Zone Media. Try spinning. That's a good trick. I'm at Zetron. This is Better Offline and this is the second episode of my two part series where I explain how open ai has become a systemic risk to the tech industry, even with its massive forty billion dollar funding round and bird brain benefactor in the form of soft Bank, the world's foremost authority in losing money. Now, before I continue, shameless request, Better Offline has been nominated for a Webbie and I want to win this thing. I've linked to it in my Twitter and my Blue Sky and if you could vote for me, well, it will be in the episode notes two. Moving on back at it. Okay, all right, open ai now has forty billion dollars somehow, right great? Right, Well, Dolgier horses. As part of its deal with soft Bank, open Ai must also convert its bizarre nonprofit structure into a for profit entity by December twenty twenty five, or it will lose ten billion dollars from that forty billion dollars and of funding. And just to be clear, by the way, they've only really got ten billion dollars of that so far. The rest is at the end of the year. Furthermore, and the event that open ai fails to convert into a for profit company by October twenty twenty six, investors in its previous six point six billion dollar funding route can claw back their investment with a converting into a loan with an attached interest rate. Naturally, this represents a night mess scenario for the company, as it will increase both its costs and its outgoings. This is a complex situation that almost warrants its own podcast, But the long and short of it is that open ai would have to effectively dissolve itself, start the process of reforming an entirely new entity, and distribute its assets to other nonprofits or seller license them to a for profit company at fair market rates which they would not set. It would also require valuing open ai as assets, which in and of itself would be a difficult task, as well as getting past the necessary state regulators, the IRA state revenue agencies, and the upcoming trial with Elon Musk Well, that only adds further problems. I've simplified things here, and that's because, as I've said, this stuff is a little complex and pretty boring. Suffice to say, this isn't as simple as liquidating a company and starting a fresh or submitting a couple of legal filings. It's a long, fraught process and one that will be as as has been subject to legal challenges, both from open AI's business rivals as well as from civil society organizations in California. You may have heard the lost monologue. Based on discussions with experts in the field of my own research, I simply do not know how open ai pulls off this by October twenty twenty six, and honestly, I'm not sure how they do it by the end of this year. It's insane. It's a it's a really I just every time I read this stuff and I write out, I'm like, how is nobody else reading this and going, what the fuck is going on? You See, this is a big problem, this nonprofit thing, because open eye really has become a systemic risk to the tech industry, and anything that increases that is bad news for everybody. Open Ai, they've become a kind of load bearing company for this industry, both as a narrative, as I've discussed multiple times as chat GPT is the only large language model company with any meaningful use base, and also as a financial entity. Its ability to meet its obligations and its future expansion plans are critical to the future health or in some cases survival of multiple large companies. And that's before the after effects that will affect its customers as a result of any kind of financial collapse. The parallels to the two thousand and seven the two thousand and eight financial crisis are starting to become a little worrying. Layman Brothers wasn't the largest investment bank in the world, although it was pretty big, just like open Ai isn't the largest tech company, though again it's certainly large in terms of alleged valuation and expenditures. Layman Brothers collapse sparked a contagient that would later spread throughout the entire global financial services industry and consequently the global economy. Now I can see open AI's failure not having as big an effect, but I can imagine a systemic effect. Still, you have to realize that the whole AI trade, the narrative, the bubble, it's holding up the economy. I think like thirty thirty five percent of the US stock market is in the Magnificent seven, and all of their bullshit numbers right now are held up by this nonsense. And like the financial crisis, the impact in this case won't be limited to just bankers and insurers. It will bleed into everything else. This episode is going to be a bit grim. I'm not going to lie. I want to lay out the direct result of any kind of financial crisis at open Ai, because I don't think anybody is taking this seriously. Let's start with Oracle, who will lose at least a billion dollars if open ai doesn't fulfill its obligations per the Information. Oracle, which has taken responsibility for organizing the construction of the stargate data centers with unproven data center build a Cruso and I quote the Information here, may need to raise more capital to fund its data center ambitions. Oracle has signed a fifteen year lease with Crusoe, and to quote the Information is on the hook for one billion dollars in payments to that firm. To further quote information. While that's the standard deal length, the unprecedented size of the facility Oracle is building for just one customerment makes its riskier than the standard cloud data center used by lots of interchangeable customers with much more predictable needs. According to half a dozen people familiar with these types of deals. In simpler terms, Oracle is building a giant data center for one customer, open Ai, and has taken on the financial burden