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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the

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Speaker 1: Bloomberg Intelligence podcast. Catch us live weekdays at ten am

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Speaker 1: Eastern on Apple car Playing and broyd Otto with the

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Speaker 1: Bloomberg Business App. Listen on demand wherever you get your podcasts,

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Speaker 1: or watch us live on YouTube.

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Speaker 2: There's a story out there, and the headline doesn't help

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Speaker 2: me because I really don't know what's going on here.

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Speaker 2: Microsoft and Apple drop open AI board plans as scrutiny grows.

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Speaker 3: I thought we wanted the big.

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Speaker 2: Tech names to be supporting AI, and I don't know

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Speaker 2: what's going on here.

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Speaker 4: So it was like a freebe scene. Isn't it like

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Speaker 4: they're just watching?

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Speaker 3: Yeah, exactly, but they tell me it's important.

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Speaker 2: And Dina Bass, who's a really good technology she's been

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Speaker 2: a great technology reporter for i'm gonna say thirty plus years.

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Speaker 2: I was reading here stuff way before she came to Bloomberg.

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Speaker 2: All right, So I'm gonna self admit I don't know

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Speaker 2: what's going on here. So I said, please get me

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Speaker 2: in deep Seeing, because I'm just guessing he knows what's

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Speaker 2: going on man deep Seeing. He's a tech analyst apt

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Speaker 2: Bloomberg Intelligence, Microsoft and Apple drop plans to take board

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Speaker 2: roles at open Ai in a surprise decision that underscores

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Speaker 2: growing regulatory scrutiny a big text influence over artificial intelligence.

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Speaker 3: What's going on here?

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Speaker 5: Well, so, I mean if you roll back through last

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Speaker 5: year when we had the open ai drama, you know,

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Speaker 5: the board firing Sam Altman and then open Ai adding

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Speaker 5: four new members, and I think everyone so far has

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Speaker 5: been just sort of interested in how open ai has

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Speaker 5: evolved since then in the sense that they have even

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Speaker 5: though they have added independent board members. Microsoft, you know,

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Speaker 5: and now Apple probably would have joined the board. It

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Speaker 5: doesn't make sense like when you have vested interests. In

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Speaker 5: the case of Microsoft, they have a forty nine per

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Speaker 5: sense steak in open ai and they're the primary cloud

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Speaker 5: provider for open Ai. How can you do a good

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Speaker 5: job of being an independent board member. And that's where

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Speaker 5: you know, the regulatory scrutiny comes into play, because the

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Speaker 5: regulators obviously are concerned about how Microsoft bought Inflection Ai.

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Speaker 5: Even though it wasn't an acquisition, they got all the

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Speaker 5: employees of Inflection Ai. So that's when it comes down

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Speaker 5: to the optics of it.

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Speaker 4: Here, break down for me again, what the relationship is

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Speaker 4: now with open ai and Apple versus open ai and Microsoft.

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Speaker 5: So Microsoft has a forty nine percent stake in open Ai.

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Speaker 5: They made a ten billion dollar investment, and so you

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Speaker 5: could argue, if you're an investor in a company, you

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Speaker 5: should get a board seat as a Sequoia and some

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Speaker 5: other private investors that open Ai has. Apple, on the

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Speaker 5: other hand, just partnered with open ai, which is going

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Speaker 5: to be one of the providers of Genai model on

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Speaker 5: their iOS and other devices, and so it's more of

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Speaker 5: a customer supplier relationship if you want to call it

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Speaker 5: that way. That Apple is using open e as a supplier,

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Speaker 5: why were they getting a board seat, Well, you could

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Speaker 5: argue they could be an independent board member, like Fijisimo

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Speaker 5: is one of the board members for open Eyes. She's

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Speaker 5: the CEO of Instacart. Now, I think that's where the

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Speaker 5: fact that these technologies are so intertwined in terms of

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Speaker 5: AI being deployed on Apple devices, you could argue the

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Speaker 5: independence of the board comes into question, and given how

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Speaker 5: important AI ethics and guardrails and all the things that

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Speaker 5: regulators care about that everyone cares about. Frankly, I think

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Speaker 5: the independence of the board was questionable, and these companies

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Speaker 5: decided to proactively not you join the board, which I

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Speaker 5: think is good for optics.

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Speaker 2: So Microsoft is under scrutiny in Europe and by US

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Speaker 2: regulators into I guess their alleged dominance of AI. What's

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Speaker 2: the view on the street about that risk to Microsoft?

