The Hater's Guide To The AI Bubble, Pt. 1

Summary

Better Offline Podcast: The Hater's Guide To The AI Bubble, Pt. 1

Podcast Information:

• Title: Better Offline
• Host/Author: Cool Zone Media and iHeartPodcasts
• Description: Better Offline is a weekly show that delves into the tech industry's impact and manipulation of society. Hosted by tech veteran Ed Zitron, the podcast combines narrative storytelling, interviews, and panel discussions to unravel the complexities of the tech world, exposing schemes and evaluating the motives of major players from cryptocurrency fraudsters to venture capitalists.

Episode: *The Hater's Guide To The AI Bubble, Pt. 1
Release Date: July 23, 2025

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Introduction to the AI Bubble Concerns

[03:12] Ed Zitron:
Ed Zitron opens the episode with a passionate declaration of his skepticism towards the current generative AI market. Highlighting his commitment to critical journalism, Zitron emphasizes his duty to inform listeners about the potentially unstable foundations of the AI boom. He asserts, “I profoundly dislike the financial waste, the environmental destruction, and fundamentally I dislike the attempt to gaslight people into swearing fealty to a sickly and frail pseudo industry” ([03:12]).

The Magnificent Seven and Nvidia's Dominance

Zitron shifts focus to the "Magnificent Seven" — a group comprising Nvidia, Microsoft, Alphabet (Google), Apple, Meta, Tesla, and Amazon — which collectively account for approximately 35% of the US stock market's value. Among them, Nvidia holds a staggering 19% share of this group, translating to about 8-9% of the entire US stock market ([03:12]).

[10:45] Zitron:
“Nvidia's continued value and continued growth is heavily reliant on hyperscaler purchases and continued interest in generative AI.”

Zitron details how these companies' substantial investments in Nvidia's GPUs tie the broader market's health to the performance and sustainability of the AI sector. He underscores the vulnerability this concentration creates: “If any one of these companies... makes significant changes to their investments in Nvidia chips, it will likely have a direct and meaningful negative impact on the wider economy and markets” ([27:22]).

Dissecting Major Tech Companies' AI Investments

Microsoft

Microsoft stands out with a planned $80 billion capital expenditure (CapEx) for 2025, primarily funneling funds into AI infrastructure. However, Zitron criticizes the actual revenue generated from these investments, pointing out that $10 billion of Microsoft's AI revenue comes from OpenAI's expenditures on Azure cloud services, which are offered at heavily discounted rates. He states, “That makes Microsoft's real AI revenue about $3 billion, or about 3.75% of this year's capital expenditures” ([16:57]).

Amazon

Amazon's AI investments are equally scrutinized. With a projected $105 billion in CapEx for 2025, Amazon anticipates only $5 billion in AI revenue by 2025. Zitron highlights the disparity between investment and returns: “It's a fucking joke.” ([16:57]).

Google (Alphabet)

Google plans to invest $75 billion in CapEx for 2025 with an estimated AI revenue of $7.7 billion. Zitron questions the sustainability, noting that a significant portion of this revenue stems from bundled services rather than pure AI advancements: “That one would stop me trying, though. Assuming the 3.1 billion DOL 2025 revenue would work out to $258 million a month” ([16:57]).

Meta

Meta's AI ventures are met with skepticism as well. Despite a planned $72 billion CapEx for 2025, Meta projects only $2-3 billion in AI-driven revenue. Zitron is critical of Meta's monetization strategies, suggesting that most of their AI investments are not translating into tangible profits: “Meta's earnings are effectively the US stock market's confidence and everything rides on five companies” ([16:57]).

Tesla and Apple

Tesla and Apple receive less focus but are not exempt from criticism. Tesla's $11 billion CapEx for AI does not correlate with significant AI-driven revenue, and Apple's cautious approach to AI investment is portrayed as lagging rather than innovative. Zitron remarks, “Apple hasn't bet the farm on AI in so much as it hasn't spent $200 billion in infrastructure for a product with limited market that only loses money” ([16:57]).

The Fragility of the AI-Driven Market

Zitron introduces the concept of the "Fragile Five," encompassing Amazon, Google, Microsoft, Meta, and Tesla. He argues that these companies' reliance on Nvidia's GPUs makes the US stock market precariously dependent on their AI investments. A faltering Nvidia could lead to severe repercussions for the broader market and individual investments: “Nvidia's earnings are effectively the US stock market's confidence and everything rides on five companies” ([28:57]).

Historical Context: Amazon Web Services (AWS) Comparison

To bolster his argument, Zitron draws parallels between the current AI investments and Amazon's early days with AWS. He critiques the common narrative that substantial initial losses can lead to long-term profitability, pointing out that AWS's eventual success does not justify the current unsustainable AI investments: “The generative AI boom is a mirage. It hasn't got the revenue or the returns or the product efficacy for it to matter” ([03:12]).

