the tipping point essay

“The Tipping Point” by Malcolm Gladwell Essay

Gladwell’s main thesis pertains to the trends in society being understood in the same manner as researchers understand the spreading of viruses and to the fact that a surprisingly large variety of social phenomena can be addressed by using the metaphor about such fads. The main focus of the book lies in the fact that three factors can result in bringing about remarkable and unexpected changes within society. These are the context, (which pertains to the current circumstances), the ideas, and the concerned people. He makes a point in saying that a small number of minor changes in single or several different contexts can result in dramatic changes in society that can influence people in sweeping ways and in epidemic proportions, which is evident when he says “in a given process or system some people matter more than others.” (Gladwell, p.19). He also writes that “the success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts.” (Gladwell, p.33).

Gladwell has divided such gifted people into three sections, the connectors, mavens, and the salespersons. He refers to connectors as “sprinkled among every walk of life… are a handful of people with a truly extraordinary knack of making friends and acquaintances (Gladwell, p. 41). Connectors’ ability “to span many different worlds is a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy.” (Gladwell, p.49). They can be present in different worlds and can take advantage of benefits from them. The author writes that the word Maven is derived from Yiddish which refers to people who accumulate knowledge. “The fact that Mavens want to help, for no other reason than because they like to help, turns out to be an effective way of getting someone’s attention.” (Gladwell, p.67). He refers to salesmen as a group that have the skills to persuade people when they are not convinced about what they hear. Gladwell goes on to further depict Tom Gau who is a salesman and has extraordinary qualities which are powerful and like being contagious and tempting to the extent that one can understand more than what he attempts to explain. Such qualities in him make people agree with him for whatever he says which is because of the enthusiasm, amiability, and many more qualities that he exudes.

The author further gathers empirical data about ideas and does not just rely on making assumptions about determining quality or stickiness as referred to by him. He has cited examples relating to instances whereby assumptions have been related to the given data, “Kids don’t watch when they are stimulated and look away when they are bored. They watch when they understand and look away when they are confused.” (Gladwell, p.102). He asserts that kids also look for awareness and predictability. This is why Barney videos lose favor with children when they realize that predictability weighs less as compared to uniqueness.

The book is praiseworthy for the way it deals with the issue of the power of context in asserting that small changes in the prevailing environments can result in far-reaching changes and positive outcomes for the betterment of society. The thesis statement too is fully supported by the fact that people are extraordinarily adjusted with their environment and are responsive in varying ways in the face of minor changes that constantly occur in society. To me, the book proved to be immensely thought-provoking and imaginative and will go a long way in making me look at life and the world differently.

Works Cited

Gladwell Malcolm, The Tipping Point, 2002, Back Bay Books

• Upton Sinclair’s novel The Jungle
• American Literature: Death Comes for the Archbishop
• "The Order of Things" by Malcolm Gladwell
• The Approach to Tipping in Restaurants
• Business Law: the Concept of "The Tipping Point"
• The Boogeyman: a part of a chapter
• "The Native Problem" by Robert Sheckley
• Works by Philip Wylie and Richard Matheson Review
• "Give Me Liberty an American History" by Eric Foner
• John Steinbeck's "The Grapes of Wrath" and the Great Depression
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2021, November 14). “The Tipping Point” by Malcolm Gladwell. https://ivypanda.com/essays/the-tipping-point-by-malcolm-gladwell/

"“The Tipping Point” by Malcolm Gladwell." IvyPanda , 14 Nov. 2021, ivypanda.com/essays/the-tipping-point-by-malcolm-gladwell/.

IvyPanda . (2021) '“The Tipping Point” by Malcolm Gladwell'. 14 November.

IvyPanda . 2021. "“The Tipping Point” by Malcolm Gladwell." November 14, 2021. https://ivypanda.com/essays/the-tipping-point-by-malcolm-gladwell/.

1. IvyPanda . "“The Tipping Point” by Malcolm Gladwell." November 14, 2021. https://ivypanda.com/essays/the-tipping-point-by-malcolm-gladwell/.

