Acquired - Episode 24: Skype

Episode Date: November 2, 2016

An acquisition so wild and crazy, they had to do it again. And again. Ben & David cover tech’s perhaps most-traded asset, Skype (which also happens to be a fantastic business). How do we even know which deal to grade? Tune in to find out… Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvanta More Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Topics covered include: Community spotlight: Slack community member Swyx’s financial data research startup Sentieo! Skype founders Niklas Zennström and Janus Friis’s meeting in the 1990’s at Swedish telecom company Tele2Zennström & Friis’s introduction to talented Estonian developers Jaan Tallinn, Ahti Heinla, and Priit Kasesalu as part of Tele2’s efforts to jump into the dot com “portal mania” Skype’s origins in the technology powering Zennström, Friis and the Estonians’ first startup endeavor together: the peer-to-peer file sharing platform KazaaThe “complicated” legal, technological and ownership situation for Kazaa and Skype Skype’s “unique” corporate culture, including a swimming pool in the board room and shots for initiating new employees The  first Skype acquisition: eBay’s 2005 deal to acquire the company for $2.6B, just two years after launchCulture clash between eBay and Skype management, and further legal drama regarding Skype technology ownership post-acquisitionThe  second Skype acquisition: eBay’s 2009 decision to spin the company out to a private investor consortium including Silver Lake and the newly-formed Andreessen Horowitz  The third (and final?) Skype acquisition: Microsoft’s $8.5B purchase of the company in 2011Skype as a “crossover” product with viable market opportunities both in consumer and enterpriseBill Gurley’s “Keys to the 10X Revenue Club” and the power of Skype’s organic customer acquisition model  Followups:  The Google iPhone… err, Pixel!   Hot Takes:  AT&T’s $85B mega-acquisition of Time Warner… making America great again, or rebuilding the T-1000?  The New York Times acquiring The Wirecutter  The Carve Out: Ben: Sam Altman’s Manifest DestinyDavid:  SOMA the Musical starring our very own Acquired listener, the brilliant and talented Jake Saper!

hang on one sec I lost my place in my notes oh wait actually can we go back definitely compare DFT Time Warner to Donald Trump I love that 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 Who got the truth? 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 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 is Sentio, S-E-N-T-I-E-O.com. They are the kind of future of wall street analysts. So they, 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, their Alexa skill. So, um, 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 tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation, and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers.

AI agents are the next phase of this. So what are AI agents? AI agents can think, learn, solve problems, and make decisions autonomously. They work on behalf of your teams, elevating their productivity and potential. And while you get incredible productivity enhancements, you also get to stay in full control. Yep. With ServiceNow, AI agents proactively solve challenges from IT to HR, customer service, software development, you name it. These agents collaborate, they learn from each other, and they continuously improve, handling the busy work across your business so that your teams can actually focus on what truly matters.

Ultimately, ServiceNow and Agentech AI is the way to deploy AI across every corner of your enterprise. They boost productivity for employees, enrich customer experiences, and make work better for everyone. Yep. So learn how you can put AI agents to work for your people by clicking the link in the show notes or going to servicenow.com slash AI dash agents. Cool. Shall we dive into the show? There's a long and rich and incredible history on this one there is uh this story has more drama than something with a lot of drama a whole lot of drama i don't know uh will and grace episode yeah sounds good bravo whatever all right so our drama filled story starts all the way back in 1999 when uh two guys nicholas zenstrom who lived in sweden and janice uh freese who lived in denmark were 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 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 everyday 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. But they had just one problem, and that was that nobody could develop software at the company, 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.

