Steven Sinofsky & Balaji Srinivasan on the Future of AI, Tech, & the Global World Order

25:29because Bill was mandating this constant synergy and and Synchronicity across products and M &A was like a huge perturbation to that whole system With the exception like something like PowerPoint, which was a huge one I'll get to PowerPoint because that's yeah sure and dear to me But but they're all the business literature on M &A is it's a destroyer value So you would think that the regulators would be out there against M &A not because of the success it has, but because of the failure. Like they should be out there. The regular should be saying, hey, companies, you shouldn't buy companies because you just destroy them, but you never ever hear them doing that.

26:08And no company sets out to destroy it. And so I actually did in the biology. I actually brought my visual aid this time, which we'll put up on the screen. Oh wow. I'm amazing. This is like what the New York Times, your favorite NYT, what they said when Google acquired YouTube. And so the headline on the front page of the New York Times is. .com boom is echoed in the deal for YouTube, followed by 500 words about copyright infringement and they're overpaid. And it's just five guys and kitten videos. And it's got like pull quotes from all these people explaining what a disaster it's going to be. So then you all right.

26:47Well, I've got I've got I loved that because I want. Can you put this one on screen? mean. So Instagram, you know, Instagram was something where at the time, John Stewart said, because Instagram had no revenue, right, at the time that Facebook bought it. Little square pictures too. Like retro square pictures with filters. Yeah, yeah, yeah, exactly. And, and, and, and John sir was like Instagram. The only thing that would be worth a billion dollars would be something that instantly get me a gram of coke, you know, or something like that, right? And, and so the thing is Instagram today is being retconned as this evil, obvious move for the evil monopolist.

27:23At the time, Zuck was supposedly an idiot for doing it because, first is, it had raised at $500 million dollars the day before Zuck offered a billion, so double valuation. Second, that was about 25 % of Facebook's $4 billion on cash in the hand. Third, it was like weeks before the Facebook era. Fourth, the board wasn't good, so the fifth Instagram had no revenue. So the balls to do that, when you're going into an IPO, you need to reassure the market that, oh, you know, this boy genius CEO needs, you know, all these idiots to say, oh, I don't super vision is needed blah blah blah. Right? So, you know, why would Facebook pay one billion for a company No revenue with Facebook's public offering only a few weeks away is spontaneous and improvisational business moves become more curious You know like you know what happened is this is not gonna be one of the best tech acquisitions of the next decade Instagram is a photo service and a sea of other photo services Kim someone please tell me how Instagram's actual content is worth anything seems like mostly a huge race of cash And then Alex will have a market cap of $950 million.

28:22The New York Times is worth, quote, less an Instagram. True, true. That one I'll give them, that's true. And I think, but, go ahead. Yeah, but I think it's also like, you have to actually read the reasons why people thought because the reasons end up being these very pedestrian, sort of non -math, unable to see exponential growth, like not strategic. They just, they always fall back on something. Like in fact, you know, Instagram was on revenue. YouTube had no revenue, but also it was like this morass of copyright violations and how will Google ever figure that out. And no one ever wrote about the potential.

29:03And of course, the potential. Well, yeah, and go ahead. So the potential is the part that it's the venture bet that the company is making. And the interesting thing is, big companies make the wrong potential bet 90 % of this time. Like they generally always think, you know, like they'll do like an HP autonomy acquisition. This is a very famous off, went off the rails acquisition during the enterprise software world where HP just thought, well, this is sort of this, an enthtier player in enterprise search information retrieval, but we'll buy them and we'll put our magical sales force and platform strength behind it, and that will fix everything, which is like 90 % of the M &A that happens.

29:45The big company just assumes that whatever it's strong at, it will just wave that dust over this failing business and it will make it great. And I think that's right. And I think that that's what it's always like this venture aspect of it that's missing in this retcon that they should have stopped it or that they should go back and stop it And because it got made into a success against all of the conventional wisdom at the time, it just completely blows my mind that that's the framework for evaluating an M &A that people would use. I mean, like nobody's going to go back and retroactively consider whether, you know, Roomba really would have been better off being bought by Amazon, even though it's true This, you know, is everybody wants a peace of the reward, no one wants peace of the risk, right?

30:37So when the state goes and blocks these acquisitions, they assume no downside risk. They're not like taking, you know, hey, like, like for example, a dopey had to pay a billion of Figma for the breakup, right? Like the breakup fee or what have you, you know, the fact that the deal didn't go through. So Citch goes in metals and then these people in the Hutzpah to take a victory lap, you know, It was really just, you know, you know, stolen banner of valor. It's like stolen a valor, right? Lina cons stolen valor, right? And genuinely like Dylan feels like and the Figma team super hero this. But just to talk about that for a second, like with an M &A, you made a bunch of good points, Steven, I wanna kind of add to that.

31:18First is absolutely, there's a power law for M &A, just like there's a power law for startups. And the best M &A you do can completely transform your company in a lot of other instances of fail. and sometimes it's still a bit unpredictable. Number two, I think is in general, a company usually needs, in my view, and we may disagree, you need to be about 100 exercise of the small company or to acquire them. And the reason is, if it's even only 10 exercise, I can only think of a one deal where it was about 10 exercise and it worked, and that was aluminum as acquisition of selector, whereas like a must win, that's in the German sequencing space, but that, or GMC was experienced, That's where there was like a really important technology that became like the basis for everything Aluminum did for the next decade and the entire executive team was bought in on it because 10 % of your capital, temperature, your equity is like a huge amount.

