July 2023 - The Myth of Capitalism by Jonathan Tepper with Denise Hearn

We learn about the fun history of many monopolies and anti-trust! While I can’t recommend this book because its long and poorly written, it does reasonably critique aspects of antitrust and monopoly formation. Its repetitive and so aggressively one-sided that it loses credibility. The fact that the author used to advise and now runs a hedge fund that owns monopoly businesses tells you all you need to know.

Tech Themes

1. Consumer Welfare. Tepper’s fundamental argument is that since the 1980s, driven by Regan’s deregulation push, the government has allowed corporate mergers and abuses of market power, leading to more market concentration, higher prices, greater inequality, worse worker conditions, and stymied innovation. Influenced by the Chicago School’s free market ideas and Robert Bork’s popular 1978 book Antitrust Paradox, the standard for antitrust enforcement morphed from breaking up market-abusing companies to “consumer welfare.” With this shift, antitrust enforcement became: “Does this harm the consumer?” A lot of things do not harm consumers. Broadcast Music, Inc. v. CBS, Inc. (1979) is widely regarded as one of the first antitrust cases that shifted the Rule of reason towards consumer welfare. CBS had sued Broadcast Music, alleging that blanket licenses constituted price fixing. Broadcast Music represented copyright holders and would grant licenses to media companies to use artist’s music on air. These deals were negotiated on behalf of many artists, and did not allow CBS to negotiate for selected works. The court sided with BMI because the blanket license process was simpler, lowered transaction costs by reducing the number of negotiations, and allowed broadcasters greater access to works. They even admitted that the blanket license may be a form of price setting, but concluded that it didn’t necessarily harm consumers and was more efficient, so they allowed it. The consumer welfare ideology has recently come under fire around the big tech companies - Apple, Microsoft, Google, Meta, and Amazon. Lina Khan, Commissioner of the Federal Trade Commission (FTC) wrote a powerful and aptly titled article, Amazon’s Antitrust Paradox, highlighting why in her view consumer welfare was not a strong enough stance on antitrust. “This Note argues that the current framework in antitrust—specifically its pegging competition to “consumer welfare,” defined as short-term price effects—is unequipped to capture the architecture of market power in the modern economy.” The note argues that Amazon’s willingness to offer unsustainably low prices and their role as a marketplace platform and a seller on that marketplace allow it crush competition. Google is currently being sued by the Department of Justice over illegal monopolization of adtech and its dominance in the search engine market. The government is attempting to shift antitrust back to a more aggressive approach regarding monopolistic behavior. From a consumer welfare perspective, there is no doubt that all of these companies have created situations that benefit consumers (“free” services, low prices) and hurt competition. The question is: “Is it illegal?”

2. The ACTs - Sherman and Clayton. The Sherman Antitrust Act, passed in 1890, was the first major federal law aimed at curbing monopolies and promoting competition. The late 19th century, often referred to as the Gilded Age, saw the rise of powerful industrialists like J.P. Morgan, John D. Rockefeller, and Cornelius Vanderbilt, whose massive corporations threatened to dominate key sectors of the economy. Public outcry over the potential for these monopolies to stifle competition and exploit consumers led to the passage of the Sherman Act. Senator John Sherman, intended the law to protect the public from the negative consequences of concentrated economic power. The Sherman Act broadly prohibited anticompetitive agreements and monopolization, empowering the government to break up monopolies and prevent practices that restrained trade. However, the Sherman Act's broad language left it open to interpretation, and its early enforcement was inconsistent. President Theodore Roosevelt, a proponent of trust-busting, used the Sherman Act to challenge powerful monopolies, such as the Northern Securities Company, a railroad conglomerate controlled by J.P. Morgan. The Supreme Court's decision in the Standard Oil case in 1911 further shaped the interpretation of the Sherman Act, establishing the "rule of reason" as the standard for evaluating antitrust violations. This meant that not all restraints of trade were illegal, only those that were deemed "unreasonable" in their impact on competition. The Clayton Antitrust Act, passed in 1914, was designed to strengthen and clarify the Sherman Act. It specifically targeted practices not explicitly covered by the Sherman Act, such as mergers and acquisitions that could lessen competition, price discrimination, and interlocking directorates. The Clayton Act also sought to protect labor unions, which had been subject to antitrust prosecution under the Sherman Act. The passage of these acts led to a wave of significant antitrust cases. Prominent examples include: United States v. American Tobacco Co. (1911): This case resulted in the breakup of the American Tobacco Company, a dominant force in the tobacco industry, demonstrating the government's commitment to using antitrust laws to dismantle powerful monopolies. United States v. Paramount Pictures, Inc. (1948): This case challenged the vertical integration of the film industry, where major studios controlled production, distribution, and exhibition. The court's decision led to significant changes in the industry's structure. United States v. AT&T Co. (1982): This landmark case resulted in the breakup of AT&T, a telecommunications giant, into smaller, regional companies. This case marked a major victory for antitrust enforcement and had a lasting impact on the telecommunications industry.

3. Microsoft. The Microsoft antitrust case, initiated in October 1998, saw the U.S. government accusing Microsoft of abusing its monopoly power in the personal computer operating systems market. The government, represented by David Boies (yes, Theranos David Boies), argued that Microsoft, led by Bill Gates, had engaged in anti-competitive practices to stifle competition, particularly in the web browser market. Gates was famously deposed and shockingly (not really) came away from the deposition looking like an asshole. The government alleged that Microsoft violated the Sherman Act by: Bundling its Internet Explorer (IE) web browser with its Windows operating system, thereby hindering competing browsers like Netscape Navigator, manipulating application programming interfaces to favor IE, and enforcing restrictive licensing agreements with original equipment manufacturers, compelling them to include IE with Windows. Judge Thomas Jackson presided over the case at the United States District Court for the District of Columbia. In 1999, he ruled in favor of the government, finding that Microsoft held a monopoly and had acted to maintain it. He ordered Microsoft to be split into two units, one for operating systems and the other for software components. Microsoft appealed the decision. The Appeals Court overturned the breakup order, partly due to Judge Jackson's inappropriate discussions with the media. While upholding the finding of Microsoft's monopolistic practices, the court deemed traditional antitrust analysis unsuitable for software issues. The case was remanded to Judge Colleen Kollar-Kotelly, and ultimately, a settlement was reached in 2001. The settlement mandated Microsoft to share its application programming interfaces with third-party companies and grant a panel access to its systems for compliance monitoring. However, it did not require Microsoft to change its code or bar future software bundling with Windows. This led to criticism that the settlement was inadequate in curbing Microsoft's anti-competitive behavior. History doesn’t repeat itself, but it does rhyme and Microsoft is doing the exact same bundling strategy again with its Teams app.

Business Themes

1. Monopoly Markets. Tepper lays out all of the markets that he believes are monopoly, duopoly, or oligopoly markets. Cable/high speed internet (Comcast, Verizon, AT&T, Charter (Spectrum)) - pretty much the same, Computer Operating Systems (Microsoft) - pretty much the same but iOS and Linux are probably bigger, Social Networks (Facebook with 75% share). Since then Tiktok, Twitter, Pinterest, and Snap have all put a small dent in Facebook’s share. Search (Google), Milk (Dean Foods), Railroads (BNSF, NSC, CSX, Union Pacific, Kansas City Southern), Seeds (Bayer/Monsanto, Syngenta/ChemChina, Dow/DuPont), Microprocessors (Intel 80%, AMD 20%), Funeral Homes (Service Corporation International) all join the monopoly club. The duopoly club consists of Payment Systems (Visa, Mastercard), Beer (AB Inbev, Heineken), Phone Operating Systems (iOS, Android), Online Advertising (Google, Facebook), Kidney Dialysis (DaVita), and Glasses (Luxottica). The oligopoly club is Credit Reporting Bureaus (Transunion, Experian, FICO), Tax Preparation (H&R Block, Intuit), Airlines (American, Delta, United, Southwest, Alaska), Phone Companies (Verizon, Sprint, T-Mobile, AT&T), Banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo), Health Insurance (UnitedHealthcare, Centene, Humana, Aetna), Medical Care (HCA, Encompass, Ascension, Universal Health), Group Purchasing Organizations (Vizient, Premier, HealthTrust, Intaler), Pharmacy Benefit Managers (Express Scripts, CVS Caremark, Optum/UnitedHealthcare), Drug Wholesalers (Cencora, McKesson, Cardinal Health), Agriculture (ADM, Bunge, Cargill, Louis Dreyfus), Media (Walt Disney, Time Warner, CBS, Viacom, NBC Universal, News Corp), Title Insurance (Fidelity National, First American, Stewart, and Old Republic). Since the book was published in 2018, there has been even more consolidation - Canadian Pacific bought Kansas City Southern for $31B, Essilor merged with Luxottica in 2018 in a $49B deal, Sprint merged with T-Mobile in a $26B deal, and CBS and Viacom merged in a $30B deal. Tepper’s anger towards lackadaisical enforcement of antitrust is palpable. He encourages greater antitrust speed and transparency, the unwinding of now clear market consolidating mergers, and the breakup of local monopolies.

2. Conglomeration and De-Conglomeration. Market Concentration. The conglomerate boom, primarily occurring in the 1960s, saw a surge in the formation of large corporations encompassing diverse, often unrelated businesses. This era was fueled by low interest rates and a fluctuating stock market, creating favorable conditions for leveraged buyouts. A key driver of this trend was the Celler-Kefauver Act of 1950, which, by prohibiting companies from acquiring their competitors or suppliers, pushed them towards diversification through acquiring businesses in unrelated fields. The prevailing motive was to achieve rapid growth, even if it meant prioritizing revenue growth over profit growth. Conglomerates were seen as a means to mitigate risk through diversification and achieve operational economies of scale. Many conglomerates formed that operated across completely different industries: Gulf and Western (Paramount Pictures, Simon & Schuster, Sega, Madison Square Garden), ITT (Telephone companies, Avis, Wonder Bread, Hartford Insurance, and Sheraton), and Henry Singleton’s Teledyne. However, the conglomerate era ultimately waned. The government took a more proactive approach to acquisitions in the late 1960s, curbing the aggressive approaches. The FTC sued Proctor & Gamble over its potential acquisition of Clorox and merger guidelines were revised in 1968, setting out more rules against market share and concentration. Rising interest rates in the 1970s strained these sprawling enterprises, forcing them to divest many of their acquisitions. The belief in the inherent efficiency of conglomerates was challenged as businesses increasingly favored specialization over sprawling, unwieldy structures. The concept of synergy, once touted as a key advantage of conglomerates, came under scrutiny. Ultimately, the conglomerate era was marked by performance dilution, value erosion, and the realization that strong performance in one business did not guarantee success in unrelated sectors.

3. Industry Concentration. A central pillar to Tepper’s argument that the capitalism game isn’t being played fairly or appropriately, is that rising industry concentration is worrisome and indicative of a broken market system. He uses the Herfindahl-Hirschman Index (HHI) to discuss levels of industry concentration. According to the Antitrust Division at the DOJ: “The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600). The agencies generally consider markets in which the HHI is between 1,000 and 1,800 points to be moderately concentrated, and consider markets in which the HHI is in excess of 1,800 points to be highly concentrated.” The HHI index is relatively straightforward to calculate. It can be a quick test to see if a potential merger creates a more significantly concentrated market. However, it still falls prey to some issues. For example, market definitions are extremely important in antitrust cases and a poorly or narrowly defined market can cause the HHI to look overly concentrated. In the ongoing Kroger-Albertson’s Merger case, the FTC is proposing a somewhat narrow definition of supermarkets, which excludes large supermarket players like Walmart, Costco, Aldi, and Whole Foods. If Whole Foods isn’t a super market, I’m not sure what is. And sure, maybe they narrowly define the market because Kroger and Albertsons serve a particular niche where substitutes are not easily available. Whole Foods may be more expensive, Aldi may have limited assortment, and Costco portion sizes may be too big. However, if you have a market that has Kroger, Walmart, Costco, Aldi, and Whole Foods serving a reasonable size population, I can almost guarantee the prices are likely to remain competitive. In some cases, high industry concentration does not mean monopolistic behavior. However, it can lead to monopolistic or monopsonistic behavior including: higher prices, lower worker’s wages, lower growth, and greater inequality.

   Dig Deeper

• Microsoft Volume II: The Complete History and Strategy of the Ballmer Years

• Lecture Antitrust 1 Rise of Standard Oil | Walter Isaacson

• Anti-Monopoly Timeline

• How Xerox Lost Half its Market Share

• (Anti)Trust Issues: Harvard Law Bulletin

April 2023 - Creativity Inc: Overcoming the Unseen Forces That Stand in the Way of True Inspriation by Ed Catmull and Amy Wallace

We continue our exploration of Disney’s history with this fascinating book on managing creativity by one of the best to ever do it, Ed Catmull!

Tech Themes

1. An Unlikely Start. When Pixar began, it did not set out to produce feature length films for children. In fact, it wasn’t even a movie studio. Pixar began as the computer division of George Lucas’s Industrial Light and Magic special effects studio. Following the success of Star Wars, Lucas sought to improve on his amazing special effects, by employing more digital computers. In 1979,Lucas hired Ed Catmull to lead the division, and begin building custom computers for special effects. As Catmull puts it; “Alvy’s team set out to design a highly specialized standalone computer that had the resolution and processing power to scan film, combine special effects images with, live action footage, and then record the final result back onto film. It took us roughly four years, but our engineers built just such a device, which we named Pixar Image Computer.” The name comes from a Pixer (a fake word) and Radar. In 1983, Catmull met a promising Disney Animator named John Lassester, who had just been fired by Disney after pitching his movie idea, Brave Little Toaster. Shortly after he joined Lucasfilm, the Pixar team set a goal to produce an animated short movie at the 1984 SIGGRAPH animation conference. Wally B. debuted and blew people away. Up until then, graphics was done by technology people, and almost never included storytellers and animators. As Walter Issacson pointed out in our January 2020 book, teams with diverse backgrounds, complementary styles, and visionary and operating capacity execute the best.

2. Exceptional Talent. Although Lasseter was a perfect fit at Pixar, gloom was on the horizon. In 1983, George Lucas divorced his then wife Marcia, which created financial challenges at Lucasfilm. He decided to sell Pixar, and courted buyers including Phillips, which wanted to use Pixar’s rendering capabilities for CT scans and MRIs, and General Motors which wanted to use its technology for modeling objects. Neither party wanted the team, and they definitely didn’t want to make animated feature films. Steve Jobs also took a look at the business, but couldn’t pull the trigger because of the immense pressure he was under at Apple (which ultimately led to his ousting). It wasn’t until almost 18 months later, and after founding NeXT, that Jobs was ready, and on January 3rd 1986, Jobs acquired Pixar for $5M. Pixar went about trying to sell their high-tech computer for $122,000 a piece, but couldn’t find many buyers (only 300 were sold). They continued making short videos and were even nominated for an Academy Award in 1987 for Luxo, Jr, a short film about a lamp. But the Company was losing tons of money, and by 1987, Jobs had sunk $54m into the company with little to show for it. The Company decided to pivot from selling computers, to making animated commercials for brands, but it didn’t produce enough cash flow to cover costs. Between 1987 and 1991, Jobs tried to sell Pixar three times: “When Microsoft offered $90 million for us he walked away. Steve wanted $120 million, and felt their offer was not just insulting but proof they weren’t worth of us. The same thing happened with Alias, the industrial and automotive design software company, and with Silicon Graphics…His reasoning was this: if Microsoft was willing to go to $90 million, then we mmust be worth hanging on to.” Jobs realized that Pixar had exceptional talent, and that it needed more time to achieve its vision. The combination of Lasseter, Catmull, and Jobs was truly unstoppable. These small acquisitions are reticent of IAC’s acquisition of College Humor, which came with a small video company called Vimeo. Sometimes these small acquisitions that are filled with creative talent can produce unbelievable results.

3. Unstable Ground. Its incredibly daunting to create something from nothing, whether its a company or a film. You feel unsure of yourself and your ideas, not knowing the right approach, wondering if your time is being used wisely. Managing in this environment requires: Frank talk, spirited debate, laughter, and love. To accomplish this list of positive tactics, Pixar created the Braintrust, a group of writers, directors, and creatives that could give early feedback to new films. The braintrust is made up of “People with a deep understanding of storytelling and, usually, people who have been through the process [of making a movie] themselves. The other important difference is the Braintrust has no authority, Directors do not have to listen to the feedback. The Braintrust has empathy for the Director. It knows: “[Mistakes] are an inevitable consequence of doing something new (and, as such, should be seen as valuable; without them, we’d have no originality.” As an example of this unstable ground, Catmull recalls the development of Monsters, Inc. Originally, Pete Docter (now CEO of Pixar), developed an idea that “revolved around a thirty-year-old man who was coping with cast of frightening characters that only he could see. His mom gives him a book with some drawings in it that he did when he was a kid. He doesn’t think anything of it, and he puts it on the shelf, and that night, monsters show up. And nobody else can see them. They follow him to his job, and on his dates, and it turns out these monsters are all the fears the he never dealt with as a kid.” Over a period of five years, Monsters Inc changed multiple times, but the ethos of “Monsters are real, and they scare kids for a living,” never changed. When approaching a creative project, things meander and wander, where they start is not normally where they end. Catmull believes: “Originality is fragile. Rather than trying to prevent all errors, we should assume, as is almost always the case, that our people’s intentions are good and that they want to solve problems. Give them responsibility, let the mistakes happen, and let people fix them.” New ideas are hard enough, you need to nurture and support them, whichever direction they go, to get to a high quality finished product.

Business Themes

1. Balance and Feeding the “Beast”. After Pixar was acquired by Disney, Catmull began hearing the phrase, “You’ve got to feed the Beast.” He was referring to “any large group that needs to be fed an uninterrupted diet of new material and resources in order to function. Following the success of the Lion King in 1994, The bureaucracy of Disney grew to the point that the process of making, marketing, and distributing films engulfed the creative process, leading to pressure for quick and fast success. You “feed the Beast, to occupy its time and attention, putting its talents to use. [But] success only creates more pressure to hurry up and succeed again. Which is why at too many companies, the schedule (that is, the need for product) drives the output, not the strength of the ideas at the front end.” In order to manage this all-consuming Beast, organizations must seek balance. You have to manage the goals of all parties involved, while giving time and energy to the best most creative ideas in the company. “The key is to view conflict as essential. A good manager must always be on the look for areas in which balance has been lost.” Its not as easy as it sounds to achieve balance, but experience is a helpful guide. It takes a constant focus and a subtle understanding of an organization’s psychology.

2. Pixar-Disney: A Love Hate Relationship. In January 2006, Disney acquired Pixar for $7.4B, a fairy-tale ending. But it wasn’t an easy beginning. After the incredible success of Toy Story, Pixar negotiated a five picture deal with Disney to handle its distribution, whereby Pixar would get an equal cut as Disney. Pixar delivered incredible films for Disney including: A Bug’s Life, Toy Story 2, Monsters Inc, and Finding Nemo. But all was not well in the partnership. Following a series of public slights at eachother, Steve Jobs and Michael Eisner essentially put the kaibosh on negotiations, both feeling they were the more important partner in any deal. With Cars and the Incredibles already in development, Disney and Pixar called off their partnership in 2004. This decision was the beginning of the end for Disney CEO, Michael Eisner, who resigned in the fall of 2005. Following his departure, Iger was named CEO, and set about repairing the broken relationship with Steve Jobs and Pixar. We have discussed the deal in length, but one of the subtle features was that Ed Catmull and John Lasseter would become head of Disney Animation, on top of Pixar. Disney animation was struggling. In the eyes of Circle 7 Studio Head Andrew Millstein, “Our filmmakers had lost their voices. It wasn’t that they had no desire to express themselves, but there was an imbalance of forces in the organization - not just within it, but between it and the rest of the corporation - that diminished the vailidity of teh creative voice. The balance was gone.” Wildly, the Pixar team notes that there were three sets of notes for a film: one from the development department, one from the head of the stuiod, and a third from Michael Eisner himself. This feedback was often conflicting and more “you must” then “you should think about.” When Catmull realized the challenge, they created a braintrust purposefully for Disney Animation, called the Story Trust. The first two meetings (for Meet the Robinsons, and American Dog - later Bolt) were unimpressive, and lacked the dynamism of true brain turst meetings. The Directors admitted they were afraid to give negative feedback to colleagues so publicly. Over time though the meetings took on more intensity, and a few years after the merger, Disney Animation produced its first successful movie in a while, Tangled. This was quickly followed by Wreck-it Ralph, and Frozen, and Disney Animation was back on track.

3. Notes Day. After many years of leading Pixar, Catmull realized that Pixar had become much larger, and: “More and more people had begun to feel that it was either not safe or not welcome to offer differing ideas.” The feeling of complacency was also manifesting in three real business problems. Production costs were rising, external economic forces were hitting the business, and a core tenant of the culture (good ideas can come from anywhere) was under attack. To remedy this onslaught of challenges, Pixar created Notes Day. The company created a digital electronic suggestion box where people could submit discussion topics that would help Pixar run more efficiently, with more innovation. They wittled down 4,000 suggesstions to 120 core topics. A handful of employees volunteered to be facilitators and were coached on how to keep meetings on track. The day started with an all-hands where John Lasseter admitted some personal shortcomings - he had been splitting time between Pixar and Disney and people didn’t like it and he frequently carried emotion from one meeting into the next, which confused employees and made employees more emotional. Then participants went to departmental meeting about efficiency, then broke into blocks of 90 minute sessions. At the end of each session - employees could fill out red forms for proposals, blue forms for brainstorms, yellow forms for best practices. The forms asked various questions about benefits to Pixar, how they could become a reality, why the idea was worth pursuing, and who should own the proposal. Notes Day was a cathartic day for employees, who shared feelings and emotions with eachother across functions and working groups. Catmull believes that Notes Day succeeded because there was a clear and focused goal (efficiency/candor), it was championed by senior management, and it was led from within, by individuals who volunteered to run sessions. The whole day mirrored the Kaizen process that was popularized by the Japanese auto-makers after W.E. Deming brought the practices to Japan. Although it was originally a World War II approach under the Training Within Industry job method, Kaizen was key to the Just-in-time manufacturing process used at Toyota. Feedback is critical to business success. Notes Day and Kaizen are great examples of the benefit of focused small improvements driven by passionate employees with great ideas.

