Microsoft
04:23:10 Share

Or you listening to before we helped on to walk out .

music bion's A H nubian's .

haven't heard IT yet.

How is IT I really like? IT nice. I would get this reductiones to call a country.

I was appropriate enough listening to start me up through the ages. Of course you were.

but I kind of feel like a David rose and all move is that you might have been listened to start me up. Whether we were doing microsoft note that's a very squarely in your genre song the stone though.

man, like it's crazy there in their seventies.

eighties.

Amazing then, I hope for in our seventies and eighties .

danced on stage season one .

hundred and twenty six. Yeah, what's do IT? What's do IT easy? You with that, you with that, you who got you easy? You with you, with you see me down, say, state, we are no way.

Welcome to season fourteen, episode four of acquired the podcast about great companies and the stories and playbooks behind them. And then gilbert, David isn't all, and we are your hosts. We often remark that selling software is the best business model of all time. Well, today, finally, we tell the story of the company that created that business, microsoft.

Finally, ten years into required, finally do with IT. I have been daunting.

You know, we wanted to do IT for a while, but IT takes some hood sport to .

tackle microsoft. I'm so fired up.

We're ready. It's time. yeah. Well, listeners, microsoft today is rowling and massive. IT is the world's most valuable company worth over three trillion dollars. They have forty nine years of history making software for consumers and enterprises, making hardware gaming systems, gaming studios, windows apps, ipad apps, mac apps, berating systems, mobile Operating systems, M, P, three players, search engine, cloud computing services on cloud computing programing, languages development, the list goes on, but I did not start out that way.

Today, we will tell the story of the desktop software company before the enterprise, before I, T, before the internet, before being a trusted partner to governments around the free world, and really before people even knew what to do with personal computers. This is the story of a bunch of rag tag genius in their twins pushing what was possible. Welcome to microsoft, the PC era.

Well, listeners, if you wanted, know every time an episode drops, you can get hints at the next topic and follow up. You can sign up at acquired df m slash email. Come talk about this episode with the community at acquire dota FM slash slack if you want more from David and night, you should check out our second show, ACCQ2， where we interview founders, investors and experts, often as a deeper dive into topics recover on the main show.

So with that, the show is not investment advice. Dave and I may have investments in the companies we discuss, and likely all of you if you hold any index funds. And the show is for informational and entertainment purposes only. David, where on earth do we start the microsoft story?

Where have I done the mid on this one? We're going to start in one thousand hundred and fifty five in seattle, washington with the earth of bill gates the third or tray as he's no yes coming up. It's so confusing because his dad is the second, but he goes by senior and villas junior slashed the third slash tray.

So bill in one thousand twenty five, is born as the second of three children to bill and marriages. Now bill gates, seeing ier, his father is from bramer ton, the navy town just across the sound from seattle, where he goes s up in a family that owns and runs a furniture store there, a long way from the software king of the world. The year now, bill gates senior slash the second after high school.

He joins the army during world war two, service during world war two. And then he goes, I presume, on the G. I. Bill to the university of ashington, where he is the first member of his family to go to college.

And there he gets an underground and lodging in four years, and then decides to stay in seattle with his new family and become a placing attorney. Now I say family, because at the youtube he meets and marries one, marry a maxwell and mary, I don't know how to put in. Other than that, he is a force.

yes. So mariya family had founded national city bank, and her father was a senior executive at first inner state bank, which later became a big part of wealth. Fargu now married, despising the daughter of a successful business family. In that day, age was not test aside, like so many other daughters we've talked about on the show.

new york times, a maz, where I was sort of passed to the sun and law to keep continue around the business. That was not the case with mary maxwell.

no. So after he graduates from the utah b. SHE becomes first, the president of the seattle junior. I can SHE starts joining nonprofit boards in seattle as a very Young woman. SHE joins the sale symphony board, the chAmber commerce, the children's hospital, the king county united way.

And she's such a force on these boards that SHE starts getting asked by her fellow board members to join their company's boards to like the corporate boards. They're so impressed with her. So first, SHE joins the board of first inter state bank, the bank that her family apart of. Then SHE joins the board of cairo television in seattle. SHE even ends up joining the pacific northwest belt telephone board.

That's right.

Part of the A T N T break up. yeah. Eventually, SHE joins the board of regions of the university of washington and the whole entire national united wayward. So he never works full time in a corporate setting. But IT is not an overstatement at all to say that mary gates became one of the most powerful business people in the pacific northwest period.

absolutely. And bill gates senior was the prominent attorney in the region. And so it's quite the power couple.

Then it's like you're reading my scrip here. Yes, we don't want to give bill senior the short shift here either. He becomes a superstar lawyer and he becomes a co founding partner of the firm, preston gates and Alice, which today I don't even realized this, still duggin the research.

That is K N L. Gates today, one of the largest law firms in the world. yep. And another fun fact that you probably know about the gate senior, but we got a that's being acquired. Talk about, do you know what corporate board he joined later in life? I do not, costa.

of course, build a senior, we should say, to basically galvanize the entrepreneurs community in seattle. He started the tech alliance. He was a huge Angel investor. He really did organize Angel investors, people who want to put high risk capital to work into startups. And you know, his heart was there, obviously, through his law practice, long before bill gates, the third became the production.

he became total. And that's the point we want to land here is for Young bill trade growing up here. He is growing up in like a pretty unique household.

He would later talk about being like nine or ten years old. And most nights at dinner at his house there would be a CEO or a senator, governor, somebody who's just over for dinner. And bill would sit there and absorb the business conversation.

You know, it's like there are my family. They do my family that we talked about on that this whole thing that makes me think of paul, that being character in the dune movie. He's in the back. He's kind of bread from birth to be this incredible business mind.

I mean, at age thirteen, with his best friend, who we will talk about very soon, he brought up the idea. I wonder what company I will be the C E O of when I grow up, what industry will I go after? What problems will I tackle? IT wasn't a question of if, but which. yes.

And I just turned out that he would be the C. E O, in fact, of the biggest company in the biggest industry ever to exist. The other thing that we got to say about bill growing up, he is in sely competitive, so he did not and does not like to lose at anything.

And that is putting IT mildly, whether it's sports, are swimming or computers or school in the classroom, there's a quote, even one of the books we read from a childhood friend of his who says, everything built did he did competitively and never simply to relax. I think this used to be more than today. There's kind of the image of bill gates that he was a computer nerd, that he was like the shy little skinny kid.

And the way he looks doesn't help this. But that is not the case at all. This guy had a competitive fire in him, i'm sure still does. Like.

not other about things can be true. He was the number of one math student in the state of washington. He was a nerdy kid and a brilliant kid and also fiercely competitive.

His child, hod friend and cofounder of microsoft, paul Allen, would say about him. You can tell three things about bill gates pretty quickly. He was really smart. He was really competitive. He wanted to show you how smart he was, and he was really, really persistent.

That sounds about right. So famously speaking, a paul and wear bill in paul meat. When bill is in seventh grade, his parents enroll him at the lakeside school, which now I think it's internationally famous because of bill.

But IT is a super rigorous college prep school, medical school in high school and bill ends up writing the scheduling software for class scheduling that he puts himself in the classes with all the girls like, uh, fully but god like this. Bill, thirty years old, seventh grade, lakeside. This is when IT starts.

Every microsoft doesn't start, but during that year builds. Thirteen years old, the lakeside mother's club raises money to buy the school a teletype and connected IT up and rent computer time from a deck. P, D, P, ten.

That is located in downtown seattle and owned by the branch office there of general electric. Now, probably a bunch of you, like, I have no idea what any of those words mean. So we ve got to set some context. This is nineteen and sixty eight, one thousand and sixty eight, the beatles, vietnam, the summer of love, this is not the computer age.

two thousand and a space auto sy has just come out.

No one bushnell l has not found A A tar yet. Bob noise and gordon or are only just leaving fair child at my conductor to start silicon valley, still dominated by lucky. There is no such thing as a microprocessor.

The united states would land on the moon one year later.

totally the way computing worked back them. IT was basically still the any act like a computer man, two things, and either a massive room size machine that had bet the computing power of a calculator or IT meant a human. People talk about computers as humans. Do you ever see the movie hidden figures about the black women who did the calculation?

Those women wore the computers.

They were called the computers, yes.

because they would sit there in computer.

This was a totally different area. So the idea that a thirteen year old kid in this high school, this middle school, would get access to share computer time, I can't imagine. There are many other secondary schools in the country .

that we're doing this. Yes, this is a very early place to make the point. Microsoft is the result of tremendous intelligence, brilliant strategy, fierce competition and an unbelievable amount of luck.

Bill gates was born in one thousand and fifty five, the same year as Steve jobs to come into adult od, just as the personal computer wave is starting. And the fact that he was at a middle school and had this much privilege where he could get access to A P D P. Ten at this point in his life to help him understand how important computers would become, I mean. There are dozens of people in amErica who are as well situated as bill is, and that might be overly generous.

He and paul got a sneak peak into the future there at lake side. It's funny you said the personal computer here we are so far away from the personal computer here. I mean, we got us at the state.

What is computing? I mentioned any act in this room size things. Computers did not have screen.

He didn't have, have curses. He didn't have lights, did have pixel. Everything was done on a teletype.

They kind of look like typewriters, and they were wired up, promote either in the same facility or like what lakeside is doing. You could be remote. I mean, it's almost like the cloud today.

And IT called over a phone line, but that was the teller type jack exactly.

got wired over the phone line, hooked up to these main frames. And so you typed commands into this teletype. And then the response came back over the phone liner, over whatever cable from the mainframe.

And IT got printed out on a spool of tape on the tityre. But this is power that Normal thirteen year olds don't come anywhere in near accessing. Yep, what is the computing market at this time? IT is pretty much will come back to the pretty much in a minute, one hundred percent dominated by IBM.

Oh yes.

IBM big blue, you know, big iron, and is what I was referred to, like the products that they would produce, they were the industry.

yes. Ben Thompson has a fantastic quote on this. He has an article called what is a tech company.

And here's his comment. Fifty years ago, what is a tech company was an easy question to answer. IBM was the tech company, and everybody else was IBM customers.

That may be a slight exaggeration, but not by much. IBM built the hardware at that time, the system, three sixty. They wrote the software, including the Operating system and the application, and provided services, including training, ongoing maintenance and custom line of business software.

Yeah, system three sixty was a line of solutions, I would say, offered by IBM. And I consisted of the thing, the room says thing, the mainframe and the software, which was system three sixty, and the consulting and the implementation, you know, you couldn't just call A P, P, S. And fork lift one of these things into a company is expected to work.

Now you got to Operate this thing too. Like S, M, I don't ship off to. And C, A full, lush, full thing.

But an important thing that was also happening this year, in thousand nine hundred and sixty eight, was that IBM was undergoing some anti trust scrutiny over that huge bundle that I just told you about. I mean, doesn't IT smell like anti trust. They do everything from the hardware to the software, the opening system, the service to support.

They are the whole market. They are starting to get concerned. And so proactively, they unbundled LED hardware, software and services.

And they started selling those separately for the first time, which was not a problem at first. But what IT did was a crack. The door for customers to say, oh, I can buy hardware from IBM and software from someone else. And other people were not explaining this, but IT was possible.

Yeah, interesting. I cracks the door for microsoft. Like fifteen years later, twenty years later.

yes, but this is where the seeds are shown of what is the exploitable opportunity when bill gates is ready to do something interesting.

Now back to the timing thing for bill and paul and microsoft. I mentioned when we were setting this up that there's something else to talk about here. IBM was facing a disruptive force at this moment, I think probably for the first time in its history, certain ly in the computing era of IBM history.

And that was the digital equipment corporation, or deck. Notice when we said earlier, the lakeside is renting computer time from the general electric computer and downtown n seattle, I said it's a deck. P, D, P, ten.

It's not an IBM product. So what's deck? There are the mini .

computer company.

Mini quotes. yeah. Mini, mini. Meaning IT was the size of a closet, not the size of.

It's all relative. Deck had been started by this guy cannot awesome from M. I, T. And what they did. He had this brilliant insight that would play out over and over and over again in technology. So i'm not going to go compete with IBM head on.

I'm not gonna any I am not going to make main frames, but computing has advanced enough that there is an opportunity to make something smaller, less powerful, more sort of toy like. And there's enough demand out there that I think I can find some new markets for people who will buy those types of computers. And it's smaller businesses, but in particular, it's like branch offices of the big company.

So no, I am sure general electric bought lots and lots and lots of IBM mainframes and products at their headquarters. But the G E. Field office in seattle, they're not gonna truck in a main frame. And in one thousand .

nine sixty eight, seattle, I mean, this is like a provincial little town. I'm standing here right now. It's a major city in a huge economy. The but at the time kind of a podunk, forgotten, sleepy, far away place totally.

And microsoft would go a long way to training that over time.

And we should say this is the e classic low end disruption playbooks. I think this is what clain Christians and was talking about going from mainframe, the middle computers. I'm going to make something that's worse for most things but Better for some new things that new customers and new markets are. Onna care a lot about and IBM get to look at IT and cope that can do any of the things that are important to our customers. And that's exactly why IT works.

And specifically, why then I got to care about, I don't know exactly what an IBM mainframe system, system, three, sixty, three, seventy, whatever cost, i'm imagine, tens of millions of dollars, all in total cost, maybe hundreds of millions of total dollars to run a system like that and buy a. So the first deck machine, when IT comes out, the P, D, P. One, a few years before this time, IT was Priced at one hundred and twenty thousand dollars.

So like an order of magnitude, maybe two below a system that you would buy from IBM. Obviously still a long, long, long way from the personal computer. People are not buying these things for their houses, but you know, yeah g by one for the field office in seattle.

Or universities will buy them for research, for their students, for their professors. And so deck china creates a new market for computing. And bill, he's so studied in business history.

The founder can often can. He's bills hero. He a totally looks up to deck and what decks done.

Now the deck and mini computer U S. Is still the same as the main frame. You're still using a teletype.

There's no innovation in terms of what the computing is or how you use IT. It's just cheaper and more people have access to IT. yes.

So back to lakeside and the mother's club raising money for this access here for the school bill. Remember, he's just started. He's in seventh grade and lakeside is a middle high school.

The high schools actually a separate building, the computer room that gets installed with the teletyped that's over in the high school. Really, he doesn't care. He gets exposed to IT.

I think in a math class one day he's like, oh, i'm hooked. So he goes over. He's hanging out. The high scholars teaches himself, had a program, and pretty quickly he becomes known as one of the very best programmers there. And he in three other kids, from what do they call themselves the lakeside programmers group. And one of his bodies who reformers IT with is, of course, the high school, or I think, the tent t grater at the time. Paul, alan 呢？

There is a fantastic photo listeners that we will tweet of bill and paul sitting in the computer room at lake side. In bill, I think he's like thirteen, fourteen. He looks like he's about IT. I think on the wall, there's this most I put that out magazine thing, that is the bugs layer that they've hung up over the wall. It's amazing.

So these high school kids, they start the lakeside programmer group. They call the programmer group because they are programmer. This is another super important thing, alan, to use a computer at this time meant to be a programmer.

R right? There was no package software that you at. The software that I M was selling was the Operating system to make the machines actually function. And IT was the programing languages that you could then program on, but you won't click on around and using excel or like you to pull them up apps. Everybody who used the computer wrote there on software.

right? There was not this multi sided network of you've got developers making applications and then you've got users of those applications. No, everybody who used the computer was a programmer.

So the goal of the likes side programmers group, remember bill, is this business protect is to use their very valuable and very rare skills as programmer at this time, too, you know, make money, you do a business. So turns out at the same time, I mean, the coincidences here is crazy.

There is a local startup coming out of the university of washington called the computer center corporation, or secured, and the business plane behind c cubed was that they were going to get a bunch of decks, a bunch P, D, P, eighth, ten and elevens, whatever. And they were gonna be like A W S. They were gonna just be a computer timeshare ing company.

So c cubed hires the lakeside programmer group these kids to come in and find in document bugs in the system, and they're going to pay them directly in computer time. So when they come in to see cubed, they learn for train, they learn less. They learn machine language for the pdps. Back at lakeside, they were just using basic the programing language.

which is reasonably high level in terms of how abstracted it's like you're dot writing machine language. You don't have to know how to address memory in registers and all that IT reads kind of like english. You know how to add numbers together.

It's not A H elegant language and it's a very verbose language. But if you sort of look at IT with your eyes as a person who speaks english, basic math, you're like, I can't understand what this program does. So there's a meaningful amount of translation done by a basic interpreter that takes you from the basic code you have to write to what is actually running on the machine.

Yes, but basic. We don't want to give the impression that IT is just basic or just for kids .

that was widely used.

It's going to become hugely, hugely important like IT is both the gateway programing language for everybody, but like it's a real programing language and a lot of stuff is done in IT.

It's sort of the python of its day. I think the way python is now where you sort of joke that. Python is so flexible, you know, you can like accidentally write a program by writing english, and I can kind of forgive a lot of mistakes. And IT reads kind of like english. It's a reasonable parallel to dry way back when with basic, where you say, look, you can understand IT as a laman, but also it's used to a broad set of business .

applications totally. When billion paul and their buddies come to see cubed, there are now getting access to learn real hard core systems programing languages, including machine code for the P. D P. ten. They're becoming pretty prolific engineers.

Here they are, hand writing assembly code.

yes. And they're getting mentored. One of the executives at c. Cubed is a guy named Steve rustle.

Did you find this band you know about? This is a you gotta die. Steve russo was the guy who wrote space war when he was A M I T.

On the first P D P 的 P D P one， easily a computer science legend. No one bushi nel told us about that. yes.

Spacewar is the first video game, first computer game ever written. IT was written as a fun side project vice of V I T. Engineers in the early days of deck. And then that became no bush else, inspiration for starting a tree and pung. And possibly, yeah, Steve Russell, that guy he meant to her.

bill gates, and he was here at the universe of washington.

He had come out to the university of washington and then left in, was part of one of the exact starting this company.

see. Wow, let's take a while for my house.

right? crazy. wow. So after a little wild, secured all of this real expertise that these kids are getting leads to another opportunity at another time, share computing company based on in portland, they ask the kids to write a real piece of software, to write a payroll billing program for all their clients that are using the time share system.

And bill, now who's the defective leader this group, he negotiates a deal with the help of his dad, bill gates, senior prolific corporate attorney in seattle. That rather than just being paid hourly for their time, they're gonna get a royalty on the revenue that their client makes on the software. I can't believe with these kids are teenagers.

They figure out the whole software business model here. They end up making at least ten thousand dollars from these royalties, which the average households income in the U. S.

At the time was below ten thousand dollars. These kids are rolling in money. wow. So the next year, paul graduates from lakeside and goes off to college at washington state. But he in bill, decided to team up on a new venture that they're gonna do together called traf o data.

They've identify E A. Market opportunity, and that opportunity is reducing traffic.

yes. So the business plan is that municipalities count cars to go create their sections, use that to make decisions about how they going to do city planning bill in people like we can take this new thing that's coming out of intel, a micro processor, which is promising to be a full computer on one ship, and we can use that. We can build a machine that is going to be a computer and a process and analyze the data, and then we can sell IT to governments like great big market and listeners.

Are you kind of sensing what's happening here? Main frame, mini computer, micro processor. We kind have to keep using smaller and smaller words to represent the fact that the computer is getting smaller and smaller here.

IT wasn't until we started doing research for the episode that I finally realized, oh, micro computers, which is the original term for the personal computer for the PC, was called micro computers before PC called on. They are called micro computers because they are .

based on the microprocessors.

absolutely. It's not just that micro was smaller than mini.

I can stop there. The computers that are sitting on all of our desks are microcomputers.

right? yes. So while they're waiting for the A D O A, this new first microprocessor from intel, to come out, or at least for them to get access to IT, they want to get a head start on programing, their traffic data machine and programing this microprocessor.

So, paul lake, I got this. I can find a way to make this happen. He takes the P D P. Ten at washington state, and he writes a whole emulator program to mimic the instruction set for the A D O A from the manual.

And they get a full emulator up and running, and they can code even without the my processor actually being there having it's just like, good video. You know, I like what jedson was like. No, we got to build an emulator and simulate this that we're going to shift at side on scene.

They are doing the same thing. It's funny in many ways. At this point in history, getting a manual was actually much more valuable than getting the processor itself because the process or would arrive. And unless there was documentation, you would have no idea how to interact with IT to take advance of its power. But if you had a manual, well, sure, you could not actually test the stuff you wrote for IT on the hardware. But if you rote an emulator on a bigger, more powerful computer, that could sort of mimic the computer that you're actually targeting, you could go years before actually ever running the software on the target device and just work off of what the manual says, as long as the manual is correct and matches how IT actually works.

Yes, as this is gonna come very important to microsoft in just a second. yeah. So travel data is not a huge success.

I think I read a few places. They make about twenty thousand dollars in revenue from its. So like, again, great money for high school and college kids, you know, not world changing stuff.

Hia, this is not what bill inspires to for the company. He's going to to start. But bill and paul are getting experience with the microprocessor. Bill actually has the idea for microsoft when they're working with IT is like, oh, this is a computer. Why don't I go often, write an interpreter for basic here, and we can sell the basic interpreter for the microprocessor and build a big business. The aoa just wasn't powerful enough yet to do that.

What spoiler alt, that totally becomes microsoft, these seats s of microsoft are selling language and interpreters for new processors, new hardware, new computers that enable you to write familiar programing languages on that new hardware.

Yep, and in a billion polar, not the only ones having this inside here too. Another seattle guy named gary killed all who they had intersected with, who they knew from secured in the university, washington. He kind of had the same idea here where to bring up the in his company, digital research a little bit later.

Yeah, he cared a little bit less about programing in, a little bit more about Operating system s. So that's how they diverge for the few years here.

Yep, but billion, paul, they absolutely see the vision for what this can grow into and become. Bill has a great quote. All I had talked about the microprocessor and IT was really his insight that because of semiconductor improvements, things would just keep getting Better.

I said to him, oh, exponential phenomena are pretty rare, pretty dramatic. Are you serious about this? Because this means, in effect, that we can think of computing as free.

IT was a gross exaggeration. IT was probably the easiest way to understand what IT means to cut costs like that. And paul was quite convinced of IT.

yes. Is this in this massoni an interview? Yes, so good. It's so good.

This quote is incredible because basically paul Allen brings up morals law to build gates. They don't use that language there. But in one thousand nine hundred and seventy one, that is what's happening.

And for all of this is just an observation of hate. There's an expansive thing happening here. Seems like it's onna keep happening. It's been happening and builds shaking and he's like what expansion al foments don't just happen. That's incredibly, incredibly rare and immediately get bills wheels turning on.

What does this mean for the world? If that actually true? We need to act and do something profoundly different than anyone's ever done before, because this enables new things that no one ever thought could be possible.

This moment is the genesis of the vision for microsoft, even though bill doesn't say the words in this quote, the vision of a computer on every desk, in every home that's the famous part of than the part that got left off later when the D. O J started stiffing around, was running microsoft software. But that is the vision here.

And IT is crazy at the time, like computer on every desk and in every home. Bill sees that this is what this expansion al phenomenon, what morals law means, that that is going to happen. You we're still in era of teletyped. Nobody else sees this.

yeah. And it's also the reason why microsoft is going to form into such a different type of company that ever come before IT, why they can break all the rules, why they can sell just software even though that's never been a thing before, why their business model can be so much different than everyone else's business model.

