Tech Brew Ride Home - Fri. 10/18 – Netflix Wins

Episode Date: October 18, 2024

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On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the Tech meme right home for Friday, October 18th, 2024. I'm Brian McCalla today. Netflix earnings make me feel like they've leveled up yet again. Eyebrow raising shakeup in Google search. Interesting new search-like products from perplexity. It's not just AirPods. The smartphone is swallowing the hearing aid. And in the long reads, the most interesting behind-the-scenes open AI deep dive since the last one. Here's what you missed today in the world of tech.

Netflix reported Q3 earnings last night and yeah, revenue was up 15. percent year-on-year, and paid memberships were up 14 percent year-on-year. But I want to focus on this number. Net income was $2.4 billion for the quarter, for one quarter. Let's come back to that. Quoting CNBC, the streamers' ad-tier memberships jumped 35 percent quarter over quarter. The company is on track to launch the service in Canada in the coming quarter and more broadly in 2025. While Netflix does not expect advertising to become a primary growth driver until 2026. It noted that the ad tier accounted for more than 50% of sign-ups during the third quarter in countries where it is available, end quote. So wow, more proof that that ad product really is popular. It's growing

35% quarter-on-quarter. Here are some more numbers. Netflix gained 5.1 million new subscribers in Q3 versus only 4 million estimated. Remember when they dropped numbers in a quarter? Remember when 5 million new subscribers in a quarter seemed like something they would probably never hit again because their markets were saturated? Let me give you another set of numbers. Netflix is now forecasting 2025 revenue of between $43 and $44 billion, which would be 11 to 13 percent higher than what it forecast for 2024 just a few months ago. And it is targeting a 2025 operating margin of 28% versus the 27% that it estimated in 2024. So let's step back and summarize that.

They're growing again. Members, revenue, growing again. The new ad tier level is growing gangbusters. Even their margins are growing, probably due to the tweaking of content development spend that we've discussed. Look, if we haven't already, and of course everybody has been, we need to start thinking about Netflix as an all-time company. They just win. Beating Blockbuster, as we discussed with M.G. Siegler on the 80s-90s pod. Creating streaming as a product, even though everyone from Bill Gates to the cable companies to Hollywood spent 20 years preparing for that, Netflix went and did

it. Surviving the whole Quickster debacle. Surviving everyone and their mother jumping onto their turf with their own streaming products. They survived all of that and won. And won. and now they are surviving and turning around bumping up against the law of large numbers. Let's come back to that one key metric I mentioned at the top of this. Profitability. As Peter Kafka notes in Business Insider, Netflix now makes $9 billion a year in annual profits, actual net income. Quoting Peter, Netflix used to be in the business of burning cash, billions of dollars worth a year,

as it built a lead in the streaming wars by licensing other people's TV shows and movies and making its own. And Netflix financed all that cash incineration by taking on many billions of dollars in debt. By the end of 2020, the company had more than 15 billion in long-term debt, and a concern you heard all the time from Netflix Bears was, it's great that they're spending all this money on content, but when are they going to pay for it? The Netflix answer went something like this. Trust us. All the money we spend on content, especially content we own, forever, is money well spent because it means we can attract more customers who will give us more money, and eventually we'll have so many customers and so much money that we won't have to borrow

any more to keep this going. And then they pulled it off. In January 2021, Netflix said it no longer had to tap the debt markets to pay for its operations, though it has since borrowed more money to pay off some of its older debt. And things have been booming since. The best way to see the turnaround is by looking at Netflix's free cash flow, the money it has on hand after it has. pays for its day-to-day operations. In 2019, Netflix had negative cash flow of $3.3. By the end of 2023, it had swung to a positive $6.9 billion. That doesn't mean Netflix is going to go hog-wild on spending now that its thesis has been borne out. The company has made it clear to Wall Street that after years of increasing programming budgets, it's going to keep things flat for a while.

Meanwhile, it knows investors want more money and more profit, which is why it's pursuing multiple things it used to say it would never do, like sell ads and make it hard for people to share passwords. Its competitors are trying similar gambits, but with much smaller user bases and more constrained programming budgets, which makes it that much harder for them to compete, end quote. So everything Netflix promised as their sort of grand unifying strategy has actually come to pass. Netflix has won, full stop. It is producing Silicon Valley tech level profits in an industry not known for doing such things, at least not reliably, in an industry very much used to boom and bust profit cycles.

