‘Mr. IPO’ on SpaceX’s Historic Listing, Anthropic’s Repelling Data Retention Policy

0:13Welcome, everyone, to The Information's TI TV. My name is Akash Pasricha. It is Thursday, June 11th. Before we get to today's show, I want to flag for you the results of The Information's latest subscriber survey on the state of cybersecurity as AI models and agents become increasingly powerful. 60 % of readers who responded to our survey say they think hackers have the advantage over defenders right now. The survey also shows that readers are anxious about cybersecurity threats to their work or organization. Four in five readers said they have more concerns today than they did this time last year.

0:53We have posted the full survey results on our website. You can check it out at theinformation.com. Today on the show, we are T-minus one day away from the historic SpaceX IPO. And with so many questions on what the market reaction is going to be, we're going to bring on Jay Ritter, also known as Mr. IPO. He'll be on the show in just a minute. We'll then unpack how Anthropix's new data retention policy is scaring off some customers. And we'll also cover some reporting that we have about Xbox. And finally, as companies break their budgets paying for AI compute, Palantir is making the case to act as an intermediary.

1:34The big question, of course, is will that actually help anyone save money? It's going to be a great show, so let's get right on into it. SpaceX is going public tomorrow. It is poised to be the biggest IPO ever, and few people can put this moment in context better than Jay Ritter, director of the IPO initiative at the University of Florida. He is also known as Mr. IPO. Jay, welcome to the show. It's great to have you here. Good morning. So I have to ask you, are you wearing blue and orange for New York Knicks colors like I am? No, I'm actually rooting for San Antonio. I always root against the New York team, but the University of Florida colors are orange and blue.

2:16Okay. All right. Well, I'll take it. I'll take it on this exciting morning here um okay so we've got this ipo tomorrow the big question everyone's wondering how do you think it trades how do you think it'll trade tomorrow it's not guaranteed to go up but it's very likely to uh on average uh 75 percent of ipos jump on the first day of trading but this has a higher probability than normal. The word is that institutional investors have oversubscribed it by a factor of four, retail investors by a factor of at least three. For institutional investors, it's not at all unusual to have demand exceed supply by a factor of four.

3:08But what's unusual here is I think a lot of the demand is true demand rather than asking for 100 ,000 shares when you really only want 20 ,000 shares. In particular, it's been reported that a few big institutional holders, I would guess State Street Global and some others, are going to be allocated as many as$10 billion worth of shares. and I'm sure they didn't ask for$40 billion worth. Now, so when you say true demand, I mean, help us understand this, is the idea that people often place orders that are much larger than what they expect or even in some cases can afford to pay? Is that typically how it works?

3:54Exactly. That very frequently institutional investors ask for a lot more shares than they expect to get. And also, there's a question, are they going to be buyers or renters? That is, are they going to be buy and hold investors or are they going to quickly sell the stock, flip it? If they flip the stock, there has to be some other buyer to buy what's being sold. And so what do you think the answer to that question is in terms of whether or not these institutional investors are buyers or renters? What's your sense there? Well, I think some of these really big allocations are indeed to buy and hold investors like State Street Global.

4:43But also because of the early index inclusion with Nasdaq's QQQ, among others, I think that some of the institutions' hedge funds that might otherwise flip on the first day are not going to be flipping on the first day. They're going to wait 5, 15 days until some of the indices add the stock to the index. And there'll be suppliers on the day that some of the index investors are buying. So I expect, well, there's going to be a lot of trading activity tomorrow, as is typical with an IPO. So there won't be as much flipping by hedge funds as normal unless the stock jumps a lot. We have sort of a split decision on the acceleration of the inclusion into the indexes.

5:43You've got NASDAQ saying we will, S &P saying we're not going to take that approach. What do you think the right answer is in terms of whether or not it should be accelerated to include in the indices? I think both NASDAQ and S &P made the right decisions. A lot of investors want SpaceX and later this year, Anthropic and OpenAI, if they go public on NASDAQ, to be included in QQQ. On the other hand, the S &P 500 has so much money indexed to it that I think it would have been a mistake for S &P to add it too early. So you're saying NASDAQ made the right decision just in terms of them wanting to get the listing basically?

