Acquired - The Top 10 Acquisitions of All-Time

Episode Date: March 17, 2020

5 years and 100+ episodes into Acquired, there’s been one question we get asked more than any other: what are the best acquisitions of all-time, and what can we learn from them? We thought it was time to formalize our answers. So here it is, the Acquired Greatest Hits album. :)We also put together an accompanying blog post, which goes into greater detail on the numbers and methodology behind out rankings. You can find it here:  https://www.acquired.fm/episodes/acquired-top-ten-the-best-acquisitions-of-all-timeFeel free to share with your friends or on social media!Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

Hey, Acquired listeners. We recorded this episode a few weeks ago in what already feels like a very different era. Obviously, we live in a whole new world now with the spread of the novel coronavirus and the global health, economic, and frankly, emotional fallout as a result. Yeah. In that vein, we have a few announcements to make. First and most importantly, we're thinking about all of you right now and in the weeks and months ahead. Many of us know people who've lost their jobs or businesses already, or even worse, whose families have been affected. And that's likely just going to grow significantly in the coming weeks. We want you all to know that Ben, myself, and the whole Acquired community are here to support each other. It's true. And related to that, we are going to make

some changes for now to both the community and the acquired show itself. As for the show, we'll share more in the days ahead. On the community side, we're changing a few aspects of our Slack to help us all do everything that we can to support each other right now. You'll find all the details in the announcement that we've pinned to the general channel. And if you haven't joined our Slack yet, now is a great time to do so. You can find a link on our website. We think it's especially important to find ways to try to be together right now, virtually, even when physically we have to be apart. Yep. One other thing, I'm a believer that when you have a voice, you should use it. And David and I are fortunate to be able to talk to all of you. So in this time, we are here to tell you to stay home.

Most of you who listen to the show are already doing this, but we figure if we can touch just one person, we can make a difference. Social distancing really works and has saved countless lives in countries across the globe. If it's not bad in your city yet, be the reason that it won't be. We promise you will look like a hero later for reacting early and reacting quickly. And of course, go pick up some takeout food from local restaurants you love. Amen on both of those. Finally, one last thing. Some of you might be wondering why, despite everything we're saying here, we still decided to release this episode right now we thought about it a lot and we decided to go ahead uh one because even with

everything going on um we think the world does still need some entertainment and most importantly to laugh um and some of the things that we say in here are pretty funny now in retrospect uh two though we also thought it was a good reminder that even as tough as things are and are likely to get right now, at some point things will return to normal again, and it will seem completely normal to debate the top 10 acquisitions of all time. So hopefully this will be a little reminder of that. Yep. Well, thank you to everyone for being on this journey with us. Stay safe and healthy. We will get through this together. And now, on to the show. Welcome to Season 6, Episode 3 of Acquired, the podcast about great technology companies

and the stories behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are tackling an episode to cover the question we get asked most. What are the best acquisitions of all time? And what can we learn from them? So today, here it is, the Acquired Top 10. Acquired Top 10. We figure we're over 100 episodes in now. It's time for Greatest Hits album. Yeah, listeners, the idea originally started as a blog post, which you can find linked at the top

of the show notes. But we wanted to do an episode with really more of a director's cut of the list and how we thought about each one, since even though there's lots of numbers involved, it's not quite an objective exercise. We reserve the right to grade as we see fit. As always. All right, a few announcements before we dive in. First, we had a great limited partner episode this week with Hamilton Helmer, and you can listen to a segment of it attached at the end of this episode.

For those who don't know Hamilton's name, he is the author of Seven Powers, which David recently described to me as the best business strategy book out there. Now, David is in good company here getting high praise from strategy master Reed Hastings at Netflix, Daniel Eck at Spotify, Peter Thiel, and many, many more. So we had to, of course, have the author on the LP show. Now, if you want to go deeper on company building topics, you can become an Acquired Limited Partner and get access to all the things that come with that by clicking the link in the show notes or going to glow.fm slash acquired and all subscriptions come with a seven day free trial. Hamilton was fantastic. Indeed. 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 Agentic 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. All right, David, how on earth are we structuring this episode? Well, instead of history and facts, we're going to replace that with notes and methodology today.

It must be two things coupled by an and in the middle. Exactly. Ampersand, not an and. Oh, is it an ampersand? Do you know they're not interchangeable? Really? Yeah. Whoa, that's shocking to me. This is like little known nerd facts. So I'm not going to get this exactly right, but it is when you are coupling two things together rather than when you are using and in the way that you sort of would in a in a sentence like compound sentence as a conjunction and whatnot yeah okay that makes sense that makes sense yeah i also it has a cousin called etc and there's a crazy you can go sort of

research the evolution of this glyph but if you think about uh the and sign the ampersand sign not the big curly one that looks like an s but sort of the smaller one that has two curly things on the side. Yeah, yeah, yeah. It's actually an ET. Oh. And so it sort of comes from the same root as et cetera does. I think we could have a whole spin-off podcast about this. I think so, too.

Origins of odd typography and linguistics. All right. Well, back to the lecture at hand. So first off, we thought about all acquisitions out there in history. We didn't necessarily limit ourselves to just the technology universe, as you will see as we go through the list here. But the big caveat is it's based on kind of what we know in our universe and our experience. So there may be ones out there that we didn't identify, that we slipped. We thought a little bit about some of the Berkshire Hathaway acquisitions.

Obviously, they are fantastic. But by some of the criteria that we look at, don't quite compare to what we have on our list. Big caveat that we may be missing some. And obviously, please write in if you have super interesting ones. And we'll have to discover them on the show in the future. Yes, please. Also the acquired slack at acquired.fm would be an awesome place because I think this one is going to be a good fodder for community discussion. Yeah. Okay. So that's caveat one. Caveat two, enough time has to have passed since the acquisition that we can make a definitive call. So we're not going to be

talking about like Visa's acquisition of Plaid here or Credit Karma or anything that just happened, you know, in the last few weeks or even in the last couple of years, we need to be able to say definitively what the outcome was here. Yep. Another thing is it must be a majority purchase. So there are many amazing pickups of minority shares in companies, better known as investments. But one listener- Naspers, Tencent comes to mind. One listener pointed out Liberty Media buying 40% of SiriusXM, which is now worth over, I think, $20 billion.

$20 billion. Yeah, that was incredible. I remember being a media investment banker, investment banking analyst on Wall Street at the time, and seeing this happen and just being like, SiriusXM, my dad listens to SiriusXM. That's a dumb idea. These guys are going to go bankrupt. And yeah, that was why I'm no longer a media investment banker. Yeah, just a world-class podcaster instead. Another one, this represents a moment in time with company market capitalizations as of the end of March 3rd, last night when we compiled a lot of this data in the midst of the U.S. Democratic primary, coronavirus, and everything

else going on in our macroeconomic world right now. And so this episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. And so this, you know, episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. So it definitely represents a moment in time, though, I think directionally correct for a while. Yeah. This episode may, we may actually be the actual music that is playing on the Titanic while deck chairs are being rearranged, but we'll see. Hopefully not. Oof. Yeah. Well, as you know, on Acquired, the way we issue a grade is using this criteria. How good of a use of capital was it for the big company to buy the small company? So of course, the way we ended up ranking our list, best we can tell, is what is the absolute dollar return in value to the big company from buying the smaller one?

So in other words, if I have a company worth a billion dollars, like acquired, and I buy David's piddly little startup... David, your little startup's worth a dollar, and I pick it up for that. And my company then later becomes worth $2 billion by integrating your product. We would look at this as an acquisition that added nearly a billion dollars of value. And that's sort of how we would rank and score. $999 million, $999 million. Look, I'm rounding up for you.

No, value added minus the acquisition price, because this is going to be important in a couple of these. It's a fair point. Last thing is in cases where, or at least the last notes and methodology that I have, in cases where the acquired company's product ended up becoming a component of a larger product within the acquired company, we thought of some sort of subjective discount of like, in our estimation, what percentage is this acquired company's product responsible for the success of the ultimate product? Yeah, you could imagine if you bought maybe like a way to make chips or maybe a programming

language or something like that. Where are you finding those examples? You might say that that's not responsible for all of the company's future value or even all of that product line's future value. Yep. All right. Now with all that out of the way, I think it's time to actually start moving through our our top 10 and dare i say our our top 15 we've got actually 16 ah adding too many to the list well we we're only going to rank the top 10 but we have some honorable mentions to start with first and most aptly given recent acquired history, we would be completely remiss if we don't mention WhatsApp on this list. And by estimation, as we talked about on the show, on the episode,

definitely one of the best acquisitions of all time. However, by our criteria, where we are looking at revenue and market cap contribution to the parent company. Oh, I don't think we said, so the way we tried to estimate market cap contribution of the acquired companies into the parent companies was via the percentage of revenue that that company is now responsible at the parent company and then what the revenue multiples of the parent company are. We totally recognize that a lot of these companies don't trade on revenue multiples. They trade on free cash flow basis, but we can't get the cost structures of the acquired companies anymore. So this is the best we could do. Yep. Again, I think it's directionally correct. And the fun part about

getting to do a show that's kind of the director's cut here is we can talk a little bit, especially in Playbook as we get into it, and hem and haw a little bit about ones that we were too generous on or not generous enough by just thinking about it as revenue contribution to the business. So by our screen, WhatsApp essentially generates zero revenue for Facebook, so they're not going to show up on the list. They were far lower than 16, if you... But definitely deserved to be mentioned. For sure. For sure. It's funny how that one's a, I don't know, six-year-old acquisition that's still in camp too soon to tell.