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 spend a week in Tallinn at the Skype headquarters there. Skype headquarters in Tallinn, Estonia. Beautiful city. Former Soviet bloc nation on the Baltic Sea. Yeah. And it 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 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 and and 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 um 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 saying uh advertising a 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 dollars 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 um they get a lot of interest and they end up hiring three developers jan talen uh we're going to butcher these names we we apologize. Ati Heinja 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, that that my problem was that i didn't know php like sophomore year of high school i remember that that would have been uh like 2004 or 5 and uh 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. Uh, 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 learned PHP in a weekend, uh, 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 Friis, the guy in Sweden and the guy in Denmark, they decide they want to leave Teletoo and they want to become entrepreneurs, you know, internet bubble. Um, and this is the heyday of Napster. So folks probably remember Napster. Uh, I certainly do. Um, won't comment on whether I, whether I participated in the file sharing or not.

It was great. I heard it was great. Yep. Uh, although I was definitely under 18 at the time, so whatever. 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, you know, AVI is, you know, um, and, uh, software programs, you'd be able to basically share and, you know, read pirate, uh, anything. Uh, and so they decide that they're going to call this Kazaa. Oh my God. Yeah. I, when I was doing the research, I could not believe these were like the same guys that did the Kazaa. Literally the same guys. So,

so again, but like, they're not not software developers so what are they gonna do well they call up the estonian guys so they call up the estonian guys like we're doing this we're building an appster competitor you're in they they come on board they build kazaa it's awesome um and it was indeed quite awesome yeah i remember i i was in always like 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 the heir apparent.

And Kazaa actually becomes pretty quickly the most popular application in the world. Really? Yeah. 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. Which is hilarious to make that analogy. Because thinking about Facebook's brief detour and mark zuckerberg and those guys into doing uh wire hog and the early days of facebook um and actually being a competing priority they almost didn't do facebook because they were focused on wire hog yeah p2p file sharing was the thing which sounds totally crazy now but i mean this there actually was some justification for this um i mean because so this because i launched in september 2000 and like i said super quickly becomes the most popular program on the internet and along with that massive massive legal issues you know

playing out once again just like they did with napster which i, 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. So Zenstrom and Frees, I mean, they're riding high, right? Like they have the biggest company on the internet, but they're also terrified that they're going to get arrested. And so they actually sell Kazaa on paper to some Australian businessmen with...

Yeah, that's all I was able to find. They sell it to some Australian businessmen. There's just no price or... Yeah, I don't know exactly what happened yeah lost in the sands of time if you know actually we would love to uh hear about that in um 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.

So they sell the company, but they keep the technology behind it. 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 um but this was before the cloud uh quote unquote the cloud existed um you could just download pieces of that file from everybody else every other node on the network so um 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 computers 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. Um, in, in those days, those days, you had CDNs that were not as established and well built out yet. The bandwidth issues and performance issues,

getting it from that one single server. So suffice to say, peer-to-peer was this total revolution in maybe not the highest availability. There were 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 Zennstrom and Freeze at this point have sold, quote-unquote sold Kazaa, 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. Uh, 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 you know starting points and ending points of calls that were happening you could transfer packets that contained voice you know across this peer-to-peer network instead of like you know in singular you know kind of routes between one computer and another over the internet and 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 from there would sort of establish this hybrid model where they had the, these direct peer to peer nodes were like, like we're talking about and super nodes. So, you know, established servers that were, that were always on,

always on and, and meant to handle that kind of traffic. Yep. So this is, 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 they couldn't get the dot com name yeah they couldn't get skyper.com so instead they decided to just drop the r at the end and thus skype was cleaner totally so clean incredible at that time that that skyper was not available, but Skype, a one-syllable, five-letter word was. Yeah, that would never happen today that you would go down a letter and that that domain name would be available versus a higher number of letter domain name. Pining for the old days. 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 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 early early skype employee um laurie uh tapandi 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 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 you go around all that entirely.

And I think the funniest thing to think about is in the history of networked computing, 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 um ip over voice and then you have the advent of this and where we are today and and how every office mostly has phones that are actually ip phones and now all of our voice goes over ip yeah it's kind of hilarious yeah i mean it's like this technology is so much better than the traditional phone system that now the traditional phone system runs on this technology. Right, right. Which is pretty amusing. Yeah, actually, we're sitting here in Pioneer Square Labs.

