A lot of the open weights are coming out of China, who I think would like to see or would like to kick the American economy in the nuts and maybe have an incentive with local governments to subsidize these models, making their cheap models even cheaper and perhaps giving Xi and the CCP a chance to engage in AI dumping that makes it nearly impossible for these companies to maintain their growth and profitability growth, at which point the markets would just throw up because now 40% of the S&P is kind of directly related to the prospects of AI. So, if I'm Xi, I'm going to flood the market with cheap AI and watch OpenAI and Anthropic announce a slowdown in growth, which will absolutely freak out the market and probably thrust the US, if not the entire West, into a recession.
Can free local AI kill GPT's subscription business? And would you work for a company you believe is harmful if it doubled your salary? Today, we answer your questions about AI, sperm donation, surveillance cameras, and online gambling. Question number one comes from Fred who texted us. "Dear Prof, how can a frontier AI lab sustain a subscription-based revenue model when free local AI is getting so powerful? Every week the setup process for local AI gets simpler and the local models get more powerful. I've cut my spend on cloud code by 50% using local AI. Plus, local AI solves some compliance issues for enterprises. So, what's the future of AI's business model?" So, first off, thanks for the question. What does local AI mean? It's essentially open-weight models make their core components publicly available, allowing users to download, customize, and run them on their own hardware. This can lower costs and keep sensitive data from being sent back to a model provider to help it learn and do a better job with other people's queries. The idea is you own your data and you're not using it to train. It doesn't jump the firewall and get absorbed or strip-mined by one of the frontier LLMs. The trade-off is that providers have less ability to monitor misuse, restrict access, or quickly deploy safeguards. And there's some enterprise-wide benefits protecting you from cybercrime and ensuring certain debugging that you don't get with your own internal, almost like call it desktop, open-weight AI. Open models are getting more competitive. In July, the UK's AI security institute tested leading open-weight models against frontier models released four to seven months earlier. It found that the gap in their cybersecurity performance had narrowed since 2025. The open models were also substantially cheaper on tasks both models completed reliably. GLM 5.2 cost $6 per task versus $15 for Claude Opus 4.6. DeepSeek version 4 Pro costs about 30 versus $12.50 for Opus 4.5. Many of the strongest open-weight models now come from Chinese developers including DeepSeek and Moonshot. In July, Nvidia, Microsoft, Meta, and 20-plus other companies published an open letter warning Washington against premature restrictions on open-weight AI models. Consumer subscriptions remain a small market. It's all about the enterprise. Bank of America found that only about 3% of US households paid for an AI subscription as of February. Adoption was highest among households earning more than $125,000. Basically, the domain of businesses and rich households. OpenAI reported 50 million paid subscribers in June just as estimates report the company hit 1 billion users around the same time. This means only about 5% were paying. So the reason why Anthropic has accelerated ahead of ChatGPT, kind of the initial gangster from a valuation standpoint, is because of that. It's because the larger opportunity appears to be in enterprise. In December of last year, OpenAI claimed they had hit more than a million business enterprise customers. Anthropic reportedly tells investors that its total addressable market is more than 30 trillion. Okay, that number is meaningless. Plus, Anthropic has cited gross margins above 80%, but that excluded some major expenses including model training costs and revenue share with partners. It's sort of like WeWork adjusted EBITDA. It's, you know, profits before everything else. The Financial Times estimates its effective margin may be closer to 40 to 50%. So frontier models versus open weight. This feels to me like the auto industry and it's bifurcating in that frontier models in the US are German automobile companies: better performing, stronger brands, more reliable and more expensive and higher margin. And there's a big market for that. But ultimately the bigger market might be with Hyundai and Toyota and Kia. And that is basically products that offer 80% of the frontier model at 10 or 20% of the price. That's a pretty strong value proposition. Now, with scale, the frontier models may be able to slowly but surely bring down that price and start to put pressure and find the sweet spot where the premium can be justified by the increased value or increased performance of the model. So, this is just straight market economics playing out.
