Hello, and welcome to a free preview of Sharp Tech. Hello, and welcome back to another episode of Sharp Tech. I'm Andrew Sharp, and on the other line, Ben Thompson. Ben, how you doing? Are you surviving winter out there? I'm feeling pretty touched right now, actually. I warned you before we came on that my voice is not right. It was much worse. I just recorded dithering. It was much worse there. I sort of just just woken up. But, you know, you expressed your sympathy, concern, winter, and then you jumped on. I think your voice sounds terrible, too. My voice isn't in a great place either. You know, tis the season. You made it sound bad for me. That's great. Yeah, this might be a rough listen. Hopefully the content's good because the sound quality, the sound generation capabilities appear to be quite low on both sides. There you go. So with that caveat and or warning out of the way, we can dive into the news of the day. We're going to start with Stratechery's bread and butter here, Ben, a little company out there in Menlo Park. I will read from Bloomberg, who wrote this week, Meta's better than expected sales outlook helped ease Wall Street concerns about plans for unprecedented spending on artificial intelligence this year. The social networking giant topped projections for the holiday quarter revenue. and gave a strong forecast for the current period during its earnings report on Wednesday. And then later in the story, they write, Meta projected record spending for 2026, driven by Mark Zuckerberg's aggressive campaign to amass the infrastructure, computing power, and talent that he deems necessary to win a competitive AI race. Zuckerberg has said his strategy centers on front-loading computing capacity in preparation for reaching the company's goal of superintelligence a theoretical milestone. What are you laughing about? They have to add that it's a theoretical milestone, at which point AI can meet or outperform humans at many tasks. So much for being a neutral arbiter. I'm sort of giving away the game here. To get there, Meta is spending aggressively. The company estimated that full year capital expenditures will be between $115 billion and $135 billion at the upper limit. So it's now time to play the most dangerous game. What is Wall Street thinking reacting to these earnings? Why do investors like these results and up to $135 billion in projected CapEx this year after getting squeamish in the middle of last year's $72 billion AI spending? What do you think? I don't know. That's a good question. It's pretty interesting because last quarter I thought, once again, Wall Street totally overreacted. And this quarter, it's like an overreaction in the opposite direction. So last quarter was, I think, a very actually impressive quarter from Meta. They delivered impressions increased for reasons that I sort of identified back in Q2. They clearly can increase engagement And they can increase ad load And both seem to be happening And they didn't really cop to the second one last summer They did this earnings call Which I thought was very interesting And you can argue that's actually a very bullish signal for Meta's business You could absolutely make the case Based on the last six months That Meta has been under-monetized throughout its entire history I remember back in – for a long time, they just sort of got growth for free as more people joined Facebook than Instagram came along. And I made this point last summer. Investors for ages gave them insufficient credit for how organic their growth was. And so it was not just sort of – such that they underestimated the extent to which the entire world was Facebook's audience and would grow into that. And by the way, was never shrinking, is still growing, even its sort of old properties. But also, every time they would introduce these new inventory surfaces, that was a huge opportunity to increase ads even more, whether that be stories or reels or sort of whatever it might be. And the concern I expressed, I think, a year, year and a half ago is where is the new inventory going to come from, right? Like, yes, this meta AI thing could be a thing. It could be an app that people use. But it wasn't like a Reels or a Stories thing where there's this obvious new format with obvious new potential. There's a limit to how much they can grow the monetization pie in that scenario was at least the concern. No, it's just like back in the day, Stories clearly worked. So, of course, they would get money from ads. Reels clearly worked. So, of course, they would get money from ads. Does Meta AI work? Well, no, I know. And is it a good advertising surface? So like these were I was I think it was fair to be somewhat skeptical. It turns out that Meta does have more inventory available, which is all their existing products. They can shove that many more ads. Exactly. That's what we've learned. We've also learned that they can do that without bleeding users because engagement is up. I mean, it really does. Right. It's both. They're dialing both. They're increasing engagement. Now, of course, they want you to believe that both of these are downstream from AI and investments. And they're not wrong. They do have new recommendation capabilities. They do have new ad, sort of this ad model, particularly this one called Gem, that is sort of – it's not an LM per