Bibliography

IvyPanda . "“The Tipping Point” by Malcolm Gladwell." November 14, 2021. https://ivypanda.com/essays/the-tipping-point-by-malcolm-gladwell/.

• To find inspiration for your paper and overcome writer’s block
• As a source of information (ensure proper referencing)
• As a template for you assignment

IvyPanda uses cookies and similar technologies to enhance your experience, enabling functionalities such as:

• Basic site functions
• Ensuring secure, safe transactions
• Secure account login
• Remembering account, browser, and regional preferences
• Remembering privacy and security settings
• Analyzing site traffic and usage
• Personalized search, content, and recommendations
• Displaying relevant, targeted ads on and off IvyPanda

Please refer to IvyPanda's Cookies Policy and Privacy Policy for detailed information.

Certain technologies we use are essential for critical functions such as security and site integrity, account authentication, security and privacy preferences, internal site usage and maintenance data, and ensuring the site operates correctly for browsing and transactions.

Cookies and similar technologies are used to enhance your experience by:

• Remembering general and regional preferences
• Personalizing content, search, recommendations, and offers

Some functions, such as personalized recommendations, account preferences, or localization, may not work correctly without these technologies. For more details, please refer to IvyPanda's Cookies Policy .

To enable personalized advertising (such as interest-based ads), we may share your data with our marketing and advertising partners using cookies and other technologies. These partners may have their own information collected about you. Turning off the personalized advertising setting won't stop you from seeing IvyPanda ads, but it may make the ads you see less relevant or more repetitive.

Personalized advertising may be considered a "sale" or "sharing" of the information under California and other state privacy laws, and you may have the right to opt out. Turning off personalized advertising allows you to exercise your right to opt out. Learn more in IvyPanda's Cookies Policy and Privacy Policy .

Home — Essay Samples — Literature — Malcolm Gladwell — A Review Of The Tipping Point By Malcolm Gladwell

A Review of The Tipping Point by Malcolm Gladwell

• Categories: Malcolm Gladwell

About this sample

Words: 768 |

Published: Dec 16, 2021

Words: 768 | Pages: 2 | 4 min read

Cite this Essay

To export a reference to this article please select a referencing style below:

Let us write you an essay from scratch

• 450+ experts on 30 subjects ready to help
• Custom essay delivered in as few as 3 hours

Get high-quality help

Dr Jacklynne

Verified writer

• Expert in: Literature

+ 120 experts online

By clicking “Check Writers’ Offers”, you agree to our terms of service and privacy policy . We’ll occasionally send you promo and account related email

No need to pay just yet!

Related Essays

3 pages / 1360 words

3.5 pages / 1561 words

1.5 pages / 674 words

3 pages / 1428 words

Remember! This is just a sample.

You can get your custom paper by one of our expert writers.

121 writers online

Still can’t find what you need?

Browse our vast selection of original essay samples, each expertly formatted and styled

Related Essays on Malcolm Gladwell

Birkinshaw, Julian. 'As thoughtful beings, we like to be in control, but increasingly we cannot.' London Business School. https://www.wsj.com/articles/conversations-with-strangers-make-people-happier-11565645999

explores the role of social media in activism and social movements. In this essay, I will provide an analysis of Gladwell's key arguments, the history of the topic, and the debates surrounding it, as well as discuss the [...]

Gladwell, Malcolm. Talking to Strangers: What We Should Know about the People We Don't Know. Allen Lane, 2019.Schallhorn, Charles D. Psychology, Preparing for the Advanced Placement Examination. AMSCO School Publications, Inc., [...]

In the book Outliers by Malcolm Gladwell the author exclaims, “In Outliers, I want to convince you that these kinds of personal explanations of success don’t work. People don’t rise from nothing”. This demonstrates Gladwell’s [...]

In the annals of human history, the tale of David and Goliath stands as a testament to the triumph of the underdog against overwhelming odds. Set in the Elah valley, this iconic battle between a shepherd boy and a formidable [...]

