July 23, 2025 • 35 mins
In part one of this week's three-part Better Offline, Ed Zitron walks you through how the US stock market rests on the back of GPU sales, and how a lack of any real business returns spells doom for the AI bubble long-term.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Zone Media.
Speaker 2 (00:04):
Hello and welcome to Better Offline. I'm your host ed
zip tron. Check out the episode notes. Got a wonderful
merchandise and completely separate to the podcast, got a wonderful
newsletter Where's your Head dot at with the premium section
(00:27):
that I would love you to subscribe to. But I
also got some good news. You've got another three part episode,
the second of the year, and this week we're going
to be talking about how the cracks and the generative
AI market are becoming harder to ignore, and how recent
events are making a collapse seem all the more inevitable.
What that means for the wider economy, really the markets
and you and I want to make that case because
(00:49):
as a journalist, I believe I have the duty to
give you the information you need to make sense of
a world increasingly feeling incomprehensible and of course detachment reality,
and where everything is consequent to everyone, where it's impossible
for ordinary people to shroud themselves from the consequences of
decisions made by the executive and shareholder class. Good journalism
is making sure that history is actively captured and appropriately
(01:11):
described in the cest, and it's the accurate to describe
things as they currently are as alarming, and boy howdy
am I alarmed?
Speaker 3 (01:19):
Now?
Speaker 2 (01:19):
Alarm is not a state of weakness or belligerence in myopia,
My concern does not dull my vision, even though it's
a convenient to frame me as somehow alarmist like I
have some hidden agenda or bias toward doom. I profoundly
dislike the financial waste, the environmental destruction, and fundamentally I
dislike the attempt to gaslight people into swearing fealty to
a sickly in frail pseudo industry where everybody but in
(01:42):
Nvidia and consultancies lose money. And I also dislike the
fact that I and others like me are held to
a remarkably different standard to those that paint themselves as optimists,
which typically means people that agree with what the market
wishes were true. Critics are continually badgered, prodded, poked, mocked,
and jeered out for not all the metrically aligning with
the idea that generative AI will be this massive industry,
(02:03):
constantly having to prove themselves as if somehow there's something
malevolent or craving about criticism. The critics do this for clicks,
or to be contrarian. I don't do anything for clicks
or downloads or prestige. I don't have any stocks or
short positions. My gender is simple. I like talking about
this crap and it comes to me naturally. I have
a podcast and it is on some level my job
(02:24):
to try and understand what the tech industry is doing
day to day.
Speaker 3 (02:27):
And I get it.
Speaker 2 (02:28):
I get It's easy to try and dismiss what I
say is going against the green because AI is big,
and AI is something we should all be impressed by,
and the AI is the thing that's going to start everything,
and all this fucking money is tied up in it.
But look, this isn't a fad for me. This isn't
something I'm doing because I feel like it because I'm
jumping to the next trend. No. I've been roiling against
(02:50):
bullshit bubble since twenty twenty one, the anti remote work
push and the people behind it, the clubhouse and audio
social networks bubble, the NFT bubble that made up quiet,
quitting panic, and even even and this one I got
no credit for.
Speaker 3 (03:03):
I called that.
Speaker 2 (03:04):
Something was up with the FTX several months before it imploded.
Did I do much more than that. No, I found
one thing. Nevertheless, this is in contrarianism, not at all.
It's the kind of skepticism of power and capital that's
necessary to meet these moments. And if it's necessary to
dismiss my work because it makes you feel icky inside,
get a therapist or see a priest. Nevertheless, I'm alarmed.
(03:25):
And while I have said some of these things separately,
based on recent developments, I think it's necessary to say why.
In short, I believe the AI bubble is deeply unstable,
built on vibes and blind faith. And when I say
the AI bubble, I mean the entirety of the AI trade.
And it's alarmingly simple too, he says, before doing three
episodes on it. But this isn't going to be some saccerin,
(03:46):
whiny or simply worrisome podcast. I think at this point
it's become a little ridiculous to not see we're in
a bubble. We are in a goddamn bubble. By the way,
it's so obvious we're in a bubble. It's been so
obvious we're in a bubble. It's been obvious for months,
if not years, A bubble that seems so strong, but
it's very weak with a central point of failure. I
may not be a contrarian, but I am a hater.
I hate the waste, the loss, the destruction, the theft,
(04:07):
the damage to our planet, and the sheer excitement. And
some executives and yes, some writers have that workers may
be replaced by AI and the bold faced fucking lie
that it's actually happening. And what Generative AI is doing
is somehow proof that it will. And so I present
to you the Hater's Guide to the AI Bubble, a
comprehensive rundown of the arguments I have against the current
(04:28):
AI booms existence. Send this podcast to your friends you
love ones or I don't know, blare it in their
ears like you're torturing them. But no, this isn't going
to be a traditional guy but something you can listen
to and say, oh, that's why the AI bubble is
so bad. And at this point, I know, I'm tired
of being gas lit by guys in Gingham shirts who
desperately want to curry favor with other guys in Gingham
shirts but who also have PhDs. I'm tired of hearing
(04:51):
people talk about how we're in the era of agents
that don't fucking work and will never fucking work. I'm
tired of hearing about powerful AI that's actually crap, and
I'm tired of being told the future is here while
having the world's least useful, most expensive cloud software shoved
down my throat and up my asshole. Look, the general
FAI boom is a mirage. It hasn't got the revenue
or the returns of the product efficacy for it to matter.
(05:11):
Everything you're seeing is ridiculous and wasteful when it all
goes tits up. And want you to remember that I
said this. I tried to say something. I've been trying
to say something for a while. But let's start with
something real obvious. Let's start by talking about the so
called Magnificent Seven's week point and it's not the one
you think because it's in video. As I write the
(05:32):
script for this podcast, in Vidia's sitting around one hundred
and seventy bucks a share, a dramatic reversal of faith
after the pummeling it took from the deep Seek situation
in January, which sent it tumbling to a brief late
April trip below one hundred dollars. Four things turned around
the mag seven stocks and Video, Microsoft, Alphabet, which is Google, Apple, Meta, Tesla,
and Amazon make up around thirty five percent of the
(05:53):
value of the US stock market, and of that and
Video's market value takes up about nineteen percent of the
Magnificent seven, eight to nine percent of the entire US
stock market. It's not brilliant. This dominance is also why
ordinary people ought to be deeply concerned about the AI bubble.
The Magnificent seven is almost certainly a big part of
their retirement plans, even if they're not directly invested. Back
(06:13):
in May, the Wonderful Laura Branton from Yahoo Finance reported
the Microsoft, Amazon, Meta, Alphabet, and Tesla alone make up
forty two point four percent of Invidia's revenue. The breakdown
doesn't make things better. Meta spends twenty five percent, and
Microsoft on alarming forty seven percent of their capital expenditures
and on Nvidia chips and as Branton notes, Microsoft also
(06:35):
spends money renting service from core Weave, which analyst Guild
Luria of DA Davidson estimates accounted for eight billion dollars
more than six percent of Invidia's revenue in twenty twenty four.
Laurier also estimates that neo cloud companies like Coreweav and
Crusoe that exist only to provide AI compute services account
for as much as ten percent of Nvidia's revenue, or
at least did so in twenty twenty four. In vidious
(06:57):
climbing stock value comes from one thing. It's continued revenue
growth in the past four quarters. And video has seen
year of a year growth of one hundred and one percent,
ninety four percent, seventy eight percent, and sixty nine percent.
And in the last quarter a little statistic was carefully
brushed under the rug in Video missed though narrowly, on
data center revenue. And data center revenue is, by the way,
(07:19):
where the GPUs go, and all the associated hardware and
so kind of server architecture switches and the like, and yeah,
this is exactly what it sounds like. GPUs that are
used in servers rather than gaming consoles and PCs. I
get a lot of emails saying, oh, will it be
easier for me to buy consumer graphics cards? I don't
fucking know, mate, I'm just did to talk about enterprise bullshit. Okay,
not really enterprise, but enterprise scale GPUs were getting off track.
(07:42):
Analyst estimated it would make. It would make thirty nine
point four billion dollars from the data center category, and
then video only only. I no pathetic amount brought in
thirty nine point one billion dollars. Then again, this could
be attributed to their problems in China, especially as the
H twenty ban they were banned from selling uspace chip
in China has only just been lifted. In any case,
(08:03):
this was a miss, and I'm not sure why no
one wanted to talk about them.
Speaker 3 (08:08):
But there's another problems.