associated with them. If open Ai fails to expand or lacks the capital to actually pay for its share of the Stargate data center project, Oracle is on the hook for at least a billion dollars, and based on the Information's reporting, it's also on the hooked by the GPUs for the site. This is me quoting them again. Even before the Stargate announcement, Oracle and open Ai had agreed to expand their Abelene deal from two to eight data center buildings, which can hold four hundred thousand and VIDIA Blackwell GPUs, adding tens of billions of dollars to the cost of the facility. In reality, this development will likely cost tens of billions of dollars, nineteen billion dollars of which is due from open Ai, which does not have the money until it receives its second tranche of funding in December twenty twenty five from SoftBank, and this is contingent partially on their ability to convert into a for profit entity, which has mentioned is extremely difficult and extremely unlikely. It's unclear how many of the Blackwell GPUs the Oracle has had to purchase in advance, but in the event of any kind of financial collapse, open Ai Oracle will likely have to toss at least a billion dollars, if not several billion dollars, and then we get the core with a companies. So a company whose expansion is likely driven entirely by open Ai now and cannot survive without open Ai flilling its obligations if it doesn't die. O Anyway, Now, I've written and spoken a lot about publicly traded AI compute firm Core Weave, and it would give me the greatest pleasure in my life. Never think or talk about them ever again. Nevertheless, I have to. This is my curse. This is my curse. Core Weave has become my curse every time I think about this. Fuck Okay. The Financial Times revealed a few weeks ago that core Weave's debt payments could balloon to over two point four billion dollars a year by the end of twenty twenty five, far outstripping its cash reserves, and the Information reported that its cash burn would increase to fifteen billion dollars in twenty twenty five, as Bird's IBO filing. Sixty two percent of core weaves twenty twenty four revenue a little under two billion, with losses amounting to eight hundred and sixty three million was Microsoft Compute, and based on the conversations I've had with sources, a good amount of this was Microsoft running compute for open Ai. Starting October twenty twenty five, open Ai will start paying core Weave as part of its five year long, twelve billion dollar contract, picking up the option that Microsoft declined. This is not great timing, or maybe it's perfect timing, because this is also when core Weave will have to start making payments on their massive, stupid, multi billion dollar d DTL two point zero loan mentioned in previous episodes. But really, there's a newsletter if you want to you hear me, go mad, You want to read me go mad? You read my read my core with piece because it really drove me insane. Nevertheless, these core Weave payments, the ones from open Ai to core Weave that October, they're pretty much critical to Corewave's future. This deal also suggests that open ai will become core Weave's life just customer. Microsoft had previously committed to spending ten billion dollars on core Weave services by the end of the decade, but CEO satchly Adella added a few months later on a podcast that its relationship with core Weave was a one time thing. Man, man a really like really fucking around there, such a don't love core Weave. Assuming Microsoft keeps spending it its previous rate, So about one point like sixty six percent of two billion dollars whatever those I have something that isn't guaranteed. By the way, it would still only be half of open AI's potential revenue to core Weave. Core Weave's expansion at this point is entirely driven by open Ai. Seventy seven percent of its twenty twenty four revenue came from two customers, Microsoft being the largest and yes, I just fucked up a number at sixty two percent and using core weaves auxiliary compute for open Ai. As a result, the future expansion efforts the theoretical one point three gigawatts have contracted, and by the way, that means it doesn't exist. Compute at core Weaver are largely, if not entirely, for the benefit of open Ai. In the event that open Ai cannot fulfill its obligations, core weave will collapse. It's that fucking simple, and then the shock waves will ripple further. In Video relies on corewey for more than six percent of its revenue and corwy's future credit worthiness to continue receiving said revenue. Well, much of that is dependent on open ai continuing to buy services from core Weave now and basically this in a comment I received from the legendary Gil Luria, Managing director and head of Technology research at Analyst DA Davison and Co, I quote him, since cor We've bought two hundred thousand GPUs last year, and those systems are around forty thousand dollars. We believe cor We've spent eight billion dollars on in Vidia last year. That represents more than six percent of Nvidia's revenue in twenty twenty four, he said last year, but I've just wanted to make it sound better. Core We've receives preferential access to Nvidia's GPUs, though Nvidia kind of denies that and makes up billions of dollars of Nvidia's revenue. Corweave then takes those GPUs and then they raise debt using the GPU's as collateral as well as customer contracts. Then they use the money they've raised to buy more GPUs from Nvidia. You may think that doesn't sound right. I am being complete, like this is factual information. At this point in video was the anchor for Corwave's IPO, and CEO Michael and Trader said that the IPO would not have closed without Invidia buying two hundred and fifty million dollars worth of their shares. Nvidia also invested one hundred million dollars in the early days