Speaker 1: Media.
Speaker 2: Hi, I'm d Zeitron and this is Better Offline.
Speaker 1: Welcome to dot Comweek.
Speaker 3: I hope you enjoyed my chat with Matt Rosof to
Speaker 3: kick it off, and today is the first of a
Speaker 3: four part special But why I think the AI bubble
Speaker 3: is that much worse than the dot com bubble. So
Speaker 3: for almost five years I put out a newsletter or
Speaker 3: article basically every week that addresses the underlying financial rat
Speaker 3: at the heart of the tech industry, whether it be
Speaker 3: the outright corruption the crypto industry, the bullshit of the metaverse,
Speaker 3: or the AI bubble that I won't shut up about.
Speaker 3: It's been some of the most challenging work I've ever done.
Speaker 3: I've been forced to learn accountancy, economics and the names
Speaker 3: of at least ten different guys i'd gladly see under
Speaker 3: a with a I'm not on accountant, forensic, or otherwise.
Speaker 3: I'm not a banker or a financial analyst. I've never
Speaker 3: worked as a venture capitalist or a hedge fund, or
Speaker 3: at a hedge fund. I guess that would be I'm
Speaker 3: just a guy with a laptop and a microphone. But
Speaker 3: I think I've picked up a great deal of knowledge
Speaker 3: in the last few years, and the clarity of starting
Speaker 3: from a position of oh God, what does that mean
Speaker 3: actually allowed me to see things in the way that
Speaker 3: many haven't, which is why I am so utterly horrified
Speaker 3: when I hear people flippantly say that the AI bubble
Speaker 3: will work out fine because it's just like the dot
Speaker 3: com bubble. While there are similarities, I need to be
Speaker 3: clear that I think the AI bubble is far, far worse,
Speaker 3: and the calamity that follow us would be far more destructive.
Speaker 1: Let's review the dot com.
Speaker 3: Bubble actually had two elements, the stable, sensible tech companies
Speaker 3: that actually made money, and then the likes of pets
Speaker 3: dot com and webvan, both ideas that would eventually find
Speaker 3: margin positive existence in the form of Dewey and Instacram.
Speaker 3: I'd also add the telecommunications companies onto the side of
Speaker 3: this as well, but technically they weren't making the websites.
Speaker 3: They were just building me into them. What buried these
Speaker 3: companies was their obsession with growth, with them a rush
Speaker 3: to take them public. The idea of ordering pet food
Speaker 3: or groceries online was one that would have made a
Speaker 3: lot more sense if more people were connected to the
Speaker 3: Internet or had faster connections in the year two thousand,
Speaker 3: only about fifty two percent of Americans were online, and well,
Speaker 3: both web van and pets dot Com were losing two
Speaker 3: dollars for every dollar of revenue.
Speaker 1: I don't know.
Speaker 3: That shit didn't make any sense, and it wouldn't have
Speaker 3: even if we had high speed internet. But I think
Speaker 3: by the middle of the two thousands we only had
Speaker 3: most people on at best four hundred kilobits per second,
Speaker 3: so we're talking websites that took time to load. Anyway,
Speaker 3: the economic sourceer didn't make sense. Now the AI bubble
Speaker 3: differs in so far as that what we would have
Speaker 3: once considered stable sensible tech companies are acting irrationally, having
Speaker 3: doubled or in the case of Microsoft, tripled the amount
Speaker 3: of hardware known as PP and E that they operate
Speaker 3: in just a couple of years, with no signs of
Speaker 3: slowing down. These companies are racking up entering into multi
Speaker 3: decade long lease agreements, and it accumulated so much hardware
Speaker 3: that the depreciation will erode any profitability for the short
Speaker 3: term medium term future. For example, Microsoft went from having
Speaker 3: around eighty eight billion dollars in PP and E that's property,
Speaker 3: plants of equipment which is where the GPUs are, by
Speaker 3: the way, in the beginning of twenty twenty three, to
Speaker 3: a remarkable two hundred and thirty billion dollars in pp
Speaker 3: and E as of its last quarter. And depreciation, by
Speaker 3: the way, is not it's not a cash expense. They've
Speaker 3: already bought the GPUs and the service and the like.
