Is The AI Spending Boom Creating A Depreciation Time Bomb?
Via City AM,
Big Tech's AI spending has exploded, with Google, Microsoft, Amazon, and Meta collectively investing hundreds of billions of dollars in infrastructure.
Rapid technological change may shorten the economic life of AI servers and GPUs, increasing depreciation and replacement costs.
The long-term profitability of AI will depend not only on demand growth but also on whether companies can justify the enormous ongoing capital requirements.
The eye-watering capital expenditure plans of Big Tech has been one of the year’s biggest stories.
Google, Meta, Amazon, and Microsoft have all splurged to secure a podium spot in the race to build out the infrastructure that will run the artificial intelligence (AI) revolution.
Total capex by these four firms is expected to reach $750bn (£560bn) this year, around half the annual spending of the entire UK government. It is much higher than this high-tech quartet has budgeted for before. And it is expected to be even higher next year.
Shareholders are on board with the plan, up to a point.
Since 2023, the average share price across the four firms has doubled. But that hasn’t kept pace with the average quarterly capex budgets, which have roughly quadrupled over the same period.
These trillion-dollar businesses can’t be too far away from hitting a ceiling on growing their computing power.
Firstly, because of physical constraints – things like the supply of chips and the availability of power and water infrastructure – with the latter beginning to come under genuine constraint in some parts of the developed world.
Secondly, because of the sheer build cost, given that most AI projects are far from hitting profitability, and there isn’t enough cash flow elsewhere to fill the hole.
Alphabet, Google’s parent company, has raised $85bn on its own in debt over the past year. It plans to raise another $80bn in equity over the coming months – an unprecedented fundraise and not something it can keep doing forever.
Getting older faster
Most of the focus has been on data centre build-out. But there is also another major factor, and one in danger of being overlooked: maintenance.
The cost of keeping AI running once the infrastructure is in place will be vital.
Data centre servers tend to last in the region of three to six years before they have to be replaced. Given the speed of innovation and intensity of compute needed for AI, you can expect that to skew towards the lower end of the range for the hyperscalers.
The kit inside AI data centres accounts for as much as two-thirds of the build cost. Add replacement costs onto the capex projections over the next few years, and things start to look scarily expensive.
Annual depreciation of property and equipment across the four firms has almost doubled over the past two years to $116bn. You can expect that to accelerate, given how much equipment has been added to their balance sheets over the past 18 months.
Last year, Amazon cut the expected useful life of its data centre assets from six years to five, a move which it said was “due to the increased pace of technology development, particularly in the area of artificial intelligence and machine learning.”
So far, Meta, Microsoft, and Alphabet have yet to follow suit, sticking with six years, but it seems like only a matter of time before they capitulate and cut this back, pushing up depreciation costs even further.
Something has got to give – sooner or later. Or am I missing something?
Badenoch blasts 'moaning' female Labour MPs over Burnham jobs 'quota'
Kemi Badenoch has told Labour women to earn a job in Andy Burnham's Cabinet instead of demanding they are handed jobs because of their gender.
The Tory leader lashed out today amid reports that female MPs are demanding the de-facto new prime minister introduce a 50:50 gender split 'quota' in his government.
Amid reports that former foreign secretary David Miliband is being lined up to return to the role, possibly with his brother Ed as Chancellor, one female minister also complained that Burnham could not have 'more Milibands than women' in the top posts.
But in a scathing article in the Times today Mrs Badenoch told them to 'stop moaning' and get chosen on merit instead of retreating into 'more of the failed identity politics that is holding back our country'.
'There are many, many reasons why you shouldn't have any Milibands in the cabinet,' she said.
'But complaining that the boys haven't given them the right jobs or that the boys are taking all the jobs, just shows that Labour's women still don't get it.'
The idea of quotas was also attacked by Baroness Jacqui Smith, Labour's Skills Minister.
Asked by Times Radio if Mr Burnham should reserve jobs for women, she said: 'No, I think what Andy Burnham should be doing is building the very best team around him to change this country.'
A letter written by the Women's Parliamentary Labour Party has called on Mr Burnham to ensure a 50:50 split between men and women in government jobs
Amid reports that former foreign secretary David Miliband (above, right, in 2010) is being lined up to return to the role, possibly with his brother Ed as Chancellor, one female minister complained that Burnham could not have 'more Milibands than women' in the top posts
But Mrs Badenoch told them to pipe down and get chosen on merit instead of retreating into 'more of the failed identity politics that is holding back our country'
A letter written by the Women's Parliamentary Labour Party and seen by the BBC has called on Mr Burnham to ensure a 50:50 split between men and women in government jobs after he succeeds Sir Keir Starmer.
'We are asking you to demonstrate this change from day one and address the toxicity and misogyny within our own party and government,' it said.
Labour has never had a female leader, while the Conservatives have had three, and Mrs Badenoch urged the government to follow its meritocratic example.
'If you run a meritocracy, then you do not have to worry about jobs for the boys,' she wrote.
'Every woman who is a Conservative MP, every woman who has ever won the leadership, has had to fight to get where she is.
'By contrast, Labour women are demanding guarantees from Burnham. But the truth is he doesn't have to give any guarantees.
'If none of Labour's women are prepared to get their hands dirty and challenge him for the leadership, their demands are toothless.'
'In fact, it's quite revealing that the women's parliamentary Labour Party has written to Burnham asking him to commit himself to at least 50 per cent female ministers.
'This has nothing to do with meritocracy. It is yet more of the failed identity politics that is holding back our country.'
