All-In PodcastE162: Live from Davos! Milei goes viral, Adam Neumann's headwinds, streaming's broken model & more
EVERY SPOKEN WORD
150 min read · 30,026 words- 0:00 – 4:25
Live from the WEF: "Oh Davos, Kumbaya"
- JCJason Calacanis
All right, everybody. Welcome to the 54th Annual World Economic Forum here in Davos.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
You guys didn't know this, but as elites ourselves, we were invited to kick off the festivities.
- CPChamath Palihapitiya
Surplus elites. Surplus elites.
- JCJason Calacanis
Yeah. You know, the All-In podcast very popular, and so they wanted us to come and represent the pod and our audience there. And, uh, it's been amazing. If you haven't seen some of the great musical performances this year, I mean they're, they're so notable.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Let's just start off here. I mean, guys, we were here for this live.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Soak it in. I mean, on the, put that on replay here, Jamal.
- CPChamath Palihapitiya
Soak it in. (laughs)
- DSDavid Sacks
Oh. There's the air flute.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
(laughs)
- CPChamath Palihapitiya
Soak it in.
- JCJason Calacanis
Wait, wait. There's a great moment where she really starts vibing.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Wait for the head shake.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
The eyebrows are great, but the head shake comes in at about there. There it is. There it is. There's that head shake.
- CPChamath Palihapitiya
I like her... I like her muumuu. I like her muumuu.
- DSDavid Sacks
Have you ever played the air flute?
- CPChamath Palihapitiya
(laughs)
- DSDavid Sacks
Or just the skin flute, Jamal?
- CPChamath Palihapitiya
Just the skin flute.
- DSDavid Sacks
(laughs)
- CPChamath Palihapitiya
At high school.
- JCJason Calacanis
Only in high school. Who went there? It's like a, it's like a high school thing. But guys, guys, th- this isn't it. There, there were other... Uh, there was a witch doctor or something. I'm not sure exactly what's going on here. I'm gonna just apologize in advance for mocking this.
- NANarrator
(Native American chanting)
- JCJason Calacanis
Or for Sax mocking it, I should say.
- NANarrator
(Native American chanting)
- 4:25 – 21:53
Why Davos lost its luster, plus major moments: Milei's speech, Jamie Dimon on Trump
- NANarrator
in.
- JCJason Calacanis
All right, everybody. Yes, the, uh, World Economic Forum is wrapping up in Davos. Uh, if you don't know what the WEF is, I'll just give you the brief overview. 3,000 people, five days. Tons of parties. Happens in Davos, Switzerland. It's run by a foundation. Uh, they call these non-government organizations, NGOs. Uh, I can think of it kind of like the TED Conference. Topic this year was Rebuilding Trust. It's politicians, business leaders, economists, journalists, all the elites. The mission statement of the WEF, improving the state of the world by engaging business poli- political, academic, and other leaders of society to shape global, regional, and industry agendas. It's a money-printing machine. I'll give you a funny backstory later if you care to know. But basically they try to shake you down for about 40 grand a year to go to this thing. Tons of notable moments that we can get to on the docket here. Friedberg, any highlights for you watching this, you know, get mocked on social media? This year, it's, it's been a slow unraveling from this being something that people used to flex about, going to Davos. Now people are literally apologizing on social media, X, Twitter, et cetera, explaining why they're going, because they're kind of feeling shame in going to this event. So what, what are your thoughts on the sort of whole flipping of this from being a flex to requiring an apology in advance?
- CPChamath Palihapitiya
You guys know Andrew Ross Sorkin, the journalist for CNBC? I think he posted on Twitter, you know, "I know, I know. Forgive me. I gotta go to Davos." It's almost like embarrassing now that you are associating yourself with the elite cabal in the Swiss Alps-... during a time of rising global populism and all the criticism that's been rained down on Davos in the last couple of years. And then Davos is trying to adapt by trying to be more cool and appeal to the, the populist notions, uh, that have criticized them, thus the flute playing-
- JCJason Calacanis
(laughs)
- CPChamath Palihapitiya
... thus the shamanism. You know, and, and thus, I think, a lot of what Javier Milei has called a general economic support for what he defines as collectivism, which I'd love to talk about, but wh- why don't we just say that? So I think-
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
... there's generally been, like, a response from the community that attends Davos, but there, there's a lot of conflict here with the fact that folks are flying in on private jets and telling everyone to stop producing carbon, the fo- the fact that they're all dining and spending lots of money and telling everyone that we should move to more, towards socialist conditions and higher taxation. It's all a lot of irony wound up in this whole thing. It's almost like a, like a, like a Simpsons show, is, is what it's become.
- JCJason Calacanis
Well, and the theme, rebuilding trust, is kind of insulting at its face, at least to me. Like, "W- we don't trust you." (laughs) "You don't need to rebuild trust with us, we're not going to trust you. There's no way for you to do that, especially after what happened with COVID." Sachs, did you have any sort of reaction to this year's Davos and just how people are reacting to it? You heard Freberg's sort of thoughts on it.
