The AI Money Trap, Part Two

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Hi, I'm Ed Zitron, and this is the second part of this week's Better Offline.

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Anyway, the thrust of this two-part is that the AI trade is going to, as you've probably guessed by now, end badly.

And as I'll also explain, I believe we're now set up for potentially economic and market-wrecking consequences of this hysterical investment bubble.

Today, we're going to go beyond just start-ups and into how the poison of the bubble has crept into our economy and how dangerous things are getting as a result.

In the first installment we talked about Cursor, the AI coding startup that, despite having no moat and zero sustainability, has somehow earned a valuation of ten billion dollars and then asked why none of these generative AI companies are being acquired, at least not in the traditional sense.

And no, I'm not including the acquisitions where a big company snags the talent and leaves barely breathing bodies of startups in their wake.

This matters because if these AI companies can't get an exit, go public or get bought, it raises serious questions about how any of this ends.

Cursor is the best example, and the fact that Anthropic is hopelessly dependent on Cursor for revenue, despite doing everything they can to kill it, makes the entire situation feel a little bit weird.

Cursor's paths to viability seem, frankly, to be non-existent, and the collapse of Cursor will inevitably result in a vast chunk of Anthropic's revenues going up in smoke, which again will also make its collapse seem inevitable, as how can it fundraise an evaluation over its previous one when its biggest customer just died?

So much of what I'm describing is structural, and few companies have bigger structural obstacles to survival than OpenAI.

As a reminder, OpenAI appears to have burned at least $10 billion in the last two months.

It has just raised another $8.3 billion after raising $10 billion in June, according to the New York Times, and intends to receive around $22.5 billion by the end of the year from SoftBank, and that is assuming it becomes a for-profit entity by the end of the year.

And if that doesn't happen, the round gets cut to $20 billion total, meaning that SoftBank would only be on the hook for a further $1.7 billion.

I am repeating myself and I need you to really get this.

OpenAI just got $10 billion in June.

Just in June, and had to raise another $8.3 billion in August, and that is an unbelievable cash burn.

One dwarfing any startup in history, rivaled only by XAI, makers of Grok, the racist LLM, which loses over a billion dollars a month.

I should also be clear that if OpenAI does not convert to a for-profit, there is no path forward.

To continue raising capital, OpenAI must have the promise of an IPO.

It must go public, because at a valuation of $300 billion or more, OpenAI can no longer be acquired because nobody has that much money.

And

let's be real, nobody actually believes OpenAI is worth that much.

The only way to prove that anybody does is to take OpenAI public, and that will be impossible if it cannot convert.

And ironically, SoftBank's large and late-stage participation makes exits actually harder, as early investors will see their holdings diluted as a percentage of total equity, or whatever the hell we're calling it, because these aren't real equity shares, they're profit participation units.

They're a non-profit, you can't do stock in them.

While a normal company could just issue equity and deal with the dilution that way, OpenAI's structure necessitates a negotiation where companies can obstruct the entire process if they see fit.

Speaking of companies doing that, let's talk about Microsoft.

As I asked in my premium newsletter a few weeks ago, what if Microsoft does not want OpenAI to convert?

They own all the IP, they own all the access to OpenAI's research and already run most of their infrastructure.

While assuming a best case scenario that it would end up owning a massive chunk of the biggest textup of all time, and I'm talking about equity, not OpenAI's current profit-sharing units, Microsoft might also believe that it stands to gain more by letting OpenAI die and assuming its role in the AI ecosystem.

But let's assume that OpenAI converts and now has to continue raising money at a rate that will require it, allegedly, to only need to raise $17 billion in 2027.

That number doesn't make any sense considering that OpenAI already had to bring forward its $8.3 billion fundraise by at least three months.

But let's stick with that idea.

OpenAI believes it will be profitable somehow by 2030.

And even if we assume that, that means it intends to burn over $100 billion total to get there.

Is the plan to take OpenAI public and then dump a toxic act

onto the public markets?

Then it will just flounder and convulse and die for everybody to see.

Kind of sucks.

Can you imagine OpenAI's S1?

How well do you think this company would do when they had a true financial audit from a major accounting firm?

And you can claim they already have one.

I simply don't believe you.

This burn does not seem like an accountancy firm would be good with them.

And if you want to know what all that looks like, Google WeWork, which went from tech industry darling to joke in a matter of days, in part because it was forced to disclose how bad things actually were when they filed to go public.

No, really, I'll link to an article I've linked in the spreadsheet called The Strangest and Most Alarming Things in WeWorks IPO Filing.

It's a bad sign if your IPO filing is described as strange and alarming.

