It Finally Happened: The AI Bubble Burst

 

Eder Pozo Pérez

Since 2022, Americans could hardly google search a quick question without being given an AI summary. AI image generators were creating copyright controversies questioning whether they were infringing on artists’ copyright or had enough of a human touch to be worthy of being copyrighted themselves. ChatGPT was in everybody’s mouths and sometimes were some people’s mouths. Tech Companies and investors were throwing money at any proposal that mentioned AI to grab market share and avoid missing out on the brand-new technology. It didn’t matter that AI was expensive and difficult to convince people to pay for. What mattered was making it bigger and better to ride the wave, so they don’t miss out on the rise of smartphones or streaming. It was an all-you-can-eat buffet, where every variety of AI technology that nobody asked for could suddenly appear as a shiny button or notification to see what can stick.

Then the bubble went pop. The Nasdaq plummeted as every top company had money in some form of AI. AI went from threatening to replace everybody’s job to simply erasing them in recession. Many pioneering AI implementations are out of business or barely surviving. Virtually every single index fund, including the safest most blue chip filled ones, is down 72% as many realized their diversified portfolios were actually all in on AI technology. OpenAI and Midjourney, both former industry leaders, saw their capital plummet 99% from their peak.

Unlike the concerning decline in famous tech stocks that simply implemented AI features like Alphabet or Apple from a rise in wasted expenses, the sharp plunge of AI model companies that didn’t make any profits for their clients and consumers proved to be a source of comfort for those that believed in classic market principles like profitability over the more recently popular long term growth model that many in the tech industry preferred. Even the most traditional brokers and investments banks ignored their initial instincts that a company’s stock prices should reflect its profits and urged investors to not miss out on the next big thing.

The current despair in the AI industry may be as overrated as it’s growth. AI is a revolutionary technology that has changed how many seek out information, read, translate, write, and more. What recent months suggest though, is that it may not be a magical new means of making money.

Failure to capitalize on revolutionary new technology by venture capitalists is not new. The advent of social media, Television, Bitcoin mining, and other get rich quick investments have also led to many a shattered ream. The number of failed NFT collectors far exceeded the number that succeeded.

From a novelty viral sensation in 2022 to a universal feature in all thing’s software, Americans can hardly search a quick question without an accompanying generative AI summary. From language models, image generation, to even video and audio, AI has spread to all creative vectors possible, and leaving a wake of copyright controversies both for the creators of its scrapped training data and its own output. Within months of its release, ChatGPT was in everybody’s mouth and soon after were many people’s mouths. Tech Companies and investors were throwing money at any proposal that mentioned AI, cutting a slice of whatever market share they can get in the brand-new technology. It didn’t matter that AI was expensive to run and difficult to break even let alone make a profit. What mattered was making it bigger and better before getting left behind and missing out on the next sensation like they did for smartphones and streaming. An all-you-can-eat buffet, where every variety of software can have its own generative AI technology that nobody asked for, but served on silver buttons and notifications to see what would stick.

Then pop the bubble went. The NASDAQ plummeted as every top company had money in some form of AI. Within days, AI went from threatening to replace everybody’s job to simply erasing jobs via recession. Many generative AI companies and the data centers they built crumbled or barely left standing. Virtually every index fund, from the most experimental to the safest blue chip are down almost 72% as shocked investors discovered their diversified portfolios were actually all in on AI technology. OpenAI and Midjourney, both former industry leaders, saw their capital plummet 99% from their peak as the well dried up.

Despite the concerning decline in renowned tech stocks such as Alphabet or Apple that simply implemented AI features and simply had a rise in wasted expenses, the execution of the companies that made the AI models themselves without any profits for clients and consumers are a breath of fresh air to those that believed in classic market principles. Profitability proved to still be a better sign of a company’s future success than the more popular long-term growth model that the tech industry has preferred. Even the most traditional brokers and investment banks ignored their initial instincts that a company’s stock prices should reflect its profits and urged their clients and investors not to miss out on the next big thing.

There is a light at the end of the tunnel though as the current despair in the AI industry may be as overrated as its growth. Generative AI is still a revolutionary technology that has changed how mankind seeks out information, read, write, draw, compose, and more. The recent months suggest though that it is not a magical means to make money. Failure to capitalize on new technology by venture capitalists is not new. The advent of social media, television, cryptocurrency, and other get rich quick investments have led many to their downfall. Ultimately, the number of failed miners of the gold rush has once again far exceeded those that succeeded, and those that fed upon them made the most money anyways. The top tech stocks are already beginning discussions on how to best cannibalize the AI models left in the rubble, as we take the first steps back to sane financial investments before the next big thing appears.

The financial implosion of artificial intelligence was particularly cruel to the developers that worked on creating them. It is not that internet denizens do not want to use artificial intelligence in their day-to-day life, with surveys showing the number of people expected to use artificial intelligence regularly is expected to be about two thirds greater than last year. But it is not the innovators that are reaping the benefits. The Magnificent Seven of the S&P500, Nvidia, Apple, Microsoft, Alphabet Inc, Amazon, Broadcom, and Meta have bought out collapsing developers such as OpenAI and announced they expect little to no impact on their AI services.

ChatGPT and OpenAI are a mascot of the demise of the AI sensation. Less than a year ago, ChatGPT had billions of dollars invested in them. Now in the wake of their bankruptcy, their developers are looking for employment at other companies, reaping the havoc they have sown with their efforts.