Outliers: The Story of Success by Malcolm Gladwell explains with the cultural and social forces that give rise to opportunistic individuals. Through a series of investigations, Gladwell insists that successful people are not [...]

Related Topics

By clicking “Send”, you agree to our Terms of service and Privacy statement . We will occasionally send you account related emails.

Where do you want us to send this sample?

By clicking “Continue”, you agree to our terms of service and privacy policy.

Be careful. This essay is not unique

This essay was donated by a student and is likely to have been used and submitted before

Download this Sample

Free samples may contain mistakes and not unique parts

Sorry, we could not paraphrase this essay. Our professional writers can rewrite it and get you a unique paper.

Please check your inbox.

We can write you a custom essay that will follow your exact instructions and meet the deadlines. Let's fix your grades together!

Get Your Personalized Essay in 3 Hours or Less!

We use cookies to personalyze your web-site experience. By continuing we’ll assume you board with our cookie policy .

• Instructions Followed To The Letter
• Deadlines Met At Every Stage
• Unique And Plagiarism Free

42 pages • 1 hour read

The Tipping Point: How Little Things Can Make a Big Difference

A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.

Chapter Summaries & Analyses

Introduction-Chapter 1

Chapters 4-5

Chapters 6-8

Key Figures

Index of Terms

Important Quotes

Essay Topics

Discussion Questions

Choose a product from the past that you don’t hear about much anymore (e.g., Furby or Tickle-Me-Elmo). Construct a narrative in which a Connector, a Maven, and a Salesman play their part in bringing this former fad back into the mainstream. Use the source text to explain how each individual utilizes their unique skill sets to push the product closer to the mainstream. By the end of your narrative, you should explain how your product “tipped.”

The central message of The Tipping Point is optimistic about the possibilities of real change through strategic, intelligent action. Discuss a cynical interpretation of this book in which the beneficiaries of social epidemics are virtually always wealthy corporations, and real change is inaccessible to the average person.

What is the difference between “contagiousness” and “stickiness”? Describe the difference and then explain how something could be contagious but not very sticky; sticky but not very contagious; both contagious and sticky; neither sticky nor contagious. How do these two qualities complement each other?

Plus, gain access to 8,450+ more expert-written Study Guides.

Including features:

Related Titles

By Malcolm Gladwell

David And Goliath

Talking to Strangers

The Bomber Mafia

What the Dog Saw

Featured Collections

Books About Leadership

View Collection

Business & Economics

Science & Nature

Self-Help Books

• Undergraduate
• High School
• Architecture
• American History
• Asian History
• Antique Literature
• American Literature
• Asian Literature
• Classic English Literature
• World Literature
• Creative Writing
• Linguistics
• Criminal Justice
• Legal Issues
• Anthropology
• Archaeology
• Political Science
• World Affairs
• African-American Studies
• East European Studies
• Latin-American Studies
• Native-American Studies
• West European Studies
• Family and Consumer Science
• Social Issues
• Women and Gender Studies
• Social Work
• Natural Sciences
• Pharmacology
• Earth science
• Agriculture
• Agricultural Studies
• Computer Science
• IT Management
• Mathematics
• Investments
• Engineering and Technology
• Engineering
• Aeronautics
• Medicine and Health
• Alternative Medicine
• Communications and Media
• Advertising
• Communication Strategies
• Public Relations
• Educational Theories
• Teacher's Career
• Chicago/Turabian
• Company Analysis
• Education Theories
• Shakespeare
• Canadian Studies
• Food Safety
• Relation of Global Warming and Extreme Weather Condition
• Movie Review
• Admission Essay
• Annotated Bibliography
• Application Essay
• Article Critique
• Article Review
• Article Writing
• Book Review
• Business Plan
• Business Proposal
• Capstone Project
• Cover Letter
• Creative Essay
• Dissertation
• Dissertation - Abstract
• Dissertation - Conclusion
• Dissertation - Discussion
• Dissertation - Hypothesis
• Dissertation - Introduction
• Dissertation - Literature
• Dissertation - Methodology
• Dissertation - Results
• GCSE Coursework
• Grant Proposal
• Marketing Plan
• Multiple Choice Quiz
• Personal Statement
• Power Point Presentation
• Power Point Presentation With Speaker Notes
• Questionnaire
• Reaction Paper
• Research Paper
• Research Proposal
• SWOT analysis
• Thesis Paper
• Online Quiz
• Literature Review
• Movie Analysis
• Statistics problem
• Math Problem
• All papers examples
• How It Works
• Money Back Policy
• Terms of Use
• Privacy Policy
• We Are Hiring

