Lenny's Podcast: Product | Career | Growth
00:30:23 · Benedict Evans
[00:30:23] S0: Yeah. I mean, this was his whole software's eating the world thesis from 15 years ago, whenever it was. Yeah. The TAM, it gets progressively bigger, because you can address larger and larger parts of the economy. And so if you think about the classic platform ship framing that mainframes are, I think peak mainframe install base was something like 70, 80,000 units. I mean, slightly fuzzy term, what exactly is a mainframe, and at what point does it become two mainframes as one. But something like that, that order of magnitude. And then when the internet kicks off, there are, as I said, 50 to 100 million PCs on earth, maybe. Today there are something over a billion, one to one and a half billion, but obviously a lot of those are corporate. Like seven, 800 million consumer PCs in the world. There's about five and a half, six billion smartphones in the world, which is why you can have 900 million weekly active users on ChatGPT. And so there was this narrative five years ago of like, "Well, we've run out of people. So the next thing can't be in order of magnitude bigger." Which was true up to a point, but that was the wrong model, because clearly what's happening now as you're moving in another direction, is you're just branching out and automating big news weights of the economy. Now, back to your job point, you could argue, well, we're just going to replace all the people with AI and all the money will go to Sam Altman. And Mark can buy himself another Gulfstream, add to the fleet. I think the other answer, it's back to the lump of labor fallacy, and the last 200 years, that each of these technologies removes a bunch of jobs, creates a bunch of new jobs, creates a bunch of new value, unlocks prosperity for all of us, and that's painful as you go through it, but it always creates more value. And so here you could certainly make an analog to... The useful analog to the electricity industry is just saying how that electricity became part of absolutely everything. And software has been kind of slowly working its way out. Another would be electricity in factories, and then electricity sort of slowly spreads out. And so that would be the point again, that it slowly spreads out to do more and more things. And so more and more value and a bigger and bigger contribution to the economy. Also, of course, disappears inside things.
00:32:38 · Benedict Evans
And the other side, the point of my capital section in the presentation is there's this quote from Sam Altman where he said, "We're going to be selling AI intelligence on a meter like water or electricity." And you look at this and think, "My dear sweet child, you need me to explain the margin structure of the utility industry to you." Because guess what? When you watch television, the TV company isn't paying a percentage of your monthly bill to the electricity company. When you wash your clothes, Bosch isn't paying a percentage of the price of the washing machine. And clearly, this is like the much more specific tactical question at the moment, is, do we even end up with three giant models or does it become hundreds of models and open models and local models and so on? And even if we do end up with, say, pick a number, three to six to 10 giant foundation models that cost hundreds of billions of dollars a year, fine, do they get all the value from that? Now, I started my career as a telecom analyst, and so still pay attention to it a bit. Global mobile industry has revenue of about a trillion dollars a year, maybe a bit more now. And it spends about $200 billion a year on CapEx every year. Total telecoms is about 300. Mobile is about 200. It's about 15, 20% of revenue every year. And if you look at a chart of mobile data consumption, it's an exponential curve, like perfect curve going spread up. And the number now, I think it's about 1,500 to 2,000 times what it was in 2010 globally. And the stocks have gone nowhere in 25 years, because it's an X gross low margin commodity utility, where they're selling this objectively amazing piece of global technology infrastructure that has enormous complexity and enormous sophistication, but all the cool stuff is made by you. It's made by the people listening to this podcast. It's made by somebody else. This was that kind of pivotal moment where the telcos thought that they would do all the stuff that you did on your iPhone. And not only do they not do it, but Apple doesn't do it either. It's all further up stack. And so this is the elemental question right now around foundation models is, does the model do the whole thing? Do you just go to the chatbot and get the chatbot to do the whole thing?