We moved into a new office a couple months ago. And all of our hardwired phones that are like our desk phones are all IP phones. 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. So like I said, super simple, free, really compelling value prop. So Skype launches officially in August 2003. On the very first day, remember this is August 2003. So like the internet is orders, multiple orders of magnitude smaller than it is today

on the very first day they get 10 000 downloads of uh uh first day they launch get 10 000 downloads of skype by the end of the first month they have a million users by the i'm so curious how they like on the first day so how do they get the word out i think that that that's a little lost to history but yeah it's not like there's an app store to be featured on the front page of. They did like super early growth hacking, emailed their 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 there were known quantities. 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 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, 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'd heard that the Kazaa guys were starting a new company. And they're like, we're going to give you some money. 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 where these original developers are. And Estonians are crazy. 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, 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, um, you know, startups, like there's lots of, uh, you know, fun and pressure and crazy times and 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 tequila, sambuca, and Tabasco sauce. I did this. You did this? This is amazing.

Yes, there's this bar right outside the old city in Talon. Yeah, this is from day one. Every Skype employee did this. No way, this is on the internet? This is on the internet, yeah. Did you see what the shot was called? 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 not a not a pool table a pool what yeah um and apparently they have to like negotiate with the building about like yeah building management like whether the floor is going to be able to support this um you know i think it was a kiddie pool but it was still like 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,

uh, so the growth just continues as we were talking about things are growing like gangbusters in June of 2005. They add video calling, um, 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 um right but that wasn't even added until two years after it launched yeah

oh five it's interesting to think like um fast forward to today where like they're they're uh um making forays into text chat i, they've had text chat all along, but trying to make that more part of the core experience started with, you know, audio, then got into video, became ubiquitous with video. And a lot of other kind of chat platforms are competing against today

that are text and photo based. Like that's not their kind of core and starting place at all. And it's funny to think about like how, much like with phones, how primitive text seems and how complicated voice and video seem. But like there was calling on cell phones before there was texting on cell phones. And you know, Skype text was the third feature of Skype. I think this is, um, 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 and from multiple acquirers, big companies are interested in buying the company. They end up deciding to sell to eBay for $2.6 billion. eBay. That was the heyday for ebay too that was uh well it was slightly post heyday

i mean this was after the a couple years after the the bubble internet bubble burst um but ebay still a very large company and uh people 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. The mind-blowing thing here with this is when we covered PayPal, the PayPal eBay acquisition, that made so much sense because people were already using PayPal as a major source of payment on eBay. And I'm very curious, like did they observe behavior where people were using Skype to do this already? Or was it literally just-

It's really hard to imagine. Like I have no idea why you would call somebody after they won an eBay auction. Yeah, like it almost, to me it seems sort of like eBay's foray 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, 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 guys sold Kazaa

and they kept the technology. Once again, they kept the technology once again they kept the technology um and so they had a i think it was a company called skype technologies that literally was just licensing it to ebay 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 was Zenstrom and Friese's company. And they kept the core peer-to-peer networking technology in that company and then licensed it to eBay and Skype. And so as we'll see in a minute, that definitely comes back to bite eBay and Skype too. 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 like very corporate as far as Silicon Valley goes has been through the.com crash and now emerged and is a very large public company. Um, so to say there was culture clash is, is an understatement. Um,

and in fact, in 2006, uh, most of the eBay management, uh, goes over to estonia um to go you know visit uh visit the skype team there and uh you know go through kind of like the roadmap and the feature development and the integration plans and um you know that doesn't doesn't go you know the skypers aren't too excited about that but then in the evening 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 and then he gets on the bar and he's he's still, you know, he's pouring shots for everybody. And he yells out what happens in Estonia stays in Estonia. And and the ends up like everybody, eBay ebay skypers they all jump in the pool

uh they're all like fully closed 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 like management basically trashing this hotel 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, you know, Skype is still growing super, super fast. Uh, we get to 2009, um, and wall streets like, so Skype is at 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, Skype itself did $185 million in revenue. But it's just not a fit within eBay.

