind of was able to get there. But I'm still loyal. Didn't want to sell. There's one, then we get our philanthropy started. And then I do need to do something because we do need some of the asset value to give away. So I went through a, a bit where, um,

• 2:17:15Speaker 02

  we gave some away, i.e. we put it into our donor advised fund. Uh, and I also, you know, sold a little bit at the time. And I was thinking,

• 2:17:24Ben Gilbert?

  This is like 2015 ish?

• 2:17:26Speaker 02

  Yeah, it might've been even 16, something like that. And then, you know, because our philanthropy was just ramping up. Uh, I mean, kind of even giving away money, but the dollar value was rocking. And, and then I said, maybe I should just sell it all. Hmm. Full emotional detachment.

• 2:17:44Ben Gilbert?

  Wow.

• 2:17:44Speaker 02

  Let's do full emotional detachment because look, it was my, it was my baby. It's my baby. I mean, I'm not a founder, but I think of myself as a founder. I was there so early and I hired basically everybody and, you know.

• 2:18:00Speaker 02

  Everybody was a senior leader I'd recruited and you know, it's not true anymore. Now, things have changed. There's probably only 10% of the people who are there now were there when I was there or something higher at the senior levels. I mean, I can go through the math and why that's true. But that would have been a very understandable decision. Just emotional detachment. It had nothing to do with money. Yeah, yeah, yeah. My only thought process was emotional detachment. I was, I was, I was wrestling and. You're ready to hit the button. You're ready to hit the sell button. I was wrestling. I was wrestling. And then lady who works here, ex-Microsofty, who works here in finance, who's the woman who sort of really charts what's going on financially at Microsoft. She and her boss, who's another ex-Microsofty,

• 2:18:45Speaker 02

  who used to work with me most closely on the financial stuff, but she says, you can't sell. You can't sell. This is going to be worth a lot more. You can't sell. You can't.

• 2:18:58Ben Gilbert?

  So she effectively made a Microsoft stock pick?

• 2:19:01Speaker 02

  She made us, and she was recommending, she had some, she has loyalty too. It's not like, you know, we have a bunch of Microsofties here and it's not like they lack loyalty either, but it was a little bit loyalty and a lot of pick. And I, I said, look, my loyalty trumps my emotional attachment. I can get through my emotional attachment, but my loyalty, and look, I think of the thing as, I think of the thing as like a two-headed Hydra. I thought about this the whole way. Things could go to nothing or things could explode. And that's partly why we tamped on the stock because we always saw the possibility for either of two radically different outcomes.

• 2:19:43Speaker 02

  And finally, I say, look, I don't really, I'm not going to sweat whether we're going to get the downside or the upside.

• 2:19:50Speaker 02

  I'm just going to be loyal. And I'm going to be enough emotionally detached for this to be okay.

• 2:19:56Ben Gilbert?

  Cause for you, it kind of doesn't matter. There, there's not a downside that could be so bad.

• 2:20:00Speaker 02

  No, I had enough money off the table. It's not like my family's gonna.

• 2:20:03Ben Gilbert?

  You could still run one of the best philanthropies of all time, even if the.

• 2:20:06Speaker 02

  We could be great in our.

• 2:20:09David Rosenthal?

  I hear you own an NBA team.

• 2:20:10Speaker 02

  Connie would have been okay with it. I mean, she finds it difficult to give away as much money as we have. So she wouldn't have minded a smaller problem to start with. She would have been okay.

• 2:20:19Ben Gilbert?

  I've been charting it over the last three years. You guys are giving away almost somewhere in the neighborhood of a billion dollars a year.

• 2:20:25David Rosenthal?

  Cash out the door.

• 2:20:26Ben Gilbert?

  But your net worth is ballooning every year way faster than you can give money away because of the Microsoft hold.

• 2:20:33Speaker 02

  Yeah. And one other thing that, yeah, Microsoft hold, but you may be missing one thing on the Microsoft hold that's important. And that's the size of the dividend check.

• 2:20:42Ben Gilbert?

  Ah.

• 2:20:45Speaker 02

  Between Microsoft and the other stuff I own, the dividend checks are

• 2:20:53Speaker 02

  pretty close to what we give away. So you can look at the appreciation, but you know, we're, we're, we're just above the dividend checks.

• 2:21:01David Rosenthal?

  You're just trying to shovel the money that is coming in the door, out the door.

• 2:21:04Ben Gilbert?

  So you can fund the whole philanthropy without selling additional shares.

• 2:21:09Speaker 02

  Well, there's two things that are going on. One, the dividend checks are pretty good. And number two, uh, I do have stuff that's not in Microsoft. So.

• 2:21:18Ben Gilbert?