Critique of Industry Optimism and Analyst Perspectives

Zitron is critical of the prevailing optimistic outlook among analysts and industry insiders. He challenges the validity of their bullish projections, suggesting that they ignore the fundamental flaws in the AI market: “The AI trade is not driven by any real meaningful revenue growth” ([28:57]). He dismisses the idea that current AI trends will lead to sustainable economic benefits, emphasizing the lack of substantial financial returns from generative AI technologies.

Conclusion and Teaser for Part 2

Wrapping up Part 1, Zitron reiterates the precariousness of the AI-driven market and the significant risks posed by the over-reliance on a handful of tech giants and their AI investments. He promises to continue the analysis in the next episode, where he will further explore why comparisons between AWS and generative AI are fundamentally flawed and why the current AI infrastructure is inherently brittle.

[28:57] Ed Zitron:
“And we're back. Now I'm going to use a new term. I came up with this really really bad but the Fragile five...”

[28:57] Zitron concludes:
“We are in a goddamn bubble, by the way. It's so obvious we're in a bubble. ...Everything you're seeing is ridiculous and wasteful. When it all goes tits up, I want you to remember that I said this.” ([16:57])

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Notable Quotes

• Ed Zitron ([03:12]):
  “I profoundly dislike the financial waste, the environmental destruction, and fundamentally I dislike the attempt to gaslight people into swearing fealty to a sickly and frail pseudo industry.”

• Ed Zitron ([27:22]):
  “If any one of these companies... makes significant changes to their investments in Nvidia chips, it will likely have a direct and meaningful negative impact on the wider economy and markets.”

• Ed Zitron ([16:57]):
  “The generative AI boom is a mirage. It hasn't got the revenue or the returns or the product efficacy for it to matter.”

• Ed Zitron ([28:57]):
  “We are in a goddamn bubble, by the way. It's so obvious we're in a bubble.”

Takeaways

• Skepticism of the AI Boom: Ed Zitron presents a strong critique of the generative AI market, questioning the sustainability and profitability of current investments.

• Concentration Risk: The heavy reliance of the US stock market on a few major tech companies and their AI investments poses significant economic risks.

• Investment vs. Returns: There's a notable disparity between the massive capital expenditures in AI and the relatively modest revenue generated, raising concerns about a potential market bubble.

• Historical Parallels: Comparing current AI investments to the early days of AWS serves to highlight potential pitfalls and the unsustainability of the current AI investment model.

• Future Episodes: The podcast promises to delve deeper into these issues, exploring the foundational weaknesses of the AI infrastructure and further dispelling myths around the AI market.

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Stay Tuned: The episode concludes with a promise of deeper analysis in subsequent parts of the series, aiming to provide listeners with comprehensive insights into the AI industry's structural issues and the looming risks of the AI bubble.

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Connect with Better Offline: For more detailed discussions and updates, visit betteroffline.com or subscribe to the newsletter. Engage with the community on Discord and Reddit to continue the conversation.

Transcript

[Ed Zitron]

This is an iHeart podcast.

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[Ed Zitron]