And Wall Street 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. But there's still one problem again which is that skype doesn't own the ip and um and they're they're just licensing it back from uh from jolted from from zennstrom and freeze and so what happens um zennstrom 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. You know, there's a chance that Skype could just die. Like 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 that's not realistic, right? They're going to settle. Well, right. So another potential path that eBay and the Skype team

was furiously working on is develop an alternative technology to power Skype. But again, really hard to do that because the peer-to-peer technology is kind of the core of how this works. And then the third option is settle with them. And that's really, I think, what was going on was the founders were basically trying to,

they wanted to invest in the deal and they did end up investing in the spin out. But so they do eventually end up settling. And it's interesting what happens. So they give Jolted 10% in Skype as part of the settlement. Skype gets, so they get 10% equity stake. Skype gets the technology. So finally the actual technology becomes part of Skype, the company. Um, and, uh, and the founders also get an $85 million cash payment. But what's interesting is they then also invest $80 million into the spin out. So I guess net the, uh, cash comes out about even for them but they again then get another roughly four percent of the company so they end up with 14 of skype post spin out

ebay retains 30 and the investor group gets 50 56 of skype also interesting as part of the deal, Skype itself, at this point, Nicholas 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 Friis started RDO. No way. Yeah.

They had a third act with RDO. Wow. 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 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 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 like 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. Incredibly well-executed. I mean, I don't know if we're going to disaggregate the grades of all of these acquisitions here, but I think this definitely is making a case for getting the highest marks. They also 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. And the business does great. And then just a couple of years later in May of 2011, so actually less than two years after

the spinout happens from eBay, Microsoft shows up. And finally, we get to the end of the story, $8.5 billion acquisition. Microsoft announces in May of 2011 that they're acquiring Skype. 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 six billion dollars almost six billion dollars 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 Silver Lake, but boy, you know, Microsoft paid 32 times Skype's operating profits. Yeah. So when Microsoft acquired Skype, had 700 million users and in 2010 the full year of 2010 uh had done 860 million in revenue and 264 million in operating profit

so it's still i mean a very rich price paid by microsoft right well it's something that i think kind of gets lost in this all the ups and downs and roller coasters of this story and 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 focus on this, you know, the valuation play of like, basically eBay sold it for what they bought it for after some tumultuous years. 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, 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. bought um when microsoft bought skype they made uh 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 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.

And so, to be clear, there's no more partial ownership after this. Microsoft really, I mean, they clean out the cap table. They're the full owner. They have an entire… 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, it's 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... 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. And like there's management put in place to clean it up and get it ready for a sale. 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 the company was going to reorient to more of a functional organization under Steve. Since then, obviously, Satya has come in. Microsoft's taking a little more of a functional organization under uh yeah under uh under steve um since then obviously satya has come in microsoft's taking a little bit of a different or tremendously different direction um and but 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 whenber announced that he was going to retire. There was a lot of speculation about who the next CEO of Microsoft was going to be.

And Tony Bates was pretty at the top of the list. You know, it was Tony Bates. 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. 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. Huh. Um, it's, it's probably worth talking a little bit about what's happened at Microsoft since, uh, since the acquisition. Um, so for a long time, you know, um, let's talk about what's going on at Microsoft during the period of the

Skype years. So they had office communicatorator that was part of the Office suite when you subscribed and you entered an enterprise engagement. And you got Word, Excel, PowerPoint, Visio, the entire Microsoft Office suite. There's obviously varying levels of that that would come with Communicator, which I believe in 20... 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 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. Link is dead, is formally 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 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. In all of its glory. All of its glory. You know, enterprise social or enterprise mass communication 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.

