How Vision Services Subscriptions Reach $3000/yr

One of the biggest puzzles of my adult life was this question: Why do people pay to attend live events when broadcasts and/or recorded versions are free? Not only do people tend to pay for live events, the costs are extraordinarily high. Earlier this year, 32% of planned concertgoers expected to spend $500 or more attending events, a LendingTree survey found. The survey also revealed 38% of concertgoers were willing to pay more for better seats, up to $328 for their favorite artists. The average price for a Drake concert is $600 and for Taylor Swift it’s $2,424(!) Adding travel, accommodations, opportunity costs and transactions costs, the live event costs can easily run in the thousands per event.

And it does not end there. Live events offer an inferior experience. The seat location can be far from the action, acoustics can be poor and there is usually a lack of multiple angles or replays (in the case of sports) to see the details of the action. Often, spectators have to watch large screens in order to actually see what is going on. In other words, they pay a great deal to watch the event on TV even if they are at the event.

This puzzle came back to me also when attending the Apple Vision Pro launch at this year’s WWDC. Those of us watching it in person basically watched what everyone at home saw, but in a degraded outdoor screen experience complete with sun glare and wind noise. Of course, we also got to see the device up-close and some even got demos. But this was the exception. Most spectators at live events do not obtain access to the talent. They may get to chat with friends or meet new ones but that is entirely haphazard.

Now I know all the arguments about “presence” and the feeling of being a part of the event itself and the sense of occasion and shared experience that it generates. It’s something movie theater operates are trying to also convey even while they are screening recorded content. Clearly there is some value to this. But $3000 of value?

Let’s then assume that, since the market is always right, there is $3000 of value in a premium live event. Consider a season pass to top sports leagues. Consider concerts, night clubs and band gigs. Then there is the line of business that I happen to also offer: live talks and conferences. How does technology affect this particular form of content?

Well, I believe Apple has an idea. Apple, after all, invented the product-release-as-an-event. That is, Apple created event marketing–and everyone followed. Apple was first to know the value of the technology show business and in particular live show business.

But delivering such businesses is not reliably profitable. The more reliable business is ticketing–an annoying racket. Putting on the show is touch-and-go. It might be sustainable until costs rise due to the talent asking for a greater share, or other service providers following suit. It’s also difficult to stay on top as crowds are fickle and tastes change.

This is why I think Apple’s Vision Pro is at least partly aimed at “performance conveyance,” rather than the more crude “recorded media playback” job to be done. If this is so, then the business model that makes sense is to license rights to performances and deliver them. The same way that licensing rights to recorded content and delivery was the business model of screen-based devices.

So what does Performance Conveyance mean? Well, we have to look at performer quality, brand and the experience itself. If they come together well then Apple can say they deliver on the job of “live”. And if so, then they can charge accordingly. Hence, whereas Apple Music is $10/mo. or Apple TV is $10/mo. or a bundle of services is $30/mo., then why wouldn’t Apple Live be $300/mo?

If not subscription then perhaps à la carte payment for events: sports, concerts, et. al. In combination it’s not unreasonable that Apple with Spatial Computing and Vision will offer a new tier of service bundle pricing with an average revenue per user of $3000/yr.

That would certainly solve my puzzle.

[Edit: I forgot to mention the value of theme parks and (ersatz) tourism in general. Clearly this is such a powerful idea that industries have been created around it.]

Predicting Apple Services

The data is finally out. Apple Services and perhaps Apple itself can be quantified and predicted as never before. As we shall see this data changes almost everything we know.

It is even more shocking that this most important data set has been released by Apple itself. (Though it did so in order to comply with regulation, Apple did offer a bit more detail than was required.)

I am speaking of course of the European DSA Recipients of Services Report publication for the European Digital Services Act. Available in all the languages of the European Union, and thanks to Ireland and Malta, we can even read it in English.

What the data shows is the number of average monthly active recipients in the EU of Apple-provided data services, calculated as an average over the period of the six months to 31 July 2023. This number is 123 million.

In addition, if you follow the link, you can see the number of recipients broken down by Member States. I summarize this data below.

Note that my summary is not that of the absolute numbers of recipients but the percent of population that these numbers represent. Note further that for some of the states with less than 1 million total recipients, estimates had to be generated. These were done in order to complete a total of 123 million. You’ll have to trust me that these estimates make sense.

This release of data might be amusing for the ranking we obtain, showing which countries’ citizens are more likely Apple fans than others. Seeing, for example, that the nordic countries show more affinity for Apple than the balkans; whatever that implies.

But a geographic categorization is banal. What would be more interesting is to look for a proxy for Apple adoption that is predictive. I know what you’re thinking: it’s obvious, look at income. More precisely GDP per capita. The data yields the following.

Please keep in mind that some countries might have missing or outdated data, and the values presented here are based on information available up to 2021. Note that there is one outlier. That data point around $90,000 and 40% adoption is Ireland. It’s an outlier because the GDP income for Ireland includes the large number of multinational firms based there. That includes Apple, Facebook, Google and LinkedIn, etc. which pull GDP above what would be assumed by GNP.

With Ireland the data fits with the coefficient r-squared of 0.77. Without Ireland it’s 0.85. This seems good enough to me to estimate the relationship of Apple Adoption ~= (National Income – 4247)/116,358. The trend line in the graph above shows this relationship.

What are the implications?

First, the ends of the line need to be finessed. 100% Apple Adoption is suggested at income of $116,358/yr/capita. Also, 0% Apple Adoption happens below an income of $4,247/yr/capita. Now both of these are problematic as there are known adopters in countries with income below $4,247/yr (more about this later) and there are countries with income above $116,358 which cannot therefore have more than 100% adoption (or can they? This makes a good trivia question.)

These anomalies should encourage us to look further. What if we apply this formula for countries outside the EU? To answer this, I generated a country set with about 190 entries and applied the pattern seen within the EU country set (n = 27.)

Knowing the GDP per capita for all countries as well as population size, we can estimate the global total of Apple services subscribers to be 560 million individuals. Note that Apple reports 1,010 million total subscriptions but that includes multiple subscriptions per subscriber and subscriptions to services which for Apple only acts as guarantor through the Apple App Store. Overall data on Apple Subscriptions (and other details) is provided below:

Note that we know the total active devices to be over 2 billion and the active iPhones to be about 1.2 billion. This implies that about half of iPhone users have an Apple-owned subscription and that over half of the subscriptions Apple manages are for its own services.

What’s more, we can obtain a detailed list of expected Apple Services users for each country. An example would be 5.8 million users in Mexico or 1.7 million in New Zealand. [I could furnish this on a country-level in a newsletter, if anybody is interested please let me know.]

It also allows us to understand the potential for countries which currently are below the model’s threshold of income. That list consists of 88 countries with a combined population of over 4 billion. They will join the Apple ecosystem, it’s only a matter of time. Can we predict this? I believe so. Stay tuned.

The story of Apple Services is only getting more important but also more detailed in terms of data and analysis. Readers of this blog have been well prepared for what happened and Apple has followed through with gross margin data and now with some limited country-level data.

As we move into the era of spatial computing, services will only matter more and it’s imperative that observers of the company stay on top of the data with solid modeling.

Movies and the Internet

Almost a year ago, on March 1st, 2021, I tweeted a snapshot of the “FAANG” P/E ratios. They were:

  • Netflix: 88.63
  • Amazon: 73.94
  • Microsoft: 34.65
  • Google: 34.75
  • Apple: 32.89
  • Facebook: 25.53

Today same companies have the following ratios:

  • Netflix: 19.34
  • Amazon: 46.08
  • Microsoft: 30.17
  • Google: 22.35
  • Apple: 27.79
  • Facebook: 13.67

What a difference 13 months makes. Microsoft and Apple saw modest falls 13% to 16%. Amazon, Google and Facebook saw large falls in their ratios: 38%, 36% and 48%. Facebook (now renamed pitifully as “Meta”) in particular saw its valuation collapse by half! This is largely because in February the company forecasted lower than expected revenue growth in the next quarter, blaming privacy changes in iOS, macroeconomic challenges, and the market finally realizing that it’s an evil and despicable company.

Microsoft and Apple grew their businesses nicely and have been resilient post-Covid. They are now revenue-reliable “blue chip” tech companies with large user bases that encompass high value, loyal customers. Google and Amazon are a bit more precarious given exposure to macro conditions and unclear new market opportunities but Amazon is still sporting a very healthy 46 ratio which is largely due to its investment-heavy approach to cash flow.

But the star of the show, the real blockbuster, is Netflix. It fell from P/E of 88 to P/E of 19. Even six months ago the P/E was close to 70. What happened?

Remember that P/E is an indication of growth potential. A P/E of 19 implies that the equity should be priced at 19 times last year’s earnings, which are roughly indicative of profit in a year and thus P/E is a time horizon: how many years would I wait before I got my investment capital back (and thus break-even).

Well, one could say that a P/E of 13 or 19 (FB or NFLX) is pretty reasonable. It’s reasonable to pay that many years’ profit for a company. The large ratios only make sense if a company is growing rapidly. 20% to 30% growth can justify P/E of above 20. But what would justify a P/E of 88?

The market has always given Netflix high valuation because it was growing and when the growth stopped the P/E fell to a more reasonable level. Unfortunately that means the share price had to fall over 70% from its peak. More than 40% in two days. Tragic.

The stock peaked at $700 in October and is $221 now. Why were investors betting on high growth, just a few months ago?

I think it was because investors like movies. And the Internet. Investors like movies and the Internet.

Netflix was never a great business. The logic evolved from sending movies as DVDs by email, ordered through an online catalog, to having the same selection available for download (streaming). Everything was subscription-based so bundling gave movies a “binging” consumption option.

But this depended on the having access to good titles. The access was easy at first since Netflix was a new channel and it was a bonus for the movie publisher. Pure margin. But over time the movie publishers saw the new channel eating into existing distribution and they thought they could deliver it themselves, increasing margins. The catalogs were suddenly cut off.

Netflix responded bravely: they would make their own movies. Out came the checkbooks and the distributor became the producer.


But is that really a good business? You have to make movies which are very expensive. Some will be hits, some won’t. You thus have to make a lot of them. And then you have diverse demand. People want to have all kinds of genres. So you have to make them all. And what’s more you can’t really market them as events because they are so numerous. It sounds really hit-and-miss with a huge risk.

At this point you have to raise pricing. And then came the competition who, like Disney, said “we have better, more targeted family content”. Or Apple TV+ which simply said “we have better quality.” Many other streamers offered alternatives like Amazon Prime with a smorgasbord approach. Sure, households could subscribe to all these services, but the bill would start to be painful. Not much savings over the cable bundle. Netflix increasing price sends many for the exits.

The company then drops a bomb: they feel they can’t grow subscribers because they are “near saturation” and the families which are not yet paying are probably using “shared” passwords. It can only grow if it converts the non-payers.

That all happened rather quickly. The market loves movies and the internet and who doesn’t. It’s just that movies and the internet don’t make a great business.

Movies look to be more of a feature of an internet service bundle. That’s Apple’s approach. They don’t see video as a business but as hygiene: must-have something to put in a bundle.

So Netflix, who first unbundled the neighborhood video store, then bundled production and distribution was itself not much more than a substitutable piece of a bigger bundle.

For this reason I always wondered why there was an “N” in FAANG. Netflix always seemed more a transient idea: yes people like movies, as they like music and books and magazines. And producing and distributing media has undergone dramatic change with computing and internet. But a business that only produces and distributes a single media type may be an ok business but should it be put on the same level as platform companies with billions of users?

Netflix has 200 million subs but that is not a big number. Apple distributes 785 million subscriptions to over 1 billion customers. Google has at least 2 billion users, Microsoft about 1.5 billion and Meta is over 3 billion. Netflix says it can’t get many more and indeed they forecast losing 2 million next quarter.

It’s a bit sad, but reminiscent of the games industry: it has its limits and the limits mean that it can’t be seen as a ubiquitous and hence maximally valuable asset.

Asymetric: The Crypto Plan for World Domination. An Interview with Balaji Srinivasan

This is a transcript of an Asymetric podcast. It was lightly edited for legibility.

Judd Rubin:  Three continents, one conversation, this is Asymetric. We are very excited to have Balaji Srinivasan with us today. Balaji, you’re a busy man, Horace you’re on the run as usual, so why don’t we dive right in. Thanks for joining us today. 

Balaji Srinivasan: Good to be here. Good to see you, Horace.

Horace Dediu: Likewise.

Balaji: I know you from online, from Twitter, or at least, I know of your work. It’s always interesting for people to understand how they’re maybe thought of by folks who are maybe a little bit on the periphery. And I, we’ve, always thought of you as the most quantitative Apple analyst, I guess you and [John] Gruber would be the two people who, if you’re in the Apple ecosystem, might be the most perceptive commentators outside of Apple itself.

Horace: And John’s a qualitative guy, right, so that makes sense.  

Balaji: Yeah, exactly. And I’m not like a huge, I mean, it’s funny, certainly I have a lot of Apple equipment, but I wouldn’t consider myself an Apple fanboy, per se. I converted to Apple when they supported BSD in OSX, because it was a better compute experience.

And, for the last, almost 20 years, the typical developer/engineer/founder, whatever, set up has been a Mac laptop locally, and then all your compute is on AWS or a Linux box or something in the cloud. 

Horace: Yeah, me too, actually, because when I started my university work, it was all on Unix, and this was in the days of VAX computers, Digital Equipment, and I just loved that interface at the time of DOS. This felt like, you know, ages ahead. And then I moved from a console to a workstation, which would have been a large screen using the X windowing system and that was my career for five years.

I wasn’t even on a PC anymore, I wasn’t using a Mac, but in 2000 when they switched, roughly around that time they switched to being, like you said, BSD. And I was like, okay, Mac is the way to go. Anyway, we don’t want to talk about necessarily Apple, tell us what you’re working on these days.

Balaji: Sure. I’ve actually got the crypto plan for world domination that I thought I might discuss with you. Which is essentially how if you’re a crypto maximalist, so to speak, how I think crypto is the most important threat to the Big Five. 

