Speaker 1: Zone Media. I'm d Zetron and this is better offline.
Speaker 1: That's right, folks, We're back for the second part of
Speaker 1: our series in the dot Com Bubble and why I
Speaker 1: believe the AI Bubble could be much, much worse. While
Speaker 1: the dot com bubble was a mixture of dodgy venture
Speaker 1: capital deals and websites that could never turn a profit,
Speaker 1: combined with a global mania around the interconnectivity of high
Speaker 1: speed Internet companies, the AI bubble is one company selling
Speaker 1: expensive aigpus, a bunch of companies building data sentence to
Speaker 1: put them in, and a bunch of companies building shit
Speaker 1: that runs on GPUs that only loses money and that
Speaker 1: customers kind of fucking hate. I should also note that
Speaker 1: a very important part of the story is venture capital's
Speaker 1: lack of returns in the last few years, something I
Speaker 1: covered in the Hitter financial Crisis last week, specifically in
Speaker 1: parts two and three. In simple terms, AI startups now
Speaker 1: make up more than half a venture investment, and I
Speaker 1: believe that most of these stops will die because of
Speaker 1: their horrible margins, no part to profitability, and products that
Speaker 1: people really don't want to pay for its scale, and
Speaker 1: when they die, they will leave venture capitalists stranded with
Speaker 1: tons of dead equity at a time when they already
Speaker 1: have trouble generating returns and thus raising money from their
Speaker 1: limited partners. The result, I worry, will be gruesome. Venture
Speaker 1: capitalists make their money through the fees they generate, which
Speaker 1: are based on the value of their investments and the
Speaker 1: returns they give their investors, which don't seem to be happening.
Speaker 1: What do you think happens when they can't generate any
Speaker 1: returns and their investments aren't worth anything. The answer is simple,
Speaker 1: they won't have any way of raising more capital as
Speaker 1: their limited partners won't fucking trust them. And to be clear,
Speaker 1: these arswapes have cocked it up many years at a time.
Speaker 1: Look at crypto, look at NFTs, look at ar VR, metaverse,
Speaker 1: all of that, and all of this ridiculousness has happened
Speaker 1: because of the ridiculous, ridiculous myths of AI, like just
Speaker 1: the insatiable demand for AI compute and the made up
Speaker 1: decline in the price of intelligence, which, by the way,
Speaker 1: that last one I've talked about it, I swear to god,
Speaker 1: I mentioned it in the Guardia, mentioned it everywhere. It
Speaker 1: may be cheaper to pay for the tokens, but you
Speaker 1: use more of them, so it's more expensive in the aggregate.
Speaker 1: On top of that, it doesn't mean that the price
Speaker 1: of intelligence for the model providers is going down. Jesus Christ,
Speaker 1: I'm so tired of making this points. But in both cases,
Speaker 1: these assumptions are convincing investors that it's time to invest
Speaker 1: in data centers that only lose money because you assume
Speaker 1: that the demand will be there, or in AI startups
Speaker 1: to only lose money because you'll assume they magically stop
Speaker 1: losing money somehow. And it turns out we do actually
Speaker 1: have a historical comparison. The mania of the dot com
Speaker 1: bubble was based on a misunderstanding of the scale of
Speaker 1: the Internet at the time, rather than its actual potential.
Speaker 1: Hundreds of billions of dollars were invested based on flimsy logic.
Speaker 1: To quote researcher Justin Kohler. This continental rewiring was also
Speaker 1: justified by another powerful myth that Internet traffic was doubling
Speaker 1: every ninety days. This claim spread through analyst reports, burning
Speaker 1: course and investor presentations like a particularly virulent meme. If true,
Speaker 1: it meant the demand was growing exponentially, far out pacing
Speaker 1: any conceivable supply, and that every new trench of fiber
Speaker 1: would soon pay for itself many times over. And I
Speaker 1: pause here to go, oh god, they're doing it again.
