Oracle, OpenAI Expand Stargate Deal for More US Data Centers

0:00Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode.

0:39Available on Plus and Pro plans. This dog salon? Operational excellence. Thanks to Genius from Global Payments. Scheduling? Personalized. Checkouts? Instant. Absolutely genius. Big League reliability for any business. That's genius. Never bet against American grit or American energy. Through innovation, Venture Global is not only building some of the largest energy facilities in the world right here in the United States, but delivering American energy at a fraction of the cost and a fraction of the time. So while others are busy talking, we're busy building. That's venture global. That's unstoppable energy.

1:49live on YouTube. I think there's a lot of news in the technology side of the business on OpenAI. OpenAI has agreed to rent a massive amount of computing power from Oracle data centers as part of its Stargate initiative, totaling about 4.5 gigawatts. I don't know what a gigawatt is, but it sounds big, of data center power in the U.S., so I have no idea what that means. And OpenAI is not, I mean, Bloomberg AI is giving me some stuff, but I need to go to the source, Anurag Rana, technology analyst for Bloomberg Intelligence. Anurag, it seems like we're seeing a lot of deals getting inked here in the tech space.

2:25This AI story is still moving along at a great pace. Talk to us about what's going on at Oracle. Yeah. So this is something we discussed a few days ago when Oracle was up sharply at that point. They didn't disclose the name of the client, but that seems like, as we said, it is OpenAI. This is part of the Stargate project that came out right after the president got elected at the beginning of January or the middle of the end of Jan. This is a big project. It's going to take several years to build out. It's going to be very humongous data centers across the country and perhaps even globe, where OpenAI is basically buying computing capacity from Oracle with the help of SoftBank, you know, funding part of that particular project.

3:06What is your sense of this deal? Because we have credit ratings S &P saying that Oracle Cloud's infrastructure building spree was straining cash flow and that the current spending pace is higher than anticipated. Is that also the view you have? Yeah, it's going to be much higher. In fact, we think the company gave guidance of about CapEx of$25 billion. We think that's going to be low. It's going to be well north of that over the long term. I mean, over the next three to five years. Remember, just a few years ago, they were only spending about$5-6 billion a year. But frankly speaking, if you really want to play in the cloud infrastructure game or AI infrastructure game, you really need to spend the money up front in order to get those workloads down the road.

3:47Microsoft is spending, Amazon is spending, and frankly, for Oracle's good fortune, they actually have a client who's willing to pay them ahead of time. or they have an agreement so they can go out and build this data center and they can recognize revenue over the next few years. Oracle will develop multiple data centers across the U.S. with partners with sites in several states under consideration, including Texas, Michigan, and Wisconsin here. Where does Oracle fit within kind of your broader AI theme, Anurag? Yeah, just about five years ago, to be honest, they were pretty much absent in this game because their cloud infrastructure was there to take care of their clients only, and nobody else was renting it from them.

4:29I mean, there were certain clients, but not so big. I think the TikTok deal really helped them out because TikTok runs on Oracle cloud infrastructure. They gave them some credibility. They've been spending a lot of money to expand their data center footprint. I think they can afford to do that because they have a very incredible, profitable database business where they are the market leaders. They have a lot of cloud applications where they generate a lot of free cash flow. So they established this business, and now they're reaping the benefit of it. As it relates to, let's say, AWS, they're still very small in size.

5:04In their infrastructure as a service business, last year, they're$10 billion in revenue, as compared to, let's say, Amazon, which is running at about$100 billion or so. But this particular customer or this customer and a few others, by FY28, will add another$30 billion on top of the 10 that we are talking about. So their cloud business really becomes much stronger down the road because of this deal. What about Microsoft? Lots of news here, too. Their gaming division laid off hundreds of employees and specific to Xbox. This is the fourth mass layoff at least in the last 18 months. What is their strategy here?

5:41The strategy, I think, is by the CEO saying, listen, you use these AI tools, become more productive, and I'm not going to hire at the same pace as we used to hire before. And I think that is the game now. I think this is going to go on and carry on to other tech firms, whether it's on the software landscape or any of the other subsectors. But I think you're going to see this theme recurring over the next 12 months where CEOs, CEOs are saying, you really need to figure out your productivity before you ask for a headcount. And I think that is, frankly speaking, that's not good for the downstream players, people who are selling software packages to these companies, HR software, sales software.

6:21But, you know, there's not a whole lot anybody can do about it at this point. Anurag, I know you and Mandeep and your technology team have done deep, deep dives into AI. And folks, there's lots of great Bloomberg intelligence research out there on the terminal. And so check it out. But there's some serious deep dive work, some of the best on Wall Street. If you want to learn about what AI is, check that out. I'll tell you what I say, which I don't hear many people talking about. This will replace people. AI is going to replace people across, I think, countless industries. What do you guys think?

