This is an AI Transcription. It’s pretty good, but please forgive any errors.
[00:00:00] Jonathan: Welcome to the Difference Engine, the show for founders, investors, and tech innovators.
What have we got on the show today?
[00:00:12] Paul: Well, we'll be looking at the love affair between politicians and tech jobs, and asking if the old SaaS playbook is the right road to category leadership today.
[00:00:21] Jonathan: We'll also be taking a look at the aftermath of when Cisco and Linksys collided. But first, Elon's been at it again, but has he gone too far this time?
The, uh, question I think on everybody's lips at the moment is has Elon Musk Gone
[00:00:42] Paul: mad, well, you certainly in the news again a lot and not in our view for good reasons He's has he finally pushed us all even those who like his style a lot. Has he pushed too far perhaps? He has indeed. It's one thing to be edgy and it's another thing entirely to fly Into the abyss with a mad leap.
We love category designers who think way, way outside the box and take massive risks and reframe problems in an innovative way. And he's the epitome of that. He is indeed, or has been on the other hand, some of us as former journalists and former PR pros, no, becoming the story is never advisable. Not a good idea.
Now this applies even more, we would argue when you own the channel, the newspaper, or the social media site, which is not advisable. parroting the story. Yeah. Did Elon Musk take this into account with his recent rants on X? It appears that he hasn't. Yeah, it appears not. Now, we all know Elon's controversial.
He's readily, uh, evoking us to create more humans. And he sacked, uh, 80 percent of Twitter's, now X's staff, starting with the moderation team because of his Free speech agenda, and he also supports President Trump, right? You could say the guy's out there, but when he starts piling into Matters very close to our home the utterly controversial Protests come riots.
We've seen that fast tracked into multi year convictions. Yeah for quite elderly people Keyboard warriors, um, who, uh, had make creative the heinous crime of sending ill advised Facebook posts. And they were ill advised, which built on the racist untruths of others. Should Elon even bother himself with that?
[00:02:20] Jonathan: Well, I think even Elon would probably consider it a bad thing that he might just be creating, as we've discussed in previous episodes, a growth engine for threads. Um, you know, there seems to be an entirely new subject for virtue signaling, uh, on LinkedIn in recent weeks, which is why I'm deleting my ex account.
[00:02:40] Paul: I've seen a lot of it. Yeah, yeah. Yeah. Yeah. So, so what happened, Elon, to Sticks and Stones? Was it actually necessary for you to post Civil War Inevitable, or were you just, you Saying it as you see it. Well, I'll tell you one person who didn't see it that way is, um, Sakhir Starmer. He's grown a new hashtag as a result, uh, two tier Kia, whether or not you agree with that, it's certainly, uh, caused a lot of furore.
And allegedly, to your point, a lot of his newly minted Labour MPs have got a dilemma, because they know X gets them out to a massive audience and is a great way to get their news out. However Should they leave and join the Virtuosi? It's interesting
[00:03:17] Jonathan: because Elon seems to have even got under the, uh, the skin of certain European commissioners and causing them to suddenly respond and get ticked off by their own organization.
[00:03:27] Paul: Absolutely. So Brussels is on fire with this. Um, and we know that legislation and regulation In tech is coming and coming hard now over the years, Elon has riled a lot of people. So, um, you mentioned, uh, senators, uh, certainly competitors. I see there's a, there's a lawsuit with himself and Mr Altman, um, uh, cause he felt he was misled and obviously allegedly, allegedly, allegedly he's wound up dictators like Mr Putin, et cetera, but now he's made the mistake, fatal mistake.
Possibly of winding up the little people. So some examples, Mike Butcher, who we know very well, TechCrunch, European editor, has posted onto X, ironically, explicit instructions about, and I quote, how to piss off Musk, which goes, in case you're interested, Hey, UK, do you really want to piss off Musk? Open the settings page on X.
on the web, not app, select the privacy and safety button, select grok and uncheck the box that reads allow your post blah, blah, blah, and results with grok to be used for training. How explicit is that for a Um, rebellion against, against X. Yeah. Pretty spot on.
[00:04:40] Jonathan: Yeah. And, but I, you know, I think the point is, is, is that, you know, we can agree or disagree with either Musk or the little people who are responding.
But what are the consequences here for, for Musk himself?