6:37Is that what you're saying? The company probably would have gone with NASDAQ anyway. But in ballpark numbers, roughly 30 times as much money is indexed to the S &P 500 as to QQQ. So, you know, having a large but in comparison modest index added, I think is perfectly okay. But with S &P 500, although they would have been adding it with a float weight rather than the total market cap, still so much money is indexed there that that boost in demand might result in some temporary price dislocations if they had done it right away. Right. Now, tech stocks are down this week. How much of that do you think is investors making room in their portfolios for SpaceX?

7:40Probably a little bit. In that, with some retail investors freeing up money in their personal accounts so that they can buy SpaceX stock, resulted in the main sellers. But I think for a lot of big institutions, the bigger issue has been have the valuations on a lot of the tech stocks risen so fast and so far that there's a bit of a bubble going on. You mentioned the retail allocations here and the retail traders. I wonder what impact you think these seem – it feels like retail allocations are increasing for IPOs. You probably have more data on whether or not that's the case. But just anecdotally, I mean, it feels like this is something that more companies consider.

8:38What structural impact do you think that would have on IPOs going forward? Well, I think this is going to be pretty much a one-off thing that for almost all IPOs, 95 % or so gets allocated to institutional investors. And of the retail allocation, a lot of it goes to the private wealth management accounts of the main underwriters. So mom-and-pop retail investors don't get many shares, if any. And I think that's probably going to continue. I think SpaceX with the Elon Musk factor is a bit of an exception where Tesla has an unusually large proportion of retail investors. And I think that's one of the reasons that SpaceX decided that they want a big retail allocation here.

9:37For other IPOs, I don't think that factor is going to come into play as much. You know, Jay, you've studied IPOs for so long. Can you recall an IPO that was as close a referendum to one person and one leader as this one ever before? No. Now, when Facebook went public in 2012, Mark Zuckerberg was already well known, but that was one company. And tens of millions of people had Facebook accounts, so it had incredible retail name recognition. That was an IPO that had a very big retail allocation, about 25%. But that Facebook retail allocation was a bit different in that the company did not intend to have such a big retail allocation.

10:42But when institutional demand turned out to be a little bit disappointing, the underwriters decided to give more shares to retail investors than otherwise would have been the case. Here, it's the company that wanted the big retail allocation up front. And indeed, there have been some press reports this week that the institutional demand is so strong that the retail allocation actually might get cut a bit. and that that sort of connects to another question i wanted to ask you about which is retail allocation we sort of conflate that with these the online sentiment right i mean we've seen these these reddit forums sort of capture the mood uh certainly on on twitter as well you know there is there's a question in my mind to what extent online sentiment actually drives stock movements and to what extent the retail allocation can actually move markets.

11:48I mean, for smaller companies, it can happen, right? But I wonder, have you studied any data to the impact of this and whether or not it's overestimated or underestimated? I haven't studied this directly, But I think with meme stocks like the AMC and GameStop, their Reddit retail demand was moving the price around unrelated to fundamentals. Here, SpaceX is not a meme stock, and Tesla is not a meme stock. There might be some retail investors that are influenced by Reddit threads, but I don't think it's the main thing driving the retail demand here. Right. And it strikes me that, again, if the company is so big, I mean, you can call it a meme stock, but the larger the company is, I mean, the more movement you would need by the meme stock traders to actually sway a difference in the stock price.

13:07And so perhaps that's one point that you're hitting on here. Jay, I want to ask you broadly, just you've studied IPOs for so long. What trends are you seeing in tech IPOs broadly over the past three years? And what are you expecting to come? Well, OpenAI and Anthropic and Google's Gemini and some other AI, large language models, are definitely a threat to a lot of software companies. So what we've been seeing is weakness, both in venture capital markets and in public markets, for a lot of software companies. So this is something where everybody agrees AI is disruptive. It is the next big thing.

14:00But while AI-related companies are benefiting from this enthusiasm, it's actually harming the business models of some other tech companies. And consequently, we're not seeing an enormous surge in tech IPOs or other IPOs across the board. If we go back 46 years ago, 1980, oil prices went up a lot. Oil stocks did very well. The oil and energy sector got to be 30 % of the S &P 500 in terms of market cap. That sector was really booming while other industries weren't booming in terms of IPO activity. And I think we're seeing the same thing now, that some other industries, some other verticals aren't benefiting, but there's definitely a huge investor enthusiasm for AI-related companies.

