Sharp Tech with Ben Thompson - Charter Wins and Does Disney a Favor, Charter and the Broadband Market, SMIC Gets the US Government’s Attention

Episode Date: September 12, 2023

The eleventh hour agreement between Charter and Disney, why Charter was the clear winner but Disney will benefit regardless, and what Charter’s investments say about the future of internet in America. At the end: Reactions to a breakthrough chip from Huawei and SMIC and its potential implications on US-China policy.

Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? The question is, how are you doing? I mean, we have heard on greatest of all the talk that you have been suffering a back injury. You are here. You look very rigid as you're sitting across from me on this video. Listen, how are you?

What I've learned in the last week or so is that posture is important. So I'm trying to put best practices into play for this podcast. And, you know, we'll see how it goes. We'll see how the back holds up. But yes, I'm doing much better than I was 48 hours ago, 72 hours ago. I was really down for the count. And now I feel like I'm on the upswing. I've done a lot of productive stretching in recent days.

So I'm ready to rock here. Oh, hey, well, let's do it. Okay. So we're starting with a couple news items. number one, we're going to be getting back to the regular schedule this week with a mailbag episode. That will be for subscribers only. So if you're not subscribed to Stratory, go to your show notes, get signed up now. And Ben, I look forward to a more traditional mailbag later in the week.

News item number two are most important news of the show. On last week's episode, I said there should be more books about the cable cowboy John Malone than there are books about Bob Eiger. And several listeners emailed in to let us know that there is, in fact, a book about John Malone. Ben, as you can see here, I'm holding it up for our little stream. Oh, I was, I was distracted by your grimacing as you twist the ground of the book. I do see a book in your I do see a book in your hand called Cable Cowboy. Cable Cowboy, John Malone and the rise of the modern cable TV business arrived this afternoon. I got through the introduction and chapter one, enjoying it thus far.

One night when you're sick, I'll come on here and do a solo pod. That'll be a book report on Cable Cowboy. So the audience can look forward to that. Unfortunately, that's not going to happen because I just don't get sick. My whole entire household has been super sick all week. Here I am, just powering through. Both sides of the podcast, powering through. That's what tonight is all about.

So news item number three, I will read from the Wall Street. Journal to get us started here. Charter has agreed to pay Disney higher rates to carry its TV channels in return for being able to provide the Disney Plus and ESPN Plus streaming services to its Spectrum pay TV subscribers, which was a big point of contention during the standoff. Specifically, the ad-supported version of Disney Plus will be included in Spectrum's TV Select video packages, which are among the cable operators most popular. The ad-supported ESPN Plus will be a available to charter customers who subscribe to a tier that includes other sports channels such as regional sports networks. In addition, when Disney releases its much anticipated

direct-to-consumer version of its ESPN cable channel, which is separate from ESPN Plus, charter pay TV customers will be able to get it as well. Quote, this deal sets the framework for what should be developed throughout the entire industry, said Charter Chief Executive Chris Winfrey in an interview. Winfrey added that Disney's willingness to meet Charter halfway gives the entertainment giant an opportunity to, quote, transform the video business model. Disney executives acknowledged that the agreement with Charter represented some concessions, but said they felt the new price terms the company got for its TV channels, as well as the boost to the deal is likely to give its streaming services reach and

advertising revenue, will make it worthwhile. So this was the compromise that always seemed like it made sense. It was the compromise that was highlighted by you when you wrote about all this a week ago. So as the dust settles, what do you think of the way this was resolved? Well, first off, I reject the word. I want to reject two things. A small thing that is directed at you and a broader thing that is directed at the media ecosystem broadly. Oh, boy.

Number one, I reject the word compromise. This is a complete charter victory in my estimate. And it's what we should expect, given the other point of what we were about last week, is that they actually have the leverage in this deal. That's number one. Number two, there's a lot of poo-pooing this agreement. Like, oh, yeah, this is what always happens. There's always in a dispute. And then they get together, thought it was going to be a big deal.

Oh, boy. I'm guilty of that, too. This knowing cynicism about the default response to stuff is so tiring. I mean, leaving aside the fact it's wrong. Number one, it's just not interesting. Like you, you're trying to sound smart. I actually understand what's going on. Number two, it's totally wrong.

This is a big deal. And it's a, I'm actually probably going to write another. It's always, I always hate writing about talking about writing stuff before I write it because I'm like admitted. But writing, I wrote an article a few years ago called the Great Unbundle. Actually, I have a debate. You can help me settle it. There's two titles I'm thinking about. Oh, wow.

And be tested. Live on Sharp Tech. Number one, I wrote an article a few years ago called The Great. the great unbundling, and so this can be the great re-bundling. Or number two, I wrote an article a year ago called Cable's Last Laugh, and I could call it Cable Lafts Last or something along those lines. I'm partial to number two. I feel like bundling, re-bundling, all that stuff is overused, whereas I like that you're

explicitly referring to last year's cable article, which aged horribly through the first six months or so. and now appears to have new life as, you know, companies like Charter Spectrum are well positioned to be the people who help re-bundle all these failed streaming services. Right. So let's go back to number one where it's not a compromise to Charter victory. That does not preclude this also being a win-win, which is exactly what I think this deal is. Charter won this negotiation because Disney was being stupid. And so Charter or Disney, with Charter's help, is now doing the right thing. So in that sense, it's a win-win.

Even if they lost the battle, Charter is helping them win the war because, as we talked about last week, they should be on the same side. So Cable's last laugh. And just for the record, that's why I was looking at this a week ago and saying this is probably where it's going because it would have been crazy for Disney to draw a line in the sand and say, absolutely not. we're going to forfeit a billion dollars in revenue or two billion dollars in revenue that we get from charter spectrum because we don't want to give away our ad supported streaming service, which we're already trying to grow anyways. Like it just was a weird battle to fight. And given the stakes, they had more to lose. That's right. They just need, this is all the right thing to do.

So basically what in Cable's last laugh, the big part in there was, I did talk a little bit about sort of their mobile phone business, which I kind of lifted from Craig Moffat at Moffin-Dathanson. I didn't realize the extent of the opportunity they had there. What happened was the cable companies for years ago bought all this spectrum, and then they sold it to Verizon in a sweetheart deal where they got carriage on Verizon's networks, and then they've been seeking to rebuild the bundle. And in some companies have been more aggressive than others.

Charter's been very aggressive in this regard. I actually tried to switch to Charter because I am a charter cable subscriber also. I could not do it because my third. phone wasn't suitable for their network and I, you know, whatever. There's complications involved still on T-Mobile, which again, still has the best international sort of plan or whatever. But neither here nor are there. But that wasn't the bigger point in the article.

The bigger point of the article was not just to talk about cable specifically, it was to talk about the fact that all these streaming services are hitting a wall. And this was like a year, you know, a year and a half ago or something like that. It's like they're going to run out of adding new subscribers and their big issue going forward is going to be churn. So they have two issues. Number one, they need to solve churn. And number two, they need to reach marginal customers.

The people who aren't aware of the services aren't going to go online and sign up. There's sort of people who aren't subscribed to cable, right? Like maybe they're older people, maybe they're less technically inclined, whatever it might be. And the cable companies were the best suited to solve this problem for two reasons. Number one, they have this huge go-to-market apparatus. They have been selling video for decades. They have salespeople that do it. They have stores that do it.