Yeah, serious. Well, we know that it was, as we talked about, not too soon to tell yeah serious well we know that it was a as we talked about not too soon to tell on the defensive move front right too soon to tell on the revenue front yep all right well coming in at 15th or i guess our first of our honorable mentions coming in an episode that we have not yet done yet uh but a couple of listeners, especially recently, have been suggesting in the Slack that we try it. So that is VMware being acquired by Dell EMC. First acquired by EMC and then later EMC was, of course, swallowed up by Dell. This one is super interesting. You know, EMC acquired VMware for $625 million. VMware currently is doing right under $9 billion in revenue. Now EMC acquired 80% of VMware. So VMware has always had this public stub that trades publicly of the rest of the equity. Super, super interesting though. The only reason this is so far down on the list

is because of all the complicated EMC Dell stuff. We'll get into when we do this episode someday. Dell is actually trading in the public markets at a significantly lower value than what their stake in VMware is worth. It's crazy. It's completely nuts. I think we saw this with that holding company that owned part of, what episode was that? Where there was like a nine person holding company based in-

Oh, it was Altaba. Altaba, that's right. Owning the stake in Alibaba. Yeah. Where it actually traded lower than what their percentage of Alibaba was worth. We thought that was crazy. I mean, the discount,

and again, we haven't done all the math here and know the whole corporate structure and everything. But with that caveat, the discount at which Dell is trading on the public markets simply to the 80% they own of VMware, which is also publicly traded, is astounding. Yeah. So on the one hand, it's a cheap way to pick up some access to VMware. On the other hand, the way the stock market is sort of behaving, they're putting a massive, massive discount on it for its lack of being able to escape out of Dell. Yeah.

So. Yeah. Okay. Next, we have our near and dear to our hearts, both Heartbreaker and our very first acquired episode. Pixar. Pixar. So in 2006, Disney, which at some point we got to cover Disney

on this show, you know, David? Disney bought Pixar in a landmark $7.4 billion deal. And I thought this one would be a lot higher, but we'd like to walk you through sort of how we did the math on this. And the absolute dollar return that we're looking at from a bunch of our estimates and this methodology is about $2.3 billion to Disney's market cap. And the way we sort of thought about that is Pixar is basically good for a film a year. And as much as I wanted to do this by summing all of the profits or maybe abstracting one layer up and summing all of the revenues from all their films really the right way to think about especially as we're thinking about contribution to market cap is how much revenue of disney's annual revenue are they responsible for every year yeah which is effectively one film's worth yeah now what is one

pixar film worth in revenue from its sort of worldwide gross after release? It's about a billion dollars in the success case. You look at The Incredibles 2 or Toy Story 4, each brought in right around a billion dollars. Because of our Disney episode, we know that you make about twice as much from perks and merch as you make from the film itself, or at least the division as a whole does. So we felt it was reasonable to say triple the amount of money that any given film

gets from the box office to sort of its total revenue contribution to Disney. And you get about $3 billion. And so contributing about $3 billion in revenue per year to Disney out of their close to $70 billion market cap. $70 billion revenue. Sorry, $70 billion in revenue. You get to just under $10 billion in market cap contribution from Pixar. But of course, they paid $7.4 billion for it. So when you net those two out, you get incrementally about $2.3 billion in market cap contribution

from Pixar. This, you should also note, is our lowest annualized return out of anything from the entire list with about 2% per year since this was a 10-year-old acquisition. Well, we're going to have... 14-year-old acquisition. We're going to have some more discussion in grading about this one. Okay, next on the list, another fun episode from Acquired's history, our first big independent live show, Venmo. Pick up by PayPal in 2012 for $26 million. PayPal

was recently announced doing about 300 million in annual revenue, or sorry, Venmo doing about 300 million in annual revenue within PayPal. You do the math and that nets out to market cap contribution within PayPal of about two and a half billion dollars. Not bad for buying it for 26 million. Yeah. And of course, this went through Braintree. So it was 26 million that Braintree bought it for. And then less than a year later, that was picked up for 800 million million, but sort of rolled that $26 million forward since that is the isolated number for Venmo alone. Now, David, I will say, still not profitable. Indeed. But, you know, not a part of our analysis here. Profits? What are you talking about? We don't care about revenue here. Unacquired. No.

But they do, it is worth noting that they did give guidance that they thought this, by the end of the year, Venmo would be a profitable unit. So that's an interesting, interesting update to our Venmo episode. Yep. Next we have Bungie, near and dear to my heart, my heart, played so many, so many sessions of Halo over the years. Microsoft's pick up a Bungie in the year 2000 for an estimated $30 million. Now, this one was really interesting to think about because the Halo franchise in total has generated about $5 billion in revenue over the life of the franchise. And of course, Microsoft got that IP as part of the acquisition. But you also got to think about how many Xboxes did Halo sell? And no Halo, what would have happened to the Xbox franchise? The Xbox franchise

generates about $11 billion in annual revenue for Microsoft. We estimated current market cap contribution of that $30 million Halo, Bungie Halo pickup in 2000 to be about $8 billion currently. It's funny, like this is an honorable mention that doesn't make our top 10 list, but like, oh my God, getting that thing for $30 million, even with all the work they poured into it afterward, was a frigging steal in order to bootstrap the Xbox business. Totally, totally. I mean, it was the killer app. Yep.

Speaking of killer apps. Yeah. PA Semi. So long, long time listeners of the show will know that uh we did an episode early on with apple's 2008 purchase of pa semi which at the time was working on very advanced um arm infrastructures yeah yeah and developing ip for um new chips that they didn't manufacture they like fabulous semiconductor yep many many firms these days outsource it. But it seemed not contrarian, but a little odd for Apple to be buying this sort of like researchy CPU, you know, company.

This was right after the first iPhone had come out. Yep. People were confused. And they paid a bunch of money too. I mean, it was $278 million. So this isn't like some of our other ones that were like tiny little pickups. And Apple's market cap back then, let's just say they weren't a trillion plus dollar company. And so this is a decent size bet for them.

But as we know today, the iPhone being as differentiated and creating as magical of an experience as it does is in many ways attributable to apple making their own silicon which of course all started with pa semi you also look at apple's innovations in silicon elsewhere so in their wearables division being able to do the w series chips for you know the the airpods and the watch the what is the there's the W chips and then there's another one. There's like an S series of chips, I think. Yeah. Even actually, I think the Touch Bar has its own ARM CPU in it, which probably is attributable to PSMI. And of course, all the rumors are, these have been rumors for years, but the rumors are this year, maybe, or next year,

we're going to see ARM- and pi semi technology based macbooks yep so this is this is like the hardest thing to figure out and this is probably the most fun thing to sort of debate on this show or at least in in this format how do you account for something like this that is necessary but not sufficient to create the product line that they have today that if you look at the revenue contribution of the iphone the ipad and the wearables division which are all sort of made possible by apple making their own silicon it's 188 billion dollars a year in revenue so necessary but not sufficient so what do you do well Well, David and I took a little bit of a hack job of estimates here. But basically what we said is, look, you can probably say 25% of iPhone

revenue is attributable to making their own silicon. Yep. iPhone and wearables and iPad, like that's 25% of the differentiation is from the chips. 5%, then, we further discounted that and said 5% of making their own silicon is attributable to their acquisition of PA Semi. So what that basically says is, well, let's take all that revenue and go grab 1% of it. And I promise we didn't come up with that 1% number. We first came up with this 25% and then that 5%. We love false precision here. It is false precision at its finest. But that gives us the funniest metric of all time that

acquired should probably trademark, the discount adjusted current market cap contribution. Eat that community justice, Evita. Yeah. And we look at that as contributing about $11 billion to Apple's market cap, which of course is a nice 36% annualized return, absolute dollar return of over $11 billion, but somehow still not making our list. Just missing the top 10. My God, is this a gilded set of acquisitions that we've got in the top 10. All right. Should we move into in the top 10? All right.

Should we move into the official top 10? Yes. Okay. Coming in at number 10, what we and I have sometimes referred to on the show as the best media acquisition of all time. Turns out it's not. There's going to be one that's above it coming later in the list.

But Disney's 2009 acquisition of Marvel. This was just brilliant. Who would buy some defunct comic book company that's IP is already basically leased out to everyone and cut up 11 ways for 10 years. Totally. Well, this we're going to, I'm going to talk more about this in playbook, but you know, Marvel was, I can't remember exactly, but sort of like going on a, you know, 70, 80 year old company. It was very old company at this point, been around forever. Of course, you know, Marvel comics, one of the pioneers of the comic industry, but Marvel studios and Iron Man, the first film out of it had only launched a year earlier. So it was actually pretty early

in this part of the market for Marvel. So Disney, of course, paid $4.2 billion to acquire all of Marvel in 2009. Which of course is $3 billion less than Pixar. Yes, $3 billion less than Pixar. So for Marvel, we did essentially the same thing as we did with Pixar. But you'll note with Marvel, as opposed to Pixar, where they're cranking out one feature length film per year. With Marvel, they're cranking out multiple feature length films. They're cranking out TV series. They're cranking out action figures. They're doing comic books, of course, still.

All sorts of stuff. So we took their revenue since the acquisition. We did that on an annualized basis. We applied the same 2x multiple for parks and merch that would apply to the content revenue that they're creating yep and that that revenue that you mentioned that that at the beginning there that we are only taking their uh films revenue that's what we had access to yep yep so you do that you get between six to seven billion dollars of annual revenue contribution from marvel to disney out of 70 billion dollars in total revenue. Which is fascinating. So it's basically more than twice as much revenue per year from Marvel than it is from

Pixar. I mean, 10% of Disney's revenue by this estimation coming from Marvel. It's crazy. Crazy. We may not be correct on that, but like, it seems reasonable. Yeah. So if you look at, you know, I just want to do this comparison to Pixar. They're making twice, over twice as much money per year. They paid almost half as much for it originally, and they did it three years later. And so it's sort of this like every lever that you have the ability to sort of pull and make this one a better acquisition, they did so if you just look at the stats we have an absolute dollar return

market cap contribution minus the price they paid for the acquisition of over 16 billion dollars on marvel incredible fantastic not quite the incredibles but even better than the incredibles also coming in right around 16 billion dollars of an absolute dollar return is Google's acquisition of three companies, WhereTo, Keyhole, and ZipDash. The Google Maps suite. Yes, around 2004 to create the Google Maps that we know of today. Now, estimates are that Google Maps does about $3 billion in revenue. This mostly comes from the sponsored products that you see that are basically the ad units that are shown on Maps.

