December 18, 2025 • 29 mins
In part two of this week's three-part NVIDIA series, Ed Zitron walks you through the history of Enron, why it differs from NVIDIA, and why growth-desperation led big tech to waste hundreds of billions of dollars on GPUs.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Zone Media. Hello on welcomes a better offline. I'm at Zeitron,
and I'm nothing like Enron. Now. This is the second
episode in the Nvidia Enron series. And to give you
(00:24):
a recap, a few weeks ago a document from Nvidia
leaked where the company denied that it was anything like
Enron at all. But what was Enron? Now? Some of
you might know this, some of you might not, but
I think it's time to remind everyone what Enron was
and what Enron did and why Enron was So I
don't know if we should say special, but it sure
(00:46):
was Enron. Now, the collapse of Enron wasn't just in retrospect,
a large business that ultimately failed. If that's all it was,
it wouldn't come on the same space in our heads
as other failures like WorldCom or Nortel, which I'll actually
get to later talked about WorldCom line episode, both of
whom were similarly considered giants in their fields. By the way,
it's also not just about the fact that Enron failed
(01:07):
because had proven business and accounting fraud. World comm entered
bankruptcy due to similar circumstances, though, rather than being liquidated,
and this is kind of a mind fuck, so forgive me.
It was the quietest part of Verizon's acquisition of MCI,
the name of a company that had previously merged with WorldCom,
that WorldCom renamed itself to after bankruptcy. This era sucked,
(01:27):
and unlike Enron, WorldCom isn't the subject of multiple films
and even a Broadway production. And my editor saw the
UK tour of that and apparently it was pretty good,
you asked Matt Hughes, if you want to know more.
And it's also not the size of Enron that made
its downfall so intriguing, nor, for that matter, is it
the fact that Enron did a lot of legally and
ethically dubious stuff to bring about its downfall. No, what
(01:49):
makes Enron special is the sheer gravity of its fuckery,
the rotten culture at the heart of the company that
encouraged said malfeasance, and the creative ways Enron's leaders crafted
an image of success around what was at its heart
a big, fat dog of a company. Enron was born
in nineteen eighty five out on the foundations of two older,
much less interesting businesses. The first, Houston Natural Gas HG,
(02:11):
started life as a utility provider bumping natural gas from
the oil fields of Texas to customers throughout the region,
before later exiting the industry to focus on other opportunities.
The other Inter North, was based in Omaha, Nebraska, and
was in the same business pipelines. In the mid nineteen eighties,
H ANDNG was the subject of a hostile takeoff from
Coastal Corporation, which until two thousand and one operated a
(02:34):
chain of refineries and gas stations throughout much of the
US mainland. Unable to fend it off by itself, h
ANDNG merged with inter North, with the combined corporation renamed Enron.
The CEO of this new entity was called Ken Lay,
an economist by trade who spent most of his career
in the energy sector, who also enjoyed deep political connections
with the Bush family. He co chaired George H. W.
(02:56):
Bush's failed nineteen ninety two re election campaign and allowed
Enron's corporate jet to Ferry Bush Senior and Barbara Bush
back and forth. To Washington Center for Public Integrity director
Charles Lewis said that there was and I quote no
company in America closer to George W. Bush than Enron.
George W. Bush, and I mean the second one even
had a nickname for Lay Kenny Boy. Anyway, in nineteen
(03:19):
eighty seven, Enron hired McKinsey, the world's most evil management
consultancy firm, to help the company create a futures market
for natural gas. Well that means isn't particularly important to
the story, but essentially, a futures contract is where a
company agrees to buy or sell an assair in the
future at a fixed price. It's a way of hedging
against risk, whether that be from something like price or
currency fluctuations, or from default. If you're buying oil in dollars,
(03:43):
for example, buying a futures contract for oil to be
delivered in six months time at a predetermined price means
that if your currency weakens against the dollar, your costs
won't spiral. That bit isn't terribly important. What does matter
is while working with McKinsey, Lay met someone named Jess Skilling,
a young engineer turned consultant who impressed the company's CEO deeply,
so much so that Ley decided to poach him from
(04:04):
McKinsey in nineteen ninety and give him the role of
chairman and CEO of Enron. Finance Group. Oh. By the way,
Enron had a bunch of subsidiaries and some had their
own CEOs and boards. I mentioned this because he may
be a bit confused, as Lay was CEO of Nron
and Skilling was CEO of Nron Finance Group. In essence,
it's a bit like how Sam Altman is CEO of
open Ai and Fijisimo as the CEO of Applications. That
(04:27):
bit isn't important, but I just want to be as
explicit as possible. I don't think open Ai is Enron either,
at least I hope. Anyway, Skilling continued to impress Lay,
who gave him greater and greater responsibility, eventually crowning him
chief operating Officer of Enron itself. With Skilling in a
key leadership position who was able to shape the organization's culture,
(04:47):
He appreciated those who took risks, even if those risks,
when viewed with impartialized were deemed reckless or even criminal.
He introduced the practice of stack ranking, also known as
rank and yank, to Enron, which had previously been pioneer
by Jack Welcher General Electric. And you should listen to
the shareholder supremacy from last year. If you want to
hear what I think about that redacted guy here. Employees
(05:10):
were graded on a scale, and those at the bottom
of the scale were terminated. Managers had to place at
least ten percent. Other reports stay closer to fifteen percent
of employees in the lowest bracket, which created an almost
Darwinian culture and a drive to succeed that matched him.
Staffers were brutal hours, they cut corners, They did some
really really dodgy shit. None of this bothered skilling in
(05:30):
the slightest. Now you might be asking how dodgy ed well.
In two thousand and two thousand and one, California suffered
a series of electricity blackouts. This shouldn't have happened. California's
total energy demand at the time was twenty eight gigawats
and its production capacity was forty five gigawats. California also
shares a transmission grid with other states and for what
it's worth, the Canadian provinces of Alberta and British Columbia,
(05:51):
as well as part of Baja California in Mexico, meaning
that in the event of a shortage, it could simply
draw capacity from elsewhere. There's plenty to go around. Did
that happen? Well? Remember, Enron traded electricity like a commodity,
and as a result, it was incentivized to get the
highest possible price for that commodity, so it took power
plants offline during peak hours and exported power to other
(06:12):
states where there was real domestic demand. But how does
a company like Enron shut down a power station? Simple,
it just asked. In one taped phone conversation released after
the company's collapse, an Enron employee called Bill called an
official at a Las Vegas power company California shares the
same grip with Nevada, and asked him to and I quote,
(06:33):
get a little creative and come up with a reason
to go down. Anything you want to do over there,
any cleaning, anything like that. Very cool. The power crisis
had dramatic consequences for the people of California, who faced
power outages and price hikes, for Governor Gray Davis, who
was recalled by voters and later replaced by Arnold Schwarzenegger,
for PG and E, which entered Chapter eleven bankruptcy that year,
(06:55):
and for Southern California Edison, which was pushed at the
brink of bankkruptcies result. This kind of stuff could only
happen in an organization whose culture actively rewarded being a
fucking asshole. In fact, Skilling was seemingly determined to elevate
the dodgiest of characters to the highest positions within the company,
and few more more ethically dubious than Andy Fastau, who's
(07:16):
Skilling mentored like a protege, and who would later become
Enron's chief financial officer. And you gotta wonder how did
the CFO hired by Jeff Skilling do well? Even before
vaulting to the top of Enron's nasty little empire, fast
I was able to shape its accounting practices, with the
company adopting mark to market accounting practices in nineteen ninety one. Now,
(07:38):
mark to market sounds complicated, but it's actually real simple.
