Speaker 1: Media.
Speaker 2: Hello and welcome to Better Offline. I'm your host ed
Speaker 2: Sir Tron. Now, before we go any further, I hate
Speaker 2: to ask you to do this, but I need your help.
Speaker 2: I'm up for this year's Webbe's for the Best Business
Speaker 2: Podcast Award. I know it's a pain in the ars
Speaker 2: to register, but can you sign up and vote for
Speaker 2: Better Offline? Never won an award in my life, and
Speaker 2: I have enough listeners that I think we can tip
Speaker 2: the scales. But on with the show. The following two
Speaker 2: part episode is the culmination of months of research, presenting
Speaker 2: a case I'd been making in parts since July of
Speaker 2: last year. Open AYE is a financial abomination, a thing
Speaker 2: that should not be, an aberration, a symbol of rot
Speaker 2: at the heart of Silicon Valley, a company that unrepentantly
Speaker 2: and needlessly burns billions of dollars with no end in sight,
Speaker 2: helmed by a creticist, dis ingenuous billionaire who continually lies
Speaker 2: about what it is that it will do because he,
Speaker 2: like I've been saying since last year, knows that Generative
Speaker 2: AI can't do much more than it does today. What
Speaker 2: I'm going to lay out for you is my case
Speaker 2: the Open AI can't survive, that it's boadline impossible under
Speaker 2: any of the current terms for this company to continue,
Speaker 2: and that its demise will bring about the death of
Speaker 2: a or significant harm of several other firms. A cottage
Speaker 2: industry of despicable, billion dollar burn rate capitalistic monstrosities has
Speaker 2: sprung up around this stupid fucking company in the hopes
Speaker 2: of further inflating a bubble set to burst at any moment.
Speaker 2: My discuss for the parties involved is unrelenting. This is
Speaker 2: my discuss for a media industry that failed to even
Speaker 2: attempt to tackle the subject matter I'm going to detail.
Speaker 2: I believe at the end of these episodes you'll see
Speaker 2: my point and at the very least agree that open
Speaker 2: AI's current situation is totally untenable. If I'm right, open
Speaker 2: ai will go down in history as an abdication of
Speaker 2: due diligence, fiscal responsibility, in frankly common sense, both in
Speaker 2: the venture capitalists and entities that propped it up and
Speaker 2: a tech media that was more concerned with taking detailed
Speaker 2: notes on my comings and goings than knowing their ass
Speaker 2: from their ear hole. Those who have failed to hold
Speaker 2: men like Sam Altman and darra Ama Day Accountable have
Speaker 2: tacitly approved a financial and environmentally destructive movement that will
Speaker 2: lead to the very little actually happening or changing in
Speaker 2: the world other than damaging our power grid and the
Speaker 2: theft of art from millions of people. These episodes will
Speaker 2: be full of numbers and statements and very few declarations
Speaker 2: or personal opinions, though probably a few swear words. If
Speaker 2: I'm honest, I don't need to get that personal here.
Speaker 2: The numbers in question, they're damaging, they're staggering, they're worrying,
Speaker 2: and ultimately spell collapse. The truth is, we don't even
Speaker 2: need to talk about tarifs for things to go sideways
Speaker 2: for this industry. The price of a GPU could rise
Speaker 2: one hundred percent, or it could have it really wouldn't
Speaker 2: make much of a difference to open AI's chances of survival.
Speaker 2: That's how bad the fundamentals are. And to illustrate that point,
Speaker 2: I'm going to ask a number of relatively simple questions
Speaker 2: over the next couple of episodes and make an attempt
Speaker 2: to answer them. First, let's start with something simple, how
Speaker 2: much cash does open ai have. At the start of April,
Speaker 2: open Ai closed what was called the largest private tech
Speaker 2: funding round in history, where it raised and astonishing forty
Speaker 2: billion dollars. And the reason I'm saying this with the
Speaker 2: sarcastic inflection is that open ai has only actually raised
Speaker 2: ten billion dollars of the forty billion dollars, with the
Speaker 2: rest arriving by the end of the year, and even
Speaker 2: as I record this, I don't know if the money's
Speaker 2: actually gone yet. I'll get it into that in a minute. Now.
Speaker 2: A lot can happen in a year, and the remaining
Speaker 2: thirty billion dollars twenty billion dollars of which will allegedly
Speaker 2: be provided by soft Bank, is partially contingent on an
Speaker 2: open AI's conversion from a nonprofit to a for profit
Speaker 2: by the end of twenty twenty five, and if it fails,
Speaker 2: soft Bank will only give open Ai a further twenty
Speaker 2: billion dollars. I'll get into how fucking stupid this gets later.
Speaker 2: The round also valued open Ai and astonishing three hundred
Speaker 2: billion dollars. To put that in context, open Ai had
Speaker 2: revenues of four billion dollars in twenty twenty four. This
Speaker 2: deal values open Ai at seventy five times its revenue.
Speaker 2: That's more than Tesla even at its most looted Chris Peak.
Speaker 2: I also want to add that, as of writing this sentence,
Speaker 2: this money is yet to arrive. Maybe it will arrive
Speaker 2: by the time this is out. Maybe what really make
Speaker 2: me look stupid. But based on soft Bank's filings, which
Speaker 2: I'll link to in the spreadsheet for this episode, say
Speaker 2: that the money will arrive mid April. It's April fourteenth
Speaker 2: as I'm recording this, and that soft Bank would be
Speaker 2: borrowing as much as ten billion dollars of the financing
Speaker 2: for the round, with the option to syndicate, meaning you
Speaker 2: bring in other investors the rest of them. For the
Speaker 2: sake of argument, I'm going to assume the money actually arrives,
Speaker 2: though filings also suggest that, and I'm quoting in certain circumstances,
Speaker 2: the second thirty billion dollar tranch could arrive in early
Speaker 2: twenty twenty six. This isn't great. It also seems that
Speaker 2: soft banks ten billion dollar commitment is contingent on getting
Speaker 2: a loan, as it says it's financed through borrowings from
Speaker 2: Mizuho Bank Limited, among other financial institutions. Soft Banks had
Speaker 2: plenty of loans in the past, so I think they're
Speaker 2: going to get it. But I think this is one
Speaker 2: of their biggest open a I also revealed it now
Speaker 2: has twenty million paying subscribers and over five hundred million
Speaker 2: weekly active users. If you're wondering why it doesn't talking
Speaker 2: about monthly users, it's because they're likely much higher than
Speaker 2: five hundred million, which would reveal exactly how poorly open
Speaker 2: ai converts free chat GPT users to paying ones. The
Speaker 2: Information reported back in January that open ai was generating
Speaker 2: twenty five million dollars in revenue a month from its
Speaker 2: two hundred dollars a month pro subscribers, and just so
Speaker 2: we're clear, they lose money on every one of those two,
Speaker 2: suggesting that they have around one hundred and twenty five
Speaker 2: thousand Chat GPT pro subscribers, each losing the money somehow.
