Speaker 1: Zone Media. Finally someone let me out of my cage.
Speaker 1: Welcome to this week's Better Offline Monologue, and I'm your
Speaker 1: host ed ze Tron. We're approaching high noon for generative
Speaker 1: AI and it's the true test of whether this industry
Speaker 1: has that dog in it, and I believe it does.
Speaker 1: But the dog in question is sick, covered in fleas,
Speaker 1: and the swallowed a live grenade. Let me set the scene.
Speaker 1: A few weeks ago, I reported that Microsoft had pulled
Speaker 1: at least a gigawatt of planned compute capacity, according to
Speaker 1: a report by analyst TD Cohen, equivalent to the entire
Speaker 1: capacity of London or Tokyo. To be clear, the actual
Speaker 1: figure was much much more than a gigawa but that
Speaker 1: figure was the only one we had solid confirmation for
Speaker 1: despite the press sitting on their hands not really covering
Speaker 1: this number, they should have. A follow up report published
Speaker 1: on March twenty sixth shed more light on the situation
Speaker 1: and revealed that Microsoft has actually pulled over two gigawatts
Speaker 1: of capacity across the US and Europe. That's the equivalent
Speaker 1: capacity of London and Tokyo combined. Were still t Cohenawson said,
Speaker 1: and I quote the pullback on new capacity leasing by
Speaker 1: Microsoft was largely driven by the decision not to support
Speaker 1: incremental open ai training workloads. In other words, this is
Speaker 1: as I have predicted, Microsoft not only pulling back from
Speaker 1: generative AI, but walking away from supporting open AI's future
Speaker 1: expansion efforts. These efforts, i add, were a major driver
Speaker 1: behind Microsoft's massive multi billion dollar CAPEX spend, which was
Speaker 1: forecast to surpass fifty billion dollars to eighty billion dollars
Speaker 1: this year alone. For open ai to continue training their
Speaker 1: future large language models, they'll have to rely on a
Speaker 1: combination of whatever support Microsoft is still willing to provide,
Speaker 1: their relationships with Oracle and other cloud providers, and of
Speaker 1: course the Stargate Data Center project, which is contingent on
Speaker 1: money coming through from SoftBank, who need to fund open
Speaker 1: AI's forty billion dollar funding round, and their own eighteen
Speaker 1: billion dollar contribution to Stargay and Gorway. If the subject
Speaker 1: of my love this monologue, I mean open aiy is
Speaker 1: dependent on them. As a reminder, core Weave is a
Speaker 1: company that sells access to compute for training and running
Speaker 1: generative AI models, and they're going public on March twenty eighth,
Speaker 1: which is the data this monologue runs annoyingly. I can't
Speaker 1: speak to how the stock will do. I'm not a
Speaker 1: stock analyst. I will, however, say that Corewave is a
Speaker 1: company burdened by multiple times its revenue and debt. And
Speaker 1: they're a company that lost eight hundred and sixty three
Speaker 1: million dollars in twenty twenty four, and according to the
Speaker 1: Financial Times, they're also facing nearly seven point five billion
Speaker 1: dollars in debt repayments by the end of twenty twenty six.
Speaker 1: And they also don't appear to have any path to profitability.
Speaker 1: And this IPO, it's it's not looking so good. As
Speaker 1: of the morning of March twenty seventh, twenty twenty five,
Speaker 1: which is when I wrote the script, corwe've planned to
Speaker 1: cut the size of their initial public offering to around
Speaker 1: one point five billion dollars according to Bloomberg, which is
Speaker 1: down from the two point seven billion dollars or so
Speaker 1: they plan to raise.
Speaker 2: When a company goes public.
Speaker 1: They usually are selling a bunch of stock to get
Speaker 1: money into the company. Sometimes they do it just because
Speaker 1: they want to make more money. Sometimes they want to
Speaker 1: be a public company and take the fame of that,
Speaker 1: or in this case, I believe because they're desperate and
Speaker 1: they need whatever they can get. Now, this is problematic
Speaker 1: for a number of reasons, chief being that the information
Speaker 1: reports the Corweave's cash burn will be fifteen billion dollars
Speaker 1: in twenty twenty five, which is up from six billion
Speaker 1: dollars in twenty twenty four. None of these fucking companies
Speaker 1: make any They just burn money. It's insane. Now, Corwave
Speaker 1: has just over six billion dollars in available liquidity between
Speaker 1: loans and the one point three billion dollars or so
Speaker 1: in cash they have lying around, while they could borrow more.