  You hold, I think mostly index funds outside of the Clippers. Is that right?

• 2:21:21Speaker 02

  Yeah. Clipper slash arena index funds. I have one business I invested in with a guy who I went to college with, who worked at Microsoft. It's called Stagwell Media. It's a marketing services company called a modern day ad agency, but it's not really an ad agency. A guy named Mark Penn. So I do have some money that's not in index funds, but mostly I'm in index funds and.

• 2:21:46David Rosenthal?

  Which, I mean, anybody else, you know, in your, um, the same couple top pages of, you know, list that you're on. You must be the only one that operates like this. You know, everybody else, huge family offices, lots of investments, private equity funds.

• 2:22:00Speaker 02

  Yeah, but if you look at the guy, I mean, look, I would say you probably would find that Zuckerberg is pretty concentrated. I don't know this, but I'm gonna guess you would find, I don't know about Ellison, but you know, obviously, some of the guys who own more privately held businesses.

• 2:22:18David Rosenthal?

  But required to be concentrated, yeah.

• 2:22:21Speaker 02

  You know, yeah, who else? The Google guys, I imagine are concentrated, but I don't know that. I mean, I can't speak for anybody else.

• 2:22:30Speaker 02

  Obviously Bloomberg is concentrated.

• 2:22:32David Rosenthal?

  Right, right. So, well, I think in practice, it all works out the same way of like, there's one thing that is everything.

• 2:22:39Speaker 02

  And look, if you sell it, you're just gonna pay capital gains taxes. So you really, if you're really just being a financial monster about it, you gotta decide, will Microsoft underperform the index by enough to?

• 2:22:51David Rosenthal?

  Right, right, right.

• 2:22:52Speaker 02

  To top that the capital gains taxes. I don't need the money. I got plenty to live on without selling anything. That's number one. Financially, where's that money gonna go? Some will go to my kids, but most of it's gonna go to the government or to philanthropy. So why would I sell so we have less to give to philanthropy someday? Unless I really think Microsoft's gonna underperform the market by essentially the capital gains rate.

• 2:23:25David Rosenthal?

  So I feel like I'm watching a live USA Facts.

• 2:23:28Speaker 02

  Yeah.

• 2:23:28David Rosenthal?

  Video right here.

• 2:23:30Speaker 02

  Yeah, I got this question once. I'm a member of a country club in LA. And one of the things country clubs do sometimes is they'll do Q and A with members to entertain. And I did a Q and A with a friend of mine at the club and who'd been president of the club, actually. And also is a, kinda knows Charlie Munger pretty well, and Charlie Munger's there as well. And Charlie Munger comes up to him beforehand, and to me, I know Charlie through Bill and Warren, and says,

• 2:24:02Speaker 02

  If you call on me, I have a question.

• 2:24:06Speaker 02

  As only Charlie can. So, so you did a Charlie episode. So, you know, so we do the Q, we do our panel thing, the two of us. And then Q and A, Charlie, you know, gets up to the mic. He's not moving super well, but he gets up to the mic. And, "Oh, Charlie, we can call on you." And Charlie says, "Steve,

• 2:24:31Speaker 02

  you know, I'm wondering why you held on to your Microsoft stock when your partners over there didn't. I know you're not that smart."

• 2:24:44Ben Gilbert?

  I said, "No, Charlie, but I'm not loyal."

• 2:24:48Speaker 02

  Wow. I don't know why, why Paul and Bill didn't hang on. I don't know. You'd have to ask them. But for me, it's, you know, it's sort of a from the heart kind of thing. And I think it'd be fine. It's not going to screw anything up financially. I mean, what's the worst thing that happens? You know, Microsoft goes to zero? Probably not. But even if Microsoft goes to zero, me and my family, we can live, we can give away money. We, you know, it's not going to go to zero. And, and I'm okay. Either, any, any way it goes, I'm fine.

• 2:25:23Ben Gilbert?

  And are the Clippers and the Intuit Dome fully paid off at this point?

• 2:25:26Speaker 02

  Uh, the Clippers are fully paid off. I paid them off the day I bought them. Uh, that's not true. Uh, I didn't want to sell stocks at the time. So I borrowed some money, which is long paid off. Intuit Dome, we borrowed some money against Intuit Dome. So I don't owe any money on it. Oh, that's not true. I owe some, I have some margin debt, uh, that I used to, but again, it's just a timing thing. I didn't want to sell stock. So took some margin debt, which as dividends come in, I'm reducing the margin debt. Uh, but the building itself has debt on it. Why? Because to sell the building, let's say something was to happen to me and Connie, uh, my wife had to sell, sell it.

• 2:26:09Speaker 02

  It obviously has a lower val- the buyer would have to come up with less cash because it has debt on it. So call it worth X billion.