And the Maps API revenue, I believe. That's right. So bought for $70 billion. $70 million. Sorry, bought. Gosh, the orders of magnitude here. This one's a hard one to do because you just keep forgetting commas everywhere and sets of three zeros all at the same time. Bought for $70 million, doing about about 3 billion in revenue 16 years later.

So we looked at the current market cap contribution of about $16 billion to Google's near trillion dollar market cap. That kind of pencils. I mean, if you think about it, like, is it- I can maybe even make an argument it should be a little higher. Than 1.6% of the value of the company? Totally. Totally.

So when you look at, similar to Marvel, you look at the absolute dollar return. It was about $16 billion. The funny thing is, if you compare another, there's another number we sort of have here that's interesting to compare, the ROI multiple. So what's the return on the invested capital there? With Marvel, it was five. With Google your family and pays the bills. And at the end of the day, $16 billion is $16 billion, whether it's a 240X ROIC or a 5X ROIC, it's still $16 billion in incremental dollars. Everything else is a vanity metric. And speaking of those vanity metrics,

we are going to publish this whole table. So if you click the link in the show notes, you can go check out with probably some false precision, all the numbers that we came up with across all of these different measures. Well, next on our list, next highest on our list. And what are we at? That was number nine.

So we're here at eight. The actual best media acquisition of all time. We're going right back to our friends at Disney, actually ABC, Capital Cities, the acquisition of ESPN, 1984. Is this the oldest? This is the oldest acquisition on our list. Acquisition price of just under $200 million.

ESPN currently is contributing over $10 billion in revenue to Disney through, obviously, advertising revenue and subscription fees, and including ESPN Plus in there now, too. Just incredible. This, even though

this acquisition happened in 1984, generated, by our estimation, over 30 billion dollars in absolute dollar returns 166 roi multiple we also calculated the annualized return to just try and adjust for time here a little bit 15 annualized return since 1984 that is just incredible that is like Berkshire Hathaway levels of return by an acquisition within a company. Yep. Yeah. If you found a financial advisor who could figure out how to guarantee you a 15% annualized return for, what is this? For 35 years? I was born in 1984 and I'm 35. There you go. Yeah. That would be, I'd happily pay whatever they need for the cash management fees on that absolutely all right moving on to number seven the mafia ebay's acquisition of paypal in 2002 and david as you say the the mafia it is uh is not just for all the future value that would be

created by all those founders starting every company from Tesla to Yelp to LinkedIn to you name it. Wild group. But actually, the value of PayPal growing inside eBay was frigging crazy. So the way that we did this one, because eBay actually did spin PayPal out in full. In 2015. In 2000, I think, 15, is that right? Yeah. I think it was 15. 15, 16, somewhere in there. This is the only one where our sort of-

We have exact numbers. We do have exact numbers, and we know an exact annualized return, and we're not pegging that to the market cap today, but rather the actual spin out. So when they did spin it out, the market cap of the independent paypal entity was 47 billion dollars now in 2002 they bought the company for 1.5 billion dollars so no analysis needed that was 45.6 billion dollars of an absolute dollar return for eBay shareholders, a 28% annualized return. Just an unbelievable job of picking something up relatively on the cheap, both doing a nice job integrating it with PayPal to create new, dare I say, synergy value.

And of course, betting on a trend that was internet payments and being spot spot on there. Yeah. Now we're going to get into start to get into some of the real fun. So I mean, not that all these aren't fun. The next one, this acquisition was so incredible that the company that bought it, bought this little company back in 2005 has now fully changed its name. Even though this was a large public company buying tiny, tiny little company, the company is now called the name of the little company. We're of course talking about Priceline's acquisition of booking.com and Active Hotels, as we discussed about on the

episode with Drew. It was those two companies together, even though booking was the larger at the time and is still the larger. $135 million in 2005. Booking.com, as best as we can tell, separating out what the core booking and active hotels revenue is within now, it's booking holdings, right? Booking holdings. It is no longer the Priceline Group,

but booking holdings. Booking holdings is over $10 billion in annual revenue contribution. The company does about $15 billion in revenue. At least $10.8 billion comes from what they call the agency revenue, which is basically Booking's original business model. There's even more. Yeah, there's even more in there.

There's sort of other segments of their revenue that Booking also contributes to, but we were conservative in our analysis here and basically said, let's just call Booking.com's contribution here the agency revenue. So responsible for over two-thirds of Booking Holdings revenue now, and as David mentioned, $10 billion. So that translates to an absolute return of just under $50 billion. Here's the crazy thing. We were talking about annualized return with ESPN a minute ago, 35 years of 15% annualized return. Here we're talking about 15 years, so not 35. They got a long way to go to get to 35. You know what the annualized return on this one is? I'm not looking at my screen, so I don't know.

48% annualized return compounded for 15 years. Man. Insane. That is a good acquisition. The other fun one about this is I think all the rest of them that we're going to mention come up very, very commonly in conversations where people say, what's the best acquisition of all time?

Actually, I think number two is going to be a surprise for people. It was a surprise for me. Okay, fair. But yeah, with booking, it's one that I think people don't realize. Don't appreciate. Yeah. You know, the booking is, I haven't checked the latest market caps, but I remember back, you know, when we did the episode booking holdings, you know, is worth

roughly by market cap, several multiples of Airbnb, several multiples of Expedia. I mean, Expedia is a $13 billion company right now, market cap. And what's booking? Booking is 70. Now, of course, we're doing this in the middle of the coronavirus, you know, outbreak. So the bookings, all travel companies, you know, market caps have been taking a big hit. But still, I don't think particularly people in the Seattle area don't appreciate how much larger booking is than than expedia yeah absolutely um this was uh you know i mean again like what happened says it all like the company is now called booking holdings very true okay the next one number five next is next how come i get

both of these ones so number five apple's 1997 aqu acqui-hire of Steve Jobs. Greatest acqui-hire of all time. And all of the incredible technology that comes from Next. That's the thing. It's not just Steve Jobs with Next. Right. So this one had to be in there, right? Because Apple is a $1.4 trillion company now that certainly would not be but for the next

acquisition. So this is an another situation where we have necessary but not sufficient so apple makes this move get steve jobs back they also get the sort of new and blooming object-oriented programming yeah uh the objective c language and runtime uh next step which turns into mac os 10 which then gets refactored into iphone os which then became ios which then forked to ipad os which then forked to watch os like so for as much as we wanted to attribute value to the the hardware from pa semi the software in all of apple's you know everything that is Apple today. Comes from Next. Yeah, it is not.

Don't forget. Gershwin and Copeland and all these machinations of. Oh, man. Machinations? I don't think I know that word. Of Mac OS 9. Machinations. Machinations.

Progressing through. It was, nope, new thing based on Next Step. Don't forget, they also got the cube. They also got the cube. Also got the cube. So, of the cube. Also got the cube. So of course, how do we value this one? So what we basically said, so first of all, the acquisition price, $429 million. Again, big freaking pickup for Apple. You think about 1997, that much money for them. Huge bet. Huge bet. The funny thing is, the company wouldn't do

literally any of the revenue of the $260 billion in revenue that they do today. Zero. Without that acquisition. But of course... Look at all their business lines. All the iOS business lines. Yep. iPhone, iPad wearables, none of that. Mac, none of that. Services, none of that. Yep. Everything. Yep. Everything. Yep. Yeah. So then how do we do the math here? So what we basically just kind of like squinted at is we said that the discount for future dependency.

So this discount that we apply where we're basically saying what percentage of the product that ships today came from outside the assets acquired. We're going to say it's about 95% that necessary, but far, far, far 95% from sufficient. And so we take a 95% discount on Apple's current market cap today. Here's the crazy thing. Oh, what's 5% of Apple's market cap? Some tiny number, 63 billion. Providing us with an absolute dollar return of 62 and.5 billion that are very squinty math here, but honestly, it's hard to come up with something better would yield for Apple buying next. Yeah. Okay. Number four, just a hair's width outside of our top three, but absolutely just this is well we'll get to we'll reveal what it is this is going to win the

prize for uh roi multiple here by a long long shot we are talking about google's 2005 acquisition of android for 50 million dollars which one of the one of the things this points to is how you can get these gigantic multiples from early stage investing. Yeah. I mean, when, when you say this one wins the award for ROI multiple, what I really hear is must've been a really cheap pickup price. Yeah, exactly. Well, exactly. Exactly. But again, like you can't eat ROI multiple. So that's why this is number four and not a number three, two, or one. But still a monster. Okay. Android, $50 million to buy this thing. We tried to think about how do you account for what Android's

current revenue contribution is to Google. And of course, Google is not helpful to us at all in this segment that when they report Android revenue, they report the search revenue that is generated from people searching on Android phones, which is like not really how you'd want to do this. You really want to think about like... Yeah, that's Google search revenue. Yeah, those Google searches were going to happen somewhere anyway, whether they had the Android or not. So how should we think about this? Well, there's one piece of the revenue that is actually the much, much easier part, which is Google Play Store revenue. That is fully attributable to

Android. That was going to happen. There's no sharing of that. It's like no Android, no Google Play Store. Yep, exactly. The other component, which is a little bit harder to squint at, is what we call traffic acquisition costs. So it is reported that Google currently pays Apple about $9 billion a year in order to keep Google as the default search engine on the iPhone. That is an insane, insane number in their cost structure. And so one big thing that we sort of determined on the episode with Android, in addition to the Play Store, how should you think about the value of Google creating Android in-house? You should think about it as money they don't have to pay anyone else for that traffic. Because if they own the operating system, then they can for free keep Google as the default search engine.

