A New AI World
Audio Recording by George Hahn, Illustration and Charts by Shira Seri Levi
A hat tip here to Financial Times columnist Robert Armstrong, who said on the Prof G Markets Podcast on Jan. 30: “There is a new vision where [AI] is much more competitive, and profits are shared, and much of the value may be captured by consumers.” (Listen on Apple here or on Spotify here.)
The Answer Is “No”
A new technology emerges that ushers in remarkable productivity or, better yet, dopamine on demand. A group of talented people builds a thick layer of innovation on top of the tech (financed by government), and a small number of CEOs leverage storytelling to access cheap capital and overwhelm the competition with brute force. These companies engage in regulatory capture (i.e., they become johns for our elected whores), and create trillions in shareholder value. GPS, e-commerce, payments, search, social, streaming … all produced trillion-dollar-plus entities.
AI is likely as transformative a technology as the aforementioned, and it’s already setting records for consumer and enterprise adoption. So the question is: Which organization(s) will capture, and sustain, trillions in shareholder value? The answer may be … no.
Marc Andreessen says DeepSeek is AI’s “Sputnik moment.” That’s the wrong analogy. This isn’t a rival flexing technological superiority, but dispelling the myth that we (the U.S.) are the only game in town. The Soviet Union did that before Sputnik, in 1949, when it detonated its first nuclear weapon.
Bicycles & Vaccines
Bicycles, sanitation, airplanes, vaccines, and Crispr are just a few technologies that have changed the world, but their benefits were dispersed across society rather than being hoarded by a few shareholders. I increasingly believe AI will join this roster — it presents dynamics similar to most stakeholder vs. shareholder innovations:
- Government-backed or university-developed (the internet, GPS, vaccines);
- Open-source or public domain (Linux, Python, Wikipedia, USB); and
- Too foundational to be monopolized (bicycles, sanitation, airplanes).
In sum, the winners here will be stakeholders, not shareholders. Scan your emotions after reading the last sentence. Did you reflexively grab your shareholder pearls and feel this was, maybe, a bad thing? It isn’t.
America becomes more like itself every day, and our obsession with, and idolatry of, the dollar has put the public good in the back seat. Billions of stakeholders benefiting from AI, vs. one business becoming worth more than every stock market on Earth except Japan and the US, and one man being worth more than Boeing feels less sexy … less American. (Hint: NVDA & Jensen Huang.)
A Brief History of Last Week
In December, Chinese hedge fund High-Flyer released an open-source AI chatbot called DeepSeek that looks to be almost as good as OpenAI’s ChatGPT. It was reportedly designed in a matter of months by modestly paid millennial engineers and doesn’t run on the expensive Nvidia chips the U.S. prohibits from being sold to China. DeepSeek reportedly cost $5 million to train; it cost $100 million to train OpenAI’s LLM. Nvidia fell 17% on Jan. 27, losing over a half a trillion dollars in market cap. In one day, the company shed the value of the entire global auto industry (not including Tesla).
We don’t know if Jan. 27 was a speed bump in AI or the beginning of a tech market correction many have been expecting for 15 years. Some air definitely came out of the balloon, but just some — NVDA fell to its October ’24 price level (NBD). The DeepSeek revelation was shocking, but not surprising: A Chinese company knocks off an expensive U.S. product at lower cost (see above: China).
Gong
In retrospect, it’s easy to identify the action that rang the bell at the apex of a market. I believe the gong may have been the news that SoftBank is close to leading a $40b investment in OpenAI at a valuation of about $300b. This is double the valuation the firm raised at four months ago and a similar valuation to TikTok parent Bytedance. IP theft and addiction are both great businesses. However, crime pays more as OpenAI is being valued at 92x revenues, vs. Bytedance at 2.3x. Jesus, after reading the last sentence I wonder when Sam Altman is going to begin using terms such as “Community Based EBITDA.”
Masayoshi Son’s limited partners (i.e., his investors) are looking for venture-type returns (3x to 5x in 7 to 10 years), meaning Masa’s LPs (i.e., masochists) believe OpenAI will be one of the 10 most valuable firms in the world … soon.