   Dig Deeper

• Toyota Production System

• Ed Catmull: Creativity, Inc.

• Soul: A Conversation with Pete Docter (Current Pixar CEO)

• When the Lamp Switched On: How Pixar Went From Experimental Studio to Commercial Juggernaut

• Andrew Stanton John Carter Interview | Most Expensive Movie Ever to Box Office Bomb | Director Q&A

February 2022 - Cable Cowboy by Mark Robichaux

This month we jump into the history of the cable industry in the US with Cable Cowboy. The book follows cable’s main character for over 30 years, John Malone, the intense, deal-addicted CEO of Telecommunications International (TCI).

Tech Themes

1. Repurposed Infrastructure. Repurposed infrastructure is one of the incredible drivers of technological change covered in Carlota Perez’s Technology Revolutions and Financial Capital. When a new technology wave comes along, it builds on the backs of existing infrastructure to reach a massive scale. Railroads laid the foundation for oil transport pipelines. Later, telecommunications companies used the miles and miles of cleared railroad land to hang wires to provide phone service through the US. Cable systems were initially used to pull down broadcast signals and bring them to remote places. Over time, more and more content providers like CNN, TBS, BET started to produce shows with cable distribution in mind. Cable became a bigger and bigger presence, so when the internet began to gain steam in the early 1990s, Cable was ready to play a role. It just so happened that Cable was best positioned to provide internet service to individual homes because, unlike the phone companies’ copper wiring, Cable had made extensive use of coaxial fiber which provided much faster speeds. In 1997, after an extended period of underperformance for the Cable industry, Microsoft announced a $1B investment in Comcast. The size of the deal showed the importance of cable providers in the growth of the internet.

2. Pipes + Content. One of the major issues surrounding TCI as they faced anti-trust scrutiny was their ownership of multiple TV channels. Malone realized that the content companies could make significant profits, especially when content was shown across multiple cable systems. TCI enjoyed the same Scale Economies Power as Netflix. Once the cable channel produces content, any way to spread the content cost over more subscribers is a no-brainer. However, these content deals were worrisome given TCI’s massive cable presence (>8,000,000 subscribers). TCI would frequently demand that channels take an equity investment to access TCI’s cable system. “In exchange for getting on TCI systems, TCI drove a tough bargain. He demanded that cable networks either allow TCI to invest in them directly, or they had to give TCI discounts on price, since TCI bought in bulk. In return for most-favored-nation-status on price, TCI gave any programmer immediate access to nearly one-fifth of all US subscribers in a single stroke.” TCI would impose its dominant position - we can either carry your channel and make an investment, or you can miss out on 8 million subscribers. Channels would frequently choose the former. Malone tried to avoid anti-trust by creating Liberty Media. This spinoff featured all of TCI’s investments in cable providers, offering a pseudo-separation from the telecom giant (although John Malone would completely control liberty).

3. Early, Not Wrong. Several times in history, companies or people were early to an idea before it was feasible. Webvan formed the concept of an online grocery store that could deliver fresh groceries to your house. It raised $800M before flaming out in the public markets. Later, Instacart came along and is now worth over $30B. There are many examples: Napster/Spotify, MySpace/Facebook, Pets.com/Chewy, Go Corporation/iPad, and Loudcloud/AWS. The early idea in the telecom industry was the information superhighway. We’ve discussed this before, but the idea is that you would use your tv to access the outside world, including ordering Pizza, accessing bank info, video calling friends, watching shows, and on-demand movies. The first instantiation of this idea was the QUBE, an expensive set-top box that gave users a plethora of additional interactive services. The QUBE was the launch project of a joint venture between American Express and Warner Communications to launch a cable system in the late 1970s. The QUBE was introduced in 1982 but cost way too much money to produce. With steep losses and mounting debt, Warner Amex Cable “abandoned the QUBE because it was financially infeasible.” In 1992, Malone delivered a now-famous speech on the future of the television industry, predicting that TVs would offer 500 channels to subscribers, with movies, communications, and shopping. 10 years after the QUBE’s failure, Time Warner tried to fulfill Malone’s promise by launching the Full-Service Network (FSN) with the same idea - offering a ton of services to users through a specialized hardware + software approach. This box was still insanely expensive (>$1,000 per box) because the company had to develop all hardware and software. After significant losses, the project was closed. It wasn’t until recently that TV’s evolved to what so many people thought they might become during those exciting internet boom years of the late 1990s. In this example and several above, sometimes the idea is correct, but the medium or user experience is wrong. It turned out that people used a computer and the internet to access shop, order food, or chat with friends, not the TV. In 2015, Domino’s announced that you could now order Pizza from your TV.

Business Themes

1. Complicated Transactions. Perhaps the craziest deal in John Malone’s years of experience in complex deal-making was his spinoff of Liberty Media. Liberty represented the content arm of TCI and held positions in famous channels like CNN and BET. Malone was intrigued at structuring a deal that would evade taxes and give himself the most potential upside. To create this “artificial” upside, Malone engineered a rights offering, whereby existing TCI shareholders could purchase the right to swap 16 shares of TCI for 1 share of Liberty. Malone set the price to swap at a ridiculously high value of TCI shares - ~valuing Liberty at $300 per share. “It seemed like such a lopsided offer: 16 shares of TCI for just 1 share of Liberty? That valued Liberty at $3000 a share, for a total market value of more than $600M by Malone’s reckoning. How could that be, analysts asked, given that Liberty posed a loss on revenue fo a mere $52M for the pro-forma nine months? No one on Wall Street expected the stock to trade up to $300 anytime soon.” The complexity of the rights offering + spinoff made the transaction opaque enough that even seasoned investors were confused about how it all worked and declined to buy the rights. This deal meant Malone would have more control of the newly separate Liberty Media. At the same time, the stock spin had such low participation that shares were initially thinly traded. Once people realized the quality of the company’s assets, the stock price shot up, along with Malone’s net worth. Even crazier, Malone took a loan from the new Liberty Media to buy shares of the company, meaning he had just created a massive amount of value by putting up hardly any capital. For a man that loved complex deals, this deal is one of his most complex and most lucrative.

2. Deal Maker Extraordinaire / Levered Rollups. John Malone and TCI loved deals and hated taxes. When TCI was building out cable networks, they acquired a new cable system almost every two weeks. Malone popularized using EBITDA (earnings before interest, taxes, depreciation, and amortization) as a proxy for real cash flow relative to net income, which incorporates tax and interest payments. To Malone, debt could be used for acquisitions to limit paying taxes and build scale. Once banks got comfortable with EBITDA, Malone went on an acquisition tear. “From 1984 to 1987, Malone had spent nearly $3B for more than 150 cable companies, placing TCI wires into one out of nearly every five with cable in the country, a penetration that was twice that of its next largest rival.” Throughout his career, he rallied many different cable leaders to find a deal that worked for everyone. In 1986, when fellow industry titan Ted Turner ran into financial trouble, Malone reached out to Viacom leader Sumner Redstone, to avoid letting Time Inc (owner of HBO) buy Turner’s CNN. After a quick negotiation, 31 cable operators agreed to rescue Turner Broadcasting with a $550M investment, allowing Turner to maintain control and avoid a takeover. Later, Malone led an industry consortium that included TCI, Comcast, and Cox to create a high speed internet service called, At Home, in 1996. “At Home was responsible for designing the high-speed network and providing services such as e-mail, and a home page featuring news, entertainment, sports, and chat groups. Cable operators were required to upgrade their local systems to accommodate two-way transmission, as well as handle marketing, billing, and customer complaints, for which they would get 65% of the revenue.” At Home ended up buying early internet search company Excite in a famous $7.5B deal, that diluted cable owners and eventually led to bankruptcy for the combined companies. Malone’s instinct was always to try his best to work with a counterparty because he genuinely believed a deal between two competitors provided better outcomes to everyone.

3. Tracking Stocks. Malone popularized the use of tracking stocks, which are publicly traded companies that mirror the operating performance of the underlying asset owned by a company. John Malone loved tracking stocks because they could be used to issue equity to finance operations and give investors access to specific divisions of a conglomerate while allowing the parent to maintain full control. While tracking stocks have been out of favor (except for Liberty Media, LOL), they were once highly regarded and even featured in the original planning of AT&T’s $48B purchase of TCI in 1998. AT&T financed its TCI acquisition with debt and new AT&T stock, diluting existing shareholders. AT&T CEO Michael Armstrong had initially agreed to use tracking stocks to separate TCI’s business from the declining but cash-flowing telephone business but changed his mind after AT&T’s stock rocketed following the TCI deal announcement. Malone was angry with Armstrong’s actions, and the book includes an explanation: “heres why you should mess with it, Mike: You’ve just issued more than 400 million new shares of AT&T to buy a business that produces no earnings. It will be a huge money-loser for years, given how much you’ll spend on broadband. That’s going to sharply dilute your earnings per share, and your old shareholders like earnings. That will hurt your stock price, and then you can’t use stock to make more acquisitions, then you’re stuck. If you create a tracking stock to the performance of cable, you separate out the losses we produce and show better earnings for your main shareholders; and you can use the tracker to buy more cable interests in tax-free deals.” Tracking stocks all but faded from existence following the internet bubble and early 2000s due to their difficulty of implementation and complexity, which can confuse shareholders and cause the businesses to trade at a large discount. This all begs the question, though - which companies could use tracking stock today? Imagine an AWS tracker, a Youtube tracker, an Instagram tracker, or an Xbox tracker - all of these could allow cloud companies to attract new shareholders, do more specific tax-free mergers, and raise additional capital specific to a business unit.

Dig Deeper

• John Malone’s Latest Interview with CNBC (Nov 2021)

• John Malone on LionTree’s Kindred Cast

• A History of AT&T

• Colorado Experience: The Cable Revolution

• An Overview on Spinoffs

December 2021 - Trillion Dollar Coach: The Leadership Playbook of Silicon Valley's Bill Campbell by Eric Schmidt, Jonathan Rosenberg, and Alan Eagle

This month we read a book about famous CEO and executive coach, Bill Campbell. Bill had an unusual background for a silicon valley legend: he was a losing college football coach at Columbia. Despite a late start to his technology career, Bill’s timeless leadership principles and focus on people are helpful for any leader at any size company.

Tech Themes

1. Product First. After a short time at Kodak, Bill realized the criticality of supporting product and engineering. As a football coach, he was not intimately familiar with the intricacies of photographic film. Still, Campbell understood that the engineers ultimately determined the company's fate. After a few months at Kodak, Bill did something that no one else ever thought of - he went into the engineering lab and started talking to the engineers. He told them that Fuji was hot on Kodak's heels and that the company should try to make a new type of film that might thwart some competitive pressure. The engineers were excited to hear feedback on their products and learn more about other aspects of the business. After a few months of gestation, the engineering team produced a new type of film: "This was not how things worked at Kodak. Marketing guys didn't go talk to engineers, especially the engineers in the research lab. But Bill didn't know that, or if he did, he didn't particularly care. So he went over to the building that housed the labs, introduced himself around, and challenged them to come up with something better than Fuji's latest. That challenge helped start the ball rolling on the film that eventually launched as Kodacolor 200, a major product for Kodak and a film that was empirically better than Fuji's. Score one for the marketing guy and his team!" Campbell understood that product was the heart of any technology company, and he sought to empower product leaders whenever he had a chance.

2. Silicon Valley Moments. Sometimes you look back at a person's career and wonder how they managed to be at the center of several critical points in tech history. Bill was a magnet to big moments. After six unsuccessful years as coach of Columbia's football team, Bill joined an ad agency and eventually made his way to the marketing department at Kodak. At the time, Kodak was a blockbuster success and lauded as one of the top companies in the world. However, the writing was on the wall, film was getting cheaper and cheaper, and digital was on the rise. After a few years, Bill was recruited to Apple by John Sculley. Bill joined in 1983 as VP of Marketing, just two years before Steve Jobs would famously leave the company. Bill was incessant that management try to keep Jobs. Steve would not forget his loyalty, and upon his return, Jobs named Campbell a director of Apple in 1997. Bill became CEO of Claris, an Apple software division that functioned as a separate company. In 1990, when Apple signaled it would not spin Claris off into a separate company, Bill left with the rest of management. After a stint at Intuit, Bill became a CEO coach to several Silicon Valley luminaries, including Eric Schmidt, Steve Jobs, Shellye Archambeau, Brad Smith, John Donahoe, Sheryl Sandberg, Jeff Bezos, and more. Bill helped recruit Sandberg and current CFO Ruth Porat to Google. Bill was a serial networker who stood at the center of silicon valley.

3. Failure and Success. Following his departure from Claris/Apple, Bill founded Go Corporation, one of the first mobile computers. The company raised a ton of venture capital for the time ($75m) before an eventual fire-sale to AT&T. The idea of a mobile computer was compelling, but the company faced stiff competition from Microsoft and Apple's Newton. Beyond competition, the original handheld devices lacked very basic features (easy internet, storage, network and email capabilities) that would be eventually be included in Apple's iPhone. Sales across the industry were a disappointment, and AT&T eventually shut down the acquired Go Corp. After the failure of Go. Corporation, Bill was unsure what to do. John Doerr, the famous leader of Kleiner Perkins, introduced Bill to Intuit founder Scott Cook. Cook was considering retirement and looking for a replacement. Bill met with Cook, but Cook remained unimpressed. It was only after a second meeting where Bill shared his philosophy on management and his focus on people that Cook considered Campbell for the job. Bill joined Intuit as CEO and went on to lead the company until 1998, after which he became Chairman of the board, a position he held until 2016. Within a year of Campbell joining, Microsoft agreed to purchase the company for $1.5b. However, the Justice Department raised flags about the acquisition, and Microsoft called off the deal in 1995. Campbell continued to lead the company to almost $600M of revenue. When he retired from the board in 2016, the company was worth $30B.

Business Themes

1. Your People Make You a Leader. Campbell believed that people were the most crucial ingredient in any successful business. Leadership, therefore, was of utmost importance to Bill. Campbell lived by a maxim passed by former colleague Donna Dubinsky: "If you're a great manager, your people will make you a leader. They acclaim that, not you." In an exchange with a struggling leader, Bill added to this wisdom: "You have demanded respect, rather than having it accrue to you. You need to project humility, a selflessness, that projects that you care about the company and about people." The humility Campbell speaks about is what John Collins called Level 5 leadership (covered in our April 2020 book, Good to Great). Research has shown that humble leaders can lead to higher performing teams, better flexibility, and better collaboration.

2. Teams Need Coaches. Campbell loved to build community. Every year he would plan a trip to the super bowl, where he would find a bar and set down roots. He'd get to know the employees, and after a few days, he was a regular at the bar. He understood how important it was to build teams and establish a community that engendered trust and psychological safety. Every team needs a good coach, and Campbell understood how to motivate individuals, give authentic feedback, and handle interpersonal conflicts. "Bill Campbell was a coach of teams. He built them, shaped them, put the right players in the right positions (and removed the wrong players from the wrong positions), cheered them on, and kicked them in their collective butt when they were underperforming. He knew, as he often said, that 'you can't get anything done without a team.'" After a former colleague left to set up a new private equity firm, Bill checked out the website and called him up to tell him it sucked. As part of this feedback style, Bill always prioritized feedback in the moment: "An important component of providing candid feedback is not to wait. 'A coach coaches in the moment,' Scott Cook says. 'It's more real and more authentic, but so many leaders shy away from that.' Many managers wait until performance reviews to provide feedback, which is often too little, too late."

3. Get the Little Things Right. Campbell understood that every interaction was a chance to connect, help, and coach. As a result, he thought deeply about maximizing the value out of every meeting: "Bill took great care in preparing for one-on-one meetings. Remember, he believed the most important thing a manager does is to help people be more effective and to grow and develop, and the 1:1 is the best opportunity to accomplish that." Meetings with Campbell frequently started with family and life discussions and would move back and forth between business and the meaning of life - deep sessions that made people think, reconsider what they were doing and come back energized for more. He also was not shy about addressing issues and problems: "There was one situation we had a few years ago where two different product leaders were arguing about which team should manage a particular group of products. For a while, this was treated as a technical discussion, where data and logic would eventually determine which way to go. But that didn't happen, the problem festered, and tensions rose. Who was in control? This is when Bill got involved. There had to be a difficult meeting where one exec would win and the other would lose. Bill made the meeting happen; he spotted a fundamental tension that was not getting resolved and forced the issue. He didn't have a clear opinion on how to resolve the matter, on which team the product belonged, he simply knew we had to decide one way or another, now. It was one of the most heated meetings we've had, but it had to happen." Bill extended this practice to email where he perfected concise and effective team communication. On top of 1:1's, meetings, and emails, Campbell stayed on top of messages: ""Later, when he was coach to people all over the valley, he spent evenings returning the calls of people who had left messages throughout the day. When you left Bill a voice mail, you always got a call back." Bill was a master of communication and a coach to everyone he met.

Dig Deeper

• Intuit founder Scott Cook on Bill Campbell

• A Conversation between Brad Smith (Intuit CEO) and Bill Campbell

• A Bill Campbell Reading List

• Silicon Valley mourns its ‘coach,’ former Intuit CEO Bill Campbell

• CHM Live | Trillion Dollar Coach: The Leadership Playbook of Silicon Valley’s Bill Campbell

November 2021 - Ender's Game by Orson Scott Card

This month we check out the futuristic sci-fi war drama, Ender’s Game. While the book is meant for kids, its a quick read and a great story.

Tech Themes

1. The Metaverse. During Ender's time at Battle School, he interacts with the Mind Game, an individual game reflecting the thoughts and experiences of each person. Later, as he preps for battle, Ender uses a simulator to learn and practice commanding an army of battleships. These experiences in the simulator are completely personalized, driven by a supercomputer that can do whatever it wants to serve up experiences in the game: "You don't understand, sir. Our Battle School computer is only a part of the IF network. lf we want a picture, we have to get a requisition, but if the mind game program determines that the picture is necessary--it can just go take it." These hyper-personalized mind game experiences are similar to the latest ideas surrounding the Metaverse. The Metaverse is an unclear vision of cyberspace where individuals can interact in virtual reality, mixed reality, or augmented reality in a new computing paradigm. Facebook was so excited about the Metaverse that the company announced it was going to invest $10B in building out its virtual reality platform and changed its name to Meta Platforms, Inc. Matthew Ball has covered the Metaverse since 2018 and has penned his own definition: "The Metaverse is a massively scaled and interoperable network of real-time rendered 3D virtual worlds which can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications, and payments." This is reminiscent of the world we explored in our September 2019 book, Ready Player One, and somewhat similar to the 1990s promise of the information superhighway. It will be interesting to see how the Metaverse develops in the coming years.

2. Anonymity on the Internet. As Ender continues his training at Battle School, Peter and Valentine hatch a plot to create division throughout the world. The two decide the best way to take over the world as young, intelligent children is to write blog posts under a pseudonym and gain a mass following, eventually exercising their political influence. To avoid suspicion, Peter and Valentine switch emotional positions and take on the roles of historical figures aligning with their viewpoints. Peter becomes John Locke, a liberal philosopher, and inventor of the Social Contract, while Valentine becomes Demosthenes, an Athenian hellbent on inciting a war against Macedonia. While the idea of two teenage children starting war by writing on the internet is comical now, the specter might have been possible in the pre-mass internet era of 1985, the year Ender was published. This also raises the contentious shield of anonymity offered by the internet. While some argue that complete anonymity could mean the end of rational society, others say that anonymity must be preserved. This concept of anonymity is extended further in the over-hyped decentralized, crypto/web3 world of the future, where 15-word recovery phrases might become the norm for ultimate secrecy. Internet security and anonymity are likely to evolve if we move to a decentralized computing world - whether this is good or bad remains a matter of view.

3. Technology and Governments. The International Force (IF) is a space army designed by the world to fight against the evil Buggers. The surprising thing about this International Force is how it unifies different governments: "Val, it was bound to happen. Right now there's a vast international fleet and army in existence, with American hegemony. When the bugger wars are over, all that power will vanish, because it's all built on fear of the buggers. And suddenly we'll look around and discover that all the old alliances are gone, dead and gone, except one, the Warsaw Pact." The Warsaw Pact was the agreement between the Soviet Union and several neighboring states following the creation of NATO. Funnily enough, the Warsaw Pact disbanded in 1991 with the fall of the Soviet Union, six years following the publication of Ender's Game. After Ender defeats the Buggers, the world immediately descends into political chaos until Peter comes to power. A once unified world with incredible technology like real-time technological communication through the Ansible is now torn apart by politics. These events bring up the broader role of government in the technological landscape. As we saw earlier this year, global non-US tech superpowers like Bytedance (owner of Tiktok) can cause immense political tension. Furthermore, companies like Taiwan Semiconductor (TSMC), that offer a unique product in a politically contentious region can even provoke the potential for war. Technology enables globalization while also raising the question of who owns non-physical products - the government, a company, or the world?

