Mike Monegan saw the writing on the wall in January. For weeks, he’d had difficulty sleeping.
As vice president of product management for Australian artificial intelligence software vendor Appen, Monegan and many of his colleagues had been doing their best to keep things afloat as tech behemoths slashed their spending on the company’s AI training data.
Five customers — Microsoft, Apple, Meta, Google, and Amazon — accounted for 80% of Appen’s revenue, and this was supposed to be the company’s moment to shine. Across the industry, companies were committing to hefty investments in generative AI, trying to ensure they weren’t left behind in the sudden race to embed the latest large language models into all of their projects.
Appen has a platform of about one million freelance workers in more than 170 countries. In the past, it’s used that network of people to train some of the world’s leading AI systems, working for a star-studded list of tech companies, including the top consumer names as well as Adobe, Salesforce and Nvidia.
But just as AI’s big moment was arriving, Appen was losing business — and fast. Revenue declined 13% in 2022, a drop the company attributed in part to “challenging external operating and macro conditions.” Former employees, who asked not to be named for fear of retaliation, told CNBC that the company’s current struggle to pivot to generative AI reflects years of weak quality controls and a disjointed organizational structure.
In mid-December, Appen announced a change at the top. Armughan Ahmad, a 25-year veteran of the tech industry, would be taking over as CEO, replacing Mark Brayan, who had helmed the company for the prior seven years. Upon starting the following month, Ahmad called generative AI “one of the most exciting advancements” in the industry and noted that he “was happy to learn that our team has already put the technology to work on our marketing content.”
Monegan wasn’t buying it. He told CNBC that after his first meeting with Ahmad he began looking for another job. Monegan had been watching Appen fall behind, and he didn’t see Ahmad, whose LinkedIn profile says he’s based in Seattle, presenting a realistic path out.
Monegan left in March to help start his own company.
The numbers seem to prove him right.
Despite Appen’s enviable client list and its nearly 30-year history, the company’s struggles have intensified this year. Revenue in the first half of 2023 tumbled 24% to $138.9 million, amid what it called a “broader technology slowdown.” The company said its underlying loss widened to $34.2 million from $3.8 million a year earlier.
“Our data and services power the world’s leading AI models,” Ahmad said on last week’s earnings call. “However, our results are far from satisfactory. They reflect the ongoing global macroeconomic pressures and continued slowdown in tech spending, particularly amongst our largest customers.”
In August 2020, Appen’s shares peaked at AU$42.44 on the Australian Securities Exchange, sending its market cap to the equivalent of $4.3 billion. Now, the stock is trading at around AU$1.52, for a market cap of around $150 million.
‘Resetting the business’
Along with its troubled financials, the company is dealing with a string of executive departures. Helen Johnson, who was appointed finance chief in May, left after just seven weeks in the role. Marketing chief Fab Dolan, whose departure was announced on the earnings call, spent just over two months in the position. The departure of Chief Product Officer Sujatha Sagiraju was also just announced.
“In the environment of a turnaround, we anticipate changes,” a representative for Appen told CNBC.
Elena Sagunova, global human resources director, left in April, followed by Jen Cole, senior vice president of enterprise, in July and Jukka Korpi, senior manager of business development for the Europe, Middle East and Africa Region, in August.
Still, Ahmad said on the earnings call that the company remains “laser-focused on resetting the business” as it pivots to providing data for generative AI models. He added that “the benefits from our turnaround have yet to show meaningful results” and that “the revenue growth does not offset the declines we are experiencing in the remainder of the business.”
Appen’s past work for tech companies has been on projects like evaluating the relevance of search results, helping AI assistants understand requests in different accents, categorizing e-commerce images using AI and building out map locations of electric vehicle charging stations, according to public information and interviews conducted by CNBC.
Appen has also touted its work on search relevance for Adobe and on translation services for Microsoft, as well as in providing training data for lidar companies, security applications and automotive manufacturers.
Depending on the data that a customer requires, an Appen freelancer could be sitting at a laptop to label or categorize images or search results or using Appen’s mobile application to capture the sounds of glass breaking or background noise in a vehicle.
During Appen’s growth years, that manual collection of data was key for the state of AI at the time. But LLMs of today have changed the game. The underlying models behind OpenAI’s ChatGPT and by Google’s Bard are scouring the digital universe to provide sophisticated answers and advanced images in response to simple text queries.
