Monologue: The Pale Horsemen Arrive

0:03Speaker 1:Media, and I looked in Behold a Pale Horse, and the writer's name was the Smiling Man. This is your weekly Better Offlying monologue, and I'm your host ed Zitron. This week I put out one of my most consequential newsletters of all time, called the AI Demand Bubble, pulling together multiple distinct financial analyst notes from Wells Fargo, Barclay's, and UBS that directly estimated that seventy percent or more of the AI revenues of Microsoft, Google, and Amazon were from either open Ai or Anthropic. To be clear, UBS estimated the next year, Anthropic and open AI's compute spend will be forty eight percent of all Google Cloud revenues, which means that they will likely account for even more than seventy percent. But I wanted to be fair. This was both the colossal pain in the ars and the story that I knew woud piss off a lot of people because of its huge ramifications. As a result, I've had a ton of pushback from people that either outright deny that this is the case, or say, actually it's good.

1:09Speaker 1:The two one sustainable companies are the majority of AI revenues for companies that spent over a trillion dollars. Actually, that's great anyway. Twenty four hours later, Bloomberg ran a story estimating, based on open AI's twenty four point one billion dollar contribution to Microsoft's fiscal year twenty twenty six revenues and previous statements, the open ai alone contributed to seventy percent or more of Microsoft's AI revenues for the year.

1:33Speaker 1:For some context, Microsoft has spent twenty six point one three billion dollars in capital expensires since the beginning of twenty twenty two. And other than getting to have the swagger of someone who just laid out a seven thousand worth thesis founded in deep research and hard numbers, only to get their work validated in less than a day, this story also confirms my greatest fears about the state of the AI industry and the actual demand for AI compume.

1:57Speaker 1:Microsoft has spent over two hundred billion dollar dollar and that's not including the thirteen billion and it invested in open ai or the losses it's incurred running their services at cost at least in twenty twenty four, but potentially beyond, to create a customer that is now worth seven percent of its annual revenue. That cannot sustain its existence without near constant flows of venture capital funding. Microsoft's year over year growth for fiscal year twenty twenty six was about seventeen point seven percent, But when you remove open AI's twenty four point one billion dollars in revenue, which comes from open AI's compute spending revenue share, Microsoft's year over year growth was more like nine point two four percent, the lowest it would be since fiscal year twenty twenty three, when it only grew by seven percent. But there is one big difference, and that well, capital expenditures in the entire fiscal year twenty twenty three were thirty one point eight billion dollars, and Microsoft spent thirty five point eight billion dollars in the fourth quarter of the fiscal year of twenty twenty six, a year when it spent one

2:54Speaker 1:hundred and fifteen billion goddamn dollars, and it was to spend another one hundred and seventy five billion dollars in capex in fiscal year twenty twenty seven, which begins July Firs, twenty twenty six. It's annoying, but we're moving on. Oh and open Ai, arguably Microsoft's largest customer and responsible for nearly half of its growth in the last fiscal year, is going to run out of money, and by nature of it being seventy percent of Microsoft's AI revenues, it's very obvious that there are no other large customers that exist that could possibly take up all of this infrastructure, other than, of course, weird Warrio Ama das Anthropic, who is in exactly the same position as open Ai, but with a slightly more annoying voice. Because we're near the exponential.

3:35Speaker 1:This also means that any future revenue guidance and analyst expectations are now set under the explicit assumption that Anthropic and open Ai will both have the need for and be able to pay for increasingly larger levels of compute at increasingly higher prices. Based on the analyst notes I reported on which are in the newsletter or at least quotes ubs Wills, far Going Barclay's all have the expectation that much of Google, Amazon, and Microsoft's revenues are going to come from open AI and Anthropic for the next few years, and they don't seem to be diverging from that point in any any way. Everyone just thinks that this is where it's going to come from. Any failure for these revenues to appear out of insolvency, lack of demand, or unbuilt data center capacity meaning they can't get paid will piss off a Wall Street that's been brainwashed into believing that these three companies are growing because of diverse demand for AI services, rather than having pissed the trillion dollars up the walls mostly to just feed themselves money.

4:28Speaker 1:I am not confident that the market will actually understand what Bloomberg has said. As I'm looking now, Microsoft is up two percent. Jesus spark in Christ, So let me spell it out for you. Seventy percent of Microsoft's AI revenues are from either its revenue share of open AI's money, or open ai spending money to rent out compute from Azure. This means that Microsoft is now dependent on open Ai for future revenue growth, as the company now represents more than seven percent of its annual revenues and there does not appear to be significant contribution from anything outside of single digit billllions of annual revenue from Microsoft three to sixty five. Copiler, a product mostly sold by tricking people into signing contracts like doctor facilie. In the beginning of Princess and the Frog, Microsoft believed it would create an independent, ultra growth engine from its investments in open Ai. Instead, it has created a parasite. At seventy percent of AI revenues.

