Speaker 1: Media greetums. I'm at xytron and this is better offline.
Speaker 1: In my last episode, I started by telling you about
Speaker 1: a report from the analyst wing of a major bank,
Speaker 1: TD Cohen that revealed how Microsoft had drastically pulled back
Speaker 1: on its plans to build new data center capacity. At
Speaker 1: a bare minimum, Microsoft had canceled the equivalent of every
Speaker 1: data center in London or Tokyo at least, that the
Speaker 1: real figure is actually probably much much higher, and as
Speaker 1: I pointed out, that this is a real pale horse,
Speaker 1: a harbinger of bad times through generative AI and open
Speaker 1: AI especially, and an indicator that the bubble is imploding
Speaker 1: or popping or I really don't want to say it's popped,
Speaker 1: and I actually don't know if it's necessary to say
Speaker 1: when it does, it's never going to be one thing.
Speaker 1: I also mentioned that some may interpret this movie as
Speaker 1: a sponds to open AI's Stargate project, which aims to
Speaker 1: build hundreds of billions of dollars of data centers and
Speaker 1: power generation facilities in the US, all to power generator
Speaker 1: FAI apps and tools that I'm not sure actually there's
Speaker 1: really the demand for. But this begs the question how
Speaker 1: feasible is the Stargate project. Let's start with a bit
Speaker 1: of background. The Stargate project was officially announced that the
Speaker 1: very beginning of the Trump presidency. Is open AI tried
Speaker 1: to court favor from the notoriously transactional and praise hungry
Speaker 1: person of the United States of America, despite that the
Speaker 1: project has been in the works for some time and
Speaker 1: open AI had previously courted the Biden administration. Sam Allman's
Speaker 1: previous pitch to that administration late last year was that
Speaker 1: it was necessary to build a five gigaw what data center.
Speaker 1: We don't know how big Stargate will be, just that
Speaker 1: it will initially involve spending one hundred billion dollars due
Speaker 1: and I quote developed data centers for artificial intelligence in
Speaker 1: the US according to the information, with the project potentially
Speaker 1: scaling to five hundred billion dollars, a truly fucking, astoundingly
Speaker 1: stupid number. Stargate's first and only data center deal currently
Speaker 1: signed is in Abilene, Texas, and it's expected to be
Speaker 1: operational in mid twenty twenty six. Though these centers usually
Speaker 1: become operational in phases, this is especially likely to be
Speaker 1: the case here considering that, according to the information. Open
Speaker 1: Ai plans to have access to a gigawat of power
Speaker 1: on hundreds of thousands of GPUs. As part of this,
Speaker 1: the Stargate project will construct a three hundred and sixty
Speaker 1: point five megawatt natural gas power station. And as I
Speaker 1: said last episode, that one's about power. This power station is,
Speaker 1: as far as I can tell, still in the permitting phase.
Speaker 1: It'll be some time before Stargate breaks ground on the facility,
Speaker 1: let alone starts to actually generate power. Now, as for funding,
Speaker 1: things have got a little weird. Both open ai and
Speaker 1: soft Bank have committed to putting in either eighteen billion
Speaker 1: or nineteen million dollars each into the project. I've seen
Speaker 1: both numbers reported, by the way. Regardless, it's not that
Speaker 1: big a difference to worry about, especially with well the
Speaker 1: fact that open ai does not really have the money
Speaker 1: either way. What's a billion dollars when you don't have anything.
Speaker 1: The company is currently trying to raise forty billion dollars
Speaker 1: at a two hundred sixty billion dollar valuation, with the
Speaker 1: quote CNBC part of the funding expected to be used
Speaker 1: for open AI's commitment to Stargate. Now, I'm old enough
Speaker 1: to remember when this round was previously rumored to be
Speaker 1: valuing open Ai at three hundred and forty billion dollars
Speaker 1: and also at three hundred billion dollars, and soft Bank
Speaker 1: appears to be taking full responsibility for raising the round,
Speaker 1: including syndicating as much as ten billion dollars of the amount,
Speaker 1: which means that it would include a group of other investors. Nevertheless,
Speaker 1: it certainly seems SoftBank will provide the majority of the
Speaker 1: capital thirty billion dollars, with CNBC reporting that it will
Speaker 1: be paid out over the next twelve to twenty four months,
Speaker 1: with the first payment coming as soon as spring. Soft
Speaker 1: Bank also has another problem, and this one's this one.
Speaker 1: I think even the least technical of you can understand.
Speaker 1: They also appear to not have the money. They don't
Speaker 1: have the money. They not the money to give open Ai,
Speaker 1: not the money for Stargate. It's a little bit of
Speaker 1: worrying math issues with this. According to the Information, SoftBank
Speaker 1: CEO Masayoshi's Sun is planning to borrow sixteen billion dollars
Speaker 1: to invest in Ai, and may borrow another eight billion
Speaker 1: dollars next year. The following points, by the way, are
Speaker 1: drawn from the Information's reporting, and I give serious props
Speaker 1: to Duro Osawa and Corey Weinberg for their hard work here.