Callzone Media hello and welcome to Better Offline. I'm your host Ed Zitron. Better Offline Check out the episode notes. Got a wonderful merchandise and completely separate to the podcast. Got a wonderful newsletter. Where's your red app with the premium section that I would love you to subscribe to? But I also got some good news. You've got another three part episode, the second of the year and this week we're going to be talking about how the cracks in the generative AI market are becoming harder to ignore, and how recent events are making a collapse seem all the more inevitable. What that means for the wider economy, really the markets. And you and I want to make that case because as a journalist, I believe I have the duty to give you the information you need to make sense of a world increasingly feeling incomprehensible and of course detached from reality, and where everything is consequential to everyone, where it's impossible for ordinary people to shroud themselves from the consequences of decisions made by the executive and shareholder class. Good journalism is making sure that history is actively captured and appropriately described and assessed, and it's accurate to describe things as they currently are, as alarming. And boy howdy am I alarmed. Now. Alarm is not a state of weakness or belligerence or myopia. My concern does not dull. My vision, even though it's convenient to frame me, is somehow alarmist, like I have some hidden agenda or bias toward doom. I profoundly dislike the financial waste, the environmental destruction, and fundamentally I dislike the attempt to gaslight people into swearing fealty to a sickly and frail pseudo industry where everybody but Nvidia and consultancies lose money. And I also dislike the fact that I and others like me are held to a remarkably different standard to those that paint themselves as optimists, which typically means people that agree with what the market wishes were true. Critics are continually badgered, prodded, poked, mocked and jeered at for not automatically aligning with the idea that generative AI will be this massive industry, constantly having to prove themselves, as if somehow there's something malevolent or craven about criticism. The critics do this for clicks. Or to be contrarian, I don't do anything for clicks or downloads or prestige. I don't have any stocks or short positions. My agenda is simple. I like talking about this crap and it comes to me naturally. I have a podcast and it is on some level my job to try and understand what the tech industry is doing day to day. And I get it. I get it's easy to try and dismiss what I say as going against the grain because AI is big and AI is something we should all be impressed by, and that AI is the thing that's going to start everything and all this fucking money is tied up in it. But look, this isn't a fad for me. This isn't something I'm doing because I feel like it, because I'm jumping to the next trend. No, I've been railing against bullshit bubble since 2021. The anti remote work push and the people behind it. The clubhouse and audio social networks bubble, the NFT bubble, the made up quitting pan, Even I even. And this one I got no credit for. I called that something was up with FTX several months before it imploded. Did I do much more than that? No. I found one thing. Nevertheless, this isn't contrarianism, not at all. It's the kind of skepticism of power and capital that's necessary to meet these moments. And it's if it's necessary to dismiss my work because it makes you feel icky inside, get a therapist or see a priest. Nevertheless, I'm alarmed. And while I have said some of these things separately, based on recent developments, I think it's necessary to say why. Sure, I believe the AI bubble is deeply unstable, built on vibes and blind faith. And when I say the AI bubble, I mean the entirety of the AI trade. And it's alarmingly simple too, he Sundays before doing three episodes on it. But this isn't going to be some saccharine, whiny or simply worrison podcast. I think at this point it's become a little ridiculous to not see we're in a bubble. We are in a goddamn bubble, by the way. It's so obvious we're in a bubble. It's been so obvious we're in a bubble. It's been obvious for months, if not years. A bubble that seems so strong, but it's actually very weak, with a central point of failure. I may not be a contrarian, but I am a hater. I hate the waste the loss, the destruction, the theft, the damage to our planet, and the sheer excitement that some executives and yes, some writers have that workers may be replaced by AI. And the bald faced fucking lie that it's actually happening and what generative AI is doing is somehow proof that it will. And so I present to you the Haters guide to the AI Bubble, a comprehensive rundown of the arguments I have against the current AI boom's existence. Send this podcast to your friends, your loved ones, or, I don't know, blare it in their ears like you're torturing them. But no, this isn't going to be a traditional guy, but something you can listen to and say, oh, that's why the AI bubble is so bad. And at this point, I know I'm tired of being gaslit by guys in gingham shirts who desperately want to curry favor with other guys in gingham shirts, but who also have PhDs. I'm tired of hearing people talk about how we're in the era of agents that don't fucking work and will never fucking work. I'm tired of hearing