← BG2Pod with Brad Gerstner and Bill Gurley 
BG2Pod with Brad Gerstner and Bill Gurley
Ep14. Public Market Volatility, AI Air Pocket, $GOOG Ruling | BG2 w/ Bill Gurley & Brad Gerstner
01:25:51
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- [00:00]
Bill
The idea that we're going to go through this phase shift with Capex and revenues perfectly aligned and perfectly matched. Right. It would be the first major phase shift we went through where that's the case. Hey Bill, good to see you. So much. So much for a smooth, nice exit to the summer. I mean, what a week.
- [00:31]
Unnamed Speaker
Been a rough summer.
- [00:33]
Bill
I mean it reminds me of this video going around with Peter lynch in it. You know, it's 1987, he's managing the Magellan Fund, I think has like 12 billion bucks in it. He finally, his wife convinces him to go away to play a couple days of golf in Ireland. Right?
- [00:48]
Unnamed Speaker
Yeah.
- [00:49]
Bill
And it's hard to actually keep track of the market in 87. He says in two days his fund goes from 12 billion to 8 billion. He's like, I took two days and he lost 30% of the value in his fund.
- [01:03]
Unnamed Speaker
Oh, rough, rough. I don't think it's been that bad, but it's been bad. It's been, you know, a lot of stocks have been reset pretty dramatically here.
- [01:13]
Bill
No doubt about it.
- [01:15]
Unnamed Speaker
One thing that I thought would be great and to talk about today is just to spend a lot of time on these public markets. This is a world you live in every day. I did participate. I had a brief career as a South side analyst arguably three decades ago. So I consider myself more of a sideline player to the public markets. But I do pay attention. I've often said that the public markets are the buyers of private companies and you gotta know them, you gotta know em, you gotta study em, you gotta know what they want to buy. So I do pay attention, but let's focus it your way. So just to run down some numbers. S and P down 8% which wiped out $4 trillion. The QQQ down 11%. There were three worst days since March of 2020. Mag 7's down a trillion dollars. Crypto, which you kind of would have thought maybe would have rallied with what's going on, didn't it? Traded down in sympathy. And we've seen this a bit where you hope for it to be uncorrelated and then oh shit, it's correlated. And then everyone's talking about Buff jumping out of his apple position. So you did speak about taking risk off at the beginning of the summer and it looks like that was a smart move. Congratulations. But tell us what you think you're seeing out there and how people should put all this in perspective.
- [02:42]
Bill
I think that's the key. This is not 1987. In fact, we've Seen this big bounce back the last couple of days and while we've been having these big gyrations, you know, if you just put it in context, since Q1 of 2023, remember when everybody was really nervous at the start of 23 about Mike Wilson's hard landing? So that's just six quarters ago, right after ChatGPT hit the screens, you know, stocks are up 60%. I mean, that's a huge move in six quarters. And the Qs were up nearly 80% at their peak in July. Many individual stocks have more than doubled, like Nvidia. So, you know, I put what's happened this week and what's happened over the course of the last month in kind of run of the mill healthy consolidation of these big gains that we had in these six quarters. But you know what I said at the beginning of summer, we're active managers, right? So I live with one foot in the venture markets where we think about five or ten year time horizons, but in the public markets, we have to think about risk reward every day. And as stocks have run up, it has been accompanied by what we think is a deterioration in some of the conditions. Right. So this means the skew has gone from very positive at the start of 2023, when everybody was nervous, to, you know, a little more negative by the, by the beginning of the summer. And you know, just like when you and I are playing in a game or a house game of poker, when the skew gets more negative, when cards get turned over, when our probabilities of winning dissipate, we gotta reduce the bet size. So I talked a couple weeks ago about reducing units of risk and I got some questions online about that. So here's a really simplified depiction of how we were thinking of things in January of 2023 and how we were thinking of things you, you know, at the start of July in 2024. Right. So as you can see on this chart, at the beginning of 23, we looked at it, prices were in the toilet. So you started with really low prices. We expected big earnings beats because consensus was really beaten down. People were super negative on where earnings would come in and we expected there to be rate cuts which would be further stimulatory of the economy. So we looked at it and just again, very simplistically we said, hey, we think there's an 80% chance that the names that we like in technology can be up a lot because we expected big earnings beats. So up 50%. But the future is unknown, so there could have been a hard landing. So he said there's 20% chance the market can be down, but it's already down so much that we think, let's call it down 10%. And when we looked at that skew, that's what I would call highly positive skew. Right. It's a five to one or four to one risk reward, which we put on nine units of risk. So what's nine units of risk?
- [05:38]
Unnamed Speaker
Well, yeah, what is nine units of risk?
- [05:41]
Bill
So let's say that you're managing $5 billion of public equities. Nine units of risk would be that you have four and a half billion of that risk directionally long the market. Right. So that could either be that you know that your longs are more than 100% and you have some shorts on, or let's just keep it simple here and say that you have 95% of your cash invested or 90% of your cash invested. Right. And four and a half billion directionally long the market. Okay. Now, as the chart depicts, by the summer of, by the beginning of this summer, we were worried about a variety of things, the first of which is prices had just gone up a lot, Bill. Right. We were at all time highs. And the moves had been fairly parabolic in a lot of the names that, that you and I talked about. And we had talked on this pod about concerns over an AI Air pocket, and people were pointing out that Nvidia was up multiples in a very short period of time. So we looked at it, we said, we got high prices, we've got an upcoming election where there's going to be, you know, some, some real binary things at play, including higher taxes, which we think would be a negative for the market. We started to see our earnings expectations which were just in line with consensus or in some cases we expected misses occur. Okay. And we were increasingly concerned about the prospect of a recession because we started to pick up these, these signs of slowing in the economy. And then you and I had talked a lot about this AI Air pocket. So by the beginning of this summer, we said there's no longer an 80% chance of a 50% upside like we saw at the beginning of 23. Now there's an 80% chance that we could have a 20, you know, 10 to 20% downside, right?
- [07:29]
Unnamed Speaker
Yeah.
- [07:30]
Bill
And the move up the 20% chance was like, wow, we're at all time highs. We could see this squeeze a little bit higher. But between here and the election, we think the probability of going much higher is fairly low. So we had much lower units of Risk. What's that mean? It means we sell some of our longs or we put edges on, or we add to our short positions so that our net exposure directionally to the market. Right. Is three units of risk, not the nine units of risk that we had had on earlier. So that's really what I was saying, in a simplified way, that we tend to have longer holding periods. We hold things about three years in the public markets. Obviously in the venture markets, we're holding things 10 years. But that doesn't mean that you buy and go to sleep just like in a poker game. You gotta watch when things change. They don't change every day, but over the course of the last six quarters, that risk reward has indeed changed.
- [08:25]
Unnamed Speaker
Yeah, and I mean, the NASDAQ shot up about 33% in that window from January to first week of July. And I think a lot of the people in Silicon Valley didn't really feel that because they may still be anchoring on some of these multiples from two years ago. And so when the stat. I hear people say, oh, my God, SaaS is super cheap at six times revenue. And I'm like, I've seen industries mature where six ain't a stopping point, you know, and of course, you gotta move on to net income and earnings and cash flow and get out of this revenue mindset. But anyway, yeah, so I think you timed that exactly right. And obviously now we're looking at all of these new issues that have come to the table. What do you think are the key issues that have been changing, and how do we want to think about each and every one of them?
- [09:25]
Bill
Well, first, you know, as price goes up mathematically, risk reward gets worse. Right. Unless we're taking up our numbers. So the first problem is our numbers stopped going up a lot. And so, you know, price really matters. In 2023, we kept revising those numbers up, and in 2024. Right. The numbers didn't go up a lot. And so we're much more in line with consensus. But in addition to that, we see five forces really at play. Um, we've been focused on three, and then two more came into play over the course of the past six to eight weeks. But the five forces we've been thinking about, Bill, number one is taxes. Right. We got this election coming up, and remember, depending upon who wins the election, we have the potential of an automatic tax increase in 2025. See Expiration of the personal income tax reductions from the Trump tax cuts.