6:57No, I think that's a very valid view. and as I was telling you on the Microsoft case, when we go pre-chart GPT era, for every dollar one percentage points increase in revenue for Microsoft, their headcount used to grow somewhere around 0.7 or 0.8 times. We're close to a point that it's going to be very difficult to see that ratio now because Microsoft revenue is going to grow in, let's say, in the next 12 months somewhere around 13 to 15 percent, but I don't think the headcount's going to grow anywhere more than 4 or And that's frankly is the asymmetric growth between revenue and headcount that's going to recur throughout the entire technology space.

7:38And that's, frankly speaking, it is good for the shareholders, but not so good for if you are a tech worker in this landscape. What about the tens of billions of dollars spent on data centers and application development? We have Microsoft, for instance, pledging that it would put a lid on that cost. Are you also hearing that same vibe from other companies? And by the way, to Paul's point, that's kind of sad because I hope we still have a job, which is why I keep cooking. Because I think cooking will not be replaced by AI. Back to AI cost in Microsoft. Yeah, see, for Microsoft, they have already pledged, you know, let's say over the next 12 months, somewhere close to$100 billion for the expansion of their data center and all the AI infrastructure build.

8:20that revenue that the pace of that growth is going to slow down over the next let's say 24 months but what we don't know is you know beyond an fi 27 or 28 whether it's going to continue that level or not right now it is driving some growth for them but it's also hurting margins all this revenue that's coming up is actually has a much lower margin structure than their core business so we really have to see you know how they're going to deal with margins and one of the ways they can do that is by reducing headcount. So I think they're going to give guidance by the end of this month when they report results for the next fiscal year, which is F526.

8:57And I think that's where they're going to see some of the margin benefits of these layoffs. Anurag Rana, thanks so much. Appreciate it. As always, Anurag Rana, Senior Technology Analyst for Bloomberg Intelligence. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful.

9:37Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com by selecting work mode, available on plus and pro plans. At Edward Jones, we believe rich is more than caring about the latest and greatest. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Let's find your rich together. Edward Jones, member SIPC. If you listen to financial news, you know a lot of time is spent thinking about what's next, the next opportunity, the next investment, the next move.

10:27But sometimes what matters most is being ready for what you never saw coming. A storm damages a second home, A pipe bursts above a collection you spent decades building. An unexpected loss puts a growing business on pause. Those are the days no one sees coming. But for more than 75 years, Cincinnati Insurance has been ready when they do. With deep expertise, coverage for businesses, homes, valuables, and more, Cincinnati Insurance works with independent agents who take the time to understand what matters to you. Together, they help protect more than what you own. They help protect what you're building toward.

11:03And when a bad day does come, Cincinnati Insurance has real people there to help make things right. Because planning for the future isn't only about knowing what's next, it's about making sure you're ready for what you can't predict. Let Cincinnati Insurance make your bad day better. Find an independent agent at CINFIN.com. 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. One of the stories I really enjoyed the most on the Bloomberg Terminal today is about a company I used to cover for years and years and years and did a lot of work with, Warner Brothers Discovery.

11:49This was a company, two famed media companies put together a few years ago to get scale to compete, but they probably don't have enough scale even there. So now they are, and the stock has underperformed since putting those two companies together. So now they're doing what I would have recommended as a banker, which is let's take them apart again. But part of it is you've got to deal with the balance sheet. There's a lot of debt there for this company, so you have to figure out a way to deal with that. Reshmi Basu joins us here, Bloomberg News, a credit reporter. Reshmi, I loved your story here today.

12:19Talk to us about what J.P. Morgan, the banker for Warner Brothers Discovery, What deal did they kind of craft to deal with the debt problem at Warner Brothers Discovery before they could even split the company apart? In order for the split to happen, J.P. Morgan needed to do a restructuring of the debt stack. So basically what they did is they provided a$17.5 billion bridge, which is biggest bridge, massive. And they used those funds to take out existing debt. They cut about$3.2 billion of$32.5 billion of outstanding debt. And it was just a deal that really used a lot of distressed restructuring tools and applied it to an investment-grade company, something we've never seen before.

13:10Can you talk about how this has the potential to set a new president for companies, especially those in investment-grade, to just renegotiate their debt moving forward? So this kind of introduces a new playbook to the investment grade community in that it was an unbelievably short consent. It was only five days. And it was even shorter for some funds because they had to turn in their consents within three days given the processing times. Like they were depending on slower software, et cetera. So really this deal prevented lenders from being able to organize a group and fight for better terms. How did they get away with that?

