This is an AI Transcription. It’s pretty good, but please forgive any errors.
Jonathan: [00:00:00] Welcome to The Difference Engine, the show for tech founders, investors and innovators.
Hey Jonathan, what have we got? Small but mighty we'll ask how AI can downsize your team while dialing up your productivity,
Paul: and we'll continue to be Europe's loudest cheerleaders by speculating how the dumping of Chinese electronics could give the continent a competitive edge.
Jonathan: But first, let's talk about Trump's tariff turmoil.
Could the chaos. Be concealing a golden opportunity. Unless you've been living under a rock for the past couple of uh, weeks, you might have noticed that the US is going through what is in fact the third of its regular every hundred years protectionist, tariff, imposing cycles. The last two didn't go too well for the us.
All the world, uh, let's hope this one entirely. The product of the Petulant Orange Man Baby fares better. When global free trade is disrupted, [00:01:00] um, a market uncertainty arises. It inev inevitably impacts the entire ecosystem of established supply chains, production models, regulatory norms, and so on. Now, compared to the last.
Two tariff events. The world is now globalized whether the dongle realizes it or not. Uh, and economies are intimately connected and managed by technology. Uh, so if this disruption lasts, and who knows that the Fanta Fre appears to change his mind at the, at the drop of a hat. So technology is gonna have to change or just cope, but make the most of a new reality.
So as, as the old proverb goes, necessity is the mother of invention. So disruptions often create fertile ground for new technology categories to emerge, especially those that address efficiency, localization, resilience and digital trust. So we thought we'd put our heads together and identify a magnificent seven new or evolving [00:02:00] areas of technology categories.
Uh, tariff tech, uh, you heard it here first. Um, opportunities that we think could be right for the design in these interesting times. So, who might have the Trump cards in all of this?
Paul: Alright. Category designers. Now is your time. So, uh, I think number one of all magnificent seven is simply supply chain intelligence.
Yeah. And resilience platforms. There's a massive opportunity here because tech solutions that provide real time visibility and predictive analytics and AI driven task management. Are gonna be hot properties. Why? Companies want more control and more foresight as they're forced to move away from just, just in time global logistics and rebuild nimbler, let's say federalized or decentralized, um, distribution chains.
Example of this, imagine that you are the ship that is three days out from LA Port just before the tariffs kick in.
Jonathan: Yeah.
Paul: And you're gonna get hit with. Let's say 104% tariff, I think that's gonna force you to put the pedal to the metal and get in there quick.
Jonathan: [00:03:00] Or, or if your land driver just park him, it seems, yeah.
Paul: As, as we've seen, so lots of people, uh, ceasing what they're doing while everybody figures it out, when it stabilizes. What this leaves us with is a need for real-time information to figure out whether when you land the product, wherever it's sold, it's gonna be outta profit or not.
Jonathan: Okay? So, um, as we're talking category, here's some, here's some suggestions.
Um, how about blockchain chain for traceability? I. In that case, um, digital twins for logistics, um, AI based disruption forecasting.
Paul: Absolutely. And those old technologies, um, which have been around for a while, event driven architectures and publish subscribe buses, which, you know, some would say may not be the most innovative in the world.
Suddenly they're looking really attractive because they tell you where exactly your goods are in transit and they can calculate on the fly. Whether or not you're gonna be in profit when they land.
Jonathan: Okay, well, you gotta make these things in the first place. Of course. That brings us to our
Paul: second category.
Jonathan: Indeed, it does. And of, of course, the [00:04:00] Donald can't tell the difference between, uh, services and manufacturing. But let's have a look at manufacturing. So given the disruption that Tars are causing the opportunity here is technology that enables local. Flexible and on demand production. Um, so things like micro factories, 3D printing, uh, CNC automation.
Dark kitchens. Dark kitchens. Indeed, indeed. That would be a really good one. We will get fed tonight, um, to replace all. Complement that overseas manufacturing, that has been an integral part of the, this globalization period we've been going through. Um, so you know, this is really important right now because companies need to reduce dependency, um, on distant or high tariffs suppliers and react faster to changes in market trends.
Paul: So all those nice beautifully efficient supply chains blown up Yep. Have to be rethought through,
Jonathan: you know, in terms of category. How about things like additive manufacturing [00:05:00] networks, uh, smart microfactory management and AI driven design to prototype tools to really speed up that part of the manufacturing process.
So again, some of this stuff
Paul: is old school, right? Yeah. So like when you say additive manufacturing, I think 3D printing. But when you say, um, AI driven. Designed to prototype tools. I think there's something in that because there'll be a whole lot more prototyping before anything's made and attracts a tariff.
