Speaker 1: As media.
Speaker 2: Hello you, it's better offline. I'm your host ed Zeitron. Now,
Speaker 2: I've talked about the pay all horses of the AI
Speaker 2: apocalypse in the past, and these are the events that
Speaker 2: signify that the general VAI era is coming to an end.
Speaker 2: And the subject to this episode and its second part, well,
Speaker 2: I believe represents the biggest paylest horses of the entire flock.
Speaker 2: So on February twenty first analyst TD Cohen revealed that
Speaker 2: Microsoft had canceled leases and I quote totaling a couple
Speaker 2: hundred megawatts with at least two private data center operators
Speaker 2: across multiple US markets canceled. The report also detailed how
Speaker 2: Microsoft pulled back on converting negotiated and signed statements of
Speaker 2: qualifications sqq's, which are added was precursors to a data
Speaker 2: center lease, so effectively the first step before you really
Speaker 2: agreed to something, well the last step, I guess. Although
Speaker 2: the analyst, which is part of the TD Bank company,
Speaker 2: added it was unclear whether Microsoft might convert these sqqs
Speaker 2: in the future. These generally close close to one hundred
Speaker 2: percent of the time. According to them, canceling these was
Speaker 2: effectively rather unusual. Now TD Cohen also added that Microsoft
Speaker 2: was reallocating a considerable portion of its projected international spend
Speaker 2: to the US, which suggests to DD Cohen that there
Speaker 2: was a material slow down in international leasing for Microsoft,
Speaker 2: But one crucial, teeny tiny part of the report was
Speaker 2: missed by just about everybody. I'm going to read directly
Speaker 2: from the report, and you'll probably be able to tell
Speaker 2: from the tone of my voice which the most pertinent
Speaker 2: part is. Ah. As we highlighted in our recent takeaway
Speaker 2: from PTC, the Pacific Telecommunications Council Conference, we learned via
Speaker 2: our channel checks that Microsoft one walked away from multiple
Speaker 2: one hundred plus make what deals in multiple markets that
Speaker 2: were in early to mid stages and negotiations to let
Speaker 2: one gigawatt of loys on larger footoprint sites expire, and
Speaker 2: three walked away from at least five land parcels that
Speaker 2: it had under contract in multiple Tier one markets. What
Speaker 2: TD Cohen is saying is not just that Microsoft canceled
Speaker 2: some data centers, but the Microsoft also effectively canceled over
Speaker 2: a gigawatt of data center operations on top of the
Speaker 2: previously reported multiple one hundred plus what megawat deals. If
Speaker 2: we add in the land under contract, which is indeterminate.
Speaker 2: Based on what tdcens has said and the deals that
Speaker 2: were in flight, the total capacity likely amounts to even
Speaker 2: more than a gigawat. For some context, data sent to
Speaker 2: Dynamics reported that Microsoft had five gigawats of data center
Speaker 2: capacity in April twenty twenty four, saying that Microsoft had
Speaker 2: also planned to add one gigawat of capacity by the
Speaker 2: October twenty twenty four and another one and a half
Speaker 2: gigawats of capacity by the first half of twenty twenty five.
Speaker 2: Based on this reporting, one can estimate the Microsoft as
Speaker 2: somewhere between six and seven and a half gigawatts of
Speaker 2: capacity at this time. As a result, based on td
Speaker 2: Cohen's analyst analysis, even Microsoft has thro recombination of canceled leases,
Speaker 2: pullbacks and statements of qualifications, cancelations of land parcels, and
Speaker 2: deliberate expiration of letters of intent. That's those lois. They've
Speaker 2: effectively abandoned data center expansion equivalent to over fourteen percent
Speaker 2: of their current capacity. It's completely bloody insane, and this
Speaker 2: story just kind of sat there. It kind of not
Speaker 2: the market's confidence. But I don't know, I'm a lot
Speaker 2: more worried about this than I think people are. And
Speaker 2: really I don't like telling people how to feel, but
Speaker 2: this kind of worries me. Okay, now I've thrown a
Speaker 2: lot of new terminology at you. But before we move on,
Speaker 2: let's explain some terms, because they're essential to understanding why
Speaker 2: this is all such a big deal. First of all,
Speaker 2: letter of intent or LOI in this context is a
Speaker 2: statement that an entity intends to lease or buy land
Speaker 2: or power from a data center. These can be binding
Speaker 2: on non binding. A letter of intent is serious, though,
Speaker 2: and walking away from one is not something you do idly.