- DSDavid Sacks
Well, Davos has become a parody of itself, and that's why you saw these clips go viral of these ridiculous antics of the priestess doing, I don't know what she was doing. But the only two sets of remarks that actually were taken seriously on their own terms was the speech by Milei from Argentina, and then also comments by Jamie Dimon. And the reason why they went viral is because they were actually saying sensible things that contradicted the sort of established wisdom or consensus at Davos. I mean, they were effectively subtweeting the other elites at Davos. I mean, Milei gets up there, and I think he's introduced by Klaus Schwab, and he immediately starts denouncing collectivist experiments and says that the West is in danger because its elites have been co-opted by a vision of the world which leads inexorably to socialism and thereby to poverty. So Milei basically says this right in front of Klaus Schwab. I mean, he's describing the, the people at Davos. That's why that took off and went viral.
- JCJason Calacanis
It was incredible. I mean-
- DSDavid Sacks
Yeah.
- JCJason Calacanis
Yeah.
- DSDavid Sacks
In a similar way-
- DFDavid Friedberg
And he flew there commercial.
- DSDavid Sacks
(laughs) I didn't know that.
- JCJason Calacanis
Yeah.
- DSDavid Sacks
Yeah, kudos to him. Jamie Dimon gave this interview, I think it was on CNBC, where he basically went full Chamath. You know, he basically admitted that Trump had been right and that, you know, a lot of the criticism of Trump and all the derogatory comments for years were, were basically just lazy. And he said that, you know, Trump was largely right on NATO, on immigration, on tax reform. He grew the economy well. He-
- DFDavid Friedberg
Immigration.
- DSDavid Sacks
... immigration. He was mostly right on China, he said. Dimon said he didn't always like how Trump said things-
- DFDavid Friedberg
Said things.
- DSDavid Sacks
... or talked about people, but he said his policies were largely sound and only looked better in time since we've abandoned them. And, and he's basically saying that, you know, "Look at where we are right now," and he questioned the kind of everything is hunky-dory narrative that the Biden campaign is pushing out. So he really went off script there and, like I said, I think Chamath said it first here on this pod three months ago, and now Jamie Dimon is, is accepting that. So that was a huge subtweet, you could say, of all the elites at Davos and the accepted wisdom and, you know, the narrative that they're all pushing out. So, you know, that was the other big interview that went viral, and I think that's really saying something. That, you know, that the elites now have parodied themselves to the point where Davos has become a joke and the only talks or remarks out of Davos that people pay attention to are the ones talking sense to the people at Davos because they're not listening.
- JCJason Calacanis
Chamath, your thoughts?
- DFDavid Friedberg
Look, everything has a season, and I think that when there was a much more singular hierarchy of status, Davos played a very important role to signal to other people that you had made it. But, you know, these things come and go, and I think that this is sort of in the back half of its usefulness and half-life. What, is it probably more than anything else now? A glorified enterprise software sales conference where the reason to go to these conferences, for a lot of these companies, I suspect, is that it allows you to close very big deals, multimillion dollar licenses of this, that, and the other thing, where you can get the leaders of that counterparty across the table from you and hammer out a deal. And I think you pay 40 grand a ticket for the right to get everybody together to do that. So I think they want to pretend that it's a lot more than what it is, and I think what it is is that. And I think whenever you have the ability to convene people to close business, that's valuable. Beyond that, I think it's sort of in the eye of the beholder, and it used to be that the beholder thought that this was important, and now I think we realize it's much of nothing. It's shaman and air flutes and all kinds of stupidity, which is why people have the courage to go and mock it. And I think that Milei's comments and Jamie Dimon's comments exemplify that. The only other thing I would say is that I had heard, although I haven't seen it so I don't know, is that Alex Karp apparently did a very thoughtful speech about antisemitism, and-
- JCJason Calacanis
He did, yeah.
- DFDavid Friedberg
... which was also, which was also very counter-cultural to the established logic that the, the surplus elites at Davos want to believe, which is the anti-Israel, pro-Palestine line. I haven't heard it though, so I don't know-
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
... how impactful that was.But those are the three things that I, that I've just seen on Twitter, just kind of ...
- CPChamath Palihapitiya
The Milei speech, I think is the one that everybody is keying on and, and correctly so. You know, obviously he's the, he's the new president of Argentina, and this speech was amazing. I- people might not, people mi- might not also know that he was a, an economics teacher. And so this talk about collectivism leading to suffering and regulatory capture and bloat, which we'll talk a little bit about when we talk about Boeing today, was incredibly powerful. It's super basic, you know, like listen, free markets work. There are people opting in to either side of it. He went over essentially without saying it, the Rule of 72, and like 200 years of GDP growth and how GDP growth under capitalism rises everybody up, and then collectivism, AKA socialism is a bit of a disaster. But it's well worth watching it. There was a really cool thing that a company called HeyGen did, H-E-Y-G-E-N, with their AI tool, they just immediately took his speech, put it in his own words and, um, published it and translated it as if he was speaking English, 'cause he was, he was speaking in his native tongue. So really worth checking it out and, yeah, it was super notable. It's pretty basic but it-
- DFDavid Friedberg
I think-
- CPChamath Palihapitiya
... I think it's everybody wants to hear this right now which is, if you're picking collectivism and socialism and redistribution of wealth, Ar- Argentina has like a really good history of watching this fail, and now they're in the process of dismantling it.
