The Steve Ballmer Interview

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: David, Steve gave us the signed Clippers jersey with the name Acquired on it. There’s only one jersey. What are we going to do about this?

David: Should we rock paper scissors for it? You know what? You keep it. There’s no Seattle basketball team. Keep it there up north.

Ben: All right. It’ll go in the Acquired museum north.

David: Great.

Ben: Perfect. All right, let’s do it.

David: Let’s do it.

Ben: Welcome to episode one of the Summer 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts.

Steve Ballmer is, among other things, arguably the very best investor of the last 20 years. It sounds a little funny to frame it that way, but here are the numbers. In 2014 when Steve left Microsoft, his net worth was $20 billion, almost entirely comprised of Microsoft stock. Today, 11 years later, it is a staggering $130 billion according to Forbes.

It is incredibly rare to reach this stratospheric level when you are: (a) not the founder of the company, and (b) no longer CEO or even employed by the company. And all of this comes from just one investment decision. Just keep holding substantially all of his Microsoft stock.

David: Incredible. We chatted about it with him in the conversation to come.

Ben: Now, as most of you know, we did a big two-part Microsoft series last year on the history of the company up through when Steve transitioned the CEO role to Satya Nadella. Steve listened to those episodes and he had some thoughts that he wanted to share with his recollection of how things went down. Things like what made Microsoft so fabulously successful, what his missteps were as CEO.

We wanted to share that as a recorded conversation with all of you, so we set up our cameras and our mics at his philanthropy office, Ballmer Group, in Bellevue, Washington, and we pressed record. We’ll go into everything from the misses on mobile, search, social, the huge wins in enterprise and cloud.

Steve also reflects on his business lessons learned, he goes into why he stepped down as CEO when he did, and he talks about his relationship with Bill Gates over the years. Of course, we had to talk with him a little bit about the Clippers and the new arena that Steve built and personally owns too.

David: Intuit Dome, incredible place. A cathedral of basketball as Steve would put it.

Ben: Listeners, if you want to know every time an episode drops, check out our email list. It’s the only place where we will share a hint of what our next episode will be. We’ll share episode corrections, updates, and little tidbits that we learn from all of you about previous episodes.

Come join the Slack to talk about this with us and the whole Acquired community, that is acquired.fm/slack, and the email list is acquired.fm/email. If you want more Acquired between our monthly episodes, check out ACQ2. We just released one with Zach Perret, the co-founder and CEO of Plaid.

David: And we’ve got some banger ACQ2 episodes coming up.

Ben: Yes, we do. Well, as most of you know, we are doing a massive, massive live show at the 6000-seat Radio City Music hall in New York City on July 15th with our friends at J.P. Morgan Payments. There are just a few seats left, so get yours before they are gone at acquired.fm/nyc. The lineup for the night is going to be something very special and we cannot wait to see you there.

David: And speaking of, just like how we say every company has a story, every company story is powered by payments, and J.P. Morgan payments is a part of so many of their journeys from seed to IPO and beyond.

Ben: So with that, this show is not investment advice, David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. Onto our conversation with Steve Ballmer.

Well, Steve, first of all, I noticed you prepared some printed materials here for us. Listeners should know, we didn’t ask for this in any way, but at 10:00 PM last night, you sent us a PowerPoint deck and said, I made you some slides. Sorry it got here so late. David and I are looking at each other like we didn’t ask you to prepare for this. Thank you for the materials.

Steve: Oh, it’s just some stuff that I’ve used with thoughts about how businesses work. I think of this as a time to reflect on things I’ve learned primarily at Microsoft, but also the Clippers about business. I figured, eh, I’ll send them to you. And they’re PowerPoint.

Ben: You mixed a few different templates.

Steve: Promotional opportunity.

David: Yeah, yeah.

Ben: Always a cheerleader.

David: Always.

Steve: There you go.

David: I think the word cheerleader is actually in the PowerPoint deck.

Ben: Yes, great.

David: Well, Steve, speaking of reflecting, we sit here today, Microsoft is the most valuable company in the world, almost $3.5 trillion in market cap. I think everybody would agree it’s an enterprise company, and that’s largely thanks to you.

Ben: It’s reasonable to call you the founder of Microsoft’s enterprise business. That is not a narrative that is often discussed. We wanted to ask you, how do you feel about the fact that it basically defines the business today?

Steve: Interesting. Very kind. Fathering something, I feel good about that. I think there’s a lot of truth to that. Of course, there are many fathers to the enterprise business at Microsoft, and I feel both good and bad about it.

The truth is, Microsoft started out as a consumer company. We built a very important consumer business. That success translated into the opening to go build an enterprise business. One of my regrets is we lost the consumer muscle along the way. I think the ability to be ultra, ultra.

We’re a great company. Microsoft’s a great company. But to have both of those muscles totally firing, if I’d been able to sustain that consumer muscle, and I had some ideas about why that didn’t happen, but the enterprise muscle, muy macho. It got very big and very strong. So I’m very proud of that.

It’s also funny when you say consumer and enterprise. What does it mean really to say enterprise? Sometimes it can sound just like backend stuff. The truth of the matter is, Microsoft Office/M365, whatever exactly it’s called today, is super important. It was the foundation for having permission to be in the enterprise, and yet it’s a product that sits right there in front of users.

The question is, do you think about users or consumer, and do you think about enterprise or do you think about IT? And then there are developers that span both. That’s my mental model. You have products that appeal to consumers that IT can handle, and a platform that lets developers build around those and based around those, whether they’re building for users, users and IT, or in some instances just for IT people, because there are a lot of tools that are just for IT people.

Ben: Well, to contextualize all this, we want to go back almost all the way to the beginning, right around the time you joined Microsoft, and talk about Microsoft’s relationship with IBM.

Before the IBM PC and before DOS, can you catch listeners up who weren’t around at that time, what was IBM in that era?

David: I think you called it to us, and when we were talking to you for research, the sun, the moon, and the stars.

Steve: Yeah, I did, I think. Well, it’s 1980 when I got here. The company started obviously in 1975. There were IBM computers and a couple of others. But literally, people would say there’s IBM and the bunch. The bunch was Burroughs’ UNIVAC, NCR, Control Data, and Honeywell. But they were just the bunch.

IBM did the mainframe, and it did the software, and it did the service. It did everything in computing. Everything. Everything. Then you had this little upstart try again called Digital Equipment, very important in our story because Dave Cutler, who was the father of Windows NT, came from Digital Equipment. They were fighting, they were scrappy, they were mini computers, so smaller than a room, but definitely bigger than a PC, if you will.

All the initial Microsoft software was developed actually on DEC computers. Digital Equipment equals DEC, and DEC had a nice business, but it was a lot smaller than IBM. If IBM breathed, that was the direction the computer industry would go.

IBM was the subject of an antitrust lawsuit, shockingly in 1969, that didn’t actually get settled (I think) to shortly after I got here in the term of Reagan. So 11 years they’d been living because they were that big and bad and mighty.

Ben: And what was the result of that antitrust action? What did they have to do?

Steve: I don’t remember. It may be when they had to unbundle. In fact, I think it was when they had to unbundle the operating system from the mainframe hardware, so people could build IBM-compatible mainframes.

Then one day, shortly after I got here, some guys from IBM call and they say, hey, can we come see you? You’re going to have to sign an agreement that says you can use nothing we tell you, anything you tell us we can use.

These guys showed up, and they told us after we signed their agreement that they wanted to build a PC. They were hoping to get the operating system and some of our language software for it.

David: And they were coming to you for the language software?

Steve: No, they came to us for the operating system. Now why, you’d say. We weren’t in the operating system business. We had a card called the CP/M SoftCard or the SoftCard for the Apple II. It was a card that plugged into an Apple II, that ran CP/M, not our operating system.

David: Gary Kildall.

Steve: Gary Kildall, Digital Research was the name of the company, but we had licensed it to put on this card that plugged in the Apple II. Somehow, IBM thought they could license CP/M. Even though it wasn’t our product, they thought they could license it from us.

We said, no, no, no, but you can license our language software. But there’re these guys down in Pacific Grove, California. Bill called Gary Kildall and said, there are some guys, they want to talk to you, they’re important. Gary went down there and didn’t sign the non-disclosure agreement. In the meantime, there was a company here in Seattle called Seattle Computer Products that had a little CP/M clone.

Ben: So the licensing of Microsoft DOS, which didn’t even exist when IBM approached you about licensing some things, is the single greatest business deal in history. The licensing of that software—

David: We made that contention on our episodes.

Ben: Well, I just think you look $3.5 trillion later at Microsoft’s market cap. This kickstarted it all.

Steve: It was pretty good. Literally good. There was a company that happened to be here in town, Paul Allen and I went down there, and we met with the founder who later came to work in Microsoft, a guy named Tim Patterson. I think we paid $45,000 or $49,000 for this operating system, because we told IBM no, no. We can take care of it.

There was a famous meeting amongst me, Paul, Bill, and this guy Kazuhiko Nishi, who ran our affiliate in Japan, where we were talking about this. There was a lot of, let’s just say, four letter words thrown around. Screw them. Screw them is five letters, but you get the drift. Screw them. Let’s just go get this operating system. Screw them. We can do this. Let’s go. That was the theme.

David: Kazu was a cowboy.

Steve: He was, yeah. Nishi, absolutely a cowboy. So we sold it to him, half of what we paid for it. We said, we can do this 10–20 times. Twenty times $21,000, $400,000 against $50,000 we paid for it. Pretty good deal. It was a little better than that as you said.

David: Talk us through the structure and how you guys thought about this. Because you did not make a lot of money directly from this deal.

Steve: Nope, we did not. Remember, the key thing was we didn’t charge for the operating system on an ongoing basis. We charged for it one time. If you got a new version, we charged another time. We did the same thing for BASIC and everything else, because at the time you could think we were like a substitute for an R&D department, which means we were fixed price. It was only (I don’t know) four or five years later that we actually switched to licensing per unit as opposed to just fixed fee—here it is, pay us once, and we’re done.

David: But the ultimate thing that you guys negotiated was a non-exclusive deal. You could sell this operating system and your language interpreters, but also mainly the operating system to other manufacturers. This is IBM we’re talking about here. How on earth did you—

Steve: But IBM wanted this. IBM were experimenting with a different approach. They had said, look. Instead of us building everything all custom, we want to use some industry standard parts, components because that’ll let us be more agile, et cetera.

They didn’t come in, loath to any of this. They knew that was our business. They know that was Digital Research’s business. They wanted to use an Intel part versus their own proprietary part. They didn’t ask Intel to do them a custom part either.

The notion was, we’ll move fast. We’ll get away from the IBM bureaucracy by taking this approach. I wouldn’t say that was the hardest convincing, if you will in the story.

Ben: But what ended up happening after all these years—I imagine it only took a few years to see it play out—was IBM sold a ton of IBM PCs, and DOS was the operation system, and then everybody else adopted DOS because all the application makers, all the software vendors were targeting DOS as the platform. So Microsoft accrued a huge amount of benefit.

Steve: You became the point of integration.

Ben: Yeah, and the old world IBM would’ve accrued that platform benefit. Did they see the—

Steve: Well they were selling a lot of computers and making profit also. They would’ve been making more profit than we were at the time just the way pricing worked.

There was a little twisty in here though I should throw at you if you’re curious. These things had something called the BIOS (Basic Input/Output System), which was the lowest, lowest layer firmware, first level software built into the hardware. IBM had its own BIOS, and some applications became BIOS-dependent.

Then the question is, who was going to do an IBM-compatible BIOS? We weren’t going to get into that game. We didn’t want to have that intellectual property, other arguments, but there were people then, that was important.

David: Compaq ultimately became the big company.

Steve: Compaq became the big company. I don’t remember whether they wrote their own IBM-compatible BIOS, but they were the first one to be IBM-compatible. There were plenty of people who ran MS-DOS who were actually not IBM-compatible because they didn’t do a compatible BIOS.

Ben: I see. IBM thought, oh we’ve got some protection from Microsoft, disintermediating us from all the developers and all the potential customers, because targeting our BIOS is going to be important and unreplicable.

Steve: The one thing you have to remember is we live in the modern world now. When you say all the developers, that wasn’t a long list. Remember, there was no software industry to speak of when we got started.

David: This is the creation of the software industry.

Steve: There were a couple of software companies that made packages for IBM mainframes, but almost everything was custom. Really, I would say we—few other companies, but I would say we—defined what a modern software business looked like. The notion that there could be lots of developers and yeah, there were some, but it’s not like we think today. There were developers doing lots of standard applications. No. There was no licensing model, no business model. Nothing. VisiCalc was around.

Ben: So it would’ve been counterintuitive or required too many mental hops to think, we’re IBM. Wait, are we giving away the future by allowing someone to distribute a wide operating system that ends up being the target that everyone standardizes on? Which eventually created all of modern Microsoft.

Steve: Exactly. You can’t blame them because there was nothing to build off of, but yeah. One of the things my little PowerPoint here says is luck is important in the creation of great companies. It is. A lot of people always say we’re masters of the universe. We figure everything out. We never have any luck. It’s because we’re so talented. Sure, they’re talented people and hardworking people. But most people have a little luck in their story, and this was our big luck.

David: Clearly, but when you were negotiating this, signing it, and then those first couple of years before the clone market really took off, did you think that this could happen?

Steve: No. I can’t remember what year it would’ve been, but Andy Grove who was running Intel at the time said, yeah, pretty soon we’ll be selling 100 million PCs a year. I don’t know. Sometime in the 80s. I think it might have even been in the 90s. Bill and I laughed and said, ah, that’s not going to happen.

We invested big time and if it did happen, we said that’s great, we’re not going to underinvest. But we thought, ah, he’s crazy. This market will never grow like that. I would say we classically underforecast, that was our tendency.

Ben: So the deal gets signed with IBM, you end up shipping DOS, it goes on the IBM PC, it’s selling like gangbusters. When did you start to realize, whoa, what we have here is actually leverage over the ecosystem. We actually are becoming the important layer that ties this whole computing world together with the operating system?

David: The personal computing layer.

Steve: Oh, I think by the mid- to late-80s. You make it sound very strong. No, we didn’t feel very strong. There was IBM man. IBM was still the sun, the moon, and the stars. That didn’t change.

I would say we didn’t drop that theory well. Well, into the 2000s. Into the 2000s, Lotus Notes was coming for us, and that was mid-90s and and beyond. But maybe you could say late, but we weren’t an enterprise company. If you looked at the enterprise, the enterprise was still…

David: IBM.

Steve: IBM. We used to say we had to hang on to IBM, that if we ever let go they might trample us. We called them the bear.

David: It’s called this riding the bear, yeah.

Steve: Ride the bear. You had to stay on. Then of course graphical user interface. It’s coming out of Xerox Park at the time, Apple’s doing their thing, and that’s another disruption, could blow everything up. I would say no sense of confidence about controlling the ecosystem well into the 90s before I think any of that, or at least for me.

Ben: When did you start to feel like we’re getting out from under the thumb of IBM? And maybe walk us through a little bit the OS/2-Windows world.

Steve: We’ve been staying with IBM, they decided they wanted to build something that was sort of their operating system and sort of not. This is 1982–1983. We and they would collectively build part of it. We would be able to license it to others. They would build a value add layer that was a database and a 3270 emulator. Crazy, just saying now.

We were going to work on the operating system and what was called Presentation Manager, called that the graphical user interface, and they were going to have rights equivalent to ownership in the code we wrote.

Ben: This sounds so convoluted.