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Speaker 2: And I don't know because at some point maybe Apple

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Speaker 2: out of it, but certainly Microsoft.

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Speaker 5: I mean, the best way to look at it is

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Speaker 5: these companies require a lot of compute for training their models.

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Speaker 5: So whether it's open ai and Tropic, any of the

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Speaker 5: independent GENI model providers, they need a lot of compute. Now,

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Speaker 5: in the case of Microsoft, arrangement is really you know,

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Speaker 5: full of their interests Because OpenAI ends up using Microsoft

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Speaker 5: Compute for training their models.

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Speaker 3: What does that mean? What is compute?

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Speaker 5: So think of all the Nvidia GPUs that open ai needs,

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Speaker 5: but it's deployed on Microsoft Cloud. So if I need

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Speaker 5: compute to train the models, I'm not setting up my

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Speaker 5: data center and Tropic open Ai they're not setting up

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Speaker 5: data centers. They're using Microsoft Data centers to get access

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Speaker 5: to that compute. And that's where they could have gone

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Speaker 5: to Amazon or Google to get that compute. The reason

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Speaker 5: they're going to Microsoft is because of the you know,

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Speaker 5: the stake they have and the board seed. And so

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Speaker 5: if you are open ai and Microsoft is sitting in

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Speaker 5: that board, are you really going to pick any of

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Speaker 5: the alternative cloud providers for training your models? Probably not.

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Speaker 4: Do you feel like open ai will ever go public

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Speaker 4: or be bought by Microsoft? Like, how does that situation

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Speaker 4: play out?

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Speaker 5: I mean, everyone knows their antitrust concerns around Bigpeg buying

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Speaker 5: any of these companies, So the acquisition is definitely out

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Speaker 5: of the window. And that's why the way Microsoft got

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Speaker 5: all the employees of Inflection Ai, it was a pseudo acquisition.

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Speaker 5: You get all of the employees, you pay six hundred

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Speaker 5: million dollars, and you're not calling it an acquisition. So

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Speaker 5: in the case of OpenAI, obviously that's not gonna have happened.

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Speaker 5: But they Microsoft does have a forty nine percent stake.

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Speaker 5: Google bought DeepMind for six hundred million. Now they bought it,

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Speaker 5: you know, a few years back. But it just goes

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Speaker 5: to show how, you know, these companies positioned themselves for

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Speaker 5: the future and they end up buying a lot of

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Speaker 5: the startups. So I don't see an acquisition on the cards.

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Speaker 5: But my open AI is unique in the sense it's

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Speaker 5: a nonprofit and then they are looking to build a

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Speaker 5: business out of it. So their structure was sort of

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Speaker 5: very weird to begin with. And now they had that

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Speaker 5: board trouble where it was a three percent board that

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Speaker 5: fired their CEO. Now they are expanding with independent board members.

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Speaker 5: So I don't think they've got it right still, but

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Speaker 5: at least, you know, not having Microsoft and Apple on

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Speaker 5: the board is good in terms of optics. And that's

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Speaker 5: what I can conclude.

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Speaker 3: Here on surveillance.

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Speaker 2: Earlier today we had a London based headshunt which I

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Speaker 2: had never heard from heard of rougher like I about

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Speaker 2: thirty eight billion dollars in assets under under management.

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Speaker 3: They have a Parish call on the market.

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Speaker 2: They think so overheated, everything's overhead blah blah blah, and

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Speaker 2: that includes AI. Now they're saying they believe AI that

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Speaker 2: of course they've been wrong by their owned mission and

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Speaker 2: they've been trying their peers because the market's been going up.

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Speaker 2: But the AI call is simply that yeah, AI is transformed,

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Speaker 2: blah blah blah blah.

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Speaker 3: But we don't even.

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Speaker 2: Know what the uses are and we don't all the

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Speaker 2: money that's being invested in AI. Explain to me what

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Speaker 2: the return on investment is on that. How do you

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Speaker 2: answer that or deal with that?

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Speaker 5: I mean, we know some tangible use cases right now.

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Speaker 5: One is from a developer co pilot perspective AI works,

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Speaker 5: and this thing is getting deployed at every company. Developers

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Speaker 5: are using copilot, same thing with customer service chatbots. This

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Speaker 5: thing is productivity enhancing and this is getting deployed. So

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Speaker 5: I think it's hard to argue that there is no

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Speaker 5: tangible use case. But look, the valuations have run up

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Speaker 5: and there will be a disconnect at some point where

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Speaker 5: valuations are way ahead of reality. And that's where you

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Speaker 5: as an investor, you got to pick your spots. I mean,

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Speaker 5: a TSMC will continue to benefit, whether it's in VideA,

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Speaker 5: whether it's Apple or anyone else that needs the latest

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Speaker 5: chips for AI, they won't continue to benefit.

