Who is winning the generative AI war? Accenture.

Welcome to Weird Money, a column written by me, Jack Raines, where I discuss the most interesting and, more importantly, weirdest stories I've seen in business and markets.

Consultants love generative AI

What do companies using generative AI and companies producing generative AI have in common? They are both struggling to make money from generative AI.

Since the launch of ChatGPT in November 2022, the number of companies citing “AI” in their earnings calls has exploded, with 199 S&P 500 companies mentioning it at least once in their Q1 2024 calls. However, management optimism still hasn’t translated to company profits.

Despite mentioning “AI” 40 times in its Q1 2024 earnings call, Adobe’s management predicted decelerating earnings and revenue growth of 12% and 10%, respectively, and its stock fell by 13.7% that day.

Similarly, Salesforce and Dell, which had both tripled between December 2022 and May 2024 on AI optimism, fell 18% and 15%, respectively, after their May earnings calls, with Morgan Stanley analysts noting that GenAI bookings still hadn’t improved Salesforce’s top line, while Bernstein analyst Toni Sacconaghi asked if Dell was selling its AI servers at zero margin, noting that its $1.7 billion in server revenue didn’t boost operating profits.

Generative AI startups are also struggling. The Wall Street Journal noted in April that gen-AI startups raised a collective $21.8 billion in 2023, with investors hoping to find the next OpenAI, but most of these companies have struggled to establish a business model. In March, venture firm Sequoia estimated that generative AI startups had only generated a total of $3 billion in revenue, with most of that stemming from OpenAI, which hit $2 billion in revenue in December. These are also costly operations – even Anthropic, with an estimated $150-200 million in revenue, is spending $2 billion per year.

So who is making money from AI? Management consultants, of course. From Accenture’s most recent earnings transcript:

“We also have leaned into the new area of growth, GenAI, which is comprised of smaller projects as our clients primarily are in experimentation mode. In this quarter, we hit two important milestones. With over $900 million in new GenAI bookings this quarter, we now have $2 billion in GenAI sales year to date, and we have also achieved $500 million in revenue year to date. This compares to approximately $300 million in sales and roughly $100 million in revenue from GenAI in FY23.”

Accenture’s annualized GenAI bookings, from its Q3 stats, are $3.6 billion. To put this number in context, OpenAI’s annualized revenue is $3.4 billion. Accenture isn’t alone, either.

Boston Consulting group, which made $12.3 billion in 2023, is projecting 20% of its 2024 revenue, and 40% of its 2026 revenue, to come from AI integration projects. IBM’s consulting arm has also made more than $1 billion from generative AI, per its April earnings report:

“Inception to date, our book of business related to watsonx (unveiled in May 2023) and generative AI is greater than $1 billion, with sequential quarter over quarter growth. Similar to last quarter, this remains weighted towards Consulting.”

It’s really not that crazy that consulting firms have been the big winners so far. The current AI marketplace looks something like this:

1. Everyone thinks AI is the next big thing, and most companies are either terrified that it will kill their business or excited to leverage it to expand their business.

2. These same companies can’t figure out how to profitably leverage generative AI.

3. Generative AI startups, most of which aren’t making money, haven’t built business-specific solutions for companies that want to make money from AI.

Enter: management consultants, who are now making more money than all generative AI startups, combined, by charging fees to help companies figure out what to do with generative AI. This seems, to me, like a market inefficiency. If you’re a generative AI platform that can’t figure out how to make money, and you’re spending billions of dollars to keep the lights on, and you see that management consultants are charging clients billions of dollars to figure out how best to use your technology, wouldn’t it make sense for you to hire a few of those consultants away, launch an internal consulting arm called, I don’t know, “Anthropic Consulting,” and charge Salesforce $100 million to help them implement your tools?

OpenAI, by far the revenue leader among AI startups, has basically done this. The ChatGPT creator hit $1 billion in annualized revenue from selling access to its models, outselling Microsoft’s Azure OpenAI Service, which also resells OpenAI’s models. From The Information:

OpenAI pulled off the feat with simple tactics: promising customers early access to new versions of conversational AI, and helping its largest customers tailor the software to their needs. That’s helped it counter Microsoft’s powerful discounts for customers that bundle services. As of March, OpenAI was generating around $1 billion in annualized revenue from selling access to its models, according to someone who viewed internal figures related to the business…

One example is Holiday Extras, a European travel booking site that competes with Expedia. The company decided to pay OpenAI for access to models as well as ChatGPT, after OpenAI salespeople and engineers in London met repeatedly with its employees to help them customize the internal chatbot.”