Jonathan: Yeah. And of course, as was said before, that's one of the great opportunities for Europe are, are those vertical market, uh, applications of ai, given that the, the, the big horizontal, uh, AI. Area is now mapped out on the west coast. Yeah,
Paul: somebody's, uh, taken that till. Okay. Which leads us to our third of our seven magnificent seven category opportunities.
Nearshoring as a service. So what we're looking at here is integrated platforms that businesses can use to evaluate, set up, and whether it's worth their while or not. Nearshoring operations. Of course there's a whole lot of calculations and dare I say it, there's work for, um, accountants to do or process folks to [00:06:00] do to figure this out.
Yeah. But if you are looking to relocate closer to key markets because you're worried about tariffs, et cetera, this is a perfect opportunity to figure out how to. Match your manufacturing and your service provision to your buyers.
Jonathan: And that's where AI can definitely come in. Again, we've got AI matching there.
Paul: Yeah. And of course there's a ton of, and we'll come onto this in our, in our next category, there's a ton of, am I paying the right tariffs?
Jonathan: Yeah. There's a new as a service. I think compliance as a service, to your point, are you paying the right taxes in in the right way? And, and just some basic plug and play infrastructure tools I think are gonna be needed in this area.
And,
Paul: and we've worked previously for a global tax. Platform. Yep. Yep. And, uh, one of our clients at, at categorical, and you know, I've reached out to, to their CEO, and maybe they're not seeing it just yet, but essentially to non-accountants, like your non-tax people, like you and I, this is, although it's not technically a tax, this is another.
Type of revenue collection that people will have to do in the states on behalf of the US [00:07:00] government and possibly for other legislations as well. So there's a whole lot of work that needs to be done there. That's a whole
Jonathan: level of complexity, which does in fact bring us on nicely to, to the, the number four in the magnificent seven of digital trade compliance and of risk management tools.
So what we're talking about here is, is software that helps businesses adapt to changing trade policies, um, tariffs, sanctions. Different customs regulations, but in real time
Paul: because if there's one thing we know about our gold friend, yes, it is. That he changes his mind a fair bit every day, it seems, you know, um, depending on how things go with the third term, et cetera, we're looking at least four years of uncertainty.
Yeah. So dynamics here. Calls out for new country. Yeah. So people
Jonathan: have absolutely gotta understand what that, that legal and financial exposure is in real time. Real time. Yep. Um, so, you know, the opportunity we see here is for smart contract platforms. Yep. Because we can think of a firm based, not too [00:08:00] far from here, that's actually in that area already.
Yep. I think the AI hub opportunity here is ai, legal assistance for trade compliance. And of course, as you just mentioned, global tax management platforms.
Paul: Absolutely. This is the moment for them. There you go. Lock tax. All right, so number five in all seven is tokenized cross-border finance infrastructure.
And what we really mean here, of course, is blockchain. Yep. There has been a lot of discussion about whether blockchain is a solution looking for a problem or is actually useful. And all of those Web3 companies out there we're saying, now is your time. This might be their problem. This could be it, right?
So it's, it's amazing how things complain to your advantage. So. Anything that allows using the blockchain, quick movement of secure cross border payments and part payments, et cetera, et cetera. Trade financing, yeah, to make sure that you get paid on time, invoicing, and all of the FinTech innovation that we've seen is about to get revolutionized.
Again, it's [00:09:00] pretty
Jonathan: simple. Why now? Because this whole geopolitical instability means that companies have to look for better ways of doing business than through traditional. Banking systems
Paul: and every government's got its own, um, trade credit sort of set up, right? Yep. Those guys are your customers. People knock on those doors.
Gotta
Jonathan: get off the banking rails. So if we think about where are the category opportunities in this, you know, I'm thinking stable coin, coin based B2B. Payments, um, decentralized credit systems and possibly even invoice tokenization.
Paul: And I'm not sure if the gurus out of the White House have figured this out yet, but all of this talks about not doing stuff in dollars.
Yes. But hey, let's not worry about, Hey, it's not, this is not a problem to solve. Hey, no, it isn't. We're on the category tip. Let's move on to number six.
Jonathan: So I think autonomous trade negotiation, AI agents, Ooh, that sounds fancy. The point here is, is [00:10:00] that. AI driven agents could, uh, stimulate or support international business negotiations.
Again, these things are gonna be very active all the time. So no
Paul: humans involved. AI to ai. Yeah. I want this. You've got that. I bid. I offer.
Jonathan: Yeah. Complex, complex negotiations. Yeah. Yeah. And within that, you know, how, how do you come up with pricing scenarios and you know, these things like contract arbitration, which is gonna have to go on, um.
And in order to do that and make your argument stick, you are gonna have to use real time economic and regulatory data to feed into those systems. So we're being pushed into a, an area where we have a pervasive network across the world. We've had experience of globalization, which means that going against globalization is going to massively complicate and speed up what we have to do to get trade done.
