Only the paranoid survive, Accenture leading AI sales, and consumer AI strategy

23 June 2024 | Issue #24 - Mentions $NVDA, $MSFT, $ACN, $AAPL, $BKNG, $META

Welcome to the twenty-fourth edition of Tech takes from the cheap seats. This will be my public journal, where I aim to write weekly on tech and consumer news and trends that I thought were interesting.

Let’s dig in.

Nvidia’s search for growth

This week had Nvidia briefly topping Microsoft as the world’s most valuable publicly listed company before settling at third by Friday. With AI mania taking hold of the markets it’s hard not to read about them in the news and this week was no exception. The Information had a big piece on Jensen Huang and his paranoia of being the next Cisco during the dot-com bubble.

Around Christmas last year, Nvidia CEO Jensen Huang called a series of meetings with company executives to discuss a growing concern: whether Nvidia’s biggest customers were going to run out of data center space to install its artificial intelligence chips, which could hurt sales, according to someone who attended the meetings.

Huang told colleagues he was worried cloud server providers such as Amazon Web Services and Microsoft, which collectively have been buying about half of Nvidia’s AI server chips in recent quarters, weren’t moving fast enough to set up new data centers and power sources to accommodate the chips they had ordered, known as graphics processing units. After the meetings, Nvidia managers stepped up their pace of asking cloud providers whether they had enough space and electricity to accommodate their orders, according to an employee at Nvidia and several customers and data center operators.

“Nvidia will not ship GPUs unless the customer can certify that they have data center capacity in which to place those GPUs,” said Raul Martynek, CEO of DataBank, a data center provider whose clients include cloud providers.

Huang has become a business rock star and the chief cheerleader of an AI boom that has propelled his microchip firm’s once-in-a-generation growth and profits, lifting its value to the same $3 trillion level enjoyed by both Microsoft and Apple. But behind the glamour and well-deserved victory laps, Huang and his colleagues have also focused on countering the next threat to the business—the likelihood that demand for Nvidia’s chips will eventually slow down.

The entire article is worth a read but it details some of the quirks within the AI data centre industry, where Nvidia is a key supplier to the hyperscalers but also a customer and competitor.

In May, Nvidia disclosed that it had committed to spend nearly $9 billion on renting cloud servers from its top customers, mainly for internal research and development but also to boost its cloud server rental business. Some customers and former employees believe that business could eventually insulate Nvidia from an inevitable chip downturn and make it more difficult for customers who are renting its servers to pursue alternative chips.

The cloud and software products are “underappreciated by the analysts and technology community” as a business that could generate tens of billions of dollars a year in revenue, said Sasha Ostojic, a former Nvidia executive who is now a partner at venture firm Playground Global. “Nvidia has all of the leverage” it needs to grow services that complement its chips, he said.

Last fall, Nvidia even considered leasing its own data centers for DGX Cloud, according to a person who was involved in those discussions. Such a move would have cut out the cloud providers entirely. Nvidia also recently hired a senior Meta Platforms executive, Alexis Black Bjorlin, to run the cloud business, though it isn’t clear whether Nvidia plans to move ahead with its own data centers for DGX Cloud.

As Nvidia takes these steps, its salespeople are going to great lengths to understand what customers are doing with Nvidia’s chips. Among the questions they’re asking cloud providers lately is who their customers are and what kind of commitments they are signing to rent those servers. The answers could help Nvidia plan ahead for sales and could also help it learn about prospective customers for its own cloud server rental business.

Another part I found interesting was this quote below. It’s a good reminder that hardware sales are one-time revenues tied to the physical construction of data centres that reset annually. This model becomes challenging as a company grows, contrasting with recurring revenue streams. Maintaining high growth rates at scale requires increasingly large sales volumes each year.

Though the 61-year-old Huang has soaked up the limelight, he has been managing tricky relationships with companies like Microsoft that are buying Nvidia’s chips while at the same time trying to lessen their reliance on those chips. Microsoft, AWS and other cloud providers have experienced a resurgence of demand for traditional computing workloads, not just AI, so they can’t afford to expand their data centers only to accommodate Nvidia chips, according to two people who work for one of the major cloud providers, as well as executives of several data center operators.