Those are not even terms of art, they're just worrisome.

With that in mind, I feel the same way about Anthropic.

Nobody is buying this company at $170 billion, which is how much it's raising it right now, and thus the only way to access liquidity would be to take Anthropic public and show the world how a company that made $72 million in January and more than $400 million in July 2025 and also plans to lose $3 billion or more.

And then you show them that and let the market decide on a fair price, especially if the S1 includes a bunch of strange and alarming stuff that raises questions about whether Anthropic's value is actually justified.

I'm stuttering here because

everyone's acting like these are rational things.

Like, yeah, OpenAI, which burns $5 billion in 2024, probably 10 or more in 2025, if not 15 or 20, like, that's fine.

Like, this is all good.

They'll just go public one day.

Will they?

Really?

Will they?

No, really.

What's the plan?

What's the plan here?

Because the arguments against my work always come down to costs will go down and these products will become essential.

Outside of Chat GPT, there's no real proof that these products are anything remotely essential.

And I'd argue there's very little about ChatGPT that Microsoft couldn't provide with rate limits via copilot.

I'd also argue that essential is a very subjective term.

Essential in the sense that some people use it as search doesn't mean it's useful for enterprises or the majority of people or could not be replaced by anything else.

And I guess ChatGPT somehow makes $1 billion a month in revenue selling access to premium versions of ChatGPT, though I'm not 100% sure how.

Assuming it has 20 million customers paying 20 bucks a month, that's 400 million dollars a month, then 5 million business customers paying an average of $100 a month each, that's $900 million.

And is that is that really indicative?

Is the average really that good?

Are there that many people paying 35 35 or 50 or 200 bucks a month?

How many of those versus 100 bucks?

I mean, most don't pay 100 bucks.

It's either 35, 50, or 200.

OpenAI doesn't break out the actual revenues behind these numbers for a reason.

I believe that reason is they don't look as good.

I also, by the way, when I was fucking around trying to play with GPT-5, I got offered a Team subscription for a dollar for one month.

How many people, how many of those business customers got a month for a dollar?

How long does OpenAI count a customer?

What is OpenAI's churn like?

And does it really, as I wrote in my newsletter, how much money do OpenAI and Anthropic make, in the year making more than Spotify at $1.5 billion a month?

We don't know, and OpenAI, much like Anthropic, has never shared actual revenues other than in June when they said 10 billion annualized revenue, choosing instead to leak to the media and hope to obfuscate the actual amounts of money being spent on its services.

Anyway, long story short, these companies are unprofitable with no end in sight, don't even make that much money in most cases, and are valued more than anybody would ever buy them for.

And they don't even have that much in the way of valuable IP.

And on top of that, the two biggest players burn billions of dollars more than they make, serving these companies that also burn billions of dollars.

I wish someone would make this make sense, because it doesn't.

But Ed, the government will give them more money forever.

They'll bail them out.

I'm tired of this fucking point.

I'm so tired of hearing about bailouts.

I'm so tired of people saying they'll bail them out.

I get that you're scared.

I get that things are grim.

Things are absolutely fucking grim, but engage with reality here.

You can't bail this out.

You can't bail it out.

Even if this were going to happen, and it will not, who would they give the money to and for how long?

Would they give it to all AI startups?

Is every startup going to get a paycheck protection program for generative AI?

How would that play out in rural red districts where big tech has never been popular, which are being hit with both massive cuts to welfare as well as the shockwaves of a trade war that has made American agricultural exports like feedstocks, which previously went to China by shiploads, less appealing worldwide.

So they just in this scenario, by the way, bail out open AI, then stuff it full of government contracts to the tune of, what, $15 billion a year?

Right?

Like, just in this example.

Just to be clear, that's the low end of what this would take to do.

And they'll have to keep doing it forever until Sam Altman can build enough data centers to what?

Keep burning billions of dollars?

There's no plan to make this profitable.

Say this happens.

It won't, but

say it.

Now what?

America has a bullshit generative AI company attached to it, attached to the state that doesn't really innovate and doesn't really matter in any meaningful way except that it owns a bunch of data centers, which it doesn't yet, by the way.

Microsoft owns all their infrastructure.

The core weave stuff is barely happening.

Fucking hell.

I just don't think this happens.

I think it's a silly idea and the most likely situation would be that Microsoft would unhinge its jaw and swallow open AI and its customers whole.

Hey, hey, hey, did you know, by the way, the Microsoft's data center construction is down year over year and it's basically signed no new data center leases?

I wonder why it isn't building these new data centers for OpenAI.

Could be anything.

By the way, Stargate isn't saving them either.

