Ben & David examine Google's 2005 purchase of Android for a rumored $50M, undeniably one of the best technology acquisitions of all time. But will it top the list of these tough graders? Tune in to find out.
Topics covered include:
The Carve Out:
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
Ben: Welcome back to Episode 20 of Acquired, the podcast about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today’s episode is one that’s been coming for a long, long time. It's a cornerstone of all of computing today – Google’s 2005 acquisition of Android.
David: I’m speechless.
Ben: Yeah, it's interesting. I mean, 2005, when you think about the numbers it doesn’t feel that long ago, but when you think about the first time you saw an Android phone and heard about what Google is working on, it seems like the iPhone hadn’t come out yet, right?
David: Yeah. This was before. iPhone was just a glimmer in Steve Job’s eye.
Ben: Yeah, all right. So to all of our new listeners, welcome. We were featured on New and Noteworthy in iTunes over the past, looks like a week or two and about doubled our subscriber base. So, thanks so much for everyone trying us out and giving us a shot. I think what I want to do is go over the format of the show since a lot of you are new and talk about what we’ll cover today and kind of reviewing and grading Google’s Android acquisition.
So the first thing is something sort of newish that we’re trying called Community Showcase. We felt it was important since we have so many listeners who are working on projects and building things, a lot of entrepreneurs, and we like to on each episode talk about something that one of those people is working on. So we’ll do our Community Showcase, then we go into Acquisition History and Facts where David takes us through…
David: What actually happened.
David: What happened and when.
Ben: Then we get into the acquisition category where we decide if it's a people acquisition, technology, product, business line. We recently added asset to our categories or the ever-so-famous –
David: All-encompassing other.
Ben: Yes. Then we talk about what would have happened otherwise, what tech themes this illustrates for us. We then formally give the grade of our acquisition from the episode. Then we have some follow-ups and a section called The Carve Out. This is where David and I grab something from our lives that we’ve seen whether a book or a piece of software or anything in the media that we think is either related or completely unrelated to the topic at hand.
David: Just something fun that strikes our fancy. The other thing that we sometimes do now is Hot Takes. If something big in the M&A world or otherwise happened in the past week or two, we’ll do a quick discussion.
Ben: We will
David: So that’s the show.
Ben: Indeed. All right, so our community showcase this week. Listener Matt – I might butcher this – Morgante released a book called Patagonia on a Budget. It's on Product Hunt right now. If you search on Amazon for Patagonia on a Budget, you can find it. And it’s how to have your adventure in Patagonia on $3 a day. There’s a ton of cool photographs in there. I should go pick up a copy. It looks super cool.
David: Patagonia is awesome. That brings us to, also for our new listeners, our Slack community. So we have a community channel on Slack and if you’d like to join it, there’s lots of great discussion going on on there. Just go to our website Acquired.fm, and there’s a signup form there. Then, you can hang out with the community throughout the week.
Ben: Yeah. And if you want us to show off what you’re working on, drop a link in and we’ll check it out.
So, on to this week’s topic. David, you want to hit it with the acquisition history and facts?
David: As always, Ben. So, Android. As Ben mentioned, this one has been a while coming. We’ve had a lot of requests for this. We’ve been saving it and we felt it was time to finally dive in here. There is so much to unpack here, so we’ll get into it.
October 2003, Android is a startup company, just founded in Palo Alto by Andy Rubin, Rich Miner, Nick Sears and Chris White. Andy Rubin, the CEO, was basically born to start this company. So Andy’s career started at Carl Zeiss, the camera technology and camera lens manufacturing company. Then he moved to Apple. At Apple, he met a bunch of folks. This was during the John Scully era.
Ben: Wow, I did not know he was at Apple.
David: He was at Apple, yup. There for a couple of years. He and a bunch of other people spun off from Apple and started a company called General Magic, which not a lot of people remember, but this was a spin-off from Apple, actually went public itself. They never launched a product but what they were doing was they were building essentially a tablet, like a personal communicator, sort of a Palm competitor. A lot of that tech, I believe, ended up in the Newton at Apple.
Ben: They went public?
David: It was a public company, yup, and then it ended up going bankrupt.
David: It was super ambitious at the time. I believe also some of the technology that they developed there became the standard for USB. A lot of really cool stuff happened there.
So, he went from Apple to General Magic and then, a bunch of General Magic alums went and started a company called WebTV, which you probably do remember. WebTV was part of… this was in the kind of mid to late ‘90s, a vision that a lot of people in technology had at the time that the internet was not going to happen on computers in a big way, it was going to happen on your TV.
Ben: That’s right.
David: So this was a set top box, with your cable box.
Ben: This is in the era that Microsoft was making the bet that they should do MSNBC like a technology-enabled television channel joint venture.
David: Yup, this is the AOL Time Warner days, like it's all new media, old media. Like, it’s the eyeball economy.
So WebTV ends up getting acquired by Microsoft. Andy and the team go up to Seattle, worked in Microsoft. I don't know if they actually ever came up to Seattle. But they built Microsoft TV which as we know is an abject failure.
But shortly thereafter, Andy leaves and he starts a new company called Danger. So Danger was founded in the late ‘90s, I believe, after Andy left Microsoft. They made a little device called the Sidekick. RIM already existed, so there were Blackberry’s out there but this was the first consumer-focused smartphone really.
Ben: Yeah, and it had like celebrities where it had a cool factor because they would show they’re Danger and, you know, photo shoots. This was a thing. You wanted to have one of these.
David: I remember the first time that I started hearing about the Sidekick and Danger was watching Entourage.
Ben: Oh, man.
David: It was like everybody on Entourage had a Sidekick. I think there’s actually an episode where there was a plot point that Turtle gets a Sidekick. Can’t remember exactly.
Ben: It’s so recognizable too, the way that it spun out. I mean, the industrial design was crazy, unique and super cool.
David: Yup. There was very little on the market. Like I said, there were smart phones, they existed, but this was like the Windows Mobile days, there was Blackberry.
Ben: It’s for business people.
David: It was for business people. Then the Sidekick comes out and it’s the first time like, “Oh, we can bring this technology to consumers as well.”
So, Andy was the CEO of Danger and then he ends up leaving relatively early on in the life of the company. Oh, by the way, supposedly, Larry Page and Sergey Brin were huge Sidekick users as well. So he ends up leaving and starting a new company that he calls Android. The vision for the Android is –
Ben: This is post acquisition?
David: No, no, this is pre-acquisition of Danger. Danger doesn’t end up getting acquired by Microsoft until 2008.
Ben: Oh, wow.
David: Much later. But in 2003, Andy leaves and starts Android. Whereas Danger was sort of a full stack company, they were making the hardware, they were making the software that went on the Sidekicks. They were dealing with carriers, everything.