Paul: And. Not for the category, uh, designers who build these products, [00:11:00] but for the rest of us, we have to realize AI is often described as a black box. These negotiations, um, will happen lightning fast. Yep. Will involve no humans and maybe incomprehensible to humans. So winding back from a situation, from a contract.
Could be fiendishly difficult slash impossible. So lots of possibilities there.
Jonathan: So number seven of the magnificent seven resilient digital
Paul: marketplaces. Well, what I don't like this from, from this, from a category point of view is we've. We've got digital marketplaces and we're modifying it. So the modifier here may not end up being resilient.
Jonathan: Yeah, I mean the problem we're, we're having to deal with here is it's fractured global ecosystems. Um, and we need to have new digital marketplaces that don't follow the rules of globalization. So what I mean by that is things which are built for regional sourcing, uh, variable logistical conditions and adaptive compliance.
Paul: 'cause what you don't mean is [00:12:00] sheen and tamu dumping a load of stuff under weird VAT regulations.
Jonathan: No, you don't. That that would be somehow a strange manifestation of, of. What Taring is supposed to achieve,
Paul: but the world's greatest digital marketplace, the everything store Amazon Yeah. Is already showing that.
It's really rethinking what it's doing. It's, it's paused a whole lot of, of what its operations, its shares are, have tanked quite badly. And this new type is new category of digital marketplace is where it's gonna be. And whether it comes from them or somebody else, it's definitely gonna shake up the digital marketplace.
Jonathan: Yeah. So we need. Marketplaces that can adapt to a volatile future. And you know, to do that, we think the category opportunities could be around B2B platforms with embedded trade services, localized fulfillment hubs. Uh, or indeed dynamic pricing for volatile markets. I
Paul: mean, you are talking about a massive, uh, set of category opportunities [00:13:00] here.
Um, so weirdly outta something. So perhaps, uh, gloomy. Yeah. Let's say murky, let's say brownie orangey. Yeah. Comes some white light and maybe some white light of innovation, right? Yeah. Well,
Jonathan: I mean, you and I have both learned from painful experience that, that. That in running businesses you have to stay positive, uh, and look upon change, you know, even stuff that makes no sense whatsoever, but is reality, uh, as an opportunity.
Um, so, you know, we know that major disruptions, I. Do cause fertile ground for new technology categories, uh, to emerge. Uh, and and so why shouldn't a new wave of innovation and category creation be driven by the tango torent?
So we've been thinking a little bit, have we not, Paul, about recent events by events of the last, uh, couple of weeks, what is happening in the world and the [00:14:00] possibility that, um, there could be a large scale dumping of, uh, Chinese originated electronic products into the European market. Now, if that was to happen, what impact do we think.
That would have
Paul: on Europe. Just imagine, imagine this, imagine that iPhones go due to crazy tariffs. Yep. A thousand dollars, uh, in the US and over a thousand pounds here for the, um, top end ones. 1100. 1100 for the uh, uh, pro and the rest, um, to over $2,000. Yep. Because somebody has slapped 104% or whatever the tariffs are.
Who could that be making them more of a luxury item in the us Yeah. Even than they are tanking sales in the process. Now, um, that price drop would only eat into apple's margins, which are quite big. Yeah. And they might say to themselves, well, I wanna keep my sales up, but I'm not willing [00:15:00] to match the price of the Chinese made brands like Huawei or Jeremy.
Uh, and those other phones, uh, the Android phones that people use in preference to Apple, they're pretty highly speced phones, but they're not Apple. So Apple decides. Sod this, I'm gonna focus elsewhere in the world. Yep. And in the world's largest single market, Europe, half a billion punters. Yep. Pretty wealthy compared to the rest of the world.
Let's focus on Europe and we'll keep Wall Street happy. I. Could potentially be the way that they think.
Jonathan: And we're talking about a large European population, a little bit resentful as, as in the past, having to pay so much more for Apple products. Oh, oh yeah.
Paul: So we're used to paying over the odds for iPhone.
So it, it used to be, and, and this was so cynical in my view, even when the, the pound was at $1 30, it was a pound dollar equivalent. Oh yeah. So we are paying the same numbers, uh, as the states and, and somehow the psychological trick there is. Oh, well, it's the same number, but in value terms, in earning terms, it was [00:16:00] 20.
20%. Yeah. Or so more. No
Jonathan: gap did that as well. That didn't seem to work out terribly well for them. In did. They
Paul: don't. Okay. Are they, so now, uh, if this all, uh, goes on and um, Europe becomes the focus because they simply out price themselves from the u their home market, let's remind ourselves Yeah. The US market.
Yeah. Then they are now competing not only with the, with the Chinese guys, but they have an abundance of product, which is in your words, they might dump
Jonathan: Yes.