- [10:18]
Unnamed Speaker
And if that happens, you're talking about personal income taxes, not Corporate taxes.
- [10:24]
Bill
Right, we can dive into that in a sec. Number two, we're worried about earnings misses or just skinny beats and general slowing in the economy. Right. So this is things like consumer delinquencies. Number three was a concern about this AI air pocket, that prices had come up so much, expectations had come up so much, you know, would we have, you know, as Satya said to us a few weeks ago, right, this mismatch between Capex and when the actual revenues start to come in. And then just in the last few weeks, right, we had two more geopolitical factors emerge. One was around this huge Japanese carry trade unwind which we can dive into a little bit. And then the last one was just this expanding saber rattling in the Middle east, potential of an expansion of the conflict with Iran. All of these things, right. Creates a bit of a toxic brew. And you know, of course like the future's unknown, a bunch of these things could break positive. But it means that there's more uncertainty in the world. And when that uncertainty goes up, the discount rate, the margin of safety you need on your portfolio goes up and that means that the multiples on these stocks come down. So that's really, those are really the things that we've been paying attention to in addition obviously to what companies we expect to do best, which ones we expect to underperform. And that's what causes us to modulate from nine units of risk to three units of risk.
- [11:55]
Unnamed Speaker
And these are all things that change, right? There's a perception, there's obviously been a perception shift on the election which can affect something there. There was a general perception that the soft landing was stuck using the Olympic metaphor. And so that's a change. If we're thinking about a recession again, the AI shift we've talked a lot about, the Japan carry trade came out of nowhere. So we'll dive into that. And then on the Iran issue and just to clarify for people, I mean, obviously any war is bad, obviously and it can lead to a lot of horrible things for citizens and people. I think one of the reasons you're bringing up relative to the US markets is because it could cause an oil shock and that could impact oil prices which obviously has a huge impact on the economy. Is that correct?
- [12:50]
Bill
Yeah, certainly, certainly.
- [12:51]
Unnamed Speaker
Okay, cool. Well, let's take them one by one and dive in. Why don't you start with the tax thing?
- [12:57]
Bill
Well, you know, so we talked about this, I think on episode 11 or something, you know, the tax situation we're facing going into this election is a very different situation than we've had in prior presidential elections. Right. There's always debates in presidential elections about higher taxes, lower taxes, and of course, like, we never know whether or not they'll actually follow through on those promises, whether or not there are things, those things will happen. But in this situation, we have tax cuts that automatically are set to revert back to prior levels. Right. So remember, the corporate tax cuts were made permanent when they were passed, brought the corporate tax rate from 35% down to 21%. So if, if a new administration came in, let's say the Harris administration came in and they wanted to raise corporate taxes, they would have to get that through Congress, which would be a very difficult thing to do. Right. Given the fact that we expect to continue to have divided government. But the individual tax cuts, which included increasing the child tax credit and the standard deduction, it's, it's worth about $150 billion a year, to put it in perspective. Right. That's about 60 basis points on US GDP.
- [14:11]
Unnamed Speaker
And we're talking about, we're talking about the marginal federal income tax.
- [14:17]
Bill
Correct. So this is. Everybody's rates came down under Trump. We also increased the standard deduction, we increased the child tax credit. And think about that. That's like pushing $150 billion of consumer firepower into the economy. Now, you know, there's a lot of debate about whether we can afford this as a country. You know, whether it actually gets spent and added to GDP or saved, whether it's fair. I'm making a different point. Right. Set aside what you think politically, but from a market perspective, if taxes were to go up by 150 billion bucks a year, this is a big risk to the market. And the market seems to currently be saying the likelihood. Right. We know what the betting markets are saying. They're saying there's a. Kamala is now favored to win the election by a slight amount. Right. And as the probability of her winning has gone up, the market has gotten more concerned about these tax increases. Right. And some people have estimated that the tax decreases from the Trump tax cuts contributed to about 20% of the gains in the S&P 500. So whatever your number is, if those tax cuts go away, you have to assume that will be a headwind, at least in the short term for the markets.
- [15:34]
Unnamed Speaker
Can you not make an argument, I mean, depending on exactly who is impacted as to whether or not those taxes come out of discretionary money that would be available to spend.
- [15:49]
Bill
Yeah.
- [15:49]
Unnamed Speaker
No, I say for an ultra wealthy person, it's not going to matter.
- [15:53]
Bill
It's not going to affect your spend, of course. And so like that's what I was saying at the start. There's some debate, right. We know if the tax cuts were 150 billion, it's unlikely that all 150 billion of that was stimulatory. Right. Because some people just put it into increased savings. But we know when you look at the bulk of the people who, you know, who are recipients of those tax cuts, right. They've spent down their Covid stimulus checks. Right. They've increased their credit cards. Right. And whatever incremental take home pay they got as a result of these tax cuts is being spent. So that had to have some stimulatory effect on the economy.
- [16:31]
Unnamed Speaker
Okay, let's dive into the next one, which I think is the one that's for me at least most interesting, which is. And you know, because I've been very outspoken, I try and avoid macro at all costs. So this is, this is, this is.
- [16:45]
Bill
You're feeling very uncomfortable today.
- [16:47]
Unnamed Speaker
Yeah, this is an awkward journey for me. But, but you know, just out listening to the, to the. And it did appear that the common point of view was that a soft landing had been achieved or that it was going to be achieved. And there was a lot of high fives and tadas and I told you sos. And so to reconsider that and take that off the table is a big deal. So what are you seeing out there and what's causing people to use the recession word again?
- [17:20]
Bill
Yeah, no, I think you're spot on. Right. I mean, Right. The markets were at all time high, Bill in July. So I mean, I think that's telling you, I don't know that there was an 80% chance of a soft landing. Now we started to get some data coming in that suggested maybe the economy was softening faster than getting softer faster than people think. So for example, the Wayfair CEO, you know, Wayfair is a company that provides cheap home furnishings. We know that housing is under pressure because interest rates remain very high. You know, the CEO came out and said customers remain cautious in their spending on the home. And our credit card data suggests that the category correction now mirrors the magnitude of the peak to trough decline the home furnishing space experienced during the great financial crisis. Right. That's pretty extraordinary.
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Unnamed Speaker
Right.
- [18:13]
Bill
You have the CEO of a home furnishing, you know, company saying this looks like it did in 2008. Right. Airbnb is another. Go ahead.
- [18:22]
Unnamed Speaker
Yeah, go ahead.
- [18:23]
Bill
Airbnb reported just last night, you know, they talked about some softness, you know, that they're seeing. Jamie Dimon was just on CNBC on, on the flip side, and he said, listen, my expectation all year is that there was a 30, 35% chance that we're going to have a soft landing. And my view remains the same today. But. But I think Jamie was probably in the more conservative camp. The market was pricing in an 80% chance of a soft landing. He was at 30 or 35% chance. And I think that's probably where the market is beginning to price it. And on top of that, so we have about 80% of the companies.
- [19:00]
Unnamed Speaker
Let me ask you a quick question while you're on that topic. So I also saw Disney gave soft guidance on the theme park business, and Universal had said the exact same thing. So I know you used to be very focused on the travel sector. When you look at theme park revenue and you look at Airbnb revenue, what does it tell you when the consumer's having second thoughts about those types of expenditures?
- [19:29]
Bill
Right. Well, the first thing they do is when things are starting to get tight is you defer your couch. And that's what Wayfair's seen. The second thing you do is you defer your family trip. Right? You hold onto that family trip because that's the most important thing you do during the year. But when Airbnb and Disney and the cruise lines and the airlines start seeing downticks now, you know that the consumer is really getting pressured. So there is no doubt.