Steve: It was so convoluted. Man, there was a time when I made 16 trips to the East Coast in 16 weeks, most of them to South Florida, a couple of them to New York, leave on the red-eye, the Delta DASH flight at around 11:00 PM, get into Atlanta around 5:00 AM, get the flight to West Palm Beach at about 7:00 AM, get in and be able to be at a meeting at 9:00 AM at IBM, and then work all day, catch the 7:00 PM flight home, be here about 10:30 PM or 11:00 PM. Twenty-four hours, down and back.

If you’re building something together, remember there’s no real email at the time. We were literally shipping disks back and forth. And then they decided they were going to do the Presentation Manager piece in England. There were also then a lot of flights to England. And then Texas is where the database and communication [...].

David: This sounds so IBM.

Ben: This sounds like Boeing.

Steve: It was the joint development agreement. It was the price of staying involved with IBM, and it was convoluted. For speed of action, we kept going on Windows, which we had started.

David: For listeners, everything we’re talking about is OS/2, the operating system that basically never comes to.

Steve: OS/2 and there was OS/2 Extended Edition or something, which it had their edition.

David: And Windows was your Plan B. It was like your side.

Steve: No, Windows was our plan. They wanted to do this new operating system. We convinced them, you got to have a graphical user interface. We tried to sell them Windows and they were resisting.

Ben: Okay, so it almost seems like you’re humoring IBM at this point with yeah, let’s do OS/2 together. We really think the future’s Windows.

Steve: Humor.

Ben: It’s more than lip service.

Steve: My job was managing (by then) system software. I’d shipped when I’d been the development manager for Windows 1.0.

David: Oh, the great videos of you from the Windows 1.0 launch are so good.

Steve: But no, that’s the sales side. I actually managed the engineers because the guy who was doing it wasn’t being successful, and we had to ship the thing. That’s when I learned some about engineering management from the engineers, basically, had to teach me to be effective.

We’re trying to keep with OS/2, Bill’s very frustrated with IBM. I’m frustrated, but I know my job is to ride the bear. Bill’s pushing Windows hard, but we still suspected OS/2 could be the winner because it came from IBM. But we couldn’t just stop for three or four years. We couldn’t make the mistake we made in the thing that became Vista.

We kept going with Windows, we kept going with OS/2, and then May 1990, they come along and shoot us. I was out running with my wife. I stopped.

David: Wait, IBM shot you?

Steve: Yeah, they divorced us. They threw us out.

David: I thought the story was Windows was gathering strength, and you all thought maybe we can step out from the little brother.

Steve: No.

David: They came after you?

Steve: They had a new leader by then, a guy named Jim Cannavino. He was getting frustrated with us because we were still selling Windows. We were still promoting Windows.

This was our first antitrust problem. I don’t know if you guys know this. The FTC at the time thought we and IBM were working to divide the market because we had done some positioning—what’s Windows good for, what’s OS/2 good for. We and IBM had done that, and then they said, no, you guys are colluding. That’s when we first got attention from antitrust authority.

Ben: This is even before the per processor licensing issue.

Steve: Yeah. That came later. That came with the DOJ. This was an FTC case and they started it in (I think) 1990, maybe 1989, as we were getting our divorce. My wife and I were remodeling our house. We were living in a condo. We stopped on a run, used a restroom or something. I pick up the Wall Street Journal and I read that IBM’s divorcing us.

David: All right. Listeners, now is a great time to thank our friends at J.P. Morgan Payments. You almost certainly have seen Steve’s famous 1999 ‘developers, developers, developers’ chant, which we will talk about with him later in the episode. The ethos, though, of focusing on developers was valid when he said it in 1999 and still holds true today.

Like Steve, J.P. Morgan Payments recognizes that supporting developers is a long-term investment. We’ve talked about the $17 billion that J.P. Morgan invests in technology and R&D, and for payments. That means dedicated teams focused on making developers’ lives easier.

Ben: Last year, we discussed J.P. Morgan payments developer portal. At a high level, their platform essentially empowers developers to operate securely while abstracting away the complexities of global payments.

If you look at the suite of tools available on that platform, the takeaway is J.P. Morgan has continued to roll out more and more technical solutions to effectively accept, manage, and send payments on a global scale. Their APIs come with all the technical documentation you’d expect with detailed testing guides and explaining payments concepts to build your application as you scale your business.

David: Let’s say you work at (say) an e-commerce company, for example. You need to restock your products, but your vendor is based in another country. Before any transaction happens, you’d want to use the validation services API to verify account ownership, and ensure that your payment is directed to the correct vendor. Then you’ve got to pay them in their local currency and you don’t have time to evaluate multiple solutions and stitch together various APIs. So J.P. Morgan’s single global payments API can help you take care of all that, including multiple payment rails and methods easily.

Ben: And that’s just one use case. Developers across industries traditionally had to choose between the innovation and flexibility of a FinTech, and the security and scale of a global bank. J.P. Morgan Payments is on a mission to eliminate that choice and offer you both.

If you’re a developer working within a FinTech or looking to embed payments within your software, head on over to jpmorgan.com/acquired to learn more about their ever-growing list of APIs.

If any listeners remember the meetup that we did after our Chase Center show, we’re actually going to do it again. We’re planning another meetup the day after Radio City on the 16th. We will share more details soon in the Slack community, but wanted to give folks a heads up in case you were planning for travel, evening of July 16th. A great meetup with our friends at J.P. Morgan Payments.

Steve: I pick up the Wall Street Journal and they read that IBM’s divorcing us.

Ben: What does that mean? Walking away from OS/2 collaboration?

Steve: Yes.

David: Basically they kick you out, kick Microsoft out, said we’re taking OS/2 in-house.

Steve: Exactly.

Ben: So you’re sitting there. Windows isn’t powerful Windows yet. Windows is this fledgling idea.

Steve: We still had something called the 640K barrier. You couldn’t speak to more than 640K of memory. We didn’t break the 640K barrier until (I think) Windows 3.1, which I want to say was 1991 or 1992.

Ben: So you’re on this run, you see IBM is divorcing us. You don’t really have confidence in Windows yet. What are you feeling and what do you think the pass is possible?

Steve: Mr. Wizard. Whoa. Shoot. Oh my God. We were so, you could say energized if you like. Scared also works. It’s like, oh my God. Now we have to confront the bear.

David: You’re already a billion-dollar-business at this point. You end 1992 at $2.8 billion in revenue.

Steve: Now IBM, but still.

David: But you’re still a pipsqueak.

Steve: We’re still pipsqueak to IBM. And remember, we have no enterprise presence. IBM has all dominant enterprise presence.

Ben: Who’s using Windows and how are you selling to them at this point?

Steve: Interesting. Single copies. Some hobbyists and end users. Somebody who says, hey, I really want to use a spreadsheet. And a lot of users in enterprises. It wasn’t going through IT. You’d have a user that would buy a PC on the expense account, probably for the department, buy a copy of Windows, buy a copy of Excel, at an Egghead Software—was a software retailer at the time—bring them in and use them.

Then IT started to get nervous about that. We knew most of the copies, not most, but many of the copies were winding up in businesses. What the hell? IBM’s going to stomp us like a bug.

David: Given an assumption that if IBM wants to stomp out this happening, it’s going to happen. If we want a future, we got to play with them.

Steve: Yeah. That’s why we were “riding the bear” the whole time because they’d stomp us out and they divorce us in 1990. Then we say, oh my God.

David: So at this point, your business, even though it’s a billion-plus scale, it’s selling to retailers to sell copies of software—DOS, Windows, languages, apps.

Steve: Not DOS. DOS was always sold to…

David: OEM?

Steve: Yeah. Not always, but so much the lion’s share, it’s worth saying it, was only sold because you needed a BIOS, remember? You needed a BIOS, so you had to have the hardware vendor build the BIOS into the machine basically.

David: So you’ve got that. The OEM business, which was already—

Steve: The OEM business was the biggest part of the business. Then we had this retail business, and there was no notion of enterprise licensing.

David: You’ve got no CIO relationships, no enterprise agreement.

Steve: We had a couple of CIO relationships. The Air Force was the first big Windows customer.

Ben: Your first enterprise customer was government?

Steve: Our first big Windows customer, at least as I remember it, was the US Air Force, and they were buying single copies of Windows. When you say government, there are really two governments in this country. There’s government and there’s the military. The military is a much more disciplined, advanced user of IT. They’re just better. They’re more professionally run than most parts of government. So yeah, it was the Air Force.

David: You’ve got a little bit, but…

Steve: Yeah, we had one or two customers just to prove we could actually serve big customers.

David: As we understand it, you had this realization at this point. Once the divorce happens, well I’m going to go figure out how to do what IBM does. You personally.

Ben: To put a finer point on it, the thing that we said on our episode, and I’m curious if it’s true or not, is this was not Bill’s passion area, and you raised your hand and said, I’ll go figure out enterprise sales.

Steve: Oh yeah. That’s for sure true. Bill had passions a lot of places, but he’d say the apps group and what Windows could deliver to the apps quite appropriately, I’d say that’s where a lot of Bill’s brain cycles went.

I had also hired Dave Cutler. Dave Cutler had been the architect of the VMS Operating System for Digital Equipment, we had DOS and Windows, and when we were talking to Cutler about coming here, he says, I don’t want to work any toy operating systems. I had to say to Dave, good thing, because we have a toy operating system.

But Dave is the key to getting us there. We said, look. You got to build an operating system whose API looks like Windows and whose user interface looks like Windows.

Ben: So developers are can be familiar with it and write apps for it.

Steve: Yeah. You might make some changes because you have to, but it’s got to be a robust operating system. It’s got to have a secure kernel. It’s got to have all of these things.

Ben: The product set that you had wasn’t really enterprise grade yet.

Steve: No, we had a joint development agreement, a joint agreement on LAN manager with a company called 3Com. It wasn’t all our stuff. We had a development agreement with a company called Sybase to do the SQL database, because we were trying to figure out all these pieces IBM would have, and we didn’t have any of that.

Ben: An operating system alone is not going to do it. You need all these other components.

Steve: And you want to have backend infrastructure. We started scrambling on that in the 80s. We had all these infrastructure pieces that we had to build if we wanted to sell to (I’ll say) business customers. When you say enterprises, sometimes people think very large companies, but we couldn’t sell to companies of 20 people without some of this stuff, or 50 people.

David: You talk a lot now about this management concept of building muscle. Is this where this came from of you should always be, you used the phrase in the weight room, building muscle ahead of what you need. Were you and Bill thinking this way in the 80s of, hey, we need to be building up this muscle across all parts of computing and business computing?

Steve: Well, Paul Allen, Paul’s the key. Paul is the one who said Bill said we’re never going to be a hardware company. When the Altair came out, the first real microprocessor-based computer, Paul says, okay, let’s write all the software that these things will ever need.

Bill and I had a lot of the execution around that, but that was the push. Paul was cracking on me in the early 80s to start building an apps group. Come on, Steve. Come on, Steve.

Ben: It’s not just systems. We need to have applications also. Any code that executes on a microprocessor, we should have a player in that market.

Steve: And there was a VisiCalc spreadsheet. Come on, Steve, Word Processor. Come on, come on, come on. Let’s get the talent. Let’s get going. We were doing mostly college hiring at the time, so okay. Then we met this guy Simonyi, who’d been at Xerox PARC.

Ben: Charles Simonyi.

Steve: Charles Simonyi, exactly. We met him through a mutual friend at 3Com corporation who’d been at PARC, and he really was the first leader of the apps business. But we licensed. We worked with other people the way IBM worked with us.

We went to Sybase and 3Com and let’s work together. It wasn’t exactly a JDA (joint development agreement), but we worked with those guys. The analogy now is a little bit Microsoft working with OpenAI. When the big company works with the new company, how does that all play out over time? But I took over system software in 1984, so that’s when we’re starting all this stuff. You could say I was a little bit more enterprisey.

Ben: I’m looking at your chart here that you made for us. You’ve got 1992–1998 titled lift-off, and that’s after the era where you talk about enterprise start.

David: And you have your role switching from your role as OS division in the previous era to sales.

Steve: The lift-off there though is mostly on Windows and applications. The lift-off isn’t really enterprise. It was not until the late-2000s. People would say that you guys might find this funny or maybe you even know it. Customers say you’re not an enterprise company. You’re not an enterprise company.

Ben: As late as when?

Steve: Oh, late 2000s.

Ben: Really?

Steve: Absolutely. You’re not enterprise-grade, you’re not enterprise-ready. Oh, I heard that so much.

Ben: And in 2005.

Steve: You had Oracle out there. Remember, there were still mainframes and mini computers. Those things were enterprise-ready. IBM had product, still. You didn’t have enterprise support. Our licensing, we had to evolve in the early 90s and then again in the late 90s. No, we didn’t have those things. So no, we weren’t an enterprise software company.

Ben: That’s so interesting.

Steve: Until it was late 2000s. Certainly, it wasn’t before 2005. It wasn’t at the beginning of my tenure. We were still trying to prove that we were an enterprise company. Now, I just find it cuckoo that all Microsoft is characterized as an enterprise company, which I’m not.

I think it’s more complicated than that, but I’m not going to say that that’s not the primary muscle. For sure it is, but me, the company, I was hell bent and determined to prove we were an enterprise company.

Ben: Why was that? Let’s call it 1992, 1993, 1994. Why did you feel it’s so important for us to attack that market?

Steve: Easy. Because that’s where IBM could squish us like a bug. If we couldn’t sell our stuff to businesses, only to consumers, we knew that by then we’d only get so far because enterprises wanted some features. Enterprise don’t like, okay you can go to computer land and buy a few copies.

David: And the consumer market, we’re pre-mobile. So pre-mobile, the consumer market, pre-internet, it’s big, but it’s nowhere near IBM’s market in the enterprise market.

Steve: By revenue. No, for sure not.

Ben: We’ve talked a lot about the products. Let’s talk about the go-to market motion and this invention of the enterprise agreement. What are the key pillars that you came up with for the enterprise agreement and why did they exist?

Steve: Our first software pricing packaging model for the enterprise was not the enterprise agreement. First it was we sold you disks. Second, we came up with this notion of what we called select licensing. You could make your own copies. You just report how many copies you sold.

David: Sounds rife with challenges here.

Steve: You tell us how many copies, and just pay us what you did.

David: The enterprise honor system.

Ben: Astonishing. And that’s of Windows, that’s of Office.

Steve: Windows, typically, by then, came with the hardware.

Ben: You were mostly using the OEM channel.

Steve: For Windows? Yeah. Even to this day, upgrades and stuff are sold direct to enterprises, but basic computer that comes to an enterprise would have the operating system license to the OEM. We were on, you can call it the honor system, but we just couldn’t make people buy disks from us or CDs. Enterprises didn’t like that, so we had this thing called select.

Select had two problems with it. Number one, very hard to copies of software you print. And number two problem, we were selling upgrades and new licenses. Upgrades were less than half the price of new licenses. What does that mean? The company was headed to a world where its revenue was half of its existing revenue.

Ben: Unless you’re growing new customers, new logos, a phenomenal clip.

Steve: So it was a real problem-looking thing. Bill and I, we’d always dream of this thing where you get some recurring revenue, and then we came up to say, okay, well why don’t we just do a license that you didn’t have to count the number of licenses you printed? Just the number of computers. Made life simpler.

We said, instead of doing sell you a new license and then God knows when we would sell you another upgrade or whatever, we’ll do something that just says, hey look. You sign up for three years, you pay us per machine, and you just pay us the same amount of money each year for three years.

It let us jimmy-up the price of the upgrade. We solved the upgrade price problem, and we solved the difficulty of administration problem. And that was the enterprise agreement.