Paul: Sorry. Send yes to Europe. Yeah, and obviously, you know, scarcity drives value. If there's a glut of products and some competition for, for customers, and let's say.
Imagine this. A little bit of anti-US sentiment. Yep. That's not gonna go too well for them in all view.
Jonathan: That could make it very, very hard for Apple. But it, it's not really just about Apple. It's about every uh, yeah. Potential electronic product, PCs, TVs, game consoles.
Paul: So if any of these manufacturers or manufacturing out in the far East decide to take the price war [00:17:00] on high-end brands, apple being the one in, in electronics, get involved in a severe.
Price war, the like of which we haven't seen so far. And if it spirals into like commodity pricing and you know, apple's, for whatever reason, Apple's products become less fashion forward, at least for a few brief months or so. Maybe a recycle, an iPhone recycle or two, we get super well priced phones and the Donald could be quite popular for a short time.
And, and, and we like that. I, I think that, that, that's something that I think will go down very well now, what it'll do for the brand long term, different story. There are some losers even in this scenario, aren't it? Oh, for sure. So like, um, all the stuff that we get to accompany our apple, our cords or chargers, all of the anchor products that we love, the cases, all of that stuff, which drives a whole economy.
Of, um, you know, shops on, on all high streets. Mm. They're in, they're in a different situation. Yeah. They don't have low price product to sell. Apple drops its price potentially because it, it needs to, to get [00:18:00] rid of, of stock. These guys are putting their prices up. Because they're tariff to hell.
Jonathan: Yeah. And, and let, let's not forget that complex manufacturing that doesn't shift overnight.
And every piece of tech kit other than the most basic is assembled from products of more than one country.
Paul: Let's, let's carry on with the thought experiment. So, so now I want the EU to tariff my Chinese made phone cases as low as possible. Yeah. So now from a consumer point of view, I have a low, lower priced iPhone.
Comparatively, I have nice gadgets that I can attach to it, and yeah, eventually if I'm the manufacturer, let's say, I don't know, anchor or whoever mm-hmm. Uh, maybe the, the, the guys that, that, that put the battery in your us. Built Tesla. Yeah. Uh, for which you normally need to, to get a new mortgage. Maybe they're good value.
Let's face it, in the
Jonathan: end. Um, you know, if, if we had a whole lot of electronics coming in, uh, and component parts at below market prices coming in, um, this could have significant effect on European inflation, uh, and [00:19:00] technology investments, um, both positive and negative depending on the lens you use. So let's try and break this down Deflation.
Yes. The opposite of inflation. Yeah, so we're talking about short term deflationary pressure here. Cheap electronics, right? So, you know, smartphones, computers, appliances, et cetera. Lower consumer price inflation, quite nice from a macro economic point of view. Um, it could soften headline inflation giving central banks like, you know, the European Central Bank E ccb, uh, more room.
To pause or cut interest rates hurrah. I I also think there could be supply chain cost reductions in this, you know, European manufacturers or tech firms relying on Chinese components may see input cost form.
Paul: Yeah. 'cause the, the Chinese, uh, manufacturers say, I. I can't get to the US. Yep. My nice friends in Europe can buy all my stuff.
Yep. Let's go there. And we go, you
Jonathan: know, brilliant. Uh, easing producer, price inflation, you know, hurrah. That's two hurrahs. It is, but you know, don't catch chickens. Oh, okay. There is the risk of sectoral disruption. Oh, that's, [00:20:00] I was painful. What's
Paul: a
Jonathan: sectoral
Paul: disruption? Well,
Jonathan: if dumping causes European electronics firms to lose market share or even go under.
It could trigger job losses and supply side issues, which might ironically fuel inflation in the medium term.
Paul: Boo boo two. Horizon one boo. I don't like that. Two horizon,
Jonathan: boo.
Paul: Okay. Alright, so that's the inflation economic stuff done for the wonks. Can we get to the technology stuff? Well, the investment stuff,
Jonathan: yes.
Yeah. Right. Okay. So first thing. Impact is gonna be negative pressure on domestic tech firms. Yeah. So European tech firms may get margin compression and reduce competit competitiveness. And what does that inevitably lead to in any economic cycle? Low r and d spending, hiring freezes or layoffs and hesitancy from investors due to weakened earnings prospects.
Right. So that. Is not a good way to go. No. And
Paul: that is really the, the shame of this for us. That's the, that's the, that's the thing we need to be care careful about. So what we're
Jonathan: [00:21:00] seeing is a short term tactical effect. Having a long term strategic impact. Absolutely. Okay. That's not good. There's also the potential for overall market disruption here.