There is an inherent vulnerability in the business of selling chips on a one-off basis: As fast as sales have been rising, they could drop as demand inevitably cools off.

For Nvidia, a future without a steady new profit stream might not be pretty: As numerous commentators have pointed out, in 2000, Cisco Systems suddenly became the world’s most valuable company from selling routers at the height of the dot-com bubble, when telecom built new data centers, only to watch those centers go unused as internet-based revenue failed to materialize the way technology executives and investors thought it would. Cisco hasn’t recovered from the sales dropoff it experienced as its hardware became a widely available commodity.

Privately, Huang has told colleagues Nvidia must make sure it doesn’t end up like companies such as Cisco or Sun Microsystems, referring to their quick rise and eventual fall. Sun became a juggernaut in server and computer hardware in the 1990s, but after the bubble burst, the company didn’t capitalize on the burgeoning software market, which Microsoft and others captured. “He tries to remind people not to get ‘Sunned,’” said one Nvidia employee who has heard him say it.

Over the past few months, Nvidia has launched several software products it hopes will diversify its business from hardware. On an earnings call in February, Huang described the business, Nvidia AI Enterprise, as an “operating system for artificial intelligence” that customers would use to train and run AI. Nvidia charges $4,500 per GPU per year for access to the software. “My guess is that every enterprise in the world, every software enterprise company…will run on Nvidia AI Enterprise,” Huang said. “And so this is going to likely be a very significant business over time.” Nvidia has said design software maker Adobe and cybersecurity firm CrowdStrike are among the customers for the system.

Nvidia even tried to dictate how Microsoft should install its GPUs and the feud reached the desks of CTO Kevin Scott and CEO Satya Nadella.

In another effort to generate more hardware revenue, Nvidia is trying to have more influence over how its largest customers buy and install its GPUs. Typically, large cloud providers build their own customer server racks, which they use across their global data centers and for various kinds of chips. But when Nvidia approached customers about its next flagship chip, the GB200, it tried to convince them to buy the rack exactly as it had designed it, according to several people who have been involved in the talks.

Microsoft and Nvidia feuded over the issue for several weeks this year. Andrew Bell, a vice president at Nvidia, asked counterparts at Microsoft to buy a server rack design that was a few inches different in measurement from the racks Microsoft uses in its data centers, according to someone who was involved in the talks. Such a change would hinder Microsoft’s ability to easily switch between different AI chips. Bell said customers who agreed to buy Nvidia’s server rack design could be first in line to receive its new chips, but Microsoft executives demurred.

The dispute over the server rack design eventually reached the desks of Microsoft Chief Technology Officer Kevin Scott and CEO Satya Nadella, said one of the people who was involved. In the end, Nvidia backed down and agreed to let Microsoft design its own custom racks for the GB200 chips. (Google and AWS are also expected to produce custom racks for GB200s, according to two Nvidia employees.)

Data centre constraints

Touching on Nvidia's growth challenges, there's an interesting Bloomberg article about the massive power demand fueled by AI. It's a fascinating look at how the AI boom is impacting the physical world. The piece dives into the unexpected consequences of our AI ambitions, from skyrocketing energy needs to the strain on existing infrastructure.

Like much of Northern Virginia, Loudoun County was once known for its horse farms and Civil War battle sites.

But over the past 15 years, many of this community’s fields and forests have been cleared away to build the data centers that form the backbone of our digital lives.

The rise of artificial intelligence is now turbocharging demand for bigger data centers, transforming the landscape even more and taxing the region’s energy grids.

On a crisp afternoon this spring, the newest facility was nearing completion. When it’s done, this 200,000-square-foot building could use as much energy as 30,000 homes in the US.

But first, it needs to get enough power...

