The AI Profit and Cost Race: Drivers, Get Your Checkbooks Out
January 15, 2025
A dinobaby-crafted post. I confess. I used smart software to create the heart wrenching scene of a farmer facing a tough 2025.
Microsoft appears ready to spend $80 billion “on AI-enabled data centers” by December 31, 2025. Half of the money will go to US facilities, and the other half, other nation states. I learned this information from a US cable news outfit’s article “Microsoft Expects to Spend $80 Billion on AI-Enabled Data Centers in Fiscal 2025.” Is Microsoft tossing out numbers as part of a marketing plan to trigger the lustrous Google, or is Microsoft making clear that it is going whole hog for smart software despite the worries of investors that an AI revenue drought persists? My thought is that Microsoft likes to destabilize the McKinsey-type thinking at Google, wait for the online advertising giant to deliver another fabulous Sundar & Prabhakar Comedy Tour, and then continue plodding forward.
The write up reports:
Several top-tier technology companies are rushing to spend billions on Nvidia graphics processing units for training and running AI models. The fast spread of OpenAI’s ChatGPT assistant, which launched in late 2022, kicked off the AI race for companies to deliver their own generative AI capabilities. Having invested more than $13 billion in OpenAI, Microsoft provides cloud infrastructure to the startup and has incorporated its models into Windows, Teams and other products.
Yep, Google-centric marketing.
Thanks, You.com. Good enough.
But if Microsoft does spend $80 billion, how will the company convert those costs into a profit geyser? That’s a good question. Microsoft appears to be cooperating with discounts for its mainstream consumer software. I saw advertisements offering Windows 11 Professional for $25. Other deep discounts can be found for Office 365, Visio, and even the bread-and-butter sales pitch PowerPoint application.
Tweaking Google is one thing. Dealing with cost competition is another.
I noted that the South China Morning Post’s article “Alibaba Ties Up with Lee Kai-fu’s Unicorn As China’s AI Sector Consolidates.” Tucked into that rah rah write up was this statement:
The cooperation between two of China’s top AI players comes as price wars continue in the domestic market, forcing companies to further slash prices or seek partnerships with former foes. Alibaba Cloud said on Tuesday it would reduce the fees for using its visual reasoning AI model by up to 85 per cent, the third time it had marked down the prices of its AI services in the past year. That came after TikTok parent ByteDance last month cut the price of its visual model to 0.003 yuan (US$0.0004) per thousand token uses, about 85 per cent lower than the industry average.
The message is clear. The same tactic that China’s electric vehicle manufacturers are using will be applied to smart software. The idea is that people will buy good enough products and services if the price is attractive. Bean counters intuitively know that a competitor that reduces prices and delivers an acceptable product can gain market share. The companies unable to compete on price face rising costs and may be forced to cut their prices, thus risking financial collapse.
For a multi-national company, the cost of Chinese smart software may be sufficiently good to attract business. Some companies which operate under US sanctions and controls of one type or another may be faced with losing some significant markets. Examples include Brazil, India, Middle Eastern nations, and others. That means that a price war can poke holes in the financial predictions which outfits like Microsoft are basing some business decisions.
What’s interesting is that this smart software tactic apparently operating in China fits in with other efforts to undermine some US methods of dominating the world’s financial system. I have no illusions about the maturity of the AI software. I am, however, realistic about the impact of spending significant sums with the fervent belief that a golden goose will land on the front lawn of Microsoft’s headquarters. I am okay with talking about AI in order to wind up Google. I am a bit skeptical about hosing $80 billion into data centers. These puppies gobble up power, which is going to get expensive quickly if demand continues to blast past the power generation industry’s projections. An economic downturn in 2025 will not help ameliorate the situation. Toss in regional wars and social turmoil and what does one get?
Risk. Welcome to 2025.
Stephen E Arnold, January 15, 2025
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