I mean, prepping for the episode we get to talk with the higgs iran excel and was an executive overseeing office for a long time in the early days. And he had this great quote to us, which was computer on every death was wa, do stuff. People laughed at IT, who's absolutely wild. People thought, I don't know, maybe one in ten people in their finance group or something will have one at some point. This is the profound dance of an exponential decrease in Price or increase in power of computing is it's going to become universal.

So all that said, even bill and paul know the ado a, it's not there yet. It's not powerful enough to really be a general propose computer on a chip, but they know it's coming. So in the fall in one thousand nine hundred and seventy three, bill goes off to college, harvard, famously and fully at harvard. You kind of like jm Simons that we talked about a MIT on the ranted episode. Bill thinks he's gonna be like a world class mathematician and set the world on fire.

It's literally a quote from paul Allen. So bill was the number one mass student in the state of washington. And he gets there and he does the thematically math class math fifty five and gets a bee.

And paul says when he came to hire mathematics, he might have been one and one hundred thousand or Better, but there were people who were one in a million or one in ten million, and some of them wowed up at harvard. Bill would never be the smartest guy in the room, and I think that hurt his motivation. He eventually switched his major to applied math.

yes. So while bills in harvard, he's also doing a bit to the typical college kid stuff. He's playing poker, his cutting classes, he's making friends.

And one of the friends he makes there is a kid down the hall from him named Steve. Steve bomb and bomber, and everybody knows bober his kinder everything. The bill is not his super social, his super outgoing. He's in a final club, which, like a big thing in the social scene.

Serious, anyone has ever meet Steve or seen a video. Steve, you are well aware that this man has presents, but the thing that people don't know about him is he is so unbelievably political. Steve is the guy that outscored bill gates on the partner c exam.

which is the annual math competition for college students.

Yeah, Steve is in a programmer, but he is every bit the mathematician that bill gates. And that is one of these things where I think when people try to set IT up as well, you know, you've got the brilliant programme, r genius. And the marketing guy is just like, those are the rules they took. But I think when you're getting a sense of who the original crew was at microsoft, they were all brainy ax, and they were all wildly analytical.

totally. So then in the spring of one thousand and seventy four bills fresher electronics magazine publishes big news about a new intel chip, the next generation, the next turn of the crank on mos law, the eighty, eighty. And in bill's words, here all at once, we were looking at the heart of our real computer, and the Price was under two hundred dollars.

We attacked the manual. I told paul deck can sell any more P. D, P. ates. Now IT seemed obvious to us that if a tiny chip could get so much more powerful, the end of big, unwilling machines was coming.

yeah. And this is really where bill gates commits to computers to be his lifework. I think what's often lost in the story is bill, even though he was good at computers and spent tons of time programing computers, he never fancied himself a computer guy until this moment in history.

He went to harvard because he felt like, hey, if I ever want to be a lawyer or something else, like theyve got a lot of great programs there. And this was the moment where I think IT really clicked for him, that i'm just in the middle of the right place at the right time with the right skill set. And this is my way of having the most impact on the world.

So they think, okay, what's clearly gna happen here is all the big computer companies is IBM deck. The big japanese computing companies, they see this. They're gna get into this business.

They are going to make machines. They're gonna make microcomputers. Surely they will jump on this opportunity, right?

If I didn't destroy they're existing business model, sure they .

would exactly so bilin pool. Can I sit around waiting through one thousand nine seventy four? And one thousand nine seventy five been like, hey, when are the eighty eighty computer is gna come out? Where are they? It's just crickets.

yeah. Paul is so convinced that the revolution is coming that he actually drops out of washington state, moves to boston to be close to bill, so that they can be already when that happens. And that summer, they both get summer jobs at honeywell as programmer.

Pull days on into the next school year, when bill goes back to school, he's just like waiting, waiting, waiting. And then in december one thousand nine hundred and seventy four, paul is walking across harvard square. And he sees in a new stand the january issue of popular electronics, on whose cover is the altair eighty eight hundred, the world's first real honest god, commercially available for sale micro computer.

And the legend has IT that paul grabs the magazine, runs over the bills dorm, throws open the door, throws the magazine on the desk and is like, it's here and bills just says, oh my god, it's happening without us. We need to get on this right now. It's so funny.

He thinks they're already behind because clearly they're not. History would show. I think bill gates even says we might have actually started a year to too early. The market actually had materialized. And the funniest thing is the starting gun on off at bill in paul and and everyone else is still stand around.

And this is IT. This is the moment the revolution is here. Microsoft is about to be founded.

okay? Listeners, now is a great time to tell you about long time friend of the show service now.

yes, as you know, service now is the A I platform for business transformation, and they have some new news to share. Service now is introducing A I agents. So only the service now platform puts A I agents to work across every corner .

of your business. yeah. And as you know from listening to us all year, service now is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of.

So what are A I agents? A I agents can think, learn, solve problems and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancement ments, you also get to stay in full control.

Yep, with service now AI agents proactively solve chAllenges from I T H R. Customer service software development. You name IT. These agents collaborate, they learn from each other, and they continuously improve handling the busy work across your business so that your teams can actually focus what truly matters .

ultimately service. Now, an agenda I is the way to deploy A I across every corner of your enterprise. They boost productivity for employees and rich customer experiences and make work Better for everyone.

Yeah, so learn how you can put A I agents to work for your people by clicking the link in the shower notes or going to service now dot com slash A I dash agents. So David, they're like, it's happening without us.

What do they do? Well, they do the natural thing that too super excited, ambitious, high acting college kids would do. They call up the main phone number of altered manufacturer, a company called mitt M. I T. S, and ask for the president, a man named ed robberts in billion, paul. They get him on the phone and they say, we have a basic interpreter ready to go, ready to ship for the eighty, eighty intil ship, and we want to provide IT for you, for your machine.

which of course, they don't.

They don't have a single lot of code written.

They don't have anything, but it's a market test. They want to know like what's the response if this were true?

Exactly add he's a bit of a character himself he says, okay, well, guys, a lot of other people are calling me and saying the same thing. What i'm telling them, and i'm onna, tell you too, is that anybody who can come here to my office in Albertini, mexico and demonstrate a working version of basic on my altair will get a contract with us to distribute IT when they go on sale. And so bill in paul, they say, okay, great. Will see a soon, hang up. And by see a soon they mean, let's go get to work.

And this is a big deal for mitts to if this works because right now, they've just announce a machine for which you can't really do anything on IT. The hardware is powerful, but they're going to have a lot of customers unless there's stuff you can do on the machine and a basic interpreter or running on IT. You know it's quite valuable to then make the claim you can program basic on our computer. So they're very excited about this even though they're kind of playing coy.

I was going to talk about this in a minute, but let's talk about what the altair is. What did they just announced in the magazine here? This is the altair is the first mass market, commercially available personal again.

no screen or anything.

Yeah does not have a screen, does not have a keyboard, doesn't have a display of any kind. What IT does have is IT has a set of sixteen lights on the phone, the machine like Christmas lights and sixteen switches, and you can flip the switches to flip bits, and then the machine will respond by letting up different patterns of lights. IT doesn't come with any software. There's nothing that all of is sixteen lights, sixteen switches.

So in order to use IT, you gotto OK up your own until oye, you gotto get the manual. You ve got a hope that the manuals right, and you ve got a code to the machine instructions, like a little of the assembly language for the chip inside for the intelligent eighty.

Now back to the travel data days, and paul writing the emulator for the ado, a washington state cause like we got this. I'll just write in any later on the harvard P D P. Ten for the eighty eighty instruction set.

So IT does the same thing again. They get the manual and they have an emulator and they ride against the .

emulator yeah bill rights, the basic interpreter and in a couple weeks they've got IT working and that's like, okay, come on out to alberca key. So bilin paul member bills still looks like he's twelve at this point in time. They decided that .

just paul should go. And does paul have like .

a rock and beer at this point? And paul is super seventy. He is like into IT and will see he's going to fit right in IT albuera y admits so pogey on a plane flies from boston to albuquerque and you are in a total like epic legend moment.

They didn't have a boot loader written for the basic interpreter, so they had the basic IT was all written. They done IT on the emulator and pauls flying out with the tape, the computer tape with the code of the basic interpreter on IT. But it's like, oh, shoot, we can't just feed that right into the machine and there's got to be a boot loader till load up this thing. So he writes the boot loder on .

the plane on paper by hand, his hand coding oc, not even assembly language instructions like his hand coding in pure octo, the instructions to load their basic interpreter program in the memory.

Yep, so he lands an alo. Curchy drives out to mitts. They load the boot loder onto the prototypes.

Tair there that loads up the basic interpreter, and IT fails. IT doesn't work. Please try again.

Let's try again. So they tried again. You know, this is how early computing is.

Like IT works. The second like is what the bug was the first and then change anything. IT just didn't work the first time, and I worked the second time. So IT loads up. Paul writing the instructions, print two plus two. IT spits out for, and I spits out, I mean, like the lights light up and say, you know, for and both he and the shows are on the floor, pulls like, oh my god, the basic works and it's like, oh my god, the altair works like either them believe this was actually .

GTA work and ed actually has more x in this basket than he sort of LED on. Because when billion paul call and say, hey, can you give us the teletype instructions? He revealed the actually the only ones who called about that. So everyone else who said they were writing a basic. Never got far enough to ask, how do we actually interact with your computer?

yes. So now is the time to say a few words about ed and meet. Like, what is this company? Bill and paul originally thought that he was gonna a be, the IBM, the dex.

The japanese companies who are gonna make the first microcomputers. Mitt is about as far away from IBM as you can possibly imagine. Mitt basically was a model rocket company, which alcocer .

ky is a great place to do that.

Ed Roberts, the founder he had been in the air force and stationed in alboher, ky. And that's how we get involved in model rocket tree. And the reason that they're introducing the altair and they made this big splash in the magazine, this is a last ditch gambit to try and save the company so you like a bankrupt model rocketry company.

And there a little gamble worked and got a couple of college kids to pounds totally.

And like, why did that work? They had two things going for them that really, and I think probably personally, made IT happen when they got this splashy, popular electronics magazine cover. That was there a relationship that ed had? And to the sticker Price was three hundred and ninety seven dollars, which is about twenty three hundred dollars in today, twenty twenty four dollars.

Yes, that's a lot of money. But the next cheapest computer that anybody could buy at this point time was like a deck you'd like a hundred and twenty thousand dollar mini computer. So the idea that somebody could buy a computer for four hundred dollars, I don't care who sell in that thing. Like, I want that.

So what did they get some kind of sweet deal from intel?

yes. So this is all adds doing. The list Price from intel for the eighty eighty chip was three hundred and sixty dollars. So like, I think this is part of what was deterring the market of how would anybody sell a kit that was affordably Priced when so much of the cost of goods would go to intel with the processor deal, he managed to negotiate a volume deal with to get eighty eighty chips at seventy five bucks above. And that was the key unlock.

Take a five x Price .

production totally, huh? I wasn't able to find how that negotiation went down or why like ed Roberts and Albert ky. Knew mexico got this sweet hard deal from until I mean.

either the list Prices like wildly wrong or they were cutting deals all over the place. One thing I could have been is just that i'm totally speculating, but chips are the ultimate high fixed cost investment, low marginal costs next to software. You could imagine maybe intel had already put all the money into the fixed cost of spinning up the fabs and was expecting a certain amount of market demand and they weren't seeing IT.

They're like crap. We ve got to recoup our investment. I don't know, lower the prize. Let them just help me will make IT up in volume.

I like that. I have no idea, but that's a totally viable, I think trainer thought here. Either way, he gets the sweet, hard deal. And not only does IT make computer history and enable and create microsoft IT saves the company of meet. So they were on the edge of bank PSA.

After the popular electronics article comes out, they get four thousand, three orders in the first mother two, which is one and a half million dollars in revenue. Cash paid up front, that is peer cash hitting the back account, Better save the company and also just proves hate. Four thousand people just paid cash side and seen for sixteen lights and switches. There is a lot of demand for a home computer here and .

a decent margins. Two have been forgetting the processor for seventy two box. And they're selling IT for, what did you say.

three hundred and ninety seven dollars?

yes. So I mean, everything else and there is much cheaper than the processor. So I don't know depending on how much they have to give to the sales channel they're selling through. If it's retail or distributors.

I think they'll in direct. I think people are just send in money orders.

yes. So it's decent margin business unlike what the P. C. Business would become over time. They managed to have nice margins.

So paul in and they had to hit off. Paul decides to move out to Albert ky. Be close to the action here.

And he actually joins mitts as their vice president of software. He's vice president of a software department of one. He is the software department here yeah.

a software department of one. But you know he's got his body. Bill gates, who is not employed, but bills definitely working on software for the alter as well.

yes. So bill stays at harvard but keeps cranking on enhancing the basic interpreter and adding more functions and functionality to the version of basic that they are just written for the altair. And then once the school year is over, he comes out to other cokey two for the summer.

Now the alter is getting ready to ship with the basic, the microsoft basic included in IT. Bill in paul can not need to set up a company, but paul is an employee of metz. At this points, what did they do? They set up a partnership. So the founding of micro soft at this point, microban h soft, is a two persons partnership between bilin polo.

And as we record this, that was forty nine years and one day ago. So we are sitting here on April fourth, recording that was April 4， one thousand nine hundred and seventy five. And IT is very funny to look back at some of the original signatures when bill right on letters. It's bill gates, the general partner of micro dash soft, which is great. I think it's actually a paul Allen name where he wants to put together micro computer and software and bills like that's perfect or immediately just gona run with IT that as IT was a partnership originally, they were gonna call IT something like Allen and gates and then they ultimately are like, no microsoft perfect.

Microsoft has become like clean x but like, no, it's like microsoft means micro processor software.

I will say like it's a nice clarifying north star because IT really draws the line in the sentence. We're in the software business and gates makes us really clear to paul Allen, who is often tempted to do hardware stuff and bill is very hard core about saying no, what were uniquely good at in the world is software, and we should stick to that. I also suspect bill is starting to realize there's an amazing business model here.

If we can pull IT off where we don't have to make the hardware and we can charge for every copy of the software sold. But that inside, I would say, has not yet fully materialized. Yeah.

okay. Well, let's talk about business mother here in one sec. First, I want the partnership again.

We've been saying along the bill is clearly the leader here. They set up the partnership initially. Its sixty forty ownership business is sixty percent, pl is forty percent. Later gets change to bill is sixty four percent, and Paula thirty six percent. Yep, bill is the leader here.

yep. And bills case said he makes on that to polis. Hey, you took a job and you were doing this on aside, I was all in and Paula, agreeable guy and thirty six, still a nice percent. So he says, sure.

you know, in the longer here, everybody gets so it's all sort of a rounding air. But to that point back to the business model, so once the partnership is set up, they sign an exclusive licensing arrangement with mitt. This is super important.

This is a big lesson that Young bill in point gonna learn here. So mitt gets exclusive license to the basic interpreter, to the basic, as they call IT for the eighty eighty. And math is the one that can then decide whether to sub license the basic out to other companies or not.

Essentially, this is a distribution deal with mitt, where myths becomes the exclusive seller and distributor of microsoft basic. Microsoft doesn't have any direct sales control here. It's going to become a big, big, big issue. And the terms of the deal are microsoft is to get thirty dollars for each copy of basic that mits cells plus fifty percent of the revenue that comes from the sublimating inc. Deals that mits mayor may not do with other companies who wants to use the basic.

which why would they ever do any sub licensing deals? Like why would you give to your competitors?

Well, that is a really good question that .

so let's just round that part of the revenue is zero.

Yeah this is a big, big, big diverging of interests between microsoft and mets. And the kicker on this contract is that the total amount of lifetime revenue that microsoft can make from the basic h it's got from mitch is capped at one hundred ninety thousand dollars, huh? So admits really have the upper hand in this deal or phrase.

Another way it's we will give you one hundred and ninety thousand dollars for you to hand over exclusive rights to all that cool basic stuff you just wrote to us. But if we sell fewer than x machines were actually going to paid out to you on a created basis at thirty dollars a pop rather than giving the full hundred. And yet .

that is another way to frame IT. So definitely a great deal for mat. On the other hand, water bill in poll GTA do here, right?

Kind of a great deal for them to given the .

position the in is the industry. yeah. Now there is one very, very important clause in the contract, though protecting microsoft interest. And that clause is that mitt must use its best efforts to license, promote and commercialize the basic broadly in the marketplace, and that any failure to do so by mitts would be grounds for termination of the contract .

by microsoft. Hm, think god, bill's dad is .

a lawyer deed. So the altair comes out for sale later in one thousand nine hundred seventy five. Microsoft does sixteen thousand dollars in revenue that year from there, thirty dollars pop.

Uh, the basics that are getting sold with the altair, which is great, especially the first year that they're starting and the next year in one thousand nine hundred seventy six, everybody so excited about this new market. The vision is happening. The demand, the altair, the sales that paul Allen resigns from mts to join microsoft ll time bill drops out of harvard officially he moves to Albert curchy.

They are all in on this. But for the year in one thousand nine hundred seventy six, microsoft revenue was still only twenty two thousand dollars. So sixteen thousand year, twenty two thousand and one hundred and seventy six.

not a high growth company.

This is less than they were making in high school. Like what is going on here? One is certain, like mitt is the one that the controls of sales, not microsoft, but two myths, is selling a thousand computers a month.

This is taking off. This is creating a new industry. Despite mid selling thousands of computers a month, only a few hundred copies of basic are selling per month.

What's got on. People are pivoting the software. This is the discovery of software piracy.

And this is a pretty interesting time to pause and say, what are the pirated software because that's a good thing. This is one thousand nine seventy five. So practices lies that you are running a foul of some particular illegal protection for the good.

And you might say, well, with today's legal frameworks in hindi, you would say, of course, if they're copying the software, not paying the money forest, that was actually not established yet. And this is the crazier thing. So bill basically has an opinion that its pacy and he writes letters to the computer community.

he writes an open letter to hobby ists.

yes, and tries to basically guilt trip people. He tries to use that as a recruiting method and say if you're so excited about piratic our software, maybe you should just come work with us and you know, nothing would make me happier than making the best software in the world and please join us on this mission. But ultimately, the legal standing that he has to say, hey, what you're doing is illegal is not fully a published.

And so we would actually take a couple of years for the courts to look at software and say, what about this is protected able? And if you think about IT, IT is a little bit weird. So you got source code that looks kinder like english, you know, basic letters and numbers.

IT gets translated to machine code. That machine code ends up running and its basically electrons. It's voltages that are flip up and down.

And so what about that? Are we trying to protect? Ultimately, the way that gets litigated through some case law from court cases is that the source code is a copy writable creative work that is expressed through some sort of tangible medium.

That's the important thing about copyright law as a creative work expressed through a tangible medium. So a book, the cream of work, is the words and the tangible media. M is that, you know, printed on paper.

And so with software, IT actually took until one thousand and eighty. Congress changed. The law will put a link in the shower notes to, like the literal congressional change that happened. And IT is in title seventeen copyrights, chapter one subject matter and scope of copy rate in thousand nine hundred and eighty.

They include a defined term, which is a quote, quote computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result. And once you have that passed by congress qualified in the law, you now have the standing legal framework that all the whole computer industry is going forward, in particular the software industry. A computer program is copy writable work. Wow, I didn't know .

that's awesome.

It's totally crazy how recent that is. But when you think about IT, why would that have any legal, you know, software is such an abstract idea before the whole business model of computers was good luck just replicating an IBM PC and everything that comes with IT. You don't need an illegal standing, but if you're going to pursue this software only business model, what's the protection around your abstract product?

That's exactly what I was going to say. This is the other element of what's going on. This is the first time software has ever been sold, right, other than the IBM accounting marginals to protect themselves from anti trust, which was just accounting, nobody had ever sold software before. This is the first time, right.

certainly to build like a legitimate business around IT. The other thing that's useful to know is when you're selling an IBM PC, you literally selling a PC to a customer, the same way that when I am selling you this glass from cate barrel, I am selling you the glass, and the glass is now yours. I've transferred property to you.

Software is not that. So the whole world of software is built on a license agreement. So the source code, that computer program, the actual right of that is retained by the creator.

And you license the copyright to your customer to be able to use that on their machine. So there is this dual idea that computer software is copywriters and you can grant a license under certain conditions for customers to use IT. That is the legal framework for which the next fifty years of technology at large would Operate under.

For the moment, though.

they got a piracy problem.

right? The law is gonna change. Until one thousand and eighty, microsoft would be dead if they didn't figure out a solution to this before one thousand nine hundred and eighty.

So this is when bill ultimately kind of realizes, shoot, we did the wrong business deal with mets here. Mitch has to sell, and customers have to make the decision to buy. Our basic is a key critical part of the value of the computer. It's like the whole thing that makes .

that machine useful.

right? Without IT is not useful. It's totally setting up the wrong incentives and value equation that customers should be buying this themselves. IT should be included by the hardware om in the machine that they are selling and in the total purchase Price. And then if that happens, we no longer have a piracy problem because we're just getting paid as part of the purchase of the machine.

right? Should be a royalty.

right? The problem is that is not the deal that they had with mets.

right? Or framed differently, instead of saying, hey, consumer, do you want to buy something else too and make a new purchase decision, they should be saying, hey, computer manufacturer, we make your thing actually useful. So pay us for IT.

yes. So during seventy five and seventy six minutes, pretty much had this new micro computer market all to themselves. There were a couple other competitors who sprang up, but you know, nothing made like the altair and mitch was the micro computer company.

All of that changes, though, in a big way, in one thousand nine seventy seven, when what bike magazine calls the nineteen, nineteen seventy seven trinny hits the market. And that is three machines, the radio shack T R S, A T D flash radio shack T R S, the comedy personal electronic transaction or or pacco um pet and the apple two. All three of which machines were like the altair low cost mass market.

Unlike the altair, they were not kids. They were fully assembled, fully functional, right out of the box. And they each have their own major distribution advantages and embed ls words, these three machines, the one thousand nine hundred seventy seven trinity ign volume in the market, they loves these really dramatic verbs, like we attack to the manual, the gate, the value in the market.

And the press just latches onto a whenever bill has a leaked member or something where he talks about of this war terminology. Those are become headlines so great.

Now, earlier, during one thousand hundred and seventy six, microsoft had started getting approached by a few of the bigger computer companies like N, C, R, national castle register, G, E, control data systems. I want to license microsoft year basic for the eighty eighty microprocessor here, so that we can experiment with these things. And each of these deals would have been revised to microsoft of, like a hundred thousand dollars ash.

But ad and mitts, they keep dragon their feet on negotiating these. They're the exclusive license. Everything is got to go through mets and most of them they're turning down because band, like you said, they don't want anybody to come in and compete with them. Yep.

there is the missile incentive.

There is the missile incentive and there is the clause that bill and microsoft and I presume bill senior put in the original agreement is myth using its best efforts to commercialize the basic and gain adoption in the market. And you can make a prety strong argument that they're not. So although unbeknown ce to build paul, he has another reason that he's dragging his feet on these deals, which is that he's about to sell the company.

So in may of one thousand and seventy seven, mitt gets acquired by the tape drive manufacturer protect for six and a half million dollars. And d kind of rides off into the sunset and protect. They know about this dispute with microsoft, and they start to come in and they figure like, who is this? Bill gates? He's a twenty one year old kid, a college drop out.

Like, we're a big company. We can deal with this. And Robert says, amazing quote later, he says, pertect kept telling me they could deal with this kid. IT was a little like roseae e telling churchill that he .

could deal a stalin. Oh my god boy.

And I also don't think they realized that this kid's dad is one of the best corporate atterley in the country.

Yeah, bill gates was just constantly underestimated, which kind of worked to his advantage in those early days.

Yes, totally.

