Goldman's Report on Generative AI

July 9, 2024

The recent Goldman Sachs report on generative AI is a must-read. Jim Covello's analysis stood out to me.

When asked "You haven’t bought into the current generative AI enthusiasm nearly as much as many others. Why is that?" Covello responded, in part, as follows.

My main concern is that the substantial cost to develop and run AI technology means that AI applications must solve extremely complex and important problems for enterprises to earn an appropriate return on investment (ROI).

We estimate that the AI infrastructure buildout will cost over $1tn in the next several years alone, which includes spending on data centers, utilities, and applications. So, the crucial question is: What $1tn problem will AI solve?

Replacing low wage jobs with tremendously costly technology is basically the polar opposite of the prior technology transitions I’ve witnessed in my thirty years of closely following the tech industry.

"What $1tn problem will AI solve?"

Many people attempt to compare AI today to the early days of the internet. But even in its infancy, the internet was a low-cost technology solution that enabled e-commerce to replace costly incumbent solutions. Amazon could sell books at a lower cost than Barnes & Noble because it didn’t have to maintain costly brick-and-mortar locations. Fast forward three decades, and Web 2.0 is still providing cheaper solutions that are disrupting more expensive solutions, such as Uber displacing limousine services.

While the question of whether AI technology will ever deliver on the promise many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do.

He added:

The big tech companies have no choice but to engage in the AI arms race right now given the hype around the space and FOMO, so the massive spend on the AI buildout will continue.

This is not the first time a tech hype cycle has resulted in spending on technologies that don’t pan out in the end; virtual reality, the metaverse, and blockchain are prime examples of technologies that saw substantial spend but have few—if any—real world applications today.

And companies outside of the tech sector also face intense investor pressure to pursue AI strategies even though these strategies have yet to yield results. Some investors have accepted that it may take time for these strategies to pay off, but others aren’t buying that argument.

Case in point: Salesforce, where AI spend is substantial, recently suffered the biggest daily decline in its stock price since the mid-2000s after its Q2 results showed little revenue boost despite this spend.

In addition MIT professor Daron Acemoglu finds, regarding gen AI:

. . . total factor productivity effects within the next decade should be no more than 0.66% — and an even lower 0.53% when adjusting for the complexity of hard-to-learn tasks. And that figure roughly translates into a 0.9% GDP impact over the decade.

The report also includes very fascinating analyses of infrastructure needs including a ballooning of electricity demand, requiring a revamp of the grid. (See page 3, then skip to page 15 on.)

"Expanding the grid is no easy or quick task."

See: Gen AI: Too Much Spend, Too Little Benefit?