Judd Several microphones, several local hard drives, several cloud drives, and yet sometimes. Nothing gets recorded. This is asymmetric.
Apple announced Apple upgrade. Some people are very upset. Other people are loving it.
You've talked about how this was This idea of basically a hardware subscription had kind of been inevitable. Yeah. But it's taken us a little while to get here.
So You you are I've never seen you happier. Tell us tell us why you're overjoyed and why we should all be overjoyed.
Horace think about Apple products as a some something you pay on a month on a daily basis. Not pay as I should say you should consider what it costs you on a daily basis. And that's a un that's called unit economics.
It's like, what does it cost for a cup of coffee? But what does it cost to own a car? What does it cost to rent a house or whatnot.
So years and years ago I have to give a little credit to to who gave me this inspiration. It was actually Jean-Louis Gasset. And like could like twenty JLG twenty 12 or earlier even.
We had a lunch in Palo Alto, I remember. And you know he's he's Who paid? I think I think he did, yeah.
Yeah, he's a good guy. he said, you know, you should look at Macs and phones and everything as a what does it cost per day? The problem back then and for until last week, was that, you know, you paid a thousand bucks for a computer or a phone or whatever it was.
And the way to calculate what it's costing you a day is knowing how long you're gonna use it. then subtracting how much you're gonna get for it as a secondary, you know, or as a as a used product. So you're gonna trade it in or you're going to sell it to your friendly you know f Facebook marketplace or you're gonna find the you know a a mall guy or something.
I don't know how people even do that. Or you give it to your children or you give it to your family. And so they use it for another year or two, and then you calculate, okay, I've this has been in use for five years now, so I'd have to take my initial purchase price divided by the number of months in five years and th and then and then do all the math.
Well, if you did that on average My point was, based on this suggestion, that Apple products were about a dollar a day. Now that assumed that, for example, you would keep an iPhone that cost you let's say eight hundred dollars, you'd keep it for three years and then get back. m whatever it was like two hundred dollars at the end, right?
So that would be like roughly six hundred dollars divided over two years. You know, give or take, you it comes out to about a dollar a day. But now it's a lot easier because now when you go through Apple upgrade, you'll get that price on a monthly basis.
All you have to do is divide by thirty or m you know the equivalent average month. which is 365 divided by 12. So that is b that becomes your daily cost to own the product.
And at the end, yeah, you could extend its life or your ownership of it. through buying out the lease and the value is whatever it is left over from the original purchase price having you know paid into it with with lease So there's no there's no interest, by the way. That's the amazing thing.
It's like you you get a an interest-free loan, at the end you can choose to pay the remainder. That you owe, or you can just turn it in and get another one and continue. And all of that works out so the the w most expensive option is to have the one-year lease.
and you're paying a little bit higher, I think, for depending again, so depending on on the configuration. Now this is where it gets gets a little bit tricky. So you have to go And what I did is actually to calculate on average, you have to go out there and and pull every configuration.
Get those those revenue or those cost numbers and then decide okay what is the average from all of these price points because some are more popular than others. Now the good thing is that these tend to d what I did is I picked the median, which is the midpoint of all these prices and said, okay, let's call that the most common and call that the average. And if you do that with the iPhone, it comes up to about a dollar 13 to $1.
15 per per per day. So the old rule of thumb of the dollar per day holds even though this was initially determined In 2012, and it hasn't changed since. So I was very surprised.
By the way, this is on the longer lease. Shorter lease is a little bit more money, like a dollar thirty or something like that So anyway, it's but but most people think of it as like, oh my god, it's a thousand dollars or it's twelve hundred dollars or it's uh whatever the Mac might be, you know. And Macs, by the way, are surprisingly also in fairly cheap, like a buck fifty a day because you hold on to them a little bit longer.
By the way the lease terms on the Mac are two years or three years. On the phone it's one year or two years. And the iPad is also two to three years.
Judd So a couple of things. So right now it's only available in the US. And they've had programs like this before, at least for the phone.
I don't think they've done it before for um for the Mac itself. But for Apple, what's the real advantage? Like what's the they they have the Apple card, so if you you know, you wanted to get basically interest-free loan, you get an Apple card and then Buy it with an Apple card.
Horace And you get your three percent cash back, all that. You So what's the advantage for Apple for Well a couple of things economically it might be a little bit advantageous because you get the product back with a reliability of like most people are gonna turn them in and and they get to probably resell it at a little bit higher than would have been the residual value. because people have been yeah, so they you know if it's residual 200 then maybe it's worth a little bit more, it's maybe 400, depend again, a lot of variables.
We're talking hundreds of different configuration here so that's one thing is is that the majority of people are probably leaving a little bit of money on the table, whereas they if they paid for it off they could maybe even get a better price on their own if they went and shopped around or or or marketed their product. That's one thing. The other thing though that's more interesting to me as an analyst is that you get a lot more predictability in terms of having access to large inventory of used products, which means for Apple, now the some might be in poor shape and they're gonna get refurbished or disposed of, but there might be quite a few that allow them to market more effectively into emerging markets.
So the problem has been that they've always offloaded that job, you know, like dealing with second hand and third gen. I mean there's refer, but but this is gonna drive that volume a lot higher and then it might allow them to kind of maybe create a secondary market that's a little bit more upscaled than what they have. what people have to rely on today in these markets.
So there's there's something interesting in that secondary market control. And and there's also the data overall. Like you have you know having people on lease paying you every month.
You have that same relationship with with the mobile operators who kind of know the financial activities if you if you will a little bit. And and so inf it's funny actually how they might steal, quote unquote, steal a little bit of that knowledge away from operators, because operators may end up not having as f as many sales through that channel 'Cause you'll get through Apple and it's monthly. But that's why they bundled the operator with the phone.
You'll notice if you try to buy a phone, you have to buy it with an operator contract now. even though it's unlocked. So the assumption is that in the US you're going to still need to go through a major operator to get the phone.
So there's there's something of a of a glitch there but but there's something knowledge this on so number one it's it's gonna be secondary markets are more more reliable for apples and s and and and in addition there's There's probably more information they're gonna be able to mine.
Judd So just to clarify, so when you say secondary market, do you mean Apple will sell in a used you know pre a Apple will sell a lease return phone in Bangladesh, as opposed to a local retailer or an Apple store doing it. And does that mean that they're not going to expand the program outside of the city?
Horace No, I think they will. And I think what's going to happen is they'll have They'll have Apple Store Referb for lack of better term, because I think it's used now, but Apple Store Refurb inventory will be much higher. And maybe they'll market them a bit better And then they'll have the the Refurb refurb Apple certified products in those secondary markets or used markets. Um under Apple branding, there'll be a lot more inventory there and it'll be much easier for Apple to then get that customer in the front door in these markets.
Judd Well, I'm glad you're excited.
Horace I Well I would I'm so excited I w I would do it this way. If I had probably the next phone I'll buy. I'm gonna do it this way.
And I'm a little bit concerned about that operator deal but but but maybe I'll do it for other products. The watch is available, the iPad, the I the Mac And and I would recommend this over it's it's essentially an interest-free loan and you you still get three percent if you pay with their your Apple card. 3% back, cash back.
Judd Yeah. This was also the last last week Apple reported earnings. I hear they did quite well.
So congratulations to all involved. This is the last earnings call that Tim Cook was on as CEO. He will very quickly become executive chairman and there will be a new CEO, mister Suns out, guns out himself, John Turnus.
what is the one thing he absolutely cannot do. And I don't mean like a major strategic decision. I mean a very small tactical decision.
Like what is one tiny little thing that he absolutely cannot do as CEO of this company we refer to as Apple.
Horace first of all let me just say I the the the word is that the way he's referred to internally is JT. So Justin Timberlake?
Judd No, just John Turn is his JT and Justin Timberlake is JT.
Horace Oh no.
Judd I had If Justin Timberlake became CEO of Apple I would be I think that would be just very impressive.
Horace Maybe maybe I'm wrong about this, but I heard him referred to as JT. So but because I don't know what to say. You know, there's Tim, Tim Apple Cook, I don't know if we're gonna call him John, you know.
John is so generic. Um Yeah. Turnus.
Turnus is also a little too formal. Anyway, um, yeah, maybe it'll be John Apple. Could be.
So what was your question? What is it something that he cannot do
Judd Yeah, absolutely like if he does this one little thing, I don't mean like a big thing, I don't mean like he decides to put out the Apple car I mean a small thing. What's a small thing he cannot do or Apple will truly be doomed?
Horace Well, I probably I'm gonna it's a little a little weird question, but I think He cannot go to the Apple Mac Cafe and expect not to pay for his lunch If he walks out the door without paying, I think his reputation will be demolished. I think he'll be ostracized Famously, you know the story of how Steve Jobs did this. He he he somehow always paid you know, if you were if you were a guest.
And and the thing was though that the way it works is you swipe your your ID and then it will deduct from your paycheck the uh the amount and this was very convenient. And the thing was though that at that time Steve Jobs had a paycheck of one dollar. He he was insisting to pay for other people And in so doing I was stealing from the company lunch once in a while.
So nobody nobody bothered to catch him on that. But I think if he Steve could get away with that, but I think John He's not gonna be able to get away with that. He's he's he's gonna have to pay for lunch.
Judd Has he offered to work for speaking of a dollar, was it a dollar a day or was it a dollar a day?
Horace A dollar a year actually, I think For a while at least, he pr he you know he came on with that deal.
Judd I've never seen him eat. Steve or John? John. Well.
Horace You know, he's a fit guy. He probably eats a lot. He seems to be a swimmer.
I think he was a swimmer, right? He's got the physique. Gotta have those long arms.
Yeah. Long legs. I used to be a swimmer, but I'm not a very good one.
I swam in high school and
Judd I wasn't very good because I don't have the the long arms. It took a while for Tim Cook to have his his own product that was not just considered the latest version of something that had had been introduced under Steve Jobs. I think it was the watch. Yep Is there we're running out of of things to introduce. does JT need to have his own No I think he will.
Horace In fact, and I know what it is. it's gonna be the glass the Spectacles, the Apple Vision, not Vision Pro. I don't know what they're gonna call it, but it'll be it'll be the equivalent of of um whatever Meta's name is, but yeah, it will be eyewear.
And I think the eyewear market is very exciting and I think There's been rumors and rumors about what they'll do next. the vi the Vision Pro was sort of looked like a bit early. and maybe the next first the next version will actually not even have any display in the in the lenses but it'll be just it'll just be passive lenses But eventually the lenses will be displays and that category of product, um, although under development But you don't consider that the same category as the Vision Provision Pro I mean Vision Pro if anything was a prototype and yes it is it is effectively the beginning of that category, but it's like saying You know, because the iPad was developed before the iPhone, and and yet the iPhone is reco regarded as the sort of the defining product for multi touch and all of that thing, all that followed with the iOS.
and you don't you interface. But spatial computing is what we're talking about at a software level and as an interface level. And spatial computing is gonna carry on and be embedded in other things.
But but I think the the whatever they're gonna be called, the Apple Vision it will be the product that most people remember. Remember also the Model T was not the first car that existed and certainly not even the m first car that Henry Ford built. I mean the you know so we tend to remember version three of something usually as the the sort of the the actual s genesis even though it is it is it is really built on generations of other work.
Judd But it was the first one that people could afford. That could be mass produced.
Horace Well, if even the models that Henry Ford always developed were a little bit the probably they didn't work so well, they weren't marketed, they weren't There wasn't a production system for them. And so he he had something called a quadricycle as one of his earliest cars. And that was like I forget what year it was, 1905 or something.
Yeah, anyway, I digress. But but the the the the the work on Vision Pro started seven, eight years before it launched. So we're probably you know already a decade into it now.
Judd Okay. So you would consider those to be this d distinct products though, the vision and the vision product.
Horace Well, I think John will be remembered as the guy who introduced the vision. That's how old it'll be. It won't be that Tim oh wait a minute.
Wasn't there a Vision Pro before that and Tim introduced that? No, I think John will be I'm gonna bring it up. Well John I think John will be remembered for this.
This is the thing.
Judd I wish him luck. Um You posted a YouTube video to your X account. Maybe you maybe you post it elsewhere.
as well. But it was it was a a gentleman, I forget his name, some sort of he is a doctor, I believe in Aussie, and he works at a place called Kira And they are making software in order for people to make their own local AI, most likely using upcoming Mac Studio that'll have all the RAM in the world. And your your only comment was a data center never Oh oh I see.
Horace Yeah I okay I remember now it finally clicks. That the I thought you meant a video that I made, but it was a video someone else made, yes And that was Yeah, so this guy who I don't really follow, but I have seen a couple of his videos and he's he's a I think he's British or Australian, like you said. And he he he he writes or speaks a lot about AI and you know he s he got excited about the fact that There's a generation of Macs that will come soon that will have unified memory in the dozens of gigabytes.
Okay? Now That means, as he put it, as a data center on your desk, you have multiple processors, you have multiple cores, and then you have multi-this giant addressable memory and so yeah the you know I don't know what that really means but in practice the and also by the way Apple in invested in a company that shrinks the size of models by like a factor of ten or more. So there's there's so the models are shrinking in size and there might it might be soon possible to fit everything.
in a in a desktop. That's why it's interesting. And I think I you know, the the lI sound a little bit old fashioned here, but I do remember when we went through this before with mainframes and other big computers becoming small.
And then the Apple would just rode that wave of my miniaturization, the so-called microcomputer Then it rode the wave of getting even smaller to the pocket sized computer. And now many people are saying, yeah, but these models are so big they can only be be delivered by the cloud cloud data centers that are the size of I don't know buildings big buildings and yeah I just keep thinking the old days you know we we The tendency is to get things to be smaller and s get things to be personal, get things to be cheaper, and uh That's that's where we're going. I do believe, I've said this before, but I do believe Apple is even going to make their own servers.
And their own server processors as well. So even though that future of a data center on your desk will be possible, maybe they'll also have Apple Silicon data centers as well because they you know they'll they'll they'll be doing some heavy lifting in the cloud for Apple's own LLMs. and their own services.
So the the the chances are they they are developing their own alternatives to nvidia's processors So Apple's doing its own data centers for a long time, not always with its own Macs in the data centers, but We'll see more and more of Apple's data center strategy coming forward.
Judd Maybe clarify that a little bit for me. What if there you know if more and more of this stuff is gonna be if it's gonna be easier for more of this stuff to be local Yeah, what does the data sit?
Horace Well there's a local model and there's a global model. So Apple's already kind of hinted at this in dubbed up DC. So what they what they've done there is They're using Google on the world models that are in the cloud, and then they're using their own, there's like four, I think, four different um models that are available to to developers and users.
And the stuff in the cloud is is also used to train some of the local models But the global stuff is, let's say, knowledge, general knowledge, world knowledge, world understanding, okay? And it's also up to date, constantly being refreshed. And the problem with the local is that that's where the private knowledge is.
So to the extent that you need, hey, can you index my emails? Or rather index this like the kind of questions you're going to ask your computer to do would be organize my calendar. you know connect to my friends and contacts, do things with my personal data that that I need done and so that gets processed locally.
But but but then you ask When's the next flight or how do I connect to databases? Those are gonna be in the cloud. And so the the the the the Google models are better at that world stuff and then Apple's models are better at the private stuff.
and private cloud compute is what Apple's bridging these with. So to the extent that they send information to Google to say, can you fit this data into the global data that will be protected against Google's indexing of it. And so this is why a lot of people were like suspicious that there handing over the keys to Google.
There's a lot of suspicion about Google being the brains behind everything Apple does on AI. That's not the case at all. There's a lot of heavy lifting on on Apple's side as well.
In fact, some suppose you know suppose you are to launch in China, for example, as as Apple will and has been actually authorized to do. They're not going to be using Gemini in China. Or the or in India they're probably not going to use Gemini in in many parts of the world.
So the question is, th there's a plug-and-play architecture where they can they can substitute the world models that fit the markets, right? And so the they've they've architected this whole thing so that there is there is a lot of modularity, I believe. so th that's why I think it you know and also the access to these things will be through through possibly through agents and apps, which are third parties.
that you know will will be yet another level of integration.
Judd Are these large language models in the process of being bundled or being unbundled?
Horace Well, they're bundling the global knowledge, and then the the commoditization is happening simultaneously where other open source models are unbundling them So that the this is all happening simultaneously. And this is one of the things that's perplexing is that a lot of Chinese open source models are essentially scraping or copying the the the pr the so-called frontier models and they seemingly are good enough because they're just one one step behind and as as the the As the best models move forward, the open source models are like like right behind. And you're dealing with like a one maybe a one-year lag, maybe less.
And w in which case, I mean last year's AIs were pretty damn good. So if you can get that for free, a lot of people are saying, why am I paying, you know, so much for the latest version of Anthropic or or whatnot. So I think that's the commodization angle is a modularization, somewhat.
And then Apple's gonna just say, well we treat all of these as modules because we think of these as as as modules that we plug into our operating system. And and for that reason I think there's there's this is why there's the whole economics of AI is is cracking or there's a lot of confidence the being uh lost by by by the s by the hyperscalers and and if their economics don't work then they stop spending on data centers. Then then the whole semiconductor bubble bursts And and the data center bubble bursts.
By the way, I don't know how much you've been paying attention. There's a lot of chaos going on in in Korea with with that market. The stock market there went through Girations up up over 100% in a couple of months, now crashing like 30-40% in a couple of days and then up again fifteen percent the next day.
It's tripping all of these circuit breakers almost every other day. And there was a the th this was done the this is ha the tr the circuit breakers were being tripped once every ten years and now it's like every ten days.
Judd Circuit breakers in terms of the market being shut down.
Horace So the you you know the market opens. The market opens and these were circuit breakers were established precisely to protect let's say I don't know, the small investor or or whomever. But it was if it drops I think it was there's a threshold, I forget what it is, maybe five percent.
So if it drops be beyond that, then suddenly the the market stops. You know the biggest thing, but trading ends for for a while until the O starts again. And and this is causing not just pain, but the problem is that a lot of the people who are investing in the Korean stock market are small investors, retail investors, mom and pop investors And they've been getting in the game while the m market is booming, and then they've been leveraging themselves with so-called single what is it single equity ETFs, exchange traded funds that are trading just one thing so that they can get leverage.
So people are, you know, four times exposed to to something. But you're four times up and four times down. So you're you're They they get margin called.
And so what happened is millions, literally millions of Korean small investors have gotten wiped out in like the last week and and various estimates out there, how many people are were affected and it it's it's it's scary and it's all because semiconductors, as I said which is including Samsung are being bit up to crazy trillion dollar valuations and then the rug is pulled. and and I think it's it it's one of the aspects of the mania that is driving also Apple's component pricing up, but it's actually causing complete societal level disturbance in in the in a major economy right now. So we're we're we're you you know we're talking about potential for trauma and maybe even a a recession, maybe even a a a real estate crisis.
One of the funny things. Yeah, in Korea. So far so far it hasn't spread yet, but you know, it could spread to Japan.
Japan's having its own issues with the currency there. The yen is being is is being bailed out and under pressure and there's all kinds of things. We could be looking at m at at bank runs, we could be looking at a lot of things.
Russia is another case in point. the oil market is in chaos. But the what I want to point out about Korea that's particular is why so many mom and pop investors exist is because As I understand it in Korea, if you had a landlord, you're not allowed to to own you're not allowed to charge rent.
What you do is you collect a deposit. from the renter and then you're s you're supposed to give it back to them on the lease end fully. And so people who rent in quote unquote rent in in uh in Korea really don't have enough money to buy, but they may have like twenty or thirty percent of the value of the house, so they'll hand over hundreds of thousands of dollars equivalent as a deposit and the only way that the landlord makes money is by investing that money to try to maximize their return and that it should be higher than what you get in rent.
Now think about that Because then that that encourages speculation and encourages precisely these sort of investments in crazy in crazy leverages. And and so these landlords who might be doing this and they get margin called, then they lose their house because the bank says, you know, um This is only only collateral or the only capital you have. So I don't know exactly.
I'm just saying that this this is scary. AI is not just An interesting odd technology, the way it's being and one of the big lessons here is if it's a bad business generally speaking, right, and we are not sure it is what it is right now. It's it could be good for some, bad for others.
But the ide the problem with misallocating capital is that it's not as it's not a victimless crime. It's like saying, well, the investor lost. But when y when society does it on such a grand scale, when with capital is so badly allocated, markets are supposed to be really good and efficient and really smart about allocating capital, right?
They make mistakes, but the the damage is contained. and and the the investor learns pro supposedly. But here we have something.
And I wrote this piece, Why is everyone all in on AI? and m my problem with this is that they're all in even though we're not sure it's a great business And if it isn't, then then it it it's maybe the first equity led financial crisis we've ever seen, because everything else has been debt driven. I mean ever, not ever, you know, the initial investments in by you know in peop the famous Dutch pul bulbs that were tulip tulips, yeah That that would that was effectively also like an equity an equity.
Judd I'm a little rusty on the Dutch tulip crisis. Um in the from the sixteen hundreds. tie those together for me.
Horace How how make What I'm trying to point out is that there's typically when you get to s what we call typically a um Not just a market crash, but it's contagious enough so that an entire economy, globally possibly, ends up in a recession. So do you have a global crisis? So we have the last was 2008.
And that was driven by bets on on i e derivatives, but ultimately real estate exactly. And a lot of those were mortgage backed securities and and a lot of those were fundamentally tied into the bond market. It wasn't that it was any stock market bubble.
It was it was it was something in a whole different type of equity. I mean that that the stock market got dragged down by a crisis in debt, let's put it this way simply. And if you go back and look at other crises It's been usually behind the real estate like Japan has problems I mentioned Korea, but also China.
China has huge real estate problems. And because the amount of debt out there is far bigger than the amount of equity, the debt market is far, far, far bigger. Than the equity market.
So the equity market, if you were to sit all up, is you imagine all the businesses that are traded on all the stock exchanges in the world. Take all that market capitalization, add it all up, it wouldn't be one percent of the debt market. Because everything in real estate is debt.
Everything in commercial real estate, private real estate, then you have commercial loans to to you know businesses that are f you know underwriting things like factories and other things though that may be capital in capital expenses. But it there's real estate is by far the biggest asset class, even in amongst let's say all the wealth in the world. More than I'd I you know, I'd guess equities make up probably fifteen percent of the wealth in the world.
And and and so everything else is debt or or cash. And and and so then or other things. I don't know, the art market is tiny, but but the y you know, I can't overstate the importance of a stable debt market.
And this is why when even when Trump was messing around with tariffs, he had to pull back from some statement or p policy because he quote quote unquote, you know the the the bond market was getting jittery. I used the different phrase, but it was essentially the bond market was and if bonds by the way, the bond market crashes then you know, treasuries are in trouble. The m the US can't borrow anymore you know, there's there's issue issues with with the federal federal government liquidity.
So so there's there's it's profound and what what I'm saying is that when you talk about contagion There's a famous phrase or s word. It says that the the the bad debt is contagious. Well, what means is a the bank fails And because other banks have pieces of that bank or the assets in that bank, they're all going down start to you know domino effect.
So the the thing about AI so far is that it seems like it's not apart from the hyperscalers. It's not likely that it's going to be contagious to other parts of the economy if things go bad. But it looks more and more, and it's always surprising because you don't know where it's coming from, where the threat is Sometimes these things are hidden from view and they're deliberately hidden because they're nasty.
So here the problem we have with AI is is a circular is circularity in terms of relationship that Nvidia is paid by the hyperscalers but then it turns around and finances the hyperscalers. Right. Finances and owns equity in OpenAI and Anthropic in in this or that whatever project is involved, startups and so on.
And and so you get this process of knocking over one another. So you know I'm just warning. I'm not an expert any of this, but I'm just warning that The bigger it is, the more likely that there's stuff that you cannot see as far as the the dirty laundry.
Judd Well I'm worried about I'm worried about these Korean landlords. What are they gonna do?
Horace Yeah, and I I've I have one friend from who from from Korea and I'm sometimes pinging him and asking him are you alright? Are you on a ledge somewhere? Um But I try to I try to to get some inside info because I'm I'm just reading reading the headlines is not the You know, there's a there's there's a lot going on on the street level.
So Korea is a weird place, you know. You also have North Korea, but you also have you have politics. Yeah, but the the the whole c I've been there a couple of times.
The whole it's very different than uh Then what you might expect. I mean in many ways.
Judd Rent thing is I don't think I've ever heard of that before.
Horace Yeah, but plus there's other things like like the government interferes a lot in the Chables.
Judd The Chables are the large organizations, like conglomerates.
Horace Conglomerates. So what happens is like they're not allowed to participate in certain businesses there, you know, because they don't want the small businesses to be crushed. So one example is I was there visiting and I was talking about micromobility and I said hey why don't you let's say Samsung or LG I'm not gonna name who it is but it was one of the Chables And I said, why don't you guys build e-bikes or or scooters?
And they're like, we're not allowed to because bikes are considered a small business. that local people are running and if and Samsung is has a gentleman's agreement with the government that they're not gonna go make bicycles. I mean that's a that's a sort of like informality but also like there's there's this this and there's a bit of socialism if I may say because I think there's a lot of a lot of Koreans are kind of Quite, although it's a very capitalistic country, there's a lot of social justice d demanding.
You know, people are very kind of w the workers' rights and this and that and there's I suppose there's a there's a left and a right in politics and the left is swinging sometimes w you know, one you know, in power and others there's a reaction. And so when when they had this gr constitutional crisis it was exactly because like the right was was one fomenting for for, you know, a coup and stuff like that. So it's a very is is I don't know what to say, but I would say that in it sounds to me like Korea is a little bit A little bit of a canary in the coal mine here.
So maybe maybe you should keep an eye on it as as this AI story develops.
Judd Yeah, no, for sure. Can you briefly I think I have a decent understanding of what a che ball is, but maybe you could explain it more succinctly than I could.
Horace So the Che Balls are similar to the Keiretsu in Japan. And Kiretsu in Japan were informal or formal relationships between so it's not quite as you said a conglomerate but it's let's say a big company is in a partnership with another big company and they form together Not a cartel because they're in different businesses. So Toyota will be in a relationship with Denso.
Denso makes parts, Toyota makes cars, but somehow Denso is nearly exclusive to Toyota. And then Denso then gets into a relationship with a chemicals company and another relationship with a steel company and so on. And then therefore Toyota is linked to all these other companies and they all kind of are happy together and doing business together but not really a classic cartel.
And so Che Ball is similar, but in this case, maybe Samsung has divisions doing all kinds of things, and that that is a conglomerate. But also is a relationship with, I don't know, they're big vacucleaners, but they're also like, you know, have a relationship with a rental company or something. It's funny Samsung when I looked it up started as a rice trading company or noodles or something.
It was it was food and it was a it was a it was a it was like a wholesale or intermediary. and trading and doing random random things and and over the decades it just became um it just became a a a m a ma mass of business.
Judd and and I think they were tolerated but isn't there something isn't there like a there's a family component to this. There's something And most of them are family do the there was a original
Horace Because these are all old post war. They're not that old. We're talking since the fifties probably.
so the the founder or his direct descendants are still alive. And it they tended to be majority but then maybe minority shareholders, but still a huge chunk of the of the equities held by by a family and it gets ugly because again you got this social y you know, resentment against the ultra rich and and and and then they have to they're sometimes accused of all kinds of uh economic white collar crimes and the msometimes they go to jail. The the the the their behavior is scrutinized for signs of insensitivity.
I remember there was a the the daughter of the f president or maybe part owner of the major airline in Korea had an incident where she was flying first class and she she complained to the steward that the service was inadequate, like but she s was so violent and angry about it that You know, he was almost like injured. And it it bubbled out of this, you know, this incident came out because of this. And then she ha Man, she was almost she w they almost lost everything because of that because everybody turned against this.
You know, they'd like canceled her in a sense. But i it's a strange strange thing where you have these well I suppose wasn't there a movie Crazy Crazy Rich Asians or something like that, but that was set in Singapore Mm-hmm. It was about very wealthy people.
Good movie.
Judd That's a it's a it's a perfect airplane movie. That's a perfect airplane movie. Okay, so basically, uh, in order to keep track of how the the so-called AI business may bring us all down Download and listen to every single BTS alband we'll we'll have a clear understanding.
Horace That is your expert advice. Correct. Fascinating also Korea becoming a a a an exporter of of soft power and cultural goods, which I always think is an interesting indicator.
Because Japan began that too with uh Comics with cartoons, with with films, famous famous movies in the fifties, Godzilla, all those things from Japan. manga or whatever the comics are. Manga anime.
Yeah anime. But the but I think w again Korea many ways replicates whatever happens in Japan because they they copy what's successful and they decided hey we should do that too so they said hey we can do pop music And then that we can do it with boy bands and we can do it with this. So they you know, K-pop came around and and that to me I would without disrespect, but it just seems a little bit manufactured, you know Like like it's a business business development.
Judd Yeah, I can't I can't speak to the music part of it, but I will say there are some of the most interesting and exciting filmmakers are Korean.
Horace Nowadays, yes. Nowadays.
Judd Yeah. Yep. Yeah. And I ca when I was growing up that really wasn't the case. But I'd say you know fifteen, twenty years ago. For me, there's a movie called Old Boy, and that was the first one that really kind of broke over, and now it's
Horace well didn't they get an Oscar for what was it Several Parasite in a one one
Judd several Academy Awards. but it's not uncommon to see in Minnesota at the movie theater cor you know, movies from Korea in Korean
Horace and Unheard of, unheard of, unbelievable.
Judd It's it's wild. So kudos, kudos to the Koreans, but man, I hope they figure that out because we want more movies, we want better movies
Horace So we don't want we don't want Korea to go down in flames and they won't make movies anymore. But I would say it's also by the way, they're living next to an existential threat of North Korea, nuclear nuclear armed f m the second third largest army in the world. And and and and yet they're like they're like super cr super productive, creative, and And apparently super willing to gamble on on on very very very precarious bets on the on the stock market
Judd Well every day is precarious if you're living next to insane an insane person with nuclear weapons.
Horace My my questions when I go there is like aren't you guys worried and like well not really but you know if you were in Taiwan and you look at China same thing it's like existential.
Judd Well hopefully everybody in South Korea and Taiwan listening is feeling good about their prospects. And Horace, anything we're we're coming up on our our time. Anything you'd like to add before we before we bid adieu?
Horace we're gonna post a b a few videos I believe from my office hours. So if you want to check in on on some of the some of the details of the quarter, but it was a it was a it was a surprisingly good quarter but also there was a surprisingly bad guidance and that had to do with with shortage of components and and so th there's a lot of m madness in the markets right now but uh But overall demand demand for Apple's products is is through the roof. It reminds me a lot of COVID when things were looked very, very crazy and yet people just couldn't get enough Apple product But this time there's there's there's a there's actually not enough supply. So anyway, interesting times. but stay tuned and we'll talk about it all.
