By Nathan Hunt
2022 looked to be a grim year for technology’s titans. The cloud business that had kept margins chunky was beginning to show signs of softness. Valuations predicated on future growth were being questioned. Gravity was returning to the weightless environment of big tech. Then on November 2022, a nonprofit with an unusual governance structure called OpenAI announced the release of a new model called ChatGPT.
Whether generative AI will become a paradigm-bending technology like the internet remains an open question. S&P Global Ratings forecasts that global IT spending will remain at 8% for 2024. Enterprise IT continues to spend on cloud transitions, but other expenditures have been under tighter scrutiny.
At a superficial level, significant amounts of money are being spent on AI technology. S&P Global Ratings projects that global AI spending will grow into the high-20% area through 2028 when it will be 14% of total global IT spending, up from 6% in 2023. But the current spending is mostly capital outlays on AI datacenters from hyperscalers that anticipate that their large corporate customers will soon be in the market for generative AI offerings.
Capital expenditure has jumped for Amazon, Microsoft and Google. Spending on property, plant and equipment net of depreciation has increased 183% for Amazon, 75% for Alphabet and 164% for Microsoft since 2019, according to S&P Global Market Intelligence. Building out these datacenters has created a huge jump in demand for the high-end chips used in AI applications and an explosive growth in memory prices. S&P Global Ratings projects that US hyperscale spending will increase in the mid-40% area for the year, compared to a previous estimate of about 30%.
The big tech companies believe that a market exists for the AI capabilities they are building out at such a huge cost. In quarterly earnings calls, Amazon, Microsoft and Alphabet touted their AI credentials and plans to invest ahead of an expected market shift enabled by large language models. Despite experiencing slower growth in the face of economic uncertainty, they are spending aggressively on developing large language models and associated tools, delivered through a cloud platform.
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By GlobalData“If you look at the really significant leading large language models, they take many years to build and many billions of dollars to build,” Amazon CEO Andy Jassy said during a 2023 earnings call.. “And there will be a small number of companies that want to invest that time and money, and we’ll be one of them.”
