OpenAI Cannot Survive

24:29Now, here's the funny part. If OpenAI fails to convert to a for profit, that$40 billion is slashed down to a paltry$30 billion. Although again, SoftBank's share is contingent upon whether it finds other investors to join the deal. Now there's another $3 billion that SoftBank's promised to spend on OpenAI's tech, and then$19 billion for the Stargate Data Center project, which SoftBank is taking full financial responsibility for, the information reports. And the total is either$52 billion or$62 billion, with at least$10 billion dollars due by the end of 2025, but more like 20, like there's so much money.

25:04To be clear, SoftBank had to borrow all of the 10 billion dollars. How the fuck are they meant to get the 30 billion dollars? Now, I kind of mentioned S &P, but I want to really return to that. Now, SoftBank's exposure to OpenAI is materially harming the company, and I'm quoting the Wall Street Journal here. Ratings agency S &P Global said Tuesday that SoftBank's financial condition will likely deteriorate as a result of the OpenAI investment, and that its plans to add debt could lead the agency to consider downgrading SoftBank's ratings. While one might argue that SoftBank has a good amount of cash, the journal also adds that they're somewhat hamstrung in its use as a result of CEO Masayoshi's son's dickshit, reckless gambles.

25:44Again, quoting from the Wall Street Journal, SoftBank had a decent buffer of$31 billion of cash as of December 31st, but the company has also pledged to hold much of that in reserve to quell worried investors. SoftBank has committed to not borrow more than 25 % of the value of its holdings, which means it will likely need to sell some of the other parts of its empire to pay the rest of the OpenAI deal. Worse still, it seems that, as mentioned before, that SoftBank will be financing the entirety of the first$10 billion, $7.5 billion if they're able to syndicate it. As a result, SoftBank is likely going to have to sell off parts of their actually valuable holdings in companies like Alibaba or Arm, or worse still, parts of their ailing investments from their vision fund, resulting in a material loss in its underwater deals.

26:27This is an untenable strategy, and I'd like to explain why. First, OpenAI needs at least$40 billion a year to survive, and its costs are only increasing. While we don't have much transparency into OpenAI's actual day-to-day finances, we can make educated guesses that its costs are increasing based on the amount of capital it's raising. If OpenAI's costs were flat or only mildly increasing, we'd expect to see raises roughly the same size as the previous one,$6.6 billion, something in that range. A$40 billion raise is nearly six times the previous funding round. Admittedly, multiples like that aren't particularly unusual.

27:02If a company raises$300 ,000 in a pre-seed round and a$3 million Series A round in funding, that's a tenfold increase. But we're not talking about hundreds of thousands of dollars or even millions of dollars. We're talking about billions of dollars. If OpenAI's funding round with SoftBank goes as planned, it will raise the equivalent of the entire GDP of Estonia, a fairly wealthy country itself that's also a member of NATO and the European Union. That alone should give you a sense of how fucking stupid this all is. Stupid, sure, but undoubtedly necessary. Per the information, OpenAI plans to spend as much as$28 billion in compute on Microsoft Azure Cloud in 2028.

27:39over a third of open ai's revenue per the same article will come from softbank's alleged spend it's reasonable to believe that open ai will as a result need to raise in excess of 40 billion dollars a year though it's reasonable to believe that it will need to raise more like 50 billion a year until they reach profitability you know never and this this actually has a reason it's due to the growing cost of doing business as well as the various infrastructure commitments they've made, both in the terms of Stargate as well as deals with third-party suppliers like CoreWeave and, indeed, Microsoft. OpenAI CEO Sam Altman's statement around costs also suggests that they're going up quite fiercely.

28:17In late February, he claimed that OpenAI was out of GPUs. While this suggests that there is demand for some products, like its horrifying image-generating tech that has made abominations that insult Miyazaki and I will hate them for it forever, and thus made them go viral in March, it also means that to meet the demand of the horrible abominations, OpenAI needs to spend more. And at the risk of repeating myself, that demand doesn't necessarily translate into revenue or profitability. Now, second, SoftBank cannot fund OpenAI long-term. I must be clear. OpenAI's costs are projected to be$320 billion over the next five years.

28:55SoftBank has to overcome significant challenges to fund both OpenAI and its part of Stargate. And when I say fund, I mean fund the current state of both projects, assuming no further obligations or complications. The information reports the OpenAI forecast that it will spend, as I mentioned, $28 billion on compute with Microsoft alone in 2028. And I apologize for repeating myself, these numbers fucking matter. The same article also reports that OpenAI would turn profitable by the end of the decade after building out Stargate, suggesting that OpenAI's operating expenditures will grow exponentially year over year.