32:09It's basically more than you're going to spend for the whole year, maybe for multiple years at a time. And so a 10 % buy is massive. It has to really be 1 % in that still a whole integration effort. Now, number two, and the reason I say There's lots of founders at various stages who would be like, oh, I'm acquiring another startup. And I'm like, start to start deals to never work in general, because now there's them have money. Maybe one of them can shut down and join the other one. That sometimes works once in a while, but in general, they don't work. That's why M doesn't work, but A works. Like merger usually just works because it shouldn't.

32:42AOL and time order and stuff. What are the huge disaster that was? Yeah, exactly. Again, once in a while it's something like, you know, C of jobs, Pixar, and all the ones at work are sweet generisware. It's like they really acquired some amazing founder. It is part of that and then leads the company or something The third thing about M &A as you again said is that the smart big company values them on the basis of the big companies distribution right and it's this product terms ad distribution is something however The dumb big company just thinks they can just roll up anything and sell it and that just doesn't work, right?

33:18I think one of the the huge I mean The response is by the way on this Fidma thing, and then let's get to actually win surf. I wanted to talk about that as well, and then also the genius hack. The response on the Fidma thing, I think fell into one of three categories. The first was the Elizabeth Warren School, which is just anti -crypto -army, anti -tech -army. They hate tech guys. And I actually like that because that's just like pure tribal animus, okay, meet me on the 50 -yard line. You bring your guys, we bring our guys. is let's, you know, we did the battle for the ideas. Let's go, right? I should prefer that because that's like explicit conflict and it's just, you know, try versus try, you don't got to work pain on.

34:01Okay. Then you've got the like well -meaning maybe, but, you know, I often can't tell if they're trying to kill us or they're just actually arsonists or would have you, right? Which is, oh, we're gonna have more startups if we allow them to become big and not be eaten by these other companies or would have you. And I struggle for the analogy or would have you, but it's like, I don't know, you can't hire somebody and still you interview 20 people because then they'll be like the best of 20 people and we're gonna let you hire the best of 20 people. What it does is, first of all, you shouldn't be interfering that choice.

34:45Second is that if you cut off the flow of M &A is obviously most companies aren't either good enough or it's really tough to make it all the way to IPO. Like Oculus for example, down 10 years ago, they were burning a lot of cash. They probably couldn't have made it to IPO. A lot of companies are like that, they're burning cash, but they're valuable to a big deep pocket of the acquirer. And there's like maybe one of five guys who could buy them, 10 guys, 20 guys, whatever the number is, but they really can't operate the standalone company. They got to prove concept enough, right? So in that circumstance, airlines are often like this, sort of, a ton of fixed costs to go into it and like mergers make sense because they have riled since stuff like that, the Jeff Blue Spirg one, right?

35:24So when they block those deals, they are actually destroying value, right? And moreover, one of the biggest issues in this related regulation general is they think of it as, oh, this is punishing the big tech companies, the punishing of the companies. It's actually, even though it's an annoyance to them, the short run in the medium to long to make some stronger because if the big companies can't buy, well, we'll first of all figure out other things, so we'll get to these complex deal structures. But second is, that means less money for shops is when a big company makes a big acquisition that's a big surrender because it means a big company couldn't have built it themselves.

36:00Like Google had Google video, but it had to buy YouTube for 1 .6 Bill, which certainly caused some short some churning internally by the Google video guys, right? And most of the time, that big company is there's some faction inside who's like, we could build it ourselves or you know, no, no, we're paying too much or something like that. So it's often a surrender for a big company to do this. It's not that they wanted to do didn't want to pay a billion dollars or whatever for this. And then that surrender money, it goes in excite territory. They're like, let's make a million Instagrams when you see a big billion dollars from the Instagram acquisition.

36:30And then you get Snapchat and then you get TikTok and you get all these other competitors. or suffice book, it's like throwing fertilizer on, you know, thing to spring up a thousand competitors that, you know, all start attacking you, right? And so the actual way of regulating big companies is with a thousand started piranhas, not by dysregulation. Let me pause here. I think it's more effective. No, that's a fantastic observation because you always remember that in a big company, whenever something new that's adjacent pops up, the immediate reaction is, okay, we're selling this giant blob of in software.

37:02We're selling this giant blob of software and this thing is adjacent to it. So our blob needs to have that thing. And that's what immediately gets the antitrust regulators. Oh, but that's that's that's expansion by leverage or or by tying or something like that. Tying. Oh my God. But what is tying mean? Tying means you're tying peanut butter and jelly together in standards. Tying is like business strategy. What I want now 10 years later or the truth can be told, I'll tell you. And Microsoft did nothing wrong. It is. And so you have all these meetings at a big company, which is, well, should we make it or should we buy it?

