This Week In Tech

Apr 6, 2023

Welcome to today's newsletter! We covered a wide range of topics, from the challenges streaming services face as their business models mature to the regulatory pressures startup banks face. We also looked at the latest revelations in the CFTC's lawsuit against Binance and the ongoing scrutiny of TikTok amid growing criticism. Finally, we explored the coming copyright storm as AI technology advances and the talented individuals behind the lightning-fast performance of OpenAI. We hope you enjoy and find this brief summary of today's topics informative.

The Team Behind OpenAI's Lightning-Fast Performance

Sam Altman is the co-founder and CEO of OpenAI, which has quickly outmaneuvered rivals such as Google to launch cutting-edge artificial intelligence to the public. The company's success is attributed to its flat organizational structure, with few managers overseeing technical teams, and its leaders' ability to overcome a common problem at tech companies: getting in-house AI researchers to work well with software engineers to turn their research into commercial products. The role of some of OpenAI's most important employees may not be immediately apparent from their place in the org chart, such as Chair and President Greg Brockman and Chief Scientist Ilya Sutskever, who report to Bob McGrew, vice president of research. Altman said the company's best trait is getting two distinct types of workers to collaborate: staff focused on launching products and researchers developing technologies such as GPT. OpenAI is a seven-year-old startup based in San Francisco's Mission District with a small staff of 400 employees, mostly engineers.

It has a hybrid workplace, with most staff coming into the office at least several days a week, and many technical staff previously worked at other tech companies with large machine-learning research units. Co-founders Sutskever, McGrew, Murati, and Zaremba oversee the company's technical and research operations, product roadmap, and partnerships with customers like Salesforce and Meta Platforms. Radford is an early developer of the GPT language model and a lead author on a research paper about the tech behind the company's text-to-image model, Dall-E.

OpenAI's CEO, Sam Altman, is followed by Chief Operating Officer Brad Lightcap, who worked as an investor at Y Combinator when Altman ran it. Altman spends time on high-level issues such as major business partnerships, fundraising, and recruiting for key roles, while Lightcap manages the startup's finance operations and runs its business and commercial efforts. He also oversees the $100 million OpenAI Startup Fund, which has taken stakes in companies including Descript, a media-editing software maker, and Harvey, which uses OpenAI's machine-learning models to generate answers to legal questions. After months of negotiations, OpenAI recently struck a deal to take billions of dollars in additional funding from Microsoft in exchange for a complex profit-sharing arrangement with the enterprise software company.

OpenAI's team of technical staff, led by co-founders Brockman, Zaremba, and Schulman, oversees reinforcement learning, a key method of training AI systems with human feedback. Peter Welinder oversees the applied AI group, Sherwin Wu is a key staffer working on OpenAI's application programming interface, and a recent hire said OpenAI's key draw was its ability to bring together large teams around projects like GPT-4, which can generate text answers to a wide variety of queries. OpenAI has a recruiting advantage due to its ability to hire key Google researchers and high-profile technical staff. It also pays well and has axed initiatives that did not have a clear path to becoming commercial products, such as its robotics efforts, and an "open-endedness" team focused on studying how AI systems learn patterns without receiving detailed instructions. London Calling?

OpenAI is considering expanding beyond San Francisco to attract more talent and has discussed opening an office in the city. It has also approached some researchers at Meta's AI research hub in Paris about moving to London to staff the new lab. OpenAI recently hired a sales leader and someone to manage relationships with big customers to sell its ChatGPT chatbot and the technology that powers it to app developers. In mid-2021, many of OpenAI's research and engineering staff put their regular work aside to prepare for a visit from Microsoft Chief Technology Officer Kevin Scott to view a demonstration of the company's technology. The demo included an early look at OpenAI's Dall-E 2 model, which generates images based on text, and GPT-3.5, an earlier version of the language-understanding model that would later power ChatGPT.

Streaming Services Facing Challenges as Business Model Matures

The media business's ongoing production budget cuts, layoffs, and a general sense of struggle may be due to streaming, as cable networks still serve 60 million homes and streaming services such as Netflix and Disney+ reach hundreds of millions of customers worldwide. However, streaming alone has not been able to deliver even break-even revenues for some of the newer entrants in the market, especially for legacy media services. Disney CEO Robert Iger diagnosed the problem as one of "general entertainment," offerings like prestige TV that is more or less undifferentiated from brand to brand versus the core franchises a company is known for. If general entertainment is a lower-margin product, then why keep producing it? Paramount+ has gone all-in on "Yellowstone" and the Taylor Sheridan universe, while Warner Bros. has bet the farm on HBO Chief Content Officer Casey Bloys' ability to identify the next "The Last of Us." Even Peacock has pivoted in this direction, with its Rian Johnson–directed detective series "Poker Face" landing at No. 2 on Nielsen's U.S. streaming originals list.

Algorithm-driven streaming services such as Netflix, TikTok, YouTube, and regional sports networks have been successful in serving general entertainment to passionate fans, but what other options are there? In January, I argued that streaming on its own is no longer enough to keep users happy and that core franchises are the solution. Netflix, Prime Video, Apple TV+, Disney+, HBO Max, Hulu, Paramount+, and Peacock collectively released 1,752 titles and 4,878 hours of first-run original content in 2022, a 60% increase in titles and an 87% in hours year over year. However, there is content that will never be discovered once a content library gets past a certain size. Netflix's algorithm favors new or recent content, which can lead to a divide between core franchises and general entertainment.

This is exemplified by the dilemma of the regional sports network, where tens of thousands of fans pay for the privilege of watching their particular team play however many times over the duration of their season. However, Discovery recently told various teams in MLB, the NBA, and the NHL that its AT&T SportsNet networks no longer have the money to make their scheduled payments for rights. This means that if streaming only works, the Pirates would have to charge each of the 55,000 fans who regularly tuned in to games between March and October of last year $1,090 for a season-long streaming package.

