Speaker 1: Zone, media, superstition, fear, and jealousy. Welcome to this week's
Speaker 1: Better Offline monologue. I'm your host ed ze Tron. As ever,
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Speaker 1: and I'll sort you out. I'm generous like that, and
Speaker 1: I love my premium mates. Really some of the best
Speaker 1: analysts work out there. It's very deep. I got the
Speaker 1: terminal going now and pulling all sorts of data. The
Speaker 1: many numbers I read every week are driving me truly insane.
Speaker 1: And with that in mind, to day's monologue starts with
Speaker 1: a simple question, what the fuck are hyperscaler is doing? Now?
Speaker 1: I realize I've asked this question maybe one hundred thousand
Speaker 1: times in the last two years, but it's begun to
Speaker 1: get so incredibly stupid that I'm actually a little exasperated. McKinsey.
Speaker 1: Spawn and Google CEO Sundar Pashai announced in Wednesday's earnings
Speaker 1: that Google would raise its year end capital expenditures to
Speaker 1: somewhere between one hundred and ninety five billion dollars and
Speaker 1: two hundred and five billion dollars after burning eighty point
Speaker 1: six billion dollars in the first half of the year,
Speaker 1: and this suggests that Google will spend another one hundred
Speaker 1: and fourteen billion dollars by the end of twenty twenty six.
Speaker 1: They're going to be doing what fifty five sixty billion
Speaker 1: dollars a quarter. It's fucking insane, it's fucking stupid. I'm
Speaker 1: sorry for swearing, but it's absolutely deranged. What are you doing, Sunda.
Speaker 1: You've already spent two hundred and eighty eight billion dollars
Speaker 1: in capex since twenty twenty two, and all you've got
Speaker 1: to show for it is several also RAN llms and
Speaker 1: one indeterminately large customer in Anthropic, who you've also invested
Speaker 1: thirteen billion dollars in. Now. One answer might be that
Speaker 1: Anthropic helped choose Google cloud's growth by eighty two percent
Speaker 1: year of a year in this qure But considering that
Speaker 1: Google doesn't actually break out how much of that is
Speaker 1: from AI, or from Anthropic, or really from anything, it's
Speaker 1: difficult to say what exactly this money is doing, other
Speaker 1: than turning its free cash flow negative for the first
Speaker 1: time since Google went public. While I can't say for
Speaker 1: sure how much Anthropic is spending, I do believe it's
Speaker 1: taking up the vast majority of Google's AI infrastructure and
Speaker 1: representing most of its cloud growth. Google Cloud was, up
Speaker 1: until fairly recently the last year or so, are much
Speaker 1: smaller business than Microsoft. As euroamason web services have been
Speaker 1: growing somewhere between twenty two percent and thirty percent year
Speaker 1: of a year, hitting thirty three point nine percent year
Speaker 1: of a year growth in the third quarter of twenty
Speaker 1: twenty five. That very same quarter, Google and Anthropic announced
Speaker 1: the deal to expand its use of TPUs, which is
Speaker 1: Google's special GPUs, in a contract worth than I quote
Speaker 1: tens of billions of dollars. Mysteriously can't imagine how Google's
Speaker 1: next time three quarters of cloud revenue growth showed forty
Speaker 1: seven point seven percent sixty three point four percent and
Speaker 1: eighty two point one percent year of a year growth.
Speaker 1: Whatever could that be? Where did that come from? I
Speaker 1: can't work it out, can you, dear listener? What could
Speaker 1: it possively? It's anthropic, It's it's obviously anthropic. Except in
Speaker 1: those same quarters, Google's capital expenditures went up ninety five percent,
Speaker 1: one hundred and seven percent, and one hundred percent year
Speaker 1: of a year, absorbing every dollar of cloud revenue and
Speaker 1: then some. In fact, outside of the fourth quarter of
Speaker 1: twenty twenty four, Google's capital expenditures have outpaced cloud growth
Speaker 1: by at least twelve percent year of a year for
Speaker 1: two goddamn years. And if your pushback is, well, Google
Speaker 1: spending that CAPEX on something else, No, they're not. They're not.