5:18Speaker 1:Open Ai represents the failure of saching Adella's empire Microsoft to spend two hundred and sixty billion dollars on infrastructure for demand that does not exist outside of two different companies that purn tens of billions of dollars a year. And to make matters worse, open Ai and Anthropic must grow their compute spend aggressively every single year to keep up with the expectations of analysts, which will mean it will need more and more money, which means anyone investing in Microsoft is effectively gambling on how long open Ai and Anthropic can continue to raise money before they simply exhaust every available form of capital. This also means that there's not really real demand for AI, at least not remotely commensurate with the capital expenditure or all of the endless blathering on about how much the world is changing because of AI. Microsoft has tens of thousands of Azure and software salespeople, the single most expertise in building large scale infrastructure outside of AWS, and the single most ruthless CFO outside of Oracle. If they were actual demand, actual margins, actual customers, they would sell to literally anybody else. They

6:24Speaker 1:would sell that compute to literally anyone else other than Open Ai. They would sell it to Gargamel. Microsoft would happily help Gargamel kill every single smurf rather than talk to Sam Thucking Altman or Darier Amiday. Ever, again, if there were meaningful demand for a compute or AI software, Microsoft would be representative of it as the largest vendor in the world of both. Seventy percent of its AI revenues and seven percent of its entire annual revenues come from a company that just had to raise one hundred and twenty two billion dollars in March and then delay its IPO because its advisors didn't think it would get a trillion dollar valuation. The demand is not there for the over three hundred gigawatts of data center capacity in planning, outside of course of Open AI and Anthropic, who still to this day have yet to prove any possible way of becoming profitable and have had to raise over a combined two hundred billion dollars in the last seven months just to keep the lights on. To be clear, sam Altman has also signed up for over seven hundred and fifty billion dollars worth of commitments, which means that Google, Amazon, Microsoft, Core, Weave, Cerebrus, Iron, Nebius, Lambda,

7:29Speaker 1:and any other associated counterparty's future revenue growth is dependent on Clammy sam Morton's ability to raise more than the combined sum of global venture capital in the last year in the next three years. On top of that, Dariama Day's Anthropic has made over three hundred billion dollars worth of commitments, on top of a thirty five billion dollar Apollo backed private credit deal where Google will sell its TPUs to an SPV that would then install them in Google data centers to for Anthropic to then rent from Google.

7:59Speaker 1:It it's so stupid. It's an insane monument to the desperate, manic, capitalistic innovations the crown this wretched era of dog shit. The demand isn't there, and some of you might. I know, I'm going to get an email saying well, demand is real Fromanthropic and open Ai. Yeah, they're selling twenty dollars or forty dollars for a dollar. I imagine there's some demand. Everyone's screaming at you to use AI everywhere. Wow, that's demand that comes from social pressure, not actual value or the utility. And really that demand isn't there. If Microsoft isn't seeing it, nobody is seeing it. The only reason that any neocloud is still alive is in vidious circular financing rituals, a failure of ratings agencies, Open AI and Anthropic and whatever weird oh bullshit it is that Mark Zuckerberg is up to. There's a reason that the first and only story about a customer for metas compute capacity was Anthropic. There's nobody else, nobody else other than Anthropic of course, open ai or the hyperscalers that are siphoning off what remains of the AI labs venture capital funding to sustain their own growth rates, every time, raising a

9:18Speaker 1:little bit more and a little bit higher at a higher valuation, each time, demanding more and more money, hoping to be able to dump it onto the public markets, and the hope that they can perpetually con investors into backing their deals. The reason that Microsoft and Google and Amazon have been so squeerrely about their AI revenues is that they know that they're pathetic compared to their capex and near entirely dependent on two companies that Hyperscalers must keep alive so that they can pay them. They can get paid by them with the money that the hyperscaler is handed to them. It's not good. And in twenty twenty six alone, Google and Amazon have invested a combined fifteen billion dollars in Anthropic and Amazon's invested to combined fifty billion dollars in open Ai. And what's crazy about that was thirty five billion dollars of that was contingent on the IPO or AGI. Neither of those happened, which heavily suggests that Amazon kind of knew that they needed to pay open Ai so that open Ai could pay them.