37:36And it's just make versus buy. And that's the conversation that you're going to have. And of course, this is the funny part about companies are hard to make, though, but going out. But this is the funny thing, because, you know, if the regulators get involved, then they get all the memos and all the emails. And it turns out inside the company, half people said we could make it and half people said we could buy it. And all the people said we have to have this thing. And they said it with varying levels of hysteria. And like it's like, we have to have this. This is going to put us out of business.

38:06So, well, this would be really nice. And we have some customers on the peripheral asking for it. So, which one of those enters the discovery for the regulators, the hysterical person who's probably the person on point losing a deal in sales or the engineer that just is is mesmerized by the exciting implementation of something. And, and like, that's exactly what, that's the say, oh, but then they still go back and have the make versus buy. They always make one of two choices. They, they almost never really just try to make it. But if they have to, because the one that they want, there's only one they can't buy it or whatever, they, it's very, very hard to succeed on the, the make versus buy when you go to choose make.

38:47So then you go buy and they, there's a fork in the road, about two thirds of the time the big company says, wow, the leader is really expensive. But we have our magic distribution beans. So we're gonna pick the number two or number three that's way, way cheaper and get in a fire sale. And of course, that never, ever, ever works. Like Microsoft ever, when is that ever works? I'm actually trying to think it doesn't. Like you can, you have Google bought Motorola. Double click, Google watch, don't click, and then what is it, a quantum? did Microsoft bought a product for $5 billion? You had Sprint merging with Nextel, which was like two number fours.

39:25If that's a possibility, you have Microsoft and Nokia. I made a giant long list. You had everybody in the phone business that needed, already in the chip business, that needed modems. And so then they went and everybody bought these like number two or three modemakers. Like Nvidia almost got overtaken by a PE Rater because it bought a modem company. And that was a signal to the market that it was completely confused about gaming graphics. Why would you compete with Qualcomm from a gaming graphics company? And this just goes on and on and on with that kind of thing. But then you still get to the point where you want to buy something, which is still a power or law return.

40:06But again, one of the things that doesn't get taken into account is that in a venture investments or acquisitions from a company can actually be really transformative to the big company, which is a thing that the regulators don't really see because they see the world as a static fixed pie. So they think like once a company is like IBM and ones mainframes or as Microsoft and owns Windows, well, that's just what it should do. It should then just make Windows forever and just be the Windows company. This is where tech people are very, very different because they just assumed tech has this finite, you know, sell by date and that the tech is just not going to be all that useful down the road.

40:47So, so you know you have to reinvent yourself. And, you know, like it's not like people in, you know, 1985 thought Apple was going to be a phone company. And, and like that, that whole mindset, it just sort of escapes people. Like here's an example of an acquisition that was hugely transformative for Microsoft that nobody knows about today, which was in the throes of the rise of the internet in 1996 or so, we bought a company called FrontPage, which was basically a word processor for the web. And it was a way to design a whole website and to also do something that nobody else did, which was you could edit on a PC, push a button, and those things would end up on the internet.

41:28Like that was a, that's the best. I mean, at the time it was actually pretty good. It was super cool. But what it did to Microsoft was it like salt, I was in office, we did the deal, but then we had a fight with the internet explorer team who thought they should do the deal, but they didn't want to do the deal until they saw us wanting to do the deal, which is a whole how things work in a big company. And so we ended up, first we had to solve the bidding war within our company, and then we had to get on the phone with Mark and do the bidding war against Netscape for this company in Boston. But the thing that it did was it galvanized Microsoft to say, you know what's really important on the internet is editing.

42:07And nobody was really solving the way to edit this very finite thing called HTML and publish it to an Apache web server. And so we finally figured out that like editing on the internet was not gonna be like word. And it was gonna be a different kind of tool that involves script, that involves programming. and that's what led to a series of things. But the people we brought in were experts in the internet and editing on the internet, which we just didn't have. And although the product never materialized as a big Microsoft thing, the people infused that DNA into the company, that enabled Microsoft to go and figure out how to do editing in a browser, which turned out to be incredibly important.

42:50And that kind of thing is transformative, but it also transformed the whole industry. Like, where would we be today? Had we not figured out these dynamic websites and the way you could edit web in the browser and stuff? Like, that wouldn't have happened because we were just not innovating there. And I feel like that whole thing is missing even from the Figma, which again, the specifics of Figma aren't really super important. But it was a whole new innovative category of how to do tooling, which then gets to AI and tooling. So I think that's a good way to get us to win surf and everybody else. Okay.

43:26Yes. In general, one of the things that's been happening is due to the not just past, people can only remember maybe a name. It's like a fleeting kind of thing. They're like, well, Lena Khan is gone. So therefore, nothing is shined. US First Google is a giant interest case still going. FD SuperSmart has still going. All the interest stuff is also not just US. All these other countries that gang up on this thing. There's just every lawyer at all of these companies like their number one priority is do not get us into some antitrust situation. So because of that a lot of the big companies have been forced to innovate on deal structures and do things that are new.

44:06Scale character, inflection, adapt, covariant are all end windsurf. They're all very similar, right? Where essentially they are, they're not all the same, but we have, so there's a typical acquisition where you have an acquired, let's call it Google, and it buys a company. And what it does when it buys company is a process which most people watching the show will know, but if they don't, there's something called the capitalization table which says who owns what shares. And there's something associated with it called the liquidation of our fault that says who gets what money when. And so, for example, if there's debt providers, how they get paid and who gets paid in the middle who gets paid at the top, the preference tag, who's at the bottom, common holders, and so on and so forth.