The Tipping Point, Essay Example

Pages: 5

Words: 1506

Hire a Writer for Custom Essay

Use 10% Off Discount: "custom10" in 1 Click 👇

You are free to use it as an inspiration or a source for your own work.

Malcolm Gladwell’s book The Tipping Point: How Little Things Can Make a Big Difference  provides an excellent summary of the tipping points of social epidemics that can be utilized as an understanding for a variety of marketing principles. Ultimately, the job of marketers is to convince people that the product being sold is one that is necessary to improve their lives, and this becomes easier if the product is made into a social phenomenon. It becomes easier to sell products when individuals are of the opinion that it is great to have and effective, and this word-of-mouth advertisement can be furthered by publishing advertisements in the media.

Throughout the book, Gladwell discusses the three rules of social epidemics that individuals can use to gain a greater understanding of how their target audience can be reached. These include “The Law of the Few”, “The Stickiness Factor”, and “The Power of Context”. It would be helpful for individuals in marketing to gain an understanding of these principles because they delineate good advice regarding understanding the populace in relation to the production of advertisements. Gladwell states that, “Ideas and products and messages and behaviors spread like viruses do”. Therefore, it is necessary for the marketing professional to understand how to make their products become a social phenomenon.

The first rule of social epidemics discussed by the author points out the fact that a majority of marketing is done by individuals that are outside of the marketing team and the company that produced the product. Specifically, Gladwell states “the success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts”. Typically, these are individuals with connections and are therefore able to exert influence on others. Accordingly, they are referred to as “connectors” because they know many people and are able to make connections. It is important for marketing teams to both have this type of person on staff and to determine who these individuals are in the outside world. In this manner, the marketing team will be able to reach out to a greater amount of companies and partners to increase sales by taking advantage of the connector. Furthermore, targeting advertisements to external connectors will help enhance the speed at which a particular product becomes popular, thereby enhancing its likelihood to be purchased.

Another type of individual that Gladwell discusses in the “Law of the Few” is the concept of the “maven”, who is considered to be an information specialist. Ultimately, these individuals are needed within the marketing team and on the outside as consumers as well. On the inside, these individuals are responsible for gathering the information related to the product and consumer needs and help portray the product in a light that makes it desirable based on this data. On the outside of the marketing team, this results in word-of-mouth advertising. In reality, we think of the maven as individuals who may consider themselves to be technologically savvy and therefore wish to remain on the top of the latest trends. In an attempt to convince the individuals within a friend group, the maven promotes the product to them while trying to prove his or her ability in terms of discovering and understanding the latest trends.

The third type of individual discussed in “The Law of the Few” is the “salesman”, who is responsible for directly convincing individuals to buy a product. While we typically think of salesmen as individuals who blatantly push products, effective salesmen are more subtle in doing so. Since these individuals have a significant understanding of the needs of their clients, they are able to engage them in conversation in a manner that allows them to believe that acquiring the product is the best choice for them, and that the salesman mentioned the product only as a suggestion. While the connector and maven are important for promoting a product from the background, the salesman does so at the front line, as he or she is usually in a situation that allows the customer to purchase the product at the precise moment that it is pushed.

The second law that Gladwell discusses that helps facilitate the tipping point in social epidemics is referred to as “The Stickiness Factor”. This is particularly important to understand in terms of marketing because the advertisements that are the most effective are the most memorable. For example, many individuals across the country associate Target with the dog with the target on his eye and we associate Wal-Mart with the rollback smiley face. These are things we cannot forget because they have been ingrained into our memories. As a consequence, they are effective. These symbols help us associated Target with customer service and variety and Wal-Mart with low prices.