As I've written recently, Stargate doesn't actually exist beyond the media hype it generated.

And every single person who wrote big articles about Stargate being real and Stargate being connected to Abilene, Texas should be fucking ashamed of themselves.

It's deeply unprofessional.

Anyway, that also counts the hint of the involvement.

There are several articles that hint without directly saying that Abilene, Texas was part of the SoftBank Stargate thing.

You can't wriggle out of this one.

When the time comes, all will be Ed.

By which I mean I'm going to be pointing at the articles aggressively.

But we have other stuff to do.

Anyway, by the way, does the government do this for everybody?

This very important question.

Is everyone getting bailout?

Is it just Anthropic and Open AI?

What about Google and Microsoft?

They're going to be burning a bunch of money.

Why do they get the money and no one else?

What other industries are going to to turn around and go, wait, wait, wait, wait, wait.

Why do I have to fucking make money when what's the point of this?

Because AI is important.

You're going to get a bunch of fraud if this happens.

It's not going to, just to be clear.

And what is the limit, by the way?

Do they subsidize all compute for companies like Cursor?

To what end?

Where's the limit?

How does it end?

What is the bailout?

What are you bailing out?

Where does the bailout go?

These are all questions that would get answered.

You can sit there and say, oh, the government's corrupt.

Oh, I feel this way and that way.

Here's the thing.

Top, which is the thing that was used to bail out banks and such and hedge funds during that whole situation, at least made more sense because if a bank fails, people lose actual money.

If this stuff fails, what do people lose?

What is the service that people lose access to?

Chat GPT?

That's it.

I don't even think that Donald Trump could explain what chat GPT is.

And even then, he already has people to give him money.

Like, these people don't have anything to offer other than just this vague sense of AI is important.

I just, I just don't buy it.

And I think that people, if you're worried to get hopeful, I don't know.

I'm hopeful that something's going to explode within this terrible fucking industry.

And I'm kind of hopeful because I think it's time to ask a basic question, which is, what if generative AI just is not profitable?

And I think this is a question that we have to seriously consider at this point because its ramifications are significant.

If I'm honest, I think the future of large language models will be largely client-side, on egregiously expensive personal setups for enthusiasts, and in a handful of niche enterprise roles.

Large language models do not scale profitably, and their functionality is not significant enough to justify the costs of running them.

By immediately applying old economics, the idea that you would pay a monthly fee to have relatively unlimited access, companies like OpenAI and Anthropic immediately trained users to use their products in a way that was antithetical to their costs.

Then again, had these models been served in that way, had they been mindful of the cost and charged what they actually were, there would likely have been no way to get this far.

If OpenAI is making billions of dollars a month, or a billion dollars a month, or whatever the fuck it is, it's possibly losing that much or more after revenue, and that's the money it can get selling the product in a form that can never turn profitable itself.

If OpenAI charged in line with its actual costs, would we even be able to justify a free version of ChatGPT outside of a few requests a month?

The revenue you see today is what people are willing to pay for a product that loses money, and I cannot imagine they would pay as much if companies in question charge their costs.

If I'm wrong, Cursor will be just fine, and that's assuming that Cursor's current hobbled form is even profitable, which it is not said it is.

So you've got an entire industry of companies that struggle to do anything other than lose a lot of money.

Great.

And now we have a massive expansion of data centers, the likes of which we've never seen, or to capture demand for a product that nobody makes much money selling.

This naturally leads to an important question: how do these people building data centers actually make money?

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At the start of August, the Wall Street Journal published one of the most worrying facts I've seen in the last two years.

The journal quoted investor Paul Khodrovsky as saying that, and I quote, as a percentage of gross domestic products, spending on AI infrastructure has already exceeded spending on telecom and internet infrastructure from the dot-com boom, and it's still growing.

Khodrovsky described this insane CapEx spending as a sort of private sector stimulus program.

The journal also quotes analyst Neil Duter as saying that CapEx spending for AI contributed more to growth in the US economy in the past two quarters than all consumer spending.

The massive buildout of data centers and the associated physical gear like chips, servers, and raw materials for building them has become a massive dominant economic force, building capacity for an industry that is yet to prove it can make real money.

And no, Microsoft talking about its Azure revenue, its last quarterly earnings for the first time is not the same thing as it stopped explicitly stating its AI revenue in January when it was $13 billion annualized, so about a billion a month.

And by the way, that's revenue, not profit.

Just to remind you, I need to every time.

Remind anyone who ever mentions AI revenue that that's not profit.

