WEBVTT - Monologue: OpenAI Vs. Microsoft

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<v Speaker 1>A zone media greetums. I'm ed Zeitra and this is

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<v Speaker 1>your weekly better offline monologue. Earlier this week, a story

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<v Speaker 1>came out in The Wall Street Journal at tensions between

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<v Speaker 1>open ai and Microsoft are and I quote, reaching a

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<v Speaker 1>boiling point. Why well, let's give you some background. As

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<v Speaker 1>open ai tries to convert part of itself into a

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<v Speaker 1>for profit entity, all very annoying, but it would still

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<v Speaker 1>be controlled by the nonprofit board. It faces one big

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<v Speaker 1>obstacle it's deal with Microsoft. Back in twenty nineteen, Microsoft

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<v Speaker 1>invested a billion dollars into open ai, and as part

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<v Speaker 1>of that deal, OpenAI agreed to let Microsoft have full

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<v Speaker 1>access to rights to its pre agi intellectual property, which

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<v Speaker 1>means all of their intellectual property along with their research,

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<v Speaker 1>and the exclusive right to sell open AI's models to

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<v Speaker 1>their customers. Microsoft also, as a result of the deal,

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<v Speaker 1>owns forty nine percent of the future profits of open

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<v Speaker 1>ai and offers or offered It's unclear how these terms

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<v Speaker 1>are these days discounted rates on Azure four open ai,

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<v Speaker 1>Microsoft's cloud compute service, so open ai would pay less

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<v Speaker 1>than other customers to host their services. I should also

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<v Speaker 1>be clear that this deal means that Microsoft has almost

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<v Speaker 1>complete control over open AI's future, and without their blessing,

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<v Speaker 1>open ai cannot complete its conversion to a for profit entity.

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<v Speaker 1>In the event that that conversion fails, soft Bank is

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<v Speaker 1>able to pair the size of their investment in open

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<v Speaker 1>ai down to a mere twenty billion dollars according to

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<v Speaker 1>The Wall Street Journal, as opposed to the forty billion

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<v Speaker 1>dollars that open ai well needs. In simpler terms, open

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<v Speaker 1>ai has got ten billion dollars so far from SoftBank,

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<v Speaker 1>and if they don't become a for profit entity by

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<v Speaker 1>the end of twenty twenty five, they only get another

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<v Speaker 1>ten billion dollars rather than the thirty billion dollars that

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<v Speaker 1>they want, and will need to keep burning more money.

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<v Speaker 1>All very silly and actually existentially bad. I'm surprised people

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<v Speaker 1>aren't more freaked out about this. So open ai and

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<v Speaker 1>Microsoft are currently locked in negotiations, which I mean open

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<v Speaker 1>Ai is making arbitrary demands and Microsoft is saying no.

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<v Speaker 1>So as part of the conversation, according to the information,

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<v Speaker 1>open ai is asking for some very fucking stupid things

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<v Speaker 1>I'll list them. They want Microsoft to only have thirty

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<v Speaker 1>three percent of the new entity, as opposed to the

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<v Speaker 1>forty nine percent of profits they have already. They want

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<v Speaker 1>a lower Microsoft's revenue share, which is currently twenty percent

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<v Speaker 1>of open AI's revenue, to ten percent. Just they want that,

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<v Speaker 1>and they want to bar Microsoft from having access to

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<v Speaker 1>open AI's future intellectual property, in part due to open

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<v Speaker 1>AI's attempts to acquire coding startup Windsurf, which competes with

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<v Speaker 1>Microsoft's git hub copylom. What's funny is part of the

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<v Speaker 1>Information's story. They're like, yeah, Microsoft is said is part

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<v Speaker 1>of the current deal. They're totally fine with the acquisition.

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<v Speaker 1>What's really interesting as well is everyone reported the Windsurf deal,

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<v Speaker 1>which is about three billion dollars, is a done deal.

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<v Speaker 1>But at the time I was saying, hey, this hasn't

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<v Speaker 1>happened yet. It's been two months since people talked about it.

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<v Speaker 1>The Information says that Windsurfer said this deal was speculative.

