AAPL en fuego

That's kind of the baffling thing in all this… because the limitations are very clear — Apple has little to no interest in growing market share into the "makes no money" segment of the market which, at this point, is all that's left, because Apple is hoovering up all the money in the profitable bit of every market in which they choose to compete. Is the stock market betting on Apple aggressively moving into low-margin, low-profit market segments? They certainly haven't been paying the slightest attention to Apple's strategy for multiple decades if that's what they think…
Right. Over in the BF in a discussion of the value of marketshare as a measure of dominance, I argued that a platform is dominant if it forces competitors to respond to them, more than they need to respond to competitors. And marketshare is so unimportant as a metric that if at any point since 1997, you had looked at Apple and their competitors and invested based on who had the most marketshare, you'd have bought a bit in the iPod era (but still rejected Apple due to Mac share to others), and some in the Watch era (and rejected Apple due to Mac, phone, tablet share). You'd have bought a lot of Nokia and HP. You'd have lost a lot of money.

Apple has always had a strategy of starving competitors of margin. What you can invest in competing - R&D, etc. comes from what you have left after covering COGS and overhead. The low-end of every market is also the low margin end of the market. You might beat Apple on revenue, but after you've covered COGS and overhead, you have relatively little money left, so your ability to out-engineer Apple keeps shrinking. If you find yourself behind them, you kind of need a eureka moment that delivers disproportionate value, and those are exceedingly rare. If you are a retail chain, then kind of who gives a shit. If you are a technology company, that's your ability to compete.

Apple's market cap increased ~10x more on Friday than the company was worth when I first invested in it. I thought it was a safe buy in early July '97 - company was trading below its liquidation value on rumors that Steve sold his last shares in June, which was confirmed in August. But there were rumors Amelio was going to be out and Jobs in. In Sept he was announced as iCEO. Had no idea they'd wind up here.
 
Well you have to wonder how much more upside there could be.

This past year, iPhone sales kind of stalled but Apple still beat lowered forecasts.

They're going to need growth from somewhere. A couple of months back, there were indications that Mac sales had may not have been robust. In fact, you see all these little articles about discounts.

OTOH, I heard that there are like 450 million iPhones which are more than 2 years old so there may be another big upgrade cycle coming in the next year or two.
  1. "Emerging" markets, with "emerging" firmly in quotes. iPhone has limited penetration in China and India, but both have middle classes that could consume a large number of iDevices in the future, especially if those devices are made in-country.
  2. Health. If AAPL can crack transdermal glucose monitoring and have any significant period of market exclusivity/leadership, that's $$billions right there.
  3. Finance. I once thought AAPL could monetize the data from a rich transaction history, but I now concede that Tim has waved that away as a matter of principle and of differentiation. But that doesn't mean that AAPL can't make money on transaction volume. They don't seem to doing much of that now, but they should do more. @johnsonwax, how much advantage is there to the merchant for taking contactless payment vs. a traditional card swipe?
 
@johnsonwax, how much advantage is there to the merchant for taking contactless payment vs. a traditional card swipe?
The fees for the former will be roughly half of the latter for smaller purchases. As the value of the thing goes up, that difference goes away because the transaction cost drops relative to the entire purchase cost.

The underlying driver is a bit nebulous right now. ApplePay came out right at the time of the liability shift - when the card networks were going to shift liability from the issuing bank to the merchant. That was intended to get the merchants to knock their shit off and crack down on their own verification efforts and to back systems that reduced fraud. Apple helped sell ApplePay to the banks because it allowed them to treat every transaction as a card present with actual verification transaction (remember when they'd actually check your signature on the back of the card?) That liability shift did help along with the other mechanisms to reduce the total fraud in in-person purchases which has helped close that gap a bit.

Online is where the big gap remains. Most online retailers don't have anything better than card on file, which is the highest fee structure, but ApplePay along with the various Visa online purchase verification systems (that best as I can tell nobody uses because they're cumbersome) get billed as card present. Contactless really has no solution for online purchases relative to ApplePay.

