Amazon, Microsoft, and Alphabet, the parent company of Google, are all expected to increase capital expenditure as they build up their capacity to support the growth in generative artificial intelligent.
Over the last few years, the Big Tech groups that together dominate the global market for cloud computing have increased their investment in the infrastructure of computing.
Capital expenditures rose by almost 20% in the first three months of 2021, bringing the total to $42bn. This figure includes reported corporate capex by Alphabet, Microsoft, and Amazon’s overall investment in property, equipment and other assets. It represents a 10% increase from the quarter ending June. Analysts predict that cloud-related expenditures will accelerate in the coming year.
Last month, executives from the companies stated that large amounts of capital expenditure are being allocated to generative AI systems which require a lot of computing power. Amazon CEO Andy Jassy said that generative AI would drive “tens and billions of dollars in revenue”.
To retain their customers, the three tech giants must compete in AI in order to gain market share in the cloud. This business is the main driver of Amazon’s profits. Each company wants to attract new customers by offering a range of AI services and tools that are state-of-the-art, while also enhancing their core products.
Jeff Pearson, the managing director of technology consultancy Slalom, said that rivals must compete in generative AI. Otherwise they will lose market share and relevance. “All of that will require a huge amount of capital expenditure”, such as for servers and data centers.
Bank of America analysts predict the collective cloud-related capex of Amazon, Alphabet and Microsoft will rise at an accelerated 22 per cent next year to $116bn. This year they raised their 2023 forecast from no growth to 14 per cent. Last year the companies’ combined investment increased 20 per cent from 2021 to $84bn, BofA said.
Justin Post, analyst at BofA, says Microsoft “ramps up” its investment to support “an increase in AI workloads”, and their cloud business. Post said that all three companies were investing ahead of future revenue.
Amazon’s quarterly figures for investment include assets from its retail business in which it made significant investments during the pandemic. Analysts believe that the decline in Amazon’s investment in its third quarter, as compared to last year, is due to a decrease in ecommerce expenditure. Amazon announced in October that its retail capex will fall this year, while cloud-related investments would increase.
Microsoft took the lead and signed an exclusive deal with OpenAI, now seeking a valuation of $86bn. Microsoft was the first to sign an exclusive agreement with OpenAI. The company is now seeking an valuation in excess of $86bn. Microsoft customers will now have access to ChatGPT’s technology.
Microsoft became the first company in the industry this month to offer the technology behind ChatGPT as a standard feature within a widely-used software product. This was done with the launch its Copilot AI assistant. Upgrades can add up to 83 percent to monthly software costs for businesses. Microsoft stated that AI-related demand boosted cloud growth unexpectedly in the latest quarter. Alphabet, Amazon and Microsoft were more vague in their quarterly earnings reports regarding the impact of AI investments.
Charles Fitzgerald, a former Microsoft executive and angel investor, said that none of the three companies has “unique benefits on the capex-side”. All three have huge amounts of cash on their balance sheets. “All are committed to being leaders in the AI age, and will spend what is needed.”
Analysts warned that a focus on capital-intensive businesses could squeeze margins. According to BNP Paribas analyst Stefan Slowinski, high levels of capex “would not show up immediately” but would be a “headwind to margins and cash flow over time”.
Alphabet stated in October that they were committed to “reengineering their cost base” to create “capacity” for AI investments. Microsoft stated that margins may decrease as a result cloud and AI investments.