How The AI Bubble Bursts

26:28These companies are probably not going to fall apart, shut down, close their doors suddenly. It could be that they're absorbed into another company on unfavorable terms, you know, like character AI and inflection, like the things that just happened. And in that case, I think investors are going to take a massive loss. OpenAI or Anthropic might be forced to radically limit their operations, either by shutting down their free chatbots or limiting access to enterprise customers or by slowing down development massively, which, by the way, will be death's embrace. It will be over. We could see massive layoffs, or we could see these companies pivot to a less capital-intensive business model, such as licensing their patents and IP to other technologies or companies, but not really offering an actual tangible product to consumers or business customers, as opposed to what they're doing today, which is offering a tangible thing that doesn't really do that much.

27:21I'm rambling again. Yeah, I can imagine all sorts of terminal endings for generative AI is big too, and some of them aren't even legally actionable. But I believe that the collapse or absorption of these companies is the one critical sign to look for. OpenAI began this hype cycle, and Sam Altman is definitely the P.T. Barnum of the large language model circus. And OpenAI has absorbed more money and attention than any other startup of the last few years, and outside of Uber, I think they might be getting the most all time. God, I hate it. It's symbolic of the excess and the waste of the generative AI boom, and its death, or as I mentioned, some alternative collapse, is the sign that we're done here, in the same way that FTX signaled the end of the cryptocurrency boom.

28:03And if OpenAI's collapse marks the apocalypse for generative AI, I believe it will be accompanied by one or several of the following pale horses, real, tangible signs that things are falling apart, things you can send to your friends and family and laugh at. Let's take a look, shall we? Number one. Any significant price changes by any large language model company are a bad sign. Desperate times require desperate measures, and any oscillation in pricing is a bad sign. We could see a race to the bottom, which is kind of already happening, with model developers releasing increasingly cheaper options to grow revenue and build their customer bases, which is an idea that only makes sense if the underpinning technology is profitable, which Generative AI is not.

28:44And it's already kind of begun, with OpenAI's reduced-price GPT-40 mini and google gemini's uh google flash 1.5 i believe it's called and they just reduced that pricing to compete with gpt40 mini's cheapest option this is totally unsustainable which means it fits right in with the rest of the hype cycle conversely if prices start increasing this is a sign that the company's getting really really desperate and have to find a way to start recouping the massive costs of the unsustainable shit show they've been participating in now this i think is probably one of the later ones. If they do this, if they even get to it, it's just a sign that things are falling apart.

29:23I also think we're going to see stories about general discord in AI investment. Any articles you see about investors fleeing private AI deals, as they did with the metaverse, are a sign that things are falling apart. And the things I'm hearing, by the way, is that this has already begun. But that's anecdotal. Don't take my word for it. Just watch the media. We might also see stories about OpenAI having trouble raising money. Up until now, there haven't been any rumors about them having trouble, despite the fact that they're expected to lose, like I mentioned,$5 billion in 2024. They need to raise billions of dollars and they have to do it soon.

29:57And if they can't raise, nobody can. But moving on, there's another harbinger to look out for. And it would be evidence that Google or Microsoft is reducing the capex, as discussed. Because it's really important to realize that venture capital and Silicon Valley really are not the ones propping this up. They might be the cheerleaders. They might be the ones talking about how important it is. But Google and Microsoft are the ones holding this up, and Amazon as well. They're the ones who are bankrolling Anthropic and OpenAI. Microsoft, as I will get to, basically owns OpenAI. If those companies decide they don't want this to continue, it will stop.

30:34Venture capital cannot afford to keep OpenAI alive. But moving on, you should keep out a beady little eye for any discord within any of the major players in generative AI. But I'm not talking about OpenAI and Anthropic. I'm talking about companies like ScaleAI, who are a training data company that's raised over$1.5 billion, and Cohere, another large language model company that recently raised another$450 million from NVIDIA and Salesforce. And Salesforce, they've been talking about doing AI for like a decade. I don't know what product they sell. and i'd watch those two very carefully they're seen as stable revenue generating yet as discussed unprofitable ancillary firms that will likely need to raise again in the next 12 months if we hear about problems such as employees being unhappy or troubles fundraising or making money this means that people on the inside are making nasty little noises because they know things are falling apart and the same by the way goes for any discord in open ai or anthropic this one's obvious if we hear there are problems, they're worried, or if they're getting worried, if they can't raise money, if they're losing people, which is kind of already happening, if they can't seem to make a deal work, if they're having trouble progressing their software, anything about these companies is probably a bad sign.

