Are you intentionally wearing a black turtleneck for this one?
No. It is actually going to be one of my carveouts, though.
Yeah. Amazing. What? You think I dress up like Steve Jobs for a Google episode? Well, I thought because of the, you know, war between Android and... I walk in and there's this like smirk on your face.
[Applause] All right, let's do it. Who got the truth? Is it you? Is it you? Is it you? Who got the truth? Now, is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Welcome to the summer 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
I'm David Rosenthal. And we are your hosts.
In the late 1990s, Google built the best search engine for the rapidly growing internet. With a breakthrough search algorithm, low-cost servers based on commodity hardware, and the best business model of all time, search ads. They turned that search engine into a cash-gushing business and took it public in 2004. But then, curiously, they started doing some things that weren't related to search. They launched a breakthrough email service in your browser with Gmail, maps that were far superior to the current state-of-the-art, docs and spreadsheets with real-time collaboration for the first time. Of course, YouTube, then Android, and their own web browser with Chrome. Astonishingly, today Google has 15 products with over half a billion users. Seven of those have over two billion users. David, that is over 25% of humans use seven of Google's products.
Just unreal. Can't wait to tell all of these stories today.
Yes. And they've also launched some colossal failures. Plus to try to compete with Facebook, Google Wave, Buzz, and about half a dozen messaging apps. I don't know, maybe a dozen messaging apps over the years. Hot air balloons to provide wireless internet. And of course, oh man, I forgot about the hot air balloons. Google Glass. Can't forget about that one, unfortunately.
So, why did they do all this? And as a business, Google was and still is the company that makes the vast majority of their money from ads on search results on the web. So today, we tell the story of Google as the innovation factory of the 2000s, their reorganization into the parent company Alphabet, and how all these different products cleverly serve different business purposes, and also how it feeds into Google's original core mission to organize the world's information. And we'll end this episode story right at the dawn of the AI era.
Oh, you're giving away the end. Oh, spoilers. Sorry.
So, is Google a search engine? Is it the platform company of the web era? Or is it an incubator that just happens to have struck gold with search and perhaps AI? Today, we dive in.
Listeners, if you want to know every time an episode drops or get early hints at what the next episode will be, check out our email list. That's also where we share corrections and updates about previous episodes and we are adding a new bonus. You get to help us vote on future episode topics. So, the first poll is going out soon. Sign up now at acquired.fm/email. Join the Slack if you want to come talk about this with us and the whole Acquired community. acquired.fm/slack. Before we dive in, we want to briefly thank our presenting partner JP Morgan Payments. Yes, just like how we say every company has a story, every company's story is powered by payments and JP Morgan Payments is a part of so many of their journeys from seed to IPO and beyond. So with that, this show is not investment advice. David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only. David, where are we starting this Alphabet story?
Oh, I have a very, very fun beginning for you, Ben. I want to start with a quote from Russ Hanneman, the fictional character [from the] Silicon Valley HBO show.
Oh yeah. From the TV show. Awesome.
And the quote is: if you show revenue, people will ask how much and it will never be enough. The company that was the 100xer, the thousandxer is suddenly the 2x dog. But if you have no revenue, you can say you're pre-revenue. You're a potential pure play. It's not about how much you earn. It's about what you're worth and who's worth. The most companies that lose money. Immortal words of wisdom for the technology world. God, that show was so good. Why do I bring this up? Why do I start here?
Why are you talking about this?
Google is a cash-gushing machine. Revenue is obviously not the problem for Google. But what was the problem in 2004, 2005, 2006 was being viewed as, in Russ's terms, [not a] pure play. When Google went public in fall of 2004, the stock shot up, basically doubled in two months. Wall Street loved Google. AdWords, the search business model, everybody had to own shares. Google had cracked the code on monetizing the internet. The more people use the internet, the more they search. The more they search, the more money Google makes. Simple, easy, pure play, you might say.
That is until Google announced fourth quarter 2005 earnings. Full year 2005 revenue, $6.1 billion. That's almost double the 3.1 that it was in 2004, the first year it went public. But earnings are flat. Profitability is down. Google's now investing in all these new products and services. Gmail, maps, the forthcoming Google Docs. Later this year in 2006 would buy YouTube for $1.6 billion. Wall Street hates this. Hates it. This is a huge amount of their cash they're putting back on the table and betting for the future. So this is January 2006. The stock falls 27%. Wall Street's like, 'God, these guys, what are they doing? They're messing it up.' Steven Levy writes in In the Plex that the perception of Google's ventures beyond search at the time was that the company was tossing balls into the air like a drunken juggler. They were a pure play in investors' eyes and now they're messing it up. They're adding all this other stuff. They don't want the other stuff.
So then Ben, as you teed up in the intro, the question is why did they do all this? And I think the way to answer it is to start and just tell the stories of all the individual products.
Let's do it. Strap in. I will say, David, doing the research took me way back to early Acquired, grading acquisitions. This is the cornucopia of hits of iconic product launches in tech history. So, the first and probably the most important here because it sets the stage for everything else. The first major non-search product was on April 1st, April Fool's Day, 2004, Gmail. The most famous, infamous, non-joke April Fool's Day announcement of all time.
Yes. But it sure sounded like a joke. Here's the announcement. In 2004, entirely web-based email in your browser. You can log in and access it anywhere on any device. Google search is built in. You don't need to spend all this time sorting your mail into folders anymore. And one gigabyte of storage free. No need to delete your mail. No need to clean up your inbox. No need to do anything ever. And the whole thing is free.
Yep. Of course, this sounds like a joke. This is too good to be true. The universe at the time is Microsoft sells sort of enterprise-grade mail for a lot of money or there's all these free web-based services popping up like Hotmail that Microsoft would end up buying and Yahoo Mail and AOL. You get like 5 megabytes of storage.
Yeah. Not even. At the time, Hotmail, which as you said, Microsoft owns, had 2 megabytes of free storage and Yahoo Mail had 4 megabytes. There's another great story from In the Plex that Steven Levy has. He's interviewing Bill Gates at the Newsweek headquarters office in New York shortly after Gmail comes out and they started talking about Gmail and Bill can't believe it. He's like offended by Gmail because he thinks that giving people all this storage is just wasteful. You're doing email wrong. It's morally repugnant to leave all of this email sitting right on the servers. I was thinking about it. Until Gmail, the paradigm for email, people treated it like regular physical mail. Sort it. You file away the important stuff. You throw out the pieces you don't need anymore. I mean, even freaking Bill Gates operates this way.
Yes. So, Gmail, this is radical. This is a radical notion of how email should work.
And was also correct. I mean, if you sat and you thought about it in say 2001 or so when Gmail starts getting worked on within Google and you thought about the combination of the growth of the internet, which obviously Google has a front row seat to, and Moore's law, you would logically come to this conclusion that the cost of sending and storing and searching email would asymptotically go to zero. And thus, as that happened, a whole lot more email was going to be sent in the world.
Yep. So, can I tell you my understanding of where this story starts in 1996?
Oh, I was going to go back to '99, but yeah, go for it.
All right. So, I know you're about to bring up the name Paul Buchheit. Is that right?
So, Paul was kind enough to speak with me before recording this episode. Paul famously the inventor of Gmail. In 1996, Paul was a student at Case Western Reserve University in Cleveland, which you may also know this, David, famously was one of Ohio's...
...first campuses in the nation to have broadband internet in the dorms and all over campus.
Oh, okay. I knew about the Paul fascination with webmail starting in college. But I didn't realize that Case Western had broadband. So this is why when you're living in the universe of broadband everywhere, he was living like 15 years in the future temporarily for 4 years in college.
Yeah. 1996. Yes. So he realizes email is kind of a bummer if it's a thing that you download and lives on your computer. The information should just exist at my fingertips all the time. Bits are becoming free to move around. So he kind of gets obsessed with this idea in college that email should exist on the web in a browser without ever having to download it. And he builds a prototype for webmail when he's in college.
In 2001, famously pre-IPO at Google, Larry Page feels like Google is moving a little bit too slow and gets rid of all engineering managers. So Larry and Wayne Rosing, who is leading engineering, go and meet with each engineer individually to talk about ideas that they could work on. This tells you so much about Googliness, but it also tells you a lot about the caliber of the engineers they were hiring at the time where they would just approach them and say, 'What ideas are you thinking about? Here are some ideas we have. Can you just full-stack own this product entirely yourself?' And so in Paul's meeting, they knew about his previous interest in email and web-based mail and they sort of float this amorphous idea to him and that's where it comes from.
Ah, so Larry and Wayne suggested it to him. Interesting.
Okay. So here's some other stuff that Paul said. So part of the motivation was that they were looking to make something that would make Google stickier. So you'd have sort of this ongoing relationship for if there was a next Google after Google, there was some reason why you would still have a relationship which obviously you know Yahoo would have for many many years even though there was a next Yahoo after Yahoo in Google. We still get emails from people with Yahoo mails. Do you know how Paul found out about Google in 1999?
Unbelievable. Fitting that you know he gets hired with an email. Heyo.
Okay, so 2001 Paul gets to work with encouragement from Larry and Wayne. Do you know what the original seed of the code is?
Google had just bought a company called Deja News, their first acquisition. It was the corpus of all the old Usenet posts.
Oh yeah, then this becomes Google Groups, right?
That's exactly right. Yeah. And Paul's working on that. And part of that was a feature to do real-time indexing of all the posts that would allow you to search the whole corpus. So Paul just applies that to his own personal inbox. The first instantiation of this is just a search box to search his personal Unix mail directory as if it is the old Usenet posts that they had just bought. That's the first version of Gmail.
Amazing. As he's building on that though, obviously like the first thing he needs is a web front, an interface. Okay, Hotmail's out there, Yahoo Mail's out there, webmail's out there. It sucks. It sucks for a lot of reasons. There's got to be a way to make it better, make it more performant and better to use as a web page. And so he's playing around with JavaScript and what he can do with JavaScript to make this application, this web application of email better. The history of JavaScript is fascinating. Brendan Eich created it at Netscape back in 1995. We did a whole episode with Brendan years ago about this. The idea behind JavaScript was to include a programming language as part of web browsers so that people could make dynamic web pages instead of just static HTML documents. The problem was it was kind of this casualty of the browser wars with Microsoft and Internet Explorer and everything that killed Netscape. So up until this time, kind of 2001, JavaScript existed, but like it wasn't super popular. It wasn't very powerful. You could do weird stuff like animate something on the page, but I would describe it as toy-like and not a real programming language, for sure.
Yep. And for what the web was up until that point in time, you didn't really need it. Static web pages are kind of fine for most of what's happening. I mean, even google.com was static. You type a search into the search box, Google servers process the query and they send you a whole new static web page with the results. But you'd imagine for doing something like email on the web or any application on the web, you don't want the site to reload every time you open a new email or you create a draft or you move something around in folders. You might want to move from a website to a world of web applications.
Yeah. But this is how Hotmail and Yahoo Mail worked. Every time you took an action, I mean, it reloaded the page and so they were super slow.
Yes. And so Paul's like, 'Maybe I can use JavaScript to make this better.' He's working on it and he discovers a little known feature of JavaScript called the XMLHttpRequest, which lets a web page fetch automatically new XML data from a server without reloading the page. And Paul's like, 'Oh my god, this is gold.' And this is the birth of Ajax, asynchronous JavaScript and XML. So, David, I assumed you were going to go here. I thought that you get it all laid up. You've been letting me go. You just been feeding me a rope the whole time. You trying to tell me that Gmail is the first Ajax application?