Android is an operating system company. They want to take Linux and essentially make it into an operating system capable of running on mobile devices. We now know Android runs on so many devices today. The first target market that they’re going to go after is digital cameras.
Ben: That’s right, that’s right. I remember reading that and I think what they assessed is that it’s not a big enough market.
David: Yeah. Which is interesting because it was a huge market at the time. This was 2004. Everybody had the point-shoots and it will be interesting to know like what process they went through in deciding that that wasn’t big enough. But fortunately, they made the right call and it quickly pivot into focusing the device on mobile phones.
Ben: I wonder. The hindsight’s 20/20 but I don’t think it was apparent in 2003 that point-and-shoots would go away and become part of phones. Is there a world where you see that maybe the other way around that you’re like, we should build a really great camera because at some point cellular technology will become lightweight enough that we can put it in.
David: Into the camera.
David: It would certainly have been hard to imagine cameras on phones to the extent they even existed then getting good enough that you could actually take real pictures on it.
Ben: Right. I don’t think I had a camera phone until 2005 or 2006.
David: Yup, later than this time period.
Ben: They were just horrendous.
David: Oh, they were awful. Even the first iPhone in 2007 like the camera was part of it but it wasn’t like that was a big selling point and contrast that now with how huge the camera is on the iPhone.
Ben: I literally just pre-ordered a form factor that I don’t want because the camera is better. The Plus is too big for me. I had this weird realization that, “Wow, I use this thing more as a camera than a phone.”
David: Maybe Andy and team were more right than they thought at the time. Anyway, getting back on track. So, as far as we know, they never raised any venture capital at Android. But Steve Perlman who had been the CEO of WebTV and who had been at General Magic with Andy, and Andy had worked for him at both places, at one point there’s in the lower of pre-Google Android, apparently Andy was running low on cash and Steve shows up at the office at Android with an envelope with $10,000 in cash in it and he just gives it to Andy.
Ben: And he refuses to take a share in the company. Andy tries to give him shares for it and he says “No, no, this is just for you.”
David: No, he is just giving him the cash. What a good friend.
Ben: I know.
David: It’s awesome. Steve, will you be our friend? So that happens, they’re working away on this operating system and as we mentioned a minute ago, Larry and Sergey had been big Sidekick fans. They had actually met Andy back in the day when he was working on Danger.
July 2005 comes along and Google ends up just acquiring Android before they’ve shipped anything, they’re a long way away from shipping anything. Deal term is not announced. This was a small team, hadn’t raised any venture in Palo Alto. Rumored to be about $50 million. What’s interesting is that many years later, David Lawee who at one point had Google’s corporate development in 2010, he’s being interviewed and he calls this Google’s “best deal ever”.
So they've acquired this company, it’s Andy and team, they’re working on this operating system. Immediately, you know, Google had just gone public a year before, lots of rumors start circling about what Google is up to here. You know, are they working on the G phone, that’s kind of the like the G Drive that we talked about with Google Docs, the Writely acquisition. For years people are speculating “What is going on here? What is going on here?” and there’s no G phone. Andy and team are working away for years. So, pretty much nothing happens until 2007.
Then in January 2007, the world changes. Steve Jobs announces the iPhone.
Ben: The breakthrough internet communications device where nobody really understands what he’s talking about.
David: It’s a phone, it’s an iPod, it’s a breakthrough internet communications device. One of the best product launches and speeches and presentations of all time.
David: So that happens in January 2007. Meanwhile, Andy and team within Google had been working on the operating system and they’d been working with hardware partners about what the phones that they would ultimately bring to market would look like and they’re working with HTC. They had a prototype and it looked a lot like the Palm Trio, if you remember that. It was not a touch screen. It had Blackberry-like keys on it. I’m not sure if it had a stylus, it may. So then they watched the iPhone announcement which at the time it was amazing like I lined up for the first iPhone, like I couldn’t wait to get it.
Ben: I lined up for the first iPhone and didn’t buy one. I was young and did not have any money and it was like I couldn’t pay for the data plan, but I wanted to be part of it.
David: That’s amazing. I was lucky I had just graduated from college when it came out that summer literally and this was the first cellphone I bought. Like I went off my parent’s plan, got my phone plan just so I could get an iPhone.
Ben: That’s right because they launched special iPhone plans that didn’t include family plans.
David: Because it was – we’ll get back to this – it was an exclusive with AT&T. Which becomes quite important later. So this happened and consumers were dying to get this thing. I think people were calling it the “god phone” but this is also the time Steve Ballmer was saying like, you know, literally laughing about it. A lot of corporate tech and big companies are really discounting the transformative power that the iPhone is about to have here.
Ben: Meanwhile, there’s a great story about a bunch of RIM employees that were sitting around that watched the keynote and said it was fake. They were like, “There’s literally no way to do this. That, we’ve tried. You can’t get scroll performance like that. You can’t make a screen like that.” It’s amazing how you can get Steve Ballmer dismissing it while simultaneously the BlackBerry guys don’t even believe it’s possible to do that stuff.
David: It's interesting to look at the spectrum of reactions here. You’ve got Steve Ballmer who just dismisses it, the BlackBerry guys are in denial. And the Google reaction, so an engineer later, an interview later with Google engineer Chris DeSalvo who was working on Android at the time and he says, “What we had suddenly looked just so ‘90s. It’s one of those things that are so obvious when you see it,” and they realized that they had to go back to the drawing board immediately, that this was game-changing.
David: So this was January 2007 and they had these prototypes that were pretty far along with HTC.
Ben: Had they started the Open Handset Alliance?
David: That comes in a minute. But they scrap everything. They realized, “Hey, the world has changed. We now need to compete with the iPhone.” So, later that year in November, Google – and it's interesting, the timing here. We don’t know when they were originally planning to do this but they ended up doing it in November. So after the iPhone had launched, they have a big event and they announce the Android operating system and they also announce, equally importantly, the Open Handset Alliance.
So the Open Handset Alliance, they have HTC, Sony, Samsung, Sprint, T-Mobile, and Qualcomm. The whole phone ecosystem.
Ben: It's like the stack, right?
David: The whole stack.
Ben: Manufacturer, they’re the operating system, they’re the carriers.
David: Yup. For all of these players in the ecosystem, if they don’t realize already this comes to be this is the only way they’re going to stand up to Apple, is they all need to work together and there needs to be this open operating system tying it all together which becomes Android. So they announce both at the same time and what’s super interesting is as part of the announcement, they also have the $10 million Android challenge. So they make it super clear, Google does, that Android is an open operating system. And that means two things: one, it's open source so anybody can use it and later on this leads to forks of Android like Cyanogen, like the Kindle Fire.
Ben: Xiaomi as an entire company.
David: Xiaomi becomes super important later. But it's completely free. Anybody can take the Android software and do whatever they want with it.
