>>: I think we're good to go. Well, I have a feeling there are a number of you watching on the
intranet today, so welcome, as well. I have the good fortune of introducing and spending a few
minutes interviewing Fred Vogelstein, who is our guest today, and we're going to get into the
book that he's written, and some of you have already purchased. Okay. Fred is, as you may
know, a contributing editor at Wired Magazine, where he writes about the world of high-tech
business and finance. His writing has appeared in Fortune, the New York Times Magazine, Wall
Street Journal, US News and World Report and elsewhere, but he certainly is probably best
known for his writings with Wired.
So we met a couple years ago, and just by happenstance reconnected in the last few weeks since
I saw the book and was very intrigued by it. I think as good a place as any, since obviously
many of the people, since you're just buying the book, have not had a chance to read it, is to
provide kind of an overview of the book and as much why you decided to invest two years of
your life focused on this, interviewing dozens of people and a fascinating read. I have had the
good fortune of reading it.
>> Fred Vogelstein: Well, I think the answer to the question is because I have a death wish.
Writing a book is hard. But the reason I wanted to do it was because I'd written a couple of
stories for Wired, and what I came to understand, I'd written a couple of stories for Wired about
the iPhone and the early days of some of the competition that was going on between Apple and
Google. And what I came to understand was that this really wasn't just a fight between two tech
companies, but that this was a fight that was going to spill over into a bunch of different
industries, that it was going to really -- that it was a fight that had the potential to be as big as the
Internet browser, as big as the PC, as big as the integrated circuit, and arguably maybe bigger
than all of those. And so I know that in Silicon Valley, the word revolution is used liberally, and
so I wanted to spend some time thinking about whether or not this was indeed actually going to
be happening. But what I ultimately concluded was that these devices that we carry around in
our pockets now and take for granted really are changing the world in fundamental ways, and
what I came to realize is that they're not just changing the world of technology, that they're
essentially changing the world of media, that basically the kind of convergence that many people
have been thinking and talking about in the world of tech for 30 years, and many people have
been thinking and talking about and losing money over in the world of tech and media for years,
was actually starting to happen. In fact, the debate about whether or not we were all going -whether or not the PC was going to be the dominant device in the house or the TV was going to
be the dominant device in the house, that it turned out that it actually was going to be neither of
those, that actually there were going to be these devices that fit in our pocket.
Because, ultimately, when you stop and think about it, you can watch TV on these things, and
that sounds like it's belittling them to kind of talk about it like that, but ultimately that's kind of
what -- that's how powerful these devices are. One of the things that's kind of remarkable is to
think a little bit about what Netflix has done with House of Cards, for example. Netflix is a
technology company, and yet as a result of these devices controlled by Google and Apple in our
pockets, it was able to go out and produce an Emmy Award-winning series called House of
Cards and distribute it outside the broadcast system, outside the cable system and have it become
something of an enormous hit. And so I guess I thought that we were on the verge of some
enormous shifts in the way we not only think about technology but media, as well, and that
seemed bigger than a magazine piece.
>>: Why, natural question sitting here at 1 Microsoft Way, why only Apple and Google? Why
those two?
>> Fred Vogelstein: This was sort of a central question that I had to answer, actually, before I
embarked on this project, because one of the things that you think about when you think about
platforms and change in the world of technology is that there are lots of different companies
doing lots of different things, so there's Apple and Google, but then there's also Amazon, there's
Microsoft, there's Facebook, there's Netflix, there's Twitter, and you could even go down the list
into things like Square and maybe Snapchat. What I ultimately concluded was what made Apple
and Google -- what put Apple and Google on a slightly higher plane than everybody else was
that, ultimately, they controlled the devices in one way or another. So if you -- they control the
eyeballs. So the majority of smartphones being sold today are either being sold by Apple or sold
by companies, like Samsung and HTC and Motorola, that all run the Android operating system.
And so what I ultimately concluded was that, as a result of controlling those endpoints, that put
them in a particularly special and important place vis-a-vis everybody else.
I'll give you a for instance about sort of the power that these platforms create. About in 2010,
many of you will probably remember that Apple announced a new version of iOS that had
Twitter deeply integrated into it. You could do some things with Twitter that you couldn't do
with any other application, because they were deeply embedded into the operating system on the
phone. Well, the question that everybody asked at that moment was, well, what happened to
Facebook? Why wasn't Facebook there? Well, the answer to that story is because, when
Facebook and Apple were negotiating a deal to be on the phone, Facebook tried to negotiate with
Apple the way any business in that situation would negotiate, and Apple didn't really like
Facebook's terms, so it just simply turned and did the deal with Twitter.