29:28According to the information, It expects its costs to surpass$320 billion between 2025 and 2030, with half of that going towards funding model training and development. How the fuck does building Stargate make them profitable? I really can't. Anyway, it won't. It's the same shit. But SoftBank has had to, and will continue having to, go to remarkable lengths to fund OpenAI's current$40 billion round, lengths so significant that it may lead to their credit rating being further downgraded, as I mentioned. Even if we assume the best case scenario, OpenAI successfully converts to a for-profit entity by the end of 2025 and gets that full$30 billion, it seems unlikely, if not impossible, for it to continue raising the amount of capital they need to to continue operations.

30:14As I've argued in multiple newsletters and podcasts, there are only a few entities that can provide the kind of funding that OpenAI needs. These include big tech-focused investment firms like SoftBank, sovereign wealth funds like those of Saudi Arabia and the UAE, and perhaps the largest tech companies. I also want to be clear that I keep getting messages being like, the government could do it. It's not going to happen. Stop fucking asking me. It's just not going to happen. The government's not sending$40 billion to Sam Altman. They're not going to do it. I will apologize personally to each and every one of you if I'm wrong, but they will need to send $40 billion cash to OpenAI.

30:50But these entities can meet OpenAI's needs for some time, but not all the time. It's not realistic to expect SoftBank or Microsoft or the Sauds or Oracle or whoever to provide$40 billion every year for the foreseeable future. And just to be clear, this is what OpenAI needs. Eventually, even the Sauds have to have a break. And I don't know if you remember from a previous episode, but Masayoshi-san gets a lot of his money from them, and they're not happy with him. In fact, Masayoshi-san said a few years ago that he owed Mohammed bin Salman. Not a great guy to owe? Anyway, this really is especially true for SoftBank, by the way.

31:25They're bruised, they're battered after several rough years, including a failed multi-billion dollar investment in WeWork. Based on its current promise to not borrow more than 25 % of its holdings, it's near impossible that SoftBank will be able to continue to fund OpenAI at this rate, and$40 billion a year may not actually be enough. Based on SoftBank's last reported equity value of its holdings, they have about$229 billion of staff, meaning that they can borrow just over $57 billion while remaining compliant with these guidelines. In any case, it's unclear how SoftBank can fund OpenAI, but it's far clearer that nobody else is willing to.

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34:03Now, I'm going to move off the questions for a minute, because I just want to get into some problems I've popped, because it turns out that OpenAI, they got doo-doo ass. That's a professional finance term. I did just say finance, and we're just going to keep that. Now, OpenAI has started running into capacity issues, and this is a real problem, and it suggests material instability in their business or infrastructure, and it's really not clear how OpenAI expands further. Let me explain. It's important to know that OpenAI does not really have any of its own compute infrastructure. The majority of its compute is provided by Microsoft, though, as mentioned previously, Obviously, OpenAI now has a deal with CoreWeave to take over the capacity that Microsoft was going to have,$12 billion or so of capacity in the future.

34:47Anyway, in the last 90 days, Sam Altman has complained about the lack of GPUs and pressure on OpenAI's servers many times. In my newsletter, published a few days ago, I listed six such examples, should you be curious. These statements in a bubble seem either harmless or like OpenAI's growth is skyrocketing, the latter of which might indeed be true, but bodes ill for a company that burns money with every single user. Any mention of rate limits or performance issues suggests that OpenAI is having significant capacity issues. And at this point, it's unclear what further capacity it can actually expand to outside of that currently available.

35:19Sam was complaining about melting GPUs. You've got the lead from Sora saying, yeah, we're going to have some problems showing you stuff for a minute just because like, yeah, we're melting GPUs. There was a whole thing about how you should expect delays on product launches and service problems. None of it's really good. And like I said, it isn't really obvious how OpenAI is going to expand much further. Remember, Microsoft has now pulled as much as 2 gigawatts of data center projects, walked away from a billion dollar data center development in Ohio, and declined the option, the one I just mentioned, on$12 billion of compute from CoreWeave that OpenAI had to pick up.

35:55Meaning that OpenAI may be pushing up against the limits of what is physically available. While the total available capacity of GPUs at many providers like Lambda and Crusoe is unknown, and indeed I don't know if Crusoe has a single data center at this point. We know that CoreWeave has approximately 360 megawatts available compared to Microsoft's 6.5 to 7.5 gigawatts, a large chunk of which I think powers OpenAI. If OpenAI is running into capacity issues, it could be one of the following. They could be running up against the limit of what Microsoft has available or is willing to offer the company.