Speaker 1: Back to the quote. But the mathematics were fiction. Network
Speaker 1: researchers like Andrew Adlisco at AT and T, looking at
Speaker 1: actual traffic data, found that US backbone traffic was doubling
Speaker 1: roughly once a year, rapid growth, certainly, but nowhere near
Speaker 1: the purported ninety day cycle. Meanwhile, advances in fiber technology
Speaker 1: were making each strand exponentially more powerful. Dense wavelength division
Speaker 1: multiplexing allowed dozens of signals to travel simultaneously down the
Speaker 1: same line a different wavelengths of light, like multiple conversations
Speaker 1: happening in different colours. While demand doubled annually, supply expanded
Speaker 1: tenfold or more. Carriers buried the discrepancy under layers of
Speaker 1: creative accounting that would have impressed medieval alchemists. First of all,
Speaker 1: justin if you hear this, I fucking love that. That
Speaker 1: was very fun. Second of all, to quote twin peaks,
Speaker 1: it's happening again. Mania had taken hold based on very
Speaker 1: flimsy logic. Economically speaking, this meant the telecoms companies, serve
Speaker 1: a hardware companies, ISPs, construction firms, optical cable providers, wireless
Speaker 1: technology companies, and basically anybody related to the business of
Speaker 1: providing Internet access in any way saw a massive influx
Speaker 1: of business to build capacity that didn't need to be
Speaker 1: built yet. If you're in the business of selling services
Speaker 1: to get people online, you were high on the hug,
Speaker 1: you know, kind of like selling high bandwidth rem Similarly,
Speaker 1: one could get a startup funded if you had a website,
Speaker 1: or even take in public. One could raise debt to
Speaker 1: build a nascent ISSP or a fiber network. The money
Speaker 1: was flowing because people people weren't really really being thoughtful
Speaker 1: about it. And as far as the dot com part
Speaker 1: of the dot com bubble, the unsustainable websites, the problem
Speaker 1: wasn't so much the industry but the businesses themselves, which
Speaker 1: were hyped and dumped onto the public markets with little
Speaker 1: regard for their long term health. The problem here is
Speaker 1: relatively simple. These were bad companies that people ignored the
Speaker 1: issues with because of and they quote the power of
Speaker 1: the Internet and how it would somehow save them, which
Speaker 1: which it didn't obviously had they been kept private. And
Speaker 1: died in the dark. I don't think these companies would
Speaker 1: have had the same reputation. I don't think we give
Speaker 1: a fuck about pets dot com. I also don't think
Speaker 1: they were really in accurate comparison to anything happening today.
Speaker 1: While the valuations were ridiculous, the Globe's market cap was
Speaker 1: at one point eight hundred and forty million dollars, the
Speaker 1: scale of destruction caused by dot com startups was significantly smaller,
Speaker 1: even in today's money. The economics were bad, but not
Speaker 1: anywhere near as bad. For the first nine months of
Speaker 1: nineteen ninety eight, the Globe made two point seven million
Speaker 1: dollars in revenue and lost eleven point five million dollars,
Speaker 1: largely due to trying to move into multiple different business
Speaker 1: lines at once like voice over IP. And to be clear,
Speaker 1: this company made money selling ads and also buying random companies.
Speaker 1: Buying random companies was the thing that happened during the
Speaker 1: dot com boom. Everybody fucking loved buying companies. You just
Speaker 1: bought random. There was I think like Excite, bought at Home,
Speaker 1: like there was the AT and T sort, the Aol
Speaker 1: time Warner merger. So many stupid mergers, so little time. Nevertheless,
Speaker 1: the economics of this shit show were quite complex. You
Speaker 1: had companies raising money to do any website they could
Speaker 1: think of, companies raising money to lay fiber, companies raising
Speaker 1: money to found ISPs, all of which had multifaested layers
Speaker 1: of physical and digital infrastructure that were quite ugh unbuilt.
Speaker 1: I think is the term. It's tempting yet incorrect to
Speaker 1: say the thing about AI. The similarity everybody points to
Speaker 1: is that people doubted the Internet at the time, and
Speaker 1: people really need to remember their fucking history. In two
Speaker 1: thousand and only fifty two percent of Americans who were
Speaker 1: using the Internet. By two thousand and three, the number
Speaker 1: had only increased the sixty one percent per the World Bank.
Speaker 1: In two thousand and five, only sixteen percent of the
Speaker 1: world used the Internet, and in twenty twenty four the
Speaker 1: number had increased to seventy one percent. Yet the real
Speaker 1: difference is the access to high speed Internet. When the
Speaker 1: Internet was connected via a fifth to six K modem,
Speaker 1: access was at times charged by the minute, and even
Speaker 1: if it was unlimited, it was always much much slower.
Speaker 1: While we're used to connecting its speeds that make using
Speaker 1: web based app near indistinguishable from using one on a computer.
Speaker 1: Back in two thousand, two thousand and one or two
Speaker 1: thousand and two, the average US Internet speed was at
Speaker 1: best four hundred kilobits per second, or roughly fifty killer
Speaker 1: bytes per second, compared to the average US Internet speed
Speaker 1: today of other two hundred megabits per second or twenty
Speaker 1: five megabytes per second. In simpler terms than the younger
Speaker 1: members of the audience won't understand this, A website took
Speaker 1: time to load in a way that feels almost impossible
Speaker 1: to conceive if you didn't experience it at the time,
Speaker 1: you had to make a commitment to God all website.