The other part of “open” that Google really focuses on is developers can develop for the platform, so this was before the iPhone iOS was not yet open to develop.
Ben: That’s right. WWDC in July or in June of 2008 is when Apple walked back there, you can make web apps and announced the App Store.
David: Steve Jobs initially was, you know, his posturing was “We don’t want developers. We want to control everything with the software stack.” And hard to imagine what the iPhone would be like today if there were not third party developers.
Ben: Not successful.
David: Well, it’s interesting. Google kind of pushes them towards this with when they make Android open and developers start to realize the massive reach with however many computers there are, PCs there are in the world and web browsers, but there’s a lot more phones. And they can reach this huge consumer base. So this really is sort of like Google’s kind of putting a flag in the ground and saying, “Hey, we’re open. That means two things. We’re open to the entire hardware and supply chain ecosystem, but much more importantly in the long term, we're open to developers.”
So that was November 2007. But remember, they realized they couldn’t compete with the iPhone. So they end up not shipping the first Android phone until almost a year later in October 2008 and that’s when the HTC Dream slashed in the US the T-Mobile G1 is the first Android phone, the much vaunted, anticipated Google phone when it comes out.
Ben: That still had a keyboard, right?
David: Still had a keyboard. So, it was a touch screen and it had a scroll wheel on it.
Ben: That’s right.
David: And physical hardware buttons which are part of Android for a long time. And then it had a slide-out full QWERTY keyboard much like the Sidekick that slid out horizontally from the device.
David: Super interesting. So it doesn’t really look anything like the iPhone. It’s kind of its own thing. But this is the first Android phone that finally comes to market. So with T-Mobile made by HTC and it comes out sort of just in time for the holidays in 2009, doesn’t really make much of a splash. At this point the growth in iPhone shipments by today’s standards were slow but at the time it was completely taking off, clear that this was a hit.
Ben: I remember Steve Jobs on stage saying that I think it was their goal for the first year of the iPhone was to capture 1 percent of phones. I don’t think he said smartphones intentionally.
David: I believe it was intentionally.
Ben: Because they didn’t want to acknowledge that smartphones were a category, much like they never acknowledged Netbooks. I think it's amazing looking back like their hope was to get 1 percent. I think that’s kind of what they tracked actually that first year, but then the explosion after that – never could have predicted.
David: Then the market just completely exploded. So it wasn’t actually then until around the holiday season of 2009 that Google, who knows how much Google drove this but essentially the rest of the wireless phone industry ecosystem except for Apple realized they have a big problem. A big, big problem because the iPhone is on its way, you know. At this point, 3G has been launched so that was one of the big things with the original iPhone. Like, “Oh, it’s great but it’s slow.”
Ben: And 3G was out but it was one of those things where Apple had been working on the iPhone for so long that the only thing they can get to market by July of 2007 was an Edge phone.
David: Was Edge, yup. 2.5G - you remember, Ben?
Ben: That’s right.
David: And by 2009, Apple then opened up iOS to developers, so that wasn’t even an advantage anymore. So remember, iPhone was still exclusive to AT&T at this point in the US. AT&T is just raking in subscribers at this point. I believe it was already the largest phone network before the iPhone and at this point, Verizon, Sprint, T-Mobile have huge, huge issues.
Ben: Yeah, that’s got to be one of the best partnership or exclusivity agreements in the history of the American corporation, is AT&T strapping itself to the iPhone as a rocket. The thing that paints it in my mind for how big a deal that was is how big a deal the opposite was. Like how widely anticipated the Verizon iPhone was. When the Verizon iPhone came out how crazy all my friends went that were non AT&T with all this incredible pent up demand for it.
David: Which is interesting. By holiday of 2009, there’s finally been enough time in the product cycle that Verizon, Google, everybody else, all the handset makers realized they got to do something and so Verizon launches the Droid in 2009.
Ben: And they paid Lucasfilm every single time the word “droid” was mentioned.
David: Isn’t that amazing?
Ben: It’s at the bottom of every magazine ad. It’s so awesome that they were like, “Yeah, screw it, it's worth it.”
David: It’s worth it. In a lot of ways, this was a phone ahead of its time, but the whole positioning was against the iPhone here was, the campaign was called Droid Does and this was like the old Mac and PC campaigns but in reverse it was like, “well, your iPhone doesn’t do X but Droid Does.”
Ben: That’s right. This is like the full swing of the smartphone wars heating up where now we sort of settle into this place where Android’s got about 80 percent of the people, iPhone’s got about 20 percent of the people, but iPhone people pay for apps and much more so than Android people. It’s interesting how it’s reached this almost like not a peace treaty but it’s like we thought there was going to be one winner in this smartphone wars and it was going to be a crazy 5-year thing and one person would –
David: We thought it was going to be Microsoft and Apple all over again.
Ben: Right, right. It’s interesting how we’ve reached this equilibrium where like the world exists in a multi-platform way kind of sustainably for at least this set of year, this decade.
David: This moment in time.
Ben: And that initial Droid Does thing, they intentionally like it was confusing to people that you could get an Android but it wasn’t from Google and it wasn’t called an Android. So I think it was like an intentional move to say “you know what, we’re just going to lean into that. The phone is going to be called a Droid. It’s the main one we’re going to market. We're not going to have Android be a consumer brand.” It was amazing how many people –
David: And important to remember too who made the Droid – it was Motorola, which we’ll get to in a second.
Ben: Oh, yeah. But I guess my point is like it’s amazing how it was in most people’s lexicon to ask “Do you have an iPhone or a Droid?”
David: Yeah. It wasn’t Android, it was a Droid.
David: So yeah, everything you’re saying, Ben, I mean this was like, these were the holy wars of mobile that got kicked off with the Droid. So basically from 2010 to kind of 2012-ish, there’s just this race where everybody who’s not Apple in the ecosystem is racing to copy Apple and then try and surpass if they can, but even just get to parity. Towards the end of time that’s when you see Samsung really emerging. I mean, they were the most shameless, just literally ripped wholesale everything from the iPhone, but it worked.
Ben: And so fast like 2 months after Apple would announce something, like some team at Samsung will get to it, work all night and then they’d rush it to market and then they’d announce that it exists. Then maybe you could get them from the supply chain, maybe you couldn’t but they put a stake in the ground that like, “Yes, Samsung has this too.” You see it all the way through like touch ID like the had the --
David: Slide to unlock, like there was a big fight about that.
To the bitterness involved here, so Steve Jobs is towards the end of his life at this point and the Walter Isaacson biography that comes out which is this incredible book, he has this quote in there and he says, “I will spend my last dying breath if I need to and I will spend every penny of Apple’s 40 billion in the bank –” funny that at that time Apple only had 40 billion in the bank, like that’s cute, right, “–to right to this wrong, I’m going to destroy Android because it’s a stolen product. I’m willing to go thermonuclear war on this.” This is incredible. But this was the height. So that comes out and then Vic Gundotra –
Ben: I miss that guy.
