Europe’s good with the stick, but what about the carrot?

The EU’s landmark AI Act is due to come into force (albeit in tranches) next month, and according to a Financial Times report published Tuesday, founders and lawmakers alike are fretting over whether it’s fit for its purpose. What’s not being discussed is how the EU plans to keep its AI startup industry competitive with other large economies jostling for AI talent.

Little Guys

The EU has a history of robust tech regulation in general, and every now and then it makes a headline for smacking a Silicon Valley giant with an eye-watering fine — which then takes several years to materialize as said tech giant spends time dragging the penalty through Europe’s legal system. Alexandru Voica, head of corporate affairs and policy at UK-based generative AI unicorn Synthesia, said this is ultimately something that giant tech companies can put under the “cost of doing business” column, whereas startups can’t hope to put up the same legal resources. “It creates a situation which looks like a two-class system,” Voica said. 

Voica said this leaves startups with two choices: relocate or fall behind competitors. He added that in the case of the AI Act, if enforcement is going to be a disproportionate burden on smaller startups, then the EU needs a better industrial policy to support them on the other side of the equation:

• “In the Middle East or India, they’ve been buying GPUs and offering startups access to GPUs,” Voica added. “In Japan, for example, they’re allowing startups to have access to datasets to train their models. These kinds of measures you can take on industrial policy can overcome some of the barriers you’re putting [up] with regulation.”
• Responding to Voica’s comments, a European Commission spokesperson told The Daily Upside that in January the EU brought in a package of measures to help AI startups. “We are already investing more than €1 billion a year in AI research projects,” the spokesperson said, “The Commission will further increase the annual spending on AI, in particular to ensure the EU is at the forefront of the latest developments in generative AI. The total for this package is €4 billion,” the spokesperson added.

A big part of the EU’s strategy revolves around supercomputers. The EU has given startups access to its current supercomputers, and has allotted a €2.1 billion chunk of its AI pot towards acquiring or upgrading supercomputers, but according to Voica that’s not super useful for startups. “Although supercomputers are useful for scientific studies and academic AI research, startups require access to cloud services on which they can easily deploy applications and train their commercial models. So if the EU wants to help, it could give startups credits to spend on cloud providers,” he said.

Land of Hope and AI: The EU is not an AI wasteland: In fact, one of the biggest startups outside of OpenAI is France’s Mistral. Sifted reports US companies have shown a willingness to base their European HQs in the UK, the one that got away. The UK is no AI regulation slouch, though — on Tuesday it announced an antitrust probe into Microsoft’s acqui-hire of startup Inflection AI.

The IMF isn’t the first to count out the US economy. How’s that worked out so far? 

The International Monetary Fund said Tuesday that the US economy is set to cool compared to previous projections, and that America’s piling up debt at “concerning” levels. Meanwhile, US retail spending beat projections, suggesting resilient consumers are nevertheless poised to keep boosting growth prospects.

Fiery Spending Amid Signs of Cooling

The IMF’s latest World Economic Outlook said US economic growth would rise to 2.6% this year, up from 2.5% in 2023 but a downgrade from the previous 2.7% projection. “The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023,” wrote IMF chief economist Pierre-Olivier Gourinchas in the report.

“It is concerning that a country like the United States, at full employment, maintains a fiscal stance that pushes its debt-to-GDP ratio steadily higher, with risks to both the domestic and global economy,” he added, although at a press conference after the report’s release he clarified the IMF sees no immediate “vulnerability” with the US. The US federal debt has consistently risen since 2001 and, as of last year, sat at 123% of GDP. At the same time, a report by the US Commerce Department brought encouraging news:

• US retail sales were flat in June, beating Wall Street projections of a 0.4% decline. Retail sales in May were revised up to an increase of 0.3%, better than the previously reported 0.1% — consumer spending, which accounts for two-thirds of the economy, is now predicted to have grown 2% year-over-year in the second quarter, besting the previous 1.5% forecast. 
• Markets responded to the news with aplomb: The Dow Jones Industrial Average rose 1.8%, the small-cap Russell 2000 rose 3.4%, and the S&P 500 rose 0.6%.

At Your Service: The IMF said global inflation will fall to 5.9% this year from 6.7% in 2023, but cautioned services remain costly and could extend the conditions central bankers are waiting on before deploying rate cuts. “Unless goods inflation declines further, rising services prices and wages may keep overall inflation higher than desired,” wrote Gourinchas.

What media industry crisis?

According to PricewaterhouseCoopers’ annual Global Entertainment & Media Outlook, published Tuesday, the media industry has plenty of reasons for optimism. Oh, but that’s only if it figures out how to effectively reach consumers — something PwC contends necessitates a rethink of the direct-to-consumer strategy.

Ad Men

The bad news for the industry, per PwC: Revenue from consumer spending on subscription services is set to all but plateau as consumers grow fatigued with an increasingly saturated and expensive DTC market. The good news: PwC still projects revenue in the media and entertainment industry to grow from $2.8 trillion last year to $3.4 trillion in 2028, with ad revenue accounting for half that growth and notching $1 trillion on its own by 2026. 

But securing those ad dollars means media companies face an “existential imperative” to undergo fundamental “business model reinvention” — forcing them into a push-pull tension between dedicating resources to retain subscribers on increasingly ad-supported DTC products and chasing them beyond the walls of their carefully siloed platforms. 

It’s a dynamic the industry’s biggest players are aware of:

• A recent data analysis by media consulting firm Owl & Co. found that streamer churn rates drop significantly the more and more users watch the service, with users who are watching at least 40 hours per week far less likely to cancel their subscriptions than those who watch 30 hours. But that’s a lot of hours to fill at a time when the industry is pulling back on production and spending.
• Still, per a Wall Street Journal report on Tuesday, “hours per subscriber” has become a leading metric within Disney, and the company is increasingly turning toward Netflix-esque data-driven recommendation algorithms to keep viewers hooked.

Meanwhile, per a Business Insider story published Monday, Disney — and the rest of the legacy media world — is responding to YouTube’s iron grip on children’s programming by shifting some original programming there rather than on its own platforms.

Blockbuster: The PwC report did offer one more shimmer of hope for media giants, projecting that the struggling global box office will finally return to and surpass pre-pandemic levels by 2026. Someone tell Kevin Costner, whose partially self-financed Western epic Horizon: An American Saga – Chapter 1 just crashed and burned at the box office. Chapter 2, which was set to hit theaters in August, has promptly been pulled from Warner Bros. Discovery’s release slate. Maybe they just need to wait a couple years.