Big Tech making record profits off AI is concerning, as is the lack of a plan for when it fails to meet its potential, says Jason Walsh
Blogs
Image: Getty
Recent years, 2022 and the early months of this year aside, have been a real boomtime for the technology sector. Google’s owner, Alphabet, has reported record revenue, including some 16% growth. Microsoft, meanwhile, is reporting a revenue rise of 18%.
Even Apple, today something of a laggard in the hot new technology hype cycle of artificial intelligence (AI), also reported record revenue and predicts 10% to 12% further revenue growth in the quarter ending in December. The first company to ever have a market capitalisation (the combined value of all shares on the open market) of $1 trillion dollars, it has now become the third company to reach a market cap of $4 trillion.
Moreover, the US stock market as a whole is booming. If, by booming you mean, in a kind of languorous slump apart from seven or eight tech giants – Apple, Amazon, Alphabet, Microsoft, Meta et al – whose meteoric rises, when combined with their giant size, have seriously destroyed the averages.
Naturally, concerns have also grown. They always do during asset bubbles, and make no mistake: we are in the middle of an asset bubble. Not only are shares, at least in the top tech firms, selling at lofty valuations, but other traded commodities, from gold to cryptocurrency, are booming, and even fine art is showing signs of shaking off a recent slump.
The fact that this is happening while so few of us are jumping for joy about the economy, our jobs or the universe in general, is an important factor to bear in mind, too.
An economy being led around by the nose by stock valuations in the tech sector is hardly unheard of. Indeed, many business columnists have been given occasion to trot out a potted history of the rise and fall of Internet companies during the dotcom bubble of 1995-2000.
Two things need to be noted about the dotcom crash, though. Firstly, while painful it was not a total wipeout. Indeed, Amazon.com became a giant despite its shares tanking with the rest of the e-commerce sector. In addition, the boom left behind a tremendous amount of hard infrastructure that would lay the foundations for the next tech boom that would soon follow. Secondly, the inflated valuations of the era were often attached to businesses that were not able to even turn a profit.
Show your work
Today’s crop of tech companies is different. It’s not like those gargantuan revenues are outmatched by spending or debt. That may be true of some AI start-ups but not so the likes of Google, Apple and Microsoft, whose superprofits make them entirely different from the companies that defined the rise and fall of the dotcom era. Others, such as Nvidia and Broadcom, have also obviously grown due to the AI boom. These companies make real profits from real products: semiconductors.
That’s the good, so what’s the bad? Well, obviously these companies’ general dominance and near monopsony position is an issue in and of itself, but there’s more to worry about: it’s a lot of concentration of investment. If AI fails to deliver, the pain will be substantial.
If the AI boom turns to bust (or more likely fails to deliver on the hype while quietly improving in the background for years until it really does change everything) some infrastructure will survive. The billions spent on specialised GPUs may never be recouped but the massive data centres do have, and will continue to have, value.
Just as the problem is not that the tech boom resembles the dotcom era (it doesn’t), the real problem is not that AI is destined to fail. The problem is simply that the promises being made are too great, and they are being made by people who are too powerful.
If some AI start-up oversells the everything-changing nature of its technology then that is one thing. When the tech giants do it there is a wider implication, because their scale means that a disappointment will have a material impact on markets and, therefore, the real economy.
These companies are now so dominant that their stumble would be everyone’s problem – they’re embedded in infrastructure, pensions, index funds. And then, for Ireland, there is the matter of jobs. The technology sector is now very clearly too-big-to-fail territory, but without anything like the regulatory framework we put in place for banks. As a result, the most interesting question we can ask today is not will AI hype cause these companies to stumble, but whether anyone has a plan for if they do.