44:47So, the capitalization, shape and elimination portfolio, you're a very well -defined process for who gets paid when you just buy the whole company, right? Eat the whole thing. Okay. Then you've got something which is like an aquahire, an aquahire or something where, and I'm just describing these basic things, just set the context for what the sort of thing was. So an aquahire or something where the acquired company doesn't really get any money, It's not usually done through the liquidation waterfall and said the company just shuts down, but there is a press release that says it was acquired and then the team goes and gets jobs at the new company.

45:23Maybe there's some cash that's giving to the investors, but essentially the, it's way better to at least get an aquahire than to have a total go to zero moment because you get the status, it's not the money, right? That's one of the thinking about it, right? And now we get to And the third thing, which is what these sales structures have, where they have an aqua higher component, but they also have what I'm calling the aqua fire. Okay. So the aqua fire, what is, the aqua higher component is in these like six deals in scale character and flexion, adept, chavarian and wind surf, the big company basically bought the top AI researchers and engineers out of the smaller company and paid a huge sum for that.

46:06But then it wasn't actually buying the company. The company was left as a shell or as actually an existing entity. And then let's say for example, in the case of Windsor, if you have 40 people go to Google and about 200 people were left behind. But there was a huge chunk of money that was left in the bank account of the left behind entity. And it's usually set up and it was in the case of Windsor in such a way that the money that was left in the company is what they would have received through the liquidation waterfall. Right? And so the point is that in aqua higher, you get the status, but not the money, in an aqua fire, you get the money, but not the status.

46:44Okay? So that leads to the whole been sort of trauma. In the other five acquisitions, you don't, you're seeing the dark down, you know, Bane, he's like, we need one of us to be in the wreckage prada, right? So whoever was in the left behind, you know, company, right, was on somebody who was well -behaved enough to basically be like, okay, salute, I'm going to go kind of down with the vehicle, I'm going to divot in the money out, you know, deal with it silently and so on and so forth, right? It was, you know, you know, like, there's a line of succession for the presidency, and it's like president, vice president, like, I think it's like the speaker of the House blah blah, and you get to like number 37, it's like the Secretary of Interior or something like that.

47:26It's Kiefer Sutherland, the housing and urban development. Kiefer Sutherland, right, right, exactly, right? So the Kiefer Sutherland is the designated successor. If the entire leadership structure is decapitated or in this case acquired, right? If they're all raptured, right? That is a person who is behind his own position. Now, one of the things I think we need to do in our contracts is we need to have, you know what comes with a key man provision? Yeah, yeah. We need to have a non -key man provision, which is this is the designated executive who is in the event of an aquifier like thing and we can decide how to describe it.

48:04It's not an acquisition because there's an acquisition then you have all the FCC blah blah blah blah blah blah stuff right. But in the event of an aquifier this non -Keyman stays behind, he gets maybe a little more money than he wore a lot more money whatever very very knows she it's uh, because he's not getting the status of being acquired. Okay. But he executes an orderly shutdown of the company, doesn't have any drama, uh, yeah, and just dividends out the money. Okay. The issue is that this deal structure was new enough that the other five times it went fairly well, but in this context, what had happened and just to give you some details that I'm aware of.

48:40First, most of the wins are from plays who just been hired in the last few months, because they were all sales guys. Second, Google, when acquiring the company, didn't want to acquire these sales guys because Google has its own sales team. Google just wanted the engineers, right? Third, Google put a hundred million plus in the bank account of Windsor if we're the intent was to divin and it out But the guys who are left behind didn't understand what was happening because their sales guys They just think about money or whatever and The problem was it was so constrained in terms of what could be said about what was going on since it's not in acquisition guys right?

49:16Since they couldn't say anything about what was actually happening, the people who were doing the deal couldn't communicate clearly about what was happening. So just looked like, oh my god, the founders left and they left everybody in the lurch, oh, they broke the social contract and so that's not actually what happened at all. What happened was the FTC and others had made opposition so difficult that they had to do this other structure and it resulted in the people left behind not getting the hint about this. That's one interpretation. The other interpretation is that people left behind got money but not status.

49:49So, after all, if you put yourselves in their position, like normally in an acquisition, Google might have acquired a 250 person company and they might have kept 40 people and the other 200 people, they said, hey, we're not acquired. But those people would have had a face saving thing and they would have a line other CV saying, my company was bought by Google. You know, I decided to do something and all this afterwards. And you know, that's actually a common thing because it has to be both parties have to agree, both the big company and small guy, you know, have to agree, hey, I want to still work at Google rather than do another chart.

50:20And it's very common. Everybody has a broad, warm halo. You're exact exit numbers and I'll wish online. You know, whether you've got offer letters and publish online, so everybody who is acquired has a junction point where they can choose to go the big company or not and they're the status and the money, right? So the issue with the FTC interference in that is it broke the status part of the transaction where the guys left behind didn't get status So but they did have money So what do they do rationally for them they negotiate a second acquisition with cognition where they got the status of being acquired now The issue is cognitions like 60 people and the acquiring the 200 people of Windsor that's that's gets back to our early Appointing usually a company can't buy something that it's not 10x greater than so it'll be very challenging for I think, you know, I have nothing against cognition, nothing against Windsor, if nothing against any of the people here, I wish everybody the best.

