Apple Tax is Dead, OpenAI Ends Vesting Cliff, Anthropic’s Massive TPU Order | Diet TBPN

0:01Tim Sweeney was taking a victory lap. I sort of missed this. This was last Thursday. Basically, the Ninth Circuit struck down Apple trying to do something else. in the Apple tax battle with the Epic Games. So a quick, quick refresher on this. Tim Sweeney says the Apple tax is dead in the United States. This particular nail in the coffin comes from the Ninth Circuit. These things are never fully over, I've learned. Like it's just, there's a class action lawsuit, then there's another lawsuit, then there's this one, then there's appeals, then they go to the Supreme Court, then they go back to the Supreme Court.

0:35It's always up and down. Like that's just the nature of these things because the stakes are so, so high. Exposure seems a little hot on that. What's going on there? Basically the court had had said that Apple could not charge 30 % if a developer routed an app customer to their own payment page and so Apple was like yeah totally we're cool with that how about 27 % plus 3 % for payments and 27 % for like IP licensing and so like the end result was exactly the same it was literally 30 % it was just like structured slightly differently they they just changed the language, this was contempt. It's like, we told you not to do this, and you're still doing it, Apple.

1:15And so now they're not supposed to. Of course, the weird takeaway here is these big momentous things happen, and then the stock moves, not at all. My conclusion from digging into this was that the fundamentally consumer behavior has built up over almost two decades now. I mean, the App Store would launch, I believe, in 2007. This whole saga starts in 2011. This guy, Robert Pepper, he sues Apple along with three other plaintiffs. Mr. Pepper. Mr. Pepper, alleging that he was overcharged for iOS apps. It's funny to imagine a guy just saying, I'm coming for you, Apple. You know what? Flappy Bird, I was charged$2 for it.

1:57Should have been$1.70 or something like that. $1.20 and taking it all the way to the Supreme Court. I mean, if he's a flappy bird whale and he spent millions, tens of millions of dollars in the app. But yeah, the economics are a bit, you wouldn't normally see somebody like that suing Apple because they're like, you overcharged me by$2 ,000 across the lifetime and I'm suing you for damages and it's like a lawsuit that will, you know. With the class action lawsuit, obviously you get a couple of plaintiffs who are exemplary of the problem. And then when the settlement happens, it's like billions of dollars paid to everyone who ever purchased an app.

2:35And you see these things before. like, did you use Facebook between 2016, 2017? You may be entitled to like five cents. Obviously massive economic incentives for the lawyers who fight them. Anyway, the court ruled that Apple can't do that anymore. They can only collect fees that are in line with actual costs of facilitating links. Payment process. The cloud costs for one link? I know, I know, it's crazy. And the associated intellectual property. we need to use AI for this. And we need to. No, no, no, that's actually what's gonna happen. So basically right now it's like the, like if I'm the app store, I'm Apple, I have the app store, you have your own app and you have your own Stripe account and you wanna pay, you wanna accept payments your way.

3:24Apple says, well, you know, even though we're, yes, you are checking out on your payment rails and it's your app. Like I created the link and the technology that creates links within iOS and that is helping you. So you got to pay me an IP licensing fee. Typically it was like 27 % of whatever you make, which doesn't make any sense because obviously my, as Apple, my, my costs don't scale proportionally to your revenue. It's linear with regard to my cost. So like, yes, if, if Apple probably. These are pricey links, John. These are pricey links. Like you're laughing, but like, like realistically, like the, the iOS team that has been working on just, just links, like they get paid a lot.

4:05It's probably in the millions. If you're a successful mobile developer, you've been paying millions of dollars to Apple forever. And you're talking about millions, like relatively fixed OPEX for Apple that again, doesn't. And they make 30 billion a year or something. But the idea is like justifiable costs should be like 10 bucks, maybe like 100 bucks for reviewing an app and just saying, okay, we ran our software. We understand the, you know, is this violating any rules? We maybe had a human pop by and look at it for, you know, a couple minutes, make sure that this is compliant with the app store.

4:38And then there are obviously other costs, but, you know, should it be millions of dollars? Should it be proportional to revenue? Should it be 30 % of revenue? A lot of people have been arguing no. but of course this will go back and forth and Apple will probably try and make the fee as high as possible of course because they have every incentive to. Oh the other interesting thing is in Pepper versus Apple there was this question of you know like where in the chain is the monopoly pricing having an effect? Where is it increasing the price of the good? This Illinois brick company versus Illinois, the state of Illinois.

