Speaker 1: Zone Media. Hello on welcomes a better offline. I'm at Zeitron,
Speaker 1: and I'm nothing like Enron. Now. This is the second
Speaker 1: episode in the Nvidia Enron series. And to give you
Speaker 1: a recap, a few weeks ago a document from Nvidia
Speaker 1: leaked where the company denied that it was anything like
Speaker 1: Enron at all. But what was Enron? Now? Some of
Speaker 1: you might know this, some of you might not, but
Speaker 1: I think it's time to remind everyone what Enron was
Speaker 1: and what Enron did and why Enron was So I
Speaker 1: don't know if we should say special, but it sure
Speaker 1: was Enron. Now, the collapse of Enron wasn't just in retrospect,
Speaker 1: a large business that ultimately failed. If that's all it was,
Speaker 1: it wouldn't come on the same space in our heads
Speaker 1: as other failures like WorldCom or Nortel, which I'll actually
Speaker 1: get to later talked about WorldCom line episode, both of
Speaker 1: whom were similarly considered giants in their fields. By the way,
Speaker 1: it's also not just about the fact that Enron failed
Speaker 1: because had proven business and accounting fraud. World comm entered
Speaker 1: bankruptcy due to similar circumstances, though, rather than being liquidated,
Speaker 1: and this is kind of a mind fuck, so forgive me.
Speaker 1: It was the quietest part of Verizon's acquisition of MCI,
Speaker 1: the name of a company that had previously merged with WorldCom,
Speaker 1: that WorldCom renamed itself to after bankruptcy. This era sucked,
Speaker 1: and unlike Enron, WorldCom isn't the subject of multiple films
Speaker 1: and even a Broadway production. And my editor saw the
Speaker 1: UK tour of that and apparently it was pretty good,
Speaker 1: you asked Matt Hughes, if you want to know more.
Speaker 1: And it's also not the size of Enron that made
Speaker 1: its downfall so intriguing, nor, for that matter, is it
Speaker 1: the fact that Enron did a lot of legally and
Speaker 1: ethically dubious stuff to bring about its downfall. No, what
Speaker 1: makes Enron special is the sheer gravity of its fuckery,
Speaker 1: the rotten culture at the heart of the company that
Speaker 1: encouraged said malfeasance, and the creative ways Enron's leaders crafted
Speaker 1: an image of success around what was at its heart
Speaker 1: a big, fat dog of a company. Enron was born
Speaker 1: in nineteen eighty five out on the foundations of two older,
Speaker 1: much less interesting businesses. The first, Houston Natural Gas HG,
Speaker 1: started life as a utility provider bumping natural gas from
Speaker 1: the oil fields of Texas to customers throughout the region,
Speaker 1: before later exiting the industry to focus on other opportunities.
Speaker 1: The other Inter North, was based in Omaha, Nebraska, and
Speaker 1: was in the same business pipelines. In the mid nineteen eighties,
Speaker 1: H ANDNG was the subject of a hostile takeoff from
Speaker 1: Coastal Corporation, which until two thousand and one operated a
Speaker 1: chain of refineries and gas stations throughout much of the
Speaker 1: US mainland. Unable to fend it off by itself, h
Speaker 1: ANDNG merged with inter North, with the combined corporation renamed Enron.
Speaker 1: The CEO of this new entity was called Ken Lay,
Speaker 1: an economist by trade who spent most of his career
Speaker 1: in the energy sector, who also enjoyed deep political connections
Speaker 1: with the Bush family. He co chaired George H. W.
Speaker 1: Bush's failed nineteen ninety two re election campaign and allowed
Speaker 1: Enron's corporate jet to Ferry Bush Senior and Barbara Bush
Speaker 1: back and forth. To Washington Center for Public Integrity director
Speaker 1: Charles Lewis said that there was and I quote no
Speaker 1: company in America closer to George W. Bush than Enron.