And so when Facebook then did appear on the iPhone a year or two later, I know from doing
reporting from the book, the terms were much more favorable to Apple than they had been, and
so it's that kind of power implied -- it's that kind of power that prompted me to kind of focus on
those two, and obviously it's something that people around here understand intuitively, the power
of platform economics.
>>: So you interviewed -- what was the number of past and present Apple and Google ->> Fred Vogelstein: I think if you add it up, it probably winds up being about 100, over 100.
>>: Of just those two companies.
>> Fred Vogelstein: Yes, of just those two companies. And one of the things -- but one of the
things that I really tried to do with the book, which I have not done as aggressively with some of
my magazine pieces, is it was really important for me in order to make the story work to actually
get people on the record talking about their experiences. One of the things you'll notice in the
book, or at least people have noticed for me, is that there are about a dozen people from Apple
and Google on the record talking about their experiences working on the iPhone and the Android
project.
Now, as you guys will not be surprised to learn, the Apple people no longer work at Apple, but
since they were the people who were primarily responsible for getting the project off the ground
while they were at Apple, it seemed reasonable to talk to them, regardless -- to include them
regardless as to where they were. But the point was that I really wanted to give people a feeling
not just about what was happening but sort of the how. For example, we all talk and think a lot
about how -- we all look at each other's devices, we all look at what we have done, and people
here look at Apple and Google's dog and pony shows, and people at Google and Apple look at
Microsoft's dog and pony shows, whenever they roll out a new product, and it is tempting for all
of us to kind of believe the sales pitch that is presented to us that essentially goes like this, we
came up with this idea here, and it wound up with this product here. Draw a straight line.
Well, what I wanted to try to do in the book is convey to people is that it doesn't work like that at
all, that the way Silicon Valley really works and the way that products get built that change the
world is incredibly messy, and so messy, for example, that the people who were -- I talked to one
of the engineers a lot who helped put together the iPhone for Apple and was in charge of a lot of
the radios in the first iPhone. And he tells a story about being so nervous when Steve Jobs was
demoing the phone that he and his team were sitting in the fifth row doing shots of whiskey,
because they were so convinced that the demo was going to collapse. And so I wanted to give
people an understanding of how things really worked.
>>: Hard as it is to put aside a couple of individuals, the late Steve Jobs, for one, and leadership
at Google, how, as you made your way through the two years of all these interviews, what was
your impression of the differences in the way these two companies approached this whole topic
that you have -- I mean, I certainly have an impression from reading it, but I'm just reading the
final book. What was your impression as to how they each approached this and strategizing, and
how much was forward thinking versus reactive, etc., as they went through this?
>> Fred Vogelstein: Well, I think what's really interesting is that they started essentially here,
and they're much closer in terms of how they're approaching things than they were when they
started. Apple is a company full of incredible engineers, but the most powerful people at Apple
are not engineers, they're marketers and designers. Jony Ive is arguably the most powerful
person at Apple, besides Tim Cook, and he's a product designer, whereas at Google, the guys
who run the show most definitely are the engineers.
In fact, at Google, until I want to say four years ago, getting a job at marketing in Google was
arguably one of the worst jobs you could have in Silicon Valley. I mean, Larry and Sergey
actually, when they were starting the company in the early days, they had some of the best
marketers in the planet draw up an enormous advertising campaign. I think Sergio Zyman was
the guy who was famous, I guess maybe for -- I don't want to say he was famous for New Coke,
but he was a very well-known ad person. They spent a zillion dollars drawing up a marketing
plan for Larry and Sergey to get Google off the ground, and Larry and Sergey looked at it and
said, what do we need marketing for? We have the Internet.
But the point is that, so both of them kind of went at the phone project from very different points
of view, Apple from sort of a design perspective, Google sort of from an engineering
perspective. But what's interesting is, as the years have gone on and as the competition has
gotten more and more ferocious, what you'll notice, and this is especially true of Google, less so
of Apple, is that Google is becoming actually much more and more Apple like in the way it sort
of actually thanks about the stuff that it produces. So Android initially started out as the free
software that was going to be distributed to all the phone manufacturers that were then going to
kind of do whatever they needed to do to make great phones, and Google would just sit back and
let it all happen.
Well, what they came to understand was that having that kind of hands-off attitude was actually
getting in their way, that when you have less than 10% of the people running on the most recent
version of the software and developers squawking that the software that they write for one phone
doesn't work on another phone, you realize that you have to kind of exert a lot more control over
it. And so what you're actually seeing with Google is they're becoming much more Apple like in
the way they're thinking. But the answer is, when you boil it down, you've got the best marketers
on the planet over here and the best engineers on the planet over here, and that tells you a lot
about how both companies approach what they're doing.
