Speaker 1: Zone Media.
Speaker 2: Hello and welcome to Better Offline. I'm your host ed
Speaker 2: zip tron. Check out the episode notes. Got a wonderful
Speaker 2: merchandise and completely separate to the podcast, got a wonderful
Speaker 2: newsletter Where's your Head dot at with the premium section
Speaker 2: that I would love you to subscribe to. But I
Speaker 2: also got some good news. You've got another three part episode,
Speaker 2: the second of the year, and this week we're going
Speaker 2: to be talking about how the cracks and the generative
Speaker 2: AI market are becoming harder to ignore, and how recent
Speaker 2: events are making a collapse seem all the more inevitable.
Speaker 2: What that means for the wider economy, really the markets
Speaker 2: and you and I want to make that case because
Speaker 2: as a journalist, I believe I have the duty to
Speaker 2: give you the information you need to make sense of
Speaker 2: a world increasingly feeling incomprehensible and of course detachment reality,
Speaker 2: and where everything is consequent to everyone, where it's impossible
Speaker 2: for ordinary people to shroud themselves from the consequences of
Speaker 2: decisions made by the executive and shareholder class. Good journalism
Speaker 2: is making sure that history is actively captured and appropriately
Speaker 2: described in the cest, and it's the accurate to describe
Speaker 2: things as they currently are as alarming, and boy howdy
Speaker 2: am I alarmed?
Speaker 3: Now?
Speaker 2: Alarm is not a state of weakness or belligerence in myopia,
Speaker 2: My concern does not dull my vision, even though it's
Speaker 2: a convenient to frame me as somehow alarmist like I
Speaker 2: have some hidden agenda or bias toward doom. I profoundly
Speaker 2: dislike the financial waste, the environmental destruction, and fundamentally I
Speaker 2: dislike the attempt to gaslight people into swearing fealty to
Speaker 2: a sickly in frail pseudo industry where everybody but in
Speaker 2: Nvidia and consultancies lose money. And I also dislike the
Speaker 2: fact that I and others like me are held to
Speaker 2: a remarkably different standard to those that paint themselves as optimists,
Speaker 2: which typically means people that agree with what the market
Speaker 2: wishes were true. Critics are continually badgered, prodded, poked, mocked,
Speaker 2: and jeered out for not all the metrically aligning with
Speaker 2: the idea that generative AI will be this massive industry,
Speaker 2: constantly having to prove themselves as if somehow there's something
Speaker 2: malevolent or craving about criticism. The critics do this for clicks,
Speaker 2: or to be contrarian. I don't do anything for clicks
Speaker 2: or downloads or prestige. I don't have any stocks or
Speaker 2: short positions. My gender is simple. I like talking about
Speaker 2: this crap and it comes to me naturally. I have
Speaker 2: a podcast and it is on some level my job
Speaker 2: to try and understand what the tech industry is doing
Speaker 2: day to day.
Speaker 3: And I get it.
Speaker 2: I get It's easy to try and dismiss what I
Speaker 2: say is going against the green because AI is big,
Speaker 2: and AI is something we should all be impressed by,
Speaker 2: and the AI is the thing that's going to start everything,
Speaker 2: and all this fucking money is tied up in it.
Speaker 2: But look, this isn't a fad for me. This isn't
Speaker 2: something I'm doing because I feel like it because I'm
Speaker 2: jumping to the next trend. No. I've been roiling against
Speaker 2: bullshit bubble since twenty twenty one, the anti remote work
Speaker 2: push and the people behind it, the clubhouse and audio
Speaker 2: social networks bubble, the NFT bubble that made up quiet,
Speaker 2: quitting panic, and even even and this one I got
Speaker 2: no credit for.
Speaker 3: I called that.
Speaker 2: Something was up with the FTX several months before it imploded.
Speaker 2: Did I do much more than that. No, I found
Speaker 2: one thing. Nevertheless, this is in contrarianism, not at all.
Speaker 2: It's the kind of skepticism of power and capital that's
Speaker 2: necessary to meet these moments. And if it's necessary to
Speaker 2: dismiss my work because it makes you feel icky inside,
Speaker 2: get a therapist or see a priest. Nevertheless, I'm alarmed.
Speaker 2: And while I have said some of these things separately,
Speaker 2: based on recent developments, I think it's necessary to say why.
Speaker 2: In short, I believe the AI bubble is deeply unstable,
Speaker 2: built on vibes and blind faith. And when I say
Speaker 2: the AI bubble, I mean the entirety of the AI trade.
Speaker 2: And it's alarmingly simple too, he says, before doing three
Speaker 2: episodes on it. But this isn't going to be some saccerin,
Speaker 2: whiny or simply worrisome podcast. I think at this point
Speaker 2: it's become a little ridiculous to not see we're in
Speaker 2: a bubble. We are in a goddamn bubble. By the way,
Speaker 2: it's so obvious we're in a bubble. It's been so
Speaker 2: obvious we're in a bubble. It's been obvious for months,
Speaker 2: if not years, A bubble that seems so strong, but
Speaker 2: it's very weak with a central point of failure. I
Speaker 2: may not be a contrarian, but I am a hater.