Judd Horace, thanks for the time. Thanks to everybody listening. We will see you again very soon on asymmetric.
Asymetric 138, hosted by Horace Dediu and Judd Rubin.
Judd: The World Cup has only just begun, but somehow Horace has amassed 11 yellow cards. This is asymmetric. Horace, why are you being so rough on the refs and your fellow competitors?
Horace: I don't know what to say because I'm not even watching the World Cup. Never mind playing in it. But so, what can I say? First of all, the World Cup is, for me, something kind of very beloved. I used to watch it quite religiously when I was younger, and my family and my father in particular was always a big fan of what Americans call soccer, but the world calls football. And because I grew up in Europe, and I live in Europe now, it was always a big deal. We would kind of predict those first round games, like what the outcome would be, and have a competition with that. And I even went to see, in 94 when it played, I think it was 94, yeah, when the games were in the US again. And I actually went to see a couple of games. Miami and New England or Boston. But the last few years I just haven't been as excited about it. It feels like it's lost a lot of its charm. It's become very expensive. And I don't know if the right word is corporate. I don't think it is corporate, but it has felt more commercial in a way. Which isn't always bad, but I'm just thinking that football is a people's sport, or it's the beautiful game, the game that everyone plays even if they don't have any money. You just need a ball. And many people just don't, barely even use a real ball.
Judd: It's like they make their own. And feet.
Horace: Yeah, you need feet. But when I was hearing that ticket prices were like thousands of dollars and it was so exclusive, it just didn't feel like it used to. And also, the game has become much more defensive because it turns out you can game the game, so to speak. And the games are kind of a little bit less vibrant. But anyway, I'm not an expert. I just kind of don't have the passion anymore for it.
Judd: Okay. Good to know. When we were talking earlier you had said that it's been a watershed couple of weeks for Apple. Tell me more. Why do you think that is? What has been the major life, world, company changing events or series of events that makes you feel that way?
Horace: Well, we finally had, in WWDC, we finally had the kind of, I don't know if catharsis was the right word, but it's some revelation of what people had been hoping for for a long time. Which is, firstly, well, maybe, I hate to say it, but I think it's kind of like two years ago we had anticipated sort of Apple intelligence being something that was going to change everything, or at least bring AI into the world of Apple, and it didn't seem to do so. And now it seems like it actually has delivered on that promise of two years ago. Now, what it did is actually delivered beyond that, but people haven't yet absorbed just what changes will be coming, I think. Because I think, unlike a two-year-old promise, what we're seeing now is an integration that's far deeper, where the operating system is going to change dramatically the way it works for the user in terms of interpretation of their intentions. So I call it intention computing. And it's going to allow developers to participate with AI inside of their apps, and it'll make apps modular for an intent driven experience for the user. So they're reorchestrating the entire operating system and the entire app ecosystem to accommodate intent computing. That's my read of it. And that intent computing has very much been the promise of AI as a new way of doing computing versus touch computing, which has been the consistent interface for almost 20 years now. And touch was going to propagate into voice computing or spatial computing, and now it's intent computing. Now, actually, voice didn't really go very far. Spatial, the jury's still out, and I do think Apple's pushing hard on spatial, continuing to develop that, but it's far more, let's say spatial is far more, I would say, along the lines of what Mac is, whereas intent is much more along the lines of where phone is. What the dream of those who wanted to replace touch was, those who, for example, if you go back to Alexa, if you go back to, what's the Google version of that? You know, just smart speakers. If you go to Siri, even the original Siri, if you go to Humane, which had the notion of a microphone-only interface, maybe with like a mini projector. And even if you go to what OpenAI suggests that they are building, an AI-first device. The assumption behind all of these is that, first, you don't have touch; second, you don't have apps; and that your entire compute is a conversation with some intelligent agent, or the equivalent of a chatbot. And you ask it what you want to have done and it'll do it. By this I mean intent, because it's kind of like you just ask. It seems a bit utopian, because I think that it's not driven by analyzing what people actually do, but rather hoping to replace what they do now with this new way of doing things. Let's not forget that touch also didn't replace the way we were computing before touch. We had applications on our computers, but they weren't apps as we call them today, and they weren't, you know, involving swiping and gesturing. They involved mostly, you know, clicking and typing. So the idea of intent is just, tell me what you want and I'll get it done. And I think, as I said, it's a little bit utopian. It's, you know, remember Star Trek, you know, asking the computer. And yet when you look at what people actually do, they're not in an inquiry mode. They're not inquiring. They're not requesting. They're chilling. Entertainment, communications, they're doing things with their phones which are far more passive, you know, and far more like television than they are interrogatory or trying to be productive with a machine. That's, I think the reason behind intent's utopian vision is that it's created by computer people who think that computers are utility first, and, well, first, second and third. So I find it a little bit, the visions until now have been more or less, you know, not consumer friendly and not consumer accepted. But what Apple's building, in terms of intent, is a layer within the operating system. You can do those things, but at the same time you maintain all the other things that you're already doing. So you'll have the app economy, you'll have the app ecosystem, but apps will also be stitched together into workflows and experiences that would allow you to get things done. So, for example, instead of turning to three different apps to deal with your travel. You'll have an app for booking your flight, an app for booking your hotel, an app for booking your ride to the airport, maybe something more to do with setting your vacation settings in your calendar, maybe dealing with some shopping that you need to do before you leave. Instead, you might get all those things done with a few voice commands, which then will put together, it has to be iterative, so it'll give you back options and you'll go through them, and it'll connect to these apps that you're normally using. And my thesis is that Apple decided not to completely obsolete the app economy because it is somehow easier to replace all that. It isn't. They decided to keep trust and connections with developers and connections with data sets and connections with the trusted entities that are like banking, shopping, all those places you go. Those relationships will be preserved rather than you giving rights to all those things to a new entity that is this new agent. And so for that reason, I think the future that Apple is envisioning is where AI is layered on top of what we already have. That they call the system orchestrator, which routes your queries to multiple AI models but also to the apps that can work with those models and put the solution together.
Judd: That does sound very nice. It also sounds like a lot of, you know, maybe the methodology is slightly different than what's been talked about before, but as you were saying earlier, this is sort of where they seem to be where they were hoping slash promising to be a couple of years ago. But when I think watershed, I think something new. This feels like they're doing some really interesting things, but they're just sort of catching up to where they thought they would have been a couple years ago.
Horace: Well, Siri's gotten better and Siri has caught up to where it was promising to be. I mean, it's not even the way it should have been two years ago. It's where models are maybe as of six months ago. So things have gotten better from that point of view. So Siri has caught up and then surpassed where it was supposed to be. But my observation about intent is that it isn't only, it isn't just we have a new Siri, or we have new image playground, or we have new text creation tools and all of those things that work better that were introduced two years ago. Rather, we have, at the operating system, the orchestrator. And the ability for developers to work with these new Apple foundation models. By the way, there's five Apple Foundation models. Two are on device, three are in the cloud. One of them is hosted with Google. There is training that was supplied, or rather, you know, there was training data that was supplied by Google, and so Google's data was used to, you know, create these models to some degree. Possibly those will continue, that relationship will continue, and there'll be improvements over time also because of Apple and Google kind of partnering there. But one thing to note is that this isn't Gemini, this isn't any of the Google apps, any of the Google interfaces, and the data never leaves Apple's own servers, or what's called private compute. And so none of that was promised two years ago. The idea of the foundation models being updated. The on device foundation models, which by the way require quite a higher level of device performance that two years ago wasn't available. So they've done a lot to enrich this whole thing. And like I said, connections to developer, connections to Google, connections within the operating system, all of this is new. So let's just summarize it as, it's smarter, but it's also far more integrated.
Judd: That sounds great. You also were not shocked at how the market responded.
Horace: Yes. So the market, the stock fell immediately when, let me just put it as precisely as I can. During the keynote event, there were several segments. There was one on child safety, or, you know, safety in general. There was a previous segment to that that was on changes to the core operating systems, broadly speaking, not very detailed and not operating system by operating system the way we used to do it. And then finally Siri came in about two-thirds in, or Siri AI. And to introduce it came Mike Rockwell, who is the new head of Siri AI. He used to be the head of spatial computing, or vision pro actually, and he delivered vision pro and then moved to this role. As soon as he began speaking, and I mean within seconds, you know, they introduced him, he said hi, I'm here to introduce Siri AI, probably between the second and third syllable of Siri AI, the market fell. I was watching it. I was watching it and it had been up, up, up throughout the anticipation. It had been up for a long time before even the event occurred. But during the event, you can see it keep rising. And then, as soon, I think $317 right before Mike began speaking. And I of course blame Mike Rockwell for this. I mean, his outfit was terrible. His outfit as soon as he comes, not cool. I don't know, it was his haircut at the time, but clearly as soon as he began speaking, it felt like straight down and then it kept going and going and going to the end. Over the next couple of days it fell over twenty-five dollars. I mean, it's, but if the drop started as soon as he said Siri AI, is it just that—
Judd: people are freaked out at the name. If it was a different name, do you think it would have happened? What was the signal? Or did it just hit a number where it was far beyond what you've always described as a point. Many people said, you know, the market's got nothing to do with the event, the market's nothing to do with Siri.
Horace: I saw these feedback, as I had posted this on the social media, and I said no, I was watching, it was very precise. But notice that it wasn't based on what he said because he hadn't even begun explaining. He hadn't even done a demo. It just started falling as soon as, okay, now the presentation begins. It's time to sell, which is indicative of the phenomenon that's known as buy the rumor and sell the news. And the thing is that usually you don't know, but some people, you don't know the timing, so they'll say, well, as soon as the keynote begins, or as soon as the day begins of WWDC, people start to sell. Why not? But here they start to sell only when this Siri announcement was finally made. And it was spectacular. I've never seen a better representation of just sell the rumor, sorry, sell the news, because, you know, Siri, it doesn't matter what it is, they're announcing AI, they're doing all the things that everybody anticipated. It's time to sell, and it just kept going and going and going. And then days later people are trying to explain the quote unquote market's reaction, or Wall Street reaction, or investor reaction, or analyst reaction to WWDC, because it had kept, you know, it had fallen so much.
Judd: Will he be allowed to present again?
Horace: Yeah, exactly. I don't know. But of course, when Steve was on stage back in the day, we had calamitous, catastrophic falls similar to this. One of the worst was when he announced the MacBook Air. I have no idea, but I think the stock fell 20% in the next few days. The very first air, the launch of that brand. It's not explainable because it is entirely driven by some kind of momentum and market, you know, markets are not pricing at that point. What they're doing is, there's an anticipation that other people will sell, so you sell. So it's an avalanche of anticipations. And the same thing before, this is an anticipation of buying, so you buy. So it's all based on what other people might be doing, and what other people might be doing based on what other people might be doing. So it's kind of recursive, and it's a news cycle that leads to this kind of, you know, amplification, on the upside and on the downside.
Judd: So, but again, I thought this was... other than that, how was the play, Mrs. Lincoln?
Horace: that the kind of, these play, these types of games are over for Apple. It used to be much more prevalent, used to be much more common, but it became, let's say, less of a game. But it's interesting how the market itself is so hyperactive right now. We've had these international issues, we've had inflation issues, we've had consolidation or concentration inside of the tech sector. And so it just seems jittery. So my point though is, I kind of felt, because it was back to this game, I found it strangely comforting, because, hey, look, Apple is selling on good news. And the more the news piled on, by the way, throughout the week, you know, WWDC was still running. There were more and more events, more stuff coming out, there was more interviews with the executives and the picture of Siri AI, with, you know, the whole picture of the integration I've been speaking of, the relationship with Google, all those got fleshed out and it sounded better and better and better. Most analysts or whoever got their hands on the software said, wow, it really is pretty good, even being, you know, great, some people would say. And there was a lot of applause from the people watching the performance here of the product. That we're gonna need a lot more powerful hardware from Apple to take advantage of all these things. Obviously that is a positive for the business. So maybe that is not what was expected, but now we have a precision about exactly how many current devices can take advantage of the full scale of this improvement, and it's not many, so a lot more hardware will be needed. So my reading is, as an observer, as an analyst, there was kind of, I would say there wasn't a huge excitement during the event, because it was not their greatest event, especially taking so much time on the safety side of things, which isn't, it's, safety is a hygiene thing. You don't advertise that your system is more hygienic than ever. Just like people can't sell cars because they're safer, that is a not a purchase decision driver. So from the defense, yeah, well it works for one, but not many car makers. So it's flat, it's kind of, for me the whole keynote was a little bit flat. Also, by the way, the Siri demos were slow because they weren't faking it, and therefore that is exactly how their action happens. So from a snappiness and entertainment point of view, it was a bit like, it felt like there were a couple of beats off, you know, in the quality of the video. For me as an observer, again, it was like, okay, this is decent, this isn't great. But then as time after the event passed I was getting more and more and more impressed. Okay. The market went the other way. They hyped it up way in advance. They sold it deeply afterwards, ignoring all the interesting stuff coming out of WWDC. Historically though, that's how WWDC has always been sold off because people would always anticipate more than what was happening. In this case, they delivered actually more than they expected. Most people expected, and yet it's still sold off. And now it's bottomed out and it's probably gonna start recovering. But you know, there's a lot of cynicism around, as usual. And that's, again, encouraging to me in a way, because it means Apple works as an underdog, you know, it works better when it's underestimated. And it's great to see the market throwing away good, you know, the baby with the bathwater.
Judd: What else jumped out at you? I mean, not only just the keynote, but there were other events throughout the week and all sorts of other announcements. Was there anything else in particular you wanna touch on, for Tim Cook's last WWDC as CEO?
Horace: Well, a couple of things have been in the background. The news coming out of the analysts following this, the market for phones and computers and PCs has been, and this isn't getting a lot of highlights, but the market, because of the memory crisis, the market for computers is going to be down this year and the market for phones is going to be probably the worst year anyone can remember. I mean, we're going to see 20% drop for a lot of the vendors out there. And some may actually be almost in a state of, you know, economic or financial distress. Like, who, it's that bad. These are the smaller so-called budget phones, the lower price points of Android, okay. They're just not able to get, you know, any memory, and they're not gonna be able to ship their market shares.
Judd: Would now be a good time for us to introduce an Asymco phone.
Horace: Yeah, sure. It'll just be an iPhone with an Asymco logo on the back and we'll just charge double. But the idea of the market being in serious trouble is contrasted with the fact that Apple is, the same analysts are projecting Apple to be growing. Apple grew in the first quarter, projected equal growth in the second quarter, which is ending June. That growth would roughly be in line with the first quarter, which was like in the twenty percent plus. Now this is at a time when most of the vendors are seeing declines, and then the analysts are suggesting that declines will accelerate into the end of the year. So this sounds to me like a catastrophe. So while the market for smartphones is collapsing, Apple is somehow still increasing its volume. Now we don't know if it's going to actually continue their rapid growth into the second half of the year. But because it has had such a great success with iPhone 17, and because there's new product coming out, probably of the, you know, high-end, maybe a new version of air, a new version of fold, a new version of the pro products. And then the anticipation that 18, base 18 is not coming out until early next year means that 17, base 17 is gonna run through the end of this year. All of this is probably going to increase Apple's revenues in the iPhone segment. The NEO is doing amazingly well.
Judd: But time out, timeout. So did you just say you don't think that the iPhone 18 is gonna come out in the fall?
Horace: Well, that's what the rumors are saying, and they've been saying this for a while. The iPhone lineup into two. Now they already have an iPhone, the S, sort of the low-end version of the iPhone, was a spring product, springtime. So that started with the iPhone, I think it was C back in the day, and then became the S. And now the idea, I think, is that they're actually going to take the standard base model, okay, which is now maybe the mainstream model, and move that to a spring launch and keep the, by the way, there's a reason why in the December quarter the mix of the high-end product is far overwhelming. There's a lot more of the premium stuff sold, and not many people are rushing out to get the latest of the mid or low range of the iPhone. And they know this, and they've known this for a while. So it also makes sense to move around China a little bit. China holiday is in first quarter. And so moving the 18, and possibly also for India, I don't know when the Indian holidays are. But if we can move something off into the spring, it might be an interesting split. Now I don't think it's gonna affect sales that much because, like I said, there's not only a bias towards the high end, but we're going to have more high end than ever before. If a fold is coming, then the high-end lineup will be the pro, the pro max, the air, and then probably ultra will be the branding for the, so we're looking at four high-end iPhones we'll be launching in the fall, with hints of what might be the 18 base model coming in later. And thus also maybe concentrating a lot of the buyers to saying, okay, since this is what the latest is, we're gonna go with one of those four options, driving the ASP higher, and so on and so on. So yes, it's a radical departure, but it's been rumored for at least, I'd say, a year, maybe two years.
Judd: Well, I guess a couple things. I mean, in American football, not soccer, but in American football, there's a saying that when it comes to your quarterback position, if you have two starting quarterbacks, you really have no starting quarterbacks. So if you have four premium phones, don't you have zero? I mean, like, they can't all be premium. They can't all be. They're just expensive.
Horace: Well, you have a good point. And historically, you know, Apple's been about a simple and clean and clear product portfolio. You know, famously when Steve came back he eliminated half a dozen, whatever, there were so many different versions of back. He eliminated a lot of them and then introduced the iMac and it became, as you say, the quarterback, the leading quarterback. But with the iPhone over the years it's kind of gotten a little bit broader. And you see this in what, the so-called, my stairway to heaven is my, the breadth of the products available. Of course that includes different memory configurations, so that there are far more now than there used to be. Used to be one iPhone or maybe two, and now we have like about 15 with all the memory configurations, and not to mention the color configurations. But as far as the so-called premium, now there's this puzzle around fold, and I must say I'm a little bit confused by this product. I think we talked about this before, but I think when it opens, it kind of starts to look and feel a lot like an iPad. Like an iPad mini actually. And I'm not sure that people want to carry an iPad in their pocket. Of course, when closed it's a phone and it feels fine, but it is, the iPad is not necessarily, maybe it'll become, because if it is with you all the time, it'll become far more attractive for you to interact with the iPad type of interface. But I will say that one of the rumors about why they're doing this is that there's a lot of interest in China. And it isn't for software reasons, but rather because it is such a, it's such an event, it's such a theater, it's so theatrical, right? When you have a machine, a moving object, it's a different thing than something static, and so there might be a preference for something that shows action, that shows clever mechanicals. And that could be one of the reasons that market is appreciating it. I'm reminded, by the way, of the debate back when I was at Nokia, that there were flip phones that were very popular in the US. And Nokia resisted going to a flip phone. They had something called a monoblock, or the candy bar. The candy bar phone was the way Americans called it, but inside Nokia we called it the monoblock, and it was better by every possible thing you could measure. It had more durability, it had longer battery life, it was more durable, it was easier to use. You didn't have to do something to get something done. And it just was cheaper too. Obviously you could make it fancy and expensive, but it was cheaper to make and cheaper to manufacture and so on. So everyone, all the engineers were scratching their heads. Why Americans preferred flip phones. And Motorola launched the Razr, which was a super thin flip phone, and that went on to become the number one world bestseller in the phone space. So much so that, you know, they make dozens of versions, and eventually they relied so much on it that when it began to decline the whole Motorola failed. I mean, the whole company essentially collapsed. Strange story, but you know, you have a hit product and a couple of years later you're out of business. That was the story of Motorola. But it wasn't just because it was a fold, it was because they, I don't know, they made a lot of mistakes as well. But flips were very popular. And so when we try to find out why people wanted a flip phone, it was that this mechanical action felt like, I don't know if people felt like, well, that's one idea, but people felt like it's much more satisfying. It's satisfying to open it and answer and close it, to hang up, and especially if you don't like whatever the conversation was, it's satisfying to just hang up on something with violence. So it was, you know, as some people even in Japan, it was common to have tiny little flip phones with little antennas. So you had to flip for the phone and then extend the little antenna to make it work. And that's outrageous, you know. You have simplicity on one side, you have complexity on the other, and people are voting for complexity. Now, I don't suggest, and this is one of the reasons I think people reject, and Nokia, or sorry, Apple rejected a lot of these moving origami, you know, have your laptop flip inside out, have it be an iPad or a tablet with a pen. Do all these things as if it's kind of a convertible. But here we are. So maybe after, you'll know the answer to this question.
Judd: I won't. How popular are the current folding phones from, you know, Samsung or the other manufacturers? I mean, are they that popular?
Horace: Not that popular at all. They've been doing it for years.
Judd: Yeah.
Horace: Partly the reason they're not popular is that they are flimsy, and there's a visible crease, and they're gimmicky and cheap. The, but cheap feeling, but very expensive to buy, and this is the problem. And it isn't a killer function, what do you do when it's open? Well, you have a bigger phone screen, so maybe you watch videos or something. So it hasn't come with a killer app, if you will, for the bigger screen. So this is what's interesting about Apple, is whether they will, first of all the form factor is slightly different. It's shorter in height, and then when it opens it's much more like, like I said, like a mini iPad. And I think once it's in iPad mode it's going to be probably usable for entertainment and other things in a much more intuitive way. Maybe the keyboard and other things will be easier to use. I don't know what they're going to introduce in terms of software, besides just making it an iPad. So from Apple's point of view, they are also getting rid of the crease. It probably mechanically will be nearly magical. Probably they'll solve a lot of the durability issues as well. So there's a lot that they can fix about those products. And then there's something that needs to be done on the software side to make it more attractive and usable. So yes, there's room to improve, but it's not clear that people are craving this, except again, maybe culturally for various reasons. I do believe that $2,000 will make it very, very niche. You know, it'll cost more than a MacBook Pro.
Judd: This just feels like, I don't get it. I don't get it. This feels like it's like the cube. You know, like, sure, you can have a beautiful acrylic cube. But, okay.
Horace: But this is why I don't like to speak about rumored products, although there's a lot of evidence for this one. But no, I brought it up because I think the portfolios, the split between the two. I mean, we're talking about watershed, okay, and we're talking about how the market is contracting for phones. Into this, Apple is expanding its portfolio. It's going to launch a lot of new product in the fall. There's a lot of expectation that they might, if not volume wise, but at least in dollar wise, going to expand, they're gonna grow their business. And their market share probably will increase substantially. This is where it comes down to. Historically, Apple's had 18 to 20 percent of the phone market. A lot more in terms of the install base because the phones last longer. But with this crisis in memory, and with this market expansion in product, the lineup and the new spread of launch dates, it's possible that Apple is going to reach 22 to 25% market share in devices, or, I should say, in iPhone. Okay. In the phone market. And at the same time, in the PC market, we're looking at 10 million NEOs this year. I think the market share in the phone, it's much harder to make an impact in the PC market because Apple's share is relatively limited. You know, closer to ten to fifteen percent. And so, but they probably, we're going to see a couple of points increase there, and we're going to see a couple of points increase in the phone, and this is going to be going down in history, the twenty twenty-six, twenty twenty-seven time period we'll probably see a substantial increase in market share for Apple. We'll look back upon this year and ask what happened for that change to occur. And that's why I think now, this last few weeks we've had this WWDC with AI. And we've had the memory crisis, which also is caused by AI, you know, restructuring the phone market. Some analysts are suggesting we're not going to see a recovery to 2025 levels of phone sales for three to four years. That's three to four years for Apple to continually beat down their competitors. And Ternus is going to take over just at this moment when there's probably this market shift happening. I think we might, and I've been sort of pulling punches on this, but we might be looking at Apple doubling down on a market share strategy that will see them shoot up significantly. Something that we've been thinking for 20 years they might do, but they haven't done yet. They've always been kind of happy with their limited market share, but obviously extremely high revenue share and extremely high profit share, to the point, by the way, where their profit share might end up being nearly a hundred percent, if not actually one hundred percent, going into the end of this year. So this is why I think the watershed is maybe AI, but we don't yet see the impact of AI on the bottom line. But we're seeing evidence that the market share game is changing. Because they made this decision probably two years ago to split into a fall lineup and then a spring lineup. Yeah. I think the only thing is that it's compounded by the memory crisis. That's affecting, by the way, it's, let me clarify, it's less of an effect on Apple because they manage their supply chain very well. They're also not squandering a lot of this memory on cheap product with no margin. But it's also not affecting Samsung as much because Samsung also has more of a mix of premium product. They sell lots of cheap, but they can always retreat back into the premium, and they then drop a lot of low-end product and they can still be in the business of selling phones. But Samsung is doing very well selling memory. They're far more profitable selling components than they are selling phones. So for Samsung to actually exit the phone business would probably be a blessing, because they'll be like, well, thank God we don't have to deal with that low margin, typically negative actually on many of their phones. That's interesting. But it's all the other guys, the Vivo, the Oppo, which are, by the way, numbers three and four in volumes. Nobody's heard of them because they're China mainly, and they sell in Africa and they sell in Middle East and they sell in parts of Asia. But globally those are the four, the two big brands. There's some other one, oh, in India I forgot to mention, and there's a lot going into these markets that is at two hundred dollars price points. And those $200 price points are no longer sustainable with the cost of memory that's out there. So what we'll see is contraction, Apple's share goes up. Premium, what they call premiumization, premiumization, I don't even know how to pronounce this, but the idea of portfolios going to the high end even if you're not an iPhone, that's been happening for a while. So maybe we'll look back upon this year again as something of a, I would, you know, market discontinuity, cracks, it's something cataclysmic, it's something substantial.
Judd: Well, it could be. It could be. I mean, it's interesting to me in that, I think what I can't get away from, and I'm curious if they care about this at all, but just because something is expensive doesn't mean it's special. And I don't know what, what do you think they think is special about the iPhone at this point? I mean, obviously it's the best phone.
Horace: But this is a syndrome that occurs every year. But people are always remarking about the very, very high end of the market. So the premium iPhone, when it reached one terabyte and it reached a thousand dollars, people freaked out and said, oh my god, the iPhone is so expensive, why is the iPhone, they're just gouging, da-da-da. Well, again, that's the top of that staircase. It is the highest of many products, but if you look down into the middle of that distribution, of that range, that's where the most popular phones still sell. They're selling at, you know, six to eight hundred dollar price points. This is the bread and butter iPhone, whatever is the right analogy. That is a mainstream product that's not going away. There's also, by the way, low-end versions, and there's last year's versions that are still for sale. Those end up being the cheapest. And so all of those things are gonna carry on. What they're separating is that the launch window that used to be fall for Christmas purchase, which, by the way, Christmas is gifting. So when you gift people, you want to always show maybe a little bit more of your generosity. So the gifting process typically also attracts the premium. And then the students and everybody else who needs to buy medium grade phones, they're still, but the 17 is going to be still for sale. It's done very well this year. It's gonna continue next year as the low-end product. The 18's coming out a couple of months later. No big deal. It's just that from a marketing point of view, from a ramp, the production point of view, they probably were seeing this already, that the mainstream phone and the low end phones were doing better later in the year, and that is later in the next year versus the end of the year. So I don't think this is a giant change in how Apple thinks about premium. I think it's just a cadence question that some people said, which I find incorrect. They said, well, the seventeen is doing so well they're gonna keep it going a couple of months more. No, no, no. This was decided years ago, but they're going to start to launch in a kind of a two-phase process. And, by the way, I think it keeps the excitement of the iPhone moving into spring. Because the problem they've had is that people would see new iPhones in the fall and then there'd be nothing new and the competitors would take advantage. Point of fact, Samsung always launched six months out of phase with Apple. So if Apple had a big event in the fall, Samsung would launch six months later, literally, so that they would come in when Apple was, you know, being long in the tooth. So now Apple suddenly has fresh product coming also at the same, you know, not quite six months, but into that Samsung cycle, and it's going to drive excitement. And as I said, China, their holidays are different than ours. So I think there's some value to this staggered approach. You know, if I were to design it, in fact, from the very beginning I would have probably said, yeah, why don't you launch around the whole year so that people are always looking forward to something. Again, Steve was the one who said, no, we do once, simple, yada yada. But it was because of clarity, it was because of the simplicity, and it wasn't optimal in the case of the five, yeah.
Judd: Well, but it's also an event. It's also an event.
Horace: It's also an event.
Judd: And what they had been doing over the years is releasing new colors in the spring, but maybe that just wasn't enough. Anything else before we sign off?
Horace: Well, again, the AI thing is one of those things that we've been waiting for two years. But we're gonna probably have another ten years before it propagates to most of the people who are using Apple phones. So let me, you know, a lot of commentators that I think are smart about this have been saying, hey, it looks like AI will be first experienced by the majority of people through an iPhone. And that's very profound. It's not just that, yeah, using a chatbot is not in and of itself an experience. People, I mean, some people are addicted to it, some people are using it productively, some people are becoming mentally ill, whatever. Yes, but the majority of people, your mother, my grandmother, or, well, I don't have one, but, you know, these types of laggard users or mainstream users are probably going to experience AI through their iPhone.
Judd: Yeah.
Horace: And that's, you now, we're now seeing just what that experience might end up being. It's gonna be a Siri and it's gonna be apps. And as a final line, the economic model, everyone's been thinking that you pay for AI, you pay ChatGPT monthly, you pay Anthropic, or you pay whomever. What Apple's probably going to do is not charge, unless, maybe you have a new tier of iCloud accounts, that, you know, if you're a frequent user you might hit a limit and then you'll be invited to pay more. But also the developers are going to be probably charging extra for these types of AI functions, and so what that goes into is services, almost without any drama, without any change in business model. Suddenly Apple will be seeing an acceleration in services, which has been the growth story for forever now. And I'm pretty excited that, it's almost, it's almost, what's the word? It's almost anticlimactic. The financial model of AI is anticlimactic. It's there, there'll be lots of revenue, but it's not even mentioned by Apple. They never talked about it in WWDC. Fascinating.
Judd: Horace, this has been great. Thank you for taking the time today. Thanks to everybody listening. We will be back with you very soon on Asymmetric.
Not everything you hear in the Asymetric podcast makes it through the ruthless editing process. I retrieved some of what was deleted and will post it to YouTube as Asymetric Deleted Scenes. While these segments didn’t make the final cut of the podcast, they may still be worth sharing. Here is the first.
Judd • 00:00 Tim Cook got to go to China on Air Force One. Horace gets to talk to me. This is Asymmetric, Horace. There's a lot to talk about. You recently wrote that something terrible might be coming. I do not normally think of you as Chicken Little, but is in fact the sky falling, Horace? Are we about to see a crash? Horace • 00:23 I didn't suggest it was happening, but I said, are we facing a crash? "Is there a crash coming", I think was the title. And this is a topic that's just been a worry for a long time, because we've seen the surge in the market value of so many companies.