This is a thing about microsoft. Kind of forget how insanely Young bill was. He was just twenty. And to put that in context, he is only seven years older than jenson wang. But they feel an entire generation apart since microsoft was started almost twenty years before in video, when you start spending your mind around like, oh, bill gates is still pretty Young considering what an institution microsoft has become in the world.

right? I mean, microsoft next year is going to have its fifty of anniversary, and I believe that will also be the same year that bill turns seventy. That's wild, yes.

So that fall in one thousand and seventy seven, the dispute between mid slash protect and microsoft goes to arbitration in albuquerque and the international months. While this arbitration is happening, are the only moment in microsoft s history where the cash gets tight. They are of running out of money because they can't really make any sales here, right?

They don't control their destiny.

People aren't paying mets for the basic, their cortical piot, the software. They can't do deals with all the other computer companies that want to come license directly. And so things get a little tight.

Michael soft ends up winning the arbitration, I believe in maybe like november one thousand nine hundred and seventy seven, meaning they are now totally free to go license basic to anybody who wants to buy IT on any terms that they want. So they turn around. They immediately license to the trinity, to apple comedy radio shack, tandy.

They licensed to all the big companies, the gs, the ncr s who want to experiment with microcomputers. There's a really funny story with the apple that apparently was had more or less written like ninety five percent of their own basic, their own basic. But I didn't have floating point p numbers that only had energy numbers. And jobs is like totally writing loves is like the basic is really important like can you just finish IT can you do floating point and was just doesn't do IT so jobs has to go license microsoft basic. amazing.

And that's the first deal that happens between the companies. I think there's so many deals done both directions, commercial deals, equity deals, legal disputes in both directions. And this is the very first time that they do something together. yep.

So bill and polar microsoft, they do all these deals and they do them all, is cash up front fixed cost, all of you companies you're gona pay us and then you include the basic in the machines that you're selling and we're going to get all the money up front. Super president's, though, bill does not value maximize on this deal.

So like the apple deal is thirty one thousand dollars for eight years of wow access for apple, for the apple two to make ourself basic. They're not Price gouging here because bill sees he's like the play. Here is we want to make IT a no brainer for everybody, everybody who selling a microcomputer to have microsoft basic on IT.

Because we want to set the standard, if we are the standard programming environment that anybody who is using these computers, and again, anybody who is using these computers is programing them, they are used to the microsoft version of basic. We're gonna so much power that it'll become a self fulfilling propac's. All of our competitors will just whether away nobody want them because it's not going to be compatible with the language everybody knows. And then once people start trading and then ultimately developing and selling software that they've written, it's only gonna run on r basic interpreter. Not anybody else is fascinating.

I actually didn't know that started this early in one correction there. You don't know for a fact, it's all league in to run on microsoft basic interpreter, but you do know for a fact that IT will run on microsoft s basic interpreter. And so if it's cheap enough, why would you take the chance on a clone that might have one or two things wrong with IT?

Yes, basically his vision is I want to to remove any oxygen from any argument anyone could have about not using microsoft basic on a microcomputer. He thinks about this concept as a positive spiral that he really, in his mind, is the reason for microsoft success. He says success reinforces success in a growing market.

One way of doing something gets a slight advantage over its competitors. This is most likely to happen with high technology products that can be made in great volume for a very little increase in cost. And if you get that slide advantage at all compound, and this is what he's playing for here.

and it's interesting in the earliest day, is what was stopping someone else from writing a basic interpreter. Licensing, get to apple or radio shack. nothing. There were other smart people out there. And so I was just a very good business decision to say we ve got to close that door. We just got to make this an no brainer for people to buy for us because if we're value maximum and it's starting to feel expensive, they're going to turn elsewhere until we get a lead right.

The apple story is the perfect example. You know, the last thing is cute, and that makes for a good story. And like I I didn't finish the basic, but when microsoft sold them, the basic, which was already getting a stable, is the standard for thirty one thousand dollars. sure.

Why not? No brainer. Apple could have gone out, hired another program or to finish the basic. They like wait to do that or I could just get the standard one for thirty one thousand dollars.

I to do that just because it's important to establish trade us for everything. If you're running to start up right now, you might think yourself, oh, great, i'll just run that exact strategy. The important thing here is, a, most of the work was already done for the original basic.

b. Bill was doing IT himself, bill and paul. So the importance of technical co founders and their overhead was crazy low. And so they could do these deals where they don't make very much money because they were, I think at the end of seventy seven, they were five employees. So their overhead was just so unbelievably low that they could take a really long lens.

So even though IT takes until the very end of one thousand nine hundred seventy seven, when the midst dispute gets resolved, that microsoft can actually you make money again, they in one thousand nine seven seven with three hundred and eighty one thousand dollars in revenue, despite zero for the first like eleven months of year, they're just rolling in cash. This is when bill famously goes out and buys a Green and portia nine eleven and is mooring around the Albert ke, get all sorts of speeding ticket. You know, hilarious stuff.

This is when he got his mug shot, right?

Yeah, think that's.

this is the classic bill.

get told up there yeah, yes, yes.

Amazing because he got, I think, three speeding tickets in one day, two of which were from the same police officer.

yeah. And there's funny stories of the alper cookie. Police thought this, how was a kid driving a portion nine eleven? He must be like a drug the .

or something because even when he was twenty twenty one he looked .

in right is like, do you even have .

a driver's license?

Wild um but back to wait you're thing is a really, really important point. To make this dynamic work, you need to be able to a for the investment in the fixed cost, for the software, for the technology to make IT that little bit prior. Like bills talking about the slide advantage over the competitors.

And at this moment in time, the industry is completely brand new, like the software industry is brand new. So the amount that, that fixed cost takes, the cost is quite low really. It's just bill in pulse time and dedication to this industry that nobody else is making that investment. You can't run this playbook today because in any market, even a brand market, even a speculative market, the minimum viable fixed cost is billions of dollars, right?

Yeah, that's interesting. I also think this moment Gavin ized something important, which is bill and paul can sort of look around and see there is going to be so much value created by microcomputers and by software. They really found religion around software is magic, the things that people can create. Now that we've done this basic interpreter, and these machines are cheap and plentiful, the magic will take care of itself as long as we ensure this industry can just exist and do its thing.

And so they flipped from this mode of we need to buy and scratch and clay and make sure that we win in deals to, huh, how can we enable software as a thing to thrive? And i'm sure we can position ourselves well to capture some or a lot of that. And I think they became almost stewards of the software industry and evAngels .

from this point forward. Yes, they also do another really present thing the next year in one thousand nine hundred seventy eight, which is they go global.

Yes.

nobody else is going in global. The way that this happens is so fun. Bill, get a call one day.

Also, how crazy is that? You've got five people. You're Operating out of alba turkey. You just finally expanded from having one customer and you like, you know, we should do this year. Let's open in japan and become an international company.

yes. Now the way this happens is one day bill gets a call from a guy name cazi hero niche, or k niche, who is a computer enthusiast in japan, has gotten a hold of microsoft. Basic, totally shares the same vision as bill in paul.

He doesn't have a paul, you know, nor is he technical himself. He like, i'm going to bring you guys to japan. I'm going to bring you to all the big computer companies. They agree that k will become microsoft s's exclusive distribution partner into pay on. And by the next year in one thousand, nine and seventy nine, half of microsoft revenue is coming from japan.

which is wild. It's unbelievable. And IT stayed at that very high run rate of a international being a huge chunk, you know, close to half, always basically forever. This is a huge cornerstone of microsoft success that they were in international company from year three of their existence.

Yes, totally. So revenue in one thousand and seventy seven, you know that like last month of revenue was almost four hundred thousand dollars. One hundred and seventy eight revenue is one point three million dollars.

And they have thirteen employees at this point.

one thousand hundred and seventy nine revenue is two point four million dollars. And at the end of that year, they are like, all right, we ve got to get out of .

the curry and we've got twenty five employees.

I believe at that point. Yes, something like that. And this is when they moved to seattle.

And it's interesting to hear bill talk about this. He actually really liked Albert turkey. And specifically, there weren't any distractions there.

No distractions.

whether was great yeah everybody was happy there. But the big problem was recruiting yeah he was like, you know, if we're onna build this into the opportunity that I see, the vision that I see that paul shares with me, there's no way we're going to do that in all my kirk y, we got to move to a hub.

right? And so he's got three reasons for why, seattle in particular. And by the way, IT worked.

Every single person, except for his secretary, did make the move. So one, he grew up in seattle. He is like, I just want to go home.

And I justifies IT in two other ways, which I found pretty fascinating. This is from an interview in the early nineties that he did. He said, IT basically came down to seattle or silicon valley.

And in silicon valley, it's hard to keep secrets because there's a rumor mill. And in seattle, we can be a little bit more removed and we can announce things when we want to announce them. And two, in silicon valley, people switch around companies.

I don't want that. I want people to just work. In microsoft, there was a disadvantage to not being a little recruit from your competitors. But for a while, they were really the only game in town in seattle, right?

But not really though, because pretty quickly, microsoft is such an important part of the industry they recruit from silicon valley too. We're going to talk about some of the people who come up, but you're totally right. People stay at microsoft. They don't leave. This continues right through to this day.

And the other thing I think is really important to say that makes IT work for seattle in a way that I don't know that this could have worked in too many other places in the country, is the university of washington. Yes, the computer science department. There was really good.

There were great people. You do. Steve Russell had come out there like, there was real talent, and they were turning out graduates out of the u dub. That would go on to populate microsoft for decades to come.

Oh, and then bill, of course, reinvested in that fly. We all donating tons of money to the university. I mean, there are buildings. There is whole new schools.

Yes, absolutely. They played right into IT.

And so today, I mean, it's always a top ten, if not top five, computer science programme in the country. But unlike other top computer science programs, it's a state school. So I just has huge volumes. I think more students come out of the university of washington and go to big tech than any other program in the country that has stayed this amazing advantage.

Yeah, I think the only thing even close to IT is berkeley in the bar with a lot of the same dynamics, but they're stanford. There are too. So it's kind of like a dull universe system in the big area can overstate how important the university of washington was to this decision and an ultimate success of coming to seattle.

So this brings us to one thousand nine hundred eighty in the beginning of the year when they move to seattle just in time for I think you can make a very strong argument, the single most important deal ever done in the history of technology. absolutely. The microsoft IBM. I'm is crazy. You would say that now the microsoft I B M P C partnership.

it's crazy. You have this absolute behemoth partnering with someone that's not really relevant. And if you're standing here today, IT sounds like i'm talking about microsoft partners with IBM.

But at the time I was IBM partnering with microsoft, IT was the only computer company that mattered in the entire world. Got themselves into a particular situation where they came to microsoft looking for help. It's the crazy set of events that made this possible, and I can't wait to dive into IT.

all right listeners. Our next sponsor is a new friend of the show hunters. Unrests is one of the fastest growing and most loved cyber security companies today, its purpose built for small amid size businesses and provides enterprise grade security with the technology, services and expertise needed to protect you.

They offer a revolutionary approach to manage cyber security that isn't only about tech, it's about real people providing real defense around the clock.

So how does IT work? Well, you probably already know this, but IT has become pretty trivial for an entry level hacker to buy access and data about compromised businesses. This means cybercriminal activity towards smell and medium businesses is at an all time high.

So hunches created a full managed security platform for their customers to guard from these threats. This includes end point detection and response, identity threat detection, response security awareness training and a revolutionary security information and event management product that actually just got launched. Essentially, IT is the full sweet of great software that you need to secure your business, plus twenty four seven monitoring, buying a elite team of human threat hunters in a security Operation center to stop attacks that really software only solutions could sometimes miss. Hunches is democratizing security, particularly cyber security, by taking security techniques that were historically only available to large enterprises and bringing them to businesses with as few as ten, a hundred or a thousand employees at Price points that makes sense for them.

In fact, it's pretty wild. There are over one hundred and twenty five thousand businesses now using, and they rave about IT from the hill tops. They were voted by customers in the g two rankings as the industry leader in end point detection and response for the consecutive season and the industry leader in manage detection and response again this summer.

Yep, so if you want cutting edge cyber security solutions backed by a twenty four seventeen of experts who motor or investigate and respond to threats with precision, head on over to huntress dot com slash acquired or click the link in the show notes are huge, thanks to huntress.

So the I B M P C, why is I B M getting into the personal computer here in one thousand hundred and eighty? A fun quote we heard in our research was that IBM was the sun, the moon, the stars of the computing industry. And that meant the hard core enterprise, mainframe computing industry.

Yes, David, are you going to attribute that quote?

You are going to leave listeners just hanging time. We talk to early microsoft people in research and preparation. And one of those folks with Steve ballmer himself, he used those words in describing IBM.

yes. And it's hard to imagine a Better person to get their perspective on what IBM meant to the world at this point in time, because one thousand nine hundred and eighty was also the year that Steve joined microsoft. So literally at the same time, in one thousand nine hundred eighty, you've got the management team coming together with Steve and bill and paul Allen, and you've got the IBM thing go on on. And you've got that moving to seattle. And we talked about cherwell salmoni.

but this was the year he joined. This is a year. yes. I mean, every year for microsoft until this point is that year. But like one thousand.

nine eighty is big. Okay, so why is IBM the sun, the moon and the stars of computing? Why are they getting into this PC? It's way cheaper than anything else they sell. IT seems to be like a totally different business strategy, a different customer set, what's going on.

So all the early micro computers we were just talking about, the T, R S. These are all eight bit machines there running the intel eighty eighty processor or competitor making a similar a bit processor. The problem with an a bit processor is that the maximum data size for a given instruction cycle in the processor, this is called a data word in computer science terminology, is two hundred and fifty six two to the eight. You can't represent any number greater than two hundred fifty six in any given CPU clock cycle in a bit machine.

right? It's effectively a bad with limitation. Weird if you're in a single clocking cle trying to do some particular instruction. It's a very, very small amount of data that you can move through the earth metic logic unit or that you can move through the processor in that clock cycle totally.

You can think of IT like an hourglass or something. There's like all of the data sitting there in memory at the top, the hour glass and then there's a small little little of fun, al, that IT goes to. That's the processor. And then IT comes out as a good analogy, is gona take forever, yep, into the application of software that the user sees you, just not really gna process.

Is that fast? Very primitive machines.

yes. And so for a company like IBM, they eclipse the a bit computing cycle a long, long, long time ago, main frames and even many computers with deck IT. All these machines are at least sixteen bit, if not thirty two bit computing machines. So a bit is is not interesting.

which is why the only cost three hundred and seventy five box .

or whatever for an alter right in late one thousand nine hundred and seventy nine until announced that they're coming out with the eighty eighty six processor, which is a sixteen bit microprocessor with sixteen bits. You can really start to do some damage here in terms of the applications that you could put on this thing to eat into business software use cases.

In sixteen bits, you can represent numbers up to sixty five thousand, five hundred and thirty six. So that's two to the sixteen th. You can do interesting things passing sixteen bits around at once.

There's some really, really fun aspects to this. If you look at pictures of these processors, what did the eighty, eighty, the a bit processor look like? And then you look at what the eighty, eighty six to sixteen bit processor look like.

You can see this in the A D O A processor that's only eight bits. You see only nine pins coming off of the little chip. You know there's the eight pins for the data bits and then I there's one more control pin. If you look at the eighty eighty six processor, it's a much longer rectangle with sixty and seventy, you know maybe like twenty pdts coming off. And like you see this physically represented in the tip.

the further we get in the computing world, the more abstract stuff becomes. So it's always fun to go back in history when these concepts were so grounded in our physical reality that sort of easily observable since everything was so much bigger to yeah .

back to one thousand nine hundred eighty. The eighty eighty six has been announced. Sixteen bit microprocessor is coming.

I B. M. Has already lived through missing a computing expansion era. Once with deck in the mini computer, they just let deck take that market. Of course, that didn't really hurt IBM, but man, and I won't been nice to also have that market too.

And the thing that they're observing about the micro computer market is it's exploding. People in our industry know about deck. People in the broader world never do about deck, but I think it's a very different rate of adoption and rate of demand with micro computers where I, B, M. Started to kind of look at and go, oh, this might be like a real market, like a really big computer market for people.

They're finally observing the same thing that bill and ul did, you know, all the way back in the traffic data days of this is an exponential psychotic c mos law. This is exponential. And exponential gets ruby very quickly once you get a few years in.

yep. And the mini computer cycle never was that. So it's hard to remember today.

But just to understand this again, in one thousand nine hundred eighty, I B M was the most valuable company in the entire world. The highest market cap company is bigger than all the oil companies. In nineteen .

and eighty, the sun, the moon and the stars.

yes, do you know what their market couple was?

With one hundred and eighty hundred and fifty billion.

you are almost an order magnitude thirty four billion dollars that was the most valuable company. This is a wild, what a different world we live in today .

yeah even inflation adjust. That is interesting that the rate of growth of the most valuable companies in the world in terms of market cap has far outpaced inflation.

So that company the most value in the world, they're go on a tiny little microsoft that's just moved to seattle for this partnership. What's going on here? So what I B M decided, this is just so amazing, like they deserve so much credit here.

They got the clay Christianson disrupt yourself, disruptive technology thing, intuitively, decades before clay rates. Any of this stuff, the way that they decide to compete as the league, all the things that clay wrote about are working against us here. What we need to do is we need to create essentially a schunk works division, just like our lucky episode.

We need to do something outside the company, completely removed from the politics, sure, but like the business incentive not to disrupt ourselves and create a new division. That called the entry level system's division actually may have existed before, but they refer positive. This is an boker return in bogert, florida.

Very nice place. We were just there a couple months ago, but not a technology hot bed in the world. And they create a secret project called project chess secret from the rest of the company of the whole world.

In the goal is to develop the IBM micro computer, or the personal computer, as people are starting to refer to micro computers. yeah. And this is why they are going to do IT in secret with a small team with no other IBM sources. And so that means the small team, the only way they can do IT is to use all off the shelf components from technology providers, basically play on the same level playing field as all the other micro computer manufacturers is out there. And oh ah one more thing IBM leadership tells this team in boca, they have to ship the PC two customers within one .

year to crazy constraint is .

a total crazy constraint. A couple quotes on this down asteria, who is one of the leaders of project chess, he would later say that the company realized that if you're gna compete against people who started in a garbage, obviously reference to apple here, you have to start in a garage yourself. And then lugosi, who later would take over IBM, would describe this whole boker project as the way you get an elephant to tap dance.

And the question is, are they playing from behind and thus have to adopt a flood strategy? Or is this strategy of assembling with all of the shelf components actually a good strategy? If IT works?

Um well, let's tell the story and .

then come back to IT. great.

Okay, so what do they do? The hardware aspect of this is trivial, basically hell, ed Roberts could put together the hardware to sell a microcomputer and do this deal with intel. Like I think I B M can do a deal with you.

The you do not necessarily tRicky er, but the more important part is the software. And thanks to build genius strategy about be the volume player don't optimize on per unit Price, set the standards out there. They were like the .

world's leading provider of programing language interpreters, right?

One hundred percent. There is one m town in one game in town only. And that is microsoft in bell view, washington, at this point in time.

Now, interpreters are notably different than Operating systems, but microsoft definitely had sort of raised the flag, and everyone could see if I want to go buy software from my computers. Broadly there. An interesting group to talk to.

Oh, Operating systems are going to become really, really big here and just a sk. But again, the epic generation Operating systems weren't that important because people were running their on software, the standard the software packaged application software doesn't happen until the sixteen bit and doesn't really, really happen until the sixteen bit era and the I, B M P C. So that's why the basic, the interpreter is so important.

So what happens? I, B, M calls up bill gates. And by August one thousand and eighty, the two companies are in serious talks to partner and work together on the IBM PC.

And we reference Steve bammer a minute ago. The timing is just crazy. Steve had just joined the company in june of one hundred and eighty.

He's employee number thirty.

the microsoft team of thirty, which the whole company of microsoft votes like work on. The IBM PC partnership is bigger than the project chess team in boke.

It's amazing.

Well, so okay, bill is just convinced Steve to drop out a business school at stanford and come help him in. Paul, run the company. So microsoft at this point in time is still a partnership. Steve is the first person besides bill in poll to get equity in the company when he joins. And it's eight, nine half percent and it's a handshake deal at this point.

Yes, bill really, really wanted to bring Steve on. Knew him from the harvard days, knew what an asset he could be.

He is the end to build yet.

yes. And so I mean, Frankly, eight and half percent is a big grand, you know who's out there running a thirty person company and you're given away eight and a half percent slugs. That just doesn't happen.

Those are founder share. So this is really a sort of reflection that the way that bill thought about Steve was as a founder, in fact, IT created some tension with paul. And where bill last poll, if they could go to five percent, polls said, sure.

And then bill actually offered him eight and a half percent, and paul got upset. Bill said, i'll eat the three and hf percent. I can come out of my share because I want him that bad.

But is the perfect person for this point time. Bill was like the only sales person doing these OEM deals. Now they're dealing with IBM. They're entering the enterprise world.

This needs to be a real business. yes.

So back to the IBM negotiations. Obviously, microsoft is very interested. IBM is not just very interested in working with microsoft. They have to work with microsoft.

They are the only game in town, yes. And specifically, they ask microsoft for program languages. They're like we're making this great PC. We're going to the basic. We think you guys work on a cobo d like .

some yes for train like give us the whole thing and there's some debate on whether there was the microsoft or the IBM side that really saw the vision of hate. The sixteen bit generation is going to enable real business software use cases on the personal computer, but that doesn't matter. That's the plan here, and that is absolutely what happens.

So these initial discussions right are for the programing language. Microsoft doesn't make an Operating system at this point because in the a bid generation, the Operating system, I think, was kind of like a glorified boot load to just get into the programing environment so that you could either write or load up the basic programs that microsoft was going to interpret and then run. And in a bid generation, most, if not all, hardware providers of micro computers just wrote their own Operating system is like, this is wasn't a big deal. Now there was one of the shelf Operating system out there from a company called digital research, which was run by gary kildow, who I think, as we talked about earlier, bill and paul had actually intersected with back and seattle. T yes.

I think they were reasonably friendly. Yeah.

I think they were quite friendly because they partners you. You need a Operating system to get into the programing environment. IT wasn't that big deal.

And so yeah, whenever anybody needed one off the shelf build in, microsoft would just refer people over the digital to get IT. C P M right？ exactly. C P M C P flash m, which I think is maybe control program for microprocessors, I think is the .

abbreviation there. God, they were so bad. Every single thing that's been named point, except for the company, microsoft, was a horrible name.

Oh, it's the processor is eight O, O, eight. And now it's 8O， 8o but the machine is eight eight O O that the processor is inside。 Give me a break. Everyone is horrible.

Naming bill, and i'm sure paul to be bill is the only person in this industry that has the vision for what this can become. Even intel, and you are still talks about this. He doesn't think that intel even realize is what's happening here. They're like, I would just make them more chips IT o i'd like people .

easy for stuff yeah IT doesn't m like very few people are thinking about their products as something they really need to build a brand around with consumers. Yes, hence the naming schemes.

okay. So the IBM microsoft discussions are going along. And IBM like, oh yeah, we knew an Operating system. So bill, and I think from everything we've read and folks we ve talked to kid in good faith, just does the standard thing is always that in these situations, like, yeah, go talk to gary, go talk to digital research, he can probably do that.

right? We don't have Operating system.

So this guy does. So what happens next is unclear. But what is clear is, however, goes down. This is one of, if not the biggest, business blender in history, IBM. That team from project chess flies down, I think, directly from seattle and talk in with bill and Steve to moderate california, where digital research is based at this point, to meet with gary and his wife, dorthy, who run the business together and bills call like, hey, got a big O M client coming down, needs an Operating .

system and he signed half ty half Y N Y eight so he can not say who is is. But he's like, you really should take this seriously.

right? So the team comes down. Obviously, they show up there for IBM.

