The Prof G Pod with Scott Galloway - Prof G Markets: Microsoft and OpenAI, Wash Trading, and European Tech Regulations

Episode Date: January 16, 2023

This week on Prof G Markets, Scott shares his thoughts on Microsoft's plan to invest $10 billion in OpenAI. He also discusses how the concept of anonymity has enabled rampant wash trading in the NFT market. Finally, we check in on the state of EU tech regulations from the DLD conference in Munich. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. This week's number, 45%. That's the percentage of NFT trades that were wash trades. What is a wash trade? It's a false signal one wallet buys from another wallet it controls in order to send a false signal about the value of an NFT. Non-fungible tokens are entirely fraudulent tokens. Welcome to PropG Markets.

Today, we're discussing Microsoft's investment in OpenAI, wash trading, and we're checking in on European tech regulations from the DLD conference in Munich. Here with the news is PropG Media analyst, Ed Elson. Ed, what is the good word? I'm feeling pretty great, Scott. I've eaten some Weisswurst, some Bratwurst. I'm on a diet of beer and sausages. It's pretty nice. A few of my favorite things. Have you been to Munich before? I have. I've been here for Oktoberfest a few years ago, but I don't remember it very well. You know, it's a good thing. You just want to be sure that you don't just surrender to anybody here. Because when you surrender to Germany, it's like having sex with a horse.

Kind of identifies who you are for the rest of your life. Anyways, all right, on to the market. Okay, let's start with our weekly review of market vitals. The S&P 500 climbed, the dollar dropped, Bitcoin enjoyed its longest winning streak since 2020, and the yield on 10-year treasuries fell. Shifting to the headlines. Inflation cooled for the sixth consecutive month in December, clearing the Fed's path to slow down interest rate hikes. Crypto exchange FTX says it's recouped $5 billion in cash and liquid investments after the company went bankrupt in November.

It has roughly 9 million customer accounts to recover. Goldman is cutting 3,200 jobs, or about 7% of its workforce. Meanwhile, Coinbase is also laying off employees. CEO Brian Armstrong said he would reduce headcount by 950, and that's 20% of the company's total staff. Scott, do you have any thoughts on this news? Well, it's a tale of two cities. The layoffs at Goldman probably just take them back a year or two years in terms of employment. I would imagine they've been hiring like crazy. Whereas layoffs at Coinbase is just a preview of what's to employment. I would imagine they've been hiring like crazy. Whereas layoffs at Coinbase is just a preview of what's to come. I would imagine that they'll do another layoff

or I would predict they'll do another layoff in the next six months. The total value of the token market has gone from $3 trillion to around $600 or $700 billion. So just the market that Coinbase is known for creating an exchange in has gone sour.

In addition, I think people are nervous about putting their assets on any platform that's not backed by FDIC insurance. So I think it only gets worse for Coinbase. I think you're looking at another 20, 40, 60%. I think Coinbase is going to be a shadow of itself. By the way, I invested in the IPO of Coinbase. I was trying to do a quick trade. It came out at 360, I think, and I bought some and ran to 410 for a hot minute. Then it ran back to 320. And because I didn't know the company, I just was trading just on the IPO. I lost a decent amount of money pretty quickly and got out. But it's good that I got out and decided not to just hang in there because as we sit here today, it's trading at 43 bucks. So it's off about 90% from its highs. But anyways, one is a secular

decline and will keep happening. And one is just a temporary blip. And just a statistic here, as of November, layoffs account for less than 1% of all non-farm payrolls in the US. And before COVID, that number was above 1%. Could you speak to that? And you had an interesting insight around how we're sort of obsessing over this tech stuff, but overall, it's not really the same for the rest of the nation. Well, it is true.

As you get older, what you realize is it's important to question almost everything. And when a handsome guy or an attractive woman in a sleeveless dress known as a news anchor tells you something, you sort of take it as having a lot of, or assume it has a lot of veracity. And that's sort of your default positioning, recognizing that the media gets it wrong all the time. And this is an example of that. And it's really interesting. We're obsessed with technology. We know Apple, we use their products. We know Meta. Their products depress our teenage girls.