36:29The information reported in October 2024 that OpenAI was frustrated with Microsoft and said it wasn't moving fast enough to supply OpenAI with servers. And that could also be that while OpenAI's capacity is sufficient, it does not have the resources available to easily handle bursts in user growth in a stable manner. Per the information's reporting, Microsoft promised OpenAI 300 ,000 NVIDIA GB200 Blackwell chips by the end of 2025, a roughly$18 billion worth of them. It's unclear if this has changed since Microsoft allowed OpenAI to seek other compute from other companies in late January 2025.

37:02I also don't believe that OpenAI has any other viable options for existing compute infrastructure outside of Microsoft. CoreWeb's current data centers mostly feature NVIDIA's aging Hopper GPUs, and while it could, and likely is, retrofitting its current infrastructure with Blackwell chips, doing so isn't easy or cheap. Blackwell chips require far more powerful cooling and server infrastructure to make them run smoothly, a problem which led to a delay in their delivery to most customers according to the information. And even if CoreWeave was able to replace every last hopper GPU with a Blackwell, and they won't, it still wouldn't match what OpenAI needs to expand.

37:36One might argue that it simply needs to wait for the construction of the Stargate data center or for CoreWeave to finish the gigawatt or so of construction it's working on. I want to be clear how impossible that is. I need to be clear. One of my least favorite responses to my work is people saying, they'll just build more data centers. They'll just go and build them, man. They're just going to build them right now. They won't. You can't just, data centers don't just grow from the fucking ground. As I've argued in the past, I have serious concerns over the viability of CoreWeave ever completing its alleged contracted 1.3 gigawatts of capacity.

38:08Based on calculations, it'll have to spend in excess of$39 billion to build it. It's unclear how that'll happen, and it doesn't have the money to do so. Like, it actually does not have the cash. I'll get into that later, but they don't have the money. However, even if I were to humor this idea, it's impossible that any of this project is done by the end of 2025, and I'd argue, even in 2026, I can find no commitments to any timescale other than the fact that OpenAI will allegedly start paying CoreWeave in October, per the information, which could very well be using their current capacity. I also can't find any evidence that Crusoe, the company building the Stargate data center in Texas has any compute anywhere else.

38:49Lambda, a GPU compute company that raised$320 million earlier in the year, and according to Data Center Dynamics, operates out of co-location data centers in San Francisco, California, and Allen, Texas, and is backed by more than$820 million in funds raised this year. All of that just kind of doesn't say that they have a data center at all. A co-location, that means you're in someone else's. Buddy, you don't own a house, you're renting one. And just to be clear, OpenAI's ability to scale is entirely contingent on the availability of whatever data center providers it has relationships with. And all of the growth is coming from these two companies.

39:24I'll get there. Don't worry. But every time I kind of say this stuff out loud, I feel my soul slightly stripped from me. I feel like I'm in hell. Because this is an insane thing. If you or I went to someone and went like, hey, look, I'm going to lose$5 billion, but I promise you God will come out of the computer, they'd institutionalize you or me. They definitely would institutionalize me. It's just fucking stupid. But in any case, this means that OpenAI's only real choice for GPUs is either CoreWeave or Microsoft. And while it's hard to calculate precisely, OpenAI's best case scenario is that 16 ,000 GPUs come online in the summer of 2025 as part of the Stargate data center project.

40:07And that's a drop in the bucket compared to the 300 ,000 of the fucking things that Microsoft have previously promised. Now, one last thing. Any capacity or expansion issues that happen with OpenAI will kneecap this company. OpenAI is, regardless of how you or I may feel about generative AI, one of the fastest growing companies of all time. It currently has, according to its own statements, over 500 million weekly active users. Putting aside that each user is unprofitable, such remarkable growth, especially as it's partially as a result of its extremely resource-intensive image generator, is a massive, horrifying strain on their infrastructure.

40:46The vast majority of OpenAI's users are free customers using ChatGPT, with only, like I mentioned earlier, 20 million paying subscribers, and the vast majority of them on the cheapest 20-buck plan. OpenAI services, even in the case of image generation, are relatively commoditized, meaning that users can, if they really care, go and use any number of other large language model services. They could use Bing, they could use Stable Diffusion, they could even use Grok, if they really... I don't like saying it. But free users, they're a burden on the company, especially with such piss-poor conversion rates, losing money with each prompt, which is, by the way, also a case with paying subscribers, and the remarkable popularity of its horrible image generator, it only threatens to bring more burdensome one-off customers that will generate a few abominable Studio Ghibli pictures of Garfield with giant knockers and then never return.

41:39If OpenAI's growth continues at this rate, it will run into capacity issues, and it does not have much room to expand. While we don't know how much capacity they're taking up with Microsoft, or indeed whether Microsoft is approaching capacity or otherwise limiting them, We do know that OpenAI has seen reason to beg for access for more GPUs. In simpler terms, even if OpenAI wasn't running out of money, even if OpenAI wasn't horrifyingly unprofitable, it also may not have enough GPUs to continue providing its services in a reliable manner. If that's the case, there really isn't that much that can be done other than significantly limiting free users' activity on the platform, which is OpenAI's primary mechanism for revenue, growth, and customer acquisition, limiting activity or changing the economics behind its pay product.