Speaker 2: Assuming the other nineteen million, eight hundred and seventy five
Speaker 2: thousand users are paying twenty bucks a month, that puts
Speaker 2: revenue about four hundred and twenty three million dollars a month,
Speaker 2: or at least five billion dollars a year from chat
Speaker 2: GPT subscriptions. This is what reporters mean when they say
Speaker 2: annualized revenue. By the way, it's literally the month. The
Speaker 2: monthly revenue that the money they're making in one month
Speaker 2: multiplied by twelve, and you'll be surprised to hear that
Speaker 2: people play silly buggers with that all the time. In March,
Speaker 2: Bloomberg reports the open ai expects its revenue to triple
Speaker 2: to twelve point seven billion dollars in twenty twenty five,
Speaker 2: assuming a similar split of revenue to twenty twenty four.
Speaker 2: This would require open ai to nearly double its annualized
Speaker 2: subscription revenue from Q one twenty twenty five from five
Speaker 2: billion dollars right now to around nine point twenty seven
Speaker 2: billion dollars, and nearly kuldruple API revenue from twenty twenty
Speaker 2: four's revenue of one billion, which includes Microsoft's twenty percent
Speaker 2: payment for access to open AI's models, and that would
Speaker 2: get them about three point four to three billion. We
Speaker 2: all need to super worry about these numbers. And I
Speaker 2: realized these are messy numbers. It's just unclear how open
Speaker 2: ai intends to pull any of this off. It's an
Speaker 2: incredible leap, and open AI's own plans don't exactly inspire confidence.
Speaker 2: They're really good at getting free subscribers, they don't seem
Speaker 2: to be able to get paying ones in quite the
Speaker 2: same number, and also they even lose them money. Every
Speaker 2: time I think about this company, I start feeling a
Speaker 2: little crazy, and if I'm on it anyway, The Information
Speaker 2: reported in February that if the open ai plan to
Speaker 2: grow its revenue by making three billion dollars a year
Speaker 2: selling agents with chat GBT subscriptions seven point nine billion
Speaker 2: dollars and API cous one point eight billion dollars making
Speaker 2: up the rest. This is, of course, what's the technical term, Oh,
Speaker 2: it's bollocks. It's complete fucking bollocks. I'm sorry. Agents, by
Speaker 2: the way, are AI chatbots that can do something like
Speaker 2: interact with another program on the user's behalf. Open aiy's
Speaker 2: agents can't even do the simplest tasks. And three billion
Speaker 2: dollars of twelve point seven billion dollar figure appears to
Speaker 2: be a commitment made by soft Bank to purchase three
Speaker 2: billion dollars a year of Open Aiyes, tech, now, let's
Speaker 2: pass out these numbers precisely. So incoming monthly revenue roughly
Speaker 2: four hundred and twenty five million dollars give or take
Speaker 2: theoretical revenue from soft Banks completely made up thing two
Speaker 2: hundred and fifty million dollars a month. However, I really
Speaker 2: can find no proof that soft Bank has begun to
Speaker 2: make these payments, or indeed that it intends to make
Speaker 2: them even how it intends to. Now, let's talk liquidity.
Speaker 2: Open Ai has ten billion dollars that they yet to
Speaker 2: receive a recording this, but let's assume they get it,
Speaker 2: and it will be ten billion dollars seven point five
Speaker 2: billion from soft Bank and a syndicate of investors including
Speaker 2: my mic Krossoft and Cutchiu and a few others. Potentially.
Speaker 2: There's also an indeterminate amount of remaining capital on the
Speaker 2: four billion dollar credit facility provided by multiple banks back
Speaker 2: in October twenty twenty four, and that was raised alongside
Speaker 2: of funding ground that valued the company one hundred and
Speaker 2: fifty seven billion dollars now. As a note, the October
Speaker 2: announcement stated that open ai had access to over ten
Speaker 2: billion dollars in liquidity, giving us a sense of how
Speaker 2: fast it's burning through the cash it has on hand,
Speaker 2: as that was pretty much all the money they'd raised
Speaker 2: at the time. Based on reports, open Ai will not
Speaker 2: have access to the rest of the forty billion dollars
Speaker 2: that soft Bank is funding them with. Until the end
Speaker 2: of the year. And it's unclear what part of the
Speaker 2: end of the year that is, but SoftBank's filing says December.
Speaker 2: Will it be December first? Will it be Christmas time?