And essentially the plan for the next decade for how crypto goes after, not just FinTech, but Messaging, Log-in, Social, Search; Crypto Phone, Crypto OS, compilers, databases, advertising, actually reinventing CPA (cost per action), hosting, data centers, creator monetization, and then, on the back end, equity, compensation, privacy, and then most importantly: values. 

I actually think that people are underestimating the scope of how big of a deal crypto is and that the Big Five don’t really get it. The Big Five, meaning, Google, Apple, Facebook, Amazon, Microsoft.

And there’s pieces of their empires that I haven’t yet figured out how crypto might disrupt. Amazon’s physical logistics, for example, but there’s much more of it that is crypto vulnerable than I think people think. And your audience might be interested in this. Some of this is new, even, for maybe my audience.

So we could go area by area. And push back. 

Horace: Yeah, the one thing I would caution on, is this usage of the word disruption, because I’m also a student of Clay Christensen. To what extent what I challenge you to answer is, to what extent might these Big Five find [crypto], possibly sustaining?

So if they would say, ‘Oh, well, thank you very much. We’ll take it from here.’ So, I agree that there’s an opportunity here to disrupt, but many times people just assume change is always disruptive, but change can be sustaining as well. So, please tell us.

Balaji: So, actually, on that point, there’s a colloquial usage of disrupt, which just means a change. And then there’s the more technical, the Clayton Christensen version, which is, it starts out as sort of an inferior product in some ways, but it’s 10x on one axis, it’s sort of underestimated. And then it takes the bottom end of the market, and then zooms up to the top in such a way that the incumbent finds it difficult to adopt it because it attacks their margins and so on.

Right? That’s assuming the kind of, more technical —

Horace: That’s what I mean, yes. That’s low end disruption. There’s also new markets where it basically carves out for itself a new niche and it does things that nobody’s asked it to do. Or markets that are non-consuming, like, you know, emerging markets or something like that, and grows from that base as opposed to low end.

But, yes, generally speaking, that it comes in and is not good enough initially.

Balaji: Yeah, so I think that this fits, as I’ll go through each of these examples, I think each of these fit both the sort of colloquial usage, as well as the more technical usage. But let me go one by one and just talk through these points.

So first, at a high level, I’m actually pretty confident that, with the exception actually of Facebook and Twitter, I think crypto is kryptonite to large companies because they don’t understand it. And in particular, they’re sort of frozen by antitrust and they can’t take on more regulatory risk, even if they had the personalities internally to do so. I actually give a lot of credit, even if I think Libra was misguided in some respects, in terms of implementation, I give a lot of credit to [Mark Zuckerberg] for trying to get into crypto relatively early and putting out a project. Even if, in many respects, I think the parameters were flipped, as I can get into, to simply push through that relatively early, starting in 2018, when the other companies didn’t get there is because he has a founder’s mentality still.

And I think Twitter is actually the dark horse here where it’s the furthest ahead on Bitcoin, specifically, as opposed to crypto more generally, that’s an internal distinction in the community that I can talk about. But I don’t think that Google, Apple, Microsoft, Amazon actually get it because they’re not founder led.

And also because they’re under this regulatory microscope.

Horace: By the way, just a funny story. So I’m here in Germany because I’m at an event for e-bikes called Eurobike, or just bikes in general. So I’m a fan of Micromobility, I’ve been talking about it for a couple of years now. I get the same impression. I’ve spoken to people at those companies that they’re not seeing it, they’re not feeling it. Their entire mobility focus is still automotive. It’s not that there’s a cognitive problem. They understand the idea, but they can’t actually implement it, it’s this innovator’s dilemma thing. 

Balaji: Yeah. I mean, it gets to the fundamental thing, right? Which is that a founder is able to say, ‘Hey, we were doing X for such a long time and X got us to where we are, but now we’re doing, not X. We’re doing the opposite of that.’

And they have the credibility to turn the entire organization, in particular, to impose short-term costs for long-term benefit to cannibalize or disrupt, in the colloquial sense, an existing product for a new one. 

You know, Satya [Nadella, Microsoft CEO] is actually the exception. I would put him, if I rank order the existing companies by their crypto friendliness… 

What’s interesting is it’s the $100 billion and $10 billion and $1 billon companies that are much more crypto friendly than the trillion-dollar companies. 

So Shopify, for example, gets it, right? Coinbase. Stripe, I think, is coming around. So the ones that are sort of like the sophomores or the juniors, as opposed to the seniors, are going to, I think, use this to slip stream. And I think this is a disruption again, you know, I know you’re from the Christensen club, so I may use that colloquially, so poke at it.

I think this is a change or an alteration or a forcing function, whatever you want to call it. That is actually on par with the desktop to internet transition. That you can think of this as, just like you went from on disk to online, the transition from online to on chain involves a similar number of cultural and technical changes that render the current generation, basically like the Borlands and DEC Alphas and so on of the previous generation. 

Horace: So tell us how do you think that… You gave a lot of examples, of things going on chain —

Balaji: Yeah, so let’s go to specifics. Let’s start with the obvious, which is FinTech. One of my colleagues, friends, Chris Dixon runs the crypto fund at a16z. He observed a while ago that many Unix command lines became apps.

For example, GIT became GitHub. That’s an obvious one, but had these command line chat apps that effectively became Facebook and IRC and Slack and so on and so forth, right? Command line apps turned into full-blown UXs. Crypto is actually the reverse in some ways where every FinTech app can be turned into a crypto command line. For example, Affirm or PayPal or Funbox, or, many of these things that essentially are doing cashflow transformations of some kind can be written as a few lines of code in Solidity. Which is Ethereum’s programming language. And that alone is actually kind of a big deal where you can write that down and then just start piping arbitrary amounts of money through it, between countries, where it really is the internet of money. Any user can route money to any other user, if both users have a crypto address, if they have a Bitcoin address or an Ethereum address for the purpose of smart contracts.

And so that’s just a fundamental backend change. And one way of thinking about it is over the last 10 years, since the financial crisis, Dodd-Frank basically stopped the issuance of new banking charters. Were you familiar with that? Did you ever see the graph of that? 

Horace: No. No, tell us. 

Balaji: So, you’re a graph guy – I’ve got a chart on this somewhere on Twitter, but basically the way that they dealt with the banks’ failure during the financial crisis is to effectively reward them by eliminating their competition entirely by refusing to issue new bank charters for almost a decade. And, here’s the graph over here. 

The state’s solution to the financial crisis was to stop issuing commercial bank charters for almost a decade and to reward failure by regulating away competition via Dodd-Frank. 

The network solution was FinTech and now DeFi.

The reason I bring this up is FinTech is a front end, Blockchain is a backend. Over the last 10 years… You’re probably familiar, at least to some extent, with the FinTech side of things. Imagine if, when I sent you a message via Gmail, that behind the scenes, Google printed out the email, put it on a Pony Express, took it to you cross continent, scanned that and put that into your inbox.

And it looked like it was digital, but it actually had this antiquated pre-internet backend of a two or three-day delay in there, but the company did the best it could to obscure that. You know, all of those hacky steps in between, yeah? That’s a good analogy for what FinTech is, where it’s this shiny web-like front end, but on the back end, you’re dealing with pre-internet mechanisms for settlement where it’s often FTP or flat files or some horrible Cobol-era file format. It just wasn’t set up for the workloads that we have when you actually press on that. Right? Once you set it up and you give people the expectations of being as performant as a Facebook or a Twitter or a Gmail, and you start putting huge workloads through – that the financial system doesn’t anticipate, you get things like the Robin Hood issue of earlier this year.

Horace: Yep.

Balaji: Right? You make people think that it can handle internet-like workloads. But it can’t, it just kind of simulated that. Taking that Gmail analogy a little bit further, with Gmail, every email that I send you is basically non-fungible. In the sense that each one is just a different set of characters. But if it was fungible, if it was money where every dollar is the same as every other dollar, Google could… when I hit a button to send you a hundred bucks, Google could just extend you effectively a hundred bucks on credit where it’s assuming I’m good for the hundred bucks. Right?

And that is essentially the mechanism by which a lot of FinTech companies operate where they’re like a central buffer that makes users think that this stuff is instant and fast, but it’s actually not on the backend. Okay, so FinTech is a front end. Blockchain’s a backend, where it’s a genuine innovation.

So it’s almost like this flanking thing where bank charters were cut off. FinTech built all of these fancy front ends on top of banks by doing deals with banks, by now, more recently starting to get licenses in Utah and places like that. And then blockchain, the crypto space, built a completely different set of rails where they essentially, over 10 years, got people to accept these things as money-like. 

And now they’re coming together where, with Robin Hood, with Square, most FinTech companies are aware that crypto is a big deal. It’s not going away. And the reason many of them have a hard time getting their head around it is that it flips basic assumptions. 

What Satoshi did with Bitcoin is he flipped absolutely basic assumptions. Where the concept of Bitcoin starts with the idea that deflation is actually good if it’s coming from productivity. The typical macroeconomist would say hyperinflation is bad, but deflation is also bad. A little bit of mild inflation is good. This is what you’ll read in every Econ 101 textbook. 

Horace: Yep, that’s true. 

Balaji: And so Satoshi said, actually, no, that’s not the case.

You want to have users be able to hold their own funds and you want to have a fixed monetary policy that gives certainty for investing in the future. That can’t be monkeyed around with, by the Fed open markets committee, to bail out banks and stop transactions and so on. That meant so many flips of fundamental premises. 

Number one, digital gold being good rather than bad. Number two, that users should be able to custody their own money rather than having it at banks and they should be able to take that risk. Number three, that transactions by default should all be able to go through. So it’s like a default approved as opposed to a default sanctioned and so on and so forth. They basically just flipped fundamental premises. 

And when you flip fundamental premises, you can often get to just a completely different environment, completely different worldview, completely different set of solutions. I mean, it’s like land animals versus sea animals or like Google’s culture versus Apple’s culture, right?

I mean, now they’ve become more similar but Apple for a long time, it used to be very private internally and Google was very public internally. Both of them worked on their own terms, but were just fundamentally different in terms of their premises and axioms. 

Horace: Let me get back to this example you gave us, of online as a way to do fundamental transactions. Now, one of the things that, and this seems very much, like you said, behind the scenes, because from the front end the consumer is given an illusion of technical competence. But in the backend, it’s actually still jury rigged.

Now, the thing that I would ask is what does that mean and how does it feel different for the consumer? Because if you fix the backend, then yes, it’s much more robust and clean and probably safer. But I think that the way it affects behavior is not so much that people feel different about that interface, but rather that they will do more of it.

In other words, that, like you said, it was about volumes that caused the cracks to appear in Robin Hood. So to me, the question, the reason, let’s say I’m not skeptical, but I’m slightly reluctant to dive headfirst in on crypto is that I’m asking all the time is: How does it feel different for the end user?

And the end user would have to have some sort of emotional response to this change and say, ‘Wow, this is really amazing! Now it’s much better.’ Or, ‘Now I can do things that I couldn’t do before.’ So what I would posit is that the change you speak of would allow the users to suddenly say, ‘You know, I may do a wire to pay for a very large sum, but now I would do it a hundred times a day. Or I would do it to pay my friend, or I would do something financially that I never did before.’

And I, by the way, I feel this pain a lot because I live in two countries and you probably do as well, and you have to always transfer money and it’s an absolute nightmare. And it’s almost confiscatory in the way they steal money on the way, to try to transfer funds internationally.

So do you see this driving new user behavior or is it simply that you fixed something that was broken?

Balaji: Absolutely, excellent question. Let me give a few points on that. An interesting thing Evan Williams once said, in a sort of counter-intuitive way, was that the way to get people to adopt an app is to not do something totally different, but to take something they’re already doing and just cut out steps. Make it just faster, simpler, etc.

You know, people were blogging and then they did Twitter. People were blogging and then they did Medium and made it simpler, with front end editing. And that’s one view, that technology is incremental. But the other view is it’s transformative. Wait a second – our lives are so different than the past. 

And here’s how I reconcile those, then let me get to specifics. If you go from physical mail to email, just sending point to point email, to a group email with reply all. To a group email with reply all where you add attachments of images to a Facebook thread, to then real-time chat in something like Slack or Discord where you’re attaching images.

Each one is an incremental step over the previous one. But if you were to think about how expensive it would be to do a Facebook thread by physical mail. You’d have, I don’t know, a thousand friends and you’d be printing out the thread each time and sending postcards to each of them, with someone saying LOL… 

If you would just diagram that out and see how many packets were moving back and forth between those thousand participants of which maybe 95, 99% of them are, actually, not even participating. So therefore they wouldn’t even go and send in their postcards. And you’d say how much of a cost that would be on the legacy postal system? 

At a certain point, when it’s a million postcards to be one simple Facebook thread that we take for granted that has some images and a reply and maybe a link or something like that. Well, then the quantitative difference makes a qualitative difference. 

Horace: Absolutely. Yup. 

Balaji: Right? And in the same way, that’s basically what’s happening with crypto. And one way of thinking about it is – and this is now changing, but in the first 10 years, what crypto was best for and by the way, within crypto the term ‘crypto’ is an overarching thing that encompasses… There’s just different people who have a beef with the term. One group, are those people for whom, you know, crypto used to mean cryptography, right?

And the second are those folks who think of Bitcoin as its own area, as distinct from crypto in general. I think crypto is the right term for the space as a whole. I think, in particular, cryptocurrency and blockchain is to cryptography roughly as the internet is to software. Software is not synonymous with the internet. Computer science is not synonymous with the internet, but it’s certainly the most frequent deployment and monetization point for it. And, in the same way, I think many cryptographic concepts will be deployed and monetize within the blockchain and cryptocurrency space. 

On the second thing, just to finish this little tangent for a second, Bitcoin people think of Bitcoin as the only real cryptocurrency and everything else is a scam and a fraud and blah, blah, blah.

Which I don’t believe. And I don’t think Satoshi Nakamoto believed that, but this is something you’ll probably hear more and more of. 

