As media.

As media.

Hello you, it's better offline. I'm your host ed Zeitron. Now, I've talked about the pay all horses of the AI apocalypse in the past, and these are the events that signify that the general VAI era is coming to an end. And the subject to this episode and its second part, well, I believe represents the biggest paylest horses of the entire flock. So on February twenty first analyst TD Cohen revealed that Microsoft had canceled leases and I quote totaling a couple hundred megawatts with at least two private data center operators across multiple US markets canceled. The report also detailed how Microsoft pulled back on converting negotiated and signed statements of qualifications sqq's, which are added was precursors to a data center lease, so effectively the first step before you really agreed to something, well the last step, I guess. Although the analyst, which is part of the TD Bank company, added it was unclear whether Microsoft might convert these sqqs in the future. These generally close close to one hundred percent of the time. According to them, canceling these was effectively rather unusual. Now TD Cohen also added that Microsoft was reallocating a considerable portion of its projected international spend to the US, which suggests to DD Cohen that there was a material slow down in international leasing for Microsoft, But one crucial, teeny tiny part of the report was missed by just about everybody. I'm going to read directly from the report, and you'll probably be able to tell from the tone of my voice which the most pertinent part is. Ah. As we highlighted in our recent takeaway from PTC, the Pacific Telecommunications Council Conference, we learned via our channel checks that Microsoft one walked away from multiple one hundred plus make what deals in multiple markets that were in early to mid stages and negotiations to let one gigawatt of loys on larger footoprint sites expire, and three walked away from at least five land parcels that it had under contract in multiple Tier one markets. What TD Cohen is saying is not just that Microsoft canceled some data centers, but the Microsoft also effectively canceled over a gigawatt of data center operations on top of the previously reported multiple one hundred plus what megawat deals. If we add in the land under contract, which is indeterminate. Based on what tdcens has said and the deals that were in flight, the total capacity likely amounts to even more than a gigawat. For some context, data sent to Dynamics reported that Microsoft had five gigawats of data center capacity in April twenty twenty four, saying that Microsoft had also planned to add one gigawat of capacity by the October twenty twenty four and another one and a half gigawats of capacity by the first half of twenty twenty five. Based on this reporting, one can estimate the Microsoft as somewhere between six and seven and a half gigawatts of capacity at this time. As a result, based on td Cohen's analyst analysis, even Microsoft has thro recombination of canceled leases, pullbacks and statements of qualifications, cancelations of land parcels, and deliberate expiration of letters of intent. That's those lois. They've effectively abandoned data center expansion equivalent to over fourteen percent of their current capacity. It's completely bloody insane, and this story just kind of sat there. It kind of not the market's confidence. But I don't know, I'm a lot more worried about this than I think people are. And really I don't like telling people how to feel, but this kind of worries me. Okay, now I've thrown a lot of new terminology at you. But before we move on, let's explain some terms, because they're essential to understanding why this is all such a big deal. First of all, letter of intent or LOI in this context is a statement that an entity intends to lease or buy land or power from a data center. These can be binding on non binding. A letter of intent is serious, though, and walking away from one is not something you do idly. It's not like not answering an email. Now we'll go on to SQQS statements of qualifications. These set the terms and conditions of a lease. While they do not themselves constitutally, they convert into sign leases, as I mentioned, at an almost one hundred percent rate according to TD Cohen, and are generally used as a signal to the landowner to start construction. Basically, they're the green light before the green lane. As for Tier one markets, these are markets for hyperscale growth, helped by favorable conditions like power, land and cabling. From what I can tell, there's no fixed list of which cities are Tier one in which aren't, but they include obvious candidates like London, Singapore, as well as Northern Virginia, which is the largest tube of data centers in the world. Finally, we're talking power, megawatt and gigawe. This one is really important, but it's also really confusing. Data center capacity is measured not by the amount of computations the facility can handle, but rather by power capacity, and that makes sense because power capacity is directly linked to the capabilities of the facility, with more power capacity allowing for more servers or more power hungry chips, of course, and because chips themselves are constantly getting faster and more power efficient. Power makes a little more sense. If you mentioned in terms of computations per second, you'd likely have a number that fluck you as hardware as upgraded and decommissioned. When you hear megawat or gigawatt in this episode, assume that we're talking about capacity and not power generation unless I say otherwise. Now, with that out of the way, let's talk more about this report.