David: Was it from the beginning of you get everything?

Steve: No, that was a special enterprise agreement. You got all the upgrades during that three year period to the products you licensed.

David: But you were still picking and choosing, oh I want Excel. Oh I want Server.

Steve: You could. We were encouraging you to buy Office. But we also had this all-you-can-eat license. I can’t remember what we called that, but basically then I think you counted the number of employees and you could use any of our software for anybody.

We just tried to go simpler and simpler and simpler in the administration. Recurring revenue that didn’t decline over time. As much as you wanted to eat, the upgrades, everything. We did want essentially what we have now, which is a recurring services business. But we didn’t have the cloud. We weren’t delivering things. But we’re already on that path. I think we started the Energizer. You guys mentioned what we do with Energizer, which is where we wanted to run their IT department.

Ben: They were a pilot customer for this concept.

Steve: Yeah, they were the first customer. I talked them into it. This is beyond the enterprise agreement. This is where we actually want to run their stuff because we did want to get to this recurring revenue thing.

Ben: And David was referring to this concept earlier. We talked about it a lot in our Microsoft episode and then on our Epic episode. This genius idea of you will get included in your license, a whole bunch of software, even if you’re not ready to use it yet.

If at any point you’re considering buying this different software package from this other vendor who just make this one thing, then they look in their paperwork and they’re like, oh wait, actually we get that from Microsoft for free as a part of the thing we’re already doing. Let’s just do that.

As long as you’re developing a lot of software every year, you can indefinitely just make more and more and more stuff so that your customers don’t need to look elsewhere as they expand their software needs. How did that come about?

Steve: Let’s start with Office. When we’re selling Excel, Word, PowerPoint, and then we put these things together, people would complain. We didn’t always sell Office because people say our users don’t use Excel. We don’t want Excel included. Okay, we had a licensing option for you.

But it became easier and easier. People then departments. Departments always, were in-running IT at the time. Still now, I think. We did sell you things that you might not be using. But it also, if you’re trying the departments, we already got it all for you. You may want something different than this department, but we got it all for you. That was an attractive thing for people.

There’s an insurance aspect that I learned that IT people really want. They want peace of mind. That’s part of what it means to be an enterprise. I want to make sure everything’s secure. I want to make sure that everything is well-managed. I want to make sure everything is well paid for. I want to make sure there’s somebody to call if things go wrong. I want to make sure I bought everything. I don’t want to look bad because either I paid too much or I have holes in what I bought for people.

I view this, and I probably evolved my view to this over time, when you sell the enterprise, you have to provide peace of mind, which is like an insurance policy. Buying more than you might be using or some users are using. It’s an insurance policy.

Ben: And software has zero marginal cost and zero distribution cost. So we’re happy to mail you a few more discs if you need them.

Steve: But we weren’t even mailing discs by then, because we had the enterprise agreement in place.

David: At a certain point along the way, you get to, well I want to say the holy trinity, but I think there are more than three pieces of this. But the real killer suite in enterprises, which is Windows, Windows Server, Active Directory, Exchange, Office, and all of these pieces of software, all work in orchestration to run your enterprise. Your users, they do their email on Outlook, which is part of Office which runs on Windows, which uses Exchange, which uses Active Directory, which is a—

Ben: SQL server.

David: All these things. How long did it take to get to that point? To my mind, that’s when the enterprise is firing on all cylinders here.

Steve: That really comes with email boom. Email boom is late 90s/beginning of 2000s.

Ben: Because email is the cart that pulled the whole thing.

Steve: Oh yeah. No, it’s the locomotive.

Ben: Enterprises wanted email.

Steve: Yeah. When Accenture became a company, we started a joint venture called Avanade to help do essentially the holy trinity to help install. We needed support infrastructure and partners who knew how to set up the servers, provision email, put all that in. We needed partners and we didn’t have enough capacity. That’s why we started this thing, Avanade, which is big, big company at this stage, with Accenture, and that was in the 2000s. I went on the board of Accenture.

Ben: But all this to say, the way you could pitch an enterprise is rather than any of these other value propositions—David listed off a whole bunch of software—you could say you guys want some email. We have the most reliable, robust way for your enterprise to adopt email, and it’s going to come with all this other great stuff.

Steve: And everything was nicely integrated because remember, you needed Active Directory to manage file shares, to manage printers. It was used for a lot of different things. It really did all come together as the integrated proposition. You guys made fun of the notion that we called all that stuff the BackOffice as if that was [...]. No, no, no. It’s so wrong. So wrong about that.

David: We took that as a signal that Bill just didn’t care about this stuff.

Steve: Oh, completely not right. I wanted to call it the BackOffice because you needed to buy the Office in the BackOffice. The user, the consumer saw the Office and the BackOffice were the things that were in the server rooms/data centers. But a lot of them were server rooms. It’s the same thing these days. but cloudized.

Ben: All right. As we were preparing for this, there are a bunch of big questions that we just desperately want your take on. A big one is around one of your most iconic moments. 1999, the developers, developers, developers speech.

I’ve probably watched this clip 20–30 times, almost everyone listening has seen this clip. What is missing from this clip is all the context around Microsoft and what’s going on in the world at this time, and what you need to accomplish as a leader of this company. Help us set that stage and then understand why you went on stage that way.

Steve: Well remember, by this time we’re not through our IBM competition, and we got Linux competition now on the docket because Linux is competing with Windows Server. Linux is competing with Windows, and there’s a thing called OpenOffice, open source software for office that’s competing with Office. We have all these things going on. We haven’t beat Lotus Notes yet.

David: And you’ve got antitrust count.

Steve: We have antitrust issues (of course) by then.

Ben: The culmination of the DOJ suit is happening within 12 months of this moment.

Steve: Correct. But it’s clear in all these competitions, the thing you need are third-parties that reinforce what you’ve got—add value around what you’ve got. I could say run on your platform, but I’ll come to that later if you want to what a platform is and isn’t, if you want to do that. It’s interesting, I think.

Ben: Yeah, let’s do it.

Steve: Particularly since everything’s called a platform these days. But anyway.

Ben: Let’s take an aside here. Give us your definition of a platform.

Steve: You could call it anything that is extensible, and it’s the extensibility that “makes it a platform,” because you’re going to get people to extend the value you add.

The question and the reason that’s important is that applications are platforms too. Not just developer platforms. When people say that they might mean Azure, AWS, or in the old days, Windows or Windows Server or Unix then Linux. Yes, those are platforms. You extend them.

But you also extend Office. You add value partners plug in. They write applications. They use the file formats. All of this stuff is platform. Part of the issue (I think) for Microsoft is if you see yourself as just a platform company, platforms need apps. You want to have the top first-party app that runs on your platform. Otherwise your platform can’t get good.

Office was the best first-party app on Windows, and that’s how things get good. Outlook was the best first-party app on exchange. There were other clients at one point, by the way. So you really do want extensibility in your apps in addition to your “platform.” You want to make sure you own first-party app in addition to “platform.”

I think you can get stuck in the mud if you say we’re just a platform company. I think we got it into our corporate mindset that we were “a platform company” far more than I ever intended.

There were people telling me in the mid- to late-2000s, well we can’t do that. We’re a platform company. I said, yes, we can do that. By 2010, I was just frustrated with myself and my inability to get people out of the, we’re-just-a-platform company.

I think to this day you have to think app with platform. You have to think extensibility of the app and the “platform.” I think we got caught on that. Maybe I got caught on it for a while, and I certainly got caught in my inability to tell people what the company needed to do because people had such a culture then of saying we’re a platform company. We’re a platform.

Now I go back to, developers, developers, developers. I’m trying to tell people at that time that third-parties really mattered. You got different opinions inside Microsoft.

Ben: And what event was this at?

Steve: The developer conference, I think.

Ben: So it’s for external developers?

Steve: External developers. Who’s Windows’ number one client? Is it Office or is it all developers? You ask the Windows team, it’s all developers. You ask the Office team, come on, you got to do for us what we need to do. You have to be able to communicate that you really care about developers who are not your own. That you really want these things because they may think, oh, it’s all about running Microsoft Office. We just had to tell people, we want you, we want you, we want you, we want you.

I think we got caught in thinking it’s all about third-parties and not also about our first-party apps. That’s where you say, are you a, the word ‘consumer’ sounds unserious. Are you for users and for enterprises? Which really means IT departments. Or are you for users and not IT departments? And do you allow both all aspects of what you do to be extended by developers?

That’s the frame I believe in. We had some issues over the course of where we went in the 2000. We can talk about that if you want to. But go back to 1999, come on, we need you guys on Windows. IBM still selling OS/2. Linux is right there on the horizon. It’s coming like a freight train.

Ben: Is the web starting to enter your psyche at all?

Steve: The web’s part of that. We’re trying to get people to write for Windows Server, good point. We’re trying to get them to extend ActiveX controls, I think. We’re the part of the browser. We were trying to get our browser to be a platform, embrace and extend I think is what we said. We’ll embrace the Internet and we’ll extend with these ActiveX controls. We need developers to do ActiveX, we need them to do Windows Server.

We’re just getting ready on .NET. I have my own wild style. How do you end a speech? You tell people you love them, that you want them. That’s the call to action. That’s where I think the developers, developers, developers thing came. Before that one, there was a different video that people characterize it.

Ben: I love this company?

Steve: No, it was my Windows video. I don’t know if you’ve ever seen that.

Ben: Oh, of course, but wasn’t that a parody? Don’t people misunderstand?

Steve: It was for fun. It was just a fun thing. It was not a real speech.

Ben: And it was for internal consumption where you were saying, for this low, low price.

Steve: Yeah. There’s a lot of little nuances in there. We’re trying to get our people pumped up about Windows.

Ben: What I was looking for there is the developers, developers, developers speech is one where you feel like we haven’t really won the last battle yet. We’re still in this death grip for enterprise developers or this death fight against IBM, and yet there’s now Linux and the web for these more independent or platform-of-the-future–looking developers. In some ways, were desperate to sell, to win, to say, hey, we have a great platform here. You need to come use our stuff.

Steve: Exactly. I can’t remember whether we’re pre-LAMP or LAMP by then. But I don’t remember. There’s some infrastructure on top of Linux that people are using to write, let’s say they’re backends not their user-facing code. We had tons of competition.

The interesting thing is people say, only think about your customer. Never think about your competitor. I actually think you have to think about both. Ironically, we were pretty consumed with our competitor, which (I think) was essential, and we were pretty consumed about doing new things. But the competitor thing wound up being very important.

We have no business. We’re not in the enterprise. We could lose Windows on the client. The company weren’t really self-confident. The DOJ was really self-confident that we were a lock and there was no competition, and life was easy. That’s not where our heads were.

Now, there is some time in the 2000s where we think extending. We did a slide once called Windows everywhere. We used to use this on all these devices. We became too wed to extending what we had versus jumping to something new because in a sense, we were too confident if we only Windows-ized something.

You guys make a point in your episode on us. You guys call it sticking with Windows too long. That may be it, but I don’t think we stuck with Windows too long. I think what we did is we tried to put Windows in places that it didn’t naturally go, and we tried to be too Windows-ey both in the API and the UI in some things.

Ben: Mobile being an obvious.

Steve: Windows Mobile, exactly.

Ben: And the car.

Steve: We did a layer on Windows that when you hooked your PC up to the TV, it had a simplified user interface on your TV.

David: Oh, yeah. I remember this.

Ben: It wasn’t just Media Center, right? It was some…

Steve: Media Center, exactly right. We became convinced to some degree paranoia and some degree confidence. Well our birthright here comes from Windows. That’s our permission to enter the area. But then we also, in some areas, it just wasn’t going to be extensible. There was both a fear and an overstated confidence in trying to take Windows everywhere.

Ben: All right, listeners. It’s time to talk about another one of our favorite companies, Statsig. Since you last heard from us about Statsig, they have a very exciting update. They raised their Series C valuing them at $1.1 billion.

David: Huge milestone. Congrats to the team. Timing is interesting because the experimentation space is really heating up.

Ben: So why do investors value Statsig saying at over a billion dollars? It’s because experimentation has become a critical part of the product stack for the world’s best product teams.

David: This trend started with Web 2.0 companies like Facebook, Netflix, and Airbnb. Those companies faced a problem. How do you maintain a fast, decentralized product and engineering culture while also scaling up to thousands of employees?

Experimentation systems were a huge part of that answer. These systems gave everyone at those companies access to a global set of product metrics from page views, to watch time, to performance. Then every time a team released a new feature or product, they could measure the impact of that feature on those metrics.

Ben: So Facebook could set a company-wide goal, like increasing time in-app, and let individual teams go and figure out how to achieve it. Multiply this across thousands of engineers and PMs, and boom, you get exponential growth. It’s no wonder that experimentation is now seen as essential infrastructure.

David: Today’s best product teams like Notion, OpenAI, Rippling, and Figma are equally reliant on experimentation. But instead of building it in-house, they just use Statsig. And they don’t just use Statsig for experimentation. Over the last few years, Statsig has added all the tools that fast product teams need, like feature flags, product analytics, session replays and more.

Ben: So if you would like to help your teams, engineers, and PMs figure out how to build faster and make smarter decisions, go to statsig.com/acquired, or click the link in the show notes. They have a super generous free tier, a $50,000 startup program, and affordable enterprise contracts for large companies. Just tell them that Ben and David sent you.

Let’s jump to this point, but what is the generalizable lesson here? You have Windows, this amazing piece of software with this tremendous multi-sided network effect around it. The logical thing to do is to continue to try and extend it and say, geez, wouldn’t it be nice if the next great technology wave was also Windows?

Steve: And that worked for us on Windows Server. It’s not like we didn’t have an existence proof that the thing could work. But if you’re going to, in my little deck I gave you.

Ben: Yes, please.

Steve: If you’re trying to skate to where the puck is, if you’re trying to recognize, what did I call this about capabilities, if you’re a startup in something, there’s an ongoing business, you just keep enhancing your products. There’s a line extension. Okay, we’re going to add networking to Windows. No problem. You still call it Windows. It’s related.

But new, SQL Server for example, was that for a while. It was related because we had a backend platform. Dynamics, somewhat related, our accounting, et cetera stuff. Because there was some enterprisey sales, but it was really new.

It turned out the phone was more like a startup, recognizing and thinking about things, and then asking yourself, what capabilities do you need? I say get in the weight room. You’ve got to develop capability. Take a look at a capability we developed that is now essential. We didn’t build it for this reason.

Hardware design. Microsoft’s a major hardware design company now. I started it out mostly to help client-side devices—Xbox, Surface, phone. And guess what? They use that mostly now in Azure data centers. I think the guy who actually runs hardware design used to be on Xbox. The backend hardware design for the data center—the chip, et cetera, infrastructure—I’m pretty sure there were a lot of talent we brought in.

Building capabilities is important. We built some capability, but we didn’t build enough capability. We didn’t see things as different enough. Okay, let’s try to keep the comfortable Windows user interface because people understand it. It wasn’t right for the phone. I don’t even remember what processors we started out on, but I’m pretty sure we started out on Intel. Of course that wasn’t right. We tried to keep too much consistency, both out of a fear that this was our permission to exist and out of a self-confidence that we had to put Windows everywhere.

Ben: So when should a company that has an existing fantastic business say, no, no, no. We cannot extend our existing franchise to this new world. This new world is going to be dominated by some new paradigm where we have no advantage. How do you play that?

Steve: And then do we choose to get in?

Ben: Exactly.

Steve: Then you have to choose to get in. I would say two things were true at the time for us.

Ben: And this is specifically about mobile.