But just in terms of that term, ‘crypto’ is basically thinking of the space as a financial and technological and efficiency related movement. There’s also a very strong overlap, which I’ll get to on the ethical aspects and how it’s actually a pro-freedom movement. And those overlap. And a Bitcoin maximalist would be like purely on the pro-freedom side, or in their mental model of it. 

Okay. Just coming back up the stack. So, end-user benefit basically in the first 10 years, crypto benefited what I’d call the power users and the marginalized. The people who are at both ends of the spectrum. It’s the exact opposite of the bell curve.

It’s not the person in the middle. It’s a person at the extremes. And so that’s why I like the example of, ‘Hey, I’m buying coffee at Starbucks. You know, this crypto thing doesn’t seem like too much of a benefit.’ It’s actually a good point. And the reason is crypto is good for transactions that are very large, very small, very fast, very international, very automated and/or very transparent.

So those six things: large, small, fast, automated, international, transparent. 

Your Starbucks [order], maybe it’s 10 bucks or 15 bucks, whatever, for coffee and bagels or something like that. You know, big city prices nowadays. That’s not a very large nor very small transaction. It’s not millions of dollars. It’s not a cent. It doesn’t need to be very fast because to clear it, settlement can happen over a day or something like that. It doesn’t need to be ridiculously fast. It doesn’t need to be very automated because with both you and the clerk, there are humans monitoring the transaction on both ends. 

It’s not very international. You’re both literally in the same coffee shop and doesn’t need to be very transparent. There’s no reason for either of you to have that receipt on chain. So everybody thinks about coffee payments because that’s maybe the most frequent thing that people actually buy on a daily basis.

There are not too many other things. People used to buy a newspaper on daily basis, but they don’t really do that anymore. They may have a subscription, but they don’t consciously buy it. So relatively a few other things you buy on a daily basis. You don’t buy a chair on a daily basis. You don’t buy a computer on a daily basis.

So they think about their coffee purchase, but that’s actually sort of the opposite. So where crypto is actually really good – let’s start at the power users first. The power users can be split into two overlapping groups, which are engineers and investors. Both of them are trying to do things like, for example, move a million dollars across the world to Japan in a day to do something, right?

The engineer might be doing that because they’re moving money around on the back end of Airbnb or Uber or PayPal or something like that. They’re pooling capital from lots of users and trying to do something with it. Take the profits from one area and move it to another. Accept all of these wire transfers in different currencies and convert them into USD within Airbnb’s main account, something like that.

Brian Armstrong, founder of Coinbase, saw what a big deal this was as an Airbnb payments engineer. He realized it was not a solved problem. That’s actually how he got into Bitcoin originally. So as an engineer, you understand it from that perspective. An investor understands it from a similar perspective where you want to do an international wire and, you know what? It’s actually still a pain to do that.

Wires get lost. There’s [the matter of] correspondent banks. It’s a huge pain to do a wire trace or something. But you know what’s really simple? If both sides use USDC, which is the stable coin I helped launch, but it’s the number two stable coin in the world. Maybe the number one, if you think of it, as in terms of legal stable coins, you can go to a website,

Right now, it’s $26 billion outstanding in USDC and over the last 24 hours, it was $694 million in volume. Okay. That’s quite a lot of wire. 

Horace: Impressive. Yeah. That’s striking. 

Balaji: That’s striking. The whole space is bigger than people get from the outside.

A good metaphor is crypto is a country. It’s a fractal country of a hundred million people, which is bigger than most people realize. Cambridge had a study on this last year. It’s probably bigger than that now, but it’s a hundred million people who hold some crypto, according to the surveys, spread across countries.

And the key is you have to have that sort of value flip right in your head to think of it as money. It’s basically like, do you think of the yen as money or not? Do you think of the ruble as money? And if you do, then you can participate in the Japanese or the Russian ecosystem. And if you do not, then you do not.

But crypto is like a country that is exponentially expanding. And there’s a million people at the core and then 10 million people around that and a hundred million and it’ll keep growing. And then once you’re part of this economic environment, all these other people accept cryptocurrency as money, all of these things become possible. 

And once the other person, on their side, accepts USDC as a dollar equivalent, well, I can hit enter. And just like how sometimes you’ll send somebody a file and you’ll talk to them on the phone for a minute or 30 seconds, and they’ll be like, ‘Oh, okay. I got the file in my inbox, done.’

You can now do that with an international wire transfer with USDC. You can hit enter, and they will see it on chain in a few seconds. Now, at first, all that’s doing is it’s similar to the transition from mail to email, where you go from a two to three day delay to seconds. But then over time that increases the metabolism of business.  

For example, I sold a company,, to Coinbase several years ago.

One of the things we did there was kind of a V1 of this where we would accept Bitcoin from somebody in Greece or Japan, let’s say $10,000 worth. And then we were able to issue a thousand $10 amounts of Bitcoin to a thousand individual people in different places for microtasks.

And the thing is that, because I could get that $10,000 wire or wire equivalent from them same day, you didn’t have to know whether they were good for the money.

Horace:  I think it’s unbelievable. But let me bring you back to the Big Five and the questions [from earlier in the discussion]. We just did FinTech, I think convincingly, the next question is how does this, which yes, it will increase metabolism, but how –

Balaji:  How does it disrupt the Big Five?

Horace:  Yeah. In particular, those examples you gave: messaging and platforms and coding and all these other things.

Balaji: Let me just tie up one last point on the previous thing, if you don’t mind. I mentioned [crypto] is good for the power user and the marginalized.

So the power user – the dev or the investor wants to move millions of dollars around the world with the keystroke. The marginalized, that’s somebody who just wants to hold on to a bank account equivalent. That’s somebody in a Venezuela or a place where the currency is being inflated. Or Nigeria, where people are being pushed out by the police.

But it’s also anybody who’s de-platformed or canceled or ostracized, or basically locked out of the financial system for whatever reason. Like the thing recently, [which is an] obvious example of something where… That’s what cryptocurrency sells, where the banking system can’t just lock you out.

And what’s interesting is sometimes these are the same entity at the same time. Something like, for example, is both a power user of crypto but it’s also marginalized where it’s sort of on the margins of the legal systems in the world. 

A couple of other quick points on this before I move on.

One thing people often talk about is, ‘Where are all the use cases for crypto?’ Well, now there are many of them are out there. You know, I’ve actually got a post on this: And What Has Blockchain Ever Done For Us?Crypto has transformed crowdfunding, it’s transformed international wire transfers, it’s transformed gold. 

Just those three applications are worth trillions of dollars, but there’s way more.  If you go to, it’s transformed loans, it’s transformed derivatives. Many of these applications are actually out there and already at substantial scale. 

But a very important point is speculation was installation. Without people speculating that this thing could be big, it wouldn’t have had a price. Without it having a price you couldn’t treat it as money. Without it being treated as money, you couldn’t build all of these apps. The loans wouldn’t work because it’d be just sending zero for zero.

The thing about crypto, in particular, is it has the opposite emergence mode from social networks. You know, we’ve now been tuned to such an extent to DAUs (daily average users) and MAUs (monthly average users) and whatnot, that we sort of forget in the 2000s, that those were metrics that people scoffed at and poo-pooed because social networks were piling up all the users, but where the money, you know? 

Even as late as 2012 or 2013, there was an article, something like why Facebook will never make a significant profit. And just a few years later, [people were saying] ‘Oh my God, they’re so evil, They’re dominating the world.’

The New York Times had an article in the early 2000s, Google’s Toughest Search is For a Business Model, right. And of course, Amazon.bomb.

And you’ve seen all these kinds of things. With Facebook in particular, it piled up users. It made money, actually, pretty early on, but Twitter, Pinterest, Snapchat, this entire model of piling up users before making money was, and is, a common one. Now people understand it so much that they think that’s the default emergence mode of new technology, 

But crypto flips that. Where it piled up the money before it had the users. Making money, almost in the literal sense, before the users came. So it flipped it around. And so instead the question people were asking is, ‘Oh, where’s the utility?’

Now it’s actually coming. 

But I wanted to point that out. It’s the opposite of the social network model, MAUs and DAUs, there’s a totally new set of metrics you need for crypto, which are not daily active users, but daily inactive holders – that is people who are holding for the long-term and are committed to it.

So that’s macro, let’s go to specifics. So I mentioned FinTech. Pretty much every FinTech app is going to get backend blockchain-ified. Unless there is some prohibition within the country on that. And if that is the case, it’ll probably get out-competed internationally, even if it has a captive market at home.

And the reason for that is, if you think about an email address, it is something which is uniform across geographies. I don’t need to look up the postal code of this, or the zip code of that. With an email list, you don’t need to know whether somebody is in Nigeria or Switzerland or India. Just hit enter and you send it. That uniformity alone is something that blockchain addresses give you. It’s way easier to do a cross-border deal with somebody in Japan and Brazil or Nigeria with the smart contract than it ever was before.

In fact, one might even argue international business didn’t even really exist before smart contracts and cryptocurrency. And the reason I say that is if a Brazilian company wants to acquire something in Bangladesh – –

Judd: You need locals.

Balaji: Yeah. You know, what you might do is say, all right, there’s not too much law on the Brazil – Bangladesh interface, but there’d be U.S. – Brazil and U.S. – Bangladesh. So let’s set up an intermediate there and work through the precedents on both sides and get A plus B and B plus C.

The other country you might use for this is China, but if we actually go down to brass tacks and think about what the obligations are for each side and how the legal systems interact, you sort of need that centralized intermediate, the U.S. and China are the only two countries that do so much business worldwide.

There’s probably a Chinese enterprise in Bangladesh, probably a Chinese one in Brazil, and so you could make the things add up and the laws add up and the property rights add up. But that’s something that only works at scale. For large companies doing those kinds of transactions, you can make it work and you’d probably set up a U.S. or Chinese intermediary to help make it work. To lubricate it.

But if you wanted to do it direct – how do you do direct? These people don’t speak each other’s language? They certainly don’t know or trust each other’s legal system. So all kinds of weird peccadilloes. But on chain, everybody can read the same code. So, essentially, the pooling of money, the friction of diligence, the consistency and uniformity of naming, all of those things are 10x improvements  just from a developer-investor standpoint, the power user standpoint with FinTech.

So all FinTech gets disrupted by blockchain. That’s very clear to me, it’s already happening in some ways, but that’s very obvious. All right, let me pause there and get your thoughts, feedback, and then I’ll move on to the next one. 

Horace: Yeah, exactly. I love the way you framed it in those six categories of applicability.

Most people don’t experience small transactions or international or transparency’s not a concern of theirs. But that allows me to classify this as the type of disruption where it would allow things to happen which normally wouldn’t happen. It would allow, like you said, inter[national] deals to happen in ways that no one would even think of doing today.

And as a result, it’s sort of a new market disruption. It would unify people who are now divided by country boundaries. It would unify them in, as you said, this new country, this country of coin, [of] which they would be all effectively citizens that would somehow communicate and understand each other so much better, because they are not divided by these artificial boundaries. And I think that would, if you said the exponential growth is current[ly happening], then it would encompass a substantial part of the globe. And that in itself is so powerful that we can’t even fathom the consequences of. But it’s effectively, in the FinTech world, I think what you’re saying, and I’m sort of reading ahead of it here, so what you’re saying is that once that platform or that foundation is laid, you can imagine a lot of new things emerging and that will build new empires. Is that where you getting at? 

Balaji: Yes. I actually think crypto is to America as America was to Europe. Like you can, and let me explain what I mean by that. It’s actually-

Horace: No, I get it, yeah.

Balaji: And just like you had, so why is that actually a good analogy and not just simply verbiage? If you know different kinds of distance metrics, the most obvious distance metric is the great circle distance on the surface of the earth between two people.

That’s just the distance as the Crow flies. You know, on the surface of globe. There’s another distance metric, which is the geodesic distance between two people in a social network. You could have, for example, you and I right now are closer geodesically than we are geographically. And then there’s people outside who are closer geographically than geodesically. People I don’t know, or haven’t spoken to, but they’re within a mile of me or, or within a mile of you.

And so those metrics, they actually have typologies associated with them. Just like you can have a cartography of continents, you can have a cloud cartography of who is close to who in the social network. In many ways, you’re probably closer to people in Cupertino and New York and various financial capitals around the world than you are to people who are a mile away physically.

And that is something, when you start visualizing what that cloud continent looks like, with all the nodes colored by what coins they hold, you know, a big orange for Bitcoin and blueish for Ethereum and so on and so forth. You start getting a visual that looks a lot like the European incursion into the New World.

Without, of course, any Native Americans or anything like that, it’s sort of the pure expansion of different demographics into this new region where people are spending more and more of their time. And VR will make this more than a metaphor. It’ll actually be like physical space.

Now the one thing I would edit on your point is that when I said crypto’s a country and you said without internal boundaries, there actually is a lot of crypto tribalism. So it’s actually an interesting thing where just like there was the New World and the Old World, there’s a crypto world and the fiat world, and there are conflicts within the crypto world and there are alliances with folks in the fiat world. 

So it’s actually an interesting analogy to the age where the French and the English and the Spanish and so on all slugged it out for the Americas. Again, without the native population there, it’s sort of the pure version of that. So with that as an analogy, it’s something where you can build things from scratch. All these ideas that were infeasible in the Old World, like democracy or so many innovations that the U.S. had in terms of governance and — 

Horace: The federation, the transportation networks, the frontier, the way the U.S. was constructed, mostly accidentally, allowed it to become a superpower.

And I think the continental scale of it, which again was accidental by acquisition of territories peacefully and not peacefully, but generally Europe was stuck in a centuries old grid of monarchies, feudalism and all the other baggage they had carried. It just wasn’t able to have a frontier mentality. I sometimes think that that conquest of land, that the open horizons is reflected in the dynamism and the ability to invent that followed.

Balaji: Yes. This is Frederick Jackson’s Turner’s frontier thesis, and one can argue whether these changes were all good or all bad. I think there were some both good and bad innovations that came back from the New World to the Old. For example, The French Revolution, they were in part inspired by The American Revolution, but had a much worse result.

