Speaker 1: All Zone Media. Hello, and welcome to Better Offline Live
Speaker 1: and direct, coming at you from the middle of nowhere
Speaker 1: the center of everywhere, and I'm your host ed zetron.
Speaker 1: What else it feels like forever since I talked directly
Speaker 1: to you, my dear listeners. So I'll get right to it.
Speaker 1: And as a reminder, I'll be including links to everything
Speaker 1: I'm talking about in the episode notes. And if you're
Speaker 1: just catching up, all you really need to know here
Speaker 1: is that open ai makes large language models like GPT
Speaker 1: and of course the product chat GPT and throp it
Speaker 1: makes claude a similar product, and that generative AI products
Speaker 1: have yet to really prove a use case that justifies
Speaker 1: them losing money on every single transaction. Let's begin. August second,
Speaker 1: twenty twenty four was Black Friday for the AI boom,
Speaker 1: as a week of rough earnings from big tech led
Speaker 1: to what felt like the entire media industry asking one question,
Speaker 1: is the AI bubble popping? And that's the question I'm
Speaker 1: going to try and answer for you today and in
Speaker 1: the next episode two, the Guardians sought to answer why
Speaker 1: the big seven tech companies had been hit with AI
Speaker 1: boomed outs. CNN asked has the AI bubble burst, and
Speaker 1: The Atlantic suggested several months too late that the generative
Speaker 1: AI revolution may indeed be a bubble. The Financial Times
Speaker 1: reported hedge fund Elliott Management told investors that Nvidia was
Speaker 1: a bubble, and Bloomberg reported that big tech had failed
Speaker 1: to convince Wall Street that AI was paying off. It's
Speaker 1: all part of a growing trend where people are suddenly
Speaker 1: realizing what I've been saying for months, that this unprofitable,
Speaker 1: energy hungry technology that creates mediocre outputs is not actually
Speaker 1: the future. It's just another cloud do hickey. I had
Speaker 1: not a great way of putting it, I realized, but
Speaker 1: this is my nice way of saying. Generative AI isn't
Speaker 1: completely useless, but the large language models they kind of
Speaker 1: are based on the costs. These articles were for the
Speaker 1: most part, talking about the sudden and violent declines and
Speaker 1: the share prices of companies like Microsoft, Amazon, and Google,
Speaker 1: which for the most part haven't really recovered and as
Speaker 1: of about August tenth, are down significantly over the past month.
Speaker 1: Although these articles didn't say anything particularly new or reveal
Speaker 1: any individual missteps or scandals that might have prompted the slide,
Speaker 1: they hinted to a broader awareness among Wall Street that
Speaker 1: the AI ambitions of these companies and by which I
Speaker 1: really mean generative AI, will require these massive upfront investments
Speaker 1: and the payoff might not n actually be there, and
Speaker 1: at least if it is, it's not going to be
Speaker 1: there for a while. We're talking years, if not a decade,
Speaker 1: and once the narrative gets settled, is very, very very
Speaker 1: hard to move in. While a stock market isn't always rational,
Speaker 1: check out Tesla for more. The one day sell off
Speaker 1: of these stocks and the comments from analysts and industry
Speaker 1: figures that followed, suggest that Wall Street is growing in
Speaker 1: increasingly uncomfortable with the vast amounts of money required to
Speaker 1: build and grow generative AI into whatever the fuck that's
Speaker 1: meant to be. These companies, while still making over ten
Speaker 1: billion dollars in profit, of course, referring to Microsoft, Google, Amazon,
Speaker 1: and the like in the last quarter alone, have also
Speaker 1: spent an absolute shit ton of money on infrastructure to
Speaker 1: capture the so called demand for cloud services from generative AI. However,
Speaker 1: one little problem, none of them seem to actually be
Speaker 1: making that much money from the thing they're investing in.
Speaker 1: In the last fiscal year, Microsoft's capex the capital expenditures
Speaker 1: was about fifty five point seven billion dollars, which is
Speaker 1: up seventy five percent year over year, with more than
Speaker 1: one third nineteen billion dollars spent in the last quarter
Speaker 1: and in June thirtieth, twenty twenty four. This is reportedly
Speaker 1: split fifty to fifty between infrastructure and technology, which suggests
Speaker 1: an aggressive data center build out, with Chief financial officer
Speaker 1: for Microsoft Amyhood saying that the company expects capital expenditures
Speaker 1: to increase on a sequential basis, giving cloud and the
Speaker 1: and I quote AI demand that, as I've repeatedly said,
Speaker 1: is not really there. And what exactly does increasing on
Speaker 1: a sequential basis mean in dollar terms? I have absolutely
Speaker 1: no idea. It's vague and perhaps vague enough to rattle
Speaker 1: the markets, particularly when Microsoft will be starting from an
Speaker 1: already quite high valuation. We're still, Hood added, and I
Speaker 1: quote Microsoft's earnings calles that AI related spend represented nearly
Speaker 1: all of our total capital expenditures, with roughly half for
Speaker 1: infrastructure needs that will support monetization over the next fifteen
Speaker 1: years and beyond ugh. In essence, Microsoft spent nineteen billion
Speaker 1: dollars in the last quarter on cloud and AI expenses
Speaker 1: and has made it clear that it's not done spending
Speaker 1: more money than it's ever spent before on a technology
Speaker 1: that neither makes Microsoft nor the people paying them that
Speaker 1: much money. It's very stupid and for context, Microsoft made
Speaker 1: twenty two point zero four billion dollars in profits in
Speaker 1: Q two twenty twenty five. Is this really worth sinking
Speaker 1: an entire quarters worth of profits into? Let me give
Speaker 1: it another way to look at it. Microsoft's net profit
Speaker 1: margin has dropped from thirty nine point four four percent
Speaker 1: in Q three twenty twenty three to thirty four point
Speaker 1: four percent in Q two twenty twenty four, meaning that
Speaker 1: it's taking home less money than it usually would because
Speaker 1: they're really investing in this thing that only loses money.