Ultimately, Gladwell’s “Stickiness Factor” is related to branding. Companies that advertise themselves effectively are able to come up with a particular way that they wish for consumers to perceive them. Typically, these need to be simplistic to be memorable and they need to be repeated many times so that the target audience continues to associate a company or a product with the branding message. While branding is certainly an important contributing factor to “stickiness”, it is also important to ensure that advertisements are entertaining and/or relatable. Car insurance advertisements tend to take on this perspective. For example, Geico tends to regularly make entertaining jokes related to its gecko mascot, while Progressive shows stories featuring their own character Flo. Some consumers actually look forward to these commercials to see what crazy thing the companies do next, which significantly contributes to their sales and popularity. When one goes to purchase car insurance, it is likely that Geico or Progressive will be on their minds ahead of other insurance options as a consequence of their promotion style.

The third rule that Gladwell discussed was referred to as “The Power of Context”, indicating that the environment of consumers or the advertisement can impact its efficacy. Therefore, this principle teaches marketing teams that it is necessary to be relevant. For example, it may be useful to advertise books on trains and busses because commuters typically look towards reading as a way to be entertained while they travel. In addition, it may be useful to advertise for nearby vacation destinations on a highway billboard. When advertisers consider the context of a situation, they become increasingly able to reach their target audience, which allows them to reach a larger number of relevant individuals.

An addition component of “The Power of Context” that is important to consider is the importance of social and cultural groups in marketing a particular product. Many advertisements attempt to cater only to a specific group, which could include a particular gender, race, or religion. In order to ensure that the correct group is reached through an advertisement, it is therefore necessary to produce an ad that is culturally relevant. This could be as simple as ensuring that there are only women in a women’s deodorant commercial to as complex as integrating foreign traditions into a commercial that promotes an English language learning program. It would be even more necessary to place these advertisements on television channels that are more popular among the target demographic.

While it is apparent that Gladwell’s theories make sense in terms of marketing, they are reliable because they have a scientific basis as well. Before working on these theories, the author did much work to gain an understanding of how the connections between individuals operate and how these relate to communication. To do so, he studied Milgram’s network theory, which demonstrated that two random individuals have six degrees of separation in terms of knowing a common individual. This indicated the importance of “The Law of the Few” because it indicates how passing a message to a few individuals could spread the same message to a large group.

Knowledge of “The Stickiness Factor” and “The Power of Context” are also scientifically supported and tie in to our understanding of many psychological theories. We are more likely to remember information if it is constantly repeated and presented to us in a manner that allows us to draw connections with information we’ve learned previously. Therefore, it is intuitive that these marketing rules would be effective for the same purpose.

In conclusion, Gladwell’s three rules of social epidemics effective describe trends in the marketing world that would be useful for marketing teams to understand. They provide a rationalization of why these techniques work so effectively, which is ultimately grounded in psychology and an understanding of how the human brain works. We are more likely to accept the usefulness of a product if those that we respect already have. Furthermore, we are more likely to purchase it if it is presented to us in the proper context and in a memorable manner. It is important for marketing professionals to ensure they take advantage of these three aspects in order to ensure that their marketing campaigns are maximally effective.

Works Cited

Gladwell M. The Tipping Point: How Little Things Can Make a Big Difference. Little Brown and Company, 2000.

Stuck with your Essay?

Get in touch with one of our experts for instant help!

My Life as an Hispanic Young Lady in America, Essay Example

The Cost-Effectiveness of Criminal Justice, Essay Example

Time is precious

don’t waste it!

Plagiarism-free guarantee

Privacy guarantee

Secure checkout

Money back guarantee

Related Essay Samples & Examples

Relatives, essay example.

