Invest Like the Best with Patrick O'Shaughnessy
00:35:52 · Ben Thompson
[00:35:52] S2: We can talk about a few different ones. Like, we'll start with memory. Memory used to have tons and tons of memory makers. Every time there'd be a boom, memory makers would sort of reenter the market. New countries would come in like Taiwan used to have like a memory market, but you would get these exact dynamics. If there's a shortage of memory, there's so much money to be made. You can't bring capacity on immediately. It's the same as shipping, the same as what we're seeing right now. That would spur people to come in the market. You'd get too much capacity, prices would plunge and people would just get blown out. Because the issue is the upfront cost for these is so large, just like buying a ship, like building a fab is even more so. And memory now, like the leading edges of memory are using things like EUV machines. So the costs are getting into the billions of dollars for these lines. What happens is every time with these boom and bust cycles, some people would enter, more people get washed out. You go through these famous historical moments for these memory cycles. Companies just get blown out. One of the most interesting actually memory stories is how Samsung sort of took over memory was they saw it as an opportunity and they had studied history and they realized that actually the way to take over the market is to invest into downturns so that you're ready when the next cycle comes around, which requires a ton of guts and a ton of discipline and a ton of money. But they did that and basically wiped out the Japanese. That's when the South Koreans generally took over the market in a major way. But it got down to three. And the problem is three, it's not a monopoly, but it's kind of an oligopoly. And they all got a lot more discipline about let's not make the mistakes of the past. And we're not colluding, but we all are on the same page about let's not do that. And I think that dynamic sort of ran head on to the current moment where it just took a while for them to realize, no, there is a secular shift in memory demand that didn't exist for a very long time. I think the memory solution will be solved eventually. The other risk they run is Apple's lobbying to get Chinese memory. What is the number one focus of like arrhythmic changes? How can we use less memory?
00:37:59 · Ben Thompson
I think the memory makers probably screw themselves in the long run by creating such a massive target on their back. I've analogized memory makers to Iran. The issue with the Strait Of Hormuz is it's very effective. It's more effective if you don't use it, because then it's always hanging out there as something you could do. Now they did it. Turns out it worked. But The UAE and Saudi Arabia, they're gonna build pipelines. They're gonna build new ports. They're not gonna let this happen again. It's very painful right now, but say Iran wants to close the Strait of our moves in 2035. It's not gonna have any effect because it will have been built around. My concern for the memory makers is they might have done the same thing. No one's gonna let themselves get in this situation again, as far as memory goes. TSMC is arguably worse because there's only one. There's one company on the leading edge. Obviously, Intel and Samsung are trying to get there. It's the same thing. All markets carry risk. And a lot of the question is who ends up holding the risk? What I think a lot of the tech companies didn't fully appreciate is the extent to which TSMC has offloaded risk onto the big tech companies. And the way they've done that is the risk that TSMC is worried about is overcapacity. If we build too much, it's not just that we built too much and we have all these fixed costs that are not being fully utilized. But if we build a fab, we expect that fab to run for thirty years. We've, like, baked in too much capacity into the system for years and years and years. So they are very biased towards being much more conservative. There's a little bit of a culture component to this too. One of the most interesting TSNC stories, it's kind of a nellus, that Samsung story, was Morris Chang retired in like the late two thousands. New leadership took over. There's the great recession. And so they pulled back their planned spending. He comes in, fires everyone. And he's like, the iPhone just launched. This is the biggest opportunity we've ever seen. We need to be investing, not cutting. And they invested through the great recession and through that downturn. That's what laid the foundation for them taking over sort of leading edge semiconductors in that time. Morse Chang is a one of one on the Mount Rushmore in my mind of the greatest and most impactful tech exec is of all time.