Hello you, it's better offline. I'm your host ed Zeitron. Now, I've talked about the pay all horses of the AI apocalypse in the past, and these are the events that signify that the general VAI era is coming to an end. And the subject to this episode and its second part, well, I believe represents the biggest paylest horses of the entire flock. So on February twenty first analyst TD Cohen revealed that Microsoft had canceled leases and I quote totaling a couple hundred megawatts with at least two private data center operators across multiple US markets canceled. The report also detailed how Microsoft pulled back on converting negotiated and signed statements of qualifications sqq's, which are added was precursors to a data center lease, so effectively the first step before you really agreed to something, well the last step, I guess. Although the analyst, which is part of the TD Bank company, added it was unclear whether Microsoft might convert these sqqs in the future. These generally close close to one hundred percent of the time. According to them, canceling these was effectively rather unusual. Now TD Cohen also added that Microsoft was reallocating a considerable portion of its projected international spend to the US, which suggests to DD Cohen that there was a material slow down in international leasing for Microsoft, But one crucial, teeny tiny part of the report was missed by just about everybody. I'm going to read directly from the report, and you'll probably be able to tell from the tone of my voice which the most pertinent part is. Ah. As we highlighted in our recent takeaway from PTC, the Pacific Telecommunications Council Conference, we learned via our channel checks that Microsoft one walked away from multiple one hundred plus make what deals in multiple markets that were in early to mid stages and negotiations to let one gigawatt of loys on larger footoprint sites expire, and three walked away from at least five land parcels that it had under contract in multiple Tier one markets. What TD Cohen is saying is not just that Microsoft canceled some data centers, but the Microsoft also effectively canceled over a gigawatt of data center operations on top of the previously reported multiple one hundred plus what megawat deals. If we add in the land under contract, which is indeterminate. Based on what tdcens has said and the deals that were in flight, the total capacity likely amounts to even more than a gigawat. For some context, data sent to Dynamics reported that Microsoft had five gigawats of data center capacity in April twenty twenty four, saying that Microsoft had also planned to add one gigawat of capacity by the October twenty twenty four and another one and a half gigawats of capacity by the first half of twenty twenty five. Based on this reporting, one can estimate the Microsoft as somewhere between six and seven and a half gigawatts of capacity at this time. As a result, based on td Cohen's analyst analysis, even Microsoft has thro recombination of canceled leases, pullbacks and statements of qualifications, cancelations of land parcels, and deliberate expiration of letters of intent. That's those lois. They've effectively abandoned data center expansion equivalent to over fourteen percent of their current capacity. It's completely bloody insane, and this story just kind of sat there. It kind of not the market's confidence. But I don't know, I'm a lot more worried about this than I think people are. And really I don't like telling people how to feel, but this kind of worries me. Okay, now I've thrown a lot of new terminology at you. But before we move on, let's explain some terms, because they're essential to understanding why this is all such a big deal. First of all, letter of intent or LOI in this context is a statement that an entity intends to lease or buy land or power from a data center. These can be binding on non binding. A letter of intent is serious, though, and walking away from one is not something you do idly. It's not like not answering an email. Now we'll go on to SQQS statements of qualifications. These set the terms and conditions of a lease. While they do not themselves constitutally, they convert into sign leases, as I mentioned, at an almost one hundred percent rate according to TD Cohen, and are generally used as a signal to the landowner to start construction. Basically, they're the green light before the green lane. As for Tier one markets, these are markets for hyperscale growth, helped by favorable conditions like power, land and cabling. From what I can tell, there's no fixed list of which cities are Tier one in which aren't, but they include obvious candidates like London, Singapore, as well as Northern Virginia, which is the largest tube of data centers in the world. Finally, we're talking power, megawatt and gigawe. This one is really important, but it's also really confusing. Data center capacity is measured not by the amount of computations the facility can handle, but rather by power capacity, and that makes sense because power capacity is directly linked to the capabilities of the facility, with more power capacity allowing for more servers or more power hungry chips, of course, and because chips themselves are constantly getting faster and more power efficient. Power makes a little more sense. If you mentioned in terms of computations per second, you'd likely have a number that fluck you as hardware as upgraded and decommissioned. When you hear megawat or gigawatt in this episode, assume that we're talking about capacity and not power generation unless I say otherwise. Now, with that out of the way, let's talk more about this report.

Now.

Now.

The numbers in the TD Cohen Report, which I'll link in the episode spreadsheet, of course, heavily suggest that Microsoft, the biggest purchaser of Nvidio GPUs and, according to Ted Cohen and I quote, the most active data center LESE of capacity in twenty twenty three and the first half of twenty twenty four, does not believe that there's future growth in generative AI, nor does it have faith in, nor does it want responsibility for the future of open AI. Data center buildouts take three to six years to complete, and the largest hyperscalar facilities can easily cost several billion dollars, meaning that these moves are extremely forward looking. You don't just build a data center for the demand GI now, but for the demand you expect further down the line. This suggests that Microsoft believes its current infrastructure and its likely scaled back plans for expansion will be sufficient for a movement that Sachynadella once called a golden age for systems. He did that less than a year ago. To quote TD Cohen again, the magnitude of both potential data center capacity Microsoft walked away from the decision to pull back on land acquisition, which supports core long term capacity growth, in our view, indicates the loss of a major demand signal that Microsoft was originally responding to, and that we believe the shift is in their appetite for capacity is tied to open AI. To explain here, TD Cowen is effectively saying that Microsoft is responding to a major demand signal, and said major demand signal is saying you do not need more data centers. Said demand signal that Microsoft was responding to, in TD Cohen's words, is its appetite for capacity to provide servers to open AI. And it seems that said appetite is waning and Microsoft no longer wants to build out data centers for America's most swagged out AI guy. Now, I say that kind of as a joke, and I do think that he's more swagged out than Mark Zuckerberg. Mark Zuckerberg's trying too hard. However, Sam Moltman is more damp than Mark Zuckerberg, so ultimately Zuckerberg wins. Now, I want to make it clear that Microsoft is effectively cutting its data center expansion by over a gigawatt of capacity, if not more, and it's impossible to reconcile these cuts with the expectation that generative AI will be this massive, transformative technological phenomenon. I believe that the reason that Microsoft is coming back is that it does not have the appetite to provide further data center expansion for open Ai, and it's having doubts about the future of generative AI as a whole. If Microsoft believed that there was a massive opportunity in supporting open AI's further growth, or that it had massive demand for generative AI services, there'd be no reason to cancel capacity, let alone cats or such a significant amount. These moves also suggest that Microsoft is walking away from building and training further large frontier models like chat GPT's GPT four point five now and from supporting doing so for others. Remember, Microsoft has significantly more insight into the current health and growth of GENERATIVEAI than any other company. Remember they have full access to all of open AI's tech, probably the future stuff too, not that there's much they know. All their research too, Microsoft knows something we don't. As open AI's largest backer and infrastructural partner and the owners of the server architecture where they train them ultra expensive models, not to mention, the largest shareholder in OpenAI, Microsoft can see exactly what is or isn't coming down the pike on top of having a view into both the sales of its own GENERATIVEAI powered software such as Microsoft three sixty five copiler, and sales of both model services and cloud compute for other models run on Microsoft A zero, which is their cloud platform in plain English, Microsoft, which arguably has more data than anybody else about the health of the generative AI industry and its potential for growth, has decided that it needs to dramatically slow down its expansion.

