SoftBank and OpenAI's Dangerous Game

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1:51Here is a sneak peek at some of the fun. Vince Wilford. Bill finally like, look, guys, stop screwing around. We are joined by Matthew Light, ladies and gentlemen. And Vrabes. You're going to love him. Will Campbell. Not into eating hot dogs. Having Ernie Adams come and teach a defense. Being able to play the wide three techniques tap. Full episodes of Dudes on Dudes and Games with Names presented by Duncan. Tune into iHeart Podcast or wherever you listen to your podcast. Thanks to Duncan for a great time. I'm Glenn Washington, the host of Snap Judgment from KQED. Every week, they don't just tell stories.

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2:52Call Zone Media Greetings, I'm Ed Zitron and this is Better Offline.

3:07Better Offline In my last episode I started by telling you about a report from the analyst wing of a major bank, T.D. Cohen, that revealed how Microsoft had drastically pulled back on its plans to build new data center capacity. At a bare minimum, Microsoft had canceled the equivalent of every data center in London or Tokyo. At least. The real figure is actually probably much, much higher. And as I pointed out that this is a real pale horse, a harbinger of bad times through generative AI and open AI especially, and an indicator that the bubble is imploding or popping. I really don't want to say it's popped and I actually don't know if it's necessary to say when it does.

3:45It's never going to be one thing. I also mentioned that some may interpret this move as a response to OpenAI's Stargate project, which aims to build hundreds of billions of dollars of data centers and power generation facilities in the US, all to power generative AI apps and tools that I'm not sure actually there's really the demand for. But this begs the question, how feasible is the Stargate project? Let's start with a bit of background. The Stargate project was officially announced at the very beginning of the Trump presidency, as OpenAI tried to court favor from the notoriously transactional and praise-hungry person of the United States of America.

4:18Despite that, the project has been in the works for some time, and OpenAI had previously courted the Biden administration. Sam Altman's previous pitch to that administration late last year was that it was necessary to build a 5 gigawatt data center. We don't know how big Stargate will be, just that it will initially involve spending$100 billion to, and I quote, develop data centers for artificial intelligence in the US, according to the information, with the project potentially scaling to$500 billion, a truly fucking astoundingly stupid number. Stargate's first and only data center deal currently signed is in Abilene, Texas, and it's expected to be operational in mid-2026, though these centers usually become operational in phases.

4:56This is especially likely to be the case here, considering that, according to the information, OpenAI plans to have access to a gigawatt of power on hundreds of thousands of GPUs. As part of this, the Stargate project will construct a 360.5 megawatt natural gas power station, and as I said last episode, that one's about power. This power station is, as far as I can tell, still in the permitting phase. It'll be some time before Stargate breaks ground on the facility, let alone starts to actually generate power. Now, as for funding, things have got a little weird. Both OpenAI and SoftBank have committed to putting in either$18 billion or$19 billion each into the project.

5:33I've seen both numbers reported, by the way. Regardless, it's not that big a difference to worry about, especially with, well, the fact that OpenAI does not really have the money either way. What's a billion dollars when you don't have anything? The company is currently trying to raise$40 billion at a$260 billion valuation with, to quote CNBC, part of the funding expected to be used for OpenAI's commitment to Stargate. Now, I'm old enough to remember when this round was previously rumored to be valuing OpenAI at$340 billion and also at$300 billion, and SoftBank appears to be taking full responsibility for raising the round, including syndicating as much as$10 billion of the amount, which means that it would include a group of other investors.

6:15Nevertheless, it certainly seems SoftBank will provide the majority of the capital,$30 billion, with CNBC reporting that it will be paid out over the next 12 to 24 months, with the first payment coming as soon as spring. SoftBank also has another problem. This one, I think even the least technical of you can understand, they also appear to not have the money. They don't have the money. Not the money to give OpenAI, not the money for Stargate. It's a little bit of worrying math issues with this. According to the information, SoftBank CEO Masayoshi Sun is planning to borrow$16 billion to invest in AI and may borrow another $8 billion next year.

6:50The following points, by the way, are drawn from the information's reporting, and I give serious props to Juro Osawa and Corey Weinberg for their hard work here. I attack the information sometimes with some of the framing, but they actually do some of the best reporting in tech journalism. Now, let's do some maths. SoftBank currently only has$31 billion in cash on its balance sheet as of December 2024. Its net debt, which, despite what you think does not measure total debt, but rather represents its cash minus any debt liabilities, stands at$29 billion. They plan to use the loaning question to finance part of their investment in OpenAI and their acquisition of chip design firm Ampere.