00:34:49 · Benedict Evans
Can the model companies keep building these like Claude for X, Claude for Y things, which to me look very much like what you see if you hit file new in Excel. It's like the tablets, but all of those are actually billion-dollar companies as well. And if not, no, does it all have to be "apps"? Whatever app means. And if it all has to be apps who builds those, well, they can't all get built by the model labs, just as they didn't all get built by Microsoft. And so if they're all built by other companies, does their notion models have leverage up the stack the way Windows did? Or is this more like AWS where, if you're, I don't know, an engineering company or a law firm buying a piece of software, you don't care which cloud it runs on? And you don't have to standardize on AWS because that's where all the software is. And the developers all standardize on AWS because all the customers use AWS. That's not how it works. That's how Windows or iOS works, but that's not how AWS works. And so it does sort of seem to me that if the chatbot isn't the UX, and it needs to be apps, and the model companies aren't going to build that, and the models themselves are basically commodities, at least as you can see them as users, then why would the model companies have pricing power? And wouldn't all the value be further up the stack? Aren't you basically, have you got like three to six companies selling a commodity at marginal cost? Now, obviously the semi-analyst guys are like, "No, no, no, no, no. There's going to be infinite pricing power forever." I'm sorry, I'm exaggerating. But I think you have to really important to draw a distinction between where are we now, where you have radical price disequilibrium, and you've got these, what's the guy, the OpenClaw guy spent one and a half million dollars on token this last month. But that's somebody getting like a 50 grand mobile data built in 2010. That's temporary. What is the steady state equilibrium point where all of these lines on the chart kind of get lined up, and we don't have this kind of weird, crazy stuff going on? And then will you have pricing power, or have you got like three or four or five companies kind of all selling the same thing? And so then you should have a pricing price. You should have lower pricing and lower margins, and the value you've got stack.
00:37:04 · Lenny Rachitsky
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00:38:28 · Benedict Evans
[00:38:28] S0: Yeah. I mean, this is a very sort of deterministic thesis, which is, the models companies, crucially what I said is the models don't seem to have no after effects. So there doesn't seem to be a winner takes all effect where one of these will run away ahead of the other. So you should have competition indefinitely. If you have competition indefinitely, you don't have primary really radical differentiation of what the product is. Then why would you have pricing power? And meanwhile, if you need to have thousands of applications that are all different built by different people, those can't all be built by the model people. So, it should end up looking more like cloud than it looks like Windows. Now that may be completely wrong, and one of the points I make in the presentation is like, imagine having this conversation about the internet in 1997, what would you have got right? Or indeed having it about mobile in 2000. You would've missed almost all of it. You certainly would've said that a has-been PC company from [inaudible 00:39:28] would win the whole thing. And no one would've said that. And a search company with a weird logo like, "Search, what's that got to do with mobile?" "No, forget it, you're an idiot." So we should presume we don't know, but they're all this sort of basic building blocks of like, well, but why would they have pricing power? I don't know, when I was a baby analyst in '99, went to see a dotcom company in the UK that was trying to do online selling computer cars, components online. And they had this whole model and this whole story in the brand and buy the whole thing and we went up to see them, and we're on the train back from Birmingham, and this just senior banker called David Tate. We're all sitting talking about it, and Tate says, "It's a low margin reseller, one time sells." "You can say dotcom all you like, it's a low margin reseller." And I think that's the crux of this, is they're undifferentiated commodity infrastructure providers. There's a lot of science to it, but there's a lot of science in mobile. I mean, what do you pay for flat panel screen? There's Nobel Prizes in flat panel screens. There's still a low margin commodity. I look forward to be proving wrong, proven wrong, but like, hey, that's what it looks like now.
00:40:39 · Lenny Rachitsky, Benedict Evans
[00:40:39] S1: This is great. So I know you're not an investor. I know you didn't actually do investing at a16z even though you work for A16Z. [00:40:45] S0: Partner. [00:40:46] S1: Partner. Just sit around and pontificate partner. Are there companies you would invest in? If there are a couple companies you'd invest in now, is there some on that list, or categories even?