Big tech can’t risk being left out of the AI race even if it means over investing in it

With the Artificial Intelligence (AI) hype getting louder and louder, big tech has no choice but to pour fuel into AI investment even though no profits are really visible yet.

Amazon just developed a new version of Alexa with generative AI. Recent numbers suggest that Open AI is expected to spend nearly US$4 billion this year on Microsoft’s servers and almost US$3 billion on training its models. Microsoft announced plans to spend more money this fiscal year to enhance its AI infrastructure, even as growth in its cloud business has slowed down, suggesting that the AI payoff will take longer than expected. 

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Microsoft CFO Amy Hood explained that the spending is essential to meet the demand for AI services, adding that the company is investing in assets that “will be monetised over 15 years and beyond”. CEO Satya Nadella also said that Azure AI now boasts over 60,000 customers, marking a nearly 60% increase year-on-year, with the average spending per customer also on the rise. 

Last week, Google’s cloud revenue exceeded $10 billion, surpassing estimates for Q2 2024. The company is, however, facing increasing AI infrastructure costs. Google CEO Sundar Pichai insists, “The risk of under-investing far outweighs the risk of over-investing for us.” He warned, “Not investing to stay ahead in AI carries much more significant risks.”

The risk of under-investing far outweighs the risk of over-investing for us.” He warned, “Not investing to stay ahead in AI carries much more significant risks — Google CEO Sundar Pichai

That about sums it up. Big tech cannot take the risk being left out in the Ai race, even if it means over investing in it.

“If you take a look at our AI infrastructure and generative AI solutions for cloud across everything we do, be it compute on the AI side, the products we have through Vertex AI, Gemini for Workspace and Gemini for Google Cloud, etc, we definitely are seeing traction,” Pichai said, elaborating that the company now boasts over two million developers playing around with Gemini on Vertex and AI Studio. 

On the contrary, analysts and investors from major financial institutions like Goldman Sachs, Sequoia Capital, Moody’s, and Barclays have released reports expressing concerns about the profitability of the substantial investments in generative AI.

AI is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do — Jim Covello, Goldman Sachs’ head of global equity research

“AI is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do,” said Jim Covello, Goldman Sachs’ head of global equity research.

Sequoia Capital partner David Cahn’s recent blog, ‘600 Billion Question’, points out the gap between AI infrastructure spending and revenue. He suggests the industry needs to generate around $600 billion annually to cover investment costs and achieve profitability.

Still, the funds continue to pour in. Recently, Safe Superintelligence Inc (SSI), started by OpenAI Co-founder Ilya Sutskever, raked in a US$1 billion in funding from NFDG, a16z, Sequoia, DST Global, and SV Angel. In May, Elon Musk’s xAI attracted funding to the tune of US$24 billion from Valor Equity Partners, Vy Capital, a16z, Sequoia Capital, Fidelity, and Al Waleed bin Talal Al Saud. Last month, xAI launched Grok-2 and Grok-2 mini, advanced AI models with improved text and vision understanding. These models are available to X Premium users and developers via an upcoming enterprise API platform.

There’s just so much noise out there. And there’s so much innovation. It’s hard to tell fact from fiction

— Edmund DeLussey, global enterprise leader at Genpact

OpenAI is in discussions with Apple and NVIDIA to secure funding in an upcoming round led by Thrive Capital. This move would value OpenAI at an impressive $100 billion. Rival Anthropic has raised $9.7 billion so far and currently holds an $18.4 billion valuation after its latest funding round. Anysphere’s AI accelerator tool Cursor received $60 million in Series A funding from Thrive Capital, OpenAI, and a16z.

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This isn’t a new phenomenon. Last year, French startup Mistral AI set a record by raising $113 million in just four weeks last year.

Waiting in the wings to add to this burgeoning list of AI billionaires is Andrej Karpathy’s Eureka Labs, alongside other successful companies like CoreWeave, Scale AI, Inflection, and Groq.

However, with so much harkat in the AI landscape, it’s hard to tell which ones will actually come shining through.

As Edmund DeLussey, global enterprise leader at Genpact, said during a keynote at AIM’s MachineCon Summit in New York, “There’s just so much noise out there. And there’s so much innovation. It’s hard to tell fact from fiction.”