Episode 24: Skype

[0] um hang on one sec i lost my place in my notes oh wait actually can we go back uh i wish definitely compared it i think i think i love that who got the truth is it you is it you is it you who got the truth now is it you is it you is it you sit me down Say it straight, another story.

[1] Welcome back to episode 24 of Acquired, the podcast about technology acquisitions.

[2] I'm Ben Gilbert.

[3] I'm David Rosenthal.

[4] And we are your hosts.

[5] Today's episode is Microsoft's 2011 acquisition of Skype and the wild crazy journey that it took to get there.

[6] Ben, you mean eBay's 2005 acquisition of Skype and the wild crazy journey it took to get there.

[7] Or perhaps the Silver Lake Partners Private Equity Takeover with Andreson Horowitz.

[8] In 2009, acquisition of Skype and the crazy path it took to get there.

[9] All that and more as we dive into the show.

[10] Before we get started today, we want to do a community spotlight.

[11] User in Slack, Swix, S -W -Y -X pointed us at his company, I believe is Centio, S -E -O -E -O -O -com.

[12] They are the kind of future of Wall Street analysts.

[13] So they have a software platform where you can save time on research, join thousands of investment professionals on a modern and intuitive platform built by former Wall Street analysts.

[14] And he lets us know that they just launched their Alexa skill.

[15] So check that out if you have an Alexa or go to their website to check it out if you're interested.

[16] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

[17] Yes, ServiceNow is the AI platform for business transformation, helping automate processes, improve service delivery and increase efficiency.

[18] 85 % of the Fortune 500 runs on them, and they have quickly joined the Microsofts at the NVIDias as one of the most important enterprise technology vendors in the world.

[19] And, just like them, ServiceNow has AI baked in everywhere in their platform.

[20] They're also a major partner of both Microsoft and NVIDIA.

[21] I was at NVIDIA's GTC earlier this year, and Jensen brought up ServiceNow and their partnership many times throughout the keynote.

[22] So why is ServiceSouth?

[23] now so important to both Nvidia and Microsoft companies we've explored deeply in the last year on the show?

[24] Well, AI in the real world is only as good as the bedrock platform it's built into.

[25] So whether you're looking for AI to supercharge developers and IT, empower and streamline customer service, or enable HR to deliver better employee experiences, service now is the platform that can make it possible.

[26] Interestingly, employees can not only get answers to their questions, but they're offered actions that they can take immediately.

[27] For example, smarter self -service for changing 401k contributions directly through AI -powered chat, or developers building apps faster with AI -powered code generation, or service agents that can use AI to notify you of a product that needs replacement before people even chat with you.

[28] With ServiceNow's platform, your business can put AI to work today.

[29] It's pretty incredible that ServiceNow built AI directly into their platform.

[30] So all the integration work to prepare for it that otherwise would have taken you years is already done.

[31] So if you want to learn more about the ServiceNow platform and how it can turbocharge the time to deploy AI for your business, go over to servicenow .com slash acquired.

[32] And when you get in touch, just tell them Ben and David sent you.

[33] Thanks, Service Now.

[34] Cool.

[35] Shall we dive into the show?

[36] There's a long and rich and incredible history on this one.

[37] There is, uh, this story has more drama than something with a lot of drama.

[38] A whole lot of drama.

[39] I don't know.

[40] A Will and Grace episode.

[41] Yeah.

[42] Sounds good.

[43] Bravo.

[44] All right.

[45] So our drama filled story starts all the way back in 1999 when, uh, two guys, Nicholas Zendstrom, who lived in Sweden, and Janice, uh, Fries, who lived in Denmark.

[46] We're both working at the Swedish telecom company, Teletu.

[47] This was early days of the, well, late days of the internet bubble, but very much Internet 1 .0 bubble.

[48] And this Telet2, that's T -E -L -E number two, they wanted to launch a web portal because everybody in those days had to have a web portal.

[49] And they wanted to call it every day.

[50] I don't know if it's Everyday .com or whatever the Swedish.

[51] domain, you know, term ending was at that point in time.

[52] But they had just one problem, and that was that nobody could develop software at the company, or at least nobody could develop good web software.

[53] And so they had a department in Estonia.

[54] Do you know where Estonia is, Ben?

[55] I do.

[56] I do.

[57] I will totally dive into this.

[58] But when I was at Microsoft, I was fortunate to spend a bunch of time at Skype offices and spend a week in Tallinn at the Skype headquarters there.

[59] Skype headquarters is in Tallinn, Estonia.

[60] Beautiful city.

[61] Former Soviet block nation on the Baltic Sea.

[62] Yeah, and it is wild being there because it's this incredible dichotomy of old and new, where you have total Soviet block buildings and even the real old, kind of the old city from, you know, before the Soviet era in Tallinn.

[63] And then these like, you know, companies like Skype and a lot of this sort of new revitalization.

[64] And Estonia is a totally, you know, imagine if you had the opportunity to intelligently start a new country today, all the decisions you would make.

[65] And they kind of learned from the best and looked at what's working in.

[66] Yeah, I mean, this is a company that was part of the country that was part of the Soviet Union until the late 80s.

[67] Yeah.

[68] And so like there's so much, if you ever get a chance to check out, there's a lot of really interesting things that they do as a government that are totally tech enabled.

[69] Like they have every city.

[70] has a smart card that they can put into their computer and you can vote online because you have a uniquely identifiable, you know, electronic thing that identifies you as a citizen.

[71] It's super cool.

[72] Wow.

[73] So 1999, the whole country is 10 years old.

[74] This Swedish telecom wants to make a web portal.

[75] So what do they do?

[76] They take out an ad in the local newspaper saying advertising a contract job to build this web portal for them and uh they're going to pay five thousand estonian croons per day which is about three hundred and thirty dollars at the time um and that was more than the average estonian earned in a month apparently and they were going to pay that every day so um they get a lot of interest and they end up hiring three developers jan tallen uh we're going to butcher these names we apologize uh ati heinja and prit kanslau uh we totally butchered that and we apologize.

[77] They end up hiring them.

[78] And there's just one more problem, though.

[79] They're very talented programmers, but they don't know PHP, which is the language of the web at the time.

[80] Yeah, I mean, that, my problem was that I didn't know PHP, like sophomore year of high school.

[81] I remember that that would have been, like, 2004 or five.

[82] And I wanted to make, like, this, it's totally irrelevant.

[83] But, like, that was the, that was totally the language of the day, right?

[84] If you wanted to do anything on the web, it was like, well, you know, you can, if you have a PHP server running, you can drop these fancy tags and to do dynamic stuff inside your HTML and wow everyone.

[85] Yeah.

[86] I mean, for the longest time, Facebook was all ran in PHP.

[87] Yep.

[88] Uh, no longer those days are over.

[89] But back in the day, PHP was how the internet ran.

[90] So no problem.

[91] These guys are super talented.

[92] They just learn PHP in a weekend.

[93] Uh, and they build everyday .com or whatever it was that Tele2 wanted it to be called.

[94] awesome.

[95] So a couple of years, not even a couple years, go by, but Zendstrom and Fries, the guy in Sweden and the guy in Denmark, they decide they want to leave Telethu and they want to become entrepreneurs.

[96] This internet bubble.

[97] And this is the heyday of Napster.

[98] So folks probably remember Napster.

[99] I certainly do.

[100] Won't comment on whether I participated in the file sharing or not.

[101] I heard it was great.

[102] Yeah.

[103] Although I was definitely under 18 at the time.

[104] So whatever.

[105] And so they decide that they want to start a competitor to Napster.

[106] And it's not going to be just for music.

[107] You're also going to be able to share files that of any type.

[108] So movies, you know, avi's, you know, and software programs, you'd be able to basically share and, you know, read pirate anything.

[109] And so they decide that they're going to call this Khazah.

[110] Oh, my God.

[111] Yeah.

[112] When I was doing their research, I could not believe these were like the same guys that did the Khazah.

[113] Literally the same guys.

[114] So, so again, but like they're not software developers.

[115] So what are they going to do?

[116] Well, they call up the Estonian guys.

[117] So they call up the Estonian guys.

[118] you guys are like we're doing this we're building a napster competitor you're in they they come on board they build kazaa it's awesome um and it was indeed quite awesome yeah i remember i i was always like an epic war with my friends on what was better lime wire or kaza because they were both sort of the they both the successors to napster and napster gets shut down uh and so kazaa and limewire become like the heir apparent and and um kazaa actually become comes pretty quickly, the most popular application in the world.

[119] Really?

[120] Like, not like PDP, like the most popular application, period.

[121] Yeah, it's like the biggest thing on the internet.

[122] I mean, the internet is quite small at this point in time, but, but Kazaa basically owns the internet.