The energy supply can’t come soon enough for DataBank, the data center provider that owns the Virginia facility. An unnamed "big tech" client leased the entire facility and was so eager to tap into the complex to access computing resources for AI applications that it had servers ready in the building before DataBank was scheduled to have electricity for them.

“That’s the thing with AI. They need a lot of power and as soon as you have it, they want it right away,” said James Mathes, who manages some DataBank facilities. “Right now, it’s like a blank check for AI."

The almost overnight surge in electricity demand from data centers is now outstripping the available power supply in many parts of the world, according to interviews with data center operators, energy providers and tech executives. That dynamic is leading to years-long waits for businesses to access the grid as well as growing concerns of outages and price increases for those living in the densest data center markets.

The dramatic increase in power demands from Silicon Valley’s growth-at-all-costs approach to AI also threatens to upend the energy transition plans of entire nations and the clean energy goals of trillion-dollar tech companies. In some countries, including Saudi Arabia, Ireland and Malaysia, the energy required to run all the data centers they plan to build at full capacity exceeds the available supply of renewable energy, according to a Bloomberg analysis of the latest available data.

By one official estimate, Sweden could see power demand from data centers roughly double over the course of this decade — and then double again by 2040. In the UK, AI is expected to suck up

500% more energy over the next decade. And in the US, data centers are projected to use

8% of total power by 2030, up from 3% in 2022, according to Goldman Sachs, which described it as “the kind of electricity growth that hasn’t been seen in a generation.”

….

Over the past five years, Dominion Energy Inc., the power company that services Loudoun County, also known as “data center alley,” has connected 94 data centers that consume about four gigawatts of electricity, combined. Now it’s fielding requests for data centers campuses that would consume multiple gigawatts — enough to power hundreds of thousands of homes — two or three of which could use as much electricity combined as all the facilities hooked up since 2019.

The surge in demand is causing a backlog. Data center developers now have to wait longer to hook their projects up to the electric grid. “It could be as quick as two years, it could be four years depending on what needs to be built,” Dominion Energy Virginia president Edward Baine said in an interview.

Dominion is trying to build out the infrastructure to support it. New power lines hang from massive metal towers and run along roads and over creeks to feed electricity to these towering, windowless data centers. The company is building a large new wind farm off the coast and a lot of solar farms, but coal and gas powered plants could also stay online longer.

In late 2022, Dominion filed a previously unreported letter to its regulators asking for permission to build new substations and power lines to serve “unprecedented” load growth. In the letter, Dominion said it experienced 18 load relief warnings in the spring of that year. These warnings occur when the grid operator tells the company that it might need to shed load, the technical term for the controlled interruption of power to customers, which could include rotating outages.

“This is far outside of the normal, safe operating protocol,” Dominion told regulators.

Accenture an AI leader?

Accenture reported Q3 results this week which gave us some insight into how corporates are currently thinking about IT spend.

As you know, this fiscal year, our client spending developed differently than we expected at the beginning of the fiscal year. And these conditions continue with clients prioritizing large-scale transformations, which convert to revenue more slowly, while limiting discretionary spending, particularly in smaller projects, with delays in decision-making and a slower pace of spending as well.

Accenture's recent report highlights an interesting trend in GenAI projects. These smaller-scale initiatives, mostly involving clients experimenting with AI, saw new bookings jump to $900 million from $600 million in the previous quarter. This puts their run-rate sales at $3.6 billion, just edging out OpenAI's $3.4 billion and not far behind Microsoft's estimated $4 billion¹.

It's intriguing to compare these figures given the vastly different levels of investment required. While the business models and profit margins vary, it's food for thought as discussions about return on investment for AI capex gain traction in the investment community. AI's long-term economic impact is undeniable, but it's worth considering how much patience public markets will have, especially with today's higher cost of capital. This sentiment is echoed by Brad Gerstner from Altimeter, who recently shared an anecdote about Satya Nadella. At a Coatue conference, Nadella reportedly warned that Microsoft might face a 30% stock decline before reaching new heights, due to the mismatch between AI investments and immediate returns.