Speaker 2 (08:10):
There's so many little problems here, like in videos. Quarter
over quarter growth has also become aggressively normal. It went
from sixty nine percent to fifty nine percent to twelve
percent to twelve percent again a quarter of quita, which
again isn't bad, it's pretty great in fact, But when
eighty eight percent of your revenue is based on one
particular line in your earnings, it's a pretty big concern,
(08:31):
at least for me. Look, I'm no stock analysts do
not take stock advice from me. I don't know about stocks.
I don't know what will go up and down, but
I'll tell you, I'll tell you something's not right here.
But I'm going to keep this simple in Video relies
on not only selling lots of GPUs each quarter, but
it must always sell more of them the following quarter.
More than forty two percent of revenue, and Video's revenue
(08:54):
comes from Microsoft, Amazon, Meta Alphabet, and Tesla continuing to
buy more GPUs. Remember, it's not about buying the same amount.
Number must go up. In Vidia's continued value and continued
growth is heavily reliant on hyperscalar purchases and continued interest
in generative AI. But really just the buying part the
GPUs are what matter. And the US stock markets continued
(09:17):
health relies on some level of five or six companies,
and it's unclear how many GPUs Apple buys, spending billions
of dollars on GPUs from Nvidia and more every quarter.
In fact, I found an analysis from portfolio manager Don
ke Wang from January twenty twenty five. The found that
the Magnificent seven stocks accounted for forty seven point eighty
seven percent of the Russell one thousand indexes returns in
(09:39):
twenty twenty four. And that's an index fund of the
thousand highest ranked stocks on the foot Sea Russell's Index,
which in simpler terms means thirty five percent of the
US stock market is held up by five or six
companies buying GPUs. If a video's growth story stumbles, it
will reverberate through the rest of the mag seven to two,
making them rely on their own AI trade stories. And
(10:01):
you know it when you know it, when you look
at the stories. There is no AI trade because Generative
AI is not making anybody any goddamn money. But I
have to make money, which is why you need to
listen to the following advertisement. It's the only one of
these bloody things you're gonna get. Here's an ad and
(10:26):
we're back. And I am so tired of people telling
me that companies are making tons of money on AI.
They are not. Anyone saying this to you is lying
or ignorant or both. The Magnificent Seven spent an insane
five hundred and sixty billion dollars between twenty twenty four
and twenty twenty five on Capex, with the overwhelming majority
going towards Generative AI and their effort for this wonderful effort.
(10:49):
For that more than half a trillion dollars, these companies
have made about thirty five billion dollars in revenue and
no profit. And I must say, and this is a
technical term, this is egregiously fucking stud But let's break
it down. Start with starting out in Redmond with our
friends at Microsoft, and they plan to spend eighty billion
dollars on CAPEX in twenty twenty five. Now, mustn't. January
(11:10):
twenty twenty five, Microsoft's annualized revenue meaning best month times
twelve from our official intelligence, was thirteen billion dollars, a
number that it's chosen, not what they since slightly because
said number is either flat or not growing, though it
could in its upcoming I think at the end of
this week or next one, it's got cut earnings coming up.
Speaker 3 (11:29):
Maybe they'd be good news. Yeah.
Speaker 2 (11:31):
The problem with this revenue is that ten billion dollars
of that revenue, according to the information, comes from open
AIS spend on a Microsoft' as or cloud, and Microsoft
offers preferential pricing. I'm quoting the information here at a
heavily discounted rental rate that essentially only covers Microsoft's costs
for operating the servers. That's not good, right, like it's
(11:51):
not good. It's not good that seventy six point nine
percent of Microsoft's AI revenue comes from open AI, and
that revenue is made at cost or just above it,
which makes Microsoft's real AI revenue about three billion dollars
or about three point seven five percent of this year's
capital expenditures, or sixteen point two five percent if you
count open AIS revenue, which costs Microsoft likely more money
(12:13):
than it earns. The information also reports that Microsoft made
four point seven billion dollars in AI revenue in twenty
twenty four, of which open AI accounted for two billion dollars,
meaning that for the one hundred and thirty five point
seven billion dollars that Microsoft are spent in two years
in AI infrastructure, it's made seventeen point seven billion dollars,
of which open AI was twelve point seven billion dollars.
(12:37):
It's kind of crap, isn't it. It's not very good
at all, and things do not improve when we get
to Amazon. An analyst estimates that Amazon, which plans to
spend one hundred and five billion dollars in capital expenditures
this year, will make five billion dollars in AI in
twenty twenty five, rising and I quote as much as
eighty percent, suggesting that Amazon might have made a measly
two point seven seven billion dollars in twenty twenty four
(12:58):
on AI in a year when it's spent eighty three
billion dollars in capital expenditures, and last year, Amazon CEO
Andy Jesse said that and I quote, AI represents for
sure the biggest opportunity since cloud and probably the biggest
technologies shift an opportunity in business since the Internet. I
personally think he is full of shit. And it's a
similar story over with Google, which plans to spend seventy
(13:19):
five billion dollars in capex twenty twenty five. Bank of
America analysts justin Post estimated a few weeks ago that
Google's AI revenue would be in the region of seven
point seven billion dollars, though his math, if I'm honest,
is a little generous because it includes subscribers to packages
that include a lot of non AI staff.
Speaker 3 (13:35):
Two.
Speaker 2 (13:36):
Google's one subscription includes increased cloud storage across Google Drive, Gmail,
and Google Photos, and added a twenty dollars a month
premium plan in February twenty twenty four that included access
to Google's various AI models. Google's claim that the premium
AI tier accounts some millions of the one hundred and
fifty million subscribers to Google one, though how many millions
is impossible to estimate That one would stop me trying, though,
(13:58):
Assuming the three point one billion dollars in twenty twenty
five revenue would work out to two hundred and fifty
eight million dollars a month, that would mean there were
twelve point nine million Google one subscribers also paying for
the premium Ai tier. This isn't out of the realm
of possibility, after all, Open ai has like fifteen point
five million paying subscribers, but post is making in a
kind of a generous assumption here. Nevertheless, well accept the
(14:21):
numbers as they are, because they fucking stink. Google's one
point one billion dollar in workspace revenue came from a
forced price hike on those who use Google services to
run their businesses. My ass included meaning that it's not
likely a number that they can significantly increase in the
future because it was just raising the rent on everyone.
And that's seven point seven billion dollars of revenue, not
(14:42):
profit on seventy five billion dollars of capital expenditures. Very nasty.
But let's move on to one of my faves, Meta,
which plans to spend seventy two billion dollars in twenty
twenty five. Someone's going to get mad at me for
saying this, But I believe that Meta is simply burning
cash on generative. There is no product the Meta sells
that monetizes large language buddles that I can tell at least,
(15:05):
But every Meta product now has them kind of shoved
in there. Year Instagram dms oinking at you to generate
artwork based in your conversation. Nevertheless, they do make some money, allegedly,
and we do have some sort of knowledge of what
Meta is saying they make due to a copyright infringement
case cardre versus Meta on sealed judgment briefs revealed in
(15:26):
April that Meta is claiming that Jenai driven revenue will
be more than two billion dollars in this year, with
estimates as high as three billion dollars. The same document
also claims that Meta expects to make four hundred and
sixty billion to one point four trillion dollars in total
revenue through twenty thirty five. And this is from Ai,
by the way, And this is the kind of thing
that should have you wrenched out of them. But you
(15:47):
should your key God should stop working when the words
leave your mouth because Meta makes ninety nine percent of
its revenue from advertising, and the unsealed documents state that
it generates from its Larmer models and will continue earning
revenue from each iteration and share percentage of the revenue
it generates from users of the Lama models hosted by
those companies. But the companies in question redacted. Mister Max
(16:07):
Zeph of tech runchads that metaalist host partners like Amazon
Web Services and Video Data Breaks, Grock Dell, Microsoft, as Yure,
Google Cloud, and Snowflake, so it's possible that Meta makes
money licensing to those companies. Sadly, the exhibits further discussing
these numbers are filed on the seal and also their
large language model is open source. What service is Meta providing?
(16:29):
Are these companies so goddamn lazy that they need Meta
to come in and set up the fruit? And Jesus Christ,
Jesus Christ, when I read these numbers, I just when
I read about these people who drive me a little insane.
Either way, we are now at three hundred and thirty
two billion dollars of capital expenditures in twenty twenty five.
For twenty eight point seven billion dollars of revenue, off
which ten billion dollars of it is open AI is
(16:51):
at cost or just above cost. Revenue not great. Then
there's Tesla, which doesn't appear to make money from generative
AI and plans to spend eleven billion dollars on capex
in twenty twenty five. Despite its media prominence in the
Magnificent seven. At least, Tesla is one of the least
exposed companies of mag seven to the AI trade, as
Elon Musk has turned it into a memestock company where
(17:12):
what they do doesn't really matter. That doesn't mean, of course,
that Musk isn't touching AI. The XAI, the company that
develops racist large language model grok and owns what remains
of Twitter, apparently burns a billion dollars a month, and
The Information reports that it makes a whopping hundred million
dollars of annualized revenue, so about eight point three three
million dollars a month. Now there's a shareholder vote for
(17:32):
Tesla to potentially invest in Xai, which will probably happen,
allowing Musk to continue to pull leverage from his Tesla
stock until the company's decaying sales and brand eventually swallow
him whole. But we're not talking about Elon Musk today.