Speaker 2: Will Sam Mortman look on to the tree and Messiyoshi
Speaker 2: san will be there? We'll find out, won't we. But
Speaker 2: we can assume in this case that open ai likely has,
Speaker 2: in the best case scenario, access to about roughly sixteen
Speaker 2: billion dollars in liquidity at any given time. It's reasonable
Speaker 2: to believe that open ai will raise more debt this
Speaker 2: year despite this massive raise, and it does so to
Speaker 2: the tune of around five or six billion dollars. Without it,
Speaker 2: I'm genuinely not sure what they're going to do. And
Speaker 2: as a reminder, kids, open ai loses money on every
Speaker 2: single user, free or paying. Now here's my next question,
Speaker 2: what are open AI's obligations? Now? When I put out
Speaker 2: how does open ai survive and open aiy is a
Speaker 2: bad business? I used reported information to explain how this
Speaker 2: company was at its court unsustainable. I'll link to the
Speaker 2: newsletters and the spreadsheet in the podcast too. But let's
Speaker 2: refresh our memory, shall we. Okay, compute costs at least
Speaker 2: thirteen billion dollars of which are going to Microsoft a
Speaker 2: loan in twenty twenty five, and as much as five
Speaker 2: hundred and ninety four million dollars to my favorite company,
Speaker 2: core Wave. Core Weave's back. Every time I think I
Speaker 2: got away from core Weave, they pop out like a
Speaker 2: sour turd coming back in the toilet. Anyway, it seems
Speaker 2: from even a cursory glance that open AI's costs are
Speaker 2: increasing dramatically. The information reported earlier in the year the
Speaker 2: open ai projects to spend thirteen billion dollars on compute
Speaker 2: with Microsoft the loan in twenty twenty five, nearly tripling
Speaker 2: what it spent in total compute in twenty twenty four,
Speaker 2: which was five billion dollars, with three billion for training
Speaker 2: and two billion for running their models. This suggests that
Speaker 2: open aiyes costs as skyrocketing, and that was before the
Speaker 2: launch of their new image generator, which led to multiple
Speaker 2: complaints from Sam Mormon about a lack of available GPUs,
Speaker 2: leading to open Aiy's Terrible Little Man CEO saying that
Speaker 2: he expected stuff to break and delays in new products. Nevertheless,
Speaker 2: even if we assume open ai in factored in the
Speaker 2: compute increases into its projections, it still expects to pay
Speaker 2: that thirteen billion dollars to Microsoft a loan. This number, however,
Speaker 2: doesn't include the twelve point nine billion dollar five year
Speaker 2: long compute deal signed with core Weave, a deal that
Speaker 2: was a result of Microsoft declining to pick up the
Speaker 2: option to buy the compute themselves for open Ai. As
Speaker 2: an aside from what I am here and this is
Speaker 2: sources telling me most of the Microsoft compute was open Ai.
Speaker 2: It's basically they put an open Ai sticker over Microsoft.
Speaker 2: It's basically the same thing. Now, payments for this deal
Speaker 2: with with open Ai and core Weave they start in
Speaker 2: October twenty twenty five according to the information, and assuming
Speaker 2: that it's even paid, or like evenly paid or even
Speaker 2: like anyone gets the cash. But these contracts are weird,
Speaker 2: you never know exactly how they're paid, this would still
Speaker 2: amount to roughly two point three eight billion dollars a year. However,
Speaker 2: for the sake of argument, let's consider the payments are
Speaker 2: around one hundred and ninety eight million dollars a month.
Speaker 2: Though there are scenarios such as say core weaves build
Speaker 2: out partner not being able to build the data centers
Speaker 2: or core weave not having the money to pay to
Speaker 2: build them, where open ai might end up paying less.
Speaker 2: And don't worry, I'll get to that later. Let's talk
Speaker 2: about Stargate. You heard this, You've seen this. Stargate is
Speaker 2: this data center project the open ai is going into.
Speaker 2: And they've dedicated somewhere in the region of nineteen billion
Speaker 2: dollars to this project, along with another nineteen billion dollars
Speaker 2: provided by Software Bank at some indeterminate time. And there
Speaker 2: are other partners too, like oor Coins. Not even obvious
Speaker 2: what they're putting in either. One thing I can tell you, though,
Speaker 2: is the Trump administration is not actually spending any money
Speaker 2: on this anyone. I've had tons of people emailing me
Speaker 2: being like, hey, yeah, Donald Trump was there. Yeah, Donald
Speaker 2: Trump was there. Doesn't mean shit anyway. Based on reporting
Speaker 2: from Bloomberg, open Ai plans to have sixty four thousand
Speaker 2: Blackwell GPUs running by the end of twenty twenty six,
Speaker 2: or roughly about three point eighty four billion dollars worth
Speaker 2: of them. I should also note that Bloomberg said that
Speaker 2: sixteen thousand of these chips would be operational by summer
Speaker 2: twenty twenty five, though it's unclear if that will actually happen,
Speaker 2: and as I'll get to later, I got some more
Speaker 2: questions about what exactly is happening at Stargate or told.
Speaker 2: Though it's unclear who actually pays what parts of Stargate,
Speaker 2: it's safe to assume that open Ai will have to
Speaker 2: at least put a billion dollars into a project that
Speaker 2: is meant to be up and running by the end
Speaker 2: of twenty twenty six, if not more. Now Stargate really
Speaker 2: on has one like data center project under development is
Speaker 2: in Abilene, Texas, and as I've mentioned, it's not really
Speaker 2: clear how it's going though. Are recent piece from the
Speaker 2: Information reported that it was currently empty and incomplete, and
Speaker 2: if it stays that way, and I quote again, open
Speaker 2: Ai could walk away from the deal, which would cost
Speaker 2: Oracle billions of dollars. Though the article takes great pains
Speaker 2: to assure the reader that that won't be likely. Even
Speaker 2: an inkling of such a possibility is a bad fucking sign.
Speaker 2: Business insiders reported on the site in Abilene calls it
Speaker 2: a three point four billion dollar data center development, as
Speaker 2: did the press release from the developer Crusoe, who will
Speaker 2: get too later. Though these numbers don't include GPUs hardware
Speaker 2: or the labour necessary to run them. Right now, Cruso is,
Speaker 2: according to Business Insider, building six new data centers, each
Speaker 2: with a minimum square footage, which will join the two
Speaker 2: it is already constructing for Oracle. Oracle is signed, according
Speaker 2: to the information, a fifteen year long lease with Cruiser
Speaker 2: for its data centers, all of which will be rented
Speaker 2: to open Ai. In any case, open AI's exposure could
Speaker 2: be much, much, much higher than billion dollars. And I'll
Speaker 2: explain in greater depth how I've reached the figure at
Speaker 2: the women I get there. But nevertheless, it could be
Speaker 2: much higher. If OpenAI has to contribute significantly to the
Speaker 2: costs of associating with Stargate in general, it could cost
Speaker 2: them a lot of money. Data centers aren't something you
Speaker 2: can do. Funny money math with Data Center Dynamics reports
Speaker 2: that the Abilene site is meant to have two hundred
Speaker 2: megawatts of compute capacity in the first half of twenty
Speaker 2: twenty five, and then as much as one point two
Speaker 2: gigawats by mid twenty twenty six. To give you a
Speaker 2: sense of the total cost of the project, Former Microsoft
Speaker 2: VP of Energy Brian Janis said in January that it
Speaker 2: costs twenty five million dollars a megawat or about twenty
Speaker 2: five billion dollars a gigawe, meaning that the initial capital
Speaker 2: expensures for Stargate to spin up its first two hundred
Speaker 2: megawat data center will be around five billion dollars, spiraling
Speaker 2: to thirty billion dollars or more for the entire project.