- 21:53 – 35:16
Boeing's regulatory capture leading to negative impact on consumer safety
- JCJason Calacanis
segue, I think, into this Boeing issue that we've seen because here's an issue of regulation and safety where you want the government and you want safe planes and, and you want some level of regulation, but then you get regulatory capture, so maybe you-
- DFDavid Friedberg
But the government, the government has not been the supporter of the safety agenda that citizens think.
- JCJason Calacanis
Yes.
- DFDavid Friedberg
Meaning when you look at what has happened in the US airline industry, there are a handful of end user providers, but those are all using OEM equipment from one of two vendors, Boeing or Airbus. So it's a duopoly, but in many ways, it's a monopoly the way that these folks fight with respect to tariffs and imports and incentives. So the United States airline industry is a monopoly of one company. Now, if you look at what's happened, what they would say is, well, planes have become safer and safer and safer. Yes, but they've become safer in some ways, in, in the most simple and obvious ways, but they've become unsafe in that you have these fleets of planes that are now behaving very unpredictably. And if you look under the hood, what happens is Boeing, as an example, in like the last four years, how much money do you think they've spent on lobbyists and PACs? I'll tell you, $65 million. How much have they spent just in the last year? Almost $11 million. They're like the 15th most active spender in, in politics in Washington. Now, what did they use that money for? Well, that's also documented. See, the crazy thing is this stuff happens in plain, in plain sight. So they were able to water down the safety regulations. What does that allow you to do? It allows you to have a situation like this unfold, and then on the other side, the pilots unions can lobby those same politicians who are taking money from Boeing and prevent systems that would actually make these planes safer. You can have more improvements in the guide by wire technology. You can have more improvements in GPS. You can have more improvements in a computer's ability to help improve and augment the capability of the pilot. Unfortunately, that would result either in fewer pilots or less pay, and so that doesn't happen nearly as fast and obviously as it should. It's the same for air traffic control, and all of these issues build up because we've allowed monopolies to build up. So as much as we think we are a capitalist society, we have veered...
- CPChamath Palihapitiya
... into this collectivism in certain markets. And where it's measurable and obvious, we need to point at it and say, "Let's go fix it."
- JCJason Calacanis
Yeah. And, and this would be a... Let me just tee up a little bit of what you're referring to, in case people don't know, but everybody probably saw the news that on January 5th, the door blew off of, uh, one of these Boeing 737 Max jets. If you've heard that name before, it's because this isn't the first time that the Max jets have had problems. This plane safely landed, thank God, and there was nobody sitting in the row where the door blew off. And this has to do with some bolts on the doors. But this is just the start of problems with the 737 Max. I- There's an incredible documentary if you haven't seen it. We'll, we'll put it in the, uh, show notes, Boeing's Fatal Flaw. And the version before this, the 737 Max 9 is the one that had the, the bolts come off, Chamath. The Max 8, if you remember, there were two really harrowing, uh, instances where tragically 346 people died in these two instances because-
- CPChamath Palihapitiya
That's right.
- JCJason Calacanis
... the plane, literally the software on the plane, which is called Max, um, Maneuvering Characteristics Augmentation System, which was designed because they were trying to get more fuel efficiency and they had positioned the engines in a weird way on, on the wings, so they had to kind of help pilots, uh, level the stuff. And to your point about regulatory capture, there was all this behind the scenes manipulation of the market to try to get these planes built, to try to get them out the door because there was so much money at stake. Well, on these two terrible accidents, the plane, the nose literally dove and the pilots were fighting it in both cases.
- CPChamath Palihapitiya
Right.
- JCJason Calacanis
They, they just crashed and, and everybody on board died. And for 20 months, the, the 737 Max models were grounded, and, uh, that cost the company over $21 billion. So-
- CPChamath Palihapitiya
Look, the-
- JCJason Calacanis
... there is no competition, to your point. And then in a free market, if there were 10 providers, would this be much different, Chamath, and-
- CPChamath Palihapitiya
Absolutely.
- JCJason Calacanis
Yeah. So I think that's what you have to realize here is that these duopolies, you'd think there's competition. In a duopoly, there isn't competition.
- CPChamath Palihapitiya
No, I mean, like, for example, like if you look at the car market-
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
... how many instances... I think the last big incidence that I remember was, I think Ford had an issue with the fuel tanks of some cars that were exploding, right?
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
But the reality is when that happens, there are alternatives. One is that there's legal requirement for Ford to just fix these things quickly. There were lawsuits that happened, there was class actions, there was settlements, but there's also the ability for folks that can afford it is just to switch vendor, and of which there are 50 other vendors to choose from. That is a healthy dynamic. So today, when you look at the auto market, what do you see? A plethora of choice. And when you see fatalities or safety issues, they are overwhelmingly driver error.
- JCJason Calacanis
Yes.
- CPChamath Palihapitiya
And we assume that, and we get insurance to deal with that. When you look at airplanes, you have these three sections of risk that each are compounding because there is no competition. Number one is that the monopoly vendor has zero pressure to actually test these things adequately. Because on the other side of building something well is shareholder pressure to deliver something sooner and faster so that they can reap more profits. Then second is you have a regulatory infrastructure that puts rules on top of rules, but then will bend the rules if you donate to them.