31:52If I were you, I'd keep an eye on the Washington Post, Natasha Tiku's done great work there, as the people at Shirovide and Jeffrey Fowler, but Natasha's done some great work on Mr. Altman. The information has got some great people doing work on this. Reuters, TechCrunch, 4FL Media, they're the ones I keep an eye out for. We've already seen a little bit of this happening already. A few days ago, OpenAI lost two of its co-founders. John Shulman left for competitor Anthropic and Chief Operating Officer Greg Brockman has gone on something he's calling extended leave. As an aside, this is objectively one of the funniest things anyone has ever done in tech.

32:30Yeah, man, nothing big going on. Enjoy your vacation, mate. Not like the entire industry is falling apart. Not like the bubble might be popping. Enjoy Carbo. Anyway, as things get especially bad, I think we're going to see discussions of layoffs. Based on people I've talked to, generative AI companies are paying these massive salaries in stock and cash. And they're not run particularly efficiently because they are really driven by dreamers, by which I mean con artists. If AI jobs are no longer these cushy little hidey holes for the most expensive engineers in the valley, things are going to sour fast, because they need the best to do this mediocre crap that you see every day.

33:08But I'd argue the biggest and most desperate of these pale horses would be some sort of big, stupid magic trick. No, really. As these companies get desperate, expect someone, especially OpenAI, to try and show something new and crazy as a means of trying to turn this narrative around. When or if this happens, look very carefully at what they say about the product's availability, what it can actually do, or who they show it to. Is it available publicly? Are there limitations on it? And are there any weird terms and conditions to look out for? If OpenAI gets desperate, it may move up the public launch of Sora, its generative video product.

33:46Doing so is really only going to cause more problems. There isn't a chance in hell that this thing is profitable. and I'm 100 % confident that it's much, much, much, much more expensive than the video and the text-based generation tools they already have. And I imagine its visual inconsistencies and hallucinations would make for some entertaining content for YouTubers and tech reporters, which will mean that they just have hundreds, thousands, hundreds of thousands perhaps of people requesting shitty videos off of this thing, burning servers, quite literally in this case, losing them money and for what?

34:19How much can they charge for this thing? Because it's not going to be enough. The common thread between all of these events is that they're all expressions of desperation, fear, and a total lack of confidence in the underlying company. So far, and this is napkin maths, I'd estimate that a total of 200 billion dollars has been spent to get generative AI to this point. In infrastructure, in funding, in energy, in so many different meaningless ways. All to get us to the point that we have a tool that's really good at generating things that aren't as good as what a human could make, and only sometimes are they good enough to actually use.

34:53To be clear, we're not quite at the bubble popping yet. The reason I chose the collapse of OpenAI as the event is because it will mean that Microsoft decided to cut them off, and that there wasn't enough banker or venture capital interest to prop them up further. OpenAI's collapse would be both financial and symbolic, the sign that the Valley would let a company die, and that this idea was not good enough for everybody to stake their futures on it. In any case, things could change. The bubble could stay inflated. But while you're thinking about how, why don't you take a breather to hear from someone, one of our wonderful, beautiful, precisely chosen advertisers that you simply must pay money to.

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38:32and we're back now i don't want to give you any homework i know you're currently holding up a convenience store or maybe trying to get a hubcap off of a car wheel you hear me speak enough but a few weeks ago i wrote a newsletter called how does open ai survive an 8 000 or so word analysis of how difficult it's going to be to keep that company going at its current burn rate to simmer it down as quickly as possible open ai costs about 8.5 billion dollars a year to run and only makes about three and a half billion to four and a half billion a year in revenue. A number, by the way, that does not sound right, but it's what's being reported.

