It’s swallowed billions of dollars, but has AI lived up to the hype?

But AI is a cash guzzler—Microsoft, Meta and Alphabet invested $32 billion in the first quarter of 2024 in AI development. The billions that were invested have been spent on expensive hardware, software and power-hungry data centres, totting up Big Tech valuations, but without real benefits.

Enterprises, meanwhile, have been waiting on the sidelines for the most part. With little return on investment (RoI) expected in the foreseeable future, they have been hesitant to deploy or depend entirely on AI. They also have doubts about the accuracy of AI generated results, aside from concerns over data privacy and governance.

So, while huge sums of money have been invested in AI, the rate of adoption has been slow, costs (of access) are very high, and the output is not reliable. For all the money that has been spent, AI should be able to solve complex tasks. But the only visible beneficiaries are the few big companies with a stake in AI, such as AI chipmaker Nvidia, which saw its market value jump by over $2 trillion in under two years as investors picked the stock anticipating a disruptive change. But what happened on 24 July shows that investors are running out of patience.

Inflated expectations

Last month, Wall Street investment bank Goldman Sachs released a 31-page report on AI, questioning its benefits. Titled‘GenAI: Too much spend, too little benefit’ the report points out that AI’s impact on productivity and economic returns may have been overestimated. Jim Covello, head of global equity research, Goldman Sachs, asked, “What $1 trillion problem will AI solve?"

The venerable investment bank forecasts there will be expenditure of $1 trillion over the next few years to develop AI infrastructure but casts doubts over returns or breakthrough applications. In fact, the report warns that if significant AI applications fail to materialize in the next 12-18 months, investor enthusiasm may wane.

The flow of funds is already thinning, particularly in early-stage AI ventures. While investments in AI startups surged in 2023, the first quarter of 2024 saw just $3 billion invested globally, according to the EY report. The consultancy projects total global investment to be in the region of$12 billion in 2024, a little over half the level in 2023.

“GenAI was crowned very quickly to be the best new thing to have happened since sliced bread," said Archana Jahagirdar, founder and managing partner, Rukam Capital, a Delhi-based early-stage investor which has backed three AI ventures—unScript.ai, Beatoven.ai and upliance.ai. “Now, there’s a realization that GenAI tech is exciting, but monetizable use cases are yet to emerge."

Daron Acemoglu, institute professor at MIT, noted in the Goldman Sachs report that “truly transformative changes won’t happen quickly. Only a quarter of AI exposed tasks will be cost effective to automate in the next 10 years".

Indeed, technology research and consulting firm Gartner, which popularized the concept of the new-technology hype cycle, says that Generative AI has passed the peak of inflated expectations (marked by overenthusiasm and unrealistic projections) and is entering the trough of disillusionment.

Poor RoI

“The RoI (return on investment) is not in tune with the high capex on AI. At the heart of GenAI is the ability to summarize, synthesize and create content. People are using ChatGPT, like they use Google search," said Arjun Rao, partner, Speciale Invest, a venture capital firm.

Comparisons with another disruptive technology, the internet, are inevitable. The internet impacted every area of work, business, the economy, and society with tangible benefits—banks could expand without opening branches, or online retail could reach anyone without investing in physical stores. The internet led to the global IT services boom, as work could be sent online to tap affordable resources. This resulted in a $250 billion industry in India employing nearly five million. The internet offered cost effective and efficient alternatives. In contrast, AI will likely be replacing low-wage jobs with expensive technologies and lack of reliability, as of now.

“Unless there is RoI, companies will not invest. But we believe every business will be an AI business in future. Voice assistants are improving, and can also analyze conversations at scale. We do see adoption going up," said Ganesh Gopalan, chief executive and co-founder, Gnani.ai. Set up by a group of former Texas Instruments engineers, Gnani.ai is a conversational AI platform backed by Samsung Ventures.

To be fair, technology disruptions are not easy and geeks tend to oversell ideas saying they will change the world. “A lot of people will lose money before they start making money," Nishit Garg, partner, RTP Global Asia, an early-stage venture capital firm, toldMint. “This happens with every disruption we have seen, in cloud, internet and e-commerce. AI is going to raise the intelligence level of every organization. But before that happens it has to be affordable to use and error free." RTP Global has invested in a few AI-led ventures, in areas such as market automation and drug development.

The internet, cloud, smartphones went through that hype cycle of lofty promises but eventually did improve and changed the way we work. Proponents argue that it takes a lot of money to set up infrastructure. For instance, it took billions of dollars to set up mobile networks before calls could be made.

Repeating history?

Back in 1905, Spanish-American philosopher George Santayana wrote: “Those who cannot remember the past are condemned to repeat it". Geeks fervently believe that the next big tech idea will change the world. But history shows that many of the tech ideas that lured investors and enterprises like moths to light were either ahead of their time or just plain wrong.

For instance, after companies poured billions into solving the Y2K problem, the dotcom bubble started taking shape. Fuelled by investments in internet-based companies in the late 1990s, the value of equity markets grew exponentially during the dotcom bubble, with the Nasdaq rising from under 1,000 to more than 5,000 between 1995 and 2000. Everyone from autoparts sellers to the neighbourhood bakery were sold the idea that if they weren’t online they were doomed.

By the end of 2001, reality set in—companies were online but there were no users. TheNasdaq composite stock market index, which had risen almost 800% in just a few years, crashed from its peak by October 2002, giving up all its gains as the bubble burst.

