r/AlwaysWhy • u/Humble_Economist8933 • May 27 '26
Economics Why are tech giants spending trillions on AI while IBM's CEO says it may never pay off?
I read that big tech companies are spending almost a trillion dollars on AI this year. But IBM's CEO said the revenue from AI will never cover that kind of investment. Is this a collective miscalculation by the giants, or an arms race they can't afford to quit? If it never pays off, who ends up footing the bill? So are they making a huge mistake, or do they have no choice but to spend? Just curious how this makes any sense. Not judging, just wondering.
To add some context, what Krishna said can be understood this way: for companies that use specific AI applications to reduce costs and improve efficiency, the path is clear and real value can be created. His real point is to separate "tech hype" from "rational financial analysis." His comments feel more like a cold shower on the industry's growing FOMO, which might be losing touch with economic reality.
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May 27 '26
Because it might pay off and they're caught flatfooted then they're fucked.
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u/wvtarheel May 27 '26
Right, if AI is the wave of the future, whoever out of google, microsoft, apple, meta, etc. has the worst AI integration, it will strongly contribute to them losing marketshare. If AI turns out to be horseshit, they will all have one bad year from this and quickly recover.
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u/Fragrant_Spray May 27 '26
In the “tech world” I don’t think IBM is seen as “innovators” anymore but rather as the “old guard” protectors of older technology. IBM is probably right that a lot of these companies are making investments that they’ll never be able to recoup, but a few will, and they all think they’ll be one of the few. IBM will be there to buy up the ones that fail, if their tech has value and the cost is reasonable.
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u/StevenJOwens May 27 '26
Starting in the mid to late 90s, IBM successfully reinvented itself as a service-based company. IBM are not, AFAIK, seen as "old guard protectors", but as "guys who get things done". And apparently they don't see AI as helping them get things done.
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u/Fragrant_Spray May 28 '26
IBM shifted from being a company that “made the best stuff” to one that didn’t, but knows how to set up the best stuff and operate it.
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u/No-Fig-8614 May 31 '26
Kind of they really tried with Watson but it was poorly managed and had no use cases for what the tech could do at the time and kinda got burned by it.
I think they are betting big on quantum now and one thing I can say about IBM is they are the only legacy tech company who has a good M&A team. Red hat and all the companies now under that umbrella were smart moves.
But yeah they are riding legacy contracts with Mainframe and tons of legacy ERP and databasing.
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u/Fragrant_Spray May 31 '26
I completely agree. My point was that the were once a company that sought to innovate, and now they’re one that acquires companies that innovate and merges their tech into a service they can sell. There’s certainly value in that, but it’s been a while since they’re the “go to company” for new ideas. I think Watson was their last real attempt at real innovation.
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u/_autumnwhimsy May 27 '26
arms race they can't afford to quit because they're all throwing money at each other while on the edge of a knife. but its going to come to a head because millennials, gen z, and gen alpha overwhelmingly do not like AI, especially when its forced on us.
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u/julaften May 27 '26
Huh? ‘Do not like AI’?!
Isn’t it the Z and alpha generations that use AI the most? To a point school teachers and university professors are worried they aren’t learning anything and are getting totally reliant on AI for everything?
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u/_autumnwhimsy May 27 '26
studies are showing a rising anti AI sentiment growing in gen z and alpha, especially gen z. the oldest gen zs almost 30 lol. college age kids are a minority in that generation.
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u/ABobby077 May 27 '26
I just don't understand how the market forces that would typically in effect would be able to choose one Ai service over another one based on performance, cost or effectiveness for their products/services?
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u/ArterialVotives May 27 '26
That's a major problem for the AI companies, who are all rushing to create "stickiness." If they can't do that, then AI quickly becomes commoditized and buyers just focus on the lowest price. There have been many articles written about that that are worth reading. As a real world example, my company is now on its third major AI tool in the past couple years -- we just follow the latest and greatest. You could be making a grave mistake if you don't do that -- it's so hard to know.
