Long read: Winners & Losers of the AI Era

Ben Thompson writes a very popular blog on the business of technology called Stratechery. It is a go to blog for tech investors and tech entrepreneurs alike. Given tech is increasingly a part of all life around us, we would recommend the blog even if you don’t belong to either of those categories. Here, Patrick O’Shaugnessy who runs an equally successful content firm (besides his investment firm) called Colossus, interviews Ben in his ‘Invest like the Best’ podcast. Ben shares his thoughts on all things AI – from impact on macro-economics and geopolitics to his take on the different layers of the AI stack from frontier models to hyperscalers to chip makers. You can listen to the whole podcast on Youtube here. We cover a few of the takeaways we found interesting here:

Patrick starts with an interesting question on what happens if the US wins the AI race? Ben gives a rather counter-intuitive answer: “I think it would be very problematic for the US to win. Let’s say we take the most fantastical scenario where if you control AI, your military is better than anyone else. Somehow it fixes our manufacturing, all these things that I don’t think AI is necessarily going to do because they sort of deal with the real world.

But in this world, what is the game theory optimal response of China? To blow up TSMC.”

And to think that the US will bring manufacturing back home he reckons is fantastical:

“I think there’s a little bit of magical thinking, which I just invoked in terms of manufacturing and whether it be fabs, whether that be actuators — all these precursors. I think the degree to which we are dependent on China is underappreciated and is not something that is going to be fixed outside of a conflict. Just because fixing so many of these things is going to be dramatically dumb. If your competitor is sourcing from China and you’re going to start sourcing or getting things from the US, you’re going to be at such a disadvantage, relatively speaking, that you’re just not going to do it.”

The most interest part to us was the reference to Berkshire’s investment in Google, linking railroads to AI. Referencing Nvidia’s recent proposal to raise $500bn from pension funds and insurance to continually fund the AI capex, Ben draws parallels with the railroads of the 1870s – the one infrastructure buildout in history that comes close to AI in terms of capex as a share of GDP.

“The railroads had a real duration mismatch. To build a railroad and make money off it was a decade or multiple decades-long endeavor. Whereas you had to issue money to pay for it in the short term. And the world ran out of money, right? And I think that is probably the aspect.

I think that’s why people reach for the railroads because everyone talks about, are we going to have enough compute? Are we going to have enough electricity? Maybe the nearest term question is, are we going to have enough money? Which is kind of a bizarre thing to think about. That’s what happened in the 1870s. The world ran out of money.

The funny thing is the railroads kept operating and they expanded the West. Their contributions to GDP were astronomical. They’re still contributing to GDP.”

So, what’s the connection between Berkshire and Google in this context? Berkshire’s large cashflows from its holding of railroads reinvested into Google, which in turn is moving from an asset light high return search business to a lower return albeit on a massively larger asset – AI datacenters:

“Berkshire comparison is interesting because to a rough approximation, they have See’s Candies famously, right? Tremendously high margin business. The problem with a lot of high margin businesses is the percentage profit you can make is very high, but the absolute profit you can make is capped.

You’re just accumulating cash. The brilliance of the BNSF railway thing was basically they took the See’s Candies profits and said, here’s another industry whose margins are way worse, but the absolute dollar amounts are so large that those way worse margins result in absolute profits that are much larger. BNSF in 2025 or something, the amount of free cash they threw off in one year was more than See’s Candies had thrown off in its entire lifetime. Even though you’re talking about a low-margin business compared to a very high-margin business. I think there’s an aspect from Berkshire Hathaway where once your capital gets so large, you start operating in a world of absolute numbers as opposed to percentage numbers.

And the reason why I thought that was so interesting, that story, is it seems to capture where Google itself might be going. And so it was very symbolic for them to invest in Google. Google has this unbelievable high-margin business of search, one of the most perfect, beautiful business models of all time. And it’s the purest aggregator of them all — it scales in every direction, doesn’t have to invest any money to do it, everything’s zero marginal cost. It’s amazing.

Meanwhile, there’s this AI opportunity which is just incinerating cash. But you can imagine if AI is intelligence and its TAM is basically all white-collar work, and eventually with robotics.

The absolute profits available here, even if the margins are lower, is so much larger that we will look back and Google search was See’s Candies? It feels like that’s what’s happening. In that world, you use all your free cash flow. They’ve done that. You tap the debt markets to the tune of hundreds of billions of dollars. They’ve done that. You issue equity. What does an equity issue do? It dilutes your interest in your shareholders. So you have a smaller percentage of the pie. Well, you have a smaller percentage of an astronomically larger pie.

At the end of the day, no one’s going to be complaining. It was very symbolic, Berkshire being the symbol of that equity issuance in that, are they actually not just an investor in Google, but a model for Google and where they’re going?”

There’s plenty more interesting insight about tech including how Morris Chang of TSMC famously came out of retirement in the late noughties to fire his management who had shown ‘discipline’ on capacity expansion (much like today) to reverse it and ride the iPhone boom. Worth listening to the podcast in its entirety.

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