Why AI Needs Seatbelts And Brakes

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Some analysts have been talking about the “AI bubble” in the stock market, wondering when it might pop. The argument for it is solid: Companies that are working with different areas of AI—integrating AI technology into the functions they already have, investing in up and coming players in AI, and building infrastructure to make AI applications possible—are tip-toeing into a nascent area in technology that has a lot of potential, but hasn’t yet proven its worth. AI development so far has been expensive, and the platforms that have resulted have yet to show significant cost and time savings.

Last week’s earnings reports and market reactions to them demonstrate that if AI is indeed a bubble, it can still get bigger. Following a blockbuster earnings report Thursday afternoon that smashed analysts’ expectations, Google parent Alphabet’s stock price surged nearly 10%, boosting it to its first valuation exceeding $2 trillion. Microsoft, which also reported earnings Thursday afternoon, beat analysts' expectations with overall revenue increasing 17% year over year. Both companies’ success pushed the overall stock market higher and gave a significant boost to the share prices of tech companies in the chip business, including Nvidia, AMD and Arm Holdings.

While Alphabet and Microsoft both have a wide variety of business areas, AI was the engine that drove the results and the rallies. In the beginning of the earnings call, Alphabet CEO Sundar Pichai describes the company as being in an AI-first mindset since 2016. He touted the company’s accomplishments using AI—the technology now is present in Google’s search, messaging and advertising efforts, as well as its Chrome browser. Their cloud infrastructure is prepared to support AI applications, already working with several large companies. And its Gemini chatbot is utilized by both individual people and enterprises. For Microsoft, its AI-heavy intelligent cloud division saw a 21% increase in revenue in the last quarter.

AI on its own isn’t enough to boost markets, however. Meta also reported earnings last week, coming off of the launch of its AI chatbot and highly capable LLM, Llama 3. While Meta beat expectations and posted a 27% year-over-year increase in sales, Wall Street didn’t treat the Facebook parent company as well. The company indicated that sales would likely be slowing down in the next quarter, and more money would need to be invested in AI before monetizing it. Last week, Meta’s stock was down more than 10%.

Until AI can become a bigger portion of Meta’s business, it may not matter much to investors what the company does with it. After all, 97.8% of Meta’s revenues come from advertising on its various social platforms, compared with Alphabet, which got 86.6% of its revenues from ads.

While tech companies are providing the backbone and infrastructure to implement AI, companies are starting to utilize the technology. I talked to Partnership on AI CEO Rebecca Finlay about where businesses are in the AI revolution, and what they should do to implement it. A portion of our conversation is later in this newsletter.

ECONOMIC INDICATORS

Even more proof that AI is strong enough to move markets: All three major indexes closed up on Friday following some fairly pessimistic reports on the economy as a whole. On Thursday, the Department of Commerce found only 1.6% GDP growth in the first three months of 2024 when compared with the final quarter of 2023. Consensus estimates predicted much higher GDP growth of 2.5%, and the lower figure sent markets downward for the day. The GDP growth was at its slowest pace since 2022, but Forbes senior reporter Derek Saul notes that any growth is laudable, considering a year ago policymakers and economists thought it would stay flat as interest rates were increased to slow the rate of inflation.

On Friday, the core personal expenditures index, which is the Federal Reserve’s favored inflation gauge, showed 2.8% inflation in March. While this number remains unchanged from February’s 2.8%, it’s a bit higher than economist forecasts of 2.7%. It’s also much higher than the 2% target set by the Federal Reserve in order to cut interest rates. As actual numbers from the beginning of 2024 have continued to show the persistence of inflation, the chances of rate cuts happening have steadily gone down. Now, according to the CME FedWatch Tool, the probability of interest rate reductions in the first half of the year is just 13%.

POLICY + REGULATIONS

After years of talking about banning TikTok, the federal government actually did it last week. A measure requiring either the sale of Chinese company ByteDance’s short video app to a U.S.-friendly owner, or eventually banning it from app stores, was added to a package of bills providing military aid to Ukraine, Israel and Taiwan. It passed both houses of Congress and was signed into law by President Joe Biden.

And now the legal battle begins. Forbes’ Alexandra S. Levine and Emily Baker-White report TikTok is not going down without a fight. In an internal memo from Michael Beckerman, TikTok’s top policy leader in the Americas, a court battle is promised. “This legislation is a clear violation of the First Amendment rights of the 170 million Americans on TikTok,” he wrote. A top First Amendment law firm is already assembling creators and small businesses that rely on TikTok to bring the new law to court, Levine reports. Nearly 5 million businesses use the short video app to reach customers.

Many said the sale of TikTok isn’t a realistic goal, either. Forbes reporting has shown many of TikTok’s internal systems are built on ByteDance tools custom-made years ago by Chinese engineers, which will be difficult to take apart. Former National Security Agency general counsel Glenn Gerstell told Forbes TikTok’s sophisticated algorithm makes a divestiture more “economically unrealistic,” since China is likely unwilling to sell it. ByteDance has already denied reports that it was exploring a sale without the algorithm.