Now, around the latest controversy, there's a theory that the reason why these frontier models have called for a pause is that, okay, maybe they're freaked out, maybe they're worried, but calling for a pause means a slowdown in the capex, meaning that they will be more profitable and perhaps may be able to pour some of those profits back into a reduced pricing such that they become more competitive with open weight. We're just seeing a market play out with one competitor coming from the bottom and one is the premier model. The open weights are essentially trying to Old Navy the frontier models, and that is the fastest zero-to-a-billion-dollar retailer in history was Old Navy. What did they do? 80% of Gap for 50% of the price. Southwest Airlines, same thing. At one point more valuable than the rest of US airlines combined. 80% of Delta, American or United for 60% of the price. That is the best business model in terms of value creation in history and I would argue that the open-weight models are adopting that business model. There's also a geopolitical overlay here. A lot of the open weights are coming out of China, who I think would like to see or would like to kick the American economy in the nuts and maybe have an incentive with local governments to subsidize these models, making their cheap models even cheaper and perhaps giving Xi and the CCP a chance to engage in AI dumping that makes it nearly impossible for these companies to maintain their growth and profitability growth, at which point the markets would just throw up because now 40% of the S&P is kind of directly related to the prospects of AI. So if I'm Xi, I'm going to flood the market with cheap AI and watch OpenAI and Anthropic announce a slowdown in growth which will absolutely freak out the market and probably thrust the US if not the entire West into a recession. So this is a super interesting market playing out. I would bet that both models survive or both positionings survive. Both bring a different value proposition, but I still don't believe there's almost any way that these frontier models can sustain their current valuations, which assume they're going to own 98% of the market and 200% of the profits that everyone else will just hemorrhage money. Thanks for the question.
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Question number two comes from Owen who emailed us. He says, "Scott, I'm 26 in my third year at a T14 law school. I went to a T20 university where I rowed for four years and met a bunch of wealthy individuals. I, however, am the son of two Irish Catholic school teachers. This is a long windup, but I'm considering being a sperm donor in my final year to pay down some of my debt. I have a job offer from a top firm for next fall, but find myself constantly worrying about my huge debt load with rates this high. Do you regret your decision to donate in school? Do you think this is silly if my ultimate goal is having a stable family that I provide for?" Well, I can relate, as I rowed at UCLA and I put myself through my junior year as a sperm donor.
Let's talk about me. So, two other friends of mine who were water polo players told me about this, that at UCLA they had something called an athletes' job board where we had access to a special job board which was totally inappropriate, and one of them was to be a sperm donor. And you go down to this clinic, I think it was called FPG Clinic in Santa Monica, and they interview you and they run you through a battery of tests. They take a picture of you in nothing but your underwear. They give you an IQ test. They give you a psychology test, a personality test. And the thing I remember was him asking me about my substance abuse. And he said, "Do you do drugs?" And I said, "No." And he said, "Nothing?" And I said, "Well, occasionally I smoke marijuana." And this guy looked up from the table and looked at me and said, "That kills stuff." And he looked up from the table and said, "That stuff kills sperm dead." Like, oh, it was the secret to life. And I was, you know, pot was the devil killing sperm. Anyways, and then they do a — what I wasn't expecting is they do a venereal disease test on you, which I found out in a very unexpected way involves a very invasive procedure. At which point, in the midst of that procedure, I became weak and fainted. There you go. There you go. There's a man for you. They take a swab and stick it up your urethra — what women have happen to them I think about every three or six months — and I faint. And I remember waking up and seeing a semicircle of nurses and doctors, whoever was there, looking very concerned. And the first thought I had was, they're not going to want my fainty sperm now.
