Fire Burn And AI Bubble

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In my early years at Chapters-Indigo, I survived multiple rounds of layoffs, including the bursting of the dot-com bubble and the subsequent purge that followed with the merger of the two book companies.

At some point in 2001, the Chapters Online HR office was stacked full with a jumbled collage of Herman Miller Aeron Chairs.

The team of recruiters who had previously occupied that office space and had been tasked with rapidly hiring hundreds of people for one of Canada’s fastest-growing late 1990s start-ups was gone.

The people who had been hired and sat in those chairs were also gone, having been laid off or preemptively left the company due to fears of being laid off.

A good friend took a stunning black-and-white photo of the scene where these expensive chairs were piled on top of each other, framed it, and called the shot “dot-com graveyard.”

It was a pointed visual representation of what happened when the dot-com bubble burst.

Mass layoffs, empty offices, epic tales of ill-fated companies with suspect business models, bankruptcies, investor dismay, and reasonable prices on second-hand designer office furniture were the norm.

Twenty-five years later, the similarity between today’s AI frenzy and the dot-com era bubble is difficult to ignore.

Corporate AI investment reached $252.3 billion in 2024, with private investment climbing 44.5% and mergers and acquisitions up 12.1% from the previous year.

The AI investment levels don’t line up well with the revenue being generated.

Bloomberg reported that September saw the publication of at least two widely read analyses suggesting that what is happening in AI is indeed a bubble: “Is AI a Bubble?” published on Exponential View by Azeem Azhar, and “Dotcom on Steroids” by GQG Partners.

Sam Altman believes we’re in an AI bubble. “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes,” said Altman in a recent interview.

And Sam is likely one of the folks with the bubble-making machine in his hands. His Stargate Project intends to invest $500 billion over the next four years, building new AI infrastructure for OpenAI.

David Cahn, a partner at Sequoia, estimates that the capital invested in AI over 2023 and 2024 alone requires consumers and companies to purchase roughly $800 billion in AI products over the life of these chips and data centers to result in a good investment return.

“If the current scaling laws hold, AI will increasingly strain supply chains globally,” said David Crawford, chairman of Bain’s Global Technology Practice. “By 2030, technology executives will be faced with the challenge of deploying about $500 billion in capital expenditures and finding about $2 trillion in new revenue to meet demand profitably.”

That demand isn’t surfacing yet.

The productivity promise of AI has yet to be realized.

US businesses have invested between $35 billion and $40 billion into internal AI projects. However, 95% of these businesses have seen no return on investment, according to a study by MIT.

What makes the current tech boom different from the times when we literally partied like it was 1999 is that AI expenditure appears to be propping up something like the entire US economy.

More than half of the S&P 500's growth since 2023 has come from just seven companies: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.

And these mega tech businesses are expected to spend as much as $320 billion this year on artificial intelligence technologies.

You get the idea.

Billions are being spent.

And trillions of dollars of revenue are required to make that spending level make any sense.

Suppose there is an AI bubble, and it bursts.

It will likely have a significantly more profound impact on the global economy than the dot-com bubble did, and it will be felt in many more households, well beyond the sphere of tech workers who sit in Aeron chairs.

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