of core weaves, and for reasons I cannot understand, also agreed to spend one point three billion dollars over four years two and I quote the information rent its own chips from core weave fum fact. I can't find a single fucking mention of core weave in any of Nvidia's filings. Now buried in that core weaves s one the document every company publishes before going public was a warning about counterparty credit risk, which is when one party provides services or goods to another with specific repayment terms and the other party doesn't meet their side of the deal. While this was written as a theoretical as it could, in theoretically speaking, come from any company to which core Weave acts as a creditor. It only named one open Ai now has discussed previously. Core Weaver is saying that should a customer, any customer, but really they mean open Ai failed to pay its bills for infrastructure built on their behalf or services rendered, it can have a material risk of the company. Now. As an aside, the information reported that Google and someone's going to email me there, so I just want to get ahead of it. The core Weave is apparently in advanced talks with Google to nd GPUs it Also, it also added another thing in this story, just so that I don't have to hear from any of you. The Google's potential deal with core Weaves significantly smaller than their commitments with Microsoft as according to one of the people briefed on it, but could potentially expand in future years. Do not come to me and claim that Google's going to save core Weeve. I'll be so mad anyway. Even with Google and open AI's money, Carew's continued the ability to do business hinges heavily on its ability to raise further debt, which I have previously called into question a newsletter that gave me madness, and its ability to raise future debt is to quote the financial times secured against it's more than two hundred and fifty thousand n vida GPUs and its contracts with customers such as Microsoft. Now, any future debt that core Weave raises will be based off of its contract with open Ai. You know, the counterparty credit risk threat that represents a disproportionate sharef it's revenue I just mentioned, and also whatever GPUs they still have left that they can get debt on. As a result, a chunk of a video's future revenue is dependent on open AI's ability to fulfill its obligations the core Weave both in its ability to pay them, and they're timing less in doing so. If open ai fails, then core Weave fails, then that hurts and video Jensen's going to have to go. He's going to have to go to a cheaper leather jacketarium and it gets worse. Open AI's expansion is dependent on two unproven startups, one of them I just mentioned, who are also dependent on open ai to live with Microsoft's data center pullback and open AI's intend to become independent from redmen. Future data center expansion is based on two partners supporting coll Weave I know will get there and Oracle. Now I'm referring, of course to Core Scientific, which is the data center developer for core Weave, and of course Crusos, the data center develer four Oracle. Now, if you were wondering, I can't hint it about this earlier how many data center how many DIIDENTA centers do you think Cruso's ever built, and the answer is none, And of course Scientific, how many do you think they've built and the answer is also none. These are the fucking companies underpending the AI boom. I also really must explain how difficult it is to build a data center, and how said difficult he increases when you're building an AI focused one. For example, in Video had to delay the launch of its Blackwell GPUs because of how finnicky the associated infrastructure, so the servers and the cooling and such is for customers. This was for customers that had already been using GPUs and therefore likely knew how to manage the temperatures created by them. Also is another reminder open eyes on the hook for nineteen billion dollars of funding behind Stargate, and neither of them have that money. I just want to remind you of that, because it costs so much money to build a fucking data center. And imagine if you didn't have any experience and effectively had to learn from scratch, how do you think it would be building these data centers? Let's find out. So let's start in Abilene, Texas with Crusoe and the Stargate Data Center project. Now. Cruso is a former cryptocurrency mining company that has now raised hundreds of millions of dollars to build data centers for AI companies, starting with a three point four billion dollar data center financing deal with asset manager Blue Owl Capital. This yet to be completed data center has now been leased by Oracle, which will allegedly fill it full of GPUs for open AI. Despite calling itself and I quote the industry's first vertically integrated AI infrastructure provider, with the company using flared gas as a waste by product of oil production to power I infrastructure, Cruso does not appear to have built a single AI data center and is now being tasked with building one point two Gigawatt's had a data center capacity for open Ai. It's just so fucking Cruso is the sole developer and operator of the Abilene site, meaning, according to the information that it is in charge of contracting with construction contractors and data center customers as well as running the data center after it is built. Oracle, it seems, will be responsible for filling said data center with GPUs as mentioned. Nevertheless, the project also appears to be behind schedule. The Information reported in October twenty twenty four that Abilene was meant to have fifty thousand of Nvidia's Blackwell AI chips in the first quarter of twenty twenty five, and also suggested that the site was projected to have a whopping one hundred thousand of them by the end of twenty twenty five. Now