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CONTRIBUTORS

Michael Browne

Global Investment Strategist,
Franklin Templeton Institute

Preview

This paper analyses the artificial intelligence (AI) investment boom and the potential for a much-forecast bust.

We ask three important questions:

  1. How is AI investment funded? We consider whether it is self-funded through cash flow or debt.
  2. What will be the business model post launch? We think three distinct revenue streams are likely: First, advertising revenue cannibalizing search engines; second, subscription revenues from B2B customers and B2C firms; third, utility-style cash flows, because once AI is embedded in a system, it is needed forever.
  3. What is the competitive model? There is risk of oligopolistic competition, or collusion, which would invite the regulators’ wrath.

Bubbles, booms and busts: The story is always the same and has always ended in busts. The story typically serves as a parable about greed and avarice, misplaced hopes and destroyed lives. It is not an urban myth; it is real and resonates and repeats across centuries: Dutch tulips in 1637; the South Sea Bubble of 1720; railway mania during the 1850s in the United Kingdom and during the 1860s/1870s in the United States; the 1929 Wall Street crash, so infamous that mentioning the year alone is a reminder to investors; the dot-com crash of 2001; and the global financial crisis (GFC) of 2008, which was so traumatic that we often fail to acknowledge the subprime mortgage boom that caused it. These are only the major events; between these notable examples are countless others of local and international importance, including in 1907, 1987 and others.

So, should we prepare for a new chapter of tears? Will the AI boom end in a bust?

In this article we will assess the size of this boom, including whether it is truly big enough to change the world. Another critical question is its financing, given all of the earlier busts came from the weight of debt. And we will look at how AI generates revenues and profits.

Only after discussing these topics can we then draw a conclusion about whether the boom is sustainable or more likely to end in a bust.

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