High AI Capex Demand a 'Multi-Year' Cycle

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1:18Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies and trends shaping today's complex economy. Plus, global business, finance and tech news as it happens. The Bloomberg Business Week Daily Podcast. With Carol Masser and Tim Stenebeck. on Bloomberg Radio. All right, so let's get to certainly a story that we've been talking about a lot, and it feels like two companies got together and they said, let's do more for longer.

2:10Bloomberg's Mark Gurman found out that Broadcom and Apple will extend their tie-up in an expanded partnership to 2031 on products that will find their way into, quote, multiple generations of Apple products. So let's get to it. He is here in studio, made his way to the East Coast. He is Mark Gurman, of course, Bloomberg News Managing Editor for Global Consumer Tech. Good to have you here. Thanks for having me. On the East Coast. Yeah, it's great. And there's stuff going on. What is going on? These guys have been working together for a while. Yeah, well, speaking of phones, Broadcom, they make chips, all sorts of chips.

2:43And Apple and Broadcom have worked together for decades at this point on wireless components. So for a long time to get your phone to connect to Wi-Fi or to connect to Bluetooth, you were using what's called a combined Wi-Fi plus Bluetooth chip made by Broadcom. And Apple was the biggest buyer of this chip. It was the biggest revenue source for Broadcom. But a few years ago, Apple decided it's going to go on its own path. They're going to develop their own Wi-Fi plus a Bluetooth module. It's called the N1. It's now in the latest iPhones, latest iPads, latest Macs. They're going to bring it to more devices.

3:15And so Broadcom got designed out of the iPhone. But starting in 2023, in order to keep Broadcom around, they created a technology. It's called an RF filter. It's a component that works with the cellular modem. Because as you also know, Apple has dropped Qualcomm for the most part, and is now building their own modem. So they're there for this small filter component. But now the partnership is expanding again to something really timely and really important. That's ASIC chips. Now, ASIC chips is a type of circuit, a type of silicon that's really geared towards a single purpose. Now, what is a big piece of machinery that you need that has a single purpose?

3:53An AI server. It's all about AI. And so they didn't come out and say this in their press release. They said this is for multiple new generations of Apple products. If you consider an Apple intelligence, an Apple AI server to be a product, then fine. But what I'm telling you is that's what it is. Wait, so are they now all of a sudden Apple going to be spending a lot of money and kind of building out their AI expert? Help me understand what this means. So for Apple Intelligence, there's really two ways that this AI processes. There's on-device AI models, and there's cloud models. Now, the cloud model has now been split up starting later this year as part of the new Siri.

4:30You have the Apple Cloud, which they call private cloud compute. These are Mac chips, the M2 Ultra chips that they released in 2023. those chips are running in servers to power the ai features in the cloud the more advanced ai features as an aside they're splitting that so you're gonna have the apple servers then you've got google you've got nvidia etc etc but just think of it this way there's on device and there's cloud for cloud the chips are starting to get a little dated the m2 is from three years ago apple's now working on a new server chip it's called baltra right they name all these chips internally after islands, maybe the island Tim is at.

5:09And they are working on this new chip. They're going to deploy it 2027, 2028. And the ASIC technology in there has been developed by Broadcom. And they have multiple generations of these new AI servers planned. And what's unique about these AI servers is that the current version is the same as that top end Mac chip that you have in the Mac Studio. That's their most powerful desktop. The one they're going to be deploying at the end of 2027 has four times the power of the m5 ultra which is coming to the mac desktop later this year and broadcom is going to help power that and apple's got a long roadmap ahead of subsequent servers so they are still doing a lot on device for ai but apple knows that the real goods are what's powered by the cloud and so that's why you need that new technology okay so this was Was Apple needed Broadcom's help or Broadcom needed a new partnership with Apple?

6:05I mean, Apple needed Broadcom to get this up and running, but Broadcom certainly, for its bottom line, probably needed a new relationship with Apple because Apple was their biggest growth driver and revenue source. And they had been designed out for Wi-Fi and Bluetooth. And so kudos to Broadcom and good for their shareholders and investors and what have you, that they were able to figure out a way to get back Apple's business for something that's really pertinent right now. Mark, what does it mean in terms of the Apple AI story too? Well, what you're seeing right now is a shift more to cloud-based processing versus the on-device processing.

6:44On-device is great for processing, but it's not so great for functionality. Cloud is much more performant. Okay. Does that mean also then Apple's going to be spending more in terms of? I believe that Apple will be spending more on AI. I believe Apple will be spending considerably more on AI, but nowhere near what these hyperscalers and the metas and Googles of the world are spending. Because they do have that split. And a lot of it is going to be relying on outside vendors and outside parties. So they do a lot of in-house server infrastructure, and they do a lot of licensing or paying other data farms for this.