[123] They're like Facebook.

[124] Which is hilarious to make that analogy, because, like, thinking about, you know, Facebook's brief detour and Mark Zuckerberg and those guys into doing wire hog in the early as a Facebook, and actually being a competing priority.

[125] They almost didn't do Facebook because they were focused on Wirehawk.

[126] On Wirehog, yeah.

[127] P -to -P file sharing was the thing.

[128] Which sounds totally crazy now, but, I mean, there actually was some justification for this.

[129] I mean, because I launched in September 2000, and like I said, super quickly becomes the most popular program on the Internet.

[130] And along with that massive, massive legal issues, you know, playing out once again just like they did with Napster.

[131] Which, I mean, this will be the, the, uh, foreshadowing for all of the legal issues that they would go through with Skype later on.

[132] Oh, yeah.

[133] Much more to come.

[134] Um, so Zenstrom and Fries, uh, I mean, they're, they're riding high, right?

[135] Like they have the biggest, you know, biggest company on the internet, but they're also terrified that they're going to get arrested.

[136] Um, and, uh, so they actually sell Kazah on paper, uh, to some Australian businessmen with uh yeah that's that's all i was able to find they find they sell it to some australian business there's just no like price or uh yeah it's i don't know exactly what happened if you yeah lost in the sands of time if you know actually we would love to hear about that in um in the slack channel or email us acquired fm at gmail dot com it'd be good to follow up and it may be out there somewhere in the internet there's so much out there about because on the early days of Skype, this show was so much fun to research.

[137] So they sell the company, but they keep the technology behind it.

[138] And that becomes foreshadows what will happen in a few years with Skype.

[139] But so they keep the technology and they start casting about for, well, what else could we do with this incredible peer -to -peer file sharing technology that we developed?

[140] and it might be worth a quick detour to just talk about how peer -to -peer technology and file sharing actually works at this point in time.

[141] So the basic structure is that whoever's on the network is connected to everyone else on the network.

[142] And so if you have a file or any kind of piece of data that you need to be transferring, rather than going and downloading that from one server in one location, which is how traditionally the internet networking have worked and actually once again works mostly this way today.

[143] But this was before the cloud, quote unquote, the cloud existed.

[144] You could just download pieces of that file from everybody else, every other node on the network.

[145] So this is why on Napster and on Kazah, you know, songs that were really popular were super, super fast to download because if thousands and thousands or millions of users all had that same file on their computers and they were connected to the network, you could just download little pieces of it from many thousands of different people instead of downloading everybody going to one spot and downloading the whole file.

[146] And that's so much more effective because, you know, then you're bandwidth constrained by that one single server.

[147] In those days, you know, you had CDNs that weren't, you know, that were not as established and well built out yet.

[148] You, you know, the bandwidth issues and performance issues, getting it from that, that one single server.

[149] So suffice to say, peer -to -peer was this total revolution in maybe not the highest availability.

[150] There were kind of issues with reliability and some spotiness with it.

[151] But in a full distributed peer -to -peer network, amazing if your neighbor had something that you wanted, that you could just one -off grab from them.

[152] And so Zendstrom and Fries at this point have sold, quote -unquote, sold Qazah, but they've retained this technology and they're casting about for what else they can do it.

[153] and they realize they actually have this ingenious realization that this same peer -to -peer technology can be used for a bunch of stuff, but for transmitting voice over the internet.

[154] And if a whole bunch of computers all running the same peer -to -peer software, just like Napster or like Kazaa, were online in various geographies around the world, as long as you had enough density in particular, you know, starting points and ending points of calls that were happening, you could transfer packets that contained voice, you know, across this peer -to -peer network instead of, like, you know, in singular, you know, kind of routes between one computer and another over the Internet.

[155] And it actually enabled really clear, high -quality voice calls to be done just for free over the Internet.

[156] Right.

[157] And they would eventually, they actually develop their own protocol for this, you know, that's formally known as the Skype protocol that endured until, I think, 2014.

[158] and from there would sort of establish this hybrid model where they had these direct peer -to -peer nodes like we're talking about and super nodes.

[159] So, you know, established servers that were kind of always on.

[160] Always on and meant to handle that kind of traffic.

[161] Yep.

[162] So this is now kind of late 2002, early 2003.

[163] So they team up with the Estonians again.

[164] And they start working on an early alpha for what would become Skype.

[165] and they wanted, they decided they wanted to call it sky peer to peer.

[166] Catchy name.

[167] Super catchy name.

[168] But they wanted to abbreviate it to Skype.

[169] Which I think is cool.

[170] I wish they'd stuck with it.

[171] But I think the issue was they couldn't find the dot -com name.

[172] Yeah.

[173] They couldn't get Skypeor .com.

[174] So instead, they decided to just drop the R at the end and thus Skype was born.

[175] Totally.

[176] So clean.

[177] Incredible at that time that Skype was not available.

[178] you know, Skype, a one -syllable five -letter word was.

[179] Yeah, like, how often, like, that would never happen today that you would go down a letter and that that domain name would be available versus a higher number of letter domain name.

[180] Pining for the old days.

[181] But they do something really right at the beginning, too.

[182] So we talked about how the technology was pretty amazing and that enabled them, you know, it enabled people to do voice calls over the internet, as long as there was a density of people online in both where the call was starting and ending, you know, around the whole world, way better than traditional telephone networks.

[183] But the other thing they got really right is they made it really simple in the beginning.

[184] They realized that kind of just like Kazaa and like Napster, if you were going to build a huge network of people doing this, you had to get, you couldn't just have tech geeks doing this.

[185] You had to make the software so easy that everyday people would do it.

[186] And so there's actually an interview, a quote from, early Skype employee Laurie to Pondi at the time and she says right from the start we sit out to write a program simple enough to be installed and used by a soccer mom with no knowledge of firewalls, IP addresses, or other technological terms.

[187] And because of that and also probably because it was free and enabled you to call people in other countries for free when you used to pay a lot of money to do that.

[188] Longest since calling even domestically was super expensive.

[189] then.

[190] Yep.

[191] Yeah, even domestically, long distance calling was expensive.

[192] But think about, you know, in Europe, where Skype is based, like calling between countries and people have friends and family that are in other countries and they have to pay exorbitant amounts to call them.

[193] Yeah, and the telecoms were highly, highly regulated, had a very inflated price scheme where there was, you know, not necessarily collusion, but at least a set expectation of how much you would charge for long distance and routing.

[194] between networks and by pioneering VoIP really coming up with this idea that like you go around all that entirely and I think I think the funniest thing to think about is in the history of networked computing you know everybody that had a dial -up modem we started with our data flowing over voice lines and the way that it would communicate is literally making sound over those lines so it was like IP over voice and then you have the advent of this and where we are today and how every office mostly has phones that are actually IP phones, and now all of our voice goes over IP.

[195] Yeah, it's kind of hilarious.

[196] Yeah, I mean, this technology is so much better than the traditional phone system that now the traditional phone system runs on this technology, which is pretty amusing.

[197] Yeah, we're actually, we're sitting here in Pioneer Square Labs.

[198] We moved into a new office a couple months ago, and all of our, you know, hardwired phones that are like our desk phones are all IP phones.

[199] Like we didn't even think to, you know, why would we like reach out?

[200] to AT &T and have them set up a yeah totally um so uh like I said super simple free really compelling value prop um so Skype launches officially in August 2003 on the very first day remember this is August 2003 so like the internet is orders multiple orders of magnitude smaller than it is today on the very first day, they get 10 ,000 downloads of, first day they launch, get 10 ,000 downloads of Skype.

[201] By the end of the first month, they have a million users.

[202] I'm so curious how they, like on the first day, so how did they get the word out?

[203] I think that, that's a little lost to history, but like, it's not like there's an app store to be featured on the front page of.

[204] They did, like, super early growth hacking, you know, emailed their, you know, friends and friends of friends and got the word out.

[205] I mean, they also had some benefit in that these.

[206] were like the Khazah guys.

[207] So, you know, there was, uh, uh, they were, they were known qualities, quantities.

[208] Um, but still, this is incredible.

[209] 10 ,000 downloads on day one, a million users by the end of the first month, 4 .1 million users by the end of the first quarter, and just a hair under 20 million users, 19 .8 million users that they get in their first year.

[210] Wow.

[211] Which is, I mean, those are like pretty decent numbers for even like a mobile startup today.

[212] Like, there are no mobile phones at this point.

[213] Yeah.

[214] And the fascinating thing about peer to peer.

[215] There are no smartphones at this point.

[216] It's cheaper to start a company with the advent of, you know, cloud hosting than it was in those days where you needed really expensive data centers.