- JCJason Calacanis
Mm-hmm.
- CPChamath Palihapitiya
Right? And that's measured and known. And then the third are the folks that actually operate the planes who have this actual incentive to not see technical improvements because it defends their job for longer. And in all of these cases, there isn't enough competition to shine a light on this to say, how does society actually want this market to operate? This is collectivism. It's not working.
- JCJason Calacanis
Freyberg, do you have thoughts on this Boeing regulatory capture and the issue of only having two vendors there, and the complexity of these machines now i- in relation to that?
- CPChamath Palihapitiya
Nick, you can pull this up. This is an audit of the business model for a company called TransDigm Group. TransDigm Group is a aircraft aerospace parts manufacturer. They sell certified regulated, uh, aircraft parts to aviation companies as well as to airlines, private pilots, and also the government. And they do about 7 billion in revenue, three and a half billion in EBITDA. So Chamath, to your point a couple weeks ago about what's the (laughs) appropriate competitive EBITDA margin that a company can ultimately achieve, their EBITDA margin's 53%, this company.
- JCJason Calacanis
Insane. Better than Facebook. Insane.
- CPChamath Palihapitiya
On 7 billion of revenue and growing. Nick, if you wanna pull up their stock chart, and you guys can see how the business has performed over the years. And their business model has been relatively simple. They've acquired aerospace companies, got... that have certified parts, they drop the cost and raise the price. And (laughs) they do that over and over again, and here's the business over the last 10 years. This thing is, um, you know, a roughly 10 bagger, eight to 10 bagger in the last 10 years. The market cap is 60 billion today. No end in sight. And so there was a government audit done of the business. By using uncertified cost data, which is one of the most reliable sources of information to perform cost analysis, we found that TransDigm earned excess profit, profit of at least $21 million on 105 spare parts on 150 contracts. So they're selling spare parts into the government. The government auditor came in, audited them, and identified... Because there's no real audit, there's no real accountability in government as purchasers, but there is regulatory authority on deciding who are the winners and who are the losers in the market. TransDigm has been elected a winner because they have regulatory approval to make and sell these parts. The cost to get approval to make and sell these parts is so high that it makes it prohibitive for startups to come in and compete in this marketplace. And now that they're a preferred supplier and they get these single contracts where there's no competition, uh, to be a supplier, they can raise the price every year.... multiple audit reports over the last 23 years have highlighted the problem of the Department of Defense paying excess profits on sole source contracts where cost analysis was not used to determine fair and reasonable prices, and this problem continues to occur. Now, I'm not necessarily saying that this is a negative on TransDigm. It's a fantastic business. It's well-run. It's one of the best-run public companies with a multi $10 billion market cap in the world. But the condition is that the US government comes in and picks and chooses through its regulatory authority which companies can make products, the cost to enter and compete becomes prohibitively high, and then the company has complete pricing power and there's very little accountability in the overall system. And I think that this plays out not just with this company, but obviously also with Boeing and the fact that we've narrowed down the competitive market space to just a few sole source providers that have very little accountability and eventually these sorts of conditions arise. Either prices get too high, quality degrades, all the other things that natural market forces would keep a check on.
- JCJason Calacanis
Yeah. And in- in terms of competition, Chamath, the, I guess, the only thing you could say is consumers could potentially maybe try to avoid the 737 Max. I know I did when all these accidents happened. I just told, you know, my- my person who books the flights, "Hey, d- do not put me on a 737 Max." Period, full stop. And you know what? You're gonna wind up paying a lot more, you're gonna have a hard time getting certain routes, you're gonna reduce it because, you know, most airlines, I think, have these 737 Maxes in their- so you- when you have such a few number of providers, to your point about it's not like cars, it's not fragmented like that, you can't avoid a certain car type, a plane type the way you can avoid a car type, so... Just wrapping up here, Chamath, what changes should we see in terms of late-stage capitalism, something in the example like air travel and- and manufacturers? Is there any way to unwind this reasonably, or is it too late because w- we're at this ...
- DFDavid Friedberg
Well, I- I- I- I go back to some of the examples that we've made fun of before. Y- y- you have to rely on the government to actually be competent in key moments and time. I think this is one of them. The organization that could do something about it, for example, take the FTC or even take the DOJ, you know, we are investigating Amazon's purchase of the portable vacuum cleaner, Roomba, right?
- JCJason Calacanis
C- critically important issue. (laughs)
- 35:16 – 50:24
Adam Neumann facing familiar challenges at his new startup, Flow
- JCJason Calacanis
Adam Neumann, you remember from WeWork infamy/fame i- has a new startup, you may have heard of it, Flow. They've raised a ton of money. He started buying a bunch of apartment buildings. The idea, people can rent nice apartments in cool cities that focus more on social interaction and hanging out, w- common spaces, all that great stuff. And there's also allegedly or reportedly some sort of rent-to-own where renters can receive equity in the company over time and I don't think this has ever been released, but the idea would be maybe you own shares in Flow. Flow manages around 3,000 units, most of which were purchased by Neumann after he left WeWork and, you know, he took down a windfall as an exit package. And so according to The Real Deal, it's a real estate publication, Neumann had a 60 million variable rate mortgage on, uh, one of these properties in June. Sax, maybe you could explain to us what's going on here since you have a lot of experience in real estate.