you can join me back here in reality, because a report from Bloomberg in March twenty twenty five said the Open AI and Oracle we're expected to have sixteen thousand available by the summer of twenty twenty five, with and a quote open Ai and Oracle expecting to deploy sixty four thousand then video GB two hundreds at the Stargate Data center by the end of twenty twenty six. That's that's very delayed. That's really delayed. Again. How I run a PR firm in that I record a podcast, I've write a newsletter, I have a book. I'm right in. I got all this shit on and I'm the asshole who notices this anyway, has discussed previously. Open ai needs this capacity very bad. According to the information, open ai expect stargate to handle three quarters of its compute by twenty thirty and these delays call into question, at the very least whether this schedule is reasonable, or logical or even possible. And I actually really question whether Stargate itself is possible at this point. But it can get dumber because we're about to talk about Core Scientific, and they are core Weave's friends. They're the people building data centers for core Wave in Denton, Texas. Now, as you can probably tell, I've written a great deal about core Wave in the past. That got a monologue, got a newsletter, and I got a therapy bill for it. And specifically I've written about their build out partner, Core Scientific, a cryptocurrency mining company, yes, another one that has exactly one customer for its AI data centers, and you'll never guess who it is. It's Core Wave. Now here's a few fun facts about Core Scientific. Core Scientific was bankrupt lotat year. Course Scientific has never built an AI data center, and its cryptocurrency mining operations were built around a six specialist computers for mining bitcoin, which led to an analyst to tell CNBC that said data centers would and I quote need to be buildozed and built from the ground up to accommodate AI compute. That's the stuff. Course Scientific also does not appear to have any meaningful AI compute of any kind. It's AI slash HPC, which is high performance computing. Revenue represents a teeny tiny, teeny little percentage of overall revenue, which mostly comes from mining crypto, both for itself and other parties. Now, hearing all of this, would you give this company your your compute? Would you think these are the people that I am going to call to build my data centers. If you said no, you are smarter than Corewave, who has given their entire one point three gigabat build out to Core Scientific. Course Scientific. Also, it seems they seem to be taking on like one point one four billion dollars of capital expenditures to build these data centers, which, by the way, is not enough money. But nevertheless, Corwave has promised to reimburse them at eight hundred and ninety nine point three million of these costs. This is all from public filings. By the way, it's as one clear house course Scientific actually intends to do any of this shit. While they've taken on a good amount of debt in the past five hundred and fifty million dollars in the convertible note towards the end of last year, this would be more debt than they've ever taken on. It Also, as with Crusoe, does not appear to have any experienced building AI data centers, a point I keep repeating because it's very important. These are other companies behind the growth for open AI, except unlike Crusoe, Core Scientific is a barely functioning, recently bankrupted bitcoin minor pretending to be a data center company. Crusoe, on the other hand, is possibly also doing the same thing, but less egregious about it. Now, how important do you think core Weave is to open ai? Exactly? Well, that's our semaphore. Core Weaver has been one of our earliest and largest compute partners, open ai chief Sam Allman said in Corwave's roadshow video, adding that Corwave's compute power led to the creation of some of the models that were best known for Core. We figured out how to innovate on hardware, to innovate on data center construction, and to delve for results, very very quickly did it. But even if it did, will it survive long term? Going back to the point of the contagion. If open ai fails and core we fails, so too does course Scientific And I don't really fancy Crusoe's chances either. But let's take a step back for a moment. We've been going so hard, haven't we. I've got a genuine question, just for the fact finders out there. There's a Microsoft book. Open AI's computer's revenue now. Up until fairly recently, Microsoft has been the entire infrastructure backing open ai, but recently to free open ai up to work with Oracle and see other people, released it from its exclusive cloud compute deal. Nevertheless, put the information, open ai still intends to spend thirteen billion dollars on compute on Microsoft as there this year. What's confusing, however, is whether any of this is booked as revenue for Microsoft. Microsoft claimed earlier in the year that it surpassed thirteen billion dollars in annual recurring revenue, by which it means it's last month multiplied by twelve by the way, and they said it was from ai. Open AI's compute costs in twenty twenty four or five billion dollars, and that's at are discounted as your rate, which on an anualized basis will be about four hundred and sixteen million dollars in revenue a month for Microsoft. It isn't, however, clear whether Microsoft counts open ai is computer's money, which is really fucking weird. You'd think with all this money they're making from this company, they'd be saying there was money coming in. It's peculiar. I've yet to find a real answer. Now. Microsoft sernings do not include an artificial intelligence section. No, They're made up of three separate segments, Productivity and Business Processes, which includes things like LinkedIn, Microsoft