[217] But with the advent of peer to peer, they could support 20 million users without those insane infrastructure costs that it would, you know, any other company saying like, oh, it's, you know, 2001 and we're launching a company and we quickly have 20 million users.

[218] It's like, well, how many millions of venture capital did they raise?

[219] Yeah.

[220] And they did raise a small amount of venture capital before they launch.

[221] interestingly from Bill Draper, the legendary venture capitalist, and Howard Hardenbaum, who's now at August Capital.

[222] They were working together at a different firm at the time.

[223] And they went over and they had heard that the Kazag guys were starting a new company and they're like, we're going to give you some money.

[224] We don't care what you're doing.

[225] We're just going to invest in you because you're the Kazag guys.

[226] So they were the first investors.

[227] But then they launched and this growth is incredible.

[228] And so as this growth is happening, of course, every BC, you know, now in the world wants to invest.

[229] And so they raise $18 million from Index, Bessemer, and DFJ after they launch and have this growth.

[230] But things are still pretty crazy.

[231] So, like, most of the company is in Estonia where these original developers are.

[232] And Estonians are crazy.

[233] Like, if I learned one thing while I was there.

[234] I mean, I was there in February.

[235] So it's, like, you know, negative 20 degrees.

[236] And, like, people are still, like, going out drinking.

[237] and, you know, just like, like, they get used to it like it's nothing.

[238] They cross -country ski miles and miles and miles everywhere all the time.

[239] Like, I walked away with this impression that, like, you do not mess with an Estonian.

[240] Yeah.

[241] So, you know, startups, like there's lots of, you know, fun and pressure and crazy times and startups, you know, still.

[242] But, like, this kind of took it to a new level.

[243] So I think still, even to this day, every new employee at Skype has to undergo an initiation.

[244] and the initiation is you have to do a shot of tequila, sambuca and tobasco sauce.

[245] I did this.

[246] You did this?

[247] This is amazing.

[248] Yes, there's this bar right outside the old city and tall.

[249] Yeah, this is every, from day one.

[250] Every Skype employee did this.

[251] No way, this is on the internet.

[252] This is on the internet.

[253] Did you see what the shot was called?

[254] Yeah, there's like a name for it.

[255] I didn't write it down.

[256] Yeah, I don't think like English speakers can't, it's not, it's hard to pronounce.

[257] I'll see if I can't.

[258] and look it up while you're...

[259] So the other thing that they do is they install a pool in the boardroom in the office in Estonia.

[260] Not a...

[261] Not a pool table, a pool.

[262] What?

[263] Yeah.

[264] And apparently they have to like negotiate with the building about like, yeah, building management, like whether the floor is going to be able to support this, you know, I think it was a kiddie pool, but it was still like a ton or two of water that was installed in the boardroom.

[265] Jesus.

[266] Okay, the drink was, it's either Millie Milakos or Millimilicus.

[267] I heard it differently from different people, but it's like, as soon as I saw it on Google, it's like, oh yeah.

[268] That's amazing.

[269] You've been initiated.

[270] I have.

[271] Um, so, uh, so the growth just continues as we were talking about things are growing like gangbusters in June of 2005.

[272] They add video calling, um, which is funny when we think like, when I say to somebody, I'm going to Skype them today instead of doing a call, like, I mean I'm going to video chat you.

[273] Um, right.

[274] But that's, That wasn't even added until two years after it launched.

[275] Yeah, 05.

[276] It's interesting to think, like, fast forward to today where, like, they're making forays into text chat.

[277] I mean, they've had text chat all along, but trying to make that more part of the core experience, started with, you know, audio, then got into video, became ubiquitous with video.

[278] And a lot of other kind of chat platforms are competing against today that are text and photo -based.

[279] Like, that's not their kind of core and starting place at all.

[280] And it's funny to think, about like how much like with phones, how primitive text seems and how complicated voice and video seem.

[281] But like there was calling on cell phones before there was texting on cell phones.

[282] Yeah.

[283] And, you know, text was the third feature of Skype.

[284] I think this is, I'm sure this is something we'll get into more in tech themes and, you know, grading.

[285] But it is pretty funny to think about that, that text is now the dominant medium of communication.

[286] not calling, even though it's more complicated and more bandwidth heavy, these days on smartphones.

[287] So they launched video calling.

[288] That grows also enormously.

[289] And so a couple months later, September of 2005, there is lots of interest in Skype and from multiple acquirers, big companies are interested in buying the company.

[290] They end up deciding to sell to eBay for $2 .6 billion.

[291] eBay.

[292] Hey, I mean, that was the heyday for eBay, too.

[293] That was, well, it was slightly post -hayday.

[294] I mean, this was after the, a couple years after the bubble, internet bubble burst.

[295] But eBay's still a very large company.

[296] And people are like, why is eBay acquiring Skype?

[297] And one of the rationales that they give for the deal is, well, people will be able to call each other and verify transactions.

[298] The mind -blowing thing here with this is like, when we covered PayPal, the PayPal eBay acquisition that made so much sense because people were already using PayPal as a major source of payment on eBay and I'm very curious did they observe behavior where people were using Skype to do this already or was it literally really hard to imagine like I have no idea why you would call somebody after they won an eBay auction like it almost even to me it seems sort of like eBay's foray into trying to become a conglomerate and like private equity style take on this high growth business that, you know, has a very pioneering technology and see if they can just, you know, grow that as an asset inside their organization and like theoretical synergies happen with their other product.

[299] But to me, you know, hindsight's 2020 and we can look all smart here being like, that was a dumb acquisition.

[300] But yeah, eh, like I don't see it.

[301] Yeah, I agree.

[302] I mean, it would be hard to see this being a smart acquisition.

[303] regardless.

[304] However, it was definitely a dumb acquisition because they made one key mistake as part of the acquisition.

[305] And that was much like when the when the Kazah guy sold Kazah and they kept the technology.

[306] Once again, they kept the technology.

[307] And so they had a, I think it was a company called Skype Technologies that literally was just licensing it to eBay.

[308] It was actually a company called, I don't know if it's Jolt ID or Jolted.

[309] It's J -O -L -T -I -D.

[310] And that was Zendstrom and Fries's company.

[311] And they kept the core peer -to -peer networking technology in that company and then licensed it to eBay and Skype.

[312] And so as we'll see in a minute, that that definitely comes back to bite eBay and Skype too.

[313] So the transaction happened.

[314] Skype, which is this crazy European company, is now part of eBay, based in San Jose, you know, run by, I think Meg Whitman was still CEO at that point in time.

[315] Yeah, this is September of 05.

[316] Yep, September of 05.

[317] You know, very, you know, Silicon Valley, but like very corporate as far as Silicon Valley goes, has been through the dot -com crash and now emerged and is a very large public company.

[318] So to say there was culture clash is.

[319] is an understatement.

[320] And in fact, in 2006, most of the eBay management goes over to Estonia to go, you know, visit the Skype team there and, you know, go through kind of like the roadmap and the feature development and the integration plans.

[321] And, you know, that doesn't go, you know, the Skypeers aren't too excited about that.

[322] But then in the evening, they decide they're going to throw it.

[323] the Skype team is going to throw a huge party for this, for the eBay guys coming over.

[324] And so they throw this huge party at the hotel where everybody, where the eBay team is staying.

[325] And the party ends, apparently Nicholas Zendstrom, we read this on the internet, so it must be true.

[326] He gets behind the bar, starts pouring everybody shots, unclear if they included Tabasco or not.

[327] And then he gets on the bar and he's still, you know, he's pouring shots for everybody.

[328] and he yells out, what happens in Estonia stays in Estonia.

[329] And the ends up, like, everybody, eBay, Skypers, they all jump in the pool.

[330] They're all, like, fully closed at this point at the end of the night.

[331] Well, it turns out it gets caught by news crews in Estonia and it's on, like, local television.

[332] Like, eBay and Skype, like, management basically trashing this hotel.

[333] So then, of course, they have to pay for it all.

[334] And, you know, this is not like the corporate culture that eBay signed up for.

[335] So it's like a good party to me. Yeah, it sounds like a pretty good party.

[336] I kind of wish I was there.

[337] But, um, but the eBay management did not.

[338] So a couple of years go by, you know, Skype is still growing super, super fast.

[339] Uh, we get to 2009.

[340] Um, and Wall Street's like, so Skype is at this point, um, the fastest growing part of eBay, division within eBay.

[341] Uh, they have, that, boy, that's a story.

[342] we've heard before, PayPal.

[343] Yeah, exactly.

[344] Skype has over half a billion users around the world at this point and is quite profitable and making a lot of revenue.

[345] In the third quarter of 2009, they made Skype itself did $185 million in revenue.

