The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:23:09 · Harry Stebbings, Parag Agrawal
[00:23:09] S1: of time shopping. One thing that does worry me is actually the dissolution of the advertising industry in the wake of agents. If I have... You know, if I order my delivery and my Uber, DoorDash for our dear American counterparts through Instinct, that Uber banner that's now advertising something becomes worthless. Amazon, their advertising business is bigger than their e com business now. Of course, they're shutting it off because if agent's the primary customer, your ads business goes to next to nothing. Correct. [00:23:39] S0: And this is not just... You're talking about this in the e commerce line, right? But this is what I meant early on when I said like the business models have to change. Ads don't work with agents in their current form. Forgetting e commerce for a second, if you think of you're in the content business, let's say your page, which is ad supported public information on the web, ad supported page, people show up, you show them ads, you make money, great content. Agents show up, no one sees ads, you make no money, which is why we like to pay people. So we're effectively building an AdSense for agents showing up to read your content. So we like to pay content owners a variable amount of money every time an agent derives benefit from reading their information, which is a variable amount of money is what a visitor to your website will pay you based on a click probability or a value probability on ads. Why do you do that? To incentive align content owners. Otherwise, what's
00:23:39 · Parag Agrawal, Harry Stebbings
[00:23:39] S0: And this is not just... You're talking about this in the e commerce line, right? But this is what I meant early on when I said like the business models have to change. Ads don't work with agents in their current form. Forgetting e commerce for a second, if you think of you're in the content business, let's say your page, which is ad supported public information on the web, ad supported page, people show up, you show them ads, you make money, great content. Agents show up, no one sees ads, you make no money, which is why we like to pay people. So we're effectively building an AdSense for agents showing up to read your content. So we like to pay content owners a variable amount of money every time an agent derives benefit from reading their information, which is a variable amount of money is what a visitor to your website will pay you based on a click probability or a value probability on ads. Why do you do that? To incentive align content owners. Otherwise, what's [00:24:28] S1: gonna happen? Everyone's gonna block agents. So you you need to find a replacement to the ads business model. I get you, but you have to assume that you're gonna be, like, a 100% of the market then. Because if you're 30, 40% of the market and you're like, oh, don't worry. We'll pay you. And New York Times is still like, well, thanks, Parag, but 60% of my traffic is still unpaid. So I'm just gonna block all of
00:24:28 · Harry Stebbings, Parag Agrawal
[00:24:28] S1: gonna happen? Everyone's gonna block agents. So you you need to find a replacement to the ads business model. I get you, but you have to assume that you're gonna be, like, a 100% of the market then. Because if you're 30, 40% of the market and you're like, oh, don't worry. We'll pay you. And New York Times is still like, well, thanks, Parag, but 60% of my traffic is still unpaid. So I'm just gonna block all of [00:24:50] S0: you. No. But I think they're gonna block them and not me. They're gonna give me a data feed. What does incentive alignment mean? It means that New York Times believes that I pay them competitive market price or the right price or an attractive price or a fair price. If I do that, they should give me their content. And if somebody else doesn't give them that, and if they have the technical levers or legal levers, they shouldn't give it to them. Do you think [00:25:12] S1: this business is a little bit like music with streaming, which is like the business just becomes candidly much worse for the creators. And it still provides some money and significant money, but they have to get a little bit more creative with alternative streams, touring, merchandise, alternative business. Is it the same where your core goes down and you have to get more creative?
00:25:12 · Harry Stebbings, Parag Agrawal
[00:25:12] S1: this business is a little bit like music with streaming, which is like the business just becomes candidly much worse for the creators. And it still provides some money and significant money, but they have to get a little bit more creative with alternative streams, touring, merchandise, alternative business. Is it the same where your core goes down and you have to get more creative? [00:25:33] S0: I don't know, but I don't think so. I think there's one fundamental thing that is different here. Agents using the web a thousand x more, like that thousand x is really different. Now all of a sudden, the amount of utility added goes up if these agents are presumed to be doing something useful. And so this is not just a change in the share of value that people transact over. This is a large growing pie. And when that happens, it is actually possible to transition business models. And of course, don't get me wrong. There are going to be winners and losers. Right? Like, some pieces of content will become very valuable. Some pieces of content will get more commoditized, and people are going to have to adapt to a new customer, to a new market dynamic, to a new kind of monetization engine. But the overall market size, I think, has the potential to increase. Unlike in music where it took a while for it to grow back. I think my understanding is now the industry has grown back up and exceeded its previous peaks in a material way, but there was a moment where it was smaller. In this case, that might be a very compressed period given how fast these things are growing.
00:25:33 · Parag Agrawal, Harry Stebbings
[00:25:33] S0: I don't know, but I don't think so. I think there's one fundamental thing that is different here. Agents using the web a thousand x more, like that thousand x is really different. Now all of a sudden, the amount of utility added goes up if these agents are presumed to be doing something useful. And so this is not just a change in the share of value that people transact over. This is a large growing pie. And when that happens, it is actually possible to transition business models. And of course, don't get me wrong. There are going to be winners and losers. Right? Like, some pieces of content will become very valuable. Some pieces of content will get more commoditized, and people are going to have to adapt to a new customer, to a new market dynamic, to a new kind of monetization engine. But the overall market size, I think, has the potential to increase. Unlike in music where it took a while for it to grow back. I think my understanding is now the industry has grown back up and exceeded its previous peaks in a material way, but there was a moment where it was smaller. In this case, that might be a very compressed period given how fast these things are growing. [00:26:45] S1: Everyone questions the sustainability of margin structures in this business. How do you think about that as a business today?
00:26:53 · Parag Agrawal
[00:26:53] S0: Today, we're in the infrastructure business, and we have a real technical lead in terms of being able to do things at very high quality, very cheap. If you think of the tech we're building, right, like what are we doing? We like to give the highest quality answer. Make it fast, make it cheap. Spend the least amount of compute doing it. Like, we obsess about only these three things. Right? Quality, cost, latency. Turns out if you do that relative to a stack built for humans over the last twenty years, years, you can do things at the same quality for one twentieth, one fiftieth of the compute. And so a lot of margins come down to market structure on competition over time rather than any other factor. Factor. And And in our industry, the market is large. We're too early to know what future competition and market structure looks like. But the margin change due to content owners is not something I worry about. And let me tell you why. The entire premise of us paying content owners is driving incentive alignment. So we like to pay content owners the marginal contribution that they added to an agent doing work. What does that mean? Let's assume that there's an agent trying to get something done, and you're gonna spend a dollar on that agent to get this thing done. Now if you've spent a dollar and ten seconds, because we have a larger model available or ways of spending compute, you could have gotten a slightly better answer. If you spend 90¢, you would have gotten a slightly worse answer. If you're running good agents, like, they're on this Pareto curve. So now imagine I took out one content owner, their data from the web index, and I still spent a dollar. But let's say after taking them out, the quality of the result was the same as the 90¢ agent with their content. So why wouldn't we go and take this 10¢ of marginal contribution they had as a content owner and pay out a decent chunk of it to the person who brought that data? That's how we do our math. That's how we have trained our models, which tell us how much to pay for what content need. And so to produce, if I was going to offer an equivalently good product to my customer, I'd rather pay content owners than spend on inference because I'm spending the