Speaker 1: It's very good, it's very good that this is happening.
Speaker 1: This is what you love to see. The other cloud
Speaker 1: providers aren't really doing much better. Google's capital expenditures are
Speaker 1: forecast to be fifty billion dollars in twenty twenty four,
Speaker 1: and it's spent eleven billion dollars in Q four twenty
Speaker 1: twenty three, driven by and I quote mostly by technical
Speaker 1: infrastructure meaning servers and data centers, and twelve billion dollars
Speaker 1: was what they spent in Q one twenty twenty four.
Speaker 1: The reason I'm not breaking things out much with Google
Speaker 1: is because it hasn't been extremely guarded about its AI expenses,
Speaker 1: probably because they're really high and not making any money
Speaker 1: from it. Amazon's similarly guarded, with its capex last year
Speaker 1: hanging somewhere around forty eight point four billion dollars. It's
Speaker 1: spent thirty point five billion dollars so far in twenty
Speaker 1: twenty four, an absolutely ridiculous amount considering its profit for
Speaker 1: Q two twenty twenty four was thirteen point four to
Speaker 1: eight billion. They're just sinking their profits into these things,
Speaker 1: and there's really no sign that anything changes. Every hyperscaler
Speaker 1: has said that they intend to keep spending all of
Speaker 1: this money on AI, and I haven't even mentioned companies
Speaker 1: like Oracle, which expects to spend ten billion dollars on
Speaker 1: cloud infrastructure this year, with much of that new capacity
Speaker 1: going to support Microsoft and Google Cloud. I don't know
Speaker 1: what happens if they don't need it anymore. Anyone think
Speaker 1: about anyway anyway, But no Black Friday. It was a
Speaker 1: collective realization of the scale and the cost of AI
Speaker 1: and the first signs that the markets are starting to
Speaker 1: ask those annoying little questions about whether it's actually worth it.
Speaker 1: Yet the real chaos, and one that comparatively speaking slipped
Speaker 1: under the radar, came in the form of one of
Speaker 1: my pale horses. Last month, I put out an episode
Speaker 1: called top Culture where I suggested that the first signs
Speaker 1: of the AI bubbles collapse would be in the failure
Speaker 1: of a major AI company, though one not operating at
Speaker 1: the scale of say Open Ai, and I specifically picked
Speaker 1: one out character dot Ai, which raised one hundred and
Speaker 1: fifty million dollars in funding, and the information had already
Speaker 1: hinted might sell itself to one of the big tech companies. Now.
Speaker 1: The reason I picked them is that their app which
Speaker 1: allows you to talk to AI chatbots of Elon Musk
Speaker 1: and Staragojo from jiu Jitsu Kaizen, the anime manga which
Speaker 1: we all know I'm tired of waiting for. That's not
Speaker 1: a business, by the way, and they never really had
Speaker 1: a sustainable business model or really a meaningful product. And
Speaker 1: there one hundred and fifty million dollar raise was the
Speaker 1: first big stupid capital raise in the generative AI boom.
Speaker 1: Early twenty twenty three, when nobody else could raise at all.
Speaker 1: In my opinion, their continued existence, other than being a
Speaker 1: disgusting insult to company building and startups everywhere, was proof
Speaker 1: that the bubble existed, and their death or whatever form
Speaker 1: this really is, is a sign that the tolerance for
Speaker 1: bullshit is leaving the market, as my blunt force for
Speaker 1: shadowing suggests. On Friday August second, and yes, most of
Speaker 1: this stuff happened. On that Friday, Google said that it
Speaker 1: would license Character AI's technology and hire the company's leaders,
Speaker 1: Noam Shazia and Daniel Defritas, along with their research team
Speaker 1: of thirty people, to work at Google's DeepMind AI division.
Speaker 1: The fates of the other one hundred and forty employees
Speaker 1: remain uncertain. I assume they're alive, but I imagine some
Speaker 1: will remain on as staff as the character dot ai
Speaker 1: app remains operational. It's a strange, sad end for a
Speaker 1: company that never really had any business existing, and in
Speaker 1: many ways feels like a con happening in broad daylight.
Speaker 1: Shazir and Defritas are both former Google employees, having left
Speaker 1: the company in twenty twenty one to create Character dot ai.
Speaker 1: It's unclear whether given their previous employment, they'll be required
Speaker 1: to wear the new GLO propeller hat that you get
Speaker 1: if you're new to Google. I actually don't know if
Speaker 1: they still do that. Email me is easy at better
Speaker 1: offline dot com. That's the letter E than the letter
Speaker 1: Z or Z for my British and Canadian fans. If
Speaker 1: you know about this propeller or indeed can get me one,
Speaker 1: I would very much like one anyway. While this is
Speaker 1: being framed as a typical licensing employee poaching deal where
Speaker 1: nothing acquisition adjacent has happened, it is actually an acquisition.
Speaker 1: Google's paying two point five billion dollars to investors. Employee
Speaker 1: stock options will vest, and that means when you get
Speaker 1: stock in a company, it usually takes time for you
Speaker 1: to actually earn it, so that you can't just take
Speaker 1: it and leave it immediately, as I would, And that
Speaker 1: will keep vesting until July twenty twenty six at the
Speaker 1: acquisition rate of eighty eight dollars a share paid for
Speaker 1: by the money from the licensing deal. That is not
Speaker 1: an acquisition from Google. But after that point your shit
Speaker 1: out of luck. It's no longer guaranteed. This is a
Speaker 1: terrible situation. All around for everyone other than the earliest investors.
