The Hater's Guide To The AI Bubble, Pt. 3

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2:31Call Zone Media Stop your grinning and drop your linen. I'm Ed Zitron and this is Better Offline.

2:46Better Offline. Welcome to the final part of our three-part haters guide to the AI bubble where we've been talking about the growing cracks emerging in the industry and the potential contagion to the wider economy that a pullback in generative AI spending will cause. And I must be clear, things are bad. The vibes are rancid. I spent the past two episodes and will spend much of this episode explaining why, but I just want to recap something from the first part of this series. Right now, seven companies, the magnificent seven, account for the value of nearly 35 % of all of US stocks. And the biggest of these companies is Nvidia, which has gotten fat off the back of the AI bubble.

3:22Today, a disproportionate amount of nvidia's revenue 88 of it is coming from the other members of the magnificent seven and their purchases of the enterprise gpu is designed to power the compute heavy applications that you're hearing about all day if and when they pull back nvidia will sink so will too will the other companies especially when it becomes evident that they've spent nearly half a trillion dollars in two years on bugger all it'll be an apocalyptic shedding of value they won't die but it'll be the likes of which we haven't seen since the dark days of 2007 and 2008 for those companies.

3:56I don't know about the global banking system imploding, but I also can't say it won't. I just, I don't know. But what I do know is tech is going to take such a precipitous haircut that you're going to see scissor gashes in the man's bald head. Terrible metaphor. If that sounds like a them problem though, and not a you problem, ask yourself, what's in your 401k? Do you own any index funds or ETFs? Are you close to retirement? And how much do you enjoy eating ramen? Are you willing to eat the same whiskers cat food as your American shorthair? I am, except I feed them a different, better food because Babu deserves the best.

4:29But in the last two episodes, I made the case that the generative AI industry is unique in its capital demands and unparalleled in the fact that no company beside NVIDIA or consultancies are making any money from it. I can easily imagine a chain of events where one big company fails, like either because they ran out of money or because the investors pulled back. This in turn spooks the rest of the market, causing other companies to start seeing massive revenue drops. And as the demand for compute drops, hyperscalers like Microsoft, Amazon, and Google massively cut their capital expenditures, cancelling data center build-outs and, of course, slowing down their GPU orders.

5:01And then Jensen Huang would have to watch as the cash cow that made his company rich and fat is taking for a walk behind the barn for two shots to ring out. Though I must be clear, NVIDIA isn't gonna die. None of the Magnificent Seven will. However, the first big failure, the first domino to fall, could be any number of companies. And while I don't think OpenAI and Anthropic are necessarily going to be the first, I also believe that there's an error of inevitability about one or both of their demises. This matters because these companies are, for all intents and purposes, the generative AI industry.