• 2:26:17Ben Gilbert?

  Right. You just rolled.

• 2:26:18Speaker 02

  And it's got Y billion on debt on it. You're only selling it for X minus Y. You're not selling it for X. Meaning the universe of buyers is bigger because it has debt on it. And oh, by the way, I happened to get the debt at a very good time at a very good rate. So it's sort of a double value to a potent, you know, to a future buyer. So that's the reason we put debt on the building. Uh, and the margin debt was just a timing issue, if you will.

• 2:26:44Ben Gilbert?

  I feel like I've done you, or we've done you a great disservice by going into the Clippers and Intuit Dome through the element of-

• 2:26:51Ben Gilbert?

  The financial lens.

• 2:26:52Ben Gilbert?

  Yeah. Uh, can I ask you?

• 2:26:54Speaker 02

  Now, that I do not own for financial purposes.

• 2:26:58Ben Gilbert?

  Well, hey.

• 2:27:00Speaker 02

  And I will also tell you, unlike Microsoft, it cannot go to zero.

• 2:27:06Ben Gilbert?

  Yeah.

• 2:27:06Ben Gilbert?

  Hmm. Yeah. Like the asset value.

• 2:27:08Speaker 02

  Not a chance. It is far more secure than Microsoft.

• 2:27:14Ben Gilbert?

  Hmm.

• 2:27:14Speaker 02

  Why? Not making more of them. They're not making more of them. And as long as anybody in the world's getting richer, the buyer pool will only go up. And people don't buy them for their earnings. I wish we had more earnings. But the end of the day, people are buying them because almost more like a piece of art. I mean, not everybody, some, you know, people don't like negative cash flow, blah, blah, blah. But at the end of the day, and, and I have, you know, the Clippers, we have the best market in the world. I mean, going on a basketball team, other than maybe Miami, the only, I mean, the place

• 2:27:54Speaker 02

  players want to play is LA. And if you look at buyers, you know, if you're a buyer and you, where do you want to go? Yeah, you care about where you're buying. If you don't live in LA, where do you want to go? Well, you want to go to LA or you want to go to Miami. You don't want to go to New York in the winter time. And if you're a foreign buyer, you know, potentially, you want to go to LA. So that asset value, I mean, we should get on to something other than asset value. And I'm not selling the thing. My estate may sell it. I don't know what the Connie and the kids will want. But at the end of the day, that one does not have a lot of volatility in it. It's a nice retirement fund. What's been the most surprising thing in your Clippers journey?

• 2:28:36Speaker 02

  I'll give you two parts to the answer. First is how the, I relate to that business versus the businesses I've known. Number one, there are more similarities than I ever thought. I mean, we do version upgrades, just like you do. What's a version upgrade? You do major, major version upgrades over the summer. That's the draft and free agency and trades. And you do a minor version upgrade at the time of the trade deadline. So that, yeah, it's very similar. You've got a six-month ship cycle.

• 2:29:07Ben Gilbert?

  It's your service pack.

• 2:29:08Speaker 02

  Yeah. SP1 and SP2. And oh, by the way, you know how people like Agile now development? Guess what? That's called changing the game plan. Per, you know, the coaches are always modifying in that sense. So it's a little bit similar. Ah, I never thought about that. Uh, the business is just like Microsoft. We sell both advertising and that's called sponsorship. And we sell tickets. Software licenses. Software, oh, no, that's like software licenses. And we have an OEM business. That's called broadcast revenue. It's 100%. It actually is remarkably similar.

• 2:29:49Speaker 02

  Yeah. I mean, just in terms of business modeling, um, we do have a union. That's very different. What that means in terms of the complexity through the collective bargaining agreement, it also covers things like what's max salary, what trades can you make, all that, very different. You actually, you're kind of, you really are business partners with your, with your competitors. That's different. I mean, you actually get together and talk to them. I never did that when I was at Microsoft. But you get together and you talk to them, but you're trying to compete.

• 2:30:26Speaker 02

  If you have somebody who wants to advance through their career, oftentimes the best way for them to advance, they have to go to another team. And we have a president of basketball. It's not an open job. And I don't plan for it to be an open job. I don't want to lose anybody, but if, you know, a lot of the career moves people make would be to other, other organizations. We, we don't like that, but we want to have the talent everybody loves.

• 2:30:51David Rosenthal?

  Right. At Microsoft, your domain is always growing and so there's always.

• 2:30:55Speaker 02

  The domain is growing or number of people, you can move people. You're an engineer, you, you, you're bored. You've worked on X, we'll move you to work on a different product, for example. It's different, the way you think about people because primarily because of the union, but also, you know, just, there's only 30 head coaching jobs. There just are. So if somebody wants to be a head coach and they're not our head coach, they have to find a job someplace else. Again, not what we want. But the reality is we don't want people held back in their career. It's not like Microsoft where I felt like I could always find a job that somebody should want. So that's, that's different. I'll give you, I'll give you another one to think about.