So we know these companies really well. And when anything happens there, we take it as a proxy for what's happening in the larger economy. And it absolutely isn't. These are meaningful industries. But in terms of at least number of jobs, they're actually one of the smaller industries. They employ a small number of very well-paid people. And they create a ton of value. One of the reasons they create so much shareholder value is their revenues relative to the number of employees is extraordinary. So when we hear about a layoff at Meta, we get all hot

and bothered, but the reality is it only takes it back to, say, November of last year, or it takes us back six months. And as you just pointed out, layoffs are at historic lows. And while the headline is about layoffs, which lends you to believe or leads you to believe that unemployment is a big issue, one of the biggest issues facing the U.S. is not an absence of jobs. It's an absence of workers. There are 1.7 open jobs for every one person who is looking for a job. The hospitality industry is just massively understaffed. Any skills, if you're one of those kids, it's handy. Your dad or your mom taught you anything about carpentry.

You're just basically handy. You can walk into a construction site right now in Florida and make minimum 20, 25 bucks an hour, maybe 30 bucks an hour, which isn't huge money, but for someone who doesn't have a, you don't even need a high school degree. My takeaway is to get good at carpentry. There you go.

Microsoft is in talks to invest $10 billion in OpenAI. OpenAI is the artificial intelligence company behind ChatGPT. That's the AI assistant that took the world by storm in the past few months. The deal would value OpenAI at $29 billion, making it one of the most valuable startups in the world. And it's expected that Microsoft will try to integrate ChatGPT into its products. That includes the search engine Bing, and also the whole Microsoft Office suite. So, Scott, let's start big picture. What do you generally make of this deal? So, I think this is fascinating. Jason, our editor-in-chief, referenced Gary Marcus's view when he said that OpenAI was initially meant to sort of check back or be a guardian for the

dangers of AI. And where has it taken us? It's taken us to a deal with Microsoft and is advancing the commercial power of AI. So, I it taken us? It's taken us to a deal with Microsoft and is advancing the commercial power of AI. So I'm not sure that's what they initially intended. The structure is really unusual. It's a different type of organization or structure. Yeah, I've got it actually in front of me, this deal structure. So first, Microsoft will receive 75% of OpenAI's profits until it recoups the $10 billion.

And then after that point, and there's been a lot of confusion in the reporting here, Semaphore put out an article that it turned out to be slightly wrong. But after that point, once it's recouped the investment, Microsoft will start receiving 49% of the profits. And then the final strange thing is that Microsoft's return on investment

is capped at $92 billion. In other words, it can only 9x its money. And that's somewhat low in the world of venture. And once Microsoft receives all of that, all of the equity and profits will finally revert back to open AI 100%. So, yeah, I was going to say these are very strange terms. It almost sounds like a loan or something similar. Have you ever seen anything like this before? It's strange on a few levels. One, $90 billion is a lot of money. And we're talking about profits.

I don't think Amazon has registered that much in profits in its entire lifetime. So Microsoft tops out, if you will, or only gets enough profits if this company becomes one of the most profitable companies in history. The other thing that really struck me about this deal is that, distinctive of all the excitement around AI, this company immediately has recognized that they're nothing without a monopoly on the front end and the back end. And what do we mean by that? The processing power requirements are substantial here. And I read that every query to chat GPT, it costs them two cents.

And that may not seem like a lot, but when you're doing millions of transactions every hour, that adds up. But essentially, there are only a small handful of players that have the cloud infrastructure to support that type of computing intensity. So again, we're back to the same old players. And also I thought it was interesting that they've said,

rather than trying to figure out a front end to monetize this, we're going to do a deal with Bing that already has a front end, already has people using it, and already has a business model. In other words, they're going vertical. They're getting the backend, the manufacturing, or the infrastructure, and they're getting the front end.

And what it says to me is that artificial intelligence is like a refinery, but unless you're sitting on'Leary shitty Shark Tank deal where he's like, you know, I'm going to invest, then I'm going to take 75% royalties. And then after that, once you've repaid me, I'm going to take half of the equity. So do you feel like there's a loser here? Or is it even? Who's winning this? I think there's a great deal for Microsoft. Because even if AI and chat GPT become somewhat commodified or commoditized, just the opportunity to establish some perceived or real, hopefully, differentiation with Bing and give Bing some renewed life is probably worth a decent amount of money. And when you're talking about Microsoft, you're talking about a $2 trillion market cap company, a $10 billion investment, sounds like a lot. But what is that? That's basically a dilution of one half of a percent in an effort to maybe be out front

in what kind of might be the next thing. Microsoft is always sort of criticized for missing social, missing mobile, missing search. So if they're out ahead of what is the next big, big thing, or they're kind of putting in an insurance policy that they're going to be on the cutting edge, this feels to me like ride as rain. And they deserve it because my understanding is they made a substantial investment a while ago before anyone really was talking about open AI. So kudos to them. It sounds to me like a really deft move and further evidence of why kind of

Satya Nadella is the CEO of what is oftentimes the most valuable company in the world that sort of pings back between Microsoft, Apple, and occasionally Saudi Aramco. You mentioned wash trading at the beginning of the show. So a recent report by June Analytics showed that in 2022, 58% of NFT trades that occurred on the Ethereum network were wash trades. This is where you buy an NFT and sell it to yourself with a different account or to someone in cahoots with you for a higher price.