se. It is similar to an LM. There's aspects of it that are transformer-based. And the key part of that is it does scale. Like you throw more compute at it, it gets better, which is great. And that is like a core validation of the thesis that Meta should be spending more on compute because there's a direct link between spending more on compute and getting better ads. I don't think that takes $135 billion. Can you actually solve that without spending $130 billion? dollars yeah well and it seems like what wall street is doing is buying this story that the spending to date 72 billion dollars last year is accretive to the core businesses they grew 26 percent last quarter which again i think last quarter is more impressive than this quarter this quarter they do 24 it was actually less and they had more of a currency advantage this quarter next quarter they're talking about growing 30 or as much as 30 i think it's 26 to 30 again that's with a sort of 4 or 400 basis points of that is from currency you know with the U dollar weakening But that on a debate on a billion company that incredible That's like their best growth in like five years. So that more than anything, I suspect undergirds why suddenly everyone's piling back into meta. And this is part of the meta pattern. They continually surprise Wall Street and surprise investors with their ability to grow from ever larger bases every time this happens and they show these incredible growth numbers it's off of a base that is dramatically larger than the last time there was a crisis right and so the uh i think this so every 18 months people say oh it turns out that's actually a pretty good business yeah it's more like three to four years but yes it happens it happened with stories it happened with reels and now it's happening with uh actually we can just shove everywhere as much as we want. And there's nobody that can touch us. Our users aren't going anywhere. So it's all really, really impressive. What did you think of the results, though? And the idea, I mean, I was struck by a note in your daily update on Thursday. Almost the entire free cash flow that Meta has is going to go to AI CapEx in 2026. Yeah, my takeaway is it's actually underappreciated the extent to which Mark Zuckerberg is burning the boats as it were. Like, I think, I don't know that people have fully accepted or internalized the implication of this spent. How do they come up with 135 billion at the top end? I actually think it's pretty simple. 135 billion is how much free cash flow they're projected to have this year. And so we're talking about putting basically every single dollar of cash they have towards It's buying data centers and chips and all the sorts of things that go into that. And to put that in context, a few years ago they were spending – I don't have the number in front of me, but I would say $12, $15 billion sort of in CapEx. The increase from like three years ago to this year's projected number is basically more than they've lost in reality labs over the last 13 years. This supposed albatross where they're spending all this money. so reality labs which is like this symbol of meta excess and mark zuckerberg like on a lark and fine if he keeps turning out results we'll let him spend money uh is a footnote compared to the amount of money they are projecting to spend and that is yeah yeah what it what it is is and it was this earnings call actually i think i might have literally laughed um i laugh at very stupid things because i'm a business nerd but the very first analyst question is uh can you give us some examples of how you expect to get a return on invested capital and over the next three five this was my favorite part of your daily update just for the record and what did duck say he's like no yeah exactly it's like a paragraph long no from mark zuckerberg right which i appreciate the honesty after like it was very honest the part that i quoted there was another like few words up my voice is fading you can hear it i can't wait to see how it holds up over 90 minutes here of him actually then trying to come up with examples of stuff they might do but it was appropriately should be appropriately taken with a grain of salt the grain of salt that mark zuckerberg is like that meme remember the salt guy meme of the guy like just flinging salt that was mark zuckerberg at the beginning of this answer basically yeah details and everything i say should be taken with a grain of salt and let me throw the salt on the steak for you because you're going to need a lot of it. Well, we got a question from Adam that tracks with some of my instinctive skepticism that I gave away when I was reading the Bloomberg article. So Adam says, Ben, in your update Thursday, I would have liked some discussion of whether Zuckerberg ought to come to terms with the idea of being just an app or a set of apps. I'm skeptical of Meta's right to win in Gen.A.I. even as a capability, isn't all the ad revenue just funding Zuck's ongoing yearning to be more than a set of apps? What do you think of that? I do think it continues to be underrated and underappreciated. The extent to which Apple saved Meta from itself, saved Mark Zuckerberg from himself. People forget the Facebook platform, like the idea that we're going to be this place for other apps and we have Facebook credits and Farmville