David: Yeah. Incredible. It’s amazing like how much the world is changed though from his vision when he was alive and how different things are. The famous quote like, “if you see a stylus, we blew it.”
Ben: Did you hear the interview with Tim Cook a couple of weeks ago that they asked – I forget who did it, but in Apple’s recent little PR rush, they asked Tim Cook about that exact thing and they’re trying to push him on the point that like, “Are o guys blowing it?” Tim starts with “Well, first of all, it's a pencil, not a stylus.”
David: Love it.
Ben: I love Apple marketing.
David: What would Steve have said? But Tim doesn’t see, which is the point.
Ben: Tim did recently, you know, the last couple of years referred to the Android ecosystem as a “toxic hellstew.” Or I think he pointed out. It was like a quote ripped from a writer that they put up on the stage at Apple.
David: So you know, Google doesn’t take this lying down. They strike back. So Vic Gundotra who is a long-time exec at Google and I believe founder of or in charge of Google Plus at one point, so that was a little mark on his time there but at IO, at Google’s big conference in 2010, Vic’s asked about this and Steve’s quote and Apple’s feelings about it. And he says, this is a quote, “If Google did not act, we faced a draconian future where one man, one company, one device, one carrier would be our only choice. That’s a future we don't want.”
Ben: Yeah, it's a very noble way to approach this business.
David: It’s like the famous Apple 1984 commercial. It’s like Apple is now the man talking on the screen and Google and Android is throwing the hammer at it.
Ben: If you can find a way to position yourself as an underdog, even if you have a monopoly in search and one of the largest technology companies in the world, by God you should do it.
David: Absolutely. They’re literally Apple-ing Apple at Apple’s own game here. So it was a war and at the time everybody in the press, everybody in the tech world was “Is Android going to win? Is iOS going to win? What’s going to happen?” And startups at the time, you know, our portfolio companies and as we’re talking to new investments, it’s like “Well, what are you going to develop for?” It was a big question then because it was really hard to develop for both.
Ben: Right. I guess it’s probably a good time to say for new listeners David is a VC here at Madrona Venture Group, we're recording out of their office this weekend. And I’m over at Pioneer Square Labs just down the street and we’re a startup studio. So it’s probably helpful to have some context on who we are and why we're doing this.
David: A couple other side notes on that one, that is more a quirk of history but it is just too fun not to talk about here – In August of 2010, HTC acquires a majority stake in Beats (Beats Audio). As a result of that from kind of 2011 to 2012-2013-ish, you can still go buy these things on Amazon which is amazing. We will link to this in the show notes. There are Beats branded Android phones out there on the market, HTC phones.
Ben: I kind of want to buy one and bring it to my next meeting at Apple pretending it’s my phone and see what happens.
David: That would be amazing. Total quirk of history. HTC was bundling Beats headphones with their Android phones for a while when they were selling them. Hard to imagine that in today’s world of Beats being part of Apple.
Ben: I know.
David: Also makes me realize just how small the technology world is. I feel like we talk about this a lot on this show but whether it’s Marc Lore had worked at Amazon and Amazon had acquired his last company and then he’s vowing to destroy them or all the companies that came out of PayPal, or Photoshop and Pixar (they came out of Lucasfilm), It’s a small world in this corner of the economy here.
Ben: It is. I guess they’re sort of tech themes, like themes of the show. It’s funny how long things seem in our mind and how short they were in number of years. When Apple launched the iPhone in 2007, Android had not been announced yet. They were not at war. They were so friendly that Eric Schmidt was on Apple’s board.
David: Eric Schmidt, yeah, came on stage at the launch of the iPhone and talked about how Google was going to be an integral part of the iPhone.
Ben: And it was. I mean Google Maps was huge, like that was a 10-pole feature of –
David: Not to mention Google Search which we will get into in a minute.
Ben: Indeed. But it’s incredible how fast these companies became at each other’s throats and completely separated. I mean, the way that companies are direct competitors like if you go back 20 years, Apple and Microsoft are direct competitors and hate each other, and Google is like this benevolent, hands-off “we serve all” group. And in very short order from 2007 to 2009, it became Apple and Google at each other’s throats and fast forward to today, where like Microsoft Services are all over these platforms and Apple’s partnering with Microsoft and a lot of things. Another crazy example is like Apple launching this big enterprise partnership with IBM like how fast the world changes.
David: And you’re in the middle of this. I mean you were one of the original folks on Office for iPad.
Ben: Was. That was heck of a project.
David: So we’ll get more into this a minute, but I think it was – I mean, this is a little flash forward to tech themes for me – but I think the reason this was happening was like all these big tech companies realized all of a sudden that this was the opening of a new frontier and a new market, the mobile market that was going to be literally the biggest market that technology and maybe the world had ever seen. I mean because Apple becomes the world’s most valuable company during this time period. So all these companies are realizing that you’re going to have first couple of hundred million people in the United States and then a billion people around the world and then multiple billions of people and ultimately every person in the world when we get to the end stage, you know, still a couple years hence from now, is going to be coming online, buying a smartphone, having access to technology for the first time and as friendly as Apple and Google were before this, all of a sudden it's a race to go capture this market.
But I think the mistake that they made is a release that – I don’t know if there was a mistake but the fight that they were fighting at first wasn’t the right fight. They were fighting for the hardware there.
Ben: Right. And the question is, was Google doing that first? Why did Google? So is this sort of as we transition from the history and facts into more of like our analysis portion. Where we are today, it’s very clear that the reason that Android needs to exist is to prevent Apple from being the front door for users to use Google Services. Like Google can’t afford to give up that control, number one, in case people are going to use other services instead of Google Services, namely Google Search where all their money comes from, where all the revenue comes from.
Secondarily, there is an agreement that gets signed with people who are sending traffic to Google and I may as well just come out and start with this number right now – 34 percent of Google Search revenue from their AdSense, right? AdWords.
David: Well, so what Ben is referring to, for our new listeners, one of the things that we love on this show is lawsuits – not targeted at us but between the companies that we cover because all sorts of really interesting things come out in lawsuits. Over the last few year, Oracle has been waging a lawsuit against Google for Google’s and Android’s use of Java APIs in creating Android. One of the things that came out in that lawsuit is how much money Google pays Apple for having Google Search as the default search on the iPhone. And it’s pretty incredible.
Ben: Yeah, the amazing thing, David and I were looking over the lawsuit and thinking about this, it’s not a flat fee. Apple gets 34 percent of all of the search revenue that comes from their platform.
David: Somewhere in the neighborhood of 34 percent. It was at one time around that. A lot of this part of the lawsuit, Google freaked out about and had sealed, but for a moment it was public how this worked.
