Open-AI, Broadcom Sign 10-Gigawatt Pact for Chips, Networking

0:28The news doesn't stop on the weekends. We put the past week's events into context, examining what happened in the markets and the world. Then on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television, listen on Bloomberg Radio, stream the show live on the Bloomberg Business app, or listen to the podcast. That's Bloomberg this weekend, Saturdays and Sundays starting at 7 a.m. Eastern on February 28th. Make us part of your weekend routine on Bloomberg Television, Radio, and wherever you get your podcasts.

1:10Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Mandeep Singh joins us here because we want to get some more details on this Broadcom deal because again, moving the stock big time, helping propel the NASDAQ to a nice move today. Mandeep Singh is a senior tech analyst for Bloomberg Intelligence. He's been telling us about AI for like a couple of years now.

1:46And folks, if you don't really know what AI is and you have access to the Bloomberg terminal, just go type in BIGO. That'll get you to Bloomberg Intelligence homepage. In the search bar, just type in AI and it'll bring up, send you to of the definitive report, really large report on AI. What is it, how to play it, and what's the future of AI? It is the definitive research report on Wall Street on AI. And Mandeep Singh is the blame for that. Mandeep, talk to us about this Broadcom deal here. Lay it out for us. What does it mean for Broadcom and for just kind of an open AI as well? Yeah, I mean, look, open AI is going after having as much compute capacity as they can.

2:27and they did first 10 gigawatts with NVIDIA, six gigawatts with AMD, and now 10 gigawatts with Broadcom. And the difference here is with Broadcom, they get to use their own chips. NVIDIA and AMD are what we call merchant silicon. Exactly. That's basically generalized chips where you can deploy the workload you want, whether it's from OpenAI or Microsoft or any other vendor. In the case of custom silicon, which is what Broadcom does, a company like OpenAI or Google, Google makes up almost 50 % plus of Broadcom's AI revenue. So Google has their chip called TPUs. They use it for everything run on Google's platform, whether it's YouTube, whether it's AI, whether it's cloud, everything inside Google's run on their TPU.

3:24So OpenAI's strategy here is to use an approach which is similar to Google GPUs because it saves you a lot of money. I mean, imagine an NVIDIA AI chip costs you$30 ,000. A custom silicon that Broadcom is making for Google costs you$6 ,000. That's the cost differential we are talking about. And it's not because NVIDIA has to spend$30 ,000 to make that chip. They have a 75 % gross margin on the chip that they're selling to the customer. So NVIDIA's cost is also low, but they mark up the price of their silicon. Same thing with AMD. In the case of Google, they're going directly to Broadcom to make that chip at a far lower price, and it's for their own use, which is why they don't have to pay the markup to NVIDIA or AMD.

4:13And that's why having your custom silicon strategy is so good, because it really saves you. So one gigawatt with NVIDIA Silicon would cost you about 40 to 50 billion. One gigawatt with a Broadcom OpenAI Silicon would cost you 25 to 30 billion. So we're talking about, you know, 30 to 40 percent cost differential. And it's huge. I mean, in the context of what these guys are trying to do, you know, scale the infrastructure. In addition to that distinction, there's also no investment or stock component to this OpenAI Broadcom deal, which makes it different from the deals that it struck with NVIDIA and AMD.

4:51So I guess my question is, how would OpenAI finance the purchase or the chips in general? And that's a great question, because right now they have to do a lot of financing. It's one thing that's a common thread in the NVIDIA transaction, where even though NVIDIA is putting$10 billion in OpenAI, they still have to find the remainder of the money. So if you imagine, you know,$40 to$50 billion per gigawatt, 10 gigawatts costs you around$500 billion. NVIDIA is only investing up to$100 billion. So they still have to figure out the remainder of$400 billion. In the case of AMD, I mean, yes, they are getting some stock, but you still have to figure out the financing for that, you know,$300 billion or so.

5:37Here, it's the same thing. You need the money. And OpenAI's bet is if we keep ramping up our revenue, that is obviously a big source of the funding. We'll do a lot of private deals because we already have the buy-in from these big players, whether it's NVIDIA or Microsoft and other sovereign providers. And I think it's a lot of scale game right now because once we keep hitting our milestones, we'll keep raising more money. And that's the hope when it comes to OpenAI. One name I haven't heard during all this dance between all these tech companies is Apple. Yeah. What's going on there? Glaring absence.

6:16Exactly. I think that's the right way to frame it. And look, at some point, I think they are going to go the Broadcom route. Out of the three partnerships that OpenAI has had, a company like Apple will never go for merchant silicon. I mean, look at what they have done in their own devices. It's all custom silicon. And that's where if I had to pick a strategy for Apple, it will likely be custom silicon using Broadcom or Marvell or one of these ASIC providers. But the hard thing for them is because they have missed out all the action in the past three years, it's so hard to catch up. Even if you throw money and, you know, your CapEx dollars, time is of the essence.

