Hi, enjoy this weeks curated risk and business updates.

After years on top, is Google Search finally vulnerable to disruptive innovation? Google has dominated the global search market with a 90%+ market share since 2014 and hundreds of billions in cumulative profits. The search market segment has attracted many would-be competitors over the years that have failed to make a dent in Google’s business. In fact, Bing, the second largest competitor, holds just over 3.7% market share.  

Disruptive innovation risk refers to the potential threats and uncertainties that established companies face when new technologies or business models emerge, potentially displacing existing products or services by offering simpler, more affordable, or more effective alternatives that eventually appeal to a broader customer base. These alternatives are often less profitable and therefore less attractive to established companies.

Increased concern by customers about privacy, search biases and accuracy, ongoing friction with regulators and content creators, and potential for generative AI to offer superior performance and convenience all appear to be signals of change that the search market may finally be primed for disruptive innovation.

OpenAI is launching a version of its long-awaited search engine called SearchGPT with features and capabilities it believes will allow it to disrupt the global search market, including:

• Provide more accurate and contextually relevant search results leveraging the latest advancements in natural language processing.

• Allow users to interact with the search engine more naturally and intuitively with a more conversational interface.

• Provide highly personalized search results using deep learning to better understand individual user preferences.

• Offer results that are sensitive to the user’s current context, including location, time, and recent activities.

• Fast and timely answers with clear and relevant sources instead of pages of search results.

• Subscription-based, ad-free search options to cater to privacy-conscious users and provide a cleaner search experience.

• Enhanced privacy controls or avoiding the collection of personal data altogether.

• Revenue sharing with media companies, content creators and websites, encouraging high-quality content and collaboration. This means SearchGPT could provide more accurate and reliable information, while also supporting the journalism industry.

Precisely predicting disruptive innovation is challenging and cognitive biases of previously successful companies and leaders may limit foresight. Disruption arises from startups and unexpected competitors. Companies should continually monitor signals of change and whether new products and offerings in the marketplace match up to those signals. Advances in no-code/ low-code tools, generative AI, and natural language processing can be utilized to support marketplace surveillance of signals and matching products. Unfortunately, many leaders will continue to ignore low-end, down market competitors, products and services to their peril.

Request more information on disruptive innovation, DelCreo’s Risk Universe and risk assessment services.

As a reminder, here are our Risk Universe categories that we leverage to tackle and understand risk which include:

• External Risk

• Governance Risk

• Strategic Risk

• Product Risk

• Business Operations Risk

• Legal & Compliance Risk

• Financial Risk

• Technology Risk

We leverage our understanding of risk maps and risk universes to better advise our clients in strategic business decisions and to optimize the management of risk throughout the enterprise.

Weighing the Risks

Weekly Highlights

Three Key Ideas:

• The recent tech sell-off led by major stocks like Tesla and Alphabet has significantly impacted the market, causing the S&P 500 and Nasdaq Composite to experience their worst days in over a year. This downturn highlights economic risk factors, including high inflation, interest rate hikes, and market overreliance on big tech stocks.

• U.S. consumer tech spending has been affected by high inflation and supply chain disruptions, leading to consecutive declines in hardware revenues. However, the market is expected to recover with growth driven by falling inflation and increased spending on software and services, emphasizing the importance of economic stability for industry health.

• The integration of AI technologies in businesses poses significant risks, including overinvestment due to competitive pressures and dependency on critical components like Nvidia GPUs. Companies must balance current expenditures with the uncertain long-term revenue potential of AI technologies while managing the operational challenges of rapidly advancing AI infrastructure.

Recommendations:

• To address these risks, business and risk managers should implement robust risk management frameworks that include continuous monitoring of market conditions, strategic investment in AI technologies with clear ROI analysis, and proactive management of supply chain dependencies. Additionally, fostering strong partnerships and ensuring regulatory compliance will help mitigate potential disruptions and enhance operational resilience.

Risk Universe Weekly Updates

External Risk

• US markets suffer worst day since 2022 as Tesla and AI stocks fall

  • The recent tech sell-off, led by major stocks like Tesla and Alphabet, has significantly impacted the market, with the S&P 500 and Nasdaq Composite experiencing their worst days in over a year. This downturn reflects broader economic risk factors, including investor concerns over high inflation, interest rate hikes, and the market's overreliance on big tech stocks.

