OpenAI’s First Device is a Speaker? & Permanent Daylight Saving Passes The House

0:01Neal Freyman:Marketers, tell us if this sounds familiar. You invest in something that seems incredible, like millions of views, but then don't see any revenue. Instead, invest in what looks good to your CFO. LinkedIn Ads generates the highest ROAS of all major ad networks. Spend$250 on your first campaign on LinkedIn Ads and get a$250 credit. Just go to linkedin.com slash mbd. That's linkedin.com slash mbd terms and conditions apply good morning brew daily show i'm yul freiman and

0:33Jack Kramer:i'm toby howell today is the u.s done with switching our clocks then open ai wants to

0:38Neal Freyman:put a smart speaker in your house it's thursday july 16th let's ride

0:53Jack Kramer:It is so great to be back with you all. And huge thanks to Ray, Kayla, and Kyle for filling in with pure class. Jeez, Toby, we've been in the UK for too long. Didn't know we were returning to Arrakis, but that appears to be the case. Three years after wildfire smoke blanketed the Northeast in an apocalyptic orange haze, déjà vu all over again, as the Midwest, Northeast, and Mid-Atlantic are suffering through smoky conditions expected to last throughout the week. The culprit this time, more than a dozen fires in Western Ontario and Northern Minnesota are sending smoke eastward and could cause around 100 million people in the U.S.

1:26Jack Kramer:to face unhealthy air quality. While officials suggest you take precautions, it's not going to be as bad as last time. In 2023, the air quality index reached a record high of 465 in New York City. Yesterday, it ranged between 101 and 150. Still combined with a brutal heat dome. Be careful out there. And if you need tips, ask the Fremen.

1:46Neal Freyman:So I checked this morning in the three cities with the worst air quality in the world right now are Detroit, Minneapolis, and Toronto, followed by Kinshasa in the DR Congo and Delhi, India. New York is 12th, which is hard to believe because when we flew in yesterday, it literally looked like we were descending into a campfire smoke cloud. It was so hazy. We were also asked to play a soccer game yesterday for Morning Brew FC, walked outside, immediately started coughing and sneezing, just going to the subway. So we put the ixnay on that, but everyone stay safe out there, especially if you're in Canada or Minnesota or anywhere affected.

2:23Jack Kramer:And now a word from our sponsor, Ultra Running. Toby, what size shoe are you? We don't have to get into that.

2:29Neal Freyman:They're definitely not small or anything.

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2:48Jack Kramer:No matter how petite your feet.

2:50Neal Freyman:And that's not mean, just rhymes. Sure. Use promo code MorningBrew10 for 10 % off your first pair of ultra running shoes at ultra running.com slash morning brew. That's a L T R a running.com slash morning brew. IBM stands for international business machines, but it might as well stand for it is bad man. After the performance it had in the market this week, it started on Tuesday when the company pre-announced disappointing Q2 results eight days before it's a normal earnings and unusual move that ignited fears about AI spending, cannibalizing its bread and butter software sales. The market reacted swiftly with shares falling 25%, their worst one-day slide since 1968.

3:32Neal Freyman:CEO Arvind Krishna said, we did not anticipate the magnitude of the CapEx reprioritization. Basically, IBM customers shifted their budgets towards AI servers, storage, and memory chips, and away from software consulting in the boring mainframe systems that IBM specializes in. It wasn't just IBM either. Software stocks in general have been getting dumped all week, including Salesforce, ServiceNow, and Adobe, with consulting firms like Accenture and Cognizant getting caught up in the crossfire too. It's giving shades of the so-called SaaSpocalypse from earlier this year, when every anthropic feature drop caused the market to freak out that AI would eventually replace specialized software.

4:10Neal Freyman:Neil, this is a different version of the SaaSpocalypse that has to do with budget. Companies simply don't have enough money for everything, and when push comes to shove, CFOs are saying see ya to IBM software and hello to AI.

4:23Jack Kramer:IBM isn't building something that goes into a data center. And that's the main problem. If you're any company that is building software or anything that just doesn't go into a data center, whether it's a chip or a server, then you are going to be vulnerable, as IBM's 25 % plunge shows. And compounding the problem is that the things that are going into data centers, the thing that companies are actually buying right now and prioritizing with their budgets is getting insanely expensive. Memory, servers, they're all going through the roof, which is benefiting companies like Micron and Dell. But it's not benefiting companies like IBM because its customers, like banks, are a huge customer of IBM.

5:04Jack Kramer:they're looking at their budgets right now and they're saying, okay, well, we want to devote all of this stuff to AI data centers and our AI initiatives. But the problem is these things are getting even more expensive. We want to lock in prices now before they get even pricier. And that's coming at the expense of IBM.

