The AI gold rush rages on. Multibillion dollar AI deals are being inked left and right between the heavyweights of the tech sector, dazzling us with awesome sums and promising that this revolutionary tech is just getting started.
But there’s something very worrying about many of these deals: they’re often “circular,” as a slew of recent coverage has noted, meaning that AI companies are pouring money into one another, creating an illusion of a robust ecosystem that skeptics worry could quickly come crashing down. And many of the deals tie back to Nvidia, the chipmaker whose hardware is underpinning our age of AI, for which it has become the world’s most valuable company.
Experts warn that all this inter-industry dealing may be one of the most ominous signs of an impending bubble.
One recent example is Nvidia’s agreement to invest up to $100 billion in OpenAI, as the ChatGPT maker expands its empire of data centers that will demand enough energy to power millions of homes. As part of that deal, announced two weeks ago, OpenAI will in return use Nvidia’s chips to fill out its AI facilities.
OpenAI announced it had reached a staggering deal with Oracle, the Larry Ellison-led software giant, to buy $300 billion worth of its cloud computing power over the next five years. Oracle already uses Nvidia chips to power some of its cloud computing options, and it reportedly committed to spending another $40 billion on buying more Nvidia chips to supply OpenAI’s colossal data center in Abilene, Texas.
Perhaps the clearest example yet came this week from fellow chipmaker AMD. On Monday, it announced plans to sell billions of dollars worth of computing capacity to OpenAI. And OpenAI, in exchange, would receive a ten percent stake in AMD for just one cent per share, an extremely advantageous deal.
Of course, that’s basically just one step removed from AMD outright paying OpenAI to buy its products — which does not evince a sustainable model for the long term future. The deal, in other words, is circular, as are the ones mentioned previously. If the money keeps circling back on itself, is this really an industry that will be as profitable as the hundreds of billions of dollars of investment suggest?
Perhaps not. Circular deals — or vendor financing — defined another tech boom that eventually went bust: the dot-com bubble.
“In the late 1990s, circular deals were often centered on advertising and cross-selling between startups, where companies bought each other’s services to inflate perceived growth,” Paulo Carvao, a senior fellow at the Harvard Kennedy School, told Bloomberg. “Today’s AI firms have tangible products and customers, but their spending is still outpacing monetization.”
Nvidia is especially guilty of propagating this ever-widening web of circular agreements, investing billions into AI companies that also happen to be its biggest customers, like OpenAI.
... continue reading