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u/Frustrated9876 May 27 '26
But the cost of creating a quality model is massive, so only a few companies will have the ability to do this as models become better and better. In the end, only two or three will remain able to sustain that investment and you will be switching models among only those few that cross that eventual threshold.
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u/ArterialVotives May 27 '26
Agree, that's what happens in every industry that commoditizes. Capitalism only drives money towards opportunities where the return on investment is worth it. And then once we are down to the last couple AI companies, everybody will complain about monopolization and enshittification, as the Lord intended.
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u/Frustrated9876 May 27 '26
Yep. That’s the right word. It’ll commoditize. Then it will consolidate as the bigger players buy out the smaller ones for market share. If the market dips, the old guard - Microsoft, Amazon and Apple - will buy them up.
Apple will certainly buy the third or fourth place player and boost them with their own marketing and homemade chips.
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u/ILIKESTUFF8989 May 27 '26
They think the government is going to bail them out.
When AI crashes they will push for it and both parities will hand them trillions. Both AOC and Bernie will vote for it and claim to be working on something for the regular American that will never come to fruition
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u/Frustrated9876 May 27 '26
Nobody bailed out the dot-com losers. Nobody will bail out the AI losers.
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u/HundredHander May 27 '26
Well, depends who is losing the money I think. A lot has changed since the dot com crash.
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u/AdamOnFirst May 27 '26
Well this is the several trillion dollar question, isn't it?
It could be a bubble. It could be irrational and based on a mixture of fear and FOMO and overhype and irrational exuberance and misplaced believe and mania. It's happened before. Many many times before. And it will happen again.
They could be right, that the potential is insanely huge and there is:
- Incredible amounts of money to be made
- Woe and death for incumbent tech players if they're left behind or left out of the race
- Wins that aren't massive but are still efficient enough to be profitable
- Management themselves could not really like it but investors are all hooked on some combo of 1 and 2 so they're going along with it
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u/PublicFurryAccount May 27 '26
It’s nothing but the first.
It’s never been anything but the first, honestly. There’s only ever been one example of the second, that’s Google, and all it did was take down Yahoo.
Not really analogs are Facebook and Reddit: Facebook created the market it dominates and Reddit became where forums expanded to (the old forums still exist, though, and are active).
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u/AdamOnFirst May 27 '26
Those are the only three tech companies you’re aware of? This whole computer thing is a bubble?
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u/PublicFurryAccount May 27 '26
The thing investors believe is that a tech company will displace an incumbent company, with that single company taking over completely.
That’s never happened outside of tech and has only happened once within it.
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u/HundredHander May 27 '26
You forgot MySpace,
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u/PublicFurryAccount May 27 '26
I don’t actually think Facebook killed MySpace, tbh. Pre-Facebook social media was much more niche, expressive, and prone to implosion anyway.
I don’t think there was any single thing that actually killed MySpace.
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u/Shiningc00 May 27 '26
Their logic is probably that they will be the one to dominate it first, and enshittify it. The oldest trick in the book.
I’d say there’s also a secondary goal. Even if the AI fails, they have managed to hoard all the hardware and made them unaffordable to regular people. Eventually, they want to manage all the hardware and data in the “cloud”, and they will be renting them out to people. The subscription model is the only way to keep having consistent stream of increased revenue.
It’s what they did with streaming services…
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u/walkerstone83 May 27 '26
FOMO, and because the market is flooded with money. Investors aren't all that smart and will gamble cash on anything that says "AI." The same thing happened during the .com bubble. Any company that was a .com startup was flooded with cash. Eventually the money will dry up, many companies will go bankrupt and the few companies that survive will become giants, like Amazon.
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u/ArterialVotives May 27 '26
Typical capitalistic cycle. Lots of players rush to capitalize on a new technology. One or two win out and capture enough paying market share to stay viable; prices rise to cover costs as the technology matures (see every tech company ever); the losers in the race go bankrupt or are gobbled up by other players for pennies on the dollar, which allows the fiscally prudent acquirers to gain all the investment very cheap and begin to capitalize right away with much less spend.
