Speaker 1: Zone Media. Hello, and welcome back to Better Offline. I'm
Speaker 1: your hostead z Tron and this is the third part
Speaker 1: of our series and one way AI bubble is worse
Speaker 1: than the dot com bubble, And today we're going to
Speaker 1: focus on a question what actually burst dot com bubble.
Speaker 1: I should also be clear there is no clear answer
Speaker 1: to any question like this is kind of a kind
Speaker 1: of a difficult thing to pull apart. But to start,
Speaker 1: we're going to need a comparison, and really the InVideo
Speaker 1: of the dot com bubble would be the companies making
Speaker 1: and selling the fiber optic cables themselves and the associated hardware.
Speaker 1: In July two thousand, Corning, which made and still makes
Speaker 1: far more than just optical cables, became the largest supplier
Speaker 1: of fiber optic wires and ended two thousand and seven
Speaker 1: point one billion in revenue on an income of four
Speaker 1: hundred and twenty two million. That's profit, baby. I know
Speaker 1: we're not used to that because we talk about AI
Speaker 1: all the time. By April two thousand and one, Corning
Speaker 1: had revised its earnings estimates down three times, estimating revenue
Speaker 1: for the year to be between seven point eight billion
Speaker 1: and eight billion. Corning would eventually reveal net sales of
Speaker 1: six point two seven billion dollars with a loss of
Speaker 1: five point four ninety eight billion dollars for the year.
Speaker 1: They tried to grow a little too fast. They took
Speaker 1: out loans. They did the thing that everyone does in
Speaker 1: this kind of era. Fiber optic cable from firm JDS Uniphase,
Speaker 1: a conglomerate of different optical companies merged in nineteen ninety nine,
Speaker 1: would go on an acquisition spread to dramatically expand its
Speaker 1: fiber optic offerings, eventually crowning itself and this is from
Speaker 1: their own press release, the number one supplier of fiber
Speaker 1: ouptic components and revealing net earnings of two hundred and
Speaker 1: eight million in January two thousand and one. In July
Speaker 1: two thousand and one, it would announce a thirty five
Speaker 1: percent decrease in sales quarter over quarter and a forty
Speaker 1: four point eight billion dollar decrease in the value of
Speaker 1: companies that it had acquired, on top of a net
Speaker 1: loss of four hundred and seventy seven million dollars in
Speaker 1: the quarter. The stock would lose ninety nine percent of
Speaker 1: its value before an eventual rebrand and collapse Okay, so
Speaker 1: now you know all that crab. Let's get more specific.
Speaker 1: Nvidia currently represents seven percent of the S and P
Speaker 1: five hundred, with a market capitalization of somewhere in the
Speaker 1: region of four trillion dollars. In September two thousand, je
Speaker 1: Uniphase made up point seven percent and Colling zero point
Speaker 1: six nine two percent of the S and P five
Speaker 1: hundred when it totaled, and it is surprisingly difficult to
Speaker 1: find the exact number, around eleven point seven trillion dollars
Speaker 1: in total, with the highest weighted tech stocks being Cisco
Speaker 1: at three point one percent, Microsoft are two point five percent,
Speaker 1: Intel at two point two percent, Oracle at one point
Speaker 1: seventy five percent, and EMC at one point seven percent.
Speaker 1: Now I've had some bright sparks when I've made this
Speaker 1: point online, say ed ed, what about no hotel? Nortel
Speaker 1: was at one point four percent, Loocent was at point
Speaker 1: eight eight percent. Wasn't the same thing? In simpler terms,
Speaker 1: the dot com bubble didn't burst because of the market
Speaker 1: subsession with one company, but evenly distributed in an incredibly
Speaker 1: vague sense that the future was going to be online
Speaker 1: and we all need to be involved. The world didn't
Speaker 1: wait with baited breath for every single earnings announcement from
Speaker 1: Corning or Jduniphase, nor did the health of the market
Speaker 1: depend on the continued ability to bet and raise revenues
Speaker 1: that Echelon's higher than any other company in the market. Now,
Speaker 1: the problem with trying to find an exact comparison is
Speaker 1: that fiber optic cabling and GPUs are fundamentally different things, requiring,
Speaker 1: amongst other things, massive optical network terminals to actually turn
Speaker 1: big looms of cable into actual Internet connections. And well,
Speaker 1: I guess that you could compare that to a data center.
