Companies have a lot of tools at their disposal to hide things on their balance sheet for a while. However when that happens it typically means the numbers are bad. Really bad. If they weren’t, they’d do everything they can to highlight how great the investment is going.
Same reason why seemingly every CEO on the planet is making hand wavy statements about how their company is leading with AI and it will revolutionize their industry, and yet almost nobody is willing to break out this amazing stuff in their P&L. Funny how that works.
AWS is a great example of the opposite, started around ~2006, it was originally deemed an "internal project" so they did not break it out. It was also really really tiny compared to retail revenue (amazon.com). They didn't actually start to break it out until 2015 and that is after wall street was somewhat demanding for it as it was well known it had experienced exponential growth and was generating billions for amazon. Were they trying to had bad numbers? Negative, they were trying to hide how awesome it was doing because it gave them the ability to make further gains w/ first mover advantage before competitors could react.
By 2015 they were trying to hide how much of the group growth and profits were largely contributed by just AWS , i.e. they were hiding the e-commerce margins .
Without AWS and subscriptions, Amazon is quite an unprofitable company.
Both overall growth and margin driven by AWS(and prime) while E-commerce revenue remains outsized because they count GMV as revenue which is iffy even when they own the merchandise, but being largely a marketplace these days GMV is very misleading metric.
It would be like Stripe decided to count their revenue as $1.4T the amount they processed this year as revenue rather than $10-20B they actually got after paying the banks, merchants , VISA etc . This 20B is not profit either just the pie from which salaries cloud costs etc have to be paid to get to actual profit.
Correct. It wasn’t a secret that AWS was profitable. Revealing those numbers put a lot more pressure on Amazon to get other business lines in better shape financially. Something Amazon was keen to avoid for as long as it could.
Fair. There are counter examples, although those are pretty rare. Usually publicly traded companies don’t hide when they’re doing really well.
The inverse true now with AWS. Lots of press about analysis on how AWS is in “last place” on AI and while AWS leadership has been doing a lot of hand waving to say they’re not, it’s a pretty safe bet this week’s earnings call won’t have any hard financial numbers to counter press that they’re way behind.
In the grand scheme of things it doesn’t matter. As long as companies are building infrastructure on AWS and AWS can host third party models like it’s doing now with Bedrock.
In my experience - and I’ve run comparisons against the various models for projects (consulting) - their in house Nova models usually give me the best results on the spectrum of speed/quality/cost I need for a given project.
Even if this isn't Enrony, this sounds so Enrony (if you know anything about the Enron accounting scandal)
"How Microsoft has managed to avoid disclosing such basic details is baffling. The company in its financial reports identifies OpenAl as an equity-method investment. That means OpenAl, by definition, is a related party of Microsoft under the accounting rules. Microsoft, however, doesn't identify OpenAl in its financial reports as a related party, and doesn't say anything about its transactions with OpenAl in its related-party disclosures."
If its equity accounted it won't be considered a related party as far as I understand. Related party in IFRS isnt what you think it is. Its the equivalent of "extended family".
AFAIK Microsoft didn't put any kind of liquid money into OpenAI, it's something like "you can use up to nB USD of our resources for free", not sure how that should go into accounting. It could even be a liability without much juggling.
Yeah, Enron didn't really put any money into its related parties, it just used to them to move things around. I don't think it is Enron, but related parties shenanigans give me the chills.
Yes. You don’t need to be moving $ to have a profit or loss. You could take your salary in sacks of potatoes. You still owe the government taxes on the fair market value of your pile of potatoes.
A while back there was a big fuss because executives were caught not paying tax on the fair market value of extra perks they were getting like use of the corporate jet on the weekends for trips to the beach house. Anything that’s not purely a business expense is considered compensation and is taxable.
> Companies have a lot of tools at their disposal to hide things on their balance sheet for a while. However when that happens it typically means the numbers are bad. Really bad. If they weren’t, they’d do everything they can to highlight how great the investment is going.
There are many legitimate reasons to not disclose an investment on your balance sheet:
- materiality: immaterial compared to overall position
- classification: research-phase or contingent on future event
- control & ownership: if you don't have significant control or ownership
- off-balance sheet arrangements: SPVs, JVs, lease agreements that don't meet consolidation criteria (disclosed in notes, but not recognized as assets or liabilities due to limited exposure)
- strategy or confidentiality: minimize visibility to protect competitive information or negotiations; must still comply with disclosure rules so details might appear in aggregated or summarized form
- regulatory or accounting policy differences: IFRS vs. US GAAP have different recognition and measurement bases
- held-for-trading or short-term nature: e.g. marketable securities might be short-term trading assets so would be grouped together in a single line item, rather than disclosed separately
Sounds like you are suggesting there are a lot of legitimate reasons to mislead shareholders. OpenAI is private and that's one thing. Microsoft is not.
> Companies have a lot of tools at their disposal to hide things on their balance sheet for a while.
That's why some analysts ignore most company-provided metrics and just focus on cash-flow. You need inside and outside of the house fudgers to mess with that metric.
I think you’re calling out two different phenomena: 1) the gold rush mentality leads to bad investments (at least in the short term), and 2) in a hype bubble companies are incentivized to attach everything to the hype, even if it’s not real (many companies talk AI but aren’t seriously investing).
Both are true in many cases. But to the extent companies are making major investments that are strategically correct but won’t make money for years, it’s still the right move to hide stuff in financial statements.
Markets don’t reward long term investments. Everything has to be short term, and if it’s not paying off instantly, short term investors get no value and want it stopped.
Net result: lots of PR about AI, but almost every company is incentivized to downplay it financially.
You’re not wrong, but the point of the article is that for a publicly traded company there’s an expectation of more transparency. The size of the losses is getting to a point where it can’t just be kept hidden inside a handwavy “other” line item.
IF said investments are strategically correct (considering their amounts). A few years bck companies were making strategic investments in the VR/AR/XR goggles, on a bet that tech would become cheaper in a few years while quality would improve dramatically. And they were correct in the price and quality aspects. But they were fundamentally wrong strategically, regarding millions of people wanting a display semi-permanently strapped in their visual area. Apparently not many people want it and even less need it, which was drastically different from the mode of work of CEOs, which is to always move and issue commands while walking/driving etc. Same story with multiple failed voice assistants.
That opinion really doesn’t jibe with all of the money “the market” is putting into money losing AI companies with no hopes of profitability in the near future or - Tesla.
> Markets don’t reward long term investments. Everything has to be short term, and if it’s not paying off instantly, short term investors get no value and want it stopped.
The AI investment bubble is almost entirely about making long-term, extremely expensive investments. That's what the gigantic datacenter build-out is about, not short-term investments and short-term returns. They're telling everybody, persistently, that they're making huge long-term bets, and the market is rewarding them like crazy. See: Oracle's run due to long-term bets on AI (it's certainly not short-term results causing the stock to do that, their short-term growth has been mediocre).
Amazon for two decades repeatedly told investors they were making extremely expensive, long-term investments in build-out (eg their fulfillment build-out era), where the primary payoff would be far into the future. The market bought into the long-term on the basis that it was attached to Bezos at the center (that he'd be there to deliver that long-term result). The same is true about Elon Musk with Tesla: they have endlessly made outlandish long-term proclamation to drive their stock. Tesla: robot super business, self-driving taxi business, et al - these are 10-20-30 year long-term claims by Tesla and the market has aggressively rewarded it. That's because they think Musk will/might be there to guide it to actuality. In most cases investors don't buy in because they know the CEO & team won't be around even seven years from now.
Markets (investors) reward long-term if they can be made to believe in the long-term. The issue is that most companies are not believable on long-term statements, they don't have a leadership that will be around for any long-term delivery. Buffett, Bezos, Musk, Zuckerberg were/are long-term attachments so the market has been willing to buy in on various long-term bets.
Agree on the long term concept, but there’s little comparison between Amazon’s early years and now. Amazon spent money on tangible capital infrastructure that was highly differentiated and long lasting (fulfillment centers, logistics networks). That costs a ton up front but can be used for decades. Folks struggle to compete with Amazon now because that infrastructure is a giant physical logistics moat that’s not easily replicated.
The AI bubble is far from that. Companies are spending tons on GPUs that have limited lifespan, building models that have limited lifespan, using algorithms that are all basically the same, in a space where someone can dump a “good enough” open source model on the market and blow up your business overnight. There’s very little lasting value in what’s being built and the “we’re investing for the long term” arguments don’t hold much water. It’s like saying you’re investing in real estate but then you keep tearing down the building and rebuilding it every 18 months. That just doesn’t work.
