OpenAI Takes Aim at Google & Southwest Ends Open Seating

0:00Tuesday on NBC, Jimmy Fallon and Bozma St John host the highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On Brand with Jimmy Fallon. Series premiere Tuesday on NBC. Good morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, did OpenAI just release its Google killer?

0:38Introducing Search GPT. Then pour one out for the People's Airline. Southwest is getting rid of its open seating policy. It's Friday, July 26th. Let's ride.

0:54The Paris Olympics are off to an ominous start. Just hours before the opening ceremony later today, France's high-speed rail network was hit with coordinated arson attacks that has severely disrupted traffic along three train lines, according to the National Railway. It advised travelers to postpone their trips if possible and canceled many trains. About 800 ,000 travelers will be impacted due to disruptions that are expected to last through the weekend until Monday. Not the kind of news you want to wake up to, especially with the opening ceremony coming later today. The timing could not be worse because not only is it the day of the opening ceremony, it's also the first day of the Grande Depart, which is this key date for Parisians to begin their summer breaks.

1:39Lots of city dwellers leave for the countryside for most of August, leaving Paris to the tourists. Obviously, it's a unique year with the Olympics coming to town, but now people can't get out of town after the attack. So just hope everything goes smoothly and they can get these repairs done because it should be a joyous day for Paris. Now, a word from our sponsor, Beehive. We're already a week into talking about your new favorite newsletter platform, and we haven't even mentioned the best part yet, price. Beehive set up their pricing model in a unique way from all of their competitors. There's a great free version that you can immediately start using, but if you want access to their full suite of growth and monetization features, it starts at$39 a month.

2:21But the best part about that$39 a month price tag is that some of those monetization features like subscriptions or participating in their ad network immediately start paying for themselves. So you can make back your Beehive subscription fee while using Beehive. And they never take a portion of your profits either. So as you scale and become rich and famous, the price you pay for Beehive doesn't go up. Plus, even if you don't want to be rich and famous and don't think you need Beehive's entire suite of tools, you can still get access to their custom website and newsletter builder, campaign analytics, unlimited email stands, and more with their cheaper pricing options.

2:57Beehive's got range, baby. If you want to see what Beehive has to offer, head to beehive.com slash brew. That's B-E-E-H-I-I-V dot com slash brew and get a 30-day free trial plus 20 % off three months with code brew. eczema isn't always obvious but it's real and so is the relief from ebglyss after an initial dosing phase about four in ten people taking ebglyss achieved itch relief and clear or almost clear skin at 16 weeks and most of those people maintain skin that's still more clear at one year with monthly dosing ebglyss libra kizumab lbkz a 250 milligram per two milliliter injection is a prescription medicine used to treat adults and children 12 years of age and older who weigh at least 88 pounds or 40 kilograms with moderate to severe eczema.

3:41Also called atopic dermatitis that is not well controlled with prescription therapies used on the skin or topicals or who cannot use topical therapies. EBCLIS can be used with or without topical corticosteroids. Don't use if you're allergic to EBCLIS. Allergic reactions can occur that can be severe. Eye problems can occur. Tell your doctor if you have new or worsening eye problems. You should not receive a live vaccine when treated with EBCLIS. Before starting EBCLIS, tell your doctor if you have a parasitic infection. Searching for real relief? Ask your doctor about EBCLIS and visit ebglis.lily.com or call Call 1-800-LILY-RX or 1-800-545-5979.

4:11On a long enough timeline, everyone conforms to society's norms. The hippie liberal arts students work on Wall Street, the proud city kids move to the suburbs, and Southwest Airlines will assign seats to its passengers. Yesterday, the airline said it would scrap its free-for-all seating policy and begin giving each passenger a designated seat, reversing a unique boarding system it had used for its 50-year history. Every other airline assign seats in order to segment the cabin and upcharge for premium fuselage digs. This is the right change at the right time, said Southwest CEO Bob Jordan. He noted that this is what passengers wanted.

