Big Tech giants concede that AI is costing huge sums of money with little return on investment right now. But they say it's worth the risk.
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AI is burning a big hole in the pockets of Big Tech.
Leaders at Meta and Alphabet have conceded that they might be funneling too much money into AI out of fear of falling behind in the arms race.
Meta CEO Mark Zuckerberg said during an earnings call with investors this week that one big focus for the company will be "figuring out the right amount" of infrastructure for AI. The company expects to spend at least $35 billion on the technology this year and noted that AI will be a significant driver of "expense growth."
Future versions of Meta's large language models are also going to command significant computational resources — and investment. But Zuckerberg thinks shelling out money for them now will prepare the company for the future.
"It's hard to predict how this will trend multiple generations out into the future, but at this point, I'd rather risk building capacity before it is needed rather than too late," he said. "And as we scale these investments, we're — of course— going to remain committed to operational efficiency across the company."
Meanwhile, during Alphabet's earnings call, CEO Sundar Pichai said that the "risk of underinvesting is dramatically greater than the risk of overinvesting" and that AI projects will benefit the company long term.
But all that spending with little to no return so far is beginning to irk investors and raise fears of an AI tech bubble — sparking $1 trillion in losses on the Nasdaq 100 Index on Wednesday as nervous investors rushed to sell. The tech-heavy Nasdaq was down another 3% on Friday and is down more than 10% since early July.
"After last year's hype, executives are impatient to see returns on GenAI investments, yet organizations are struggling to prove and realize value," Rita Sallam, chief of research at technology research firm Gartner, said at the Gartner Data & Analytics Summit earlier this week. "As the scope of initiatives widen, the financial burden of developing and deploying GenAI models is increasingly felt."
Gartner's research shows that generative AI requires executives to have a higher tolerance for indirect gains on their investments in the future over immediate returns. Many chief technology officers have not historically been comfortable with this.
Gartner's research also found that at least 30% of generative AI projects will likely be abandoned by the end of 2025 due to "poor data quality," "inadequate risk controls," and "escalating costs."
Meanwhile, investor management firm Eliott Management flagged Friday in a note that its analysts think AI is in a "bubble" and is mostly "hype."
"There are few real uses," the Financial Times reported Elliott as saying, other than "summarising notes of meetings, generating reports and helping with computer coding."
But Big Tech executives believe that generative AI will bring about some of the biggest technological changes the world has seen in the past century — so it's worth the risk.
Amazon CEO Andy Jassy said in a letter to shareholders earlier this year that generative AI "may be the largest technology transformation since the cloud" and maybe even "since the internet."
The company is planning to spend $150 billion in the coming 15 years on data centers, which are one of the biggest cost drivers of AI. The company is also planning to invest some $230 million into funding new AI startups.
Amazon CFO Brian Olsavsky admitted this week in a call with reporters that AI "certainly is a very expensive area to build capacity in" when asked a question about investor concerns over Big Tech's spending on ramping up for the new world of artificial intelligence.
Still, he said, eventually, the investment will pay off. "We see customer demand signals, we invest, build the data centers for generative AI, get chips, get power, everything else — and then once those assets are in the ground, we use them to drive revenue and free cash flow for the next decade and beyond," he said. So the investment is actually a "really positive indicator."
Some analysts believe it won't be long before these companies begin seeing big returns on their spending. "This revolution is happening," Wedbush Securities analyst Dan Ives said on "Squawk on the Street. "The monetization phase is now just starting."
"This is not a time to panic," he added.