5:19Neal Freyman:So IBM does make these giant, I call them boring, but these enormous enterprise computers, these mainframe computers that you see hackers hack in the movies that banks and governments and insurance companies buy. And initially a lot of analysts thought that they would benefit from the AI tailwinds. They were supposed to be, you know, more powerful now that they were enhanced by the power of AI, but actually sales started disappointing in this specific sector. Plus the other thing that IBM blamed in this kind of early earnings report was cybersecurity. A lot of AI releases have put cybersecurity at the forefront of a lot of companies' minds and cybersecurity stocks have been rallying while these software stocks have been plunging because IBM can't offer the cybersecurity that these companies want.

6:07Neal Freyman:So again, when we talk about that budget and the fact that you have to prioritize certain things, cybersecurity and AI are taking precedent above a new mainframe computer, which is why we saw the stock reaction that we did.

6:19Jack Kramer:And it's just, it's a crazy stock reaction. We should say IBM is a more than a hundred year old company and for it to lose 25 % of the day and behave more like a meme stock is quite unusual. It shows the frothiness and volatility of the market this year. I mean, according to Bloomberg, this is just what IBM stock has done this year alone. It had its biggest one-day decline since 2000 in February. Then it had its biggest one-day rally since 1968 in May. It set a new record high in June. And then this week, it had its biggest one-day plunge since 1968. So AI is causing so much havoc in the stock market, It's setting new records for some companies, but it's also sending others to the depths of decades ago.

7:01Neal Freyman:Yeah, Robert Burgess at Bloomberg Opinion noted that there are now more ETFs than publicly traded stocks. And a lot of those ETFs make it easy to enhance your returns, like sometimes they're triple leverage, quadruple leverage. And so turning a 100-year-old blue chip company into a meme stock is something that it's just the current reality of our market right now because you are right. It is jarring to see IBM, boring IBM, lose a quarter of its value in a single day, but that's just kind of the world that we're living in.

7:28Jack Kramer:And as earnings season gets going, it started this week. We'll see whether other companies, other software companies are saying very similar things to IBM and saying, look, our profits are down. We kind of misread the AI boom because a lot of companies that are customers are now prioritizing hardware, stuff that goes into data centers instead of our products. Moving on, we might have seen the largest mass breakup event in human history yesterday. Call it anti-Valentine's Day. That's because a Chinese government law went into effect that cracks down on AI virtual companions, which officials say is discouraging people from getting married to other humans and having kids to sustain the population.

8:06Jack Kramer:To comply with the law, leading tech companies like TikTok owner ByteDance and Alibaba have removed features that allow users to customize AI companions and introduced features that periodically remind humans, hey, you know I'm made up of ones and zeros, right? People with an AI girlfriend or boyfriend or situation shit might seem like a niche community here, but it's pretty normalized in China where one AI role-playing service had 150 million users as of last September. As one woman told Bloomberg, this is like being told the date of my lover's death while leaving me completely powerless. The AI companion crackdown came on the same day that China reported its economy grew at its slowest pace in three years, expanding by just 4.3 % in the second quarter.

8:47Neal Freyman:So I have a theory here that companies were actually a little relieved to get this direct mandate from the government because the AI companion business is not that profitable because people use them all the time. They're extremely popular, but it is expensive to moderate it. It has regulatory issues. There's legal issues that come from people talking to AI companions all day. and they just don't generate as much revenue as something like a coding tool. So if you tell Tencent, if you tell Alibaba, like, hey, get rid of these chatbots, they go, okay, we'll pivot to a lot more profitable business lines.

9:25Neal Freyman:We will roll out more coding tools. We will focus more on productivity-based AI. We will, you know, sell you enterprise software. So even though that a lot of consumers are extremely sad that their AI companions are going away, I do think some people in the boardroom are going, maybe this is for the best and we're getting out of the AI companion.

9:43Jack Kramer:And that seems to be the vibe among the population of China as well. They're blaming, seems like they're blaming more of the tech companies than the government. They think the tech companies are going a little more strict than they needed to comply with the law, perhaps because of the same reasons you were talking about. This happened in the United States as well. California and New York also have AI companion laws. There's a three-hour reminder that AI companions need to remind people that they aren't humans. For miners in California and for all users in New York, this one in China goes a lot further.

10:16Jack Kramer:And the tech companies there, Alibaba and ByteDance, might be taking it even further.

10:21Neal Freyman:And you mentioned that we got some economic data out of China yesterday. And it's kind of a bifurcating economy we're seeing right now with AI masking a lot of weakness maybe under the surface. because if you look at exports right now, which is something China is very good at, they jumped 27 % in June. Semiconductor exports in particular rose over 120%. So obviously that sector of the economy is cooking, but then you go a little further down and you look at retail sales, basically flat up 1.3%. The real estate market is just a disaster. Real estate investment fell 18%. Fixed asset investment declined 5.7%.