But the reduction in fraud has also caused that liability to shift further - with the card networks taking on more of that role particularly for online purchases since the overall fraud amount has fallen. Amazon does a kind of backend ApplePay like tokenization, as does Apple, and I think a few others now, so where you buy matters a lot on that.

But for small purchases like a coffee, it could be 10% or so of the total purchase amount between ApplePay and a swipe. That's a LOT to a retailer.
 
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Apple take a cut off every Pay transaction.
So what?

Apple also takes 30% out of App Store sales.

I’m saying I don’t see Apple pushing for volume. It seems slightly at odds with their advertised goal of being fiscally responsible:
[Apple Card Family allows you to] build credit as equals.13Participants14 18 and older can choose to start building their own credit history,15 and teens can learn better spending habits


Apple Card eliminates fees,3provides innovative tools for managing your spending and reducing your interest, helps you build your savings, and as an Apple product, is designed to set a higher bar for privacy and security. All in the name of helping you and your Apple Card Family4 live a more financially healthy life.
 
So what?

Apple also takes 30% out of App Store sales.

I’m saying I don’t see Apple pushing for volume.

Agreed.

I was just pointing out that they are making money on transaction volume. Not necessarily as a goal, but probably enough to annoy banks. Apparently, enough to annoy them into lobbying the EU to force Apple to open up their NFC for other wallets — even though that means breaking the simplicity of having a single wallet accessible via a single universal gesture/control.
 

wco81

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Well there was a notice that Goldman Sachs is looking to get out of Apple Card.

Back in the day, one of the first cards to offer 2% cash back was the Schwab Visa and they did it for 1-2 years before they bailed.

The cash back and points are nice but the merchants pay higher fees which they may or may not pass down to customers. There used to be cash discounts but you don't see that much anymore.

A restaurant owner has to choose between paying higher credit card fees vs. hiring someone, maybe an armored car, to take the cash receipts to their bank. Or take the risk of doing it themselves -- armed robbery of small business owners doing that is not unknown.
 

iPilot05

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Well there was a notice that Goldman Sachs is looking to get out of Apple Card.
Goldman is getting out of all of their consumer banking products like Marcus. So I'm not sure how much of this is due to Apple and how much is due to Goldman.

No doubt Apple drove a hard bargain when they set up this partnership but I doubt it was to the point of insolvency for the bank. AppleCard just isn't that crazy of a deal either so there was plenty of room for profit all around. If anything I wonder if the contract is coming up and Goldman just simply didn't want to compete for renewal or couldn't outbid AmEx or whoever takes it over.

Ironically AmEx befell that same fate with Costco which, if you want to talk about raking their banking supplier over the coals, ran a master class when they switched their entire membership from AmEx to Citi. I could see AmEx being especially aggressive to court Apple simply to claw back some of what they lost when Costco walked.
 
Google doesn't need China to manufacture their bits. There is no way Apple could function at remotely the same level it does now without being able to manufacture in China. There are a billion articles on this, but it goes way, way beyond inexpensive labor. It's production engineers, supply chain, mid-level production managers, etc., etc., etc., that can spin up a new production line and make a million units of X in a matter of days and weeks instead of months.

It'll be a decade before any other country can even modestly approach the level of manufacturing prowess that China demonstrates on a daily basis.

Everyone sees this now; Tim Cook was prescient enough to see it 20 years ago.
More on this:

"We don't have the port facilities (in India) that China does. We don't have the road facilities that China does. They have been doing this for the last 30 years, their efficiency levels are much better than ours," Hedge said.
 
W.R.T. India, I suspect the bigger issue is bureaucracy, red tape and good helping of corruption that gets in the way. The Chinese communist party can order roads and ports to be built with just a sweep of their hand, screw the property rights of any poor peasants who may be living on that land. Not so in India. Want a highway built in India? That will be couple years to study the feasibility, another year or so for engineering, then ~10 years in the Court system to evict the folks who may be living (more likely illegally squatting) on that land. And you have to grease palms every step of the way, from the lowly clerk that stamps your application to the politician who approves your project to the authorities who’s help you will need to evict the folks from the land after the courts finally decide and all appeals are exhausted. Then we can start building the highway for your toy factory.
 
