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Happy Friday, everybody. It's the Informations 411, your weekly look from the reporting team at the information, at the biggest stories that we published and other items in the news that we feel fit to give our opinion on. My name is Tom Dautan. I'm one of those reporters and one of those people who unsolicited gives his opinion.

Here's what we've got on tap for you this week. I am talking to Alex Heath, Hardware Heath, about Facebook and its plans with augmented reality and virtual reality. It is a much bigger bet for them than I ever would have expected before reading the story. Lots and lots of employees, billions of dollars of investment, and a surprising amount of success, at least in certain regards.

The interesting aspect of all of this for Facebook is that they're trying to learn their lessons from mobile in which they were slow to adopt to the new platform and they're trying to get in as early as possible on what many people at the company, including probably Mark Zuckerberg, believe will be the next big platform shift. So Alex talked to a lot of leaders at Facebook, had some new details on companies they've tried to acquire and, uh,

Yeah, all of it put together is a pretty impressive investment. Although I will say I remain skeptical about the possibility of AR becoming a thing. And Alex, I talk about that too. And then I'm talking to Kevin McLaughlin and Nick Bastone about Google Cloud, the internal meeting that happened in 2018 where they were trying to figure out a timeline on when they could surpass their bigger rivals, Amazon and Microsoft, and why cloud remains a sort of odd fit within the Google ecosystem.

what do you call it? The Google city, the Google universe. So that is Kevin and Nick. That's about it. Join me here next week as we do our year end wrap up podcast. That'll be a lot of fun. But for now, here's my conversation with Alex.

So around five years ago, Facebook turned a lot of heads in Silicon Valley when they bought for around $2 billion Oculus. And it was this kind of moment where you realize that they had ambitions that went far outside just being a software company and a social media company and really saw something big with VR. And it's kind of been a strange thing to watch since then. But you sort of put a lot of the pieces together in this story in terms of

how much investment they've made, that the fact this is still a major cost center for them and what hardware, VR, AR and all of that means for the company. So from like a high level perspective, what is Facebook trying to do with its hardware investments and ambitions?

Yeah, so when they bought Oculus, Oculus was less than 100 employees. And you would think that given how VR has not really hit mainstream since then, it's still a relatively niche product. You'd think that maybe they would have scaled back that investment. But to the contrary, they actually have thousands of people working in AR, VR industries.

And they're getting their own dedicated campus with 4,000, you know, room for 4,000 employees next year, plus other offices. And they're spending billions of dollars a year on hardware and the software for the hardware. So I think, you know, this honestly goes up to CEO Mark Zuckerberg and his – it's a mix of, I would say, paranoia and also skepticism.

sensing some opportunity in the coming shift that will happen whenever, uh, these next devices, uh, eventually replace, uh, the, the dominance of mobile phones. So that could be, whether that's VR remains in question. Um,

But now most of Silicon Valley seems to have landed on AR, augmented reality, the overlaying of virtual objects onto the real world through your field of vision as this next medium. And so Facebook is very seriously working to create these AR glasses,

How much of this do you think, I'm sorry to cut you off there, but before we get into some of the specifics...

As a bit of a history lesson to our listeners out there, Facebook was actually a little bit late in the mobile revolution. They kind of dropped the ball at first when people started using Facebook on their phones. They didn't have a great business model for quite some time. It was a big question when they went public.

And how much of, you know, do you think that that experience and going through the growing pains of becoming a mobile company inform their decisions who think as early as possible about this new platform?

I think it very much informs it. And you can see it all the way up to the leader they chose to run this thing, a veteran Facebook executive named Andrew Bosworth, known as Boz internally, who's been there for over 14 years. He's one of the most, obviously, most tenured employees at the company, a close friend of Zuckerberg. Goes back to Harvard, right? I mean, like they go back to the college days.

They go back to the Harvard days. Yeah. And, you know, it was Boz who was tasked with putting ads in the newsfeed on mobile when Facebook realized it needed to figure out how to monetize mobile. And they were they barely made the shift to mobile. And it's something they've been very open about since then, that it was an existential crisis for the company because it started as a desktop website.