There might be some longer term fungible value from some of the baseline infrastructure investments (data centers, electrical upgrades) but those are undifferentiated and highly fungible.
I wonder if this is how it felt shortly before the dot com crash. So enraging that my livelihood is likely to end up threatened by people just flat out lying and they will not experience any consequences for it.
There are parallels here of folks getting so caught up in the hype that they forgot business fundamentals. Everytime folks say “but this is different” and every time it’s not.
It's certainly different this time; machines have never been able to do anything like what they can do now. You might as well argue that the Industrial Revolution or the Internet itself wasn't "different this time."
But the phrase "this time" requires a lot of hand-waving. The current generation of models is obviously a bubble, which means that businesses based on them are also participants in a bubble. The market seems to be pricing in various unspecified future miracles. Given the history of AI to date, the miracles needed to justify current valuations might arrive next week, next year, or 30 years from now.
They will arrive, though. That part is no longer up for debate by anyone who's been paying attention since AlphaGo, never mind Vaswani.
I don't think anyone is questioning current or future capabilities.
It's more of a question if it will ever actually be profitable or marketable without subsidizing most of the cost of running it.
We're seeing the same with streaming services right now. 5-10 years ago, everyone thought they needed their own streaming service and heavily invested into building one and acquiring licenses or producing content for it.
Now we're seeing the part where they are trying to make it profitable by raising prices/adding ads or both.
I'm not sure if OpenAI will ever be able to just run by themselves. Without major outside investments to subsidize the cost of actually having users use their services.
But that isn’t different than previous bubbles, either. The first dot com crash was an over investment in online shopping. And yet we all online shop for everything now. Same with the video games crash in the 80s, now a wildly successful industry.
This is a silly article. Since MSFT took a ~49% stake in OpenAI, it records its share of OpenAI's net losses in the other income line under the equity method of accounting. MSFT is offsetting its taxable income based on a prior investment
The complaint is not that MSFT is reporting the loss. It's that, in terms of both the % of OpenAI and the dollar value of the stake, it's large enough that there should also be a related party disclosure.
IANAA so I don't know how true that is. Just wanting to point out that I don't think you're responding to the key point of the article.
Does Microsoft even have an OpenAI stake? Their original more public deal was revenue sharing up until they reached 100x $1 billion. That doesn't sound like a stake.
They also had tech sharing valid until the OpenAI board declares 'AGI'.
That seems like a really bad deal. And that was probably at the time when Microsoft had the most leverage to make a deal. Their subsequent deals would make sense to be worse.
They have a very creative investment structure but they do own a stake in OpenAI. It’s just sounds more like a commercial agreement the way it was laid out, which primarily has to do with OAIs organizational structure
If the deal is still based around capped revenue, I wouldn't call it an ownership stake.
As far as I know, they have not disclosed it. If you have more information about something concrete regarding ownership, I'd love to hear it. Maybe I haven't understood everything that was stated.
In the end, whatever Microsoft has is probably less valuable than a sizable ownership chunk that most people seem to assume.
I imagine a lot of people are investing in Microsoft as a proxy to OpenAI. Those people are set to be disappointed.
I definitely think fundamental research is fun, I think it's unfortunate that people are so focused on quarterly profits that they think Microsoft shouldn't be investing in fundamental research. And are deriding it as "cool" as if that were a bad thing.
That's not how any of this is sold though. Google did a lot of fundamental research quite publicly in this space for many years, and people were generally quite favourable of this and didn't ask to see insane revenue from it (yet). But Microsoft is not doing that, not even by proxy of funding OpenAI. They are selling it as the greatest business thing ever, so where are the numbers to back that?
Not to mention also shoving it into every product even without a solid reason or use case for it. Microsoft has been making AI the focal point of everything they do recently. Google spend years investing in fundamental research into AI while not making it the focal point of everything they did.
If Microsoft were just Windows, Teams, Azure, Bing and whatever it is, Microsoft would actually feel like a competitor for firms like Canonical or Red Hat or SUSE which happens to be big but nothing special relative to the others, whereas it now, with with this very public service feels like a behemoth.
Huh, that’s a funky statement because having “Azure”, one of the largest Cloud Providers outside of China is definitely a different camp than Canonical, Red Hat and SUSE.
Although I don’t particularly like their cloud services they are undeniably an important part of Microsoft’s business. (And they also own a large chunk of the gaming industry nowadays).
>(And they also own a large chunk of the gaming industry nowadays).
They’re shuttering half their studios, cancelling half their games, and firing game devs by the thousands as they hand halo over to PlayStation lol. You’re technically right but they clearly aren’t taking that part of their business seriously anymore. IIRC Gamepass has plateaued on subscribers for years now even prior to their very aggressive price hikes over the last 18 months.
I saw an article the other day that said Microsoft is telling developers they have to have a 30% return on their games, which is almost double the industry standard. That’s just absurd.
Edit: worth mentioning that you have people openly speculating at this point that they might not even make another Xbox. I’m not quite in that camp, but I also think it is a distinct possibility given the back slide they are clearly in right own when it comes to gaming. Fun fact: It’s been 4 console cycles, almost 25 years, since we saw a major player drop out.
Yeah, you're right on all those fronts.. but they do own some large IP like Call of Duty which will continue to generate money for them for the foreseeable future.
I did hear the speculation about Xbox as well and I hope it's not true. I quite like the Xbox as a console (Series X was the first one I bought, used to be on PlayStation before that). Competition is good for the console space, and Nintendo and PlayStation aren't really competitors IMO. The audience for Switch and PS/Xbox isn't the same.
Yeah I’d be bummed too. I think they were on to something with the Series S (my Xbox currently) in particular but they blew whatever interest they had at the start. For $300 it’s been a fantastic investment, even though it’s collecting dust now.
I’m going to try and find a good source on it but the short version is that Bungie was in deep financial trouble and approached Apple for an acquisition. Jobs didn’t want a video game company as part of their core business as it was not the future he saw for the company, but Microsoft was willing to make that deal, so Bungie went with that for the security. Jobs was pissed but ultimately he passed on an acquisition they felt was necessary for survival.
And Jobs was probably right. Apple was a bad fit for Bungie (and games in general). There is a reason Marathon is virtually unknown when it was one of the best "Doom clones" of the era.
Yeah I agree with it too - plus they were hurting financially, that’s a lot of risk to assume. And frankly what we got with FPS halo seems way better to me anyway. It’s hard to imagine the Apple version would’ve been a better game, but admittedly I am speculating.
I think you might be right but the other side of it is that Microsofts business outside of AI is mature other than their lock on the windows desktop you listed the others :-
Windows competitors are OSX (and the very good Apple hardware), Linux (which thanks to Valve is gaining users at an increased rate).
Teams competes against Slack/Discord
Azure competes against AWS/GCP.
Bing "competes" against Google Search
While they do have a share of each (and a big share of the desktop) they don't really have anywhere they can grow, they've filled their existing niches and are competing with other equally sized companies in all of them.
So spaffing some cash on AI on the off chance it pays off down the line might look smart.
Hell if AI does pay off then they look good and if it doesn't, it'll look bad for everyone who invested and they can at least shrug off the cash hit.
Now that OpenAI is starting to talk about ads and allowing "erotic" content, I feel more comfortable in my prediction that not only have OpenAI never turned a profit, they never will. They will be consumed by Microsoft or crash the market so hard it's not even funny. The technology will survive, and it will be useful, but OpenAI as a company is done.
It’s amusing how “ads” is seen as an obvious way to make profit for OAI as if Google’s (especially) and Meta’s ads businesses aren’t some of the most sophisticated machines on the planet.
Three generations of Twitter leadership couldn’t make ads on that platform profitable and that exposes far more useful user specific information than ChatGPT.
There's an absolutely massive disconnect between the technology Sam Altman is presenting in interviews and what is available. Like they're going to create an AI that will design fusion power plants, but right now they can't turn a profit on a technology that millions of people actually use in their day to day work? Can you sell enough ads to carry you through to the fusion capable AI?
More and more OpenAI is drawing parallels to the Danish scandal of IT Factory. Self-proclaimed world leading innovation and technology in the front, financial sorcery in the back.
If they really believe their AI is going to be so great, I guess they can just ask it for a business model when it gets there. So their lack of business model is at least self-consistent.