6:58And the longer they delay this, I feel either it's Broadcom or a partnership with Google now that antitrust is behind. So they may very well adopt Google's LLM across their device. That would be huge. That will be huge. But I think, you know, with the regulatory overhang going away, that could be a very likely strategy. Apple has a ton of cash. It can't buy its way to a solution here. Who do you buy? I mean, these are all scale players. AMD, Broadcom. Maybe you could say Marvel is a smaller player, but you need the best end chips. That's why everyone is buying NVIDIA, because they have the highest performance per watt.

7:38So you can't really get a second or a third player, because then you compromise on the performance per watt, when the biggest constraint out there is power. So, you know, you need the leading player when it comes to the chip side of the equation. Stay with us. More from Bloomberg Intelligence coming up after this. This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven.

8:18We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today wherever you get your podcasts. You're listening to the Bloomberg Intelligence Podcast.

8:55Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's get back to what's happening in the markets. One of the concerns, and Scarlett mentioned a couple of times here today, is in the credit markets. Do we have some concerns out there? First brands, for example, their challenges there have really spooked some parts of the credit market. We want to get the latest on what's going on there. We check in with Steve Mann, Bloomberg Intelligence Global Autos and Industrials Research Analyst.

9:30Steve, from your perspective, just tell us for the people out there that don't know who First Brands is, who are they and what happened? Yeah, First Brand is a big, huge aftermarket parts supplier. Some of the brands are really well known in the markets. parts include like brake pads, engine oil filters, windshield wipers. So a lot of these are just very fast, wearable parts that everyday consumers buy. Okay, so it's something that's quantifiable, it's knowable to consumers. And it kind of shocked everyone when it ran into financial problems. And I know that everyone's still trying to uncover how much of this is perhaps corporate malfeasance or there might be some fraud going on.

10:23But it happened at the same time that another company named Tricolor was also falling apart. And both of these are tied to the auto sector. They're not making cars and selling cars directly, but they are tied to the business of selling cars or the business of taking care of car consumers afterwards. What does that say about the car industry, Steve? Yeah, I think those two instances really freaked out the market. Based on our research, I think those are really contained situation to those companies and don't feel there's a broader impact. But you never know, you know, the market's based on investor sentiment.

11:06But we did some research on the impact on the after market parts market. Companies like O 'Reilly, AutoZone, and Advanced Auto Parts are unlikely to see impact on their supply chain. Like I said earlier, these are high commodity parts. There's a lot of producer that actually produce wipers and brake pads, not just first brands. So it's not going to impact the consumer. It's not going to impact companies like O 'Reilly or AutoZone. It actually may be beneficial to the aftermarket retailers in terms of higher prices. How important are these aftermarket retailers? I mean, it seems I keep hearing, I'm reading your research that people are holding on to their cars longer and longer and longer.

11:54And therefore, this after parts is a pretty good business. And it's a very good business. It's a relatively high margin business, great for cash flow. So in this instance, with first brand, companies like O 'Reilly, AutoZone, on a financial perspective, doesn't really deal with first brands. They buy parts from first brands, but they pay the financial institutions. And the financial institution actually pays first brand through these what we call supplier agreements, finance agreements. So these auto parts retailers are actually shielded from what's happening with First Brands. The news, of course, today is that First Brands' founder and CEO, Patrick James, someone that a lot of people don't know and haven't heard of, he is resigning because, of course, the company is facing an investigation over its finances, and he will be replaced by Charles Moore as an interim CEO.

12:56This is very inside baseball, Steve. But what I wanted to get to is this idea that a lot of people are not overly concerned that this spells broader problems at what point might you get a little bit more concerned uh i think i think if it if if there's a contagion effect which i think it's a low low low probability the other issue is is the supply chain uh is it gonna if if first brand does stop operations and stop producing parts uh does it impact the supply chain of like o'reilly and AutoZone. I think temporarily it does. But what really could happen is that O 'Reilly and AutoZone will probably raise prices and actually will help juice up their margins.

13:43Stay with us. More from Bloomberg Intelligence coming up after this. Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday, keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy.

14:21We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts.

14:50You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. M &A, media, likely to be some type of media activity, M &A activity in the media space that some of these companies need to consolidate even more to get even more scale to compete against the Netflix of the world, not to mention the Amazons and the Apples and so on and so forth. So one of the deals that's out there potentially is Skydance, Paramount, maybe doing a deal with Warner Brothers Discovery.

