All-In PodcastE168: Can Google save itself? Abolish HR, AI takes over Customer Support, Reddit IPO teardown
EVERY SPOKEN WORD
150 min read · 30,113 words- 0:00 – 1:36
Bestie intros! Jato Caelin
- CPChamath Palihapitiya
Jason, where are you? That, is that a virtual background or? (beep) oh, it's (beep) . Oh, right, that (beep) place. I, uh, it did look architecturally familiar to me.
- JCJason Calacanis
It is architecturally significant. We'll bleep out the (beep) house, but yes, I am... You know, this is like top three or four of, uh, places I like to be a house guest. You know, like I'm in rotation right now as my house guest.
- DSDavid Sacks
You're Kato Kaelin-ing through our friend group?
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Basically. You know, I'm just a great house guest. People like to have breakfast with me. People like having me around, so I just find myself in mansions around the world.
- DSDavid Sacks
Hey Nick, do you have an updated picture of Kato Kaelin? Is he still alive and kicking?
- JCJason Calacanis
He's alive for sure. He's gotta be 70 or something, right? He's gotta be old enough.
- DFDavid Friedberg
He was on one of those reality TV shows with Dr Drew, I think, a couple of years ago.
- DSDavid Sacks
What does Kato Kaelin do?
- JCJason Calacanis
He's a good hang.
- DSDavid Sacks
Is he, yeah.
- CPChamath Palihapitiya
There's a lot of these people in LA, you know. Like just-
- JCJason Calacanis
They just hang.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
They kinda hang. They set things up. Oh my God.
- DSDavid Sacks
Wow.
- JCJason Calacanis
Ooh.
- DSDavid Sacks
Is that current, Kato Kaelin?
- DFDavid Friedberg
He, oh man.
- JCJason Calacanis
He's 64 now.
- DSDavid Sacks
Wow.
- JCJason Calacanis
God almighty. What did he-
- DFDavid Friedberg
That's incredible.
- CPChamath Palihapitiya
How did he survive?
- JCJason Calacanis
He's got an Instagram account.
- CPChamath Palihapitiya
I'll tell you how he survived. See no evil, hear no evil.
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
Exactly. He goes, "I didn't see nothing."
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
"All I know is hey listen, man, they gave me a pool house." And I didn't see anything.
- 1:36 – 5:55
Groq update!: The key metric developer platforms should care about
- NANarrator
- JCJason Calacanis
All right, everybody. Welcome to your favorite podcast, the All In podcast, episode 168. David Sachs. Can you believe it? We've made it to 168 episodes. With me again, the Rain Man, David Sachs. How you doing, buddy?
- CPChamath Palihapitiya
Good.
- JCJason Calacanis
Yeah? Heard you got a big talk coming up? Giving another-
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
... speech? Yeah?
- CPChamath Palihapitiya
Yes, I'm giving a talk.
- JCJason Calacanis
In DC?
- CPChamath Palihapitiya
Yes, I'm giving a talk.
- JCJason Calacanis
All right.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Get ready for that, uh, all of the GOP fans out there, all you Sachs fans. You get a big keynote coming from Sachs next week. Also with me, of course, the sultan of science, formerly known as the queen of quinoa. He's got another crop he's, uh, growing.
- DFDavid Friedberg
(laughs)
- JCJason Calacanis
David Freiberg. How are you doing? How's the crops? How's the fields?
- DFDavid Friedberg
(laughs) So worse.
- JCJason Calacanis
How's life in the fields?
- DFDavid Friedberg
Worst cold open. (laughs)
- JCJason Calacanis
(laughs) Not a cold open. These are intros.
- DFDavid Friedberg
Oh, intros.
- JCJason Calacanis
I'm glad you're not producing. There's a reason why I'm the executive producer. Go ahead, Freiberg.
- DFDavid Friedberg
Mm. Mm.
- JCJason Calacanis
How's your, um, how's your crops? How's the-
- DFDavid Friedberg
Great.
- JCJason Calacanis
... how's life in the fields?
- DFDavid Friedberg
It's great. Got a great team, making progress, tech is awesome.
- JCJason Calacanis
Hm.
- DFDavid Friedberg
Having a lot of fun, it's great.
- JCJason Calacanis
Back in the CEO seat, huh? And of course, the chairman dictator, who's becoming completely insufferable because he invested in a company seven years ago that is absolutely crushing it right now called Grok. We talked about it last week. You're back, you're back, Chamath. Everybody's (laughs) talking about Grok. You're, you're on, uh, cloud nine it seems.
- DFDavid Friedberg
Grok, Grok, Grok. Grok, Grok, Grok.