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<v Speaker 1>Kind of weird, right, be cool if we had like

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<v Speaker 1>a kind of an analyst or a journalist who covered

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<v Speaker 1>tech and thought about it. Yeah. Anyway, you may be

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<v Speaker 1>wondering what it is that open ai is offering in

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<v Speaker 1>return for these concessions, and the answer is nothing. Understandably,

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<v Speaker 1>Microsoft is refusing to budge which has led to open

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<v Speaker 1>Ai considering making an outlandish antitrust complaint against them. It's

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<v Speaker 1>kind of like putting a gun to your own head

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<v Speaker 1>and threatening to release the hostages if your demands aren't met,

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<v Speaker 1>And if I'm honest, it's one of the most ridiculous

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<v Speaker 1>things I've seen a company do in the Valley. Later

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<v Speaker 1>in the week, the Information also report that open Ai

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<v Speaker 1>has been undercutting Microsoft and selling chat GPT to enterprise customers,

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<v Speaker 1>discounting chat GPT enterprise by ten to twenty percent for

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<v Speaker 1>customers buying additional products from open Ai, and that directly competes,

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<v Speaker 1>by the way, with Microsoft's Copylum. The Information also reports

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<v Speaker 1>that Microsoft has been losing deals to open Ai because

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<v Speaker 1>their finance side will only generally discount by five to

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<v Speaker 1>ten percent. They also add that the same has been

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<v Speaker 1>happening with enterprise deals over providing access to open AI's models,

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<v Speaker 1>which Microsoft also sells. This whole relationship is so goddamn stupid.

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<v Speaker 1>You've got two companies selling the same thing for some reason.

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<v Speaker 1>I don't even know why you'd buy from Microsoft. Doesn't

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<v Speaker 1>really make any sense to me other than and the

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<v Speaker 1>Information even says that companies like Fidelity buy it because

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<v Speaker 1>they're already buying crap from Microsoft. I just I think

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<v Speaker 1>about this and it makes me slightly annoyed because it's like,

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<v Speaker 1>this is not real business. Why would you have both

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<v Speaker 1>companies selling the same thing. And it's just because everyone

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<v Speaker 1>wants a monopoly these days. But it's all bad business.

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<v Speaker 1>They all lose money. It's all very silly. But another

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<v Speaker 1>tidbit from the information story is that and I quote

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<v Speaker 1>open aiyes, pricing power may not be as strong with

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<v Speaker 1>enterprises as it is with customers. This is a huge

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<v Speaker 1>deal because it means that open AI's future is tied

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<v Speaker 1>to the idea that they can sell and I shit

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<v Speaker 1>you not. These are their alleged projections over one hundred

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<v Speaker 1>billion dollars a year in subscription to consumers by twenty

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<v Speaker 1>twenty nine. I want to give you some scale as

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<v Speaker 1>to how fucking stupid this is. In twenty twenty four, Spotify,

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<v Speaker 1>the most popular music streaming app, made just under sixteen

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<v Speaker 1>billion dollars in revenue from subscriptions, and Netflix, the most

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<v Speaker 1>popular streaming service, made around thirty nine billion dollars from

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<v Speaker 1>the same Are you telling me that chat GPT is

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<v Speaker 1>going to become more successful than two netflixes and two spotifies.

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<v Speaker 1>Are you fucking insane? Anyway? This whole situation is completely ridiculous.

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<v Speaker 1>Open Ai does not have any real leverage here, and

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<v Speaker 1>the only possible way that they can lean on Microsoft

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<v Speaker 1>is to try and make them look bad, which would

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<v Speaker 1>require open Ai to piss off their number one infrastructure

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<v Speaker 1>provider and their number one financial backer by arbitrarily threatening

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<v Speaker 1>an antitrust case an obviously to the press. As a

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<v Speaker 1>means of dragging down Microsoft. Open Ai is attempted to

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<v Speaker 1>put pressure on a company that holds all the cards.

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<v Speaker 1>You see, Sam Alman's real talent is that open ai

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<v Speaker 1>has no not really had to commit anything to build

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<v Speaker 1>their company. Microsoft provides them with the infrastructure. Microsoft funded

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<v Speaker 1>them along with venture capitalists, private equity firms, and SoftBank.