So dumping can distort fair competition. Of course it can, it discourages in innovation, as you just said. Yeah. And long-term investment from European firms who can't compete on price. In fact, they can't compete on price even when the tech is not being dumped. Yeah. So imagine if that was pushed further down.
Big problems. I
Paul: think there are second order issues with that as well. So if I'm in a nice, secure, uh, let's say French, yes. Uh, I'm employed, employed in France for a tech company with all my beautiful workers' rights.
Jonathan: Yeah. I,
Paul: I become even less attractive as a higher than let's say somebody from a country with.
More higher and fire type rights.
Jonathan: Yeah. A company that might have zero hours contracts for possibly talk about that. That could be no. So there, there's another thing, and this is like a sort of drug effect. If, if Chinese products dominate due to low [00:22:00] prices, Europe could become more dependent on China for critical technology.
I think that's inevitable. So what does that do? Raises geopolitical and supply chain resilience concerns. Just look at what's happening in the current EV marketplace with the salt from BYD.
Paul: Look at the confusion around steel manufacturing in the uk, right?
Jonathan: Yeah. And, and I think, you know, at, at a European level, uh, although the UK is not part of the EU anymore, um, the EU itself may respond with anti-dumping tariffs, right?
Increased subsidies. Or strategic tech investments, you know, then, then that could be by existing legislative mechanisms such as the EU Chips Act or Digital Europe program. Um, you know, and that would be a classic status response to protect and promote local innovation. And
Paul: you are just talking about manufactured goods there.
That's. For you muddy the water with a digital sales tax and get into the realm of services.
Jonathan: I have to say that the words protect and promote, um, when used by Pan national government entity of of which I have experience of from the inside fills me with [00:23:00] dread. Right. But, but, but, but this could spur targeted investment in, in strategic autonomy areas like semiconductors.
Yep. AI and green tech. Um, where we could establish category leads.
Paul: God, I hope that's true. So we don't have so much, uh, of these token, white elephant, silicon roundabouts, platform F et cetera. But we have some joined up thinking. Yeah. And I dare I say, an industrial policy. That would be great. The only
Jonathan: problem here is that we are.
Trying to dominate ca categories in a more restricted world. Let's do worst case. Best case. Let's do it. Let's do a takeaway of some sort on this. Okay, let's do that. Okay. So I think that the, the best case, and this is really only short term, is that consumers enjoy cheaper gadgets, inflation dips, and the European Central Bank gets, uh, you know, some breathing room.
Uh, things return to a sort of normal as the iron bruises influence wanes. Okay, so take us to the other end. Okay. Okay. So the wor the much worse case. And who knows how worse it could get is, [00:24:00] is that lunacy prevails. Um, and European Tech stagnates due to unfair competition, uh, strategic dependence grows, um, IC reality re retaliatory, uh, trade measures increase.
And the
Paul: world becomes an even more unstable place. Ooh, that is quite grim. But our take, I think has to be somewhere in the middle, right? Yes, of course. Um, we know that, um, the recent changes, uh, in tariffs were railed back a little bit by the good old bond markets. Whoever thought they'd be sexy. Yeah. But for now and for the foreseeable future, the genie is outta the bottle.
Yeah. On free trade. Yeah. And so it's time to start thinking there's a shift afoot from tariff free to tariff first markets. And we all need to adjust. Yeah. There's gonna be wins and, and, and losses from all this protectionism. Uh, yeah. Yeah. No more free defense of Europe. So, and, you know, speaking to, to people in the states, even Europeans who work in the states, they're quite happy about no more free defense
Jonathan: and no more.[00:25:00]
Odd US dollar pricing for Europe. Oh, same price on, on the Apple store. Yeah. Maybe not anymore. Yeah, yeah, yeah. Um, potentially tougher to operate in the us Less attractive for US tech firms to, to invest and hire here.
Paul: Yeah. And so every business and innovator in Europe has to reevaluate their US expansion plans right now.
And they start, need to start looking. Again and afresh at the largest single market in the world, which to remind you is the European Union. Yeah. And perhaps, uh, and you've no idea how much this hurts me, perhaps we, uh, need to get even closer ties to the Far East, uh, because they are suffering most. Uh, and they could help us out a lot
Jonathan: from our point of view as as category designers, traditionally building your category in Europe has been perceived to many as a disadvantage.
Yeah, a mere stepping stone. Let's just do it here for now, and then let's go For the big prize global success. That's what we want. And global success for, for most time meant actually dominating I in the US
Paul: and floating on their deeply liquid, much vaunted, um, stock markets. Yeah. [00:26:00] Yeah. Which, yeah, it's been a bit of a rollercoaster recently.
Yeah.
Jonathan: So I mean, if the World World's free trade is truly coming to an end, we, we need to plan to stand on our own strengths. And fast. And that means thinking very carefully about where the category opportunities are.