Speaker 2: The Information has reported that the site, which could be
Speaker 2: and I quote potentially one of the biggest AAY identify
Speaker 2: data centers, could cost fifty billion to one hundred billion
Speaker 2: dollars in the coming years. Where's that fucking money coming from? Me?
Speaker 2: Stick with the lower end of these cost estimates, it's
Speaker 2: likely the open AI is on the hook for over
Speaker 2: five billion dollars for the Abilene site. Based on the
Speaker 2: nineteen billion dollars it's committed to the overall Stargate Data
Speaker 2: center project. This expenditure won't come all at once and
Speaker 2: will be spread across several years. Still, assuming even the
Speaker 2: rosiest numbers, it's hard to see how open ai doesn't
Speaker 2: have to pony up at least a billi in twenty
Speaker 2: twenty five, and that's likely because the development at this
Speaker 2: site is going to be heavily delayed by both tariffs,
Speaker 2: labor shortages, and oracles as reported by Information. Well, they're
Speaker 2: trusting and I this is the kind of quote you
Speaker 2: really want to hear. They're trusting scrappy but unproven startups
Speaker 2: to develop the project. Is that good? Is that who
Speaker 2: you want doing this? I know when I get a
Speaker 2: contractor in to fix something, my first thought is, is
Speaker 2: this guy's scrappy? Anyway, Let's talk about the other costs.
Speaker 2: They're at least three point five billion based on reporting
Speaker 2: from the information from last year, open ai will spend
Speaker 2: at least two point five billion dollars across salaries, data
Speaker 2: referring to buying data from other companies, hosting another cost
Speaker 2: of sales in sales and marketing, and then another billion
Speaker 2: on what infrastructure open ai owns. I expect the latter
Speaker 2: cost to balloon with open AI's investment in physical infrastructure
Speaker 2: for stargame. Here's another bloody question. How does open ai
Speaker 2: meet its obligations? Based on previous estimates, open ai spends
Speaker 2: about two dollars and twenty five cents to make a buck.
Speaker 2: At that rate, it's likely the open AI's cost in
Speaker 2: its most rosy reed revenue projections of twelve point seven
Speaker 2: billion dollars or at least twenty eight billion, meaning that
Speaker 2: it's on course to burn at least fourteen billion dollars
Speaker 2: in twenty twenty five a loan, assuming that open ai
Speaker 2: has literally all of the money they had from last year.
Speaker 2: They don't, but for the sake of argument, let's pretend
Speaker 2: they have ten billion dollars, as well as ten billion
Speaker 2: from soft Bank. It's still unclear how they pay for
Speaker 2: everything now. While open ai likely has preferential payment structures
Speaker 2: with all of their vendors, such as discounted rates with Microsoft,
Speaker 2: Razi or cloud Services, it will eventually have to pay someone,
Speaker 2: especially in the case of costs related to stargate, many
Speaker 2: of which are upfront and involve physical things happening. In
Speaker 2: the event that its costs a severe as reporting suggests,
Speaker 2: open AI's revenue comes at a terrible cost and will
Speaker 2: likely be immediately funneled directly into funding the obscene cost
Speaker 2: behind inference and training models like GPT four point five,
Speaker 2: which Sam Wuonton called a giant expensive model, and yeah,
Speaker 2: nevertheless he pushed that to every single user. Worse. Still,
Speaker 2: open ai has while delaying its next model, GPT five
Speaker 2: promised to launch after all that its O three reasoning
Speaker 2: model after saying it wouldn't do so, which is strange
Speaker 2: because it turns up three is actually way more expensive
Speaker 2: to run that people thought. With arc Price Foundation, a
Speaker 2: nonprofit that makes the RKGI test for benchmarking models, because
Speaker 2: real tests don't work on them, they need to make
Speaker 2: something out. Well, they're estimating they will cost about thirty
Speaker 2: grand a task, which is that's a lot of money.
Speaker 2: And yes, they again it. Open Ai has a new
Speaker 2: sugar Daddy in the form of SoftBank. But SoftBank has
Speaker 2: to borrow money to meet its obligations for Stargate and
Speaker 2: also open Ai, and this is leading to its financial
Speaker 2: condition likely deteriorating. And that's S and P Global that
Speaker 2: you know, you know, the S and P five those people,
Speaker 2: those people said that that's not what you want to hear.
Speaker 2: Let's look soft Bank. As of right now, soft Bank
Speaker 2: has committed to the following at least thirty billion dollars
Speaker 2: in funding, is part of open AI's recent forty billion
Speaker 2: dollar funding round. Now. Soft Bank's filing surrounding open AI's
Speaker 2: funding also suggests that they are ultimately on the hook
Speaker 2: for the entire forty billion, but they can syndicate it.
Speaker 2: Like I mentioned earlier, reporting suggests that the syndication will happen,
Speaker 2: and it will happen with people at COUTE, Microsoft and
Speaker 2: other investors. Now here's the funny part. If open ai
Speaker 2: fails to convert to a for profit, that forty billion
Speaker 2: dollars slashed down to a paltry thirty billion dollars, although
Speaker 2: again soft Banks shares contingent upon whether it finds other
Speaker 2: investors to join the deal. Now there's another three billion
Speaker 2: dollars that soft Bank's promised to spend on open AI's tech,
Speaker 2: and then nineteen billion dollars for the Stargate Data Center project,
Speaker 2: which soft Bank is taking full financial responsibility for. The
Speaker 2: information reports, and the total is either fifty two billion
Speaker 2: dollars or sixty two billion dollars, with at least ten
Speaker 2: billion dollars due by the end of twenty twenty five,
Speaker 2: but more like twenty Like there's so much money. To
Speaker 2: be clear, SoftBank had to borrow all of the ten
Speaker 2: billion dollars. How the fuck are they meant to get
Speaker 2: the thirty billion dollars? Now I kind of mentioned s
Speaker 2: and P. But I want to really return to that now,
Speaker 2: SoftBank's exposure to open Ai is materially harming the company,
Speaker 2: and I'm quoting the Wall Street Journal here. Ratings agency
Speaker 2: S and P Global said Tuesday that SoftBank's financial condition
Speaker 2: will likely deteriorate as a result of the open Ai investment,
Speaker 2: and that its plans to add debt could lead the
Speaker 2: agency to consider downgrading SoftBank's ratings. While one might argue
Speaker 2: that SoftBank has a good amount of cash, the journal
Speaker 2: also adds that they're somewhat hamstrung in its use as
Speaker 2: a result of CEO Massaoshi's son's dick shit reckless gambles.
