Episode 24: Skype
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Hang on one sec. I lost my place in my notes. Oh, wait. Actually, can we go back? Definitely compare it. I think I see. I love that. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way.

Welcome back to episode 24 of Acquired, the podcast about technology acquisitions. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today's episode is Microsoft's 2011 acquisition of Skype and

and the wild, crazy journey that it took to get there. Ben, you mean eBay's 2005 acquisition of Skype and the wild, crazy journey it took to get there. Or perhaps the Silver Lake Partners private equity takeover with Andreessen Horowitz. In 2009, acquisition of Skype and the crazy path it took to get there. All that and more as we dive into the show. Before we get started today, we want to do a community spotlight.

User in Slack, Swyx, S-W-Y-X, pointed us at his company, I believe it's Sentio, S-E-N-T-I-E-O.com. They are the kind of future of Wall Street analysts. So they have a software platform where you can save time on research, join thousands of investment professionals on a modern and intuitive platform built by former Wall Street analysts.

And he lets us know that they just launched their Alexa skill. So check that out if you have an Alexa or go to their website to check it out if you're interested.

Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow. Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery, and increase efficiency. 85% of the Fortune 500 runs on them, and they have quickly joined the Microsofts and the NVIDIAS as one of the most important enterprise technology vendors in the world.

And just like them, ServiceNow has AI baked in everywhere in their platform. They're also a major partner of both Microsoft and NVIDIA. I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

So why is ServiceNow so important to both NVIDIA and Microsoft, companies we've explored deeply in the last year on the show? Well, AI in the real world is only as good as the bedrock platform it's built into. So whether you're looking for AI to supercharge developers in IT, empower and streamline customer service, or enable HR to deliver better employee experiences, ServiceNow is the platform that can make it possible.

Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately. For example, smarter self-service for changing 401k contributions directly through AI-powered chat, or developers building apps faster with AI-powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

With ServiceNow's platform, your business can put AI to work today. It's pretty incredible that ServiceNow built AI directly into their platform. So all the integration work to prepare for it that otherwise would have taken you years is already done. So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow.com slash acquired. And when you get in touch, just tell them Ben and David sent you. Thanks, ServiceNow.

Cool. Shall we dive into the show? There's a long and rich and incredible history on this one. There is a, this story has more drama than something with a lot of drama, a whole lot of drama. I don't know. A Will and Grace episode. Yeah.

Sounds good. Bravo. Whatever. All right. So our drama filled story starts all the way back in 1999 when two guys, Nicholas Zenstrom, who lived in Sweden, and Janice Friis, who lived in Denmark,

We're both working at the Swedish telecom company Tele2. This was early days of the, well, late days of the internet bubble, but very much internet 1.0 bubble. And this, uh, Tele2, that's T-E-L-E number two, um,

they wanted to launch a web portal because everybody in those days had to have a web portal and they wanted to call it every day. I don't know if it's everyday.com or whatever the Swedish, uh, domain, you know, uh, term ending was at that point in time. Um, but they had just one problem and that was that nobody could develop software at the company. And, uh, uh,

or at least nobody could develop good web software. And so they had a department in Estonia. Do you know where Estonia has been? I do. I do. I was, uh, we'll, we'll, we'll totally dive into this. But when I was at Microsoft, I was fortunate to spend a bunch of time at Skype offices and, uh,

and spent a week in Tallinn at the Skype headquarters there. Skype headquarters in Tallinn, Estonia. Beautiful city. Uh, former Soviet block nation on the, uh, Baltic sea. Yeah. And it is, is wild being there because it is this incredible dichotomy of old and new where you have total Soviet block buildings and even the real old kind of the old city from, um,

you know, before the Soviet era in, uh, in talent. And then these like, you know, uh, companies like, like Skype and a lot of this sort of new revitalization and Estonia is a totally, um, you know, imagine if you had the opportunity to intelligently start a new country today, all the decisions you would make. And they kind of learned from the best and looked at what's working in, in, uh, yeah, I mean, this is a company that was part of the country that was part of the Soviet union, uh,

Until the late 80s. Yeah. And so like there's so much if you ever get a chance to check out, there's a lot of really interesting things that they do as a government that are totally tech enabled. Like they have every citizen has a smart card that they can put into their computer and you can vote online because you have a uniquely identifiable electronic thing that identifies you as a citizen. It's super cool. Wow. So 1999, the whole country is 10 years old.

This Swedish telecom wants to make a web portal. So what do they do? They take out an ad in the local newspaper...

advertising contract job to build this web portal for them. And they're going to pay 5,000 Estonian croons per day, which is about $330 at the time. And that was more than the average Estonian earned in a month, apparently. And they were going to pay that every day. So they get a lot of interest and they end up hiring three developers, Jan Talen, who

We're going to butcher these names. We apologize. Ati Heinjat and Preet Kanslau. We totally butchered that, and we apologize. They end up hiring them. And there's just one more problem, though. They're very talented programmers, but they don't know PHP, which is the language of the web at the time. Yeah, I mean, my problem was that I didn't know PHP, like sophomore year of high school. I remember that would have been...

2004 or 5 and I wanted to make like this it's totally irrelevant but like that was the that was totally the language of the day right if you wanted to do anything on the web it was like well you know you can if you have a PHP server running you can drop these fancy tags and to do dynamic stuff inside your HTML and wow everyone yeah I mean for the longest time Facebook was all ran in PHP yeah no longer those days are over but

Back in the day, PHP was how the internet ran. So no problem. These guys are super talented. They just learn PHP in a weekend and they build everyday.com or whatever it was that Teletoo wanted it to be called. And it was awesome. So a couple of years, not even a couple of years go by, but Zenstrom and Freeze, the company

guy in Sweden and the guy in Denmark, they decide they want to leave Teletubbies and they want to become entrepreneurs. Internet bubble. And this is the heyday of Napster. So folks probably remember Napster. I certainly do. Won't comment on whether I participated in the file sharing or not. I heard it was great. I heard it was great. Yeah. Although I was definitely under 18 at the time. So yeah.

Whatever. Um,

And so they decide that they want to start a competitor to Napster. And it's not going to be just for music. You're also going to be able to share files of any type. So movies, AVIs, and software programs. You'll be able to basically share and read pirate anything. And so they decide that they're going to call this Kazaa.

Oh my God. Yeah. When I was doing the research, I could not believe these were like the same guys that did the Kazan.

So they call up the Estonia guys. They're like, we're doing this. We're building a Napster competitor. They come on board. They build Kazaa. It's awesome. And it was indeed quite awesome. Yeah, I remember I was always at an epic war with my friends on what was better, LimeWire or Kazaa, because they were both sort of the... They both succeeded Napster. And Napster gets shut down.

And so Kazaa and LimeWire become like the heir apparent. And Kazaa actually becomes pretty quickly the most popular application in the world. Really? Not like P2P, like the most popular application, period. Yeah, it's like the biggest thing on the internet. I mean, the internet is quite small at this point in time. But Kazaa basically owns the internet. They're like Facebook now.

Which is hilarious to make that analogy because thinking about Facebook's brief detour and Mark Zuckerberg and those guys ended up doing Wirehog in the early days of Facebook and actually being a competing priority. They almost didn't do Facebook because they were focused on Wirehog. On Wirehog, yeah. P2P file sharing was the thing. Which sounds totally crazy now, but there actually was some justification for this. Because I launched in September 2000 and...

