GoKawiilEverything I read about the AI industry leads me to think there will be an AI crash. Consider the following:
Unsustainable Capital Expenses . It’s hard to imagine there can ever be enough revenue to pay for the huge capital investments in data centers and electronics. Several analysts have estimated that it will take $2 trillion a year in revenue to pay for the infrastructure that has already been built, and there are no believable forecasts for generating even half that much revenue. The capital needs of the industry are relentless since expensive AI data center electronics have to be replaced within five years, or less.
. It’s hard to imagine there can ever be enough revenue to pay for the huge capital investments in data centers and electronics. Several analysts have estimated that it will take $2 trillion a year in revenue to pay for the infrastructure that has already been built, and there are no believable forecasts for generating even half that much revenue. The capital needs of the industry are relentless since expensive AI data center electronics have to be replaced within five years, or less. Circular Revenues . A small handful of tech firms, chip manufacturers, and AI companies are propping each other up by investing and buying from each other. If one stumbles, they might all fall.
. A small handful of tech firms, chip manufacturers, and AI companies are propping each other up by investing and buying from each other. If one stumbles, they might all fall. Huge Debt . Much of the industry is being funded through debt, which has to eventually be repaid, instead of through equity.
. Much of the industry is being funded through debt, which has to eventually be repaid, instead of through equity. Public Pushback . Local governments and people are increasingly pushing back hard against the creation of new data centers. Most new technologies have been welcomed by the public with open arms.
. Local governments and people are increasingly pushing back hard against the creation of new data centers. Most new technologies have been welcomed by the public with open arms. Increasing Corporate Skepticism . The news is full of stories of corporations that are throttling the employee use of AI since the costs to use the software are a lot higher than expected. There are many companies having second thoughts about replacing people with AI. The AI industry needs complete corporate buy-in to have any chance of succeeding, and large companies are generally still on the sidelines.
. The news is full of stories of corporations that are throttling the employee use of AI since the costs to use the software are a lot higher than expected. There are many companies having second thoughts about replacing people with AI. The AI industry needs complete corporate buy-in to have any chance of succeeding, and large companies are generally still on the sidelines. Diseconomies of Scale . Every new technology I can think of thrived, in part, due to economies of scale, where the larger the industry grew, the more efficient it got. AI is going in the opposite direction, where every new AI model consumes more resources than its predecessors. This may turn out to be the fatal flaw – the bigger the industry gets, the more its operating costs increase.
. Every new technology I can think of thrived, in part, due to economies of scale, where the larger the industry grew, the more efficient it got. AI is going in the opposite direction, where every new AI model consumes more resources than its predecessors. This may turn out to be the fatal flaw – the bigger the industry gets, the more its operating costs increase. Institutional Warnings. Moody’s recently warned that high AI infrastructure spending threatens the credit of AI companies and their large tech partners. I read recently that the number one question being fielded by investment advisors is people asking how to divest from AI.
I don’t have a crystal ball to foresee the nature of the crash. It could be a total crash like the 2000 tech crash, where four out of five tech startups disappeared practically overnight. I lived in the DC area at the time, and I will never forget the rows of abandoned CLEC headquarters buildings in Northern Virginia. A crash could be milder, where a few firms disappear, with the outlooks for the survivors greatly diminished, and industry expectations are reset to something more realistic.
The reason I wrote the blog is to speculate about what happens after an AI crash. I foresee some of the following consequences of an AI crash.
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