[346] But it's just not a fit within eBay.

[347] And Wall Street is, you know, is saying that they should say.

[348] spin it out or do something.

[349] This makes no sense.

[350] And so they start working on a transaction that we referenced earlier where a consortium of private equity firms and Andreessen Horowitz, which had just been founded by Mark and Ben, are going to invest in directly in Skype, spin it out of eBay, eBay will retain a stake, and end up valuing the company about it what eBay bought it for a few years earlier.

[351] Because I think somewhere in the middle there, October of 2007, eBay did a write -down internally of the value of Skype.

[352] Yep.

[353] But there's still one problem again, which is that Skype doesn't own the IP.

[354] And they're just licensing it back from Jolted, from Zendstrom & Fries.

[355] And so what happens?

[356] Zensstrom and Fries actually sue both eBay.

[357] and the investor consortium sue to stop them using the technology and there's this whole big and this is all playing out in public, eBay's a public company.

[358] So that's totally roadblocking any event.

[359] Totally roadblocking.

[360] You know, there's a chance that Skype could just die.

[361] Like one very real path was that if they couldn't use the technology anymore, that they would just have to shut the whole thing down.

[362] And like, I don't, that's not realistic, right?

[363] They're going to settle.

[364] Well, right.

[365] So another potential path that eBay and the Skype team was furiously working on is develop an alternative technology to power Skype.

[366] But again, really hard to do that because the peer -to -peer technology is kind of the core of how this works.

[367] And then the third option is settle with them.

[368] And that's really, I think, you know, what was going on was the founders were basically trying to, trying to, you know, they wanted to invest in the deal.

[369] And they did end up investing in the spin -out.

[370] But so they do eventually end up settling.

[371] And it's interesting what happens.

[372] So they give jolted 10 % in Skype as part of the settlement.

[373] Skype gets, so they get 10 % equity stake.

[374] Skype gets the technology.

[375] So finally, the actual technology becomes part of Skype the company.

[376] And the founders also get an $85 million cash payment.

[377] But what's interesting is they then also invest $80 million into the spin -out.

[378] So I guess net the cash comes out about even for them, but they then get another roughly 4 % of the company.

[379] So they end up with 14 % of Skype post -spin -out.

[380] eBay retains 30%.

[381] and the investor group gets 56 % of Skype.

[382] Also interesting, as part of the deal, Skype itself, at this point, Nicholas and has a venture firm in Europe, which is quite a good venture firm called Atomico.

[383] Skype ends up investing in Atomico's second fund and investing in Ardeo, the streaming music service that was also started by them.

[384] Oh, no way.

[385] as part of the settlement.

[386] Wait, was Ardeo an Atomica company, or was Ardeo, who started, what's the connection there?

[387] Zendstrom and Freese started Ardeo.

[388] No way.

[389] Yeah.

[390] They had a third act.

[391] Wow.

[392] Yeah, they had a third act.

[393] And they had a fourth act, a company called Juiced, which was going to be a peer -to -peer video streaming, you know, basically disrupting television.

[394] And Skype didn't invest in that, but they agreed as part of the settlement to promote Juist on Skype.

[395] I don't know how they would promote Juist on Skype, but it was a part of the settlement.

[396] Wow.

[397] Super interesting.

[398] This is a crazy deal.

[399] But it works out.

[400] So the spin out happens.

[401] October of 2010, Skype hires Tony Bates, who was a star at Cisco to come in and be the CEO.

[402] And before that, in June of 2010, Mark Gillette, who was an operating partner at Silver Lake, became the chief development officer.

[403] So those guys, you know, this is where the folks at Microsoft start to become familiar with these names.

[404] people who are there now and have been for the last five years or so, both played huge roles in sort of the integration and leading the Skype division inside Microsoft.

[405] Yep, huge roles.

[406] And so in these couple years in the interim, Tony and the new management team basically focuses on like totally restructuring Skype.

[407] So integrating the technology that is now finally part of Skype into the company, modernizing it.

[408] Classic and super well -executed private activities.

[409] would you play.

[410] Incredibly well executed.

[411] I mean, I don't know if we're going to disaggregate the grades of all of these acquisitions here, but, you know, I think this definitely is making a case for getting the highest marks.

[412] They also realize at this point it's obvious that mobile is going to be a thing.

[413] So they really push Skype for mobile, getting on iOS, getting on Android.

[414] And the business does great, and then just a couple years later in May of 2011, so actually less than two years after the spinout happens from eBay, Microsoft shows up.

[415] And finally, we get to the end of the story, $8 .5 billion acquisition.

[416] Microsoft announces in May of 2011 that they're acquiring Skype.

[417] At that point was their largest acquisition ever.

[418] Just until LinkedIn.

[419] Just until LinkedIn.

[420] And looking at, just to recap, September of 2009, their valued, Skype is valued at $2 .75 billion in the private equity takeover.

[421] And then when you look at this Microsoft acquisition May of 2011, so what, two, under two years?

[422] Under two years later, essentially $6 billion, almost $6 billion of value creation.

[423] Now, granted, I mean, there was a lot of pain that they had to go through to get that but hey that's a pretty good payout for everybody yeah and i mean value creation defined in the terms of which i guess is how you define value but um value is whatever the highest bidder is willing to pay um because if you truly look at the intrinsic value i mean it grew tremendously in terms of user growth under uh under um silver lake but boy you know Microsoft paid 32 times Skype's operating profits yeah so when Microsoft acquired Skype uh had 700 million users, and in 2010, the full year of 2010, had done 860 million in revenue and 264 million in operating profit.

[424] So still, I mean, a very rich price paid by Microsoft.

[425] Right.

[426] But it's something that I think kind of gets lost in this, all the ups and downs and roller coasters of this story and all of these transactions were reported so much in the press is Skype is actually a really, really good business.

[427] Yeah, absolutely.

[428] I mean, we, we focus on this, you know, the valuation play of, like, basically eBay sold it for what they bought it for after some tumultuous years, you know, the private equity days, they tripled it in less than two years.

[429] But you're right, you know, as an independent business, you know, I don't know if it's actually worth $8 .5 billion in, in 2011, but, like, fantastic business.

[430] Yep, fantastic business.

[431] And eBay, you know, we've been pretty hard.

[432] on them, I think, justifiably so thus far.

[433] But they did make quite a bit of money on Skype because they sold a 65 % share at the spinout, but then they retained 30%.

[434] Great point.

[435] And so when Microsoft bought Skype, they made roughly back, you know, the same value that they, even just from that pretty close to the same value that they paid for Skype in 2005.

[436] That's totally lost to the narrative.

[437] I mean, the intelligence of eBay to hold on to that much that it had had future growth ahead of it outside of eBay.

[438] Yeah, I mean, it was never a question that, A, this was a great business, and B, was growing super fast, even through all of this tumult.

[439] Yep.

[440] And so, to be clear, there's no more partial ownership after this.

[441] Microsoft, really, I mean, they clean out the cap table.

[442] They're the full owner.

[443] They have an entire...

[444] Which usually is what happens in an acquisition.

[445] but I guess third time is the charm for Skype.

[446] Yeah, yeah.

[447] Well, I mean, we're used to, yeah, kind of shocking what happened with eBay.

[448] I was going to say, like, what we normally see with a tech company is they want full and complete control because they're going to integrate the product and it's going to become, like, you know, as we're doing research, we look into Skype today and it's, it's impossible to get clear numbers on how the Skype business is doing because it's been so integrated into every fiber of what Microsoft's doing.

[449] and that's kind of the normal story.

[450] People look at it like an asset that they've acquired, that they move into all these pieces of their business, not this independent private equity -owned thing that another tech company kind of owns and the founders kind of own.

[451] And like there's management put in place to clean it up and get it ready for a sale.

[452] Well, I think that's why, you know, part of the reason why Wall Street was clamoring so hard for eBay to spin Skype off in the late 2000s because, you know, they reported it as a separate division.

[453] Like it was a completely, separate company.

[454] There were no synergies with eBay despite whatever, whatever they may have said at the time of the deal.

[455] But it was really clear that there was a lot of value locked up in that company.

[456] Yep.

[457] Yep.

[458] So at this point, Skype's former CEO, Tony Bates, is now the president of Skype reporting directly to Microsoft CEO Steve Balmer.

[459] They have 663 million global users.

[460] And it's time to do the integration.

[461] It's, uh, this is in the, the, um, I, I remember this vividly when the one Microsoft memo came out that, um, we, the, the company was going to reorient to more of a functional organization under, uh, yeah, under, uh, under, uh, under Steve, um, since then, obviously Satya has come in, uh, Microsoft's taking a little bit of a different, or tremendously different direction, um, and, uh, but what's interesting, um, you know, and we'll move on to, I feel like we've talked a little bit about acquisition category already, but, um, I don't know if you remember, you know, there was a lot of, when Bomber announced that he was going to retire, there was a lot of speculation about who the next CEO of Microsoft was going to be.