5:35They're deeply unsustainable and unstable, and yet they are also critical to the AI trade continuing. I haven't really spent much time on my favorite subject, that open AI is a systemic risk to the tech industry. But let's recap my reporting. Open AI and Anthropic both lose billions of dollars a year after revenue, and their stories do not mirror any other startup in history. Not Uber, not Amazon Web Services, nothing. I've addressed my Uber point before in how does open ai survive i it'll be in the show notes someone always asks me about this please stop learn to read learn to listen softbank also is putting itself in dire straits simply to fund open ai this deal threatens its credit rating with softbank having to take on what would be multiple loans to fund the remaining 30 billion dollars open ai's 40 billion dollar funding round which is yet to close and open ai is in fact still raising from the middle east this is before you consider the other 19 billion dollars that softbank has agreed to contribute to the stargate data center project money that it does not have available at this time but i must say while recording this episode i saw some news come out and i'm just going to read it to you it said softbank and open ai's 500 billion ai project struggles to get off ground the stargate venture introduced the white house event is now setting the more modest goal of building a small data dissented by year end i just want to say anyone that doubted me consult one i i was oinking and squawking around my my room just before this when i got this news in i just want to say i just learned this news i'm still taking it in i'm still taking in because it makes me so excited inside anyway neither softbank nor open ai has the money for stargate regardless of what they build also clammy sammy's making some interesting claims about what stargate is he's claiming the denton site the core wave is building is also stargate this motherfucker loves lying anyway open ai must also convert to a for-profit by the end of 2025 or lose 20 billion dollars of the remaining 30 billion dollars of funding if it does not convert by october 2026 its current funding converts to debt it is also demanding remarkable unreasonable concessions from microsoft stuff like they want to reduce their rev share they want to reduce their their i think their ability to their exclusive rights to sell models i did a i really need to do a monologue about this and i know this is technically a monologue but nevertheless they want these insane things and microsoft is refusing to budge and is willing to walk away from negotiations necessary to convert according to the financial times and also open ai does not have a path to profitability and its future like anthropics is dependent on the continual flow of capital from venture capitalists and big tech who must also continue to expand infrastructure don't know how that's gonna fucking happen with stargate going god i feel so good about that oh i want to like bolt that up and drink it anyway anthropic is in a similar but slightly better position it's set to lose three billion dollars this year on four billion dollars of revenue it also has no path of profitability and recently jacked up prices on cursor its largest customer and has had to put restraints on clawed code after allowing users to burn 100 to 10 000 of their revenue a month these are the actions of a desperate company nevertheless open ai and anthropics revenue amount to by my estimates more than half of the entire revenue of the generative ai industry including the hyperscalers and to be abundantly clear the two companies that amount to around half of all generative ai revenue are only losing money now i said a lot of this before which is why i'm trying not to harp on it too much but the most important company in the entire ai industry needs to convert to a for-profit entity from a non-profit entity which has never happened before in this case by the end of the year or it's effectively dead and even if it does open ai burns billions and billions and billions of dollars a year and will die without continual funding they have no path to profitability and anyone telling you otherwise is a liar or a fantasist and on top of this as part of the thing about softbank by the way and and stargate they revealed that they've promised oracle 30 billion dollars a year for their cloud contract.

9:30I swear to fucking God, does no one read these stories and think, does this not sound just like an egregious lie? Anyway, as I wrote earlier in the year, there was really no significant adoption of generative AI services or products. ChatGPT has 500 million weekly users, and otherwise it seems that other services struggle to get 15 million users. Although you could mention Google, that's not a fair comparison, as it cheated by combining Google Gemini with Google Assistant to claim it had 350 million active users. And while the 500 million weekly users sounds and is in fairness impressive, there's a world of difference between someone using your product as part of their job, which they pay for, and someone dicking around with an image generator or a college student trying to cheat on their homework.

10:12On top of that, now I'm recording this July 21st, there's an Axio story that came out today with some bullshit vanity metrics for OpenAI. But that story said that OpenAI themselves had said that they have 500 million weekly active users. Now here's the crazy thing. That 500 million number, that came from March. That's a March number. That came from an OpenAI funding announcement. Have they plateaued? Stick around. I'm going to find out. But this is all worrying on so many levels. Chief of which is that everybody has been talking about AI for three goddamn years. And everybody has said AI in every earnings and media appearance, exhausting fucking blog post.

10:46And we still can't scrape together the bits to make functional industry. Now, I know some of you will probably read this and point to chat gpt's users and i quote myself writing in my newsletter make fun of them which i also read for this podcast chat gpt is allegedly 500 million weekly users and by the last count only 15.5 million paying subscribers an absolutely putrid conversion rate even before you realize that the actual conversion rate would be monthly active subscribers which is how any real software company actually defines its metrics by the fucking way why is this impressive because it grew so fast it literally had more pr and more marketing and more attention and more opportunities to sell to more people than any company has ever had in the history of anything.

11:25Every single industry has been told to think about AI for three years, and they've been told to do so because of a company called OpenAI. There isn't a single goddamn product since Google or Facebook that has had this level of media pressure, and both of these companies launch without the massive amount of media and social media that we have today. ChatGPT is a very successful growth product and an absolutely horrifying business. They're a banana republic that cannot function on their own. They do not resemble Uber, Amazon Web Services, or any other business in the past other than WeWork, the other company that SoftBank spent way too much money on.