It was interesting. Go for it. You know, I feel like we're bleeding just is it yeah it's kind of an interesting product in the early days well it's interesting go for it um you know i i feel like we're bleeding a little bit into tech themes here but um you know skype was really uh well i'm just gonna say we'll talk about it more in tech themes later um skype was really the first both business and consumer internet product, you know, and really, um, really in many ways, both foreshadowed and, uh, was the wrong instantiation of Slack, uh, to come, you know, 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. Right. 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 serve a different purpose than what Slack is or glorified IRC chat. You know, Slack is expanding to become communication and the fiber that exists between employees that's more than just chat, but that's really their core competency.

And the question is, who will own communication in enterprises going forward and what form will it be? And will these things be combined? Like, are we going to see uh you know a skype like product and a slack like product merge and are we going to see you know uh that happen you know are we going to get to see slack let me say this right slack get skypefied and skype get slackified at the same time well i think like these things are both happening um 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 product derivative Z. derivative z um it's very confusing whereas 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 there's 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 um and i think that is uh just speaking on personal preference but i think also um you know 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 i'm just like this is maybe it always comes back to ben thompson come on it's integrated versus modular and like like it just like 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 like we're about to see bundling i think and these you know we'll see this this stuff get recombined and then we'll see get rebroken out again when that's appropriate but yeah all right listeners our next sponsor is a new friend of the show huntress huntress is one of the fastest growing and most loved cybersecurity companies today. It's purpose built for small to mid-sized businesses and provides enterprise grade security with the technology, services,

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unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. 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. 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 in cash flow this thing. They were buying a product to integrate into the rest of their ecosystem and create a stronger offering across the board. This was an acquisition done where this product was being greatly sought after by both Google and Facebook. There were acquisition rumors swirling for about half the price of what they got bought by Microsoft for for months before this.

And so, you know, in a competitive environment where video streaming technology is not yet, or video chat technology is not yet commoditized, we're still two years away from Google launching Hangouts. You know, 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. But the Microsoft acquisition, 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 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 uh competing video chat and VoIP products, it doesn't feel like Skype is the sort of one and only the way that it used to be. I don't know if you feel that way too. I definitely feel that way. This is totally, totally anecdotal. But when someone says we should hop on a Skype call,

it ends up being a Google Hangout pretty often. Or in an enterprise case, often a Zoom call. Oh, yeah, or BlueJeans. Yeah, BlueJeans or Zoom. I found that Zoom actually tends to work the best out of everything. But I think this is interesting, and I want to talk about this in the context of what would have happened otherwise, because, 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 comes back to this crossover nature of Skype. Microsoft primarily acquired Skype, I think, for the enterprise side of the business, more so than the consumer side of microsoft's business um and uh and and you see that you know it was actually it was our our friend kurt dalbenny who uh when he was president of office who who led the acquisition so it was actually being done through office um at microsoft 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, uh, Facebook messenger.

So Philip Sue, I think led this project, which is like the, the overlap in people. And this is incredible. So when I, um, was doing the garage at Microsoft, Philip had started one of the most legendary projects of all time. And he was like a, you know, constant garage tinker guy and had worked on all kinds of cool stuff.

He ended up leaving to go to Facebook. Um, he's, he runs, uh, engineering in the Facebook London office now. But before that, um,

did a, uh, uh did led the project to integrate skype calling which wasn't called skype calling it was just like video video calling i remember this yeah into newsfeed but it was skype that powered messenger 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 know, they can acquire them, which, you know, didn't quite end up happening. But interesting proof of concept there. Totally. Now that we're hearing 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 U.S. corporations. We've been hearing a lot about it in the news recently 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. God, I can't even think picturing him. Sorry about that. We can cut that. So in thinking about 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, communication. Like they, they needed, uh, uh, a consumer and to boost their enterprise offering in, in video chat and calling like that. 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, um, you know, something, uh, 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. Was Microsoft willing to pay a lot more because they had all this cash overseas that they needed to put to work? Certainly at a much healthier balance sheet than Facebook, at least, at that point.

