Speaker 1: Zone Media. Hello and welcome to this week's Better Offline Monologue.
Speaker 1: I'm your host ed ze Trunk. In August of last year,
Speaker 1: I put out a podcast called How the AI Bubble Bursts,
Speaker 1: where I ran down what I thought would be the
Speaker 1: signs that things were collapsing, my pale horses of the
Speaker 1: AI Apocalypse, if you will, which is something that reads
Speaker 1: really well, but when you say it out loud, not
Speaker 1: so good. The reason I put these together is that
Speaker 1: the bubble is unlikely to have one specific moment where
Speaker 1: things explode. Things like burst earns Is collapse during the
Speaker 1: Great Financial Crisis for such significant moments, in part because
Speaker 1: that was a public company. Mortgages were a massive part
Speaker 1: and are a massive part of the economy, and indeed
Speaker 1: there was billions and indeed I think trillions of dollars
Speaker 1: resting on them, and I don't really think there's a
Speaker 1: situation like that, nor is there one where a public
Speaker 1: company collapses as a result of the AI bubble bursting.
Speaker 1: This bubble is different because it's so thoroughly based on
Speaker 1: that games. I'll end up at some point doing a
Speaker 1: longer episode about this, But the long and short of
Speaker 1: it is that the actual core of the system. The
Speaker 1: real weak point is actually in video. In Vidia's continued
Speaker 1: success comes from the reliable quarter of a quarter or
Speaker 1: a year of a year growth from selling GPUs, the
Speaker 1: graphics processing units that power generally of AI and that
Speaker 1: people take and put inside of servers so that they
Speaker 1: can immediately start losing money. More than forty percent of
Speaker 1: their GPU revenue comes from the other six companies in
Speaker 1: the Magnificent Seven, Microsoft, Google, Meta, Tesla, Apple, and Amazon,
Speaker 1: and then VideA. Deeply depends on their continued and growing
Speaker 1: hunger for GPUs. It isn't just enough that they buy
Speaker 1: the same amounts, they must buy more. The rest of
Speaker 1: the mag seven's valuations are dependent on continued growth too,
Speaker 1: which is what AI is meant to provide them. But
Speaker 1: it's not really providing growth at all. Indeed, their growth
Speaker 1: stories are not really based on numbers but vibes. They're
Speaker 1: based on feelings and the general warm, fuzzy feeling the
Speaker 1: dipgits get when they claim that AI is the future.
Speaker 1: Let me give you an example. Metas stock jump because
Speaker 1: they've announced the theoretical data center the size of Manhattan
Speaker 1: now important detail here as well. Meta is making exactly
Speaker 1: minus dollars on generative AI. They're just putting generative AI everywhere,
Speaker 1: and yeah, giving people a little bit of psychosis. I
Speaker 1: imagine filling feeds full of slop. It's very bad. And
Speaker 1: you know what, it also isn't making them money. And
Speaker 1: right now this is really good for the Magnificent seven
Speaker 1: because they're not actually having to prove that AI is
Speaker 1: a big deal. People are basically believing it is because
Speaker 1: the AI trade, which means the value of these stocks,
Speaker 1: remains positive, and honestly, it is currently a positive trade,
Speaker 1: even though it's based on effectively nothing. Seriously, Amazon may
Speaker 1: only make five billion dollars in revenue this year on AI,
Speaker 1: and I mean revenue, not profit. Googled maybe three to
Speaker 1: seven billion, Microsoft thirteen billion dollars, and ten billion dollars
Speaker 1: of that is open AI's compute. These are pathetic numbers.
Speaker 1: But these companies are let off because the AI trade
Speaker 1: still works. The possibilities are still theres that don't exist
Speaker 1: today and don't appear to have any path to them either.