And so the way that we went about that is we compared the amount of money that is spent on the iPhone through the App Store to the amount of money that is... Sort of purchase intent. Exactly. That would be monetizable search traffic. Exactly. To the amount of money that is spent Store versus the Play Store, which kind of gives us a sense of there's, if you think about gross purchase intent or basically the value of the traffic on iPhones,

it's about twice as much as the value of the traffic on Android phones. And so that's sort of how we backed into, let's add another $4.5 billion in quote revenue per year to Google for owning Android, because it's basically cost they don't have to pay to to anyone else yeah so here's the surprising thing to me though the total number that we come up with revenue contribution for android is uh right around 13 billion right uh

yep 13 and a half 13 and a half billion so four and a half that were of that word attributing by our you know flawed methodology here flawed in some, we don't know why, to search. I realize this. There's so much revenue in the Play Store. It's so big now, even though the iOS App Store monetizes more and is worth more. Google is going to do, by estimates,

Google did about just under $30 billion in total gross merchandise value in the Play Store last year in 2019. They take a 30% cut of that. We're slightly under $10 billion in super high margin revenue to Google. Basically, infinite revenue, infinite margin revenue to Google. That's incredible. Yep. Yep. Yeah. Listeners, we'd love to hear your thoughts if you have a better way of thinking about google sort of revenue contribution we fully recognize that this this cost saving is different than revenue we also fully recognize that taking a ratio of the app store's earnings and sort of using that as a ratio of traffic acquisition costs we may be

vastly underestimating search value here. It's true. And of course, the $9 billion number that they pay to Apple is not a Google disclosed number. That is a reported number. And so, yeah, we'd love to have more conversation around that. So we net out all this when your current market cap contribution taking out the $50 million acquisition price of $77.68 billion in absolute return on this acquisition of Android, which represents an ROI multiple of 1,555X compared to a 5X for Marvel. And a nice little annualized return of 63%. 63% over 15 years. Now, of course, that's not hard cash like booking, which is the 48% annualized of like, yep, that's like, you can take that to the bank. But still,

got to rank this one super high. All right. Well, our Google streak continues. It's going to continue for a little while here. Number three, Google's 2006 acquisition of YouTube, which I think the Acquired podcast called this a C when they did that episode. Those guys are morons. Yeah, they definitely need to revisit this one. Definitely need to revisit this one. Consider this a primer on our revisit.

So big acquisition price. I mean, this is a $1.65 billion acquisition. And in 2006... For a year old company. For a year old company that was basically incubated inside Sequoia. Yeah. So... Actually is, I believe, still to this day, the only publicly available Sequoia investment memo out there.

Because, of course, it was part of a discovery in the YouTube Viacom lawsuit. Yep. We'll link that in the show notes if you're listening to this show and you find this interesting you will like love geeking out over this investment memo it's awesome i think this was real off's first investment at sequoia i mean it's really it's like remarkably cogent for someone's first successful investment memo yeah you know it's better to be lucky than good. He's good too. So Google finally did us a favor and broke out YouTube and its most recent earnings, a fast growing revenue segment of $15 billion a year. I've got lots of comments on this, but I'm going to hold it for our playbook section. We're going to do a little more analysis,

but you look at the acquisition price of 1..65 billion, now doing $15 billion in revenue. Google total is doing about $160 billion in revenue. So that comes to a market cap contribution to Google's trillion dollars of $86 billion in market cap contribution for YouTube, which of course then is an $84 billion absolute return on Google's cash. We're just getting into silly numbers at this point. Yeah. If you can get a 52x ROI multiple on a billion and a half dollar investment, you're doing pretty good.

Doing pretty good. There's lots more I want to say here. We'll hold this one for the end of the show. But all right, number two, I was shocked by this. I'm just shocked. We have not covered this as an episode. I mean, listeners, you're listening along. What would you think number two is going to be? This is not what you think it's going to be. And you probably know what number one is going to be based on the number of times we reference it. So like, what is two? Yeah, what is two? Okay, so big caveat here. We haven't done this episode.

We need to dig in more. This is, this episode is like coming right up to the top of the list now of like, we need to do the work here. Another Google acquisition. And let's pause. It's another Google acquisition. So listeners take, take five seconds and think about like, what else did Google buy? 2008. That's when it happened. Double click. Man, I man i was like ben when you first put this on like the first draft of our list and i was like double click come on no like that's not like yeah i mean there's revenue and stuff in there but like a bunch of that was already in google and they did other stuff and so we almost took it off the list you know and then we went we actually like dug in a little bit and we're like wow no double click contributes the former double click assets now contribute a massive amount of revenue to google you know google ad manager uh that business line in the

business unit that it's within which is almost all double click and ad mob they acquired ad mob uh in when was that, 2012? Somewhere in there for $750 million. So you put those two together, that's about $22 billion of revenue within Google today. Now, obviously, that's not search revenue. That's like display revenue. Right. But that's revenue. Listeners, the way to think about this is of the sort of two big Google ad segments,

and we're excluding YouTube here, and there's the stuff they own. So there's search engine ads that come up, and that used to be called AdWords. It may still actually be called AdWords. I think they just changed it to Google Ads. Google Ads. Okay. And that's the larger segment.

And then there's this other still very large segment. That's the stuff they don't own. So the ads that they're showing on other people's websites which used to be called adsense yeah and that predates the the double click acquisition and that's why initially i thought like oh yeah adsense been around forever that wasn't double click yeah but adsense that product line is actually quite small these days almost all of what is in what do they call it now it's like like Google network ads or something like Google network advertising, maybe something like that. Almost all of it is double click and ad mob. It's wild. And so of course this requires a much more nuanced understanding of sort of the

digital ad serving ecosystem and, you know, understanding double click for publishers and understanding what's an ad network versus, you know, double clicks. Is it a DSP? Well, there's like, yeah, there's a double click for publishers and then there's double click for advertisers. And that's, you know, I believe again, we're not ad tech experts, but I believe that's like the standard, you know, rails that all kind of third party ad tech runs on these days. Yep. I know, I know every publisher for sure still has DFP as the sort of main container that all the, all the ad networks plug into on their site. So the TLDR on this one is they created an unbelievable amount of value. It's still massively value created for Google and, and we're excited to do a, an episode on it.

Yeah. So they bought it for $3.1 billion in 2008. Current revenue contribution of, of this segment within Google is just a hair under $22 billion. Multiply that out by the market cap and you get $126 billion in market cap contribution. Net out the acquisition price, $123 billion of value creation.

You know, anyone should be trepidatious spending $3 billion, but when you have any sort of uh guess that 103 billion could pop out the other end or i guess 126 billion could pop out the other end yeah have a little more faith all right well number one on our list no surprises here the king the king the goat so after three Googles in a row, we have Facebook buying Instagram. In 2012, they bought it for a billion dollars. Recent estimates say that there's about $20 billion in revenue that comes from advertisers going into the very same portal on Facebook that they use to buy Facebook ads

and instead buying Instagram ads. Or in addition, probably most often. Yep. So Facebook's current market cap, around $540 billion. They do about $70 billion in revenue. So 20 of this 70 comes from Instagram. And that's nuts. Two sevenths of Facebook's revenue is Instagram. Yep. So not ridiculous to say that they contribute somewhere around 150 billion to Facebook's current market cap, which, you know, let's just round and say somewhere around $150 billion

in absolute value return. Nuts. And you think about how recent that was to 2012, that puts it at an 88% annualized return for Facebook. So on our whole list, this is the highest annualized return. Now only eight years, but still eight years of annualized return of 88%. Wow. 88% compounded annualized return. It's funny. There's nothing more to say. These percentages really force you to understand for folks who aren't used to looking at like IRRs

or, you know, annualized returns, like you'll notice like even the best one isn't 100%. And so it really forces you to sort of like think exponentially, which humans are bad at. Yeah. Well, it's, you know, there's the Warren Buffett and Charlie Munger re-quote of, I believe it was Albert Einstein that said, compounding interest is the eighth wonder of the world. If you can compound something at 88% per year for even just eight years, you get the greatest acquisition of all time. It's true. So we're going to do a little bit of a modified version here of acquisition category. So David, how are you thinking about this?

So I went through our top 10. It's only the top 10 that qualify. And I categorized for me, this may be slightly different than what we did on the episodes of the show, maybe different than what you think. I categorized each real quick. So Instagram as a business line, double click business line, YouTube business line, Android product, next people plus technology, booking.com business line, PayPal business line, ESPN business line, the Google Maps suite, I Plus Technology, Booking.com Business Line, PayPal Business Line, ESPN Business Line, the Google Maps suite, I said product, and then Marvel Business Line. So of that, we have two products, one People Plus Technology and all the other seven business lines for me. Wow.

You agree? Yeah. I would not change a single categorization there. Did you call Instagram a product or did you call it a business line? I called it a business line. That's maybe somewhat debatable. It was not generating revenue when they bought it. I think it's a product that plugs into Facebook's existing business line. Yeah. That's debatable on that one. I could see that. That kind of straddles the line. Yeah. Because we define business line as like it is a, if not sustainable, then having a path to sustainability business on its own. Right.

Yeah. So like booking.com, of course. ESPN, of course. Yeah. YouTube, of course. Was YouTube generating ad revenue when they sold? I guess that's not that important. But it's pretty same.