three sixty five and so on. More Personal Computing, which includes Windows and gaming products, and then Intelligent Cloud including server products and cloud services like A zero, which is likely where open AI's computers included, and where Microsoft book the revenue from selling access to open AI's models but not open AI's compute question. As a result, it's hard to say specifically where open AI's revenue might sit. Even guessing intelligent Cloud might not be right, but based on an analysis of Microsoft's Intelligent Cloud segment from financial year twenty twenty three Q one through its most recent earnings, and there was a spike in revenue from twenty three Q one to twenty four Q one. In financial year Q one, which ended on September thirtieth, twenty twenty two, a month before Chat GPT's launch, the segment made twenty point three billion dollars. The following year, in FY twenty four Q one, it made twenty four point three billion dollars, a nineteen point seven percent year of a year growth, or roughly four billion dollars. This could represent the massive increase in training and inference costs associate with hosting Chat GPT, and they peaked at twenty eight point five billion dollars in revenue in the financial year twenty four Q four, before dropping dramatically to twenty four point one billion dollars in financial year twenty five Q one, and raising a little twenty five point five billion dollars in financial year twenty five Q two. I'm so sorry none of this is easy to read. This is a plausible explanation. Open ai spent twenty twenty three training its GPT four to Roho model before transitioning to its massive, expensive iryme model, which would eventually become GPT four point five, as well as its video generating model sourer. According to the Wall Street Journal, training GPT four point five involved at least one training run, costing around half a billion dollars in compute costs alone. These are huge sums, but it's worth noting a couple of things. First, Microsoft licenses open AI's models the third parties, so some of this revenue could be from other companies using GPT on Azure. We've seen lots of companies launch Ai products, and not all of them are based on l lambs mrieing things. Further, Microsoft provides open ai access to a zerr cloud services at a discounted rate, as I've mentioned in the past, and so there's a giant question mark over open AI's actual contribution to the various spikes in revenue for Microsoft's Intelligent cloud segment, or whether other third parties played a significant role. Furthermore, Microsoft's investment in open Ai isn't entirely cold hard cash. Rather, it's provided the company with credits to be redeemed on in see your services, kind of like Chucky cheese tokens. I'm not entirely sure how this would be represented in accounting terms, and if anyone can shed any light on this, please get in touch. Would it be noted as revenue or something else? Open Ai isn't paying Microsoft or are they? Are they doing the tech equivalent of redeeming air miles or have they spent a gift card of us? You're it really isn't obvious, and Microsoft is doing some accounting bullshit here and not suggesting impropriety, not suggesting anything illegal. I'm just saying it's insane that they have this company spending billions of dollars theoretically on their services and it's just nowhere. Additionally, while equity is often treated as income for tax purposes, as is the case when an employee receives RSUs as part of their compensation package, under the existing open Ai structure, Microsoft isn't actually a shareholder, but rather the owner of profit sharing units. This is a distinction worth noting. These profit sharing units are treated as analogous to equity, or at least in terms of open AI's ability to raise capital, but in practice they aren't the same thing. They don't represent ownership in a company as directly as, for example, a normal share would. They lack the liquidity of a share in the upside they provide, namely dividends is purely theoretical. Another key difference. When a company goes bankrupt and enters liquidation, shareholders can potentially receive a share of the proceeds after creditors, employees, and so on are paid. Well, that often doesn't happen as is, as in the liabilities generally, they can exceed the assets of the company. In many cases it's at least theoretically possible, given that profit sharing units aren't actual salaries or shares. Where does that leave Microsoft? This stuff is confusing, and I'm not ashamed to say that I just fucked up a word and that complicated accounting questions like these are far beyond my understanding. If anyone can shed some light, drop me an email, buzz me on Twitter or blue sky, hit me up on clerk or gorp or post on the better offline subware. Someone might take your wallet though. Anyway, back on track, I think it's worth understanding the scale of the open air vortex and how it's distorting the tech investment market and why, even without having failed, it represents the systemic risk. Without open ai, and American startup investment is flat, and even with it, less startups are receiving investment. Crunch based News reported in early April the North American startup investments spiked in Q one due to open Ai, hitting eighty two billion dollars. Great, right, sounds great? This statement sadly has a darker undertone. American star up investment was actually like forty two billion in Q one twenty twenty five when you remove the deal, which is appropriate because none of the money is actually received by open Ai yet and at best only ten billion dollars if it will be received before Sember twenty twenty five. This quarter also included a three point five billion dollar investment in Wormlight competitors Aroundthropic run by Warrio Amma Day, making the appropriate