“Helping its largest customers tailor the software to their needs” sounds like something a consultant would do, no?

Who’s your daddy?

In 2019, the SEC began investigating Morgan Stanley for misconduct related to its block trading business. Block trades are bulk sales of shares executed by an investment bank, usually for a client, that can be large enough to sink a stock’s price. Per this Financial Times piece, bankers will sometimes speak to different potential buyers to gauge interest in a stock, which is problematic because some of those potential buyers may trade on that information by shorting the stock. Morgan Stanley eventually paid the SEC and DoJ $249 million to settle charges that it had leaked confidential information and used it to better position itself ahead of block trades.

Now, Robert “Gags” Gagliardi, a former hedge fund trader, is suing his former employer, Evolution Capital Management, for not paying him a $7.5 million bonus, and Evolution is countersuing over the $7 million it paid Robert during his time there. Evolution’s reason for countersuing and refusing to pay is that it believes Gags was one of traders involved in a Morgan Stanley block trade scandal, and the details from the lawsuit are hysterical. From The Financial Times:

Evolution Capital Management said in court filings that it believed its former employee Robert Gagliardi, a block trading specialist nicknamed “Gags”, was linked to several of the trades that US authorities scrutinised in the probes that led to the Wall Street bank paying a $249mn fine. It also highlighted his relationship to the former head of the bank’s US equity syndicate, Pawan Passi. It said it believed the block trader referred to Passi as his “daddy” who had “put [him] in the fucking game” on block trades.”

My favorite thing about court filings is the text and phone call transcripts that get revealed, and it gets even better, per a different FT piece showing that Gagliardi did have at least one conversation with a Morgan Stanley banker:

Three people with knowledge of the matter said that Gagliardi, a block trading specialist nicknamed “Gags” who worked for Segantii as a portfolio manager in London, was the hedge fund investor on the call. The DoJ’s statement said a hedge fund investor called a Morgan Stanley banker and asked whether there was anything he “should be focusing on for, uh, tonight, tomorrow”. The banker replied: “How is your store of cold weather jackets?” and “chuckled”. The banker’s desk had been sent confidential details of a planned block sale of shares in New York and Toronto-listed Canada Goose, an upmarket parka brand, the DoJ document said.

This case is still ongoing, and I don't know how it will shake out,  but referring to a banker allegedly giving you confidential information as a “daddy” who “got you off the kiddie table,” and using “How is your store of cold weather jackets?” as veiled language for “Canada Goose block trade,” is just excellent. Hopefully any new filings will include more phone call transcripts.

The creative economy

In 2021, with Joe Rogan and Alex Cooper inking $100 million and $60 million podcasting deals with Spotify and Jimmy Donaldson (better known by his YouTube channel name, MrBeast) earning tens of millions through his YouTube channel, venture capitalists invested ~$5.5 billion in US-based “creator economy” startups, betting on an explosion of creators and influencers looking for new tools to help grow their businesses.

Two years later, venture funding for the “creator economy” has slowed to a crawl, with just $1.03 billion flowing to US-based startups in 2023. The reason? The market for selling to creators just isn’t that big. The Wall Street Journal published a great piece on the real earnings of different influencers, showing that only 13% of creatives made more than $100,000, and 48% of creators made $15,000 or less.

While the “creator economy” may be on the decline, the “creative economy” is catching investors’ eyes. From The Information:

New York venture capital firm Thrive Capital said it has invested in film studio A24. Thrive’s founder, Josh Kushner, will join A24’s board of directors as part of the deal, which values A24 at $3.5 billion, according to a person with direct knowledge of the matter…

It’s unusual for a technology-focused VC firm to invest in a film studio, which are unpredictable, can lose a lot of money and typically take longer than startups to generate a return for investors. In the release, Thrive said that A24 could “reinvent entertainment for the modern age.”

What investors missed two years ago was that the creator economy is subject to power laws: a few creators, like Joe Rogan and MrBeast, are going to take almost all of the earnings. It makes sense then, if you want to invest in the creative field, to invest in the creative enterprises and individuals, not the companies selling to an audience of creators. Most creators don’t have money! I imagine that future venture investments in the creative field will look more like A24, and less like link-in-bio startups.