To fuel their LLMs, which are powered largely by state-of-the-art processors from Nvidia, companies are spending less on Appen and a lot more on competitive services that already specialize in generative AI.
Ahmad told CNBC in a statement that, while the company’s financials are being hurt by the economy and a reduction in spending by top customers, “I’m confident that our disciplined focus and the early progress we are making to turn around the business will enable us to capture value from the growing generative AI market and return Appen to growth.”
Cash-strapped
Ahmad said on the earnings call that there’s customer interest in niche types of data that’s more difficult to acquire. For Appen, that would mean finding specialists in particular types of information that can bolster generative AI systems. That also means it needs to expand its base of workers while simultaneously finding ways to preserve cash.
Appen’s cash on hand was $55 million as of June 30, thanks to proceeds from a $38 million equity raise. Prior to the new infusion, cash had been dwindling, from $48 million at the end of 2021 to $23.4 million a year later.
Even before the generative AI transition, wages for Appen’s data labelers were a sticking point. In 2019, Google said its contractors would need to pay their workers $15 an hour. Appen didn’t meet that requirement, according to public letters written by some workers.
In January, after months of organizing, raises went into effect for Appen freelancers working on the Bard chatbot and other Google products. The rates went up to between $14 and 14.50 per hour.
That wasn’t the end of the story. In May, Appen was accused of squeezing freelancers focused on generative AI, allotting strict time limits for time-consuming tasks such as evaluating a complex answer for accuracy. One worker, Ed Stackhouse, wrote a letter to two senators stating his concerns about the dangers of such constrained working conditions.
“The fact that raters are exploited leads to a faulty, and ultimately more dangerous product,” he wrote. “Raters are not given the time to deliver and test a perfect AI model under the Average Estimated Time (AET) model they are paid for,” a practice that “leads raters to spot check only a handful of facts before the task must be submitted,” he added.
In June, Appen faced charges from the U.S. National Labor Relations Board after allegedly firing six freelancers who spoke out publicly about frustrations with workplace conditions. The workers were later reinstated.
Appen employees who spoke to CNBC on behalf of the company in recent months said the rapidly changing AI environment poses challenges. Erik Vogt, vice president of solutions at Appen, told CNBC in May that the sector was in a state of flux.
“There’s a lot of uncertainty, a lot of tentativeness for experimentation, and new startups trying out new things,” Vogt said. “How to make new use cases a reality usually means acquiring unusual data – sometimes astronomical volumes of data, or highly rare resource types. There’s a need for specialists in a wide range of different capabilities.”
For recent projects, Vogt said Appen needed to enlist the help of doctors, lawyers and people with experience using project-tracking software Jira.
“People you wouldn’t necessarily think of as being gig workers, we had to engage with these specialists for these expert systems in a way there hadn’t been a huge demand for before,” Vogt said.
Kim Stagg, Appen’s vice president of product, said the work required for generative AI services was different than what the company has needed in the past.
“A lot of work we’ve done has been around the relevance of search for big engines – a lot of those are more, ‘Is this a hot dog or not,’ ‘Is this a good search or not,'” Stagg said. “With generative AI, we see a different demand.”
One focus Stagg highlighted was the need to find “what we would call really good quality creative people,” or those who are particularly good with language. “And another is domain experts: sports, hobbies, medical.”
However, former employees expressed deep skepticism of Appen’s ability to succeed given its tumultuous position and the executive shuffling taking place. Part of the problem, they say, is the organizational structure.
Appen was divided into a global business unit and an enterprise business unit, which were at one time made up of about five clients and more than 250 clients, respectively. Each had a separate team and communication between them was limited, creating inefficiencies internally, ex-employees said. One former manager said it felt like two separate companies. Appen said that in the last quarter, the company has integrated the global and enterprise business units.
The company’s plunging stock price suggests that investors don’t see the company’s business offerings transferring to the generative AI space.
Lisa Braden-Harder, who served as CEO of Appen until 2015, echoed that sentiment, telling CNBC that “data-labeling is completely different” than how data collection works in a ChatGPT world.
“I am not clear that their past experience of data labeling is a competitive advantage now,” she said.
Former Appen employees say the company has in recent years been dealing with quality control problems, hurting its ability to provide valuable training data for AI models. For example, one former department manager said people would annotate rows of data using automated tools instead of the manual data labeling required for accuracy, which is what clients thought they were buying.