number of paltry thirty nine point five billion dollars. Now, this is still an improvement, though a marginal one over the thirty seven point five billion dollars raised in Q one twenty twenty four. Nevertheless, crunch based news also has a far, far darker story. Your volume women in American startups has begun to collapse, trending downward almost every quarter or deal volume isn't the direct result of open AI's financial condition. The so called revolution created by open ai and other generative AI companies technology appears to be petering out, and the contagion is starting to impact the wider tech sector. It's important to understand how bleak things are the future of generative AI, wrest and open ai, and open AI's future rests on near and possible financial requirements. I've done my best to make this argument is in as objective a tone as possible, regardless of my feelings about the bubble and its associated boosters open Ai. As I've said before and argued countless times in interviews and podcasts and newsletters, it's effectively the entire generative AI industry, with its nearest competitor being less than five percent of its five hundred million weekly active users Anthropic, Google, Microsoft XAI. They're all rounding errors in the grand scheme of things. But open AI's future is dependent and this is not an opinion. This is an objective fact on effectively infinite resources in many forms. Let's start with the financial resources. If open ai required forty billion dollars to continue operations this year, it's reasonable to believe it will need at least another forty billion dollars next year, and based on its internal projections, will need at least forty billion dollars every single year until twenty thirty, when it claims somehow it will be profitable. And I quote the information with the completion of the Stargate Data Center project, you may be wondering, how's that possible? Ed? How you think the information wrote that down? Fuck no, just go Lesson's too busy humiliating people. She let go by name on Twitter, Ess Golesson. I like the information. I think you're a fucking asshole for how you treated your people. Say it on my podcast, I say it on Twitter. Anyway. Let's keep talking about some of these resources that open ai is dealing with, specifically the compute resources and expansion. Open ai requires more compute resources than anyone has ever needed, and will continue to do so in perpetuity. Building these resources is now dependent on two partners, Course Scientific and Crusoe. Though I've never built a data center, as Microsoft has materially pulled back on data center development and has as aforementioned, pulled back on two gigawads of data centers, slowed or paused. Of course, some of its early stage center products too, with TD Cohen's recent analyst reports saying that data center pullbacks were and I quote them March twenty six, twenty twenty five, data center channel checks letter because it's so good, driven by the decision to not support incremental open Ai training workloads, that's the stuff. In simpler terms, open ai needs more computer at a time when it's lead backer, which has the most GPUs in the world, has specifically walked away from building it. Even in my most optimistic frame of mind, it isn't realistic to believe that Cruso or Core Scientific can build the data centers necessary for open AI's expansion, even if soft Bank and open Ai had the money to invest in Stargate today, which they do not. Dollars do not change the fabric of reality. Data Centers take time to build, requiring concrete would steal in other materials to be manufactured and placed, and that's after the permitting required to get these deals done. Even if that succeeds, getting the power necessary is a challenge unto itself, to the point that even Oracle, an established and storied cloud compute company run by a very evil man at one point to quote the Information, has less experience than its larger arrivals in dealing with the utilities, to secure power and working with powerful and demanding cloud customers whose plans change frequently. A partner like Cruso will Core Scientific simply doesn't have the muscle, memory, or domainer expertise that Microsoft has when it comes to building and operating data centers. As a result, it's hard to imagine, even in the best case scenario, that they are able to match the hunger for compute the open Ai has now. I want to be clear, I believe open ai will still continue to use Microsoft's compute and even expand further into whatever remaining compute Microsoft may have. However, there is now a hard limit on how much of that there's going to be, both literally and what's physically available, and in what Microsoft itself will actually allow open ai to use, especially given how unprofitable GPU compute seems to be based on how every single company that isn't in vidio lose his money running them. But really, and we're coming to the end of this, which leads to a question, how does all of this end? Last week, a truly offensive piece of fan fiction framed as a report called AI twenty twenty seven went viral, garnering press with the Duiskesh podcast and gormles childlike wonder from Dope New York Times reporter Kevin Rus and reporter I think is a fucking stretch. Its predictions vaguely suggest a theoretical company called open Brain will invent a self teaching agent of some sort. It's total bullshit, but it captured the handsome minds of AI boosters and other people without object permanence because it vaguely suggests that somehow, large language models and their associated technology will become something entirely different. Like making predictions like these because the future, especially in our current political climate, is utter chaos. But I will say that I do not see, and I say this with complete objectivity, how