We are not. We have to talk about Apple now,
and honestly, they're the least interesting part of this story.
Their capital expensures in twenty twenty five are expected to
(17:54):
also be around eleven billion dollars, and they arguably have
the weirdest AI story in the mag of Since seven,
Apple intelligence radicalized millions of people against AI, mostly because
it fucking sucks. Apple clearly got into AI reluctantly and
now faces stories about how they feel left behind in
the AI race, which mostly means that Apple aggressively introduce
people to the actual features of generative AI by force,
(18:17):
and it turns out that people don't really want to
summarize documents, or write emails or make custom emoji, and
anyone who thinks they would is a fucking alien. In
any case, Apple hasn't bet the farm on AI in
so much sit It hasn't spent two hundred billion dollars
in infrastructure for a product of the limited market that
only loses money. And again, if you want to give
me some money, I'm gonna put an ad break here.
So after this, whatever comes next buy it or don't
(18:41):
if you don't want to, but really you should. If
I'm speaking, if you hear my voice in the ad,
then you should buy it unless you don't want it.
(19:05):
And we're back now. I'm going to use a new
term I came up with that's really really bad. But
the fragile five I call them Amazon, Google, Microsoft, Meta,
and Tesla, the ones investing all the money in the GPUs,
are holding up the US stock market by funding in
Vidia's future growth story. And this is really the first
big takeaway I want you to take from this three parter.
To be clear, I'm not saying that any of the
(19:25):
mag seven are going to die, just that five companies
spend on in Vidio GPUs largely dictate our state of
the US stock market will be If any of these companies,
but especially in Vidia, sneeze, you four O one K
and your kid's college fund will probably catch a cold.
I realized this sounds a little simplistic, but by my calculations,
in Vidia's value underpins about eight percent of the value
of the US stock market. At the time of writing,
(19:47):
it accounts for roughly seven point five percent of the
S and P five hundred an index of the five
hundred largest US publicly traded companies are disturbing eighty eight percent.
As I mentioned, of in Vidia's revenue comes from enterprise
scale GPUs, primarily US for Generative AI, of which five
companies spend, makes up over forty two percent of its revenue.
In the event that any one of these companies makes
significant changes to their investments and in video chips, it
(20:10):
will likely have a direct and meaningful negative impact on
the wider economy and markets. In Vidia's earnings are effectively
the US stock market's confidence and everything rides on five companies.
And if we're honest, here really four companies. This tesla
is point nine percent of the investment in GPUs of
those five companies buying GPUs for Generative AI to train
(20:30):
at generative AI models were still these services while losing.
These companies' massive amounts of money don't really produce much revenue,
meaning that the AI trade is not driven by any
real meaningful revenue growth.
Speaker 3 (20:43):
But d it hid they said?
Speaker 2 (20:46):
They said, points of growth? Silence, quiet, nothing more out
of you any of these companies talking about growth from
AI or the jobs that AI will replace, or how
AI has changed their organization are handwaiving to avoid telling
you how how much money these services are actually making them.
If they were making good money and experiencing real growth
as a result of AI, they wouldn't shut the fuck
(21:07):
up about it. They'd be in your ear and up
your ass, hooting and hollering about how much cash they
were rolling in. And they're not because they're not rolling
in cash and are in fact blowing nearly one hundred
billion dollars each to build massive, power hungry, costly data
centers for no real reason. Don't watch the mouth, watch
the hands. These companies are going to say they're seeing
growth from AI, but unless they actually show you the
growth and enumerate it, they are kind of lying. They're
(21:30):
lying in the way that you're allowed to.
Speaker 3 (21:32):
But it Hey, Amazon Web Services took years to become profitable.
People said Amazon would fail. So this is one of
the most annoying and consistent responses to my work, and
it's when people say that either Amazon or Amazon Web
Services ran at a loss. In the Amazon Web Services,
which pretty much was the invention of modern mass market
cloud compute infrastructure for running stuff on the cloud, lost money.
Speaker 2 (21:52):
And then didn't. Here's the thing, this statement is one
of the things that people say because it sounds rational.
Amazon did lose mone and Amazon Web Services was expensive.
That's right, right, it's obvious. Right. The thing is, I've
never really had anyone explain this point to me, so
I finally sat down. I'm going to deal with this
criticism because every fucking person who manages it thinks they
(22:13):
just bulled Excaliper from the stone and can now decapitate me.
They claim that because people in the past doubted Amazon
because are in addition to the burn rate of the
AWS systems as the company built out its infrastructure, that
I too, am wrong because the analysts were wrong about that.
This isn't Camelot, You're a rube. You are not King Arthur.
And now I will address both the argument itself and
(22:34):
the day part of it too, because if the argument
is that the people who got Amazon Web Services wrong
should not be trusted and we should no longer trust them,
the people who actively propagate and dies something wrong, we
shouldn't trust them, right right, Well, you'll never guess who's
now saying AI is good. Oh, I'm going to get there,
don't you flip and worry? Well, if I'm honest, I'm
(22:56):
not sure where this argument came from, because there is,
to my knowledge, no story about Amazon Web Services where
somebody suggests its burn rate would kill Amazon. But I'm
a curious little creator, so let's start with an obvious one,
the obvious point. I want to give a shout out
to Harry mccrack and a fast company for bringing this
one up to me. It May May thirty first, ninety
ninety nine, there was a piece that everybody is thinking
(23:18):
of called Amazon dot bom and the writer Jacqueline Doherty
was mocked soundly for being wrong about Amazon, which has
now become quite profitable. The article, along with the other
sources that form the basis of this episode, are going
to be linked in the spreadsheet, and as a as
a surprise, I'll actually up later. I also want to
be clear that Amazon Web Services did not launch until
two thousand and six, and Amazon itself would become reliably
(23:39):
profitable in two thousand and three. Technically, Amazon had opened
up Amazon dot COM's web services for developers to incorporate
Amazon content into their applications in two thousand and two,
but what we consider Amazon web Services today, cloud storage
and compute, launched in two thousand and six. But okay,
fancy pans, what did she actually say? We quote Doherty.
(23:59):
Unfortunately for Bezos, Amazon is now entering a stage in
which investors will be less willing to rely on its
charisma and more demand advances to tough questions like when
will this company actually turn a profit? And how will
Amazon triumph over a slew of new competitors who have
deep pockets and new technologies. Who tried to ask Bezerz,
but he declined to make himself for any other executives
of the company available. He could ignore barons, but he
can't ignore the questions. Bang a line, by the way,
(24:22):
Amazon last year posted a loss of one hundred and
twenty five million dollars, which is about two hundred and
forty two point six million today's money on revenues of
six hundred and ten millions to about one point one
eight three billion dollars in today's money, and then this
year's first quarter referring of course, to nineteen ninety nine,
as the company posted a loss of sixty one point
seven million, which is one hundred and nineteen point seventy
five million today's money on revenues of two hundred and
(24:44):
ninety three point six million, five hundred and sixty nine
point eight two million dollars in today's money. I realized
that was a real motherfucker of a quote, but it's necessary.
Her argument, for the most part is that Amazon was
burning cash and had a ton of competition from other
people doing similar things, and that analysts backed her up,
and they really did. By the way, again, I quote
the first mover does not always win the importance of
being first as a mantra in the internet world, but
(25:05):
it's wrong. The ones that the most efficient will be successful,
says one retail analyst. In retailing, anyone can build a
great looking store. The hard part is building a great
looking store that makes money, which is a good point
fair arguments for the time, though perhaps a little narrow minded.
The assumption wasn't what Amazon was building, and we are,
by the way, are referring to Amazon dot com. The
(25:25):
store was a bad idea, but the Amazon wouldn't be
the ones to build it. And again we quote. Once
Walmart decides to go after Amazon, there's no contest. The
Barnard President Bernard's Retail Trend report. Walmart has the resources
that Amazon can't even dream about, which is true at
the time, but in simpler terms, Amazon's business model was
(25:46):
not in question. People were buying shit online. In fact,
this was just before the dot com bubble burst, when
people had insane optimism about the future of the web.
Yet the comparison stops there. People obviously like buying shit online.
It was the business models of many of these web
pioneers that sucked at Year WEBVAM. But we're going to
talk about Amazon Web Services and the less technical of you.
