The intense excitement surrounding artificial intelligence (AI) has kept anticipations soaring high. However, the recent financial reports have failed to meet these expectations. The year 2024 is poised to be a critical period of assessment.
Authored by Elizabeth Lopatto, a seasoned journalist specializing in technology, finance, and human psychology, known for her contributions to The Verge since 2014 and her previous work at Bloomberg.
The AI hype, arguably initiated by OpenAI’s ChatGPT, has escalated significantly: investors and corporate leaders hold exceedingly lofty hopes for the potential of this technology. Yet, the greater the expectations, the easier it becomes to fall short. Consequently, 2024 is anticipated to be a pivotal year for AI, as businesses focus on the practical capabilities of the technology at present.
According to the Gartner hype cycle, following the peak of exaggerated expectations comes the phase of disappointment. This was evident in the recent financial results of tech giants like Microsoft and Alphabet, the parent company of Google. While Alphabet reported robust quarterly earnings with revenue exceeding $86.2 billion, a 13% increase from the previous year, its stock plummeted by over 7% the following day. Similarly, Microsoft observed a 33% rise in net income, yet its shares dipped by 2%.
The investors’ outlook was not just positive; it bordered on perfection. The tech industry has been thriving, with major players such as Nvidia, Meta, Amazon, Tesla, Apple, Microsoft, and Alphabet outperforming the market last year. However, the returns on AI investments have not been as lucrative as anticipated.
The heightened expectations within the business community stem from the relentless AI hype of the past few years, with analysts touting AI as a transformative force comparable to the introduction of electricity.
“We’ve witnessed a rapid escalation in enthusiasm,” remarks Mark Shmulik, an analyst at Bernstein. Some investors and analysts have drawn parallels between AI and the early days of the internet, placing immense pressure on AI companies. However, past experiences with cycles like crypto and the metaverse have been short-lived.
The widespread interest in AI tools across various industries is undeniable. Bret Greenstein from PwC notes that while the adoption of AI is still in its infancy across the board, business leaders anticipate substantial enhancements in product and service quality through generative AI, as indicated by PwC’s annual survey. The report also underscores a critical juncture for AI trust, warning that failures to deliver on promised productivity gains could have severe repercussions, as evident from the recent earnings reports.
The initial sectors poised for widespread AI adoption are likely to be IT-related, particularly in software development, customer service, and back-office operations like form processing. Microsoft’s Copilot, dubbed the “AI companion,” serves as a barometer for the overall industry. Adam Niewinski, a partner at OTB Ventures, highlights Microsoft’s leadership in this space, emphasizing their strategic partnership with OpenAI, which allows them to leverage development resources effectively.
Microsoft’s proactive approach sets the stage for a positive feedback loop, where user engagement drives training data quality, leading to further user adoption. Observing the adoption of Copilot could offer insights into the broader implementation of AI, suggests Brendan Burke from PitchBook. The key lies in assessing whether Copilot genuinely aids developers or merely serves as a distraction.
Despite the potential, the efficacy of Copilot remains uncertain. While AI failed to significantly impact Microsoft’s Bing search engine market share, the company is still exploring optimal use cases for Copilot. The evolution of Copilot from GitHub to sales products and eventually Microsoft Office apps reflects this ongoing quest for a breakthrough application.
The cost of AI is substantial, exemplified by OpenAI’s financials, with an annualized run rate of $2 billion as of December 2023. Despite generating significant revenue, OpenAI operates at a loss and may require substantial additional funding, according to the Financial Times. Sam Altman, OpenAI’s CEO, aims to secure trillions of dollars in investments to revolutionize the chip industry, while the growth of ChatGPT has stagnated.
In an era of diminishing interest rates, tech giants could allocate vast resources to experimental projects. However, the current climate prioritizes profitability over unchecked spending, posing challenges for ambitious AI initiatives. As Google trims costs and investor scrutiny intensifies, the sustainability of projects like Gemini, Google’s AI initiative, remains uncertain compared to established players like ChatGPT.
The tightening of investment flows, particularly in the AI sector, signals a shift in VC priorities, with caution prevailing in funding decisions. Concerns around tech antitrust further complicate acquisition prospects, with potential regulatory hurdles hindering large-scale deals in the AI space.
Despite the compelling value proposition offered by AI companies, actual adoption and profitability may lag behind expectations. Microsoft’s Copilot, for instance, has faced slower uptake than anticipated, prompting adjustments in subscription requirements. The transition to outcome-based pricing models from premium pricing reflects the industry’s evolving commercialization strategies, aiming to align incentives with tangible results.
The efficacy of AI tools hinges on their ability to deliver measurable outcomes and operational efficiency. As AI applications evolve, the focus on tangible results may mitigate potential disillusionment and pave the way for sustainable growth in the AI sector. However, the road ahead is fraught with challenges, requiring a delicate balance between innovation and practical utility to realize the full potential of AI technologies in 2024 and beyond.
