AI Data Center Demand Isn't Collapsing, It's Shifting
Ryan Vlastelica
The framing in this report by Ryan Vlastelica and Newley Purnell suggests that this may be the beginning of the end of the big AI build out spend:
Microsoft Corp. has begun canceling leases for a substantial amount of datacenter capacity in the US, a move that may reflect concerns about whether it’s building more AI computing than it will need over the long term, TD Cowen said in a report.
OpenAI’s biggest backer has voided leases totaling “a couple of hundred megawatts” of capacity, the US brokerage wrote Friday, citing channel checks or inquiries with supply chain providers. Microsoft has also stopped converting so-called statement of qualifications, which are agreements that usually lead to formal leases, TD Cowen said. That was a tactic rivals such as Meta Platforms Inc. employed previously, when it decided to cut back on capital spending, the brokerage wrote.
But actually, I read it simply as Microsoft being able to back out/shut down some deals that they had put in place just in case they ended up on the hook for the crazy amount of data center spend that OpenAI would need going forward.
Remember, Microsoft has essentially been "eating for two" as it were. They have their own AI needs (and those of their partners using Azure) and then there's OpenAI, undoubtedly the largest consumer of AI data center spend, simply due to their scale. And Microsoft's deal ensured they were the exclusive provider of those needs. Sure, OpenAI paid them for it – with Microsoft's own money, since Microsoft is also the largest investor in OpenAI...
But that all changed with the 'Stargate Project'. Alongside that announcement, Microsoft issued their own release to let the world know that while the OpenAI partnership remained intact – the subject of much discussion – they were now going to allow them to use other cloud providers for the AI/data center needs (a major source of tension between the two sides in this partnership). This meant Oracle for 'Stargate', but also opened the door to SoftBank for OpenAI's immense capital needs. And with the rumored new $40B round now coming together we're seeing this new pecking order in place.
Remember, 'Stargate' actually started as a joint effort with OpenAI and Microsoft. But then the whole coup business led Microsoft to start balking at some of the cash demands of their partner. And as costs have continued to ramp and with Wall Street now watching more closely, Microsoft seemingly pulled off a very savvy maneuver to outsource the capital partnership to SoftBank.
And so again, when I see the news of Microsoft "pulling back" on data center spend – not the first such report, by the way – my guess would be that it's simply this dynamic changing. Though perhaps I'm biasing myself here since I wrote about exactly this topic just yesterday in 'Microsoft Outsources OpenAI's Ambitions to SoftBank':
The problem for Microsoft is that if they gave OpenAI everything they wanted in terms of spend, their CapEx number would probably more than double on a yearly basis. And may grow from there!
How do I know this? Well, just look at the "promised" spend on Stargate. $500B over 4 years. To be clear, this is clearly a made up big round number to please a certain President who loves made up big round numbers. But still, it's probably safe to assume this is directionally where OpenAI is aiming. And much to Elon Musk's chagrin, they do appear to have line-of-sight to at least that first $100B. Thanks largely to... SoftBank.
And that's why you had Nadella on CNBC humorously noting that he was "good for my $80B" this year. At the time, it was interpreted as a shot at OpenAI and the ridiculous-sounding Stargate spend. But it was much more of a signal to Wall Street that they were sticking with their CapEx projection and figured out a way to offload the additional spend that OpenAI required.
Said another way: Microsoft was keeping the CapEx at $80B, not going to $180B – a year – to accommodate Stargate. A project which they were initially working on with OpenAI, by the way, until a little coup got in the way...
Back to the Bloomberg story:
In a Monday research note, the same analysts said Microsoft’s pullback reflects a shift by OpenAI toward alternative partners, including Oracle Corp. They wrote that overall the effect is “net neutral for third-party data center demand.”
Microsoft in a statement on Monday reiterated its spending target for the fiscal year ending June, but declined to comment on TD Cowen’s note.
“While we may strategically pace or adjust our infrastructure in some areas, we will continue to grow strongly in all regions,” a company spokesperson said in the statement. “Our plans to spend over $80B on infrastructure this FY remains on track as we continue to grow at a record pace to meet customer demand.”
Yeah, so "net neutral" demand again suggests that it's less Microsoft pulling out and more others stepping in. Again, my guess would be SoftBank, Oracle, and the various other 'Stargate' partners. Call it the conservation of mass-ive AI spend: Cash for data centers is never created nor destroyed, it simply shifts amongst partners.1
And yes, this is Microsoft once again reiterating, "we're good for the $80B".
M.G. Siegler
M.G. Siegler
M.G. Siegler
1 For now, at least. At some point, an actual collapse may happen. My guess remains if/when Wall Street gets wary of all the AI spend after helping to pump it.