Paul: Let's get into smaller marketing teams or smaller teams in general. And ai. Yeah, but not in the way you might think. No. 'cause everybody says today's re received wisdom and, and it's amazing how fast these things happen is that AI won't kill your job, but it might give your job to someone else. Who can use AI a little better 'cause they've got better skills.
Yeah, but But what does that
Jonathan: mean? You know, will there be smaller teams overall? Whatever the reason, this idea to hire fewer new. Folks and upskill those you have is pretty hot today. Absolutely. That's what everybody's talking about. Um, so is it time to get working with fewer folks in, [00:27:00] in everything from coding to hiring, to marketing, to finance, uh, and and do the team need to learn more AI tools
Paul: and what tools?
Well, it seems a little bit harsh, isn't it? We all come back from Covid. It's back to the office, and we're getting used to like humans and being humans again. Yeah. Yeah. What happens? An email manifesto by Toby Luka. He's the Shopify CEO, as you probably know. Yeah. Toby,
Jonathan: please get in
Paul: touch if we've just murdered you, sir.
Now, magnificent Canadian success. Um, he mandated in his email manifesto. Yeah. Experimenting with AI a lot. A lot. Yeah. And that has spawned a ton of comments from management press through to, um, marketing teams and, uh, so much so. He felt compelled to publish it because it was already out there. Well, so illegitimized
Jonathan: it by publishing it.
We
Paul: think it's a sign of a great CEO. Yeah. If they don't fear their internal comms being leaked, the evil thought is. Did he plan this? Mm-hmm. And his note on X says, I heard this internal memo of mine is being leak [00:28:00] leaked right now. So here it is.
Jonathan: Right? Right. What do you think? What
Paul: do you think?
Jonathan: Uh, well we, we all know any great communications plan these days.
Anything that comes out from the CEO. You have to plan that. It's gonna leak. It's gonna leak. It's actually in the planning, not in the intent, I think. Okay.
Paul: Fair point. Signal Gate will tell you that. Alright. Right. Two of the greatest tech laws, as we're talking about tech are Moore's Law. Yep. And Metcalf's Law.
Right. And just as a reminder, professor Snick, can you please state Moore's Law and Metcalf's law?
Jonathan: Right. Uh, from memory, I think the Moore's Law states that the capacity, the processing capacity of chips will double. Every 18 months to two years, that's negotiable. Yeah. Good. And, uh, I think Gordon Moore, uh, has been proved right even to this day on this.
Paul: Um, I think AI slightly accelerated that, but it held for what a good. 30, 40 years. Well, that's a good way to think about things. What about Metcal Law?
Jonathan: It is about the fact that the value of networks increase exponentially with the amount of users that are attached to the network.
Paul: [00:29:00] Now, the interesting thing about Metcal Law, and this applies to Shopify, Spotify, and many other of our current, uh, big tech companies, is that it doesn't just apply.
In a technical sense to the number of nodes on the network. It applies to big platforms. When you get sufficient, um, usage, you freeze out all the competition. I give you meta. Yeah. Et cetera, et cetera. Yeah.
Jonathan: So, so it's Metcalf's law that is essentially given most of big tech. It's ludicrous valuations. Yeah.
Because this is the network effect that we all talk about. No,
Paul: it, it. Probably helps to remember that those two laws, um, are both to a certain extent, proven and old.
Jonathan: Yeah.
Paul: Let's fast forward to today and let's see if this applies to team members being exponential to value.
Jonathan: So we, we know there's been quite a few examples of companies that have achieved massive valuations, IPOs, huge sales.
Mm-hmm. With really [00:30:00] very few people,
Paul: this is the point, right? So in Toby's, uh, email where he says, uh, you know, first thing is try AI before you hire anybody. Um, he's making the point that you don't need to hire lots of people to get lots of value. One example is the UK's money box, um, funded by, um, VC Breger.
Who, um, who's Ben? We had on the show, Ben Morrell. Go back. Listen to that. It's a core cut of a show. Yeah. Um, so this is a FinTech, which is belief to scale to profitability and 75,000 customers. You know, it ain't, it ain't Barclays, but it ain't bad. Half a billion valuation, half a billion to three quarters of a billion dollars valuation.
Oh, thousand was fewer than 500. Employees, but that that ain't even. Impressive in the scale of things.
Jonathan: No, it's not unusual at all is it? I think, you know, one of the things in this is if you've got product that's user generated that is, uh, a certain thing that will drive towards this ratio between valuation and the amount of people you employ.
So, you know, when YouTube was acquired by Google for ea, [00:31:00] was it 1.65 billion? Um, just seem cheap now. Doesn't it just seem cheap? That was 2006. It was a different world. Um. It, it, I'm sure it only employed less than 70 people at the time. Wow. Um, and a little bit later, when Instagram sold to Meta for a poultry 1 billion back in 2012, I think
Paul: it only had 13 employees.