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Speaker 2: And I think I can kind of write the press

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Speaker 2: release from in Video or any company that's really been

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Speaker 2: lifted by AI. You know, it's almost kind of a

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Speaker 2: customer fatigue. They've already bought all this stuff, They've already

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Speaker 2: invested all this money.

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Speaker 3: Our customers have pulled.

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Speaker 2: Three to four years of capex forward and spent it

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Speaker 2: over the last twenty four months, and we're seeing instead

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Speaker 2: of going forty eight percent, we're gonna go with thirty percent.

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Speaker 2: That's a bad day, yeah, text and for the market,

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Speaker 2: I think, And it's.

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Speaker 5: Still going to be uniform. So some sectors will see

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Speaker 5: very tangible productivity benefit of AI, some others will have

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Speaker 5: a delayed benefit or maybe no benefit, and that's where

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Speaker 5: the disconnect will start to show up. But right now

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Speaker 5: we are in that you know mode where everyone believes

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Speaker 5: AI is the next big thing and it will have

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Speaker 5: productivity boots.

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Speaker 4: And then just one quick point on what Paul was

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Speaker 4: talking about too, just that the monetization part, Like you say,

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Speaker 4: the use cases are there, but then how you monetize it? Yeah,

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Speaker 4: Like we don't know what that really looks like yet,

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Speaker 4: Like everyone's gonna keep wanting in video chips. Okay, I

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Speaker 4: get that, But then what the use case is for that? Okay,

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Speaker 4: then you got to monetize it. And at some point

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Speaker 4: that's gonna have to be proven.

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Speaker 5: I mean, look at Cloud. So when Cloud came through

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Speaker 5: the scene, everyone said, Okay, it's a secular trend. But

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Speaker 5: the monetization came about over time, and there are certain

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Speaker 5: cloud native apps that really did very well as a business.

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Speaker 5: So that's where an AI native app I think it's

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Speaker 5: going to do exceedingly well. Whereas if you're changing a

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Speaker 5: business and you're overlaying AI, you may or may not

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Speaker 5: be successful, but we'll find out.

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Speaker 3: Good time to be a tech analyst, he's the best.

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Speaker 4: Yeah, I know, like you can ask the dumbest questions

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Speaker 4: and he's like right there for you. Yeah, I appreciate it.

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Speaker 3: It's amazing. Mandeep, thank you so much for joining us.

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Speaker 2: Man Deep seeing senior tech industryental from Bloomberg Intelligence coming

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Speaker 2: into the New York office on like his management team, So.

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Speaker 3: We appreciate that. Thank you, man Man Deep.

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Speaker 4: Cher J Powell. He is speaking of the House Financial

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Speaker 4: Services Committee. In his opening statement, we will bring you

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Speaker 4: the Q and A when that kicks off. Steve Matthews'

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Speaker 4: Bloomberg Federal Reserve reporter. He joins us, Now he's anything

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Speaker 4: we're going to hear different today than yesterday.

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Speaker 6: I think the plan is not to hear anything different.

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Speaker 6: I mean, Powell's plan yesterday was pretty clearly to try

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Speaker 6: not to make news. And he was asked repeatedly about

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Speaker 6: we're going to get a right cut in September and

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Speaker 6: or July or whenever, and he said, I'm not going

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Speaker 6: to give any guidance on rights. And I think he

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Speaker 6: was trying to be very balanced. In most of the

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Speaker 6: recent testimony, the semi annual Hemphrey Hawkins testimony, he has

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Speaker 6: tried not to make a lot of news because, you know,

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Speaker 6: and this is a particular political situation, it's right before

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Speaker 6: the election. He doesn't want to make a lot of news.

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Speaker 6: So I think that you're going to see the same

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Speaker 6: tone today, Alex.

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Speaker 3: One of the things I love about Bloomberg and Bloomberg News.

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Speaker 2: Is we actually have a dedicated reporter for the Federal Reserve.

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Speaker 3: How cool is that? Nobody else does that?

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Speaker 4: No, it's really cool.

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Speaker 3: Yeah, Steve, Yeah, you're the best. Steve, Thanks so much.