You can now, like, if you're trying to explain to Grandpa how to watch the game on a streaming service, wouldn't it be easier if you could direct him to an entity that has a massive cut, that half their workforce or more is customer support, right? That's part of their whole sort of thing. And it's in their interest to help because then they're using broadband. So number one, you have this huge go-to-market apparatus, which would help the streaming services. Number two, if you bundle the streaming services together, you get relief from the churn problem. It was clear a year and a half ago they couldn't spend their way out of churn. Like this was just going to be the problem with streaming.

You had to make new stuff every single month to keep people from turning away because canceling was too easy. But if all the services are all together, then they can pick each other up. When you're not watching one, you're watching the other. And you could also bundle it with regular TV. All videos should be one bundle. That is what makes sense for everyone. It's actually better for consumers from an ease of use perspective. they get a better price because when stuff's bundled, every individual component is cheaper than it would be individually.

And it's better for the distributors because they don't have to go it alone in this world of like, like they just all these fantasies of work. Our stuff is so special. We will get all the customers and they will stay close to us forever and they realize, no, actually they won't. They will cancel. Then they will sign up six months later and binge everything and then cancel and move forward. Yeah. I mean, that's how I use some of these streaming services.

So before we get too far down the road, in the immediate aftermath of your cable's last laugh article a year and a half ago, why did it look so dire for cable before we get to the comeback part? Well, I pretend I don't pay attention to stock prices, but all their stock prices weren't getting obliterated. And there was a lot of cord cutting, if I recall correctly, right? Right, but I mean, the cord cutting has accelerated, you know, has continued to accelerate dramatically, even more in the last year than it did,

than it had up to date. So that was number one. Number two, the threat to cable all along has been losing broadband subscribers, right? And losing it to, like, someone like you, go to fiber. Like, wow, this is actually way better. And I do want to get more into the broadband issue in a bit because I think there's some really interesting angles here to consider. So there was the broadband issue.

And then the, yeah, and so, like, they just weren't, they weren't doing well for sort of lots of different reasons. And, but it's been kind of interesting. interesting and gratifying a bit. There are times where structural analysis of an industry doesn't work out. And what I was kind of chalking that Cable's last laugh issue up to, I wasn't sure if that held up well, was I felt good about the prescription that these companies would be better if they were bundled together. They'd be better if they partner with the cable companies. But what I felt like I didn't properly evaluate was the human factor. The fact that they had to give up

on their dreams of being independent, of cutting out the intermediary. And the reality is, is that the story of streaming is all about irrational overconfidence in like your own capabilities. And it's like, well, maybe they just, they're not going to figure it out. And we talked about last week, they're just going to end up in the arms of tech. And I reflect, I'm like, you know, this is what happened to newspapers, what happened to all these other industries. They all tried to go it alone and it just wasn't doable.

And maybe they're not going to have it in them to come to the right. place. And this is where Charter did Disney a massive favor. Charter basically is forcing them into this bundle for all intents and purposes. And so now you're going to subscribe to Charter and you're going to get Disney plus the ad-supported version. And again, massive win for Disney. The ad-supported level in particular, you need more subscribers. The more subscribers you have, the more leverage you get on to your ad infrastructure, the better sort of it can work. And same thing with ESPN. And now you have a much clear path to ESPN going over the top because you're going to just move these customers over that are already ESPN subscribers and they can get it either through when you're sort of directly.

And that's good. That's a good thing for Disney and to have it all in one bundle where you're paying the same thing. And yes, like Disney's trying to say, oh, well, Charter wanted it for free and now they're going to pay a wholesale rate. Whatever. Those are pedantic details. That's like letting Disney feel good. It's all money moving around.

And also, don't forget, Charter's dropping like eight Disney. channels, right? We've talked about this before. The real value of ESPN for a very long time wasn't just the ESPN carriage fee. It was also that Disney forced you to carry all these crap channels that no one watched that were pure margin if you wanted ESPN. This carriage fee and this carriage fee and this carriage fee, much smaller carriage fees, but it adds up, you know, in the little Disney constellation there. Absolutely, absolutely. I mean, I was on Bill Simmons last week. He told this great sort of anecdote when he was at ESPN. He saw ESPN Classic sitting there, right?

ESPN Classic right in Bill Simmons Wheelhouse. And he presented like this whole new plan for ESPN Classic and these different rights they should get in old movies and really make it into a destination channel. And what was he told by ESPN? He's like, no, that's a no ship. We don't pay anything for content at ESPN Classic. All ESPN Classic was was a vehicle to collect more money for ESPN because you had to take ESPN Classic if you wanted ESPN. All those types, I don't know if remember if ESPN Classic is in the cut list, but there's like eight or nine channels that you've probably never heard of and never watched that were basically pure profit for Disney that they forced all the carriers to take.

And those are out. And so some of that money. So yeah, sure. So maybe that money is now going to go to Disney for the Disney plus ad supportive version. So Disney can pat themselves on the back and say, we didn't get completely obliterated here. but they did. And it was good for them. Again, like, that's the craziest thing. Disney completely lost this negotiation in my estimation and are arguably the biggest victors of this negotiation all at the same time. So you know that phrase sometimes God will do for you what you can't do for yourself? Is John Malone God? John Malone is God in this scenario. And Disney, you know what? You lucked out this time. And I wonder whether they

recognize that this should be like a concerted shift in the direction they're moving as a content company like Disney returning to its role as content maker instead of content distributor because some of what's happening here is like a cable operator is paying an increased carriage fee in exchange for customers getting free access to ad support at Disney Plus. And so when you step back, what, and to be clear, Charter is also going to be paying more for ESPN, the rates that that that that that's what I mean. Yeah. They're a buck 50 a month or something right, which is a lot of money.

They're paying an extra dollar 50 and then an extra wholesale fee, whatever that fee may be. But when you step back in this scenario, Disney Plus actually functions like a product that had a much bigger market 10 or 15 years ago, something called a cable channel that every customer is going to get as a result of, you know, an incremental increase in fees. and it's a more sensible model than Disney trying to sell this to people on its own. And I wonder whether Disney has sort of fully processed that epiphany or whether it'll take more time. But either way, like the outlines of what's happening here make a lot more sense than the streaming dreams that we've been watching crumble over the last four or five years. Yeah.

And to be clear, they're still in a worse place than they might have been otherwise. because they now have broken out all these products to be a la carte, and they've killed the bundle, right? The bundle is half the size that it used to be. And so ESPN will still go over the top because they need a way to reach to increase, reincrease sort of the base. But once you're selling directly and you're exposing your price directly to customers, right? This selling wholesale, yes, it's less money, but number one, you're insulated from it. Customers don't see what the price is so they don't have to recognize you directly. You don't have to do customer support.

You don't have to worry about churn. Like there are huge benefits that come from selling directly or from selling indirectly, I should say, that were much better for Disney. It would be better today if all these streaming services were only ever a part of the bundle. But now it's too late. Like they have to be independent. They already started as independent. And there was this misguided attempt to double dip. Like we can get money from the cable bundle and we can get money from our own service.

