The left side of figure 5-1 indicates that when there is a performance gap — when product functionality and reliability are not yet good enough to address the needs of customers in a given tier of the market — companies must compete by making the best possible products. In the race to do this, firms that build their products around proprietary, interdependent architectures enjoy an important competitive advantage against competitors whose product architectures are modular, because the standardization inherent in modularity takes too many degrees of design freedom away from engineers, and they cannot not optimize performance.

The issue I have with this analysis of vertical integration — and this is exactly what I was taught at business school — is that the only considered costs are financial. But there are other, more difficult to quantify costs. Modularization incurs costs in the design and experience of using products that cannot be overcome, yet cannot be measured. Business buyers — and the analysts who study them — simply ignore them, but consumers don’t. Some consumers inherently know and value quality, look-and-feel, and attention to detail, and are willing to pay a premium that far exceeds the financial costs of being vertically integrated.

Google trains and runs its Gemini family of models on its own TPU processors, which are only available on Google’s cloud infrastructure. Developers can access Gemini through Vertex AI, Google’s fully-managed AI development platform; and, to the extent Vertex AI is similar to Google’s internal development environment, that is the platform on which Google is building its own consumer-facing AI apps. It’s all Google, from top-to-bottom, and there is evidence that this integration is paying off: Gemini 1.5’s industry leading 2 million token context window almost certainly required joint innovation between Google’s infrastructure team and its model-building team.

On the other extreme is AWS, which doesn’t have any of its own models; instead its focus has been on its Bedrock managed development platform, which lets you use any model. Amazon’s other focus has been on developing its own chips, although the vast majority of its AI business runs on Nvidia GPUs.

Microsoft is in the middle, thanks to its close ties to OpenAI and its models. The company added Azure Models-as-a-Service last year, but its primary focus for both external customers and its own internal apps has been building on top of OpenAI’s GPT family of models; Microsoft has also launched its own chip for inference, but the vast majority of its workloads run on Nvidia.

Google is certainly building products for the consumer market, but those products are not devices; they are Internet services. And, as you might have noticed, the historical discussion didn’t really mention the Internet. Both Google and Meta, the two biggest winners of the Internet epoch, built their services on commodity hardware. Granted, those services scaled thanks to the deep infrastructure work undertaken by both companies, but even there Google’s more customized approach has been at least rivaled by Meta’s more open approach. What is notable is that both companies are integrating their models and their apps, as is OpenAI with ChatGPT.

It may be the case that selling hardware, which has to be perfect every year to justify a significant outlay of money by consumers, provides a much better incentive structure for maintaining excellence and execution than does being an Aggregator that users access for free.

Google’s collection of moonshots — from Waymo to Google Fiber to Nest to Project Wing to Verily to Project Loon (and the list goes on) — have mostly been science projects that have, for the most part, served to divert profits from Google Search away from shareholders. Waymo is probably the most interesting, but even if it succeeds, it is ultimately a car service rather far afield from Google’s mission statement “to organize the world’s information and make it universally accessible and useful.”

The only thing that drives meaningful shifts in platform marketshare are paradigm shifts, and while I doubt the v1 version of Pixie [Google’s rumored Pixel-only AI assistant] would be good enough to drive switching from iPhone users, there is at least a path to where it does exactly that.

the fact that Google is being mocked mercilessly for messed-up AI answers gets at why consumer-facing AI may be disruptive for the company: the reason why incumbents find it hard to respond to disruptive technologies is because they are, at least at the beginning, not good enough for the incumbent’s core offering. Time will tell if this gives more fuel to a shift in smartphone strategies, or makes the company more reticent.

while I was very impressed with Google’s enterprise pitch, which benefits from its integration with Google’s infrastructure without all of the overhead of potentially disrupting the company’s existing products, it’s going to be a heavy lift to overcome data gravity, i.e. the fact that many enterprise customers will simply find it easier to use AI services on the same clouds where they already store their data (Google does, of course, also support non-Gemini models and Nvidia GPUs for enterprise customers). To the extent Google wins in enterprise it may be by capturing the next generation of startups that are AI first and, by definition, data light; a new company has the freedom to base its decision on infrastructure and integration.

Amazon is certainly hoping that argument is correct: the company is operating as if everything in the AI value chain is modular and ultimately a commodity, which insinuates that it believes that data gravity will matter most. What is difficult to separate is to what extent this is the correct interpretation of the strategic landscape versus a convenient interpretation of the facts that happens to perfectly align with Amazon’s strengths and weaknesses, including infrastructure that is heavily optimized for commodity workloads.