4:49In an internal survey, the company found that the number one thing on Happy Passengers site is the opening open seating arrangement at Southwest. 80 percent of Southwest customers and 86 percent of potential customers prefer an assigned seat. Toby, this is a drastic departure from Southwest's longtime business model, but it's feeling the pressure to act. An activist hedge fund recently took a$2 billion stake and is pushing for changes. It looks like some are in store. This is the end of the world as we know it, and I do not feel fine. I am a big Southwest stan. I loved the open seating arrangement.

5:25It was actually the American dream, if you think about it, with a little hard work and some punctuality when you check in for your flight. You, too, could sit anywhere in the plane. It was truly a classless system when so much of America is segmented by class. But now that dream is dead. That being said, if you are Southwest CEO and you look at these internal surveys, you look at the data, it seems like a very easy decision to make. But I can still be sad about it. You can be sad. And I think a lot of Southwest fans are sad about it. But if you're a business leader and you're trying to make more money, I mean, segmenting the cabin so you can charge for premium seats is the way to go.

6:04And it seems remarkable that they've held off for this amount of time. Like I said, every other airline does this because it just makes you more money. United said that revenue from its premium products accounts for more than half of all passenger revenue. And then Lufthansa says its premium economy cabin is the most productive by square foot, 6 % higher than business class, 33 % higher than economy class. So you have Southwest, which is struggling, which we can get to. And it's like, where can we move the dial to make more money, to add more sales, to become profitable again? This is the way to do it.

6:38Yeah, remember, Southwest is in a weird financial spot right now because they actually had a 46 % drop in Q2 profits despite pulling in record revenue. So clearly they're making money, but they're not being efficient with how much they're making money. The issue was that they said they sold too many tickets too early in the summer travel period, so they couldn't get those last-minute procrastinators like myself, honestly, who booked their flights like three days before they actually go. So they missed out on some of that last-minute profit squeeze. But then you're right. They also cannot – they don't have the golden ticket that these other airlines have, which is their first-class economy plus that can help offset some of those higher labor, higher fuel costs that all airlines have been dealing with.

7:18But Southwest just doesn't have that second gear that they can go into to increase their profitability. And now a third of their cabin will be premium seating. It makes a few other changes that are of note to bring it more in line with industry standards. So it's going to start flying overnight. Red eyes. I didn't realize it hadn't done this before, but it is a very popular way for people coming back from the West coast to the east coast. So it's going to start flying red eyes on February 13th. Next February, it's going to go from Las Vegas, Los Angeles and Phoenix to BWI, Baltimore, and also from Vegas to Orlando, Los Angeles to Nashville.

7:54So it's starting these red eyes to just bring it more in line with what the industry is doing. And you're seeing discount airlines everywhere, the JetBlue's, the frontiers, the spirits of the world become more like their Delta American by segmenting the economy, by segmenting the cabin, by charging more for things. So this Southwest move kind of marks the end of an era. I know I said it, but for these budget airlines that tried a particular business model and it may not be working out in this new aviation landscape. The final reason that I'm sad about this, though, is that this was the fastest way for loading a plane.

8:31Mythbusters literally did a 2014 study. Random boarding was by far fastest than back-to-front boarding. It was faster than even like aisle window boarding. Now it's gone. Very sad. So I hated it. It was so stressful. I agree with the 86 % of people surveyed that you want your assigned seat. It doesn't matter where it is. I mean, I prefer the window, but it doesn't matter where you are in the plane just to know, you know, that have that peace of mind that you have a place and you're not going to be waiting at B30, you know, and you're spot in line with Southwest, with everyone else, I think just gives you, you know, a peace of mind going into the airplane.

9:09I think that's what a lot of people want. You're in the minority. Like Neil's bench press the other day at the gym, the U.S. economy is looking surprisingly stronger than expected. It grew at a healthy 2.8 % annualized rate in the second quarter of the year, double the 1.4 % reading in the previous quarter. Granted, it's a little cooler than last year's breakneck pace, but that's kind of what you, as an inflation-strap consumer and Jerome Powell want. An economy that's not too hot, not too cold, but just right. It was the usual suspects in consumer spending and business investments that accounted for almost all of the growth in the quarter.

