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Speaker 1: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. Since ChatGPT introduced much of the world to generative AI, promises of a new tech boom have added trillions of dollars to the stock market. But can big tech actually turn these chatbots into big business and can they do it quickly enough to satisfy Wall Street’s supersized expectations? We’ll dive into those questions today. Then we look toward this weekend’s Super Bowl, which will generate billions of dollars in bets and see hundreds of millions spent on clever commercials. One of those commercials will feature a candy relic of the 1980s, which has turned into a new school hit. We’ll bring you the story of Nerds, a candy that is experiencing an unexpected star turn. Plus we’ll take a quick look at the news stories we’re watching right now and how they will affect your wallet. First, let’s talk about AI.
I thought that AI hype had hit a peak, but last week, tech execs got in front of their earnings call microphones and continued to raise the ante. Take Amazon, their Chief Financial Officer, Brian Olsavsky, said he believed generative AI would drive tens of billions of dollars of revenue for the company over the next several years. And then there’s Facebook founder and Meta platform’s Chief Executive Mark Zuckerberg, who seemed to be workshopping a chatbot and every pot campaign slogan. Here’s what he said.
Speaker 2: And if we succeed, everyone who uses our services will have a world-class AI assistant to help get things done, every creator will have an AI that their community can engage with, every business will have an AI that their customers can interact with to buy goods and get support, and every developer will have a state-of-the-art open source model to build with.
Speaker 1: Even Apple CEO, Tim Cook, who has largely stayed out of the AI fray, promised Apple would show off its advances later this year saying, “Generative AI could be a huge opportunity for Apple.”
For Microsoft CEO, Satya Nadella, all that talk is so 2023. Now it is time to actually show your work. On Microsoft’s Earnings Call, he said, “We have moved from talking about AI to applying AI at scale.” Microsoft was actually able to show results last week with cloud revenue that executives attributed directly to generative AI. Amazon and Google also pointed to cloud gains, as chip makers detailed sales of AI enabling server chips. Many of them sold to the executives I just mentioned. Overall, tech companies showed Wall Street enough early returns to largely hold onto their multi-trillion dollar valuations. But many questions remain about whether businesses and their customers want that chatbot in every pot, and whether they’ll pay enough to cover the huge amounts of spending, big tech will need to create them. Maribel Lopez, founder and Principal Analyst of Lopez Research, a tech-focused consulting firm, joined us to talk through what we saw in last week’s parade of earnings and what they pretend for the future.
Maribel, we expect generative AI to really lead to new tech, but what you’ve really stressed to me is the old saw that in the gold rush, especially at the beginning, you want to own the companies that sell the pick and shovels, not necessarily the companies that sell the gold and in tech that would be the chip makers, the equipment makers, the hardware makers. We’ve seen Nvidia rocket hire and make so much money, and now we’re starting to see that ripple through some others. Where have you seen so far in earnings that AI revenue that actually matters beyond Nvidia?
Speaker 3: Obviously we’re starting to see the cloud computing companies really demonstrate that their AI workloads going into the cloud.
Speaker 1: That’s Microsoft, Amazon, even Google has shown big gains in their cloud revenue.
Speaker 3: Even IBM saw a good lift that they attributed to AI. We’re seeing across the hyperscalers there’s been tremendous momentum for enterprise buyers to buy workloads in the cloud for AI, which is unexpected in terms of the timeframe. I think you and I thought that this train might take a lot longer to leave the station, and we were frankly a bit pessimistic about it, but it’s happened probably a couple of quarters earlier than I had anticipated.
Speaker 1: For sure coming into 24, I did not expect to see a whole lot of AI revenue yet. The two places really that it would show up is in cloud providers and in chip manufacturers. Intel and MD have given signals that they’re going to see AI revenue a little bit quicker than we thought as they’re trying to catch up to Nvidia.
Speaker 3: Right now, we’re in a space where AI is all about the cloud, but we’re shifting to a more broadly distributed market where AI goes from the edge through the cloud. That’s actually a win. You and I joked the other day about the AI PC, that’s a new category that we’re talking about, but the reality is people are going to need to upgrade their PCs and they’re going to be buying AI capable PCs. It doesn’t make sense to really buy anything else.