Customers’ expectations of a “clean data set” were often not met, the person said, leading them to leave Appen for competitors such as Labelbox and Scale AI. When the manager started at the company, there were more than 250 clients in the enterprise business unit. Within 18 months, he said, that number had dwindled to less than 100.
Appen told CNBC that in the first half of the year it “secured 89 new client wins.”
Monegan recalled that many customer relationships were “hanging on by a thread.”
Following the earnings report, Canaccord Genuity analysts cut their price target on Appen by more than half to AU$1.56. One concern the analysts referenced was a 34% reduction in spending by Appen’s top customer, a number that Appen wouldn’t confirm or deny.
The more existential problem, the analysts note, revolves around Appen’s effort to win business while also looking to cut costs by 31% in fiscal 2023.
“That seems like a brutal level of cost reduction,” they wrote, as the company tries to stabilize its “core revenue base while growing a business around Generative AI.”
Microsoft owns lots of Nvidia graphics processing units, but it isn’t using them to develop state-of-the-art artificial intelligence models.
There are good reasons for that position, Mustafa Suleyman, the company’s CEO of AI, told CNBC’s Steve Kovach in an interview on Friday. Waiting to build models that are “three or six months behind” offers several advantages, including lower costs and the ability to concentrate on specific use cases, Suleyman said.
It’s “cheaper to give a specific answer once you’ve waited for the first three or six months for the frontier to go first. We call that off-frontier,” he said. “That’s actually our strategy, is to really play a very tight second, given the capital-intensiveness of these models.”
Suleyman made a name for himself as a co-founder of DeepMind, the AI lab that Google bought in 2014, reportedly for $400 million to $650 million. Suleyman arrived at Microsoft last year alongside other employees of the startup Inflection, where he had been CEO.
More than ever, Microsoft counts on relationships with other companies to grow.
It gets AI models from San Francisco startup OpenAI and supplemental computing power from newly public CoreWeave in New Jersey. Microsoft has repeatedly enriched Bing, Windows and other products with OpenAI’s latest systems for writing human-like language and generating images.
Microsoft’s Copilot will gain “memory” to retain key facts about people who repeatedly use the assistant, Suleyman said Friday at an event in Microsoft’s Redmond, Washington, headquarters to commemorate the company’s 50th birthday. That feature came first to OpenAI’s ChatGPT, which has 500 million weekly users.
Through ChatGPT, people can access top-flight large language models such as the o1 reasoning model that takes time before spitting out an answer. OpenAI introduced that capability in September — only weeks later did Microsoft bring a similar capability called Think Deeper to Copilot.
Microsoft occasionally releases open-source small-language models that can run on PCs. They don’t require powerful server GPUs, making them different from OpenAI’s o1.
OpenAI and Microsoft have held a tight relationship shortly after the startup launched its ChatGPT chatbot in late 2022, effectively kicking off the generative AI race. In total, Microsoft has invested $13.75 billion in the startup, but more recently, fissures in the relationship between the two companies have begun to show.
Microsoft added OpenAI to its list of competitors in July 2024, and OpenAI in January announced that it was working with rival cloud provider Oracle on the $500 billion Stargate project. That came after years of OpenAI exclusively relying on Microsoft’s Azure cloud. Despite OpenAI partnering with Oracle, Microsoft in a blog post announced that the startup had “recently made a new, large Azure commitment.”
“Look, it’s absolutely mission-critical that long-term, we are able to do AI self-sufficiently at Microsoft,” Suleyman said. “At the same time, I think about these things over five and 10 year periods. You know, until 2030 at least, we are deeply partnered with OpenAI, who have [had an] enormously successful relationship for us.
Microsoft is focused on building its own AI internally, but the company is not pushing itself to build the most cutting-edge models, Suleyman said.
“We have an incredibly strong AI team, huge amounts of compute, and it’s very important to us that, you know, maybe we don’t develop the absolute frontier, the best model in the world first,” he said. “That’s very, very expensive to do and unnecessary to cause that duplication.”
President Trump’s new tariffs on goods that the U.S. imports from over 100 countries will have an effect on consumers, former Microsoft CEO Steve Ballmer told CNBC on Friday. Investors will feel the pain, too.
Microsoft’s stock dropped almost 6% in the past two days, as the Nasdaq wrapped up its worst week in five years.
“As a Microsoft shareholder, this kind of thing is not good,” Ballmer said, in an interview with Andrew Ross Sorkin that was tied to Microsoft’s 50th anniversary celebration. “It creates opportunity to be a serious, long-term player.”
