Inside OpenAI’s Smart Speaker and the Minds Behind It, Social Media Stocks Under Pressure

0:13Welcome, everyone, to the Information's TI TV. My name is Akash Pasfritzha. It is Friday, February 20th. We are kicking off the show with exclusive reporting about OpenAI's 200-person team working on the company's hardware ambitions. Next up, we'll bring on a public markets investor as we continue to unpack whether or not the software sector is oversold right now. Also, it's a Friday, which means it is time for another edition of The Editor's Cut. We are bringing on two of our editors to unpack the movement in social media stocks this year and the growing competition that they face in the AI era.

0:52And finally, we will wrap with a fascinating story from our health and science reporter. Silicon Valley has an obsession with longevity, with many tech billionaires pouring money into the sector. In this weekend's Big Read, we dive deep into one company that is transplanting mitochondria from younger people to older people as a way of testing anti-aging technology. We're going to talk more about that. It's going to be a fun show, so let's get right on into it. OpenAI is working quickly to launch itself into the hardware game. And according to our new reporting, the company is looking to launch a smart speaker and possibly even smart glasses and a smart lamp.

1:32My colleague Stephanie Palazzolo today published an in-depth look at the latest developments on that project. And I want to bring her on to share more with us about what she has learned. Stephanie, welcome back to the show. It's great to have you here. Thanks. Great to be here. So remind us, where exactly are OpenAI's hardware ambitions? Yeah, so OpenAI has actually, in various ways, been working on hardware for quite a while. So in September 2023, we were the first to report that CEO Sam Altman had been meeting with former Apple design chief Joni Ive about developing some sort of AI hardware device.

2:10So that was over two years ago at this point. Then last May, OpenAI acquired the startup that Johnny Ive had been working on called IO for close to$6.5 billion. And so that was kind of their way of officially bringing those device efforts in-house. And, you know, since then, you know, the employees that joined OpenAI in that acquisition, plus other OpenAI researchers and Love From, which is Johnny's separate design studio, they've all been working together to create prototypes for this personal AI device that will be coming out.

2:49What do we know about the device now? You said in your story, they're looking to develop a speaker? Yeah. That's the main device that it seems like is going to be coming out sometime in the next couple of years or so. Basically, this will be a smart speaker that has a camera that can take in audio and video and see what's going on around it. And that's likely to be the first device that's going to be shipped. It's probably going to be between$200 and$300. At the earliest, it won't be shipped until next February, as we saw from a court filing from one of the leaders working on the device. And as you mentioned, they've also prototyped some other designs, such as smart glasses and a smart lamp.

3:34but it's less clear whether those are actually going to be released as kind of official products. And they've got 200 people working on this thing? Yeah, I mean, it's a pretty big effort within OpenAI. Obviously, I think at this point, OpenAI has, you know, thousands of people working there, but this is definitely a very real effort that is going on there. Okay, so now this, let's start with the speaker, because I mean, the speakers looks like it's the one that it's sort of closest in development. And what is the company thinking about differentiation strategy and how this is going to be different from all the other smart speakers that are out there on the market?

4:11Yeah, so I think actually what's interesting is that what kind of makes this speaker different from what I've heard is not necessarily the kind of physical design or what it might look like. And it's more about the kind of software that's powering it and the way that consumers are going to be interacting with it. So, you know, as you wrote in the story this morning, there was a presentation last summer where, you know, leaders from the device team basically told OpenAI employees that this device is going to be able to observe users through video and kind of nudge them towards actions that the device believes will help them achieve their goals.

4:44So a very silly or basic example of this could be you can imagine the device observing the user staying up late the night before a big presentation, for instance, and nudging the user to go to bed. So obviously that's kind of a bit of a silly example, but the overall idea here is the device taking a more proactive approach to its users and influencing the user's lives versus what we see today with our phones. Now, I want to ask you about Joni Ives' role in all of this. He obviously came in with the IO acquisition. What do we know about how OpenAI's team is working with Joni's team? Yeah, so the actually, the really interesting thing about that is, even though OpenAI paid, you know, almost$6.5 billion for IO, Joni is not actually an official employee at OpenAI.