And I think they don't want that to happen again. And what happened is that the mobile era has worked out very well for Facebook. Yeah, that's why you can be open about it because when you're crushing it now, it's fun to say like, oh, yeah. So they're sitting on $52 billion in cash. They make billions of dollars a year in ads off of mobile platforms. But at the end of the day, they don't control the pipes that they run on. So they don't control the phones and the operating systems. So for Apple iOS and Google Android,

that, you know, make their apps work. And that gives them a limited ability to control their own destiny. And I think that's really what a lot of this is about is that, you know, Apple became a trillion dollar company when they realized that creating fully, you know, integrated technology from the OS to the hardware to the chips gives you full control over the product and you can create a better product. And that's, you know, really you can chart Apple's, you know, dominance, you know,

really tied to that in the iPhone and how they doubled down on that approach. Right, and owning a new platform, right? I mean, they were most successful in kind of becoming the dominant player for smartphones. Yeah, so I think Facebook doesn't want to have that happen again when we eventually shift from mobile to whatever is next, whether it's a mix of wearables or glasses or what have you.

Right. Okay. So let's go into some of the specifics here because they have made a couple of acquisitions. They've announced a couple of acquisitions and in the story you broke news about others that they had kicked the tires on. So what was going on there?

Yeah, so they bought a, honestly, it's, I guess, a mind reading technology startup called Control Labs that's developing an armband that they think could be an input mechanism for AR glasses one day for almost a billion dollars about a month or two ago. They almost bought Fitbit before Google, I reported, about a month ago. That would have been close to a $2 billion acquisition.

And in this story we broke that they actually looked at buying a chip maker called Cirrus Logic. It's one of Apple's top chip suppliers, specifically audio chips, which is interesting. And that company is worth about $4.5 billion, so it would have been at least double the Fitbit purchase. So that, I think, goes to show how large their eyes and their appetite is for hardware and for investing in this category, because if all those acquisitions would have come to fruition...

And as they were bidding on all of them, you know, they would have easily been spending over, you know, five to six billion dollars in hardware. Right, right. And and and yeah. And at a time that they're getting so much government regulatory scrutiny, I wonder, do they feel like hardware is just so far away from the nature of the scrutiny that they're not worried that that could raise any more alarms?

It is. I don't honestly think that they're thinking about it as much as everyone in the media thinks they are. I think it certainly affects, you know, we had an executive at one of our events recently say it affects how they, you know, look at buying social companies for sure, because that's the area they're already dominant in. I think this area is so unknown and it's so, you know, it's just uncharted territory that I don't think any regulators are going to know how to make sense of the buying a mind reading company that

Doesn't even have a product on the market yet, which is honestly what happened with Oculus. The product had barely been out. It was a Kickstarter and fewer than 100 employees and then came in with this massive offer that catalyzed the entire VR industry. So they have this history of coming in and betting on these early technologies before anyone really can make sense of it.

Right. And so with Oculus specifically, in following VR from the content side of things, I've always been underwhelmed by the businesses that have grown out of it. There's been a huge number of failures in the startup side of things with VR. And, you know, I think you've seen a lot of people really write it off.

at least for the time being, as a consumer-level device. But from what your story said, it sounds like it's actually done better than you'd expect, Oculus. I think this is all about expectations. So Facebook doesn't disclose sales of its devices. They don't disclose the revenue they make from hardware. They do say they're selling every single Oculus they can make. This new Quest headset that came out earlier in 2019,

Really is, you know, I've used it quite a bit. It's actually a good device and it's the beginning of me being like, I could actually see myself using VR because it's cordless and it doesn't need a computer and it doesn't need a phone to power it. And you have a thing called six degrees of freedom where you can walk freely around in a room and interact with things. And they just added hand tracking where you don't even need controllers. Your hands can interact with the environments.

And that's a good example, the hand tracking of how that technology can actually be applied to AR. So I think Facebook may actually have a heads up with AR development given all the optics and tracking tech they have in VR. And they're really a leader now in VR.

Partly because other companies have moved away from the space, like Google, but also because they've been continuing to invest and the tech is actually getting pretty good. So we may still be at like the iPhone 1.0 moment of VR with the Quest, but I think they are starting to see that this thing has a lot of potential running.

Right. And yet at the same time, like you say in the story, AR really is like the long-term goal for them and where really where, you know, they really have their hopes and dreams rested on it. And I remember in attending F8 conferences in years past, I noticed a distinct shift from them really pumping up AR

you know, VR and the My Life world and all these things that they had thought as one of the key advantages of Facebook being involved in VR to, hey, let's start getting in kind of the selfie masks game. And, you know, how can what can AR do for you? So, I mean, what does it meant inside Facebook for AR to suddenly become not suddenly, but to over time become the sort of top priority when it comes to hardware?