[462] And Tony Bates was thrown around a lot.

[463] It was pretty at the top of the list.

[464] You know, it was Tony Bates.

[465] It was Alan Malawi from Ford.

[466] Until he went and joined the board of Google.

[467] Yeah, right.

[468] Good way to disqualify yourself from becoming CEO of Microsoft.

[469] and unclear that he ever wanted the job.

[470] Maybe that was how he stated he didn't want the job.

[471] And Satya.

[472] But Tony was a very, very legitimate candidate to potentially, you know, become the next CEO of Microsoft.

[473] Yeah, that's right.

[474] He's actually a GoPro now.

[475] Really?

[476] He's the president of GoPro.

[477] Huh.

[478] Yeah.

[479] It's probably worth talking a little bit about what's happened at Microsoft since the acquisition.

[480] So for a long time, you know, let's talk about what's going on at Microsoft during the period of the Skype years.

[481] So they had Office Communicator that was part of the Office Suite when you subscribed and you entered an enterprise engagement and you got Word, Excel, PowerPoint, you know, Vizio, the entire Microsoft Office Suite.

[482] There's obviously varying levels of that that would come with Communicator, which I believe in 20, I'm going to get the date wrong, but at some point was rebranded as Link, which was Something that never, I mean, that was an enterprise offering that people who had a communicator in their workplace then knew, okay, we got Link.

[483] And that was never a brand that was on consumers, the tip of consumers' tongues.

[484] And in acquiring Skype, then there was this like very interesting, you know, dichotomy of, well, we've, we've been building this thing called MSN Messenger, which was our consumer offering for a while.

[485] There was office communicator, which became Link.

[486] Now we have Skype.

[487] So there's sort of these like three different chat looking things that all seem to sort of do the same thing.

[488] And it's taken probably three or four years to really start to narrow that.

[489] So MSN Messenger has been killed.

[490] Link is dead, is formally changed into and using kind of a mesh code base, but Skype for business.

[491] So there's Skype for consumers and Skype for business for businesses.

[492] And, you know, this is in Outlook .com when you log into your, your consumer.

[493] your mail offering.

[494] You see Skype automatically is there.

[495] There's all sorts of apps for every platform.

[496] It's baked into Windows.

[497] It's really kind of like across the whole Microsoft ecosystem at this point.

[498] Yep.

[499] And let's not forget, a year later Microsoft acquires Yammer.

[500] Yes.

[501] And then all of its glory.

[502] All of its glory.

[503] You know, enterprise social or enterprise mass communication that transcends email is and will be a thing, it just was not in the form of yammer.

[504] Yeah.

[505] That was just, is it, yeah, it's kind of an interesting product in the early days.

[506] Well, it's interesting, go for it.

[507] You know, I feel like we're bleeding a little bit into tech themes here, but, you know, Skype was really, well, I'm just going to say, we'll talk about it more in tech themes later.

[508] um Skype was really the first both business and consumer internet product you know and really um really in many ways both foreshadowed and uh was the wrong instantiation of slack uh to come you know i mean slack is a business product um but very uh also used by consumers super user friendly super user friendly and Skype's very similar.

[509] I think it was more a consumer product and the business model was more for consumers than enterprises, but it was the first, I don't know if it was the first, but it was a great example of a crossover product.

[510] Right.

[511] That businesses, I mean, I do many calls with, you know, with startups I do as Skype video chats.

[512] Yep.

[513] Yeah, it's, it's, I wouldn't say that it was the wrong product.

[514] I think that video, audio, serve a different purpose than what Slack is or glorified IRC chat.

[515] You know, Slack is expanding to become communication and the fiber that, you know, exists between employees that's more than just chat.

[516] But that's really their core competency.

[517] And the question is, who will own communication in enterprises going forward and what form will it be?

[518] And will these things be combined?

[519] like are we going to see uh you know a Skype like product and a Slack like product merge and are we going to see you know uh that happen you know are we going to see slight let me say this right slack get Skypeified and Skype get slackified at the same time well I think like these things are both happening um but it's interesting you know the the path that Microsoft has kind of taken since the acquisition with Skype we were talking about this before the show is not a unified path.

[520] I mean, there's Skype for X, Skype for Y, Skype product, derivative Z. It's very confusing, whereas unclear what product that Microsoft and Skype are offering today that I would use for what use case.

[521] Whereas you look at Slack, on the other hand, it's just Slack.

[522] Like, there is one product.

[523] Right.

[524] There's no Slack 4.

[525] One front door.

[526] And everything is integrated into slack, but it is one user experience.

[527] And then you can do everything from within that one user experience.

[528] And I think that is, just speaking on personal preference, but I think also, you know, speaking for most users out there, I would so much rather have one superior user interface and customer experience that I can accomplish many things from than I would.

[529] Oh, am I stealing your thunder here?

[530] No, I'm just like, this is, maybe.

[531] It always comes back to Ben Thompson, come on.

[532] It's integrated versus modular.

[533] And like, like, it just like, it's going to ebb and flow and it's going to be advantageous to be bundled.

[534] And then it's going to be advantageous to be unbundled.

[535] And then it's going to bundle in a new way.

[536] And it's going to keep going back and forth.

[537] And like, we're about to see bundling, I think.

[538] And these, you know, we'll see this stuff get recombined.

[539] And then we'll see it get rebroken out again when that's appropriate.

[540] But yeah.

[541] All right, listeners, our sponsor is one of our favorite companies, Vanta.

[542] And we have something very new from them to share.

[543] Of course, you know Vanta enables companies to generate more revenue by getting their compliance certifications.

[544] That's SOC2, ISO 2701, but the thing that we want to share now is Vanta has grown to become the best security compliance platform as you hit hypergrowth and scale into a larger enterprise.

[545] It's kind of wild.

[546] When we first started working with Vanta and met Christina, my gosh, they had like a couple hundred customers, maybe.

[547] Now they've got 5 ,000, some of the largest companies out there, it's awesome.

[548] Yeah, and they offer a tremendous amount of customization now for more complex security needs.

[549] So if you're a larger company, and in the past, you showed Vanta to your compliance department, you might have heard something like, oh, well, we've already got a compliance process in place, and we can't integrate this new thing.

[550] But now, even if you already have a SOC2, Vanta makes maintaining your compliance even more efficient and robust.

[551] They launched vendor risk management.

[552] This allows your company to quickly understand the security posture of the vendors that you're choosing in a standardized way that cuts down on security review times.

[553] This is great.

[554] And then on the customization front, they now also enable custom frameworks built around your controls and policies.

[555] Of course, that's in addition to the fact that with Vanta, you don't just become compliant once, you stay compliant with real -time data pulled from all of your systems, now all of your partner's systems, and you get a trust report page to prove it to your customers.

[556] If you click the link in the show notes here or go to vanta .com slash acquired, you can get a free trial.

[557] And if you decide you love it, you will also get a thousand dollars off when you become a paying customer.

[558] Make sure you go to vanta .com slash acquired.

[559] I want to move on to acquisition category.

[560] Okay, let's move on to acquisition category.

[561] So I'm going to call this a product acquisition.

[562] There is technology in there.

[563] Well, it very definitively was not a technology acquisition a couple times.

[564] Yes.

[565] Yeah.

[566] It certainly was more of a technology acquisition this time than it was the eBay time around.

[567] The reason I don't think it's business line is because they bought it at such a high multiple of what their operating profit was that they weren't just going to buy in cash flow this thing.

[568] They were buying a product to integrate into the rest of their ecosystem and create a stronger, you know, a stronger offering across the board.

[569] This was an acquisition done where this product was being greatly sought after by both Google and Facebook.

[570] There were acquisition rumors swirling for about half the price of what they got bought by Microsoft for for months before this.

[571] And so, you know, in a competitive environment where video streaming technology is not yet, or video chat technology is not yet commoditized.

[572] We're still two years away from Google launching hangouts.

[573] You know, this is a product that has a lot of users, is growing fast and can really be integrated to beef up somebody's offering, and Microsoft decided it needed to be them.

[574] Yep.

[575] I totally agree.

[576] It's interesting, you know, I think the eBay acquisition really was a business line acquisition.

[577] I mean, it was totally separate.

[578] It was reported separate.

[579] It was a very different product.

[580] But the Microsoft acquisition, I think, is very clearly a product acquisition.

[581] And now with the integration that you've seen into all parts of the office suite and other areas within the business.