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mklein

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Well there has to be efforts to diversify away from China. The covid lockdowns showed how dangerous is is to rely on one country, and if things implode with Taiwan then there needs to be be other options, such as Viet Nam and India. But China doesn't like companies moving on elsewhere so they will attack the process. Easy in, battle to leave.
 

wco81

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Well there has to be efforts to diversify away from China. The covid lockdowns showed how dangerous is is to rely on one country, and if things implode with Taiwan then there needs to be be other options, such as Viet Nam and India. But China doesn't like companies moving on elsewhere so they will attack the process. Easy in, battle to leave.
If the Chinese invade Taiwan, not only would they commandeer commercial fleets for military operations, all the traffic across the Pacific would likely be disrupted.
 

Hap

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But China doesn't like companies moving on elsewhere so they will attack the process. Easy in, battle to leave.
Well, the chinese companies are the ones helping setup factories in India and Vietnam. I can't find it at the moment, but there was an article where they were complaining about Indian work ethic and approaches.
 

wco81

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Closes at ll-time high a day after the Apple Intelligence presentation.

OK, it was hitting highs the past couple of weeks, in anticipation of their AI strategy.

So Apple is now riding the AI hype train, which I think is way overdone but it’s made MS, NVDA and APPL the three most valuable companies in the world with META also seeing a huge valuation jump for their AI as well.

Watched a Morgan Stanley analyst, who did not change his target of $217 or his best case price of $270.

He wants to know what Apple’s del with OpenAI is. Is it going to be a cost center — Apple pays Open AI — or a profit center?

He said if the latter, he wonders if it gets as big as the Google money which he calls $20 billion in pure profit.

He also said Apple may be able to inject other AI companies and play them against each other for the most favorble terms. Because the Apple ecosystem is the largest, most lucrative consumer technology platform.

Based on the chip requirements for Apple Intelligence, he says only 5% of the iphone installed base and only 8% of the iPad installed base will be able to get Apple Intelligence feature. Overall that would mean that only 25% of the installed base of 2 billion Apple devices would get Apple Intelligence features.

So will the owners of those other 1.5 billion devices upgrade them sooner because of Apple Intelligence? For now he believes they will but the number may be modest to reduce the average upgrade cycle from 5 to 4.8 years or reduce the average by 2-3 months.

For comparison, he says iPhone 12 and the introduction of 5G reduced the average upgrade cycle by .6 years.

Personally, I don’t see myself changing my upgrade plans because of AI. I am ready to upgrade a couple of devices but it will be for an M4 Pro or M4 Max Mac, not because the latest SOCs will be the bestest chip ever! for AI.

I will play around with the features but don’t know yet if I will use them regularly yet. The AI features I’m most interested in are photo processing in the iPhone Camera app, better Mail and Photos search (because these need a lot of improvement), maybe a more functional Siri.

New iPhone is going to give you some kind of improvements in computational photography so you get more with AI/ML anyways.
 

ant1pathy

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Based on the chip requirements for Apple Intelligence, he says only 5% of the iphone installed base and only 8% of the iPad installed base will be able to get Apple Intelligence feature. Overall that would mean that only 25% of the installed base of 2 billion Apple devices would get Apple Intelligence features.

So will the owners of those other 1.5 billion devices upgrade them sooner because of Apple Intelligence? For now he believes they will but the number may be modest to reduce the average upgrade cycle from 5 to 4.8 years or reduce the average by 2-3 months.

For comparison, he says iPhone 12 and the introduction of 5G reduced the average upgrade cycle by .6 years.
I'm so suspicious of 5G having moved the needle in any way whatsoever. A quality 4G connection was blazing fast and from my ~decade in cell phone retail consumers could not really care less about what flavor of cellular connection they were getting aside from "fast" or "not so fast". Feels like an analyst talking point that has gotten brain-wormed into repetition.
 

wco81

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5G was definitely a draw for me to upgrade. I probably would have upgraded anyways but it really was a thing.

I agree that fast 4G connections were good but it was in Europe where some networks touted hundreds of Mbps speeds. I'm not sure US carriers did all those later iterations of LTE.