11:56And outside of ChadGPT, there really isn't anything else. But before I wrap up this three-parter, and I'm tired, and I imagine you are too, I do want to address something. I want to address the kind of both sides thing that everyone's doing. And I think we all need to do way less of this because at this point, it's kind of silly. Yes, generative AI has functionality. There are coding products and search products that people like, and some even pay for them. As I've discussed across this series, and I said disgust there, but I'm keeping going, and across countless podcasts and newsletters, none of these companies are profitable until one of them is profitable, really profitable, sustainably so.

12:35Generative AI-based companies are not real businesses. In any case, the problem isn't so much that LLMs don't do anything, but that people talk about them doing things they can't. the use of the word agent is a deliberate attempt to suggest that llms are autonomous and any and all stories about ai replacing jobs are intentionally manipulative attempts to boost stock valuations and suggest that models are capable of replacing human workers at scale which they are not alison morrow of cnn who's been on the show a few times also has an excellent piece on this which i've linked to in the show notes as i discussed in my newsletter sincerity wins the war which i've also linked to this is one of the most egregious failures of the tech media i've ever seen willingly pushing wario amaday's outright making up of stuff no one asked him if that if the stat he said 10 to 20 white collar unemployment if i started lying i just really want to be clear about something if i went on this podcast and i just fucking made up stats if i was just like yeah 75 of all generative ai's ceos literally they they love kicking puppies they love drop kicking puppies you'd get mad at me right what's the difference between that and Wario Amadei saying 20 % white collar unemployment.

13:42There is none. They're both lies. And I don't know why I'm doing the dog kicking one, but it's just an example. We move on. And as a side note, the discussion also of the term AGI, artificial general intelligence, and every acceptance of it is an attempt to suggest that large language models can create conscious intelligence, a fictional concept that even Meta's chief AI scientist says won't come from scaling up LLMs. Members of the media, listen to me. Every time you talk about the really smart engineers that say Meta is paying$100 million to, know that you are doing free marketing for these companies when what's really happening is people are giving tens of millions of dollars to guys who will work on teams that are pursuing a totally unproven concept.

14:22It is like saying that they are all going to see if they could, I don't know. I was about to say create the wrong trousers from Wallace and Gromit, but you know, those are 100 % possible. I'm sure someone could build them. How about this? They all believe they're going to hunt and kill the tooth fairy because the tooth fairy is about as realistic as AGI. And if you disagree with me, email me. I might even read it. I should also add that the use of the word singularity is similarly manipulative. These are terms that are used to obfuscate the actual abilities of large language models and indeed what can be built on them it's really frustrating because these should be really obvious tricks but the media keeps accepting them and i don't want to accuse anyone of being anything i just want to say i find it fucking disgusting when this all falls apart there will be a referendum on this i will not be kind or merciful to the people that have continually pushed these narratives.

15:22I also want to add there's another really annoying narrative that we need to get rid of, and that's these stories about models lying, cheating, and stealing to reach their goals or stop themselves being turned off. These are intentionally deceptive as these models can and clearly are being prompted to take these actions. To be abundantly clear, the manipulative suggestion here is that these models are autonomous or conscious in some way, which they're not. When I say prompted, I mean we don't have all of the information as to how these models were trained or prompted to get these answers they can make them do them they could create a model to do it and oh anthropic wouldn't lie wouldn't they dario amaday went on stage and said there'd be 20 unemployment from white-collar labors and he'll claim he said it was the future it's a fucking lie absolutely ridiculous and i believe that the generative ai market is a 50 billion dollar revenue industry masquerading as a trillion dollar one and the media is helping.

16:17And underneath this troubling fact, there's another one that should give us pause. The AI trade really is not about AI. It's not about generative AI. It's not about autonomous agents. It's not about AGI. It's all about GPUs. And it's incredibly brittle as a result.