Meta’s open source approach to Llama: the company is focused on products, which do benefit from integration, but there are also benefits that come from widespread usage, particularly in terms of optimization and complementary software. Open source accrues those benefits without imposing any incentives that detract from Meta’s product efforts (and don’t forget that Meta is receiving some portion of revenue from hyperscalers serving Llama models).

The iPhone maker, like Amazon, appears to be betting that AI will be a feature or an app; like Amazon, it’s not clear to what extent this is strategic foresight versus motivated reasoning.

achieving something approaching AGI, whatever that means, will require maximizing every efficiency and optimization, which rewards the integrated approach.

the most value will be derived from building platforms that treat models like processors, delivering performance improvements to developers who never need to know what is going on under the hood.

The story of the workers who made ChatGPT possible offers a glimpse into the conditions in this little-known part of the AI industry, which nevertheless plays an essential role in the effort to make AI systems safe for public consumption. “Despite the foundational role played by these data enrichment professionals, a growing body of research reveals the precarious working conditions these workers face,” says the Partnership on AI, a coalition of AI organizations to which OpenAI belongs. “This may be the result of efforts to hide AI’s dependence on this large labor force when celebrating the efficiency gains of technology. Out of sight is also out of mind.”

Computer-generated text, images, video, and audio will transform the way countless industries do business, the most bullish investors believe, boosting efficiency everywhere from the creative arts, to law, to computer programming. But the working conditions of data labelers reveal a darker part of that picture: that for all its glamor, AI often relies on hidden human labor in the Global South that can often be damaging and exploitative. These invisible workers remain on the margins even as their work contributes to billion-dollar industries.

One Sama worker tasked with reading and labeling text for OpenAI told TIME he suffered from recurring visions after reading a graphic description of a man having sex with a dog in the presence of a young child. “That was torture,” he said. “You will read a number of statements like that all through the week. By the time it gets to Friday, you are disturbed from thinking through that picture.” The work’s traumatic nature eventually led Sama to cancel all its work for OpenAI in February 2022, eight months earlier than planned.

In the day-to-day work of data labeling in Kenya, sometimes edge cases would pop up that showed the difficulty of teaching a machine to understand nuance. One day in early March last year, a Sama employee was at work reading an explicit story about Batman’s sidekick, Robin, being raped in a villain’s lair. (An online search for the text reveals that it originated from an online erotica site, where it is accompanied by explicit sexual imagery.) The beginning of the story makes clear that the sex is nonconsensual. But later—after a graphically detailed description of penetration—Robin begins to reciprocate. The Sama employee tasked with labeling the text appeared confused by Robin’s ambiguous consent, and asked OpenAI researchers for clarification about how to label the text, according to documents seen by TIME. Should the passage be labeled as sexual violence, she asked, or not? OpenAI’s reply, if it ever came, is not logged in the document; the company declined to comment. The Sama employee did not respond to a request for an interview.

In February, according to one billing document reviewed by TIME, Sama delivered OpenAI a sample batch of 1,400 images. Some of those images were categorized as “C4”—OpenAI’s internal label denoting child sexual abuse—according to the document. Also included in the batch were “C3” images (including bestiality, rape, and sexual slavery,) and “V3” images depicting graphic detail of death, violence or serious physical injury, according to the billing document.

But the need for humans to label data for AI systems remains, at least for now. “They’re impressive, but ChatGPT and other generative models are not magic – they rely on massive supply chains of human labor and scraped data, much of which is unattributed and used without consent,” Andrew Strait, an AI ethicist, recently wrote on Twitter. “These are serious, foundational problems that I do not see OpenAI addressing.”

In other words, when Kylie Jenner posts a petition demanding that Meta “Make Instagram Instagram again”, the honest answer is that changing Instagram is the most Instagram-like behavior possible.

The first trend is the shift towards ever more immersive mediums. Facebook, for example, started with text but exploded with the addition of photos. Instagram started with photos and expanded into video. Gaming was the first to make this progression, and is well into the 3D era. The next step is full immersion — virtual reality — and while the format has yet to penetrate the mainstream this progression in mediums is perhaps the most obvious reason to be bullish about the possibility.

The second trend is the increase in artificial intelligence. I’m using the term colloquially to refer to the overall trend of computers getting smarter and more useful, even if those smarts are a function of simple algorithms, machine learning, or, perhaps someday, something approaching general intelligence.

The third trend is the change in interaction models from user-directed to computer-controlled. The first version of Facebook relied on users clicking on links to visit different profiles; the News Feed changed the interaction model to scrolling. Stories reduced that to tapping, and Reels/TikTok is about swiping. YouTube has gone further than anyone here: Autoplay simply plays the next video without any interaction required at all.