Speaker 1: George W. Bush, and I mean the second one even
Speaker 1: had a nickname for Lay Kenny Boy. Anyway, in nineteen
Speaker 1: eighty seven, Enron hired McKinsey, the world's most evil management
Speaker 1: consultancy firm, to help the company create a futures market
Speaker 1: for natural gas. Well that means isn't particularly important to
Speaker 1: the story, but essentially, a futures contract is where a
Speaker 1: company agrees to buy or sell an assair in the
Speaker 1: future at a fixed price. It's a way of hedging
Speaker 1: against risk, whether that be from something like price or
Speaker 1: currency fluctuations, or from default. If you're buying oil in dollars,
Speaker 1: for example, buying a futures contract for oil to be
Speaker 1: delivered in six months time at a predetermined price means
Speaker 1: that if your currency weakens against the dollar, your costs
Speaker 1: won't spiral. That bit isn't terribly important. What does matter
Speaker 1: is while working with McKinsey, Lay met someone named Jess Skilling,
Speaker 1: a young engineer turned consultant who impressed the company's CEO deeply,
Speaker 1: so much so that Ley decided to poach him from
Speaker 1: McKinsey in nineteen ninety and give him the role of
Speaker 1: chairman and CEO of Enron. Finance Group. Oh. By the way,
Speaker 1: Enron had a bunch of subsidiaries and some had their
Speaker 1: own CEOs and boards. I mentioned this because he may
Speaker 1: be a bit confused, as Lay was CEO of Nron
Speaker 1: and Skilling was CEO of Nron Finance Group. In essence,
Speaker 1: it's a bit like how Sam Altman is CEO of
Speaker 1: open Ai and Fijisimo as the CEO of Applications. That
Speaker 1: bit isn't important, but I just want to be as
Speaker 1: explicit as possible. I don't think open Ai is Enron either,
Speaker 1: at least I hope. Anyway, Skilling continued to impress Lay,
Speaker 1: who gave him greater and greater responsibility, eventually crowning him
Speaker 1: chief operating Officer of Enron itself. With Skilling in a
Speaker 1: key leadership position who was able to shape the organization's culture,
Speaker 1: He appreciated those who took risks, even if those risks,
Speaker 1: when viewed with impartialized were deemed reckless or even criminal.
Speaker 1: He introduced the practice of stack ranking, also known as
Speaker 1: rank and yank, to Enron, which had previously been pioneer
Speaker 1: by Jack Welcher General Electric. And you should listen to
Speaker 1: the shareholder supremacy from last year. If you want to
Speaker 1: hear what I think about that redacted guy here. Employees
Speaker 1: were graded on a scale, and those at the bottom
Speaker 1: of the scale were terminated. Managers had to place at
Speaker 1: least ten percent. Other reports stay closer to fifteen percent
Speaker 1: of employees in the lowest bracket, which created an almost
Speaker 1: Darwinian culture and a drive to succeed that matched him.
Speaker 1: Staffers were brutal hours, they cut corners, They did some
Speaker 1: really really dodgy shit. None of this bothered skilling in
Speaker 1: the slightest. Now you might be asking how dodgy ed well.
Speaker 1: In two thousand and two thousand and one, California suffered
Speaker 1: a series of electricity blackouts. This shouldn't have happened. California's
Speaker 1: total energy demand at the time was twenty eight gigawats
Speaker 1: and its production capacity was forty five gigawats. California also
Speaker 1: shares a transmission grid with other states and for what
Speaker 1: it's worth, the Canadian provinces of Alberta and British Columbia,
Speaker 1: as well as part of Baja California in Mexico, meaning
Speaker 1: that in the event of a shortage, it could simply
Speaker 1: draw capacity from elsewhere. There's plenty to go around. Did
Speaker 1: that happen? Well? Remember, Enron traded electricity like a commodity,
Speaker 1: and as a result, it was incentivized to get the
Speaker 1: highest possible price for that commodity, so it took power
Speaker 1: plants offline during peak hours and exported power to other
Speaker 1: states where there was real domestic demand. But how does
Speaker 1: a company like Enron shut down a power station? Simple,
Speaker 1: it just asked. In one taped phone conversation released after
Speaker 1: the company's collapse, an Enron employee called Bill called an
Speaker 1: official at a Las Vegas power company California shares the
Speaker 1: same grip with Nevada, and asked him to and I quote,
Speaker 1: get a little creative and come up with a reason
Speaker 1: to go down. Anything you want to do over there,
Speaker 1: any cleaning, anything like that. Very cool. The power crisis
Speaker 1: had dramatic consequences for the people of California, who faced
Speaker 1: power outages and price hikes, for Governor Gray Davis, who
Speaker 1: was recalled by voters and later replaced by Arnold Schwarzenegger,
Speaker 1: for PG and E, which entered Chapter eleven bankruptcy that year,
Speaker 1: and for Southern California Edison, which was pushed at the
Speaker 1: brink of bankkruptcies result. This kind of stuff could only
Speaker 1: happen in an organization whose culture actively rewarded being a
Speaker 1: fucking asshole. In fact, Skilling was seemingly determined to elevate
Speaker 1: the dodgiest of characters to the highest positions within the company,
Speaker 1: and few more more ethically dubious than Andy Fastau, who's
Speaker 1: Skilling mentored like a protege, and who would later become
Speaker 1: Enron's chief financial officer. And you gotta wonder how did
Speaker 1: the CFO hired by Jeff Skilling do well? Even before
Speaker 1: vaulting to the top of Enron's nasty little empire, fast
Speaker 1: I was able to shape its accounting practices, with the
Speaker 1: company adopting mark to market accounting practices in nineteen ninety one. Now,
Speaker 1: mark to market sounds complicated, but it's actually real simple.