When listing assets on a balance sheet, you don't use
the acquisition cost like how you paid for him, but
rather the fair market value of an asset. So if
I buy a baseball card for a dollar and I
see that it's currently selling for ten bucks on eBay,
I'd say that asset is worth ten bucks, not the
dollar I paid for him, even though I haven't actually
(07:58):
sold it yet, nor do I not if anyone's interested. Now,
this sounds simple, maybe even reasonable, But the problem is
that the way you determine the value of an asset matters,
and marked to market accounting allows companies and individuals to
exercise some what's the word creativity. Sure, for publicly traded companies,
where the price of a share is verifiable and open knowledge,
(08:19):
it's not too bad. But for assets with limited liquidity,
limited buyers, or where the process to be engineered somehow,
you have a lot of latitude for fraud. Now, let's
go back to that baseball card example. How do you
know it's actually worth ten bucks and not one dollar?
What is the fair value of something you can't check
on any babe, what somebody told me in person it's worth.
(08:40):
What's to stop me from lying in saying that the
card is worth a one hundred dollars or one thousand dollars, Well,
other than the fact that I'd be committing fraud. Now,
what if I have ten one dollar baseball cards and
I give my friend ten dollars, and I tell him
by one of my baseball cards using that ten dollar
bill that I just handed him, and allows me to
say that I've now realized a nine dollar profit on
(09:03):
one of my one dollar baseball cards, and my other
cards are now because I just did that worth ninety
dollars and not nine dollars. Now, what if I use
that valuation, that phone evaluation of my remaining cards to
get a fifty dollar loan using those cards as collateral,
even though the collateral itself isn't worth even one fifth
of the value of the loan. You get the idea. Well,
(09:37):
A lot of things people can do to alter the
marked to market value of an asset ah illegal and
would be covered under generic fraud laws. It doesn't change
the fact that marked to market accounting allows for some
shenanigans to take place. Another trait of marked to market accounting,
as employed by Enron is that it would count all
the long term potential revenue for a deal as quarterly revenue,
even if that revenue would be delivered over the course
(09:58):
of a decades long contra or if the contract would
be terminated before its intended expiration DAME. It would also
realize potential revenue as actual revenue even before money changed
hands and when the conclusion of the deal wasn't a certainty.
For example, in nineteen ninety nine, Enron sold a stake
in four different electricity generating barges in Nigeria. They're basically
(10:20):
floating power stations, sold and sold it to Merrill Lynch,
which allowed the company to register twelve million dollars in profit.
One little problem that sale didn't actually happen, though that
didn't stop Enron from selling pieces to Meyal Lynch, which
I'm not kidding. Merril Lynch then sold to a special
purpose vehicle called LJM two. You'll never guess who owned that.
(10:41):
It was controlled by Andrew Fastau. Yep, remember that guy.
You're gonna hear that name again. Although the Meryl Lynch
bankers who participated in the deal were eventually convicted of
fraud and conspiracy charges long after the collapse of Enron.
Of course, the convictions were later questioned on appeal, Thank
you government, but still, for a moment, gave a jolt
to Enron's quarterly earnings. Anyway, Enron was incredibly creative when
(11:04):
it came to how it valued assets. Take, for example,
fiber optic cables. As the dot com bubble swelled, Enron
saw an opportunity and wanted to be able to trade
and control the supply of bandwidth, just like it did
with other more conventional commodities like oil and gas. It built, bought,
and leased fiber optic cables throughout the country, and then,
using exaggerated estimates of their value and potential long term revenue,
(11:26):
released glowing financial reports that made the company look a
lot more healthy and successful than it actually was. Whatever
would be quick digression here. One of the funniest ironies
of Enron is that it was in many ways ahead
of its time, when most people were still connecting to
the Internet through screeching fifty six K dial up modems.
It saw a future in edge and cloud computing, even
if said terms didn't exist at the time, and streaming
(11:48):
video here's a funny one. In two thousand, it entered
into a twenty year deal with Blockbuster Video to allow
customers to stream films and TV shows through Enron's fiber network,
something that would take at Netflix and other decade to
realize as a product now. There wasn't really much of
a market for at the time because broadbam was pretty
rare back then, nor was it necessarily technologically possible. But
(12:10):
it was such a fun idea. People really liked it.
It was a good idea. Everyone wanted it to happen.
Not really though, Anyway. The deal collapsed after a year,
but that didn't stop Enron's creative accountants from booking the
deal based on its projective future revenue as a profitable
venture mark to market accounting. Baby, you gotta love it.
We love it, don't we, folks? All right, I'll stop
doing the impression. Still, it's hilarious to think about a
(12:32):
future world in which Blockbuster and Enron stuck it out
and the former didn't collapse. Around the time of the
global financial crisis, Enron also loved making special purpose vehicles
that existed either to generate revenue that didn't exist or
to hold toxic assets that would otherwise need to be disclosed,
with Enron then using its holdings insid entities to boost
its balance sheet. One White Wing was created and capitalized
(12:54):
by Enron hand an outside investor, and pretty much exclusively
bought assets from Enron, which allowed the company to recognized
sales and profits on its balance sheets even when they
were fundamentally contrived. Another set of entities known as LJM,
named after the first initial of Andy Fasthou's wife and
two children, which I mentioned earlier, did the same thing,
allowing the company to hide risky or failing investments, to
(13:16):
limit its perceived debt, and to generate artificial profits and revenues.
LJM two was creatively the second version of this idea.
Even though the assets that LJM held were ultimately dog shared,
the distance that LJM provided, combined with Enron's use of
marked to market accounting, allowed the company to turn a
multi billion collective failure into a resounding and on paper
(13:37):
profitable triumph. So how did this happen? How did it
go on for so long? Well? First, Enron was that
it is peak worth seventy billion dollars. Its fail would
be a failure for its investors in shareholders and nobody
besides the press that is wanted to ask tough questions
remember when they did that. Anyway, he had auditors, but
they were paid handsomely, turning a blind eye to the
(13:57):
criminal malfeasans at the heart of Enron to Arthur Anderson
surrendered its license in two thousand and two, bringing an
end to the company and resulting in eighty five thousand
employees losing their jobs. Well, look, it's not so much.