I want to explain something. AWS is a really important company.
(26:08):
I'll kind of get into those details. But people like
to argue about it and say, well, it lost a
bunch of money, so you know that means that generative
a I should lose a bunch of money to and
that's how it works. I'm going to substantively and repeatedly
explain why that is so goddamn stupid. I'm sick of
the argument. I'm sick of it. Breathe Edward, breathe. They
(26:29):
can't get you behind the microphone, okay. Amazon Web Services
was an outgrowth of Amazon's own infrastructure, which had to
expand rapidly to deal with the influx of web traffic
from Amazon Dot Com, which had become one of the
world's most popular websites and was becoming increasingly more complex
as it sold things other than books to multiple international
locations as well. Other companies had created their own infrastructure,
(26:50):
but if a smaller company wanted to scale, they basically
needed to build their own thing. It was a massive
barrier between companies and building web services. And it's actually
kind of cool what Amazon did. I hate to look
Rosie I bind rose colored lenses. I don't know the
phrase that Jeff Bezos, but oh no, I remember this
was early two thousands, before Facebook, Twitter, and a lot
(27:10):
of modern internet we know that runs on services like
Amazon Web Services or Microsoft Zero or Google Cloud. They
basically invented the modern concept of cloud compume.
Speaker 3 (27:20):
But we're bit to.
Speaker 2 (27:21):
Talk about Amazon Web Services being dangerous for Amazon and
people hating on it the thing that allegedly happened, right.
I do hope all the people that said this to
me didn't just make it up. Oh my god, they did.
A November two thousand and six story from Bloomberg talked
about Jeff Bezos is risky bet to run your business
with the technology behind his website, saying that that wall
(27:41):
Street wanted him to mind the store. Bezos referred to
as a one time Internet poster boy that became a
post dot com pinata. Fuck, they were so good, but
where is this pisson vinegar? By the way, this is fun. Nevertheless,
this article, which again is linked in the spreadsheet for
the episode notes, has what I think my hater's crave
hmm and I quote. But if techies are wowed by
(28:02):
Bezoz's grand plan, it's not likely to win many converts
on Wall Street. To many observers, it conjures up the
ghost of Amazon past. During the dot com boom, Bezez
spent hundreds of millions of dollars to build distribution centers
and computer systems in the promise that they would eventually
pay off with outsize returns. That helps set the stage
of the world's biggest web retail operation, with expected sales
at ten point five billion dollars this year. All that
(28:24):
has investors, wrestlers, and many analysts throwing up their hands
wondering if Bezos is merely flailing around from an alternative
to his retail operation. Eleven of twenty seven analysts who
followed the company of under perform or sell ratings on
the stock a stunning vote of no confidence. That number
of cell recommendations is matched among large companies only by
Quest Communications International, Inc. According to investment consultants Starmind Corp.
(28:47):
It's more than even the eight cell options on the
struggling Ford Motor Company. Pretty bad, right, pretty bad. My
goose is cooked, all those analysts seem pretty bad, except
it's not. My goose is raw. Yours, however, has been
in the oven for over a year. As one on
as Scott W. Duvitt noted at the time, the direct
costs of providing Amazon Web services at first were miniscule
(29:10):
because much of the startup infrastructure already existed. It was
sur plus capacity, Amazon already owned, software Amazon already used,
and Amazon was in it for the long haul. It
knew that this would take some time before it became
a profitable business unit, as the company was basically scaling
up the infrastructure of the Internet. And by the way,
let's just go back to that quote here. The quote
(29:31):
says the costs were miniscule. The costs weren't the problem.
Hey wait a second, that's a name, Scott W. Duvit.
I can look him up. I wonder what he's up
to right now? Oh oh, looks like he's working at
web Bush as it's managing director of equity. Researcher has
said that AI companies would enter a new stage and
early twenty five he said, Oh oh God, just listen
(29:53):
to this. The second stage is the application phase of
the cycle, which would benefit software companies as well as
the cloud of I. And then phase three of this
will ultimately be the consumer facing companies figuring out how
to use the technology in ways that can actually drive
increased interactions with customers. The analyst says the market will
enter phase two in twenty twenty five, with software companies
and collaborvider stocks expected to see gains. He adds that
(30:15):
cybersecurity companies could also benefits the technology evolves. I know
I'm meant to be more mature, but it also calls
out Palenteer, Snowflake, and salesforces those who would gain. In
none of these cases am I able to see any
actual revenue from AI. Salesforce themselves cerid according to the
information that they'd see no revenue growth from AI in
twenty twenty five. Palenteer also has discovered by the Autonomy
(30:39):
Institute's recent study recently added the following to its public disclosures.
There are significant risks involved in deploying AI, and there
could be no assurance that using AI in our platforms
and products will enhance be beneficial to our business, including
our profitability. What I'm trying to say here is that
analysts can be wrong, and they could be wrong at scale.
There is no analyst consensus that agrees with me. In fact,
(30:59):
most analysts to be bullish and AI despite the significantly
worse costs and lack total lack of growth, but ed
ed Amazon Web Services cost money ahead. Now you should
meet your awn nice S tried chuckles. In twenty fifteen,
the year that Amazon Web Services became profitable, Morgan Stanley
analyst Catty Huberty believed that it was running and a
material loss, suggesting that the five point five billion dollars
(31:20):
of Amazon's technology and content expenses was actually AWS expenses
with a negative contribution of one point three billion dollars.
And by the way, want to know what she's up
to nowadays? I wanted to know because six months ago
she declared that twenty twenty five would be the year
of AGENTICAI robust they enterprise adoption and broadening AI winners.
(31:40):
So yes, analysts really got AWS wrong. But putting that aside,
there might actually be a comparison here. Amazon Web Services
absolutely created the capital expenditures drain on Amazon from Forbes's
Chuck Jones. In twenty fourteen, Amazon at four point nine
billion dollars in capital expenditures, up forty two percent from
twenty thirteen to three point four billion dollars. The company
is a wide range of items that it buys the
(32:01):
support and grow its businesses, ranging from warehouses, robots, and
computer systems for its core retail business and AAWS. Well,
I don't expect Amazon to detail how much goes to AWS.
I suspect it is a decent percentage, which means Amazon
needs to generate appropriate returns on the capitol deployed from AWS.
In today's money, this means that Amazon spent six point
(32:21):
seven billion dollars in capital expenditures in twenty fourteen, likely
on AWS, assuming it was this much every year. It wasn't,
but I want to make an example of every person
claiming that this is a gotcha. It took sixty seven
point six billion dollars, and that's in today's money, and
about nine or ten years of pure capital expenditures, even
though all that capex wasn't just AWS to turn Amazon
(32:42):
Web Services into a business that now makes billions of
dollars a quarter in profit. And that's fifteen point four
billion dollars less than Amazon's capex for twenty twenty four,
and even less than one hundred and five billion dollars
they spent this year. It's a fucking joke. And to
be clear, the actual capital expension numbers are like the
AWS cost in totality, we're likely much lower. I just
(33:06):
want to make it clear that even when factoring in inflation,
AWS was a a bargain and b a fraction of
the cost of what Amazon is spent in twenty twenty
four or twenty twenty five. Here's a funny little thing.
On March thirtieth, twenty fifteen, New York Magazine published a
piece from none other than mister Kevin Ruse about the
cloud compute wars, in which he claimed that, and I quote,
(33:27):
there's no reason to suspect that Amazon would ever need
to raise prices in AWS or turn the fabled profits
which the pundits have been speculating about for years less
than a month later, Amazon revealed that Amazon Web Services
was profitable. They don't call him the most right man
in tech journalism for nothing. I think it's so funny
when you go back and read all of Kevin Rus's stuff,
how many just like rates he steps on, and how
(33:48):
quickly they whammy him in the face, and how no
body says anything. I'm saying something. But here's the good news.
We're at the end of this first part. Next episode,
we're going to continue exploring the comparison in AWS and
general of AI and talk about why that comparison fundamentally
doesn't work and why everything's cry the bripple. I'll catch
you on the flip side.
Speaker 1 (34:08):
Thanks for listening, Thank you for listening to Better Offline.
Speaker 4 (34:19):
The editor and composer of the Better Offline theme song
is Metasowski. You can check out more of his music
and audio projects at Matasowski dot com, M A T
T O, S O W s ki dot com. You
can email me at easy at Better Offline dot com,
or visit Better Offline dot com to find more podcast
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(34:40):
you go to chat dot Where's Youreed dot at to
visit the discord and go to our slash Better.
Speaker 1 (34:45):
Offline to check out our reddit. Thank you so much
for listening. Better Offline is a production of cool Zone Media.
Speaker 2 (34:52):
For more from cool Zone Media, visit our website cool
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Zone Media.