Communism actually, there were a fair number of Americans that were involved in it. There’s a book by Kenneth Ackerman, for example, Trotsky in New York, where he raised money in New York. Also Lenin was basically released by the German government. Even the New York Times had something of this, like Lenin was a German agent.

So some of that stuff that came back to Europe from the Americas, that’s not that well-known, but it’s also not that obscure. You can Google around and find it. Some of that stuff that came back from the Americas was not good, but some of it was. The modern railroads and the history of how many technical innovations came back from the U.S. to everywhere else. From mass production to, I mean, in some ways bad, but the atomic bomb, nuclear power, all of these things that you would not have had without that fresh new, clean slate to build things and have influence back [the Old World].

And I think that’s very similar to what we’re seeing in crypto, where in many ways it’s already changing the financial system. The most obvious is every government in the world, every bank, knows what CBDCs (Central Bank Digital Currencies) are, at least in concept. And China is shipping a digital Yuan. Which means that a post on a message board by a pseudonymous guy 10 years ago has shook the entire world, and is already a topic for not just discussion, but active execution by the governments of a billion people.

And that’s, that’s- 

Horace: Just while we’re on this cultural aspect, what is your opinion on who Satoshi is? I’m curious as you seem to know — 

Judd: Are you Satoshi?

Balaji:. No, I’m not Satoshi. I wouldn’t tell you if I was Satoshi, but I’m not Satoshi.

Judd: What if we asked twice?

 Balaji:. What’s that? What if you asked twice? Ha ha. No, I mean, Satoshi Nakamoto had a very important combination of skills.

First, he was a world-class programmer. The thing about something like Bitcoin is computer security. The late Dan Kaminsky, who was a friend of mine and absolutely a genius in computer security had an article in 2013 where he said, I tried to hack Bitcoin and I failed. And this was very exciting. 

The point that he made was that, in most applications, security can rightfully be a little bit of an afterthought. That’s to say that in the early years of the web, maybe not so much today in 2021, but in the early years of the web, you just needed to stand up a site and get users. And you could sort of assume that there wasn’t that much to be hacked and people didn’t care that much. And so people would optimize for growth over security, because if you have growth and no security, then you can hire engineers and add the security later. But if you have security and no growth, you have no money, and it doesn’t matter. Nobody cares if it’s secure. 

And the thing that’s different about cryptocurrency is that security is a fundamental characteristic. If it’s hacked, even once, if you can duplicate coins, inflate coins, and that’s a persistent issue and an unfixable issue, then the value goes away.

So security wasn’t an afterthought. Satoshi built the code like you’d build the code for a space shuttle. Where it was just a different mentality from the very start. And so, first of all, he’s a genius programmer. But, second, he clearly had a deep humanities background to build something — I mean, with many kinds of inventions, there’s Newton and there’s Leibniz. You know, there’s an idea in the air and there’s simultaneous invention of some kind.

But Bitcoin wasn’t like that. It really was something where one person’s genius  shaped the world and it took a while for people to catch up. And it wasn’t like there were a lot of contemporaneous Bitcoins with similar ideas. It was something where it was kind of out there and it took a while for people to get it. And even still today, people don’t get it because it flips premises. 

And unless you’re actually reasoning from first principles… people will quote Econ 101 as if it’s like some kind of inoculation against this thing that’s at a trillion dollars [in market value]. It’s similar in my view, by the way, the American, just to digress on this for a second, the American school and maybe the international school of macroeconomics, I think is similar to like Soviet economics where the Soviet Union had all of these prizes that were given out for Marxist economics. But it didn’t amount to a hill of beans because their premises were actually wrong. Some of it was good. Like, I think Kantorovich did linear programming. Some of the math was useful, but it was something where the premises were wrong. And one of the reasons for that is that with macroeconomics, you can’t actually run experiments very easily. Because the maximum that we know in macro is something like communism doesn’t work. In the sense if you compare a North Korea versus South Korea or China before Deng Xiaoping to Hong Kong and Taiwan and Singapore, or East Germany versus West Germany. You take ethnically similar populations, you partition them, run the experiment for 40 years, communism impoverishes one side of the country versus the other. We’ve now seen that multiple times. So that’s the extent to which you can see that within macroeconomics and so in that sense you’ve got controlled experiments, but that’s not actually the fundamental principle of macroeconomics.

It’s something more like John Lanchester wrote this in London Review of Books, you know, almost a decade ago. And Tyler Cowen wrote about it. The fundamental principle of macroeconomics is governments aren’t households. Meaning governments can print money, meaning governments can seize things at gunpoint, and so on and so forth.

And this type of stuff, this kind of discussion goes to philosophical roots. It goes to economics. It goes to history. It goes to policy. It’s inseparable.

Horace: But just to build on that, the way I would say it, governments typically have a monopoly on violence. What it boils down to is that they can do these things, which are not allowed by households, is because they have armies.

Balaji: Yes. 

Horace: They have police forces that effectively are armed. Citizens may or may not be armed, but generally never could match the firepower of the state. So this is — the monopoly on power is monopoly on violence, at this moment.

Balaji: That’s right. And the thing about that is that the modern school of macroeconomics is backed not by mathematics, but by guns. Actually, Paul Krugman, in an interview with Joe Weisenthal said, fiat currency, if you like, is backed by men with guns. It’s like Mao’s thing, “power comes from the barrel of a gun.” Whereas, and so once we’re honest about that, we’re like, oh, it’s not Econ 101, it’s AR-15. Right? And so once you realize, okay, that’s actually the backing. These fancy formulas, it’s just like the Soviet Union, the Marxist stuff was backed by AK-47. Right?

So once you realize that, okay, well, I’ll give you another one, which is Bitcoin is backed by SHA256. So Bitcoin is actually backed by cryptography and mathematics versus violence. And that’s just a fundamentally different set of premises. So the reason this is inescapable to talk about is that you can use JavaScript without really knowing much about history. But to understand the problem that Bitcoin solves, you really do need to understand history and philosophy. And that’s why Satoshi was- 

Horace: Yeah, exactly. I was going to bring you back to Satoshi. So he’s a humanist and he’s also a programmer par excellence. But you also speak of him in the past tense. Why do you do that? Is he not still with us? And what’s happened, what will happen with his share of Bitcoin?

Balaji: Well, nobody knows. It’s something, which is interesting, where it shows that with good enough OPSEC, to my knowledge, nobody’s actually, de-anonymized him.

A lot of people suspect that Satoshi was close to Hal Finney, who was an early extropian and programmer, but nobody knows for sure. Some people think it’s Nick Szabo. I don’t think it’s Nick because Nick has never published code to my knowledge. So I don’t think he could have done it himself, but Nick has published ideas that are clearly influential on Bitcoin. But the reason we speak of it in the past tense is for him to authenticate a message he’d have to do so from the private keys that are associated with early Bitcoin addresses that we know belong to him that only he would hold.

He could trivially do that. And he has not done that in last seven years. And Hal Finney actually died of Lou Gehrig’s disease, I believe, around that same time. So it sort of connects that Hal Finney might be Satoshi, but it’s not known. And  nobody really wants to poke into it because in many ways what Satoshi did, it’s amazing that it was a human being who did it, like a single human being. And I think it really was a single human being because something like that is just sort of hard to do as a team. Satoshi… the fact that he has disappeared means that Bitcoin is “decentralized,” or rather it is one of the forces that makes Bitcoin feel decentralized.

It is something where there’s no identifiable leader, yet it has massive global adoption. Now, you can argue, well, the core developers and the miners and the reference client, and so on, are points of centralization. Each of these are tested over time. I think mining centralization just got tested. People had made the point, oh, China could take over mining, but China just cracked down on mining.

It was a huge drop. If you looked at the Bitcoin mining charts, the hash rate dropped from, I think, around 180 exahashes to like 80 exahashes. That’s a huge drop. The biggest drop I think ever in Bitcoin history. And all that happened was what you’d sort of predict by looking at it. Transactions slowed down for a little while, and now it’s back up to 140 exahashes.

So China, which is probably the largest and most organized and ruthless and technologically competent state, all the things combined, took a hard swing at Bitcoin mining, actually pushed it out of the country. Bitcoin kept ticking. So Satoshi’s absence has helped decentralize it because everybody can imprint their own thing on it.

In this sense, Bitcoin is like Linux where ferocious competitors like Google and Facebook still collaborate on Linux. And the reason is Linux is a demilitarized zone where one party’s contributions cannot be deleted or removed by the other parties. It is a true commons where you can give, but not really take back.

And that’s what Bitcoin is like: a truly decentralized technology where every user is a root user. Nobody else can de-platform you, nobody else can take away your funds. It is something where you have parties that can be highly dis-aligned, but aligned on BTC. Very, very powerful thing.

And a big part of that comes from Satoshi’s absence and disappearance. 

Horace: Okay. Take us home then, back to the Big Five. How do we think about  all this building up to something much more visible. 

Balaji: All right, so the first 10 years, we can very much compare the current era to the year 2000 for the internet where you had infrastructure, you had Yahoo, you had AOL and you had the early broadband connections.

You have the first billionaires, you had everybody knowing what the internet was, but a lot of the applications of daily use didn’t yet materialize. And there were a lot of people who’d use the internet to check news or send email, but you could basically get away with a completely offline life, even in the year 2000. By the year 2010, that was not true.

And by the year 2020, it’s flipped the other way around. Now you need a phone in many places in Asia to get in with your vaccine passport and so on and so forth. And so I think that’s similar to where crypto is today. Where the infrastructure is being built out. We have the exchanges, we have the mining, we have the coin developers.

We have the first billionaires. We have widespread awareness of it. But yet today, you can still live a completely crypto free life. I do not believe that will be true by 2030. And I believe it will be totally flippened by 2040, where it’ll be crypto first for the entire financial system. But let me go to specifics, okay?

So we talked about FinTech. Every loan, every mortgage, it’ll start with all the digital stuff first because that’s which is easiest. The stuff that has an offline correlate to it, like mortgages, will be harder because you have to have so-called crypto oracles recording the transfer of things offline. But all the FinTech stuff, that’s kind of obvious.

Okay, then messaging. The big thing about crypto is it allows for provably, encrypted end-to-end encrypted messaging. See when, nothing against WhatsApp, but it just tells you that it’s end-to-end encrypted. They could have a bug in the implementation. It’s not easy for the user to verify that. You know, it feels the same as Facebook Messenger.

It’s trusted [as] end-to-end encryption, but then you can get backdoors and stuff put in. Whereas with crypto messaging…  You know, it’s funny, when you say cryptocurrency is taking two concepts that seem to be totally distinct like encryption and money, they have, of course, come together since the advent of HTPS and credit card payments on the internet twenty-five years ago.

But crypto has put them directly together in a very powerful way. In the 1990s and the 2000s people talked about this thing, they still talk about it, called the public key infrastructure problem, which is if you could assume that everybody had public and private key pairs, you could imagine this magical world where all of these privacy preserving things were possible.

Now many of your [listeners] may not know what public and private key pairs are. Roughly speaking, a public key is like a sealed envelope that you can give out and people can then put a message in there and seal it up and send it. And only you with your private key can actually see what’s inside that envelope.

They can send you messages that only you can decode. There’s many other uses for them, but that’s one way of explaining them. The thing about it is, when you talk about everybody having a private key and public keys that are out there, well, you could do secure messaging.

For example, if your public key is out there next to your Twitter account, I could just take that public key. I could gin up a message. I could post that to you publicly, but only you would be able to decrypt it. The reason public key, private key, the whole public key infrastructure problem has been hard to solve is you need people to keep their private key available and secure at all times. So if you want to keep it available, you can just put a post-it note on your desktop computer, but it wouldn’t be secure. If you want to keep it secure, you could go and put it in a lockbox somewhere, but it wouldn’t be available. You’d forget where it was. 

To have something be secure and available at all times is actually very expensive. It’s like your wallet, it’s like your cell phone. It’s something which, you’ve got eyes on it at all times. And that’s something which basically has to be on your person and you need a strong incentive for doing it.

And so the big thing that crypto has done is it’s made that incentive literal. It’s money. If you lose your private keys, you lose money. And so because of that, everybody, millions of people, hundreds of millions, billions of people will have private keys that they can encrypt messages with. And so that will unlock end-to-end encrypted messaging in a provable way where you don’t have to trust WhatsApp, or what have you.

And that’s going to become more and more important as you’re seeing, for example, Apple ran all these billboards on privacy and, I’m not sure what your stance is on that, but the CSAM thing, if you saw that, recently was basically cracked. Where people were able to put fake caches on people’s devices to make it seem as if they had CSAM on there, but they didn’t.

And I think you’re going to see more and more of this, where there’s a lot of advertising based assertions of privacy that are then eroded by some action and people will not want to take the Big Five’s word on trust. They already don’t. And they’re going to want provable end-to-end encrypted messaging.

We already saw this earlier this year, where there was an exodus in part from WhatsApp to Signal over some rumors that’s WhatsApp’s new terms of service were making it more feasible to eavesdrop on you. And I’m not sure how true that was or not, but you’re actually starting to see consumer demand for privacy, which people didn’t think existed.

Let me pause there. That’s messaging, let’s talk about that. 

Horace: I think therefore the, let’s say, the disruptive technology, as opposed to business model, is trusted encryption. And I think that what you’re saying, effectively, is that the incumbents are going to struggle to implement. That’s why I’m struggling. I’m thinking of it as a competitive question. 

But if the struggle seems to be what you’re suggesting, this is asymmetric or contrary to the way they would implement this new demand for privacy.

Balaji: Yeah, here’s the thing. A lot of people tried to separate blockchain and cryptocurrency.

They were like, ‘Oh, this blockchain thing is a great database, but this crypto thing it’s weird and unregulated and volatile and it’s bad. And so let’s do it without that.’ And they tried to do enterprise blockchain where eight banks would get together and have some shared database. And that actually was the worst of both worlds solution where it had all the complexity of enterprise and all of the technical complexity of blockchains.