But as I said many months ago, on a PE basis, it doesn't look so bad. But then we should ask, is that basis not valid? We should be looking at another basis, perhaps, because the PE ratio is not the whole picture. And so I'm putting out a series of posts. Because you see, the problem is this. There are some topics that are, let's say, not simple, and you feel like you should dive in, but you feel like you might leave the audience behind. And my struggle is to make it simple so that everybody can follow along, but without making it simplistic. Judd • 01:32 Heavy lies the crown. Horace • 01:34 Well, it's not that hard. It's just that sometimes you need to do five steps instead of just one. And you see this process online, where people are trying to fit everything into one tweet, or even now a thread of tweets — and there's a lot of long-form stuff actually going on social media nowadays. But I don't think this topic requires a very long single post. I think it just requires a few baby steps strung together. So I don't want to necessarily — well, we could dive into it right now, but I'll summarize at least. So the problem with the PE is that it doesn't, first of all — remember, E is our friend. E is earnings. But it's also true that earnings are an opinion. Remember the old adage: earnings are an opinion, cash flow is a fact. And arguably I added to that by saying a share price is a fantasy. Literally, I mean it is a dream. Maybe I should say dream, not fantasy, because it could be a bad dream as well. But the fact is that earnings fundamentally are an opinion. They are a result of an accounting practice, an accounting convention — the so-called generally accepted accounting practice, GAAP. And what it means is you don't put into earnings things like capital expenditures, you don't put into earnings the fact that you have a huge amount of cash. So things to do with cash flow don't go there, and things to do with balance sheet don't go there. And both are important in evaluating the value of a company. E comes from the income statement, and it does not cover issues that are outside the income statement. And this is why a better measure — again, not a complete measure, but a better measure — is free cash flow, or FCF. And this is why years and years ago I said, because at the time the problem was people weren't valuing what was on the balance sheet of Apple, which was cash, huge amounts of cash — and so for that reason, even then, I suggested don't use PE, use free cash flow. Which, by the way, is the denominator, where the numerator is EV, or enterprise value, which includes debt and cash, or rather balances those out. So you divide — instead of doing the P over E, which is market capitalization over the earnings per share, you do it with the top being the EV or enterprise value, where you cancel out the debt, and then divide it by free cash flow. So that's as if you took not the market divided by the income statement, but you take the balance sheet divided by the cash flow statement, which is very interesting from an accounting point of view. So anyway, I don't want to belabor this, but what I'm going to do is explain in writing, and using examples — especially the so-called Mag 7, or even expanded to the top ten most valuable companies. Judd • 04:51 I look forward to that. My question for you right now, since we're here together chatting, is: you've long held that a PE of thirty-five is pretty much where Apple should be. It's fine. So in terms of free cash flow, what should that ratio be? What should that number be? Horace • 05:13 Well, they should be roughly the same. So here's the beauty of this: the EV over FCF — Judd • 05:17 So EV over FCF is 35. Horace • 05:20 If they're the same, so — I put it this way: if P over E equals EV over FCF, it means that there's no weird stuff on the balance sheet, there's no weird stuff going on with the cash flow. It's all pretty much — the income statement is the best measure of the business. And in those situations you're not playing games elsewhere. Or — well, not that they're games. It's just that there's nothing invisible to you when you're looking at the income statement. And that's a nice way of analyzing a company. The problem is today, with all the hugest companies in the world, which make up a disproportionate portion of the S&P 500 and a disproportionate part of the US economy and the growth and everything that's indexed to that — those few companies are out of whack. Their PEs are not at all equal to EV over FCF. In other words, there's stuff either on the balance sheet, or there's stuff going on in cash flow, which makes that PE ratio irrelevant. And this is what I have to expose. With Apple in the middle of it, showing how Apple actually conforms more or less to, let's say, an income-statement-driven view of its value, whereas the others are much more skewed, because so much of the money that's coming in is being spent on capex. Which means they are no longer — here's the catchphrase — they are no longer considered software or services companies. We're talking Microsoft, Google, Meta, Amazon. These are intellectual machines. They deal in software, they deal in non-tangible items. They deal with data. And yet they're investing today as if they're chimneys, boilers, forges, hammers, and our industrial-might giants, which require huge capex. There's nothing wrong with that. Sorry — there's a motorcycle. So the problem is — Judd • 07:40 But haven't Google and Facebook for a really long time — I mean, they've had their own data centers, they've spent a lot of money. This is much more than it's been, but this is not entirely new. Horace • 07:51 Well, it isn't, but the thing is it's way, way bigger than anyone anticipated. We're talking, on a combined level, at least half a trillion dollars being spent. It's moving the needle on everything in the whole economy. Caterpillar is having an amazing year. Energy companies are having an amazing year. We're bringing back nuclear reactors. We're bringing back water issues and energy issues, because these data centers are monsters. So what I'm saying is that if these companies that historically have been seen as income-statement businesses are now suddenly balance-sheet and cash-flow businesses, we cannot evaluate them strictly on the PE basis. Apple is the outlier. So Apple is the exception that proves the rule. Apple is still extremely consistent with respect to all these ratios, how it used to be. But all the others have gone way off. And by the way — I wrote a short note, a note of Bennett, which said basically that Google's cash flow is going to zero. Well, so is everyone else's. And what happens when they don't have even more cash flow is they're going to start borrowing. Which means not only are they destroying their cash flow, but they're going to be destroying their balance sheet as well, by putting a lot of debt in, in order to pay for these infinite data centers. So there's an interesting dynamic. I would say we're in uncharted waters, but we have to then put a little bit more effort into trying to figure out whether we're in a bubble or not, because this is the thing: all of that could be supported by enormous growth in revenue, enormous growth in profitability — and there is growth, tremendous growth. It's 50, 60, 70, 90% growth. But their investments are growing even faster. So this is why some people are grasping for ways to detect it. I've seen half a dozen indicators out there — everything from the Warren Buffett indicator, this or that, that things are out of whack. But all these indicators were dependent on the ratios of the past. We are in a situation — it's not like the dot-com era, it's not like the Great Recession, it's not like the Great Depression, it's not like all these previous bubbles and crashes. If you applied those metrics, many of them may be true today, but then you have other things that are actually even more important. So that's what the series is all about: we're going to try to get to the bottom of it. And I will propose at the end, this is the best way to think about a business. Judd • 10:35 What's your best guess right now? Horace • 10:37 So the way to look at it is: given the growth projected forward, how many years will it take you, as an investor, to get your money back? If you put down a hundred bucks on a share, or a portion of a share — let's say. I don't think anything's a hundred bucks anymore. So you buy a share in Google and — Judd • 10:56 How long's it gonna take? Horace • 10:59 Sorry? Judd • 10:59 A pair of pants is a hundred bucks. Horace • 11:01 Oh, well, you've gotta get your Dockers. But a hundred bucks invested today has a payback period based on cash flow and growth. So those are the two most important metrics. And the problem with the growth is: are you going to look at the last quarter and project it for the next five years? Are you going to look at the last year and project it for the next three years? So the whole thing depends on how much of that growth is sustainable. So all of this comes down to — okay, well, we don't know for sure, but let's play with some scenarios. And then you get a good idea: am I going to wait five years, ten years, twenty years? And in the case of Tesla, by the way, which is also among this group — it's an outlier. Its PE is 400. Even if it grew at 70%, it's not going to get back. And of course the sad truth of Tesla is it's actually contracting as a business. So it's actually the only one that is going negative in growth. And yet it's also the only one that's accelerating in PE. And so there's a huge anomaly. There's a huge elephant in the room — we talk about theory, and then it demonstrates — yeah, well, there's a robotic elephant. Or space robots. There's so much mystery, because that demonstrates also how sentiment, optimism, euphoria, and memes all play a part. So anyway — sorry, this is a bit, as they say, in the weeds. But I feel it needs to be done. Judd • 12:47 Yeah, well, let's put a pin in this. We look forward to seeing what you come up with. Please, as always, show your work. And we'll be paying close attention to your follow-ups to this. It's hard to not talk about AI. Would it be fair to say that services — which is becoming more and more the centerpiece of Apple's business — would it be fair to say that services is the most vulnerable part of Apple to AI, in the sense of — because services boils down to — Horace • 13:32 The US? Yeah, I get your question. Well, it's a great question, because I think there are a lot of hypotheses out there about how Apple could be disrupted by AI — and I use that term carefully and with knowledge. The scenarios which are disruptive to Apple would be not just for services but also the hardware itself: that the business would move away from what the user interfaces today for the consumer. But you don't actually think that. I do not. In fact, I think I can set that out. The underlying thesis is that we are visual machines, or visual animals. And as long as vision is involved, I think Apple's going to do very well. If you say, well, it's audio in the future, or something that is much more in the background, not the foreground — it's ambient. Computing becomes ambient, then there's no interface. If there's no interface, Apple has a hard time. But I just don't believe that future is likely. And we — I think we mentioned this before — the services aspect: now people are starting to wake up and say, wait a minute, actually services could get a big sustaining boost from AI. Just days ago there's been an idea put forward that Apple could launch an agent store. The way there's an app store, there could be an agent store. And what an agent is, as you would imagine, is like an entity that you hire to do things for you. And it's very possible that Apple could embody or integrate agents into its services, and that the discovery of agents, payments — all of the things that are related to the economics of AI — would go through Apple. And people are finally realizing that, yeah, as I've been saying for three years, distribution is just as important in the age of AI as it was in the age of software, as it was in the age of computers, or any other pieces of equipment that we have ever bought. So agents are possibly the embodiment of AI that are actually consumer-oriented. I hate to go back and forth on this, but the fact is the AI business is still mostly, right now, very few professionals are using it, and quite a few businesses are using it. But it's not yet consumer-driven. Maybe chatbots are, or entertainment, maybe companionship — but as I see it, no one's quite gotten the killer app. And that will probably be discovered through introduction via an iPhone. That's the platform for discovery and everything else. So I think many people now are starting to write — and by many I mean the analysts on Wall Street are starting to write reports suggesting, wow, AI could actually be very sustaining to Apple, to the point where it's going to ride the wave and be the one capturing a significant portion of the profits. I would even say it may even capture the majority of the profits, because it's at the intersection of the consumer and the device. And that's not going to change. And I think the attacks by OpenAI, to try to replace that device with whatever wearable Johnny Ive and company come up with, will fail. And I quote Johnny on this matter. Johnny Ive said, "I'm nothing outside Apple." He, and every other person who's left Apple who's smart enough, has said the same thing. And yet here we are with this idea that, oh, I'm just going to sell my services to an AI company. Anyway. Judd • 17:48 And what it feels like he might be doing is something that — I mean, it's touch-based, it's voice-based, and all those things are much slower than a visual interface. You also recently wrote about using the Apple Vision Pro outdoors, which I'm skeptical of, at least for me personally. I would not want to do that. Maybe I'll have no choice. But it's not something that is — Horace • 18:20 It's not going to be the device as you see it today. So the puzzle for me is — we have rumors now that Apple is doing glasses. Generally I don't comment on rumors, but it's obvious to me that there would be a wearable. What about a monocle? Yeah. Or — what is it called? A pince-nez? Yeah. But the problem with these devices is that maybe they're mostly — what I would say is — input devices, like cameras or other sensors reading things. There are also rumors of AirPods having cameras. The view of the future I have is that there will be wearables which have augmented reality and you could wear them all the time. That's not the case of the Vision Pro today. But I think if I were to imagine a future, theoretically it's possible to do that, and that would be fantastic. Anyway, back to the threats at hand. I think AI, for me — at least the version we have, which is not yet AGI — it's a nice extension. It helps with a lot of tasks, it improves some productivity, decreases other things. But it isn't disruptive yet. It might be disruptive to some type of work out there. So it's disruptive to people. But none of the players — okay, I take it back. There's a couple of companies out there that might feel it, and are being punished right now because of AI. One is Adobe; another would be so-called SaaS, or Software as a Service. You have companies essentially that are providing tools or tool chains, and those might be very easily replaced with the person who does those things but happens to be an artificial person. So if there's not that much value added with those technologies, then yes, they would be disrupted. But even they, I think, will bounce back. One of the issues is — especially with software — and I don't see a lot of conversation about this — people talk about vibe coding, and writing code very quickly and being very productive with programming tasks, but that doesn't take into consideration the maintenance of that. And the maintenance, as anyone who does software engineering knows, is not so much about how much code you write, it's how well that code can be managed, maintained, upgraded, and everything else. And that's the engineering part of software engineering. When something other than you writes something — even if it's a person — you're going to have to deal with that. This was a big problem when I was a student: you were told, comment your code for your own sake, so that when you go back to it you know what you did. But also, if you have to hand it off to somebody, it's more self-explanatory. And it was a very bad practice — almost an antisocial practice — to have cryptic code that nobody can read, therefore nobody can maintain, and you're just doing it to preserve your own job, so nobody can fire you, because nobody can fix whatever you wrote. That's just not considered good practice. And now do we have the equivalent of machines writing code, and they don't even know what they're doing? I mean, they're just basically copy-pasting a lot of things. And so they become spaghetti code, it becomes intractable. You can't understand what they did. And so it becomes unsupportable, unmaintainable, and that might cost you even more to rectify than if you had a human write it in the first place. So either machines get far better at creating code that is inherently supportable and they can explain themselves — but there's so many things wrong with this picture as far as the long-term things, right? Somebody wrote, saying, yeah, it may look cheap to write code, but you're going to get the invoice on maintenance years down the road, and you'll realize it wasn't cheap at all. So there's a lot of things about that, that I don't see disruption happening here. But there are some things. A lot of work, like legal, tax, or accounting — a lot of that — I've used it in these instances where it's a better search. A lot better to search with Gemini, for example, than it was with plain old Google. And I'm learning a lot of things. Although I'm a little bit cautious, because sometimes, as it says as a disclaimer at the bottom of every page, this is not always accurate — which is a worry sometimes. So anyway. Judd • 23:38 You know, Google wasn't always accurate either. So in all cases, buyer beware. You were saying something a minute ago in terms of having an agent store, and I'm not sure if you are a reader of Neal Stephenson, as I am. I don't know if I'm current — in fact, I know I'm not current — but a few years back he wrote a book called Fall, which was a follow-up to a book called Reamde. Fall takes place in an age where AI is very common, and this is the thrust of the story. But it's very common, and every family, if not every individual member of that family, has their own agent — to do things, process information, give them answers, tell them what to do, et cetera. Which to me leads to the ultimate form of reality being fragmented. So everyone is living in a completely different world based on their agent. Should there be a required agent? Like, if you live in Helsinki, should everyone have at least the Helsinki agent, so they know just the basics — so there's a basic frame of reference? Horace • 25:01 Yeah, but it's a huge problem, because we don't have a lot of shared experiences anymore, right? Even within the same family, people are not consuming the same content. It used to be at least there was one newspaper in the house, there's one TV set, and more or less everybody watched the same TV. And we ended up with a situation where, even when there's a common space, where people live together, people are looking at their own screens, and they're looking at a different reality. And then if that is intermediated by an agent who is essentially, let's say — rather than calling it an agent, I would say, let's say it was a personal assistant. And the personal assistant is like a gatekeeper. Chief of staff, whatever. And they are intervening even in the question of whom you meet, and what you choose to do. They kind of act on your behalf. So there's a lot of problems with that, because it's not just what you consume, it's also acting on your behalf in all aspects of life. It's kind of a little scary, if I'm honest. But let me put it through a different perspective, which is that already there's a lot of difference between people from different countries. It's fascinating to me, having lived in many countries, how different the perspectives are on very basic things. In many ways, by the way, we are also getting together more. And let me explain what I mean. The globalization phenomenon has meant that people are more aware of, let's say — Americans are more aware of the World Cup, for example, soccer, which was something nobody cared about. Europeans are more aware of American football, and they're sort of kind of aware of baseball. And at the same time, you have shared devices like Apple, the iPhone, you have shared brands — everybody knows about Nike. Americans will know about European cars, and vice versa. So at the commercial level, because businesses have grown to be global, products and brands have kind of become uniform. It used to be that you went to a different country and you couldn't see on the shelf anything you could recognize. They ate totally different foods, they had totally different tastes. But now you can kind of agree that, as far as packaged goods are concerned, there's commonality. And that has a lot to do with the globalization of business, right? The fact that I can get a banana in the middle of Finland — even though it's a tropical fruit — and the banana I get is as fresh as it is in Costa Rica. That's an incredible story. Judd • 28:24 Pretty close. Horace • 28:25 Well, it's green. I think — and by the way, all these bananas are genetically identical, because they're all clones, because they're all made from the same exact genetic material. And if that gets wiped out, then we have to reinvent bananas, if you will. So there's a lot of funny things that happen because we have these modes of transport — these ships and airplanes around the world that constantly tie us together. So we have that. That's a positive. But on the information side of things — Judd • 29:01 So we've got the same bananas, but completely different sources of news and information. Horace • 29:05 Right — the same bananas, but at the same time — oh, I'll give you another stupid example. Americans have baseball caps. Well, baseball caps are global now. But I can tell you, when I grew up in the 70s and 80s, nobody outside the United States wore baseball caps. Maybe Japan, because Japan, weirdly, was colonized by baseball. And yet this style of headwear was never seen. Everybody had different hats, different styles. You had berets, and you had fedoras, or bowler hats. And yet now there's so many things that are uniform — in some ways, boring as a result. We all kind of wear sneakers. We all look the same. We all dress the same. Probably the music is also very common. And the other thing — I'll give an example. Rap music. American music back in the 70s, 80s was well known because there was a global music industry. But people in Europe did not necessarily make a French version or German version of what would be a pop song. Let me put it the other way. ABBA was European. And ABBA wasn't all that resonant in the US — although it was enjoyed, it wasn't like our thing. People were much more into either rock and roll, or rhythm and blues, or Motown — American. Judd • 30:49 Well, America had a disco phase. Horace • 30:52 Sure, sure, but — there was, and it mostly came from Europe. But you also had indigenous American music that was enjoyed in Europe, but it wasn't felt that it was something that they produced themselves in the same way. You can do Motown in Europe, okay. So the thing is, though, today rap is universal, and it's from the Philippines to South Africa to Japan. That genre has caught on with everybody. Judd • 31:23 Who is your favorite Filipino rap group these days, Horace? Horace • 31:25 I have none, I'm sorry. I'm not aware of the individual acts. But what I'm saying is, I was observing it with youth behaviors — that they're acting very American here in Finland. At the same time, though, they don't understand a lot of American decision-making. They have no perception of student debt here. It's such a strange idea. Or medical bankruptcy. Judd • 31:54 Yeah. Horace • 31:56 The bottom line on this is that we can hear these stories about fragmentation, disassociation — but at the same time, there's a lot going on with unification of experiences. And most of all, think about your iPhone. Everybody in the world speaks iPhone. Everybody in the world recognizes and interacts with a computer the same way. And even before the iPhone, that was the case for computers in general, whether it was Microsoft or Mac. We — the Americans — invented how to compute effectively. And everything else in the world just completely disappeared. It wasn't that they didn't have it, they just disappeared. The French way of doing things, or even the Soviet Union had its own computers. But it's one of those things that we don't pay attention to very much, because — well, it's — Judd • 32:49 It's too obvious. What exactly do you mean by that when you say the American way to compute? Do you mean — because Apple and Microsoft dominate personal computing and they're American companies — or is there something — Horace • 33:02 First of all, the American computer is based on — I'll give you a very simple example — the byte. The byte is eight bits. Eight bits is enough to encode ASCII, which is the code for characters, and then you have the alphabet and the numerals. And the problem is, if Japan — let's have an alternate history. Japan wins World War II — Japan and China, maybe. Imagine that Japan and China together, with their kanji alphabet, would have come to dominate Asia, and then more and more of the world. Or Russia with Cyrillic — but Cyrillic is still a limited character set. The problem is you have fifty thousand kanji characters. You wouldn't be able to fit them in one byte. You would have to have a computer architecture that was bigger words, as they say. The layout on screen also — what happened with American characters on a screen is that you have eighty characters on the original terminals, eighty characters on an IBM punch card, and that was a line. And from that came the screen as we know it. Now, the form factor of the screen, the page layouts, the metaphors of Microsoft when it copied Xerox, and the Macintosh, the file folders — everything to do with layout on the screen was what an office looked like. All these things are, if not American, Western-centric. And the American keyboard is not the same, by the way. French keyboards are different. So you have all these weird things that were introduced by — Judd • 34:56 There's a croissant button. Horace • 35:00 The fact you have all these accents. But the thing is, the world adapted and internationalized what was effectively an American worldview, or compute view. And now, by the way, in AI it's the same thing, although it's English-led. The techniques can work in any language. But the leadership that comes from the United States, as far as AI is concerned, is — more or less people aren't questioning it. Who knows how it would have been different had it come from somewhere else? But I think the aspect of unified compute is not necessarily a counterpoint to the disunified cultures. In many ways we are much more alike culturally than we used to be. The Arabs in Syria — oh, to give you another example. If you go to Saudi Arabia — a friend of mine went there recently; I haven't been. I've been to Dubai, but I'm embarrassed to say I haven't been to Saudi Arabia. But if you go to places in the Middle East, it's burger joints. It's chicken joints. It's fries. It's ketchup. These are not what Bedouins ate. And probably there are restaurants that still serve indigenous cuisine, but they are one in a thousand, literally. So it's amazing to me how that American culture is everywhere. Maybe the Middle East is more skewed than, let's say, India. But still, the Indians know America very, very well indeed. Judd • 36:50 Not that I wouldn't love a traditional Bedouin feast, but a hamburger joint works pretty well. Horace • 37:00 It's exactly right. The economic models that scale, and that are replicable because of their inherent efficiencies and demonstrated value, are quickly adopted. What seems to be divisive, I would say, runs not on cultural lines, it runs much more on human nature being roughly divisible into several personality types. And then those divisions are amplified by the media you consume, and possibly by the agents in the future. And so you might be predisposed to lean one way or another politically — which, by the way, I think is one of these unspoken truths, that somehow there is a genetic component to political affiliation. And it's very difficult to actually get people to switch. Once they establish their — of course, there are the independents who claim that they switch, and probably independents are the majority — but nonetheless, there is — I think what algorithms discover, because they offer you things, and you react to things, and they offer you more of the things that you tend to dwell on — they immediately are able to characterize you based on your consumption. And then they create a dysfunction, because they then feed you things that exclude what other people see, and you become radicalized. And you can do this on very basic things, like cats and dogs. Cat lovers never see dog pictures, and then they grow up and say, oh, I hate all dogs. I'm exaggerating, but I think this idea of, we end up being divided — we're unified with the fact that we use the same computers, the same interfaces, possibly even speak the same language. A lot of people speak English. But then you divide yourselves — you divide into cat people and dog people. And the more you consume, the more you are the radicalized cat person. But do we want to talk about John Ternus at all? Judd • 39:25 Horace, who would win in a fight at their primes: Steve Ballmer on stage at a developers conference, or John Ternus preparing for a WWDC demo video, in a skin-tight t-shirt? Horace • 39:42 Easy. Ternus is going to completely crush Ballmer. Let me — oh, yeah. Look, Ternus was — Judd • 39:52 Ballmer is hyped up on all those sales figures and the developers — Horace • 39:55 All that — pulls a muscle, screaming, "Developers, developers, developers." He pulled a muscle on stage. Ternus — was he what, varsity in college? Swimming? The guy can take his team off and do hikes in the mountains. Swimming — I did swimming in high school. And swimming was — Judd • 40:17 That might help you if you're being surrounded by salmon, but — Horace • 40:22 We're talking about dolphins. No, dolphins can be very powerful. But look, swimmers — come on. Well, if anything, he can run away from him. Judd • 40:38 He'll need to run. I mean, he might have more endurance — that would be the thing. So I would say Ballmer has more brute strength, and Ternus has more stamina. So if he can evade for a little bit — Horace • 40:56 Could he do one of those kick turns in the water? I don't know. I'm a lover, not a fighter. I don't know how to evaluate fighting ability. Judd • 41:09 But I will say this about Ternus — I don't know if you're aware of this, but the company he worked at before Apple, which is, I guess, thirty-some years ago at this point, was a VR company. Horace • 41:21 Yeah. But that was his first job, and he was there only a couple of years. And I've read — Judd • 41:26 Isn't that exciting for all of you Apple Vision Pro aficionados? Horace • 41:29 Yeah, yeah. No, I think he knows that. He's got ideas there. He did something in grad school or undergrad to do with helping people who had some sort of disability — assistance, robotics or something, I forget. And then he went to a VR company, and that would have been like 25, 30 years ago, like you said. And then he went to Apple and has been there since. I think the first product he worked on was a cinema display, of which I have one, by the way — or had one, anyway. Tremendous product. But the thing I said about him is that I use the word engineer. He's like a real engineer, and he's an engineer who can connect with non-engineers — but "engineers" is too broad a topic. You can say, well, he's product, or he's R&D — but he's all of those things. I think it's important to get a person like that to retain talent. It's not just motivational. There's a big problem, I think, Apple has of turnover. Now, it's no bigger than any other company. But in the case of Apple, they need to keep people more than other companies. They need to have that loyalty, because things take a long time. So if the project you're on isn't going to see the light of day for seven years, it would be a pity if you have to switch over the team three times during those seven years. There's going to be big problems with continuity if there's turnover in product teams that are committed to long-term projects. So that's an issue that Apple has to contend with. And the way Steve dealt with it — I think this is where the questions of culture come in — I think Steve offered to his greatest people the chance to do their best work, and not to be distracted by politics, by management which has turf wars, or has an agenda. Managers have personal agendas, empire builders. And once that work is hopefully finished, then millions of people will use your product. I think these are the motivations of the engineer, of the creative and analytical type. And by the way, you could argue the same thing for someone who makes a movie. If you say to somebody, hey, come and work on my project, here's a bunch of money — but if you're working with this great team, and we have a great project, a great script, a great director, that movie could end up being seen by a billion people — you might say, you know, I'm going to give it my best. And forevermore I can reflect on that. And whatever I do in the future, the glory of that product will shine upon me forever. And that doesn't mean necessarily you get paid a lot because of it — probably not; probably you'll get a little bit of residual value from it. But you'll have that on your resume. And believe me, people are going to come out from everywhere asking to work with you, simply because you're glowing from the glory of that project. So I think — now, that sounds vain, but it's more than that, because I think the engineer devotes so much of their time, their life, early in their career, their education, their learning, and everything else — it's brutal. It's quite a challenging program to get through. And at the end you feel like, hey, I'm not going to use 10% of that capability — I hope not, otherwise I wasted all this effort. Secondly, I hope that I can make an impact, not just make money. And you can argue the same for a doctor. A doctor probably feels great if they get a nice job — maybe they're a lobbyist, maybe they work in compliance, maybe they end up in something else with their medical degree. But if you're a practitioner, and you end up saving people's lives — or, in the case of our friend Dr. Tommy Korn, he saved 23,000 patients' eyesight — I can't imagine how satisfying that is. Same thing for the creators of the Macintosh, right? And they say that's why he had them sign the inside of the case. You guys really made a miracle, and those people can be proud. So that's why I think Ternus — or JT, let's call him JT — I think he will offer this to the people working there, as did Steve, and as did Tim. But in the case of Tim, it was a secondary thing — no, that's the wrong word. It was through other people that he inspired, right? He would say, well, we have good people, and they'll inspire you. So I think that's the directness of JT's connection with the teams — that he was in the trenches with them, working on the same things, that he stuck it through 25 years, and now, as a result, he really made it big. Not that they're all going to be wanting to climb the ladder — that's also not necessary. But anyway, motivation and retention. Remember, we talk about satisfaction a lot. The satisfied customer is number one priority. Well, the satisfied employee is probably the number two priority. Satisfied employees at Apple are a really, really high priority. And I remember being asked years ago, what do you think keeps Tim Cook up at night? And I said: employee retention. It was true then, it's true now, and I think it's going to be true for JT as well. Judd • 48:10 So Steve Ballmer is six-five. I could not find a published height for Ternus, but he looks to be about the same height as Tim Cook, who's about six feet. So I think one-on-one, if it was like a bar fight, I think one-on-one Ballmer would have an advantage. But basically what you're saying is, more people in the bar would back up JT than Ballmer. Is that — Horace • 48:39 Well, yeah. And I think JT's going to — Judd • 48:41 He would inspire more people. Horace • 48:43 He's never going to be within reach. If Ballmer's got the reach, with the height, I think JT's going to dance around him and get him with a lateral move, whatever the term is. Judd • 49:04 A hook. Sure. Yeah. Horace, this has been fun. Thank you for taking the time. Thank you to everybody listening. We will be back again very soon on Asymmetric.
In this episode of Asymetric Podcast, Horace reminds himself to buy flowers, shares the one product he feels has set Apple apart over the years, and gives us a preview of his latest research.
Now in Beta for Asymco One Subscribers. Subscribe to an Asymco One from your favorite Podcast app.
In Account > Asymco One App Access (Beta)tap on the podcast or newsreader app of your choice. This should open your app and subscribe to Asymco One feed.
Ben Thompson of the Stratechery interviews Horace on the Stratechery Plus Podcast to discuss Horace's journey to become an influential tech analyst: early career in research, business school under Clayton Christensen, and his time at Nokia during the rise of the iPhone.
The conversation further explores Disruption Theory in the context of both smartphones and AI, why Christensen misjudged Apple, and whether AI could challenge today’s tech giants. It also marks the launch of Dediu’s new paid service Asymco One and reflects his continued conviction in Apple Inc. at its 50-year milestone.
Ben Thompson • 00:06 April 2nd, 2026. Good morning. This week's Stratechery interview is with Horace Dediu of Asymco. Dediu started Asymco 16 years ago and was a major inspiration for Stratechery. While Asymco remains free, Dediu recently launched Asymco One, a paid offering primarily focused on Apple that includes additional analysis, research, newsletters, a conference, and more. In this interview, we discussed Dediu's fascinating background, including coming to America as a refugee, working as a researcher at an offshoot of Bell Labs, and what he learned and didn't learn at business school. It was there Dediu met Clayton Christensen, who we worked with closely. We discussed disruption in the context of both the iPhone and AI, and why Christensen got the iPhone wrong. We also covered Dediu's career at Nokia, and why the company was so oblivious to the iPhone threat. Then we jumped to AI. How long will it take to become profitable and fully diffused? And is Apple the only big tech company that might be disrupted? Finally, we discuss Apple at 50 and why Asymco One is the ultimate evidence that Dediu continues to be an Apple believer. On to the interview. Horace Dediu, welcome to Stratechery.