I still believe that 5G will definitely improve my experience. So much that when I buy prepaid mobile data overseas, which is a couple of times a year, I will pay a little more for 5G prepaid data.

AI may or may not have as much impact on UX, at least the initial rollout of Apple Intelligence.
 
I can honestly say that the only time I notice 5G is when I’m on a 5G network that’s congested or has poor coverage, and in those cases, I notice it because it takes forever to fall back to LTE and start working again. I have the “Action Button” on my 15 Pro tied to a Shortcut that toggles LTE/5G, just so I can save myself the trip into settings.
 
Like Internet of Things, Self Driving Cars and Smart Home speakers, everyone is piling on they hype train only to see the bubble burst in a couple of years
That seems awfully shortsighted of you.

The use case of ML seems pretty solid to me. Why do you think Apple’s just piling on the hype train, vs actually making useful improvements using ML in order to sell more product?

I think the latter. Apple is going to make solid enhancements that will sell more iOS devices.
 
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dh87

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Closes at ll-time high a day after the Apple Intelligence presentation.

...

For comparison, he says iPhone 12 and the introduction of 5G reduced the average upgrade cycle by .6 years.

...

I will play around with the features but don’t know yet if I will use them regularly yet. The AI features I’m most interested in are photo processing in the iPhone Camera app, better Mail and Photos search (because these need a lot of improvement), maybe a more functional Siri.

New iPhone is going to give you some kind of improvements in computational photography so you get more with AI/ML anyways.

When I bought my iPhone 12 mini (which I intend to use until Apple makes another small phone), I was very much looking forward to its superior network connection that would facilitate making phone calls while on my daily walks. Instead, its network connectivity is much worse than the iPhone SE (original) that it replaced, and now the only people I can call while walking are people I've known for more than 30 years who are tolerant of the lost passages and repeated disconnects of my iPhone 12. (Everything in the iPhone works correctly. It just has worse reception than the SE.)

I was also looking forward to greatly improved photography. Photography is not improved much. In fact, for many of the most interesting photos, the iPhone imagines what it thinks the image is supposed to look like and changes the colors and lighting to match its conceptions. These usually ruin the photo beyond my ability to correct it in Lightroom. (I can sometimes make color corrections, usually by masking parts of the photo individually, but I can't fix the iPhone's standard oversharpening.) The iPhone has been using some type of AI to fix photos for years. Is there a reason that it will now be materially better? (I haven't watched the keynote yet.)

The third reason I bought the iPhone was for better battery life, and it does have that.

It's been a while since I posted in this thread. I will long since have been forgotten (even if the AAPL shares that I sold today generated a near-johnsonwax-range gain).

Edit: I note that most of the posts in this thread are from people who've been posting on Ars longer than I have.
 
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Agreed.

I was just pointing out that they are making money on transaction volume. Not necessarily as a goal, but probably enough to annoy banks. Apparently, enough to annoy them into lobbying the EU to force Apple to open up their NFC for other wallets — even though that means breaking the simplicity of having a single wallet accessible via a single universal gesture/control.
Banks love Apple Pay. Apple eliminated about 150 basis points of fraud in return for a 15 basis point cut. They'll take that trade every day.
 
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When I bought my iPhone 12 mini (which I intend to use until Apple makes another small phone), I was very much looking forward to its superior network connection that would facilitate making phone calls while on my daily walks. Instead, its network connectivity is much worse than the iPhone SE (original) that it replaced, and now the only people I can call while walking are people I've known for more than 30 years who are tolerant of the lost passages and repeated disconnects of my iPhone 12. (Everything in the iPhone works correctly. It just has worse reception than the SE.)

I was also looking forward to greatly improved photography. Photography is not improved much. In fact, for many of the most interesting photos, the iPhone imagines what it thinks the image is supposed to look like and changes the colors and lighting to match its conceptions. These usually ruin the photo beyond my ability to correct it in Lightroom. (I can sometimes make color corrections, usually by masking parts of the photo individually, but I can't fix the iPhone's standard oversharpening.) The iPhone has been using some type of AI to fix photos for years. Is there a reason that it will now be materially better? (I haven't watched the keynote yet.)

