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There’s plenty of argument about whether the worst case scenario with artificial intelligence is that it lives up to its promise and potentially throws millions of people out of work or if it will turn out to be an overhyped buildout that will lead to a cataclysmic market decline for all the companies pouring billions into data center buildouts.
On the positive side, there are also those who think it will lead to a new era of employee empowerment, where a proliferation of agents will make the global economy feel and produce like there are 35 billion people working in it, rather than about 3.5 billion or so active workers. Then there are all manner of expectations in between.
When thinking about the negatives, it’s often helpful to go to the section entitled “Item “1A. Risk Factors” of the quarterly and annual reports that publicly traded companies file with the U.S. Securities and Exchange Commission. In the case of AI, the biggest publicly-traded players are NVIDIA, Microsoft, Alphabet, Meta, and Oracle.
These companies are some of the biggest boosters of AI’s upsides, but what are they telling investors in this section where they’re obligated to disclose potential risks?
We’re seeing them enumerate risks in four main areas:
The biggest concerns are that the huge investments in AI data centers outrun market demand for AI-based services and may never pay off.
“There are significant risks involved in developing and deploying AI and there can be no assurance that the usage of AI will enhance our products or services or be beneficial to our business, including our efficiency or profitability,” Meta’s latest 10-K filing reads.
Here’s Microsoft’s 10-K sounding a similar alarm: “We are incurring significant costs to build and maintain infrastructure to support cloud-based and AI services, reducing operating margins,” the filing reads. “It is uncertain whether our strategies will continue to attract users or generate the revenue required to succeed. If we are not effective in executing organizational and technical changes to increase efficiency and accelerate innovation, or if we fail to generate sufficient usage of our new products and services, we may not grow revenue in line with the infrastructure and development investments described above.”
All the major players are concerned about the patchwork of regulatory and legal requirements emerging in different jurisdictions.
Alphabet’s 10-K details concerns about laws and regulations covering AI that could result in monetary penalties or other regulatory actions. “The EU AI Act introduces various requirements for AI systems and models placed on the market or put into service in the EU, including specific transparency and other requirements for general purpose AI systems and the models on which those systems are based. In the U.S., there is increasing uncertainty as to the federal government's approach to AI regulation going forward,” Alphabet wrote in its February filing. While there’s been clarification since then at the federal level, Alphabet also points to state level proposals and laws addressing deepfakes and other AI-generated synthetic media.
NVIDIA filings have addressed the twist of export controls that may affect the company’s ability to do business in certain countries or maintain its supply chain.
Oracle’s latest 10-K also flags the difficulties of keeping up with government action. “Regulatory uncertainty, including the lack of comprehensive federal legislation and a patchwork of existing and proposed frameworks and regulatory initiatives in numerous jurisdictions, may expose us to compliance challenges and uncertainties,” its 10-K says.
The companies are also concerned about legal issues around intellectual property arising from their efforts to use massive amounts of data to train the large language models.
The filings from Meta, Oracle, and Alphabet all highlight concerns about intellectual property. “We may not always be able to anticipate how courts and regulators will apply existing laws to AI, predict how new legal frameworks will develop to address AI, or otherwise respond to these frameworks as they are still rapidly evolving,” Meta acknowledges in its risk section.
Another area of concern is that customers’ unpredictable use of equally unpredictable models can wind up requiring so much compute and power as to cut into profit margins, and that abuse by disreputable actors could result in significant brand damage.
The Microsoft filing sums up the issue: “Our AI systems offer users powerful tools and capabilities. However, there may be instances where these systems are used in ways that are unintended or inappropriate. In addition to some users may also engage in fraudulent or abusive activities through our cloud-based and AI services, such as unauthorized account access, payment fraud, or terms of service violations including cryptocurrency mining or launching cyberattacks. While we are committed to detecting and controlling such misuse of our cloud-based and AI services, our efforts may not be effective, and we may incur reputational damage or experience adverse impacts to our business and results of operations.”
To be clear, all of these companies are totally bullish on the potential of AI, as evidenced primarily by the billions of dollars they’re collectively committing to building data centers. But if things do go sideways, some of the reasons why will have been detailed in those same companies’ financial statements.