ARTIFICIAL INTELLIGENCE

Luxury brands rely on human creativity and craftsmanship to design and make items that provide experiences for which people will pay top dollar. So luxury powerhouse LVMH’s partnership with Stanford University’s Institute for Human-Centered Artificial Intelligence seems to be somewhat built on an inherent contradiction. Forbes senior contributor Pamela N. Danziger writes LVMH is interested in exploring AI applications in its business—including making sales predictions, augmenting customer experience, supply chain management, marketing, manufacturing, and yes, product design. LVMH Chief Data Officer Anca Marola said in a statement that the company has already used AI to augment efficiency. “It’s important to embrace and take advantage of these ground-breaking technologies, but do it in the right way that is virtuous for our future as companies, people and society.”

TOMORROW’S TRENDS

Partnership On AI CEO Rebecca Finlay On The Right Way To Bring AI To Business

The Partnership on AI is a nonprofit organization dedicated to ensuring AI developments advance positive outcomes. CEO Rebecca Finlay has a unique perspective on how businesses are bringing AI into their operations, what they plan to do with it and what’s likely to happen next. I talked to her about business AI implementation and how to get the benefits from this high tech platform.

This conversation has been edited for continuity, brevity and clarity. A longer version is available here.

What do you see as an ideal way a business can assess the way to go about using AI?

Finlay: For me, an ideal assessment is one that doesn’t prefer innovation and speed over responsibility. I say that the reason why we can drive fast is because we have brakes in our cars. The reason why we can drive fast and be safe is because we have seatbelts, right? Those are two innovations that are safety innovations, that actually drive our capacity to move more quickly and more effectively and more safely down the road. And so I encourage companies to get started because there are all sorts of ways in which AI could be helping them to serve their customers better. I also say if you’re going to get started, make sure that you are considering the responsibility requirements right from the very start. Then you’re building, I think, a much more effective system that’s going to drive much more effective product down the road as well.

When CEOs are looking at AI right now, do they seem to have a handle on kind of everything it takes? Are they aware of the responsibility, safety and security issues, whether they need to hire more people, if more training is needed for existing employees?

It’s a question of, do you have the right people with the right skill sets? It used to be, and it continues to be, very important that you have very strong IT expertise, computer science and computer engineering expertise in house. But what we’re seeing with some of these generative AI models is their capacity to code, and their capacity to be able to pick up some of that coding work that some of your software engineers may have been doing previously, and that might create space for them to do some of the innovations that we’re talking about around AI.

But also, I think it is understanding from your privacy professionals and your legal advisors internally, as well as your product and marketing professionals. What are they each hearing in their own professional associations? We’re seeing a lot of interest from lawyers’ associations to better understand what the legal issues are. And one of the key pieces there, of course, for both your lawyers and your privacy officials and others, is the evolving policy landscape. We now have the EU AI Act, so if you’re a company that is in the EU market, understanding what the implications are for you therein is really crucially important. And then we have a number of states in the U.S. who are developing different state-level privacy bills. So really, you need to have a community that’s both attending to what’s happening in-house, but also really understanding from their professional perspective what some of the emerging trends and opportunities might be.

When CEOs are looking at AI and talking to their finance team, where is the priority? Are they looking for a quick return on investment? Is it eventually saving money? Or is it all about keeping up with other companies?

CEOs are dealing with these demands across their business sectors, no matter whether it’s AI or otherwise. There’s always this tension between speed, pace of change, need to innovate for efficiency and productivity; together with what is my competition doing, and how do I make sure that I’m in a competitive place to move forward. And then the other piece of it is the risk; the unknown pieces of this model. I think that CEOs are in this moment, weighing all of those. Getting the good team in place internally to give them some advice, trying to engage as much as they can with experts outside of their companies who can help to give them some of that advice as well. And I think, most importantly with the board, is coming to a clear understanding about what level of transparency the board needs in order to be assured that the AI decisions that are taking place are being done transparently and responsibly.

One of the interesting developments that I’ve noticed, some [publicly traded] companies have started within those [annual financial] filings that specifically speaks to what are the risks: We’re using AI. What are the risks that we want to make sure that the public is aware of? That, to me, is a really interesting form of governance that really shows how important it is for companies to be attending to the innovation components of AI, and doing it in as transparent a way as possible.

FACTS + COMMENTS

The Labor Department last week increased the salary amount for employees who must be paid overtime.

$58,656: New minimum overtime exempt salary as of January 1, 2025. Currently, it’s $35,568, and will increase to $43,888 on July 1

4.3 million: Number of additional salaried employees who will be eligible for overtime pay

‘Raise the bar for workers who help lay the foundation for our economic prosperity’: What Acting Labor Secretary Julie Su says the rule does

STRATEGIES + ADVICE

Business is changing rapidly today with new markets, new technologies and new challenges. To get employees who can best adapt, you may want to consider becoming a networked workforce.

Boeing can offer many lessons in what companies should not be doing. If you’re in manufacturing, here are some ways you can learn from their mistakes.

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QUIZ

A company in Warren Buffett’s Berkshire Hathaway portfolio reached a $250 million settlement last week in a case in which it was accused of charging fees that were artificially high. What industry is this business in?

A. Insurance

B. Energy

C. Publishing

D. Real estate

See if you got the answer right here.