There is a big snack ffo, where gary does not attend the meeting and there's conflicting reports about what happened. Was IT one of them that he's out flying an airplane? yes. So i'm pretty sure he was flying his personal airplane while this happens. Some reports are he was just out joyriding and missed IT.

Some reports are no, he was like on a business trip, knew he was happening, but he had another important business meeting and he didn't know that this was IBM that was coming. Regardless, IT doesn't really matter because I, B, M just wants the Operating system. Dorthy does meet with them.

She's unwilling to sign their N. D. A. There's a lawyer from digital research who gets involved and he doesn't really understand what's going on. The punchline is that I B M.

Sora leaves this interaction with the belief that gary and digital research arn up for working with them and like aren't capable of producing here. And producing is important because it's not like the existing C P M O S that they made would work here. They would have to write a new version, a sixteen bit version, yes, and they had done that yet.

And in particular, they would have to do some customizing. But part of what IBM wants is a customized version of an Operating system for the IBM PC. They don't want this to be fully off the shelf.

yes. And just to add one more, stir the pot of history here. There is another version of this story where gary does actually have a conversation with IBM. And IT blows up over licensing terms that what gary really wants is a significant royalty of every IBM PC sold and IBM walks over that. So whether that happened or whether it's just an N D A issue either way, I think we all know the IBM PC did not end up in the cpm Operating system.

Oh, that's a mac. I didn't know that will talk about that when we get to the business terms of the microsoft IBM deal. In a minute, yes.

But for the moment, there's no deal yet because an Operating system needs to be provided here. So I B, M goes back to microsoft, like cake. This guy you referred us to think, get to work the way that I read some codes from the IBM people here.

We like, we just threw the problem back at microsoft. Slap of you guys deal with this u source and Operating system. yeah. Well, i'd like to say that bill and Steve and microsoft, you don't need to give them an opportunity twice.

In this case, you kind of did me to give them an opportunity twice because they almost flogged IT and sent IBM down to see gary this time. They don't flow IT. They're okay.

We'll get you an Operating system. And so enter seattle computer products.

yes. So IT, just what happens that right down the road from microsoft in the seattle area, I think they despite being named seattle computer products, I think this company is actually based in to quiller, washington.

A programmer named tim patterson had just written a sixteen bit Operating system for the eighty eighty six that until I just announced, and he was calling IT the quick and dirty sixteen bit Operating system, or custos, for short, and had IT ready to go. Now why had he written this? What was this company? Seattle computer products? Why did they have an Operating system? They were a component provider to micro computer manufacturer.

They essentially made motherboards. And so when intel now has announced this new sixteen by a processor generation that they're coming out with, well, seattle computer products, they want to sell other boards and have them ready for sixteen bit. They kind of need to test and play around with these things.

And their customers are asking for IT. So they had been going to kill all in digital research to embattled ing them till like, hey, right, the sixteen bit version of cp and gary just didn't. So tim like, fine, i'll do a quick and dirty version myself.

amazing.

And that this is born incredible.

Which, of course, later they would drop the queue and call IT doss the disk Operating system. Something about dirty didn't have a ring to IT when .

you're selling IT to IBM? No, no, no, no, no, no. So in polar and microsoft, theyve learned about this. They know seattle computer products.

They know the brows, the guy who wants the company, they get in touch with him and they say, hey, can we license custos from you in tim? We've got a big O E M customer that wants a sixteen bit Operating system, so they would get a deal whereby microsoft pace seattle computer products, twenty five thousand dollars further rights to adapt and sell custos to the one unnamed original equipment manufactures who are working with tim. Actually, he's jax about this.

He ends up leaving S, C, P, computer products and joining microsoft. And so he with the rest of the team, he's part of building dos, taking his initial work in turning them into real dos later on. Before this, i'll gets announced in the PC ships, microsoft would pay seattle computer products another fifty thousand dollars for full rights to own eighty six q dos sell in license to anybody else indefinitely. So I believe the total amount of dollars that change hands here is seventy five thousand dollars.

unbelievable.

This is dos. Now look, one program or rote, quick and dirty Operating system. And microsoft bought the license to that and adapted IT into dos.

Tim, when he was at seattle computer products, definite did not write dos as dos becomes, it's not like microsoft ought all of dos for seventy five thousand dollars. They did a lot of work on IT. But yeah.

this is how IT all goes down. So microsoft would eventually generate billions of dollars on the space products. Now you're exactly right in the same way that instagram today is a much different code base than instagram and much larger code base than instagram when I was purchased. But my god, seventy five thousand dollars to buy dos to get this whole thing started for, I mean, until windows ninety five, all of the windows Operating systems were dose based.

It's just crazy. I mean, IT really illustrates how fast things were moving, how much all this was getting invented in discovered real time, that even to this point, bill gates isn't thinking that Operating systems are that important. This is just a shortcut to get the deal done with IBM to make that happen.

Yep, also, David, I got to say I just looked IT up the address of seattle computer products on business card for seattle computer products where I presume q dos was written, the spaces is available. So I know where our next studio needs to be and it's into qua and it's into quila.

I will the rent can be like that expensive then. So like, let's do rect correct. Well, yeah, well, don't we've had token for years about making the acquired museum.

We might have a location. okay. So now we've got the Operating system. We've got q dos dos. In place to license IBM.

The only thing that is left to formalize the partnership is the business terms. And then if what you said is right about the gary killed all I B. M.

Negotiations, this is just a master stroke from bill here in the licensing with IBM. Yes, because there's two really, really big levers that IT looks like. Bill is giving big time on one of them, but he is winning big time on the other one.

What are they? So the one that he looks like he's giving on is he does another fixed cost O E M deal with IBM. yes.

So this is in paul Allen's mr. IBM paid microsoft seventy five thousand hours for testing and consultation, forty five thousand dollars for dos, forty five and three hundred and ten thousand dollars for in a ray of sixteen bit language interpreters and compilers. So all told, bundled together, that is four hundred and thirty thousand dollars fixed that IBM paid microsoft with no ongoing obligation?

yes. No per copy royalties? yes. Every copy of dose that IBM cells either included as part of systems that they're selling or they are free to charge independently for dos, whatever amount they want, microsoft gets zero sales. And if it's true that this is where things fell apart with gary killed all crazy, the bill is willing to do this.

And you might say, what didn't bill leras lesson? Why would he ever agree to this?

On the one hand, this is what he was doing with apple and others. He was doing this fixed cost deals. You would think, like, man IBM, like, this is the time people are going to pirate IBM software now, the time to really grab the money bags.

But bills saw something that no one else .

did in extreme, I don't know he was directly and exchange in the negotiations, but the other lever that he saw that he hold was microsoft retained the rights to own dos and to own their languages and license IT and them to anyone else they wanted at any Price on any terms.

It's so interesting because what ended up happening that bill gates mass reminded was once we distribute our Operating system through IBM PC, that's going to become the thing everyone buys. And now in the sixteen bit generation, when there are people building programs for computers, not just developers, once those application developers who are writing programs are targeting an Operating system, then that is the Operating system that every other O E M, every other computer maker, is also going to want and really need. And we're gonna the ones that they have to come to to buy IT.

And I can't figure out, did IBM miss this fact or did they know IT? Basically what IBM did was they were the one place where every business needed to go for their computer needs. And what they did in this negotiation was they actually handed that over the microsoft, and they said, we are going to become a commodity, just like every other hardware manufactured, and you are going to be the point of integration for the whole ecosystem. You're going to be the linchpin that everyone has to target further applications.

So I think there are two things going on here, one small and one big. The small thing is actually related all the way back to the begin of the episode, what you had been about the anti trust concerns within IBM to hear them say they actually didn't want ownership of the software. They wanted IT to be separate because they would sort of look Better .

because then they have the sort of plausible deniability of how could we possibly have apply where off the shelf .

part of the new system yeah .

from a vender who can sell to anybody else we have no luck in.

And that may well be true. I think the bigger thing that just wasn't in their consideration or mindset was they, I think, assumed that once they entered the P, C market, IBM was going to be the dominant player. So I didn't matter what's I B M is selling PC, who's gonna A P C for anybody else. I B M is going to win this market just .

like they have in every other light of business in in.

And what bills saw was he really made a bet that the same dynamics that played out with the altair were also gonna play out with the IBM. P. C. That there would be a million hardware manufacturer flowers blooming here, building to the same spec and building to the same .

spec using the same processor.

which of course, they could because IT was all off the shelf components. And I bm either didn't see or didn't believe that, that would actually happen.

IBM failed to see the value of software, and they certainly failed to understand what a software platform business model would be.

which makes sense, and why would they?

right?

It's almost like their are computing company.

Yes, there are experience in selling mainframes with everything bundle in was the wrong experience to go off of in understanding the way the future would unfold and bills very modest experience watching the alter and all these sort of altera clone type machines, or even if they are not alter cloes, just more micro computers that need more software. That actually was the experience to pattern match off of of what does the world of micro computers look like and how is that fundamentally different than the world of mainframes, totally.

And in a way that you know, the many computer generation like we've been saying who was like a half generation and IT was in IT wasn't actually fundamentally that different other than deck gained a foot hold.

Yeah the deal that bill gates made with IBM for the I B M P C is the greatest deal in at least computer industry history, if not all business history. Full stop. right?

So let's say a little bit about what maybe it's obvious, but here now is iba most valuable company in the world. They're gona come out with the P. C.

platform. They are going to build the market and microsoft is going to own the linchpin, started hamilton and help terms like where the power is in the market. And they're going to be free to lense that whatever terms they want to any other player who wants to enter. So they sign the agreement in november one thousand nine hundred eighty, the IBM PC ships in August one thousand nine hundred eighty one, just increase of almost exactly a year, a little more than a year from the time project chest starts toward.

They actually ship the P.

C. Mean, rely. incredible. IT changes the world like that, such a trade thing disable, like everything that everybody's .

imagining happens. IBM was right that IT was by far and away the most successful personal computer on the market .

as soon as they released total, thirteen thousand five hundred IBM PC within the first couple months after they announced IT. Over the next two years, they sell half a million of them, makes them unquestionably the largest personal computer microcomputer manufacturer. Market leader, everybody IBM is celebrating.

The plans haven't arrived yet. Maybe they won't. It'll play out like they think, you know exactly.

Now before we talk about the clans, this is really just a footnote because, of course, all the incentives are aligned for IBM two push dos as the Operating system for the P. C. I mean, they've done this whole deal with microsoft.

They have a royalty free deal with them when they launch the P C. Customers actually have a choice of which Operating system they want on their IBM PC. They don't have to go with us. Consumers can choose between dos, sixteen bit C, P, M.

By this point time, gary and digital research have gotten their act together, theyve writing a sixteen bit version of the cpm Operating system, or another sixteen bit Operating system called pascal that came out of the university, california in the ago. And the Price sheet for the Operating system option is pascal is an extra four hundred and fifty dollars with your I, B M. P, C C.

P M is an extra one hundred and seventy five dollars with your IBM PC. And thus, which was developed specifically for the P, C, is the best way to run IT is only sixty dollars. So I B M is making sixty dollars of full one hundred percent margin on top of the hardware for the PC by selling dusk because they don't have to pay microsoft any of that. And theyve set up the incentive that like, obviously.

but it's gna choose to us. It's fascinating. And you know what to give him a little bit more creative.

They did try to enforce that. There's some amount of locking to the I, B, M, P, C. And they did that in two ways.

One is we're simplifying. Calling a dos IT was PC dos, which is different than M S. Dos, which would get licensed to other computer makers.

I don't know exactly what happened, but IT basically seems like I just wasn't different enough to be meaningful to application developers. So that's one piece of IT. The second is IBM did actually have proprietaries BIOS.

So that was another part where they kind of a thought that, that might provide them some protection where they could stale linchpin in the ecosystem. And IT wasn't just all off the shelf. They actually did have something that was there that was proprietary.

IT just turned out that the effort required to reverse engineer the IBM BIOS was trivial, basically.

oh, do you know the story of the compact BIOS who?

I know the complex story, but I don't know the story of the bio specifically in lightness.

IT is basically why compact worked. Is what IT comes down to. So compact was formed basically to clone the IBM PC.

They saw the market opportunity and they realized they good bye from all the same equipment vendors. So lets go eat. Their margin is basically the plan. However, the one thing that was not off the shelf is the BIOS, the basic input output system, which is effectively the thing that decides to load the Operating system when you turn the machine on. And so there's some proprietary magic that happens to call upon the Operating system to do its thing. So compact, reverse engineered, the BIOS and the way that they did IT was the very similar to trip hawkins and the story that he told us about his reverse engineering at electronic .

guards of the sake genesis. Yes.

so compact had two engineers and one engineer went in and fully dissected the code for the I B M P C BIOS and basically saw all the proprietary calls that are made, and documented each of those calls without writing the implementation steps. Then he handed, hey, here's what the BIOS needs to interface with over to the other engineer.

And the other engineer on their own just went through and thought of an implementation and they have no idea if it's the same implementation. So it's not breaking any sort of infringement. They're basically saying i'm just seeing the requirements for this product and i'm coming up with my own implementation of their product.

They basically figured out how to exactly clone the I B M P C. And by the very same Operating system. And to go back to quoting ben Thompson, because this is from his great piece, again, the result was a company that came to dominate the market. Compact was the fastest start up to ever hit a hundred million in revenue, then the Youngest firm to break into the fortune five hundred, then the fastest company to hit a billion in revenue. And by one thousand hundred and ninety four, compact was the largest PC maker in the world.

The compact story is amazing, so that three people who start compact in one thousand nine hundred eighty two are actually texas instruments engineers who left, and they wanted to start a company. And I believe, as the legend goes, they were like trying to decide what to start. They were considering like a restaurant chain and like a bunch different business ideas.

And then the I B, M, P, C comes out at the end of one thousand nine hundred eighty one, and they're like a ha ha. We can close this and do everything, you know, the story you just told. So yeah, it's wild. They started the company in one thousand nine hundred eighty two, and within the first year, they do one hundred and eleven million dollars of revenue of selling IBM PC clone hardware. Is IT just cheaper?

Like basically this is the IBM PC, but for less money.

yes, exactly. Same thing, cheaper.

And so begins the race to the bottom of PC hardware, completely undifferentiated all the value crews to the software layer.

Totally compact. Went public the very next year, in one thousand nine hundred eighty three, well before microsoft, which is funny. But I compact all these other on companies that get started.

Microsoft t licenses dos to all of them. Importantly, critically, on a per machine sold basis, this is when they grab the money. The Operating system is so deeply embedded needs to get shipped with the computer itself.

Yet consumers can go by Operating systems to upgrade and what not. But no hardware manufacturer is gonna ship a sixteen bit PC without an Operating system. So piracy is not an issue here. Microsoft can now do a per copy sold power machines sold license with all these clones, my god, is just like a guy of money.

Microsoft used IBM to generate demand for their software, and then they used every other PC manufacturer to capture the value that of that demand created. Yeah.

so I think I have these numbers and time frames, right? I believe that for calendar year one thousand and eighty two, microsoft revenue was twenty five million dollars. And I think this must have been when they switched to fiscal year and in june thirty is so microsoft fiscal year and starting them and up through now is je thirty.

So there are fiscal thousand nine hundred eighty four. So the year ended june 4 thousand and eighty four or one thousand and eighty three midpoint to one thousand and eighty four midpoint。 Microsoft does ninety eight million dollars in an eighteen month period from the end of nineteen eighty two.

They go from twenty five to ninety, what's all on the back of the clones. And unlike compact that you know yeah they did one hundred and eleven million of revenue their first year. They're selling hardware which has serious cogs associated with the microsoft. The one hundred percent essentially gross margin software revenue more than doubling year on year. That is the best business all time.

yes. And they combined two magical principles together. This infinite replicability ties you a marginal cost of software and becoming the linchpin of the ecosystem. They are now the software that everyone needs to target, which gives them pricing power totally, so that pricing power raises your top line and you have no cost. So unbelievable.

So meanwhile, in the computing industry background, while all this is going on with the launch of the IBM PC and then the clown apple had gone public at the end of one nine hundred eighty, and I think the biggest, the most successful IPO of all time at that point, remember, we talked about genentech on the nova notice episode. They went public like right before apple, and then apple was bigger.

So their valued ed, at one point eight billion dollars at IPO, Steve jazz is this multi hundred million like media darling, all this stuff. The next year in one nine hundred eighty one, microsoft reorganizes from the partnership between bill and paul with handshake deal that steeves going to be cut in in on the partnership into a stock company, a sick corporation, and is part of doing that, the venture firm, technology venture investors, or T, V. I, invest one million dollars, I believe, for five percent of the company. Yeah, this is grey. That's a twenty million dollar post money valuation.

It's a one on twenty post when microsoft is doing .

how much pain revenue that year, they did seventeen million in revenue and they're about to do the IBM deal like this is absolutely absurd.

So IT says a lot about this period of time that you could do a one x revenue deal in a high margin software company。 I mean, I actually don't think this shows a weakness in microsoft. Oh, they didn't have leverage or something like that. That wasn't IT at all. IT was just the deals sucked.

the venture capital sucked back then. Yes, there's no other way to put IT now.

You know it's only five percent so good on microsoft spoil era. This is the only delusion that they would ever take. So that's also extremely different than today. But yes, a twenty million of our valuation at this stage is bravely ludicrous.

You know even among people who should be in the know, the beauty of the software business model still is something people don't understand. That's exactly the hot tss is the hardware. It's like apple just IPO apples with one point eight billion. Like that's the industry you would. I B M S, A, when microsoft itself would go public a few years later, in one thousand and eighty six, they actually go public the same week that they move to the big campus and redmen where they are to this day, their market cap t IPO is only seven hundred and fifty million dollars, despite having done two hundred million dollars of very high margin software revenue in the trAiling told months up to growing one hundred cent inane.

Hey, that's four x multiple expansion of the .

last time of right. But it's just crazy that people don't yet appreciate the power. So bill gates and warn buffet .

did a conversation at the university of washington in one nine hundred and ninety eight. This is as late as one thousand and eighty eight. This thing that we're talking about, the magic of the software e business model and how IT should be reflected in a companee valuation, especially when it's a high growth company, was still not understood even by bill gates himself.

So here's the quote bill gates says. I think the multiples of technology stocks should be quite a bit lower than the multiples of stocks like coke and geeta because we are subject to complete changes in the rules. I know very well that in the next ten years, if microsoft is still a leader, we will have had to whether or at least three crisis. So bill gates is essentially making an argument no great that this is in middle of all the antitrust stuff. So he's very prime .

for this and the .

internet and the internet. He's basically making the argument that disruptive forces come at you so fast in the technology industry that even though you can grow extremely fast and it's an extremely scalable thing, distributing software at zero distribution cost. And even though the margins are unbelievable because you have zero marginal cost, they still shouldn't be valued as highly as like A C, P, G company, which is so different than the way that people think about IT today.

Well, it's fine. You, I ve thought about this a lot, actually watched that interview years ago. It's so good.

There are elements of true to this, too. And I think it's that for most technology companies, that is totally true, yes. And then for a few technology companies that have true power and true scale, the exact officer is true. Microsoft is still the most valuable company in .

the world today. Companies that are less acceptable to disruption, more predictable in terms of high growth, high margin revenue, deserve a premium. But gates is basically are doing.

Everyone else doesn't. So let's flash all the way back to thousand and eighty one and talk about this venture capital investment, this one on twenty. That T, V.

I does good work.

If you can get a man. How does this come to be? So even a whole year before, in the fall of one nine hundred eighty, dave mark court, one of the partners and the founders at T. V, I flies up to seattle, not to me, bill gates, but to meet Steve bomber.

because they were classmates at gsp, right?

They weren't quite classmates, but because I think they were two years apart, so they didn't lap. They had some of the same social circles. And Steve was effectively the screener for anyone who wanted to come and talk to bill and try and invest in the business.

T. A associate had been up, sudden hill had been up, hambrook quiz had been up, ioc eventual. And all of them only ever got to meet with Steve ballmer and never got passed on to build gates.

And Steve basically just bounds them off. And I know all this because there's a great oral history from the computer history museum, where this whole things, in a transcribe with an interview with dave mark, work kind of recalling the whole thing. So dave lies up to meet with Steve, and Steve says, you ask him really interesting questions.

You're talking about our strategy the right way. You don't just want to do a transactional deal like you really think this is something special. What did you meet with bill? Bill, of course, doesn't have any extra time in the schedule, he says.

But I am going to the utah, arizona football game at husky stadium one to come and talk me there. So of course they go, bill doing pay attention in the game at all. He's just laying out the strategy and grilling dave and talk about software the whole time.

So this is a full of one thousand nine hundred and eighty. So there's a whole year before the deal gets done and days remarking at this point in thousand nine hundred eighty, they're doing five million in revenue, two to three million and profit. They don't need VC money and yet he was able to get in. So here's a vote.

I was just sort of helping them out with the business in the venture business you're buying and you're selling at the same time, you're trying to figure out, are these guys crazy? Are they ever gonna anything really interesting? And if so, how do I get myself position to be able to help them do IT? And so I spent a lot of time up there helping recruit people. I helped to recruit Charles symons, who was an a league guy. Charles Simony would go on, this is an aside to write microsoft word and Charles was at the iraq's park inventing.

The guy said, yes. And he says, and I was .

working with Steve on business strategy. They had these O, E, M. Customers, the P. C. Manufacturers, and they had started to engage with IBM on this Operating system.

And then are we just gonna become a low cost contract programmer, shop for IBM, an outsource sweatshop? Or is there some way we can build a business out of this, which LED to the fixed fee, to IBM the attention of the code, which then we can sell other people. And that's what created the P.

C. Industry, basically. So that is his recollection of the whole thing, that he was sort of very helpful in this transformative time for the company.

Now at the same time, you have to look at everyone else is incentive. How can I be helpful in so dave is only twenty nine years old, but everyone else is like twenty three. And so he actually is kind of adult supervision.

At the same time, the partnership was still just a partnership and there was a handshake deal for the equity. And so if you're Steve boma at this point in history, IT would be nice to have a forcing function to actually turn this into a CoOperation so that we can get some shares granted here. So there is a little bit of incentive to say, hey, if we take on an outside investor were going to .

have to restructure. And that I always read about the tvi investment. Yeah, obviously, microsoft need the money. They like dave. But also a big part of IT was this was a catalyzing function to do the conversion into A C corp. yes.

So this would create a little bit aboard and governance. So it's not just bill all the time. Now bill, of course, I think is still the controlling shareholder just by the amount stock videos, but there's a board it's bill and it's Steve and it's kenni. It's a three person .

board yeah we should say to visible trade ally and I believe that was one thousand nine hundred eighty two eighty three. He's diagnosed with haji an's disease and he ends up taking a leave at then fully leaving the company. I think he did go on and off the board at various points in time.

Yeah, that's true.

But yeah, he is no longer a full time member the company after his diagnosis yeah.

So on this venture investment, it's pretty fascinating. None of these are terribly compelling reasons other than like, I guess, that would be nice to have a little bit of capital associated with the us formalizing. The corporation.

But they don't need money at all. They're printing cash. They've been printing cash ever since that one tight period. And alboher key dave charmed dom, I think that's kind of the answer.

And I ve always heard wonderful, wonderful things about dave, and I think everybody really did love him and see is value. But man ought to be a venture capitalist in the nineteen eighties and one nine hundred nineties, like of you couldn't lose.