Anyways, despite my fainting, they decided to call me back. And the two guys I was with, quite frankly, were just greater specimens, if you will, than me. They were blonde gods, much better shape than me, smarter than me. I imagine they did better on the IQ test. These were both like incredible scholar-athletes. And I got called back three times a week. They barely got called back. Now, why did I get called back so much? I got called back because — and I asked the people there, they said, "I had the chocolate and peanut butter of sperm donation. I was tall and Jewish." And that is parents or potential parents or customers of the clinic looking through files, like the idea that they were going to have Jewish semen. And also the number one request or criteria was height. And at that time I was 6'3". I'm 6'2" now. I'm shrinking. Isn't that nice that I'm shrinking? Anyways, ultimately my mom made me stop. I mean, I was making 120 bucks a week, which in 1985 — now it's $3 million a week. I don't know what it is now. I just know it's more with inflation, it's probably like 300 bucks or 400 bucks a week. So, with inflation, that's worth about $316. It doesn't seem so much. Anyways, that paid for — back then, that paid for, what is that, about 1,250 bucks a month. That paid for basically my room and board, my fraternity bill and my board. So my mom made me stop because she said, you don't know, you might have 1,100 kids at some point and what happens if your son accidentally marries your daughter. Which I thought was very strange and I thought, god, my mom's weird for even thinking that way, but I decided to stop, so I did it after a year. Whether you should do it, I think this is a very personal decision, boss. I don't see anything wrong with it. I would argue in some ways you're helping a couple that needs help, especially if you're healthy, don't have a history of mental illness in your family or any weird DNA. I don't know. I mean, I got to be honest, easiest money I've ever made. And I needed the money. I think you're offering a service, but at the same time, you might have ethical or religious reasons that make you uncomfortable with it. I don't know. I think this is a very personal question, but for me, it was a value-add. Now, the difference between now and then is now it's more regulated. I'm pretty sure — I don't know this, but I'm sure they won't let you have thousands of kids. There's actually a service now, I believe a law was passed, where if I go to a certain website and I submit my name from when I was a sperm donor, they send me certified mail. If I sign the certified mail, an email goes out to all of my biological children with my contact information and they could reach out to me. And I've actually considered doing this. The reason I don't do it is that I don't know if I have two kids out there or 2,000. And you can't pace it. You can't say, "Sure, let 10 know to come visit me and find out that they're going to lose their hair at the age of 27." So, I'd like to do it. I like the idea. I think it'd be super interesting. I think there was a movie like this and I'd want to document it. I'm at a stage where I want to help people. It might be nice to help family, if you will. But the idea of 200 kids showing up at my doorstep or contacting me at this stage is a little bit overwhelming. But let me return. Boss, this is your decision. I think the money — you are helping people out, but you said your parents are religious and I think the reason you brought that in is maybe they have an issue with it. What I would suggest is you speak to a few different people and get some advice. But I don't think there's anything inherently wrong with doing this. It was — I needed the money. It helped me get through college and I was helping other people is the way I see it. Anyways, hundreds of people out there, a little angry. A little cynical, right? Enjoying my life. Likes alcohol a touch too much. Makes people laugh. Not a lot of hair. But on the whole, living a nice life. Pretty happy. Has people in their lives that love them and that they love back. So yeah, I feel actually pretty good that my swimmers are out there in the form of tall, thin 40-year-olds. Is that how old they would be? 35, 40. Anyways, who knows? Who knows? Let's give it a shot. Getting paid for something you're likely doing anyway. Thanks for the question. We'll be right back after a quick break.