Ballmer was sandwiched in between Microsoft co-founder Bill Gates and current CEO Satya Nadella for the interview.
“I took just enough economics in college — that tariffs are actually going to bring some turmoil,” said Ballmer, who was succeeded by Nadella in 2014. Gates, Microsoft’s first CEO, convinced Ballmer to join the company in 1980.
Gates, Ballmer and Nadella attended proceedings at Microsoft’s Redmond, Washington, campus on Friday to celebrate its first half-century.
Between the tariffs and weak quarterly revenue guidance announced in January, Microsoft’s stock is on track for its fifth straight month of declines, which would be the worst stretch since 2009. But the company remains a leader in the PC operating system and productivity software markets, and its partnership with startup OpenAI has led to gains in cloud computing.
“I think that disruption is very hard on people, and so the decision to do something for which disruption was inevitable, that needs a lot of popular support, and nobody could game theorize exactly who is going to do what in response,” Ballmer said, regarding the tariffs. “So, I think citizens really like stability a lot. And I hope people — individuals who will feel this, because people are feeling it, not just the stock market, people are going to feel it.”
Ballmer, who owns the Los Angeles Clippers, is among Microsoft’s biggest fans. He said he’s the company’s largest investor. In 2014, shortly after he bought the basketball team for $2 billion, he held over 333 million shares of the stock, according to a regulatory filing.
“I’m not going to probably have 50 more years on the planet,” he said. “But whatever minutes I have, I’m gonna be a large Microsoft shareholder.” He said there’s a bright future for computing, storage and intelligence. Microsoft launched the first Azure services while Ballmer was CEO.
Earlier this week Bloomberg reported that Microsoft, which pledged to spend $80 billion on AI-enabled data center infrastructure in the current fiscal year, has stopped discussions or pushed back the opening of facilities in the U.S. and abroad.
JPMorgan Chase’s chief economist, Bruce Kasman, said in a Thursday note that the chance of a global recession will be 60% if Trump’s tariffs kick in as described. His previous estimate was 40%.
“Fifty years from now, or 25 years from now, what is the one thing you can be guaranteed of, is the world needs more compute,” Nadella said. “So I want to keep those two thoughts and then take one step at a time, and then whatever are the geopolitical or economic shifts, we’ll adjust to it.”
Gates, who along with co-founder Paul Allen, sought to build a software company rather than sell both software and hardware, said he wasn’t sure what the economic effects of the tariffs will be. Today, most of Microsoft’s revenue comes from software. It also sells Surface PCs and Xbox consoles.
“So far, it’s just on goods, but you know, will it eventually be on services? Who knows?” said Gates, who reportedly donated around $50 million to a nonprofit that supported Democratic nominee Kamala Harris’ losing campaign.
AppLovin CEO Adam Foroughi provided more clarity on the ad-tech company’s late-stage effort to acquire TikTok, calling his offer a “much stronger bid than others” on CNBC’s The Exchange Friday afternoon.
Foroughi said the company is proposing a merger between AppLovin and the entire global business of TikTok, characterizing the deal as a “partnership” where the Chinese could participate in the upside while AppLovin would run the app.
“If you pair our algorithm with the TikTok audience, the expansion on that platform for dollars spent will be through the roof,” Foroughi said.
The news comes as President Trump announced he would extend the deadline a second time for TikTok’s Chinese-owned parent company ByteDance to sell the U.S. subsidiary of TikTok to an American buyer or face an effective ban on U.S. app stores. The new deadline is now in June, which, as Foroughi described, “buys more time to put the pieces together” on AppLovin’s bid.
“The president’s a great dealmaker — we’re proposing, essentially an enhancement to the deal that they’ve been working on, but a bigger version of all the deals contemplated,” he added.
AppLovin faces a crowded field of other interested U.S. backers, including Amazon, Oracle, billionaire Frank McCourt and his Project Liberty consortium, and numerous private equity firms. Some proposals reportedly structure the deal to give a U.S. buyer 50% ownership of the company, rather than a complete acquisition. The Chinese government will still need to approve the deal, and AppLovin’s interest in purchasing TikTok in “all markets outside of China” is “preliminary,” according to an April 3 SEC filing.
Correction: A prior version of this story incorrectly characterized China’s ongoing role in TikTok should AppLovin acquire the app.