Steve: It’s also about something else. It’s a little bit about search too. There were two things that are true. Number one, you have to be focusing consciously on the issue. It’s easy to get caught up, there’s innovator’s dilemma. It’s a little different, but you get caught up in what you have, you get caught up in what you get caught up in the capabilities, and that’s why I say to myself, you explicitly have to think about it. If we hadn’t developed a bunch of capabilities we had, AI, if we hadn’t built Bing, company wouldn’t have capabilities.

David: You built some capabilities in online services that will… we’ll come back to that.

Steve: We built some important capabilities, but we didn’t realize the businesses were enough different to harness those in the new ways. I’m proud of the capabilities we built. Didn’t apply them the way we should have. Where did we learn to build internet-scale infrastructure?

Well, some with Azure, some even more than Azure, being even more than Azure to get started. The Office. What’s now in M365? The Office backend, because that got critical mass as a cloud infrastructure before Azure did. Even more so with Bing. We developed the capabilities, but then you look at the product and what was our strategy for Bing? Well, there’s too much based upon Windows integration. You have to say this is a separate part.

David: Before the Bing rebrand, it was Windows Live Search. You’re not going to be Google with Windows Live.

Steve: Everything was Windows Live. It’s now OneDrive. But the file sharing. Google’s done the same thing. You got to ask where do you run out of gas?

Ben: Because you could make the counter argument, shoot, Google is running away with the market. It’s very good technology. They’ve perfected the user experience. They have scale. You need scale in this business. Uh-oh, it’s a runaway train that we’re never going to catch.

Thank God we have Windows to be able to have some way we can attack them from the side. With Windows integration, maybe that gives us a fighting chance. That didn’t end up being true, but you can paint that narrative at least. We can’t fight Google head on.

Steve: No, I need to tell you something. Look, how late were we to search? The answer is when did Google start? 1998–1999?

David: 1998.

Steve: Okay. And we jumped in in 2003, I think we pushed. Now you’d say five years is a lot, or you could say five years isn’t that much. You could say we had no birthright. It’s just a completely separate thing. We had no capability. We had nobody who’d grown up in that world.

We had some guys in Microsoft Research who could start getting us there. We took talent that was doing other things in Microsoft. It’s hard to go get new talent because search is brand new. There were people from Inktomi, Google had sucked them up. So it took us a while to get off the ground.

It took us a while even, to be fair, I think this is something both Bill and I debated, not just with each other, but just we kicked around too much, how much “the verticals” in online services would be important versus search and portal is generic. So search and portal is generic.

But remember, we had a thing called Expedia. We built a travel site. We built a local information site called Sidewalk. We had a car shopping site. What did we call that thing? CarPoint. How much would the verticals be worth?

There was one vertical that mattered, except it wasn’t really vertical. It’s called all shopping. There was all information and all shopping, doing all these detailed specific things. Remember we did a portal. We did that. Then eventually, we did search a few years later. We were just off. We had the wrong thing.

Stack ranked in the wrong way, my opinion, with 20/20 hindsight. We were spread too thin. He said, when should you get into a new thing? Well, you probably shouldn’t get into five new things if you really only have the talent for one to two new things. That’s number one.

Scott McNeely of Sun used to have this expression used, “We got to get all our wood behind one arrow.” It’s nice to try. I was listening to you guys talk about Amazon and how they, okay, we’re going to try small things, but they also put in small cost structure. We put in big cost structure because we were already all in when we got into something.

In this particular case, a few years later, and then what do you do? You get stuck. We have permission to come from behind in a certain way here because we’ve got Windows, to your point. Exactly your point.

There are lessons to be learned, but for a company that’s got an established business, being able to get all the way outside of yourself and say, is this really like what we’re doing? Because you really want it to be. You really want it to be. Or does this really require a different approach that all doesn’t totally ignore, but doesn’t take into account what you own any more than the person starting it afresh.

Can you hire new capability or how do you build new capability? Because if it’s not like what you’re already doing, it must require new capability. If it’s exactly like what you’re doing, then you’d be doing it.

Ben: And you should be great at it.

Steve: And you’d be great at it. Just look. Two models worked in phone. Build the hardware, capture the profit, have a backend monetization system that even lets you pay the phone manufacturer. That worked. Android/Google.

Two things worked. That’s it. And we weren’t in either one. We needed new capability. We needed a new idea. We couldn’t use the Windows user interface. There were a bunch of things, but you have to go all the way. Yet we had a Windows everywhere slide.

Ben: It was on the slide. I don’t understand why it didn’t work.

Steve: I wrote this thing down here. You get locked in your model. We’re a platform company. No, we’re an app and platform company.

Ben: On our episode, we threw out the idea that Microsoft’s competitor, like the truest form that it should have taken on mobile was not actually Apple. The iPhone is not the bogey. It’s a pretty different thing. At that point, you were not a hardware company.

The bogey was Android. They were monetizing it a different way through advertising and through giving away for free. Microsoft always monetized through licensing revenue. It seems like until Android took off, Microsoft actually did have an opening to become the second mobile.

Steve: What year Christmas was this? There was the Christmas of blah-blah-blah year. It was being on time with the stuff we needed for Verizon. There was a Verizon design win because Verizon by now is really feeling it’s getting its ass kicked.

David: iPhone launch is on AT&T.

Ben: July of 2007.

Steve: It might’ve been Christmas even 2008.

Ben: Yeah, because the App Store launch next year.

Steve: I think Christmas 2008. Possibly even 2009. But I think 2008.

Ben: Mobile was this when it started.

Steve: It could have even been 2009. But Verizon, the empire had to strike back against AT&T, and there was a window.

David: And they went with Troy.

Steve: We didn’t have our stuff. Look, they would’ve taken our stuff because they could put pressure back on the manufacturers, but we didn’t have the stuff they wanted at the right time. They went Android. Then we kept pushing because I believe in staying hardcore, and then learning and fixing. The problem was we were so locked into our model, it was hard to, to say, hey, we’re going to learn and fix.

I don’t know where we would’ve gone with things on phone if I had stuck around. But I probably would’ve stayed at it. Maybe it would be an Android phone at this stage. Who knows? And maybe not.

If you think of yourself as just a platform company, you say we can’t do that. If you can think of yourself as an app and platform company with apps that are extensible, ah, then you can say, hey, we actually have a pretty cool user experience that can also leverage some things that we do and can leverage our software skills.

It’s okay to embrace that competitor and extend. But there are so many technologies that are hard to not just popularize, but even get good at unless you have a phone these days.

Just take voice. If you want to really be good at voice, you got to get enough signal and you’ll get the signal off the phone. You can’t say, talking to my PC is sufficient. If you want to get good at maps, there are so many things where being on phones and there are some things even you can make happen by being on cars.

I think Tesla gets good at certain things in software because it is a different form of mobile, so they get good at different things. But we missed. Should the company have kept after it? I don’t know. Satya knows and Amy and company, they know where they were.

But to your original question, big companies deciding, well, it’s not always a mistake to build off what you got, but it can be. Try to get outside of yourself. If you get in, do you have the ability from the top to shake the system and say, no, we started with our old model, but it’s not going to work.

That’s what I did with Surface. I didn’t wind up. It hasn’t played out partly. I didn’t have as much time with it. There were no high-end PCs that would really compete with Mac. I decided the only way we were going to get there, we couldn’t sit there with our OEM model and have it work, if we’re going to have high-end PCs that appealed to users because I wanted us to be a consumer/user company, not just an IT company.

Thinkpad had IBM. By then, Lenovo had some higher-end computers. But you never saw them in schools. You never saw them in coffee shops. We needed a high-end PC, and the economics, marketing, and romancing it was not going to be an option for our OEMs. I said we got to go do Surface. Again, would we have tweaked things, done things a little bit better? Part of that, iPad, sure. But the model was not going to work.

Ben: We’ve spent a lot of time talking about all these bets that sound very reasonable to make in mobile, in search. We didn’t talk about social, but in social and all the dancing you did with Mark Zuckerberg over the years, in Yahoo, in all these things that ended up not panning out, and these were trillion-dollar companies that were built not inside of Microsoft.

We talked about one multi-trillion dollar thing that did work with the enterprise. There’s another one with Azure. Can you tell us the story of how Azure really got started?

Steve: We are in probably 2005–2006. AWS has a little lift off. I think AWS comes to market around then. It’s not like the cloud is some surprise to us. The Energizer, if you go all the way back to that Energizer thing from the mid-90s, it’s all about the cloud. It’s before it was called the cloud. It’s before all the infrastructure that becomes the cloud.

It’s not like we say, oh, woke up one day, it’s oh, there’s AWS. We didn’t wake up one day and say, oh there are backends to applications too. We’ve been doing that with Windows Server and SQL Server. We’ve been in the cloud, blah-blah-blah. But at that point, I think we might have already had Exchange in the cloud as a standard product. Which you have to remember is super important because I really want to give you my sense of what Microsoft’s businesses are.

But we didn’t have a platform. So I said, we got to do one. Let’s go get Cutler. I say, okay, we got to get Cutler on it. Cutler and I have a great relationship. To this day, we have a great relationship. He’s a personal friend.

Ben: He’s still writing code at Microsoft.

Steve: He’s still writing code at Microsoft.

Ben: Unbelievable.

Steve: Cutler and I have been to a basketball game together. We’ve played golf a number of times. We’ve done golf trips together. Cutler’s a hard ass at work. If he doesn’t want to do something, he’ll tell you. If he thinks you are wrong, he’ll tell you. If he thinks somebody else in the organization is bad, he’ll tell you.

David: He’s like a thoroughbred horse.

Steve: He’s very blunt.

David: You can run really fast, but you got to get him.

Steve: He’s very blunt, was a great athlete in college. Two sports. I think he played maybe three even in college. But anyway, so I get Cutler, and there’s a guy working in MSR who I think is underutilized too. This guy Amitabh Srivastava, you guys talk about. I thought he was underutilized doing what he is doing. So grab him, grab Cutler, bring them both onto this project. Is Billy still with the company?

David: He’s about to transition out.

Steve: He’s about to leave, I think.

David: Yeah. I think he had probably told you that he was going to leave.

Steve: He had told me but hadn’t left yet. He was involved until he left. Even then, different nature of involvement. But anyway, I get Cutler and Amitabh to go do this thing. Then Cutler brings some of his (I’ll call) gang, his favorite guys. He brings them over because he’s a magnet for talent, and we get started.

We made an explicit decision. I guess you could say it’s also a function of thinking Windows first. I think you guys may have talked about this in your episode. We say we’re going to build Platform as a Service because it’s a Windows platform.

Infrastructure as a service a little bit, if you think about it. You are by nature accepting everybody’s infrastructure. It’s “by nature,” “multi-platform.” You become a different kind of a platform because you’re running other people’s Linux and whatever.

Ben: It doesn’t leverage Microsoft’s strength of owning the Windows franchise if you’re just going to be infrastructure.

Steve: No, it doesn’t leverage our strengths in the sense that we’ve got great low-level operating system people. We have all the talent to go do it, and it was explicit we wanted to do Platform as a Service. We said: (a) they’re doing it, (b) it’s all about the developers. If it’s all about the developers, then you got to have Platform as a Service, not just Infrastructure as a Service.

Ben: Well that assumes that the developers targeting Windows Server are still a big, strong, important, relevant developer group.

Steve: Which they were and they weren’t. Windows Server had a strong developer group. Unix had a strong developer group. On the front end, Windows was definitely stronger. On the backend, Unix was definitely stronger.

Ben: But on the front end, by 2006–2007, the web was clearly the emerging developer platform of choice.

Steve: Absolutely emerging. Not fully emerged. Emerging.

Ben: I would challenge you to say, in 2006 what amazing Windows apps were coming out that would sweep the world and go get a hundred million users because they were great apps?

Steve: Hard for me to remember. I think if you go to the field of productivity, the answer is yes there were still. The problem is if you left the areas of productivity and gaming, I think the answer was no.

The web wasn’t good for a number of things for IT because people didn’t feel like they could count on the connectivity. Either the amount of bandwidth or latency or just it’s very existence. We are still at that point. I’m not saying fair. We were right in the way we thought about. Not saying that. But I’m also saying there was still a great Windows developer ecosystem. It didn’t go from a lot 1999 to nothing by 2005.

Ben: Totally fair.

Steve: And then on Windows Server, Unix was stronger on the backend. Of course, we’re trying to make Windows strong and we’re trying to get to the cloud. Then we’re learning more things about the cloud from both Exchange in the cloud and Azure in the cloud.

How do you make it easy to provision? What’s the speed of provisioning? What do you do to serve developers? The notion that you give them a set of free usage and then let them embrace.

Developers have two aspects too. There are developers who are not part of enterprises and they’re developers who are. The developers who are not part of enterprises need a whole different sales motion.

You can call them consumer developers, not developers of consumer apps. They’re not like big corporations in terms of the way they use. Students are an example, but there are plenty of others who are trying to do startups and blah-blah-blah.

In any event, we get going. We’re learning how to do the things. We’re building capability for sure in the cloud through both products. By the time I leave, we have some momentum with Azure, but some momentum. The big momentum really is in the last 11 years since I left.

David: Well, I think you’re bypassing and underselling here. It really struck me as you were describing the challenges around with a big company like Microsoft, and attacking wildly different vectors like mobile, search, hardware. Azure was that. The cloud was extremely disruptive. The server and tools,what you were doing.

Steve: It was extremely disruptive, but it wasn’t. Yes and no. The things we understood were translatable. Now, getting the company, people get locked into a model.

David: Well you had to replace server and tools. Leadership to make this happen.

Steve: Well IT accept things that run in the cloud. That was not obvious back in 2008–2009. It’s not like Amazon was an enterprise company at the time. It was mostly for startups. That’s who was using AWS at the time, so no. I do agree with you. We had to shake up our internal culture.

This was my basic message. God dang it. This is our future. We can preserve and enhance these businesses. We can take more value out of the system because the customers don’t have to set up their servers anymore. They don’t have to do all this work. Essentially, money that would’ve been spent on people and hardware will get spent with us. Come on, we’re going to do this.

It was hard for me even telling our people there was still La Résistance, as they say, and that’s why I did the speech at UDub, where we talked about the fact that we’re all in on the cloud. It was partly a reminder to people, get with it or get out of it. Get out of the way.

Ben: Making an external speech to communicate something to your internal employees.

Steve: In a big company, man, I’ll tell you. Some of what you have to do because people believe the newspaper more than they’ll believe an internal email.

Ben: People always talk about how the think different campaign that Steve Jobs did was for Apple employees as much as it (in fact) way more than for the general public. Going back to the core initial start of Azure, I find it very interesting that Microsoft had a business called server and tools business, and that is not where Azure started. Azure started as an incubation by Ray Ozzie with a completely separate team than your existing actual product group selling server and tools.

Steve: But that’s a classic thing. It shouldn’t be mind-blowing. Windows and Windows NT were in different groups, too. Sometimes in order to protect the baby while it grows up, you can’t put it with the thing that’s established.

You could say it’s part of the issue with Windows, when we tried to use Windows on things for which we probably should have started.

David: I was going to ask you, would it have played out differently if you’d taken this approach with mobile?

Steve: We did break it out, but we constrained it with Windows. We broke Windows NT out and constrained it with Windows. It worked fine because Windows belong. How you do those incubations, in this case I just said, look. It’ll get probably subsumed. I don’t know.

Partly, Ray wanted some operating control over the thing, and putting it under [...] would’ve made it harder for Ray. Obviously, it was less palatable. I’m not sure Cutler would’ve gone to work on it if it was all server tools. But it was the right thing to do even though it was “part of the future of server.” It was the future of server and tools, essentially.