Anyway, AI CapEx allegedly, though I've heard some questions about this figure, accounts for 1.2% of the US GDP in the first half of the year, and it accounted for more than half of the, to quote the Wall Street Journal, already sluggish 1.2% growth of the US economy in the first half of the year.

Another Wall Street Journal piece published a few days later discussed how data center development is souring the free cash flow for big tech, turning them from the kind of asset-light businesses that the markets love into entities burdened by physical real estate and their associate costs.

And I quote, for years, investors loved those companies because they were asset-light.

They earned their profits or intangible assets such as intellectual property, software, and digital platforms with network effects.

This can be seen as a metric called free cash flow, roughly defined as cash flow from operations minus capital expenditures.

This is arguably the purest measure of businesses' underlying cash generating potential.

From 2016 through 2023, free cash flow and net earnings of Alphabet, Amazon, Meta and Microsoft

grew roughly in tandem.

But since 2023, the two have diverged.

The four companies' combined net income is up 73% to 91 billion in the second quarter from two years earlier, while free cash flow is down 30% to 40 billion, according to fact sheet data.

Apple, a relative pie cur on capital spending, has also seen free cash flow lag behind.

These numbers are all very scary, and I mean that sincerely, but they also fail to explain why.

How much was actually spent on AI capex in the US?

One would think two different articles on the subject would include that number versus a single quarter's worth, but from my estimates, I expect capital expenditures from the Magnificent 7 alone to crest $200 billion in the first half of 2025, with Axios estimating they'd spend around 400 billion total this year.

Most articles are drafting off of a blog from Paul Khodrowski, who estimates that total AI capex would be somewhere in the region of $520 billion for the total of the year, which felt conservative for me, so I did the smart thing and asked him.

Kodrowski noted that these numbers focus entirely on the four big spenders, Microsoft, Google, Metro and Amazon, and his own estimated $312 billion capex, and the 1.2% number came from the assumption that the US GDP in 2025 will be around $28 trillion, which which is lower than other forecasts, which put it around

30 trillion even.

Khodrowski, in his own words, was trying to be conservative, using public data and then building his analysis from there.

I personally believe his estimate is too conservative because it doesn't factor in the capital expenditures from Oracle, which, along with Crusoe, is building the vast Abilene, Texas data center for OpenAI or any other private data center developers sinking cash into AI capex.

When I asked him to elaborate, he estimated that AI spending all in was around half of 3%

Q2 real GDP growth.

He added that it could be half of US GDP full year GDP growth if certain conditions are met.

That's so cool!

Half of the US economy's growth came from building data centers for generative AI, which is the combined revenue of a little more than the fucking smartwatch industry did in 2024.

Another troubling point is that big tech doesn't just buy data centers and uses them, but in many cases pays for a construction company to build them, fills them full of GPUs, then leases them from a company that runs them, meaning that they themselves don't have to personally staff up and maintain them.

This creates an economic boom for construction companies in the short term, as well as lucrative contracts for ongoing support, as long as the company in question still wants them.

While Microsoft or Amazon might use a data center and indeed act as if they own it, ultimately somebody else is holding the bag and the ultimate responsibility for said data center.

One such company is QTS, a data center developer that leases to both Amazon and Meta according to the New York Times, which was acquired by Blackstone in 2021 for $10 billion.

Since then, Blackstone has used commercially mortgage-backed securities, I know it's so great, to raise over $8.7 billion

since then to sink into QTS's expansion, and as of mid-July, said it'd be investing $25 billion in AI data centers and energy.

Blackstone, according to the New York Times, sees strong demand from tech companies who apparently are willing to sign what they describe as airtight leases for 15 to 20 years to rent out data center space.

As a reminder, the Microsoft has over a thousand lawyers in the company.

Anyway, yet the Times also names another problem, the unanswered question of how these private equity firms actually exit these situations.

Blackstone, KKR, and other asset management firms do not buy companies with the intention of siphoning off revenue, but to pump them and sell them to another company, or dump them onto the public markets, of course.

Much like AI startups, it isn't obvious who would buy QTS at what I imagine would be a $25 or $30 billion valuation, meaning that Blackstone would, as I've mentioned, have to take them public.

Similarly, KKR's supposed $50 billion billion partnership with investment firm Energy Capital Partners to build data centers and their associated utilities does not appear to have much of an exit plan either.

And let's not forget Oracle OpenAI and Crusoe's abominable mess in Abilene, Texas, where Oracle is paying for $40 billion worth of GPUs.

And Crusoe is spending $15 billion raised from Blue Owl Capital and primary digital infrastructure, though I think JP Morgan is involved too, to build data centers for OpenAI, a company that loses billion dollars.

Yeah, why would they do that, right?