Speaker 2: Again quoting from the Wall Street Journal, SoftBank had a
Speaker 2: decent buffer of thirty one billion dollars of cash as
Speaker 2: of December thirty first, but the company is also pledged
Speaker 2: to hold mone much of that in reserve to quell
Speaker 2: worried investors. Soft Bank is committed to not borrow more
Speaker 2: than twenty five percent of the value of its holdings,
Speaker 2: which means it will likely need to sell some of
Speaker 2: the other parts of its empire to pay the rest
Speaker 2: of the open Ai deal. Worse still, it seems that
Speaker 2: as mentioned before that SoftBank will be financing the entirety
Speaker 2: of the first ten billion seven point five billion if
Speaker 2: they're able to syndicate it. As a result, soft Bank
Speaker 2: is likely going to have to sell off parts of
Speaker 2: their actually valuable holdings in companies like Alababa or arm
Speaker 2: or worse still, parts of their ailing investments from a
Speaker 2: vision fund, resulting in a material loss and its underwater deals.
Speaker 2: This is an untenable strategy, and I'd like to explain why. First.
Speaker 2: Open Ai needs at least forty billion dollars a year
Speaker 2: to survive and its costs are only increasing. While we
Speaker 2: don't have much transparency into open AI's actual day to
Speaker 2: day finances, we can make educated guesses that its costs
Speaker 2: are increasing based on the amount of capital it's raising.
Speaker 2: If open AI's costs were flat or only mildly increasing,
Speaker 2: we'd expect to see raises roughly the same size as
Speaker 2: the pre vis one six point six billions something in
Speaker 2: that range. A forty billion dollar raise is nearly six
Speaker 2: times the previous funding round. Admittedly, multiples like that aren't
Speaker 2: particularly unusual. If a company raises three hundred grand in
Speaker 2: the pre seed round and a three million dollar series
Speaker 2: a round in funding. That's a tenfold increase. But we're
Speaker 2: not talking about hundreds of thousands of dollars or even
Speaker 2: millions of dollars. We're talking about billions of dollars. If
Speaker 2: open AI's funding round with soft Bank goes as planned,
Speaker 2: it will raise the equivalent of the entire GDP of Estonia,
Speaker 2: a fairly wealthy country itself that's also a member of
Speaker 2: NATO and the European Union. That alone should give you
Speaker 2: a sense of how fucking stupid this all is. Stupid, sure,
Speaker 2: but undoubtedly necessary. Per the information, open ai plans to
Speaker 2: spend as much as twenty eight billion dollars in compute
Speaker 2: on Microsoft dosy or cloud in twenty twenty eight. Over
Speaker 2: a third of open AI's revenue, per the same article,
Speaker 2: will come from SoftBank's alleged spend. It's reasonable to believe
Speaker 2: that open ai will, as a result, need to raise
Speaker 2: in excess of forty billion dollars a year, though it's
Speaker 2: reasonable to believe that it will need to raise more
Speaker 2: like fifty billion a year until they reach profitability you
Speaker 2: know never And now this actually has a reason. It's
Speaker 2: due to the growing cost of doing business as well
Speaker 2: as the various infrastructure commitments they've made, both in the
Speaker 2: terms of Stargate as well as deals with third party
Speaker 2: suppliers like core Weavan, indeed, Microsoft. Open Ai CEO Sam
Speaker 2: Mortman's statement around costs also suggests that they're going up
Speaker 2: quite fiercely. In late February, he claimed that open ai
Speaker 2: was out of GPUs. While this suggests that there is
Speaker 2: demand for some products like it's horrifying him as generating
Speaker 2: tech that has made abominations that insult Miyazaki and I
Speaker 2: will hate them for it forever and thus made them
Speaker 2: go viral in much it also means that to meet
Speaker 2: the demand of the horrible abominations, open Ai needs to
Speaker 2: spend more, and at the risk of repeating myself, that
Speaker 2: demand doesn't necessarily translate into revenue or profitability. Now. Second,
Speaker 2: soft Bank cannot fund open ai long term. I must
Speaker 2: be clear. Open AI's costs are projected to be three
Speaker 2: hundred twenty billion dollars over the next five years. SoftBank
Speaker 2: has to overcome significant challenges to fund both open ai
Speaker 2: and it's part of Stargate, and when I say fund,
Speaker 2: I mean fund the current state of both projects, assuming
Speaker 2: no further obligations or complications. The Information reports the open
Speaker 2: Ai forecast that will spend as I mentioned, twenty eight
Speaker 2: billion dollars on compute with Microsoft a loan in twenty
Speaker 2: twenty eight, and I apologize for repeating myself, these numbers
Speaker 2: fucking matter. The same arcle also reports that open ai
Speaker 2: would turn profitable by the end of the decade after
Speaker 2: building out Stargate, suggesting that open AI's operating expend ditches
Speaker 2: will grow exponentially year over year. According to the Information,
Speaker 2: it expects its costs to surpass three hundred and twenty
Speaker 2: billion dollars between twenty twenty five and twenty thirty, with
Speaker 2: half of that going towards funding model training and development.
Speaker 2: How the fuck does building stargate make them profitable? I
Speaker 2: really can't anyway, it won't. It's the same shit. But
Speaker 2: SoftBank has had to and will continue having to go
Speaker 2: to remarkable lengths to fund open AI's current forty billion
Speaker 2: dollar round, lengths so significant that it may lead to
Speaker 2: their credit rating being further downgraded. As I mentioned, even
Speaker 2: if we assume the best case scenario, open ai successfully
Speaker 2: converts to a for profit entity by the end of
Speaker 2: twenty twenty five and gets that full thirty billion dollars.
Speaker 2: It seems unlikely, if not impossible, for it to continue
Speaker 2: raising the amount of capital they need to to continue operations.
