Dylan Patel: evaluation

Transcript context

…In some sense this goes back again to, essentially, what’s the economic growth picture going to really look like? What’s the firm going to look like? What’s productivity going to look like? That to me is where, again, if the Industrial Revolution created… After 70 years of diffusion is when you started seeing the economic growth. That’s the other thing to remember. Even if the tech is diffusing fast this time around, for true economic growth to appear it has to diffuse to a point where the work, the work artifact, and the workflow has to change. So that’s one place where I think the change management required for a corporation to truly change is something we shouldn’t discount. Going forward, do humans and the tokens they produce get higher leverage, whether it’s the Dwarkesh or the Dylan tokens of the future? Think about the amount of technology. Would you be able to run SemiAnalysis or this podcast without technology? No chance, at the scale that you have been able to achieve, there’s no chance. So the question is, what’s that scale? Is it going to be 10x’ed with something that comes through? Absolutely. Therefore, whether you’re ramped to some revenue number or you’re ramped to some audience number or what have you, that I think is what’s going to happen. The point is, what took 70 years, maybe 150 years for the Industrial Revolution, may happen in 20 years, 25 years. I would love to compress what happened in 200 years of the Industrial Revolution into a 20-year period, if we’re lucky. Microsoft historically has been perhaps the greatest software company, the largest software-as-a-service company. You’ve gone through a transition in the past where you used to sell Windows licenses and disks of Windows or Microsoft, and now you sell subscriptions to 365. As we go from that transition to where your business is today, there’s also a transition going on after that. Software-as-a-service has incredibly low incremental cost per user. There’s a lot of R&D, there’s a lot of customer acquisition costs. This is sort of why, not Microsoft, but the SaaS companies have underperformed massively in the markets, because the COGS of AI is just so high, and that just completely breaks how these business models work. How do you, as perhaps the greatest software-as-a-service company, transition Microsoft to this new age where COGS matters a lot and the incremental cost per user is different? Because right now you’re charging like, “Hey, it’s 20 bucks for Copilot.” It’s a great question because in some sense with the business models themselves, the levers are going to remain similar. If you look at the menu of models starting from consumer all the way, there will be some ad unit, there will be some transaction, there will be some device gross margin for somebody who builds an AI device. There will be subscriptions, consumer and enterprise, and then there’ll be consumption. So I still think those are all the meters. To your point, what is a subscription? Up to now, people like subscriptions because they can budget for them. They are essentially entitlements to some consumption rights that come encapsulated in a subscription. So I think that in some sense becomes a pricing decision. How much consumption you are entitled to is, if you look at all the coding subscriptions, kind of what they are, right? Then you have the pro tier, the standard tier, and what have you. So I think that’s how the pricing and the margin structures will get tiered. The interesting thing is that at Microsoft, the good news for us is we are in that business across all those meters. At a portfolio level, we pretty much have consumption, subscriptions, to all of the other consumer levers as well. I think time will tell which of these models make sense in what categories. One thing on the SaaS side, since you brought it up, which I think a lot about. Take Office 365 or Microsoft 365. Having a low ARPU is great, because here’s an interesting thing. During the transition from server to cloud, one of the questions we used to ask ourselves is, “Oh my God, if all we did was just basically move the same users who were using our Office licenses and our Office servers at the time to the cloud, and we had COGS, this is going to not only shrink our margins but we’ll be fundamentally a less profitable company.” Except what happened was the move to the cloud expanded the market like crazy. We sold a few servers in India, we didn’t sell much. Whereas in the cloud suddenly everybody in India also could afford fractionally buying servers, the IT cost. In fact, the biggest thing I had not realized, for example, was the amount of money people were spending buying storage underneath SharePoint. In fact, EMC’s biggest segment may have been storage servers for SharePoint. All that sort of dropped in the cloud because nobody had to go buy. In fact, it was working capital, meaning basically, it was cash flow out. So it expanded the market massively. So this AI thing will be that. If you take coding, what we built with GitHub and VS Code over decades, suddenly the coding assistant is that big in one year. That I think is what’s going to happen as well, which is the market expands massively.…

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