Well, the first widely adopted around the world. That's fair to say. That sort of set the bar for what dynamic Web 2.0, you might say, websites could be.
Yes. The origin of the XMLHttpRequest is a part of Internet Explorer first implemented by Microsoft and used in this part of Outlook called Outlook Web Access. I think I did know this when I worked for my high school. I could log in on any computer into my Outlook through their web access and that thing used Ajax and I think it only worked in Internet Explorer. So that is the origin of why this API exists in the first place.
Ironically for another mail client.
Oh, not just for another mail client. It's so deeply ironic that this originated for a Microsoft mail client.
Yes. We're going to get deep into that in just a minute here.
Yes. So I mean when Paul discovers this, this is almost like Google search all over again when people realize what you can do to create something that looks and feels and has all the functionality of an application that heretofore would have been a program that you installed on your personal computer or an app on your Mac that maybe you downloaded from the internet but more likely you went to a retail shop like CompUSA or installed on your computer. You can now just do this in a web browser. This is incredible. The web is the platform of the future.
Yep. So Paul builds the prototype, shows it to Larry and Sergey. They're super jazzed. So supposedly Larry and Sergey become the first beta users of Gmail. They are the seed Gmail users and they start using it exclusively as their mail service within Google. And then by the time it launches publicly, all of Google is on Gmail and using it, addicted to it. And it wasn't called this at the time, but it's in the cloud. You don't have to have your mail stored on your machine or a specific server. You can log in, access it anywhere on any network, any device. All this stuff sounds so boring, but it was completely breakthrough. So obviously Larry and Sergey are jazzed first because of just the incredible nature of this product. And Larry especially, he is a product person and his view is if we can build a better product and it's on the web, then it's good for Google and we should do it. And that is a huge part of the motivation underlying Gmail and everything we're going to talk about. But there's also another reason and that's Microsoft. Because Google was doing great, printing money, AdWords, search, greatest product, greatest business of all time. But they've got a big risk, which is that everything about Google, everything about the web right now flows through Microsoft, flows through Internet Explorer.
Yeah. Google's entire money printing machine was built on top of Microsoft's and at two layers. So to this point over 90% of Google search queries were done on Windows PCs and 90% were done in Internet Explorer running on those PCs. So Google's got the killer app for the web in search and the thing under them is a browser owned by Microsoft and the thing under that is an operating system owned by Microsoft.
Yes, they exist at the pleasure of Microsoft at this point in history and Microsoft has a different business model. So Google's business model, the greatest of all time, is people use Google search. They discover more of the web. They spend more time online on these new sites and services that they're discovering. As they're spending more time online, they search more. Searching more leads them to discover even more new sites and services, the cycle repeats itself and Google just monetizes the whole thing.
Yes. And web usage isn't bad for Microsoft, but if the platform of the next generation becomes the web and people are writing web applications instead of Windows applications, that makes Microsoft's platform a lot less valuable versus other operating systems like say Mac or say a future where we change away from desktop computers altogether.
Yes, at a minimum, Microsoft doesn't business-model-wise care about the web because they don't monetize the web. Microsoft makes money by OEM selling PCs that have Windows on them and then Microsoft sells software that goes on those PCs. So, at a minimum, they don't care. And at a maximum, like you're saying, web apps are an existential risk to Microsoft. Oh my god, there's a future application platform that just doesn't really require our participation other than the fact that we control IE. And at least for now, that's really important. And most of Microsoft hasn't realized this yet. Thank God for Google. Microsoft's distracted with the albatross that was Longhorn that would become Windows Vista. Yes, a few people in Microsoft realize this, but Google for sure realizes this though. Eric Schmidt for damn sure realizes it because he was the CEO of Novell before coming to Google. And who is Novell's competitor? Microsoft. And Microsoft crushed them. So why Google's so jazzed about Gmail? They need to build up leverage with consumers, with users that they're going to demand rich web applications so that if Microsoft ever tries to disadvantage Google or disadvantage web apps and things moving to the web, really the only defense against that is if consumers have already adopted this stuff and love it and would revolt. And so this is what Gmail is.
Yes. So Gmail development's trucking along through 2001, 2002, 2003. This is hard to remember now. Took three years to develop Gmail.
Long development cycle. Yeah.
To be ready to release publicly and then it was in beta for like 10 years.
Yeah. I think the reason it took so long was this was all new. There wasn't a lot of depth of knowledge out there about JavaScript. Certainly not about Ajax and XML dynamic refreshing. It was really hard to program. Today you've got all these nice abstraction layers, these frameworks that people have built to do web development that really didn't exist to make Ajax applications.
Yes. Okay. So, Google's finally getting ready to launch it. We're in 2004. There's a couple questions. One, the service for all the reasons we just described. Google, Larry, Sergey, Eric, they want it to be so compelling that consumers demand it. It takes off like wildfire. It builds this strategic moat against Microsoft, but it will cost money. There's a reason other people don't do this.
Yeah, there's a reason that a gigabyte of free storage seems a little crazy. Even if you assume, and I think this is probably directionally correct, that because of Google's commodity infrastructure advantage, they could launch Gmail at like one-tenth of the cost that anybody else could. Also remember there's no public cloud at this point in time. So you'd have to go build your own data center to do this. You can't just launch on AWS. There is no AWS. But even assume that Google has a 90% cost advantage on the infrastructure side. The state-of-the-art is other competitors are offering 4 megabytes of free storage. Google's going to offer a gig. Sure, knock that down by 90% but the effective cost is still 100 megabytes. So how do you get around being flooded with cost and infrastructure demand when you launch it? They come up with the invite system.
Yes. And this is so brilliant. I actually don't know if it was designed as this sort of prestigious growth strategy thing that it became. Anyone got any Gmail invites? Please, I'll do anything. Yeah. Yeah. Please, please, please. Or if it was truly because of the infrastructure cost. Either way, it's just brilliant. When they launched it on April 1st, 2004, they send out 1,000 seed invites to Gmail. It's a private, invite-only internet service. They send them out to influencers. You know, the term didn't exist back in the day, but influential people.
And journalists. And then each user has a set number of invites that they can give to other users to invite their friends. And it was low. It was like five or something. And then it wasn't clear when they would top back up. But you'd give out your five. And then at some point you'd come in and you'd have five more. You'd have three more. It was like super dynamic and very clearly whatever Google felt like they could give away from their servers at the moment.
Yep. But it was so brilliant. It made it feel like you're in this special world of people in the know that with super incentivized viral word-of-mouth growth because I'm telling you it's a gigabyte of free storage. It's this incredible service. They're selling on eBay for 150 bucks. There was a monetary value to these things.
Yes. Yes. They were trading on eBay for average price of 150 bucks in the early days. And so I'm giving you this gift. Incredible. And look, everybody wants this, but you need to have the product quality that cashes the check.
Yes. It needs to be a real gift, right? And it was, it was just better. It wasn't just something I'd sign up for and then churn and be like, 'Cool, I locked in my username or whatever.' It was something that you actually used every day. Or in the words of Larry Page, passed the toothbrush test. It was a part of your daily habit, something you do once or twice a day.
Uh, I wish I could only refresh Gmail once or twice a day. So, David, was this the first software that used a waitlist like this? Because obviously, it's become very popular since, I think. So, so that's how they take care of the cost side of the equation is not running out of control is the invite strategy.
Well, still not making any money though. That's question number two. How are we going to make money from this thing? Because yeah, okay, there's all these strategic reasons to do it. It'll increase more traffic on the web, time spent, people search more, we'll make more money indirectly, but they still don't really know that. So, they think, okay, we need a monetization strategy baked into the product itself.
Yes. Well, how do you make money from anything at Google? This actually came up during development. So even in the prototyping phase, Paul logs into the database of ads, which it's just funny that at that point in time, Google's got this big database of ads, right?
Yeah. I'm just going to access the ads database, you know, all of them.
Yes. And these are the ads that would run when you searched and landed on a search results page. And so he decided to do content matching against your inbox and just show those ads on the page next to your email. And even though they weren't meant for that, it actually turned out that these search ads were pretty relevant. It actually was a decent ad to be showing you while you're looking at your inbox about similar topics. So he just rolls this out. Even though all these people in Google are actually using it as their mail client at the time, people were pissed. I mean, people were like, 'Are you looking at my emails?' You know, all the things that would then sort of come later in the public actually happened inside Google first. But Larry and Sergey loved it. They were like, 'Oh, this is so obviously the answer.' Interestingly, this experiment predates AdSense. So, Google has the display ad offering for website publishers that's called AdSense. That's different than AdWords, which is the keyword advertisements on a search results page. AdSense hasn't launched yet. And there's sort of multiple versions of history here. How much credit for AdSense does Gmail get in discovering this? But it is safe to say that the idea of display ads that are content matched against your Gmail did contribute to the idea for the first version of AdSense, which are essentially the same thing, content matched ads just on a publisher website instead of the content of your inbox. So the product launches publicly April 2004. As you would expect, people go nuts. It is truly a revolutionary product. And Gmail grows over the next 20 years from that a thousand initial public beta user seed base to over 2 billion today. And it's still by far the best email service. Even if you use another front end for your email, for your Gmail like Superhuman or whatnot today, you still want Gmail on the back end, at least as a consumer.
Yes. So once Gmail starts to take off, Larry and Sergey and Eric see this and they're like, 'Wow, we should do this a lot. Let's go.' Like, let's build as many web applications as we possibly can imagine. What else can go into the browser that we didn't think was possible before? This fires on every single cylinder for us. Most importantly, grow the web. Grow usage. You grow the web, you grow time that people spend in web browsers. They will search more. We will make more money. And beyond that, with some of these products like Gmail, we can monetize the products themselves. Great. Two, we are building our strategic moat against Microsoft. The faster that we get the internet-using public to fall in love with and use web applications, the less and less leverage Microsoft has over us. To use sort of Ben Thompson speak, Google realizes the web can become the point of integration. Maybe the OS isn't what the whole universe has to target. The hardware makers, the OEMs, the application makers, the users. If applications start living in the browser, then the web can become the point of integration. Users just need a browser and OEMs just need an operating system that can access the browser. And what's so great for Google because of their business model? Sure, it's great when they build and own and operate and run and monetize web applications themselves, like they do with Gmail, like they'll do with Maps, like they'll do with Docs, like they'll do with YouTube that we're about to talk about. But if they don't, doesn't matter as long as anybody does it, right? They just need to be wind at the back of web adoption.