about powerful AI that's actually crap. And I'm tired of being told the future is here while having the world's least, least useful, most expensive cloud software shoved down my throat and up my asshole. Look, the generative AI boom is a mirage. It hasn't got the revenue or the returns or the product efficacy for it to matter. Everything you're seeing is ridiculous and wasteful. When it all goes tits up, I want you to remember that I said this. I tried to say something. I've been trying to say something for a while. But let's start with something real obvious. Let's start by talking about the so called Magnificent Seven's weak point. And it's not the one you think, because it's Nvidia. As I write the script for this podcast, Nvidia is sitting around 170 bucks a share. A dramatic reversal of faith after the pummeling it took from the deep seat situation in January, which sent it tumbling to a brief late April trip below $100 before things turned around. The Max 7 stocks, Nvidia, Microsoft, Alphabet, which is Google, Apple Meta, Tesla and Amazon make up around 35% of the value of the US stock market. And of that, Nvidia's market value takes up about 19% of the Magnificent Seven. They're about like 8 to 9% of the entire US stock market. It's not brilliant. This dominance is also why ordinary people ought to be deeply concerned about the AI bubble, the Magnificent Seven is almost certainly a big part of their retirement plans, even if they're not directly invested. Back in May, the wonderful Laura Bratton from Yahoo Finance reported that Microsoft, Amazon, Meta, Alphabet and Tesla alone make up 42.4% of Nvidia's revenue. The breakdown doesn't make things better. Meta spends 25% and Microsoft an alarming 47% of their capital expenditures on Nvidia chips. And as Bratton notes, Microsoft also spends money renting servers from CoreWeave, which analyst Gil Luria of DA Davidson estimates accounted for $8 billion more than 6% of Nvidia's revenue in 2024. Luria also estimates that NEO cloud companies like Core Weave and Crusoe that exist only to provide AI compute services account for as much as 10% of Nvidia's revenue, or at least did so in 2024. Nvidia's climbing stock value comes from one thing its continued revenue growth. In the past four quarters, Nvidia has seen year over year growth of 101%, 94%, 78% and 69%. And in the last quarter, a little statistic was carefully brushed under the rug. Nvidia missed, though narrowly on data center revenue. And data center revenue is, by the way, where the GPUs go and all the associated hardware and kind of server architecture switches and the like. And yeah, this is exactly what it sounds like, GPUs that are used in servers rather than gaming consoles and PCs. I get a lot of emails saying oh, will it be easier for me to to buy consumer graphics cards? I don't fucking know, mate. I'm just here to talk about enterprise. Okay, not really enterprise, but enterprise scale GPUs. We're getting off track. Analysts estimated it would make it would make $39.4 billion from the data center category and Nvidia only. Only I know pathetic amount brought in $39.1 billion. Then again, this could be attributed to their problems in China, especially as the H20 ban they were banned from selling a specific chip in China has only just been lifted. In any case, this was a miss and not sure why no one wanted to talk about it. But there's another problem. There's so many little problems here. Like Nvidia's quarter over quarter growth has also become aggressively normal. It went from 69% to 59% to 12% to 12% again quarter over quarter, which again isn't bad. It's pretty great in fact. But when 88% of your revenue is based on one particular line in your earnings. It's a pretty big concern, at least for me. Look, I'm no stock analyst. Do not take stock advice from me. I don't know about stocks. I don't know what will go up and down. But I'll tell you, I'll tell you something's not right here. But I'm going to keep this simple. Nvidia relies on not only selling lots of GPUs each quarter, but it must always sell more of them the following quarter. More than 42% of Nvidia's revenue comes from Microsoft, Amazon, Meta Alphabet and Tesla continuing to buy more GPUs. Remember, it's not about buying the same amount. Number must go up. Nvidia's continued value and continued growth is heavily reliant on hyperscaler purchases and continued interest in generative AI. But really, just the buying part. The GPUs are what matter, and the US stock market's continued health relies on some level of five or six companies. And it's unclear how many GPUs Apple buys spending billions of dollars on GPUs from Nvidia and more every quarter. In fact, I found an analysis from portfolio manager Danke Wang from January 2025 that found that the Magnificent 7 stocks accounted for 47.87% of the Russell 1000 indexes returns in 2024. And that's an index fund of the thousand highest ranked stocks on the FTSE Russell Index, which in simpler terms means 35% of the US stock market is held up by five or six companies buying GPUs. If Nvidia's growth story stumbles, it will reverberate through the rest of the Mag 7 too, making them rely on their own AI trade stories. And would you know it when you know it? When you look at the stories, there is no AI trade because generative AI is not making anybody any goddamn money. But I have to make money. 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[Ed Zitron]