Speaker 3: What it does, however, is sit there because they spread
Speaker 3: it out over five to six years. I think it's
Speaker 3: five and a half from Microsoft. They spread it out,
Speaker 3: so it eats into that net income side. So instead
Speaker 3: of they'd taken the immediate upfront hit, they spread it out.
Speaker 3: So this means that each quarter from here until fucking eternity,
Speaker 3: at this point, Microsoft is going to be taking billions
Speaker 3: of dollars of appreciation charges. Now, while the dot com
Speaker 3: bubble was wasteful, it didn't involve the largest and most
Speaker 3: well respected tech firms in the world accruing hundreds of
Speaker 3: billions of dollars of GPUs that are absolutely a year
Speaker 3: or so after being installed. It also didn't involve billions
Speaker 3: in operational expenses or acres of data centers. In fact,
Speaker 3: there's really no comparison. Fiber doesn't compare at all the
Speaker 3: scale of the fiber will get to it. But I
Speaker 3: just want to be clear that fiber is also something
Speaker 3: that you can use on many things. Fiber is something
Speaker 3: that another company could come up and run with. Aigpus
Speaker 3: are extremely limited in their outcomes. I've been over this before.
Speaker 3: Not going to repeat myself. Perhaps I'll do it more
Speaker 3: in depth episode on that in the future. But look,
Speaker 3: in many ways, I fear the AI bubble is going
Speaker 3: to be worse than the dot com bubble. It's going
Speaker 3: to make it look small, and we are already seeing
Speaker 3: some worrying signs. Now, let's start somewhere simple though.
Speaker 1: Layoffs.
Speaker 3: Fun fact, even during the dot com bubble, Microsoft barely
Speaker 3: had any layoffs, with the company growing its headcount even
Speaker 3: as the tech industry around it was consumed in flames.
Speaker 3: The biggest round of firings I could find during the
Speaker 3: nineteen ninety eight to two thousand and eight period was
Speaker 3: between August twenty twenty four and January twenty twenty five,
Speaker 3: when it can seventy six members of its ex Box
Speaker 3: group as well as one hundred and fifty seven test
Speaker 3: engineers whose jobs were offshore to India. That gives you
Speaker 3: a grand total of two hundred and thirty three people.
Speaker 3: For comparison, Microsoft laid off six thousand people in May
Speaker 3: of last year, or three percent of its global workforce.
Speaker 3: Now that's not to say that people at other companies
Speaker 3: were equally fortunate. In two thousand and one, some Microsystems
Speaker 3: called ninety percent of its workforce or thirty nine hundred jobs.
Speaker 3: That was the first of many at that particular company.
Speaker 3: In two thousand and one, the telecommunications sector cut and
Speaker 3: I am not shitting you here three hundred and seventeen thousand,
Speaker 3: seven hundred and seventy seven rolls, with the computer industry
Speaker 3: second rank for that year, shedding one hundred and fifty
Speaker 3: three thousand and nine hundred and fifty two positions. Similarly,
Speaker 3: Amazon saw it stocked tumble in January two thousand when
Speaker 3: it was discovered that it laid off one hundred and
Speaker 3: fifty people, two percent of its workforce at the time,
Speaker 3: and would lay off another thirteen hundred a year later,
Speaker 3: or fifteen percent of its workforce. Now, that, by the way,
Speaker 3: sounds like a lot. And also I think it's adorable.
Speaker 3: Back when the stock market cared, when companies did layoffs,
Speaker 3: they don't today. And Amazon indeed is a very different
Speaker 3: company today, going from a fledgling digital book seller to
Speaker 3: one of the largest retailers and cloud storage providers in
Speaker 3: the world, and a very profitable one. And that Yet
Speaker 3: this week Amazon laid off another fourteen thousand people, ten
Speaker 3: percent of its corporate workforce, around three months after laying
Speaker 3: off fourteen thousand more people in October twenty twenty five.
Speaker 1: Why well bids two things.