More recent examples are the metaverse and non fungible tokens (NFTs). The metaverse was a vision that people flock to the 3D virtual web via their avatars. Analysts projected that the market would be worth over $1 trillion in a decade. NFTs started selling with eyepopping valuations. Both were swept away as AI mania took over and were clearly ahead of their time.

Still early days

For all its niggles, AI is a more fundamental technology shift than the metaverse or NFTs. But if it was having a meaningful impact, more people, at least in developed economies, would have been willing to pay to use ‘reliable’ premium services. But that is not quite the case. Open AI’s ChatGPT has around 180 million daily active users worldwide, but less than 5% (less than 9 million) pay to use it. And across companies, the use of AI varies, with digital startups using it more than traditional companies.

“From a tech evolution standpoint, we are at the infrastructure buildout phase," said Namit Chugh, principal W Health Ventures, a healthcare focused venture investor. “The middleware, services layer, applications layer will come on top of that. That’s when companies can start monetizing. The problem is AI infrastructure is very expensive to build." W Health Ventures has invested in AI-focused startups such as Wysa, an AI assistant for people who need mental health support.

“There is a lot of FOMO—fear of missing out—ensuring that enterprises have an AI strategy. But at 60-65% accuracy AI won’t be good. This has to improve," said RTP Global’s Garg.

“If you ignore AI you will be out of business. Ventures like Uber, Netflix, Amazon, Airbnb disrupted the market. If they don’t adapt with AI they will be dinosaurs. The problem is, a lot of people do not understand this animal," said Arnab Basu, partner and leader, advisory, PwC India.

There is a lot of FOMO ensuring that enterprises have an AI strategy. But at 60-65% accuracy, AI won’t be good. —Nishit Garg

The India reality

“India’s ambition is to…become one of the top three global economies in terms of GDP," Rajnil Malik, partner and GenAI go-to-market leader, PwC India, said. AI services will play a big role in this. RoI is not evident yet, but building blocks are being put in place. Platforms like Uber were using AI from day 1, but there was no RoI for long, he added.

According to EY, 66% of India’s top 50 unicorns are already using AI. But only 15-20% of proof of concept AI projects (more like trials) by domestic enterprises have rolled out into production. However, among Global Capability Centres (GCCs), the back offices of global companies in India, the shift from PoC to roll out is around 40%. According to IT body Nasscom, there are around 1,600 GCCs in India and their numbers are growing.

About a third of the use cases in India are for intelligent assistants and chatbots. Another 25% relate to marketing automation enabled by text generation and other capabilities like test-to-images or text-to-videos. Document intelligence is emerging as a key opportunity with around one-fifth of the use cases focusing on document summarization, enterprise knowledge management and search, according to EY.

Tata Steel has partnered with an AI tech platform to use AI for green steel by reducing emissions. Indigo has introduced the AI chatbot 6Eskai to assist travellers. Ecommerce major Flipkart’s knowledge assistant Flippi uses GenAI and LLMs to offer customized recommendations. Reliance Industries and Tata Group inked a strategic pact with Nvidia in September last year to develop India-focused AI powered supercomputers, cloud (for AI use cases) and GenAI applications. The government of India has also made a provision of ₹10,000 crore to procure computing power for AI projects.

About a third of the use cases in India are for intelligent assistants and chatbots. Another 25% relate to marketing automation enabled by text generation and other capabilities.

Rao of Speciale Invest believes that in India, in sectors such as manufacturing, there may not be a blanket use of AI as it competes with relatively low labour costs. AI will be more cost effective in software development if it takes over some coding tasks, and decreases the need for additional manpower.

“There are productivity improvements," said Mahesh Makhija, partner and technology consulting leader, EY India. “But with errors, hallucinations (when an AI model generates misleading or incorrect results), and the risk of data thefts, securitycompanies are cautious about using AI."

But Makhija is bullish on AI’s long-term prospects. “Things will improve. The nature of work will change, like Excel sheets and PPTs decades back, collapsed business planning times from weeks to days. Further improvements will come with AI," he said.

The human element

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An oft-cited example of AI success is Swedish fintech company Klarna. In 2023, Klarna partnered with OpenAI to develop a virtual assistant. This March, the fintech claimed its virtual agent helped shrink its query resolution time from 11 minutes to just two. The assistant does the work of 700 humans and Klarna expects to save $40 million this year.

Virtual assistants and chatbots are increasingly being used across enterprises to reduce the load (and save costs) on human contact centres and also improve what they can do (though this is mostly restricted to answering FAQs). But users often find the experience frustrating and want a human to solve their problems.

In the US, a Gartner survey of 5,728 customers, conducted in December 2023, underlined that people remain concerned about the use of AI in the customer service function. Of those surveyed, 64% said they would prefer that companies didn’t use AI in customer service. In addition, 53% of the customers surveyed stated that they would consider switching to a competitor if they found a company was going to use AI for customer service. The top concern? It will get more difficult to reach a human agent. Other concerns include AI displacing jobs and AI providing wrong answers.

“Once customers exhaust self-service options, they’re ready to reach out to a person. Many customers fear that GenAI will simply become another obstacle between them and an agent," Keith McIntosh, senior principal, research, Gartner customer service and support practice, said in a media release earlier this month.

For AI to take off, its proponents will have to address high costs, build killer apps, and generate correct, error-free output for institutions and people. If this disruptive force is to become as ubiquitous as the internet is today, it has to show trustworthy results. Else it runs the risk of a further erosion in value as stakeholders grow impatient.