ChatGPT launched the AI era in November 2022. I launched the Internet era by starting the Interactive Age Daily in October 1994. (You date things your way, I’ll date them mine.)
Either way AI has been going on for a little over three years now. We’re now entering 1998 for the AI boom.
This means the AI bust is getting closer. (Picture made by Google Gemini.)
Everyone knows it’s going to happen. People think that knowing it’s out there means they can get out of its way. That’s what we thought about the Internet in 1998.
I learned the hard way. You can’t.
The AI bust will crash the whole market, including those “non-tech” stocks in your portfolio (Walmart). It will collapse the dollar, so don’t think of getting into bonds, either. It will also take out most foreign markets. Hints of a bust have already put wobbles into Bitcoin and silver, with gold on deck.
The boom depends on building data centers, which as I noted yesterday aren’t being properly accounted for. Google is doubling capex because of record earnings.
Investors like record earnings.
They wonder about the capex because the revenue side of AI is its weakest link. Customers must become willing to pay a lot more for AI than they presently pay for cloud services and software. It may be great to have Claude inside your Excel spreadsheet, but how much are can you pay for that?
Shaking Down the Cloud
The Cloud Czars think they can merely transfer their hype flag from OpenAI to Anthropic. But this chart shows how crazy that is. Anthropic thinks its revenue will grow 90% this year, to $18 billion, and that’s entirely possible. But if you think it’s then going to hit $148 billion in two years, I can sell you this lovely bridge across the East River.
To get past this math the Cloud Czars are shaking down their customers as fast as they can. Every service they provide is jumping in price. Music, video, software, you name it, online hyperinflation is here. Another 10% for Amazon Music, another 14% for YouTubeTV, oh and you must watch ads even on ad-free Peacock Plus, each time you enter a stream. It’s worse for enterprises. Their costs rose 36% last year. Anyone think that’s sustainable?
The cost of providing basic cloud services isn’t rising. It’s falling. Construction costs and software development costs for AI are climbing. Cloud Czars are now grabbing profits from all their older services to subsidize those AI investments that have yet to pay off. Amazon’s recent layoffs were all about covering the costs of AI.
The other day I described how, even at Google, this discrepancy between income and outgo is now hitting the balance sheet, in the form of ridiculous depreciation schedules. This is happening at even the strongest companies. Guess what’s happening with the weaker ones? For Oracle it means a deteriorating cash position. For Coreweave, Equinix, and the other big builders, the situation is worse. A lot of this is hidden by accounting tricks and private equity positions, but it’s a house of cards.
Marketing Won’t Fix It
Sunday will be the AI Super Bowl. On Monday everyone will be talking about how clever Anthropic was, running down OpenAI. The hype that surrounded OpenAI last year is now going to surround Claude. That has already started.
But the numbers don’t work.
When your spending plans are based on unrealistic expectations, there’s going to be hell to pay at some point. We’re still heading for a cliff with our eyes wide open. What’s on the other side is unknown.