It only turned a blind eye as much as it
turned on a big paper shredder treading tons. And I'm
(14:19):
actually being literal. That's a measure of weight and not
figuratively of documents as Enron started to implode, a crime
for which it was later convicted of obstruction of justice.
But I've already talked about Enron's culture. But I'd be
remiss if I didn't mention that Enron's highest performers and
its leadership received hefty bonuses in company equity, motivating them
to keep the charade going. Mron's pension scheme I had
(14:42):
was basically entirely Enron stock, and employees were regularly encouraged
to buy more, with Kenneth Lay telling employees weeks before
the company's collapse that and I quote the company is
fundamentally sound and that they should hang on to their stock.
VIDID did use the word fundamentally. They used that, but
it's not in videos, not Enron. It's not. It's really different.
(15:04):
They're not doing this. I swear to God, I just
don't love the language anyway. Additionally, by the terms of
the Enron pension plan, employees were prevented from shifting their
holdings into other pension funds or other investments until they
turned fifty. When the company collapsed, those people lost everything,
even those who didn't know about Enron's criminality. George Maddock's,
(15:24):
a retired former Enron employee, had his entire retirement tied
up in fourteen thousand Enron shares, worth at the time
more than one point three million dollars. He was forced
to spend his golden years making ends meet by bowing
pastures and living in a run down East Texas farmhouse.
The US government brought criminal charges against Enron's top leadership.
Ken Lay was convicted of four counts of fraud and
(15:45):
making false statements, but died on a skiing vacation to
Aspen before sentencing. May he burn in Hell? Maybe Ronald
Reagan and him could get in the hot tub together,
the hot tub scot lava in him not feeling particularly
creative on that one anyway. Jeff Skilling was convicted of
twenty four n fraud and conspiracy and sentenced to twenty
four years in jail. This was of course reduced in
twenty thirteen on appeal to fourteen years, and he was
(16:07):
released to a half way house in twenty eighteen and
then freed in twenty nineteen. He's since then tried to
re enter the energy sector with one venture combining energy
trading and I kid you not blockchain technology, although nothing
really came of him. I want to take this moment
to give a big shout out to Quartz, which, when
covering Skillings attempt to come back, had this opening line
(16:29):
and I quote Jeffrey Skilling, those are a thing or
two of our blocks and chains. Woo get his ass.
Andy Fastau pled guilty to two counts, one of manipulation
of financial statements and one of self dealing, and received
ten years in prison. This was has ever later reduced
to six years, including two years of probation, in part
Becsey cooperated with the investigations against other Enron executives. He's
(16:52):
now a public speaker and a tech investor in a
company and AI company called Keene Corp. His wife, Leah,
who also worked at en On, received twelve months for
conspiracy to commit wire fraud and money laundering and for
submitting false tax returns. She was released from custody in
two thousand and five. Enron's implosion was entirely self inflicted
and horrifyingly painfully criminal. Yet it had plenty of collateral
(17:15):
damage to the US economy, to those companies that lent
him money, to its employees who lost their jobs and
their life savings and their retirements, and to those employees
that the companies most intangled with Enron, like those that
ausering firm Arthur Anderson. This isn't unique among corporate failures.
WelCom had some dodgy accounting practices. Nortel too. Both companies failed,
Both companies wrecked the lives of their employees, and these
(17:36):
failures had systemic economic consequences, especially in Canada, where Nortel
had its peak accounted for one third of the market
cap of all companies in the Toronto Stock Exchange. The
reason why Enron remains captured in our imagination and why
Nvidia is so vociferously opposed to being compared to him,
is the extent to which Enron and manipulated reality to
appear stronger and more successful than it was, and how
(17:57):
long it was able to get away with him. We
may have forgotten the memory of Enron. It happened over
two decades ago. After all, we haven't forgotten the instincts
that it gave us. It's why on those is twitch
when we see special purpose vehicles being used to buy GPUs,
and while we gag when we see mark to market accounting.
It's entirely possible. I genuinely believe this, that everything in
Video is doing is above board. Really it's great. Doesn't
(18:22):
do anything to help the deep pit of dread in
my stomach, though. Now let's remind ourselves of watching video
(18:43):
Is It's a company that previously focused on gaming or
into GPUs graphics processing units, but thanks to a stroke
of forethought, managed to be the company that sells the
shovels for the current AI bubble. It's data center. GPUs
are expensive. They all rely on a technology that in
Video created two decades ago called Kuda, which no other
competitor has an alternative to, or at least one with
(19:04):
the maturity and depth and functionality, and no other company
shares its focus on this arena, at least not one
with its history. These gps are expensive, and thanks to
Nvidia's near monopoly status, it's seen its share price growth
by over three hundred and fifty percent at the time
of writing in the past five years. It's now the
most valuable company in the world by market capitalization, and
(19:25):
it's insanely, insanely profitable. If you're looking at this through
the cold, unthinking lens of late stage capitalism, this all
sounds really good. I've basically described a company that has
an essential monopoly and the one thing required for a
high growth if we're talking exclusively about capex spending industry
to ever exist. Moreover, that monopoly is all but assured
thanks to Invidia's Kuda mote, its first move for advantage,
(19:47):
and its actual capacities and capabilities of the products itself,
on top of the massive shipping and hardware operation at Bill,
thereby allowing the company to charge a pretty penny to
its customers. And those customers, well, if we've temporarily forget
about the likes of Nebuus and Core, we even how
I wish I could forget about Core, we've permanently we're
talking about the biggest companies on the planet, ones that
(20:08):
surely will have no problems paying their bills. But my
worry is a little simpler and more direct, because I'm
worried about the certainty that these purchases are being made
for the right or most prudent of reasons. Back in
February twenty twenty three, I put out the rot economy
and how everything in tech has become oriented around growth
(20:30):
at all cost, even if it meant making products harder
to use as a means of increasing user engagement or
funneling them towards more profitable parts of an app. Back
in June twenty twenty four, I wrote and did an
episode about the rock Com bubble and my greater theory
that the tech industry has run out of hypergrowth ideas.
In simple terms, big Tech, Amazon, Google, Microsoft, and Meta,
(20:50):
but also a number of other companies no longer have
a next big thing and jumped on AI out of
an abundance of desperation. Shit. Look at Oracle. This company's
start off by selling databases and ERP systems to big
companies and then trapping said companies by making it really
really difficult to migrate to cheaper and better solutions, and
then bleeding said companies with ownerous licensing terms, including some
(21:11):
where you're paid by the number of CPU cours that
you use the application. Fucking Oracle. It doesn't do anything
new or exciting or impressive, and even with when presented
with the opportunity to do things that are useful or
in innovative, like when it bought some microsystems, it turns away.
I imagine that deep down Oracle recognizes that its current
model just isn't viable long term, and so it needed
(21:32):
something else. When you haven't thought about innovation, ever, it's
kind of hard to start, and thus generative AI probably
seemed like a godsend to Larry Ellison, who founded Oracle
and despite not being CEO, still creeps around the building
like the Grinch. I'll get to Oracle in a bit.