And like I said, super quickly becomes the most popular program on the internet. And along with that, massive, massive legal issues playing out once again, just like they did with Napster. Which, I mean, this will be the...

foreshadowing for all of the legal issues that they would go through with Skype later on. Oh yeah. Much more to come. Um, so Zenstrom and freeze, uh, I mean, they're, they're riding high, right? Like they have the biggest, you know, biggest company on the internet, but they're also terrified that they're going to get arrested. Um, and, uh, so they actually sell Kazaa, uh,

on paper uh to some australian business men um with uh yeah i don't know that's that's all i was able to find they find they sell it to some australian business there's just no one like price or uh yeah it's uh i don't know exactly what happened we call it lost in the sands of time if you yeah lost in the sands of time if you know actually we would love to uh hear about that in um in the

in the Slack channel or email us, uh, acquired FM at gmail.com. It'd be good to, uh, follow up. And it may be out there somewhere in the internet. There's so much out there about Kazaa in the early days of Skype. Um, this was, this show was so much fun to research. Um, so they sell the company, but they keep the technology behind it. Um, and, uh,

and that foreshadows what will happen in a few years with Skype. So they keep the technology, and they start casting about for, well, what else could we do with this incredible peer-to-peer file sharing technology that we developed? And it might be worth a quick detour to just talk about how peer-to-peer technology and file sharing actually works at this point in time. So the basic structure is that whoever's on the network...

is connected to everyone else on the network. And so if you have a file or any kind of piece of data that you need to be transferring, rather than going and downloading that from one server in one location, which is how traditionally the internet and networking have worked and actually, once again, works mostly this way today, but this was before the cloud,

quote unquote, the cloud existed, you could just download pieces of that file from everybody else, every other node on the network. So this is why on Napster and on Kazaa, you know, songs that were really popular were super, super fast to download because if thousands and thousands or millions of users all had that same file on their computer,

and they were connected to the network, you could just download little pieces of it from many thousands of different people instead of downloading everybody going to one spot and downloading the whole file. And that's so much more effective because, you know, then you're bandwidth constrained by that one single server. In those days, you know, you had CDNs that weren't, you know, that were not as established and well built out yet. You, you know, the bandwidth issues and performance issues, getting it from that one single server. So CDNs,

suffice to say, um, peer to peer was this total revolution in maybe not the highest availability. Uh, there, there, there were, um, kind of issues with reliability and some spottiness with it, but in a full distributed peer to peer network, amazing. If your neighbor had something that you wanted that you could just one off grab from them. And so, uh,

Um, Zenstrom and, and freeze at this point to have, have sold a quote unquote sold because, uh, but they've retained this technology and they're casting about for what else they can do with it. And they, they realize they actually have this ingenious realization that this same peer to peer technology can be used, um,

for a bunch of stuff, but for transmitting voice over the internet. And if a whole bunch of computers all running the same peer-to-peer software, just like Napster or like Kazaa, were online in various geographies around the world, as long as you had enough density in particular starting points and ending points of calls that were happening, you could transfer packets

that contained voice across this peer-to-peer network instead of in singular routes between one computer and another over the internet. And it actually enabled really clear, high-quality voice calls to be done just

for free over the internet. Right. And, uh, they, they would eventually, um, they actually developed their own protocol for this, you know, that's formally known as the Skype protocol that endured until I think 2014. And, um, from there would sort of establish this hybrid model where they had, uh, the, these direct peer to peer nodes were like, like we're talking about and, uh, super nodes. So, you know, uh, established servers that were, uh, that were kind of always on and meant to handle that kind of traffic.

Yep. So this is now kind of late 2002, early 2003. So they team up with the Estonians again, and they start working on an early alpha for what would become Skype. And they decided they wanted to call it Sky Peer-to-Peer. Catchy name. Super catchy name. But they wanted to abbreviate it to Skyper. Which I think is cool. I wish they'd stuck with it.

But I think the issue was they couldn't find the domain name. They couldn't get the .com name. Yeah. They couldn't get skyper.com. So instead, they decided to just drop the R at the end and...

Skype was born. Totally. So clean. Incredible at that time that that Skyper was not available, but you know, Skype, a one syllable five letter word was. Yeah. Like how often, like that would never happen today that you would go down a letter and that that domain name would be available versus a higher, higher number of letter domain name. Pining for the old days. Um,

But they do something really right at the beginning too. So we talked about how the technology was pretty amazing and that enabled them, you know, it enabled people to do voice calls over the internet as long as there was a density of people online in both where the call was starting and ending, you know, around the whole world, way better than traditional telephone networks. But the other thing they got really right is they made it really simple in

in the beginning. They realized that kind of just like Kazaa and like Napster, if you were going to build a huge network of people doing this, you couldn't just have tech geeks doing this. You had to make the software so easy that everyday people would do it. And so there's actually an interview, a quote from an early Skype employee,

um, Laurie, uh, to Pondy, uh, at the time. And she says, right from the start, we set out to write a program simple enough to be installed and used by a soccer mom with no knowledge of firewalls, IP addresses, or other technological terms. Um, and, uh,

And because of that, and also probably because it was free and enabled you to call people in other countries for free when you used to pay a lot of money to do that. Long distance calling, even domestically, was super expensive then. Yep. Yeah, even domestically, long distance calling was expensive. But think about, you know, in Europe where Skype is based, like calling between countries and people have,

friends and family that are in other countries and they have to pay exorbitant amounts to call them. Yeah, and the telecoms were highly, highly regulated, had a very inflated price scheme where there was, you know, not necessarily collusion, but at least a set expectation of how much you would charge for long distance and routing between networks. And by...

you know, pioneering VoIP really coming up with this idea that like you go around all that entirely. And I think, I think the funniest thing to think about is in the history of networked computing, um,

Everybody that had a dial-up modem, we started with our data flowing over voice lines. And the way that it would communicate is literally making sound over those lines. So it was like IP over voice. And then you have the advent of this and where we are today and how every office mostly has phones that are actually IP phones. And now all of our voice goes over IP. It's kind of hilarious. Yeah. I mean, this technology is so much better than the traditional phone system that now...

the traditional phone system runs on this technology, which is pretty amusing. Yeah. We're actually, we're sitting here in pioneer square labs. We moved into a new office a couple of months ago. Um, and, uh, all of our, you know, hardwired phones that are like our desk phones are all IP phones. Like we didn't even think to, you know, why would we like reach out to AT&T and have them set up a, yeah, totally. Um, so, uh, like I said, super simple, uh,

really compelling value prop. So Skype launches officially in August 2003. On the very first day, remember this is August 2003, so the internet is multiple orders of magnitude smaller than it is today. On the very first day, they get 10,000 downloads. First day they launch, get 10,000 downloads of Skype. By the end of the first month, they have a million users.

I'm so curious how they like on the first day. So how did they get the word out? I think that that that's a little lost to history, but it's not like there's an app store to be featured on the front page of. They did like super early growth hacking, uh, you know, emailed, uh, their, you know, friends and friends of friends and got the word out. I mean, they also had some benefit in that these were like the Kazaa guys. So, you know, there was, uh, uh, they, they were known quality quantities. Um,

But still, this is incredible. 10,000 downloads on day one, a million users by the end of the first month, 4.1 million users by the end of the first quarter, and just a hair under 20 million users, 19.8 million users that they get in their first year.