It's in the same way that Instagram would have implemented some sort of ad product. Would have, yeah. have it's pretty sad like it's in the same way that instagram would have implemented some sort of product yeah um wouldn't have been successful as successful because it wouldn't have been aggregated on the back end with all of either google's existing advertisers or facebook's existing advertisers in either of those i think like android is definitely a product because you know android got integrated into so much what are they gonna windows style sell licenses right right like it wouldn't have worked there's no way android's business model could have existed except within google and same with the suite of google maps acquisitions like that was not where to was not going to build uh they were building google maps so they weren't going to build the business of google maps right

it's funny like i i so i generally agree with your thesis that the dominant tech theme here is, uh, is business line acquisitions. And if you had asked me a hundred episodes ago or 110, you know, when we started the show, like what, what do you think your takeaways might be? And I think we had this categorization thing within the first few episodes. I don't think I would have told you that the most successful ones would be the business line yeah what kind of makes me think it's kind of a uh justification for venture capital for me right like because i know you could maybe make an argument that what these some of these super super successful acquisitions that our business lines are is just like oh well the parent company the bottom of the kind of like a venture capitalist like they funded google funded youtube for a long time and youtube turned out to be an amazing business and it's a separate

kind of standalone business you can say the same thing about instagram i think probably mzuck and facebook you know we'll talk about uh in just a sec about acquisition philosophies of different companies i think that's kind of how they think about things like you know like the facebook quote-unquote style acquisition of we're gonna buy you and we're gonna leave you alone well it's kind of like what it would be like the Facebook quote unquote style acquisition of we're going to buy you and we're going to leave you alone. Well, it's kind of like what it would be like if you're operating as a standalone venture backed company. Yep. It's a great point. You know, it's funny as you talk about the companies that show up here, and then we're drifting into playbook and themes here a little bit. Notably missing is Amazon. Yeah.

Nowhere in the top 15. I mean, you've got Microsoft, Google, Facebook, Apple. Yep. You don't have Amazon. Yeah. Well, okay, let's talk about this. So the other thing I wanted to talk about in category section is use this to talk about the acquirers. Let's talk about each of these. So maybe can we start with Google? Google has four of the top 10. Yeah. It's amazing. Like, I mean,

people know, like I think, yeah, Google's like, you know, well, like this is Google is the best M and a track record in history, right?

Like four of the top 10 and three of the top four. That's pretty good. And they were in a bidding war for that for instagram so that's right that's right could have been four or four it could have been it could have been four of the top four and five of the top ten you know if you think about google you know maybe eric schmidt i can see this but like larry and sergey you don't like they don't scream like m&a genius to to me yeah i mean I was tempted to blame it on the sort of M&A spree that they were on in the sort of like late 2000s, early 2010s.

You get enough shots on goal, you're going to hit some winners? Yeah, but like those ended up being the sort of like $20 to $100 million pickups that they were doing. It was a bunch of YC companies, it was a bunch of Google alums. Those were acquihires. They were just buying employees.

Yeah, like these were bets. I mean, if you look at 1.65 billion, you look at 3 billion, these are big strategic bets that they were making out of the company in what, 2005 and 2006? It's not like, I mean, how much was Google worth in 2006? 1.6 billion was very real money I remember my investment banking interview uh one of my interviews uh was the Google YouTube acquisition had just happened and the question was what do you think about this and I remember saying like oh man they spent so much money this seems crazy yeah well here okay here's my sort of thesis on it is when you say like Larry and Sergey don't strike me as M&A geniuses. Obviously, Eric Schmidt was very active in the company at this point. Was he CEO? He was CEO during all of these acquisitions, I think.

So, you know, very seasoned executive there, technology executive. But the way I sort of think about Google is at their founding, they were tech geniuses. They figured out something very disruptive but didn't really realize it they didn't know what to use it for this sort of like as doug leone said it took them a couple years to figure out they knew they had something yeah but exactly what it was they didn't know and they kind of fell backward into a business model i mean they kind of like realized that oh my gosh this thing that we're doing by having the fastest and most accurate search results with the lowest cost structure because of our distributed compute infrastructure, like, oh, my God, we can do that thing that Overture is doing and have incredibly high margin, incredibly defensible revenue. Yeah. Oh, OK.

I guess we'll start doing that. They didn't invent that. But then I think the thing that they did realize was the power of that. And then, like, I think it's a billions quote that Bobby Axelrod says, when you have an advantage, press it. Yeah. I think they became very good at figuring out, hey, how do we leverage our existing strategic position to just widen the moat and create more business lines or create things that just add tremendous high margin revenue to our existing business lines. Here's something interesting though. All of these fantastic acquisitions happened 10 to 15 years ago for Google. Now you could argue, as we said at the top of the show, we're not going to include recent acquisitions in this because it's too early to

tell. So maybe Google has made some recent acquisitions that are going to turn into this, but I kind of don't think so. I think two things happened to Google, maybe three things in the period after when they were making these incredible acquisitions. One, Facebook showed up and started making some of these acquisitions. So like, whereas before Google was kind of the only scale tech acquirer, now all of a sudden Facebook's on the scene. And there's tons of alumni at Facebook from Google. I mean, the whole Facebook ads team was the original Google ads team. Cheryl moving over. Yep.

So Facebook gets Instagram. Facebook gets WhatsApp. You know, Facebook gets Oculus, which obviously, of course, is not on this list. But like, you know, it was a big bet to make. You know, you should be making these bets. It's like, takeaway here. Playbook, you know, News you should be making these bets it's like takeaway here playbook you know newsflash make these bets two though maybe in response to that google starts shifting to this strategy of like oh we're gonna build stuff in house with like google x and whatnot and

i just don't think that works as well that's a good point um you know i see sort of the rationale but like the incentives are wrong you You know, if you're an entrepreneur and you're going to build a company, you're like going to be all in and aligned. If you're making a Google salary and you're building a company, it's not, it doesn't work the same way. We sit here the day after Waymo finally took external capital. Right, right. I mean, maybe Waymo will become this, but like, anyway, that's two. And then I think three related to both of these was the leadership change at Google. You know, Eric Schmidt steps back,

Larry Page becomes CEO. Kind of what I was saying, Larry and Sergey, both like incredible entrepreneurs, incredibly, you know, stewardship of Google and everything, but this isn't their MO, you know, making these acquisitions. Yeah. Yeah. Google X is in very, I mean, I don't know as much lore around the founding of Google X, but it does strike me as trying to recreate the conditions upon which Larry and Sergey invented Google search. Yeah. I'm sure there's many business school professors who studied this professionally, but it strikes me that you can kind of do that once. And then when you hit your tipping point and what you need to do is grow and defend M&A is a much more high likelihood of hit rate strategy than trying to replicate those initial conditions. Which brings us to, I think the next company to talk

about, which is Facebook. Yep. Yeah. So I thought coming into this, that my takeaway would be that Facebook is the greatest acquirer of all time. Well, they got number one. Yeah. Locked down. And ultimately, the value from number one over like as it continues forward in the future may actually prove that nothing else matters.

Power law. Number one beats two through 10 combined. Yep. Maybe. Maybe. But at the end of the day, there's two very different, like holding my comments about online advertising, there's two very different modalities of sort of this traffic. There's intent-based and then non-intent-based, or I don't know what you call Facebook, but

messing around on your free time. Yeah, yeah. Yeah. They both serve an incredibly different and incredibly powerful purpose, And they haven't really stepped on each other yet. Like they've tried in different ways. Google Plus tried and actually Facebook hasn't launched a search engine, even though they index most of the web, which is kind of interesting. I do think both of those will continue as independent, enduring juggernauts because they serve very different purposes for the types of advertising that they serve people

in the moment in which they catch them yep yep it's interesting to think about like you know facebook is we were just talking about google in this era of this incredible era and then sort of seeding that definitely not intentionally to facebook but facebook is also kind of like they haven't made acquisitions like this in quite a while. I wonder if that's because the venture capital industry has been so robust over the past few years. Like where it used to be like, oh, yeah, Facebook wants to buy you for a billion dollars, a couple billion dollars, 20 billion dollars. We have a small fund.

That sounds great to us. Now you can raise money at $10 billion valuation. Yeah, that's a great point. Yeah. Interesting. One of my big tech themes is like, oh my gosh, these have all happened largely in the last 20 to 25 years. And based on your comment there, it may be the case that there was a 20 to 25 year window where the best M&A of all

time existed. And if this ability to both stay private longer and raise huge amounts of capital, and there are people with huge funds to support you to do that, or as you said, robust venture capital infrastructure, like maybe we don't see this kind of thing as much anymore. Because if YouTube was started five years ago, actually what would happen is it wouldn't be a competitor to facebook facebook at this point and it would be a large independent company i mean tiktok is the sort of what would have happened otherwise if if uh youtube was 10 years well now that's so it's i was gonna say that it's both of what would have happened it's it's too it's a counterfactual and a counterfactual counterfactual is in that they bought musically musically is too early to tell if that's going to make the list but it could there's a world in which it could and that's a recent acquisition super i i'm it makes me very glad that we broadened acquired from just acquisitions to you know first ipos now just great technology companies because yeah this the era of these type of acquisitions may be

it's never gonna be over but like that that fertile window from, you know, 2005 to 2012, I don't think it's going to come again. Yeah. Like you needed the right overlap of a technology wave and a capital wave. Yeah. And I think the interesting thing about the technology wave is these are all Internet companies. And so you alluded to this at the beginning where you said, hey, we are going to cover non-tech companies too. And we're thinking with a lens of covering non-tech companies. But when you think about it,

software being distributed over the internet. Zero marginal cost. Yeah, like holding my comments about YouTube, like you look at Instagram's gross margins, right? They don't have to pay anything for the content. The advertisers are all aggregated anyway from their big stable with Facebook and even more people coming

for the combined Facebook and Instagram. And the bandwidth cost to serve it out to the billion plus users on the platform now. Not zero, but not zero, but much, much lower than, you know, the revenue that they're generating off of this. It's not just cost structure, but it's also, I think, maybe even more important in why, at least by our biased lens, we kind of only had tech and a few media companies in here,

is just the ability to scale. If you're making widgets, you can't go from a million people buying your widgets to one out of every two people in the world buying your widgets within 10 years you just can't do that unless you're Apple I guess

yeah that's a that's a fair point so there's there's a margin there's there's scale and there's defensibility that all sort of come I mean