The third reason I bought the iPhone was for better battery life, and it does have that.

It's been a while since I posted in this thread. I will long since have been forgotten (even if the AAPL shares that I sold today generated a near-johnsonwax-range gain).

Edit: I note that most of the posts in this thread are from people who've been posting on Ars longer than I have.
Well, my story isn't finished being written. Today was a good day - my quest to balance my portfolio remains elusive. At least one analyst understood what just happened and upgraded the stock.

Congrats on the sale.
 

japtor

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I'm so suspicious of 5G having moved the needle in any way whatsoever. A quality 4G connection was blazing fast and from my ~decade in cell phone retail consumers could not really care less about what flavor of cellular connection they were getting aside from "fast" or "not so fast". Feels like an analyst talking point that has gotten brain-wormed into repetition.
The 12 was also a major redesign year, the first in a while. I know "major" is doing a lot of work in that sentence but it's all relative. Anyway redesigns have historically provided a decent bump iirc. Looking it up, the standard line went from LCD to a higher res OLED w/HDR, had various camera bumps as always, and introduced night mode to the regular 12 camera and front cameras, more night mode stuff for the 12 Pro, and of course that got lidar too. And MagSafe!

And the 12 mini! That last one really did it for sure! Look at all those iPhone minis out there! (😭)

But yeah 5G was a thing. Carriers did advertise the shit out of it so I'm sure it did play a part, but the 12 series already had various stuff going for it besides 5G.
 
I have yet to see how these big AI firms can monetize their tech. Nvidia and Apple sell hardware. But I don’t see so far how the aAI firms justify the run up in their valuations
They can’t. It’s like trying to monetize a compiler or an FTP client. All they can do is embed it into their existing products and charge more for it.
 
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wco81

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More AI froth today, so thought I’d better take some profit with a sale of part.

I think where AAPL could disappoint is if greater sales don't materialize after FY Q1, that is the Christmas quarter with iPhone 16.

The thesis driving the stock yesterday and today, and maybe the past couple of months, is that AI will make people upgrade.

So they will look for evidence with the new products.

But will they have Apple Intelligence rolled out in China by the Christmas quarter? Also will the PRC leave it alone or try to block some features?
 
Oooooh. I'd love to share that factoid with a few people. Do you have a reference? Or is this inside-ish info?
It's not insider-ish. But that info came from a dive into the financial services trade discussions taking place between 2013 and 2015 - just before ApplePay and just after, where their 'I'm a retired financial services exec now doing analysis' folks were talking about the landscape around the merchant payment systems like MCX, some of whom were involved in the ApplePay rollout. They were very familiar with how the different merchant fee tiers operated, how Apple was making use of that, and what the internal cut of every partner was.

Bottom line was that every ApplePay transaction would be treated as a 'card present' transaction (lowest merchant fees) including the web. based ones (unheard of), and that everyone kept their cut except for the issuing banks who were giving up those basis points to Apple, but because they were keeping the lion share of the fee to cover fraud, this was a trade they were happy to make if Apple's claims held up - and there was some insurance provision on that. The projected cost savings of covering fraud, which to some degree had been overshadowed by the cost of card reissues to everyone who had ever stopped into a Target or Home Depot (as much as $20/customer) made Apples cut pretty easy to accept - and more importantly it stabilized their revenue because they wouldn't have to randomly pay for a massive card reissue. Those costs were getting recouped to a large degree by lawsuits, but they were still 'oops, we didn't hit earnings' events for many.

My dad was CEO of his credit union for some time prior to this and gave me the rundown of their revenues off of these vehicles. His credit union was too small to take on credit card issuing without getting completely massacred in one of these events, but he confirmed roughly how it worked from the banks side. Debit cards, particularly if you had your own ATMs was a more stable revenue stream for them, and if they could either grow or if the credit card costs could be mitigated, then that would have been something they could take on. The problem is that the bank can't force their customers to use ApplePay - they still have to issue a conventional card, and it was a few more years before the whole arrangement calmed down enough that the issuing bank wouldn't take an absolute bath when some major retailer fucked up.
 
