The Hater's Guide To The AI Bubble, Pt, 2

0:00This is an iHeart Podcast.

0:30Thomson Reuters and specialized bikes have since they upgraded to the next generation of the cloud. Oracle Cloud Infrastructure. OCI is the blazing fast platform for your infrastructure, database, application development, and AI needs, where you can run any workload in a high availability, consistently high performance environment, and spend less than you would with other clouds. How is it faster? OCI's block storage gives you more operations per second. Cheaper? Better? OCI costs up to 50 % less for computing, 70 % less for storage, and 80 % less for networking. Better? In test after test, OCI customers report lower latency and higher bandwidth versus other clouds.

1:12This is the cloud built for AI and all your biggest workloads. Right now, with zero commitment, try OCI for free. Head to oracle.com slash strategic. That's oracle.com slash strategic. So I love Square. They make paying for stuff at a store really easy. I just use them at Court Street Grocers to buy a sandwich here in Brooklyn, New York. Their stuff's reliable, easy to use, and it just works for both businesses and their customers. Square keeps up so you don't have to slow down. Get everything you need to run and grow your business without any long-term commitments. And why wait? Right now, you can get up to$200 off Square hardware at square.com slash go slash better offline.

1:50That's S-Q-U-A-R-E dot com slash G-O slash better offline. Run your business smarter with Square. Get started today.

2:31call zone media hello and welcome to better offline i'm your host ed zitron

2:48subscribe to the newsletter buy the merchandise it's all in the notes and we're on the second an installment of our three-part Haters Guide to the AI Bubble and the Cracks Within the Generative AI Industry, and how they're becoming bigger and scarier and the potential economic meltdown caused by a collapse in generative AI spending. Well, it's not really generative AI spending, it's literally just fucking GPUs, and I think it might be sooner and likelier than many think. Toward the end of the last episode, we talked about one of the inane comparisons we hear between today's nation's state-sized spending on gen AI capital expenditures and the investments that Amazon made when scaling Amazon Web Services, which was literally the foundation of cloud computing at scale, I would say.

3:27Someone's going to email and say I'm wrong, not going to read it. And I had to cut things short because we ran out of time, but I want to continue the conversation because I think it's important to examine this comparison thoroughly, if not just to explain why it doesn't work. It's also, I want to stop, I want to stop hearing it. I want when people say it to me, I just want to send them this fucking episode and say, leave me alone, buddy boy. but but but but the first point i want to make in this episode is that generative ai and large language models do not resemble amazon web services or the greater cloud compute boom and generative ai is not infrastructure now some people compare llms and their associated services to amazon web services or services like microsoft zero or google cloud the giant multi-billion dollar operations that basically share their server capacity with companies wanting to run stuff on the internet or within their own within their own systems a very fudgy way of putting they help make sure that applications work online these are very very useful services and by the way people are wrong to make the comparison between them and lms as i'll get into and now amazon web services when it launched comprised of things like and forgive me how much i'm going to dilute this amazon's elastic compute cloud ec2 where you rent space and amazon servers to run applications in the cloud, or Amazon Simple Storage, S3, which is enterprise level storage for applications.

4:44And storing things is not just like a simple hard drive. It's redundancy. It's making sure it's copied in places. So latency comes down, tons of other things. But in simpler terms, if you were providing a cloud-based service, you used Amazon to both store the stuff that the service needed and the actual cloud-based processing. So computes are like you compute loads and runs applications, but delivered to thousands or millions of people online. And this is a huge industry. Amazon Web Services alone brought in web revenues of over $100 billion in 2024. And while Microsoft and Google don't break out their cloud revenues, they're similarly large parts of their companies.

5:18And Microsoft has used Azure in the past to patch over shoddy growth. These services are also selling infrastructure. You aren't just paying for compute, but the ability to access storage and deliver services with low latency so users have snappy experiences wherever they are in the world. And I know I just said a snappy experiences. I'm not editing it. The subtle magic of the internet is that it works at all, and a large part of that is the cloud compute infrastructure and oligopoly of the main cloud providers having such vast data centers. This is much cheaper than doing it yourself and to a certain point.