Speaker 1: I attack the information sometimes with some of the framing,
Speaker 1: but they actually do some of the best reporting in
Speaker 1: tech journalism. Now let's do some maths. Soft Bank currently
Speaker 1: only has thirty one billion dollars in cash and its
Speaker 1: balance sheet as of December twenty twenty four. It's net debt,
Speaker 1: which despite what you think, does not measure total debt,
Speaker 1: but rather represents its cash minus any debt liabilities, sounds
Speaker 1: at twenty nine billion dollars. They plan to use the
Speaker 1: loaning question to finance part of their investment in open Ai,
Speaker 1: and there are acquisition of chip design firm Ampere. According
Speaker 1: to SoftBank's reported assets, its holdings are worth about two
Speaker 1: hundred and nineteen billion dollars, so thirty three point sixty
Speaker 1: six trillion yen for those of you who deal with yen,
Speaker 1: including stock in companies like Alibaba and ARM. On a
Speaker 1: side note, not every company in soft Bank's portfolio is
Speaker 1: an arm or an Alibaba or like a good one.
Speaker 1: There are some real stinkers too, and I'm not just
Speaker 1: talking about the Morrobon carcass of we work. I recommend
Speaker 1: you look at and I'll link to the list in
Speaker 1: the episode of notes SoftBank's recent group report, which is
Speaker 1: linked in the spreadsheet. Like I just said, which is
Speaker 1: me reading a script out a little behind the curtain
Speaker 1: for you there. In particular, got to twenty nine in
Speaker 1: the report, which lists the ten largest publicly traded companies
Speaker 1: in soft Bank's Vision Fund portfolio. Now how all of them,
Speaker 1: without exception trade at a significant fraction of their peak market cap.
Speaker 1: In simpler terms, the ten biggest companies in soft Bank's
Speaker 1: flagship tech fund are worth far far less than their
Speaker 1: all time high, and in some cases with less than
Speaker 1: one fifth of their all time high. If soft Bank
Speaker 1: liquidated its assets, and I admit this is a big
Speaker 1: ear for most likely a worst case scenario situation, how
Speaker 1: big would their losses be? Separately, SoftBank has committed to
Speaker 1: a joint venture called SBO open Ai Japan and to
Speaker 1: spend three billion dollars a year on open Ai. Is
Speaker 1: take for the various companies across its group. We'll talk
Speaker 1: about that later, but there's some napkin mass. It is
Speaker 1: what soft Banks agreed to sixteen billion dollars sorry, eighteen
Speaker 1: billion dollars or nineteen billion dollars really do not know
Speaker 1: in funding for the Stargate Data Center project, three billion
Speaker 1: dollars a year in spend on open ai software, and
Speaker 1: as much as thirty billion dollars in funding for open
Speaker 1: Ai paid over twelve to twenty four months, according to
Speaker 1: the Information, and by the way, twenty five billion has
Speaker 1: also been reported. But the Information reports that open Ai
Speaker 1: has told investors that soft Bank will provide it at
Speaker 1: least thirty billion dollars of the forty billion dollars they need.
Speaker 1: Jesus fucking Christ. Can you imagine if this went It's
Speaker 1: something useful anyway, What I'm getting at is that soft
Speaker 1: Bank has effectively agreed to bankroll the entirety of open
Speaker 1: AI's future, signing up for over forty six billion dollars
Speaker 1: of investments over the next few years, and does not
Speaker 1: appear to be able to do so without selling its
Speaker 1: current holdings in valuable companies like arm or taking at
Speaker 1: least sixteen billion dollars of debt this year, representing a
Speaker 1: fifty five percent increase of its current liabilities. Work still,
Speaker 1: thanks to disagreement, open AI's future both in its ability
Speaker 1: to expand its infrastructure, which appears to be entirely contingent
Speaker 1: on the construction of Stargate with Microsoft pulling out, and
Speaker 1: its ability to raise funding, which is also entirely dependent
Speaker 1: on soft bank and soft Bank in this case, where
Speaker 1: open ai is entirely dependent on soft Bank to live,
Speaker 1: must borrow money to give to open Ai, a company
Speaker 1: that only only loses money. On top of that, open
Speaker 1: Ai also on the money losing front, anticipates it will
Speaker 1: burn as much as forty billion dollars a year by
Speaker 1: twenty twenty eight, and projects to only turn a profit
Speaker 1: by the end of the decade after the build out
Speaker 1: of Stargate, which I add is, like I said, almost
Speaker 1: entirely dependent on soft bank, which has to take on
Speaker 1: debt to fund both open Ai and the project required
Speaker 1: to theoretically make open ai profitable. How the fuck does
Speaker 1: this work? How does this work? How does this work?
Speaker 1: How does this work? How the fuck does this work?
Speaker 1: Open Ai, a company that spent nine billion dollars to
Speaker 1: lose five billion dollars in twenty twenty four, requires so
Speaker 1: much money to be its obligations, both to cover its stupid, ruinous, unprofitable,
Speaker 1: unsustainable operations and the eighteen billion to nineteen billion dollars.
Speaker 1: A committed to keep growing that it has to raise
Speaker 1: more money than any startup ever raised in history, forty
Speaker 1: billion fucking dollars, with the cast iron guarantee that it
Speaker 1: will need even more money within a year. Every goddamn month,
Speaker 1: Sam Wilton has to go to someone and say, my huge,
Speaker 1: beautiful company is so powerful, but it's weak and sick
Speaker 1: and frail. I need more money than you have today,
Speaker 1: and I'll need more money than you'll have tomorrow. My
Speaker 1: company is so sick and weak, but it's the most
Speaker 1: powerful company of all time. Sam flipping off pisces me off.