Speaker 1: When listing assets on a balance sheet, you don't use
Speaker 1: the acquisition cost like how you paid for him, but
Speaker 1: rather the fair market value of an asset. So if
Speaker 1: I buy a baseball card for a dollar and I
Speaker 1: see that it's currently selling for ten bucks on eBay,
Speaker 1: I'd say that asset is worth ten bucks, not the
Speaker 1: dollar I paid for him, even though I haven't actually
Speaker 1: sold it yet, nor do I not if anyone's interested. Now,
Speaker 1: this sounds simple, maybe even reasonable, But the problem is
Speaker 1: that the way you determine the value of an asset matters,
Speaker 1: and marked to market accounting allows companies and individuals to
Speaker 1: exercise some what's the word creativity. Sure, for publicly traded companies,
Speaker 1: where the price of a share is verifiable and open knowledge,
Speaker 1: it's not too bad. But for assets with limited liquidity,
Speaker 1: limited buyers, or where the process to be engineered somehow,
Speaker 1: you have a lot of latitude for fraud. Now, let's
Speaker 1: go back to that baseball card example. How do you
Speaker 1: know it's actually worth ten bucks and not one dollar?
Speaker 1: What is the fair value of something you can't check
Speaker 1: on any babe, what somebody told me in person it's worth.
Speaker 1: What's to stop me from lying in saying that the
Speaker 1: card is worth a one hundred dollars or one thousand dollars, Well,
Speaker 1: other than the fact that I'd be committing fraud. Now,
Speaker 1: what if I have ten one dollar baseball cards and
Speaker 1: I give my friend ten dollars, and I tell him
Speaker 1: by one of my baseball cards using that ten dollar
Speaker 1: bill that I just handed him, and allows me to
Speaker 1: say that I've now realized a nine dollar profit on
Speaker 1: one of my one dollar baseball cards, and my other
Speaker 1: cards are now because I just did that worth ninety
Speaker 1: dollars and not nine dollars. Now, what if I use
Speaker 1: that valuation, that phone evaluation of my remaining cards to
Speaker 1: get a fifty dollar loan using those cards as collateral,
Speaker 1: even though the collateral itself isn't worth even one fifth
Speaker 1: of the value of the loan. You get the idea. Well,
Speaker 1: A lot of things people can do to alter the
Speaker 1: marked to market value of an asset ah illegal and
Speaker 1: would be covered under generic fraud laws. It doesn't change
Speaker 1: the fact that marked to market accounting allows for some
Speaker 1: shenanigans to take place. Another trait of marked to market accounting,
Speaker 1: as employed by Enron is that it would count all
Speaker 1: the long term potential revenue for a deal as quarterly revenue,
Speaker 1: even if that revenue would be delivered over the course
Speaker 1: of a decades long contra or if the contract would
Speaker 1: be terminated before its intended expiration DAME. It would also
Speaker 1: realize potential revenue as actual revenue even before money changed
Speaker 1: hands and when the conclusion of the deal wasn't a certainty.
Speaker 1: For example, in nineteen ninety nine, Enron sold a stake
Speaker 1: in four different electricity generating barges in Nigeria. They're basically
Speaker 1: floating power stations, sold and sold it to Merrill Lynch,
Speaker 1: which allowed the company to register twelve million dollars in profit.
Speaker 1: One little problem that sale didn't actually happen, though that
Speaker 1: didn't stop Enron from selling pieces to Meyal Lynch, which
Speaker 1: I'm not kidding. Merril Lynch then sold to a special
Speaker 1: purpose vehicle called LJM two. You'll never guess who owned that.
Speaker 1: It was controlled by Andrew Fastau. Yep, remember that guy.