It's definitely been a shift in the last couple of years. I mean, the organization is called ARVR, not VRAR. I mean, I think that's, you know, a name is a name, but it kind of says everything about where their priorities lie. They have hundreds of people devoted to building these glasses on top of thousands of dedicated engineers that this organization has.

and it's an area that Mark Zuckerberg spends a lot of time he meets with Boz you know regularly every week to review this stuff he's very keenly interested in this and again this all goes back to can we control our own platform in the coming shift in computing can we not

have to go through what we went through with mobile. I mean, I think an interesting example of this is, you know, astute information readers might remember earlier this year when Apple actually caused all of Facebook's internal apps to just shut down because Facebook abused one of Apple's policies and with regards to how they distribute their apps.

And so all of a sudden, every single Facebook employee couldn't access their internal apps on iPhones and Apple devices. And that, I think, is an example of the power dynamics at play here, where they really are at the whims of these other companies with regards to the current tech platforms. Which is insane, by the way, for like a multi hundred billion dollar company to have another trillion dollar company flip a switch and suddenly your employees are offline. I mean, that's just not a great place for you to be.

Right, and it's a small example, but it's an indicative one of where their eyes are set in the future. And we should not forget to note they actually tried to make a phone even before they bought Oculus with HTC, and they ended up building it on Android, but it didn't work. Right, huge flop, huge flop. Yeah, so this time they're going to build the entire software stack. They actually have a co-author of the very early version of Windows NT.

who's a star Microsoft, former Microsoft engineer, leading a group that is building an operating system from scratch, which

which is a big deal because most devices run on some fork of Android that aren't Apple-made. And this is the fundamental railroad that all this stuff gets built on, and they're going to build that themselves. It's a huge undertaking. Yeah. So maybe broadening out a bit. No, let's stick with Facebook, and then I do want to ask a broader question for you. So as you came to Facebook with this story, they put a lot of people on the record for it, which...

Sometimes they do, sometimes they don't. You know, they'll be a bit closer to the vest over certainly other areas of their business. I mean, what was your experience with Facebook? It seemed like they really wanted to get at least part of this out there. I'm sure they weren't thrilled about the deals that you scooped, but, you know, they seem to really want to get out there that they are making these investments and these are the executives in charge of it. And, you know, we think we're a major player in the space. Yeah.

Look, I think everyone in the industry is skeptical of Facebook in this regard because they do have this really spotty track record with privacy and with data collection and just their reputation in general is not great in the Valley. And so, you know, I'm sure...

it's a recruiting, you know, challenge in some aspects to get someone who say has worked at Apple for 10 years to, you know, go, am I going to go to a, an ad software company to try to build hardware? Um, you know, they are still, you know, even though they are, you know, a massive company and underdog in this race, because Apple is also working on similar efforts. So, um, you know, I think, uh, this is something they want to be very out there about because it is something that is, you know, so, uh,

close to what Zuckerberg is wanting the company to do and it's also a challenge for them in the current environment. Right, okay, so

This now here at the end of the year, you have written a number of stories about AR and the various major companies that have been investing heavily into it. And so we know already that Apple has pushed back their timeline just a little bit for their various AR products. The same year as Facebook's goal, interestingly enough. Yeah, so there's that. Magic Leap, as you reported the other week, is not selling a lot of these devices, having all kinds of problems, needing to raise more money.

on and on and on. And then here we have Facebook with, you know, what they're trying to do. I mean, realistically, when are you expecting this to start being a meaningful business platform, anything in which we should, from a broader perspective, care about? I mean, how are we looking at it?

I think we're going to see the first devices that maybe like not the iPhone moment, but maybe like the BlackBerry moment where like people start using phones in a different way. And now people start using these devices in probably three years. Apple, Facebook, they'll have timelines of about 2023 for releasing the first glasses.

And I think within five years, you're going to see definitely the early adopter crowd, the average information subscriber, but also, I hate using this term, but knowledge workers, people who work in offices and people who are a little more tech savvy. You and me. We're knowledge workers. Yeah. I think within five years, and that's something that Facebook executives told me repeatedly, they think this is all coming within them.

that time frame because the technology is actually going to be solvable by then. There's several key hurdles that need to be overcome, but the

by then we should be there. Yeah. Do you worry at all? And I guess by extension to the people you talk to, worry that this could all be a giant boondoggle, that we may be actually years and years. Look, this is coming from my personal opinion, perhaps, that we could be years and years away from this further than we had initially thought. And similar to self-driving, which has huge amount of promise, but unbelievable technical hurdles, that this could be more than a decade or two away from something that people really expect.

Maybe. Comparing it to self-driving is interesting. I don't think it's quite fair because self-driving requires just massive infrastructure shift at everything from the city planning level to the government level. It's much bigger. Also, the stakes are much higher. The stakes are much higher. Lives are at stake. Look, I think you already see products on the market, even like Snap Spectacles for all the knocks they've gotten.