And the idea is that you keep on selling yourself the NFT at higher and higher prices until eventually you can sell it to someone else for way more than you originally paid. In other words, it's market manipulation. So this tactic peaked in January, accounting for 80% of all NFT trading volume that month. And it's estimated that overall 45% of NFT trades have been wash trades. That was the number we had at the top. Scott, I knew that wash trading was a thing in crypto, but those numbers are just staggering to me. Were you surprised by this? Yeah, this number absolutely blew me away. And it just shows that unregulated markets don't work, or at least these ones don't. And it made me, not that I was ever trading in NFTs, but I've gone from bullish on NFTs. I see that my kids

are willing to pay for digital goods, whether it's skins or cool weapons or whatever, what have you, or costumes on Fortnite and other video games. So I thought NFTs make sense. Art has been a great store of value. Why wouldn't digital art be a great store of value? And you brought up the notion that this isn't that dissimilar from fine art dealers who buy stuff back and forth to try and raise the awareness and pricing around a specific artist. But this feels really over the top. And where it leads me is that I've now become a bit of a bear and a skeptic on NFTs because the marketplace is basically the short-term window for grifters. And you can just kind of imagine these farms of people

who buy a bunch of NFTs for near zero or mine them or create them or however it is you manufacture or mine these things, and then just set about trying to create false signals everywhere in the market. While innovators complain that they need regulators to get out of the way so they can just run, all they've done here is create a market where some bad actors can come in and steal from other people and the market's going to collapse under the weight of the perception of fraud.

Yeah, something that strikes me about this is there are these two massive premises for crypto. And the first is transparency. And that's reflected in the fact that you have this public immutable ledger that shows you a record of all the trades that have ever happened for an asset. And that's all publicly available.

But then there's this second strange premise, which is anonymity. And that is, you don't have to disclose who you are to anyone. And all you have to show is your wallet address, which is basically the same as like an account number. And when you combine those two things, it's like this perfect cocktail for just fraud and manipulation.

Because, you know, as we're seeing, you can create multiple wallets that look like multiple different people. You can move your assets around for extremely irrational prices. And it just makes the asset look more valuable than it is. And then you dump it on someone. And to me, all of this could be resolved if the system weren't anonymous, if you had to register your name and maybe your address or your birth date with some third party auditor. But then it wouldn't be crypto anymore. Anonymity has been cloud cover for some of the most fraudulent, nefarious actions on

the internet. And it's also resulted in absolutely no repercussions for people who have made our discourse more coarse. And it's used as this, what I'll call kind of the cultural intellectual elite to talk about the importance of anonymity. And they use the edge of edge case of a human rights activist in the Gulf who needs to be anonymous. There are ways you could figure out a way to allocate a certain number of accounts to people who generally need to be anonymous and then distract the account and start seeing if they immediately talk about crypto or how Cumrocket's going to replace the dollar or start attacking people. And you realize, okay, this person is a bad actor. But in a wealthy economy, anonymity is just recipe and cloud cover for grift. And the fact that so many academics and, of course, the crypto Taliban have embraced anonymity, what you need is a strong legal system and smart regulators who create laws that protect people such that they don't need to worry about putting their identity on anything as long as they're not doing anything wrong. But you can't get on a plane without identity.

You can't get a driver's license. You can't, I mean, this notion that this world was going to benefit from anonymity. No, the folks who have benefited from it are bringing it down. We'll be right back after a quick break to check in on European tech regulation. Thank you. What learnings have shifted their career trajectories? And how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts.

Published by Capital Client Group, Inc. Hello, I'm Esther Perel, psychotherapist and host of the podcast, Where Should We Begin? Which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners, and managers. Listen in as I talk to co-workers facing their own challenges with one another and get the real work done. Tune into How's Work, a special series from Where Should We Begin, sponsored by Klaviyo. We're back with ProfgMarkets.