Speaker 1: Especially on the enterprise side. Microsoft’s going to be buying those computers for its employees, but for consumers it’s just not offering things that a typical consumer would need. Speaking of Microsoft, they definitely showed some AI results, especially in their cloud business, but the real test of this wave of generative AI is going to be Microsoft’s Copilot. Copilot is a chatbot within Microsoft’s different programs, basically an AI assistant. If this is going to ripple through and become a huge money maker for tech, it has to move from the tech companies buying the chips and creating the cloud computing. Microsoft is the first one to really get out there and show people what it looks like. What did you hear from Copilot, from Microsoft and how it’s doing?
Speaker 3: Copilot is supposed to be an additional cost for at least the enterprise companies so that they get access to this intelligence and functionality and that has the opportunity to increase Microsoft’s ARPU for its software stack.
Speaker 1: And ARPU is average revenue per user, basically, how much they make per employee that uses Microsoft Software.
Speaker 3: When they were talking in earnings, they actually thought that they had a really good opportunity to increase that ARPU over time with things like Copilot. And because Microsoft product is so pervasive, we do see that as the first potential software stack for AI. But I don’t think the AI software stack with its intelligence is an easy market. You have to convince organizations that they want to pay somewhere between five and $20 a month per user extra. And what we’re seeing is that organizations expect software to become more intelligent. And then the question is, do they consider whatever you’re delivering valuable enough that they’re going to pay that extra money for it? It’s still an open question and there’s going to be a handful of companies they’ll say yes to, but it will not be all software companies.
Speaker 1: And it’s going to be tough to get into, and that’s really why we’re staring at Microsoft right now saying, “Can you prove that this is stuff that your corporate customers want that they’ll up their spend?” Instead of saying, “If we’re going to spend there, we’re going to cut over here.” And that back and forth where maybe you don’t get as much revenue as you’re expecting while you’re spending so much money on increasing your capabilities.
Speaker 3: You just nailed what I think is the critical question to ask for most organizations, and that is if you are providing software and you have to have all the cloud computing resources and the like to run this new AI intelligence, what’s the margin impact of that? Even if you do get additional revenue, how many companies are going to pay 10, 15, $20 a month extra to have this type of intelligence for how many software stacks? And if they’re not willing to pay for it, then what does that do to your margin as a software company And if they are willing to pay for it, is it enough? These are questions I think are still unclear in the market.
Speaker 1: That’s really what the setup coming into the year was. They are trying to get more money from selling AI, but they’re going to be spending a lot of money to create that AI. And we’ve definitely seen that Microsoft said its capital expenditures, which is how much money it’s going to spend on equipment and other things, is going to go much higher. Google said the same. And the question for this year especially is can the amount you’re making on what you’re selling in AI make up for what you’re spending to build your AI systems?
Speaker 3: There’s one thing that we haven’t counted in that I think is really important, and that’s the use of AI within the organization to create efficiencies. If you look at Microsoft’s growth margin as an example, since we’ve been talking a lot about if Microsoft’s going to be the first one, they’ve been working with the technology for a while and they actually started to see some improvement on their overall expenses, some of which is related to AI. I think that’s actually very telling about the opportunity if it’s done the right way.
Speaker 1: Let me just say this straight up. Big tech laid off tens of thousands of workers so they could spend more on AI and hopefully for them replace those employees with their own AI software and systems. And those savings are really getting plowed back in.
Speaker 3: Yes, there was some of that, but to be fair, I also want to get back to the right sizing of organizations. It seems to me that in COVID, people just hired buckets of people whether or not they were the right people. And now I think going into what they might consider a more precarious economy, they’re using a combination of AI and sizing to get that back. I think we’re going to see that be pervasive in technology regardless of whether or not there’s AI. But I think AI actually, like I said, if you do it the right way, it does provide efficiencies. I actually think I heard several companies talk about efficiencies that we’re in the 30% range for different style workloads. That’s a big deal. That’s a lot of time. And you’re right, that does equal fewer people doing things over the course of time or same people doing more stuff that was different than they did before.
Speaker 1: And how people are going to interact with this technology has been a big question that I’ve received. How am I going to see AI in the real world? And what I try to tell people is that the first wave is going to be more assistive than replacement. It’s you’re going to run into a chatbot probably at your work that’s going to be asking you how to perform a function you do, and it’s going to help you make that function more efficient. And it’s going to take till generation two or three or four of that software to just handle that task for you. And what I try to tell people is, “If that’s the only function you do at your work, you should start taking some classes. If it’s one of your most annoying functions that you’d like to be able to not do, then you should look at it as a benefit.”