Ben: So in 2015, estimates from Goldman Sachs are that Google did about $15 billion of revenue from their mobile search. So Apple has about 18 percent of the global market share. So if you kind of figure out what that comes to, it’s about 918 million by that calculation or as released in these documents, about a billion dollars that Google paid to Apple for Apple to be using or directing people to Google Search. So then you start thinking about okay, the strategy for Android as it is today is very clearly to basically get free customers, basically people that are already Google’s customers to directly interface with Google and search. In that way, Google doesn’t have to pay that revenue split to anybody else for access to those users.
David: That’s just something that I didn’t really realize until we started doing the research for this episode, but it is kind of mind-blowing if you think about it, like hey, Apple is getting a percentage of Google AdWords revenue that happens on the iPhone. Like that’s crazy, one. But two, it all makes sense for Google now. To the extent that people use Android phones or use the Chrome browser on the iPhone instead of Safari, or any one of a number of ways that people are searching on platforms that are owned by Google or at least controlled by Google versus other platforms where they have to pay out revenue shares like it’s a no-brainer.
Ben: Yeah, the case for like basically Google is a company that makes money when people search and then click on ads.
David: And the people search on properties that are not Google, even indirectly like they’re searching on Google but they’re doing it in the Safari browser, Google has to pay a tax every time that happens.
Ben: Yeah, and so Google basically is the entire reason that Android exists so that Google doesn’t need to pay for access to their own existing customers. What mobile did is it inserted this new wedge into Google already had this relationship where everybody opened up their computer and Google was their homepage and they would search or it was built into browsers through all these agreements they had cut. Mobile opens this opportunity for all of a sudden there’s this whole new platform with all these people that had switched over to it and all these people.
David: Coming online for the first time.
Ben: For the first time, yeah. Not only does Google have to make sure that those places don’t use their customers, small as they may be, but they actually have to pay a cut of their revenue for the privilege of being the default search there. So when you kind of take a step back, the strategy for Android, the reason that Chrome exists, these things are all the same and it’s to make sure that no one else is inserted between the revenue generated by clicking on ads from search and their customers.
David: It's interesting like Wall Street and plenty of other analysts that are looking at Google, they always throw stones Google and they say like, “Oh, come on. This company can’t succeed at anything except AdWords, like none of their products make any money. Android doesn’t make any money. YouTube doesn’t make any money,” as we talked about, which I still feel good about our grade on YouTube. But Chrome doesn’t make any money.
Ben: But yet to see, for the record.
David: But the reality is things like Android, things like Chrome are huge economic value to Google.
Ben: Yeah. I mean it’s providing defensibility to Google’s business. To carry out that calculation a little bit, so then if you’re the flipside of that, since Google has 80 percent market share, so you look at the 80 percent of people that are searching on phones and generating that $15 billions of Google Search revenue a year right now, if you take that 34 percent that they don’t have to pay out to other people, Android is effectively saving them $4 billion a year just on that because Google doesn’t have to pay for that traffic.
David: Which is pretty incredible.
David: All right. Two things real quick to wrap up history and facts and then we’ll move on to acquisition category. One, I mentioned Motorola earlier. So, Google makes this move that is in some ways completely brilliant and in other ways completely boneheaded where they buy Motorola in August of 2011 for $12.5 billion and they say at the time that the primary driver of this was Motorola’s patent portfolio. And this is the brilliant part of it. Apple, Oracle as we’ve already talked about, Microsoft, many others, the phone companies, there starts to be a lot of litigation happening in this space and people are enforcing patents and defending patents, and Google being a much younger company than these other firms didn’t have the kind of patent bench strength that they did. So Google buys Motorola, very old company, gets all of their patent portfolio and then helps defend Google and things like the Oracle case.
But the second part of the deal was, “Oh, well now we're going to have a unified stack within Google from operating system up through the hardware. We’re going to make these incredible phones. Didn’t happen.
Ben: It didn’t go so well.
David: Didn’t happen. So they end up selling the assets of Motorola to Lenovo for $2.9 billion, a lot less than $12.5 billion. But to the extent they save themselves from multiple billion dollar judgments against them, may have been successful.
The other interesting that’s going to become very relevant as we do the analysis here, in 2010, a company in China is founded called Xiaomi which I presume a lot of our listeners are familiar with. But for those who aren’t, people refer to this as the “Apple of China.”
Ben: And if you've seen that written, that’s X-I-A-O-M-I.
David: Yep. So at this point, sitting here in September 2016, Uber I believe is the most highly valued private technology company in the world. Xiaomi, I believe, is the second valued at somewhere I believe between $40 to $50 billion in their last financing. And Xiaomi is interesting. Much like Samsung and others have been accused of just copying the iPhone but what Xiaomi has done, Samsung was completely reliant on Google. They just made the hardware and then they had some software “skins” that they would put on top of Android. But it’s running Google Android. Xiaomi, as we talked about, completely forked Android, have their own branch of Android that they fully control. There’s a startup called Cyanogen that has also done the same thing that only distributes the operating system.
Ben: Kindle Fire does the same.
David: Amazon does this with Kindle Fire. And Xiaomi basically leveraged open-source Android to compete with Apple. So they make beautiful, relatively low cost devices, sell them in China. They’re widely popular and they run a version of Android that Xiaomi has completely locked down and controls.
Ben: And this is a good time to draw the line between what is the Android Open Source project and what is Android as licensed from Google. So, you can get Android absolutely for free from Google and it comes with all the services that Google does – so Google Maps, Gmail and most importantly, access to the Play Store and all the apps in there. Or you can go get the source code yourself and you can fork it and you can just use Android source code. But the major disadvantage there is you don’t have access on your platform to the Play Store and you don’t have access to all these services. So you really have to not only go and build that yourself, all those mail app –
David: Or plug in other partners.
Ben: Right. But you actually have to build an entire new developer ecosystem. Like Amazon has to go around and convince everyone to submit to the Amazon app store and the Google Play Store. And that requires a little bit of work from each developer. Generally worth it but you kind of have this new cold start problem. So what Google sort of has an advantage here is for people who care about, for manufacturers that care about having access to all the apps in the Play Store and all the services, they’re just going to roll with stock Android and then Google gets to make sure that you don’t change any of the searcher services away from them.
David: Yup. All right. Sorry that was a long one. There is so much to cover here with Android.
Ben: David, so we’ve kind of talked about like what the point of Android is right now, do you think that was the strategy when they acquired it and when they started getting into the mobile game? Like why was mobile going to be important to Google in 2005?