Speaker 1: But all of that stuff, as big as it sounds, eh,
Speaker 1: nowhere near as big as a n AI data center,
Speaker 1: Nor was it as power intensive, nor did they require
Speaker 1: to build an entire fucking gas power station in the
Speaker 1: middle of Texas for it. The massive costs associate with
Speaker 1: the fiber buildout could make Nortel or loosen to each
Speaker 1: boasted record revenues in two thousand and then got the
Speaker 1: shit kicked out of them in two thousand and one.
Speaker 1: The invidios of the dot com bubble, if you're really
Speaker 1: one though, way, I must insist that they think that
Speaker 1: we're we're going through our own thing. We're at the
Speaker 1: beginning of history, not the end of it. In any case,
Speaker 1: they're the only real revenue comparison. In Vidia's last quarterly
Speaker 1: revenue was fifty seven billion dollars, with around eighty eight
Speaker 1: percent of that coming from its state at center Vertigo,
Speaker 1: where it sells GPUs and the associated networking gear. In
Speaker 1: Loosen's case, the Service Provider Network segment, where it bundled
Speaker 1: all its telecoms infrastructure like optical networking and switching phere.
Speaker 1: It's two thousand nine yearal rapport accounted for seventy eight
Speaker 1: percent of its thirty three point eight billion dollars in revenue,
Speaker 1: a slight improvement from ninety ninety nine when it was
Speaker 1: eighty one percent and ninety ninety eight when it was
Speaker 1: eighty three percent. For Nortel, the comp was its Service
Speaker 1: Provider and Carrier segment, which made eighty two percent of
Speaker 1: its thirty billion dollars in revenue in two thousand. It
Speaker 1: gets a little confusing at this point when you try
Speaker 1: and work out whether they're either of their net incomers.
Speaker 1: Loosen had to restate revenues in two thousand and Nortel
Speaker 1: had to do so for two thousand and one, two
Speaker 1: thousand and two, and two thousand and three, thanks to
Speaker 1: creative accounting principles that, in Nortel's case, overstate revenue by
Speaker 1: nearly two billion dollars. Pobody's nerveffect I guess nevertheless, for
Speaker 1: two thousand loose and booked one point twenty one to
Speaker 1: nine billion dollars in net income, and Nortel well, okay,
Speaker 1: whoopsee doodle, they lost two billion dollars. Yes, things are
Speaker 1: materially different in the AI bubble. In Vidia posted thirty
Speaker 1: one point one to nine billion dollars in net income
Speaker 1: it's last quarter, and if we are to believe, take
Speaker 1: in Baron's marketing arm for Nvidia, who acts like a
Speaker 1: fucking cheerleader its largest customers of printing money to the
Speaker 1: point that there's simply no reason to worry. And in
Speaker 1: some ways they're right. In Vidia prints money, It's incredibly profitable,
Speaker 1: has a virtual monopoly over the GPUs behind the AI bubble,
Speaker 1: and it can effectively set prices at whatever it wants to. Similarly,
Speaker 1: the companies that are buying the most GPUs, Microsoft, Meta,
Speaker 1: Google and Amazon are all incredibly profitable themselves, which is
Speaker 1: really easy if you don't think about it for more
Speaker 1: than a minute to take to mean that in video
Speaker 1: won't end up like loosent, Nortel, or any other dot
Speaker 1: com casualty. Now, I need to be very clear about something.