As we're here in Germany, we thought we'd catch up on some local news. Germany's antitrust regulator, or the Bundeskartellamt, issued a statement that Google users are not given enough choice over how their data is processed. The choices currently offered are, quote, not sufficiently transparent and too general. This is part of a larger crackdown on big tech in Europe. In 2018, the EU passed the GDPR Act, which set new standards for how tech companies handle user data. Since then, the EU has fined Meta $1.5 billion, Amazon $1 billion, and Google a quarter of a billion dollars. Scott, in the past, you've praised Europe for how it's handled big tech. You've also described the EU Commissioner Margaret Festier as one of your

heroes. It seems like Europe is way more up for this antitrust challenge than the US. Do you still feel positive about Europe? And also, do you think that their actions have been effective? So yes and no. I don't know if GDPR has been effective. It seems to me that it's been a real tax. It's done what it was supposed to do to big tech, to small and medium-sized media companies. I don't think GDPR, I'm not sure it's been a success. Having said that, I think this latest legislation has real teeth. Interoperability, being able to take your data, not letting Apple be the gatekeeper for any in-app purchase on the iOS system, letting people choose their own tech or their own browsers or clients or apps, no matter what operating system. There's just a lot here to like.

In addition, the thing that really struck me as part of this legislation, I don't know if it was the DSA or the MSA, said that essentially offline hate speech that's illegal is now illegal online and the platforms are liable for it, which is effectively the ending of what we would call in the U.S. Section 230. And they can start taxing you or fining you real numbers, because the bottom line is Facebook decided a while ago, 10 years ago, that their strategy was to break the law, recognizing the cash volcano they had. That if they had to pay some of that, even billions of dollars as a tax for breaking the law, that it was worth it from a shareholder's perspective. And what they've done here is said,

no, we'll tax you as a percentage of your total revenue. So some of these fines, you're probably going to see a multi-billion dollar or several multi-billion dollar fines sooner rather than later. And also what motivates all of this is that in the U.S., we have a lot of upside or register a lot of upside from big tech. We have universities and hospital wings named after Google and Facebook billionaires. They create ecosystems, huge recruiters. One in three of my students goes to work at Amazon. We benefit a lot from big tech. Now, there's some downsides.

The weaponization of our elections, teen depression, making our discourse more coarse. But in Europe, they get all of the calories. They get all of the negatives with none of the great taste. There are very few universities or hospital wings named after Google or Facebook billionaires. So this is stiff in the backbone of EU regulators who are like, well, okay, this hasn't worked well for us. Why didn't we go Chinese and steal your IP and prop up local competitors and capture all the economic value ourselves, which is what China has done. And quite frankly, it was probably a smart thing for China to do. So anyways, I think that they are leading the way and the incentives make all the sense in the world. They have less to lose and they're sick

of this. And in addition, in Washington, we have a pay-for-play system where our elected representatives are presented with a really compelling deal, and that is the lobbyists from Amazon, Apple, Facebook, and Google say to them, here's a shit ton of money, and the key to getting reelected in America is money. And all you have to do is nothing. Just ask a lot of questions about proposed legislation and water down Senator Klobuchar's antitrust until it's almost meaningless, which is what has happened.

So I'm bullish and hopeful about this regulation in the EU. Yeah, I think about how the GDPR has affected me as a user. And it was passed into law when I was living in London, so I experienced it. But yeah, all that really changed for me is that when I enter a new website, my browser asks if I accept or reject a cookie, and a cookie is the software that these companies use to track your data. And as a general principle, I'd always click reject. But overall, my internet experience hasn't really changed.

And at this point, I'm like, do I really care that much that these companies are collecting my data? But I'm not sure what to think about it. So what do you think about cookies and these tracking devices? Do you think that they're important? And do you think that American regulators should be paying attention to them as much as the EU is? We need some sort of comprehensive privacy regulation. And I'm one of those lazy people that says accept all cookies, because I think I have a younger mentality in the sense that I don't mind having my privacy violated as long as there's a coupon or utility at the end of it. And while people talk a big game around their concerns surrounding privacy, there's cognitive

dissonance here. And that is they behave as if they could give a flying fuck about their privacy. Uber knows where you're going and knows where you are. Facebook knows your key relationships. And Google, if there was a hack on Google, you'd have social chaos because everybody was contemplating divorce or having affairs or had STDs or was HIV positive or managing diabetes or was thinking about joining the Taliban. Google knows all of this about you. It knows your sexual fetishes. It knows more about you than any priest, mentor, rabbi, scholar, or boss. And for most of us, it's a good trade. It's scary to say this out loud, but I haven't had really any terrible things happen to me