Speaker 2: It's not like not answering an email. Now we'll go
Speaker 2: on to SQQS statements of qualifications. These set the terms
Speaker 2: and conditions of a lease. While they do not themselves constitutally,
Speaker 2: they convert into sign leases, as I mentioned, at an
Speaker 2: almost one hundred percent rate according to TD Cohen, and
Speaker 2: are generally used as a signal to the landowner to
Speaker 2: start construction. Basically, they're the green light before the green lane.
Speaker 2: As for Tier one markets, these are markets for hyperscale growth,
Speaker 2: helped by favorable conditions like power, land and cabling. From
Speaker 2: what I can tell, there's no fixed list of which
Speaker 2: cities are Tier one in which aren't, but they include
Speaker 2: obvious candidates like London, Singapore, as well as Northern Virginia,
Speaker 2: which is the largest tube of data centers in the world. Finally,
Speaker 2: we're talking power, megawatt and gigawe. This one is really important,
Speaker 2: but it's also really confusing. Data center capacity is measured
Speaker 2: not by the amount of computations the facility can handle,
Speaker 2: but rather by power capacity, and that makes sense because
Speaker 2: power capacity is directly linked to the capabilities of the facility,
Speaker 2: with more power capacity allowing for more servers or more
Speaker 2: power hungry chips, of course, and because chips themselves are
Speaker 2: constantly getting faster and more power efficient. Power makes a
Speaker 2: little more sense. If you mentioned in terms of computations
Speaker 2: per second, you'd likely have a number that fluck you
Speaker 2: as hardware as upgraded and decommissioned. When you hear megawat
Speaker 2: or gigawatt in this episode, assume that we're talking about
Speaker 2: capacity and not power generation unless I say otherwise. Now,
Speaker 2: with that out of the way, let's talk more about
Speaker 2: this report.
Speaker 1: Now.
Speaker 2: The numbers in the TD Cohen Report, which I'll link
Speaker 2: in the episode spreadsheet, of course, heavily suggest that Microsoft,
Speaker 2: the biggest purchaser of Nvidio GPUs and, according to Ted
Speaker 2: Cohen and I quote, the most active data center LESE
Speaker 2: of capacity in twenty twenty three and the first half
Speaker 2: of twenty twenty four, does not believe that there's future
Speaker 2: growth in generative AI, nor does it have faith in,
Speaker 2: nor does it want responsibility for the future of open AI.
Speaker 2: Data center buildouts take three to six years to complete,
Speaker 2: and the largest hyperscalar facilities can easily cost several billion dollars,
Speaker 2: meaning that these moves are extremely forward looking. You don't
Speaker 2: just build a data center for the demand GI now,
Speaker 2: but for the demand you expect further down the line.
Speaker 2: This suggests that Microsoft believes its current infrastructure and its
Speaker 2: likely scaled back plans for expansion will be sufficient for
Speaker 2: a movement that Sachynadella once called a golden age for systems.