Speaker 1: Imagine if this money went literally anywhere else, you could
Speaker 1: set it on fire at least be fucking warm. Soft Bank.
Speaker 1: On top of the thirty billion dollars of funding and
Speaker 1: three billion dollars a year of revenue it's committed to,
Speaker 1: open ai itself also has to cough up eighteen billion
Speaker 1: dollars for Stargate, the data center project that open ai
Speaker 1: will run and get this. Soft Bank will take financial
Speaker 1: responsibility for forty eight billion dollars in cash three billion
Speaker 1: dollars in revenue. You the latter of which, like all
Speaker 1: open AI's offerings, will lose the company money. Open Ai
Speaker 1: has no path to profitability guaranteeing it will need more
Speaker 1: cash and right now at the time time, and it
Speaker 1: needs it more than it's ever needed it. Soft Bank,
Speaker 1: the only company willing to provide it and possibly the
Speaker 1: only company with the money to do so, has proven
Speaker 1: that it will have to go to greet possibly ruinous
Speaker 1: lengths to do so. If open ai needs forty billion
Speaker 1: dollars in twenty twenty five, how much will it need
Speaker 1: in twenty twenty six fifty billion, one hundred billion dollars.
Speaker 1: Where is that money going to come from? While soft
Speaker 1: Bank might be able to do this once, what happens
Speaker 1: when open ai needs money in six to twelve months.
Speaker 1: Soft Bank made about fifteen billion dollars a profit in
Speaker 1: the last year on about forty six billion dollars of revenue.
Speaker 1: Three billion dollars is an absolutely obscene amount to commit
Speaker 1: to buying open ai software annually, especially when some of
Speaker 1: it is allegedly for access to open AI's barely functional
Speaker 1: operator and mediocre deep research products. As per my previous
Speaker 1: podcasts and pieces, I do not see how open ai survives,
Speaker 1: and soft Bank's involvement only gives me further concern. While
Speaker 1: soft banker theoretically burn its current holdings to fund open
Speaker 1: Ai in perpetuity, its ability to do so is cast
Speaker 1: into doubt by them having to borrow money from other
Speaker 1: banks to get into this funding ground and to get
Speaker 1: Stargate done. Open Ai burned five billion dollars in twenty
Speaker 1: twenty four, a number it will likely double in twenty
Speaker 1: twenty five. And remember the information reported that open ai
Speaker 1: was projected to spend thirteen billion dollars on compute alone
Speaker 1: with Microsoft in twenty twenty five, and has no path
Speaker 1: to profitability. SoftBank has already had to borrow to fund
Speaker 1: this round, and the fact that it had to do
Speaker 1: so suggests its inability to continue supporting open Ai without
Speaker 1: accruing further debt. Open Ai. As a result of Microsoft's cuts,
Speaker 1: the data center capacity now only has one path expansion
Speaker 1: once it runs through whatever remaining buildout Microsoft has planned.
Speaker 1: That is, and that's Stargate, a project funded by open
Speaker 1: AI's contribution, which it's receiving from SoftBank and SoftBank which
Speaker 1: is also having to take out loans to meet its share.
Speaker 1: How does this work exactly? How does this continue? Do
Speaker 1: you see anyone else stepping up to fund this. Who
Speaker 1: else has got thirty to forty billion dollars to shit
Speaker 1: out every year? While the answer is Saudi Arabia. SoftBank's
Speaker 1: CEO Massioshi Son recently said that he had had and
Speaker 1: I quote not given Saudi ruler Muhammed bin Salmon in
Speaker 1: our return, adding that he still owed him. That's really
Speaker 1: not the ideal thing you want to say after naming MBS.