  • Political and industry risk factors are evident as the tech sector, particularly AI and semiconductor stocks, faces scrutiny and shifting investor sentiment. The sell-off has been exacerbated by underwhelming earnings reports, regulatory uncertainties, and a fragile economic outlook, leading to a flight to safer assets like US Treasuries.

• U.S. consumer tech spending will grow slightly in 2024 and hit 4.4% growth in 2025 | CTA

  • Economic and industry risk factors have impacted the U.S. consumer technology market, with high inflation and supply chain disruptions from the pandemic leading to consecutive declines in hardware revenues. However, the market is expected to recover with 1% growth in 2024 and 4.4% in 2025, driven by falling inflation and increased consumer spending on software and services.

  • The technology industry’s deflationary nature, influenced by Moore's Law, has led to price reductions in products like TVs and gaming hardware, challenging growth but also fostering technological innovation. The upcoming broad replacement cycle for tech products bought during the pandemic, along with advancements in AI, is expected to boost market growth and efficiency.

• The Dow gains 600 points after a solid economic report and fresh inflation data

  • Economic risk factors have shown a mixed outlook, with recent growth in the U.S. economy and moderate inflation suggesting potential interest rate cuts later in the year. The Dow Jones, S&P 500, and Nasdaq all rose significantly, driven by positive GDP growth and controlled inflation rates, but the future remains uncertain due to the volatile nature of inflation data and Federal Reserve policies.

  • Industry risk factors were highlighted by the strong performance of 3M Company, which saw a 22% increase in shares after exceeding revenue and earnings expectations. This underscores the importance of corporate earnings reports and innovation in driving stock performance amidst broader economic fluctuations.

• US consumers show signs of flagging, companies and analysts warn

  • Economic risk factors are evident as U.S. consumer spending shows signs of weakening, with depleted pandemic savings and maxed-out credit among lower-income households, potentially leading to a slowdown in economic growth. The University of Michigan’s consumer sentiment index fell to its lowest level in eight months, reflecting concerns about inflation and election uncertainty.

  • Industry risk factors are highlighted by companies like Whirlpool, UPS, and Lamb Weston reporting softening demand and overestimations of consumer strength. This shift towards value-oriented goods and increased discounting by retailers such as Target and Walmart indicates a broader trend of consumers becoming more price-sensitive, which may impact future corporate earnings and economic stability.

Strategic Risk

• Kroger, Albertsons Agree to Pause Merger as FTC, State Challenges Proceed

  • The $20 billion merger between Kroger and Albertsons is facing significant regulatory hurdles, with lawsuits from the Colorado Attorney General and the Federal Trade Commission citing concerns about reduced competition, higher food prices, and negative impacts on workers. The outcome of these legal challenges could fundamentally alter the competitive landscape and operational strategy for both companies, potentially preventing the merger and requiring them to find alternative ways to compete with giants like Amazon and Walmart.

  • The temporary injunction and ongoing legal battles pose substantial risks to the brands' reputations, highlighting potential negative consumer and worker impacts. Additionally, the need to sell over 160 stores to appease regulators reflects the complexity and potential pitfalls of large-scale mergers, emphasizing the strategic risk of concentrating market power and the necessity for careful execution to avoid damaging public perception and regulatory backlash.

Business Operations Risk

• Data centers powered by clean energy draw higher prices, as AI fuels electricity demand spike

  • A significant majority of organizations (51%) are relying on third-party colocation data centers for AI infrastructure, increasing dependency on external providers for critical operations. This reliance introduces risks related to the availability, sustainability, and resilience of these third-party facilities, especially as AI workloads drive up power demands and require advanced infrastructure to maintain performance and security standards.

  • While AI is seen as a tool to boost worker efficiency and productivity, 64% of respondents are concerned about bridging the skills gap and managing the wave of retirements. Moreover, 80% of organizations underestimate the training resources needed for AI integration, potentially leading to operational disruptions and inefficiencies if workforce readiness is not adequately addressed.