Speaker 2: I hate the waste, the loss, the destruction, the theft,
Speaker 2: the damage to our planet, and the sheer excitement. And
Speaker 2: some executives and yes, some writers have that workers may
Speaker 2: be replaced by AI and the bold faced fucking lie
Speaker 2: that it's actually happening. And what Generative AI is doing
Speaker 2: is somehow proof that it will. And so I present
Speaker 2: to you the Hater's Guide to the AI Bubble, a
Speaker 2: comprehensive rundown of the arguments I have against the current
Speaker 2: AI booms existence. Send this podcast to your friends you
Speaker 2: love ones or I don't know, blare it in their
Speaker 2: ears like you're torturing them. But no, this isn't going
Speaker 2: to be a traditional guy but something you can listen
Speaker 2: to and say, oh, that's why the AI bubble is
Speaker 2: so bad. And at this point, I know, I'm tired
Speaker 2: of being gas lit by guys in Gingham shirts who
Speaker 2: desperately want to curry favor with other guys in Gingham
Speaker 2: shirts but who also have PhDs. I'm tired of hearing
Speaker 2: people talk about how we're in the era of agents
Speaker 2: that don't fucking work and will never fucking work. I'm
Speaker 2: tired of hearing about powerful AI that's actually crap, and
Speaker 2: I'm tired of being told the future is here while
Speaker 2: having the world's least useful, most expensive cloud software shoved
Speaker 2: down my throat and up my asshole. Look, the general
Speaker 2: FAI boom is a mirage. It hasn't got the revenue
Speaker 2: or the returns of the product efficacy for it to matter.
Speaker 2: Everything you're seeing is ridiculous and wasteful when it all
Speaker 2: goes tits up. And want you to remember that I
Speaker 2: said this. I tried to say something. I've been trying
Speaker 2: to say something for a while. But let's start with
Speaker 2: something real obvious. Let's start by talking about the so
Speaker 2: called Magnificent Seven's week point and it's not the one
Speaker 2: you think because it's in video. As I write the
Speaker 2: script for this podcast, in Vidia's sitting around one hundred
Speaker 2: and seventy bucks a share, a dramatic reversal of faith
Speaker 2: after the pummeling it took from the deep Seek situation
Speaker 2: in January, which sent it tumbling to a brief late
Speaker 2: April trip below one hundred dollars. Four things turned around
Speaker 2: the mag seven stocks and Video, Microsoft, Alphabet, which is Google, Apple, Meta, Tesla,
Speaker 2: and Amazon make up around thirty five percent of the
Speaker 2: value of the US stock market, and of that and
Speaker 2: Video's market value takes up about nineteen percent of the
Speaker 2: Magnificent seven, eight to nine percent of the entire US
Speaker 2: stock market. It's not brilliant. This dominance is also why
Speaker 2: ordinary people ought to be deeply concerned about the AI bubble.
Speaker 2: The Magnificent seven is almost certainly a big part of
Speaker 2: their retirement plans, even if they're not directly invested. Back
Speaker 2: in May, the Wonderful Laura Branton from Yahoo Finance reported
Speaker 2: the Microsoft, Amazon, Meta, Alphabet, and Tesla alone make up
Speaker 2: forty two point four percent of Invidia's revenue. The breakdown
Speaker 2: doesn't make things better. Meta spends twenty five percent, and
Speaker 2: Microsoft on alarming forty seven percent of their capital expenditures
Speaker 2: and on Nvidia chips and as Branton notes, Microsoft also
Speaker 2: spends money renting service from core Weave, which analyst Guild
Speaker 2: Luria of DA Davidson estimates accounted for eight billion dollars
Speaker 2: more than six percent of Invidia's revenue in twenty twenty four.
Speaker 2: Laurier also estimates that neo cloud companies like Coreweav and
Speaker 2: Crusoe that exist only to provide AI compute services account
Speaker 2: for as much as ten percent of Nvidia's revenue, or
Speaker 2: at least did so in twenty twenty four. In vidious
Speaker 2: climbing stock value comes from one thing. It's continued revenue
Speaker 2: growth in the past four quarters. And video has seen
Speaker 2: year of a year growth of one hundred and one percent,
Speaker 2: ninety four percent, seventy eight percent, and sixty nine percent.
Speaker 2: And in the last quarter a little statistic was carefully
Speaker 2: brushed under the rug in Video missed though narrowly, on
Speaker 2: data center revenue. And data center revenue is, by the way,
Speaker 2: where the GPUs go, and all the associated hardware and
Speaker 2: so kind of server architecture switches and the like, and yeah,
Speaker 2: this is exactly what it sounds like. GPUs that are
Speaker 2: used in servers rather than gaming consoles and PCs. I
Speaker 2: get a lot of emails saying, oh, will it be
Speaker 2: easier for me to buy consumer graphics cards? I don't
Speaker 2: fucking know, mate, I'm just did to talk about enterprise bullshit. Okay,
Speaker 2: not really enterprise, but enterprise scale GPUs were getting off track.
Speaker 2: Analyst estimated it would make. It would make thirty nine
Speaker 2: point four billion dollars from the data center category, and
Speaker 2: then video only only. I no pathetic amount brought in
Speaker 2: thirty nine point one billion dollars. Then again, this could
Speaker 2: be attributed to their problems in China, especially as the
Speaker 2: H twenty ban they were banned from selling uspace chip
Speaker 2: in China has only just been lifted. In any case,
Speaker 2: this was a miss, and I'm not sure why no
Speaker 2: one wanted to talk about them.
Speaker 3: But there's another problems.
Speaker 2: There's so many little problems here, like in videos. Quarter
Speaker 2: over quarter growth has also become aggressively normal. It went
Speaker 2: from sixty nine percent to fifty nine percent to twelve
Speaker 2: percent to twelve percent again a quarter of quita, which
Speaker 2: again isn't bad, it's pretty great in fact, But when
Speaker 2: eighty eight percent of your revenue is based on one
Speaker 2: particular line in your earnings, it's a pretty big concern,
Speaker 2: at least for me. Look, I'm no stock analysts do
Speaker 2: not take stock advice from me. I don't know about stocks.
