Invest Like the Best with Patrick O'Shaughnessy
· Krishna Rao, Patrick O'Shaughnessy
We'll build vertical where we think we have some value to add or a perspective that's useful or a way to demonstrate to the market how we think about our platform adding value. A lot of the value is going to accrue to the customers building on top of it. Our goal is to build the best models and then build the products and tools and services that allow that intelligence to proliferate within customers. [00:00:00] S0: How much do you care that it's just a reality that people are scared of you? There is a sense that because you control the most essential piece of these new applications — the underlying intelligence reasoning engine — that may totally be true, and maybe already is true, that more of the value is accruing on top of the Anthropic platform than is being captured by it. But nonetheless, it's still scary to imagine. I guess maybe you could say something similar about cloud and AWS, or something like that. But how much do you think and care about the fact that some of your would-be customers or existing customers are in fact scared of you as a competitor?
· Krishna Rao
[00:00:00] S1: Part of what is hard in this business is it's changing so quickly. The model capabilities sometimes even surprise us. When we release models or products on top of that, there is an element of what's happened in prior waves over the course of five years, ten years, twenty years — it's happening in months now. When we release things, people are also surprised by it in some ways, in the same way that we were surprised by it. Fundamentally, what we are trying to do is be very partner-oriented towards the ecosystem, and that means we have early access programs. We work very closely with customers. We listen to them about what capabilities they want. That doesn't mean that the things we release are sometimes not moments where you're like, "Wow, that's way more powerful than I thought it would be," or "I didn't realize the models would be able to do that this quickly." Part of that is a reality of where we are in this cycle, in this development of intelligence. Part of it is also, we want to make those capabilities really accessible, and that should accrue a lot of value to customers as well — and customers that are front-footed on that and adopt it, and also ones that are building and using the tools that we offer on our platform, we think we can actually accelerate them. Some of it's a reality of frontier model development, but our approach to it is probably a little different and more partner-oriented.
· Patrick O'Shaughnessy
[00:00:00] S0: You said before, going $9 to $30 billion in the first quarter, the pace is so insane. Which makes me wonder about pricing. The dynamic of how to price tokens or use of the system is so fascinating to me, because a lot of people a year ago would say price is going to constantly fall. But actually what's happening is it's going up in many cases. This is true at different levels, whether it be the Mythos pricing that is quite high because it's so powerful. The cost of an H100 — the rental price of an H100 looks like a smile curve. I'm very curious why, if everyone is compute-constrained, why everyone doesn't just raise prices a lot to try to find what the right equilibrium is. I'd love you to riff on pricing, how you think about it, what the trade-offs are. Why not raise prices a lot?
· Krishna Rao
[00:00:00] S1: The company is only a little over five years old. This past March was the third anniversary of the first dollar of revenue into the business, and we only had a frontier model for real, for the first time, in March of 2024. The timescale of these things is an important backdrop as I think about it. Our pricing has been relatively stable across Haiku, Sonnet, and Opus, and now Mythos is obviously newer. We made very few pricing changes. The biggest pricing change we made was to bring down the price of the Opus family when we launched Opus 4.5. Why did we do that? It's because we found that Opus-class models were underutilized relative to their capability. People were trying to often fit an Opus problem into a Sonnet. We were able to serve that very efficiently from our perspective, but actually bring down the price, which made it more accessible to customers. We want our customers to generate a lot of value from it. They're generating a ton of ROI from our models today. We want that to continue, because our goal is to proliferate this throughout the ecosystem. We think we're in the very, very early innings on all of these use cases. The best way to do that is get this intelligence in the hands of as many businesses, from startups to digitally native businesses to the largest companies in the world. Some of that means you have to make it at a price point that's accessible, and that allows them to get a lot of value from it. In changing the pricing for Opus, you see this Jevons paradox. We lowered the price of it, but the consumption went up way, way more than what you would have expected. Because we hit that sweet spot for customers, they were able to use it a lot more. We had the efficiency to be able to serve it to customers at scale. And they were able to build that into their workload, such that when we released Opus 4.6, which is a model improvement — they can slot it in. We didn't change the price. We think pricing stability is important, and we also think that pricing to get that value and to see that Jevons paradox happen is really important.
· Patrick O'Shaughnessy
[00:00:00] S0: The other component of this is margins and how you think about margins as a business. Again, because this is unbelievably capital-intensive to build these frontier labs, you've got the levers we talked about, which is efficiency, price — both of those relate to margin. Given how much capital you need, why not just say we want to have a healthy margin and set the price accordingly, and maybe that price can come down if efficiency is better or whatever? I'm just curious how you think about margins as it relates to pricing in the business.
· Krishna Rao
[00:00:00] S1: We think about what is the return on our compute spend writ large. That is all of the different workloads that we've talked about, whether it's serving customers. All of those are kind of in support of revenue over different timescales. If I serve inference, it's in support of revenue today. If I do model development, it might help for a capability that unlocks TAM that drives revenue six months from now. And everything in between. If I do internal acceleration to launch a new product — all of these things are in support of that. Our returns on that compute expense today are robust. We think of it as, what is the return on that full envelope of compute? We feel really good about where we are from that perspective, and we're balancing delivering value to customers with also seeing a really strong return on that compute ourselves. When revenue grows, as we mentioned in Q1 — it's not like we onboarded a bunch of new compute in that time period. Compute comes based on a ramp that might have been determined 12 months ago. This idea of a variable cost that's on the incremental to serve a customer doesn't really fit our business. It tries to fit our business into a software paradigm. That's not the case. In actuality, compute is supporting all of these activities. We're really generating a robust return on that compute, and that's our measuring stick. We think of the compute envelope that we have as the thing able to govern how much we can drive revenue, both over the short term and the long term.