And the thing is that every application of blockchains will involve a crypto component. So the reason that big companies will find it hard to adopt this is… Why do people have these public and private key pairs? Because they have cryptocurrency, probably because they have an Ethereum or a Bitcoin address or a wallet locally on their computer. That is the prerequisite. 

That installation is like having a web browser locally on your computer. And from that you can access internet. If you have a crypto wallet on your computer, you can access the financial internet. And if you do not, you cannot. And so these big companies, because they haven’t yet grasped the nettle of how important it is to have Bitcoin and Ethereum integration in their messaging and payment apps, will not get that until too late.

They’ll try their own in-house solution because they understand open source, but they don’t understand open state. You know, they understand open source in the form of GitHub and open source code and whatnot. But open state is yet another level where it’s not just a source code that’s public, it’s a database that’s public. The Bitcoin blockchain is public. The Ethereum blockchain is public. Every user is a root user. It’s shared state. It’s the next step after open-source. They just don’t get that culturally. And by the way, I wouldn’t call it trusted end-to-end encryption. I’d actually call it something slightly different, which is verifiable end-to-end encryption.

It’s end-user verifiable. So that’s the big difference. Trust only if you can verify. 

Horace: So that gets us to messaging. Potentially you get a situation where unless they buy the whole concept, as you said, the implementation has to be coin plus blockchain. So it’s not just blockchain. It has to have this, sort of, pain.

Well, I call it pain because it’s like you suffer if you lose, you know, it’s verifiable

Balaji: Yes. That’s right. 

Horace: And, so I think what you’re getting at culturally in terms of what’s asymmetric about this technology is that it’s not just utility, it’s utility plus consequence. And that consequence or consequential nature, I think, is what is difficult to absorb for, not just the Big Five, but almost any larger platform company or technology as we know it.

We get into a state of triggered, let’s say, consequences, which are negative. And people are just squeamish about it. And I think that you can’t be a manager in these companies and say, ‘Man, the consequences of this, I mean, we could get sued, you know?’

Balaji: Exactly. 

Horace: Am I getting close?

Balaji: Absolutely. Because, you know, what’s more scarce than financial budget? Risk budget.

Horace: Yes.

Balaji: Yeah. These giant companies have cash cows and are under regulatory scrutiny. So they don’t have the risk budget.

They don’t have the appetite for risk. And it’s actually true that their risk is greater than that of a small company on doing this because they’re under the microscope more. That doesn’t mean it’s impossible. [Jack] Dorsey has managed it with Twitter, but that may be because he’s just under the level of scrutiny, where the Big Five are under that maximum scrutiny.

But even Facebook has actually said, ‘You know what, we’re going to take the hit on this.’ I give them props for trying in the space. Simply as a founder, it’s actually a non-trivial thing to do, but it is one of these things where the short-term incentives are so strong to not take a risk. And you really need CEO buy-in to do it.

I mean, as I said, Satya did a decent job on this, where Microsoft was relatively early on Ethereum support on Azure, and so on. And there’s some of that. There’s some of the public cloud stuff they’re doing, like the safe things. But putting it into Google Pay or Apple Pay or things like that, or buying it at the corporate level, these guys are all going to be late adopters on that because the risk budget isn’t there. You need consensus within the company. And the thing about a crypto company is everybody is hired from the crypto country. Everybody’s hired and they already have that consensus. 

It’s similar to the 1990s and early 2000s, and people thought open source was communism. Ballmer said something like that. If you remember that in the year 2000-ish. And this is hard to remember right now,  but if you remember in the early 2000s, there was a cultural and ethical movement around tech, related to open source that was pro-Linux, anti-Microsoft, anti-corporate in some ways and so on. And that actually gave a lot of the early energy for people in technology thinking of themselves as the good guys.

And then over time the good guys became the big guys. And now they are sort of in play at safe corporate mode with lots of MBAs and spreadsheets and chiseling of customers and all the stuff that is hard to escape when you’ve got millions or billions of users and all this regulatory pressure. But it just changes your culture.

Then on top of that, they’ve got all of these political disputes internally at the company and leaks and all of this stuff. And so now crypto is like the next version of that, where it is not simply a technology, it has an ethical component to it. It has that philosophy, that community aspect, where it is returning power to the user, it is pro-privacy. It is decentralization as opposed to these centralized tech companies. That by the way, as a user —

Horace: I would even take it a step further. It has an ethical component, which may be a bit squishy, but I’d say it has even a political component. And I think by political here, I mean it’s divisive in some ways. And you have to accept the premise that as a participant, you have essentially a partisan point of view.

And that itself is a giant leap because I think the neutrality of, the implicit neutrality, of a company’s governance is like, ‘You know, we play both sides of the aisle where we’re going to be.’ And I don’t mean this in the sort of left-right sense. But this is a new dimension.

Balaji: Absolutely. 

Horace: And if you want to participate, you have to be willing to put yourself in that state. I sensed this myself because I find myself being drawn into this world. And that’s been uncomfortable for me because I do not wish to be partisan. I do not wish to be political.

I do not wish to make a statement with my support for a currency or whatnot. But this discomfort also attracts me in the sense that, intellectually I’d say, ‘Well, that’s interesting.’ We call the show Asymetric – as an asymmetry, it’s fascinating, right? That you have to be in that dimension now. And that’s what I think fundamentally would be the root of the disruption. In the true sense.

Balaji: That’s right. I think I was able to articulate this in a recent post. That’s the difference between Web 1, Web 2 and Web 3.

So Web 1, roughly, was about technology risk. Can we even build it? Can we make packet switched networks? Can we make web browsers, all of that stuff? Can we make operating systems? Okay. Web 2, it wasn’t that tech risk went away completely, but much more of it shifted to market risk. Now that you had open source databases and you had all of this open source tooling, a lot of it was, ‘Hey, we know we can build it.We can snap together this web app or later this mobile app, but will people buy it?’ 

Will this consumer behavior be adopted? Will they use, you know, Snapchat versus FrontBack? If you remember FrontBack, there were a lot of these fruit fly type experiments with consumer internet, in particular, where the risk was not so much, ‘Will the app work?’ It is, ‘Will people actually buy it, will they use it?’ 

And now we’re in the third stage, which is Web 3. With crypto [related] things, we know we can build it. The tooling has now become mature enough that it’s not, again, there is still technical risk, but you can launch a token or a coin and we know people will buy it.

It’s actually kind of interesting that there’s almost always going to be some demand for the thing, at least, you know you can get it off the ground. But the question is now will people ban it? So in other words, Web 1 was about tech risk. Web 2 was about market risk, but Web 3 is about regulatory risk.

Horace:  Yeah, that’s what I mean by political. I think I’ve used this word in maybe my own way because regulatory ultimately gets into the question of politics and that isn’t, again, the classical left-right divide, but more like, ‘What is your philosophy? What do you believe in?’ What matters is your point of view and, and that you’re forcing people to have that.

That’s the thing here. I think it’s forcing people and you cannot separate them any more, saying, ‘I’m neutral. I just believe in tech.’ It’s forcing you to make a stand and that’s a very uncomfortable position for any corporate entity. It forces them to become partisan, in a way, on this dimension.

And that is what they will resist. I’m sort of taking your point here. And I’m trying to, myself, think of how this becomes disruptive

Balaji: You’re right. You’re right. When you’re serving a billion people, they have an Innovator’s Dilemma-like thing. The problem for them is that this is a, whether you want to call it political belief or partisan belief, or what have you, ethical belief, in decentralization, which is growing exponentially.

If you think about the number of crypto adopters as just one metric, it’s like a hundred million today. And it was certainly not that in 2010. Sub 1,000,000, probably, sub10,000, probably sub 1,000, even in 2010. So that’s massive, massive growth, but it’s growth that they feel that, probably correctly, that it would be challenging for them to tap into without taking a significant messaging and risk budget hit.

Now, again, can they do it? I mean, as I said, Dorsey has managed it. I think Facebook could have, rather than doing Libra or Diem, they could have just built Bitcoin and Ethereum into their Messenger app and started with that. And that would have been smart. And they could still do that in VR, potentially. They’re at least further ahead.

They’ve actually taken some of the hits internally on getting there. They’ve got some engineers, but the biggest companies that want to be all things to all people and do inoffensive things… You know, the thing which people tell startups, they tell them focus, focus, focus, focus, focus.

You almost can’t focus too much on some micro demographic. You win there and then you level up, and you win there and you level up again. And the big company is not going to be able to focus because they’re all things to all people. And that’s now something which is no longer simply a market thing, but it’s also a political / ethical thing, where you have to essentially bet on decentralization.

Horace: I’m starting to get it. Do you want to get into some of the others – we’ve done messaging, do you want to get into some of the others?

Balaji: So we talked about FinTech. We talked about messaging and, by the way, messaging is not simply, just like you go from email to group mail to Facebook threads.

Messaging starts with one-to-one messages, but every single messaging app will be rebuilt with verifiable end-to-end encryption, where you’ll use your, probably your Ethereum name, but you could do one to one messages. You could do one to N, you could do N to N. You could do blogs, you could do blogs behind encryption walls.

You can do Slacks. All of these things are being built around so-called DAOs (Decentralized Autonomous Organizations) today, which combined sort of messaging plus corporate governance plus communities. So, relate to that login. 

So right now, a huge moat for these big tech companies is log-in. With Apple login, with Facebook login, with Google login, with Twitter, where they’ve got hundreds of millions of users and you can use their APIs and implement logging onto your site, but you’re also subject to them.

They can cut you off. That’s no longer the case with something like ENS (Ethereal Name Service), where you can log in as Horace.eth. Just your local private keys  are determined, not a password that can be reset, not account that you can be deplatformed from. That is a fundamental change where the solution to that equation, the private key, is held locally on your computer and that’s the sufficient and necessary condition to log in.

If you have that you can log in. And if not, you can’t. So that completely changes login where it means that for example, you can’t be deplatformed from social networks. It means you can authenticate also without people necessarily knowing who you are besides the fact that you have that key. 

It’s a structural shift in how you actually even log into systems and it’s sort of like phone numbers or emails. Where, if I have a collection of your phone numbers or your emails, like on a sub stack, or in a set of numbers that have opted into text messaging, I can contact you. But even better than that, because nobody can even intermediate with the phone number the telcos could in theory, stop you. But with this kind of messaging login combination, they can’t really stop me from messaging somebody on ENS.

So that disrupts Facebook login, Twitter login, Google login, LinkedIn login, all those – and it’s already happening with applications like Uniswap, for example, you could log in with ENS. 

Number four: Social. So when you’ve talked about messaging and login, you get to social and social is basically just sending lots of different kinds of messages back and forth to each other.

Decentralized social networks are now actually out there and early and working. Just technologically – Mirror, Bitclout, Capsule Social, many others. A lot of the DAO chat-style networks are out there. I’ve invested in a bunch of these. I’m going to invest in more, no particular endorsement of any one of them, but decentralized social networks are now actually out there where every like and post equivalent is actually on chain versus simply in a centralized database. And the way of thinking about what a big deal that is is you do not have root access to Twitter’s database or Facebook’s database. But with a decentralized social network, a developer can hit enter and print out every tweet equivalent from the beginning. They can print out the social graph, they can index a social graph and they can search the social graph.

So there’s applications, so-called block explorers. This gets us from Social into Search. One thing that is not very much thought about, because this battle happened almost 10 years ago, is how Google strive mightily try to buy Facebook. They were really annoyed at the emergence of Facebook and LinkedIn and Twitter because they were dark to them.

These are graphs that they couldn’t search and they knew how big it was going to be. And they were like, ‘Oh, we’re only gonna be able to index the open web, this is closed.’ The only thing that really came out of open social was the open graph standard. But they weren’t able to get these social networks to open up their databases because, of course, they could make more money with them closed than open because if the database were open and anybody could read and write to them, well, they would not be any more the monopoly provider of advertising on their platform.

That’s why Twitter shut down Tweetdeck and deplatformed all these companies that were initially building on its open protocol, it made more money with advertising vs having an open protocol. The critical thing that decentralized social networks have solved is the alignment of interests between the developers and the users and the platform creators where everybody just benefits from the token’s appreciation. And now you can build on this decentralized social network in a way that you could not do so on Twitter, because they’ll deplatform you. You can’t build on Facebook’s API, they’ll deplatform you if you get successful enough. 

So decentralized social networks, don’t just enable decentralized social they also enable decentralized search because an underappreciated aspect of Google… First, a lot more searches are done on Twitter these days than people realize. I think it’s, it’s crept up quite a lot relative to Google. I’m not sure if you have this behavior, are there days where you search on Twitter more than on Google?

Horace: Not more, but there are days. And when I do, it’s frustrating because I don’t find searching on Twitter easy.

Balaji: It’s not that easy, but —

Horace: But I sense what you’re saying. Also with the Facebook problem that the shift to social from web was, I think Google dropped the ball there. I think that’s one of the greatest failures that they didn’t manage to transition to social in any way. 

Balaji: Yeah, they got YouTube. That’s their big one that they did get.

Horace: YouTube was, yeah, it’s the best thing they’ve done actually since search. 

Balaji: So alright, so extending this point, a very important technical point where you’re thinking about search is [that] closed social network databases are harder to index in the open web, but blockchains are easier to index in the open web. And, this actually is something which most people don’t realize, blockchains, until really the last year or so, were for the most part used to contain financial data.

And so block explorers like or, that are indexes of the Bitcoin blockchain, or [which] indexes the Ethereum blockchain. Those don’t look like search engines to people, really, because the data structures they were indexing were things that weren’t really things you thought of as being on Google.

You’re looking for Bitcoin addresses and transactions and later on smart contracts and tokens, but these are very high volume search engines. And to show how behind the eight ball Google is, Google hasn’t built a block explorer for Bitcoin, even. Or any of the major crypto chains. Forget even Ethereum, they haven’t done Bitcoin. And that’s so within their core competency, it has zero regulatory risk, but just shows how behind they are, that they haven’t done that in 2021. The reason that’s important is what we’ve just proven over the last year, which is a huge milestone, is something like Bitclout or Mirror shows that you can host social networking data on a blockchain. There are others like Hive and Steam that have also shown this. And once it’s all on chain, it becomes so much easier to index for the purposes of search. 

