Op-ed: The fuel for the AI boom driving the markets is advertising. It is also an existential risk.
News Summary
With OpenAI's recent AI browser release, capital expenditures in the current AI arms race are expected to accelerate further. A Harvard economist estimates that 92% of US GDP growth in the first half of 2025 was due to AI investment, sparking discussions about a potential bubble. The article highlights that for the past 25 years, the internet's infrastructure has been engineered to extract advertising revenue. Trillion-dollar market cap companies like Google, Meta, and Amazon derive substantial profits from advertising. These platforms have used AI for years to refine their advertising models, enhancing engagement and purchase prediction. However, the latest wave of AI has the potential to disrupt these very advertising business models that fuel its growth, as AI will fundamentally change how people search, shop, and are entertained. While Google, Meta, and Amazon are best positioned to create new business models, a disruption or breakdown of the current advertising model by AI would cause a shock to the economy and markets far greater than most can imagine. The author suggests that the justification for AI infrastructure spending may not solely be to unlock new revenue, but primarily to protect the existing business models that constitute a significant portion of public companies' market capitalization.
Background
AI investment is growing at an unprecedented pace, estimated to account for the vast majority of US GDP growth in H1 2025. AI companies like OpenAI, Microsoft, and Grok are driving a global 'AI arms race.' Tech giants such as Google, Meta, and Amazon, with trillion-dollar market caps, are heavily reliant on their established advertising business models for substantial profits. These companies are now channeling a portion of these advertising revenues into massive AI infrastructure investments. AI leaders like Sam Altman have openly stated their intent to disrupt existing platforms that use AI to maximize advertising dollars, signaling that the very technology being funded poses a potential existential threat to its primary benefactors' business models.
In-Depth AI Insights
What is the fundamental paradox underlying the current AI investment frenzy, and what are its long-term implications for the market leaders? The paradox is that advertising technology, which fuels the AI boom, is simultaneously facing disruption from AI itself. This forces advertising-reliant tech giants into a defensive innovation race, essentially disrupting themselves to avoid being disrupted by others. The long-term implications of AI could be: - The emergence of entirely new, non-advertising-driven business models, redefining the profitability logic of the digital economy. - A significant devaluation of these trillion-dollar companies if existing advertising models are completely dismantled by AI, triggering broader market instability. - Market leaders are competing to invest in AI primarily to protect their existing value rather than solely creating new value, representing a high-stakes survival strategy. Beyond market share, what strategic objectives are driving the unprecedented capital expenditures by tech giants in AI, and how does this mitigate or amplify risk? Their core strategic objective is to safeguard their existing multi-trillion-dollar market capitalizations and prevent being displaced by non-advertising-dependent competitors like OpenAI. - Risk Mitigation: By internalizing the innovation process, they aim to control the disruption, ensuring their dominance in the new paradigm and preventing market share erosion by third parties. - Risk Amplification: If these massive investments fail to yield viable non-advertising revenue models, or if AI disruption accelerates beyond expectations, these capital expenditures could become significant sunk costs, accelerating the collapse of existing business models. How does the article's comparison to the dot-com bubble, particularly regarding the profitability of the funding companies, inform the risk assessment for today's AI boom? Unlike many unprofitable startups during the 2000 dot-com bubble, the primary investors in today's AI boom are among the world's most profitable companies (e.g., Google, Meta, Amazon). - This implies a more resilient funding source for AI investments, suggesting a lower probability of an immediate liquidity crisis. - However, the nature of the risk has shifted: the dot-com bubble was a risk of speculative asset misallocation. The current AI boom's risk lies in the potential for profitable giants to have their core business models disrupted by the very technology they are investing in. This represents a systemic, structural risk, where the collapse of the advertising model would have impacts far beyond a single industry.