Why?

Why would they do that?

Well, it's simple, you rube, you moron, you buffoon.

It's so that OpenAI can allegedly, starting in 2028, pay Oracle $30 billion a year for compute.

And I am being fully serious.

To be clear, OpenAI, by my estimates, has made only $5.26 billion this year and will have trouble meeting their $12.7 billion revenue projection for 2025 and will likely lose more than $10 billion doing so.

Oracle will, according to the information, owe Crusoe $1 billion in payments across a 15-year span of a lease.

How does Crusoe afford to pay back its $15 billion in loans?

Beats me.

The information says that Crusoe is raising $1 billion to take on the cloud giants by earning construction management fees and rent, and it can sell its stake in the project upon reaching certain completion milestones while also building its own AI compute, making the assumption that the demand is there outside of hyperscalers.

Then there's Corweave, my least favoured company in the world.

As I discussed a few months ago, Corweave is burdened by obscene debt and a a horrifying cash burn and has seen its stock spike to a high of 183 on June 20th, 2025, which has led to an all-stock attempt to acquire developer Core Scientific for $9 billion.

And they're doing that with all stock.

And now that's falling apart because Coreweave, as my last check, and who knows where it will be by the time this episode runs, is below $100 because the IPO lockout has gone.

All the people that invested seem to be getting out.

We'll see where they go from here.

Coreweave, by the way, has since gone public and had to borrow billions of dollars to fund their obscene capital expenditures.

And they are also, by the way, going to have to handle in October the beginning of their DDTL 2.0, their biggest loan.

And that's also when OpenAI is allegedly going to start paying them for their compute.

And by the way, they lose hundreds of millions of dollars.

They lose so much money every quarter.

They have no path to profitability.

Every time I think about Coreweave, I feel crazy.

And to be honest, I'm going to be honest when I put out that blog and people people sent me some very unfair emails about that.

They said there's no way that Corweave can run out of money.

If Corweave runs out of money, by the way, and they collapse, which I think is very possible, I'm taking some fucking names on this one.

A lot of people are very unfair to Mr.

Zitron.

Coreweave, I add, is also pretty much reliant on Microsoft as one of its primary customers.

While this relationship has been fairly smooth, so far, as far as we know, this dependence also presents an existential threat to Corweave and is part of the reason why I'm so pessimistic about their survival.

Microsoft has its own infrastructure and has every incentive to cut out middlemen when it's able to meet supply with the demand itself owns, or at least rather than subcontracts out, simply because middlemen add costs and shrink margins.

If Microsoft walks what's left, how does it service its

ongoing obligations and the debt?

In all of these cases, data center developers seem to have very few options as to making actual money.

We have companies spending billions of dollars to vastly expand their data center footprint, but very little evidence that doing so results in revenue, let alone some some sort of payoff event.

And similarly, the actual capital expenditures they're making are much smaller than those of big tech.

Digital Realty Trust, one of the largest developers with over 300 data centers worldwide and $5.5 billion in revenue in 2024, only spent $3.5 billion in CapEx last quarter.

And Equinix, $8.7 billion of revenue in 2024 total, which has 270 data centers, put CapEx at $3.5 billion for the quarter too.

NTT Global Data Centers, which has over 160 of the fuckers, has dedicated $10 billion in capex through 2027 to build out more of them.

Yet, in many of these cases, it's because these companies are, to quote a source of mine, functionally obsolete for this cycle, because legacy data centers are not plug-and-play ready for GPUs to slot into.

And remember, GPUs and the way they work with generative AI is just atypical.

They burn them, they run them hot constantly.

They're running full fucking tail.

The whole fucking time.

It's absolutely ridiculous leading to a bunch of replacements, but it, just to be specific, requires a bunch of specialized cooling, and much more energy.

And yeah, there's just, it's not a thing where you just take out one computer and you put in another.

And also, any investment in capex by these companies would have to be for both GPUs and said retrofitting, by the way.

Massive amounts of money.

And this means that the money flowing into AI data centers is predominantly going to neo-clouds like Corweave and Crusoe.

And all seems to flow back to private equity firms that never thought about where the cash out might be.

Blackstone led Corbea's $7.5 billion loan with Magnetar Capital, who, by the way, was involved with a bunch of subprime mortgages.

And Crusoe signed a deal a week ago with infrastructure firm, and they're also owned by Blackstone called Tallgrass, and they're building a data center in Wyoming.

All of which seems very good for Blackstone, unless you think, how does it actually make money here?

As private equity firms do generally not like to hold assets longer than five years, and the timer is running.

Even if it did, its capital expenditures are a drop in the bucket in the grand scheme of things.