5:14This was in 1977 and the the Supreme Court held that only direct purchases of direct purchasers of illegally priced goods had standing to sue. So the Illinois brick case, this is pretty interesting, he says the value chain was very straightforward. Concrete block makers, including the eponymous Illinois Brick Company, great name for a company that makes concrete blocks. In Illinois. They were accused of colluding to fixed prices of concrete blocks, which were bought by masonry contractors. Masonry contractors in turn submitted bids to general contractors for construction projects, which were ultimately paid for by the state of Illinois.

5:55And so the state of Illinois sued for damages, alleging that the higher prices resulting from the price fixing had been passed through to the state of Illinois. So even though the masonry contractors were like, okay, yeah, like the Illinois brick company is, is with all the other brick companies, they're jacking up prices. It doesn't really matter because they just passed that through. And so there's a question about like, well, you didn't actually pay the higher price directly, state of Illinois, but it was passed through. And so that, that harm gets passed through. And so, you know, he says in this value chain is obvious who the direct purchases were masonry contractors, to the extent the state of Illinois suffered harm, It was indirect pass-through harm.

6:33Thus, the Supreme Court ruled that the state of Illinois did not have standing. So the state of Illinois could not sue then. If every party in the value chain were to sue, the infringing party could be the subject of duplicative recovery for damages, and parsing out the share of damages would be extremely difficult. In Apple versus Pepper, there's this question of who is harmed by Apple's alleged monopolistic practices. According to the plaintiffs, the value chain looks the same as the concrete block manufacturers. Basically, there's developers who sell their apps to Apple who sell those apps to consumers.

7:05But Apple said, whoa, no, we're not a retail store, even though it's called the app store. It's not a real store. We don't buy apps and sell them. Exactly. We're an agent. The developer agreement confirms that Apple acts as an agent for app providers in providing the app store and is not a party to the sales contract or user agreement between the user and the app provider. Thus, respondents concede that the direct sale is actually between developers and consumers facilitated by Apple as an agent and conduit. And that sort of makes sense. You know, you go to a grocery store, they buy the apples from the farmer, they sell them to the customer, they take possession.

7:43A real estate agent facilitates a transaction. It doesn't... Take a fee. Takes a fee. If Apple was actually going and like buying licenses and then reselling them, you know they'd be negotiating like crazy too and be like we'll give you a dollar and then we're gonna sell for ten dollars. You could argue it'd be even worse for developers in that situation. The interesting thing about about this just how much the reality of the shape of the App Store and and the business of the services narrative changed the entire financial story of Apple over the last I guess decade and a half. Look at the price to earnings ratio because back Back in 2011, it was 9.7, let's call it 10x price to earnings.

8:24Today it's 37x. So obviously the business has grown, but the value of the earnings is so much higher. Why is that? It's because it's so much stickier and it's because they've developed this services monopoly essentially. It's a toll road for your life. It's not a toll road. That's a great thing. There is a difference between a toll and a tax. And a toll is something that you pay that is directly linked to the service that you're getting. Okay, so you're saying it would be more like a toll road now? Now, yes. Now it will be a toll road, and we should celebrate that, or developers should celebrate that.

9:00Tim Sweeney should be celebrating that because a toll road is something where it's like, I'm paying$5 to drive down this road. That money goes directly towards this road. Yeah, the tax structure applied to a toll road is like, what economic value are you creating by driving down a road? Exactly, exactly. We're gonna charge you 30 % of that. Exactly, oh, you're transporting a shipment of televisions on this road? Those are high margin. Or, oh, you're a rich person driving on this road? Or you have some GPUs. You're hiding GPUs on your truck, are you not? Yeah, yeah, oh, you can certainly break us off more.

9:35As opposed to saying, you know, every time someone drives on this road, it takes a dollar of depreciation, we need a million dollars to repave it every year, And so we need to link the cost of using the service with the actual underlying cost of operating that service. My question with these changes is what is the consumer experience going to be when trying to cancel subscriptions? Because the one aspect of the App Store that I've always appreciated is the ability to one-click cancel from within the App Store. And so I do wonder, as soon as you let payments live outside of the app store, everyone has experienced any type of software, a retailer making it hard to figure out how to cancel a subscription.