Speaker 2: I don't know what will go up and down, but
Speaker 2: I'll tell you, I'll tell you something's not right here.
Speaker 2: But I'm going to keep this simple in Video relies
Speaker 2: on not only selling lots of GPUs each quarter, but
Speaker 2: it must always sell more of them the following quarter.
Speaker 2: More than forty two percent of revenue, and Video's revenue
Speaker 2: comes from Microsoft, Amazon, Meta Alphabet, and Tesla continuing to
Speaker 2: buy more GPUs. Remember, it's not about buying the same amount.
Speaker 2: Number must go up. In Vidia's continued value and continued
Speaker 2: growth is heavily reliant on hyperscalar purchases and continued interest
Speaker 2: in generative AI. But really just the buying part the
Speaker 2: GPUs are what matter. And the US stock markets continued
Speaker 2: health relies on some level of five or six companies,
Speaker 2: and it's unclear how many GPUs Apple buys, spending billions
Speaker 2: of dollars on GPUs from Nvidia and more every quarter.
Speaker 2: In fact, I found an analysis from portfolio manager Don
Speaker 2: ke Wang from January twenty twenty five. The found that
Speaker 2: the Magnificent seven stocks accounted for forty seven point eighty
Speaker 2: seven percent of the Russell one thousand indexes returns in
Speaker 2: twenty twenty four. And that's an index fund of the
Speaker 2: thousand highest ranked stocks on the foot Sea Russell's Index,
Speaker 2: which in simpler terms means thirty five percent of the
Speaker 2: US stock market is held up by five or six
Speaker 2: companies buying GPUs. If a video's growth story stumbles, it
Speaker 2: will reverberate through the rest of the mag seven to two,
Speaker 2: making them rely on their own AI trade stories. And
Speaker 2: you know it when you know it, when you look
Speaker 2: at the stories. There is no AI trade because Generative
Speaker 2: AI is not making anybody any goddamn money. But I
Speaker 2: have to make money, which is why you need to
Speaker 2: listen to the following advertisement. It's the only one of
Speaker 2: these bloody things you're gonna get. Here's an ad and
Speaker 2: we're back. And I am so tired of people telling
Speaker 2: me that companies are making tons of money on AI.
Speaker 2: They are not. Anyone saying this to you is lying
Speaker 2: or ignorant or both. The Magnificent Seven spent an insane
Speaker 2: five hundred and sixty billion dollars between twenty twenty four
Speaker 2: and twenty twenty five on Capex, with the overwhelming majority
Speaker 2: going towards Generative AI and their effort for this wonderful effort.
Speaker 2: For that more than half a trillion dollars, these companies
Speaker 2: have made about thirty five billion dollars in revenue and
Speaker 2: no profit. And I must say, and this is a
Speaker 2: technical term, this is egregiously fucking stud But let's break
Speaker 2: it down. Start with starting out in Redmond with our
Speaker 2: friends at Microsoft, and they plan to spend eighty billion
Speaker 2: dollars on CAPEX in twenty twenty five. Now, mustn't. January
Speaker 2: twenty twenty five, Microsoft's annualized revenue meaning best month times
Speaker 2: twelve from our official intelligence, was thirteen billion dollars, a
Speaker 2: number that it's chosen, not what they since slightly because
Speaker 2: said number is either flat or not growing, though it
Speaker 2: could in its upcoming I think at the end of
Speaker 2: this week or next one, it's got cut earnings coming up.
Speaker 3: Maybe they'd be good news. Yeah.
Speaker 2: The problem with this revenue is that ten billion dollars
Speaker 2: of that revenue, according to the information, comes from open
Speaker 2: AIS spend on a Microsoft' as or cloud, and Microsoft
Speaker 2: offers preferential pricing. I'm quoting the information here at a
Speaker 2: heavily discounted rental rate that essentially only covers Microsoft's costs
Speaker 2: for operating the servers. That's not good, right, like it's
Speaker 2: not good. It's not good that seventy six point nine
Speaker 2: percent of Microsoft's AI revenue comes from open AI, and
Speaker 2: that revenue is made at cost or just above it,
Speaker 2: which makes Microsoft's real AI revenue about three billion dollars
Speaker 2: or about three point seven five percent of this year's
Speaker 2: capital expenditures, or sixteen point two five percent if you
Speaker 2: count open AIS revenue, which costs Microsoft likely more money
Speaker 2: than it earns. The information also reports that Microsoft made
Speaker 2: four point seven billion dollars in AI revenue in twenty
Speaker 2: twenty four, of which open AI accounted for two billion dollars,
Speaker 2: meaning that for the one hundred and thirty five point
Speaker 2: seven billion dollars that Microsoft are spent in two years
Speaker 2: in AI infrastructure, it's made seventeen point seven billion dollars,
Speaker 2: of which open AI was twelve point seven billion dollars.