Speaker 1: Their largest seven point six billion dollar loan includes a
Speaker 1: covenant that states that if the company takes on more debt,
Speaker 1: it can only be used to pay that loan back,
Speaker 1: which means that in order to meet Corwev's future capex
Speaker 1: spending goals, they need to raise vastly more than fifteen
Speaker 1: billion dollars, either through new debt or through selling new
Speaker 1: equity to new investors, or as they're doing Viru's IPO.
Speaker 1: One point five billion dollars is a drop in the bucket.
Speaker 2: Not for me.
Speaker 1: If you have one point five billion dollars and want
Speaker 1: to give it to me, please email me at easy
Speaker 1: at better offline dot com. I would love that money.
Speaker 1: Please give me ten dollars. I don't fucking anyway. I'll
Speaker 1: put this really simply, a good stable company going public
Speaker 1: does not reduce the size of their initial public offering,
Speaker 1: nor do they have multiple stories from the Financial Times
Speaker 1: comparing to Enron or we Work.
Speaker 2: Remember, an IPO is.
Speaker 1: An opportunity to buy equity in a company before it
Speaker 1: hits the public market. The price will, at least in theory,
Speaker 1: continue to rise. It's the next best thing to being
Speaker 1: an investor in the company. Facebook and IPO price of
Speaker 1: thirty eight dollars and now at the time of writing,
Speaker 1: there are over six hundred bucks. Pretty good, right, not
Speaker 1: for core with Furthermore, if generative AI was this massive
Speaker 1: growth industry that would usher in a golden age of
Speaker 1: tech valuations, the company selling the literal fuel access to
Speaker 1: the data centers to run generalyvai models would not be
Speaker 1: the financial equivalent of an hr Geiger painting. It wouldn't
Speaker 1: be buried in debt with obscene interest rates and restrictive comminance.
Speaker 1: It won't be burning many times more than its revenue,
Speaker 1: nor would it be beholden to a very small number
Speaker 1: of companies for the majority of their revenue who can
Speaker 1: and do walk away at any time, as Microsoft has
Speaker 1: Corweave is not a healthy company. But wait, wait, wait ah,
Speaker 1: I'm not a smart guy, all right, I mean, let
Speaker 1: me just let me just tell you a story though,
Speaker 1: because I learned about this thing. Do you ever hear
Speaker 1: of a hedge fund called Magnetar Capital, I'll tell you
Speaker 1: about them. In two thousand and six, Magnetar Capital got
Speaker 1: involved in something called a collateralized debt obligation, which is
Speaker 1: a way of packaging up a bunch of debts that
Speaker 1: you could sell it like a financial asset, or even
Speaker 1: gamble on whether it would succeed. A hedge fund wouldn't
Speaker 1: buy a single mortgage, for example, but they may buy
Speaker 1: something with hundreds or thousands of mortgages, maybe subprime ones,
Speaker 1: I don't know. And it turns out that these things
Speaker 1: were real bad because it made it hard to see
Speaker 1: the actual risk of the loans that made up the bonds,
Speaker 1: and because they were easy to sell. They encourage mortgage
Speaker 1: companies to give mortgages to people who couldn't pay them
Speaker 1: because they knew they could sell them onto investors and
Speaker 1: wouldn't have to carry on the risk themselves. This in
Speaker 1: turn created something called a let me just look at
Speaker 1: a great financial crisis, which apparently was.
Speaker 2: Bad for the economy.
Speaker 1: Hey, what happened to magnetagh Wait what they're one of
Speaker 1: the two companies providing loans to core Weave.
Speaker 2: What the fuck? And they're the largest institutional investor.
Speaker 1: That doesn't sound that doesn't sound good at what?