Speaker 1: It's another great situation where the bad guys win. In
Speaker 1: essence anyone who has options that aren't fully there. By
Speaker 1: July twenty twenty six, maybe shit out of luck and
Speaker 1: character AI's original funding valued them a billion dollars, making
Speaker 1: this a situation where and Resent Horowitz aw a one
Speaker 1: point five x return on their investment in a company
Speaker 1: that never really did anything. Employees kind of got screwed.
Speaker 1: Maybe they didn't, It's unclear, But what is clear is
Speaker 1: that as of now, character ai is effectively dead. The
Speaker 1: company will shift from using their own models their literal
Speaker 1: only thing that they did, to publicly available open source
Speaker 1: large language models like metas Lama, and the original engineering
Speaker 1: team is effectively gone. The company will likely shamble a
Speaker 1: long life lessly until it curls up in the corner
Speaker 1: like an old cat, Except an old cat has more
Speaker 1: purpose and meaning in the universe than the bullshit chatbot company.
Speaker 1: So why does this matter? On one level, the death
Speaker 1: of character dot ai is an indicator of the unsustainability
Speaker 1: of many of these generative AI applications and companies. Even
Speaker 1: with one hundred and fifty million dollars in funding, which
Speaker 1: is a decent amount of money for a normal company.
Speaker 1: Character likely couldn't keep the lights on for very long,
Speaker 1: which kind of made it necessary for them to be
Speaker 1: absorbed or acquired before they shut down and embarrassed everyone involved.
Speaker 1: It's also just like a Charlatan's Olympics. It's this company sucked.
Speaker 1: It never made money, it didn't really do anything that different,
Speaker 1: but they just get bailed out. These fucking start up people.
Speaker 1: They always go on about the meritocracy. They're always going
Speaker 1: on about, Oh, it's about working hard, It's not about
Speaker 1: your circumstances. These jack holes, these fucking idiots. They got
Speaker 1: to sell their bullshit company to Google, a company they
Speaker 1: left the found it. It's just so annoying. And this
Speaker 1: agreement also strongly resembles an earlier one between Inflection AI
Speaker 1: and Microsoft, where Microsoft bought Inflections technology and team without
Speaker 1: actually acquiring its equity, so the actual stock in the company.
Speaker 1: Founded by DeepMind co founder mister Fassuliman and LinkedIn co
Speaker 1: founder Reid Hoffman in twenty twenty two, Inflection was, in
Speaker 1: Layman's terms, intended to be a more emotion aware version
Speaker 1: of CHATGBT just one year after its creation, they'd raised
Speaker 1: one point three billion dollars at evaluation of four billion.
Speaker 1: As I noted previously, I believe that Microsoft's acquisition of
Speaker 1: Inflection was an attempt to avoid regulatory scrutiny by structuring
Speaker 1: an acquisition as a transfer of tech and talent, rather
Speaker 1: than buying the company where the tech and the talent live.
Speaker 1: And yet I'm also convinced that Inflection would struggle to
Speaker 1: last out on its own, even with its smaller user
Speaker 1: base and with a one point three billion dollar war chest,
Speaker 1: and eventually it would have had to get acquired or
Speaker 1: just die. Regardless, I'm beginning to see it patten AI's
Speaker 1: point of failure is shifting, or more accurately centralizing. At
Speaker 1: one point, the burden of this entire generative AI fast
Speaker 1: was shouldered by a large and disparate group of startups
Speaker 1: and investors, and it's now moving to a few shoulders,
Speaker 1: those of giants like Microsoft, Google, Amazon, Meta and to
Speaker 1: a much lesser extent, Apple. The two most prevalent large
Speaker 1: language models outside of course of Metaslama open AI's GPT
Speaker 1: and Anthropics claud are effectively big tech welfare recipients receiving
Speaker 1: billions of dollars in cloud credits to run their extremely
Speaker 1: expensive models without having to build their own infrastructure. It's
Speaker 1: also kind of a con because that's not real money,
Speaker 1: that's chuckie geese tokens, and how are those valued. Ten
Speaker 1: billion dollars goes to open Ai, mostly in cloud credits,
Speaker 1: and they get equity in return. That doesn't make it.
Speaker 1: I can't invest in companies and air miles. Why can
Speaker 1: Microsoft do it? Anyway? Microsoft invested billions of dollars in
Speaker 1: open Ai, and Google and Amazon are propping Upanthropic too,
Speaker 1: with the latter completing its four billion dollar investment in
Speaker 1: the ai company earlier this year. I need to be
Speaker 1: clear that open Ai and Anthropic are wholly reliant on
Speaker 1: the mercies of a handful of trillion dollar companies who
Speaker 1: are themselves at the mercy of the rot economy in
Speaker 1: the public markets, and especially in the case of open
Speaker 1: AI's relationship with Microsoft, they're not just dependent on big
Speaker 1: tech firms financial support, but also on their ability to
Speaker 1: procure and build the actual infratre structure of these products.
Speaker 1: Open Ai does not have their own service, neither does Anthropic.
Speaker 1: Perhaps they have some a few, but the majority of
Speaker 1: their actual processing is done by big tech firms that
Speaker 1: paid them in Chuck e GE's tokens in cloud credits
Speaker 1: to run their services. Who knows how you even amortize that.
