CIBC Tech & Innovation Market Update – October 2024

Microsoft and Constellation Energy signed a power deal that would restart the nuclear power plant on Pennsylvania’s Three Mile Island to support Microsoft’s growing energy needs. Microsoft intends to purchase 100% of the nuclear energy from Three Mile Island for a period of 20 years. The tech giant has been looking at nuclear power as an option to supply its data centres for some time now; Microsoft posted a job last September searching for a program manager to lead the company’s nuclear energy strategy. And Microsoft isn’t alone when it comes to nuclear ambitions. Amazon struck a deal with Talen Energy last month to purchase its nuclear-powered 960 MWh data centre campus. These recent deals between tech and energy companies underscore the insatiable energy demand of artificial intelligence and the growing acceptance of nuclear as a viable energy source. The deals could pave the way for a future where large partnerships between tech, energy, and mining companies become the norm.

While the world continues to debate whether AI will replace jobs, one startup seems to believe that AI can also replace companies. Sebastian Siemiatkowski, CEO and founder of fintech company Klarna, has stated plans to end contracts with SaaS providers in favour of automating the services they provide with in-house AI. The prospect has raised eyebrows across the tech industry, including those of Salesforce’s CEO Marc Benioff, who has questioned Klarna’s ability to replicate Salesforce’s entire suite of features. While it’s easy to see how AI chatbots can perform routine tasks such as customer support and data entry, its less clear whether generative AI’s functionality can extend to managing systems of record. Replicating the features of incumbent enterprise software applications is likely to be an expensive feat regardless, which takes us back to the age old debate: to build or to buy?

Valuations of AI startups have been unbelievably high. Take Cohere for example, which was recently valued at ~150x sales ($5.5 billion), or on a larger scale, OpenAI hopes to raise $6.5B in its next funding round, which would value the company in the vicinity of $150 billion. At this scale, the natural acquirer of OpenAI would be a mega-cap tech company. But what if those companies aren’t interested in acquisitions at such steep multiples? AI competition is fierce among the likes of Microsoft, Google, Amazon, Apple and Meta, so how do these companies continue to compete with one another without M&A? The answer may lie in the least artificial thing about AI: people. Over the last several months, big tech companies like Google, Amazon and Microsoft have been quietly entering into unique partnership agreements with AI startups that include provisions to hire their co-founders and other key talent members and to license the startup’s technology, without actually acquiring the business.

As a Canadian, when we hear the term “price-fixing” many of us likely think of the infamous bread price-fixing scandal that occurred over 2001-2015. This scheme was conducted the traditional way: a secret agreement reached among bread producers, retailers and supermarkets. More recently, technology has allowed a growing number of industries to “fix” prices via the use of algorithmic pricing. Under this method, competitors in a market outsource their price-setting functions to a third party, which is often the same software company. Such is the case in the world of U.S. home rentals, where many landlords use the property management software RealPage to set monthly rent. While textbook price-fixing via closed-door meetings and collusion of executives is a clear violation of antitrust law, what does the law say when those conversations don’t occur but the companies all rely on the same technology to set their price? Both the DOJ and the FTC are working to address this exact question.