10:59Neal Freyman:So they're still in the midst of a very big property crisis right now. So you have just two sides of the economy, a booming AI business, and then a very weak housing and consumer sector, which is kind of indicative of a lot of economies right now.

11:13Jack Kramer:I was going to say, the first two stories of the theme is AI is eating the world. If you're not making AI products, anything that goes into a data center, then you are suffering, whether it's IBM or the Chinese economy.

11:24Neal Freyman:Let's move on. When Steve Jobs unveiled the iPhone, it was the device that changed everything. communications, work, laser, you name it. Now, 20 years later, OpenAI is trying to create an iPhone moment of its own with their first consumer device. According to a report from Bloomberg, the chat GPT maker's foray into hardware is going to be a screen-free smart speaker. Internally, the device is being described as a human-like AI companion that lives in the home. And so even though I started it with the iPhone analogy, it's actually giving Amazon Alexa. It will be able to do normal smart speaker stuff like answer questions, send messages, control smart home devices, and play music.

12:02Neal Freyman:But the key difference from your typical smart speaker is it's designed to learn about you over time and access parts of your digital life like email. OpenAI believes that existing smart speakers are limited because they just take up space while sitting there waiting for commands. Their device will be proactive with its assistance instead of waiting for you to yell at it to set a kitchen timer, which means understanding where you are inside the home, helping with cooking, servicing reminders, and generally becoming an expert on your habits. Neil, there's still a little time before you can add the physical embodiment of ChatGPT into your house.

12:35Neal Freyman:The device will be unveiled later this year, but won't be released until 2027. But it looks like we're on the precipice of entering the device era of the AI race.

12:44Jack Kramer:What stood out to me is that this is designed to move around your house with you. It has a rechargeable battery. So you're, they want you to take it, you know, into the kitchen when you're cooking into the bedroom, when you're folding laundry into the bathroom, when you have explosive diarrhea after eating lettuce. Uh, and it also, another thing that stood out was that it has quote unquote mechanical elements that can move on their own. And that's all Bloomberg gave us with this particular report. I mean, I think smart speakers now have various lights that tell you, indicate what they're doing, whether they're thinking or they're sleeping or responding or things like that.

13:20Jack Kramer:So mechanical devices that move on their own. I don't know if that's an arm or legs or anything like that or lights or anything of that nature. I don't know what Johnny Ive is cooking up there, but it does seem like a hybrid between a phone because when something is designed to move around your house with you, I think that's exactly what my phone does. I take it to all the places in my house in my pocket. I don't know about a speaker. I don't know if it's meant to be a one-to-one replacement of a phone. So it does seem to be a hybrid between a phone and Alexa.

13:48Neal Freyman:Yeah. A lot of people immediately said, okay, so it's entering the speaker race, which Amazon obviously does well and Google does well. And Apple also has a home pad. And the reason I bring up Apple is because there is a lot of beef. I mean, our colleagues covered it earlier this week where Apple is suing open AI for, you know, stealing a trade secret. So I really wonder if this is going to look or act like an Apple device at all because they are clearly needing to check their boxes and say we did not steal any hardware secrets we did not steal any trade secrets from apple but that is going to be an interesting sub context throughout this whole thing is is this going to derail the launch of their first device did they actually steal from apple uh maybe other you know hardware companies are going to go after them as well because what if it just looks like and behaves like an alexa so that's kind of the underlying story to this is if it's going to be derailed by the fact that maybe they stole some secrets from Apple.

14:47Jack Kramer:And what do you think about no screen? So Peter, Peter Kafka at insider laid out a case that having no screen is bad because that's not what people want right now. People watch video. They will, they want a screen to see information. And he has a few data points to back this up. Mobile video now accounts for 75 % of data transmission these days. Instagram on video time spent on Instagram was up 30 % last year alone. Even the New York Times, which you're supposed to read, is making this huge investment into video because this is what people want to watch instead of read or listen to. So this is a bold bet by going screen free.

15:21Neal Freyman:I'm actually less concerned about the screen because we're used to speakers not having screen. That's a normal form factor. What I am nervous about is that this device reportedly uses camera, environmental sensors, and other stuff to create context awareness, which is basically like it follows you around your home. It knows what you're doing. And I think some people will be a little creeped out by that. There'll be some privacy issues around that. Do you really want something watching you in your home at all moments? So beyond the screen thing, I do think being observed is something that people might take a while to get behind.

15:53Neal Freyman:That might be the thing that forces people to not immediately adopt this because they don't want to be watched. But all it has to do is just

16:00Jack Kramer:be more than a kitchen timer.

16:02Neal Freyman:Yeah. And it'll beat Alexa. That's all I use Alexa for. And I, I'm so sorry, Alexa. I set a 15-minute timer for broccoli right now, so I will be hopefully nicer if this device does eventually make it into my own home. All right, we're going to take a quick break and come back with Neal's Numbers right after this. Hey, Toby, how's your duck impression?