Speaker 1: It's completely insane. It drives me insane that they're able
Speaker 1: to do this every time they find a horrible little
Speaker 1: thing to do. But me, I'm at the mercy of
Speaker 1: one of the fine products that you'll hear after this
Speaker 1: ad break, one that will no doubt echo my exact thoughts, feelings,
Speaker 1: and desires. Buy their things or don't. That's up to you,
Speaker 1: and we're back. As I was previously saying, Friday, August second,
Speaker 1: twenty twenty four is a rough day for AI, and
Speaker 1: it somehow got worse. That's SAE. The Information reported that
Speaker 1: Nvidia has reportedly told Microsoft and another unnamed cloud customer
Speaker 1: that its next generation Blackwell chips, which are designed primarily
Speaker 1: for accelerating AI compute tasks, will be delayed by three
Speaker 1: months due to an unspecified design floor identified by its
Speaker 1: contract foundry TSMC. It's entirely possible that this floor takes
Speaker 1: a little more than three months to resolve. Semiconductor manufacturing
Speaker 1: is really, really, really really hard and issues that initially
Speaker 1: see minor can rapidly spiral out of control. On top
Speaker 1: of that, you can't rush them in the same way
Speaker 1: you can with software. You can't just throw a bunch
Speaker 1: more money. TSMC has plenty. But on top of that,
Speaker 1: this isn't a money problem. This is one of those
Speaker 1: scientific ones that you can't just skip over. And with
Speaker 1: black Whill representing a major leap forward in capabilities both
Speaker 1: in the terms of power efficiency and sheer compute power,
Speaker 1: this is a huge blow to open ai and it's
Speaker 1: many many competitors, by which I mean it's other competitor,
Speaker 1: which is also bankrolled by a big tech sugar daddy.
Speaker 1: It's also likely to delay some of open AI's grander
Speaker 1: ambitions for an indeterminate amount of time, which in turn
Speaker 1: kind of dampens its appeal to potential investors. And to
Speaker 1: be clear, open ai basically has to raise in the
Speaker 1: next six months, as the Information reported that open ai
Speaker 1: could lose as much as five billion dollars this year alone.
Speaker 1: I will get to that later, but just to be clear,
Speaker 1: that's not five billion in losses plus revenue. That is,
Speaker 1: after you take the money out that they made. It's
Speaker 1: really bad it's really really bad. Though. It's all so
Speaker 1: very bad. I'm not sure why more people aren't freaking out.
Speaker 1: I'm mostly chilling just because they don't really care if
Speaker 1: they live or die. I feel bad for the people
Speaker 1: with the jobs, but I'm rambling. We'll get back to it,
Speaker 1: and this is a problem that expands to Google and
Speaker 1: Microsoft too. In Nvidious Blackwell chips was supposed to be
Speaker 1: a major technological leap for generative AI, designed with both
Speaker 1: influence the way that large language models generate answers in
Speaker 1: training in mind, and thus providing vastly more compute parerent
Speaker 1: energy efficiency necessary to make this shit move. But as
Speaker 1: of now, these chips have been delayed, with their availability
Speaker 1: not expected into the first quarter of twenty twenty five
Speaker 1: at the earliest, and the Information reports that open Ai
Speaker 1: probably won't get access to them until March twenty twenty four,
Speaker 1: and Nvidia might be forced to do new test runs
Speaker 1: with its foundry partner before scaling up to mass production.
Speaker 1: One particularly worrying quote, and I kind of just hinted
Speaker 1: in it there, was that Microsoft managers had planned to
Speaker 1: make Blackwell powered servers available to open Ai by January,
Speaker 1: but like I said, may need to plan for March
Speaker 1: or early spring, and that was said by a person
Speaker 1: with knowledge of the situation. Beautiful name the reason that's bad, Well,
Speaker 1: it's not really just one. First, open ai desperately needs
Speaker 1: something new. They need something that will show both investors
Speaker 1: and the media that open ai is building something meaningful.
Speaker 1: And while it's possible it will be able to deliver
Speaker 1: GPT five, which is their next model, in the near
Speaker 1: term future, even potential customers don't believe the jump will
Speaker 1: be significant enough from GPT four. Second, for reasons I've
Speaker 1: alluded to at the start of this episode, investors are
Speaker 1: getting a touch itchy with the AI hype boom, and
Speaker 1: more specifically with the giant tech companies that are bankrolling it.
Speaker 1: The street needs to see results, or at the very
Speaker 1: least ap plausible case for the future profitability and marketability
Speaker 1: of generative AI, a thing that it's genuinely bad at.
Speaker 1: In vidious Blackwell chips could help open ai models run
Speaker 1: faster and ingest training data faster, as well as, even
Speaker 1: if it's not possible, fooling investors into believing that open
Speaker 1: ai had the latest tech and thus could build the
Speaker 1: average general intelligence that sam Ortmand's been lying about and
Speaker 1: allow him to continue his con regardless, the article from
Speaker 1: the Information put it very plainly open AI only gets
Speaker 1: access to the latest technology as fast as Microsoft permits,
Speaker 1: or as fast as Microsoft is able to if I
Speaker 1: did on their own, even one of these events would
Speaker 1: be a deeply worrying sign of the bubble popping, and
Speaker 1: together they threatened to begin a collapse that I've been
Speaker 1: predicting since March, where I said that AI companies had
Speaker 1: about three quarters to prove themselves and I quote savaging
Speaker 1: the revenues of the biggest companies in tech when things
Speaker 1: don't work out. But I've realized now that it isn't
Speaker 1: really super useful to attach things to time. Though I
Speaker 1: stand by bud prediction, and thus I think it's more
Speaker 1: illustrative to suggest what the terms of the bubble popping
Speaker 1: actually are, So let's define them. What do I mean
Speaker 1: when I talk about the bubble popping? For the sake
Speaker 1: of clarity, I'm defining it as the major cloud companies
Speaker 1: reducing capital expenditures related to generative AI in a public
Speaker 1: and significant manner, as in an actual statement from satching
Speaker 1: Adelaer at Microsoft or Sun Duppishi at Google or one
Speaker 1: of the major large language model companies Anthropic or open
Speaker 1: AI collapsing in some way. No cheap thrills, no half measures.
Speaker 1: We're not calling this fucking thing until it actually pops,
Speaker 1: and it will not pop into one or both of
Speaker 1: these companies go tits up. To be clear, when I
Speaker 1: talk about Anthropic and Open Air collapsing, I don't actually
Speaker 1: mean in the Enron style way. These companies are probably
Speaker 1: not going to fall apart, shut down, close their doors suddenly.