Yes. So that leads to a whole flood of Google web products and services to come. But before we tell that story, yes, now is the perfect time to talk about our presenting partner, JP Morgan Payments. They're investing billions every year into technology and product development. In fact, Jamie Dimon even referenced it on stage in our interview last month. This investment has led to them becoming a powerful engine for marketplaces, fintech companies, and platforms to deliver growth, stability, and scale for their customers. And these days, the best companies have made payments infrastructure invisible to their users. If you're booking a ride, buying something from a marketplace, or managing a subscription, the magic happens when payments feel seamless and integrated. This is what JP Morgan Payments brings with their embedded finance solutions. Rather than bolting on payments as an afterthought, you can embed the payments infrastructure directly into your platform without customers having to leave to complete a transaction. This makes your products more seamless. And as we've seen from Google, the best products with the stickiest user bases are often the simplest for users. So embedded payments are all about integrating payments directly into your platform rather than sending users to a separate payment page or third-party processor. JP Morgan has the technology and capabilities for this with powerful APIs. But behind this simplicity, there's an incredible complexity that JP Morgan takes on so you don't have to. You can get sellers up and running quickly, offering flexible payment options, provide efficient funds management, and secure money movement at scale. Plus, they have advanced analytics. Marketplaces and platforms can provide payment acceptance, funds management and payouts in secure and compliant infrastructure, all without users ever leaving their ecosystem. And this reflects JP Morgan's broader vision. They're not just a bank anymore. Their infrastructure with the scale, resilience, and security of a global leader for trust and safety. They were even recognized as the best overall embedded finance platform in Tearsheet's Big Theory Awards 2024. So whether you're building the next great marketplace or just need reliable payment infrastructure that scales with your business, no matter how large you scale, JP Morgan Payments is there so you can focus on what you do best. To learn more about their embedded finance solutions and how they're powering growth for businesses small and large, head on over to jpmorgan.com/acquired and just tell them that Ben and David sent you. All right, David. So, Gmail, we've got our existence proof of an Ajax-based web app. It's going viral. People love it. We can really build web applications now. Let's go nuts.
Yes. So the next big web apps following Gmail were Maps, Docs, and Spreadsheets. All absolutely incredible. And it was not clear that these things were possible with web technologies. These required incredible technical and product vision. So first Maps. We actually did a whole Acquired episode back in the day just about Google Maps.
The three companies they acquired. Yeah.
It starts in 2003, so even before the Gmail launch when a young associate product manager, APM at Google named Brett Taylor...
That Brett Taylor, of course, of ACQ2 fame. Brett Taylor, recent ACQ2 guest. Brett Taylor. Oh yeah. Also FriendFeed founder, Facebook CTO, co-CEO of Salesforce, chairman of OpenAI, former chairman of Twitter. Yeah. Yeah.
That Brett Taylor starts his career out of Stanford in 2003 as an associate product manager at Google. He ends up going to Larry and is like, 'We're missing out here.' AOL has MapQuest, which they've just bought for a billion dollars. And I'm hearing through the grapevine that Yahoo is about to make a big push and launch Yahoo Maps. And so, as you would expect, Larry's like, 'Oh, yeah. Is this a web product?'
Yes, of course. Go do this. For all these things that we're studying here, there's a business rationale which might be extremely indirect, but it's there. This idea of increasing web use increases Google search, which increases the money printer. But then there's also an abstract rationale, which is our mission is to organize the world's information and make it universally accessible and useful. And Maps is squarely in the middle of that.
Yeah. Now, the thing was, as big as MapQuest and Yahoo Maps were about to become at the time, and they were big. I remember using them. My parents used them. Everybody on the internet used these services. They weren't what you think of as Google Maps today. They were static web pages.
Yep. They didn't use Ajax. And the whole point was to get driving directions that you could print out.
Exactly. And the business model for these services was on the printed piece of paper that people would print out, you would put ads on there.
Yep. It was like a Trojan horse newspaper business, right?
So Brett and Larry and Marissa are looking at this like, I think we can do better than this. So they go out and they buy a little company in Australia called Where2 Technologies which was started by these two brothers Lars and Jens Rasmussen who were incredible engineers and they had built a real-time interactive maps application except it was an installed desktop app. And so they're meeting with them and Larry's like, 'Okay, this is what we want, but we need it on the web.' I think actually the quote was, 'We like the web at Google.' And this is how good of engineers the Rasmussens were. They go off and in I think three weeks they rewrite and rearchitect the entire application to run as a web app and they basically independently discover and implement a lot of the JavaScript and Ajax features that Google was working on internally for Gmail. Gmail still hadn't launched yet.
So Google ends up buying Where2, that becomes the core of Google Maps. Around the same time they also acquired two other companies. ZipDash that did traffic data and Keyhole which would become Google Earth. Now Google Earth was an installed desktop application. Ultimately everything that Google Earth was building would get folded back into Maps later.
It's actually not true. I thought that and just last night I realized you can still go to earth.google.com and get a completely different 3D experience than Google Maps.
Oh, no way. It's all in the web now. It's unbelievably powerful.
Oh, so it is a web app, but it's separate than Maps.
Oh, I didn't know that. Oh, I got to check that out. It's amazing. That's awesome. Yes. Keyhole and Google Earth, I think, is my favorite part of our first Google episode earlier this year that the whole thing ended up just being a Trojan horse downloader to get Google Toolbar installed on Internet Explorer on people's systems. It was there organizing the world's information and making it universally accessible and useful, but also it comes with Google Toolbar.
Yeah. The greatest distribution hack for Google search of all time.
Yes. Anyway, back to Google Maps and Where2. February 2005, Google Maps launches. People go nuts. Live mapping dynamic web application. Do you want to know my favorite Easter egg for the first day launch of Google Maps? I don't know if you know this. When you loaded up maps.google.com, do you know what visually you saw?
You saw a great big ocean and North America and then floating in the middle of the Atlantic Ocean, you see the UK and then there is nothing past it. They hadn't built it yet.
They hadn't built it yet. Europe, Asia, Africa, not included. It's not even like it's off limits. It looks like there's an ocean where Europe should be. How do you decide what the MVP is or the minimum viable product to ship on the map? That's amazing.
All right, there's one more really important piece of Maps, which is the next year in 2006, they released the API. And this is what really kicks off the Web 2.0 era. Gmail and JavaScript and Ajax had inspired developers out there for sure to make richer web apps and people were doing that. When Google releases the Maps API, this thing called mashups starts happening. You remember this?
Absolutely. It's now super easy to grab Google Maps and build stuff on top of it. And it's really hot and this enables startups. So like Zillow, Uber, eventually DoorDash, Airbnb. Think about all the companies that just couldn't exist without the Google Maps API. There was that whole web of geo-related companies too. Remember that era of mobile, social, local?
Oh yeah, Foursquare and Gowalla and yeah, all those, all this existed because Google Maps existed.
So back to Google's overall strategy here and adoption of web apps and sort of building this moat and defense against Microsoft. This is just incredible. I mean here's Maps itself as a first-class rich web application that tens, eventually hundreds, today billions, two billion plus users use and love every day. And now here's this API that's making it really easy to help other startups and other companies go build great web apps, too. The lock-in just keeps getting deeper and deeper and deeper for the web.
Yep. And at first, the API was notoriously free or very inexpensive at very high limits for a long time. That's different now. But for the longest time, it was just this is a part of the mission, so we're doing it and we'll figure out the business later. It was a very sort of founder-driven thing. Now, it's popular to create maps. I mean, Apple at some point flipped into doing it and there's these sort of other third-party companies and there's the OpenStreetMap and all this stuff. For the first five to maybe eight years, Google was kind of the only ones that had a passion for this and a willing to spend into the giant hole that you need to create maps of the whole world. I mean, it's an incredibly hard data and engineering problem. And you know they had to go draw all their own maps from scratch, acquire the data, figure out how to get fresh data all the time, create a crowdsourced thing among Google, was it Google Map Maker or something like that? All the people that would update these things. This is an extremely Googly problem and a founder bet to be like, 'Nope, we're gonna go spend hundreds of millions of dollars, billions of dollars on this, drive cars around, taking pictures of everything, figure out how to not overshare personal information on this, do it dynamically because you're capturing a huge amount.' I mean, it's just, it's a wacky, wacky engineering problem that is daunting and they took it on.
Yep. And we're not going to talk about this today, but put a pin in for the next episode is one of the most incredibly strategically valuable data assets for the AI era and specifically for self-driving cars.
Yes. But today, Maps has over two billion active users this year. They don't break out revenue, but estimates are that Maps does well over five billion in revenue, maybe even 10 billion in revenue. The larger part of that is ads. You see recommended places to go around you all the time whenever you open Google Maps now that are sponsored ads just like on Google search. And then the smaller part of that is from the API licensing, David, that you were talking about. But this is a real business for Google today.
Yep. All right. Next ones that we got to talk about, Docs and Spreadsheets. So these aren't the biggest Google apps out there today. I think if you lump them all together into Workspace and Drive, it is over a billion users. That whole suite is among their most used products.
That whole, uh, you call it Office suite. Is that what you would call it?
Yeah. Sounds like an Office-type suite. It's a good idea. Someone should do that.
So Docs and Spreadsheets hit Microsoft right where it hurts: Office. So people have tried both before Google and after Google to compete with Microsoft in productivity forever. WordPerfect, Lotus Notes, Lotus 1-2-3. We talked all about that on our Microsoft episode. By the way, WordPerfect acquired by and run by Novell. Who is the CEO of Novell? Eric Schmidt. Eric knows all about this. But here's what I will say, David. If you were starting on the foot of competing with Microsoft or trying to build a word processor or trying to build a spreadsheet, you would be doomed for failure. What Google was doing was saying there is something that is uniquely possible with web applications and Ajax in this Web 2.0 era for the first time. And that thing is real-time collaboration. Real-time multi-user collaboration. These were the first... I've tried to rack my brain. I talked to Sam Schillace, the founder of Writely which Google acquired which became Google Docs. He believes these were the first real-time multi-user collaborative pieces of software in history. It just wasn't possible before the web.
Yeah. Jonathan Rochelle, the founder of the company that would be acquired that would become Google Spreadsheets, basically said the same thing. His comment was, 'We actually didn't know if it was possible to do this in the web.' Google said, 'Based on the success we're seeing with Gmail, I bet we could do actual spreadsheets in the browser with real-time collaboration.' And when the Sheets team came in, it was truly an open question of can we make it so you and another person can party on the same very basic spreadsheet at the same time.
Interesting. The Docs team. So Docs was an acquisition. It was a company called Writely that was founded by Sam and his two co-founders who were great programmers. They've worked together for many years. I used Writely before it became a Google.
No way. You were like one of very few people who did that.
Yeah. Because it was not an independent company for long. Product launched August 2005. Google bought the company in March 2006. So you had about a six-month window.
Wow. But yeah, they built real-time collaborative word processing as a web app inspired by Gmail and everything that was going on at Google.
The whole company started as, oh, for our next project, let's explore what we can do with JavaScript and Ajax and oh, what would it be like if we put a word processor on the web? They weren't actually even thinking about collaboration at first, but then as they were working on it together, they naturally started collaborating and thought, 'Oh, this is the killer feature.' That's funny. That's different than the Spreadsheets team. Their whole thing at first was, 'We're not going to make a better spreadsheet than Excel. So, if we put it in the web, it has to be about sharing and collaboration.' Yep. And so, to your earlier point, nobody can compete with Microsoft in productivity software. One, because they'd been doing it so long, they had this feature wall of so many features that people needed. Two, proprietary file formats. They had a network effect of the file format. You built your big model in Excel. Good luck. Other people need to be able to run it on their installed desktop applications. Good luck getting somebody to try downloading or buying a new piece of software and installing it on their machine. But three, I mean the biggest by far, the enterprise agreement. This is Microsoft's whole entire business model, right? You don't have to be best-in-breed in any specific thing. You just have to be a platform with everything.
Yep. And IT departments will buy it. And especially for productivity software, really all the money is in B2B and work applications. And so if IT departments are buying the Microsoft enterprise agreement, they're getting everything. Good luck unseating Microsoft Office. And I'm not sure you could do this as an independent business because think about how long Google went with these things before they were adopted by bigger companies. For the longest time it was oh a Google Doc, that's like a thing for either you use that for your personal life or maybe like a startup would use it. But even a medium-sized company, you can't be serious. Get out of here with that. And Google was basically able to subsidize it because they had a giant existing business.