- DSDavid Sacks
Well, it's pretty simple, he can't make his interest payments.
- JCJason Calacanis
(laughs) Okay, so-
- DSDavid Sacks
The reason is, is 'cause he had floating rate debt. So if he had locked in his debt over, say, 10 years back in, when he bought this building in 2021 or whenever it was, when interest rates were-... extremely low. You know, that was during the, the ZIRP period. He probably could have locked in long-term data at maybe even 3%, three or 4%. And instead, he got floating rate debt. And if you look at where commercial debt is now, I mean, it's 7, 8, 9%, if you can get it, which is pretty hard. So he maxed out on debt when he bought these buildings. He bought them top of market, it sounds like, in 2021 because real estate, like a lot of things, moves inversely to interest rates. So when interest rates spiked over the last year or so, then real estate evaluations went down. So he bought a bunch of buildings top of market using a lot of debt that was floating rate, interest rates spiked, perfect storm, now he can't make his interest payments.
- JCJason Calacanis
The crazy part about this when I was watching it happen, Chamath, and we talked about it, I think, on the program at the time was Andreessen Horowitz put in, like, over 300 million at a billion dollar evaluation, but they didn't do that in peak ZIRP. They did that in 2022 when the writing was on the wall. What are, what are your thoughts on why they would make a, a bet like that and, uh, yeah, just tech VCs betting on real estate for a second time? How does that occur?
- DFDavid Friedberg
Well, I don't think it occurs because they cared about real estate. I think it allows them to take $300 million of committed capital and put it out there so that they're $300 million less available, which means that they're $300 million closer to raising a new fund-
- JCJason Calacanis
(laughs)
- DFDavid Friedberg
... which means that they can raise, they can charge 2% on more money. That's why they did it.
- JCJason Calacanis
Got it.
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
So just-
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
... keep the money train deploying capital. It's a place-
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
... where you can put a big huge check and you can raise your next fund and, you know?
- DFDavid Friedberg
Yeah. Why not?
- JCJason Calacanis
Yeah. Okay. Well, there you have it. (laughs) I mean-
- DFDavid Friedberg
Let me, let me, let me offer a-
- JCJason Calacanis
I mean, I, I, I don't-
- DFDavid Friedberg
... counter a-
- JCJason Calacanis
... disagree. I think that candidly what you've said is exactly how mega funds are thinking about it. We have to deploy capital to raise our next fund, and if we still have capital in our last fund, then we can't deploy.
- DFDavid Friedberg
But Jason-
- JCJason Calacanis
Go ahead, Friedberg.
- DFDavid Friedberg
Wh- If you're gonna have to deploy large amounts of capital, wouldn't you feel better deploying that capital with an entrepreneur who's actually run a big business before even though the business failed? No, no, no, if you're-
- JCJason Calacanis
Does-
- DFDavid Friedberg
... if you're, if you, if you were not optimized for fees, you would do what Peter Thiel did and just have the fund and return the money.
- JCJason Calacanis
Right. He, and for, for, for the-
- DFDavid Friedberg
Peter Thiel does that-
- JCJason Calacanis
... by the way, for those-
- DFDavid Friedberg
... because he's already won. But for everybody else-
- 50:24 – 1:00:47
Evaluating "tech-enabled businesses" vs. traditional businesses that are utilizing technology
- DFDavid Friedberg
- DSDavid Sacks
I think it's a great point. I mean, look, I think whenever you're dealing with a tech-enabled business, which I would define as a more traditional business model with some sort of software layer, you know, on top of it, you have to kind of assess, like, how much of a difference does that software really make at the end of the day? In this case, this is a real estate business with a very thin kind of software/operating/...
- JCJason Calacanis
A veneer of technology.
- DSDavid Sacks
... of ex- yeah. The experience layer is a very small part of the overall, let's call it P&L, of this business.
- JCJason Calacanis
Such a great point. Sachs, I mean, a perfect analogy would be, like, if you have, if you're taking a flight on United. The United app is delightful now. It's a really good app. I don't, you, this is a commercial airline, it's called United Airlines, Sachs. You pay for one ticket instead of the whole plane, but-
- DFDavid Friedberg
Have you been to a McDonald's recently?
- JCJason Calacanis
I actually went to McDonald's, yeah. You order through an app now, and there's a big screen.
- DFDavid Friedberg
The point is, you walk in there, and it's probably not the McDonald's you knew 15 or 20 years ago. It's not about waiting in line and ordering and, it's, it, that's not how it works anymore. There are still, the point is, is that a tech-enabled business or is that still a restaurant? Well, if you spend a lot of your time intellectually contorting yourself to try to justify why the next version of McDonald's is a tech-enabled business, you're just gonna lose a lot of money. It's a restaurant.
- DSDavid Sacks
Yeah.
- DFDavid Friedberg
Now, all restaurants need technology. And what you see by McDonald's is, even the oldest and most established are running forward very quickly to implement technology because they know that it creates efficiency, which then flows to the bottom line for them.
- JCJason Calacanis
Yeah.