>>: You obviously started two years ago or whatever, approximately two years ago, without the
benefit of the deep knowledge that you got out of the research and the interviews, but I assume
that you had some impressions about various things and some changed as you became more
educated and informed. Any surprises as you made your way through that were kind of like,
wow, I never thought that until I really got into it? Were there any things that kind of took you
by surprise?
>> Fred Vogelstein: Yes. What took me by surprise was just how incredibly hard it is to do
what you guys do and it is to do what Apple and Google do every single day, that creating
products that actually change the world is not just a job, it's actually kind of a quest, and that it's
not a straight line by any stretch of the imagination. You hear people in Silicon Valley, and
when I talk about Silicon Valley, I include everything that goes on here, as well -- you hear them
sort of talk about the freedom to fail. But you really don't start to understand what that means
until you dig into -- until you start to dig into the creation of products like this. The amount of
failure that went on in the process of getting to success was absolutely enormous. I mean, one of
the things that I lay out in the book is we all remember when the iPhone first came out. It looked
amazing, like you wanted to buy one right then and there, and Steve Jobs got -- was all over the
airwaves, talking about the revolution he had started, etc., etc. The reality was very different
than that. The phone that he was showing off, that he actually showed to the world, was a
prototype, and actually kind of a lousy prototype, at that.
The phone was due to be released in six months, but when Steve Jobs was showing it to the
world, they hadn't set up a manufacturing line. There were only about 100 prototypes that
existed at that point. They didn't know how to make them in volume. Six weeks prior to the
announcement, Steve Jobs had said that the touchscreen would be glass instead of plastic, and so
there was a bunch of engineers trying to figure out how to actually make that happen. And the
internals of the phone were full of bugs, and so one of the things that they -- bugs big enough so
that in order to make sure the wi-fi worked, he actually connected antenna wire to the wi-fi
antenna instead the phone and then physically ran it offstage. Because the problem is that all of
Steve Jobs' demos were live, so one of the things that made him so captivating to watch was the
fact that his demos were live, but if you were actually one of the engineers putting one of those
demos together, it was a source of anxiety.
>>: Actually, I think I read it in your book, or I read it recently, about how they opted to use a
wi-fi -- they tricked the system into believing it was in Japan in order to avoid the others in the
room interfering with it, which was ->> Fred Vogelstein: So it turns out that there is an extra frequency -- there is an extra wi-fi
frequency in Japan that doesn't exist in the United States. And so the engineers who were -- in
addition to jury-rigging, making the wi-fi antenna larger, they also made the phone operate as if
it were in Japan. And I said to Andy, like, why did you do that? Because this was the engineer
that I was talking to. And he said, you have an audience with 5,000 nerds. Even if you hide it,
they're going to find it. You had to figure out a way to keep them off the network. Otherwise,
they were going to wreck the whole demo. They did other things, like made -- so the phone, the
baseband that actually drove the phone, was so full of bugs that it actually hardcoded it so that it
always showed five bars, so that when everybody was watching Steve Jobs do the demo and they
had the big phone up on the screen, it always showed AT&T and five bars, which is what
everybody would have essentially expected. That was all completely hardcoded, because what
they knew was that the phone would -- that the baseband would actually work for most of the
time that Steve Jobs was showing off the phone, and then it would probably work when he
actually went to make a phone call, which would last 30 seconds or 15 seconds, but that during
the 90-minute period, the baseband would probably crash half a dozen times, and so they didn't
want the audience, watching Steve Jobs do the demo, watch the bars go down from five all the
way down to zero and then back up again.
So what I'm trying to say is that, I mean, all of this is fun, but what's more, the reason I included
it all, is to give people an understanding of just how hard it is to do that and just how much work
and dedication it takes to make all this stuff turn out the way it turns out.
>>: So you wind your way, as you get toward the end of the book, talking about the media
revolution and it isn't just about -- for those of you who haven't read it, it isn't just about the
phone fight. How do you see them connecting, what is kind of in the offing? It certainly isn't a
finished chapter in any of our businesses today. How do you see the two connecting?