Right. So, so there is precedent to say you can achieve a lot of valuation with very few people, and this is in the pre AI world. Let's come right up to date. Let's come to. 2025. Um, and B2B, uh, unlike B2C is going full on Doge.
Jonathan: We've got a lot of time for some of, some of the commentators of B2B. I mean, we, we'd particularly like Jason Lempkin.
Of Of ster.
Paul: Yeah. He's talking about, he's talking about, uh, small but mighty. Yeah. But let's talk about mighty getting smaller. So right before we get there, HP laid off four and a half thousand of its highly paid. And to be fair to them, highly intelligent team this year. And so Jason is pointing to a new type of [00:32:00] business.
Yep, yep. I think he's talking about AI though, right? Right. Yeah. Yeah. He's talking about, um, AI companies growing to huge valuations. Bear in mind a lot of the, the valuations in the software and the data center and actually even just the ability to have a deal with Nvidia to get. Access to its chips?
Jonathan: Well, I mean, Jason's been typically combative here and he is basically laying down a challenge, which is, you know, how small and mighty can you get using ai?
Right? And, and it sort of points to a different way of looking at company building. Um, because you know, particularly in services businesses, we've been very used, for instance, to a ratio of turnover. Per employee. Yeah. I think over time. Yeah. You know, in the, yeah. 20 years ago you'd be thinking about what's the ratio of income per employee you'd want, and you sort of started about three and a half.
Uh, that just goes completely out. Yeah. Because the
Paul: valuation could be billions with dozens of employee employees, completely changes the ratio. But of course. That's one view of the world. Not everybody in the world works for a VC [00:33:00] funded AI company. Yeah. And arguably that's a good thing, not just for our sanity, but also for the planet, given how much fricking energy these things, uh, burn.
Jonathan: Yeah. People forget that.
Paul: But too often as we move into this AI infused age. It is the HP problem that the existing companies have, being in role for too long, uh, and not doing the sort of horizon scanning that you can do very, very easily with a ai, even basic gener generative AI is, uh, gonna be a problem.
Jonathan: Something we've been talking about this, this week, which is it, which is sort of connected to it. Is everybody I said to be talking to at the moment. At some point the conversation come, have you, have you generated your own action figure yet? Yeah, these come on actually are
Paul: everywhere. And now look, uh, this has been unfair really, but as Manchester City fans.
We cannot help but focus on, uh, dear old Andre Anana. Um, that would be
Jonathan: Manchester artist, his goalkeeper then. Yeah. Right.
Paul: Uh, and ro the Crowley, the day after performance he wanted, would wanna forget someone's produced a, a co a, um, an national with holes in his, in his goalie gloves.
Jonathan: There's, he got some, some cases for [00:34:00] his contact lenses.
He's contact lenses.
Paul: And in the crueler ones they've also got Guide dogs outfit. Sorry, Andre. Um, come on when we're not here to solely pick it. Um, no professionals. That's one. Why would we do it? We're about tech, aren't we? Well, yes. So the more serious point about these dolls, these are self-generated, right?
So all, all this is, is a little bit of code. You stick in some images. And make some decisions about how you wanna dress. Yeah. Hey, Presto, you've got something funny to send to your friends. Well, oh
Jonathan: yeah. And we know some of our friends have been sending us versions of this and they are distinctly nontechnical people.
Everybody in my
Paul: team has done it already and everybody will do it.
Jonathan: So the world just does need to, I mean, this is a, maybe a ludicrous example, but the world needs to catch up fast. Yeah. We need to need to catch up
Paul: with this fast. Right. So a little anecdote about a professional services company that we know.
Um, who recently issued a 100 plus page report. Think about that for a second. Handwritten a hundred page pages of report laid out beautifully. Ready for print. Just a sumptuous piece of work, which, how many [00:35:00] man hours would've been involved in that, and what would be the size of the team to create something like that.
I mean, like over a thousand, but it was also accompanied by a 30 page user manual for the executive leadership team. Yeah. Right. So here's what we're doing now. We know this was handcrafted. Uh, and not ai because when we looked at it using our human assessment skills, yeah, we spotted. Errors. Yeah. There could only have been human errors.
Yeah. So to your point, how many hours? Thousands. Yeah. And lots of reviews, planning, drafting,
Jonathan: revising, arguing. Oh God. You know, and, and a and a huge, and a pen. A potentially a, a hugely complex rollout plan.
Paul: Yeah. Well, I mean, if these 30 pages of, of, uh, plan to tell you how to roll it out, but you'd assume, right, you do all this work and it would have some.