Business Themes

1. Lonely at the Top. Card paints a world where the entire universe's future lies on children's shoulders. Ender becomes commander of the International Fleet, put in the challenging position as leader of older kids. He has to generate empathy while maintaining command. But Ender is just an intelligent child, and throughout the book, he finds himself in bad situations. He eventually grows to be the leader of his launch group and then the leader of his own Dragon Army. As Ender gains in stature, he loses touch with his friends. In one instance, he fears battle school enemies might jump him in the hallway and chastises Petra when she asks him to chat: "'Petra, if you had actually taken me aside just now, there are about a dozen boys following along who would have taken me in the corridor. Can you tell me you didn't notice them?' Suddenly her face flushed. "No. I didn't. How can you think I did? Don't you know who your friends are?" Many CEOs describe that the job can be lonely because you are naturally the final decision-maker. Even as a young child, Ender was forced to become a leader and suffered the mental instability of the job.

2. Sending a Message. The IF chooses Ender because he is a mix of his two siblings, Peter, who represents extreme violence, and Valentine, who represents empathy. Violence is a recurring theme throughout the book - personal violence between individuals, violence between nations, and violence between civilizations (humans and buggers). In two dramatic sequences, older boys try to corner an unsuspecting Ender. Ender uses his brains to evade an attack but severely injures the attacker to send a message: "They were all wondering if he was dead. Ender, however, was trying to figure out a way to forestall vengeance. To keep them from taking him in a pack tomorrow. I have to win this now, and for all time, or I'll fight it every day and it will get worse and worse. Ender knew the unspoken rules of manly warfare, even though he was only six." Ender thought he needed to message all of his potential attackers. However, these beatings weigh on him constantly, and he spends the rest of his life regretting them. The violent nature of these attacks is reprehensible and difficult to compare to the business world. But it does raise how some executives act with emotion to humiliate or denigrate employees. Recently the CEO of online mortgage startup Better.com fired 900 people over a zoom video call. Beyond the act, the message it sends to employees is even worse. These events can follow executives, with media coverage continuing for over five years after the event itself. Actions send messages. They should be taken with caution when emotion or retaliation is involved.

3. Self-Managed Teams. Ender is a tactical magician and completely changes the Battle Game. Ender's approach is novel: "He had the army drill in eight-man toon maneuvers and four-man half-toons, so that at a single command, his army could be assigned as many as ten separate maneuvers and carry them out at once. No army had ever fragmented itself like that before, but Ender was not planning to do anything that had been done before, either. Most armies practiced mass maneuvers, performed strategies. Ender had none. Instead, he trained his toon leaders to use their small units effectively in achieving limited goals. Unsupported, alone, on their own initiative." This approach is called Self-Managed Teams. The autonomy offered by allowing individuals to manage themselves gives extreme ownership to employees. Self-Managed teams work well in places with repeated work, where employees trust each other and have high self-awareness. This exciting concept has worked well in several businesses, including Facebook and Google.

Dig Deeper

• Ender’s Game (the Movie)

• Demosthenes and Locke - An Essay by Alyssa Rosenberg at the Atlantic

• An Interview with Orson Scott Card

• The Department of Defense is issuing AI ethics guidelines for tech

• Peter and Valentine Wiggin in Ender’s Game

August 2021 - Hit Refresh by Satya Nadella, with Greg Shaw and Jill Tracie Nichols

This month we look at how Satya Nadella reignited Microsoft’s fire and attacked new spaces with a growth mindset. The book is loaded with excellent management philosophy and complex Microsoft history.

Tech Themes

1. Bing: The Other Search Engine. After starting at Microsoft as an engineer and rising through the ranks to lead Microsoft Dynamics (its CRM product), Nadella was handpicked to lead the re-launch of a brand new search engine, Microsoft Bing. Bing was one of Microsoft’s first “born-in-the-cloud” businesses and Nadella quickly recognized four core areas of focus: distributed systems, consumer product design, understanding the economics, of two-sided marketplaces, and AI. Microsoft had a troubled history with search engines and wanted to go big quickly, submitting an offer to buy Yahoo for $45B in February of 2008. Microsoft was rebuffed and thus Nadella found himself launching Search Checkpoint #1 in September of 2008 ahead of a June 2009 Bing launch. What are the odds that Microsoft’s future CEO would have early cloud, distributed systems, and advanced AI leadership experience? It was an almost prescient combination!

2. Red Dog to Azure. Microsoft started working on the cloud two years after Amazon launched AWS. In 2008, veteran software architects Ray Ozzie and Dave Cutler created a secret team inside Microsoft known as Red Dog, which was focused on building a cloud infrastructure product. Red Dog was stationed under Microsoft’s Servers and Tools business unit (STB), with products such as Windows Server and Microsoft’s powerful RDBMS, SQL Server. In 2010, Microsoft CEO Steve Ballmer asked Nadella to lead the STB business unit and set the vision for their then single-digit millions cloud infrastructure business. It was a precarious situation: “The server and tools business was at the peak of its commercial success and yet it was missing the future. The organizing was deeply divided over the importance of the cloud business. There was constant tension between diverging forces.” How did Nadella resolve this tension? It was simple - he made choices and rallied his team around those decisions. He focused the team on hybrid cloud, data, and ML capabilities where Microsoft could take advantage of its on-premise, large enterprise heritage while providing an on-ramp for customers eager to make the shift to the cloud. Microsoft has since surged to an estimated 20% worldwide market share making it one of the biggest and fastest-growing products in the world!

3. Re-Mixed Reality. Microsoft’s gaming portfolio is impressive: Xbox, Mojang (aka Minecraft), Zenimax Media (Maker of Fallout, Wolfenstein, and DOOM). Microsoft also owns the Hololens, a virtual reality headset that competes with Facebook’s Oculus. Many believe the future computing generations will take place in virtual reality, augmented, or mixed reality. Nadella doesn’t mince words - he believes that the future will not be in virtual reality (as Facebook is betting) but rather in mixed reality, a combination of augmented reality (AR) and virtual reality, where the user experiences an augmented experience but still maintains some semblance of the outside world. Nadella lays out the benefits: “HoloLens provides access to mixed reality in which the users can navigate both their current location - interact with people in the same room - and a remote environment while also manipulating holograms and other digital objects.” Virtual reality blocks out the outside world, but that can be an overwhelming experience and impractical particularly for enterprise users of AR/VR/MR technologies. One of the big users of the HoloLens is the US Army, which recently signed a rumored $22B deal with Microsoft. It is still early days, but the future needs a new medium of computing and it might just be mixed reality!

Business Themes

1. Leading with Empathy. Satya Nadella’s life changed with the birth of his son. “The arrival of our son, Zain, in August 1996 had been a watershed moment in Anu’s and my life together. His suffering from asphyxia in utero had changed our lives in ways we had not anticipated. We came to understand life as something that cannot always be solved in the manner we want. Instead, we had to learn to cope. When Zain came home from the intensive care unit, Anu internalized this understanding immediately. There were multiple therapies to be administered to him every day, not to mention quite a few surgeries he needed that called for strenuous follow-up care after nerve-racking ICU stays…My son’s condition requires that I draw daily upon the very same passion for ideas and empathy that I learned from my parents.” Nadella reiterates the importance of empathy throughout the book, and rightly so, empathy is viewed as the most important leadership skill, according to recent research. How does one increase empathy? It’s actually quite simple - talk to people! Satya understands this: “It is impossible to be an empathetic leader sitting in an office behind a computer screen all day. An empathetic leader needs to be out in the world, meeting people where they live, and seeing how the technology we create affects their daily activities.” Leadership requires empathy - hopefully, we see more of it from big technology soon!

2. Frenemies. One of the first things that Satya Nadella did after taking over the CEO role from Steve Ballmer in 2014 was reach out to Tim Cook. Apple and Microsoft had always had a love-hate relationship. In 1997, Microsoft saved Apple shortly after Steve Jobs returned by investing $150M in the company so that Apple could stave off potential bankruptcy. However, in 2014, Nadella called on Apple: “I decided we needed to get Office everywhere, including iOS and Android…I wanted unambiguously to declare, both internally and externally, that the strategy would be to center our innovation agenda around users’ needs and not simply their device.” Microsoft had tried to become a phone company with Windows Mobile in 2000, tried again with Windows Phone in 2010, and tried even harder at Windows Phone in 2013 with a $7.2B acquisition of Nokia’s mobile phone unit. Although Nadella voted ‘No’ on the deal before becoming CEO, he was forced to manage the company through a total write-off of the acquisition and the elimination of eighteen thousand jobs. So how could Nadella catch up to the mobile wave? “For me, partnerships - particularly with competitors - have to be about strengthening a company’s core businesses, which ultimately centers on creating additional value for the customer…We have to face reality. When we have a great product like Bing, Office, or Cortana but someone else has created a strong market position with their service or device, we can’t just sit on the sidelines. We have to find smart ways to partners so that our products can become available on each other's popular platforms.” Nobody knows platforms like Microsoft; Bill Gates wrote the definition of a platform: “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.” Nadella got over his predecessor’s worry and hatred of the competition to bring Microsoft’s software to other platforms to strengthen both of their leadership positions.

3. Regulation and Technology. Nadella devotes an entire chapter to the idea of trust in the digital age. Using three case studies - North Korea’s attack on Sony’s servers, Edward Snowden’s leaked documents (that were held on Microsoft’s servers), and the FBI’s lawsuit against Apple to unlock an iPhone that might contain criminal information - Nadella calls for increased(!) regulation, particularly around digital technology. Satya uses a simple equation for trust: “Empathy + Shared values + Safety and Reliability = Trust over time.” Don’t you love it when a company that the government sued over anti-trust practices calls on the government to develop better laws! You’d love it even more if you saw how they used the same tactics to launch Microsoft Teams! Regulation in technology has been a hot topic recently, and Nadella is right to call on the government to create new laws for our digital world: “We do not believe that courts should seek to resolve issues of twenty-first-century technology relying on law that was written in the era of the adding machine.” He goes further to suggest potential remedies, including an efficient system for government access to corporate data, stronger privacy protections, globalized digital evidence sharing, and transparency of corporate and government data. I imagine the trend will be toward more regulation, especially with the passage of recent data laws like GDPR or CCPA, but I’m not sure we will see any real sweeping changes.

Dig Deeper

• “Culture Eats Strategy for Breakfast” - How Satya Nadella Rebooted Microsoft

• Satya Nadella Interview at Stanford Business School (2019)

• Microsoft is Rolling out a New Framework to its Leaders - Business Insider

• Satya Nadella email to employees on first day as CEO

• HoloLens Mixed Reality Demonstration

June 2021 - Letters to the Nomad Partnership 2001-2013 (Nick Sleep's and Qais Zakaria's Investor Letters)

This month we review a unique source of information - mysterious fund manager Nick Sleep’s investment letters. Sleep had an extremely successful run and identified several very interesting companies and characteristics of those companies which made for great investments. He was early to uncover Amazon, Costco, and others - riding their stocks into the stratosphere over the last 20 years. These letters cover the internet bubble, the 08/09 crisis, and all types of interesting businesses across the world.

The full letters can be found here

Tech Themes

1. Scale Benefits Shared. Nick Sleep’s favored business model is what he calls Scale Benefits Shared. The idea is straight forward and appears across industries. Geico, Amazon, and Costco all have this business model. Its simple - companies start with low prices and spend only on the most important things. Over time as the company scales (more insured drivers, more online orders, more stores) they pass on the benefits of scale to the customer with even further lower prices. The consumer then buys more with the low-cost provider. This has a devastating effect on competition - it forces companies to exit the industry because the one sharing the scale benefits has to become hyper-efficient to continue to make the business model work. “In the case of Costco scale efficiency gains are passed back to the consumer in order to drive further revenue growth. That way customers at one of the first Costco stores (outside Seattle) benefit from the firm’s expansion (into say Ohio) as they also gain from the decline in supplier prices. This keeps the old stores growing too. The point is that having shared the cost savings, the customer reciprocates, with the result that revenues per foot of retailing space at Costco exceed that at the next highest rival (WalMart’s Sam’s Club) by about fifty percent.” Jeff Bezos was also very focused on this, his 2006 annual letter highlighted as much: “Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long-term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We have made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and – we believe – important and valuable in the long term.” So what companies today are returning scale efficiencies with customers? One recent example is Snowflake - which is a super expensive solution but is at least posturing correctly in favor of this model - the recent earnings call highlighted that they had figured out a better way to store data, resulting in a storage price decrease for customers. Fivetran’s recent cloud data warehouse comparison showed Snowflake was both cheaper and faster than competitors Redshift and Bigquery - a good spot to be in! Another example of this might be Cloudflare - they are lower cost than any other CDN in the market and have millions of free customers. Improvements made to the core security+CDN engine, threat graph, and POP locations result in better performance for all of their free users, which leads to more free users, more threats, vulnerabilities, and location/network demands - a very virtuous cycle!

2. The Miracle of Compound Growth & Its Obviousness. While appreciated in some circles, compounding is revered by Warren Buffett and Nick Sleep - it’s a miracle worth celebrating every day. Sleep takes this idea one step further, after discussing how the average hold period of stocks has fallen significantly over the past few decades: “The fund management industry has it that owning shares for a long time is futile as the future is unknowable and what is known is discounted. We respectfully disagree. Indeed, the evidence may suggest that investors rarely appropriately value truly great companies.” This is quite a natural phenomenon as well - when Google IPO’d in 2004 for a whopping $23bn, were investors really valuing the company appropriately? Were Visa ($18Bn valuation, largest US IPO in history) and Mastercard ($5.3Bn valuation) being valued appropriately? Even big companies like Apple in 2016 valued at $600Bn were arguably not valued appropriately. Hindsight is obvious, but the durability of compounding in great businesses is truly a myth to behold. That’s why Sleep and Zakaria wound down the partnership in 2014, opting to return LP money and only own Berkshire, Costco, and Amazon for the next decade (so far that’s been a great decision!). While frequently cited as a key investing principle, compounding in technology, experiences, art, and life are rarely discussed, maybe because they are too obvious. Examples of compounding (re-investing interest/dividends and waiting) abound: Moore’s Law, Picasso’s art training, Satya Nadella’s experience running Bing and Azure before becoming CEO, and Beatles playing clubs for years before breaking on the scene. Compounding is a universal law that applies to so much!

3. Information Overload. Sleep makes a very important but subtle point toward the end of his letters about the importance of reflective thinking:

   BBC Interviewer: “David Attenborough, you visited the North and South Poles, you witnessed all of life in-between from the canopies of the tropical rainforest to giant earthworms in Australia, it must be true, must it not, and it is a quite staggering thought, that you have seen more of the world than anybody else who has ever lived?”

   David Attenborough: “Well…I suppose so…but then on the other hand it is fairly salutary to remember that perhaps the greatest naturalist that ever lived and had more effect on our thinking than anybody, Charles Darwin, only spent four years travelling and the rest of the time thinking.”

   Sleep: “Oh! David Attenborough’s modesty is delightful but notice also, if you will, the model of behaviour he observed in Charles Darwin: study intensely, go away, and really think.”

   There is no doubt that the information age has ushered in a new normal for daily data flow and news. New information is constant and people have the ability to be up to date on everything, all the time. While there are benefits to an always-on world, the pace of information flow can be overwhelming and cause companies and individuals to lose sight of important strategic decisions. Bill Gates famously took a “think week” each year where he would lock himself in a cabin with no internet connection and scan over hundreds of investment proposals from Microsoft employees. A Harvard study showed that reflection can even improve job performance. Sometimes the constant data flow can be a distraction from what might be a very obvious decision given a set of circumstances. Remember to take some time to think!

Business Themes

1. Psychological Mistakes. Sleep touches on several different psychological problems and challenges within investing and business, including the role of Social Proof in decision making. Social proof occurs when individuals look to others to determine how to behave in a given situation. A classic example of Social Proof comes from an experiment done by Psychologist, Stanley Milgram, in which he had groups of people stare up at the sky on a crowded street corner in New York City. When five people were standing and looking up (as opposed to a single person), many more people also stopped to look up, driven by the group behavior. This principle shows up all the time in business and is a major proponent in financial bubbles. People see others making successful investments at high valuations and that drives them to do the same. It can also drive product and strategic decisions - companies launching dot-com names in the 90’s to drive their stock price up, companies launching corporate venture arms in rising markets, companies today deciding they need a down-market “product-led growth” engine. As famed investor Stan Druckenmiller notes, its hard to sit idly by while others (who may be less informed) crush certain types of investments: “I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basketcase and I couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”

2. Incentives, Psychology, and Ownership Mindset. Incentives are incredibly powerful in business and its surprisingly difficult to get people to do the right thing. Sleep spends a lot of time on incentives and the so-called Principal-Agent Conflict. Often times the Principal (Owner, Boss, Purchaser, etc.) may employ an Agent (Employee, Contractor, Service) to accomplish something. However the goals and priorities of the principal may not align with that agent. As an example, when your car breaks down and you need to go to a local mechanic to fix it, you (the principal) want to find someone to fix the car as well and as cheaply as possible. However, the agent (the mechanic) may be incentivized to create the biggest bill possible to drive business for their garage. Here we see the potential for misaligned incentives. After 5 years of really strong investment results, Sleep and Zakaria noticed a misaligned incentive of their own: “Which brings me to the subject of the existing performance fee. Eagle-eyed investors will not have failed but notice the near 200 basis point difference between gross and net performance this year, reflecting the performance fee earned. We are in this position because performance for all investors is in excess of 6% per annum compounded. But given historic performance, that may be the case for a very long time. Indeed, we are so far ahead of the hurdle that if the Partnership now earned pass-book rates of return, say 5% per annum, we would continue to “earn” 20% performance fees (1% of assets) for thirty years, that is, until the hurdle caught up with actual results. During those thirty years, which would see me through to retirement, we would have added no value over the money market rates you can earn yourself, but we would still have been paid a “performance fee”. We are only in this position because we have done so well, and one could argue that contractually we have earned the right by dint of performance, but just look at the conflicts!” They could have invested in treasury bonds and collected a performance fee for years to come but they knew that was unfair to limited partners. So the duo created a resetting fee structure, that allowed LPs to claw back performance fees if Nomad did not exceed the 6% hurdle rate for a given year. This kept the pair focused on driving continued strong results through the life of the partnership.

3. Discovery & Pace. Nick Sleep and Qais Zakaria looked for interesting companies in interesting situations. Their pace is simply astounding: “When Zak and I trawled through the detritus of the stock market these last eighteen months (around a thousand annual reports read and three hundred companies interviewed)…” Sleep and Zakaria put up numbers: 55 annual reports per month (~2 per day), 17 companies interviewed per month (meeting every other day)! That is so much reading. Its partially unsurprising that after a while they started to be able to find things in the annual reports that piqued their interest. Not only did they find retrospectively obvious gems like Amazon and Costco, they also looked all around the world for mispricings and interesting opportunities. One of their successful international investments took place in Zimbabwe, where they noticed significant mispricing involving the Harare Stock Exchange, which opened in 1896 but only started allowing foreign investment in 1993. While Nomad certainly made its name on the Scaled efficiencies shared investment model, Zimbabwe offered Sleep and Zakaria to prioritize their second model: “We have little more than a handful of distinct investment models, which overlap to some extent, and Zimcem is a good example of a second model namely, ‘deep discount to replacement cost with latent pricing power.’” Zimcem was the country’s second-largest cement producer, which traded at a massive discount to replacement cost due to terrible business conditions (inflation growing faster than the price of cement). Not only did Sleep find a weird, mispriced asset, he also employed a unique way of acquiring shares to further increase his margin of safety. “The official exchange rate at the time of writing is Z$9,100 to the U$1. The unofficial, street rate is around Z$17,000 to the U$1. In other words, the Central Bank values its own currency at over twice the price set by the public with the effect that money entering the country via the Central Bank buys approximately half as much as at the street rate. Fortunately, there is an alternative to the Central Bank for foreign investors, which is to purchase Old Mutual shares in Johannesburg, re-register the same shares in Harare and then sell the shares in Harare. This we have done.“ By doing this, Nomad was able to purchase shares at a discounted exchange rate (they would also face the exchange rate on sale, so not entirely increasing the margin of safety). The weird and off the beaten path investments and companies can offer rich rewards to those who are patient. This was the approach Warren Buffett employed early on in his career, until he started focusing on “wonderful businesses” at Charlie Munger’s recommendation.

Dig Deeper

• Overview of Several Scale Economies Shared Businesses

• Investor Masterclass Learnings from Nick Sleep

• Warren Buffett & Berkshire’s Compounding

• Jim Sinegal (Costco Founder / CEO) - Provost Lecture Series Spring 2017

• Robert Cialdini - Mastering the Seven Principles of Influence and Persuasion

April 2021 - Innovator's Solution by Clayton Christensen and Michael Raynor

This month we take another look at disruptive innovation in the counter piece to Clayton Christensen’s Innovator’s Dilemma, our July 2020 book. The book crystallizes the types of disruptive innovation and provides frameworks for how incumbents can introduce or combat these innovations. The book was a pleasure to read and will serve as a great reference for the future.