• 2:31:38Speaker 02

  You know, business likes to say, oh, we're accountable, we're agile, we're this, we're that. I've, sports is so much more accountable than business. It's like a joke. I'm being a bit extreme for, for fun, but every 24 seconds, you get a report card. Basketball, shot clock. Every 48 minutes, you can't say, I'm going to make it up next quarter. We missed, but I, I got it next quarter. No, you lost that game, that game is on your loss column for the rest of the season. You cannot dig yourself out of that one game loss hole. You can't. It's gone.

• 2:32:17David Rosenthal?

  And you can probably also be reasonably confident about each individual's contribution to that winner loss.

• 2:32:23Speaker 02

  Well, now let, now let me get to that. Your customers know everything you know. It's not like you could say, "Back in the lab. You wait till you see what we got in the lab." No, every statistic we have, our customers have. You want to know how many miles James Harden ran last game? Comes out of the statistical systems. You can, you can find that out. If you want to know how many pick and rolls we ran of a certain type? And how they were guarded and how we did scoring against them? Don't worry, you can read about it. You want to look and see what the dynamics look like on the sidelines? You can just sit there and watch our players and say, "Oh, I don't know everything.

• 2:33:08Speaker 02

  I don't know what they're saying, but I can see their body language. Oh, so and so seemed really charged up. Oh, that's great. So and so cheers for their teammates. So and so seemed down." There's almost nothing.

• 2:33:20Speaker 02

  I mean, we get to watch practice. Fans don't. But the level of accountability is so high. The speed is high. Think of teamwork. Teamwork, man. It's all on display. Not only on display, but you absolutely know you need teamwork. One star does not, can't bail you out. You may have one star, but then the pieces have to fit around the star. You know, it's just, it's just kind of the way it is. You can't, you know how businesses, you say, "Okay." Everybody wants to talk about teamwork.

• 2:34:00Speaker 02

  And in a lot of places that mean, "Hey, Ben, you know, I don't know. We could work better on this." And then Ben can say, "Your team's doing things wrong. And then we can get back together and talk a little more. And then a month later, we can talk about it some more." Probably you've seen this in some organizations.

• 2:34:24Ben Gilbert?

  And then at some point, we'll talk about it as if it were a great collaboration.

• 2:34:27Speaker 02

  Right.

• 2:34:27Ben Gilbert?

  Between our two teams.

• 2:34:28Speaker 02

  And you know what has to happen in our business?

• 2:34:32Speaker 02

  Every minute.

• 2:34:32David Rosenthal?

  You actually gotta pass the ball.

• 2:34:34Speaker 02

  You have to actually say it, pass the ball.

• 2:34:35David Rosenthal?

  Yeah.

• 2:34:36Speaker 02

  Or, you know, hey, this isn't working. You gotta do X. You gotta give real time feedback. It can't, you can't lollygag or, ah, well, you know, let's rub each other's belly. No, if you want that team to be better, you have to hold one another accountable, not just the coach. The best teams, the players hold each other accountable and not just the best player holds everybody else accountable. But the guys who are not stars have to be able to hold. Everybody's got to hold everybody accountable, which means, really means, give the feedback. In Microsoft, I, we got rid of the value called teamwork. I didn't want that one.

• 2:35:16Speaker 02

  I said, uh, open and respectful and dedicated to making others better. Cause teamwork could sound like a treat, everybody, nice, nice. Open? Yes. Gotta say what's on your mind. Respectful? Yes. But number one, dedicated to, to making each other better. Which I think is what the purpose of teamwork is, as opposed to the word teamwork.

• 2:35:41Ben Gilbert?

  That's interesting. Teamwork is a, like an implementation detail, but that's not actually the goal. We don't seek to have an organization full of teamwork. It's teamwork because we want some output.

• 2:35:52Speaker 02

  Exactly. And, and, you know, I think back to the old HP. Team, you know, I'm okay, you're okay. Let's all be nice to each other. You know, there's a little bit of that that's kind of come back into the general uh, narrative of culture today and, you know, generations, yeah, much younger than me. But at the end of the day, if you want to succeed, you're right. The goal is succeeding.

• 2:36:15David Rosenthal?

  Yeah.

• 2:36:15Speaker 02

  Getting people to play well together. And in the NBA team, you're gonna know. In two and a half hours or so, two hours, you're gonna know.

• 2:36:26David Rosenthal?