Speaker 1: They're coming, we swear, if we say agents enough time,
Speaker 1: maybe it'll work. The long and short of it is
Speaker 1: that everything about the AI industry is based on some level,
Speaker 1: on lies, on lies both subtle and avert, and the
Speaker 1: general sense that generative AI is both the future and
Speaker 1: the future of the economy. There are a few real
Speaker 1: tangible things to point at other than chat GPT's five
Speaker 1: hundred million weekly users and the tens of billions of
Speaker 1: dollars invested in AI startups, or maybe the weird acquisition
Speaker 1: deals like the two point four billion dollars that Google
Speaker 1: just gave kind of AI code editor Windsurf, except Google
Speaker 1: took the staff, some of the staff the C suite,
Speaker 1: the R and D team for the two point four billion,
Speaker 1: and then Cognition, who makes the Devin coding pop took
Speaker 1: the rest for an undisclosed sum. It's all really, really
Speaker 1: fucking weird. It's all very strange, and yet when you
Speaker 1: look beneath the surface, there really are few returns. Windsurfs
Speaker 1: monthly revenue was six point eight brillion, three million dollars
Speaker 1: a month, a ridiculously small amount, working out to about
Speaker 1: eighty two million dollars of annualized revenue. Yet based on
Speaker 1: the Information's Generative AI data base, Windsurf was actually one
Speaker 1: of the highest earning AI startups out there no really
Speaker 1: based on annualized revenue meaning month multiplied by twelve, most
Speaker 1: Ai companies make about one hundred million dollars annualized or less.
Speaker 1: Not really, that's about eight point three million dollars a
Speaker 1: year a month with since there's the Weka Xai together
Speaker 1: a bridge Glean perplexity, and they're all making about one
Speaker 1: hundred million dollars annualized. And I must be clear about
Speaker 1: how weird this status. Annialize just means the month of
Speaker 1: revenue times twelve. Customers churn. Customers churn, so your arr
Speaker 1: may go down when you have a few people drop out,
Speaker 1: it may spike arbitrarily because you've increased prices, and it's
Speaker 1: just it's a very bad statistic to use. Yet people
Speaker 1: are not really looking at the other thing, which is
Speaker 1: that's not a lot of money. Eight point three million
Speaker 1: dollars a month. You have ad agencies that make several
Speaker 1: times that. Ad agency's bank ads on Facebook and Google.
Speaker 1: These are terrible fucking companies. I mean outside of one
Speaker 1: hundred million ARR side, you've got mid Journey, who are
Speaker 1: inexplicably profitable. We'll look into that, and Neo four j
Speaker 1: and they make two hundred million dollars a month, sorry,
Speaker 1: two one hundred million dollars annualized, so about sixteen point
Speaker 1: six million dollars, which is again not amazing. None of
Speaker 1: these are amazing. These aren't great. These would be okay
Speaker 1: startups if they were profitable, and they're absolutely not. But
Speaker 1: right on the tippy top behind Anthropic and open AI
Speaker 1: is any sphere who makes Cursor and they make five
Speaker 1: hundred million dollars annualized, or about forty one point six
Speaker 1: million dollars a month, which is bad because in June
Speaker 1: all of their prices got increased by Anthropic, and on
Speaker 1: top of that they had to change the pricing and
Speaker 1: now Cursor kind of sucks. Go on their subredd it
Speaker 1: check it out anyway. This is why you don't like
Speaker 1: annualized as a stat by the way, because I reckon
Speaker 1: their July revenue might be a little bit lower than
Speaker 1: forty one point six million dollars, but we'll never know
Speaker 1: because well unless someone reports there. If you've got any
Speaker 1: numbers on any of these companies, my signal is eas
Speaker 1: it tron ezit ron dot seventy six on signal. Please
Speaker 1: send me anything you have. I love numbers anyway, past
Speaker 1: that point, it's only anthropic and open AI. And I've
Speaker 1: left out a few companies like Touring and Scale they
Speaker 1: don't make AI products their consultancies. But the long and
Speaker 1: short of it is, this industry doesn't make much fucking money.
Speaker 1: The actual returns from it aren't that very good. It's
Speaker 1: not very good at all. But the reason I'm telling
Speaker 1: you all these numbers is that I need you to
Speaker 1: know that this industry is not held up by the
Speaker 1: actual businesses or their revenues. None of these companies are profitable,
Speaker 1: and it certainly isn't held up by the actual products themselves.
Speaker 1: And I'm sure you've got an AI friend who's come
Speaker 1: to you and said, oh, I use it for this.
Speaker 1: See how far you get them in the conversation before
Speaker 1: they just say they're using it like a search engine.
Speaker 1: We had this whole thing with Brian on the podcast
Speaker 1: this week. It's like, yeah, really emphatically talking about the
Speaker 1: fact that you've got a slightly sexier search engine that
Speaker 1: may or may not get things right, that can fool
Speaker 1: you into believing you're correct about something which isn't a
Speaker 1: fucking product. Now, if it was, people will be making money.