Speaker 1: Nothing about this suggests that Saudi money will follow soft
Speaker 1: banks in anywhere near the volume necessary. As to the
Speaker 1: m ratis. They're already involved through the MGX fund, and
Speaker 1: it's unclear how much more they'd be willing to commit. Really, really,
Speaker 1: are really, mate, buddy fellow? How does this? How does
Speaker 1: this work? In my opinion, this open Ai soft Bank
Speaker 1: deal is wildly unsustainable, dependent on soft Bank continuing to
Speaker 1: raise both debt and funnel money directly into a company
Speaker 1: that burns it burns it by the billions every year,
Speaker 1: and it's said to only burn more thanks to the
Speaker 1: arrival of its latest bullshit model. And if it had
Speaker 1: a huge breakthrough that would change everything. Wouldn't Microsoft want
Speaker 1: to make sure they were building the data center capacity
Speaker 1: to support him? Hey, maybe they're not. Now. Perhaps this
Speaker 1: crazy level of spending would be necessary if open ai
Speaker 1: was still the leader in generator of AI and it
Speaker 1: was still meaningfully improving its capabilities year after year or
Speaker 1: two year after two years. And I think we all
Speaker 1: know that that isn't the case. A few weeks ago,
Speaker 1: open ai launched GPT four point five, it's latest model
Speaker 1: that well, this isn't brilliant, sam Alman says, and I quote,
Speaker 1: is the first model that feels like talking to a
Speaker 1: thoughtful person, which, by the way, is really funny. It's
Speaker 1: really funny to say it, to be like, yeah, I
Speaker 1: have spent billions of dollars telling you that this bullshit
Speaker 1: is like a person, but this one really is. The
Speaker 1: other one's not so much. I did not think that
Speaker 1: in the past. And it's not obvious what GPT four
Speaker 1: point five does better, or even really what it does,
Speaker 1: other than Altman saying it is a different kind of
Speaker 1: intelligence and there's a magic to it that he has
Speaker 1: not felt before. Wow, wow, really really inspirational stuff. Sammy
Speaker 1: fucking idiot. This was, by the way, in Altman's words,
Speaker 1: the good news. The bad news was that and I
Speaker 1: quote GPT four point five is a giant expensive model,
Speaker 1: adding the open Ai was out of GPUs, but proudly
Speaker 1: declaring that it had added tens of thousands of GPUs
Speaker 1: in the week following and would roll out to open aiyes,
Speaker 1: twenty dollars a month plus here and that they would
Speaker 1: be adding hundreds of thousands of GPUs soon. Excited. Well,
Speaker 1: you shouldn't be on top of a vague product set
Speaker 1: and interterminately high compute cost. GPT four point five costs
Speaker 1: developers an incredible seventy five dollars put million input tokens
Speaker 1: in those are the prompts and data pushed into the model,
Speaker 1: and of absolutely astounding one hundred and fifty dollars per
Speaker 1: million output tokens. That's the output it creates. And that's
Speaker 1: roughly three thousand percent more for input tokens and fifteen
Speaker 1: hundred percent more expensive for output tokens than GPT four
Speaker 1: to zero For results that open Aiyes, andre J. Caapathy
Speaker 1: described as a little bit better and awesome, but also
Speaker 1: not exactly that are trivial to point to, and one
Speaker 1: developer described GPT four point five to our technica as
Speaker 1: a lemon when comparing its reported performance to its price.
Speaker 1: Arstentnaca also reported the GPT four point five was terrible
Speaker 1: for coding relatively speaking, and other tests showed that the
Speaker 1: model's performance was either slightly better or slightly worse across
Speaker 1: the board. With that according to Ours Technica, one success
Speaker 1: metric being the open ai found open human evaluators preferred
Speaker 1: GPT four point five's responses of a GPT four to
Speaker 1: zero in about fifty seven percent of interactions. Wow, that's
Speaker 1: very underwhelming. So, just to be crystal clear, the biggest
Speaker 1: AI company's latest model appears to be even more ruinously
Speaker 1: expensive than its last one, while providing modest at best
Speaker 1: improvements and performing worse than several benchmarks done competing models
Speaker 1: very good. Despite these piss poor results, Sam Wultman's reaction
Speaker 1: was to bring in hundreds of thousands of GPUs as
Speaker 1: a means of exposing as many as people as possible
Speaker 1: to his mediocre, ultra expensive model. And the best that
Speaker 1: Altman has to offer is that this is the first
Speaker 1: time people have been emailing with such passion asking open
Speaker 1: ai to promise to never stop offering a specific model.
Speaker 1: I am just going to say this. That is a tweet,
Speaker 1: and it never happened, or it happened like once. This
Speaker 1: is some girlfriend in Canada share Sam Altman is washed
Speaker 1: when all of this falls apart, Remember I said he
Speaker 1: was washed? Now, Remember how I talked about open AI's
Speaker 1: lack of meaningful improvement as a reminder, GPT four point
Speaker 1: five was meant to be GPT five, but, according to
Speaker 1: the Wall Street Journal, continually failed to make a model
Speaker 1: that advanced enough to justify the enormous cost, with a
Speaker 1: six month training run costing five hundred million dollars and
Speaker 1: GPT four point five requiring multiple runs of different sizes.
Speaker 1: So yeah, open ai spent hundreds of millions of dollars
Speaker 1: to make this great stuff. And I haven't even mentioned
Speaker 1: the company's supported agent products. And no, I'm not talking
Speaker 1: about Operator, which is also dogshit. By the way, open
Speaker 1: ai wants to create tiers of AI agents, with the
Speaker 1: cheapest costing two thousand dollars a month and capable of
Speaker 1: handling it administrative tasks, and the most expensive costing twenty
Speaker 1: thousand dollars in having PhD level, Look, I wrote the
Speaker 1: script right, and I'm gonna be honest. I can't even
Speaker 1: read that sentence with a straight face. Operator cannot even
Speaker 1: search trip Advisor properly. It can't even do a thing
Speaker 1: that let me google that for you does. And these
Speaker 1: chunder fucks want to charge two thousand dollars a month
Speaker 1: for an agent that does what does some sort of
Speaker 1: what's it dou?
Speaker 2: Oh?