  It's interesting. Yeah. Professional sports is kind of like, maybe like the last bastion of, there's not room for the, I'm okay, you're okay. Let's talk this out. Oh, your team's talked too much. It's like, extreme accountability.

• 2:36:39Speaker 02

  Extreme accountability, extreme teamwork. See, I learned some things that would have been very helpful for me to understand at Microsoft. I'll give you another one. Reference checking. Everybody does reference checking, right? How good is the reference checking in most businesses?

• 2:36:57David Rosenthal?

  Not good.

• 2:36:58Ben Gilbert?

  Well, most people call front of sheet references, which has never made sense to me.

• 2:37:01Speaker 02

  Or you call somebody who probably doesn't feel like they can give you an honest answer because they don't want to get sued or blah, blah, blah. Basketball? You should see the amount of reference material we we have on a guy before we draft him. I mean, people have talked to their old coaches. They've talked to their teammates. They've

• 2:37:22David Rosenthal?

  Right.

• 2:37:23Speaker 02

  You know,

• 2:37:23Ben Gilbert?

  Yeah.

• 2:37:23Speaker 02

  And it's not just, I mean, that's kind of scouts do. They've watched them play. They've been to practices. They kind of know what they've talked to references about work.

• 2:37:34Ben Gilbert?

  Imagine if you could scout your future employees. You could just go hang out at their current job.

• 2:37:39Speaker 02

  Yeah, or you, you know, you talk to their parents. I mean, there's so many things.

• 2:37:44David Rosenthal?

  The draft choices are such a crucible decision, right? Because free agency, I mean, you mostly know what you're getting, right? Like you're, they have a body of work.

• 2:37:53Speaker 02

  See the body of work.

• 2:37:55David Rosenthal?

  Yeah.

• 2:37:55Speaker 02

  You may know what happens behind the scenes. You may not.

• 2:37:59David Rosenthal?

  Right. So there's some risk to it.

• 2:38:01Speaker 02

  Some.

• 2:38:01David Rosenthal?

  But there's a body of work.

• 2:38:02Speaker 02

  Yeah.

• 2:38:02David Rosenthal?

  A draft, you get two choices every year.

• 2:38:07Speaker 02

  Well, we traded some away, but yes.

• 2:38:08David Rosenthal?

  Right, right, right.

• 2:38:09Speaker 02

  Yeah, yeah, that's your chance, David.

• 2:38:11David Rosenthal?

  You know, in in aggregate, every team gets two choices every year and you could choose to deal those choices. So that's part of it. Yeah.

• 2:38:17Speaker 02

  Yeah.

• 2:38:17David Rosenthal?

  But like that's a, and that's hugely, hugely impactful and you.

• 2:38:22Speaker 02

  Well, and you're dealing with one other thing. My wife reminds me. Boys' brains don't fully develop until they're what, 25? And we're drafting guys who are 19, 20, 21.

• 2:38:33David Rosenthal?

  Yeah.

• 2:38:34Speaker 02

  So you're also having to say, by everything I know, what do I project that guy looks like as they get into their? You know, you could say you enter your prime around 27. What do you start looking at though? You're going to look pretty good or not by 23, 24, 25. So you have to sort of have a progression of what you think happens to the young man. When you draft them. And so the more, so reference checking.

• 2:39:01Speaker 02

  Bigger, much bigger deal, I found. And, you know, people say, oh, well, you know, it's simple. It's sports. The strategy decks, I get 35 PowerPoints, 40 PowerPoints, easily to go through, okay, here's our strategies. What about this? What if? What about this? What do we do here? The complex, we have a PhD physicist who, you know, is a key part of our, our analytics group, focuses on our analytic systems. And it's not like, you know, this stuff's not complicated. It is.

• 2:39:39Ben Gilbert?

  Analytics has become this really big buzzword in sports. Where do you see real alpha actually happening in data science and sports versus what's just like table stakes at this point?

• 2:39:50Speaker 02

  There are two ways to use analytics. One is for game planning. You know, literally, what does this tell us about the best way to guard Anthony Edwards in this situation? Or these situations? Very helpful for that. I'd say the data is probably table stakes, honestly. The way you use it, not so much. Do you ask the right questions? Maybe not. You know, does coach really understand and embrace? Are the analytics people really able to mind meld with coach? So that coaches, you know, get the insights they can for game

• 2:40:32Speaker 02

  planning. The second is, what about for drafting and trading? Analytics are actually a little less important in that, in that instance, because they don't really tell you how if you mix Charlie with Harry, it's different than if you mix Charlie with Bobby. And Charlie and Harry haven't played together before. So it's a little different. They are helpful. We have analytics, for example, on all the kids we're going to draft, less, less valuable than on pros because you're playing on against a different level of competition. Do people have differential data? Not much. I mean, the same cameras in the ceiling are recording the same games.