[582] Yep.

[583] Okay.

[584] What would have happened otherwise?

[585] It sort of is interesting to look at, like, the rise of hangouts and, like, competing video chat and VoIP products.

[586] Like, it doesn't feel like Skype is the sort of one and only the way that it used to be.

[587] Yep.

[588] I don't know if you feel that way, too.

[589] This is totally, totally anecdotal.

[590] But, like, I'm, when someone says, like, we should hop on a Skype call, it ends up being a Google Hangout pretty often.

[591] Or in an enterprise case, often.

[592] a Zoom call.

[593] Oh, yeah, or blue jeans.

[594] Yeah, blue jeans or Zoom.

[595] I found that Zoom actually tends to work the best out of everything.

[596] But I think this is interesting, and I want to talk about this in the context of what would have happened otherwise, because, yes, you're right.

[597] There were lots of rumors that Google and Facebook were looking at Skype as well when Microsoft bought them, which I just think is super interesting.

[598] It also comes back to this crossover nature of Skype.

[599] Um, Microsoft primarily acquired Skype, I think, for the enterprise side of the business, more so than the consumer side of Microsoft's business.

[600] And, uh, and, and you see that, you know, it was actually, it was our friend Kurt Dolbenny who, uh, when he was president of office, who, who led the acquisition.

[601] So it was actually being done through office, um, at Microsoft.

[602] And then think about, like, what if Facebook had acquired Skype?

[603] Like, and then it would be primarily a, you know, a consumer facing product.

[604] And the fascinating thing about it is Facebook had just launched like a Skype, a white label version of Skype inside of Facebook Messenger.

[605] So Philip Sue, I think, led this project, which is like the overlapping people in this is incredible.

[606] So when I was doing the garage at Microsoft, Philip had started one of the most legendary projects of all time.

[607] And he was like a, you know, constant garage tinker guy and had worked on all kinds of cool stuff he ended up leaving to go to facebook um he runs uh engineering in the facebook london office now but before that um did a did led the project to integrate Skype calling which wasn't called Skype calling it was just like video video calling into news feed but it was Skype that powered it right yes yes and so then i mean that left all these questions of like well is this their first like are they just doing a little bit of a deal now so that, you know, that they can acquire them, which, you know, didn't quite end up happening.

[608] But interesting proof of concept there.

[609] Totally.

[610] Now that we're hearing what would have happened otherwise, I think it's worth bringing up the issue of repatriating of capital and what that currently looks like for U .S. corporations.

[611] We've been hearing a lot about it in the news recently in this kind of political race that we're in about companies can't bring, you mean this national travesty that we're in?

[612] Yes.

[613] Um, God, I can't even think picturing him.

[614] Sorry about that.

[615] We can cut that.

[616] So in thinking about, you know, what could have Microsoft done with a lot of this capital that had overseas, it had been a long climate of not being able to, to bring it back to the U .S. without paying huge taxes.

[617] Um, Skype is a Luxembourg corporation.

[618] It's a pretty, it's a great point.

[619] Pretty great way to, um, you know, and looking at like what foreign businesses could we buy that would integrate well into our products and give us like, you know, this boost into communication.

[620] Like they needed a consumer and to boost their enterprise offering in video chat, in calling.

[621] Like, it makes total sense when there's not a lot of better things you can do with that capital.

[622] Yeah, I think this is a great point.

[623] And also, you know, we don't know exactly how Microsoft thought about this and how much this played into it.

[624] But Ben, as you pointed out, some of the rumors that were circling about other players, is Google and Facebook acquiring Skype, the rumors were at a much lower price.

[625] Right.

[626] Was Microsoft willing to pay a lot more because they had all this cash overseas that they needed to put to work?

[627] Certainly at a much healthier balance sheet than Facebook at least at that point.

[628] Yeah, I mean, this is, was Facebook public?

[629] If Facebook was public at this point, I think it would have just been...

[630] Let's see.

[631] When was the Facebook IP?

[632] It's an easy...

[633] No, Facebook was a private company at this point, um, not public.

[634] Uh, so, uh, would have been certainly possible for them to do an acquisition of this size, uh, but quite difficult.

[635] Right.

[636] And, and honestly, that's one thing I'm going to keep in mind with when grading this acquisition.

[637] I mean, I think that, um, it's the, the super skeptical lens that I had on, uh, coming into today was Microsoft spent $8 .5 billion with Skype and seriously like how are they going to earn that back like you know it's it's so far from being something that they can just cash flow uh it's um growing but like it was already a pretty huge business with you know a massive percent of the uh um voip calls that were made um globally going through it it wasn't something that that you know i thought had that much more like growth left in it and nor could i nor did i believe Microsoft was going to accelerate that and you know it's it's done well like it's grown you know the way that you would expect it to grow but like when you think about like in the context of what else could they do with that cash and was this the best thing they or one of the better things they could have done with it certainly better than uh buying treasury bills yep um great point really great point um i guess the other thing we should we should cover on before we move out of what would have happened otherwise.

[638] You know, I think there was a path and a very viable path for Skype to go public and be a standalone public company again.

[639] That's right.

[640] That's right.

[641] And then what is this?

[642] In 2010, Skype filed with the SEC to raise $100 million.

[643] Yep, they had actually filed to go public.

[644] Filed an S1.

[645] And I think that was probably the plan at a spinout when Silver Lake and Andreessen and the other folks invested in Skype.

[646] A Spinole was that, you know, with some cleanup led by Tony Bates and others, that this could be a standalone public company.

[647] Yeah.

[648] On to tech trends, I think that it's interesting, there's a good foray from what we were just talking about.

[649] It's interesting to note for listeners that we keep seeing this pattern over and over again where a company gets bought right when it was about to raise a bunch of money, like Instagram, or somebody's, out looking to do a roll -up strategy and then they get bought because an offer was put down on the table to stop them from doing that roll -up strategy.

[650] And in this case, it was they were preparing an IPO and that made them a really great takeover target.

[651] And it's really interesting to see, that's my first tech theme is that a lot of times, whether it's you're about to make acquisitions, you're about to IPO, or you're about to get bought, there's a little bit of like a leverage game going on where you pursue concurrent tracks at the same time in order to make sure that the pressure's on for whichever one you want to happen to happen.

[652] Back when I was an investment banker, we used to call this a, quote, dual track process, dual track being one track an IPO and one track being an acquisition.

[653] And you're absolutely right.

[654] These things totally play off one another and the fact that you are it is known that you are preparing to go public you filed your s1 it's out there that has a way of drawing buyers out of the woodwork yep yep um another tech trend um is the rise of the mega acquisition so yes yes this seemed absolutely insane at the time i mean 8 .5 like it was i worked around a lot of um there were a lot of cynical people in my group and when I worked at Microsoft and I like a lot of lunch conversation was people like counting the number of things that you like how many Skype something was like oh this is an eighth of a Skype or you know pointing out like making like crazy jokes about what a huge number this was and how it was never going to pay off for the company and it turns out it's actually less than half of a WhatsApp it's so true it's less than half of what's a WhatsApp you know consumer chat broadly defined also includes Snapchat and you know like they weren't going to become Snapchat they were in a very different path for that but like could they have become WhatsApp I mean WhatsApp's value prop is that you could very inexpensively communicate across it's amazing it's the exact same value prop it's just for text not for voice exactly inexpensively communicated across political boundaries and avoid the tax of the telecom and like it is exactly that and you look at you know that that that what, $22 billion?

[655] Uh, yeah, just, um, just fully valued, given everything that went into that deal, future episode coming soon at some point.

[656] WhatsApp.

[657] I just don't think we have enough to decide yet on WhatsApp.

[658] I think we need to wait a little bit.

[659] But anyway, like, looking at, like, could Skype have become WhatsApp?

[660] Like, did they, did they falter by not becoming WhatsApp?

[661] Or was it just a different era?

[662] Yeah, I mean, um, it was totally a different era.

[663] I mean, I think.

[664] So my tech theme, this may be a good second to it.

[665] It is, you know, Skype, on the one hand, it's kind of sad that I feel like this is a company that has never fully realized its potential, given this crazy corporate history that it has.

[666] However, the growth of this company and the like product market fit that happened is pretty incredible, especially when you go back to the context of when Skype was started in 2003 and launched in 2003 and the kind of growth that it experienced.

[667] And like, what were you doing until, like, I was in, I was, I was graduating from high school and starting my freshman year of college in 2003, and I owned a tablet PC.

