FOMO is driving tech giants to invest billions in generative AI

Tech giants don’t make many acquisitions these days, mostly because of the unfavorable regulatory environment. But they find other ways to spend billions of dollars on the next big thing.

on Amazon The $2.75 billion investment in artificial intelligence startup Anthropic, announced this week, was its biggest venture yet and the latest example of the AI ​​gold rush that is prompting the biggest tech companies to loosen their wallets.

Anthropic is the developer behind the AI ​​model Claude, which competes with GPT from Microsoft-Supported OpenAI, and on Google Gemini. Together with Meta and An applethey are all racing to integrate generative AI into their vast portfolios of products and features to ensure they are not left behind in a market that expected to reach $1 billion in revenue within a decade.

In 2023, investors poured $29.1 billion combined into nearly 700 generative AI deals, a more than 260% increase in value over the previous year, according to PitchBook.

A significant portion of this money was strategic in that it came from technology companies rather than venture capitalists or other institutions. Fred Havemeyer, head of US AI and software research at Macquarie, said the fear of missing out was one of the factors driving their decisions.

“They definitely don’t want to miss out on being part of the AI ​​ecosystem,” Havemeyer said. “I definitely think there is FOMO in this market.”

The large investment is necessary because AI models are extremely expensive to build and train, requiring thousands of specialized chips, which to date have largely come from Nvidia. Meta, which is developing its own model called Llama, said it is spending billions on Nvidia GPUs, one of many companies that have helped the chipmaker boost revenue by more than 250% from the previous year.

Whether by way of construction or investment, there are a limited number of companies that can afford to play the market. In addition to developing the chips, Nvidia has emerged as one of Silicon Valley’s biggest investors, taking stakes in a number of emerging artificial intelligence companies, in part as a way to ensure that its technology will be widely adopted. Similarly, Microsoft, Google and Amazon sometimes offer cloud credits as part of their investments.

In the Amazon-Anthropic deal announced Wednesday, the two companies said they would work closely together in a variety of ways. Anthropic will use Amazon Web Services for its computing needs, as well as Amazon’s chips. Anthropic models will be distributed by Amazon to AWS customers.

Earlier this month, Anthropic released Claude 3, its most powerful model and one that it says allows users to upload photos, charts, documents and other types of unstructured data for analysis and answers.

Microsoft got into the business of investing in generative AI earlier, ie 1 billion dollars in OpenAI in 2019. Its investment size has since swelled to around $13 billion. Microsoft heavily leverages the OpenAI model and offers open source models on its Azure cloud.

Alphabet plays the role of builder and investor. The company has refocused much of its product development on generative AI and its newly rebranded Gemini model, adding features in search, documents, maps and elsewhere. Last year, Google committed to investing $2 billion in Anthropic, after previously confirming it had taken a 10 percent stake in the startup along with a major cloud contract between the two companies.

Havemeyer said tech giants aren’t just throwing money at the “hype cycle” because these investments in AI startups align with their product roadmaps.

“I don’t think it’s frivolous,” he said.

Havemeyer said alliances with major cloud providers not only bring much-needed cash to startups, but also help them sign up customers.

Cloud companies are saying, “Come to us, work on our platform, have native access to the latest and greatest AI models, and also use our infrastructure,” Havemeyer said. “It’s also part of a much larger ecosystem play.”

“We’re seeing a lot of alliances emerging among these hyperscalers that have significant scale, infrastructure and very deep pockets,” he added.

In recent earnings calls, tech executives reiterated their focus on generative AI, making it clear to investors that they need to spend money to make money, whether it’s in-house development or by investing in startups.

Microsoft Chief Financial Officer Amy Hood said last year that the company was adjusting its “workforce to the work we do primarily with AI without adding a significant number of people to the workforce.” She said Microsoft will continue to prioritize investing in AI as “the thing that will shape the next decade.”

The leaders of Google, Apple and Amazon also have have suggested to investors that they are willing to cut spending across departments to shift more funding to their AI efforts.

Microsoft is investing in many of the techniques that underlie generative AI through its Microsoft Research division. Amazon it is reported has plans to train a larger, more data-hungry model than even OpenAI’s GPT-4.

Apple researchers recently published details of their work on the MM1, a family of small AI models which can accept both text and visual input. Apple is in a different position than its peers because it doesn’t sell a cloud service. Still, the tech giant is reportedly looking for AI partners, including potentially Google in the US and Baidu in China. An Apple representative declined to comment on the AI ​​partners.

For example, Microsoft’s OpenAI investment includes profit sharing in a non-profit wing as well as credits for using Microsoft’s cloud service. Microsoft’s deal for Inflection AI amounted to an expensive acquisition, with some reports putting the total cost at 1 billion dollars. As part of the deal, Microsoft hired Inflection AI founder Mustafa Suleiman to lead Copilot AI initiatives.

“I think we’re starting to see some creativity and deal-making,” Newman said. Regarding Amazon’s deal with Anthropic, he said an acquisition would be “much more difficult than an investment.”

That’s because regulators around the world are cracking down on Big Tech, making it harder to make significant acquisitions. Even investments attract attention.

In January, the Federal Trade Commission announced it would conduct a wide-ranging investigation into the biggest players in AI, including Amazon, Alphabet, Microsoft, Anthropic and OpenAI.

FTC Chairwoman Lina Hahn described the investigation as a “market study of the investments and partnerships formed between AI developers and major cloud service providers.” The regulator has the power to order companies to submit specific reports or answer questions in writing about their business.

“We know that regulators are becoming increasingly focused on the traditional acquisition closing path,” Newman said. “The game is currently accessing the most basic IP address.”