Yeah. I mean, this is... 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? It'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 quite difficult. Right. And honestly, that's one thing I'm going to keep in mind when grading this acquisition. I mean, I think that the super skeptical lens that I had on coming into today was Microsoft spent eight point five billion dollars with Skype. And seriously, like, how are they going to earn that back? Yeah. Like, you know, it's it's so 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 did I believe Microsoft was going to accelerate that.

And, you know, it's done well. Like, it's 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 uh buying treasury bills yep um great point really great point um i guess the other thing we should we should cover on before we move out of what would have happened otherwise um you know i think there was a path and a very viable path for skype to go public um and be a standalone public company again that's right that's right and then what is this uh in 2010 uh skype filed with the sec to raise 100 million yep they had actually filed to go public um filed an s1 uh and i think that was probably the plan at a spin out when when

silver lake and uh andreason and and the other folks uh invested in skype at a spin out was was that you know with some cleanup uh led by tony batesates 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 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 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's 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 the fact that you are, it is known that you are preparing to go public, you filed your S1, it's out there, that has a way of drawing buyers out of the woodwork. Another tech trend is the rise of the mega acquisition.

Yes, yes. This seemed absolutely insane at the time. I mean, 8.5, I worked around a lot of, there were a lot of cynical people in my group when I worked at Microsoft. And I, like a lot of lunch conversation was 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, putting 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 snapchat and you know like yeah they weren't going to become snapchat they're on 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 um 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 like it is exactly that and you look at you know that that what 22 billion dollar 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 looking at could Skype have become WhatsApp? Did they falter by not becoming WhatsApp? Or was it just a different era?

Yeah, I mean, A, 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, 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.

Nobody had ever heard, like there were Palm Pilots, but there were no smartphones. The global internet, most people in America didn't even, I don't know if it was most, but certainly a large portion didn't even have broadband. 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 10X Revenue Club. And it's a great post. He goes through 10 points of like, what is it that makes companies that are valued highly by public companies, valued by 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, uh, in one of his points. And, um, this slide is just amazing. Uh, the point that Gurley

is making is, um, 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. quote unquote, maybe working, but if you're paying a lot of money to acquire every user that you're, um, that you get to your product, you're going to have to pay, spend a lot of money to build that market and win that market. Skype never spent any money on customer acquisition. Uh, it was all organic. It was just pure product market fit. Um, and so the slide from the Skype pitch deck, uh, they're comparing themselves to Vonage. I don't know if you remember Vonage, you know, was the Skype competitor in the day. And Vonage advertised all over, you know, national television in the U.S. And the 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 kind of, I don't think gets 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. Um, I'm giving it a B minus. I thought I was going to be much, which acquisition are we grading? I'm grading the Microsoft acquisition. Yeah. I thought it was going to be way, way, way harsher. Like I,

um, 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, it actually is getting integrated. It takes a long time because it's a big ship to maneuver, but it's the right move to have Skype and Skype for Business and not have versions of Link and MSN Messenger

and totally deprecate Communicator. 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 and unless of course we see some kind of like 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 um bringing home at a reduced tax rate um and on top of all that i think having this consumer offering and a little bit of that consumer DNA with all the Skype teams that have built this product

leaves them fairly well positioned for whatever's about to happen in the enterprise communication market that Slack has pioneered. You know, they, uh, 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 DelBene, uh, talking about a complete and wonder list and sort of recreating the office suite and in particular outlook on mobile. Um, and I got to wonder if, you know, and Kurt led the Skype acquisition when he was at Microsoft the first time. Um, 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 uh stayed at microsoft for a little while and was in the running to perhaps become ceo but then he left and also ultimately not like a product guy right also ultimately not a product guy yeah he plays from the pe yeah he was like a turnaround guy yeah um and uh and i think the lack of any real leaders you know corporate leaders um within skype that could come in and champion that and and champion a product division for skype as part of microsoft um 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, um, you know, they're, they're running it like the, the next evolution of link, which, you know, makes a lot of sense, but it's, it's, uh, 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 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.

