Cloud Service Providers struggle with Generative AI; Users face vendor lock-in; “The hype is here, the revenue is not”
Everyone agrees that Generative AI has great promise and potential. Martin Casado of Andreessen Horowitz recently wrote in the Wall Street Journal that the technology has “finally become transformative:”
“Generative AI can bring real economic benefits to large industries with established and expensive workloads. Large language models could save costs by performing tasks such as summarizing discovery documents without replacing attorneys, to take one example. And there are plenty of similar jobs spread across fields like medicine, computer programming, design and entertainment….. This all means opportunity for the new class of generative AI startups to evolve along with users, while incumbents focus on applying the technology to their existing cash-cow business lines.”
A new investment wave caused by generative AI is starting to loom among cloud service providers, raising questions about whether Big Tech’s spending cutbacks and layoffs will prove to be short lived. Pressed to say when they would see a revenue lift from AI, the big U.S. cloud companies (Microsoft, Alphabet/Google, Meta/FB and Amazon) all referred to existing services that rely heavily on investments made in the past. These range from the AWS’s machine learning services for cloud customers to AI-enhanced tools that Google and Meta offer to their advertising customers.
Microsoft offered only a cautious prediction of when AI would result in higher revenue. Amy Hood, chief financial officer, told investors during an earnings call last week that the revenue impact would be “gradual,” as the features are launched and start to catch on with customers. The caution failed to match high expectations ahead of the company’s earnings, wiping 7% off its stock price (MSFT ticker symbol) over the following week.
When it comes to the newer generative AI wave, predictions were few and far between. Amazon CEO Andy Jassy said on Thursday that the technology was in its “very early stages” and that the industry was only “a few steps into a marathon”. Many customers of Amazon’s cloud arm, AWS, see the technology as transformative, Jassy noted that “most companies are still figuring out how they want to approach it, they are figuring out how to train models.” He insisted that every part of Amazon’s business was working on generative AI initiatives and the technology was “going to be at the heart of what we do.”
There are a number of large language models that power generative AI, and many of the AI companies that make them have forged partnerships with big cloud service providers. As business technology leaders make their picks among them, they are weighing the risks and benefits of using one cloud provider’s AI ecosystem. They say it is an important decision that could have long-term consequences, including how much they spend and whether they are willing to sink deeper into one cloud provider’s set of software, tools, and services.
To date, AI large language model makers like OpenAI, Anthropic, and Cohere have led the charge in developing proprietary large language models that companies are using to boost efficiency in areas like accounting and writing code, or adding to their own products with tools like custom chatbots. Partnerships between model makers and major cloud companies include OpenAI and Microsoft Azure, Anthropic and Cohere with Google Cloud, and the machine-learning startup Hugging Face with Amazon Web Services. Databricks, a data storage and management company, agreed to buy the generative AI startup MosaicML in June.
If a company chooses a single AI ecosystem, it could risk “vendor lock-in” within that provider’s platform and set of services, said Ram Chakravarti, chief technology officer of Houston-based BMC Software. This paradigm is a recurring one, where a business’s IT system, software and data all sit within one digital platform, and it could become more pronounced as companies look for help in using generative AI. Companies say the problem with vendor lock-in, especially among cloud providers, is that they have difficulty moving their data to other platforms, lose negotiating power with other vendors, and must rely on one provider to keep its services online and secure.
Cloud providers, partly in response to complaints of lock-in, now offer tools to help customers move data between their own and competitors’ platforms. Businesses have increasingly signed up with more than one cloud provider to reduce their reliance on any single vendor. That is the strategy companies could end up taking with generative AI, where by using a “multiple generative AI approach,” they can avoid getting too entrenched in a particular platform. To be sure, many chief information officers have said they willingly accept such risks for the convenience, and potentially lower cost, of working with a single technology vendor or cloud provider.
A significant challenge in incorporating generative AI is that the technology is changing so quickly, analysts have said, forcing CIOs to not only keep up with the pace of innovation, but also sift through potential data privacy and cybersecurity risks.
A company using its cloud provider’s premade tools and services, plus guardrails for protecting company data and reducing inaccurate outputs, can more quickly implement generative AI off-the-shelf, said Adnan Masood, chief AI architect at digital technology and IT services firm UST. “It has privacy, it has security, it has all the compliance elements in there. At that point, people don’t really have to worry so much about the logistics of things, but rather are focused on utilizing the model.”
For other companies, it is a conservative approach to use generative AI with a large cloud platform they already trust to hold sensitive company data, said Jon Turow, a partner at Madrona Venture Group. “It’s a very natural start to a conversation to say, ‘Hey, would you also like to apply AI inside my four walls?’”
End Quotes:
“Right now, the evidence is a little bit scarce about what the effect on revenue will be across the tech industry,” said James Tierney of Alliance Bernstein.
Brent Thill, an analyst at Jefferies, summed up the mood among investors: “The hype is here, the revenue is not. Behind the scenes, the whole industry is scrambling to figure out the business model [for generative AI]: how are we going to price it? How are we going to sell it?”
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References:
https://www.ft.com/content/56706c31-e760-44e1-a507-2c8175a170e8
https://www.wsj.com/articles/companies-weigh-growing-power-of-cloud-providers-amid-ai-boom-478c454a
https://www.techtarget.com/searchenterpriseai/definition/generative-AI?Offer=abt_pubpro_AI-Insider
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2 thoughts on “Cloud Service Providers struggle with Generative AI; Users face vendor lock-in; “The hype is here, the revenue is not””
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Good summary, Alan.
The question is whether the generative AI is a feature or a product? From an end user perspective, it is probably just a productivity (hopefully) enhancing feature. Some examples include some of the features that Adobe has integrated into its Creative Suite or WordPress’s writing assistant.
It seems like there could be parallels with 5G in that it was a huge investment in technology for the carriers, but it didn’t really represent a new product with new revenue.
Excellence summary of the state of AI business issues and concerns of both service providers and end users.