13:50I mean, if I ever tried that back in the day when I was at Chase, the bondholders would just smack back at me, throw it right back in my face. How did they get that done? They really relied on kind of a prisoner's dilemma in that there were winners and losers created in this structure. And they kind of stapled it to consent. There's no kind of rules around how long a consent can be. So they really utilized that deadline to prevent lenders from organizing. And also, to J.P. Morgan's credit and to the other advisors of Accor and Kirkland, they did provide an exchange rate that was higher than where the debt was currently trading.

14:28Ah, okay, I see. So a loss on the face value, but a premium to current trading levels. But these are investment—this isn't junk. I mean, these bonds were investment-grade, weren't they? Yep. I mean, it kind of took away the protections. If I'm an investment-grade bondholder, I'm not taking this deal. I've never seen anything like it. No, neither have we. And this is kind of the concern in the market that this is going to be the playbook that we're going to see for more and more investment grade companies. So the distressed kind of mechanisms are coming to investment grade. But they must be taking a victory lap right now, although we do have the European Leverage Finance Association releasing a statement warning that the whole process was, quote, a worrying negative development.

15:06And they say that this might be coercive in nature. How are others receiving this? And will it even be a president given warnings with stern language like this? So they're talking about the anti-boycott language, which basically prevents lenders from kind of banding together and deciding not to take part in a new issuance. So that kind of is the first time we've seen that language. And, you know, as we know, in the distressed land, we see a ton of like no so-called liability management exercises. We see groups kind of forming, locking arms together. with these cooperation packs. But this one just basically prevents lenders from, again, coming together and not partaking in a new issuance.

15:49And, you know, eventually, J.P. Morgan is going to have to issue new debt. So this kind of helps him. Again, what was also interesting to me was this, you know, huge bridge loan that J.P. Morgan did. Because I know a lot of boutique investment banks, they're really good at doing these debt restructuring and maybe taking some business away from the J.P. Morgans and the Goldman Sachs of the world. I guess this is J.P. Morgan coming back and saying, listen, we've got this big balance sheet. It can help you get deals done. And not so long ago, we reported on a story about how J.P. Morgan was trying to take a bite out of restructurings and LMEs, et cetera.

16:24And one thing that we were hearing is that they have the balance sheet to do so, something that boutique firms may not. So this kind of gives them more validation. And an interesting thing in your story is you said the whole thing was so important, important enough that even Jamie Dimon received updates on it. So it's not like this one little niche group risking something big. Even the CEO has kept abreast. This went to the top. So this was a big deal for JP Morgan and its bankers, the M &A bankers, the capital markets bankers, the restructuring desks. This was a big deal. All right, JP Morgan and the company may be doing a victory lap, but at some point in the next year, two, three, they're going to have to come back to the bond market.

17:03And these people are going to remember. and there could be a price to pay there. I know I would hold a grudge if I were a bondholder there. So anyway, great story. It got a green B, folks, and that means that it's a really, really good, cool story and it's unique and it's a scoopish and all those kinds of things that the journalists worry about. Reshmi Basu, thank you so much for joining us. Credit reporter for Bloomberg News. Great story right down my hallway. And what I did notice is J.P. Morgan actually was the M &A advisor on the deal coming together to put the company together. Now they're getting paid to take them apart.

17:38That is beautiful. Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects.

18:15Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. At Edward Jones, we believe rich is more than caring about the latest and greatest. It's also taking care of what gives your life meaning. That's why your dedicated financial advisor meets you where you are with personalized financial strategies that help protect what matters so you can preserve your progress while creating a path forward. The key to being rich is knowing what counts. Let's find your rich together. Edward Jones, member SIPC. If you listen to financial news, you know a lot of time is spent thinking about what's next.

18:56The next opportunity. The next investment. The next move. But sometimes what matters most is being ready for what you never saw coming. A storm damages a second home. A pipe bursts above a collection you spent decades building. An unexpected loss puts a growing business on pause. Those are the days no one sees coming. But for more than 75 years, Cincinnati Insurance has been ready when they do. With deep expertise, coverage for businesses, homes, valuables, and more, Cincinnati Insurance works with independent agents who take the time to understand what matters to you. Together, they help protect more than what you own.

19:34They help protect what you're building toward. And when a bad day does come, Cincinnati Insurance has real people there to help make things right. Because planning for the future isn't only about knowing what's next, it's about making sure you're ready for what you can't predict. Let Cincinnati insurance make your bad day better. Find an independent agent at CINFIN.com.