Ben: And so this is pretty lost in the common narrative. If this is 2006, that is 7–8 years before you left Microsoft.

Steve: Yeah, eight years. We’d been working on the cloud since Energizer. We’d been working on Azure for eight years. People think everything in tech gets popular in 10 minutes.

Ben: People think Acquired was founded two years ago.

Steve: Good point.

David: Different scale.

Steve: When was OpenAI actually founded?

David: 2016, I think.

Steve: So seven or eight years after it really became something. Fair to say. I give them all the credit in the world, seven or eight years. Most things take a while. Even things that are “oh, they just burst on the scene.” People have been sweating blood, sweat, and tears for years before these things get lift-off, as I call it my little deck here. We were starting to get lift-off, but yeah, eight years. We had more in on Exchange. Most businesses are zero trick ponies.

Ben: You never create a billion dollar business.

Steve: Yeah. You might create something that goes nowhere. You might create what’s essentially a feature for somebody else’s business and get acquired. You might. I call that zero tricks. Then you get a one-trick pony. One-trick ponies are amazing. People should be in awe of one-trick ponies.

David: One-trick ponies are $50–$100 billion market cap companies.

Steve: Or it could be more.

David: Yeah, or more. They’re not many one-trick ponies.

Steve: I might argue that Google’s a one to one-and-a-half–trick pony. Still, if you just look at its revenue…

Ben: 80% search ad revenue, something like that.

Steve: YouTube’s half a trick you can call it a psychic trick, but it’s, it’s not clearly a second trick. And they’re huge. They have great market cap.

TSMC. You did an episode on them. They’re a one-trick pony. A very successful one-trick pony. Nvidia is a one-trick pony.

Ben: Well, gaming and AI.

Steve: Okay, I’ll give them two tricks.

David: Two-trick pony but the first trick was not that big.

Steve: You can decide whether to call it a trick or not, but I’m not taking anything away from Nvidia, and I should know the company better. But, so you say one-trick ponies. They’re amazing. Everybody should be in awe of a one-trick pony. Now, two-trick ponies, ooh la la. Those people tend to go down in business history, especially those tricks stay alive for a long time. IBM was a one-trick pony. Microsoft two to two-and-a-half tricks.

David: All right, give us your trick accounting.

Steve: Okay, you could do it a little differently. I’m going to call the desktop business, which I include Windows and Office, and the server/enterprise business, BackOffice. Two tricks.

Now, both tricks could have died if they didn’t get moved to the cloud, and I knew they could die. But they’re two tricks. Two different revenue models, two different licensing models, essentially different sales motions. Even the way Microsoft sells those stuff. I don’t know about today, but when I left, they were different muscles.

One account manager, two different muscles. Because one you’re selling applications, and one you’re just selling, hey, this is to serve your users. You need an AD account, an Exchange account. It’s exactly Windows. That’s what you need. This is what M365, you could call the modern translation of those two things are the Windows OEM business and M365, and Azure.

Then you could say, is gaming its own trick? I call it a half a trick. Just like you two. It’s half a trick.

Ben: This is an update since we last talked. I feel like we had a conversation at one point were we both landed in unclear how profitable that business is for Microsoft relative to other.

Steve: I could call it a half trick, or you could say it could be a trick. Look, I would say Microsoft is optimistic it’ll be a full-on trick. I ran into Phil Spencer at the golf course and he’s a real optimistic guy. It could be.

David: I’ll give you this. If we call NVIDIA’s first trick a full trick, then Xbox is a full trick. There we go.

Steve: Whatever you want to call it. You said it’s a small trick and I think that’s probably right. That’s amazing. Amazon’s a two-tricker. AWS and the store, they’re two-tricker. Apple’s two-tricks.

Ben: What’s your trick accounting there?

Steve: Mac and mobile, if you want to say it’s high power consumption and low power consumption.

Ben: Is it fair to call services a third? By my estimates, their profit dollars from services have now eclipsed iPhone hardware profit.

Steve: I consider it just part of the trick.

David: If you go by your platform definition, it’s part of the platform.

Steve: I call really a trick, they’ve just monetized it. It’s like us adding things to Office and redoing the EA.

Ben: It’s a monetization model.

Steve: It’s an additional monetization model, but it’s not a new locomotive. A locomotive is the business that can pull the cabooses, and the locomotive remains the phone. The services business go away pretty quick if the phone volume fell apart. It’s additional, very important…

Ben: But not uncorrelated the way that AWS and—

Steve: No. And I think Mac versus everything iOS is also uncorrelated.

David: Yeah. I get the sense you really wanted three tricks.

Steve: Abso-fricking-lutely.

Ben: What’s the one that eats you up inside? Which one do you think you were closest to getting that you didn’t get?

Steve: Not social. Forget social.

Ben: Doesn’t feel Microsoft-ey.

David: You wanted to buy Facebook.

Steve: I’m going to tell you why. We’re still on the Paul Allen strategy. We’ve got to do all the software that these things will ever need. It was still of the mindset that said, and there’s an arrogance to that and there’s a hunger to that that says there’s just nothing we shouldn’t do. I don’t think that was a good mindset by the time I took over, and yet it was still baked in with Bill, baked in with me, and I think that was a mistake not focusing.

This is like asking me to pick between negative children. I don’t know. But the phone because it was a client-side device, or search because it was a productivity tool. Both of those were Microsoft big businesses. The desktop, the phone, or office, client-side devices, we had done well with a certain model. Client-side devices, our mind should have been able to wrap around, but we had to tell ourselves it didn’t look the same. Technology didn’t look the same, nor did business model.

Ben: Then business model astonishingly for search. Advertising, call it 2005. I think Google was making more money off of a PC user than Microsoft was because their business model generated more search revenue.

Steve: By 2005, I don’t think so. Not later on, I think so. But not by 2005. I would suspect not. You can go check that.

Ben: But isn’t that astonishing? That of the pie.

Steve: And for enterprise PCs, PCs bought by businesses, it certainly wouldn’t have been the case. For consumer PC, it could well have already been the case. It actually is a notable difference because of everything else.

Our post sales monetization was with applications. We’re with ads, but it was a new productivity app. We put Office on the back by then. We would’ve had to put productivity elsewhere, in the sense that we missed a major productivity area. We were in the productivity business and in the client area, and we missed a client device. Those are the two. Nothing else we met, we “missed.”

David: You had an opportunity for four-tricks, and you got two.

Steve: Yeah. Part of the problem was particularly, we didn’t see mobile as a different trick. We thought of it as underneath the Windows trick, if you will. But it means you can go through. I don’t know that I could come up with a three-trick pony for you.

It’s possible that at the Elon level, the Musk empire could have three tricks—cars, connectivity, and…

Ben: In finance, you can do it.

Steve: Finance, I don’t think there are multiple tricks. You could say asset management versus the…

Ben: Investment banking is different.

Steve: Maybe. I don’t know. I’m not convinced. But I hear you. Possible.

David: Well, I think this makes sense because Microsoft is the most valuable company in the world with two. So if anybody have three—

Steve: If you look at the most valuables, you’re not going to find threes.

Ben: That’s a good point. Sony is nowhere near the market cap of these companies, but it’s pretty evenly diversified across their five segments, from gaming to consumer electronics.

David: Movies, music, finance.

Ben: Yeah. They have a remarkable diversified.

Steve: They bought businesses in multiple areas, but I can’t call Sony Pictures a trick. It’s just not big enough. What you can acquire to start a trick, that part there’s no pride. Pride in having a trick that starts with something small.

David: Android’s a good example. Google bought Android, but that’s a trick for them.

Steve: Well, Android’s not a trick. You highlighted it. Android is a piece of the search trick.

Ben: It’s a lead gen.

Steve: Exactly. Lead generation for search. Yeah, that’s right.

Ben: Okay. Listeners, now is a great time to thank one of our longtime friends of the show, but actually first time sponsor, Vercel.

David: Vercel is an awesome company. Over the past few years, they’ve become the infrastructure backbone that powers modern web development. If you visited a fast, responsive website lately, there’s a good chance it was built and deployed on Vercel.

Ben: The reason for this is Vercel has completely reimagined the entire web developer experience. In the old world before Vercel, if you were a web developer, you basically had two completely different jobs you had to do. One was write code, and then you had to deploy the code to your production infrastructure, which (a) was not a simple task and distracted you from what you were really good at, and (b) usually introduced all sorts of bugs and reliability or latency issues that you had to iron out.

David: Vercel did away with this distinction entirely. They built what they call the complete platform for the web, which is a framework to find infrastructure that transforms your code into live, globally distributed production applications automatically. For developers, there’s no more wrestling with deployment nonsense. You just push your code and it runs, fast.

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David: We did an ACQ2 episode with Guillermo back in February. Go check it out. You can’t listen to that and not walk away going, wow, this guy and this company are unbelievably compelling.

Ben: We’ll be talking about Vercel all season, including their newest product that is just blowing up called V0, which is an actual AI web developer that you can just ask in plain English to build websites for you.

David: It’s wild. Go listen to the ACQ2 episode and it’ll become obvious why Guillermo and Vercel didn’t stop at just, oh, let’s eliminate deployment as a barrier to people building fast websites. Let’s also now go eliminate writing code as a barrier as well.

Ben: In some cases. Well, if you want to learn more about what Vercel can do for web development at your company and join customers like OpenAI, Granola, Runway, Supreme, Chick-fil-A, Ramp, PayPal, Under Armour, and NerdWallet—gosh, that is a lot—head on over to vercel.com/acquired, and just tell them that Ben and David sent you.

Okay. We’ve been dwelling here in the products and reflecting back on big wins and misses. During your tenure as CEO, can you reflect back on your non-product wins and mistakes?

Steve: My biggest hit from my time running sales to president to CEO is establishing us with IT departments, IT professionals—you can call that the enterprise, if you will—putting in the framework from a sales and marketing perspective, the staff, It’s a capability we had to develop. Nobody developed that software model but us. We invented essentially how you do that.

Oracle had done some invention, but we came on and did our own invention. We took it to the cloud. We were able to successfully navigate that. From sales, there are product parts to that that let you highlight, but that’s a big deal and I feel very, very proud about that.

From a financial standpoint, everybody likes to say we about tripled revenue and about tripled profit. The truth is, we dramatically increased profit more than a triple. People forget there was a major change that came along early in my tenure. That’s the move to have to expense stock options.

If you had restated our books to the time I actually took over, stock option expense would have reduced profits notably. Stock options were unaccounted for. If you look at what starting profitability would’ve looked like if stock options had, it would’ve been lower, and the multiple over my tenure would’ve been much more than three.

Ben: Okay, so three plus times in revenue.

Steve: I think you might say three in revenue and probably closer to four plus, five maybe even on profit.

About the same time the dot-com bubble busts. You have two problems. Number one, now we’re showing our books all this expense for stock options. Okay. But people don’t value those things what we have to expense. And the stock is flat, so they value them even less.

David: This is a really insidious problem.

Steve: You got to get rid of stock options. We transition then from stock options to stock awards, which if you notice, I think we were the first to make that as a major transition, but everybody’s made the same transition with the exception of a few senior executives, options are not the primary form of compensation. Little different in startups. But when you look at larger companies, everybody’s,

David: Even startups are now doing RSUs.

Steve: RSUs, and we had to start that.

David: I didn’t realize that Microsoft started that.

Steve: You can check, but I know we moved before most of the tech companies.

Ben: It’s a tough thing to have to inherit right at the beginning of your tenure, coming off of an already all-time high multiple of the stock price.

Steve: The dot-com bubble bursting meant our stock price burst into—

David: But I think to your point, what you’re saying is this became an employee motivation cultural issue. It’s not just stock price.

Steve: No. We had two problems. Before the dot-com bubble burst, you have everybody saying, oh, maybe we should go to a dot-com company because we’re going to make a lot more money. Then the bubble burst and everybody says, I’m certain you guys [...] see the movie Oklahoma, but there’s a song, Pore Jud is daid.

Ben: Poor Jud is Dead, absolutely.

Steve: A candle lights his haid. That was the way people felt about stock compensation. And not just at our place. People were down because everybody thought they had a ton and then they thought they had less.

It was a real employee morale issue in the early 2000s. We had to really sell the stuff in. That’s a big thing I had to work on. Obviously the antitrust issues.

David: When you took over as CEO, what we said in our episode was that was actually your number one priority, was just end this.

Steve: It was right up there, yeah. It was up there. I think when I took over, I’m not even sure we saw a path to resolution, but having it an overhang.

I’ll give you a story because it was after I took over as CEO. We had an executive retreat. We did it down in Bend, Oregon. I can’t remember the name of the lodge. Sun River, I think. We all fly down there. We rented a plane to fly everybody down there. I don’t know how many people by then, it was probably 80–90, something like that.

The first session was supposed to be a report—we did this—from the field. What are people seeing out there? What’s the environment? And this guy, Orlando Ayala, was running sales at the time. He gets up—this is probably 2002-ish, 2001–2002; we’re still in the throes of the thing—my name is Orlando Ayala. I’m a proud Colombian. I am not a proud Microsoftee today. Our integrity is under assault. My personal integrity feels like it’s under assault.

Now, he didn’t blame us for having behaved badly, but he highlighted the thing that’s on everybody’s mind, which is it wasn’t just a business issue that needed to be taken care of. It was a culture issue. It was bothering people, particularly senior people, very personally.

I had this whole agenda, had to blow the thing up and reorient to address that elephant in the room. It was not where I was going with this thing. Completely remap, change the breakout sessions, focus in on this issue. Bill was not happy with the whole thing.

Bill bore the weight of the antitrust thing very hard because for him, I think it also felt like a personal attack. Everybody took it personally. Bill took it even more personally because he was the face of vilification, if you will for this. But it’s a reminder that it was a cultural issue to take care of, not just a market issue.

People focus in on the, oh, were you moving slowly? Yeah, there was some of that too. People say, oh, I wonder if we can do this. That was an issue. The cultural issue I think was even bigger. He said, yeah, we got to get this thing resolved. Then there was the order to break us up. I forget what year that was.

David: You were going to run one company and Bill was going to run the other company.

Steve: We never really got to the point of really planning that through.

David: But that’s what the federal government ordered.

Steve: They ordered it split. They didn’t say who had to run which company.

Ben: I think it was just that you couldn’t be at the same.

David:: You couldn’t be at the same company.

Steve: I think it was, I would run operating systems and Bill would take applications. It just gives you a sense of where each of us were associated within the mind of the company.

Ben: So that’s your starting place as you’re taking over as CEO. The dot-com bubbles bursting, antitrust is dominating the company’s culture and the external narrative. You have this big accounting headache that you now have to deal with that affects the way your profitability has shown. But then there’s a decade after that where you triple the business, but the stock price is flat. Why didn’t Wall Street get?

Steve: I’m going to give you three reasons. Reason number one, and it’s material. Bill and I, and then me and Bill when I became CEO, we always were trying to tell people, don’t get our stock price too high. Don’t have too big expectations for us. We never wanted people to feel like they got cheated buying our stock.

Partly, probably we’re trying to lower the expectations on ourselves. I never thought of it that way. I don’t think Bill did. But essentially that was part of it. So we do this financial analyst meeting every July, and we’d always warn people don’t get too excited. That’s one.

As part of that whole theme, Bill never went to a quarterly analyst call, and I never went to a quarterly analyst call. If you really think about it, part of morale is the stock price. It is. It took me a while to realize that, but I then never broke my pattern.