Speaker 1: You're gonna hear that name again. Although the Meryl Lynch
Speaker 1: bankers who participated in the deal were eventually convicted of
Speaker 1: fraud and conspiracy charges long after the collapse of Enron.
Speaker 1: Of course, the convictions were later questioned on appeal, Thank
Speaker 1: you government, but still, for a moment, gave a jolt
Speaker 1: to Enron's quarterly earnings. Anyway, Enron was incredibly creative when
Speaker 1: it came to how it valued assets. Take, for example,
Speaker 1: fiber optic cables. As the dot com bubble swelled, Enron
Speaker 1: saw an opportunity and wanted to be able to trade
Speaker 1: and control the supply of bandwidth, just like it did
Speaker 1: with other more conventional commodities like oil and gas. It built, bought,
Speaker 1: and leased fiber optic cables throughout the country, and then,
Speaker 1: using exaggerated estimates of their value and potential long term revenue,
Speaker 1: released glowing financial reports that made the company look a
Speaker 1: lot more healthy and successful than it actually was. Whatever
Speaker 1: would be quick digression here. One of the funniest ironies
Speaker 1: of Enron is that it was in many ways ahead
Speaker 1: of its time, when most people were still connecting to
Speaker 1: the Internet through screeching fifty six K dial up modems.
Speaker 1: It saw a future in edge and cloud computing, even
Speaker 1: if said terms didn't exist at the time, and streaming
Speaker 1: video here's a funny one. In two thousand, it entered
Speaker 1: into a twenty year deal with Blockbuster Video to allow
Speaker 1: customers to stream films and TV shows through Enron's fiber network,
Speaker 1: something that would take at Netflix and other decade to
Speaker 1: realize as a product now. There wasn't really much of
Speaker 1: a market for at the time because broadbam was pretty
Speaker 1: rare back then, nor was it necessarily technologically possible. But
Speaker 1: it was such a fun idea. People really liked it.
Speaker 1: It was a good idea. Everyone wanted it to happen.
Speaker 1: Not really though, Anyway. The deal collapsed after a year,
Speaker 1: but that didn't stop Enron's creative accountants from booking the
Speaker 1: deal based on its projective future revenue as a profitable
Speaker 1: venture mark to market accounting. Baby, you gotta love it.
Speaker 1: We love it, don't we, folks? All right, I'll stop
Speaker 1: doing the impression. Still, it's hilarious to think about a
Speaker 1: future world in which Blockbuster and Enron stuck it out
Speaker 1: and the former didn't collapse. Around the time of the
Speaker 1: global financial crisis, Enron also loved making special purpose vehicles
Speaker 1: that existed either to generate revenue that didn't exist or
Speaker 1: to hold toxic assets that would otherwise need to be disclosed,
Speaker 1: with Enron then using its holdings insid entities to boost
Speaker 1: its balance sheet. One White Wing was created and capitalized
Speaker 1: by Enron hand an outside investor, and pretty much exclusively
Speaker 1: bought assets from Enron, which allowed the company to recognized
Speaker 1: sales and profits on its balance sheets even when they
Speaker 1: were fundamentally contrived. Another set of entities known as LJM,
Speaker 1: named after the first initial of Andy Fasthou's wife and
Speaker 1: two children, which I mentioned earlier, did the same thing,
Speaker 1: allowing the company to hide risky or failing investments, to
Speaker 1: limit its perceived debt, and to generate artificial profits and revenues.
Speaker 1: LJM two was creatively the second version of this idea.
Speaker 1: Even though the assets that LJM held were ultimately dog shared,
Speaker 1: the distance that LJM provided, combined with Enron's use of
Speaker 1: marked to market accounting, allowed the company to turn a
Speaker 1: multi billion collective failure into a resounding and on paper
Speaker 1: profitable triumph. So how did this happen? How did it
Speaker 1: go on for so long? Well? First, Enron was that
Speaker 1: it is peak worth seventy billion dollars. Its fail would
Speaker 1: be a failure for its investors in shareholders and nobody
Speaker 1: besides the press that is wanted to ask tough questions
Speaker 1: remember when they did that. Anyway, he had auditors, but
Speaker 1: they were paid handsomely, turning a blind eye to the
Speaker 1: criminal malfeasans at the heart of Enron to Arthur Anderson
Speaker 1: surrendered its license in two thousand and two, bringing an
Speaker 1: end to the company and resulting in eighty five thousand
Speaker 1: employees losing their jobs. Well, look, it's not so much.