- [19:56]
Unnamed Speaker
So it's not just the theme parks and Airbnb.
- [19:59]
Bill
No, this is. We're hearing this across the board in travel. We're seeing it in employments, air ticket prices. Again, not at a level that should cause one to think we're in a recession or panic, but undoubtedly, in my mind, we're slowing. And if you just look at the companies that have reported in the s and P, 80% of companies have now reported, 48% of them had a positive revenue beat. Now, that sounds like a lot, but it's the lowest level since the third quarter of 2019. And remember, this is a trailing indicator. This is what happened over the course of the last three months. So, again, that's another thing I think we ought to pay attention to. And then, of course, our jobs report have come in weak. The jolts, which is the job openings, are below trend. And that trend has been in place for quite a while. And then the unemployment rate has been climbing, most recently 4.3%, many economists think. In fact, I was talking with A former chairman of the Council of Economic Advisors last night. They think this is the best indicator of a pending recession. There's something known as, as the SAHM rule. We'll put it in the notes. But they said according to the SAHM rule, a recession is almost always underway if the three month average unemployment rate rises by half a percentage point from its low of the past year. And that's exactly what's happened. So a lot of chatter on Twitter about how the SAHM rule has been triggered. So there's good reason to think that we're, that there's a lot of slowing going on. There's a lot of debate as to whether or not this is just the healthy slowing that Jerome Powell needed to engineer to bring inflation down. But you know there, there, there is a saying that the Fed has caused 10 of the last eight recessions. You know, that they're, that they have post traumatic stress. They were late to get in front of inflation in June of 2021. They were late to increase rates. And so I don't, I think it's reasonable that they may be late to reduce interest rates to head off a recession.
- [22:07]
Unnamed Speaker
And do you expect them to do something quickly? There was talk this week of like an emergency cut, although I think that's weight waned.
- [22:16]
Bill
Yeah, I mean, listen, I think it's important to realize first that the Fed is at a multi decade high in terms of its level of restrictiveness in the economy. So what do I mean by that? Well, the Fed funds rate is at five and a half percent. Right. The ten year is at four percent. So the market based mechanism for saying where rates are going to be is 150 basis points lower than where the Fed funds rate is. Another way of looking at this is the 10 year tips. Right? We've talked about this before, it's a bit of an esoteric thing but you know, it's currently at 1.8% and 50 basis points is viewed as neutral. So this is kind of highly restrictive. And the way to think about this is this is the amount you have to be compensated over, you know, the interest rate in order to bear the risk of, of inflation. So the measure of economic restrictiveness is high, you know, and inflation is coming down. In fact, the last inflation print was 3%. CPI gets reported again next week. We expect that to be, the market expects that to be around 2.9%. So I think there's very little doubt the Fed is going to cut rates. The market is saying now that there is a very high probability we'll put this chart in that we're going to have 125 basis points to 150 basis points of rate cuts over the course of the next four to five months. Now, to put this in perspective, Bill, that just gets us back to neutral, right? This is not some, oh my God, we're in a recession. This is just saying we are no longer as worried about inflation, we're more worried about jobs. We have a dual mandate and so we're gonna get back closer to neutral. I would actually point you there was a really great interview this week with Chicago Fed. President Goolsbee thinks perhaps that the Fed is already behind the curve on this when he was asked whether they would do an emergency cut. And you know, I think the emergency cut is off the table. But he said this, he said, I have been saying to you that we have been in a very restrictive stance. The real Fed funds rate is at its peak for this cycle and we should only have that restrictiveness in place if there's a fear of overheating and the data is weakening. So it does not look like there's any fear of overheating. And then he went on to say, while weaker than expected, we're not yet in a recession, but we need to be forward looking. There are other cautionary indicators. Consumer delinquencies are rising. Small business defaults are rising. They are at worrisome levels, though the domestic purchases seem steady. So I think within the Fed, they know that the balance of power between concern over inflation and jobs has shifted. So I expect that on schedule in 30 days. I think it's mid September, you're going to get a rate cut. The market's saying it's going to be 50 basis points followed by a few other rate cuts. That's, that sounds right to me. But you know, Jeremy Siegel was on Squawk Box calling for an emergency 75 basis point rate cut followed by another, you know, 75 basis points. And you know, listen, I think that that would probably spook the, the market worse than if they just stay the course here because that would suggest the economy's falling off a cliff. And I don't see evidence that's falling off a cliff.
- [25:48]
Unnamed Speaker
And so the interpretation is worse than the value of the action, if you will. The signaling. The whole Fed thing is kind of intriguing to me because the world starts talking about it like it's a thermostat. Oh, honey, it's hot in here. Can you, can you turn it down? As if it's the one thing that's always going to fix the market. And there's 40,000 other variables out there. Right. Like, like if you, you know, it looks like both parties that are running for, for the White House want to, want to do isolationism and fight globalism. That's inflationary, Right. There's, there's been, you know, a massive overspending by the last three or four administrations. And so national debt's higher than it's ever been. That's a problem. Like, who's to say that even if the Fed does cut, we're gonna see just like an immediate okay, we're fine, like the doctor gave you a shot and you're okay.
- [26:53]
Bill
We got used to, or maybe addicted to rate cuts. And every time rates would go down, it would kind of bail out the markets and markets would go up. But remember, historically, rate cuts that are preceding a recession or fears about a recession are oftentimes sold. Right. It doesn't cause the market to go up, actually causes the market to go down. You know, our team was looking at Some data in 2019, in 2018, there was fear about the economy slowing. The Fed starts cutting rates at the beginning of 2019. And the market was down big, right? It was down big because it thought we were heading into a recession. And so it took probably six months for the market to rebound from that. And a much worse version of this happened in 2001 that you and I remember well. Right. The Fed continued to raise rates in May of 2000, worried about the dot com boom and that the market was overheating, but they were way behind the curve. And we all saw the economy really slowing down and signs of the dot com bubble bursting. They were late to the game. By the time they started cutting rates in the beginning of 2001, it was clear they were behind that the economy was cascading into a recession and the NASDAQ was down over 20%. And so I don't think, you know, as market participants, when we're weighing all the risk reward here, we're not sitting here saying, oh, the Fed's gonna cut rates. And that in and of itself, you know, fends off a recession. We need to make sure that we continue to see earnings come in strong.
- [28:27]
Unnamed Speaker
You know, that one, that particular situation. There's one thing that people seem to have a really hard time remembering after the famous quote about irrational exuberance from Alan Greenspan. The Clinton administration actually lowered capital gains tax rates, which fed into that problem and probably shouldn't have, should have been raising them anyway. So, so let me ask you this question once again, Macro Bill here.
- [28:56]
Bill
Yeah.
- [28:58]
Unnamed Speaker
What are the chances that you get probably the worst situation of all where the Fed cuts and nothing positive happens, like there's no positive impact to growth. Is that a possibility in this case?
- [29:13]
Bill
Yeah, I mean, listen, I think the market's already doing the Fed's job, right. Remember that a lot of variable rate debt is priced off of where the tenure is and the 10 year has already, you know, come down. So people's mortgage, you know, you can already go get a cheaper mortgage, you can, your credit card debt is already coming down, et cetera. So this is the dynamic and the.
- [29:33]
Unnamed Speaker
Marginal impact of the Fed lowering to those long term rates is not going to be that big is what you're saying, Correct?
