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.