• 2:41:16Speaker 02

  Most of the analytics data now gets processed through standard, you know, sort of software packages that get licensed to everybody. So there's a company called Hawkeye Second Spectrum. And basically, you know, they've built machine learning layers on top of, on top of the raw motion data, et cetera. And so every team winds up with the same tools. Doesn't mean you don't need smart guys. It doesn't mean to do, you don't do analysis on top of it.

• 2:41:47Ben Gilbert?

  Has anyone had a breakthrough form of measurement? Is there an example in the last five years of a team that's had a great data source emerge?

• 2:41:54Speaker 02

  A different data source than other people have? No, I don't think so at all. It's the things people emphasize in terms of what they look like, look at could be different, I think, very much by, by teams. There are teams at the draft who just have you take a psychological test. You get to interview a set of kids and they might just have you take a test. Other teams, it's all about the interview. Some people, I don't know if they have them see psychologists. I don't, I don't know, but people will use different techniques to try to, to do some of that. It's a little different than analytics, but it gives you the sense of what is, you know, how do you assess what's important?

• 2:42:32Ben Gilbert?

  Fascinating, interesting. How does Intuit Dome fit into all this?

• 2:42:38Speaker 02

  I love Intuit Dome. Since we talked a lot about products and I've been involved in, you know, I'll say the, the visioning, and I call myself a visionary, but what should this product look like? And particularly those, you know, a number of them, both Windows, but also certainly on the backend products, backend meaning they're not customer visible. But I would say Intuit Dome is probably the product for which I had the clearest vision I've ever had. I knew what I wanted. It evolved some because we went and looked at, you know, a bunch of other arenas. But I, I, I had a point of view. I know what user I wanted to make, make happy.

• 2:43:22Ben Gilbert?

  So I bet a lot of people aren't familiar. What is the thesis behind Intuit Dome?

• 2:43:27Speaker 02

  I wanted to make Intuit Dome. The best place for the hardcore basketball fan.

• 2:43:34Ben Gilbert?

  And particularly the hardcore Clippers fan, right?

• 2:43:37Speaker 02

  Sure, sure, sure, of course, because we're the only team that plays there.

• 2:43:42David Rosenthal?

  You've got another team who plays there every night, your visiting team.

• 2:43:44Ben Gilbert?

  But like.

• 2:43:46Speaker 02

  Not trying to help them.

• 2:43:46David Rosenthal?

  Not trying to help them.

• 2:43:47Speaker 02

  So, you know, yes, Clipper fans, but I wanted you, we're going to have the Olympics. We'll have every Olympic basketball game in Intuit. I want it to be great for those environments. We have some college games or high school games in there. Basketball, basketball, basketball. So you sit in there and you're a fan. You want, it's a live event. Got to have energy. Got to have intensity. If you're a basketball fan, come on, let's go. And so you want it tight. You want to have it reverberating with people who are cheering. We built essentially, a whole side of the building is structured more like a college gym. Long and steep.

• 2:44:26Ben Gilbert?

  This is the wall?

• 2:44:27Speaker 02

  There's no sweets on the side. We even built a student section right in the middle, i.e. it's standing room only. You must stand. That's what you have to agree to if you're going to sit there or be there. You have to agree to stand. You have to agree to cheer. And if you don't, we'll find you another place in the building to sit. But you can't wear visiting gear paraphernalia on that whole side. 4,000 seats. We'll move you if, you know, otherwise. It's small. Not the number of seats is a little small. But the way we pulled it together, there's no hockey. I didn't want hockey. Not that hockey's not a great sport, but.

• 2:45:05David Rosenthal?

  Compromises you'd have to make to the arena.

• 2:45:07Speaker 02

  You have to spread it out. You have to spread people out because the rink is bigger than the court. Very different. Basketball, we put in this, we have an acre of scoreboard.

• 2:45:17David Rosenthal?

  Yeah, yeah. The halo board is unreal.

• 2:45:19Speaker 02

  More statistics. More statistics. We did, we, we, we went 4K from the start. I didn't realize it's an acre. You have an acre. Between the inside and the outside, it's almost an acre.

• 2:45:31Ben Gilbert?

  It's the largest indoor screen in the world?

• 2:45:33Speaker 02

  Yeah, yeah, for sure. Uh, for sure.

• 2:45:36Ben Gilbert?

  And what you were describing before is the wall. So at

• 2:45:39Speaker 02

  The wall.

• 2:45:40Ben Gilbert?

  For any fans that haven't, or listeners who haven't seen a game there or seen anything, you've done interviews about this. It's an unbroken.