15:12What do you think people aren't paying enough attention to as it relates to the OpenAI and Anthropic IPOs coming down the pipeline? Well, with all three of the mega IPOs, these are great companies. But great companies don't necessarily mean they're going to be great investments on a point-forward basis. All three of these companies are going public at very high valuations. valuations, whether we're talking about a trillion dollars or more, or just their price to sales ratios. When companies are going public, such as SpaceX, at a price to sales ratio of over 90, the company has to grow its revenue enormously and become immensely profitable in the future to justify this high valuation today.

16:09It could happen. There's a reason that private and public markets are giving these companies such high valuations, but a lot of things have to go right for the company to have its revenue and especially its profits grow to the enormous levels that are needed to justify a 1.8 trillion valuation. Now, you mentioned the private markets. We have talked on this show about how lucrative the private markets have been and how willing they have been to fund some of these companies and keep them private longer. Do you see that balance tipping at all back to maybe what we saw five, six years ago? We saw a lot of companies go public.

16:57If they're going public, it means they're staying private for shorter periods of time. Do you see that balance flipping at all in the years to come where companies need to start to go public again to access the amount of capital they need? Not really. There's so much money that has flowed into venture capital. And for later stage companies, mutual funds, sovereign wealth funds, others are willing to finance the companies. American capital markets, both public markets and private markets are amazing in the ability and willingness to finance companies with a promising future, whether they're currently profitable or not.

17:42And this is where the tech business is different than other industries, for the restaurant business. If you're not making money now, when are you going to? But certain verticals in the tech space have demonstrated that a company can dominate a market either due to network effects where it's winner take all or because of huge upfront costs and huge economies of scale. where there's not going to be competition leveling the profit margins. And so the company can potentially earn enormous profits in the future without competition eroding them. NVIDIA, Microsoft, Alphabet, others have demonstrated this.

18:39And this just has not happened in other industries. This is why the venture capitalists have been willing to finance money-losing tech companies with a potential bright future. The capital expenditures for the hyperscalers are enormous, and they're not having any trouble at all coming up with the money. You're saying because of the opportunity to become one of the sole winners is so great that that's the risk that people are willing to take in the private markets. Right. That unlike other industries where there aren't barriers to entry, you've got competition that keeps the profit margins in the future from being big.

19:32But training a large language model is incredibly expensive. You know, sending huge rockets into space, catching the booster on the way down to lower costs is incredibly complicated. Right. And so on that note, Jay, last question for you. Do you think that the moonshot ambitions, quite literally, of SpaceX and its IPO, do you think that will usher in a new wave of moonshot IPOs? Is it a one-off, as you suggested earlier, or will we see a lot more companies trying to go public with plans to not generate any cash flow for the next 5, 10 years, however long it takes to get orbital data centers into space?

20:24Well, the biotech industry has a business model where it takes a long time to develop a new drug. Private markets and public markets are perfectly willing to finance startup biotech companies that have no prospect of earning revenue from a new drug for five or ten years into the future. With tech, there's a limited number of niches where this is going on, where the potential ability to earn enormous profits can justify huge expenditures now. Right. Well, that's a good point. And, you know, certainly biotech is an industry where that model, where you go public before even having a product or any revenue at all, I mean, that's been a common story.

21:21And so in some cases, despite SpaceX being the biggest IPO ever, it's at least a timeline that might be familiar to some investors. Jay, I want to thank you so much for coming on. It was a wonderful conversation. That is Jay Ritter, director of the IPO initiative at the University of Florida and Mr. IPO here on TITV. As companies continue to test Anthropics' Claude Fable 5, some people are choosing not to jump at the model as quickly. Microsoft is one of the biggest names in that latter camp. My colleague Aaron Holmes covered that decision in detail in today's AI Agenda newsletter. I want to bring him on to share with us what he knows.

