As 2023 dawned, ChatGPT was gathering users at a phenomenal pace. First launched on 30 November 2022, the first ChatGPT offering was exciting and free. It set a blistering pace for the industry and soon had its competitors with Microsoft’s Co-pilot, Alphabet’s Bard, X’s Grok and Meta’s Llama amongst others. At the time, we called artificial intelligence (AI) a stardust that astute companies would sprinkle on their offerings to boost their fortunes.
The idea had been building for some time, as digital companies worked away at large language models. They wanted computers to understand spoken and written language from their users. The services they launched were a more sophisticated fast search of the vast digital data banks, allied to a capacity to analyse, select and write a convincing reply to a user’s query.
Many students leapt at the opportunity to get a first cut of their essay with little effort. Some in marketing and PR saw welcome assistance in drafting an article or press copy. Researchers saw a chance to hitch a ride on the computer’s vast reserves of data and copy written by others and safely stored for adaptation and use.
Today, every major business needs to assess what use it can and should make of the range of new services that are grouped under the loosely-defined heading of AI. Much of the resulting investment in better computers and more training will be incremental and will adapt contracts and actions that are already commonplace. As more customers use the web and mobile phones to find out information about products and services and to buy and pay for them, so companies need to make more use of intelligent computing capable of handling customer queries and sensitivities through a computer portal.
The stock market winners
Technology stocks were due a rally in 2023. They had been badly hit by the big increase in interest rates from the historic lows the previous year as market analysts argued they should be on lower multiples of profit as safer investments in deposits and short-term bonds offered ever-better returns.
There was also the danger of slower growth from these titans the larger they became – and the more economies were slowed or tipped into downturns by the aggressive tightening of money and credit from the leading central banks. As 2023 advanced, so markets started to look forward to peak interest rates and likely falls this year, and saw that growth by the majors was good. AI intelligence was a story which helped boost activity and receipts.
Just as mining booms can be good for the providers of picks and shovels, so AI growth has been good for the providers of electronic chips. Nvidia became the poster company of the AI revolution as the company capable of producing the high-powered, sophisticated chips that the AI revolution needs in large numbers. Nvidia could both expand turnover substantially and impose firm pricing as customers queued for availability. The company’s most-recent results lived up to expectations of great growth.
AI uses also require ever more data in storage and large amounts of processing power as people seek to access and use that data in intelligible and helpful forms. Amazon Web Services alongside the other digital giants has spent large sums in acquiring warehouse space and installing large data centres. Revenues from selling this computing capacity in the Cloud have been growing very quickly. Every family that wants to keep more photos in an electronic album, every company that wants to keep more customer and accounting data, every entertainment business that wants to offer more films requires more storage space in the cloud. Cloud driven success has been an important boost to the digital giants.
Over the last year, Microsoft, Amazon, and Alphabet shares are up by 40-60%. Nvidia has almost trebled in valuation and Meta has recovered strongly from big falls in 2022 when people worried about its metaverse strategy.
What are the business models of these companies?
One of the core reasons for the success of the leading technology companies has been their approach to pricing. Services people want – including Google Search, YouTube videos and a basic AI capability – are offered free to the public. Businesses and those wanting an enhanced service need to pay.
Alphabet and Meta have gone for growing revenues from advertising, taking much of the advertising previously going to terrestrial TV and newspapers. Microsoft has a strong revenue base from business users. It charges a regular subscription to many. Some products are supplied with a one-off cost for the Microsoft software built into the total package price. Amazon Web Services monitors use of storage and processing facilities and charges for usage. There is a free tier to its offering. It has proved a good tactic to offer free services and then move the retail customer on to paying for a better result.
We have probably seen the best of the surge in revenues and share prices.
Microsoft has emerged as the world’s largest quoted company as measured by the market value of the share capital. This reflects its strong position in digital services in general and AI in particular. Microsoft has a very long client list already with so many people and companies using Microsoft software. Opportunities for selling more service to existing users are high. Many businesses carrying out a review of their needs against a background of computers doing more through AI will simply come to rely more on Microsoft as their incumbent supplier.
Microsoft’s description of its offering as providing each business with a co-pilot on the business flight path is a well-chosen pitch. It seeks to reassure business owners and employees that AI is a friendly assistant, not a threat to their jobs and their control. Amazon too is building strong client lists for its web services and also has a charging model which allows them to collect more revenue from providing more service.
We have probably seen the best of the surge in revenues and share prices from the shock of the new over the last year. AI, in its widest sense, will bed down as part of everyday life and as an important part of how companies go forward improving their offerings. More businesses will become increasingly dependent on the technology giants for so much of what they do. Their data will be lodged in the cloud, they will rely on computing power in the cloud to process more of it, and they will work in tandem with their technology providers over business systems.
The dominance of the three AI leaders is based on their control of cloud capacity and their long lists of businesses already signed up their services. They are currently enjoying great growth from these developments. The companies will experience some slowing of growth as the market matures – and will probably face more regulatory enquiries into their pricing and controls over service and content.
There will be substantial competition between the leaders as they seek to get bigger market shares to enjoy more of the economies of scale. The leading companies will keep an eye open for new challengers, often offering collaborative development or bidding for them to capture their breakthroughs where this comes from smaller companies.
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