- JCJason Calacanis
(laughs)
- 5:55 – 29:17
Google's make or break moment: Should Sundar be fired, AI safety team's power, RIF potential, stock pressure, and more
- JCJason Calacanis
right, listen. The top issue this week is the same issue as last week. Google's Gemini DEI black eye continues. We covered this woke AI disaster last week.It's kind of funny, I was watching CNBC and they had a hard time describing the problem. The woman just, I guess, didn't want to call it what it is. It's a racist AI. You type in text and it gives you the opposite or just culturally insane responses of ... If you put in, you want a picture of George Washington from Google's Gemini or Sergey Brin, you might get back like a Benetton-style diversity ad with like George Washington being Black or Sergey Brin being Asian, et cetera. And so this has caused, um, a bit of a kerfluffle here in the industry, to say the least. The stock is down 5% since we talked about it last week. And, uh, Sundar sent a memo to the Gemini team. Of course when they write these memos to a team, it's written to the entire world because you know it's gonna get leaked, and so you're, you're writing it as such, it might as well be a press release. I'll give, uh, two quick quotes here, and then I'll throw it to the besties 'cause there's so many questions that we have to address. Quote number one, "I know that some of its responses," referring to Gemini, "have offended our users and shown bias. To be clear, that's completely unacceptable, and we got it wrong." And to be clear, it wouldn't show white people, especially ones like George Washington or just somebody who is obviously a Caucasian. And so the next quote, "We'll be driving a clear set of actions including structural changes." To me, structural changes means, "We're gonna lay off a bunch of people and we're gonna get rid of the DEI group." That's, that's a new ma- that's a newfound motivational riff quote, in my mind. Freeburg, will Sundar survive? And is Google too broken to fix? I'm just gonna ask you since you work there. I don't wanna mean to make it uncomfortable, but what are the chances Sundar survives this? And what are the chances that Google can be fixed and produce great products quickly that delight users?
- CPChamath Palihapitiya
I don't know how to answer the Sundar will survive because it's kind of an idiosyncratic organization. There are a couple of founders who have super voting shares, um, and ultimately it comes down to their decision and the direction they want to take the company. And I have no insights into what they individually think. So, um, frankly, I've spoken to a lot of folks who are investors in Google over the last week, and a lot of folks are just deeply frustrated and angry, um, on a number of fronts. The business, really there's, you know, three businesses inside of Google. There's, you know, search and ads, there's YouTube, and there's cloud, and the rest of it is kind of noise. And to give you a sense of how big these businesses are, right, YouTube did 10 billion a quarter roughly, cloud did 10 billion a quarter. They have this devices business and subscriptions business does about 10 billion a quarter. And then search does about 50 billion a quarter, and the margin on search is much higher than any of those other businesses. And so the search margin, uh, the ad revenue on search is, you know, probably 100% of the true operating profit of the business. So, the real threat to Google is more are they in a position to maintain their search monopoly or maintain the chunk of profits that, that drive the business under the threat of AI? Are they adapting? And less so about the anger around woke and DEI because most of the investors I spoke with aren't angry about the woke DEI search engine, they're angry about the fact that such a blunder happened and that it indicates that Google may not be able to compete effectively and isn't organized to compete effectively in AI just from a consumer competitiveness perspective. So, you know, investors are banging the table. And in the past, we saw this with Meta, I think it was, uh, towards the end of '22 if you guys remember, and it was a similar situation. Investors were like, "Why are you investing in VR and AR? This is crazy. Why do you have all these people that are getting overpaid?" And everyone started to write off the stock, and the stock took a big nosedive for a period of time, just like Google's is right now. And then the changes came. And much like Google, there's an individual with super voting shares who basically said, "You know what? I am gonna step in and we're gonna make these changes, and we're gonna fix this organization, and we're gonna right size, and we're gonna focus on the product winning." And since then, Meta's stock is up a tremendous amount.
- JCJason Calacanis
Five X since then. Yeah.
- CPChamath Palihapitiya
Google shares are down about 10% over the past two weeks. By the way, I was one of the stupid people to sell Meta around that time.
- JCJason Calacanis
And your thinking was that they just can't get out of their own way, and the God king is ...
- CPChamath Palihapitiya
It, it's another, yeah, it's exactly, it's another one of these idiosyncratic problems. You don't know what this individual is thinking-
- JCJason Calacanis
Mm-hmm.
- CPChamath Palihapitiya
... and what he is individually going to do. The point I'm making is that at Google now something has to give because the noise is so loud. The board is hearing this left and right. Investors are banging the table. Analysts are banging the table. And I'll, I'll tell you a couple of anecdotes. Internally, employees are now banging the table.
- JCJason Calacanis
Hmm.
- CPChamath Palihapitiya
A story, a story I heard this week was that someone stood up in a meeting and said, "A couple of weeks ago, if I had stood up in this meeting and said, 'We can't show Black people in the image generation at the rate that we're showing,' I would have been cast a racist."
- JCJason Calacanis
Hmm.
- CPChamath Palihapitiya
"And I didn't have permission to do that inside of the organization. But today ..." And everyone's like, "You're right. You would not have been able to stand up in the organization and say that." But I'll ... The tenor has changed inside of Google with a lot of the employees that I've spoken with who are now saying, "I can stand up and I can say that this group called Responsible AI has too much power." And it's a one-sided asynchronous problem where they get to come in and say, "We need to change this." And if you step up and disagree with them, you are deemed a racist, you are deemed, you know, culturally inappropriate, you are canceled.
- JCJason Calacanis
So it's just easier to keep your head down-
- CPChamath Palihapitiya
It's easier to keep your head down.
- JCJason Calacanis
... in this kind of a circumstance and, and keep collecting your RSS.