The numbers in the TD Cohen Report, which I'll link in the episode spreadsheet, of course, heavily suggest that Microsoft, the biggest purchaser of Nvidio GPUs and, according to Ted Cohen and I quote, the most active data center LESE of capacity in twenty twenty three and the first half of twenty twenty four, does not believe that there's future growth in generative AI, nor does it have faith in, nor does it want responsibility for the future of open AI. Data center buildouts take three to six years to complete, and the largest hyperscalar facilities can easily cost several billion dollars, meaning that these moves are extremely forward looking. You don't just build a data center for the demand GI now, but for the demand you expect further down the line. This suggests that Microsoft believes its current infrastructure and its likely scaled back plans for expansion will be sufficient for a movement that Sachynadella once called a golden age for systems. He did that less than a year ago. To quote TD Cohen again, the magnitude of both potential data center capacity Microsoft walked away from the decision to pull back on land acquisition, which supports core long term capacity growth, in our view, indicates the loss of a major demand signal that Microsoft was originally responding to, and that we believe the shift is in their appetite for capacity is tied to open AI. To explain here, TD Cowen is effectively saying that Microsoft is responding to a major demand signal, and said major demand signal is saying you do not need more data centers. Said demand signal that Microsoft was responding to, in TD Cohen's words, is its appetite for capacity to provide servers to open AI. And it seems that said appetite is waning and Microsoft no longer wants to build out data centers for America's most swagged out AI guy. Now, I say that kind of as a joke, and I do think that he's more swagged out than Mark Zuckerberg. Mark Zuckerberg's trying too hard. However, Sam Moltman is more damp than Mark Zuckerberg, so ultimately Zuckerberg wins. Now, I want to make it clear that Microsoft is effectively cutting its data center expansion by over a gigawatt of capacity, if not more, and it's impossible to reconcile these cuts with the expectation that generative AI will be this massive, transformative technological phenomenon. I believe that the reason that Microsoft is coming back is that it does not have the appetite to provide further data center expansion for open Ai, and it's having doubts about the future of generative AI as a whole. If Microsoft believed that there was a massive opportunity in supporting open AI's further growth, or that it had massive demand for generative AI services, there'd be no reason to cancel capacity, let alone cats or such a significant amount. These moves also suggest that Microsoft is walking away from building and training further large frontier models like chat GPT's GPT four point five now and from supporting doing so for others. Remember, Microsoft has significantly more insight into the current health and growth of GENERATIVEAI than any other company. Remember they have full access to all of open AI's tech, probably the future stuff too, not that there's much they know. All their research too, Microsoft knows something we don't. As open AI's largest backer and infrastructural partner and the owners of the server architecture where they train them ultra expensive models, not to mention, the largest shareholder in OpenAI, Microsoft can see exactly what is or isn't coming down the pike on top of having a view into both the sales of its own GENERATIVEAI powered software such as Microsoft three sixty five copiler, and sales of both model services and cloud compute for other models run on Microsoft A zero, which is their cloud platform in plain English, Microsoft, which arguably has more data than anybody else about the health of the generative AI industry and its potential for growth, has decided that it needs to dramatically slow down its expansion.

Now.

Now.

To be clear, this expansion, I really am hammering this home a lot, but I need you to understand this is absolutely necessary for generative AI to continue evolving expanding, even if it only does so in ways that kind of do the same thing again and again. Now, before we move on, I want to make it clear that I'm not saying that Microsoft has stopped building data centers. I've said it a few times, but these projects take years three to six years to complete and are far far in advance with their planning, and Microsoft does have a few big projects in the works. One plan three hundred and twenty four megawatt Microsoft Data center in Atlanta is expected to cost one zero point eight billion dollars and as far as I know, this deal is still in flight, however, and this was cited separately by TD Cohen. Microsoft has recently paused construction on parts of its three point three billion dollar data center campus in Mount Pleasant, Wisconsin. While Microsoft had tried to reassure locals that the first phase of the project was on course to be complete on time, its justification of delaying the rest of it was well not brilliant, and it was to give Microsoft an opportunity to evaluate and I quote the project's scope and recent changes in technology, and consider how this might impact the design of its facilities. Oh, bob, oh, buddy, that's not good. You don't want it. No. One evaluates the scope and then goes, oh, actually the scope is great. I love it. Nor do they think about impacts and go oh, let's do more. No, no, no, anyway, the same registered article I'm citing here adds that and I quote the review process may include the need to negotiate some building permits, potentially placing another hurdle in the way of the project. The register did add that Microsoft said it expected to complete one hyperscaler data center in Mount Pleasant as originally planned, though its capacity wasn't available. Arguably, Microsoft would expand its data center infrastructure. Anyway, as more stuff moves to the cloud and our dependence grows on it, Microsoft and other providers need to build capacity. The organic growth is natural and sadly inevitable. However, Microsoft's plans for data center expansion were far far in excess of that natural growth, and perhaps we're seeing a pullback from those stated extravagances into something perhaps a little more reasonable.