Horace Dediu • 01:09 Great to be here. It's nice to see you, Ben, long time, but I've always admired from afar.
Ben Thompson • 01:17 Hey, well, no, it's a real, the honor is mine. You know, it's a real honor to have you here, not just because you're one of the preeminent analysts covering Apple, whose 50th birthday was this week. So it's a great time to finally have you on. We'll get to that in a little bit. You're also a major influence on Stratechery. Your site, Asymco, was one of my favorites before I started Stratechery. A great site name that I kind of tried to mimic and mine was terrible. I'm still very jealous of Asymco. Great name, great logo. You got it all working. And you sort of gave me real confidence that there was a market for the sort of analysis that I felt I could provide. And when I started, I was a big reply guy for you. I was super excited. You would compliment my posts on Twitter occasionally. And you gave me a bunch of links on a Simcoe. So thank you for that. I'm here to say thank you.
Horace Dediu • 02:04 Oh, you're very welcome. I was always happy to see your work. And actually, I was very grateful that people picked up the torch and ran with it. it was a beginning of an era at the time where analysts could actually have a voice. but suddenly going out on your own and doing it online was a big new thing with blogs, you know. And I was happy to see more and more people take up that challenge, you know. My inspiration was John Gruber also because he was doing it, but he was doing it as a like more of a tech, let's say, product and not so much business. It was more like technology analysis, but and obviously product review and all that. But those are amazing times. And by the way, just to plug myself a little bit, although Asymco has been around ever since, well, before it's trajectory, we just relaunched into Asymco 1, which is for the first time a subscription version. 80% of what we do is still public and is all readable. There's a little bit behind a paywall, but it's like mostly that's intended for people who are investors who may want to get some of the data, some of the numbers. And so we keep some of that a little bit more private. I'm still very willing to share a lot of information, though. So we're still publishing a lot. And we just launched it a couple of months ago and kind of excited to get back in the game and writing on two to three times a day.
Ben Thompson • 03:41 So it's super exciting. Yep. Well, that is the other reason to have you on. You are, like you said, sort of back in the game. Let's get to that a little bit. Before we get to what you're doing now, though, this is the first time I actually appeared on your – you had a podcast called High Density that I appeared. I think I was the third guest that was on there. So we did talk once. That was in 2013, I think. But you have never been on Stratechery. And before – whenever someone comes on the first time, I love to get the back story. And I think you have a particularly interesting one. Lots of pieces I sort of want to dive into. But let's go back to the beginning. Where you grew up, not the United States. How you came to America.
Horace Dediu • 04:22 I think your education path is particularly interesting.
Ben Thompson • 04:24 Let's go back to the beginning.
Horace Dediu • 04:25 I'm going to try to make it real fast. First of all, I'm older than Apple.
Ben Thompson • 04:31 I'm not. That's how I started my article this week. I'm like, most tech companies, I can remember the origin story. Apple is not in that camp for me. Okay.
Horace Dediu • 04:41 You know, we're separated for a few years. Actually, I was born in 68 and Apple in 76. But the thing is that I was born in Romania at a time when it wasn't part of European Union or it wasn't it was behind the Iron Curtain. And my father was sort of wanting to leave and became a dissident. at that time, wanting to leave a country that was communist was considered a crime. So you were persecuted. And so it was pretty tough times. But we made it out. We were refugees for a while. And we first moved to Italy as stateless persons. I didn't have a passport.
Ben Thompson • 05:23 I was not technically a citizen of any country. Is there a dramatic story about how you actually
Horace Dediu • 05:29 made it out of Romania? Slightly. I mean we, we, they took away all our possessions. So all we had was one suitcase per person. And I was like nine years old. So I had to carry my own possession with me. So like four people, two parents, two children, having to leave a country with nothing, no money, no cash, no jewelry was allowed. It was very tough to, to sort of, but we left in an airplane. So we didn't have to like fight our way.
Ben Thompson • 05:54 Yeah. Like not quite Andy Grove style, but yes. Yeah, exactly. So,
Horace Dediu • 05:58 So but we made it out in Italy and then we applied for immigration to the United States under some allowance for people who are refugees. And we made it. And we got there about 78. So I was a year in Italy and I learned Italian, by the way. I was like thrown into a school because it was like we left in August and in September the school starts and I had to go to attend a school in Italy. I didn't speak a word in Italian, but I learned it pretty quick because Romanian, if people don't know, is actually a Latin language. So it's pretty easy to pick up another one. And at that age, you pick it up real easy. Anyway, so I stayed in Italy. We stayed for a full year and I took a whole year of schooling there, which was great. It was elementary school, but still. Then we went to the United States and we had to find sponsorship. It was tough to find a place to live and so on. And we ended up in Cleveland. We thought we'd be in Boston at first because there was a church willing to sponsor us there. We ended up in Cleveland. And that's where I grew up, more or less, like up until high school or late high school, actually.
Ben Thompson • 07:02 I didn't realize you're a fellow Midwesterner. See, all the good analysts come from the Midwest. It's great to know. Oh, absolutely.
Horace Dediu • 07:07 And yeah, no, Midwest made a big impression. That was my first real view of America. And so we're talking 78 to 84. I lived in Cleveland, or it's suburbs. At the time, it was Lakewood, Lakewood, Ohio. It was right next to West Cleveland. And then we moved to Boston at the time, 80s. You know, we're talking 84 now, right? Classic birth of the Macintosh-type time. But it was also booming in tech, especially around the 128 belt in Boston. My dad got a job there.
Ben Thompson • 07:40 So was your dad technical as well?
Horace Dediu • 07:42 He was a mathematician, actually. So he was a professor in university. So very, very math-oriented family. My mother also was a teacher of mathematics. So I was brought up in that tradition and plus you're not really educated in business or finance. You know, people don't realize this, but when you grew up in those places at that time, you didn't know what a credit card was. You didn't know what the Wall Street Journal was. You didn't know what a stock price was. And you weren't taught this in school. You didn't go have a summer job or learn any of these things. A lot of Americans learn by osmosis. They learn about business. They learn about every aspect of finance and accounting and all these things. You kind of get into it. For us, it was a very abstract thing. And so I actually applied myself to try to figure it out. But that's a story slightly later because I took up engineering as my undergraduate degree. And I did that at Tufts University, which is near Medford or in Medford, where we lived in Boston area. And then I actually did a master's as well. And I got a job in the meantime, between those two degrees, working at a place called
Ben Thompson • 08:51 GTE Laboratories, which was kind of like a mini- By the master's, are you referring to your MBA or you also got a master's in engineering?
Horace Dediu • 08:56 No, no, no. I got a master's in computer engineering. Got it. Completely nothing to do with MBA. This was 92. Okay. And so I had an undergraduate degree in computer science and another one in electrical engineering. It was a complicated situation. I got two undergraduate degrees.
Ben Thompson • 09:14 You could make the whole computer, not just half of it.
Horace Dediu • 09:16 Yeah, I kind of had to, yeah, long story. But anyway, I also had a master's in computer engineering from the same university. But at the meantime, I was working. So I was working through my master's. I was working at the GTE Laboratories, which was actually pretty prestigious because this was like a mini Bell Labs. This is like where you were a researcher doing really basic stuff. And at the time, the research I was working on, I was a junior guy, but it was a senior what they call member technical staff and the senior uh project uh leader was working on information retrieval now information retrieval just to give you background was the name of what search became search was born with essentially the internet or even a little bit after that with you know altavista which was one of the first search engines and you had other you know other alternatives, but Google is the one that ran with it. But basically, I was doing this 10 years earlier. So we were not yet in the internet world, but there was still a question of how to retrieve documents from large data sources, mostly textual. And was this structured or unstructured sort of data that you were working with? It's unstructured. So we were training ourselves on things like 20 years of the Wall Street Journal, but it wasn't hyperlinked data. It was like plain text, huge amounts of text. But the big thing that happened between when I was there, which was 92, roughly, and 2000, was that the internet took off. Now, we were using the internet in a much, much simpler way without the worldwide web. It was the internet back on, it was just FTP and Telnet and other things that was done in laboratory type environments or academic type environment. So I was very much into all of this stuff because I grew up with, I shouldn't say I had a personal computer at home, but I grew up with mid-size, mid-so-called mini computers, which were from digital equipment or from IBM or from various like workstation, Sun, Apollo, these things. So I was like a command line guy using Unix. And for me, PC was actually passe by about 1989. I was already jumping into these computers that were much more powerful. And so we had the X-windowing system, which was very cool. It was like today, you would say it would be like a Chromebook. It was like a terminal, but it was graphical. A lot of stories. But basically, I was in that world for doing research for six years until I kind of had, like I said, very curiosity about business. I just didn't understand how it worked. And I thought, hey, the way you learn business is by going to a school that teaches you business. That was my naive idea. I said, well, what schools teach business? It would be business schools. And so I applied and I didn't get in the first time I applied. And the feedback was that I didn't really have business experience. You needed a little bit. You needed something. And all my work was like being a very technical researcher.
Ben Thompson • 12:26 I'm the guy that went to business school from being an English teacher. So I know exactly the challenges that you're talking about.
Horace Dediu • 12:34 But it was like, again, they just gave me nice feedback. And then I said, okay, I need a job in business, quote unquote. So it turns out I was headhunted by someone to chase Manhattan. Now it's called Chase, I guess. But it was back in, again, 93. And I went to New York and I worked in effectively an IT role. So it's not very challenging technically, but it was at least in a business environment. And then I reapplied the year after. And lo and behold, I got in. And so I had to cut short my New York career, my IT career, my banking career as it was. And I went back to Boston and I did two years at Harvard. And that was when I was kind of, I was partly blown away, but also partly disappointed because actually there was no theory of business.
Ben Thompson • 13:29 Right. No, no. Tell me about this. Because you said before you were naive. In what way were you naive?
Horace Dediu • 13:35 Well, I thought there would be a theory that because when you learn engineering, You learn first science and you learn basic physics and chemistry and you learn mathematics and you learn that things are axiomatic and things are built on top of each other so that there's consistency all the way up the stack. So the way a computer works can be traced all the way down to the physics of subatomic physics, if you wanted to VLSI circuits, all of these things are based in physics. And so there was this notion that, okay, we start with the axioms and you build on those and you make proofs or you establish causality at least, like A implies B implies C, therefore A implies C things of that nature. So you do a lot of math and you think that that's what business does also depends on these things. But then when you go to a business school, you realize the way I put it retrospectively is that it's like equivalent of sitting around a campfire telling stories.
Ben Thompson • 14:34 Especially at Harvard where everything is a case study.
Horace Dediu • 14:37 Everything's a case study. And they got their idea, by the way, of case studies from the law school, which was just across the river. Because when the business school was started, they didn't know how to teach business. And they just said, hey, they have this thing called cases in the law school. And basically, if lawyers can learn law this way, then maybe business managers can learn business this way. And that's where it came from. And I think Harvard was like the second school. So at the time, it was like 1903. It was the birth of the business school was like not that long ago. Anyway, so you go through the case method. And yeah, there was an inkling, however, of a theory. And it was maybe some heuristics and there were some rules of thumb and things like that. And in finance, you do a bit of math. Okay, that's fair about that. But the thing that really influenced me was my professor at the time who was teaching us operations. And his name was Clayton Christensen. And he stood up and then said things to me which resonated deeply, which were that, hey, we don't know what the causality is, but we are going to find out. And there are times in history where businesses or parts of business management were completely unknown, but we figured it out. And the example you would give was like in operations is that the factories used to be either good or bad. And the only determination we knew whether they were good or bad is whether there was a good manager or a bad manager. So a good manager was worth his weight in gold and was always getting poached to run another factory because somehow he had the magic touch. But that was like in the 50s. And by the 70s, we knew or even 80s, we knew that you could manage factories to be reliable in their output without having to rely on some genius. And the Japanese, partly Japanese, are responsible for teaching us this, although they themselves learned it from Americans much earlier. Long story, but basically at the business school, I was like, wow, hey, this is actually exciting because this is an emerging theory. So maybe I can help even figure this out, you know. And so at the time, Christensen was writing his book that became a classic, which is The Innovator's Dilemma. He was actually writing it while he was teaching us. So he was even using some of the materials on us. And we didn't know at the time, but they came out as chapters in a book. So and two or three years later, I think it was 98, well, I graduated in 96. But in 98, the book came out, the internet blew up and suddenly everybody was doing startups. It's funny because in my graduating class, normally you would go do management consulting or you would do finance. These were the two major categories of employment for graduates of the business school. Historically, it was more like general management, but that had gone out of favor by the 90s. Nobody really went to become a CEO of IBM from there. But finally as the late 90s rolled around, suddenly five years after everybody graduated, they're all working in startups.
Ben Thompson • 17:36 But I actually went straight to a startup in 96, which was very unusual. Well, I want to ask you real quick about the Professor Christensen. it was there an aspect where it was actually less the theory that compelled you and more the fact he was trying to sort of systematize and produce a theory in the first place it was just that there
Horace Dediu • 17:58 was a hint of a theory that he he proposed that there are heuristics that work um for example the toyota production system um tps famous the machine that changed the world you know he he went through that. We went through that. And you explained, for example, just asking five questions why is better than asking one question or no questions why. And the Japanese kind of had this rule of time that you should ask five whys because you're going to eventually come to the real cause of a problem. And although that's not really a very strong theory, it's actually an extremely powerful idea that you should seek out the causality. And then you ask the same questions about why people buy things and as hard as it is to believe that the determination of why people buy things was a complete unknown and probably still is but to solve that they propose a theory called the jobs to be done theory as opposed to the kind of like women buy this and young people buy that it was not
Ben Thompson • 18:56 the attributes of the person not the attributes of the thing they're trying to do which was completely
Horace Dediu • 19:05 different it's like your outcome based your circumstances based and and all you had to do was be patient enough and and ask the people who were making the purchase decision follow them not not to ask them why they do it because they themselves don't know that was another piece of the puzzle you can't just ask anyway so so what he had was he called it like drawers you would pull on the cabinet you know and inside each drawer there was a theory so kind of you try to pick and choose from a bunch of ideas and stuff so it's the basic beginning of empiricism. It's like whole pattern recognition. Oh maybe we should categorize things. These seem to go, if things go together and these are separate, this is very basic stuff. And I with my own background, I wouldn't say it was like very deeply scientific, but at least you get a bit of introduction to the scientific method. And it was like, wow, actually, this is exciting, because there's probably a theory that's out there, which may or may not be true, by the way, in retrospect. But I was excited at the time to think that there was a theory. And secondly, that it seems like this is the way to discover it. And so, but I wasn't yet ready to dive into being a researcher on business theory. What I was hoping for is to get a job and pay off my loans.
Ben Thompson • 20:19 Let's circle back to Christian Sid and sort of some of the hints you just gave about the theory and how applicable it might be. Certainly something that I've written about and thought about a lot over the years. But did you go straight to, you mentioned you went to a startup. Where does Nokia come into this journey here after business school?
Horace Dediu • 20:36 Okay, so Nokia was like my third job. I did one startup with a partner. Then I went on my own. They did another startup. This was like about 99. I hopped out and did my own. This was going to be in the e-book space.
Ben Thompson • 20:51 Got it.
Horace Dediu • 20:51 So then my first startup was document analysis. We were using today, we wouldn't call it AI, but back then it was called AI. We were trying to look at a document and break it up into its components and then try to reconstruct the document. And that got applied to PDF, by the way. PDF extraction is something that people are kind of doing now. But that takes essentially, it took an expert system to do that. So that was the first start. Second one was actually with the knowledge of PDF, I was able to take all printed materials and make e-books out of them. Essentially, a production system for e-book publishers. So they could take their pipeline, which is print-oriented, and then reoriented to this new thing we call e-books. And at the time, these were going to be read on computers mainly, but on the horizon, I was watching and talking to a lot of people on the horizon with devices. They were, initially they were PDAs, but we were looking for the done. And I said, phones are going to be huge. Already dumb phones, cheap phones were quite popular at about 98, 99. And millions and millions in the world, right, were sold every year. And I said that little screen could get bigger. That was all my, that's all I observed. And then I got on an e-book standard committee and met somebody from Nokia there. And I told them, guys, and this was in the U.S., but the Nokia guy was finished. But I told them, guys you're the ones that are going to dominate this because the phone is going to be the reading tool of the future. And they're like, you're the only person who agrees with us. Everybody in the U.S. Well, that's interesting.
Ben Thompson • 22:37 You're the ones that agrees with us. That implies that they saw the future. Oh, absolutely they did.
Horace Dediu • 22:45 this is 98. In 1996, there was a movie called The Saint, in which it featured a smartphone. This is 1996. Val Kilmer was in it. And he had this opening phone, which they called it the brick. But it was a phone that opened that had a screen and a keyboard inside a phone in 1996. And by 1998, they introduced a new version. And by 2000, they had a color version. And that was called the Nokia Communicator. Already on the third version. And that was like such a cool product for me. It's what I carried for many, many years. And I read books on it in 2000. I read the Harry Potter series on the phone in the year 2000, 2001. Think about it.
Ben Thompson • 23:28 No, we're two pieces of the pod here. I remember I got my first cell phone. I want to say 99, 2000 somewhere. But I quickly figured out how to get an RSS reader. Or I think it was like some like website where you could like get your feeds. And I would just read on there. like four lines of text all the time, which was great until I got my phone bill, which was astronomical. I'm like, oh, shit, the data was quite expensive back then. But yes, this is the things we we we I
Horace Dediu • 23:58 mean, and the thing was, OK, so just a little back to the story. So now people were like, this is only guy in America who seems to agree with us. The Japanese had ideas, the Europeans had ideas, but I was like in the US at the time. And so I said, all right. And then they said, would you be willing to just be a consultant for us? We want you to write a report on how phones could be used to deliver content in the form of written content. It could be newspapers, could be magazines, could be books. But these were all businesses. These were publishing businesses. And I said, as far as media is concerned, this media problem can be solved with phones, media distribution, how do you make a profit, what's the margin, how do publishers work, how do you get deals with them, how do you protect it, just the whole business plan for distributing. And I wrote it up about books. And then they said, great, now we want to actually implement some of that, which would be willing to come on. And by now, we're looking at year 2000. In 2001, as you know, as we crossed into 2001, the great crash occurred.
Ben Thompson • 25:05 Yep. And suddenly a job offer from a big phone company sounds pretty great.
Horace Dediu • 25:09 Yeah, but the crash occurred and it impacted my startup because I couldn't raise money anymore. And that's why I said, OK, I'm throwing in the towel. I'll take this idea to Nokia and build it inside of this company. So for the first year, I actually worked out of the U.S. and then they invited me to come to Finland. And I fell in love with it, not to mention finding someone to fall in love. Yeah, I'm still here. But let me, so we created an internal venture called media distribution. And it struggled for a couple of years now. We partnered with a publishing company here in Finland that is the biggest newspaper and magazine company. And we worked with them. Again, 9-11 happened. We worked with them throughout that period to test this idea of distributing content on phones. And that's how I met my wife, actually, because she was working for the publishing firm. and we were in the meetings together. And my point is this, that remember when Apple News launched, like I don't forget how many years ago it was already. It was five, six years ago. And she texted me during the keynote. She goes, you realize that's what we were working on together in 2001.
Ben Thompson • 26:22 Right.
Horace Dediu • 26:22 It was called Project Melissa. I can save that now. Project Melissa was this idea of Apple News today. And that was 25 years earlier. Yep. Or maybe 20 years. And that just goes to show you sort of the story of my life. I was doing search 10 years before Google existed. I was doing e-books 10 years before Amazon launched the Kindle. I was doing smartphones and media distribution on smartphones 20 years before Apple more or less showed how it's done. And so my problem has been that I kind of see things happening or see where things are going, but way too early. And that's why one of the theses I have over time is like, I don't know what to call it, a quote I have. It's the idea that the difference between a futurist and a billionaire is knowing when one thing happens. So it's not about knowing what's going to happen. A lot of people are very good at that.
Ben Thompson • 27:31 Including Nokia, to your point.
Horace Dediu • 27:33 Nokia, science fiction writers, Elon Musk, a lot of people predict this. But getting the timing right is where the money is made. And so that was one of those lessons I learned.
Ben Thompson • 27:45 Well, when you talk about the publishing and Nokia and the reading and all those sorts of things, what it makes me think of is when the iPhone comes along in 2007, And I'm very curious to get your perspective on what that was like inside Nokia when the iPhone launches.
Horace Dediu • 27:59 I'll tell you exactly.
Ben Thompson • 28:00 But before I get there, but to this publishing point specifically, the key bit was the Internet was permissionless in terms of producing content. Like, it's great that you met your wife, but the fact that you needed to be in a situation where you could meet your wife was actually the reason why it wasn't going to happen. Because if you have to make a deal to do everything, it's just never going to get there. Whereas if you can just surf the Internet, the real Internet, and no one needs to do anything to adapt to it, suddenly you get it all for free. And then you get the virtual cycle going where they're making stuff for you. And that was sort of the, that's the timing bit is like the, the external structure around what you're doing.
Horace Dediu • 28:41 Yeah, it's, it's, it's complex and it's multi-causal and you're right. It's multiple, the reasons why things happen the way they are. And it's just not foreseeable. The internet was, and by the way, the thing that really caused the project to fail and be abandoned, this media distribution side note, it was actually the fixation on DRM. And DRN actually killed a lot of great businesses with content ideas back in the day, whether it was music or video or textual. It was people just obsessed about protecting it before they obsessed about distributing it and making it great. And this is why when iTunes came along, even though there were some circumstances there with being on a Mac and not on the PC, that the publishers finally said, why don't we go ahead with this? So long story there. But as far as what Nokia was doing, so that was like for four years I did this startup inside of Nokia that was kind of abandoned. And then they switched me to, because I was kind of, okay, he's the guy with an MBA, he's the guy with an engineering degree. He kind of can speak both languages. Let's put him in charge of doing some analytics. So finally, I got into the job of essentially developing a strategy analysis and doing competitive analysis initially. So it was like they said they asked me to do Microsoft. So Microsoft was the biggest worry for everyone because they had intentions of being in the phone business. They made no secret about it. They had prototypes. They were working with competitors of Nokia to give them the operating system so that they would swap Nokia with like Samsung running Microsoft, essentially mobile. Went for many names, but essentially that was the effort. They were pushing on all fronts, except Nokia was the one that was holding out and saying we've got our own operating system and so on. So they gave me this job because every other company was hardware. All the analysts were covering hardware. That was the only guy who was covering what essentially was a software company. And in doing that, I was also sort of nibbling at Apple a little bit because the iPod had come out. The iPod was doing amazing, but it wasn't a phone product. And I was kind of looking at it a little bit, because now Christensen comes back in the picture, because his book had taken off. He has already written the second book, which is The Innovator Solution. And I was like, hang on a second. A lot of stuff that I read in the book, and I remember back from my days at school, applies to Apple. here because they're doing a lot of interesting things with being disruptive as the case may be. And Nokia itself had been disruptive in its early years. So, but mostly I'm focused on Microsoft. And my point was that we can fight this battle and win, but we got to be very careful. And there's a lot of twists and turns there, but I took it upon myself also to understand what's going to happen with this media product from Apple. And then I began to write a few internal notes because nobody was covering Apple. This is really interesting and important. No one's not coming. It was no cover. No, no. Imagine you have a team of a dozen analysts, you could put on multiple jobs you assign people to multiple problems. No one thought that Apple was a problem to be looked at even like, okay, just put it part time when you're on your plate. No, there was nothing interesting about it. And part of that had to do with the fact that they were one foot in the grave already in the 90s. And now they were more or less like this little toy media company. They didn't really have scale. Phones were on the orders of billions of users already. And this was iPod was in the tens of millions, maybe a hundred million. So it was orders of magnitude. There was no real worry there. But I was really annoying at this thing. And I started building a model. I remember distinctly opening a spreadsheet, looking at, I had access to a research report. I was looking at research reports and I was thinking to myself, okay, let's look at the history of the iPod, how it's growing. And I started to match that to the Razer, which was the most viral product at the time, the Motorola Razer. It was like, even Nokia was jealous about this thing. And so, and they were like, Damn it, they sold 50 million in total. That was like, at that time, they had a cumulative sales of 50 million, which was considered way too scary. And BlackBerry was another one, by the way. So I'm doing this and I'm like, hang on a second, what if they do a phone and it's a combination of the Razer and the iPod, could that resonate? And I just put it out there. I said, it's possible. And there was a rumor of the iPhone coming out. Right.
Ben Thompson • 33:31 So Apple did do a Motorola Razr with iTunes functionality. Did that actually end up, because that was a flop. And did that actually make people not as like more relaxed?
Horace Dediu • 33:46 No, it was, if anything, because we knew that it didn't run an operating system. It didn't have a developer API. Okay. There was nothing, no hooks in it. It was just an appliance. And as such, it was like a feature phone. And that was not interesting. We had been talking and pounding the table on smartphones already since 2001. Remember, when I was joining, we had a communicator. And I was also, one other job I had as an analyst is to project the smartphone market. We had Symbian, Series 60. We had the interfaces. We had all picture phones, music, etc.
Ben Thompson • 34:20 I was a user as well.
Horace Dediu • 34:22 And I had done the numbers, by the way, and by 2005, more or less people were burned out on smartphones. Because the projection was like this, but it was more like this. It wasn't growing as much as you thought it would. And so a lot of people kind of said, especially the top manager was like, you guys are very enthusiastic about the software stuff, but it's just not working out. We're going to double down on hardware. So there was a lot of burnout. So, but I kept looking at the phone at Apple and I suggested, hey, what if this thing scaled away? Like I said what if they could sell as many as 50 million? That was my provocation. And people were like, dude, I was essentially taken aside and say, tone it down, okay? First of all, you're not doing yourself any favors by being so provocative. People, you're just going to lose credibility. my boss, who's a great guy he just took me aside and said, just don't do that. You know, it's bad for you.
Ben Thompson • 35:22 And this is like 2005, 2006, around then?
Horace Dediu • 35:25 Well, already 2006, because the iPhone was rumored. It wasn't out, but it was like, if you're going to have iPod success and you're going to do this crap phone with Motorola, you're probably thinking, maybe they're going to do something interesting beyond that, because we knew they could, in theory, do something. We didn't see the touch interface, but we saw maybe like a scroll wheel or something. You know, Tony Fabdel was running the thing. And anyway, so bottom line is like when it finally came out, it was like about this time. No, it was like almost January, I think. Yeah, January 2007. Yeah, January 2007. It came out and this was not for sale, but it was like on stage. And I was so excited. And I said, this is unbelievable. I remember running into the office the next day. Usually you socialize at lunch hour, sitting in the cafeteria, talking to your friends and asking them what do you guys think about this? And most people just said, oh, it doesn't look that interesting. aspects of it were copied. There were copies from here and there. There are other people that don't touch. You know, a stylus has been around for a long time with BlackBerry also doing amazing things with keyboard and so on and so on. So there was a lot of cynicism and sort of not really interesting. I said, man, it's running OS X or Linux or Unix or whatever you want to call it. But it was basically running a full operating system. And I said, this is going to get developers working on it. But again, the other thing, the other head fake from Apple was that Steve Jobs said, we're not going to put any apps on this thing unless we write them. So that like, oh, man so I was actually anticipating far more than even was being talked about. And for that reason, it was just super frustrating. Anyway, even two years later, I was still working there by 2009. I left in 2009. But by then, they were still not following Apple.
Ben Thompson • 37:13 How is that possible? Like even two years on, this device is out there.
Horace Dediu • 37:19 Because it still didn't have distribution. And this is the thing that consumed everyone following the iPhone in the beginning. It's like they had one launch partner. It was initially Singular became AT&T. Don't forget that the old AT&T had nothing to do with this AT&T. It was just a rebrand of Singular, which is a crappy, very small, not very small, it was maybe second tier.
Ben Thompson • 37:47 Verizon didn't want to do it. Apple did this again and again. Verizon was number one.
Horace Dediu • 37:50 They just watched with second tier. Verizon was number one. Absolutely. But Verizon was in CDMA and all these issues. But the thing is that it was a crappy network and they didn't have a lot of points to sale. They didn't have distribution. and everybody said this, you need 500 network operators to saturate the global market, right? And how fast are you going to be able to obtain distribution was the question. And so they're so cantankerous. You know, Apple is known as being like my way or the highway. And in fact, it's a very crazy thing for singular. Yeah, Verizon said no for years. And so Apple was like, this is, I'm sorry, Nokia was like, this is not going to fly. These guys are, if anything, they're naive. Don't forget, by the way, there's a separate story on how BlackBerry dealt with the iPhone. There's a movie about it, by the way. Beautiful movie. It's a great movie, yeah. Everybody should watch it. But basically, everyone had the similar responses that this is not kosher. This is not the way things are done in this business. It's all about relationships with operators. It's about getting shelf space. It's about getting salesmen in the store who are bribed effectively with a commission to tell you what to buy and like effectively yank the phone out of your hands and give you another one. So this was this was it was a very kind of dirty business at the ground floor at the street level.
Ben Thompson • 39:19 So so what do you know what was the first what was the first article of mine that I think you ever linked to? It was about precisely. No, no, you don't need to know. I know because it was very formative to me. That's what I'm going to tell you. It was basically about talking about this was how distribution worked. And what Apple changed about the whole thing was that customers actually switched networks for the iPhone. And it was doing just sort of a traditional sort of business school analysis of and pointing out the power shifted to instead of distribution to the buyers. Basically, what I ended up writing about for 13 years now is demand mattering more than sort of the supply bit. But it was the exact same thing. That's why you linked to it. You are you are already on board with it.
Horace Dediu • 40:04 But it was also the thing that resonated for me personally. Not I knew something about the phone. This is mostly I knew how big it could get. I knew that there were billions of people, many more billions than used PCs, which was by far the most dominant influence in technology was the PC. and most people oriented themselves, like even Gruber and others who were like, okay, Mac first and then all these accessories. But I knew the phone would be a couple of zeros more, number one. Number two, I also understood distribution, like you said, but also there was this problem of like the incumbency, which were all the phone makers, were so far from understanding what the software dynamics of platforms were. By the way, platforms had been more or less, platform theory was developed by Microsoft. They pretty much invented the whole idea.
Ben Thompson • 40:50 Was it because you were analyzing Microsoft that you understood the software aspects?