- CPChamath Palihapitiya
And all of a sudden you wake up one day and you see the blunder that happened last week.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
And so now internally people are waking up and saying, "We need to change this." And I heard that that's made its way up to the higher ranks at Google and they're very actively, you know ... So, there may be a moment here where Google stock, which currently-... is trading at just 17 times 2025 consensus earnings, which is cheaper than all the other big tech companies by far and is still growing. Core business is growing. Cloud is growing 20%. Search is growing 15%. All these other businesses, YouTube is growing 20% a year. It's a growth business that's very profitable and, um, it's trading at a very cheap discount. So there's, you know, a ... The bull case is, now's a great time to buy because it's so cheap and there could be this moment where, you know, you see some of the changes that are needed internally to get the AI products to where they need to be to maintain the lead that is inherent because of Search.
- JCJason Calacanis
So, that would mean, Sacks, it would require, 'cause we're using Zuckerberg as an example, uh, we could also bring Twitter and X into this, it would require founder authority to come in there and make these changes. It would require Larry and Sergey, who have the super voting chairs, to come in there and say, "Hey, this is all changing. Enough of this." Do you think there's any chance of that happening or is Google just too broken to fix and they're going to just lose this opportunity, and it's Microsoft under Steve Ballmer missing mobile and cloud?
- CPChamath Palihapitiya
Well, to quote Jefferson, "The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants." And I think there's something analogous here. I mean-
- JCJason Calacanis
Mm-hmm.
- CPChamath Palihapitiya
... you have to, if you're going to refresh this company, you have to go in and you got to go in and make major cuts, not just to rank and file, but to leadership who doesn't get it.
- JCJason Calacanis
Mm.
- CPChamath Palihapitiya
And that's the only way it's going to get fixed. Do I think that Larry and Sergey are going to come in and pull an Elon and go deep and figure out which 50% or 20% of the company is actually good and doing their jobs? Probably not.
- JCJason Calacanis
Mm.
- CPChamath Palihapitiya
But is it possible that they could make a leadership change? Yeah, it's possible.
- JCJason Calacanis
Probable.
- CPChamath Palihapitiya
I don't know. I mean, I've heard that the company is the way it is because they like the way it is. I mean, that they're part of the problem, in effect. They don't see, they don't see the problem.
- JCJason Calacanis
Hm.
- CPChamath Palihapitiya
Or at least they haven't until now. Maybe they'll get the wake-up call.
- 29:17 – 40:15
How bloated HR departments slow down companies
- CPChamath Palihapitiya
as well.
- JCJason Calacanis
Also, if you g- if you give people this job, like how are they... What are they gonna do every day, Friedberg, if they've been given the job DEI and they've been given the job to do trust and safety? They, they're looking to fill their time and make an impact. You gotta, I think, maybe have less of these people. I honestly think-
- CPChamath Palihapitiya
No, you're right. And, and-
- JCJason Calacanis
... it's about cutting people.
- CPChamath Palihapitiya
... I don't know if you guys saw it, you know, Sean McGuire's a partner at Sequoia and he used to be a, a member of the team at Google Ventures when it, what's called Google Ventures, and he did a Twitter post. Did you guys see this?
- JCJason Calacanis
Yeah. (laughs)
- CPChamath Palihapitiya
Where he said when he was at Google, he was told by his manager, "I'm not really supposed to tell you this, it could get me fired, but you're one of the highest performing people here, but I can't promote you right now because I have a quota. My hands are tied. You'll get the next slot. Please be patient, I'm really sorry." It ultimately led Sean to leave Google, and, uh, you know, the, the rest is history. He's a partner at Sequoia now.
- JCJason Calacanis
You're saying because he's a white male.
- CPChamath Palihapitiya
Because he's a white male.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
And so the, you know, the R&D-
- JCJason Calacanis
I'll be honest, I had-
- CPChamath Palihapitiya
Yeah, go ahead.
- JCJason Calacanis
No, I had the same thing happen to me at AOL. When I was at AOL, and Chamath was there at the same time, the whole organization was white men from Virginia or whatever, and they gave me an SVP title, and I said, "Well, I want the EVP one." And they're like, "You know what? We can't have any more white males in that position right now."... we have to, like, get some more women in and, uh, people of color in that position. And they told me, "You'll have the same comp and bonus, but we just can't give you the title."
- CPChamath Palihapitiya
Jemad, do you think these, like, race and gender driven quotas m- make sense for HR departments to try and enforce upon managers to ma- to increase diversity? I mean, is that a good objective for an organization to have? This is, like, a topic a lot of people I've heard kind of flip back and forth on.
- DSDavid Sacks
I... There is no company where I have majority control where I have an HR department.
- CPChamath Palihapitiya
You don't have an HR department?
- DSDavid Sacks
No.
- JCJason Calacanis
Say more. Why?