7:18Is it safe to say that when Apple says, I need outside data farms or whatever, they're going to get it? Or are they competing with everybody else? They're competing, right? Traditionally, Apple has had extreme amounts of pricing power. They've had extreme amounts of power over the supply chain and different partners. And what you've seen from the memory shortage is that Apple just does not have that clout or credibility that they once had. They're just one of the guys now. They're not at the front of the line. It's pretty remarkable. Let's talk about product. But before the show started, I had mentioned that I saw there was an iPhone that was added to the America 250 time capsule, which is just so pertinent and telling about kind of, you know, the influence that Apple has.

8:02But if this were maybe three years from now, what products would they be putting in? That's my segue here. Well, first thing I will say. What are they planning? I will tell you. But the first thing I will say, you know, that phone's going to explode, right? Right. Like having a lithium ion battery in a very warm and closed space for the next 250 years. Yeah, you can't even have it in a checked bag in an airplane. Fair, fair. But that phone's going to explode, I would guess, within two decades, three decades. So somebody didn't think this through? Maybe it doesn't have a battery in it? Maybe they protect it?

8:37I don't know. Maybe they took... No, it does. Does it? They said, I read the document for it that Apple put together. They said, we've preloaded the Notes app with a bunch of information about Apple's history and whatnot. So let's say it doesn't explode, which it will. The technology is going to be so different in 250 years that, I don't know, are there going to be outlets in 250 years? Is it going to be the same? USB-C is not going to be a thing. One way or another, this thing is not turning on. And they'll be lucky if it doesn't destroy everything else in the box that it's in. Anyways, if they were going to be packing this thing in three years, perhaps we would see smart glasses in there, which is Apple's biggest priority right now.

9:15It's a program codenamed N50. These are in-house, in-house design, in-house branded, supposedly fashionable smart glasses with oval-shaped, vertically oval-shaped cameras, a computer vision camera, a standard camera. They're looking to compete with Meta for something they believe internally is higher quality, better made, better battery, better components. They think it looks nicer. I don't know how they're going to beat the ability to partner with brands like Prada and Ray-Ban, all the Esteele or Luxottica brands that Meta has in its back pocket. But the Apple brand is still very strong. And the goal there isn't just to release smart glasses.

9:55It's to do to the glasses market what the Apple Watch did to the watch market. 10 years ago, the watch market basically had, I would say, three tiers, right? You had the bottom tier of watches where you can buy watches between, I don't know, 20 bucks and 100 bucks. Mid-tier watches where you can buy watches between 200 and$800. Then you have the super high tier, the Rolexes, the Pateks, the APs, the world, tens of thousands, hundreds of thousands of dollars north of that. That market actually got hotter, as we know, through COVID. The$20 to$80 watch market really wasn't impacted, like the low-end Timex's of the world.

10:32But that mid-tier market, right, those all got absolutely crushed. People don't go out and buy watches under$1 ,000 anymore that are not smart watches. And so what Apple wants to do is do the same thing to glasses. We shall say, I'll tell you, I ended up buying, like everybody bought an Apple watch. Not everybody, but... Well, I would expect. Well, yeah. Here's Mark Gurman. He's Bloomberg News Magic Editor for Global Consumer Tech. Check him out on the Bloomberg. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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13:10AI agents that handle the manual stuff automatically, so your team can spend their time on what actually compounds. It's time to get Brex AF. Learn more at brex.com slash AF. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. or watch us live on YouTube. Well, it feels like folks are homing in again on the hyperscalers. Feels that way, at least based on some of the Wall Street chatter. Just this morning, two voices on Bloomberg Surveillance weighing in on why it might be time for the hyperscalers to shine again.

13:50Here's Max Kettner. He's chief multi-asset strategist over at HSBC Holdings on Bloomberg TV Surveillance again this morning. Mike Wilson, who leads Morgan Stanley's team of strategists, he also joined the surveillance team again this morning. Given that drawdown in the hyperscalers, the expectations now are much, much lower. We're starting from a much, much lower base. I do worry that people once again are too neutral, a little bit too much on the sidelines, too worried about things going wrong. And actually, we are getting a bit of a summer melt up into July and August. I expect the hyperscalers now to stabilize.