- [29:41]
Bill
I don't expect it to be that big, but it does signal directionally. Right. That the market is right. Remember the market will ultimately adjust to where the Fed is. So the Fed, it's not to say that the Fed funds rate is, you know, is not important. I would say this, what's far more important about whether we end the year higher or lower is not whether the Fed cuts rates. It's what is the economic growth, what is the unemployment, what is the cpi, what's really going on in the underlying economy. And again, just again telescoping out here. So you have this concern about taxes. We're not gonna know the answer to that until after the election. You got this concern about recession, you know, the Fed can cut rates in September. That doesn't make that concern go away. That concern is still gonna be out there until we see additional inputs on economic growth, you know, come in. And then of course this third one that you know, we were talking about, Bill, which is just concerns over this AI Air pocket which you've been beating the drum on.
- [30:46]
Unnamed Speaker
Okay, yeah, well, I mean look, I think to a certain extent that's played out, right? I mean we've seen most of the stocks that you would have called AI stocks, Nvidia being the most obvious. But I think the Mag 7 a lot of them are exposed to this. They've all come in. Right. And so you and I had the discussion. You know, we've been having it all summer, but then the Goldman thing came out and the Sequoia thing came out and then the stocks retreated. So could you make the argument that that bubble's been popped already?
- [31:21]
Bill
Well, again, like I said at the beginning, I think these are healthy consolidations. Right. Like what you don't want, what a bubble is made of is when Everybody believes when there's no talk about an air pocket and when stocks just elevate to ridiculous multiples. I think here you've seen Nvidia come down from 140 to, I think it bottomed at 195 bucks. It's probably at 105 today. But we did learn some things in the earnings reports of the last two weeks, Bill, that I think we should call out in terms of what Meta said, what Google said, what what Microsoft said about their capex and about AI spending. Here's some charts from my partner Frida Dwan. And if you look at the big four, they're gonna spend 220 billion this year on capex. You know, and if you look at their statements on these calls, right. Sundar said it's more dangerous to underspend than to overspend. Right. Satya said there's still capacity constrained so they need to continue to make these investments. So I think in the short run all of these companies, Meta said, basically the same, Amazon, the same, they're gonna keep the hammer down on Capex because they're seeing the return, they're capacity constrained and they're worried about not making the investments. Right. So if you compare this to the quarterly and the annual expectations we took people through on the pod for Nvidia, right, here's this chart. We talked about this $2 billion that's gotta get or $2 trillion that Jensen said would likely be spent between now and 2028 on data center build out and you know the green line, descending line in the middle. Right. This is if you just take the consensus numbers for Nvidia and what that means for their share of the market over this period of time. So the consensus numbers while Nvidia's numbers continue to go up a lot. Right. And they're gonna report in two weeks here. But if we look at Nvidia's quarterly expectations or their annual expectations, so this year they're expected to do about 136 billion of data center revenues. Next year that goes to 166 billion, so up by about, you know, $30 billion. Obviously the rate of growth is slowing a lot. But when you compare that to the statements out of the big four, you know, it certainly seems to foot. Right. It seems that they're going to continue to spend. And I think the real question as to the air pocket now, right, like this could have been very different. They could have got on their earnings call, Bill, and they could have said we're pulling back on capex cause we're not seeing the return. Okay. None of them said that. They all said the opposite. But I think the question that remains out there is whether they're going to see the revenue on the other side of the equation. Right. To justify that return. And they've all cautioned us that they expect that there may be a lag between these two things. What was interesting, the CFOs of Microsoft and Meta, Amy and Susan were quick to point out that if the revenues don't materialize that they don't actually have to build out the data center shells that they're acquiring. They said these are 15 year long lived assets and so we have flexibility in how we manage those assets.
- [34:52]
Unnamed Speaker
Yeah. And obviously Meta has other uses for internal use and could redeploy those things. Cool. Well, I have three thoughts about this and one of them does go back 30 years to when I was a sell side analyst and I followed the PC industry really through its heyday, like the big growth years of the PC industry. And, and PC demand and growth was overestimated and underestimated five different times where you would have these cycles. And it was interesting because a lot of the commodities would become in short supply. So DRAM was one and hard drives, hard drives were this really interesting wild market where you would have boom, bust cycles and shortages and they were always, they're almost always out of step with reality. And I remember there's just this bizarre thing where you had to buy hard drive companies when their PE was the highest because that was actually when everyone had the worst view possible of their earnings possibilities. And then you literally sold it when, when the PE was the lowest because the net income was at a peak high. Anyway, one of the reasons that happens, one of the reasons why that's so out of whack is that bringing capacity on to build a hard drive or a DRAM is slow. It's not an overnight process. And the one thing I would say about these data centers, and I was just kind of, my brain was triggered on that from something I read on Twitter this morning where someone was literally walking through the steps you have to go to, to acquire land, to get electricians on board, to do all these things. And whenever you have this kind of really long cycle time to actually bring up incremental capacity, it's easier to miss supply and demand. And so anyway, I think part of what's causing me to have a bit of anxiety is that fact that, and I also think when people are talking about Nvidia, they talk about data center growth as demand, but because everyone, the end users buying these things as a cloud service, I kind of like, well that's supply, that's not demand. People are aggressively growing supply. So I don't know, it's super interesting. I think from a venture point of view, you're hopeful that there's so much demand for this stuff that they never catch up.
- [37:36]
Bill
Exactly.
- [37:37]
Unnamed Speaker
When I look at it from a, from just from a neutral observer standpoint though, I do worry that you could get out over your skis. And then two other things I would add to that. This is one of the very first waves where the incumbents were eyes wide open at the beginning of the technology shift. If you go back and read the innovator's dilemma, the reasons startup companies are able to come in and take shares often precisely because the incumbents are slow footed and aren't there. Here they moved quick. I think Microsoft and Satya are just the poster child for this. Here is a company that's very, what, 35, 40 years old and everyone thought had had its better days behind it and they came in and moved fast and people loved it and the stock was rewarded for it. And I even think their earnings have been positively impacted by it. And so that is so they move big, they move fast and it worked. And so now I think that's in their psyche, right? And so that means they're going to keep playing that game because it's working. So that's another thing. And then lastly, and this is pure conjecture on my part, so I did not hear this from anybody. Everyone can just say girly's out on a limb here, but my reading the tea leaves, and this relates to the point I just made, is that they don't want the independent AI companies to take what they see as rightfully theirs. And we've been through a couple of waves here where capital availability's dramatically improved for private companies. And you and I lived through this with Uber and Division Fund and Masa and all the money and Doordash got all and it really perverted the market. And so now I think incumbents are aware that if companies get breakout potential, they can raise unlimited capital. And so to a certain extent I think they're pushing back. They're saying, look, this is a game we're in. You look at Zuckerberg with the open source stuff, he's just being very aggressive. And I think one of the objective functions may be just precisely to make it more difficult for open air IR anthropic to raise $10 billion that they need to fund the next two model builds and now you've got people trying to project income statements and balance sheets of these companies and they're speculating about whether they might need to raise again or not. So I think all that's super interesting.
- [40:30]
Bill
And unprecedented, very insightful. What's fair to say at this point again, in the context of the risk facing public markets, we were worried about the AI Air Pocket. It seems we've traversed the 2025 CapEx concern cycle. Right. Like they are going to continue to spend. What we don't have insights into is that end user demand that you talk about. And I think it's really interesting why you say the bigs are going to continue to spend and in fact some of these take unders, you know, the characters, the inflections, et cetera certainly suggest that competing against the bigs. I mean in the case of OpenAI and anthropic, right. They partnered with them, they're owned a lot by, you know, Microsoft and Amazon at this point in time. So it's hard to find somebody who you think can go the distance at that scale that's truly independent.
- [41:29]
Unnamed Speaker
And by the way, regardless of whether the investors got paid, maybe we can go deeper in that later on. These take under deals, it is a capitulation no matter what. Like even if, even if it were a normal M and A deal and it was at 3 billion and it's still a great return for investors. The founders are saying in the inflection case in character AI, they're saying, not sure I want to keep playing the independent game anymore.