It's pretty crazy. I think part of IT had to do with the fact that microsoft is up in seattle. The VC is just weren't traveling right? And dave was Young and he was single.

dd. Valentine famously had the rule they didn't invest in any company that you could not bicycle to from santa road.

Crazy dave marker, I think most weekends is flying up to seattle to hang out with bill. And Steve IT was a real cell, and he says, I was Young and I was single, and I had nothing Better to do, and I was really fun and no, actually interesting. So I did IT, I bet.

And that resulted in in, depending how long, T. V. I held. One of, if not the best venture capital return in history.

who hard argue with that was okay. Back to the story was a couple more really, really key things that happened in the P. C, A.

And particularly now once were into the IBM PC era, in the clones, the sixteen bit era. And let's start with applications. So you know kind like we've been saying along, they put their applications packets.

Software aren't really a thing. In one thousand nine hundred and seventy nine, kind of the tail end of the a bit era, two programs come out for the apple to visit OK. And word star vic is the first software spread sheet application and word stars word processor.

These applications by today's standards are super simple, like stone age type stuff, but they're the first of their kind particularly visit out in the spread. They sort of establish the potential for business applications on personal computers. There's a joke at one point in the industry that the apple two was a couldn't vic c accessory for small businesses. And I think that is part of what IBM is seeing and why they're deciding to now get into the industry with the personal computer. Around this time, microsoft starts the good consumer products division to compete and make applications often are themselves.

And it's quite telling, it's called the consumer products division to make applications even though they're competing to make these applications that today we would view as business tools, spread sheds and word processing. That is not how they referred to IT.

right? So one of the first people that they hire into this new division to get IT going is an engineer ban, who references just a minute ago named Charles Simony. And they poach Charles, perhaps with the mark cards help away from the legendary xerox palo alto research center, or zero x park. And I think this is one of the great misconceptions in technology history. Yes, hopefully we can set the recognition.

Ate a little bit here. Yes, if you ask anybody in our ecosystem, save for the one percent of people who actually know this, what happened at xiao an park, they will tell you, they invented the mouse. They invented the graphical user in her face.

And then Steve jobs walked in and he saw all, and he said, oh my god, we have to have IT. And then he went off and he made the lisa, which hooks phial user in her face in a mouse. And that failed, but was succeeded, was the macintosh. And it's a wholesale rip off of the yucky park that lives on today in apple. And that is the story that you will hear from basically .

everyone i've heard of character ze as something like zia's hosted a picnic in silicon on valley and Steve jobs attended and died. The lavishly at which all .

of this is true.

which is true, that is true, all of that is true.

But it's half the story.

He was not the only person who died. Lavishly at the feast, microsoft did just as much directly from xerox. And Charles was one of the main vectors by which this happened.

So here is the list of things that were invented, or basically invented at the iraqi park, the graphical user interface, the s top, the mouse object or the programing ether net, laser printing, along with the whole host of other things like this, is everything about modern computing invented there? Who are the people who were at yx park, where there is elek? There was bob, my cafe, who would go on to found three calm. He invented either net, you know, meccah s. Law.

the value of a network scaling proportionally to the square of the number of inputs 呀。

Bmf C. X. park. Larry tesler, who would join apple.

John warnock, who started adobe ermin, worked jiao park. Everybody was there. IT was a lavish picnic.

and Charles CEO y and .

Charles money. Now, the thing about park and the computer that they built there to intention ate all these concepts, which was named to the alto, is that really was a research center. So the auto go look IT up on wikipedia. I go look at actually it's the mac. The auto is the mac.

It's the mac with the monitor turned on its side.

Yes, it's a vertical mac.

It's a three by four display, not a four by three display.

They start making IT in one hundred and seventy three. So I feel like where IT what's got on IT. The mac doesn't .

come out to one thousand.

eight, four, eleven years earlier. How on earth is erotics making the mac in like the per eight bit era, the premi ro processor era? Well, it's not a microprocessor.

Alto is not, uh, microprocessor architecture, it's a mini computer. So what you see when you look at photos of the auto is you see the mac. What you don't see is under the table or behind that is a mini computer is not personal computer architecture at all. IT is a sixteen bit, essentially mini computer that cause tens of thousands of dollars to make each one of them.

huh? It's a science project, right? You should have a little bit more generosity for the east coast management at xiao for fAiling to commercialize this told the .

time was not right. IT was not possible. IT wasn't even conceived of in the microprocessor architecture because the microprocessor basically didn't exist when they made IT interesting.

So in nine nineteen eighty, again, when this year for microsoft, same year microsoft joins same me a, they sign the IBM partnership. Charles Simony comes up from iraq park. And he's, of course, bringing all the same knowledge, all the same experience that Steve jobs is bringing into apple.

He's bringing all that right in the microsoft, too. And the first thing that he gets task with is working with this new consumer products division to build application software to compete with visit OK and word star, to compete with spreadsheet and to compete in word processing. And so he leads the teams that create word and multi play on microsoft first spread trip. Now remember, we're still at the end of the a bit era. The graphical user interface doesn't exist yet other than on the alto in zero ox park.

Now these are dos applications. It's all character mode. Yes.

this is command line interface. So the vector that they think they're gonna compete, at least in sped etes with visit OK, is that they're gonna be on every platform out there. VISA C, I believe was more or less basically only on the apple two.

Well, that doesn't end up working too well. And in the next generation, the IBM pcr, they sort of make the same mistake. The application business stays focused on being on later machines, making software that's compatible with everything.

A new company, pufas, called lotus. yes. And lotus makes the radical decision that they are gone to make a bread only for the I, B, M.

P. C. And this was genius. This is the one, two, three spread.

And IT goes on to become, at that point time, the most successful software ever. This is wild. I can't even believe i'm about to say this. And I blew my mind when I founded in research. There are a couple years in the late is where lotus has more revenue than microsoft and is valued higher.

Yep, in fact, the year that microsoft went public, lotus had more revenue than .

microsoft at the IPO. Yes, wild.

Yeah, it's crazy. So notice one, two, three had some graphics, but IT was still in character mode. IT was a powerful spread sheet that can start to do some graphics, even though there wasn't actually a gooey Operating system yet, which is interesting.

So latest one, two, three was faster and had bigger spread sheet, and IT was just more powerful. Microsoft multi plan was still targeting the older eight bed. And so multi play and despite microsoft bez efforts, is completely left in the dust.

Microsoft trying to figure out what should we learn from this? And in talking with pete higgs and mike slade, who were both early leaders and the development and the marketing of the applications division, actually mix lent on to work directly for Steve jobs at next and apple for many years. But in chatting with both of them, what basically became apparent as microsoft learned with our applications, we should not be targeting the current platforms at all. The lesson to learn is never leave yourself open to the next generation of technology if they're learning the morals law lesson again. yes.

And how applies to applications? Yes, you always got .

to target the next platform right, even if that platform is not the one you own right. That's the interesting thing about when they're evaluating multiple ane and they say, how do we not get notice one, two, three. Again, basically, the applications team gets the freedom to look around and say, okay, no matter what are overall company strategy is right now, no matter what the systems division doing, what is the most cutting edge platform that is gonna be so interesting to people that we can develop the most envelope pushing technology for IT. And that becomes the Mandate for applications.

This is the dawn of horizontal software.

You can have a whole company or a whole division of a company in microsoft case that makes this tool, and that tool will be so much Better than anything that even the largest companies can have their own software developers, right? General electric isn't gonna write a Better spread y than one, two, three, right? And then so I think that the technology compliment to this sort of law is the killer APP have to counter position.

If one, two, three is the best spread sheet out there for the current technology generation, you just want to be with them. You need to wait for the next big look forward in order to find a new competitive Victor.

You need to be the killer APP on the next platform. And that's what lotus one, two, three died with the spread eat on the IBM PC and IBM compatible PC. And that's what microsoft decides. Hey, we got to do this in the graphical .

interface. And who's about to come out with the very best instantiation of a graphical user interface? Apple computer?

Well, that would be Steve jobs.

yes. The next chapter of our microsoft story is the macintosh in one thousand nine hundred eighty four.

So fun.

we want to think our long time friend of the show, venta, the leading trust management platform, venta, of course, automate your security reviews and compliance efforts. So frameworks like soc two I saw twenty seven o one gdpr and hip compliance modeling ing vent to takes care of these otherwise incredibly time and resort training efforts for your organza and makes them fast and simple.

Yeah, fanta is the perfect example of the quote that we talk about all the time here and acquired jeff basis, this idea that the company should only focus on what actually makes your beer taste Better. I E spend your time and resources only on what's actually going, move the needle figure product in your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. IT plays a major role enabling revenue because customers and partners demand, but yet IT add zero flavor to your actual product.

Then IT takes here of all of IT for you, no where spread sheet, no fragment to tools, no media reviews to cobble together your security and compliance requirements. IT is one single software pain of glass that connects to all of your services via and eliminate countless hours of work for your organization. There are now A I capabilities to make this even more powerful. And they even integrate with over three hundred external tools. Plus they let customers build private integrations with their internal systems.

And perhaps most importantly, your security reviews are now real time instead of static, so you can monitor and share with your customers and partners to give them added confidence.

So whether you are start up or a large surprise and your company is ready to automate compliance and streamline security use, like fanta, seven thousand customers around the globe, i'd go back to making your beer Better head on over to vantage coms lush required and just tell him that then. And David sent you. And thanks to friend of the show, Christina anta CEO, all acquired listeners get a thousand dollars of free credit vented outcome slash acquired. Alright, so David, why are we talking about the mac?

Because I think it's fair to say that the mac made microsoft office and microsoft office made the mac. I don't think that is actually a controversial statement. No, although IT probably sounds crazy to many of you.

listings totally far away. The first thing to point out is the first version of microsoft excel was for the mac. It's especially crazy for all the finance people today who were like, oh, mac, excel isn't real. excel. Excel has happened on windows.

though excell was on the mac that was IT.

yes. And the logic basically was microsoft was really coming around to the idea that the next big thing in computing was the graphically user interface. And the reason they were coming out of this was because they knew from ioc park just as well as apple did, and they were rapidly trying to figure out how to get all of that xiao x's parkin's into their product line, too.

That's the other half of this sort of untold xian q's park story. And one of the first ways that they see to bring the graph user interface to their products is launching excel for the mac because they are basically see the way that we got destroyed with lotus one, two, three. We can't compete with low s on the IBM PC. We're a shelf multi plan and kind of start over an excel is going to come out in the graphical user interface and we're going to try to be first and best on the guy.

And one thing just to underscore here, excel is the world's first graphical spread d chy. program. And that's why wins and that's why it's so important.

Like imagine trying to use excel in the command line interface. That's what visit calk was. That's what even one, two, three was.

Yeah, useful. Better than nothing but graphical charts, cells, visual relationships. This is so important. And excel is where IT all starts.

yep. And of course, apple loves this. The macintosh came out in one thousand nine hundred eighty four, and everybody remembers the great intro video and the hallow script.

And i've watched that Steve job keynote because of course, I have and it's this magical moment in computing history where finally something that's insanely great comes out and it's like the beginning of Steve jobs is unbelievable. Presentation powers is so fun to watch. And IT took, of course, a product that eventually people really loved.

But at first, IT doesn't have the killer APP. No, it's a product that was supposed to ship in eighty two. IT didn't IT shipped in eighty four.

And so at the time, what they were targeting for eighty two was like a really great set of technologies by eighty, kind of an aging set of technologies. So IT abuse with a hotter than twenty eight k of memory, which basically isn't enough to create any interesting applications. And so developers are kind of ignoring IT as an interesting platform to develop on. Within twelve months, they kind of figure IT out and come out with a Better version that's five hundred twelve k and that kind of the version that people now really think about yeah.

that gets kind of reacted as like that's the original matter and the original origin.

Yes, exactly. But in the meantime, microsoft, the applications group, is work, and they are ask off to make something really great for the macintosh, and they come up with excel. And so what end up happening is apples really trying to promote sales, this machine and the kind of you excel in page maker as the killer apps as reasons that people should buy this thing. Because once you run through a lot of the demo apps and the stuff that apple built you like, okay, with what else is here is a kind of cricket.

right? Writing hello and script is, you know, cool, but kind, like a lot of V R stuff you do I go that's a cool demo, but like you are going to do that everyday like right now. And so i'm not .

sure this has ever been publicly disclosed before, but apple spent just as much marketing excel as microsoft did. They matched microsoft marketing spend with their own campaign for and split the bill.

That's amazing.

So you've got a couple concurrent things going on in applications and and you've got excel coming out for mac to take averages of the GUI. Meanwhile, and this strategy is just all over the place, I think that's an interesting thing to underscore about microsoft in this era. They're trying a ton of stuff because their paranoid, they don't want to miss the next wave. Meanwhile, also in the applications group Charles Simony has written, this is a about a year before, in thousand nine hundred eighty three, microsoft word comes out for dos.

right? And they sit .

IT with a mouse. Yes, so this is like, okay, we see the iraqi's parks stuff coming out in the mac. Great exile for that.

We want to develop word. We're going to do that for dos. Oh, but I can imagine how useful the mouse is going to be in a word processing environment.

So they actually ship a mouse tied to the application. That's not a part of dos. And so this is how early we were in figuring out kind of what the split between applications and platforms were at this point in history. Microsoft thought maybe a mouse makes sense just for this one application, even though IT doesn't do anything else for the rest of the command line interface.

right? Yeah, he was all being figured out. I think IT is also really fair to say microsoft was right there with apple in the mac development phase. Obviously, they are working on excel, working on you know what would become the office sweet applications you know, together for mac. Steve jobs shows bill gates the mac project in one thousand nine hundred eighty one, three years before its ships, and microsoft and apple signal agreement to work together on applications for IT. In one thousand nine hundred eighty two, they were very .

deeply embedded on this amazing.

which is going to make the lawsuit. And what comes up in a minute here, all the more third of funny.

yes. So the decision for the excel team is to focus on GUI. The whole marketing message is excel on a mac is Better than lotus one two, three on a PC.

You're starting to see a truly divergent cultures at microsoft e between the systems group, which is currently making dos and will soon make windows or soon partner with IBM or soon do something else that were getting into here in the next chapter of the story. And the applications group, which is also currently a bunch of desperate applications and teams targeting desperate platforms, but is also about to become unified in their next chapter. And within the applications group, that next chapter is microsoft office.

So in thousand nine hundred and eighty five, in january, the bundle is released. And IT was originally called the business pack from microsoft. And I started on the .

map roles of the gug totally .

does now they haven't acquired powerpoint yet or four thought, as we talked about eight years ago, on acquired way back in history. So there's note, the power points is not part of the bundle. And so what you've got here on the mac, the first version of office is word, which they've developed in house file chart and multi plan.

This is the first notion of a sweet. So today, we're very familiar with sweet. Creative sweet over the dobe software is all this way. This was kind of the first time. And so what was actually happening is all of the bungling was happening in pricing, in marketing and in manufacturing.

And so you sort of had a single box that they would ship with the different applications by one thousand and eighty eight or nine nine IT was word, excel, powerpoint. They're very different things, but they're getting sort of bundled together in a way to be sold to customers. But there's no product and integration. And so you don't have the ability to do this like very nice copy paste from an excell table and just pace that into word, that whole idea is pretty far away. So in this earliest microsoft office, IT was just how can we bundle something for a cheaper Price if you buy all three and make marketing easier for us to kind of have this unified message?

yep. And soon to come on getting the windows here in a second, in one of the big of the killer APP for productivity, in particular for business productivity. With a graphical user interface like windows and true multi I tasking, you can get copy, paste from like excel into powerpoint.

Lotus in the world, back in the command line interface. We've got these programs running on top of dos. That is like a completely foreign concept.

right? None of those verbs exist. exactly. So we've now sort of set the stage of microsoft doing a lot of stuff.

They are heads and a lot of bets. They're not totally sure which strategies in out. They're not sure platforms when out. They're not sure if they're more of a systems company and application company. But what they are unified on is we make great software for personal computers.

And I think anything that fell into that preview, they were willing to explore, they didn't really have hard boundaries between will do anything to make our Operating systems great or will do anything to advantage our applications or even we think are an enterprise company. We think we're consumer company. They didn't have well formed opinions yet. IT was just, we makes software for personal computers.

And at this point time, the actual boundary between an Operating system and an application is very fluid.

You ve got a mouse that works for one program totally.

The notice would really go down a dead and evolutionary path with notes, you know, later in its life, and its final chapter, where the application was going to be the Operating system.

right? Lotus notes was crazy. He was a word processor and service, and IT was a platform on which you could write other applications.

yes, and itself was an application. It's crazy. Not an Operating system. So yeah, was all kind of dynamic speaking up though microsoft here is in bed with apple working on the mac. Bill on the company are big believer.

S in the future of the graphical user interface, started in one thousand nine hundred eighty three. Dealer, we gotta do our own graphical Operating system, or at least user interface. And this is the origins of the windows product.

And they actually announced IT in november one thousand and eighty three before the mac ends up shipping, which their partner, apple, is of course, not happy about. yeah. Now just like development of the mac was rocky, development of windows was super freak iraqi within microsoft too.

This is around the same time when paul Allen get tag disease and leaves the company. So kiz presence says sort of great technical leader is very much missed, but they bring in someone from zero ax to manage the development of windows. That persons ends up not working out.

He gets fired. Steve bomber gets drafted to come in and be the dev manager for the final push to release windows one point now, which is hilarious. You can find amazing youtube videos from the laws, and i'll talking about holic non technical Steve coming in the save the day and dev manage windows to launch.

which is so funny. I don't think at this point in history, the lines were clearly formed among the executives yet like Steve wasn't running the global sales for us and microsoft wasn't an .

enterprise company going to gets ba.

Steve was one of the smart executives and they were a software company and someone had to manage get the software out the door. So windows one point now comes out. It's bad.

It's about november in one thousand nine hundred eighty five. Windows one point o is a very, very different thing. Then you imagine a graphical user in our faces today, or what you know of this.

Windows IT was tired. IT was not over a lapping windows that you can drag around and like, have one over the other. When you open the program in windows one point o, the system created a literal window of IT on your screen, and then IT dynamically resides the windows as you opened other applications.

And so nothing could ever be on top of each other. So as you open more and more stuff, the windows get smaller and smaller and smaller. It's very bizarre.

E, yeah, the idea of windows overlapping on top of each other, that was a sort of uniquely mac thing and a thing that smart engineers at apple figured out how to do that in a performance way that offers good user experience. I would classify windows one point always, like a half step between command line and the natural graphical user surface.

Yes, a hundred percent. And so I believe microsoft and apple actually did like a licensing agreement while they were working together during time. That said, hey, microsoft can use a lot of the stuff that's being developed for mac, for windows. One point of.

Yes, that's right. Apple does do a deal to license a lot of quote, quote their intellect al property, which of course came from syria x to microsoft. Apple I think was under the impression that IT was just for a windows one point o but the actual terms of the agreement are this and all future versions of windows, which comes back to haunt apple later. But yes, they totally get the license .

also by the time that this agreement actually happens, I think Steve jobs has been hosted. And so it's skilly who does this agreement. And people in apple would look back on this for years.

And we like this was a huge air. The other important thing about windows during this sort of awkward teenage face is is not an Operating system. It's just a graphical interface on top of dos. Yes, the original name for windows was interface manager .

isn't a crazy in all of their early marketing. They referred to IT as windows, a graphical Operating environment that runs on the microsoft M S das Operating system. yes.

And IT actually IT wasn't not until windows ninety five that windows was its own Operating system. IT was in windows one, two, three, three out one and windows for work groups. IT was a graphical Operating environment.

You but .

here's the question, why is microsoft doing windows? Obviously here microsoft knows they need to evolve dos. They need to figure something out for the graphical world. And so David, are you telling me that windows is the widely agreed upon future of the company and that's just a straight line?

Well, obviously, that's to set up there. Here's the other thing that's happening in the company at this time, and it's the a bigger thing, it's the next phase of the IBM relationship yeah windows, the mac, all of this these are hedges for the company. Microsoft and bill in particular, were masters of hedging their bets in an uncertain technology future.

He was so great, the company was so great at making sure that whichever way the apple fell from the tree is just, I want put IT to a set. Our interview, microsoft was going to a reposition to catch IT. A lot of people, including bill in microsoft themselves, believe that the way that apple was gna fall from the tree here was IBM and O, S, too. Well.

I mean, the IBM PC was such a big deal last time around. You would think that whatever IBM wants to do next is a pretty good way to A L yourself.

right? So what's going on here? I, B, M, obviously the P, C, was a huge success, but losing dominance of the ecosystem to the clone, this was bad.

And so I, B M wants to find a way to evolve the P, C ecosystem back to being more IBM propriety. And they're gonna microsoft cover along for the ride here. And the way that they're onna do this is with the next generation of the PC ecosystem.

They are going to make a whole new modern Operating system. You're going to get rid of dose, make this Operating system in partnership with microsoft. And it's gonna called, fittingly, O S two.

And they are going to lack microsoft up that they can't licence IT to anybody else. O S two is going to be proprietary to IBM hardware, just like the mac Operating system is proprietary to apple hardware. Banana, banana. And as powerful as microsoft become here, they're still the little brother to IBM. And this is not great news for microsoft.

On the other hand, it's much Better for them to be like on the inside here with IBM working in bed with him, then IT would be to be on the outside looking in if ibm's vision comes true and they recapture control of the P. C ecosystem. So bill in microsoft, in the company and Steve to, as sort of the manager of the account with IBM, commit themselves to microsoft is all in on this vision of the future of O. S. 2。 And IBM is our horse in the race.

This is such a crazy part of the story to me because we just talked about how microsoft discovered this amazing business model. And with everyone needing the license of then they're taking over the world and they're becoming the standard development platform. Why on earth, if all that is true, are they going to develop some software that's gonna locked to IBM computers?

This is a great centralization attempt. Obama has this great, great, great quote about IT. He says this, the I.

B. N. partnership. At this time, IT was what we used to call riding the bear. You just had to try to stay on the bears back and the bear with twist and turn and try to throw you off. But we were gna stay on the bear because the bear was the biggest, the most important you just had to be with the bear, otherwise would be under the bear. Like that was IBM at this point in time. I mean, really, I think IT was IBM essentially putting a gun to microsoft head and being like, well, you can be in bed with us on this future that we're going to essentialize everything or you can be like everybody else, not be, you'll lose.

And so even though microsoft doing all these little hedges, you know, window is a tiny little team, that's what I think it's thirty people or something. Yes, it's not the most prestigious place at the company. The people in the applications division may as well be on another planet by this point from the systems division.

They are try all kinds of crazy stuff. And the company kind of model at this point is the next big thing is us two in IBM. And we are the software vender for that.

And certainly, bill and I think Steve to they needed to toe the party line politically of expressing that. nope. O S, two is the future. And what we're doing with windows and with the mac is, you know, those are small things within the company.

It's a super bizarre a period in history, but IBM had also, china made a bit of a power play too, with the later generations of the sixteen bit era product. They called the P, C, A. T.

They use the intel two eighty six chip instead of the intel 37 six chip and the two eighty six chip。 This was an intentional decision on IBM part. The two eighty six ship was good, but IT wasn't great.

Well, you say IT was good, but not great. Bill gates said IT was brain dead.

Yes, bill, get called the brain dead.

So I think you might be being territory.

I mean, I think that certainly was more powerful than the eighty, eighty six, eighty, eighty eight. But IT was nowhere near what the three eighty six could do. You there's a bunch technical aspects to this but the most important takeaway is that the two eighty six, this was not really powerful ll enough to do a graphical user in her face or to power true multi tasking in a way that the three eighty six, then later the four eighty six would be. And so a big part of actually the compact story about how compact and the clones leap ahead of IBM is they're not deterred from coming out with ninety six machines, which are way more powerful, can run windows, can do all this stuff. And so that's how they start to separate for my B M.