Speaker 2: It's kind of crap, isn't it. It's not very good
Speaker 2: at all, and things do not improve when we get
Speaker 2: to Amazon. An analyst estimates that Amazon, which plans to
Speaker 2: spend one hundred and five billion dollars in capital expenditures
Speaker 2: this year, will make five billion dollars in AI in
Speaker 2: twenty twenty five, rising and I quote as much as
Speaker 2: eighty percent, suggesting that Amazon might have made a measly
Speaker 2: two point seven seven billion dollars in twenty twenty four
Speaker 2: on AI in a year when it's spent eighty three
Speaker 2: billion dollars in capital expenditures, and last year, Amazon CEO
Speaker 2: Andy Jesse said that and I quote, AI represents for
Speaker 2: sure the biggest opportunity since cloud and probably the biggest
Speaker 2: technologies shift an opportunity in business since the Internet. I
Speaker 2: personally think he is full of shit. And it's a
Speaker 2: similar story over with Google, which plans to spend seventy
Speaker 2: five billion dollars in capex twenty twenty five. Bank of
Speaker 2: America analysts justin Post estimated a few weeks ago that
Speaker 2: Google's AI revenue would be in the region of seven
Speaker 2: point seven billion dollars, though his math, if I'm honest,
Speaker 2: is a little generous because it includes subscribers to packages
Speaker 2: that include a lot of non AI staff.
Speaker 3: Two.
Speaker 2: Google's one subscription includes increased cloud storage across Google Drive, Gmail,
Speaker 2: and Google Photos, and added a twenty dollars a month
Speaker 2: premium plan in February twenty twenty four that included access
Speaker 2: to Google's various AI models. Google's claim that the premium
Speaker 2: AI tier accounts some millions of the one hundred and
Speaker 2: fifty million subscribers to Google one, though how many millions
Speaker 2: is impossible to estimate That one would stop me trying, though,
Speaker 2: Assuming the three point one billion dollars in twenty twenty
Speaker 2: five revenue would work out to two hundred and fifty
Speaker 2: eight million dollars a month, that would mean there were
Speaker 2: twelve point nine million Google one subscribers also paying for
Speaker 2: the premium Ai tier. This isn't out of the realm
Speaker 2: of possibility, after all, Open ai has like fifteen point
Speaker 2: five million paying subscribers, but post is making in a
Speaker 2: kind of a generous assumption here. Nevertheless, well accept the
Speaker 2: numbers as they are, because they fucking stink. Google's one
Speaker 2: point one billion dollar in workspace revenue came from a
Speaker 2: forced price hike on those who use Google services to
Speaker 2: run their businesses. My ass included meaning that it's not
Speaker 2: likely a number that they can significantly increase in the
Speaker 2: future because it was just raising the rent on everyone.
Speaker 2: And that's seven point seven billion dollars of revenue, not
Speaker 2: profit on seventy five billion dollars of capital expenditures. Very nasty.
Speaker 2: But let's move on to one of my faves, Meta,
Speaker 2: which plans to spend seventy two billion dollars in twenty
Speaker 2: twenty five. Someone's going to get mad at me for
Speaker 2: saying this, But I believe that Meta is simply burning
Speaker 2: cash on generative. There is no product the Meta sells
Speaker 2: that monetizes large language buddles that I can tell at least,
Speaker 2: But every Meta product now has them kind of shoved
Speaker 2: in there. Year Instagram dms oinking at you to generate
Speaker 2: artwork based in your conversation. Nevertheless, they do make some money, allegedly,
Speaker 2: and we do have some sort of knowledge of what
Speaker 2: Meta is saying they make due to a copyright infringement
Speaker 2: case cardre versus Meta on sealed judgment briefs revealed in
Speaker 2: April that Meta is claiming that Jenai driven revenue will
Speaker 2: be more than two billion dollars in this year, with
Speaker 2: estimates as high as three billion dollars. The same document
Speaker 2: also claims that Meta expects to make four hundred and
Speaker 2: sixty billion to one point four trillion dollars in total
Speaker 2: revenue through twenty thirty five. And this is from Ai,
Speaker 2: by the way, And this is the kind of thing
Speaker 2: that should have you wrenched out of them. But you
Speaker 2: should your key God should stop working when the words
Speaker 2: leave your mouth because Meta makes ninety nine percent of
Speaker 2: its revenue from advertising, and the unsealed documents state that
Speaker 2: it generates from its Larmer models and will continue earning
Speaker 2: revenue from each iteration and share percentage of the revenue
Speaker 2: it generates from users of the Lama models hosted by
Speaker 2: those companies. But the companies in question redacted. Mister Max
Speaker 2: Zeph of tech runchads that metaalist host partners like Amazon
Speaker 2: Web Services and Video Data Breaks, Grock Dell, Microsoft, as Yure,
Speaker 2: Google Cloud, and Snowflake, so it's possible that Meta makes
Speaker 2: money licensing to those companies. Sadly, the exhibits further discussing
Speaker 2: these numbers are filed on the seal and also their
Speaker 2: large language model is open source. What service is Meta providing?
Speaker 2: Are these companies so goddamn lazy that they need Meta
Speaker 2: to come in and set up the fruit? And Jesus Christ,
Speaker 2: Jesus Christ, when I read these numbers, I just when
Speaker 2: I read about these people who drive me a little insane.
Speaker 2: Either way, we are now at three hundred and thirty
Speaker 2: two billion dollars of capital expenditures in twenty twenty five.
Speaker 2: For twenty eight point seven billion dollars of revenue, off
Speaker 2: which ten billion dollars of it is open AI is
Speaker 2: at cost or just above cost. Revenue not great. Then
Speaker 2: there's Tesla, which doesn't appear to make money from generative
Speaker 2: AI and plans to spend eleven billion dollars on capex
Speaker 2: in twenty twenty five. Despite its media prominence in the
Speaker 2: Magnificent seven. At least, Tesla is one of the least
Speaker 2: exposed companies of mag seven to the AI trade, as
Speaker 2: Elon Musk has turned it into a memestock company where
Speaker 2: what they do doesn't really matter. That doesn't mean, of course,
Speaker 2: that Musk isn't touching AI. The XAI, the company that
Speaker 2: develops racist large language model grok and owns what remains
Speaker 2: of Twitter, apparently burns a billion dollars a month, and
Speaker 2: The Information reports that it makes a whopping hundred million
Speaker 2: dollars of annualized revenue, so about eight point three three
Speaker 2: million dollars a month. Now there's a shareholder vote for
Speaker 2: Tesla to potentially invest in Xai, which will probably happen,
Speaker 2: allowing Musk to continue to pull leverage from his Tesla
Speaker 2: stock until the company's decaying sales and brand eventually swallow
Speaker 2: him whole. But we're not talking about Elon Musk today.