and all these sorts of things that was sort of the stated goal and what the company was doing. And what happened was the phone comes along, they underinvest in it, and they actually try this HTML5 sort of app approach that would theoretically give them more flexibility to do this sort of stuff in the future and got killed for it. And then in 2012 or 2013, they just restart everything, redo the app. It's going to be a great app on the phone. And as an app on the phone, you don't get to be a platform. The phone is the platform. You don't get to do a platform on top of a platform, not just because of Apple's policies, which are certainly part of it, but also because you're dealing with a 3.5-inch screen. What are you going to actually do with it? And the reality is that forced Facebook into their advertising business, which is incredible. And I pointed this out way back in 2013 when I first started. I think I wrote an article, mobile makes Facebook just an app, like basically making this case. Like Facebook's being saved from themselves. And what was incredible even back then, and it's only being – like this point is – you know it's a good point because it's even more true today in 2026. It directly ties to these results. I pointed out back in 2013 that what is incredible from a business perspective about Facebook is that they somehow have gotten permission of users to continually show them full screen ads. Yep. Like you scroll the feed and for some fraction of time, every single pixel on this device in your hand on which you're focused is an ad. Is an ad, yeah. And actually users preferred it and liked it and responded to it dramatically better than they did like the banner ad idea. In-line advertising. That's right. On newspapers. Yeah, totally. Like the banner ads were actually – this is a great example of how people think about these things so wrong and what actually happens can completely upset your assumptions. People would think, oh, the banner ads, at least then they can see their content and they're not so bothered by – it's like the negative view of advertising that I think is persistent. People are like ashamed of advertising. It's like, well, we'll just put it on the side. We're not going to bother you too much, but can you look over here? Like this is basically the newspaper industry in a nutshell. And what meta achieved Facebook back then achieved with the feed and Apple forcing them into the constraint of a 3 inch screen is they figured out how to actually not tiptoe around ads but shove them in your face to the extent that people weren bothered and they actually liked it it really true as a user it is a preferable experience to see a full screen ad and then go back to the full screen content as opposed to seeing it's all content that's the thing it's all content and that's true well in the instagram the whole point content. This is what happened last quarter. Last quarter basically was a revalidation of the point I made in 2013. Not only are the ads way better now because they're all video and they're sort of immersive. You can click through and do all these things you couldn't do back then. But actually, we have way more capacity to shove this in people's faces than we thought we did. We can put more ads taking over the full screen. And by the way, now it's not like a scroll and you're going past it. It's like a whole video that's locked with you're in a reel and you flick and it's going through a video and you're like, well, I just spent 20 seconds watching an ad when actually it was totally in my control to skip it the whole time. But the ad was compelling and interesting. And actually, I kind of want to buy this thing. Like it's it's this remains underrated. And I think it remains underrated by Facebook itself. They are insufficiently grateful to Apple for forcing them to do what they didn't want to do. Now, I think they have much more valid points later on. Like we've talked about att i think what apple does in terms of apis for devices where they favor their own stuff is clearly problematic and for particularly for a company trying to build a device business but overall in the grand arc of facebook if i'm writing the facebook story facebook without apple apple is is arguably the most important company to their success which they will never ever want to admit well and look in terms of what facebook slash meta is now trying to do in ai the reason i'm skeptical and the reason i identify with some of the questions that adam is asking like i'm not a meta investor and so far be it for me to tell mark zuckerberg how to spend 135 billion dollars but on its face meta's ai strategy it looks like a business that's been sketched on the back of a napkin where no it doesn't look at business at all i think you're actually giving them too much credit but here's here's sort of the defense of it okay if you truly believe that ai is a total paradigm shifter and that everything that yes we'll look back on the smartphone the smartphone will still be around like the pc is still around not actually pertinent to the way people interact in the future and you know this idea of just-in-time ai whether it be glasses or or little handheld devices or earpieces or or whatever it might be you'll need the infrastructure you'll need the muscle you'll need to actually matter that's right