It’s like going to the newspaper every day. You don’t sell stock every day, so you really should only care what the stock price is when you sell stock. But people go every day and it’s like, oh, did my team win last night? It’s like going to the sports section, say how did the Clips do last night?

So talking more regularly to investors and talking not pie-eyed but a realistic view. We gave no guidance. I had to fight people. They wanted to give guidance and I didn’t want to give guidance. Why? Just deliver the results you get? There was a bit of a Buffet style thing going on, because Bill and Warren were very good friends and Warren didn’t go to quarterly calls, I don’t think. But he’s warned.

David: I don’t even know if they do quarterly calls. I don’t think they do.

Steve: If they do the annual meeting, obviously. Let’s call that a first reason.

A second reason is yes, I did take over when the stock was ridiculously too highly priced.

Ben: But that normalized within a year or two.

Steve: The bubble burst. It normalizes some, but it creates another narrative about things.

Next, I was hardcore about telling people I’m going to spend to do the things we need to do to succeed.

David: That’s not what Wall Street likes to hear.

Steve: No, but I was viewed as a spender, and I was much louder on this than Satya is on anything financial, because it’s how I’m programmed. He’s programmed a little differently. And Amy is more balanced. She’ll talk about balance, and I would say we’re going to win with Surface, whatever it is.

Ben: If I could paraphrase my view of it, you were willing to say, we’re going to spend whatever it takes. Amy goes and says, I’m going to account for every dollar of spend real tight and make sure that every dollar demands a return.

Steve: Yeah. I had no credibility in terms of what some investors wanted to hear. And my actions were consistent with that. It’s not like they were inconsistent.

Then lastly, people did worry about the future of a couple of our franchises, most notably Windows. You get all these things, narrative, transition from high price, some issue about franchises, and me being a big spender, no wonder the stock stayed flat. By the end of my tenure, it was even bothering me.

David: When did it start to bothering you?

Steve: Towards the end. At some point I just got too tired. But by then, it was also probably hard for me to reset that dialogue, for me to go to investors and say, aha, I’m a changed man. I’m not going to spend anymore. Nobody was going to believe that shit. They just wouldn’t have believed it. You can’t come in and say, well, I’ve been a certain way for about 30 years, but hey, I’m a new man. I’m reformed. That doesn’t work that way if you’re a spender.

David: I worship at the altar of capital allocation now.

Steve: If you’re a spender, you’re a spender. If you’re not good with investors, they’re not going to buy in overnight that you’ve changed. I didn’t intend it that way, but there’s a certain disrespect by not going to quarterly calls.

With hindsight, people aren’t going to say, oh, he is showing up. He’s a changed man. He used to tell us the stock price was too high or worry about it. Now he’s going to tell us, no, the stock should be okay. It should be higher. No. There was no way to reset the investor view of me.

Ben: You need a full rebrand, full clean slate. Some new—

Steve: Well, you probably need a full new CEO. When I wrote my letter of goodbye to the board, I did say, hey, look. This is a unique opportunity. There are a lot of things in our brand, in our image that would only be able to be reset by having a new CEO. People don’t walk in and say, oh yeah guys are changing. It’s hard to change the narrative without the change.

Now I’m not saying that means CEO should go every time there’s a bad narrative. That’s not really my point. But it just gets harder. I may have only been CEO since 2000, but it’s not like I wasn’t—

David: Been there since 1980.

Steve: Yeah, I was there since 1980. Essentially, I’d been the second voice of the company for 20 years. Then for 14, I was the first voice, theoretically. Although that had some complexity too.

Ben: I get the sense by the end it wasn’t fun for you anymore too.

Steve: That’s not true.

Ben: No?

Steve: No. The toughest time was probably the ship of Vista. That was probably the toughest time, that in the early 2000s when I took over. My little sheet here, I highlight that 1998 to 2004 were tough years, plus Xbox. Because that’s the antitrust. That’s where I moved back to be president of the company and then CEO. Bill and I went through a year where we didn’t speak.

Ben: Really?

Steve: Yeah. I think it was basically from some time in about March or April of 2000–2001. Literally, we weren’t speaking. I didn’t know what it meant to be his boss, and he didn’t know what it meant to work for me. I knew he was struggling with the DOJ and all this.

When he asked me to be CEO, I said, do you really want me to be CEO or do you just want me to be a figurehead? He said, no, I want you to be real CEO. Okay. That meant something to me. I would probably have said yes even if he’d said be a figurehead. But he said what he wanted and probably him saying to himself, hey, I’ve got to have a transition path. So I said, okay. I’ll do that.

Well, he didn’t know how to show me a different kind of respect. I didn’t know how to show him a different kind of respect. There were things where I just disagreed with him, and now I expected it to go the other way. I was always happy. I was happy being a number two guy. I was fine. Salute. I don’t like the decision. I either salute or I’d body punch and then salute, or body punch and he’d agree with me. Body punch means it’s a slower process.

Then we didn’t know how to do that. We just didn’t know how to do that. After a year, we started talking again. Basically our wives were the ones who pushed us back together. We had a very awkward dinner at a health club down the street here, but we get back together. But we never really got the right mojo. Bill’s chief software architect, and I was very deferential then to product direction from Bill.

Ben: He’s working on Longhorn at this point because it’s post XP.

Steve: Which was a mistake. Longhorn was a big mistake. I have to take accountability. I was a CEO, Bill’s got to take a lot of accountability. It was the mistake of mistakes. Between the company, Bill and I disagreed about whether we should do hardware. That was a big one. We did. Surface was a big disagreement. Phone, big disagreement. HoloLens, big disagreement.

David: What about Azure? Were you aligned?

Steve: Bill was fine with Azure. The cloud Bill and I had agreed on in the 90s. Energizer, Energizer. I think Energizer could have been Bill’s idea, not mine. Pretty sure it was Bill’s idea, not mine. I executed, but Bill’s idea, not mine. But we never hit it. There were places there should have been more contention. Maybe even during the late 90s. I don’t know. But there were certainly places where there should have been more contention.

My gut, these are the smart technical guys, Bill, and I’m trusting…

Ben: Vista.

Steve: I’m beginning to have a pit in my stomach. But we didn’t have the right contention. This is not directed at Bill personally, it’s directed at all of this. We had an emperor that had no clothes. That was in Longhorn. It was the emperor that had no clothes. Partly, it was the centrality of Windows and the notion that Windows would say central, therefore people would all want this new stuff.

Partly there was too much change all at one time. We didn’t do a new operating system, but we were doing a new operating system. It may not have sold it all, but we probably would’ve done better.

Ben: Just not calling Windows.

Steve: Well, no. Forget what we called it. Just starting from scratch. Maybe keeping parts of the kernel, but otherwise starting from scratch and throw out all the scruff. Now, I don’t think we would’ve popularized it. If we’d looked at it that way, we probably wouldn’t have built it.

But by then we were a little cocky about Windows and it was our thing. I don’t think we had the right grind in our system there in the early 2000s. Between Bill and I, did we make some good decisions? Yeah, we did make a good decision to do Xbox. Were we doing too many things? Yeah, we were doing too many things.

I would say there was probably a voraciousness misplaced by Bill and me. Maybe I had to be deal with some of the pragmatics of hiring people and stuff, so I didn’t push back on it. But I probably felt the pain a little bit more in terms of trying to hire people.

So that’s 2000–2004. Then by 2004, Bill was already started talking to me about wanting to be able to go. Then in 2006, we announced that he was going to go in 2008. I also think we screwed that up. You can’t have a long goodbye. Long goodbyes are not helpful.

David: Yours was short.

Steve: Yeah, it was goodbye. I stayed on the board for one more board meeting after I left. That was it. But a long goodbye, nobody knows their role.

I think I did some of my very best work after Bill left. If you ask me when do I think I did my best work, when I started, and when I was running sales and evolving this enterprise business. Some when I ran system software, and then the last six years I was there. That’s cloud, that’s surface, that’s some of the improvements in Windows. I feel really good about my last six years.

Bing. I think that’s when we hired Qi Lu. Do you guys know the story of Qi Lu at Microsoft? Qi Lu’s one of the most pivotal things at Microsoft? Why?

David: I knew he was important, but tell us the story.

Steve: Pivotal in a way you may not even know. First of all, brilliant guy. Great guy. Qi’s talking about leaving Yahoo. He’s at Yahoo at the time. Qi (I think) went to graduate school with Harry Shum, who had been in Microsoft Research. Harry was now working on search, and he was working for Satya who was running Bing.

Ben: That’s an amazing sentence all in itself. Oh, Satya the guy who was running Bing.

Steve: He was running Bing. Harry says, Qi’s a genius. We’ve got to hire Qi. I don’t know if Qi really wants to work for. Well, we got to pick Qi’s brain. We just have to learn from Qi Lu.

Okay. Satya, me, Harry, fly down to California and we meet with Qi Lu. We talk to Qi. Qi’s brilliant and we’re learning all this stuff about Qi. Qi leaves the room. God, there’s a lot. I don’t know who throws the idea out at first, maybe Satya. We should hire Qi and I should work for him.

Ben: Whoa.

Steve: So Harry was all in. Harry worked for Satya who worked for Qi. Now we flipped it around.

David: You flipped the Whole reporting structure to hire Qi in the room.

Steve: After Qi walked, we talked for about 15 minutes. Then Harry calls Qi and said, do you mind coming back?

David: Wow.

Steve: I forget where Qi was thinking he’d take his next job. He had a next job in mind. Maybe it was with Baidu. I can’t remember. Someplace.

David: Then what did he do at Microsoft that made him so impactful?

Steve: It’s the story I just told you. It’s what it told me about Satya. I love Satya. We were giving him more and more responsibilities anyway. But he told me this guy will do the right thing for the company. He’ll prioritize that. He doesn’t have an ego that gets in the way. And Qi did great work. Qi knew about search. He was an old pro at it.

Ben: And it started cash flowing billions of dollars eventually.

Steve: Eventually. Satya’s not an engineer by training. Qi’s an engineer. He’s a PhD in computer science. He had a lot to bring. Satya’s been great at managing product development, that’s for sure, but Qi’s digging the bits and bytes kind of thing. But the meeting is the thing that was important. Qi was important, sure, but what Satya and Harry did that day where they just found a guy and said, please Steve, go hire him as our boss.

Ben: You don’t hear that very often.

Steve: No.

Ben: What year was that?

David: It was after Yahoo, 2008–2009.

Ben: Six years before Satya became CEO for five years.

Steve: 2009, yeah. And that let me then be able to also say, now I can give Satya more responsibility doing something else.

Ben: Why did you move him to server and tools?

Steve: We had Qi, so we could probably move him. I thought it would be important to give him other experiences, to try to get him to be able to be CEO. He was on a list of three or four internals at that time, who he said he’d been on a list of guys we had been talking about because we did an annual succession plan thing.

The succession plan has two candidates. It’s what happens if you get hit by a bus and what happens if you get served to term, whatever term feels like. And they’re different people. If Satya gets hit by a bus, if Satya serves another five years, it’s probably a different person. I think that’s true in most companies. You got to think about it differently.

Anyway I said, hey, get him another experience. He hasn’t worked in apps, hasn’t worked in server and tools, and it was a good time to switch things around. Bob wound up obviously being super successful because. Bob was running server and tools at the time. I love Bob. Bob’s, one of my favorite guys I’ve ever worked with.

Ben: Went on to be CEO of Snowflake.

David: Snowflake, yeah.

Steve: Absolutely.

David: Worked out for everybody.

Steve: He’s done fantastically well, but we moved Satya into that job. He was on a great path, and Qi’s hire made search as stronger, showed just how right Satya was. We talk about this in basketball. Is it all about team first or not? All about team first, which is essential. We were able to give them the additional experiences, which were super helpful in terms of him then taking over as CEO.

David: That’s why Azure was turbocharging.

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We want to talk a little bit about your post-Microsoft term, but let’s leave Microsoft with a final question of why did you resign?

Steve: Two or three things. Number one, the phone was very on my brain. When you said, are you having fun? That was the thing that was eating at me the most, was the phone. I decided we needed to flip the model around. Your episode’s pretty good about all that happened, so I’m not going to go through all that.

I knew we had to do hardware. I knew it. There was just no question. We weren’t going to be able to play this Android/search game because we just didn’t have the power of monetization that they did. Apple’s Apple, but they’re going to be two phones. It’s not like there’d only be one phone that was popular in the world. This is something you guys didn’t put in the episode.

I had talked about buying a phone company for a number of years before the Nokia deal. I forget what year it was. I flew to Taiwan and we were looking at buying HTC. They were the biggest Windows phone OEM at the time. Nokia wasn’t signed up.

I finally just decided, Terry Myers and I, we had 3–4 trips to Taiwan to talk to Peter, look at the organization. I just decided it would be too tough to buy a Taiwanese company, that I would worry too much about the integration. I liked Peter Chou who ran HTC. I don’t know if that name means anything to you guys…

David: Yeah, of course.

Steve: …but I’d been looking at that thing for two or three years maybe before. Bill and I continued to have all the tension we had about anything that had hardware in it. It’s not like our relationship was calm. It’s clear. It had always been bumpy. Even back to the beginning, I almost quit after four weeks because we were in it. Five weeks, maybe. It’s not like it had ever been—

David: That would’ve been a very poor economic decision.

Steve: It had never been linear. We had another big fight a year after about financial stuff. It had never been linear. It had helped build Microsoft, but that didn’t mean it had always been easy for him or me.

The hardware thing was exacerbating our relationship. I thought we really needed to do a phone. Then the board said, no, we don’t want to do a phone. I was very transparent with everybody. We brought the manager, you got this right. We brought the management team in. I don’t know if it was more wanted to buy or didn’t want, but I let everybody speak. It’s a big decision to be in the phone hardware business.

We do the presentation, and the process from there to the time the board says no, I didn’t find very respectful. The board didn’t ask me to leave. I just didn’t find the process very respectful. I probably won’t go into the detail of that. And a lot of it has to do again with my relationship with Bill.

I knew Bill didn’t love the idea, and I was willing to accept whatever the board decided. I was, no question about that, but the process wasn’t very good. I was not happy with the process, but they wanted me to stay.

I just decided two things. If we’re not going to buy a phone, that’s my best shot for a consumer future for the company. Right now, that’s my best shot. I tried to fire the Yahoo shot, the phone shot. Those were my two things, remember? Mobile and search.

I said, look. This might be the right time. We can’t make my play here, not out of peak. It’s just, hey, I’d thought about this in advance and said, look. If it doesn’t work, it doesn’t work. If the board doesn’t want to do it, fine. So I said, this is a good time.

It’s also a good time because the cloud’s just coming on. I’m saying to myself, look. We’re going to have to build new capabilities. Even the way we’re moving to a gross margin to something below 100% gross margin business. We have whole new capabilities. We need to build up around that. I even think of it through the lens of the accounting system.

We had these revenue and cost reports. They have to change in the world of the cloud because you really have to get tight on gross margin not on revenue. I don’t really pay much attention to Microsoft’s revenue. I pay attention to the gross margin growth.

Ben: These days, you’re saying.

Steve: Those days. When I said the move to the cloud, I used to say this to analysts, you should expect us, you want us to have lower gross margins going forward, but we’ll make it up in volume. That is the whole process of the cloud. Lower gross margins. It’s like Walmart’s an okay company even though that margin’s, whatever, 1.5%–2%. You just got to make it up in volume.

I knew it was a good time to let the new person build from what we had to the next generation of all the machinery that would have to happen to make cloud happen. I never lost my desire to be an end user company. I bemoaned the fact that I couldn’t keep us focused on being an end user company/consumer. It killed me. You don’t just, ah, I want to be a consumer company. No, you got to find the locomotives, not just a bunch of cabooses.