The AI hype that big tech was giving last year is now being sold to other sectors and it’s their turn to talk about how AI can affect their businesses. And that’s where we’re going to hear to really see how AI is working. This year, it may behoove you to look outside of tech and to other companies that are trying to use AI, and we’re going to see if those companies can actually create those efficiencies at the level they’re trying to get or are they spending more than they’re making from it?
Speaker 3: When you look at the reality of what has to happen for people to buy AI technology, it basically means that organizations have fundamentally rearchitected their business strategies and their business processes so that they can actually buy stuff and use it. That is not a short-term wind dip. And we’ve seen people react quickly and move beyond experimentation and into actual deployments, at least for small stuff. And I think one of the things that we get hung up on is in the AI hype, it makes it sound like AI can do everything right away. And therefore, I think the market’s expecting just massive, pervasive adoption of this when the reality is you want to do basic things, document classifications, things that help the business, but they’re not every workflow in the business, and that just takes time. I think we’ve seen tremendous optimism that was perhaps a bit misplaced for how long these tech trends take to happen.
Speaker 1: Maribel, there’s so much we could talk about with AI, but I think we’re going to have to cut it off there. Thank you so much for joining us and bringing us so much information that we’ll have to think about as we go on through the year and see how much the AI revolution actually bakes in 2024.
Speaker 3: Thanks, Jeremy.
Speaker 1: Do you like using AI chatbots? Do you want to see more of them? If you’re a listener on Spotify, be sure to answer this week’s poll. We’re going to take a quick break coming up a Super Bowl story that made us nerds for Nerds. Stay with us.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Maribel Lopez about what the latest in tech earnings mean for generative AI. Now we turn to a sweeter subject, Nerds. 40 years ago, Apple introduced the Macintosh computer in a Super Bowl commercial that invoked George Orwell’s 1984, along with the smashing success of Wendy’s, Where’s The Beef?, campaign. The era of the Super Bowl event commercial was officially born. Around that same time, a new candy was invading convenience stores, and that was Nerds. Back then, the tiny sour sugar beads won industry awards and quickly became a trick or treat staple. But the Super Bowl commercial and Nerds headed in much different directions through the next four decades. Ads during the NFL’s championship game have only received more attention as the cost of commercials skyrocketed. Nerds, on the other hand, fell behind other newer sour candies.
That history is why MarketWatch reporter, Charles Passy, was shocked to see these two stories intersect once again this year. The first nerds Super Bowl commercial will air on Sunday where the cost of a 3O second spot is $7 million on average. As Charles found out, Nerds can afford it, he told us why.
I remember when Nerds first came about back in the early eighties, they were actually Candy of The Year in 1985, but I haven’t thought about them in years other than Halloween when my kid gets some Nerds in his trick or treat bucket, how did they become popular enough to afford a Super Bowl commercial?
Speaker 4: I’ll put it in three words, Nerds Gummy Clusters. Basically what’s happened to this brand is they reinvented themselves. They still have traditional Nerds out there, which are these weird pebble shaped candies, but they essentially said, “How can we make Nerds relevant again?” And they came up with the formula that is essentially to take a gummy candy and coat it with the Nerds and it just took off. This brand went from 50 million in annual sales to 500 million in annual sales in recent years. And it’s all about this weird combo that just spoke to America’s sweet tooth.
Speaker 1: I got to tell you, I went into my teenage stepdaughter’s bedroom yesterday and found a pack of Nerds Gummy Clusters in her candy stash, and I did text her to make sure it was okay if I stole them. I’ve got them here and I have tried them and they’re the weirdest looking little things, Charles. They look like little coral rocks. They’ve just got these little bumpy growths all over them and in multicolor, and they are quite the sensation in the mouth. I’ll give it that.
Speaker 4: Absolutely. Now, true confession here, I have to stay away from candy according to dentist orders. I have not indulged in them, but they are quite unique and it’s like the perfect storm because they hit on a lot of notes. People do love gummy candies and they love nostalgic candies. Retro candies are really big right now.
Speaker 1: That’s nuts. Now you also found the people who invented the original Nerds back in the eighties through your reporting, what did they tell you about the invention of Nerds, the creation event of Nerds?
Speaker 4: Nerds started as basically leftovers, garbage. They noticed that they had these little bits leftover. There were the bigger parts that got finished into actual candies that got wrapped in packaged, but then there was leftover these little bits and they basically said, “What if we coat these and make them into their own thing?” And that was one of the key ideas behind it. The other aspect of it is Nerds was a buzzword in the eighties, Revenge of The Nerds movie, et cetera. They attached that name to it, and I think it just spoke to the tenor of the times they were goofy candies. The branding worked really well too.