Relevance to the business? Yes. Because when I could, that would be the
Jonathan: whole point of it, wouldn't it? So if I
Paul: could pump out an action figure doll with a couple of keystrokes. Yeah. Um, surely if I spent months and months planning, drafting, revising, and building a rollout plan that had, um, some press releases, old [00:36:00] school and one count it, one social post.
Yep. I'll be doing more than that in this day and age, wouldn't I? Uh, no, that's, that's the plan. So with all the help available from dozens of AI tools at this point Yep. Why would you limit the chance of pickup of such a massive endeavor with such a shortsighted and frankly, old fashioned promotion trustee?
Was it because of shortness of staff?
Jonathan: Possibly. But it's probably because of shortness of the right sort of staff that have the right intellectual, um, approaches to be able to use AI properly.
Paul: Yeah. So I can tell you it's definitely not because of a shortage of sales. There was over a dozen people in that marketing department, which would remain nameless.
Um, but back to Toby's point. Hmm. If you'd have started from first principles and said, we don't need any, we need as few humans to touch this as possible and as much AI assistance as possible. Yeah. That whole thing would've come out and it would've popped out a perfectly good marketing strategy, possibly given you good assets.
Um, it was a failure to adopt that sort of strategy that caused a problem. So that [00:37:00] means that content, even serious content that's that, that you think is really gonna promote your business, uh, and you haven't thought about how it's gonna be accessed. It makes that small as mighty point again, fewer people arguably would've done a better job on this.
Yeah,
Jonathan: fewer people means fewer interactions. It, it, it also means fewer rules about how they interact and defacto it reduces the complexity, which in itself introduces errors into the process.
Paul: Yep. There is that. There is that. So, but that's, you know, that's why humans are good at that. So that's why our human eyes spotted the error.
Right? So this is not an isolated case in companies across Europe. Um, we see, uh, and, and, and also in the US we see a lot of. Layoffs. Yeah. There is a mass reskilling of smaller teams with newer skills. And the good news is if we can get to grips with the power of smaller teams to be creative, we could win.
So, so what, what we, should we
Jonathan: sort of really think about what, what does this actually tell us? You know, Toby's law. Toby's law, is it gonna be Toby's Law now?
Paul: I dunno [00:38:00] about that. Uh, that's a good one. So let's, let's, um, let's give, these are all five tips for this changing world where everything's ai. So this Yeah.
Number one, as per Toby's law. Yeah. Ask first what AI can do for you. Same
Jonathan: thing is actively vet your teams for that AI savviness.
Paul: And we're not saying dispose of those that a Ai s we're saying, train the hell out them. Let 'em loose, but watch how they understand how to
Jonathan: interact with ai. 'cause that's the key.
Paul: Yeah. Building action figure dolls. Maybe there's not the end of the game that might be a slight distraction. Yeah. And when you see complex processes. You know, valuable bits of content that are taking a long time to put together long project timelines or you're getting weak results. Go back to 0.1 Toby's law.
Let the AI show you what it can do first.
Jonathan: Yeah. And I think if you're gonna consider doing this, you really should outsource anything that's non core to your ip, right? Yeah. Point
Paul: four, outsource anything non-core to your ip, which, which AI alone can do to humans, but those humans that can demonstrate [00:39:00] results, not those humans that happen to have been in your team for the last.
10 to 15 years.
Jonathan: Yeah. The last point is this idea we just brought up, which is the idea of AI savvy. What, what does AI savvy actually mean? I, I think AI savvy means that you should be looking not just for people who know how to use the tool, but have the, the empathy, the sort of the raw creativity and the judgment to make the best of those tools
Paul: precisely.
Because at the end of the day. The people you are trying to convince to buy your products are not AI agents, they are humans. You need to empathize with them. You need to show some wisdom and judgment as to what will make them change their mind, no matter what information you're getting from the tools.
Yeah, and you should prioritize your time for those interactions where humans. Interact with humans better than AI will interact with humans because
Jonathan: AI is still a tool. Absolutely. And the best tools are still in the hands of humans. And
Paul: I think ultimately that's why Toby, uh, [00:40:00] let his memo, memorandum, manifesto out into the public.
Hmm. Because the world of work is changing and small as mighty is not going away. Yeah. Per Jason's point, the rate of this change will accelerate as breakthroughs in our ai, bring productivity gains we can't even conceive of right now. Yeah. And ultimately this means you will. Per Toby's point. And that's, I think what he's getting to.
You will have an AI infused workforce who can ride this wave confidently. And if they do so, not only will their company win out, but we will finally crack the productivity puzzle that's been boxing us for years.
Jonathan: Thank you for listening. If you wanna learn more about category design, head to. Be categorical.com. If you need help designing and dominating your category, then get in touch. Contact details are in the show [00:41:00] notes.