51:10Congress is awesome company. Windsor's awesome, Peru is awesome. Nothing bad to say about anybody. Just describing the incentives, right? So, cognition will find it challenging, I think, to integrate those 200 people, and I'll be also challenging for them to lay anybody off because they said, oh, we brought everybody on. I think on the on the windsurf side basically like a veroon side he's muscled so he can't say anything. And in general my view is usually the guy who's getting pummeled on social media and can't speak is usually not as bad a guy as it's made out to be. He just literally can't defend himself, right?

51:48But to defend him it's this deal is essentially the same as the other five deals. The difference is that people left behind you know didn't want to play the key for Southern England role or would have you just because you know from part of recent which is which is their prerogative. The way we saw in the future is a non -key man clause and there's so many things maybe paid more to shut down the company and turn off the lights because that does suck. I grant that that sucks and I understand why their egos were ruined and so and so forth. But ultimately the person to blame one of the other things that happens here is in something like this the last person of the face is the one who's blamed.

52:20Because Verune has a face but Google dozen and the FTC doesn't and then the general anti -tech antitrust US versus Google FTC for a cement kind of stuff doesn't right. So last guy with a face is blamed but the faceless stuff isn't you know it's almost like Boschiat scene and unseen right but blame the FTC blame lane of con and and there's one thing which is someone asked well why isn't the current administration reversing this and the answer is the current administration for totally different reasons I think they have a legitimate bone to pick with big tech because of the censorship and and so on and so forth.

52:51But as a consequence of that, many of the cases that were started have been continued, right? So it's not like this thing was just completely went away. The new administration is friendly to Lil Tech mostly, but unfriendly to Big Tech and continuing those cases. And then this is the Big Tech Lil Tech interaction effect that's going on there. All right, that's a lot I just said. Let me pause here as more I can say. Well, those are super, I mean, very tough stories to hear. And two things really jump out of me. One is just purely on the shaping of the landscape and what's going on. I think these are extremely important, let's just call them deals.

53:27And the reason they're extremely important deals is because the way I would say with near certainty or in general, but for me personally, we're undergoing a platform shift now with AI. We don't know, I can't say who the winner is. I don't want to say it's not really important. But there is a shift in where the nexus of the broad tech ecosystem energy is going to be from mobile and cloud to AI. Now whether or not that's a complete break or the same players move to that transition don't know. But but that what that means is first and foremost, the most exciting things that are going to be going on in the tooling to enable the platform.

54:17And that's especially true because the way that the AI and platform shift is happening is there's just a lot of players. And there's a lot of people and it reminds me a great deal of the consolidation of the PC operating system world, which was there were dozens of PC operating systems in 1980. And when IBM came out with the PC and Microsoft came out with of the DOS part of the consolidation was due to the implementation of the basic programming language that it already gained strength across many of the platforms, but this consolidation that on boot up there was basic and then this proliferation of tooling that appeared on DOS because Microsoft invested irrationally in tooling, IBM invested irrationally in tooling far more than there were any independent tool makers.

55:08And I think what's happening in AI right now, when you look at all of the energy around coding, is that this is really building the tooling for the AI era. And so it's gonna be an irrational investment because tooling itself is never a really huge business, because you have to have it. And so it's sort of this, well, if you have to have it, then there's gonna be, there are gonna be many alternatives and there are gonna be some low price ones, some high price ones. But the people that wanna have the predominant platform will invest irrationally in tooling. And so that's why you're getting these deals that don't look rational because there's just a bunch of tooling.

55:45The second thing is it's really important to put this in perspective. If you're one of those people who think that this is kind of gross or hacking the rules in some way, which is any trust law was itself designed, if you go back to the Sherman act, It was this very vague. It was barely three pages of legislation. And it was really designed to attack one specific thing. And the word trust in that context just meant contract. And so what was happening is between the railroads and manufacturing and resources and stuff, the way that interstate commerce happened, a company in one geography would sign a contract with a company, a provider or a vertical partner in another geography.

56:28And the interstate commerce laws had not yet really been established. And so it was sort of this free -for -all of like these exclusive contracts by geography, by resource type, by train tracks. And it was locking out whole parts of the country from the availability of those things. So this antitrust became break up, these vertically integrated or these horizontally constrained entities. And then when the Clayton antitrust act came along, it said, oh, you know, the real problem is pricing and tying. And so then all the laws became about how much you can charge, can you have exclusive deals, not exclusive deals.

57:06And in each step, well, you know, the first time, well, then Delaware came along and started being really favorable to companies that were doing business in multiple states. And so you ended up with this sort of, and I don't want to get criticized by legal historians or business historians or whatever. Like I'm not paying fast and loose, I'm trying to be abstract about what took place over 30 years. But then when pricing came along, well, businesses just started to develop all of these different ways of doing the pricing. Like one of the most common things people know is like, if you buy a lot of something, you get a better price.

