Tech Brew Ride Home - Mon. 01/13 – Nvidia Isn’t Happy With New Chip Rules

Episode Date: January 13, 2025

The Biden administration unveils its long planned new chip export rules, and Nvidia isn’t happy. That whole botched Sonos app debacle has cost the CEO his job. Why we might not see blockbuster tech IPOs this year. Why some of Nvidia’s customers are returning Blackwell chips. And say hello to China’s answer to Instagram. Sponsors: Robinhood.com/gold Links: US imposes export controls on chips for AI to counter China (FT) Sonos CEO Leaving After Botched App Revamp Led to Customer Revolt (Bloomberg) Sonos CEO Patrick Spence steps down after disastrous app launch (The Verge) Silicon Valley’s largest start-ups to shun IPOs in 2025 (Financial Times) Nvidia’s Top Customers Face Delays From Glitchy AI Chip Racks (The Information) Xiaohongshu, China’s answer to Instagram, hits no. 1 on the App Store as TikTok faces US shutdown (TechCrunch) Learn more about your ad choices. Visit megaphone.fm/adchoices

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 Techmeme right home for Monday, January 13th, 2025. I'm Brian McCullough today. The Biden administration unveils its long-planned new chip export rules and Nvidia isn't happy. That whole botched Sonos app debacle has cost the CEO his job. Why we might not see Blockbuster tech IPOs this year, why some Nvidia customers are returning Blackwell chips and say hello to China's answer to Instagram. Here's what you miss today in the world of tech. The Biden administration has unveiled new chip export rules and Nvidia, among others, aren't happy. First, the details on the new rules. They give 18 key allies full AI chips access while requiring licenses from most other countries, including China.

Chip orders with collective computation power up to 1,700 advanced GPUs need no license and don't count against country-specific chip caps. These export rules enter a 120-day consultation period requiring the Trump administration. to consider input, potentially modify the rules all before enforcing them. Quoting the Financial Times. This policy aims to make it harder for China to use other countries to circumvent existing U.S. restrictions and get technology that can be used for everything from nuclear weapons to modeling hypersonic missiles. The rule both provides greater clarity to our international partners and to industry and

counters the serious circumvention and related national security risks posed by countries of concern and malicious actors who may seek to use the advanced American technology. against us, said U.S. National Security Advisor Jake Sullivan. The regime creates a three-tier licensing system for chips used to power data centers that process AI computations. The top tier, which includes G7 members in addition to countries such as Australia, New Zealand, South Korea, Taiwan, the Netherlands, and Ireland will face no restrictions. The third tier includes nations such as China, Iran, Russia, and North Korea, to which U.S. groups can, in effect, not export. The middle tier of more than 100 countries will face caps and licenses for export volumes over those limits, end quote.

And quoting the journal, the caps on exports of AI chips apply in different ways to different countries and companies. The 18 close U.S. allies will face no restrictions on purchases of chips and smaller orders from customers around the world up to around 1,700 advanced AI chips won't require a license or count against caps on countries chip purchases, the Commerce Department said. That leaves the question of whether companies based in the U.S. or its allies can build significant. in AI capacity in a country falling into a middle zone. Neither trusted ally nor top adversary. The Commerce Department said yes, but with limits. Companies that meet high security standards can apply for a status that allows them to place up to 7% of their global AI computing capacity in any single such country. That could be as many as hundreds of thousands of chips, the department said. A further category of companies based in countries that aren't U.S.

adversaries can apply for a status allowing them to buy up to the equivalent of 320. 20,000 of today's advanced AI chips over the next two years. Those that don't get this status can still buy up to the equivalent of 50,000 advanced AI chips. Also under the new rules, companies that produce AI models, the likes of OpenAI and Google, would need export licenses to send the weights attached to those models to many foreign countries. Model weights are the secret sauce in advanced AI systems like ChatGPT, a series of digital knobs that fine-tune their performance. The controls won't apply to models with weights that are publicly available. The most prominent of which are meta's llama models, end quote. But as I said, the tech industry doesn't like this,

and a blog post one executive at Oracle called it, quote, the mother of all regulations, and NVIDIA was immediately out with their own statement that the regulation would jeopardize current U.S. leadership in AI, quoting Reuters, the new rule which is expected to be published as soon as Monday, quote, threatens to derail innovation and economic growth worldwide and would, quote, undermine America's leadership, NVIDIA's vice president of government affairs, Ned Finkel said in a statement. Finkle argues, that America's leading role in AI would be hurt because the rule, quote, would impose bureaucratic control over how America's leading semiconductors, computer systems, and even software are designed and marketed globally. The Santa Clara, California-based company also said the rule