7:24According to SoftBank's reported assets, its holdings are worth about$219 billion, so 33.66 trillion yen for those of you who deal with yen, including stock in companies like Alibaba and Arm. On a side note, not every company in SoftBank's portfolio is an Arm or an Alibaba or like a good one. There are some real stinkers too. And I'm not just talking about the Boroban carcass of WeWork. I recommend you look at, and I'll link to this in the episode notes, SoftBank's recent group report, which is linked in the spreadsheet, like I just said, which is me reading a script out, a little behind the curtain for you there.

7:57In particular, I got a 29 in the report, which lists the 10 largest publicly traded companies in SoftBank's Vision Fund portfolio. Now how all of them, without exception, trade at a significant fraction of their peak market cap. In simpler terms, the 10 biggest companies in SoftBank's flagship tech fund are worth far, far less than their all-time high, and in some cases, worth less than one-fifth of their all-time high. If SoftBank liquidated its assets, and I admit this is a big if, and most likely a worst-case scenario situation, how big would their losses be? Separately, SoftBank has committed to a joint venture called SB OpenAI Japan and to spend$3 billion a year on OpenAI's tech for the various companies across its group.

8:37We'll talk about that later, but doing some napkin maths, here's what SoftBank's agreed to 16 billion sorry 18 billion dollars or 19 billion dollars really do not know in funding for the stargate data center project three billion dollars a year in spend on open ai software and as much as 30 billion dollars in funding for open ai paid over 12 to 24 months according to the information and by the way 25 billion has also been reported but the information reports that open ai has told investors that softbank will provide it at least 30 billion dollars of the 40 billion dollars they need jesus fucking christ can you imagine if this went into something useful all.

9:10Anyway, what I'm getting at is that SoftBank has effectively agreed to bankroll the entirety of OpenAI's future, signing up for over$46 billion of investments over the next few years, and does not appear to be able to do so without selling its current holdings in valuable companies like Arm or taking at least$16 billion of debt this year, representing a 55 % increase of its current liabilities. Worse still, thanks to this agreement, OpenAI's future, both in its ability to expand its infrastructure, which appears to be entirely contingent on the construction of Stargate with Microsoft pulling out, and its ability to raise funding, which is also entirely dependent on SoftBank.

9:47And SoftBank, in this case, where OpenAI is entirely dependent on SoftBank to live, must borrow money to give to OpenAI, a company that only loses money. On top of that, OpenAI also, on the money losing front anticipates it will burn as much as 40 billion dollars a year by 2028 and projects to only turn a profit by the end of the decade after the build-out of stargate which i add is like i said almost entirely dependent on softbank which has to take on debt to fund both open ai and the project required to theoretically make open ai profitable how the fuck does this work? How does this work? How does this work?

10:31How does this work? How the fuck does this work? OpenAI, a company that spent$9 billion to lose$5 billion in 2024, requires so much money to meet its obligations, both to cover its stupid, ruinous, unprofitable, unsustainable operations, and the$18 billion to$19 billion it committed to keep growing, that it has to raise more money than any startup has ever raised in history. $40 billion fucking dollars with the cast-iron guarantee that it will need even more money within a year. Every goddamn month, Sam Alton has to go to someone and say, my huge, beautiful company is so powerful, but it's weak and sick and frail.

11:04I need more money than you have today, and I'll need more money than you'll have tomorrow. My company is so sick and weak, but it's the most powerful company of all time. Sam flipping off pisses me off. Imagine if this money went literally anywhere else. He could set it on fire, at least be fucking warm softbank on top of the 30 billion dollars of funding and three billion dollars a year of revenue it's committed to open ai itself also has to cough up 18 billion dollars for stargate the data center project that open ai will run and get this softbank will take financial responsibility for 48 billion dollars in cash three billion dollars in revenue the latter of which like all open ai's offerings will lose the company money open ai has no path to profitability guaranteeing it will need more cash.

