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Can this A.I. startup bring back the three-martini lunch?



Can this A.I. startup bring back the three-martini lunch?

This is the web version of Eye on A.I., Fortune’s weekly newsletter covering artificial intelligence and business. To get it delivered weekly to your in-box, sign up here.

Imagine the life of an advertising executive and a scene from Mad Men is likely to come to mind: Don Draper snake-charming a pair of Kodak marketing executives with a perfectly crafted pitch about the emotional pull of nostalgia (“It’s delicate, but potent…”) in order to win the account for their new slide projector. “This device isn’t a spaceship,” Draper tells the entranced Kodak men of their slide carousel in one famous pitch from the television show. “It’s a time machine.”

Well, it turns out, those days have mostly gone the way of three-martini lunches, skinny ties, smoking in the office, and widely-tolerated workplace sexual harassment. In the digital era, instead of a high-stakes, high-wire act focused on high concepts, advertising has largely been reduced to a volume game. Marketing departments or creative agencies have to churn out dozens or hundreds of variations of digital ads for Facebook, Instagram, or web banners, each with slightly different imagery, display copy, and calls to action, and then conduct a series of A/B experiments to figure out what works for a particular target audience. It’s a slog.

A few weeks ago, I wrote about one company trying to use machine learning to take a bit of the drudgery out of this work, helping to automate the testing of different ads. Today, I want to talk about another: Pencil, a startup that is actually using A.I. to create the ads themselves. Based in Singapore, but with employees working remotely across the globe, Pencil automatically generate dozens of six, ten or 15-second Facebook video advertisements in minutes.

“The ad industry has been moving from big ideas to small ideas,” Will Hanschell, Pencil’s co-founder and chief executive officer, tells me. “Instead of a Superbowl ad, a multi-million dollar blow out once a year, it is increasingly about very small, online ads. And in that environment, you have to run 10 ads and throw out the nine that don’t work and start again with another 10. That has made the job unfun for a lot of creative people.”

Pencil hopes it can free up these creative folks to work on the big picture while A.I. does the rest. “It cuts videos into scenes, generates copy, applies animations and then uses a predictive system that looks at variety and tries to determine what feels most on-brand and looks similar to things that have worked in the past for the brand,” Hanschell says.

A company gives Pencil’s software the URL of its website, and that software automatically grabs the logos, fonts, colors and other “brand image information” found there to use in a business’s ads. It can use images from the website or a business can choose to provide the system additional images or video. It uses sophisticated computer vision to understand what is happening in an image or a video so that it can match that to ad copy. To write the copy itself, Pencil uses GPT-3, the ultra-large natural language processing A.I. built by OpenAI, the San Francisco A.I. research firm.

Hanschell says that when Pencil started out, using GPT-3’s predecessor, GPT-2, the ad copy it generated was usable only 60% of the time. Now, with GPT-3 and better understanding of how to use the existing web copy to prompt the system, Hanschell says the system generates usable copy 95% of the time. What’s more, the system can actually generate novel ideas, he says. For instance, for a company that sells protein powder, the system can come up with ideas around energy, but it can also come up with ideas about the morning ritual or fitness, he says.

I watched a demo of Pencil’s software in which it created a series of Facebook ads for an eyeglasses company. It came up with the tagline, “Your frames, your way,” as well as, “Your wildest looks, perfectly crafted,” each paired with appropriate still images. Not exactly Don Draper. But not bad. And as Hanschell points out, in the volume game of today’s digital advertising jungle, plenty good enough to start acquiring customers.

What’s more, the system can provide a prediction for how good a particular ad will do compared to what the company has run in the past. For instance, it forecast that the “Your wildest looks, perfectly crafted” ad would do 55% better than previous ads the same company had run. That’s something most human ad executives can’t do.

Pencil is already being used by about 100 companies, including some big multinationals such as Unilever. It is a good example of a new generation of products—and even whole businesses—that are being made possible by rapid advances in natural language processing, or NLP. (For more on this, check out the latest episode of Fortune’s Brainstorm podcast. Also, last year, my Fortune colleague David Z. Morris wrote about several other companies using A.I. to automatically craft or refine digital ads. )

But at the same, a growing number of ethical concerns are being raised about these underlying NLP systems. For instance, GPT-3, despite all of its seeming power, still fails simple tests of common-sense reasoning. It also has a problem with bias: Because it was trained on the entirety of the Internet, there’s a good chance it may have picked up a tendency to write sexist or racist prose.