You are so right. Nobody except Google could do this for a whole bunch of reasons. One, you talk about subsidizing. Imagine trying to build this software as an independent company or really even as any other company. It would require a lot of infrastructure. Real-time multi-user collaboration in a web app. Gosh, that seems like really complicated server and backend infrastructure. For Google, it's what they do. Running Docs and Sheets, the incremental load to Google's infrastructure was trivial compared to search. They already had it built out. It was super cheap.
Yeah. Two, they don't need to make money from it. This is the big reason why nobody else could compete. Microsoft has all the dollars completely on lockdown because of the enterprise agreement. Big dollars. These small and medium businesses would of course pay for something, but those dollars don't add up to be nearly as big.
Right. Exactly. Google though, that's fine. Microsoft can keep all the dollars. All we care about is people use the web. And in this instance, particularly with Office and productivity, really this is about putting the screws to Microsoft a little bit and distracting them. And from Google's point of view, this is a cheap distraction. If this gets Microsoft all spun up, Microsoft is now all of a sudden getting asked all the time, 'What's your web strategy for Office? When are you going to add collaboration to Word and Excel, etc., etc.' They don't have any answers. I literally worked on this. My internship was at Microsoft and I worked on adding headers and footers to the Microsoft Word web app. We were porting the Windows code to have perfect document fidelity to the web. So when you looked on the web and then printed from the web, the document would be laid out pixel for pixel, character for character, exactly how it would look on the printed page. When you have that requirement, that is a hard, hard engineering task and it's still not as good as Google Docs, right?
I love it that this launched your technology career.
Yes. Amazing. But yeah, from Google's perspective, this is amazing. Microsoft is now forced to bring their crown jewels to the web, which they don't want to do. And Ben, to your point, because they have to make it look and feel and function exactly like the installed desktop apps, this is going to take them a long time and be a big investment. Fantastic. And no matter what, it's going to be more complicated because with Google, it's install-free. There's no licensing. Someone just shares a Google Doc with you. If you have permission to view it, you view it. With Microsoft, I remember at first it was sort of antithetical. It was like, 'But what if I haven't bought Word? Can I just use Word for free in the web then?' Right? Is Microsoft okay with that? Am I going to hit some weird usage tier? Like what? So, it's confusing for users. It forces the company to think about pricing and packaging. It was a master stroke by Google.
Yep. So, fast forward to today. It's hard to get real actual apples-to-apples data on Google Workspace versus Microsoft Office users. But basically the way to think about the market is that Google has the vast majority of users and usage of productivity software and Microsoft still has the vast majority of dollars and that's fine. Google's super happy about that.
Is that true that there's more active users of Google Workspace than there is of Office?
Yeah. I mean I think if you look at users of Docs or Sheets or Slides it's in the billion-ish, 500 million, billion range for each of those. Office I think has a couple hundred million users worldwide.
Whoa. Yeah, that's crazy. I didn't realize that.
Pretty wild, right? But to my point about the dollars, so Microsoft's Productivity and Business Processes segment, which is mostly Office, I think LinkedIn is now part of this too. Last year generated over $120 billion in revenue. Google reports Workspace as part of the Cloud segment. So all of Cloud inclusive of their infrastructure as a service, all the AI infrastructure, all that, the whole Cloud segment for Google last year did about $50 billion in revenue, less than 50. So Microsoft's productivity segment, 120, Office is the big piece and that's high-margin revenue, high-margin revenue. Google's Office products are some small portion of a $50 billion revenue segment. So yeah, Microsoft's still got all the money, Google's got all the users and everybody's happy.
But you're so right. Everyone is happy. This is exactly what Google wants.
Yeah. And ultimately today, Microsoft is fine with this arrangement too. The ultimate fun coda though is Sam Schillace, founder of Writely. He would go on to manage all of Docs and Sheets and I think he actually managed Maps at some point too. He is now the deputy CTO of Microsoft. Careers are long.
Amazing. The interesting thing reflecting on Google's actual business here and comparing it against all the things that we're talking about, Google essentially won search by the mid-late 2000s. I mean, I know Bing hasn't even launched yet, and we'll get to that, but search was going to continue becoming a more and more giant market. And so, all this stuff they're doing, it's like, oh, we've won, and this market is naturally going to become large. I guess let's just fuel it getting larger and try to do a bunch of stuff under the umbrella of our mission. But what do we really need to do? And the slightly more altruistic answer, I suspect if Larry Page was sitting next to us, he would say, 'What is the goal of a company? The goal of a company isn't build the largest business necessarily. It's to fulfill its mission. And yeah, we got a money printing machine from Search and we're investing a lot of money still in Search and making that better. But all these things fulfill our mission, too.' Yep. And I think these things are all true.
Yes. So on the back of the success of Maps, Docs, Spreadsheets really starts to inform Google's strategy here. And specifically, they've seen, hey, we can acquire these web app, Web 2.0 companies, bring them into Google, turbocharge them, offer these magical experiences to consumers. We get all this strategic value out of them both on the offensive and defensive front. We can operate these things at a fraction of the expense that it would cost anyone else to do so, standalone company or part of other big companies. And some of the things we could buy actually fit into our core ads business quite well.
Yeah. What if we went big with this? Like really big, like something super expensive to run that requires storage of massive videos and bandwidth for streaming these massive videos and lawsuit protection.
Yep. Probably also costs a lot to buy it because it's well-funded from Sequoia. That leads us to YouTube. But before we do that, now is a great time to thank friend of the show, Anthropic, and their AI assistant, Claude. So, as we were researching Google's expansion here from just search into being a real platform company here in the 2000s with Gmail, Chrome, Android, Workspace, everything we're going to get to later in the episode. The complexity just skyrocketed with all these interconnected systems that needed to scale to billions of users and keep information flowing between all the various products and services that Google was launching. The funny thing is how quaint that problem seems today compared to the scale, speed, and interconnectedness that you need in the AI era. If you're an enterprise building today in AI, you need to deal with all of this times 10.
Yes. So, enter Claude. What makes Claude different for the enterprise is sustained performance on complex tasks. We're talking about the kind of work that would typically take your senior engineers weeks, like refactoring entire codebases or synthesizing thousands of regulatory documents.
I wouldn't know anything about that.
Claude can handle these multi-hour projects while maintaining context and fewer hallucinations throughout. Claude is actually the most adopted AI within enterprises when it comes to their API.
Yep. That's because Claude integrates seamlessly with existing workflows through their MCP connector system. They have pre-built integrations with tools like Jira, GitHub, HubSpot, and Square, plus custom integrations for any internal system, making Claude your central knowledge resource.
So companies like GitLab are already using Claude for coding and research teams use it to process documents that would normally take weeks to analyze manually. If you're building the next generation of intelligent applications, check out Anthropic's enterprise offerings to see how teams are transforming their workflows with Claude. And we've got a special offer for Acquired listeners to try out Claude before making the enterprise commitment. Half-price Claude Pro for 3 months. Go to claude.ai/acquired to get started. And just tell them that Ben and David sent you. All right, David. The YouTube story.
The big kahuna. Ah, the most embarrassing thing in Acquired history was our early episode on YouTube. All right, I have got a proposal for you.
You want to take it out of the feed? Delete it today. We're setting the record straight. When we finish this section, we are regrading YouTube. We are updating the Acquired canon. It's happening.
Oh, let's do it. We're bringing grading back, baby.
Great. I'm glad you're into it.
I love it. I love it. Awesome. All right, YouTube 2003. So, same time frame as everything we're talking about here. Gmail hasn't even launched yet. Google starts working on Google Video. And the idea is that there's a lot of information in video and thus it fits Google's mission, Ben, as you were saying earlier. And also, well, there's just so much more advertising dollars in TV than anywhere else in the global economy. To this point in time, TV was the bulk of ad spend.
Yep. If you go look at some of the old Mary Meeker Internet Trends decks, remember from this time period, and you look at the share of global ad dollars spent on TV versus any other category, it's just so much bigger than anything else. David, I am so glad you did this. We are brothers. I did the exact same thing to try to tee this up. Amazing. I have the stats in front of me. For listeners, digital advertising, you know, Google's universe would not eclipse TV until 2017, 2018.
Wow. So, almost 15 years in the future from when we're talking about here in 2003.
Yes. That is the wildest thing that TV was bigger than digital for that long. Mary Meeker famously had this point that she made every single year that the attention was all in the digital economy, but there was this gap and the ad monetization hadn't caught up yet. And it took all the way till 2018 for the flip to finally happen where digital overtook television thanks to YouTube.
Yes. And Facebook and Meta and TikTok and etc. And the rest of Google too.
I know. I know. So this Google Video project actually came out of the ads or it didn't come out of engineering and the rest of the Google product or...
Yeah, it was motivated by hey there's a lot of money in TV and of course this fits the mission. There's a lot of information in video. We should totally do this. Here's how Larry describes it. Google Video was first launched in 2005 as a search service for television content.
Yes. Because TV closed captioning made search possible and user-generated video had yet to take off.
But it subsequently evolved into a site where individuals and corporations alike could post their own videos.
They were digitizing TV because the transcription wasn't as good as it is today. So they needed the closed captioning data to make it searchable. And they were almost like meta-archiving. They were looking for other websites that allowed people to upload video and including that in the search results also.
Yep. Sure. You can see how this conceivably could be a product vision you could have at the time, but Google Video was the wrong product. The problem was one, you couldn't actually watch the video. It was just search that then directed you just like Google's main search business model off of Google Video to go consume it somewhere else.
Yeah. In the beginning it didn't even have a player.
Whoa. I didn't realize that.
Yeah. Crazy. And the bigger problem though, well that's a pretty big problem. Another big problem, shall we say, was that the focus was on traditionally produced head kind of content, not long-tail, not user-generated content. It was really tied to TV. There was a press release that said that they could search the content of TV programs, find programs containing the content they're looking for, and discover when and where the program will next air.
Yeah. So meanwhile obviously here we are in 2004, 5, 6, consumer-generated digital video is becoming a thing either via standalone new devices like the Flip camera that's coming out from Flip was a startup, right? And then Cisco bought it.
Yeah, my other internship employer bought Flip while I was there.
Yeah, this is like Ben Gilbert personal history. But more commonly, so I mean there were dedicated devices like the Flip camera, but digital point-and-shoot cameras had gotten so good by this point in time. This is going to come back up later in the episode. People thought this was the big consumer electronic device vector before smartphones. People were really, really excited about how good and how universally adopted digital cameras were. All of a sudden, in the mid-2000s, for the first time, anybody could make a video at any time.
And iMovie was just becoming a thing. So, you could shoot it on your point-and-shoot and you can edit on your computer.
That's right. So, YouTube in early 2005, three PayPal employees, the PayPal mafia, actually fairly junior employees at PayPal, Chad Hurley, Jawed Karim, and Steve Chen, leave PayPal and create YouTube. Okay, Ben, I have two deep-cut YouTube corporate history trivia items for you. Number one, do you know what YouTube's...
Original tagline was? The name of the company was YouTube. What was the tagline and the value prop? I have no idea. Tune in hookup. Really? It was a video dating service. I did know that. And they actually posted Craigslist ads in the Bay Area for attractive women to make videos to post as profiles on the site. Unbelievable. And they got like no responses as you would expect. Thank goodness for them and Google though, because then they pivoted into a general purpose video uploading site that anybody could upload anything. That made YouTube. Okay, so that's trivia question number one.