Which is, I mean, those are like pretty decent numbers for even like a mobile startup today. Like there are no mobile phones at this point. Yeah. And the fascinating thing about peer-to-peer. There are no smartphones at this point. It's cheaper to, yeah, good point. It's cheaper to start a company with the advent of, of, you know, cloud hosting than it was in those days where you needed really expensive data centers. But with the advent of peer-to-peer, they could support 20 million users without those insane infrastructure costs that it would, you know, uh,

any other company saying like, oh, it's, you know, 2001 and we're launching a company and we quickly have 20 million users. It's like, well, how many millions of venture capital did they raise? Yeah. And they did raise a small amount of venture capital before they launched. Interestingly, from Bill Draper, the legendary venture capitalist and Howard Hardenbaum, who's now at August Capital, they were working together at a different firm at the time. And they went over and they had heard that the Kazaa guys were starting a new company and they're like, we're going to give you some money. Like,

We don't care what you're doing. We're just going to invest in you because you're the Kazaa guys.

So they were the first investors. But then they launched and this growth is incredible. And so as this growth is happening, of course, every VC now in the world wants to invest. And so they raised $18 million from Index, Bessemer, and DFJ after they launched and have this growth. But things are still pretty crazy. So most of the company is in Estonia, right?

where these original developers are. And Estonians are crazy. Like, if I learned one thing while I was there, I mean, I was there in February, so it's like, you know, negative 20 degrees and, like, people are still, like, going out drinking and, you know, just, like, they get used to it like it's nothing. They cross-country ski miles and miles and miles everywhere all the time. Like, I walked away with this impression that, like, you do not mess with an Estonian.

Yeah. So, you know, startups, like there's lots of, you know, fun and pressure and crazy times in startups, you know, still. But like this kind of took it to a new level. So I think still even to this day, every new employee at Skype has to undergo an initiation. And the initiation is you have to do a shot of...

uh tequila sambuca and tabasco sauce i did this you did this this is amazing yes there's this bar right outside the old city yeah this is so yeah this is every from day one every skype employee did this wait this is on the internet this is on the internet did you see what the shot was called uh yeah there's like a name for it i didn't write it down yeah i don't think like english speakers can't it's not it's hard to pronounce i'll see if i can look it up while you're um

So the other thing that they do is they install a pool in the boardroom in the office in Estonia. Not a pool table, a pool. What? Yeah. And apparently they have to negotiate with the building about building management, whether the floor is going to be able to support this. I think it was a kiddie pool, but it was still a

a ton, a ton or two of water that was installed in the boardroom. Jesus. Okay. The drink was, uh, it's either Millie Malacca's or Millie Millicus. I heard it differently from different people, but it's like, I, as soon as I saw it on Google, it's like, Oh yeah, that's amazing. You've been initiated. I have, um,

So the growth just continues as we were talking about things are growing like gangbusters. In June of 2005, they add video calling, which is funny when we think like when I say to somebody I'm going to Skype them today instead of doing a call, like I mean I'm going to video chat you. Right. But that wasn't even added until two years after it launched. Yeah, 05. It's interesting to think like...

Fast forward to today where they're making forays into text chat. They've had text chat all along, but trying to make that more part of the core experience. Started with audio, then got into video, became ubiquitous with video, and a lot of other chat platforms are competing against today that are text and photo based. That's not their core and starting place at all. It's funny to think about...

much like with phones, how primitive text seems and how complicated voice and video seem, but there was calling on cell phones before there was texting on cell phones. And text was the third feature of Skype. I think this is...

I'm sure this is something we'll get into more in tech themes and, uh, you know, grading. Um, but it is pretty funny to think about that, that text is now the dominant medium of communication, uh, not calling, even though it's more complicated and more bandwidth heavy, um, these days on smartphones. So they launched video calling that grows also enormously. And so, uh,

A couple months later, September of 2005, there is lots of interest in Skype from multiple acquirers. Big companies are interested in buying the company. They end up deciding to sell to eBay for $2.6 billion. eBay. Hey.

Hey, that was the heyday for eBay, too. Well, it was slightly post-heyday. I mean, this was a couple years after the internet bubble burst. But eBay is still a very large company. And people are like, why is eBay acquiring Skype? And one of the rationales that they give for the deal is, well, people will be able to call each other and verify transactions, right?

uh, you know, the, the, the mind blowing thing here with this is like when we covered PayPal, uh, the PayPal, eBay acquisition, um,

That made so much sense because people were already using PayPal as a major source of payment on eBay. And I'm very curious, did they observe behavior where people were using Skype to do this already? It's really hard to imagine. I have no idea why you would call somebody after they won an eBay auction. To me, it seems sort of like eBay's foresight

into trying to become a conglomerate and like private equity style, take on this high growth business that, you know, has a very pioneering technology and see if they can just, you know, grow that as an asset inside their organization and like theoretical synergies happen with their other product. But to me, you know, hindsight's 2020 and we can look all smart here being like, that was a dumb acquisition, but I don't see it. Yeah.

Yeah, I agree. I mean, it would be hard to see this being a smart acquisition regardless. However, it was definitely a dumb acquisition because they made one key mistake as part of the acquisition. And that was much like when the Kazaa guy sold Kazaa and they kept the technology. Once again, they kept the technology. And so they had a, I think it was a company called Skype Technologies that literally was just licensing it to customers.

It was actually a company called, I don't know if it's jolt ID or jolted. It's J O L T I D. And that was Zenstrom and freezes, uh, company. And they kept the, the core peer to peer networking technology in that company and then licensed it to eBay and Skype. And, uh, so as, as we'll see in a minute that, uh, that definitely comes back to bite eBay, um, and, uh, and Skype too. Um,

So the transaction happens. Skype, which is this crazy European company, is now part of eBay based in San Jose, run by... I think Meg Whitman was still CEO at that point in time. Yeah, this is September of 05. Yep, September of 05. Very...

Silicon Valley, but very corporate as far as Silicon Valley goes, has been through the dot-com crash and now emerged and is a very large public company. So to say there was culture clash is an understatement. And in fact, in 2006, most of the eBay management goes over to Estonia to go visit...

visit the Skype team there and, you know, go through kind of like the roadmap and the feature development and the integration plans. And, you know, that doesn't doesn't go, you know, the Skypers aren't too excited about that. But then in the evening, they decide they're going to throw the Skype team's going to throw a huge party for this for the eBay guys coming over.

And so they throw this huge party at the hotel where everybody, where the eBay team is staying. And the party ends. Apparently, Nicholas Zenstrom, we read this on the internet, so it must be true. He gets behind the bar, starts pouring everybody shots, unclear if they included Tabasco or not. And then he gets on the bar and he's still, you know, he's pouring shots for everybody and he yells out, what happens in Estonia stays in Estonia. Yeah.

And it ends up like everybody, eBay, Skypers, they all jump in the pool. They're all like fully clothed at this point at the end of the night. Well, it turns out it gets caught by news crews in Estonia and it's on like local television, like eBay and Skype management basically trashing this hotel. Yeah.

Uh, so then of course they have to pay for it all. And you know, this is not like the corporate culture that, that eBay, uh, signed up for. So it's like a good party to me. Yeah. It sounds like a pretty good party. Uh, I kind of wish I was there, but, um,

But the eBay management did not. So a couple of years go by. Skype is still growing super, super fast. We get to 2009 and Wall Street's like so Skype is at this point the fastest growing part of eBay division within eBay.

