Is the Top Global talent in AI losing Trust in OpenAI?

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I wanted to ground some of my thoughts around what I’m witnessing in BigTech, at OpenAI and the Generative AI startup ecosystem. Covering AI also means its positioning in the real business world, on the stock market and in how major business models like Cloud computing are impacted by it. A correction in the Generative AI bull market and a slew of exits of the startups in the space, along with a delayed Nvidia “Blackwell” B200 AI chips shows an odd situation.

Generative AI and OpenAI itself, appear to be at a significant cross-roads.

• In a big move, Character.AI co-founder and CEO Noam Shazeer is returning to Google after leaving the company in October 2021 to found the a16z-backed chatbot startup. Read more.
• Microsoft finally has acknowledged to shareholders that OpenAI is now a competitor in AI and search. Even while they get 75% of their revenue of a startup that’s losing $5 Billion just to “chase AGI”. Go deeper.
• OpenAI have released potentially impactful products in SearchGPT, advanced Voice Mode, and a very affordable “GPT-4o Mini” - fairly great potential products. But its path to profitability needs an AGI miracle and remains fairly bleak even if you are a Techno-Optimist.

Other macro factors are beginning to take shape that might have an impact here:

Shahm Rules, not Sam Altman

The reality is this July, 2024 - The US economy may have entered a recession as the unemployment rate rose to 4.3% in July. Sahm Rule, a recession indicator. According to data from the Bureau of Labor Statistics released Friday, the unemployment rate rose to 4.3% in July, up from 4.1% in June and from recent lows of 3.4% in April 2023.

The increase officially triggered the Sahm Rule — a recession indicator developed by former Fed economist Claudia Sahm — which says that the US economy is in a downturn when the three-month moving average of the unemployment rate rises by 0.5% from its 12-month low. Read more about it.

It’s not clear with a recession, even a short one, what that might do to the enthusiasm and funding opportunities for players like OpenAI, Anthropic and their peers. Many of whom don’t have a very high probability of existing in five or even three years’ time.

I’ve been trying to wrap my head around BigTech capex investments in AI and how they will lead to ROI. The math is a bit fuzzy in mid 2024.

The problem also for Hyperscalers is not all of them are doing great, as Amazon missed guidance badly. Generative AI is simply their ticket to faster Cloud and Ads growth. For BigTech, Generative AI is not useful in and of itself necessarily, it appears in blunt terms mostly useful for shareholder swag and Cloud credibility (keeping growth higher for longer). Meta’s advertising sales in the second quarter increased 22%, double the growth rate at rival Google, which is faster than even Amazon’s surging Advertising business (20%).

How much Meta’s capex in AI impacted their Ads growth is very debatable. Zuckerberg said AI is “improving recommendations and helping people find better content, as well as making the advertising experiences more effective.” It’s not clear however, if that is actually true or related to their Generative AI efforts at all.

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Capital expenditure in Datacenter Expansion is Crucial

Since Microsoft and Amazon are so reliant on revenue from the Cloud, Capital expenditures in datacenters is not an investment for 2025, but an investment for the decade ahead. You can listen to the Microsoft Earnings call (transcript here) and try to make sense of the statement of their CFO.

Amy Hood Microsoft’s CFO said of the capex: "Cloud and AI-related spend represents nearly all of our total capital expenditures. Within that, roughly half is for infrastructure needs where we continue to build and lease data centers that will support monetization over the next 15 years and beyond. For Microsoft, don’t expect ROI by 2025 or likely in the 2020s at all.

CFO Amy Hood pointed out that a lot of Microsoft's AI spending will be monetized "over 15 years and beyond." It’s less clear if shareholders will be that patient.

It’s not clear to many analysts how Capex in Generative AI and datacenters scales well if Generative AI has an ROI problem. If Generative AI isn’t generating revenue that’s rational compared to the capital expenditures in the AI chips, datacenters, , models, products and Cloud growth of MAGO (Microsoft, Amazon, Google, Oracle), there will be an implosion of value in the space eventually. Not just by Nvidia’s falling stock due to less sales, but on the Hyperscale valuations side as well.

It’s not clear how OpenAI Survives

“OpenAI is inextricably tied to Microsoft. It is bound to use Azure, Microsoft's cloud compute platform, both by its agreements and the fact that the majority of its funding is in credits that can only be used on Microsoft Azure. Microsoft sells access to GPT through Azure, while also directly competing with it with its own upcoming model, and takes three-quarters of any of the (theoretical) profit that would come out of OpenAI's services.” - Ed Zitron.

If you want to keep reading the full article you can do so here.

Thanks for your attention!

To read the second part in this series go here.