Speaker 3: First, it's the scourge of Jack welch, go and listen
Speaker 3: to the shareholder supremacy from twenty twenty four if you
Speaker 3: like that one, and the idea that laying people off
Speaker 3: well at boosts profits, which Wall Street loves now. Secondly,
Speaker 3: it's because Amazon is buying billions of dollars of GPUs,
Speaker 3: both in Vidia and directly from TSMC for its trainium
Speaker 3: custom chips. That is TSMC Taiwan Semiconductor Manufacturing Corporation they
Speaker 3: build basically every chip, and Amazon they build them internally
Speaker 3: using a company called Annapurna Labs. It's a whole thing
Speaker 3: saying it doesn't really mean much. They're not as good
Speaker 3: as vidious GPUs, but nevertheless they keep fucking that chicken.
Speaker 3: And this is a massive burden on its earnings. These
Speaker 3: chips have their costs spread out, like I mentioned as
Speaker 3: a depreciation charge, dragging down the profits that Amazon can
Speaker 3: report on its earnings in the process. Well, this isn't
Speaker 3: the problem when you buy one or two or ten GPUs.
Speaker 3: It becomes one when you have hundreds of thousands of
Speaker 3: the fuckers. Amazon had sixteen point seven billion dollars of
Speaker 3: depreciation charges and its last earnings. That's a great deal.
Speaker 3: I think their net revenue is like twenty two to
Speaker 3: twenty four billion dollars, not great. In similar terms, today's
Speaker 3: layoffs are happening not because the companies are in trouble,
Speaker 3: but because they want to boost their profits at a
Speaker 3: time when AI services aren't providing a profit and I
Speaker 3: don't think they ever will. Nevertheless, these layoffs are a sign
Speaker 3: of something that these companies know that revenue growth isn't
Speaker 3: keeping pace with their ruinous expenditures. The only jobs that
Speaker 3: AI is taking are those that the hyperscaler cuts to
Speaker 3: keep paying for its existence.
Speaker 1: In any case, people really need.
Speaker 3: To recognize that the dot com bubble wasn't some small
Speaker 3: event that could be casually waved off, and other things
Speaker 3: that happen tell the story of what might before anyone
Speaker 3: left in or invested in the tech industry when it does.
Speaker 3: In two thousand and one, VC funds raised sixty three
Speaker 3: percent less than the previous year, and the amount of
Speaker 3: money going to startups, not just technology companies, dropped by
Speaker 3: slightly more. Then there's the stock marketing. If you held
Speaker 3: stocks in the company like pets dot Com were at
Speaker 3: its highest relatively modest four hundred million dollars, or Webvam
Speaker 3: with a peak market cap of eight billion dollars, you
Speaker 3: were completely fucking screwed. Those companies went to zero or
Speaker 3: near enough. Even those who invested in established firms like
Speaker 3: Microsoft and Sun faced their own haircuts, with Microsoft's share
Speaker 3: price dropping from a high of one hundred and twenty
Speaker 3: dollars to as little as forty dollars. Adjusted for the
Speaker 3: two stock splits that happened in nineteen ninety nine and
Speaker 3: two thousand and three, it would take around seventeen years
Speaker 3: for Microsoft to reach its original dot com bubble highs.
Speaker 3: The fact is, the dot com bubble fucked a lot
Speaker 3: of people. The tech sector's share of employment wouldn't surpass
Speaker 3: the levels of the bubble era until twenty fifteen. In practice,
Speaker 3: this meant that newly graduated software engineers couldn't find much work,
Speaker 3: and what work they could find offered stagnant wages that
Speaker 3: didn't keep pace with inflation. That's the thing about the
Speaker 3: dot com bubble. We like to think if it as
Speaker 3: something that happened around the turn of the millennium, but
Speaker 3: in practice it took until two thousand and four for
Speaker 3: the contraction and the tech jobs market to finally bottom out.
