Apple’s War On OpenAI Just Got Personal

The US stock market started history's greatest way of a wealth creation, from factory

“workers in Detroit to farmers in Omaha, and he went to own a piece of the great American”

companies. But today, our most innovative companies are staying private longer, which means every day Americans are missing out until now. Introducing BCX, the public ticker for private tech, now available wherever you buy stocks. Visit getVCX.com for more info that's GetVCX.com, carefully consider the investment

material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the fund's perspective at GetVCX.com. This is a paid sponsorship. Support for the show comes from Odo. Running a business is hard enough, so why make it harder with it doesn't different apps

that don't talk to each other, introducing Odo. It's the only business software you'll ever need. It's an all-in-one fully integrated platform that makes your work easier. CRM, accounting, inventory, e-commerce, and more. And the best part, Odo replaces multiple expensive platforms for a fraction of the cost.

“That's why over thousands of businesses have made the switch.”

So why not you? Try Odo for free at Odo.com. Powder, pills, plunges, everywhere you look, there seems to be a new wellness trend. We all want to feel good, and if there's a way to feel better, I think wouldn't you want to try it?

I would. What's the cost of being well?

And why are we so obsessed with it in the first place?

That's this week on ExplainIt to me. Mine episodes every Sunday wherever you get your podcasts. Money is evil, then that building is hell. Welcome to Proftry Markets, I'm Ed Nelson, it is August 5th, let's check in on yesterday's market vitals.

The major indices climbed with the Dow and the S&P 500 hitting record highs on hopes at the straight of Remus would soon reopen. Brent crude oil dropped below $80 per barrel. The yield on tenure treasuries declined. AMD shares dropped more than 8% despite post and record revenues.

Finally, power and tear shares popped almost 30% a day after crushing earnings and raising its outlook. What else is happening? The legal war between open AI and Apple just heated up. Last month, Apple sued open AI, accusing the company of stealing trade secrets to build

its own AI hardware device. The time Apple called the lawsuit, quote, "just the tip of the iceberg." Then on Monday, Apple asked a federal judge to borrow open AI and to ex-employees from accessing using order-sclosing information, it claims our trade secrets. Apple also asked the court to fast track the case arguing that there is a "iminent threat"

to its trade secrets. Open AI then fired back in a blog post, calling the lawsuit, quote, "carless, aggressive and oddly personal." The company also accused Apple's lawyers of mistakenly emailing the wrong person after confusing two people with similar Asian surnames.

Open AI maintains it has no interest in using another company's trade secrets and says the suit is, quote, "based on false information." The hearing has been scheduled for October first. Here to unpack this drama, we are speaking with Alex Heath, author of the sources newsletter Alex.

It's good to see you. Let's just start with Apple's preliminary injunction, which was filed at the beginning of the week. What to open AI's plotback, which was equal parts hilarious and important? What is Apple saying here?

What are the accusing open AI of now?

Well, they're basically suggesting that there's more to the story than they've led on

previously, that the corruption as they see it runs deeper. And I think most importantly, as you said in the intro, they're wanting a preliminary injunction. I mean, let's be real, Apple's trying to slow open AI down, that's what they're trying to do.

They're trying to keep this launch that they have for their first device later this year from happening, derail the whole thing, freeze, employees from continuing to work on things.

“And that's why I think we saw that opening AI response that she talks about.”

So what do you make of that response?

mention that they confused the names of two Asian people, which is, I mean, that seems intentional.

It's embarrassing. That's also something you put into a case like this to get people like us to talk about it rather than the merits of the evidence. It's a bit of a distraction. It's like a look over here thing.

They're accidentally emailing people. You'll also notice, I'm no lawyer, but you'll notice like the very specific language opening AI has used, we have no interest in using trade secrets, like saying to my wife like after I snuck a cookie that I've no interest in eating cookies doesn't negate the fact that I may be ate a cookie, right?

These are very different statements like you could say we have not done this and we're ready to fight this in court. They're not saying this. They're saying we have no interest in this.