would not improve U.S. national security and it would control technology that is already widely available in gaming and consumer hardware. Quote, rather than mitigate any threat, the new Biden rules would only weaken America's global competitiveness, undermining the innovation that has kept the U.S. ahead, Finkel said, end quote. Sonos CEO Patrick Spence is leaving the company. Want to know why? Remember that botched app revamp that upset customers and stymied growth for the company? Yeah. Sonos named board member and former executive at Snap and the Pandora Music Streaming Service Tom Conrad as interim CEO. Quoting Bloomberg, the decision to tap a new CEO comes after several months of turmoil at Sonos. In May, the company rolled out a new mobile app the software consumers used to control their speakers and other equipment. That was riddled with bugs. Among the problems, the user interface confused customers, lost key accessibility features and removed capabilities like the sleep timer and alarms. When it doesn't work, our customers are taken out of the moment and our right to feel that we've let them down. Conrad said about the Sonos user

experience in an email to employees, quote, I think we'll all agree that this year we've let far too many people down, end quote. And quoting the verge, the company's decision to prematurely release a buggy completely overhauled new app back in May with crucial features missing at launch, outraged customers, and kicked off a months-long domino effect that included layoffs, a sharp decline in employee morale, and a public apology tour. The Sonos Ace headphones, rumored to be the whole reason behind the hurried app, were immediately overshadowed by the controversy, and my sources tell me that sales numbers remain dismal. Sonos's community forums and subreddit have been dominated by complaints and an overwhelmingly negative sentiment since the

spring. In October, Sonos tried to get a handle on the situation, which by then had spiraled into a full-on PR disaster by outlining a turnaround plan. The company vowed to strengthen product development principles, increased transparency internally, and take other steps that it said would prevent any mistake of this magnitude from ever happening again. But three months later, Sonos's board of directors and Spence have concluded that those steps weren't enough. The app debacle has officially cost Spence's job. No other changes are being made today, however, so for now, chief product officer, Maxime Bouvat Marlin, who some employees have privately told me deserves a fair share of the blame for recent missteps will remain in his role, end quote.

We might not get the year of stock market debuts we were hoping for in tech. That's because huge recent fundraising deals for Databricks, SpaceX, and OpenAI may delay their IPOs. Forge Global says the seven largest U.S. private firms are worth $695 billion, but they have enough cash on hand that they might not need more for a while. quoting the FT. A series of recent tech deals have furnished the biggest startups with billions of dollars of new capital to continue growing and given employees a way to cash out valuable stock options, resolving two of the main issues that have traditionally pushed companies to go public. Artificial Intelligence and Data Analytics Company Databricks raised $10 billion in December, the largest venture capital fundraising round of 2024. That followed SpaceX's $1.25 billion raise in November, which also made it the most valuable private startup in the world, and OpenAI 6.6 billion.

million dollar haul in October. We are operating as a public company already, Databricks chief Ali Goatsy told the Financial Times about its recent fundraise, a round so oversubscribed, he said investors had offered $19 billion. Quote, the absolute earliest we would go public is this year, but we have flexibility now, end quote. The deals put the spotlight on a new class of startups often far larger than their peers on public markets with unprecedented scale and sophistication for private markets, while smaller groups, including a number of private equity-backed startups are expected to take advantage of buoyant U.S. equity markets to float this year, the biggest tech startups, particularly those in AI, are under little pressure to follow. They have, quote,

so much access to capital at so much scale. There isn't an incentive driving them to go public, said Kelly Rodriguez, chief executive of Forge Global, a marketplace for trading private company stock, end quote. The top seven privately held companies in America command a staggering $695 billion in value based on Forge Global's analysis. The landscape is dominated by tech. innovators with SpaceX and Open AI together representing over $500 billion of this unprecedented private market wealth. This transformation has been fueled by the rise of mega-scale venture capital firms who've completely reimagined the playbook for private market investing, while $100 million checks were once considered exceptional in venture capital just 10 years ago, today's leading

investors are deploying capital at multiples of that scale. Take Josh Kushner's Thrive Capital, which has made bold $1 billion-plus investments into transformative companies like Databricks, Stripe and Open AI within just the past two years, a strategy that's worlds apart from traditional venture investing models. According to Mitchell Green, who leads lead edge capital and backed giants like Alibaba and Uber, the top 15 to 20 private companies, including Databricks and Stripe, have essentially gone through private IPOs. These market leaders have cracked the code on scaling while providing liquidity options for employees, crucial for winning the talent were all while steering clear of the intense scrutiny and operational burdens that come with public market listings.

