Speaker 1: Media, and I looked in Behold a Pale Horse, and
Speaker 1: the writer's name was the Smiling Man. This is your
Speaker 1: weekly Better Offlying monologue, and I'm your host ed Zitron.
Speaker 1: This week I put out one of my most consequential
Speaker 1: newsletters of all time, called the AI Demand Bubble, pulling
Speaker 1: together multiple distinct financial analyst notes from Wells Fargo, Barclay's,
Speaker 1: and UBS that directly estimated that seventy percent or more
Speaker 1: of the AI revenues of Microsoft, Google, and Amazon were
Speaker 1: from either open Ai or Anthropic. To be clear, UBS
Speaker 1: estimated the next year, Anthropic and open AI's compute spend
Speaker 1: will be forty eight percent of all Google Cloud revenues,
Speaker 1: which means that they will likely account for even more
Speaker 1: than seventy percent. But I wanted to be fair. This
Speaker 1: was both the colossal pain in the ars and the
Speaker 1: story that I knew woud piss off a lot of
Speaker 1: people because of its huge ramifications. As a result, I've
Speaker 1: had a ton of pushback from people that either outright
Speaker 1: deny that this is the case, or say, actually it's good.
Speaker 1: The two one sustainable companies are the majority of AI
Speaker 1: revenues for companies that spent over a trillion dollars. Actually,
Speaker 1: that's great anyway. Twenty four hours later, Bloomberg ran a
Speaker 1: story estimating, based on open AI's twenty four point one
Speaker 1: billion dollar contribution to Microsoft's fiscal year twenty twenty six
Speaker 1: revenues and previous statements, the open ai alone contributed to
Speaker 1: seventy percent or more of Microsoft's AI revenues for the year.
Speaker 1: For some context, Microsoft has spent twenty six point one
Speaker 1: three billion dollars in capital expensires since the beginning of
Speaker 1: twenty twenty two. And other than getting to have the
Speaker 1: swagger of someone who just laid out a seven thousand
Speaker 1: worth thesis founded in deep research and hard numbers, only
Speaker 1: to get their work validated in less than a day,
Speaker 1: this story also confirms my greatest fears about the state
Speaker 1: of the AI industry and the actual demand for AI compume.
Speaker 1: Microsoft has spent over two hundred billion dollar dollar and
Speaker 1: that's not including the thirteen billion and it invested in
Speaker 1: open ai or the losses it's incurred running their services
Speaker 1: at cost at least in twenty twenty four, but potentially beyond,
Speaker 1: to create a customer that is now worth seven percent
Speaker 1: of its annual revenue. That cannot sustain its existence without
Speaker 1: near constant flows of venture capital funding. Microsoft's year over
Speaker 1: year growth for fiscal year twenty twenty six was about
Speaker 1: seventeen point seven percent, But when you remove open AI's
Speaker 1: twenty four point one billion dollars in revenue, which comes
Speaker 1: from open AI's compute spending revenue share, Microsoft's year over
Speaker 1: year growth was more like nine point two four percent,
Speaker 1: the lowest it would be since fiscal year twenty twenty three,
Speaker 1: when it only grew by seven percent. But there is
Speaker 1: one big difference, and that well, capital expenditures in the
Speaker 1: entire fiscal year twenty twenty three were thirty one point
Speaker 1: eight billion dollars, and Microsoft spent thirty five point eight
Speaker 1: billion dollars in the fourth quarter of the fiscal year
Speaker 1: of twenty twenty six, a year when it spent one
Speaker 1: hundred and fifteen billion goddamn dollars, and it was to
Speaker 1: spend another one hundred and seventy five billion dollars in
Speaker 1: capex in fiscal year twenty twenty seven, which begins July Firs,
Speaker 1: twenty twenty six. It's annoying, but we're moving on. Oh
Speaker 1: and open Ai, arguably Microsoft's largest customer and responsible for
Speaker 1: nearly half of its growth in the last fiscal year,
Speaker 1: is going to run out of money, and by nature
Speaker 1: of it being seventy percent of Microsoft's AI revenues, it's
Speaker 1: very obvious that there are no other large customers that
Speaker 1: exist that could possibly take up all of this infrastructure,
Speaker 1: other than, of course, weird Warrio Ama das Anthropic, who
Speaker 1: is in exactly the same position as open Ai, but
Speaker 1: with a slightly more annoying voice. Because we're near the exponential.