Speaker 2: He did that less than a year ago. To quote
Speaker 2: TD Cohen again, the magnitude of both potential data center
Speaker 2: capacity Microsoft walked away from the decision to pull back
Speaker 2: on land acquisition, which supports core long term capacity growth,
Speaker 2: in our view, indicates the loss of a major demand
Speaker 2: signal that Microsoft was originally responding to, and that we
Speaker 2: believe the shift is in their appetite for capacity is
Speaker 2: tied to open AI. To explain here, TD Cowen is
Speaker 2: effectively saying that Microsoft is responding to a major demand signal,
Speaker 2: and said major demand signal is saying you do not
Speaker 2: need more data centers. Said demand signal that Microsoft was
Speaker 2: responding to, in TD Cohen's words, is its appetite for
Speaker 2: capacity to provide servers to open AI. And it seems
Speaker 2: that said appetite is waning and Microsoft no longer wants
Speaker 2: to build out data centers for America's most swagged out
Speaker 2: AI guy. Now, I say that kind of as a joke,
Speaker 2: and I do think that he's more swagged out than
Speaker 2: Mark Zuckerberg. Mark Zuckerberg's trying too hard. However, Sam Moltman
Speaker 2: is more damp than Mark Zuckerberg, so ultimately Zuckerberg wins. Now,
Speaker 2: I want to make it clear that Microsoft is effectively
Speaker 2: cutting its data center expansion by over a gigawatt of capacity,
Speaker 2: if not more, and it's impossible to reconcile these cuts
Speaker 2: with the expectation that generative AI will be this massive,
Speaker 2: transformative technological phenomenon. I believe that the reason that Microsoft
Speaker 2: is coming back is that it does not have the
Speaker 2: appetite to provide further data center expansion for open Ai,
Speaker 2: and it's having doubts about the future of generative AI
Speaker 2: as a whole. If Microsoft believed that there was a
Speaker 2: massive opportunity in supporting open AI's further growth, or that
Speaker 2: it had massive demand for generative AI services, there'd be
Speaker 2: no reason to cancel capacity, let alone cats or such
Speaker 2: a significant amount. These moves also suggest that Microsoft is
Speaker 2: walking away from building and training further large frontier models
Speaker 2: like chat GPT's GPT four point five now and from
Speaker 2: supporting doing so for others. Remember, Microsoft has significantly more
Speaker 2: insight into the current health and growth of GENERATIVEAI than
Speaker 2: any other company. Remember they have full access to all
Speaker 2: of open AI's tech, probably the future stuff too, not
Speaker 2: that there's much they know. All their research too, Microsoft
Speaker 2: knows something we don't. As open AI's largest backer and
Speaker 2: infrastructural partner and the owners of the server architecture where
Speaker 2: they train them ultra expensive models, not to mention, the
Speaker 2: largest shareholder in OpenAI, Microsoft can see exactly what is
Speaker 2: or isn't coming down the pike on top of having
Speaker 2: a view into both the sales of its own GENERATIVEAI
Speaker 2: powered software such as Microsoft three sixty five copiler, and
Speaker 2: sales of both model services and cloud compute for other
Speaker 2: models run on Microsoft A zero, which is their cloud
Speaker 2: platform in plain English, Microsoft, which arguably has more data
Speaker 2: than anybody else about the health of the generative AI
Speaker 2: industry and its potential for growth, has decided that it
Speaker 2: needs to dramatically slow down its expansion.
Speaker 1: Now.
Speaker 2: To be clear, this expansion, I really am hammering this
Speaker 2: home a lot, but I need you to understand this
Speaker 2: is absolutely necessary for generative AI to continue evolving expanding,
Speaker 2: even if it only does so in ways that kind
Speaker 2: of do the same thing again and again. Now, before
Speaker 2: we move on, I want to make it clear that
Speaker 2: I'm not saying that Microsoft has stopped building data centers.
Speaker 2: I've said it a few times, but these projects take
Speaker 2: years three to six years to complete and are far
Speaker 2: far in advance with their planning, and Microsoft does have
Speaker 2: a few big projects in the works. One plan three
Speaker 2: hundred and twenty four megawatt Microsoft Data center in Atlanta
Speaker 2: is expected to cost one zero point eight billion dollars
Speaker 2: and as far as I know, this deal is still
Speaker 2: in flight, however, and this was cited separately by TD Cohen.
