Dear friends,

In JC’s Newsletter, I share the articles, documentaries, and books I enjoyed the most in the last week, with some comments on how we relate to them at Alan. I do not endorse all the articles I share, they are up for debate. 

I’m doing it because a) I love reading, it is the way that I get most of my ideas, b) I’m already sharing those ideas with my team, and c) I would love to get your perspective on those. 

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🔎 Some topics we will cover this week

• The importance of being an integrated player

• Writing the future without being afraid to fail

• Margins and how to mobilise the frozen middle

• Why you should never underestimate competition

👉 Microsoft Office AI, Copilot and Tech’s Two Philosophies, Business Chat and Appropriate Fear (Stratechery)

❓ Why am I sharing this article?

• Incumbents will have the AI tools

• I like this notion of copilot: being the copilot for our members, being the copilot for our doctors, being the copilot for our admins, and AI being the copilot for Alaners.

• I believe that the Business Chat UI and the integration idea connects with what we want to do with Alan

• It also shows the importance of being one integrated player as we are!

• The software, including Excel, PowerPoint, Outlook and Word, will begin using OpenAI’s new GPT-4 artificial intelligence platform. 

  • AI-powered assistants called Copilots will be able to generate whole documents, emails and slide decks from knowledge the software has gained scanning corporate files and listening to conference calls. 

  • The technology will debut in the coming months, and Microsoft is already testing it with 20 companies, including eight in the Fortune 500 that it declined to name.

• Today we are at the start of a new era of computing and another step on this journey. For years, AI has in fact powered online experiences ranging from search to social media, working behind the scenes to serve up recommendations for us or about us.

• You could say we’ve been using AI on autopilot, and now with this next generation of AI, we’re moving from autopilot to copilot. 

  • We’re already starting to see what these new copilots can unlock for software developers, for business processes like sales, marketing, and customer service, and for millions of people synthesising information in powerful new ways through multi-turn conversational search.

  •  As we build this next generation of AI, we made a conscious design choice to put human agency both at a premium and at the center of the product. For the first time, we have the access to AI that is as empowering as it is powerful.

• The framing was effective: it made it very clear why these copilots would be beneficial, demonstrated that Microsoft’s implementation would be additive, not distracting, and, critically, gave Microsoft an opening to emphasize the necessity of reviewing and editing.

• The final feature Microsoft unveiled was Business Chat; from The Verge: 

  • One of the new Copilot AI features coming to Microsoft 365 apps and services is dubbed Business Chat. 

  • It’s a chatbot experience that’s able to summarize information pulled from meeting transcripts, recent contacts with customers, entries in your calendar, and more that you can plug into emails for the team or as slides in a presentation. 

  • According to Microsoft, by using grounding to focus the AI on your business’ trove of data, it can create relevant, accurate responses to natural language prompts, like “Did anything happen yesterday with [customer X]?” The bot is accessible from Microsoft365.com, Bing when signed in with a work account, or via Microsoft Teams.

• Business Chat takes this integration advantage and combines it with a far more compelling UI: 

  • You can simply ask for information about any project or customer or whatever else you can think of, and Business Chat can find whatever is relevant and give you an answer (with citations) — as long as the content in question is in the so-called “Microsoft Graph”. 

  • Now Microsoft can emphasize that the results will be that much better the more Microsoft tools you use, from CRM to note-taking to communications (and to the extent that they open up Business Chat, it will be the responsibility of any vertical SaaS company to fit into the box Microsoft provides them).

• Microsoft believes they are changing the world, and is operating accordingly, and only old people like me seem to remember what that means for anyone in their path.

👉 The Knowledge Project: Nathan Myhrvold (Farnam Street)

❓ Why am I sharing this article?

• Why we can and should write the future even when it seems crazy. We cannot afford to make decisions because we are afraid. 

• I think it particularly applies for Alan Daily: yes, we are going to build a new habit, and yes, we can do it.