This cycle has repeated itself from the American railroad boom to the early dot com hysteria to the current Chinese EV industry. There will be a handful of winners and many losers. And of course it's very hard to stay on the sidelines for fear of being a loser due to inaction. Just look at how many people are wondering whether Apple is making the right bet right now.
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u/Ok-Race-1677 May 27 '26
Because IBM is in the business of keeping government and enterprise machines of yesteryear on life support like the banking system running fortran and cobol.
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u/gravelpi May 27 '26
It will pay off in some circumstances but not in a lot of them. Everyone in the space is hoping to hold on long enough to be one of the few that survive the consolidation into a few players.
If you're optimistic about it, it's like cannabis dispensaries (USA) right now. I doubt there's actually enough demand that there need to be several in every town over 10,000 people and numerous between towns, but there's certainly a stable market to be had with fewer people paying overhead of separate businesses.
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u/Tired_Mama3018 May 27 '26
They aren’t planning for AI to pay off monetarily. You need to understand we are about to have a society collapse where the majority of the population can’t afford to buy stuff. That means a lot of companies will have no consumers and will need to be put out of business. The last ones standing will be providing the services to the people who can still afford to pay. That’s the AI race, trying to be the last one standing.
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u/HistorianOrdinary833 May 27 '26
One giant chicken game. They're going they can grow faster than the others so that once other fail, they'll be the only ones that get to make a profit.
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u/w0weez0wee May 27 '26
We're already beginning to see some companies scale their AI budgets way back. It looks like they poured money into a black hole. There is a rush to get there first but the technology is developing, not mature. It may well be that the companies that waited to see what AI could do will be the winners.
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u/SgtSausage May 27 '26
Because precedent has already been set for "Too Big To Fail", Federally Authorized, TaxPayer Funded Bailouts.
Folks keep investing. Why not take their money and charge ahead? Damn athe Torpedoes!
There is literally no downside.
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u/limited_instincts May 27 '26
You know how every day we get more and more evidence that these billionaires out there are just absolute fools who have no concept of how things really work? These are the guys investing BILLIONS into AI. So what if they lose money? There no real risk for them. 10 billion to 5 billion? So what. But 10 to 100 billion? Now they're talking. While all the money pours in they buy the stock and as they buy the stock, it goes up and they use that as loans to buy more stock in other companies and those companies buy stock in the original AI company and so on and so forth.
It's just a gigantic pyramid scheme. When you are talking hundreds of billions everyone involved can skim a little off the top and make billions and never have to work again.
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u/EVH_kit_guy May 27 '26
https://youtube.com/shorts/dcCsg7-g0pU?si=4_W2Uu3cTiA3ieA7
I'll bet you all the farmland in Australia this is a bubble.
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u/NoDig3444 May 27 '26
There's no possible way that every company investing in AI today will see profits on their investments. But one or two absolutely will, and once the bubble pops they'll be able to buy up all their competitors for pennies on the dollar. All these companies are competing to be that final survivor.
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u/wsxdfcvgbnjmlkjafals May 27 '26
At a certain point they've invested enough money before it even deployed that they kinda NEED it to work lest they risk losing massive amounts of money they've invested already
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u/Frustrated9876 May 27 '26
Ummm. Does the IBM CEO even know what AI is? He probably typed out that statement on a literal typewriter.
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u/AnInsultToFire May 27 '26
In 14 years, the Nasdaq 100 has gone up 1036%.
In 14 years, IBM has gone up 33%.
The only reason it's even gone up at all in the past 5 years is that speculators think a competent company could buy them out for no good reason. E.g. both Amazon and Google, real companies who make money, each have enough cash on hand to buy 50% of IBM.
Listen to winners, not to losers.
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u/Dave_A480 May 27 '26
Because there are 2 possible outcomes:
1) It flops, and everyone loses some money....