11:49And right now, at the time when it needs it more than it's ever needed it, SoftBank, the only company willing to provide it, and possibly the only company with the money to do so, has proven that it will have to go to great, possibly ruinous lengths to do so. If OpenAI needs$40 billion in 2025, how much will it need in 2026? $50 billion? $100 billion? Where is that money going to come from? While SoftBank might be able to do this once, What happens when OpenAI needs money in 6-12 months? SoftBank made about$15 billion of profit in the last year on about$46 billion of revenue. $3 billion is an absolutely obscene amount to commit to buying OpenAI software annually, especially when some of it is allegedly for access to OpenAI's barely functional, operator, and mediocre deep research products.

12:32As per my previous podcasts and pieces, I do not see how OpenAI survives, and SoftBank's involvement only gives me further concern. While SoftBank could theoretically burn its current holdings to fund OpenAI in perpetuity, its ability to do so is cast into doubt by them having to borrow money from other banks to get both into this funding ground and to get Stargate done. OpenAI burned$5 billion in 2024, a number it will likely double in 2025. And remember, the information reported that OpenAI was projected to spend$13 billion on compute alone with Microsoft in 2025 and has no path to profitability.

13:08SoftBank has already had to borrow to fund this round, and the fact that it had to do so suggests its inability to continue supporting OpenAI without accruing further debt. OpenAI, as a result of Microsoft's cuts to data center capacity, now only has one path to expansion. Once it runs through whatever remaining build-out Microsoft has planned, that is. And that's Stargate, a project funded by OpenAI's contribution, which it's receiving from SoftBank, and SoftBank, which is also having to take out loans to meet its share. how does this work exactly how does this continue do you see anyone else stepping up to fund this who else has got 30 to 40 billion dollars to shit out every year while the answer is saudi arabia softbank's ceo masayoshi son recently said that he had had and i quote not given saudi ruler muhammad bin salman enough return adding that he still owed him that's really not the ideal thing you want to say after naming mbs nothing about this suggests that saudi money will follow soft banks in anywhere near the volume necessary.

14:09As for the Emiratis, they're already involved through the MGX fund, and it's unclear how much more they'd be willing to commit. Really? Really, though? Really? Mate? Buddy? Fellow? How does this work? How does this work? In my opinion, this OpenAI SoftBank deal is wildly unsustainable, dependent on SoftBank continuing to raise both debt and funnel money directly into a company that burns it. Burns it billions every year and is set to only burn more thanks to the arrival of its latest bullshit model. And if it had a huge breakthrough that would change everything, wouldn't Microsoft want to make sure they were building the data center capacity to support it?

14:43Hey, maybe they're not.

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17:56now perhaps this crazy level of spending would be necessary if open ai was still the leader in generative ai and it was still meaningfully improving its capabilities year after year or two year after two years and i think we all know that that isn't the case a few weeks ago open ai launched gpt 4.5 its latest model that well this isn't brilliant sam allman says and i quote is the first model that feels like talking to a thoughtful person, which by the way is really funny. It's really funny to say it to be like, yeah, I have spent billions of dollars telling you that this bullshit is like a person, but this one really is.

18:32The other one's not so much. I did not think that in the past. And it's not obvious what GPT 4.5 does better or even really what it does other than Altman saying it is a different kind of intelligence and there's a magic to it that he has not felt before. Wow. Wow. Really, really inspirational stuff, Sammy. Fucking idiot. This was, by the way, in Altman's words, the good news. The bad news was that, and I quote, GPT 4.5 is a giant expensive model, adding that OpenAI was out of GPUs, but proudly declaring that it had tens of thousands of GPUs in the week following and would roll out to OpenAI's$20 a month plus tier and that they would be adding hundreds of thousands of gpus soon excited well you shouldn't be on top of a vague product set and indeterminately high compute cost gpt 4.5 costs developers an incredible 75 dollars per million input tokens and those are the prompts and data pushed into the model and a absolutely astounding 150 dollar per million output tokens and that's the output it creates and that's roughly 3 000 more for input tokens and 1500 more expensive for output tokens to GPT-40.

19:42For results, the OpenAI's Andrei Kapathi described as a little bit better and awesome, but also not exactly in ways that are trivial to point to. And one developer described GPT-4.5 to Arstechnica as a lemon when comparing its reported performance to its price. Arstechnica also reported that GPT-4.5 was terrible for coding, relatively speaking, and other tests showed that the model's performance was either slightly better or slightly worse across the board, with, according to Ars Technica, one success metric being that OpenAI found human evaluators preferred GPT-4.5's responses of a GPT-4.0 in about 57 % of interactions.