That's right. That was like a bet company move where a microsoft was like, hey, compact, go make three ty six stuff because we're going to make a really great three ty six software. And we need someone to be all on that because IBM not. This is the thing .

bill and Steve in the company, they are having to toe the party line of expressing commitment to IBM. But really, they like, know our complet, go to the three to six where I do windows. They are like, rally up the rebels.

Exactly, they are the rebels versus the empire here. So anyway, I, B, M, of course, sees all this. They made the decision not to go to three, eighty six and to discourage IT in the market place because they didn't want pcs to start creeping into the core enterprise.

You don't main frame IBM workloads, the core business, if that was going to happen. They wanted IT to be IBM proprietary close system. So I think that was a big part of the input for O S two initiative.

I see this .

is the empire strikes back here.

They're basically trying to go up the PC movement back into IBM proprietory land.

Yes, exactly. So when O S two finally does come out in december eighty seven, predictive ly, as you can imagine here, it's not very good. The market does not like IT.

Thank god for microsoft. And I think again, this probably was built strategy along that they head with windows, with the mac. That's clearly the future like the market is not going to accept O S two and a return zion IBM. Microsoft is crushing IT on the revenue side even though O S to is a failure.

I mean, dos and the applications were both great businesses by eighty seven.

yes. So fiscal eighty seven, microsoft s three hundred and fifty million in revenue. Fiscal eighty eight, they do six hundred million in revenue. Basically none of this is from O S two and the IBM world.

And then towards the end of one nine hundred eighty eight years, when the wind starts really blowing away from IBM here in june of one thousand and eighty eight, microsoft hires mike maples, who is IBM director of software strategy, away from IBM to come head microsoft application software. And what is microsoft application software strategy right now? It's the graphical user interface.

It's everything that IBM isn't. The writing is starting to be on the wall here. That divorce is coming between IBM and microsoft. And then finally, year and a half later, in one thousand nine hundred ninety, windows three point o comes out.

And this is when they get IT, right? This is when there is enough installed base of eighty sixth and forty sex machines out there in the open P. C.

Go system that you can have a really good true multi tasking, good U I graphical user interface running on top of dos. So windows one point o and windows two point o only ever achieve five percent penetration of the dos installed base. Windows three point o double that in the first six months.

P, C, computing magazine rights about windows three point o may twenty second, one thousand and ninety will mark the first day of the second era of IBM compatible. Microsoft released windows three points, and on that day, the IBM compatible P, C, A machine hobbled by an outmoded character based Operating system and seventy cycle programs, was transformed into a computer that could sore in a decade of multitasking graphical Operating environments. A K, A, everything.

O S two is not winter. Three point o gets right. What its processor is got wrong. IT drives adequate performance.

IT accommodates tes existing dos applications and IT makes you believe that IT belongs on a PC as awesome. That's what the press i'd been. I know you talk to. A really important person in the wind dies a system in microsoft internally at this time.

What do you have for us? Yes, we have to think brad silverberg for helping us with this section. Brad LED, the windows three point one team.

He came in right after the three point of release that would eventually go on to lead the windows ninety five effort as the VP of the personal systems division. So bad comes in, windows three doo has just shipped. And the first thing that is super, super obvious is, as brad sort of observed, everything going on with O S.

Two land and everything going on with the core microsoft culture. IT was a complete clash. IT was impossible for th Epace o f m icrosoft. This is like a super Young group. I mean, all in their twenty, some people in their thirties, but mostly twenty years, who just want to push the cutting edge ship stuff. IT was almost like thing about google in the early two thousands.

Just hire all the smartest people you can and set them loose and have creativity and bump up against the edge of what's possible, both in terms of pushing the hardware, but also pushing me, even like laws, as we would later see. Let's just do what users love and see what happens. Let's just do what technology enables us to do and see what happens, like the opposite of IBM culture at this point.

So there's is a huge cultural rift between what IBM sort of needs and who microsoft is at this point. And so what ended up happening with three I O IT was unexpected. Dly loved the microsoft was not really prepared for how much people are going to love the gooey.

And with three out one, I got really good. There was a small outsides of the executives and billing. Steve basically decided that IT was time to bed on windows.

That was the new strategy. Windows had always been planned b and now suddenly IT was plan a. And when I say plan B, I don't mean like, thought they had a prayer of being playday.

I mean, there was sixty five people that shipped windows three point one. These were like the misfits. IT was not prestigious.

I mean, the prestigious thing to work on a microsoft was O S. To, and eventually windows N T. But the windows team in the windows three era is almost like the mac team over at apple.

They were sort of flying the rebel flag. They valued creativity over bureaucracy, even if IT meant they weren't working on the prestigious thing. And so suddenly there is this huge strategic opportunity to become the standard independent of IBM.

If the platform is good enough, and then boom, the early reception of windows is so good, IT gives this glimmer of that, makes m really ambitious. But that opportunity is actually are if we want to go see that. So everyone took a big gulp and said, the goose, the next big thing. Users love this. Let's take the rag tag group and promote them.

This was, I think, the moment when microsoft started to believe in themselves. Like really like you look at the facts as we told the story is like, oh yeah, like build this great business deal with IBM and anticipated the rise, the clone in the first PC and one. And then like microsoft was the thing and IBM was like the old thing.

But I wasn't until of this when, like in this whole O S two thing, I think you can see like they sort of felt like they were still little brother. They had to go along with what IBM dictated. And now they're like, wow, why do we again, wearing control .

and the press is making a big deal out of bill gates. Boy, he's the Youngest ever billionaire at age thirty one. And by the way, when billion etes became a billionaire, there were not lots of billionaire.

There were like fifty billionaire. All this law around the company, it's like they can do no wrong. But inside the company, I think they're like we don't know the future of technology.

Any wave could break against us at any moment. And this is ten us. I think that casm kept getting wider and wider and wider of international feeling like they're screwed and externally IT seeming like this is the next great thing.

totally. I've got some fun stats on like money in revenue around all this. So in fiscal one thousand and ninety, the year that windows three point o shipped, microsoft does one point two billion dollars in revenue, making them the first software company ever to pass a billion dollars in revenue. Fiscal ninety one, they do one point eight billion. Fiscal ninety two, they finally win the apple copyright lawsuit around the which.

by the way, the way that they won, that a judge basically looked at the paper and said, apple, you totally said in all the future versions of windows, they can use your UI paradise. And so for most of the counts are covered. And for these other things that you are trying to ask them about, those are not actually defensible, is just widely accepted that these are U I. Paradigms now and you can enforce any ownership over those. So I basic got like throw out apple, try to appeal all the way up to the supreme court who said, no.

that's right. I'm like we've been saying to like they .

both stole from iocs.

Yes, fiscal ninety two though, this is when microsoft just blows the doors off. They do two point eight billion dollars in revenue in fiscal ninety two, up from one point the year before. And that year one thousand nine hundred ninety tude in october is when gates finally passes john clue que O G fans back to the L V M A episode.

Gates passes john clue of metro media fame media mogul to become the wealth est person in america. And so everything you're talking about, all the press comes around that. And then genre ninety three, the crowning moment that happens, microsoft passes IBM in market cap.

And it's like they have inherited the earth. They have inherited computing. Yeah, supposedly. I don't know if this hundred percent this is written in one of the books I read. I read this.

The folks involved will have to confirm or deny, supposedly the next month after microsoft passes IBM in market cap. So now, february e in thousand nine hundred ninety three, the IBM board is in disarray. The empire is going down.

They fired the C. E. O. Tom Murphy of capital city's fame, who is on the IBM board.

Supposedly he comes out to redmen to sit down with bill and personally ask him to come and be the next CEO of IBM. Yes, this is what I read of. This actually happened.

But this is I read, is that in hard drive? That's a hard drive. yeah. Wow.

listeners, there are some unauthorized biography that we try to corroborate as many of the facts as we can. But the ones were David saying he doesn't know a source except these unauthorized ones. Yes.

gates obviously declines that. But whether not that actually happened spiritually, you could believe that happened. Bill and microsoft, the new emperor here. I mean, this Carries through to this day.

We're going to tell him the next episode here, the antti trust, in the fall of not really microsoft, still the most valuable company in the world. They inherited the throne from my B. M. Happens right here, nuts.

And so suddenly microsoft feels the full weight of everything that you have to do to build a platform and be a start of an ecosystem. So suddenly this huge effort began to try and make developers successful. That's how windows would be successful if IT was a great platform for application developers to thrive on.

So Cameron mere, vod LED, the developer relations group, basically to try and figure out what do people want out of a platform and how do we provide the as for them and the support and everything in order to do that, all the documentation and all of the help, everything. And at the same time, microsoft basically knew establishing a platform is brutal and requires bootstrapping, a multi sided network of helpers, users and PC manufacturers. And so three, that one had users excited, but IT was still very early.

They could have lost that throne. Developers were not really yet targeting windows. Microsoft sort of had to show we make great applications for windows two. So that applications group really had to start doing windows three out one.

right? Because developers were targeting dos at this point, they were probably preparing for O S. two. Some of them were targeting the mac like microsoft itself, but nobody was targeting windows exactly.

So you've got this big developer relations group effort that spins up. Meanwhile, there's a huge push with OEM to get them to install windows. At this point, they were still installing dos or some people were actually installing nothing and requiring users to put upernavik ms. on. So there is a conceded push to get the o EMS to install three out one.

Well yeah, in the some people installing nothing we should mention here around the same time this error, they move lot of their O E M deals to a per processor licensing fee arrangement, which gets them in a lot of hot water with, and they trust a few years later.

okay. So this happened from one thousand hundred and eighty eight to nine hundred ninety four, David explained the poor processor licensing agreement.

Well, here's how microsoft, I think, would position IT to their O E. M. partners. You could pay us, you know, a license fee for every machine, new ship with dos installed on a dos and windows. And you know you can offer other O S, S too. But rather than that arrangement will give you a cheaper per unit deal because you're gna ship does on everything does is the standard, and we want windows to be the standard.

And windows the standard will make IT more economically attractive to you, give you a lower per unit rate if we just kind of change the terms and say, instead of every unit you ship with dos or with windows, every machine you ship period, every microprocessor based machine that you ship no matter what Operating system is installed on us, just pay us a per processor rate. So if you do that, you'll be paying us for every machine, whether you dos windows on IT or not. But you're gonna do the windows anyway.

See, mays will take the cheaper, right? MaaS will take the cheaper option, right? And obviously, what effect does this have on competition? Well is now a very, very, very strong incentive never to ship at other Operating system. But basically .

you're going na pay for two different Operating systems even though you're all they putting one on if you ever loaded a different Operating system on. So yes, IT very strongly instead vises you to never, ever, ever ship any other Operating systems on your computers as a company.

Now this is, of course, the way that regulators would look at IT in one thousand and eighty four, and that would get microsoft in some hot water, and they had to agree to stop doing this practice. The way microsoft look at IT is we're just helping our customers. Do you really think that these companies want to keep a whole separate letter. Of what machines they shipped dos on or windows on versus what machines they shipped period IT wouldn't just be easier if once a month there, once a cord, and they could just report to us their total shipments like they have to report to their investors anyway and then will just send me an invoice for all their .

machines totally and well and I trust in the government would cease onto their says like a smoking and like I think the reality is this was kind of irrelevant in terms of the forces that may, dos, d windows. The winners, they were already the winners by the time they started to doing this.

So, right, if this had happened earlier, you could see how this would be more of a compelling way to get market here. But by the time they started doing that, they were ready, started running away with the market.

yes. Now speaking of this, started new customer friendly by a friendly business practice from microsoft, I think, is how they thought .

about IT totally. They wanted to make the stuff that people wanted to use the most, and that's how they would win. Their goal was make the very best products, the best software we possibly can in the ways that people want to use in my software, and then we'll make a lot of money.

Yep, as this changing of the guard is happening for my B. M. To microsoft.

Think part of this new self confidence from microsoft is, wait a minute, why can't we go in the enterprise too and take that for my B. M. We don't have to get in bed with them to sell to the enterprise. We should sell to the enterprise.

And I think they were sort of realizing is, well, we have made software that people like to use, so they're using IT in businesses. They always kind of wanted that to be the goal, but now was happening. People are doing their work in excel.

People are bringing pcs to the office. Maybe businesses are buying their pcs, but people are actually buying them themselves and using them in the office. And so I just made them that much more efficient.

And so microsoft really had to figure out how to sell to businesses, but we actually have no idea how to do that. And IT sounds crazy today. The microsoft, you know, today, as late as the mid nineties, really had no idea how to sell or build software for businesses totally.

And and this is the first half of the original microsoft's sion statement coming to a PC on every desk, in every home desk means work, means enterprise. yeah. And this era, everybody we talk to gives one hundred percent of the credit to steep bomber. Steve took IT on his shoulders at this point time when microsoft is passing IBM to say, I am gna build and we are going to learn as a company how to sell to enterprises. And then like you're think, it's impossible to imagine now microsoft not like this, but there's so much that they needed to do that they didn't have.

in part because prior to this, personal computers were not used by enterprises. IT was just not an enterprise tool. So now that IT was happening, microsoft had to figure out how to be the ones that would benefit from IT.

yep. And that meant selling to the sea sweet at global fortune five hundred companies, most of whom did not use computers.

correct, and certainly didn't want to buy Operating systems one at a time.

right? D, to the extent members of the sea sweet, like cio s or proto I T organizations use computers, or were the computing centers in the company they hated, the P. C. IT made their life hard. This was like when employs would bring A P C to work and plop IT down on their desk and start mucking around with stuff and made things hard.

right? And there really isn't yet a business server that couples nicely with the PC on the desk. And so you have this weird thing where there is a main frame, that is where the companies like real enterprise applications run, but people are bringing pcs.

And those pcs don't actually communicate well with anything else yet. They just are there for the employee to do their own work on a sprayed sheet or something print IT out because finally, three, that one had printer drivers and then deliver that map. But IT wasn't like a system that Operated with other .

systems and renter prize, there's no email. So this really was like a business transformation task for the global fourteen five hundred IT wasn't like.

hey, let's sell something to businesses that they want to buy. It's, hey, let's convince businesses that pcs are a good idea for their workforce to adopt.

right? This was partner with the consulting firms. This was building a direct sales force within microsoft. This is building an indirect sales force within microsoft, partner with distribution partners, with channel partners, with independence software vendors. This is building a customer service organization.

This is building the executive briefing center on the microsoft campus and bringing CEO another sea sweet folks there to microsoft. It's building solutions for them. It's becoming a partner is everything that Steve is Frankly just born to do.

And all of this stuff is pretty out of scope for the episode, including all the software systems you would need to build for the enterprise, like windows N T server and exchange and sequel server and active directory, like the classic mid two thousands microsoft stuff that they got known for. But that is what this would all evolve into.

And IT really just started with everyone kind of looking at Steve and saying, can you figure this out? We have all to date basically just been either running dev teams or running marketing or running product groups and been selling through retail or distributors in the application side or most through o EMS on the systems and Operating system side. But can you go figure out how to sell everything we make in a completely different way to a completely different buyer profile and keep us posted on how that needs to change all the products we make in order to do that? That's a pretty crazy change.

yep. And how actually goes down? And you do we hurt this from Steve, and you heard that from other people is so fitting.

So by the end of one thousand nine hundred ninety, the microsoft I B M. Divorce is official. IBM takes full control of O S two development back from microsoft.

Microsoft ceases involvement, break up his official. This now gives microsoft and Steve hunting license in the enterprise to go compete against IBM. But they have a secret weapon that is going to enable them to come take the enterprise for my B.

M. And then tell us what IT is. Well.

it's painfull obvious. It's microsoft office and it's the fact that the whole workforce is already using microsoft office. And everyone loves to talk about product LED growth and how it's this new thing in the late twenty tens and how slack. And at last, I in and tl o, everyone figured out pog and this bottle up workforce adopted way rather than selling to procurement, R I, T or the central administration or and it's just not new.

No, this is always in the case. And microsoft invented IT.

All the employees wanted to use excel and word, and they just had to figure they were do that anyway at at some point, microsoft to to figure out how to take advantage of selling IT centrally, then how you do business with other businesses rather than selling a zilla and retail copies of people who are using a kind of illegally for their work.

There are so many things that they are beautiful about. This one. It's the legacy of this bet on the mac, bet on excel.

You know that on windows, you know shortly there after that enables microsoft to go into the enterprise because yeah, even though they've just broken up with IBM, I O S two isn't going anywhere. It's not like Steve can just go knock on the door of some banking C E O or did see swe be like I microsoft. Come talk to me about how you can use micro t products in your organization. But rather, it's like, hey, thousands of people in your organization are already using excel. Let's have a conversation about how we can make that work Better for your organza and what else microsoft can do for you.

I absolutely. And next episode is going to be all about the enormous success of becoming an enterprise company and the enterprise agreement and cloud and everything that sort of came after that. But we have two chapters left in this episode, and they happened concurrently within the systems group by two very, very different teams.

And that is windows ninety five and windows and t so David, let's start with N T. And that our little Cherry on top can be a ninety five to closest out. How did windows N T happen?

perfect. And it's entertained with the beginning of all this enterprise fiction of microsoft. Okay, so windows N T remember I B M whole goal with O S two was that they saw the trajectory of the P, C was going to eat into traditional main frame type applications in the enterprise, and they wanted to retrial ze an own the P C and our precious ation of work clothes.

N T after the divorce. Microsoft in like, screw that, we're going to do the same thing. I need lunch. And so the initial work kinds starts out of the work they have been doing on O S two with IBM. But then in october one thousand nine hundred eighty eight, as their heading towards divorce, microsoft higher dave cutler away from deck. And dave is an absolute just beast, a legend like he's still writing code of microsoft today, which is amazing.

It's not crazy. So like in is eighties.

amazing dave. A deck wrote the whole Operating system that deck ran on facts and so poaching him away to come work at microsoft, both like he's the guy that's GTA build an enterprise ready take share away from the way traditional enterprise computing is done under the PC you know like he's got the shops to do this. He's also got the credibility to do this.

He's written a widely deployed enterprise Operating system. yes.

Him coming to microsoft, him leading and building this effort gives Steve the sales for so much legitimacy when they're going in and talking to the c suits and the cio s and the IT departments.

And enterprise is even though they don't yet have an enterprise product to sell, they've got dawson early windows, which is essentially consumer targeted. But now they've got this guy, dave.

Yes, now they've got dave .

a and we should say, dave, this is really the first time they brought in someone who had real industry experience. I mean, in eighty eight, microsoft was thirteen years old, so bill gates would have been thirty three. Everyone is in there like late twenty years, in early thirties, and dave like mid d forties. You know, he's like know i've seen a few things.

I think he was David also like maples coming from IBM. My obviously wasn't a technical leader you know on the business and strategy side. Yep, so N T we will talk a lot more about IT on the next episode, but spoiler alert, IT is the vision of what I B M wanted O S to to be. But it's microsoft sion of IT, right?

IT enables all of your desktop computers at the company to join a network together in a compliant way. IT enables an internal server that everything communicates with. IT enables a directory of all the devices on the network and all the people in your organization soon.

with the internet coming at all, enable services that face externally from your company. The punchline here is that N. T becomes the seeds of windows server, the business line, which become the seeds of azure today.

So the other important take away on N. T. Is he was going to take a long time to build IT was going to take a long time to test IT was going to take a long time to sell in deploy and IT was gna have really strict requirements for what I could work on because it's a power hungry Operating system built for enterprise IT administrators.

And so that is not your short term product strategy. That is a long term bet that a team is gonna work on concurrently while you're figuring out what to do after windows three out one. So in one thousand nine hundred ninety one, bill gates summer s this up in a memo where he says our strategy is windows one evolving architecture, a couple of implementations and an immense number of great applications from microsoft and others.

And every word in that sentence does a bunch of heavy lifting. You got one architecture, okay? I think what that basically ends up, meaning a few years later, is one application programing interface, API, that developers can target so that when they want to write a windows APP, IT works on both N, T.

And whatever. The evolution of three dout one is okay. So that's one architecture. But IT says one evolving architecture, so that buys microsoft a little bit more fluidity in the one architecture that's being targeted. Then you hear a couple of implementations.

So this basically says even though developers are targeting what became the win thirty two API with one way that we write applications, there's two different implementations. And so for many years they would display very differently on nt systems verses spoiler ert. Windows ninety five, the successor to windows three out one. Oh.

by windows ninety five, you mean windows four that was supposed to ship in nineteen, nineteen eighty three?

Yes, I do, but it's so much sexy to say windows ninety five and named in after the year that I actually ships versus yes. But yes, an immense number of great applications for microsoft and others that sort of shed light on the D R G, the developer relations group strategy. We got to got a massive of Angels.

And everyone in the systems group is looking over at the apps group going. Did you see that bill gates just said our strategy is windows. We're now the windows company and that includes great applications from microsoft and others.

And so what does that mean? Applications group like let's go first best on windows, get to IT. I just think that sentence can of says at all for what we're looking at, nineteen ninety one through call IT, two thousand or so you .

and you know we just spend a bunch time talking about the enterprise is a fiction and all the amazing enterprise stuff, the the seeds get zone for microsoft at this point time. This area is also the hay day of the consumer PC ninety three gents starts in video. Graphics cards are becoming a thing.

PC gaming is becoming an industry, you know, that goes all the way back to. You can even look at mine sweeper as being a seminal moment, terms of the consumer ization, these devices, these personal computers, becoming companions to people's lives like the phone is today. I mean, you've got CD, RAM technology, multi media. Enda, the hay day of the consumer PC is here in this era, totally.

I mean, even before windows and ninety five shipped, they had seventy five million windows users. This is even before you get plug in play or multimedia or networking like this is on windows three out one. Yeah, crazy. okay. So we've been leading up to IT.

We've been building hype windows ninety five or should I say chicago? So the chicago name, for those of you out there who are like paying attention, you know, when this was under development and you are all excited about what windows ninety five would become. And you know, it's quite one percent of our audience or something, who knows the chicago code name.

They wanted to create an OS for the every man, one that was easy to get to a nice quality of life when you're there, who was affordable. Chicago is the perfect name in every way. And IT is also kind of a contrast to what was going on in a different part of microsoft, where there was the code name of cao for a very ambitious next generation Operating system.

Now might do anti had already come out in thousand nine hundred ninety three. So kayo is sort of this general bucket of maybe it's post N T, maybe it's part of N T. But this is like a really sophisticated crazy set of technologies that we're going to eventually bake into an Operating system.

IT doesn't really have a release state. No one really believes in any the release states that are proposed. But the windows ninety five teen, the windows four teen, the chicago team loved contrasting this idea like a far flung land that's really ambitious.

And who knows what I will actually be like with this chicago, something we know quite well. You get on ninety from seattle. You drive for three days and you're there. And that is sort of like the goal. That's the spiritual thing of our windows .

ninety five pizza. The bears.

the of a hundred percent, we should say, kiro never shipped. So there's a lesson in .

that well been called.

or a long horn OK.

I get ahead of selves again.

ahead ourselves. So, okay, windows ninety five, lets start with the launch of itself. IT was a huge, ridiculous, insane day in redmond, washington.

They set up tents all over microsoft campus. They flew in journalist beta testers. There was a movement around windows ninety five in a way that you would not believe.

IT was an Operating system launch, and j. Leno launched IT. IT wasn't like jay leno did some stand up. He was like jay leno for ninety minutes in a tightly scripted environment. Cohoes with bill gates, all of the fan fare and festivities.