and it's actually interesting the contrast between meta and apple right now is extremely striking no kidding apple has basically abandoned this. They're outsourcing to Google. Like John Gruber on Dithering just pointed out, like you go back to the Tim Cook doctrine. One of the core things is we have to own and control the technologies that are like critical to our business. Apple is basically either giving up on that doctrine or stating that AI isn't actually going to be that big of a deal in terms of disrupting their core business. Which by the way all might be true right like like maybe they can just rent the eye all off that's right and and it's fascinating to me watching meta because we've kind of raked apple over the coals for its complacency over the last two and a half years even as every conversation does include the caveat this might be smart but it's less interesting from a technology standpoint right so so that's why i'm going to push back on you laughing at this like if you actually if you want if you're going to rake Apple over the coals, shouldn't you be lauding Mark Zuckerberg for basically saying, we are going to push and squeeze our core business and we're not going to dilly-dally around. We're actually going to take every single dollar from our existing business and put it into being competitive and controlling our own destiny in the future. Totally. You interrupted me before I could say, actually, I've come to respect Apple's stance more when I look at what Ben is doing because I look at the napkin and it says CapEx plus super intelligence equals profit is basically what I'm taking away from a lot of what Mark Zuckerberg has had to say over the last year or so. And I find myself sitting here being like, all right, so what's the product and why is that product going to be differentiated from any of the companies that are already dominating in this space. And I think one argument is that performance will be correlated to compute and the infrastructure that you have. And so they'll eventually take the lead that way or get near the top that way. But they seem to be operating from the assumption that none of their present day advantages will matter in an AI dominated future, which itself is a pretty speculative premise. And it's why a lot of this is such a fascinating bet from Zuckerberg. I'd push back on that. I actually think it is a defense of meta spending that AI, even as it is today, has tremendous upsides for their business. I wrote this two years ago that meta should be the biggest beneficiary of this. We talked about generating ads just in time or better targeting or in the long run, every single pixel on Instagram should be monetizable. Like it shouldn't be content, then you go to an ad. No, everything should be an ad. Like basically that is viable. Like with the technology as it exists today, you can identify everything on screen. You can link it to something else. You could have a buy. Like when I, right now I take a screenshot of our podcast. I'm looking at you. I'm like, what kind of mic does Andrew have? I should be able to click on that. I should buy that. Yeah. I should be able to buy that. Like that should be monetizable. Like there's no reason given technology as it exists right now that that couldn't be done. So Meta, more than any other company, we talk about the product overhang of the model capabilities and all the things that can be built just given what exists today, never mind what might exist in the future. I actually buy the case that – I do too. I just don't know. I don't know that you need to spend $130 billion to get there. Do you? I mean, I don't know. So we're talking about AI that exists today. What is AI going to look like in two to three to four years? And if you're not investing today, then all you're doing is making it that much further and fall and falling behind. Like, I guess my defense of this is what do you want them to save the money for? That's a good question too. Again, I'm not, I'm not a better shareholder and this makes for more interesting podcasting, but I just not sure where the money leads I think is a fair question to ask at this point given the lack of clarity from Meta and Zuckerberg Yeah but if it was super clear again I do think there real things in terms of the current business So I think you're actually, yes, we laughed at his sort of, I'm not going to give you a clear answer here, but he did say in the answer, it'll benefit our current business. And I do think that's super clear. Actually, if anything, I think he understates this and I would argue doesn't fully understand this in part because one of my critiques of Zuckerberg is he doesn't really like ads either. Yeah. And doesn't fully understand or think about the potential there. Like I feel I am much more enthusiastic about meta ads than Mark Zuckerberg is, which is kind of a problem. I mean, I'm a better advocate for them. You're enthusiastic about all the AI opportunities. Going back to the interview with Zuckerberg about a year ago, year and a half ago. Right. Well, I think it's part of this ad angle in particular. I think he could actually sell this much better if he was deeper into and cared more about ads, because I just think the opportunity here is astronomical. Like, just again, with LLMs as they are and Facebook inventory as it