- [41:57]
Bill
Yeah, that may have just been very difficult to raise private capital in an up round, you know, in this environment. I mean because you know you're gonna have to go compete with Google, with Microsoft, with Meta, you know, they're not gonna stop spending and they have a printing press that's spitting out $10 billion bills in the back room that.
- [42:17]
Unnamed Speaker
Well. And they've got hundreds of billions sitting in cash anyway.
- [42:21]
Bill
Exactly.
- [42:21]
Unnamed Speaker
So yeah, they like. And this, I think you brought this up. Or maybe we saw Satya talk about it like, okay, we're spending 50 billion a year on CapEx, but look at all this cash we got sitting around. And the FTC says we can't do acquisitions. What are we supposed to do then? That's another factor. Maybe that's a fourth factor.
- [42:41]
Bill
Three things you can do, Bill. You can buy your own stock, you can issue a dividend or you can buy Nvidia chips.
- [42:48]
Unnamed Speaker
They're doing, yeah, exactly. I think they're doing all three. Yeah, it'll be interesting. You know there are obvious huge wins in AI. You know we've already talked about Tesla and full self driving. I think all the core AI opportunities non LLM where they've actually figured out how to go from A to B and get better at what you're doing through AI. Those are fantastic. I think the, the language oriented things around customer service and where you're literally replacing the notion of someone either talking or doing a search. I know you're a big fan of Glean and that is a type of. I think I could restate that. What it is is a super enhanced corporate search product that helps you find things that have been scattered around the organization.
- [43:46]
Bill
I think it's your enterprise assistant. Microsoft says they're capacity constrained because they got a lot of demand for Copilot. Right. And I think the real enterprise copilot. Right. Glean has gone from enterprise search to being that enterprise assistant. I would say this, you and I have some debate about this. Whether or not we're actually seeing the end user demand, whether or not the solutions are good enough to unlock that demand. I tend to be on the positive side of that question based on the companies we're seeing, based upon, you know, folks like Satya saying that we're capacity constrained. But I will also stipulate just as a risk factor in the public markets, the idea that we're going to go through this phase shift with CapEx and revenues perfectly aligned and perfectly matched. Right. It would be the first major phase shift we went through where that's the case. In the case of the Internet, capex got way out ahead of early revenues. In the case of Cloud, capex ahead of early revenues. Mobile, same thing. So in fact I think what you're hearing out of these CEOs once they're cautioning us, they're saying there's going to be a period of time here where we have really high capex relative to our revenues. But it's the right bet to make when you look at a three to five year time horizon and I would say on that dimension each of those prior super cycles were underestimated when you looked at them three to five years out.
- [45:12]
Unnamed Speaker
Yeah. And just to put a nail in the point I was making, I see a ton of great use cases and I'm super excited about everything I've seen. There are statements that are continually made that I think are over the top. I don't think this replaces all software. I don't think people are going to be sitting around jobless and need ubi. I don't think, you know, I don't think that, that all software just goes away. Someone said that this is the new operating system. I don't think there's any proof of that. Doesn't know how to store data. It may get there. But anyway, so I. The hyperbole causes me a little bit of cognitive dissonance is the only thing. But I do see a lot of positive stuff. Let's move on. Explain to people what happened with the Japan Carry trademark.
- [46:06]
Bill
Oh my God. I mean, you know, the fact of nowhere, right? You show up on a Monday morning. Exactly. I thought I had to worry about taxes and recession and AI air pocket, you know, it wasn't on my bingo card. Maybe it should have been that we were gonna have to, you know, be worried about a 13% drawdown in the Nikkei, right? Its biggest one day drop since 1987. Then we have a rip back the next day. Well, let's break down what happened here first. Let's remember the Japanese markets were really crowded, Bill. They hit an all time high just three weeks ago. High prices always make for big drops, right? So there was a setup, but basically the market was down big since the bank of Japan. So the Japanese Fed meeting where they basically increased interest rates for the first time in 17 years. So why was this such a big deal? Well, the great threads on Twitter about this Zero Hedge has been basically live blogging the events in a way where.
- [47:07]
Unnamed Speaker
I think, by the way, I think it's important before you go into what happened, why were interest rates, why had they not done an interest rate increase in 17 years and why did they feel they needed to?
- [47:24]
Bill
Right? I mean, so in Japan you have a population that saves a lot, a population that's not growing a lot. And so they've been battling slow economic growth and deflation for the better part of 15 years. And for the last eight years they've had negative interest rates. Right? So that is just a way to force people into the risk pool to try to get people to take risk and get your economy going and to keep it from deflating. Remember, like in some ways this is what, you know, we copied their experiment at the beginning of COVID when everybody went into lockdown and wasn't taking any risk. We said we'll pay you to take risk and we took interest rates negative. Well, they're systematically been doing that for eight years now. It leads to one of these very interesting consequences, which is when you have negative rates, that is you're paying somebody to borrow money. That leads to what is called a carry trade. So there are estimates that up to $20 trillion of yen was borrowed. And then you invest that in rate yielding assets around the world and you pocket the spread, right? So remember, just I think earlier this year, maybe it was late last year, Buffett borrowed $200 billion of yen denominated currency. So it seems like a great idea, especially if you're getting paid to borrow in Japan. So there's no cost to borrow in Japan. Then you get paid to buy bonds in the us but you need to make sure that things don't change quickly on you. So the predictability of the rate environment in Japan is key. It's absolutely essential. And what scared the hell out of people is out of left field. You know, the bank of Japan raises rates and all of a sudden these people who were effectively borrowing in Japanese yen, assuming that rates would stay low and investing in these higher yields, they had to unwind these trades. And you had 20 trillion of these trades at play. According to JP Morgan, I think in the first two days, half of those trades they estimated got unwound. That means they had to sell US Bonds, they had to sell stocks around the world, et cetera. And of course that causes this negative reflexivity because you have the already have concerns about recession and the other things we've talked about. So this just adds to that list of problems. Now remember, part of the reason that you have this carry trade going on is the US has kept rates higher for longer. So it increases the spread. They're at zero or negative and our rates have been higher for longer. So that's led even more people to pig pile into this carry trade. But what was so shocking here, you know, within 36 hours, right, it seems like the bank of Japan capitulated and overnight they reverse course. And they said, we're just kidding, we're not gonna raise rates when the market is unstable. Now what the hell does that mean, we're not gonna raise rates when the market is unstable? Well, you're the ones that destabilized it. So I guess that means, sorry, footfall, we're not gonna raise rates. But I think that most of the stock market contraction we saw here, so if you look at where the NASDAQ was trading before, you know, this all happened, I think it was like at, you know, 475, it dropped to 450 and now we're basically back to 475 on the QS. So basically it was one of these Long tail events that reminded us there's risk in the world. And when you have a bunch of other buckets of risk, recession, slowing, AI air pocket, and then you throw one of these on, it can really be the, the trigger to light the fuse. Remind you just a couple weeks ago, I can't even believe, you know, that it happened at this point. But if that shot fired @ Trump was one inch different, if Trump had been assassinated, can you imagine what would have happened to the US markets?
- [51:26]
Unnamed Speaker
Yeah.
- [51:27]
Bill
Right. So when markets are at all time highs and you're just hanging out and there's not a lot of upside return and you got these other things you're concerned about, you gotta take down those units of risk because there are always things like this that can happen. Right. Take Iran into account, geopolitical risk. You know, we've come, the world has come to I think appreciate these skirmishes between Iran and Israel over the course of the last decade. And they never really amount to all that much. And so when the markets get concerned about it, it's generally a buying opportunity because they are generally short lived. Right. They keep each other in check. Could you imagine, let's assume tail risk this time. What if Iran really did something different? And now we've heard rumors of the Israeli leadership in nuclear proof bunkers and they said if you touch one of our civilian populations we're going to wipe out your nuclear capabilities. Right. Like you could imagine. I'm not saying it's the base case, but you can imagine a scenario where this time it is in fact different. I think for all these reasons, Bill, that's why you're seeing the markets taking just a bit more cautionary position. And to be perfectly honest, it's not off the table. This market could give up 100% of the gains that we've had year to date, which would mean you'd still have another 10 to 15% down in the market. And that just takes you back to where you were on January 1st. And so you have to ask yourself as an investor sitting here in August, is the world so much better than it was on January 1 that it has to be priced 10 to 15% higher? And the answer to that is no.