And we're back. And I am so tired of people telling me that companies are making tons of money on AI. They are not. Anyone saying this to you is lying or ignorant or both. The Magnificent Seven spent an insane 560 billion doll between 2024 and 2025 on CapEx, with the overwhelming majority going towards generative AI and their effort. For this wonderful effort for more than half a trillion dollars, these companies have made about $35 billion in revenue and no profit. And I must say, and this is a technical term, this is egregiously fucking stupid. But let's break it down, starting with starting out in Redmond with our friends at Microsoft, and they plan to spend $80 billion on capex in 2025. Now, as of January 2025, Microsoft's annualized revenue, meaning best month times 12 from artificial intelligence, was $13 billion, a number that it's chosen not to update since, likely because said number is either flat or not growing, though it could in its upcoming, I think at the end of this week or next one. It's got earnings coming up. Maybe there'd be good news yet. The problem with this revenue is that $10 billion of that revenue, according to the Information, comes from OpenAI's spend on Microsoft's Azure cloud. And Microsoft offers preferential pricing, I'm quoting at a heavily discounted rental rate that essentially only covers Microsoft's costs for operating the servers. That's not good, right? Like, it's not good. It's not good. That 76.9% of Microsoft's AI revenue comes from OpenAI, and that revenue is made at cost or just above it, which makes Microsoft's real AI revenue about $3 billion, or about 3.75% of this year's capital expenditures, or 16.25% if you count OpenAI's revenue, which costs Microsoft likely more money than it earns. The information also reports that Microsoft made $4.7 billion in AI revenue in 2024, of which OpenAI accounted for $2 billion, meaning that for the $135.7 billion that Microsoft has spent in two years in AI infrastructure, it's made $17.7 billion, of which OpenAI was $12.7 billion. It's kind of crap, isn't it? It's not very good at all. And things do not improve when we get to Amazon. An analyst estimates that Amazon, which plans to spend $105 billion in capital expenditures this year, will make $5 billion in AI in 2025, rising and I quote as much as 80%, suggesting that Amazon might have made a measly $2.77 billion in 2024 on AI in a year when it spent $83 billion in capital expenditures. And last year Amazon CEO Andy Jassy said that, and I quote, AI represents for sure the biggest opportunity since cloud, and probably the biggest technology shift in opportunity in business since the Internet. I personally think he is full of shit. And it's a similar story over with Google, which plans to spend $75 billion in CapEx 2025. Bank of America analyst Justin Post estimated a few weeks ago that Google's AI revenue would be in the region of $7.7 billion, though his math, if I'm honest, is a little generous, because it includes subscribers to packages that include a lot of non AI stuff too. Google's one subscription includes increased cloud storage across Google Drive, Gmail and Google Photos, and added a $20 a month premium plan in February 2024 that included access to Google's various AI models. Google has claimed that the premium AI tier accounts for millions of the 150 million subscribers to Google One, though how many millions is impossible to estimate. That one would stop me trying, though. Assuming the 3.1 billion DOL 2025 revenue would work out to $258 million a month, that would mean there were 12.9 million Google One subscribers also paying for the premium AI tier. This isn't out of the realm of possibility. After all, OpenAI has like 15.5 million paying subscribers, but Post is making kind of a generous assumption here. Nevertheless, we'll accept the numbers as they are because they fucking stink. Google's $1.1 billion in Workspace revenue came from a forced price hike on those who use Google services to run included, meaning that it's not likely a number that they can significantly increase in the future because it was just raising the rent on everyone. And that's $7.7 billion of revenue, not profit, on $75 billion of capital expenditures. Very nasty. But let's move on to one of my faves, Meta, which plans to spend $72 billion in 2025. Someone's gonna get mad at me for saying this, but I believe that Meta is simply burning cash on generative AI. There is no product the Meta sells that monetizes large language models, that I can tell, at least. But every Meta product now has them kind of shoved in there. Your Instagram DMS oinking at you to generate artwork based on your conversation. Nevertheless, they do make some money, allegedly. And we do have some sort of knowledge of what matter is saying they make. Due to a copyright infringement case. Cadre versus Meta Unsealed judgment briefs revealed in April that Meta is claiming that gen AI driven revenue will be more than $2 billion in this year, with estimates as high $3 billion. The same document also claims that Meta expects to make 460 billion to $1.4 trillion in total revenue through 2035. And this is from AI, by the way. And this is the kind of thing that should have you, like wrenched out. You should. Your key card should stop working when the words leave your mouth because Meta makes 99% of its revenue from advertising, and the unsealed documents state that it generates from its llama models and will continue earning revenue from each iteration and share a percentage of the revenue it generates from users of the llama models hosted by those companies. But the companies in question redacted. Mr. Max Zeff of TechCrunch adds that Meta lists host partners like Amazon Web Services, Nvidia Databricks, Grok, Dell, Microsoft Azure, Google Cloud and Snowflake. So it's possible that Meta makes money licensing to those companies. Sadly, the exhibits further discussing these numbers are filed under seal, and also their large language model is open source. What service is Meta providing? Are these companies so goddamn lazy that they need Meta to come in and set up the fraud? Jesus Christ. Jesus Christ. When I read these numbers, I just want to read about these people. They drive me a little insane. Either way, we are now at $332 billion of capital expenditures in 2025 for $28.7 billion of revenue, of which $10 billion of it is OpenAI's at cost or just above cost revenue. Not great. Then there's Tesla, which doesn't appear to make money from generative AI and plans to spend $11 billion on CapEx in 2025 despite its media prominence in the Magnificent Seven at least. Tesla is one of the least exposed companies of the Mag 7 to the AI trade, as Elon Musk has turned it into a meme stock company where what they do doesn't really matter. That doesn't mean, of course, that Musk isn't touching AI. The xai, the company that develops racist large language model Grok and owns what remains of Twitter, apparently burns a billion dollars a month, and the information reports that it makes a whopping $100 million of annualized revenue, so about 8,3 million a month. Now there's a shareholder vote for Tesla to potentially invest in Xai, which will probably happen, allowing Musk to continue to pull leverage from his Tesla stock until the company's decaying sales and brand eventually swallow him whole. But we're not talking about Elon Musk today. We are not. We have to talk about Apple now. And honestly, they're the least interesting part of this story. Their Capital expenditures in 2025 are expected to also be around $11 billion, and they arguably have the weirdest story it AI story. In the Magnificent Seven, Apple Intelligence radicalized millions of people against AI, mostly because it fucking sucks. Apple clearly got into AI reluctantly and now faces stories about how they feel left behind in the AI race. Which mostly means that Apple aggressively introduced people to the actual features of generative AI by force. And it turns out that people don't really want to summarize documents or write emails or make custom emoji. And anyone who thinks they would is a fucking alien. In any case, Apple hasn't bet the farm on AI in so much as it hasn't spent $200 billion in infrastructure for a product with limited market that only loses money. And again, if you want to give me some money, I'm going to put an ad break here. So after this, whatever comes next, buy it. Or don't if you don't want to, but really you should. If I'm speaking, if you hear my voice in the ad, then you you should buy it. Unless you don't want to.