Speaker 1: It only turned a blind eye as much as it
Speaker 1: turned on a big paper shredder treading tons. And I'm
Speaker 1: actually being literal. That's a measure of weight and not
Speaker 1: figuratively of documents as Enron started to implode, a crime
Speaker 1: for which it was later convicted of obstruction of justice.
Speaker 1: But I've already talked about Enron's culture. But I'd be
Speaker 1: remiss if I didn't mention that Enron's highest performers and
Speaker 1: its leadership received hefty bonuses in company equity, motivating them
Speaker 1: to keep the charade going. Mron's pension scheme I had
Speaker 1: was basically entirely Enron stock, and employees were regularly encouraged
Speaker 1: to buy more, with Kenneth Lay telling employees weeks before
Speaker 1: the company's collapse that and I quote the company is
Speaker 1: fundamentally sound and that they should hang on to their stock.
Speaker 1: VIDID did use the word fundamentally. They used that, but
Speaker 1: it's not in videos, not Enron. It's not. It's really different.
Speaker 1: They're not doing this. I swear to God, I just
Speaker 1: don't love the language anyway. Additionally, by the terms of
Speaker 1: the Enron pension plan, employees were prevented from shifting their
Speaker 1: holdings into other pension funds or other investments until they
Speaker 1: turned fifty. When the company collapsed, those people lost everything,
Speaker 1: even those who didn't know about Enron's criminality. George Maddock's,
Speaker 1: a retired former Enron employee, had his entire retirement tied
Speaker 1: up in fourteen thousand Enron shares, worth at the time
Speaker 1: more than one point three million dollars. He was forced
Speaker 1: to spend his golden years making ends meet by bowing
Speaker 1: pastures and living in a run down East Texas farmhouse.
Speaker 1: The US government brought criminal charges against Enron's top leadership.
Speaker 1: Ken Lay was convicted of four counts of fraud and
Speaker 1: making false statements, but died on a skiing vacation to
Speaker 1: Aspen before sentencing. May he burn in Hell? Maybe Ronald
Speaker 1: Reagan and him could get in the hot tub together,
Speaker 1: the hot tub scot lava in him not feeling particularly
Speaker 1: creative on that one anyway. Jeff Skilling was convicted of
Speaker 1: twenty four n fraud and conspiracy and sentenced to twenty
Speaker 1: four years in jail. This was of course reduced in
Speaker 1: twenty thirteen on appeal to fourteen years, and he was
Speaker 1: released to a half way house in twenty eighteen and
Speaker 1: then freed in twenty nineteen. He's since then tried to
Speaker 1: re enter the energy sector with one venture combining energy
Speaker 1: trading and I kid you not blockchain technology, although nothing
Speaker 1: really came of him. I want to take this moment
Speaker 1: to give a big shout out to Quartz, which, when
Speaker 1: covering Skillings attempt to come back, had this opening line
Speaker 1: and I quote Jeffrey Skilling, those are a thing or
Speaker 1: two of our blocks and chains. Woo get his ass.
Speaker 1: Andy Fastau pled guilty to two counts, one of manipulation
Speaker 1: of financial statements and one of self dealing, and received
Speaker 1: ten years in prison. This was has ever later reduced
Speaker 1: to six years, including two years of probation, in part
Speaker 1: Becsey cooperated with the investigations against other Enron executives. He's
Speaker 1: now a public speaker and a tech investor in a
Speaker 1: company and AI company called Keene Corp. His wife, Leah,
Speaker 1: who also worked at en On, received twelve months for
Speaker 1: conspiracy to commit wire fraud and money laundering and for
Speaker 1: submitting false tax returns. She was released from custody in
Speaker 1: two thousand and five. Enron's implosion was entirely self inflicted
Speaker 1: and horrifyingly painfully criminal. Yet it had plenty of collateral
Speaker 1: damage to the US economy, to those companies that lent
Speaker 1: him money, to its employees who lost their jobs and
Speaker 1: their life savings and their retirements, and to those employees
Speaker 1: that the companies most intangled with Enron, like those that
Speaker 1: ausering firm Arthur Anderson. This isn't unique among corporate failures.