Speaker 1: It could be that they're absorbed into another company on
Speaker 1: unfavorable terms, you know, like character AI and inflection, like
Speaker 1: the things that just happened. And in that case, I
Speaker 1: think investors are going to take a massive loss. Open
Speaker 1: AI or Anthropic might be forced to radically limit their operations,
Speaker 1: either by shutting down their free chatbots or limiting access
Speaker 1: to enterprise customers, or by slowing down development massively, which
Speaker 1: by the way, will be death's embrace. It will be over.
Speaker 1: We could see massive layoffs, or we could see these
Speaker 1: companies pivot to a less capital intensive business model, such
Speaker 1: as licensing their patterns and IP to other technologies or companies,
Speaker 1: but not really offering an actual tangible product to consumers
Speaker 1: or business customers, as opposed to what they're doing today,
Speaker 1: which is offering a tangible thing that doesn't really doom
Speaker 1: that much. I'm rambling again. Yeah, I can imagine all
Speaker 1: sorts of terminal endings for Generative AI is big two,
Speaker 1: and some of them aren't even legally actionable. But I
Speaker 1: believe that the collapse or absorption of these companies is
Speaker 1: the one critical sign to look for. Open ai began
Speaker 1: this hype cycle and Sam Altman is definitely the pt
Speaker 1: barnum of the large language model circus, and open ai
Speaker 1: has absorbed more money and attention than any other startup
Speaker 1: of the last few years, and outside of Uber, I
Speaker 1: think they might be getting the most all time. God,
Speaker 1: I hate it. It's symbolic of the excess in the
Speaker 1: waste of the generative AI boom and it's death or
Speaker 1: as I mentioned, some alternative collapse is the sign that
Speaker 1: we're done here in the same way that FTX signaled
Speaker 1: the end of the cryptocurrency boom. And if open AI's
Speaker 1: collapse marks the apocalypse for generative AI, I believe it
Speaker 1: will be accompanied by one or several of the following
Speaker 1: pale horses, real tangible signs that things are falling apart,
Speaker 1: things you can send to your friends, family and laugh at.
Speaker 1: Let's take a look, shall we. Number one, Any significant
Speaker 1: price changes by any large language model company are a
Speaker 1: bad sign. Desperate times require desperate measures, and any oscillation
Speaker 1: in pricing is a bad sign. We could see a
Speaker 1: race to the bottom, which is kind of already happening
Speaker 1: with model developers releasing increasingly cheaper options to grow revenue
Speaker 1: and build their customer bases, which is an idea that
Speaker 1: only makes sense if the underpinning technology is profitable, which
Speaker 1: Generative Ai is not, and it's already kind of begun
Speaker 1: with open AI's reduced price GPT four oh mini in
Speaker 1: Google Gemini's Google Flash one point five I believe it's called,
Speaker 1: and they just reduce that pricing to compete with GPT
Speaker 1: four oh mini's cheapest option. This is totally unsustainable, which
Speaker 1: means it fits right in with the rest of the
Speaker 1: hype cycle. Conversely, if prices start increasing, this is a
Speaker 1: sign that the company is getting really, really desperate and
Speaker 1: have to find a way to start recouping the massive
Speaker 1: costs of the unsustainable shit show they've been participating in well.
Speaker 1: This I think is probably one of the later ones.
Speaker 1: If they do this, if they even get to it,
Speaker 1: it's just the sign that things are falling apart. I
Speaker 1: also think we're going to see stories about general discord
Speaker 1: in AI investment. Any articles you see about investors fleeing
Speaker 1: private aideals as they did with the metaverse, or a
Speaker 1: sign that things are falling apart. And the things I'm hearing,
Speaker 1: by the way, is that this has already begun, but
Speaker 1: that's anecdotal. Don't take my word for it. Just watch
Speaker 1: the media. We might also see stories about open ai
Speaker 1: having trouble raising money. Up until now, there haven't been
Speaker 1: any rumors about them having trouble, despite the fact that
Speaker 1: they're expected to lose like I mentioned, five billion dollars
Speaker 1: in twenty twenty four. They need to raise billions of
Speaker 1: dollars and they have to do it soon. And if
Speaker 1: they can't raise, nobody can. But moving on, there's another
Speaker 1: harbinger to look out for, and it would be evidence
Speaker 1: that Google or Microsoft is reducing the capex as discussed,
Speaker 1: because it's really important to realize that venture capital and
Speaker 1: Silicon Valley really are not They're not the ones propping
Speaker 1: this up. They might be the year leaders, they might
Speaker 1: be the ones talking about how important is But Google
Speaker 1: and Microsoft are the ones holding this up, and Amazon
Speaker 1: as well. They're the ones who are bankrolling Anthropic and
Speaker 1: open Ai. Microsoft as I will get to basically owns
Speaker 1: open ai. If those companies decide they don't want this
Speaker 1: to continue, it will stop. Venture capital cannot afford to
Speaker 1: keep open ai alive. But moving on, you should keep
Speaker 1: out and beady little I for any discord within any
Speaker 1: of the major players in generative AI. But I'm not
Speaker 1: talking about open ai and Anthropic, talking about companies like
Speaker 1: Scale Ai, who are training data company that's raised over
Speaker 1: one on a half billion dollars and cohere, another large
Speaker 1: language model company that recently raised another four hundred and
Speaker 1: fifty million dollars from Nvidia and Salesforce and Salesforce up.
Speaker 1: They've been talking about doing AI for like a decade.