5:36So what he does is he leads his independent design studio, which is called Love From, which is separate from OpenAI.

5:47Love From is the entity that's actually in charge of coming up with the design of the device, what it's going to look like, is it going to be a speaker or glasses or a lamp or something else. There he's the one that has final say and veto power over what the design of the device is going to be like. But interestingly, he's not really kind of, you know, frequently like physically seen in the office, but he, you know, he's obviously very well known in the hardware space. Um, and people kind of like talk about him like this kind of omnipresent figure where he's always coming up in conversations, even if he's not physically there and people talk about him kind of saying things like, you know, Johnny would, would like this.

6:32He wouldn't like this. This is what he would say about this sort of design. So he's very much kind of like emotionally present, even if he's not kind of physically present in the office. And how do OpenAI's employees feel about this partnership here with this team coming in? I mean, have they been working well together? Yeah. So I mean, I think overall, it does seem like things are going well. But one thing that I actually predicted last May after the acquisition happened that seems to be coming true is that there are these kind of culture differences between IO employees and OpenAI employees where, you know, Joni and a lot of the leaders that came in through the acquisition are former Apple leaders.

7:17And so Apple is kind of known for this very like unique culture where, you know, they're very secretive. Like there are these kind of silos between different teams. There's very strict rules around which employees are allowed to know about certain projects or not know about other ones. And they're kind of known for this very meticulous approach to design where you're moving carefully, you're moving slowly, you're testing every possible iteration of the design, which obviously can take a bit longer. And then you kind of compare that to OpenAI's approach, which is very typical Silicon Valley startup, move fast, break things, let's move quickly, let's release models quickly.

7:59and you can kind of start to see how there might be some kind of tension there. So what questions are you trying to get answers to now? I mean, we have this product. We have OpenAI that is building out an entire supply chain, which is something that's very different from building out AGI, although in some ways I guess you do have the sort of industrial operations of setting up a data center, partnering with suppliers and stuff like that. So that's one part of this. The other part of this is what the product is actually going to be. And the third part is the people that you mentioned. What are the big reporting questions on your mind right now?

8:35Yeah, so I think right now I'm thinking through a lot of the things that you mentioned. So first, you know, beyond the speaker, what are some of the devices that are going to be coming next? Because it's important to remember that this is going to be a family of devices, not a single device. And, you know, as interesting as a speaker is, like, we have speakers today. We have the Alexa. We have this is something that a lot of people already have in their home. So I'm curious what's going to come next that maybe might be more unexpected. I think the second thing is what you mentioned around the supply chain and how OpenAI is navigating, you know, finding suppliers for this hardware device, which is something that it doesn't really have a lot of experience with.

9:11And, you know, how that is intersecting with what's happening at Apple. So, you know, it seems very likely that Apple and OpenAI are kind of going after similar suppliers and folks in the supply chain. what is that leading to? Is that causing issues for them? Is that causing tensions? And then I think just the last thing is like, you know, how the device is going to change the way that consumers interact with AI. So, you know, today, a lot of us interact with AI through chatbots, basically, whether that's ChatGPT or Claude or other chatbots that people use. And I've previously reported that, you know, folks at OpenAI want this device to be audio first, something that we talk to out loud versus typing into our phones or our computers with.

9:57So how is that going to change the way that we're using AI and the way that we think about AI? Is it going to become more like a friend or a companion that you're just musing out loud to? And what does it mean for AI to work in a more proactive way in our life? Like, is it going to be having more of an impact on what decisions we're making versus maybe being something that we turn to whenever we have a question. So lots of questions and I think lots of interesting stories that are coming, you know, related to all these things. And I think, you know, one thing that I might add that I'm wondering about here is even though we have Joni Ive in the mix and even though the iPhone, for example, was such a pivotal moment for Apple.

10:42I mean, Apple had devices before the iPhone, you know, in the iPod. And, you know, nowadays, I remember when the Vision Pro came out, people talked a lot about, hey, well, Apple's not hoping to make a dent in their sales with the Vision Pro. You're not thinking about it the right way. This is actually more of just a little bit of a proof of concept a little bit to see, you know, if people buy into the idea of using it, how they use it, you know, maybe even some data collection. And, you know, if I look at Meta's device strategy, it's somewhat similar. I mean, those are selling quite well, but still, even though they're playing the long game here that they want the device, I don't think anyone made the bet that the first device that they drop is going to be the game-changing device.