And, you know, the newest ones have a form of AR in the lenses and they're kind of fun. Like you can make really cool effects and see whales, you know, floating in the sky around you as you look around. Like this technology is already like in its beta infancy stages, you know, out there. People can use it.

And yeah, I guess it could all go up in smoke, but it would be one of the biggest like misses, like collective misses in Silicon Valley. It's just kind of remarkable that all the smartest people I talked to in the Valley, they all think that this is where things are headed. And it's all about tech becoming more intimate and more closer to us as human beings. Like our phones are on our, in our hands and like eventually it will be on our faces and in our brains and yeah.

Oh god, he knows who knows. Yeah, i'll never forget a facebook employee one time telling me very off the cuff that like well You know really all of this isn't that meaningful because at some point we're just going to hack the ocular nerve And uh, we'll just be able to overlay stuff in our brains Yeah, yeah, cool Happy holidays. Yeah, exactly. Um, look look forward to that in 2023. Um, we're all just uh black mirror episodes, um

All right, Heath. Good talking as always. Have a good holiday and we'll check in with you again in the new year. All right. Take care. So in 2018, a lot of the top executives at Google have a meeting in which they discuss the future of cloud. This cloud providing arm of cloud services, providing arm of Google that has remained a third tier or sort of in third place of all of the major cloud service providers. What was the nature of this meeting and what came out of it?

So our understanding is that it took place at some point towards the end of Diane Greene's tenure at Google, which would have been mid-2018. I think that the piece of what we reported that is getting the most attention, obviously, is that in this meeting with Alphabet's senior leadership, the idea of exiting the cloud market was discussed and then dismissed. I think generally from what I see on Twitter, the part where we said was dismissed was

has been lost on some people. I think it's important for us to kind of say that our understanding is not that Google Cloud is going to quit the cloud computing business. If Thomas Kurian does not hit the targets that have been set for him by 2023, it is very likely that Alphabet could revisit its strategy on the cloud. But you know, I think it's really important. Google could. Yeah. I mean,

I don't get the sense that Google Cloud is going to get out of the cloud market. But the fact that this idea was raised definitely is important. And I think that, you know, I've seen some arguments that, well, any any large company is going to assess all of its options on the table.

I just have a hard time thinking that Microsoft or Amazon Web Services have ever floated the idea of getting out of the cloud market. Right. And Google didn't dismiss. We reported a 2023 sort of timeline to be either number one or two. And, you know, we didn't receive pushback on that. And again, like Kevin said, we didn't say, you know, after 2020,

2023 that Google is going to, you know, get out of the market. What we said is if they're not one or two, you know, they could reassess their investment. And the idea from people that we talked with was, you know, maybe this sort of all in green light that they've had in terms of a budget as of late that might might fade if they haven't reached their goals. Let's maybe get a bit of a history lesson here with Google and their involvement in cloud.

because they're a bit of a latecomer, right? I mean, Amazon has been in it. They've more or less invented the category, this idea of the public cloud and Microsoft has, you know, it's, it's their business. You know, they, they, they really don't have a second thing to lean back onto. So they're a reason for it to be a major thing. But for Google, obviously they're a giant fountain of cash sprinkling all over Mountain View coming from search ads. So why is, why is Google in the cloud business? Why did they decide to get into it? And what,

what's the reason that they think they can actually make it to number one or number two?

Well, you know, it's kind of interesting. Google has been in the cloud market for a lot longer, I think, than people realize. They launched App Engine, which was one of their first services for developing applications that run on the cloud, a decade ago or in 2008. And Google Apps has been around as well for a long time. So what's important is that they had those products, but there wasn't an organizational senior level commitment until about 2014 when Google

That's when they kind of said, okay, we're going to establish ourselves in the cloud market and eventually challenge the leaders. And so you could say that 2014 was kind of the rebirth, if you will, of Google Cloud. Gotcha. Okay. And for them, it's a huge business opportunity. Like you said, they rely so heavily on ads. You know, cloud represents like a legitimate opportunity.

you know revenue maker for them where some of these other projects that they have in the works like You know Waymo or you know a drone delivery service like that might be further off but you know cloud is is Something tangible. It's here. It's it are it already makes huge amounts of money for for Amazon and for Microsoft and so why not us? How did it end up though since they have been in it for so long that they tend to lag the competitors by? Sounds like a pretty significant margin

There are a lot of theories for why that's the case, but one of them was that Google did not have the enterprise DNA, the experienced salespeople and marketing people who have worked at other old guard companies as well as other cloud providers. That's something that Diane Greene made progress on fixing or addressing. She hired lots of people from VMware, companies like Oracle, a

across the spectrum of enterprise, there's a lot of institutional knowledge about how to sell to large companies now inside Google Cloud. But the actual execution now is the issue. And also, some of the people that she brought in left after she left. Right, it's a bit of a revolving door over there.