14:22That's what's going on in the last couple of weeks. And the semiconductor stocks are going to correct. That's a good development. That doesn't mean the capex cycle is over. but that ebbing and flowing between the two is a natural kind of governing factor. Just some of the things that make this market so interesting that Max Kettner over at HSBC, Mike Wilson of Morgan Stanley, again, earlier on Bloomberg TV surveillance. Everyone watching the run up in chips, we just talked about with our Ed Ludlow, SK Hynes getting ready for its U.S. listing on Friday. We want to get into, though, what we feel like is the evolving AI story.

14:55Ed is here with us in studio. And then we want to bring in longtime time investor, Rudina Ciceri. She's founder and managing partner at Glassweek Ventures. She invests in companies where AI is the core architectural foundation. And so she's been thinking about the next generation of winners. She joins us from Boston. Hey, great to have you here, Rudina, with Emily and of course with Ed. I'm curious about how this conversation around AI continues to evolve. We are now talking so much about the memory names. How do you see it? Well, hello, Caroline. Good to see everyone. I think fundamentally, we are seeing the overall demand for AI-related infrastructure and all the way up to the application layer continue to be strong.

15:38And in my view, the shifts that we are seeing in the market sort of reflect the scarcity or overestimation of scarcity along the value chain. So on the point around NVIDIA and others, are we seeing the correction because we expected more scarcity while on the hyperscalers, are the valuations coming back because it's becoming a lot easier to track the sources of revenue that these players will have. And, oh, by the way, we think of the hyperscalers as that sort of fundamental layer, the software infrastructure layer, but each of them are much more vertically integrated with their own chips. So in many ways, we're seeing the market move toward vertically integrated players from the chip layer all the way to the foundation models, rather than just the capex spend.

16:26I don't know that we're out of the capex demand. I think that's a multi-multi-cycle, multi-year level of demand. I do think that perhaps we're correcting a bit for the overestimation of scarcity. You mentioned revenue, and I'm curious, if you can talk a little bit more about just how critical it is for investors like you to be able to pinpoint whether the spending on AI is actually translating into tangible revenue and whether we've seen that yet. Thank you, Emily. I think it's interesting because I'm a very early stage investor. So I often say I back to brilliant researchers out of a lab and we build out a monetization plan.

17:09If anything, I would bifurcate between the next gen application layer AI companies where not only are we seeing revenue, but the scale from zero to multi-million, hundreds of millions is a matter of months rather than a matter of years. So if anything, we are seeing acceleration. Now, beneath that, two fundamental questions. Why? Is it because, especially on the enterprise side and even consumers, we are all experimenting and trying a lot of things. Thus, Is the revenue sustainable or is it a leaky bucket? Second question, though, is really pertaining to the adoption of AI more systematically.

17:49So having moved beyond the I'm going to experiment with this in-house build tool or with a chat function of Claude or ChatGPT to something more serious. In that case, we're seeing demand for AI products to become much more of an important component, not just to the tech stack of enterprises, but to their actually business models and go to markets. You know, Radina, what's interesting about what you and the team at Glasswing are looking at, it's so timely for today with this Morgan Stanley hyperscaler story. So you are looking at AI native SaaS, various layers of the software stack. every time i speak to one of the ceos at the hyperscalers i always ask them you seem to be pitching and working on the same kinds of technologies that your customers already do you know so how do you respond to that the idea that the hyperscalers you know the cloud computing companies let's call them what they actually are are going to want to offer the same tools that you might back at that early stage so the under thank you and the underlying question is where is the mode for the startups relative to the incumbents.

19:00And I think the mode depends. Some of it has to do with, you know, vertical plays. You know, I recently backed a company called Modern Industrials. They are developing an end-to-end demand planning for distributors of lumber and building materials. Very, very specific. Tens of billions type of opportunity a year in terms of the revenue they can generate. But if Microsoft or Anthropic or OpenAI are going to that level of specificity, we have something to worry about. By the same token, who will be their customer? So they have to draw a line to your very astute question around where am I going to stop competing with my customers?

19:41And, oh, by the way, is there value in being highly, highly specialized? My view is that there is. And the value doesn't necessarily lie in the models. it actually lies in the highly specific albeit not as broad data sets which then you know deliver much you know superior outputs i would say if i'm i'm pharmaceutical maker or like in the medical field right and like i would say that i want a data set that i'm going to play with and that's very related to my field i don't need to know about the rest of the stuff that some of the large language models are doing yeah or they 100 or radina they you know you something you said a moment ago is really interesting you are backing not companies necessarily we'll work out the business plan later you're backing the researchers out of the lab and like that that applies at the late stage as well right the founder-led thesis but those people also have specialisms right does it matter to you if they have a core team of not just computer scientists but in bio biology uh biochemistry, et cetera?