57:40But if you actually read the Clayton Act, like that doesn't appear to be legal. And so then it took a whole bunch of court cases to just make this very basic premise, which is the more you buy the better price you get because I like good customers. Or if you commit to not buying my competitors products, we'll give you a good price. And the Clayton Act was like, you cannot do that. And you're like, but that seems to be a fairly reasonable constraint. Like, you're not going to buy it for me and play that off my competitor. And I'll be nice to you. And so all of these things. And so at each juncture in the evolution of regulatory oversight, like the next step of it was what could be viewed as a hack to the systems that got put in place, which generates this animosity with regulators.

58:25And of course, you can go back banking as a classic one where, like, checking accounts didn't have interest. And so someone clever with software invented this notion that you have a checking account and a savings account, and your savings account has all your money in it. And the minute you write a check, we move money from your savings accounts, to your checking account. So it stops on the interest, we pay the check and you're covered. And that was called a now account. And that innovation allowed you to have interest on a checking account, which turned out to be a really, a really big thing.

58:53When MCI came out with like, we want you to use our deregulated long distance, but we want you to, you know, only get a really good price when you call 10 friends and family. We'll give you a really good price. So everybody around the country signed up for MCI when phones were deregulated and had to make a list of all of their friends, which of course turned out to be this massively great marketing tool because then they would take that list you gave them, give you a discount for calling those 10 people and then hit those 10 people up to be part of friends and family. But that was just like a software innovation that completely worked around this idea that the price of long distance should be the same for everyone everywhere.

59:30And then AT &T did it with free minutes up to unlimited long distance calling. And so what's happening now is just like, Okay, the regulations have been fixed for a long time. We want to invest irrationally in platforms. You're making this part of it very difficult, so we're just going to go figure out innovative way. And so we have to be careful because, of course, they are going to circle back and make this difficult in some way. And that's the cycle that you get in with regulatory oversight. And you know, you could be like, I've always the guy, I used to stand up and fight about like this feels like the guy in basketball who decided that when there's seven seconds left you should intentionally foul someone.

1:00:10I always thought that is like the most unsported like thing because I'm like they didn't invent fouls to like be executed on purpose. They did it so you wouldn't poke the other guys eyes out. But it became part of the strategy. And that is like the ultimate American capitalism is exploiting the rules that way. And there you well so it's also Silicon Valley. Yeah, yeah. So I think that what happens is following is that you start out in a totally honorable, I think fairly honorable, you know, capitalistic way. And that what happens is when the government attacks you enough, then sometimes the companies that survive that get a taste for the one right.

1:00:51Yeah, yeah, right. And they're like, okay, well, you know what? We just built this huge lobbying team to defend ourselves. What if we go on offense, right? And they're kind of corrupted by it in a certain way. And the one issue, there's like, I think, you know, in chemistry, if you think about like reaction kinetics, sometimes you can have a bunch of time constants where you have this reaction, this reaction, this reaction, they're all going and you have to actually do the math, figure out which one goes first, you know. And so I think there's several things that are all hitting at the same time in this space that I'll just give them a quick succession.

1:01:25The first is these big companies are now getting the taste, they're forced to, they wouldn't actually want to consider this in the first place, but of, you know, getting like rather than buying the cow, they're getting the milk for free, right? Decapitation rather than acquisition, right? Now that they know that that's a thing, actually, it's faster than an acquisition, just leave the money in the car, you know, it's almost like a deal. You're just buying something from somebody. It's closer to just like a big, big purchase order almost than it is to an acquisition with all the complexities that are involved in that.

1:01:56So now, they're like, oh, I can do that faster and less overhead. Let me have five of those. Yeah, yeah. So that's like, that's like one thing that's happening where you're giving companies now a taste of this and it's like, you know, so we'll have to figure out our deal terms to account for that as something that counts as an exit, but doesn't count as an exit, you know, we're figured out. Okay. The second thing is AI is making it so that you can do more with less, more with fewer people, right? So this will be a more common thing where there's an internal, you know, amplified intelligence rather than artificial intelligence.

1:02:32You're going to have its stratification within every company and between companies where the top people will become more and more valuable because they can just do so much more, so much more quickly, right? And the third thing is, you know, one thing people say about AI that I actually don't agree with, didn't agree with then, and actually I don't agree with now is this is a worse still ever be. that this is the use of say, right? But I remember with Napster, Napster was actually the best it was. And then all the copyright lawsuits and attacks and it made it worse and worse over time. Google Books was amazing.

1:03:07And then all these copyright lawsuits jelded it enough so that you could get like some little snippet preview and then you couldn't see the whole thing, right? And so it's quite possible, I would even say probable that the combination of all the copyright lawsuits These are desperate lawsuits, by the way. Desperate attacks by all these journalists and authors, writers, et cetera, who hate AI. And I understand why they hate it, but they just hate it. So they just want to kill the thing. And you know, they'll say it, they'll say, are you an AI supporter with like venom in their voice? It's like, you've been offered that?

