Is the AI investment boom a mirage?
Some thoughts on the implications of big tech investments in AI
Credit to Foresight for making me think about this. The linked article made me curious. Is the current AI investment boom a mirage? What wider effects might this trend have on the investment landscape? Could this just be the first of many unforeseen second order effects of AI?
I rarely focus on investment. Partly because it bores me, partly because its a noisy, unreliable indicator of both the direction and focus of future change.
So that means its also not my deepest area of expertise. With that in mind, let’s dive into some thoughts:
First, the Foresight article is a good summary of the main headlines in recent deals. Names, numbers and some interesting points on the deal structures.
Tim also makes a great point about the actual substance of these deals. They are to protect market share. AI is the biggest growth area for cloud computing right now. All the players want to secure their share.
That is all straightforward. The signals these deals send are still noisy though. Five other things strike me:
Most obviously, these are bets on the future. Both the future of cloud and the future of the other major revenue streams for the tech giants. Those streams are a broad spread. Consumer software, enterprise software, advertising and eCommerce as a minimum. Which other areas of the tech sector are vulnerable to disruption from AI?
The big tech companies have been accumulating large piles of cash for a long time. This is the largest concentrated burst of deploying that cash we have seen. Could that be a long-term shift? Will we see these companies change to being vehicles for massive deployment of investment? What will that mean for both debt and equity markets in the medium term?
Against that, many of these deals are effectively paying for revenue upfront. Arguably, that means the true level of “investment” in AI is inflated to a significant degree. Perhaps that means this is not quite the revolutionary technology that everyone assumes? I think it also suggests that the tech investment “recovery” is a bit of a mirage for now.
These deals are also a shift in the overall investment landscape. In recent years, VCs have dominated tech sector investment. More widely, private equity and financially oriented sovereign wealth funds have been the biggest deployers of capital. Are we now seeing a shift back from financial engineering to big corporate led investment?
Corporate investment in innovation has a spotty track record at best. In part because the incentives are mixed. Corporate investment is defensive as much as it is innovative. More complex and restrictive deal terms have also constrained the returns from corporate investment. The structures of recent deals, especially by Microsoft, display this tendency in spades. Might some of those clever structures come back to bite the tech giants? If this trend dominates, will that constrain the pace of innovation in AI?
None of this is a solid body of evidence. Aggregate investment numbers rarely are. I find it interesting because its an early indicator of second or third order effects from AI. AI will change our lives and the economy in all sorts of unpredictable ways. Perhaps it is already shifting the investment landscape?
Thanks for the link to the source article Kenny, and those thoughts. It made me wonder... do you see similarities without the big tech companies are chasing after LLM/Gen AI and AGI... and how Telcos chased behind 5G? In terms of expectations, investment and initial use cases