Microsoft

"Perhaps part of the impulse to skip this story is because NeXT was—spoiler alert—never a huge market success. NeXT had all the ingredients to succeed. We were at the right place at the right time, we had a world-class team, and we were building technology that was years ahead of the rest of the industry. If history had gone differently—and if Steve had been more willing to take advice—I believe NeXT and its operating system, NeXTSTEP, could have become the industry standard, taking the place that Microsoft Windows eventually occupied."

"Having left NeXT in 1990, I watched from the outside as Steve managed Apple’s remarkable transformation. Meanwhile my own experience at NeXT—and my relationship with Steve—remained fundamental to my life’s work even as I took a job working for Microsoft to help Steve’s rival, Bill Gates, normalize business relationships with Apple and the rest of the computer industry as it settled its lingering antitrust case."

"For help with the company’s name, Steve turned to a friend named Tom Suiter. Tom was a gregarious and highly creative graphic artist who had designed the Mac’s packaging. Plus, he was an independent consultant, leaving him free from Apple, where much of the rest of Steve’s network remained stuck. “Hey,” a voice said when Tom picked up the phone, “I’m starting a new company.” “What are you going to call it?” Tom asked. “Two,” Steve replied. “For my second company.” Two? Seriously? Tom thought it was a terrible name, making it sound like Steve’s new company was going to be second best to Apple. “Everybody’s going to ask what happened to number one,” he panned. Steve wanted Tom’s suggestion for a name. Tom said he’d get back to him. He was about to attend a Microsoft conference in Seattle where Bill Gates was set to speak about a novel technology known as the CD-ROM. From the stage, Bill extolled the virtues of the CD. He said it would displace the floppy disk and transform how we watch media, listen to music, and access our information. As Bill spoke, he kept saying the word next. The next big thing, the next device, the next standard, all coming in the next year. “I had my little journal,” Tom said, “and I wrote down the word next probably twenty-five times.” Listening to Steve’s greatest rival, Tom experienced an epiphany. He hopped on an airplane back to San Francisco and called Steve. “I got it,” Tom said, heart pounding, “Next.” Silence on the other end. Then: “I love it!”"

"These earlier companies tended to have far shorter holding periods than the ones to which we have become accustomed in the past twenty years. Some of this was due to the absence of a growth equity market, some by the level of interest rates, which peaked at 20% during 1980, and, some by the receptivity of public market investors to small cap companies. (For example, Microsoft’s and Oracle’s valuations after their 1986 IPOs were $519 million and $188 million respectively while for Electronic Arts it was $74 million in 1989.)"

"Microsoft repeatedly has reacted to innovation outside its walls by acting quickly and intensely to nullify the threats. They have looked for customer validation of someone else’s innovation before embarking on their own. It is a very powerful strategy. A former senior Microsoft executive once told me that Microsoft does exceptionally well when it has a well-defined target. When the company went after Netware or Lotus 1-2-3, there was no ambiguity about what the product ought to look like or what the revenues ought to be. It is a very well-defined target."

"Looking at a handful of outstanding technology companies, their top management continually learns and renews itself, so that they not only keep up with technological progress but even lead it. In this way, they not only maintain their own position but also keep the company continuously ahead. Microsoft’s Gates is one example. Twenty years ago Gates founded Microsoft from scratch; at that time he was already an expert in the software industry."

"Over the past twenty years, the pace of progress in the software industry, Microsoft, and Gates’ personal achievements can practically only be measured at the “speed of light.” Yet today, Gates’ understanding of the software industry is even more incisive than it was twenty years ago!"

"Of course, in earlier business history there were quite a few successful examples of “the small taking on the big,” but those successes were achieved only after long struggles, and most were cases where big companies made serious mistakes that gave small companies opportunities. TI’s large competitors, however, had not made serious mistakes, yet TI surpassed them in only a few short years. Why was this? Ultimately, the pace of technological progress clearly accelerated after World War II, and “technological inflection points” emerged one after another. When each “technological inflection point” appears, big companies are not necessarily stronger than small ones; small and big companies have almost equal opportunities. Over the past decades, cases of small companies outperforming big companies have become too numerous to count. The most famous example in the past ten-plus years is Microsoft beating IBM. But as far as I know, TI established the earliest model."