- [53:13]
Unnamed Speaker
I have a very similar thought on the whole Japan carry trade thing, which is at the end of the day it really shouldn't matter. For American investors, this was an arbitrage thing that had been created by a systematic problem in Japan that was started with stagflation, but where they had a problem. I think the reason they had to raise rates is they had a problem that the currency was causing and they felt like they had to defend it. And the consequence was all these arbiters got wiped out. But there's no sympathy line for arbiters, right? And, and even if the banks got in trouble and went to the government, said I need help because I had given loans to arbiters, they're not going to make hold, there's not going to be a long sympathy line for that either. But I do think what happened is exactly what you're saying, which is people were nervous already and so you got your finger on the sell button and then you wake up and you see this and said, shit, I should have sold last week. And you start pressing sell. It becomes self reinforcing, almost kind of like a reflexivity kind of thing. That's my, that's my non informed take on what happened there.
- [54:29]
Bill
No, I mean, I mean, listen, when people are offsides, you know, you know this hand in poker, right, where you kind of limp in, maybe you have pocket sevens, right, and you got, you got a little too much money at play, but you're feeling good, you've been winning the whole night and so you're feeling a little swagger, that's kind of what a market is when it's at all time highs, right? You're playing the hand a little too strong and then the flop comes and somebody has you trapped, right? And now you're like, okay, I got this sunk cost, do I take it off the table? Do I, you know, do I bluff? Do I bet bigger? And you know, I think this is one of these situations where people were just caught off sides, right? They viewed this as very, very easy money. And it's easy money until it's not. And you know, and so, you know, I put all of these things in the category of healthy resets in the markets, right, I agree with that.
- [55:26]
Unnamed Speaker
I agree with that.
- [55:27]
Bill
And so I do think there are a series of events like if we end up in a recession, if one of these situations, if Japan were to trigger something bigger, if the geopolitical events caused the price of oil to spike, right? All of those risks have to be taken into account, you know, particularly when stocks are at or near all time highs. And that just means again, it doesn't mean you get out of the game, right? Like when prices are high in venture, you know, you don't just stop doing venture, right? But you do less and you wait for the really great stuff. And when prices are high in the public markets, you don't necessarily step out of the markets altogether, but you just do less. And that's how we think about it here. It's less or more. How many units of risk do you want to have on at any one moment in time? Time.
- [56:16]
Unnamed Speaker
And I agree, I do agree that of the topics you mentioned, the one that matters the most is the recession one going forward. So we'll see what happens. Let's hit two more things before we wrap up. The first thing we should dive into is this Google decision that happened this week, which is pretty landmark decision. I think there've been pressure on a lot of the Max 7, you know, from the government and questions about monopoly status and, you know, having, having seen Google from, you know, I met with Sergey And Larry, our 25 employees to today, I mean, kind of at a front row seat just to watch this amazing, you know, people have called it the best business model of all time. What do you, what do you take away from this decision and what do you think it's going to mean for going forward?
- [57:09]
Bill
Well, I kind of want to turn the tables on you and ask you that, given how close you've been to it and how much you've thought about this. But first, just like, let's talk about what the ruling in fact did. So it said that Google used unfair tactics to maintain itself as the default search engine on the iPhone over the last decade. And it said it did this mainly by negotiating lucrative deals worth over $25 billion per year to cement its position as the default search engine on the iPhone, which then led it to have superior data, which then led it to have superior conversion, which then led it to further cement its position. I think the current deal is set to run through 2026, but the court, I believe, is set September as a date to kind of work out a solution with Apple and Google. The judge will deem to comply with the ruling. So I guess the question I have for you is, you know, these guys negotiated a deal between the two of them. Google said, we'll pay you a bunch of money. Like what do you think is the remedy? What do you think is a better alternative? You know, why can't they do a deal with Google?
- [58:25]
Unnamed Speaker
So to your last question, you and I had forwarded back and forth Ben Thompson's thoughts on this. And obviously super intelligent human being Ben with a massive mental capacity. And he wrote a piece that's subscription but we'll put a link to and maybe we'll get him some new subs. But he broke down the Sherman act, which was the piece of regulatory law that was applied here. And section one of the Sherman act says if you're a monopoly, and I don't think there's anyone that questions Google's monopoly status just because market share north of 80, 90% and Ben makes a point of saying they earned it through innovation versus some type of underhanded tactic or a roll up. And I think that's fair too. But the Sherman act doesn't say that there's a fair monopoly and an unfair monopoly. It just says are you a monopoly? And then section two says you can't enter into partnership deals basically that reinforce that monopoly position. And so the judge and Ben argues properly looked at the Apple deal for the iPhone and said this violates section two, you're a monopoly and you're extending that monopoly with an exclusive deal. And so one thing I would back up and highlight for people, I think most people know this, but whatever the share is that Google's giving to Apple, let's say it's 30% or 40%, who knows, it might be 50. It represents this massive amount of net income for Apple. Right. What's the number?
- [60:17]
Bill
It's 26 billion, I think a year or two ago.
- [60:20]
Unnamed Speaker
So the reality is that Google's monetization is so much better than anyone else that's out there that I don't think there's a deal you can do with Bing that will create that amount of net income for Apple. So there's no, like Apple's not mad about this deal. They're very positively impacted by it. And so that's a huge irony because they're not, they're not, it's not a loss leader for Google where they're blocking someone out. It's a win, win for both parties because Google's so good at monetization on search that I guess I'm making the argument if bing gave them 100%, replacing them would cause Apple to have less money.
- [61:08]
Bill
Oh for sure. That's for sure the case. And what do you think the remedy is, Bill? I mean is this just going to end up in one of these? And I saw a screenshot of this, these sloppy choices where, you know, the next time I open my iPhone it says choose what you know, where you, what search engine you want to use for this query. And it gives me a choice between Bing and DuckDuckGo and maybe now search GPT and maybe now perplexity and maybe now Google, you know, is that going to pop open every time? Is it one and done? How do you think about that and is that remedy enough? Like if the consumer chooses Google and Google just pays a rev share rather than boxing everybody out, do you think that remedy will be enough?
- [61:52]
Unnamed Speaker
It could be. It could be a nothing burger. So let's say that Apple is forced to do the selection chart. Let's say Apple then tells every search engine in order to be a partner of us and in our search sort, we'll take 30% of whatever you earn and then 90% of people choose Google. I think you're in the same spot. I think you end up in the same spot.
- [62:20]
Bill
That's why I think this is a bit silly. Yeah, go ahead.
- [62:22]
Unnamed Speaker
Would be if they're forced to do the search and Apple somehow cut out of the economics and then Google ends up making more money because I think the consumers are going to choose 80 or 90% Google. So yeah, I think there are remedies where it could be nothing. One thing that would be super interesting. I've often said that the federal government should have a new test for a monopoly. And this is very self centered bias to someone who's been a venture capitalist working with small companies for a long time. But over the course of the years there have been many cases where I've been fortunate enough to work with a category leader in a vertical or something and you get invited in by Google and Apple sometimes, sometimes at their request to do a deal and you're presented with a set of terms that you would never consider with any other party out there. It's a completely one sided deal. And I've often thought that should be a test for a monopoly. Like are they able to negotiate deals that are, that would just be off the table with any other set of partners. Because I do think it's a sign of strength. And I could even go further and say that it should qualify under the Section 2 of the Sherman act because if the partnership deal results in the monopolist now having a new feature set because they were able to basically steal everything you've built through the terms of the deal, you've extended the monopoly through that practice. So that was one thing. You know, I'm sure Jeremy Stoppelman would agree with what I just said.
