AI firm fires 1,000 contractors—sparking fears of looming bubble burst

San Francisco-based Scale AI quietly laid off over 1,000 contractors on Monday, and the news has some people seeing the move as a canary in the coal mine for a potential AI bubble burst.

Inc. reported on the layoffs on Tuesday. Workers who spoke anonymously about the layoffs in a Reddit thread said they were blindsided by the news, which came in an email.

Scale AI told Inc. through a spokesperson that the layoffs were due to an undefined “shift in business strategy” and that it only affected contractors on project-based work.

“This reduction was not a layoff and does not impact full-time Scale employees,” the spokesperson added, mentioning that the contractors received severance and healthcare coverage through the end of the month, which only has a few days remaining.

Scale hired contractors for its data annotation work, which helps train AI models on datasets to improve functionality. It reportedly has contracts with the Department of Defense.

The news has AI doomsayers warning that it could be the sign of a bubble ready to burst, as companies like Scale AI have raised huge amounts of investment money (In Scale’s case, $1.35 billion) that seem at odds with profitability. 

“AI scam is running into problems,” posted @DonMiami3 on X in reaction to the news.

“More signs of the AI bust,” posted @9kRPMadness.

While investment in AI skyrocketed the past few years, returns have yet to truly materialize, leading many to predict a coming collapse.

“Whaaat?! You're telling me that this incredible new tech that helps students write term papers, do homework & tell you to put glue on your pizza isn't generating trillions in revenue?!” posted @StephenK28765.

Amazon, Microsoft, and Google spent around $48 billion on data centers in the second quarter of this fiscal year, according to a report by Business Insider, and plan to spend $1 trillion on the technology in the next five years.

AI companies say they anticipate the technology becoming profitable, but at rates much lower than traditional software investments, according to market research surveys reported on by Business Insider.

Software gross profit margins are around 90% while generative AI pulls in about 60%.

And while there’s still plenty of money pouring into AI, investments declined last year, according to an April report from TechCrunch. AI-related mergers fell 31.2% from 2022 to 2023, and private investment went down by around $8 billion. OpenAI just announced today it was seeking new funding, aiming to pull in several billion more dollars.

On the Reddit thread where Inc. first found the news, employees commiserated about the layoffs at Scale AI, lamenting the lack of a human touch in announcing it.

“i didn’t get to say goodbye to my team,” posted u/pickle_chiip.

“Seems to be a real serious lack in the human side of this, when people get to know each other as fam and support in working, then, bam! Gone! That sucks,” added u/YesitsDr “They could at least have given some kind of fair warning to prepare people for it.”

“No warning at all,” replied u/Ready_Outcome_673. “I was deactivated in the middle of typing a response.”

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