[00:04:52] Paul: Well, let's think about it. Let's look at another. little person, uh, Sakhir Starmer, who's the UK Prime Minister. His quote, let me also, I'm not going to do the voice. Let me also say to large social media companies and those who run them, violent disorder was clearly whipped up online.
That is also a crime. It is happening on your premises and the law must be upheld everywhere.
[00:05:13] Jonathan: And let's not forget that for those that don't know, our current Prime Minister used to be our Director of Public Prosecutions. So when it comes to prosecuting companies, He probably knows a bit.
[00:05:24] Paul: Yep, and he's locked up a lot of people in the last few weeks.
One of the most prominent BBC journalists says, and I quote, I've also seen a number of high profile account holders writing that they are leaving the platform as a result of all the toxicity. Is this the digital town square Musk dreamed of? If this is free speech absolutism, do we want
[00:05:45] Jonathan: it? Well, deeply philosophical discussion there.
It's hard to say ultimately what to make of all this provocation. You know, Musk is Musk, you know, we know what we're getting.
[00:05:55] Paul: Yeah, but he's got to carry some or all of the public with him, because he needs someone to buy his products, right? And they don't all want to be Trump voters in the US, right? Who I'm sure are right on board.
He needs to think about his broader audience. It seems like some basic, um, comm strategy would help here. And to do otherwise, and to provoke as Elon just has, Seems hubristic. You forget your customers at your peril, Elon. Yeah. What can we take? What do we learn from all of this?
[00:06:23] Jonathan: Well, one, we think, you know, does he really, really need to do this?
Or is his ego taking over? Perhaps it is time he should at least apologize. Uh, and then, you know, carry on with a lot of his work, which is highly important to the modern global economy. But if we were to say to him, what would be the three things you need to do right now to maintain a category of leadership in communications terms, what do we think they would be?
[00:06:48] Paul: Well, I think the first one and obviously is a clear one is that, you know, we do need you to be bold, but you need to be a bit smarter than this. I think secondly, um, Hold your tongue, right? Choose your battles Elon. We don't need you at war with the BBC, TechCrunch, and the UK Prime Minister. And I think clearly you've probably got some, some recommendations, some
[00:07:09] Jonathan: readings, some recommended reading.
Yes, I would recommend that he grabs hold a copy of Daniel Goldman's seminal work called, unsurprisingly, Emotional Dictatorship. Intelligence.
[00:07:22] Paul: There you go. We end with a recommendation for a bit of reading for Elon.
You've got to learn to earn. Okay, it's that time again. It's time to learn and earn. And so what are we going to learn this time, Professor Simnett?
[00:07:43] Jonathan: Well, I've been musing over recent weeks about What I think is the modern day sass playbook and wondering if it's really the route to sustain category Leadership.
[00:07:55] Paul: Whoa, so you're thinking maybe that time's moved on It's time to call time on the old playbook and get ourselves some new some new books
[00:08:02] Jonathan: Well, I think we need to have a good look at it if we think about it in in recent years SAS companies have come out of nowhere and created brand new categories, but It strikes me that the current playbook appears to have its own destruction built in and I'm wondering, is this tech and financial flywheel a good thing or do customers ultimately suffer?
[00:08:24] Paul: Well, they say all good things come to an end and, um, perhaps it is that SAS, for its own sake, SAS, cloud enabled software, software as a service, software that you buy, On the trip you consume and as you buy, and rather than just buying a massive piece of capability, maybe, just maybe is old news.
[00:08:44] Jonathan: Maybe that's true.
But if you were to imagine that the stages that you need to build a significant SaaS firm, it sort of might go like this. First thing you've got to do is clearly think category by reframing customer expectations. In an existing market and focus on solving existing customer problem. And I say, as we've talked about before, dirty, expensive, inconvenient cabs, maybe synchronous broadcast TV, or perhaps expensive inflexible accounting packages.
After. Somebody has identified this customer need and figured out how they might be able to satisfy it. They then go out, usually on the west coast, to raise huge amounts of capital to actually create a solution to the problem and then enter and redefine the market. Now, what do they usually do? They usually use some of that capital to subsidize pricing,
[00:09:36] Paul: right?
Because they don't need to make a profit as they're building out their competition. They can keep throwing punches quote, unquote for free, obviously very VC funded to try and inculcate them into the incumbents market because they're, they're a SAS company and what they're offering looks superficially at least different to the incumbent.