11:26And so I almost feel a little bit like everyone's waiting for the first device, but I don't think it's going to be the first device that actually is the big open AI moment that, once again, they take over the whole ecosystem. them. Yeah, I think that's super true. And I think there is this kind of balance between wanting to come out of the gate with a bang, but also, you know, wanting to kind of like test the waters a little bit with consumers and see how they feel about this device. So I agree. I think I'm sure the first device will be really interesting. And obviously, I'm very excited for it.

11:56But I think I'm almost more excited to see what the second and third devices are going to be. Great. Well, Steph, I want to thank you for coming on. That is Stephanie Palazzolo, our AI reporter here at The Information. The software sector continues to stay significantly depressed compared to where share prices were at the start of this year. The Bessemer Emerging Cloud Index is down more than 15 % year to date. Will it come back? Is it oversold? What will happen with AI? These are all the big questions on everyone's mind right now. I want to bring on Evan Skorpin for his perspective on all of this.

12:29Evan is partner and head of public equity markets at LeadEdge Capital. Evan, welcome to TI TV. It's great to have you here. Yeah. Hey guys. Thanks for having me. So what do you think of software valuations right now? Yeah, look, software is exceedingly cheap, right? People focus on revenue multiples. The revenue multiples are the, you know, public SaaS businesses are the cheapest they've been in 15 years. But honestly, we don't think about that. what we focus on is free cash flow multiples and the, you know, the businesses of the median businesses ramp to 20 % margins. And, you know, I think the, you know, software sector is trading at 19 times, maybe 18 times free cash flow, which is, I think the first time ever that it's traded at a discount to the S &P 500, which is like more like 28 times free cash flow.

13:17So it's really cheap. You know, the public markets don't like uncertainty and we're at a period where uncertainty is high. And so I think it's created this kind of air pocket here. But overall, the sector seems unbelievably cheap. So let's talk about free cash flow multiples. Where do you think the sector should be? What's the Evan Scorpin number on where you think it should be compared to the S &P? Yeah, look, over time, software should trade at a premium to the rest of the S &P 500. The growth rates of these businesses are twice as fast. The S &P is growing 7%. The median software business is still kind of double-digit growing.

13:58And the free cash flow margins here are 20%, which is nowhere near kind of mature margin levels, right? A lot of public SaaS businesses have been putting up 40 % incremental margins, which kind of suggests that margins are heading in that direction. So overall, kind of a free cash flow per share within the software sector is growing meaningfully faster than the S &P 500. So over time, I think it deserves a premium multiple. But I think people don't like this uncertainty, and so we need to get through this period where people don't know who the winners and losers will be before you kind of see that re-rating happening.

14:33I want to go a little bit deeper in free cash flow multiple. We haven't talked about it too much on the show here, but one question I always have is, is all free cash flow equal? And you have stuff like stock-based comp, which is baked into that at times. How do you think about that? Yeah. Look, we can look at free cash flow per share or we can look at GAAP EPS per share. I think both are very reasonable metrics to look at. At times, you can manipulate both of these metrics. GAAP is very easy to manipulate. It's been a huge issue in pharmaceuticals and M &A. GAAP has a whole variety of problems.

15:14Over time, those two metrics I think are both acceptable. I think are both reasonable. You can look at both. We focus on free cash flow per share and account for dilution in the share count growth over time. The reason is, is that a lot of the SBC metric is a misleading metric as well. It's, you know, options that were granted or RSUs that were granted three or four years ago show up in the metric. And so, look, it's a kind of a lagging indicator, the gap EPS, whereas free cash flow per share is more of a leading indicator. But I think both are reasonable. and if rates come down does revenue multiple becomes more important in your mind at that point revenue multiple in our mind has always been a proxy for what is the earnings power of the underlying business and so when people bought a business that you know when you talk about six times revenue to me what i hear is when the business is 30 margins that's 20 times earnings And when people talk about 15 times revenue, look, I think what you're doing is you're saying, five years from now, this will be six times revenue, and that six times revenue at 30 % margins is 20.