Prabhakar Ragavon will leave his role overseeing Google Search and ads products to be replaced by Nick Fox. Ragavon will become chief technologist at Google, but this is a notable move because critics of, well, whatever it is Google Search has become over the last few years, shall we say, have often placed the blame for Search's degradation on Raghavan, quoting the journal. The shakeup comes as the alphabet unit faces unprecedented pressure on its search business from the courts and artificial intelligence products such as ChatGBT.T. Google's search advertising business is expected to dip below a 50% market share in the U.S. next year

for the first time in more than a decade, according to the research firm e-marketer. Raghavon oversaw a range of products in addition to search and ads, including Google's virtual assistant, maps, commerce, and payment services. He was once considered a candidate to become the company's next CEO. Fox's elevation now makes him a possible successor to Sundar Pichai, who is also CEO of Parent Company Alphabet. The team overseeing the Gemini chatbot, which previously reported to Raghavan, won't be overseen by Fox. It is moving to Google's AI Research Division, Google Deep Mind. Google's virtual assistant is also moving and will become part of the division working on the Android mobile software system and devices, such as pixel phones,

end quote. Speaking of Google competitors, Perplexity is launching internal knowledge search to search the web or internal files, and also spaces a way to organize research, both for its pro and enterprise customers, quoting Ventra Beat. Internal knowledge bases will be limited to the files perplexity users upload to the platform. Frank Tepa, head of. of Enterprise Product at Perplexity told Venture Beat in an interview that internal knowledge search will only look for information on files users have uploaded, not entire internal databases.

Users have a file upload limit, 500 for Enterprise Pro users, but Tepas said this may be expanded. Customers can also upload files directly from folders in all the popular document formats like Excel sheets, Word documents, or PDFs. Perplexity gave customers like Nvidia, Databricks, Dell, Bridgewater, Latham and Watkins, Fortune, and Lambda, early access to the feature. During the early access testing, the company said customers used the internal search feature to do due diligence by combining internal research notes and news from the web, combine older sales materials with more current insights for proposal requests, help employees find benefit information and get product roadmap feedback based on best practices from the internet.

Perplexity will also label data sources if the information was from a website or uploaded files so that the user can dive deeper later. Perplexity also announced Spaces a way for teams to share and organize research. Spaces will allow users to share files across a team and customized Perplexity AI Assistant with specific instructions and responses based on their data. The company said customers will also get full control over who gets to access their information. Specific to Perplexity Enterprise Pro, all files and searches on Spaces, quote, are excluded from AI quality training by default.

Pro customers have to voluntarily opt out of AI training. Perplexity also promises to provide, quote, the highest levels of safety and privacy. Perplexity plans to add third-party data integration with crunch base and facts set, so Enterprise Pro users with subscriptions to those services can add data to their spaces, end quote. It's interesting how quickly this has happened. It's just a few months ago that Apple announces AirPods can now be hearing aids. And now it's happening. It's like one of those, yeah, this is obvious.

we should have done this a long time ago thing, the FCC has issued new rules that will require all mobile phones sold in the U.S. to be compatible with hearing aids. This will be after a, what they're calling transitional period. Quoting in Gadget, with the number of Americans 65 and older expected to balloon by nearly 50% by 2050, the rules will ensure that those with hearing loss don't have to worry about which phones will work with their hearing aids. On the flip side, the FCC also passed a requirement for hearing aid makers that effectively bans, proprietary Bluetooth coupling standards in the assistive devices. So phones must be compatible with hearing aids and vice versa. The rule even applies to the recently approved over-the-counter

hearing aids, which now include AirPods Pro 2. Other changes include requiring all new mobile handsets sold in the U.S. to let users raise the volume without introducing distortion. In addition, the FCC now mandates that cell phones' point-of-sale labels clarify hearing aid compatibility and whether the handsets meet Bluetooth or telecoil coupling requirements, end quote. Yeah, everyone, even old people, now have smartphones with them all the time. That's why it's blindingly obvious in retrospect. It's eminently logical to tie hearing aid management to smartphones. So add hearing aids to the list of things like cameras, translation devices, music players, etc.,

all the things that have been subsumed into the one single holy grail product of the smartphone. Time for the weekend long read suggestions. This is essentially the long reads in one single go, although I even could have led with this story today at the top of the show. More speculation on the whole open AI situation. Sources are describing to the New York Times, open AI and Microsoft's fraying relationship with open AI renegotiating its deal for more computing power, Microsoft's own LLM efforts, and more. Quote, last fall, Sam Altman, OpenAI's chief executive asked his counterpart at Microsoft, Sacha Nadella, if the tech giant would invest billions of dollars in the startup. Microsoft had already pumped $13 billion into OpenAI, and Mr. Nadella was initially willing to keep the cash spigot flowing. But after OpenAI's board

of directors briefly ousted Mr. Altman last November, Mr. Nadella and Microsoft reconsidered, according to four people familiar with the talks, who spoke on the condition of anonymity. Over the next few months, Microsoft wouldn't budge as OpenAI, which expects to lose $5 billion this year, continued to ask for more money and more computing power to build and run its AI systems. Mr. Altman once called OpenAI's partnership with Microsoft the best bromance in tech, but ties between the companies have started to fray. Financial pressure on OpenAI, concern about its stability and disagreements between employees of the two companies have strained their five-year partnership, according to interviews with 19 people familiar with the relationship between the companies. That tension demonstrates a key challenge for AI startups. They are dependent on the world's tech giants for money and computing power