“I think probably both parties have some embarrassing things that they don't want to come”

out as my read of the situation and the way they're messaging it. It's a very nasty lawsuit, I mean, open AI was saying that this way that Apple's approach this has felt oddly personal and it's like, yeah, no shit. It is super personal to Apple. You hired Johnny Ive, who ran design it Apple, you hired as Apple as Apple as put it, hundreds

of ex employees, Eddie Q's son is working at open AI on this hardware, I mean, it is very personal, everyone knows each other, they go way back and Apple takes these things very seriously. They've been very consistent, even back to Steve Jobs on litigating these kinds of things, taking employee-pouching very seriously, suing ex employees for suspected leaking.

This is not out of the norm of them to behave this way. I think opening AI going, you know, they start with saying like how much respect they have for Apple and then saying like, this is beneath them, it's a tactic, but it also doesn't speak to like the merits of what Apple has said. And if you look at the texts that open AI has produced, they try to back up.

I didn't see a smoking gun there that, you know, Apple's totally in the wrong here. I just see a lot of he said she said here say, yeah, maybe some ex-appel employees reached out to the people at open AI, asking just innocently for stuff back, and Apple is using that to say, oh, open AI people are leaking, proprietary info or taking it from Apple. There's just a lot of like very messy energy to this that suggests these two companies

hate each other. And I haven't seen this smoking gun on either side. I see a lot of like potential room for more embarrassment on each side.

“And I think you see that even in the way open AI has responded.”

Well, that was sort of what struck me in in open AI's response and in the blog post that they published is I was looking for them to make the actual counter argument to the claim. But I couldn't find it. I thought I was seeing it when I was seeing all of their accusations because the language

was very powerful and very accusatory, but to go with like your stealing cookies analogy,

it kind of is like, hey, no, I didn't steal or they didn't say I didn't steal cookies. The accusation was to stole the cookies and then the response was like, yeah, well, you didn't do the laundry out of it or it's like, I have no interest in the cookies. Maybe I did eat them, but maybe I did it accidentally. And that's like maybe where this land is like there were some unintentional transfers of

trade secrets and that's bad and Apple's using that to really go for the jugular and slow things down. I would not be surprised if that ends up where this land is, but we don't know, right? You and I haven't seen all of the discovery. It hasn't happened, you know, open AI is producing these texts to me.

These texts don't really meaningfully move anything forward on the arguments on the other side.

“So I think we'll have to wait and see how Apple responds, you know, it'll be really interesting”

if this settles or Apple gets the injunction. I mean, open AI definitely responded because of the injunction because if that were granted, they'd have to pause work on their first device. I mean, what really is the point of posting this blog, if they're not actually addressing the merits of the case, and if it's not going to hold water really in the legal sphere.

I mean, I know you're not a lawyer. Well, I don't know. So I don't want to speak to like, I don't know if it'll hold water as someone who's just following the case to me, I didn't see a strong rebuttal. I did see, you know, like, Hawk Tan, like, the most senior person that they're accusing

at Open AI, the former Apple leader, you know, I did see Open AI have a very simple blanket,

like he always told people not to give him trade secrets kind of response, didn't address

like any specific. I mean, Apple's very specific about how Open AI employees allegedly coerced information out of people, and Open AI didn't get into detail on that, and that's responsive. It was very blanket, and again, this, like, we have no interest.

And it's like, very, very specifically lawyer, and I've seen much forceful responses

where, you know, usually the standard is like, oh, this is perilous.

“We believe this case is perilous, and we look forward to defending it in court, right?”

You're not seeing that here. You're seeing a lot of like, why is this so personal? We have no interest, like, it's very, it's very like teenage angsty. Yeah, it's really interesting. What do you think this means for the launch of this hardware device?

I mean, where do we even stand on this hardware device that's been that Open AI has been working on? Is that still happening? I mean, the latest I've heard, and that others have reported, is they definitely are on

track for an unveil sometime later this year of the first device, which is supposedly

going to be this kind of Alexa HomePod, like AI speaker with a bunch of sensors on it, that kind of sits at your desk or goes on a table, and Amber Ambiently takes in the environment, maybe even interrupts you, essentially has like an AI personality, maybe your AI chief of staff kind of in a way, and takes in the world around you, and then obviously they have a family of devices they've said they're working on.