Speaker 1: It's ridiculous. But even in areas like coding, coding the
Speaker 1: one place where people can point and go look look
Speaker 1: users like this, look edward, look at them. A study
Speaker 1: from nonprofit group Model Evaluation and Throat Research found that
Speaker 1: despite developers believing AI coding tools sped them up by
Speaker 1: twenty four percent, coding tools actually increase the completion time
Speaker 1: of their tasks by nineteen percent. It actually it slowed
Speaker 1: them down. Oh my god. Every week with this industry,
Speaker 1: I feel like I'm going insane. It's like every week
Speaker 1: there's this goddamn story like this. I still have people
Speaker 1: who tell me it's the future. I feel like I'm
Speaker 1: going insane. But as a result of AI being a
Speaker 1: nearly entirely vibe spaced economy, the pale horses of its
Speaker 1: apocalypse will be vibe shifters rather than defined events that
Speaker 1: would logically change things. Remember Deep Seek, that was a
Speaker 1: clunky story. So you had a Chinese model developer that
Speaker 1: may be cheaper, it was cheaper to train, much cheaper
Speaker 1: to train, but still cheaper to train, and their model
Speaker 1: might be cheaper, and it is comparable. I mean, I've
Speaker 1: certainly made my hay with the episodes and interviews that
Speaker 1: did around it, but I surprise that shocked the market.
Speaker 1: There are bigger, nastiest stories. But if that can do
Speaker 1: it well, basically anything could one thing that really spreads
Speaker 1: like information poison into the heads of business idiot's everywhere
Speaker 1: who are saying AI now please without really understanding what
Speaker 1: it does. It's unlikely to be one big pop but
Speaker 1: several little doots from the bubble deflating. So let's get
Speaker 1: to it. Here are the science to look out for,
Speaker 1: freshly updated, and if you have any ideas, please do
Speaker 1: reach out. I'd love to hear from you. We'll start
Speaker 1: with an obvious one. Any price increases or decreases are
Speaker 1: open AI and Anthropic. I called these increases in August,
Speaker 1: and they had decreases because, as I've mentioned in the
Speaker 1: subprime AI crisis, there is now a race to the
Speaker 1: boond for model developers. Open Ai cut the price of
Speaker 1: their own through Reasoning model by eight percent in June
Speaker 1: in an attempt to undercut Anthropics claud for Opus, which
Speaker 1: launched May twenty second, I believe, and we've already begun
Speaker 1: to see price increases too. Anthropic added service theres and
Speaker 1: open ai priority processing for enterprise customers to give them
Speaker 1: uninterrupted service in June. And I must be clear when
Speaker 1: I say enterprise, I mean any AI company that has
Speaker 1: customers at scale. So any Sphere, Cursor, Glean and the like,
Speaker 1: they are enterprise customers and they are very likely having
Speaker 1: to pay these prices. Now here's another one. Anthropic and
Speaker 1: open Ai may move away from monthly subscriptions, and indeed
Speaker 1: ANYAI company may do this. This is a huge payer
Speaker 1: horse when companies start moving away from simple business models,
Speaker 1: so twenty bucks one hundred bucks a month, or they
Speaker 1: start changing those so the returns on a sort of
Speaker 1: returns the actual usership isn't obvious. Isn't obvious how much
Speaker 1: you can or can't use. That's a sign that the
Speaker 1: company is trying to contain costs and indeed fuck with
Speaker 1: their customers a bit. And we've already seen a little
Speaker 1: bit of this with how Cursor changed their pricing or
Speaker 1: Claude Max the one hundred dollar or two hundred dollars
Speaker 1: a month subscription from Anthropic, which has now changed things
Speaker 1: to say you get more usage at the higher tiers
Speaker 1: than the twenty dollars a month pro subscription. How much
Speaker 1: more it isn't clear. Go to Claude subreadit. You'll see
Speaker 1: a lot of people who are constantly saying, I don't
Speaker 1: know what the rate limits are, and that's working as
Speaker 1: intended by the way Anthropic is tweaking things very clearly
Speaker 1: on the back end, we do not know what they are.
Speaker 1: There are rumors that they are quantizing models, so making
Speaker 1: them smaller, dumber, cheaper to run, but still doing comparable things,
Speaker 1: or just not having as much access within peak hours.