Speaker 1: This also means that any future revenue guidance and analyst
Speaker 1: expectations are now set under the explicit assumption that Anthropic
Speaker 1: and open Ai will both have the need for and
Speaker 1: be able to pay for increasingly larger levels of compute
Speaker 1: at increasingly higher prices. Based on the analyst notes I
Speaker 1: reported on which are in the newsletter or at least
Speaker 1: quotes ubs Wills, far Going Barclay's all have the expectation
Speaker 1: that much of Google, Amazon, and Microsoft's revenues are going
Speaker 1: to come from open AI and Anthropic for the next
Speaker 1: few years, and they don't seem to be diverging from
Speaker 1: that point in any any way. Everyone just thinks that
Speaker 1: this is where it's going to come from. Any failure
Speaker 1: for these revenues to appear out of insolvency, lack of demand,
Speaker 1: or unbuilt data center capacity meaning they can't get paid
Speaker 1: will piss off a Wall Street that's been brainwashed into
Speaker 1: believing that these three companies are growing because of diverse
Speaker 1: demand for AI services, rather than having pissed the trillion
Speaker 1: dollars up the walls mostly to just feed themselves money.
Speaker 1: I am not confident that the market will actually understand
Speaker 1: what Bloomberg has said. As I'm looking now, Microsoft is
Speaker 1: up two percent. Jesus spark in Christ, So let me
Speaker 1: spell it out for you. Seventy percent of Microsoft's AI
Speaker 1: revenues are from either its revenue share of open AI's money,
Speaker 1: or open ai spending money to rent out compute from Azure.
Speaker 1: This means that Microsoft is now dependent on open Ai
Speaker 1: for future revenue growth, as the company now represents more
Speaker 1: than seven percent of its annual revenues and there does
Speaker 1: not appear to be significant contribution from anything outside of
Speaker 1: single digit billllions of annual revenue from Microsoft three to
Speaker 1: sixty five. Copiler, a product mostly sold by tricking people
Speaker 1: into signing contracts like doctor facilie. In the beginning of
Speaker 1: Princess and the Frog, Microsoft believed it would create an independent,
Speaker 1: ultra growth engine from its investments in open Ai. Instead,
Speaker 1: it has created a parasite. At seventy percent of AI revenues.
Speaker 1: Open Ai represents the failure of saching Adella's empire Microsoft
Speaker 1: to spend two hundred and sixty billion dollars on infrastructure
Speaker 1: for demand that does not exist outside of two different
Speaker 1: companies that purn tens of billions of dollars a year.