David: I don’t know but I don’t think there was any way anyone could have foretold what was going to happen in this market. I think this was a great buy by Google of a really talented team working on some really cool technology that had a lot of potential, but Google probably knew about the iPhone because Eric Schmidt was on Steve Jobs’ board at Apple. But I don’t think anybody really could have figured out exactly how this was going to play out. But Google has done an amazing job with Android in terms of shepherding it through this widely complex gyrations in the market that, by the way, completely killed BlackBerry. It’s a company that was many multibillion dollar company that was the leader in smartphones just decimated, gone.
David: And Microsoft in a lot of ways too, you know, obviously Microsoft is having a resurgence now and wasn’t destroyed, but they were I think one of the leading mobile operating system providers and now that’s gone. Google really has done a great job shepherding this.
Ben: Yeah, it’s a great point. All right, do you want to move on to acquisition category?
Ben: Awesome. I’m going to go with technology here. Other choices are people, product, business line, asset, or other. My initial inclination was product but this was so early that what they were acquiring was not a complete product and not something that they can go to market with and something that didn’t have its own independent, fully fleshed out strategy. What they are really buying was kind of this core technology that actually no one else really went out and tried to build that. Like it clearly is a difficult piece of technology to build because…
David: Surprising though too because clearly it's difficult, but it itself was based on Linux. Somebody else could have also taken Linux and the Android team was a super small team and hadn’t raised any VC when Google bought it.
Ben: And now there’s no incentive to go out and building anything else because if you were going to build anything else, you’d have the cold start problem on all those services.
David: Well, everybody’s already on iOS and Android.
Ben: Right. But it is interesting how Google has this core technology and access to services that it licenses out and I guess it’s a free license, but at the very core of that is this technology that they acquired.
David: I basically gave my answer to this earlier, which I won’t repeat all of it but I completely agree this was a technology acquisition when they bought it. Then Google has done just this incredible job of shepherding it through. I actually wrote down that it was a technology acquisition with a little bit of some great talent when they bought it. But over time, this has gone from a technology to a product to business line and now an asset at Google. It’s really been under the storage of the whole company.
Ben: And it’s amazing how it’s an asset of defensibility. I mean, really the core thing they get from Android, in my opinion is making sure they don’t lose access to all those people searching. For as many of these interesting moon shots as Google is working on and self-driving cars truly could be a very different business for them and a very big and profitable one that actually rivals Search. Like Google makes money from having a marketplace of ads when you search and sometimes on other websites. I think that when you boil it down, they bought defensibility and more importantly, it was a cheap buy. What they did was invest 10 years into building an entire arm of their business to provide defensibility.
David: Totally agree. Should we move on to what would have happened otherwise?
Ben: Yeah. So I was thinking about this one earlier and my core question is I guess could and would Google have built themselves into the position that they’re in today, if they had not made the Android acquisition.
David: Interesting. We usually think about what would have happened otherwise from the startup’s perspective.
Ben: Where is that company going to land?
David: Which here I think is an easy question to answer because there’s no way. The playing field was so massive here as this market evolved. There’s no way a small independent company could have at the scale of impact. So I don’t think Android – it probably would have been bought by somebody else or failed on its own. But yeah, for Google, could they have done this without buying Android?
Ben: Let’s say hypothetically they had the foresight to know that the world would be the way it is today.
David: Which again, they knew what Apple was up to.
Ben: Yeah, and they knew they would need a competitive mobile operating system or maybe even actual phones to make sure that they owned that customer relationship to funnel people to search. Then you have a build or buy decision. And 50 million is like, you know, let’s say they were going to staff a team to go and build basically Android in-house. It feels like it’s close. It feels like this was not an outlandish…
David: Especially back then, I mean Google was the darling of Silicon Valley. Everybody wanted to work there, they had just gone public. Certainly they could have done it. The question I think is: would they have? They bought Android, at least part of it was Larry and Sergey were Sidekick fans, right? They knew Andy and Google’s M&A strategy has always been about acquiring really talented teams and having those people come in to Google and see what they do. In this case, they hit it out of the park. Would anyone at Google have been enough of a champion and visionary about what was going to happen to do this otherwise.
Ben: Right. Did you need an Andy Rubin to kind of be at the helm of that.
David: Like we said in the beginning, Andy was born to start this company. His whole career to this point, as Steve Jobs says, you can only connect the dots looking backwards, not forwards. But looking backwards, it’s hard to imagine anyone more qualified or who had been thinking about this problem about how do you create a really compelling mobile computer and operating system and experience than Andy.
Ben: Yeah, you’re right. The thing that keeps tugging at me is you could see a very classic Microsoft way to go about this where Google says, “Okay, we got to have phones, we’re not going to make the phones. We’re going to make the operating system, we’re going to charge for the operating system.” But Android already had this whole open source thing going on and they said, “You know, we’re going to be completely open source.” They hadn’t figure out the license packet with Google services.
David: Yeah, built on Linux.
Ben: But was that a forcing function to make Google go into this business strategy of “give it away for free” or would Google have arrived at this “give it away for free” business strategy on their own if they hadn’t acquired Android. One thing that just popped in my head is you could make the case that well, compared to the insane business that Search is, they shouldn’t be in the business of selling individual software licenses. But they’re doing it with Google Apps. It's this tiny portion of their revenue but they haven’t totally shied away from the traditional business model.
David: It’s interesting. I mean if you think about the grade that we gave Google Docs which is a big part of Google Apps, I can’t remember exactly what it was, but it was not an A. We haven’t graded Android yet, more to discuss. But I’m pretty confident I’m going to be higher than it was on Google Docs.
Ben: Yeah. I guess the question in my mind that I don’t think we can really answer is yeah, would Google have done this very unique open source approach to grow insanely quickly and get on 80 percent of the world’s smartphones without acquiring Android.
David: Well, listeners, if any of you were at Google at this time, let us know. We’d love to know. Okay, tech themes?
Ben: We can’t go an episode without bringing up Ben Thompson and Stratechery but you have to own the front door to the customer in this day and age.
David: The reason – Ben and I were talking about this before the show too – I think the reason why that’s important in the current internet information economy that we live in is what the internet has done is it has made distribution free. In the old world, this is – not taking credit for this, this is Ben Thompson’s insight here – in the old industrial world, distribution was really hard. So you had to aggregate distribution and if you control distribution, the customer was your serf basically in your kingdom. But now, distribution is free and anybody can build anything. Like we were saying, anybody could have build something on top of Linux, a mobile operating system. So in that world, you need to win the customer and you need to have the best customer experience.
David: That is one of mine too. I think the spin that I had on that was if you think about what Microsoft was trying to do at that point in time with Windows Mobile, the Microsoft way of thinking which is evolving now but certainly still at that point in time was like “we control everything you need to distribute a computing experience to a customer. We have a deep relationship with Intel. We have all the software developers that can make our own proprietary operating system. We don’t use open source. And we have relationships with all the carriers, the phone carriers and we can push this stuff out in to market,” and that’s great and people will use it, especially corporate customers because they need it. But Windows Mobile especially in that day and age sucked. I believe I had one of those devices at one point in time and it was very frustrating. They didn’t approach it from this way that, Ben, you’re talking about, that we’re talking about now like okay, we can just take Linux and build this and let’s build something awesome on top of it. So, that’s one.