Speaker 2: We are not. We have to talk about Apple now,
Speaker 2: and honestly, they're the least interesting part of this story.
Speaker 2: Their capital expensures in twenty twenty five are expected to
Speaker 2: also be around eleven billion dollars, and they arguably have
Speaker 2: the weirdest AI story in the mag of Since seven,
Speaker 2: Apple intelligence radicalized millions of people against AI, mostly because
Speaker 2: it fucking sucks. Apple clearly got into AI reluctantly and
Speaker 2: now faces stories about how they feel left behind in
Speaker 2: the AI race, which mostly means that Apple aggressively introduce
Speaker 2: people to the actual features of generative AI by force,
Speaker 2: and it turns out that people don't really want to
Speaker 2: summarize documents, or write emails or make custom emoji, and
Speaker 2: anyone who thinks they would is a fucking alien. In
Speaker 2: any case, Apple hasn't bet the farm on AI in
Speaker 2: so much sit It hasn't spent two hundred billion dollars
Speaker 2: in infrastructure for a product of the limited market that
Speaker 2: only loses money. And again, if you want to give
Speaker 2: me some money, I'm gonna put an ad break here.
Speaker 2: So after this, whatever comes next buy it or don't
Speaker 2: if you don't want to, but really you should. If
Speaker 2: I'm speaking, if you hear my voice in the ad,
Speaker 2: then you should buy it unless you don't want it.
Speaker 2: And we're back now. I'm going to use a new
Speaker 2: term I came up with that's really really bad. But
Speaker 2: the fragile five I call them Amazon, Google, Microsoft, Meta,
Speaker 2: and Tesla, the ones investing all the money in the GPUs,
Speaker 2: are holding up the US stock market by funding in
Speaker 2: Vidia's future growth story. And this is really the first
Speaker 2: big takeaway I want you to take from this three parter.
Speaker 2: To be clear, I'm not saying that any of the
Speaker 2: mag seven are going to die, just that five companies
Speaker 2: spend on in Vidio GPUs largely dictate our state of
Speaker 2: the US stock market will be If any of these companies,
Speaker 2: but especially in Vidia, sneeze, you four O one K
Speaker 2: and your kid's college fund will probably catch a cold.
Speaker 2: I realized this sounds a little simplistic, but by my calculations,
Speaker 2: in Vidia's value underpins about eight percent of the value
Speaker 2: of the US stock market. At the time of writing,
Speaker 2: it accounts for roughly seven point five percent of the
Speaker 2: S and P five hundred an index of the five
Speaker 2: hundred largest US publicly traded companies are disturbing eighty eight percent.
Speaker 2: As I mentioned, of in Vidia's revenue comes from enterprise
Speaker 2: scale GPUs, primarily US for Generative AI, of which five
Speaker 2: companies spend, makes up over forty two percent of its revenue.
Speaker 2: In the event that any one of these companies makes
Speaker 2: significant changes to their investments and in video chips, it
Speaker 2: will likely have a direct and meaningful negative impact on
Speaker 2: the wider economy and markets. In Vidia's earnings are effectively
Speaker 2: the US stock market's confidence and everything rides on five companies.
Speaker 2: And if we're honest, here really four companies. This tesla
Speaker 2: is point nine percent of the investment in GPUs of
Speaker 2: those five companies buying GPUs for Generative AI to train
Speaker 2: at generative AI models were still these services while losing.
Speaker 2: These companies' massive amounts of money don't really produce much revenue,
Speaker 2: meaning that the AI trade is not driven by any
Speaker 2: real meaningful revenue growth.
Speaker 3: But d it hid they said?
Speaker 2: They said, points of growth? Silence, quiet, nothing more out
Speaker 2: of you any of these companies talking about growth from
Speaker 2: AI or the jobs that AI will replace, or how
Speaker 2: AI has changed their organization are handwaiving to avoid telling
Speaker 2: you how how much money these services are actually making them.
Speaker 2: If they were making good money and experiencing real growth
Speaker 2: as a result of AI, they wouldn't shut the fuck
Speaker 2: up about it. They'd be in your ear and up
Speaker 2: your ass, hooting and hollering about how much cash they
Speaker 2: were rolling in. And they're not because they're not rolling
Speaker 2: in cash and are in fact blowing nearly one hundred
Speaker 2: billion dollars each to build massive, power hungry, costly data
Speaker 2: centers for no real reason. Don't watch the mouth, watch
Speaker 2: the hands. These companies are going to say they're seeing
Speaker 2: growth from AI, but unless they actually show you the
Speaker 2: growth and enumerate it, they are kind of lying. They're
Speaker 2: lying in the way that you're allowed to.
Speaker 3: But it Hey, Amazon Web Services took years to become profitable.
Speaker 3: People said Amazon would fail. So this is one of
Speaker 3: the most annoying and consistent responses to my work, and
Speaker 3: it's when people say that either Amazon or Amazon Web
Speaker 3: Services ran at a loss. In the Amazon Web Services,
Speaker 3: which pretty much was the invention of modern mass market
Speaker 3: cloud compute infrastructure for running stuff on the cloud, lost money.
