In years to come, we might look back at this period in tech as one in which the entire industry was in the grip of a mass delusion, namely the idea that artificial intelligence would prove to be good for business. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏
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In years to come, we might look back at this period in tech as one in which the entire industry was in the grip of a mass delusion, namely the idea that artificial intelligence would prove to be good for business. Of course, it’s still early days. But so far, AI has proven lucrative primarily for the companies involved in making and selling AI chips and the servers they power—Nvidia, TSMC and Dell. For many others, it’s a money pit. We previously knew that was true of OpenAI, but a new example is Oracle, a software firm whose tiny cloud business is growing like gangbusters—at a cost to Oracle's fat profit margins. (The report sent Oracle stock tumbling as much as 5%, dragging down the overall market.)
As our story today revealed, Oracle earned a gross margin of just 14% on renting out servers powered by Nvidia chips in the three months ending with August. The company’s overall gross margin is closer to 70%. Seeing as Oracle has projected that AI cloud rental revenue will balloon through 2030, likely becoming its major source of revenue, its overall margins have to fall. And this issue isn’t just a problem for Oracle. Nvidia chips are expensive, and all the cloud firms that rent Nvidia-powered servers are suffering the impact. They might be generating AI cloud revenue, but profits in line with what they're used to? Fuhggedaboutit. (Catch our reporters talking about Oracle’s margins on The Information’s TITV today).
Meanwhile, we’ve seen precious little evidence that AI is a profitable business for those using the servers to sell AI apps or those developing AI models. The cost of AI models weighs on all AI-powered applications, although those costs have come down over time. Coding assistants, for instance, aren’t exactly high margin. We’d bet that’s true of other AI apps, whether they’re run by big companies or startups, although we don’t really know. Few of the big public companies have said much about the revenue they’re getting from AI apps, let alone the profits.
What we do know is that businesses aren’t yet sure if the benefits of AI services are worth what tech firms want to charge for them. Attendees at our AI Agenda Live conference last week predicted it would take several years for businesses to adopt AI broadly. One theory is that AI will automate many jobs, saving companies lots of money. General Catalyst CEO Hemant Tanjea told The Information’s TITV last month that ”companies that effectively diffuse AI into their overall operations…will have fewer people than they do today.” OK, but isn’t there a danger that so many people are automated out of their jobs that the consumer market for goods and services shrinks?
SUVs or Robots?
Here’s a question for Tesla investors: Would you rather CEO Elon Musk spend his time making an affordable mass-market sports utility vehicle that can help the company defend its lead in the electric vehicle market, or obsessing over a humanoid robot he claims will eventually eclipse the auto business entirely?
If you prefer the latter, you’re in luck. As I reported today in a deep dive on Tesla’s humanoid robot, known as Optimus, Musk is spending a lot of his time focusing on the finer details of humanoid robotics, including the intricacies of replicating the human hand, which Tesla is struggling to do. Musk has been more focused on Optimus over the past 18 months since killing Tesla’s plans for a $25,000 SUV in early 2024.
Also today, Tesla revealed its apparent replacement for that $25,000 SUV: a new Standard edition of its existing Model Y SUV, which will sell for $40,000 in the U.S. That’s just $5,000 less than the existing two-wheel-drive version of the Model Y, which Tesla has renamed the Premium edition. The Standard Model Y comes with 36 fewer miles of range, a lower-quality sound system, cheaper interior finishes, and heated seats only in the front rather than the entire vehicle, among other downgrades. And the price point isn’t likely to blow anyone’s socks off—it’s pricier than Hyundai’s electric Kona SUV, which sells in the U.S. for $33,000, or Chevrolet’s electric Equinox SUV, which starts at $35,000.
What’s perhaps most telling is that Musk doesn’t seem very excited about the new Model Y, which he didn’t unveil in the kind of spectacular media event he usually has for new products. Instead, Tesla revealed the new Model Y, as well as a cheaper version of the Model 3, in a one-minute video on X. Tesla investors weren’t enthused either—shares closed down 4% on Tuesday.—Theo Wayt
In Other News
• Semiconductor giant Qualcomm announced Tuesday that it will acquire Arduino, an Italian electronics company known for its affordable circuit boards, which are popular with hobbyists.
• Intercontinental Exchange, owner of the New York Stock Exchange, will invest up to $2 billion in Polymarket, a prediction market.
• Soaring debt levels at companies funding the artificial intelligence boom have passed notable benchmarks, Goldman Sachs and JPMorgan Chase both said this week, marking a note of caution as tech companies increasingly turn to the credit markets to support the costs of developing AI.
• Dell doubled its forecast annual revenue growth rate, to between 7% and 9%, and doubling its earnings growth rate to at least 15%, as it cashes in on the demand for AI chip-powered servers.
Today on The Information’s TITV
Check out today’s episode of TITV, where we talk to Runway CEO and cofounder Cristobal Valenzuela about AI copyright issues.
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