Pod Insights Better Offline The Hater's Guide To The AI Bubble, Pt. 1 About this episode In part one of this week's three-part Better Offline, Ed Zitron walks you through how the US stock market rests on the back of GPU sales, and how a lack of any real business returns spells doom for the AI bubble long-term.
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0:39 Speaker 01 Every small business owner has that one moment that could have broken them, but remarkably, it didn't. Hi, I'm Kathleen Griffith, co-host of The Unshakeables, along with Stevie Barron, CEO of Chase for Business. We have more incredible stories of overcoming the impossible still to come in season three. Listen to The Unshakeables wherever you get your podcasts and learn more at chase.com/podcast. JPMorgan Chase Bank, N.A., member FDIC. Copyright 2026 JPMorgan Chase and Company.
1:18 Speaker 02 Call Zone Media.
1:20 Ed Zitron? Hello and welcome to Better Offline. I'm your host, Ed Zitron.
1:35 Ed Zitron? Check out the episode notes. Got wonderful merchandise and completely separate to the podcast, got a wonderful newsletter, Where's Your Ed dot 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
2:18 Ed Zitron? 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 as 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.
3:00 Ed Zitron? 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.
3:44 Ed Zitron? 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 or because I'm jumping to the next trend. No, I've been railing against bullshit bubbles 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 panic, and even, 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.
4:28 Ed Zitron? Not at all. It's the kind of skepticism of power and capital that's necessary to meet these moments. And 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. In short, 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 says before doing three episodes on it. But this isn't going to be some saccharine whiny or simply worrisome 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
5:13 Ed Zitron? 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 bold-faced fucking lie that it's actually happening, 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 guide, but something you can listen to and say, oh, that's why the AI
5:57 Ed Zitron? 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 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. And 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
6:41 Ed Zitron? 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 sea situation in January, which sent it tumbling to a brief late April trip below $100 before things turned around. The Mag7 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 eight to nine percent 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
7:23 Ed Zitron? 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 Branton 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 Branton notes, Microsoft also spends money renting servers from CoreWave, which analyst Guild 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 CoreWave and Crusoe that exist only to
8:06 Ed Zitron? 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 so 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 buy consumer graphics cards?" I
8:50 Ed Zitron? don't fucking know mate, I'm just here to talk about enterprise bullshit. Okay, not really enterprise, but enterprise scale GPUs. We're getting off track. Analyst estimated it would make, it would make thirty nine point four billion dollars from the data center category and Nvidia only, only, I know pathetic amount, brought in thirty nine point one billion dollars. 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 uh, 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 sixty nine percent to fifty nine percent to twelve percent,
9:35 Ed Zitron? to twelve percent again, he, quarter over quarter, which again, isn't bad, it's pretty great in fact. But when eighty eight percent 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, so, but I'm gonna 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 forty two percent of revenue, 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.
10:21 Ed Zitron? 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 an analysis from portfolio manager Danke Wang from January twenty twenty five, that found that the magnificent seven stocks accounted for forty seven point eight seven percent of the Russell one thousand indexes returns in twenty twenty four, and that's an index fund of the hu- thousand highest ranked stocks on the FTSE Russell Index, which in simpler terms
11:02 Ed Zitron? means thirty five percent 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 Seven too, making them rely on their own AI trade stories. And you know it, when you flip and 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, which is why you need to listen to the following advertisement. It's the only one of these bloody things you're gonna get. Here's an ad.
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12:44 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 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 two thousand and twenty five.
13:27 Ed Zitron? Now, as of January two thousand and twenty five, Microsoft's annualized revenue, meaning best month times twelve, from artificial intelligence was thirteen billion dollars, 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 come got earnings coming up, maybe they'll be good news. Yet the problem with this revenue is that ten billion dollars 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 the information here, at a heavily discounted rental rate that essentially only covers Microsoft's costs for operating the servers. That's not good, right?
14:08 Ed Zitron? Like, it's not good, it's not good that seventy six point nine percent 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 three billion dollars or about three point seven five percent of this year's capital expenditures, or sixteen point two five percent if you count OpenAI's revenue, which costs Microsoft likely more money than it earns. The information also reports that Microsoft made four point seven billion dollars in AI revenue in two thousand and twenty four, of which OpenAI accounted for two billion dollars, meaning that for the one hundred and thirty five point seven billion dollars that Microsoft has spent in two years in AI infrastructure,
14:47 Ed Zitron? it's made seventeen point seven billion dollars, of which OpenAI was twelve point seven billion dollars. 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 one hundred and five billion dollars in capital expenditures this year, will make five billion dollars in AI in two thousand and twenty five, rising, and I quote, as much as eighty percent, suggesting that Amazon might have made a measly two point seven seven billion dollars in two thousand and twenty four on AI in a year when it spent eighty three billion dollars 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 and opportunity in business since the internet." I personally think he is full of shit.
15:33 Ed Zitron? And it's a similar story over with Google, which plans to spend seventy five billion dollars in CapEx two thousand and twenty five.
15:40 Ed Zitron? 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 in 2025 revenue would work out to $258 million a month,
16:22 Ed Zitron? 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 a 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's services to run their businesses, my arse 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.