- DSDavid Sacks
I think that it's very important. You should go to a very respected lawyer at a third-party firm, someone very visible, an Eric Holder type person, and you should work with that law firm and retain them so that you have an escape valve if there are any kind of serious issues that, that need to be escalated so that you can get them into the hands of a dispassionate third-party person who can then appropriately inform the board, the CEO, and investigate. So that, that covers sort of all the bad things that can happen. Then there are buckets of, I think, good things. One, one important set of things is around benefits. My perspective is that the team should build their own benefits package that they want. They should understand the P&L of the company that they work for. They should be given a budget. And in, in my companies, again, what I do is I allow committees to form and I ask those committees to be diverse. But what I mean by diverse is I want somebody who has a sick partner, I want somebody who has a family, I want somebody who's young and single, so that the diversity of benefits reflects what all these people need. They go and talk to folks, they come back, and they choose on behalf of the whole company and there's a voting mechanism. Then when it comes to hiring, I think what has to happen is that the person that... for whom that person will end up working for, it's the head of engineering, it's the head of sales, those are the people that should be running the hiring processes. I don't like to outsource it to recruiters. I don't like to outsource it to HR. So, when you strip all of these jobs away, HR doesn't have a role. And what is left over is the very dark part of HR in most organizations, which is the police person, the policeman, right? The... What, what do Sachs call it? The commissar.
- CPChamath Palihapitiya
Commissar. (laughs)
- DSDavid Sacks
That is why everybody hates HR.
- CPChamath Palihapitiya
Totally.
- DSDavid Sacks
I have never met a company where that is a successful role over long periods of time. They are this conflict creating entity inside of an organization that slows organizations down. So, that allows me to empower individuals to actually design the benefits that they want, to hire the team that they want, and I let them understand the P&L in a very clear, transparent way, and the results are what the results are. You want more bonuses? Hire better people. And then what I do is at the end of every year, I talk about this distribution of talent and I make sure we are identifying the bottom 5 or 10%. They need to be managed up or they must be fired. Every year. And it does not matter how big the company is. You must manage up or out those bottom 5 to 10%. And see, in some cases I'm talking about one person because it's a small company. And in other cases, I'm talking about 30 or 40 people.
- JCJason Calacanis
So just hire the best person for the job?
- DSDavid Sacks
No, you eliminate HR.
- JCJason Calacanis
Yep.
- DSDavid Sacks
You empower the team. Make the, make, allow them to make their own decisions. Measure it, hold them accountable.
- JCJason Calacanis
Right. So if you have-
- CPChamath Palihapitiya
Yeah.
- 40:15 – 53:50
Google's licensing deals: Is this TAC 2.0? How can Reddit capitalize on its data?
- JCJason Calacanis
decades. All right. Issue two, Google goes splashy cash. It's licensing deals for training data and it's now becoming a bit of a pattern. Google, we talked about, I think just last week, had done a deal with Reddit for $60 million. That's reportedly per year. Today, Stack Overflow is now using its overflow API to train Gemini. No word on the contract value. I did get some back channel that it's a multiyear, non-exclusive deal. According to Red's S-1, they have already closed 200 million worth of AI licensing deals over the next two to three years, so, you know, maybe it's gonna be 75 million a year or 100 million a year. Who knows how big that business can get? We're gonna talk about the S-1 from Reddit in just a moment. And, uh, they're, this is on top of all the other licensing deals that have occurred after Springer and OpenAI, remember that one? And OpenAI is in talks reportedly with CNN, Fox, and Time to license their content. That comes on the heels of that blockbuster New York Times OpenAI lawsuit that we talked about, I don't know, 10 episodes ago. And OpenAI's lawyers are trying to get that one, just to give you a little update on it, they're trying to get that case dismissed saying that the New York Times hacked ChatGPT to get certain results, and that the New York Times took tens of thousands of tries to generate the results, yada yada. And they said, here's the quote from the filing from OpenAI, "The allegations in the Times complaint do not meet its famously rigorous-"
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
"... journalistic standards." Both OpenAI and Google-
- CPChamath Palihapitiya
All right.
- JCJason Calacanis
... and Gemini have been furiously guardrailing their systems, as we talked about as well, to end- stop copyright infringement, like trying to make pictures of Darth Vader and that kinda stuff. Chamath, you've talked a little bit about your TAC 2.0 framework. Maybe you could talk about what you see happening here with all these licensing deals and what it means for startups in the AI space.
- DSDavid Sacks
Well, just to maybe catch everybody up, TAC is this thing called Traffic Acquisition Cost, and you can see it most importantly in Google's quarterly releases, which is that what they realized very early on at the beginning of the search wars in the early 2000s is that they could pay people to offer Google Search. People would use it, and then it would generate so much money that they could give them a huge rev share and it would still make money. So I remember, Jason, when you and I were at AOL, this is the first time I met Omid, we were flying back to California. We were both in Dulles at the same time in, like, 2003 or '04.And that's when Omid did the first big search deal between AOL and Google, and it was, it was, I wanna say hundreds of millions of dollars back then.
- JCJason Calacanis
Yeah.