by giving up this data, and I get tremendous utility. You do. I mean, if you're really worried about privacy, you just wouldn't have a mobile phone. And very few people are willing to do that. But I do think we need some sort of privacy legislation. It's not that people don't mind giving up data for utility. What they mind is companies that don't put in place the requisite safeguards such that bad actors can access that data and then use it against them. And what they've shown is that not only do they not do that or make the requisite investments,

that even if that happens, they try and cover it up. So it's sort of, you know, we can't trust them with this data is what it comes right down to. But I think, I don't know if it's going to happen, but we're desperate for some sort of kind of systemic or, you know, industry-wide privacy legislation. So that's an American's view on EU tech regulation. But we also wanted to know what Europeans think. Luckily, we're in Germany right now. Here's Mia on the street, Munich edition. What do you think of the EU's regulation of big tech? I mean, GDPR, before it was introduced, everyone was so scared about it and no one knew what it was. Now it kind of ended up as a little cookie banner when you go on websites.

On the one side, regulation is always good because it creates certain rules on the market. So it's harder for outliers who are not playing with the rules to play unfair on the one hand. But also is that when you over-regulate, you make it very hard for especially innovative and also young companies to enter the market and to really play a role in this market. But I appreciate that we have more diversity and that kind of those big monopolies are not there or like or they break it up. I think that's good, more competition, more access. I think even though we have a GDPR regulation, we might be a bit safer, our data might be a bit safer, but we are never safe. But some people might drop their guard and think they're protected even though you're not 100% protected, you should always be careful.

As a customer, I need to be sure that my data is not going anywhere. EU kind of tries to be a leadership in regulation and I think that's problematic because while their intent is good and right, what it always turns out to be is in this weird click banner that everyone ignores or other regulation that's sort of not being really taken seriously. So I think we really need to think more about how we can make regulation work and achieve its goal. And if that's leadership in regulation, then that would be great. But unfortunately, I'm only foreseeing

another generation of click banners. GDPR, has that affected your life at all online? Oh yeah, I think so. It makes everything more difficult. And like in the bureaucracy level in Germany it's high, but with all the privacy in Germany it's like always special. It makes life harder. Yeah.

But I think companies are aware of the importance of it. European Union, we have a more conservative way, I think. It is ineffective, but at the same time it also really creates an issue because it means

additional overhead for an already fragmented market. While it's a very big market, it's not a unified market because of languages, because of other things. So there's already like intrinsic limitations of how fast you can grow in a European market. And I think if you really want to become faster

and become a larger market, we have to be better in being a unified and easy to access place. All right, thanks, Mia. Let's take a look at the week ahead. Fourth quarter earnings season is kicking off with Charles Schwab, Morgan Stanley, and Goldman Sachs, and Netflix is also reporting.

We'll also see housing starts, existing home sales, and retail sales data for December. Scott, do you have any predictions? So my prediction is I met the CEO of a software company in Germany, and it's the most successful company or tech company you've never heard of. It's a company called Solonis,

and it's business performance software. They did 400 million last year. They're going to grow 50% this year. And I was asked the same two questions of any software company, and that is, what is their logo renewal, which is essentially customer return, what percentage of their clients renewed in year two from year one, and then dollar renewal. What is the growth of revenue of those clients that they retain?

And this company has about 90% retention and about $140 renewal, meaning of those 90 of 100 clients that renew, they're spending on average 50 or 60% more. So this is a juggernaut. And at 400 million, if it goes to 600 million this year, and then it has 2024 numbers of, say, a billion, you're talking about a company that will probably go public at a $20 billion to $50 billion market cap. It just closed on around at $12 billion, which makes it, I think, the most valuable tech startup in Germany and would be one of the probably 20 or 30 most valuable private companies in the world. But it is going to be, Germany is overdue. It's interesting. The UK just passed a trillion dollar mark,

and that is private tech companies are now worth a trillion dollars, over a trillion dollars in the UK. And in Germany, despite having a much bigger economy, it's only about half that. So Germany is sort of not an innovator. It hasn't been able to birth giants. I think SAP is their biggest tech company. But anyways, my prediction is that the biggest tech IPO in Europe over the next four to six quarters is going to be business performance software firm Solonis. Oh my God, that was boring. That was boring. That's all for this episode. Our producers

are Claire Miller and Jason Stavers. Special thanks to Catherine Dillon, Ed Elson, Mia Silverio, That was boring. Hey, it's Scott Galloway. And on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life. So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. What software do you use at work?

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