5:48Dropbox moved away from Amazon Web Services as it scaled, for example. But this also allows someone to take care of the maintenance of the hardware and make sure it actually gets your stuff to your customers. You also don't have to worry about spikes in usage because these things are usage-based, hence the elastic. And you could always add more compute to meet demand, or just have it in a particular time. There is, of course, nuance. Security-specific features, content-specific delivery services, data-based services. There's nuance behind these clouds. You're buying into the infrastructure of the infrastructure provider, and the reason these products are so profitable is that, in part, you are handing off the problems and responsibility to somebody else, and also, most web applications are not that demanding of cloud compute.

6:28They might be at scale expensive to provide to millions of people but Facebook was not a super complex I don't know website depending on on thousands or millions of GPUs and based on that idea there are multiple product categories you can build on top of something like AWS because ultimately cloud services are about Amazon Microsoft and Google running your infrastructure for you large language models and their associated services are completely different despite these companies attempting to prove otherwise and it starts with a very very simple problem why did any of these companies build these giant data centers and why did they fill them full of gpus amazon web services was created out of necessity amazon's infrastructure needs were so great that it effectively had to build out the software and hardware necessary to deliver a store that sold theoretically everything to theoretically anywhere handling both the traffic from customers delivering the software that runs amazon.com quickly and reliably and well making sure things kept working making sure they were stable.

7:24And it didn't need to come up with a reason for people to run web applications. They were already running applications client-side on their computers. They realized that doing so at scale would be cool, or they were already doing so in a way that was likely not particularly cost-effective. And the ways they were doing so, they were inflexible, and they required specialist skills and indeed physical infrastructure personnel. They were quite expensive. So Amazon Web Services took something that people already did and what there was actually a proven demand for and made it better and scaled it. Eventually, Google and Microsoft copied them because that's all they can do.

7:57And that appears to be the only similarity with generative AI, that due to the ridiculous costs of both data centers and GPUs necessary to provide these services, it's largely impossible for others to enter the market. Yet after that, generative AI feels more like a feature of cloud infrastructure rather than the infrastructure itself. AWS and similar megaclouds are versatile, flexible, and multifaceted. Generative AI does what generative AI does, and well, that's about it. You can run lots of different things on AWS. What are the different things you can run using large language models? What are the different use cases and indeed, user requirements that make this the supposed next big thing?

8:33Perhaps the argument is that generative AI is the next AWS or similar cloud service because you can build the next great companies on the infrastructure of others, the models of, say, OpenAI and Anthropic and the service of microsoft okay okay let's humor this point too you can build the next great ai startup and you have to build it on one of the mega clouds because they're the only ones that can afford to build the infrastructure one eensy wincy teeny weeny small problem companies built on top of large language models don't make much money and in fact they're almost all deeply unprofitable but let's establish a few facts to get going i said flacts flacts jesus christ facts here are the flacts I'm establishing.

9:13Outside of one exception, MidJourney, which claimed it was profitable in 2022, which may not still be the case. I've actually reached out to ask them and they didn't get back to me. Every single LLM model company is unprofitable, often wildly so. Outside of OpenAI, Anthropic, and AnySphere, which makes the AI coding app cursor, there are no large language model companies, either building models or services on top of others' models, that make more than$500 million in annualized revenue, meaning month times 12. outside mid-journey's 200 million arr and ironclad's 150 million arr and also fucking perplexity there are only 12 generative ai powered companies making 100 million dollars annualized or 8.3 million dollars a month in revenue though the database then this is the information's ai generative ai database doesn't have repli which also announced it hit 100 million in annualized revenue, I've included it in my statement of facts.

10:08Of these companies, two of them have been acquired. Moveworks, acquired by ServiceNow in March 2025 after the company shit the bed big time, and Winsurf, which was acquired by Google and Cognition in July 2025 in one of the most annoying deals of all time. But for the sake of simplicity, I've left out companies like Surge, Scale, Turing, and Together, all of whom run consultancies selling services and training stuff for training models. Otherwise, there are seven companies total that make$50 million or more annual recurring revenue, which is$4.16 million a month. Now, none of this is to say that$100 million isn't a lot of money to you and me.

10:41I just want to be clear, if you want to give me$100 million, I'll do anything. I'll oink like a pig for you. Anyway, but in the world of software as a service or enterprise software, this is jump change. HubSpot had revenues of$2.63 billion in its 2024 financial year. Three years into this crap, and Generative AI's highest grossing companies outside of open ai 10 billion annualized as of june and anthropic 4 billion annualized as july don't like saying that word both of them lose billions a year after revenue there are really three problems here businesses powered by generative ai do not seem to be popular those businesses that are remotely popular are deeply unprofitable and even the less popular generative ai powered businesses are also deeply unprofitable but i want to start somewhere because I keep hearing about fucking Cursor.