Pages: 1

Words: 364

Voting as a Civic Responsibility, Essay Example

Words: 287

Utilitarianism and Its Applications, Essay Example

Words: 356

The Age-Related Changes of the Older Person, Essay Example

Pages: 2

Words: 448

The Problems ESOL Teachers Face, Essay Example

Pages: 8

Words: 2293

Should English Be the Primary Language? Essay Example

Pages: 4

Words: 999

The Tipping Point Essay Questions

By malcolm gladwell, essay questions.

These notes were contributed by members of the GradeSaver community. We are thankful for their contributions and encourage you to make your own.

Written by Micola Magdalena

What is syphilis?

Syphilis is a venereal disease transmitted primarily through sexual contact. The disease can also be transmitted if the infected mother gives birth to a child while being a carrier of the bacteria. Syphilis is relatively easy to treat, the bacteria being easily killed by penicillin. However, the disease is sometimes hard to diagnose without blood tests because its signs are common with other ailments and disease. The number of people infected with syphilis dropped drastically in the 40s, when penicillin was discovered but then it rose again in the 90s due to various environmental and social reasons.

What was the Spanish Flu?

The Spanish Flu was a pandemic that affected the world in the year 1917. It is estimated that more than 6% of the population died because of it in a short period of time. The Spanish Flu was easily transmitted from one infected person to a healthy person and in comparison with other disease, the Spanish Flu affected primarily the young and those who had a good immune system. Because of this, the Spanish Flu represents an exception from the other pandemics that affected primarily children, the elderly and the people with a weak immune system. The author talks about the Spanish Flu in the context in which he describes how quickly information can be transmitted and how it can end up affecting the people’s lives in a short period of time.

What was the Stanford Prison experiment?

In the fourth chapter, the author talks about the effect the environment can have on our behavior. To prove this, he mentions the Stanford Prison experiment that took place in the 1970s. During the experiment, a group of people were divided into prisoners and guards and put into an environment simulating the conditions inside a prison. The psychologists found that only after a few days, the people that were chosen to be guards changed their perspective and attitude about the prisoner group completely: they started beating them and treating them in an inappropriate manner. The things escalated so much that the experiment was called off only after a few days even though the experiment was supposed to last for more than two weeks. The experiment showed just how much the environment can affect a person’s decisions and how it can affect their behaviors.

Update this section!

You can help us out by revising, improving and updating this section.

After you claim a section you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.

The Tipping Point Questions and Answers

The Question and Answer section for The Tipping Point is a great resource to ask questions, find answers, and discuss the novel.

tipping point

What is your question here?

The Bernard Goetz incident in the NY subway is an example of?

The Goetz incident is used as an example of environmental and social cues in human behavior.

How does the author support his claim that there are tipping points for social problems?

One of the main themes in the book is the idea that every little action matters. The author points out the way in which the actions we take influence our lives and those around us. The author mentions a few key people in history who influenced the...

Study Guide for The Tipping Point

The Tipping Point study guide contains a biography of Malcolm Gladwell, literature essays, quiz questions, major themes, characters, and a full summary and analysis.