Speaker 1: It was like you've browsed multiple tabs and fuck around
Speaker 1: the different windows. You sat there and you waited a
Speaker 1: little bit. Sometimes it came up quick and then another.
Speaker 1: In fact, websites like Google were quite popular because they
Speaker 1: were very clean, and the reason that them being clean
Speaker 1: wasn't usability. It was the fact it loaded quickly, which
Speaker 1: I guess would be usability either way. We've also had
Speaker 1: dramatic improvements in web design and accessibility. The advent of
Speaker 1: mobile browsing and the proliferation of widespread mobile and desktop
Speaker 1: Internet access in the two thousands, we were at the
Speaker 1: very early days of e commerce, and the weird irony
Speaker 1: of the dot com bubble is that it was actually
Speaker 1: pretty useful to lay millions of miles of fiber optic cable.
Speaker 1: This is in no way, shape or form remotely comparable
Speaker 1: to large language models GPUs or any nebulous VC spunk
Speaker 1: around Generative AI. Global Internet access has never been higher
Speaker 1: or cheaper, and for the most part, billions of people
Speaker 1: can access the connection fast enough to use Generative AI.
Speaker 1: There is very little stopping anyone from using an LM,
Speaker 1: Chat GBT is free, chat GPT's cheaper ghost subscription has
Speaker 1: now spread to the entire world. When I originally wrote
Speaker 1: this section, it was originally just in the global South,
Speaker 1: but now it's everywhere. Gemini is free, Perplexit is three,
Speaker 1: and metas LM is free. Whether dot com bubble was
Speaker 1: made up of stupid businesses and the lack of fundamental
Speaker 1: infrastructure to give most people the opportunity to access a
Speaker 1: reliable Internet experience, Basically anybody can get reliable access to
Speaker 1: Generative AI. Anyone claiming this is just like the early
Speaker 1: days of the Internet is a fucking liar or a
Speaker 1: fucking moron. Llms have now spread to every nook and
Speaker 1: cranny of the Internet. Anybody can use one, anybody can
Speaker 1: experience the so called power of AI. Users are not
Speaker 1: sitting frothing at the mouth unable to access chet GPT
Speaker 1: due to a lack of infrastructure. Nor is anybody saying, amen,
Speaker 1: I can't access CLAW because I don't have a local
Speaker 1: data center. They might be doing it because there's a
Speaker 1: fucking rate limit, because Anthropic can't afford to run their services,
Speaker 1: but that's not what this is about. Edward experiences are
Speaker 1: not worse because these companies have a lack of access
Speaker 1: to infrastructure or capital. They're worse because the underlying technology
Speaker 1: of transformer based models is inherently limited, and in turn,
Speaker 1: any company connected to these models is limited along with them.
Speaker 1: Then we get to the economics of the AI bubble
Speaker 1: and things begin to get more worrying. While the dot
Speaker 1: com bubble rested on the back of companies like luciend, Cisco,
Speaker 1: Nortel WorldCom Enron, and others, the AI bubble rests fundamentally
Speaker 1: on one company in Video, and to a lesser extent,
Speaker 1: the valuations of the remainder of the Magnificent seven Microsoft Amazon, Google, Meta, Apple,
Speaker 1: and Tesla. Four of those companies Amazon, Microsoft, Google, and
Speaker 1: Meta through to midiaries I'll get to in a future episode.
Speaker 1: I think. Actually i'll explain in a second have spent
Speaker 1: hundreds of billions of dollars on GPUs and their associated
Speaker 1: infrastructure for reasons that none of them can seem to explain.
Speaker 1: As in a side by the way. I will get
Speaker 1: to this in an episode. I had to cut it
Speaker 1: from the script just for length. It's already quite long.