Speaker 2: Microsoft has recently paused construction on parts of its three
Speaker 2: point three billion dollar data center campus in Mount Pleasant, Wisconsin.
Speaker 2: While Microsoft had tried to reassure locals that the first
Speaker 2: phase of the project was on course to be complete
Speaker 2: on time, its justification of delaying the rest of it
Speaker 2: was well not brilliant, and it was to give Microsoft
Speaker 2: an opportunity to evaluate and I quote the project's scope
Speaker 2: and recent changes in technology, and consider how this might
Speaker 2: impact the design of its facilities. Oh, bob, oh, buddy,
Speaker 2: that's not good. You don't want it. No. One evaluates
Speaker 2: the scope and then goes, oh, actually the scope is great.
Speaker 2: I love it. Nor do they think about impacts and
Speaker 2: go oh, let's do more. No, no, no, anyway, the
Speaker 2: same registered article I'm citing here adds that and I
Speaker 2: quote the review process may include the need to negotiate
Speaker 2: some building permits, potentially placing another hurdle in the way
Speaker 2: of the project. The register did add that Microsoft said
Speaker 2: it expected to complete one hyperscaler data center in Mount
Speaker 2: Pleasant as originally planned, though its capacity wasn't available. Arguably,
Speaker 2: Microsoft would expand its data center infrastructure. Anyway, as more
Speaker 2: stuff moves to the cloud and our dependence grows on it,
Speaker 2: Microsoft and other providers need to build capacity. The organic
Speaker 2: growth is natural and sadly inevitable. However, Microsoft's plans for
Speaker 2: data center expansion were far far in excess of that
Speaker 2: natural growth, and perhaps we're seeing a pullback from those
Speaker 2: stated extravagances into something perhaps a little more reasonable.
Speaker 3: Now.
Speaker 2: I've talked a lot about megawards and gigawats, and you're
Speaker 2: not in the data center business, and you should be.
Speaker 2: The parties are an absolute laugh. This can all seem
Speaker 2: a bit abstract, so let's put it into context. Without context,
Speaker 2: it's hard to understand how big and one hundred megawat
Speaker 2: data center is. These are some of the biggest. According
Speaker 2: to the International Energy Agency, Small data centers can consume
Speaker 2: anywhere between one and five megawats. These are, for the
Speaker 2: most part, average size facilities, perhaps not for cloud compute giants,
Speaker 2: but for other companies. It's kind of part of the course.
Speaker 2: One hundred megawats, by comparison, is huge. It's the equivalent
Speaker 2: of the annual energy consumption of between three hundred and
Speaker 2: fifty thousand, four hundred thousand electric cars, and I know
Speaker 2: some sort of pedant it's going to say, it's not
Speaker 2: the same thing, shout out a fuck up. Go outside,
Speaker 2: stop listen, go outside, go outside now, go do something anyway,
Speaker 2: Although there are others that will likely dwarf what we
Speaker 2: today considered to be a large facility, META is in
Speaker 2: the process of constructing, for example, a ten billion dollar
Speaker 2: data center campus in Louisiana with a proposed two gigawat capacity. Still,
Speaker 2: whatever way you cut it, and one hundred megawatt facility
Speaker 2: is big and it's a big long term investment. Cushman
Speaker 2: and Wakefield's twenty twenty four global data center market comparison
Speaker 2: gives some chilling context into how significant Microsoft's pullback is.
Speaker 2: A gigawatt of data set to capacity is roughly the
Speaker 2: entire operational IT load of Tokyo, which has a one
Speaker 2: point to eight gigawatt capacity, or London nine hundred and
Speaker 2: ninety six megawatts, or the Bay Area, which only has
Speaker 2: eight hundred and forty two megawatts. These are actually very large.
Speaker 2: It's just that Microsoft got rid of so much more.
