Prof G Markets: Microsoft and OpenAI, Wash Trading, and European Tech Regulations

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

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:18Scott Galloway?

  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 an order to send a false signal about the value of an NFT. Non-fungible tokens are entirely fraudulent tokens.

• 1:50Scott Galloway?

  Welcome to Prop G 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 Prop G Media Analyst Ed Elson. Ed, what is the good word?

• 2:06Ed Elson?

  I'm feeling pretty great, Scott. I've eaten some vice versa, some bratwurst. I'm on a diet of beer and sausages. It's pretty nice.

• 2:13Scott Galloway?

  A few of my favorite things. Have you been to Munich before?

• 2:15Ed Elson?

  I have. I've been here for Oktoberfest a few years ago, but I don't remember it very well.

• 2:20Scott Galloway?

  You know, it's a good thing. You just want to be sure that you don't 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.

• 2:31Ed Elson?

  Okay, let's start with our weekly review of market vitals.

• 2:40Ed Elson?

  The S and 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 head

• 3:23Ed Elson?

  count by 950, and that's 20% of the company's total staff. Scott, do you have any thoughts on this news?

• 3:30Scott Galloway?

  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 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

• 4:13Scott Galloway?

  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 Uh, three twenty and uh, because I didn't know the company, uh, 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. Cause as we sit here today, it's trading at forty three bucks. So it's off about ninety percent from its highs. But anyways, one is a secular decline and will keep happening. And one is a, just a temporary blip.

• 4:51Ed Elson?

  And just a statistic here, as of November, uh, layoffs account for less than one percent of all non-farm payrolls in the U S. And before COVID, that number was above one percent. 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, it's not really the same for the rest of the nation.

• 5:12Scott Galloway?

  Well, it is true. It's, as you get older, what you realize is it's important to question almost everything. And when, um, you know, 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, we, you know, 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.

• 5:57Scott Galloway?

  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 of Meta, we get all hot and bothered, but the reality is it only takes it back to say November of last year. 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 one point seven open jobs for every one person who is looking for a job.

• 6:39Scott Galloway?

  The hospitality industry is just massively understaffed. Any skills, if you, if you're one of those kids, it's handy that 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, you know, 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 know, you don't even need a high school degree. My takeaway is to get good at carpentry. There you go.

• 7:14Ed Elson?

  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?

• 7:46Scott Galloway?

  So I think this is fascinating. Jason, our editor in chief, referenced Gary Marcus's view. And 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'm not sure that's what they initially intended. The structure is really unusual. It's a different type of organization or structure.

• 8:10Ed Elson?

  Yeah, I, I've got it actually in front of me, this, 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, you know, somewhat low in the world of venture. And once Microsoft receives all of that.

• 8:51Ed Elson?

  All of the equity and profits will finally revert back to OpenAI one hundred percent. So, yeah, I was gonna say, these are very strange terms. It almost sounds like a loan or something similar. Have you ever seen anything like this before?

• 9:07Scott Galloway?

  It's strange on a few levels. One, ninety billion dollars 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, distinct 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 ChatGPT, 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.

• 9:52Scott Galloway?

  But essentially, there are only a small, a 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 gonna 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, you know, artificial intelligence is like a refinery, but unless you're sitting on billions of metric tons of oil, oil being processing power, you're in danger.

• 10:35Ed Elson?

  Who's the winner in this deal? I mean, I was seeing memes on Twitter comparing this to like a Kevin O'Leary shitty shark tank deal, where he's like, you know, I'm gonna invest, then I'm gonna take seventy five percent royalties, and then after that, once you've repaid me, I'm gonna take half of the equity. So do you feel like there's a loser here? Or is it even, who's winning this?

• 10:57Scott Galloway?

  I think this is a great deal for Microsoft, because even if AI and ChatGPT 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, you know, 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.

• 11:39Scott Galloway?

  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 right as rain, and they deserve it because my understanding is they made a substantial investment a while ago before anyone really was talking about OpenAI. 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. It's sort of pings back between Microsoft, Apple, and occasionally Saudi Aramco.

• 12:19Ed Elson?

  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.

• 13:04Ed Elson?

  Scott, I knew that wash trading was a thing in crypto, but those numbers are just staggering to me. Were you surprised by this?

• 13:12Scott Galloway?

  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 makes 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.

• 13:55Scott Galloway?

  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 much 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.

• 14:34Ed Elson?

  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, 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.

• 15:19Ed Elson?

  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, I don't know, maybe your address or your birth date with some third-party auditor. But then it wouldn't be crypto anymore.

• 15:37Scott Galloway?

  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. Activists in the Gulf who need 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 ComRockets can replace the dollar or start attacking people and you realize, okay, this person is a bad actor.

• 16:16Scott Galloway?

  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, 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.

• 16:55Ed Elson?

  We'll be right back after a quick break to check in on European tech regulation.

• 17:22Scott Galloway?

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• 19:59Ed Elson?