The other one that I wanted to talk about that I referenced earlier was thinking about how the mobile market has played out, it’s interesting to see like you kind of see this in technology that the area of competition and what’s interesting kind of moves up the stack. So in the old PC world, it was the hardware. You can buy a Mac or you can buy a PC. Then in the beginning of the phone world, as we talked about, it wasn’t really so much about the hardware whether you’re going to buy because Android wasn’t competing in hardware. But it was the services, you know, are you going to buy an Android phone that has Google Services baked into it or are you going to buy an Apple phone that has Apple services and that Google can still participate in that but they’re paying the Apple tax.
What’s interesting is I think that the great mobile holy wars are pretty much over as far as we think, I mean who knows what will happen in the future. The level of competition has kind of further elevated up the stack to the application layer.
Ben: And services.
David: Well, services, some services but like not core level services, not operating system level stuff. It's like are you going to use Uber or Lyft, are you going to spend your attention in Snapchat or in Facebook or in Instagram. These are where money is being made today and this is where the playing field exists. It’s not at the level of the operating system anymore. It’s interesting when people talk – I think this is kind of a red herring at least not in China – but people talked about moving even further up into being on top of the messenger ecosystem. Maybe we’ll see that happen. People are talking bots.
Ben: We’re in the early stage of the hype cycle in those.
David: Early stage of the hype cycle. But it is definitely a theme that you see in technology that this level of play keeps getting further pushed up the stack.
Ben: Totally agreed. Well, I think it’s time to grade the acquisition. Before I throw my grade, here’s my reasoning and logic. So Android makes money for Google in two ways. One is advertisement supplied by Google and shown on Android phones. The other is revenue Google takes from its mobile app store, Google Play. And we haven’t talked much about that yet. That’s a nontrivial amount of money.
Ben: Since we’re going off of the data that Oracle opened up in this lawsuit, it's reported that they had $31 billion of revenue per year from Android. So we’ve seen the estimate that $15 billion of that is from mobile search revenue between iOS and Android largely on, I guess so it would be about $12 billion at that because it’s all from Android. Then you have the rest of that is, you know, there’s some amount from the actual phones that they’re selling because Google sells the Nexus phones. But then a lot of that, that top line, $10 to $15 billion of it is from the Google Play Store. And Google keeps 30 percent of that. So let’s say $3 to $4 billion a year is made from the actual Play Store. So that in itself much like how the App Store for Apple is a great business. You know, compared to their other businesses, it’s not insane but that in itself on a $50 million acquisition would be great. But the thing that I think Android really did is ensure that Google was safe for the next decade or two as the world changed out from under them and they were at great risk of losing access to their customers. They engineered a strategy here where they not only went and got a lot of those customers kind of back and made sure that as they transition to mobile, they stayed with direct access to Google and actually even tighter since they’re never on the operating system on desktop, but really where the primary place to go for the developing world as people came online for the first time. So I think Google’s core asset marches on and is well protected and this is an A+.
David: Yeah. For me, the question about grading this is a question whether this is an A or an A+. No doubt this was $50 million for something that is achieved even though it didn’t start this way, but over time achieved everything that we’ve talked about in this episode – for Google, absolutely fantastic. As David Lawee said, “Google’s best deal ever.”
Ben: Yeah, the Goldman numbers has $22 billion in profit last year from the Android division.
David: Incredible. The thing that I’m wrestling with a little bit is in trying to determine whether to give the plus or not is this was in many ways, again, I don’t think they saw it this way at the time but this was a defensive acquisition; this was not an offensive acquisition. And I’m comparing it with Instagram which is kind of our gold standard here. Instagram is so much simpler than Android.
Ben: I would still say defensive, though.
David: Well, it’s interesting, right? Like defensive, yes, existentially as I guess Android was in some ways too but not really because people are still going to keep using Google services whether it was on a Google property or not. This was just like preventing them from paying the 30-whatever percent tax and lots of other things too. But Instagram was much more about like, “Oh, we’re going to up-level the playing field now.” Like I was talking about in tech themes, we’re going to move up the stack. I don’t know. I’m struggling with that. Part of me feels like I want to – just the bold part of me wants to reward offensive acquisitions and forward-thinking acquisitions, not that Android wasn’t more than defensive.
Ben: Wait, wait, I would still say that Instagram was not a bold, offensive, forward-thinking. Ultimately they sell attention to advertisers and they were at risk of losing all the attention to advertisers.
David: Which is the same that Facebook sells.
Ben: Facebook, Instagram, and Google all do the same thing. They all sell attention to advertisers.
Ben: I think it’s interesting like Facebook’s move was defensive in that they wanted to make sure that they captured Instagram’s attention and can sell that to advertisers too. Google knew that they were going to keep getting the attention but basically wanted to save their margin.
David: Yup. And platform on which to do it. Yeah, I’m struggling. I think it’s an A+.
Ben: He says it in a very defeated tone.
David: I’m defeated, I’m limping into the A+ here, Ben. But which makes me think, I don’t want to be limping into the A+. I want to be charging into the A+.
Ben: Okay. What acquisition ever is an A+?
Ben: I mean Android has already made a lot more money for Google than Instagram has for Facebook.
David: But I think this is what I’m having a hard time with and maybe it’s just semantics. But Android has saved Google a lot of money. Instagram has made Facebook a lot of money. You know what I’m saying?
Ben: Yeah, I’ll buy in on that. Yeah, Android is effectively a margin saver.
David: Yeah. Whereas Instagram is like this is a new revenue engine for Facebook.
Ben: Yeah, presuming that Google would have gotten the queries from all the new people that were lighting up and basically new people coming online for the first time.
David: All right, here’s what I’m going to say. Android is my new gold standard for defensive acquisitions and is an A+ in that regard. I still like to play offense more than defense.
Ben: All right. It’s interesting because at the time – we just keep going back to this – I don’t think it was defensive when they bought it. But what it ends up turning out to be is one of the most incredible defensive plays of all time.
David: On that note.
Ben: On that note.
David: Let’s move quickly into follow-ups. So sticking with Google, a couple episodes we covered Waze. This is one of those quirks of history on our show that I think we spoke too soon here. We are going to have to do a full follow-up episode on this. Maybe on automotive technology generally at some point. But within the last couple of weeks, Google and Waze announced that they are now doing ride sharing within Waze. The product is slightly different but competing with Uber and Lyft too, but competing with Uber. Interestingly which Google is a major shareholder in Uber. David Drummond, Google’s head of corp dev and chief legal officer, was on Uber’s board and resigned after this happened. What do you think?
