Ed Zitron, or as my friends call him while doing the SpongeBob thing "EdWaRd," Seems to think that AI is in some manner a bubble.
This is patently ridiculous. To understand why you need to understand a little basic kindergarten level economics.
Imagine a lemonade stand run by three plucky 12-year-olds. Call them Ed, Edd, and Eddy.
Each day of operation for this lemonade stand will both cost money to run and bring in money from sales. These costs are expenses and the money brought in is revenue.
Subtract expenses from revenue, and you get the total profit (or loss) for that day of operations.
Say they sell $10 worth of lemonade and the cost of sugar, lemon, and water totals up to $6. For that day they will have made $4 in profit.
Businesses have all sorts of expenses.
We can simplify these broadly into one-time expenses (like the lumber to make the booth) and recurring expenses (like the materials to make the lemonade.)
One-time expenses needed for the business to begin operations are called "startup costs."
Since the business is not yet running - at least not at full capacity - the funds to cover these startup costs needs to come from somewhere else. For a lemonade stand this is likely a parent of one of the children. This, depending on the preferred child-rearing strategy, can make that parent an "investor."
So if it costs $20 to get all the supplies for the first day of operations, how long until the lemonade stand can repay their startup costs?
It is generally understood that the more customers a business has the more money it makes.
To know exactly how much money to expect you need to understand the "unit economics" of the business. This is just the amount made per unit of product sold.
So if you sell 1 cup of lemonade for $1.00, and it took $0.50 to make, you will profit $0.50 per cup of lemonade sold.
This means that once you sell 40 cups of lemonade you will have made back the initial $20 investment.
Unfortunately sugar and lemons are not sold in clean "amount needed for a cup of lemonade" increments.
If you buy a small bag of sugar it might cost $5 but contain enough sugar for 20 cups of lemonade. If, however, you buy a large bag of sugar it might cost $100 but contain enough sugar for 1000 cups of lemonade.
This is what people mean by "economies of scale." If you can expect to sell more than 1000 cups of lemonade you can make your per-unit cost go down by buying the larger bag of sugar. If you aren't yet selling that much lemonade you might need to make do with the smaller bag.
It is always possible for a business to run at a loss. There are two broad reasons for this.
First is that it might not yet be profitable. It takes time for customers to discover and use your lemonade stand. For a period of time you might be stuck buying small bags of sugar. If you actually priced your product so that you make a profit-per-unit you might never get enough customers to "activate economies of scale."
Second is that it might never be profitable.
In both situations a business needs to be subsidized. This means that cash needs to be continuously injected to keep operations afloat.
Investors generally do this because they believe that, with enough time in the proverbial oven, the business can become profitable. One way that can happen is that the aforementioned "economies of scale" can drive down per-unit costs.
The other is "market capture." If you pour enough money into a lemonade stand that it can open branches on literally every street corner you can prevent new lemonade stands from opening. Being the only option in town for lemonade means you can jack up the price to become profitable. This has some limits - you can't make lemonade $2000 and expect anyone to be able or willing to afford that - but monopolies and oligopolies are almost the ideal state for a business.
If a business will never become profitable investors still might subsidize it. Lemonade stands are often used to teach children life lessons, not to become profitable. For this reason a parental investor might contribute money that they never expect to make back. The thing they are purchasing is not future returns but instead the existence of the lemonade stand itself.
With a particularly affluent parent a modest lemonade stand can be kept in operation almost indefinitely, even if they sell the lemonade for free.
Anthropic, a major AI company, loses money on every active user. This is because they charge people a monthly rate, and it costs multiple times that monthly rate to provide them the product they paid for.
The numbers aren't fully known, but it seems safe to say that for everyone who pays for and uses their platform they probably lose at least ~3x what that person paid them. The more someone uses their AI the faster they lose money.
There aren't any economies of scale left for them to activate. They are already plenty big and the GPUs they bought are expensive. But the more expensive part is actually running them. The costs of doing that aren't going to go down any time soon and actually increase the more usage they see.
They also can't make up the difference by capturing the market. Their users are costing them multiple thousands of dollars and only paying them at most a few hundred. Not enough people will drop a mortgage payment on AI to make up the difference.
Anthropic is just one AI company, but the broad math seems to be the same for all of them.
But here's the part that critics don't understand.
People aren't investing in AI companies to make a profit. It's clear these companies will never be profitable and, because the market famously is never irrational, investors must be taking this into account.
Instead, these companies are kept healthy and thriving by "parental investors." Just like how a lemonade stand keeps a kid occupied on the weekend and out of trouble, generative AI companies keep a large number of business and tech brothers off the streets. You'd much rather have then doing ZYNs and Addies in a safe office setting where they can chill with their homies and learn valuable life skills.
These investors have, from my perspective, almost infinite money. It only makes sense that they will be able to keep investing that infinite money forever, regardless of how much money the AI companies lose.
The future is bright and this economy - our economy - is invincible.