Speaker 2 (00:04):
Hello and welcome to Better Offline. I'm your host ed
zip tron. Check out the episode notes. Got a wonderful
merchandise and completely separate to the podcast, got a wonderful
newsletter Where's your Head dot at with the premium section
(00:27):
that I would love you to subscribe to. But I
also got some good news. You've got another three part episode,
the second of the year, and this week we're going
to be talking about how the cracks and the generative
AI market are becoming harder to ignore, and how recent
events are making a collapse seem all the more inevitable.
What that means for the wider economy, really the markets
and you and I want to make that case because
(00:49):
as a journalist, I believe I have the duty to
give you the information you need to make sense of
a world increasingly feeling incomprehensible and of course detachment reality,
and where everything is consequent to everyone, where it's impossible
for ordinary people to shroud themselves from the consequences of
decisions made by the executive and shareholder class. Good journalism
is making sure that history is actively captured and appropriately
(01:11):
described in the cest, and it's the accurate to describe
things as they currently are as alarming, and boy howdy
am I alarmed?
Speaker 3 (01:19):
Now?
Speaker 2 (01:19):
Alarm is not a state of weakness or belligerence in myopia,
My concern does not dull my vision, even though it's
a convenient to frame me as somehow alarmist like I
have some hidden agenda or bias toward doom. I profoundly
dislike the financial waste, the environmental destruction, and fundamentally I
dislike the attempt to gaslight people into swearing fealty to
a sickly in frail pseudo industry where everybody but in
(01:42):
Nvidia and consultancies lose money. And I also dislike the
fact that I and others like me are held to
a remarkably different standard to those that paint themselves as optimists,
which typically means people that agree with what the market
wishes were true. Critics are continually badgered, prodded, poked, mocked,
and jeered out for not all the metrically aligning with
the idea that generative AI will be this massive industry,
(02:03):
constantly having to prove themselves as if somehow there's something
malevolent or craving about criticism. The critics do this for clicks,
or to be contrarian. I don't do anything for clicks
or downloads or prestige. I don't have any stocks or
short positions. My gender is simple. I like talking about
this crap and it comes to me naturally. I have
a podcast and it is on some level my job
(02:24):
to try and understand what the tech industry is doing
day to day.
Speaker 3 (02:27):
And I get it.
Speaker 2 (02:28):
I get It's easy to try and dismiss what I
say is going against the green because AI is big,
and AI is something we should all be impressed by,
and the AI is the thing that's going to start everything,
and all this fucking money is tied up in it.
But look, this isn't a fad for me. This isn't
something I'm doing because I feel like it because I'm
jumping to the next trend. No. I've been roiling against
(02:50):
bullshit bubble since twenty twenty one, the anti remote work
push and the people behind it, the clubhouse and audio
social networks bubble, the NFT bubble that made up quiet,
quitting panic, and even even and this one I got
no credit for.
Speaker 3 (03:03):
I called that.
Speaker 2 (03:04):
Something was up with the FTX several months before it imploded.
Did I do much more than that. No, I found
one thing. Nevertheless, this is in contrarianism, not at all.
It's the kind of skepticism of power and capital that's
necessary to meet these moments. And if it's necessary to
dismiss my work because it makes you feel icky inside,
get a therapist or see a priest. Nevertheless, I'm alarmed.
(03:25):
And while I have said some of these things separately,
based on recent developments, I think it's necessary to say why.
In short, I believe the AI bubble is deeply unstable,
built on vibes and blind faith. And when I say
the AI bubble, I mean the entirety of the AI trade.
And it's alarmingly simple too, he says, before doing three
episodes on it. But this isn't going to be some saccerin,
(03:46):
whiny or simply worrisome podcast. I think at this point
it's become a little ridiculous to not see we're in
a bubble. We are in a goddamn bubble. By the way,
it's so obvious we're in a bubble. It's been so
obvious we're in a bubble. It's been obvious for months,
if not years, A bubble that seems so strong, but
it's very weak with a central point of failure. I
may not be a contrarian, but I am a hater.
I hate the waste, the loss, the destruction, the theft,
(04:07):
the damage to our planet, and the sheer excitement. And
some executives and yes, some writers have that workers may
be replaced by AI and the bold faced fucking lie
that it's actually happening. And what Generative AI is doing
is somehow proof that it will. And so I present
to you the Hater's Guide to the AI Bubble, a
comprehensive rundown of the arguments I have against the current
(04:28):
AI booms existence. Send this podcast to your friends you
love ones or I don't know, blare it in their
ears like you're torturing them. But no, this isn't going
to be a traditional guy but something you can listen
to and say, oh, that's why the AI bubble is
so bad. And at this point, I know, I'm tired
of being gas lit by guys in Gingham shirts who
desperately want to curry favor with other guys in Gingham
shirts but who also have PhDs. I'm tired of hearing
(04:51):
people talk about how we're in the era of agents
that don't fucking work and will never fucking work. I'm
tired of hearing about powerful AI that's actually crap, and
I'm tired of being told the future is here while
having the world's least useful, most expensive cloud software shoved
down my throat and up my asshole. Look, the general
FAI boom is a mirage. It hasn't got the revenue
or the returns of the product efficacy for it to matter.
(05:11):
Everything you're seeing is ridiculous and wasteful when it all
goes tits up. And want you to remember that I
said this. I tried to say something. I've been trying
to say something for a while. But let's start with
something real obvious. Let's start by talking about the so
called Magnificent Seven's week point and it's not the one
you think because it's in video. As I write the
(05:32):
script for this podcast, in Vidia's sitting around one hundred
and seventy bucks a share, a dramatic reversal of faith
after the pummeling it took from the deep Seek situation
in January, which sent it tumbling to a brief late
April trip below one hundred dollars. Four things turned around
the mag seven stocks and Video, Microsoft, Alphabet, which is Google, Apple, Meta, Tesla,
and Amazon make up around thirty five percent of the
(05:53):
value of the US stock market, and of that and
Video's market value takes up about nineteen percent of the
Magnificent seven, eight to nine percent of the entire US
stock market. It's not brilliant. This dominance is also why
ordinary people ought to be deeply concerned about the AI bubble.
The Magnificent seven is almost certainly a big part of
their retirement plans, even if they're not directly invested. Back
(06:13):
in May, the Wonderful Laura Branton from Yahoo Finance reported
the Microsoft, Amazon, Meta, Alphabet, and Tesla alone make up
forty two point four percent of Invidia's revenue. The breakdown
doesn't make things better. Meta spends twenty five percent, and
Microsoft on alarming forty seven percent of their capital expenditures
and on Nvidia chips and as Branton notes, Microsoft also
(06:35):
spends money renting service from core Weave, which analyst Guild
Luria of DA Davidson estimates accounted for eight billion dollars
more than six percent of Invidia's revenue in twenty twenty four.
Laurier also estimates that neo cloud companies like Coreweav and
Crusoe that exist only to provide AI compute services account
for as much as ten percent of Nvidia's revenue, or
at least did so in twenty twenty four. In vidious
(06:57):
climbing stock value comes from one thing. It's continued revenue
growth in the past four quarters. And video has seen
year of a year growth of one hundred and one percent,
ninety four percent, seventy eight percent, and sixty nine percent.
And in the last quarter a little statistic was carefully
brushed under the rug in Video missed though narrowly, on
data center revenue. And data center revenue is, by the way,
(07:19):
where the GPUs go, and all the associated hardware and
so kind of server architecture switches and the like, and yeah,
this is exactly what it sounds like. GPUs that are
used in servers rather than gaming consoles and PCs. I
get a lot of emails saying, oh, will it be
easier for me to buy consumer graphics cards? I don't
fucking know, mate, I'm just did to talk about enterprise bullshit. Okay,
not really enterprise, but enterprise scale GPUs were getting off track.
(07:42):
Analyst estimated it would make. It would make thirty nine
point four billion dollars from the data center category, and
then video only only. I no pathetic amount brought in
thirty nine point one billion dollars. Then again, this could
be attributed to their problems in China, especially as the
H twenty ban they were banned from selling uspace chip
in China has only just been lifted. In any case,
(08:03):
this was a miss, and I'm not sure why no
one wanted to talk about them.
Speaker 3 (08:08):
But there's another problems.
Speaker 2 (08:10):
There's so many little problems here, like in videos. Quarter
over quarter growth has also become aggressively normal. It went
from sixty nine percent to fifty nine percent to twelve
percent to twelve percent again a quarter of quita, which
again isn't bad, it's pretty great in fact, But when
eighty eight percent of your revenue is based on one
particular line in your earnings, it's a pretty big concern,
(08:31):
at least for me. Look, I'm no stock analysts do
not take stock advice from me. I don't know about stocks.