Kill Orville Wright
Yesterday, I skirted along the edge of the atmosphere at four-fifths the speed of sound, traveling from London to New York in seven hours. The least expensive tickets were $400. Jet transport technology has changed the world. Sixty years ago, my mother crossed the Atlantic in a steamship: It took seven days and cost 4x what flying does today. Commercial aviation has created enormous value. However, the vast majority of that value has been captured by consumers and society, vs. airlines. Since 1945 the industry has experienced years of low-margin profitability only to have its gains wiped out by periods of huge losses (e.g., $128b in 2020).
Weak Flex
Starting in the 1980s personal computers put technology that had cost tens of millions 20 years earlier on nearly every person’s desk. The gains in productivity, globally, have been substantial. I was on the board of Gateway Computer in 2006 — weak flex. We were the second-largest manufacturer (by unit volume) of a technology that, at the time, had greater adoption and a bigger impact than AI has at this moment. I raised, and purchased, 18% of the firm for $90m. Eighteen months later, we sold it to Acer for $900m. Why? A: The CEO urged us to sell, as he felt there was a real risk we might run out of money. Think about this: NVDA shed 600 Gateways on the DeepSeek news.
AI could be enormously valuable, and at the same time a lousy business. As with email, the user may capture 99% of the value and the manufacturer 1%. What looked at first like a proprietary asset may turn out to be a public good. BTW, isn’t this how education and health care are supposed to work? But that’s another post.
Vaccines may be a useful analog here. I have a stock screen looking for potential fallen angels to buy. One of them is Moderna. At the height of the pandemic the company’s stock was nearly $500 a share. As I write this it’s $33. Vaccines may be the greatest innovation in modern history. However, their value to shareholders is fleeting.
Private assets can transform into public ones for a variety of reasons. Economists have different words for the process depending on the details: It might be called “decommodification,” “non-excludability through diffusion,” or “commonization.” They are all Latin for “there is no money here.”
Shoplifting
The ironies of DeepSeek are pretty rich. The biggest is that, as Jon Stewart pointed out, AI stole AI’s job.
Another one is the way Sam Altman has been bitching that DeepSeek stole some of his IP, “distilling” big OpenAI models to produce its own smaller, more efficient version. This conjures Steve Jobs whining that Bill Gates stole the idea of a graphic user interface from Apple. Gates responded that Apple had stolen the idea, too, when Xerox PARC left its garage door open. OpenAI is built on data it took from other people under the banner of “fair use.” Hannibal Lecter is irate that his neighbors aren’t vegan.
Another irony is that the U.S.’s attempt to keep American-made chips out of China may turn out to be a powerful argument in favor of free trade. Nvidia is now in a reasonable position to tell the U.S. government, “You’ve only created an incentive for adversaries to develop workarounds, destabilizing the AI industry and U.S.-China relations.” Anyways, it’s an argument.
Finally, though, what looks like it may be very bad for some businesses has the potential to be wonderful for the rest of us, not just for the public but also for the tech industry. Since the rise of Amazon and then Netflix, valuations have been driven not by innovation, but capital.
Kong
We thought King Kong was singular, and under U.S. control. And then a prehistoric reptile appeared on our shores, empowered by many years of exposure to nuclear radiation. FYI, Godzilla (#awesome) was meant to be a metaphor for nuclear weapons. Feels weird, but recently I find myself rooting for Canada, Denmark, and the lizard.
Life is so rich,
P.S. Introducing the Prof G Markets Newsletter, your weekly guide to the stories shaping the business world, designed for anyone who wants to understand the capital markets and establish economic security.
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P.P.S. AI might not make Sam Altman (much) rich(er), but it can do a lot for you. Take 30% off Section’s AI Academy when you use code SCOTT30.
If you’re moderating, this is just for you, Scott. You might have figured out that I don’t like left-wing nuts who sound a bit too much like the unethical hypnotherapist. I’d guess anyone who worked with a “Christian”-type unethical hypnotherapist to hurt someone who for a long time didn’t know there was an unethical hypnotherapist is about the worst kind of Democrat you could have, at least if you ever wanted to have a system of views that presented a worthwhile alternative to the GOP.
When the left wing starts sounding like name-calling idiots who just want to hurt anyone, they sound like they’ve had their minds clouded more than I have.