Okay, trivia question number two. Do you know who Chad Hurley, Chad was the CEO, who Chad's father-in-law at the time was?
Oh, no. I have no idea. Jim Clark of SGI and Netscape of Silicon Graphics and Netscape. Jim Clark. Jim Clark. Didn't know that. Yeah. So, not only were they part of the PayPal team and PayPal mafia, like they had the best adviser of all time. Wow. To navigate the Silicon Valley ecosystem and the internet ecosystem in Jim Clark.
So, the brilliance of YouTube, and it really was absolutely brilliant, was three-fold. One, it was super easy for anyone to upload a video. So they had a killer content acquisition model. Anybody, anytime, anything. And as soon as the servers process it, we'll put it live. No copyright checks. Unlike Google video, which would take one to two days, all about copyright for humans to pour over it, make sure that it was all good, and bless it, and then put it live, which of course won't scale in the UGC era. YouTube's just like, 'Whatever, upload it.' Yeah. Two, super easy for anyone to watch a video. You need a really good viewer in the web app to view the videos. Google video didn't have it at the beginning. So, killer content consumption model. Go to youtube.com, find something or find a link or number three brilliant thing about YouTube, see a YouTube video embedded on another website. Boom, you're watching the video. Killer growth in distribution model. And also, YouTube pretty much from the beginning had great search. You can search YouTube and find videos that you're looking for. Pretty quickly, YouTube became and still is, Google talks about this all the time, the second largest search engine on Earth behind Google.
It's amazing. Is searches happening on YouTube. That happened quickly. I always thought that was a more recent last 10 years phenomenon. I think that happened very quickly. YouTube traffic scaled so fast and so big. So you can see how YouTube here, not only are they the correct video platform for the web and just doing it much better than Google's doing it with Google video, there's actually some version of the world where they might become a real competitor to Google's core business. If all these searches are happening, they could add search for other things on YouTube, too, right? I don't think they had any plans to do that, but it's the same rationale of Mark Zuckerberg saying, 'Uh oh, everyone's using WhatsApp for messaging, whether or not they put in a social media feed stream. They always could.' And so, it's really dangerous to me for them to be out there aggregating all the users and attention and habits when they always could do something like that.
Exactly. Same dynamic. And whereas in the previous categories of apps that we talked about, Google had the advantage of uniquely being able to do it as Google in a way that startups couldn't. Here it's a little bit the opposite. YouTube as a small startup has the advantage of oh copyright rules, laws, but I don't know. We're just a platform. We're just a startup. Anybody upload anything. Google by this point in time is a public company. No way they could behave like this.
Well, it's funny. They could, but they wouldn't. They actually could do it and stay in business, whereas YouTube can say, 'Eh, whatever.' But then they're going to go out of business because they're going to get sued out of business. So it's this really interesting sort of catch-22 of this is the way to start and get all the users because this is the best user experience and at the same time it will not work as a resource constrained small company once it is started it needs to be part of Google right yes obviously we're going to get to that but in the beginning though oh my gosh I mean the embeds were a beautiful distribution growth mechanic for YouTube but people were just uploading copyrighted video that people could watch for free. I mean, it's almost like Gmail. It is so unbelievably compelling to a consumer when your friend tells you about YouTube or just sends you a link or you see an embed page of, 'Whoa, I can go watch Lazy Sunday from Lonely Island and Saturday Night Live in my web browser anytime I want for free with no commercials.' Yes. Yes, I want that.
And in fact, when users started uploading Lazy Sunday, the Lonely Island skit from Saturday Night Live to YouTube, this is in that brief phase where YouTube was an Ascendant startup and not yet part of Google. That one skit increased YouTube traffic by 83%. Wow. Unbelievable. And so they very quickly raised money from Sequoia. Is that right? Yep. So it was basically incubated at Sequoia when the three founders left PayPal. Sequoia invested right away. I think it was Roelof Botha's first investment when he joined cuz Roelof knew them from PayPal. He's also part of the PayPal mafia. Exactly. And then Sequoia led another round pretty quickly thereafter because the infrastructure costs started as you would imagine scaling astronomically here. Yeah. So three things that are very expensive. Two of which are ongoing. One is a onetime cost. It's the onetime cost but still expensive is encoding the video. This might eventually play on multiple types of devices and multiple browsers. So there's a lot of encoding that has to happen. Two then are just big ongoing variable costs. You have to store all this video. And the biggest of all the networking, the bandwidth becomes extremely expensive and costs you every single time someone plays the video. Your biggest cost driver scales with minutes watched. So that is eventually going to kill you unless you have an aligned business model. Yep. By the way, it would also be really nice if whoever owns and operates this had its own really good, really cheap infrastructure with all of these things built into it. Y So yeah, pretty quickly within a little over a year of launching, YouTube is in way over its head. The content issues, the copyright issues, the infrastructure scaling issues. It's all exactly what they wanted. It's going as well as they could have hoped and it is in way over its head. Yes. And if this had happened today, you could probably raise enough capital from the private markets to address this and scale up as a company fast enough, especially with public cloud that you could probably build this as a standalone company. Yeah. I mean today you can go raise billions of dollars as a series A startup if you're in the right space doing the most interesting things with the big market. 2005 2006 not the same kind of private capital available and of course there's no way the company could go public with all these issues or anything right in particular there was a giant suit from Viacom. Yes. So because of these things YouTube ends up basically putting itself up for sale. I mean they have no leverage in content negotiations with rights holders and infrastructure is killing them. So in November 2006 which is less than 18 months after the product launched Google buys YouTube for $1.65 billion in stock.
In stock. I'm glad you caught that too. Stock. Yes. We heard in the research that after this deal, Patrick Pichette, I think was the CFO of Google at the time. He said, 'Never again.' Right? This was our biggest mistake. Said, 'Never again. This is the last stock deal that we ever do.' Google's market cap has 20xed since the day that this deal closed. If they had paid in cash, they would have made an extra 20 times multiple on whatever you already think the multiple is on their purchase of YouTube. Yep. The thing is though, this is we will correct the acquired record at the end of this section. Either way, even if Google paid 20 times $1.6 billion for this, they got a screaming deal. YouTube is so valuable. All right. I have some of the numbers from the first few years that I was able to cobble together and then I want to talk about some of the product evolution over the years. Yes. Great. All right. So, Google buys it for $1.65 billion. And interestingly, Shishir Mehrotra this week went on the Grit podcast, the Kleiner Perkins podcast, and laid out a bunch of data on this. And I actually didn't have a chance to reach out to Shishir yet cuz it just came out, but a lot of this is from that conversation. So after the acquisition, he said, and Shishir was the head of product and basically the CPO CTO at YouTube, not right after the acquisition, but within a year kind of came in for four or five years. So after the acquisition, he said it was doing about 30 million in revenue. Okay. So they did have revenue. I believe just to foreshadow our next chapter that was in the form of programmatic advertising that was on the DoubleClick ad exchange that they were using to make money. They were losing about a billion dollars a year run rate on 30 million in revenue. The amount of money they lost was almost exactly equal to a penny per view. So just imagine every time you loaded YouTube in those years, Google would just flush a penny down the drain. They got to figure out something to do about this. So for the first couple years, the CFO at the time was terrified of it scaling. Like, please don't scale in its current state. But of course, there's nothing they can do. The cat's out of the bag. It's scaling. And the CFO was exploring, hey, can we sell this to one of the other companies who was bidding on it? That's right. Because Yahoo and the media companies also wanted to buy YouTube. Yes. So Shishir says, 'We were broadly known as Google's first mistake.' Well, back to my tee up in the intro being a pure play. Investors didn't like this for a long time. This was a huge knock. I mean, geez, when we did our episode 10 years ago about YouTube, we said it was a terrible acquisition. Yes. The thing we haven't talked about, music licensing was really expensive. They were one of the top revenue sources for the music industry for a long time. Maybe even still one of the top few to the music industry. Yeah. Right up there with Spotify. Yep.
So, kind of on the product side of things early on, as you were saying, the way that you found YouTube is you would see it embedded on a different site. You would click through and then you may stick around to watch something after, but then you'd leave and your entry point to YouTube again was another embed. Most sessions did not start on YouTube.com. So you weren't going to YouTube with the idea of that they'll recommend something to me. And then even the people who did go to YouTube.com in this sort of four year five year period after the acquisition 90% of that traffic was there to search and they just ignored anything that you recommended to them. I mean it takes a long time a to build habits and b to build out the technology to make any sort of recommendation or browse or anything good. Yep. First with related videos and then ultimately the feed. And just for a sense of scale, there was a report that estimated that YouTube that year in 2007 consumed as much bandwidth as the entire internet did in the year 2000. So just 7 years before.
I have an extremely similar stat from Shishir, which is it's a later period. It's 2014, but it's apples to apples rather than comparing that '07 to 2000. He said in 2014, YouTube was 20% of the bits on the internet. Wow. I mean, this stat, but especially your stat, illustrates just how much this thing took off and also just how much more bandwidth video took up than any other media type on the internet. Yeah. But the long-term play here obviously is the Mary Meeker slide of yes, video the reason that it gets consumed so much is this is what humans want, right? And you can advertise against it. And Google realized this. So I think they they were very smart to rather than trying to continue investing in Google video to basically say they got the lightning in the bottle, they have the consumer brand, they have the attention, let's just go buy that thing and on a expected value basis if you're making a bet. Sure, you could build it on your own cheaper, but your chance of succeeding is so unlikely relative to buying that thing that it's actually a deal to get it for 1.65 billion plus the billion that we'll need to invest every year for a few years to run it in the red. So 2009 is the year where the business really starts working. Google actually discloses nothing about profitability but that the ad revenue tripled in one year in 2009. 2010 2011 they turned profitable. There was a report that in 2012 they were estimated to make about $4 billion in revenue but roughly break even. Then the 2012 13 I think they were small profitable but profitable. Then in 2013 to 2015, that time period on the product side, that's when things really changed. So the north star really became users should go to YouTube to be entertained for 15 minutes. And it's our job to do whatever we need to do to make that true. And a few things really helped with this. One was the shift to mobile. In mobile, and remember they were a launch partner on the iPhone. Oh, we're going to get into it. Okay. There were a lot more low intent sessions. So people who open the app rather than clicking through from an embed page. Low intent being low intent of watching a specific thing. Yes. It's a beautiful thing on mobile that you can sort of say I've got something to recommend to you. And obviously short form vertical video like TikTok and YouTube shorts and all that these days is that on steroids. Mobile also made it the case that any given user was more likely to be logged in. That way all the personalization, all the algorithm stuff works well. They also adjusted their core metric internally away from views and to watch time. And YouTube was very early to the concept of creator monetization. For a long time, it was the only place on the internet where creators could make money, share revenue with creators. And in our old episode, we sort of knocked them. We said, 'Look, this business has to give its first 50% off the top of any revenue it makes to the creator of the video. That's a way worse business than say Google search ads or Facebook who you know Facebook has influencers on their platforms too all the meta platforms Instagram and their rev share if it's anything sure sure isn't 50% it's probably closer to zero and YouTube right early on said you're a 50-ish% partner which takes you a decade longer to get profitable but helps you build that base just creates amazing incentives for people to build businesses and careers is on this. I mean, YouTube is the ultimate instantiation of the internet to me and the power that it can provide to individuals to make a living. It abstracts the need at all to create or run a business. It really just simplifies it down to make content that people watch, you will get money for it. You don't have to do anything else in between.