20:22Wow, that's very underwhelming. So just to be crystal clear, the biggest AI company's latest model appears to be even more ruinously expensive than its last one while providing modest at best improvements and performing worse on several benchmarks than competing models. very good despite these piss-poor results sam altman's reaction was to bring in hundreds of thousands of gpus as a means of exposing as many people as possible to his mediocre ultra expensive model and the best that altman has to offer is that this is the first time people have been emailing with such passion asking open ai to promise to never stop offering a specific model i am just going to say this that is a tweet and it never happened or it happened like once This is some girlfriend in Canada shit.

21:04Sam Altman is washed. When all of this falls apart, remember, I said he was washed. Now, remember how I talked about OpenAI's lack of meaningful improvement? As a reminder, GPT 4.5 was meant to be GPT 5, but according to the Wall Street Journal, continually failed to make a model that advanced enough to justify the enormous cost. With a six-month training run costing$500 million and GPT 4.5 requiring multiple runs of different sizes so yeah open ai spent hundreds of millions of dollars to make this great stuff and i haven't even mentioned the company's purported agent products and no i'm not talking about operator which is also dog shit by the way open ai wants to create tiers of ai agents with the cheapest costing two thousand dollars a month and capable of handling administrative tasks and the most expensive costing twenty thousand dollars and having phd lower look i wrote the script, all right?

21:56And I'm going to be honest, I can't even read that sentence with a straight face. Operator cannot even search TripAdvisor properly. It can't even do a thing that let me Google that for you does. And these chanderfucks want to charge$2 ,000 a month for an agent that does what? Does some sort of, what's it do? Oh,$20 ,000 for something with PhD level capabilities. I think all the people with PhDs listen to this have just stood up and gone, I have an idea. And this is insane on many levels, not simply because the base product is undercut by actual human workers in many parts of the world, and even PhD students are typically only paid$20 ,000 to$30 ,000 a year on average.

22:37And even people with actual doctorates in industries rarely earn$20 ,000 a month unless they're working in Silicon Valley or occupying a C-suite job. But forget all about that. What does it mean to have a PhD level agent? Remember, LLMs are guessing machines they don't know anything or even understand the concepts behind the words they spit onto a page no seriously Sammy what does it mean I'm fucking waiting you damp goblin you pissant maybe I shouldn't just sit here insulting him wanker anyway this by the way is the company that is about to raise 40 billion dollars led by a Japanese bank that has to go into debt to fund both their operations and the infrastructure necessary for them to grow any further.

23:20Again, as we started with, Microsoft is cancelling plans to massively expand its data center capacity right at a time when OpenAI just released its most computationally demanding model ever. How do you reconcile those two things without concluding either that Microsoft expects GPT 4.5 to be a flop, or that it's simply unwilling to continue bankrolling OpenAI's continued growth? Or perhaps it's having doubts about the future of generative AI in general. Hmm. Maybe. Now, I have been and remain hesitant to call the bubble bursting, because bubbles do not burst, really. They certainly don't burst in neat little events.

23:58Nevertheless, my pale horses I've predicted in the past were led by one specific call, that reduction in capital expenditures by a hyperscaler was a sign that things were collapsing. Microsoft walking away from over a gigawatt of data center plans, equivalent to as much as 14 % of its current data center capacity is a direct sign that it does not believe that growth is there in generative AI, and thus they are not building the infrastructure to support it, and indeed may have overbuilt, something that, as I've mentioned, that Microsoft CEO Satya Nadella has directly foreshadowed in his interview with Dwarkesh and otherwise extremely boring waste of an hour of your life.

24:33The entirety of the tech industry and the AI bubble has been built on the assumption that generative AI was the next big growth vehicle for tech. And if Microsoft, the largest purchaser of NVIDIA GPUs and the most aggressive builder of AI infrastructure is reducing capacity, it heavily suggests that the growth is not there. Microsoft has, by the looks of things, effectively given up on further data center expansion, at least at the breakneck pace it runs promised and even suggests that generative AI will be a thing in a few years. Definitely not the scale it is right now. AI boosters will email me and they'll say, There's something that I don't know, that in fact Microsoft has some greater strategy and some efficiency play.