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[Matt Osowski]

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[Matt Osowski]

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[Ed Zitron]

And we're back. Now I'm going to use a new term. I came up with this really really bad but the Fragile five, I call them Amazon, Google, Microsoft, Metro and Tesla, the ones investing all the money in the GPUs are holding up the US stock market by funding Nvidia's future growth story. And this is really the first big takeaway I want you to take from this three parter. To be clear, I'm not saying that any of the MAG7 are going to die, just that five companies spend on Nvidia GPUs largely dictate how stable the US stock market will be. If any of these companies, but especially Nvidia, sneeze your 401k and your kid's college fund will probably catch a cold. I realize this sounds a little simplistic, but by my calculations Nvidia's value underpins about 8% of the value of the US stock market at the time of writing, it accounts for roughly 7.5% of the S&P 500, an index of the 500 largest US publicly traded companies. A disturbing 88%, as I mentioned of Nvidia's revenue comes from enterprise scale. GPUs primarily used for generative AI, of which five companies spend, makes up over 42% of its revenue. In the event that any one of these companies makes significant changes to their investments in Nvidia chips, it will likely have a direct and meaningful negative impact on the wider economy and markets. Nvidia's earnings are effectively the US stock market's confidence and everything rides on five companies. And if we're honest here, really four companies as Tesla is 0.9% of the investment GPUs. Of those five companies buying GPUs for generative AI are to train their generative AI models. Worse still, these services, while losing these companies massive amounts of money, don't really produce much revenue, meaning that the AI trade is not driven by any real meaningful revenue growth. But Ed, Ed, they said, they said points of growth. Silence. Quiet. Nothing more out of you. Any of These companies talking about growth from AI or the jobs that AI will replace or how AI has changed their organization are hand waving to avoid telling you how much money these services are actually making them. If they were making good money and experience experiencing real growth as a result of AI, they wouldn't shut the up about it. They'd be in your ear and up your ass, hooting and hollering about how much cash they were rolling in. And they're not, because they're not rolling in cash. And they're in fact blowing nearly a hundred billion dollars each to build massive power hungry, costly data centers for no real reason. Don't watch the mouth, watch the hands. These companies are going to say they're seeing growth from AI, but unless they actually show you the growth and enumerate it, they are kind of lying. They're lying in the way that you're allowed to. But hey, Amazon Web Services took years to become profitable. People said AMAZ would fail. So this is one of the most annoying and consistent responses to my work. And it's when people say that either Amazon or Amazon Web Services ran at a loss and the Amazon Web Services, which pretty much was the invention of modern mass market cloud compute infrastructure for running stuff on the cloud, lost money and then didn't. Here's the thing, this statement is one of the things that people say because it sounds rational. Amazon did lose money and Amazon Web Services was expensive. That's right. Right. It's obvious. Right. The thing is, I've never really had anyone explain this point to me. So I finally sat down. I'm gonna deal with this criticism because every fucking person who mentions it thinks they just pulled Excalibur from the stone and can now decapitate me. They claim that because people in the past doubted Amazon because or in addition to the burn rate of the AWS systems as the company built out its infrastructure. That I too am wrong, because the analysts were wrong about that. This isn't Camelot. You're a rube. You are not King Arthur. And now I will address both the argument itself and the they part of it too. Because if the argument is that the people who got Amazon Web Services wrong should not be trusted, then we should no longer trust them. The people who actively propagandize something wrong, we shouldn't trust them. Right? Right. Well, you'll never guess who's now saying AI is good. Oh, I'm going to get there, don't you flipping worry. But if I'm honest, I'm not sure where this argument came from because there is, to my knowledge, no story about Amazon Web Services where somebody suggests its burn rate would kill Amazon. But I'm a curious little critter, so let's start with an obvious one. The obvious point. I want to give a shout out to Harry McCracken of Fast Company for bringing this one up to me. In May 31st, 1999, there was a piece that everybody is thinking of called Amazon Bomb and the writer Jacqueline Doherty was mocked soundly for being wrong about Amazon, which has now become quite profitable. The article, along with the other sources that form the basis of this episode, are going to be linked in the spreadsheet and as a. As a surprise, I'll actually update it. I also want to be clear that Amazon Web Services did not launch until 2006 and Amazon itself would become reliably profitable in 2003. Technically, Amazon had opened up Amazon.com's web services for developers to incorporate Amazon content into their applications in 2002. But what we consider Amazon Web Services today Cloud storage and compute launched in 2006. But okay, fancy pants, what did she actually say? We quote Doherty. Unfortunately for Bezos, Amazon is now entering a stage in which investors will be less willing to rely on its charisma and more demanding of answers to tough questions like when will this company actually turn a profit? And how will Amazon triumph over a slew of new competitors who have deep pockets and new technologies? We tried to ask Bezos, but he declined to make himself or any other executives at the company available. He could ignore