Boy, that's a story we've heard before. PayPal. Yeah, exactly. Skype has over half a billion users around the world at this point and is quite profitable and making a lot of revenue in the...

third quarter of 2009, uh, they made Skype itself did 185 million in revenue. Um, and, um, but, but it's just not a fit within eBay and wall street is, you know,

is saying that they should spin it out or do something. This makes no sense. And so they start working on a transaction that we referenced earlier where a consortium of private equity firms and Andreessen Horowitz, which had just been founded by Mark and Ben, are going to invest directly in Skype, spin it out of eBay. eBay will retain a stake.

and end up valuing the company about it what eBay bought it for a few years earlier. Because I think somewhere in the middle there, October of 2007, eBay did a write-down internally of the value of Skype. Yep. And...

But there's still one problem again, which is that Skype doesn't own the IP. And they're just licensing it back from Jolted, from Zenstrom and Freeze. And so what happens, Zenstrom and Freeze actually sue both eBay and the investor consortium, sue to stop them using the technology.

And there's this whole big... And this is all playing out in public. eBay is a public company. So that's totally roadblocking any event. Totally roadblocking. There's a chance that Skype could just die. One very real path was that if they couldn't use the technology anymore, that they would just have to shut the whole thing down. And like...

I don't, that's not realistic, right? They're going to settle. Well, right. So the other, another potential path with that, uh, the eBay and the Skype team was furiously working on is develop an alternative technology to power Skype. But, um, again, really hard to do that because the peer to peer technology is kind of the core of how this works. Um, and, and then the third option is settle with them. And that's really, I think, you know, what was going on was, um, was the founders were, um,

basically trying to, trying to, um, you know, they, they wanted to invest in the deal and they did end up investing in the spin out. Um, but so they do eventually end up settling and it's interesting what happens. So they give, uh, jolted, um, 10% in Skype as part of the settlement. Um,

So they get 10% equity stake. Skype gets the technology. So finally, the actual technology becomes part of Skype, the company. And the founders also get an $85 million cash payment. But what's interesting is they then also invest $80 million into the spinout. So I guess net...

the cash comes out about even for them, but they then get another roughly 4% of the company. So they end up with 14% of Skype post spin out. eBay retains 30% and the investor group gets 56% of Skype. Also interesting as part of the deal is

Skype itself at this point, Nicholas and has a venture firm in Europe, which is quite a good venture firm called Atomico. Skype ends up investing in Atomico's second fund and investing in RDO, the streaming music service that was also started by them.

Both of these as part of the settlement. Wait, was RDO an Atomica company or was RDO, who started, what's the connection there? Zenstrom and Freese started RDO. No way. Yeah. They had a third act with RDO.

Yeah, they had a third act and they had a fourth act, a company called Juiced, which was going to be a peer to peer video streaming, you know, basically disrupting television. And Skype didn't invest in that, but they agreed as part of the settlement to promote Juiced on Skype. I don't know how that they would promote Juiced on Skype, but it was a part of the settlement. Wow.

Super interesting. This is a crazy deal. But it works out. So the spin-out happens. October of 2010, Skype hires Tony Bates, who is a star at Cisco, to come in and be the CEO. And before that, in June of 2010, Mark Gillette, who was an operating partner at Silver Lake, became the chief development officer. So those guys, this is where the folks at Microsoft started.

at Microsoft start to become familiar with these names, people who are there now and have been there for the last five years or so, both played huge roles in sort of the integration and leading the Skype division inside Microsoft. Yep, huge roles. And so...

In these couple years in the interim, Tony and the new management team basically focuses on totally restructuring Skype. So integrating the technology that is now finally part of Skype into the company, modernizing it. Classic and super well executed private equity play. Exactly.

play incredibly well executed um i mean i don't know if we're going to disaggregate the grades of all these acquisitions here but you know i think this definitely uh is making a case for for getting the highest marks um they also uh realize at this point it's obvious that mobile is going to be a thing so they really push skype for mobile getting on ios getting on android um and uh

uh, the business does great. And, and then just a couple of years later in May of 2011, um, so actually less than two years after the spin out happens from eBay, Microsoft shows up. And finally we get to the end of the story, eight and a half billion dollars acquisition. Uh, Microsoft announces in May of 2011 that they're acquiring Skype, uh,

At that point was their largest acquisition ever. Just until LinkedIn. Just until LinkedIn. And looking at, just to recap, September of 2009, Skype is valued at $2.75 billion in the private equity takeover. And then when you look at this Microsoft acquisition May of 2011, so what, two...

Under two years? Under two years later, essentially $6 billion, almost $6 billion of value creation. Now, granted, I mean, there was a lot of pain that they had to go through to get that, but hey, that's a pretty good payout for everybody. Yeah, and I mean, value creation defined in the terms of, which I guess is how you define value, but value is whatever the highest bidder is willing to pay.

because if you truly look at the intrinsic value, I mean, it grew tremendously in terms of user growth under, uh, under, um, Silver Lake, but boy, you know, Microsoft paid 32 times Skype's operating profits. Yeah. So when Microsoft acquired Skype, uh,

Had 700 million users. And in 2010, the full year of 2010, had done 860 million in revenue and 264 million in operating profit. Hmm.

um, so it was still, I mean, a very rich price paid by Microsoft, but it's something that I think kind of gets lost in this, all the ups and downs and roller coasters of this story. And, um, all of these transactions were reported so much in the press is Skype is actually a really, really good business. Yeah, absolutely. I mean, we, we focus on this, you know, the valuation play of like basically eBay sold it for what they bought it for after some tumultuous years. Um,

You know, the private equity days, they tripled it in less than two years. But you're right. You know, as an independent business, you know, I don't know if it's actually worth $8.5 billion in 2011, but like fantastic business. Yep, fantastic business. And eBay, you know, fantastic.

We've been pretty hard on them, I think, justifiably so thus far. But they did make quite a bit of money on Skype because they sold a 65% share at the spin-out, but then they retained 30%. Great point. And so when Microsoft bought Skype, they made...

roughly back, you know, the same value that they, even just from that, pretty close to the same value that they paid for Skype in 2005. That's totally lost to the narrative. I mean, the intelligence of eBay to hold on to that much that it had

had future growth ahead of it outside of eBay. Yeah. I mean, it was never a question that a, this was a great business and B was growing super fast, even through all of this tumult. Yep. Um, and so my, to be clear, there's no more partial ownership after this Microsoft really, I mean, they, they clean out the cap table. They're the, the full owner they have in, uh,

Which usually is what happens in an acquisition, but I guess third time is the charm for Skype. Yeah, yeah. Well, I mean, we're used to... Yeah, kind of shocking what happened with eBay. I was going to say, like, what we normally see with a tech company is they want full and complete control because they're going to integrate the product and it's going to become, like, you know, you...

As we're doing research, we look into Skype today and it's impossible to get clear numbers on how the Skype business is doing because it's been so integrated into every fiber of what Microsoft's doing. And that's kind of the normal story. People look at it like an asset that they've acquired that they move into all these pieces of their business, not this like independent private equity owned thing that another tech company kind of owns and the founders kind of own. Yep.

