“Dad, what if we made a washing machine that automatically dried the clothes too?”
My teenage son is very creative and always dreams of new business ideas. I always ask him, “Will it be profitable enough to justify the expense?”
Spending on artificial intelligence and hoping it will drive up profits was a constant theme through this last earnings reporting season. My question to them is the same as my son’s: “But will it make any money?”
How are these companies planning to make money from AI?
Almost all tech companies are betting on consumers adding new monthly subscriptions for AI services for $20 to $30 monthly. For example, if you want Copilot AI for your Microsoft Office 365 subscription, it will cost $30 per month per employee. That is 50% more expensive than their premium subscription. Microsoft and every other tech company are hoping every big company will pay for all of its employees to have it for increased productivity. If they did, it would be a huge new revenue stream for tech companies. Microsoft said in their most recent earnings call that they currently have 1.8 million AI Copilot subscribers.
Tech companies are also hoping regular people will fall so in love with AI that they will pay $20 to $30 monthly for use at home. I wonder how many people whose home budgets are already stretched by inflation will love AI enough to add a monthly bill. These companies have to figure out a way to become profitable because the new data centers and expensive microchips aren’t going to pay for themselves.
Investors have had mixed reactions to these big AI spending plan announcements.
Apple’s value increased by $300 billion after its June 10 announcement of “Apple Intelligence.” Google and Microsoft also saw a big increase in value after announcing their AI plans.
On the other hand, Meta Platforms (Facebook and Instagram) saw its stock have one of its worst days ever on April 24. It lost $133 billion in value after the company said it would continue to spend billions of dollars on AI but thought it would take years before its AI made a profit.
Investors want to know the path to profitability in this AI arms race. Microsoft said 7% of its quarterly revenue growth was from the use of ChatGPT. Microsoft is making money with AI, but I don’t think adding AI to Facebook will make more people want to use it. Most people I talk to are annoyed with Facebook’s AI search tool and are trying to turn off the AI feature.
Tech companies are in the middle of an infrastructure build-out, which we haven’t seen since the dot-com days. Investors remember the overbuild of fiber-optic infrastructure spending, where several companies laid fiber cables that eventually weren’t needed, leading to their bankruptcy. Companies can’t get too far ahead of the consumer. Microsoft CFO Amy Hood seems to have a good mindset on AI spending. She told the Wall Street Journal that their AI spending would depend on consumers’ demand to pay for their AI services.
A few companies are finding ways to profit from AI, but I don’t know when the expense will be worth it for small and medium-sized businesses. AI can make employees more productive, but I don’t think they are that much more productive to justify the monthly expense. It will be worth it in time, probably a long time, just like the internet and mobile phones, which took decades.
My son thinks we should build a Top Golf-type facility for baseball and softball players. Here, you hit off a batting cage, and you can watch to see if your ball goes over a real outfield fence.
I again asked him, “Will it make enough money to justify the expense?”
He said, “I don’t know, Dad, because it would take a huge area to have baseball and softball fields in the middle of town.”
My advice is the same for companies wanting to jump in the AI race as it was for my son: “Keep thinking, but don’t spend any money until you know it will make a profit.”
Have a blessed week.
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