There is no other word to describe the windows died five launch. Besides glorious, I am so glad that this stuff is preserved on the internet and on youtube, and that we could experience IT ourselves .

over the past month. IT might be like the peak moment of pure joy to celebrate technology before a lot of the sort of skepticism came in.

And the tech heaters, the D. O, J.

And yeah, totally IT was unashamed celebration of software is probably the best way to put IT microsoft license start me up famously from the .

rolling stones, a software company licensed start me up by the rolling stones as the official theme songs. E of an Operating system. Yes, the idea that this would be happening certainly back in one thousand nine hundred seventy five when they were moving Albert key, but even just a couple years earlier, this is breaking new ground totally.

The other thing is happening in one thousand nine hundred ninety five is the internet hype is starting to build. But we will table that for next episode, right? At this point in history, only fourteen percent of americans had internet access.

IT was still very early. There was no guarantee that any story posted online would actually reach the masses. And so microsoft had really relied on traditional broadcast coverage of this event and brought in all these journalists and all these print magazines and all these newspapers to kind of build the hype.

I watch the whole key note yesterday at at the end, they ripped down the to the back of the tent behind the stage and there is the entire development team in the red, yellow, Green and blue squares of the windows logo sort of sitting outside on the big sports field on redman campus. And there's only three hundred and sixty people that built windows ninety five. So it's still kind of a small team, but they're all there.

They're fired up. They're part of the moment. okay. So that's the launch event in redd.

At least around the world, people are lined up around the block to buy an Operating system. There's a lot of news coverage of that. Who is basically the iphone launch of its day? Yes, they lit up the C.

N. Tower, the tower of london, this state, August twenty forth, nine hundred ninety five. They basically treated an Operating system. Launch the way that you would launch like a movie or a new madona album. IT was a marketing case study, so much so that the folks from coca cola actually reached out to microsoft to ask them, how do you do marketing this? Well, in the new age of a gates .

quote with the warn buffet talk, do you do? Yeah, yes.

This is the company that we can invented, sana laws, to sell us all sugar water. And they're calling microsoft, asking, how do you market in this new era? IT was that successful? They launched concurrently worldwide in eight languages.

So this thread that microsoft had of early international continued all the way through to this moment. They invested heavily in doing all of the localization and help stuff so that the whole world really could adopt something all at one time. IT really was the perfect product at the right time. The internet games.

all that. And there's so much about windows ninety five two that i'm sure you're going to get into, bit like the start menu. IT was so perfect because this was the peak of the P.

C. Going fully mainstream. Nobody had ever treated software like this before.

Yes, that's the takeaway. They thought about software in a completely different way. And yes, the start menu, you, well, I got clustered and complicated and mess up over time. The idea of a button that you click to start using your computer was very appealing to people totally.

The mac obviously shared a lot of these elements. But IT, was that so much a smaller scale?

Oh yeah, I mean, the mac just never had any real PC penetration from the IBM PC forward. I'd never had big market chair.

Yes, this was like your grandmother coming into the digital world.

And that is how they tried to market IT. They market IT as people on job sites using windows. They market IT IT as people doing crafts. And there's like someone who's modeling something for an f one car is just fun watching all these old videos and seeing all the different personas.

Computer companies love f one cars for demos total, the ultimate aspirational demo.

yeah. Now I must say this all paints me deeply as someone who never owned a PC, grew up using a mac, loved every bit of my mac, was even an apologist in the sort of OS nine era of. This isn't very good, but i'm still going to say it's good.

And you know, I was on the O S ten public beta. I only click to start menu when I was like fixing a teacher's computer at school, even though they take away. Here is everyone thought this was a great Operating system and I won the market. I always .

looked at IT like, well, not a well, yes.

the way that apple products became mainstream always felt odd to me as someone who was using them when they weren't. But it's been interesting gaining a new appreciation for microsoft through studying their history that I absolutely did not have as a user during this era.

Having this discussion now makes me think what microsoft in this year, when does ninety five like they did what apple tried to do in bringing scalia skull, came from? Psi, obviously, that didn't work. But micro soft, they're the ones who did. They're the ones who mass martial ed, the computing vision .

and IT was the wrong strategy for apple, and IT was the right strategy for microsoft. I mean, apple has always, at least in my opinion, created Better computing experience by being completely integrated. I mean, the Allan k quote, anyone who cares about making great software needs to build their own hardware. And the complete integrated package that apple offers, I have always found to be the best competing experience. And IT doesn't scale .

or IT didn't in that era.

for sure in that era. yeah. The way to scale is make the software that is going to get distributed on the most pcs.

And then that is the most interesting to software developers and that is the most interesting to consumers who want the software and IT buyers who want to buy the standard thing. Apple strategy versus microsoft strategy. In this era, apple was always gonna be a bit player rather than the sort of scale winner.

And the trade office, lots of pcs had blue screen of death. Apple never read lue screens to death, like what a blue screens come from its driver problems. It's that the printer is not speaking the same language as you are particular computer and what the Operating system knows about your computer and all of the device drivers, right? For your particularly version of whatever is on your motherboard, like apple never had those issues, but they also had very few units ship than, you know, much more expensive product side bar .

that Allen k quote about if you really care about sofa, you do you're on hardware makes so much more sense to me now having done this episode because he's coming from having made doto and the graphical into user face there. The only way that he could have made the guy on the alto was basically building .

a any computer yeah not crazy.

Make much more sense.

So a little bit more on windows ninety five before you finished the story here. IT is remarkable to reflect that IT took what five, six years to go from windows. Is plan b to microsoft being extremely right that that was the franchise like that was the bed to bet the entire company on. And as brad silver break put in this way to me, he said windows ninety five semmens windows as the franchise product for microsoft, which interesting ly IT was not yet. David, this crazy IT would remain the franchise product for the next twenty years, perhaps five or ten years too long.

But i'll save that story. Yeah, I just put the numbers on this. So August twenty forth, nineteen ninety five is the launch event.

The glorious day windows ninety five comes out. Sells a million copies in the first week, seven million copies in the first month fiscal ninety five. So this is the twelve month ending in june before windows ninety five comes out. Microsoft did five point nine billion dollars in revenue fiscal ninety six.

That did eight point seven fiscal ninety seven when windows ninety five is really go and they do twelve billion dollars in revenue first software accompany to past ten billion dollars in revenue, already the most valuable company in the world. I mean, they are a monster. There is no other way to put IT.

Yeah, crazy. From a product perspective. There was just so much that really got smooth here.

This was a user experience where they finally had time to think, what actually do users want to do with an Operating system? What features you should be part of the U. S.

And what should we delegate to applications? What are modern networking technologies that we should bring in? I don't want to forshaw too much, but how should the internet be in a modern Operating system?

That was a huge thing. The multi media, the video stuff, an Operating system really showed up and said, we thought about this experience for you. You are looking for where to start.

You are looking for cool stuff to do, and you're looking for IT to not break on you. We now finally have a complete story around all of that. yeah.

So a couple of interesting technical notes. IT was basically all new technology. If you try to look this up, IT will tell you windows ninety five was dos based.

IT still used dos in fall back situations for older dos applications or drivers. But for most of the time, IT was no longer true that windows was just an Operating environment on top of the dos Operating system. Windows had now become a true thirty two bit Operating system of its own windows.

In all of the heavy lifting, IT had its own file system. IT accomplished a lot of the sort of user experience, magic and speed that IT was praised for by rewriting a lot of this from scratch. So this was kind of the beginning of windows as its own O.

S. And you can see that actually change in the marketing messages, that change from Operating environment to Operating system. So David, that brings us to the end of our chapter one. We've got plenty of analysis here to do, but my god, what a first twenty years for the company. I mean.

we knew this was gonna en, right? This is why we waited ten years into acquired life to cover. Microsoft is the most important company in the world still today.

Yeah.

I was so fun researching, going back in doing all this because a there are so many different perspectives and so much has been written. But I don't know if we've gotten IT right here, but I feel like every other major attempted story telling that this has not got net right. And so getting to go talk to all the people who are part of this really living .

in seattle is quite helpful.

Yeah like we really got that sense of like there's still a story to be told here and it's never been more relevant again then you do today all that safe. I'm we wait ten years, right?

And there's all the stuff we miss. Like I didn't mention microsoft research. Microsoft research was a lot .

of people and a lot of money microsoft tried to buy into IT too along the way.

That got actually, the start of research is interesting, say, this quake in ninety one, Nathan mirror started microsoft research. And the logic is fascinating. Basically, everything microsoft had done until that point was taking things from main frames in many computers and adapting those tasks, those jobs, to be done for personal computers.

And at some point they kind of a looked around and said, all right, well, we did IT. All the personal and business applications can now be run on personal puter. So we have to come up with uses for future technologies in order to continue to drive the ecosystem forward. There's no more low hanging fruit. And I thought that was an interesting thesis of why to spin up a research division at that point in history.

Yes, let's move into analysis. Okay.

great. So playbook, the big interesting one that I want to start with, IT. IT actually involves a chapter from the story that we just sort of gassed over is capital efficiency allows founders to control their own destinies in a way that you just don't get when you're selling off huge chunks of the company in order to accomplish er mission.

Oh yes, I love this.

Let's just talk through the captain over time and how the company went public. So we talked about the partnership being sixty four percent gates, thirty six percent pol. In nineteen eighty, Steve bobber comes in and gets eight and half eight points, seven, five, something like that percent of the company.

So deludes gates and Allen down. Then in one thousand nine hundred and eighty one, just a year later, they take the VC investment for five percent of the company from tvi. This also, i'm guessing, around five percent twenty to reverse engineer some of the numbers. They also created an option pool where they were then creating opportunity for basically rewarding management, which is how there were ten thousand millionaire created in the seattle area from microsoft.

right? That's the amazing thing. The option pool doesn't get created until so late in microsoft life. All those microsoft millionaires only came from that whatever size that was five percent of the company or whatever.

right? Yes, at IPO. So even with all this delusion, so you ve got the bomber delusion, the V C.

Delusion and the option poll delusion. Bill gates still owned forty nine percent of the company. I mean, that's pretty unprecedented.

And he wasn't the only one with a big chunk. Paul Allen owned twenty eight percent of the company. Steve had seven point five percent of the company.

This company was basically owned by the three more or less confounders a little tiny option pool and then A V, C, who ended up with six point one percent. I think they ve got some more shares from being on the board. You just don't see companies that look like this anymore.

Yeah, this is bill company. This is their company in a way no other company is these days, no venture back company going to do. The moderna is like that. By the time you get to be public, you may still be the largest shareholder as a founder, C E, O. But it's not your company far from IT.

Yeah, absolutely. I'm trying to figure out why they were able to be. So capital efficient is IT just that software was such an unbelievably good business model compared to everything else that existed like they didn't need a lot of working capital, everything was high margin.

They could growly fast or IT was just an era before much competition. And so they didn't need to out raise their competitors once they got a little bit ahead. There was really no way for anybody else to close the gap, assuming that they executed well.

I totally think it's the latter, and I think it's the the minimum fixed costs threshold to be that you know in bills words slightly Better than your competitors and get the positive spiral going was low enough that I could be paid for just in billion polls, time and effort. And there was that unique moment at the beginning of the software industry where that was true, and that would never be true again.

It's so, so, so insane. And there was no one else really with knowledge either, even if someone else came in with a big one million dollar check and gave IT to a competitor. In seventy five, like how many people could really write these .

language interpreters? You couldn't buy the experience having written emulation software for micro processors that paul had.

They had an obsession and an obscure skill that turned out to be one of the most valuable in the world, in an area where there was a freak law, nature in play, with more law that so uninitiated that you had to think from real first principles to understand the impacts of IT.

Yeah, well, I think there are two free laws of natures. One, there was more law that they were benefiting from. But then two, there was this year marginal cost of software.

Yeah, but IT is like complete perfect storm that enabled them to build a highly defensible business without really any investment ever. This is the largest company in the world, the most valuable company in the world. That was entirely bootstrapped.

Yes, even though they raised money, not a single dollar of investment actually happened at this company.

No, I mean, in eighty six, when they actually did go public, they raised forty five million dollars. And they never spent that because they generated much more free cash flow than that, that year.

right? IT was just a means to an end of getting public.

And they needed to further reason that they had been granting so many stock options from that little option pool to employees that they were gonna blow the s five hundred shareholder cap by. They projected one thousand nine hundred eighty seven. So they wanted to go public on their own terms in eighty six, not when they sort of had to buy A C. C. rules.

Also, microsoft needed to be a public company if you're gonna be an important company in the world at this scale, if you're gonna first ride the bear with IBM, but then inherit the earth for IBM, you got to be a public company. You can be a private partnership. You can not going to go have conversations with c sweets and ceos, four thousand and five hundred companies if you are a private partnership. Maybe in this era.

especially maybe I don't know. I agree with you if you had a bunch of short term capital interest that owe your company. But if it's all found their owned, there are great large private companies in the world up to coke industries as a trusted company by a whole bunch of their customers.

Car deal is even bigger than that. There's a bunch of european industrial and shipping companies role. There are privately held big important companies in the world.

Oh yeah, for sir. But now that those companies are microsoft.

that's true. That's very fair. And especially getting to the stage that they eventually got to being the trusted partner to governments around the free world that requires being a public company. Yeah.

it's fund this playbook theme. This was a moment in time and a set of factors where this work, I mean, I guess the lesson is find an industry and its infancy and be capital efficient and run .

the table that has like, unique economic conditions that have never existed before to create these magical businesses. You could never for them before this new technology thing existed. It's an impossible thing to wish for. Like, IT may never happen again. We may never get another google either.

That's always going to say IT did happen again. IT happened with google.

But how many things can you collapse to zero? I think that's the question. With microsoft, they were able to collapse their marginal cost to zero, but they still have distribution costs.

And then google collapsed distribution costs to zero with the internet. So what's a big cost that the company has? Now maybe A I will collapse, you know, you know, longer. You need fifty thousand employees. You can have five employees.

Maybe I can collapse that to zero, but you need something of that scale, which is like, where does the company spend most of its money that suddenly I can spend no money on? I suppose actually, IT is on the human capital. You just look at big successful companies and look what they spend money on. And those are the candidates.

good. Still unlikely will ever find another microsoft opportunity.

Yep, other fun things on the IPO. Do you know who I po ed the day before?

microsoft? Oh, no, oracle. And oracle had a nice pop.

which actually helped microsoft Price a little bit higher in their IPO. That is another opposite. We have to do another thing, adds yet another layer to the insanity of everything that we've been talking about, of why they were able to build such a successful company on such little capital.

I don't think there has ever been a tailwind in history like the one that microsoft had with the secular growth of the personal computer wave. And the only thing I can think of that is comparable is amazon, with the growth of the internet sort of powering their early growth. But here's the stat from nineteen seventy five to one thousand eighty six, eleven years prior to their IPO.

So founding IPO pcs grew at a compound annual growth rate of ninety eight percent. IT grew from four thousand units per year to nine million units per year. Ship, you can almost not mess up when you have a tail in like that.

yes, especially when you are like the linchpin player.

right? They made as to bake themselves the point of immigration for the whole industry. yes. So often times I find myself when we we're looking at these companies that are like among the most successful in the world are like microsoft most successful in the world, it's basically like a multi dimensional multiple ation problem. We were like, okay.

And they had this unbelievable one in zilia thing going for them, which you can sort of multiple by this other one, and zzz an mult thing. And so it's still like zero martial cost, zero distribution costs. Unbelievable secular growth of the PC morals law happening.

There are a single choke point for the whole industry. It's just crazy how many things you've all supply together. And of course, IT should end up in a number .

over three trillion, of which I am with a playbook team that we reference a little bit. The episode we really got a highlight here. Bill and Steve and paul and everybody, microsoft, they were incredibly talented, incredibly smart.

They saw the future and away, nobody else did. But they also, we're willing to hedge their bets. And it's not like they just got everything right. I mean, they are gonna get things wrong with O S. Two, but they headed the bets with windows.

I think I got a such a key lesson of when you're in a really dynamic market like this in our ecosystem right now, you know, in tech venture capital startups, what now people put so much value on conviction, I am conviction. This is what features is going to be like. And I think the microsoft story is the opposite of that. They had conviction. The software, software was gonna be big.

And personal computers, like creating software for desktop computers, was a really good idea. And they wanted to be the best at IT.

But beyond that, but the exact path of how that was gna play out, yes, they had very little convention and we're willing to .

be very flexible. Yeah, you're right. It's both the hedging but also then the ability to read the world and quickly entirely change your strategy, if you need to, and having your head be far enough along that you can jump quickly to IT and shift your whole organization to get on board with that is a hard leadership thing .

to do totally. I can't wait in the next device IT to talk about the the internet title of memo. Yes, but that's related to your playbook theme to IT. You can really do that if you don't know forty nine percent of the company, you know if it's not your company.

which I think you're seeing play out with most CEO today, there is a big difference between a founder CEO and the stuff that they can do, socket berg with the metaverse or jenson with betting the whole company going all in again on A I VS tim cook or soon approached. Certainly very different type of CEO. Sai is interesting. He's almost despite the fact that he doesn't own half the companies, is got a lot of founder like control, which I think is pretty interesting.

But I don't get ahead .

ourselves moving long other playbook themes. A big one that jumps out to me is that new generations of technologies enable market dislocations. And unless you are in a transformational moment in terms of a new technology came out that enabled something that wasn't possible before this gonna arrange the whole value chain and open up new markets, it's pretty hard to go chAllenge in in comment. No one was gna chAllenge IBM really until the microcomputer. Even the many computer people to deck really chAllenge IBM not really never made a dent.

IT wasn't a full platform shift in the same way.

And there there is a little blips of IT like the gooey, I think, meaningfully reshuffle the decks. But those are the moments where you can have meaningful new entrance, and otherwise you canna have to bite your time and just build your hedgers and see, yeah, related, even if you are the income ent being disrupted, IT is possible to have a very, very large and durable revenue stream that can go on for a very long time. And what I refer to in this particular example is, despite all of the dethroning that we just talked about, microsoft would not eclipse IBM in revenue. You mentioned market of David, but in revenue until the year twenty fifteen.

Wow, is that nuts? I sort of intentionally didn't look up revenue because I made the story media. But wow, yeah.

there you go. But I think that's the point right, is like microsoft perception by the market. I'm sure they were grown faster.

I'm sure they had a Better gross margins. I'm sure there was a Better story there. And so there's multiple IT comes out of story. I'm sure there's lots of good reasons why microsoft became more valuable than IBM fair early, but IBM revenue did not peak until twenty twelve. Wow, what it's just like long after public perception moves on, customers still get value from something created by incubate for a very long time. And I think that's something we often forget about in the sort of buzz twitter verse of like that things over so they might still grow for another twenty years before it's over.

Well, that also just speaks to the nature of the enterprise business, business.

business, right? Actually, pelton revenue can dry up a lot faster than contracts remain frames, right? What do you got a play a .

game that I want to highlight that really, really came out in our conversations is microsoft was not just a talent magnet v talent magn. Yes, during the P, C, R, if you were an ambitious Young person, this is where you wanted to be. And IT was on every dimension.

If you are an ambitious Young technical person, that's where you wanted to be. If you were an ambitious Young sales person, if you are an ambitious Young marketing person, that's where you wanted to be. And they just had.

This culture there, which is so fly, will talk the next episode of how that culture really fell apart for a while there. But I asked a lot these early people that we talk to, like, what is he like being there? I mean, you guys were ourselves have to death.

We mad about that to you recent. We like, we're just make a bill rich. They are like, no, yeah, we neglected every other part of our life. But that was the good old days. This was the magic we were making IT happen.

Yep, that totally comes through. I asked brad wide windows ninety five work. And now there's lots of structural reasons.

But he said we basically did two things. One, we laid out principles for product and then pushed responsibility down. Developers were often their own pms for this idea.

Once you get the principles, we don't need to write zalia specks and design something three times and pass that through three functions. Just like, you know, the principles make great software that follows the principles. And two was, he said that everyone felt personally responsible for the product. And IT really showed .

anybody you talk to from this era, microsoft, this was their life's work, no doubt, about IT.

Yeah, something we touched on a little bit is the benefit of scaling with OEM. This was sort of the contrast against apple, where I said apple was out of always going to be a niche player, by the way, that they designed and built and package everything themselves. Apple is in many ways, like the amx where microsoft is the VISA.

yes. yeah. On a VISA episode, just became clear that VISA could sort of quickly take over the world at master card by being an open network where they didn't have to do all the work to scale themselves. They could distribute to a bank partner with a bank and then boom, each of the banks that was on their network could independently scale at their own rate, which created obviously compounding effects for how fast VISA mastercard could scale. The same can be set of windows totally.

The o yes.

I think the microsoft O E M team for windows was like twenty people or something before the enterprise. In this era that we're talking about, the group of people responsible for go to market for windows was really small. They sold some retail, but the team was just about he make sure hp and .

compact and the gateway.

exactly that was there going to market. And that makes you are scaling like unbelievably efficient.

Do you get the deal?

Do you will get the deal? Similarly, I think the fact that they went international early was this very powerful constraint where IT meant that every time they ship software, they had to make a globally ready quickly. And so that meant that if there was any sort of network effects to your software, like anything becoming a standard, microsoft is just way Better position to become the standard than anyone else was.

And on top of, there are being network effects. There's also scale economies. A word processor is a word processor. And so the extent that you have customers in every country who can buy your one piece of software, you can advertise ze the development cost over a huge user base, so much more quickly, a hundred percent. The fact that they force themselves to be international early ment at every product after that also had to figure out how to do all the localization in training in all of that to get all those effects to I mean.

no matter how much time and money and resources you have to spend to localize microsoft word into koji, it's a lot less time and research of money than developing microsoft word.

Yes, exactly. And they just realized that so early. They also realized that most people who were doing some sort of localization would do a shooting job.

They would think about IT as lesser than the U. S. market. And so they just did a good job at localization. They just cared. They found of IT as like this is a strategic pillars that in every country, everyone experienced our software to the same quality is our brand everywhere.

And I don't know, I just think that is not how the rest of the industry thought about IT definite not on top of all of this. The way that they executed IT through subsidiaries is was pretty genius. Redmen did not control international.

They spun up country managers and subsidiaries in each of these countries in a hunt of countries. And so well, redmond did the product development and then did the engineering work to do localization to all the strings, files and everything for those countries. The actual marketing messaging and the sales strategy and the sales structure happened in the country that was owned by a person who lived there.

So they actually could think through what is the best way for people to receive the software here, which again, that's just going to yield way Better results than if you're sitting their armchair corner backing at redmen thinking about how person and chili is going to receive your marketing message. yep. And one other that I have is this one that we didn't really talk about, but microsoft famously was not first to market with basically any of their applications.

They aren't even really today in most cases, if you think about the strategy that they had early on spread, she's word processing. All these were copycats at their outset. I mean, sometimes they would do an acquisition, but most of the time they just look at a product and say, huh, our software should do the same thing.

And they would copy IT. They had no shame in doing that. They had their eyes everywhere looking for good ideas, and they had reference for the good ones, and then they would just incorporate them. And on top of that, they wanted to make a software, uh, very easy to switch to.

So a lot of the keyboard shortcuts in excel to this day are there because they were originally the notice one, two, three shortcuts, and they wanted people to have the same muscle memory that just worked. So fundamentally, what this does for you as a business is that just leads to Better risk. Adjust ted returns.

You already know what's going to work before you ship IT like you don't really take market risk. So you're not going to be the first to the market with early adopters. But most of the time, you actually don't need to be to win.