Disney CEO Bob Iger recently stated that ESPN's pivot to streaming will be "inevitable." This hypothesis is still being tested, but if Iger were right, Disney would not be dealing with an apparent case of franchise fatigue across its various fan bases. "The Mandalorian," the company's most popular title, has shown lackluster ratings so far in its third season. Another recent entrant in the Star Wars universe, the series "Andor," received critical acclaim but largely failed to reach the top of the charts. Disney has taken to updating the release windows of previously announced shows on Disney+ to declare simply "Coming Soon." Last week it ousted Victoria Alonso, chief of visual effects and postproduction at Marvel Studios after Marvel films like "Ant-Man and the Wasp: Quantumania" and series like "She-Hulk: Attorney at Law" got dinged for subpar graphics. If former WarnerMedia CEO Jason Kilar is right, Iger needs to rethink his dichotomy to do more.

CFTC Lawsuit Uncovers Startling Insights into Binance Operations

On Monday, the Commodity Futures Trading Commission sued crypto exchange Binance and its CEO, Changpeng Zhao, for violating U.S. trading laws. The lawsuit alleges that Binance breached multiple laws by encouraging U.S.-based customers to use virtual private networks and shell companies to access the international exchange and creating special policies for "VIP customers" to skirt compliance controls. Binance has been working with the CFTC for more than two years and intends to continue collaborating with regulators in the US and worldwide. Binance used a network of U.S. residents called "Binance Angels" to recruit customers to trade on the platform. The Angels were invited to events and given Binance merchandise.

Binance has gone to great lengths to keep customers using its global exchange but has also traded on its own exchange with lax controls and tried to shield compliance shortcomings from business partners. This lack of internal controls could have given Binance-affiliated trading entities an unfair advantage on its exchange. Binance did a compliance audit in 2020 but used an auditor that would "do a half assed individual sub audit" to hide the scope of its compliance program's ineffectiveness. The exchange's former officer in charge of money laundering reporting complained that she needed to create a fake annual report on money laundering as part of the audit. Due to unresolved issues, the New York State Department of Financial Services ordered Paxos to stop issuing BUSD last month.

Binance's revenue in 2021 was $700 million, compared to Coinbase's $7.8 billion. It mislabeled accounts to conceal the presence of its U.S. customers and has more than 120 entities around the world. The lawsuit alleges that some of these entities have commingled funds and that Zhao's HQ is wherever he is located at any point in time.

Why is this good for Coinbase?

The Commodity Futures Trading Commissions’ lawsuit against Binance alleges that its executives routinely discussed business matters over Signal, even after receiving document requests from the CFTC. The CFTC also alleges that Binance deliberately lured American investors to use its platform despite failing to register with U.S. authorities. Binance has called the complaint "unexpected and disappointing."

The Securities and Exchange Commission has filed a lawsuit against Binance, a publicly traded U.S. crypto exchange, alleging that executives knew some bad people were using the exchange to move money around. This case should be good news for Coinbase, as it demonstrates to regulators which fish they should try their hardest to catch. Elon Musk's Twitter buyout should also be believed, as Musk is making stock awards to employees at a "roughly $20 billion valuation." However, this valuation is optimistic, as Twitter was worth $20 billion before Musk loaded it up with $13 billion in debt and sent half its advertisers running for their lives. Musk may be able to rebuild the company, given enough time.

TikTok Fights Back Amid Growing Scrutiny and Criticism

TikTok CEO Shou Zi Chew's Congressional hearing last week sparked fears of a ban, and Golin, a major PR firm, asked some clients to hold off on sponsorship agreements. TikTok is shifting into damage-control mode, sending a note to advertisers with many of Chew's talking points and a document debunking misinformation about its parent company ByteDance's ties to China. Advertisers can shift budgets to other social networks, but creators who primarily rely on TikTok face a greater risk.

Dulma Altan, an influencer with 103,000 followers on TikTok, has decided to diversify her revenue streams to other platforms, including Instagram, her podcast "Due Diligence," and the Substack newsletter. Over the weekend, TikTok scored support from at least one more politician, Alexandria Ocasio-Cortez, a social-media-savvy Democrat representing New York. However, there are risks for politicians if the U.S. were to ban TikTok, which has more than 150 million monthly active users in the country. A TikTok spokesperson said the company will continue to educate lawmakers and the public about its progress with Project Texas.

Regulatory Pressures Mounting for Startup Banks

Neobanks feel bullish after picking up billions in deposits during the banking crisis, but some customers have already ditched them for big banks like JPMorgan Chase. Software glitches, customer service teams too small to handle the sudden uptick in accounts, and broader headwinds in fintech could challenge their ability to retain new customers. Companies need to know that they can trust startup banks to have their back in tough times and that the banks will stick around themselves.

Everett Cook, CEO of Rho, a startup backed by M13 and DFJ Growth, has seen several hundred million dollars in new deposits due to the SVB implosion. Henrique Dubugras, CEO of Brex, has seen 4,000 new account holders, and Immad Akhund, CEO of Mercury, has seen retention. All of these startups could soon raise money on the back of the uptick in business, but should they jump at the opportunity or wait until their business stabilizes and the impact of SVB's death is clearer? Something tells me they'll go with the former option.

That's all for today's newsletter. We hope you found these insights and updates valuable. As always, feel free to reach out to us with any comments or suggestions on the topics we covered. And don't forget to stay tuned for our next newsletter, where we'll bring you the latest news and trends from the tech industry. Thank you for reading, and we'll see you soon!