That is more or less their actual plan. They ignore or want us to ignore that the technology is commoditising so fast that even if it is great, they won't have enough of an advantage for this to provide an edge for more than a matter of months. Just as Microsoft and anyone betting on AI data centre rollouts want us to ignore that the equipment they are rolling out will be functionally inadequate to support new models in far less time than they can make money to offset the cost; the only part of this capital expenditure that will provide lasting value is the building/power/cooling infrastructure, and probably not all of that.
It's a giant money pit, funding a bunch of people who are not long off the crypto grift train if they are at all.
The LLM space is so weird. On the one hand they are spectacularly amazing tools I use daily to help write code, proofread various documents, understand my home assistant configuration, and occasionally reflect on parenting advice. On the other hand, they are the product of massive tech oligarchs, require $$$$ hardware, dumber than a box of rocks at times, and all the stuff you said. Oh yeah, and it definitely has a whiff of crypto grift all over it, but yet unlike crypto it actually is useful and produces things of value.
Like, where is this tech headed? Is it always going to be something that can only be run economically off shared hardware in a data center or is the day I can run a “near frontier model” on consumer grade hardware just around the corner? Is it always going to be trained and refined by massive centralized powers or will we someday soon be able to join a peer 2 peer training clan ran by denizens of 4chan?
This stuff is so overhyped and yet so under hyped at the same time. I can’t really wrap my head around it.
> the day I can run a “near frontier model” on consumer grade hardware just around the corner?
I suspect it is, in fact. But you can also see why a bunch of very very large, overinvested companies would have incentives to try to make sure it isn't. So it's going to be interesting.
No I just think it's the same people (because it is the same people). They jump from hype technology to hype technology, and many of them had an enormous incentive to jump from one GPU-investment-heavy technology with a bad reputation for grift to the new shiny-clean-hope-for-the-future thing that might help them make use of their capital investments.
But specifically at least one of these people — Sam Altman —- is not, IMO, off the crypto grift train, because he's still chairman of Worldcoin, which strikes me (and more importantly strikes regulators around the world [0]) as a pretty shoddy operation (not to mention creepy and weird).
> It’s amusing how “ads” is seen as an obvious way to make profit for OAI as if Google’s (especially) and Meta’s ads businesses aren’t some of the most sophisticated machines on the planet.
There is much more manipulation potential with LLMs than typical ads. I am worried. It gets more and more difficult to distinct ads and the neutral information.
Twitter executed incredibly, incredibly badly in the ads space. It came out that a majority of their business was brand advertising which just blows my mind.
They should've made so much money on direct response and yet somehow they messed it all up.
Just like they should have been a few times as large in terms of users, but they executed really, really badly.
So I'm not sure Twitters failures imply anything about OpenAIs prospects.
Eventually, yes. But they should've been huge, making substantial fractions (50% )of Meta or Google's revenue. I could never understand what went wrong, tbh.
> There’s a famous Sam Altman interview from 2019 in which he explained OpenAI’s revenue model [1] :
>> The honest answer is we have no idea. We have never made any revenue. We have no current plans to make revenue. We have no idea how we may one day generate revenue. We have made a soft promise to investors that once we’ve built this sort of generally intelligent system, basically, we will ask it to figure out a way to generate an investment return for you. [audience laughter] It sounds like an episode of Silicon Valley, it really does, I get it. You can laugh, it’s all right. But it is what I actually believe is going to happen.
> It really is the greatest business plan in the history of capitalism: “We will create God and then ask it for money.” Perfect in its simplicity. As a connoisseur of financial shenanigans, I of course have my own hopes for what the artificial superintelligence will come up with. “I know what every stock price will be tomorrow, so let’s get to day-trading,” would be a good one. “I can tell people what stocks to buy, so let’s get to pump-and-dumping.” “I can destroy any company, so let’s get to short selling.” “I know what every corporate executive is thinking about, so let’s get to insider trading.” That sort of thing. As a matter of science fiction it seems pretty trivial for an omniscient superintelligence to find cool ways make money. “Charge retail customers $20 per month to access the superintelligence,” what, no, obviously that’s not the answer.
> On a pure science-fiction suspension-of-disbelief basis, this business plan is perfect and should not need any updating until they finish building the superintelligent AI. Paying one billion dollars for a 0.2% stake in whatever God comes up with is a good trade. But in the six years since announcing this perfect business plan, Sam Altman has learned [2] that it will cost at least a few trillion dollars to build the super-AI, and it turns out that the supply of science-fiction-suspension-of-disbelief capital is really quite large but not trillions of dollars.
> [1] At about 31:49 in the video. A bit later he approvingly cites the South Park “underpants gnome” meme.
> [2] Perhaps a better word is “decided.” I wrote the other day about Altman’s above-consensus capital spending plans: “'The deals have surprised some competitors who have far more modest projections of their computing costs,’ because he is better at this than they are. If you go around saying ‘I am going to build transformative AI efficiently,’ how transformative can it be? If you go around saying ‘I am going to need 1,000 new nuclear plants to build my product,’ everyone knows that it will be a big deal.”
Just based on the number of ads I get for thinly veiled erotic chatbots, and the success sites like character.ai have with pretty bad LLMs, there has to be a lot of money in erotic LLM content. OpenAI turning to that market is a sign they are running out of easy investor money, but if they can survive the associated controversy without lobotomizing the models this sounds like a method to turn the entire company profitable over night. They might have to raise prices or abandon the flatrate model to deal with heavy users, but locking adult content behind separate plans might even increase acceptance
Not sure if increased availability of LLM porn or the gradual erosion of LLMs with ads and sponsored content would be the greater evil on a societal level. Neither is particularly great. But they will certainly drive shareholder value
This. If you really think you're a couple of years away from building Digital God, and today have virtually unlimited access to capital, you are not going to spend time shipping a sexy mode.
Isn’t the whole point of AI to replace labor? If they really want to put their money where their mouth is, they’d be casting off staff at a prodigious rate.
Porn is enormously profitable. This might just be the saving grace for AI. Historically, porn has been a pioneer in new tech industries (home video, online commerce, video and streaming). This time they aren't first to the game but don't underestimate the industry.
The saving grace here might be that you can hide your porn subscription in your monthly OpenAI subscription. Only question then: Will VISA and Mastercard cut off OpenAI for peddling porn?
A quick search seems to indicate that the porn industry has a $100B in revenue per year, 20% of which is from subscriptions. If OpenAI consumed the entire global market for subscriptions, $20B, would that cover their yearly operational cost?
Assuming it deals somehow with the folks who use it for revenge porn, deep fakes of non-consenting parties, and depictions of minors…has it said anything about doing that? Has anyone? Does anyone know the legal implications of generating mass quantities of sexual exploitation, or is this just another thing with AI that society will have to simply tolerate in the name of “progress”?
The problem, I think, is that IF OpenAI fail, they'll take with them a lot of other AI companies, simply because funding will be redirected away from the field entirely. If you're profitable, then you're probably going to be fine. If anything your operating costs will go down as there is less competition for staff and compute.
If we go purely by economics, then Anthropic belongs to the same category of LLM corporations - ones which have only LLM as a product. As opposed to the likes of Google, Microsoft, even Facebook. Sure, these LLM-first corporations have a very tiny lead in both technology and (LLM) brand recognition, but it is shrinking fast. I suspect that only companies which will bundle LLMs with other big products (and do it cheaply) will survive in the long run.
Would be totally a guess since as mentioned, they are not being too forth coming. But chances are, the inclusion of GPT into the products probably did not make those products any more profitable than before, and just make them more expensive to run. Everyone who would buy Sharepoint/dynamics 365 already has it. I doubt they saw a massive influx to the user base of these tools due to GPT. Have you heard of a massive influx of new Windows license being bought because og co-pilot? No, its just the normal churn of people upgrading their machines they were probably gonna upgrade soon anyways.
The exception might be Azure with their LLM services.
They're in a tough place with respect to pricing. Qwen3 and DeepSeek's latest local models are too good and are practically free -- so if they try and jack up pricing to a level that ensures profitability, it won't work, as they're simply going to lose too many customers.
There's a mechanism here similar to a Laffer Curve: Charge too much, they lose; charge too little, they lose. OAI needs to strike a delicate balance vs. surging low-cost competition.
The most valuable thing MS gets from its OpenAI dealings is that they can incorporate its AI in all their products. If you look at it as a defensive move to protect the value of Office, Windows, etc. from an AI focused competitor it's worth absorbing the losses. But try showing that on a balance sheet!
Plus, of course, if OpenAI makes money, that's also good for them.