Like there's management put in place to clean it up and get it ready for sale. Well, I think that's why, you know, part of the reason why Wall Street was clamoring so hard for eBay to spin Skype off in the late 2000s because, you know, they reported it as a separate division. Like it was a completely separate company. There were no synergies with eBay despite whatever they may have said at the time of the deal. But it was really clear that there was a lot of value locked up in that company. Yep.

Yep. So at this point, Skype's former CEO, Tony Bates, is now the president of Skype, reporting directly to Microsoft CEO Steve Ballmer. They have 663 million global users. And, you know, it's time to do the integration. This is in the... I remember this vividly when the one Microsoft memo came out that we...

the company was going to reorient to more of a functional organization under, uh, under, uh, under Steve. Um, since then, obviously Satya has come in, uh, Microsoft's taking a little bit of a different or tremendously different direction. Um, and, uh, what's interesting, um, you know, and then we'll move on to, I feel like we've talked a little bit about acquisition category already, but, um,

I don't know if you remember, you know, there was a lot of when bomber announced that he was going to retire, there was, um, a lot of speculation about who the next CEO of Microsoft was going to be. Tony Bates was pretty at the top of the list. You know, it was Tony Bates. Uh, it was Alan Mulally from Ford until he went and joined the board of Google. Yeah. Right. Good way to disqualify yourself from becoming CEO of Microsoft. Uh,

And unclear that he ever wanted the job. Maybe that was how he stated he didn't want the job. And Satya. But Tony was a very legitimate candidate to potentially become the next CEO of Microsoft. Yeah, that's right. He's actually a GoPro now. Really? He's the president of GoPro. Huh. Yeah.

It's probably worth talking a little bit about what's happened at Microsoft since the acquisition. So for a long time, let's

Let's talk about what's going on at Microsoft during the period of the Skype years. So they had Office Communicator that was part of the Office suite when you subscribed and you entered an enterprise engagement. And, you know, you got Word, Excel, PowerPoint, you know, Visio, the entire Microsoft Office suite. There's obviously varying levels of that that would come with Communicator, which I believe in 2020,

I'm going to get the date wrong, but at some point was rebranded as Link, which was something that never, I mean, that was an enterprise offering that people who had a communicator in their workplace then knew, okay, we got Link. And that was never a brand that was on the tip of consumers' tongues.

And in acquiring Skype, then there was this like very interesting, you know, dichotomy of, well, we've been building this thing called MSN Messenger, which was our consumer offering for a while. There was Office Communicator, which became Link. Now we have Skype. So there's sort of these like three different chat looking things that all seem to sort of do the same thing. And it's taken probably three or four years to really start to narrow that. So MSN Messenger has been killed. Yeah.

Link is dead is formally, you know, changed into and using kind of a mesh code base, but Skype for business. So there's Skype for consumers and Skype for business for businesses. And, you know, this is in outlook.com. When you log into your your consumer mail offering, you see Skype automatically is there. There's all sorts of apps for every platform. It's baked into Windows. It's really kind of like across the whole Microsoft ecosystem at this point.

Yep. And let's not forget a year later, Microsoft acquires Yammer. Yes. And then all of its glory, all of its glory, you know, enterprise, um, social or enterprise mass communication, uh, that transcends email is and will be a thing. It just was not in the form of Yammer. Yeah. That was just, is it? Yeah. It's kind of an interesting product in the early days. Well, it's interesting. Go for it. Um,

I feel like we're bleeding a little bit into tech themes here. But Skype was really... Well, I'm just going to say we'll talk about it more in tech themes later. Skype was really the first both business and consumer internet product. And really...

in many ways, both foreshadowed and was the wrong instantiation of Slack to come. I mean, Slack is a business product, but also used by consumers. Super user-friendly. Super, super user-friendly. And Skype's very similar. I think it was more a consumer product and the business model was more for consumers than enterprises, but it was the first...

I don't know if it was the first, but it was a great example of a crossover product that businesses... I mean, I do many calls with startups. I do as Skype video chats. Yep. Yeah, it's... I wouldn't say that...

it was the wrong product. Like I think that video audio, um, serve a different purpose than, than what Slack is or glorified IRC chat. Um, you know, Slack is, is expanding to become communication and the fiber that, that, um, you know, exists between employees. That's more than just, just chat, but that's really their core competency. And the question is who will own, um,

communication in enterprises going forward and what form will it be and will these things be combined? Like, are we going to see, you know, a Skype-like product and a Slack-like product merge and are we going to see, you know, that happen? You know, are we going to see Slack...

let me say this right, Slack gets Skype-ified and Skype gets Slack-ified at the same time. Well, I think these things are both happening. But it's interesting, you know, the path that Microsoft has kind of taken since the acquisition with Skype, we were talking about this before the show, is not a unified path. I mean, there's

Skype for X, Skype for Y, Skype products, derivative Z. Um, it's very confusing. Whereas, uh, like unclear what exact, what product that Microsoft and Skype are offering today that I would use for what use case. Whereas you look at Slack on the other hand, it's just Slack. Like there is one product, right? There is no Slack for one front door. Uh,

and everything is integrated into Slack, but it is one user experience. And then you can do everything from within that one user experience. And I think that is, just speaking on personal preference, but I think also speaking for most users out there, I would so much rather have one superior user interface and customer experience that I can accomplish many things from...

than I would. Oh, am I stealing your thunder here? No, I'm just like, maybe. It always comes back to Ben Thompson. Come on. It's integrated versus modular. And it's going to ebb and flow, and it's going to be advantageous to be bundled, and then it's going to be advantageous to be unbundled, and then it's going to bundle in a new way, and it's going to keep going back and forth. And we're about to see bundling, I think. And we'll see this stuff get recombined, and then we'll see it get rebroken out again when that's appropriate. But...

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I want to move on to acquisition category. Okay, let's move on to acquisition category. So I'm going to call this a product acquisition. There is technology in there. Well, it very definitively was not a technology acquisition a couple times. Yes, yeah. It certainly was more of a technology acquisition this time than it was the eBay time around. Okay.

The reason I don't think it's business line is because they bought it at such a high multiple of what their operating profit was that they weren't just going to buy and cash flow this thing. They were buying a product to integrate into the rest of their ecosystem and create a stronger ecosystem.

you know, a stronger offering across the board. This was an acquisition done where this product was being greatly sought after, um, by, by both Google and Facebook. There were acquisition rumors swirling for about half the price of, uh, of, uh, what they got bought by Microsoft for, for months before this. And so, you know, in a competitive environment where, um,

Video streaming technology is not yet... Our video chat technology is not yet commoditized. We're still two years away from Google launching Hangouts. This is a product that has a lot of users, is growing fast, and can really be integrated to beef up somebody's offering. And Microsoft decided it needed to be them. Yep. I totally agree. It's interesting. I think the eBay acquisition...

really was a business line acquisition. I mean, it was totally separate. It was reported separate. It was a very different product. Um, but, uh, but the Microsoft acquisition I think is very clearly a product acquisition. And now with the integration that you've seen into all parts of the office suite and other areas within the business. Yep. Um, okay. What would have happened otherwise? It sort of is interesting to look at like the rise of hangouts and, and like,

competing video chat and VoIP products. Like it doesn't feel like Skype is the sort of one and only the way that it used to be. Yep. I don't know if you feel that way too. This is totally, totally anecdotal, but like I, I'm, when someone says like we should hop on a Skype call, it ends up being a Google hangout pretty often. Or in an enterprise case, often a zoom, uh, call. Um, Oh yeah. Or blue jeans. Yeah. Blue jeans or zoom. Um,