20:42Yeah. So, let me parse what I intended with what I shared. In the case of a modern industrial, I'm very much going in with a very clear understanding of how it's monetized, what's the ROI for the customer. So, in many ways, that's extremely tangible and very clear around the TAM pricing competitive dynamics. My earlier comment related more to what I would call frontier tech. So, we have already achieved what we have achieved with the large language models. What comes next? You know, we backed a company called Recursive AI. It's about the models correcting themselves to get around the next set of issues like hallucination and other problems that the large language models have.

21:23There's a whole paradigm of neo labs and new researchers that are bypassing in many ways the capabilities of the current incumbents. Think about Liquid AI, multi, multi, multi-billion dollar company. They're actually doing all the processing at the edge is actually a whole different sort of way to bypass the need that we currently have on compute. So in those cases, you solve one of the compute problems or the energy problem or the sort of the performance of the models, and then you worry about monetization. So it's not pie in the sky, I'll beg these smart people, and someday they will deliver something.

22:03It has a purpose, but you might not know the pricing. Kind of like how many of us would have I guess that pure consumption pricing was going to be the model. Does that make sense? One contemporary difference, though, is that that group of three or four people can raise a billion dollars out of the gate or several hundred million dollar seed round at crazy valuation based on the value of their own intellectual capital. How does Glasswing even participate in early stage valuations like that? Very good question. So our core product is actually, you know, the more typical pre-seed stage rounds. We have a pool of capital and a product called Access Checks, where we write, you know, small one to two million dollar access checks in these gigantic rounds to have a seat at the table, to have a seat to the ecosystem, to support the founders and participate for, you know, with those that actually make it big.

22:56So while our core checks are focused on building the companies from the ground up in the more typical fashion that you think of early stage venture, we absolutely get access to the big guys. And it's important. There are benefits for both. Hey, speaking of the big guys, I just got time for maybe one or two more last questions. I'm thinking about SpaceX, which does go into the NASDAQ 100 at the end of trading today. XAI, like what's your thought about that company, which seems to be to some extent coming from behind, but it's got certainly deep, deep pockets. it's emerging more and more i think you know in many ways i think of elon's companies as all being intertwined with one holding and the holding being elon himself i think it'll be interesting to do to see what he does with xai vis-a-vis spacex and maybe even what happens with tesla eventually they are catching up i think performance um has improved and to be perfectly honest in the in the circles that sort of are leveraging the most cutting-edge models, XAI is starting to become a real contender, definitely coming from behind, though.

24:00Are people talking more about XAI? Yeah, increasingly because of Cursor, right? Like the Cursor acquisition moving so quickly, people pay close attention because it's such a widely used tool. And yet, even with Cursor now, the next generation is saying we've bypassed Cursor. So things are moving so very fast. What becomes, I go back to what becomes sustainable versus what is the flavor du jour? We shall see. You know, and it's fascinating too. Rudina, thank you so much. Rudina Cessari, founder and managing partner, Glasswing Ventures. We always appreciate your view. I have to say, I had more and more conversations I have with folks where companies are using a lot of different LLMs.

24:43They're saying they're starting to get more discretionary in terms of who's got access to what, because there is a cost. Well, real quick, the reason people loved Cursor is you could swap in Anthropic, OpenAI, Gemini model and change it. Now Elon owns it. They're going to be allowed to do that? It's a big question. It is a big question. Hey, listen, I'm so glad you're here this week. We're going to reach out to you a bunch. Of course, our Ed Ludlow. Catch him on Bloomberg Tech, 11 a.m. on Bloomberg Television. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

25:14Support for the show comes from Public.com. If you're actively involved in your portfolio, you probably catch yourself repeating the same actions. Buying the dip, manually sweeping idle cash, putting on a hedge. On public, you can now create AI agents that handle all these tasks on your behalf. Just describe what you want to do in plain English. Like, if the VIX hits 25, buy a put option on the S &P 500. Or, if my cash balance goes above$20 ,000, move the excess into my direct index. You approve the workflow and your agent handles the risk. Monitoring the market, watching for your conditions, and executing your strategies exactly as defined.

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27:14Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. Hey, among our most read stories on the Bloomberg today, Saudi Arabia making big reductions to its main crude oil price for buyers in Asia, selling barrels at a discount for the first time since it embarked on a price war in 2020 as a surge of global supply is heightening competition to find buyers. State producer Saudi Aramka will lower Arab light oil for next month by$11 a barrel to$150 below the regional benchmark. This is according to a price list that they put out today.