>> Fred Vogelstein: Well, the reason I wrote the book was twofold, one, to kind of give people
an understanding of what it took to build this stuff, but to give also people a sense of where I
think it's going, and where I think it's going is that these -- is essentially that Apple and Google
and maybe a couple of other companies, but let's just take Apple and Google for the moment -they're in the process of creating 21st century television networks. That sounds really sort of
farfetched to a lot of people. It's kind of counterintuitive, because the idea of Google or Apple or
Microsoft or any of the companies in Silicon Valley producing like an episode of Breaking Bad
or Mad Men or whatever your poison is -- or pleasure. On the other hand, when you go back and
look at the evolution of television, when you go back and look at the evolution of Hollywood,
where they ultimately started is where Apple and Google are right now, which is controlling
distribution and having more money than anybody else. Apple and Google, between them, have
$200 billion. Well, to put that in perspective, the market cap of all of Hollywood is about $400
billion.
Now, there are lots of things that people care about in the content industry, but ultimately, when
you really kind of boil it down, what they care about is how much are they going to get paid and
how many people are going to see their stuff. Well, Apple and Google are in a position to kind
of solve both of those equations, and it's not just because they have money and they control the
endpoints with their phones, but they have -- Google has YouTube, Apple has iTunes. They
have distribution mechanisms that are already set up that will enable them to push content out to
people in ways that I think we're only just beginning to get our heads around. I think Google has
spent, what, 300 million bucks financing content on YouTube, and it's not just the two of them.
Amazon is doing it, Microsoft is doing it. Everybody is looking at -- everybody, I believe,
looked at what Netflix was able to do and said, well, I can do that, too.
>>: Any -- and then I'm going to turn it over. Start thinking about questions you might have.
Certainly want to open it up to you. Any gut as to what the much-quoted Jobs comment, said
about television and all, after having done all this? I realize you didn't really delve into that
topic, per se, but any gut?
>> Fred Vogelstein: Well, I can tell you what I think they should do. Whether or not they're
going to do it is an entirely different conversation.
>>: What's the should?
>> Fred Vogelstein: I mean, I think they should do a couple of things. I don't know whether or
not Apple is going to make a TV or not, but I know that one of the biggest problems that we all
face right now in the TV world is that the content that we all watch has become incredibly
fragmented, so there are movies that you can watch on Comcast, as well as sports, but then
there's also stuff that you can watch with Roku Boxes and Apple TV boxes, and then there's stuff
that you can download from Amazon. The number of places where we can all get content is sort
of exploding. And, as a consumer, that's actually kind of making it frustrating, so whenever my
kids and I try to sit down and watch a movie, we always have a moment where I'm going, well,
we're paying for Netflix, so we've got to try to find it on Netflix first, and then you do the search
for Netflix, you don't find it, and then you go to either iTunes or Amazon and download it. Well,
Apple could just fix this by starting to buy big chunks of content. Apple could spend $1 billion a
year and not even miss it and become the biggest repository for content out of all the companies
out there. So sometimes I think -- so I'm not even sure the answer for them is technological. I
mean, a TV would be nice, but the thing about a TV is we don't replace them as much as we
replace our phones or our tablets, and so I find myself scratching my head about whether or not
that, actually making the TV itself would be the right solution and whether or not the better
solution wouldn't be to simply connect, come up with a better Apple TV box that connected to
the existing hardware that we already have. But I don't know whether or not they're going to do
it.
>>: Well, certainly, you spend a certain amount of time on the challenges of doing the deal with
AT&T, that maybe they've gotten into this just like they did with AT&T and discovered that was
just one company as opposed to dozens and an entire industry, too. Questions? While your
microphone's being -- how did you get so many people to talk to you? That's a lot of people to --
>> Fred Vogelstein: I asked them. That's the glib answer. The real answer is that I did
something that -- I violated the cardinal rule of journalism that no journalist should ever do, ever,
which is that I agreed to talk to all the people in the book on a background basis before -- I
agreed to talk to all the people I quote in the book on a background basis. And then, when the
book was written, I went back to them and told them how they appeared in the book and asked to
be able to use their name.
This is not for the faint of heart. I can tell you that there were some people who insisted on being
anonymous that I was hoping -- that I really wanted to be on the record. Thankfully, because of
the way life works, there were some people I would convinced would demand to be anonymous
who agreed to be on the record. But it was really that simple. What I was ultimately hoping -the only reason I did it was because I thought it was the only way I could actually get that many
people on the record in the book. Human nature is kind of interesting, is unpredictable, but one
of the things that you do know about people is nobody's going to say -- we all move around in
the tech industry too much. Nobody's going to say to a journalist, two years before his book
comes out, oh, sure, I'll talk to you on the record and tell you everything you want to know, and
then you can use it any way you want in something that you put together two years down the
road.