"It is worth repeating that in business, unlike in war, the main effort or focus is generally not a specific unit or division of the company. More often in business, the focusing device is a concept, like Microsoft’s “trustworthy computing,” that all the other activities of the company must support. In particular, it tells people, “Whenever you have a conflict or are unsure of what to do, take the action that best supports the main focus.” However, a leader in a business still needs to be “at the Schwerpunkt,” even a conceptual one."

"“At X.com we had this philosophy: frameworks are good,” remembered Alexander. “Today, everybody uses frameworks. But back then, X.com said, instead of writing everything yourself, we should use frameworks. You can get a lot more done in little time.” Musk supported the decision because it swapped flexibility for efficiency. “If you fast forward like ten or twelve years, now Linux has a lot of tools,” Musk said. “But not then.” With Microsoft’s prewritten software libraries, he noted, three X.com engineers could do the work of dozens."

"Thiel points to this pressure as the defining characteristic of his PayPal experience. “If you’re at a fantastically successful company like Microsoft or Google,” he explained, “you will infer that starting a new business is easier than it is. You’ll learn a lot of wrong things. If you’re at the company that failed, you tend to learn the lesson that it’s impossible. At PayPal we were sort of intermediate. We weren’t as successful as some of the great successes of Silicon Valley, but I think people sort of calibrated it and learned the best lesson—that it’s hard, but doable.”"

"“We should go for it,” he said. “Pixar worked years to develop this technology. Why should they use it for free? We should shut down their infringing products.” “We’d be better off charging license fees than trying to shut them down,” I suggested. “Those products are not really threatening Pixar’s business.” “How much can we get from licensing?” Steve wondered. “These are huge companies and our patents are central to their graphics businesses. It’s worth fifty million at least.” “I don’t disagree,” I said. It was true; we might have been able to earn license fees of that magnitude. But my years as a lawyer told me that Microsoft and Silicon Graphics wouldn’t pay those kinds of numbers without a big court battle. That could take years and cost millions. “We’re better off making it easier for them to make a deal than to go to war for every penny that we think we’re entitled to,” I told Steve. “The biggest benefit to Pixar is to make this quick and to gain a cash infusion now, when we need it the most.” Steve didn’t like the idea of going for less than he thought we were entitled to earn. He felt this would be too much of a bargain for Microsoft and Silicon Graphics. Five million, or even $10 million, was nothing to them if they needed these patents. Steve wasn’t wrong; I just didn’t think going for too much was pragmatic. I was nervous about locking Pixar up in a protracted legal battle, even if we liked our chances of winning it. Patent licensing was not a business strategy for Pixar. It was a financing strategy, something we would do once or twice to bring in cash, but no more. It would buy Pixar time, not guarantee long-term success."

"The strategy ended up working. It took three months to conclude the Microsoft license and about a year to conclude the Silicon Graphics license. Microsoft paid $6.5 million and Silicon Graphics a bit more, plus it gave credits for Pixar to acquire the Silicon Graphics computers it needed to make films. Pixar got just the shot of cash it needed, and Steve was happy. It meant that, for the first time, he would not have to pay Pixar’s cash shortfalls out of his own pocket for a while. It wouldn’t last forever, but it gave us room to figure out our long-term strategy."

"Steve could easily have told me to ask Microsoft and Silicon Graphics for $25 million each, the amount he wanted. He didn’t. He wanted us to keep talking until we agreed. We ended up deciding to ask for an amount somewhere between what I thought and what Steve wanted."