Tech Themes

1. Integration and Outsourcing. Today, technology companies rely on a variety of software tools and open source components to build their products. When you stitch all of these components together, you get the full product architecture. A great example is seen here with Gitlab, an SMB DevOps provider. They have Postgres for a relational database, Redis for caching, NGINX for request routing, Sentry for monitoring and error tracking and so on. Each of these subsystems interacts with each other to form the powerful Gitlab project. These interaction points are called interfaces. The key product development question for companies is: “Which things do I build internally and which do I outsource?” A simple answer offered by many MBA students is “Outsource everything that is not part of your core competence.” As Clayton Christensen points out, “The problem with core-competence/not-your-core-competence categorization is that what might seem to be a non-core activity today might become an absolutely critical competence to have mastered in a proprietary way in the future, and vice versa.” A great example that we’ve discussed before is IBM’s decision to go with Microsoft DOS for its Operating System and Intel for its Microprocessor. At the time, IBM thought it was making a strategic decision to outsource things that were not within its core competence but they inadvertently gave almost all of the industry profits from personal computing to Intel and Microsoft. Other competitors copied their modular approach and the whole industry slugged it out on price. The question of whether to outsource really depends on what might be important in the future. But that is difficult to predict, so the question of integration vs. outsourcing really comes down to the state of the product and market itself: is this product “not good enough” yet? If the answer is yes, then a proprietary, integrated architecture is likely needed just to make the actual product work for customers. Over time, as competitors enter the market and the fully integrated platform becomes more commoditized, the individual subsystems become increasingly important competitive drivers. So the decision to outsource or build internally must be made on the status of product and the market its attacking.

2. Commoditization within Stacks. The above point leads to the unbelievable idea of how companies fall into the commoditization trap. This happens from overshooting, where companies create products that are too good (which I find counter-intuitive, who thought that doing your job really well would cause customers to leave!). Christensen describes this through the lens of a salesperson “‘Why can’t they see that our product is better than the competition? They’re treating it like a commodity!’ This is evidence of overshooting…there is a performance surplus. Customers are happy to accept improved products, but unwilling to pay a premium price to get them.” At this time, the things demanded by customers flip - they are willing to pay premium prices for innovations along a new trajectory of performance, most likely speed, convenience, and customization. “The pressure of competing along this new trajectory of improvement forces a gradual evolution in product architectures, away from the interdependent, proprietary architectures that had the advantage in the not-good-enough era toward modular designs in the era of performance surplus. In a modular world, you can prosper by outsourcing or by supplying just one element.” This process of integration, to modularization and back, is super fascinating. As an example of modularization, let’s take the streaming company Confluent, the makers of the open-source software project Apache Kafka. Confluent offers a real-time communications service that allows companies to stream data (as events) rather than batching large data transfers. Their product is often a sub-system underpinning real-time applications, like providing data to traders at Citigroup. Clearly, the basis of competition in trading has pivoted over the years as more and more banking companies offer the service. Companies are prioritizing a new axis, speed, to differentiate amongst competing services, and when speed is the basis of competition, you use Confluent and Kafka to beat out the competition. Now let’s fast forward five years and assume all banks use Kafka and Confluent for their traders, the modular sub-system is thus commoditized. What happens? I’d posit that the axis would shift again, maybe towards convenience, or customization where traders want specific info displayed maybe on a mobile phone or tablet. The fundamental idea is that “Disruption and commoditization can be seen as two sides of the same coin. That’s because the process of commoditization initiates a reciprocal process of de-commoditization [somewhere else in the stack].”

3. The Disruptive Becomes the Disruptor. Disruption is a relative term. As we’ve discussed previously, disruption is often mischaracterized as startups enter markets and challenge incumbents. Disruption is really a focused and contextual concept whereby products that are “not good enough” by market standards enter a market with a simpler, more convenient, or less expensive product. These products and markets are often dismissed by incumbents or even ceded by market leaders as those leaders continue to move up-market to chase even bigger customers. Its fascinating to watch the disruptive become the disrupted. A great example would be department stores - initially, Macy’s offered a massive selection that couldn’t be found in any single store and customers loved it. They did this by turning inventory three times per year with 40% gross margins for a 120% return on capital invested in inventory. In the 1960s, Walmart and Kmart attacked the full-service department stores by offering a similar selection at much cheaper prices. They did this by setting up a value system whereby they could make 23% gross margins but turn inventories 5 times per year, enabling them to earn the industry golden 120% return on capital invested in inventory. Full-service department stores decided not to compete against these lower gross margin products and shifted more space to beauty and cosmetics that offered even higher gross margins (55%) than the 40% they were used to. This meant they could increase their return on capital invested in inventory and their profits while avoiding a competitive threat. This process continued with discount stores eventually pushing Macy’s out of most categories until Macy’s had nowhere to go. All of a sudden the initially disruptive department stores had become disrupted. We see this in technology markets as well. I’m not 100% this qualifies but think about Salesforce and Oracle. Marc Benioff had spent a number of years at Oracle and left to start Salesforce, which pioneered selling subscription, cloud software, on a per-seat revenue model. This meant a much cheaper option compared to traditional Oracle/Siebel CRM software. Salesforce was initially adopted by smaller customers that didn’t need the feature-rich platform offered by Oracle. Oracle dismissed Salesforce as competition even as Oracle CEO Larry Ellison seeded Salesforce and sat on Salesforce’s board. Today, Salesforce is a $200B company and briefly passed Oracle in market cap a few months ago. But now, Salesforce has raised its prices and mostly targets large enterprise buyers to hit its ambitious growth initiatives. Down-market competitors like Hubspot have come into the market with cheaper solutions and more fully integrated marketing tools to help smaller businesses that aren’t ready for a fully-featured Salesforce platform. Disruption is always contextual and it never stops.

Business Themes

1. Low-end-Market vs. New-Market Disruption. There are two types of established methods for disruption: Low-end-market (Down-market) and New-market. Low-end-market disruption seeks to establish performance that is “not good enough” along traditional lines, and targets overserved customers in the low-end of the mainstream market. It typically utilizes a new operating or financial approach with structurally different margins than up-market competitors. Amazon.com is a quintessential low-end market disruptor compared to traditional bookstores, offering prices so low they angered book publishers while offering unmatched convenience to customers allowing them to purchase books online. In contrast, Robinhood is a great example of a new-market disruption. Traditional discount brokerages like Charles Schwab and Fidelity had been around for a while (themselves disruptors of full-service models like Morgan Stanley Wealth Management). But Robinhood targeted a group of people that weren’t consuming in the market, namely teens and millennials, and they did it in an easy-to-use app with a much better user interface compared to Schwab and Fidelity. Robinhood also pioneered new pricing with zero-fee trading and made revenue via a new financial approach, payment for order flow (PFOF). Robinhood makes money by being a data provider to market makers - basically, large hedge funds, like Citadel, pay Robinhood for data on their transactions to help optimize customers buying and selling prices. When approaching big markets its important to ask: Is this targeted at a non-consumer today or am I competing at a structurally lower margin with a new financial model and a “not quite good enough” product? This determines whether you are providing a low-end market disruption or a new-market disruption.

2. Jobs To Be Done. The jobs to be done framework was one of the most important frameworks that Clayton Christensen ever introduced. Marketers typically use advertising platforms like Facebook and Google to target specific demographics with their ads. These segments are narrowly defined: “Males over 55, living in New York City, with household income above $100,000.” The issue with this categorization method is that while these are attributes that may be correlated with a product purchase, customers do not look up exactly how marketers expect them to behave and purchase the products expected by their attributes. There may be a correlation but simply targeting certain demographics does not yield a great result. The marketers need to understand why the customer is adopting the product. This is where the Jobs to Be Done framework comes in. As Christensen describes it, “Customers - people and companies - have ‘jobs’ that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can ‘hire’ to get the job done. Their thought processes originate with an awareness of needing to get something done, and then they set out to hire something or someone to do the job as effectively, conveniently, and inexpensively as possible.” Christensen zeroes in on the contextual adoption of products; it is the circumstance and not the demographics that matter most. Christensen describes ways for people to view competition and feature development through the Jobs to Be Done lens using Blackberry as an example (later disrupted by the iPhone). While the immature smartphone market was seeing feature competition from Microsoft, Motorola, and Nokia, Blackberry and its parent company RIM came out with a simple to use device that allowed for short productivity bursts when the time was available. This meant they leaned into features that competed not with other smartphone providers (like better cellular reception), but rather things that allowed for these easy “productive” sessions like email, wall street journal updates, and simple games. The Blackberry was later disrupted by the iPhone which offered more interesting applications in an easier to use package. Interestingly, the first iPhone shipped without an app store (but as a proprietary, interdependent product) and was viewed as not good enough for work purposes, allowing the Blackberry to co-exist. Management even dismissed the iPhone as a competitor initially. It wasn’t long until the iPhone caught up and eventually surpassed the Blackberry as the world’s leading mobile phone.

3. Brand Strategies. Companies may choose to address customers in a number of different circumstances and address a number of Jobs to Be Done. It’s important that the Company establishes specific ways of communicating the circumstance to the customer. Branding is powerful, something that Warren Buffett, Terry Smith, and Clayton Christensen have all recognized as durable growth providers. As Christensen puts it: “Brands are, at the beginning, hollow words into which marketers stuff meaning. if a brand’s meaning is positioned on a job to be done, then when the job arises in a customer’s life, he or she will remember the brand and hire the product. Customers pay significant premiums for brands that do a job well.” So what can a large corporate company do when faced with a disruptive challenger to its branding turf? It’s simple - add a word to their leading brand, targeted at the circumstance in which a customer might find themself. Think about Marriott, one of the leading hotel chains. They offer a number of hotel brands: Courtyard by Marriott for business travel, Residence Inn by Marriott for a home away from home, the Ritz Carlton for high-end luxurious stays, Marriott Vacation Club for resort destination hotels. Each brand is targeted at a different Job to Be Done and customers intuitively understand what the brands stand for based on experience or advertising. A great technology example is Amazon Web Services (AWS), the cloud computing division of Amazon.com. Amazon invented the cloud, and rather than launch with the Amazon.com brand, which might have confused their normal e-commerce customers, they created a completely new brand targeted at a different set of buyers and problems, that maintained the quality and recognition that Amazon had become known for. Another great retail example is the SNKRs app released by Nike. Nike understands that some customers are sneakerheads, and want to know the latest about all Nike shoe drops, so Nike created a distinct, branded app called SNKRS, that gives news and updates on the latest, trendiest sneakers. These buyers might not be interested in logging into the Nike app and may become angry after sifting through all of the different types of apparel offered by Nike, just to find new shoes. The SNKRS app offers a new set of consumers and an easy way to find what they are looking for (convenience), which benefits Nike’s core business. Branding is powerful, and understanding the Job to Be Done helps focus the right brand for the right job.

Dig Deeper

• Clayton Christensen’s Overview on Disruptive Innovation

• Jobs to Be Done: 4 Real-World Examples

• A Peek Inside Marriott’s Marketing Strategy & Why It Works So Well

• The Rise and Fall of Blackberry

• Payment for Order Flow Overview

• How Commoditization Happens

December 2020 - Do Androids Dream of Electric Sheep? (Blade Runner) by Phillip K. Dick

This month we read the classic sci-fi novel, Do Androids Dream of Electric Sheep? The book follows Rick Deckard, a bounty hunter searching out android robots who are pretending to be human beings. Along the journey, the reader is asked to consider: what does it mean to be alive? Philip K. Dick was a crazy sci-fi writer, producing many books and stories that became famous like The Man in the High Castle, Minority Report, and Total Recall. Although his writing career was prolific, Dick was a troubled individual. He was a heavy drug user, he married five times, he experienced drug-induced “paranormal activities” and he was physically abusive to at least two of his wives. While

Tech Themes

The common, modern depiction of a Turing Test

1. Are you an android? In 1950, British computer scientist Alan Turing conceived of the Turing Test, a hypothetical test to determine whether a machine can display intelligent behavior. Turing asked the question, “Can machines think?” and attempted to define a test whereby a human might be tricked into believing a machine was human. The test design is fairly complex but involves a human asking written questions to a machine in another room. If the machine can convince the interrogator that it’s human, then machines can “think.” This Turing test is mirrored in the Voigt-Kampff test used throughout the book. It’s unclear if the test works, and Rick Deckard almost misdiagnoses Rachel in the book's early parts. At the end of the book, the test is turned on its head, with Rick impersonating John Isidore (another human), trying to convince machines (in another room) to let him in. This role-reversal and the questioning of who is an android happens throughout the novel - at times, Rick, Phil Resh, and Harry Bryant might all be androids. These questions are the centerpiece of sci-fi lore. They are also explored in a similar style in the famous movie Ghost in The Shell, where people have now have some organs and limbs replaced by electric parts. When a cyber-attacker named the Puppet Master takes over the machine network of technological parts, it’s unclear who is human, who is an android, and who is possessed by the Puppet Master. In the video game world, this idea has also recently been explored in Detroit: Become Human. In the game, which is set up in choose-your-own-adventure style, players can play as humans or androids and choose whether they stay in character or break out of their controlled, android state. The idea of an interrogator or bounty hunter snooping out rogue machines has been explored across books, film, and video games. As technology has become more prevalent in our lives, the cultural mediums may have changed, but the classic philosophical question - what does it mean to be alive? - remains.

2. Predicting the future. The Blade Runner movie is famously set in Los Angeles, 2019, while the book is set in 1992 in San Francisco. The book itself was written in 1968, and the movie Blade Runner debuted 14 years later in 1982. In 2019, Blade Runner experienced a comic resurgence as its dark, bleak futuristic society of flying cars, fully intelligent artificial beings, and international space travel never happened. Today, predictions of computing and artificial intelligence abound. In his original Imitation Game paper, Alan Turing made one of the most famous AI predictions: “I believe that in about fifty years’ time it will be possible to programme computers, with a storage capacity of about 10^9, to make them play the imitation game so well that an average interrogator will not have more than 70 percent, chance of making the right identification after five minutes of questioning.” It’s tough to know if this prediction came true (other than the 10^9 part because that is only 1 GB), with some places claiming to have built algorithms that beat the Turing Test. Interestingly, one common theme emerges about these computing predictions - both experts and non-experts typically predict about 15-25 years out. In the Innovators, Walter Issacson posited that this was enough time to allow people to engage in imaginative thinking. Roy Amara, co-founder of the Institute for the Future, probably put it best: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” How long run is the long run, though? As John Maynard Keynes proclaimed: “In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.” It is seriously hard to estimate the combination of changing technologies and infrastructures, which unlock completely new and cost-effective ways of building things. Will we have self-driving cars in 20 years? Will we have Artificial General Intelligence? Will we have quantum computing? I have no idea.

3. Technology and nature. One theme repeatedly explored throughout the novel is this balance or tension between technology and nature. World War Terminus has caused a layer of radioactive dust to fall over the world, killing animal life and changing the environment. Mechanical animals are the norm, and Rick dreams about procuring a real horse, ostrich, or goat one day. He regularly checks his Sidney’s Animal & Fowl Catalogue like a stockbroker checking the latest price change. A real animal is significantly more expensive than a mechanical version, despite it being nearly impossible to figure out whether an animal is real or fake. This mirror’s the book's whole premise - a real human is more important and valuable than an Android despite increasingly small differences between Androids and humans. Rick realizes this at the end of the book: “The spider Mercer gave the chickenhead, Isidore; it probably was artificial, too. But it doesn't matter. The electric things have their lives, too. Paltry as those lives are." Technology and nature have a tradeoff in today’s world as well. Cloud computing is certainly energy-intensive, but according to the companies that run those clouds (like Google Cloud or Microsoft Azure), it is significantly less intensive than having companies run their own data centers. Beyond the environmental impact, the behavior of nature is something to consider when operating a data center. A few years ago, Facebook data centers went down when a Snake chewed through a switchboard and took down all services. In 2014, a shark bit through an underwater Google fiber cable, and in 2012 a squirrel took down a Yahoo data center. Animals, technology, and nature are constantly interacting, sometimes in unexpected ways.

Business Themes

1. Status seeking and the growth of e-commerce. In the battle to achieve status, real animals are a highly sought after status symbol. Early on in the book, Rick engages in a jealous conversation over his neighbor’s real horse: “‘Ever thought of selling your horse?’ Rick asked. He wished to god he had a horse, in fact any animal.” After revealing that his sheep was electric, Rick’s neighbor kindly remarks that he won’t tell the other people in the apartment complex, suggesting that if people knew Rick had an electric sheep (rather than a real one), they would look down on him. While this interaction seems weird, it parallels so many interactions people have today. Vance Packard offered a description of “status seekers” in 1959: “People who are continually straining to surround themselves with visible evidence of the superior rank they are claiming.” As general consumption and wealth rose after World-War II in the US, luxury goods became more attainable for more classes. Globalization of supply chains also increased this trend. When commerce moved online, new shopping styles and behaviors emerged. E-commerce purchases can frequently replace feelings and there is even a psychological disorder caused by excessive purchasing: Buying-shopping disorder (BSD) is characterized by extreme preoccupations with and craving for buying/shopping and by irresistible and identity-seeking urges to possess consumer goods. Patients with BSD buy more consumer goods than they can afford, and those are neither needed nor frequently used. The excessive purchasing is primarily used to regulate emotions, e.g. to get pleasure, relief from negative feelings, or coping with self-discrepancy.” Dick may be signaling that humans seek status and importance compared to their reference groups, regardless of setting or what indicates that status to others, whether it be an expensive handbag or a goat.

2. Buy goat now, pay-later. 2020 saw the emergence of buy-now, pay-later (BNPL) vendors like Affirm, Klarna, and Afterpay. These companies typically offer zero-interest loans to consumers and get paid a 5% merchant fee for increasing purchases at e-commerce stores. The stores (like Peloton for example) increase sales and the consumers benefit from not having to pay a significant upfront payment. The other way these companies make money is by charging interest payments on specific types of purchases (likely where the merchant doesn’t want to give away a fee). These interest rates can be really, really high - averaging around 10-30% depending on the purchase. This is not a new concept and the idea of payday loans at predatorily high-interest rates has been around for over 30 years. Luckily, the purchases that these BNPL providers are financing tend to not be really high-value products, but it’s still concerning that some people are buying things without understanding the true value they will have to pay in interest. When Rick purchases a real goat, after killing three androids, he finances it, paying $3,000 upfront and entering into a three-year payment contract. Rick’s wife Iran is outraged at the cost of the goat: "‘What are the monthly payments on the goat?’ She held out her hand; reflexively he got out the contract which he had signed, passed it to her. ‘That much,’ she said in a thin voice. ‘The interest; good god — the interest alone. And you did this because you were depressed. Not as a surprise for me, as you originally said.” With BNPL providers now securitizing these consumer loans and selling them off to banks, I wonder if we will see any new regulation come to bear for the benefit of consumers. If people are not careful, they could be locked into long contracts with significant interest over time.

3. Two case studies in electric animals. Electric animals have actually been invented and while they may not be the equivalent of Goddard from Jimmy Neutron yet, they are pretty funny and interesting case studies. Sony released the AIBO dog in 1999 after many years of research. The original robot dog cost $2,100 (~$3,500 in today’s dollars) and sold about 65,000 units. The programmable software allowed the dogs to be used in a variety of situations including an AI soccer world cup. The initial popularity of the dogs waned, and price wars with new rivals caused sales to decline. In 2006, the AIBO dog was discontinued. In 2018, it made a resurgence and is now a barking flexible model that you can pet, play games with, and feed. Another tale of odd mechanic animals is Boston Dynamics. The company that spun out of MIT in 1992 produced massive quadruped animals including one called BigDog, that was capable of balancing, walking up-hill, and carrying significant amounts of equipment. The Company had trouble selling products though and was acquired by Google in 2013 for an undisclosed sum. This came at a time when Google was pushing heavily into robotics with Google Glass and what would become Waymo - they literally titled this Project Replicant (the name used for Android in the Blade Runner film). After some more years of underperformance, Google sold Boston Dynamics to Softbank in 2017. After years of development, the company finally released a product to consumers for a whopping $75,000. The dog is still pretty creepy and comes without a real face, unlike the Aibo. In 2020, it was announced that Hyundai had acquired an 80% stake in the business at a $1.1B valuation. We are still years away from having electric animals that mimic real-life animals and that may be a good thing.

Dig Deeper

• Blade Runner: How Its Problems Made It a Better Movie

• Does Buy Now, Pay Later Threaten Credit Card Issuers?

• Predicting a Future Where the Future Is Routinely Predicted

• An Overview of the latest Affirm Consumer Loan Securitization

• Snakes in a Facebook Data Center

November 2020 - Tape Sucks: Inside Data Domain, A Silicon Valley Growth Story by Frank Slootman

This month we read a short, under-discussed book by current Snowflake and former ServiceNow and Data Domain CEO, Frank Slootman. The book is just like Frank - direct and unafraid. Frank has had success several times in the startup world and the story of Data Domain provides a great case study of entrepreneurship. Data Domain was a data deduplication company, offering a 20:1 reduction of data backed up to tape casettes by using new disk drive technology.

Tech Themes

Data Domain’s 2008 10-K prior to being acquired

1. First time CEO at a Company with No Revenue. Frank is an immigrant to the US, coming from the Netherlands shortly after graduating from the University of Rotterdam. After being rejected by IBM 10+ times, he joined Burroughs corporation, an early mainframe provider which subsequently merged with its direct competitor Sperry for $4.8B in 1986. Frank then spent some time at Compuware and moved back to the Netherlands to help it integrate the acquisition of Uniface, an early customizable report building software. After spending time there, he went to Borland software in 1997, working his way up the product management ranks but all the while being angered by time spent lobbying internally, rather than building. Frank joined Data Domain in the Spring of 2003 - when it had no customers, no revenue, and was burning cash. The initial team and VC’s were impressive - Kai Li, a computer science professor on sabbatical from Princeton, Ben Zhu, an EIR at USVP, and Brian Biles, a product leader with experience at VA Linux and Sun Microsystems. The company was financed by top-tier VC’s New Enterprise Associates and Greylock Partners, with Aneel Bhusri (Founder and current CEO of Workday) serving as initial CEO and then board chairman. This was a stacked team and Slootman knew it: “I’d bring down the average IQ of the company by joining, which felt right to me.” The Company had been around for 18 months and already burned through a significant amount of money when Frank joined. He knew he needed to raise money relatively soon after joining and put the Company’s chances bluntly: “Would this idea really come together and captivate customers? Nobody knew. We, the people on the ground floor, were perhaps, the most surprised by the extraordinary success we enjoyed.”