any of this bullshit continues. I want to be extremely blunt with the following points, as I feel like both members of the media and tech analysts have categorically failed to express how ridiculous things have become. I will be repeating myself, but it's fucking necessary, as I need you to understand how untenable things are. Soft Bank is putting itself in dire straits simply to fund open Ai once this deal threatens its credit rating, with soft Bank having to take on what will be multiple loans to fund this forty billion dollar round, and open Ai will need at least another forty billion dollars a year later. This is before you consider the other nineteen billion dollars that soft Bank has agreed to contribute to the data center project with Stargate money it does not currently have available. Now. Open Ai has promised nineteen billion dollars to the Stargate Data Center project two and again they do not have it, and they need soft Bank to give it to them. And again I've said it, and I'll say it again. Neither of these companies have the money. The money is not there, and open Ai needs Stargate to get built to grow much further. I see no way in which open ai can continue to raise money at this rate, even if open Ai somehow actually receives the forty billion dollars it's been promised, which will require it to become a for profit entity, which I don't think it can fucking do. While it could theoretically stretch that forty billion dollars to the last multiple years, projections say it will burn three hundred and twenty billion dollars in the next five years, or more likely, I can't see a realistic way in which open ai gets the resources it needs to survive. It will need this insane streak of good fortune, the kind of which you only really hear about in Greek poems or JoJo's Bizarre Adventure. You know, the more cultured choice, but let's go through them. Somehow soft Bank gets the resources and loses the constraints required to bankroll this company forever. The world's wealthiest entities, those sovereign wealth funds mentioned in the last episode, sounds and so on, they pick up the slack until open Ai receive they reach profitability, which is a huge assumption. It's also assuming that open ai will have enough of these megawealthy benefactors to provide it with the three hundred and twenty billion dollars they need to reach profitability, which it won't. There'll also need Cruso and Core Scientific to turn out to be really good at building AI infrastructure, which they've never done before, which is that's very possible, I'm sure. And then Microsoft will then walk back its walk back on building UAI infrastructure and recommit to tens of billions of dollars of CAPEX, specifically on AI data centers, and also will give it to open Ai. And then, of course Stargate's construction happens faster than expected and there are no supply chain issues in terms of labor, building materials, GPUs and so on. Now I don't know, I haven't checked the news in the last three weeks, but is there anything going on that might increase the costs of materials? Probably not. Anyway, if those things happen, I'll eat quo. I'm not particularly worried. In the present conditions. Open ai is on course to run out of money or run out of compute capacity, and it's unclear which will happen first. But what is clear is it's time to wake up. Even in a hysterical bubble where everybody is agreeing that this is the future, open ai is currently requiring more money in more compute than is reasonable to acquire. Nobody nowhere, ever, anywhere, has ever raised as much money as open ai needs to. And based on the sheer amount of difficulty that soft Bank is having raising the funds to meet the lower tranche, the ten billion dollar one of its commitment, it may not actually be possible for this company to continue, even with the extremely preferential payment terms months long deferred payments for example that open ai probably has. At some point someone will need a dollar. I'll give Sam Ortman some fucking credit. He's found many partners the shoulder the burden of the rock economics of open Ai. With Microsoft, Oracle, Crusoe and Core We've handling the upfront costs of building the infrastructure, and SoftBank finding the investors for its monstrous stupid round, and the tech media mostly handling marketing for him, which is really nice, great job everybody. He is. However, overleveraged. Open Ai has never been forced to stand on its own two feet or focus on efficiency, and I believe the constant enabling of this ugly nonsensical burn rate has doomed this company. Open Ai has acted like it'll always have more money. In compute, And that's kind of because everyone's acted as that would be the case. No one's really called sam Altman out on his bullshit. There are some people, but really no one in the mainstream media has bothered. Really, Sam Altman has been enabled. Open Ai, by the way, cannot just make things cheaper at this point, because the money has always been there to make things more expensive, as has the compute to make larger and larger language models that burn billions of dollars a year. This company is not built to reduce its footprint in any way, nor is it built for a future in which it wouldn't have access to infinite resources. Worse still, investors in the media have run cover for the fact that these models don't really do much more than they did a year ago, and for the overall diminishing returns of large language models writ large. Now, I've had many people attack my work about open ai, but none of them, not one of them. Nobody has provided me any real counterpoint to the underlying economic argument I've made since July of last year, the open ai is unsustainable. Now this is likely because there really isn't one other than open ai will continue to raise more money than anybody has