[00:09:54] Jonathan: The point is, is that the incumbents are unable to compete due to lack of investment. They haven't got that great. Big VC fund behind them. So they basically buy their way into a new category by capturing market share and raise more money at ever higher valuations. It's a great internal flywheel.
[00:10:14] Paul: And it's interesting.
I remember sitting beside, uh, at the time, a chap who was the CEO of Sage. pointing out to him that zero was eating his lunch. Uh, and he reassured me, not very convincingly, I will say that, you know, not to worry about zero. And sure enough, Sage was developing and has developed his own SAS product, which I believe is the majority of its, of its services right now.
So yeah, you're absolutely right. And if I was playing the waiting game as an incumbent and trying to pick off SAS companies, now's a pretty good time because as we know, people are calling the top. So if I'm a non profitable, highly a VC funded SaaS company, and I'm now hit this era of you better make some profits.
I'm looking pretty vulnerable to the incumbents.
[00:10:58] Jonathan: Even in more, shall we say, stable times, what happens after the significant market share has been grabbed and all that money keeps coming in at ever higher valuations? The founders and the VCs cash out, either to new investors, to an IPO, or even sale to an incumbent that can't organically grow its share quickly enough.
It's a
[00:11:21] Paul: very valid exit clause for the SaaS company that has not quite reached category leadership. But it's looking very pretty to the winking incumbent who needs to get its sass game together.
[00:11:34] Jonathan: Indeed. Now that's
[00:11:35] Paul: normal times, but right now, let's think about where we are. The IPO market is pretty much dried up, certainly in the US.
The secondary market, which was a good way to keep things, keep the party going because you could just sell a few shares, keep some of the founders happy, you know, work your way towards profitability. That's dried up a little bit. As well. Um, and so even the most optimistic of teams looking at the valuation of their shares dropping have got to be looking around.
And then you add in the mass tech layoffs some more this week from Cisco, and you start asking yourself, what is the advantage of creating a SaaS company? The
[00:12:10] Jonathan: way I've been thinking about this over recent weeks is what happens after the VCs and the founders have effectively cashed out? Reality starts to dawn.
Well, the traditional thing is they bring in a CEO who's probably inverted commas seasoned as it usually says in the Press release in order to make the business actually viable until this point this massive market grab It isn't a viable business. So what happens prices get increased? Costs get cut as you say people have to go and tears start to get introduced now You What happens then all the customers who have followed this new category as it comes in, get disappointed.
And if they're not locked in permanently, they essentially look for new solutions. And what does that do? It paves the way for the category ambitious to start this tech finance innovation cycle over and over
[00:13:08] Paul: again. And we need to do much more of this in Europe. So this is not entirely, this creative destruction isn't an entirely, Negative thing.
We recently spoke to a cashed out existing entrepreneur, fabulous company, very profitable. Uh, and he decided to make the move to cash out to private equity. What did he have? He had a great ride. He got a very large check and the chance to start again. In some ways, maybe this is the upside of SAS having a downturn right now.
[00:13:35] Jonathan: It could be, this is a very smart. And it nets founders and VCs billions to the end user. It's sometimes hard not to feel like they've become a little more than pawns in a recurring tech and finance chess game. And I'm asking myself, is this really what category design should really about, or is this just modern creative destruction that in itself drives innovation?
I mean, if you look at it. You know, those three companies referred to earlier, you know, thinly disguised, Uber has undoubtedly increased customer choice and utility at the same time, improving the existing. Cab industry. Netflix has accelerated a shift into streaming and given the consumer, Apple TV, Amazon prime, even iPlayer from the venerable old BBC, and has actually plowed back billions into the production of new content, of course, zero.
And we talked about before has taken cloud accounting, uh, to millions of new businesses and forced existing players such as sage, to which you referred earlier to innovate for, for customer benefit. So I was wondering. Is this just greed is good in you, Klaus? Or
[00:14:44] Paul: is it actually, uh, accidentally even, a very good way for innovation to thrive?
[00:14:49] Jonathan: Or should category leadership be built on firmer and some more ethical footings?
[00:14:53] Paul: There's a thought.
[00:14:54] Jonathan: There's a thought. If you've got anything to contribute, you know where to get us.
What does the future hold? Let's look into our crystal ball.