Speaker 1: WelCom had some dodgy accounting practices. Nortel too. Both companies failed,
Speaker 1: Both companies wrecked the lives of their employees, and these
Speaker 1: failures had systemic economic consequences, especially in Canada, where Nortel
Speaker 1: had its peak accounted for one third of the market
Speaker 1: cap of all companies in the Toronto Stock Exchange. The
Speaker 1: reason why Enron remains captured in our imagination and why
Speaker 1: Nvidia is so vociferously opposed to being compared to him,
Speaker 1: is the extent to which Enron and manipulated reality to
Speaker 1: appear stronger and more successful than it was, and how
Speaker 1: long it was able to get away with him. We
Speaker 1: may have forgotten the memory of Enron. It happened over
Speaker 1: two decades ago. After all, we haven't forgotten the instincts
Speaker 1: that it gave us. It's why on those is twitch
Speaker 1: when we see special purpose vehicles being used to buy GPUs,
Speaker 1: and while we gag when we see mark to market accounting.
Speaker 1: It's entirely possible. I genuinely believe this, that everything in
Speaker 1: Video is doing is above board. Really it's great. Doesn't
Speaker 1: do anything to help the deep pit of dread in
Speaker 1: my stomach, though. Now let's remind ourselves of watching video
Speaker 1: Is It's a company that previously focused on gaming or
Speaker 1: into GPUs graphics processing units, but thanks to a stroke
Speaker 1: of forethought, managed to be the company that sells the
Speaker 1: shovels for the current AI bubble. It's data center. GPUs
Speaker 1: are expensive. They all rely on a technology that in
Speaker 1: Video created two decades ago called Kuda, which no other
Speaker 1: competitor has an alternative to, or at least one with
Speaker 1: the maturity and depth and functionality, and no other company
Speaker 1: shares its focus on this arena, at least not one
Speaker 1: with its history. These gps are expensive, and thanks to
Speaker 1: Nvidia's near monopoly status, it's seen its share price growth
Speaker 1: by over three hundred and fifty percent at the time
Speaker 1: of writing in the past five years. It's now the
Speaker 1: most valuable company in the world by market capitalization, and
Speaker 1: it's insanely, insanely profitable. If you're looking at this through
Speaker 1: the cold, unthinking lens of late stage capitalism, this all
Speaker 1: sounds really good. I've basically described a company that has
Speaker 1: an essential monopoly and the one thing required for a
Speaker 1: high growth if we're talking exclusively about capex spending industry
Speaker 1: to ever exist. Moreover, that monopoly is all but assured
Speaker 1: thanks to Invidia's Kuda mote, its first move for advantage,
Speaker 1: and its actual capacities and capabilities of the products itself,
Speaker 1: on top of the massive shipping and hardware operation at Bill,
Speaker 1: thereby allowing the company to charge a pretty penny to
Speaker 1: its customers. And those customers, well, if we've temporarily forget
Speaker 1: about the likes of Nebuus and Core, we even how
Speaker 1: I wish I could forget about Core, we've permanently we're
Speaker 1: talking about the biggest companies on the planet, ones that
Speaker 1: surely will have no problems paying their bills. But my
Speaker 1: worry is a little simpler and more direct, because I'm
Speaker 1: worried about the certainty that these purchases are being made
Speaker 1: for the right or most prudent of reasons. Back in
Speaker 1: February twenty twenty three, I put out the rot economy
Speaker 1: and how everything in tech has become oriented around growth
Speaker 1: at all cost, even if it meant making products harder
Speaker 1: to use as a means of increasing user engagement or
Speaker 1: funneling them towards more profitable parts of an app. Back
Speaker 1: in June twenty twenty four, I wrote and did an
Speaker 1: episode about the rock Com bubble and my greater theory
Speaker 1: that the tech industry has run out of hypergrowth ideas.
Speaker 1: In simple terms, big Tech, Amazon, Google, Microsoft, and Meta,
Speaker 1: but also a number of other companies no longer have
Speaker 1: a next big thing and jumped on AI out of
Speaker 1: an abundance of desperation. Shit. Look at Oracle. This company's
Speaker 1: start off by selling databases and ERP systems to big
Speaker 1: companies and then trapping said companies by making it really
Speaker 1: really difficult to migrate to cheaper and better solutions, and
Speaker 1: then bleeding said companies with ownerous licensing terms, including some
Speaker 1: where you're paid by the number of CPU cours that
Speaker 1: you use the application. Fucking Oracle. It doesn't do anything
Speaker 1: new or exciting or impressive, and even with when presented
Speaker 1: with the opportunity to do things that are useful or
Speaker 1: in innovative, like when it bought some microsystems, it turns away.