00:40:11 · Ben Thompson
The entire fabulous model is so critical to what tech is and what it does. And also just the guts to do that at that time, particularly in someone who lived there, a culture that doesn't necessarily tend to make those sorts of bets. TSMC, they were pretty conservative, to be totally honest. So what happens though? Where'd the risk go? TSMC's like, we don't wanna take the risk. Risk doesn't disappear. It just moves. The risk is right now where you have every single big tech company realizes if we had more compute, we could be making more money. So there's lots of foregone revenue and foregone profits that is the manifestation of the risk that TSMC handed off to them. Risk doesn't disappear. It just gets handed off. And sometimes that risk doesn't manifest in losing money. It manifests in not making money. And there's money not being made right now because what happened was they were very excited about five gs. They did a big wave of like investment, expanding their fabs in around 2020, 2021, '22. And they're like, oh yeah, we're good. Like I said, 2024, Cheshire Bucasal 2022, big thing in tech in 2023. In 2024, their growth rate went down. In 2025, their growth rate went down. In 2026, it's up now. It was very funny because I was writing about this a while ago, and then I think it was like one or two earnings calls ago. Suddenly CC Way, the CEO and chairman is talking about like use cases for AI, the whole earnings call in a way he never had before. This is why the money makers are scared. Usually there's like a bullwhip and they're worried about being at the end of the bullwhip where the demand happens and it works its way down the chain and they're at the end and then they double down. It's already too late. They're wasting all their money. And I think the thing with AI is if it's a bullwhip, it's like the longest bullwhip of all time. There's still so much to be built. And it just took a while for Asia to get the message where these sort of companies are. I think they've by and large gotten it, but them getting the message, it then takes several years for that to actually materialize.
00:42:08 · Patrick O'Shaughnessy
[00:42:08] S0: Do you have a sense for how long you think it will take given the extreme shortage of compute?
00:42:14 · Ben Thompson
[00:42:14] S2: The interesting thing is what this means for Intel and Samsung's sort of logic business. I've been writing about the problem of this dependency on TSMC for years. One of my first articles in 2013 was exhorting Intel. Well, I say you have to build a fab business. You're not gonna be a designer anymore. There's a huge business in manufacturing chips. I thought I was late writing it then. Their stock goes to the moon throughout the twenty tens as they're riding the sort of cloud wave. And it wasn't until 2020 where they finally realized we fell behind. By the way, there's this huge opportunity. We're totally unprepared for it. We don't have a customer service mindset or culture organization, or all the IP building blocks and all these things that TSMC has. And they need a customer. They need customers to help them actually build a real foundry business. So I would write about this as a problem. I write about the China issue. Like you're dependent on a company that is 60 miles offshore of our greatest geopolitical opponent who thinks it's theirs. So like these are big problems. That's where I came to appreciate this insurance issue. For a big tech company to go to Intel and say, Intel, you make our chip. And by the way, the biggest benefactor of this is going to be you because you're gonna learn how to work with a partner. And the biggest pain is going to be us because we're going to have to figure out how to work with you. We could just go to TSMC. They are awesome. They're so great to work with. We know they're going to do a good job. It just never made rational sense for anyone to go work with Intel. That was their fundamental problem. In a unchanging world, TSMC would just win forever. But this is where TSMC and some respects made the same mistake as the mermaid makers made the same mistakes as Iran. If I can continue the analogy. Because they didn't invest the last few years, These shortages are going to be so acute. Big 10 companies that were foregoing so much revenue and so many profits because we don't have enough compute. We will go through the pain of getting Intel up to speed, of getting Samsung's logic up to speed. The scarcity is what ultimately saved Intel. I expect at some point that they're gonna announce some major partner for the first time. It's gonna be a big deal. But ultimately, TSMC brought it on themselves.
00:44:25 · Patrick O'Shaughnessy, Ben Thompson
[00:44:25] S0: It's the cure for high prices is high prices thing. We're gonna route around [00:44:29] S2: There's all these things as like an analyst sitting on the side. You can write these things. And it's one of the things I've sort of learned. No one's gonna pay insurance that they don't need to pay when that insurance expected value is negative. The way to solve the geopolitical problem of dependence on TSMC is to come up with a compute use case that is so massive that everyone is economically incentivized to bring other people up to speed. And then we get the sort of geopolitical insurance for free. [00:44:56] S0: If you think about the, let's say, top 10 or 15 technology companies, which ones do you think have the most interesting setups today for their business?