22:03Aaron, welcome back to the show. It's great to have you here. Happy to be here. Why isn't Microsoft jumping at Claude Fable 5 the way everyone else is? Well, it's not just Microsoft. I've heard that a number of customers are holding off on using Fable, especially for mission-critical tasks. And that's because Anthropic has this kind of unusual clause in the usage agreements with Fable where they say, you know, we, Anthropic, will hold on to all of the traffic that you put into this model for 30 days. And Anthropic says that's a necessary step in order to keep track of how people are using the model and specifically to make sure that nobody is using it for illegal or malicious purposes.

22:45At the same time, that's giving a lot of customers pause because, you know, typically, especially companies like Microsoft or companies that are in regulated industries have their own strict policies about, you know, where data that they're using internally is going and how it's being stored. and there's currently a good deal of confusion around exactly what Anthropic's policy would mean for those customers. And so the idea here is basically if any kind of malicious attack does happen, Anthropic can go back to that data that it's sitting on within a third day period and sort of do a bit of an autopsy, I guess, on what happened, you know, study it essentially.

23:28Right, and yeah, Fable is like essentially a neutered version of Mythos, which, you know, as we know, is this model that is supposed to be incredibly good at hacking and basically doing cyber attacks. And right now, Mythos is only available to a select number of testers, whereas Fable is widely available. And, you know, from Anthropic's perspective, they've put a lot of guardrails onto Fable to stop it from being used for such attacks. But, you know, it's safe to assume that some hackers are still going to try to use it for malicious ends. So Anthropic basically wants to be able to make sure that that isn't happening.

24:03And if it is to be able to have, you know, some receipts in the form of this 30 day of traffic data. And is Anthropic storing this data on a cloud service like Azure or AWS? So it's very complicated. Essentially, you know, in most cases, Anthropic previously, you know, would let customers have of this zero data retention option, which means like any data that you're feeding into their models on a cloud like Amazon or Google is not leaving your environment and they're not storing it anywhere else. It's a little bit different for Microsoft Azure. Anthropic has always said that customers of Azure do have to agree that their data might leave Azure.

24:44And I think that's mostly just because Anthropic is newer on Azure and they haven't used as much of Azure servers to run their models. However, now with this new policy, Amazon actually warns customers that if you're using Fable specifically, this data that's saved within the 30-day window is not guaranteed to stay in the same region or in the same security guardrails that you've already configured for your other AWS usage. And that can be a problem because there are laws, especially Europe's GDPR, that say you can't move European customers' data out of Europe. And so if a company is dealing with customers in Europe and trying to use Fable for any tasks involving those customers, they now have to go and figure out whether doing so would run afoul of those laws.

25:32So it really is very complicated. And the companies I've spoken to are trying to figure out exactly what it means before they start using this model. Right. And I guess what I'm hearing from you is basically they are using AWS, but AWS cannot guarantee that the data that's being stored in that 30-day window, they can't guarantee that it's stored the same way that customers may have initially hoped for type of thing. That's right. And essentially, you know, the way that these policies are worded say that, you know, by using this model, you're basically agreeing that this data is going to be stored by Anthropic under Anthropics terms.

26:12and I think that's somewhat unusual in the world of cloud services. Typically, the client is the one who gets to decide exactly how their data is being stored or used, not the vendor, which I think is why there's now some move to pause on using this model. So this hesitation to use Fable because of the retention policy, you talked about Microsoft and a couple other customers at the start. How widespread is it? You know, I think it's mostly concentrated in companies that have to comply with a lot of laws and regulations. We've heard that, you know, some of the big legal AI companies are hesitant to use it because there are, you know, laws around attorney-client privilege, and they want to be able to guarantee that any, you know, usage of their products, if they're using anthropic models, don't run afoul of those.

27:05There's also, you know, people in the medical industry who have to deal with privacy laws. At the same time, I have heard from some folks, specifically at, you know, tech companies who are just using this for writing code or, you know, similar kind of coding tasks who told me that they are not too worried about this. And, you know, anytime you're using a third party vendor, there's going to be some amount of trusting that vendor and how they store data and that the benefits of using Fable outweigh those potential concerns. So I don't think that this is a universal hesitation. That latter camp, are they in the camp that are sort of saying that, hey, Fable is so good that we are willing to kick aside any kind of retention policy issues?