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Let's go run through quick the other big tech companies. So Apple's on this list, but it's interesting. Apple's just whole approach and mo to this is so different you know they make hardware right like apple by components technology small technology companies from time to time is always their comment we thought about that as a name for the show originally that's right glad we didn't do that yeah um microsoft what do we think so they have none in the top 10 uh we've got bungie as an honorable mention yep microsoft famously bungled m&a for most of the balmer era yeah which is interesting given they had such a robust team they had probably a bigger more robust team than then i think maybe they overthought things it's a couple things well actually they all stem from the same thing it's microsoft's culture either the not invented here syndrome just crushed anything that came in to the point where they weren't going to play nice

right or microsoft bought a quantitative like at the same time google bought double click and like i mean that's the counterfactual yeah or the crony culture or the cronyism that emerged from the the the culture there people would make these acquisitions for political reasons within the organization and then refer to point one for wouldn't end up playing nice when they tried to get integrated yeah and i think frankly like for as dominant as microsoft was and as much as the culture helped them get to that position i think it was pretty value destructive for being able to grow meaningfully through m&a yeah yeah that makes sense to me under satya now with the new microsoft obviously microsoft is research is microsoft the current currently the largest

company in the world by market cap it's up there. I think they may be above Apple now. I do know that their stock went up 50% between December 30th, 2018 and 2019. Wow. Wow. So obviously, Satya is doing an incredible job leading the company. It would be interesting, given we were just saying the era of the great golden age of M&A may be over. If it weren't over, though, would Microsoft and can Microsoft even in this era make some? I mean, you look at like what Minecraft. Yeah.

What else did they bought in the last few years? Well, they bought LinkedIn, of course. LinkedIn's never going to qualify because it was already so large, like so much the value had already been created. Yeah. Which to your point, like this sort of like robust capital environment. Although LinkedIn was the same era as Facebook as it was, but they went public. They were, LinkedIn went public right before Facebook and they were kind of the first, there was a huge drought of tech IPOs after the financial crisis and LinkedIn kind of broke the log jam. Um,

anyway, the only other one I want to mention, you know, that we have to Disney got two of the top 10 media company, you know? Yeah. to disney got two of the top 10 media company you know yeah so i've had this like blog post that i've wanted to write for a long time that might be just better as an lp show but what is the same and what is different between content and software yeah because both are i mean if you look at software it's really just content like it's i mean it executes yeah it is it's content but it's copyrightable you know it's words ish and it's a set of instructions that is processed by some brain just like an essay is and so it has the same characteristic where you create it once and then you can create an infinite number of copies so zero marginal costs this era it has basically the same distribution

costs as software does putting 4k video out there obviously is a little bit more expensive to host and uh and distribute youtube than uh other forms of you know then than sass for example so there's like these things that are the same but then the things that are different are like you have to create the constant next thing in content in the way that you don't in software and you need to maintain it and stuff but like right like when was the last time slack added a new feature that was meaningful to your life never but like whereas we go three weeks without making an episode and we start getting like oh it's nothing it's like uh what doug leone say like without uh uh without the next great investment we just got the chickens 20 chickens running

and that's how it feels i mean that's the difference between that line more often that's Like without, uh, uh, without the next great investment, we just got the chickens in the back. 20 chickens running in the back. And that's how it feels. I mean, that's the difference between. We gotta start using that line more often. That's a really good line. Totally. I mean,

it's the difference between sort of building an enduring thing that has a snowball effect and grows over time versus, you know, having to start from square one each time. Yeah. So to me, it's like the reason why these content things are on here is because they have zero marginal and low distribution costs.

So they can sort of have this high gross margin characteristic where you sink a ton of money into making it. And then you can amortize that over tons and tons and tons and tons of people. But the reason why they're not in the top, you know, one, two, three, four, five. Yeah. Is and the reason why Pixar didn't make the top 10 is because it three four five yeah is and the reason why pixar didn't make the top 10 is because it's all about your next hit that's so funny and like just riffing on this for a minute pixar didn't make the top 10 marvel and espn did marvel and espn are more

predictable and repeatable than you know pixar is dependent on the brain trust coming up with something great every year yeah and sometimes they don't whereas you know yes but like sports are gonna get played every every day of every year that's true the content kind of creates itself too and with marvel like the depth of the bench and existing library is like yeah you got to make good content the movie's got to be good and whatnot but like you're taking a lot less risk than you are on like okay brain trust go make me something good you know yep yeah that's a great point yeah okay playbook yeah can we talk about the fact that the top three are all online advertising yeah let's talk about that i have this is my what i think you're gonna say is also my number one theme here. Yeah, I mean, there's a few different ways to attack this.

One is a defensibility perspective, which I think is interesting. Like once you already have all the advertisers and you already have all the users, it's a far cry to ever break that that bond that's created. And so the other side of that coin is being anti-competitive so you know the the fact that our top three are all online advertising network effect businesses that were bought by other online advertising network effect businesses like that may pay some credence to the drum that ben thompson has been beating around do we need a new regulatory framework yeah regulation yeah so hugely hugely value created for the companies that bought them.

Open question of whether it's net positive for the world for this combination to exist. Yeah. What other angles do you have on this? So my angle on this, I agree totally with everything you said. My angle on this, though, certainly for this insight that the top three are all online advertising markets, but also the whole list and all the honorable mentions. This comes back to me like, this is another beat yourself over the head with a hammer moment of like, you want to build a big company, target a big market. You know, like you're not going to build a big company if you don't target a big market, you

know, and there's lots of big markets out there. But this top three all being online advertising you know like think about it for a minute online advertising is probably the biggest market in the history of markets so it's interesting advertising all up at least in the u.s it consistently tracks as one percent of gdp yeah now okay you could argue that um residential real estate is larger i'd buy that argument but those two i can't think of anything bigger because like advertising and online advertising, like you're taking a vig on everything that is sold. All of commerce. You basically get a vig on the economy.

You're getting a vig on the economy. Yep. And so like it's so big that it can support the three biggest acquisitions of all time. I think, yeah yeah i don't know if you should say it's like if you look at household consumer spend there's like a big chunk i think like 30 is like their housing and then like 10 to 20 is their car and like 10 to 20 is food so like i i guess the what i you think about all of those, even housing, advertising.

Right, Zillow. Yeah. But I guess the point I'm making is like, maybe it's the single largest high margin addressable market by a number of consumers perspective, but from an absolute dollars perspective, I bet those other markets are, are larger. The only difference being one, you actually have to do the hard stuff like bringing making the food bringing the food whatever it is cars you know making margins margins um segments like online advertising knows no segments everybody everybody has a social

network account it's crazy um and and ease of scale yeah so like i don't think the amount of revenue available in online advertising compares the on the amount of revenue available in residential real estate however the reason these other attractive yeah the reason these market caps are the way that they are and the reason these multiples are the way they are is gross margin lack of segmentation and ability to scale characteristics now what we're talking about at the end of this episode with, you know, in our clips with Hamilton, as we talked about in the whole episode with him, the mistake that VCs always make is you only look at market size. That's only one half of the equation. The other half of the equation is your ability to create defensibility within that

market. And we haven't talked about that on this episode. This is not the time and place for it. But all of the top companies on this list were able to do that. The other two quick kind of sub-bullets of that that I want to say are, one, if you look at all these acquisitions on the list with a couple notable exceptions, DoubleClick being a really notable one, these acquisitions were done early in that particular market's development in the life cycle of the market. And Hamilton also talks about this. It's the growth phase of a market. That's when you can create power. You can create defensibility. If you wait too long, you can enter markets later, but you're never going to dominate a market unless you enter later. Now, DoubleClick is interesting in that Google bought that in 2008. think double click was founded in 1995 um so that was that but you could argue that was an evolution of the market anyway and then my other sub bullet is like if this if you're big game hunting you know if you're big elephant hunting uh price doesn't matter you know bring a big gun

you can spend 1.65 billion for youtube and and still end up number three on the list. All right, David. So in this final section, most commonly known as grading in every other episode, we're going to use this to sort of talk about things we might want to adjust in this list. Acquired adjusted ranking. Acquired adjusted ranking. And we're not going to actually change the rankings at all, but there's some things like you can't serve all masters and there's some masters we didn't serve, namely profit contribution, you know, gross margin, strategic value. Yep. That deserve to be talked about here. Like WhatsApp.

And so this is sort of our opportunity, I think, in this to grade. Are there entries on this list that we're like, you know, maybe that should be higher or lower? Yeah. First, let's just talk that should be higher or lower. Yeah. First, let's just talk about how unbelievable Instagram is again. So Instagram... Can we make it higher than number one?

There's a defensibility amazingness to it that I think gets harped on over and over and over again. There's another thing that is they don't pay the creators for the content on it. Like Instagram generates $20 billion in revenue from content

that they get for free. It's incredible. Yeah. And the content is like, what's interesting, we're going to talk about YouTube in a sec. They got to pay for the content. They got to pay the creators. Then you look at Facebook, like, oh, Facebook gets their content for free. But the nature of the content on Instagram is super high. like it's art like there's there's high like that content has value whereas like the facebook content does that have value if it does you know like me typing out a status update you know like whatnot you've been on facebook in a while it's kind of the same as instagram it's videos yeah well i think i've been on facebook and but like you know professional photographers and brands and people creating incredibly free.

Yeah. Highly produced content. Yeah. That they could, you could go spend a million dollars to make a film that you release on Instagram for free. Like crazy, crazy million might be high a hundred thousand. So then compare that against YouTube where of course they pay something like half of their revenue out to creators.