“I think we're going to see probably some kinds of earbuds, maybe a wrist thing, some”

glasses, they're not going to do a phone, but I'm sure I'll put love to slow down the release of this. I think Scott has been saying that as well, that it's worth probably the legal fees just to introduce chaos into this very competitive moment, whatever open AI that was putting out the fall, it's not going to cannibalize iPhone sales, so there's no near-term wrist

apple here. I think it's more of the principle that Apple feels very betrayed, and yes, it's clearly very personal, you know, Hawk Tan, the most senior executive at open AI, they're accusing of leaving Apple and taking secrets and coercing for secrets, you know, used to work very closely with John Ternis, right, the new CEO of Apple in coming, like these people go way

back, and so it's also very telling, I think, an interesting that Johnny Ives is not named in the suit. I mean, I know that's been discussed before, but he continues to stay out of it, which to me suggests there's some kind of blank and agreement there that I'm not reporting this. I'm just speculating that, you know, there's an intentional reason he's been left out

of it, and maybe it doesn't mean that he's not implicated, but Apple isn't able to include him. Say the preliminary injunction is granted, Apple wins that, and the hardware launch is at the very least put on hold, or maybe even just canceled. How bad would that be for Open AI?

How important is it to them? Very bad. If there's any traction of Apple winning an injunction, you're going to see my prediction, you're going to see Open AI go full court press on this, and make a big mess of it, and do a bunch of Apple messaging against this, it matters a lot.

There's a lot writing on them getting hardware right, right, it's a personal kind of thing for Sam Altman and Johnny, and they spent over $6 billion on acquiring Johnny's hardware team. They've been working on the stuff, it would be very bad. All right, I'll see how things unfold, Alex Heath is author of the sources newsletter

Alex, always appreciate your time.

Thank you. Thanks, Dad. After the break, a first look at SpaceX earnings, and for even more markets insights you can subscribe to my weekly newsletter simply put @simplyput.proftymedia.com. Support for the show comes from new, most journeys don't travel in a straight line.

There are ups and downs, peaks and valleys. WayLoss can feel the same way, often losing the weight is only half the battle, keeping it off is the other half.

“That's why new combines GLP1 medication and behavioral support designed to help people”

build healthier routines and sustain progress over time. Newfound that 37% more weight is lost when using new, but just taking GLPs on their own, and the weight is sustained too. That's because new uses a psychology-based science-back program that pairs your medication with daily lessons and food logging to support weight loss that lasts.

Plus, you can get personalized weight loss plans and expert coaching designed to maximize your success with GLP1s while helping you develop sustainable habits to live better and longer. The new GLP1 program starts at $39 in a delivered your door in as little as seven days. For your GLP1 journey today at new.com, that's N-O-O-M.com, new, lose for keeps.

Initial one month subscription from $39 plus tax and $99 plus tax for month thereafter, cost of medication not included final pricing depends upon program selection.

Imagine you just found out your sales team is at risk of missing quota. No need to panic, just ask Ripling AI.

“Since it's built on your real-time people in business data, Ripling AI can pull metrics”

from Ripling and sales force into a meeting ready dashboard showing quota attainment, head counter-jectory, and monthly revenue to quota by region. In seconds, you can see exactly what's behind your quota risk, and fix it before it's missed. Question answered, action take, and crisis averted.

So, when you have critical business questions that need answers, don't just file a ticket

in way weeks for an outdated report. To describe what you need and have Ripling AI built it instantly from your live people and business data, whether it's a dashboard with detailed charts or automated workflows with the right triggers, conditions, and approvals. Ready to rule your business, head to Ripling.ai/markets to get the only AI built to give you

full visibility and take complex actions across your entire organization. That's ripplng.ai/markets, sign up for exclusive access today. Support for the show comes from Odo. Running a business is hard enough, so why make it harder with it doesn't different

apps that don't talk to each other?

Introducing Odo, it's the only business software you'll ever need. It's an all-in-one fully integrated platform that makes your work easier. We are M, accounting, inventory, e-commerce, and more. And the best part, Odo replaces multiple expensive platforms for a fraction of the cost.

“That's why over thousands of businesses have made the switch.”

So why not you? Try Odo for free at Odo.com, that's OdoO.com. Back with ProfG Markets. SpaceX made its earnings debut yesterday, and the results were strong, but investors still weren't happy.