- DFDavid Friedberg
So, the reality is that we have lived in this wonderland where we've looked at these software businesses that have 80 and 90% gross margins and imposed that expectation on other markets, and then made investment decisions by trying to justify how that it's a tech-enabled real estate business, a tech-enabled healthcare business, a tech-enabled energy business, without being honest with ourselves that those businesses have, over decades, because of lots of competition, found a consistent and reliable resting place in terms of gross margins far below 80 and 90%. And so instead of willing tech-enabled businesses to be at 80 and 90 and tricking oneself, I think it's more realistic to ask yourself, why aren't 80 and 90% gross margin businesses decaying to 30 and 40% gross margins like every other part of the economy when everything will be technology-enabled? I think that that's a very reasonable question, and I think the answer is, there is no safe space. I don't think you can justify 80 and 90% gross margins in software when you can use a model and whip up a competitor. I just think that we are all going to a place where everything is a tech-enabled version of something.
- JCJason Calacanis
Yeah, marketplaces would be a notable exception there with network effects. So DoorDash versus the tech-enabled restaurant. Asset-light marketplaces, you and I, Sachs, have been involved in a bunch of different marketplaces together. Sometimes they're asset-heavy, sometimes they're asset-light. When they're asset-heavy, man, it's really hard to make those businesses work, huh, Sachs?
- DSDavid Sacks
Yeah, I mean, I think we should differentiate between gross margin and then the net operating margin or, or, or profit, right? And so, you know, g- gross margin is what is the cost on the margin of providing one incremental unit? And the thing about pure software businesses is that on the margin, you can provision another instance of the product almost for free. I mean, there's a little bit of hosting cost at AWS or whatever. So on the margins, it's, you know, it's like the perfect gross margin business. Um-
- JCJason Calacanis
As opposed to a hamburger.
- DSDavid Sacks
As opposed to a, a, yeah, a restaurant is gonna have very large costs of goods sold, or COGS. The simple heuristic that I use is just, does this company have large COGS, costs of goods sold, and are they physical world COGS? If they are, it's not a software business. It's, at best, a tech-enabled business. So just look for that. You know, does this business have large physical world COGS? Now, what I would say is, if the COGS are virtual, like, you know, it could be hosting costs or it could be paying Twilio for telephony or something like that, then at least it's still not, like, as good a business because the, the margins aren't as good, but...... it's very scalable, right?
- DFDavid Friedberg
Yes.
- DSDavid Sacks
Because you're, you're not- you don't have that, like, huge friction of needing to scale up physical world infrastructure or physical world supply chains, that kinda stuff. So I like virtual COGS a lot better, the- or digital COGS a lot better than physical COGS.
- DFDavid Friedberg
I, I love it when marketplaces though, I mean, we could speak to that too, you know, when I had Dara on the pod the other week, and when he launches an adjacency, "Hey, we're gonna sell alcohol. Hey, we're gonna sell groceries. Hey, we're gonna add this thing that's right next to the already, you know, portfolio of, uh, of Uber offerings," doesn't cost them much, right? They just have to get the supply side up and running, but they already have the demand side, and I think that's where, like, these super apps-
- DSDavid Sacks
Yeah.
- DFDavid Friedberg
... are doing really well, or Airbnb adding, you know, some inventory in a new city that they unlock, right?
- DSDavid Sacks
Well, true, true marketplaces are perfect gross margin businesses as well because they don't have physical inventory that they themselves own. What you'll see is with a lot of marketplaces, they'll cheat by buying the inventory themselves, at least to jump start the market, and then selling it.
- DFDavid Friedberg
Yeah.
- DSDavid Sacks
And so when you see that line item on the P&L, the, you know, that they have real costs of goods sold, you know, "Oh, wait a second. This isn't a true marketplace. They're providing the service."
- DFDavid Friedberg
Mm-hmm. Yeah.
- DSDavid Sacks
And so again, it's just a way to, like, catch whether the business is truly one of these great high gross margin businesses or whether it's more of a tech-enabled business that's pretending to be a pure software business.
- DFDavid Friedberg
Yeah, direct-to-consumer got people in a lot of trouble during the last cycle-
- DSDavid Sacks
By the way-
- DFDavid Friedberg
... in venture capital. ... if you look at a lot of these companies, even the best SaaS businesses have seen their gross margins erode by about 15 to 20%. It used to be that best-in-class software business can generate 90, 91%, 80, eight, high 80s to low 90s gross margins. Now that's not true. You see a lot of these best-in-class companies that are in the high 60s, low 70s. So it already just shows you that that pressure has, has come upon the market. And so is it that the software-enabled business goes towards 85 or is it the 85% gross margin business goes towards 30? It looks like it's the latter. That's just what the data says.
- DSDavid Sacks
Well, maybe I'm just categorizing certain costs differently than you are. But I don't know why a software business would go all the way to 30, right? Because again, sales and marketing don't count in the gross margin, G&A doesn't count, even R&D doesn't count in the gross margin. It has to be, you know, a unit cost that you can attribute on the margin to that incremental instance of the product. So things like, again, paying Twilio for metered telephony or paying OpenAI for, like, metered API access, all of that is definitely in COGS. And I think some customer support costs, that can be attributed on kind of a per instance basis. That goes in there. But if s- if sales and marketing and R&D and G&A aren't going in there, I mean, I just, I don't know why it would go all the way to 30. I guess I'm just saying that I still think software businesses, and marketplaces for that matter, are still the best kinds of businesses on a margin profile basis. The problem is that there's a lot of fake software businesses or fake marketplaces out there that are pretending to be pure tech businesses-
- 1:00:47 – 1:20:51
Streaming at a crossroads: is the business model broken?