Horace Dediu • 40:54 Yeah, but I knew Microsoft in my gut already in the 90s. There was this little when I was at the laboratories and we're using very powerful workstations. And this like crummy PC is just outselling every great machine out there. And it's worse in every way, and yet it's still killing everyone. It crashed all the time, and yet it ran Windows 3.1, by the way, even before we got to Windows 95 and then NT as a better version of it. And all of us were like, this is awful. This is just, how could this win the computer game? The computer race. Mac was elegant, but Unix was a real operating system. And then these PC guys have a non-multitasking non-real-time, just really bad technology-wise, right? So I need enough engineering to know. And then my mind was blown, like, these guys are winning even though they're not good. All these things, you can't imagine how you have to go through multiple disillusionments before you realize enlightenment. You have to be hurt badly. This is what people don't understand, especially young people. It's like success doesn't make for greatness. Failure does. And this is, so when Apple was doing it, I also knew they had been themselves through the wringer. And I thought, how do they think? What do they think? How do they do things? Why are they focused on the customer in a world where the customer was number four on their list of importance, right? You know, distribution, technology, lock-in, platforms, developers. Microsoft in the 80s and 90s was all about those things. customer experience was not high. And those who did focus on customer failed. And I kept going back to the theory, kept going back to Christians and I kept going back. And I I had some instinct. I was not, by the way, a Mac user. I was not, I had used one yet before, but it wasn't like my main machine. I had not even spent my own money on one until about 2004. Yeah, same year I got a Mac. Yeah. Yeah. I, in 2001, I did get an iPod, but again, I was using it with, uh, well, initially with a Mac, but I had a Mac. I remember my first Mac was actually in 2000. I slightly misremember. I had a Cube as my first Mac, but my first work computer was 2004 with a laptop. And I had the first iPod in Finland and I brought it to work and I showed it to people and people loved to look at it. It wasn't available to buy. So nobody had even seen one. Nobody had seen a BlackBerry for years there after it was launched. So unless you were a competitive analyst, like you had the budget to go buy one somewhere, people just weren't exposed to these things. Anyway, so this is one of those hard lessons about understanding the response mechanism of incumbency, the response mechanism, especially these are not stupid people. These are the best in the world after what they do. The best executives at Nokia were the best people to understand phones, including engineers. You know, they need distribution. They knew how to segment properly. They knew how to sell billion phones. It was incredible. But at the same time, they had their blind spots. And so this is where you kind of have to have a little bit of faith. You're not going to work with data. That's another thing Christian said, his famous quote was like, God is very cruel. He gives us no, none, no information about the future. How could he do that? So I thought about that pretty hard. All the interesting stuff that we need to know is not available. The most important data is the one you don't have. And so then you have to rely on theory.
Ben Thompson • 44:39 To the theory point, and you mentioned Clay Christensen. Why did Clay Christensen get Apple so wrong? He predicted the Apple was doomed again and again.
Horace Dediu • 44:48 If we fast forward to 2013, I actually went to work for him. so i left at 2010 i started a simco yep exactly a couple years i did that on my own i was getting a couple of gigs out of it and stuff but uh but basically he approached me people who knew me and knew him uh had told him about it hey do you know one of your students is doing this stuff on my name he wasn't probably even reading my stuff but people recommended it and he said would you like to come to join the think tank I'm forming. We're going to get corporate money to fund my research as opposed to academic money, but it's going to be from businesses. And we're going to have a couple of fellows that are going to sit and write and think about the future. And I said, well, man, this is a dream, working with Clay, getting paid. So I took a job in 2013 to work at the Clayton Christensen Institute. And the idea usually was that you work with him for a couple of months or so, and then you decide on a topic, and then you plan on writing a book with him. So you become a co-author on the book. And so he had done this with collaborators over the years. And he had a pipeline so that a book would come out every year. His publisher essentially ensured that. So I went to him and I said, maybe we should do something. So why was he wrong on Apple? Well, the reason was the price. At the beginning of the disruption theory, his definition of the low end was that it was like a cheaper product. So the idea was that low end meant almost always a cheaper product, a more humble product. But the problem is if you measure performance, it's all relative. So an iPhone. Sorry, let's start with the iPod. an iPod, although $400 in the beginning, it was not competing with a cheaper MP3 player, which was 50 bucks at the bottom, right? Very, very cheap stuff. But it was competing against either home stereo or something like a Sony…
Ben Thompson • 46:57 A huge binder full of CDs and a Discman, which is…
Horace Dediu • 47:00 Yeah, Sony, whether you had a DVD player or whatnot, So it was very small. It was very beautiful and had amazing design and a thousand songs in your pocket. And people, that was just nowhere to be found, a thousand songs. You know, you would have a library at home fewer than that. So my observation was that what Apple was doing usually is they were introducing product that was relatively expensive. So a Mac may be more than a PC, but it was much cheaper than getting a supercomputer or something. And so the relative low-end was important, as I put it to him. And I said this, when the iPhone came out, by then it was already five years out, I said, the iPhone is a low-end computer. Now, it took an engineer to decide this because I said, it's got an operating system just like a Mac. It's got the memory and storage and even the display that are pretty good compared to a computer of a few years ago. And now we're saying, by the way the Mac Neo has got a phone processor in it. So that's the whole idea. So I said, if you compare the iPhone to a computer, it's an amazing low-end product. And that convinced him, actually. He said, yes, we were wrong to categorize only on price. We have to understand that performance can be relative to something much bigger. This is why when Apple usually introduces a very expensive product, I don't look at the other PCs. I would look at like a monitor. Let's say the Vision Pro. The Vision Pro is $3,500. But if you're a surgeon and you're putting that on for help in the operating room, which I know surgeons that do this, and there's not a piece of equipment in their operating room that costs less than that device. In fact, you're looking at 30,000 for a monitor, you're looking for 100,000 pieces of equipment everywhere. So for them, it's almost a disposable item. It's so cheap. So it all depends on what it and it gives them huge superpowers. this is an amazing product. So there's a lot of relative, you have to think relatively. And that was my point to him. And I said, we need to maybe rework a little bit the theory to do this. But what I settled on working with him was to figure out mobility and transportation and particular energy. Because remember, 2013-14, a lot of green tech was coming out. A lot of people were worried about the environment. Global warming was a new thing. And then I said, maybe we can look at the whole transportation. Apple, by the way, 2014 was when the rumored Apple car project started. So I thought everybody's going to get in this game. So we're going to have to look at cars. And that's what I, but the long story short is that after about two years of pounding the table on that, I realized that it's not the cars we've got to fix. We've got to actually find lower end vehicles, which became micro mobility. So I created the idea of micro mobility and I left to do another startup basically because I believed in so much of this that I thought rather than write about it, I'm actually going to build it.
Ben Thompson • 50:17 Well, you're still, you're still working in the micro mobility space, right? Do you have a big conference coming up in a little bit?
Horace Dediu • 50:22 I started two companies. One of them, unfortunately, ended because of COVID. The other persisted and was sold last year. But I'm still working with, I still have a relationship with the buyer. So we're still helping out. But I feel very good about it. it's again a question of timing. I'm afraid I'm a bit cursed that if I say something's going to be huge like the Vision Pro or micromobility, you probably…
Ben Thompson • 50:53 It will be, just who knows what. It's my time frame.
Horace Dediu • 50:56 It's going to take a while longer.
Ben Thompson • 50:58 Well, in this context, you saw all this stuff coming, and the question of timing is a good one. Where would you put AI in your personal framework? What is a bit of a surprise? Did you see this coming?
Horace Dediu • 51:12 Again, as an old computer science guy, having taken the AI classes in the 80s, you don't get very excited about every new AI that comes along. There's been so many. But this one was interesting and was surprisingly rapidly adopted. And it impressed a lot of people, including me. But it was very difficult to go from that to a business model. And again, the question of distribution. So I keep asking these dumb questions like, are these things going to get into the hands of people? Are consumers, what's the job to be done? What's the consumer market versus business market? Is this going to commoditize? Is it going to be horizontal? All this, by the way, is going to get written up in great detail on my website. And I've already started and I'm asking some tough questions there. But the thing I want to point out is the old rules of business haven't disappeared because we ended up with a new technology. They never do. Every new technology obeys business rules. And what are those business rules? Well, things like I said you have to have profitability. You have to understand the customer. You have to have distribution. You have to decide if it's modular or integrated. You have to ask yourself, do I stick to this piece or do I integrate to other pieces? you know, should I make my own microprocessors or should I why should I not be in the silicon business? Why should I not be in the why should open AI do its own operating system or processor? The fact that Google, a search company, made an operating system, this is not obvious. This is not obvious at all. In fact, you would have been bet against that idea back in 2000. So when you study the problem, you have to understand that in order for this company to be successful, to have the fuel it needs to grow, to become dominant or whatever its target is, it has to have some profit or it has to be, you know, you couldn't go without profit for a long time, but then you have to raise money. You have to figure out where it comes from and how to deal with the whole economic question. So technologists and business people tend to be oil and water. And historically, I think you can't usually think, like I said, because one theory is very different than another. And so now we're in a world where many are expert in both, but it's still two things in your head that are often in conflict.
Ben Thompson • 53:51 Well, you told the iPhone story before. And what it sounds like to me is you're inside Nokia, even though you're a business analyst, you were the technologist. And you were dealing with the greatest business people who were thinking about distribution, were thinking about profitability and all these bits and pieces. But because you understood software, you understood platforms, you could see what was going to happen. When you raise objections like business type objections, do you ever feel concerned? Am I a Nokia executive right now? Or am I young Horace who sees the iPhone coming and it's going to be a big deal?
Horace Dediu • 54:24 You always have to be full of doubt. I think scientists have their superpowers. their superpowers, they just are skeptical. You have to be skeptical. But here's the answer to the AI question. I did do a piece that I didn't publish, when I will publish soon, about how long it takes for AI to reach saturation, where we have to define what that means, first of all. But while I was at the Institute, I took it upon myself to ask this timing question, because I felt I was so bad at it. I wanted to understand how long things take. So I stumbled upon all this data about s curves s curve is a phenomenal uh once you understand what's behind it and how it works it's it's a phenomenal uh uh revelation it's it's it's it's an epiphany and what the s curve tells you uh or the diffusion curve or the logistics curve um what it tells you is to uh understand and jeffrey more popularized this idea of sort of that there are stages from early adoption to later or laggards. And that's based on even earlier work in the 1960s. But basically what you understand is that some things are fast and some things are slow. I know it's shocking. But in the world where we live, where everybody assumes everything's fast, there are things which are slow, like automobiles. The speed that that's changing is far slower than anyone in 2014 imagined. As a quiz, ask yourself how old Tesla is. Tesla is from 2003. It's already 20…
Ben Thompson • 55:58 23 years old.
Horace Dediu • 55:59 You know, 23 years old. I don't know exactly when it was born in that year, but roughly.
Ben Thompson • 56:04 But we consider it new because automobiles were like stagnant for like 50 years before that.
Horace Dediu • 56:09 But we think of it as a startup. We think of it as a sort of an up-and-coming company. And the incumbents are very old. But still, it has like 3% or less market share in terms of all cars sold. Actually, it's a bit even less than that. I think it's 2%. You know, the electric car, you can build an S-curve. So I did this for AI. And I did this like three years ago, almost. Two, sorry, two years ago. And there wasn't that much data to put on the graph. But what I used as a proxy, as a way of sort of calibrating this curve, were previous inventions that I felt had a similar feel to them. That is to say that they were mostly trying to do intelligence. And the two examples I used were one from the 15th century, which was called the printing press, and another from the 19th century, which was called the automatic loom. the machine that makes clothing. And those were both, I felt, intellectual machines. One was replicating intellect. The other one was encoded to create a pattern based on code, based on data. And the people who were involved in that adoption, who took it up, who invested in it, who ended up having many times been fighting over it or getting killed over it. There was a dynamic there very similar to the tension in society that we see with AI. And my conclusion based on that and a lot of others, 140 different diffusions, is that AI will take about 50 years. Now, the problem there is when you mark the beginning. And the beginning would have to be not just all NEI. I think it would have to be about, I'm still debating this, whether it's about 2003 or 2004 when the algorithms were first proposed or 2017 when the first implementations happened. And I call this as market zero. It's like the point of invention also is not the point usually where a market begins. So it's very tough to pin that thing. And then you have to ask, what do you define as adoption? and it could be many things. It could be space, like railroads is a network or it could be users, but you got to be careful because they have to pay something usually to be counted. Free stuff is, of course, easy to adopt. So maybe I'm going to modify my thesis, but I think it's a 50-year cycle and we're going to be measuring it in terms of AI being in the hands of everybody and they're using it every day.
Ben Thompson • 59:02 Well, you said you did that two years ago. Have the previous two years affirmed your thesis or has stuff maybe happened faster than you expected or slower?
Horace Dediu • 59:13 I think maybe if there's a bias, it would be maybe it's a little bit faster, but it is still not yet clear. I had the same struggle, by the way, with crypto. Everyone was saying it was going to take off. And it was people were counting wallets, but there weren't a lot of practical applications. And I kept looking for the killer apps. I kept looking for this. And although crypto is established now, I don't think it rose to the potential of replacing the things I was hoping to replace. And I was, again, the guy was a little bit maybe too conservative about it. I'm still maybe feeling that I'm not sure yet how AI sort of begins to resonate with consumers and whether it's actually going to deliver on the promise of value.
Ben Thompson • 01:00:02 it resonated in a way that makes, is it really about profitability? OpenAI is doing billions of dollars in consumer revenue, even setting aside the enterprise aspects.
Horace Dediu • 01:00:13 Yeah, but the problem is there's a huge, huge bill in CapEx that we're having to work through. And I actually wrote the piece this week, which is going to come out maybe today, tomorrow. where the valuations in AI shouldn't be PE ratios, they should be EV over FCF. And that takes into consideration the CapEx. And when you look at it that way, even though pricing has come down on the hyperscalers, they're still quite expensive. But I think the cash flow question is the fundamental question for AI. It's not just revenue. You have to be able to prove that you can generate free cash flow. And so I'm a little bit reluctant to commit to this because I don't feel I'm an expert on AI. But I think that my instincts and my data tells me that it's not going to be as fast as… Again, please tell me I'm wrong, but I don't understand the consumer business yet. And like, what is the main job to be done? I hear about consumers using it for chatting and being a companion. Is that a big job? Is that the main job? What other jobs do consumers anticipate? Or what do we expect people to do different? That's not clear.
Ben Thompson • 01:01:44 Yeah. Well, I think this is a very interesting point here, because I think the AI has clear productivity gains. But I think the history of software shows that consumers don't pay for that. To the extent they pay for productivity, it's they will buy devices. That has been Apple's sweet spot. It's software differentiated hardware. But every sort of startup that sort of starts out trying to serve the consumer with a productivity application ends up pivoting to enterprise. Because the enterprise is paying employees, so they will pay to make those employees more productive. And that's probably a big thing that Anthropic has sort of gotten right, is being sort of focused on that. And if anything, OpenAI has probably been distracted and has been hurt by the consumer uptake. At the same point, that's also why I take their sort of device forays somewhat seriously, just because they may be coming out of backwards, as this is actually the only way to make money from consumers in the long run. And if AI is that good and integration still matters, maybe there is a bigger opportunity here than people might expect.
Horace Dediu • 01:02:50 I agree. And I just feel uncomfortable about calling it this early. And I feel uncomfortable about how it's going to end up. It's like it's not even the phone business, I would say. It's more, remember, because phones were around a long time before 2007. We went through multiple, multiple huge debates about spectrum, about operating systems, about who controls network operators versus devices and so on. It wasn't at all clear until 2010 or 12, around then, what started in the 70s as far as what that industry would shape up into. And also the same you can argue for social media where the early pioneers were all disappeared. And so even though that's a behavior that's now extremely saturated in society and extremely consequential. So the other bigger question, though, I think that you need to ask the right questions. The real question to me for AI is, is it modular or is it integrated? And I think you hinted at that with, is the device together with the software? But the other layers would be like, if it's like infrastructure, and if I think it was Bezos, it's like a layer. If it's a layer, it's okay. It's like operating system, super important, super valuable, but maybe not easily valued by the user because it's background. And it's not something that you decide with you don't, it's kind of given to you. So there's all these questions about, does it commoditize rapidly? How soon do you reach a point of good enough or a point where you can't go beyond because you've reached the limit of the algorithm? So there's a lot of debates. On one hand, you're watching all these, reading all these papers, people making claims and counterclaims. And then at the same time, you're trying to figure out the economics. You're trying to figure out how long will it take for these chips to depreciate? So what is the horizon for a lot of the capital that's in use? So there's a lot of questions I still don't feel comfortable with. And so I think the safe thing to do is to kind of assume it's going to take longer than anticipated.
Ben Thompson • 01:05:15 That's my assumption. This is a point I've been coming back to again and again. What's so intriguing now and also very uncomfortable as someone who has to, like, give takes multiple times a week for weeks on end is the high degree of uncertainty. And I think it's layered on with everyone has opinions. But also, I think there's so much tenseness in the air because of the amount of money that's at stake.
Horace Dediu • 01:05:43 Yeah. And that, by the way, makes me a little nervous with the Christian philosophy. Let me put it this way. There's a couple of tests, litmus tests. And one of the things I immediately came to as a conclusion with AI was that it was very much sustaining. Now, the question is to whom. It's certainly disruptive to some job categories, but is it disruptive to technology companies that are extremely wealthy today and have a lot of money? or a lot of capital. So the test for that is, is this something that repels incumbents or causes them to embrace it?
Ben Thompson • 01:06:17 Oh, that's great.
Horace Dediu • 01:06:18 And control it. Because the key thesis of disruption is that incumbents are allergic to the new thing. They'll either say like, okay, this is uninteresting or not for us and not for our customers. Or if they look into it and say, We can't make money with this. The components are too expensive. It's the bill of materials is too high. We can't build millions of these profitably. None of it makes sense. We know the price is going to go down because of competition. So our margins are going to disappear. You keep rationalizing why not to do it. And so my take on AI is like when people said that it costs hundreds of billions of dollars to create a leading model, I said, well, what startups can do this? I will put it to you. I did this with mobility. I would ask myself every time, can a company in Africa today become a global giant manufacturer of mobility vehicles? Well, if it's bicycles, yes. If it's scooters, probably. But when you start to talk about cars, probably not. now when you when you then ask the same question who can make this thing now there's some hints that hey open source guys are doing something in china and like i get interested i'm much more likely to get excited but if you're telling me it costs half a trillion dollars to be in the game i say well this is a big boy game let them play at it but that doesn't make it disruptive no exactly i think
Ben Thompson • 01:07:52 it's such a compelling point that all the big players are spending so much money, which affirms this was my initial take at the beginning, too, is this seems like it's going to be mostly a sustaining technology. But you've sort of pointed out, along with a lot of Apple observers, Apple's getting the greatest deal in the world here. They don't they they don't need to invest
Horace Dediu • 01:08:13 all this money. Yeah. So that was I was getting beat up for two, three years about this because
Ben Thompson • 01:08:18 speaking privately mostly. But does that suggest it might be disruptive to Apple also? that it's not just that they're getting a good deal.
Horace Dediu • 01:08:26 So I was speaking in New York to investors once in January recently, and I said this. What Apple is not allergic to, what they're most attracted to, is having the interface between humans and computers, having or controlling, whatever you want to call it. But they've always lived on being right there. That begins with the Apple II, where they had the interface, the first personal computer. The interface happened to be a keyboard and a monitor. Then they moved into being a mouse and a bitmap display, and then they moved to a scroll wheel, and then they moved to multi-touch and gestures. And all of these things, for each of these major leaps forward, platforms were built, empires were built. Now, they happened to be competing ones, but they usually settled into one or two or three. But in the case of, so we had the DOS era, we had the Windows era, we had the iPod and we have the iPhone. And I said, if Apple wants to be on the next thing, it's going to try to figure out, well, how are we going to communicate with computers better in the future? And a lot of people said, oh, it's voice. And that was all the Alexa thing. Some people said it's watch. Well, that kind of helps, but it's very short duration, glances only. So we kept debating and debating. And then the big thing, which also captured the imagination of Zuckerberg, was like, what if it's a visual interface, but it's really head-mounted? And so I still am a firm believer that that's the next frontier is human interfaces. And then in the middle of that, somebody comes along and says, hey, how about we go back to the command line?
Ben Thompson • 01:10:08 Right.
Horace Dediu • 01:10:09 It's like 1976 again. I remember those years fondly, well, at least the years when I was using a command line for everything on a computer. okay i'm still know by heart all the unix commands i could right now open a terminal and do anything i want the point is though that that's what the state of the art of ai interfaces was at least a few years ago and then it's slowly moving into the voice but when i when i when i asked why would apple want to go there the answer is they wouldn't there's no challenge in figuring out anything well
Ben Thompson • 01:10:44 So here's sort of the counterpoint, though. But if this is a completely new type of computing, right, and it's almost like AI is like business versus like traditional computing is like engineering. It's very deterministic versus probabilistic, right? And if you have to go back to the beginning, Apple did start with the command line. Like the Apple II, you had to type in what you wanted it to do. And I guess in the short and medium term, I think Apple is clearly fine because you need a device to access AI, and they make the best devices. The question, though, is if the way to interact with AI has to go through that progression from command line to WIMP interface to multi-touch to whatever it might be. By the time we get to multi-touch, could you have gotten there without having gone through the whole path? And at that point, what would be a problem?
Horace Dediu • 01:11:32 Yeah, it's unlikely. And that's unlikely. And just to complete my theory, I said Apple would lose AI if AI becomes enabled through a new interface that is low end, that is voice only, which I create an equivalence here. Voice, the bandwidth of voice, even of type, it's a little bit more than typing, but it's like a 1200-baud modem.
Ben Thompson • 01:11:58 Yep.
Horace Dediu • 01:11:59 Your eyes have the interface of megabits per second. The bandwidth of the optic nerve is astronomical compared to at least the parsing necessary to decrypt words. Okay? The brain has to actually work very hard in cognition to understand what's being spoken.
Ben Thompson • 01:12:26 There's an analogy to AI here where we're stuck on these tokens that are like words. It's like it's very inefficient compared to how this could be done.
Horace Dediu • 01:12:32 Exactly. Words are terrible for the interface because they depend on cognition, not on perception. Perception always wins against cognition. This is why people are not thinking, they're acting and reacting. So there's a huge gulf between these worlds. And Apple's always very conscious of the perception, very, very much from the beginning. It's about really triggering people and perceptions. So my point is this. I'm not dismissing the low-end disruption, but it has to evolve. So it has to convince the world that you need to put aside your phone and we're going to work with you as an agent. And the metaphor there is like, what if you had, there's always this great thought experiment, ask what rich people do today and ask how can that be done by billions of people? And almost everything in history has gone that way. So we live, an average person lives far better than any king would have in the Middle Ages or even 200 years ago. And today, if you think about rich people and how they lead their lives, and seriously, somebody should do jobs to be done analysis, just follow a person who has at least net worth of 100, maybe 200 million, and see what they do all day. And to see to what extent they depend on other people. Now, I'm sure, for example, for travel, they don't go on search for their flights. I'm sure when it comes to getting to the airport, they don't figure out, should I drive or take an Uber and deal with parking? They have an assistant to do all that. And they used to have an assistant to do a lot more, but like that became part of the phone. But the thing that is disruptive is that the interface for most people will not be a screen, but will be effectively like almost a year piece with maybe other displays around you. Maybe every display is your display. And then it becomes more like, hey, I'm your best friend. I'm your companion. I'm your assistant. I'm maybe even your lover. And people will totally trigger on that because companionship and all those aspects of interacting with other humans, those are far more powerful hormonally than any cognition or perception. Then AI has a shot, which is why I always think that the AI boyfriend or girlfriend is a disruption potentially. But we got to be thoughtful about how we get to transition through that into something that you trust, something that actually, you know, you will be divulging information to this assistant that is so personal that they'll know more about you than you know yourself and more than any doctor. So we got to be very careful to earn that trust. But my point is that, yes, if that interface becomes so pervasive or so subliminal or so non-visual that Apple would find it like, we cannot value here. We just don't, there's no surface for us to paint anything on. Then it's a worry. On the other hand, I also say that the smart in the smartphone can get smarter. There's no reason why the phone couldn't be the best AI device the world could imagine. Maybe it'll take 20, 30 years to move beyond it. And even so, I still think putting a 4K display on top of every retina is more interesting than putting an AirPod in your ear. But that's just me. I could be wrong about that. I have a blind spot because I love visual stuff.
Ben Thompson • 01:16:10 Well, this is the 50 question, right? You talked about AI in 50 years, and if you mark it from, say, 2003 or 2017 or whatever you might do, we're here in the context where the reasons was Apple is turning 50 years. And the MacBook, to your point, has been the device all along. MacBook Neo, arguably the most perfect Mac yet. Where is Apple in 50 years? Are they still around? And what's –
Horace Dediu • 01:16:34 Yeah, so again, I'm writing all this stuff on my blog, and I'd love to have conversations there. But I even asked today, I asked the question, what are the odds that Apple survives? And the data, again, I go back to the data. And I point out that actually being in a Fortune 500 is very fragile. In other words, I call it the unfortunate 500, those who are there. Because you tend to live a very short life in a Fortune 500. But if a company reaches 50 years in the Fortune 500, it's most likely it's going to stay forever. Interesting. Because there are a few what I call immortals.
Ben Thompson • 01:17:21 Yep.
Horace Dediu • 01:17:22 They've been around since like a century ago. They're still there. Oil companies, IBM, a bunch of railroads, stuff like that. And Apple actually was born in 76, but it didn't join the index until 83. So I'm kind of using the clock from then. So there's this sort of, as opposed to human beings who live long lives, but we know what the limit is. With companies, they're very short lives, except for a few that are becoming more. And most people are fixated on those and don't realize that the tens of thousands of bodies that are buried to make those other ones survive. It's not at all guaranteed that if you have even a big business, you're going to survive. So there's myth about corporations being somehow superhuman and all that. So there's a duality to it. So my first observation was that already by the fact that it's made it this far, it's kind of buying itself a long life. But the more important thing, and I think there isn't really a good theory of Apple that's been published, but I think the company is an exception. in many ways, every time I dig into it, and I've been digging in 50 more years, is that there's an operating system there, mostly put in by Jobs. The Jobs, not the original Jobs, but Jobs 2.0, which came in in 97. In fact, Jaws, Josie Black, said that all these people are trying to write thought pieces on Apple 50, say anything before 97 doesn't matter. It's true. There's two apples. And the second apple is the one that actually they thought hard about, how do we make this survive? Because they've been to near death. So they started to think about, become introspective. You know, they say that unexamined life is not worth living. When I was at Nokia, I even pointed out to people that because of turnover, there is no institutional memory. There are some old timers maybe who remember things, but most people have not been there long enough to know what was the causality of success and failure for the firm from the beginning. They might read about it. There's a lot of lore, but most of it is written by journalists. No offense, but it's written by people who want to tell a good story. and that's how you get published.
Ben Thompson • 01:19:48 Yep. Well, to that point, when I was at Apple, I was at Apple University, which was, this was sort of the, at that point, this was sort of the goal was to sort of, what makes Apple, Apple was the point.
Horace Dediu • 01:19:58 So that's the evidence of introspection. So they're trying to think, what do we do to pass this on? And I think they were conscious of it in Steve's time and I think Tim has had this on his mind for the whole tenure. He knows that he's the custodian and he wants to make sure it doesn't get broken by the next. That's another thing, entropy. Companies lose their souls and that happens naturally and it should be somehow, you should try to preserve it. I even wrote a piece years ago about what makes companies that last hundreds of years. There are companies, they're hundreds of years old. They're all private. In fact, they're all family owned. So it's genetic. It's like I pass it on through my blood. That is what keeps the thing together. And the oldest are Japanese, and they actually have a trick up their sleeve. The Japanese last for hundreds of years because they adopt people as adults into the family because they don't trust their own children because they feel that they're born with a silver spoon in their mouth and they're not going to fight very hard. But if you brought into the company as an adopted son, then you might, with a daughter, you might fight harder. And this is, so it's fascinating to understand longevity, mortality, and all these things. So Apple, I think, is cognizant. I'm not sure I'm good that you understand the problem, but at least they're aware of the problem, and they're trying to figure it out. There's other things about the story of Apple, which is that the focus and the sort of the idea that the customer is the most important thing. One of the mantras I have is that the value of the firm should always be the measurement of the creation of the customer. This comes from Deming. It's not particularly novel, but he had the great phrase, which I remember, which was that every number on a financial statement needs to be multiplied by something called customer satisfaction, because that tells you whether those numbers are going to happen in the future. So the customer comes back based on their satisfaction. There's nowhere in the financial statement where that number can be read, however. And by the way, there's a numerator. You divide everything in the financial statement by the customer dissatisfaction. And so those are the two most important numbers that companies should have. And everyone should look at them as a KPI every single day. And yet, hardly anybody knows what they are or what they should be. So the customer, and that brings you back to the hard question of like, is Apple measuring its success based on how much customers are satisfied? And you know what? If you listen to Tim Cook and the CFO every quarter, they always bring it up, probably five times. And not once is it ever written about in any of the commentaries that follow. So analysts are not paying attention. Pundits are not paying attention. But Apple somehow continues to pound the table on this. It's just because we've become kind of, it's glazed over. It's like, yeah, yeah, everybody says they want to have happy customers and stuff. But I do believe that Apple cares about it a bit more than others. And that, again, unlocks a lot of puzzles because when they went through all these weird decisions and other companies went different ways. Microsoft was an example. You know, Google was an example. And I highlighted some of these facts. You know, the fact that Google doesn't have people paying for its product. People are its product. So all these things affect your meta. Meta is the worst. They affect how everyone in the organization behaves.
Ben Thompson • 01:23:43 Well, we offer a point on this, which I think is interesting. We've got way long. I have 47 questions, so you have to come out again. We got to talk about more about this. But one of the cases I've always made about meta, and I think this applies to Google as well, is the reason why they are much stronger than people think is precisely because they have created their own customers. and in that a huge portion of Meta's revenue base are advertisers who only exist because Meta's advertising exists. And so that's why they're almost anti-fragile in a way where you go through something like COVID or you go through a large CPG boycott of Meta and they get stronger because that's just more opportunity for the customer base that they've created.
Horace Dediu • 01:24:28 Yeah, I don't want to pick on Meta. Honestly, I…
Ben Thompson • 01:24:31 But I'm saying, I think your point is a good one. It's just like, it all depends on who you look at as the customer.
Horace Dediu • 01:24:36 You've got to be careful. Yeah, totally. You've got to be careful about defining the customer satisfaction. I do believe there are many people are very happy being users of Meta.
Ben Thompson • 01:24:46 Well, the advertisers are very happy being advertisers of Meta. That's the key thing.