And the reality is you couldn't. And so they're being forced. back into either they will get subscribers that are a la carte to Disney Plus and are dipping in and out as they want, probably most non-sports fans in young people. And then they will also get money from the traditional bundle and sports fans that actually value having all those sort of channels. So they're going to end up in a better place than they were a week ago, but still a much worse place than they were five years ago or 10 years ago. It could have ended up at having gone in a different direction. You can imagine a different world where they still do things like. streaming services, they still get all the customer benefits of on-demand video and all those

sorts of things, but they only ever go through the cable companies such that it's always a part of the bundle. And then the bundle remains as strong as it ever was, and maybe Netflix is off to the side, but had all at all of Hollywood sort of like realized what they had and said, look, can we deliver the superior customer experience that comes from streaming, where you have all the library accessible, you can watch it anytime, you can binge, you can do all these sorts of things, but we're going to maintain the business model that we have, that would have been plausible. And then today, instead of having 50 million households or whatever it is with cable,

we would still be close to 100 million, I bet. If you were still paying that $100, $150, but you didn't just get cable, you also got Disney Plus. You also got HBO Max that included all these libraries. It would be a phenomenal customer proposition, and Netflix would be in much worse trouble, but instead they try to double dip. Like, like, it is, it's a, it's a morality tale or whatever. Like greed just like just sunk them here. And so they're recovering to a spot they, that is better than what they were headed

towards, but it's nowhere near the heights that they once were. Yeah, I mean, they had the sweetest deal in the entire entertainment business for about 30 years there. So it's hard to continue that trajectory in perpetuity. and particularly with streaming, the one aspect that we haven't really mentioned is how expensive it is to maintain these streaming services and generate that much more original content on a quarterly basis. And that's the piece of it. When people can churn every single month, it's one quick churn, right? It's one quick cancel. And so if we're talking about re bundling some of these failed streaming services, I wonder who is going to be the ones that, lower their prices as costs remain high and the economics as it is.

I mean, the reason there's more churn in recent years is because all the streaming services are twice as expensive as they used to be when they were trying to take market share. And now that people are actually trying to make money. Exactly. The content's getting worse and everything's getting more expensive. Not a recipe for retaining your customer base. This is what happened to the cable bundle, right? They all found themselves up a creek without a paddle.

Like it was, it was, I mean, this is, I mean, the cliche, this is a classic business case. It is one of the all-time classic business cases to watch Hollywood throw away one of the greatest business models of all time. Like, it is, I mean, how many cliches you go up with? It is killing the golden goose. Like that way, it is, I mean, it's incredible. And so this is a better recovery, like the, where we will end up in a spot where if you sign up with like charter or Comcast or whatever. it might be. And this will, it'll take time, but this will filter out to all the sort of the, number one, I expect this to filter out to all the cable companies via Disney. And then number two, I expect the streaming services to all come in under a Disney type model in the long run, where you will sign up for a cable company and you will get the ad supportive version of all these streaming services with your cable login. And the problem is it's probably going to be a fairly crappy, janky experience, because that's exactly what's happened for a long time, right? TV everywhere and that whole failure and all these sorts of things. And so, but whatever, it's going to. to be a better spot. And if you're, if you do the math, it's going to make sense to pay, I don't

know, 150 bucks, 200 bucks, whatever ends up being. And you'll basically get access to all video known to mankind, right? And there is a bit where it's going to be better for consumers because the experience is going to be better. You'll have access to these libraries on demand, all these sorts of pieces. But there's going to be a huge chunk of folks that don't do it, that just dip in and out, go back and forth, that are sort of, the sort of classic person that was paying for ESPN and never watched ESPN, that person is gone. And they're going to just surf in and out because these a la carte options are going to be out there.

And it's a big loss. And it's going to be lost forever. Well, and I'm very curious to see how it plays out because the model that you laid out in Cable's Last Laugh, which will link in the show notes for anybody who hasn't read the entire thing, it makes sense that if churn is the greatest, threat that a lot of these companies face. You bundle them together, sell it to people at a discount, and then people are less prone to cancel five streaming services at once because they like something on this month.

Yeah, exactly. Like it varies month by month, depending on what's on. But in order to make that work, you do have to give people a deal. And this is where I think some of the corporate personalities could get in the way of making the best deal and making this work for everybody because like Disney thinks they have the best content. Netflix thinks they have the best content. Paramount for whatever reason has been committed to this streaming idea for several years now. And so I will be very curious to see how that shakes out. To be fair to Paramount, they actually were first here. They have been doing

some bundling deals where you get the Paramount service with your cable bundle, which is the right place to be, but they were not big enough to meaningfully shift the industry, right? They're just sort of like drifting along and acting optimally, but there's a bit where it doesn't matter how optimal you act if you're not big enough to sort of affect the industry. Disney is the big Kahuna. So this is why it is more meaningful than sort of paramount broadly doing the right thing, but a whale matters more than a minnow. The other thing here is the other enabling factor for this is the increase in the advertising-based streaming. services and the realization that that's the actually the only true growth factor.

The benefits, as we've talked about with advertising-based streaming services, is you can increase your revenue endlessly without getting customer detrimental actions, right? If you're just charging a subscription price, the only way to increase revenue beyond adding subscribers, obviously, is increasing the price on subscribers, which drives churn, which makes it harder to acquire new customers. Subscribe subscription, direct subscription businesses are hard. If it's ads, though, the better your ads get, the better your targeting gets, the higher prices you can charge. And customers don't feel that, right?

Like, you want to get businesses where the cost pressure is indirect, right? Where customers don't feel it so that they stay there and it's easier to acquire customers. This is why everything ends up ad supported. Because it really is sort of the best business model. And so as far as like long term sustainability and growth is concerned. And so it makes sense. In Spectrum didn't ask for the full of subscriber one. And this does retain a bit of upside for Disney where, hey, they can double dip where if you want to subscribe this bundle, but you really don't like ads, then you can pay to subscribe directly to Disney Plus.

And so this isn't bad, actually. This is sort of a customer segmentation approach where they get to effectively charge more to their wealthiest subscribers who are willing to pay a premium to get rid of. ads. And oh, by the way, those wealthy subscribers are also probably subscribed to cable or some sort of package because, you know, whatever reason. Why not? They are not feeling the $150 a month anyway, right? And so there is a benefit here of having that separate from the bundle where you, you capture the largest majority, you avoid churn by offering a deal, your upside is provided by advertising. And then you can also skim off extra revenue from your more well-off subscribers who are willing to pay to have no ads. Right. And the broad direction toward ad supported being like the

majority of your business is a good, smart direction to be heading. I mean, it's consistent with themes we were hitting on multiple occasions this summer saying, look, eventually these ad-supported streamers are going to be like the central businesses for people like Netflix and people like Disney Plus. And they're also going to have to lower the prices in order to entice like a much bigger slice of the audience pie. And now, you know, cable cowboy has helped them do that. Right. Well, this is the magic of selling it at a wholesale rate.

The Disney Plus ad-supported tier is going to be perceived by customers as being free. So they're getting to free, which is exactly what we wanted them to do. But they're doing it without having to signal to the customer or to like cannibalize people who are subscribed directly. Again, this is the funny thing about it. This is why Charter won the deal, but it's the hugest victory for Disney possible. I've been writing for all summer, to your point, they need to get to free, they need to get to free, they need to get to free. Well, now they are too free and they're getting paid along the way.