Barrons, but he can't ignore the question banger line. By the way, Amazon last year posted a loss of $125 million, which is about 242.6 million in today's money on revenues of 610 million. So about $1.183 billion in today's money. And then this year's first quarter, referring of course to 1999 as the company posted a loss of 61.7 million, which is 119.75 million in today's money, on revenues of $293.6 million $569.82 million in today's money. I realized that was a real of a quote, but. But it's necessary. Her argument for the most part is that Amazon was burning cash and had a ton of competition from other people doing similar things and that analysts backed her up and they really did. By the way. Again, I quote, the first mover does not always win. The importance of being first is a mantra in the Internet world, but it's wrong. The ones that are the most efficient will be successful. Says one retail analyst. In retailing, anyone can build a great looking store. The hard part is building a great looking store that makes money. Which is a good point. Fair arguments for the time, though perhaps a little narrow minded. The assumption wasn't what Amazon was building. And we by the way are referring to Amazon.com the store was a bad idea, but that Amazon wouldn't be the ones to build it. And again we quote. Once Walmart decides to go after Amazon, there's no contest, declares Kurt Barnard, President Barnard's Retail Trend Report. Walmart has the resources that Amazon can't even dream about, which is true at the time, but. But in simpler terms, Amazon's business model was not in question. People were buying shit online. In fact, this was just before the dot com bubble burst when people had insane optimism about the future of the web. Yet the comparison stops there. People obviously like buying shit online. It was the business models of many of these web pioneers that sucked. I'm looking at you webvam, but we're gonna talk about Amazon Web Services and the less technical of you. I wanna explain something. AWS is a really important company. I'll kind of get into those details. But people like to argue about it and say, well, it lost a bunch of money. So, you know, that means that generative AI should lose a bunch of money too. And that's how it works. I'm going to substantively and repeatedly explain why that is so goddamn stupid. I'm sick of the argument. I'm sick of it. Breathe, Edward, breathe. They can't get you behind the microphone, okay? Amazon Web Services was an outgrowth of Amazon's own infrastructure, which had to expand rapidly to deal with the influx of web traffic from Amazon.com, which had become one of the world's most popular websites and was becoming increasingly more complex as it sold things other than books to multip international locations as well. Other companies had created their own infrastructure, but if a smaller company wanted to scale, they basically needed to build their own thing. It was a massive barrier between companies and building web services. And it's actually kind of cool what Amazon did. I hate to look rosy buying rose colored lenses. I don't know the phrase that Jeff Bezos, but I don't know. Remember this was early 2000s, before Facebook, Twitter and a lot of modern Internet. We know that runs on services like Amazon Web Services or Microsoft Azure or Google Cloud. They basically invented the modern concept of cloud Compute. But we're here to talk about Amazon web services being dangerous for Amazon and people hating on it. The thing that allegedly happened, right? I do hope all the people that said this to me didn't just make it up. Oh my God, they did. A November 2006 story from Bloomberg talked about Jeff Bezos risky bet to run your business with the technology behind his website saying that Wall street wanted him to mine the store Bezos referred to as a one time Internet poster boy that became a post.compinata. fuck, they were so good. But where is this piss and vinegar by the way? This is fun. Nevertheless, this article, which again is linked in the spreadsheet for the episode notes, has what I think my haters crave and I quote but if techies are wowed by Bezos grand plan, it's not likely to win many converts on Wall Street. To many observers it conjures up the ghost of Amazon past. During the dot com boom, Bezos spent hundreds of millions of dollars to build distribution centers and computer systems in the promise that they would eventually pay off with outsized returns. That helped set the stage for the world's biggest web retail operation with expected sales of $10.5 billion this year. All that has investors restless and many analysts throwing up their hands, wondering if Bezos is merely flailing around for an alternative to his retail operation. 11 of 27 analysts who follow the company have underperform or sell ratings on the stock, a stunning vote of no confidence. That number of sell recommendations is matched among large companies only by Quest Communications International Inc. According to investment consultant Starmind Corp. It's more than even the eight cell options on the struggling Ford Motor Company. Pretty bad, right? Pretty bad. My goose is cooked. All those analysts seem pretty mad. Except it's not. My goose is raw. Yours, however, has been in the oven for over a year. As one on a Scott W. De Vit noted at the time, the direct cost of providing Amazon web services at first were minuscule because much of the startup infrastructure already existed. It was surplus capacity. Amazon already owned software Amazon already used and Amazon was in it for the long haul. It knew that this would take some time before it became a profitable business unit as the company was basically scaling up the infrastructure of the Internet. And by the way, let's just go back to that quote here. The quote it says the costs were minuscule. The costs weren't the problem. Hey, wait a second. That's a name. Scott W. Duvid. I look him up. I wonder what he's up to right now. Oh, oh, looks like he's working at Wedbush as its managing director of equity research, has said that AI companies would enter a new stage in early 25, he said. Oh