10:10Speaker 1:And by the way, this is what you do when you have no other options, no other viable customers, and your core businesses are not growing at the rate necessary to appease wall Stream. It's been sitting in plain sight for years. Hyperscalers overbuilt capacity, funded their largest customers, incubating them actually, and believed that both the opportunity of owning their models and the underlying compute capacity would be some sort of infinite money glitch, with each hyperscaler owning the equivalent of both the next big cloud infrastructure and cloud software plays, while also owning controlling stakes and creating dependency from the two largest players in both Pretty easy, right, anyone else building AI data centers believe that Microsoft, Google, and Amazon would never be as foolish as to do all of this without a cast iron guarantee that it would turn into everything they'd promised, and that the capital expenditures would be for certain worth it and have the demand to back them that they would not continue spending without that certainty. The reality is that Hyperscalers made a huge mistake, both in what AI could do, how fast

11:08Speaker 1:Open Ai and Anthropic could grow, and in underestimating how bad these businesses would get as they grew. It was also obvious in retrospect from day one. Hyperscalers and most companies in fact, refused to share their AI revenues, and when they did so, they used deceptive run rates based on non specific periods. I've said this for years. If these companies had diverse and meaningful AI revenues, they would be screaming about them from the rooftops. With clarity and vigor, they would tell you segment by segment AI specific contribution to revenue, they'd break out the costs. They would have them in big font on investor presentations. Instead, Google is telling us it processed three point two quadrillion tokens a month.

11:50Speaker 1:Who gives a fuck, Sunda, You're planning to spend one hundred and eighty billion dollars this year, and we both know that if you had the revenues that would remotely justify spending that much, you'd include them. Did you make a big mistake? Son? Dar? You can tell me, buddy. I won't be mad at you. Investors will be, though, They're gonna be furious, but look at the bright side. At least you won't have to hear from that boring of Demis Hassabis and hearing him prattle on and on a bala. Oh what if the computer had the most brilliant mind? What if we had agi in twenty one minutes now he's going to go off and I assume spend more time with his money. Anyway, one day everybody is going to whack super surprised and say there was no way to see this coming. Know that the signs were there for years. They've stayed the same. The only thing that's changed is the inflated value of open AI and Anthropic and the ever escalating capex, fueling a semiconductor bubble that erupted because nobody thought Hyperscalers would ever waste one trillion dollars. At some point, the money runs out to fund these two companies, at which point Hyperscalers will

12:51Speaker 1:have no way to further feed themselves in money. As I've said before, the AI bubble is a syop, a melodrama, a financial crisis, and a mask moment for the business idiots that run the vast majority of the economy. It is one of the strangest moments in history, and it will only get stranger as things get more desperate. We are seeing what happens when the rot economy demands that we push the world's resources to their very limits, both physically and fiscally, in pursuit of eternal growth, and what happens when we discover what those limits actually are. None of this was ever about technology, or good business or anything other than creating the next growth engine for capital. Instead, AI has become a parasitic presence culturally, financially, and ecologically, and it will exhaust as much as it can in its collapse. Nothing about this can be bailed out, because the problem isn't that the money doesn't exist, just that it doesn't exist naturally. A bailout cannot make growth restart for Google, Microsoft, Meta, Amazon, or Oracle once it fully slows, and based on the fact they've sunk more than a

13:53Speaker 1:trillion dollars of CAPEX into AI, I think they must clearly see that growth is already or will die very soon without an id quote doing AI, which mostly means hoping anthropic and open AI pay them ever increasing amounts of money every quarter forever. The US government cannot prop up a stock market that accepts that AI's growth is finite and outside of semiconductor companies and two subsidized AI labs is tens of billions of dollars of demand in the best case scenario. I realize how easy it is to fall into the mindset that everything gets bailed out, that the evil people always win, because we're so used to seeing these evil, corrupt people escape accountability. In this case, while I don't think anyone's going to prison. I think these companies simply exhaust their resources at some point and drop off. I think the era of hyperscale growth is ending, and the only reason they're so desperately joining the no IT loads, refused AI compute come dump is because they know that the only way to keep growth going is to hope they can drain the venture capital and debt markets infinitely by proxy. I don't know if people are

14:55Speaker 1:gonna like that. They just said that I'll keep going though anyway. There are no other hypergrowth markets left. That's all this is about. So many numbers are going up so much higher in the next few months. Then at some point they'll stop going higher, and then they'll start going lower, and then some of them will go to zero or even become negative numbers because the only thing that grows forever is cancer. This all may seem unthinkable right now because Microsoft, Google, and Amazon numbers are going up, but that's really only happening because of open AI and anthropic Most didn't see this coming because it has involved pushing back against one of the most gratuitous and excessive marketing campaigns in history, involving actual reporters that are at real outlets attacking and harassing people for daring to question the powerful, and those people will be held accountable, mark my words. But let's talk about who actually matters, and that's you, and a lot of you have been here with me for years, hearing me build these arguments, and I appreciate the amount of support I hear from you

15:56Speaker 1:via a signal, the terminal, and on the subreddit an email. Of course, you're all awesome, and you keep me going when things are hard, when people are pressing back, when people are genuinely horrible to me. I don't want to complain. I get to do the best job in the world. It fucking rocks to record this podcast and write the news letter. It's the greatest job I've ever done. I couldn't be happy at doing it. It's stressful, but I keep going because of all of you, because I really truly enjoy it. I'll be back next week, and to quote Drill, I'll be calling out all the bullshit of society, the smart way and against all odds. I'll do it for free. Thank you for listening.