9:44Government spending at the federal and state levels also chipped in to give the numbers a boost, kind of like me spotting Neil at the gym. Home construction, however, is in the timeout corner. It was actually a drag on economic growth, despite coming off three straight quarters of solid numbers. Neil, this report was almost too good in the sense that it reintroduced some uncertainty into whether the Fed will actually start cutting interest rates come September. But the growth wasn't so, so strong so as to totally derail the Fed's plans. I think it was an A. If I'm a kindergarten teacher, I'm giving this report a big sticker.

10:18It was the perfect report for the Fed to begin cutting interest rates in September. I want to focus on one particular aspect of the economy, which is nonresidential fixed investment. This is spending by businesses on things like construction, equipment, and software. And that rose at a 5.2 % annual rate. That is a huge number. And I don't know how much of it is attributed to just data centers. Because when I look at those things, I'm like, all right, so that's just Facebook and OpenAI building data centers and NVIDIA. But that was a huge part of the growth story here in Q2. I think this is a great GDP report that shows the economy is still growing very strongly.

10:53Not too hot, not too slow, but right in the sweet spot. Let's just call out one thing, too. Remember all those gloomy, those doomsday forecasts of recession over the past year just definitely have not come to pass. Every quarter of new data that comes in, it's just worth reminding people that it is still a very good economy. We've defied a slowdown. And the headlines that you'll probably see as you're filtering through the news today is that this new data raises a ton of confidence that the economy has achieved that mythical soft landing that we've been referencing since pretty much the dawn of Morning Brew daily.

11:24It does look like we're going to have that healthy economic growth without letting inflation get out of control. It's been what the Fed and what Jerome Powell have been after this whole time. So each new report that comes in, we feel more and more confident that we actually are achieving that. And we'll see what happens with that consumer spending number. A bunch of companies that reported earnings in the past few weeks have warned of a strapped consumer. I'm thinking PepsiCo, Conagra Brands, which makes a ton of food products. UPS had its worst day ever this week after it said that people were pulling back on spending packages and said that customers were trading down to cheaper options.

11:59They were saying, all right, you can send it to me, you know, seven to nine days. I'm not opting for that two to three really fast delivery. Etsy also warned of customers, you know, slowing down their spending. So we'll look at that. going forward in the Q3 GDP report a little bit. But overall, it seems like consumers are holding up just OK in this very high interest rate environment. It is shaping up to be a solid next few years for the U.S. economy, too, if you want to look ahead. Great time probably to be president as well, because you have inflation returning to normal. You have the Fed preparing to cut race.

12:32You've had this huge push towards infrastructure spending as well that happened under the Biden administration that will take time to ramp up, but hopefully that starts paying dividends over the coming years. So a lot of these projects, both big, big projects, both smaller projects are kicking off. So if you are in the presidential race right now, you are kind of licking your chops because it's probably going to be a productive next four years for you. OpenAI must be feeling lucky because yesterday the company released what may be a Google killer. It launched a test version of its long-awaited search engine called Search GPT, which combines the conversational style of its chatbot, ChatGPT, with the ruthless, up-to-date information retrieval of Google.

13:16Search GPT is still in beta, so you can't use it. But this is exactly what Google execs feared when last year they declared a code red warning about OpenAI clawing away at their decades-long dominance in search. The main question that's dogged an OpenAI search engine is, where is it getting its information? And will the publishers providing that information be cited as the source? Google Search drives a lot of web traffic to news websites, and there are big concerns that an AI search engine would devastate the news business by scraping articles and providing full answers. OpenAI appears very sensitive to this criticism, so it's inked partnerships with numerous news outlets for Search GPT, including the Associated Press and the Wall Street Journal.

14:00It says its search engine will give inline attributions to these publications when delivering an answer, hopefully tamping down fears of information theft. Toby, what do you make of Search GPT, and should Google be worried? I think Google should be worried because the big unlock here from just a product and a user perspective is the follow-up question. That is just a massive unlock because if you think about going through a Google search, you probably have to do multiple searches that add context to what you're looking for. Whereas if people who have used ChatGPT or any of these AI chatbots, they know that it uses context from your previous conversation.

