WSJ What’s News - Can AI Startups Keep Powering Big Tech’s Spending Spree?

Episode Date: November 1, 2024

A.M. Edition for Nov. 1. WSJ global tech editor Jason Dean breaks down the results of this week’s tech earnings amid investor concern over soaring capital expenditures. Plus, Boeing offers machinists a 38% raise over four years as it tries to end a monthslong strike. And the WSJ’s Megan Graham explains how marketers are getting creative as they contend with a deluge of political ads that threaten to drown out their message. Luke Vargas hosts. Sign up for the WSJ’s free What’s News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Courage. I learned it from my adoptive mom. Hold my hand. You hold my hand. Learn about adopting a teen from foster care at adoptUSkids.org. You can't imagine the reward. Brought to you by AdoptUSkids, the U.S. Department of Health and Human Services, and the Ad Council. Kamala Harris tweaks her stump speech to capitalize on Donald Trump's comments about women, while he tries to put more states in play. Plus, Boeing makes a third attempt to end a strike that's hobbled

its business for months. And tech earnings show that big AI spending is starting to pay off. But how sustainable is a reliance on startups to keep renting expensive servers? Those companies themselves are not profitable and they're largely providing revenue for these services to Microsoft, Amazon and Google, those so-called hyperscalers from money they're getting from investors. It's Friday, November 1st. I'm Luke Vargas for The Wall Street Journal and here is the AM edition of What's News, the top headlines and business stories moving your world today.

Days after Donald Trump seized on negative remarks about his supporters by President Biden, Kamala Harris on the campaign trail last night quoted back her opponent's recent comments about being a guardian of women. Speaking in Phoenix, Harris cited Trump's remarks from a day earlier, in which he said that his advisors had urged him not to bring up an often-used line about protecting women before he stated that, quote, I'm going to do it whether the women like it or not. I'm going to protect them. He simply does not respect the freedom of women or the intelligence of women to know what's in their

own best interests and make decisions accordingly. But we trust women. We trust women. Surveys show that a wide gender gap has come to define the contours of the deadlocked presidential race, with Trump garnering the support of more men and Harris attracting more women. Meanwhile, before ending his night in Nevada, Trump made a detour yesterday to New Mexico, the latest in a string of recent stops in states not typically seen as competitive, including New York, California, and Montana. Polls have consistently shown Trump trailing Harris in New Mexico, but at a rally in Albuquerque,

he predicted he could pull off an upset and hinted at another goal of the visit. So I'm here for one simple reason. I like you very much and it's good for my credentials with the Hispanic or Latino community. Trump is scheduled to visit Virginia tomorrow, another state that hasn't voted Republican in a presidential election since 2004. And as for the candidate's whereabouts today, Trump is due in Detroit and Milwaukee, while Harris concentrates her focus solely on Wisconsin. Georgia's Secretary of State is asking social media platform X to remove a video purporting to show a Haitian immigrant

claiming to have voted multiple times, calling it a fake. Republican Brad Raffensperger said state and federal officials are looking into the origin of the video, which he described as likely a production of Russian troll farms and an example of targeted disinformation. And a judge in Philadelphia has delayed ruling on whether Elon Musk's cash giveaways to voters are unlawful after Musk sought to move the case from state to federal court. Musk had been ordered to attend yesterday's hearing but didn't appear, with a lawyer forum saying that he would attend future proceedings if required.

The Philadelphia District Attorney's Office said it might seek penalties if Musk doesn't attend. Well, this campaign cycle could be the costliest in U.S. history. According to research firm eMarketer, political ad spending will top $12 billion this year, and that deluge of political messaging is forcing many consumer brands to compete for consumers' attention and contend with higher prices for ads. We asked journal advertising and marketing reporter Megan Graham how companies are adjusting their strategies.

Some advertisers are choosing to avoid some of the states where there's higher volume of campaign ads. So, avoiding swing states and choosing to advertise solely in states where the volume is a little bit less. Some advertisers are biting the bullet and saying, we're just going to have to spend more than we ordinarily would. So, increasing their budget on platforms such as Metas, Instagram, and Facebook. Some marketers are choosing to try out different platforms. So some are moving advertising into platforms like Amazon where they can avoid some of the political chatter and on TikTok, which does not accept political advertising.

And in other business news, Boeing shares are moving higher off hours after it made a third attempt to end a strike that has halted most of its airplane production since mid-September. The shares are moving higher off hours after it made a third attempt to end a strike that has halted most of its airplane production since mid-September. The company and its machinists union reached a deal yesterday in which Boeing offered a 38% wage increase over four years, up from an original 25% offer that was overwhelmingly rejected.