It's a little bit of the old magic, right? The old bundle magic. Yeah, absolutely. And it speaks to the corporate dysfunction that they have to be dragged, kicking and screaming, and basically have the scare of their life put into them to get there. So is it corporate dysfunction or just understandable delusions of grandeur after the last 30 years of sort of dictating the terms of every deal they entered? A, a little bit of A, a little bit of B. I mean, again, I think that ESPN, and again, and I say this as I feel like I got a lot of the pieces of this, right?

If you go back to Cable's Last Laugh and some of the other pieces that I've written, all in the great I'm bundling, like all this sort of stuff, the outlines of all the factors were here. What I didn't write and what I think I didn't see coming and what Disney didn't see coming, even though it was there if you were, if you looked for it, was the fact that a cable company could take Disney to the mat like this and the way the leverage had flipped. It was just so stuck in everyone's mind that ESPN, ESPN is this sort of dominant position. And they didn't anymore. And that that was sort of the real wakeup call. And they did it in part because ESPN is now selling ESPN to all these internet TV services. and so you can get it in a bunch of different ways. They kind of already did go to the top.

Right. So I do want to get to the broadband bit here. Okay. There's a lot of pieces that go into this. So I've actually dived a lot into this recently because my service that lets me sort of consume my spectrum TV entails having a cable card. And, you know, people who are technically probably figure out in broad strokes what's happening as far as how I get the signal here. But fun game for the listeners after this cryptic message. No, no. Get channels.

So spectrum is stopping cable cards, which is, and so which is very sort of upsetting for me personally, but there's a good reason for that, which is they're on still, I think, doxis 3.1, I think. And cable cards, I think we're like actually 2.0. It's whatever, the technology that that actually organizes the signals that go over your cable wire. And the issue for cable companies generally is that all this video takes up a huge amount of bandwidth on that wire. And so they have a limited amount on that wire that they can deliver broadband over. And the old cable standards were very biased. Again, I might not get these facts and complete right, but broadly speaking, towards download speeds versus sort of upload speeds. And so they have limited frequency and they have these standards that are sort of backwards. Now, a couple of years ago, the FCC removed the requirement for cable providers to offer cable cards.

This was a, you know, I think a theoretically good idea where we're going to increase competition in like cable boxes and stuff. like that, so you can plug it into a TiVo, you can plug it into your own HDHR Prime, which I have, that that de-encrypts it, and then you can do with the signal what you want. And it is great if you're willing to do it. The problem is that it was too difficult. And actually, I think something like less than a million or some tiny number of cable cards were ever shipped in like 20 years. And this is actually a really interesting object lesson in these sort of nominally pro-competitive regulatory actions in markets that advance quickly often don't move the needle and actually restrict innovation.

In this case, the cable companies got cable boxes that were good enough for most subscribers. They had some sort of DVR capability. They paused. Were they as good as a TiVo? No, but they were good enough. And no one ended up getting cable cards. But they were stuck with these cable cards that were married to this old standard. I can't remember if it's 2.0 or 3.1 or whatever it is.

And so a couple years ago, they whifted it saying, like, look, this didn't work. It didn't increase competition. And this was a great example of even though it's hurting me personally, it's going to be very sad when my cable card. I can't get a new one now, but when it's when it's gone, what it's going to enable is a charter. Can I just say I'm laughing because I wonder what percentage of our audience even knows what a cable card is. That's how much higher of this particular technology. I know, definitely much higher than the average podcast. But continue.

What are the implications for the market writ large here? All right. So again, and I forget, I don't have the details in front of me as far as the different standards and stuff. So I'm sure reading an email saying I got X, Y, Z wrong. But the broad strokes is correct. So Charter in particular has been very aggressive about this. And so you can no longer get a new cable card from them. They were still grandfather and old ones, but they're very clear it's going away at some point.

And they've announced massive capital expenditure plans to move to Doxys 4.0. And a big part of this is it's a new way to formulate all the stuff that goes on your cable such that they can offer vastly superior internet speeds. And so you can get like five gigs now and one gig up. So they can basically be fiber competitive as far as their internet speeds go. And why? Because what actually matters to their business is broadband, as we've talked about. And the biggest threat to them, therefore, is what you went through. You switch to fiber because it's better.

It's better for podcasting. it's better for lots of other things. That's what they're most worried about losing. So they really need to sort of move up the ladder. And Charter is particularly sort of aggressive in this regard. One thing to note is, and I'm stealing this from Craig Mofford, wrote this in a note today, is this is another reason why losing video charter is probably more open to it.

Like on one hand, as we've talked about, if you don't. Yeah, more room. If you don't have video, if you habituate people to using things like YouTube TV, then the switching cost is decreased to switch from cable to fiber, right? Because you can use the same app, right? It's better to have stuff bundled together. That applies to Charter just as much it applies to Disney or anyone else. On the other hand, the only reason you would ever switch is because fiber is a better product as far as Internet speeds go.

And so there's a real pressure on them to get to better Internet speeds faster. And Charter in particular is announced massive capital expenditures to get there. but there was a bit where it's like, look, if we just dump video, we could get there a lot faster, right? Like, there's a lot of sort of stuff to be freed up here. You know, all this to say is that like, you know, I think I'm actually skipping ahead to an emailer, but it sort of prompted this who like criticized me using the word dump pipe. And it's a fair criticism. Like there is actually a lot of complexity and innovation that goes into this.

Now, it's a challenge as the phone carriers sort of learned relative to Apple, because whoever is on top and has the customer-facing product still gets to dictate, right? The iPhone comes out and Apple basically forces every phone carrier on Earth to spend billions and billions and billions of dollars to increase their network capacity to handle all this traffic that's coming. And Apple got it all for free because they basically set them off against each other as competitors. It wasn't until the iPhone went on AT&T. It used to always be you just stayed with their carrier.

You made your carrier choice first and then you got whatever phone was in the shop. For the first time when the iPhone was only on AT&T, people switched. They switched from Verizon. And Verizon refused for ages to agree to Apple's terms, and they had to come to the table begging in the long run because Apple had customer control and they were bleeding customers because of it. And this happened in Japan. Japan is probably the better example where NTC Docomo super innovative as far as phones.

They had like these crazy phones that did all this sort of stuff with their cell phone services is going back to like the 2000s or even the 1990s, and they refused the iPhone. What did Apple do? Made a deal of SoftBank. They came in and people started switching in droves from Entity Docomo to SoftBank because they wanted an iPhone. And entity Docomo had to bend the knee.

And this is like, there's so many interesting things here about the power of controlling the consumer being on sort of the front end. And the fact that when I say Dumb Pipe, it's not to dismiss the very real complexity and innovation that goes into providing any services, but it is dumb as far as the customer is concerned. Customers don't care. They don't care about this innovation that goes in. Charter has to make these investments because customers just care about getting

their faster internet speeds. They don't care about the complexity that goes into it. Well, and there's a ton of value in the distribution network that Charter has built out over the last several decades. And that was actually the note that Richard was trying to strike here. We could close off this segment with his email. Ben, I liked your point about how programmers and distributors have been in testing negotiations for decades, parentheses, building animosity in the process.

But I'm not sure it captures the full reason why programmers like Disney and ESPN might be missing the boat in this shift to streaming. I used to work for a programmer, a much smaller one than ESPN. And the other issue is that programmers don't respect the distributors. They think of them as dumb pipes who aren't nearly. as smart or cool as the programmers who are the true innovators creating all of this wonderful content. Note that this is not really true of ESPN anymore, which is just aggregating rights these days, but I guarantee you that's how they think of themselves.