14:37So you can talk to it like a normal person who has that contextual information. So I have used not SearchGPT but another competitor perplexity. And it's just a very great experience being able to ask follow-up questions like a normal human being. It is a step above the normal Google experience that we've all grown up on. So, yes, I would be very worried if I'm Google. This is a direct shot at Google's business and what they've always feared, and now it's coming to pass. And Google hasn't been complacent here. They've infused their search with AI. The problem is it's been a complete debacle when they put in their AI overviews feature to Google Search as a way of defending themselves against chat GPT and open AI and search GPT, which which just came is it failed miserably.

15:25It told people to eat rocks and put glue on their food. It just was a really bad experience and they had to roll it back a bit. So Google really hasn't done a good job of defending its search fortress by infusing AI into its search. And it looks like OpenAI and Perplexity, which is another competitor, and there are other ones too, are sort of taking it to Google. And Google's just been caught on the defensive. They've been caught flat-footed, and they just aren't delivering a product that consumers may want. Then again, Google search is just undefeated. Like, it is just—it has gone on for decades.

15:58there have been a lot of attempts to dethrone it and people just seem to be very used to it. They know how it works. And I don't know, you know, there's that long list of hyperlinks and maybe that in the end, that's what people just want. I do think though that the way that SearchGBT is set up, that you can see the sources on the side, you can click out to them, is something that people will enjoy as well. Because remember, OpenAI isn't immune to the hallucinations that Google was having. Those actually weren't even hallucinations. They were just taking information from all the Reddit posts. They couldn't determine the difference between humor and non-humor.

16:33So I do think the way that these search programs are set up where it literally will give you a citation, you can see the hyperlink where it's coming from, is a way to get around that. But OpenAI has to nail it as well because they are not immune to having these embarrassing egg on your face moments. I think the biggest thing that they'll have to address is this plagiarism of media outlets problem because perplexity has already had issues with that. So it's not as much hallucination as much as it is just directly copying journalists' work. So that's their biggest challenge that I think they have to solve.

17:06You're hurting here first. Toby's declaring the death of Google. Oh God, that's not going to age well. Up next, a deep dive into taxing tips and your MBD Olympic preview. I'm Christian McCaffrey, pro running back, and Abercrombie is an official fashion partner of the NFL. I'm not kidding when I say NFL by Abercrombie broke the internet last year, and I think this season's lineup is even cooler. And so does my wife, who keeps stealing all my hoodies. Stay fit for the season and Abercrombie's newest arrivals. Shop NFL by Abercrombie in the app, online, and in store.

17:49When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom's 60th, and never miss a meme or milestone, all protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. So this week, we've talked a bit about what a Harris presidency might mean for the economy, but let's look at an interesting economic policy proposed by former President Trump that affects service workers.

18:29Last month, the former president proposed eliminating taxes on tips, but economists are mixed on the actual benefits of the idea. The first issue, two-thirds of restaurant workers don't bring in enough income to even pay federal income tax under the current law, so it wouldn't help the majority while benefiting higher-earning tipped workers. Plus, you narrow the tax base when you stop taxing tips, so it could lead to higher taxes for everyone else, while warping the labor market to boost the attractiveness of tipped positions. Neil, this seemingly small and popular policy proposal has much larger implications that ripple through the tax system as you dig down deeper.

19:08If I was an economics professor, this would be a great exam question. I'd say, OK, there's a policy we have right now that we're going to tax tips or we're going to take away taxes on tips. What are 10 downstream consequences of what this will happen? And it might be a very interesting thought experiment. Like you said, I think one of the main things is that a lot of people won't even see this because there is a threshold for federal income taxes that you need to make at least 13 ,850 as an individual or just under 30 ,000 per household in order to just meet the income tax filing requirements.