Assuming Crusoe burns, as the information suggests it will, as much as $4 billion in 2025, CoreWeap spends as much as $20 billion, Digital Realty Trust spends as much as $14 billion, Global Data Centers $3.33 billion, that's $10 billion over three years, Equinis spends $14 billion.

That's about $55.33 billion in AI capex spent in 2025 from the largest developers of data centers in the world.

For some context, $102 billion was spent by Meta, Alphabet, Microsoft, and Amazon in the last quarter.

Private equity may face the same problem as AI startups in the end, though.

There is no real exit strategy for any of these investments.

Furthermore, the supposed AI capex boom that's driving the U.S.

economy is not, as reported, driven by the massive interest in driving AI infrastructure up for a variety of customers.

The reality is simple: the majority of AI capex is from big tech, which is a massive systemic weakness for our economy.

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Now, while some might say that AI CapEx has swallowed the US economy, I think it's more appropriate to say that big tech capex has swallowed the US economy.

I also want to be clear that the economy, which is the overall state of a country's production and consumption of stuff and the flow of money between participants in said economy, and the markets, as in the stock market, well, those are two very different things.

But the calculations from Paul Kodrowski and others have now allowed us to see where one might hit the other.

You see, the markets do not actually represent reality.

While Microsoft, Amazon, Google, and Meta might want you to think there's a ton of money in AI, their growth is mostly from selling further iterations and contracts of their existing stuff, or in the case of Meta, further increasing its ad revenue.

The economy is where things are actually bought and sold, representing the economic effects of both the things that happen to build out the AI boom or whatever you call it, and selling access to the services and the models themselves.

I recognize this is simplistic, but I'm laying it out for a reason.

As As I discussed in the three-part haters guide through the AI bubble, NVIDIA is the weak point in the US stock market, representing 90% of the value of the Magnificent 7, which in turn makes up about 35% of the value of the US stock market.

The associated Magnificent 7 stocks have seen a huge boom through their own growth, which has been mistakenly and incorrectly attributed to revenue from AI, which I've laid out previously is about $40 billion of revenue in, what, in the last year or two?

Maybe a little bit more.

Nevertheless, the markets can continue to be irrational because all they care about is number going up, as the value of a stock is oftentimes disconnected from the value of the company itself, instead associated with its kind of propensity for growth.

It's fishy, it sucks, and it's going to end badly.

GDP and other measurements of the economy aren't really something you can fudge quite as easily.

Nor can you say a bunch of fancy words to make people feel better in the event that growth stalls are declines.

This leads me to my principal worry, that AI capex is actually a term for the expenditures of four companies, namely Microsoft, Amazon, Google, and Meta, Meta, with NVIDIA's GPU sales being part of that CapEx too.

What we include, you can, if you want, include others like Oracle, XAI, and various Neo-Clouds like Coreweave and Crusoe, who, according to D.A.

Davidson's Gil Luria, will account for about 10% of GPU sales from NVIDIA in 2025.

The reality is that whatever economic force is being driven by AI investment, it's really just four companies building and leasing data centers to burn on generative AI, a product that makes a relatively small amount of money before losing a great deal more.

Also, I want to be clear, Anthropic runs on Amazon and Google, OpenAI runs on Microsoft.

These companies don't really own their own infrastructure.

That's what OpenAI is allegedly building with Oracle.

Now, 42% of NVIDIA's revenue comes from the Magnificent 7 per Laura Brandon at Yahoo Finance.

Big up to Laura, one of the best out there, which naturally means that big tech is the linchpin of investment in data centers.

I'll put it far more simply.

If AI capex represents such a large part of our GDP and economic growth, our economy does on some level rest on the back of Microsoft, Microsoft, Google, Meta, and Amazon and their continued investment in AI.

What should worry everybody is that Microsoft, which makes up 18.9% of Nvidia's revenue, has signed basically no leases in the last 12 months and its committed data center construction and land purchases are down year over year.

Also, their data center CapEx is not all going to be AI and all of these data centers won't necessarily be used for that.

In fact, nothing they're doing suggests that they're super into it.

It's not good.

And while its capex capex may not have dipped yet, in part because the chip-heavy nature of generative AI means that capex isn't exclusively dominated by property or construction, it's now obvious that if it does, there will be direct effects on both the U.S.

economy and the stock market, as Microsoft is part of what amounts to a stimulus package propping up America's economic growth.

And not to repeat the point too much, but big tech has yet to actually turn anything resembling a profit on these data centers and isn't making much revenue at all out of generative AI.

How exactly does this end?

What is the plan here?