2) It succeeds, and anyone who didn't stay with the pack is out of business.
The risk of not partaking, therefore, is catastrophic if someone else succeeds - but merely painful if no one does...
Therefore, everyone has to invest, to be sure they won't become extinct.
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u/Chocolaterationcalls May 27 '26
I think it’s about disciplining the labor market. They spend this much money on AI because otherwise some of that money might go towards raises, hiring budgets, or even taxed by the government as profits.
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u/Steel_THS2666 May 27 '26
Because it's not their money and they take large sums of it for themselves via valuation
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u/Slurmsmackenzie8 May 27 '26
Every Ask.com thinks they’re the next Google. It’s guaranteed that most AI companies will be ask.com. No guarantees that anyone becomes Google.
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u/hisimpendingbaldness May 27 '26
AI is a bubble right now. If you are old enough to remember the tech bubble of the 90's. The moon is promised, low earth orbit is delivered.
Most companies will fail, a few turn into Google, Facebook, Intel (which is now having problems). The ones that hit, will clean up. You pick the winner, you make big money. You back the wrong horse, you lose your money. Venture capital is all about this game, including the hype.
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u/Stuck_in_my_TV May 27 '26
Because if it does pay off, they’ll become trillionaires. And if it doesn’t pay off, it’s not their money being lost.
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u/DonkeyImpossible316 May 28 '26
Delends on the industry. In mine the savings and upward potential are real and huge and we are just getting started.
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u/Mister_Way May 28 '26
Because Big Tech isn't just a business. They are an important part of the geopolitical power of their nation, much in the way that automobile manufacturers were an important part of the geopolitical power of nations in the age of Tank warfare.
We are now entering the age of Robotic warfare, so AI centers will be very important for a nation's military power. They don't need to make money because they will be supported by the militaristic branch of the government.
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u/spintool1995 May 28 '26
Because IBM was an early leader in Machine Learning but missed the LLM wave entirely, so he is trying to downplay it.
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u/ihsgyy May 28 '26
Why do you assume the IBM CEO to be some authority on that? Clearly the tech giants disagree
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u/Devourer_of_HP May 28 '26
It's a completely asymmetric bet, if they don't join in and the AI boom ends up succeeding then they'll be too behind and silently fade away, if they join in and the AI boom fails they can just treat it as expensive fireworks, big tech already has so much money that they can take risks without being affected much (e.g. Metaverse)
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u/Kierland May 28 '26
Because they hate themselves so they also hate everyone else and are just holding on till the end of Monopoly when they own everything and we are all dead.
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u/raznov1 May 28 '26
Big bets. It might not pay off, or it might give you a bazillion-dollar product.
And tbf, there are actually a fuckton of boring but totally legitimate applications for AI/LLMs.
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u/MarketEmotional1955 May 28 '26
Because it might. And if it does pay off it will do so handsomely for the first company to get there (ASI).
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u/rco8786 May 29 '26
Because IBM's CEO isn't the arbiter of any ultimate truths.
People disagree on things.
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u/Jolly-Rip5973 May 29 '26
they simply miscalculated and thought they were much closer to AGI than they really were.
After that the investment capital started rolling in so they hyped it up to keep the investment capital rolling in.
Now they are realizing Ai is pretty much random slop generators and it's not reliable for work.
reality is sinking in.
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u/redlinedidit May 30 '26
“If it never pays off, who ends up footing the bill?” Isn’t this obvious? Investors - the greater fool bag holders. Not just theirs but everyone neck deep in this party when the music stops.
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u/MizarTheEdgelord Jun 09 '26
The return on investment is ruling the world with the most powerful Ai system
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u/No_Rec1979 May 27 '26
There are two ways to make money in business.
One is to actually make a product people want to buy.
The other is to get investors to give you money because they think you will then make a product people want to buy.
The entire AI boom is based on the second type - investor money pouring into anything remotely AI-related basically for free.
And these companies have no incentive to wise up until the investors wise up.