- [64:13]
Bill
That felt a little Yelp like to me in terms of your concerns. I wasn't gonna out you.
- [64:19]
Unnamed Speaker
But no, not, no, not just Yelp though. I mean, yeah, yeah.
- [64:24]
Bill
I mean listen, I think it's, I think it's a fine line. Right. Michael Porter's five forces would make the argument that, you know, this is what businesses should try to achieve, which is enough market power that you can extract rents, you know, commensurate with your market power. And so I don't think we want to be, you know, casually undermining companies ability to, you know, enter into commercial relationships. And those are going to reflect different market power in the economy. But to your point, you know, listen, I think there's a pretty easy remedy here. I think the remedy is gonna be consumer choice. I think the remedy is going to result in Google still getting 90% of the searches. But you know, it may not. And the only reason it may not is because we are at this really disruptive moment with things like Perplexity and Search GPT. And so listen, I'm happy to let them compete and to see, you know, where, where it all shakes out. And so speaking of, have you played with Search GPT?
- [65:24]
Unnamed Speaker
I have not. Have you?
- [65:26]
Bill
I know all I've seen are the screenshots, you know, the videos. Everything looks very perplexity like to me.
- [65:37]
Unnamed Speaker
Just go ahead. I think it's worth stating. I think a lot of people know this, but I talked to a few people yesterday that didn't. I believe what happens at Perplexity and why it's so much better when you're doing searches related to recent information. It's even good for the Olympics. I encourage people to use it. Is that in the background when you type a search into Perplexity, they're doing a search against a Google like database. They're doing the equivalent of a Google search, maybe, I don't know where they built that. Maybe they partner with DuckDuckGo or whatever and they then take the results of that search and stuff it through rag into the context window and make it part of the prompt. And your result then is focused on those things. And so it can handle newness, which everyone knows the original AI models couldn't do because they weren't trained on it. And that's also why a lot of people are like, surprise. Perplexity has links. Well, the reason they have links is because of the process I just described, described. And so now, anyway, I think it's important for people to understand that now was, I think the difference between Search GPT and chat GPT is precisely that they're now doing that same thing.
- [66:58]
Bill
Well, one of the things, you know, a few weeks ago you cast some doubt on the engagement metrics. You know, at OpenAI I mentioned I was a little more bullish on OpenAI but I wanted to do the work. So I had a poor of on my team, you know, pull some metrics. And so I want to run through a few charts here about engagement and usage metrics that we're seeing on gen AI apps compared to other consumer apps and enterprise apps and, you know, get your reaction to this bill. So this first chart here is just weekly average users, monthly average users. And as you see, if you go to the far right on the chart, if you're like Spotify, Instagram, Instagram, WhatsApp, you know, they have engagement metrics well over 80%. If you look at these generative AI apps, character tops out at about 64%. But if you look at Claude, Gemini, ChatGPT, they're about 40%. So much lower engagement, you know, than, you know, Internet consumer apps. Now, if you go to the next slide, and by the way, just, just.
- [68:08]
Unnamed Speaker
Just, just so people understand, you're looking at ma, I guess. Is this MAU over? Oh, it's wa over MAU. So weekly versus monthly. Okay.
- [68:23]
Bill
Correct, correct. Now, if you go to the next slide, which this is, what does it take to get to a really big app? And if you go to the far right, for those apps that have over 80% engagement, right, they get to billions of users. But apps with much lower engagement, this all stands to reason, those apps tend to cap out right, at tens of millions or maybe 100 million users. Right. So the question we were debating is, can ChatGPT get to a billion users? And like, one of the early warning signs that you were talking about, this engagement doesn't look like it's the type of engagement that is commensurate with really growing your user base. So then we asked the question around retention. Yeah, right. Which is, I think, what you had specifically mentioned before. So here's month one retention. So this is one month retention again, if you go to WhatsApp, Instagram, Chrome, et cetera. Right. Retention metrics, super high, over 90% retention. And again, enterprise apps, you know, like Gmail at 75%. But if you go to ChatGPT, it's the best of the gen AI apps at about 65%. But you see that these generative AI apps also have not only lower engagement, but they have lower retention. Yeah.
- [69:51]
Unnamed Speaker
And you're mixing paid and unpaid on this, so it's tricky. Like, you got to be careful. Duolingo is paid, Tinder's paid, Spotify's paid, WhatsApp X aren't paid. So anyway, that can be tricky.
- [70:06]
Bill
I think what we're trying to drill down on is, and this should all stand to reason but low engagement, lower retention and lower usage as measured on this last chart by the minutes per week that these apps get used. And what it tells me is this. Bill and I just wanted to get your reaction to this. I love ChatGPT. I love Perplexity. You know, I love Claude. My team uses it all the time. Right. It's a better version of search. But the truth of the matter is Google's copied them pretty quickly. You know, it hasn't led to massive share shift and it hasn't led to a step function in engagement, retention and usage. And so I would say that Search GPT I don't think is going to be the product that gets up to a billion users. And it reminds me, it takes me all the way back to a conversation you and I had maybe in episode four, which is what is going to be the next GPT moment. And it feels to me like AI enabled search is not that moment. Maybe the moment is when we all have a personalized agent that has memory about us, that can track us over time, that really understands us, that can take actions. We've talked about this on the pod, but I think this data that we pulled together kind of confirms the point you made a few weeks ago, which is, barring, right. The launch of I don't know whether it's Q Star or some other product. Right. That feels like it's really this personalized agent that's a hundred x better in terms of driving my personal productivity. I don't think we're seeing the metrics from ChatGPT and even search GPT that are going to lead to the breakout needed to get to that billion users.
- [72:01]
Unnamed Speaker
By the way, this will sound a bit rude, but while you're talking, I did several Search GBT searches and it's exactly like Perplexity. I think it's exactly what I described. I had it drilled down on the Christian Faulkner race. I don't know if you got to see that. It was fantastic. Yes. Woman who was briefly a venture capitalist, but the clothes she did was so brutal, like she accelerated when she caught him. Anyway, I just had to walk through all that. It lists the sources. It's very similar. I think there's some really big questions. The $20 thing, is that real or not? Feels tough. It feels tough. It feels like Google's going to do it for free. Feels like Perplexity's kind of caved and said they gotta do it for free. We'll see, I think. But that's a big question because if you have to surround it with ads it's a little different. And then the other key question which we started talking about at the beginning of this podcast is if it is free, is the alternative to Google in having less ad units on it just better and so do you. Even if Google can lay chase, is it a situation where the disruptor just doesn't make as much money and therefore that puts pressure on the incumbent? I still think that's a possibility. And I would pay the 20 not to have ads. There's a lot of questions about how big that universe of people is. I don't think it's the majority. And so anyway, yeah, it's interesting to watch. The one thing I would add to your one month retention numbers, the numbers I had done and I don't know if the service I'm using allows me to repost it, I'll have to ask them, but they had 35% numbers for the 12 month retention, which is also pretty low and reinforces your point. The other thing, last thing I would say about this is, you know, I continue, you know, when you start talking about that personal assistant, I continue to think, you know, I think Apple's in a decent position, but I really think that Google has and it's interesting because I just talked about how Google may be disrupted negatively by this on search. But when I think about the personal assistant side having the assets of Gmail, docs, spreadsheets and Android, you know, and I actually ran into Samir Samad who runs Android the other day and I had this discussion with him. It's the best set of assets, like if you could pull it all together, it's the best set of assets because they have their hands on the mobile product, they have their hands on the email, they have their hands on your docs and infrastructure. They have a product that competes with Slack and teams. So I could imagine if they perfect that integration with AI and what I like to call infinite memory or infinite recollection, people switching to their stack into their phone because it's done so well.