There's a little slight of hand that you did there, Ben, which is that people watch. Well, yes. So, YouTube internally went back and forth for years on this, and I think we're sort of in this no man's land that we've landed today. Camp one is, hey, the way to make people most engaged is by getting them to follow creators and they curate the information sources they want. Camp two is in algorithms we trust. It turns out camp 2 is actually correct, which is unfortunate. It's a messed up incentive. Most of the time, if you show someone something that they're subscribed to or you show someone something that the very smart computers have figured out, you will watch and then watch another video after that. Usually the algorithmic approach is right. And so there is sort of this internal conflict there where they say, 'Yeah, of course you should subscribe, but your views are only loosely related to how many subscribers you have.' Yep. This is the dark side to the YouTube economy. Yes. But putting that aside, just the sheer concept of anybody and everybody in the world has a video camera today can create something and if it's good and people watch it and the definition of good being the algorithm likes it, you will make money with no other steps in between that can only happen on the internet.
It's pretty interesting because it kind of has these two business models in core Google land. They have the AdWords business model where they're the first party media site. Each search result page is a form of media and they run ads on that and then they keep approximately 100% of the revenue generated from that ad. The advertiser pays them and they share some in the form of traffic acquisition costs that we'll talk about later, but it's largely a first party ad. And then they have this other form AdSense and the Google content network when they show display ads on other people's websites where they share like 70% of the revenue most of the revenue out to the publisher the content owner right who actually is the reason why there's an ad there in the first place and YouTube was sort of a interesting mix between the two they were comfortable and familiar with the idea that we can manage a platform where we actually share a lot of the revenue with those producing the content, which is interesting. Like, if they had never gone into the AdSense world and they were purely a search engine, I think it would have probably been more of a fight to try to do this 50% split with creators.
of a fight to try to do this 50% split with creators. All right. So, there's a thing that I mentioned earlier, this notion of people on mobile are more likely to be logged in than people who just hit a web page on desktop. Logged-inness is essential for YouTube's success.
That is actually new to Google. Logged-inness is not essential to the effectiveness of a search engine or even the monetization of a search engine. We've sort of flirted with this idea. You can kind of hear it through our episode of things like Gmail are good because then you're logged into Google, but there's not a giant lift. It's sort of like a nice to have.
Yes. Search, especially on the advertising side, is already so bottom of funnel, right? The intent is right there. I don't need to know what your demographics are. I know what your intent is, right? You search for a shovel, I'm going to sell you a shovel.
Yeah. That's a stark contrast to YouTube where the whole YouTube flywheel really only works with logged in users, right? Not just for serving videos and content for you to watch, but also for advertising. This is how the television advertising ecosystem works. It's about targeting. You know, why does Chevrolet advertise on football games? You need demographic data, right?
All right. So, David, are you ready to regrade the acquisition of YouTube by Google?
Yes. We got to set the context of how big it is today. All right. So, back in 2016, we had two knocks on YouTube. One is that it wasn't a destination site. Narrative number two was they only get to keep 50% of their total gross revenue and then they've got these crazy infrastructure costs and they'll never be able to outrun them.
Well, they sure have solved both of these issues. Clearly a destination site. Actually, more than anything, a destination app. You open YouTube and an algorithm we trust. It's what I do every night before I go to bed.
Yes. And you know, it's some mix of things you're subscribed to and things you're not, but things YouTube believes will grip your attention at that moment. On the infrastructure costs, let's just start by unpacking their financials. So last year in 2024, YouTube ads alone did $36 billion in revenue. So half goes to creators. They have 18 billion left to play with, and they've had two decades to figure out how to get their variable cost down for video hosting, bandwidth, compute, for encoding, music licensing, all that stuff. They now do insane feats of engineering including doing their own custom silicon to do video encoding.
They also have a whole bunch of crazy things that they do like change the video encoding that is used depending on how many views the episode has.
So they do like vanilla H.264 when you first upload it and then when it hits some number of views it switches to a more computationally expensive to encode but then smaller to distribute format and then when you hit another one, when you have like 5 million views or something, then they do it yet again, they re-encode the video and make the file size even smaller. So they have figured out all these little optimizations to make any given stream as inexpensive as possible on the sort of variable cost basis.
On the revenue side, they have gotten much better at selling ads and most estimates is that YouTube is actually quite profitable. Now, on top of the 36 billion in advertising revenue, Google reported that if you include subscription revenue, so this is things like YouTube Premium, YouTube Music, NFL Sunday Ticket, they're now doing over 50 billion in revenue.
Wow. So, David, this now makes YouTube the second largest media company by revenue after only Disney. And Disney has so many other things contributing to that revenue. Theme parks, cruise ships, merchandise, etc.
Yes. So, YouTube is already bigger than Disney's media business, and this year will likely become bigger than Disney's entire business.
The question is, how does that revenue figure compare to Netflix?
I'm glad you asked. Netflix annual revenue for 2024 was 39 billion. So, they've already eclipsed Netflix.
Wow. So, there you go. Google doesn't release usage data for YouTube, but I'm pretty sure that YouTube is the biggest single property on the internet in terms of minutes spent by humans on it. It's not, I believe, the biggest number of users on the internet. Both Facebook Blue app and WhatsApp are bigger in terms of total number of users, but I think YouTube probably dwarfs them in terms of time spent by users on the app. I think it is the biggest human attention time sink known to man.
So then the question becomes how profitable is the 50 billion in revenue? And officially we don't know, but there's these great things called research firms out there that make our jobs at Acquired here much easier. So storied firm MoffettNathanson published a report earlier this year that they think YouTube does about $8 billion in operating income.
8 billion a year. So, I want to diff that against their total investment into...
Oh, yeah. Okay, great. This is the way to grade it. Okay, here we go.
Yes. Now, we're getting into grading here. We're landing the YouTube plane. The definitive Acquired regrading of YouTube.
So, as mentioned earlier, I don't think they ever lost much more than a billion a year, and I think they got to break even within conservatively 5 years. So after the $1.7 billion purchase price and the 5 billion in additional costs, Google paid $6.7 billion. I'd bet it's closer to 5.5 to own something that spits off $8 billion a year in profit today and revenues are growing 10 to 15% every year.
By the way, also since I think the theme of this whole episode is sort of like the dual bottom line to Google of everything they're doing of both revenue and profits and strategic insulation versus other large tech companies.
Oh, but David, you're forgetting the third of organizing the world's information.
Okay, the triple bottom line. There we go. The triple bottom line.
Google itself, not including YouTube, pretty much whiffed on social. Really, really strategically good for them that they own YouTube, isn't it? Now that you know Meta and TikTok exist.
Well, here's the crazy thing. They whiffed on social and then what ended up happening was social became YouTube.
Yes. Yes. It's the craziest thing. We don't open apps anymore to look at what our friends are posting, a place where Google has no presence. But you open Meta's most important property with Instagram and you look at Instagram's most used thing, Reels, or you look at TikTok, and what do you see? You see videos from people you don't know. I mean, it's crazy that the rest of social media or almost like user-generated media pivoted into Google's space.
Yeah, this was the big de facto to our Meta episode last fall was, hey, social networking such as the conception of it existed in the mid-2000s and 2010s is dead. It's gone. It bifurcated into private messaging and public media.
Yes. The sort of middle ground of wide group of people you kind of know is effectively dead. It's close friends and it's I don't really care where it came from, but it's entertaining.
Yep. So you could do a discounted cash flow on this thing that I just gave you, this call it 6 billion of investment and now 8 billion growing at 10 to 15% every year, but there's additional strategic value too in addition to this thing you just said, this becoming the winner in the short form era. They have the largest corpus of video to train on for the AI era.
Yeah, let's go. So MoffettNathanson estimated that if this was publicly traded, it would be worth about $500 billion as a standalone company. And even conservatively, if you sort of take media company comps and do a revenue multiple and you discount all the strategic future value, it's still like $200 billion. So this is officially one of the best acquisitions of all time. And I am raising my grade from a C to an A+.
I am obviously right there with you. This isn't a plus-plus. Now, it's not really fair to say that it's like turning 6 billion into 500. That initial 1.7 was largely Google stock that they traded. So, that had real opportunity cost, but it's still ridiculous. Like I said earlier, a screaming deal either way.
Yes. All right. There we go. We have revised history. Corrected the record.
Yes. All right. Well, for our next chapter, I motion that we go back closer to Google's core business of advertising on the web and maybe also stay closer to Acquired's original raison d'être of discussing the greatest acquisitions of all time. We may as well follow up YouTube with DoubleClick. But before we do that, it is time to talk about one of our favorite companies, Statsig.
So, on our first Google episode earlier this year, we talked about how great the search business model is and how once a company takes a lead, it's just hard for anybody else to catch up. But Google did something that kept them in the lead, using data to relentlessly improve the search experience.
Yep. Google really was a pioneer in the idea of a data-driven product culture. They took this to the extreme with a famous example where they tested 50 different shades of blue for their links on Google search result pages to find the optimal one. They also famously leveraged user data when people correct their queries to bootstrap the 'did you mean' autocorrect feature. More recently, they even opted people into AI search via an A/B test. This obsession with testing helped Google find a thousand small product and business wins. It also helped Google scale its unique culture where its employees can quickly test and ship new products and features because they all have access to great tools.
But for a long time, smaller companies didn't have access to the same quality of tools that were available at places like Google. Now that's changed thanks to Statsig. The smartest new companies like OpenAI, Figma, Atlassian, Brex, Notion, and Anthropic, plus hundreds of startups that you see and use every day are using Statsig to build a bottoms-up data-driven product culture. Statsig provides all the tools you need to make data-driven product decisions in one place: advanced experimentation, feature flags, product analytics, session replays, and more. All backed by a single set of product data.
And using Statsig isn't just about saving engineering time. It's about bringing that Google-level continuous improvement culture into your company. Rather than arguing about metric definitions or troubleshooting broken tools, your team can focus on shipping improvements. And if you already have your own product data, Statsig is warehouse-native. So they can plug directly into your existing data in Snowflake or BigQuery, whatever. So if you're interested in giving your product team the same continuous improvement capabilities that keep Google Search ahead, go to statsig.com/acquired, that's statsig.com/acquired.
They've got a generous free tier, a $50,000 startup program, and affordable enterprise plans. Just tell them that Ben and David sent you.
So, DoubleClick. Well, if buying YouTube in October 2006 for $1.65 billion dollars was a lot, Google decided to basically double that a few months later in April of 2007 when they bought DoubleClick for $3.1 billion in cash, this time, not stock. And this is on the display ad side of the house. So Google's got two advertising businesses at this point. There's AdWords when you search and you get the blue links that show up above the blue links, and then there's the off-property or the Google Network ads. And at this point in time, Google just is operating something called AdSense, which is this ad network that they've started.
Yeah. So DoubleClick actually has a fascinating company history before Google that I did not know.
Yeah. Not a hot rising startup like YouTube that they bought for, you know, a couple billion dollars, though it once was.
Yes. All right. So, here's the DoubleClick story. And huge thank you. There's a new book that actually just came out by Ari Paparo. The book is called Yield.
DoubleClick was originally founded in 1995. So, before Google, before Google, the founders were Kevin O'Connor and Dwight Merriman and their headquarters were in New York City. The original idea was twofold. One, build software that could let advertisers serve ads across websites. This is called an ad server. And the network of websites and media, the advertisements. When people talk about paid media, it's the advertisements themselves that would run. Over the next 5 years, they end up building and acquiring their way to being the leading display ad network and ad server. And they went public during this time.