I found that zoom actually tends to work the best out of everything. Um, but, uh, I, I think this is interesting and I want to talk about this in the context of what would have happened otherwise. Cause yes, you're right. There were lots of rumors that Google and Facebook were looking at Skype as well when Microsoft bought them, which I just think is super interesting. And also it comes back to this crossover nature of Skype. Um,

Microsoft primarily acquired Skype, I think, for the enterprise side of the business more so than the consumer side of Microsoft's business. And you see that, you know, it was actually it was our friend Kurt Delbeny who when he was president of Office who led the acquisition. So it was actually being done through Office at Microsoft and

And then think about like, what if Facebook had acquired Skype? Like, and then it would be primarily a, you know, a consumer facing product. And the fascinating thing about it is Facebook had just launched like a Skype, a white label version of Skype inside, um,

inside of Facebook Messenger. So Philip Hsu, I think, led this project, which is like the overlap in people in this is incredible. So when I was doing the garage at Microsoft, Philip had started one of the most legendary projects of all time, and he was like a constant garage tinkerer guy and had worked on all kinds of cool stuff. He ended up leaving to go to Facebook and

He runs engineering in the Facebook London office now. But before that, did a did led the project to integrate Skype calling, which wasn't called Skype calling. It was just like video video calling. I remember this into newsfeed. But it was Skype that powered it, right? Yes. Yes. And so then I mean, that left all these questions of like, well, is this their first like, are they just doing a little bit of a deal now so that

you know, they can acquire them, which, um, you know, didn't, didn't quite end up happening, but interesting proof of concept there. Totally. Um, now that we're here in what would have happened otherwise, I think it's worth bringing up the issue of repatriating of capital and what that currently looks like for, uh, us corporations. Um, we've been hearing a lot about it in the news recently, um, in this kind of political race that we're in about companies can't bring, you mean this national travesty that we're in? Yes. Um,

God, I can't even think picturing him. Sorry about that. We can cut that.

So in thinking about, you know, what could have Microsoft done with a lot of this capital they had overseas, it had been a long climate of not being able to, to bring it back to the U S without paying huge taxes. Um, Skype is a Luxembourg corporation. It's a pretty, it's a great point, pretty great way to, um, you know, and looking at like what foreign businesses could we buy that would integrate well into our products and give us like, you know, uh, this boost into, uh,

Like they needed a consumer and to boost their enterprise offering in video chat, in calling. Like it makes total sense when there's not a lot of better things you can do with that capital. Yeah, I think this is a great point. And also, you know, something...

we don't know exactly how Microsoft thought about this and how much this played into it, but Ben, as you pointed out, some of the rumors that were circling about other players, Google and Facebook acquiring Skype, the rumors were at a much lower price. Right. Um, was Microsoft willing to pay a lot more because they had all this cash overseas that they needed to, uh, that they needed to put to work? Certainly at a much healthier balance sheet than, uh, than Facebook, at least at that point. Yeah. I mean, this is, uh,

Was Facebook public? If Facebook was public at this point, I think it would have just been... Let's see. When was the Facebook IPO? That's an easy... Nope. Facebook was a private company at this point, not public. So it would have been certainly possible for them to do an acquisition of this size, but...

but quite difficult. Right. And, and honestly, that's one thing I'm going to keep in mind with when grading this acquisition. I mean, I think that, um, it's the, the super skeptical lens that I had on, uh, coming into today was Microsoft spent $8.5 billion with Skype and seriously, like, how are they going to earn that back? Like, you know, it's, it's so far from being something that they can just cashflow, uh,

it's growing, but like it was already a pretty huge business with, you know, a massive percent of the VoIP calls that were made globally going through it. It wasn't something that, you know, I thought had that much more like growth left in it and nor could I, nor did I believe Microsoft was going to accelerate that. And, you know, it's done well. Like it's grown, you know, the way that you would expect it to grow. But like,

When you think about like in the context of what else could they do with that cash? And was this the best thing they, or one of the better things they could have done with it? Certainly better than buying treasury bills. Yep. Um,

Great point. Really great point. I guess the other thing we should cover on before we move out of what would have happened otherwise, you know, I think there was a path and a very viable path for Skype to go public and be a standalone public company again. That's right. That's right. And then what is this? In 2010...

Skype filed with the SEC to raise $100 million. Yep, they had actually filed to go public, filed an S1. And I think that was probably the plan at a spin-out when Silver Lake and Andreessen and the other folks invested in Skype. But a spin-out was that with some cleanup led by Tony Bates and others that this could be a standalone public company. Yeah. On to tech trends, I think that...

It's interesting. There's a good foray from what we were just talking about. It's interesting to note for listeners that we keep seeing this pattern over and over again where a company gets bought right when it was about to raise a bunch of money, like Instagram or Facebook.

somebody's out looking to do a roll-up strategy and then they get bought because an offer was put down on the table to stop them from doing that roll-up strategy. And in this case, it was they were preparing an IPO and that made them a really great takeover target. And it's really interesting to see, that's my first tech theme, is that a lot of times, whether it's you're about to make acquisitions, you're about to IPO, or you're about to get bought, there's a...

There's a little bit of like a leverage game going on where you pursue concurrent tracks at the same time in order to make sure that the pressure is on for whichever one you want to happen to happen. Back when I was an investment banker, we used to call this a, quote, dual track process. Dual track being one track.

an IPO and one track being an acquisition. And you're absolutely right. These things totally play off one another. And, um, the fact that you are, it is known that you are preparing to go public. You filed your S one. It's out there. That has a way of drawing buyers out of the woodwork. Yep. Um, yep.

Another tech trend is the rise of the mega acquisition. Yes, yes. This seemed absolutely insane at the time. I mean, 8.5, like it was...

I worked around a lot of, um, there were a lot of cynical people in my group. Um, and, uh, when I worked at Microsoft and I like a lot of lunch conversation was the people like counting the number of things that you like, how many Skypes something was like, Oh, this is an eighth of a Skype or, you know, pointing out like, like making like crazy jokes about, um,

what a huge number this was and how it was never going to pay off for the company. And it turns out it's actually less than half of a WhatsApp. It, that it's, it's so true. It's less than half of what's a WhatsApp. Um, you know, consumer, consumer chat broadly defined also includes, uh, Snapchat. And, you know, like they weren't going to become Snapchat. They were in a very different path for that, but like, could they have become WhatsApp? I mean, WhatsApp's value prop is that you could very inexpensively communicate across, uh,

It's amazing. It's the exact same value prop. It's just for text, not for voice. Exactly. Inexpensively communicate across political boundaries and avoid the tax of the telecom. And it is exactly that. And you look at that $22 billion...

uh yeah just um just fully valued given everything that went into that deal future episode coming soon at some point what's up i just don't think we have enough to decide yeah what's up i think we need to wait a little bit but anyway like looking at like could skype have become whatsapp like did they did they falter by not becoming whatsapp or was it just a different era yeah i mean um

It was totally a different era. I mean, I think... So my tech theme, this may be a good segue into it. It is... You know, Skype, on the one hand, it's kind of sad that I feel like this is a company that has never fully realized its potential, given this crazy corporate history that it has. However, the growth of this company and the, like...

product market fit um that happened is pretty incredible especially when you go back to the context of when skype was started in 2003 and launched in 2003 and the kind of growth that it experienced and like what were you doing until like i was in i was uh i was um

graduating from high school and starting my freshman year of college in 2003. And I owned a tablet PC. Like, you know, nobody had ever heard, like there were Palm pilots, you know, like, but there was no, there were no smartphones, you know, the global internet. Most people in America didn't even, you know, I don't know if it was most, but certainly a large portion didn't even have broadband. Right. Yeah.

