WSJ Tech News Briefing: ‘Distillation’ Is AI’s New Buzzword—and a Scary One for AI Companies
Release Date: February 6, 2025
Host: Pierre Bienname, The Wall Street Journal

Introduction

On February 6, 2025, The Wall Street Journal’s Tech News Briefing, hosted by Pierre Bienname, delved into two pivotal topics shaping the tech landscape: Amazon’s retreat from its brick-and-mortar ventures and the emerging trend of “distillation” in artificial intelligence (AI) development. This episode provides insightful discussions with industry experts Kate King and Miles Krupa, examining the implications of these developments for businesses and investors alike.

Amazon’s Shift Away from Physical Stores

Overview:
Amazon, a titan in online retail, has been gradually scaling back its physical store presence. Despite innovative concepts like Amazon Go, the company has been closing various storefronts, raising questions about the future of its brick-and-mortar strategy.

Key Points:

1. Amazon Go and Customer Reception:
   Amazon Go stores, renowned for their cashless and checkout-free experience, have seen a significant reduction in numbers—from 32 to 16 locations across four states since early 2023. While sales have grown at Whole Foods Market, reaching $5.2 billion in Q3 2024, this pales in comparison to Amazon’s $61.4 billion online sales.

   • Kate King, Real Estate Reporter:
     “I did interview one person who said that it was convenient in the moment to go into the store and walk out without waiting in line. But it didn't necessarily change his life...” (02:09)

2. Challenges with Innovative Retail Concepts:
   Customers appreciate the convenience of Amazon Go but often find traditional payment methods like Apple Pay sufficiently quick, diminishing the perceived benefits of the new technology.

   • King:
     “Paying by credit card is so quick now... so for him it wasn't a huge game changer.” (01:44)

3. Diverse Retail Experiments and Their Decline:
   Amazon has experimented with various store formats, including bookstores, Four Star stores (featuring best-selling online items), and tech-driven fashion stores. However, these ventures have been largely abandoned in favor of focusing on more profitable segments.

   • King:
     “Amazon's tried a bunch of different bricks and mortar concepts... Amazon has closed and kind of abandoned those projects.” (02:12)

4. Focus on Grocery and Technological Adaptations:
   The acquisition of Whole Foods in 2017 for over $13 billion remains a success, with sales and locations expanding. Amazon Fresh, a high-tech grocery store, initially implemented Amazon Go’s “just walk out” technology but later reverted to using shopping carts with scanners after encountering operational challenges.

   • King:
     “Even some of the harshest critics that I interviewed do say that the Amazon Fresh redesign has worked...” (02:44)

5. Licensing and Future Prospects of Just Walk Out Technology:
   Despite scaling back its own Amazon Go stores, Amazon continues to develop and license its checkout-free technology to over 200 third-party retailers, including institutions like colleges, hospitals, and convenience stores in high-traffic areas.

   • King:
     “Amazon licenses this technology to over 200 third party retailers... [it] wasn't a waste of time or money...” (03:53)

Conclusion:
Amazon is recalibrating its physical retail strategy by shuttering less successful ventures while leveraging its innovative technologies through licensing. The focus on Whole Foods and the redesigned Amazon Fresh indicates a strategic pivot towards more sustainable and scalable brick-and-mortar operations.

The Rise of Distillation in AI and Its Implications

Overview:
The episode shifts focus to the AI industry, highlighting Deepseek, a Chinese AI company that has garnered attention for its cost-effective and efficient AI model training through a process known as distillation. This technique poses significant challenges for established AI giants and raises concerns among investors.

Key Points:

1. Understanding Distillation:
   Distillation involves using the outputs of one AI model to train another, enabling the creation of smaller, more efficient models that retain much of the original’s capabilities. This method allows smaller companies to develop competitive AI models without the immense resources typically required.

   • Miles Krupa, Tech Reporter:
     “It's basically taking the outputs of one AI model and using that to sort of teach another one how to solve problems and ask questions.” (06:18)

2. Deepseek’s Strategic Use of Distillation:
   Deepseek’s AI model, R1, has been developed by distilling knowledge from established models like those from OpenAI. This approach has enabled Deepseek to produce high-performing AI models at a fraction of the cost, intensifying competition in the AI space.

   • Krupa:
     “Ali Godse... compared distillation to basically getting to ask any question you want of Einstein...” (06:18)

3. Impact on Major AI Players and Investors:
   The effectiveness of distillation challenges the investments of hyperscalers—companies like Google, Meta, and OpenAI—that have heavily invested in developing proprietary AI technologies. The ability to replicate advanced AI capabilities cheaply questions the sustainability of these large-scale investments.

   • Krupa:
     “It just raises the question of what's the point if everything can be replicated so quickly and so cheaply.” (08:33)

4. Cost Reduction and Commodification of AI:
   Distillation accelerates the commodification of AI models, driving down costs and increasing accessibility. This trend is likely to spur further replication and innovation, potentially diminishing the unique advantages held by early AI pioneers.

   • Krupa:
     “Everything is coming down in cost. A lot of people are talking about the commodification of the AI models...” (09:33)

5. Challenges in Enforcing Intellectual Property Rights:
   OpenAI, whose terms of service prohibit using its models to develop competing products, faces difficulties in enforcing these restrictions. Efforts to shut down accounts linked to infringing activities are often temporary solutions in the ongoing battle against misuse.

   • Krupa:
     “It's hard. They said that they've closed down an account they believe was tied to Deepseek... it's a game of whack a mole.” (10:17)

Conclusion:
The advent of distillation presents a paradigm shift in AI development, democratizing access to powerful models but simultaneously undermining the investments of major AI companies. As the technology becomes more accessible and cost-effective, the competitive landscape is poised for significant transformation, raising critical questions about the future of AI innovation and investment.

Final Thoughts

This episode of WSJ Tech News Briefing underscores the dynamic and evolving nature of the tech industry. Amazon’s strategic retreat from physical stores, coupled with its continued investment in innovative technologies, reflects broader trends in consumer behavior and retail operations. Simultaneously, the rise of distillation in AI development highlights a potential inflection point in the AI race, where efficiency and cost-effectiveness could redefine competitive advantages and industry standards.

For listeners seeking to stay abreast of these developments, the discussions presented by Kate King and Miles Krupa offer valuable perspectives on the challenges and opportunities facing both retail giants and emerging AI companies.

Produced by Julie Chang with supervising producer Kathryn Millsop.