Speaker 1: And to make matters worse, open Ai and Anthropic must
Speaker 1: grow their compute spend aggressively every single year to keep
Speaker 1: up with the expectations of analysts, which will mean it
Speaker 1: will need more and more money, which means anyone investing
Speaker 1: in Microsoft is effectively gambling on how long open Ai
Speaker 1: and Anthropic can continue to raise money before they simply
Speaker 1: exhaust every available form of capital. This also means that
Speaker 1: there's not really real demand for AI, at least not
Speaker 1: remotely commensurate with the capital expenditure or all of the
Speaker 1: endless blathering on about how much the world is changing
Speaker 1: because of AI. Microsoft has tens of thousands of Azure
Speaker 1: and software salespeople, the single most expertise in building large
Speaker 1: scale infrastructure outside of AWS, and the single most ruthless
Speaker 1: CFO outside of Oracle. If they were actual demand, actual margins,
Speaker 1: actual customers, they would sell to literally anybody else. They
Speaker 1: would sell that compute to literally anyone else other than
Speaker 1: Open Ai. They would sell it to Gargamel. Microsoft would
Speaker 1: happily help Gargamel kill every single smurf rather than talk
Speaker 1: to Sam Thucking Altman or Darier Amiday. Ever, again, if
Speaker 1: there were meaningful demand for a compute or AI software,
Speaker 1: Microsoft would be representative of it as the largest vendor
Speaker 1: in the world of both. Seventy percent of its AI
Speaker 1: revenues and seven percent of its entire annual revenues come
Speaker 1: from a company that just had to raise one hundred
Speaker 1: and twenty two billion dollars in March and then delay
Speaker 1: its IPO because its advisors didn't think it would get
Speaker 1: a trillion dollar valuation. The demand is not there for
Speaker 1: the over three hundred gigawatts of data center capacity in planning,
Speaker 1: outside of course of Open AI and Anthropic, who still
Speaker 1: to this day have yet to prove any possible way
Speaker 1: of becoming profitable and have had to raise over a
Speaker 1: combined two hundred billion dollars in the last seven months
Speaker 1: just to keep the lights on. To be clear, sam
Speaker 1: Altman has also signed up for over seven hundred and
Speaker 1: fifty billion dollars worth of commitments, which means that Google, Amazon, Microsoft, Core, Weave, Cerebrus, Iron, Nebius, Lambda,
Speaker 1: and any other associated counterparty's future revenue growth is dependent
Speaker 1: on Clammy sam Morton's ability to raise more than the
Speaker 1: combined sum of global venture capital in the last year
Speaker 1: in the next three years. On top of that, Dariama
Speaker 1: Day's Anthropic has made over three hundred billion dollars worth
Speaker 1: of commitments, on top of a thirty five billion dollar
Speaker 1: Apollo backed private credit deal where Google will sell its
Speaker 1: TPUs to an SPV that would then install them in
Speaker 1: Google data centers to for Anthropic to then rent from Google.
Speaker 1: It it's so stupid. It's an insane monument to the desperate, manic,
Speaker 1: capitalistic innovations the crown this wretched era of dog shit.
Speaker 1: The demand isn't there, and some of you might. I know,
Speaker 1: I'm going to get an email saying well, demand is
Speaker 1: real Fromanthropic and open Ai. Yeah, they're selling twenty dollars
Speaker 1: or forty dollars for a dollar. I imagine there's some demand.
Speaker 1: Everyone's screaming at you to use AI everywhere. Wow, that's
Speaker 1: demand that comes from social pressure, not actual value or
Speaker 1: the utility. And really that demand isn't there. If Microsoft
Speaker 1: isn't seeing it, nobody is seeing it. The only reason
Speaker 1: that any neocloud is still alive is in vidious circular
Speaker 1: financing rituals, a failure of ratings agencies, Open AI and
Speaker 1: Anthropic and whatever weird oh bullshit it is that Mark
Speaker 1: Zuckerberg is up to. There's a reason that the first
Speaker 1: and only story about a customer for metas compute capacity
Speaker 1: was Anthropic. There's nobody else, nobody else other than Anthropic
Speaker 1: of course, open ai or the hyperscalers that are siphoning
Speaker 1: off what remains of the AI labs venture capital funding
Speaker 1: to sustain their own growth rates, every time, raising a
Speaker 1: little bit more and a little bit higher at a
Speaker 1: higher valuation, each time, demanding more and more money, hoping
Speaker 1: to be able to dump it onto the public markets,
Speaker 1: and the hope that they can perpetually con investors into
Speaker 1: backing their deals. The reason that Microsoft and Google and
Speaker 1: Amazon have been so squeerrely about their AI revenues is
Speaker 1: that they know that they're pathetic compared to their capex
Speaker 1: and near entirely dependent on two companies that Hyperscalers must
Speaker 1: keep alive so that they can pay them. They can
Speaker 1: get paid by them with the money that the hyperscaler
Speaker 1: is handed to them. It's not good. And in twenty
Speaker 1: twenty six alone, Google and Amazon have invested a combined
Speaker 1: fifteen billion dollars in Anthropic and Amazon's invested to combined
Speaker 1: fifty billion dollars in open Ai. And what's crazy about
Speaker 1: that was thirty five billion dollars of that was contingent
Speaker 1: on the IPO or AGI. Neither of those happened, which
Speaker 1: heavily suggests that Amazon kind of knew that they needed
Speaker 1: to pay open Ai so that open Ai could pay them.