is. Like I just think like you look now, look, yes, there is an aspect of their growth that is from shoving more ads in front of people. But number one, you get away with that because your recommendation gets so good that people don't mind. And also just they talk about like 1% increase, 5% increase. that level of increase in terms of effectiveness and targeting and click throughs on a 200 billion dollar business is astronomical like like so like these these are very real gains that they are achieving today and i think it's completely legitimate when they talk about building new targeting built around lms which is basically what they're saying is we can understand the content and then oh and we're going to build new ones where you can go back further in people's history to understand what is interesting to them. That's about increasing context windows and understanding all the stuff that's going on. All this is totally legitimate. These are legitimate arguments. And I actually think my critique of Zuckerberg is he doesn't make these arguments well enough because he doesn't care. I think Mark Zuckerberg just wants to control the future technology, which he believes is AI. And it's working out because that is going, he has smart people who do care about ads and build them out. but you know at least he's better than like you know open ai in that he accepts the reality of ads and lets those people do what they need to do right we do need money in order to sell any of this that makes sense uh so yeah so i so i do think the future opportunity is real but why do you need you know this is i guess the critical thing you want let's take consider regulation okay you love regulation i don't uh what depends on the regulation for the record a lot of bad eu regulation out there but sure what is my core concern with regulation um the core concern drawing on about 50 different sharp tech episodes over the last couple of years the core concern with regulation is that it stifles innovation and we don't we fail to account for the products we don't see and the businesses we don't see in an over-regulated environment. Is that right? Excellent. Great job. A plus for you. You know, it's always tricky at the end of the semester. You're tired, worn down, and you have your final and you're a little sick. Nope. Nope. That's what the Starbucks is for, Ben. Can you actually come through in the clutch and give the right answer? And you did it. I'm extremely proud of you. Okay. So the point is it's a hard argument to be on the anti-regulatory side because on the pro-regulatory side, you get to point to actual harms that happen. And on the anti-regulatory side, you have to point to things that didn't happen that were foreclosed, which by definition, you don't actually know what they are. And that's what is so frustrating and also concerning. We don't actually have a measure of everything that didn't happen. and it could be actually way larger than we think it might have been. But then people like you who want more laws, they're like, well, give me an example. What is it, huh? Yeah. But that's what you're doing to Facebook and AI. That's what you're doing to Facebook and AI, right? So there is an aspect of the more transformative that you think AI is, almost by definition, the less you can say what the transformative aspects are going to be, simply because what is possible in the future wasn't even imaginable previously. And so I have sympathy for Mark Zuckerberg in that he clearly believes this is that level of transformative. He believes to the extent they're going to spend every single dollar of free cash flow they have. but implied in that level of belief is that we're pursuing things that are definitionally impossible to say what they are because that's how transformative this technology is yeah now maybe in an insane perspective for a public company ceo but that's the whole point of having founder control like so i mean i respect where he's coming from i do think adam nailed it that Zuck at his core is a technologist and a dreamer. And he feels like this is the next big thing. And he wants meta to be at the center of it. And it's his company. So it's his prerogative to spend. I just am not sure it's an existential concern to the extent you need to spend every last dollar. I know, but, but, but the point where you validate whether it's existential or not is too late. Like that's what apples that, that, like we're running an experiment. Yeah. Let's schedule our podcast for 2036 and see who was right, Apple or Meta. And I think ultimately my skepticism here is a vote of confidence in the moat that Meta has with Instagram and Facebook and how durable those businesses are going to be, even in a paradigm shifted environment 10 years from now. But maybe I haven't read enough Dario essays to fully internalize the revolution that's coming for all of us. who can say all right and that is the end of the free preview if you'd like to hear more from ben and i there are links to subscribe in the show notes or you can also go to sharp tech.fm either option will get you access to a personalized feed that has all the shows we do every week plus lots more great content from stratechery and the stratechery plus bundle check it out and if you've got feedback please email us at email at sharp tech.fm We'll be right back.