11:28Let's start with AnySphere and Cursor. And their app, Cursor, it's an AI-powered coding app, and they have$500 million of annualized revenue. Pretty great, right? It hit$200 million in annualized revenue in March and then hit$500 million in June after raising$900 million. That's amazing. Ed, Ed, it's time. Walk to the garage, Jed, it's over for you. Wrong. It's a mirage. Cursor's growth was a result of an unsustainable business model that it's now had to replace with opaque terms of service, dramatically restricting access to models and rate limits that effectively stop its users using the product at the price point they were used to.

12:05Go to rslashcursor on Reddit. Take a look. Take a look at how happy everyone is. I want to know why my peers in the media don't seem to have the ability to talk to actual fucking customers. It's ridiculous. This company is circling the drain and nobody seems to want to talk about it, despite how big a deal that is. Oh, also, Cursor's horribly unprofitable, and I believe they're a sign of things to come in generative AI. A couple of weeks ago, I wrote up the dramatic changes that Cursor made to its service in the middle of June on my premium newsletter, and discovered that they timed these changes precisely with Anthropic and OpenAI to a lesser extent, adding service tiers and priority processing, which is tech language for pay us extra if you have a lot of customers or face rate limits or service delays, arsehole.

12:48These price shifts have also led to companies like replit having to make significant changes to their pricing model that disfavours users people are finding in really simple terms that what they used to get for 20 bucks is much much much much much smaller cursor users hit rate limits replit users are hitting rate limits and even then when they try and do the same things they're spending way more money if they go pay as you go it's a complete fast but i'm going to repeat some of this stuff from the premium newsletter because there is a time of events that i believe are going to be in the big short to AI Boogaloo, all right?

13:20In or around May 5th, 2025, Cursor closed the$900 million funding round. In or around May 22nd, 2025, Anthropic launched Claude 4, Opus, and Sonnet, new models with Sonnet and Opus, both of them kind of well known for coding. And on May 30th, 2025, they added service tiers, including priority pricing specifically focused on cash-heavy products like Cursor. And the cash is when you put stuff that you're going to be looking at regularly, take a look at it and you can use it more readily. Cash is generally, the CAC8G by the way, is generally something that's for efficiency. The idea that you would add a toll onto the cash is fucking disgusting and only targeted at coding startups.

13:58But on May 30th, 2025, Reuters reported that Anthropik's annualized revenue hit$3 billion with a key driver being code generation. This translates to around$250 million in monthly revenue. June 9th, 2025, 5 cnbc reported open ai had hit 10 billion dollars in annualized revenue and yeah when they said annual recurring revenue they meant annualized but the very same day they cut the price of their 03 model by 80 which competes directly with claude 4 opus by the way and this was a direct and aggressive attempt to force anthropic to kind of like make two other lower prices or compete it's just shitheads fucking ganging around with assholes but on or around june 16 2025 cursor changed its pricing at a new$200 a month ultra tier that, in their own words, was made possible by multi-year partnerships with OpenAI, Anthropic, Google, and XAI, which translates to multi-year commitments to spend which can be amortized as monthly amounts.

14:51A day later on June 17th, Cursor dramatically changed its offering for its$20 a month subscriptions to usage-based, where one got at least the value of their subscription, so a$20 a month person would get more than$20 of API calls in compute, along with arbitrary rate limits and unlimited access to Cursor's own slow model that its users hate. Then on June 18th, Replit, another Vibe code and company that I previously mentioned, announced their effort-based pricing increases that were massive. July 1st, the information report that Anthropic hit$4 billion of annualized revenue, making$330 million a month, an increase of$83 million a month, with just under 25 % in the space of a month.

15:33Hmm, where could that money have come from?

16:02off and really that's the only person that matters. I also really love their linen shirts too. They're comfortable, they're breathable and they look nice. Get a lot of compliments there too. I have a few of them. Love their rust colored ones as well and in general I really like quints. The shirts fit nicely and the rest of their clothes do too. They ship quickly, they look good, they're high quality and they partner directly with ethical factories and skip the middlemen. So you get top tier fabrics and craftsmanship at half the price of similar brands and I'm probably going to buy more from them very, very soon.