Speaker 1: And by the way, this is what you do when
Speaker 1: you have no other options, no other viable customers, and
Speaker 1: your core businesses are not growing at the rate necessary
Speaker 1: to appease wall Stream. It's been sitting in plain sight
Speaker 1: for years. Hyperscalers overbuilt capacity, funded their largest customers, incubating
Speaker 1: them actually, and believed that both the opportunity of owning
Speaker 1: their models and the underlying compute capacity would be some
Speaker 1: sort of infinite money glitch, with each hyperscaler owning the
Speaker 1: equivalent of both the next big cloud infrastructure and cloud
Speaker 1: software plays, while also owning controlling stakes and creating dependency
Speaker 1: from the two largest players in both Pretty easy, right,
Speaker 1: anyone else building AI data centers believe that Microsoft, Google,
Speaker 1: and Amazon would never be as foolish as to do
Speaker 1: all of this without a cast iron guarantee that it
Speaker 1: would turn into everything they'd promised, and that the capital
Speaker 1: expenditures would be for certain worth it and have the
Speaker 1: demand to back them that they would not continue spending
Speaker 1: without that certainty. The reality is that Hyperscalers made a
Speaker 1: huge mistake, both in what AI could do, how fast
Speaker 1: Open Ai and Anthropic could grow, and in underestimating how
Speaker 1: bad these businesses would get as they grew. It was
Speaker 1: also obvious in retrospect from day one. Hyperscalers and most
Speaker 1: companies in fact, refused to share their AI revenues, and
Speaker 1: when they did so, they used deceptive run rates based
Speaker 1: on non specific periods. I've said this for years. If
Speaker 1: these companies had diverse and meaningful AI revenues, they would
Speaker 1: be screaming about them from the rooftops. With clarity and vigor,
Speaker 1: they would tell you segment by segment AI specific contribution
Speaker 1: to revenue, they'd break out the costs. They would have
Speaker 1: them in big font on investor presentations. Instead, Google is
Speaker 1: telling us it processed three point two quadrillion tokens a month.
Speaker 1: Who gives a fuck, Sunda, You're planning to spend one
Speaker 1: hundred and eighty billion dollars this year, and we both
Speaker 1: know that if you had the revenues that would remotely
Speaker 1: justify spending that much, you'd include them. Did you make
Speaker 1: a big mistake? Son? Dar? You can tell me, buddy.
Speaker 1: I won't be mad at you. Investors will be, though,
Speaker 1: They're gonna be furious, but look at the bright side.
Speaker 1: At least you won't have to hear from that boring
Speaker 1: of Demis Hassabis and hearing him prattle on and on
Speaker 1: a bala. Oh what if the computer had the most
Speaker 1: brilliant mind? What if we had agi in twenty one
Speaker 1: minutes now he's going to go off and I assume
Speaker 1: spend more time with his money. Anyway, one day everybody
Speaker 1: is going to whack super surprised and say there was
Speaker 1: no way to see this coming. Know that the signs
Speaker 1: were there for years. They've stayed the same. The only
Speaker 1: thing that's changed is the inflated value of open AI
Speaker 1: and Anthropic and the ever escalating capex, fueling a semiconductor
Speaker 1: bubble that erupted because nobody thought Hyperscalers would ever waste
Speaker 1: one trillion dollars. At some point, the money runs out
Speaker 1: to fund these two companies, at which point Hyperscalers will
Speaker 1: have no way to further feed themselves in money. As
Speaker 1: I've said before, the AI bubble is a syop, a melodrama,
Speaker 1: a financial crisis, and a mask moment for the business
Speaker 1: idiots that run the vast majority of the economy. It
Speaker 1: is one of the strangest moments in history, and it
Speaker 1: will only get stranger as things get more desperate. We
Speaker 1: are seeing what happens when the rot economy demands that
Speaker 1: we push the world's resources to their very limits, both
Speaker 1: physically and fiscally, in pursuit of eternal growth, and what
