How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

This is such a strange article -- there's nothing particularly unusual going on here.

The first example basically stands in for all of them -- Microsoft invests $13B in OpenAI, and OpenAI spends $13B on Azure. This is literally just OpenAI purchasing Microsoft cloud usage with OpenAI's stock rather than its cash. There is nothing unusual, illicit, or deceptive about this. This is entirely normal. You can finance your spending through debt or equity. They're financing through equity, as most startups do, and they presumably get a better deal (better rates, more guaranteed access) via Microsoft than via other random investors and then buying the cloud compute retail from Microsoft.

This isn't deceiving any investors. This is all out in the open. And it's entirely normal business practice. Nothing of this is an indicator of a bubble or anything.

Or take the deal with Oracle -- Oracle is building data centers for OpenAI, with the guarantee that OpenAI will use them. That's just... a regular business deal. What is even newsworthy about this? NYT thinks these are "circular" deals, but by this logic every deal is a "circular" deal, because both sides benefit. This is just... normal capitalism.

> Microsoft invests $13B in OpenAI, and OpenAI spends $13B on Azure.

This isn't deceiving any investors.

It's Microsoft increasing its revenue by selling its stock.

The last time this hit the news, it was the dotcom bubble, and Nortel was in a similar position with startups, taking equity for equipment.

Microsoft isn't selling any stock. It's using its cash.

And an increase in revenue isn't the point. Microsoft isn't doing this to try to bump its short-term stock price or anything -- investors know where revenue is coming from. Microsoft is doing it because it thinks OpenAI is a good investment and wants to make money with that investment and have greater control.

The bubble part is that nvidia is getting revenue from people investing money in their hardware in order to sell something that has not yet been shown to be profitable. If it turns out no one can make enough money selling AI generated data to justify the costs spent on the compute needed to generate it at the current rate, then what nvidia are selling becomes much less valuable, and the whole thing collapses. We haven't figured out yet whether or not that will be the case.

No, that's not the last time this hit the news. This happens literally all the time. Again, this is just business as usual. It's not specific to AI, it's not specific to tech, and it's nothing to do with bubbles.

But that has nothing to do with the arrangement of deals here.

If it's a bubble, then it will pop. If it's not a bubble, then all these investments will turn out to be great. But that's a different question.

The point is, all these deals happen all the time. They're not some kind of sign of a bubble. They happen just as much in non-bubbles. They're just capitalism working as usual.

I remember the same argument being used before the 2008 crash.

Point is that all of this companies need to start making real profits and pretty damn big ones, otherwise all of this will collapse. Problem is that unless Altman has some super-intelligent super-AI hidden in his closet, it is very unlikely that it will.

And whose gonna take the bill when it falls? Let me guess… Where have I seen this before…?

That's fine, but that's a separate conversation. Maybe this is a bubble, maybe it isn't.

My point is that the way it's all being financed is just regular financing. This article is trying to present the way it's being funded as novel, as "complex and circular", when it's not. This is how funding and investment works 365 days a year in all sectors. Nothing about the funding arrangements is a bubble indicator.

So this is a strange article from the NYT, because it's trying to present normal everyday financing deals as uniquely "complex and circular".

Sometimes additional context can take the same action that looks harmless in a vacuum and turn it into a bad idea or even a crime!

These deals happen all the time. The case for a bubble is the following.

When Microsoft offers cloud-credits in exchange for openai equity, what it has effectively done is to purchase its own azure revenues. ie, a company uses its own cash to purchase its own revenues. This produces an illusion of revenue growth which is not economically sustainable. This is happening for all clouds right now wherein their revenues are inflated by uneconomic ai purchases. This is also happening for the gpu chip vendors as well, wherein they are offering cash or warrants to fund their own chip sales.

Then it would be great to have that context that shows criminality. Because that's an extraordinary claim you're suggesting, which is going to require actual evidence.

As for "bad ideas", businesses make tons of decisions every day that turn out to be good or bad in hindsight. So again, more specifics are needed here.

So what exactly are you suggesting? What context do you think the NYT chose to omit, and why would they omit it if it was meaningful?

But nobody is falling for the "illusion of revenue growth". This is out in the open. This isn't a scam. Investors know this and are pricing accordingly. They see the revenue growth but also see the decrease in cash.

What Microsoft is actually doing is taking the large profits it would have otherwise made on its cloud compute with retail customers, losing much/all of those profits as it sells the compute more cheaply to OpenAI, and converting those lost profits into ownership of OpenAI because Microsoft's goal is to own more of OpenAI.

There is nothing "bubble" about this. Microsoft isn't some opaque startup investors don't understand. All of this is incredibly transparent.

I don’t know financial world well enough to say whether that’s here nor there, but can you give me examples from other companies or sectors where a company X funds the company Y with tens to hundreds of billions that the company Y uses to buy a service from the company X.

Furthermore, yes it might be business as usual but so is fraud and god knows what else in this particular political era. In order to strengthen your argument you have to not only show that the phenomenon is not only common, but good for the overall economy.

There will be increased transparency since microsoft will now have to report on the performance of its openai equity [1]. The concern is that while chatgpt is a great app, the economic benefits of the current investments are being questioned. There is starting to be skepticism of ai as the public starts to get jaded. This happens in all fads. That explains why the media is buzzing with articles like these which are becoming increasingly critical while earlier they were all aboard the ai-train.

[1] https://news.ycombinator.com/item?id=45719669

Circularly passing around tens to hundreds of billions of dollars for things which don't exist and may never exist to fund a technology that hasn't A. lived up to the hype they've marketed and B. proven any strategy to breakeven is fundamentally not that much different than the way in which Enron strategically boasted their revenue numbers by passing the money between shell corporations that their CFO created.

The main difference of course being that these are actual companies as opposed to just entities intently designed to inflate the apparent financials. While it seems like that difference means this situation is perfectly fine as compared with the fraudulent case of Enron, the net effect is still the same; these companies are posting crazy quarter over quarter revenue growth, sending their stock prices to crazy highs and P/E multiples, while the insiders are cashing out to the tunes of hundreds of millions of dollars.

I don't really see how exactly you're trying to make the argument that it may or may not be a bubble, it objectively meets the definition of a bubble in the traditional economic sense (when an asset's market price surges significantly above its intrinsic value, driven by speculative behavior rather than fundamental factors). These companies are massively overvalued on the speculative value of AI, despite AI having not yet shown much economic viability for actual profit (not just revenue).

Worse yet, it's not just one company with inflated numbers, it's pretty much the entire top end of the market. To compare it to the dot com bubble wouldn't be a stretch, it'd basically be apples to apples as far as I see it.

> Point is that all of this companies need to start making real profits and pretty damn big ones

MS, Meta, Google, Apple, Nvidia make enormous profits. I think part of this AI push we're seeing is that all of these companies have so much money they don't know how to spend it all. Meta is a great case where they bounced from blowing excess cash on the metaverse and now to AI.