Speaker 1: Twenty thousand dollars for something with PhD level capabilities. I
Speaker 1: think all the people with PhDs listen to this have
Speaker 1: just stood up and gone, I have an idea. And
Speaker 1: this is insane on many levels, not simply because the
Speaker 1: base product is undercut by actual human workers in many
Speaker 1: parts of the world, and even PhD students are typically
Speaker 1: I only paid twenty thousand to thirty thousand a year
Speaker 1: on average, and even people with actual doctorates in industries
Speaker 1: really earn twenty thousand dollars a month unless they're working
Speaker 1: in Silicon Valley occupying a C suite job. But forget
Speaker 1: all about that. What does it mean to have a
Speaker 1: PhD level agent? Remember? Other lambs are guessing machines. They
Speaker 1: don't know anything or even understand the concepts behind the
Speaker 1: words they spit onto a page. No, seriously, Sammy, what
Speaker 1: does it mean? I'm fucking waiting you damp Goblin you pissant. Ah,
Speaker 1: maybe I shouldn't just site here instarting him wanker. Anyway, This,
Speaker 1: by the way, is the company that is about to
Speaker 1: raise forty billion dollars led by a Japanese bank that
Speaker 1: has to go into debt to fund both their operations
Speaker 1: and the infrastructure necessary for them to grow any further. Again,
Speaker 1: as we started with, Microsoft is canceling plans to massively
Speaker 1: expand its data center capacity right at the time when
Speaker 1: open ai just released its most computationally demanding model. Ever,
Speaker 1: how do you reconcile those two things without concluding either
Speaker 1: that Microsoft expects GBT four point five to be a
Speaker 1: flop although it's simply unwilling to continue bankrolling open AI's
Speaker 1: continued growth, or perhaps it's having doubts about the future
Speaker 1: of generative AI in general. Hmm. Maybe now I have
Speaker 1: been and remain hesitant to call the bubble bursting, because
Speaker 1: bubbles do not burst, really, they certainly don't burst in
Speaker 1: neat little events. Nevertheless, my pale horses I've predicted in
Speaker 1: the past were led by one specific call that reduction
Speaker 1: and capital expenditures by a hyperscaler was a sign that
Speaker 1: things were collapsing. Microsoft walking away from over a gigawatt
Speaker 1: of data center plans equivalent to as much as fourteen
Speaker 1: percent of its current data center capacity, is a direct
Speaker 1: sign that it does not believe that growth is there
Speaker 1: in generative AI, and thus they are not building the
Speaker 1: infrastructure to support it, and indeed may have overbuilt something,
Speaker 1: as I've mentioned that Microsoft CEO Sachinidella has directly foreshadowed
Speaker 1: in his interview with Dwarkesh and otherwise extremely boring waste
Speaker 1: of an hour of your life. The entirety of the
Speaker 1: tech industry and the AI bubble has been built on
Speaker 1: the assumption that generative AI was the next big growth
Speaker 1: vehicle for tech, and if Microsoft, the largest purchaser of
Speaker 1: Nvidia GPUs in the most aggressive builder of AI infrastructure,
Speaker 1: is reducing capacity, it heavily suggests that the growth is
Speaker 1: not there. Microsoft has, by the looks of things, effectively
Speaker 1: given up on further data center expansion, at least at
Speaker 1: the breakneck pay suit runs promised, and that even suggests
Speaker 1: that generator if AI will be a thing in a
Speaker 1: few years, definitely not the scale it is right now.
Speaker 1: AI boosters will email me and they'll say there's something
Speaker 1: that I don't know that in fact, Microsoft has some
Speaker 1: greater strategy and some efficiency play. But answer me this,
Speaker 1: Why is Microsoft canceling over a giga? What of data
Speaker 1: set expansion? And again this is the most conservative estimate.
Speaker 1: The realistic number is much much higher. Do you think
Speaker 1: it's because it expects there to be this dramatic demand
Speaker 1: for the AI services? Do you think it's reducing supply
Speaker 1: because of all the demand? Now you might think that
Speaker 1: this is an efficiency play they're playing with deep SIG right, No, sorry,
Speaker 1: that doesn't matter. Even if deep CG was this magical
Speaker 1: efficiency play, which it may or may not be. I
Speaker 1: actually think it is more efficient, Like that's true, but
Speaker 1: we actually don't know if it's profitable. Even then, they've
Speaker 1: been talking about not having the capacity to deal with demand.
Speaker 1: They've been talking about how incredible this is. They've been
Speaker 1: talking about how big this is gonna be. This sounds
Speaker 1: like they don't think it's gonna big, gonna be big.
Speaker 1: Even it's gonna big, they're gonna get my ass in
Speaker 1: the comments on that one. Now, one might argue that
Speaker 1: Microsoft's reduction and capacity build out it's just the sign
Speaker 1: that open AI is moving its compute elsewhere. Maybe that's true.
Speaker 1: And if starguate ever gets built, which I question anyway,
Speaker 1: here are some questions to ask. Microsoft still sells access
Speaker 1: to open AI's API through asure. Does it not see
Speaker 1: the growth in that product? Do they not see it?
Speaker 1: They're not expanding? Is the growth not there? And Microsoft still,
Speaker 1: one would assume, makes money off of open AI's compute expenses,
Speaker 1: right or is that not the case due to the
Speaker 1: vast seventy five percent discount the open ai gets on
Speaker 1: using its services. I have been told that it's very
Speaker 1: close to the wire by sources, but I can't say it.
Speaker 1: But you'd have to just look at the fact that
Speaker 1: they do actually do that was reported by the information.