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Speaker 2: I want to ask you just mentioned the election help

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Speaker 2: us understand how the FED thinks about timing of any

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Speaker 2: rate movement and the election when when is too close?

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Speaker 4: Are you stealing John Tucker's question? He's totally stealing John

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Speaker 4: Tucker's question. Sorry, go ahead, Steve.

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Speaker 6: There is a theory out there among Fed watchers that

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Speaker 6: the FED would prefer not to move in September. It's

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Speaker 6: the last meeting before the election. If they move in September,

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Speaker 6: there will be complaints, Oh, you're doing it for political reasons.

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Speaker 6: What Powell has said about this is they don't think

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Speaker 6: about it at all. If September is the right time,

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Speaker 6: they will move in September, and you know it doesn't

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Speaker 6: enter their discussions or as an influence at all. So

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Speaker 6: you know, some people believe there is a little bit

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Speaker 6: higher bar to move in September. But you know, if

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Speaker 6: that's what the data says is the right time, that

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Speaker 6: they would go ahead and move.

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Speaker 4: I'm going to bring in what Joe Wisenthal was talking

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Speaker 4: about in his column today, saying that yesterday the headline

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Speaker 4: was Powell says that labor is not a source of

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Speaker 4: inflationary pressures now and his point was like, well, that's

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Speaker 4: kind of the game, right, Like if the FED no

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Speaker 4: longer sees the risks of that wage price spiral and

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Speaker 4: that inflation spiral from the labor market, which is what

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Speaker 4: the FED can control. If the FED looks at it

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Speaker 4: that way, that could set him up for a cut.

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Speaker 4: What do you think about that?

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Speaker 6: That's certainly true. I agree with Joe. Joe's a smart guy.

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Speaker 6: Over the last three years, Powell has basically said, it's

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Speaker 6: all about inflation. We have one sided risks. We want

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Speaker 6: to return to price stability. The labor market is fine.

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Speaker 6: Now he's saying there are two sided wrests. There's risks

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Speaker 6: on inflation, there's risks on the labor market. And that

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Speaker 6: does set up a rate cut. I mean, because you

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Speaker 6: know they don't want to see the labor market softened further.

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Speaker 2: Steve to make a rate change, either up or down.

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Speaker 2: Does it have to be unanimous or what does a

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Speaker 2: FED like to do?

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Speaker 6: Typically it doesn't have to be unanimous. Powell has kept

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Speaker 6: things unanimous for the last couple of years. But I

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Speaker 6: think you know, particularly in the political environment, he would

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Speaker 6: much prefer that there be unanimous vote. But there are

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Speaker 6: a couple of hawks on the committee, so that that

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Speaker 6: may be tough. To get. I mean, you probably will

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Speaker 6: get a dissent.

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Speaker 4: What do you think we're going to get tomorrow with inflation? Like,

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Speaker 4: what do you think the Fed? I mean JPL yesterday

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Speaker 4: definitely talked about how it's still going to be inflation

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Speaker 4: X services that core number, right, what do you think

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Speaker 4: we're going to learn?

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Speaker 6: I mean, all the estimates are that the CPI is

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Speaker 6: going to come in relatively low, and the Fed, you

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Speaker 6: have to remember, is focused on PCEE inflation. CPI goes

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Speaker 6: into it PPI, which comes out a little bit later.

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Speaker 6: We'll also go into that, and after PPI sometimes CPI

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Speaker 6: can be misleading. After PPI you'll get some estimates of

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Speaker 6: what they're their preferred measure of inflation is for the month.

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Speaker 6: And but the estimates are things are coming down. Housing

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Speaker 6: prices are coming down, and they know rents have been

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Speaker 6: coming down, and that's delayed in the official data.

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Speaker 2: Steve, the Fed had a you know, a knock certainly

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Speaker 2: that they were too late to raise rates here and

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Speaker 2: that they really missed the boat there. Does that influence

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Speaker 2: kind of they're thinking today or they just kind of

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Speaker 2: sloth that off.

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Speaker 6: It does influence their thinking in the respect that you

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Speaker 6: know they don't want to see a recurrence of inflation,

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Speaker 6: and if they're going to air on one side or

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Speaker 6: the other, they want to air on the side of

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Speaker 6: not seeing a recurrence. So they're afraid that if inflation

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Speaker 6: were to bark up again, that would be really problematic

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Speaker 6: for inflation expectations.

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Speaker 2: All right, Steve, thanks so much. We really appreciate Steve.

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Speaker 2: Matthews Feder reserve reporter for Bloomberg News.

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