10:19Will Apple keep that kind of one-click cancellation ability within the app, or will they actually have to let? I mean, this already exists, because you can go put your credit card down on Fortnite. The thing is that I think the subscription revenue is not as much as you think. It's not as much of a driver. Like the in-app payments, the one-off clicks, like those are much bigger, that's a much bigger driver of overall economic activity. But I don't know, on the subscription side, it would be interesting if there's like some sort of re-aggregation at like the Stripe level or something like that.

10:53The interesting thing is that like, so Apple's price to earnings goes from 10 to 40, basically, like massive run-up. And this is all on the back of like the services narrative that Luca Mastri, the CFO, sort of outlined in, I think, 2016. He said, each quarter we report for our services category, which includes revenue from iTunes, the App Store, Apple Care, iCloud, Apple Pay, licensing, and some other items. Today, we would like to highlight the major drivers of growth in this category, which we have summarized on page three of our supplementary materials. The vast majority of the services that we provide to our customers, for instance, apps, movies, TV shows, are tied to our install base of devices rather than to current quarter sales.

11:36And so he's saying, like, you need to stop thinking about our financial performance as driven by how many phones do we sell this quarter. You need to think about just how many users we have broadly and start valuing us more like Google, more like Facebook. So Luca Mastri went on to say for some of these services such as content we recognize revenue based on transaction value. For some of these services such as App Store we share a portion of the value of each transaction with the app developer. And we only recognize revenue on the portion that we keep to fully comprehend the scale of the services that we are delivering to our installed base and how fast this business is growing.

12:14We look at purchases in addition to revenue. when we aggregate the purchase value of all the services tied to our install base during fiscal 2015 it adds up to more than 31 billion. Basically what's going on is Luca Mastri is the CFO of Apple and he's he's having trouble in the market because it's 2015 and what's happening? You're eight years into the iPhone. 2007 the iPhone comes out it's expensive it doesn't have 3G it's got a lot of rough edges. Doesn't have copy and paste. But it's cool and it's interesting and there's lines out the door for them. And people at the higher end, like a cell phone back then was like a hundred bucks or you'd get it for free.

12:53You'd get it as part of a, you know, every - Cellular bundle. Yeah, yeah, yeah. Every two years you'd get a new phone and it was free, basically. Then the iPhone comes in, it's$600, very expensive, very upmarket. Then a year or two in, they start figuring out how to bring down the price. It comes down to like 300, 400. There's these incentives for signing up for a year-long plan. There's a whole variety of things that make it, you know, the app store comes out. There's like, there's just more functionality. You don't, you, you no longer are like, well, my Blackberry still does this, but Apple doesn't.

13:31It's like, no, they do the enterprise stuff. They, they've checked all the boxes. And so it's growing, growing, growing, but eight years in, everyone who has one, like they won the game. And so device, like actual, the device install base, device sales are starting to flatline. Then they need sort of a new narrative for the stock because it's sort of getting beat up because Apple's basically winning the smartphone. You sold everyone an iPhone. But it's over. The trade's over. It's like, yeah, we get it. Everyone has smartphones now. iPhone revenue is basically, or unit sales, are slowing significantly.

14:02Of course, they're able to raise prices still because people are locked in. It's a good business, but it's not this incredibly high growth thing anymore. So Luca Maestri needs to come in with a new narrative, and that's the services narrative. And so the services narrative is saying, hey, for a long time, you've been looking at this bucket of basically like other revenue. We have device sales, which you've been obsessed with as the investor, as the Wall Street. You've been obsessed with, you know, how many iPhones we're selling, how much we're selling them for, our margins on those iPhones, how many we can make, all of that.

14:31And then we've had this other bucket, which is like iTunes, App Store, Apple Care, iCloud, Apple Pay, licensing, just a bunch of other stuff. They were kind of treating it like the storage feature on the iPhone, where it's like, hey, you have like photos and these other things that are taking in apps. And then like, don't worry about other. Yeah, don't worry about other. Don't worry about other. We're just gonna throw everything in there. Don't worry about other because we don't really know how it's growing. Is it that high margin? We don't know. Then all of a sudden it became like, don't just not worry about other.