"Staff meetings should be a forum for the most important issues and opportunities, more so than 1:1s. “Use meetings to get everyone on the same page, get to the right debate, and make decisions.” Most important issues cut across functions, but, more important, bringing them to the table in team meetings lets people understand what is going on in the other teams, and discussing them as a group helps develop understanding and build cross-functional strength. This applies even to some issues that perhaps might be solved in 1:1s, because they give the team practice in tackling challenges together. GO founder Jerry Kaplan recalls, in his book Startup, a time when he wanted to discuss GO’s growing competition with Microsoft in his 1:1 with Bill. This was a critical topic, requiring detailed discussion of confidential and potentially controversial issues, so a one-on-one between the founder and the CEO seemed like the best forum for it. But Bill said no. He wanted to discuss and decide the issue as a team.9"

"The point is simple. If you look at all the really important breakthroughs made in any field, what you will find is that the unplanned, unintended or fortuitous connection plays just as great a role as the planned, the processed and the organised. This is why, fairly early on, Microsoft placed whiteboards along the corridors on the Redmond campus; for they found that the accidental meetings which took place in hallways were in fact more productive than the scheduled ones which happened in meeting rooms."

"A Prediction Today, the combination of record corporate cash levels and generally low interest rates and P/E ratios presents a historic opportunity for aggressive capital allocation. This situation is particularly pronounced among the largest, bluest-chip technology businesses—companies like Cisco, Microsoft, and Dell—many of which are still run by members of their founding management teams, have enormous cash balances, and trade at unprecedented single-digit P/E multiples. I think it’s likely one of these firms will reverse its historic emphasis on R&D investment and move to optimize returns through a combination of dramatically increased buybacks or dividends. Were this to happen, the market’s response would likely be rapturous, and one can imagine Henry Singleton as the CEO of one of these companies, rubbing his hands together in delight at the opportunities."

"Steve Ballmer has similarly demonstrated the difference between billionaire-style risk taking and owning a diversified stock portfolio. In March 1989, Microsoft received an unfavorable ruling in its ongoing liti¬ gation with Apple Computer. The software company’s stock plummeted as investors fretted that Microsoft would be blocked from using certain Macintosh-like features in future versions of its Windows operating sys¬ tem. Sales chief Ballmer, who correctly foresaw that Apple would not ulti¬ mately prevail, shelled out $46 million to add to his existing large holdings of Microsoft stock. Three years later, he followed Bill Gates and Paul Allen into the billionaire ranks. By then, the Microsoft shares that Ballmer had purchased for $46 million at a low point in the company’s fortunes were worth more than $350 million."

"in 1985 Apple’s new chairman, John Sculley, gave in to Gates’s demand to discontinue development of the MacBasic language for Macintosh and sign over rights to the MacBasic name to Microsoft. According to Sculley, Gates indicated that if Apple did not give up the project, he would suspend Apple’s license to use the competing Microsoft language on its popular Apple II computer. “[Gates] insisted that Apple withdraw what was an exceptional prod¬ uct,” claimed an Apple software engineer. “He held the gun to our head.”70 In a similar vein, internal documents of Intel indicated that at an August 1995 meeting, Gates made “vague threats” to support com¬ petitors of the semiconductor producer if it did not cease development of software that he viewed as a danger to Microsoft’s interests. Intel did in fact, delay the project. Chairman Andrew Grove characterized that decision by saying that his company “caved in” to Microsoft’s de¬ mands.71"

"D ominating a market is a highly effective strategy for accumulating wealth. It has produced both the first self-made billionaire, John D. Rockefeller Sr., and the first self-made centibillionaire, Bill Gates. In both cases, as well, market dominance has prompted calls to break up the com¬ panies that made them rich, Standard Oil and Microsoft. Developing a thick skin is an especially important principle if you pursue this path to fortune. Market dominance is not synonymous with monopoly. Complete elimination of competition is the ultimate form of dominance, but it is not a realistic objective. Moreover, dominating a particular market does not confer unlimited economic power, given the interdependence of sup¬ pliers, producers, and customers."