Speaker 1: With this sudden increase in sales and popularity, how do Nerds compare to other candies? Are they crash in M&M’s territory at this point?
Speaker 4: Here’s what’s interesting and here’s the reason why, Ferrara Candy, the company that owns Nerds thinks there’s room to grow well beyond the 500 million. Yes, 500 million is a lot of sales, but the household penetration for Nerds is 16%. That means 84% of US households have basically no interest in Nerds yet. But I know that they’re thinking they’ve got a lot more sales to go and it’s all tied to the household penetration. Basically, they’re saying, “Yes, we’re big, but a lot of people are not aware of us or not aware that we’re still around even.” People who grew up in the eighties, they probably forgot about Nerds, a lot of them.
Speaker 1: And now they’ve gone from eighties candy relic to Super Bowl star, what is going on with their commercial this weekend during the Super Bowl? What is that going to be? And are Nerds going to have a star turn?
Speaker 4: They’re certainly hoping so. Basically they said, “Look, we’re selling like hotcakes. Let’s take it to the next level.” And obviously brands often look to a Super Bowl ad as a breakaway moment for them. The campaign is costing them $10 million. They basically decided to go all in and say, “Let’s do a Super Bowl ad.” We will see if their bet pays off. Super Bowl ads are their own thing. Some do very well, some do not so well. There are brands that, Apple computers, the Mac computer essentially was all built around a Super Bowl campaign that some people say is the greatest ad of all time and literally put that computer forefront in America’s minds.
Speaker 1: And that’s 40 years ago. And that was really the beginning of what we now know as Super Bowl commercials. And all of a sudden the prices started shooting higher for these ads and people started planning their campaigns around the Super Bowl.
Speaker 4: Part of what also happens with the Super Bowl campaign is look, it’s a few days away from the Super Bowl, and here we’re talking about an ad. They’re obviously hoping they’re going to get not just exposure on game day, but people will talk about this in advance. It used to be you just talked about the Super Bowl ads the day of, now the ads much like this one are getting released days in advance and you’re getting people to write whole articles about these ads or whatever. Clearly the investment is much more than game day and they hope they’ll get some mileage going into the game, but it’s a lot of money to spend with no guarantee. You just have to look at it, like I say, as a big bet.
Speaker 1: Charles, thank you so much for bringing us the story of Nerds and we’ll be looking for this commercial with the game this weekend.
Speaker 4: Sounds great.
Speaker 1: Before we go, it’s time for What We Are Watching, a look at the news you need to know for the rest of the week and beyond.
Commercials won’t be the only big money maker at this year’s Super Bowl, which is the first to ever be played in Las Vegas. The American Gaming Association projects that more than $23 billion will be legally gambled on the big game this year, and that’s a 35% increase from last year. Plenty more will be wagered in games that aren’t cataloged in that way, namely Super Bowl squares pools. Since I live in a state that hasn’t legalized gambling yet, in California, my only wagers this weekend will be on a few of those at my usual Super Bowl party.
I called a professor this week to talk through my strategy for the game, and if you’re wondering how to pick your squares this weekend, check out the story on MarketWatch.
As inflation continues to be the biggest factor in the Federal Reserve’s interest rate decisions, upcoming readings will be very important. Tomorrow we’ll receive annual revisions. And then on Tuesday we received January’s consumer price index or CPI reading, that will measure how inflation moved at the beginning of the year. Fed will be watching these numbers closely, so we will as well. Since the Fed signaled that an interest rate cut isn’t in the cards as soon as Wall Street had hoped this year, the bond market has been rocked by volatility. Rates on treasury bonds have increased on the news, leading to angst and selloffs from professional traders. But Main Street should see these developments much differently from Wall Street. And we’ll talk about that more next week.
And that’s it for this episode. Thanks to Maribel Lopez and Charles Passy. To keep following the latest on AI and the Super Bowl, head to marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review, it really helps others discover the show. And let us know what you want to hear from us. You can reach us at onwatch@marketwatch.com. And if you’re a listener on Spotify, be sure to answer this week’s poll on chatbots. The show is hosted by me, Jeremy Owens, and produced by Metta Lutz-Hopt and Katie Ferguson, who also mixed this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode and until then, we’ll be watching.
