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How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

nytimes.com

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Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#91

Post by singron »

NBJack wrote: post #47
embedding-shape wrote: post #34

Earlier quoted context omitted.

Why is ML knowledge "in the engineers" while chip manufacturing apparently sits in the company/hardware/something else than the engineers/humans?

Read up a bit on the effort needed to get a fab going, and the yield rates. While engineers are crucial in the setup, the fab itself is not as 'fungible' as the employees involved. I can spin up a strong ML team through hiring in probably 6-12 months with the right funding. Building a chip fab and getting it to a sensible yield would take 3-5 years, significantly more funding, strong supply lines, etc.

Nvidia isn't a fab.

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#94

Post by delis-thumbs-7e »

crazygringo wrote: post #39

This is such a strange article -- there's nothing particularly unusual going on here. The first example basically stands in for all of them -- Microsoft invests $13B in OpenAI, and OpenAI spends $13B on Azure. This is literally just OpenAI purchasing Microsoft cloud usage with OpenAI's stock rather than its cash . There is nothing unusual, illicit, or deceptive about this. This is entirely normal. You can finance you…

I remember the same argument being used before the 2008 crash.

Point is that all of this companies need to start making real profits and pretty damn big ones, otherwise all of this will collapse. Problem is that unless Altman has some super-intelligent super-AI hidden in his closet, it is very unlikely that it will.

And whose gonna take the bill when it falls? Let me guess… Where have I seen this before…?

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#95

Post by api »

zemvpferreira wrote: post #44
jacquesm wrote: post #17

These kinds of deals were very much a la mode just prior to the .com crash. Companies would buy advertising, then the websites and ad agencies would buy their services and they'd spend it again on advertising. The end result is immense revenues without profits.

There’s one key difference in my opinion: pre-.com deals were buying revenue with equity and nothing else. It was growth for growth’s sake. All that scale delivered mostly nothing. OpenAI applies the same strategy, but they’re using their equity to buy compute that is critical to improving their core technology. It’s circular, but more like a flywheel and less like a merry-go-round. I have some faith it could go anot…

The assumption is that they have a large moat.

If they don't then they're spending a ton of money to level up models and tech now, but others will eventually catch up and their margins will vanish.

This will be true if (as I believe) AI will plateau as we run out of training data. As this happens, CPU process improvements and increased competition in the AI chip / GPU space will make it progressively cheaper to train and run large models. Eventually the cost of making models equivalent in power to OpenAI's models drops geometrically to the point that many organizations can do it... maybe even eventually groups of individuals with crowdfunding.

OpenAI's current big spending is helping bootstrap this by creating huge demand for silicon, and that is deflationary in terms of the cost of compute. The more money gets dumped into making faster cheaper AI chips the cheaper it gets for someone else to train GPT-5+ competitors.

The question is whether there is a network effect moat similar to the strong network effect moats around OSes, social media, and platforms. I'm not convinced this will be the case with AI because AI is good at dealing with imprecision. Switching out OpenAI for Anthropic or Mistral or Google or an open model hosted on commodity cloud is potentially quite easy because you can just prompt the other model to behave the same way... assuming it's similar in power.

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#96

Post by J_McQuade »

Arkhaine_kupo wrote: post #61
zemvpferreira wrote: post #44

Earlier quoted context omitted.

There’s one key difference in my opinion: pre-.com deals were buying revenue with equity and nothing else. It was growth for growth’s sake. All that scale delivered mostly nothing. OpenAI applies the same strategy, but they’re using their equity to buy compute that is critical to improving their core technology. It’s circular, but more like a flywheel and less like a merry-go-round. I have some faith it could go anot…

> they’re using their equity to buy compute that is critical to improving their core technology But we know that growth in the models is not exponential, its much closer to logarithmic. So they spend =equity to get >results. The ad spend was a merry go round, this is a flywheel where the turning grinds its gears until its a smooth burr. The math of the rising stock prices only begins to make sense if there is a possi…

There is something about an argument made almost entirely out of metaphors that amuses me to the point of not being able to take it seriously, even if I actually agree with it.

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#97

Post by bwhitty »

Flockster wrote: post #4

Okay, that article is a little bit shallow. I just summarises the headlines of the last weeks of circular deals. But is there also a more in depth article that sheds a little more light onto what this actually means? From a financial perspective?

IMF chief economist has thoughts: https://www.afr.com/wealth/investing/the-crash-that-could-to...

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#98

Post by automatic6131 »

klustregrif wrote: post #56
TZubiri wrote: post #32

Earlier quoted context omitted.

Seems like a net loss due to transactional costs.

The increase in value of the companies outweighs the transactional costs and then you borrow against the value of the company and make new circular deals. It works really well for a very long time and then at some point it doesn’t. The trick of the game is to get big corps involved and key decision makers so that the government bails out everyone in the end.

> The trick of the game is to get big corps involved and key decision makers so that the government bails out everyone in the end.

This is bad. We should not shrug our shoulders and go "Oh ho, this is how the game is played" as though we can substitute cynicism for wisdom. We should say "this is bad, this is a moral hazard, and we should imprison and impoverish those who keep trying it".

Or we'll get more.

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#99

Post by danans »

throwaway106382 wrote: post #26

Isn't paying a company to dig a hole who then pays you the same amount to fill said hole illegal?

Only if you defraud investors in hole-digging corp and hole-filling corp by that by doing this you will be able to extract Unobtanium, which will make both companies 1000x profitable.

Re: How OpenAI uses complex and circular deals to fuel its multibillion-dollar rise

#100

Post by crazygringo »

delis-thumbs-7e wrote: post #94
crazygringo wrote: post #39

This is such a strange article -- there's nothing particularly unusual going on here. The first example basically stands in for all of them -- Microsoft invests $13B in OpenAI, and OpenAI spends $13B on Azure. This is literally just OpenAI purchasing Microsoft cloud usage with OpenAI's stock rather than its cash . There is nothing unusual, illicit, or deceptive about this. This is entirely normal. You can finance you…

I remember the same argument being used before the 2008 crash. Point is that all of this companies need to start making real profits and pretty damn big ones, otherwise all of this will collapse. Problem is that unless Altman has some super-intelligent super-AI hidden in his closet, it is very unlikely that it will. And whose gonna take the bill when it falls? Let me guess… Where have I seen this before…?

That's fine, but that's a separate conversation. Maybe this is a bubble, maybe it isn't.

My point is that the way it's all being financed is just regular financing. This article is trying to present the way it's being funded as novel, as "complex and circular", when it's not. This is how funding and investment works 365 days a year in all sectors. Nothing about the funding arrangements is a bubble indicator.

So this is a strange article from the NYT, because it's trying to present normal everyday financing deals as uniquely "complex and circular".

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