2. Playing to his Strengths: Capital Efficiency. One of the big takeaways from the Innovators by Walter Issacson was that individuals or teams at the nexus of disciplines - primarily where the sciences meet the humanities, often achieved breakthrough success. The classic case study for this is Apple - Steve Jobs had an intense love of art, music, and design and Steve Wozniak was an amazing technologist. Frank has cultivated a cross-discipline strength at the intersection of Sales and Technology. This might be driven by Slootman’s background is in economics. The book has several references to economic terms, which clearly have had an impact on Frank’s thinking. Data Domain espoused capital efficiency: “We traveled alone, made few many-legged sales calls, and booked cheap flights and hotels: everybody tried to save a dime for the company.” The results showed - the business went from $800K of revenue in 2004 to $275 million by 2008, generating $75M in cash flow from operations. Frank’s capital efficiency was interesting and broke from traditional thinking - most people think to raise a round and build something. Frank took a different approach: “When you are not yet generating revenue, conservation of resource is the dominant theme.” Over time, “when your sales activity is solidly paying for itself,” the spending should shift from conservative to aggressive (like Snowflake is doing this now). The concept of sales efficiency is somewhat talked about, but given the recent fundraising environment, is often dismissed. Sales efficiency can be thought of as: “How much revenue do I generate for every $1 spent in sales and marketing?” Looking at the P&L below, we see Data Domain was highly efficient in its sales and marketing activity - the company increased revenue $150M in 2008, despite spending $115M in sales and marketing (a ratio of 1.3x). Contrast this with a company like Slack which spent $403M to acquire $230M of new revenue (a ratio of 0.6x). It gets harder to acquire customers at scale, so this efficiency is supposed to come down over time but best in class is hopefully above 1x. Frank clearly understands when to step on the gas with investing, as both ServiceNow and Snowflake have remained fairly efficient (from a sales perspective at least) while growing to a significant scale.

3. Technology for Technology’s Sake. “Many technologies are conceived without a clear, precise notion of the intended use.” Slootman hits on a key point and one that the tech industry has struggled to grasp throughout its history. So many products and companies are established around budding technology with no use case. We’ve discussed Magic Leap’s fundraising money-pit (still might find its way), and Iridium Communications, the massive satellite telephone that required people to carry a suitcase around to use it. Gartner, the leading IT research publication (which is heavily influenced by marketing spend from companies) established the Technology Hype Cycle, complete with the “Peak of inflated expectations,” and the “Trough of Disillusionment” for categorizing technologies that fail to live up to their promise. There have been several waves that have come and gone: AR/VR, Blockchain, and most recently, Serverless. Its not so much that these technologies were wrong or not useful, its rather that they were initially described as a panacea to several or all known technology hindrances and few technologies ever live up to that hype. Its common that new innovations spur tons of development but also lots of failure, and this is Slootman’s caution to entrepreneurs. Data Domain was attacking a problem that existed already (tape storage) and the company provided what Clayton Christensen would call a sustaining innovation (something that Slootman points out). Whenever things go into “winter state”, like the internet after the dot-com bubble, or the recent Crpyto Winter which is unthawing as I write; it is time to pay attention and understand the relevance of the innovation.

Business Themes

1. Importance of Owning Sales. Slootman spends a considerable amount of this small book discussing sales tactics and decision making, particularly with respect to direct sales and OEM relationships. OEM deals are partnerships with other companies whereby one company will re-sell the software, hardware, or service of another company. Crowdstrike is a popular product with many OEM relationships. The Company drives a significant amount of its sales through its partner model, who re-sell on behalf of Crowdstrike. OEM partnerships with big companies present many challenges: “First of all, you get divorced from your customer because the OEM is now between you and them, making customer intimacy challenging. Plus, as the OEM becomes a large part of your business, for all intents and purposes they basically own you without paying for the privilege…Never forget that nobody wants to sell your product more than you do.” The challenges don’t end there. Slootman points out that EMC discarded their previous OEM vendor in the data deduplication space, right after acquiring Data Domain. On top of that, the typical reseller relationship happens at a 10-20% margin, degrading gross margins and hurting ability to invest. It is somewhat similar to the challenges open-source companies like MongoDB and Elastic have run into with their core software being…free. Amazon can just OEM their offering and cut them out as a partner, something they do frequently. Partner models can be sustainable, but the give and take from the big company is a tough balance to strike. Investors like organic adoption, especially recently with the rise of freemium SaaS models percolating in startups. Slootman’s point is that at some point in enterprise focused businesses, the Company must own direct sales (and relationships) with its customers to drive real efficiency. After the low cost to acquire freemium adopters buy the product, the executive team must pivot to traditional top down enterprise sales to drive a successful and enduring relationship with the customer.

2. In the Thick of Things. Slootman has some very concise advice for CEOs: be a fighter, show some humanity, and check your ego at the door. “Running a startup reduces you to your most elementary instincts, and survival is on your mind most of the time…The CEO is the ‘Chief Combatant,’ warrior number one.” Slootman views the role of CEO as a fighter, ready to be the first to jump into the action, at all times. And this can be incredibly productive for business as well. Tony Xu, the founder and CEO of Doordash, takes time out every month to do delivery for his own company, in order to remain close to the customer and the problems of the company. Jeff Bezos famously still responds and views emails from customers at jeff@amazon.com. Being CEO also requires a willingness to put yourself out there and show your true personality. As Slootman puts it: “People can instantly finger a phony. Let them know who you really are, warts and all.” As CEO you are tasked with managing so many people and being involved in all aspects of the business, it is easy to become rigid and unemotional in everyday interactions. Harvard Business School professor and former leader at Uber distills it down to a simple phrase: “Begin With Trust.” All CEO’s have some amount of ego, driving them to want to be at the top of their organization. Slootman encourages CEO’s to be introspective, and try to recognize blind spots, so ego doesn’t drive day-to-day interactions with employees. One way to do that is simple: use the pronoun “we” when discussing the company you are leading. Though Slootman doesn’t explicitly call it out - all of these suggestions (fighting, showing empathy, getting rid of ego) are meant to build trust with employees.

3. R-E-C-I-P-E for a Great Culture. The last fifth of the book is all focused on building culture at companies. It is the only topic Slootman stays on for more than a few chapters, so you know its important! RECIPE was an acronym created by the employees at Data Domain to describe the company’s values: Respect, Excellence, Customer, Integrity, Performance, Execution. Its interesting how simple and focused these values are. Technology has pushed its cultural delusion’s of grandeur to an extreme in recent years. The WeWork S-1 hilariously started with: “We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” But none of Data Domain’s values were about changing the world to be a better place - they were about doing excellent, honest work for customers. Slootman is lasered focused on culture, and specifically views culture as an asset - calling it: “The only enduring, sustainable form of differentiation. These days, we don’t have a monopoly for very long on talent, technology, capital, or any other asset; the one thing that is unique to us is how we choose to come together as a group of people, day in and day out. How many organizations are there that make more than a halfhearted attempt at this?” Technology companies have taken different routes in establishing culture: Google and Facebook have tried to create culture by showering employees with unbelievable benefits, Netflix has focused on pure execution and transparency, and Microsoft has re-vamped its culture by adopting a Growth Mindset (has it really though?). Google originally promoted “Don’t be evil,” as part of its Code of Conduct but dropped the motto in 2018. Employees want to work for mission-driven organizations, but not all companies are really changing the world with their products, and Frank did not try to sugarcoat Data Domain’s data-duplication technology as a way to “elevate the world’s consciousness.” He created a culture driven by performance and execution - providing a useful product to businesses that needed it. The culture was so revered that post-acquisition, EMC instituted Data Domain’s performance management system. Data Domain employees were looked at strangely by longtime EMC executives, who had spent years in a big and stale company. Culture is a hard thing to replicate and a hard thing to change as we saw with the Innovator’s Dilemma. Might as well use it to help the company succeed!

Dig Deeper

• How Data Domain Evolved in the Cloud World

• Former Data Domain CEO Frank Slootman Gets His Old Band Back Together at ServiceNow

• The Contentious Take-over Battle for Data Domain: Netapp vs. EMC

• 2009 Interview with Frank Slootman After the Acquisition of Data Domain

October 2020 - Working in Public: The Making and Maintenance of Open Source Software by Nadia Eghbal

This month we covered Nadia Eghbal’s instant classic about open-source software. Open-source software has been around since the late seventies but only recently it has gained significant public and business attention.

Tech Themes

The four types of open source communities described in Working in Public

1. Misunderstood Communities. Open source is frequently viewed as an overwhelmingly positive force for good - taking software and making it free for everyone to use. Many think of open source as community-driven, where everyone participates and contributes to making the software better. The theory is that so many eyeballs and contributors to the software improves security, improves reliability, and increases distribution. In reality, open-source communities take the shape of the “90-9-1” rule and act more like social media than you could think. According to Wikipedia, the "90–9–1” rule states that for websites where users can both create and edit content, 1% of people create content, 9% edit or modify that content, and 90% view the content without contributing. To show how this applies to open source communities, Eghbal cites a study by North Carolina State Researchers: “One study found that in more than 85% of open source projects the research examined on Github, less than 5% of developers were responsible for 95% of code and social interactions.” These creators, contributors, and maintainers are developer influencers: “Each of these developers commands a large audience of people who follow them personally; they have the attention of thousands of developers.” Unlike Instagram and Twitch influencers, who often actively try to build their audiences, open-source developer influencers sometimes find the attention off-putting - they simply published something to help others and suddenly found themselves with actual influence. The challenging truth of open source is that core contributors and maintainers give significant amounts of their time and attention to their communities - often spending hours at a time responding to pull requests (requests for changes / new features) on Github. Evan Czaplicki’s insightful talk entitled “The Hard Parts of Open Source,” speaks to this challenging dynamic. Evan created the open-source project, Elm, a functional programming language that compiles Javascript, because he wanted to make functional programming more accessible to developers. As one of its core maintainers, he has repeatedly been hit with requests of “Why don’t you just…” from non-contributing developers angrily asking why a feature wasn’t included in the latest release. As fastlane creator, Felix Krause put it, “The bigger your project becomes, the harder it is to keep the innovation you had in the beginning of your project. Suddenly you have to consider hundreds of different use cases…Once you pass a few thousand active users, you’ll notice that helping your users takes more time than actually working on your project. People submit all kinds of issues, most of them aren’t actually issues, but feature requests or questions.” When you use open-source software, remember who is contributing and maintaining it - and the days and years poured into the project for the sole goal of increasing its utility for the masses.

2. Git it? Git was created by Linus Torvalds in 2005. We talked about Torvalds last month, who also created the most famous open-source operating system, Linux. Git was born in response to a skirmish with Larry McAvoy, the head of proprietary tool BitKeeper, over the potential misuse of his product. Torvalds went on vacation for a week and hammered out the most dominant version control system today - git. Version control systems allow developers to work simultaneously on projects, committing any changes to a centralized branch of code. It also allows for any changes to be rolled back to earlier versions which can be enormously helpful if a bug is found in the main branch. Git ushered in a new wave of version control, but the open-source version was somewhat difficult to use for the untrained developer. Enter Github and GitLab - two companies built around the idea of making the git version control system easier for developers to use. Github came first, in 2007, offering a platform to host and share projects. The Github platform was free, but not open source - developers couldn’t build onto their hosting platform - only use it. GitLab started in 2014 to offer an alternative, fully-open sourced platform that allowed individuals to self-host a Github-like tracking program, providing improved security and control. Because of Github’s first mover advantage, however, it has become the dominant platform upon which developers build: “Github is still by far the dominant market player: while it’s hard to find public numbers on GitLab’s adoption, its website claims more than 100,000 organizations use its product, whereas GitHub claims more than 2.9 million organizations.” Developers find GitHub incredibly easy to use, creating an enormous wave of open source projects and code-sharing. The company added 10 million new users in 2019 alone - bringing the total to over 40 million worldwide. This growth prompted Microsoft to buy GitHub in 2018 for $7.5B. We are in the early stages of this development explosion, and it will be interesting to see how increased code accessibility changes the world over the next ten years.

3. Developing and Maintaining an Ecosystem Forever. Open source communities are unique and complex - with different user and contributor dynamics. Eghbal tries to segment the different types of open source communities into four buckets - federations, clubs, stadiums, and toys - characterized below in the two by two matrix - based on contributor growth and user growth. Federations are the pinnacle of open source software development - many contributors and many users, creating a vibrant ecosystem of innovative development. Clubs represent more niche and focused communities, including vertical-specific tools like astronomy package, Astropy. Stadiums are highly centralized but large communities - this typically means only a few contributors but a significant user base. It is up to these core contributors to lead the ecosystem as opposed to decentralized federations that have so many contributors they can go in all directions. Lastly, there are toys, which have low user growth and low contributor growth but may actually be very useful projects. Interestingly, projects can shift in and out of these community types as they become more or less relevant. For example, developers from Yahoo open-sourced their Hadoop project based on Google’s File System and Map Reduce papers. The initial project slowly became huge, moving from a stadium to a federation, and formed subprojects around it, like Apache Spark. What’s interesting, is that projects mature and change, and code can remain in production for a number of years after the project’s day in the spotlight is gone. According to Eghbal, “Some of the oldest code ever written is still running in production today. Fortran, which was first developed in 1957 at IBM, is still widely used in aerospace, weather forecasting, and other computational industries.” These ecosystems can exist forever, but the costs of these ecosystems (creation, distribution, and maintenance) are often hidden, especially the maintenance aspect. The cost of creation and distribution has dropped significantly in the past ten years - with many of the world’s developers all working in the same ecosystem on GitHub - but it has also increased the total cost of maintenance, and that maintenance cost can be significant. Bootstrap co-creator Jacob Thornton likens maintenance costs to caring for an old dog: “I’ve created endlessly more and more projects that have now turned [from puppies] into dogs. Almost every project I release will get 2,000, 3,000 watchers, which is enough to have this guilt, which is essentially like ‘I need to maintain this, I need to take care of this dog.” Communities change from toys to clubs to stadiums to federations but they may also change back as new tools are developed. Old projects still need to be maintained and that code and maintenance comes down to committed developers.

Business Themes

1. Revenue Model Matching. One of the earliest code-hosting platforms was SourceForge, a company founded in 1999. The Company pioneered the idea of code-hosting - letting developers publish their code for easy download. It became famous for letting open-source developers use the platform free of charge. SourceForge was created by VA Software, an internet bubble darling that saw its stock price decimated when the bubble finally burst. The challenge with scaling SourceForge was a revenue model mismatch - VA Software made money with paid advertising, which allowed it to offer its tools to developers for free, but meant its revenue model was highly variable. When the company went public, it was still a small and unproven business, posting $17M in revenue and $31M in costs. The revenue model mismatch is starting to rear its head again, with traditional software as a service (SaaS) recurring subscription models catching some heat. Many cloud service and API companies are pricing by usage rather than a fixed, high margin subscription fee. This is the classic electric utility model - you only pay for what you use. Snowflake CEO Frank Slootman (who formerly ran SaaS pioneer ServiceNow) commented: “I also did not like SaaS that much as a business model, felt it not equitable for customers.” Snowflake instead charges based on credits which pay for usage. The issue with usage-based billing has traditionally been price transparency, which can be obfuscated with customer credit systems and incalculable pricing, like Amazon Web Services. This revenue model mismatch was just one problem for SourceForge. As git became the dominant version control system, SourceForge was reluctant to support it - opting for its traditional tools instead. Pricing norms change, and new technology comes out every day, it’s imperative that businesses have a strong grasp of the value they provide to their customers and align their revenue model with customers, so a fair trade-off is created.

2. Open Core Model. There has been enormous growth in open source businesses in the past few years, which typically operate on an open core model. The open core model means the Company offers a free, normally feature limited, version of its software and also a proprietary, enterprise version with additional features. Developers might adopt the free version but hit usage limits or feature constraints, causing them to purchase the paid version. The open-source “core” is often just that - freely available for anyone to download and modify; the core's actual source code is normally published on GitHub, and developers can fork the project or do whatever they wish with that open core. The commercial product is normally closed source and not available for modification, providing the business a product. Joseph Jacks, who runs Open Source Software (OSS) Capital, an investment firm focused on open source, displays four types of open core business model (pictured above). The business models differ based on how much of the software is open source. Github, interestingly, employs the “thick” model of being mostly proprietary, with only 10% of its software truly open-sourced. Its funny that the site that hosts and facilitates the most open source development is proprietary. Jacks nails the most important question in the open core model: “How much stays open vs. How much stays closed?” The consequences can be dire to a business - open source too much and all of a sudden other companies can quickly recreate your tool. Many DevOps tools have experienced the perils of open source, with some companies losing control of the project it was supposed to facilitate. On the flip side, keeping more of the software closed source goes against the open-source ethos, which can be viewed as organizations selling out. The continuous delivery pipeline project Jenkins has struggled to satiate its growing user base, leading to the CEO of the Jenkins company, CloudBees, posting the blog post entitled, “Shifting Gears”: “But at the same time, the incremental, autonomous nature of our community made us demonstrably unable to solve certain kinds of problems. And after 10+ years, these unsolved problems are getting more pronounced, and they are taking a toll — segments of users correctly feel that the community doesn’t get them, because we have shown an inability to address some of their greatest difficulties in using Jenkins. And I know some of those problems, such as service instability, matter to all of us.” Striking this balance is incredibly tough, especially in a world of competing projects and finite development time and money in a commercial setting. Furthermore, large companies like AWS are taking open core tools like Elastic and MongoDB and recreating them in proprietary fashions (Elasticsearch Service and DocumentDB) prompting company CEO’s to appropriately lash out. Commercializing open source software is a never-ending battle against proprietary players and yourself.

3. Compensation for Open Source. Eghabl characterizes two types of funders of open-source - institutions (companies, governments, universities) and individuals (usually developers who are direct users). Companies like to fund improved code quality, influence, and access to core projects. The largest groups of contributors to open source projects are mainly corporations like Microsoft, Google, Red Hat, IBM, and Intel. These corporations are big enough and profitable enough to hire individuals and allow them to strike a comfortable balance between time spent on commercial software and time spent on open source. This also functions as a marketing expense for the big corporations; big companies like having influencer developers on payroll to get the company’s name out into the ecosystem. Evan You, who authored Vue.js, a javascript framework described company backed open-source projects: “The thing about company-backed open-source projects is that in a lot of cases… they want to make it sort of an open standard for a certain industry, or sometimes they simply open-source it to serve as some sort of publicity improvement to help with recruiting… If this project no longer serves that purpose, then most companies will probably just cut it, or (in other terms) just give it to the community and let the community drive it.” In contrast to company-funded projects, developer-funded projects are often donation based. With the rise of online tools for encouraging payments like Stripe and Patreon, more and more funding is being directed to individual open source developers. Unfortunately though, it is still hard for many open source developers to pursue open source on individual contributions, especially if they work on multiple projects at the same time. Open source developer Sindre Sorhus explains: “It’s a lot harder to attract company sponsors when you maintain a lot of projects of varying sizes instead of just one large popular project like Babel, even if many of those projects are the backbone of the Node.js ecosystem.” Whether working in a company or as an individual developer, building and maintaining open source software takes significant time and effort and rarely leads to significant monetary compensation.

Dig Deeper

• List of Commercial Open Source Software Businesses by OSS Capital

• How to Build an Open Source Business by Peter Levine (General Partner at Andreessen Horowitz)

• The Mind Behind Linux (a talk by Linus Torvalds)

• What is open source - a blog post by Red Hat

• Why Open Source is Hard by PHP Developer Jose Diaz Gonzalez

• The Complicated Economy of Open Source

July 2020 - Innovator's Dilemma by Clayton Christensen

This month we review the technology classic, the Innovator’s Dilemma, by Clayton Christensen. The book attempts to answer the age-old question: why do dominant companies eventually fail?

Tech Themes

1. The Actual Definition of Disruptive Technology. Disruption is a term that is frequently thrown around in Silicon Valley circles. Every startup thinks its technology is disruptive, meaning it changes how the customer currently performs a task or service. The actual definition, discussed in detail throughout the book, is relatively specific. Christensen re-emphasizes this distinction in a 2015 Harvard Business Review article: "Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents' mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants' offerings in volume, disruption has occurred." The book posits that there are generally two types of innovation: sustaining and disruptive. While disruptive innovation focuses on low-end or new, small market entry, sustaining innovation merely continues markets along their already determined axes. For example, in the book, Christensen discusses the disk drive industry, mapping out the jumps which pack more memory and power into each subsequent product release. There is a slew of sustaining jumps for each disruptive jump that improves product performance for existing customers but doesn't necessarily get non-customers to become customers. It is only when new use cases emerge, like rugged disk usage and PCs arrive, that disruption occurs. Understanding the specific definition can help companies and individuals better navigate muddled tech messaging; Uber, for example, is shown to be a sustaining technology because its market already existed, and the company didn't offer lower prices or a new business model. Understanding the intricacies of the definition can help incumbents spot disruptive competitors.