quoting from the FT one more time. If you have a bad quarter, you can be hammered for it. You can have activists, said Luke Ward, an investment manager at Bailey Gifford, who has invested in SpaceX. There's an argument that some of these pioneering companies wouldn't have been able to do what they have done if they had been on public markets and had those short-term pressures. But the scrutiny of public markets can also be valuable, as private startups can have valuations that appear detached from the strength of their underlying business. WeWorks, $47 billion valuation obtained during a soft bank-led funding round in 2019,

plummeted after it launched its roadshow ahead of a planned IPO, for instance. It feels as though the VC firms are in a parallel universe, which has no relation to the real world, said the head of investment at a U.S. Foundation that invests in multiple venture firms who ask not to be named. They have their own valuations, their own liquidity, which is self-generated. It's a game of past the parcel, end quote. T leaves reading here, but notable sources say Microsoft, META, AWS, and Google recently cut some orders of Nvidia's Blackwell GB200 racks as overheating and connection glitches led to delays. Quoting the information, some of Nvidia's biggest customers are facing new delays and getting its most

advanced artificial intelligence chips up and running in data centers. The first shipments of racks equipped with Nvidia's newest chips, Blackwell, have been plagued by overheating as well as glitches involving the way the chips connect to one another, according to three people working at suppliers and two customers that have dealt with the issues. These kinds of defects aren't unusual for a new type of chip, but they're delaying the data center plans of customers such as Microsoft. In response, Microsoft and three other major customers, Amazon Web Services, Google, and Meta platforms recently cut some orders of NVIDIA's Blackwell GB200 racks, according to two people who work at suppliers for the customers. Some of these customers are waiting for a later version of the racks, which may not be available

until the second half of the year, or plan to purchase NVIDIA's older AI chips, according to an Nvidia employee and a Microsoft employee with knowledge of their plans. Microsoft, Amazon, Google, and meta had each place Blackwell rack orders worth $10 billion or more, according to two people with direct knowledge of the orders. Contract manufacturers such as Han High Precision Industry and Wistron assemble the chips, which Taiwan Semiconductor Manufacturing produces for NVIDIA into larger server racks, end quote. Let me paint the picture of how this Blackwell chip situation is unfolding. Some major players might opt for individual chip purchases rather than going all in on NVIDIA's recommended rack solution, even though NVIDIA's pushing the rack

approach as the optimal performance path. The interesting twist, if NVIDIA and their partners crack those technical hiccups, we could see these customers pivot back to embracing the RAC strategy. The revenue impact from these order adjustments remains a bit of a puzzle. Here's why. Even with some technical quirks, those GB200 server racks might find new homes since they're still outperforming previous-gen-in-Vidia solutions in certain aspects. Looking at the numbers, NVIDIA's November forecast painted an ambitious picture, projecting

Blackwell to drive several billion in revenue for the January quarter. as deliveries roll out, the bigger picture. We're potentially looking at NVIDIA's data center chip revenue skyrocketing to around $150 billion this year, up from $47.5 billion in 2024. These delays, while potentially manageable for NVIDIA, are creating real headaches for major cloud providers and conversational AI pioneers. These companies are in an intense race to build the most powerful server clusters for competitive advantage. Despite developing their own chip alternatives, they're still heavily dependent on NVIDIA's solutions. The efficiency story here is compelling. InVIDIA claims Blackwell delivers four times better energy efficiency compared

to its hopper predecessor. This matters enormously for data centers operating within fixed power constraints as cloud providers are banking on these new chips to squeeze more performance out of their limited energy resources. But if they're not getting the yield in terms of quality performance that they need, we're on the verge of TikTok may be getting banned because it's owned by a Chinese-based company, but maybe this is a case of fighting the last war because Xiaohong Shu, known as Red Note in English, has hit number one on the app store after previously topping the social networking category. What is Zhao Hong Shu? It's basically China's answer to Instagram. Quoting TechCrunch, several TikTok creators are promoting Xiaohang Shu on their accounts, encouraging their

followers to transition to the platform. Influencers may not have a crystal ball to predict whether TikTok will weather a ban, but Zhao Hongshu gives them a way to hedge their social bets. Zhao Hongshu originally launched back in 2013, and it hits a lot of the right notes for creators looking for a TikTok alternative. It has a layout that's similar to Pinterest. It's typically thought of as China's answer to Instagram, and critically, it boasts a number of social shopping features. And it also has been on a strong viral trajectory. After a few steady years of growth during the COVID-19 pandemic, Xiaohang Shu boomed among younger Chinese consumers. It now boasts 300 million monthly active users, 79% of them women. And for now, it's the top app in

the U.S. Unsurprisingly, the startup has also caught the attention of investors, to date it has raised some $917 million in venture funding with backers including Tencent, Ali Baba, Jen Fund, DST, Hong Shan, formerly Sequoia, China, and some 13 others. It was reportedly valued at $17 billion following a secondary share sale in 2024. According to a report from Bloomberg, the app is projected to increase its profits to over $1 billion in 2024. It hit $1 billion quarterly sales last year, per this FT report, ahead of a possible IPO. This growth not only signifies the U.S. app's potential, but also hints at the promising opportunities it could bring to its creators,

end quote. It's not clear if the surge in interest has staying power because it's not entirely clear. Normal users are migrating over, but if a TikTok ban actually comes into effect, expect to hear more about Red Note. Nothing more for you today. Talk to you tomorrow.