Here’s a short story on theft of ideas. Aspen, Colo., yes that Aspen, has two daily newspapers, a public radio station and two commercial radio stations that report and comment on news. It is one of the healthiest media markets in the country in that respect.
The motto of the Aspen Daily News is “If you don’t want it printed, don’t let it happen.” It’s a great motto that endears local readers and visitors as well. But that motto was actually thought up by Bil Dunaway, the longtime publisher of the competing paper, The Aspen Times. Bil and his competing publisher, Dave Danforth were walking out of the courthouse one day back in the 1980s with a story in hand. Apparently the defendant or his family in the case that they were attending, made pleas to both men not to write about the case. Bil offhandedly said the to Dave that if the defendant didn’t want it printed, he shouldn’t have let it happen. A few days later Dave put the now legendary motto atop his newspaper.
As a former writer and editor at the Times, I recall a moment in the early 2000s when the entire staff was trying to come up with a motto that was equally kitschy and iconic. One that could make us cooler than the Daily News. The best one we came up with was “The Aspen Times. Lies … all lies.” Needless to say it didn’t make it to the banner.
I think that AI will be a distributed good. But I also think it’s not up to it’s hype. I want to compare the hype cycle of AI to the hype cycle of bitcoin/blockchain. They are both going to end up widely distributed and I think niche.
Blockchain is a public ledger that is resilient to tampering because there are so many copies of it in the universe. That’s useful. Bitcoin is a token/currency to pay miners for burning hydrocarbons like an F1 racer to maintaining the blockchain. Bitcoin did not sweep fiat currency off the planet because it’s a lousy currency (7 transaction per second vs Visa’s 5,000 per second VISA).
AI’s hype is that it will eliminate office jobs. A bold claim. AI can summarize, it’s OK at proofreading, has access to knowledge that is wide, but shallow. That is the essence of a lot of the “grunt work” in but AI’s answers are meh. Where AI shines is in pattern matching, as a tool to aid in mammogram readings it looks spectacular. For AI as an assistant, as a resource, as a crutch, it’s a supercharged Siri. Much more importantly AI will become a niche part of the tool kit of certain professions. That’s where it will shine and that I submit is where the tinkering will be concentrated.
I always think an AI robot standing next to another Ai robot are running the same filters over the same data … so where 2 humans collaborate and bounce ideas and grow with a universal dose of divine insanity – 2 become 3 at the very least – where the bots are waiting for a new prompt from the first human to get bored.
If we think of the eternal loop if the snake eating it’s tail – this is akin to the closed loop of the internet without new data. But instead of starving the beast or feeding it health food, we established it on war and sex and now feed it ego in 4 second bytes ….. thats gonna be a sick kid … who thinks we are all sick kids.
TRUMP/Musk are looking to cut scientific research… a gift to China! There is a proposal to only allow 15% overhead charge (aka indirect cost recovery) on research grants… as you may know all academic research and accounting is 100% transparent… but funding to SpaceX is not…why is that? I would bet SpaceX administration costs/overhead is a hell of a lot more than 15%.
Also claiming that University have huge endowments to cover the Trump squashing scientific research is a stupid justification. A college endowment fund is a collection of individual contracts that the University must comply to, or give the money back to the endowment establisher (e.g. donor). University’s can’t take money that has has been compounding over years from one endowment account to be used for a different purpose like supporting the libraries, or new scientific exploration.
He’s had plenty to say on Bluesky. To get what’s happening with Musk you have to have read “Atlas Shrugged”. Really read it, not just threw it across the room partway through. This is the part of the story where the independent brains and heroes decide to go back and remake government and society after it has fallen apart due to its own malfeasance and incompetence. Musk thinks he’s John Galt.
Hugo Drax want to be Musk might think he’s Galt, but this is not a novel. Wannabe Drax’s DOGE gamer buddies that have accessed very important USG info, will be the target of the hottest women and men (some DOGE kids might be gay) that foreign intelligence will send in an effort to Honey Pot them.
Musk himself is not to be truly trusted because he was an adult immigrant whose moral compass was set in apartheid South Africa. Add to the massive business interests dependent on China. In short he can always sell out the USA and bail to China.
Musk had the world on his side with Tesla, SpaceX, Spacelink, etc before he went dark side. I don’t think its going to end like the book for Galt. More likely he will be played by the Chinese, like Russia played Snowden.
