Why are Big Tech companies moving away from AI?

At first glance, it looks like an odd deal. Facebook’s owner Meta was reported last week to be looking at taking a 5% stake in the glasses manufacturer EssilorLuxottica at a cost of $5 billion or more.

The two firms already cooperate on making the Ray-Ban Meta smart glasses, and while that product has hardly set the world alight, it seems the social media giant is planning to double down on its bet that one day we will all surf the web through our glasses. Over time, it may even buy the whole business. Its €90 billion valuation would hardly be out of reach for a business that is valued at $1.2 trillion.

Meta is not the only tech giant looking for deals. Alphabet , the company that owns Google, was reported last week to be close to buying cyber-security start-up Wiz for about $23 billion. The global outage of Microsoft systems probably only made it even keener to get into the security industry, and although the offer was rejected on Tuesday, it may well come back with a higher bid, or acquire one of its competitors.

Against Alphabet’s total value of $2.2 trillion, it is hardly a huge sum of money. Earlier this week, Amazon even bought the old Hammer Horror studios in the UK to expand its film and TV production.

Big Tech companies turn away from AI

These are all very different deals, but they have one thing in common: Big Tech is starting to spend some serious money on acquisitions. And over the course of the next year that is only going to accelerate. Why?

First, there are signs that growth is starting to slow in its core businesses. Google’s advertising revenue rose by only 5.9% last year, the slowest rate for more than two decades. For Meta, total revenues slipped by 1.1% in 2022, and although they recovered again last year the bounce back was not as strong as it has been in the past. The tech giants are no longer expanding at the rate they once were.

The internet advertising market has become mature and so has the ecommerce industry. We already spend as much time staring at a screen and clicking on product links as is humanly possible and, if anything, it is more likely engagement will fall instead of rise. If they are to keep growing, the tech giants need to move into new industries, and that is probably going to involve buying their way in.

Second, they have figured out that artificial intelligence (AI) won’t deliver many meaningful products. For the past couple of years, all the hype in technology has been around AI, with expectations that it will launch a fresh round of growth.

Over the last few months, however, it has started to become clear that while AI is useful for small tasks, it is also an incredibly expensive solution to a problem that often doesn’t exist. Sure, it might be able to write a document for you, or design a graphic presentation, but you didn’t need to pay a person very much money to do that work and they would not be at risk of hallucinations, or be as likely to engage in copyright infringement. If AI turns out to be a dud, then the tech giants are going to need something else to power their growth.

Tech giants have cash to spend

Finally, they have to do something with their vast cash piles. Alphabet has more than $100 billion in cash available, Meta has $60 billion, Apple , $160 billion. The businesses are very profitable, they pay little in dividends to their shareholders, and they don’t have huge factories to maintain. There is a lot of money sitting around in the bank.

True, they can at least earn a little more in interest on it than they could a year or two or ago. Even so, it makes sense to put it to work. The simplest way of doing that is to start buying up other firms, especially if you can convince yourself that they are a strategic fit and can offer something to the rest of your business. Add it all up, and one point is clear.

The flurry of offers we have seen from the big tech giants over the last couple of weeks is just the beginning of a major trend. And that will have a huge impact on stock markets around the world. There is a lot of cash to be spent. All investors have to do is work out some of the potential targets, and they should be able to make a lot of money.

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