I've been doing this a long time. I was certain that nobody would agree to do that. What I also
suspected, however, was that this was a story that a lot of people wanted to have told, that people
worked -- people at Apple, people at Google, killed themselves to build these things and spent a
lot of time watching all the people at the top get all the credit for this. And now that time has
gone by and the products that they worked on had changed the world, I kind of thought that some
of them would actually want people to know what they went through to actually create these
things. I turned out to be righter than I thought I was going to be. That's kind of the story behind
it. I don't ever want to do it like that again. I can tell you that.
>>: Anybody from this room that would like to? I don't think it's dialed in, but anybody have
any questions that they want to pose?
>> Fred Vogelstein: Should we be looking at Twitter now? Go ahead.
>>: There's been a lot of speculation about Apple, especially in the Jobs book, about him
creating the great big thing, whatever the next thing is for television. Do you have any idea,
from just talking to everybody, what you think that might be?
>> Fred Vogelstein: No, I wish I did.
>>: Actually, just repeat the question that was.
>>: Nobody laid out the roadmap for you.
>> Fred Vogelstein: Oh, sorry. So the question was, do I have any idea what the next really
killer product from Apple is going to be, if it's a TV, what's it going to look like? The short
answer is no. What I can say is that I am worried about Apple as a company without Steve Jobs
running it. I mean, it's obviously not going to go away any time soon. It's got more money than
God and it has -- actually, if you were to take Apple's just cash, you could probably turn it into
the biggest bank in the world. The company isn't going to go away, but one of the things that I
came to really understand as a result of doing the book is that, in order to make products that
change the world, you really have to have somebody in charge who has the ability and the
authority to bet the entire company's future on the products that they're throwing out there on
changing the world. So the iPhone would not have gotten off the ground if Steve Jobs hadn't bet
all of Apple's future on the product. He pulled his best engineers away from other projects, so
that if the iPhone had failed, not only would Apple have not actually had a killer product, but
they wouldn't have had anything in the pipeline for years. And so I guess I'm worried that even
though Tim Cook is a wonderful executive and Jony Ive is one of the best designers in the world,
that nobody but a founder has that kind of authority, to make those -- to take those kinds of risks.
>>: The Street's much more tolerant, too. The investment community tends to be much more
tolerant. Rupert Murdoch is able to do things as the essential founder of News Corp. that hired
executives rarely could do.
>> Fred Vogelstein: Right. Well, Jeff Bezos is a perfect example at Amazon. Jeff Bezos can
look at Wall Street and say, Amazon's not going to make any money for the next five years, but
you'll keep investing because you believe that the money I'm investing in R&D will pay off after
that. Nobody else can make that claim.
>>: Over here.
>>: In the rise of Google as it relates to smartphones, did you learn anything about how the
decision was made to acquire Android? And then, along the same lines, do you know any of the
scoop about why they acquired Motorola?
>>: Just a quick repeat.
>> Fred Vogelstein: Yes, sure. So the question was how and why Google acquired Android,
and then the second question was about Motorola, similar. The answer to the first question is
that Google acquired Android in 2005 because Larry Page knew that the mobile phone was
going to be one of the most important devices -- knew that the smartphone was going to become
one of the most important devices in all of technology, and he believed that Andy Rubin was the
smartest guy in that world. Android really didn't exist in any meaningful way when Google
acquired it, but what they did know was that -- most of you guys here probably know the history
of the Sidekick that Andy Rubin built when he started Danger. Well, the thing about the
Sidekick is that even though it didn't have the marketing budget behind it, it was the first phone
that had a full-functioning Internet browser. So all the Internet browsers up until then, and
actually after then, were all using WAP or some other kind of protocol that hampered their
ability to function normally, the way a normal desktop web browser did. The Sidekick had a
fully functioning Internet browser, and actually, Larry Page and Sergey Brin were one of the first
real users of the Sidekick, and so they had been thinking about this for a while. The question
about Motorola is, I think, much more straightforward, which is that, yes, I think Google bought
Motorola for the patents, but it's obvious that Google bought Motorola for other reasons besides
patents, which is that it allows it to make its own phones, and that gives it some control over the
evolution of the Android ecosystem that it previously didn't have.
>>: Gentleman back here.
>>: I was disappointed to see there's no photos in your book, because I'd really like to hear your
analysis of that famous photo of the meeting between Steve Jobs and Eric Schmidt out in front of
the coffee shop.
>> Fred Vogelstein: Yes, it was staged.
>>: You need to describe the photo a little bit, too.