Horace Dediu • 01:24:49 Yeah, there's value. There's definitely value there. I'm just pointing out the fact that if Meta wants to make a device, you might think about it differently.
Ben Thompson • 01:24:58 Right. Well, that's probably why they're bad at devices.
Horace Dediu • 01:25:01 Exactly. But no matter how many great people you hire, you poach the best designers, you poach the best product marketers, you poach the best engineers, industrial or otherwise, to come to your firm to repeat what Apple does. Somehow, it doesn't come out as good. Now, there's a question about this. Why? And even many people at Apple, in particular, Johnny Ive is famous of saying that you take me out of Apple and I'm completely useless. He said this. And then, of course, he goes off and works on Ferraris and works on devices for opening eye. But there are many people left who said the same thing to me privately. They said it's a system that somehow brings out the best in people, but it's still your cog in a very big machine.
Ben Thompson • 01:25:53 It's also a unifying theory. Some of the points, your concerns about AI, which is there's a bit where it's precisely because Apple devices are so expensive and they make so much profit per device that that's actually a key to their long longevity because they have to continually earn it as opposed to we're going to sell at cost just to like expand our user base or whatever it might be. It's sort of counterintuitively increasing the challenge and having to earn money makes you last longer.
Horace Dediu • 01:26:22 Yeah, in many ways, I'm always impressed by, I forgot who wrote this, but basically the idea of Apple being the underdog is a superpower. For a long, long time, they were the guys who were always on the siege. They were always, some of them, stronger than them. First, it was because they were the rebel against IBM, then it was the rebel against Microsoft. Even Android versus iOS, there's a sense of like, okay, we got to fight our way against commodity. And I think there's a sense also that when Apple makes a mistake, it gets punished much more severely than when other companies make exactly the same mistake. I give the example of Samsung Galaxy, which I forget which year it was, in 2016, 17, 18.
Ben Thompson • 01:27:19 Yeah, the phone would really blow up.
Horace Dediu • 01:27:22 It would catch fire. And every time I got on the plane for about a year, I was told, if you have a Samsung Galaxy device, please make sure it's turned off. And so you had a situation where a product was effectively declared a menace to society. and i was watching carefully the pnl of samsung throughout the period and nothing happened they didn't lose a beat um they it all washed over but if apple a couple years earlier had the antenna gate but nothing really major happened except there was attenuation of the signal because of the way the antenna was positioned. You're holding it wrong. And they had the lawsuit and you had to sell bumpers to solve it. I'll give these bumpers away. But more or less people had freaked out and said, that's it, it's over. Apple is dead. They just shattered their credibility, their brand, everything is destroyed. How could they? How could in the mockery and just piling on? And now we're seeing the same thing. Oh, they're going to have advertising. They lost their way. I don't know how many times I hear this, but actually I think that's a positive. I think for the company, whenever they're beat up so much, it puts them always on their guard and you will have an instinctive intuition about making sure what you ship is not going to be damaging to the brand. It's one of the reasons I think they got out of the car business is possibly, I know that's one of the reasons they wouldn't get into the micro-mobility business, even though it a sense for Apple to make a scooter or a knee bike or something really neat. But if somebody falls, breaks the bone, everyone will say Apple is the worst company in the history of the world. It's for sure. And I said this to an interview with CNBC recently. I said, when the new theory shifts, it will be declared the worst AI in the history of the world, even though underneath it's Gemini, whatever it is, it doesn't matter. It will be for sure declared pathetic. This is true of Maps. This is true of Siri. This is true of any product that Apple ships. It's always the worst in the world. The critics are absolutely vicious. And that's their superpower.
Ben Thompson • 01:29:54 Well, that's a great note to end on. I literally have like, we got through like a quarter of my questions here. But the good thing is you are back in the analyst game, as you mentioned, a Simcoe one. There is a to your point. You can go there, start reading. There is free stuff that you could pay. I like how you're doing it. You have lots of snippets of articles. And then if you pay, then you get your sort of your commentary on it.
Horace Dediu • 01:30:17 Yeah, there's basically two categories. One is like reactions. So I quote an existing piece and I have a take called Nota Bene. And then there's research pieces, which are longer and more in the traditional style of me kind of coming up with some original material. The difference was that because of the days when a lot of my articles would be like, well, this is an inflammatory or this is an outrageous comment. Let me dissect or rebut this point. Instead of doing that as an article, I sort of categorize this as a reaction to the news. But it's not a new site and it's not. And I think my takes are particularly different, I would say, hopefully different than most takes. So there's hopefully value in the reaction, but also value in the research, of which there will be plenty, a few hundred a year at least.
Ben Thompson • 01:31:12 With your Asymco One plan. So I'm actually a big proponent of the way to think about business models is on the Internet, you need to maximize revenue per user. If you're not going to be like a massively scaled player. And you're taking that to the extreme. It's $100 a month, $1,000 a year. How did you think about pricing when you were launching this?
Horace Dediu • 01:31:32 Well, the reason is because, again, we had a lot of feedback over the years. And I realized that the core audience were people who were very interested in investing. And although there are plenty of developers, there are plenty of enthusiasts, there are plenty of journalists and others. And we can probably segment pricing for them as well. but the the i think the core job to be done was that i was i was i was i was being thanked for um essentially preserving wealth for people um and and the fact that that a lot of people weren't it wasn't about saying buying this or that thing but it was more like holdings for tough times
Ben Thompson • 01:32:13 don't sell apple that's how you make money is just hold on to the stuff yeah it's a funny thing
Horace Dediu • 01:32:18 He even told me things like if one of the best performing types of portfolios out there are estates. So when people die, their money gets held up in an estate for a while while they settle it. And they outperform everyone else because nobody's doing anything. So actually being holding is a very good strategy. Anyway, but the question of pricing, let me say this. There's a dichotomy people have in their minds between those who have and have not. And this becomes a political discussion. Because people say, oh, there's all these billionaires, and then there's everybody else. Well, the fact is there's actually millions of millionaires. Actually, in the U.S., there's 24 million people with net worth between $1 and $10 million. Now, a lot of that is in real estate and businesses. These are the primary asset classes. But there's a lot of money also being held by retail, what's called retail investors, in stocks and funds. And the thing is that they don't get access to great financial advice. Most advisors are positioned for people above 10 million or even above 100 million net worth. And those, by the way, the numbers of those people goes down exponentially. So there's like 900,000 people who are 10 to 100 million. Then it's like 40,000 people that are above 100 million and so on. So you're like dropping off a zero from the number of people when you get to the higher numbers. But if you're going to be a fund manager who wants to advise people on wealth, you're looking for someone 10 and above. So there's a sweet spot, in my opinion, between 1 and 10. And of course, there's below 1 as well. But those are people who are usually younger and are looking to start and are looking for buying opportunities, not holding as much. So the thing I was puzzled by is that if you look at the instruments, at the information sources out there, you have institutional, which are the usual Wall Street suspects. And then you have CNBC, the Wall Street Journal, business magazines, business newspapers, and so on. And their business models are advertising. They're not trying to help you out with, and the narrowness of my scope is like, I really want to just talk about Apple. And I found that there are people who were grateful, like I said, and I figured if there's a handful of those, there's probably out of, like I said, by the way, Apple is one of the most widely held, both for retail and institutional. So just institutionals alone, there's over 6,500 institutional owners of Apple. That's public information. I don't know how many retail investors there are, but there are about 60% of the money invested is retail. So there's millions and millions of people who have millions and millions of dollars of Apple. And if there's so many people like that who are not getting access to great research, We're not getting to communicate, except, of course, they're seeking Alpha and a bunch of other places. But it's all like it's not high quality. It's not concentrated wisdom.
Ben Thompson • 01:35:50 Right. Well, to your point, they're the ones that are the most susceptible to the underdog narrative. And so your your case, I guess, is yours talking it with your own book that you do believe in Apple's future. And the point of this is to convince other people that as long as you believe they should believe, too.
Horace Dediu • 01:36:08 Well, I got some skin in the game, but the main point is that I just Warren Buffett said, if you're going to put all your eggs in one basket, you better watch that basket. And Philip DeWitt taught me another thing. He told me about his, he has a good audience, okay, who are Apple investors. And he said, although he's more news driven than analysis, right? So he does a lot of news every day. He goes through and exposes the most interesting views, which are very valuable. But he said, when we sat on stage with Laura Martin in New York, he said almost all of his audience has all of their money, like 90% in one stock, which is very highly concentrated. And so, again, if there's a few there, there's plenty of them everywhere. And I just feel that this portfolio is not what I do. And I don't try to tell people to balance things out. And I will do a little adjacency. I'll look at I have Google and the usual suspects, but mainly it's Apple. So, yeah, I think the idea of having a deep, deep 15-year track record where you've looked under every stone and you look at it at every angle. You've looked at culture. You've looked at product. You've looked at history. You've looked at financials and technology and competition. You looked at everything. I think there's some value in saying, hey, if there's something about Apple, there's probably I've probably known it or forgotten it.
Ben Thompson • 01:37:51 It's great that you're back writing regularly. Not that you stopped, but the pace is very high. It took me quite a bit of time to go back even just to February when you really launched. And given that, now that you're back in the game, I would love to actually get to the rest of these questions sometime. It'd be great to talk to you again.
Horace Dediu • 01:38:09 Absolutely. Happy to connect again. Appreciate your continuing efforts. I think I really feel like we're sort of birds of a feather. Absolutely. It's wonderful. Thank you.
This is a transcript of an Asymetric podcast. It was lightly edited for legibility.
Judd Rubin: Three continents, one conversation, this is Asymetric. We are very excited to have Balaji Srinivasan with us today. Balaji, you're a busy man, Horace you're on the run as usual, so why don't we dive right in. Thanks for joining us today.
Balaji Srinivasan: Good to be here. Good to see you, Horace.
Horace Dediu: Likewise.
Balaji: I know you from online, from Twitter, or at least, I know of your work. It’s always interesting for people to understand how they're maybe thought of by folks who are maybe a little bit on the periphery. And I, we've, always thought of you as the most quantitative Apple analyst, I guess you and [John] Gruber would be the two people who, if you're in the Apple ecosystem, might be the most perceptive commentators outside of Apple itself.
Horace: And John's a qualitative guy, right, so that makes sense.
Balaji: Yeah, exactly. And I'm not like a huge, I mean, it's funny, certainly I have a lot of Apple equipment, but I wouldn't consider myself an Apple fanboy, per se. I converted to Apple when they supported BSD in OSX, because it was a better compute experience.
And, for the last, almost 20 years, the typical developer/engineer/founder, whatever, set up has been a Mac laptop locally, and then all your compute is on AWS or a Linux box or something in the cloud.
Horace: Yeah, me too, actually, because when I started my university work, it was all on Unix, and this was in the days of VAX computers, Digital Equipment, and I just loved that interface at the time of DOS. This felt like, you know, ages ahead. And then I moved from a console to a workstation, which would have been a large screen using the X windowing system and that was my career for five years.
I wasn't even on a PC anymore, I wasn’t using a Mac, but in 2000 when they switched, roughly around that time they switched to being, like you said, BSD. And I was like, okay, Mac is the way to go. Anyway, we don't want to talk about necessarily Apple, tell us what you're working on these days.
Balaji: Sure. I've actually got the crypto plan for world domination that I thought I might discuss with you. Which is essentially how if you're a crypto maximalist, so to speak, how I think crypto is the most important threat to the Big Five.
And essentially the plan for the next decade for how crypto goes after, not just FinTech, but Messaging, Log-in, Social, Search; Crypto Phone, Crypto OS, compilers, databases, advertising, actually reinventing CPA (cost per action), hosting, data centers, creator monetization, and then, on the back end, equity, compensation, privacy, and then most importantly: values.
I actually think that people are underestimating the scope of how big of a deal crypto is and that the Big Five don't really get it. The Big Five, meaning, Google, Apple, Facebook, Amazon, Microsoft.
And there's pieces of their empires that I haven't yet figured out how crypto might disrupt. Amazon's physical logistics, for example, but there's much more of it that is crypto vulnerable than I think people think. And your audience might be interested in this. Some of this is new, even, for maybe my audience.
So we could go area by area. And push back.
Horace: Yeah, the one thing I would caution on, is this usage of the word disruption, because I'm also a student of Clay Christensen. To what extent what I challenge you to answer is, to what extent might these Big Five find [crypto], possibly sustaining?
So if they would say, ‘Oh, well, thank you very much. We'll take it from here.’ So, I agree that there's an opportunity here to disrupt, but many times people just assume change is always disruptive, but change can be sustaining as well. So, please tell us.
Balaji: So, actually, on that point, there's a colloquial usage of disrupt, which just means a change. And then there's the more technical, the Clayton Christensen version, which is, it starts out as sort of an inferior product in some ways, but it's 10x on one axis, it's sort of underestimated. And then it takes the bottom end of the market, and then zooms up to the top in such a way that the incumbent finds it difficult to adopt it because it attacks their margins and so on.
Right? That's assuming the kind of, more technical --
Horace: That's what I mean, yes. That's low end disruption. There's also new markets where it basically carves out for itself a new niche and it does things that nobody's asked it to do. Or markets that are non-consuming, like, you know, emerging markets or something like that, and grows from that base as opposed to low end.
But, yes, generally speaking, that it comes in and is not good enough initially.
Balaji: Yeah, so I think that this fits, as I'll go through each of these examples, I think each of these fit both the sort of colloquial usage, as well as the more technical usage. But let me go one by one and just talk through these points.
So first, at a high level, I'm actually pretty confident that, with the exception actually of Facebook and Twitter, I think crypto is kryptonite to large companies because they don't understand it. And in particular, they're sort of frozen by antitrust and they can't take on more regulatory risk, even if they had the personalities internally to do so. I actually give a lot of credit, even if I think Libra was misguided in some respects, in terms of implementation, I give a lot of credit to [Mark Zuckerberg] for trying to get into crypto relatively early and putting out a project. Even if, in many respects, I think the parameters were flipped, as I can get into, to simply push through that relatively early, starting in 2018, when the other companies didn't get there is because he has a founder's mentality still.
And I think Twitter is actually the dark horse here where it's the furthest ahead on Bitcoin, specifically, as opposed to crypto more generally, that's an internal distinction in the community that I can talk about. But I don't think that Google, Apple, Microsoft, Amazon actually get it because they're not founder led.
And also because they're under this regulatory microscope.
Horace: By the way, just a funny story. So I'm here in Germany because I'm at an event for e-bikes called Eurobike, or just bikes in general. So I'm a fan of Micromobility, I've been talking about it for a couple of years now. I get the same impression. I've spoken to people at those companies that they're not seeing it, they’re not feeling it. Their entire mobility focus is still automotive. It's not that there's a cognitive problem. They understand the idea, but they can't actually implement it, it's this innovator's dilemma thing.
Balaji: Yeah. I mean, it gets to the fundamental thing, right? Which is that a founder is able to say, ‘Hey, we were doing X for such a long time and X got us to where we are, but now we're doing, not X. We’re doing the opposite of that.’
And they have the credibility to turn the entire organization, in particular, to impose short-term costs for long-term benefit to cannibalize or disrupt, in the colloquial sense, an existing product for a new one.
You know, Satya [Nadella, Microsoft CEO] is actually the exception. I would put him, if I rank order the existing companies by their crypto friendliness…
What's interesting is it's the $100 billion and $10 billion and $1 billon companies that are much more crypto friendly than the trillion-dollar companies.
So Shopify, for example, gets it, right? Coinbase. Stripe, I think, is coming around. So the ones that are sort of like the sophomores or the juniors, as opposed to the seniors, are going to, I think, use this to slip stream. And I think this is a disruption again, you know, I know you're from the Christensen club, so I may use that colloquially, so poke at it.
I think this is a change or an alteration or a forcing function, whatever you want to call it. That is actually on par with the desktop to internet transition. That you can think of this as, just like you went from on disk to online, the transition from online to on chain involves a similar number of cultural and technical changes that render the current generation, basically like the Borlands and DEC Alphas and so on of the previous generation.
Horace: So tell us how do you think that… You gave a lot of examples, of things going on chain --
Balaji: Yeah, so let's go to specifics. Let's start with the obvious, which is FinTech. One of my colleagues, friends, Chris Dixon runs the crypto fund at a16z. He observed a while ago that many Unix command lines became apps.
For example, GIT became GitHub. That's an obvious one, but had these command line chat apps that effectively became Facebook and IRC and Slack and so on and so forth, right? Command line apps turned into full-blown UXs. Crypto is actually the reverse in some ways where every FinTech app can be turned into a crypto command line. For example, Affirm or PayPal or Funbox, or, many of these things that essentially are doing cashflow transformations of some kind can be written as a few lines of code in Solidity. Which is Ethereum's programming language. And that alone is actually kind of a big deal where you can write that down and then just start piping arbitrary amounts of money through it, between countries, where it really is the internet of money. Any user can route money to any other user, if both users have a crypto address, if they have a Bitcoin address or an Ethereum address for the purpose of smart contracts.
And so that's just a fundamental backend change. And one way of thinking about it is over the last 10 years, since the financial crisis, Dodd-Frank basically stopped the issuance of new banking charters. Were you familiar with that? Did you ever see the graph of that?
Horace: No. No, tell us.
Balaji: So, you're a graph guy - I've got a chart on this somewhere on Twitter, but basically the way that they dealt with the banks' failure during the financial crisis is to effectively reward them by eliminating their competition entirely by refusing to issue new bank charters for almost a decade. And, here's the graph over here.
The state's solution to the financial crisis was to stop issuing commercial bank charters for almost a decade and to reward failure by regulating away competition via Dodd-Frank.
The network solution was FinTech and now DeFi.
The reason I bring this up is FinTech is a front end, Blockchain is a backend. Over the last 10 years... You're probably familiar, at least to some extent, with the FinTech side of things. Imagine if, when I sent you a message via Gmail, that behind the scenes, Google printed out the email, put it on a Pony Express, took it to you cross continent, scanned that and put that into your inbox.
And it looked like it was digital, but it actually had this antiquated pre-internet backend of a two or three-day delay in there, but the company did the best it could to obscure that. You know, all of those hacky steps in between, yeah? That's a good analogy for what FinTech is, where it's this shiny web-like front end, but on the back end, you're dealing with pre-internet mechanisms for settlement where it's often FTP or flat files or some horrible Cobol-era file format. It just wasn't set up for the workloads that we have when you actually press on that. Right? Once you set it up and you give people the expectations of being as performant as a Facebook or a Twitter or a Gmail, and you start putting huge workloads through - that the financial system doesn't anticipate, you get things like the Robin Hood issue of earlier this year.
Horace: Yep.
Balaji: Right? You make people think that it can handle internet-like workloads. But it can't, it just kind of simulated that. Taking that Gmail analogy a little bit further, with Gmail, every email that I send you is basically non-fungible. In the sense that each one is just a different set of characters. But if it was fungible, if it was money where every dollar is the same as every other dollar, Google could… when I hit a button to send you a hundred bucks, Google could just extend you effectively a hundred bucks on credit where it's assuming I'm good for the hundred bucks. Right?
And that is essentially the mechanism by which a lot of FinTech companies operate where they're like a central buffer that makes users think that this stuff is instant and fast, but it's actually not on the backend. Okay, so FinTech is a front end. Blockchain's a backend, where it's a genuine innovation.
So it's almost like this flanking thing where bank charters were cut off. FinTech built all of these fancy front ends on top of banks by doing deals with banks, by now, more recently starting to get licenses in Utah and places like that. And then blockchain, the crypto space, built a completely different set of rails where they essentially, over 10 years, got people to accept these things as money-like.
And now they're coming together where, with Robin Hood, with Square, most FinTech companies are aware that crypto is a big deal. It's not going away. And the reason many of them have a hard time getting their head around it is that it flips basic assumptions.
What Satoshi did with Bitcoin is he flipped absolutely basic assumptions. Where the concept of Bitcoin starts with the idea that deflation is actually good if it's coming from productivity. The typical macroeconomist would say hyperinflation is bad, but deflation is also bad. A little bit of mild inflation is good. This is what you'll read in every Econ 101 textbook.
Horace: Yep, that's true.
Balaji: And so Satoshi said, actually, no, that's not the case.
You want to have users be able to hold their own funds and you want to have a fixed monetary policy that gives certainty for investing in the future. That can't be monkeyed around with, by the Fed open markets committee, to bail out banks and stop transactions and so on. That meant so many flips of fundamental premises.
Number one, digital gold being good rather than bad. Number two, that users should be able to custody their own money rather than having it at banks and they should be able to take that risk. Number three, that transactions by default should all be able to go through. So it's like a default approved as opposed to a default sanctioned and so on and so forth. They basically just flipped fundamental premises.
And when you flip fundamental premises, you can often get to just a completely different environment, completely different worldview, completely different set of solutions. I mean, it's like land animals versus sea animals or like Google's culture versus Apple's culture, right?
I mean, now they've become more similar but Apple for a long time, it used to be very private internally and Google was very public internally. Both of them worked on their own terms, but were just fundamentally different in terms of their premises and axioms.
Horace: Let me get back to this example you gave us, of online as a way to do fundamental transactions. Now, one of the things that, and this seems very much, like you said, behind the scenes, because from the front end the consumer is given an illusion of technical competence. But in the backend, it's actually still jury rigged.
Now, the thing that I would ask is what does that mean and how does it feel different for the consumer? Because if you fix the backend, then yes, it's much more robust and clean and probably safer. But I think that the way it affects behavior is not so much that people feel different about that interface, but rather that they will do more of it.
In other words, that, like you said, it was about volumes that caused the cracks to appear in Robin Hood. So to me, the question, the reason, let's say I'm not skeptical, but I'm slightly reluctant to dive headfirst in on crypto is that I'm asking all the time is: How does it feel different for the end user?
And the end user would have to have some sort of emotional response to this change and say, ‘Wow, this is really amazing! Now it's much better.’ Or, ‘Now I can do things that I couldn't do before.’ So what I would posit is that the change you speak of would allow the users to suddenly say, ‘You know, I may do a wire to pay for a very large sum, but now I would do it a hundred times a day. Or I would do it to pay my friend, or I would do something financially that I never did before.'
And I, by the way, I feel this pain a lot because I live in two countries and you probably do as well, and you have to always transfer money and it's an absolute nightmare. And it's almost confiscatory in the way they steal money on the way, to try to transfer funds internationally.
So do you see this driving new user behavior or is it simply that you fixed something that was broken?
Balaji: Absolutely, excellent question. Let me give a few points on that. An interesting thing Evan Williams once said, in a sort of counter-intuitive way, was that the way to get people to adopt an app is to not do something totally different, but to take something they're already doing and just cut out steps. Make it just faster, simpler, etc.
You know, people were blogging and then they did Twitter. People were blogging and then they did Medium and made it simpler, with front end editing. And that's one view, that technology is incremental. But the other view is it's transformative. Wait a second - our lives are so different than the past.
And here's how I reconcile those, then let me get to specifics. If you go from physical mail to email, just sending point to point email, to a group email with reply all. To a group email with reply all where you add attachments of images to a Facebook thread, to then real-time chat in something like Slack or Discord where you're attaching images.
Each one is an incremental step over the previous one. But if you were to think about how expensive it would be to do a Facebook thread by physical mail. You'd have, I don’t know, a thousand friends and you'd be printing out the thread each time and sending postcards to each of them, with someone saying LOL…
If you would just diagram that out and see how many packets were moving back and forth between those thousand participants of which maybe 95, 99% of them are, actually, not even participating. So therefore they wouldn't even go and send in their postcards. And you'd say how much of a cost that would be on the legacy postal system?
At a certain point, when it's a million postcards to be one simple Facebook thread that we take for granted that has some images and a reply and maybe a link or something like that. Well, then the quantitative difference makes a qualitative difference.
Horace: Absolutely. Yup.
Balaji: Right? And in the same way, that's basically what's happening with crypto. And one way of thinking about it is - and this is now changing, but in the first 10 years, what crypto was best for and by the way, within crypto the term ‘crypto’ is an overarching thing that encompasses... There's just different people who have a beef with the term. One group, are those people for whom, you know, crypto used to mean cryptography, right?
And the second are those folks who think of Bitcoin as its own area, as distinct from crypto in general. I think crypto is the right term for the space as a whole. I think, in particular, cryptocurrency and blockchain is to cryptography roughly as the internet is to software. Software is not synonymous with the internet. Computer science is not synonymous with the internet, but it’s certainly the most frequent deployment and monetization point for it. And, in the same way, I think many cryptographic concepts will be deployed and monetize within the blockchain and cryptocurrency space.
On the second thing, just to finish this little tangent for a second, Bitcoin people think of Bitcoin as the only real cryptocurrency and everything else is a scam and a fraud and blah, blah, blah.
Which I don't believe. And I don't think Satoshi Nakamoto believed that, but this is something you'll probably hear more and more of.
But just in terms of that term, ‘crypto’ is basically thinking of the space as a financial and technological and efficiency related movement. There’s also a very strong overlap, which I'll get to on the ethical aspects and how it's actually a pro-freedom movement. And those overlap. And a Bitcoin maximalist would be like purely on the pro-freedom side, or in their mental model of it.
Okay. Just coming back up the stack. So, end-user benefit basically in the first 10 years, crypto benefited what I'd call the power users and the marginalized. The people who are at both ends of the spectrum. It's the exact opposite of the bell curve.
It's not the person in the middle. It's a person at the extremes. And so that's why I like the example of, ‘Hey, I'm buying coffee at Starbucks. You know, this crypto thing doesn't seem like too much of a benefit.’ It's actually a good point. And the reason is crypto is good for transactions that are very large, very small, very fast, very international, very automated and/or very transparent.
So those six things: large, small, fast, automated, international, transparent.
Your Starbucks [order], maybe it's 10 bucks or 15 bucks, whatever, for coffee and bagels or something like that. You know, big city prices nowadays. That's not a very large nor very small transaction. It's not millions of dollars. It's not a cent. It doesn't need to be very fast because to clear it, settlement can happen over a day or something like that. It doesn't need to be ridiculously fast. It doesn't need to be very automated because with both you and the clerk, there are humans monitoring the transaction on both ends.
It's not very international. You're both literally in the same coffee shop and doesn't need to be very transparent. There's no reason for either of you to have that receipt on chain. So everybody thinks about coffee payments because that's maybe the most frequent thing that people actually buy on a daily basis.
There are not too many other things. People used to buy a newspaper on daily basis, but they don't really do that anymore. They may have a subscription, but they don't consciously buy it. So relatively a few other things you buy on a daily basis. You don't buy a chair on a daily basis. You don't buy a computer on a daily basis.
So they think about their coffee purchase, but that's actually sort of the opposite. So where crypto is actually really good - let's start at the power users first. The power users can be split into two overlapping groups, which are engineers and investors. Both of them are trying to do things like, for example, move a million dollars across the world to Japan in a day to do something, right?
The engineer might be doing that because they're moving money around on the back end of Airbnb or Uber or PayPal or something like that. They're pooling capital from lots of users and trying to do something with it. Take the profits from one area and move it to another. Accept all of these wire transfers in different currencies and convert them into USD within Airbnb's main account, something like that.
Brian Armstrong, founder of Coinbase, saw what a big deal this was as an Airbnb payments engineer. He realized it was not a solved problem. That's actually how he got into Bitcoin originally. So as an engineer, you understand it from that perspective. An investor understands it from a similar perspective where you want to do an international wire and, you know what? It's actually still a pain to do that.
Wires get lost. There's [the matter of] correspondent banks. It's a huge pain to do a wire trace or something. But you know what's really simple? If both sides use USDC, which is the stable coin I helped launch, but it's the number two stable coin in the world. Maybe the number one, if you think of it, as in terms of legal stable coins, you can go to a website, stablecoinstats.com.
Right now, it's $26 billion outstanding in USDC and over the last 24 hours, it was $694 million in volume. Okay. That's quite a lot of wire.
Horace: Impressive. Yeah. That’s striking.
Balaji: That's striking. The whole space is bigger than people get from the outside.
A good metaphor is crypto is a country. It's a fractal country of a hundred million people, which is bigger than most people realize. Cambridge had a study on this last year. It's probably bigger than that now, but it's a hundred million people who hold some crypto, according to the surveys, spread across countries.
And the key is you have to have that sort of value flip right in your head to think of it as money. It's basically like, do you think of the yen as money or not? Do you think of the ruble as money? And if you do, then you can participate in the Japanese or the Russian ecosystem. And if you do not, then you do not.
But crypto is like a country that is exponentially expanding. And there's a million people at the core and then 10 million people around that and a hundred million and it'll keep growing. And then once you’re part of this economic environment, all these other people accept cryptocurrency as money, all of these things become possible.
And once the other person, on their side, accepts USDC as a dollar equivalent, well, I can hit enter. And just like how sometimes you'll send somebody a file and you'll talk to them on the phone for a minute or 30 seconds, and they'll be like, ‘Oh, okay. I got the file in my inbox, done.’
You can now do that with an international wire transfer with USDC. You can hit enter, and they will see it on chain in a few seconds. Now, at first, all that's doing is it's similar to the transition from mail to email, where you go from a two to three day delay to seconds. But then over time that increases the metabolism of business.
For example, I sold a company, Earn.com, to Coinbase several years ago.
One of the things we did there was kind of a V1 of this where we would accept Bitcoin from somebody in Greece or Japan, let's say $10,000 worth. And then we were able to issue a thousand $10 amounts of Bitcoin to a thousand individual people in different places for microtasks.
And the thing is that, because I could get that $10,000 wire or wire equivalent from them same day, you didn't have to know whether they were good for the money.
Horace: I think it's unbelievable. But let me bring you back to the Big Five and the questions [from earlier in the discussion]. We just did FinTech, I think convincingly, the next question is how does this, which yes, it will increase metabolism, but how –
Balaji: How does it disrupt the Big Five?
Horace: Yeah. In particular, those examples you gave: messaging and platforms and coding and all these other things.
Balaji: Let me just tie up one last point on the previous thing, if you don't mind. I mentioned [crypto] is good for the power user and the marginalized.
So the power user - the dev or the investor wants to move millions of dollars around the world with the keystroke. The marginalized, that's somebody who just wants to hold on to a bank account equivalent. That's somebody in a Venezuela or a place where the currency is being inflated. Or Nigeria, where people are being pushed out by the police.
But it's also anybody who's de-platformed or canceled or ostracized, or basically locked out of the financial system for whatever reason. Like the OnlyFans.com thing recently, [which is an] obvious example of something where… That's what cryptocurrency sells, where the banking system can't just lock you out.
And what's interesting is sometimes these are the same entity at the same time. Something like binance.com, for example, is both a power user of crypto but it's also marginalized where it's sort of on the margins of the legal systems in the world.