- DFDavid Friedberg
So Chamath just mentioned streaming. NBC Universal, if you...
- JCJason Calacanis
... didn't know it, paid the NFL a hundred million dollars for the exclusive str- streaming rights to one, that's right, one first round playoff game for the NFL. That happened last weekend between the Chiefs and the Dolphins. That was on their service Peacock, NBC's app, basically their version of Netflix or Disney+. It garnered 23 million viewers, which makes it, uh, the most streamed live event in US history. Even so, that's almost half of what the Packers and Cowboys had, about 40 million, Lions versus Rams same weekend, 36 million. And so this has brought into question what's going on with streaming. Uh, have these businesses gotten ahead of their skis? Just to give you a couple of charts, Disney+ took off like a massive rocket, peaked in Q4 of 2022 at 164 million subscribers. They're now at 150 million. Here's a chart. I mean, just amazing how, uh, quickly they got to Netflix-ish numbers. Here's Netflix's chart. Again, this is quarterly. They're up to now an all-time high, 247 million subscribers and the annual growth rate all the way back to 2001, still pretty spectacular, and their revenue also, uh, very respectable for Netflix. However, they overspent massively during the peak streaming era, 2019 to 2022, and that's when subscriber growth started to slow. Obviously, they were spending way too much and other entrants came in like Apple Plus and Amazon Prime where they really didn't even think that they had to make a profit. They were using streaming maybe to sell more iPhones or to get more Amazon Prime subscribers. So here is the major problem, here's the churn chart. Basically, churn means people cancel, right? And so as these services have cut what they're offering, the number of Marvel shows or Disney, you know, having Star Wars shows, the churn goes way up. People are also having subscription overload. I don't know how many of these I subscribe to (laughs) but I think it's all of them, or maybe out of these one, two, three, four, five, six, seven, eight, nine on the chart, I think I'm, I have seven of these. So there is definitely some unbelievable subscription burnout. And the streamers, i- in order to get these businesses above water, have raised their prices. We all know that. You've probably seen your streaming bills, you know, have three, four, or five bucks added to them every month, and at the same time they're cutting how much they're spending so you're paying more. For our last, Chamath, your thoughts on this dynamic.
- DFDavid Friedberg
If you bring the chart back up, here's the most important thing that's worth noting. Let's take Starz as an example. It churns 12% of their users every month, which means that over a year they've churned 144% of their user base. That means that they have to basically turn their entire membership base one and a half times in order just to tread water, right? So if you start with 100, it's a lot of money that you have to spend to make sure you end the year at 100. Forget about growing. If you look at Peacock, they're gonna lose 100% of their subscribers in a year. If you look at Discovery, they're gonna lose 75%. If you look at Max, they're gonna lose 50 odd percent. Apple TV same. Hulu and Disney+ will lose 60%. Netflix will lose almost 40%. So the only winner in all of this is Facebook and Google. The only winners are Facebook and Google because that's where the ads will appear to try to reacquire these folks, right? So I guess that's a positive indication. But the reality is that money isn't infinite and so what happens in a dynamic where you have a category where there's just a lot of consumer churn, I think what happens is it evolves in phases. And in phase one, which is sort of where we are now where there's a bunch of relatively well-established folks, is that they are going to initially overspend on content because they're going to try to differentiate the cost of acquisition based on content, right, which makes sense. "I have a tent pole, come and watch it here. You can't watch it anywhere else." And I think that was the Peacock example where they had this football game and all these people showed up and they thought, "This is exactly why we're paying so much money for these rights because people will show up." I think the problem is that when everybody is doing it, everybody's doing it, and so you don't know how to differentiate. Even in our group chat, look at the number of times when somebody randomly says, "Is there something to watch?" And everybody's got 50 recommendations. Guess what I do? I tune it all out because I'm like, "50 across six different services? I have no way to track it," and then I lose interest and I'm like, "You know, I'll just stick to YouTube." So I think what happens is in phase one, folks spend a lot of content. In phase two, they realize that actually what you need to do is spend on a long tail of content in a much more disciplined way. So there's a company that, that I know about, for example, they just signed a pretty big deal with Amazon, hundreds of millions of dollars, and I was trying to figure out, is that a lot or a little? And it turns out that Amazon's trying to get three or four or five versions of these going, which means that before we probably could have gotten five or 600 million, and instead you get two or 300 million. It's still an incredible thing, but it just goes to show you that there's a lot of competition. And so instead of having a single mode, right, if you were to graph something, where there's a few pieces that just get all the money, now you're smearing this content across all kinds of stuff. And I think that that makes it very difficult to keep folks, so I suspect that you're just gonna see a lot of churn. I don't, I don't like this category at all as an investor.
- JCJason Calacanis
Clearly there's been an overspend here, but consolidation is coming. Freeberg, any thoughts on the streaming space?