- [75:17]
Bill
One big problem, Bill. One big problem, Bill. It's called execution. And Google's been fumbling the ball on getting there. You know, they're going to be in the race. You know, I would say when it comes to agents, the person who I think's talked most eloquently about it is doing a ton of work, is Zuckerberg at Meta OpenAI is going to be in that race. My main point here is not like we know all of these are going to be in the hunt Right. They have the capabilities to be in the hunt. Google may be advantage from, you know, access to information and capabilities like you suggest, but what's clear to me is that the current state of the consumer product, it's not enough to dislodge Google.
- [76:00]
Unnamed Speaker
And that could improve, I mean the memory part could, could, could dramatically improve. And, and, and I've said this many times, I think the voice thing's really cool. I finally got the, the upgraded Voice Assistant on ChatGPT and, and I love, I love playing with it. It's just so much fun. And, and I'm sure it'll get better, but it does everything. I mean you can just talk to it like you're sitting next to this incredible librarian and it's fun to do it with other people around. People get a lot of kicks out of it. So we'll see what happens. I continue. So voice and memory are the two things that I think are the biggest and most exciting areas to add. But we'll see where it goes. Let's touch on one last topic before we part ways. We had yet another one of these odd transactions that I wanted to brand it. So I'm going to throw out a phrase, a take under rather than a takeover. And so we've had inflection and the one that just happened is character AI which had pretty interesting engagement numbers on your slide here. What's going on? Like what's your take on these transactions? There's now been enough of them that it's, I have to say it's a trend.
- [77:23]
Bill
Well, I mean I think it's a combination of two things. Number one, I think from a company perspective, Noam Shazir is an incredible technologist, engineer, visionary, was one of the authors on attention is all you need and he's building, you know, he raised capital building a, building a great business. You saw the engagement metrics, they're off the charts. But I imagine he's looking at the daunting amount of capex required, right, to continue to compete with Meta and continue to compete with Google. And you know, that's a challenging slog, Bill. And so on the one hand you have these founders who are saying I need to have, I need to 10x my infrastack in order to go, you know, attract the best engineers to work on the best projects, et cetera. And that's a full time job and I'm not even sure you can get it done. On the other hand, Google and Microsoft and Meta, they're willing to pay super big money for talent but they can't acquire companies because we know we have a regulatory environment in this country where doing outright acquisitions is hard. And so I think they found this kind of third way that you describe. I don't exactly know how it works, Bill. To be perfectly honest. I haven't been in either of these deals. I would say that we looked at both inflection and character. We really liked what we saw at character. We wanted to be involved in it, but it was really hard to underwrite it for exactly this reason. We said the most likely outcome is that they're going to be a seller to Google or to, or to, or to Meta, because it's going to be very hard to break out. Now they're doing these deals. If it was just an outright sale of the business and you sold the business for 3x what the series A investors put into the business, I don't even think we'd be talking about this. We would say it was a reasonable outcome and they're going on and gonna build something bigger and better at Google. I think what's interesting here is that these things are being structured not as straight up M and A in order to avoid perhaps some of the regulatory scrutiny. And so I don't know. I asked you, do you like. I'm just not sure how they're structured or how they work. But the rumors, at least as reported by the information and some other places, is that investors are earning 2 or 3x on their money and character. I'm just not sure exactly how it's structured.
- [79:52]
Unnamed Speaker
So I'm not 100% sure either. And I've done quite a bit of research knocking on doors. And I also am not in one of those companies. And so I don't have perfect information. And if anyone does, if anyone wants to reach out and chat with me about it and explain to me how it works, I'd love to hear. But I did talk to a few attorneys that have been around the Valley for a long time and I would state this one. It is almost certainly the case that the primary reason that these funky transactions are happening are, let's just call them non standard, is precisely to avoid federal regulatory scrutiny. And so the minute that the Fed, the people in the Fed realize that's what's happening, they can start a process of laying chase which might involve lawsuits, might involve pushing on Congress to write rules in a different way, but they can't stop it right away. And so you're going to, you know, you'll probably continue to see this happen if it is an arb. The people that wrote the original rules won't be happy. Let's just state that there's no reason they should. 2. As I understand it, there is a substantial double taxation risk. And if this is not the case, it's a thing I'd love for someone to educate me on. But the way the money makes it from the mag 7 to the investors, I think is two step one, the money is transferred to the startup as part of this massive license deal and that's revenue for the company which is exposed to corporate tax at that level. And then step two is either a stock buyback or a dividend distribution to. To the shareholders and that two step process. And then obviously that's taxable at a personal level. And so that is. It seems like a sticky piece of this. And it means if someone truly is getting 2x back on their money, they'd have to. The Mag 7 would be paying 3x or whatever so that the taxes, you.
- [82:11]
Bill
Know, so it could net out the.
- [82:14]
Unnamed Speaker
Yeah, they could net it out. And I could. I mean, I'd love to hear how I'm wrong or I'd love to actually have perfect visibility into how one of these things plays out. I continue to doubt that it's preferable for the venture investor to a traditional deal. It just seems a little too sloppy and messy and this entity stays around and people. It's funny, in all these PR releases they try and posture as if this thing's going to achieve great stuff after all the core people left. And that act of theater alone causes me to be a little skeptical of what's going on.
- [82:55]
Bill
Yeah, I don't know. I'd be surprised if this is the case with character. I think they had options. I think they had other buyers of the business. So I'd be surprised if it didn't work out in a way that was. Was reasonably positive for the investors and reasonably positive for the team. Frankly, I think it was a bit of a coup for Google to get Noam and his team back there. I mean you saw these engagement metrics. They really are building. They have an eye to build something here that I think is important. So I like you, I look forward to learning more about this. But you know, and if they fix.
- [83:30]
Unnamed Speaker
Character and the things that I've read in the user forums and on Reddit is that it doesn't evolve with you. So it goes back to this memory issue and this kind of infinite recollection. But if they fix that, this is a product that feels more at home at Meta than it does at Google. So it'd be a new front for Google, I think, if they were to make this work.
- [83:57]
Bill
I would say, finally, Silicon Valley has been battling it out. We talked about it on the last episode. You know, Washington Post talks about why is Silicon Valley all in the Trump category. Now we have VCs for Kamala, you know, and a long list there. You know, this seems to be the one thing that both sides in Silicon Valley agree on, Bill, which is, you know, Lina Khan and the regulatory environment that has been created that causes, you know, these companies to have to do these legal gymnastics in order to do acquisitions of small teams and small companies. It just seems that it doesn't make a lot of sense. Part of the beauty of capitalism is creative destruction. Companies come and go, companies get acquired, teams move around. That's part of the dynamism of it all. So whoever is in this new administration, I certainly hope that we enter into a new period where they're enforcing the stuff that's on the books, where monopolists are truly blocking out smaller competitors using their monopoly power. But we need to get back to a place where Microsoft and Google can go buy a company that's de minimis relative to their size. Amazon can buy vacuum cleaner company iRobot without phalanxes of lawyers and having to come up with these creative structures. I can't see how this is in any way good for the country. Three.
- [85:31]
Unnamed Speaker
Yeah, understood. All right, sir.
- [85:33]
Bill
All right, buddy. Great seeing you.
- [85:34]
Unnamed Speaker
Thank you very much. Take care.
- [85:36]
Bill
We'll talk soon.
- [85:36]
Unnamed Speaker
Bye. Bye. Bye.
- [85:47]
Bill
As a reminder to everybody, just our opinions, not investment advice.