I don't know what will go up and down, but
I'll tell you, I'll tell you something's not right here.
But I'm going to keep this simple in Video relies
on not only selling lots of GPUs each quarter, but
it must always sell more of them the following quarter.
More than forty two percent of revenue, and Video's revenue
(08:54):
comes from Microsoft, Amazon, Meta Alphabet, and Tesla continuing to
buy more GPUs. Remember, it's not about buying the same amount.
Number must go up. In Vidia's continued value and continued
growth is heavily reliant on hyperscalar purchases and continued interest
in generative AI. But really just the buying part the
GPUs are what matter. And the US stock markets continued
(09:17):
health relies on some level of five or six companies,
and it's unclear how many GPUs Apple buys, spending billions
of dollars on GPUs from Nvidia and more every quarter.
In fact, I found an analysis from portfolio manager Don
ke Wang from January twenty twenty five. The found that
the Magnificent seven stocks accounted for forty seven point eighty
seven percent of the Russell one thousand indexes returns in
(09:39):
twenty twenty four. And that's an index fund of the
thousand highest ranked stocks on the foot Sea Russell's Index,
which in simpler terms means thirty five percent of the
US stock market is held up by five or six
companies buying GPUs. If a video's growth story stumbles, it
will reverberate through the rest of the mag seven to two,
making them rely on their own AI trade stories. And
(10:01):
you know it when you know it, when you look
at the stories. There is no AI trade because Generative
AI is not making anybody any goddamn money. But I
have to make money, which is why you need to
listen to the following advertisement. It's the only one of
these bloody things you're gonna get. Here's an ad and
(10:26):
we're back. And I am so tired of people telling
me that companies are making tons of money on AI.
They are not. Anyone saying this to you is lying
or ignorant or both. The Magnificent Seven spent an insane
five hundred and sixty billion dollars between twenty twenty four
and twenty twenty five on Capex, with the overwhelming majority
going towards Generative AI and their effort for this wonderful effort.
(10:49):
For that more than half a trillion dollars, these companies
have made about thirty five billion dollars in revenue and
no profit. And I must say, and this is a
technical term, this is egregiously fucking stud But let's break
it down. Start with starting out in Redmond with our
friends at Microsoft, and they plan to spend eighty billion
dollars on CAPEX in twenty twenty five. Now, mustn't. January
(11:10):
twenty twenty five, Microsoft's annualized revenue meaning best month times
twelve from our official intelligence, was thirteen billion dollars, a
number that it's chosen, not what they since slightly because
said number is either flat or not growing, though it
could in its upcoming I think at the end of
this week or next one, it's got cut earnings coming up.
Speaker 3 (11:29):
Maybe they'd be good news. Yeah.
Speaker 2 (11:31):
The problem with this revenue is that ten billion dollars
of that revenue, according to the information, comes from open
AIS spend on a Microsoft' as or cloud, and Microsoft
offers preferential pricing. I'm quoting the information here at a
heavily discounted rental rate that essentially only covers Microsoft's costs
for operating the servers. That's not good, right, like it's
(11:51):
not good. It's not good that seventy six point nine
percent of Microsoft's AI revenue comes from open AI, and
that revenue is made at cost or just above it,
which makes Microsoft's real AI revenue about three billion dollars
or about three point seven five percent of this year's
capital expenditures, or sixteen point two five percent if you
count open AIS revenue, which costs Microsoft likely more money
(12:13):
than it earns. The information also reports that Microsoft made
four point seven billion dollars in AI revenue in twenty
twenty four, of which open AI accounted for two billion dollars,
meaning that for the one hundred and thirty five point
seven billion dollars that Microsoft are spent in two years
in AI infrastructure, it's made seventeen point seven billion dollars,
of which open AI was twelve point seven billion dollars.
(12:37):
It's kind of crap, isn't it. It's not very good
at all, and things do not improve when we get
to Amazon. An analyst estimates that Amazon, which plans to
spend one hundred and five billion dollars in capital expenditures
this year, will make five billion dollars in AI in
twenty twenty five, rising and I quote as much as
eighty percent, suggesting that Amazon might have made a measly
two point seven seven billion dollars in twenty twenty four
(12:58):
on AI in a year when it's spent eighty three
billion dollars in capital expenditures, and last year, Amazon CEO
Andy Jesse said that and I quote, AI represents for
sure the biggest opportunity since cloud and probably the biggest
technologies shift an opportunity in business since the Internet. I
personally think he is full of shit. And it's a
similar story over with Google, which plans to spend seventy
(13:19):
five billion dollars in capex twenty twenty five. Bank of
America analysts justin Post estimated a few weeks ago that
Google's AI revenue would be in the region of seven
point seven billion dollars, though his math, if I'm honest,
is a little generous because it includes subscribers to packages
that include a lot of non AI staff.
Speaker 3 (13:35):
Two.
Speaker 2 (13:36):
Google's one subscription includes increased cloud storage across Google Drive, Gmail,
and Google Photos, and added a twenty dollars a month
premium plan in February twenty twenty four that included access
to Google's various AI models. Google's claim that the premium
AI tier accounts some millions of the one hundred and
fifty million subscribers to Google one, though how many millions
is impossible to estimate That one would stop me trying, though,
(13:58):
Assuming the three point one billion dollars in twenty twenty
five revenue would work out to two hundred and fifty
eight million dollars a month, that would mean there were
twelve point nine million Google one subscribers also paying for
the premium Ai tier. This isn't out of the realm
of possibility, after all, Open ai has like fifteen point
five million paying subscribers, but post is making in a
kind of a generous assumption here. Nevertheless, well accept the
(14:21):
numbers as they are, because they fucking stink. Google's one
point one billion dollar in workspace revenue came from a
forced price hike on those who use Google services to
run their businesses. My ass included meaning that it's not
likely a number that they can significantly increase in the
future because it was just raising the rent on everyone.
And that's seven point seven billion dollars of revenue, not
(14:42):
profit on seventy five billion dollars of capital expenditures. Very nasty.
But let's move on to one of my faves, Meta,
which plans to spend seventy two billion dollars in twenty
twenty five. Someone's going to get mad at me for
saying this, But I believe that Meta is simply burning
cash on generative. There is no product the Meta sells
that monetizes large language buddles that I can tell at least,
(15:05):
But every Meta product now has them kind of shoved
in there. Year Instagram dms oinking at you to generate
artwork based in your conversation. Nevertheless, they do make some money, allegedly,
and we do have some sort of knowledge of what
Meta is saying they make due to a copyright infringement
case cardre versus Meta on sealed judgment briefs revealed in
(15:26):
April that Meta is claiming that Jenai driven revenue will
be more than two billion dollars in this year, with
estimates as high as three billion dollars. The same document
also claims that Meta expects to make four hundred and
sixty billion to one point four trillion dollars in total
revenue through twenty thirty five. And this is from Ai,
by the way, And this is the kind of thing
that should have you wrenched out of them. But you
(15:47):
should your key God should stop working when the words
leave your mouth because Meta makes ninety nine percent of
its revenue from advertising, and the unsealed documents state that
it generates from its Larmer models and will continue earning
revenue from each iteration and share percentage of the revenue
it generates from users of the Lama models hosted by
those companies. But the companies in question redacted. Mister Max
(16:07):
Zeph of tech runchads that metaalist host partners like Amazon
Web Services and Video Data Breaks, Grock Dell, Microsoft, as Yure,
Google Cloud, and Snowflake, so it's possible that Meta makes
money licensing to those companies. Sadly, the exhibits further discussing
these numbers are filed on the seal and also their
large language model is open source. What service is Meta providing?
(16:29):
Are these companies so goddamn lazy that they need Meta
to come in and set up the fruit? And Jesus Christ,
Jesus Christ, when I read these numbers, I just when
I read about these people who drive me a little insane.
Either way, we are now at three hundred and thirty
two billion dollars of capital expenditures in twenty twenty five.
For twenty eight point seven billion dollars of revenue, off
which ten billion dollars of it is open AI is
(16:51):
at cost or just above cost. Revenue not great. Then
there's Tesla, which doesn't appear to make money from generative
AI and plans to spend eleven billion dollars on capex
in twenty twenty five. Despite its media prominence in the
Magnificent seven. At least, Tesla is one of the least
exposed companies of mag seven to the AI trade, as
Elon Musk has turned it into a memestock company where
(17:12):
what they do doesn't really matter. That doesn't mean, of course,
that Musk isn't touching AI. The XAI, the company that
develops racist large language model grok and owns what remains
of Twitter, apparently burns a billion dollars a month, and
The Information reports that it makes a whopping hundred million
dollars of annualized revenue, so about eight point three three
million dollars a month. Now there's a shareholder vote for
(17:32):
Tesla to potentially invest in Xai, which will probably happen,
allowing Musk to continue to pull leverage from his Tesla
stock until the company's decaying sales and brand eventually swallow
him whole. But we're not talking about Elon Musk today.