[00:15:09] Paul: All right, it's that time. We'd love you to look into a crystal ball. What do you see in there?
[00:15:13] Jonathan: Well, it's interesting. One of the things I think we've noticed, uh, certainly over over recent years is that the idea of tech job creation is, is not actually as helpful to politicians as they would hope, because I think they fundamentally misunderstand the idea of job creation through tech.
[00:15:32] Paul: They think tech jobs are wonderful. Um, so for instance, they believe they're really highly paid. You know, you see, um, all of these sort of various growth business parts being set up, lots of growth. Anytime there's an AI date, Data center. Everyone's beating their chest and saying how amazing it is that big techs come in and invested with a dotted line that they think there's going to be jobs following.
But we need to put something on record here, don't we?
[00:15:56] Jonathan: Well, I think we do. It's that our jobs are not the silver bullet. Tech jobs are not the silver bullet. The silver bullet is efficiency.
[00:16:04] Paul: And so these phrases get bandied about economic growth from politicians who mostly, as we've seen from recent, uh, gaffes, let's call them, um, know nothing about tech.
So they'd constantly tout AI data centers and labs as being somehow able to replace the significant amount of employment that this country once had in the shape of AI. You know, the unfashionably coal pits, steelworks, car factories, and even the high streets. You know, these things provided mass employment in the industrial age.
This is not the same as tech jobs.
[00:16:37] Jonathan: It absolutely isn't. They sit there trying to be all tech savvy and future facing in front of the public. But whereas in the 18th century, the The California gold rush left a long tail of employment opportunities. In that case, that from farriers to jeans makers and barkeepers and bankers and other less salubrious occupations, that effect will not happen from the implementation of AI itself.
[00:17:03] Paul: No, if you look around. A datacenter, and there's one not far from here, the Microsoft's new datacenter being built in Acton. If you look around a datacenter, there's a ton of capital being deployed, a lot of money. Racks of servers and other appliances, all rammed these days with these really super expensive, hundreds of thousands of euros, pounds of dollars.
Uh, GPU chips, they'll also be state of the art backup power. There'll be amazing fire suppression operational technology. There'll be computer vision security. What will there not be? People.
[00:17:36] Jonathan: And just to put this into perspective, a worrying perspective, is that these big investments are going to give us AI power.
That will affect You know, everybody in a white collar job's from accountants to filmmakers, from nurses to architects, who are touched by that AI. Some might escape, some might get replaced, but there's a whole load of jobs, certainly in the UK, which we don't have enough skills in anyway, you know, everybody from sort of the plumbers to electricians and so on, who will be less effective, you know, people are still going to need to get their, their hair cut.
That's fine. That may keep up people in employment, but they create no net gain for the economy in international
[00:18:20] Paul: terms, right? In the economics terms, I believe those, those, um, sorts of professions are called non tradable. So a company, a country rather, does not grow richer because you cannot export a haircut, you cannot export a nail polish, et cetera, et cetera.
But to be a little bit more positive about AI, the tech jobs that the politicians are talking about, I think they have got that wrong. But actually, it's not that they're tech jobs. They are more like tech assisted, AI powered jobs for all of these white collar professions you just mentioned. So yeah, so I think a useful analogy, um, you know, for the tech job miracle that these, uh, politicians are spouting is the green jobs miracle.
[00:18:58] Jonathan: Yep.
[00:18:58] Paul: Bandied about, like, this is going to solve the problem of an enlarged welfare state, an aging population, and all of our overblown net zero promises. Don't worry, we'll fix it.
[00:19:07] Jonathan: Green jobs. It is just replacing carbon based jobs with green jobs. The people who are putting up aerogenerators are the people that were previously doing all rigs.
To do a very simplistic example, those are engineering tasks, but it's essentially just replacement. I don't believe it's net growth.
[00:19:25] Paul: Right. And your Corgi registered gas technician who comes around to fix your boiler?
[00:19:28] Jonathan: Well, he's going to become very adept at doing electrical boilers. That is just change within sectors.
So there's no silver bullet. fair either.
[00:19:37] Paul: So I think the politicians really to cut to the quick here, they're looking for the upside of these tech jobs in the wrong places. You're not going to get northern towns built around a colliery with everybody in the town contributing to the economic output of that one particular service.
It ain't going to be like that. And they should stop talking as if these tech jobs are specific things.