Speaker 1: I don't know what product they sell. I'd watch those
Speaker 1: two very carefully. They're seen as stable, revenue generating yet
Speaker 1: as discussed, unprofitable and sillery firms that will likely need
Speaker 1: to raise again in the next twelve months. If we
Speaker 1: hear about problems such as employees being unhappy, or trouble's
Speaker 1: fundraising or making money. This means that people on the
Speaker 1: inside are making nasty little noises because they know things
Speaker 1: are falling apart. And the same, by the way, goes
Speaker 1: for any discord in open Ai or Anthropic. This one's obvious.
Speaker 1: If we hear there are problems they're worried, or if
Speaker 1: they're getting worried, if they can't raise money, if they're
Speaker 1: losing people, which is kind of already happening, if they
Speaker 1: can't seem to make a deal work, if they're having
Speaker 1: trouble progressing their software. Anything about these companies is probably
Speaker 1: a bad sign. If I were you, I'd keep an
Speaker 1: eye on the Washington Post. Natasha Tiku's done great work there,
Speaker 1: as the people at Shera A. V. Day and Jeffrey Fowler.
Speaker 1: But Natasha's done some great work. Or mister Altman, the
Speaker 1: Information has got some great people doing work on this
Speaker 1: Reuter's Tech Crunch for or film media. They're the ones
Speaker 1: that keep an eye out for. We've already seen a
Speaker 1: little bit of this happening already. A few days ago,
Speaker 1: open Ai lost two of its co founders, John Shulman,
Speaker 1: left for competitor anthropic and chief operating officer Greg Brockman
Speaker 1: has gone on something he's calling extended leave. As on aside,
Speaker 1: this is objectively one of the funniest things it's anyone
Speaker 1: has ever done in tech. Yeah, man, nothing big going on.
Speaker 1: Enjoy a vacation, mate, Not like the entire industry is
Speaker 1: falling apart, not like the bubble might be popping. Enjoy
Speaker 1: carbo Anyway. As things get especially bad, I think we're
Speaker 1: going to see discussions of layoffs based on people I've
Speaker 1: talked to. Generative AI companies are paying these massive salaries
Speaker 1: in stock and cash, and they're not run particularly efficiently
Speaker 1: because they are really driven by dreamers, by which I
Speaker 1: mean conn artists. If AI jobs are no longer these
Speaker 1: cushy little Heidi holes for the most expensive engineers in
Speaker 1: the valley, things are going to sour fast because they
Speaker 1: need the best to do this mediocre crab that you
Speaker 1: see every day. But I'd argue the biggest and most
Speaker 1: desperate of these pale horses would be some sort of big,
Speaker 1: stupid magic trick. As these companies get desperate, expect someone,
Speaker 1: especially Open AI, to try and show something new and
Speaker 1: crazy as a means of trying to turn this narrative around.
Speaker 1: When or if this happens, look very carefully at what
Speaker 1: they say about the products availability, what it can actually do,
Speaker 1: or who they show it to. Is it available publicly?
Speaker 1: Are there limitations on it? And are there any weird
Speaker 1: terms and conditions to look out for. If open ai
Speaker 1: gets desperate, it may move up the public launch of
Speaker 1: soro It's generative video product. Doing those really only going
Speaker 1: to cause more problems. There isn't a chance in hell
Speaker 1: that this thing is profitable, and I'm one hundred percent
Speaker 1: confident that it's much much, much, much more expensive than
Speaker 1: the video and the text based generation tools they already have,
Speaker 1: and I imagine its visual ginconsistencies and hallucinations would make
Speaker 1: for some entertaining content for YouTubers and tech reporters, which
Speaker 1: will mean that they just have hundreds thousands, hundreds of thousands,
Speaker 1: perhaps the people requesting shitty videos off of this thing,
Speaker 1: burning servers quite literally in this case, losing the money.
Speaker 1: And for what how much can they charge for this
Speaker 1: thing because it's not going to be enough. The common
Speaker 1: thread between all of these events is that they're all
Speaker 1: expressions of desperation fear and a total lack of confidence
Speaker 1: in the underlying company. So far, and this is Napkin maths,
Speaker 1: I'd estimate that a total of two hundred billion dollars
Speaker 1: has been spent to get Generative AI to this point
Speaker 1: in infrastructure and funding and energy in so many different
Speaker 1: meaningless ways, or to get us to the point that
Speaker 1: we have a tool that's really good at generating things
Speaker 1: that aren't as good as what a humor could make,
Speaker 1: and only sometimes are they good enough to actually use.
Speaker 1: To be clear, we're not quite at the bubble popping yet.
Speaker 1: The reason I'd chose the collapse of open ai as
Speaker 1: the event is because it will mean that Microsoft decided
Speaker 1: to cut them off and that there wasn't enough banker
Speaker 1: or venture capital interest to prop them up further. Open
Speaker 1: AI's collapse would be both financial and symbolic, the sign
Speaker 1: that the valley would let a company die and that
Speaker 1: this idea was not good enough for everybody to stake
Speaker 1: their fetes on it. In any case, things could change,
Speaker 1: the bubble could stay inflated. But while you're thinking about how,
Speaker 1: why don't you take a breather to hear from someone
Speaker 1: one of our wonderful beautiful, precisely chosen advertisers that you
Speaker 1: simply must pay money to, and we're back now. I
Speaker 1: don't want to give you any homework. I no, you're
Speaker 1: currently holding up a convenience store or maybe trying to
Speaker 1: get the hub cap off of a car wheel. You
Speaker 1: hear me speak enough. But a few weeks ago I
Speaker 1: wrote a newsletter called how does open ai Survive? And
Speaker 1: eight thousand or so word analysis of how difficult it's
Speaker 1: going to be to keep that company going at its
Speaker 1: current burn rate, to simmer it down as quickly as possible.
