Today’s premium newsletter is part 1 of my What If...We're In An AI Bubble? series, covering scenarios that could burst the bubble starting with token-based billing's destruction of most AI products, and the slow collapse of data center construction.
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I’ve spent hundreds of thousands of words in the last year talking about the very and scary signs that we are an AI bubble, and the exuberance fueling it. Today is the first time in a long time where I’ve discussed the potential consequences in depth.
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I feel like people are very cavalier when discussing the AI bubble, saying stuff like "we're in an OpenAI bubble," not realizing that the collapse of OpenAI would destroy AI investment, AI startups, and kill debt issuance for AI data centers.
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GitHub Copilot moves to token based billing on June 1, and its users got a calculator showing their actual monthly token burn - some $39-a-month users have spent $1500 to $5800 in tokens a month.
I believe it's indicative of every AI startup.
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AI companies currently subsidize their users $3 to $25 for every dollar of subscription. As a result, users are very sensitive to *any* price or rate limit changes, and have no idea of the actual costs of AI. Token-based billing will be lethal at scale.
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The current API revenues of Anthropic and OpenAI are driven predominantly by AI companies subsidizing their users' compute by 300% to 1000%, obfuscating the actual costs. Once the industry moves away from that, API revenues could face a brutal collapse.
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Meanwhile, those currently paying token rates - big enterprises - are blowing through their annual AI budgets in weeks. CFOs are already saying that they need to reduce budgets, as this token spend is experimental - and finance executives are worried.
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Enterprise AI token spend is out of control, driven by do-nothing CEOs with AI psychosis. Sources say Stripe is spending $2.8m+ a month, and a major real estate platform $300k-$700k a month, killing margins.
It's experimental and deeply unsustainable.
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One scenario that could burst the bubble is if data center construction doesn't keep pace with Anthropic or OpenAI's capacity demands. If the capacity crunch doesn't clear quickly, both Claude and ChatGPT will begin having serious stability issues.
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If data center construction slows or stalls, neoclouds and hyperscalers will suffer. $748bn of Microsoft, Google and Amazon's backlog is entirely dependent on them building gigawatts of capacity they don't have and that isn't getting built with urgency.
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Another question: What happens if hyperscalers have hundreds of thousands of GPUs sitting in warehouses, yet to be installed in data centers?
This isn't a hypothetical question. Google has nearly $100bn in yet-to-be-deployed capex, and Meta over $50bn.
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I think that if data center construction doesn't speed up dramatically in the next 6 months, hyperscalers will see massive write-downs on aging Blackwell GPUs as Vera Rubin ships. Either way, depreciation charges are likely to skyrocket in the next year.
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So what if data centers aren't getting built? On the supplier front, customers can (and do!) cancel orders, and if this happens, we’ll witness a repeat of the kind of beatdown that Cisco and other telecoms firms suffered during the dot com bubble.
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The thing you should know is that small events can have outsized impacts in a bubble. Something as simple as a slowdown in demand caused by a shift to token-based billing will have massive repercussions throughout the supply chain.
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This was the first of a two-part (or possibly three-part) "What If...We're In An AI Bubble" series. Here's what's up next.
My premium newsletter is $7 a month/$70 a year, and weighing in at 10k+ words a week, making it the best value in tech analysis.
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