>> Fred Vogelstein: Okay, sorry. So the question was wishing that there were photos in the
book, and specifically the photo of Eric Schmidt and Steve Jobs outside the coffee shop in Palo
Alto. I wish there were photos in the book, too. We actually tried very hard to get photos in the
book. I actually purchased some photos myself to make sure we could get them in the book, and
because of production reasons that I'm not even sure I can explain, we had to kill it at the last
minute. The picture about Eric Schmidt and Steve Jobs at the coffee shop was staged. They
were trying to make sure that people didn't think that Apple and Google were fighting as
ferociously as they were. One of the things that people forget is that even though Apple and
Google were fighting ferociously, they really needed each other, too, for a long time. Even
though Steve Jobs went bananas the first time he saw the video of Android in 2007 and
threatened Google with lawsuits even then, he didn't have as much clout in 2007 as he did in
2009, certainly at the end of 2009, because in 2007, Steve Jobs wasn't going to be able to sell the
iPhone without Google Search, without Google Maps, and without YouTube on it. And so there
were some business reasons, as well as personal ones, that were getting in the way there. Go
ahead.
>>: With all your research about Google and Apple and their market share for the phones, do
you think Microsoft will stand a chance to continue in our competition in this market? What will
it take for Microsoft to catch up, or if there's a chance.
>> Fred Vogelstein: So the question is, what will it take for Microsoft to catch up in the
smartphone race. I don't know. I think the short answer is that Microsoft -- how do I put this?
What's going on right now between Google and Apple is essentially a platform war, and in the
history of platform wars in the world of high tech is that it tends to be a winner-take-all game.
You guys taught the world that with Windows and Office, eBay. But there are lots of other
examples, too. So eBay, there were lots of auction companies out there before eBay completely
took over that business. There were lots of -- the search advertising business was pretty
competitive for a while, until Google took that business. I'm sure people in this room remember
Friendster and remember MySpace, but I'm not sure anybody else remembers those social
networking companies before Facebook took over that world. The whole network effect is very
powerful, and once it gets going to the point that it's going now, in order for somebody to come
in and take it and change the dynamics, what they come in with has to be -- the hurdle is much
higher, because in order to get people to switch, the product that Microsoft or any new
competitor has to come in with doesn't have to be as good or even a little bit better. It actually
has to be like 10 times better to get people to go, oh my gosh, that's so much better, we have to
go over there. I think Andy Grove, from Intel, is one of the people that first talked about the
power of this. So I don't know. I mean, maybe, if Apple's market share continues to fall the way
it's falling, that will provide an opportunity. But whatever Microsoft comes in with in the market
has really got to wow people. It's got to be perfect right out of the gates.
>>: This gentleman.
>>: In the book, you talked about the strategy of Apple going with the walled garden and
looking at a verticalization of its products, and in Google, you were looking at ubiquity and OS.
And to kind of vamp on the question prior, maybe not necessarily what would make Microsoft
successful in that, but where are the Achilles heels in both of those strategies?
>> Fred Vogelstein: Let me repeat the question. So what are the Achilles heels in Google's
strategy and Apple's strategy that Microsoft could maybe exploit? Well, the Achilles heel in
Apple's strategy is essentially the Achilles heel that was in its strategy with the Macintosh, and
there are -- the world is a much different place today, so in the 1980s the biggest buyers for PCs
were corporations, who didn't care about things like ease of use and industrial design. Today, the
biggest buyer for phones are obviously consumers, who care about that a lot. But still, just
looking at Apple's market share numbers, it's pretty clear that the market, even in the United
States, is saying that, if you have one phone that you're selling, and only one phone, that that's
ultimately going to be harder to compete with somebody who's got a bunch of different phones.
I think Google's Achilles heel is the fragmentation issue and the issue of the health of its
ecosystem. By that, I mean whether or not developers can make money making Android apps.
So up until the beginning of this year, if you were a developer making Android apps, you did it
for the distribution. You didn't do it for the money, because the only money that you could make
making mobile apps was making them for the iPhone platform. On top of that, and part of the
reason that that was going on was because only 10% of phones were on the current operating
system. So if a company like Microsoft wanted to come in and solve either of those problems, it
could. I mean, if Microsoft, for example, could come in with a product that enabled developers
to make more money and get better -- if Microsoft could come in with are product that enabled
software developers to get the same distribution that they get on Android but also make as much
money as they make on iOS, and then, third, have it be something that was as good or not better
a consumer product, that would be a very powerful thing to bring to the market. Go ahead.
>>: You mentioned earlier that a lot of things were messy when they were being developed in
the Valley in general, and also Apple and Google. How much of a strategy to people have before
they make these massive amounts of investments? Obviously, it took a lot of money to develop
either of those products. So was there a clear strategy as to where they were going, or was it just
money being invested more in a messy way?