Speaker 2: And again, the total figure of canceled or abandoned capacity
Speaker 2: is likely far higher than a gigawatt. That number only
Speaker 2: accounts for the letters of intent that Microsoft allowed to expire.
Speaker 2: It doesn't include everything else that the two data sentences
Speaker 2: already killed, or the land pass was it abandoned, or
Speaker 2: the deals that were in early to mid stages of negotiation.
Speaker 2: Imagine walking away from two London's or two Tokyos of
Speaker 2: capacity and it not being a massive deal. This is
Speaker 2: a huge flipping deal. Microsoft is not simply walking back
Speaker 2: some future plans. It's effectively canceling what it loudly insisted
Speaker 2: was the future. If you think this sounds hyperbolic, consider this.
Speaker 2: London and Tokyo are respectively the biggest data center markets
Speaker 2: in Europe and Asia, according to the same Cushman and
Speaker 2: Wakefield report. Canceling city's worth of capacity at a time when
Speaker 2: artificial intelligence is supposedly revolutionizing everything certainly suggests that artificial
Speaker 2: intelligence isn't really revolutionizing anything now. One other detail in
Speaker 2: TD Cohen's report really stood out to me. While this
Speaker 2: pullback in Microsoft's data center leasing, It's also seen a
Speaker 2: commensurate rise in demand from Oracle related to the Stargate project,
Speaker 2: a relatively new partnership of up to five hundred billion
Speaker 2: dollars stopped saying it's five hundred billion dollars to build
Speaker 2: massive new data centers for Ai, specifically for one company
Speaker 2: led by soft Bank and of course open Ai with
Speaker 2: investment from Oracle and MGX and one hundred billion dollar
Speaker 2: investment fund backed by the United Arab Emirates. Open Ai
Speaker 2: has committed eighteen to nineteen billion dollars to the Stargate project,
Speaker 2: money it doesn't have, meaning that part of the twenty
Speaker 2: five to forty billion dollars that they're raising at the
Speaker 2: moment will be committed to funding these data centers, and
Speaker 2: less as I'll get to later. Open Ai raises more
Speaker 2: in debt. Leading the round is SoftBank, which is also
Speaker 2: committing eighteen to nineteen billion dollars, as well as creating
Speaker 2: a joint venture fund called sb open Ai Japan to
Speaker 2: offer open Ai services to the Japanese market, something that
Speaker 2: I thought was already happening, as well as spending three
Speaker 2: billion dollars annually to use open AI's technology across its
Speaker 2: group businesses. According to The Wall Street Journal. In simpler terms,
Speaker 2: soft Bank is investing as much as I think it's
Speaker 2: going to be like thirty billion dollars in open Ai,
Speaker 2: then spending another three billion dollars a year on software
Speaker 2: that only loses money and still hallucinates and shows no
Speaker 2: side of getting meaningfully better or more reliable. Well a
Speaker 2: soft bank actually sees value in open AI's tech, or
Speaker 2: whether this purchase dealer is a subsidy by the back
Speaker 2: door is open to debate. Given that three billion dollars
Speaker 2: is equivalent to open AI's entire revenue from selling premium
Speaker 2: access to Chatch GPT in twenty twenty four, which included
Speaker 2: some major deals with the likes of Price Waterhouse Coopers,
Speaker 2: I'm inclined to believe the latter. Even then, how is
Speaker 2: it feasible that SoftBank can continue paying to get the
Speaker 2: deal done? Microsoft changed the terms of its exclusive relationship
Speaker 2: with open Ai to allow it to work with Oracle
Speaker 2: to build out further data centers full of GPUs necessary
Speaker 2: to power open AI's big, shitty, unprofitable and unsustainable models.
Speaker 2: The open Ai Oracle stargate situation was a direct result,
Speaker 2: according to reporting from the Information of open Ai becoming
Speaker 2: frustrated with Microsoft and not providing it with service fast enough,
Speaker 2: including an allotment of three hundred thousand of nvidious GBT
Speaker 2: two hundred chips by the end of twenty twenty five.