So what do you think about this timeline, though? I mean, what could they honestly do to unseat someone like a Microsoft? I mean, it sounds kind of insane to me. It's sort of like, you know, I don't know, Walmart, which I'm sure they do think in some off, you know, quiet corner being like, we got to topple Amazon. We got to be the number one, you know, online retailer. I mean, is this kind of thing realistic? And how can they go about cutting into what seems like such an insurmountable lead?

Well, I would say that without making a major acquisition, it's really, really hard to envision Thomas Kurian hitting number one or number two in the market in five years. It's almost ludicrous given current growth rates to imagine that. I mean, AWS just had its re:Invent conference. It announced a bunch of new services and really it was kind of like a demonstration of how far ahead they are. Microsoft obviously has emerged as the number two.

a lot of momentum and Microsoft also has a number of levers that it can pull to grow its cloud business like bundling cloud services into agreements with companies, long term licensing agreements with companies that also buy data center software.

Google doesn't really have those things. So it would have to be an acquisition in my opinion. Right, right. Within Google, what are the thoughts? I mean, other areas of the company, how do they feel about the cloud computing unit? Is it kind of a point of frustration that it's gotten so much investment and remains a third place, which is something Google is not really accustomed to given their dominance in almost every other Google-like area that they're a part of, maps or search or double click, those kinds of things. Right.

I think, like Kevin said, I think the switch to enterprise is something new for them. I mean, they have a massive sales team for ads, but they're not used to these huge investments and these huge sales cycles. So just culturally, it's different. We spoke to some people on the...

G Suite side, which is still a part under the Google Cloud umbrella. And a lot of them were sort of frustrated with the direction of that org where before Gmail became Gmail because it was a consumer product. And now that team is pretty much primarily focused on building for the enterprise. So you can see some frustrations in those teams where

they're building for an enterprise company in mind rather than a consumer. And that's a shift and that's caused some frustration. Now they're bringing more people in and maybe those people are happy to build for enterprise. But the people that have been there for a while are used to more of a consumer focus. - Gotcha. And you mentioned a bit at the opening part of this conversation that there's been quite a bit of reaction on Twitter from the company at all about the story.

You mentioned already that, to be very clear, we're never suggesting that Google is going to leave the cloud business, only that it could fundamentally change its structure and approach. I mean, what else kind of about the aftermath of this story coming out and the reactions to it did you find interesting and worth kind of commenting on? Well, look, I mean, Google has a track record now of killing off products, in some cases products that people liked.

with very little warning. And so this is a-- - Google Reader, RIP. - Exactly, this perception is earned. And so when our story landed, it was, I'm not surprised that people sort of jumped to that conclusion that, oh, well, Google Cloud's gonna be next. - Yet another, right, yeah, here comes Grim Reaper, Sergey, and then, not Sergey, Sundar, to kill off another thing we thought we liked. - Right, and I think that that is largely what fueled the reaction on Twitter. - Okay, and so in closing here,

if Google is going to, as it seems, double down, invest heavily, whatever it is to try to reach this mark, I mean, what are the big questions that they need to answer to prove that they can truly grow their share of the pie in cloud? - The question I have is what business problem can Google Cloud solve for Alphabet? Because if you look at the success of AWS, it really started with Amazon, which had a computing problem that it needed to solve.

It formed AWS, then it realized other companies wanted these services too. Microsoft got into the cloud business because it had to, because that was its core business and it didn't have another business that it was running at the time. So it's a little different. Are Alphabet units using Google Cloud? Are they going to use Google Cloud? Is Google Cloud part of the fabric of the computing and engineering culture at Alphabet?

If it becomes that, then I think we'll be having a different discussion in five years. Right. And they still have to prove that. Yeah. And I think a big open question, too, is like if you're not number one or two, you know, can you still be profitable? I think there's a theory out there that you need to be a top player. You need to reach a certain scale in order for, you know, this thing to be profitable. You know, if that's if that's really the case, you know, we'll find out. But yeah.

Yeah. And, you know, basically it's like, how is Google going to make money from this? They have other products coming out like Stadia, which is a gaming service that's running over the cloud. And maybe that's, you know, going to generate some revenue for them. But it's like, how is this thing going to make money? Because ultimately that's what they need is they need something. They need another revenue stream besides ads that's going to be making money for them. Yeah. All right. Well, pressure's on cloud. Thanks for joining, guys. Thanks. Thanks. Thanks.