People for example, stood up a thing, to index Bitclout. This is a demo, I’m not saying any particular decentralized social network will win, but in 10 days they were able to stand up the search engine.

How long would it take you to stand up a search engine for Twitter? It would take basically forever because you need access to their API. They’re not going to give you access to the API. And if they do, it’s going to be very throttled and very expensive, and you’ll have to raise venture just to pay for that. They can cut you off or change it at a moment’s notice. They don’t care about your business. And even if you give them a hundred percent of the company, they might not care. 

Search will be transformed by block explorers. There’s so many different ways from a technology standpoint that blockchains are easier to index.

Just one example, there are entire PhD dissertations that are written on freshness indexing. You’ve got a million websites, you’ve got a limited crawl budget. You can’t crawl all of them every second. It’ll make the servers mad, but it’ll also use up your own bandwidth. And they don’t update every second.

So how do you actually crawl them? Well, you have to have some statistical model of when they’re likely to get updated and you have to go back to the website when it’s predicted to have been updated and you have to have some provision for them going from one update a week to one update a day when you see a lot more changes than they used to have, and you’re updating your parameters… It’s this huge mathematically complicated thing.

And that’s just one aspect of search indexing. And all that goes away with blockchains because you just subscribe and you get a block every 10 minutes or one minute, and it’s got all the changes there. So, just the architecture obviates that entire —

Horace: It’s self indexing. 

Balaji: It’s self indexing. You get a change set. You know, this is also related to the broader move towards, log structured databases and so forth, which, if you’ve got listeners who know about what’s been happening in data science, that’s been a big deal. But it all kind of comes together where you have Kafka and so on. 

These change sets that are coming in, you can just subscribe to them as opposed to having to go out and get them. You don’t have to crawl. So that simplifies fundamentally – that alone makes search easier. 

Okay. Going a little bit further. The Crypto Phone, you know what’s happened recently with Apple and the CSAM thing?

The reason that it’s bad for Apple to be searching your phone like that is today they’re searching for photos with incredible possible levels of false positives, because people can put these adversarial machine learning images on somebody’s phone and frame them for a very serious crime.

Tomorrow, though, they can use the same technology to scan for cryptowallets on phones. And it may be ordered to do so by governments. So that alone is going to mean, and there’s already pushes for a crypto phone out there. Foundation Devices, for example, there are people who are building it. But a crypto phone is also important because of other things like payments. You have all this pressure on Google and Apple for payments.

The fact that you’ve got login, payments and identity, getting decentralized and app developers making more money and users having their funds secure. These are the kinds of pressures that could actually lead to a new mobile operating system. And actually that gets to the next point, which is Crypto OSes.

So that’s actually where, unbeknownst to most people, the operating system innovation today is happening in crypto. The reason is, a blockchain like Ethereum has a compiler and a database and a built-in programming language, and is as complicated as a web browser in many ways. Because you can write programs on it.

You don’t just write programs on it. You write programs that interface with other programs on it. Ethereum is a programming environment where one Solidity program can call another. That’s what it means to be composable. You know, you can take a loan and you can pipe it into a Dex (decentralized exchange), and you can pipe that into interest, and so on and so forth.

So the innovation in operating systems is happening in crypto where the operating system and the payment system and the login, and then eventually the social network, they’re all just kind of baked into one thing that’s happening in plain sight. But that’s actually what comes after Android and iOS and Windows and so on. It’s in plain sight and it’s an operating system that also has the community, the fan boys, which are critical for it, because they’re all the token holders. 

Horace: I’m already extrapolating what you’re saying. So my concern now is this, what you’re saying is effectively, then… Let me put it to you from an investor’s point of view and say, okay, I got you. It sounds like the value of Apple, Google and others will probably start to evaporate.

Balaji: Well, I wouldn’t say… it’s gonna take like 10 or 20 years. These are huge incumbents —

Horace: Like I said, I’m just extrapolating. I ask you this then, okay, what would you do instead? Who would take their place? And the answer, if I may, it sounds like there is no way to concentrate profit anymore in an operating system. Because, by nature, this isn’t going to be replaced by another Apple or another Google.

Those business models will simply not longer be viable. You’re going to have to find ways of creating value elsewhere. Because what you’re saying, effectively, is search is not value accruing. Platforms that are effectively communication platforms are no longer accruing. And so that includes Facebook and messaging. And even the phone itself. So then, what would be the new empires if there were new empires to be built?

Balaji: The coins.

Horace: The coins themselves? 

Balaji: Yes. Because basically, if you think about the whole fiduciary duty model of a corporation and people have pushed back on that, they said, ‘Oh, you know, a corporation has duties to the community, not just to its shareholders’ and so on. 

Crypto answers that by making the community the shareholders. 

Horace: So would you recommend any coin in particular or is, are they all pretty good?

Balaji: Well, they’re definitely not all pretty good. I would say if you’re just starting out, buy Bitcoin. That’s just where to start.

I think Ethereum is also, obviously, at very large scale, and those are like the number one and two. Once you are familiar with… If you can only do one thing, buy Bitcoin. If you’re a little more adventurous, buy 50/50 Bitcoin and Ethereum. Beyond that, I could go on for hours and hours about different kinds of coins and what they do.

But what I will say is if you think about what happened with the internet, it took all these different forms of media, like radio and television and newspapers, and it turned them all into packets. And what crypto is doing is it’s turning every single existing financial instrument into on chain debits and credits. 

Because ultimately what is a loan? It’s debits and credits somewhere.  What is a mortgage, what is a derivative? What is equity? What is a cap table? And the fundamental mechanism of value creation… what’s the most important data structure in Silicon Valley? You can argue it was the cap table. You know, the capitalization table determines who holds what equity. And that little Excel data structure, with a thousand odd rows is what led a thousand odd people to build Google in 2004 and align all these people from around the world to build this amazing thing. Even more than their billion row data sets. 

That cap table is now on chain. If you go to something like the Brave Basic Attention Token, or any of these other tokens, and you look on Etherscan, you go from a thousand people to 50,000 or 100,000 or even 1,000,000 people that hold a given token.

So you’ve scaled up the basic aligning function of Silicon Valley, the equity shares for shareholders, into something that is not equity, but it’s like Equity 3.0 or the sequel to equity. The problem with this, of course, is the reason crypto is not equity is it’s API keys. It’s something which you can use to interface with an app.

It is your encrypted messaging system. It is your login. It’s all these things that a share doesn’t do. And so fitting it into older classifications, like the SEC and others want to do is just sort of like trying to treat every packet that’s being sent to your house as physical mail and requiring you to get a stamp for it and saying, ‘Oh my God, I can’t believe how bad you are. You’re not in compliance. You don’t have a stamp.’ 

It’s this old way of looking at things that I don’t think is going to survive long-term. I think we’re in the middle of, you know how there’s a Reformation and then the Counter-Reformation you’re familiar with that. Right? 

Horace: Yeah, sure. 

Balaji: We’re in the middle of what I would call the Decentralization and the Counter Decentralization in both the U.S. and China. They’re pushing back on decentralization. Pretty hard in China and fairly hard in the U.S. And I think it’s going to increase. 

But I think the rest of the world also has a say. And I think what’s really under-appreciated is, and this is kind of related to this also, you know, that Google, Apple, Microsoft, Amazon, Facebook have to deal with; the rest of the world no longer wants to have American tech companies be able to deplatform their political leaders in these countries. Or unbank them. And they don’t want the Chinese companies to do so either because the new boss would be same as the old boss. So I wrote a series of articles on this, where what I think happens is that the new non-aligned movement is the aligned movement, the decentralized movement. Where just like many of these countries have actually said, ‘Hey, you know, for military or government purposes, we should look at open source software first versus proprietary software.’

They’re going to, over time, shift to using Bitcoin and Ethereum and other decentralized cryptocurrencies for different purposes. Because they are a transaction and soon communications networks that cannot be shut down by American or Chinese companies. And that’s another thing which a Google or Apple or Facebook can’t really compete with because the whole point is it’s not them. Unless they manage to launch a fully open source project.

You know, React is something Facebook launched that is a genuinely open source project that people can use. Because even if Facebook cuts them off, you can go and modify it. Unless they actually launch a chain and take the whole hit of doing that, they won’t have the trust. Because people don’t want them to have server side control.

So going a little bit further, advertising and e-commerce. So, the engine of Facebook and Google is CPM and CPC ads. Costs per impression. And then per click. Every thousand impressions, every click, you pay them. They don’t usually do full CPA advertising where you only pay them when something is sold.

If [you’re] Casper mattresses, though, what you’d want to do is you say, ‘Hey, I’m selling a mattress for X dollars. I only want to pay Google when I’ve got a conversion that came through Google.’ The issue with this is Casper as an incentive to understate the number of conversions and Google has an incentive to overstate it.

You would need an incorruptible neutral third-party ledger of all transactions in order to actually do full CPA advertising. And guess what? That’s what the blockchain is. 

So CPA advertising is going to be an area where I think that’s going to start really hitting the Big Five in an area where they don’t expect it because the people within the crypto community, on both the e-commerce and the consumer side, the merchants and the consumers are at sufficient scale where if a pure CPA thing was introduced, it would just be better.

It would be something where you might offer discounts to people because of it. It gives you better analytics. And then what this also does by the way, is it’s better for merchants because it means automated accounting. All the stuff that you’re currently paying PwC or all these guys to do, can be turned into a shell script if all your stuff is on chain. Which is a huge thing, because it also automates diligence and then automates M & A, you can start actually stacking things. Once you, I mean, we’re talking five or 10 years out, but once you start going from, okay, all transactions are on chain, then all financial statements are on chain, then actually M & A can be put on chain because these higher order abstractions can be built on it.

And this is sort of like saying in 1990, well, once you’ve got emails, you’ll have blogs and social networks. We’re looking far out, but that’s what happens once you start having more stuff on chain, it becomes more programmable. Okay, so CPA advertising: there’s e-commerce, there’s accounting, a few more pieces. 

[Let’s talk about] hosting. AWS. So, centralized hosting is going to be tricky to fight head on for awhile because you know, the scale, the capacity of blockchains isn’t there yet. But it’s improving dramatically. And if you look at Filecoin and Chia, and of course, Bitcoin itself, Ethereum… one of the most remarkable things is a moat that I thought 10 years ago would be very difficult to disrupt, which is just the sheer scale of Facebook and Google’s data centers, right?

That’s something that seemed like only a huge centralized company could do. We have now proven that if the protocol is fixed, people will do massive multi-billion dollar international data center build outs, not just for Bitcoin mining, but for Chia and Filecoin and many other lesser well-known coins.

If the protocol can make money, people will buy the hardware and they will rack and stack it. And that means that many things that we think of as companies will be turned into monetizeable protocols and decentralized in this way. So the hosting, the data centers will get there. 

Creator monetization. This is another attack where, you know, Facebook and Twitter are now trying to do these newsletters and so on. But for 10 years, 15 years, they really didn’t give creators a cut. And with crypto, creators, don’t just things like NFTs, they don’t just make money from art, they can make money from equity-like appreciation. People can buy into their coin to go and attend their events, or you could log into a Substack equivalent by just holding enough of the coin.

So this combines like the earlier things I was saying about login. So the crypto, the encryption, the payments are kind of the same thing. It also kind of attacks the Big Five and other tech companies on the backend. It’s like holding a coin is in many ways better than equity compensation. It’s liquid, it’s marked to market. If it’s legal in a country, you would just do that. 

Some countries are just going to be smart and they’re going to stop with all this stupid stuff from the 1930s and orange groves… just using 100 year old regulations to harass founders today. You have to deal with it because that’s what the environment is.

And you can, I think, make a very strong argument that crypto is not the same as equity because you can use it for API keys, you can use it for other things. But eventually there’ll be countries, and actually, even in the U.S., Wyoming has passed DAO laws. 

There are states within the U.S., both subnational and international regulators that are enlightened and are going to say, absolutely, we want the entire stock market on chain. We want the stock chain. We want the transparency, we want the throughput, we don’t want to have the Robin Hood situation where we’re still dealing with DTCC (Depository Trust and Clearing Corporation) and these antiquated ways of recording stock transfers with paper certificates. We want modernity, we don’t want to talk about orange groves and try to fit a square peg into a round hole.

So I think equity compensation, the backend, that gets transferred to coins. And these companies that are used to outbidding are not going to be able to do so, because if you actually look at the growth of Bitcoin and Ethereum and other coins over the 2010s, as remarkable as the growth in the Big Five tech companies are, those coins make them look like slow growth companies.

The story of the 2010s, in retrospect, with zero offense to Uber or Airbnb or Stripe, it was Bitcoin. That was the biggest hit of the 2010s. It was bigger than all the other startups combined, because it wasn’t a startup. It was a coin. 

I mentioned FinTech, messaging, login, social, search, crypto phone and crypto OS, advertising, hosting, data centers, creator monetization, equity compensation. 

There’s also values. You know, this is very important, actually. It almost goes unsaid, but it shouldn’t. The initial values that tech stood for back in 2012, or thereabouts, Twitter called itself ‘the free speech wing of the free speech party.’ And there was a huge emphasis on this during the Arab Spring. And of course with open source. And that strain still exists. The current non-free and focused, very state aligned thing where you’re censoring people, for contesting, what the WHO is saying, where the WHO changes what it said last week is, is basically the Western equivalent of the Chinese censoring Li Wenliang for getting the message out.

And I certainly don’t agree with everything that is said on social networks, but I do agree that the centralized authority is not always right. And to simply treat that as truth and censor people who are saying something contrary to that means it’s not a free society anymore. 

So the values aspect, anybody who cares about those values, and those are some of the most ideologically motivated and committed engineers, those folks are going to crypto. Then there’s, obviously on the privacy end, you only get verifiability if you’ve got the private keys locally.