1:03:40I, yeah, go ahead. I'll follow up. I promise. I will let you just get away with that. Okay, okay. Yeah, so it's like, because like, you know, they'd say like, are you a Trump supporter? like your AI supporter, you know, and some, there was some company, there's a few that, it's similar to actually like when Discord tried to roll out crypto. You're like, you're doing crypto, you know, you've got super, super mad, right? And that is a building thing of an anti -AI, anti -crypto, anti -tech, and the setting fire to the waymos, it's a real thing that we should not just watch out for. I think it's gonna come actually in the future political axis between futurism and primitivism.

1:04:18That's gonna be the new left -right after the whole thing finishes rotating. But so the issue is that those attacks from a copyright standpoint and also the energy constraints because data center buildouts are going to just start hitting spare energy constraints. And the fact that Chinese models are open and they're actually pretty good in the decision and quickly. And China is, do you see my post on AI reduction a few months ago? That's happening now. You've got Kimmy, you've got Quinn, you've got Deepseek, These are good models and they're open. I shouldn't say fully open source because they're open coefficients, but not open source because they haven't released a full source code to build them and all the complexity that involves and so on and so forth.

1:05:00But they are open coefficients. So the combination of those three things means it's quite possible. Then the fourth is, I already saw something where some government restriction on using hosted deep seek. Okay, I could understand that host deep sea is going to China, but I wouldn't be surprised to see something where it all combines such that A USAI companies are hit with copyright loss. It's B They're blocked by the lack of energy see the Chinese open models are out there and D US regulations Prohibit people from using the Chinese open models so that Actually that lead in AI is actually lost and it becomes harder to do AI in the US and it's similar to what happened with crypto where crypto had to decentralize outside the US in the 2020 -24 range.

1:05:46I don't think that's the intent, but I can see those storm clouds coming. And the one I think I would say is because AI doesn't middle to middle, not end to end. It doesn't do everything, but it does do a lot of bureaucratic jobs, lawyers, that doctors do, that teachers do, professors, artists, journalists. was this is going after like the blue base, really going after them. And so, you know, doing all the AI in San Francisco and publicly making millions or even billions of dollars and being demographically different with all these immigrants and being very publicly rich and recognizable in the blue state, in the blue city and the blue state and the union, to me is not a good launch or recipe for peace and prosperity, right?

1:06:37It results in accumulating too much capital too publicly. And then you just start to see some very, very nasty things happening. So because of all that, I think I am bullish on decentralized AI, but I'm not so sure how centralized American AI is going to. I think this is a good way to close. I'm going to give you the impossible thing with the biology, which is I'm going to try to get the last word in and let Eric just say thank you very much. Go, go, go. No, it's like we opened up a lot of topics. And I would encourage comments and dialogue out on X for where we should take the next part of this because we should keep going.

1:07:14But like I want to say broadly and deeply I agree on the the biggest issue we all face right now in in the technology sector of the economy is the risk to to the AI innovation trajectory in the US. And you could look at that from a technology perspective, a regulatory perspective, a business practices perspective, an immigration perspective, like a research funding, any way you wanna look at it, there are arrows aimed at from various perspectives, from preventing it, when the right answer is we just need to let the market work, the market for talent, the market for technology, the market for people, there's just a very strong market that can really, really work.

1:08:03Because from the Clay -Christmasthcent perspective, what China is trying to do is commoditizing our strength. And so the release of a bunch of open, pure open -source, open -weight models coming from China is specifically designed to go after or a rigid or complacent American view of AI, which is cloud hosted by a few big players, closed source, so China is just doing, and I can look at this very emotionally and personally, which is this is Google releasing Google Docs for free. Yeah, yeah, exactly. And I'm running Microsoft Office, and Google is just like, we're never gonna make money from this.

1:08:49And here we are, 2020, 2025, they still don't make any money from it. But they did. They, and what Microsoft dad's dad's upper lying on is the worst part of the business, which is just enterprise distribution, lock in as you're a core part of your business, not innovation, not moving forward, which bums me out. I mean, they made money from Coon. G Suite, the host of G Suite is starting to get expensive. So they are expensive.

1:09:16But relative like the profits from officers, still the profits of Microsoft with Windows and stuff. But the other angle is like copyright. I'm gonna come at it from a different angle and we should maybe think about talking about this because I think people are, the people are rightfully panicked about the US position and then point to one of those slings and arrows being copyright, which of course has no issue in China at all. Like they have no problem with copyrights, you know, ask the form of industry. I lived in China, I worked on copyright, I know exactly what they're doing, But the truth is is that copyright also created the technology industry in the world.

1:09:53And it was Microsoft and Intel with intellectual property and copyright that an Apple that enabled the industry. And so we have to look at it a little bit more critically and not think just about the starving novelist in Brooklyn who is frustrated by being used as training data. There's a lot more tooling. There's a lot more stuff. Of course, there's a lot of depth to the copyright issue. Finally, I do think that there is to wrap up just the M &A side, the recent wave of deals is going to get looked at with scrutiny. The truth is that something will change in what's permitted in deal structures in terms of oversight, because I think they're too big to get ignored by regulators in a tech industry that they're no longer just going to ignore.