"Over the years, Gates has occasionally embellished his own legend. He long claimed that his first 13 software customers had gone bankrupt, a tale that underscored the fierce competitiveness of the computer in¬ dustry. “I made that up,” he subsequently conceded.17 Gates also said that between 1970 and 1974, he and Microsoft cofounder Paul Allen developed a computer program that was eventually used in about half the elevators in the United States. This “never happened,” he later ac¬ knowledged.18 Additionally, Gates maintained that it was during the 1970-1974 period that he and Allen began using the phrase that they later repeated endlessly as Microsoft’s creed: “A computer on every desk and in every home, running Microsoft software.” In reality, no such company name existed at the time. The famous phrase, which ap¬ parently was not heard around Microsoft until the mid-1980s, evolved from a January 1975 Popular Electronics article heralding “the era of the computer in every home.”1"

"“At X.com we had this philosophy: frameworks are good,” remembered Alexander. “Today, everybody uses frameworks. But back then, X.com said, instead of writing everything yourself, we should use frameworks. You can get a lot more done in little time.” Musk supported the decision because it swapped flexibility for efficiency. “If you fast forward like ten or twelve years, now Linux has a lot of tools,” Musk said. “But not then.” With Microsoft’s prewritten software libraries, he noted, three X.com engineers could do the work of dozens."

"Thiel points to this pressure as the defining characteristic of his PayPal experience. “If you’re at a fantastically successful company like Microsoft or Google,” he explained, “you will infer that starting a new business is easier than it is. You’ll learn a lot of wrong things. If you’re at the company that failed, you tend to learn the lesson that it’s impossible. At PayPal we were sort of intermediate. We weren’t as successful as some of the great successes of Silicon Valley, but I think people sort of calibrated it and learned the best lesson—that it’s hard, but doable.”"

"Traditional software companies, like Oracle or Microsoft, generally favored internal new product investment. When they did do acquisitions, they wanted a high-growth profile—certainly above 10 percent, and rarely near the 5 percent ballpark that Roper was more than happy to take. Jellison found the biggest mispricings in less sexy, slower, but still solid growers. These were usually software companies in highly niche markets."

"In fact, after acquiring COMDEX, as long as he claimed to be “COMDEX President Masayoshi Son,” everyone was willing to interact with him. This also allowed the president to quickly strengthen his network with Bill Gates of Microsoft and other business leaders and industry figures in the IT world."

"*Financial comparison of the two giants is an accounting minefield. Microsoft appeared to have pulled ahead in revenues as of 1991, but this included $213 million from sales of hardware. Subtracting the hardware revenues leaves $1.63 billion net. By the same measure and for approximately the same period, CA has characteristically understated its total revenues by choosing not to take into account at least $348 million from companies acquired for cash in 1991. With these included, CA revenues surpassed $1.7 billion."

"And this is a corporation that, since its inception as a four-person software outfit selling one program, has acquired and integrated unto itself no fewer than forty-two companies at a cost of some $2 billion, a corporate entity so revolutionary in its management and so successful in nearly every aspect of its being that one would think it would be at least as well-known and admired as IBM or Digital Equipment Corp. (DEC) or Microsoft or Lotus or Campbell’s soup."

"CA sells products priced in the thousands, the hundreds of thou- sands, and the millions, but to far fewer clients. Had the two gone into communications and not computing, CA would be making enormous and extremely complex switching systems to run entire telephone companies, Microsoft would be making cute little phones that light up in the dark."

"Just as the legal attack on Microsoft was ending Bill Gates’s dominance, Steve Jobs’s return to Apple demonstrated the irreplaceable value of a company’s founder. In some ways, Steve Jobs and Bill Gates were opposites. Jobs was an artist, preferred closed systems, and spent his time thinking about great products above all else; Gates was a businessman, kept his products open, and wanted to run the world. But both were insider/outsiders, and both pushed the companies they started to achievements that nobody else would have been able to match."