At the end of the day, Zune was a caboose. A lot of the things we invested in were cabooses. We had to find the locomotive. There were only two possible locomotives that made any sense. I didn’t have a play that I thought was going to break through anytime soon in search.

Mobile was going to be really hard. But I knew in my heart of hearts that without physical hardware, we weren’t going to break through there either because of search. Board said no. I said, okay. Bill and I are, it’s not really the board being disrespectful. Maybe it is, but it’s mostly me and Bill grinding. And that’s never fun when we grind.

I say, okay, we’re grinding. I know it’s frustrating for him. It’s frustrating for me. We’re grinding. Here goes my idea. Oh, by the way, this is a great juncture point. I said, okay, I’ll pass. Then the board changed its mind.

Ben: So why did they end up buying Nokia then after your decision was final? You were out.

Steve: Oh, I don’t know.

Ben: Maybe you don’t know.

Steve: I don’t really know. I’m not sure they really understood, but I had told them about we had a deep partnership with Nokia and I’m not really sure maybe guys really understood. I hadn’t done a good job explaining how close the partnership was. There was really no, go back to Nokia and see if we can have a bigger partnership.

The problem with the partnership with Nokia is they didn’t have the money to invest in marketing. We did. They did not have the ability to go deep pockets. We did. But if we didn’t have the monetization capability back through the phone, we weren’t going to be able to make it work as a partnership because we had to put in the cash and therefore we had to get the return, and it wasn’t going to work.

David: It reached to a point where you had to buy the company or just cut bait totally on the whole thing.

Steve: Yeah, just because the math wouldn’t work. What we had to do to be successful was beyond their financial capacity. But if we were going to do what it took to be successful, we couldn’t do it on $4 [...]

Ben: You needed the margin dollars from the hardware too.

Steve: Exactly.

David: So you left. You did a pretty incredible thing, or really you didn’t do an incredible thing. You held everything. You’re still the largest individual shareholder in Microsoft.

Steve: I think I might be. Other than index funds, the largest institutional investor too.

David: And basically besides Vanguard.

Steve: I’m not sure about that part, but yeah, it could be.

David: On the one hand I imagine it was very simple and you’ve given reasons on other interviews in the past, you’re a loyal guy, et cetera. Just talk us through the emotions thinking about that. I imagine that was not so simple.

Steve: No. I leave, then what does it mean to emotionally detach? Because if you’re not there, you have to emotionally detach. You can’t say because you don’t, you can’t control anything anymore. It’s hard. You don’t want to stay quite that emotionally attached because it’s like, oh, I got to get back in and fix everything.

But I said, I’m going to be the best investor. We’re going to know everything about this company. I’m going to read everything just like I used to. We’re going to go to conferences just like we used to.

I went to one shareholder meeting and I was a dick in my opinion. Literally one of the shareholder meetings. I was too emotionally attached. Took me about a year to say I just have to emotionally detach. It took some work, but I was able to get there. But I’m still loyal. Didn’t want to sell.

There’s one. Then we get our philanthropy started and then I do need to do something. We do need some of the asset value to give away. I went through a bit where we gave some away, i.e., we put it into our donor advised fund. I also sold a little bit at the time and I was thinking—

Ben: This is 2015-ish?

Steve: Yeah. It might have been even 2016, something like that. Then because our philanthropy was just ramping up. Connie had been giving away money, but the dollar value was ramping up. Then I said, maybe I should just sell it all. Full emotional detachment. Let’s do full emotional detachment. Because look. It was my baby. It’s my baby.

I’m not a founder, but I think of myself as a founder. I was there so early and I hired basically everybody. Everybody was a senior leader I’d recruited. It’s not true anymore. Now things have changed. It’s probably only 10% of the people who were there now were there when I was there or something. Higher at the senior levels. I can go through the math and why that’s true.

David: But that would’ve been a very understandable decision of, you know? It’s time to just put it all away.

Steve: Just emotional detachment. It had nothing to do with money. My only thought process was emotional detachment. I was wrestling.

David: You’re ready to hit the button. You’re ready to hit the—

Steve: It was wrestling. I was wrestling. Then the lady who works here, ex-Microsoftee who works here in finance, who’s the woman who really charts what’s going on financially at Microsoft, she and her boss, who’s another ex-Microsoftee who used to work with me most closely on the financial stuff, but she says, you can’t sell. You can’t sell. This is going to be worth a lot more. You can’t sell. You can’t.

Ben: So she effectively made a Microsoft stock pick.

Steve: And she was recommending. She has some loyalty too. It’s not like we have a bunch of Microsoftees here, and it’s not like they lack loyalty either, but it was a little bit loyalty and a lot a pick. I said, look. My loyalty trumps my emotional attachment. I can get through my emotional attachment, but my loyalty. And look. I think of the thing as like a two-headed hydra. I thought about this the whole way. Things could go to nothing or things could explode.

That’s partly why we tamped on the stock, because we always saw the possibility for either of two radically different outcomes. Then finally I say, look. I’m not going to sweat whether we’re going to get the downside or the upside. I’m just going to be loyal and I’m going to be enough emotionally detached for this to be okay.

Ben: Because for you it doesn’t matter. There’s not a downside that could be so bad that actually—

Steve: No, I had enough money off the table that ah, it’s not like my family’s going to—

Ben: Could still run one of the best philanthropies of all time, even if the stock—

Steve: Connie would’ve been okay with it. She finds it difficult to give away as much money as we have. She wouldn’t have mind a smaller problem to start with. She would’ve been okay.

Ben: I’ve been charting it over the last three years. You guys are giving away almost somewhere in the neighborhood of a billion dollars a year.

Steve: Cash out the door.

Ben: But your net worth is ballooning every year way faster than you can give money away because of the Microsoft hold.

Steve: Yeah, Microsoft hold, but you may be missing one thing on the Microsoft hold that’s important. And that’s the size of the dividend check.

Ben: Ah.

Steve: Between Microsoft and the other stuff I own, the dividend checks are pretty close to what we give away. You can look at the appreciation, but we’re just above the dividend checks now.

David: You’re just trying to shovel the money that is coming in the door, out the door.

Ben: So you can fund the whole philanthropy without selling additional shares.

Steve: Well, there are two things that are going on. One, the dividend checks are pretty good. And number two, I do have stuff that’s not in Microsoft.

Ben: So you hold, I think mostly index funds outside of the Clippers, is that right?

Steve: Yeah, Clippers/Arena index funds. I have one business I invested in with a guy who I went to college with who worked at Microsoft. It’s called Stagwell Media. It’s a marketing services company. Call it a modern day ad agency, but it’s not really an ad agency. A guy named Mark Penn. I do have some money that’s not in index funds, but mostly I’m in index funds.

David: Which that anybody else in the same couple of top pages of lists that you’re on, you must be the only one that operates like this. Everybody else, huge family offices, lots of investments, private equity funds.

Steve: Yeah, but I would say probably would find that Zuckerberg is pretty concentrated. I don’t know this, but I’m going to guess you would find, I don’t know about Ellison, but obviously some of the guys who own more privately-held businesses pretty concentrated.

Ben: Required to be concentrated.

Steve: Yeah. Who else? The Google guys I imagine are concentrated, but I don’t know that, I can’t speak for anybody else. Obviously, Bloomberg is concentrated.

David: Well, I think in practice it all works out the same way of, there’s one thing that is everything.

Steve: Yeah. And look. If you sell it, you’re just going to pay capital gains taxes. If you’re really just being a financial monster about it, you got to decide, will Microsoft underperform the index by enough to offset the capital gains taxes.

I don’t need the money. I got plenty to live on without selling anything. That’s number one. Financially, where’s that money going to go? Some will go to my kids, but most of it’s going to go to the government or to philanthropy. Why would I sell, so we have less to give to philanthropy someday, unless I really think Microsoft’s going to underperform the market by essentially the capital gains rate.

Ben: I feel like I’m watching a live USA facts video right here.

Steve: I got this question once. I’m a member of a country club in LA, and one of the things country clubs do sometimes is they’ll do Q&A with members to entertain. I did a Q&A with a friend of mine at the club who’d been president of the club, actually, and also as a knows Charlie Munger pretty well. Charlie Munger’s there as well. Charlie Munger comes up to him beforehand. And to me. I know Charlie through Bill and Warren, and says, if you call on me, I have a question,

David: As only Charlie can.

Steve: You did a Charlie episode. We do our panel thing, the two of us, and then Q&A. Charlie gets up to the mic, he’s not moving super well, but he gets up to the mic and, oh, Charlie. We can call on you. Charlie says, Steve, I’m wondering why you held onto your Microsoft stock when your partners over there didn’t. I know you’re not that smart.

Steve: I said, no, Charlie, but I’m not loyal. I don’t know why Paul and Bill didn’t hang on. I don’t know. You’d have to ask them. But for me it’s from the heart thing. And I think it’d be fine. It’s not going to screw anything up financially. What’s the worst thing that happens? Microsoft goes to zero? Probably not, but even if Microsoft goes to zero, me and my family, we can live, we can give away money, it’s not going to go to zero. And I’m okay any way it goes. I’m fine.

Ben: And are the Clippers and the Intuit Dome fully paid off at this point?

Steve: The Clippers are fully paid off. I paid them off the day I bought them. That’s not true. I didn’t want to sell stocks at the time, so I borrowed some money, which is long paid off.

Intuit Dome, we borrowed some money against Intuit Dome. I don’t owe any money on it. Oh, that’s not true. I owe some. I have some margin debt that I use to, but again, it’s just a timing thing. I didn’t want to sell stock, so took some margin debt, which as dividends come in, I’m reducing the margin debt.

But the building itself has debt on it. Why? Because to sell the building, let’s say something was to happen to me and Connie (my wife) had to sell, the buyer would have to come up with less cash because it has debt on it.

Call it worth X billion and it’s got Y billion on debt on it. You’re only selling it for X minus Y. You’re not selling it for X. Meaning the universe of buyers is bigger because it has debt on it. Oh, by the way, I happen to get the debt at a very good time, at a very good rate. It’s a double value to a future buyer.

That’s the reason we put that on the building. The margin debt was just a timing issue, if you will.

Ben: I feel like we’ve done you a great disservice by going into the Clippers and Intuit Dome through—

Steve: The financial lens.

Steve: Now, that I do not own the financial purposes. And I will also tell you, unlike Microsoft, it cannot go to zero.

David: Like the asset value?

Steve: Not a chance. It is far more secure than Microsoft. Why?

David: Not making more of them.

Steve: They’re not making more of them, and as long as anybody in the world’s getting richer, the buyer pool will only go up. People don’t buy them for their earnings. I wish we had more earnings, but at the end of the day, people are buying them because almost more like a piece of art.

Some people don’t like negative cash flow, blah-blah-blah, but at the end of the day, I have the Clippers, we have the best market in the world. If you want to want to own a basketball team, other than maybe Miami, the only place players want to play is LA.

If you’re a buyer, where do you want to go if you don’t live in LA? Where do you want to go? Well, you want to go to LA or you want to go to Miami. You don’t want to go to New York in the wintertime. If you’re a foreign buyer, potentiallym, you want to go to LA.

That asset value—we should get onto something other asset value—I’m not selling the thing. My estate may sell it. I don’t know what Connie and the kids will want, but at the end of the day, that one does not have a lot of volatility.

David: It’s a nice retirement fund. What’s been the most surprising thing in your Clippers journey?

Steve: I’ll give you two parts of the answer. First is how I relate to that business versus the businesses I’ve known. Number one, there are more similarities than I ever thought. We do version upgrades just like you do. What’s a version upgrade? You do major version upgrades over the summer. That’s the draft and free agency and trades. And you do a minor version upgrade at the time of the trade deadline. It’s very simple.

David: You got a six month ship cycle.

Ben: Your service pack.

Steve: A major pack, minor release every year.

David: SP1 and SP2.

Steve: And oh, by the way, how people like agile now development, guess what? That’s called changing the game plan per the coaches are always modifying in that sense. It’s a little bit similar. Ah, I never thought about that. The business is just like Microsoft. We sell both advertising and that’s called sponsorship. We sell tickets.

David: Software licenses.

SteveOh, no. That’s only software licenses. We have an OEM business that’s called broadcast revenue. It’s 100%.

David: Remarkably similar.

Steve: Just the terms of business model. We do have a union. That’s very different. What that means in terms of the complexity through the collective bargaining agreement, it also covers things like what’s max salary, what trades can you make, all that very different. You actually really are business partners with your competitors. That’s different. You actually get together and talk to them. I never did that when I was at Microsoft. You’re get together and you talk to them, but you’re trying to compete.

If you have somebody who wants to advance through their career, oftentimes the best way for them to advance, they have to go to another team. We have a president of basketball. It’s not an open job. I don’t plan for it to be an open job. I don’t want to lose anybody. But if a lot of the career moves people make would be to other organizations. We don’t like that. But we want to have the talent. Everybody loves.

David: Microsoft, your domain is always growing.

Steve: The domain is growing, or number of people, you can move people. Oh, you’re an engineer. You’re bored. You’ve worked on X. We’ll move you to work on a different product, for example. It’s different the way you think about people, primarily because of the union, but also there are only 30 head coaching jobs. There just are. If somebody wants to be a head coach and they’re not our head coach, they have to find a job someplace else.

Again, not what we want, but the reality is we don’t want people held back in their career. It’s not like Microsoft where I felt like I could always find a job that somebody should want. That’s different.

I’ll give you another one to think about. Business likes to say, oh, we’re accountable, we’re agile, we’re this, we’re that. Sports is so much more accountable than business. It’s like a joke. I’m being a bit extreme for fun. But every 24 seconds, you get a report card. Basketball shot clock every 48 minutes.

You can’t say, I’m going to make it up next quarter. We missed, but I got it next quarter. No. You lost that game, that game is on, you lost comp for the rest of the season. You cannot dig yourself out of that one game loss hole. You can’t. It’s gone.

David: And you can probably also be reasonably confident about each individual’s contribution to that win or loss.

Steve: Now let me get to that. Your customers know everything you know. It’s not like you could say back in the lab, you wait until you see what we got in the lab. No. Every statistic we have, our customers have.

You want to know how many miles James Harden ran last game? Comes out of the statistical systems. You can find that out. If you want to know how many pick and rolls we ran of a certain type, how they were guarded, and how we did scoring against them? Don’t worry, you can read about it.

You want to look and see what the dynamics look like on the sidelines? You can just sit there and watch our players and say, oh, I don’t know everything. I don’t know what they’re saying, but I can see their body language. Oh, so and so seemed severely charged up. Oh, that’s great. So and so cheers for their teammates. So and so seemed down. There’s almost nothing. We get to watch practice, our fans don’t. But the level of accountability is so high. The speed is high.

Think of teamwork. Teamwork, man. It’s all on display. Not only is it on display, but you absolutely know you need teamwork. One star can’t bail you out. You may have one star, but then the pieces have to fit around the star. It’s just the way it is.

You know how businesses, you say, okay. Everybody wants to talk about teamwork. In a lot of places that would mean, hey Ben, I don’t know. We could work better on this. Then Ben can say, your team’s doing things wrong. Then we can get back together and talk a little more. Then a month later we can talk about it some more. Probably you’ve seen this in some organizations.

Ben: And then at some point, we’ll talk about it as if it were a great collaboration between our two teams.

Steve: And what has to happen in our business?

David: You actually got to pass the ball.

