This may have been a contributing factor, but the reason the American frigates were successful in the War of 1812 was because they were significantly larger and more powerful ships, with more powerful cannons. They had material advantages in size (100% heavier), crew (50% more numerous), and firepower (30-50% more weight of shot). The crews were well trained (and included many former British navy able seamen, pressed from American merchantmen) but it was the material advantages that swayed these combats.
It was curious how effectively the American naval establishment gamed the European 'honor' system of naval warfare - they knew that if they kept these warships technically rated as 'frigates' (even though they were the largest and most powerful frigates ever built, similar in size to smaller ships of the line), the British would still try to fight them one on one with their frigates.
Yes, it was old growth southern live oak, which is harder and denser than the oak the British used in their warships. Hence the Constitution's apt nickname of "Old Ironsides".
It is a talent and a distribution play.
Talent: obvious.
Distribution: OpenAI believes the marginal token they sell will be accretive to their bottom line, so the goal then is to deliver as many tokens as possible. Windsurf already has 1k+ enterprise logos and allegedly millions of downloads. 2 m tokens × $0.00001 gross / token = $20/seat/mo; if windsrf runs 500k seats, oai books $120 m/yr gross @ 90% margin.
I saw a similar dynamic play out in the UK with Pub (bar) companies. By mid-2000s, the major players were failing. Margins were nearly zero, thanks to rising costs, and securlar decline in demand, plus they had too much expensive term debt.
But they represented profitable sources of distribution for the beer makers. So Heineken went on a buying spree. They didn't care about making money from the pubs themselves and were happy to run them break-even. This is because they then had a controlled channel of distribution for their beer (and they made a profit on every pint they shipped).
The switching costs are very different here, and the market is still so nascent. It is a thin product and vscode‑copilot can catchup. But 1% of enterprise value ($3bn of $300bn) is not a lot to gamble on owning the #2 horse in the most promising AI end market today.
I mention distribution in the post, and reasons to be skeptical of that as the primary driver (though I agree that may be the case)
Re talent, I'm not sure how big windsurf is, but aren't these teams generally quite small? $3b for a small team still seems quite high, especially since (afaik) their core area of expertise is more in UX and product than in ml research. That's not to say that UX and product aren't worth acquiring, just that the price tag is surprising if that's the primary justification.
Given Sam recently said he thinks consumer is going to be the valuable path, perhaps it is not too much to pay for a great ux/product team
"Ben Thompson: What’s going to be more valuable in five years? A 1-billion daily active user destination site that doesn’t have to do customer acquisition, or the state-of-the-art model?
It makes sense for OpenAI to overpay for wrapper companies that have distribution - a good analogy is British pub (bar) companies. By mid 2000s they were struggling. Low margins, rising cost base, expensive debt.
What saved them? Heineken. They didn't care if the pubs made much of a profit - they made positive margins on having people drink their beer at market prices. They just wanted to increase volume. So they bought up several major players. In 2008 they acquired Scottish & Newcastle's operations, later thought bought Star Pubs & Bars, which had 1,049 leased and tenanted pubs, and finally half of Punch Taverns.
The same strategy can work for OpenAI - buy up the wrapper companies, and make sure YOUR models are served to the user base.
"The company must change its mindset and become proactive in its approach to compliance. I have decided this can best be achieved by the imposition of a sanction that will serve as a deterrent to future non-compliant conduct by Star and other pub-owning businesses."
Nice analogy. Although a simpler way to say it is simply vertical integration, a known term for the phenomenon with a whole class of benefits.
One of those benefits brings to mind another analogy: Apple. The ai model and the tooling are kind of like the hardware and software. By co-developing them you can make a better product and certainly something hard to compete with.
Juice not worth the squeeze I imagine. 4.5 is chonky, and having to reserve GPU space for it must not have been worth it.
Makes sense to me - I hadn't founding anything it was so much better at that it was worth the incremental cost over Sonnet 3.7 or o3-mini.