• 2:45:47Speaker 02

  51 rows, unbroken, all the way up, student, I call it the student section. We call it the swell. Clippers, waves, get it? Swell. The swell is right in the middle. They do a chant before the game starts. They're chanting, they're making noise. A bunch, a bunch of them, they'll find weird things they want to bring to games. Funny posters, but every, and you, you basically sign up, first come, first served. If you're not there early, you're not in the swell that game. So we oversell the section. It's a thousand bucks for the year, which is only 25 bucks a game. Hell of a price, but you're expected. Good one. NBA game for 25 bucks. You're expected to deliver the goods. You have to. You gotta bring the value. You gotta bring the value.

• 2:46:30Ben Gilbert?

  And the thesis behind the wall, if I'm sort of understanding correctly, is it should be easy to be a Clipper player, but hard to be an opposing player.

• 2:46:39Speaker 02

  We put it right on top of the visitor's side. So it makes noise right into the visitors' huddle. We put the swell right behind the backboard. So basically when you're shooting free throws on that end, you're looking right at the swell. And it makes a difference.

• 2:46:53Ben Gilbert?

  I saw data that said that the

• 2:46:54Speaker 02

  Lowest free throw shooting percentage in the league for the visiting team is against the wall.

• 2:47:00Ben Gilbert?

  Like Steve, this

• 2:47:03Speaker 02

  What did the other owners think about this? We've had a bunch of people come through, look at the building and would I be surprised if a number of the new arenas get built, don't have a wall? No, I would be, or at least But at least you've got, you've got a duration of your advantage because not every other team is doing a remodel. Can build or remodel an arena. But you also have to remember, I, I took some financial hits on this. We have fewer suites. Less revenue and we only charge a thousand bucks for a season ticket that gets you pretty close to the damn floor.

• 2:47:34Ben Gilbert?

  And you didn't have any public funding for it. So in terms of the cash outlay.

• 2:47:37Speaker 02

  California, you can't have public funding for arenas. That's why we don't.

• 2:47:41Ben Gilbert?

  So you paid for the whole arena at, and you're going to have slower payback on that because you have less revenue opportunity.

• 2:47:47Speaker 02

  Yeah, we, we took a revenue. Definitely. We could have made more revenue on that side if we'd done things a little bit differently, but it's about basketball. We have a lot of toilets.

• 2:47:57Ben Gilbert?

  Three times the average or something like that?

• 2:47:59Speaker 02

  Something like that. Why? It's about basketball. Get out and get back into your seat. Don't miss the action. We, we started out with a lot more concession stands and then we said, no, no, let's just do this completely frictionless. So if you register your face, you just walk in, grab what you want and leave. If not, you can just tap your phone on the way in, grab your stuff and leave. Uh, there's no checkout. We don't serve eclectic food, little everything, same thing everywhere. Why? We don't want you walking around having to look for your favorite food. No, you're going to get the same great stuff everywhere. Turns out 85% of what gets bought is in five items. Anyway, it's a hamburger. It's a hot

• 2:48:42Speaker 02

  dog. It's a nachos, uh, chicken tenders. And I don't, I'm not remembering off the top of my head.

• 2:48:48Ben Gilbert?

  Is part of the calculus of this for attracting players too?

• 2:48:52Speaker 02

  Sure. If you look at our back end spaces, like our practice facility, ooh la la. Yeah. I think most people think.

• 2:48:59Ben Gilbert?

  But I'm thinking even like, if you know your opponent's going to have a lower free throw shooting percentage in your home arena.

• 2:49:04Speaker 02

  Sure. I think people think, players have said they think it's really cool. No.

• 2:49:10Speaker 02

  And that's good. That's good. Players offices are also good, i.e. the training facility. I mean, the training area, the practice area, our outdoor pool and sauna and cold plunge, our weight room, our sports performance center. So that, that stuff's all I would say a pretty.

• 2:49:33Speaker 02

  Pretty good as well. Very good. So we've done a bunch of things. We have the best refs room, I think, in the league. We called the refs' union and said, you know, what do you guys need? The media area, we said, let's, look, if we're going to build a new arena, our visiting locker room's the best in the league. Best weight room.

• 2:49:55Ben Gilbert?

  That's your sales pitch to visiting stars.

• 2:49:58Speaker 02

  Exactly. Yeah, we say, hey, we care. And we care about everybody. And then we make it about the basketball, in and out. Oh, what's our artwork? I mean, we have public art that is required, some of which is basketball oriented. But our major piece of public art is a Clippers ship, whose masks are backboard replicas of basketballs from around the world. Basketball, basketball, basketball. Our art inside the building? We have a jersey, a high school basketball jersey from every high school in the state of California. It looks like art almost because it's nice colors on the wall. Basketball, man. It's about the basketball.

• 2:50:39Ben Gilbert?