Speaker 1: Open ai costs about eight point five billion dollars a
Speaker 1: year to run and only makes about three and a
Speaker 1: half billion to four and a half billion a year
Speaker 1: in revenue, a number, by the way that I'm that
Speaker 1: does not sound right, but it's what's being reported. Open
Speaker 1: AI's costs are increasingly nearly and generative AI, as I've
Speaker 1: said a few times, is deeply unprofitable and unsustainable. Making
Speaker 1: open AI's models better, which doesn't necessarily mean they're more
Speaker 1: valuable and more useful, also costs hundreds of millions, if
Speaker 1: not billions, of dollars. As a result, open ai needs
Speaker 1: to raise more money than anybody has ever raised in
Speaker 1: the history of the valley in the next twelve to
Speaker 1: twenty four months, or launch a products so significant that
Speaker 1: it blows chet GPT out of the water and actually
Speaker 1: is profitable. And these things are unlikely but possible. I
Speaker 1: guess Microsoft, Google, and Amazon could somehow change the narrative,
Speaker 1: but doing so too would require some sort of technological
Speaker 1: breakthrough or a product, a very obvious product that would
Speaker 1: make people money, more money than is being spent on
Speaker 1: the thing. And the markets are also capricious, and thus
Speaker 1: I really wouldn't count on there being a narrative turnaround,
Speaker 1: especially with the shifting sands of a vestor sentiment. As
Speaker 1: I've mentioned previously. On August second, Elliott Management, the hedge
Speaker 1: fund with over seventy billion dollars in assets under management,
Speaker 1: said in a letter to clients that AI is overhyped
Speaker 1: and the Nvidia is a bubble, adding that AI had
Speaker 1: not delivered value commensurate with the hype. While it's possible
Speaker 1: there are others that dissent against the rapidly forming consensus
Speaker 1: against generative AI to prop things up, which I do
Speaker 1: think is possible, as especially if you deepen the whole
Speaker 1: with Microsoft or and Video. It's worth putting Elliott Management's
Speaker 1: note in a broader context. It's only the latest voice
Speaker 1: in a loud or at least increasingly louder, chorus of
Speaker 1: critics whose members include esteamed, analyst houses, and some of
Speaker 1: the largest investment banks in the world. Gold and Sax
Speaker 1: put out a report in July that you've heard in
Speaker 1: the pop culture episode that said generative AI was too
Speaker 1: expensive and didn't solve the complex problems that would need
Speaker 1: to justify their expenses. At the end of July, Gartner
Speaker 1: put out a report predicting that thirty percent of generative
Speaker 1: AI products would be abandoned entirely after a proof of
Speaker 1: concept by end of twenty twenty five, and The Washington
Speaker 1: Post reports that Barklay's bank thinks that and I quote
Speaker 1: Wall Street and Lists are expecting big tech companies to
Speaker 1: spend around sixty billion dollars a year on developing AI
Speaker 1: models by twenty twenty six, but reap only twenty billion
Speaker 1: dollars a year in revenue from AI by that point.
Speaker 1: The lastra is gone there for you. That does say revenue,
Speaker 1: that doesn't say profim and by the way, that's only
Speaker 1: a billion dollars more than Microsoft's entire capital expenditures in
Speaker 1: the last quarter alone. Microsoft also has a storied history
Speaker 1: of pumping and dumping ideas for Microsoft. Augmented reality was
Speaker 1: and I quote, an absolute breakthrough in twenty nineteen before
Speaker 1: it was quietly shoved in a corner with mass layoffs
Speaker 1: and a business line enclosures a few years later in
Speaker 1: twenty twenty one, satchur Innidella, their CEO, couldn't overstate how
Speaker 1: much of a breakthrough the metaverse was yet two years later,
Speaker 1: and big props the Preston Growler of Computer World for
Speaker 1: saying this in February twenty twenty three, he laid off
Speaker 1: most of the people involved in everything on artificial intelligence
Speaker 1: and that everything thing that's a headline from Wired magazine.
Speaker 1: Very good. It's also important to remember that Microsoft effectively
Speaker 1: owns open ai as part of their twenty nineteen funding round,
Speaker 1: which I believe was a billion dollars. Microsoft is full
Speaker 1: access to all of open AI's intellectual property and research,
Speaker 1: which makes thorny little question why at this point would
Speaker 1: Microsoft give open ai any more money other than to
Speaker 1: save face. That's a very real possibility that Satch in
Speaker 1: the Dela is surrounded by yes men who don't know
Speaker 1: what they're talking about. Microsoft also has access to sell
Speaker 1: open ais and I quote pre agi products, which is
Speaker 1: all of their products right now, and full access to
Speaker 1: all of their research, as well as and I quote
Speaker 1: certain rights to open AI's intellectual property. Unless open ai
Speaker 1: is capable of delivering something meaningfully different, something that Dela
Speaker 1: can wave in front of analysts faces and show them
Speaker 1: that they can automate all of these jobs away, its
Speaker 1: existence is just another cost center and one that could
Speaker 1: get eliminated in a tough quarter. And to be clear,
Speaker 1: saturn Adella has been extremely frank about his leverage over
Speaker 1: open ai and it's effective ownership of their tech or
Speaker 1: be it buffeted with the usual bullshit platitudes and niceties
Speaker 1: that you'd expect from a shape shifting tech CEO. Monster.
Speaker 1: In a late twenty twenty interview with PR person Kara Swisher,
Speaker 1: sach an Adella said, if open ai disappeared tomorrow, I
Speaker 1: don't want any customer of ours to be worried about it,
Speaker 1: quite honestly, because we have all the rights to continue
Speaker 1: the innovation, not just to serve the product, but we
Speaker 1: can go and just do what we were doing in
Speaker 1: partnership ourselves. We have the people, we have the compute,
Speaker 1: we have the data, we have everything. Mister Nadella, that
Speaker 1: is an insane thing to say, and the kind of
Speaker 1: thing you'd only say to someone like Kara Swisher. Swisher
Speaker 1: should have made that the headline that Microsoft effectively owns
Speaker 1: open ai. I miss this at the time I found
Speaker 1: out about this quote, like a week or two ago.