One area where OpenAI itself has already acknowledged a problem: The system can exhibit a clear anti-Islamic bias, with a tendency to depict Muslims as violent. A recent paper by two researchers at Stanford found that in more than 60% of cases, GPT-3 associated Muslims with violence—and that the system was more likely to write about Black people in a negative context.

This lead the tech journalist David Gershorn, who covers A.I. for tech site OneZero, to question why OpenAI would allow it to be used in a commercial setting and why OpenAI’s investor and partner, Microsoft, would be incorporating GPT-3’s capabilities into its own products. How broken does an A.I. system have to be, Gershorn asked, before a tech company decides not to release it?

I asked Hanschell about the problem of potential bias. He noted that OpenAI had developed filters that screened out some of the worst examples. And he said that in Pencil’s case, no ads are ever run without a human approving them first. “One of the principals of this is that we wanted a human to be in control at all times,” he says.

So I guess maybe we can’t get back to those three-martini lunches quite yet. There’s still work for us to do.

With that, here’s the rest of this week’s A.I. news.

Jeremy Kahn


Coinbase’s near-term outlook is ‘still grim’, JPMorgan says, while BofA is more positive about firm’s ability to face crypto winter



Coinbase's near-term outlook is 'still grim', JPMorgan says, while BofA is more positive about firm's ability to face crypto winter

Coinbase is well positioned to successfully navigate this crypto winter and take market share, Bank of America said in a research report Tuesday. It maintained its buy recommendation following the exchange’s second-quarter results.

The results warrant “a muted stock reaction,” the report said. Net revenue of $803 million was below the bank’s and consensus estimates, while its adjusted $151 million loss before interest, tax, depreciation and amortization was better than the street expected. Importantly, the company remains “cautiously optimistic” it can reach its goal of no more than $500 million of adjusted EBITDA loss for the full year, the report added.

Coinbase shares fell almost 8% in premarket trading to $80.74.

Bank of America notes that Coinbase had no counterparty exposure to the crypto insolvencies witnessed in the second quarter. The company also has a “history of no credit losses from financing activities, holds customer assets 1:1, and any lending activity of customer crypto is at the discretion of the customer, with 100%+ collateral required.” These rigorous risk-management practices will be a “positive long-term differentiator” for the stock, the bank said.

JPMorgan said Coinbase had endured another challenging quarter, while noting some positives.

Trading volume and revenue were down materially. Subscription revenue was also lower, but would have been much worse were it not for higher interest rates, it said in a research report Wednesday.

The company is taking steps on expense management, and in addition to the June headcount reductions, is scaling back marketing and pausing some product investments, the note said.

The bank says the company’s near-term outlook is “still grim,” noting that the exchange expects a continued decline in 3Q 2022 monthly transacting users (MTUs) and trading volumes, but says Coinbase could take more “cost actions” if crypto prices fall further.

JPMorgan is less optimistic than Bank of America about the company in the near term, saying pressure on revenue from falling crypto markets will have a negative impact on the stock price. Still, it sees positives including higher interest rates, from which the firm will generate revenue. It also sees opportunities for the exchange to grow its user base, leveraging almost $6 billion of cash. The surge in crypto prices in July, and the forthcoming Ethereum Merge are also seen as positive catalysts, it added.

The bank maintained its neutral rating on the stock and raised its price target to $64 from $61.

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Elon Musk sold $6.9B in Tesla stock in case he’s forced to buy Twitter



Elon Musk sold $6.9B in Tesla stock in case he's forced to buy Twitter

Elon Musk sold $6.9 billion of his shares in Tesla Inc., the billionaire’s biggest sale on record, saying he needed cash in case he is forced to go ahead with his aborted deal to buy Twitter Inc.

“In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock,” Musk tweeted late Tuesday after the sales were disclosed in a series of regulatory filings. 