Speaker 1: I imagine that deep down Oracle recognizes that its current
Speaker 1: model just isn't viable long term, and so it needed
Speaker 1: something else. When you haven't thought about innovation, ever, it's
Speaker 1: kind of hard to start, and thus generative AI probably
Speaker 1: seemed like a godsend to Larry Ellison, who founded Oracle
Speaker 1: and despite not being CEO, still creeps around the building
Speaker 1: like the Grinch. I'll get to Oracle in a bit.
Speaker 1: But we also live in an era where nobody knows
Speaker 1: what big tech CEOs actually do other than make nearly
Speaker 1: one hundred million dollars a year, meaning that somebody like
Speaker 1: Satching the Dell can get called a thoughtful leader with
Speaker 1: striking humility for pushing co pilot AI up every asshole
Speaker 1: in Microsoft's product experience, even notepad a place that no
Speaker 1: human being would want it and accelerating capital expenditures and
Speaker 1: twenty eight billion dollars across the entirety of fiscal year
Speaker 1: twenty twenty three to thirty four point nine billion dollars
Speaker 1: in its last quarter in simpler terms, spending money makes
Speaker 1: the CEO look busy, and at a time when there
Speaker 1: were no other potential growth avenues left, AI was a
Speaker 1: convenient way to make everybody look busy. Every department can
Speaker 1: have an AI strategy, and every useless fucking manager and
Speaker 1: executive can yell a service. Now CEO Bill McDermott did
Speaker 1: back in twenty twenty two. Let me make it clear
Speaker 1: to everybody here, everything you do AIAIAIAI AI. That's a
Speaker 1: real goddamn quote. I should also add that chat GPT
Speaker 1: was the first real meaningful hit that the American tech
Speaker 1: industry has produced in a long long time, the last
Speaker 1: being if I'm honest, Uber, and that's if we allow
Speaker 1: successful yet not particularly good businesses into the pile. I
Speaker 1: guess you could say Instagram Stories, but that was ripped
Speaker 1: off from TikTok. No sorry, Snapchat Christ they nicked reels
Speaker 1: from TikTok. I hate this fucking industry. Now. Look, if
Speaker 1: we're assholes about it and we insist on things like
Speaker 1: profitability and sustainability, US tech hasn't done so great. Snowflake
Speaker 1: runs at a loss, Snap runs at a loss, and
Speaker 1: while Uber's turned things around, somewhat. It hardly created the
Speaker 1: next cloud computing or smartphone industry. Putting aside finances, the
Speaker 1: last major hit was probably Vemo or zell and maybe
Speaker 1: if I'm feeling generous, smart speakers like Amazon Echo or
Speaker 1: Apple home Pod, but those I think, I think Echo
Speaker 1: and Alexa has lost Amazon billions much like Uber. None
Speaker 1: of these were the next big thing, which would be
Speaker 1: fine except big tech needs more growth forever right now,
Speaker 1: you pig. To be clear, I'm not saying there's been
Speaker 1: no innovation, just nothing at the scale of smartphones and
Speaker 1: cloud computing. This is why Google, Amazon, and Meta all
Speaker 1: do twenty different things, although rarely for any length of time,
Speaker 1: with these things often having a shelf life shorter than
Speaker 1: strawberries left on your counter. Because the rot economy's growth
Speaker 1: at all costs mindset exists only to please the markets
Speaker 1: and the market's demand growth. Chat GBT was different. Not
Speaker 1: only did it do something new, it also did it
Speaker 1: in a way that was relatively easy to get people
Speaker 1: to try and see the potential of. It was also
Speaker 1: really easy to convince people that would become something bigger
Speaker 1: and better, because that's what tech does. To quote Bender
Speaker 1: and Hannah Ai, is a marketing term, a squishy way
Speaker 1: of evoking futuristic visions of autonomous computers that could do
Speaker 1: anything and everything for us. And because both customers and
Speaker 1: analysts have been primed to believe in trust the tech industry,
Speaker 1: everybody believed that whatever chat GBT was would be the
Speaker 1: next big thing, and said next big thing was powered
Speaker 1: by large language models which required GPU sold by one
Speaker 1: goddamn company in video. AI became a very useful thing
Speaker 1: to do. If a company wanted to seem futuristic and
Speaker 1: attract investors, it could now integrate AI. If a hyperscaler
Speaker 1: wanted to seem enterprising and lae it was building the future,
Speaker 1: it could buy a bunch of GPUs or invest in
Speaker 1: its own silicone, as Google, Microsoft, Amazon and Meta have done,
Speaker 1: though Meta to only some extent, and of course shove
Speaker 1: AI in every imaginable crevice of an app. Investors could