Speaker 2: As I've argued in multiple news letters and podcasts, there
Speaker 2: are only a few entities that can provide the kind
Speaker 2: of funding that open AI needs. These include big tech
Speaker 2: focused investment firms like soft Bank, sovereign wealth funds like
Speaker 2: those of Saudi Arabia and the UAE, and perhaps the
Speaker 2: largest tech companies. I also want to be clear that
Speaker 2: I keep getting messages being like the gatherment could do
Speaker 2: it daily, couldn't it get me word? If the government
Speaker 2: did get it's not going to happen. Stop fucking asking me.
Speaker 2: It's just not going to happen. The government's not sending
Speaker 2: forty billion dollars to Sam Altman. They're not going to
Speaker 2: do it. I will apologize personally to each and every
Speaker 2: one of you if I'm wrong, but they will need
Speaker 2: to send forty billion dollars cash to open ai. But
Speaker 2: these entities can meet open ai needs for some time,
Speaker 2: but not all the time. It's not realistic to expect
Speaker 2: soft Bank or Microsoft or the Soald's Oracle or whoever
Speaker 2: to provide forty billion dollars every year for the foreseeable future.
Speaker 2: And just to be clear, this is what open Ai needs. Eventually,
Speaker 2: even the Souds have to have a break. And I
Speaker 2: don't know if you remember from a previous episode, but
Speaker 2: Masayoshi's son gets a lot of his money from them,
Speaker 2: and they're not happy with him. In fact, Masaoshi's son
Speaker 2: has said a few years ago that he owed Muhammad
Speaker 2: bill and Salmon. Not a great guy to owe anyway.
Speaker 2: This really is especially true for soft Bank by the way.
Speaker 2: They're bruised. They're battered after several rough years, including a
Speaker 2: failed multi billion dollar investment in we Work. Based on
Speaker 2: its current promise to not borrow more than twenty five
Speaker 2: percent of its holdings, it's near impossible that SoftBank will
Speaker 2: be able to continue to fund open Ai at this rate,
Speaker 2: and forty billion dollars a year may not actually be enough.
Speaker 2: Based on soft Bank's last reported equity value of its holdings,
Speaker 2: they have about two hundred and twenty nine billion dollars
Speaker 2: of stuff, meaning that they can borrow just over fifty
Speaker 2: seven billion while remaining compliant with these guidelines. In any case,
Speaker 2: it's unclear how soft Bank can fund open Ai, but
Speaker 2: it's far clearer that nobody else is willing to. Now
Speaker 2: we're going to move off the questions for a minute
Speaker 2: because I just want to get into some problems. I've
Speaker 2: popped because it turns out that open ai they got
Speaker 2: doodoo ass. That's a professional finance term. I did just
Speaker 2: say financi and we're just going to keep that. Now.
Speaker 2: Open Ai has started running into capacity issues, and this
Speaker 2: is a real problem, and it suggests material instability in
Speaker 2: their business or infrastructure, and it's really not clear how
Speaker 2: open ai expands further. Let me explain it's important to
Speaker 2: note that open ai does not really have any of
Speaker 2: its own compute infrastructure. The majority of its compute is
Speaker 2: provided by Microsoft, though as mentioned previously, open now has
Speaker 2: a deal with core Weave to take over the capacity
Speaker 2: that Microsoft was going to have twelve billion dollars or
Speaker 2: so of capacity in the future. Anyway, in the last
Speaker 2: ninety days, Sam Altman has complained about the lack of
Speaker 2: GPUs and pressure on open ai servers many times. In
Speaker 2: my newsletter published a few days ago, I was did
Speaker 2: six such examples. Should you be curious, these statements in
Speaker 2: a bubble seem either harmless or like open AI's growth
Speaker 2: is skyrocketing, the latter of which might indeed be true,
Speaker 2: but botzil for a company that burns money with every
Speaker 2: single user, any mention of rate limits or performance issues
Speaker 2: suggests that open ai is having significant capacity issues, and
Speaker 2: at this point it's unclear what further capacity it can
Speaker 2: actually expand to outside of that currently available. Sam Wilton's
Speaker 2: complaining about melting GPUs, You've got the lead from Sourer saying, yeah,
Speaker 2: we're gonna have some problems showing you stuff for a minute,
Speaker 2: just because like, yeah, we're melting GPUs. There was a
Speaker 2: whole thing about how you should expect delays on product
Speaker 2: launches and service problems. None of it's really good, And
Speaker 2: like I said, it isn't really obvious how open ai
Speaker 2: is going to expand much further. Remember Microsoft has now
Speaker 2: pulled as much as two gigawatts of data center projects,
Speaker 2: walked away from a billion dollar data center development in
Speaker 2: Ohio and declined the option the one I just mentioned
Speaker 2: on twelve billion dollars a compute from Corewave that open
Speaker 2: ai had to pick up, Meaning that open ai may
Speaker 2: be pushing up against the limits of what is physically available.
Speaker 2: While The total available capacity of GPUs at many providers
Speaker 2: like Lambda and Crusoe is unknown, and indeed, I don't
Speaker 2: know if Cruso has a single data center at this point.
Speaker 2: We know that Corewave has upon approximately three hundred and
Speaker 2: sixty megawats available compared to microsoft six point five to
Speaker 2: seven point five gigawads, a large chunk of which I
Speaker 2: think powers open Ai. If open ai is running into
Speaker 2: capacity issues, it could be one of the following. They
Speaker 2: could be running up against the limit of what Microsoft
Speaker 2: has available or is willing to offer the company. The
Speaker 2: Information reported in October twenty twenty four the open Ai
Speaker 2: was frustrated with Microsoft and said it wasn't moving fast
Speaker 2: enough to supply open ai with servers and now. It
Speaker 2: could also be that while open ai is cony is sufficient,
Speaker 2: it does not have the resources available to easily handle
Speaker 2: bursts in user growth in the stable manner. Per The
Speaker 2: Information's reporting, Microsoft promised open Ai three hundred thousand in
Speaker 2: Vidio GB two hundred Blackwell chips. By the end of
Speaker 2: twenty twenty five, are roughly eighteen billion dollars worth of them.