Speaker 1: These are unsubstantiated rumors, but I've seen enough claims of
Speaker 1: them that they're worth mentioning. These are signs that things
Speaker 1: are getting bad, or that they need to make things
Speaker 1: more profitable. And really, any and all cost increases on
Speaker 1: consumers by any AI service are a pay or horse,
Speaker 1: as they suggest the company in question is trying to
Speaker 1: deal with these ruinous costs. Remember, there are no profitable
Speaker 1: AI companies. It's fucking crazy. We are three years into
Speaker 1: this dog shit and there's none of them. Okay, surge AI.
Speaker 1: They are an AI data training company. That does not matter.
Speaker 1: It does not matter. If you've got a car that
Speaker 1: has a horrible fuel economy. You don't point out how
Speaker 1: well oil is selling to say that the car is good.
Speaker 1: The different things anyway, Any and all rate limits that
Speaker 1: any AI startup are a huge pay or horse because
Speaker 1: these companies are spending a shit ton of money and
Speaker 1: they're having to run these massive infrastructural operations to keep
Speaker 1: things going. Those things are expensive. Power in particular is expensive,
Speaker 1: so any mediating those costs is necessary. If you see
Speaker 1: it with other companies, it's even worse because it means
Speaker 1: that open ai and Anthropic are turning the screws on them. Now.
Speaker 1: Another obvious one, of course, is any funding of revenue
Speaker 1: problems from the remaining AI software companies Glean, Harvey, Alpha Sense,
Speaker 1: any sphere who makes Cursor as I mentioned, or replet
Speaker 1: for example. It's just the funding required to keep these
Speaker 1: companies going is running out, and their business models aren't working.
Speaker 1: And I want to make one real clear point here.
Speaker 1: I'm kind of repeating myself, but it's necessary. These companies
Speaker 1: are symbolic of whether generative AI will work. I realized
Speaker 1: chet GPT is the big sexy one. But if you
Speaker 1: can't build software on GENERATIVEAI and sell it for a profit,
Speaker 1: there is no industry here. Every single major cloud computing
Speaker 1: revolution has started because there is profit, and fucking hell,
Speaker 1: it's nothing like Amazon Web Services when it grew. I'm
Speaker 1: tired of hearing this point. I think I have to
Speaker 1: do a thing about it because I'm fucking sick of it.
Speaker 1: It's nothing to do with it, nothing, It's not remotely similar.
Speaker 1: The only similar thing is that goddamn data centers. God
Speaker 1: calming down. But on the subject to data centers, any
Speaker 1: delays to Stargate or Amazon and Anthropics new Carlisle, Indiana
Speaker 1: build out, both Anthropic and OpenAI are running into capacity issues.
Speaker 1: This is documented well both by the companies and reporting
Speaker 1: from outs like the Information. And they need these projects
Speaker 1: to happen because right now it's very obvious Microsoft is
Speaker 1: not going to expand their infrastructure for Open AI and
Speaker 1: Anthropic well, they need Amazon to do it. But data
Speaker 1: centers don't grow like weeds. They take forever to build.
Speaker 1: I don't even know when the Carlysle Indiana data center
Speaker 1: is going to get built. Fucking hell, what a mess.
Speaker 1: Every reason I must think about this, it's such a mess,
Speaker 1: all right. One final pale horse, and this is my
Speaker 1: favorite one. Anything that happens with soft Bank and their
Speaker 1: ability to raise money is a big pale horse the
Speaker 1: paylist of them all. Actually, because soft Bank is critical
Speaker 1: to everything. Soft Bank is the money behind open Ai.
Speaker 1: Soft Bank is the money behind Stargate. Soft Bank is
Speaker 1: financially responsible for Stargate, by the way, And if open
Speaker 1: Ai doesn't move in to Stargate, and indeed if Stargate
Speaker 1: never happens, Oracle gets left with forty billion dollars of
Speaker 1: chips unused and Cruso, who they have to pay a
Speaker 1: billion dollars I think, have a fifteen year lease with them.
Speaker 1: What a mess. But as I've said, the actual bubble
Speaker 1: bursting will be slow, annoying and unsatisfying at times. But
Speaker 1: these pale horses are the signs that things are falling apart.
Speaker 1: I will, as ever keep you up to date on
Speaker 1: when these signs are happening, what they mean, why you
Speaker 1: should care. I'll probably say fucking shit a few times
Speaker 1: when I do, so, really appreciate you, love you all,
Speaker 1: Thanks for listening.