Is big tech going to spend hundreds of billions of dollars a year in capex on generative AI in perpetuity?

Will they continue to buy more and more NVIDIA chips as they do so?

Because it's always got to be more.

It can't be the same.

They must get more.

Otherwise, NVIDIA doesn't grow.

At some point, surely these companies have built enough data centers.

Surely, at some point, they will run out of space to put these GPUs in.

Is the plan to, by then, make so much money from AI that it won't matter?

What does NVIDIA do at that point?

How does the US economy rebound from the loss of of activity that follows?

I don't fucking know, and it's worrying me.

As I've said again and again, the generative AI bubble is and always has been fundamentally irrational and inherently gothic, playing in the ruins, patterns, and pathways of previous tech booms despite this one having little or no resemblance to them.

Though the tech industry loves to talk about building a glorious future, its presence is one steeped in rituals of death and decay, where the virtues of value creation and productivity take a back seat to burning billions of dollars and lying to the public again and again and again.

The way in which the media has participated in these lies is disgusting.

Venture capital, still drunk off the fumes of 2021, keeps running the same old plane book.

Shove as much money into a company as possible in the hopes you can dump it onto an acquirer of the public markets, only to get high on their own supply, pushing valuations to the point that there's no possible liquidity event for the majority of big private AI companies as a result of their overstuffed valuations, burdensome business models, and a lack of any real intellectual property.

And like the rest of the AI bubble, Silicon Valley's only liquidity path out of the bubble is big tech itself.

Without Google, character.ai and Winsource founders would likely have been left for dead, and the same goes for Inflection.

And I'd even argue Scale AI, whose $14.3 billion investment, doing air quotes there for Meta, effectively decapitated the company, removing its CEO Alexander Wang, leaving the rest of the company to die, laying off 14% of its staff and 500 contractors mere weeks after its CEO and investors cashed in.

In fact,

generative AI is turning out to be a fever dream, entirely made up of big tech.

OpenAI would be dead if it wasn't for the massive infrastructure provided by Microsoft at cost in returns for its rights to its IP, research, and the ability to sell its models on top of tens of billions of dollars of venture capital thrown into its billion-dollar cash incinerator.

Anthropic would be dead if both Google and Amazon, the latter of which provides most of its infrastructure, hadn't invested billions in keeping it alive so that it can burn $3 billion or more in 2025 while fucking over its enterprise customers and rate limiting the rest.

The generative AI industry is at its core unnatural.

It does not make significant revenue compared to its unbelievable costs, nor does it have much revenue potential itself.

It requires, unlike just about every other software revolution, an unbelievable amount of physical infrastructure to run.

And because nobody but big tech can afford to build the infrastructure necessary, creates very little opportunity for competition or efficiency.

As the markets are in the throes of the growth at all cost rot economy, they fail to keep big tech in line, conflating big tech's ability to grow with growth driven as a result of the capital expenditures.

Sensible, reasonable markets would notice the decay of free cash flow or the ridiculousness of big tech's capex bonanza, but instead they clap and squeal and oink whenever Sachinadella jingles his keys.

And I got told the other day by someone that Sachinadella is not a business idiot, that he's secretly this big tech guy.

And here's what I'd like to say to them.

It's fucking stupid.

It's fucking dumb.

If this guy's actually technical, he's just a craven liar.

I actually think he's a bozo.

But anyway, putting that aside, what's missing is any real value generation.

Again, I tell you, put aside any feelings you may have about generative AI itself and focus on the actual economic results of this bubble.

How much revenue is there?

Why is there no profit?

Why are there no exits?

Why does big tech, which has sunk hundreds of billions of dollars into generative AI, not talk about the money they're making from it?

Why, for three straight years, have we been asked just wait and see?

And for how long are we going to have to wait?

And when are we going to see it?

What's incredible is that the inherently compute intensive nature of generative AI basically requires the construction of these facilities without actually representing whether they are contributing to the revenues of the companies that operate the models, like Anthropic or OpenAI or any other business that builds on top of them.

As the models get more complex and hungry, more data centers get built, which hyperscalers book as long-term revenue, even though it's subsidized by hyperscalers or funded by VC money.

This in turn stimulates even more CapEx spending, and without having to answer any basic questions about longevity or market fit.

Longevity, longevity, I don't know.

Yet the worst part of this financial farce is that we've now got a built-in economic breaking point in the form of CapEx from AI.

At some point, CapEx has to slow, if not because of the lack of revenues or massive costs associated, but because we live in a world with finite space.

And when said CapEx slow happens, so will the purchase of NVIDIA GPUs, which in turn, as proven by Khadrowski and others, slow America's economic growth.