- DSDavid Sacks
Where Google pays you upfront, you have to syndicate Google Search, and then they clean it up on the back end with some kinda rev share. So what's incredible is that that process has escalated to a point now where, for example, on the iPhone, it's somewhere between 18 and 20 odd billion dollars a year is what now Google pays Apple. So that's the traffic acquisition cost 1.0 world, TAC 1.0, and I just said that we should call this TAC 2.0 except now what Google is doing is instead of paying for search, they're actually paying for your data and saying, "Give it to me so that I can train my models and make it better." And I think that that's an incredible thing. Both it's very smart for Google, but also it's great for these businesses because it's an extremely high margin thing to do when you have a really good corpus of tr- of data that is very unique. So in the case of Reddit, that $60 million deal, I didn't, I, I looked through the S-1 to try to figure out whether it was a multi-year deal or not. It wasn't totally clear, but the point is that, you know, Google's paying Reddit 60 million bucks, and Jason, you just said that they're, they've done a couple more of these things. That's incredible. This TAC 2.0 thing is amazing. So if you're an entrepreneur building a website or building an app that has really unique training data or really unique data, you'll be able to license and sell that, and that'll be an incremental revenue stream to everything you do in the near future. That's amazing.
- JCJason Calacanis
Yeah, and I-
- DSDavid Sacks
That's what TAC 2.0 is.
- JCJason Calacanis
It's gonna be incredible for the entire, uh, content and community-based industries. Do you think this could sustain content creation where advertising has become very difficult, Sax?
- CPChamath Palihapitiya
I guess my question to, to Chamath would be do you think this is going to be available to small websites? There'll somehow be some sort of program or... 'Cause I mean, Reddit's one of the biggest sources of content on the entire web, right? It's like a top five traffic site with tons and tons of user gener- generated content.
- DSDavid Sacks
Yes.
- CPChamath Palihapitiya
Do you think, like, a small publication would be able to make these types of deals?
- DSDavid Sacks
Yeah, and in fact, I think, like, if you go back to Search 1.0, that's exactly what these small companies were able to do, which was in a more automated way. They were able to basically partner, and in that example what they would say is, "Here, Google, why don't you just run your ads on our page?" Right? And that was sort of in that Web 1.0 world. So Google had solutions for the largest companies on the internet all the way to the smallest, and in this TAC 2.0 world, I do think that, that it works in that way as well. The problem in the, in that world if it's a small website that says, "Here's my training data," the question is how do you attribute how much incremental value a model derived from it versus something else? And so I think that that part has to get figured out. And so, you know, what Google will be able to pay you will probably be pretty de minimisly small if you're small right now. So, you know, to your point, if, if the upper bound is 60 million for Reddit, then the average website's gonna get a few hundred bucks. But that still may be a good start. And when Google figures out how to monetize this stuff or somebody else where then they can give you back some way to make money, I think, I think that there's a real monetization here. I really do.
- JCJason Calacanis
Ray Berger, you, you took the other side of this, but now that you see the market-based solution starting to emerge, what do you think of this market-based solution? You think it's, uh, got legs?
- CPChamath Palihapitiya
Well, I'm not convinced that this looks like TAC in the traditional sense where you're basically buying a continuous stream of traffic, and then you're helping to monetize that traffic. That's effectively what Google did in the ad syndication business and does today. That business makes about 10 billion a quarter at Google, and they're paying, call it 70 to 80 cents on every dollar back out to the owners of that traffic, the folks where that traffic is derived from. I would say that this looks a lot more like the content licensing deals to build a proprietary audience, which is effectively what Netflix did. They, they paid studios for content. Apple does this. They have proprietary content that they pay producers to make, and they put on Apple TV. Amazon does this and so on. This is a lot more like that where there are content creators out there, whether that content is proprietary like The New York Times or user generated like Reddit, and what they're trying to do is acquire that content to build a better product on Google Search. And I'm not sure how you get paid a continuous licensing stream for that content. Once you've trained the model, the content gets old, it gets stale at some point in a lot of cases like news, and then eventually, if you don't have a high quality continuous stream of content, it's not worth as much anymore. To give you guys a sense, humans generate in total... Well, let me just give you some stats. There's about a million petabytes of data on the internet today, and humans are generating about 2,500 petabytes of data, new data, uh, per day right now. Remember I shared a couple weeks ago, YouTube is generating about two petabytes of data, uh, per day. Half of all data generated is never used. So this is like records and files and stuff that gets put on a-
- JCJason Calacanis
Log files.
- CPChamath Palihapitiya
Log files, get stored somewhere, never accessed, never used. The majority of the rest of that data is not in the public domain. It's not on the internet. So there is a lot of data out there, what some people might call dark data, to train on. And I think that as the identification of better sources of training data and the value of training data, right now we're in this kind of shotgun approach. We're trying to blast out and, you know, source lots of content, lots of data. Just like over time Netflix got better at figuring out what content to buy and what to pay for it, and they're the best at it, I think so too will Google and others figure out what data is actually particularly useful, what it's worth, and what to pay for it.And so there's a lot of data out there to go and identify, to mine, to pay license fees to get access to. Whether those are continuous license fees or one-time is still TBD.
- JCJason Calacanis
That's a key issue, yeah.
- CPChamath Palihapitiya
So I think we're still a little bit early to know if this is, like, you know, a continuous model, like a TAC type business or if these are sort of chunky type deals, and we don't really know what the real value is yet, and that all changes over time. And remember tha- tha- the rate of data generation is increasing. So while we're generating 2,500 petabytes of data per day as a species on the internet, that number is going up every day. And so every year, all the old data becomes worth even less. So this is all changing fairly dynamically, and I think there's a lot still to be figured out on what the monetization model will be for content creators and, and how that's gonna change over time.