But we also live in an era where nobody knows
(21:53):
what big tech CEOs actually do other than make nearly
one hundred million dollars a year, meaning that somebody like
Satching the Dell can get called a thoughtful leader with
striking humility for pushing co pilot AI up every asshole
in Microsoft's product experience, even notepad a place that no
human being would want it and accelerating capital expenditures and
(22:13):
twenty eight billion dollars across the entirety of fiscal year
twenty twenty three to thirty four point nine billion dollars
in its last quarter in simpler terms, spending money makes
the CEO look busy, and at a time when there
were no other potential growth avenues left, AI was a
convenient way to make everybody look busy. Every department can
have an AI strategy, and every useless fucking manager and
(22:35):
executive can yell a service. Now CEO Bill McDermott did
back in twenty twenty two. Let me make it clear
to everybody here, everything you do AIAIAIAI AI. That's a
real goddamn quote. I should also add that chat GPT
was the first real meaningful hit that the American tech
industry has produced in a long long time, the last
(22:56):
being if I'm honest, Uber, and that's if we allow
successful yet not particularly good businesses into the pile. I
guess you could say Instagram Stories, but that was ripped
off from TikTok. No sorry, Snapchat Christ they nicked reels
from TikTok. I hate this fucking industry. Now. Look, if
we're assholes about it and we insist on things like
(23:17):
profitability and sustainability, US tech hasn't done so great. Snowflake
runs at a loss, Snap runs at a loss, and
while Uber's turned things around, somewhat. It hardly created the
next cloud computing or smartphone industry. Putting aside finances, the
last major hit was probably Vemo or zell and maybe
if I'm feeling generous, smart speakers like Amazon Echo or
(23:38):
Apple home Pod, but those I think, I think Echo
and Alexa has lost Amazon billions much like Uber. None
of these were the next big thing, which would be
fine except big tech needs more growth forever right now,
you pig. To be clear, I'm not saying there's been
no innovation, just nothing at the scale of smartphones and
cloud computing. This is why Google, Amazon, and Meta all
(23:59):
do twenty different things, although rarely for any length of time,
with these things often having a shelf life shorter than
strawberries left on your counter. Because the rot economy's growth
at all costs mindset exists only to please the markets
and the market's demand growth. Chat GBT was different. Not
only did it do something new, it also did it
in a way that was relatively easy to get people
(24:19):
to try and see the potential of. It was also
really easy to convince people that would become something bigger
and better, because that's what tech does. To quote Bender
and Hannah Ai, is a marketing term, a squishy way
of evoking futuristic visions of autonomous computers that could do
anything and everything for us. And because both customers and
analysts have been primed to believe in trust the tech industry,
(24:39):
everybody believed that whatever chat GBT was would be the
next big thing, and said next big thing was powered
by large language models which required GPU sold by one
goddamn company in video. AI became a very useful thing
to do. If a company wanted to seem futuristic and
attract investors, it could now integrate AI. If a hyperscaler
wanted to seem enterprising and lae it was building the future,
(25:01):
it could buy a bunch of GPUs or invest in
its own silicone, as Google, Microsoft, Amazon and Meta have done,
though Meta to only some extent, and of course shove
AI in every imaginable crevice of an app. Investors could
invest in AI companies, Retail investors, regular people could invest
AAI stocks. Tech reporters could write about something new and
do access journalism. Even harder LinkedIn perverts could write long
(25:24):
screens about AI. The markets could become obsessed with AI,
and yeah, you can kind of see how things got
out of control. Everybody now had something to do, an
excuse to do an AI thing, regardless of whether it
made sense. Because everybody else was doing it, you didn't
need to justify it anymore. Everybody was doing AI chat
GPT quickly became one of the most popular websites on
(25:46):
the Internet, all while open AI burned billions of dollars,
and because the media effectively published every single thought that
Sam Mortman had, such as that GPT four would automate
away some jobs and create others, and that he was
a little bit scared of him. AI as a tech
knowlogy and an idea and a symbolic stock trope and
a marketing tool and a myth became so powerful that
it could do anything, replace anyone, be worth anything, even
(26:09):
the future of your company. Amongst the hype, there was
an assumption related to scaling laws, summarized well by Charlie Meyer,
who was on the podcast a few months ago. You
should go listen to his episode. In twenty twenty, one
of the most important papers in the development of AI
was published, Scaling Laws for Neural Language Models, which came
from a group a OpenAI. The papers showed with just
a few charts incredibly compelling evidence that increasing the size
(26:31):
of large language models would increase their performance. This paper
was a large driver in the creation of GPD three
and today's L ANDM revolution, of course, the movements of
trillions of dollars in the stock market. In simple terms,
the paper suggested that shoving more training data and using
more compute power would exponentially increase the ability of a
model to do stuff. And to make a model that
did more stuff, you needed more GPUs and more data centers.
(26:53):
Did it matter that there was compelling evidence in twenty
twenty two and god to say it, Gary Marcus was
right that there were limits to galing laws and that
they would hit the point of diminishing returns. Nah amidst
all of this and video has sold over two hundred
billion dollars of GPU since the beginning of twenty twenty three,
becoming the largest company on the stock market and trading
over one hundred and seventy dollars as of writing this sentence,
(27:16):
only a few years after being worth less than twenty
dollars a share. You see meta, Google, Amazon, Microsoft all
wanted to be part of the future, so they sunk
a lot of money into in video, making up forty
two percent of its revenue in its fiscal year twenty
twenty five. Though there are some arguments about how much
exactly big text billowing capital expenditures are spent on GPUs.
(27:36):
Some estimate somewhere between forty one percent and more than
fifty percent of a data center's capex is spent on GPUs.
If you're wondering what the payoff is, well, you're in
good company. I estimate that there's only around sixty one
billion dollars in total genera of AI revenue, and that
includes every HYPERSCALA and neocloud. Large language models are limited,
AI agents are a pipe dreene and simply do not work.
(27:57):
AI powered products are unreliable, and coding l make developers slower,
and the cost of influence the way in which a
model produces its output keeps going up. The thing is,
what comes up tends to have a habit of coming down.
And I'm increasingly if the opinion that a return to
a terror firmer is coming sooner rather than later. But
that's for the next episode. Join me, then, thank you
(28:26):
for listening to Better Offline, The editor and composer of
the Better Offline theme song is Matasowski. You can check
out more of his music and audio projects at Mattasowski
dot com m A T T O. S O w
Ski dot com. You can email me at easy at
Better Offline dot com or visit Better Offline dot com
to find more podcast links and of course, my newsletter.