Speaker 2: And then didn't. Here's the thing, this statement is one
Speaker 2: of the things that people say because it sounds rational.
Speaker 2: Amazon did lose mone and Amazon Web Services was expensive.
Speaker 2: That's right, right, it's obvious. Right. The thing is, I've
Speaker 2: never really had anyone explain this point to me, so
Speaker 2: I finally sat down. I'm going to deal with this
Speaker 2: criticism because every fucking person who manages it thinks they
Speaker 2: just bulled Excaliper from the stone and can now decapitate me.
Speaker 2: They claim that because people in the past doubted Amazon
Speaker 2: because are in addition to the burn rate of the
Speaker 2: AWS systems as the company built out its infrastructure, that
Speaker 2: I too, am wrong because the analysts were wrong about that.
Speaker 2: This isn't Camelot, You're a rube. You are not King Arthur.
Speaker 2: And now I will address both the argument itself and
Speaker 2: the day part of it too, because if the argument
Speaker 2: is that the people who got Amazon Web Services wrong
Speaker 2: should not be trusted and we should no longer trust them,
Speaker 2: the people who actively propagate and dies something wrong, we
Speaker 2: shouldn't trust them, right right, Well, you'll never guess who's
Speaker 2: now saying AI is good. Oh, I'm going to get there,
Speaker 2: don't you flip and worry? Well, if I'm honest, I'm
Speaker 2: not sure where this argument came from, because there is,
Speaker 2: to my knowledge, no story about Amazon Web Services where
Speaker 2: somebody suggests its burn rate would kill Amazon. But I'm
Speaker 2: a curious little creator, so let's start with an obvious one,
Speaker 2: the obvious point. I want to give a shout out
Speaker 2: to Harry mccrack and a fast company for bringing this
Speaker 2: one up to me. It May May thirty first, ninety
Speaker 2: ninety nine, there was a piece that everybody is thinking
Speaker 2: of called Amazon dot bom and the writer Jacqueline Doherty
Speaker 2: was mocked soundly for being wrong about Amazon, which has
Speaker 2: now become quite profitable. The article, along with the other
Speaker 2: sources that form the basis of this episode, are going
Speaker 2: to be linked in the spreadsheet, and as a as
Speaker 2: a surprise, I'll actually up later. I also want to
Speaker 2: be clear that Amazon Web Services did not launch until
Speaker 2: two thousand and six, and Amazon itself would become reliably
Speaker 2: profitable in two thousand and three. Technically, Amazon had opened
Speaker 2: up Amazon dot COM's web services for developers to incorporate
Speaker 2: Amazon content into their applications in two thousand and two,
Speaker 2: but what we consider Amazon web Services today, cloud storage
Speaker 2: and compute, launched in two thousand and six. But okay,
Speaker 2: fancy pans, what did she actually say? We quote Doherty.
Speaker 2: Unfortunately for Bezos, Amazon is now entering a stage in
Speaker 2: which investors will be less willing to rely on its
Speaker 2: charisma and more demand advances to tough questions like when
Speaker 2: will this company actually turn a profit? And how will
Speaker 2: Amazon triumph over a slew of new competitors who have
Speaker 2: deep pockets and new technologies. Who tried to ask Bezerz,
Speaker 2: but he declined to make himself for any other executives
Speaker 2: of the company available. He could ignore barons, but he
Speaker 2: can't ignore the questions. Bang a line, by the way,
Speaker 2: Amazon last year posted a loss of one hundred and
Speaker 2: twenty five million dollars, which is about two hundred and
Speaker 2: forty two point six million today's money on revenues of
Speaker 2: six hundred and ten millions to about one point one
Speaker 2: eight three billion dollars in today's money, and then this
Speaker 2: year's first quarter referring of course, to nineteen ninety nine,
Speaker 2: as the company posted a loss of sixty one point
Speaker 2: seven million, which is one hundred and nineteen point seventy
Speaker 2: five million today's money on revenues of two hundred and
Speaker 2: ninety three point six million, five hundred and sixty nine
Speaker 2: point eight two million dollars in today's money. I realized
Speaker 2: that was a real motherfucker of a quote, but it's necessary.
Speaker 2: Her argument, for the most part is that Amazon was
Speaker 2: burning cash and had a ton of competition from other
Speaker 2: people doing similar things, and that analysts backed her up,
Speaker 2: and they really did. By the way, again, I quote
Speaker 2: the first mover does not always win the importance of
Speaker 2: being first as a mantra in the internet world, but
Speaker 2: it's wrong. The ones that the most efficient will be successful,
Speaker 2: says one retail analyst. In retailing, anyone can build a
Speaker 2: great looking store. The hard part is building a great
Speaker 2: looking store that makes money, which is a good point
Speaker 2: fair arguments for the time, though perhaps a little narrow minded.
Speaker 2: The assumption wasn't what Amazon was building, and we are,
Speaker 2: by the way, are referring to Amazon dot com. The
Speaker 2: store was a bad idea, but the Amazon wouldn't be
Speaker 2: the ones to build it. And again we quote. Once
Speaker 2: Walmart decides to go after Amazon, there's no contest. The
Speaker 2: Barnard President Bernard's Retail Trend report. Walmart has the resources
Speaker 2: that Amazon can't even dream about, which is true at
Speaker 2: the time, but in simpler terms, Amazon's business model was
Speaker 2: not in question. People were buying shit online. In fact,
Speaker 2: this was just before the dot com bubble burst, when
Speaker 2: people had insane optimism about the future of the web.