Speaker 2: It's unclear if this has changed since Microsoft allowed open
Speaker 2: Ai to seek other compute from other companies in late
Speaker 2: January twenty twenty five. I also don't believe that open
Speaker 2: ai has any other viable options for existing compute infrastructure
Speaker 2: outside of Microsoft. Corweep's current data centers mostly feature in
Speaker 2: Vidia's aging Hopper GPUs, and while it could and likely
Speaker 2: is retrofitting its current infrastructure with Blackwell chips, doing so
Speaker 2: isn't easy or cheap. Blackwell chips require far more powerful
Speaker 2: cooling and server infrastructure to make them run smoothly, a
Speaker 2: problem which led to a delay in their delivery to
Speaker 2: most customers according to the information. And even if Corey
Speaker 2: was able to replace every last Hopper GPU with a Blackwell,
Speaker 2: and they won't, it still wouldn't match what open ai
Speaker 2: needs to expand one might argue that it simply needs
Speaker 2: to wait for the construction of the Stargus data center,
Speaker 2: or for core we have to finish the gigawa or
Speaker 2: so of construction it's working on. I want to be
Speaker 2: clear how impossible that is. I need to be clear.
Speaker 2: One of my least favorite responses to my work as
Speaker 2: people saying they'll just build more data centers. They just
Speaker 2: go and build them inn They're just going to build
Speaker 2: them right now. They won't. You can't just data centers
Speaker 2: don't just grow from the fucking ground. As I've argued
Speaker 2: in the past, I have serious concerns over the viability
Speaker 2: of core We've ever completing. It's alleged contracted one point
Speaker 2: three gigawatts of capacity. Based on calculations, it'll have to
Speaker 2: spend in excess of thirty nine billion dollars to build it.
Speaker 2: It's unclear how that will happen, and it doesn't have
Speaker 2: the money to do so, like it actually does not
Speaker 2: have the cash. I'll get into that later, but they
Speaker 2: don't have the money. However, even if I were to
Speaker 2: humor this idea, it's impossible that any of this project
Speaker 2: is done by the end of twenty twenty five, and
Speaker 2: I'd argue even in twenty twenty six. I can find
Speaker 2: no commitments to any time scale, other than the fact
Speaker 2: that open Ai will allegedly start paying core Weave in
Speaker 2: October per the information, which could very well be using
Speaker 2: their current capacity. I also can't find any evidence that Cruso,
Speaker 2: the company building the Stargate data center in Texas, has
Speaker 2: any compute anywhere else. Lander, a GPU compute company that
Speaker 2: raised three hundred and twenty million dollars earlier in the year,
Speaker 2: and according to Data Center Dynamics, operates out of co
Speaker 2: location data centers in San Francisco, California, and Allen, Texas.
Speaker 2: It's backed by Moorner eight hundred and twenty million in
Speaker 2: funds raised this year. All of that just kind of
Speaker 2: doesn't say that they have a data center at all.
Speaker 2: A colocation. That means you're in someone else's buddy. You
Speaker 2: don't own a house, you're ranting one. And just to
Speaker 2: be clear, open AI's ability to scale is entirely contingent
Speaker 2: on the availability of whatever data center providers it has
Speaker 2: relationships with, and all of their growths coming from these
Speaker 2: to these two companies. I'll get there, don't worry. But
Speaker 2: every time I kind of say this stuff out loud,
Speaker 2: I feel my soul slightly stripped from me. I feel
Speaker 2: like I feel like I'm in hell because this is
Speaker 2: an insane thing. If you or I win to someone
Speaker 2: went like, hey, look, I'm going to lose five billion dollars,
Speaker 2: but I promise you God will come out of the computer.
Speaker 2: They institutionalize you or me, they definitely would instalize me.
Speaker 2: It's just fucking stupid, But in any case, this means
Speaker 2: that open AI's only real choice for GPUs is either
Speaker 2: Core Weave or Microsoft. And while it's hard to calculate precisely,
Speaker 2: open AI's best case scenario is that sixteen thousand GPUs
Speaker 2: come online in the summer of twenty twenty five as
Speaker 2: part of the Stargate Data Center project. And that's a
Speaker 2: drop in the bucket compared to the three hundred thousand
Speaker 2: of the fucking things that Microsoft have previously promised. Now,
Speaker 2: one last thing, any capacity or expansion issues that happen
Speaker 2: with open Ai will needcap this company, open ai is,
Speaker 2: regardless of how you or I may feel about generative Ai,
Speaker 2: one of the fastest growing companies of all time. It
Speaker 2: currently has, according to its own statements, over five hundred
Speaker 2: million weekly active users. Putting aside that each user is unprofitable.
Speaker 2: Such remarkable growth, especially as it's partially as a result
Speaker 2: of its extremely resourced intensive image generator, is a massive,
Speaker 2: horrifying strain on their infrastructure. The vast majority of open
Speaker 2: aiyes users are free customers using chat GPT with only,
Speaker 2: like I mentioned earlier, twenty million paying subscribers, and the
Speaker 2: vast majority of them on the cheapest twenty bucks plan.
Speaker 2: Open Aiyes, services, even in the case of image generation,
Speaker 2: are relatively commoditized, meaning that users can, if they really care,
Speaker 2: go and use any number of other large language model services.
Speaker 2: They could use bing Oh, they could use stable Diffusion,
Speaker 2: they could even use GROC if they really I don't
Speaker 2: like saying it, but free users they're a burden on
Speaker 2: the company, especially with such piss poor conversion rates, losing
Speaker 2: money with each prompt, which is by the way, also
Speaker 2: case with paying subscribers, and the remarkable popularity of its
Speaker 2: horrible image generator, it only threatens to bring more burdens
Speaker 2: than one off customers that will generate a few abominable
Speaker 2: studio ghibli pictures of Garfield with giant knockers and then
Speaker 2: never return. If AI's growth continues at this rate, it
Speaker 2: will run into capacity issues, and it does not have
Speaker 2: much room to expand. Well, we don't know how much
Speaker 2: capacity they're taking up with Microsoft, or indeed whether Microsoft
Speaker 2: is approaching capacity or otherwise limiting them. We do know
Speaker 2: that open ai has seen reason to beg for access
Speaker 2: for more GPUs. In simpler terms, even if open ai
Speaker 2: wasn't running out of money, even If open ai wasn't
Speaker 2: un horrifyingly unprofitable, it also may not have enough GPUs
Speaker 2: to continue providing its services in a reliable manner. If
Speaker 2: that's the case, there really isn't that much that can
Speaker 2: be done other than significantly limiting free users activity on
Speaker 2: the platform, which is open AI's primary mechanism for revenue
Speaker 2: growth and customer acquisition. Limiting activity or changing the economics
Speaker 2: behind its paid product. And this is quoting sam Orman.