Most of these data centers are built with special purpose vehicles to make the balance sheet look better. Imagine the gnashing of teeth when those get written down
I am surprised and glad that journalists are reporting on this. OpenAI is the hinge in the whole AI bubble, and it has every incentive to keep its financials private if it is not very flattering. So, thats the place to look for funny business - specially given their outlandish and provocative announcements of 16GW of datacenter buildouts which defies economic sense and demands more scrutiny.
Note on how to spot propaganda: use of the phrase "demolish the East Wing..." is used to get an emotional effect, instead of the more factual "build a new ballroom for the White House" statement.
It is obvious that demolishing is the first step in new construction, and has been done before to the White House. You can't give all the context in a single sentence. You can avoid bias or wording that attempts to sway the audience (propaganda).
There is no praise or value judgement on the ballroom. The neutral PoV statement is "Microsoft donated to a new ball room for the White House east wing."
This isn't a subject that needs opinions. "Microsoft donated to a new ball room for the east wing of the White House." is a neutral, factual statement.
As is "Donald Trump ordered the demolition of the existing east wing of the White House, in order to construct a new ballroom on that site. Microsoft has funded this construction work."
Let's say he was demolishing the whole White House, and was replacing it with a high rise, with his name in gold letters on the outside. Would the headline be "Trump expands White House. It's now bigger and better!". Or would it be that Trump destroyed a historic building that he had no right to destroy?
Yup, demolishing is the first step in renovation. You are right, this isn't hard. This is the weirdest topic for globalists to use in their anti-Trump rhetoric. It just makes you look desperate.
Is it really just a ballroom? I see few people mentioning the East Wing was actually covering the White House's underground bunker. Maybe Trump wants a more future-proof nuclear refugee.
Maybe I’m mistaken but I thought I had read somewhere that nukes are now so powerful that bunkers don’t really work, even Cheyanne Mountain not considered safe anymore. If so, not sure if that’s a possible upgrade.
No, it is humorous. Everyone knows the story and there is literally a link to a publication owned by one of the other donors (with full disclosure).
I mean, it would have been possible to examine the birthday letters of Myhrvold and Trump and a couple of Trump quotations to put the financing into context.
This sounds like a terrible approach to accounting. Surely large public companies should account for their expenditure at greater fidelity than billions.
We should be more worried about OpenAI forever twisting the word "Open" the same way as the "Democratic"/"Republic" in the names of countries like North Korea etc.
I always had a critical eye on the huge missteps that Microsoft had especially when it came to acquisitions like Danger, Nokia, whatever the ad network they bought and wrote down, etc.
And then I listened to an Acquired podcast about Microsoft when they interviewed Ballmer as part of the research. He said “At the end of the day, it was only money”. In other words, Microsoft was throwing off so much money from their profitable businesses, they could afford to lose money and take risks without it having any meaningful impact on the company.
The deal with OpenAI is really a nothingburger as far as cash. They aren’t spending any. They are giving OpenAI Azure credits and in return have a huge upside potential.
Yeah I find it really funny how companies are being lambasted essentially for investing in R&D. How dare they put money into anything that isn't guaranteed to yield profits this year! It's positively anti-capitalist!
I figure it's at least a couple of years until the Great Disappointment sets in. When you've been investing half a trillion a year with no realistic hope of a descent ROI, you'll do anything you can to not admit your error.
We were entering a new paradigm, but the price took about 13 years to recover after 2000. Price can get very far ahead of reality, even at the cusp of a new paradigm. The bubble chart is about the price.
Yes, but it took 15 years after the bubble popped for life via internet to really cement for our society in a broader sense. The bubble mechanics still played out, even if the ultimate result was a new paradigm.
Fair point that there’s less direct retail investor exposure than there was with the dot-com implosion, but I don’t think many folks believe this bubble is non-poppable. Even megacorps can’t just keep inflating it forever if no viable business model for AI materializes
By analogy, think about the government. They've been printing money since August 1971, the price of gold has increased from $35 to $4000, and people still accept dollars rather than gold, and even Switzerland sold their gold because they believe that paper money is better. THe party can last forever!
https://www.msn.com/en-us/money/companies/microsoft-needs-to...
Companies have a lot of tools at their disposal to hide things on their balance sheet for a while. However when that happens it typically means the numbers are bad. Really bad. If they weren’t, they’d do everything they can to highlight how great the investment is going.
Same reason why seemingly every CEO on the planet is making hand wavy statements about how their company is leading with AI and it will revolutionize their industry, and yet almost nobody is willing to break out this amazing stuff in their P&L. Funny how that works.
AWS is a great example of the opposite, started around ~2006, it was originally deemed an "internal project" so they did not break it out. It was also really really tiny compared to retail revenue (amazon.com). They didn't actually start to break it out until 2015 and that is after wall street was somewhat demanding for it as it was well known it had experienced exponential growth and was generating billions for amazon. Were they trying to had bad numbers? Negative, they were trying to hide how awesome it was doing because it gave them the ability to make further gains w/ first mover advantage before competitors could react.
https://www.channelfutures.com/cloud/amazon-com-breaks-out-a...
It wasn’t the opposite .
By 2015 they were trying to hide how much of the group growth and profits were largely contributed by just AWS , i.e. they were hiding the e-commerce margins .
Without AWS and subscriptions, Amazon is quite an unprofitable company.
Both overall growth and margin driven by AWS(and prime) while E-commerce revenue remains outsized because they count GMV as revenue which is iffy even when they own the merchandise, but being largely a marketplace these days GMV is very misleading metric.
It would be like Stripe decided to count their revenue as $1.4T the amount they processed this year as revenue rather than $10-20B they actually got after paying the banks, merchants , VISA etc . This 20B is not profit either just the pie from which salaries cloud costs etc have to be paid to get to actual profit.
Correct. It wasn’t a secret that AWS was profitable. Revealing those numbers put a lot more pressure on Amazon to get other business lines in better shape financially. Something Amazon was keen to avoid for as long as it could.
The difference is Amazon was being quiet about AWS, whereas everyone is hyping up how game changing their AI is.
Fair. There are counter examples, although those are pretty rare. Usually publicly traded companies don’t hide when they’re doing really well.
The inverse true now with AWS. Lots of press about analysis on how AWS is in “last place” on AI and while AWS leadership has been doing a lot of hand waving to say they’re not, it’s a pretty safe bet this week’s earnings call won’t have any hard financial numbers to counter press that they’re way behind.
In the grand scheme of things it doesn’t matter. As long as companies are building infrastructure on AWS and AWS can host third party models like it’s doing now with Bedrock.
In my experience - and I’ve run comparisons against the various models for projects (consulting) - their in house Nova models usually give me the best results on the spectrum of speed/quality/cost I need for a given project.
Even if this isn't Enrony, this sounds so Enrony (if you know anything about the Enron accounting scandal)
"How Microsoft has managed to avoid disclosing such basic details is baffling. The company in its financial reports identifies OpenAl as an equity-method investment. That means OpenAl, by definition, is a related party of Microsoft under the accounting rules. Microsoft, however, doesn't identify OpenAl in its financial reports as a related party, and doesn't say anything about its transactions with OpenAl in its related-party disclosures."
If its equity accounted it won't be considered a related party as far as I understand. Related party in IFRS isnt what you think it is. Its the equivalent of "extended family".
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/fin...
26.5 Common related party transactions
In order to comply with the related party disclosure requirements, a reporting entity must identify all of its transactions with related parties.[…]
26.5.1 Disclosure of related party equity method investments
Equity method investees are, by definition, related parties of the equity holder.
It's not a related party that's the point.
“Equity method investees are, by definition, related parties of the equity holder.” suggests otherwise. You may need to elaborate your point.
AFAIK Microsoft didn't put any kind of liquid money into OpenAI, it's something like "you can use up to nB USD of our resources for free", not sure how that should go into accounting. It could even be a liability without much juggling.
Yeah, Enron didn't really put any money into its related parties, it just used to them to move things around. I don't think it is Enron, but related parties shenanigans give me the chills.
Accounting mostly focuses on the value of things, not “liquid money.”
A cash-flow statement does exactly that.
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IANAA, but AFAIK income from bartering is taxable on the basis of the fair market value of the goods or services bartered at the time of exchange.
Yes. You don’t need to be moving $ to have a profit or loss. You could take your salary in sacks of potatoes. You still owe the government taxes on the fair market value of your pile of potatoes.
A while back there was a big fuss because executives were caught not paying tax on the fair market value of extra perks they were getting like use of the corporate jet on the weekends for trips to the beach house. Anything that’s not purely a business expense is considered compensation and is taxable.