This was never fair. It took real innovation to get those pipes to pivot from moving an analog signal to digital and then to full IP, and also absolutely mind-boggling large financial commitments. But even if they were dumb, it doesn't change their relative strategic position in the value chain. Also, Ben, I think you're right. Tech will eat the programmers for breakfast. I don't think they're going to be able to resist the siren song and recognize the danger until it is way too late. So good notes to end on there, Cables Last Laugh, you know, or Cable Laugh's Last Last is potentially the title for tomorrow. Yeah, I mean, again, everyone is in a diminished state, relatively speaking, right?

Obviously, why are like that said, I do think there, the fiber, the fiber buildouts, again, this is the challenge with capital with sort of, it's hard to forecast sort of capital investments because it's always easy to get the most attractive customers first, right? You like, you weigh some fiber in a metropolitan area, and for every dollar you spend, the number of customers you get is quite high. Once you start getting out to the suburbs, the economics change a lot. And you get to the experts, they change even more. And the reality is, is, you know, cable in part because it's just been sort of de facto thing, it was so profitable.

But also, remember, cable started in small towns. It worked its way into the cities in reverse because the whole point was to get the big city broadcast. And it is cheaper for cable to upgrade its capabilities that are already in the ground, already going to people's houses, than it is for fiber buildouts to sort of go and go actually to the end state. So I think there is a natural limit to the growth of fiber probably broadly, particularly if, you know, like charter, for example, like I have a place that's in a charter footprint. I don't have access to fiber, but I'm actually, I'm okay with losing my cable card if they move away from that standard. If the internet gets that much better. Well, it's not just that. It's like, I mean, being in Taiwan having access to US TV is obviously hugely important to me, being a big sports fan.

But I understand it and I appreciate that innovation is not free. It costs money. And to Richard's point, the amount of money these companies have spent and the wireless companies have spent is meaningful and does a lot. And it's kind of a bummer. You can understand why ATT is like, oh, let's go buy time order. Let's actually be cool for once when actually their business is kind of being a commodity and you feel sort of put upon because everyone does think of you as a dumb pipe. But this is like how customers are going to perceive Disney Plus as free. Is it free?

No, they're actually paying for it. But it is, but your mark, your power in the market is downstream from your perception, because your perception is downstream from like your position in the value chain. And the reality is from ESPN's perspective, yeah, they were dumb pipes. ESPN, they had the luxury of not caring about how much they spent on distributing bits. Just as Apple had the luxury of not caring how much the carrier spent to build out their network, right? They just sort of got a ride on top because they own the consumer demand. That's what happened to Disney too. Now, the challenge here, again, with Disney is because Apple is the only company that ever sold iPhones.

And so they maintained a monopoly of customers that want iPhones. So it's not a classic definition of monopoly, but it's in many respects the most powerful monopoly ever, right? People who are Apple customers are not going anywhere and they will change every other aspect of their life to make sure they get their Apple products. That's market power right there. ESPN used to be like that, but this is where things like YouTube TV and Fubo and in Hulu Live actually diminished ESPN's power because it introduced choice. And choice, again, great for consumers, bad for business. And people are wondering, why would Charter push people to this?

Again, number one, it was immaterial as far as, you know, or it was increasingly immaterial, the sort of video revenue. Number two, yes, they were making an easier path to switch to fiber. to switch whoever, but that's still a high degree of difficulty to actually change your internet service takes like a lot. But then number three, they had a customer support problem. That was the price of this debate. It's a lot easier to mollify very angry subscribers to say, look, no, no.

People aren't going to cancel if you say this is where you can get ESPN, let us help you. It's in their head is like, okay, Charter's not giving me my TV. I'm going to go to AT&T and they have a TV service and get Uverse, right? That's what Charter doesn't want. the number one priority was keeping people on their broadband. And the best way to do that is to even at the cost of long term sort of your bundle, it was worth it to recommend these sorts of other things. And in the end, it worked.

They got Disney on board and getting Disney on board means the rest of the industry is going to get on board. And all the kudos in the world to charter. And Disney ought to send them a thank you card. Yeah. Well, and to your point that everyone is worse off now than they were five to ten years ago, that was going to be true regardless of what happened. And the cable industry, we talk about perception. The perception was this hollowed out industry, these dead husks of companies. And Charter showed a little backbone here and now potentially has a path forward that makes a little bit more sense. Again, the rebuttling idea is great. I've loved it since you proposed it.

you know, a year and a half ago, I want to believe it is going to take a lot of willingness on the part of these massive streaming companies. They need to be willing to make a deal and offer customers a deal and work together. And we'll see whether that actually comes to fruition. Do you have any final thoughts? Yeah. By the way, I, you know, I deal with spectrum. And, you know, I've had very good customer service from spectrum.

I have to say. I know. You said that on the last episode and a couple people emailed in and were like, I had some good customer service with Spectrum also. I actually feel like, no, it's actually, I feel like COVID is one of the best things to happen to the cable companies because they have this thing. They said like every solution, every problem we have is send someone to your house. And like that did scale well. And it was a big problem to give you all there.

And so they had to really invest in just come to the store, get a box and we'll do everything remotely. Like we'll figure all that out. Good bedside manner. Right. Well, no, not just good bedside manner, but also just much more capabilities to solve problems and figure stuff out remotely, which was, you know, to stop like people having interact during COVID, but actually I think it made their product significantly better. So speaking of like external circumstances forcing you into sort of a better situation,

you know, basically all this we have to think COVID for. So there you go. Yeah, there you go. Well, I can't wait to check back in with the cable industry. And I look forward to reading your coverage later in the week. For now, though, we'll go to a story. about a new phone in China and the most advanced chip China has ever developed. Can I make one more point?

Please. I talk about like, oh, choice is bad for business, good for consumers, XYZ. We're going to end up in a much better spot for consumers where basically it's not productive for anyone to have the competition be at the sort of app layer to like, oh, you know, I'm going to try to. Because number one, it was just a jack price. It was the only way to sort of make money. and all the hassle of changing and canceling, there's a real cost that went with that. If we get to a scenario where the default is you get the bundle

and you get all these sort of streaming services for one low price, low in quotes. Number one, it reduces consumer complexity. Number two, you're getting a better deal. And number three, the locus of competition between a charter and an AT&T and a Verizon and Xfinity is about who could provide the best broadband. That's what we want, right?

Say what you, one of the benefits of Apple coming in with their monopoly of Apple lovers is they forced a drastic, dramatic increase in the quality and bandwidth capability of U.S. networks. And all these people around the side saying, oh, you know, talking about that competition was going to solve that. No, you need something that drives customers to care. Apple did more to increase the bandwidth and availability of wireless in the U.S. than any regulator ever could or ever did. And we're going to get that's where we're ending up in the long run with sort of video broadly. Is the only locus of competition for these carriers is who can spend the most money to provide the best service. Rod band is going to get really good.

That's actually, yeah. It is. And it's a huge win for consumers. And it didn't require, again, this ought to be. object lesson. The cable card is maybe the most elegant example of an obvious regulatory win. That's good. That's spur competition.