Speaker 1: Just because Nvidia isn't like Nortel or loosened doesn't mean
Speaker 1: that things aren't bad. And just because some of the
Speaker 1: companies that buying these GPUs are profitable doesn't mean that
Speaker 1: all of them are or won't die on their asses
Speaker 1: the moment the debt train stopped showing up. Okay, So
Speaker 1: to really simplify the comparison here, the debt part of
Speaker 1: the dot com bubble was about customers of telecommunications companies
Speaker 1: taking on debt and the telecommunications companies themselves taking on
Speaker 1: debt to service these contracts. These companies also did a
Speaker 1: number of aggressive acquisitions, many of which had to be
Speaker 1: marked down. As I've mentioned, Loosened, Nortel and many of
Speaker 1: the other tailcom's companies building out Internet infrastructure would also
Speaker 1: loan money to their customers in a thing called vendor financing,
Speaker 1: leading them to have to write off hundreds of millions
Speaker 1: of dollars of debts. When these customers collapsed, and in
Speaker 1: fact Windstar, a company that did a massive deal with
Speaker 1: how you may remembered this with the Enron series, they
Speaker 1: ended up their bankruptcy. People ended up suing Loosen and
Speaker 1: getting hundreds of millions of dollars. In fact, that's a
Speaker 1: great place the start to make the comparison. Nortel's largest
Speaker 1: deals included a multi billion dollar contract to sell stuff
Speaker 1: to now world famous fraudster's world Com, a bizarre three
Speaker 1: billion dollar managed services deal with global IT firm computer
Speaker 1: scientists that involved two thousand Nortel employees moving into the company,
Speaker 1: and a one point four billion dollar, ten year long
Speaker 1: deal with England's Cable and Wireless Group to build and
Speaker 1: operate the cable and wireless internet backbone throughout Europe and
Speaker 1: North America that was quickly underwater. Loosen steals included a
Speaker 1: five billion dollar deal with Verizon and a one point
Speaker 1: four billion dollar deal with other carriers to supply tech
Speaker 1: to Chinese Unicorn. Money was flowing, but it was all
Speaker 1: in these weird directions with people that couldn't necessarily afford
Speaker 1: it or that would lose. Everybody involve money. The comparison
Speaker 1: starts to drift when you talk about revenue centralization. Loosened,
Speaker 1: Nortel and other dot com bubble telecoms companies had a
Speaker 1: variety of deals in the one hundred million dollars to
Speaker 1: three hundred million dollar range and many more that were
Speaker 1: in the twenty million dollars to fifty million dollar range.
Speaker 1: In two thousand eight, and t account for ten percent
Speaker 1: of Loosen's revenue and Verizon thirteen percent. Nortel sadly didn't
Speaker 1: disclose its revenue breakdown by customer. Nortel was, however, Calling's
Speaker 1: largest customer for optical cable and fun fact, Loosen also
Speaker 1: made optical cable and was the second largest provider in
Speaker 1: the business. Despite what JDA Uniphase said, JDA uniforse, you
Speaker 1: fucking lied to me that one's just for Phil. Phil
Speaker 1: brought on. You're listening to this, you're going to hear
Speaker 1: that you can go. I fucking hated jediuniphase or JDS uniphase.
Speaker 1: I learned about this company a month ago. I hate them,
Speaker 1: but that revenue centralization is very important. In Video's revenue
Speaker 1: is extremely centralized. In its last earnings, in Video noted
Speaker 1: that sixty one percent of its revenue came from four
Speaker 1: unnamed companies, and for years somewhere between eighteen percent and
Speaker 1: forty percent of its revenue has come from anywhere from
Speaker 1: doing two and four companies, none of which it names.
Speaker 1: This is critically important because in video represents, as I said,
Speaker 1: seven percent of the value of the S and B
Speaker 1: five hundred and the markets have an unhealthy relationship with
Speaker 1: its stock freaking out in August twenty twenty five, when
Speaker 1: year of a year growth was only I am not
Speaker 1: fucking with you, expected to be around fifty percent year
Speaker 1: every year, people were freaking out. They dumped the stock
Speaker 1: for over a month. It was crazy. As a result,
Speaker 1: any stock panic caused by Nvidia will naturally drag down
Speaker 1: the entire market with him. The dot com bubble was,
Speaker 1: as I've discussed two things, the bullshit dot com bubble
Speaker 1: from websites and the telecommunications bubble caused by massive overbuilds
Speaker 1: of fiber optic and internet services. When the bubble burst,
Speaker 1: it was caused by rising interest rates increasing the cost
Speaker 1: of borrowing, and the markets realizing that these unprofitable companies
Speaker 1: wouldn't survive long term, and then venture capital being depleted
Speaker 1: and I realized it's tempting to claim we're in the
Speaker 1: same situation, but I must I must insist it's really
Speaker 1: quite different. At the time, venture capital was much much smaller.