Speaker 2: For what it's worth, The Wall Street Journal reports that
Speaker 2: Microsoft was getting increasingly frustrated with open AI's constant demands
Speaker 2: for more compute. The relationship between the two entities had
Speaker 2: start to fray, with both sides feeling kind of aggrieved. This,
Speaker 2: combined with Microsoft's data center pullback, heavily suggests that Microsoft
Speaker 2: is no longer interested in being open AI's infrastructure paypig
Speaker 2: long term, at least after all it was if it was,
Speaker 2: I mean it funded and support open AI's expansion rather
Speaker 2: than doing the literal opposite.
Speaker 3: And you have to.
Speaker 2: Wonder if when that whole non exclusisive thing came along,
Speaker 2: whether Microsoft was kind of like, no, no, you couldn't
Speaker 2: possibly like the papers already at the pen they've already
Speaker 2: got a stamp Ford sad woman's signature. No, don't sign
Speaker 2: it. It would be so bad. No, I really don't. I
Speaker 2: don't think that Microsoft's too cut up about that. And
Speaker 2: here's a question for you. If general, if AI had
Speaker 2: so much demand, why is Microsoft canceling data centrare contracts.
Speaker 2: Why is Microsoft Oracle's largest customer as at the end
Speaker 2: of twenty twenty three, allowing softmank and open Ai to
Speaker 2: work with Oracle to build the future rather than Microsoft.
Speaker 2: As mentioned previously, TD Cohen specifically noted in its report
Speaker 2: that microsoft shifting appetite for capacity was tied to open Ai, which,
Speaker 2: as I've said already, heavily suggests that Microsoft is at
Speaker 2: best less invested in the future of the company, a
Speaker 2: statement confirmed by the information which adds that Microsoft have
Speaker 2: been trying to and I quote lessen its reliance and
Speaker 2: open ai technology as they increasingly compete in selling AI
Speaker 2: products well. At worse, this situation could suggest that Microsoft
Speaker 2: is actively trying to dump open ai and it's having
Speaker 2: questions about the fundamentals of this industry. Writ large in
Speaker 2: very plain terms, Microsoft, despite its excitement around AI and
Speaker 2: its dogged insistence that it's the future, has canceled data
Speaker 2: center leases of over a gig or what of other
Speaker 2: data center infrastructure. Doing so heavily suggests that they do
Speaker 2: not intend to expand further, or at least to the
Speaker 2: extraordinary levels that they'd initially promised. I know, I'm being
Speaker 2: kind of repetitive. I know that I'm saying some of
Speaker 2: these things repeatedly, and you might think why. I need
Speaker 2: you to understand how significant this is because this did
Speaker 2: not get covered enough. The coverage of this was dogshit.
Speaker 2: I'm saying it, frankly, everyone missed this detail. I am
Speaker 2: just one guy. I do a podcast and a newsletter
Speaker 2: and I run a PR firm. Why am I the
Speaker 2: person every not every time? But it just drives me
Speaker 2: a little insane because this was seeing that how many
Speaker 2: reporters actually read this report too. This is what drives
Speaker 2: me insane with my work. But I really do enjoy
Speaker 2: it was all right. While Microsoft has reiterated that it
Speaker 2: intends to spend a ridiculous eighty billion dollars in capital
Speaker 2: expenditures on AI in twenty twenty five, per CNBC article,
Speaker 2: it's unclear how it intends to do so if it's
Speaker 2: pulling back on data center expansion at such a large scale,
Speaker 2: and the company has provided no tangible explanation or elaboration
Speaker 2: as to how it might do so. While hardware upgrades
Speaker 2: could account for some of those CAPEX, it would be
Speaker 2: nowhere near the eighty billion dollar figure. Again, hyperscale data
Speaker 2: centers aren't cheap. They're massive billion dollar or multi billion
Speaker 2: dollar ventures. Microsoft, according to CNBC, also leases data center
Speaker 2: capacity through core Weave and other providers, though at that
Speaker 2: point the reporter has stopped being curious enough to ask
Speaker 2: how much or who those other providers might be. Now, Luckily,
Speaker 2: with the power of research, I found that the information
Speaker 2: report that Microsoft plants spend about tenion dollars renting core
Speaker 2: Weave service between twenty twenty three and twenty thirty, which
Speaker 2: was also reported by CNBC and otherwise anyway planned past
Speaker 2: tense being the operative word, because last week we learned
Speaker 2: that Microsoft plans to scale back its purchase of capacity
Speaker 2: from core Weave. Core Weave is, as you'll find out
Speaker 2: in a future episode and newsletter probably before that. They're
Speaker 2: a very odd company which is closely tied to another
Speaker 2: company called core Scientific, which it actually rents service from,
Speaker 2: and that company exited Chapter eleven bankruptcy only last year.