2. Value Networks. Value networks are an underappreciated and somewhat confusing topic covered in The Innovator's Dilemma's early chapters. A value network is defined as "The context within which a firm identifies and responds to customers' needs, solves problems, procures input, reacts to competitors, and strives for profit." A value network seems all-encompassing on the surface. In reality, a value network serves to simplify the lens through which an organization must make complex decisions every day. Shown as a nested product architecture, a value network attempts to show where a company interacts with other products. By distilling the product down to its most atomic components (literally computer hardware), we can see all of the considerations that impact a business. Once we have this holistic view, we can consider the decisions and tradeoffs that face an organization every day. The takeaway here is that organizations care about different levels of performance for different products. For example, when looking at cloud computing services at AWS, Azure, or GCP, we see Amazon EC2 instances, Azure VMs, and Google Cloud VMs with different operating systems, different purposes (general, compute, memory), and different sizes. General-purpose might be fine for basic enterprise applications, while gaming applications might need compute-optimized, and real-time big data analytics may need a memory-optimized VM. While it gets somewhat forgotten throughout the book, this point means that organizations focused on producing only compute-intensive machines may not be the best for memory-intensive, because the customers of the organization may not have a use for them. In the book's example, some customers (of bigger memory providers) looked at smaller memory applications and said there was no need. In reality, there was massive demand in the rugged, portable market for smaller memory disks. When approaching disruptive innovation, it's essential to recognize your organization's current value network so that you don't target new technologies at those who don't need it.

3. Product Commoditization. Christensen spends a lot of time describing the dynamics of the disk drive industry, where companies continually supplied increasingly smaller drives with better performance. Christensen's description of commoditization is very interesting: "A product becomes a commodity within a specific market segment when the repeated changes in the basis of competition, completely play themselves out, that is, when market needs on each attribute or dimension of performance have been fully satisfied by more than one available product." At this point, products begin competing primarily on price. In the disk drive industry, companies first competed on capacity, then on size, then on reliability, and finally on price. This price war is reminiscent of the current state of the Continuous Integration / Continuous Deployment (CI/CD) market, a subsegment of DevOps software. Companies in the space, including Github, CircleCI, Gitlab, and others are now competing primarily on price to win new business. Each of the cloud providers has similar technologies native to their public cloud offerings (AWS CodePipeline and CloudFormation, GitHub Actions, Google Cloud Build). They are giving it away for free because of their scale. The building block of CI/CD software is git, an open-source version control system founded by Linux founder Linus Torvalds. With all the providers leveraging a massive open-source project, there is little room for true differentiation. Christensen even says: "It may, in fact, be the case that the product offerings of competitors in a market continue to be differentiated from each other. But differentiation loses its meaning when the features and functionality have exceeded what the market demands." Only time will tell whether these companies can pivot into burgeoning highly differentiated technologies.

Business Themes

1. Resources-Processes-Value (RPV) Framework. The RPV framework is a powerful lens for understanding the challenges that large businesses face. Companies have resources (people, assets, technology, product designs, brands, information, cash, relationships with customers, etc.) that can be transformed into greater value products and services. The way organizations go about converting these resources is the organization's processes. These processes can be formal (documented sales strategies, for example) or informal (culture and habitual routines). Processes are the big reasons organizations struggle to deal with emerging technologies. Because culture and habit are ingrained in the organization, the same process used to launch a mature, slow-growing market may be applied to a fast-growing, dynamic sector. Christensen puts it best: "This means the very mechanisms through which organizations create value are intrinsically inimical to change." Lastly, companies have values, or "the standards by which employees make prioritization decisions." When there is a mismatch between the resources, processes, and values of an organization and the product or market that an organization is chasing, its rare the business can be successful in competing in the disruptive market. To see this misalignment in action, Christensen describes a meeting with a CEO who had identified the disruptive change happening in the disk-drive market and had gotten a product to market to meet the growing market. In response to a publication showing the fast growth of the market, the CEO lamented to Christensen: "I know that's what they think, but they're wrong. There isn't a market. We've had that drive in our catalog for 18 months. Everyone knows we've got it, but nobody wants it." The issue was not the product or market demand, but the organization's values. As Christensen continues, "But among the employees, there was nothing about an $80 million, low-end market that solved the growth and profit problems of a multi-billion dollar company – especially when capable competitors were doing all they could to steal away the customers providing those billions. And way at the other end of the company there was nothing about supplying prototype companies of 1.8-inch drives to an automaker that solved the problem of meeting the 1994 quotas of salespeople whose contacts and expertise were based so solidly in the computer industry." The CEO cared about the product, but his team did not. The RPV framework helps evaluate large companies and the challenges they face in launching new products.

2. How to manage through technological change. Christensen points out three primary ways of managing through disruptive technology change: 1. "Acquire a different organization whose processes and values are a close match with the new task." 2. "Try to change the processes and values of the current organization." 3. "Separate out an independent organization and develop within it the new processes and values that are required to solve the new problem." Acquisitions are a way to get out ahead of disruptive change. There are so many examples but two recent ones come to mind: Microsoft's acquisition of Github and Facebook's acquisition of Instagram. Microsoft paid a whopping $7.5B for Github in 2018 when the Github was rumored to be at roughly $200M in revenue (37.5x Revenue multiple!). Github was undoubtedly a mature business with a great product, but it didn't have a ton of enterprise adoption. Diane Greene at Google Cloud, tried to get Sundar Pichai to pay more, but he said no. Github has changed Azure's position within the market and continued its anti-Amazon strategy of pushing open-source technology. In contrast to the Github acquisition, Instagram was only 13 employees when it was acquired for $1B. Zuckerberg saw the threat the social network represented to Facebook, and today the acquisition is regularly touted as one of the best ever. Instagram was developing a social network solely based on photographs, right at the time every person suddenly had an excellent smartphone camera in their pocket. The acquisition occurred right when the market was ballooning, and Facebook capitalized on that growth. The second way of managing technological change is through changing cultural norms. This is rarely successful, because you are fighting against all of the processes and values deeply embedded in the organization. Indra Nooyi cited a desire to move faster on culture as one of her biggest regrets as a young executive: "I’d say I was a little too respectful of the heritage and culture [of PepsiCo]. You’ve got to make a break with the past. I was more patient than I should’ve been. When you know you have to make a change, at some point you have to say enough is enough. The people who have been in the company for 20-30 years pull you down. If I had to do it all over again, I might have hastened the pace of change even more." Lastly, Christensen prescribes creating an independent organization matched to the resources, processes, and values that the new market requires. Three great spin-out, spin-in examples with different flavors of this come to mind. First, Cisco developed a spin-ins practice whereby they would take members of their organization and start a new company that they would fund to develop a new process. The spin-ins worked for a time but caused major cultural issues. Second, as we've discussed, one of the key reasons AWS was born was that Chris Pinkham was in South Africa, thousands of miles away from Amazon Corporate in Seattle; this distance and that team's focus allowed it to come up with a major advance in computing. Lastly, Mastercard started Mastercard Labs a few years ago. CEO Ajay Banga told his team: "I need two commercial products in three years." He doesn't tell his CFO their budget, and he is the only person from his executive team that interacts with the business. This separation of resources, processes, and values allows those smaller organizations to be more nimble in finding emerging technology products and markets.

3. Discovering Emerging Markets.

   The resources-processes-values framework can also show us why established firms fail to address emerging markets. Established companies rely on formal budgeting and forecasting processes whereby resources are allocated based on market estimates and revenue forecasts. Christensen highlights several important factors for tackling emerging markets, including focusing on ideas, failure, and learning. Underpinning all of these ideas is the impossibility of predicting the scale and growth rate of disruptive technologies: "Experts' forecasts will always be wrong. It is simply impossible to predict with any useful degree of precision how disruptive products will be used or how large their markets will be." Because of this challenge, relying too heavily on these estimates to underpin financial projections can cause businesses to view initial market development as a failure or not worthy of the companies time. When HP launched a new 1.3-inch disk drive, which could be embedded in PDAs, the company mandated that its revenues had to scale up to $150M within three years, in line with market estimates. That market never materialized, and the initiative was abandoned as a failed investment. Christensen argues that because disruptive technologies are threats, planning has to come after action, and thus strategic and financial planning must be discovery-based rather than execution-based. Companies should focus on learning their customer's needs and the right business model to attack the problem, rather than plan to execute their initial vision. As he puts it: "Research has shown, in fact, that the vast majority of successful new business ventures, abandoned their original business strategies when they began implementing their initial plans and learned what would and would not work." One big fan of Christensen's work is Jeff Bezos, and its easy to see why with Amazon's focus on releasing new products in this discovery manner. The pace of product releases is simply staggering (~almost one per day). Bezos even talked about this exact issue in his 2016 shareholder letter: "The senior team at Amazon is determined to keep our decision-making velocity high. Speed matters in business – plus a high-velocity decision making environment is more fun too. We don't know all the answers, but here are some thoughts. First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you're wrong? I wrote about this in more detail in last year's letter. Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you're probably being slow." Amazon is one of the first large organizations to truly embrace this decision-making style, and clearly, the results speak for themselves.

Dig Deeper

• What Jeff Bezos Tells His Executives To Read

• Github Cuts Subscription Price by More Than Half

• Ajay Banga Opening Address at MasterCard Innovation Forum 2014

• Clayton Christensen Describing Disruptive Innovation

• Why Cisco’s Spin-Ins Never Caught On

May 2020 - Hitchhiker's Guide to the Galaxy by Douglas Adams

We want to recognize the craziness of the world today and the saddening police brutality and systemic racism that continues to occur in the US. This month we opted for a fiction book that may provide a minor break from that current, depressing reality. We want to acknowledge that our reality is messed up, and as a book club we are committed to reading more books about diversity in tech and more books written by a diverse set of authors.

Tech Themes

1. The Computer knows the answer. There is an overwhelming feeling in society today, that the computer should be able to tell us the answer. Predictive models are everywhere, from personalized AI workflows to sports gambling. Society has become accustomed to the idea that computers will solve problems for us. Interestingly, the novel portrays technology in the opposite light. Marvin, the robot on Zaphod Beeblebrox’s ship is so knowledgeable that even the most complex task seems meaninglessly easy. As a result, Marvin is constantly depressed. Deep Thought, the most powerful computer in history, takes seven million years to come up with an answer to the question of what life is all about. The simplistic forty-two answer, prompts the crowd to ask what the question was to which the answer is forty-two. The computer suggests that earth will provide that question. These examples somewhat reverse the expectations of technology to the reader. We normally think of technology as providing the answer, simplifying our lives and dehumanizing us. At the end of the story it is not Marvin’s heroism that saves the crew from being killed by the Blagulon Kappa cops who are after the Heart of Gold, it is his depression. When Marvin seizes control of the cops computer and explains his life-view, they commit suicide. In these instances, the role of technology is reversed - it is emotion and human nature that can help save the world and provide the answers to the universe.

2. Not so obvious, Space Travel and Towels. “A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have.” Something so simple as a towel - which seems relatively unimportant in everyday life - is an absolute necessity for space travel and hitchhiking through the galaxy. Frequently throughout technological history, the simple and unimportant things are overlooked in favor of tackling more complex problems and solutions. The largest data breach in history occurred when Equifax overlooked an expired certificate. During early development of the ENIAC, one of the first computing machines, software was looked at as unimportant and was relegated to early female programmers. Little did these sexist hardware programmers realize that software would become the most important aspect of computing. When the first iPhone released, Microsoft CEO Steve Ballmer laughed at the the device, saying it was too expensive and unable to cater to business customers because it didn’t have a keyboard. The incredibly sad, failed launch of space shuttle Challenger was due to cold temperatures causing rubber joint rings to become too stiff for appropriate sealing. Sometimes the value of a technology or a towel is not inherently obvious.

3. The Guide, the Whole Earth Catalog and the Internet. “The reason why it was published in the form of a micro sub meson electronic component is that if it were printed in normal book form, an interstellar hitchhiker would require several inconveniently large buildings to carry it around in.” The Hitchhiker’s Guide to The Galaxy is a massive electronic guide to help hitchhikers move throughout space. This interestingly mirrors the current state of the internet, which didn’t exist when Douglas Adams wrote Hitchhiker’s Guide to the Galaxy in the early 70s. Prior to the internet, this type of alternative information could be found in the Whole Earth Catalog, a famous magazine that Steve Jobs once called “Google in paperback form, thirty-five years before Google came along.” The Whole Earth Catalog was created by Stewart Brand, a famous writer and technologist, who actually participated with Douglas Englebart in the Mother of All Demos, which featured the introduction of the mouse and video conferencing. Brand wanted a way to publish material that wouldn’t be found in traditional textbooks, including product reviews of the latest technology. When the internet was starting to launch, Brand created The WELL (Whole Earth ‘Lectronic Link) to continue to provide interesting alternative articles and essays. The WELL is credited with being one of the first internet forums, which was originally accessed via dial-up bulletin board system. The internet today very much mirrors the Hitchhiker’s guide to the galaxy: its content is enormous, it isn’t necessarily factual (the Guide is not completely factual either, but based on experience), and its content spans all possible information needed to survive. On top of that, the packaging is described as suspiciously similar to modern smartphones: “He also had a device which looked rather like a largish electronic calculator. This had about a hundred tiny flat press buttons and a screen about four inches square on which any one of a million ‘pages’ could be summoned at a moment's notice.” The internet and mobile computing have come a long way in 50 years; it will be great to watch what happens in the next 50!

Business Themes

1. The Business of Space: SpaceX / Virgin Galactic. Elon Musk and Chamath Palihapitiya are outspoken, visionary billionaires. Elon has an incredible track record of under-delivering but still exceeding most people’s wildest expectations. Chamath was an early employee at Facebook and is now a part owner of the Golden State Warriors. He is CEO of a VC-firm turned “technological holding company” and the creator of three public SPACs, one of which now represents Virgin Galactic. A SPAC or Specialty Purpose Acquisition Company is a blank-check company with no commercial operations. A SPAC is normally led by experts in a specific space like software or real estate and these executives raise money to acquire a company. The money raised in an IPO sits in an interest bearing account until the blank-check company has found a company to acquire. If no deal is completed after two years, the SPAC will give money back to their investors. Chamath purchased 49% of Richard Branson's Virgin Galactic space company in 2019. Space is impossibly big and its natural to think that someone who can develop the technology to unlock that vastness to humans would also unlock a fortune. As the Guide puts it: “‘Space,’ it says, ‘is big. Really big. You just won’t believe how vastly, hugely, mindbogglingly big it is. I mean, you may think it’s a long way down the road to the chemist’s, but that’s just peanuts to space.’” But the business of space is in its earliest days. SpaceX relies almost completely on government contracted work which means the company needs an incredible amount of funding to survive because of the capital investment and the uncertain, non-recurring nature of these space contracts. Interestingly, the development of early commercial air travel, in the 1920’s, also had a similar funding issue, and it was up to the Guggenheim family, rich from mining profits, to set up a fund to exclusively contribute to the development of Western Air Express, the world’s first commercial airliner. Virgin Galactic is taking a piece out of Tesla’s playbook by selling future space rides ahead of any commercial launch. Public markets investors including reddit’s wallstreetbets community is piling into Virgin Galactic at the literal moonshot risk of it becoming the space company (Income statement above). Space has always been a billionaire passion, the question remains - can it be a business?

2. Moore’s Law and Murphy’s Law. Murphy’s law states: “Anything that can go wrong, will go wrong.” Hitchhiker’s Guide to the Galaxy explores this notion repeatedly as Arthur continually finds himself in unbelievably bad circumstances; his house is demolished, his planet is destroyed, he is captured by Vogons, and sure-death missles approach the ship as the crew descends on Magarathea. Arthur continues to survive these dangers with the help of the improbability drive, which the book states is a “a wonderful new method of crossing interstellar distances in a few seconds; without all that tedious mucking about in hyperspace. As the Improbability Drive reaches infinite improbability, it passes through every conceivable point in every conceivable universe almost simultaneously. In other words, you're never sure where you'll end up or even what species you'll be when you get there. It's therefore important to dress accordingly.” In comparison to Murphy’s law, Moore’s Law is the idea that computing power doubles every 18 months. A 2006 Economist article explained Moore’s Law as the opposite of Murphy’s Law: “But his law seems safe for at least another decade—or two to three chip generations—which is as far as he has ever dared to look into the future. As things are made at scales approaching individual atoms, he says, there will surely be limitations. Then again, the law has often met obstacles that appeared insurmountable, before soon surmounting them. In that sense, Mr Moore says, he now sees his law as more beautiful than he had realised. “Moore's Law is a violation of Murphy's Law. Everything gets better and better.” While Moore’s Law has surely reached its current limitations, the question remains where do chips go from here? Some have posited that chips will push towards function specific hardware or purpose built for specific computing tasks like NVIDIA’s graphics cards. The space is large and complex - with companies like Apple licensing ARM technology to build their famous A13 chip while other companies have focused on specific parts of the value chain like TSMC. A big question that still remains is how cloud companies will scale hardware to meet continuing demand from customers. Arthur Dent, like Elon Musk, continues to benefit from infinite improbability - maybe quantum computing is the only way to know if Elon will succeed and what happens next in chip design.

3. Mentorship. Slartibarfast is a wise, old, planet creator who is plopped into the story to provide Arthur with answers to so many incredible questions. Slartibartfast explains the creation of earth and the interaction with Deep Thought. The interactions between Arthur and Slartibartfast are somewhat akin to traditional business mentorship - when you have none of the answers or you have preconceived ideas of how everything came to be, a mentor can quickly dispel your ideas and provide deep answers. Mentorship has been popular in Silicon Valley, with Bill Campbell mentoring Steve Jobs and several others. Bill was also instrumental in several decisions Ben Horowitz contemplated as he took Opsware through its spinout and sale of its managed services division. Mentors help change perspective and provide guidance.

Dig Deeper

• Discussion of how the Whole Earth Catalog pushed 1960s CounterCulture

• List of the Latest OpenAI models for predictive image generation and interaction prediction

• Chamath says “Let Them Get Wiped Out!” when talking about hedge funds during the coronarvirus downturn

• The resurgence of a business model formerly considered fraud - SPACs

• Apple releases A13 bionic chip and it works incredibly fast

April 2020 - Good To Great by Jim Collins

Collins’ book attempts to answer the question - Why do good companies continue to be good companies? His analysis across several different industries provides meaningful insights into strong management and strategic practices.

Tech Themes

1. Packard’s Law. We’ve discussed Packard’s law before when analyzing the troubling acquisition history of AOL-Time Warner and Yahoo. As a reminder, Packard’s law states: “No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company. [And] If a company consistently grows revenue faster than its ability to get enough of the right people to implement that growth, it will not simply stagnate; it will fall.” Given Good To Great is a management focused book, I wanted to explore an example of this law manifesting itself in a recent management dilemma. Look no further than ride-sharing giant, Uber. Uber’s culture and management problems have been highly publicized. Susan Fowler’s famous blog post kicked off a series of blows that would ultimately lead to a board dispute, the departure of its CEO, and a full-on criminal investigation. Uber’s problems as a company, however, can be traced to its insistence to be the only ride-sharing service throughout the world. Uber launched several incredibly unprofitable ventures, not only a price-war with its local competitor Lyft, but also a concerted effort to get into China, India, and other locations that ultimately proved incredibly unprofitable. Uber tried to be all things transportation to every location in the world, an over-indulgence that led to the Company raising a casual $20B prior to going public. Dara Khosrowshahi, Uber’s replacement for Travis Kalanick, has concertedly sold off several business lines and shuttered other unprofitable ventures to regain financial control of this formerly money burning “logistics” pit. This unwinding has clearly benefited the business, but also limited growth, prompting the stock to drop significantly from IPO price. Dara is no stranger to facing travel challenges, he architected the spin-out of Expedia with Barry Diller, right before 9/11. Only time will tell if he can refocus the Company as it looks to run profitably. Uber pushed too far in unprofitable locations, and ran head on into Packard’s law, now having to pay the price for its brash push into unprofitable markets.

2. Technology Accelerators. In Collins’ Good to Great framework (pictured below), technology accelerators act as a catalyst to momentum built up from disciplined people and disciplined thought. By adapting a “Pause, think, crawl, walk, run” approach to technology, meaning a slow and thoughtful transition to new technologies, companies can establish best practices for the long-term, instead of short term gains from technology faux-feature marketing. Technology faux-feature marketing, which is decoupled from actual technology has become increasingly popular in the past few years, whereby companies adopt a marketing position that is actually complete separate from their technological sophistication. Look no further than the blockchain / crypto faux-feature marketing around 2018, when Long Island iced-tea changed its name to Long Island Blockchain, which is reminiscent of companies adding “.com” to their name in the early 2000’s. Collins makes several important distinctions about technology accelerators: technology should only be a focus if it fits into a company’s hedgehog concept, technology accelerators cannot make up for poor people choices, and technology is never a primary root cause of either greatness or decline. The first two axioms make sense, just think of how many failed, custom software projects have begun and never finished; there is literally an entire wikipedia page dedicated to exactly that. The government has also reportedly been a famous dabbler in homegrown, highly customized technology. As Collins notes, technology accelerators cannot make up for bad people choices, an aspect of venture capital that is overlooked by so many. Enron is a great example of an interesting idea turned sour by terrible leadership. Beyond the accounting scandals that are discussed frequently, the culture was utterly toxic, with employees subjected to a “Performance Review Committee” whereby they were rated on a scale of 1-5 by their peers. Employees rated a 5 were fired, which meant roughly 15% of the workforce turned over every year. The New York Times reckoned Enron is still viewed as a trailblazer for the way it combined technology and energy services, but it clearly suffered from terrible leadership that even great technology couldn’t surmount. Collins’ most controversial point is arguably that technology cannot cause greatness or decline. Some would argue that technology is the primary cause of greatness for some companies like Amazon, Apple, Google, and Microsoft. The “it was just a better search engine” argument abounds discussions of early internet search engines. I think what Collins’ is getting at is that technology is malleable and can be built several different ways. Zoom and Cloudflare are great examples of this. As we’ve discussed, Zoom started over 100 years after the idea for video calling was first conceived, and several years after Cisco had purchased Webex, which begs the question, is technology the cause of greatness for Zoom? No! Zoom’s ultimate success the elegance of its simple video chat, something which had been locked up in corporate feature complexity for years. Cloudflare presents another great example. CDN businesses had existed for years when Cloudflare launched, and Cloudflare famously embedded security within the CDN, building on a trend which Akamai tried to address via M&A. Was technology the cause of greatness for Cloudflare? No! It’s way cheaper and easier to use than Akamai. Its cost structure enabled it to compete for customers that would be unprofitable to Akamai, a classic example of a sustaining technology innovation, Clayton Christensen’s Innovator’s Dilemma. This is not to say these are not technologically sophisticated companies, Zoom’s cloud ops team has kept an amazing service running 24/7 despite a massive increase in users, and Cloudflare’s Workers technology is probably the best bet to disrupt the traditional cloud providers today. But to place technology as the sole cause for greatness would be understating the companies achievements in several other areas.