16:31Keep it classic and cool this fall with long lasting staples from Quince. Go to quince.com slash better for free shipping on your order and 365 day returns. That's Q-U-I-N-C-E dot com slash better. Free shipping and 365 day returns. Quince.com slash better. Parking shouldn't slow you down. ParkWiz gives every driver a shortcut. Book ahead, Save up to 50 % and skip the hassle of circling the block. Park smarter. Park faster. ParkWiz. Download the ParkWiz app today and save every time you park. This week on a very special episode of Health Discovered, we're taking a closer look at a condition that affects hundreds of thousands of men each year, prostate cancer.

17:17I first found out about my cancer on my birthday at the age of 45. I found out my cancer has spread to my pelvic bone. And from there, life just changed. About one in eight men will be diagnosed with prostate cancer during their lifetime, and the risk increases with age. Anything with cancer, you just think death sentence. And the only thing I could think about was, who's going to take care of my family? You have to go out there and build your support system. You got to build your team. In this episode, we'll explore the science behind detection, along with the practical steps men can take to protect their health.

17:58Listen to Health Discovered on America's number one podcast network, iHeart. Open your free iHeart app, search Health Discovered, and start listening.

18:10Run a business and not thinking about podcasting? Think again. More Americans listen to podcasts than ad-supported streaming music from Spotify and Pandora. And as the number one podcaster, iHeart's twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only iHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business? Think iHeart. Streaming, radio, and podcasting. Call 844-844-iHeart to get started. That's 844-844-iHeart. In simpler terms, Cursor raised$900 million and very likely had to hand large amounts of that money over to OpenAI and Anthropic to keep doing business with them, then immediately change the terms of service to make them worse for their customers.

18:55And as I said at the time, and this is a direct quote from my newsletter, while some may, no, I can't do the Kevin Roos voice and do my own stuff. Pardon me. While some may believe that OpenAI and Anthropic hitting annualized revenue milestones is good news, you have to consider how these milestones were hit. Based on my reporting, I believe that both companies are effectively doing steroids, forcing massive infrastructural costs onto big customers as a means of covering the increasing costs of their own models. There is simply no other way to read this situation. By making these changes, Anthropic is intentionally making it harder for its largest customer to do business.

19:28By the way, Cursor is their largest customer. Creating extra revenue by making Cursor's product worse by proxy. What's sickening about this particular situation, it doesn't really matter if Cursor's customers are happy or sad. They, like OpenAI's Enterprise Priority Access API, Anthropic in this case, require a long-term commitment which involves a minimum throughput of tokens per second as part of their tiered access program. If Cursor's customers drop off, both Anthropic and OpenAI still get their cut, and if Cursor's customers somehow outspend those commitments, they'll either still get rate limited or Anisphere will incur more costs.

20:01Why do you care about this? Well, Cursor is the largest and most successful genitive AI company by far, and these aggressive and desperate changes to its products suggest that A, that its products are deeply unprofitable, and B, that its current growth was a result of offering a product that was not the one it would sell in the long term. Cursor misled its customers, and its current revenue is, as a result, highly unlikely to stay at this level. Worse still, two Anthropic engineers left from the Claude Code team to go and work at Cursor two weeks ago, and they have already come back. This heavily suggests that whatever they saw over there wasn't compelling enough to make them stay.

20:35As I also said, while Cursor may have raised$900 million, it was really open AI philanthropic xai and google that got that money at this point there are no profitable enterprise ai startups and it's highly unlikely that the new pricing models by both cursor and repli are going to help these are now the new terms of doing business with the big model companies a shakedown where you pay for priority access or tiers or face indeterminate delays or rate limits any startup scaling into an enterprise integration of generative ai which means in this case anything that requires a level of service uptime has to commit to both a minimum amount of months and a throughput of tokens, which means that the price of starting an AI company that gets any kind of real market traction just dramatically increased.

21:15Well, one could say, oh, perhaps you don't need priority access. The need here is something that can be entirely judged by Anthropic and OpenAI in a totally opaque manner. They can and they will throttle companies that are too demanding on their systems. It's proven by the fact that they've done this to Curseum multiple times. But okay, why does Curseum out so much? And it's simple. Generative AI will not get big on selling consumer software. Without an enterprise SaaS story, they're dead. And I realize, I know, okay, folks, it's kind of a little boring hearing about software as a service, despite the fact that it's a huge, several hundred billion dollar industry.