Speaker 1: Look look what that Microsoft making. So which a material
Speaker 1: pullback on data center expansions suggests that the growth in
Speaker 1: generative AI products, both those run on Microsoft servers and
Speaker 1: those sold as part of Microsoft's products, do not have
Speaker 1: the revolutionary growth trajectory that both CFO Amhood and CEO
Speaker 1: of sach Inadella have been claiming. And this is all
Speaker 1: deeply concerning, while also calling into consideration the viability of
Speaker 1: generative AI as a growth vehicle for any hyperscaler. If
Speaker 1: I am correct, Microsoft is walking away not just from
Speaker 1: expansion of its current data center operations, but from generative AI,
Speaker 1: writ large. I actually believe it will continue selling this unprofitable,
Speaker 1: unsustainable software because the capacity it has right now is
Speaker 1: more than sufficient to deal with the incredible lack of demand.
Speaker 1: It's time for investors in the general public to begin
Speaker 1: demanding tangible, direct numbers on the revenue and profits related
Speaker 1: to GENERATIVEAI, as it is becoming increasingly obvious that the
Speaker 1: revenues are small and the profits are non existent. A
Speaker 1: gigawatt of capacity is huge, and walking away from that
Speaker 1: much capacity is a direct signal that Microsoft's long term
Speaker 1: plans do not include needing a great deal of compute.
Speaker 1: One counter could be that it's waiting for more of
Speaker 1: the specialized nvideo GPUs to arrive, to which the response
Speaker 1: is Microsoft still wants to build the capacity, so it
Speaker 1: has somewhere to fucking put them again, These facilities take
Speaker 1: anywhere between three and six years to build. Do you
Speaker 1: really think black will be so delayed that they won't
Speaker 1: arrive until what twenty twenty eight? Ways, what are you
Speaker 1: talking about? From even alive then? Anyway, One counter could
Speaker 1: be that there isn't the power necessary to power these
Speaker 1: data centers, and if that's the case, it isn't but
Speaker 1: let me human the idea.
Speaker 2: Then.
Speaker 1: The suggestion is that Microsoft is currently changing its entire
Speaker 1: data center's strategy so significantly they now has to issue
Speaker 1: over a giga what's worth of statements of intent across
Speaker 1: the country to different places because of more power. There's
Speaker 1: more power in those places, less than did they make
Speaker 1: like a giga what worth of mistakes? Now? Okay. Another
Speaker 1: counter is that I'm only talking about leases and not purchases.
Speaker 1: In that case, I'll refer you to this article from CBRE,
Speaker 1: which is linked in the spreadsheet for this episode, and
Speaker 1: which includes a looser dating read on how hyperscalers actually
Speaker 1: invest in data center infrastructure. Leases tend to account for
Speaker 1: the majority of spending simply because it's less risky. A
Speaker 1: specialist takes care of the tough stuff location buying, land handling, construction,
Speaker 1: and the hyperscaler isn't left trying to figure out what
Speaker 1: to do with the facility when it reaches the end
Speaker 1: of it's the useful life cycle. I also expect someone
Speaker 1: to chime in and say well, that's this Microsoft, What
Speaker 1: about Google and Amazon? Get out of my house. I'd
Speaker 1: counter and say that these companies are comparatively less exposed
Speaker 1: to general IFAI. Amazon has invested eight billion dollars in Anthropic,
Speaker 1: which is a bit less than half of what Microsoft
Speaker 1: is reportedly invested in open Ai, which amounted to about
Speaker 1: fourteen billion dollars as of December. When you consider the
Speaker 1: discounted asure rates Microsoft offers to open ai too, the
Speaker 1: real number is probably my much much higher. Google also
Speaker 1: has three billion dollars in Anthropic, in addition to its
Speaker 1: own AI services like Gemini. Open Ai, as I noted
Speaker 1: in my last newsletter, is pretty much the only real
Speaker 1: generative AI company with market share and significant revenue, although
Speaker 1: I once again remind you that revenue is not the
Speaker 1: same thing as profim and this is true across mobile
Speaker 1: web and likely it's APIs two. Similarly, nobody has quite
Speaker 1: pushed generative AI as aggressively as Microsoft, which has introduced
Speaker 1: it to an overwhelming number of its paid products, hiking
Speaker 1: prices for customers as it goes. I suppose you could
Speaker 1: say that Google has pushed GENII into its workspace products
Speaker 1: as well as its sarch products, but the scale and
Speaker 1: aggression of Microsoft's push feels different that, and as I've
Speaker 1: mentioned repeatedly, they are the largest purchaser of Nvidia GPUs
Speaker 1: by nearly twice as many four hundred and eighty five
Speaker 1: thousand as its nearest competitor to Meta, which brought two
Speaker 1: hundred and twenty four thousand in twenty twenty four. Ultimately,
Speaker 1: Microsoft has positioned itself at the heart of generative AI,
Speaker 1: both through its own strategic product decisions and its partnership
Speaker 1: with open AI. And the fact that it's now scaling
Speaker 1: back on the investment required to maintain that momentum is
Speaker 1: I believe pretty significant. I also recognize that all of
Speaker 1: this is a big juicy steake for someone some people
Speaker 1: call a pig or an animal or a monster or
Speaker 1: an AI cynic. Look, I've pulled over this data repeatedly
Speaker 1: and done all that I can to find less convenient
Speaker 1: or satisfying conclusions. Let us off intent and likely the
Speaker 1: weakest part of my argument. These are serious documents, by
Speaker 1: the way, but they're not always legally binding. Neither are
Speaker 1: those statements of qualifications. But as Tdcoen pointed out, sqqs
Speaker 1: are generally treated as the green lights stop working on
Speaker 1: construction even though a formal lease agreement hasn't yet been signed,
Speaker 1: and to be clear, Microsoft let an interminate amount of
Speaker 1: sqqs go. Nevertheless, it's incredibly significant that Microsoft is letting
Speaker 1: so many the equivalent of as much as fourteen percent
Speaker 1: of its current data set of capacity at a bare minimum.