Yep. 1998. Shining success of the dot-com industry. However, dot-com crash happens. 70% of DoubleClick's customers not only churn but go out of business. A huge amount of DoubleClick's advertisers were actually VC-backed startups. Brand dollars hadn't really spread to the web yet. Like we talked about, the digital advertising was so early and so nascent.
Yeah. It was pets.com that was advertising on other.com properties.
Exactly. They're almost levered on the bubble is probably the right way to think about it. So, easy come, easy go. So, in 2002, after they're sort of limping along for a while, they sell that ad network division off for under $15 million with an M.
So, now all they've got left is the software, the sort of ad server part of the business. So flash forward to 2004, they're this kind of sleepy, slow-growth company with a shrinking market cap. The ad server, their software was still widely used, but digital marketing on the web just wasn't actually having that much spend flow through it. They decided to put themselves up for sale. Google actually took a meeting to look at it to see if they wanted to buy it. They decided not to and eventually they sold it to private equity. Two different firms, Hellman & Friedman and JMI Management, bought it in 2005 for about...
a billion dollars. IPO day was double this final price tag that they would sell it to private equity for. And in many stories, this is kind of the end of the story. This is the start.
Yeah, it's sort of crazy given the fact pattern that you just told us that two years later, Google's going to buy this thing for $3 billion.
Yes. So, David Rosenblat becomes CEO and he has a very familiar name that all of you will probably recognize who becomes Neil Moan.
Yes. The head of product and strategy at the company, Neil Mohan. Neil, of course, is the CEO of YouTube today.
Yep. So, from DoubleClick originally, many would argue the best thing that Google got in the DoubleClick acquisition. You could argue that. Now, here's the amazing thing. What happens under the private equity ownership is that they launch a completely different product. This new thing called an ad exchange when the concept of an ad exchange is first invented. Remember it was very straightforward before this. There was just an ad network and some software called an ad server. The ad exchange is this sort of brilliant idea that we can cross route demand between ad networks. And at first what this is sort of used for is like the remnant or unsold inventory. Oh, we've got some page loads. We don't currently have a buyer in our ad network forum. So, throw them up on this exchange and see if programmatically some people will bid on it and we'll get more dollars this month for the same number of page views. But technically, what was going on is it was really sophisticated and it allowed for some crazy stuff to get done. You could bid in real time, including against the publishers direct sold ads. You know, let's say the New York Times has done a specific deal with Ford, then in a real-time basis, right? If somebody else is willing to top forward, then you can displace them.
Yep. Yep. Exactly. Gosh, this sounds a lot like Google, doesn't it? It really created the modern programmatic display advertising for better or for worse. That's basically what happened here. And as a publisher, when you start working with an ad exchange, you can incorporate multiple different networks, agency trading desks, cuz this became a big thing with ad agencies. You can stand up these complex rules engines. Effectively, what happened is you sort of jumped in front of the ad networks. you almost disintermediated them. You're the lowest level building block that everything else has to integrate with and eventually what started as this ad exchange that just became used for remnant and unsold ultimately becomes the primary way that digital media is bought on the biggest advertisers with the biggest publishers and all of course bought and sold through these big agencies.
Google is running this little thing called AdSense. It's kind of for smaller publishers and it's very like DIY self-serve. It's almost like a techie utopian's version of how do you run ads on websites. Whereas this ad exchange is let's acknowledge all the complex realities that exist in all these business relationships, all these purchasing decisions. the way Madison Avenue has evolved from the Madman era to, you know, this moment in time in the early 2000s. And let's essentially construct fat pipes for money to flow through all this. And what I mean by that is direct integrations into ad agencies financial systems and the ad agencies control the budgets for all the big brands and all the big dollars that are flowing.
That's exactly right. So, if only Google had a way of unlocking and now participating in these deeply integrated money flows, Google had a few other problems. The way DoubleClick worked and performed a lot of really fancy stuff like frequency capping to make sure you don't see the same ad 46 times is third party cookies. Google was philosophically opposed to using third party cookies, so they couldn't do stuff like that, but DoubleClick could. Google didn't have a lot of these big sales relationships since at the time again they're very obsessed with self-serve web pages. Advertisers just log in and upload and transact. So Google ends up kind of locked out of the best ad inventory. Advertisers on Google could really only be placed on the long tail of websites which advertisers were willing to pay less to appear on those websites. Again, we're all in the AdSense part of the world, not search ads. Yes, there's all sorts of things that make them not enterprise-grade here. So, Google decided they'd like to buy DoubleClick.
Yes. Well, that's sort of the story out there. The reality is, think back to how you started and when I interjected and I said, gosh, a lot of what DoubleClick is doing, it really sounds a lot like what Google is doing, right? Well, we were talking to Tim Armstrong for research for this episode. Tim of course was head of sales at Google for many years and we were asking Tim about DoubleClick and he was like, well, I was close with the DoubleClick guys and I wanted to meet with them here in kind of late 2006, early 2007 and just so happened I was going to be in Seattle for some stuff and I was emailing with them and they were like, uh oh, you're in Seattle, actually we're in Seattle too right now, we can get together here. Tim immediately sounds the alarm inside Google to Eric and Larry. They're in Seattle. Why are they in Seattle? This is a New York based company. There is only one reason why the DoubleClick guys are going to be in Seattle, and that would be if Microsoft is going to buy the company.
Yep. Now, back to everything we've been talking about all episode. What does Google absolutely not want to have happen here? Well, one was Microsoft to kneecap them by making changes to Internet Explorer or Windows or whatnot. They basically neutralized that through the whole web app web 2.0 strategy. Now the threat is, oh, Microsoft is finally going to wake up and do what they should have done 10 years ago and compete with us, build their own search engine, right? Be willing to be an ad-based business. Their DNA was, "Yeah, we'll do some ad stuff and MSN kind of has to because it's a media business, but we sell software. We sell software. That's what we do primarily. And we would never trade our ability to sell software to make money on dirty ads."
Yep. Well, Microsoft is realizing that for some set of users, Google's actually making more money on any given PC user than Microsoft is. And they're not happy with this. And say, "Fine, we at least just need to be in that game, too."
Yep. So, the negotiations are kind of happening with Microsoft and DoubleClick. Tim told us this great anecdote where he's invited to present and he still thinks it's like a early stage conversation in the negotiations and somehow he gets sent to the wrong floor. The person who is escorting him into the DoubleClick building sent them to a floor and they sort of freak out when the door opens and they're like trying to close the door like please go to the other floor. And Tim is like what's going on here? He steps out. He runs down the hall and he sees a conference room full of all the Microsoft people and their accountants and their lawyers and he's like, "Oh my god, oh my god, you guys, you're you're about to sign this deal with Microsoft. You got to." So he gets them to hold off so he can kick the tires, do his diligence, submit a counter bid. This is a crazy process that goes back and forth. Yahoo gets involved. There's a whole presentation series that happens where Yahoo, Microsoft, AOL, and Google are basically all getting the pitch and DoubleClick is now.
I'm imagining they're all like in an auditorium and DoubleClick is presenting on stage. Dude, there was a spreadsheet called YMAG.XLS. And the reason they've created it is they're effectively trying to show in each of these presentations, here's how much incremental money you'll make if you own DoubleClick and you tie it into your existing ad system. And they're tweaking the numbers slightly for each one. So Google then submits their LOI for $3.1 billion. And it includes a clause where they can't shop the deal around during this diligence period. And so the whole Google team goes to New York. They rent out this big room at a hotel near DoubleClick's offices. And I'm going to read an excerpt from the book Yield. The company's counsel, this is DoubleClick, checked her Blackberry and held it up for David Rosenblat to see. There was an incoming message from Microsoft's corporate development team. They were willing to match the offer for DoubleClick and the message included an email from Steve Ballmer saying that he opened the door for a much higher offer. Ballmer wrote that if the offer match was not acceptable, DoubleClick should simply mark up the paper to meet its needs and then sign it and Microsoft would review and rapidly countersign to close the deal with minimal negotiation required. Without saying so, Ballmer was communicating, "Here's a blank check. Tell me what closes the deal."
Ultimately, a week goes by and they're in this period where they can't really respond and they're supposed to just kind of proceed with Google. And a day before the LOI is set to expire, the DoubleClick team gets an updated term sheet from Google. The financial terms of the deal are unchanged at 3.1 billion. But now the deal includes what they call a hell or high water clause, which means that Google was committed to closing the deal without any substantive diligence or any other conditions. It's just money in the bank. So no more diligence. DoubleClick just signs it. 3.1 billion. And the private equity firm turns that 1 billion, which was levered. It was something like 300 million of equity and 700 million of debt into a $3.1 billion sale to Google. Then it's over.
Not bad work if you can get it. Nope. So this was huge for Google. DoubleClick bringing it into Google did really help with those fat money pipes as I was saying of dollar flows from ad agencies.
Yep. But the biggest thing was DoubleClick was the number one player in the space. There was another company, public company called Aquantive that was the number two player which Microsoft then bought for twice as much. They were like, "We really wish we had gotten DoubleClick." And then within months, it was the next month. Right away, Microsoft turned around and bought Aquantive for $6 billion. So twice the price. But Microsoft getting the number two player versus the number one player slowed them down. We're heading right into Microsoft search efforts with Yahoo and then ultimately Bing and getting into the advertising business worth every penny to Google even for the sole reason of keeping the premier number one player in the display ad space out of Microsoft's hands.
Yep. Okay. Hey, the one thing I will say here, David, is unlike all those other Google products, maps, Gmail, YouTube, the organizing the world's information. This is not organizing the world's information and making universally accessible. This is we're running an ad business and we want to expand the ad business and so we're going to expand and protect our business interest by buying this. And it's a chess piece on the table that it being in our hands versus other people's hands is better.
That's exactly right. And there's ways that it like systematically advantages you to own the exchange when you also own the network. And this is only checking the box of strengthening our business without checking any of the other boxes. And you basically never heard Google executives get up on a stage where they're inspiring people about the future of the company and talk about basically anything DoubleClick is doing.
Yes. Correct. And you know, even fast forward today, unlike YouTube, it's not like this has become a world dominating thing, right? If you're in the display ads world or you're a publisher or this feels like a huge deal. If you're Google, let's just look at the numbers today. Google in total in 2024 made 350 billion of revenue. About 200 billion of that is from Google search. About 30 billion of that is from Google network. This falls under Google network. Plenty of which existed before and would have existed anyway in AdSense regardless.
I don't know about that. I don't know that Google would have become the dominant player in display ads absent DoubleClick without buying DoubleClick.
Yeah. I don't think. Yeah. Yeah. But AdSense was probably doing a billion plus in revenue at the time. would have kept scaling. So all that to say like in the context of Google, this isn't a YouTube. It just doesn't matter that much.
Yeah. 200 billion in revenue they make from search where they get to keep 90ish% of that, you know, after paying out traffic acquisition costs. Google Network, they pay out 70%. And they only made 30 billion. So if you start thinking about like gross profit, it's comparing $9 billion to $175ish billion.
Yep. It's just not that consequential to the story. All right. So speaking of search, catch us up on how the search business is doing during these years and why Microsoft finally said like, "Okay, enough. We got to enter this business ourselves."