Speaker 1: There is a weird thing going on where Microsoft, Google, Meta, Amazon,
Speaker 1: They don't buy their GPUs directly from Nvidia. They get
Speaker 1: them through various Taiwanese holding companies like Fox Cotton Holding
Speaker 1: companies is the wrong world. Manufacturers of server hardware and
Speaker 1: search called like Honhai, who is Fox con, Wistron, Quantum Computing,
Speaker 1: they order through Taiwan and then those sels are put
Speaker 1: together and shipped to their data centers. This allows them
Speaker 1: to hide how many GPUs they're buying from their investors
Speaker 1: because guess what is quite a long anyway, when this
Speaker 1: all collapses, we're also going to see a market contagion
Speaker 1: that goes to Taiwan because all those Taiwanese companies are
Speaker 1: booking revenue from selling these fucking servers anyway. Lots of
Speaker 1: fun there, but let's keep going now. In Vidious revenue
Speaker 1: is also predominantly eighty eight percent in its data center segment,
Speaker 1: and it's customers of those who can afford at the
Speaker 1: very least fifty to one hundred GPUs retailing at four
Speaker 1: hundred grand or more for a pot of eight of them,
Speaker 1: and you've require tens of thousands of dollars a networking
Speaker 1: gear to go with them to make them turn on.
Speaker 1: The Customers of those renting those GPUs are either AI
Speaker 1: labs training or running inference for models, and their customers
Speaker 1: are AI startups. The problem isn't so much that nobody
Speaker 1: can afford a GPU, but that you can't get very
Speaker 1: far with just one. You have to buy so many
Speaker 1: of them. You need to build a big data center
Speaker 1: around them, You need to get power to that data center,
Speaker 1: and then you have the massive environmental concerns of well
Speaker 1: running all that power. This naturally means that there are
Speaker 1: really only two customers who can afford these chips at scale,
Speaker 1: the Magnificent seven, who have all now begun to take
Speaker 1: on debt after previously financing their GPU purchases with cash
Speaker 1: flow and companies that raise them with companies meaning anybody
Speaker 1: who wants to build a data center, an oracle who
Speaker 1: had negative thirteen billion dollars in cash flow last quarter
Speaker 1: and is steeped in debt to the point that bondholders
Speaker 1: are suing them. We also have no idea if the
Speaker 1: economics of renting GPUs actually makes sense, and based on
Speaker 1: everything I've found, I'm not sure anybody renting them can
Speaker 1: ever make a profit due to either or both the
Speaker 1: upfront cost and debt necessary to pay it, and the
Speaker 1: power intensive nature of providing AI compute. It is fundamentally
Speaker 1: insane that we don't know for sure. It's so crazy.
Speaker 1: How do we not know? How the fuck do we
Speaker 1: not know that this is crazy? It's What we do
Speaker 1: know is that the only company making any kind of
Speaker 1: profit during the AI bubble appears to be in video
Speaker 1: or Companies selling RAM, Microsoft, Google, Meta, and Amazon refuse
Speaker 1: to share their actual AI revenues, and because people have
Speaker 1: the brains of dogs, they have conflated revenue growth from
Speaker 1: hyperscalis already existing segments like software and advertising, with growth
Speaker 1: created by AI. In the dot com bubble, one could,
Speaker 1: at the very least point to where a company was
Speaker 1: making revenue, even if the answer was handing a dollar
Speaker 1: to somebody and getting handed at a dollar back. People
Speaker 1: bought and installed physical infrastructure, and that infrastructure was, albeit
Speaker 1: a much lewer scale than the build out anticipated paid
Speaker 1: for by the associated services. Companies got greedy, rushed to
Speaker 1: expand in the way that was unnecessary, took on ruinous debt,
Speaker 1: and suffered the consequences. This isn't what's happening in the
Speaker 1: AI bubble. Consumers have no problem getting exposure to AI.
Speaker 1: In fact, AI is breaking into every single device and
Speaker 1: app that we have like an angry pervert with a knife.
Speaker 1: While WorldCom wannabes like open Ai and Anthropic are whining
Speaker 1: about not having enough compute, it's very clear they've got
Speaker 1: more than enough to burp out a new model every
Speaker 1: few months or drop copyright infringement machines on millions of
Speaker 1: people at a moment's notice. The post bubble over build
Speaker 1: of fiber left thousands of miles of dark I e
Speaker 1: not connected to anything, cabling that took years to light.
Speaker 1: But doing so, I had an obvious business use case
Speaker 1: connecting people to the Internet and didn't require an entire
Speaker 1: fucking data center and masses of power to do so.