Speaker 1: Maybe they've got a couple of billy coming in from
Speaker 1: Google Workspace and cucking their various subscribers with annoying things.
Speaker 1: It's coming from anthropic. Google is not making that money
Speaker 1: from Gemini. Your ass must be crazy if you think
Speaker 1: that's that's the point. But all of this begs the question,
Speaker 1: when exactly does all of this payoff? How does it payoff?
Speaker 1: What does the payoff even look like? And why am
Speaker 1: I one of the few people asking these questions, hyperscalas
Speaker 1: have now spent I asked them at about one point
Speaker 1: one trillion dollars. I haven't seen Amazon and Microsoft's quarters yet,
Speaker 1: and I'm going to guess they spend a good amount
Speaker 1: on capex. They now spent one point one trillion bloody
Speaker 1: dollars on capital expenditures. And when you ask them to
Speaker 1: tell you how much revenue they made from said expenditures,
Speaker 1: they look at you like that meme of Brendan Fraser
Speaker 1: from the whale. Anyway, here's a fun fact for you.
Speaker 1: Thanks to my own reporting and open ais auditive financials,
Speaker 1: we know that It's spent seventeen point two billion dollars
Speaker 1: on Microsoft a zure in colendar year twenty twenty five,
Speaker 1: a year when Microsoft's intelligent cloud segment made one hundred
Speaker 1: and twenty point four billion dollars in revenue. The segment
Speaker 1: grew as a result twenty six percent year of a year. Yeah,
Speaker 1: I'm a curious little Chris or around the numbers, and
Speaker 1: open Ay's revenue represented fourteen point three percent of all
Speaker 1: Microsoft's cloud revenues for that period. And to be clear,
Speaker 1: it's calendar year twenty twenty five, they have a fiscal
Speaker 1: core thing. But I went and worked it out. But
Speaker 1: this means the open Aiy's money represented eighteen percent of
Speaker 1: the year of year growth of Microsoft's cloud. Without it,
Speaker 1: their cloud revenue growth was a mere eight percent year
Speaker 1: of a year. That's pathetic. That's a bonable. That's barely
Speaker 1: keeping up with inflation. That's dog shit. Satya, Satchy, you
Speaker 1: should be ashamed of yourself. Sacha, come on my show
Speaker 1: so I can ask you very reasonable questions. I'll be nice.
Speaker 1: I swear you won't. You're scared, just let the rest
Speaker 1: of them, just like Clammy Sam on one Clamuel, your
Speaker 1: public relations people said you're too scared to speak to me. Well,
Speaker 1: they said you wouldn't speak to me, and I know
Speaker 1: you're scared. Same with weird Daria. Where are you boys?
Speaker 1: You're too scared of better offline? Anyway, Enough of the
Speaker 1: Trump voice, though, there is actually a reason that hyperscalers
Speaker 1: are still spending all that capex, open AI and Anthropic
Speaker 1: allow hyperscalers to boost growth by feeding their own money
Speaker 1: back into their businesses, a short term solution to the
Speaker 1: long term problem of the end of the era of hypergrowth.
Speaker 1: One of the reasons they're so shy about AI revenues
Speaker 1: is that they know it'll become obvious where those revenues
Speaker 1: are coming from two unprofitable and unsustainable AI labs and
Speaker 1: a little trickle, little spurt from AI services they dump
Speaker 1: on their enterprise customers through confusing subscriptions up cells and
Speaker 1: just adding AI to random things and being like, look, folks,
Speaker 1: don't we love this? Don't you all love this? You
Speaker 1: little shits? And hyperscalers also know that the second they
Speaker 1: cut their capex spend, their AI trade unwinds. If Microsoft, Google,
Speaker 1: Amazon and Meta aren't buying hundreds of billions of dollars
Speaker 1: of GPUs a year, that means Taiwanese server manufacturers like
Speaker 1: Quanta and on High won't sell as many servers and
Speaker 1: thus won't need as many GPUs broad common in video
Speaker 1: won't need as much high bandwid memory for those TPUs
Speaker 1: and GPUs, and they are sent speculators across the world
Speaker 1: will suddenly realize that they conflated hyperscalers being stupid with
Speaker 1: their money with the existence of massive amounts of demand
Speaker 1: for AI compute. But another way, hyperscalers are doing k
Speaker 1: fape to keep the crowd riled up, but everybody slowly
Speaker 1: working out that the wrestlers aren't really hitting each other
Speaker 1: and everything is scripted. I also should add I can
Speaker 1: just anticipate I'm going to get an email from someone
Speaker 1: being like, well, actually, this is good. The cattle expenditures
Speaker 1: are good because it showed growth, even though it's short term.