Ben: Our assertion with the Waze episode was that mostly they were using Waze data but not doing massive reinvestments in that product to make Google Maps better and potentially provide data for their self-driving car stuff. What they’re showing now is that they’re actually using Waze –
David: They’re playing offense, not just defense here.
Ben: Yeah, to introduce new products and try new things. Not only is it a new thing that is interesting, it’s probably the most interesting new thing that they’re doing that they’re rolling out through and they’ve chosen Waze.
David: And they’ve chosen Waze, yeah. Super interesting. Not Google Maps.
Ben: The question is like so they’re going to do their car sharing through Waze. Right now their self-driving cars are much more of an independent thing. Does that mean that they do a self-driving car service rolled out through Waze instead of through other –
David: Well, I wonder here too how much the fact that Google is a huge shareholder in Uber, and David Drummond was on Uber’s board, played into the decision to do this through Waze here. Like oh, this is this company that is still standalone, they’re based in Israel and Waze had rolled out ride sharing in Israel long ago. The news was that they brought it to San Francisco. So this is sort of like our independent division doing this, not related to Google corporate, and so like a head fake here. If Google were not an investor in Uber, would they have rolled this out through Google Maps?
Ben: Huh. I don’t know. An unrelated question is, is it actually that much different than what already existed in their Israeli product and that they just decided like, “Yeah, we’ll try it here too.” Is it actually as big a deal as the press and we are now making it out to be?
David: Well, Uber thinks it’s a big deal for sure.
Ben: Yeah, that’s true. To continue our mention from earlier about how fast things change, like friends become enemies very quickly when things like this happen.
David: As we saw with Apple and Google, yeah. New markets create a lot of competition.
Ben: In five years, who is Uber using as their Maps provider on Android?
David: A hundred percent Uber.
David: Actually a lot of Uber driver rides that I take now, the drivers are using the native Uber navigation and now switching over to Waze or Google Maps.
Ben: But you still need the core Maps product underneath even if their navigation is –
David: Yeah, but Uber bought – I’m liking on who they bought, but they bought some assets from Nokia, I believe.
Ben: The Here Maps?
Ben: They’re part of that conglomerate, yeah.
David: Yup. All right. Quick hot take. Not an acquisition but we thought it would be fun to talk about especially given the content of this episode. Apple’s big event – launching the iPhone 7 and airpods.
Ben: Airpods, yeah. I mean we’re just seeing the full maturation of mobile. It’s interesting to see phones are where laptops were 10 years ago. It starts to open the question for what’s next. Like I got excited, I bought one. Of course that was going to happen. It’s going to be an incredible product. All the changes that are made are largely incremental except for their continued breakthrough advancements with the cameras which I’m super excited about. I heard another interesting point that this could be Apple’s soft foray into the VR capture.
David: Because of the dual camera system on the Plus.
Ben: Yeah, yeah, that that’s something that’s kind of going on the side a little bit. Apple just launched a phone that will be in hundreds of millions of people’s hands that has two cameras and they can kind of do some interesting things with software with that later. Who knows?
David: So here’s what’s really interesting to me about the Apple event last week. I’m really surprised that people aren’t talking about this or maybe just not people I’m following are talking about this. Apple is super secretive about their roadmap, what they do, they don’t talk about anything. But they do drop these hints and if you listen closely to what they’re saying, it’s usually not a surprise what they end up doing. I was really struck when they were talking about airpods and talking about the removal of the headphone jack and everybody’s focusing on the courage, right? Like yeah, that was probably a poor choice of words. But here’s what I think they’re saying. I think they’re saying like we are moving with maybe it’s the next iPhone, maybe it’s two down the road or maybe this happens incrementally, we’re moving to a world where there are no wires. There’s no cord to your earphones. There’s no power cord. There’s nothing tethering you and that means that the device is actually kind of secondary and if you look at the airpods, you know, double tap to activate Siri, like we’re moving to a world where computing is just on you, part of you, around you all the time. People have been talking about this, this is what Amazon is doing with Alexa. But that to me was a really strong message from Apple that coming soon, Siri which we’ve done our episode on Siri and Ben and I are very skeptical of Apple on this, like Siri is going to control your computing experience. It may or may not be through a screen.
Ben: Yeah, expect more chips and airpods 2 and airpods 3 and airpods 7. Get excited because you won’t need a phone, and we’ll go from there.
David: We’ll go from there. All right, that’s our hot take. Carve Out?
Ben: Mine’s quick. Reading a really cool book right now. It’s called Business Adventures by John Brooks.
David: Oh, so good.
Ben: It’s short vignettes, maybe like 20-30 pages each that are stories of incredible things that happened in business over the last 100 years. The first couple are awesome. The 1962 stock market crash talking about the impact of the fact that trades were happening at a higher velocity than could be printed out, so no one knew what price they were buying things for when they put in a buy order and a sell order on some of these crazy crash days. The second chapter that I’m on right now is the colossal failure of the Ford Edsel.
David: That’s a good one.
Ben: The history and how that came to be. Just super great and really nice if you’re doing a lot of short flights or something like that where you can go knock out 30 pages, then you won’t pick it up again for a month or something and don’t want to forget. They’re very kind of bite-sized.
David: This is a great book recommended to me a while back by my buddy, Matt Nerlinger who’s at AVP which is a growth VC firm in San Francisco. This I believe is one of Bill Gates’ favorite books, and I think his favorite business book.
Ben: Yeah, he’s endorsed it on the cover. It’s a pretty killer endorsement.
David: Hard to beat that. Mine is also quick. It is the ESPN OJ documentary. It is so good. Have you seen this, Ben?
Ben: No, but you were telling me about that.
David: Everybody’s got to watch this. It is a 5-part documentary series. Jenny, my wife and I are in the midst of watching it now. We’re through the first 3 parts. So good. It’s like 30-40 percent about OJ and the rest, the majority about what was going on in America from the Civil Rights Movement in the ‘60s up through the ‘90s and specifically like in LA, race relations in LA, the police in LA, I mean this is where NWA was, you know. There’s so much deep history here that’s not people know about but this just such a fantastic job covering it. Also, I didn’t realize for people kind of Ben and my age, OJ just like, it’s the trial, right? That’s all we think about him. But he was an incredible football player. Like head and shoulders above everybody else. So, really great to watch. I highly recommend to everybody. All right, that’s what we got for you.
Ben: If you aren’t subscribed and you want to hear more, you can subscribe from your favorite podcast client and if you feel so inclined, we would love a review on iTunes and if you want to share this episode, tweet about it, put it on Facebook, tell your coworkers, yeah, really appreciate it as a listener. Thanks so much.
David: Thanks to everybody. We’ll see you next time.
Ben: See you next time.
Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.
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