Speaker 1: To make matters worse, as I've hinted that the depreciation
Speaker 1: of these GPUs is utterly brutal purple Kudrowski and I quote,
Speaker 1: we are in a historically anomalous moment. Regardless of what
Speaker 1: one thinks about the merits of AI or explosive data
Speaker 1: center expansion, the scale and pasive capital deployment into a
Speaker 1: rapidly depreciating technology is remarkable. These are not railroads. We
Speaker 1: aren't building century long infrastructure. AI data centers are short lived,
Speaker 1: aset intensive facilities, riding declining cost technology curves, requiring frequent
Speaker 1: hardware replacement to preserve margins. Let me put it a
Speaker 1: little simpler. Imagine if all of that fiber was useless
Speaker 1: in five or six years at best. What if all
Speaker 1: of that fiber could only be used to access a
Speaker 1: small subset of websites. What if all of that fiber
Speaker 1: required such massive amounts of power that it threatened rolling
Speaker 1: blackouts of the East coast of America. That is the
Speaker 1: scale of the apocalypse I am talking about, and I
Speaker 1: am worried that people are not taking the problem. More seriously,
Speaker 1: the demand for Invidio chips is fueled by hype, and
Speaker 1: that hype has caused this company, and to a lesser extent,
Speaker 1: the Magnificent Seven, to become a load bearing part of
Speaker 1: the American stock market. An analysis from portfolio manager Don
Speaker 1: Kee Jong from January twenty twenty five found that the
Speaker 1: Magnificent Seven stocks accounted for forty seven point eight seven
Speaker 1: percent of the Russell one thousand indexes returns in twenty
Speaker 1: twenty four. And that's an index fund of the thousand
Speaker 1: highest ranked stocks and the foot Sea Russell's Index. In
Speaker 1: really simple terms, without the mostly vibes driven nature of
Speaker 1: the Magnificent Seven's growth as none, if this is based
Speaker 1: on anyone's actual revenues, the US stock market would be
Speaker 1: in incredibly rough shape. Except unlike the dot com bubble,
Speaker 1: most of these companies have taken on incredibly large amounts
Speaker 1: of GPUs debt finance and operating leases and data centers
Speaker 1: full of GPUs that can't be used for really much
Speaker 1: of anything else. And because GPU is a guaranteed to depreciate,
Speaker 1: each and every one of them will without fail have
Speaker 1: to write down the value of upwards of one hundred
Speaker 1: billion dollars of investments in the future, as these things
Speaker 1: are eventually facing the recoverability test, which is when there's
Speaker 1: a huge crash within any market sector and you have
Speaker 1: to look at your assets and say, shit, will these
Speaker 1: actually generate enough money? And this is going to happen
Speaker 1: whether or not the AI bubble bursts. In Video is
Speaker 1: on a yearly cycle of upgrades on their GPUs. Every
Speaker 1: single year, every single GPU investment loses value, and to
Speaker 1: make matts worse, takes fucking years to install these things,
Speaker 1: so by the time they're there, your way in the past.
Speaker 1: Even if the AI bubble doesn't burst, it's gonna The
Speaker 1: US stock market has an unhealthy relationship within video, which
Speaker 1: by this time next year will have to make over
Speaker 1: ninety billion dollars a quarter to keep up with its
Speaker 1: ridiculous fifty percent year every year growth, and by twenty
Speaker 1: twenty eight and video will to keep its ridiculous valuation,
Speaker 1: have to be making more than Apple, which makes about
Speaker 1: foreign and sixteen billion dollars a year in revenue. In fact,
Speaker 1: from my calculations, in video will have to be making
Speaker 1: five hundred to six hundred billion dollars, which puts it
Speaker 1: in the realm of Walmart. It can't happen. It can't happen.
Speaker 1: Can't it can't happen, And to do that in video's
Speaker 1: customers will continue having to be able to afford these GPUs, which,
Speaker 1: as have established, are being paid out of debt because
Speaker 1: AI services do not make a profim Even if AI
Speaker 1: services take off and are useful in a way they've
Speaker 1: never even remotely hinted it being, it is inevitable that
Speaker 1: the debt and cash necessary to keep buying in video
Speaker 1: GPUs runs out, and more than likely the revenues of
Speaker 1: the Magnificent seven will stumble in growth before then, as
Speaker 1: it becomes obvious that those GPUs are not providing any
Speaker 1: meaningful revenue growth. The result, I fear, is that the
Speaker 1: American stock market takes as shit the size of Iowa,
Speaker 1: and due to the unique way that the tech industry functions,
Speaker 1: the contagion will be global. I'll catch you tomorrow for
Speaker 1: part three. I don't have a rosy or funny app
Speaker 1: Every time I think of this stuff, I feel very
Speaker 1: very sad. Well anyway, very optimistic.
Speaker 2: Peace.
Speaker 1: I'll catch you tomorrow.
Speaker 2: Thank you for listening to better Offline The editor and
Speaker 2: composer of the Better Offline theme song is Matasowski. You
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Speaker 2: at Mattasowski dot com, m A T T O s
Speaker 2: O W s ki dot com. You can email me
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