View / AI’s ‘let 1,000 flowers bloom’ era is over

IBM’s big earnings miss, previewed last week but somehow coming in even worse than suggested, boiled down to their customers buying less of their AI-adjacent stuff so they could buy more of other people’s AI-critical stuff.

The episode, in addition to being a black eye for one of America’s most reliable corporate numbers-hitters, shows the mad scramble for dollars in the world of AI, which has been a giant sucking sound in the economy for a while now. It’s also a sign the “let 1,000 flowers bloom” phase of this cycle is falling away under the harsh glare of priority-setting and thinning shareholder patience.

“Deals are slipping a few weeks here, deals are slipping a few weeks there, because people are in this process of evaluating what AI can do and what AI can’t do,” Vice Chair Gary Cohn told me this morning. In a fitting bit of corporate justice, IBM did the same thing to its vendors that its customers did to it, hoarding inventory of memory and power ahead of expected price hikes in its own supply chain.

The company won a Pyrrhic victory over customers who figured it was desperate enough to hit its quarterly numbers to offer last-minute discounts. “That was the history of IBM,” which is retraining customers not to expect it, Cohn explained. (He has some thoughts on the role quarterly reporting played into the miss; read on for that.)

The cost to implement AI — tokens, engineers, McKinsey advice, etc. — “is occupying a huge majority of [companies’] budgets, and if they don’t get more budget, they’re forced to not buy something else,” Cohn said. That’s basic corporate math, but only in a world where CEOs are no longer being rewarded for AI spending; otherwise, they’d simply tap wide-open credit markets and buy everything they want.

We’re in the “educational friction” era, as Cohn puts it, where lessons are being learned on the fly and budgets are reworked accordingly. Spare a thought for the bean counters.