Speaker 1: On top of the couple hundred so at least two
Speaker 1: hundred megabats of data center leases become canceled. I do
Speaker 1: not know why nobody else has done this analysis. I've
Speaker 1: now read every single piece about the td co and
Speaker 1: report from every single outlet the covenant. I've read some
Speaker 1: weird seo stuff. It's it's not good, and I'm under
Speaker 1: I'm just kind of astounded by the lack of curiosity
Speaker 1: as to what one GW plus means and the report
Speaker 1: the meaningfully moved markets, as I'm equally astonished by the
Speaker 1: lack of curiosity to contextualize most tech news. It's as
Speaker 1: if nobody wants to think about this too hard, like
Speaker 1: nobody wants to stop the pie. Nobody wants to accept
Speaker 1: what's being staring us in the face since last year,
Speaker 1: if not earlier, and we're given the most egregious, glaring evidence.
Speaker 1: People still must find ways to dismiss it or ignore
Speaker 1: it rather than give it the energy it deserves. Far
Speaker 1: more resources were dedicated to finding ways to gussy up
Speaker 1: the releases of anthropics claudes on at three point seven
Speaker 1: or open ais GPT four point five. And we're given
Speaker 1: the report from an Investment Banks research wings that the
Speaker 1: largest spender and generityve Ai, the largest backer for now
Speaker 1: of open ai at least, is massively reducing its expenditures
Speaker 1: in data centers required for the industry and for open Ai,
Speaker 1: a company of stems worth one hundred and fifty seven billion
Speaker 1: dollars to expand. Microsoft's stake in open Ai is a
Speaker 1: bit fuzzy, is open Ai doesn't issue traditional equity, and
Speaker 1: there's a likelihood it may be diluted as more money
Speaker 1: comes in. It reportedly owned forty nine percent in twenty
Speaker 1: twenty three, though assuming that's still the case, are we
Speaker 1: to believe that Microsoft is willing to strangle and that's
Speaker 1: it worth at least seventy five billion dollars several times
Speaker 1: more than its investment today by canceling a few leases.
Speaker 1: How many more alarms do we need to go off
Speaker 1: before people recognize that something bad is happening. Why is
Speaker 1: that tangible, meaningful evidence that we're in a bubble and
Speaker 1: possibly a sign that it might be popping less interesting
Speaker 1: than the fact that Claudes on it three point seven
Speaker 1: can think longer. And if you're listening to this and
Speaker 1: you think I'm talking about you, I fucking am. I
Speaker 1: am sick of this shit. I am absolutely sick of
Speaker 1: this shit. I'm sick of reading articles like that when
Speaker 1: far more important and scary and damning things are happening,
Speaker 1: things that actually matter. I don't care if Warrio Ama
Speaker 1: Day has allowed you to make it compute for longer.
Speaker 1: It doesn't are compared to this. It does not matter
Speaker 1: compared to a gig or what or more of capacity going.
Speaker 1: And I'm sick of this. I'm sick of me having
Speaker 1: to be the guy. Sometimes. I do not say these
Speaker 1: things to be right. I don't want to be a
Speaker 1: cynic or a hater. I say this all because I
Speaker 1: am trying to understand what's going on, and if I
Speaker 1: do not, I will actually go insane. Every time I
Speaker 1: sit down to write my newsletter or record this podcast,
Speaker 1: I'm doing it because I'm trying to understand what's happening
Speaker 1: and how I feel about it, And these are the
Speaker 1: only terms to dictate my creativity. It just happens that
Speaker 1: I've stared at the tech industry for too long and
Speaker 1: now I can't look away. Perhaps it's driving me mad,
Speaker 1: or maybe I'm getting smarter, or maybe it's an arm
Speaker 1: or palmer of the two. But what comes out of
Speaker 1: my work is not driven by wanting to go viral
Speaker 1: or having a hot take, or be a renowned skeptic,
Speaker 1: or being right or being anything, because such things suggest
Speaker 1: that I would do this differently if three people listened
Speaker 1: versus actually can't say the amount of people that do.
Speaker 1: I have rules, but fifty seven thousand people subscribe to
Speaker 1: my newsletter extra. From there, I would do the same
Speaker 1: goddamn thing. And in fact, if you look back in
Speaker 1: my work, I've done the same thing from the beginning. Now,
Speaker 1: I'm not saying that Microsoft is dying or making any
Speaker 1: grandiose claims about what happens next. What I am describing, however,
Speaker 1: is the material contraction of the largest investor in data centers,
Speaker 1: according to TD Cohen, potentially at a scale that suggests
Speaker 1: the Microsoft has meaningfully reduced its interest in further expansion
Speaker 1: of data centers. Writ large, this is a deeply concerning move,
Speaker 1: one that suggests that Microsoft does not see demands sustain
Speaker 1: the current expansions, which has greater ramifications beyond generative AI,
Speaker 1: because it suggests that there isn't any other reason for
Speaker 1: it to expand the means of delivering software. What has
Speaker 1: sat in Adella scene? What is Microsoft cfo amy Hood doing?