16:21It's always been a proxy in our mind. Right. I want to talk about the AI story right now. So the narrative here that is AI going to eat SaaS, kill SaaS, will it replace SaaS? I mean, these are all the big questions right now. What is your perspective on that narrative, and And how are you thinking about the cost savings or the potential cost savings that companies could achieve with AI? Yeah, it's a great, and look, it's the question. I think it's worth stepping back for a moment. Software has been on a 50-year journey to replace labor, right? If you fundamentally think about what software is, it's we're making labor more efficient, so you need fewer people to do the same thing.

17:04We're on a 50-year journey there, and AI is the newest tool which I think will unlock a significant growth in the software market, right? All of a sudden, software is able to now do things that labor has done historically that software has not been able to help with. I think first and foremost, this is exciting, right? AI is software, right? Fundamentally, it is software. What we're doing is we're unlocking a new power within the software ecosystem. With that, yes, there will be new incumbents coming in that are kind of, you know, people use the word AI native all the time. There's going to be new incumbents.

17:42And there will be, you know, there will be the original businesses, SaaS businesses that have deep relationships with their customers. And that's nothing new to the software ecosystem. There's always been new technology, which has led to new entrants into the market. And there's a duking out that needs to happen between who wins, the businesses that own the customer or these new technologies. And I think overall, though, there's this fear that this is bad for software. No, this is unlocking a lot of growth for software. And the question is, who is going to win this incremental growth? Is it going to be the installed base of software businesses which own the relationship with the customers today?

18:18Or is it going to be new entrance that the market perceives will be better able to harness this new technology? But I think this view, and the answer will be both, right? The answer will be as with every new technology that's happened, there will be new entrants, and there will be installed base that continues to gain share. And I think that people are trying to draw this black and white thing, and I just don't think it's fair. So where do the cost savings come from then? If spending on software, whether or not it changes over time, the point you're making is that, I mean, we'll see. AI is software.

18:51I take your point. But is it labor budgets then where you see cost savings coming in? Yeah. Look, the software market is tiny. The average S &P 500 company spends about like 3 % of their OPEX budget on software. People are not excited about AI because it's going to replace Workday or Salesforce. That opportunity is not big enough, frankly. Salesforce and Workday are not big enough businesses for people to be spending a trillion dollars in CapEx to displace. What are all the AI native businesses doing? Look at the Harveys, the Sierras of the world. They're all targeting the labor market. They're saying there's a population of people that are, these people are, you know, think about the software budget, 3 % of the S &P 500 labor budget, much larger, you know, orders of magnitude larger.

19:38I think it's 40 times larger than labor market. And they're saying, look, we think we can replace customer service agents. We think we can replace junior engineers. We think we can replace, so it's, what are they targeting? They're saying there's a bunch of repetitive labor that we can automate. Will there be some collateral damage on the software market as it exists today? Maybe, but the real opportunity with AI is to expand the software market and steal share from the labor market. So let's put aside for a moment the question about what happens to that labor. That's a whole other topic. But now you have companies that conceivably will save money on labor, like you're saying with these new tools.

20:20where do they put those dollars then what do they invest in yeah look there's this view that you know all of a sudden we'll have you know labor is not going to be used anywhere and there'll be unemployment rising i don't prescribe to that um i think we historically find ways to use resources in this country and labor is a productive resource and And if we can make customer service more efficient with AI, I think we'll see customer service agents shift to other jobs that are going to be productive as well. And so what are those jobs? I don't know. But we end up, as we become more efficient, we use the resources elsewhere.

21:06But I guess what I'm getting at is what I thought you were initially saying was that it's coming for the labor market in that you'll have cost savings there. Maybe if you had 1 ,000 people, now you're employing doing the same job with 700 people. Yeah. And so the question I was trying to get at was, okay, so the cost savings from those 300 people, then what do you invest in? But now what I hear you saying is that, well, no, actually, you still have 1 ,000 people. It's just that the jobs are different. So which of those? Yeah, fair question. Look, some of it will flow to the bottom line, right?