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Welcome back. Our next question comes from a listener who texted us. They say, "Hi, Scott. I'm a father of two boys with similar ages to yours, and I get a lot out of your valuable insight. There is recent static over Flock cameras, especially on the progressive side. They've been around for a while. I'm just not sure why people are so concerned when in our day-to-day we walk through everyone's cameras, and most of those are handled by people without any sort of compliance oversight. Also, we're fine with our phones listening to us all day. What's your take on Flock? Thanks, Scott. And keep going." Okay, so some data. Surveillance in the US pre-Flock. Back in 2012, the Wall Street Journal reported that from 2007 to 2012, the Department of Homeland Security distributed more than 50 million in federal grants to law enforcement agencies for automated license plate recognition systems. The article cited a 2010 study conducted by the Center for Evidence-Based Crime Policy at George Mason University, which estimated that more than a third of large US police agencies use automated plate reading systems. Some data on Flock. Today, more than 7,000 organizations in the United States have contracts with Flock alone. Roughly 40% of US law enforcement, along with universities and HOAs. Its cameras are ALPRs — automated license plate readers — and use algorithms to read the letters and numbers on license plates. The company offers a reciprocal database. Customers can opt into departments' statewide or national sharing and officers can alert agencies around the country if a target vehicle is spotted. The company operates roughly 120,000 cameras nationwide and its founder claimed it solved more than a million crimes last year. So, let's talk a little bit about misuse of Flock or potential misuse. In May, a sheriff's office in Texas ran a nationwide license plate lookup for a woman who got an abortion, including in states where abortion is legal, such as Washington and Illinois. In an official statement on its website, Flock claims its tech was used purely to locate the woman as a missing person and not to target her for seeking reproductive care. In July, after the chief of police of Indianapolis published an op-ed on her department's policies and use cases for Flock, the Washington Post found that an officer appeared to use Flock cameras to track vehicles used by his wife and two other people, searching nearly 4,000 times over a 10-month period, an average of 12 to 13 lookups per day. So, some of the opposition to Flock. Los Angeles city officials suspended the use of 138 pole-mounted security cameras operated by Flock this past July. This year, more than 100 governments in blue and red towns have paused or ended Flock contracts per opposition group Defog. In sum, I'm a huge fan of Flock, with very stringent safeguards.
For decades now, you can't walk six feet in Manhattan or London since the attacks of September 11th and the IRA terrorist attacks in the '80s and '90s without being on some form of surveillance. It's not the collection of data, it's the stringency of the privacy laws around what you can do with the collection of that data, which is the problem. ATMs have cameras. It's just impossible to think that you're not going to be surveilled one way or another. Your phone is tracking everything you're doing all day. So you're carrying a surveillance device around with you. The issue is we need really stringent privacy laws. So, HIPAA has your HIV status, but they've done a good job of ensuring only certain people can access it. The government can't — certain aspects, certain agencies of the government can't access it without a good reason. And it has to be a reason that is additive or helpful to your life that you wouldn't see as a violation of your privacy. With these cameras, I don't think — for example, I don't think any request for Flock data should be made if in any state that data collection is illegal. I think there needs to be a watermark around what types of infractions or crimes you cannot use Flock data as evidence for. Or if a person is related to a crime, met with someone, you can't use Flock data on them to confirm the crime with someone else just because of a happenstance meeting. I think the problem with Flock is not — in my opinion, it's not that people don't trust Flock. They don't trust the institutions overseeing them and deciding who has access to this data. We are living in a surveillance state. The question is what are the protections by our court system and our laws and our government such that they don't begin tracking journalists or they don't begin tracking people to try and find information that can be leveraged against them. That we have institutions we trust that cannot be hacked by bots that then reveal embarrassing or private information. So, we're in a surveillance state. What's needed is institutions and lawmakers that give the public a sense that they value their privacy, that the litmus test or the benchmark for accessing the data is strong, specifically under relatively strong conditions of an actual crime and maybe even a certain type of crime, and that people understand that 99.999% of the data collected on Flock is going to be scratched, erased, put into a vault that no one can access. So, I'm a fan of this technology.
And let's talk about the upside. Have you noticed how every mayor is bragging that crime is at an all-time low? Mom Donnie saying crime, murder is at an all-time low in New York. And what does it have to do with Mom Donnie? Nothing. Nothing. I'm not even sure it has anything to do with Eric Adams, the previous mayor. It's about these technologies. Oh, by the way, crime is plummeting in California. You know how everyone's posting California being, you know, post-apocalyptic and, you know, escape from New York. Crime is way down. And by the way, crime is way down across the nation because of Flock. It's just harder to get away with crime. So, you don't commit the crime unless you can do the time. So, there is a huge upside. This is one of those things where you don't know what you're benefiting from because without these things, there'd be a lot more people being assaulted, a lot more street crime, a lot more violent crime. So, "I'm worried about my privacy," said someone who hasn't been the victim of crime. So there is always a sweet spot between privacy and crime. In Russia, they err on the side of violating your privacy for safety. There are no search and seizure laws. They can just show up and toss your apartment if you're suspected. So we do want to err on the side of privacy around search and seizure laws, and we do that. In this case, it's incumbent upon the government to continue to demonstrate that the upside is way greater than the violation of privacy, which they only should do when there is credible evidence of a crime, a certain type of crime being committed. But folks, the upside of Flock is undeniable. Crime is plummeting across the nation. This is not about surveillance. This isn't even about Flock. It's about a lack of trust in our institutions to put in place the right safeguards. I appreciate the question.