• About The Tipping Point
• The Tipping Point Summary
• Character List

Wikipedia Entries for The Tipping Point

• Introduction

Find anything you save across the site in your account

THE TIPPING POINT

The New Yorker , June 3, 1996 P. 32

DEPT. OF DISPUTATION about the application of what epidemiologists call the "tipping point"--the point at which an ordinary and stable phenomenon--a low-level flu outbreak, for example, can turn into a public-health crisis. Today, bringing epidemiological techniques to bear on violence is one of the hottest ideas in criminal research.... Writer describes the part of New York City that the Police Department refers to as Brooklyn North, where neighborhoods slowly start to empty out... Tells about East New York, home of the 75th Precinct, a 5.6 square mile tract where some of the poorest people in the city live... East New York is not a place of office buildings or parks and banks, just graffiti-covered bodegas and hair salons and auto shops.... In 1993 there were 126 homicides in the Seven-Five, as the police call it. Last year there were 44. There is probably no other place in the country where violent crime has declines so far, so fast. Once the symbol of urban violence, NYC is in the midst unprecedented transformation. According to the preliminary crime statistics released by the F.B.I. earlier this month, New York has a citywide violent-crime rate that now ranks it 136th among major American cities, on a par with Boise, Idaho. Car thefts have fallen to 71,000, down from 150,000 as recently as 6 years ago. Burglaries have fallen from more than 200,000 in the early '80s to under 75,000 in '95... What accounts for the drop in crime rates? William J. Bratton--who as the New York City Police commissioner presided over much of the decline from the fall of 1994 until his resignation this spring--argues that his new policing strategies made the difference: he cites more coordination between divisions of the NYPD, more accountability from precinct commanders, more arrests for gun possession, more sophisticated computer-aided analysis of crime patterns, more aggressive crime prevention. Tells about the social science definition of epidemics... Tells how epidemics do not follow linear patterns... What does this have to do with the murder rate in Brooklyn? Quite a bit, as it turns out, because in recent years social scientists have started to apply the theory of epidemics to human behavior... Tells about the "broken window" hypothesis & about gang-related homicides in L.A. County as an epidemic... Writer interviews Mark L. Rosenberg of the Centers for Disease Control in Atlanta about endemic crime... Perhaps Brooklyn--and with it New York City-- has tipped.

View Article

AI’s $600B Question

The AI bubble is reaching a tipping point. Navigating what comes next will be essential.

In September 2023, I published AI’s $200B Question . The goal of the piece was to ask the question: “Where is all the revenue?” 

At that time, I noticed a big gap between the revenue expectations implied by the AI infrastructure build-out, and actual revenue growth in the AI ecosystem, which is also a proxy for end-user value. I described this as a “$125B hole that needs to be filled for each year of CapEx at today’s levels .” 

This week, Nvidia completed its ascent to become the most valuable company in the world. In the weeks leading up to this, I’ve received numerous requests for the updated math behind my analysis. Has AI’s $200B question been solved, or exacerbated?

If you run this analysis again today, here are the results you get: AI’s $200B question is now AI’s $600B question.

Note: It’s easy to calculate this metric directly. All you have to do is to take Nvidia’s run-rate revenue forecast and multiply it by 2x to reflect the total cost of AI data centers (GPUs are half of the total cost of ownership—the other half includes energy, buildings, backup generators, etc) 1 . Then you multiply by 2x again, to reflect a 50% gross margin for the end-user of the GPU, (e.g., the startup or business buying AI compute from Azure or AWS or GCP, who needs to make money as well).

What has changed since September 2023? 

• The supply shortage has subsided: Late 2023 was the peak of the GPU supply shortage. Startups were calling VCs, calling anyone that would talk to them, asking for help getting access to GPUs. Today, that concern has been almost entirely eliminated. For most people I speak with, it’s relatively easy to get GPUs now with reasonable lead times.
• GPU stockpiles are growing: Nvidia reported in Q4 that about half of its data center revenue came from the large cloud providers. Microsoft alone likely represented approximately 22% of Nvidia’s Q4 revenue . Hyperscale CapEx is reaching historic levels. These investments were a major theme of Big Tech Q1 ‘24 earnings, with CEOs effectively telling the market: “We’re going to invest in GPUs whether you like it or not.” Stockpiling hardware is not a new phenomenon, and the catalyst for a reset will be once the stockpiles are large enough that demand decreases.
• OpenAI still has the lion’s share of AI revenue: The Information recently reported that OpenAI’s revenue is now $3.4B , up from $1.6B in late 2023. While we’ve seen a handful of startups scale revenues into the <$100M range, the gap between OpenAI and everyone else continues to loom large. Outside of ChatGPT, how many AI products are consumers really using today? Consider how much value you get from Netflix for $15.49/month or Spotify for $11.99. Long term, AI companies will need to deliver significant value for consumers to continue opening their wallets.  
• The $125B hole is now a $500B hole: In the last analysis, I generously assumed that each of Google, Microsoft, Apple and Meta will be able to generate $10B annually from new AI-related revenue. I also assumed $5B in new AI revenue for each of Oracle, ByteDance, Alibaba, Tencent, X, and Tesla. Even if this remains true and we add a few more companies to the list, the $125B hole is now going to become a $500B hole. 
• It’s not over—the B100 is coming : Earlier this year, Nvidia announced their B100 chip, which will have 2.5x better performance for only 25% more cost. I expect this will lead to a final surge in demand for NVDA chips. The B100 represents a dramatic cost vs. performance improvement over the H100, and there will likely be yet another supply shortage as everyone tries to get their hands on B100s later this year.