(28:48):
I also really recommend you go to chat dot Where's
youreed dot at to visit the discord, and go to
our slash Better Offline to check out our reddit. Thank
you so much for listening. Better Offline is a production
cool Zone Media. For more from cool Zone Media, visit
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the iHeartRadio app, Apple Podcasts, or wherever you get your
(29:09):
podcasts
Zone Media. Hello on welcomes a better offline. I'm at Zeitron,
and I'm nothing like Enron. Now. This is the second
episode in the Nvidia Enron series. And to give you
(00:24):
a recap, a few weeks ago a document from Nvidia
leaked where the company denied that it was anything like
Enron at all. But what was Enron? Now? Some of
you might know this, some of you might not, but
I think it's time to remind everyone what Enron was
and what Enron did and why Enron was So I
don't know if we should say special, but it sure
(00:46):
was Enron. Now, the collapse of Enron wasn't just in retrospect,
a large business that ultimately failed. If that's all it was,
it wouldn't come on the same space in our heads
as other failures like WorldCom or Nortel, which I'll actually
get to later talked about WorldCom line episode, both of
whom were similarly considered giants in their fields. By the way,
it's also not just about the fact that Enron failed
(01:07):
because had proven business and accounting fraud. World comm entered
bankruptcy due to similar circumstances, though, rather than being liquidated,
and this is kind of a mind fuck, so forgive me.
It was the quietest part of Verizon's acquisition of MCI,
the name of a company that had previously merged with WorldCom,
that WorldCom renamed itself to after bankruptcy. This era sucked,
(01:27):
and unlike Enron, WorldCom isn't the subject of multiple films
and even a Broadway production. And my editor saw the
UK tour of that and apparently it was pretty good,
you asked Matt Hughes, if you want to know more.
And it's also not the size of Enron that made
its downfall so intriguing, nor, for that matter, is it
the fact that Enron did a lot of legally and
ethically dubious stuff to bring about its downfall. No, what
(01:49):
makes Enron special is the sheer gravity of its fuckery,
the rotten culture at the heart of the company that
encouraged said malfeasance, and the creative ways Enron's leaders crafted
an image of success around what was at its heart
a big, fat dog of a company. Enron was born
in nineteen eighty five out on the foundations of two older,
much less interesting businesses. The first, Houston Natural Gas HG,
(02:11):
started life as a utility provider bumping natural gas from
the oil fields of Texas to customers throughout the region,
before later exiting the industry to focus on other opportunities.
The other Inter North, was based in Omaha, Nebraska, and
was in the same business pipelines. In the mid nineteen eighties,
H ANDNG was the subject of a hostile takeoff from
Coastal Corporation, which until two thousand and one operated a
(02:34):
chain of refineries and gas stations throughout much of the
US mainland. Unable to fend it off by itself, h
ANDNG merged with inter North, with the combined corporation renamed Enron.
The CEO of this new entity was called Ken Lay,
an economist by trade who spent most of his career
in the energy sector, who also enjoyed deep political connections
with the Bush family. He co chaired George H. W.
(02:56):
Bush's failed nineteen ninety two re election campaign and allowed
Enron's corporate jet to Ferry Bush Senior and Barbara Bush
back and forth. To Washington Center for Public Integrity director
Charles Lewis said that there was and I quote no
company in America closer to George W. Bush than Enron.
George W. Bush, and I mean the second one even
had a nickname for Lay Kenny Boy. Anyway, in nineteen
(03:19):
eighty seven, Enron hired McKinsey, the world's most evil management
consultancy firm, to help the company create a futures market
for natural gas. Well that means isn't particularly important to
the story, but essentially, a futures contract is where a
company agrees to buy or sell an assair in the
future at a fixed price. It's a way of hedging
against risk, whether that be from something like price or
currency fluctuations, or from default. If you're buying oil in dollars,
(03:43):
for example, buying a futures contract for oil to be
delivered in six months time at a predetermined price means
that if your currency weakens against the dollar, your costs
won't spiral. That bit isn't terribly important. What does matter
is while working with McKinsey, Lay met someone named Jess Skilling,
a young engineer turned consultant who impressed the company's CEO deeply,
so much so that Ley decided to poach him from
(04:04):
McKinsey in nineteen ninety and give him the role of
chairman and CEO of Enron. Finance Group. Oh. By the way,
Enron had a bunch of subsidiaries and some had their
own CEOs and boards. I mentioned this because he may
be a bit confused, as Lay was CEO of Nron
and Skilling was CEO of Nron Finance Group. In essence,
it's a bit like how Sam Altman is CEO of
open Ai and Fijisimo as the CEO of Applications. That
(04:27):
bit isn't important, but I just want to be as
explicit as possible. I don't think open Ai is Enron either,
at least I hope. Anyway, Skilling continued to impress Lay,
who gave him greater and greater responsibility, eventually crowning him
chief operating Officer of Enron itself. With Skilling in a
key leadership position who was able to shape the organization's culture,
(04:47):
He appreciated those who took risks, even if those risks,
when viewed with impartialized were deemed reckless or even criminal.
He introduced the practice of stack ranking, also known as
rank and yank, to Enron, which had previously been pioneer
by Jack Welcher General Electric. And you should listen to
the shareholder supremacy from last year. If you want to
hear what I think about that redacted guy here. Employees
(05:10):
were graded on a scale, and those at the bottom
of the scale were terminated. Managers had to place at
least ten percent. Other reports stay closer to fifteen percent
of employees in the lowest bracket, which created an almost
Darwinian culture and a drive to succeed that matched him.
Staffers were brutal hours, they cut corners, They did some
really really dodgy shit. None of this bothered skilling in
(05:30):
the slightest. Now you might be asking how dodgy ed well.
In two thousand and two thousand and one, California suffered
a series of electricity blackouts. This shouldn't have happened. California's
total energy demand at the time was twenty eight gigawats
and its production capacity was forty five gigawats. California also
shares a transmission grid with other states and for what
it's worth, the Canadian provinces of Alberta and British Columbia,
(05:51):
as well as part of Baja California in Mexico, meaning
that in the event of a shortage, it could simply
draw capacity from elsewhere. There's plenty to go around. Did
that happen? Well? Remember, Enron traded electricity like a commodity,
and as a result, it was incentivized to get the
highest possible price for that commodity, so it took power
plants offline during peak hours and exported power to other
(06:12):
states where there was real domestic demand. But how does
a company like Enron shut down a power station? Simple,
it just asked. In one taped phone conversation released after
the company's collapse, an Enron employee called Bill called an
official at a Las Vegas power company California shares the
same grip with Nevada, and asked him to and I quote,
(06:33):
get a little creative and come up with a reason
to go down. Anything you want to do over there,
any cleaning, anything like that. Very cool. The power crisis
had dramatic consequences for the people of California, who faced
power outages and price hikes, for Governor Gray Davis, who
was recalled by voters and later replaced by Arnold Schwarzenegger,
for PG and E, which entered Chapter eleven bankruptcy that year,
(06:55):
and for Southern California Edison, which was pushed at the
brink of bankkruptcies result. This kind of stuff could only
happen in an organization whose culture actively rewarded being a
fucking asshole. In fact, Skilling was seemingly determined to elevate
the dodgiest of characters to the highest positions within the company,
and few more more ethically dubious than Andy Fastau, who's
(07:16):
Skilling mentored like a protege, and who would later become
Enron's chief financial officer. And you gotta wonder how did
the CFO hired by Jeff Skilling do well? Even before
vaulting to the top of Enron's nasty little empire, fast
I was able to shape its accounting practices, with the
company adopting mark to market accounting practices in nineteen ninety one. Now,
(07:38):
mark to market sounds complicated, but it's actually real simple.