Speaker 2: What? Just this fucking industry?
Speaker 1: Every time I think this industry can't getting fucking stupid?
Speaker 2: Pardon me, pardon me.
Speaker 1: Well, at least they're not involved in any other major
Speaker 1: deal in general of AI. Right right, wrong, wrong, so
Speaker 1: fucking wrong. Over in Silicon Valley, Open ai is for
Speaker 1: the third time close to finalizing a forty billion dollar
Speaker 1: funding round led by soft Bank, And wouldn't you know it,
Speaker 1: MAGNETARH Capital is in there too, according to Bloomberg, for
Speaker 1: as much as one billion dollar, valuing the company at
Speaker 1: an astonishing three hundred billion dollars. And I recently got
Speaker 1: told about a term suicide round, and that term refers
Speaker 1: to a time when a company gets such a high
Speaker 1: valuation that any future investment is effectively impossible, because when
Speaker 1: you're investing out a company three hundred billion dollars. You
Speaker 1: need to see liquidity at some point. You need to
Speaker 1: see a chance to sell it. And guess what, who's
Speaker 1: going to buy this dog shit merchant company that burns
Speaker 1: billions that the open a eye as a complete dog.
Speaker 2: Yeah? What's weird about this deal?
Speaker 1: I mean, other than the fact did so isn't actually
Speaker 1: finalized and it's taken months and involves man capital and
Speaker 1: it involves seemingly every side of the deal taking on debt,
Speaker 1: is that it also isn't exactly forty billion dollars yet.
Speaker 1: Bloomberg reports that SoftBank will actually invest seven point five
Speaker 1: billion dollars into open Ai and provide another two point
Speaker 1: five billion dollars from a syndicative investors, which is just
Speaker 1: it sounds far fancy than this. It's just a group
Speaker 1: of investors who invest together. The remainder twenty two point
Speaker 1: five billion dollars soft Bank and the seven point five
Speaker 1: billion dollars from a syndicate will come up some sort
Speaker 1: of indeterminate time later this year, which is weird, Right,
Speaker 1: It's okay, it's not that weird. What the funding rounds,
Speaker 1: especially big ones, they're meet it out in tranches based
Speaker 1: on performance. I've talked to a few vcs before I
Speaker 1: did this, and they say that's that's normal. But it
Speaker 1: is extremely weird that this is considered a forty billion
Speaker 1: dollar round despite the fact that only ten billion dollars
Speaker 1: appears to exist at this time. And I'm not being
Speaker 1: facetious or joking here. SoftBank literally does not have the money.
Speaker 2: To give open ai right now.
Speaker 1: They have like thirty billion dollars in hash, which is
Speaker 1: why they're not sending that much, and they're having to
Speaker 1: take on loans as well. I'll get to that in
Speaker 1: a minute. But nevertheless, it's also not obvious how any
Speaker 1: of this works long term, because the entirety of the
Speaker 1: generative AI boom appears to rest on open AI's ability
Speaker 1: to continue raising capital. Let me explain. Microsoft neglected to
Speaker 1: exercise twelve billion dollars of future capacity with core Weave,
Speaker 1: which was quickly picked up by open Ai. According to
Speaker 1: se around the same time, the company canceled plans for
Speaker 1: future data center expansion referring to Microsoft here that would
Speaker 1: have undoubtedly cost tens of billions of dollars. This heavily
Speaker 1: suggests that Microsoft is pulling back from Generative Ai writ
Speaker 1: large and that a large degree of their spend with
Speaker 1: Coreweed was to support open ai services, which open aim
Speaker 1: well now for the bill.
Speaker 2: For for open.