Speaker 1: invest in AI companies, Retail investors, regular people could invest
Speaker 1: AAI stocks. Tech reporters could write about something new and
Speaker 1: do access journalism. Even harder LinkedIn perverts could write long
Speaker 1: screens about AI. The markets could become obsessed with AI,
Speaker 1: and yeah, you can kind of see how things got
Speaker 1: out of control. Everybody now had something to do, an
Speaker 1: excuse to do an AI thing, regardless of whether it
Speaker 1: made sense. Because everybody else was doing it, you didn't
Speaker 1: need to justify it anymore. Everybody was doing AI chat
Speaker 1: GPT quickly became one of the most popular websites on
Speaker 1: the Internet, all while open AI burned billions of dollars,
Speaker 1: and because the media effectively published every single thought that
Speaker 1: Sam Mortman had, such as that GPT four would automate
Speaker 1: away some jobs and create others, and that he was
Speaker 1: a little bit scared of him. AI as a tech
Speaker 1: knowlogy and an idea and a symbolic stock trope and
Speaker 1: a marketing tool and a myth became so powerful that
Speaker 1: it could do anything, replace anyone, be worth anything, even
Speaker 1: the future of your company. Amongst the hype, there was
Speaker 1: an assumption related to scaling laws, summarized well by Charlie Meyer,
Speaker 1: who was on the podcast a few months ago. You
Speaker 1: should go listen to his episode. In twenty twenty, one
Speaker 1: of the most important papers in the development of AI
Speaker 1: was published, Scaling Laws for Neural Language Models, which came
Speaker 1: from a group a OpenAI. The papers showed with just
Speaker 1: a few charts incredibly compelling evidence that increasing the size
Speaker 1: of large language models would increase their performance. This paper
Speaker 1: was a large driver in the creation of GPD three
Speaker 1: and today's L ANDM revolution, of course, the movements of
Speaker 1: trillions of dollars in the stock market. In simple terms,
Speaker 1: the paper suggested that shoving more training data and using
Speaker 1: more compute power would exponentially increase the ability of a
Speaker 1: model to do stuff. And to make a model that
Speaker 1: did more stuff, you needed more GPUs and more data centers.
Speaker 1: Did it matter that there was compelling evidence in twenty
Speaker 1: twenty two and god to say it, Gary Marcus was
Speaker 1: right that there were limits to galing laws and that
Speaker 1: they would hit the point of diminishing returns. Nah amidst
Speaker 1: all of this and video has sold over two hundred
Speaker 1: billion dollars of GPU since the beginning of twenty twenty three,
Speaker 1: becoming the largest company on the stock market and trading
Speaker 1: over one hundred and seventy dollars as of writing this sentence,
Speaker 1: only a few years after being worth less than twenty
Speaker 1: dollars a share. You see meta, Google, Amazon, Microsoft all
Speaker 1: wanted to be part of the future, so they sunk
Speaker 1: a lot of money into in video, making up forty
Speaker 1: two percent of its revenue in its fiscal year twenty
Speaker 1: twenty five. Though there are some arguments about how much
Speaker 1: exactly big text billowing capital expenditures are spent on GPUs.
Speaker 1: Some estimate somewhere between forty one percent and more than
Speaker 1: fifty percent of a data center's capex is spent on GPUs.
Speaker 1: If you're wondering what the payoff is, well, you're in
Speaker 1: good company. I estimate that there's only around sixty one
Speaker 1: billion dollars in total genera of AI revenue, and that
Speaker 1: includes every HYPERSCALA and neocloud. Large language models are limited,
Speaker 1: AI agents are a pipe dreene and simply do not work.
Speaker 1: AI powered products are unreliable, and coding l make developers slower,
Speaker 1: and the cost of influence the way in which a
Speaker 1: model produces its output keeps going up. The thing is,
Speaker 1: what comes up tends to have a habit of coming down.
Speaker 1: And I'm increasingly if the opinion that a return to
Speaker 1: a terror firmer is coming sooner rather than later. But
Speaker 1: that's for the next episode. Join me, then, thank you
Speaker 1: for listening to Better Offline, The editor and composer of
Speaker 1: the Better Offline theme song is Matasowski. You can check
Speaker 1: out more of his music and audio projects at Mattasowski
Speaker 1: dot com m A T T O. S O w
Speaker 1: Ski dot com. You can email me at easy at
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Speaker 1: I also really recommend you go to chat dot Where's
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Speaker 1: you so much for listening. Better Offline is a production
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