It ended up being a total failure. What spurs competition is having leverage on the consumer point that leaves infrastructure providers as the only means of competition is to spend money. And that's what happened in wireless. It was good for consumers and it was

going to happen sort of with wired. And yes, people are to come and say, oh, US wireless coverage is so bad. You think it's bad today. It was a million times worse previously. Again, and I am a wireless coverage connoisseur. I live in Taiwan where I get better signal in my elevator than I get on my porch in Wisconsin. I understand the challenges in the U.S. is a hard market. It's big. It's spread out. Like there's very, very low density. And the reality is things are much better today because of the iPhone than they were previously. And we're setting up a similar structure in video. And I think that's a good thing. There you go. Well, my favorite phrase that

coin throughout the course of this episode and the last episode was calling the cable companies greed conduits for these channels and studios. Disney just passing costs onto customers through the cable companies. And now maybe one day the cable companies are going to be passing along better deals on some of these streaming services and better broadband. A nice optimistic note to carry us to the rest of the week. But I mentioned a new phone in China and the most advanced chip China has ever developed. I'll read from Bloomberg.

Huawei and China's top chip maker have built an advanced 7 nanometer processor to power its latest smartphone. Assigned Beijing is making early progress in a nationwide push to circumvent U.S. efforts to contain its assent. Huawei's Mate 60 Pro is powered by a new

Kieran 9,000 S chip that was fabricated in China by semiconductor manufacturing international corporation. Love the hyper-literal name for Smick, according to a teardown of the handset that Tech Insights conducted for Bloomberg News. The processor is the first to utilize Smick's most advanced 7-nanometer technology and suggests the Chinese government is making some headway in attempts to build a domestic chip ecosystem. Much remains unknown about Smic and Huawei's progress, including whether they could make chips in volume or at reasonable cost, but the Mate 60 Silicon raises questions about the efficacy of a U.S.-led global campaign to prevent China's access to cutting-edge technology driven by fears it could be used to boost Chinese military capabilities. So Ben, you wrote about the new smic chip on Monday, and I'll let people go to Stratory to read the full update for some of the details and the distinctions between DUV lithography and EUV lithography. But in broad strokes, my takeaway from what you wrote is that this development doesn't mean that China is getting closer to making cutting edge chips and actually being at the leading edge. and it could actually be detrimental to China's efforts to catch up with the U.S.

because the success at 7 nanometers will trick leaders into thinking that they're closer to catching up with the U.S. than they actually are and redirect efforts that should be spent on mastering some of the legacy chips as they work their way up the chain. Is that a fair characterization of what we're talking about? Yeah, but it's hard to fully explain without getting into things like DUV and EUV. I mean, the big picture takeaway is that this is not a surprise. And I'm baffled by, like, oh, I know, I'm not baffled by the response. The response is actually instructive for getting to that second point. So, so let's park that for a moment.

Okay. Number one, Smick shipped a seven nanometer chip last year. It was, and it was a big deal in Washington then. Like, so this chip is more complicated. More importantly, it's larger, which means. they're getting better at managing yields because the larger a chip is, the more likely it's going to have a defect is just basically, it kind of makes sense if you think about it, but it's clearly true. This chip is probably six to seven times larger than the chip they

made last year, which is like a Bitcoin mining chip. But they've already, they've already shown they can make seven nanometer chips with a fact they're making new seven nanometer chips, number one is not a surprise. Number two, technically speaking, it also shouldn't be a surprise. Smick has a huge 28 nanometer operation, which is I think the first stage that uses DUV immersion. So deep ultraviolet light is a 193 nanometer light. It's focused through all these lenses. And then the final focusing is actually a thin layer of water that refracts it down

so they can make these sort of very, very thin lines. That's why it's called immersion. Before that, there's dry. So you can, it's very, everything is very descriptive, which is very helpful. So then to go to 14 nanometer, you have to do what's called double patterning. You have to, like, you can't get the white small enough, so you actually have to run the chip through twice, which means you have twice the opportunity to make a mistake. And actually more because you have this, you have to get it aligned so perfectly to sort of get it just right. To get down to seven nanometer, you have to do quad patterning.

You have to actually go over the chip four times. And your potential for error is increasing exponentially, not linearly. That's why it's really hard. In fact, it is so hard that Intel could not do it. This is why Intel hit a wall was they did not want to commit to EUV yet, which is extreme ultraviolet, which is like where you're shooting that like a drop-up chemical laser, 13.5 nanometer white. We're no longer exporting to China for purposes of chip making. Right.

And I mean, and DoV runs on Dutch equipment also. But this is also where the Japanese firms are competitive. Nikon is long been Intel's sort of main supplier, and they make immersion DUV. So you have, it's really, really hard. And now, Intel could make it. They just couldn't make it economically. They had too many errors. The yields were too low.

And when you're making chips where you're trying to churn out tons and tons of them on this equipment that costs hundreds of millions of dollars, you can't, your error rate has to be sufficiently low for it to be economically viable. Intel could not get their error rate low enough. Now, if Intel was pumped full of subsidies, they could have been selling 7 nanometer chips. And Intel kind of 10 nanometers like the equivalent of these 7 nanometer chips. They could have been doing it. They just couldn't do it economically.

And so this idea that you can make these chips with the same machines that you used to make 28 nanometer chips is not at all a surprise. And TSMC, by the way, they did succeed in making 7 nanometer chips with immersion DUV. It was only the third generation of 7 nanometer chips that TSM even introduced EUV. And the reason they introduced EUV was not because they needed it. It's because they had to get experience using it in production because they knew to go to 5 nanometer and beyond it had to be EUV. So like this is the key thing about building semiconductors. You don't just snap a finger and buy some equipment and make chips.

You have to, there's an entire like tacit knowledge and mass. massive learnings that go into, how do you actually get this to work? Little adjustments, doing little things, changing these sort of processes as sort of XYZ. That's why you have to move down the warning curve. You just can't snap into something. And Smick, to their credit, has moved down the learning curve down to seven nanometers. And they are making seven nanometers. Again, probably not in any sort of money making way.

But, hey, China will spend what they need for them to sort of, like, will make up that economic shortfall. So number one, it's not technically surprised. Number two, it's not factually surprised because it's already happened. Okay. None of this changes the fact that there is no evidence. It seems very clear that no one can actually go past seven nanometer with immersion to UV. You need EUV.

So China, if they want to go further, they're going to need EUV. And they're not going to get EUV from the West. That's very sort of clear. They need to learn how to build it themselves. And so the issue here is not just fabbing. these smic seven nanometer chips are are yes built on completely western equipment that's 100% the case but that's western equipment they acquired long before these sanctions came in effect they already haven't it's just sort of a fact of life and where the the Biden administration we're going to draw the line at 28 nanometers whatever that didn't make sense because you use the same equipment to go down to seven nanometers just about doing a better process what china has to actually do is they have to work down the learning curve with lithography in particular they have to figure out how to how to make EUV machines. But you don't just make EUV machines overnight.

You have to, like China's Smee, there's another sort of very sort of descriptive sort of acronym. Smee is their Shanghai microelectronics equipment. That is their ASML equivalent. That makes lithography machines. It's as I understand it, I might be wrong on this. I wrote about yesterday. I haven't checked my emails. So we've got any corrections.

I think they're fully home-built native machines are like 0.13 microns. they're not even in the nanometer range yet. Okay? So this is like circa 2000 era technology. And they're not even using the same lasers that are using UV immersion. But that's okay. Again, putting on my sort of analyst hat, not my sort of like patriotic hat, whatever might be. You have to learn how to build 0.13 microns.

