Investors are getting worried that a big payoff from AI is further down the line than once thought. In recent months, high-profile tech industry watchers, including Goldman Sachs’s and venture firm Sequoia Capital, have questioned when or if A.I. will ever produce enough benefit to bring in the sales needed to cover its staggering costs. It is not clear that A.I. will come close to having the same impact as the internet or mobile phones. (But) in the last quarter, Apple, Amazon, Meta, Microsoft and Google’s parent Alphabet spent a combined $59 billion on capital expenses, 63% more than a year earlier. “What $1 trillion problem will A.I. solve?”
Mark Zuckerberg, Meta’s chief executive, started 2023 by declaring it the “year of efficiency.” Like several of its big tech peers, Meta cut jobs and mothballed expansion plans.
Then came A.I.
Mr. Zuckerberg started this year saying his company would spend more than $30 billion in 2024 on new tech infrastructure. In April, he raised that to $35 billion. On Wednesday, he increased it to at least $37 billion. And he said Meta would spend even more next year.
Mr. Zuckerberg said he’d rather build too fast “rather than too late,” and allow his competitors to get a big lead in the A.I. race.
The tech industry’s biggest companies have made it clear over the last week that they have no intention of throttling their stunning levels of spending on artificial intelligence, even though investors are getting worried that a big payoff is further down the line than once thought. Mark Zuckerberg, Meta’s chief executive, started 2023 by declaring it the “year of efficiency.” Like several of its big tech peers, Meta cut jobs and mothballed expansion plans.
Then came A.I.
Mr. Zuckerberg started this year saying his company would spend more than $30 billion in 2024 on new tech infrastructure. In April, he raised that to $35 billion. On Wednesday, he increased it to at least $37 billion. And he said Meta would spend even more next year.
Mr. Zuckerberg said he’d rather build too fast “rather than too late,” and allow his competitors to get a big lead in the A.I. race.
The tech industry’s biggest companies have made it clear over the last week that they have no intention of throttling their stunning levels of spending on artificial intelligence, even though investors are getting worried that a big payoff is further down the line than once thought.
In the last quarter alone, Apple, Amazon, Meta, Microsoft and Google’s parent company Alphabet spent a combined $59 billion on capital expenses, 63 percent more than a year earlier and 161 percent more than four years ago. A large part of that was funneled into building data centers and packing them with new computer systems to build artificial intelligence. Only Apple has not dramatically increased spending because it does not build the most advanced A.I. systems itself.
“These things take time,” he said, and “the risk of underinvesting is dramatically greater than the risk of overinvesting.”
The leaders of the biggest tech companies see a once-in-a-generation opportunity in the generative A.I. technology behind the popular chatbots like ChatGPT. They believe it can revolutionize everything from the software that runs the complex operations of global companies to research on new drugs. When ChatGPT debuted in late 2022, tech giants were beginning to dial back a burst of spending from the pandemic. But the industry’s brief embrace of austerity went out the window when they saw the potential of artificial intelligence.
This new wave of A.I. is wildly expensive. The systems work with vast amounts of data and require sophisticated computer chips and new data centers to develop the technology and serve it to customers. The companies are seeing some sales from their A.I. work, but it is barely moving the needle financially.
In recent months, several high-profile tech industry watchers, including Goldman Sachs’s head of equity research and a partner at the venture firm Sequoia Capital, have questioned when or if A.I. will ever produce enough benefit to bring in the sales needed to cover its staggering costs. It is not clear that A.I. will come close to having the same impact as the internet or mobile phones, Goldman’s Jim Covello wrote in a June report.
“What $1 trillion problem will A.I. solve?” he wrote. “Replacing low wage jobs with tremendously costly technology is basically the polar opposite of the prior technology transitions I’ve witnessed in my 30 years of closely following the tech industry.” Google’s parent company was the first big tech outfit to report its earnings for April through June, and it added weight to those overspending concerns. Though Alphabet had a 29 percent jump in profit, sales for ads on YouTube, which Google owns, were lower than expected and the massive jump in infrastructure spending — Google spent an average of $145 million each day in the quarter — rattled investors. Microsoft was up next. As OpenAI’s largest investor, it had a jump on its peers and had been raising its capital spending every quarter since the start of last year. On Tuesday, Microsoft had a bit of unwelcome news: Its cloud computing business, where most of that A.I. work was being done, didn’t grow as fast as expected.
But instead of serving as a moment of caution, the miss (about one percentage point below what was expected) added fuel to the building frenzy. Executives said that Microsoft had more demand for A.I. than they could serve from their data centers, a problem that they expect will persist through the end of the year. That helped explain why they are building so furiously.
Satya Nadella, Microsoft’s chief executive, said much of the capital spending went to acquire physical land and buildings, which they need to lock up in advance. But the remaining 60 percent was for what he called “the kit,” the expensive chips and other components of a computer network.
Microsoft’s executives also asked for patience, saying the spending would bring in revenue over a long time — “over 15 years and beyond,” said Amy Hood, the company’s financial chief. Digging into Microsoft’s numbers indicates that the company is on track for more than $5 billion in sales for generative A.I. products this year. But for a tech giant that just reported $245 billion in annual revenue, that’s still tiny. (The New York Times has sued OpenAI and Microsoft, claiming copyright infringement of news content related to A.I. systems. The two companies have denied the suit’s claims.)
The next day, Meta increased its predictions for how much it would spend. Mr. Zuckerberg said he was planning for the next generation of A.I. systems, and the next major update to their main A.I. model will demand 10 times more computing power.
Meta gives away the advanced A.I. systems it develops, but Mr. Zuckerberg still said it was worth it. “Part of what’s important about A.I. is that it can be used to improve all of our products in almost every way,” he said.
On Thursday, Amazon told investors it had spent more than $30 billion on capital expenses in the first half of the year, and that it too would spend more in the rest of the year. Executives said they need to balance building enough to meet demand without getting ahead of what they really need.
“The reality right now is that while we’re investing a significant amount in the A.I. space and in infrastructure, we would like to have more capacity than we already have today,” said Andy Jassy, Amazon’s chief executive. “I mean, we have a lot of demand right now.” That means buying land, building data centers and all the computers, chips and gear that go into them. Amazon executives put a positive spin on all that spending. “We use that to drive revenue and free cash flow for the next decade and beyond,” said Brian Olsavsky, the company’s finance chief.
There are plenty of signs the boom will persist. In mid-July, Taiwan Semiconductor Manufacturing Company, which makes most of the in-demand chips designed by Nvidia that are used in A.I. systems, said those chips would be in scarce supply until the end of 2025.
Mr. Zuckerberg said A.I.’s potential is “super exciting.”
“It’s why there are all the jokes about how all the tech C.E.O.s get on these earnings calls,” he said, “and just talk about A.I. the whole time.”
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