Bravo- epic post Scott. “Killer” line “Hannibal Lecter is irate that his neighbors aren’t vegan.”
Impressive to see the big swings you’ve been taking of late. Great stuff.
The week we witness just the start of Musk’s tech bro coup of the U.S. government and you have nothing to say about it? Has he finally gotten to you too?
There should be more focus on Deepseek being a model from a fundamentally untrustworthy regime, created for potentially shadowy purposes, providing unreliable (ie even MORE unreliable than other models…) information.
If we’re banning Tiktok, Deepseek must be next for the hammer blow.
Stymie authoritarian and don’t talk to me about free markets. They’re for regimes where you can tell the leader he looks like Winnie the Pooh or an overripe orange
Thank you for a great post and magnificent insight. Suddenly I found words for my optimism about AI’s impact which I have felt for a long time now. YES, life is so rich, Scott
Perhaps hubris played a part in the demise of Gateway? I remember a pretty spectacular law suit by shareholders – which genius called the customers “dumb sh*ts”…did they run out of money because the legal expenses were enormous? Just wondering
I didn’t think there were still steamships in 1965, yet your mother miraculously found one from Europe and booked passage for $1,600. A poor choice; flying might have been faster, cheaper, and far easier.
The vast majority of ships in 1965 were steam powered. They ran huge boilers that turned water to steam and the steam pushed the turbines that pushed the props. I was on a VERY large Navy ship in the 90s that ran 1200 pound steam for propulsion.
The reference to Xerox reminded me that as employees my wife and I purchased a Xerox 820 II PC for our home in the early 1980s.
Many of us could not understand why upper management pushed desk top computers and LAN to the side and continued to place all the bets on copiers.
They doubled down on copiers again in the 1990s into the 2000s.
A lesson to corporate management. When coming to visit customers, say “Take me to the customers that cancelled us. Not the customers that like you.”
Corporate management would have learned that people who have a PC want a desktop printer. (We invented that too.) They do not want to share a printer with ten people on the floor.
I always used to walk the floors because there is a difference between the influencers and the decision makers. The future was not good for Xerox.
One day I when into an Office supply store and saw a Xerox branded paper shredder, I thought I was kicked in the chest I almost couldn’t catch my breath.
We loved our company…. Thank you for this session, I needed that.
At the very least we have excellent retiree dental benefits.
One issue that needs to be addressed: funding the US Sovereign Wealth Fund. How does the country with the largest sovereign debt in the known universe do a SWF? Modest proposal: sovereign extortion. Threaten to invade foreign “sovereigns” who decline to “invest” in the US SWF. Get your roadshow tickets today!
What does this article have to do with a domestic sovereign fund??
Well, the view that AI will spread to bring benefits to a wider population is encouraging. I am Canadian, faced with economic attack. We feel that the tech propagandists and ‘big battalion’ Trumpists are pushing annexation and control of our resources. There is a rising sense we can rally and find our way thru this, become more independent and pursue our national interests. Reliance on branch plant operations and US customers was easy but not viable. (We have to push back on negativity from a politician and US owned ‘Cdn.’ Media.)
The peddling of pre-aloohol supplements is gross and you are now in Alex Jones’ territory. I wish you would get back to being the Prof G of the past. I think you quest for more and more money has warped your brand and agenda.
Hi Scott, always have loved your stuff and think you are one of the great honesateral thinkers in the business world Good writer and bet teacher too! One of my favorite lines you wrote was trying to get the best teacher award at NYU was one of your top desires. Me too at Lehigh.
Am in the later part of my life after doing a number of successful (and failed) business ventures plus some writing and teaching. This spring, I will be at Lehigh teaching students about the Creator Economy and lwould ove to make time to introduce myself to you if possible in New York.
Meantime, have you ever looked into the Japanese Wisdom concept of Wabi Sabi? Like I said am at a point in my life where I get to do some foolish but perhaps very interesting things and think you would love the book by Beth Kimpton Wabi Sabi…..sure seems to me we are in a similar era that mid-evil 16th century Japan was and although history may not repeat itself, it sure does seem to rhyme. Think you might like it . Again thank you for your wonderful work.
my very best, Craig Gordon