Tuesday, October 29, 2024

Generative AI: Why It is All or Nothing

Suppliers of generative artificial intelligence frontier models (advanced artificial intelligence systems that push the boundaries of what generative AI can achieve) are under scrutiny for capital investments and pathways to revenue, given the explosion in investment that started in 2023. 


Risk is very high, but so is the potential reward. And even if most contenders eventually will lose their bets, the winner is epected to dominate the market.


Some idea of the ramp up of investment can be seen in venture capital investments alone, and excluding investments by leading firms such as Google, Microsoft, Meta, Apple and Amazon, to support generative and other forms of AI. 


Year

Estimated VC Investment (Billions USD)

2020

0.2

2021

1.2

2022

2.7

2023

22.4

2024 (projected)

30+


Those figures do not include any sums spent by enterprises, software or hardware firms to create AI features, apps or platforms. Nor doe those amounts include investment by hyperscale app providers or  device firms to add AI features to their existing products. 

source: Our World in Data 


Estimating all AI capex by the hyperscale app and device providers is difficult, as many types of capex as well as operating expense (personnel, for example) are involved. Often, all we know is aggregate capex. 


Company

Time Period

AI-Related Capital Expenditure

Combined (Apple, Amazon, Meta, Microsoft, Alphabet)

Q2 2023*

$59 billion

Combined (Apple, Amazon, Meta, Microsoft, Alphabet)

2024 (forecast)

$215 billion**

* total capex, not just AI capex

** source: New York Times 


And most of the revenue tied to AI investments is indirect, often contributing to cloud computing as a service revenues, for example. 


Company

AI Model/Product

Reported Financial Outcome

Microsoft

Azure OpenAI Service

$10 billion investment in OpenAI, contributing to 27% growth in Intelligent Cloud revenue in Q4 20232

Google (Alphabet)

Various AI products

28% year-over-year increase in Google Cloud revenue in Q2 2023, partly attributed to AI offerings3

IBM

Watson AI platform

$1 billion in annual revenue from Watson and AI-related services as of 20214

Palantir

AIP (Artificial Intelligence Platform)

31% year-over-year revenue growth in Q2 2023, with AI driving new customer acquisition5


We should expect to see continuing reporting of AI-attributed revenues by firms making big AI investments, even as we have to expect an awful lot of somewhat indirect approaches to identifying that revenue growth. 


Just as important, if generative AI winds up being a “winner take all” business, as most other computing segments have been, there will be no prize for third best. 


We have already seen that pattern in many other computing markets. The leader in search has 91 percent market share. The browser leader has 65 percent share. The mobile operating system leader has 72 percent share. The U.S. ride-hailing leader has 68 percent share. 


Market

Dominant Player

Market Share

Runner-up

Market Share

Search Engines

Google

91.9%

Bing

3.0%

Desktop Browsers

Chrome

65.72%

Safari

18.22%

Mobile Browsers

Chrome

66.17%

Safari

23.28%

E-commerce

Amazon

37.8% (US)

Walmart

6.3% (US)

Video Streaming

YouTube

2.5B users

Netflix

231M subscribers

Music Streaming

Spotify

31%

Apple Music

15%

Ride-hailing (US)

Uber

68%

Lyft

32%

Cloud Services

AWS

32%

Azure

22%

Mobile OS

Android

71.8%

iOS

27.6%


So if generative AI follows that pattern, the strategic choices are “don’t play” or “play to be number one.” That implies most of the investment, in most of the firms, will be stranded or lost, eventually. But a whole ecosystem might be built around the leader.


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