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Our next question comes from James who texted us. He says, "Hi Scott, this is James living and working in Charlotte, North Carolina. I work in cybersecurity at a major bank and have hit a bit of a growth wall after two and a half years into my career. Despite receiving glowing performance evaluations and generally being told I'm doing a tremendous job, I've seen little in the way of promotion opportunities or raises. I recently received an offer for a similar but more senior role at a major online sports betting platform. The offer would essentially double my pay and would be a chance to work in a new industry on new types of security issues. The only con is that I myself am not a gambler and I have real concerns over the impact of mass online gambling on society. I don't think the people that work for betting companies are evil, but the companies are incentivized to make people gamble more and lose more. Plain and simple. I'm curious what you think about working in morally questionable industries and how you would balance your personal values with the need to provide for your family and make a way for yourself." Okay, so just some data from the American Gaming Association's yearly commercial gaming revenue tracker in 2025. Sports betting raked in nearly $17 billion in gross gaming revenue in the US, up 23% from 2024. For context, that number was only $8 billion in 2022. North Carolina specifically grew its sports betting revenue 34% after only two full years of operation, putting it in the top 10 states. Americans legally wagered nearly $167 billion on sports in 2025, up 11% from the previous year. I think online gaming has become — and this word is overused, but I do think it's a crisis. When gambling is legalized in a state, bankruptcies go up 30%. One in two men under the age of 25 bet on the Super Bowl. There's a weird phenomenon right now, and that is men are taking too much risk online and not taking enough risk offline. They're not applying for jobs. They're not applying to college. They're not approaching women and expressing romantic interests. They're not even approaching potential friends. If there's one piece of advice I could give to American men, it would be the following. Take less risk on a screen online and more risk off a screen offline. Don't be critical of someone online. Don't post aggressive threads or tweets. Don't swipe right or engage in porn all day long. Don't gamble on Coinbase or crypto or Robinhood with stocks. That's just gambling. Don't bet on the Fed raising or cutting interest rates or on the Eagles game. Reduce your risk online and then get out of the house more and take more risk. Apply for jobs you're not qualified for. Apply to colleges you may not have the credentials for. Start talking to the man or the woman in line at Starbucks. Gamble with your person — maybe try and start a small business. Gamble with your person. Don't gamble with your fingers, if you will, or online. So, I don't like online gaming companies.