To be clear, this expansion, I really am hammering this home a lot, but I need you to understand this is absolutely necessary for generative AI to continue evolving expanding, even if it only does so in ways that kind of do the same thing again and again. Now, before we move on, I want to make it clear that I'm not saying that Microsoft has stopped building data centers. I've said it a few times, but these projects take years three to six years to complete and are far far in advance with their planning, and Microsoft does have a few big projects in the works. One plan three hundred and twenty four megawatt Microsoft Data center in Atlanta is expected to cost one zero point eight billion dollars and as far as I know, this deal is still in flight, however, and this was cited separately by TD Cohen. Microsoft has recently paused construction on parts of its three point three billion dollar data center campus in Mount Pleasant, Wisconsin. While Microsoft had tried to reassure locals that the first phase of the project was on course to be complete on time, its justification of delaying the rest of it was well not brilliant, and it was to give Microsoft an opportunity to evaluate and I quote the project's scope and recent changes in technology, and consider how this might impact the design of its facilities. Oh, bob, oh, buddy, that's not good. You don't want it. No. One evaluates the scope and then goes, oh, actually the scope is great. I love it. Nor do they think about impacts and go oh, let's do more. No, no, no, anyway, the same registered article I'm citing here adds that and I quote the review process may include the need to negotiate some building permits, potentially placing another hurdle in the way of the project. The register did add that Microsoft said it expected to complete one hyperscaler data center in Mount Pleasant as originally planned, though its capacity wasn't available. Arguably, Microsoft would expand its data center infrastructure. Anyway, as more stuff moves to the cloud and our dependence grows on it, Microsoft and other providers need to build capacity. The organic growth is natural and sadly inevitable. However, Microsoft's plans for data center expansion were far far in excess of that natural growth, and perhaps we're seeing a pullback from those stated extravagances into something perhaps a little more reasonable.

Now.

Now.

I've talked a lot about megawards and gigawats, and you're not in the data center business, and you should be. The parties are an absolute laugh. This can all seem a bit abstract, so let's put it into context. Without context, it's hard to understand how big and one hundred megawat data center is. These are some of the biggest. According to the International Energy Agency, Small data centers can consume anywhere between one and five megawats. These are, for the most part, average size facilities, perhaps not for cloud compute giants, but for other companies. It's kind of part of the course. One hundred megawats, by comparison, is huge. It's the equivalent of the annual energy consumption of between three hundred and fifty thousand, four hundred thousand electric cars, and I know some sort of pedant it's going to say, it's not the same thing, shout out a fuck up. Go outside, stop listen, go outside, go outside now, go do something anyway, Although there are others that will likely dwarf what we today considered to be a large facility, META is in the process of constructing, for example, a ten billion dollar data center campus in Louisiana with a proposed two gigawat capacity. Still, whatever way you cut it, and one hundred megawatt facility is big and it's a big long term investment. Cushman and Wakefield's twenty twenty four global data center market comparison gives some chilling context into how significant Microsoft's pullback is. A gigawatt of data set to capacity is roughly the entire operational IT load of Tokyo, which has a one point to eight gigawatt capacity, or London nine hundred and ninety six megawatts, or the Bay Area, which only has eight hundred and forty two megawatts. These are actually very large. It's just that Microsoft got rid of so much more. And again, the total figure of canceled or abandoned capacity is likely far higher than a gigawatt. That number only accounts for the letters of intent that Microsoft allowed to expire. It doesn't include everything else that the two data sentences already killed, or the land pass was it abandoned, or the deals that were in early to mid stages of negotiation. Imagine walking away from two London's or two Tokyos of capacity and it not being a massive deal. This is a huge flipping deal. Microsoft is not simply walking back some future plans. It's effectively canceling what it loudly insisted was the future. If you think this sounds hyperbolic, consider this. London and Tokyo are respectively the biggest data center markets in Europe and Asia, according to the same Cushman and Wakefield report. Canceling city's worth of capacity at a time when artificial intelligence is supposedly revolutionizing everything certainly suggests that artificial intelligence isn't really revolutionizing anything now. One other detail in TD Cohen's report really stood out to me. While this pullback in Microsoft's data center leasing, It's also seen a commensurate rise in demand from Oracle related to the Stargate project, a relatively new partnership of up to five hundred billion dollars stopped saying it's five hundred billion dollars to build massive new data centers for Ai, specifically for one company led by soft Bank and of course open Ai with investment from Oracle and MGX and one hundred billion dollar investment fund backed by the United Arab Emirates. Open Ai has committed eighteen to nineteen billion dollars to the Stargate project, money it doesn't have, meaning that part of the twenty five to forty billion dollars that they're raising at the moment will be committed to funding these data centers, and less as I'll get to later. Open Ai raises more in debt. Leading the round is SoftBank, which is also committing eighteen to nineteen billion dollars, as well as creating a joint venture fund called sb open Ai Japan to offer open Ai services to the Japanese market, something that I thought was already happening, as well as spending three billion dollars annually to use open AI's technology across its group businesses. According to The Wall Street Journal. In simpler terms, soft Bank is investing as much as I think it's going to be like thirty billion dollars in open Ai, then spending another three billion dollars a year on software that only loses money and still hallucinates and shows no side of getting meaningfully better or more reliable. Well a soft bank actually sees value in open AI's tech, or whether this purchase dealer is a subsidy by the back door is open to debate. Given that three billion dollars is equivalent to open AI's entire revenue from selling premium access to Chatch GPT in twenty twenty four, which included some major deals with the likes of Price Waterhouse Coopers, I'm inclined to believe the latter. Even then, how is it feasible that SoftBank can continue paying to get the deal done? Microsoft changed the terms of its exclusive relationship with open Ai to allow it to work with Oracle to build out further data centers full of GPUs necessary to power open AI's big, shitty, unprofitable and unsustainable models. The open Ai Oracle stargate situation was a direct result, according to reporting from the Information of open Ai becoming frustrated with Microsoft and not providing it with service fast enough, including an allotment of three hundred thousand of nvidious GBT two hundred chips by the end of twenty twenty five. For what it's worth, The Wall Street Journal reports that Microsoft was getting increasingly frustrated with open AI's constant demands for more compute. The relationship between the two entities had start to fray, with both sides feeling kind of aggrieved. This, combined with Microsoft's data center pullback, heavily suggests that Microsoft is no longer interested in being open AI's infrastructure paypig long term, at least after all it was if it was, I mean it funded and support open AI's expansion rather than doing the literal opposite.