>> Fred Vogelstein: So the question is did Apple and Google actually have a strategy, given
how chaotic the process of developing Android and the iPhone were. I think the answer is
absolutely they had a strategy, but I think that it was a -- I think they knew they wanted to get
from -- I think they knew they were here and they knew where they wanted to get to. What they
didn't know but had to simply assume was that it was going to be -- the process was going to be a
little bit like this rather than a straight line. So when they were developing -- for example, if you
know something -- you have to do a long-term of guesswork. So when Apple was designing the
iPhone, a lot of the software that it was developing was actually being done on simulators.
Why? Because the actual chips that were going to run the iPhone didn't yet exist. When they
developed the touchscreen, they knew that multitouch had been invented, but they also knew that
nobody had mass produced a screen that small for a handheld device. But I guess the answer is
that they understood that it was going to be chaotic, but they also understood what the
boundaries of that chaos were, so instead of being a straight line from point A to point B, they
knew that, imagine a rubber ball with -- imagine sort of two walls and a rubber ball, sort of
bouncing against the walls. They knew generally what direction it was going to go, they just
knew that it was going to be a little bit chaotic in the process.
>>: It was certainly mentioned in the book, and the litigation was underway in the history of the
book, that you covered -- the Samsung factor. I've got another question, but just quickly, what
do you think -- how does that play into the scheme of things? Because there's certainly -- in one
sense, Apple is, as you explain, going after the OEMs versus Google and so forth, but beyond
just that, Samsung has obviously become a formidable force in the consumer electronics
business.
>> Fred Vogelstein: Yes, and in fact, I actually think Samsung is -- if you want to talk about
wildcards in the smartphone world, Samsung is the wildcard, because when -- because Samsung
can be a formidable competitor to Apple, but it also can be an equally formidable competitor to
Google. So the competition with Apple is very straightforward. Do you like the iPhone or do
you like the Galaxy? The competition with Google has the potential to be really interesting,
because when Android first got started, Samsung needed the Android operating system to get its
phone business, to sell the phones that it wanted to sell, and it needed to do things the way that
Google wanted Samsung to do things in order to make that happen. Now, Samsung has half the
smartphone -- the Android smartphone sales. So that puts it in a very different negotiating
position with Google than it was previously. Previously, the discussion that Samsung and
Google would have would be every time Samsung sort of tried to get more flexibility, Google
would say, you can do that, it's totally fine, but we might not give you access to the app store or
to Google Maps or to YouTube or all the other things that Samsung would need in order to sell
its phone. And in 2010, there wasn't a whole lot that Samsung could say. In 2013 and 2014,
Samsung can say back to Google, yeah, maybe that's true, but we have -- you guys are an
advertising company and you are increasingly reliant on the success of mobile advertising for
your business. And since we control half the eyeballs in your mobile advertising business, you
would be upset if that went away, wouldn't you? So the pushback is going to be -- and on top of
that, what people forget, although I'm sure Samsung paid very close attention to, was that the
assumption until recently was that you couldn't sell a phone without Google Maps and without
Search and YouTube and things like that. Well, the iPhone 5S -- was it the iPhone 5 or the
iPhone 5S -- the iPhone 5 kicked Google Maps off and they kicked YouTube off, and it still sold
like hotcakes, even though the maps product was the subject of one or two stories in the media.
So I'm sure that Samsung probably paid very, very close attention to that and thought hmm. I'm
not sure where that's going to go, but it's going to be interesting to watch.
>>: I know some of you are going to have to leave. In case you didn't notice, there are books for
sale, $10 in the back, and Fred is nice enough to stay as soon as we wrap in a minute, to sign, if
you'd like it autographed.
>>: You had mentioned earlier that for Microsoft to make inroads in the smartphone market that
product would have to be solid, probably 10 times greater than anything that's out there. Having
used Android and iOS, Android certainly isn't 10 times better than iOS. It might be like -- so I'm
curious. What was the disruptive force that Android had to get the market share? Was it Google
services, was it being able to sell phones for a penny under contract?
>> Fred Vogelstein: Distribution, basically. Essentially, they have two different -- essentially,
what allowed -- sorry. So the question was, what was it that allowed Android to kind of get the
market share that it did over Apple? Apple and Android have very different distribution models,
so Android's -- so Apple makes the operating system and it makes the hardware, and then it sells
one phone. Google puts the Android software on hundreds of phones, so Google was able to get
enormous market share exactly the same way that Microsoft was able to get enormous market
share in the PC business in the 1980s and 1990s over Apple, which was it's not about the
hardware. It's about the software platform. And if you get it on as many devices as you possibly
can, then that gives you the ability to, through the power of platform economics, to drive the
conversation about what kind of software and applications run on top of that.