Their marketing copy mentions the iPhone, or at least their press release copy does. It looks really good. All the reviews are super encouraging. Someone here at PSL got one, um, earlier today. So I'm excited to like play around with it tomorrow, but like looking at the pictures, the comparing it against the iPhone seven, um, not counting the portrait mode stuff, all the flaws that I noticed in the iPhone photography over the years where it like,

it flattens things too much and it like loses some details and it doesn't have like the, the incredible high contrast and the textures like the pixels phone looks really, really good. And I'm excited to play around with it. And aside from all that, there, there's like, um,

there's a niceness to that hardware that we haven't seen in, um, non Apple devices. Yeah. In a long time. It's interesting. 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 the but it's interesting in that episode we talked about the days when samsung was just like unabashedly copying the iphone and the design wise i'm ripping this off from everybody needs to go listen to uh the most recent episode of the talk show with john gruber uh with host bent 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 Samsung always acted like Apple never existed. Like, oh, Apple, never heard of them. But look at the new phone that we invented. Swipe to unlock.

Beautiful new design that we came up with. And Google's just not treating it like that, right? Yeah. And the really interesting thing, and again, totally go listen to that podcast episode, but Ben and John point out this really great point that this is a potential change in business model for Google. Like they're selling hardware and they normally are the, you know, they just make the software and then the OEMs make the hardware. But 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. And I think this is by far the most interesting part of this announcement. So walk through this. In a world where 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, 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 worked in those native ads? 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 yeah yeah 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 um the things are good at being Google assistant. Um, maybe they just have a really high margin phone that they sell. Include the Google assistant. Yeah. Super interesting.

So go listen to that podcast. Cause 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 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 uh my senior research paper was about net neutrality 42 pages of arguing why that is the most relevant and terrifying aspect of this it just keeps coming back and i every time we get closer to you know um the the telecom and the content and a gigantic content provider being aligned like this you know it scares the crap out of me yeah but i mean i think a little bit like god i hope uh knocking on wood um 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 um wait say more about that how does that well like uh that um politically like we are moving towards uh a much more progressive society 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, 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 these forces pop up that are total reactionary conservative um you know go back in time make america great again um and like hopefully they will lose right but i love that you just compared like at&t and time wargs merger to donald trump i did that i just did that yes yeah the the slogan of this like year-long process of fcc approval of this thing is going to be make america great again yes all right we should just leave it at that yeah um let's talk about the wire cutter oh wait that um uh we'll link to this in the show notes but i um

i tweeted a link to this article the other day that uh had an awesome graphic of baby basically the baby bells getting built back together it is so interesting to look at like the 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. 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 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 wire cutter, New York times. Yeah. Great for them.

God, the wire cutter is awesome. And I don't think I've bought anything of significance that was not researched on the wire cutter, the sweet home in years. So awesome. Great. And I'm an unabashed, know fan of the new york times and

it's such 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 like to your point earlier go with the 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 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, the experimenting in VR and buying sites like the Wirecutter. And we were just watching before we were diving into the show. There's a great interview with Brian Lamb, right? With Brian Lamb talking about how he loves doing what they do with the Wirecutter because rather than writing news, he's writing something that just helps people. He's like, 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, many multiples of hours longer than anybody would ever take to write a piece. And, um, it's, 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,

um, 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, what is actually the one that you should go buy? And I think we're gonna see the continued evolution of of uh digital journalism all right with that should we do a carve out we should um

although i feel like i've been just sitting here doing carve outs for the last few minutes uh i read uh 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 And frankly, expanded the scope of the ambition significantly. Hugely, yeah. And 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 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, um, 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 eminently laudable. May the failures be colossal and the successes even more so. Yeah, totally. Um, great piece. Go read it. Uh, 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, um, 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, um, was

a huge success. So big shout out to lots of articles. You can go read about it. We'll link to some, um, uh, big shout out to Jake and, you can go read about it. We'll link to some. 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 talk about enterprise SaaS, go talk to Jake.

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