  We're back with Prof G Markets. As we're here in Germany, we thought we'd catch up on some local news. Germany's antitrust regulator, or the Bundes Kartellamt, 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 $1.25 billion. Scott, in the past, you've praised Europe for how it's handled big tech.

• 20:43Ed Elson?

  You've also described the EU Commissioner Margaret Festaia 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?

• 20:57Scott Galloway?

  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 with their own browsers or, you know, 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,

• 21:40Scott Galloway?

  which is effectively the ending of what we would call in the US Section 230. And they can start taxing you or finding 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 US, we have a lot of upside, or register a lot of upside from big tech. We have universities and hospital wings named

• 22:25Scott Galloway?

  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, this hasn't worked well for us. You know, 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

• 23:06Scott Galloway?

  a smart thing for China to do. So anyways, I, 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, I'm bullish and hopeful about this regulation in the EU.

• 23:45Ed Elson?

  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'd accept or reject a cookie. And a cookie is the software that these companies use to track your data. 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?

• 24:26Ed Elson?

  And do you think that American regulators should be paying attention to them as much as the EU is?

• 24:31Scott Galloway?

  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.

• 25:15Scott Galloway?

  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. So and for most of us, it's a good trade. You know, 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. So 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.

• 25:59Scott Galloway?

  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.

• 26:12Ed Elson?

  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.

• 26:27Speaker 04

  Was denkst du über die EU-Regulation Big Check?

• 26:30Speaker 05

  Ich meine, Gdpr, bevor es eingeführt wurde, war alle so gefühlt, und niemand wusste, was es war. Jetzt ist es ein kleines Klickbanner, das man auf Webseiten schaut.

• 26:40Speaker 06

  Auf der einen Seite ist die Regulation immer gut, weil es bestimmte Regeln auf dem Markt schafft. Es ist schwieriger für diejenigen, die nicht mit den Regeln spielen, unfair zu spielen. Auf der anderen Seite ist es auch so, dass wenn man überreguliert wird, es sehr schwer macht, besonders innovative und junge Unternehmen, die den Markt zu starten und wirklich einen Rolle in diesem Markt zu spielen.

• 27:06Speaker 07

  Aber ich appreciere, dass wir mehr Diversität haben und dass die großen Monopolen nicht da sind oder sie es zerstören. Ich denke, das ist gut. Mehr Konkurrenz, mehr Zugang.

• 27:20Speaker 08

  Ich denke, obwohl wir eine Gdpr-Regulation haben, können wir ein bisschen sicherer sein. Unsere Daten können ein bisschen sicherer sein, aber wir sind nie sicher. Aber einige Menschen könnten ihre Verteidigung verlieren und denken, sie sind geschützt. Obwohl du nicht 100% geschützt bist, sollte man immer vorsichtig sein.

• 27:33Speaker 09

  Als Kunde muss ich sicher sein, dass meine Daten nicht irgendwo gehen.

• 27:38Speaker 10

  Die EU versucht, in der Regulation zu sein, und ich denke, das ist problematisch. Weil die Intention gut ist und richtig ist, aber es stellt sich immer wieder ein weirdes Klickbanner, das alle ignorieren. Oder andere Regulation, die nicht wirklich ernst genommen wird. Also ich denke, wir müssen wirklich mehr darüber nachdenken, wie wir Regulation funktionieren und ihre Ziele erreichen können. Und wenn das Leadership in der Regulation ist, dann wäre das groß. Aber leider sehe ich nur noch eine Generation von Klickbannern.

• 28:14Speaker 04

  Gdpr, hat das auf deine Leben auf der Online生活 beeinflusst?

• 28:19Speaker 11

  Oh ja, ich denke. Ja. Ich denke, es macht alles schwieriger. Und wie im Bürokratienlevel in Deutschland ist es hoch, aber mit all der Privatsphäre in Deutschland ist es immer besonders.

• 28:34Speaker 09

  Es macht die Leben schwieriger.

• 28:38Speaker 09

  But I think companies are aware of the importance of it.

• 28:43Speaker 11

  European Union, we have like a more conservative way, I think, so.

• 28:48Speaker 10

  It is ineffective, but at the same time, it also really creates an issue because it means additional overhead for an already fragmented market. Like the EU, 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 like being a unified and easy to access place.

• 29:22Ed Elson?

  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?

• 29:40Scott Galloway?

  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 Salonis, 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 churn, 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 a $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,

• 30:25Scott Galloway?

  say, a billion, you're talking about a company that'll probably go public at a $20 billion to $50 billion market cap. It just closed on around a $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. So I think SAP is their biggest tech company. But anyways, my prediction is that the biggest tech IPO in Europe over the next

• 31:10Scott Galloway?

  four to six quarters is going to be business performance software firm Solonos. 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, and the Prop G Media team. If you like what you heard, please follow, download, and subscribe. Thank you for listening to Prop G Markets from the Vox Media Podcast Network. We will catch you next week.

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