21:51But this is the only place where generative AI can really make money. Companies buying hundreds of thousands of seats are how industries that rely on compute grow. And without that growth, they're going nowhere. To give you some context, Netflix makes about$39 billion a year in subscription revenue from consumers, and Spotify about$18 billion. These are the single most popular consumer software subscriptions in the world, and OpenAI's 15.5 million subscribers suggest that OpenAI can't rely on them for the kind of growth that would actually make the company worth$300 billion, or more. Cursor, as it stands, is the one example of a company thriving using Generative AI, a software company selling software, and it appears its rapid growth was the result of selling a product at a massive loss.

22:32As it stands today, Cursor's product is significantly worse, and its Reddit is full of people furious at the company for the changes. In simpler terms, Cursor was the company that people mentioned to prove that startups could make money by building products on top of OpenAI and Anthropics models. Yet the truth is the only way to do so and grow is to burn tons of money. While the tempting argument is to say that Cursor's customers are addicted and will keep paying, this is clearly not the case, nor is it an actual business model. like people that say this i've never had a drug addiction but i know people that do it doesn't it's nothing like software stop making that comparison it's insulting to the victims of addiction but anyway this story showed that open air and anthropics are actually their bigger the biggest threats to their customers and will actively rent seek and punish any of their success stories looking to loot as much as they can from them before they copy their products to put it bluntly because this growth story was a fucking lie it reached 500 million dollars in annualized revenue selling a product it can no longer afford to sell and could not afford to sell long term, suggesting material weakness in its business and any and all coding startups.

23:35It's also remarkable and a shocking failure of journalism that this isn't in every single article about any sphere. I'm doing this part-time. Why am I the asshole here? Like, I'm, I don't know. But really, though, I do have a question. Where are all the consumer AI startups? I'm genuinely serious. What have you got for me? Perplexity? Perplexity. Perplexity only has $150 million in annualized revenue, and they spent 167 % of their revenue in 2024, or$57 million of spending on revenues of$34 million on compute services from Anthropic, OpenAI, and Amazon. They lost$68 million. And worse still, they still have no path to profitability.

24:16And it's not even making anything new. They're a search engine. They have an AI browser. But don't worry, professional gas bag Alex Heath just did this insane and flummoxing interview with CEO Aravin Sravinas, who, when asked how it perplexed it would become profitable, appeared to experience what seems to be a stroke. I'm about to read something to you, and it's going to sound strange, but this is exactly what was said. Maybe let me give you another example. You want to put an ad on meta Instagram and you want to look at ads done by similar brands. Pull that, study that, or look at AdWords pricing of a hundred different keywords and figure out how to price your thing competitively.

24:54These are tasks that could definitely save you hours and hours and maybe even give you an arbitrage over what you could do yourself because AI is able to do a lot more. And at scale, if it helps you to make a few million bucks, does it not make sense to spend$2 ,000 for that prompt? It does, right? So I think we're going to be able to monetize in many more interesting ways than chatbots for the browser. i want to be fucking clear about something alex haith seems like a nice guy if someone said that to me i'd ask them if they could smell toast i'd be like aravin mate are you okay how many fingers am i holding up aravin you're right did you hit your head on something the ceilings don't seem that low in here but mate you're just spewing utter fucking nonsense i've read this paragraph multiple times i do not know what he's getting at i think he's suggesting something about how you could ask it to tell you what to do with ads?

25:41I don't know. I don't know. This is probably the biggest consumer AI company that isn't open AI, and they speak like they're an insane person, or a stupid person. Check out the Business Idiot Trilogy for what I think there. I also mentioned them earlier, but I don't want you to talk to me about AI browsers. Anyone humoring AI browsers is being an imbecile for some reason. They are not a business model. how are people going to make money on the browser hmm what do these products actually do oh they can poorly automate accepting linked invites wow wow it's like god himself has personally best my computer big fucking deal in any case it doesn't seem like you can really build a consumer ai startup that makes any real money or approach being a real company other than chat gpt i guess and that's because the generative ai software market is small with little room for growth and no profits to be seen.