ChatGPT-led AI buzz unlikely to fuel near-term software growth

This analysis is by Bloomberg Intelligence Senior Industry Analyst Anurag Rana and Bloomberg Intelligence Associate Analyst Lucas Ramadan. It appeared first on the Bloomberg Terminal.

The hype around artificial intelligence (AI) fueled by ChatGPT is a positive development for the software industry, but we don’t see any sizable near-term sales gains, given the investments needed to develop AI-enabled products. Enterprises must move more infrastructure to the cloud and spend on cloud-data warehouses before reaping any benefits, which we believe is a multiyear process.

Cloud providers likely main beneficiaries in software

Public-cloud infrastructure vendors are likely the main beneficiaries of increased demand for AI-infused products, given the processing power needed to run such operations. Though OpenAI’s ChatGPT uses Microsoft’s cloud infrastructure, we see enough room for all major providers to grow, including Amazon Web Services (AWS) and Google. AWS leads the industry with around 50% market share in cloud Infrastructure-as-a-Service (IaaS) and, while ChatGPT is providing publicity to Microsoft Azure, we don’t envision AWS’s category leadership being threatened by Microsoft.

Microsoft has been narrowing its gap to AWS in recent years, which we expect to continue. Both these providers should grab share from smaller companies, given the capital spending required to build a large global cloud infrastructure.

Increased demand for cloud-data warehouses, CDPs

Software products such as cloud-data warehouses and customer-data platforms (CDPs) that help enterprises better analyze the troves of data hidden in their legacy software products should see increasing demand, we believe. AWS, Microsoft, Oracle and Snowflake are some of the top providers of cloud-data warehouse products and will likely see them gain greater adoption. The impact of this demand could be less pronounced for Oracle due to its large footprint of legacy databases. Key providers of CDP products include Salesforce, SAP and Adobe.

IBM may market Watson more due to OpenAI’s success

IBM could accelerate its efforts to market its Watson product more aggressively, given the popularity of ChatGPT. Though the latter is targeted at consumers, Watson helps corporations improve sales and customer service and reduce costs by uncovering insights from data hidden across the company. The investment needed to create a custom product was a key reason for the lack of sales growth in Watson, along with IBM’s inflexibility in keeping it from being hosted on non-IBM clouds. However, Watson has become available on AWS and Microsoft Azure.

More downstream work for IT services industry

The IT services industry could be one of the biggest beneficiaries of the surge in demand for AI products for corporations, given the customization needed to create such solutions. Companies with large consulting practices like Accenture, Deloitte, IBM and Capgemini may see a bigger share of such work than others in the industry. Among verticals, we anticipate financial services to take the lead in developing such products, whether it’s insurance companies looking to uncover better risk patterns or banks seeking to determine higher credit risks.