Speaker 2: Yet the comparison stops there. People obviously like buying shit online.
Speaker 2: It was the business models of many of these web
Speaker 2: pioneers that sucked at Year WEBVAM. But we're going to
Speaker 2: talk about Amazon Web Services and the less technical of you.
Speaker 2: I want to explain something. AWS is a really important company.
Speaker 2: I'll kind of get into those details. But people like
Speaker 2: to argue about it and say, well, it lost a
Speaker 2: bunch of money, so you know that means that generative
Speaker 2: a I should lose a bunch of money to and
Speaker 2: that's how it works. I'm going to substantively and repeatedly
Speaker 2: explain why that is so goddamn stupid. I'm sick of
Speaker 2: the argument. I'm sick of it. Breathe Edward, breathe. They
Speaker 2: can't get you behind the microphone, okay. Amazon Web Services
Speaker 2: was an outgrowth of Amazon's own infrastructure, which had to
Speaker 2: expand rapidly to deal with the influx of web traffic
Speaker 2: from Amazon Dot Com, which had become one of the
Speaker 2: world's most popular websites and was becoming increasingly more complex
Speaker 2: as it sold things other than books to multiple international
Speaker 2: locations as well. Other companies had created their own infrastructure,
Speaker 2: but if a smaller company wanted to scale, they basically
Speaker 2: needed to build their own thing. It was a massive
Speaker 2: barrier between companies and building web services. And it's actually
Speaker 2: kind of cool what Amazon did. I hate to look
Speaker 2: Rosie I bind rose colored lenses. I don't know the
Speaker 2: phrase that Jeff Bezos, but oh no, I remember this
Speaker 2: was early two thousands, before Facebook, Twitter, and a lot
Speaker 2: of modern internet we know that runs on services like
Speaker 2: Amazon Web Services or Microsoft Zero or Google Cloud. They
Speaker 2: basically invented the modern concept of cloud compume.
Speaker 3: But we're bit to.
Speaker 2: Talk about Amazon Web Services being dangerous for Amazon and
Speaker 2: people hating on it the thing that allegedly happened, right.
Speaker 2: I do hope all the people that said this to
Speaker 2: me didn't just make it up. Oh my god, they did.
Speaker 2: A November two thousand and six story from Bloomberg talked
Speaker 2: about Jeff Bezos is risky bet to run your business
Speaker 2: with the technology behind his website, saying that that wall
Speaker 2: Street wanted him to mind the store. Bezos referred to
Speaker 2: as a one time Internet poster boy that became a
Speaker 2: post dot com pinata. Fuck, they were so good, but
Speaker 2: where is this pisson vinegar? By the way, this is fun. Nevertheless,
Speaker 2: this article, which again is linked in the spreadsheet for
Speaker 2: the episode notes, has what I think my hater's crave
Speaker 2: hmm and I quote. But if techies are wowed by
Speaker 2: Bezoz's grand plan, it's not likely to win many converts
Speaker 2: on Wall Street. To many observers, it conjures up the
Speaker 2: ghost of Amazon past. During the dot com boom, Bezez
Speaker 2: spent hundreds of millions of dollars to build distribution centers
Speaker 2: and computer systems in the promise that they would eventually
Speaker 2: pay off with outsize returns. That helps set the stage
Speaker 2: of the world's biggest web retail operation, with expected sales
Speaker 2: at ten point five billion dollars this year. All that
Speaker 2: has investors, wrestlers, and many analysts throwing up their hands
Speaker 2: wondering if Bezos is merely flailing around from an alternative
Speaker 2: to his retail operation. Eleven of twenty seven analysts who
Speaker 2: followed the company of under perform or sell ratings on
Speaker 2: the stock a stunning vote of no confidence. That number
Speaker 2: of cell recommendations is matched among large companies only by
Speaker 2: Quest Communications International, Inc. According to investment consultants Starmind Corp.
Speaker 2: It's more than even the eight cell options on the
Speaker 2: struggling Ford Motor Company. Pretty bad, right, pretty bad. My
Speaker 2: goose is cooked, all those analysts seem pretty bad, except
Speaker 2: it's not. My goose is raw. Yours, however, has been
Speaker 2: in the oven for over a year. As one on
Speaker 2: as Scott W. Duvitt noted at the time, the direct
Speaker 2: costs of providing Amazon Web services at first were miniscule
Speaker 2: because much of the startup infrastructure already existed. It was
Speaker 2: sur plus capacity, Amazon already owned, software Amazon already used,
Speaker 2: and Amazon was in it for the long haul. It
Speaker 2: knew that this would take some time before it became
Speaker 2: a profitable business unit, as the company was basically scaling
Speaker 2: up the infrastructure of the Internet. And by the way,
Speaker 2: let's just go back to that quote here. The quote
Speaker 2: says the costs were miniscule. The costs weren't the problem.
Speaker 2: Hey wait a second, that's a name, Scott W. Duvit.
