The GAME dynamic

Companies with high fixed overhead costs will gain the most as they adopt AI tools in their business processes

- AKASH PRAKASH

The golden age of margin expansion (GAME) was a theory most publicly expounded by Brad Gerstner of Altimeter Capital in various tweets and podcasts. Mr. Gerstner is best known for his open letter to Meta in October 2022, near the stock's bottom, urging the company to become fit, cut costs, and refocus on its core business. Having followed much of this advice, Meta has since become one of the best-performing technology stocks of the past three years.

A big believer in artificial intelligence (AI) and an investor in OpenAI, Mr. Gerstner believes that now the time has come for the largest tech companies specifically, and all companies more broadly, to use AI tools to increase productivity. He thinks the productivity release afforded through the effective use of AI in business processes will lead to substantial margin expansion as it will allow companies to lower headcount while still growing revenues robustly.

AI has already proven its value in customer support and programming, and its applications will only broaden as the technology matures and enterprises grow more comfortable with the tools. Every day, we see new applications and further proof of concept, from healthcare to defense and everything in between. The costs of AI adoption and use are also dropping rapidly. Large language models are on the path to commoditization, with at least six models of similar capability, half of them open source.

As evidence of this productivity and margin dynamic, Mr. Gerstner points out how the Magnificent-7 technology giants have dramatically slowed headcount growth. He shows a chart indicating that between 2011 and 2021, these companies were growing headcount at about 25 per cent per annum. This peaked in 2020 at 45 per cent growth, when Covid supposedly changed consumer behavior forever. In the last three years, however, this same metric has slowed to just about 2 per cent growth.