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<v Speaker 1>Oracle is covering all the costs of the GPUs going

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<v Speaker 1>into the Stargate data center project in Abilene, which is

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<v Speaker 1>funded by a private equity firm that pays Crusoe, an

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<v Speaker 1>unproven data center builder, who has also taken out seven

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<v Speaker 1>hundred and fifty million dollars in a line of credit

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<v Speaker 1>to get the data center built. More egregiously, the Stargate

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<v Speaker 1>entity which SoftBank will have full financial responsibility for has

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<v Speaker 1>not even been formed, and from reports it doesn't even

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<v Speaker 1>sound like open Ai has signed a contract to use it.

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<v Speaker 1>It's so silly. The other side of this, though, is

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<v Speaker 1>that having everybody else own all of the problems means

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<v Speaker 1>that open ai doesn't really own anything, making them dependent

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<v Speaker 1>on literally everybody. Any delays to stargate are out of

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<v Speaker 1>open ais hands, as are any issues with their infrastructure,

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<v Speaker 1>as are any issues with their funding, and when bartering

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<v Speaker 1>with other companies, has little to offer other than discounts

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<v Speaker 1>on the software that loses the money all the time.

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<v Speaker 1>Sam Mormon's play here is that Microsoft is somehow dazzled

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<v Speaker 1>by the glory that is open Ai and wouldn't want

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<v Speaker 1>to take the reputational hit of scorning Silicon Valley's favorite

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<v Speaker 1>company and their clammiest founder. Samy's only hope is that

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<v Speaker 1>Satchynadella likes him enough to make major concessions for no

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<v Speaker 1>apparent reason, something that seems increasingly unlikely as they send

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<v Speaker 1>passive aggressive leaks to different media outlets. I should also

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<v Speaker 1>add that Microsoft's legal team is two thousand people. Two thousand.

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<v Speaker 1>I'm not kidding that is the team that if they

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<v Speaker 1>did an anti trust complaint that would take years and

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<v Speaker 1>years and years and years. Cannot be clear enough how

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<v Speaker 1>long that would take. They would be going up against

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<v Speaker 1>a company that has already won an anti trust case

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<v Speaker 1>back in the nineties and the two thousands. I think

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<v Speaker 1>open ais like fifty lawyers. Maybe they probably have an

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<v Speaker 1>outside firm as well. How the fuck is that meant

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<v Speaker 1>to work? I've had people suggest, oh, they could bribe Trump. No,

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<v Speaker 1>they though they can't. And also to what end a bailout?

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<v Speaker 1>How much money OpenAI constantly burns cash. It's more likely

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<v Speaker 1>Microsoft absorbs them, and the outcome of this event will

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<v Speaker 1>determine the entire future of the ai bubble. Though there

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<v Speaker 1>is a decent chance that Microsoft degrees to some concessions

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<v Speaker 1>and they work it out as a means of continuing

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<v Speaker 1>their strangle hold on open Ai. There's also a chance

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<v Speaker 1>that they just let open ai diet. After all, they

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<v Speaker 1>own all the IP and the research, as well as

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<v Speaker 1>housing all their infrastructure. They could just rip the open

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<v Speaker 1>ai stick could put a Microsoft sticker on it. Open

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<v Speaker 1>ai sends the Microsoft CHATGPT, dot Com goes to copilot.

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<v Speaker 1>They probably do chat GPT, buy Copilot or buy Microsoft.

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<v Speaker 1>Pretty easy, right. I understand why people don't think that

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<v Speaker 1>can happen, just because it would be so big, but

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<v Speaker 1>all the rails are there for it to occur. All

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<v Speaker 1>very silly. I also think this pissy back and forth

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<v Speaker 1>is a helpful distraction from open AI's core problem that

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<v Speaker 1>they've yet to ship a meaningful new product in some time,

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<v Speaker 1>and their entire future is based on consumer subscriptions, which

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<v Speaker 1>will require them to create meaningful consumer products, a thing

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<v Speaker 1>they've failed to do. I can't wait to see how

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<v Speaker 1>this shakes out. I feel bad for Silicon Valley, but

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<v Speaker 1>this is tremendous content