I've talked a lot about megawards and gigawats, and you're not in the data center business, and you should be. The parties are an absolute laugh. This can all seem a bit abstract, so let's put it into context. Without context, it's hard to understand how big and one hundred megawat data center is. These are some of the biggest. According to the International Energy Agency, Small data centers can consume anywhere between one and five megawats. These are, for the most part, average size facilities, perhaps not for cloud compute giants, but for other companies. It's kind of part of the course. One hundred megawats, by comparison, is huge. It's the equivalent of the annual energy consumption of between three hundred and fifty thousand, four hundred thousand electric cars, and I know some sort of pedant it's going to say, it's not the same thing, shout out a fuck up. Go outside, stop listen, go outside, go outside now, go do something anyway, Although there are others that will likely dwarf what we today considered to be a large facility, META is in the process of constructing, for example, a ten billion dollar data center campus in Louisiana with a proposed two gigawat capacity. Still, whatever way you cut it, and one hundred megawatt facility is big and it's a big long term investment. Cushman and Wakefield's twenty twenty four global data center market comparison gives some chilling context into how significant Microsoft's pullback is. A gigawatt of data set to capacity is roughly the entire operational IT load of Tokyo, which has a one point to eight gigawatt capacity, or London nine hundred and ninety six megawatts, or the Bay Area, which only has eight hundred and forty two megawatts. These are actually very large. It's just that Microsoft got rid of so much more. And again, the total figure of canceled or abandoned capacity is likely far higher than a gigawatt. That number only accounts for the letters of intent that Microsoft allowed to expire. It doesn't include everything else that the two data sentences already killed, or the land pass was it abandoned, or the deals that were in early to mid stages of negotiation. Imagine walking away from two London's or two Tokyos of capacity and it not being a massive deal. This is a huge flipping deal. Microsoft is not simply walking back some future plans. It's effectively canceling what it loudly insisted was the future. If you think this sounds hyperbolic, consider this. London and Tokyo are respectively the biggest data center markets in Europe and Asia, according to the same Cushman and Wakefield report. Canceling city's worth of capacity at a time when artificial intelligence is supposedly revolutionizing everything certainly suggests that artificial intelligence isn't really revolutionizing anything now. One other detail in TD Cohen's report really stood out to me. While this pullback in Microsoft's data center leasing, It's also seen a commensurate rise in demand from Oracle related to the Stargate project, a relatively new partnership of up to five hundred billion dollars stopped saying it's five hundred billion dollars to build massive new data centers for Ai, specifically for one company led by soft Bank and of course open Ai with investment from Oracle and MGX and one hundred billion dollar investment fund backed by the United Arab Emirates. Open Ai has committed eighteen to nineteen billion dollars to the Stargate project, money it doesn't have, meaning that part of the twenty five to forty billion dollars that they're raising at the moment will be committed to funding these data centers, and less as I'll get to later. Open Ai raises more in debt. Leading the round is SoftBank, which is also committing eighteen to nineteen billion dollars, as well as creating a joint venture fund called sb open Ai Japan to offer open Ai services to the Japanese market, something that I thought was already happening, as well as spending three billion dollars annually to use open AI's technology across its group businesses. According to The Wall Street Journal. In simpler terms, soft Bank is investing as much as I think it's going to be like thirty billion dollars in open Ai, then spending another three billion dollars a year on software that only loses money and still hallucinates and shows no side of getting meaningfully better or more reliable. Well a soft bank actually sees value in open AI's tech, or whether this purchase dealer is a subsidy by the back door is open to debate. Given that three billion dollars is equivalent to open AI's entire revenue from selling premium access to Chatch GPT in twenty twenty four, which included some major deals with the likes of Price Waterhouse Coopers, I'm inclined to believe the latter. Even then, how is it feasible that SoftBank can continue paying to get the deal done? Microsoft changed the terms of its exclusive relationship with open Ai to allow it to work with Oracle to build out further data centers full of GPUs necessary to power open AI's big, shitty, unprofitable and unsustainable models. The open Ai Oracle stargate situation was a direct result, according to reporting from the Information of open Ai becoming frustrated with Microsoft and not providing it with service fast enough, including an allotment of three hundred thousand of nvidious GBT two hundred chips by the end of twenty twenty five. For what it's worth, The Wall Street Journal reports that Microsoft was getting increasingly frustrated with open AI's constant demands for more compute. The relationship between the two entities had start to fray, with both sides feeling kind of aggrieved. This, combined with Microsoft's data center pullback, heavily suggests that Microsoft is no longer interested in being open AI's infrastructure paypig long term, at least after all it was if it was, I mean it funded and support open AI's expansion rather than doing the literal opposite.