39:06OpenAI's costs are increasingly nearly, and generative AI, as I've said a few times, is deeply unprofitable and unsustainable. Making OpenAI's models better, which doesn't necessarily mean they're more valuable or more useful, also costs hundreds of millions, if not billions of dollars. As a result, OpenAI needs to raise more money than anybody has ever raised in the history of the valley in the next 12 to 24 months, or launch a product so significant that it blows ChatGPT out of the water and actually is profitable. And these things are unlikely, but possible, I guess? Microsoft, Google, and Amazon could somehow change the narrative, but doing so too would require some sort of technological breakthrough, or a product, a very obvious product that would make people money, more money than is being spent on the thing.

39:54And the markets are also capricious, and thus I really wouldn't count on there being a narrative turnaround, especially with the shifting sands of investor sentiment. As I've mentioned previously, on August 2nd, Elliott Management, the hedge fund with over $70 billion in assets under management, said in a letter to clients that AI is overhyped and that Nvidia is a bubble, adding that AI had not delivered value commensurate with the hype. While it's possible there are others that dissent against the rapidly forming consensus against generative AI to prop things up, which I do think is possible, especially if you're deep in the hole with Microsoft or NVIDIA, it's worth putting Elliott Management's note in a broader context.

40:34It's only the latest voice in a loud, or at least increasingly louder, chorus of critics, whose members include esteemed analyst houses and some of the largest investment banks in the world. Goldman Sachs put out a report in July that you've heard in the Pop Culture episode that said generative AI was too expensive and didn't solve the complex problems that would need to justify their expenses. At the end of July, Gartner put out a report predicting that 30 % of generative AI products would be abandoned entirely after a proof of concept by end of 2025. And the Washington Post reports that Barclays Bank thinks that, and I quote, Wall Street analysts are expecting big tech companies to spend around$60 billion a year on developing AI models by 2026, but reap only$20 billion a year in revenue from AI by that point.

41:20Little asterisk on there for you. That does say revenue. That doesn't say profit. And by the way, that's only a billion dollars more than Microsoft's entire capital expenditures in the last quarter alone. Microsoft also has a storied history of pumping and dumping ideas. For Microsoft, augmented reality was, and I quote, an absolute breakthrough in 2019, before it was quietly shoved in a corner with mass layoffs and abyssal line closures a few years later. In 2021, Satya Nadella, their CEO, couldn't overstate how much of a breakthrough the metaverse was. Yet two years later, and big props to Preston Growler of Compute World for saying this in February 2023, he laid off most of the people involved and bet everything on artificial intelligence.

42:05And that bet everything thing, that's a headline from Wired magazine. Very good. It's also important to remember that Microsoft effectively owns OpenAI. As part of their 2019 funding round, which I believe was a billion dollars, Microsoft has full access to all of OpenAI's intellectual property and research. Which begs a thorny little question. Why at this point would Microsoft give OpenAI any more money other than to save face? Though it's a very real possibility that Satya Nadella is surrounded by yes-men who don't know what they're talking about, Microsoft also has access to sell OpenAI's, and I quote, pre-AGI products, which is all of their products right now, and full access to all of their research, as well as, and I quote, certain rights to OpenAI's intellectual property.

42:50Unless OpenAI is capable of delivering something meaningfully different, something Nadella can wave in front of analysts' faces and show them that they can automate all of these jobs away, its existence is just another cost center, and one that could get eliminated in a tough quarter. And to be clear, Satchin Adela has been extremely frank about his leverage over OpenAI and its effective ownership of their tech, albeit buffeted with the usual bullshit platitudes and niceties that you'd expect from a shape-shifting tech CEO monster. In a late 2020 interview with PR person Kara Swisher, Satchin Adela said, if OpenAI disappeared tomorrow, I don't want any customer of ours to be worried about it, quite honestly, because we have all the rights to continue the innovation, not just to serve the product, but we can go and just do what we were doing in partnership ourselves.

43:34We have the people, we have the compute, we have the data, we have everything. Mr. Nadella, that is an insane thing to say. And the kind of thing you'd only say to someone like Kara Swisher. Swisher should have made that the headline, that Microsoft effectively owns OpenAI. I miss this at the time. I found out about this quote like a week or two ago. It's crazy to me. It's crazy to me that this was said and it's not front page news. Microsoft owns OpenAI, who gives a shit about the nonprofit structure. But it actually gets better because he followed up that quote with this. Microsoft's investment of$13 billion in open AI gives us significant rights, as I said.

