Six predictions for 2023
Everyone else is offering up their predictions so I'll jump into the fray
In no particular order, here are six predictions for 2023. These are very much American-centric predictions. Caveat emptor, etc. More detail on each prediction follows below the section break.
Interest rates will remain high, with the preternatural optimists being most negatively affected.
AI will continue to surprise, and Google will find no easy answer to its increasingly precarious position.
Amazon’s delivery service will continue to degrade, as free cash flow proves elusive.
Tech entrepreneurs who can cut their burn rate and grow revenues will fare best.
Crypto will continue to be in search of a viable use case, aside from speculation, JPEGs, and payments in un- and under-banked countries. Its three main issues will remain unsolved: regulatory/legal status, blockchain scalability, and usability.
McConnell will work with Biden to blunt the impact of MAGA types, but his overarching strategy will be to position DeSantis for ‘24. To the extent that any of Biden’s goals accord with McConnell’s overarching goals, McConnell will work with Biden to get it done. Otherwise, Biden will be politically impotent.
The details
Interest rates
Jay Powell has publicly stated that he’s interested in cooling the economy, and one way to do that is to raise interest rates. When interest rates are high, capital is expensive. When capital is expensive, people who want to undertake risky projects, which is to say entrepreneurs, find it harder to raise capital. They find it harder to raise capital because, in a world of higher interest rates, treasuries and other securities offer more attractive yields than they did in a zero interest rate world.
The way I see it, a low interest rate environment is great for the preternaturally optimistic because they are able to (more) easily raise cash for their projects. But in a world where capital is more dear, it is the realists who control the reins. Given more expensive capital, the best thing for the preternaturally optimistic to do is to understand the current environment and proceed accordingly. A project that was feasible when capital was inexpensive may not be feasible today.
AI & Google1
Google increasingly looks like an obstinate incumbent unable to contend with an innovation which threatens its core business. I am, of course, talking about ChatGPT. That Google has its own vaunted AI research organization, DeepMind, doesn’t matter as much as many technologists seem to think. It’s true that Google has the resources to spin up its own version of ChatGPT. But it doesn’t follow that Google is willing to do that.
Google’s problem is this: the vast majority of its revenue is generated via its advertising platform. And that revenue stream is directly threatened by a future version of ChatGPT which is integrated into Bing2 or another search engine.
Companies are loath to cannibalize their revenue streams. Clayton Christensen wrote about this in his book The Innovator’s Dilemma. Some technologists do understand this issue. Here’s Box CEO Aaron Levie:
“There’s a reason why Clayton Christensen wrote The Innovator’s Dilemma. It’s a real dilemma,” said Box CEO Aaron Levie on Big Technology Podcast this week. “Google doesn’t inherently want you, at an inherent level, to just get the answer to every problem. Because that might reduce the need to go click around the web, which would then reduce the need for us to go to Google.”
Further, there have been some news stories recently indicating a “code red” situation at Google. Google is certainly aware of its precarious position. The question is whether it is willing and able to sacrifice revenues in the short term in order to address a longer term existential risk.
Though Larry Page, Sergey Brin, and Eric Schmidt control Google via a supervoting share class, it’s unclear whether they’d be willing to sacrifice the company’s revenues in pursuit of competing with ChatGPT. And if they do go along with it, Google’s public tracking stock will tank, which will make recruiting and retention that much harder.
Amazon
Amazon’s operations have been generating negative free cash for the past two years.
Screenshot via Yahoo Finance.
While there is a world in which Amazon could spend the money to make its delivery service more reliable, a world in which its operations generate billions in negative cash flow is not that world. Expect continued degradation of its delivery services throughout 2023. At least some people are bruiting about the idea that Bezos could return to Amazon.
Tech entrepreneurs cut burn rate; grow revenue
I mentioned above that interest rates are likely to remain high through 2023. This has a direct effect on tech entrepreneurs: investors’ cash will be scarce for all but the most promising of companies. This means that entrepreneurs who want their companies to survive have to cut their burn rate (reduce expenses) and find ways to grow revenues. And, if you can reliably grow revenues in this more parsimonious environment, you’ll likely find it easier to raise cash.
Crypto & its use case(s)
I remain fairly bearish on cryptocurrency and blockchain technology. I think the industry will spend 2023 continuing to search for a use case, aside from speculation, trading JPEGs, and payments in un- and under-banked countries. While each of these use cases has their place, none of them suggest the ‘mass adoption,’ especially in the United States, about which its proponents frequently talk.
Here’s a claim that Metamask has 10 million MAUs (monthly active users). While 10 million MAUs is nothing to be ashamed of, 10 million users is hardly “mass adoption,” given that there are ~8 billion people in the world. And, Metamask still remains hard to use:
I see three main issues with cryptocurrencies/blockchain, none of which I expect to be resolved in 2023:
legal/regulatory status
blockchain scalability
ease of use
Its legal and regulatory status is likely to remain uncertain given everything that has happened as of late with FTX & SBF.
The scalability of the various blockchains is a solvable problem, but it will, as with any complex software engineering project, take time to solve. Blockchain engineers will remain in high demand, at least for bitcoin and ethereum.
Ease of use is the big one. If “mass adoption” is really the end goal, then all of the apps that run on top of blockchains need to be simpler to use. If your grandmother can use it easily, it will attain mass adoption. If your grandmother cannot easily use it, it will remain a niche technology. That’s really all that there is to it. Figure out how to simplify the technology and abstract away its complexity. Or consign yourself to it remaining a niche tool.
As much as I find Balaji Srinivasan’s Network State thesis to be interesting as philosophy, it also, in common with much of libertarian thought, reads as intellectual onanism. It is short on practical advice about how to get from the present state to his decentralized, crypto-enabled future. And that is how I view the entirety of crypto: an interesting philosophical experiement, with little evidence of a road from the present state to the world envisioned by its philosophers.
Politics & Joe Biden’s presidency
Mitch McConnell is about as savvy a political operator as they come, and he has two priorities. His first priority is his constituents’ interests. His second priority is the 2024 election. In order to address that second priority, he will work with Joe Biden to blunt the influence of the MAGA types, but he’ll do it in service of positioning Ron DeSantis to be the Republicans’ nominee for the 2024 election.
McConnell and Biden have a decades-long working relationship, and to the extent that Biden wants to do something that doesn’t conflict with McConnell’s first or second priority, McConnell will work with Biden. Biden will otherwise find himself to be politically impotent for the remainder of his term.
Kevin McCarthy, in the House, will prove to be feckless and incompetent. He’ll be unable to corral the MAGA members of the House, but their influence will be diminished in any event.
When I write “Google” here I am of course referring to Google’s parent corporation, Alphabet, and the corporate entity called “Google.” “Google” is a convenient and common shorthand for the parent organization and all the entities that fall under its umbrella.
Microsoft’s revenue streams are much more diverse than Google’s. It’s not dependent on Bing-based advertising in the way that Google (or its parent Alphabet) is dependent on Google-based advertising revenue.
I agree, and I learned something. A fine list.