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A play about Enron's financial scandal was recently back showing in London.
Feels somewhat prescient.
> Companies have a lot of tools at their disposal to hide things on their balance sheet for a while. However when that happens it typically means the numbers are bad. Really bad. If they weren’t, they’d do everything they can to highlight how great the investment is going.
There are many legitimate reasons to not disclose an investment on your balance sheet:
- materiality: immaterial compared to overall position
- classification: research-phase or contingent on future event
- control & ownership: if you don't have significant control or ownership
- off-balance sheet arrangements: SPVs, JVs, lease agreements that don't meet consolidation criteria (disclosed in notes, but not recognized as assets or liabilities due to limited exposure)
- strategy or confidentiality: minimize visibility to protect competitive information or negotiations; must still comply with disclosure rules so details might appear in aggregated or summarized form
- regulatory or accounting policy differences: IFRS vs. US GAAP have different recognition and measurement bases
- held-for-trading or short-term nature: e.g. marketable securities might be short-term trading assets so would be grouped together in a single line item, rather than disclosed separately
Yes. The point of the article though is that the list of usual excuses is becoming hard to justify here.
Sounds like you are suggesting there are a lot of legitimate reasons to mislead shareholders. OpenAI is private and that's one thing. Microsoft is not.
> Companies have a lot of tools at their disposal to hide things on their balance sheet for a while.
That's why some analysts ignore most company-provided metrics and just focus on cash-flow. You need inside and outside of the house fudgers to mess with that metric.
But isn’t there some of that? Microsoft buys services for prices it might influence the sticker price of
sticker price, or amount of cash that actually changes hands?
I think you’re calling out two different phenomena: 1) the gold rush mentality leads to bad investments (at least in the short term), and 2) in a hype bubble companies are incentivized to attach everything to the hype, even if it’s not real (many companies talk AI but aren’t seriously investing).
Both are true in many cases. But to the extent companies are making major investments that are strategically correct but won’t make money for years, it’s still the right move to hide stuff in financial statements.
Markets don’t reward long term investments. Everything has to be short term, and if it’s not paying off instantly, short term investors get no value and want it stopped.
Net result: lots of PR about AI, but almost every company is incentivized to downplay it financially.
You’re not wrong, but the point of the article is that for a publicly traded company there’s an expectation of more transparency. The size of the losses is getting to a point where it can’t just be kept hidden inside a handwavy “other” line item.
IF said investments are strategically correct (considering their amounts). A few years bck companies were making strategic investments in the VR/AR/XR goggles, on a bet that tech would become cheaper in a few years while quality would improve dramatically. And they were correct in the price and quality aspects. But they were fundamentally wrong strategically, regarding millions of people wanting a display semi-permanently strapped in their visual area. Apparently not many people want it and even less need it, which was drastically different from the mode of work of CEOs, which is to always move and issue commands while walking/driving etc. Same story with multiple failed voice assistants.
That opinion really doesn’t jibe with all of the money “the market” is putting into money losing AI companies with no hopes of profitability in the near future or - Tesla.
> Markets don’t reward long term investments. Everything has to be short term, and if it’s not paying off instantly, short term investors get no value and want it stopped.
The AI investment bubble is almost entirely about making long-term, extremely expensive investments. That's what the gigantic datacenter build-out is about, not short-term investments and short-term returns. They're telling everybody, persistently, that they're making huge long-term bets, and the market is rewarding them like crazy. See: Oracle's run due to long-term bets on AI (it's certainly not short-term results causing the stock to do that, their short-term growth has been mediocre).
Amazon for two decades repeatedly told investors they were making extremely expensive, long-term investments in build-out (eg their fulfillment build-out era), where the primary payoff would be far into the future. The market bought into the long-term on the basis that it was attached to Bezos at the center (that he'd be there to deliver that long-term result). The same is true about Elon Musk with Tesla: they have endlessly made outlandish long-term proclamation to drive their stock. Tesla: robot super business, self-driving taxi business, et al - these are 10-20-30 year long-term claims by Tesla and the market has aggressively rewarded it. That's because they think Musk will/might be there to guide it to actuality. In most cases investors don't buy in because they know the CEO & team won't be around even seven years from now.
Markets (investors) reward long-term if they can be made to believe in the long-term. The issue is that most companies are not believable on long-term statements, they don't have a leadership that will be around for any long-term delivery. Buffett, Bezos, Musk, Zuckerberg were/are long-term attachments so the market has been willing to buy in on various long-term bets.
Agree on the long term concept, but there’s little comparison between Amazon’s early years and now. Amazon spent money on tangible capital infrastructure that was highly differentiated and long lasting (fulfillment centers, logistics networks). That costs a ton up front but can be used for decades. Folks struggle to compete with Amazon now because that infrastructure is a giant physical logistics moat that’s not easily replicated.
The AI bubble is far from that. Companies are spending tons on GPUs that have limited lifespan, building models that have limited lifespan, using algorithms that are all basically the same, in a space where someone can dump a “good enough” open source model on the market and blow up your business overnight. There’s very little lasting value in what’s being built and the “we’re investing for the long term” arguments don’t hold much water. It’s like saying you’re investing in real estate but then you keep tearing down the building and rebuilding it every 18 months. That just doesn’t work.
There might be some longer term fungible value from some of the baseline infrastructure investments (data centers, electrical upgrades) but those are undifferentiated and highly fungible.
I wonder if this is how it felt shortly before the dot com crash. So enraging that my livelihood is likely to end up threatened by people just flat out lying and they will not experience any consequences for it.
“Irrational exuberance.”
There are parallels here of folks getting so caught up in the hype that they forgot business fundamentals. Everytime folks say “but this is different” and every time it’s not.
It's certainly different this time; machines have never been able to do anything like what they can do now. You might as well argue that the Industrial Revolution or the Internet itself wasn't "different this time."
But the phrase "this time" requires a lot of hand-waving. The current generation of models is obviously a bubble, which means that businesses based on them are also participants in a bubble. The market seems to be pricing in various unspecified future miracles. Given the history of AI to date, the miracles needed to justify current valuations might arrive next week, next year, or 30 years from now.
They will arrive, though. That part is no longer up for debate by anyone who's been paying attention since AlphaGo, never mind Vaswani.
I don't think anyone is questioning current or future capabilities.
It's more of a question if it will ever actually be profitable or marketable without subsidizing most of the cost of running it.
We're seeing the same with streaming services right now. 5-10 years ago, everyone thought they needed their own streaming service and heavily invested into building one and acquiring licenses or producing content for it. Now we're seeing the part where they are trying to make it profitable by raising prices/adding ads or both.
I'm not sure if OpenAI will ever be able to just run by themselves. Without major outside investments to subsidize the cost of actually having users use their services.
But that isn’t different than previous bubbles, either. The first dot com crash was an over investment in online shopping. And yet we all online shop for everything now. Same with the video games crash in the 80s, now a wildly successful industry.
This is a silly article. Since MSFT took a ~49% stake in OpenAI, it records its share of OpenAI's net losses in the other income line under the equity method of accounting. MSFT is offsetting its taxable income based on a prior investment
The complaint is not that MSFT is reporting the loss. It's that, in terms of both the % of OpenAI and the dollar value of the stake, it's large enough that there should also be a related party disclosure.
IANAA so I don't know how true that is. Just wanting to point out that I don't think you're responding to the key point of the article.
Can you elaborate on this a bit more? Does that mean OpenAI had a ~$9.4 billion loss so MSFT needs to put 49% of that loss in their books?
Yes
I always chuckle when tech writers take a stab at financial statements
Heard on the Street is the financial side of the WSJ.
Moreover, the author of this article is the reporter who first reported on Enron's sketchy accounting: https://en.wikipedia.org/wiki/Jonathan_Weil
This is a funny sentence bc I consider the WSJ to be a financial news source in general
It's from the financial side of a financially focused paper.
Anything else you can add to the conversation?
Does Microsoft even have an OpenAI stake? Their original more public deal was revenue sharing up until they reached 100x $1 billion. That doesn't sound like a stake.
They also had tech sharing valid until the OpenAI board declares 'AGI'.
That seems like a really bad deal. And that was probably at the time when Microsoft had the most leverage to make a deal. Their subsequent deals would make sense to be worse.
They have a very creative investment structure but they do own a stake in OpenAI. It’s just sounds more like a commercial agreement the way it was laid out, which primarily has to do with OAIs organizational structure
If the deal is still based around capped revenue, I wouldn't call it an ownership stake.