And you have to.

And you have to.

Wonder if when that whole non exclusisive thing came along, whether Microsoft was kind of like, no, no, you couldn't possibly like the papers already at the pen they've already got a stamp Ford sad woman's signature. No, don't sign it. It would be so bad. No, I really don't. I don't think that Microsoft's too cut up about that. And here's a question for you. If general, if AI had so much demand, why is Microsoft canceling data centrare contracts. Why is Microsoft Oracle's largest customer as at the end of twenty twenty three, allowing softmank and open Ai to work with Oracle to build the future rather than Microsoft. As mentioned previously, TD Cohen specifically noted in its report that microsoft shifting appetite for capacity was tied to open Ai, which, as I've said already, heavily suggests that Microsoft is at best less invested in the future of the company, a statement confirmed by the information which adds that Microsoft have been trying to and I quote lessen its reliance and open ai technology as they increasingly compete in selling AI products well. At worse, this situation could suggest that Microsoft is actively trying to dump open ai and it's having questions about the fundamentals of this industry. Writ large in very plain terms, Microsoft, despite its excitement around AI and its dogged insistence that it's the future, has canceled data center leases of over a gig or what of other data center infrastructure. Doing so heavily suggests that they do not intend to expand further, or at least to the extraordinary levels that they'd initially promised. I know, I'm being kind of repetitive. I know that I'm saying some of these things repeatedly, and you might think why. I need you to understand how significant this is because this did not get covered enough. The coverage of this was dogshit. I'm saying it, frankly, everyone missed this detail. I am just one guy. I do a podcast and a newsletter and I run a PR firm. Why am I the person every not every time? But it just drives me a little insane because this was seeing that how many reporters actually read this report too. This is what drives me insane with my work. But I really do enjoy it was all right. While Microsoft has reiterated that it intends to spend a ridiculous eighty billion dollars in capital expenditures on AI in twenty twenty five, per CNBC article, it's unclear how it intends to do so if it's pulling back on data center expansion at such a large scale, and the company has provided no tangible explanation or elaboration as to how it might do so. While hardware upgrades could account for some of those CAPEX, it would be nowhere near the eighty billion dollar figure. Again, hyperscale data centers aren't cheap. They're massive billion dollar or multi billion dollar ventures. Microsoft, according to CNBC, also leases data center capacity through core Weave and other providers, though at that point the reporter has stopped being curious enough to ask how much or who those other providers might be. Now, Luckily, with the power of research, I found that the information report that Microsoft plants spend about tenion dollars renting core Weave service between twenty twenty three and twenty thirty, which was also reported by CNBC and otherwise anyway planned past tense being the operative word, because last week we learned that Microsoft plans to scale back its purchase of capacity from core Weave. Core Weave is, as you'll find out in a future episode and newsletter probably before that. They're a very odd company which is closely tied to another company called core Scientific, which it actually rents service from, and that company exited Chapter eleven bankruptcy only last year. Core Scientific's financial statements, by the way, are very confusing. They're a mess, and it mostly makes its money not from selling high performance computer services, but from mining bitcoin. It's a weird relationship, and it's weird to still that Microsoft is even entangled with a company connected to Core Scientific. But again, that's a future episode, future newsletter, future panic attack that I'll give myself as I read s once all day. Moving on, Microsoft also added in a comment to CNBC in the same article that it continues to grow at a record pace to meet customer demand. Okay, excuse me. What customer demand? What customer demand? What is it? What is the customer demand? What is going on? Microsoft said back in April twenty twenty four that AI demand was exceeding supply even after a seventy nine percent surgeon capital expenditures, and Cfoamyhood send in their next quarterly earnings in July twenty twenty four that demand remained higher than microsoft available capacity. On its most recent January twenty twenty five earning score, Cfoamyhood once again said, as your growth included thirteen points from AI services, which grew one hundred and fifty seven percent year of a year and was ahead of expectations even as demand continued to be higher than our available capacity. Riddle me this, batman, Why does a company that keeps talking about having demand that exceeds capacity decide to cancel multiple data centers which collectively account for a significant chunk of its existing capacity. I don't know. Let's see what Microsoft had to say when asked a week or two ago. Ahem. Thanks to the significant investments we've made up until this point, we are well positioned to beat our current and increasing customer demand. Last year alone, we added more capacity than any prior year in history. What we may strategically pay just our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest in, allocate resources to grow areas and for our future. The fuck are you talking about? Sounds like Microsoft built too much capacity and in fact as yet to see the customer demand that actually could reach it. In fact, a couple weeks ago, Microsoft's CEO Saturnadella said in a podcast interview that one of the things is that there will be as a result of data center expansion related to AI overbuild. Why is the CEO of Microsoft saying that if nothing's changed. Microsoft also in late January said it had thirteen billion dollars in annual recurring revenue from AI. And by the way, that's that's revenue. That's revenue. It's revenue, it's not profit and On top of that, they don't. It's not like they've made thirteen billion dollars. They're multiplying like a month's revenue by twelve. And by the way, AI is also not a line item on Microsoft's earnings, meaning that all of this is just related revenue put into a hatamari and rolled around by satching a Dell or picking up chairs and shit in the office. Either way, this is a piss poor amount that works out to about three point twenty five billion dollars a quarter. These are mediocre numbers. Their bush league and Microsoft's data center pullback suggests that they're not going to improve. But wait, wait, or perhaps Microsoft's pullback has something to do with Stargate open aiy's big infrastructure project. In fact, I think that might have something to do with a great deal. Let's take a look. According to the information, open ai plans to have stargate handle three quarters of its computing needs by twenty thirty. Look they'll make it, which heavily suggests that Microsoft canceling so much capacity is on some level linked to open AI's future plans and not being part of them. Well, the information reports that open ai is still forecasting to spend thirteen billion dollars in twenty twenty five and as much as twenty eight billion dollars in twenty twenty eight on Microsoft's cloud compute in addition to whatever capacity it gets from Stargate or Oracle. One has to wonder how it intends to do so if it needs capacity that Microsoft isn't building and doesn't have. And these are two huge numbers, by the way. For context, thirteen billion dollars is about ten percent of Microsoft's cloud revenue in the twenty twenty four fiscal year, though it's unclear whether Microsoft counts open AI's compute spenders its revenue. Nevertheless, I got some real concerns about whether open ai is even capable of expanding further, starting with a fairly obvious one. Open AI's only source of money SoftBank, the world's worst tech investor and the only company in the world better incinerating huge piles of cash, and open Ai, well, they got some money issues that I'll get into, and funnily enough, that is going to be the topic of the next episode. I'm not convinced that Microsoft's pullback is driven by Stargate largly because I don't think Stargate at least with the current spending goals and capacity targets is actually viable. The real motivations, I believe have far more to do with the fact that Microsoft is recognizing that maybe it got generative AI and a large part of its future all wrong. See you in the next episode. Thank you for listening to Better Offline.