So you put all that together and that’s actually a recipe for attacking enormous swaths of the whole thing. 

There’s one other aspect I’ll add there, which is when the back ends become open, this actually disrupts APIs in a very fundamental way. Because right now, yes, you have APIs, but they’re pretty siloed. You’d use a bunch of APIs in your app, but to make Stripe talk to Shopify, to this or that, maybe you’d use Zapier or maybe you’d write your own customer integration. It’s not that easy to work with because you don’t have root on those databases. 

With crypto backends you do have root, you have total root access. Every user can look at every single row of the, it’s not exactly a row, but every entry in a blockchain. Any user who owns coins can write and any user with sufficient compute can write blocks. And so, because of that, anything that’s like the next Google Docs or the next messaging app that’s built on a blockchain has much better interop[erability] between chains because it transforms what an API is.

API access, your API key, is holding the coin. And you can do anything you want so long as you hold enough coin, within compliance of the protocol. So what I just outlined, that’s essentially a recipe for 10 years of disruption. 

Horace: Absolutely. But let me say this – I think it’s not just disruptions of the Big Five as you put it, or maybe Big 100. A lot of possible asymmetries here. But my concern or, rather, optimism even, is that this is about institutions more, even, than private equities. It’s institutions that have been built throughout the Industrial Revolution. And you talked about putting equities on, the very idea of holding paper to represent something else. The very idea of institutions, which are there to ensure transactions and trusts.

Those, again, I’m sort of parroting the ethos of coin, but you’ve effectively shown the roadmap as how it happens in the ways that are very tangible. My point is this – because when I wanted to have the show with you was to ask a sort of a profound question. 

Is someone living in a 21st century, as my son was born in 2005, will they see as much change throughout their life as someone born in 1900? Or even someone born in 1800 living through the 19th century.

So if I asked this question of myself, because it’s not so much about me but the next generation. And I struggled with this question because I felt like the first 20 years of this century, haven’t been all that exciting in the same way that the first 20 of the last century or even the one before it. If you think about the 18th Century, sorry, 19th Century- early 1800s were very volatile. There were the Napoleonic wars. And then we ended up with the Industrial Revolution taking off. Steam engines, railroads. It was a crazy century. And then you get to the 20th and you’ve got World War I already would have passed [by now]. We would have had the invention of the airplane, the mass production of automobiles.

We were heading into the Roaring 20s by now, and the 21st Century looks pretty lame so far. And I thought to myself, you know, all of these changes… I am a technologist. So I think of all the changes that we saw in the previous centuries, it was due to technological innovation, due to inventions.

And the formation of the Industrial Revolution was fueled by capitalism. That’s what we call it, capitalism. But I ask myself, and I’ll put the question to you, is: Do you think someone born in 2000 and then living 100 years, which is not improbable, would they experience this century in as much of a sense of wonder and change and drama that the 20th Century, now, of course, there’s a lot of negative things have happened. But, fundamentally, someone born in 1900 dying in the 1990s would have seen a completely different world.

And that’s exciting. That’s very exciting to think that you’re part of this dramatic, poetic change. And good and bad, but generally progress. And I would say I’m excited now from what I heard, that possibly the 21st Century will be even more exciting because it certainly would undo a lot of things, if what you say is true, but also might create new things we cannot imagine.

Certainly, 1900 Man would not have imagined life in the 1990s, no way. And I don’t know if we can, and we should be humble about what will be created from this creative destruction that has to happen. But do you believe, as I do that, should we be optimistic that something will emerge, that will be even more exciting than than the last century?

Balaji: Yes, though, let me get my take on that, I actually did a whole interview – it’s funny because we think about some of the similar things, but I did a whole interview with Sotonye, which you might find interesting on this topic of 1800s, 1900s, 2000s, actually, in its own way.

My thesis is 1950 was sort of peak centralization. And in many ways, if you go forward and backward in time, we’re getting more decentralized from then. So 1950, you had one telephone company and two super powers and three television [networks]. You had AT&T you had the U.S. and U.S.S.R., and you had ABC, CBS, NBC.

If you go forward in time, 1991, the internet frontier opens, NSF (National Science Foundation) repeals its acceptable use policy and allows commerce on the internet. Backward in time, 1890, the frontier closes, the western frontier. Frederick Jackson Turner, his [essay], the frontier thesis, where he talks about how actually it was the frontier that made America, more than even democracy or capitalism. 

It was exit, it was immigration, it was the free soil. And the fact that people could just start a new community or a new business, or go out west and, and make their name on nothing that gave America its character. Now, of course, there’s the Native Americans and so on, which obviously complicates that story.

With the internet you have a frontier that did not have that issue. And if you go backwards and forwards, there’s lots of parallels where as the centralized state in the west, its grip loosens. We see the Coronavirus and the Spanish Flu. We see left and right fighting in the streets. And we saw that in the 1920s and 1930s.

We see the tech billionaires, and we have the Robber Barons of the past. We see the private banking era of the past, and we have the cryptocurrencies of the present. We see the same, well, not the same but similar, arguments in William Jennings Bryan’s Cross of Gold speech on monetary policy was a huge thing in the late 1800s in the U.S. and digital gold is an issue again.

We see fundamental arguments over the role of the state and all this stuff with sanctuary cities, and gun laws being different at local level from the federal level and states pushing against the federal government as similar to some of the tectonic plate movements in the 1930s with the federal government versus the states. And then also even the mid 1800s. 

And what I think happens is all of those things get resolved in the opposite direction this time. Where if you ramp up from, arguably, the 1700s, you might track it all the way back to 1492, or something like that. But at least from the 1700s to 1947, technology’s favored centralization.

You’ve had railroads, telegraph, radio, television, movies, mass media and mass production, where a few people could control a lot. And then you go to de-centralization with the transistor, the personal computer internet, remote work, smartphones and now cryptocurrency where you’re decentralizing power away from the Maos and the Stalins and the Pol Pots. And even the FDRs. The people who run these gigantic countries, where who’s the number two after them? All of this power is concentrated in a few people. 

Now we’re actually decentralizing it out. And, in many ways, people talk about inequality rising, but actually in many ways, equality is rising and that’s actually what people have a problem with.

And what I mean by that is A) global income equality is converging because China, India, other countries have been rising, relatively, they were very poor 40 years ago. But it’s not just them. It’s also chunks of South America and Southeast Asia and Eastern Europe and Russia, and so on.

B) consumption inequality is plummeting because a kid in Nigeria or India or Brazil has basically the same Google experience as Larry Page because it costs just fractions of a cent. And then C) and this is to my point, power inequality is decreasing because some kid in India or Nigeria is not going to grow up to be the president of the U.S. but they can become the founder and CEO of their own tech company. Or their own crypto protocol. And so they can rise in a different way, which doesn’t include migrating to the U.S. and doing that whole 20th Century rigmarole. 

So I do think it’s an exciting century in many ways. I actually think the 20th Century was a much worse century than the 19th Century, because the 20th Century was two world wars and communism and socialism for much of the planet.

It was okay in the U.S. and Western Europe. But [for] much of the planet, it really sucked. And now it actually might flip where the U.S. and Western Europe, the U.S. more so even, that feels like it’s kind of… Maybe not all of the U.S. I’m actually bullish on individual states like Wyoming and Colorado and cities like Miami and so on. They’ve gotten behind crypto. And the reason I just keep saying, ‘crypto crypto,’ is because, as we just went through, the sheer scope of applications is difficult to realize until you’ve gone through it. It’s really a big deal. It’s a civilizational technology. It’s not simply like a toaster oven or something.

So those states have gotten behind crypto. I think there’s pieces of the West that are going to be good, there’s pieces that aren’t. And it’s almost like a flip of the 20th Century where it’s the East that is more capitalist, that’s India in particular, but it’s also east Asia, it is probably Eastern Europe that is maybe more capitalist than the U.S., much of the U.S., and much of Western Europe.

So, that’s my broad scope of history.

Horace: Yeah, I wouldn’t be as… my judgmental question on better or worse was not really that most people would be better off or [had] suffered more, but more in this poetic sense. We feel like we’ve made progress

Balaji: Acceleration, yes. Yes.  

Horace: And the 20th Century… I don’t think that you can argue that the technologies that emerged, that someone born in that century would have witnessed —

Balaji: Yes, they go from out houses to flush toilets, and so on. 

Horace: Yeah, exactly. Not distributed very well, but the thing about the 21st is I cannot imagine how it’s going to go. But to me, I sense that we will [eventually] feel like we’re making progress. And I think we’ll feel, because the first 20 years, it hasn’t felt like that. I mean, we’ve certainly had a lot of… the joke goes, you know, we didn’t get flying cars, but we got 132 characters.

So there’s going to be much more coming. And I think there’s a sense of wonder in the sense of opportunity, a sense of optimism in the sense of the decentralization. But also, like I said, that optimism around the small states. I live in Finland now, but my point is –

Balaji: Yes. Small states, yes.

Horace: I said this once, the 20th Century was the century of the large state. The superpower was every everyone’s idea of success. But now, I think it’s going to be much more the small states that are going to be the 21st Century giants, if you will. 

And so that’s my point. I agree that it might be a very different feel from an individual point of view, but I think, as a civilization, we’re probably going to look back, or historians will look back on 21st and say, what was the defining thing?

Like, I think of the 19th Century, sort of as the steam century. And I think of the 20th as the chemical engineering [century]. You know, at the end of the day, it was the fact that we built everything on top of energy that was suddenly released, right?

Balaji: Well, it’s interesting, because I’d say the 20th century had a lot of stuff.

You can argue this, but going up to the moon landing. Then after 1969, outside of digital technology, things really slowed down. It’s hard to think of some, I mean there’s a microwave oven and stuff like that. This is the point Thiel has made, people have made this with the website,

I think partially it is the gold standard, but partially it is, essentially, the sort of risk aversion that arose after that point in time. When nuclear power plants were made very difficult to build and regulations were enforced in such a way that it was just difficult to take risks, voluntary risks.

There’s actually a great book, Where Is My Flying Car?, have you read that? 

Horace: No, but I can imagine what it says.

Balaji: It’s by J. Storrs Hall. It’s self published. It has a really bad looking cover, but it’s really good. It’s something where you learn something from every few pages. Highly recommended —  

Horace:  I did my own conference once on the subject of what happened to modernism.

The idea of utopia, it being foreseen in the 1950s based on technological progress, which, I put it to you this way. So if you were born in 1900, by 1950, you were middle-aged. But you would have seen all of this progress. And if you were, technologically sort of extrapolating it you’d say, well, that’s where you get the flying cars by the 1990s.

So you see the ad copy, the way advertisers were, and the usual visuals from the 1950s of flying, or progress in agriculture, in transportation, progress in, not so much computation, but the extrapolation of the first half of the 20th Century.

And I pointed out that the last place where such optimism existed was in the tech sector because the rest of the country, the rest of the world, felt like it was in stagnation. And, again, we can quibble on this or discuss this on another episode. But I think we’re in agreement that possibly this is the key.

If someone were to look back on the 20th and then say, okay, maybe it was internal combustion. But someone looking back on the 21st would say it’s Bitcoin. 

Balaji: Yes.

Horace: It’s crypto. That’s the biggest thing that happened in this century.

Balaji: It is. I actually do think Bitcoin, the impact of it is at least on par with the steam engine.  Maybe more like the Reformation or even the Bible, in terms of where it’s going to be long-term. It is just such a fundamental, it’s a social technology, because it just changes the relationship of people to each other and decentralizes power in this very, very, very fundamental way. And I don’t think people get that. 

Horace: I think that’s a great thesis. That’s what I wanted to do in this show is to sort of zoom out as much as possible. But you took us zoomed in to explain that these are the building blocks. And it’s hard for people to, you need —

Balaji: Yes, crypto is too zoomed out in some ways, right? 

Horace: Yeah, but you need the mind that can grasp this, can go both ways. And that that’s very hard, flexible plastic minds. I’ve spoken to people in the community who are very nuts and bolts. And then there are some who are very idealistic and some very ideological. And most people, when they look at this and say, ‘My God, it’s filled with nerds and it’s filled with ideologues. They’re a bunch of maniacs.’ So it’s important to bridge those two somehow. So thanks for all that.

Balaji: Hopefully this was good. We talked about applications and of relevance to your audience. Happy to do it again. This was great. 

Horace: Excellent. Thanks so much. 

How to listen to Asymco: The Asymco Podcast Channel

I’d like to let everyone know that Asymco is a podcast channel available on Apple Podcasts and Supercast. These podcasts are subscription-only (with a trial period).

Join Horace Dediu and Judd Rubin as they strive to ask the right questions on the purpose of the firm, priorities in a time of plenty and what it means to be great.

Content is updated at least every few weeks and more likely weekly. The format includes conversation with Judd Rubin but also interviews. Guests already include thinkers and doers such as Efosa Ojomo, David Sundahl, and Balaji Srinivasan.

The channel includes three podcasts today but we will introduce new shows on an eclectic range of topics.

The Most Important iPhone Ever

Just recently, the 2 billionth iPhone was sold. Unlike the 1 billionth, there was no announcement, no celebration. Partly this is because Apple stopped reporting unit shipments, but partly it’s because it’s not as interesting to talk about 2 billion as it is about 1 billion. There is a desensitizing when numbers get that big. What happens after you achieve the status of the most popular and valuable product of all time? How much more better can the world absorb?

Before we answer, let’s reflect on how it’s going. The iPhone is doing better than ever.

There are more than 1 billion iPhone users. The total number of users has been rising steadily. iPhone users make up about 26% of all smartphone users (3.8 billion is the current estimate). The share of users in the US is about 60% (or soon will be.) The share in UK is close to 50%. All these share numbers are higher than ever. Over 14% of US and 10% of UK survey respondents have switched to an iPhone in the past two years. The following graph shows how churn is boosting iPhone market share in terms of users.