1:10:41But I also think that there's a lot of opportunity to be, to have much more clarity and deal structure. Maybe it's a great idea from that biology race, like to have designated survivors as part of corporate governance. I mean, there's a lot of interesting things you can think of to make that kind of outcome something that's thought about. Because of course today, people who take on money from very late stage private equity investors or corporate venture, they know the terms and conditions that you have to have in those deals to attract that money. And so in the same way, if you know the kinds of things that might happen, you structure your cap table, you structure your corporate governance to facilitate that or prevent it.

1:11:23And right now, and then it becomes part of the business practice, and then it becomes formalized and it's less likely to be something that could just be stopped by sort of an arbitrary ruling by an appellate court in the eighth district, who doesn't like a deal that happened to a local company, which I think is where we end up with the risk right now, is that just it'll be arbitrary, and nothing is worse for anybody than arbitrary. But I feel like we had this very long arc of discussion that was super interesting in terms of M &A and where we're heading and look to where to pick it up. Great. If Lena Khan a few years ago when she was sort of, if she was asking for advice or perspective, is your view, hey, let the markets work because M &A helps everybody from big companies to small companies to the second -year system to the consumer.

1:12:12Or how should we think about antitrust? Well, I'll go first and then, but we should wrap up on biology. Sure. Which is just the truth is, because M &A will almost certainly fail, unless they want to come out on the regulatory side of like defending against the potential for failure, They really can't come out on the, we predict that this one will be successful because that just, it's statistically not a supportable public policy approach to the action. And the markets are much, much better. Otherwise, they're just basically instituting rent control on investing, which is definitely not going to be the right way.

1:12:55Yeah, so it... I was just, I need to get done there for a second. Can you hear that over there? Yeah. Oh, is it lightning you said? Let me, okay, if I'm sliding through. No, it's a no, I mean, not a earthquake. We're good, right? So, yeah, to your question, I would say we have to actually think more deeply in the following sense, which is if you model, you know, the public sector as a platform and the private sector as the apps on that platform. Sometimes an app gets big enough that you just have to actually build a platform or become the platform, right? Like, you know, Google was search and then it grew and grew and grew and actually had to build a platform, right?

1:13:37And like essentially Google, you know, with Chrome, it kind of became something as Steve is aware, built things. And so what we have to do is we have to stop being reactive to Lena Khan or like Scott Weiner on the AI bill or things like that. And we have to be proactive in the following way. A, for every space that we're in, we figure out what is the ideal set of laws. B, we write model legislation for all 50 states and all 190 sovereign countries. And A, I can help with this. But obviously, it'll just give you a first draft, but it'll get you on base. C, we build a sales team that goes down and knocks on the doors of those 50 states and 190 countries.

1:14:16And of course, there's subdivisions of cities and counties and all kinds of stuff, both within an outside US. Next, we actually find politicians, and of course, you can rank before you go and knock on the doors. You can rank that list by those that are the most pro -tech, the most amenable to tech, right? For example, Jared Polieson, Colorado is friendly to accepting Bitcoin for payments there, or you have somebody who's posted about AI, and they clearly, they're conversing with it. And often you'll find some state senator or some governor, like obviously, like there's Bekele before he became who he is today was a very pro tech, you know, person and government in El Salvador.

1:14:56And so we identify all the pro tech politicians around the world. And in particular, in this process, small states are the friends of Lil Tech because they're the ones who don't take anything for granted. They want to build their economy and so on and so forth. And so if we go to them, we say, here's the draft of a bill. And then here's 10 CEOs or 10 founders or 10 investors or whatever, 50, representing X billion dollars in AUM or Y billion dollars in revenue or some combined thing. And if you pass a legislation, then we will invest in your country, right? Because then that is now unlocked, right?

1:15:32Now we can build speed of physics, not permits, right? I should write an article on this Elon Salvador. Okay. Elon Salvador is what it sounds like, which is the tie up where in an American time zone, Elon gets some space where he can build this feed of physics and operatives. All 20 century barriers go away. You keep the common sense stuff like, you know, Vashanakil, you know, Saltmurder, blah blah, but there are all those, you don't have to sense it every law, obviously, right? There's some laws that are just eternal laws. But lots of 20 century regulations are just very stupid. You know, Zyra Pave said, you know, after the incident, you have to kind of go back and look at a lot of laws and see if they still make sense, right?

1:16:11Permitting laws, this law is, you know, do they still make sense when you can build in different ways with robots or other things. The answer is, I don't think it would be a micro -ansor -eric, which is, it wouldn't just be like, you know, advising a con or a different con. It's a macro -ansor of like, go between countries, essentially, you know what it is, rather than, here's a flip. Rather than say, oh, you know, how do we let them decide whether we're monopoly or not? Assume the instrument was a monopoly federal government, and how do we build competition to that? Right? How do we build jurisdictional competition?

1:16:44How do we build choice? Because 90 % of the world is on America, and then only 50 % is on blue even within the US. You've got lots of jurisdictional choice. So how do we do antitrust on that? Maybe, that's awesome. I'm very grateful. We'll wrap on that big idea. Apologies, David. This has been a fantastic conversation. Thanks so much. Thank you. Thanks for listening to the A16Z podcast. If you enjoyed the episode, let us know by leaving a review at ratethispodcast .com slash A16Z. We've got more great conversations coming your way. See you next time.