Speaker 1: What is the plan here? And really what's the plan
Speaker 1: with open Ai? SoftBank has committed over forty billion dollars
Speaker 1: of cost that it currently cannot afford, taking on as
Speaker 1: much as twenty four billion dollars in debt in the
Speaker 1: next year to help sustain one more funding round and
Speaker 1: the construction of data centers. Open Ai, a company that
Speaker 1: loses money on literally every single customer. To survive, open
Speaker 1: Ai must continue raising more money than any startup has
Speaker 1: ever raised before, and they are only able to do
Speaker 1: so from SoftBank, which in turn must take on debt.
Speaker 1: Open Ai burned five billion dollars in twenty twenty four
Speaker 1: and more likely burn eleven billion dollars or more in
Speaker 1: twenty twenty five, and will continue burning money in perpetuity
Speaker 1: and to scale further will require funding for a data
Speaker 1: center project funded partially by a funding from a company
Speaker 1: that's taken on debt to fund them. And when you
Speaker 1: put this all together, all I can see is calamity.
Speaker 1: Generative AI does not have meaningful mass market use cases,
Speaker 1: and while chat GPT may have four hundred million weekly
Speaker 1: active users, there doesn't appear to be meaningful consumer adoption
Speaker 1: outside of chat GPT, mostly because almost all AI media
Speaker 1: coverage inevitably ends up marketing one company Open AI. Argue
Speaker 1: with me all you want about your personal experiences with
Speaker 1: chat GPT or how you personally found it useful. I
Speaker 1: don't care. I stopped listening a while ago. Your points
Speaker 1: never prove anything that doesn't make it a product with
Speaker 1: mass market utility or enterprise utility, or worth the vast
Speaker 1: sums of money being plowed into it. Worse still, that
Speaker 1: doesn't appear to be any meaningful revenue. As discussed in
Speaker 1: my last episode, Microsoft claims thirteen billion dollars in annual
Speaker 1: recurring revenue not profit on all AI products combined on
Speaker 1: over two hundred billion dollars of capital expenditures since twenty
Speaker 1: twenty three, and no other hyperscaler is willing to break
Speaker 1: out any AI revenue at all. Not Amazon, no matter,
Speaker 1: not Google, Nobody does that. Not worry anyone. Is anyone
Speaker 1: listening to this who actually deals with the economy? Can
Speaker 1: you please listen to me? So we don't Actually I
Speaker 1: don't know what we do. I actually don't know. I
Speaker 1: have no idea. Where's the growth? Where's the money? Where's
Speaker 1: the money? Sammy? Where is it? Where's my money? Honey,
Speaker 1: give me the money, Sam Mormon? Where's my money? Why
Speaker 1: is Microsoft canceling a gigawat of data center capacity while
Speaker 1: telling everybody that it didn't have enough data centers to
Speaker 1: handle demands for its AI products. I suppose this is
Speaker 1: one way of looking at it. Microsoft may currently have
Speaker 1: a capacity issue, but soon one, meaning that further expansion
Speaker 1: is unnecessary. And that's the case, It'll be interesting to
Speaker 1: see whether their peers follow suit either way. Look, I
Speaker 1: see nothing that suggests that there's future growth in general
Speaker 1: of AI. In fact, I think it's time for everybody
Speaker 1: to seriously consider the big tech burn billions of dollars
Speaker 1: on something that nobody ever wanted or would pay for.
Speaker 1: If you listen to this and scoff, I don't know
Speaker 1: what should I have talked about anthropic adding a sliding
Speaker 1: thinking bar to a model GPT four point five. Who
Speaker 1: gives a shit? Can you even tell me what it
Speaker 1: does differently to GPT four to zero? Can you explain
Speaker 1: to me why it matters? Or are you more interested
Speaker 1: in nakedly captured imbeciles like Ethan Mollock sweatly oinking about
Speaker 1: how powerful the latest ask and shit. It's like no
Speaker 1: one's interested in the things happening in the real world.
Speaker 1: It's like nobody's thinking about the silicon and the infrastructure
Speaker 1: and how things actually get built. Wake the fuck up, everybody.
Speaker 1: Things are on fire. Thank you for listening to Better Offline.
Speaker 1: The editor and composer of the Better Offline theme song
Speaker 1: is Matasowski. You can check out more of his music
Speaker 1: and audio projects at Matasowski dot com, M A T
Speaker 1: T O S O W s ki dot com. You
Speaker 1: can email me at easy at better offline dot com,
Speaker 1: or visit better Offline dot com to find more podcast
Speaker 1: links and of course, my newsletter. I also really recommend
Speaker 1: you go to chat dot Where's youreaed dot at to
Speaker 1: visit the discord and go to our slash Better Offline
Speaker 1: to check out our reddit. Thank you so much for listening.
Speaker 2: Better Offline is a production of cool Zone Media. For
Speaker 2: more from cool Zone Media, visit our website cool zonemedia
Speaker 2: dot com, or check us out on the iHeartRadio app,
Speaker 2: Apple Podcasts, or wherever you get your podcasts.
Speaker 1: F