Source: Piplsay

There are more iPhone configurations. As the following graph shows the spread of phone price points is wider than ever. Reaching $1600, the range still starts at $399 in the US (excluding taxes.) The total range (number of lines in each year) is increasing also, now 24 mainly due to the addition of a 1TB storage option. NB: There are now two iPhone minis (12 and 13) and one SE bringing up the rear.

Carrier incentives are picking up again. There are tremendous trade-ins and incentives for financing new iPhones which is bound to create retail traffic. Also with the opening of more economies, there is likely to be a surge in shopping. Bear in mind that around 400 million users have iPhones older than 3 years. Trade-in values are as high as $1000. Which leads to…

A thriving secondary market. The used smartphone market is dominated by iPhones and this drops the floor for entry into the iPhone ecosystem to essentially $0. The following graph shows price drops across 2019 for Apple and Samsung smartphones (for various models by date of initial release).

Most importantly, the specification of the iPhone continues to push the boundaries of what consumers demand from a phone. The camera performance for the latest iPhone 13 enables a set of new behaviors beyond the selfie, the snapshot or 10 second video. Apple is putting cinematographic power in the hands of amateurs. It’s not so much about replacing professionals but enabling amateurs to look better to each other. Be sure to listen to the latest Asymetric podcast to hear from John J. Connor, accomplished film industry camera operator and cinematographer on the power of iPhone cameras.

The new cameras are for the new generation of YouTube, Instagram and TikTok influencers. Ordinary people with extraordinary tools can do extraordinary work.

The latest iPhone 13 is, in my opinion, the most important iPhone ever. It creates the perception of what a phone should be and it sets up the trajectory for demand that did not yet exist. It’s facile to think that the utility of an ok older phone is good enough. That assumes that we are satisfied with ok messaging and ok apps. With ok photos and ok video. With no wide angles, no nightmode and no macro photos. What the iPhone has shown however is that the demand for performance can be nudged up.

We did not ask for rack focus, post-production focus (!), night mode, macro photography and portrait bokeh. But once we have these features we begin, ever so slowly, to use them and then we start demanding them. Conversely it seems that what people mostly ask for—that is what the critics ask for—are extrapolations of existing features. The “faster horse” dilemma.

What makes the iPhone and perhaps Apple special is that it seems to deliver things that nobody asks for but then everybody wants while eschewing overshooting a performance dimension that a few demand but most won’t use.

The tragedy of overservice and disruption is that if you don’t shift the definition of performance eventually you run out of demand at the top of the performance curve. That opens you up to “good enough” competition from below. Instead you need to re-define the notion of performance: compete on a new basis, reset expectations. That the iPhone can find new dimensions of performance and hence demand is effectively a solution to the innovator’s dilemma.

Forecasting The Past

The last quarter of 2020 was a remarkable quarter for Apple. Every line in the income statement increased by double digits. Net sales up 21%, iPhone sales up 17%, Mac sales up 21%, iPad up 41%, Services up 24% and Earnings Per Share up 30%. This had not happened in over 10 years. The last time being the first quarter of 2010.

Take a look at the table below which color-codes each line based on the rate of growth. The darker the green the faster the growth (blue being above 100%).

A shockingly good performance is made all the more remarkable by its happening in a time of uncertainty. The company has refused (rightly) to issue guidance as long as a pandemic is raging world-wide. The disruptions in supply chains, demand and changes in behaviors due to new limitations on mobility and interactions between people are unprecedented and consequences are still to be estimated.

The growth surely, you say, is precisely because of this disruption. The “work and study from home” and lockdowns have forced people to buy more technology. Phones, Laptops, tablets are not just tools but lifelines for a society denied other forms of contact.

But this was not at all obvious at the beginning of the crisis. The months leading to pandemic caused the share prices of most equities to fall, and tech was not immune. Apple’s shares fell in March 2020 to $57/share. I heard comments suggesting that Apple would collapse as a business with unemployment reaching 25% and nobody willing to pay for luxuries like iPhones.

The crisis has proven that technology is not a luxury but a necessity, and technology that works better is far more valuable than technology that works barely. Spending on better machines has increased.

Some of that is of course helped by stimulus programs but growth was not only in countries which gave out cash. The growth for Apple was in all regions of the world, breaking new records even in poorer countries.

Far more likely, the economic fuel for Apple’s growth came from disposable income being unspent on other high-ticket items like dining, vacations and entertainment. Much cash sloshing around the economy surely ended up in an Apple cash register.

But this is all old news. The question into 2021 is what will this year look like. The first quarter already ended and the data is dribbling in: Apple has 1 billion customers, 88% of US teens have an iPhone, 70% have AirPods, China is growing at crazy rates, Foxconn reporting 40% growth, production of next generation iPhone chips starting early (May), etc.

There does not seem to be a let-up in growth, despite some component shortages postponing some non-iPhone product introductions. Apple’s cautious comments 3 months ago are probably moot now.

We are providing some directional insights assuming that COVID-related impacts of our business do not worsen from our current assumptions for the quarter. For total company revenue, we believe growth will accelerate on a year-over-year basis and in aggregate, follow typical seasonality on a sequential basis.

At the product category level, keep in mind two items: First, during the March quarter last year, we saw elevated activity in our digital services as lockdowns occurred around the world, so our services business faces a tougher year-over-year comparison; second, we believe the year-over-year growth in the Wearables, Home and Accessories category will decelerate compared to Q1.

As you know, we were chasing demand on AirPods last year as we expanded channel inventory from Q1 to Q2. This year, we plan to decrease AirPods channel inventory as is typical after the holiday quarter. We expect gross margin to be similar to the December quarter.

We expect opex to be between $10.7 billion and $10.9 billion. We expect OI&E to be up around $50 million and our tax rate to be around 17%.

Luca Maestri

Given this, I am tentatively projecting top line growth of 15% (vs. 1% a year ago and 21% last quarter) and EPS growth of 11% (vs. 3.8% year ago and 25.6% last quarter.) A goldilocks quarter.

More details will be forthcoming.

Significant Contribution Again

Five years ago I used the Cook Doctrine (put forward 12 years ago) to assess the possibility of Apple’s entry in the car market. That doctrine states, among other things:

We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.

Tim Cook

I concluded that it was not a question of if, but of how and to what degree Apple could make a significant contribution. How in terms of control of the technology and to what degree in terms of significance of contribution.

It was a tough call five years ago and it’s still a tough call today. Arguably the failure of initial efforts to meet the Cook doctrine have caused resets and reboots and pivots which means no entry is visible in the near future.

But there is another effort that Apple has undertaken in the automotive space which might be indicative of their intentions and capabilities.

This is an effort that hardly gets mentioned and was dismissed as immaterial a long time ago but I would argue it has made a contribution. It’s also unique for Apple in being a licensed software technology made available to hundreds of licensees and extending a software and services strategy to non-Apple hardware.

I am speaking, of course, of CarPlay.

CarPlay was announced almost exactly 6 years ago. It implements a unique division of labor between the iPhone and the on-board hardware. A division that keeps most of the computation and data on the phone but displays and allows inputs through the car. As a result it can evolve with new versions of iOS while keeping car inputs and outputs functional even when they age well beyond the lifespan of several iPhone generations.

It can be argued that CarPlay is a necessary “connector” for the iPhone for that one hour a day that many iPhone users spend in their cars. It is effectively a better way to control the iPhone and have it be the “brains” of the infotainment system. In that regard it’s very similar to Apple TV: controlling the “dumb” TV without having to be a screen. The difference here is that CarPlay does not need an Apple remote.

But how is this significant? It improves things, sure. It improves most in-car experiences related to making calls, music, navigation, calendar, messaging, podcasts and news. It also seems to have traction.

The measure of any product introduction should be adoption and in that regard CarPlay could also be seen as significant in its departure from the Apple play book.

Because the adopters are not users but carmakers, the decision to deploy it depends on it being licensed and put into cars that are produced and made available. Quite a different set of hurdles, these are the “orifices” that Steve Jobs famously riled against.

One of the aspects of adoption by institutions vs. adoption by consumers is that whereas consumers are influenced by an early adopter calculus followed by the observation and imitation of others, for institutions there is a long delay with indecision followed by a rush to do adopt in unison with competitors. In other words, the adoption curve for consumers is a continuous gradual uptake whereas for institutions it’s a flat line followed by near-vertical step function.

We can see this with the following graph showing the number of car models supporting CarPlay for the model years they represent.

2014 and 2015 were very tepid but 2016 and 2017 saw huge leaps in adoption. Since then there has been a steady filling out of support. At this point in time about 600 car models support CarPlay which is very nearly all the models available in the US market and a substantial number for the markets where the iPhone is widely used.

So is CarPlay significant and can it provide control? On the control side the answer is a tentative yes. CarPlay creates an iOS bubble in the car and it sustains the iPhone ecosystem with no incursions by alternatives likely. [Android Auto which seems to have a similar degree of adoption does the same for Android but there is no “pull” of switchers from one to the other.] Anecdotally, CarPlay support has become a hygiene issue with carmakers. Having it offers few advantages but not having it may repel users.

On the significance question, the answer should be “it depends”. The support seems substantial but it’s hard to assess market share of models as a complete list of car models available is not easily obtained. Apple has effectively injected software in a lot of cars and done so relatively quickly. By licensing it has amplified its reach much in the way Microsoft did with Windows and the Intel PC in the 90s. The speed is remarkable because everything in the car industry happens very slowly.

More than 1000 licensed car models in 4 years. This is quite a feat.

But the software touches only a fragment of the car. Infotainment is important, perhaps more than anything else the user perceives about the car experience. But it has not changed what the car is. It has not made driving safer nor more productive or more efficient.

Messaging and calling and mapping/navigation notwithstanding, significance needs to be measured in more important terms. The iPhone is significant precisely because an iPhone is not a Phone. The Apple Watch is significant because it’s not a Watch. AirPods are significant because they are not just acoustics.

CarPlay would be significant if it made the car something it isn’t and not keep the car being what it is. We know it should be something else and that is what we are all waiting for.

The Car Bundle Paradox

The EV car market is booming. The graph below shows the global market for plug-in electric cars (plug-in hybrid (PHEV) and battery (BEV)–BEV are about 70% of total). The data is split between 2019 and 2020 with further distinction between the main regions.

EV (PHEV+BEV) units sold 2019, 2020 by region.

There is an additional detail in the delineation of Tesla’s shipments into these regional markets. To that point Tesla’s market share of all EV cars has remained roughly equal from 2019 to 2020.

Tesla share of EV car market and share of all cars.

The big story of 2020 was the growth of European EV shipments. Those who follow the market know that new EU penalties for CO2 emissions have come into effect, causing much of this increase. Indeed, previous surges in the US and China have also been driven by new incentives and/or disincentives.

As an aside, it should be noted the absence of Japan from this EV story. It’s quite a shock, really. Japan is responsible for a large percent of all cars sold through its national heroes Toyota, Nissan, Honda, Mitsubishi (and Subaru, Suzuki, Mazda, Isuzu) and has been a driving force for innovation. The absence of a local market for EVs is a glaring indicator of lack of industrial policy. Unlike the US, Japan does not even have an oil industry, importing all its supply (while the US is a net exporter.) Yet the US produces and consumes far more EVs than Japan. This should give pause. One wonders what would happen if Japan followed Europe in providing incentives for EVs in the “JDM” market.

Japan and “Other” countries aside, there was growth. But much remains to be done. The overall industry is far larger, as shown in the following graph.

EV growth and global light vehicles 2019, 2020.

Nevertheless, optimism abounds. With an increase in market capitalization of about 648%, Tesla is now the most valuable automaker in the world.

Tesla, the champion EV maker has taken 17 years to reach 0.65% market share.

Market capitalization of the auto industry (top 25 firms) and the market size (in units delivered).

Actually, as the graph shows above, Tesla is now almost as valuable as the entire auto industry was a year earlier. But the rest of the industry did not collapse. The top 24 companies (i.e. apart from Tesla) increased their market capitalization from $901 billion to $1266 billion during 2020. That’s a 40% increase during a year when sales fell by 15%. Quite an achievement.

Overall the market capitalization of the top 25 automakers more than doubled from $1.0 to $2.1 trillion. This begs many questions, mainly, how would such profits ever be generated.

To put a finer point on it, if we divide the market capitalization by units produced we get a figure of value that allows a historic perspective.

A measure of valuation by units of production.

Historically car companies were valued at $8,000/yr. 2019’s value was about $10,000 which makes sense given some inflation. But the drop in volumes coupled to increase in valuation brought the ex-Tesla cap/unit to an eye-watering $16,400, a 64% increase in one year.

Tesla’s valuation is on a different level. It went from $291,361 to over $1.6 million/car sold. Roughly this is 100x rest of industry.

But if we continue to pull the thread there’s yet another story to consider. The car industry (i.e. making and selling and servicing cars) is not the only way to deliver “miles” to citizens. There are multiple “modes” and services that deliver transportation.

There are also the ride hailing and micromobility which are positioned on different “jobs-to-be-done” than cars. The market capitalizations of ride hailing and micromobility are shown below

Adding the value of ride hailing and motorcycles and bicycles.

Note that micromobility is only measured by the value of motorcycles and bicycles whose markets are measurable and applying a 1.1 multiple to those sales yield a rough estimate of market cap.

It’s hard to get a measure on these jobs but I’ve taken to heart the idea that what you measure is most important in seeing what’s next and have been dividing the “market for miles” into short, medium and long distance trips.

The “Car Bundle Paradox”: The demand for travel vs. value of modes for travel by trip distances.

In the view above we get a sense of the scale of perceived value for businesses serving various trips. The inverted nature of valuation positioned on trips is, I believe, worthy of further analysis.

As the car today is a bundle, the design and engineering efforts are directed at serving the longest of long trips (with the largest payloads.) But the demand is for short trips.

If the car is to be unbundled (as the Personal Computer was into laptop, tablet, phone, wearables) then one can imagine that devices designed for short trips would accrue the value of those trips (and their popularity).

The absence of value in short trips is a paradox. Or perhaps it’s just an opportunity.