ever raised in history imperpetuity and will somehow turn the least profitable company of all time into a profitable company. This is not a rational argument. It's a religious one. It's a call for faith. And it's disgusting to see well paid reporters with one hundred and fifty thousand subscribers to the newsletters and a really shitty podcast with a major news outlet constantly just ignore them share and I see no greater payal horse of the apocalypse than Microsoft's material pullback on data centers. Well, the argument might be that Microsoft wants open ai to have an independent future. That's fucking laughable when you consider Microsoft's deeply monopolistic tendencies, and for that matter, it owns a massive proportion of open AI's pseudoequity. At one point, Microsoft's portion was valued at forty nine percent, and while additional fundraising has likely diluted Microsoft's steak, it still owns a massive portion of what is, at the very least, if you believe any of this nonsense, the most valuable private startup of all time. And we're supposed to believe that Microsoft's pullback, which limits open AI's access to infrastructure it needs to train its and run its models, and thus is mentioned represents an existential threat to the company. You meant to believe that this is because of some sort of paternal desire to see open ai leave childhood behind to spread its wings and enter the real world. Are you fucking stupid? Sorry? I shouldn't be calling people stupid. I shouldn't. I really shouldn't. But I am more likely Microsoft got would have needed out of open Ai, which has reached the limit of the models that can develop, and which Microsoft, by the way, already owns the ip of due to their twenty nineteen funning round. There's probably no reason for Microsoft to make any further significant investments other than just kind of throwing a little cash in there, and then I imagine some sort of tax dodge. I'm just guessing. It's also important to note that absolutely nobody other than Nvidia is making any money from generative AI. Core Weave loses billions of dollars, open Ai loses billions of dollars, Anthropic loses billions of dollars. And I can't find a single fucking company providing generative AI powered software that's actually making a profit. The only company is even close to doing so Are Consultancy is providing services to drain and create data for models like Churing and Scale AI, and Scale isn't even fucking profitable now. The knock on effects of open AI's collapse will be wide ranging. Neither core Weave nor Crusoe will have tenants for their massive, unsustainable operations. An oracle will have nobody to sell compute to because they've leased that thing for fifteen fucking years, or one customer who else is going to take that anyway. Cor we will likely collapse under the weight of its abominable debt anyway, which will lead to a six seven percent or more revenue drop for in video or a time when revenue growth has already begun to slow. On a philosophical level, too, open AI's health is what keeps this industry alive. Open ai has truly the only meaningful user base in generative AI, and this entire hype cycle has been driven by its success. Meaning any deterioration or collapse of open ai will tell the market what I've been saying for over a year. The generative AI is not the next hype of growth market and it's underlying economics do not make sense. But look, I'm not saying this to be a hater. I'm not saying this to be right. This stuff has driven me insane, but I'm not doing it to be a pundit, to be a skeptic, to be a cynic, to be someone that hates because I want to hate. And I hate them not because I think people like me because I hate them. I hate them because I have brainworms. I have something wrong with me inside my brain that tells I have to be like this, and I have to look at these things and I have to try and find what's going on, otherwise I will be driven mad, which is why I'll say if something changes, if I'm wrong somehow, I promise you I will tell you exactly how, exactly why, and what mistakes I made to come to the conclusions I have in this episode and the episodes before. But I don't believe that my peers in the media will do the same when this collapses. But I promise you that they will be held accountable because all of this abominable waste could have been avoided. Large language models are not on their own the problem. The tools capable of some outcomes, doing some things, But the problem, ultimately are the extrapolations made about their abilities and the unnecessary drive to make them larger, even if said largeness never really amounted to much. Everything that I'm describing is the result of a tech industry, including media and analysts, that refuses to do business with reality, trafficking in the ideas and ideolo, celebrating victories that have yet to take place, applauding those who have yet to create the things that they're talking about, cheering on men lying about what's possible so that they can continue to burn billions of dollars and increase their wealth and influence for barely any fucking reason. I understand why others might not have said what I've said. What I am describing is a systemic failure, one at a scale here too unseen, one that has involved so many rich and powerful and influential people agreeing to ignore reality, and that'll have crushing impacts for the wider tech ecosystem when it happens. Don't say I didn't warn you. 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 Mattasowski dot com m A T. T O S O w Ski 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'soead dot at to visit the discord, and go to our slash Better Offline to check out I'll Reddit. Thank you so much for listening. Better Offline is a production of cool Zone Media. 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