[668] Like, you know, nobody had ever heard, like, there were palm pilots, you know, like, but there was no, there were no smartphones, you know, the global internet most people in america didn't even you know i don't know if it was most but certainly a large portion didn't even have broadband right and so you couldn't use Skype if you didn't have broadband um like think about that and did addressable market and yet how fast it still clearly grew um and so and so the the tech theme that i had is uh there was a really great actually ironically right at the same time that the Microsoft acquisition of Skype happened uh bill girlie wrote this great blog post called the um uh i believe the title is uh all revenue is not created equal the keys to the 10x revenue club and uh it's a great post it's a great post and he goes through 10 points of like what is it that makes companies that are valued highly by public companies valued by wall street um at 10 times revenues or higher uh sort of these elite companies like what are the factors that separate them from other companies and he includes a from an early Skype pitch deck in one of his points.

[669] And this slide is just amazing.

[670] The point that Gurley is making is that companies that tend to be valued very highly, they grow on the back of organic demand versus heavy marketing demand is what he says.

[671] And so a lot of companies you think about this and we see it in startups all the time, your unit economics, quote unquote, may be working.

[672] But if you're paying a lot of money to acquire every user, that you get to your product, you're going to have to spend a lot of money to build that market and win that market.

[673] Skype never spent any money on customer acquisition.

[674] It was all organic.

[675] It was just pure product market fit.

[676] And so the slide from the Skype pitch deck, they're comparing themselves to Vonage.

[677] If you remember Vonage, you know, was the Skype competitor in the day.

[678] And Vonage advertised all over, you know, national television in the U .S. And the slide just compares Skype's cost CAC to acquire a new user and Vantage.

[679] Vantage is $400 that they were spending per new user.

[680] Wow.

[681] And Skype was one -tenth of one cent.

[682] And because they had no costs for every call, it was a complete peer -to -peer model.

[683] They had no server costs.

[684] And they were spending no marketing.

[685] And so this thing could just grow and grow and grow, and there were no limits to it, which is pretty amazing.

[686] it's it's super rare to find these kind of businesses um and again like i said you know Skype uh kind of i don't think gets the credit it deserves as a product and as a business uh because of this corporate history but um but but the growth is just impressive yeah yeah yeah all right on to grade the acquisition um i'm giving it a b minus i thought i was going to be much which acquisition are we grading here i'm grading the microsoft acquisition yeah i thought i was going to be way way way harsher like I and in fact I didn't know I was going to do this episode years ago but like I would have called it like a D in 2012 and it seems like over time it actually is getting integrated it takes a long time because it's a big ship to maneuver but like it's the right move to have Skype and Skype for business and not have you know versions of link and MSN messenger and totally deprecate communicator like it's it's the right move and it was an amazing use of that capital, considering other options that they could have done with it.

[687] And unless, of course, we see some kind of like big break where all the U .S. companies in the next few years are allowed to bring the cash home, but I don't really foresee that happening, bringing home into a reduced tax rate.

[688] And on top of all that, I think having this consumer offering and a little bit of that consumer DNA with all the Skype teams that have built this product leaves them fairly well positioned for whatever's about to happen in the enterprise communication market that Slack has pioneered.

[689] You know, I'm sure they wish it looked more like Slack right now and less like the kind of like slow, steady growth of Skype.

[690] But, you know, if Skype teams is a real thing, I'm excited to see it.

[691] Yep, yep.

[692] I definitely agree with that.

[693] Yeah, it's interesting to think about, you know, think back to one of our early episodes with Kurt Delbenny talking about a Complee and WonderList and sort of recreating the office suite and in particular outlook on mobile.

[694] And I got to wonder if, you know, and Kurt led the Skype acquisition when he was at Microsoft the first time, I got to wonder if the experience with Skype informed some of the things they did differently with a Complea.

[695] And in particular, you know, making Javier, who is the CEO of Accompli, head of all of Outlook, not just Outlook Mobile, but empowering him within the organization to really remake.

[696] And it's still a work in progress and will be for a long time.

[697] But I think Outlook has made huge strides from the massively bloated, super old school piece of software it was before the acquisition to the still really bloated, but, you know, much nicer designed and clearly making strides.

[698] And, you know, it's my most opened app on my iPhone, where it is today.

[699] And to compare that to Skype, where, yes, Tony stayed at Microsoft for a little while and was in the running to perhaps become CEO, but then he left.

[700] Also, ultimately not like a product guy, right?

[701] Also, ultimately not a product guy.

[702] He plays from the P .E. Yeah, he was like a turnaround guy.

[703] Yeah.

[704] And, and I think the lack of any real leaders, you know, corporate leaders within Skype that could come in and champion that and champion a product vision for Skype as part of Microsoft has really hurt them.

[705] Yeah, the heroes of Skype are gone.

[706] And the heroes that are talked about in Skype and the talent offices and otherwise are the original founders.

[707] Yeah.

[708] And like that the dudes from the newspaper ad.

[709] And I mean, you even go, yeah, right, you even go and you look at the way that it's structured in the org now.

[710] Like, it's, it's under Redmond leadership.

[711] I mean, it's all over, it's these distributed offices in like six or eight places around the globe.

[712] But like long time Microsoft people that they report up to that, you know, they're running it like the next evolution of link, which, you know, makes a lot of sense.

[713] But it's, you know, it's very different than the accompli acquisition.

[714] Yeah.

[715] So, and thinking back to what Kurt was saying, um, you know, that realizing that ultimately a lot of these things really are about the people, you know, that's what was not there in the Skype acquisition, as good as the product is and the product market fit and even the financials.

[716] So I think I actually net out at the same B -minus, like would have been a bad acquisition, but for some of these other factors we mentioned, like finding a use for foreign cash, it actually being a good business.

[717] But just so, relative to the potential that it has not yet realized.

[718] Yep.

[719] Okay, let's move on, do some quick follow -ups and hot takes.

[720] So follow -ups from our Android episode, Google recently held a big event and launched the Google iPhone, otherwise known as the Google Pixel.

[721] And sort of unapologetically so.

[722] Like their marketing copy mentions like the iPhone, or at least their press release copy does.

[723] and it's it's um it looks really good like all the reviews are super encouraging someone someone someone here at PSL got one um earlier today so I'm excited to like play around with it tomorrow but like looking at the pictures comparing it against the iPhone 7 um not counting the portrait mode stuff all the flaws that I notice in the iPhone photography over the years where it like it flattens things too much and it like loses some details and it doesn't have like the the incredible high contrast and the textures like the pixels phone looks really really good and i'm excited to play around with it and aside from all that there there's like um there's a niceness to that hardware that we haven't seen in um non -appled devices in android devices yeah in a long time it's interesting a couple things for me one we in our android episode you know we're like the mobile wars are over google and apple you know are not fighting you each other anymore and then a month later you know Google comes out with like the most direct shot at Apple that they've taken in a long time but I still think the mobile wars are over the but it's interesting in that episode we talked about the days when Samsung was just like unabashedly copying the iPhone and the worst part is I'm ripping this off from everybody needs to go listen to the most recent episode of the talk show with John Gruber with host or with guest Ben Thompson of course we can't go an episode without mentioning Ben Thompson of course but this is John Gruber's line but it's like it's like Samsung always acted like Apple never existed like oh Apple never heard of them but look at the new phone that we invented like and look at this beautiful new design that we came up with yeah and Google's just not treating it like that right yeah and the the really interesting thing and again totally totally go listen to that podcast episode but Ben and John point out this really great point that this is a potential change in business model for Google, not only because they're selling hardware and they normally are the, you know, they just make the software and then the OEMs make the hardware, but Google Assistant right now appears to be only available on the pixel and not on, it's actually not part of Android.

[724] The Google Assistant is part of the phone and not part of Android.

[725] So I think this is by far the most interesting part of this announcement.

[726] So walk through this.

[727] In a world where you use an AI, the AI is there to give you answers, not options.

[728] And Google's business model is predicated upon giving you options, some of which are sponsored options.

[729] And in this voice world, like the user experience of this, we're shifting to, you know when banner ads didn't work on mobile and we had to figure out what we're doing these native ads?

[730] Like now we're shifting to this world where like search result ads don't work when people are asking their phone stuff.

[731] So Google had this incredibly profitable business model, and now there's a chance they might need a new one if this thing that they happen to be very good at, which this is like the Googliest piece of technology of all time is creating this Google assistant.

[732] This thing they happen to be incredibly good at is incredibly bad for their business model.

[733] Yeah, man, this is technology cycle disruption at work here.

[734] Right, right.

[735] So then they look to Apple for like, okay, what's a good business model where we can leverage the things that we're good at?

[736] And it just so happens that it might be that the things are good at being Google Assistant.

[737] Maybe they just have a really high margin phone that they sell phones that include the Google Assistant.

[738] Yeah.

[739] Super interesting.

[740] So go listen to that podcast because I'm totally ripping those ideas from there and that is like such a good astute analysis.