14:57Like in fact, focus entirely on it because it is the best revenue that's super high margin and it's growing really fast. And oh, by the way, if you zoom out and you look at the economic activity that is driving on top of the app store, Yes, our take rate's 30%, but on top of it, just in 2015, it's$31 billion of economic activity in that ecosystem. But Ben Thompson was not a fan of it. I mean, he was a fan from the stock price perspective, but he had some really, really harsh words. He said at the time, it seems incredibly worrisome to me any time a company that predicates its growth story on rent seeking.

15:31It's not that the growth isn't real, but rather the pursuit is corrosive on whatever it was that made the company great in the first place. It's like, whoa. It's sort of like, okay, they're going private equity mode, like the beautiful art, the creativity is gone at this point. Tim Cook has effectively done exactly that. Going forward, the growth story of Apple has been, someone else innovates, someone else creates an app, and we'll take 30%. And we don't need to do the innovation. That doesn't need to happen here. And that's a big shift in the narrative. Whereas before, all through 70s, 80s, 90s, 2000s, it was like, the innovation comes from Apple.

16:06They're like, we're going to make the iPhone 1700. It's going to be newer, lighter, better, faster, stronger, and they're going to buy it. Then we're going to take our cut from everything on top of it. Exactly. Exactly. Megan, in the Wall Street Journal, has a scoop. OpenAI ended a policy earlier this week that required employees to work at the company for six months before their equity vested. A few months ago, XAI shortened their waiting period, known as a vesting cliff, from 12 months to six. The change to the vesting cliff announced by applications chief Fiji Simo is designed to encourage new employees to take risks without fear of being let go before accessing the first chunk of equity.

16:46Interesting. So they had a problem where people would come in and say, okay, I gotta just do politics for the first six months because I don't want to get fired before. That's a crazy culture, I feel like. I think this has to be more reactionary to Meta and obviously some of the other public companies. It has shortened its vesting period for new employees to six months from the industry standard to 12 months in April. Let's see. Elon Musk's ex-AI and OpenAI competitor made a similar change in late summer. People familiar with the matter said the decision to loosen or do away with restrictions meant to ensure new hires stick around reflects the frenzied competition for top-tier technical talent within AI, within the industry.

17:29Tech companies typically have a one-year vesting cliff, that's what I'm certainly familiar with, for new employees, preventing them from having to give away stock to hires who leave quickly or don't work out. But with AI companies, including meta platforms, Google, Anthropic, wooing top researchers with pay packages that can be worth$100 million or more, researchers and engineers have been able to hold out for the most attractive terms and in many cases have been quick to leave jobs they have found not to their liking. I also could see it them trying to kind of rehab their employer brand. Do you remember there was a bunch of, this was probably six, eight months ago at this point, OpenAI had a bunch, there were some articles surrounding, they had some like really restrictive exit agreements.

18:18That's right. That's right. Yeah. A lot of people are pretty frustrated. I feel like that was over a year ago. That was maybe if you left and didn't maybe didn't sign a non-disparagement agreement or NDA or something. Yeah. If you didn't sign it, they could claw back all your equity. And then they were saying. That was important during the whole like Ilya ousting thing. Yes. A lot of the employees left after that, but then they couldn't talk about it. I always thought that like the bull case for that was, well, if you're going to be whistleblowing on something that's like a true AI doom scenario, well, then money doesn't matter.

18:49So you shouldn't matter about them clawing back your equity. Company expects to spend$6 billion this year on stock-based comp, almost half of its projected revenue. A company that creates however many hundreds of billions of dollars in value in a year and then has$6 billion of a non-cash expense. It doesn't seem that crazy. The SpaceX IPO, if they raise 30 billion will be lower than the 40 billion that open AI raised in the private markets. And so there's been this great question about like, like, are the private markets tapped? It appears it's the David Goggins thesis market. David Goggins thesis for life.

19:31I mean, if you if you went back, you know, I don't know, five years, and you were like, Yeah, like, do you think you could raise$40 billion in the private markets? or would you have to go public for that? They're like, you know, the Saudi Aramco level funding. Like, yes, you'd have to be public. But it turns out you do not have to be public. Finn Barr says, okay, but seriously, why is everyone leaving Meta? People are speculating in the comments. Jane says, vest. Finn says, but if you stay longer, you vest more. True. Someone else says, no direction for the company. Several major unannounced RL project canceled.