One of the major rebuttals to my last piece was that “GPU CapEx is like building railroads” and eventually the trains will come, as will the destinations—the new agriculture exports, amusement parks, malls, etc. I actually agree with this, but I think it misses a few points:

• Lack of pricing power: In the case of physical infrastructure build outs, there is some intrinsic value associated with the infrastructure you are building. If you own the tracks between San Francisco and Los Angeles, you likely have some kind of monopolistic pricing power, because there can only be so many tracks laid between place A and place B. In the case of GPU data centers, there is much less pricing power. GPU computing is increasingly turning into a commodity, metered per hour. Unlike the CPU cloud, which became an oligopoly, new entrants building dedicated AI clouds continue to flood the market. Without a monopoly or oligopoly, high fixed cost + low marginal cost businesses almost always see prices competed down to marginal cost (e.g., airlines).
• Investment incineration: Even in the case of railroads—and in the case of many new technologies—speculative investment frenzies often lead to high rates of capital incineration. The Engines that Moves Markets is one of the best textbooks on technology investing, and the major takeaway—indeed, focused on railroads—is that a lot of people lose a lot of money during speculative technology waves. It’s hard to pick winners, but much easier to pick losers (canals, in the case of railroads).
• Depreciation: We know from the history of technology that semiconductors tend to get better and better. Nvidia is going to keep producing better next-generation chips like the B100. This will lead to more rapid depreciation of the last-gen chips. Because the market under-appreciates the B100 and the rate at which next-gen chips will improve, it overestimates the extent to which H100s purchased today will hold their value in 3-4 years. Again, this parallel doesn’t exist for physical infrastructure, which does not follow any “Moore’s Law” type curve, such that cost vs. performance continuously improves. 
• Winners vs. losers: I think we need to look carefully at winners and losers—there are always winners during periods of excess infrastructure building. AI is likely to be the next transformative technology wave, and as I mentioned in the last piece, declining prices for GPU computing is actually good for long-term innovation and good for startups. If my forecast comes to bear, it will cause harm primarily to investors. Founders and company builders will continue to build in AI—and they will be more likely to succeed, because they will benefit both from lower costs and from learnings accrued during this period of experimentation. 

A huge amount of economic value is going to be created by AI. Company builders focused on delivering value to end users will be rewarded handsomely. We are living through what has the potential to be a generation-defining technology wave. Companies like Nvidia deserve enormous credit for the role they’ve played in enabling this transition, and are likely to play a critical role in the ecosystem for a long time to come.

Speculative frenzies are part of technology, and so they are not something to be afraid of. Those who remain level-headed through this moment have the chance to build extremely important companies. But we need to make sure not to believe in the delusion that has now spread from Silicon Valley to the rest of the country, and indeed the world. That delusion says that we’re all going to get rich quick, because AGI is coming tomorrow, and we all need to stockpile the only valuable resource, which is GPUs. 

In reality, the road ahead is going to be a long one. It will have ups and downs. But almost certainly it will be worthwhile.

If you are building in this space, we’d love to hear from you. Please reach out at [email protected]

• Some commenters challenged my 50% assumption on non-GPU data center costs, which I summarized as energy costs. Nvidia actually came to the exact same metric, which you can see on Page 14 of their October 2023 analyst day presentation, published a few days after my last piece.

Related Topics

AI is Now Shovel Ready

AI’s $200B Question

Ai ascent 2024.

AI in 2024: From Big Bang to Primordial Soup

Get the best stories from the sequoia community..

By navigating this website you agree to our cookie policy.