• I would like all of our product and marketing teams to think like that!

• The personal computer revolution was something that we take for granted today. Back then, not so much. You know what? At Microsoft, we used to have a slogan for the company: “a computer on every desk and in every home.” And I took so much grief from people when I would say this in speeches, where people would say, “I’m never going to have a computer in my home. That’s just an absurd nerd fantasy.” Well, it worked.

• I heard a speech by the CEO of one of the companies that developed a vaccine, Pfizer, I believe it was. And he said, “If I had told everybody that we needed to do it in eight years, they would’ve said, ‘You’re crazy. It takes us 10 to 12.’ So I told them we had to do it in eight months, because if I told them eight years, they would’ve taken the old process and tried to fix it in little ways, and that would never work.” 

👉 Trae Stephens (Founders Fund, Anduril) - Find Good Quests (Join Colossus)

❓ Why am I sharing this article?

• As a relatively low margin business, I think we can say we have a very good impact on society 🙂

• Distribution:

  • Why you need to sell direct and not go through brokers (the example of Palantir)

  • How could we be more paranoid about our deals? 

  • How to be more top down & bottom up?

  • How to solve for the frozen middle?

Low margin businesses:

• High-margin businesses tend to have either no positive impact on society or sometimes even a negative impact on society.

  • I think the reason that I would articulate that those are may be bad for society is because they draw engineers in the tech community away from things that have more importance.

  • It's a distraction for the things that we should maybe be spending more time working on, which, in many cases, are much lower margin.

Distribution:

• The general idea that we had at the beginning of Palantir was that there were probably all these channels that we should hit. 

  • And so it's like partner with consulting firms, higher channel resellers, work with SAP, do all of these things that sound like the right thing to do. 

  • It seems very logical that you would work with all these people that have already sold to the government. 

  • As it turns out, none of these things worked. 

  • And the reason that Palantir survived was really paranoia. We're always deeply paranoid that our deals were going to get scooped, that people were going to figure out some procurement reason why it was impossible to buy the tech, and that there was some custom bespoke solution that one of the primes was going to build to replace what it is that we were doing at very high cost of the taxpayer.

  • And we developed all these antibodies to ensure that the organization had a healthy level of paranoia to prevent all of these eventualities from happening. 

• Our strategy is top-down and bottom-up.

  • You have to get the user to believe that the technology you're building is going to be helpful for them. That's like table stakes. 

    • The product has to work and you have to be able to demonstrate that it works. 

  • But that's not sufficient. 

    • You have to work from the top down as well to make sure that the people that are appropriating budget in Congress, the decision makers in the department, which could start with the Secretary, the undersecretary right below them, the person running the program office, you have to make sure that they also understand that you are going to back them up to align the incentive structure towards getting them what they want as well, which is a successful program, a derisk on signing up for a massive [ goon dago. ]

• They don't want to be the person that's stuck behind a Theranos or something like that. They want to be very confident that it's going to do what you say it's going to do. And you have to push both of those equally hard. 

• And then eventually, that frozen middle which are the most risk-averse people in the department, the ones signing the paperwork, you have to make sure that they feel like they have enough support from those sides that they're able to break through the morass and do the thing that’s right for the taxpayer and the war fighter in turn.

• It doesn't matter if you build a product, the customer will not come unless you figure out some strategy, some advantage that you can lever to make sure that the thing that you built is actually going to be used the way that it was intended to be used by the people who intend to use it.

👉 Netflix’s New Chapter (Stratechery)

❓ Why am I sharing this article?

• On why being patient when our competitors do “stupid prices”, but we need to know what is stupid and what is not and get 10x better at knowing all our costs and the ones of our competition

• Always keep seeing competitors in the customer’s lens

• Do not underestimate competition

Netflix at the time of the fight with Blockbuster

• “The $8 billion in U.S. store rentals would pour into online rentals, setting off a grab for subscribers, he said. The ensuing growth of online rentals would cannibalize video stores faster and faster, until they collapsed. As video store revenue dropped sharply, Blockbuster would struggle to fund its online operation, he concluded. “The prize is huge, the stakes high, and we intend to win.”