"I was eager to get a toehold in the nascent industry. If you believe in the laws of attraction, they were working when I got a call from an investment banker who said Paul Allen, a cofounder of Microsoft, had around 25 percent of AOL stock—and now wanted to get out of it."

"TCI and Microsoft were already conducting small interactive tests in the Redmond area, and there were some discussions to develop a cable-TV network covering computing. *What is there to think over?* TCI would be a 20 percent owner of a new internet portal that would piggyback on the most successful operating software in the industry."

"The large end-to-end groundbreaking deal with Microsoft never materialized, though we managed to strike smaller deals with Bill later. Bill Gates remains a friend, and I am still in awe of his intellect, energy, and relentless curiosity. Some of my favorite memories are of spending time with Bill and his team, including Craig Mundie, chief research and strategy officer, and Nathan Myhrvold, the chief technology officer—while traveling to Washington State for Cellular One board meetings. Cable stocks started to climb higher after the Microsoft investment in Comcast, and the entire market started to heat up for internet companies and online businesses. But while I chased the next big thing, I missed the cracks forming beneath our core business. Satellite had finally found its footing by the mid- 90s, peeling away our subscribers week by week. Customer service issues dragged on, and we were bleeding money on consultants and campaigns. The old guard was stepping back, and a wave of new leadership was stepping in. Somewhere along the way, we stopped moving with purpose—and started chasing too many things at once."

"“Let me tell you the whole story,” he began. The reason Paul Allen wanted to sell his block of AOL was to avoid a conflict of interest: Microsoft was about to come out with a new operating system that would directly compete with AOL. Bill cited Microsoft’s 90 percent share of the PC software market and said, “We will soon have our own web portal. It’s gonna be called The Microsoft Network—MSN—and it will be a dial-up internet service provider (ISP) tucked inside the release of Windows 95.” And then Bill Gates issued the real warning he wanted to convey: “And when we release this, it’s gonna be very difficult for customers that upgrade to Windows 95 to be able to find AOL… and we think Microsoft Network is gonna be a huge success. “So, you know, I don’t want you making the mistake of putting your money into something that we’re gonna put out of business.” This was rather brass knuckles of Bill, and sometimes this was his way; it is how you get to 90 percent market share of anything."

"The box delay continued to eat at me, so in the summer of 1996 I called one of the few people who could grok the box issue: Bill Gates. “Bill, I know we can build this digital set-top box for three hundred dollars in volume—cable operators can afford that if it meets our CableLabs specs. “But there are engineers at some of the vendors, namely Scientific Atlanta, saying this could be five years out now, and cost at least $600. Keep in mind, I am trying like hell to avoid a major rebuild of the entire TCI footprint with fiber—and to use digital compression to get channel expansion at an affordable price.” Vendors would point to the all-digital, interactive Full Service Network whose astronomical costs made it impractical, and they’d say the same thing: “Well, we can demonstrate it technologically, but it is far too expensive as a consumer product.” But I also knew Moore’s Law meant processing power would keep doubling every two years, so it was only a matter of time before the tech caught up. I’d run the numbers and think, “Why should these components cost so much?” “John, I am absolutely certain that that we could build such a device and deliver it at or below a three-hundred-dollar target price. Why don’t you bring ’em up here and we’ll have a discussion. And I’ll tell them myself—Microsoft will build what you want for three hundred bucks—any volume you want—and we’ll guarantee it.”"

