some thoughts on why labs are good businesses 1) absent nationalization, the frontier labs are wonderful businesses; the reason for this is that controlling access to the best model is an enormous advantage 2) frontier models are data + compute + labor, and research agents are increasingly substituting for labor; so frontier labs have an advantage training models 3) this advantage is tied to the extent of their lead, and having the frontier model also lets them do things like better distillation and better inference optimization 4) this means that not only can frontier labs charge oligopoly rents on their frontier models, which automate the most labor, but they can compete on the low end too 5) a model like opus-5.5 can only be purchased from a frontier lab, and a model like haiku (eci 159) ends up about as strong as kimi-k3 (eci 158) 6) so frontier labs end up with excellent economics both on their frontier models, where they have oligopoly rents, and on their cheaper models 7) because the businesses are so capital intensive, it is extremely hard to compete with them; neolabs can’t match the scale of experiments frontier labs run 8) and even if someone comes up with a cool product idea, like jev, it is extremely easy for frontier labs to copy it at short notice, do it better, and run it cheaper 9) so it’s very hard to compete with a frontier lab, or to spin up another competitive lab 10) and pure inference providers can’t match their inference optimization 11) also, because they have the earliest access to models, they can acclimatize their businesses before everyone else; we see this now with agent usage 12) so it ends up being hard to get too far in front of them, even on the product side; they are power users of their own products and can see ahead 13) the best arguments for why frontier labs are bad businesses are normally some combination of open source and interchangeable products 15) the first idea is that frontier models will eventually saturate the relevant tasks, then open source models will saturate them too, and then frontier lab margins will get crushed 16) but this doesn’t happen; tasks just get bigger, so they never end up saturated; there is always some bigger thing you want a model to do, until the end 17) and, as already described, frontier models let you compete with open source models on inference margins using your small models, with little additional r&d 18) the second idea is that the labs all have interchangeable products, so they will compete each other down on price 19) but demand for frontier intelligence exceeds supply, there are few providers, the barriers to entry (as already described) are very high, etc. 20) also, the labs can always decide to commercialize differently, like competing directly in application verticals 21) we are already seeing this with things like claude legal, which in the limit will be very hard to compete with, and also with anthropic's bio efforts 22) and labs will always be able to choose the best way to commercialize: equity arrangements, profit sharing, direct competition, etc. 23) and having advance access to the best model, will always give a large advantage to whomever they give access; unaligned companies will have a very hard time 24) notice, i said all of this *absent nationalization* and as i have said many times elsewhere, i expect some level of nationalization soon, just reading trends 25) but, i think people do need to understand *in the abstract* why these are very good businesses, why anthropic is valued at $2t etc 26) oh also, data, people talk about access to valuable data a lot; the thing is, there is very little valuable data in the world to which anyone has exclusive access 27) and, most of the necessary data is already in the model; anthropic will only spend ~$1b on data this year, relative to like ~$30b on compute 28) and the percentage of compute they spend on data has been trending down, like 9% of r&d compute in 2024, 7% in 2025; 3% in 2026 28) this is because the frontier labs can generate synthetic data to target most tasks, get agents to build their own environments, etc... 29) so, it is hard to imagine that the labs will end up unable to extract rents from service or application companies because the latter have data the frontier labs do not