because those big companies control the massive cloud computing systems. The small outfits need to develop AI. Over the last year, OpenAI has been trying to renegotiate the deal to help it secure more computing power and reduce crushing expenses, while Microsoft executives have grown concerned that their AI work is too dependent on Open A.I. Mr. Nadella has said privately that Mr. Alman's firing in November shocked and concerned him, according to five people with knowledge of his comments. Microsoft could be left behind if it is only using OpenAI technology, said Gil Luria,

an analyst at the Investment Bank, DA Davidson. It is a real race, and OpenAI may not win it, end quote. In March, Microsoft paid at least $650 million to hire most of the staff from inflection and OpenAI competitor. Inflections former chief executive and co-founder Mustafa Suleiman oversees a new Microsoft group that is working to build AI technologies for consumers based on OpenAI software. He is also the point person for Microsoft's long-term efforts to build technologies that could replace what the company is getting from OpenAI, according to two people familiar with Microsoft's plans. Some Open AI executives and employees, including Mr. Altman, are angered that Mr. Suleiman is at Microsoft, according to five people familiar with the relationship

between the two companies. Mr. Silliman's team is part of a group of Microsoft engineers who work directly with employees at OpenAI. Dozens of Microsoft engineers work on-site at OpenAI's offices in San Francisco and use laptops provided by OpenAI that are set up to maintain the startup's security protocols. Some OpenAI staff recently complained that Mr. Suleiman yelled at an OpenAI employee during a recent video call because he thought the startup was not delivering new technology to Microsoft as quickly as it should, according to two people familiar with the call. Others took Umbrage after Microsoft's engineers downloaded important Open AI software without

following the protocols the two companies had agreed on, the people said. After Microsoft backed away from the discussions about additional funding, OpenAI was in a bind. It needed more cash to keep its operations going and its executives chafed at the exclusivity of the contract. Over the past year, the AI company repeatedly tried to negotiate a lower cost and allow it to buy computing power from other companies, according to seven people familiar with the discussions. In June, Microsoft agreed to an exception in the contract, six people with knowledge of the change said, that allowed Open AI to sign a roughly $10 billion computing deal with Oracle for additional computing resources,

according to two people familiar with the deal. Oracle is providing computers packed with chips suited to building AI while Microsoft provides the software that drives the hardware. And in recent weeks, OpenAI and Microsoft negotiated a change to a future contract that reduces how much Microsoft will charge the smaller company for computing power, although the exact terms were unclear, according to a person familiar with the change. While it was looking for computer power alternatives, Open AI also raced to broaden its investors, according to two people familiar with the company's plan. Part of the plan was to secure strategic investments from organizations that could bolster

OpenAI's prospects in ways beyond throwing around money. Those organizations included Apple, the chipmaker, NVIDIA, and MGX, a tech investment firm controlled by the United Arab Emirates. Earlier this month, OpenAI closed a $6.6 billion funding round led by Thrive Capital, with additional participation from NVIDIA, MGX, and others. Apple did not invest, but Microsoft also participated in the funding round. Open AI expected to spend at least $5.4 billion in computing costs through the end of 2024, according to documents reviewed by the New York Times. That amount was expected to skyrocket over the next five years as Open AI expanded,

soaring to an estimated $37.5 billion in annual computing costs by 2029, the documents showed. It's not clear how much the recent tweaks to the partnership between Open AI and Microsoft will alter that trajectory, but Microsoft executives were happy with the changes, according to a person familiar with the company's strategy. The tech giant can continue to benefit from open AIs improving technologies, while the startup continues to pay the tech giant for substantial amounts of computing power. Still, Open AI employees complain that Microsoft is not providing enough computing power, according to three people familiar with the relationship,

and some have complained that if another company beat it to the creation of AI, that matches the human brain, Microsoft will be to blame because it hasn't given Open AI the computing power it needs, according to two people familiar with the complaints. Oddly, that could be the key to getting out from under its contract with Microsoft. The contract contains a clause that says if OpenAI builds artificial general intelligence or AGI, roughly speaking, a machine that matches the power of the human brain, Microsoft loses access to Open AIs technologies.

The clause was meant to ensure that a company like Microsoft did not misuse this machine of the future, but today, Open AI executives see it as a path to a better contract, according to a person familiar with the company's negotiations. Under the terms of the contract, the OpenAI Board could decide when AGI has arrived, end quote. For the bonus episode this weekend, I'm going to share with you that Gruber episode from Rad History about GoldenEye-O-7, because it's Gruber, and it is video games, so it's topic adjacent. But this is the last one I'll share for now. Please do subscribe to the Rad History podcast if you haven't already done so. And hey, one last favor to ask, subscribe to the YouTube channel if you could.

Help me get my subscriber numbers up there too. And also check out the videos. On everyone, I overlay them with pictures and videos over top of us talking. So, like, as we're talking about Golden Eye, you can see some of the gameplay that we're specifically talking about as we talk about it. Check that out. Link in the show notes. Please like and subscribe there. Talk to you on Monday.