A couple of other quick points on this before I move on.
One thing people often talk about is, ‘Where are all the use cases for crypto?’ Well, now there are many of them are out there. You know, I've actually got a post on this: And What Has Blockchain Ever Done For Us?Crypto has transformed crowdfunding, it's transformed international wire transfers, it's transformed gold.
Just those three applications are worth trillions of dollars, but there's way more. If you go to defipulse.com, it's transformed loans, it's transformed derivatives. Many of these applications are actually out there and already at substantial scale.
But a very important point is speculation was installation. Without people speculating that this thing could be big, it wouldn't have had a price. Without it having a price you couldn’t treat it as money. Without it being treated as money, you couldn't build all of these apps. The loans wouldn't work because it'd be just sending zero for zero.
The thing about crypto, in particular, is it has the opposite emergence mode from social networks. You know, we've now been tuned to such an extent to DAUs (daily average users) and MAUs (monthly average users) and whatnot, that we sort of forget in the 2000s, that those were metrics that people scoffed at and poo-pooed because social networks were piling up all the users, but where the money, you know?
Even as late as 2012 or 2013, there was an article, something like why Facebook will never make a significant profit. And just a few years later, [people were saying] ‘Oh my God, they're so evil, They're dominating the world.’
And you've seen all these kinds of things. With Facebook in particular, it piled up users. It made money, actually, pretty early on, but Twitter, Pinterest, Snapchat, this entire model of piling up users before making money was, and is, a common one. Now people understand it so much that they think that's the default emergence mode of new technology,
But crypto flips that. Where it piled up the money before it had the users. Making money, almost in the literal sense, before the users came. So it flipped it around. And so instead the question people were asking is, ‘Oh, where's the utility?'
Now it's actually coming.
But I wanted to point that out. It's the opposite of the social network model, MAUs and DAUs, there’s a totally new set of metrics you need for crypto, which are not daily active users, but daily inactive holders - that is people who are holding for the long-term and are committed to it.
So that's macro, let's go to specifics. So I mentioned FinTech. Pretty much every FinTech app is going to get backend blockchain-ified. Unless there is some prohibition within the country on that. And if that is the case, it'll probably get out-competed internationally, even if it has a captive market at home.
And the reason for that is, if you think about an email address, it is something which is uniform across geographies. I don't need to look up the postal code of this, or the zip code of that. With an email list, you don't need to know whether somebody is in Nigeria or Switzerland or India. Just hit enter and you send it. That uniformity alone is something that blockchain addresses give you. It’s way easier to do a cross-border deal with somebody in Japan and Brazil or Nigeria with the smart contract than it ever was before.
In fact, one might even argue international business didn't even really exist before smart contracts and cryptocurrency. And the reason I say that is if a Brazilian company wants to acquire something in Bangladesh - -
Judd: You need locals.
Balaji: Yeah. You know, what you might do is say, all right, there's not too much law on the Brazil - Bangladesh interface, but there'd be U.S. - Brazil and U.S. - Bangladesh. So let’s set up an intermediate there and work through the precedents on both sides and get A plus B and B plus C.
The other country you might use for this is China, but if we actually go down to brass tacks and think about what the obligations are for each side and how the legal systems interact, you sort of need that centralized intermediate, the U.S. and China are the only two countries that do so much business worldwide.
There's probably a Chinese enterprise in Bangladesh, probably a Chinese one in Brazil, and so you could make the things add up and the laws add up and the property rights add up. But that's something that only works at scale. For large companies doing those kinds of transactions, you can make it work and you'd probably set up a U.S. or Chinese intermediary to help make it work. To lubricate it.
But if you wanted to do it direct - how do you do direct? These people don't speak each other's language? They certainly don't know or trust each other's legal system. So all kinds of weird peccadilloes. But on chain, everybody can read the same code. So, essentially, the pooling of money, the friction of diligence, the consistency and uniformity of naming, all of those things are 10x improvements just from a developer-investor standpoint, the power user standpoint with FinTech.
So all FinTech gets disrupted by blockchain. That's very clear to me, it's already happening in some ways, but that's very obvious. All right, let me pause there and get your thoughts, feedback, and then I’ll move on to the next one.
Horace: Yeah, exactly. I love the way you framed it in those six categories of applicability.
Most people don't experience small transactions or international or transparency's not a concern of theirs. But that allows me to classify this as the type of disruption where it would allow things to happen which normally wouldn't happen. It would allow, like you said, inter[national] deals to happen in ways that no one would even think of doing today.
And as a result, it's sort of a new market disruption. It would unify people who are now divided by country boundaries. It would unify them in, as you said, this new country, this country of coin, [of] which they would be all effectively citizens that would somehow communicate and understand each other so much better, because they are not divided by these artificial boundaries. And I think that would, if you said the exponential growth is current[ly happening], then it would encompass a substantial part of the globe. And that in itself is so powerful that we can't even fathom the consequences of. But it's effectively, in the FinTech world, I think what you're saying, and I'm sort of reading ahead of it here, so what you're saying is that once that platform or that foundation is laid, you can imagine a lot of new things emerging and that will build new empires. Is that where you getting at?
Balaji: Yes. I actually think crypto is to America as America was to Europe. Like you can, and let me explain what I mean by that. It's actually-
Horace: No, I get it, yeah.
Balaji: And just like you had, so why is that actually a good analogy and not just simply verbiage? If you know different kinds of distance metrics, the most obvious distance metric is the great circle distance on the surface of the earth between two people.
That's just the distance as the Crow flies. You know, on the surface of globe. There's another distance metric, which is the geodesic distance between two people in a social network. You could have, for example, you and I right now are closer geodesically than we are geographically. And then there's people outside who are closer geographically than geodesically. People I don't know, or haven't spoken to, but they’re within a mile of me or, or within a mile of you.
And so those metrics, they actually have typologies associated with them. Just like you can have a cartography of continents, you can have a cloud cartography of who is close to who in the social network. In many ways, you're probably closer to people in Cupertino and New York and various financial capitals around the world than you are to people who are a mile away physically.
And that is something, when you start visualizing what that cloud continent looks like, with all the nodes colored by what coins they hold, you know, a big orange for Bitcoin and blueish for Ethereum and so on and so forth. You start getting a visual that looks a lot like the European incursion into the New World.
Without, of course, any Native Americans or anything like that, it's sort of the pure expansion of different demographics into this new region where people are spending more and more of their time. And VR will make this more than a metaphor. It'll actually be like physical space.
Now the one thing I would edit on your point is that when I said crypto's a country and you said without internal boundaries, there actually is a lot of crypto tribalism. So it's actually an interesting thing where just like there was the New World and the Old World, there's a crypto world and the fiat world, and there are conflicts within the crypto world and there are alliances with folks in the fiat world.
So it's actually an interesting analogy to the age where the French and the English and the Spanish and so on all slugged it out for the Americas. Again, without the native population there, it's sort of the pure version of that. So with that as an analogy, it's something where you can build things from scratch. All these ideas that were infeasible in the Old World, like democracy or so many innovations that the U.S. had in terms of governance and —
Horace: The federation, the transportation networks, the frontier, the way the U.S. was constructed, mostly accidentally, allowed it to become a superpower.
And I think the continental scale of it, which again was accidental by acquisition of territories peacefully and not peacefully, but generally Europe was stuck in a centuries old grid of monarchies, feudalism and all the other baggage they had carried. It just wasn't able to have a frontier mentality. I sometimes think that that conquest of land, that the open horizons is reflected in the dynamism and the ability to invent that followed.
Balaji: Yes. This is Frederick Jackson's Turner's frontier thesis, and one can argue whether these changes were all good or all bad. I think there were some both good and bad innovations that came back from the New World to the Old. For example, The French Revolution, they were in part inspired by The American Revolution, but had a much worse result.
Communism actually, there were a fair number of Americans that were involved in it. There's a book by Kenneth Ackerman, for example, Trotsky in New York, where he raised money in New York. Also Lenin was basically released by the German government. Even the New York Times had something of this, like Lenin was a German agent.
So some of that stuff that came back to Europe from the Americas, that’s not that well-known, but it's also not that obscure. You can Google around and find it. Some of that stuff that came back from the Americas was not good, but some of it was. The modern railroads and the history of how many technical innovations came back from the U.S. to everywhere else. From mass production to, I mean, in some ways bad, but the atomic bomb, nuclear power, all of these things that you would not have had without that fresh new, clean slate to build things and have influence back [the Old World].
And I think that's very similar to what we're seeing in crypto, where in many ways it's already changing the financial system. The most obvious is every government in the world, every bank, knows what CBDCs (Central Bank Digital Currencies) are, at least in concept. And China is shipping a digital Yuan. Which means that a post on a message board by a pseudonymous guy 10 years ago has shook the entire world, and is already a topic for not just discussion, but active execution by the governments of a billion people.
And that's, that’s-
Horace: Just while we're on this cultural aspect, what is your opinion on who Satoshi is? I'm curious as you seem to know —
Judd: Are you Satoshi?
Balaji:. No, I'm not Satoshi. I wouldn't tell you if I was Satoshi, but I'm not Satoshi.
Judd: What if we asked twice?
Balaji:. What's that? What if you asked twice? Ha ha. No, I mean, Satoshi Nakamoto had a very important combination of skills.
First, he was a world-class programmer. The thing about something like Bitcoin is computer security. The late Dan Kaminsky, who was a friend of mine and absolutely a genius in computer security had an article in 2013 where he said, I tried to hack Bitcoin and I failed. And this was very exciting.
The point that he made was that, in most applications, security can rightfully be a little bit of an afterthought. That’s to say that in the early years of the web, maybe not so much today in 2021, but in the early years of the web, you just needed to stand up a site and get users. And you could sort of assume that there wasn't that much to be hacked and people didn't care that much. And so people would optimize for growth over security, because if you have growth and no security, then you can hire engineers and add the security later. But if you have security and no growth, you have no money, and it doesn't matter. Nobody cares if it's secure.
And the thing that's different about cryptocurrency is that security is a fundamental characteristic. If it's hacked, even once, if you can duplicate coins, inflate coins, and that's a persistent issue and an unfixable issue, then the value goes away.
So security wasn't an afterthought. Satoshi built the code like you'd build the code for a space shuttle. Where it was just a different mentality from the very start. And so, first of all, he’s a genius programmer. But, second, he clearly had a deep humanities background to build something — I mean, with many kinds of inventions, there's Newton and there's Leibniz. You know, there’s an idea in the air and there's simultaneous invention of some kind.
But Bitcoin wasn't like that. It really was something where one person's genius shaped the world and it took a while for people to catch up. And it wasn't like there were a lot of contemporaneous Bitcoins with similar ideas. It was something where it was kind of out there and it took a while for people to get it. And even still today, people don't get it because it flips premises.
And unless you're actually reasoning from first principles… people will quote Econ 101 as if it's like some kind of inoculation against this thing that’s at a trillion dollars [in market value]. It's similar in my view, by the way, the American, just to digress on this for a second, the American school and maybe the international school of macroeconomics, I think is similar to like Soviet economics where the Soviet Union had all of these prizes that were given out for Marxist economics. But it didn't amount to a hill of beans because their premises were actually wrong. Some of it was good. Like, I think Kantorovich did linear programming. Some of the math was useful, but it was something where the premises were wrong. And one of the reasons for that is that with macroeconomics, you can't actually run experiments very easily. Because the maximum that we know in macro is something like communism doesn't work. In the sense if you compare a North Korea versus South Korea or China before Deng Xiaoping to Hong Kong and Taiwan and Singapore, or East Germany versus West Germany. You take ethnically similar populations, you partition them, run the experiment for 40 years, communism impoverishes one side of the country versus the other. We've now seen that multiple times. So that's the extent to which you can see that within macroeconomics and so in that sense you've got controlled experiments, but that's not actually the fundamental principle of macroeconomics.
It's something more like John Lanchester wrote this in London Review of Books, you know, almost a decade ago. And Tyler Cowen wrote about it. The fundamental principle of macroeconomics is governments aren't households. Meaning governments can print money, meaning governments can seize things at gunpoint, and so on and so forth.
And this type of stuff, this kind of discussion goes to philosophical roots. It goes to economics. It goes to history. It goes to policy. It's inseparable.
Horace: But just to build on that, the way I would say it, governments typically have a monopoly on violence. What it boils down to is that they can do these things, which are not allowed by households, is because they have armies.
Balaji: Yes.
Horace: They have police forces that effectively are armed. Citizens may or may not be armed, but generally never could match the firepower of the state. So this is — the monopoly on power is monopoly on violence, at this moment.
Balaji: That's right. And the thing about that is that the modern school of macroeconomics is backed not by mathematics, but by guns. Actually, Paul Krugman, in an interview with Joe Weisenthal said, fiat currency, if you like, is backed by men with guns. It's like Mao’s thing, “power comes from the barrel of a gun.” Whereas, and so once we're honest about that, we're like, oh, it's not Econ 101, it's AR-15. Right? And so once you realize, okay, that's actually the backing. These fancy formulas, it's just like the Soviet Union, the Marxist stuff was backed by AK-47. Right?
So once you realize that, okay, well, I'll give you another one, which is Bitcoin is backed by SHA256. So Bitcoin is actually backed by cryptography and mathematics versus violence. And that's just a fundamentally different set of premises. So the reason this is inescapable to talk about is that you can use JavaScript without really knowing much about history. But to understand the problem that Bitcoin solves, you really do need to understand history and philosophy. And that's why Satoshi was-
Horace: Yeah, exactly. I was going to bring you back to Satoshi. So he's a humanist and he's also a programmer par excellence. But you also speak of him in the past tense. Why do you do that? Is he not still with us? And what’s happened, what will happen with his share of Bitcoin?
Balaji: Well, nobody knows. It's something, which is interesting, where it shows that with good enough OPSEC, to my knowledge, nobody's actually, de-anonymized him.
A lot of people suspect that Satoshi was close to Hal Finney, who was an early extropian and programmer, but nobody knows for sure. Some people think it's Nick Szabo. I don't think it's Nick because Nick has never published code to my knowledge. So I don't think he could have done it himself, but Nick has published ideas that are clearly influential on Bitcoin. But the reason we speak of it in the past tense is for him to authenticate a message he'd have to do so from the private keys that are associated with early Bitcoin addresses that we know belong to him that only he would hold.
He could trivially do that. And he has not done that in last seven years. And Hal Finney actually died of Lou Gehrig's disease, I believe, around that same time. So it sort of connects that Hal Finney might be Satoshi, but it's not known. And nobody really wants to poke into it because in many ways what Satoshi did, it’s amazing that it was a human being who did it, like a single human being. And I think it really was a single human being because something like that is just sort of hard to do as a team. Satoshi… the fact that he has disappeared means that Bitcoin is “decentralized,” or rather it is one of the forces that makes Bitcoin feel decentralized.
It is something where there's no identifiable leader, yet it has massive global adoption. Now, you can argue, well, the core developers and the miners and the reference client, and so on, are points of centralization. Each of these are tested over time. I think mining centralization just got tested. People had made the point, oh, China could take over mining, but China just cracked down on mining.
It was a huge drop. If you looked at the Bitcoin mining charts, the hash rate dropped from, I think, around 180 exahashes to like 80 exahashes. That's a huge drop. The biggest drop I think ever in Bitcoin history. And all that happened was what you'd sort of predict by looking at it. Transactions slowed down for a little while, and now it's back up to 140 exahashes.
So China, which is probably the largest and most organized and ruthless and technologically competent state, all the things combined, took a hard swing at Bitcoin mining, actually pushed it out of the country. Bitcoin kept ticking. So Satoshi's absence has helped decentralize it because everybody can imprint their own thing on it.
In this sense, Bitcoin is like Linux where ferocious competitors like Google and Facebook still collaborate on Linux. And the reason is Linux is a demilitarized zone where one party's contributions cannot be deleted or removed by the other parties. It is a true commons where you can give, but not really take back.
And that's what Bitcoin is like: a truly decentralized technology where every user is a root user. Nobody else can de-platform you, nobody else can take away your funds. It is something where you have parties that can be highly dis-aligned, but aligned on BTC. Very, very powerful thing.
And a big part of that comes from Satoshi’s absence and disappearance.
Horace: Okay. Take us home then, back to the Big Five. How do we think about all this building up to something much more visible.
Balaji: All right, so the first 10 years, we can very much compare the current era to the year 2000 for the internet where you had infrastructure, you had Yahoo, you had AOL and you had the early broadband connections.
You have the first billionaires, you had everybody knowing what the internet was, but a lot of the applications of daily use didn’t yet materialize. And there were a lot of people who’d use the internet to check news or send email, but you could basically get away with a completely offline life, even in the year 2000. By the year 2010, that was not true.
And by the year 2020, it's flipped the other way around. Now you need a phone in many places in Asia to get in with your vaccine passport and so on and so forth. And so I think that's similar to where crypto is today. Where the infrastructure is being built out. We have the exchanges, we have the mining, we have the coin developers.
We have the first billionaires. We have widespread awareness of it. But yet today, you can still live a completely crypto free life. I do not believe that will be true by 2030. And I believe it will be totally flippened by 2040, where it'll be crypto first for the entire financial system. But let me go to specifics, okay?
So we talked about FinTech. Every loan, every mortgage, it'll start with all the digital stuff first because that’s which is easiest. The stuff that has an offline correlate to it, like mortgages, will be harder because you have to have so-called crypto oracles recording the transfer of things offline. But all the FinTech stuff, that's kind of obvious.
Okay, then messaging. The big thing about crypto is it allows for provably, encrypted end-to-end encrypted messaging. See when, nothing against WhatsApp, but it just tells you that it's end-to-end encrypted. They could have a bug in the implementation. It's not easy for the user to verify that. You know, it feels the same as Facebook Messenger.
It's trusted [as] end-to-end encryption, but then you can get backdoors and stuff put in. Whereas with crypto messaging… You know, it's funny, when you say cryptocurrency is taking two concepts that seem to be totally distinct like encryption and money, they have, of course, come together since the advent of HTPS and credit card payments on the internet twenty-five years ago.
But crypto has put them directly together in a very powerful way. In the 1990s and the 2000s people talked about this thing, they still talk about it, called the public key infrastructure problem, which is if you could assume that everybody had public and private key pairs, you could imagine this magical world where all of these privacy preserving things were possible.
Now many of your [listeners] may not know what public and private key pairs are. Roughly speaking, a public key is like a sealed envelope that you can give out and people can then put a message in there and seal it up and send it. And only you with your private key can actually see what's inside that envelope.
They can send you messages that only you can decode. There's many other uses for them, but that's one way of explaining them. The thing about it is, when you talk about everybody having a private key and public keys that are out there, well, you could do secure messaging.
For example, if your public key is out there next to your Twitter account, I could just take that public key. I could gin up a message. I could post that to you publicly, but only you would be able to decrypt it. The reason public key, private key, the whole public key infrastructure problem has been hard to solve is you need people to keep their private key available and secure at all times. So if you want to keep it available, you can just put a post-it note on your desktop computer, but it wouldn't be secure. If you want to keep it secure, you could go and put it in a lockbox somewhere, but it wouldn't be available. You’d forget where it was.
To have something be secure and available at all times is actually very expensive. It's like your wallet, it’s like your cell phone. It's something which, you've got eyes on it at all times. And that's something which basically has to be on your person and you need a strong incentive for doing it.
And so the big thing that crypto has done is it's made that incentive literal. It's money. If you lose your private keys, you lose money. And so because of that, everybody, millions of people, hundreds of millions, billions of people will have private keys that they can encrypt messages with. And so that will unlock end-to-end encrypted messaging in a provable way where you don't have to trust WhatsApp, or what have you.
And that's going to become more and more important as you're seeing, for example, Apple ran all these billboards on privacy and, I’m not sure what your stance is on that, but the CSAM thing, if you saw that, recently was basically cracked. Where people were able to put fake caches on people's devices to make it seem as if they had CSAM on there, but they didn't.
And I think you're going to see more and more of this, where there's a lot of advertising based assertions of privacy that are then eroded by some action and people will not want to take the Big Five’s word on trust. They already don't. And they're going to want provable end-to-end encrypted messaging.
We already saw this earlier this year, where there was an exodus in part from WhatsApp to Signal over some rumors that’s WhatsApp’s new terms of service were making it more feasible to eavesdrop on you. And I'm not sure how true that was or not, but you're actually starting to see consumer demand for privacy, which people didn't think existed.
Let me pause there. That's messaging, let's talk about that.
Horace: I think therefore the, let's say, the disruptive technology, as opposed to business model, is trusted encryption. And I think that what you're saying, effectively, is that the incumbents are going to struggle to implement. That's why I'm struggling. I'm thinking of it as a competitive question.
But if the struggle seems to be what you're suggesting, this is asymmetric or contrary to the way they would implement this new demand for privacy.
Balaji: Yeah, here’s the thing. A lot of people tried to separate blockchain and cryptocurrency.
They were like, ‘Oh, this blockchain thing is a great database, but this crypto thing it's weird and unregulated and volatile and it's bad. And so let's do it without that.’ And they tried to do enterprise blockchain where eight banks would get together and have some shared database. And that actually was the worst of both worlds solution where it had all the complexity of enterprise and all of the technical complexity of blockchains.
And the thing is that every application of blockchains will involve a crypto component. So the reason that big companies will find it hard to adopt this is… Why do people have these public and private key pairs? Because they have cryptocurrency, probably because they have an Ethereum or a Bitcoin address or a wallet locally on their computer. That is the prerequisite.
That installation is like having a web browser locally on your computer. And from that you can access internet. If you have a crypto wallet on your computer, you can access the financial internet. And if you do not, you cannot. And so these big companies, because they haven't yet grasped the nettle of how important it is to have Bitcoin and Ethereum integration in their messaging and payment apps, will not get that until too late.
They'll try their own in-house solution because they understand open source, but they don't understand open state. You know, they understand open source in the form of GitHub and open source code and whatnot. But open state is yet another level where it's not just a source code that’s public, it's a database that’s public. The Bitcoin blockchain is public. The Ethereum blockchain is public. Every user is a root user. It's shared state. It's the next step after open-source. They just don't get that culturally. And by the way, I wouldn't call it trusted end-to-end encryption. I'd actually call it something slightly different, which is verifiable end-to-end encryption.
It's end-user verifiable. So that's the big difference. Trust only if you can verify.
Horace: So that gets us to messaging. Potentially you get a situation where unless they buy the whole concept, as you said, the implementation has to be coin plus blockchain. So it's not just blockchain. It has to have this, sort of, pain.
Well, I call it pain because it's like you suffer if you lose, you know, it's verifiable
Balaji: Yes. That's right.
Horace: And, so I think what you're getting at culturally in terms of what's asymmetric about this technology is that it's not just utility, it's utility plus consequence. And that consequence or consequential nature, I think, is what is difficult to absorb for, not just the Big Five, but almost any larger platform company or technology as we know it.
We get into a state of triggered, let's say, consequences, which are negative. And people are just squeamish about it. And I think that you can't be a manager in these companies and say, ‘Man, the consequences of this, I mean, we could get sued, you know?’
Balaji: Exactly.
Horace: Am I getting close?
Balaji: Absolutely. Because, you know, what’s more scarce than financial budget? Risk budget.
Horace: Yes.
Balaji: Yeah. These giant companies have cash cows and are under regulatory scrutiny. So they don't have the risk budget.
They don't have the appetite for risk. And it's actually true that their risk is greater than that of a small company on doing this because they're under the microscope more. That doesn't mean it's impossible. [Jack] Dorsey has managed it with Twitter, but that may be because he's just under the level of scrutiny, where the Big Five are under that maximum scrutiny.
But even Facebook has actually said, ‘You know what, we're going to take the hit on this.’ I give them props for trying in the space. Simply as a founder, it's actually a non-trivial thing to do, but it is one of these things where the short-term incentives are so strong to not take a risk. And you really need CEO buy-in to do it.
I mean, as I said, Satya did a decent job on this, where Microsoft was relatively early on Ethereum support on Azure, and so on. And there's some of that. There’s some of the public cloud stuff they're doing, like the safe things. But putting it into Google Pay or Apple Pay or things like that, or buying it at the corporate level, these guys are all going to be late adopters on that because the risk budget isn't there. You need consensus within the company. And the thing about a crypto company is everybody is hired from the crypto country. Everybody's hired and they already have that consensus.
It's similar to the 1990s and early 2000s, and people thought open source was communism. Ballmer said something like that. If you remember that in the year 2000-ish. And this is hard to remember right now, but if you remember in the early 2000s, there was a cultural and ethical movement around tech, related to open source that was pro-Linux, anti-Microsoft, anti-corporate in some ways and so on. And that actually gave a lot of the early energy for people in technology thinking of themselves as the good guys.
And then over time the good guys became the big guys. And now they are sort of in play at safe corporate mode with lots of MBAs and spreadsheets and chiseling of customers and all the stuff that is hard to escape when you've got millions or billions of users and all this regulatory pressure. But it just changes your culture.
Then on top of that, they've got all of these political disputes internally at the company and leaks and all of this stuff. And so now crypto is like the next version of that, where it is not simply a technology, it has an ethical component to it. It has that philosophy, that community aspect, where it is returning power to the user, it is pro-privacy. It is decentralization as opposed to these centralized tech companies. That by the way, as a user —
Horace: I would even take it a step further. It has an ethical component, which may be a bit squishy, but I'd say it has even a political component. And I think by political here, I mean it's divisive in some ways. And you have to accept the premise that as a participant, you have essentially a partisan point of view.
And that itself is a giant leap because I think the neutrality of, the implicit neutrality, of a company’s governance is like, ‘You know, we play both sides of the aisle where we're going to be.’ And I don't mean this in the sort of left-right sense. But this is a new dimension.
Balaji: Absolutely.
Horace: And if you want to participate, you have to be willing to put yourself in that state. I sensed this myself because I find myself being drawn into this world. And that's been uncomfortable for me because I do not wish to be partisan. I do not wish to be political.
I do not wish to make a statement with my support for a currency or whatnot. But this discomfort also attracts me in the sense that, intellectually I'd say, ‘Well, that's interesting.’ We call the show Asymetric - as an asymmetry, it's fascinating, right? That you have to be in that dimension now. And that's what I think fundamentally would be the root of the disruption. In the true sense.
Balaji: That's right. I think I was able to articulate this in a recent post. That's the difference between Web 1, Web 2 and Web 3.
So Web 1, roughly, was about technology risk. Can we even build it? Can we make packet switched networks? Can we make web browsers, all of that stuff? Can we make operating systems? Okay. Web 2, it wasn't that tech risk went away completely, but much more of it shifted to market risk. Now that you had open source databases and you had all of this open source tooling, a lot of it was, ‘Hey, we know we can build it.We can snap together this web app or later this mobile app, but will people buy it?’
Will this consumer behavior be adopted? Will they use, you know, Snapchat versus FrontBack? If you remember FrontBack, there were a lot of these fruit fly type experiments with consumer internet, in particular, where the risk was not so much, ‘Will the app work?’ It is, ‘Will people actually buy it, will they use it?'
And now we're in the third stage, which is Web 3. With crypto [related] things, we know we can build it. The tooling has now become mature enough that it's not, again, there is still technical risk, but you can launch a token or a coin and we know people will buy it.
It's actually kind of interesting that there's almost always going to be some demand for the thing, at least, you know you can get it off the ground. But the question is now will people ban it? So in other words, Web 1 was about tech risk. Web 2 was about market risk, but Web 3 is about regulatory risk.
Horace: Yeah, that’s what I mean by political. I think I've used this word in maybe my own way because regulatory ultimately gets into the question of politics and that isn't, again, the classical left-right divide, but more like, ‘What is your philosophy? What do you believe in?’ What matters is your point of view and, and that you're forcing people to have that.
That's the thing here. I think it's forcing people and you cannot separate them any more, saying, ‘I'm neutral. I just believe in tech.’ It's forcing you to make a stand and that’s a very uncomfortable position for any corporate entity. It forces them to become partisan, in a way, on this dimension.
And that is what they will resist. I'm sort of taking your point here. And I'm trying to, myself, think of how this becomes disruptive
Balaji: You’re right. You’re right. When you're serving a billion people, they have an Innovator's Dilemma-like thing. The problem for them is that this is a, whether you want to call it political belief or partisan belief, or what have you, ethical belief, in decentralization, which is growing exponentially.
If you think about the number of crypto adopters as just one metric, it's like a hundred million today. And it was certainly not that in 2010. Sub 1,000,000, probably, sub10,000, probably sub 1,000, even in 2010. So that's massive, massive growth, but it's growth that they feel that, probably correctly, that it would be challenging for them to tap into without taking a significant messaging and risk budget hit.
Now, again, can they do it? I mean, as I said, Dorsey has managed it. I think Facebook could have, rather than doing Libra or Diem, they could have just built Bitcoin and Ethereum into their Messenger app and started with that. And that would have been smart. And they could still do that in VR, potentially. They're at least further ahead.
They've actually taken some of the hits internally on getting there. They've got some engineers, but the biggest companies that want to be all things to all people and do inoffensive things… You know, the thing which people tell startups, they tell them focus, focus, focus, focus, focus.
You almost can't focus too much on some micro demographic. You win there and then you level up, and you win there and you level up again. And the big company is not going to be able to focus because they're all things to all people. And that's now something which is no longer simply a market thing, but it's also a political / ethical thing, where you have to essentially bet on decentralization.
Horace: I'm starting to get it. Do you want to get into some of the others - we've done messaging, do you want to get into some of the others?
Balaji: So we talked about FinTech. We talked about messaging and, by the way, messaging is not simply, just like you go from email to group mail to Facebook threads.
Messaging starts with one-to-one messages, but every single messaging app will be rebuilt with verifiable end-to-end encryption, where you'll use your, probably your Ethereum name, but you could do one to one messages. You could do one to N, you could do N to N. You could do blogs, you could do blogs behind encryption walls.
You can do Slacks. All of these things are being built around so-called DAOs (Decentralized Autonomous Organizations) today, which combined sort of messaging plus corporate governance plus communities. So, relate to that login.
So right now, a huge moat for these big tech companies is log-in. With Apple login, with Facebook login, with Google login, with Twitter, where they've got hundreds of millions of users and you can use their APIs and implement logging onto your site, but you're also subject to them.
They can cut you off. That's no longer the case with something like ENS (Ethereal Name Service), where you can log in as Horace.eth. Just your local private keys are determined, not a password that can be reset, not account that you can be deplatformed from. That is a fundamental change where the solution to that equation, the private key, is held locally on your computer and that's the sufficient and necessary condition to log in.