[00:19:59] Jonathan: Tech. has to be seen as pervading into the whole economy. And that's where the discussion has to start.
[00:20:05] Paul: Yes, it's time for a grownup conversation. Let's talk about what we mean by technology enhanced jobs.
The economic value is not in one small and potentially shrinking from an employment point of view. Part of the market. In fact, it pervades the entire economy. And so the upside really is within every sector.
[00:20:35] Jonathan: There's captain hindsight.
[00:20:39] Paul: What are you taking us to
[00:20:41] Jonathan: today? Captain hindsight. Okay, well, I'm going to bring in some more lessons from the history of the IT business. And, uh, today I thought it'd be quite interesting to, uh, to look back at, uh, Cisco and Linksys. You know, lessons to be learned actually here are about what can go wrong when you expand at a category peak.
So, for those of you who are old enough to remember, um, All Conquering Internet Routing Category Leader Cisco acquired a company called Linksys, uh, for a cool half a billion dollars in 2003.
[00:21:12] Paul: That seems like a funding round now. But back in the day, that was that was
[00:21:15] Jonathan: big money. That was money. And you know, why was it big money?
Well, you just thought it was the most perfect natural fit. You could imagine, you know, Cisco would continue catering to larger enterprise organizations. Nice fat profits. Exactly. Well, the Linksys brand would keep selling to home small business consumer customers, right? So Cisco providing every route you need, right?
Problem was timing really wasn't on their side. Now, that plan might have worked if Linksys emerging market hadn't quickly become saturated with competitors. Routers are not that complicated. You know, massive capacity to make them in the Far East, you know. So, yeah, Netgear, D Link, you know, quickly emerged, quickly got distribution.
And Linksys really started to, really failed to benefit from any of Cisco's enterprise grade shine. Um, actually I think Cisco really choked it here. For instance, they only went as far as Linksys by Cisco branding later on when things were looking decidedly sticky.
[00:22:13] Paul: At this point, you and I were swanning around the, uh, very flash Cisco offices out, uh, near Heathrow.
Uh, and there were lots of highly paid, very, uh, impressive car driving. salespeople, why on earth would they sully themselves dealing with Linksys when they could sell Cisco kit on nice fat profits?
[00:22:29] Jonathan: Well, I remember also Cisco was trying to develop a channel and, you know, you're dead right. All those enterprise, uh, sales guys became richer than Creasys, a lot of them and retired very, very early.
But from a strategic point of view, Cisco was looking for category domination in routers. Something else started to go really quite badly wrong. The consumer internet was expanding and the channel was changing. So cable operators were starting to provide an. Sell their own routers to customers who they were already locked on with.
[00:22:56] Paul: I'm doing a deal with Sky. I don't also need a branded router. I'll just take whatever they give me.
[00:23:01] Jonathan: And, you know, Cisco had never manufactured its own products anyway. And it allowed product quality at Linksys to slip. I mean, that's the one thing you'd expect. You expect it to be the best. They suddenly realized a little bit too late that things were going wrong.
Completely redesigned the Linksys range in 2011. But, you know, it made no difference. The die was cast. By 2013, they decided to cut their losses and sell the Consumer Products Division off to Belkin.
[00:23:25] Paul: Yeah, let me add a little bit of color on this. It's around this time that a younger version of me rocked up at these very nice offices to interview for a job at the Cisco's new Prosumer Division.
And this was the mad idea, which stupidly I told them instead of just taking the check, that they were going to unite the little phone thing, the flip phone that they had, And the WebEx, which was the predecessor to Zoom, let's not forget, and put it all into some sort of like prosumer consumer version of Cisco.
They just didn't have the DNA for it. They really overstretched themselves at this point, and possibly that's what happened with the with the Linis.
[00:24:00] Jonathan: The lesson here is, is if you're gonna go for category expansion, if you are already a category leader, understands. That the dynamics of the ecosystem of the acquired company may be very different in those additional market segments.
And don't allow the fundamentals that have allowed you to build your category domination, such as in this case, quality to erode.
[00:24:22] Paul: I think that's a super important point for anybody that's currently leading in a category. Thank you.
Thank you for listening. If you want to learn more, go check our blog posts on becategorical. com.
[00:24:35] Jonathan: If you have a category issue, then we can help get in touch with us.
[00:24:38] Paul: And remember. Don't be better, be different.