20:19which means Ira Jersey cares. Ira Jersey, chief U.S. interest rate strategist, Bloomberg Intelligence, is scounced in that Princeton office. I keep telling them we have a nice office here in New York, but it's not budging at all. My man is comfortable down there, and I respect that. Hey, Ira, what did you and what did your bond market take away from some of all this economic data we had today, including ISM, which came in a little bit better than expected as well? Yeah, well, I think in particular, people were concentrating on that unemployment rate as well as the fact that you didn't have a significant, you know, you had a slowdown in private payrolls, but you didn't have as significant a slowdown in aggregate payrolls.

20:56And those were the things that people were worried about. So the reason why the two-year yield is off nine basis points right now is basically we were starting to price in for the chance of a July rate cut. And that's basically off the table at this point. So September is now priced about three quarters of a 75 % chance of a September cut. I I still think that's probably going to be a little bit too early. But nonetheless, you know, taking out July meant, you know, nine basis points on twos. And that's exactly what we've seen. We have Gregory Firenello, a mayor of it security, saying the Fed will take the summer off.

21:28It's really a surprising report. To your point, rate cuts for July basically went to zero. September is kind of iffy. How did this shape your view moving forward? Did you immediately have to write a report? Did you and your team really were surprised? and had to reshape or re-angle your outlook? Yeah, it was, I mean, I guess a little bit. You know, the consensus for the unemployment rate was for it to go up a tenth instead of went down a tenth, and I think that that was the single biggest surprise. You know, we don't, our colleagues over at Bloomberg Economics, they own that unemployment call.

22:04But the, you know, I think it didn't really reshape our views very much at all because we've been suggesting that we'll continue to kind of muddle along with okay employment situation with this overhang of tariffs keeping the Fed on hold probably until at least the October meeting, which happens in very late October. So we're looking at the fourth quarter in our view before the Federal Reserve makes any moves at all or we'll get enough data. You know, I think the market is more sensitive to data now thinking that, oh, they're going to change on a dime. One bad data print means that the Federal Reserve may go or not.

22:39But that's quite frankly not the case. And one of the necessary conditions for the Fed to cut rates is a weakening employment situation. And while it's weakening, it's not getting weaker. So we're not yet at a point where the Fed will feel compelled to cut because of the job situation. So to the extent that the market now has maybe a better feel on the labor market, and maybe the Fed has a better feel on the labor market with today's data, focus can then maybe move to inflation. What are the expectations in the market here? We haven't really seen any inflation creep into this market of any note here, which some people had feared with the tariffs and so on.

23:23What's the view there? Yeah, well, there's a couple of things going on under, you know, underlying some, there were some, when you look at the May data, there were some sectors that did see a little bit of an uptick in inflation in the good sector, but that was offset in large part and will be offset again by lower energy prices and as well as rents that are starting to flow through. Keep in mind, you know, when we talk about rents and owner's equivalent rent, which is the housing component of the consumer price index, that will continue to fall just naturally because it takes a long time for, you know, 12 months basically, right, for rents to be adjusted to these new prices.

24:02So you're going to wind up seeing, yes, prices will increase, but they're increasing at a slower pace. That means that inflation is falling. And I think we're in an environment where, okay, goods prices go up a little, but with energy prices and housing prices starting to come down, the only variable left is what are service prices doing? And in today's report, you saw that wages in the services sector were a little bit lower month-on-month in June than they were in May. So, yeah, I agree with you, Paul. We haven't seen inflation and probably won't. Interesting. All right, folks, Ira Jersey, we know him as one of the leading voices on U.S.

24:38interest rates in Global Wall Street, but he's also our soccer correspondent as well. Ira, can you explain to me, Club World Cup, where did that come from? It was the attempt by FIFA for money grab, and quite frankly, I think it's underwhelmed. You know, in the summer, you're kind of used to seeing Major League Soccer and then, you know, some international tournaments. like the women's Euros just kicked off. That's all the national women's teams in Europe kicking off. And we have the Gold Cup here in North America where we just saw last night Guatemala lose to the United States. And, you know, so now we're set up for a final this weekend.

25:21You know, the Club World Cup is an idea that maybe some people will like, but it's really underwhelmed. The times of games have been really poor. It hasn't been good for the health of some players playing. and summer heat in the United States at noon. I'm not a huge fan of the tournament so far, the way it's been run. Yeah, it kind of was there, but I didn't really know it was there. And I'm like, where did that come from? So, all right, now I have a little bit more clear. Ira Jersey, he gives you what you need to know on the interest rate space. He gives you what you need to know about global soccer.

25:52He tells me what I need to pay attention to and what I don't. So we appreciate that. Ira Jersey, Chief U.S. Interest Rate Strategist at Bloomberg Intelligence, coming to us from our Princeton office. 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.