Speaker 1: happens when we discover what those limits actually are. None
Speaker 1: of this was ever about technology, or good business or
Speaker 1: anything other than creating the next growth engine for capital. Instead,
Speaker 1: AI has become a parasitic presence culturally, financially, and ecologically,
Speaker 1: and it will exhaust as much as it can in
Speaker 1: its collapse. Nothing about this can be bailed out, because
Speaker 1: the problem isn't that the money doesn't exist, just that
Speaker 1: it doesn't exist naturally. A bailout cannot make growth restart
Speaker 1: for Google, Microsoft, Meta, Amazon, or Oracle once it fully slows,
Speaker 1: and based on the fact they've sunk more than a
Speaker 1: trillion dollars of CAPEX into AI, I think they must
Speaker 1: clearly see that growth is already or will die very
Speaker 1: soon without an id quote doing AI, which mostly means
Speaker 1: hoping anthropic and open AI pay them ever increasing amounts
Speaker 1: of money every quarter forever. The US government cannot prop
Speaker 1: up a stock market that accepts that AI's growth is
Speaker 1: finite and outside of semiconductor companies and two subsidized AI
Speaker 1: labs is tens of billions of dollars of demand in
Speaker 1: the best case scenario. I realize how easy it is
Speaker 1: to fall into the mindset that everything gets bailed out,
Speaker 1: that the evil people always win, because we're so used
Speaker 1: to seeing these evil, corrupt people escape accountability. In this case,
Speaker 1: while I don't think anyone's going to prison. I think
Speaker 1: these companies simply exhaust their resources at some point and
Speaker 1: drop off. I think the era of hyperscale growth is ending,
Speaker 1: and the only reason they're so desperately joining the no
Speaker 1: IT loads, refused AI compute come dump is because they
Speaker 1: know that the only way to keep growth going is
Speaker 1: to hope they can drain the venture capital and debt
Speaker 1: markets infinitely by proxy. I don't know if people are
Speaker 1: gonna like that. They just said that I'll keep going
Speaker 1: though anyway. There are no other hypergrowth markets left. That's
Speaker 1: all this is about. So many numbers are going up
Speaker 1: so much higher in the next few months. Then at
Speaker 1: some point they'll stop going higher, and then they'll start
Speaker 1: going lower, and then some of them will go to
Speaker 1: zero or even become negative numbers because the only thing
Speaker 1: that grows forever is cancer. This all may seem unthinkable
Speaker 1: right now because Microsoft, Google, and Amazon numbers are going up,
Speaker 1: but that's really only happening because of open AI and
Speaker 1: anthropic Most didn't see this coming because it has involved
Speaker 1: pushing back against one of the most gratuitous and excessive
Speaker 1: marketing campaigns in history, involving actual reporters that are at
Speaker 1: real outlets attacking and harassing people for daring to question
Speaker 1: the powerful, and those people will be held accountable, mark
Speaker 1: my words. But let's talk about who actually matters, and
Speaker 1: that's you, and a lot of you have been here
Speaker 1: with me for years, hearing me build these arguments, and
Speaker 1: I appreciate the amount of support I hear from you
Speaker 1: via a signal, the terminal, and on the subreddit an email.
Speaker 1: Of course, you're all awesome, and you keep me going
Speaker 1: when things are hard, when people are pressing back, when
Speaker 1: people are genuinely horrible to me. I don't want to complain.
Speaker 1: I get to do the best job in the world.
Speaker 1: It fucking rocks to record this podcast and write the
Speaker 1: news letter. It's the greatest job I've ever done. I
Speaker 1: couldn't be happy at doing it. It's stressful, but I
Speaker 1: keep going because of all of you, because I really
Speaker 1: truly enjoy it. I'll be back next week, and to
Speaker 1: quote Drill, I'll be calling out all the bullshit of society,
Speaker 1: the smart way and against all odds. I'll do it
Speaker 1: for free. Thank you for listening.