Speaker 1: That's a silly, silly perspective to take, considering they're feeding
Speaker 1: all the revenues back into the business in the capex
Speaker 1: for stuff that won't be useful in the future. Mathematics.
Speaker 1: My friend try it sometime. Anyway. It is a funny
Speaker 1: old time for me right now, because I feel like
Speaker 1: I'm on three or four podcasts or TV shows or
Speaker 1: interviews a week, as the system appears to be trying
Speaker 1: to cover its ass by having me on to explain
Speaker 1: stuff I said two years ago, but a little more
Speaker 1: insistently and clearly than before. While the mainstream media seems
Speaker 1: hesitant to fully commit to the graveyard small of the
Speaker 1: AI bubble. It feels as if there's a conscious attempt
Speaker 1: to represent my work as more than just the other side,
Speaker 1: or a hater or a skeptic or a cynic, which
Speaker 1: is both edifying and enraging because we are now so
Speaker 1: far past past the point of no Returnemy. Yeah, we
Speaker 1: really can't avoid what's coming. As I wrote in my
Speaker 1: newsletter this week, I think there's a subprime data center
Speaker 1: crisis brewing right now, with over five hundred billion dollars
Speaker 1: in data center SPVs that can only ever make investors
Speaker 1: whole if there's hundreds of billions of dollars of AI
Speaker 1: compute demand in the next two years. And to be clear,
Speaker 1: when I say hundreds of billions of dollars demand, I
Speaker 1: mean a year. I mean literally a year. I ran
Speaker 1: the numbers, and for the what I think it's one
Speaker 1: hundred ninety giga wats of supposedly planned data centers, you'd
Speaker 1: need one point six trillion dollars a year in annual
Speaker 1: compute revenue to make it worth worthwhile. And by the way,
Speaker 1: the global software market is under eight hundred billion dollars
Speaker 1: a year, So I don't know where that fucking money's
Speaker 1: coming from, and no one else seems to really want
Speaker 1: to think about him. And I deeply worry about what
Speaker 1: happens when the demand doesn't arrive. As these data center
Speaker 1: debt deals are often funded by private credit funds, which
Speaker 1: are in turn funded by both public and private pensions
Speaker 1: and insurance funds. Anyway, do read the free newsletter to
Speaker 1: learn more. It is free this one. I have a
Speaker 1: premium one coming out today that will be about well,
Speaker 1: the fact that Oracle's dying, which I mean, hey, you
Speaker 1: in the back, stop laughing. Stop it, poor Larry Ellison
Speaker 1: Paul who gives a fuck in all seriousness. Though, it's
Speaker 1: going to be a banger. The Free ones a banger.
Speaker 1: There's bangers everywhere. And I'll be back next week with
Speaker 1: my good friend Nick Saresh to talk about how AI
Speaker 1: mania is eviscerating global decision making, creating a cult lug
Speaker 1: environment where once participation in AI is almost a religious act,
Speaker 1: and if you talk badly about AI, it's considered a
Speaker 1: cardinal sin or a cardinal sin, one of those two.
Speaker 1: Sure one of you will correct me on this one. Nevertheless,
Speaker 1: it's a really he it's based on this incredible piece
Speaker 1: he wrote. I can't wait for you to read it.
Speaker 1: I can't wait for you Timmy talk to him. Oh no,
Speaker 1: can't wait for you to consume my content. What a
Speaker 1: peculiar thing to say. Anyway, I'll got you Next week
Speaker 1: Zitron out