($) AI Spending Against the Price of Time
Learnings from Zoom and Snowflake’s earnings
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CFOs and CIOs of large enterprises are drawing up their 2024 IT budget as we speak. Part of that budget will be a dedicated envelope for investing and building in generative AI, heading into next year.
This year was an odd year in enterprise IT spending. Because 2022 was such a tough year of layoffs, rapidly rising interest rates, currency fluctuations, and an overall dim view of the economy, budget and headcount heading into 2023 was not flush nor generous. But then ChatGPT happened on November 30, 2022. To everyone’s surprise, including OpenAI, it took off. Everyone was scrambling to figure it out and invest in AI to not fall behind, yet no one had a “2023 AI budget”, during a year that most people predicted would have a recession, but didn’t.
With AI proven to be not a fad and, at the very least, a productivity boost for most white color and technical jobs, there is good reason to believe that the 2024 IT budget will have a healthy envelope dedicated to generative AI. However, this money will still be allocated under an interest rate environment that will be elevated, probably in the 4-5% range, even if the Fed starts cutting – a scenario many on Wall Street are hoping for and betting on, but one I find unlikely.
Warren Buffett once said, “Interest rates are to the value of assets what gravity is to matter.”
The CFOs of large enterprises are all sophisticated stewards of capital, who understand the gravity effect of both the cost of money and the price of time. So even if they set aside a healthy AI budget, the pace of spending – when that money leaves the corporate coffer to pay the AI software vendors – will be closely managed and scrutinized. After all, every dollar that does not leave your bank account is now a dollar that can earn 5% interest income. (This was, of course, a non-factor during the period of ZIRP.)
This “pacing” factor will make a still-difficult software spending environment more tricky to navigate, especially when it comes to revenue collection, payment terms flexibility, and cash flow management. In fact, it is already showing up in smaller ways this year. I have picked up some clues from the Q3 earnings of Zoom and Snowflake – two significant software companies, who are aggressively making a play for all the AI spending in 2024.