The recent earnings cycle has shown how harshly the markets can punish software companies that fail to demonstrate AI-related revenues. It's not a stretch to imagine this scrutiny extending to current market leaders if AI revenue growth slows, particularly as many corporates remain in the experimentation phase. This situation is well-illustrated by a quote from Accenture's CEO during their recent earnings call, which provides valuable insight into how corporations are approaching AI adoption. The CEO's perspective offers a glimpse into the challenges and considerations businesses face as they navigate the AI landscape.

Now let me give a little context on how we're executing our strategy to be the reinvention partner of choice and why we're uniquely positioned to be helping our clients on AI. It is important to remember that while there's a near universal recognition now of the importance of AI, which is the heart of reinvention, the ability to use GenAI at scale varies widely with clients on a continuum. With those which have strong digital cores genuinely seeking to move more quickly, while most clients are coming to the realization of the investments needed to truly implement AI across the enterprise, starting with a strong digital core from migrating applications and data to the cloud, building a new cognitive layer, implementing modern ERP and applications across the enterprise to a strong security layer. And nearly all clients are finding it difficult to scale GenAI projects because the AI technology is a small part of what is needed. To reinvent using technology, data and AI, you must also change your processes and ways of working, reskill and upskill your people and build new capabilities around responsible AI, all with the deep understanding of industry function and technology to unlock the value. And many clients need to first find more efficiencies to enable scaled investment in the digital cores and all these capabilities, particularly in data foundations. In short, GenAI is acting as a catalyst for companies to more aggressively go after cost, build the digital core and truly change the ways they work, which creates significant opportunity for us. And this is why clients are coming to us.

While companies recognize AI's importance, widespread adoption is facing delays. The primary hurdle is the need to establish the necessary infrastructure before fully embracing AI technologies. This gap between acknowledging AI's potential and actual implementation highlights the complex challenges businesses face in their AI journey.

Big Tech’s regulatory chess game

EU regulators had a rough week, with big tech companies grabbing headlines for their vocal criticism of the European regulatory environment.

Apple Won’t Roll Out AI Tech In EU Market Over Regulatory Concerns

Apple Inc. is withholding a raft of new technologies from hundreds of millions of consumers in the European Union, citing concerns posed by the bloc’s regulatory attempts to rein in Big Tech.

The company announced Friday that it would block the release of Apple Intelligence, iPhone Mirroring and SharePlay Screen Sharing from users in the EU this year, because the Digital Markets Act allegedly forces it to downgrade the security of its products and services.

“We are concerned that the interoperability requirements of the DMA could force us to compromise the integrity of our products in ways that risk user privacy and data security,” Apple said in a statement.

Booking.com chief slams EU over ‘dumb’ regulations

Booking Holdings has refused to rule out leaving the EU over “dumb” regulatory burdens that its chief executive says are putting the online travel group at a “competitive disadvantage”.

Glenn Fogel attacked new EU digital rules that have forced it to allow hotel companies to offer lower prices on their own websites than on Booking.com, the US group’s Amsterdam-based subsidiary.

“If regulations are not smart regulations then you’re at a competitive disadvantage,” he said during the Financial Times’ TNW tech conference in the Netherlands on Thursday. “I believe in giving customers the best prices. Any regulation that prohibits us [from doing that], I consider that to be a dumb regulation.”

Asked whether he was considering moving the $135bn company’s headquarters out of the EU because of his concerns over the bloc’s growing scrutiny of tech groups, Fogel said: “I never say no to anything that is possible.”

The threat follows a series of regulatory setbacks for the company in the EU, with the bloc seeking to challenge the market dominance of the world’s biggest tech companies through new legislation and a series of antitrust actions.

Booking last month became the first Europe-based company to be designated an “online gatekeeper” under the EU’s landmark Digital Markets Act (DMA), which imposes additional burdens on the company such as forcing it to avoid promoting its own services ahead of rivals.