The deal doesn't restore pensions, a key demand of many workers. However, Boeing says it will increase 401k contributions, keep paying annual bonuses, which were eliminated in its initial offer, and give workers $12,000 ratification bonuses. The union plans to vote on the deal Monday. Bud Light owner A.B. Inbev says its U.S. sales have bounced back after over a year of getting hammered in its largest market by a boycott that had caused it to lose its spot as the country's best-selling beer. Those results only partially outweigh big sales drops for the company internationally, led by double-digit declines in volumes in Argentina and China, the latter of which the

company blamed on Chinese consumers going out to bars and restaurants less and going on fewer vacations. Well, a private gauge of China's manufacturing activity today paints a slightly rosier picture of the country's economic fortunes, showing the sector returning to growth in October. That's a potential sign Beijing's more aggressive efforts to boost the economy are having an effect after a five-month run in which the Kaixin Manufacturing Purchasing Manager's Index was in contraction territory. A separate index for China's construction and service industry also shows a return to

expansion in October. Well speaking of economic indicators, how's this for a pre-election data drop? The October jobs report is due out today. Earnings from Exxon, Chevron, and Dominion Energy are also due, while shares of Apple, Amazon, and Intel will be in focus once trading gets underway after the tech giants reported results yesterday. Apple stock is trading moderately lower off hours, while Amazon and Intel are up more than 5%. And speaking of tech earnings,

Journal Global Tech editor Jason Dean drops by to discuss whether big tech's AI bets are paying off. A key question for investors as spending shows no signs of slowing. That's after the break. That's after the break. Well six of the magnificent seven group of big tech companies have now reported quarterly earnings, with Apple and Amazon providing results after the bell yesterday, and just Nvidia still to come later this month. Which makes this a perfect time to chat with journal global tech editor Jason Dean about

what we can say about these tech industry heavyweights and how they're broadly faring. Jason, no surprises here, really, right? It's AI again, more specifically AI-related capital expenditure that's been the big theme this earnings season. So much money being spent out there in an environment in which investors are somewhat antsy, right? That's right. Yeah.

You can see in the executive comments, in these earnings calls and in the stock reactions are somewhat antsy, right? and expand their cloud computing businesses. We're talking tens upon tens of billions of dollars every quarter. Jason, you told me off air that the good news was that all three of those companies did present some evidence that they're starting to see revenue from that business. But I wanna zoom in on Amazon,

where the scale of the spending was just really huge when they gave this number last night, saying $75 billion is the projected capex for this year, and that that will go up next year with CEO Andy Jassy saying, the way this is just going to happen is that investments will need to come in advance of the company's ability to monetize those efforts. If you're inclined to take a pessimistic view on all of this spending, that is the kind of comment that could make you nervous. Yes, exactly. I mean, people are desperate to get a read on that question, like when and that is the kind of comment that could make you nervous. to be trying to grab market share.

We've heard similar things from other CEOs this quarter and in previous quarters saying, look, this is the right thing to be doing right now. Just staying with these three hyperscalers you mentioned, Jason, do we see a kind of formula in any of these companies for what they need to do or have in place for investors to not punish them for their AI spending? Is there kind of a magic approach that goes over best? People want to hear about how this is already bringing in new streams of revenue. You know, all these cloud businesses were quite sizable before ChatGPT came out two years ago. Investors want to know, where's the money?

down. But what was interesting there is the company said, big reason for that is they're not able to build new capacity in their data centers fast enough to meet demand. Not that there isn't demand for these types of products. Just in terms of products, Jason, is it an issue for investors that in many cases there isn't a tangible or even kind of easy to understand AI product per se that they can see in return for all this spending? And sometimes even when there is one, as with the case of Microsoft launching its AI assistant pretty early on within its office software. We've heard from some analysts including at RBC Capital who've expressed some disappointment that the products maybe didn't quite live up to their promise. That's right.

So first of all, there are kind of two categories too, I would say. One is the products the companies themselves are offering and that's where you get like Microsoft's co-pilot products that you were alluding to. The other thing is providing these cloud services, basically renting very expensive servers that have these very expensive GPU chips sold by Nvidia and others to businesses that do AI functions, that provide AI services. Companies like OpenAI, Anthropic, etc. Those companies themselves are not profitable and they're largely providing revenue for these services to the hyperscalers from money they're getting from investors. They do have some revenue, but they're not at all profitable. So how that will play out is a big question. Will the revenue from those startups be sustainable? Will their own products catch on in a way that really they haven't

yet for the most part? All right. So it sounds like the question here is how long will venture capital keep funding these AI startups? And if they start pulling the plug, what would that mean for these hyperscalers? That's right. And a decent share of that investment is actually coming from some of these hyperscalers themselves. is going to completely evaporate. This is not NFTs from a few years ago. But whether these startups and the business lines of existing companies that are focused on AI will succeed in the long run, be profitable and sustainable and continue to push revenue into the cloud

operations and at what level is a big question mark. I've been speaking to Wall Street Journal global tech editor Jason Dean. Jason, thanks so much for staying up for us breaking down these results. Sure thing. Thank you. And that's it for What's News for Friday morning. Today's show was produced by Daniel Bach and Kate Bullivant with supervising producer Christina Rocca.

And I'm Luke Vargas for the Wall Street Journal. We will be back tonight with a new show. Otherwise, have a great weekend and thanks for listening.