27:46Yeah, essentially, I mean, from what I've heard, people are just starting to test it out. But Fable is seemingly a step function better at coding tasks. I mean, we've heard yesterday on the show they said it's really good. Yeah, it is. I mean, on the benchmarks, it definitely outperforms Opus significantly. And we have to kind of wait and see exactly what the consensus is around that. But early data shows that Fable is an extremely capable model. Where do you think this story ends up? Do the people that you talk to, do they believe that Anthropic may reduce the data retention window? I don't even know if they would bring it to zero, but maybe 10 days is a more willing characteristic.

28:32Do they think that's going to happen, or do they think that customers will become okay with the 30-day retention? How does this sort of still may end up playing out? My prediction is that, you know, especially for the biggest customers like Microsoft, for example, I think Anthropic will be able to work something out. And, you know, essentially, if not show customers exactly how and where the data is being stored, you know, be able to make assurances that will assuage some of these early concerns. But I think that'll be a little harder for, you know, the long tail of midsize customers who don't get the white glove treatment.

29:05And, you know, I think it's really going to come down to whether the legal departments at these customers decide that whatever communication they're getting from Anthropic is enough to put these concerns to rest or not. Right. Aaron, before we let you go, I want to ask you quickly about some news you reported yesterday on Xbox. What did you find out about the current state of that company or that division within Microsoft, I guess I should say? Yeah, so Xbox is in a bit of a financial tough spot, and they are now planning significant layoffs and also cost cutting in other areas. And they actually said publicly yesterday, CEO Asha Sharma said that Xbox's margins have been compressed by rising costs of hardware as well as increased spending on game development.

29:52And she said that their profit margins have shrunk to around 3%, which means they're barely eking out a profit as of the fiscal year that's ending this month. And so, you know, essentially what Sharma told staff and also said publicly is that this can't continue. Revenue has been falling. Costs have been rising. We need to right the ship. And so we're expecting to see layoffs and other cost cutting as part of that. Did you get any indication as to whether or not AI is playing a role here in terms of those rising costs, maybe even rising hardware costs? Maybe there's more advanced chips that are being used in the consoles.

30:31I mean, that's a way that AI could affect it, not in the way that we've seen at other companies, which is that AI is doing the job of the workers. Was AI at all in the conversation here? Yeah, Sharma didn't really mention AI specifically, but we have seen sort of across the entire world of gaming hardware, computing hardware, server hardware, that, you know, memory is getting more expensive across the board. And so are obviously graphics processing units, which originally were kind of invented for video games and now are used widely for AI. So that's definitely contributing to this kind of hardware, you know, crunch.

31:09And I think we're also seeing some of that be impacted by just like the broader geopolitical situation. At the same time, you know, one thing that Asha Sharma did say last week is that she thinks AI can in some ways help save costs when it comes to game development. And, you know, she said that there are new ways to use AI to improve graphics in games and maybe cut down on development costs. So she didn't really say that explicitly in the announcement yesterday about the dire financial position. but I think it's definitely part of the equation on both sides. You wrote a weekend big read for the information a couple months ago now, I think, on Asha Sharma.

31:49Just remind folks of what her overall ambition and approach to managing that unit is going to be. I think so far we've seen that her biggest priority is to sort of win back the trust of Xbox fans and also staff at Xbox. and it's kind of interesting because originally, you know, she came out the gate saying, my mandate here is not just to improve margins, I also want Xbox to be the best console on the market and to have the best games available and to, you know, reward the people who have been loyal to Xbox. And so I think what we're seeing this week is her slightly walking that back, but also kind of explaining publicly why cuts are necessary, you know, despite her early focus on just wanting to improve Xbox and not worry about margins.

32:36I think that the financial state they're in makes it clear that something has to give. Great. Well, Aaron, I want to thank you for coming on. That is Aaron Holmes, our Microsoft reporter here at The Information. Established software companies like Palantir are trying to capitalize on the growing frustration over the soaring costs of using AI tools from providers like OpenAI and Anthropic. I spoke with our AI reporter, Laura Bratton, on Palantir's pitch and how customers are reacting to it. Here is that conversation. Laura, welcome back to the show. It's great to have you here. Hey. Okay, Palantir CEO Alex Karp, he has some choice words, as usual, about how companies should and shouldn't be spending on AI.