20:04The 100 million boys reportedly do zero work because they know that if Zuck fires them, he'll look foolish. I don't know. I think some of these$100 million men and women, they are about that life. They do want to pursue greatness. They do want to do the biggest run. So who knows? I'm sure there's some instances of that. Zuck overpaid for talentists to try to catch up. No PMF on their consumer AI products, even though they forced everyone on Instagram to see it. I think we got to wait a little bit for the Christmas season to come and go and see how these things are selling. It is a tough position to be in because they don't have a public cloud.

20:50They don't have a cloud service, even though they are a hyperscaler. With Google, even if Google gets completely smoked by OpenAI and ChatGPT, and ChatGPT winds up being truly the Facebook of chat apps, and it's like 99 % people use, it captures 99 % of like the consumer AI value. It's like having a Gemini API is still extremely valuable because like you have cloud services. Brett Adcock. Okay, what's going on with Brett Adcock? He had a party over the weekend with Deadmau5. He posted earlier today that that figure is looking quite cheap now in comparison to SpaceX. Okay. Right, because there's a new biggest line on the private markets chart.

21:33Is he drinking on here? What is he drinking? I think he's cracking open some cold ones. This is crazy. So my theory is that they have done billions of dollars in sales. Okay. And this is kind of their way of signaling. Signaling. If you know, you know. Because, of course, it would be absolutely insane to have a party like this if you still hadn't shipped a product, if you still were kind of a sort of, I don't know if they're pre-revenue, but certainly being valued on vibes. So there's no way they would throw a party like this if they weren't. So, Percetix has 30 billion in revenue, right? Yeah.

22:09And it's going out at 1.5 trillion. So, it's at like 50X revenue. He's probably trading at like, what, 20X revenue? Something like that? That was my theory, at least. And then what's the market? So, they're at around 40. They're at around 40 billion. So, yeah, they could be doing like 2 to 4 billion in revenue, potentially. This is very much a - On a price to sales ratio. A wink, wink moment. because seriously, I don't think any CEO would throw this crazy of a party if you weren't really printing. So expect an announcement soon. I would. Data centers in space, it might not be economically rational, but it might be physically possible.

22:46I'm trying to bring some quantitative structure to a conversation that's been mostly big number of vibes. So we have sort of dueling math equations at this point. What is he? This is vibe coded from public. So maybe we need to have a debate. Maybe we need to have them both on. But he says TLDR, the analysis is actually far more favorable than I thought. It's a close thing. I desperately want a Kardashev-level civilization, but we've got a lot of work ahead of us. Delian's been saying, like, it's impossible. It's not going to happen anytime soon. It's not going to be a thing. But Andrew McAuliffe says there just might be a chance.

23:22Goss says, my dealer, I got some straight gas. This train called Space Data Centers. You are gonna effing fry, LOL, me, yeah, whatever. 20 minutes later, dude, WTF, we just need to radiate the heat and then we can totally bypass terrestrial regulations. My friend, pacing, I should buy magnet stocks to get ahead of all the rail guns. What is it? They're smoking space data centers, John. I don't get it. Anthropic has ordered$21 billion worth of TPUs to train large claws. Is that really what they're calling it? Text is from yesterday's Broadcom's earnings call. The scale at which we see this happening could be significant.

24:01As you are aware, last quarter, Q3, we received a$10 billion order to sell the latest TPU Ironwood racks to Anthropic. This was our fourth custom that we mentioned. In this quarter, we received an additional 11 billion order from the same customer for delivery in late 2026. Kaiju fights are the best kind of fights. From October, this is from Andrew Curran. He says, Anthropic is in discussions with alphabets google about a deal that would provide the artificial intelligence company with additional computing power valued in the high tens of billions of dollars according to people familiar with the matter fermi which is the uh energy company that went public at a 20 billion dollar valuation they talked about uh getting uh getting their kind of facilities online i think in the 2030s and people were a little bit bearish about that they've they've traded down uh almost 75 % since their IPO.

24:54So it seems like, yeah, we've basically seen this kind of rolling correction across every single AI pure play. You could even say that - But nobody's done volcano data centers yet. No one has done those. Where are you gonna, the chat's asking, where do you put the heat? Just shoot it up into the air. That's what that's - Yeah. Volcano data centers is funny because immediately, they're like, but don't you want the chips to be cold? You want the, you need cooling, not heating. Yeah, the heat dissipates with the lava. It would be great to just hard light. But the heat's free. Heat's free. Data centers are hot.