Speaker 1: It's crazy to me. It's crazy to me that this
Speaker 1: was said, and it's not front page news. Microsoft owns
Speaker 1: open ai. Who gives a shit about the nonprofit structure.
Speaker 1: But it actually gets better because he followed up that
Speaker 1: quote with this. Microsoft's investment of thirteen billion dollars in
Speaker 1: open ai gives us significant rights, as I said, and
Speaker 1: also this thing, it's not hands off, right. We are
Speaker 1: in there, we are below them, we are above them,
Speaker 1: we are around them. We do the kernel optimizations. Very
Speaker 1: funny if you consider the CrowdStrike thing. By the way
Speaker 1: we build tools, we build the infrastructure. So that's why
Speaker 1: I think a lot of the industrial analysts are saying,
Speaker 1: oh wow, it's really a joint project between Microsoft and
Speaker 1: open ai. The reality is we are as I said,
Speaker 1: very self sufficient in all of this. Well, I'm not
Speaker 1: saying it's for certain. Microsoft can very clearly if they
Speaker 1: so please, simply drop open AI and keep all of
Speaker 1: their stuff. Nevertheless, as the market's sour and jennit of AI,
Speaker 1: I think it's time for big tech to prove something.
Speaker 1: It's time for them to prove that this wasn't all
Speaker 1: a huge, big, stupid, fucking waste of time and money
Speaker 1: to continue with their current paths. Summed up is sh
Speaker 1: of Google and sach and Adella of Microsoft. As the
Speaker 1: loudest of the publicly traded generative AI hype men, will
Speaker 1: have to show everybody something remarkable. But even then they
Speaker 1: will have to show how it actually makes money, and
Speaker 1: if they can't, at least in the case of sach
Speaker 1: and Adella, they can still walk away. As well as
Speaker 1: in the best case scenario, these companies would either have
Speaker 1: to dramatically reduce their costs, something they've really shown they're
Speaker 1: not capable of doing and in fact have said they'll
Speaker 1: do the opposite of or show ways to make generative
Speaker 1: AI so significantly efficient that it somehow finally balances itself out.
Speaker 1: What we're really waiting for now is for somebody to blink.
Speaker 1: If none of the major cloud companies change course over
Speaker 1: the next few months, we could potentially see this boom
Speaker 1: continue for another quarter. And just to be clear, they
Speaker 1: usually in lockstep. They love holding up each other's oligopolies
Speaker 1: and monopolies. They love being a weird cartel that sells data.
Speaker 1: To continue, though, they'll have to commit billions of dollars
Speaker 1: in at the very least cloud credits for open ai
Speaker 1: and Anthropic, as neither of those companies can survive without
Speaker 1: further cash infusions. They'll also have to find some way
Speaker 1: to make any of this useful and profitable, two challenges
Speaker 1: the generative AI has never been able to deal with,
Speaker 1: not even once. And I just as an aside, I've
Speaker 1: had people email and saying, well, I use it for this.
Speaker 1: I was on a show the other days that he
Speaker 1: uses it for show notes. These are all fine whatever,
Speaker 1: These are like little use cases. These people need this
Speaker 1: to make a trillion dollars. Show notes aren't going to
Speaker 1: do it. Shitty translations are not going to do it.
Speaker 1: A picture of Garfield with a gun is not going
Speaker 1: to do it. And big tech is going to have
Speaker 1: to figure out a way to support these companies in
Speaker 1: the face of rising disquiet among shareholders, who in the
Speaker 1: most recent route of AI companies lost them about two
Speaker 1: point six trillion dollars in market capitalization. As I pointed
Speaker 1: out in the Shareholders Supremacy, investors don't really care about
Speaker 1: the future or innovation. They just want profits and their
Speaker 1: portfolios to get bigger. And they want to see the
Speaker 1: number for profit go larger and the costs go lower,
Speaker 1: and absolutely nothing else matters at all, which is why
Speaker 1: they love generative AI at first, because if this actually
Speaker 1: made a bunch of money, this is a way that
Speaker 1: Microsoft could just route cloud costs from themselves to themselves.
Speaker 1: I'll get to that in a future episode about monopolies, though,
Speaker 1: And I think that if generative AI becomes an albatross
Speaker 1: around the next of Google, Microsoft, and Amazon, which I
Speaker 1: really believe it will, these companies are going to face
Speaker 1: really nasty pressure to curtail their investments and their capex.
Speaker 1: Investors will ask why these companies are spending a collective
Speaker 1: one hundred two hundred billion dollars by the end of
Speaker 1: twenty twenty five on a technology that likely won't drive
Speaker 1: much revenue growth when it could be used for things
Speaker 1: like stock dividends and stock buybacks, and I don't know
Speaker 1: thrones for the demon lords that live underneath the offices.
Speaker 1: I don't know how Microsoft truly makes money. That's a joke,
Speaker 1: don't email me about it. But I believe in any case,
Speaker 1: the next month is going to be critical to the
Speaker 1: future of the AI boom, and I believe this is
Speaker 1: a time for industry wide introspection and to really consider
Speaker 1: everyone's roles and why this bubble existed in the first place.
Speaker 1: In the next episode, I'm going to take a closer
Speaker 1: look into open Aiy's likely demise, what it looks like,
Speaker 1: and why the company's view avenues for salvation in fact
Speaker 1: look like dead ends. And I'll get into how fucking
Speaker 1: ridiculous this whole bubble is and what its potential collapse
Speaker 1: spells for the future of the tech industry. Thank you
Speaker 1: for listening to Better Offline. The editor and composer of
Speaker 1: the Better Offline theme song is Matasowski. You can check
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