When listing assets on a balance sheet, you don't use
the acquisition cost like how you paid for him, but
rather the fair market value of an asset. So if
I buy a baseball card for a dollar and I
see that it's currently selling for ten bucks on eBay,
I'd say that asset is worth ten bucks, not the
dollar I paid for him, even though I haven't actually
(07:58):
sold it yet, nor do I not if anyone's interested. Now,
this sounds simple, maybe even reasonable, But the problem is
that the way you determine the value of an asset matters,
and marked to market accounting allows companies and individuals to
exercise some what's the word creativity. Sure, for publicly traded companies,
where the price of a share is verifiable and open knowledge,
(08:19):
it's not too bad. But for assets with limited liquidity,
limited buyers, or where the process to be engineered somehow,
you have a lot of latitude for fraud. Now, let's
go back to that baseball card example. How do you
know it's actually worth ten bucks and not one dollar?
What is the fair value of something you can't check
on any babe, what somebody told me in person it's worth.
(08:40):
What's to stop me from lying in saying that the
card is worth a one hundred dollars or one thousand dollars, Well,
other than the fact that I'd be committing fraud. Now,
what if I have ten one dollar baseball cards and
I give my friend ten dollars, and I tell him
by one of my baseball cards using that ten dollar
bill that I just handed him, and allows me to
say that I've now realized a nine dollar profit on
(09:03):
one of my one dollar baseball cards, and my other
cards are now because I just did that worth ninety
dollars and not nine dollars. Now, what if I use
that valuation, that phone evaluation of my remaining cards to
get a fifty dollar loan using those cards as collateral,
even though the collateral itself isn't worth even one fifth
of the value of the loan. You get the idea. Well,
(09:37):
A lot of things people can do to alter the
marked to market value of an asset ah illegal and
would be covered under generic fraud laws. It doesn't change
the fact that marked to market accounting allows for some
shenanigans to take place. Another trait of marked to market accounting,
as employed by Enron is that it would count all
the long term potential revenue for a deal as quarterly revenue,
even if that revenue would be delivered over the course
(09:58):
of a decades long contra or if the contract would
be terminated before its intended expiration DAME. It would also
realize potential revenue as actual revenue even before money changed
hands and when the conclusion of the deal wasn't a certainty.
For example, in nineteen ninety nine, Enron sold a stake
in four different electricity generating barges in Nigeria. They're basically
(10:20):
floating power stations, sold and sold it to Merrill Lynch,
which allowed the company to register twelve million dollars in profit.
One little problem that sale didn't actually happen, though that
didn't stop Enron from selling pieces to Meyal Lynch, which
I'm not kidding. Merril Lynch then sold to a special
purpose vehicle called LJM two. You'll never guess who owned that.
(10:41):
It was controlled by Andrew Fastau. Yep, remember that guy.
You're gonna hear that name again. Although the Meryl Lynch
bankers who participated in the deal were eventually convicted of
fraud and conspiracy charges long after the collapse of Enron.
Of course, the convictions were later questioned on appeal, Thank
you government, but still, for a moment, gave a jolt
to Enron's quarterly earnings. Anyway, Enron was incredibly creative when
(11:04):
it came to how it valued assets. Take, for example,
fiber optic cables. As the dot com bubble swelled, Enron
saw an opportunity and wanted to be able to trade
and control the supply of bandwidth, just like it did
with other more conventional commodities like oil and gas. It built, bought,
and leased fiber optic cables throughout the country, and then,
using exaggerated estimates of their value and potential long term revenue,
(11:26):
released glowing financial reports that made the company look a
lot more healthy and successful than it actually was. Whatever
would be quick digression here. One of the funniest ironies
of Enron is that it was in many ways ahead
of its time, when most people were still connecting to
the Internet through screeching fifty six K dial up modems.
It saw a future in edge and cloud computing, even
if said terms didn't exist at the time, and streaming
(11:48):
video here's a funny one. In two thousand, it entered
into a twenty year deal with Blockbuster Video to allow
customers to stream films and TV shows through Enron's fiber network,
something that would take at Netflix and other decade to
realize as a product now. There wasn't really much of
a market for at the time because broadbam was pretty
rare back then, nor was it necessarily technologically possible. But
(12:10):
it was such a fun idea. People really liked it.
It was a good idea. Everyone wanted it to happen.
Not really though, Anyway. The deal collapsed after a year,
but that didn't stop Enron's creative accountants from booking the
deal based on its projective future revenue as a profitable
venture mark to market accounting. Baby, you gotta love it.
We love it, don't we, folks? All right, I'll stop
doing the impression. Still, it's hilarious to think about a
(12:32):
future world in which Blockbuster and Enron stuck it out
and the former didn't collapse. Around the time of the
global financial crisis, Enron also loved making special purpose vehicles
that existed either to generate revenue that didn't exist or
to hold toxic assets that would otherwise need to be disclosed,
with Enron then using its holdings insid entities to boost
its balance sheet. One White Wing was created and capitalized
(12:54):
by Enron hand an outside investor, and pretty much exclusively
bought assets from Enron, which allowed the company to recognized
sales and profits on its balance sheets even when they
were fundamentally contrived. Another set of entities known as LJM,
named after the first initial of Andy Fasthou's wife and
two children, which I mentioned earlier, did the same thing,
allowing the company to hide risky or failing investments, to
(13:16):
limit its perceived debt, and to generate artificial profits and revenues.
LJM two was creatively the second version of this idea.
Even though the assets that LJM held were ultimately dog shared,
the distance that LJM provided, combined with Enron's use of
marked to market accounting, allowed the company to turn a
multi billion collective failure into a resounding and on paper
(13:37):
profitable triumph. So how did this happen? How did it
go on for so long? Well? First, Enron was that
it is peak worth seventy billion dollars. Its fail would
be a failure for its investors in shareholders and nobody
besides the press that is wanted to ask tough questions
remember when they did that. Anyway, he had auditors, but
they were paid handsomely, turning a blind eye to the
(13:57):
criminal malfeasans at the heart of Enron to Arthur Anderson
surrendered its license in two thousand and two, bringing an
end to the company and resulting in eighty five thousand
employees losing their jobs. Well, look, it's not so much.
It only turned a blind eye as much as it
turned on a big paper shredder treading tons. And I'm
(14:19):
actually being literal. That's a measure of weight and not
figuratively of documents as Enron started to implode, a crime
for which it was later convicted of obstruction of justice.