[741] Very astute analysis.

[742] Hot takes.

[743] Interestingly to me, I think the, interestingly, the least interesting thing to me that we are going to talk about today is.

[744] AT &T and Time Warner.

[745] Yeah, I mean, it's 1999 again.

[746] What's All Is New, and my senior research paper was about net neutrality, 42 pages of arguing why that...

[747] That is the most relevant and terrifying aspect of this.

[748] It just keeps coming back.

[749] And every time we get closer to, you know, the telecom and the content and a gigantic content provider being aligned like this, you know, it scares the crap out of me. yeah but i mean i think a little bit like god i hope uh knocking on wood um you know it's a little bit like this election cycle like it's like you can't fight the forces of history and like you have these um wait say more about that how does that well like uh that um politically like we are moving towards uh a much more progressive society like that's the direction that history is moving um and if you're going to fight that you're going to be on the wrong side of history uh And just like that in this case, you know, net neutrality is the future and content will be unbundled and Facebook is worth more than every old traditional media company combined and that is the future.

[750] But what's interesting is that even though, you know, we can sit here and say like that's the, you know, the right side of history, at times like these forces pop up that are total reactionary conservative.

[751] um you know go back in time make america great again um and like hopefully they will lose right but um i love that you just compared like at t and t and time orders merger to donald trump i did that i just did that yes yeah the the slogan of this like year long process of FCC approval of this thing is going to be make america great again yes all right we should just leave it at that um let's talk about the wire cutter oh wait that um uh we'll link to this in the show notes but i um i um i um i i tweeted a link to this article the other day that had an awesome graphic of basically the baby bell is getting built back together it is so interesting to look at like the the AT &T breakup and kind of the reassembly of the Terminator 2 robot into its former glory and it's super interesting to see how that's awesome I feel like I should say one more word about what I meant by Make America Great again like Time Warner has many good businesses within it and it will continue to be decent businesses, especially HBO, probably a really good one.

[752] But like, by the minute, West world is so good.

[753] Yeah.

[754] By the minute, that world just becomes less and less relevant.

[755] Like, who watches linear television programming anymore?

[756] You know, movies are also undersea, like, there's the old world media companies and the types of content they produce, like, just don't have as important a place in a Snapchat world, you know.

[757] I like it.

[758] Okay.

[759] The Wirecutter, New York Times.

[760] Yeah.

[761] Great for them.

[762] God, the wire cutter is awesome.

[763] And I don't think I've bought anything of significance that was not researched on the wire cutter of the sweet home in years.

[764] So awesome.

[765] And I'm an unabashed fan of the New York Times, and it's great to see them land in one of the media institutions that has figured out how to come into the modern era.

[766] And like, to your point earlier, go with the version of the future.

[767] And I think, like, the New York Times had it a lot easier than many smaller regional papers because they were truly a destination site.

[768] They had a brand built up.

[769] People were going to go there without having someone, without someone needing to share content with them.

[770] You just go to the New York Times because it's the freaking New York Times.

[771] But, like, love seeing how progressive they are in, you know, experimenting in VR and buying sites like the wirecutter.

[772] and there's just watching before we were diving into the show there's a great interview with it's Brian Lamb right yeah with Brian Lamb talking about how he loves doing what they do with the wirecutter because rather than writing news he's writing something that just helps people he's like this this is a thing that people find continual value in over and over again we figured out when to refresh it what to refresh it with how to tell people that we've refresh the guides, and we just build a solid, long, like many multiples of hours longer than anybody would ever take to write a piece.

[773] And it's a phenomenal piece of content that's super engaging that actually helps people.

[774] And, you know, I think it's interesting what we'll see as they start to bundle it in more with the New York Times, coupling some of these buyers' guides with more investigatory pieces.

[775] And the example he uses, is like, it's like, why can't anyone make a good Wi -Fi router is the investigatory piece that someone writes.

[776] What happened with the Samsung Galaxy Note 7?

[777] Right, right.

[778] But then coupling that with a buyer's guide for wireless routers or phones, like what is actually the one that you should go by?

[779] And I think we're going to see, you know, the continued evolution of digital journalism.

[780] All right, with that, should we do a carve -out?

[781] We should.

[782] Although I feel like I've been just sitting here doing carve -outs for the last few minutes.

[783] I read, finally got around to reading the super long -form piece from the New Yorker called Sam Altman's Manifest Destiny.

[784] Oh, it's a great article.

[785] Yeah, it's like, it's interesting.

[786] So for a little background, Sam took over Y Combinator from Paul Graham and sort of like revamped the whole thing, made it significantly larger or opened up new divisions, hired a whole bunch more people, and frankly expanded the scope of the ambition significantly.

[787] hugely yeah and it's you you either really buy into it or you think the piece is a mega puff piece but no matter what reading it leaves you with this mindset of a widened ambition and thinking about like oh i've been thinking too small and it's it's uh i love when things reset my perspective like that so highly recommend it yeah really really good piece also highly recommend it, regardless of what you think about YCE or about Sam.

[788] And I fall on the side of, like, I think everything Sam's done is, is, I'm on team Sam, so.

[789] Yeah, I agree.

[790] Like, the, not everything he's doing will work, and that's the point.

[791] Right, right.

[792] That you can't be, to have that scale of ambition, you know, you need to be comfortable with failure, and that's eminently laudable.

[793] May the failures be colossal and the success is even more so.

[794] Yeah, totally.

[795] Great piece.

[796] Go read it.

[797] My Carve Out for the Week, super fun one.

[798] One of my really good friends from business school, Jake Saper, who is a venture capitalist at Emergence Capital, is the star of the hottest thing to hit the Bay Area in Silicon Valley since Silicon Valley.

[799] And that is Soma the musical.

[800] No way.

[801] Which, ironically, Jake is the star of the show, and he plays the entrepreneur.

[802] in the musical opened and ran in San Francisco last week and was a huge success.

[803] So big shout out to lots of articles you can go read about it.

[804] We'll link to some.

[805] Big shout out to Jake and very, very well done.

[806] Hopefully coming to a Broadway stage near you soon.

[807] That's awesome.

[808] Yeah, if you want to see a great show or talk about Enterprise SaaS, go talk to Jake.

[809] Yeah, totally.

[810] our sponsor for this episode is a brand new one for us stat sig so many of you reached out to them after hearing their CEO vj on acq2 that we are partnering with them as a sponsor of acquired yeah for those of you who haven't listened vj's story is amazing before founding stat sig vj spent 10 years at facebook where he led the development of their mobile app ad product which as you all know went on to become a huge part of their business.

[811] He also had a front row seat to all of the incredible product engineering tools that let Facebook continuously experiment and roll out product features to billions of users around the world.

[812] Yep.

[813] So now Statsig is the modern version of that promise and available to all companies building great products.

[814] Statsig is a feature management and experimentation platform that helps product teams ship faster, automate AB testing, and see the impact every feature is having on the core business metrics.

[815] The tool gives visualizations backed by a powerful stats engine unlocking real -time product observability.

[816] So what does that actually mean?

[817] It lets you tie a new feature that you just shipped to a core metric in your business and then instantly know if it made a difference or not in how your customers use your product.

[818] It's super cool.

[819] Statsig lets you make actual data -driven decisions about product changes, test them with different user groups around the world, and get statistically accurate reporting on the impact.

[820] Customers include Notion, Brex, OpenAI, FlipCart, Figma, Microsoft, and Cruise Automation.

[821] There are, like, so many more that we could name.

[822] I mean, I'm looking at the list, Plex and Versel, friends of the show at Rec Room, Vanta.

[823] They, like, literally have hundreds of customers now.

[824] Also, Statsig is a great platform for rolling out and testing AI product features.

[825] So for anyone who's used Notion's awesome, generative AI features, and watched how fast that product has evolved, all of that was managed with Statsing.

[826] Yep.

[827] If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPI's Statsig is awesome for that.

[828] They can now ingest data from data warehouses.

[829] So it works with your company's data wherever it's stored so you can quickly get started, no matter how your feature flagging is set up today.

[830] You don't even have to migrate from any current solution you might have.

[831] We're pumped to be working with them.

[832] You can click the link in the show notes.

[833] or go on over to statsyg .com to get started.

[834] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[835] Well, that's all we've got today.

[836] If you aren't subscribed and want to hear more, you can subscribe from your favorite podcast client.

[837] If you feel so inclined, we would love or review on iTunes, or please tweet, Facebook, share with your friends.

[838] And we are Acquired FM on Twitter.

[839] We'll see you next time.

[840] See you.

[841] Who got the truth?

[842] Is it you?

[843] Is it you?

[844] Who got the truth now