The company reported massive revenue growth of 92% year over year, and all three business segments, space connectivity and AI, beat expectations. Just half an hour before the results came out, SpaceX also made a separate announcement a partnership with Nvidia, the two companies, are working together in an attempt to put data center computing into orbit, SpaceX stock initially at a risen roughly 10% yesterday

in anticipation of the earnings, however, after the earnings came out, in after hours trading the stock fell 8%. So here to break down SpaceX's first quarter of publicly reported earnings, we're speaking with Nicholas Owens, equity analyst at Morningstar Nicholas, thanks for joining us. This was better than analysts had expected on the revenue side, also on the operating income

or loss side. What do you make of this quarter for SpaceX? I think you're referring to consensus.

They actually came in $200 million light on my revenue and operating margin forecast.

I'll say that one grain of salt is that we don't have a, first of all, it's a quickly pivoting business, and we don't have a sense of what the seasonality of this business is in terms of what's a normal Q2 look like. So I don't think there's a huge much to be made there. They also spent about $11 billion more in CapEx than I forecast.

“I think the anticipation was, you know, for a good quarter, and that's what they delivered.”

The big delta really is in the acceleration of AI revenue, and these rental agreements, which I think we've talked about, and those were mostly announced along with the IPO. So I actually think the announcement about the partnership within video has some interesting nuance in that previously that said they wanted to make custom chips, which is what I understand if you kind of the long-term trend that a lot of people who want to build

out all this AI infrastructure, they want to tailor the chips to tailor to their computation and their algorithms and so forth. The comments today were, we really like these in video chips, we think they're the best ones. I think that is almost like a, we're going to buy those chips and rent them out, and it's less of an emphasis on the tailoring to, to grok.

And in terms of your expectations for capital expenditures, I mean, what do you make of the money losing side of this business? I mean, they have reduced their losses compared to last quarter. Last quarter, the losses were insane. This quarter, the losses are still crazy, but seemingly less insane, what do you make

revenue side?

Well, a lot of what they're spending is still classified as R&D.

I mean, I saw a few of the line items even for S.G. and I go up, you know, admittedly the

“CapEx doesn't show up in the income statement, but the spending generally, right?”

So let's say R&D and CapEx together, you can think of those as investments in the future of the business, which they're doing hand over fist, which is appropriate for this type of project. And again, I think it's lumpy. I think they almost pulled forward a lot of their R&D type spending, and they had, like

you said, extremely low margins, high spending last year. And so in a way, we're looking at almost favorable comparison post IPO. The overall level, I mean, we don't expect them really to make much money for a while.

It seems like the story of this company is kind of morphing into the story of any other

high-pascala, which is that the entire thing depends on the AI thing. And the potential for AI to work is an open question. That's where they're generating most of their growth. That is kind of what they say that the company is going to be about. It's going to be about AI, but also that is where the losses are stacking up.

And when we look at how sustainable their business actually is, it seems like the reason that their losses were a little less bad than they were before is because their AI revenue, increased in the reason that AI revenue increased, is probably because they inked a deal with Anthropic.

“And then that's why I was very interested to see a disclosure that they included,”

which was their customer concentration risk. What they told us is that 38% of the company's entire revenue comes from two companies, which they said will customer A, which makes up 18% and customer B, which makes up 19.5%. I assume one of those customers is Anthropic, and that's basically the bulk of their AI revenue.

And maybe the other customer is the US government. I'm seeing headlines today that Anthropic is borrowing or in talks to borrowing nearly $40

billion from Blackster and in order to buy compute from Google.

So does that mean they're going to have to borrow tens of billions of dollars to keep buying compute from SpaceX? Probably. I mean, they're probably going to have to keep borrowing, they're going to have to keep raising money because clearly the profitability isn't working, at least on the frontier

side of things. So it does seem to me at least that there is a real risk that you could have randomly in one quarter, 19% of your revenue disappear overnight and suddenly the entire AI thesis is gone. At least that's the concentration risk right now, just looking at the price.

The stock has come crashing way down from its highs of $225 per share. It was cut enough. That was one of my predictions. I'll ring the bell. Right now, at a more reasonable place, but certainly not anywhere close to your fellow

fair value estimate before the IPO of $62 per share, it would need to get cut in half again.

“What do you make in the valuation at this point today?”

Still seems high and I have no reason based on today to change my fair value. As we move forward and let's say gain new information about some of these market dynamics. I mean, I think the scenario you're talking about maybe to quote Elon Musk, there's a non-zero chance that that anthropic rent goes away. You have to keep that in mind.