3. Build up, Breakthrough Flywheel. Jeff Bezos loves this book. Its listed in the continued reading section of prior TBOTM, The Everything Store. The build up, breakthrough flywheel is the culmination of disciplined people, disciplined thought and disciplined action. Collins’ points out that several great companies frequently appear like overnight successes; all of a sudden, the Company has created something great. But that’s rarely the case. Amazon is a great example of this; it had several detractors in the early days, and was dismissed as simply an online bookseller. Little did the world know that Jeff Bezos had ideas to pursue every product line and slowly launched one after the other in a concerted fashion. In addition, what is a better technology accelerator than AWS! AWS resulted from an internal problem of scaling compute fast enough to meet growing consumer demand for their online products. The company’s tech helped it scale so well that they thought, “Hey! Other companies would probably like this!” Apple is another classic example of a build-up, breakthrough flywheel. The Company had a massive success with the iPod, it was 40% of revenues in 2007. But what did it do? It cannablized itself and pursued the iPhone, with several different teams within the company pursuing it individually. Not only that, it created a terrible first version of an Apple phone with the Rokr, realizing that design was massively important to the phone’s success. The phone’s technology is taken for granted today, but at the time the touch screen was simply magical!

Business Themes

1. Level 5 Leader. The first part and probably the most important part of the buildup, breakthrough, flywheel is disciplined people. One aspect of Good to Great that inspired Collins’ other book Built to Last, is the idea that leadership, people, and culture determine the long-term future of a business, even after current leadership has moved on from the business. To set an organization up for long-term success, executives need to display level five leadership, which is a mix of personal humility and professional will. Collins’ leans in on Lee Iacocca as an example of a poor leader, who focused more on personal celebrity and left Chrysler to fail, when he departed. Level 5 leadership has something that you don’t frequently see in technology business leaders, humility. The technology industry seems littered with far more Larry Ellison and Elon Musk’s than any other industry, or maybe its just that tech CEOs tend to shout the loudest from their pedestals. One CEO that has done a great job of representing level five leadership is Shantanu Narayen, who took the reigns of Adobe in December 2007, right on the cusp of the financial crisis. Narayen, who’s been described as more of a doer than a talker, has dramatically changed Adobe’s revenue model, moving the business from a single sale license software business focused on lower ACV numbers, to an enterprise focused SaaS business. This march has been slow and pragmatic but the business has done incredibly well, 10xing since he took over. Adobe CFO, Mark Garrett, summarized it best in a 2015 McKinsey interview: “We instituted open dialogue with employees—here’s what we’re going through, here’s what it might look like—and we encouraged debate. Not everyone stayed, but those who did were committed to the cloud model.”

2. Hedgehog Concept. The Hedgehog concept (in the picture wheel to the right) is the overlap of three questions: What are you passionate about?, What are you the best in the world at?, and What drives your economic engine? This overlap is the conclusion of Collins’ memo to Confront the Brutal Facts, something that Ben Horowitz emphasizes in March’s TBOTM. Once teams have dug into their business, they should come up with a simple way to center their focus. When companies reach outside their hedgehog concept, they get hurt. The first question, about organizational passion, manifests itself in mission and value statements. The best in the world question manifests itself through value network exercises, SWOT analyses and competitive analyses. The economic engine is typically shown as a single metric to define success in the organization. As an example, let’s walk through an example with a less well-known SaaS company: Avalara. Avalara is a provider of tax compliance software for SMBs and enterprises, allowing those businesses to outsource complex and changing tax rules to software that integrates with financial management systems to provide an accurate view of corporate taxes. Avalara’s hedgehog concept is right on their website: “We live and breathe tax compliance so you don't have to.” Its simple and effective. The also list a slightly different version in their 10-K, “Avalara’s motto is ‘Tax compliance done right.’” Avalara is the best at tax compliance software, and that is their passion; they “live and breath” tax compliance software. What drives Avalara’s economic engine? They list two metrics right at the top of their SEC filings, number of core customers and net revenue retention. Core customers are customers who have been billed more than $3,000 in the last twelve months. The growth in core customers allows Avalara to understand their base of revenue. Tax compliance software is likely low churn because filing taxes is such an onerous process, and most people don’t have the expertise to do it for their corporate taxes. They will however suffer from some tax seasonality and some customers may churn and come back after the tax period has ended for a given year. Total billings allows Avalara to account for this possibility. Avalara’s core customers have grown 32% in the last twelve months, meaning its revenue should be following a similar trajectory. Net retention allows the company to understand how customer purchasing behavior changes over time and at 113% net retention, Avalara’s overall base is buying more software from Avalara than is churning, which is a positive trend for the company. What is the company the best in the world at? Tax compliance software for SMBs. Avalara views their core customer as greater than $3,000 of trailing twelve months revenue, which means they are targeting small customers. The Company’s integrations also speak to this - Shopify, Magento, NetSuite, and Stripe are all focused on SMB and mid-market customers. Notice that neither SAP nor Oracle ERP is in that list of integrations, which are the financial management software providers that target large enterprises. This means Avalara has set up its product and cost structure to ensure long-term profitability in the SMB segment; the enterprise segment is on the horizon, but today they are focused on SMBs.

3. Culture of Discipline. Collins describes a culture of discipline as an ability of managers to have open and honest, often confrontational conversation. The culture of discipline has to fit within a culture of freedom, allowing individuals to feel responsible for their division of the business. This culture of discipline is one of the first things to break down when a CEO leaves. Collins points on this issue with Lee Iaccoca, the former CEO of Chrysler. Lee built an intense culture of corporate favoritism, which completely unraveled after he left the business. This is also the focus of Collins’ other book, Built to Last. Companies don’t die overnight, yet it seems that way when problems begin to abound company-wide. We’ve analyzed HP’s 20 year downfall and a similar story can be shown with IBM. In 1993, IBM elected Lou Gerstner as CEO of the company. Gerstner was an outsider to technology businesses, having previously led the highly controversial RJR Nabisco, after KKR completed its buyout in 1989. He has also been credited with enacting wholesale changes to the company’s culture during his tenure. Despite the stock price increasing significantly over Gerstner’s tenure, the business lost significant market share to Microsoft, Apple and Dell. Gerstner was also the first IBM CEO to make significant income, having personally been paid hundreds of millions over his tenure. Following Gerstner, IBM elected insider Sam Palmisano to lead the Company. Sam pushed IBM into several new business lines, acquired 25 software companies, and famously sold off IBM’s PC division, which turned out to be an excellent strategic decision as PC sales and margins declined over the following ten years. Interestingly, Sam’s goal was to “leave [IBM] better than when I got there.” Sam presided over a strong run up in the stock, but yet again, severely missed the broad strategic shift toward public cloud. In 2012, Ginni Rometty was elected as new CEO. Ginni had championed IBM’s large purchase of PwC’s technology consulting business, turning IBM more into a full service organization than a technology company. Palmisano has an interesting quote in an interview with a wharton business school professor where he discusses IBM’s strategy: “The thing I learned about Lou is that other than his phenomenal analytical capability, which is almost unmatched, Lou always had the ability to put the market or the client first. So the analysis always started from the outside in. You could say that goes back to connecting with the marketplace or the customer, but the point of it was to get the company and the analysis focused on outside in, not inside out. I think when you miss these shifts, you’re inside out. If you’re outside in, you don’t miss the shifts. They’re going to hit you. Now acting on them is a different characteristic. But you can’t miss the shift if you’re outside in. If you’re inside out, it’s easy to delude yourself. So he taught me the importance of always taking the view of outside in.” Palmisano’s period of leadership introduced a myriad of organizational changes, 110+ acquisitions, and a centralization of IBM processes globally. Ginni learned from Sam that acquisitions were key toward growth, but IBM was buying into markets they didn’t fully understand, and when Ginni layered on 25 new acquisitions in her first two years, the Company had to shift from an outside-in perspective to an inside-out perspective. The way IBM had historically handled the outside-in perspective, to recognize shifts and get ahead of them, was through acquisition. But when the acquisitions occured at such a rapid pace, and in new markets, the organization got bogged down in a process of digestion. Furthermore, the centralization of processes and acquired businesses is the exact opposite of what Clayton Christensen recommends when pursuing disruptive technology. This makes it obvious why IBM was so late to the cloud game. This was a mainframe and services company, that had acquired hundreds of software businesses they didn’t really understand. Instead of building on these software platforms, they wasted years trying to put them all together into a digestible package for their customers. IBM launched their public cloud offering in June 2014, a full seven years after Microsoft, Amazon, and Google launched their services, despite providing the underlying databases and computing power for all of their enterprise customers. Gerstner established the high-pay, glamorous CEO role at IBM, which Palmisano and Ginni stepped into, with corporate jets and great expense policies. The company favored increasing revenues and profits (as a result of acquisitions) over the recognition and focus on a strategic market shift, which led to a downfall in the stock price and a declining mindshare in enterprises. Collins’ understands the importance of long term cultural leadership. “Does Palmisano think he could have done anything differently to set IBM up for success once he left? Not really. What has happened since falls to a new coach, a new team, he says.”

Dig Deeper

• Level 5 Leadership from Darwin Smith at Kimberly Clark

• From Good to Great … to Below Average by Steven Levitt - Unpacking underperformance from some of the companies Collins’ studied

• The Challenges faced by new CEO Arvind Krishna

• Overview of Cloudflare Workers

• The Opposite of the Buildup, Breakthrough, Flywheel - the Doom Loop

January 2020 - The Innovators by Walter Isaacson

Isaacson presents a comprehensive history of modern day technology, from Ada Lovelace to Larry Page. He weaves in intricate detail around the development of the computer, which provides the landscape on which all the major players of technological history wander.

Tech Themes

1. Computing Before the Computer. In the Summer of 1843, Ada Lovelace, daughter of the poet Lord Byron, wrote the first computer program, detailing a way of repeatedly computing Bernoulli numbers. Lovelace had been working with Charles Babbage, an English mathematician who had conceived of an Analytical Engine, which could be used as a general purpose arithmetic logic unit. Originally, Babbage thought his machine would only be used for computing complex mathematical problems, but Ada had a bigger vision. Ada was well educated and artistic like her father. She knew that the general purpose focus of the Analytical Engine could be an incredible new technology, even hypothesizing, “Supposing, for instance, that the fundamental relations, of pitched sounds in the science of harmony and musical composition were susceptible to such expression and adaptations, the engine might compose elaborate and scientific pieces of music of any degree of complexity.” 176 years later, in 2019, OpenAI released a deep neural network that produces 4 minute musical compositions, with ten different instruments.

   2. The Government, Education and Technology. Babbage had suggested using punch cards for computers, but Herman Hollerith, an employee of the U.S. Census Bureau, was the first to successfully implement them. Hollerith was angered that the decennial census took eight years to successfully complete. With his new punch cards, designed to analyze combinations of traits, it took only eight. In 1924, after a series of mergers, the company Hollerith founded became IBM. This was the first involvement of the US government with computers. Next came educational institutions, namely MIT, where by 1931 Vanneaver Bush had built a Differential Analyzer (pictured below), the world’s first analog electric computing machine. This machine would be copied by the U.S. Army, University of Pennsylvania, Manchester University and Cambridge University and iterated on until the creation of the Electronic Numerical Integrator and Computer (ENIAC), which firmly established a digital future for computing machines. With World War as a motivator, the invention of the computer was driven forward by academic institutions and the government.

Business Themes

1. Massive Technological Change is Slow. Large technological change almost always feels sudden, but it rarely ever is. Often, new technological developments are relegated to small communities, like Homebrew computing club, where Steve Wozniak handed out mock-ups for the Apple Computer, which was the first to map a keyboard to a screen for input. The development of the transistor (1947) preceded the creation of the microchip (1958) by eleven years. The general purpose chip, a.k.a. the microprocessor popped up thirteen years after that (1971), when Intel introduced the 4004 into the business world. This phenomenon was also true with the internet. Packet switching was first discovered in the early 1960s by Paul Baran, while he was at the RAND Corporation. The Transmission Control Protocol and Internet Protocol were created fifteen years after that (1974) by Vint Cerf and Bob Kahn. The HyperText Transfer Protocol (HTTP) and the HyperText Markup Language (HTML) were created sixteen years after that in 1990 by Tim Berners-Lee. The internet wasn’t in widespread use until after 2000. Introductions of new technologies often seem sudden, but they frequently call on technologies of the past and often involve a corresponding change that address the prior limiting factor of a previous technology. What does that mean for cloud computing, containers, and blockchain? We are probably earlier in the innovation cycle than we can imagine today. Business does not always lag the innovation cycle, but is normally the ending point in a series of innovations.

2. Teams are Everything. Revolution and change happens through the iteration of ideas through collaborative processes. History provides a lot of interesting lessons when it comes to technology transformation. Teams with diverse backgrounds, complementary styles and a mix of visionary and operating capabilities executed the best. As Isaacson notes: “Bell Labs was a classic example. In its long corridors in suburban New Jersey, there were theoretical physicists, experimentalists, material scientists, engineers, a few businessmen, and even some telephone pole climbers with grease under their fingernails.” Bell Labs created the first transistor, a semiconductor that would be the foundation of Intel’s chips, where Bob Noyce and Gordon Moore (yes – Moore’s Law) would provide the vision, and Andy Grove would provide the focus.

Dig Deeper

• Alan Turing and the Turing Machine

• The Deal that Ruined IBM and Catapulted Microsoft

• Grace Hopper and the First Compiler

• ARPANET and the Birth of the Internet

December 2019 - The Moon is a Harsh Mistress by Robert A. Heinlein

This futuristic, anti-establishment thriller is one of Elon Musk’s favorite books. While Heinlein’s novel can drag on with little action, The Moon is a Harsh Mistress presents an interesting war story and predicts several technological revolutions.

Tech Themes

1. Mike, the self-aware computer and IBM. Mycroft Holmes, Heinlein’s self-aware, artificially intelligent computer is a friendly, funny and focused companion to Manny, Wyoh and Prof throughout the novel. Mike’s massive hardware construction is analogous to the way companies are viewing Artificial Intelligence today. Mike’s AI is more closely related to Artificial General Intelligence, which imagines a machine that can go beyond the standard Turing Test, with further abilities to plan, learn, communicate in natural language and act on objects. The 1960s were filled with predictions of futuristic robots and machines. Ideas were popularized not only in books like The Moon is a Harsh Mistress but also in films like 2001: A Space Odyssey, where the intelligent computer, HAL 9000, attempts to overthrow the crew. In 1965, Herbert Simon, a noble prize winner, exclaimed: “machines will be capable, within twenty years, of doing any work a man can do.” As surprising as it may seem today, the dominant technology company of the 1960’s was IBM, known for its System/360 model. Heinlein even mentions Thomas Watson and IBM at Mike’s introduction: “Mike was not official name; I had nicknamed him for Mycroft Holmes, in a story written by Dr. Watson before he founded IBM. This story character would just sit and think--and that's what Mike did. Mike was a fair dinkum thinkum, sharpest computer you'll ever meet.” Mike’s construction is similar to that of present day IBM Watson, who’s computer was able to win Jeopardy, but has struggled to gain traction in the market. IBM and Heinlein approached the computer development in a similar way, Heinlein foresaw a massive computer with tons of hardware linked into it: “They kept hooking hardware into him--decision-action boxes to let him boss other computers, bank on bank of additional memories, more banks of associational neural nets, another tubful of twelve-digit random numbers, a greatly augmented temporary memory. Human brain has around ten-to-the tenth neurons. By third year Mike had better than one and a half times that number of neuristors.” This is the classic IBM approach – leverage all of the hardware possible and create a massive database of query-able information. This actually does work well for information retrieval like Jeopardy, but stumbles precariously on new information and lack of data, which is why IBM has struggled with Watson applications to date.

2. Artificial General Intelligence. Mike is clearly equipped with artificial general intelligence (AGI); he has the ability to securely communicate in plain language, retrieve any of the world’s information, see via cameras and hear via microphones. As discussed above, Heinlein’s construction of Mike is clearly hardware focused, which makes sense considering the book was published in the sixties, before software was considered important. In contrast to the 1960s, today, AGI is primarily addressed from an algorithmic, software angle. One of the leading research institutions (excluding the massive tech companies) is OpenAI, an organization who’s mission is: “To ensure that artificial general intelligence (AGI)—by which we mean highly autonomous systems that outperform humans at most economically valuable work—benefits all of humanity.” OpenAI was started by several people including Elon Musk and Sam Altman, founder of Y Combinator, a famous startup incubator based in Silicon Valley. OpenAI just raised $1 billion from Microsoft to pursue its artificial algorithms and is likely making the most progress when it comes to AGI. The organization has released numerous modules that allow developers to explore the wide-ranging capabilities of AI, from music creation, to color modulation. But software alone is not going to be enough to achieve full AGI. OpenAI has acknowledged that the largest machine learning training runs have been run on increasingly more hardware: “Of course, the use of massive compute sometimes just exposes the shortcomings of our current algorithms.” As we discussed before (companies are building their own hardware for this purpose, link to building their own hardware), and the degradation of Moore’s Law imposes a serious threat to achieving full Artificial General Intelligence.

3. Deep Learning, Adam Selene, and Deep Fakes. Heinlein successfully predicted machine’s ability to create novel images. As the group plans to take the rebellion public, Mike is able to create a depiction of Adam Selene that can appear on television and be the face of the revolution: “We waited in silence. Then screen showed neutral gray with a hint of scan lines. Went black again, then a faint light filled middle and congealed into cloudy areas light and dark, ellipsoid. Not a face, but suggestion of face that one sees in cloud patterns covering Terra. It cleared a little and reminded me of pictures alleged to be ectoplasm. A ghost of a face. Suddenly firmed and we saw "Adam Selene." Was a still picture of a mature man. No background, just a face as if trimmed out of a print. Yet was, to me, "Adam Selene." Could not he anybody else.” Image generation and manipulation has long been a hot topic among AI researchers. The research frequently leverages a technique called Deep Learning, which is a play on classically used Artificial Neural Networks. A 2012 landmark paper from the University of Toronto student Ilya Sutskever, who went on to be a founder at OpenAI, applied deep learning to the problem of image classification with incredible success. Deep learning and computer vision have been inseparable ever since. One part of research focuses on a video focused image superimposition technique called Deep Fakes, which became popular earlier this year. As shown here, these videos are essentially merging existing images and footage with a changing facial structure, which is remarkable and scary at the same time. Deep fakes are gaining so much attention that even the government is focused on learning more about them. Heinlein was early to the game, imaging a computer could create a novel image. I can only imagine how he’d feel about Deep Fakes.

Business Themes

1. Video Conferencing. Manny and the rest of the members of the revolution communicate through encrypted phone conversations and video conferences. While this was certainly ahead of its time, video conferencing was first imagined in the late 1800s. Despite a clear demand for the technology, it took until the late 2000s arguably, to reach appoint where mass video communication was easily accessible for businesses (Zoom Video) and individuals (FaceTime, Skype, etc.) This industry has constantly evolved and there are platforms today that offer both secure chat and video such as Microsoft Teams and Cisco Webex. The entire industry is a lesson in execution. The idea was dreamed up so long ago, but it took hundreds of years and multiple product iterations to get to a de-facto standard in the market. Microsoft purchased Skype in 2011 for $8.5B, the same year that Eric Yuan founded Zoom. This wasn’t Microsoft’s first inroads into video either, in 2003, Microsoft bought Placeware and was supposed to overtake the market. But they didn’t and Webex continued to be a major industry player before getting acquired by Cisco. Over time Skype popularity has waned, and now, Microsoft Teams has a fully functioning video platform separate from Skype – something that Webex did years ago. Markets are constantly in a state of evolution, and its important to see what has worked well. Skype and Zoom both succeeded by appealing to free users, Skype initially focused on free consumers, and Zoom focused on free users within businesses. WebEx has always been enterprise focused but they had to be, because bandwidth costs were too high to support a video platform. Teams will go to market as a next-generation alternate/augmentation of Outlook; it will be interesting to see what happens going forward.