• Blockbuster responded by pricing Blockbuster Online 50 cents cheaper, accelerating Netflix’s stock slide. Netflix, though, knew that Blockbuster was carrying $1 billion in debt from its spin-off from Viacom, and decided to wait it out; Blockbuster cut the price again, taking an increasing share of new subscribers, and still Netflix waited. Again from Keating: 

  • Hastings agonized over whether to drop prices further to meet Blockbuster’s $14.99 holiday price cut, but McCarthy steadfastly objected. 

  • With Blockbuster losing even more on every subscriber, relief from its advertising juggernaut was even closer at hand. 

  • Kirincich checked his models again—and the outcome was the same. Blockbuster would have to raise prices by summertime. 

  • Because Netflix was still growing solidly, McCarthy wanted to sit tight and wait until the inevitable happened. 

  • “They can continue to bleed at this rate of $14.99, given the usage patterns that we know exist early in the life of the customer, until the end of the second quarter,” Kirincich told the executives.

• Netflix was right: 

  • By summertime Blockbuster CEO John Antioco could no longer shield the online program from the company’s financial difficulties.

  • Blockbuster’s financial crisis unfolded just as McCarthy and Kirincich’s models had predicted

  • It was clear that Blockbuster would miss its earnings targets, meaning that it was in danger of violating its debt covenants. 

  • Antioco directed Zine to again press Blockbuster’s creditors for relaxed repayment terms, and broke the news to Evangelist that he would have to suspend marketing spending for a few months, and possibly raise prices to match Netflix’s…

• Still, Netflix wasn’t yet out of the woods: in 2006 Blockbuster launched Total Access, which let subscribers rent from either online or Blockbuster stores; the stores were still not connected to the Internet, so subscribers received an in-store rental in exchange for returning their online rental, which also triggered a new online rental to be sent to them. In other words, they were getting two rentals every time they visited a store. Customers loved it; Keating again: 

  • Nearly a million new subscribers joined Blockbuster Online in the two months after Total Access launched, and market research showed consumer opinion nearly unanimous on one important point — the promotion was better than anything Netflix had to offer. 

  • Hastings figured he had three months before public awareness of Total Access began to pull in 100 percent of new online subscribers to Blockbuster Online, and even to lure away some of Netflix’s loyal subscribers. 

  • Hastings had derided Blockbuster Online as “technologically inferior” to Netflix in conversations with Wall Street financial analysts and journalists, and he was right. 

  • But the young, hard-driving MBAs running Blockbuster Online from a Dallas warehouse had found the one thing that trumped elegant technology with American consumers — a great bargain. 

  • His momentary and grudging admiration for Antioco for finally figuring out how to use his seven thousand–plus stores to promote Blockbuster Online had turned to panic.

  • The winter holidays, when Netflix normally enjoyed robust growth, turned sour, as Hastings and his executive team —McCarthy, Kilgore, Ross, and chief technology officer Neil Hunt— pondered countermoves. 

  • Carl Icahn, though, who owned a major chunk of Blockbuster and had long feuded with Antioco, finally convinced him to resign that very same quarter; Antioco’s replacement took money away from Total Access and funnelled it back to the stores, and Netflix escaped (Hastings would later tell Shane Evangelist, the head of Blockbuster Online, that Blockbuster had Netflix in checkmate). Blockbuster went bankrupt two years later.

• I suspect, for the record, that Hastings overstated the situation just a tad; his admission to Evangelist sounds like the words of a gracious winner. The fact of the matter is that Netflix’s analysis of Blockbuster was correct: giving movies away was a great way to grow the business, but a completely unsustainable approach for a company saddled with debt whose core business was in secular decline — thanks in large part to Netflix.

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