Speaker 1: For the following numbers, I'm going to give you the
Speaker 1: numbers sug justed for inflation, otherwise I'm going to be
Speaker 1: here all fucking day. US venture capital invested twenty three
Speaker 1: billion dollars in ninety ninety seven, twenty eight point twenty
Speaker 1: one billion dollars in ninety ninety eight, ninety five point
Speaker 1: five billion dollars in ninety ninety nine, and one hundred
Speaker 1: and ninety seven point seven one billion dollars in two thousand,
Speaker 1: for a grand total of three hundred and forty four
Speaker 1: point five billion dollars, a mere six point two billion
Speaker 1: dollars more than the three hundred and thirty eight point
Speaker 1: three billion dollars raised in twenty twenty five alone in
Speaker 1: venture capital was somewhere between forty and fifty percent of
Speaker 1: that around one hundred and sixty eight billion dollars going
Speaker 1: into AI investments, and in twenty twenty four, North American
Speaker 1: AI startups only raised around one hundred and six billion dollars.
Speaker 1: HiT's growing HiT's happening more the dot com bubble burst
Speaker 1: when the bullshit dot com stocks died on their ass
Speaker 1: and the world realized that the magic of the Internet
Speaker 1: was not a panacea that would fix every business model,
Speaker 1: and there was no magic moment where a company like
Speaker 1: webvan or pets dot Com would turn into this magical
Speaker 1: profitable beast from a horribly unprofitable business. Similarly, companies like
Speaker 1: Loosent Technology stop being rewarded for doing dodgy circuit that
Speaker 1: deals with companies like Windstar, leading to the collapse of
Speaker 1: the telecommunications bubble that led to millions of miles of
Speaker 1: dark fiber being sold dirt cheap in two thousand and two.
Speaker 1: The oversupply of dark fiber was eventually seen as a positive,
Speaker 1: leading to an eventual surge and demand as billions of
Speaker 1: people came online toward the end of the two thousands. Now,
Speaker 1: I know what you're thinking, Ed. Isn't this exactly what's
Speaker 1: happening here in the AI bubble? Isn't this the same thing.
Speaker 1: We've got overvalued stars, We've got multiple unprofitable, unsustainable AI
Speaker 1: companies promising to IPO, We've got overvalued tech stocks, and
Speaker 1: we've got one of the largest infrastructure buildouts of all time.
Speaker 1: Tech companies are trading at ridiculous multiples of their earnings
Speaker 1: per share, but the multiples aren't as high. That's good, right, No,
Speaker 1: it isn't.
Speaker 2: It isn't.
Speaker 1: AI boosters and well wishers are obsessed with making this
Speaker 1: comparison because saying things worked out after the dot com
Speaker 1: bubble allows them to rationalize doing stupid, destructive, and shitty things.
Speaker 1: Even if this was just like the dot com bubble,
Speaker 1: things would be absolutely fucking catastrophic. The NASDAG drops seventy
Speaker 1: eight percent from its peak in March two thousand, this
Speaker 1: time due to the incredible ignorance of both the private
Speaker 1: and public powerbrocus of the tech industry. I expect consequences
Speaker 1: that will range from horrifying to calamitus, depending almost entirely
Speaker 1: on how long the bubble takes to burst and how
Speaker 1: willing the SEC is the greenlight and IPO of Open
Speaker 1: AI or anthropic. I'm very worried, and tomorrow I'm going
Speaker 1: to finish up this series with a somewhat dark note.
Speaker 1: Then we need to stop pretending that this will be
Speaker 1: a smooth landing or that anything will be left in
Speaker 1: its wake worth keeping.
Speaker 2: Thank you for listening to Better Offline. The editor and
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