As far as I know, they have not disclosed it. If you have more information about something concrete regarding ownership, I'd love to hear it. Maybe I haven't understood everything that was stated.
In the end, whatever Microsoft has is probably less valuable than a sizable ownership chunk that most people seem to assume.
I imagine a lot of people are investing in Microsoft as a proxy to OpenAI. Those people are set to be disappointed.
OpenAI and MS have been negotiating about turning that into a straight percentage of equity.
How is it already losing that much money on its OpenAI investment?
OpenAI is a textbook example of having fun by burning cash. Nobody doubts it’s “cool.” Lots of people questioning if there’s an actual business there.
I definitely think fundamental research is fun, I think it's unfortunate that people are so focused on quarterly profits that they think Microsoft shouldn't be investing in fundamental research. And are deriding it as "cool" as if that were a bad thing.
That's not how any of this is sold though. Google did a lot of fundamental research quite publicly in this space for many years, and people were generally quite favourable of this and didn't ask to see insane revenue from it (yet). But Microsoft is not doing that, not even by proxy of funding OpenAI. They are selling it as the greatest business thing ever, so where are the numbers to back that?
Not to mention also shoving it into every product even without a solid reason or use case for it. Microsoft has been making AI the focal point of everything they do recently. Google spend years investing in fundamental research into AI while not making it the focal point of everything they did.
You can invest in a fundamental research without investing in a company creating tons of weird circular financial deals.
I think it makes Microsoft feel bigger though.
If Microsoft were just Windows, Teams, Azure, Bing and whatever it is, Microsoft would actually feel like a competitor for firms like Canonical or Red Hat or SUSE which happens to be big but nothing special relative to the others, whereas it now, with with this very public service feels like a behemoth.
Huh, that’s a funky statement because having “Azure”, one of the largest Cloud Providers outside of China is definitely a different camp than Canonical, Red Hat and SUSE.
Although I don’t particularly like their cloud services they are undeniably an important part of Microsoft’s business. (And they also own a large chunk of the gaming industry nowadays).
>(And they also own a large chunk of the gaming industry nowadays).
They’re shuttering half their studios, cancelling half their games, and firing game devs by the thousands as they hand halo over to PlayStation lol. You’re technically right but they clearly aren’t taking that part of their business seriously anymore. IIRC Gamepass has plateaued on subscribers for years now even prior to their very aggressive price hikes over the last 18 months.
I saw an article the other day that said Microsoft is telling developers they have to have a 30% return on their games, which is almost double the industry standard. That’s just absurd.
Edit: worth mentioning that you have people openly speculating at this point that they might not even make another Xbox. I’m not quite in that camp, but I also think it is a distinct possibility given the back slide they are clearly in right own when it comes to gaming. Fun fact: It’s been 4 console cycles, almost 25 years, since we saw a major player drop out.
Yeah, you're right on all those fronts.. but they do own some large IP like Call of Duty which will continue to generate money for them for the foreseeable future.
I did hear the speculation about Xbox as well and I hope it's not true. I quite like the Xbox as a console (Series X was the first one I bought, used to be on PlayStation before that). Competition is good for the console space, and Nintendo and PlayStation aren't really competitors IMO. The audience for Switch and PS/Xbox isn't the same.
Yeah I’d be bummed too. I think they were on to something with the Series S (my Xbox currently) in particular but they blew whatever interest they had at the start. For $300 it’s been a fantastic investment, even though it’s collecting dust now.
> firing game devs by the thousands as they hand halo over to PlayStation
They kind of took it from Apple to begin with. We almost had Halo on the iMac before Microsoft acquired Bungie [1].
[1] https://www.youtube.com/watch?v=6eZ2yvWl9nQ
Very familiar with that actually! Apple abandoned halo and Bungie, desperate for money, signed with M$. Hence the change 3rd to 1st person!
I'd no idea about this... any good additional reading? I'm a big Marathon fan and will likely try and finish Infinity over the holidays.
I’m going to try and find a good source on it but the short version is that Bungie was in deep financial trouble and approached Apple for an acquisition. Jobs didn’t want a video game company as part of their core business as it was not the future he saw for the company, but Microsoft was willing to make that deal, so Bungie went with that for the security. Jobs was pissed but ultimately he passed on an acquisition they felt was necessary for survival.
And Jobs was probably right. Apple was a bad fit for Bungie (and games in general). There is a reason Marathon is virtually unknown when it was one of the best "Doom clones" of the era.
Yeah I agree with it too - plus they were hurting financially, that’s a lot of risk to assume. And frankly what we got with FPS halo seems way better to me anyway. It’s hard to imagine the Apple version would’ve been a better game, but admittedly I am speculating.
Yes, of course those things are huge, but I was focused on perceptions.
Suddenly Microsoft has gone from being some software to being everywhere. I know that Azure is huge, but you don't see Azure.
I think you might be right but the other side of it is that Microsofts business outside of AI is mature other than their lock on the windows desktop you listed the others :-
Windows competitors are OSX (and the very good Apple hardware), Linux (which thanks to Valve is gaining users at an increased rate).
Teams competes against Slack/Discord
Azure competes against AWS/GCP.
Bing "competes" against Google Search
While they do have a share of each (and a big share of the desktop) they don't really have anywhere they can grow, they've filled their existing niches and are competing with other equally sized companies in all of them.
So spaffing some cash on AI on the off chance it pays off down the line might look smart.
Hell if AI does pay off then they look good and if it doesn't, it'll look bad for everyone who invested and they can at least shrug off the cash hit.
Microsoft already has a new business out of the deal. OpenAI can now be extinguished at the earliest convenience.
You may not be following OA for a while! They’ve never turned a profit. So, someone on the other side has to lose for them to stay afloat!
> They’ve never turned a profit
Now that OpenAI is starting to talk about ads and allowing "erotic" content, I feel more comfortable in my prediction that not only have OpenAI never turned a profit, they never will. They will be consumed by Microsoft or crash the market so hard it's not even funny. The technology will survive, and it will be useful, but OpenAI as a company is done.
It’s amusing how “ads” is seen as an obvious way to make profit for OAI as if Google’s (especially) and Meta’s ads businesses aren’t some of the most sophisticated machines on the planet.
Three generations of Twitter leadership couldn’t make ads on that platform profitable and that exposes far more useful user specific information than ChatGPT.
The hubris is incredible.
There's an absolutely massive disconnect between the technology Sam Altman is presenting in interviews and what is available. Like they're going to create an AI that will design fusion power plants, but right now they can't turn a profit on a technology that millions of people actually use in their day to day work? Can you sell enough ads to carry you through to the fusion capable AI?
More and more OpenAI is drawing parallels to the Danish scandal of IT Factory. Self-proclaimed world leading innovation and technology in the front, financial sorcery in the back.
If they really believe their AI is going to be so great, I guess they can just ask it for a business model when it gets there. So their lack of business model is at least self-consistent.
Right now they may be a bit scarce on business plans and revenue, but I hear they're ushering in an era of "post-scarcity" so that should fix it.
I never saw it, but I heard that was the actual original pitch deck.
I have basically no sympathy toward them, but that’s cool, that’s ballsy.
I should point out that making the pitch deck sound ballsy and cool was that persons goal. So it may have been a made up story.
That is more or less their actual plan. They ignore or want us to ignore that the technology is commoditising so fast that even if it is great, they won't have enough of an advantage for this to provide an edge for more than a matter of months. Just as Microsoft and anyone betting on AI data centre rollouts want us to ignore that the equipment they are rolling out will be functionally inadequate to support new models in far less time than they can make money to offset the cost; the only part of this capital expenditure that will provide lasting value is the building/power/cooling infrastructure, and probably not all of that.
It's a giant money pit, funding a bunch of people who are not long off the crypto grift train if they are at all.
The LLM space is so weird. On the one hand they are spectacularly amazing tools I use daily to help write code, proofread various documents, understand my home assistant configuration, and occasionally reflect on parenting advice. On the other hand, they are the product of massive tech oligarchs, require $$$$ hardware, dumber than a box of rocks at times, and all the stuff you said. Oh yeah, and it definitely has a whiff of crypto grift all over it, but yet unlike crypto it actually is useful and produces things of value.
Like, where is this tech headed? Is it always going to be something that can only be run economically off shared hardware in a data center or is the day I can run a “near frontier model” on consumer grade hardware just around the corner? Is it always going to be trained and refined by massive centralized powers or will we someday soon be able to join a peer 2 peer training clan ran by denizens of 4chan?