Then you have to learn how to build 90 nanometers. They have to build, you know, 70, 50. You have to work your way down. and that's the only way you're going to get to the point where you can actually make 5 nanometer chips because you figured out all the little tips and tricks that were necessary to sort of get there in the long run. And along the way you built up like ASML machine has like hundreds of thousands of pieces that go into it from all kinds of different suppliers. All that has to be built for China. And it's going to take years and years and years and you have to be super patient.

But the payoff is in 20 years or however long it takes, suddenly you are to. truly independent of the U.S. And this has always been the risk of these sanctions, is that the reality is, SMIC using Western equipment to put together a chip is not chip independence. Because as we're discussing right here, they needed the Western equipment to do it. The, like, yes, they could develop that

tacit knowledge on how to use the different pieces. They could replicate TSMC, but to replicate ASML and Tokyo Electronic and Lamb Research and all the other sort of pieces, that was going to be much more difficult. And there was going to be no incentive to do it when you could just buy the stuff. So the incentive here now is to do it. Now, I got an email in response to my daily update from someone saying, look, Ben, you said that you found it more productive in your analysis to sort of always assume that folks are smart

and figure out what are the incentives that make them to do dumb things. And he's like, in this case, I feel your analysis is flawed because you're basically saying that Chinese leaders are dumb and they can't pursue a two-prong strategy of also working on native stuff while doing these seven nanometer chips. First of all, we've said that American leaders are making the same mistake, so we're not singling out any leaders here on the geopolitical stage. No, that's my point here. That's the reason why this reaction is instructive. China flips out.

We have the centimeter chips. We defeated U.S. sanctions. The U.S. flipping out. Oh, they beat our sanctions. What's going on? blah, blah. Every single person is clueless about the reality of this situation. And the fact of the matter is this is so complicated and so hard to understand.

And the bitter taste of having to accept that. These sanctions mean 20 years of hard work and investment. That's what it's going to take. And there is a difference in incentive in motivations and resources that come from a top-down commitment to we are investing for 20 years when, by the way, Xi Jinping's probably going to be dead to a, look, we have something in hand now. And so, yes, I think the emailer's point was well taken. Of course, China is pursuing a dual track strategy. but I do think there's a difference in leadership at the top of the stack accepting the reality. And the truth is, it seems, yeah, China's figuring it out.

They're breaking their sanctions. China has not broken anything. Like, like, and the risk of the sanctions is not that China figures out how to make seven-nometer chips. The risk of the sanctions that China actually understands that true independence requires a multi-decade investment. And every year they delay, they fall further behind in the long run. and it's harder and harder to catch up. So that's the point here where I think the seven-anamier thing is potentially bad for China, and the U.S.'s unhinged response is evidence as to why,

because people just don't understand this stuff. Yeah, well, there are also incentives. I'm kind of saying it's dumb, but whatever. No, it's a fulsome answer there. Honestly, the only reason I brought this up is because it is a great coda to the episode we recorded a few weeks ago where we talked about the dangers of systems where the market doesn't have feedback loops that are effective. Like, Smix losses to the extent that they're not able to produce seven nanometer chips and their yield is low or whatever, those losses are going to be covered by the government and it's not going to be a big problem for them.

And at the same time, there's not incentive in the PRC system to convey the message that you just laid out on, the podcast here and say, look, the energy should be focused over here. This seven nanometer thing is ultimately a red herring because it's a massive propaganda win to be able to produce this and for Huawei to be able to reenter the hardware market. Right. No one is throwing a propaganda victory because you learned how to use organ lasers instead of krypton lasers or whatever, the sort of the shift that's me needs to undergo. And so this is even before you get to the tin lasers or whatever they are.

Exactly. So I was reading your article, nodding my head saying, yes, this is exactly what Ben and I talked about a month ago, where ultimately the incentive structure is a little skewed. And so rather than getting to the optimal solution, it may take a couple years before they realize, actually, there's nowhere further to go on the DUV track. And we need to look backwards and work our way up the stack, as it were. Yeah. Yeah. And this is where the U.S. needs to accept some reality, too, where I got a few emails from, people and this is like people that are sort of in the Washington sort of establishment

about like, because I said something on the lines up. No shots at the Washington is. No, I will take part of the shots of the blob here. Yeah. No, the block,

it's a real thing, right? And so, because I made a comment about like, look, most military applications don't even need seven nanometer chips, right? Like guided missiles use like two micronous chips. Like they,

like there's a reason why Texas. Yeah. Like we haven't changed our laser bombs in ages because it is actually not that complicated. And, and so the, And so it's like, oh, well, no, there actually are. It's like, well, yes, there are.

Of course a faster chip is always useful. But you have to accept reality at some point, which is this is not a, you get to draw clear lines and dictate your will to the world. To try to, to try to say we're going to somehow restrict seven nanometer. And yes, they can restrict maybe the volume of output by limiting more what gets shipped in. But, but I actually, I kind of think that. it wouldn't be the worst thing of the world for the U.S. to let China flourish at 7 nanometer. And the reason is that is, is 7-a-mere fast enough to build like AI chips? Yeah, it is. It is. But it's going to take a lot longer and it's going to use a lot more energy. It's going to be a lot more inefficient.

Well, we're racing down 5-nometer or 3-nometer and sort of continuing on. And so the advantage is going to widen there. And it's made up for the fact that if you allow China to feel satisfied at 7 nanometer or sufficiently satisfied and underinvest and underprioritized moving down the chain, that is better off in the 20 to 30 year timeframe would be sort of my sort of argument. And again, this I do get the point. Of course they're going to do a dual track strategy. But that's the same thing where China was going to invest in getting away from U.S. chips for years and years and years. And incentives matter. It's one thing when there's a government dictat for state-owned enterprises to buy the locally produced chip. The private company is like, yeah, we'll just buy Intel chips.

We'll buy NB2. Like, we'll get the best stuff, right? And it changes the, a big reason why this chip can come to market is Huawei induces a sense of urgency on SMIC to make this work. Because Huawei got utterly its legs cut out from under them by the U.S., right? And that is like innovation, incentives matter. Desperation matters. And I think there's a bit where you have to, the U.S. would be better off to accept sort of the reality that, look, we've been selling equipment for China for years.

That equipment is perfectly sufficient to get to seven nanometers, especially if you're willing to eat sort of all the costs that come with it. And is it worth it to shut the barn door when the horse. is already out to like reduce volume or whatever it might be. And in the process for that much more desperation for China, China's already shifted meaningfully their investment focus because of the sanctions, because of the Huawei cut down, all this sort of stuff has happened. But the immediate shift was to smick, was to we can make seven nanometer chips. And that's a dead end. Like in the very long run from a geopolitical perspective, it is good for the U.S. for China's leadership to have its eyes focus on 7 nanometer because it's a dead end.

The worst thing in the very, very long run is for China to step back and say, look, we are going to, the whole thing about China and their long range output and all these sorts of things is generally drastically overstated. Chinese leaders are political operators just like anyone else that are relatively short-term of their thinking. And in this case, though,

you actually do need that fable long-term view. You need not a 20-25. I've planned for chips, like made in China, 2025. You need a made in China 2050. And you need the national heroes. So we don't want to be the John Malone here helping them see the line and redirecting them. Your national heroes need to be the Smey engineers that get them down to 28 nanometers natively, even as Smit can make 28 nanometers no problem.