Speaker 1: Ai to pay that bill, they'll need SoftBank to give
Speaker 1: them the forty billion dollars of fundank, which SoftBank is
Speaker 1: on the hook for at least thirty billion dollars of
Speaker 1: according to the information, which includes open AI's eighteen billion
Speaker 1: dollar contribution to the Stargate Data Center project, to which
Speaker 1: soft Bank also owes eighteen billion dollars for SoftBank to
Speaker 1: give them this money. The information also reports that SoftBank
Speaker 1: will borrow sixteen billion dollars in twenty twenty five and
Speaker 1: eight billion dollars in twenty twenty six, which still does
Speaker 1: not add up to the forty six billion dollars or
Speaker 1: so they promised open Ai and I haven't even mentioned
Speaker 1: the fact that SoftBank has also committed three billion dollars
Speaker 1: a year in revenue to the Bullsheit agent product. Without
Speaker 1: that money or further funding, open Ai will not be
Speaker 1: able to pay core Wave. So now everything rests on
Speaker 1: soft Bank, a company with a checkered reputation, to put
Speaker 1: it mildly, and if they buckle, everything else fails, core Wave,
Speaker 1: open Ai, all of it. I don't know how any
Speaker 1: of this ends, but I'll tell you this, absolutely nothing
Speaker 1: I'm reading suggests that there is any long term viability
Speaker 1: in generative AI. Open Ai loses billions of dollars a
Speaker 1: year and will have to pay core Wave, which also
Speaker 1: loses billions of dollars a year and has obligations that
Speaker 1: are many times in excess of its actual assets or revenue,
Speaker 1: or at least what it will make from the public market.
Speaker 1: To be, that's not gonna help that much. If any
Speaker 1: of this made sense, Corewave would be the biggest IPO
Speaker 1: of the last decade. And while I doubt that would
Speaker 1: be the case, I promise to you that, regardless of
Speaker 1: what happens, you're about to witness something historic. And I
Speaker 1: want to say something. Some of you have given me
Speaker 1: feedback said, like, this stuff's really like it's a little
Speaker 1: much like there's a lot of numbers. It's not, it's
Speaker 1: just very it's very ominous. When you see all these numbers.
Speaker 1: I didn't get in. I'm not a financial journalist, or
Speaker 1: I guess I am now, and I'm pretending to be one,
Speaker 1: and it all seems like a lot, but it really
Speaker 1: does come down to addition of subtractions sometimes with the
Speaker 1: occasional multiplication. I failed a lot of mathematics in my time,
Speaker 1: and British libel also stopped me really elaborating further at school.
Speaker 1: But the point is I was never trained to do
Speaker 1: any of this stuff. This stuff seems very monolithic, but
Speaker 1: it really is much simpler. And the way you stop
Speaker 1: these companies being able to fuck around is learning this stuff.
Speaker 1: If you ever have any questions, go to the Better
Speaker 1: Offline Reddit. I will happily help walk you through any
Speaker 1: of this. It seems dense, but if we want to
Speaker 1: change things, it starts with stopping this feeling like magic.
Speaker 1: Stop it isn't black magic. They want you to believe
Speaker 1: that they'll work this out, because if you think about
Speaker 1: any of these numbers for even two seconds, it kind
Speaker 1: of seems fucking stupid because it is just because they
Speaker 1: say it's going to work out, it doesn't mean it well.
Speaker 1: And I think that we are potentially about to see
Speaker 1: something really shocking. I think we're about to see the
Speaker 1: greatest mask Off Dunce moment in the economy. If AI bursts,
Speaker 1: if the bubble bursts, you're going to see all these
Speaker 1: people that said AI was the future, kind of walk
Speaker 1: it back, kind of stop talking about it anytime they try.
Speaker 2: Scream at them, scream at them, say what are you
Speaker 2: talking about AI?
Speaker 1: Like it was the biggest thing in the world, like
Speaker 1: two minutes ago, Well are you talking about that?
Speaker 2: Hey? Where's Ai? Didn't you say I was a I
Speaker 2: was a big deal?
Speaker 1: Hey Bob Iger, Hey what's happening with the AI ship?
Speaker 2: And they're going to really try and aggressively walk this back.
Speaker 1: Never ever let them forget what they've done here, Never
Speaker 1: ever forget the terrible people holding up this spurious, spacious, destructive,
Speaker 1: disgusting bubble. It's horrible. It will be horrible to watch
Speaker 1: it collapse. I feel bad for our economy, but this
Speaker 1: is tremendous content