Asked by followers if he was done selling and would buy Tesla stock again if the $44 billion deal doesn’t close, Musk responded: “Yes.”

Tesla’s chief executive officer offloaded about 7.92 million shares on Aug. 5, according to the new filings. The sale comes just four months after the world’s richest person said he had no further plans to sell Tesla shares after disposing of $8.5 billion of stock in the wake of his initial offer to buy Twitter.  

Musk last month said he was terminating the agreement to buy the social network where he has more than 102 million followers and take it private, claiming the company has made “misleading representations” over the number of spam bots on the service. Twitter has since sued to force Musk to consummate the deal, and a trial in the Delaware Chancery Court has been set for October. 

In May, Musk dropped plans to partially fund the purchase with a margin loan tied to his Tesla stake and increased the size of the equity component of the deal to $33.5 billion. He had previously announced that he secured $7.1 billion of equity commitments from investors including billionaire Larry Ellison, Sequoia Capital, and Binance. 

“I’ll put the odds at 75% that he’s buying Twitter. I’m shocked,” said Gene Munster, a former technology analyst who’s now a managing partner at venture-capital firm Loup Ventures. “This is going to be a headwind for Tesla in the near term. In the long term, all that matters is deliveries and gross margin.”

At the weekend, Musk tweeted that if Twitter provided its method of sampling accounts to determine the number of bots and how they are confirmed to be real, “the deal should proceed on original terms.” 

Musk, 51, has now sold around $32 billion worth of stock in Tesla over the past 10 months. The disposals started in November after Musk, a prolific Twitter user, polled users of the platform on whether he should trim his stake. The purpose of the latest sales wasn’t immediately clear.  

Tesla shares have risen about 35% from recent lows reached in May, though are still down about 20% this year. 

With a $250.2 billion fortune, Musk is the world’s richest person, according to the Bloomberg Billionaires Index, but his wealth has fallen around $20 billion this year as Tesla shares declined.    

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The rent is too d*mn high for Gen Z: Younger generations are ‘squeezed the most’ by higher rents, BofA says



The rent is too d*mn high for Gen Z: Younger generations are 'squeezed the most' by higher rents, BofA says

Most of Gen Z is too young to remember the 2010 New York gubernatorial candidate Jimmy McMillan.

But over a decade later, they would probably agree with his signature issue (and catchphrase): the rent is too damn high.

This July, median rent payments were 7.4% higher than during the same period last year, according to a Bank of America report released Tuesday. 

The national median price for a one-bedroom apartment has been hitting new highs nearly every month this summer. It was $1,450 for July, according to rental platform Zumper. In the country’s largest city, New York, average rent exceeded a shocking $5,000 a month for the first time ever in June. 

But inflation in the rental market hasn’t hit each generation equally, and no one is getting squeezed harder by the higher monthly payments as Gen Z. Those born after 1996 have seen their median rent payment go up 16% since last July, compared to just a 3% increase for Baby Boomers, BofA internal data shows. 
“Younger consumers are getting squeezed the most by higher rent inflation,” BofA wrote.

The great rent comeback

Early in the pandemic, landlords slashed rents and gave significant COVID discounts to entice tenants to stay instead of leaving urban areas. Once those deals started expiring in 2021, many landlords suddenly raised payments once again, sometimes asking for over double their pandemic value. 

Young people across the board have been hit hard, and rent burdens compared to age can be seen even within a single generation. Younger millennials had their median rent payment grow 11% from last year, while the median payment for older millennials rose 7%. Gen X experienced a 5% median rent increase, according to BofA. 

It’s not a surprise, then, that Gen Z feels so strapped for cash. The majority of young people, 61%, said they want to receive their wages daily instead of twice a week, a practice typically reserved for workers living paycheck to paycheck, according to a report from the Center for Generational Kinetics, which specializes in research across the generations. Rising rent inflation has even priced nearly a third of Gen Zers out of the apartment search altogether. Around 29% of them have resorted to living at home as a “long-term housing solution,” according to a June survey from personal finance company Credit Karma.

It’s no wonder—the rent really is too high.

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