Now, as it relates to you going to work there or not going to work there, again, this is a personal decision, and it's easy for me to be generous with your money. I sold my Meta stock. I think it's an unbelievable company. I think Mark Zuckerberg is arguably the best business mind of his generation, and it's trading at a pretty good multiple. I think it's a great stock to own. I sold my stock because I think Meta really is — I just kind of defined the term mendacious fox. I think they are trying really hard to use AI and every other technology to get young people addicted to something that slowly but surely sequesters them from the key to happiness, and that is deep and meaningful relationships offline. So these are personal decisions. But at the same time, I invest in big tech. I invest in Amazon. And for the most part, I invest in companies where I just think I can make money. And you have an obligation to yourself and to your family. What I would do: one, I'd talk to some people about it. And two, I would perhaps think about going back to your company if you have a good relationship with your boss. Transparency and the truth has a nice ring to it, and tell them about this offer and tell them you'd rather stay at your current firm. Is there any way they can match the opportunity in terms of compensation and upside? Typically, companies don't realize the value of someone until they're about to leave. And what I've always told everyone is, look, I hope that this experience makes me more valuable in the marketplace. And occasionally people leave, and that's a good thing. But I want to know before you're leaving because what I don't want is someone to leave for something that they could have had here. "I'm leaving because I want to manage people." It's like, well, boss, why didn't you tell me you can manage people here? So, I think my initial recommendation is: one, find a group of people to talk to about it. And two, maybe go back to your current company, tell them about this offer and see if they can match it. And then you get to stay at a company that sounds more aligned with your personal values and also you get the compensation in the role, or maybe use this as a jumping-off point to try and get a job at a similar compensation. You're clearly worth this. The market has said you're worth this. So you're likely worth it at a company where you would have fewer philosophical problems. But if at the end of the day you decide to take this job and go to an online gaming company — this company, what they're doing is legal. We're in a capitalist society. You have an obligation to develop economic security for you and yourself. So, I'm certainly not going to judge you and nor should others. So, talk to some people, see if you can get your current company to match the compensation. And if you do decide to go to this company, forgive yourself, do a great job, and recognize we live in a capitalist society, and everything's a bit of a trade-off, and you just have to decide what are the trade-offs you're comfortable with. Appreciate the question.
Our final question comes from Tabas Punk on Reddit. "I'm about to enter consulting recruiting from a top MBA program after eight years in the military. When you were running different consulting firms, including Profit and L2, what were the key traits and attributes you were looking for in interns and new hires?" Most generally, we were looking for smarts. We were looking for someone who had a lot of presence, who could be good with clients, and someone who could demonstrate just real intellectual rigor. We asked for work samples. We gave them consulting assignments. We'd say, "Okay, Williams-Sonoma is thinking of launching a brand for the home office trend called West Elm. Write up a three-page assessment of the opportunities, the risks, and the critical success factors on launch of the brand." And we'd see what they came back with, which would be more challenging in a world of AI. But we did — we were snobs. We were looking for people from good schools, although we toned that down. We were looking for candlepower, someone that it looked like would be good with clients. So, you know, we were looking for impressive people, quite frankly. We did an analysis at L2 of who were the most successful people, who were the stars. You don't say this out loud, but my general theory is that 10% of your employees add 120% of the value and the other 90% are negative 20, and that is they just take a ton of time to manage and they're okay, not great. By the way, you can't just scale with A players. A players want equity and there's only so much equity in a company. A players want to feel like they're part of a senior management team. There's only so many spots in the senior management team. So, it's not that you don't need B players. Every company — Google has B players. So does Amazon. Amazon and Google both have people that are just okay to good, and you need those people to scale because people who are outstanding all want a lot of equity and want to be an SVP or they'll go be a founder or a senior player somewhere else. Oh, back to the people who were successful at L2. We did an analysis of those 10% that were really good, and three things were common, and we couldn't write this down, obviously. First, a disproportionate number of high performers were female, and a lot of data just shows that a woman's prefrontal cortex matures before a man's, more going to college. So, what do you know? We had more candidates that were qualified, that demonstrated a certain level of business maturity, that were female. Two, they went to elite schools. Oh, you don't like to hear that? No, supposedly it doesn't matter anymore. Well, yeah, it does. The admissions departments at these schools — when a school has a 4% admissions rate, the people who get through that filter are one of two things: very, very rich or very, very impressive. And the majority of them are the latter. So, we hired a lot of women from elite schools. And then the third thing was that they were oftentimes athletes. So, a woman who was a gymnast from Yale — boom, automatic hire. And that's not to say we didn't hire men. It's not to say we didn't hire non-athletes, but the people in charge of hiring and recruiting had a tendency to be very drawn to, you know, one or more of those attributes. That's what we found. That was obviously a pretty limited sample size. L2 was about 120 people. But you can — what I would suggest is that you can be fooled pretty easily in the interviewing process, and that you run them through a pretty rigorous testing process where you ask them to do the work they're going to be doing and see what they come back with. Congratulations on the role. That's all for this episode. To submit a question for next time, email a voice recording to
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