This stuff is so overhyped and yet so under hyped at the same time. I can’t really wrap my head around it.
> the day I can run a “near frontier model” on consumer grade hardware just around the corner?
I suspect it is, in fact. But you can also see why a bunch of very very large, overinvested companies would have incentives to try to make sure it isn't. So it's going to be interesting.
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> funding a bunch of people who are not long off the crypto grift train if they are at all.
Your last statement: are you implying that the AI-bubble is perhaps an attempt at building out more cryptocurrency mining outfits?
No I just think it's the same people (because it is the same people). They jump from hype technology to hype technology, and many of them had an enormous incentive to jump from one GPU-investment-heavy technology with a bad reputation for grift to the new shiny-clean-hope-for-the-future thing that might help them make use of their capital investments.
But specifically at least one of these people — Sam Altman —- is not, IMO, off the crypto grift train, because he's still chairman of Worldcoin, which strikes me (and more importantly strikes regulators around the world [0]) as a pretty shoddy operation (not to mention creepy and weird).
[0] https://en.wikipedia.org/wiki/World_(blockchain)#Legal_and_r...
"Could it be that, once again", Sam Altman is really not that far removed from a grifter?
> It’s amusing how “ads” is seen as an obvious way to make profit for OAI as if Google’s (especially) and Meta’s ads businesses aren’t some of the most sophisticated machines on the planet.
There is much more manipulation potential with LLMs than typical ads. I am worried. It gets more and more difficult to distinct ads and the neutral information.
I think ChatGPT's user info will be far more valuable than twitters or even metas.
Yes, all that user info such as “write me hot waifu erotica”…super valuable.
The court order from the Google search antitrust case gives OAI access to Google Ads for 5 years, if they choose.
Twitter executed incredibly, incredibly badly in the ads space. It came out that a majority of their business was brand advertising which just blows my mind.
They should've made so much money on direct response and yet somehow they messed it all up.
Just like they should have been a few times as large in terms of users, but they executed really, really badly.
So I'm not sure Twitters failures imply anything about OpenAIs prospects.
Twitter at least booked profit which is more than anyone can ever say about OpenAI.
Eventually, yes. But they should've been huge, making substantial fractions (50% )of Meta or Google's revenue. I could never understand what went wrong, tbh.
https://www.bloomberg.com/opinion/newsletters/2025-10-15/ope...
> There’s a famous Sam Altman interview from 2019 in which he explained OpenAI’s revenue model [1] :
>> The honest answer is we have no idea. We have never made any revenue. We have no current plans to make revenue. We have no idea how we may one day generate revenue. We have made a soft promise to investors that once we’ve built this sort of generally intelligent system, basically, we will ask it to figure out a way to generate an investment return for you. [audience laughter] It sounds like an episode of Silicon Valley, it really does, I get it. You can laugh, it’s all right. But it is what I actually believe is going to happen.
> It really is the greatest business plan in the history of capitalism: “We will create God and then ask it for money.” Perfect in its simplicity. As a connoisseur of financial shenanigans, I of course have my own hopes for what the artificial superintelligence will come up with. “I know what every stock price will be tomorrow, so let’s get to day-trading,” would be a good one. “I can tell people what stocks to buy, so let’s get to pump-and-dumping.” “I can destroy any company, so let’s get to short selling.” “I know what every corporate executive is thinking about, so let’s get to insider trading.” That sort of thing. As a matter of science fiction it seems pretty trivial for an omniscient superintelligence to find cool ways make money. “Charge retail customers $20 per month to access the superintelligence,” what, no, obviously that’s not the answer.
> On a pure science-fiction suspension-of-disbelief basis, this business plan is perfect and should not need any updating until they finish building the superintelligent AI. Paying one billion dollars for a 0.2% stake in whatever God comes up with is a good trade. But in the six years since announcing this perfect business plan, Sam Altman has learned [2] that it will cost at least a few trillion dollars to build the super-AI, and it turns out that the supply of science-fiction-suspension-of-disbelief capital is really quite large but not trillions of dollars.
> [1] At about 31:49 in the video. A bit later he approvingly cites the South Park “underpants gnome” meme.
> [2] Perhaps a better word is “decided.” I wrote the other day about Altman’s above-consensus capital spending plans: “'The deals have surprised some competitors who have far more modest projections of their computing costs,’ because he is better at this than they are. If you go around saying ‘I am going to build transformative AI efficiently,’ how transformative can it be? If you go around saying ‘I am going to need 1,000 new nuclear plants to build my product,’ everyone knows that it will be a big deal.”
The switch from "Ai might kill us" to "you'll goon to Ai" was kinda funny, not gonna lie
This may be the funniest comment I've ever read, considering the circumstances.
Just based on the number of ads I get for thinly veiled erotic chatbots, and the success sites like character.ai have with pretty bad LLMs, there has to be a lot of money in erotic LLM content. OpenAI turning to that market is a sign they are running out of easy investor money, but if they can survive the associated controversy without lobotomizing the models this sounds like a method to turn the entire company profitable over night. They might have to raise prices or abandon the flatrate model to deal with heavy users, but locking adult content behind separate plans might even increase acceptance
Not sure if increased availability of LLM porn or the gradual erosion of LLMs with ads and sponsored content would be the greater evil on a societal level. Neither is particularly great. But they will certainly drive shareholder value
This. If you really think you're a couple of years away from building Digital God, and today have virtually unlimited access to capital, you are not going to spend time shipping a sexy mode.
Why not do both if you have unlimited capital today?
Do they also have infinite labor?
Isn’t the whole point of AI to replace labor? If they really want to put their money where their mouth is, they’d be casting off staff at a prodigious rate.
Because you don't have unlimited attention
But people have attention now, and it's surely quicker to make sexy mode than God.
Porn is enormously profitable. This might just be the saving grace for AI. Historically, porn has been a pioneer in new tech industries (home video, online commerce, video and streaming). This time they aren't first to the game but don't underestimate the industry.
It's not as profitable as the original promise of AI to cut labour costs on a massive scale. Stockholders won't be happy.
The saving grace here might be that you can hide your porn subscription in your monthly OpenAI subscription. Only question then: Will VISA and Mastercard cut off OpenAI for peddling porn?
A quick search seems to indicate that the porn industry has a $100B in revenue per year, 20% of which is from subscriptions. If OpenAI consumed the entire global market for subscriptions, $20B, would that cover their yearly operational cost?
Assuming it deals somehow with the folks who use it for revenge porn, deep fakes of non-consenting parties, and depictions of minors…has it said anything about doing that? Has anyone? Does anyone know the legal implications of generating mass quantities of sexual exploitation, or is this just another thing with AI that society will have to simply tolerate in the name of “progress”?
Do you predict the same for Anthropic? Hopefully they will stick around.
The problem, I think, is that IF OpenAI fail, they'll take with them a lot of other AI companies, simply because funding will be redirected away from the field entirely. If you're profitable, then you're probably going to be fine. If anything your operating costs will go down as there is less competition for staff and compute.
If we go purely by economics, then Anthropic belongs to the same category of LLM corporations - ones which have only LLM as a product. As opposed to the likes of Google, Microsoft, even Facebook. Sure, these LLM-first corporations have a very tiny lead in both technology and (LLM) brand recognition, but it is shrinking fast. I suspect that only companies which will bundle LLMs with other big products (and do it cheaply) will survive in the long run.
> OpenAI is starting to talk about ads and allowing "erotic" content
I'm curious what you're referring to here. Did Sam Altman tweet something about this?
Surely nothing bad could happen by basing our entire economy and stock market health on these companies!
To be fair, MSFT is likely making a ton of money (or more likely, preventing churn) with their GPT-powered products for the enterprise.
So the math is probably harder than it seems.
Would be totally a guess since as mentioned, they are not being too forth coming. But chances are, the inclusion of GPT into the products probably did not make those products any more profitable than before, and just make them more expensive to run. Everyone who would buy Sharepoint/dynamics 365 already has it. I doubt they saw a massive influx to the user base of these tools due to GPT. Have you heard of a massive influx of new Windows license being bought because og co-pilot? No, its just the normal churn of people upgrading their machines they were probably gonna upgrade soon anyways.
The exception might be Azure with their LLM services.
Nobody really knows, they hide Copilot inside each of the business units and then claim it's too hard to split out.
They're in a tough place with respect to pricing. Qwen3 and DeepSeek's latest local models are too good and are practically free -- so if they try and jack up pricing to a level that ensures profitability, it won't work, as they're simply going to lose too many customers.