But I've already talked about Enron's culture. But I'd be
remiss if I didn't mention that Enron's highest performers and
its leadership received hefty bonuses in company equity, motivating them
to keep the charade going. Mron's pension scheme I had
(14:42):
was basically entirely Enron stock, and employees were regularly encouraged
to buy more, with Kenneth Lay telling employees weeks before
the company's collapse that and I quote the company is
fundamentally sound and that they should hang on to their stock.
VIDID did use the word fundamentally. They used that, but
it's not in videos, not Enron. It's not. It's really different.
(15:04):
They're not doing this. I swear to God, I just
don't love the language anyway. Additionally, by the terms of
the Enron pension plan, employees were prevented from shifting their
holdings into other pension funds or other investments until they
turned fifty. When the company collapsed, those people lost everything,
even those who didn't know about Enron's criminality. George Maddock's,
(15:24):
a retired former Enron employee, had his entire retirement tied
up in fourteen thousand Enron shares, worth at the time
more than one point three million dollars. He was forced
to spend his golden years making ends meet by bowing
pastures and living in a run down East Texas farmhouse.
The US government brought criminal charges against Enron's top leadership.
Ken Lay was convicted of four counts of fraud and
(15:45):
making false statements, but died on a skiing vacation to
Aspen before sentencing. May he burn in Hell? Maybe Ronald
Reagan and him could get in the hot tub together,
the hot tub scot lava in him not feeling particularly
creative on that one anyway. Jeff Skilling was convicted of
twenty four n fraud and conspiracy and sentenced to twenty
four years in jail. This was of course reduced in
twenty thirteen on appeal to fourteen years, and he was
(16:07):
released to a half way house in twenty eighteen and
then freed in twenty nineteen. He's since then tried to
re enter the energy sector with one venture combining energy
trading and I kid you not blockchain technology, although nothing
really came of him. I want to take this moment
to give a big shout out to Quartz, which, when
covering Skillings attempt to come back, had this opening line
(16:29):
and I quote Jeffrey Skilling, those are a thing or
two of our blocks and chains. Woo get his ass.
Andy Fastau pled guilty to two counts, one of manipulation
of financial statements and one of self dealing, and received
ten years in prison. This was has ever later reduced
to six years, including two years of probation, in part
Becsey cooperated with the investigations against other Enron executives. He's
(16:52):
now a public speaker and a tech investor in a
company and AI company called Keene Corp. His wife, Leah,
who also worked at en On, received twelve months for
conspiracy to commit wire fraud and money laundering and for
submitting false tax returns. She was released from custody in
two thousand and five. Enron's implosion was entirely self inflicted
and horrifyingly painfully criminal. Yet it had plenty of collateral
(17:15):
damage to the US economy, to those companies that lent
him money, to its employees who lost their jobs and
their life savings and their retirements, and to those employees
that the companies most intangled with Enron, like those that
ausering firm Arthur Anderson. This isn't unique among corporate failures.
WelCom had some dodgy accounting practices. Nortel too. Both companies failed,
Both companies wrecked the lives of their employees, and these
(17:36):
failures had systemic economic consequences, especially in Canada, where Nortel
had its peak accounted for one third of the market
cap of all companies in the Toronto Stock Exchange. The
reason why Enron remains captured in our imagination and why
Nvidia is so vociferously opposed to being compared to him,
is the extent to which Enron and manipulated reality to
appear stronger and more successful than it was, and how
(17:57):
long it was able to get away with him. We
may have forgotten the memory of Enron. It happened over
two decades ago. After all, we haven't forgotten the instincts
that it gave us. It's why on those is twitch
when we see special purpose vehicles being used to buy GPUs,
and while we gag when we see mark to market accounting.
It's entirely possible. I genuinely believe this, that everything in
Video is doing is above board. Really it's great. Doesn't
(18:22):
do anything to help the deep pit of dread in
my stomach, though. Now let's remind ourselves of watching video
(18:43):
Is It's a company that previously focused on gaming or
into GPUs graphics processing units, but thanks to a stroke
of forethought, managed to be the company that sells the
shovels for the current AI bubble. It's data center. GPUs
are expensive. They all rely on a technology that in
Video created two decades ago called Kuda, which no other
competitor has an alternative to, or at least one with
(19:04):
the maturity and depth and functionality, and no other company
shares its focus on this arena, at least not one
with its history. These gps are expensive, and thanks to
Nvidia's near monopoly status, it's seen its share price growth
by over three hundred and fifty percent at the time
of writing in the past five years. It's now the
most valuable company in the world by market capitalization, and
(19:25):
it's insanely, insanely profitable. If you're looking at this through
the cold, unthinking lens of late stage capitalism, this all
sounds really good. I've basically described a company that has
an essential monopoly and the one thing required for a
high growth if we're talking exclusively about capex spending industry
to ever exist. Moreover, that monopoly is all but assured
thanks to Invidia's Kuda mote, its first move for advantage,
(19:47):
and its actual capacities and capabilities of the products itself,
on top of the massive shipping and hardware operation at Bill,
thereby allowing the company to charge a pretty penny to
its customers. And those customers, well, if we've temporarily forget
about the likes of Nebuus and Core, we even how
I wish I could forget about Core, we've permanently we're
talking about the biggest companies on the planet, ones that
(20:08):
surely will have no problems paying their bills. But my
worry is a little simpler and more direct, because I'm
worried about the certainty that these purchases are being made
for the right or most prudent of reasons. Back in
February twenty twenty three, I put out the rot economy
and how everything in tech has become oriented around growth
(20:30):
at all cost, even if it meant making products harder
to use as a means of increasing user engagement or
funneling them towards more profitable parts of an app. Back
in June twenty twenty four, I wrote and did an
episode about the rock Com bubble and my greater theory
that the tech industry has run out of hypergrowth ideas.
In simple terms, big Tech, Amazon, Google, Microsoft, and Meta,
(20:50):
but also a number of other companies no longer have
a next big thing and jumped on AI out of
an abundance of desperation. Shit. Look at Oracle. This company's
start off by selling databases and ERP systems to big
companies and then trapping said companies by making it really
really difficult to migrate to cheaper and better solutions, and
then bleeding said companies with ownerous licensing terms, including some
(21:11):
where you're paid by the number of CPU cours that
you use the application. Fucking Oracle. It doesn't do anything
new or exciting or impressive, and even with when presented
with the opportunity to do things that are useful or
in innovative, like when it bought some microsystems, it turns away.
I imagine that deep down Oracle recognizes that its current
model just isn't viable long term, and so it needed
(21:32):
something else. When you haven't thought about innovation, ever, it's
kind of hard to start, and thus generative AI probably
seemed like a godsend to Larry Ellison, who founded Oracle
and despite not being CEO, still creeps around the building
like the Grinch. I'll get to Oracle in a bit.