42:22And this is quoting Sam Orman. They could potentially find some way to let people pay for compute they want to use more dynamically. That's not good. Orman's come up with some other ideas, like an idea for paid plans on March 4th, where 20 bucks a month goes to credits, which you can use across features like Deep Research, O1, GPT 4.5, Sora, and so on, with no fixed limits per feature. And you choose what you want. If you run out of credits, you can buy more. I just want to be clear that that is a terrible fucking deal. We have no idea what the credits would be, and it would definitely be rigged so that you would have to buy more.

42:54He's also brought up things like mentioning losing$200 a month on the Pro subscription, but here's a funny one. Buried in an article from the Information from March 5th is a comment that suggests that OpenAI is considering measures like changing its pricing model entirely, with Altman reportedly telling developers in London in February 2025 that OpenAI is primed to judge 20 or 30 % of Pro customers a higher price because of how many research queries they're doing. but he suggested an a la carte or pay-as-you-go approach. When it comes to agents, though, we have to charge more than$200 a month.

43:27Fucking just this fucking guy. The problem is that with all of these measures, even if they succeeded in generating more money for the company, also need to reduce the burden on OpenAI's available infrastructure. Remember, remember, data centers can take three to six years to build, and even with Stargate's accelerated and I'd argue unrealistic timelines, OpenAI isn't unlocking a tenth of the promised compute. that Microsoft gave them. 300 ,000 GPUs is a lot. 16 ,000, really not. So what might these capacities look like? What are the consequences? You love pale horses. I love pale horses. Let's get riding.

44:03Though downtime might be an obvious choice, capacity issues at OpenAI will likely manifest in hard limits on what free users can do, some of which I've documented previously. Nevertheless, I believe the real pale horses of capacity issues come from arbitrary limits on any given user group, meaning both free users and paid users, some limits on what a user can do, a reduction in the number of generation of images for paid users, any introduction of peak hours, or any increases in prices are assigned that open AI is running out of GPUs. It's already said it's happening publicly. However, the really obvious thing, the real obvious pale horse, would be service degradation, delays in generations of any kind, 500 status code errors, or chat GPT just failing to produce an answer.

44:47OpenAI has, up until this point, had fairly impressive uptime. Still, if it's running up against a wall, this streak will end. The consequences depend on how often these issues occur, and to whom they occur. If free users face service degradation, they'll bounce off the product as their use is likely far more fleeting than the paid user, which will begin to erode OpenAI's growth. Ironically, rapid and especially unprecedented growth in one of OpenAI's competitors, like XAI or Anthropic could also represent a pale horse for OpenAI, though based on the monthly active users I've seen from Anthropic, I don't think that's going to be a problem.

45:20Now, if paid users face service degradation, it will likely cause the most harm to the companies. While paid users still lose OpenAI money in the end, at least they receive some money. OpenAI is effectively one choice here. Get more GPUs from Microsoft, and really its future depends heavily on both Microsoft's generosity and there being enough of them at a time when Microsoft has pulled back from over 2 gigawatts of data centers, specifically according to TD Cohen, because of it moving away from providing compute to OpenAI. Now, admittedly, OpenAI has previously spent more on training models than inference, and that's the actual running of them, and the company might be able to smooth downtime issues by shifting capacity.

45:58This would, of course, have a knock-on effect on its ability to develop new models, and the company is already losing ground, particularly when it comes to Chinese rivals like DeepSeek. Now, I know this has been a long episode and the fact is i'm not even close to finish i have some more tough tough questions and tough problems for open ai tune in for to the next episode to hear them i realize this has been a lot and i know you're very patient with me you let me read my long scripts but this stuff is important it's important to me and i think you're going to find it important too and i'll have a nice sexy conclusion to this at the end of the next one but before i go please vote for me in the fucking webbies.

46:35I want to win. It's my pin post on Blue Sky and Twitter and my handle's edzittront.com on Blue Sky. Please vote for me in the webbies. Anyway, catch you next episode.

46:51Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Ossowski. You can check out more of his music and audio projects at Matosowski.com. M-A-T-T-O-S-O-W-S-K-I.com. You can email me at ez at betteroffline.com or visit betteroffline.com to find more podcast links and of course my newsletter. I also really recommend you go to chat.wheresyoured.at to visit the discord and go to r slash better offline to check out our reddit. Thank you so much for listening. Better Offline is a production of Cool Zone Media. For more from Cool Zone Media, visit our website, coolzonemedia.com, or check us out on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

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