"During this interregnum, Steve Jobs asked me to fly up to San Jose so I could see a movie he was in the middle of making for this unknown company he’d acquired called Pixar. But first he wanted to show me what he was doing with a “revolutionary” computer system at another new company of his called NeXT. It hadn’t been going that well because its complex yet elegant design couldn’t find a market, given the absolute domination of Microsoft. I went to the NeXT office, where Steve showed me a few scenes from *Toy Story*, and asked if I would join the Pixar board. I said I’d have to think about it. I didn’t want to commit myself and didn’t want to insult him, but I’d never been much interested in animation and had never made any animated movies. I don’t really understand the form and I thought this new Pixar work was awkward, and, separating me from most of the world, I didn’t get any of the charm of *Toy Story.*"

"Some of our ventures led, some fizzled. But the ones that led were blockbusters. One that still leads is Expedia. I thought travel was the perfect business to be colonized by the internet. We found and bought a fast-growing but still small company called Hotel Reservations Network based in Dallas. It owned the name Hotels.com, and it was our first foray into online travel. Microsoft had also started an online travel service called Expedia, which by 2001 was getting some traction. After the dot-com bubble burst, I went to see Steve Ballmer, then CEO of Microsoft, on a mission to persuade him to sell it to us. It was still losing money and Steve felt Microsoft shouldn’t be in these internet verticals anyway and quickly agreed to let us have it in exchange for $1 billion of our stock. We were set to close the deal in October 2001 when you-know-what happened on September 11 and travel ceased to exist. We had an out clause in our deal for a “material adverse change,” and 9/11 was certainly that. We thrashed around for weeks asking ourselves how we could pay $1 billion for a travel service when there was no traveling. One day, as we were stewing around, someone in the room said, “If there’s life, there’s travel.” That rang loud enough for me to say, “That’s it—we’re betting on *life,*” and we closed the deal."

"“If it’s okay to peak in 30 years, a single brand, single business model is the most efficient. But even Microsoft has already started slowing down in growth now. Even Intel, we can’t predict how much it will survive in fifty or a hundred years. That’s the danger of the single brand, single business model.”"

"Masayoshi Son carried this photo in a transparent folder for about half a year, and at night, he placed it beside his pillow while sleeping. Later, it would become known that Bill Gates, the genius from Microsoft, said: “I also saw ‘Popular Electronics’ magazine at the same time and couldn’t contain my excitement.” Hearing this, Son re-confirmed that his intuition was not wrong. Masayoshi Son was blessed with a sharp sensibility from birth. The frontal lobe, which controls creativity within the brain, works sufficiently when the brain is filled with information. The inspiration, which is the function of the sixth sense, is induced by information and evokes emotions. For this, one must always be alert and sharpen the keen sensibility to catch top-notch information."

"When I entered “Sushi” into the search engine, I found only one sushi restaurant. Mysteriously, it wasn’t in big cities like New York or Los Angeles but was a country sushi place; nonetheless, at that time, only one sushi restaurant in the entire English-speaking world had a homepage. Toshi’s Sushi Bar also launched its website around 1996. The year 1995 marked the introduction of Microsoft’s “Windows 95,” making it a year that could be called the dawn of the internet, and over the next year or two, the internet quickly became familiar. By 1995 and 1996, IPOs had become a complete boom. We were no exception, and every morning at the fish company waiting room where we went to buy fish, the topic of conversation was all about stock investments."

"Take Nick Hanauer, a self-confessed ‘proud and unapologetic capitalist’ who has co-founded more than thirty companies including aQuantive, an internet advertising company that was sold to Microsoft in 2007 for $6.4 billion in cash."

"For openers, McCaw always hunted for new technology. Years later, some people would assume that the Craig McCaw vision was to lock on to one technology and ride it. Not true. MdCawalways attended presentations of new gadgetry. You could always find him playing with some new kind of phone or betting a few dollars on promising techno- logical 7dea<T that~might flop. Most did flop, or didn't succeed soon enough. McCawIiked~~ATcK:T's EO Personal Communicator, a small device that read handwriting, and Steve Jobs's black-cube NeXT computer, which featured an operating system to rival Microsoft's Windows. Both failed. But McCaw kept watching changes in technol- ogy, measuring each innovation against his sense of the future."

"McCaw's actions are often difficult to explain. In this instance, there was a point to his behavior. He didn't want his company getting too comfortable. In that sense, it was the same ethic that Bill Gates brought to Microsoft: Be adaptive. Run scared. Never assume a franchise is permanent."