Transcript
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Not this onion I'm chopping.
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The onion.
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Ed Zetron (0:52)
Callzone Media. I'm Ed Zetron and this is Better offline, Better offline. That's right folks, we're back for the second part of our series on the dot com bubble and why I believe the AI bubble could be much, much worse. While the dot com bubble was a mixture of dodgy venture capital deals and websites that could never turn a profit, combined with a global mania around the interconnectivity of high SPE Internet companies, the AI bubble is one company selling expensive AI GPUs, a bunch of companies building data centers to put them in, and a bunch of companies building shit that runs on GPUs that only loses money and that customers kind of fucking hate. I should also note that a very important part of the story is venture capital's lack of returns in the last few years, something I covered in the insider financial crisis last week, specifically in parts two and three. In simple terms, AI startups now make up more than half of venture investment. And I believe that most of these startups will die because of their horrib margins, no path to profitability and products that people really don't want to pay for at scale. And when they die, they will leave venture capitalists stranded with tons of dead equity at a time when they already have trouble generating returns and thus raising money from their limited partners. The result, I worry, will be gruesome. Venture capitalists make their money through the fees they generate, which are based on the value of their investments and the returns they give their investors, which. Which don't seem to be happening. What do you think happens when they can't generate any returns and their investments aren't worth anything. The answer is simple. They won't have any way of raising more capital as their limited partners won't fucking trust them. And to be clear, these ass wipes have cocked it up many years at a time. Look at crypto, look at NFTs, look at AR, VR, metaverse, all of that. And all of this ridiculousness has happened because of the ridiculous, ridiculous myths of AI, like the fictitious insatiable demand for AI compute and the made up decline in the price of intelligence. Which, by the way, that last one, I've talked about it, I swear to God, I mentioned it in the galley, I mentioned it everywhere. It may be cheaper to pay for the tokens, but you use more of them so it's more expensive in the aggregate. On top of that, it doesn't mean that the price of intelligence for the model providers is going down. Jesus Christ, I'm so tired of making this point. But in both cases, these assumptions are convincing investors that it's time to invest in data centers that only lose money because you assume that the demand will be there. Or in AI startups that only lose money because you'll assume they magically stop losing money somehow. And it turns out we do actually have a historical comparison. The mania of the dot com bubble was based on a misunderstanding of the scale of the Internet at the time, rather than its actual potential. Hundreds of billions of dollars were invested based on flimsy logic, to quote researcher Justin Kohler. This continental rewiring was also justified by another powerful myth, that Internet traffic was doubling every 90 days. This claim spread through analyst reports, earning calls and investor presentations like a particularly virulent meme. If true, it meant that demand was growing exponentially, far outpacing any conceivable supply, and that every new trench of fiber would soon pay for itself many times over. And I pause here to go, oh God, they're doing it again. Back to the quote. But the mathematics were fiction. Network researchers like Andrew Odlisco at AT&T, looking at actual traffic data, found that US backbone traffic was doub traveling roughly once a year. Rapid growth, certainly, but nowhere near the purported 90 day cycle. Meanwhile, advances in fiber technology were making each strand exponentially more powerful. Dense wavelength division multiplexing allowed dozens of signals to travel simultaneously down the same line at different wavelengths of light, like multiple conversations happening in different colors. While demand doubled annually, supply expanded tenfold or more. Carriers buried the discrepancy under layers of creative accounting that would have impressed medieval alchemists first of all, Justin, if you hear this, I fucking love that. That was very fun. Second of all, to quote Twin Peaks, it's happening again mania had taken hold based on very flimsy logic, economically speaking. This meant that telecoms companies, server hardware companies, ISPs, construction firms, optical cable providers, wireless technology companies, and basically anybody related to the business of providing Internet access in any way saw a massive influx of business to build capacity that, that didn't need to be built. Yet if you're in the business of selling services to get people online, you were high on the hog, you know, kind of like selling high bandwidth ram. Similarly, one could get a startup funded if you had a website or even take it public. One could raise debt to build a nascent ISP or a fiber network. The money was flowing because people, people weren't really, really being thoughtful about it. And as far as the dot com part of the dot com bubble, the unsustainable websites, the problem wasn't so much the industry, but the businesses themselves, which were hyped and dumped onto markets with little regard for their long term health. The problem here is relatively simple. These were bad companies that people ignored the issues with because of, and I quote, the power of the Internet and how it would somehow save them, which, which it didn't. Obviously had they been kept private and died in the dark, I don't think these companies would have had the same reputation. I don't think we give a fuck about pets.com. i also don't think they were really an accurate comparison to anything happening today. While the valuation is ridiculous, the Globe's market cap was $1.840 million. The scale of destruction caused by dotcom startups was significantly smaller. Even in today's money. The economics were bad, but not anywhere near as bad. For the first nine months of 1998, the globe made $2.7 million in revenue and lost $11.5 million largely due to trying to move into multiple different business lines at once, like voice over ip. And to be clear, this company made money selling ads and also buying ra. Buying random companies was the thing that happened during the dot com boom. Everybody fucking loved buying companies. You just bought random. There was, I think like Excite bought at home. Like there was the at&t. Sorry, not the AOL Time Warner merger. So many stupid mergers, so little time. Nevertheless, the economics of this shit show were quite complex. You had companies raising money to do any website they could think of, companies raising money to lay fiber, companies raising money to found ISPs all of which had multiple multifaceted layers of physical and digital infrastructure that were quite, ugh, unbuilt I think is the term. It's tempting yet incorrect to say the thing about AI, the similarity everybody points to is that people doubted the Internet at the time and people really need to remember their fucking history. In 2000, only 52% of Americans were using the Internet, and by 2003 the number had only increased to 61% per the World Bank. In 2005, only 16% of the world used the Internet, and in 2024 that number had increased to 71. Yet the real difference is the access to high speed Internet. When the Internet was connected via a 56k modem, access was at times charged by the minute, and even if it was unlimited, it was always much, much slower. While we're used to connecting at speeds that make using a web based app near indistinguishable from using one on a computer back in 2000, 2001 or 2002, the average US Internet speed was at best 400 kilobits per second, or roughly 50 kilobytes per second, compared to the average US Internet speed today of over 200 megabits per second or 25 megabits per a second. In simpler terms, and the younger members of the audience won't understand this, a website took time to load in a way that feels almost impossible to conceive if you didn't experience it at the time, you had to make a commitment to go to a website. It wasn't like you browse multiple tabs and fuck around in different windows. You sat there and you waited a little bit. Sometimes it came up quicker than another. In fact, websites like Google were quite popular because they were very clean. And the reason that them being clean wasn't usability, it was the fact it loaded quickly, which I guess would be usability. Either way, we've also had dramatic improvements in web design and accessibility, the advent of mobile browsing, and the proliferation of widespread mobile and desktop Internet Access in the 2000s. We were at the very early days of E commerce, and the weird irony of the dot com bubble is that it was actually pretty useful to lay millions of miles of fiber optic cable. This is in no way, shape or form remotely comparable to large language models, GPUs or any nebulous VC spec spunk around generative AI.