And that growth is pretty much based on the whims of four companies, which is an incredibly risky and scary proposition.

I haven't even dug into the wealth of private credit deals that underpin buildouts from private AI neoclouds like Coreweave, Crusoe, Nebbius, and Lambda, in part because their economic significance is so much smaller than Big Tech's ugly meaningless sprawl, and because I don't like saying their names very much.

To quote Paul Khodrosky,

We live in a historically anomalous moment.

Regardless of what one thinks about the merits of AI or explosive data center expansion, the scale and pace of capital deployment into a rapidly depreciating technology is remarkable.

These are not railroads.

We aren't building century-long infrastructure.

AI data centers are short-lived, asset-intensive facilities riding declining cost technology curves, requiring frequent hardware replacement to preserve margins.

To which I say what margins, Paul?

But nevertheless, you can't bail this out because there is nothing to bail out.

Microsoft, Meta, Amazon, and Google have plenty of money and have proven they can spend it.

NVIDIA is already doing everything it can to justify people spending more on their GPUs.

There's little more it can do here other than soak up the growth before the party ends.

That capex reduction will bring with it a reduction in expenditures on those GPUs, which will take a chunk out of the US stock market.

Although the stock market isn't the economy, the two things are inherently linked, and the popping of the AI bubble will have downstream ramifications, just like the dot-com bubble did with the wider economy.

Expect to see an acceleration in layoffs and off-shoring in pop, driven by a need for tech companies to show, for the first time in living memory, fiscal restraint.

For cities where tech is a major sector of the economy, think Seattle and San Francisco there'll be knock-on effects to those companies and individuals that support the tech sector like restaurants, construction companies building apartments, Uber drivers and so on.

We'll see a drying up of VC funding which is kind of already starting.

Pension funds will take a hit which will affect how much people have to spend in retirement.

It'll be grim.

Worse than that is the fact that these companies will be, by definition, non-performing assets and ones that inflicted an opportunity cost that will be impossible to calculate.

While a house once built and sold technically falls into that category, it doesn't add to any economic productivity obviously.

People at least need somewhere to live.

Shelter is an essential component of life.

You can live without a data center the size of Manhattan.

What would happen if companies like Microsoft and Meta instead spent the money on things that actually drove productivity or created a valuable competitive business that drove economic activity, for example?

Hell, even if they just gave everyone a 10% raise, it would likely be better for the economy than this if we're factoring in things like consumer spending.

Instead, it's just waste.

Ugly, pointless waste.

In summary, we're already facing the prospect of a recession, and though I'm not an economist, I can imagine it being a particularly nasty one given that the Magnificent 7 accounted for 47.87% of the Russell 1000 index's returns in 2024.

Even if big tech somehow makes this crap profitable, they won't, it's hard to imagine that they'll be able to counterbalance any capex reduction with revenue because there doesn't seem to be that much revenue in generative AI to begin with.

This is what happens when you allow the rot economy to run wild, building the stock market and tech industry on growth over everything else.

This is what happens when the tech media repeatedly fails to hold the powerful to account, catering to their narratives and making excuses for their abominable billion-dollar losses and mediocre, questionably useful products.

Waffle all you want about the so-called agentic era or any realized revenues that make you hot under the collar, I see no reason for celebration about an industry with no exit plans and needless capital expenditures that appear to be one of the few things keeping the American economy growing for effectively no reason.

I've been writing about the tech industry's obsession with generative AI for two years, and I've really never felt more grim.

Before, this was an economic uncertainty, a way that our markets might contract, that big tech might take a big haircut, that

a bunch of money might have been wasted, but otherwise the world could keep turning, right?

It felt before Khadrowski said that thing, and this was all sitting in public as well.

I don't know how I missed it.

It felt until then that it was like, oh, this will really fuck up big tech.

It'll hit their stocks.

It'll be bad for them.

Now, because the economy has slowed so much otherwise, this data center CapEx and these four companies is holding everything up.

And it won't last forever.

There's just no way it can last forever.

And there's not really anything to bulk it up.

And Microsoft's already pulling back.

How does this end?

I keep asking that.

The original title of this was called How Does This End?

And I really don't know how this ends.

It feels as if everything is aligning for disaster, and I really fear there's nothing that can be done to avert it.

I will be here to tell you what's happening as it happens.

And your third part for this week is going to be about GPT-5, which I'm going to be honest, doesn't really fill me full of hope or promise either.

Thank you for listening to Better Offline.

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Hi, I'm Morgan Sung, host of Close All Tabs from KQED, where every week we reveal how the online world collides with everyday life.

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