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18:43One, it's$15 a month. Two, seriously, it's$15 a month. Three, no big contracts. Four, I use it. Five, my mom uses it. Are you playing me off? That's what's happening, right? Okay. Give it a try at mintmobile.com slash switch. Upfront payment of$45 for three-month plan,$15 per month equivalent required. New customer offer first three months only. Then full price plan options available. Taxes and fees extra. See mintmobile.com. Now, as I've explained at length, the AI trade is not one based on revenue, user growth, the efficacy of tools or significance of any technological breakthrough. Stocks are not moving based on whether they're making money on AI because if they were, they'd be moving downward.

19:20However, due to the vibes-based nature of the ai trade companies are benefiting from the press inexplicably crediting growth to ai with no proof that that's the case open ai is a terrible business but the only business worse than open ai are the companies built on top of it large language models are too expensive to run and have limited abilities beyond the ones i named previously and because everybody's running models that all on some level do similar things it's very hard for people to build really innovative products on top of them. But ultimately, this entire trade, all of the AI trade hinges on GPUs.

19:54CoreWeave was initially funded by NVIDIA. They're a company that does AI data centers. I don't want to talk about them. Makes me angry. But their IPO was funded partially by NVIDIA. It sells the GPUs. NVIDIA is also one of their customers. And CoreWeave raises debt to buy GPUs by using the GPUs they've already bought as collateral. And so they get those loans and then they use that money to build data centers and buy more GPUs to put in them, which they then use as leverage to... Do you see the problem? Do you see the issue with that? This isn't me being polemical, hysterical, by the way. This is quite literally what's happening and how CoreWeave operates.

20:35If you aren't alarmed by that, I'm not sure what to tell you. Elsewhere, Oracle is buying$40 billion in GPUs for the still-unformed Stargate data center project, and Meta is building a Manhattan-sized data center to fill with NVIDIA GPUs, if you believe that Meta will actually do that, which I do not. OpenAI is also Microsoft's largest Azure client, an insanely risky proposition on multiple levels, not simply in the fact that it's serving the revenue at cost, but that Microsoft executives believed that OpenAI would fail in the long term when they invested in 2023, according to the information.

21:05And Microsoft is NVIDIA's largest client for GPUs, meaning that any changes to Microsoft's future interest in open AI, such as reducing its data center expansion, would eventually hit NVIDIA's revenue. Why do you think DeepSeek shocked the market? It wasn't because of any clunky story around training techniques or costs. It was because it said to the market that NVIDIA might not sell more GPUs every single quarter in perpetuity. Microsoft, Meta, Google, Apple, Amazon, and Tesla aren't making much money from AI. In fact, they're losing billions of dollars on whatever revenues they do make from it.

21:36Their stock growth is not coming from actual revenue or actual products but the vibes around being an ai company which means absolute jack shit when you don't have the users finances or products to back them up so really everything on the ai trade comes down to invidia's ability to sell gpus and more of them each quarter and this industry if we're really honest is at a point where it really only exists to do so generative ai products do not provide significant revenue growth its products are not useful in the way that unlocks significant business value and the products that have some adoption run at such a grotesque loss.

22:10It's really sad. But I realize I've thrown a lot at you. And for the second time this year, I've recorded the three-part podcast series. And what's great is you may think maybe I took a break. Maybe, no, I recorded these bad boys back to back to back. That's why I sound so tired and why my voice kind of, I think, smooths out. I like doing this, but I needed to say all of this. I really did because I am genuinely really worried. we're in a bubble if you do not think we're in a bubble you are not looking outside apollo global chief economist torsten slock killer name said it last week in a research note published july 16th okay what he said was much worse the difference between the it bubble in the 1990s and the ai bubble today is that the top 10 companies in the smp today are more overvalued than they were in the 1990s slock wrote in a recent research note that was widely shared across social media and financial circles.

23:02We're in a bubble. We're in a bubble. Genitive AI does not do the things that it's being sold as doing. And the things it can do aren't the kind of things that create business returns, automate labor, or really do much more than one extension of a cloud service platform. The money isn't there. The users aren't there. Every company seems to lose money, and some companies lose so much money, it's impossible to tell how they'll survive. Worse still, this bubble is entirely symbolic. The bailouts, and I know I get a lot of emails about this, and I'm really going to address this issue right now. The bailouts of the great financial crisis were focused on banks and funds that had failed because they ran out of money, and the top initiative existed to plug holes with low-interest loans.

