Invest Like the Best with Patrick O'Shaughnessy
00:26:00 · Ben Thompson
[00:26:00] S2: I am frustrated, but not surprised. This is obviously a market that should be supported by advertising. That is why advertising is always the consumer business model. Consumers don't wanna pay. There's two things to understand about consumers that Silicon Valley has to relearn about every ten years. Number one, consumers do not wanna pay for software. And number two, consumers do not care about being productive. We went through this in early SaaS. The canonical company for this in my mind is Dropbox. So Dropbox, unbelievable product. Like, especially when it first came out. In business school, I was one the first people to use Dropbox. And that went off like crazy. I have so much storage still like my free Dropbox because I gave out my code to like so many people. So Drew Houston makes this amazing product. So easy to use, just absolutely seamless. He was very clear about this. He wanted to build a consumer company. And there's that famous story of him meeting with Steve Jobs. Apple was interested in acquiring Dropbox. And they're like, oh, we wanna build a company in Steve's, you know, you're a feature, not a company, which that plain Jane just file sync. Apple did make a feature as far as like sort of iCloud drive and with Dropbox, they grew very fast. And then they had like a two year lull. And in that two year lull, what they had to do was basically completely rebuild the app from the bottoms up because not enough consumers are gonna pay for it. Enterprises could see the value they would pay. But if want enterprise, you need permissions. You need control. You need someone else to be able to set all these sorts of things. And their app wasn't even created to do that at all. So they had to rebuild the whole thing and realize the only way we're gonna make money is by selling to companies. Why do companies pay? Because companies are paying employees to the extent they can make their employees more productive. They're getting a greater return on their investment. It's the complete inverse of a consumer. A consumer's like, I spent all day working. Why do I wanna come home and be more productive? I wanna sit on the couch and watch reels. But you see that with AI. And you also have this overarching just skepticism of advertising. I've gotten so much traction on trajectory by being an advertising appreciator.
00:28:09 · Ben Thompson, Patrick O'Shaughnessy
And I go back and read my early articles about advertising that were kind of directionally correct, but also, like, were not very good at all. But I got so much traction doing it because I was the only person writing about advertising. In a world of everyone wanna have a blog and Twitter, no one wanna talk about advertising. But even now, there's in Silicon Valley, this sort of embarrassment about the fact that the Valley is in many respects monetized by advertising. And particularly during the last sort of eight years, there was a Facebook's icky. [00:28:39] S0: The best engineers don't want to go work on this problem.
00:28:39 · Patrick O'Shaughnessy, Ben Thompson
[00:28:39] S0: The best engineers don't want to go work on this problem. [00:28:42] S2: And so you literally had OpenAI replaying the Dropbox story, but at like a 100 exercise. Being like, no, we're going to sell subscriptions to consumers. They did. They sold a lot, but they didn't sell enough. If you're going to be in the consumer market, you have to be doing advertising. They're doing advertising now. It's a little weird. They finally pivoted to doing advertising at the same time. They're like, oh crap, we need to go off the enterprise because Anthropic is kicking our in. So I'm not quite sure what they're doing there. They have been rolling out ad features very rapidly. Things like copying the connections with retailers. So, you know, if a purchase went through, you can do all the tracking and things like that. I'm very interested to see how that goes. There's a bit where had they leaned into advertising immediately as soon as ChatGPT was a hit, I think they would have a killer ad product right now. I think that Google would be in much bigger trouble. I think Meta would be in much bigger trouble because if you have this flywheel, the thing about advertising with consumers is your ability to monetize the consumer [00:29:46] S0: Goes up as Yeah. The volume goes
00:29:46 · Patrick O'Shaughnessy, Ben Thompson
[00:29:46] S0: Goes up as Yeah. The volume goes [00:29:48] S2: the advertiser is bearing the price increase. So there's zero elasticity issues. If you're charging consumers a price, if you want to raise the price like Netflix, this is their problem with the subscription plan. How much can they raise prices before consumers rebel and drop a tier or give up the service entirely? Charging people money is hard. Giving people things for free [00:30:08] S0: is easy. [00:30:09] S2: And it's very frustrating that OpenAI did not pursue this sooner. [00:30:14] S0: I know you've been spending time with some of the big money firms and sources of capital. What is your sense of their appetite right now and how they're thinking about the future? Because I think this year, it's gonna be 800,000,000,000 or something that we're gonna spend in CapEx. Next year is supposed to be 1,300,000,000,000, I think, the current estimate. It's gonna keep going up from there. We're burning through all the compute that gets installed basically immediately. It's it's such a strange circumstance that we can use the capacity right away as soon as it's online.
00:30:14 · Patrick O'Shaughnessy, Ben Thompson
[00:30:14] S0: I know you've been spending time with some of the big money firms and sources of capital. What is your sense of their appetite right now and how they're thinking about the future? Because I think this year, it's gonna be 800,000,000,000 or something that we're gonna spend in CapEx. Next year is supposed to be 1,300,000,000,000, I think, the current estimate. It's gonna keep going up from there. We're burning through all the compute that gets installed basically immediately. It's it's such a strange circumstance that we can use the capacity right away as soon as it's online. [00:30:41] S2: Well, that's the thing, though. So there's a few timing mismatches that are happening right now. We can't use it right away. All the bulls on Twitter is always like, we don't have enough compute. We don't have compute. Well, we don't have enough compute because there was insufficient investment made in 2023 and 2024, which yes, absolutely. And by the way, if you think there's not enough compute, TSMC decreased their rate of growth in 2023 and 2024 and 2025. Our shortage of compute is going to get worse in the next few years because a fab, the lead time is even greater than a data center. Today, when we say there's not enough compute, it's not like all the money that the companies are putting [00:31:19] S0: in
00:31:19 · Ben Thompson
[00:31:19] S2: today manifests Yeah. In No. It all manifests in compute in 2028 and 2029. On the calls, have both Andy Jassy and Syna Della are out there saying, look, we're just building data centers like these are the shells. We might not use them now. Maybe we'll use them in the future. And we only buy GPUs when we know there's demand for them. That is a great story to tell. I'm not sure that I think is a lot of BS because the reality is if you've built the shell, that money is sitting there. You're not gonna let it just sit there. If you invested a fixed cost, and this is the whole logic of commodity markets. I think tech in general doesn't understand commodity markets. Tech is by and large focused on if I produce a highly differentiated product and that differentiation could be like software, it could be a network in terms of developers, It could be a social network sort of thing where peer to peer, where I'm highly differentiated than my ability to charge higher prices provides sort of my profit margin. So the classic example is like Apple. They have their ecosystem and they have their software and they have third party and all those sorts of things. And so they can charge 50% margins on their iPhone. Everyone looks at Apple as like the ideal business model. That's how you run a business. But in a commodity market, the price is set by the marginal supplier. Cost to serve is all that matter. That's right. I had a good friend in Taiwan who is in shipping. Fascinating industry. It's kind of like the airlines too. Another industry that I love to look at. You buy a ship and the cost of that ship is depreciation. Your marginal cost is actually quite low. It's the fuel to run the ship and the cost of the crew and like your port fees. Not that much. What that means is you are going to run that ship- As full