44:15And also this thing, it's not hands off, right? We are in there. We are below them. We are above them. We are around them. We do the kernel optimizations. Very funny if you consider the CrowdStrike thing, by the way. We build tools. We build the infrastructure. So that's why I think a lot of the industrial analysts are saying, oh wow, it's really a joint project between Microsoft and OpenAI. The reality is we are, as I said, very self-sufficient in all of this. While I'm not saying it's for certain, Microsoft can, very clearly, if they so please, simply drop OpenAI and keep all of their stuff.

44:49Nevertheless, as the market's sour on generative AI, I think it's time for big tech to prove something. It's time for them to prove that this wasn't all a huge, big, stupid fucking waste of time and money. To continue with their current paths, Sandar Pishai of Google and Sachin Adela of Microsoft, as the loudest of the publicly traded generative AI hype men, will have to show everybody something remarkable. But even then, they will have to show how it actually makes money. And if they can't, at least in the case of Sachin Adela, they can still walk away as winners. In the best-case scenario, these companies would either have to dramatically reduce their costs, something they've really shown they're not capable of doing and in fact have said they'll do the opposite of, or show ways to make generative AI so significantly efficient that it somehow finally balances itself out.

45:37What we're really waiting for now is for somebody to bling. If none of the major cloud companies change course over the next few months, we could potentially see this boom continue for another quarter. And just to be clear, they're usually in lockstep. They love holding up each other's oligopolies and monopolies. They love being a weird cartel that sells data. To continue, though, they'll have to commit billions of dollars in, at the very least, cloud credits for OpenAI and Anthropic, as neither of those companies can survive without further cash infusions. They'll also have to find some way to make any of this useful and profitable, two challenges that Generative AI has never really been able to deal with, not even once.

46:17And I, just as an aside, I've had people email and say, well, I use it for this. I was on a show the other day, so he uses it for show notes. These are all fine, whatever. These are like little use cases. These people need this to make a trillion dollars. Show notes aren't going to do it. Shitty translations are not going to do it. A picture of Garfield with a gun is not going to do it. And big tech is going to have to figure out a way to support these companies in the face of rising disquiet among shareholders who, in the most recent route of AI companies, lost them about$2.6 trillion in market capitalization.

46:53As I pointed out in the shareholder supremacy, investors don't really care about the future or innovation. They just want profits and their portfolios to get bigger and they want to see the number for profit go larger and the costs go lower and absolutely nothing else matters at all. Which is why they love generative AI at first, because if this actually made a bunch of money, this is a way that Microsoft could just route cloud costs from themselves to themselves. I'll get to that in a future episode about monopolies, though. And I think that if generative AI becomes an albatross around the necks of Google, Microsoft, and Amazon, which I really believe it will, these companies are going to face really nasty pressure to curtail their investments in their capex.

47:35Investors will ask why these companies are spending a collective$100-200 billion by the end of 2025 on a technology that likely won't drive much revenue growth, when it could be used for things like stock dividends and stock buybacks and, I don't know, thrones for the demon lords that live underneath the offices. I don't know how Microsoft truly makes money. That's a joke. Don't email me about it. But I believe in any case, the next month is going to be critical to the future of the AI boom. And I believe this is a time for industry-wide introspection and to really consider everyone's roles and why this bubble existed in the first place.

48:13In the next episode, I'm going to take a closer look into OpenAI's likely demise, what it looks like and why the company's few avenues for salvation, in fact, look like dead ends. And I'll get into how fucking ridiculous this whole bubble is and what its potential collapse spells for the future of the tech industry.

48:38Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Ossowski. You can check out more of his music and audio projects at matosowski.com. M-A-T-T-O-S-O-W-S-K-I dot com. You can email me at ez at betteroffline.com or visit betteroffline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat.wheresyoured.at to visit the Discord and go to r slash betteroffline to check out our Reddit. Thank you so much for listening. Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

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