It's worth keeping an eye on whether this becomes a trend among 'gatekeepers' playing hardball with the EU. We've already seen Apple withholding certain features and Meta delaying the initial launch of Threads in the region by five months. This dance between big tech and regulators could lead to EU users missing out on new features or apps, at least temporarily. It raises questions about how companies might leverage their popular products in response to regulatory pressures, and what this means for users caught in the middle. In Booking’s case, I am more sceptical they would go through with leaving the EU given its importance as a travel destination. I don’t really buy the idea that allowing hotels to price rooms on their website lower than booking sites is bad for consumers, but I might be missing something.

Models as a Service in consumer AI

Speaking of Apple, it looks like past rivalries aren't standing in the way of its consumer AI ambitions. Despite its long-standing conflicts with Meta, Apple seems keen on potentially partnering with them to use Meta's LLM Llama. It's a surprising twist that shows Apple's pragmatic approach to becoming an AI aggregator. This move suggests that in the fast-paced world of AI, even tech giants are willing to set aside old grudges to stay competitive.

From the WSJ

In its hustle to catch up on AI, Apple has been talking with a longtime rival: Meta.

Facebook’s parent has held discussions with Apple about integrating Meta Platforms’ generative AI model into Apple Intelligence, the recently announced AI system for iPhones and other devices, according to people familiar with the matter.

Meta and other companies developing generative AI are hoping to take advantage of Apple’s massive distribution through its iPhones—similar to what Apple offers with its App Store on the iPhone.

A latecomer to generative AI, Apple has developed its own smaller artificial-intelligence models but has announced it will turn to partners for more complex or specific tasks. When Apple Intelligence was unveiled earlier this month at the company’s Worldwide Developers Conference, OpenAI’s ChatGPT was announced as the company’s first partner.

“We wanted to start with the best,” said Apple software leader Craig Federighi, noting that ChatGPT “represents the best choice for our users today.” He also said Apple wanted to integrate Google’s Gemini as well.

In addition to Google and Meta, AI startups Anthropic and Perplexity also have been in discussions with Apple to bring their generative AI to Apple Intelligence, said people familiar with the talks.

Apple and Meta's history is complicated, to say the least. Apple's been pretty tough on Meta ever since they refused to pay the 'Apple tax', so a potential partnership would be a major shift in their relationship. Apple's stock has been on a rollercoaster ride this year, but it bounced back as WWDC approached and investors got excited about its AI strategy. The company's positioning as a key distribution point for AI has got Wall Street buzzing. Interestingly, Apple's late start in AI research might actually be working in its favor. They're outsourcing the heavy lifting (and the hefty bills) to suppliers like OpenAI, Google, and Microsoft. It's a clever move - why reinvent the wheel when you can just be the coolest car on the road? Like Amazon, Apple's got no choice but to offer AI models as a service except on the consumer side. Their bet? That iPhone users want a buffet of AI models to choose from, with smaller models handling personalized requests. Google, meanwhile, is likely going all-in on a seamless experience with both small and large models integrated into Android devices. On paper, Google's approach sounds more appealing. But let's face it, Google's never been the best at selling to consumers. Apple, on the other hand, could probably convince its users to buy sand in a desert (though maybe not a VisionPro... yet).

Other interesting headlines

Amazon mulls $5 to $10 monthly price tag for unprofitable Alexa service, AI revamp

Optimizing AI Inference at Character.AI

Americans Are Impressed with China’s AI

That’s all for this week. If you’ve made it this far, thanks for reading. If you’ve enjoyed this newsletter, consider subscribing or sharing with a friend

This is a free publication but if you’d like to support my work, please consider buying me a coffee. I welcome any thoughts or feedback, feel free to shoot me an email at portseacapital@gmail.com. None of this is investment advice, do your own due diligence.

1. estimate based on Jamin Ball’s blog

Tickers: NVDA 0.00%↑ , MSFT 0.00%↑ , ACN 0.00%↑ , AAPL 0.00%↑ , BKNG 0.00%↑ , META 0.00%↑