Yeah. So, we've been talking about kind of the sideshows like trying to add wind to the sails of the web and search is cranking on improvements to the core product and revenue is growing up right along with it. So, here's a little timeline to catch us up 03 to 08. They start updating the index more often. So, the index starts to feel not quite real time, but it used to be that when you would search, you would be getting results that were indexed 3 months ago. Now, the web is feeling a little bit more real-timey, recent when you're searching it. They launched Google Images, Google News, Google Books, Google Scholar. They launched Google Suggest, which is when it starts autocompleting your searches. And later they would launch something called Google Instant, which was very cool at the time. It's actually kind of gone away now, where it would run a completely new search based on every character you typed and show you the results page updated in real time with each next keystroke, which was pretty amazing.
I remember that being so cool when it launched.
Yeah. In 2005 they incorporate your search history into your results. So this is when they start doing some personalization stuff with logged in users. They go from in '04 they had
Three billion in revenue. '05, they have six billion in revenue. So doubled even at that scale. In 2007, they launched universal search across web, images, video, you know, whatever, maps. They try to deconstruct your query and understand which of these things are you looking for, rather than they used to basically build a completely separate search engine for each media type and then leave it up to you to decide which thing to go search. That year, when they launched universal search, they do 16.5 billion in revenue. This 2007 year, this is when they become the largest seller of advertisements in the world. Not just digital ads, ads. And digital ads would not overtake traditional media until 2018, as we talked about earlier.
Yeah, I was trying to square this. So I guess that means that the market share that Google has of digital ads is so high, massive, that it's bigger than even in the traditional space or the TV space what any one player has.
Yes. So every year for the last 18 years, Google has been the number one seller of advertising of any kind in the world. Wow. This, I think, helps you understand a little bit what's at stake in the era of AI. I mean, this is literally the trillion or five or 10 trillion dollar question: is can Google keep being the number one seller of advertising in the world even through this sea change? We should do a whole episode on that, probably. Maybe we'll, maybe for next time. But actually, there's some great corollaries with the mobile wave that we're about to talk about. And then just to pull forward a few more search improvements that they would do later: in 2009, that's when they really do some real-time indexing of the web. 2012, they launched the knowledge graph. So when you search about a, basically a thing with a Wikipedia page, you always get the kind of snapshot view on the right-hand side of that entity. And so all along the way, they're tweaking the algorithm in an attempt to reduce spam. That's effectively the product changes. On the people side of things, they really had solidified themselves as the preeminent computer science research company at this point. I mean, if you were to refer in 2008 to like a really smart programmer, you probably said, 'Oh, they, you know, they're like a Google-type engineer.' They sort of took the mantle from Microsoft and had not yet relinquished it to Facebook or later to Stripe or OpenAI or Anthropic or any of the sort of companies we would talk about in the future as this like dense concentration of the best engineers. And they had pulled in a lot of the people from the big research labs that had been collapsing. So you had Jeff Dean and Sanjay Ghemawat coming from DEC.
David, we did Sanjay a total disservice on the last episode. A lot of the stuff that Jeff did, and of course he became sort of a Google executive, Jeff and Sanjay peer programmed together.
Yes, there's an amazing New Yorker article that was published long ago about their friendship and career partnership and everything that they accomplished together.
Yeah, we'll link to it in the show notes.
And basically, if you look at any big research paper about giant Google infrastructure stuff that was launched from, I don't know, 2002-ish, maybe even earlier, through the 2010s, Jeff and Sanjay are either the two authors or two of the five authors. I mean, it's amazing how much stuff these two guys invented. They also got Bill Coughlen and Rob Pike from Bell Labs. You had Xerox PARC and IBM's labs were sort of losing prominence, and Google's just sucking in all this generational heavy-hitter computer science architecture systems programmers from all of those. And so I think that's sort of how I would describe where a lot of the technical breakthroughs are really coming from, or at least the culture of technical breakthroughs.
We talked about these incredible products, incredible innovations, development of the whole concept of a web application, but that was coming from these people that were coming into the company who were just like you say, generational talents.
Speaking of, that was very convenient for a couple things that they needed to start doing in 2008, namely launching their own web browser and then shortly thereafter launching their own mobile operating system. It's astonishing that they did both of these things in the same year. And this isn't like, 'Oh, I'm going to start a browser' the way that you can start a browser today. I mean, all these AI companies are launching browsers.
Yeah, they're using Chromium, right?
This is a giant engineering undertaking. You need amazing architects. I mean, this is equivalent to Dave Cutler doing Windows NT. I mean, it was earth-shattering when Google launched Chrome or everything Jeff Dean and Sanjay did in the early days of Google.
Yes. Yeah. And when I say people launching web browsers today are using Chromium, Chromium, of course, is the open-source version of Chrome.
Yeah, that Google just gives away for free to anybody. That didn't exist. They had to build it. So, in February of 2008, the shoe that Google had been fearing would drop for many, many years finally does drop, which is Microsoft is officially going to enter the search business. They make a bid, Microsoft does, to buy Yahoo for $44 billion. The giant has finally woken up. Fortunately for Google, they get a little bit of a reprieve because Jerry Yang turns it down. So dumb, in one of the worst corporate decisions of all time, because just two years later, Bing, after Microsoft would launch Bing the next year, in June of 2009, Bing would take over powering Yahoo search for a deal that paid Yahoo $1 billion versus the 44 that two years earlier Microsoft was willing to pay for the whole company. And then Yahoo would sell itself to Verizon for like three, I think, something like that.
Something like that. Yeah. Single-digit billions.
Yes. So Google, though, knew this day was going to come eventually. And fortunately, by this time in 2008, Google had its competitive response all ready to go, which was Chrome. And they had actually been working on improving the state of browsers for years.
Oh yes, they had. The story of Chrome goes all the way back to 2001. Larry and Sergey wanted to build a web browser in 2001 for this very reason that we've been talking about the whole episode. All of Google rested on...
I didn't realize that. Internet Explorer and also, I mean, it was Larry and Sergey. Of course they wanted to build a web browser. It's the most Google thing. Why wouldn't we build our own web browser, right? But it was Eric who said in 2001, 'No, we can't do this now. We can't poke the bear right now. Like, Google is too young, too vulnerable.'
Calls like this are why Larry and Sergey brought in Eric.
Eric. Yes. The actual quote from Eric at the time, this is in 'In the Plex', is, 'I don't want to moon the giant in 2001.' It's a very Eric Schmidt quote. But that doesn't mean that Google isn't preparing for this. Instead, what they do is they decide that they are going to become the primary major benefactor for the new Mozilla Foundation and what would become Firefox. Mozilla was the nonprofit organization that was founded and spun off from Netscape when AOL bought Netscape.
Are they a funder? Are they actually just like giving money?
Well, I think at first it probably was like with grants, like giving money, because this is strategically important for Google. But then once Firefox actually gets released by Mozilla and deployed out there, the way Google starts supporting Mozilla and Firefox is through paying traffic acquisition costs to them to be the default search in the Firefox browser. Spoiler alert, like they do to Apple for Safari today, to the tune of like $20 billion a year. Yes, Firefox is where this all starts with Mozilla.
Actually, traffic acquisition costs originated before Mozilla because it's effectively the same thing that they were doing with software vendors to include Google Toolbar, right? And so I think the mechanism of payment over time shifted to more of a rev share. My understanding now is that they share some of the revenue they generate from queries that originate, searches that happen in the browser.
Exactly. Which is why it ends up being kind of variable year to year. But yes, Google has a long history of paying for distribution of their search engine, and the new form that it is now taking is the Mozilla Firefox browser.
Yep. Starting with toolbar.
So, this goes on for a couple years. And by the way, I should say Google becomes a giant contributor of source code to Firefox.
Well, oh, is that where you're going?
I'm going to get into this. So, couple years, Google's paying Mozilla for default search in Firefox, basically funding Mozilla. After a little while, Google decides that they're going to hire some of the key Firefox engineers at Mozilla to come and work at Google directly. But they position this as like, essentially this is the same thing. We are still funding Mozilla and Firefox. Just like, you know, you're Mozilla, you can't give these employees, these engineers stock options like you're a nonprofit. How about instead they do the same thing that they're doing, which is working on Firefox? They'll just come and work here at Google and we'll pay their salaries and they'll get Google stock options. Otherwise, they're going to get poached, you know, by all these tech companies, etc., etc.
You can see how this makes sense. This team that comes over from Mozilla into Google becomes the core of a new, quote, product client group within Google. Meaning of this being products on clients, i.e., installed applications on PCs, not the web apps that the rest of new Google is doing. And the leader of this group, Google hires from McKinsey in 2004, Sundar Pichai.
Oh, I did not realize that that's where Sundar came from.
Yep. Well, again, all of this is very strategic because if you did someday want to build your own web browser, now you've got the bench of talent. They're employees. So, there's a quote from Eric Schmidt in 'In the Plex'.
This was very clever on Larry and Sergey's part because, of course, these people doing Firefox are perfectly capable of going and doing another great web browser. So this group is sitting there within Google for a couple years, almost like a latent sleeper cell within Google. They're just ready to activate as soon as the Microsoft threat becomes real. And the way I heard it was a lot of people are working on Google Gears, which is this browser extension that allows for offline functionality. They've built the Google Web Toolkit to make web application development even more advanced, even more sophisticated. And at some point they kind of lost faith that Firefox was going to keep the pace and that Firefox was going to stay as high quality of a browser as they needed it. And of course they had some divergent technical ideas, like different architecture ideas for how a browser should function, that we'll talk about.
I think all of these things are true. However, having your own browser when Microsoft does launch Bing, hugely, hugely, hugely important. Imagine if 90% of Google happened on Internet Explorer and all of a sudden Microsoft launches Bing, right? There's no amount of money suddenly that you could pay Microsoft where they would keep you as the default search engine because they just want all the traffic to go to Bing because they now have a great way to monetize.
Absolutely not. Bing, default search engine, done, right?
And the thing that, of course, Microsoft would fail to realize with Bing is you can't be second place in search, right? The most liquid auction will always win, and Google has already run away with the search ads auction liquidity, and so traffic on Google searches will forever be worth more than traffic on the second-place browser.
Sure. Doesn't mean that that battle wouldn't be hugely damaging to Google if they didn't have their own web browser.
So 2006, they finally decide, okay, it's time to start work on Chrome.
Yep. And also it's clear web apps, JavaScript, Ajax, very important thing, and Internet Explorer isn't keeping up with the technology.
Yeah. So, there's two killer features, arguably maybe three, that they're going to bake into the Google browser.
Oh. So, I'm curious which ones you don't think are important.
Okay, I'll go through my three and then I'll see what else you have to add.
Okay, great. Number one, most important, it is going to have a super fast, super modern, super performant JavaScript virtual machine called V8.
Yep. That is going to run big web apps fast and stably.
We're the Ajax company, baby. We got to speed up.
We are the Ajax company. That's right. Two, web apps crashed a lot back in the day. They don't so much anymore, but they used to crash a lot. And Larry has this quote when they're deciding that they should roll out Chrome, and he kind of explains, 'We have found the web-based service delivery model to have significant advantages.' You don't say. 'But it also comes with its own set of challenges primarily related to web browsers which can be slow, unreliable and unable to function offline.' There you go. And so before Chrome, this is impossible to remember now, but if you had a tab or a window open and running a web app and that web app crashed, it took down your whole browser.
Yep. Everything that you had open, gone.
Tabs were not their own processes.
Nope. So each tab is going to be a separate process on your machine. So if...
The web app running in one tab crashes, all it takes down is that one tab. And it made sense that before this they weren't their own process because one, tabs were kind of a new thing. But two, web applications were websites. The notion of web applications was only really four-ish years old.