- CPChamath Palihapitiya
I just think this is the opposite of what we were talking about earlier where there's a free market competing and it's benefiting consumers.I mean, the point that you made is a really good one, that there's a lot of great content to watch. Folks that raise prices, people cancel, so you gotta drop prices, you gotta offer good content. And I actually think this is a really good and healthy thing to see happen, is competition that benefits consumers and there'll be some set of winners here and some set of losers, but I think ultimately, it's just really good to see this, how it all shakes out. Who's willing to put up the big bucks? Who's got the smarter algorithm that predicts how fresh your content has to be and how unique it has to be relative to other platforms to keep the audience attention? I would argue, if you look at those numbers and you look at the performance over time, Netflix absolutely rules the roost in this sense. They're an incredible operating team, they have an incredible capability of predicting what content will work, how f- how quickly they have to refresh content, how much they should be investing in content per quarter, per month, and they're clearly retaining users and making money. And others maybe are, that are newer to the game haven't figured that out yet, but it's just very good to see the competition so I don't know how to predict what's gonna happen here, but it's good to see.
- JCJason Calacanis
It's clearly going to be a massive consolidation. Also these folks are launching advertising base versions, so you probably saw Netflix has an advertising tier and so a lot of these folks, uh, didn't have those. Disney+ I think is gonna have one as well.
- CPChamath Palihapitiya
You know what no one's paying attention to is YouTube TV. I don't know, do you guys subscribe to YouTube TV?
- JCJason Calacanis
I'm a Hulu person. Yeah, I think it's fantastic.
- CPChamath Palihapitiya
If you look at some third party data on YouTube TV, the subscriptions are going through the friggin' roof and it's really interesting to see because with YouTube TV, you're basically re-bundling the unbundling that happened in cable-
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
... except you're doing it over the internet and you can access it anywhere. So they've basically converted the pipe as the value, to the service itself as the value which you can access anywhere you want, on any TV, in any room without boxes, while you're on the road, on your phone, on your laptop. And it seems to be kind of highlighting that maybe it wasn't necessarily the bundling that was the problem, but the way that the service was being offered. So, who knows? Maybe bundling versus all of this part and parcel, you gotta pick five different providers and buy content on the fly, maybe that's not what consumers want.
- JCJason Calacanis
Young people don't care about the live channels, old people do, but yeah, Hulu and YouTube TV-
- CPChamath Palihapitiya
Right.
- JCJason Calacanis
... are really wonderful products because they work really well on Apple TV, the apps work great, but they also work great on your iPhone, your iPad, so-
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
... you know, they're-
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
... really spectacular in that way. Sacks, any thoughts on this space?
- DSDavid Sacks
Well, just to tie this conversation back to what we were talking about with margins and SaaS and tech-enabled versus real software businesses, I personally have never seen a B2C subscription business that works. The churn is just too high. I mean, what I've seen is that the monthly churn rates on a software subscription for consumers is somewhere in the 5-10% range. So, on a full year basis, you're retaining maybe 50% of your customer base. You're effectively rebuilding your business from scratch every two years. It's a very tough place to be. This is why I basically skew towards B2B SaaS, is because a good B2B SaaS business will have net expansion. Instead of 50% churn, you'll do 120% expansion, and so you're actually building a subscriber base with longterm value. Now, how did Netflix do it? I mean, Netflix avoided that prohibitive level of churn by spending literally billions of dollars on content and original programming, and again, it goes back to the point this is not a pure software, pure tech business. It includes an old school studio which is very capital intensive, and they financed a lot of that content acquisition with billions and billions of dollars raised during that ZIRP period, from I think both equity and debt. And you have to wonder if that could be done again in this post-ZIRP period where capital is just a lot scarcer.
- JCJason Calacanis
I think this is gonna work really well though for Netflix and Disney, man. These huge archives that they own, these libraries are gonna get them to three, four, five hundred million global subs and just become money printing machines that I don't think they're gonna need a ton of new content.
- DSDavid Sacks
The question is whether you could recreate an archive of that level today given how much more expensive capital is. My point is that ZIRP helped Netflix catch up-
- JCJason Calacanis
Yes.
- DSDavid Sacks
... to these studios and create this huge library, but still, I think that what the streaming services have shown in their churn is that if you don't provide original content and original programming, then users will churn off that. So, you have to kind of have both. You kind of have, like, the library as filler, but if you don't have a hot show come along every so often, the subscribers will churn off that.
- JCJason Calacanis
Yeah, you need to have some new content depending on how deep the library is. It feels like Netflix and Disney+ have done a great job with their libraries, just to give you an idea. Revenue for Netflix for 2023, $33.5 billion, 247 million subs, that's a ARPU yearly revenue for those folks, $136 bucks a year. Now the reason you're seeing that, uh, number not make sense if you're paying $15 a month is because internationally, Netflix is a lot, lot cheaper. But I- I love those two businesses. I think they're gonna be extraordinary over time compounding-
- DFDavid Friedberg
Netflix has to acquire 100 million people a year just to stay even.
- DSDavid Sacks
What's their churn rate?
- DFDavid Friedberg
4% a month.
- JCJason Calacanis
I think it's fine.
- DSDavid Sacks
Right, so they're churning half their customer base every year, that's my point.
- DFDavid Friedberg
100 million people.
Episode duration: 1:38:28
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