So when Google says we generated $15 billion in revenue in our segment last year, it's like I would, there's an argument about if that's even revenue and, and like they, they chose to report it as revenue and have a higher revenue, lower gross margin percentage business line there rather than I think what you could have done is said,

you know, we have seven eight billion exactly that is what it is it also youtube is serving 4k content and so their bandwidth and hosting costs gotta be i don't know at least meaningful three ish billion dollars and youtube's i'm sure i'm or instagram's i'm sure are high too, but you think about the level of compression that people are totally happy with on mobile screens and the fact that like, oh, they haven't released an iPad app. It feels, of course, like they're resource constrained,

but like, gosh, you might want much higher quality stuff if you're having it shipped down to a Retina iPad Pro. And so I guess the macro point here is I think it's always worth comparing two similar companies like this, YouTube and Instagram. Instagram doesn't pay for a lick of their content. YouTube has half their revenue going out the door. And I think probably significantly higher

hosting and bandwidth costs. Yeah. It's important to note too, like we're not going to do value creation, value capture on this episode, but they're like a bunch. We're not talking about like, what's good for the world. What's not good for the world. Like all this stuff. And I've got a lot of arguments that Instagram is like bad for the world and like how it is right now, but purely as a shareholder from a like investor economic perspective, if I could hold shares in Instagram versus YouTube, I would

put all of all a hundred percent of my dollars between those two into Instagram and zero into YouTube, even though I love YouTube. Burn. Well, it's just like Instagram is... Totally. It's everything we were just talking about. Yeah. Yeah. The other thing that's worth talking about YouTube now that we've denigrated it is talk about the strategic value, which we didn't talk about anywhere in here. Yep.

So YouTube is the second most, I think this is still true, the second highest trafficked search engine in the world. Yeah. And they're owned by the highest trafficked search engine in the world. And so it is worth, in the same way that with WhatsApp we said, was it worth Google,

was it worth Facebook paying 20% of their value to go and make sure that their core isn't threatened? It's hard to put a price on Google also owning the second most valuable search engine in the world. So I think it deserves to be up there probably for that reason alone, albeit that's not how we made this list. Yep. Another one that I want to discuss here, and again, we're a little bit out of school because we haven't done the episode on it yet and we absolutely need to, is VMware. The only reason VMware is as low as it is, is because of this crazy thing going on with EMC and Dell right now. To acquire 80% of VMware for $625 million. Like, man, if I could go do that again, I would go like mortgage, you know,

my house a million times over to do that. Like it turned out virtual machines were a thing. And also reflects all the playbook we were talking about, like early in a big market. Like also interesting that it's the, I believe, yeah, it's the only kind of enterprise company on this list oh that's interesting when you're talking about attacking big markets i thought

that was a direction you were going to go earlier of like consumer is the big market yeah yeah double click is arguably but but it's it's serving the end customers consumers right and like it kind of makes sense that the biggest companies would be consumer companies because the consumers... Businesses serve consumers. You pay retail price for something. And then there's 11 businesses that are chopping up all the revenue that you gave to the retailer along the way to power the back end of the retailer. And that all has to add up to less than what you bought it for. Otherwise,

the retailer is losing money. And so it sort of makes sense that like the biggest companies would be consumer companies and the most successful acquisitions would be consumer acquisitions. Makes sense. But yeah, we didn't point that out before. Do you want to make your, uh, Pixar, uh, apology statement, not apology, but, uh, your apology, not in that you're sorry but like a justification for pixar here of why it's uh all the way down at 14 why it's why it's worth more than we say than we say yeah yeah so there's there's a that's right we talked about this last night so pixar a thing that we didn't do is also count the disney animations value that it created of course and revitalization of the whole company

totally like i think what's the phrase from the eiger book so with animation goes the company yeah yeah you know jeffrey katzenberg did an incredible job with aladdin and what beauty and the beast and lion king and then we had sort of him leave and then we had the lilo and stitch era and we had tarzan and we had uh and those are the good ones um and so you know you have disney animation falling off a cliff which of course so as the flywheel of everything and so in acquiring john lassiter ed catmull and the rest of pixar you know they revitalized doctor and like all the whole, the whole brain trust. Totally. They revitalized Disney in a way that it's, it's kind of hard to put a value on the easy way to put a value on it is just multiply the number of basically that, that value that we said that,

um, it contributed by two and basically say, cause you get for every one Pixar movie, you get one Disney animation movie. Exactly. And that's been largely true. They've both, both studios have basically done one big mega hit per year. Some, sometimes they try to, but sometimes you get frozen. Like it, it,

it worked, you know, I, and so I do think, let it go. It's, it's, if we were considering sort of strategic value,

then I do think you'd probably want to say Pixar contributed, not what did, what did we say? 3 billion a year, $3 billion a year, but $6 billion a year, something like that. Yeah. But that wouldn't materially put it up

with some of these other ones. It wouldn't, you know. Software is hard to beat. Yep. Any other comments? I don't think so. The only other caveat that we said in the beginning, I'll say again,

we're probably missing some in here. So please write us in in acquired fm at gmail.com join the slack hit us up in there but i can't wait to do a double click episode yeah a vmware episode yep um gonna be super fun i think this just pointed out the the sort of need to do both those if not this season then soon yeah all right carve outs we haven't done them in a while oh we haven't done them in a while the sort of need to do both of those, if not this season, then soon. Yeah. All right, carve-outs. We haven't done them in a while. Oh, we haven't done them in a while. I got two. First is the piece of software, Todoist.

I'm loving it. Me too. My to-do list. Apple Reminder is just like, I just finally couldn't take it anymore. It got buggy. It was so, so icky. And even though my whole life ran on it for years so i tried a whole bunch of

different you know options and um finally landed on todoist and i i just love it it's great it's everything i want in a you know to-do list minor which sounds simple but i managed my whole life on it so and i can assure you as someone who's built a to-do list thing over the years, it's actually harder, and this is any piece of software, but it's actually harder to make it feel simple than it actually is to make it feel janky. Well, everything should be as simple as it can be, but no simpler. To-do list does a really good job of this.

What's the Hamilton quote? Simple but not simplistic? Yes, that's right. Simple but not simplistic, which you'll hear from Hamilton in a minute here. My other carve out is, uh, you know, Ben, a couple, I was on the WhatsApp episode. Your, uh, carve out was computer glasses. Um, our, uh, friends, you know, not a sponsorship, but, uh, at Felix gray, uh, direct to consumer computer glasses brand fans of the show listened, reached out to us and, um, they sent us, uh, uh, pairs of computer glasses brand. Fans of the show reached out to us and they sent us pairs of computer glasses and I've been using them. They're awesome. I love them.

Welcome to the party. And the best part is I finally, I'm very lucky my vision is normal, but when I wear glasses, I look very erudite. But I was like, I'm not going to be that guy that wears glasses that don't actually have prescriptions, just look erudite. Now I have an excuse to look erudite. I love it glasses that don't actually have prescriptions just like now i have an excuse to look erudite i love it i don't actually know what that word means you know like um knowledgeable intelligent i see i think you look that way anyway oh thanks ben all right my carve out is the master class taught by dead mouse so if for anyone out there is a master class subscriber um or wants to give it a

shot i i spent a weekend a couple weekends ago uh doing the watching and then experimenting a little bit on my own with producing some music and watching the the dead mouse class and it was awesome it's cool that he agreed to do it because with that many hours of just like somebody talking about their craft you really get a sense of how his creativity works. It's interesting from a learning perspective, learning the software. It's interesting from watching the ways in which he is resistant to using

a lot of like out-of-the-box software or cookie cutter loops. And he's like, it's a massive wall of things that he's actually plugging into and dials and doing it all sort of analog and then recording the analog sounds acquired goals dude it's it's it's really cool and it's it's really creative for anyone who sort of likes to watch the creative process in action i i highly recommend it that sounds awesome whether you're an edm fan or not so can't can't recommend it enough.

Do you think Desol watched it and learned from it? DJ Desol? Probably not. I don't know if that guy has the kind of time on his hands. Yeah, probably not. Yep. All right. Well, listeners, if you aren't subscribed and you like what you hear, you should.

This particular episode is different in that it has a accompanying blog post that we're going to publish sort of the full data table and a little probably short paragraph on each company. We got to write it. So who knows exactly what it will be. But the hope is to create kind of the first enduring piece of acquired kind of acquired artifact outside of just these hundred plus episodes that we've done that is a little bit more sort of referenceable and I think discoverable for folks who aren't already big fans of the show. Feel free to click the link in the show notes to check it out, to share it with your friends. And we'd love to have a conversation about it both on Twitter

at acquired.fm and in the Slack. By the way, you can join the Slack, go to our website, acquired.fm, and there'll be a big button to get an invite to the Slack there. We have going on 5,000 people hanging out there. All sorts of great stuff going on. It's true. Well, stay tuned after this for an excerpt of our LP episode

with Hamilton Helmer, who is the author of Seven Powers. If you'd like to become an Acquired Limited partner, subscribing gets you access to our LP show, where we dive deeper into the nitty gritty of building companies in real time. To listen, you can click the link in the show notes or go to glow.fm slash acquired and get a seven-day free trial for all new listeners. With that, thank you to Silicon Valley Bank and Wilson Sincini, and we will see you next time. See you next time. Welcome, LPs. I am here in lovely Los Altos, California, with a very, very special guest

that we've been wanting to have on the show for a long time, Hamilton Helmer, the author of a book called Seven Powers, which is just spectacular and probably the best kept secret in Silicon Valley. We and I first heard about your book on Patrick's Invest Like the Best podcast on the episode with Keith Reboy, where he said basically the same thing. And so I ordered it on Amazon and I look at the blurb in the inside of the jacket. The people who agree that this is the best kept secret in Daniel Eck, Michael Moritz, Peter Thiel, the former CEO of Adobe, Bruce Chisholm, Patrick Collison from Stripe, Daphne Kohler from Coursera, Jonathan Levin, who's the dean of Stanford GSB, Pete Docter from Pixar, who directed Monsters, Inc. and Up and Inside Out. The list goes on and on and on. We are so excited to have you with us here to talk about the book, talk about your work.

