Matt Dratch(@DratchCap):Great post, I’d only add that competitive open source is already holding back lab ARR at different intelligence/price points. If the distillation crackdown slows near term growth but also weakens that competition, you have to update both sides, i.e. you can’t ding it twice. And half tongue in cheek... what is open source’s moat exactly? Cost, privacy, control, tuning... yada yada, and I get it. But this mostly rests on an acceptable capability gap which may be a prior that needs updating. If no more distillation + more scaling + RSI = a 24-48 month frontier lead, things will change dramatically. That seems hard to believe today but… this is all kinda hard to believe? And to the “we don’t need that kind of capability”... maybe for what you’re doing today. Let’s see what folks with bigger imaginations want to do once they have it :). BTW, the labs sell cheap intelligence too and a lot of open model benchmaxing hides that it’s more expensive than the sticker price in real world use. I think both will thrive but I also think most east coast investors have too low a probability on a frontier pull away scenario

2026.10.20 14:29

Great post, I’d only add that competitive open source is already holding back lab ARR at different intelligence/price points. If the distillation crackdown slows near term growth but also weakens that competition, you have to update both sides, i.e. you can’t ding it twice. And half tongue in cheek... what is open source’s moat exactly? Cost, privacy, control, tuning... yada yada, and I get it. But this mostly rests on an acceptable capability gap which may be a prior that needs updating. If no more distillation + more scaling + RSI = a 24-48 month frontier lead, things will change dramatically. That seems hard to believe today but… this is all kinda hard to believe? And to the “we don’t need that kind of capability”... maybe for what you’re doing today. Let’s see what folks with bigger imaginations want to do once they have it :). BTW, the labs sell cheap intelligence too and a lot of open model benchmaxing hides that it’s more expensive than the sticker price in real world use. I think both will thrive but I also think most east coast investors have too low a probability on a frontier pull away scenario

Just Another Pod Guy@TMTLongShort

2026.10.20 12:51

I’d estimate Ant was generating something like $5b of ARR directly from Chinese distillation efforts going into its September crackdown. I’d guess the entirety of that spend almost immediately shifted to OAI as the next best available model. Normally one would expect Sam to leave that ARR unchecked until they IPO as the recent angst around Ant coming in below the bogey demonstrates that investors shoot first and ask questions later. However the variable that you have to consider is that the state department likely had a lot to do with encouraging a crackdown behind the scenes as evidenced by rhetoric from Bessent and Lutnik prior to the Ant distillation blog post. So normally I’d expect for that distillation ARR to move from Ant to OAI to eventually MSL and then xAI as the Chinese desperately scramble for the most capable model they can freely ride on. But again that assumes there is no unifying force that upsets the game theory of distillation crackdown. One other component to consider is that we are only now moving from frontier model capabilities being as capable as the median knowledge worker to now starting to eclipse that baseline. One could argue that commoditizing the human baseline forces enterprises to adapt to an AI world far more quickly vs if you were to price tokens at human capacity and closer to human derived intelligence. What that does is prime enterprises by forcing them to disrupt existing workflows anyways simply due to cheap cost of human level intelligence which opens up budget for them to spend on frontier intelligence that far surpasses human intellect. As a maxi I believe that fast takeoff implies we are far closer to those classes of model vs what consensus believes and I also believe that in the next week or so we will get the early glimpse of it via Ant’s new model and OAIs likely fast-follow. At that point while bears will point to OAI NNARR slowing again even as Ant accelerates into November due to OAI crackdown on distillation I suspect the first glimmers of “knowledge worker in a box” will completely shift the narrative for EOY 2027 ARR which imho will end up closer to $1T vs current cons $400b As always, long compute 🫡

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