17:05 Ed Zitron? 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 that 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 Meta is saying they make due to a copyright infringement case, Cardrey versus Meta. Unsealed judgment briefs revealed in April that Meta is claiming that gen-AI-driven revenue
17:46 Ed Zitron? will be more than $2 billion in this year, with estimates as high as $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 of the... 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 with the companies in question redacted. Mr. Max Zeff of TechCrunch adds that Meta lists host partners like Amazon Web Services, Nvidia,
18:30 Ed Zitron? Databricks, Grok, Dell, Microsoft as your, 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 fruit? And Jesus Christ, Jesus Christ, when I read these numbers, I just... When I read about these people, it drives 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.
19:13 Ed Zitron? 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 Seven 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 ex-AI, the company that develops racist large language model Grok and owns what remains of Twitter, apparently burns $1 billion a month. And the information reports that it makes a whopping $100 million of annualized revenue, so about $8.33 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
19:55 Ed Zitron? 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 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
20:38 Ed Zitron? 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 a 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 should buy it, unless you don't want to.
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22:23 Ed Zitron? And we're back. Now, I'm going to use a new term I came up with that's really, really bad, but the fragile five, I call them. Amazon, Google, Microsoft, Meta, 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 mag seven 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.
22:58 Ed Zitron? 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.
23:39 Ed Zitron? 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 or to train that generative AI models, while 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.
24:01 Speaker 04 But Ed, Ed, Ed!
24:04 Ed Zitron? 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 experiencing real growth as a result of AI, they wouldn't shut the fuck 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.
24:48 Ed Zitron? They're lying in the way that you're allowed to. But it, it, Amazon Web Services took years to become profitable. People said Amazon 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 that 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 going to deal with this criticism because every fucking person who manages it thinks they just pulled Excalibur from the stone and can now decapitate
25:33 Ed Zitron? 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 flip and worry. But if I'm honest, I'm not sure where this argument came from.
26:17 Ed Zitron? 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, May 31st, 1999, there was a piece that everybody is thinking of called "Amazon dot barmen". 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.
27:00 Ed Zitron? 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 of the company available. He could ignore Barron's, but he can't ignore the questions." Bang a line, by the way.
27:40 Ed Zitron? "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 realise that was a real motherfucker of a quote, 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.
28:25 Ed Zitron? 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 Cart Bernard, President Bernard's Retail Trend Report. "Walmart has the resources that Amazon can't even dream about." Which is true at the time, 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
29:10 Ed Zitron? about the future of the web. Yet the comparison stops there. People obviously liked buying shit online. It was the business models of many of these web pioneers that sucked. Looking at you, Webvan. But we're going to talk about Amazon Web Services, and the less technical of you, I want to 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.
29:46 Ed Zitron? Breathe, Edward. Breathe, they can't get you behind the microphone.
29:51 Ed Zitron? 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 multiple 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-eyed behind rose-colored lenses. I don't know the phrase at 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.
30:35 Ed Zitron? They basically invented the modern concept of cloud compute. But we're there 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 mind the store. Bezos referred to as a one-time internet poster boy that became a post.com pinata. 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.
31:19 Ed Zitron? 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."
31:43 Ed Zitron? 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. Eleven of 27 analysts who follow the company have underperformed 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 Starmine Corp. It's more than even the eight sell 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 analyst, Scott W. DeVitt noted at the time, "The direct costs of providing
32:24 Ed Zitron? Amazon Web Services at first were miniscule, 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 says, "The costs were miniscule." "The costs weren't the problem." Hey, wait a second, that's a name, Scott W. DeVit. I can 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
33:05 Ed Zitron? and has said that AI companies would enter a new stage in early 25. He said, oh, oh, God, just listen to this. Um, "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."
33:39 Ed Zitron? I know I'm meant to be more mature, but DeVit 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 lack, total lack of growth.
34:23 Ed Zitron? But Ed, Ed, Amazon Web Services costs money, Ed. Now you should meet your end. Nice try, chuckles. "In 2015, the year that Amazon Web Services became profitable, Morgan Stanley analyst Catty 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, wanna know what she's up to nowadays? I wanted to know because six months ago she declared that 2025 would be the year of a Gentic AI reborn. State enterprise adoption and broadening AI winners. So yes, analysts really got AWS wrong, but putting that aside, there might actually be a comparison here. Amazon Web Services absolutely created a capital expenditure strain on Amazon.
35:08 Ed Zitron? From Forbes's 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. Well, I don't expect Amazon to detail how much 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.
35:50 Ed Zitron? It took $67.6 billion, and that's in today's money, and about nine or 10 years of pure capital expenditures, even though all that capex wasn't just AWS, 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.
36:35 Ed Zitron? Here's a funny little thing. On March 30th, 2015, New York Magazine published a piece from none other than Mr. Kevin Roos 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 profits which the pundits have been speculating about for years." Less than a month later, Amazon revealed that Amazon Web Services was profitable. They don't call him the most right man in tech journalism for nothing. I think it's so funny when you go back and read all of Kevin Roos's stuff, how many just like rates he steps on and how quickly they whammy him in the face and how nobody 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
37:20 Ed Zitron? and talk about why that comparison fundamentally doesn't work and why everything's kind of brittle. I'll catch you on the flip side. Thanks for listening.
37:36 Ed Zitron? Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio projects at mattosowski.com. M A T T O S O W S K I dot com. You can email me at [email protected] or visit betteroffline.com to find more podcast links and of course my newsletter. I also really recommend you go to chat dot where's your ed dot app to visit the Discord and go to r slash better offline to check out our Reddit. Thank you so much for listening.
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