Speaker 2: They could potentially find some way to let people pay
Speaker 2: for compute they want to use more dynamically, that's not good.
Speaker 2: Almans come up with some other ideas, like an idea
Speaker 2: for paid plans on March fourth, where twenty bucks a
Speaker 2: month goes to credits which you can use across features
Speaker 2: like deep research, oh one at four point five sore
Speaker 2: and so on, with no fixed limits per feature, and
Speaker 2: you choose what you want. If you run out of credits,
Speaker 2: you can buy more. I just want to be clear
Speaker 2: that that is a terrible fucking deal. We have no
Speaker 2: idea what the credits would be, and it would definitely
Speaker 2: be rigged so that you would have to buy more.
Speaker 2: He's also brought up things like mentioning losing two hundred
Speaker 2: bucks a month on the pro subscription, but he's a
Speaker 2: funny one. Buried in an article from the Information from
Speaker 2: March fifth is a comment that suggests that open ai
Speaker 2: is considering measures like changing its pricing model entirely, with
Speaker 2: Altman reportedly telling developers in London in February twenty twenty
Speaker 2: five the open aiy is prime to judge twenty or
Speaker 2: thirty percent of pro customers a higher price because of
Speaker 2: how many research queries they're doing. But he suggested in
Speaker 2: a la carte or pays you go approach when it
Speaker 2: comes to agents, though we have to judge more than
Speaker 2: two hundred dollars a month. Fucking just this fucking guy.
Speaker 2: The problem is that with all of these measures, even
Speaker 2: if they succeeded in generating more money for the company,
Speaker 2: also need to reduce the burden on open aiyes available infrastructure.
Speaker 2: Remember remember data centers can take three to six years
Speaker 2: to build, and even with stargates accelerated, and I'd argue
Speaker 2: on realistic timelines, open ai isn't unlocking a tenth of
Speaker 2: the promised compute that Microsoft gave them. Three hundred thousand
Speaker 2: GPUs is a lot sixteen thousand. Really not, so what
Speaker 2: might these capacities look like? What are the consequences? You
Speaker 2: love payal horses. I love payal horses. Let's get riding.
Speaker 2: Though downtime might be an obvious choice. Capacity issues that
Speaker 2: open ai will likely manifest in hard limits on what
Speaker 2: free users can do, some of which I've documented previously. Nevertheless,
Speaker 2: I believe the real pay all horses of capacity issues
Speaker 2: come from arbitrary limits on any given user group, meaning
Speaker 2: both free users and paid users. Some limits on what
Speaker 2: a user can do, a reduction in the number of
Speaker 2: generations of images for paid users, any introduction of peak hours,
Speaker 2: or any increases in prices are assigned that open ai
Speaker 2: is running out of GPUs, which it's already said as
Speaker 2: happening publicly. However, the really obvious thing, the real obvious
Speaker 2: pale horse, would be service degradation delays in generations of
Speaker 2: any kind, five hundred status code errors, or chat GBT
Speaker 2: just failing to produce an answer. Open ai has up
Speaker 2: until this point had fairly impressive uptime. Still, it's if
Speaker 2: it's running up against the wall this streak will end.
Speaker 2: The consequences depend on how often these issues occur. And
Speaker 2: to whom they occur. If free users face service degradation,
Speaker 2: they'll bounce off the product, as their US is likely
Speaker 2: far more fleeting than the paid user, which will begin
Speaker 2: to erode open AI's growth. Ironically, rapid and especially unprecedented
Speaker 2: growth in one of open AI's competitors like Higher or
Speaker 2: Anthropic could also represent a pale horse for open Ai,
Speaker 2: though based on the monthly active users I've seen from Anthropic,
Speaker 2: I don't think that's going to be a problem now.
Speaker 2: If paid users face service degradation, it will likely cause
Speaker 2: the most harm to the company is while paid users
Speaker 2: still lose open Ai money, in the end, at least
Speaker 2: they receive some money. Open Ai is effectively one choice
Speaker 2: here get more GPUs from Microsoft, and really its future
Speaker 2: depends heavily on both Microsoft's generosity and there being enough
Speaker 2: of them time when Microsoft is pulled back from over
Speaker 2: two gigabats of data centers, specifically according to td COD
Speaker 2: because of it moving away from providing compute to open Ai. Now, admittedly,
Speaker 2: open Ai has previously spent more on training models than inference,
Speaker 2: and that's the actual running of them, and the company
Speaker 2: might be able to smooth downtime issues by shifting capacity.
Speaker 2: This would of course have a knock on effect on
Speaker 2: its ability to develop new models, and the company is
Speaker 2: already losing ground, particularly when it comes to Chinese rivals
Speaker 2: like Deepseek. Now, I know this has been a long
Speaker 2: episode and the fact is I'm not even close to finish.
Speaker 2: I have some more tough, tough questions and tough problems
Speaker 2: for open Ai. Tune in to the next episode to
Speaker 2: hear them. I realized this has been a lot, and
Speaker 2: I know you're very patient with me. You let me
Speaker 2: read the long scripts. But this stuff is important. It's
Speaker 2: important to me, and I think you're going to find
Speaker 2: it important too. And I'll have a nice sexy conclusion
Speaker 2: to this at the end of the next one. But
Speaker 2: before I go, please vote for me in the fucking Webbies.
Speaker 2: I want to win. It's my pin post on Blue
Speaker 2: Sky and to wear in my handles eadsit Tran dot
Speaker 2: Com and Blue Sky. Please he vote for me and
Speaker 2: the Webbies. Anyway, catch you next episode. Thank you for
Speaker 2: listening to Better Offline. The editor and composer of the
Speaker 2: Better Offline theme song is Matasowski. You can check out
Speaker 2: more of his music and audio projects at Matasowski dot com,
Speaker 2: M A T T O S O W s ki
Speaker 2: dot com. You can email me at easy at better
Speaker 2: offline dot com or visit better offline dot com to
Speaker 2: find more podcast links and of course my newsletter. I
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Speaker 2: so much for listening.
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