God, just listen to this. The second stage is the application phase of the cycle, which should benefit software companies as well as the cloud providers. And then phase three of this will ultimately be the consumer facing companies figuring out how to use the technology in ways that can actually drive increased interactions with customers. The analyst says the market will enter phase two in 2025, with software companies and cloud provider stocks expected to see gains. He adds that cybersecurity companies could also benefit as the technology evolves. I know I meant to be more mature, but De Vert also calls out Palantir, Snowflake and Salesforce as those who would gain. In none of these cases am I able to see any actual revenue from AI. Salesforce themselves said, according to the information, that they'd see no revenue growth from AI in 2025. Palantir also has, as discovered by the Autonomy Institute's recent study, recently added the following to its public disclosures There are significant risks involved in deploying AI, and there can be no assurance that using AI in our platforms and products will enhance or be beneficial to our business, including our profitability. What I'm trying to say here is that analysts can be wrong and they can be wrong at scale. There is no analyst consensus that agrees with me. In fact, most analysts appear to be bullish on AI, despite the significantly worse costs and total lack of growth. But Ed, Ed, Amazon Web Services cost money. Now you should meet your aunt. Nice try, chuckles. In 2015, the year that Amazon Web Services became profitable, Morgan Stanley analyst Katy Huberty believed that it was running at a material loss, suggesting that the $5.5 billion of Amazon's technology and content expenses was actually AWS expenses with a negative contribution of $1.3 billion. And by the way, want to know what she's up to nowadays? I wanted to know because six months ago she declared that 2025 would be the year of agentic AI, robust enterprise adoption and broaden winners. So yes, analysts really got AWS wrong. But putting that aside, there might actually be a comparison here. Amazon Web Services absolutely created the capital expenditure strain on Amazon. From Forbes is Chuck Jones in 2014, Amazon of $4.9 billion in capital expenditures, up 42% from 2013's $3.4 billion. The company has a wide range of items that it buys to support and grow its businesses, ranging from warehouses, robots and computer systems for its core retail business and aws. While I don't expect Amazon to detail how much government goes to aws, I suspect it is a decent percentage. Which means Amazon needs to generate appropriate returns on the capital deployed from AWS. In today's money, this means that Amazon spent $6.7 billion in capital expenditures in 2014, likely on AWS, assuming it was this much every year. It wasn't. But I want to make an example of every person claiming that this is a gotcha. It took $67.6 billion, and that's in today's money, and about nine or ten years of pure capital expenditures. Even though all that capex wasn't just AWB to turn Amazon Web Services into a business that now makes billions of dollars a quarter in profit. And that's $15.4 billion less than Amazon's capex for 2024 and even less than the $105 billion they spent this year. It's a fucking joke. And to be clear, the actual capital expenditure numbers are like the AWS cost in totality were likely much lower. I just want to make it clear that even when factoring in inflation, AWS was a a bargain and b a fraction of the cost of what Amazon has spent in 2024 or 2025. Here's a funny little thing. On March 30, 2015, New York magazine published a piece from none other than Mr. Kevin Roose about the cloud compute wars in which he claimed that, and I quote, there's no reason to suspect that Amazon would ever need to raise prices in AWS or turn the fabled profit switch that pundits have been spec for years. Less than a month later, Amazon revealed that Amazon Web Services was profitable. They don't call him the most ripe man in tech journalism for nothing. I think it's so funny when you go back and read all of Kevin Roose's stuff. How many just like rakes he steps on and how quickly they whammy him in the face and how no body says anything. I'm saying something, but here's the good news. We're at the end of this first part. Next episode we're going to continue exploring the comparison between AWS and generative AI and talk about why that comparison fundamentally doesn't work and why everything's kinda brittle. I'll catch you on the flip side. Thanks for listening. Thank you for listening to Better Offline.

[Matt Osowski]

The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio [e-mail] m a t t o s o w s k-I.com.

[Ed Zitron]

You can email me at ez betteroffline.com or visit betteroffline.com to find more podcast links and of course my newsletter. I also really recommend you go to.

[Matt Osowski]

Chat where's your ed to visit the.

[Ed Zitron]

Discord and go to R betteroffline to check out our Reddit.

[Matt Osowski]

Thank you so much for listening.

[Ed Zitron]

Better Off Learning is a production of Cool Zone Media. For more from Cool Zone Media, Visit our website coolzonemedia.com or check us out on the iHeartRadio app, Apple Podcasts or wherever you get your podcasts. Say you've always wanted to take a.

[Matt Osowski]

Spontaneous trip around the Caribbean. Here's the thing. If you get smart with your money, you can do things like that. With Empower you can start making the most of your money so you can go out and live a little. Isn't that why we work so hard, right? To have some fun with our money, like treating yourself to something special or spontaneously doing something extra for a loved one. So use Empower and get good at your money so you can be a little bad. Join their 19 million customers [e-mail] not an Empower client, paid or sponsored.

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[Ed Zitron]

Ah come on. Why is this taking so long? This thing is ancient. Still using yesterday's tech Upgrade to the.

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