  This building feels like your personality into a physical structure, like the competitiveness, the loyalty, the like fixation on what matters.

• 2:50:50Ben Gilbert?

  On the customer.

• 2:50:51Ben Gilbert?

  Yes.

• 2:50:52Speaker 02

  Yeah, it is. Look, I knew, you know how oftentimes startups come about because the founder like is in love with some topic and builds the product they wanted to use? I think that happens a lot. I don't think people start back and look at the market. They say, oh, I think, you know, I think Zuckerberg did that. Bill did that. Programming. Everybody does it, right? That's what you did. I didn't, I didn't try to go out and survey. We could have designed for the, let me call it the contemporary audience. We would have had more lounge space. We could have designed for what I'd call traditional, long-term. That's kind of how I think about it. We could have designed, in a lot of ways, I designed for me, in some large measure, guys like me. And it turns out Clipper fans

• 2:51:37Speaker 02

  are a little bit, are like me. Because some of them are long-suffering. The team wasn't good there for a number of years. People are diehard. So come up to you and say, I'm 89. Which really means they bought their season tickets in 1989. And they've been there. Now we've exploded in the last, whatever, 14 years. We haven't had a losing season.

• 2:52:01Speaker 02

  So.

• 2:52:01Ben Gilbert?

  Hopefully a championship here at some point.

• 2:52:04David Rosenthal?

  When are you going to overtake the Lakers?

• 2:52:08Speaker 02

  You know, there are battles in tech where you just have to be patient and long term. Our goal in LA, it's weird to have a town with two teams.

• 2:52:20Speaker 02

  Our goal is to be a long-term grinders on that. And we want to beat them every time on the court. It's, it's okay to have two popular teams. Los Angeles County, for gosh sakes, has the same number of people as the state of Ohio, pretty much. So there's plenty of people to be fans. We don't want to be, quote, little brother. We don't want to be the team with 20, a nice 20% market share. No. We want to get our fair share. We're never going to get 100. The Lakers have tradition. So, you know, just like at Microsoft, patient, long-term hardcore approach. And if we don't do that, no, we, we, the Lakers have their position. They've earned it. They got a lot of championships.

• 2:53:03Speaker 02

  I don't mean we're not going to keep coming.

• 2:53:04David Rosenthal?

  You're coming for them.

• 2:53:05Speaker 02

  And coming.

• 2:53:07Ben Gilbert?

  Steve, thank you so much.

• 2:53:08Speaker 02

  Thanks, man. Thanks, David.

• 2:53:09David Rosenthal?

  Thanks, Steve.

• 2:53:10Ben Gilbert?

  Appreciate it. Ooh, David, that was fun.

• 2:53:14David Rosenthal?

  Yes, it was.

• 2:53:15Ben Gilbert?

  I've always wanted to interview Steve Ballmer. In fact, when I was at Microsoft, I, you know, I wasn't a podcaster then, but at the time I was such a junior employee. But man, there was a complicated landscape that Steve was navigating between, you know, the product set, between developer relevance, between the sort of shifting landscape underneath him. And will Windows be the interesting bet to make going forward? You know, personnel stuff, board stuff, eventually CEO transition. That is not a job I want.

• 2:53:47David Rosenthal?

  It's kind of fun for us as a show too. I mean, obviously this is meaningful for you personally, but when we started the show in Seattle in 2015, I mean, Microsoft, the Microsoft transition, Steve, Satya, this is what was in the water. This is what we all talked about at Madrona or Seattle in the tech ecosystem.

• 2:54:09Ben Gilbert?

  And it's not clear that Microsoft was going to be this amazing juggernaut that it turned into. I mean, obviously Steve had planted some seeds in enterprise and what would become the juggernaut of Azure. But we were early in Satya's tenure when we started the show. Everyone had high hopes. He had started to transform the culture, but it's come a long way.

• 2:54:29David Rosenthal?

  Steve knew how great Azure was going to be, but the rest of the world didn't yet.

• 2:54:35Ben Gilbert?

  Yep, so fun. If you liked this episode, go check out our two big episodes on the history of Microsoft. Part one is basically the era where Bill Gates was CEO. Part two is basically the era where Steve was CEO. And if you want more acquired between the monthly episodes, check out ACQ2, our interview show where we talk with founders building their businesses today, often in spaces that we've covered on the show. If you want to know more every time an episode drops, check out our email list. That's acquired.fm/email. Get updates, get corrections, get hints at what the next episode will be. We announce all kinds of cool stuff in there. When you finish this episode, come discuss it with the other smart members of the Acquired community at acquired.fm/Slack. And with that, listeners, we'll see you next time.

• 2:55:19David Rosenthal?

  We'll see you next time.