And I think microsoft, I know they sort of own that idea most of the time. People are sheep ish about IT, Steve jobs families said. Microsoft has no taste. I think that's another way to put IT that it's copy cutting well.

So I do agree with the premise with all of this. I think doing this episode though has maybe think there's a little more nuances to IT. yes.

And in broad strokes, you can say that's what microsoft strategy was with applications over the years, but the microsoft versions never actually won until there was a platform shift that they could take advantage of to beat the comment, like microsoft wasn't gonna a be lost one, two, three until the graphical paradigm came along. And then excel being graphical was just obviously so much Better. They tried with multiple plan.

They failed what? The plan was fine, but one, two, three was the winner. The nuances to me is yes, but it's more like with the resources of microsoft and the time frame that microsoft can afford to have, they can afford to like start building the application, start building the product, getting into market, start learning, be position that then when the paradise ft comes live ahead.

right? Not a good point. It's also different. I mean, the latest one, two, three multiplying thing in that error, microsoft just didn't have great distribution yet.

And so little one, two, three just got pretty far ahead of them. And microsoft had no way to catch up a few years after that. That would basically never be true again.

Yeah, that could be due to I will .

say you touched on something is an interesting point to this is their first versions of software famously are not good. You look at windows one data and two dado, they know that it's part of the strategy and they were world class at learning from customers and integrating customer feedback into subsequent versions.

And so there is always this like saying of microsoft dos have a very good first or second version, but the third version of something is typically pretty good. And I think that fact pattern definitely follows. Yeah.

i've curious your thoughts on this is so surprised. One thing that you have not brought up yet on this episode is you were A P. M. At mice for several years. I was.

But IT was such a different era in that twenty twelve to fourteen era. It's not, I guess, twenty elevens when I started as an intern, a lot, a lot of felts on the next episode.

Kay, great, I got one more playback team before I move on the power. And that's the, well, microsoft guard out software before anybody else. And they fired out so many aspects of what that means to be a software business before anybody else, but they figured out that software is never done.

yes. I do think a lot of their competitors, you know, we do have to study lost to the same degree that we study microsoft here. We didn't study word perfect in our setter, but I think there was a mindset.

A lot of their folks, they like you, ship software and then the sofa, stan, and that was not the cultural of microsoft. This is related to what you are just saying. Shipping software is the beginning.

You are always working on that software. Yeah, you're working on next versions and stuff even before the next version. The work of software is never done.

which, of course, if you own the hardware, you definitely think of IT more of like while we ship them, the big cabinet of things, we install IT and we've fixed if it's broken, but we've sold them hardware. The software is required to run IT, but the thing we sold them as the hardware. And if you're a pear software company, think about the world differently here.

Like, well, I can always give you another C D, another poppy desk. Now over the internet. S obviously very different. But because there weren't really software companies before them, of course people didn't come from that mindset. And I think you're still .

the legacy this right to this day in apple versus microsoft. Apple still is on a early software released cadence, which is kind of ridiculous, was my god saw the cloud. It's all constant. It's all constantly shift. And like look at A I look at over ai, the software is never done, is so deeply in the software business model.

Yeah, that's true.

I to move on the power.

yes. So this is who are new to the show. We do this section based on hamilton helmers seven powers framework.

And the question is what is that? That enables a business to achieve persistent differential returns or to put in another way to be more profitable than your closest competitor and do so sustainably. And the seven, our counter positioning scale economies, switching costs, network economies, process power, branding, cornered resource. And David, I am pretty sure I could make a case somewhere between one thousand nine hundred and seventy five, one thousand nine hundred ninety five at microsoft for all seven .

of these totally. Yeah.

it's one of the most defensible businesses that they built in history. So of course, they would have all seven of the powers.

Hi, let's someone do to them and do a quick forty .

five seconds on each great counter positioning. I think the biggest example of this comes through where microsoft, basically willing to jump on the micro computer revolution before the incumbent were IBM, did not want microcomputers to happen. And then when they started to happen, IBM trying to figure out how to slow IT down and reintegrated into their whole business model.

And microsoft basically had no baggage. And I mean, this is kind of classic innovators to lima stuff. They could say, well, we don't need to make anyone on hardware.

We don't need to even make hardware. We are free to become the whole point of integration for the entire ecosystem just by shipping bits. And that is crazy.

yeah. And you know, I actually believe is that I can and talk about this in the episode until now, microsoft could enable other companies to be successful. You talk about microsoft, they always talk about themselves as a platform like we're platform, other companies grow on the back of microsoft.

That is not true for IBM. Totally not true, right? But microsoft could make compact successful.

Microsoft could make loads successful. Microsoft could make into a successful. Microsoft can make .

netscape successful. We keep talking about microsoft is the point of integration or choke point door dependency or standard for the whole ecosystem. Given that IT is quite remarkable how much value they created on top of the platform VS just captured for themselves.

So there's that famous sort of bill gates line. You want your ecosystem around you to be generating more revenue than you are taking for yourself. They did a ton of that at the o EMS, and it's the application developers. Yep.

that's a major kind of positioning. okay?

That's one scale economies.

That's everything we just talk to about empyrean.

It's unbelievable when microsoft has an installed base of hundred million people are using excel in this epa, let's say ten million people who are using excel and suddenly some up and coming spread sheet comes out with a cool feature like auto sum, or like fell down, or like draw borders around the cells or whatever. Suddenly microsoft is a tiny bit of dead work and they can rep. Tones and tones and tones of value for doing that, that the tiny company cannot do. So fixed my of dev work, immerse ze across a large custom base.

I don't think we need to say anymore this is whole .

evidence that's scale of yes, switching costs. Well, funny thing about monopoly, there's nothing to switch to.

That's a good one. Yeah, this one's pretty related to network economies for me with this one of, okay, so you can switch to another Operating system like good luck getting other applications that you love. No, I love to run on that.

Yeah, that's the answer.

Yep, speaking of network economies, developers, applications, O, E S.

yes, there is not a classic network, facebook or A T N T style network here in terms of one user can contact every other user, but more users being on windows hinson avize is more developers to make great applications for a windows, which enables microsoft to sell more copies to more users. X.

although I actually, I think once they start getting into the enterprise, workplaces in general, organizations in general, there is the user network effect. Like, I want this microsoft document that I just worked on for you to be held to open IT and use IT too.

Oh, you're right. I even think about that. The document formats are a huge neuk effect thing even before the internet, even before organizations were networked and computers were networked outside of an organza file format. You're right. There's huge network economies to file formats.

and it's into organization too. If i'm a lauer, me know I want my clients to be able to open my word docks, right? okay.

Next process power. This might be the weakest.

St, as is so often, is elusive.

This is a little bit later in history, but I did always think he was absolutely incredible when I was at microsoft. And we would ship a version of office every three years.

I worked on office fifteen that the entire six thousand person organization had a process in place where we could released manufacturing R T M on a date that we planned three years in advance and actually hit IT like the process of the ads cuts meetings and the zero bug bounds and the testing schedule and the trio age when you had things that people wanted to introduce laid in the schedule. IT was a remarkable product, especially with all these teams that needed all their code to interOperate. And I worked on a shared experiences team that would check things, and that would be a dependency. That word, excel, power point. All of them took on the shared code, and we knew our ship date three years in advance and .

would hit IT. It's crazy totally, especially by the time you get to the windows ninety five era at the end of this episode. It's like red tech.

The amount of stuff and process within microsoft know the device drivers, the middle, the programing language is the dev tools, the machine there to make all this computing work. There was like a miracle that this stuff worked. You know, you couldn't just recreate that.

It's funy. The process power, I would say, is stronger in office than windows. And now my colors are showing, like windows, always notoriously, mister ship dates. But i'm actually less sure that process power existed in that early days. I think they were a bunch of smart people, but i'm not sure that they had a unique way of creating software.

But I think i've got .

built over time.

Yeah agree OK branding for sure for sure, don't get fired for buy a microsoft.

Well, that's true. When those ninety five built consumer brand, the idea of a consumer brand of Operating systems was, you know, there was apple, that they were tiny and that was more around the hardware.

Yeah, it's both fronts. They are brand in the enterprise. That is an amazing story that they built.

They are branding consumer. That was the easiest to point to. Instantiation is like the rolling stones in j leo. They had a software brand. Nobody had that.

But branding is probably the thing that they rely on the least. Interestingly enough, there are other structural reasons that they're entrenched where even if microsoft had a crappy brand in this era, they probably still want to want the magic of getting the whole deal with the IBM PC and then getting to sell licenses to all the other arms up.

Well, that brings us to the last one, which I think is a super strong one, at least in this era. Cornet resource. Dos, full stop.

yeah. IT didn't start as cornered resource, but as soon as IBM started shipping IT on the IBM PC, he was over. I'll say again, IBM distribution created demand for dos, and then microsoft just got to capture value from everyone else who wanted IT.

All right. Well, we would do bear in bull listeners, but we kind of know what happened after this. So the bull cases that the party continues and microsoft continues to shipping amazing Operating systems after amazing Operating systems, and that stays the important thing in the world. And the bare cases, something else becomes an important thing in the world. And just having this super locked in Operating system is not actually the way to bet your whole company for the future.

The dramatic tension for you all to come back for next episode of microsoft here, not because you find to .

find out what happens, right? right?

That's true. OK take away plant. We've spent the last probably six weeks deep in this. We've talked to everybody, what are you thinking about the middle the night.

the IBM deal? I can't unc IT, microsoft figured out a way to take someone else's dominance and wholesale transfer that into their dominance for the next generation. The fact that IBM called the project chess is so deeply ironic, because bill gates was playing chess and they played checkers.

Maybe bill is playing three details. I mean, this is the thing about that though. We ve got to give IBM so much credit for project test in the PC that they even did. What they did was huge, that a big entrance ed corporation like that could ship a gun quark project in a year revolutionized the industry. Is they just to end up captain value out of IT?

yeah. And if I could make a less chicky comment on that, I would say it's that a new technology generation when something becomes possible and opens up a new market IT enables a shift in the point of integration and a value chain, the old value chain of IBM. If you ship the main frame, you had all the power. But in this new world of pcs, if you controlled the Operating system that all the users were familiar with and all the developers wanted to target, you had all the power. I think that is not necessarily obvious unless you went through IT and have the high insight of history to be able to articulate.

Yeah, I think you might be right. I think that might be the single best business deal negotiation of all time and arguably .

created like three trillion dollars of value.

So well, no, a lot more than that because this is the point about MC stopping a platform. Microsoft is worth three trillion, but how much value has been created on top of microsoft, no matter what you think good, Better, ugly on microsoft, you can't denied .

that absolutely .

at least twice as much, probably much, much more.

I mean, you watch every early interview with bill and you read a lot of his writing and he's a great writer. I mean, it's awesome that so many of his memo was leaked, whether intentionally or unintentionally over time.

is that so many of his members were .

issued for publication. Yes, he really did view himself as a steward of the software ecosystem and had the steadfast belief that software was magic and was going to change the world over the next twenty years. From seventy five and ninety five, software did change the world, and microsoft enabled IT to happen.

So again, good, good, bad, ugly, whatever you think of the company they were sincere in. I think the ugly part is a lot of people want to to hate on the value capture, because god did they capture value. But they were sincere in their desire and ability to create .

to yeah don't look that's super related to my kind of take away here, you know the moment for me in the research. And then when we are telling the story, allowing the way is when they start to believe in themselves that they don't need IBM just the audacity, I mean, that in a peer good way of these kids, these kids, they changed the world that so trade to say, my book, we read my daughter a bad time as somebody game as like the most silicon valley troope thing ever.

It's like, what do you do with an idea? And the puni at the end of IT is you change the world then like it's become such a trobe. But these kids in the seventies, they did IT, you know, they like believed in themselves in the beginning, and the more and more and more over time.

And then this, just this moment that I think where they started, till I really, truly believe that they were gonna change the world. I get a good, bad and ugly come out of that. Mostly good, I think. But yeah, just the level of ambition and audacity of these people is tagging. yes.

Is that your splinter? The splinter in your mind.

my splitter? yeah.

Listeners for who are due to the show we've been ditching on how we end episodes. And we decided on this recently, if you know, how shall we already n the plane? It's to talk about the thing that we can stop .

thinking about yeah and hit the companies forty nine years .

old and it's still the most valuable company in the world.

Crazy are David. I have some trivia for you.

I do you know where dave mark from T. V. I first encountered bill gates?

No, wow, no. I just assumed that was Steve.

So dave had watched bill present many years earlier at none other than the homebrew e computer club at stanford. Yes, the very place that is part of the apple law with jobs and was showing off the early apple computer, apparently bill also went in, made a presentation there and would hang out there. And that is where dave first came across him mazing.

Well, when we are talking about the letter, the bill rights to the hobby est, community decline, piracy and software, he's basically running to the home route. He believed those were the people who were ripping .

off his software. Amazing are right carve's right carpets .

for new listeners at the end of every episode bent. And I just chat about one or two things that we've been enjoying personally lately that usually have nothing to do with the episode. In my case, I have two.

The first one has a lot to do with the episode. I have discovered slash, rediscovered the L G R. Youtube channel.

Are you into the spend? No, clint. L G R. IT stands for lazy game reviews, which I think is out started, but that I became so much more.

And not just L, G, R. Clinton is this awesome dude. And I think he lives in north CarOlina ino.

He is dedicated to basking in the glory and restoring and reliving and preserving computer history, hardware and software from this era. The youtube channel is all like on boxing. A compact P. C, from nineteen ninety two are like restoring windows three point one machine.

That's awesome.

It's so good. He's got like the best, most suthing voice in the world. He seems like such a nice dude, and he's dedicated to preserving the era of computing that we are talking about on this episode. It's so fun.

That's cool. It's really hard because all hardware fails eventually. So now at some point, there will be zero computers out there that can run windows three out, one that will boot. And the only way to experience any these things is through an ambulatory or and so of I don't know, I have to be able to capture, you know, highest footage and stuff of those machines while they still work.

Cool epical. My other car vote is around eight three thousand from outcast. Do you know what? Hundred three thousand is up to these days? And not at all? no.

Oh my god. okay. So gq just did a big interview without thirty three thousand because he just released a new help them. This is not what you think.

So under a you know a lot of people say consensus top five rappers of all time and big boy in his counterparty, knowers sts, also great to, but they basically went out on top. So they did speaker box to love below. Yeah, of course, which was the double album.

I think that came out like two thousand four. Maybe I was a freshman and colleagues, everything, they did one more album, and then they stopped and angry with lake be featured on some other rappers tracks over the years, but didn't put out another album close to twenty years. He just put out an album and he just did this big interview video interview at E.

Q. The album is a flute album. He got really into late woodwind instruments. Wow, this has been his life. He reveals in the interview that he has put out other songs and other albums over the years under sudans.

IT is like, this interview is so great, is so unexpected, because the interview keep us like to hear a thousand and you stop, right, say, this is where my life is all right now. And I never wanted to put out any work that wasn't both authentic and grade. I just, I did anything the same.

Yeah, I love that you heard the phrase go out in the top row at the back of the auditorium is empty.

Yeah, yeah. And that's kind of what they did. I don't wild, which was the album that came out after a speaker box.

The love below, like I, this was great. But IT wasn't that yet. That's exactly what he did.

I think it's a sin sold quote. I might be attribute drop IT out in the lack if I did. But yeah, I think it's a sidel code. You let one will be empty but you .

know a way too long yeah the same thing is what I felt did fascinating. Yeah, super fun. Willing to alright.

I have three. And they're all sort of different. We've sort of had a tradition on the recent episodes of doing multiple carve outs and all of them sort of for different jan rus. So my product that I really been loving, my physical product, is the meta rbs.

Oh yes, I was talking with the team of matter about them. They're doing great.

I bet it's a pretty delightful product. I bought them because I was in hawaii and with my form, thd sun. We are in the pool and stuff, you know my iphones waterproof, but like I kind of want a different ane goal and I don't necessarily want to be holding my phone like is very cool to be able to take pictures and record video of what I actually see to be able to live that moment.

And I did a bunch of photos and video. We are on vacation that way. And then I discovered a thing that they're actually just awesome for.

I think even Better than airports is phone calls. The speakers are great. I wouldn't say like necessarily they're the best for listen in the music. The base is obviously not as good as had phone base. They project the sound down toward your ears.

So unless you're standing really close to me, you can't really hear or unless I the volume all the way, but the microphones are great too. So I was on a long walk on the beach with the wind whipping by on a call with my mom. And I was like, does this sound really bad and distorted you? She's like, not at all.

wow. And so I was really impressed and will definitely be using them from her calls. I think that style of headphone over the ear, there's many things that it's not good for like when you're on an airplane, you're something like you wanted plug your ears or fear not super loud environment, but in less year in one of those environments, it's a nice break for your ears versus having your pods jambed in.

And it's a great call experience. So they're great. The batteries great.

They are reflect four hour batteries. So it's like a low key, more subtle augmented reality experience. There is no heads up display. You don't seem anything, but when you get a text .

message or read IT to you, so more than .

just the camera system, IT basically is like you have air podds in, but you don't actually have a air podds in and you have a pretty good photo video camera on your face does .

IT have an indication when you're taking photo .

recording video. Yes, it's not super bright and not sure everybody really knows when you are, but if you know what to look for, you know if it's on or off?

Co.

so i've been loving a penny script product. I intend to wear them a lot this summer. My second one is, is a thank you to a very, very good designer, Julia round burg, who with David and I on a recent project for some design work, some of which is actually featured, as we speak on apple podcast.

And SHE did bunch of other stuff with us too, and she's really excEllent. So if you're looking for someone who's good at visual identity branding, slight decks, websites, I worked with her on a few projects before and she's just awesome, so I wanted to recommend her my third. This is kind of community spotlight to go all the way back to.

Like nine years ago, acquired IT was a listener who runs a company called summer health, reached out and said, I heard you say that you have a baby. I ve got this great company that is foreign parents. And here samentu on IT, and I am now a paying member. IT is a on demand testing relationship with a pediatric.

wow. This is like crack for new parents. IT is like crack for parents.

It's crazy. And you could hope that multiple phones, so my wife and I both have a direct line to like something weird is going on. Will you help me through IT? Including we had a two A M wake up the other night and some, you know, everything ended up being a fine.

But as i'm sure any other new parents can relate to, you really want to make sure in middle night, if you're not sure if everything's fine, you would like to figure out the right steps to make sure everything's fine. So I have A A virtual doctor on demand is a totally amazing. So summer health, if you are a new parent, we've loving IT amazing.

Well, i'm enough to subscribe, but we have referred to this before. I think this will probably be the last episode that comes out when I am still the parent, just one child. Number two, coming soon. So if I may take a little longer than usual for the next microsoft episode to come out next to six hour opus on microsoft, don't get too mad. That is the reason why.

Yeah, well, we have a lot of thank you on this one. As you can imagine, people are really generous with their time, pointing us to different resources, explaining their recollection of history as IT happened and you know being in seattle, active in the venture community here, both through p. sl.

And David, in my shared history of madrona, be working at microsoft, a lot of good opportunities to learn what really happened from folks. So a huge thank you to slide who spent the time with me. I spent two different things at microsoft, and then at next ten, an apple in between.

Yeah, he worked for Steve at next to IT.

yep. And one of the few people in the world who both spent a ton of time with Steve and with bill, and work cully ly with both of them. So, so great to get his perspective, especially about the early days of office and the applications group, very helpful.

Similarly, pete higgins worked closely with mike. Pete, I think ran excell for a long time and oversaw a lot of the difference of the applications group and I believe also ran office. It's got a funny how many different people picked up the mental over time as these things treated around groups.

But Frankly, I think that's a huge part of the microsoft story is the company very quickly adapted and changed its structure depending on the current needs of technology and competitors. And a huge thanks to trend griff in who is actually a lifelong c ao light and sort of close friend to the whole gates family. Bill gates senior was his mentor.

I'm sure you've seen from prolific tweet online about microsoft history. So and actually trend, I think, currently works at microsoft in a strategy role. So thanks trend for your help as well. David.

I know you ve got a bunch. yes. Also speaking of former microsoft folks who are very active on and prolific on twitter, we talk to Stevens and a ski who had lots and lots of great perspective, and we can't wait to share more of IT.

On the next episode I read, like, twenty of Stephen hard software post. And then when David and I were dividing up what belongs in, what episode I realized, like nineteen of them belong in, next episode is Steven. Thank you for your early prep work for a part two.

Yeah, so much fun in that stuff to talk with that. Stephen was right. Therefore, I spoke with other people who ran windows. Terry mayson, who's a great friend and, uh, a supporter, the show Terry ran windows for quite a long time.

right? Yeah when I was there, Terry was E V P of, I think windows and windows phone.

Yeah Terry was very generous and he was actually the first person that include into just how keep Steve roll was in building the enterprise for microsoft .

up and how different to go to market motions were for windows. And office. Victory was the one that sort of gave us the inside of windows, especially in the early days, was basically in O E M game, small group .

doing A O E M thing.

They all right. And still, I don't think the very big team, even today.

yep, speaking a strategy, Charles fits charred, whose O G O G, microsoft, uh, great platform strategy guy prolifically to investor in seattle. Now punch at ten with him about the early days.

You obviously brad silverberg, who we mentioned a bunch, he was very fun seeing after spending some time talking with brad and text in a lot with them to see the end of the windows ninety five announcement after a bill and jail and are done for brad to sort to come out and finished off. Fun like watching a time machine, watching that things really cool. So much so a sagar at mega as a someone. The David and I love crossing patterns within the seattle entrepreneurship ecosystem.

也 so a microsoft in the industry to there are so many people who so many made their careers like them out of school， saw something, and then maybe they did even see in themselves, and then they went on to be big executives. Adventure capital is at microsoft elsewhere.

yep. And lastly, huge. Thank you to Steve ballmer, to be honest, as a little with surreal chan hearing about his experience over the whole thing because I don't know there is nobody including bill gates that bleeds microsoft more than Steve bomber and he's just una bashed. Pure pride in what they build is infectious.

absolutely. It's so fun talking to see if he was so gracious with this time. And I was to super special for youtube like he was the CEO when you .

work there totally and I ve to be drink, I had a very opposite strategy in mind. But I was a new, higher out of college individual contribute pm, and you know, IT was still the windows company then, and Steve was championing the windows strategy. And I was a guy working on office for ipad.

If you like this episode, I was thinking of ones to recommend. IT would be pretty funny to go listen to the four thought acquisition given all of this context. I mean, it's a short episode when David and I were not good at this yet and we did our very best. But IT is from our early days and IT covers overlapping source material.

Fourth was the company that made powerpoint microsoft quiet, the first major accused for the company.

Yep, if you are new to the show and looking for great recent episodes that we've done, I highly recommend the VISA one as discussed earlier in sort of the network of network's idea. If you haven't heard that or perhaps the intendo or in video episodes, all of which will be right up your ally if you like this one.

and if you're not at all interested in technology or software. But if somehow managed to get through all these hours with us, you listen to our L V H. And arms episodes. Even if you do love technology and software, which obviously you do, if you're still here, there's so much to learn from that world.

Yep, if you want to know every time an episode drops, get hints at the next episode topic and get episode corrections and follow up, you can sign up at acquire data m slash email. Come discuss this episode with everyone else who's chat about IT at a quiet dot F M slash slack and if you're looking for another episode, go check out our second show A C to where we will have actually ism very awesome tech CEO guests coming out over the next month or so that are absolutely worth listening to, especially if you're interested in semiconductor and tech history. If you want some sweet acquired merch, go to acquired data slash store and without listeners.

we'll see you next time, next time easy you visit you, busy you who got the.