The Artificial Intelligence mania has officially reached la la land.
Oracle, OpenAI Sign Massive $300 Billion Cloud Computing Deal (archived) – Wall Street Journal
The majority of new revenue revealed by Oracle will come from OpenAI deal, sources say
OpenAI signed a contract with Oracle to purchase $300 billion in computing power over roughly five years, people familiar with the matter said, a massive commitment that far outstrips the startup’s current revenue.
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The Oracle contract will require 4.5 gigawatts of power capacity, roughly comparable to the electricity produced by more than two Hoover Dams or the amount consumed by about four million homes.Oracle shares surged by as much as 43% on Wednesday after the cloud company revealed it added $317 billion in future contract revenue during its latest quarter that ended in Aug. 31.
The increase in Oracle's potential future revenue (not profits) does not justify the increase of its share price. Especially as the whole deal is unlikely to ever being fulfilled:
The OpenAI and Oracle contract, which starts in 2027, is a risky gamble for both companies. OpenAI is a money-losing startup that disclosed in June it was generating roughly $10 billion in annual revenue—less than one-fifth of the $60 billion it will have to pay on average every year. Oracle is concentrating a large chunk of its future revenue on one customer—and will likely have to take on debt to buy the AI chips needed to power the data centers.
OpenAI promises to pay $300 billion for computing power provided by Oracle. It is unlikely to ever make that much in revenues. Oracle does not have the money to build up the computing power it has sold. It is also already over-indebted:
Compared with Microsoft, Amazon and Meta, the biggest spenders of the AI age, Oracle has a far greater debt load relative to its cash holdings. The cloud company’s spending to keep up with the AI boom is already outstripping its cash flow, according to S&P Global Market Intelligence. Microsoft has a total debt to equity ratio of 32.7% compared with 427% for Oracle.
OpenAI is making large losses and is unlikely to be profitable within the next five years. The company does not even have a profitable product that could allow it to sustain the cost of the Oracle deal:
OpenAI’s billions in annual losses are set to accelerate in the near term. Altman told investors last fall that OpenAI would lose $44 billion through 2029, the first year in which he predicted the company would turn a profit. It also faces other challenges, like converting its corporate structure to a for-profit. Roughly $19 billion of committed funding is conditional on OpenAI completing that restructuring.
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The company is expecting that money will flood in from corporations paying for more advanced features and other AI companies using its technology. But that rests on an assumption that its AI models will improve dramatically—and that companies will find ways to wring profits from the technology.
The launch of ChatGPT 5.0, the latest Large Language Model (LLM) OpenAI provides, was a disappointment. The new version is little better than its predecessor. LLMs continue to based on be pretty simple machine learning technics. They do not have an internal 'world model' that would allow them to contextualize the static results their machine learning parts are generating:
Many of generative A.I.’s shortcomings can be traced back to failures to extract proper world models from their training data. This explains why the latest large language models, for example, are unable to fully grasp how chess works. As a result, they have a tendency to make illegal moves, no matter how many games they’ve been trained on. We need systems that don’t just mimic human language; we need systems that understand the world so that they can reason about it in a deeper way.
In the quest of a general artificial intelligence machines LLMs are a dead-end street.
Gary Marcus, who has forgotten more about AI than I know, calls the Oracle-OpenAI deal Peak Bubble – It’s hard to see how this won’t end badly:
Oracle’s new market cap, near a trillion dollars, up nearly 50% this week, driven largely by this one apparently non-binding deal with a party that doesn’t have the money to pay for the services, seems more bonkers than most.
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It’s not just Oracle, though. The other problem here is that the total value of the tech market as whole, which is supposed to reflect the future of value of the companies within it, far exceeds what is likely ever to be delivered.
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We are well past peak bubble, in fact, and into peak musical chairs. It’s not going to be pretty when the music stops.
Even the Economist is warning of the oncoming crash:
What if the $3trn AI investment boom goes wrong? (archived) – Economist
Even if the technology achieves its potential, plenty of people will lose their shirts
IT ALREADY RANKS among the biggest investment booms in modern history. This year America’s large tech firms will spend nearly $400bn on the infrastructure needed to run artificial-intelligence (ai) models. OpenAI and Anthropic, the world’s leading model-makers, are raising billions every few months; their combined valuation is approaching half a trillion dollars. Analysts reckon that by the end of 2028 the sums spent worldwide on data centres will exceed $3trn.
The scale of these bets is so vast that it is worth asking what will happen at payback time. Even if the technology succeeds, plenty of people will lose their shirts. And if it doesn’t, the economic and financial pain will be swift and severe.
When the bubble burst comes, and it will come, there will be little of value left from it:
What would such an ai chill be like? For a start, a lot of today’s spending could prove worthless. After its 19th-century railway mania, Britain was left with track, tunnels and bridges; much of this serves passengers today. Bits and bytes still whizz through the fibre-optic networks built in the dotcom years. The ai boom may leave a less enduring legacy. Although the shells of data centres and new power capacity could find other uses, more than half the capex splurge has been on servers and specialised chips that become obsolete in a few years.
The AI stocks are all overvalued and their shares, which currently make up a third of the total S&P500 market value, will eventually crash. The consequences will be harsh:
To make matters worse, falls in the stockmarket could cause asset owners to cut back on their spending. Because the valuations of ai-related companies have rocketed, portfolios today are dominated by a handful of tech firms. And households are more exposed to stocks than they were in 2000; if prices fall, their confidence and spending could take a knock. The poorest would be spared, because they tend to hold few stocks. But it is the rich who have fuelled consumption in America over the past year. Robbed of its sources of strength, the economy would weaken as tariffs and high interest rates take a toll.
I well remember the crash of dot-com bubble as many of my friends in the IT industry got hurt in it. The upcoming AI-bubble crash is likely to have a worse outcome.