And so you couldn't use Skype if you didn't have broadband. And like, think about that and the addressable market and yet how fast it still clearly grew. And so the tech theme that I had is there was a really great, actually, ironically, right at the same time that the Microsoft acquisition of Skype happened, Bill Gurley wrote this great blog post called the, I believe the title is

all revenue is not created equal the keys to the 10 X revenue club. And, uh, it's a great post. And he goes through 10 points of like, what is it that makes companies that are valued highly by public companies valued by wall street, um, at 10 times revenues or higher, uh, sort of these elite companies, like what are the factors that separate them from other companies? And he includes a slide from an early Skype pitch deck, uh,

in one of his points. And this slide is just amazing. The point that Gurley is making is that companies that tend to be valued very highly, they grow on the back of organic demand versus heavy marketing demand is what he says. And so a lot of companies, you think about this, and we see it in startups all the time,

Your unit economics, quote unquote, may be working, but if you're paying a lot of money to acquire every user that you get to your product, you're going to have to spend a lot of money to build that market and win that market.

Skype never spent any money on customer acquisition. It was all organic. It was just pure product market fit. And so the slide from the Skype pitch deck, they're comparing themselves to Vonage. If you remember Vonage, you know, was the Skype competitor in the day.

and Vonage advertised all over national television in the US and this slide just compares Skype's cost of CAC to acquire a new user and Vonage Vonage is $400 that they were spending per new user and Skype was one tenth of one cent

And because they had no costs for every call, it was a complete peer-to-peer model. They had no server costs. And they were spending no marketing. And so this thing could just grow and grow and grow. And there were no limits to it, which is pretty amazing. It's super rare to find these kind of businesses. And again, like I said, Skype...

I don't think it's the credit it deserves as a product and as a business because of this corporate history. But the growth is just impressive. Yeah, yeah, yeah. All right, on to grade the acquisition. I'm giving it a B-. I thought I was going to be much harsher. Which acquisition are we grading here? I'm grading the Microsoft acquisition. I thought I was going to be way, way, way harsher. And in fact...

I didn't know I was going to do this episode years ago, but like I would have called it like a D in 2012. And it seems like over time, like,

It actually is getting integrated. It takes a long time because it's a big ship to maneuver, but like it's the right move to have Skype and Skype for business and not have, you know, versions of link and MSN messenger and totally deprecate communicator. Like it's, it's the right move. It was an amazing use of that capital considering other options that they, they could have done with it. Um,

Unless, of course, we see some kind of big break where all the U.S. companies in the next few years are allowed to bring the cash home. But I don't really foresee that happening, bringing it home at a reduced tax rate. And on top of all that, I think having this consumer offering and a little bit of that consumer DNA with all the

all the Skype teams, um, that, that have, that have built this product leaves them fairly well positioned for whatever's about to happen in the enterprise communication market that, that Slack has pioneered. Um, you know, I'm, I'm sure they wish it looked more like Slack right now and less like the kind of like slow steady growth of, of Skype. But, um, you know, if Skype teams is a real thing, I'm excited to see it. Yep. Yep. Um, I definitely agree with that. Um,

Yeah, it's interesting to think about, you know, think back to one of our early episodes with Kurt Delbeny talking about Accompli and Wunderlist and sort of recreating the Office suite and in particular Outlook on mobile. And I got to wonder if, you know, and Kurt led the Skype acquisition when he was at Microsoft the first time.

I got to wonder if the experience with Skype informed some of the things they did differently with Accompli. And in particular, you know, making Javier, who is the CEO of Accompli, head of all of Outlook, not just Outlook Mobile, but empowering him within the organization to really remake. And it's still a work in progress and will be for a long time. But I think...

Outlook has made huge strides from the massively bloated, super old school piece of software it was before the acquisition to the still really bloated, but much nicer designed and clearly making strides. And it's my most opened app on my iPhone where it is today.

And to compare that to Skype where, yes, Tony stayed at Microsoft for a little while and was in the running to perhaps become CEO, but then he left. Also ultimately not like a product guy, right? Also ultimately not a product guy. He plays from the PE. Yeah, he was like a turnaround guy. And I think the lack of any real leaders, you know,

corporate leaders within Skype that could come in and champion that and champion a product division for Skype as part of Microsoft has really hurt them. Yeah. The heroes of Skype are gone. And the heroes that are talked about in Skype and the talent offices and otherwise are the original founders. Yeah. The dudes from the newspaper ad. Yeah. And I mean, you even go, yeah, right. You even go and you look at the way that it's structured in the org now, like,

It's under Redmond leadership. I mean, it's all over. It's these distributed offices in like six or eight places around the globe. But like longtime Microsoft people that they report up to that, you know, they're running it like the next evolution of Link, which, you know, makes a lot of sense. But it's...

you know, it's very different than the Accompli acquisition. Yeah. So, and, and thinking back to what Kurt was saying, um, you know, that realizing that ultimately a lot of these things really are about the people, um, you know, that's what was not there in the Skype acquisition, uh, as good as the product is and the product market fit and even the financials. Um, so I think I actually net out at the same B minus, like, um,

Would have been a bad acquisition, but for some of these other factors we mentioned, like finding a use for foreign cash, it actually being a good business, but just so relative to the potential that it has not yet realized. Yep.

Okay, let's move on, do some quick follow-ups and hot takes. So follow-ups from our Android episode. Google recently held a big event and launched the Google iPhone, otherwise known as the Google Pixel. And sort of unapologetically so. Like their marketing copy mentions like the iPhone, or at least their press release copy does. And it's...

- It looks really good. All the reviews are super encouraging. Someone here at PSL got one.

earlier today, so I'm excited to play around with it tomorrow. But looking at the pictures, comparing it against the iPhone 7, not counting the portrait mode stuff, all the flaws that I notice in the iPhone photography over the years where it flattens things too much and it loses some details and it doesn't have the incredible high contrast and the textures. The Pixel's phone looks really, really good, and I'm excited to play around with it. And aside from all that...

There's like...

um there's a niceness to that hardware that we haven't seen in um non-apple devices in android devices yeah in a long time it's interesting uh a couple things for me one we in our android episode you know we're like the mobile wars are over google and apple you know are not fighting each other anymore and then a month later you know google comes out with like the most direct shot at apple that they've taken in a long time um but i still think the mobile wars are over um

But it's interesting in that episode, we talked about the days when Samsung was just like unabashedly copying the iPhone design wise. I'm ripping this off from everybody needs to go listen to the most recent episode of the talk show with John Gruber with host or with guest Ben Thompson. Of course, we can't go an episode without mentioning Ben Thompson. Of course not. But this is John Gruber's line. But it's like it's like Samsung always acted like Apple never exists. Like, oh, Apple never heard of them. But look at the new phone that we invented. Yeah.

Swipe to unlock. Beautiful new design that we came up with. Yeah.

