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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Baby, meet bathwater. Wheat, meet chaff. The scale of Tuesday’s savage sell-off of data analytics and software stocks speaks as much to market jitters over anticipated upheaval as it does to the potential of the specific new AI plug-in that triggered it. Investors brave enough to poke through the wreckage know that the damage AI will actually inflict on these sectors is more nuanced than that initial reaction suggests.
Anthropic is the agent of chaos in this case. The AI start-up’s Claude Cowork platform promises to automate corporate dogsbody tasks including some legal work. Shockwaves spread from Toronto to Sydney as well as the more usual market haunts of New York, London and Frankfurt. Legal and accounting-related suppliers took some of the biggest hits. Thomson Reuters, home of legal database Westlaw, tumbled 16 per cent; legal rival Relx, owner of LexisNexis, dropped 14 per cent.
Like the myriad software suppliers languishing at or near their 52-week lows, database companies had been prized for high levels of customer retention and the resulting sticky recurring revenue. That dependence should weaken — rapidly — as it gets easier for companies to write their own specific software, without the costs of customising and embedding their usual off-the-shelf kit.
But the reality is that companies are often slow to embrace new technologies, and with good reason. Indeed, data from the US Census Bureau released in August last year shows that AI adoption has been declining, particularly among bigger companies with more than 250 employees. Businesses are particularly cautious where legal, regulatory or security risks are involved. “The AI did it” is not an answer that will placate regulators poking around a company’s payment systems, or prevail in legal cases where contracts are in dispute.
As for their existing software, companies will be loath to give up services that include expertise they are unable or unwilling to maintain themselves. Those providers may thus have a longer shelf life than this week’s sell-off implies. Perhaps that’s why security specialists Datadog and Cloudflare were less badly hit, albeit both dropping roughly 7 per cent.
Those stampeding for the exit should also bear in mind that companies under pressure have a particular incentive to push into new businesses. Take Relx. In 1995, Forbes magazine asked if the company, then named Reed Elsevier and a publisher of pricey academic journals, would become the internet’s “first victim.” It didn’t: print-related efforts are today just 4 per cent of its overall sales. With a £40bn market capitalisation, even after Tuesday’s sell-off, it is among the FTSE 100’s top 20.
When Sam Altman, founder of Anthropic rival OpenAI, was asked at a San Francisco conference why AI adoption had been slower than he had predicted, he blamed naivety and said he “didn’t think about it that hard”. Investors placing their bets don’t get that luxury.