15:28Let's see where we are right now. There's been a lot of rumors and a lot of news reporting about a potential hookup between these two companies. Geetha Ranganathan, she looks at this stuff. She's the U.S. media analyst for Bloomberg Intelligence located in our Princeton, New Jersey office. Geetha, I mean, the scuttlebutt is, you know, Paramount is interested in buying Warner Brothers Discovery, but I don't we haven't seen Warner Brothers really open to a deal, at least not at the prices that have been bandied about. What's the latest? Yeah, the latest, Paul, is I mean, as you just said, that there have been rumors now ongoing about this, these possible sale talks for over a month.

16:07Over the weekend, you know, Lucas Shaw and Bloomberg News basically broke the story that Warner Brothers did receive an offer for 20 at$20 a share. But David Zaslav, the CEO of of Warner has basically rejected that offer as being too low. Now, we know from some prior reporting that he had been looking for something like about$40 a share. So obviously, that's a huge, huge gap right there. And I'm just looking at the size of these companies. I mean, Warner Brothers has a Warner Brothers Discovery has an enterprise value of more than twice that of Paramount. How's that math going to work? Yeah, so this is what we've been kind of, scratching our heads about.

16:50So initially when we had the news come in, one of the big pieces that was mentioned was that this was going to be a majority cash deal and a lot of the funding was going to come from the Ellison family. Now things seem to have changed a little bit last week because we heard that private equity players were getting involved. So Apollo was one of the names that was mentioned. It looks like Paramount had approached Blackstone, but maybe they were not really that interested. Legendary was also thrown into the mix. So we're not completely sure just yet whether, you know, Paramount is going to proceed with a higher offer with some of these external sources of financing or whether really the Ellison family is kind of going to, you know, step in and, you know, basically fund the majority of the acquisition.

17:36Well, it's not like he can't afford it. I just typed in rich go R-I-C-H. That's the list of the top most wealthy people in the world. According to Bloomberg, Mr. Ellison is number two with a net worth of$350 billion. So there's certainly some capital there to be deployed. Keith, what's the sense of timing here? I know Warner Brothers Discovery, they're actually pursuing kind of a parallel path, which is they're separating their businesses a little bit. Tell us about that. Yeah. So, you know, I really think here the odds are in Warner Brothers Discovery's favor. And I say that because, as you just pointed out, they are on this path to separating the two companies.

18:10They're separating out the TV networks, which really doesn't have a great growth outlook from their streaming and studio assets, which, by the way, is just doing extremely well. The studio has had an absolutely fantastic run this year. They're making up almost 30 percent of the box office. They've had hit after hit after hit. So they really are on a winning streak. And this is what I think gives David Zaslav a lot of confidence that he can get top dollar for at least the streaming and studio part of the business. The real problem, Paul, and you know this very well, is what the outlook is going to be for the TV networks.

18:43And that's where I think it's a little bit of a double-edged sword because the paramount offer right now is for the entire company, which means he gets to offload the TV networks, doesn't really have to worry or think about it. The thing is, if he waits and pursues the split, of course, streaming and studios is going to do really well. But then again, we're stuck with the TV networks business without much of really a future, a proper future, good outlook for it. So that's really where the dilemma is for the Warner Brothers Discovery Management team. And what's interesting here, I think, particularly if you're a banker or a lawyer trying to put a deal together, is we have a willing seller here.

19:21Mr. Zaslav has stated he's willing to sell and stated that it probably makes sense for this industry to consolidate even more. So it sounds like it's just going to come down to price. It is going to come down absolutely to price. I mean, he's already kind of said on multiple occasions that, you know, there are people who are interested, especially in the streaming and studio part of the business. He is going to push hard, very hard for, you know, on the price front. We know he's a really tough negotiator, but I'm not really sure how much Paramount is going to be willing to pay up for this. So broadly speaking for these networks, did they go to zero with cord cutting?

20:03They won't go to zero, Paul, but they're definitely, I mean, the floor has been going lower and lower. So you very well know that, you know, at its peak, pay TV households were somewhere at about 104 million in the country. Today, they're at about 65 million. The idea, or at least the thinking on the street is that this is probably going to go to somewhere like about 40 million maybe in the next three to four years. But who knows? I mean, the rate of decline has been pretty dramatic. I mean, even when Warner Brothers and Discovery came together a few years ago, remember, they had projected$14 billion in EBITDA.

20:39That number, we never got anywhere close to that number. This year, we're looking at something like about eight and a half billion or nine billion in EBITDA. So it's just such a big gap. And that's just because of the dramatic decline in the TV network business. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

21:17Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. Military withdrawal from Afghanistan. But all the time I was delivering the headlines, I wanted to go further than the news of the day. To spend more time with the people shaping our world. And that's what I'm doing here on this podcast. Speaking to people from Nigel Farage. This is love you trying ever so hard. Russia needs to be taught a lesson. This is love you trying ever so hard. To tech journalist Cara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices.

21:52This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to The Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts. You certainly ask interesting questions. Thank you.