23:40There are no few holes to plug here, because even if OpenAI and Anthropics somehow became eternal money burners, the AI trade exists based on the continued and continually increasing sale and use of GPUs. There are limited amounts of capital, but also limited amounts of data centers to actually put GPUs. And on top of that, at some point, growth will slow at one of the magnificent seven, at which cost time, costs will have to come down from things that lose them tons of money, such as generative AI. I really want to be clear though. A lot of people say, oh, it's really kind of lazy doomerism. I don't appreciate it.

24:13Cause like, if you're going to be worried about something, be worried about something that's real. You're saying, oh, Trump will just bail them out. Oh, they'll get bailed out who will get bailed out for this fast to continue nvidia's 39.1 billion dollars of data center revenue in the last quarter that means the next one needs to be 44 the one after that needs to be like 50 60 80 100 this needs to continue forever is the government going to nationalize nvidia is the government well i guess that would take them off the market wouldn't it is they just going to feed nvidia 50 60 70 billion dollars i guess if one of these ai companies fail they could give them money, but they're just going to go ahead and fucking lose it.

24:50What do you think they're going to do? Where does the money go? In the great financial crisis, banks failed. You had to give the banks money. Hedge funds failed. You had to give money to places and then they took the money and they weren't out of money anymore. This isn't a case where companies will run out of money, but otherwise be okay. They don't have a way of being okay. There is no way of being okay. If you want to be a doomer, look at the fact that the fucking stock market is built on selling more and more gpus every quarter there is no plugging that hole there's nothing for you to do oh god this guy what isn't the cost of inference coming down no you do not have proof of this statement the cost of tokens is going down and that is not the cost of inference going down everyone's saying this is they're saying it because a guy once said it to them you do not have proof i have more proof for what i am saying well it theoretically might be going down all evidence points to larger models costing more money, especially reasoning-heavy ones like Claude Opus 4.

25:47Inference is not the only thing happening if this is your one response to a big bozo and a doofus and should go back to making squeaky noises when you see tech executives or hear my name on a podcast. It's sickening. Even if the cost of inference is going down, on what model exactly? Is it coming down on, I don't know, O3, Opus 4, Sonnet 4? I don't think it is. The price that the model developers are charging, by the way, is not the price of inference. That's not the same thing. It's not the same thing at all. I'm really sick of this goddamn point. You can hear it in my voice. But let's move on.

26:21So some people bring up ASICs, and they're these customized chips for specific options to reduce the amount that these companies are spending on compute, right? I have a few thoughts. When is this going to happen, for example? Say OpenAI and Broadcom actually build their ASIC in 2026. They won't do this, but that's when they're meant to. How many will they build? Do they have contracts as companies that can actually produce high-performance silicon? There's only three of those, Samsung, TSMC, and SMIC, which is currently sanctioned. And these companies typically have their capacity booked well in advance.

26:53Great example for you, NVIDIA restarted sales of their H20 GPUs and told customers, as reported by the information, that they're not going to make more because the capacity they had at TSMC got given away because they canceled it? Even starting a production run of a semiconductor product can take weeks. Do they have the server architecture prepared? Have they tested it? Does it work? Is the performance actually good? Because the information reported that Microsoft has failed to create a workable, reliable ASIC, and the one that they're going to bring out next year is going to be still worse than NVIDIA's.

27:24What makes OpenAI special? What gives them the industry knowledge that means that they won't run into these problems? The answer is nothing. Absolutely bloody nothing. anyway if this happens and should be clear it takes a lot of money to build these chips and they're yet to prove that these chips will be better than nvidia gpus for ai compute they're gonna have to retrofit every data center for them by the way they they're not just going to plug into the same thing these blackwell chips and actually generally gpus they have specialized server architecture and nvidia is a big stickler for details so we're just going to rip up all the stuff so this will i assume take two minutes because it needs to it's the only way by the way if this actually happens, it still fucks up the AI trade because Nvidia still needs to sell GPUs.

28:07Jesus Christ.