- JCJason Calacanis
Yeah. And this is a really good point. Some things will be like The Sopranos or Seinfeld or Simpsons where that library is worth-
- CPChamath Palihapitiya
Totally.
- JCJason Calacanis
... a fortune and people will pay a billion dollars, a half billion dollars. Some, someone-
- CPChamath Palihapitiya
But no one's, no one's, no one's paying a lot for old NFL games, you know? (laughs)
- DSDavid Sacks
Nick founded... By the way, Reddit's licensing deal was 203 million over... It says two to three years, so let's assume it's, call it three just to be safe.
- JCJason Calacanis
Mm-hmm.
- DSDavid Sacks
So it's about-
- JCJason Calacanis
Mm-hmm.
- DSDavid Sacks
... you know, 60, $65 million a year. It doesn't say whether the deal with Google is exclusive.
- 53:50 – 1:13:06
Klarna's huge AI innovation: AI disruption, open-source benefits, a new class of billion-dollar startups
- JCJason Calacanis
All right, issue three, Klarna crushes customer queries with AI. You may have seen this trending on X and Twitter and in the press. If you don't know Klarna, they're a Swedish fintech company. They do that buy now, pay later stuff. I think they were the originators of that online. And they put out a press release with some really eye-popping claims. AI assistants are now doing the work of 700 full-time agents at Klarna. They moved issue resolving times from 11 minutes with humans to two minutes with AI. And customer satisfaction is on par with human agents. And it said its resolutions are more accurate than humans, creating a 25% drop in repeat inquiries. That tracks. And so far, their AI, which they built with OpenAI, has had 2.3 million conversations, accounting for two-thirds of Klarna's customer support service chats. Klarna estimates its AI agent will drive, wait for it, a $40 million increase in profits this year. We could talk a little bit more about Klarna and their valuations, but Freeburg, what, what do you think this...... means if we're in year... this is the start of year two of ChatGPT as, like, a phenomenon, let's say. What do we think year three looks like?
- CPChamath Palihapitiya
So I think the tech- the techno-pessimist point of view is, "Oh my god. Look at all these jobs that are getting lost." I think the optimistic point of view is that that company has all of that excess capital now to reinvest in doing other things. That capital doesn't just become profits that flow out the door and everyone's done with that money, and that money just gets put away in a sock. That money gets reinvested, and that money gets reinvested in higher order functioning work, and that's really where there's an opportunity to move the workforce overall forward, which is what I think is super exciting and, and, um, I'm super positive about. We've seen this in every technological evolution that's happened in human history from, you know, the plow in agriculture to automobiles to computing and to now AI that, you know, humans moved from manual labor to knowledge work to now, ideally and hopefully, more creative work. And so I do think that it isn't just about eliminating jobs and making more money, but it's about enabling the creation of an entirely new class of work, whether that's prompt engineering or, you know, building entirely new businesses that simply can't exist today, or perhaps even downscaling businesses, where you no longer need to have a 10,000 person organization. Smaller organizations can be stood up as startups to start to replace large functioning organizations. So, I don't know. I think it's a time of great opportunity. I know that some people would view it as being highly shocking. I think it's inevitable that human knowledge labor, where the job of the human is simply the ingestion of data and then communicate an output of data seems like it will eventually be replaced by computing somehow, and this is happening now in an accelerated way with these LLMs. So, I think that what we should focus on and think about is: what are all the new businesses, all the new jobs, all the new opportunities that are... just couldn't have existed 10 years ago that are now emerging that are very exciting as the workforce transitions?
- JCJason Calacanis
Saks, you buy this techno-utopian view of this, all these jobs that are gonna obviously be retired are going to open up the opportunity for these humans to do even better work at Klarna? Or do you think it's just gonna go straight to the bottom line?
- CPChamath Palihapitiya
Well, it sounds like they're able to eliminate a lot of frontline customer support roles by using AI, which is what I would expect.
- JCJason Calacanis
Yeah.
- CPChamath Palihapitiya
I think this is a very natural application for AI. You know, the... it was already the case that you could pretty much find answers to questions by searching the FAQ, things like this. This, this is an even better way of doing that. So, so look, I, I believe that this will be a big area for AI, is saving on... Again, I use the word frontline customer support, because the way that customer support is typically organized is there's level one, level two, level three. The more difficult queries or cases get escalated up the chain depending on how hard they are, and I think the AI will do a really good job eliminating level one. It'll start to getting to level two, but you're probably gonna need humans to deal with the more co- uh, complex cases. Now, the question is where do those displaced humans go? I think there's gonna be new jobs, new work. That's always been the history of technological progress. And one of the things you're already seeing is there's a whole bunch of new AI companies that are exploiting this technology, and they need to hire people. So, I basically agree with Friedberg that you will elevate people's work by automating away the less interesting parts of people's jobs, and then creating more productivity and more opportunity.