Wonder if when that whole non exclusisive thing came along, whether Microsoft was kind of like, no, no, you couldn't possibly like the papers already at the pen they've already got a stamp Ford sad woman's signature. No, don't sign it. It would be so bad. No, I really don't. I don't think that Microsoft's too cut up about that. And here's a question for you. If general, if AI had so much demand, why is Microsoft canceling data centrare contracts. Why is Microsoft Oracle's largest customer as at the end of twenty twenty three, allowing softmank and open Ai to work with Oracle to build the future rather than Microsoft. As mentioned previously, TD Cohen specifically noted in its report that microsoft shifting appetite for capacity was tied to open Ai, which, as I've said already, heavily suggests that Microsoft is at best less invested in the future of the company, a statement confirmed by the information which adds that Microsoft have been trying to and I quote lessen its reliance and open ai technology as they increasingly compete in selling AI products well. At worse, this situation could suggest that Microsoft is actively trying to dump open ai and it's having questions about the fundamentals of this industry. Writ large in very plain terms, Microsoft, despite its excitement around AI and its dogged insistence that it's the future, has canceled data center leases of over a gig or what of other data center infrastructure. Doing so heavily suggests that they do not intend to expand further, or at least to the extraordinary levels that they'd initially promised. I know, I'm being kind of repetitive. I know that I'm saying some of these things repeatedly, and you might think why. I need you to understand how significant this is because this did not get covered enough. The coverage of this was dogshit. I'm saying it, frankly, everyone missed this detail. I am just one guy. I do a podcast and a newsletter and I run a PR firm. Why am I the person every not every time? But it just drives me a little insane because this was seeing that how many reporters actually read this report too. This is what drives me insane with my work. But I really do enjoy it was all right. While Microsoft has reiterated that it intends to spend a ridiculous eighty billion dollars in capital expenditures on AI in twenty twenty five, per CNBC article, it's unclear how it intends to do so if it's pulling back on data center expansion at such a large scale, and the company has provided no tangible explanation or elaboration as to how it might do so. While hardware upgrades could account for some of those CAPEX, it would be nowhere near the eighty billion dollar figure. Again, hyperscale data centers aren't cheap. They're massive billion dollar or multi billion dollar ventures. Microsoft, according to CNBC, also leases data center capacity through core Weave and other providers, though at that point the reporter has stopped being curious enough to ask how much or who those other providers might be. Now, Luckily, with the power of research, I found that the information report that Microsoft plants spend about tenion dollars renting core Weave service between twenty twenty three and twenty thirty, which was also reported by CNBC and otherwise anyway planned past tense being the operative word, because last week we learned that Microsoft plans to scale back its purchase of capacity from core Weave. Core Weave is, as you'll find out in a future episode and newsletter probably before that. They're a very odd company which is closely tied to another company called core Scientific, which it actually rents service from, and that company exited Chapter eleven bankruptcy only last year. Core Scientific's financial statements, by the way, are very confusing. They're a mess, and it mostly makes its money not from selling high performance computer services, but from mining bitcoin. It's a weird relationship, and it's weird to still that Microsoft is even entangled with a company connected to Core Scientific. But again, that's a future episode, future newsletter, future panic attack that I'll give myself as I read s once all day. Moving on, Microsoft also added in a comment to CNBC in the same article that it continues to grow at a record pace to meet customer demand. Okay, excuse me. What customer demand? What customer demand? What is it? What is the customer demand? What is going on? Microsoft said back in April twenty twenty four that AI demand was exceeding supply even after a seventy nine percent surgeon capital expenditures, and Cfoamyhood send in their next quarterly earnings in July twenty twenty four that demand remained higher than microsoft available capacity. On its most recent January twenty twenty five earning score, Cfoamyhood once again said, as your growth included thirteen points from AI services, which grew one hundred and fifty seven percent year of a year and was ahead of expectations even as demand continued to be higher than our available capacity. Riddle me this, batman, Why does a company that keeps talking about having demand that exceeds capacity decide to cancel multiple data