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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Alright folks, we’ve got some big news coming from the world of tech giants. Amazon, Microsoft, and Google’s parent company Alphabet are about to kick things up a notch in terms of capital spending. Why, you ask? Well, it’s all because of the growth of generative artificial intelligence.
These Big Tech players pretty much dominate the global cloud market, and they’ve been steadily increasing their investment in computing infrastructure over the past few years. In fact, their combined capital spending reached a whopping $42 billion in the last three months, which is nearly 20% more than the same period last year. And get this, that’s a 10% increase from just the previous quarter. Talk about serious growth!
So, what’s all this spending for? Well, according to the executives at these companies, a significant chunk of that capital is going towards building up their generative AI systems. These systems require massive computing power and data-crunching capabilities. Amazon’s CEO, Andy Jassy, even predicted that generative AI will bring in “tens of billions in revenues.” That’s a lot of money, folks!
Now, why are these tech giants so focused on AI? It all comes down to competition. They’re all vying for a bigger share of the cloud market, and AI plays a crucial role in that. It’s what drives Amazon’s overall profits, so they can’t afford to fall behind. They want to win over new customers with state-of-the-art AI tools and services and use the technology to enhance their core products. It’s a battle for relevance and market share, my friends.
But here’s the thing, investing in AI and staying competitive comes at a cost. These companies have to shell out a tremendous amount of capital expenditure for equipment like servers and data centers. Jeff Pearson, managing director at technology consultancy Slalom, put it bluntly: “They have to compete on generative AI or they’ll lose relevance and market share. All that is going to require a tremendous amount of capex.”
Bank of America analysts have some interesting predictions. They foresee Amazon, Alphabet, and Microsoft’s collective cloud-related capex skyrocketing by 22% next year, reaching a massive $116 billion. And get this, last year their combined investment increased by 20% to $84 billion. Talk about some serious cash flow, my friends!
When it comes to who’s investing the most, it seems like Microsoft is really ramping things up. BofA analyst Justin Post says they’re boosting their investment at the fastest rate to support the uptick in AI workloads and their broader cloud business. But let’s not forget, all three companies are investing big time ahead of future revenues. They’re committed to leading in the AI era, so they’re willing to spend whatever it takes.
Now, let’s talk about Amazon’s quarterly investment figures. They include assets for their retail business, which they heavily invested in during the pandemic. Analysts have noticed a fall in Amazon’s third-quarter investments compared to last year, which reflects a pullback in ecommerce spending. However, Amazon has made it clear that they’re planning to reduce retail capex while increasing their cloud-related investment. Smart move, if you ask me!
But it’s not just the big players that are jumping on the AI bandwagon. AI start-ups are partnering up with these tech giants as well. Microsoft took the lead and signed an exclusive deal with start-up OpenAI, which is now seeking a valuation of $86 billion. This partnership gives Microsoft’s customers access to the technology behind ChatGPT. It’s all about collaboration, folks!
And we’ve got more exciting news from Microsoft. They’ve become the first in the industry to make the technology behind ChatGPT available as a standard feature in a widely used software product. They recently launched their Copilot generative AI assistant, and get this, it could add as much as 83% to businesses’ monthly software bill. That’s a game-changer, my friends!
Now, let’s talk about the impact of AI investments on these companies’ financials. Microsoft said AI-related demand actually boosted their cloud growth in the most recent quarter. Alphabet and Amazon, on the other hand, were a bit vaguer in their earnings reports. But here’s the bottom line, folks: none of these tech giants have a unique advantage when it comes to capital expenditure. They all have plenty of money on their balance sheets, and they’re all committed to leading in the AI era. So, they’re willing to spend whatever it takes. It’s all about staying ahead of the game!
Now, there is one downside to all this spending. Analysts warn that focusing on a capital-intensive business like AI could squeeze margins. The high levels of capex might not show up right away, but they could become a “headwind” to margins over time and even impact cash flow. That’s something to keep an eye on, my friends.
But overall, it’s an exciting time in the world of tech giants. We’ve got Amazon, Microsoft, and Alphabet going all-in on generative AI, investing billions of dollars. It’s a race for dominance in the cloud market and a commitment to leading in the AI era. Buckle up, folks, because things are about to get even more incredible!