Speaker 2: Core Scientific's financial statements, by the way, are very confusing.
Speaker 2: They're a mess, and it mostly makes its money not
Speaker 2: from selling high performance computer services, but from mining bitcoin.
Speaker 2: It's a weird relationship, and it's weird to still that
Speaker 2: Microsoft is even entangled with a company connected to Core Scientific.
Speaker 2: But again, that's a future episode, future newsletter, future panic
Speaker 2: attack that I'll give myself as I read s once
Speaker 2: all day. Moving on, Microsoft also added in a comment
Speaker 2: to CNBC in the same article that it continues to
Speaker 2: grow at a record pace to meet customer demand. Okay,
Speaker 2: excuse me. What customer demand? What customer demand? What is it?
Speaker 2: What is the customer demand? What is going on? Microsoft
Speaker 2: said back in April twenty twenty four that AI demand
Speaker 2: was exceeding supply even after a seventy nine percent surgeon
Speaker 2: capital expenditures, and Cfoamyhood send in their next quarterly earnings
Speaker 2: in July twenty twenty four that demand remained higher than
Speaker 2: microsoft available capacity. On its most recent January twenty twenty
Speaker 2: five earning score, Cfoamyhood once again said, as your growth
Speaker 2: included thirteen points from AI services, which grew one hundred
Speaker 2: and fifty seven percent year of a year and was
Speaker 2: ahead of expectations even as demand continued to be higher
Speaker 2: than our available capacity. Riddle me this, batman, Why does
Speaker 2: a company that keeps talking about having demand that exceeds
Speaker 2: capacity decide to cancel multiple data centers which collectively account
Speaker 2: for a significant chunk of its existing capacity. I don't know.
Speaker 2: Let's see what Microsoft had to say when asked a
Speaker 2: week or two ago. Ahem. Thanks to the significant investments
Speaker 2: we've made up until this point, we are well positioned
Speaker 2: to beat our current and increasing customer demand. Last year alone,
Speaker 2: we added more capacity than any prior year in history.
Speaker 2: What we may strategically pay just our infrastructure in some areas,
Speaker 2: we will continue to grow strongly in all regions. This
Speaker 2: allows us to invest in, allocate resources to grow areas
Speaker 2: and for our future. The fuck are you talking about?
Speaker 2: Sounds like Microsoft built too much capacity and in fact
Speaker 2: as yet to see the customer demand that actually could
Speaker 2: reach it. In fact, a couple weeks ago, Microsoft's CEO
Speaker 2: Saturnadella said in a podcast interview that one of the
Speaker 2: things is that there will be as a result of
Speaker 2: data center expansion related to AI overbuild. Why is the
Speaker 2: CEO of Microsoft saying that if nothing's changed. Microsoft also
Speaker 2: in late January said it had thirteen billion dollars in
Speaker 2: annual recurring revenue from AI. And by the way, that's
Speaker 2: that's revenue. That's revenue. It's revenue, it's not profit and
Speaker 2: On top of that, they don't. It's not like they've
Speaker 2: made thirteen billion dollars. They're multiplying like a month's revenue
Speaker 2: by twelve. And by the way, AI is also not
Speaker 2: a line item on Microsoft's earnings, meaning that all of
Speaker 2: this is just related revenue put into a hatamari and
Speaker 2: rolled around by satching a Dell or picking up chairs
Speaker 2: and shit in the office. Either way, this is a
Speaker 2: piss poor amount that works out to about three point
Speaker 2: twenty five billion dollars a quarter. These are mediocre numbers.