We are not. We have to talk about Apple now,
and honestly, they're the least interesting part of this story.
Their capital expensures in twenty twenty five are expected to
(17:54):
also be around eleven billion dollars, and they arguably have
the weirdest AI story in the mag of Since seven,
Apple intelligence radicalized millions of people against AI, mostly because
it fucking sucks. Apple clearly got into AI reluctantly and
now faces stories about how they feel left behind in
the AI race, which mostly means that Apple aggressively introduce
people to the actual features of generative AI by force,
(18:17):
and it turns out that people don't really want to
summarize documents, or write emails or make custom emoji, and
anyone who thinks they would is a fucking alien. In
any case, Apple hasn't bet the farm on AI in
so much sit It hasn't spent two hundred billion dollars
in infrastructure for a product of the limited market that
only loses money. And again, if you want to give
me some money, I'm gonna put an ad break here.
So after this, whatever comes next buy it or don't
(18:41):
if you don't want to, but really you should. If
I'm speaking, if you hear my voice in the ad,
then you should buy it unless you don't want it.
(19:05):
And we're back now. I'm going to use a new
term I came up with that's really really bad. But
the fragile five I call them Amazon, Google, Microsoft, Meta,
and Tesla, the ones investing all the money in the GPUs,
are holding up the US stock market by funding in
Vidia's future growth story. And this is really the first
big takeaway I want you to take from this three parter.
To be clear, I'm not saying that any of the
(19:25):
mag seven are going to die, just that five companies
spend on in Vidio GPUs largely dictate our state of
the US stock market will be If any of these companies,
but especially in Vidia, sneeze, you four O one K
and your kid's college fund will probably catch a cold.
I realized this sounds a little simplistic, but by my calculations,
in Vidia's value underpins about eight percent of the value
of the US stock market. At the time of writing,
(19:47):
it accounts for roughly seven point five percent of the
S and P five hundred an index of the five
hundred largest US publicly traded companies are disturbing eighty eight percent.
As I mentioned, of in Vidia's revenue comes from enterprise
scale GPUs, primarily US for Generative AI, of which five
companies spend, makes up over forty two percent of its revenue.
In the event that any one of these companies makes
significant changes to their investments and in video chips, it
(20:10):
will likely have a direct and meaningful negative impact on
the wider economy and markets. In Vidia's earnings are effectively
the US stock market's confidence and everything rides on five companies.
And if we're honest, here really four companies. This tesla
is point nine percent of the investment in GPUs of
those five companies buying GPUs for Generative AI to train
(20:30):
at generative AI models were still these services while losing.
These companies' massive amounts of money don't really produce much revenue,
meaning that the AI trade is not driven by any
real meaningful revenue growth.
Speaker 3 (20:43):
But d it hid they said?
Speaker 2 (20:46):
They said, points of growth? Silence, quiet, nothing more out
of you any of these companies talking about growth from
AI or the jobs that AI will replace, or how
AI has changed their organization are handwaiving to avoid telling
you how how much money these services are actually making them.
If they were making good money and experiencing real growth
as a result of AI, they wouldn't shut the fuck
(21:07):
up about it. They'd be in your ear and up
your ass, hooting and hollering about how much cash they
were rolling in. And they're not because they're not rolling
in cash and are in fact blowing nearly one hundred
billion dollars each to build massive, power hungry, costly data
centers for no real reason. Don't watch the mouth, watch
the hands. These companies are going to say they're seeing
growth from AI, but unless they actually show you the
growth and enumerate it, they are kind of lying. They're
(21:30):
lying in the way that you're allowed to.
Speaker 3 (21:32):
But it Hey, Amazon Web Services took years to become profitable.
People said Amazon would fail. So this is one of
the most annoying and consistent responses to my work, and
it's when people say that either Amazon or Amazon Web
Services ran at a loss. In the Amazon Web Services,
which pretty much was the invention of modern mass market
cloud compute infrastructure for running stuff on the cloud, lost money.
Speaker 2 (21:52):
And then didn't. Here's the thing, this statement is one
of the things that people say because it sounds rational.
Amazon did lose mone and Amazon Web Services was expensive.
That's right, right, it's obvious. Right. The thing is, I've
never really had anyone explain this point to me, so
I finally sat down. I'm going to deal with this
criticism because every fucking person who manages it thinks they
(22:13):
just bulled Excaliper from the stone and can now decapitate me.
They claim that because people in the past doubted Amazon
because are in addition to the burn rate of the
AWS systems as the company built out its infrastructure, that
I too, am wrong because the analysts were wrong about that.
This isn't Camelot, You're a rube. You are not King Arthur.
And now I will address both the argument itself and
(22:34):
the day part of it too, because if the argument
is that the people who got Amazon Web Services wrong
should not be trusted and we should no longer trust them,
the people who actively propagate and dies something wrong, we
shouldn't trust them, right right, Well, you'll never guess who's
now saying AI is good. Oh, I'm going to get there,
don't you flip and worry? Well, if I'm honest, I'm
(22:56):
not sure where this argument came from, because there is,
to my knowledge, no story about Amazon Web Services where
somebody suggests its burn rate would kill Amazon. But I'm
a curious little creator, so let's start with an obvious one,
the obvious point. I want to give a shout out
to Harry mccrack and a fast company for bringing this
one up to me. It May May thirty first, ninety
ninety nine, there was a piece that everybody is thinking
(23:18):
of called Amazon dot bom and the writer Jacqueline Doherty
was mocked soundly for being wrong about Amazon, which has
now become quite profitable. The article, along with the other
sources that form the basis of this episode, are going
to be linked in the spreadsheet, and as a as
a surprise, I'll actually up later. I also want to
be clear that Amazon Web Services did not launch until
two thousand and six, and Amazon itself would become reliably
(23:39):
profitable in two thousand and three. Technically, Amazon had opened
up Amazon dot COM's web services for developers to incorporate
Amazon content into their applications in two thousand and two,
but what we consider Amazon web Services today, cloud storage
and compute, launched in two thousand and six. But okay,
fancy pans, what did she actually say? We quote Doherty.
(23:59):
Unfortunately for Bezos, Amazon is now entering a stage in
which investors will be less willing to rely on its
charisma and more demand advances to tough questions like when
will this company actually turn a profit? And how will
Amazon triumph over a slew of new competitors who have
deep pockets and new technologies. Who tried to ask Bezerz,
but he declined to make himself for any other executives
of the company available. He could ignore barons, but he
can't ignore the questions. Bang a line, by the way,
(24:22):
Amazon last year posted a loss of one hundred and
twenty five million dollars, which is about two hundred and
forty two point six million today's money on revenues of
six hundred and ten millions to about one point one
eight three billion dollars in today's money, and then this
year's first quarter referring of course, to nineteen ninety nine,
as the company posted a loss of sixty one point
seven million, which is one hundred and nineteen point seventy
five million today's money on revenues of two hundred and
(24:44):
ninety three point six million, five hundred and sixty nine
point eight two million dollars in today's money. I realized
that was a real motherfucker of a quote, but it's necessary.
Her argument, for the most part is that Amazon was
burning cash and had a ton of competition from other
people doing similar things, and that analysts backed her up,
and they really did. By the way, again, I quote
the first mover does not always win the importance of
being first as a mantra in the internet world, but
(25:05):
it's wrong. The ones that the most efficient will be successful,
says one retail analyst. In retailing, anyone can build a
great looking store. The hard part is building a great
looking store that makes money, which is a good point
fair arguments for the time, though perhaps a little narrow minded.
The assumption wasn't what Amazon was building, and we are,
by the way, are referring to Amazon dot com. The
(25:25):
store was a bad idea, but the Amazon wouldn't be
the ones to build it. And again we quote. Once
Walmart decides to go after Amazon, there's no contest. The
Barnard President Bernard's Retail Trend report. Walmart has the resources
that Amazon can't even dream about, which is true at
the time, but in simpler terms, Amazon's business model was
(25:46):
not in question. People were buying shit online. In fact,
this was just before the dot com bubble burst, when
people had insane optimism about the future of the web.
Yet the comparison stops there. People obviously like buying shit online.
It was the business models of many of these web
pioneers that sucked at Year WEBVAM. But we're going to
talk about Amazon Web Services and the less technical of you.
I want to explain something. AWS is a really important company.
