A.I. Wars: ‘Shall we play a game?’

In the 1983 science fiction thriller WarGames, the movie’s lead character and amateur hacker David Lightman (played by a young Matthew Broderick) uses his desktop computer to attempt to connect to the computer systems of a gaming company. David manages to connect to a fictional artificial intelligence (AI) system which does not identify itself.

In a now famous scene in the movie, David and his friend have a conversation with the AI via a basic chat function. The human-like responses of the AI astonish the human characters in the scene. Eventually the AI asks David: ‘Shall we play a game?’.

David asks for a list of available games, and then tries to convince the AI system to play the last game on the list, called ‘Global Thermonuclear War’. Initially the AI is reluctant to play, suggesting: ‘Wouldn’t you prefer a good game of chess?’.

After some more back-and-forth between the AI and David, the AI system eventually relents and agrees to play a game of ‘Global Thermonuclear War’.

Unbeknownst to David, the AI system he has been communicating with operates the nuclear attack early warning system for the Unites States military. The game David starts to play with the AI system almost triggers a real-world nuclear war between the United States and Soviet Union.

When our investment team first trialled OpenAI’s ChatGPT, we could not help but recall the aforementioned scene from the movie WarGames. We were just as impressed as the characters were in this 1980s science fiction movie, when we started to engage with ChatGPT’s AI system via a chat function.

ChatGPT is undoubtedly a remarkable technology which could change the world...

Microsoft has been quick to capitalise on the success of ChatGPT, announcing it will be integrated into Bing, Microsoft’s internet search platform. The strategy was announced by none other than Microsoft’s CEO, Satya Nadella, in a bullish presentation where he openly called out Google Search as the first major target for the AI tool. Microsoft thinks more advanced AI language models like ChatGPT, when connected to the internet, will radically improve the capacity of its search engine to assist users and thus take market share from Google Search.

Google responded quickly with an announcement that it too would be embedding an AI system into its search engine. Google and Microsoft are tooling up to fight over dominance in artificial intelligence.

This fight for AI supremacy in internet search mirrors similar battles underway in cloud computing, cyber security, social media, and even between major governments. AI and the computer systems they run on, are now advanced enough to offer meaningful advantages to the companies and governments best able to master and utilise them.

Is there a way to play this trend from the perspective of investors?

One way would be to make a call on who has, or is likely to have in future, the best AI technology in a specific field where this will generate significant returns on investment. The winners in the AI wars, in the business field and at the geopolitical level, will yield considerable rewards. But this is an investment strategy fraught with risks. Given the relative infancy of this investment trend, and a lack of understanding of the technologies involved, we as investors would be gambling on an outcome we are in no position to accurately predict. Does Microsoft win in the AI search engine war? What about in social media and digital advertising… what about between the US and China?

As things stand, we’re currently in no position to make an accurate call on how that plays out.

But we can make one prediction which leads to a very interesting investment opportunity.

In any war, whether it be a real-world shooting war, or a technology-led war for business supremacy, the belligerents require weapons with which to fight. And those belligerents are willing to spend a lot of money on those weapons to give themselves the best chance of winning.

In real-world shooting wars, this means tanks, fighter jets, bullets and artillery shells. There’s a reason why the share prices of defence companies have risen since the War in Ukraine started… wars mean more orders for military weapons.

In the AI wars, the hard weapons required to fight are data centres and computer chips. CPUs, GPUs, memory chips, a lot of them, are the hard real-world war materiel required to fight. And in this case, the belligerents (big tech, large governments) have a lot of spending power.

We may not know the outcome of the coming wars in AI, but we do know the weapons with which these wars will be fought: data centres, computer chips, and their related supply chains.

As investors, we can invest in the owners of the manufacturing capacity and intellectual property needed to produce advanced semiconductors and computer chip designs needed to power the computer systems running advanced AI.

There’s an old saying that goes something like this: ‘during a gold rush, sell shovels!’ This very much applies to the coming global competition in AI. As investors, we can own the ‘shovel makers’, the suppliers of the tools needed by all participants, and benefit from the big increase in spending on AI compute that’s already underway, without taking the risk of trying to pick a winner.