But we also live in an era where nobody knows
(21:53):
what big tech CEOs actually do other than make nearly
one hundred million dollars a year, meaning that somebody like
Satching the Dell can get called a thoughtful leader with
striking humility for pushing co pilot AI up every asshole
in Microsoft's product experience, even notepad a place that no
human being would want it and accelerating capital expenditures and
(22:13):
twenty eight billion dollars across the entirety of fiscal year
twenty twenty three to thirty four point nine billion dollars
in its last quarter in simpler terms, spending money makes
the CEO look busy, and at a time when there
were no other potential growth avenues left, AI was a
convenient way to make everybody look busy. Every department can
have an AI strategy, and every useless fucking manager and
(22:35):
executive can yell a service. Now CEO Bill McDermott did
back in twenty twenty two. Let me make it clear
to everybody here, everything you do AIAIAIAI AI. That's a
real goddamn quote. I should also add that chat GPT
was the first real meaningful hit that the American tech
industry has produced in a long long time, the last
(22:56):
being if I'm honest, Uber, and that's if we allow
successful yet not particularly good businesses into the pile. I
guess you could say Instagram Stories, but that was ripped
off from TikTok. No sorry, Snapchat Christ they nicked reels
from TikTok. I hate this fucking industry. Now. Look, if
we're assholes about it and we insist on things like
(23:17):
profitability and sustainability, US tech hasn't done so great. Snowflake
runs at a loss, Snap runs at a loss, and
while Uber's turned things around, somewhat. It hardly created the
next cloud computing or smartphone industry. Putting aside finances, the
last major hit was probably Vemo or zell and maybe
if I'm feeling generous, smart speakers like Amazon Echo or
(23:38):
Apple home Pod, but those I think, I think Echo
and Alexa has lost Amazon billions much like Uber. None
of these were the next big thing, which would be
fine except big tech needs more growth forever right now,
you pig. To be clear, I'm not saying there's been
no innovation, just nothing at the scale of smartphones and
cloud computing. This is why Google, Amazon, and Meta all
(23:59):
do twenty different things, although rarely for any length of time,
with these things often having a shelf life shorter than
strawberries left on your counter. Because the rot economy's growth
at all costs mindset exists only to please the markets
and the market's demand growth. Chat GBT was different. Not
only did it do something new, it also did it
in a way that was relatively easy to get people
(24:19):
to try and see the potential of. It was also
really easy to convince people that would become something bigger
and better, because that's what tech does. To quote Bender
and Hannah Ai, is a marketing term, a squishy way
of evoking futuristic visions of autonomous computers that could do
anything and everything for us. And because both customers and
analysts have been primed to believe in trust the tech industry,
(24:39):
everybody believed that whatever chat GBT was would be the
next big thing, and said next big thing was powered
by large language models which required GPU sold by one
goddamn company in video. AI became a very useful thing
to do. If a company wanted to seem futuristic and
attract investors, it could now integrate AI. If a hyperscaler
wanted to seem enterprising and lae it was building the future,
(25:01):
it could buy a bunch of GPUs or invest in
its own silicone, as Google, Microsoft, Amazon and Meta have done,
though Meta to only some extent, and of course shove
AI in every imaginable crevice of an app. Investors could
invest in AI companies, Retail investors, regular people could invest
AAI stocks. Tech reporters could write about something new and
do access journalism. Even harder LinkedIn perverts could write long
(25:24):
screens about AI. The markets could become obsessed with AI,
and yeah, you can kind of see how things got
out of control. Everybody now had something to do, an
excuse to do an AI thing, regardless of whether it
made sense. Because everybody else was doing it, you didn't
need to justify it anymore. Everybody was doing AI chat
GPT quickly became one of the most popular websites on
(25:46):
the Internet, all while open AI burned billions of dollars,
and because the media effectively published every single thought that
Sam Mortman had, such as that GPT four would automate
away some jobs and create others, and that he was
a little bit scared of him. AI as a tech
knowlogy and an idea and a symbolic stock trope and
a marketing tool and a myth became so powerful that
it could do anything, replace anyone, be worth anything, even
(26:09):
the future of your company. Amongst the hype, there was
an assumption related to scaling laws, summarized well by Charlie Meyer,
who was on the podcast a few months ago. You
should go listen to his episode. In twenty twenty, one
of the most important papers in the development of AI
was published, Scaling Laws for Neural Language Models, which came
from a group a OpenAI. The papers showed with just
a few charts incredibly compelling evidence that increasing the size
(26:31):
of large language models would increase their performance. This paper
was a large driver in the creation of GPD three
and today's L ANDM revolution, of course, the movements of
trillions of dollars in the stock market. In simple terms,
the paper suggested that shoving more training data and using
more compute power would exponentially increase the ability of a
model to do stuff. And to make a model that
did more stuff, you needed more GPUs and more data centers.
(26:53):
Did it matter that there was compelling evidence in twenty
twenty two and god to say it, Gary Marcus was
right that there were limits to galing laws and that
they would hit the point of diminishing returns. Nah amidst
all of this and video has sold over two hundred
billion dollars of GPU since the beginning of twenty twenty three,
becoming the largest company on the stock market and trading
over one hundred and seventy dollars as of writing this sentence,
(27:16):
only a few years after being worth less than twenty
dollars a share. You see meta, Google, Amazon, Microsoft all
wanted to be part of the future, so they sunk
a lot of money into in video, making up forty
two percent of its revenue in its fiscal year twenty
twenty five. Though there are some arguments about how much
exactly big text billowing capital expenditures are spent on GPUs.
(27:36):
Some estimate somewhere between forty one percent and more than
fifty percent of a data center's capex is spent on GPUs.
If you're wondering what the payoff is, well, you're in
good company. I estimate that there's only around sixty one
billion dollars in total genera of AI revenue, and that
includes every HYPERSCALA and neocloud. Large language models are limited,
AI agents are a pipe dreene and simply do not work.
(27:57):
AI powered products are unreliable, and coding l make developers slower,
and the cost of influence the way in which a
model produces its output keeps going up. The thing is,
what comes up tends to have a habit of coming down.
And I'm increasingly if the opinion that a return to
a terror firmer is coming sooner rather than later. But
that's for the next episode. Join me, then, thank you
(28:26):
for listening to Better Offline, The editor and composer of
the Better Offline theme song is Matasowski. You can check
out more of his music and audio projects at Mattasowski
dot com m A T T O. S O w
Ski dot com. You can email me at easy at
Better Offline dot com or visit Better Offline dot com
to find more podcast links and of course, my newsletter.
(28:48):
I also really recommend you go to chat dot Where's
youreed dot at to visit the discord, and go to
our slash Better Offline to check out our reddit. Thank
you so much for listening. Better Offline is a production
cool Zone Media. For more from cool Zone Media, visit
our website Coolzonemedia dot com or check us out on
the iHeartRadio app, Apple Podcasts, or wherever you get your
(29:09):
podcasts
Host
Ed Zitron
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