There's a mechanism here similar to a Laffer Curve: Charge too much, they lose; charge too little, they lose. OAI needs to strike a delicate balance vs. surging low-cost competition.
The other commenters in here oblivious to the history of companies like Amazon and Google.
Profit is what you have when you have no confidence in how to reinvest what you earn already.
Because OpenAI loses far, far more. It may be one of the least profitable companies in history.
They can open up all day long, I still don't want them forcing "AI" down my throat.
The most valuable thing MS gets from its OpenAI dealings is that they can incorporate its AI in all their products. If you look at it as a defensive move to protect the value of Office, Windows, etc. from an AI focused competitor it's worth absorbing the losses. But try showing that on a balance sheet!
Plus, of course, if OpenAI makes money, that's also good for them.
The real story will be when companies report valuation losses from their investments in AI companies after the bubble bursts, or even deflates a bit.
Expect lots of hand wavy “non-GAAP” numbers pushed by leadership trying to gloss over their failed AI investments.
That’s earnings call speak for “If you ignore the pile of your money we lost with bad AI investment decisions, we’ve had a good quarter. Moving on…”
Most of these data centers are built with special purpose vehicles to make the balance sheet look better. Imagine the gnashing of teeth when those get written down
Yes… a lot of this is pretty hidden on the balance sheets but eventually GAAP catches up one way or another.
I am surprised and glad that journalists are reporting on this. OpenAI is the hinge in the whole AI bubble, and it has every incentive to keep its financials private if it is not very flattering. So, thats the place to look for funny business - specially given their outlandish and provocative announcements of 16GW of datacenter buildouts which defies economic sense and demands more scrutiny.
Microsoft won't even publicly say how much they paid to help demolish the East Wing of the White House.
https://www.cnbc.com/2025/10/23/trump-white-house-east-wing-...
Note on how to spot propaganda: use of the phrase "demolish the East Wing..." is used to get an emotional effect, instead of the more factual "build a new ballroom for the White House" statement.
Context matters. White House has history and the wing was defenitely demolished.
Whether you want to hide it and ignore the history and praise the ballroom, you alternatively omit the demolish part. Propaganda works for both ways.
https://www.whitehousehistory.org/collections/president-trum... https://en.wikipedia.org/wiki/White_House_Reconstruction
It is obvious that demolishing is the first step in new construction, and has been done before to the White House. You can't give all the context in a single sentence. You can avoid bias or wording that attempts to sway the audience (propaganda).
There is no praise or value judgement on the ballroom. The neutral PoV statement is "Microsoft donated to a new ball room for the White House east wing."
Glad that every statement of personal opinion is now "propaganda"...
This isn't a subject that needs opinions. "Microsoft donated to a new ball room for the east wing of the White House." is a neutral, factual statement.
As is "Donald Trump ordered the demolition of the existing east wing of the White House, in order to construct a new ballroom on that site. Microsoft has funded this construction work."
I get it, it's hard to wrap your head around two statements being true at the same time
Let's say he was demolishing the whole White House, and was replacing it with a high rise, with his name in gold letters on the outside. Would the headline be "Trump expands White House. It's now bigger and better!". Or would it be that Trump destroyed a historic building that he had no right to destroy?
de·mol·ish - /dəˈmäliSH/ - verb - pull or knock down (a building).
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Picture of the East wing today:
https://ichef.bbci.co.uk/ace/standard/1024/cpsprodpb/2089/li...
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This isn't hard.
Yup, demolishing is the first step in renovation. You are right, this isn't hard. This is the weirdest topic for globalists to use in their anti-Trump rhetoric. It just makes you look desperate.
Yawn. Nonetheless, glad we agreed on demolishment - it's hard to get any of that from you guys these days.
Is it really just a ballroom? I see few people mentioning the East Wing was actually covering the White House's underground bunker. Maybe Trump wants a more future-proof nuclear refugee.
Maybe I’m mistaken but I thought I had read somewhere that nukes are now so powerful that bunkers don’t really work, even Cheyanne Mountain not considered safe anymore. If so, not sure if that’s a possible upgrade.
They can gate to the alpha site if the danger is serious enough.
No, it is humorous. Everyone knows the story and there is literally a link to a publication owned by one of the other donors (with full disclosure).
I mean, it would have been possible to examine the birthday letters of Myhrvold and Trump and a couple of Trump quotations to put the financing into context.
They're doing hundreds of billions of revenue a year, a one-off 4.7B to OAI honestly sounds like nothing on that balance sheet.
Reuters says $12B: https://www.reuters.com/business/openai-hits-12-billion-annu...
Microsoft did $245B in revenue in 2024.
Oh sorry, I misread the parent
This sounds like a terrible approach to accounting. Surely large public companies should account for their expenditure at greater fidelity than billions.
Tim Berners Lee: during .com bubble, companies were high on marketing and low on profits.
Like Amazon?
We should be more worried about OpenAI forever twisting the word "Open" the same way as the "Democratic"/"Republic" in the names of countries like North Korea etc.
Text-only:
https://assets.msn.com/content/view/v2/Detail/en-in/AA1Pg1O4...
But hey they are betting on optimism!
Oh, so they did lay people off because of AI.
"How is it a write-off?"
"They just write it off."
"Write it off what?"
"Jerry, all these big companies, they write off everything."
https://www.youtube.com/watch?v=XEL65gywwHQ
You don't even know what a write-off is do you?
I love that bit. So many people think write offs mean you get the thing for free somehow. No, no you do not get the thing for free.
Knowing Microsoft I assume this is due to a sharepoint bug.
This is from the Annual Report.
Maybe I just don’t know this writer very well but this is a surprising take to see on the WSJ
I always had a critical eye on the huge missteps that Microsoft had especially when it came to acquisitions like Danger, Nokia, whatever the ad network they bought and wrote down, etc.
And then I listened to an Acquired podcast about Microsoft when they interviewed Ballmer as part of the research. He said “At the end of the day, it was only money”. In other words, Microsoft was throwing off so much money from their profitable businesses, they could afford to lose money and take risks without it having any meaningful impact on the company.
The deal with OpenAI is really a nothingburger as far as cash. They aren’t spending any. They are giving OpenAI Azure credits and in return have a huge upside potential.
Yeah I find it really funny how companies are being lambasted essentially for investing in R&D. How dare they put money into anything that isn't guaranteed to yield profits this year! It's positively anti-capitalist!
Microsoft and open... I know kids these days don't bother learning the story of things but... that's a hard sell.
No they don't
This is exactly why I am telling people the AI bubble is different. It is not poppable, even if it's size is bigger than other bubbles.
Megacorps control so much of them that the financial side has so little volatility.
No seriously this time line really will go up forever guys.
I don’t know about forever, but there’s a reason all these companies gave so much money to Trump. I think it can keep going up a while.
I figure it's at least a couple of years until the Great Disappointment sets in. When you've been investing half a trillion a year with no realistic hope of a descent ROI, you'll do anything you can to not admit your error.
I've heard that one too!, but seriously, it could keep going for a while.
Would you say we are in a New Paradigm?
https://transportgeography.org/contents/chapter3/transportat...
I've got, and you likely as well, a lifetime ouvre which shows that dot com was, in fact a new paradigm.
We were entering a new paradigm, but the price took about 13 years to recover after 2000. Price can get very far ahead of reality, even at the cusp of a new paradigm. The bubble chart is about the price.
https://fred.stlouisfed.org/graph/?g=zR9T
Yes, but it took 15 years after the bubble popped for life via internet to really cement for our society in a broader sense. The bubble mechanics still played out, even if the ultimate result was a new paradigm.
It's wild that I get down voted like I'm advocating for it while I'm clearly calling out the hazards of megacorporate power
Fair point that there’s less direct retail investor exposure than there was with the dot-com implosion, but I don’t think many folks believe this bubble is non-poppable. Even megacorps can’t just keep inflating it forever if no viable business model for AI materializes
"no viable business model for AI materializes"
Literally every aspect of commerce is exposed and the costs are arbitrarily scalable and diminishing over time.
I'm really curious for you to elaborate on this world where AI progress is a dead end in the evolution of man or intelligence
Hahahaha, that's the spirit. We're invincible. Unsinkable. Nothing could ever stop the music : )
By analogy, think about the government. They've been printing money since August 1971, the price of gold has increased from $35 to $4000, and people still accept dollars rather than gold, and even Switzerland sold their gold because they believe that paper money is better. THe party can last forever!
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