(26:08):
I'll kind of get into those details. But people like
to argue about it and say, well, it lost a
bunch of money, so you know that means that generative
a I should lose a bunch of money to and
that's how it works. I'm going to substantively and repeatedly
explain why that is so goddamn stupid. I'm sick of
the argument. I'm sick of it. Breathe Edward, breathe. They
(26:29):
can't get you behind the microphone, okay. Amazon Web Services
was an outgrowth of Amazon's own infrastructure, which had to
expand rapidly to deal with the influx of web traffic
from Amazon Dot Com, which had become one of the
world's most popular websites and was becoming increasingly more complex
as it sold things other than books to multiple international
locations as well. Other companies had created their own infrastructure,
(26:50):
but if a smaller company wanted to scale, they basically
needed to build their own thing. It was a massive
barrier between companies and building web services. And it's actually
kind of cool what Amazon did. I hate to look
Rosie I bind rose colored lenses. I don't know the
phrase that Jeff Bezos, but oh no, I remember this
was early two thousands, before Facebook, Twitter, and a lot
(27:10):
of modern internet we know that runs on services like
Amazon Web Services or Microsoft Zero or Google Cloud. They
basically invented the modern concept of cloud compume.
Speaker 3 (27:20):
But we're bit to.
Speaker 2 (27:21):
Talk about Amazon Web Services being dangerous for Amazon and
people hating on it the thing that allegedly happened, right.
I do hope all the people that said this to
me didn't just make it up. Oh my god, they did.
A November two thousand and six story from Bloomberg talked
about Jeff Bezos is risky bet to run your business
with the technology behind his website, saying that that wall
(27:41):
Street wanted him to mind the store. Bezos referred to
as a one time Internet poster boy that became a
post dot com pinata. Fuck, they were so good, but
where is this pisson vinegar? By the way, this is fun. Nevertheless,
this article, which again is linked in the spreadsheet for
the episode notes, has what I think my hater's crave
hmm and I quote. But if techies are wowed by
(28:02):
Bezoz's grand plan, it's not likely to win many converts
on Wall Street. To many observers, it conjures up the
ghost of Amazon past. During the dot com boom, Bezez
spent hundreds of millions of dollars to build distribution centers
and computer systems in the promise that they would eventually
pay off with outsize returns. That helps set the stage
of the world's biggest web retail operation, with expected sales
at ten point five billion dollars this year. All that
(28:24):
has investors, wrestlers, and many analysts throwing up their hands
wondering if Bezos is merely flailing around from an alternative
to his retail operation. Eleven of twenty seven analysts who
followed the company of under perform or sell ratings on
the stock a stunning vote of no confidence. That number
of cell recommendations is matched among large companies only by
Quest Communications International, Inc. According to investment consultants Starmind Corp.
(28:47):
It's more than even the eight cell options on the
struggling Ford Motor Company. Pretty bad, right, pretty bad. My
goose is cooked, all those analysts seem pretty bad, except
it's not. My goose is raw. Yours, however, has been
in the oven for over a year. As one on
as Scott W. Duvitt noted at the time, the direct
costs of providing Amazon Web services at first were miniscule
(29:10):
because much of the startup infrastructure already existed. It was
sur plus capacity, Amazon already owned, software Amazon already used,
and Amazon was in it for the long haul. It
knew that this would take some time before it became
a profitable business unit, as the company was basically scaling
up the infrastructure of the Internet. And by the way,
let's just go back to that quote here. The quote
(29:31):
says the costs were miniscule. The costs weren't the problem.
Hey wait a second, that's a name, Scott W. Duvit.
I can look him up. I wonder what he's up
to right now? Oh oh, looks like he's working at
web Bush as it's managing director of equity. Researcher has
said that AI companies would enter a new stage and
early twenty five he said, Oh oh God, just listen
(29:53):
to this. The second stage is the application phase of
the cycle, which would benefit software companies as well as
the cloud of I. And then phase three of this
will ultimately be the consumer facing companies figuring out how
to use the technology in ways that can actually drive
increased interactions with customers. The analyst says the market will
enter phase two in twenty twenty five, with software companies
and collaborvider stocks expected to see gains. He adds that
(30:15):
cybersecurity companies could also benefits the technology evolves. I know
I'm meant to be more mature, but it also calls
out Palenteer, Snowflake, and salesforces those who would gain. In
none of these cases am I able to see any
actual revenue from AI. Salesforce themselves cerid according to the
information that they'd see no revenue growth from AI in
twenty twenty five. Palenteer also has discovered by the Autonomy
(30:39):
Institute's recent study recently added the following to its public disclosures.
There are significant risks involved in deploying AI, and there
could be no assurance that using AI in our platforms
and products will enhance be beneficial to our business, including
our profitability. What I'm trying to say here is that
analysts can be wrong, and they could be wrong at scale.
There is no analyst consensus that agrees with me. In fact,
(30:59):
most analysts to be bullish and AI despite the significantly
worse costs and lack total lack of growth, but ed
ed Amazon Web Services cost money ahead. Now you should
meet your awn nice S tried chuckles. In twenty fifteen,
the year that Amazon Web Services became profitable, Morgan Stanley
analyst Catty Huberty believed that it was running and a
material loss, suggesting that the five point five billion dollars
(31:20):
of Amazon's technology and content expenses was actually AWS expenses
with a negative contribution of one point three billion dollars.
And by the way, want to know what she's up
to nowadays? I wanted to know because six months ago
she declared that twenty twenty five would be the year
of AGENTICAI robust they enterprise adoption and broadening AI winners.
(31:40):
So yes, analysts really got AWS wrong. But putting that aside,
there might actually be a comparison here. Amazon Web Services
absolutely created the capital expenditures drain on Amazon from Forbes's
Chuck Jones. In twenty fourteen, Amazon at four point nine
billion dollars in capital expenditures, up forty two percent from
twenty thirteen to three point four billion dollars. The company
is a wide range of items that it buys the
(32:01):
support and grow its businesses, ranging from warehouses, robots, and
computer systems for its core retail business and AAWS. Well,
I don't expect Amazon to detail how much goes to AWS.
I suspect it is a decent percentage, which means Amazon
needs to generate appropriate returns on the capitol deployed from AWS.
In today's money, this means that Amazon spent six point
(32:21):
seven billion dollars in capital expenditures in twenty fourteen, likely
on AWS, assuming it was this much every year. It wasn't,
but I want to make an example of every person
claiming that this is a gotcha. It took sixty seven
point six billion dollars, and that's in today's money, and
about nine or ten years of pure capital expenditures, even
though all that capex wasn't just AWS to turn Amazon
(32:42):
Web Services into a business that now makes billions of
dollars a quarter in profit. And that's fifteen point four
billion dollars less than Amazon's capex for twenty twenty four,
and even less than one hundred and five billion dollars
they spent this year. It's a fucking joke. And to
be clear, the actual capital expension numbers are like the
AWS cost in totality, we're likely much lower. I just
(33:06):
want to make it clear that even when factoring in inflation,
AWS was a a bargain and b a fraction of
the cost of what Amazon is spent in twenty twenty
four or twenty twenty five. Here's a funny little thing.
On March thirtieth, twenty fifteen, New York Magazine published a
piece from none other than mister Kevin Ruse about the
cloud compute wars, in which he claimed that, and I quote,
(33:27):
there's no reason to suspect that Amazon would ever need
to raise prices in AWS or turn the fabled profits
which the pundits have been speculating about for years less
than a month later, Amazon revealed that Amazon Web Services
was profitable. They don't call him the most right man
in tech journalism for nothing. I think it's so funny
when you go back and read all of Kevin Rus's stuff,
how many just like rates he steps on, and how
(33:48):
quickly they whammy him in the face, and how no
body says anything. I'm saying something. But here's the good news.
We're at the end of this first part. Next episode,
we're going to continue exploring the comparison in AWS and
general of AI and talk about why that comparison fundamentally
doesn't work and why everything's cry the bripple. I'll catch
you on the flip side.
Speaker 1 (34:08):
Thanks for listening, Thank you for listening to Better Offline.
Speaker 4 (34:19):
The editor and composer of the Better Offline theme song
is Metasowski. You can check out more of his music
and audio projects at Matasowski dot com, M A T
T O, S O W s ki dot com. You
can email me at easy at Better Offline dot com,
or visit Better Offline dot com to find more podcast
links and of course, my newsletter. I also really recommend
(34:40):
you go to chat dot Where's Youreed dot at to
visit the discord and go to our slash Better.
Speaker 1 (34:45):
Offline to check out our reddit. Thank you so much
for listening. Better Offline is a production of cool Zone Media.
Speaker 2 (34:52):
For more from cool Zone Media, visit our website cool
zonemedia dot com, or check us out on the iHeartRadio app,
Apple Podcasts, whever you get your podcasts.
Host
Ed Zitron
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