By the way, just to use your, just to use your example, Saks. So imagine if all the level one support people, some chunk of them can now do level two support, and so the customers are gonna get greater hands-on care. More customers will get access to a higher level of service. The organization can afford to do that. They'll be more competitive in the marketplace because customers feel better taken care of. I just think that's how the organizations get leveled up as new technology kind of shows up like this. That's a great point. And then those folks can have a much deeper level of interaction with their customers than they are today. Just answering basic questions.
- JCJason Calacanis
But then the world gets more complex, and then people might get better at the software, and they might discover new features. Then you might be able to redeploy those people. If you look at coffee, like, I don't know, was it 40 years ago you went to order a cup of coffee, it was decaf or regular coffee, milk and sugar. Th- like, those are your four choices. And, and now you go order coffee, I don't know if you guys have used the Starbucks app or, you know, just had the SweetGreen CEO on the pod and, man, you can... The fidelity and the, and the nuance of what you wanna order is absurd. Chamath, where do you think this is all heading? Because there is the issue of displacement, how people, how quickly people can re- be redeployed. And if we're seeing in year two customer support and developers getting 10X, what other categories do you think we're gonna see fall next?
- DSDavid Sacks
I think the truth is that, as you said, the real world applicability to AI was not last year. So I think we're really in the first five or six weeks of the first year.
- JCJason Calacanis
Hmm. So you consider that year zero?
- DSDavid Sacks
That's year zero.
- JCJason Calacanis
Sure.
- DSDavid Sacks
That was sort of like the, you know, where everybody was running around building toy apps.
- JCJason Calacanis
Proof of concept.
- DSDavid Sacks
This is one of the first few times where you're seeing something in production where there's measurable economic value. And the important thing to note about that is that it's not just what it means for Klarna but what it means for everybody else. So if you look at everybody else, for example, here's Teleperformance, which is a, a French company that runs call centers. They lost $1.7 billion of market cap when that tweak went out, about 20% of their market cap. So this is, this is the real practical implication. Yes, Klarna replaced 700 people, and they saved 40 million of OpEx, but Teleperformance, while they were just doing their everyday work, lost 1.8 billion of their market cap at the exact same moment. And so what does it mean? I think that what Klarna should do is open source what they've built. And the reason is that you want to give companies like Teleperformance a chance to-... retool themselves with the best possible technology so they- they- they can actually preserve as many of the jobs as possible. Because at the limit, if every single company is able to implement something that is as economically efficient as what Klarna did, Teleperformance doesn't exist and there's $10 billion and 335,000 employees that will not have a job.
- CPChamath Palihapitiya
Yeah.
- DSDavid Sacks
And so for Klarna, the reason to open source it is twofold. One is, they don't lose anything because you'll still need to train it on your own data and so there's no disadvantage that Klarna will have, right? They're just saying, "Look, I built this on top of GPT, here's what it looks like, and that production code can be used by anybody else. Go for it, but it has to run on your own data." That's a very reasonable thing. So I think it has the benefit of both, A, setting a technical pace that can help them attract better employees and more highly qualified people who find the scope of work even more interesting, and B, I think it's on the right side of history with all this AI stuff where it's allowing everybody to sort of benefit in a way that is the least destructive. But I just wanted to-
- CPChamath Palihapitiya
Yeah.
- DSDavid Sacks
... show you that the destruction was quite quick and it was pretty severe, and if two or three other big companies launch these kinds of tweets after real measurable results, Teleperformance would be a one billion dollar company shor- in short order.
- CPChamath Palihapitiya
There's a third reason I th- I think it's a brilliant idea for Klarna to open source this- this tool, 'cause it's not their business, right? This is just something they did as a- as a productivity improvement. They get the benefit back to them of the community working to advance that technology, so they don't have to put more engineers, like, advancing the ball on their-
- DSDavid Sacks
Totally.
- CPChamath Palihapitiya
... customer support AI.
- DSDavid Sacks
Totally.
- CPChamath Palihapitiya
So they can just re- re-emerge in the changes that the open source community comes up with.
- DSDavid Sacks
Yeah.
- CPChamath Palihapitiya
And since they're not in the business of selling AI directly, there's no reason not to do it, like Chamath said. So I-I think it's kinda brilliant.
- DSDavid Sacks
Yeah.
- CPChamath Palihapitiya
This is Meta's strategy, by the way. I mean, Zuck's done the same thing.
- JCJason Calacanis
I was about to say, they should be building this on Meta's open source products and Apple's open source products. Right, Sax?
- CPChamath Palihapitiya
Yeah. Well, so what- what Meta said, what Zuck said on the Me- last Meta call is the reason we open source everything is because we don't directly sell AI. We create products that AI makes better, so by open sourcing this, we allow the community to advance the ball and we get-
- 1:13:06 – 1:22:52
Reddit S-1 breakdown
- DSDavid Sacks
two... Okay, issue four, Reddit's S-1 is kind of fun. Let's break it down everybody. 2023 revenue, $804 million, up 21% year over year.They're still losing money, uh, net loss 91 million in 2023. They lost a 159 million in 2022, so they're cutting the loss. Free cashflow's negative. Here's a chart of their quarterly revenue and cashflow. So they're kind of bouncing along the breakeven mark, as you can see there in the chart. They got a wonderful gross margin because they don't pay to produce the content unlike The New York Times or Netflix. And so an 86% gross margin, up 2% year over year. Their daily active uniques 76 million, up 27% year over year. Average revenue per user is incredibly low, three bucks and 42 cents, and their daily active unique users, uh, here you can see another chart growing nicely quarter over quarter. They got a billion two in cash. Most interesting probably, uh, and could be challenging to execute on is their direct share program. They're gonna carve out a bunch of, uh, shares in the IPO to sell to their most active mods. Those are the moderators, the people who run the, uh, different channels or subReddits as they're called.