This is the same problem the U. The U.S. has, right? What's my big concern about U.S. with chips? My big concern is that the U.S. has no capability and no economic incentive to create the capability to make trailing edge chips. Therefore, if Taiwan is taken off the map, U.S. industry is screwed, not because Apple can't sell iPhones, whatever. Like, at the end of the day, like our phones generally work that cutting edges is, you know, it probably matters for AI, honestly, that it does for phones. The issue is our toasters aren't going to work. Our cars aren't going to work.

The issue during COVID and the chip supply crisis was not cutting edge chips. was trailing edge chips. And the U.S. has very little capability to make trailing edge chips. Almost all that comes from TSM. And the problem, this is why the Chips Act, to my mind, the biggest flaw was there is not an economic incentive to reinvest in stuff that already exists. And that's where government subsidies could actually be helpful. But again, politicians don't get this. And we've seen again and again when it comes to chips, all they see is the leading edge. It's very clear and obvious why that's important. and I see no reason why the Chinese leadership would be any different than the U.S. leadership in this regard.

It's the shiny object that seems super clear and the utility is obvious and it's going to manifest in their lifetime. What China actually needs to do is they need to do what the U.S. to do with chips but to an even greater extent. They need to put all their money, all their resources, all their prestige in 90 nanometer chips, which is like a 20-year-old technology. Take it back to 1985. I mean, it's not that far. It's not that bad. It's about 20 years or so. But then march down that learning curve.

If you can move down a node every year, you can make 20 years of progress in 10 years. But you don't just sort of, oh, yeah, you guys go over there and work on this. Like you need the incentives. You need the pressure. Chip making is a brutal business. It's really, really hard. Like, like, this is one of the challenges that TSMC has had going to the U.S. Like TSM gets away within Taiwan because it's a very high prestige job.

Like everyone here, you know, if your son or daughter goes, work for TSM. It's a huge win. Salaries are pretty good. You get company provided housing and all that sort of stuff. At the cost of you work in insane amount of hours, you're always on call. You, like, it's the middle of the night. You're at your kid's birthday party. Tough luck. I guess it's not middle of the night, but whatever, those sort of things. You're going to the fab, and you might be in that fab for 36 hours until you fix the problem. That's the reality of what it takes to actually do this stuff and actually figure it out.

And in the process, you build this tacit knowledge. You build a workforce that understands how to build things. And you step by step by step move down the chain. There are no shortcuts in semiconductor manufacturing. That is very hard for people to understand who don't understand the process, especially when it's out there. Hey, Smick's making seven nanometers. Look, we're good.

You know, now Smick make five nanometers. You can do it. And no, they can't. They can't. So here's the question I want to end on. the other aspect that you didn't cover on strategy is the possibility that Smick was violating U.S. sanction rules by making this chip for Huawei.

Mike Gallagher pointed this out, and there's going to be an investigation. If the U.S. finds that Smick violated U.S. rules and bans the export of all U.S. technology to Smick, how much do you think that would hurt China? Does China then escalate and start cutting out more Western tech companies? I mean, it's setting up a very tricky decision for the Biden administration, is my point. On the one hand, banning the sale of all U.S. technology to Smick seems like it would be a pretty major escalation that could hurt not only the Chinese economy, but also American tech companies and encourage Chinese retaliation. On the other hand, though, if you're not going to punish Smick for flagrantly violating the rules you already have in place, then why should anyone respect? the rules. I don't know whether you have any thoughts on the next steps here, but I was just curious.

I mean, there is a, there's a view of the world where you can understand why people end up with anti-American attitudes, which is like, Smick used the equipment that they have that they acquired before the sanctions came down. That is an evolution of a capability demonstrated before the sanctions happened. And this is like, you know, they didn't violate sanctions in that they bought equipment on the black market or something that made this possible. No, I think the violation was working with Huawei on this particular technology. Right. Which is, yes, I guess it's a violation. But they're, you know, at the end of the day, like, what do you expect from a U.S. perspective? And like, yes, I guess it did violate. It did violate.

And so if you want to follow the letter of the law, then the answer is yes, cut off smit completely. But this is my point. All you are doing is locking China irrevocably into a path where they will be fully independent in 15 to 20 years. So Mike Gallagher can get his victory in for the next year or two years or three years, but at the permanent loss of any sort of U.S. leverage in this situation. Now, to my emailer's point that I referenced earlier, there's a good argument that die has already been cast.

That die was cast when Huawei's legs were cut off in the first place. That die was further cast when the Biden administration brought down those sanctions. But every, like, again, the idea that, look, we're going to have to accept that we are 20 to 25 years behind and it's going to take that long to catch up is a bitter pill to swallow when that shortcuts right there. right? It's so tempting. Look, Smick can make 7-a-meter chips. Seven-a-meter chips are pretty fast. That's pretty good. Right. And, you know, and even maybe the reality is, is I'm taking too dim a view of Chinese leadership. And actually, they're all knowing and long-term viewed and all the sort of myths that are spun up around them. And the reality is, is they're going to fully dedicate to and achieve this sort of dual track path regardless. So we might as well just cut off that top track immediately. I think that alternative case, I wasn't. articulating that in a mocking matter. I think it's a legitimate case.

You can make the case that, look, once the Huawei decision happened, this was inevitable. And then once the Biden sanctions happened, it was definitely inevitable. And so you might as well go all out now. China's already going to build their own capabilities. So we should cut them off completely today. That's going to be a big hit on U.S. tech companies. It's going to be a big ask of allies. Again, the ask of allies is that they stop selling UV in the case of ASML.

and the most advanced immersion DUV. Like they're still developing DUV. So like ASMI think just came up doing the $2,800 or something like that. That is they're not going to be selling to China. But now you're saying the price of this is no, you're not selling anything, including your old machines to 33% of the market. And so that's going to be a harder track to hoe when it comes to allies. Like the big risk here is the Japanese companies or the Dutch companies saying,

screw you, we're going to sell to China anyway. And by the way, we can get China to five nanometer much more quickly. And we cut out all the U.S. companies. And suddenly the entire semiconductor market is Chinese, Dutch, and Japanese, and German, you know, they have a big part in Taiwanese. And the U.S. is out. The U.S. is in the role of China because, you know, hey, where's all the stuff made? Yeah.

Well, the Americans have done a pretty good job building a coalition thus far. but I appreciate the answers there. I like to augment sharp china discussions with thoughts from you. So thank you for diving in. I enjoyed the post on Monday. And we're going to go to the iPhone later in the week. We'll lead with the iPhone. We were not able to get to that tonight.

Ben, can you close out with any thoughts on the USBC buzz that's percolating among nerd circles as Apple prepares to unveil. a new iPhone later this week. Oh, I mean, definitely a great nerd irony in that this is the upgrade that I am by far the most excited about. I've been looking forward to it for years. I already have my new cable pack plan and the changes that I'm going to make. And it's going to be a case where Apple's going to get raked over the coals,

like, oh, you're changing your connector again, despite the fact it's been like a decade. And so it's going to be a classic example and a great reminder that what is technically correct and what is actually better for folks does not always play that way. perception matters. So we shall see how it goes. There you go. Well, we're coming back later in the week. And until then, Ben, I will talk to you soon.

Talk to you later.