>>: Fred also does a great job explaining the enthusiasm that the carriers had as they watched
AT&T at that point with having essentially exclusivity, at least in this country, on the iPhone,
and how they really were champing at the bit for and rooting for another player. It sounds -when you say it -- rather intuitive. But when you actually see how it played out, in the book,
anyway, it's interesting. I know we're going to have to wrap here in a second, but I don't know
which -- I think maybe you were next.
>>: My question dovetailed right into the comment you just made. Can you talk a little bit
about the AT&T and Apple, the impact of that kind of negotiations? Basically, the mobile
operator when Apple was first coming up with this thing.
>> Fred Vogelstein: So the question is, talk about the origins of the AT&T/Apple deal. I'm
trying to think about how to put this in a sentence or two. Essentially, AT&T, there was sort of a
shared need, so AT&T, as a result of mergers and -- I guess AT&T, then Cingular, at that point,
the wireless business was in a fair amount of turmoil, and Cingular was watching that turmoil
and wondering about its future. And it felt like it needed to do something big to retain and get
more customers. And even though the rulebook of wireless relationship with manufacturers said
that they were -- that they drove the bus and that the manufacturers just did what they were told,
by 2005 or 2006, Steve Jobs was becoming a cultural icon again. So what most people forget is
that the iPod in 2003 and 2004 -- the iPod in 2003 was not yet a hit. By 2006, it was the biggest
thing on the planet, and so AT&T thought about the possibilities of partnering with Steve Jobs
on its brand. They basically said -- or Cingular. It's hard to keep them straight, because it started
out as Cingular, and then it became AT&T. But what Cingular basically said was, gosh, we need
to kind of take our business from here to here. How do we do that? Well, let's get in bed with
Steve Jobs, because that will make us look really cool. And that, to be honest, is what allowed
them to sort of throw out the rulebook. Meanwhile, I think that Steve Jobs was looking at that
whole thing and thinking, well, goodness, if AT&T's prepared to let me do my own thing, then
maybe I should take this on, because remember -- most people forget about the Rocker, but
Apple had done a deal with Motorola and with Cingular to build something called the Rocker.
Well, the origins of that was basically Steve Jobs didn't want to do a deal with the carriers,
because he hated doing business with them, and so this to him seemed like kind of the best way
of inoculating himself from having to deal with those guys. Well, it turned out to be a disaster,
and it was bad for Apple's brand and it was bad for really everybody it touched. And so, as a
result of that failure, he was much more receptive to what AT&T was bringing to him than he
probably would have been before.
>>: I actually heard Ralph de la Vega, who runs the cellular business for AT&T, speak about a
month ago at a conference in New York. It was a closed door, not press covered, and he
described basically the breaking of rules that he did. He'd get calls from tech team about things
going back and forth, and it was -- he said it was just -- he said Jobs called him one day furious
about something that came in. I think it had to do with radio stack or something. He said, just
disregard it. And he called his people and said, I'm not getting into details, but we're not doing
that. They just took an approach of we're just shutting this down and moving on. It was really
quite amazing. In an organization that size, I suspect it never has happened before, and it was
really fascinating to hear a guy that was in the tent early on.
>> Fred Vogelstein: He was like the tent.
>>: It was really amazing.
>> Fred Vogelstein: And what people forget is there were a lot of problems. One of the things
that people -- the thing that you have to admire, actually, Ralph, and he probably -- because I've
written stories that he might or might not have liked, he might not give me the opportunity to say
this to his face, but you have to admire what Ralph put up with, because there were -- it wasn't
entirely -- it was certainly true that AT&T's network couldn't handle the load that the iPhone put
on it. It is also true that the iPhone's first baseband, made by Infineon, was full of bugs, and that
if you did an analysis of the phone as a phone, it didn't stack up compared to all the other
models. And so you have to give Ralph de la Vega some credit for eating it when Apple and
Steve Jobs kept fueling the AT&T is -- fueling the ->>: They're the culprit.
>> Fred Vogelstein: Blaming AT&T, blaming all the problems on AT&T, because it's hard to
know whose fault. How much was Apple's fault versus AT&T's fault? But the way it was
portrayed was that it was entirely AT&T's fault. That's not exactly how it turned out.
>>: Well, I think I don't see any other hands. I want to thank Fred for making the time to come
in and speak. I appreciate it. And again, any of you in the room that are interested in buying the
book, purely if you want to do so, he's going to sign them for you, and have a good afternoon.
Thanks.