Legal & Compliance Risk

• ESG regulations are still in limbo, but companies are already preparing for them

  • The implementation of new SEC climate disclosure rules and similar California laws have been delayed due to legal challenges, causing regulatory uncertainty for companies. Despite these setbacks, companies are proactively tracking and reporting ESG data, anticipating future mandatory disclosures and striving for harmonization across a fractured regulatory landscape.

  • The political debate over ESG has led to some companies re-evaluating their environmental commitments, but most remain committed to integrating ESG into their business strategies. The rise of roles like ESG controllers, responsible for collecting and analyzing ESG data, highlights the increasing importance of ethical considerations and the need for robust IT systems to support ESG initiatives.

• Meta Agrees to $1.4B Settlement With Texas in Privacy Lawsuit Over Facial Recognition

  • Meta has agreed to a record $1.4 billion settlement with Texas over allegations of using biometric data without user consent, reflecting the company's ongoing legal challenges and significant financial penalties related to privacy violations. This follows a similar $650 million settlement in Illinois, highlighting persistent legal scrutiny and the importance of compliance with privacy laws to avoid substantial fines and litigation.

  • The Texas lawsuit underscores the legal risks associated with collecting biometric data without proper consent, as state laws increasingly enforce stringent privacy protections. Meta's decision to shut down its face-recognition system and delete faceprints indicates a strategic shift towards addressing ethical concerns and regulatory compliance in the wake of growing public and governmental scrutiny.

Technology Risk

• EU, UK and US Unite in GenAI Concerns

  • Regulators from the U.S., EU, and UK are collaborating to address antitrust concerns in AI, focusing on market concentration and anti-competitive practices in generative AI technologies. This scrutiny highlights risks related to control of critical resources and the potential for dominant tech companies to entrench their market power, potentially limiting innovation and fair competition.

  • Meta's concerns over stringent EU AI regulations, including requests to pause AI model training using European data, underscore the risks of regulatory compliance and potential isolation from cutting-edge AI advancements. The evolving regulatory landscape necessitates tech companies to balance innovation with adherence to diverse regional regulations, impacting the deployment and operational strategies of AI technologies globally.

• OpenAI Is Launching Search Engine, Taking Direct Aim at Google

  • OpenAI's launch of SearchGPT, which challenges Google's dominance in search, involves significant technology platform risk as it must effectively handle and cite sources from various publishers while providing accurate and reliable information. This new venture necessitates robust operational strategies to manage partnerships, ensure content accuracy, and address publisher concerns about traffic and revenue impacts.

  • The integration of AI in search technologies poses risks related to intellectual property and legal compliance, as highlighted by ongoing lawsuits from publishers like The New York Times against OpenAI. Additionally, the dependency on massive amounts of data for training AI models raises concerns about ethical use and proper licensing of content, which could lead to further legal challenges and operational disruptions.

• Tech’s splurge on AI chips has companies in ‘arms race’ that’s forcing more spending

  • Major tech companies like Meta and Alphabet are investing heavily in Nvidia GPUs to build advanced AI models, creating risks of overinvestment due to competitive pressures and game theory dynamics. This intense focus on AI infrastructure highlights the operational challenge of balancing current expenditures with the uncertain long-term revenue potential from AI technologies.

  • The high demand and cost of Nvidia GPUs are driving companies like Tesla to develop their own alternatives, illustrating the risk of dependency on a single supplier for critical technology components. Additionally, the rapid pace of AI development and the necessity to stay ahead in the market pose significant risks related to ensuring adequate and timely returns on these massive capital expenditures.

• JPMorgan rolls out Generative AI 'research analyst' to staff

  • JPMorgan Chase's rollout of its in-house developed Generative AI chatbot, LLM Suite, to assist with writing, idea generation, and document summarization introduces potential risks related to the integration and reliability of the AI technology across various departments. Ensuring the chatbot functions effectively and securely at scale, particularly as it impacts 50,000 staff initially and expands to the asset and wealth management division, is critical for seamless operations.

  • The bank’s significant investment in AI talent and technology, including the use of OpenAI’s GPT-4 for thematic investment analysis, poses risks associated with the rapid pace of AI advancements and potential over-reliance on AI-driven processes. With over 2,000 AI and machine learning experts, managing the ethical use, data privacy, and regulatory compliance of AI applications remains a crucial challenge as the technology is integrated into over 400 use cases within the bank.