I have yet to see how these big AI firms can monetize their tech. Nvidia and Apple sell hardware. But I don’t see so far how the aAI firms justify the run up in their valuations
So, I have this kind of grid in my head where I slot different technologies - whether they are features or products, whether they are local (to the customer) or global (outside of the customer), whether they are IP moats or commodities. Apple never owns commodities - they hire that stuff out - assembly, foundry, etc. Commodities just represent risk to Apple, and they can use their cash position to control those markets pretty well and benefit from being able to switch suppliers. They build vertically on the IP moats. Apple also usually hire out the global stuff, like search, but not always. They took on maps, which was global. They're doing entertainment content which is global. iTMS was global. They're really selective here, and frankly entertainment doesn't fit their model - at least not yet (and possibly never).

AI is overbroad for this grid. It has both feature and product elements to it. There's going to be a lot of enterprise product here, but I think at the consumer level it's all features - something that augments existing product segments. 'Generative fill' isn't a product, it's just a value-add to Photoshop. One thing that Apple actively does is take products and turn them into features as value-adds to their products. Sometimes this look like Sherlocking, and sometimes it looks like Maps.

Apple's task here is to take all of the prospective consumer AI products that people are eyeing, and through control of silicon and OS move them on-board as features, either directly or via the App Store using onboard compute rather than remote. Basically these products will revert to features as Moores law overtakes them. Digital cameras stop being a thing once phones can get compact enough sensors and processing and then Apple can capture people's value purchase for having a nice camera on them. And I think Apple signaled well enough (despite all of the confusion) that the value proposition for the industry is as feature, not product.

OpenAIs failure is that they don't have a go-to-market strategy. They've been relying on hype and FOMO panic by companies like Microsoft, where I think Apple internally looked at ChatGPT and asked 'how do you productize this?' and didn't have an answer. I'm sure there's money in helping people cheat on their homework, but that's going to be short lived as instructors learn to give assignments that ChatGPT can't help them with. Eventually everyone will figure out how to address GPT spam. And that strategy is the most important thing to make - it's what Apple does better than anyone (though AVP has made me question their discipline on that).

So there will still be a product here directed at enterprise, but that's going to be a lot smaller than what the hype suggests. But if Apple is pushing those features on-device, that comes at the expense of Nvidia who represent this all being done on-server. And that market won't go away, but it's not going to be driving $3T valuations. Someone smarter than me is going to earn a Gulfstream by shorting Nvidia.

I think Microsoft understands this market, but until Monday the narrative of 'Apple is behind on AI' has instantly flipped to 'everyone else is behind on AI'. Microsoft has Copilot, but they aren't showing what Apple is showing. They've got the code completion stuff in their IDE as Apple is now introducing, and the ChatGPT hooks, but pretty much everything else is missing - including the entire mobile component because Microsoft has no phone presence. But their partnership with Qualcomm, the requirement for on-device NPU, all that indicate they get it, but they're behind. I don't think they'll stay behind for long, but Apple/Microsoft pulling the industry in the same direction is bad news for AI as product.
 

gabemaroz

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They can’t. It’s like trying to monetize a compiler or an FTP client. All they can do is embed it into their existing products and charge more for it.
Yup, even Google's internal memos acknowledge this.

Google "We Have No Moat, And Neither Does OpenAI"

I'm sure there's money in helping people cheat on their homework, but that's going to be short lived as instructors learn to give assignments that ChatGPT can't help them with. Eventually everyone will figure out how to address GPT spam.
Pedagogically, the response in the classroom to AI will probably be nothing but a net positive (in the long run) because it will require students to demonstrate deeper understanding on their feet in the classroom. As far as figuring out spam, I think it's more likely that spam itself will limit generative AI gains as AI models start drinking from their own polluted water. Explains why so many deals have been signed with media firms for training data – scraping the Internet writ large is increasingly dangerous for these models, leading to:

data inbreeding, with increasingly mangled, bland, and all-around bad outputs, something researcher Jathan Sadowski described as "Habsburg AI," or "a system that is so heavily trained on the outputs of other generative AI's that it becomes an inbred mutant, likely with exaggerated, grotesque features."

AI-Generated Data Can Poison Future AI Models
 
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