21:40I think the S &P 500 is becoming the margins of the average business. S &P 500 are growing each year. And I think that'll continue. Like, I think we're going to get companies are going to get more and more efficient. So some of the savings will drop to the bottom line and it's going to cause the S &P 500 earnings to grow. And that'll fuel the stock market for years. Others of it will be reinvested, right? People will say, hey, I can now, I'm going to turn around and take that money and I'm going to reinvest it into software, into growing my production capacity, whatever it is. It depends on the company.

22:09Okay. How do you think about the new IPOs coming to market? OpenAI, Anthropics, SpaceX. I mean, you know, I think Lead Edge Capital. I mean, you guys focus on a different class of businesses from what I understand. I mean, these are businesses that people don't even know the names of sometimes. you know, smaller businesses that are in the background, companies that we probably never will hear of. On the other hand, you have the SpaceX's, the OpenAI's, I mean, you know, orbital data centers. What's your view on the narratives that these companies are pitching? Yeah, look, they're exciting. They're exciting businesses.

22:50I think we're excited to see more of the financials of some of these businesses. I think that there's been a change in the technology ecosystem from CapEx Lite, you know, free cash flow generative machines and software to this kind of new era of IPOs, which are CapEx heavy, consuming an incredible amount of cash to grow. and I don't think investors have really been able to dig into the unit economics of that enough. And so one thing we're excited to do is to just dig in to be able to see the numbers. We see the revenue growth rates, but we don't see what's happening to gross margin. We don't see what's happening to free cash flow.

23:33So I think we're excited about that. Look, I think the IPO market is going to be tricky. I think public investors have been burned investing in IPOs. over the last five years. And I think we need to have some successful IPOs where people who get in on day one, day two, day three end up being really successful. And that will take time. And I'm hoping these are the investments that do it. I'm a little nervous that we're in this weird period where the valuations at the time of the IPO seem to be sky high. And then we've had a series of IPOs recently the kind of IPO to sky high valuation, it resets later.

24:16That's not an encouraging sign for Lead Edge or other investors to step in at the time of IPO. And so hopefully we see some that kind of price at much more reasonable levels and we see kind of a more linear rise in share price rather than this volatility, which I don't think is good for the company. I don't think it's good for the venture guys who are in the business today. I don't think it's good for employees. So I don't know how to solve it. But I think the volatility in kind of post IPO share prices is really unhealthy. And so last question for you, what are you buying then in this environment?

24:47Yeah, look, we've been active. We're buying, you know, we think we're buying great businesses, sub 2 % dilution, really sticky businesses, durable customer relationships, businesses that have proven they can ramp margins over the last few years. And we're buying these businesses at kind of like 10 times forward free cash flow or earnings. Any names you can share? Yeah. Mitchell's been on the air. We built a position in Workday recently. Workday, okay. So you guys are bullish on Workday. We're bullish on Workday. I think it's one of the highest quality software businesses in the world. And we're in at sub 10 times free cash flow, we think, which is kind of an incredible, who would have thought?

25:29We own Canaxis, which is a supply chain business in Canada. We recently rebuilt a position in Toast, which I think is compounding at 20 % plus, You know, compounding at scale, fantastic margins. Yeah, so we've been active in software. But, okay, so let's just, I just want to get into Workday here very quickly. I didn't know you guys were buyers of Workday. I mean, they've had this transition now with the founder step coming back. They had the layoffs. I mean, this is a company that is at the core of the question you just said, which is, is it the install base or is it the flashier tools that will win in this era?

26:05I mean, Workday, look, it seems like one of those tools that you could maybe do yourself and you have larger corporations using it. But help us understand your thinking. Why are you so confident in the founder coming back and in the company? Yeah, look, if you ask large companies, you ask Walmart, large companies, hey, could you replace Workday with a cheaper version of Workday? They have no interest in doing that. Workday is not, goes back to this, software today is a very small percentage of like Walmart's OPEX base. And they have no interest in trying some vibe-coded solution, which may, or, you know, this is mission-critical stuff for Walmart.