2. Privacy and Secure Communication. As part of the revolution’s communication, a secure, isolated message system is created whereby not only are conversations fully encrypted and undetected by authorities but also individuals are unable to speak with more than two others in their revolution tree. Today, there are significant concerns about secure communication – people want it, but they also do not. Facebook has declared that they will implement end to end encryption despite warnings from the government not to do so. Other mobile applications like Telegram and Signal promote secure messaging and are frequently used by reporters for anonymous tips. While encryption is beneficial for those messaging, it does raise concerns about who has access to what information. Should a company have access to secure messages? Should the government have access to secure messages? Apple has always stayed strong in its privacy declaration, but has had its own missteps. This is a difficult question and the solution must be well thought out, taking into account unintended consequences of sweeping regulation in any direction.

3. Conglomerates. LuNoHo Co is the conglomerate that the revolution utilized to build a massive catapult and embezzle funds. While Mike’s microtransaction financial fraud is interesting (“But bear in mind that an auditor must assume that machines are honest.”), the design of LuNoHo Co. which is described as part bank, part engineering firm, and part oil and gas exploitation firm, interestingly addresses the conventional business wisdom of the times. In the 1960s, coming out of World War II, conglomerates began to really take hold across many developing nations. The 1960s were a period of low interest rates, which allowed firms to perform leveraged buyouts of other companies (using low interest loans), sometimes in a completely unrelated set of industries. Activision was once part of Vivendi, a former waste management, energy, construction, water and property conglomerate. The rationale for these moves was often that a much bigger organization could centralize general costs like accounting, finance, legal and other costs that touched every aspect of the business. However, when interest rates rose in the late 70s and early 80s, several conglomerate profits fell, and the synergies promised at the outset of the deal turned out to be more difficult to realize than initially assumed. Conglomerates are incredibly popular in Asia, often times supported by the government. In 2013, McKinsey estimated: “Over the past decade, conglomerates in South Korea accounted for about 80 percent of the largest 50 companies by revenues. In India, the figure is a whopping 90 percent. Meanwhile, China’s conglomerates (excluding state-owned enterprises) represented about 40 percent of its largest 50 companies in 2010, up from less than 20 percent a decade before.” Softbank, the famous Japanese conglomerate and creator of the vision fund, was originally a shrink-wrap software distributor but now is part VC and part Telecommunications provider. We’ve discussed the current state of Chinese internet conglomerates, Alibaba and Tencent who each own several different business lines. Over the coming years, as internet access in Asia grows more pervasive and the potential for economic downturn increases, it will be interesting to see if these conglomerates break apart and focus on their core businesses.

Dig Deeper

• The rise and fall of Toshiba

• Using Artificial Intelligence to Create Talking Images

• MIT Lecture on Image Classification via Deep Learning

• 2019 Trends in the Video Conferencing Industry

• The Moon is a Harsh Mistress may be a movie

October 2019 - The Design of Everyday Things by Don Norman

Psychologist Don Norman takes us through an exploratory journey of the basics in functional design. As the consumerization of software grows, this book’s key principles will become increasingly important.

Tech Themes

1. Discoverability and Understanding. Discoverability and Understanding are two of the most key principles in design. Discoverability answers the questions of, “Is it possible to figure out what actions are possible and where and how to perform them?” Discoverability is absolutely crucial for first time application users because poor discovery of actions leads to low likelihood of repeat use. In terms of Discoverability, Scott Berkun notes that designers should prioritize what can be discovered easily: “Things that most people do, most often, should be prioritized first. Things that some people do, somewhat often, should come second. Things that few people do, infrequently, should come last.” Understanding answers the questions of: “What does it all mean? How is the product supposed to be used? What do all the different controls and settings mean?” We have all seen and used applications where features and complications dominate the settings and layout of the app. Understanding is simply about allowing the user to make sense of what is going on in the application. Together, Discoverability and Understanding lay the ground work for successful task completion before a user is familiar with an application.

2. Affordances, Signifiers and Mappings. Affordances represent the set of possible actions that are possible; signifiers communicate the correct action that should take place. If we think about a door, depending on the design, possible affordances could be: push, slide, pull, twist the knob, etc. Signifiers represent the correct action or the action the designer would like you to perform. In the context of a door, a signifier might be a metal plate that makes it obvious that the door must be pushed. Mappings provide straightforward correspondence between two sets of objects. For example, when setting the brightness on an iPhone, swiping up increases brightness and swiping down decreases brightness, as would be expected by a new user. Design issues occur when there is a mismatch in affordances, signifiers and mappings. Doors provide another great example of poor coordination between affordances, signifiers and mappings - everyone has encountered a door with a handle that says push over it. This normally followed by an uncomfortable pushing and pulling motion to discover the actions possible with the door. Why are there handles if I am supposed to push? Good design and alignment between affordances, signifiers and mappings make life easier for everyone.

3. The Seven Stages of Action. Norman lay outs the psychology underpinning user decisions in seven stages - Goal, Plan, Specify, Perform, Perceive, Interpret, Compare. The first three (Goal, Plan, Specify) represent the clarification of an action to be taken on the World. Once the action is Performed, the final three steps (Perceive, Interpret, Compare) are trying to make sense of the new state of the World. The seven stages of action help generalize the typical user’s interactions with the World. With these stages in mind, designers can understand potential breakdowns in discoverability, understanding, affordances, signifiers, and mappings. As users perform actions within applications, understanding each part of the customer journey allows designers to prioritize feature development and discoverability.

Business Themes

1. The best product does not always win, but... If the best product always won out, large entrenched incumbents across the software ecosystem like IBM, Microsoft, Google, SAP, and Oracle would be much smaller companies. Why are there so many large behemoths that won’t fall? Each company has made deliberate design decisions to reduce the amount of customer churn. While most of the large enterprise software providers suffer from Feature Creep, the product and deployment complexity can often be a deterrent to churn. For example, Enterprise CIOs do not want to spend budget to re-platform from AWS to Azure, unless there was a major incident or continued frustration with ease of use. Interestingly enough though, as we’ve discussed, the transition from license-maintenance software to SaaS, as well as the consumerization of the enterprise, are changing the necessity of good design and user experience. If we look at Oracle for example. The business has made several acquisitions of applications to be built on Oracle Databases. But the poor user experience and complexity of the applications is starting to push Oracle out of businesses.

2. Shipping products on time and on budget. “The day a product development process starts, it is behind schedule and above budget.” The product design process is often long and complex because there is a wide array of disciplines involved in the process. Each discipline thinks they are the most important part of the process and may have different reasons for including a singular feature, which may conflict with good design. To alleviate some of that complexity, Norman suggests hiring design researchers that are separate from the product development focus. These researchers focus on how users are working in the field and are coming up with additional use cases / designs all the time. When the development process kicks off, target features and functionality have already been suggested.

3. Why should business leaders care about good design? We have already discussed how product design can act as a deterrent to churn. If processes and applications become integral to Company function, then there is a low chance of churn, unless there is continued frustration with ease of use. Measuring product market fit is difficult but from a metrics perspective; companies can look at gross churn ($ or customer amount that left / beginning ARR or beginning customers) or NPS to judge how well their product is being received. Good design is a direct contributor to improved NPS and better retention. When you complement good design with several hooks into the customers, churn reduces.

Dig Deeper

• UX Fundamentals from General Assembly

• Why game design is crucial for preventing churn

• Figma and InVision - the latest product development tools

• Examples of bad user experience design

• Introduction to Software Usage Analytics

June 2019 - Zero to One by Peter Thiel

Peter Thiel’s contrarian startup classic, Zero to One, is a great book for understanding and building startups.

Tech Themes

1. Zero to One. As Thiel explains in the opening pages, Zero to One is the concept of creating companies that bring new technology into the world: “The single word for vertical, 0 to 1 progress is technology.” This is in contrast to startups that simply copy existing ideas or other products and tackle problems 1 to n. In Thiel’s view, the great equalizer that allows you to create such an idea is proprietary technology. This can come in many forms: Google’s search algorithms, Amazon’s massive book catalog, Apple’s improved design of the iPad or PayPal’s faster integrated Ebay payments. But generally, to capture significant value from a market; the winning technology has to be 10x better than competition. To this end, Thiel says, “Don’t disrupt.... If your company can be summed up by its opposition to already existing firms, it can’t be completely new and it’s probably not going to become a monopoly.” The true way to become a massively successful company is to build something completely new that is 10x better than the way its currently being done. This 10x better product has to be conceived over the long term, with the idea that the final incremental feature added to the product gives it that 10x lift and takes it to monopoly status.

2. Beliefs and Contrarianism. Thiel begins the book with a thought-provoking question: “What important truth do very few people agree with you on?” To Thiel, however you answer this question indicates your courage to challenge conventional wisdom and thus your potential ability to take a novel technology from 0 to 1. Extending this idea, Thiel defines the word startup as, “the largest group of people you can convince of a plan to build a different future.” This sort of Silicon Valley contrarianism is exactly the mindset of Internet bubble entrepreneurs. Thiel continues on this thinking, with another question: “Can you control your future?” and to that question he answers with an emphatic, “Yes.” People are taught to believe that “right place, right time” or “luck” is the greatest contributor to individual success. And as discussed in Good to Great, while many CEOs and prominent executives make this claim, they often don’t believe it and use it much more as a marketing mechanism. Thiel firmly believes in the idea of self-determination, and why shouldn’t he? He’s a white male, Rhodes Scholar and Stanford Law School graduate who has now made billions of dollars. In his mind, you either believe something novel and create that future or you waste your time tackling the problems that exist today. This also conveniently mirrors Thiel’s investing focus and he even calls this out in a chapter detailing venture returns. Venture takes informed speculative bets on which technology will ultimately win out in a market – the best bets are the ones that differ so greatly from the established norm because the likelihood of landing in the monopoly position (though still small) is much greater than a Company that is recreating existing products.

3. Looking for Secrets and Building Startups. The answers to the Thiel question posed above are secrets: knowable but undiscovered truths that exist in the world today. He then poses: “Why has so much of our society come to believe that there are no hard secrets left?” He provides a four part answer:

• Incrementalism – the idea that you only have to hit a minimum threshold for pre-determined success and that over-achieving is frequently met with the same reward as basic achievement

• Risk Aversion – People are more scared than ever about being wrong about a secret they believe

• Complacency – people are fine collecting rents on things that were already established before they were involved

• Flatness – the idea that as globalization continues, the world is viewed as one hyper competitive market for all products

Sticking on his contrarian path, Thiel emphasizes: “The best place to look for secrets is where no else is looking…What are people not allowed to talk about? What is forbidden or taboo?” This question is especially interesting in the context of the latest round of startups going public. A lot of people have argued that the newest wave of startups are tackling problems that are of lower value to society, like food delivery – focused on pleasing an increasingly on-demand, dopamine driven world. Why is that? Have we reached a local maximum in technology for a given period? While you may not completely believe Ray Kurzweil’s Law of Accelerating Returns, the pace of technological evolution has probably not hit a maximum. It could be argued that we have enjoyed a great run with mobile as a dominant computing platform (PCs before that, Mainframes before that, etc.) and that the next wave of startups tackling “important" problems could spring out of such a development.

Business Themes

1. Monopoly profits. Thiel plainly states the overarching goal of business that is normally obfuscated by cult-like Silicon Valley startups: monopoly profits. This touches on a point that has been bouncing its way through the news media (Elizabeth Warren, Stratechery, Spotify/Apple) in recent months with Elizabeth Warren calling for a breakup of Apple, Facebook and Amazon, Spotify claiming the App Store is a monopoly, and others discussing whether these companies are even monopolies. He claims monopolies deserve their bad press and regulation, “only in a world where nothing changes.” Monopolies in a static environment act like rent collectors: “If you corner the market for something, you can jack up the price; others will have no choice but to buy from you.” This is true of many heavy regulated industries today like Utilities. It’s often the case consumers only have one or two providers to choose from at max, so governments regulate the amount utilities can increase prices each year. Thiel then explains what he calls creative monopolists, companies that “give customers more choice by adding entirely new categories of abundance to the world. Creative monopolies aren’t just good for the rest of society: they’re powerful engines for making it better.” Thiel cites a few interesting examples of “monopoly” disruption: Apple iOS outcompeting Microsoft operating systems, IBM hardware being overtaken by Microsoft software, and AT&T’s monopoly prior to being broken up. It should be noted that two of these examples actually did require government regulation – Microsoft was sued in 2001 and AT&T was forced to break up its monopoly. What’s even more interesting, is the prospect of the T-Mobile/Sprint merger being blocked because while the consolidation of the telecom industry could mean increased prices, both T-Mobile and Sprint have struggled to compete with guess who, AT&T and Verizon (who started as a merger with former AT&T company, Bell Atlantic). Whether monopolies are good or bad for society, whether its possible to call tech companies with several different business lines monopolies remains to be seen – but one things for sure – being a monopoly, tech monopoly, or creative monopoly is a great thing for your business.

2. Prioritizing Near Term Growth at the Risk of Long Term Success. Thiel begins his chapter on Last Mover Advantage with an interesting discussion on how investors view LinkedIn’s valuation (since acquired by Microsoft but at the time was publicly traded). At the time, LinkedIn had $1B in revenue and $21M in net income, but was trading at a value of $24B (i.e. 24x LTM Revenue and 1100x+ Net Income). Why was this valued so highly? Thiel provides an interesting answer: “The overwhelming importance of future profits is counterintuitive even in Silicon Valley. For a company to be valuable it must grow and endure, but many entrepreneurs focus on short-term growth. They have an excuse: growth is easy to measure, but durability isn’t.” Thiel then continues with two great examples of short-term focus: “Rapid short-term growth at Zynga and Groupon distracted managers and investors from long-term challenges.” Zynga became famous with Farmville, but struggled to find the next big hit and Groupon posted incredibly fast growth, but couldn’t get sustained repeat customers. This focus on short-term growth is incredibly interesting given the swarm of unicorns going public this year. Both Lyft and Uber grew incredibly quickly, but as the public markets have showed, the ride-sharing business model may not be durable with each company losing billions a year. Thiel continues: “If you focus on near term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now?” To become a durable tech monopoly, Thiel cites the following important characteristics: proprietary technology, network effects, economies of scale, and branding. It’s interesting to look at these characteristics in the context of a somewhat monopoly disruptor, Zoom Video Communications. CEO Eric Yuan, who was head of engineering at Cisco’s competing WebEx product, built the Company’s proprietary tech stack with all the prior knowledge of WebEx’s issues in mind. Zoom’s software is based on a freemium model, when one user wants to video chat with another, they simply send the invite regardless of whether they have the service already – this isn’t exactly a google-esque network effect but it does increase distribution and usage. Zoom’s technology is efficiently scalable as shown by the fact that its profitable despite incredibly fast growth. Lastly, Zoom’s marketing and branding are excellent and are repeatedly lauded within the press. The question is, are these characteristics really monopoly defining? Or are they simply just good business characteristics? We will have to wait and see how Zoom fairs over the next 10 years to find out.

3. Asymmetric Risk & VC Returns. Thiel started venture capital firm, Founders Fund in 2005 with Ken Howery (who helped start PayPal with Thiel). Thiel notes an interesting phenomena about VC returns that several entrepreneurs don’t truly understand: “Facebook the best investment in our 2005 fund, returned more than all the others combined. Palantir, the second best investment is set to return more than the sum of every investment aside from Facebook…The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.” Venture capital investing, especially at the earliest stages like Seed and Series A (where Founder’s Fund invests) is a game of maximizing the chance of one or two big successes. In the past five to ten years, there has been a significant increase in venture capital investing, and with that a focus among many firms to be founder friendly. As discussed before, these founder friendly cultures have led to super-voting shares (like Snap, FB and others) and unprecedented VC rounds. Even with these changes, there is still a friction at most VC-backed companies: the supposedly value added VC board member doesn’t believe that Company XYZ will be the next Facebook or Palantir, and because of that chooses to spend as little time with them as possible. This has fueled the somewhat anti-VC movement that several entrepreneurs have adopted because as with Elon Musk at PayPal and Zip2, being abandoned by your earliest investors can be devastating.

Dig Deeper

• Facebook Chris Hughes co-founder calls for the breakup of Facebook

• Thiel wrote the first check into Facebook at a $5M valuation

• An overview of the PayPal Mafia

• A new book on scaling quickly by PayPal Mafia member Reid Hoffman

December 2018 - Steve Jobs by Walter Issacson

This is a long biography about an incredible person. The book is surprisingly personal and has tons of little stories that show Jobs’ true personality.

Tech Themes

1. The reality distortion field. Steve Jobs was famous for his reality distortion field: the ability to convince himself and others of pretty much anything through a mix of intense passion and hyperbole. The term was coined by Bud Tribble, an early member of Apple’s design team, who had daily experience working with Jobs at Apple and NeXT. Jobs’s would speak charismatically about achieving incredibly lofty goals and slowly bend employees to his way of thinking through somewhat manipulative means. He would frequently dismiss ideas as “complete shit” only to come back a few weeks later claiming to have come up with the idea. As Andy Hertzfeld (an original member of the Apple development team) put it: “I thought Bud was surely exaggerating, until I observed Steve in action over the next few weeks. The reality distortion field was a confounding melange of a charismatic rhetorical style, an indomitable will, and an eagerness to bend any fact to fit the purpose at hand. If one line of argument failed to persuade, he would deftly switch to another.” While this approach led to several incredible engineering feats, it also created a difficult environment for Apple employees. Jobs would frequently claim ideas as his own and give little credit to the engineers that actually created something. This extended to his personal life as well, where he wouldn’t shower because he claimed his diet of largely fruits and vegetables did not produce any smell (he was very wrong). Unfortunately this also extended to his cancer diagnosis, which he was convinced he could beat with a new diet despite several prominent doctor warnings to the contrary.

2. Owning the user experience. Steve was obsessed about user experience. At a time when the world was dominated by hard to use, clunky computers, Jobs helped Apple be the first to focus solely on how the user interacted with the computer. After his infamous visit to Xerox’s Palo Alto Research Center (Xerox PARC), in which he saw early designs for an easy to use mouse, Jobs adopted the technology for an upcoming Apple release. Apple and Jobs introduced several important design innovations including: windows for each operating program, drop-down menus, desktop metaphor (files and the trash can), drag and drop manipulation, and direct editing of a document. Jobs also wanted to maintain a tight connection between the hardware and software of all Apple devices. If Apple could abstract away all the back-end complexities and present an incredibly easy to use interface, its devices could be widely adopted by all consumers. This ran in the face of the general computing industry, which allowed significant user configurability.

3. Design simplicity. Steve Jobs was relentlessly passionate about the design of Apple products. As an extension of the user experience, Jobs wanted products that looked simple and felt magical: "To design something really well, you have to get it.” Jobs worked incredibly closely with Johnny Ive, Jobs’s “spiritual partner at Apple,” on the beautiful simplicity of every Apple product. One example of Jobs’s incredible focus on design is the iPhone. Not only does Jobs appear on the patent for the iPhone’s box, Ive and Jobs obsessed over each part of the phone, focusing on the ten commandments of design espoused by influential artist Dieter Rams. Jobs was so focused on sleek design, that even the internal, unseen logic boards of the Apple II needed to be redesigned because they weren’t straight enough. He also was thoughtful about building design at Pixar, building an open atrium that fostered random interaction as people traveled through it every day.

Business Themes

Bill Gates hovering over Jobs at MacWorld Boston 1997.

1. Vertical integration. It was Tim Cook who pulled Steve Jobs to dinner one night in Japan that led to the mass proliferaiton of Apple devices across the world. Cook had recognized that chipmakers were capable of making the device that Jobs had obsessed over for years, the iPod. Apple is a rare example of a Company that has focused on complete vertical integration. Apple wants to make both the hardware and the software behind its devices. Apple is now so large that it essentially controls all of its suppliers. Most companies leverage third party hardware (Dell, Toshiba, Motorola, Samsung, etc), put someone else’s software on it (Windows and Android), add third party services (Google, carrier services, etc.) and then sell it through someone else’s store (carrier retail stores, Best Buy, etc.) - Apple does it all.

2. Strategic investors. Many people do not know this, but Microsoft and Xerox were both strategic investors in Apple. Xerox’s investment led to that infamous visit to Xerox PARC, that led to inclusion of several proprietary technologies in Apple devices. When Jobs returned to Apple after the NeXT acquisition, he realized Apple’s dire cash circumstances. Jobs decided to call his sometimes enemy, sometimes friend, Bill Gates. Apple was in the process of suing Microsoft for copying its operating system, but Jobs desperately needed the cash. He negotiated a deal whereby Microsoft would invest $150M in Apple and Apple would drop its lawsuit against the Microsoft. “Bill, thank you. The world’s a better place.” The deal was announced at MacWorld Boston in 1997, where Gates appeared on a massive screen, hovering over Jobs in what would become an iconic scene.

3. Competing teams. Jobs would frequently set two different teams at Apple against each other in a fierce competition to produce a device or feature. The most famous example of this civil war experimentation was the design of the iPhone. According to Tony Fadell, Jobs had four different groups all working on an Apple phone: the large iPod for Video team (touchscreen), the iPod Phone team (spinning wheel), the touchscreen Macbook Pro, and the Motorola Rokr (the first phone integrated with iTunes). The whole development process was top secret within the Company, and dubbed: Project Purple. The Macbook Pro touchscreen would eventually become the iPad, and the large iPod for Video became the iPhone. These competing teams led to incredible developmental feats albeit at the sacrifice of shared knowledge within Apple.

Dig Deeper

• Steve Jobs worked the night shift at ATARI

• He dropped out of college

• Jobs went on an Apple fast and also considered himself a fruitarian

• Jobs had a kid at 23 and denied that he was her father. He eventually named an Apple computer after her, LISA

• He was absolutely ruthless