centers which collectively account for a significant chunk of its existing capacity. I don't know. Let's see what Microsoft had to say when asked a week or two ago. Ahem. Thanks to the significant investments we've made up until this point, we are well positioned to beat our current and increasing customer demand. Last year alone, we added more capacity than any prior year in history. What we may strategically pay just our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest in, allocate resources to grow areas and for our future. The fuck are you talking about? Sounds like Microsoft built too much capacity and in fact as yet to see the customer demand that actually could reach it. In fact, a couple weeks ago, Microsoft's CEO Saturnadella said in a podcast interview that one of the things is that there will be as a result of data center expansion related to AI overbuild. Why is the CEO of Microsoft saying that if nothing's changed. Microsoft also in late January said it had thirteen billion dollars in annual recurring revenue from AI. And by the way, that's that's revenue. That's revenue. It's revenue, it's not profit and On top of that, they don't. It's not like they've made thirteen billion dollars. They're multiplying like a month's revenue by twelve. And by the way, AI is also not a line item on Microsoft's earnings, meaning that all of this is just related revenue put into a hatamari and rolled around by satching a Dell or picking up chairs and shit in the office. Either way, this is a piss poor amount that works out to about three point twenty five billion dollars a quarter. These are mediocre numbers. Their bush league and Microsoft's data center pullback suggests that they're not going to improve. But wait, wait, or perhaps Microsoft's pullback has something to do with Stargate open aiy's big infrastructure project. In fact, I think that might have something to do with a great deal. Let's take a look. According to the information, open ai plans to have stargate handle three quarters of its computing needs by twenty thirty. Look they'll make it, which heavily suggests that Microsoft canceling so much capacity is on some level linked to open AI's future plans and not being part of them. Well, the information reports that open ai is still forecasting to spend thirteen billion dollars in twenty twenty five and as much as twenty eight billion dollars in twenty twenty eight on Microsoft's cloud compute in addition to whatever capacity it gets from Stargate or Oracle. One has to wonder how it intends to do so if it needs capacity that Microsoft isn't building and doesn't have. And these are two huge numbers, by the way. For context, thirteen billion dollars is about ten percent of Microsoft's cloud revenue in the twenty twenty four fiscal year, though it's unclear whether Microsoft counts open AI's compute spenders its revenue. Nevertheless, I got some real concerns about whether open ai is even capable of expanding further, starting with a fairly obvious one. Open AI's only source of money SoftBank, the world's worst tech investor and the only company in the world better incinerating huge piles of cash, and open Ai, well, they got some money issues that I'll get into, and funnily enough, that is going to be the topic of the next episode. I'm not convinced that Microsoft's pullback is driven by Stargate largly because I don't think Stargate at least with the current spending goals and capacity targets is actually viable. The real motivations, I believe have far more to do with the fact that Microsoft is recognizing that maybe it got generative AI and a large part of its future all wrong. See you in the next episode. Thank you for listening to Better Offline.

The editor and composer of the Better Offline theme song is Matasowski. You can check out more of his music and audio projects at Matasowski dot com, M A T T O S O W s ki dot com. You can email me at easy at Better Offline dot com or visit Better Offline dot com to find more podcast links and of course my newsletter. I also really recommend you go to chat dot Where's youreaed dot at to visit the discord, and go to our slash Better.

The editor and composer of the Better Offline theme song is Matasowski. You can check out more of his music and audio projects at Matasowski dot com, M A T T O S O W s ki dot com. You can email me at easy at Better Offline dot com or visit Better Offline dot com to find more podcast links and of course my newsletter. I also really recommend you go to chat dot Where's youreaed dot at to visit the discord, and go to our slash Better.

Offline to check out our reddit. Thank you so much for listening.

Offline to check out our reddit. Thank you so much for listening.

Better Offline is a production of cool Zone Media. For more from cool Zone Media, visit our website cool Zonemedia dot com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

Better Offline is a production of cool Zone Media. For more from cool Zone Media, visit our website cool Zonemedia dot com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

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