Of all the major tech giants, Amazon (AMZN) is noticeably absent from the race to artificial general intelligence (AGI).

Or at least, this is what the financial and tech media would have us believe.

And let’s be honest: that’s not without reason.

After all, if we search for ‘major language model’ in Amazon’s latest quarterly report, there is no similarity whatsoever.

And if we search for “LLM,” we find 57 matches, but they all involve the “llm” in the word “fulfillment.”

It seems strange.

For one of the dominators in the world of cloud-based computing and web services and a company that provides computing power to countless artificial intelligence companies, it would make sense that Amazon plans to compete for the top prize of artificial intelligence.

It’s not that Amazon is short on capital either. It currently has $88 billion in cash and will generate more than $45 billion in free cash flow this year.

Amazon certainly has the capital to build its own generative AI. And for those who use it, it’s very clear that Alexa – Amazon’s digital voice assistant – needs a major upgrade…

What gives, Amazon?

Amazon’s Stealth AI Strategy

It’s not that Amazon hasn’t been working on developing its own artificial intelligence.

It’s just that they didn’t want to talk about it openly.

There’s a good reason for that.

Despite being responsible for less than 20% of Amazon’s total revenue, Amazon Web Services (AWS) consistently delivers more than 50% of Amazon’s operating revenue.

This division of Amazon – which rents computers and storage to both businesses and individuals – has been the cash cow that has allowed Amazon to sustain losses in its e-commerce business for years. That is, because it built enough scale to eventually become profitable with the typically low e-commerce margins.

Artificial intelligence has been the biggest growth area for Amazon Web Services, and Amazon has made an effort to position itself as neutrally as possible towards the sector.

If you were to design your own large language model (LLM) – and you knew Amazon was doing the same – would you want to train and use your LLM on Amazon’s computer systems?

After all, it has long been rumored that Amazon exploits its own internal data – by studying top-selling products, creating a counterfeit version, and then manipulating search results to boost its own Amazon product lines. Who would want Amazon to power its own LLM?

That would make many companies nervous, which could lead AI companies to move their cloud computing to a less “threatening” company like Oracle or IBM, who simply aren’t contenders.

Staying neutral was a smart move by Amazon.

Who cares if someone thinks Amazon is losing the race to AGI or AI in general?

Who cares if Alexa isn’t that smart?

The cold, hard truth is that Amazon’s artificial intelligence business is booming and its shares are at record highs.

Amazon (AMZN) stock price since its IPO in 1997

Amazon’s outward-looking strategy was to appear neutral… and thus capture as much of the AI-related cloud services industry as possible.

Smart.

And in the background, it could quietly make strategic investments in private AI companies, seed its future customers and develop its own AI.

Smart.

And there are some interesting developments on both fronts.

The “intelligent shopper”

A few days ago – surprise! Rumors have been leaking that Amazon is getting ready to announce its own generative AI known as Olympus.

To be fair, this wasn’t entirely a secret, as the project was publicized in 2023. It just wasn’t talked about much. As far as most mainstream news sources knew, there wasn’t much to report.

But in the background, Olympus was trained on 2 trillion parameters, making it one of the largest generative AIs available.

It is a multimodal AI that can learn and understand text, video and images. It is reportedly good at analyzing and understanding images and video, suggesting a wider range of usefulness than most LLMs.

My working assumption is that Amazon will make Olympus available to its Amazon Web Services (AWS) ecosystem, allowing companies to connect their software to Olympus, which will empower any company or software package with the superhuman powers of generative AI.

This not only affects Amazon’s voice assistant Alexa, but also its e-commerce activities.

Imagine how useful it will be to have an intelligent ‘shopper’ who understands all your purchasing preferences, anticipates your daily needs and can talk to you in a natural language that is almost indistinguishable from a human.

That’s what’s coming…and also what we’ll learn more about this week.

The timing of these latest developments is no coincidence, as Amazon’s annual conference, AWS re:Invent 2024, is being held this week in Las Vegas.

And Amazon leaves nothing to chance.

One of the most strategic AWS AI customers, Anthropic, was potentially at risk from Olympus’ announcement.

How to Buy and Keep Your Customers

In many ways, Olympus is direct competition for Anthropic’s impressive lineup of LLMs. It’s the kind of business AWS wouldn’t want to lose.

This is almost certainly why Amazon has taken action and announced an additional $4 billion investment in Anthropic’s latest venture capital round, which closed last month.

That’s not a typo. Earlier this year, Amazon invested $4 billion in Anthropic, and last month Amazon did the same for a total of $8 billion.

Anthropic’s last known public valuation was $19.3 billion in January, and this latest deal was rumored to be worth $40 billion. I wouldn’t be surprised if it wasn’t closer to $50 billion.

If we’ve ever wondered, “What’s it all worth?” Or, “Is it all smoke and mirrors?” No, it’s not.

The data points are everywhere.

OpenAI will generate approximately $3.7 billion in revenue this year. And most of the costs are in computing power and storage.

Next year, OpenAI is expected to generate over $11 billion in revenue… and the same will be true.

That’s why Amazon is willing to pay $8 billion. It wants to ensure that Anthropic will continue to use AWS for both training and inference for its Claude LLMs. Billions of dollars in sales are at stake.

And while the terms of Amazon’s investment were not made public, Amazon did announce that Anthropic has now named Amazon its “primary training partner” for its generative AI technology. This was clearly part of the deal.

This is important because the two companies have collaborated on the development of Amazon’s Trainium 2 AI-specific semiconductor.

Amazon is now ramping up its contract manufacturing production of Trainium 2 to offer its new AI-specific semiconductor to all its AWS customers.

This is an important new AI semiconductor joining the race to AGI. And depending on Trainium 2’s performance, this could be a strategic advantage for Amazon.

Regardless, Trainium 2 is an accelerator for AI in general. And from a product perspective, Trainium 2 is designed to deepen relationships with its AWS customers.

AI developers spend a lot of time customizing their software code for a specific semiconductor hardware platform. It can be difficult to switch. So as long as the hardware does the job and it’s economical, there’s little reason to switch.

Amazon’s deal with Anthropic also includes the use of Amazon’s Inferentia semiconductors.

As you may have guessed, the Inferentia chips are designed for inference – running AI software – as opposed to software designed for training.

The computational cost is so critical and so much money is involved that it makes sense to adapt semiconductors for various AI-related tasks. This is why the market for AI-specific semiconductors is so exciting.

This is an exciting week for Amazon and for that matter the entire industry. Amazon will spend about $75 billion on capital expenditures this year, almost all of which will be AI-related.

And next year, Amazon’s CEO expects to spend even more.

This is money well spent.

And Amazon will win in two ways with its $8 billion investment in Anthropic. Not only will it make billions through its AWS subsidiary, but Anthropic’s involvement in Trainium 2 will also be great for pushing other AI players to use its custom AI-specific semiconductors.

And whether Anthropic goes public or is acquired, I suspect Amazon will see an impressive return on its investment given Anthropic’s leading role in the industry.

Either way, Amazon wins…

Greetings,

Jeff