Steve: You have to actually say it, pass the ball. Or hey, this isn’t working. You got to do X. You got to give real time feedback. You can’t lolly gag. Ah, well let’s rub each other’s belly. No. If you want that team to be better, you have to hold one another accountable. Not just the coach.

The best teams, the players hold each other accountable, and not just the best player holds everybody else accountable. Everybody’s got to hold everybody accountable, which really means give the feedback.

In Microsoft, we got rid of the value called teamwork. I didn’t want that one. I said open and respectful and dedicated to making others better, because teamwork could sound like a treat. Everybody nice, nice. Open? Yes. Got to say what’s on your mind. Respectful? Yes. But number one, dedicated to making each other better, which I think is what the purpose of teamwork is, as opposed to the word teamwork.

Ben: Oh, that’s interesting. Teamwork is an implementation detail, but that’s not actually the goal. We don’t seek to have an organization full of teamwork. It’s teamwork because we want some output.

Steve: Exactly. I think back to the old HP, I’m okay, you’re okay. Let’s all be nice to each other. There’s a little bit of that that’s come back into the general narrative of culture today, generations much younger than me. But at the end of the day, if you want to succeed, you’re right. The goal is succeeding. Play well together. In the NBA team, you’re going to know in 2½ hours or so, 2 hours, you’re going to know.

David: It’s interesting. Professional sports is maybe like the last bastion of there’s not room for the I’m okay, you’re okay, let’s talk this out. Oh, your team’s talk to my team. It’s extreme accountability.

Steve: Extreme accountability, extreme teamwork. I learned some things that would’ve been very helpful for me to understand at Microsoft.

I’ll give you another one. Reference checking. Everybody does reference checking. How good is the reference checking in most businesses?

David: Not good.

Ben: Most people call front of sheet references, which has never made sense to me.

Steve: Or you call somebody who probably doesn’t feel like they can give you an honest answer because they don’t want to get sued or blah-blah-blah. Basketball? You should see the amount of reference material we have on a guy before we draft them. People have talked to their old coaches, they’ve talked to their teammates. That’s what scouts do. They’ve watched them play, they’ve been to practices, they know what they’ve talked to references about work at.

Ben: Imagine if you could scout your future employees. You could just go hang out at their current job.

Steve: Or you talk to their parents. There are so many things.

David: The draft choices are such a crucible decision because free agency, you mostly know what you’re getting. They have a body of work.

Steve: You can see the body of work. You may know what happens behind the scenes. You may not.

David: So there’s some risk to it, but there’s a body of work. A draft, you get two choices every year.

Steve: Well, we traded some away, but yes.

David: But in theory. In aggregate, every team gets two choices every year, and you could choose to deal those choices. And that’s hugely, hugely impactful.

Steve: And you’re dealing with one other thing—my wife reminds me—boys’ brains don’t fully develop until they’re what, 25? We’re drafting guys who are 19, 20, 21. You’re also having to say by everything I know, what do I project that guy looks like? You could say you enter your prime around 27, what do you start looking at though? You’re going to look pretty good or not by 23, 24, 25. You have to have a progression of what you think happens to the young man when you draft him.

The more reference checking, much bigger deal I found. People say, oh, well it’s simple. It’s sports. The strategy decks I get, 35 PowerPoints, 40 PowerPoints, easily to go through. Okay, here’s our strategies. What about this? What if? What about this. What do we do here? We have a PhD physicist who is a key part of our analytics group, focuses on our analytics systems. It’s not like this stuff’s not complicated. It is.

Ben: Analytics has become this really big buzzword in sports. Where do you see real alpha actually happening in data science and sports, versus what’s just table stakes at this point?

Steve: There are two ways to use analytics. One is for game planning. Literally, what does this tell us about the best way to guard Anthony Edwards in this situation or these situations? Very helpful for that.

I’d say the data is probably table stakes, honestly. The way you use it, not so much do you ask the right questions? Maybe not. Does coach really understand and embrace? Are the analytics people really able to mind meld with coach so that coaches get the insights they can for game planning?

The second is, what about for drafting and trading? Analytics are actually a little less important in that instance. Because they don’t really tell you how, if you mix Charlie with Harry, it’s different than if you mix Charlie with Bobby. And Charlie and Harry haven’t played together before. So it’s a little different, and they are helpful.

We have analytics, for example, and all the kids we’re going to draft, less valuable than on pros because you’re playing against a different level of competition. Do people have differential data? Not much. The same cameras in the ceiling are recording the same games. Most of the analytics data now gets processed through standard software packages that get licensed to everybody.

There’s a company called Hawkeye Second Spectrum. Basically, they’ve built machine learning layers on top of the raw motion data, et cetera, so every team winds up with the same tools. Doesn’t mean you don’t need smart guys. It doesn’t mean you don’t do analysis on top of it.

Ben: Has anyone had a breakthrough form of measurement? Is there an example in the last five years of a team that’s had a great data source emerge?

Steve: A different data source than other people have? No, I don’t think so at all. It’s the things people emphasize in terms of what they look at could be different (I think) very much by teams. They’re teams at the draft who just have you take a psychological test, you get to interview a set of kids and they might just have you take a test.

Other teams, it’s all about the interview. Some people, I don’t know if they see psychologists. I don’t know. But people will use different techniques to try to do some of that. It’s a little different from analytics, but it gives you the sense of how do you assess what’s important.

Ben: Fascinating,

David: Interesting. How does Intuit Dome fit into all this?

Steve: I love Intuit Dome. Since we talked a lot about products, and I’ve been involved in (I’ll say) the visioning—I call myself a visionary—what should this product look like, particularly a number of them, both Windows but also certainly on the backend products—backend meaning they’re not customer visible—I’d say Intuit Dome’s probably the product for which I had the clearest vision I’ve ever had. I knew what I wanted. It evolved some because we went and looked at a bunch of other arenas. But I had a point of view. I know what user I wanted to make happy.

Ben: So I bet a lot of people aren’t familiar what is the thesis behind Intuit Dome?

Steve: I wanted to make Intuit Dome the best place for the hardcore basketball fan.

Ben: And particularly the hardcore Clippers fan, right?

Steve: Sure, of course, because we’re the only team that plays there.

David: You’ve got another team who plays there every night. You’re visiting team, but not trying to help them.

Steve: Yes, Clipper fans, but we’re going to have the Olympics. We’ll have every Olympic basketball game. And Intuit, I want it to be great for those environments. We have some college games or high school games in there. Basketball, basketball, basketball.

You sit in there and you’re a fan. It’s a live event. Got to have energy, got to have intensity. If you’re a basketball fan, come on, let’s go. So you want it tight. You want to have it reverberating with people who are cheering.

Essentially, a whole side of the building is structured more like a college gym. Long and steep, there are no suites on the side. We even built a student section right in the middle. It’s standing room only. You must stand. That’s what you have to agree to if you’re going to be there. You have to agree to stand. You have to agree to cheer. If you don’t, we’ll find you another place in the building to sit.

You can’t wear visiting gear paraphernalia on that whole side. Four thousand seats. Will move you if otherwise. It’s small. Not the number of seats is a little small, but the way we pulled it together, there’s no hockey. I didn’t want hockey. Not that hockey’s not a great sport, but—

David: Compromises you’d have to make to the arena.

Steve: You have to spread it out. You have to spread people out because the rink is bigger than the court. Very different. We have an acre of scoreboard.

David: The halo board is unreal.

Steve: More statistics. We went 4K from the start.

David: I didn’t realize it’s an acre. You have an acre of scoreboard.

Steve: Between the inside and the outside, it’s almost an acre.

Ben: It’s the largest indoor screen in the world.

Steve: For sure.

Ben: And what you were describing before is the wall. For any fans or listeners who haven’t seen a game there or seen anything—we’ve done interviews about this—it’s an unbroken—

Steve: Fifty-one rows, unbroken all the way up. I call it the student section. We call it the swell, Clippers, waves, get it? Swell. The swell is right in the middle. They do a chant before the game starts. They’re chanting, they’re making noise, a bunch will find weird things they want to bring to games. Funny posters. You basically sign up, first-come-first-serve. If you’re not there early, you’re not in the swell, that game.

We oversell the section. It’s $1000 for the year, which is only $25 a game. Hell of a price. You’re expected to deliver the goods. You have to deliver.

David: You got to bring the value.

Steve: You got to bring the value.

Ben: And the thesis behind the wall, if I’m understanding correctly, is it should be easy to be a Clipper player, but hard to be an opposing player.

Steve: We put it right on top of the visitor side, so it makes noise right into the visitor’s huddle. We put the swell right behind the backboard, so basically when you’re shooting free throws on that end, you’re looking right at the swell.

David: And it makes a difference.

Ben:. I saw data that said that the—

Steve: Lowest free throw shooting percentage of the league for the visiting team is against the wall. It worked. That’s what I wanted.

David: What did the other owners think about this?

Steve: We’ve had a bunch of people come through and look at the building. Would I be surprised if a number of the new arenas get built don’t have a wall. No, I would be, or at least, student section.

David: You’ve got a duration of your advantage because not every other team can build or remodel an arena.

Steve: But you also have to remember, I took some financial hits on this. We have fewer suites, less revenue, and we only charge $1000 for a season ticket that gets you pretty close to the floor.

Ben: And you didn’t have any public funding for it, so in terms of the cash out—

Steve: Yeah. California, you can’t have public funding for arenas. That’s why we don’t.

Ben: You paid for the whole arena and you’re going to have slower payback on that because you have less revenue opportunity.

Steve: But we took a revenue. Definitely we could have made more revenue on that side if we’d done things a little bit differently. But it’s about basketball. We have a lot of toilets.

Ben: Three times the average or something like that.

Steve: Something like that. Why? It’s about basketball. Get out and get back into your seat. Don’t miss the action. We started out with a lot more concession stands, and then we said, no, no. Let’s just do this completely frictionless. If you register your face, you just walk in, grab what you want and leave. If not, you could just tap your phone on the way in, grab your stuff and leave.

There’s no checkout. We don’t serve eclectic food. Little everything. Same thing everywhere. Why? We don’t want you walking around having to look for your favorite food. No, you’re going to get the same great stuff everywhere.

It turns out 85% of what gets bought is in five items anyway. It’s a hamburger, it’s a hot dog, it’s nachos, chicken tenders. I’m not remembering off the top of my head.

David: Is part of the calculus of this for attracting players too?

Steve: Sure. If you look at our backend spaces, like our practice facility, ooh la la.

David: But I’m thinking even if your opponent’s going to have a lower free throw shooting percentage in your home arena…

Steve: Sure. Players have said they think it’s really cool. And that’s good. That’s good. Players’ offices are also good, i.e., the training area, the practice area, our outdoor pool, sauna, and cold plunge, our weight room, our sports performance center. That stuff, all I would say, are pretty good as well. Very good.

We’ve done a bunch of things. We have the best refs room (I think) in the league. We called the refs union and said, what do you guys need? The media area, we said, look. If we’re going to build a new arena, our visiting locker room’s the best in the league. Best weight room.

David: That’s your sales pitch to visiting stars.

Steve: Exactly. We say, hey, we care, and we care about everybody. Then we make it about the basketball, in and out. Oh, what’s our artwork? We have public art that is required, some of which is basketball-oriented. But our major piece of public art is a clipper ship whose masks are replicas of basketballs from around the world. Basketball, basketball, basketball.

Our art inside the building? We have a high school basketball jersey from every high school in the state of California. It looks like art almost because It’s nice colors on the wall. Basketball, man. It’s about the basketball.

Ben: This building feels like your personality into a physical structure, the competitiveness, the loyalty, the fixation on what matters—

David: On the customer?

Steve: Yeah, it is. Look, you know how oftentimes startups come about because the founder is in love with some topic and builds the product they wanted to use? I think that happens a lot. I don’t think people start back and look at the market, they say, oh, I think… I think Zuckerberg did that, Bill did that, programming, everybody does it. That’s what you did.

I didn’t try to go out and survey. We could have designed for the, let me call it the contemporary audience. We would’ve had more lounge space. We could have designed for what I’d call traditional, long-term. That’s how I think about it. We could have designed in a lot of ways.

I designed for me. In some large measure, guys like me. It turns out Clipper fans are a little bit like me, because some of them are long suffering. The team wasn’t good there for a number of years. People are diehard, come up to you and say, I’m 89, which really means they bought their season tickets in 1989. They’ve been there and now we’ve exploded in the last, whatever, 14 years. We haven’t had a losing season.

Ben: Hopefully a championship here at some point.

David: When are you going to overtake the Lakers?

Steve: There are battles in tech where you just have to be patient and long-term. It’s weird to have a town with two teams. Our goal is to be long-term grinders on that. We want to beat them every time on the court.

It’s okay to have two popular teams. Los Angeles County, for gosh sakes, has the same number of people as the state of Ohio, pretty much. There are plenty of people to be fans. We don’t want to be “little brother.” We don’t want to be the team with a nice 20% market share. No. We want to get our fair share. We’re never going to get 100%.

The Lakers have tradition just like at Microsoft. Patient, long-term, hardcore approach. If we don’t do that, no. The Lakers have the position. They’ve earned it. They got a lot of championships. That don’t mean we’re not going to keep coming and coming and coming.

Ben: Steve, thank you so much.

Steve: Thanks, man. Thanks, David.

David: Thanks, Steve.

Ben: Appreciate it. Ooh, David, that was fun.

David: Yes, it was.

Ben: I’ve always wanted to interview Steve Ballmer. In fact, when I was at Microsoft, I wasn’t a podcaster then, but at the time I was such a junior employee. But man, there was a complicated landscape that Steve was navigating between the product set, between developer relevance, between the shifting landscape underneath him, and will Windows be the interesting bet to make going forward? personnel stuff, board stuff, eventually CEO transition. That is not a job I want.

David: It’s fun for us as a show, too. Obviously this is meaningful for you personally, but when we started the show in Seattle in 2015, the Microsoft transition, Steve, Satya, this is what was in the water. This is what we all talked about at Madrona or Seattle in the tech ecosystem.

Ben: And it’s not clear that Microsoft was going to be this amazing juggernaut that it turned into. Obviously, Steve had planted some seeds in enterprise and what would become the juggernaut of Azure, but we were early in Satya’s tenure when we started this show. Everyone had high hopes, he had started to transform the culture, but it’s come a long way.

David: Steve knew how great Azure was going to be, but the rest of the world didn’t yet.

Ben: Yup. So fun.

All right. Well listeners, a few things before we wrap. One, New York City. We would love to see you at Radio City Music Hall. acquired.fm/nyc is where you can get all of the information, tickets, et cetera about that. And it’s going to be quite a night to remember.

David: Yes, it will be. Can’t wait.

Ben: Can’t wait. Well thank you to our partners this season. J.P. Morgan Payments, trusted, reliable payments infrastructure for your business, no matter the scale. Statsig, the best way to do experimentation and many more things as a product team. Vercel your complete platform for web development, and Anthropic, the makers of Claude. You can click the links in the show notes to learn more about any of these great companies.

If you like this episode, go check out our two big episodes on the history of Microsoft. Part one is basically the era where Bill Gates was CEO. Part two is basically the era where Steve was CEO.

If you want more Acquired between the monthly episodes, check out ACQ2, our interview show where we talk with founders building their businesses today, often in spaces that we’ve covered on the show.

If you want to know more every time an episode drops, check out our email list that’s acquired.fm/email. Get updates, get corrections, get hints at what the next episode will be. We announce all kinds of cool stuff in there.

When you finish this episode, come discuss it with the other smart members of the Acquired community at acquired.fm/slack. And with that, listeners, we’ll see you next time.

David: We’ll see you next time.