Yeah, I would say we're sorry to blow your cover, but it's sounding like that's pretty well blown as no longer the best kept secret in Silicon Valley. I was going to say that the fact that it's the best kept secret says something about my acuity as a good marketer. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring. Vanta takes care of these otherwise

incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep. Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more

spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise and your company

is ready to automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. So, okay, let's get into the fun stuff. Seven Powers, you know, when I read it, to me to me, at least the thing that was so enlightening about it was I see this mistake all the time in, in Silicon Valley and in venture investing of like, everybody's like, tell me about the TAM got to target their big market, but that's kind of only half of the equation of what makes for a great enduring company is targeting a big market. Of course,

you have to have a big market, but you also have to have what you call power in the book within that market. You have to have defensibility. You have to have something that makes your company and your business stand out. Can you tell us a little bit about how you define power and how you came up with it? Yeah. Yeah, sure. So as I consulted with more and more companies, because I ran my own consulting firm for decades, three things started to become evident to me. One was that really strong performance is persistent. If you look at Intel's results this year and Intel's results next year, the fact that they have high profit margins will probably be true next year.

And it turns out there's a lot of empirical work that verifies that, that there's persistence. It's like the exact opposite of hedge fund managers year to year. Or mutual fund managers. You know, there's no persistence in mutual fund managers. Now, interestingly, as you probably know, there is persistence in venture capital. And then the next thing, if you've done a lot of valuation work, I'm sure you've done a ton, and I've done a ton, and I've even taught it, what you learn is it's all in the future.

Yep. So if you take a company that's growing at about 10%, do a standard valuation model, what you find is 85% of the value is after year three. Yep. Right. So persistence and in the future. what you find is 85% of the value is after year three. So persistence and in the future. That says that if you can understand the issues that drive persistence, you're going to understand what drives value.

But then as I did more and more consulting work, another thing came into focus, which was that the path to establishing that kind of persistence is not linear. There's a step change. So there's a period when a company can establish that, and that window often closes, if you will. And it's the kind of business that you are so familiar with. It's in the earlier stage. I think you called in the book the takeoff phase of the market. Yes. So there's this, so if you think of a founder, there's this period of where there's tremendous flux going on. They don't know who the customers are. Technologies can change you like crazy. They have all a wide variety of different types of competitors. And in that, there are all

kinds of degrees of freedom about how you how you move you know the the fact that people even talk about pivoting is just suggesting that it is possible in fact to pivot yeah ask intel to pivot and it won't happen very easily you know and they've certainly been trying for a long time so what that says is there's this moment, but, but then the problem is from a strategist point of view is that all the information is changing so radically that the, the person or the group that has to process that is the founder and his team. Right. And, and, and it's not hiring somebody like me and making a recommendation or strategic planning or something like that. It's actually processing all this time. And as you move through space and time,

understanding, okay, this direction looks a little better than that direction. And Silicon Valley founders and the venture capital ecosystem identify, here's a big, large market opportunity. Hundreds of companies get funded and rush in. And only one or two of them make it out. And so it's these decisions that guide what's going to create power. That's right. That's right. And so what that said to me was that what people needed was not advice from an expert, but rather teaching to fish. Trying to assemble a way of looking at strategies so that the people on the ground who are really making these decisions have a way of thinking about it that will, it's never perfect, but guide them in the right direction. But the problem in doing that for me was that providing a mental model like that, as I say in the book, it has to be simple, but not simplistic. It's simple so that you can retain it, not simplistic so that it's

relatively complete. You don't miss a lot. That's a really high bar in strategy. And that's what took me so long. I mean, I wrote the book, it took me 20 years of writing it basically. And Hamilton, I'll tell you, having read a bunch of business books and having an even larger pile of business books I've bought, but haven't read, and then probably even bigger than that of recommendations I've had but haven't made it to, there's so many different mental models for how to think about this stuff. I will say, thank you for taking the 20 years to do it because the fact that there is a one-page reference card that sort of assembles this whole whole thing it actually does make it so you can reference the seven powers and sort of make decisions in real time and it takes i think

i've read the book very recently i'm sure it will take me some time to sort of like make that system one thinking instead of system two thinking but it's certainly much more accessible than uh i think trying to weave your own fabric of lots of different theories let's talk about a few we won't have time to go through all seven but um they're all than, I think, trying to weave your own fabric of lots of different theories. Let's talk about a few. We won't have time to go through all seven, but they're all fantastic. Maybe a good one to start with, since most of our audience is in technology and most of those folks are entrepreneurs or aspiring entrepreneurs, counter-positioning. This is such a fun one. I know it's your favorite power and particularly such a fun one because it's in many ways the most relevant for startups and entrepreneurs in a lot of markets. Can you talk to us a bit about this?

Yeah, yeah. I do have a special place in my heart for counter-positioning, I have to say, because it's so contrarian and I'm sort of a contrarian person, I guess. A counter-positioning occurs if a company comes up with a new business model and challenges often a powerful incumbent with it, but for the incumbent to mimic this model, they would incur, or at least think they would incur, so much immediate financial damage that they just say, I can't go there. Even though maybe long-term it would be good, they just can't do it. And that provides a powerful disincentive for them to respond quickly.

And if something's happening in the kind of flux that you guys deal with very fast, responding late may mean that you don't do it. So I'll give you some examples. So Netflix versus Blockbuster. Late fees. Yeah, yeah, yeah, late fees. So late fees accounted for half of Blockbuster's income.

Netflix said, we're not doing it. And Blockbuster eventually mimicked Netflix. And who knows? But my suspicion is if they'd done it a year earlier, I'm not sure Netflix would exist. And the place I got to kind of cut my teeth in this was I was a big investor, big for me, not big for them, a big investor in Dell in the 90s. And my investment hypothesis was that Compaq couldn't respond quickly to them because Dell was going direct and Compact had these lucrative arrangements going through stores.

But there was nothing in the literature that sort of, I kind of, looking as an investor, I could see that was true, but why? And so that kind of got me thinking about it from sort of a ground up and eventually I was able to formalize it. Well, Hamilton, one thing to push on there. So it seems like, and I'm remembering from your book, that the criterion are basically this new thing is both a good business, but net negative for the big incumbent because of the cannibalization that would occur. Are there any other things you would sort of add to define that? Yeah. So there are a few flavors of counter-positioning. One is that, is that it's a net negative. And therefore, because their current model is so lucrative, that actually,

even if they did a net present value, they would end up with deciding not to do it, even though they'll eventually, the business will go to the challenger. And these are not mutually exclusive. It's very often true, I'd say almost always true, that there's cognitive bias involved, which is that the incumbent, they've done just great. Their model has worked for years. I mean, Blockbuster saying, oh, you know, we've got all these stores, you know, people love it. They come in, they can browse, you know, what's wrong with that? You know, and they think they just, and the idea of somebody doing this rough and ready group sending out red envelopes in the mail, they'd say, what the hell? You know, this is just not going anywhere. So they're very cognitively biased towards thinking that their model works.

And then there are also agency issues, what economists call agency issues, which means that the person who controls the business may not have interest aligned with the long-term interest of the business. So, for example, CEO comp is often about this year's performance or the next few years' performance. And so to upset the apple cart for a gain that will happen four years out, you may say, I just don't want to go there. That's something that's really hard to do if you are a hired CEO of a large, long-lasting company. That's right. If you're a founder, then most of your worth is in the equity of the company. And a large long-lasting company because if you're not if you're a founder

then most of your worth is in the equity of the company and so the long-term matters right it also reminds me as you were talking i hadn't thought about this but um obviously for startups counter positioning can be great and netflix is a fantastic example but even i'm remembering a blog post bill girley wrote a number of years ago in the beginning of when android was starting to take off and i think the title of it was like uh less than free the new like the most disruptive business model ever of you know you had android which was less it cost less than free like they would pay you to use it if you're a carrier to put it if you're a handset manufacturer to put it on your phones uh versus like nokia that's trying to make money or sell their stuff. Like, uh, even as Google and a stab, because they had the separate

business model of search, they're able to enter this adjacent market with a completely counter-positioned business model. Right. Right. Right. Uh, Hamilton listeners, uh, who have read the innovators dilemma, this is going to sound vaguely familiar and, and like, this would be the power that's sort of most similar to that concept. How do you think about in the same way that we asked earlier, what's the difference between power and moat? How do you think about counter positioning relative to sort of that sort of grand theory? I recommend everybody to read that book, Innovator's Dilemma. It's a brilliant book, you know, and Christensen was just a scholar of innovation and deeply researched.

I have great admiration for his book. But it's pretty different. So if you want to get sort of mathematical about it, there's a many-to-many mapping between the two concepts, which is to say that counterpositioning doesn't imply disruptive technology and disruptive technology doesn't imply counterposition. Give you some examples. So I would argue that In-N-Out burgers is counterpositioned against McDonald's.

There's no technology involved particularly at all, but it's counterpositioned. So that's one case. And it's not disruptive in terms of Christensen's philosophy was low end. This is like a

objectively worse product. Right, right, right. In-N-Out is objectively better. Right, right, right, right, right. And yeah, so you're going back to Christian's original book, which I think is the more interesting one where there's a product that kind of doesn't satisfy everybody. I mean, you could argue that Tesla's first cars were like that. Yeah. Okay. And so and then the other direction is that if something is a disruptive technology, it may not be counterpositioned.

So that's straightforward. And the fact that they don't map to each other and the fact that power maps directly to value or there's a one-to-one mapping between power and value, it means that disruptive technology does not map to value. And so as an investor, and the simple thing about that is you can disrupt something and it can be a really lousy business. Yeah. Happens all the time. Right. You may not be able to realize the sustained differential margins. You poison the well, but there's no good end point for it. I think, I mean, we may be overly quoting Gurley here, but I think I saw a recent tweet, something along the lines of there is an infinite amount of product market fit for selling dollars for 90 cents. Yeah, yeah, yeah. Right. So, yeah, I mean, and you see this model all the time of, so, yeah, so just pricing something so that people are attracted to it and losing money, there's no power there.