If you have that you can log in. And if not, you can’t. So that completely changes login where it means that for example, you can't be deplatformed from social networks. It means you can authenticate also without people necessarily knowing who you are besides the fact that you have that key.
It's a structural shift in how you actually even log into systems and it's sort of like phone numbers or emails. Where, if I have a collection of your phone numbers or your emails, like on a sub stack, or in a set of numbers that have opted into text messaging, I can contact you. But even better than that, because nobody can even intermediate with the phone number the telcos could in theory, stop you. But with this kind of messaging login combination, they can't really stop me from messaging somebody on ENS.
So that disrupts Facebook login, Twitter login, Google login, LinkedIn login, all those - and it’s already happening with applications like Uniswap, for example, you could log in with ENS.
Number four: Social. So when you've talked about messaging and login, you get to social and social is basically just sending lots of different kinds of messages back and forth to each other.
Decentralized social networks are now actually out there and early and working. Just technologically - Mirror, Bitclout, Capsule Social, many others. A lot of the DAO chat-style networks are out there. I've invested in a bunch of these. I'm going to invest in more, no particular endorsement of any one of them, but decentralized social networks are now actually out there where every like and post equivalent is actually on chain versus simply in a centralized database. And the way of thinking about what a big deal that is is you do not have root access to Twitter's database or Facebook's database. But with a decentralized social network, a developer can hit enter and print out every tweet equivalent from the beginning. They can print out the social graph, they can index a social graph and they can search the social graph.
So there's applications, so-called block explorers. This gets us from Social into Search. One thing that is not very much thought about, because this battle happened almost 10 years ago, is how Google strive mightily try to buy Facebook. They were really annoyed at the emergence of Facebook and LinkedIn and Twitter because they were dark to them.
These are graphs that they couldn't search and they knew how big it was going to be. And they were like, ‘Oh, we're only gonna be able to index the open web, this is closed.’ The only thing that really came out of open social was the open graph standard. But they weren't able to get these social networks to open up their databases because, of course, they could make more money with them closed than open because if the database were open and anybody could read and write to them, well, they would not be any more the monopoly provider of advertising on their platform.
That's why Twitter shut down Tweetdeck and deplatformed all these companies that were initially building on its open protocol, it made more money with advertising vs having an open protocol. The critical thing that decentralized social networks have solved is the alignment of interests between the developers and the users and the platform creators where everybody just benefits from the token’s appreciation. And now you can build on this decentralized social network in a way that you could not do so on Twitter, because they'll deplatform you. You can't build on Facebook's API, they’ll deplatform you if you get successful enough.
So decentralized social networks, don't just enable decentralized social they also enable decentralized search because an underappreciated aspect of Google… First, a lot more searches are done on Twitter these days than people realize. I think it's, it's crept up quite a lot relative to Google. I'm not sure if you have this behavior, are there days where you search on Twitter more than on Google?
Horace: Not more, but there are days. And when I do, it's frustrating because I don't find searching on Twitter easy.
Balaji: It's not that easy, but —
Horace: But I sense what you're saying. Also with the Facebook problem that the shift to social from web was, I think Google dropped the ball there. I think that's one of the greatest failures that they didn't manage to transition to social in any way.
Balaji: Yeah, they got YouTube. That’s their big one that they did get.
Horace: YouTube was, yeah, it's the best thing they've done actually since search.
Balaji: So alright, so extending this point, a very important technical point where you’re thinking about search is [that] closed social network databases are harder to index in the open web, but blockchains are easier to index in the open web. And, this actually is something which most people don't realize, blockchains, until really the last year or so, were for the most part used to contain financial data.
And so block explorers like Blockchain.com or btc.com, that are indexes of the Bitcoin blockchain, or Etherscan.io [which] indexes the Ethereum blockchain. Those don't look like search engines to people, really, because the data structures they were indexing were things that weren't really things you thought of as being on Google.
You're looking for Bitcoin addresses and transactions and later on smart contracts and tokens, but these are very high volume search engines. And to show how behind the eight ball Google is, Google hasn't built a block explorer for Bitcoin, even. Or any of the major crypto chains. Forget even Ethereum, they haven't done Bitcoin. And that’s so within their core competency, it has zero regulatory risk, but just shows how behind they are, that they haven't done that in 2021. The reason that's important is what we've just proven over the last year, which is a huge milestone, is something like Bitclout or Mirror shows that you can host social networking data on a blockchain. There are others like Hive and Steam that have also shown this. And once it's all on chain, it becomes so much easier to index for the purposes of search.
People for example, stood up a thing, cloutavista.com to index Bitclout. This is a demo, I'm not saying any particular decentralized social network will win, but in 10 days they were able to stand up the search engine.
How long would it take you to stand up a search engine for Twitter? It would take basically forever because you need access to their API. They're not going to give you access to the API. And if they do, it's going to be very throttled and very expensive, and you'll have to raise venture just to pay for that. They can cut you off or change it at a moment's notice. They don't care about your business. And even if you give them a hundred percent of the company, they might not care.
Search will be transformed by block explorers. There's so many different ways from a technology standpoint that blockchains are easier to index.
Just one example, there are entire PhD dissertations that are written on freshness indexing. You've got a million websites, you've got a limited crawl budget. You can't crawl all of them every second. It'll make the servers mad, but it'll also use up your own bandwidth. And they don't update every second.
So how do you actually crawl them? Well, you have to have some statistical model of when they're likely to get updated and you have to go back to the website when it's predicted to have been updated and you have to have some provision for them going from one update a week to one update a day when you see a lot more changes than they used to have, and you're updating your parameters… It's this huge mathematically complicated thing.
And that's just one aspect of search indexing. And all that goes away with blockchains because you just subscribe and you get a block every 10 minutes or one minute, and it's got all the changes there. So, just the architecture obviates that entire —
Horace: It’s self indexing.
Balaji: It’s self indexing. You get a change set. You know, this is also related to the broader move towards, log structured databases and so forth, which, if you've got listeners who know about what's been happening in data science, that's been a big deal. But it all kind of comes together where you have Kafka and so on.
These change sets that are coming in, you can just subscribe to them as opposed to having to go out and get them. You don’t have to crawl. So that simplifies fundamentally - that alone makes search easier.
Okay. Going a little bit further. The Crypto Phone, you know what's happened recently with Apple and the CSAM thing?
The reason that it's bad for Apple to be searching your phone like that is today they're searching for photos with incredible possible levels of false positives, because people can put these adversarial machine learning images on somebody's phone and frame them for a very serious crime.
Tomorrow, though, they can use the same technology to scan for cryptowallets on phones. And it may be ordered to do so by governments. So that alone is going to mean, and there's already pushes for a crypto phone out there. Foundation Devices, for example, there are people who are building it. But a crypto phone is also important because of other things like payments. You have all this pressure on Google and Apple for payments.
The fact that you've got login, payments and identity, getting decentralized and app developers making more money and users having their funds secure. These are the kinds of pressures that could actually lead to a new mobile operating system. And actually that gets to the next point, which is Crypto OSes.
So that's actually where, unbeknownst to most people, the operating system innovation today is happening in crypto. The reason is, a blockchain like Ethereum has a compiler and a database and a built-in programming language, and is as complicated as a web browser in many ways. Because you can write programs on it.
You don’t just write programs on it. You write programs that interface with other programs on it. Ethereum is a programming environment where one Solidity program can call another. That's what it means to be composable. You know, you can take a loan and you can pipe it into a Dex (decentralized exchange), and you can pipe that into interest, and so on and so forth.
So the innovation in operating systems is happening in crypto where the operating system and the payment system and the login, and then eventually the social network, they're all just kind of baked into one thing that's happening in plain sight. But that's actually what comes after Android and iOS and Windows and so on. It's in plain sight and it's an operating system that also has the community, the fan boys, which are critical for it, because they're all the token holders.
Horace: I’m already extrapolating what you're saying. So my concern now is this, what you're saying is effectively, then… Let me put it to you from an investor's point of view and say, okay, I got you. It sounds like the value of Apple, Google and others will probably start to evaporate.
Balaji: Well, I wouldn't say… it's gonna take like 10 or 20 years. These are huge incumbents —
Horace: Like I said, I’m just extrapolating. I ask you this then, okay, what would you do instead? Who would take their place? And the answer, if I may, it sounds like there is no way to concentrate profit anymore in an operating system. Because, by nature, this isn't going to be replaced by another Apple or another Google.
Those business models will simply not longer be viable. You're going to have to find ways of creating value elsewhere. Because what you're saying, effectively, is search is not value accruing. Platforms that are effectively communication platforms are no longer accruing. And so that includes Facebook and messaging. And even the phone itself. So then, what would be the new empires if there were new empires to be built?
Balaji: The coins.
Horace: The coins themselves?
Balaji: Yes. Because basically, if you think about the whole fiduciary duty model of a corporation and people have pushed back on that, they said, ‘Oh, you know, a corporation has duties to the community, not just to its shareholders’ and so on.
Crypto answers that by making the community the shareholders.
Horace: So would you recommend any coin in particular or is, are they all pretty good?
Balaji: Well, they’re definitely not all pretty good. I would say if you're just starting out, buy Bitcoin. That’s just where to start.
I think Ethereum is also, obviously, at very large scale, and those are like the number one and two. Once you are familiar with… If you can only do one thing, buy Bitcoin. If you're a little more adventurous, buy 50/50 Bitcoin and Ethereum. Beyond that, I could go on for hours and hours about different kinds of coins and what they do.
But what I will say is if you think about what happened with the internet, it took all these different forms of media, like radio and television and newspapers, and it turned them all into packets. And what crypto is doing is it's turning every single existing financial instrument into on chain debits and credits.
Because ultimately what is a loan? It's debits and credits somewhere. What is a mortgage, what is a derivative? What is equity? What is a cap table? And the fundamental mechanism of value creation… what’s the most important data structure in Silicon Valley? You can argue it was the cap table. You know, the capitalization table determines who holds what equity. And that little Excel data structure, with a thousand odd rows is what led a thousand odd people to build Google in 2004 and align all these people from around the world to build this amazing thing. Even more than their billion row data sets.
That cap table is now on chain. If you go to something like the Brave Basic Attention Token, or any of these other tokens, and you look on Etherscan, you go from a thousand people to 50,000 or 100,000 or even 1,000,000 people that hold a given token.
So you've scaled up the basic aligning function of Silicon Valley, the equity shares for shareholders, into something that is not equity, but it's like Equity 3.0 or the sequel to equity. The problem with this, of course, is the reason crypto is not equity is it's API keys. It's something which you can use to interface with an app.
It is your encrypted messaging system. It is your login. It's all these things that a share doesn't do. And so fitting it into older classifications, like the SEC and others want to do is just sort of like trying to treat every packet that's being sent to your house as physical mail and requiring you to get a stamp for it and saying, 'Oh my God, I can't believe how bad you are. You're not in compliance. You don't have a stamp.’
It's this old way of looking at things that I don't think is going to survive long-term. I think we're in the middle of, you know how there's a Reformation and then the Counter-Reformation you're familiar with that. Right?
Horace: Yeah, sure.
Balaji: We're in the middle of what I would call the Decentralization and the Counter Decentralization in both the U.S. and China. They're pushing back on decentralization. Pretty hard in China and fairly hard in the U.S. And I think it's going to increase.
But I think the rest of the world also has a say. And I think what's really under-appreciated is, and this is kind of related to this also, you know, that Google, Apple, Microsoft, Amazon, Facebook have to deal with; the rest of the world no longer wants to have American tech companies be able to deplatform their political leaders in these countries. Or unbank them. And they don't want the Chinese companies to do so either because the new boss would be same as the old boss. So I wrote a series of articles on this, where what I think happens is that the new non-aligned movement is the aligned movement, the decentralized movement. Where just like many of these countries have actually said, ‘Hey, you know, for military or government purposes, we should look at open source software first versus proprietary software.’
They're going to, over time, shift to using Bitcoin and Ethereum and other decentralized cryptocurrencies for different purposes. Because they are a transaction and soon communications networks that cannot be shut down by American or Chinese companies. And that's another thing which a Google or Apple or Facebook can't really compete with because the whole point is it's not them. Unless they manage to launch a fully open source project.
You know, React is something Facebook launched that is a genuinely open source project that people can use. Because even if Facebook cuts them off, you can go and modify it. Unless they actually launch a chain and take the whole hit of doing that, they won't have the trust. Because people don't want them to have server side control.
So going a little bit further, advertising and e-commerce. So, the engine of Facebook and Google is CPM and CPC ads. Costs per impression. And then per click. Every thousand impressions, every click, you pay them. They don't usually do full CPA advertising where you only pay them when something is sold.
If [you’re] Casper mattresses, though, what you'd want to do is you say, ‘Hey, I'm selling a mattress for X dollars. I only want to pay Google when I've got a conversion that came through Google.’ The issue with this is Casper as an incentive to understate the number of conversions and Google has an incentive to overstate it.
You would need an incorruptible neutral third-party ledger of all transactions in order to actually do full CPA advertising. And guess what? That's what the blockchain is.
So CPA advertising is going to be an area where I think that's going to start really hitting the Big Five in an area where they don't expect it because the people within the crypto community, on both the e-commerce and the consumer side, the merchants and the consumers are at sufficient scale where if a pure CPA thing was introduced, it would just be better.
It would be something where you might offer discounts to people because of it. It gives you better analytics. And then what this also does by the way, is it's better for merchants because it means automated accounting. All the stuff that you're currently paying PwC or all these guys to do, can be turned into a shell script if all your stuff is on chain. Which is a huge thing, because it also automates diligence and then automates M & A, you can start actually stacking things. Once you, I mean, we're talking five or 10 years out, but once you start going from, okay, all transactions are on chain, then all financial statements are on chain, then actually M & A can be put on chain because these higher order abstractions can be built on it.
And this is sort of like saying in 1990, well, once you've got emails, you'll have blogs and social networks. We're looking far out, but that's what happens once you start having more stuff on chain, it becomes more programmable. Okay, so CPA advertising: there’s e-commerce, there’s accounting, a few more pieces.
[Let’s talk about] hosting. AWS. So, centralized hosting is going to be tricky to fight head on for awhile because you know, the scale, the capacity of blockchains isn’t there yet. But it's improving dramatically. And if you look at Filecoin and Chia, and of course, Bitcoin itself, Ethereum… one of the most remarkable things is a moat that I thought 10 years ago would be very difficult to disrupt, which is just the sheer scale of Facebook and Google's data centers, right?
That's something that seemed like only a huge centralized company could do. We have now proven that if the protocol is fixed, people will do massive multi-billion dollar international data center build outs, not just for Bitcoin mining, but for Chia and Filecoin and many other lesser well-known coins.
If the protocol can make money, people will buy the hardware and they will rack and stack it. And that means that many things that we think of as companies will be turned into monetizeable protocols and decentralized in this way. So the hosting, the data centers will get there.
Creator monetization. This is another attack where, you know, Facebook and Twitter are now trying to do these newsletters and so on. But for 10 years, 15 years, they really didn't give creators a cut. And with crypto, creators, don't just things like NFTs, they don't just make money from art, they can make money from equity-like appreciation. People can buy into their coin to go and attend their events, or you could log into a Substack equivalent by just holding enough of the coin.
So this combines like the earlier things I was saying about login. So the crypto, the encryption, the payments are kind of the same thing. It also kind of attacks the Big Five and other tech companies on the backend. It's like holding a coin is in many ways better than equity compensation. It's liquid, it's marked to market. If it's legal in a country, you would just do that.
Some countries are just going to be smart and they're going to stop with all this stupid stuff from the 1930s and orange groves… just using 100 year old regulations to harass founders today. You have to deal with it because that's what the environment is.
And you can, I think, make a very strong argument that crypto is not the same as equity because you can use it for API keys, you can use it for other things. But eventually there'll be countries, and actually, even in the U.S., Wyoming has passed DAO laws.
There are states within the U.S., both subnational and international regulators that are enlightened and are going to say, absolutely, we want the entire stock market on chain. We want the stock chain. We want the transparency, we want the throughput, we don't want to have the Robin Hood situation where we're still dealing with DTCC (Depository Trust and Clearing Corporation) and these antiquated ways of recording stock transfers with paper certificates. We want modernity, we don't want to talk about orange groves and try to fit a square peg into a round hole.
So I think equity compensation, the backend, that gets transferred to coins. And these companies that are used to outbidding are not going to be able to do so, because if you actually look at the growth of Bitcoin and Ethereum and other coins over the 2010s, as remarkable as the growth in the Big Five tech companies are, those coins make them look like slow growth companies.
The story of the 2010s, in retrospect, with zero offense to Uber or Airbnb or Stripe, it was Bitcoin. That was the biggest hit of the 2010s. It was bigger than all the other startups combined, because it wasn't a startup. It was a coin.
I mentioned FinTech, messaging, login, social, search, crypto phone and crypto OS, advertising, hosting, data centers, creator monetization, equity compensation.
There's also values. You know, this is very important, actually. It almost goes unsaid, but it shouldn’t. The initial values that tech stood for back in 2012, or thereabouts, Twitter called itself ‘the free speech wing of the free speech party.’ And there was a huge emphasis on this during the Arab Spring. And of course with open source. And that strain still exists. The current non-free and focused, very state aligned thing where you're censoring people, for contesting, what the WHO is saying, where the WHO changes what it said last week is, is basically the Western equivalent of the Chinese censoring Li Wenliang for getting the message out.
And I certainly don't agree with everything that is said on social networks, but I do agree that the centralized authority is not always right. And to simply treat that as truth and censor people who are saying something contrary to that means it's not a free society anymore.
So the values aspect, anybody who cares about those values, and those are some of the most ideologically motivated and committed engineers, those folks are going to crypto. Then there’s, obviously on the privacy end, you only get verifiability if you've got the private keys locally.
So you put all that together and that's actually a recipe for attacking enormous swaths of the whole thing.
There's one other aspect I'll add there, which is when the back ends become open, this actually disrupts APIs in a very fundamental way. Because right now, yes, you have APIs, but they're pretty siloed. You'd use a bunch of APIs in your app, but to make Stripe talk to Shopify, to this or that, maybe you'd use Zapier or maybe you'd write your own customer integration. It's not that easy to work with because you don't have root on those databases.
With crypto backends you do have root, you have total root access. Every user can look at every single row of the, it's not exactly a row, but every entry in a blockchain. Any user who owns coins can write and any user with sufficient compute can write blocks. And so, because of that, anything that's like the next Google Docs or the next messaging app that's built on a blockchain has much better interop[erability] between chains because it transforms what an API is.
API access, your API key, is holding the coin. And you can do anything you want so long as you hold enough coin, within compliance of the protocol. So what I just outlined, that’s essentially a recipe for 10 years of disruption.
Horace: Absolutely. But let me say this - I think it's not just disruptions of the Big Five as you put it, or maybe Big 100. A lot of possible asymmetries here. But my concern or, rather, optimism even, is that this is about institutions more, even, than private equities. It's institutions that have been built throughout the Industrial Revolution. And you talked about putting equities on, the very idea of holding paper to represent something else. The very idea of institutions, which are there to ensure transactions and trusts.
Those, again, I'm sort of parroting the ethos of coin, but you've effectively shown the roadmap as how it happens in the ways that are very tangible. My point is this - because when I wanted to have the show with you was to ask a sort of a profound question.
Is someone living in a 21st century, as my son was born in 2005, will they see as much change throughout their life as someone born in 1900? Or even someone born in 1800 living through the 19th century.
So if I asked this question of myself, because it's not so much about me but the next generation. And I struggled with this question because I felt like the first 20 years of this century, haven't been all that exciting in the same way that the first 20 of the last century or even the one before it. If you think about the 18th Century, sorry, 19th Century- early 1800s were very volatile. There were the Napoleonic wars. And then we ended up with the Industrial Revolution taking off. Steam engines, railroads. It was a crazy century. And then you get to the 20th and you've got World War I already would have passed [by now]. We would have had the invention of the airplane, the mass production of automobiles.
We were heading into the Roaring 20s by now, and the 21st Century looks pretty lame so far. And I thought to myself, you know, all of these changes… I am a technologist. So I think of all the changes that we saw in the previous centuries, it was due to technological innovation, due to inventions.
And the formation of the Industrial Revolution was fueled by capitalism. That's what we call it, capitalism. But I ask myself, and I’ll put the question to you, is: Do you think someone born in 2000 and then living 100 years, which is not improbable, would they experience this century in as much of a sense of wonder and change and drama that the 20th Century, now, of course, there's a lot of negative things have happened. But, fundamentally, someone born in 1900 dying in the 1990s would have seen a completely different world.
And that's exciting. That's very exciting to think that you're part of this dramatic, poetic change. And good and bad, but generally progress. And I would say I'm excited now from what I heard, that possibly the 21st Century will be even more exciting because it certainly would undo a lot of things, if what you say is true, but also might create new things we cannot imagine.
Certainly, 1900 Man would not have imagined life in the 1990s, no way. And I don't know if we can, and we should be humble about what will be created from this creative destruction that has to happen. But do you believe, as I do that, should we be optimistic that something will emerge, that will be even more exciting than than the last century?
Balaji: Yes, though, let me get my take on that, I actually did a whole interview - it’s funny because we think about some of the similar things, but I did a whole interview with Sotonye, which you might find interesting on this topic of 1800s, 1900s, 2000s, actually, in its own way.
My thesis is 1950 was sort of peak centralization. And in many ways, if you go forward and backward in time, we're getting more decentralized from then. So 1950, you had one telephone company and two super powers and three television [networks]. You had AT&T you had the U.S. and U.S.S.R., and you had ABC, CBS, NBC.
If you go forward in time, 1991, the internet frontier opens, NSF (National Science Foundation) repeals its acceptable use policy and allows commerce on the internet. Backward in time, 1890, the frontier closes, the western frontier. Frederick Jackson Turner, his [essay], the frontier thesis, where he talks about how actually it was the frontier that made America, more than even democracy or capitalism.
It was exit, it was immigration, it was the free soil. And the fact that people could just start a new community or a new business, or go out west and, and make their name on nothing that gave America its character. Now, of course, there's the Native Americans and so on, which obviously complicates that story.
With the internet you have a frontier that did not have that issue. And if you go backwards and forwards, there's lots of parallels where as the centralized state in the west, its grip loosens. We see the Coronavirus and the Spanish Flu. We see left and right fighting in the streets. And we saw that in the 1920s and 1930s.
We see the tech billionaires, and we have the Robber Barons of the past. We see the private banking era of the past, and we have the cryptocurrencies of the present. We see the same, well, not the same but similar, arguments in William Jennings Bryan’s Cross of Gold speech on monetary policy was a huge thing in the late 1800s in the U.S. and digital gold is an issue again.
We see fundamental arguments over the role of the state and all this stuff with sanctuary cities, and gun laws being different at local level from the federal level and states pushing against the federal government as similar to some of the tectonic plate movements in the 1930s with the federal government versus the states. And then also even the mid 1800s.
And what I think happens is all of those things get resolved in the opposite direction this time. Where if you ramp up from, arguably, the 1700s, you might track it all the way back to 1492, or something like that. But at least from the 1700s to 1947, technology's favored centralization.
You've had railroads, telegraph, radio, television, movies, mass media and mass production, where a few people could control a lot. And then you go to de-centralization with the transistor, the personal computer internet, remote work, smartphones and now cryptocurrency where you're decentralizing power away from the Maos and the Stalins and the Pol Pots. And even the FDRs. The people who run these gigantic countries, where who's the number two after them? All of this power is concentrated in a few people.
Now we're actually decentralizing it out. And, in many ways, people talk about inequality rising, but actually in many ways, equality is rising and that's actually what people have a problem with.
And what I mean by that is A) global income equality is converging because China, India, other countries have been rising, relatively, they were very poor 40 years ago. But it's not just them. It's also chunks of South America and Southeast Asia and Eastern Europe and Russia, and so on.
B) consumption inequality is plummeting because a kid in Nigeria or India or Brazil has basically the same Google experience as Larry Page because it costs just fractions of a cent. And then C) and this is to my point, power inequality is decreasing because some kid in India or Nigeria is not going to grow up to be the president of the U.S. but they can become the founder and CEO of their own tech company. Or their own crypto protocol. And so they can rise in a different way, which doesn't include migrating to the U.S. and doing that whole 20th Century rigmarole.
So I do think it's an exciting century in many ways. I actually think the 20th Century was a much worse century than the 19th Century, because the 20th Century was two world wars and communism and socialism for much of the planet.
It was okay in the U.S. and Western Europe. But [for] much of the planet, it really sucked. And now it actually might flip where the U.S. and Western Europe, the U.S. more so even, that feels like it's kind of… Maybe not all of the U.S. I'm actually bullish on individual states like Wyoming and Colorado and cities like Miami and so on. They've gotten behind crypto. And the reason I just keep saying, ‘crypto crypto,’ is because, as we just went through, the sheer scope of applications is difficult to realize until you've gone through it. It's really a big deal. It's a civilizational technology. It's not simply like a toaster oven or something.
So those states have gotten behind crypto. I think there's pieces of the West that are going to be good, there’s pieces that aren’t. And it's almost like a flip of the 20th Century where it's the East that is more capitalist, that's India in particular, but it’s also east Asia, it is probably Eastern Europe that is maybe more capitalist than the U.S., much of the U.S., and much of Western Europe.
So, that's my broad scope of history.
Horace: Yeah, I wouldn't be as… my judgmental question on better or worse was not really that most people would be better off or [had] suffered more, but more in this poetic sense. We feel like we've made progress
Balaji: Acceleration, yes. Yes.
Horace: And the 20th Century… I don't think that you can argue that the technologies that emerged, that someone born in that century would have witnessed —
Balaji: Yes, they go from out houses to flush toilets, and so on.
Horace: Yeah, exactly. Not distributed very well, but the thing about the 21st is I cannot imagine how it's going to go. But to me, I sense that we will [eventually] feel like we're making progress. And I think we'll feel, because the first 20 years, it hasn't felt like that. I mean, we've certainly had a lot of… the joke goes, you know, we didn't get flying cars, but we got 132 characters.
So there's going to be much more coming. And I think there's a sense of wonder in the sense of opportunity, a sense of optimism in the sense of the decentralization. But also, like I said, that optimism around the small states. I live in Finland now, but my point is -
Balaji: Yes. Small states, yes.
Horace: I said this once, the 20th Century was the century of the large state. The superpower was every everyone's idea of success. But now, I think it's going to be much more the small states that are going to be the 21st Century giants, if you will.
And so that's my point. I agree that it might be a very different feel from an individual point of view, but I think, as a civilization, we're probably going to look back, or historians will look back on 21st and say, what was the defining thing?
Like, I think of the 19th Century, sort of as the steam century. And I think of the 20th as the chemical engineering [century]. You know, at the end of the day, it was the fact that we built everything on top of energy that was suddenly released, right?
Balaji: Well, it's interesting, because I'd say the 20th century had a lot of stuff.
You can argue this, but going up to the moon landing. Then after 1969, outside of digital technology, things really slowed down. It's hard to think of some, I mean there's a microwave oven and stuff like that. This is the point Thiel has made, people have made this with the website, WTFhappenedin1971.com.
I think partially it is the gold standard, but partially it is, essentially, the sort of risk aversion that arose after that point in time. When nuclear power plants were made very difficult to build and regulations were enforced in such a way that it was just difficult to take risks, voluntary risks.
Balaji: It's by J. Storrs Hall. It's self published. It has a really bad looking cover, but it's really good. It's something where you learn something from every few pages. Highly recommended —
Horace: I did my own conference once on the subject of what happened to modernism.
The idea of utopia, it being foreseen in the 1950s based on technological progress, which, I put it to you this way. So if you were born in 1900, by 1950, you were middle-aged. But you would have seen all of this progress. And if you were, technologically sort of extrapolating it you'd say, well, that's where you get the flying cars by the 1990s.
So you see the ad copy, the way advertisers were, and the usual visuals from the 1950s of flying, or progress in agriculture, in transportation, progress in, not so much computation, but the extrapolation of the first half of the 20th Century.
And I pointed out that the last place where such optimism existed was in the tech sector because the rest of the country, the rest of the world, felt like it was in stagnation. And, again, we can quibble on this or discuss this on another episode. But I think we're in agreement that possibly this is the key.
If someone were to look back on the 20th and then say, okay, maybe it was internal combustion. But someone looking back on the 21st would say it's Bitcoin.
Balaji: Yes.
Horace: It’s crypto. That's the biggest thing that happened in this century.
Balaji: It is. I actually do think Bitcoin, the impact of it is at least on par with the steam engine. Maybe more like the Reformation or even the Bible, in terms of where it's going to be long-term. It is just such a fundamental, it's a social technology, because it just changes the relationship of people to each other and decentralizes power in this very, very, very fundamental way. And I don't think people get that.
Horace: I think that's a great thesis. That's what I wanted to do in this show is to sort of zoom out as much as possible. But you took us zoomed in to explain that these are the building blocks. And it's hard for people to, you need —
Balaji: Yes, crypto is too zoomed out in some ways, right?
Horace: Yeah, but you need the mind that can grasp this, can go both ways. And that that's very hard, flexible plastic minds. I've spoken to people in the community who are very nuts and bolts. And then there are some who are very idealistic and some very ideological. And most people, when they look at this and say, ‘My God, it’s filled with nerds and it's filled with ideologues. They're a bunch of maniacs.’ So it's important to bridge those two somehow. So thanks for all that.
Balaji: Hopefully this was good. We talked about applications and of relevance to your audience. Happy to do it again. This was great.
I'd like to let everyone know that Asymco is a podcast channel available on Apple Podcasts and Supercast. These podcasts are subscription-only (with a trial period).
Join Horace Dediu and Judd Rubin as they strive to ask the right questions on the purpose of the firm, priorities in a time of plenty and what it means to be great.
Content is updated at least every few weeks and more likely weekly. The format includes conversation with Judd Rubin but also interviews. Guests already include thinkers and doers such as Efosa Ojomo, David Sundahl, and Balaji Srinivasan.
The channel includes three podcasts today but we will introduce new shows on an eclectic range of topics.
Bertel Schmitt, industry propagandist, journalist and legend joins us for a rousing conversation on production, low-end cars, Tesla, and the Great 'Round-the-globe Automotive Factory tour Tour.
One of the most fun shows I've ever recorded. Highly recommended.
It was a pleasure to spend a day with Henrik, the leading tech journalist in Denmark, and the Micromobility Summit at the Techfestival in Copenhagen.
We did the recording live in front of a large audience the evening after the event and it is already causing a stir in Denmark. I think it's worth a listen (about 30 min.)
