Commodity (Premium)

Regardless of your opinions on the efficacy of AI, the speed at which it's advancing through the industry is both exciting and terrifying. But there's a dark underbelly to this speed deployment of new functionality, which I see as chaotic, and a major downside to Big Tech firms like Microsoft that are throwing money at AI in what can only be described as unsustainable ways. What happens when AI becomes a commodity, and your business model is built on a model in which customers are asked to shoulder the extravagant costs?

We may find out sooner rather than later: The other side of the AI growth curve will be a trough of disappointment of epic proportions, and if the speed at which AI advances is any indication, the speed at which customers stop paying for it could likewise be historic. This could be a seismic shift that will undermine some of the industry's biggest players, and right at a time in which they are relying on AI to drive the growth that investors demand. This isn't tail wagging the dog stuff, like the irrational exuberance of the Azure-fueled cloud era Microsoft just crested, it's even more ephemeral. There's no there, there.

I've raised this concern several times over the past months or more--as I'm sure you've noticed, AI has quickly become an unavoidable topic, one that threatens to subsume everything else I'd rather be writing about--but I was fascinated to discover that Microsoft CEO Satya Nadella recently described the large language models (LLMs) that form the backbone of his company's overreaching strategies, products, and investments as "a commodity." As I see it, this was a passive-aggressive shot across the agents of chaos at OpenAI, a company Microsoft over-invested in and is overly reliant on, and a subtle indication to investors that maybe it's time to cool their jets a bit.

"As AI becomes more capable and agentic, models themselves become more of a commodity, and all value gets created by how you steer, ground, and fine-tune these models with your business data and workflow — and how they compose with the UI layer of human to AI to human interaction," Mr. Nadella wrote on LinkedIn on the day that Microsoft announced "wave two" of Microsoft 365 Copilot; less than two weeks later, Microsoft announced a similar "next phase" for the consumer Copilot as well.

To understand what's he's driving at there, consider where Microsoft is at right now. Having invested billions of dollars in OpenAI and seeing the sudden advances it made with ChatGPT 4 in late 2022, Nadella literally turned the battleship that is Microsoft on a dime and directed the entire company to immediately pivot on AI.

To the public, this new Microsoft arrived in February with the ill-chosen Bing AI chatbot announcement. But internally, the battle cry arrived months earlier, and employees were given a directive: You will embrace AI in whatever product you represent, or you will leave and someone more compliant will take your place. It was a...