I think the scenario in which you're describing is really sort of some collapse, house of cards falling down or some all these cross-funding deals being unwound. I'm thinking more along, but I'm kind of trying to be a little more, let's say middle road and say in a model where we're in scenarios where right now we're in this gold rush that this fantastical race to spend an invest in build and create even when the business model

hasn't proven out or the profitability isn't there. I think a lot of people are working on this assumption or the model, mental model, put forth but by the head of Nvidia that there's this five layers cake of value and that over the very long term the value should accrue to the top two layers. So that's products and apps which today looks like anthropic.

Even though that's not happening in terms of their bottom line, that's the theory. So it really boils down to what we think AI is and isn't going to do for people. If it's just going to become a plug-in to everybody's computer, so it'll like Microsoft Word

That's one scenario that I think is plausible, it's not the one most people are talking

about where they're talking about hundreds of millions of people being displaced and all this other stuff. But even with your middle of the road analysis where you assume that there wouldn't be some form of collapse that the value would accrue to the application layer, IE, the OpenAI's and the Anthropics, even in that assumption, you still value the company at half of

where it is today. You value SpaceX at half where it is today. That's correct. And that's running scenarios where mostly they are making money like they are now on these, let's call them economically attractive or generous rental deals.

It has to really, really scale up for it to work out is that if the LLM that SpaceX has

takes off and starts consuming more of their own computing capacity, ironically, that displaces these rental incomes that they might otherwise be able to charge.

“And so they have to sort of keep making more of it and that costs money, right?”

So I think they're building, or I saw a headline the other day that they're buying land in somewhere, Arizona, like another colossus type installation, and I think on the call that they talked about, how many people will go out, so they plan to have by the end of the year and by the end of the decade, and that implies more terrestrial investment. So they're continued to expand that footprint, eventually they want to do it in space.

They have to do that really fast for them to be able to sort of have their cake needed to have a very broad-based adoption of the LLM that they own, so to speak, and as well as renting out to the market. All right, Niklas Owens is a critique analyst at Morningstar. Niklas, we appreciate you, Tom.

Thank you. [MUSIC] Blackstone is in early talks to provide $36 billion in debt financing to anthropic.

“This is according to reporting from Bloomberg, the loan will be used to fund anthropics”

leasing of AI chips from Google, which would imply that anthropic doesn't have enough money to buy compute from Google on its own, so it has to borrow billions of dollars from Blackstone, which is quite remarkable when you consider how much money anthropic has already raised. The company has received roughly $132 billion in venture funding so far, and it's also

borrowed another $35 billion just a couple of months ago, which basically means that $167

billion isn't enough money to cover their costs. They need more. It's also quite remarkable when you consider the company that already invested billions of dollars into anthropics, specifically Google. Yes, Google committed to invest up to $40 billion in anthropic back in April with an

immediate cash injection of $10 billion, which means that even the money that Google wired to anthropic, so that anthropic could buy Google's chips, even that wasn't enough. Anthropic needed more. Why does this matter?

“Because it shows you just how financially unstable these frontier labs really are.”

Despite the rumors that anthropic was about to hit operating profitability, all the signs are telling us that the company is still losing money and lots of it. So much money that even the money they were given by their vendor wasn't enough to cover the cost of sending that money back to them. Now they're having to borrow to the tune of tens of billions of dollars.

The takeaway is quite simple. Despite the hype, the LLM business is still a highly unprofitable business. And if open AI and anthropic cannot resolve that problem, then the collapse of this AI trade won't be a question of if it'll be a question of when. Okay, that's it for today.

This episode was produced by Player Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Proud Williams. Our research team is Dan Chalon, Chris No Donahue and Mia Sovario, and our social producer is Jake McPherson.

Thanks for listening to Proftly Markets from Proftly Media. If you liked what you heard, give us a follow. I'm Ed Allison, I will see you tomorrow. Support for the show comes from Odo. Running a business is hard enough.

So why make it harder with it doesn't different apps that don't talk to each other. Introducing Odo, it's the only business software you'll ever need. It's an all-in-one fully integrated platform that makes your work easier. CRM, accounting, inventory, e-commerce, and more, and the best part, Odo replaces multiple expensive platforms for a fraction of the cost.

So why not you? Try Odo for free at Odo.com, that's OdoO.com.