And Google is just not treating it like that. Right. Yeah. And the, the really interesting thing. And, uh, again, totally, um, totally go listen to the, that podcast episode. But, um, Ben and John point out this really great point that, uh, um, this is a potential change in business model for Google, not only because like they're selling hardware and they normally are the, you know, they, they just make the software and then the OEMs make the hardware. But, um,

Google Assistant right now appears to be only available on the Pixel and not on... It's actually not part of Android. The Google Assistant is part of the phone and not part of Android. So I'll go to manufacturers. And I think this is by far the most interesting part of this announcement. Yeah, so walk through this. In a world where there are...

you use an AI, the AI is there to give you answers, not options. And Google's business model is predicated upon giving you options, some of which are sponsored options. And in this voice world, like the user experience of this, we're shifting to, you know, when banner ads didn't work on mobile and we had to figure out what ads like now we're shifting to this world where like search result ads don't work when people are asking their phone stuff.

So Google had this incredibly profitable business model and now they, there's a chance they might need a new one if this thing that they happen to be very good at, which like, this is like the Googliest piece of technology of all time is creating this, this Google assistant. Um,

this thing they happen to be incredibly good at is incredibly bad for their business model. Yeah, man, this is technology cycle disruption at work here. Right, right. So then they look to Apple for like, okay, what's a good business model where we can leverage the things that we're good at? And it just so happens that it might be that the things they're good at being Google Assistant, maybe they just have a really high margin phone that they sell. They just sell phones that include the Google Assistant. Yeah. Yeah.

Super interesting. So go listen to that podcast because I'm totally ripping those ideas from there. And that is like such a good astute analysis. Very astute analysis. Uh, hot takes. Um, interestingly to me, I think the, the, interestingly, the least interesting thing to me that we are going to talk about today is AT&T and Time Warner. Yeah. I mean, it's 1999 again. Uh,

what's old is new. And my senior research paper was about net neutrality, 42 pages of arguing why that... That is the most relevant and terrifying aspect of this. It just keeps coming back. And every time we get closer to the telecom and the content and a gigantic content provider being aligned like this, it scares the crap out of me. Yeah, but I mean, I think a little bit like...

God, I hope knocking on wood. You know, it's a little bit like this election cycle. Like it's like you can't fight the forces of history. And like you have these. Wait, say more about that. How does that? Well, like that politically, like we are moving towards a much more progressive situation.

Like that's the direction that history is moving. And if you're going to fight that, you're going to be on the wrong side of history. And just like that, in this case, you know, net neutrality is the future and content will be unbundled. And Facebook is worth more than every old traditional media company combined. And that is the future. But what's interesting is that even though, you know, we can sit here and say like,

that's the, you know, the right side of history. Um,

at times like these forces pop up that are total reactionary, conservative, you know, go back in time, make America great again. And like, hopefully they will lose, right? I love that you just compared like AT&T and Time Warp's merger to Donald Trump. I did that. I just did that. Yes. Yeah, the slogan of this like year-long process of FCC approval of this thing is going to be make America great again.

again. Yes. All right. We should just leave it at that. Let's talk about the wire cutter. Oh, wait. We'll link to this in the show notes, but I tweeted a link to this article the other day that had an awesome graphic of basically the baby bells getting built back together. It is so interesting to look at the

AT&T breakup and kind of the reassembly of the Terminator 2 robot into its former glory and it's super interesting to see how that works I feel like I should say one more word about what I meant by make America great again like Time Warner has many good businesses within it and it will continue to be decent businesses especially HBO probably a really good one but like

By the minute, so good. Yeah. By the minute, um, that world just becomes less and less relevant. Like who watches linear television programming anymore? Um, you know, movies are also undersea, like there's the old world media companies and the types of content they produce, like just don't have as important a place in a Snapchat world, you know? I like it.

Okay. The Wirecutter, New York Times. Yeah. Great for them. God, the Wirecutter is awesome. And I don't think I've bought anything of significance that was not researched on the Wirecutter or the Sweet Home in years. Such a great site. And I'm an unabashed fan of the New York Times, and it's great to see them land in one of the media institutions that has figured out how to come into the modern era and, to your point earlier, go with the...

the version of the future. And I think like, um, the New York times had it a lot easier than many smaller regional papers because they were truly a destination site. They had a brand built up. People were going to go there without, um, having someone without someone needing to share content with them. They, you just go to the New York times cause it's the freaking New York times. But like,

love seeing how progressive they are in, you know, experimenting in VR and buying sites like the Wirecutter. And there's, we're just watching before we were diving into the show. There's a great interview with it's Brian Lamb, right? Yeah. With Brian Lamb talking about how he loves doing what they do with the Wirecutter because they,

rather than writing news he's writing something that just helps people he's like this this is a thing that people find continual value in over and over again we figured out when to refresh it what to refresh it with how to tell people that we've refreshed the guides and we just build a solid long like many multiples of hours longer than anybody would ever take to write a piece and um

it's a, it's a phenomenal piece of content that's super engaging that actually helps people. And, um, you know, I think it's, it's interesting what we'll see as they start to bundle it in more with the New York times, coupling some of these buyers guides with, um,

more investigatory pieces. And the example he uses is like, it's like, why can't anyone make a good Wi-Fi router is the investigatory piece that someone writes. What happened with the Samsung Galaxy Note 7? Right, right. But then coupling that with a buyer's guide for wireless routers or phones, like what is actually the one that you should go buy? And I think we're going to see, you know, the continued evolution of digital journalism.

All right, with that, should we do a carve-out? We should. Although I feel like I've been just sitting here doing carve-outs for the last few minutes. I finally got around to reading the super long-form piece from The New Yorker called Sam Altman's Manifest Destiny. Oh, it's a great article. Yeah, it's like...

It's interesting. So for a little background, Sam took over Y Combinator from Paul Graham and sort of like revamped the whole thing, made it significantly larger, opened up new divisions, hired a whole bunch more people, and frankly, expanded the scope of the ambition significantly. Hugely, yeah. And it's...

You either really buy into it or you think the piece is a mega puff piece, but no matter what, reading it leaves you with this mindset of a widened ambition and thinking about like, oh, I've been thinking too small. And it's it's I love when things reset my perspective like that. So highly recommend it.

Yeah. Really, really good piece. Also highly recommend it regardless of what you think about YC or about Sam. And I fall on the side of like, I think, um, everything Sam's done is, is I'm on team Sam. So, yeah, I agree. Like, um, the, not everything he's doing will work. And that's the point that you can't be to have that scale of ambition, you know, you need to be comfortable with failure and that's,

laudable. May the failures be colossal and the successes even more so. Yeah, totally. Great piece. Go read it.

My carve out for the week, super fun one. One of my really good friends from business school, Jake Saper, who is a venture capitalist at Emergence Capital, is the star of the hottest thing to hit the Bay Area and Silicon Valley since Silicon Valley. And that is Soma the musical. No way. Yes. Which...

ironically, Jake is the star of the show and he plays the entrepreneur in, uh, in the musical, um, opened and ran, uh, in San Francisco, uh, last week and, was a huge success. So big shout out to lots of articles. You can go read about it. We'll link to some, um,

Big shout out to Jake and very, very well done. Hopefully coming to a Broadway stage near you soon. That's awesome. Yeah. If you want to see a great show or, you know, talk about enterprise SAS, go talk to Jake. Yeah, totally.

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