19:44So this will not impact many service workers to begin with. There's other unforeseen consequences, like you said, warping the labor market. So this is going to create winners and losers. And if you're a lower wage worker working in a warehouse or, say, a quick service restaurant like McDonald's, you don't rely on tips. So if you're looking to the government saying, why is this person who's working in a fancy restaurant benefiting from even though we kind of have a similar job and we're making the same amount from this particular policy and I am not seeing any of the benefits. So you create a very distinct list of winners from this policy and losers from this policy.

20:19And another downstream effect, too, is that this policy would discourage employers from waiving the base wages of tipped employees. Remember, the federal minimum wage for tip workers has been$2.13 per hour since 1991. And obviously, there's been advocates trying to boost that wage. But again, if you reduce the taxes on their tips, then that faces another uphill battle to get – it reduces the pressure to increase that base wage. So that's another consequence. A lot of economists for a long time have been a big proponent of a tax system that has low rates and minimal exemptions because that's what a free market should operate as.

21:01You want to minimize government intervention. You want to ensure that tax policies do not distort economic realities, do not create this winners and losers system. So it goes in the face of a lot of what economists like Milton Friedman and other free market economists have been pushing for for a long time. Yeah, I mean, just if you eliminate taxes on tips, think about how much more tipping is going to happen because all the incentives will be pushed to that. So you could go to any business and they will they'll probably transform to be this tipping business. You go get your car repaired and they're like, yeah, we've actually transitioned to a tipping structure here.

21:34So I'm waiting for my ten dollar bill here. So will this happen? It seems unlikely. I mean, when you make changes to taxes, you can't do it. The president can't do it. It needs an act from Congress. Ted Cruz, a Republican senator from Texas, has introduced a no taxes on tipping bill. And it was backed by some Democrats, especially from Nevada. Trump introduced this in Nevada, which is no surprise because one fifth of all workers there work in the hospitality industry. That goes to one in four in Las Vegas. So he was playing to the crowd there. I, you know, I don't think this is going to happen, but it's just a very interesting economics thought experiment to to think about when you're like, OK, Let's just take away taxes from one particular income stream and what are the impacts of that.

22:21Finally, the Paris Olympics start later today. Yes, get hype. And we're going to walk you through some major storylines to follow. Of course, the one that is most top of mind is the security situation. Today's arson attacks on rail lines happened far outside of Paris, but the city itself has been turned into an open-air fortress for the Games. France is deploying the largest peacetime security operation in its history. to keep people safe, dispatching up to 45 ,000 police, 10 ,000 soldiers, and 22 ,000 private security guards around the city. They basically turned central Paris into one giant cage with metal fences and police checkpoints.

22:59And this is not going over well with the local shops inside the security perimeter. Instead of the economic boom that was promised, businesses like bakeries and I'm not going to pronounce it in French and souvenir shops say their sales have dropped 50 % or more in the days leading up to the opening ceremony. There just aren't that many people around on the streets because you need a special QR code involving a background check to get access to areas around famous sites like the Eiffel Tower and Notre Dame. Toby, they're gonna relax these checkpoints after the opening ceremony and hopefully the visitors come back, but so far it's been pretty brutal for these business owners.

23:33Right, if you are a business owner who bids on a mega event like the Olympic Games, the pitch that you're presented with is that it's going to bring all these tourists there. It's going to increase business. You're going to reap the rewards of having all this activity around it. But then when you just have such tight security preferences, it makes it an unappealing destination for tourists to go to. In some places, they literally cannot even get to these shops. So that promise has been ripped out from underneath them. And it's really, it feels bad for them too because they're looking at these big sponsors like the Coca-Colas of the world, the Adidas of the world that are going to profit handsomely off the games because they are just getting this worldwide exposure.

24:13While you are just a local business, a local entrepreneur, you're saying, why are we coming out the losers in this situation? We were supposed to come out the winners. Again, hopefully when those restrictions are lifted, that's when people will start flooding in. But right now you're feeling like you're getting the short end of the stick. Yeah, I mean, they are just seeing no customers. And a big reason why there's such an intense security perimeter in the central part of the city is that the organizers have created, turned Paris into just a giant sports stadium, essentially, whereas in other games they would have competitions outside of the city, in the suburbs, or in other smaller cities, or in just areas not in the main tourist areas.