Speaker 2: Their bush league and Microsoft's data center pullback suggests that
Speaker 2: they're not going to improve. But wait, wait, or perhaps
Speaker 2: Microsoft's pullback has something to do with Stargate open aiy's
Speaker 2: big infrastructure project. In fact, I think that might have
Speaker 2: something to do with a great deal. Let's take a look.
Speaker 2: According to the information, open ai plans to have stargate
Speaker 2: handle three quarters of its computing needs by twenty thirty.
Speaker 2: Look they'll make it, which heavily suggests that Microsoft canceling
Speaker 2: so much capacity is on some level linked to open
Speaker 2: AI's future plans and not being part of them. Well,
Speaker 2: the information reports that open ai is still forecasting to
Speaker 2: spend thirteen billion dollars in twenty twenty five and as
Speaker 2: much as twenty eight billion dollars in twenty twenty eight
Speaker 2: on Microsoft's cloud compute in addition to whatever capacity it
Speaker 2: gets from Stargate or Oracle. One has to wonder how
Speaker 2: it intends to do so if it needs capacity that
Speaker 2: Microsoft isn't building and doesn't have. And these are two
Speaker 2: huge numbers, by the way. For context, thirteen billion dollars
Speaker 2: is about ten percent of Microsoft's cloud revenue in the
Speaker 2: twenty twenty four fiscal year, though it's unclear whether Microsoft
Speaker 2: counts open AI's compute spenders its revenue. Nevertheless, I got
Speaker 2: some real concerns about whether open ai is even capable
Speaker 2: of expanding further, starting with a fairly obvious one. Open
Speaker 2: AI's only source of money SoftBank, the world's worst tech
Speaker 2: investor and the only company in the world better incinerating
Speaker 2: huge piles of cash, and open Ai, well, they got
Speaker 2: some money issues that I'll get into, and funnily enough,
Speaker 2: that is going to be the topic of the next episode.
Speaker 2: I'm not convinced that Microsoft's pullback is driven by Stargate
Speaker 2: largly because I don't think Stargate at least with the
Speaker 2: current spending goals and capacity targets is actually viable. The
Speaker 2: real motivations, I believe have far more to do with
Speaker 2: the fact that Microsoft is recognizing that maybe it got
Speaker 2: generative AI and a large part of its future all wrong.
Speaker 2: See you in the next episode. Thank you for listening
Speaker 2: to Better Offline.
Speaker 3: The editor and composer of the Better Offline theme song
Speaker 3: is Matasowski. You can check out more of his music
Speaker 3: and audio projects at Matasowski dot com, M A T
Speaker 3: T O S O W s ki dot com. You
Speaker 3: can email me at easy at Better Offline dot com
Speaker 3: or visit Better Offline dot com to find more podcast
Speaker 3: links and of course my newsletter. I also really recommend
Speaker 3: you go to chat dot Where's youreaed dot at to
Speaker 3: visit the discord, and go to our slash Better.
Speaker 2: Offline to check out our reddit. Thank you so much
Speaker 2: for listening.
Speaker 1: Better Offline is a production of cool Zone Media. For
Speaker 1: more from cool Zone Media, visit our website cool Zonemedia
Speaker 1: dot com, or check us out on the iHeartRadio app,
Speaker 1: Apple Podcasts, or wherever you get your podcasts.
Speaker 2: SPO