What could go wrong? What could go wrong? (laughs)
What could go wrong? We've seen this movie before. And, uh, but they're gonna invite users to participate on it on a rolling basis. So-
A more unqualified retail buyer pool does not exist in the Reddit mods, except maybe the Reddit participants themselves.
WallStreetBets knows what they're doing, yeah. I think they'll buy the, uh, I think they'll buy after the lockup comes up. But let's just get started here. I think you looked at the S-1 a little bit, Freberg, and you had asked us to, you'd asked me to put it on the docket 'cause you were, you were digging into it. Anything stick out to you or thoughts on the business overall?
- CPChamath Palihapitiya
No, I mean, I wasn't pu- pulling. I just asked if you guys had read it. Um, Re- (laughs) um, I think-
- DSDavid Sacks
Hey.
Hey.
- CPChamath Palihapitiya
I made a funny joke actually. (laughs) Read it, get it.
Accidentally.
Get it? i.e.- (laughs)
- DSDavid Sacks
I'll let you guys go on for a minute. Go ahead. Go ahead. Tell me when you're ready.
- CPChamath Palihapitiya
(laughs)
Sorry.
It was a good pun. Too bad it was accidental. No, it was, it was intentional. I'll give you credit.
- DSDavid Sacks
It was intentional. I'll give it to you.
- CPChamath Palihapitiya
So I think the, the thing about Reddit, if you could pull up the chart with the quarterly average daily active user data. This was a business that the last couple of years everyone was like, had flat-lined because it was only growing 5% a year in terms of usage. And then all of a sudden in the last two quarters, so starting in late summer, early fall of '23, so just six months ago, the usage started to climb pretty significantly growing 15 and most, in the most recent quarter, 27% year over year. Absent that growth story, it's a really challenged business because a business without much growth gets value typically on a multiple of the cashflow that they're generating. And, you know, there's less upside and all this kind of optionality goes away. That's kind of a key point. I, I don't know. I think, like, for you to make an investment at a five billion dollar valuation here, you've really gotta believe that the growth continues at this rate and it doesn't revert back to the mean growth rate of the last couple of years of basically 5%, which has roughly flat-lined. The other challenge they have is that their ARPU is only in that kinda $3 range, which is, like, less than 10% of where Facebook is at. And the data that Facebook collects on their users gives them the ability to do much better targeting on ads and therefore monetize their audience much better than Reddit has been able to do, to the order of over 10X. And then if you look at the ARPU number, how much they've been able to grow that metric, it's also, you know, been a little bit flat-lined. So this business, I think, is a real question mark. I mean, you could argue it's probably worth in the best, best case, in the two to three billion dollar kind of valuation range. And then you have to believe the bull case that the growth continues or accelerates from here and they have a plan to address the ARPU problem, they have other paths for monetizing their audience than what they're kind of doing today. What do you guys think this thing's worth? Do you buy it if it goes out at three billion or five billion, do you buy it?
- DSDavid Sacks
I think the first question, which you nailed, that a buy side investor will ask is what happened in the last two quarters that was different than the last 15 quarters? That's gonna be a very important question and I think they're gonna have to have a very buttoned up answer for that.
- CPChamath Palihapitiya
Right.
- DSDavid Sacks
And if they can point to very specific repeatable things, I think that'll be good. The thing that they... This IPO, if it goes off in the next four weeks, they won't have to wait, but if it doesn't get off in the next four weeks, they'll have to update the S-1 probably with Q1. And so you'll see whether this thing is a trend or whether it was a one-time thing.
- CPChamath Palihapitiya
Do you know what it is?
- DSDavid Sacks
Well, the growth in the logged out is probably largely because typically if you use it on a phone, it tries to force you to use the app, right-
- CPChamath Palihapitiya
That's right.
- DSDavid Sacks
... so that you can be in this logged in experience. And if you just turn that off, you can get a lot more logged out because Reddit gets tremendous rank authority from Google. So if you just, if you just turn that off, I think that you'll have a lot of logged out customers and that will grow very quickly. And so maybe it's a decision that they'd rather have the top line number grow than have logged in users grow. But the logged in user growth has still been pretty healthy. It's basically doubled in the last three years, so... But to your point, Freberg, if they said, "Oh, our, our business is really only these 30 odd million logged in users," it would be worth a lot less than saying, "75 million." I think it's, I think you're right, it's kind of like in the mid, you know, kind of two, three, four billion dollar-ish range. The, the big problem is the ARPU because these are not users that represent sort of Facebook's bread and butter kind of a $40 ARPU, lives in a good suburb in the United States and is monetized like crazy.I just don't think that's what these users are.
Episode duration: 1:26:51
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