Speaker 3: Existing workers face threats not simply from economic related cutbacks
Speaker 3: making the company do the same with the resources they
Speaker 3: already have, but also from outsourcing, which grew exponentially in
Speaker 3: popularity in the early two thousands. This incidentally, was around
Speaker 3: the time that China entered the World Trade Organization, meaning
Speaker 3: that in addition to cuts in the service related the
Speaker 3: sector the economy, a lot of high tech manufacturing jobs
Speaker 3: went out the door too. The point I'm making is
Speaker 3: that the dot com bubble was bad, and that the
Speaker 3: second order effects, the things that didn't get as many
Speaker 3: headlines or as much pop culture weight, were really truly gruesome.
Speaker 3: Now there's a great line from The Big Shot. I
Speaker 3: always find myself returning to. It's when Ben rick At,
Speaker 3: the retired finance guy who came back in from the
Speaker 3: cold in order to help Brownfield Capital short the mortgage market,
Speaker 3: castigates the two young founders for celebrating what would be
Speaker 3: the trade of the century.
Speaker 2: If we're right, people lose homes, people lose jobs, people
Speaker 2: whose retirement savings, people lose pensions.
Speaker 1: You know what I hate about fucking banking. It reduces
Speaker 1: people to numbers. Here's a number.
Speaker 2: Every one percent, unemployment goes up, forty thousand people died.
Speaker 3: Did you know that It's so fucking easy to talk
Speaker 3: about this period with statistical data, to talk about layoffs
Speaker 3: and abstract terms like tens of thousands or hundreds of
Speaker 3: thousands of jobs, or to say how the stock market contracted,
Speaker 3: but things would work out okay, that everybody would be
Speaker 3: fine in the future, and thus the fuck ups today
Speaker 3: would be okay. I need to be clear that anybody
Speaker 3: who traded into the dot com bubble got washed out,
Speaker 3: and similarly, anybody who believed story after story about the
Speaker 3: eternal growth and telecommunications or web startups lost almost everything,
Speaker 3: if not everything they put in. Anybody who worked for Enron,
Speaker 3: the people that didn't know about the illegal bullshit happening,
Speaker 3: lost every cent of their stock based pension. Unemployment swelled
Speaker 3: to a peak of six point three percent in June
Speaker 3: two thousand and three, and the NASDAK lost nearly eight
Speaker 3: percent of its value from its peak in the year
Speaker 3: two thousand. Anyone saying that this is just like the
Speaker 3: dot com bubble as some sort of defense of the reckless,
Speaker 3: monstrous expenditures of the AI bubble is trying to find
Speaker 3: rationalizations for irrational, reckless actions. These are likely privileged people
Speaker 3: who define at the time were of found ways to
Speaker 3: look back at a time of incredible suffering and believe
Speaker 3: that because things are better today, that.
Speaker 1: All of it was worthwhile. It wasn't.
Speaker 3: I know that the fiber build out led to something,
Speaker 3: and I'll get to that in the future episode, I promise.
Speaker 3: But just because that happened doesn't make any this worthing.
Speaker 3: All of the wasted money in that time could have
Speaker 3: been spread out over a more thoughtful period. It wasn't,
Speaker 3: and people suffered as a result. I'm going to talk
Speaker 3: about this more next episode. Thank you for listening.
Speaker 1: Thank you for listening to Better Offline.
Speaker 3: The editor and composer of the Better Offline theme song
Speaker 3: is Matasowski. You can check out more of his music
Speaker 3: and audio projects at Mattasowski dot com, m A T
Speaker 3: T O.
Speaker 2: S O w Ski dot com.
Speaker 3: You can email me at easy at better offline dot
Speaker 3: com or visit better offline dot com to find more
Speaker 3: podcast links and of course, my newsletter. I also really
Speaker 3: recommend you go to chat dot Where's Youreed dot at
Speaker 3: to visit the discord, and go to our slash Better.
Speaker 1: Offline to check out our reddit. Thank you so much
Speaker 1: for listening. Better Offline is a production of cool Zone Media.
Speaker 1: For more from cool Zone Media, visit our website cool
Speaker 1: Zonemedia dot com.
Speaker 3: Check us out on the iHeartRadio app, Apple Podcasts, or
Speaker 3: wherever you get your podcasts.