Speaker 2: I can look him up. I wonder what he's up
Speaker 2: to right now? Oh oh, looks like he's working at
Speaker 2: web Bush as it's managing director of equity. Researcher has
Speaker 2: said that AI companies would enter a new stage and
Speaker 2: early twenty five he said, Oh oh God, just listen
Speaker 2: to this. The second stage is the application phase of
Speaker 2: the cycle, which would benefit software companies as well as
Speaker 2: the cloud of I. And then phase three of this
Speaker 2: will ultimately be the consumer facing companies figuring out how
Speaker 2: to use the technology in ways that can actually drive
Speaker 2: increased interactions with customers. The analyst says the market will
Speaker 2: enter phase two in twenty twenty five, with software companies
Speaker 2: and collaborvider stocks expected to see gains. He adds that
Speaker 2: cybersecurity companies could also benefits the technology evolves. I know
Speaker 2: I'm meant to be more mature, but it also calls
Speaker 2: out Palenteer, Snowflake, and salesforces those who would gain. In
Speaker 2: none of these cases am I able to see any
Speaker 2: actual revenue from AI. Salesforce themselves cerid according to the
Speaker 2: information that they'd see no revenue growth from AI in
Speaker 2: twenty twenty five. Palenteer also has discovered by the Autonomy
Speaker 2: Institute's recent study recently added the following to its public disclosures.
Speaker 2: There are significant risks involved in deploying AI, and there
Speaker 2: could be no assurance that using AI in our platforms
Speaker 2: and products will enhance be beneficial to our business, including
Speaker 2: our profitability. What I'm trying to say here is that
Speaker 2: analysts can be wrong, and they could be wrong at scale.
Speaker 2: There is no analyst consensus that agrees with me. In fact,
Speaker 2: most analysts to be bullish and AI despite the significantly
Speaker 2: worse costs and lack total lack of growth, but ed
Speaker 2: ed Amazon Web Services cost money ahead. Now you should
Speaker 2: meet your awn nice S tried chuckles. In twenty fifteen,
Speaker 2: the year that Amazon Web Services became profitable, Morgan Stanley
Speaker 2: analyst Catty Huberty believed that it was running and a
Speaker 2: material loss, suggesting that the five point five billion dollars
Speaker 2: of Amazon's technology and content expenses was actually AWS expenses
Speaker 2: with a negative contribution of one point three billion dollars.
Speaker 2: And by the way, want to know what she's up
Speaker 2: to nowadays? I wanted to know because six months ago
Speaker 2: she declared that twenty twenty five would be the year
Speaker 2: of AGENTICAI robust they enterprise adoption and broadening AI winners.
Speaker 2: So yes, analysts really got AWS wrong. But putting that aside,
Speaker 2: there might actually be a comparison here. Amazon Web Services
Speaker 2: absolutely created the capital expenditures drain on Amazon from Forbes's
Speaker 2: Chuck Jones. In twenty fourteen, Amazon at four point nine
Speaker 2: billion dollars in capital expenditures, up forty two percent from
Speaker 2: twenty thirteen to three point four billion dollars. The company
Speaker 2: is a wide range of items that it buys the
Speaker 2: support and grow its businesses, ranging from warehouses, robots, and
Speaker 2: computer systems for its core retail business and AAWS. Well,
Speaker 2: I don't expect Amazon to detail how much goes to AWS.
Speaker 2: I suspect it is a decent percentage, which means Amazon
Speaker 2: needs to generate appropriate returns on the capitol deployed from AWS.
Speaker 2: In today's money, this means that Amazon spent six point
Speaker 2: seven billion dollars in capital expenditures in twenty fourteen, likely
Speaker 2: on AWS, assuming it was this much every year. It wasn't,
Speaker 2: but I want to make an example of every person
Speaker 2: claiming that this is a gotcha. It took sixty seven
Speaker 2: point six billion dollars, and that's in today's money, and
Speaker 2: about nine or ten years of pure capital expenditures, even
Speaker 2: though all that capex wasn't just AWS to turn Amazon
Speaker 2: Web Services into a business that now makes billions of
Speaker 2: dollars a quarter in profit. And that's fifteen point four
Speaker 2: billion dollars less than Amazon's capex for twenty twenty four,
Speaker 2: and even less than one hundred and five billion dollars
Speaker 2: they spent this year. It's a fucking joke. And to
Speaker 2: be clear, the actual capital expension numbers are like the
Speaker 2: AWS cost in totality, we're likely much lower. I just
Speaker 2: want to make it clear that even when factoring in inflation,
Speaker 2: AWS was a a bargain and b a fraction of
Speaker 2: the cost of what Amazon is spent in twenty twenty
Speaker 2: four or twenty twenty five. Here's a funny little thing.
Speaker 2: On March thirtieth, twenty fifteen, New York Magazine published a
Speaker 2: piece from none other than mister Kevin Ruse about the
Speaker 2: cloud compute wars, in which he claimed that, and I quote,
Speaker 2: there's no reason to suspect that Amazon would ever need
Speaker 2: to raise prices in AWS or turn the fabled profits
Speaker 2: which the pundits have been speculating about for years less
Speaker 2: than a month later, Amazon revealed that Amazon Web Services
Speaker 2: was profitable. They don't call him the most right man
Speaker 2: in tech journalism for nothing. I think it's so funny
Speaker 2: when you go back and read all of Kevin Rus's stuff,
Speaker 2: how many just like rates he steps on, and how
Speaker 2: quickly they whammy him in the face, and how no
Speaker 2: body says anything. I'm saying something. But here's the good news.
Speaker 2: We're at the end of this first part. Next episode,
Speaker 2: we're going to continue exploring the comparison in AWS and
Speaker 2: general of AI and talk about why that comparison fundamentally
Speaker 2: doesn't work and why everything's cry the bripple. I'll catch
Speaker 2: you on the flip side.
Speaker 1: Thanks for listening, Thank you for listening to Better Offline.
Speaker 4: The editor and composer of the Better Offline theme song
Speaker 4: is Metasowski. You can check out more of his music
Speaker 4: and audio projects at Matasowski dot com, M A T
Speaker 4: T O, S O W s ki dot com. You
Speaker 4: can email me at easy at Better Offline dot com,
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