On a spectrum between tulip wilting and fiber build out, we know deprecation cycle of DC hardware leans towards tulips i.e. <10 years (very generous) vs 20+ years for fiber layout, a lot of which is actually infra/earth works etc.
The numbers being cited is ~100B is well within accounting/ledger maxxxing tricks relative to current pool of investment. Luu is not analyzing number's he's just listing and believing numbers, and analytically entirely avoids the core Zitron thesis... once you tap out of easy investor $$$, FAANG warchest, accounting tricks... where is the rest of the order magnitude more $$$ that justifies existing spent relative to time frame coming from?
> we know deprecation cycle of DC hardware leans towards tulips i.e. <10 years (very generous) vs 20+ years for fiber layout
[1] is a reasonable discussion of DC cost models, which calculates depreciation as part of the annual cost.
> here is the rest of the order magnitude more $$$ that justifies existing spent relative to time frame coming from?
That money comes from long term debt (ie bonds by public companies[3]) and new investment into neo-cloud companies (ie, IPOs like 4).
The justification comes revenue. Eg, the NScale IPO above[4] has $51B in long term contracted revenue with an annual run rate of $500M.
[1] https://epoch.ai/data-insights/ai-datacenter-cost-breakdown
[2] https://www.cushmanwakefield.com/en/united-states/insights/d...
[3] eg https://www.yondrgroup.com/newsroom/press-release/yondr-secu... (but you'll find lots of similar bonds issued)
[4] https://dealroom.co/news/143730-nscale-eyes-september-us-ipo...
This narrow focus, of course some intermediaries in industrial chain is going to make $$$ selling/renting shovels - there is stupendous amount of $$$ being moved around, there will be some very phat winners, but even more losers in aggregate on broad ecosystem level. [1] is actually illustrative, there's a reason why opex low - capex premium is ridiculous right now, with almost everyone along compute industrial chain capturing 50%+ margins. Investors are burning $$$ and companies and pillaging warchests, intermediaries are raking in $$$, but that doesn't mean investors or companies doing all the spending will make more than they spend, i.e. the net ecosystem business model is not sustainable precisely because intermediaries are capturing crazy rent relative to actual monetization to sustain.
> but that doesn't mean investors or companies doing all the spending will make more than they spend, i.e. the net ecosystem business model is not sustainable precisely because intermediaries are capturing crazy rent relative to actual monetization to sustain.
You understand that this doesn't follow at all right?
The intermediaries margins can compress.
> opex low - capex premium is ridiculous right now
What does "capex premium" even mean?
Of course you spend more on capex when you build a data center than opex!
High capex matches the expected business model. If opex was high then everyone would be worried!
Of course it follows.
Investors exuberantly build $10 of housing when there is $5 of demand, builders extract $8, when they normally extract $2 under normal margins, builders raking it, but arrangement is net loses vs world where investors build same housing for $4 and make a profit. Intermediaries margins can compress but what they already extracted for current build out is already built in balance sheet.
>What does "capex premium" even mean? >Of course you spend more on capex when you build a data center than opex!
No. Historically DC opex > capex, i.e. 60-80% goes towards power... because hardware costs were relative low % of TCO. Historically without delulu AI demand, IC producers capturing much less margin and TCO of DC was much lower than it is now. It's not opex vs capex it's TCO. AI is paying $10 vs $4, when demand is $5, $10 isn't sustainable, $4 is.
Now builders will be fine in case of crash, they'll compress margins for next round of buildouts, i.e. bubble bursts, current spend proves not sustainable. This is where the crux of argument is...
Future investors post crash when margins revert towards mean will be spending $4 to supply $5+ of demand. And due to nature of compute deprecatiion (i.e. tulips) they will have more efficient hardware with less opex/capex TCO per unit of compute, with much more sustainable balance sheet. The builders are still fine with their $2 margins, it sucks its not $8. But that leaves the current investors who spent $10 with stranded assets that are not competitive with more efficient $4 future build out, i.e. current investors have balance sheet black hole that cannot compete with none bubble market force.
This does not mean AI is doomed, it just means incumbents from current tranch of bubble driven, stupid high TCO build out is most likely doomed relative to future entrants. Unless incumbant has unassailable moat, or other hedge/cards (i.e. political bailout/intervention). That is the actual argument, Zitron is saying current ecosystem economics not sustainable, not that there is not a future model that isn't sustainable. But it does mean a lot of current players are balance sheet zombies, who _should_ die. But a reasonable disagreement is reality is size of bubble + contagion risk + influence of incumbents i.e. trillion dollar companies is such that they have non market lever (i.e. politics) to save themselves... but someone else is going to be doing the paying for a model that is net loss.
> On a spectrum between tulip wilting and fiber build out, we know deprecation cycle of DC hardware leans towards tulips i.e. <10 years (very generous) vs 20+ years for fiber layout, a lot of which is actually infra/earth works etc.
Counterargument: As advancements in transistor densities slow down, the rationale for increasing depreciation cycles makes more sense. As the performance gap between new & 5-year-old hardware continues to shrink, then the need to replace older hardware similarly shrinks, justifying longer depreciation cycles.
It's not just about node advancement, which is coupe de grace condition. Even if hardware advancement freezes, its about IC premium that fed current tranch of AI buildout. Current players paid $10 for a $2 hammer due to premium, a better future hammer might cost $3 but does twice the work of $2 hammer. That is like ball park the premiums we are talking about - from gpu to memory to other components getting inflated due to exuberate AI demand.
The economic logic is if current spend vs revenue gap is not sustainable... hardware prices / margins will revert towards mean. That $10 hammer will be compared against a $2 identical hammer (margin reversion/compression)... or worse, a $3 future hammer that does $4 / past $20 of work. The future player who only paid $2 can charge much less... i.e. simply paying $10 limits ability to price competitively. The future player who pays $3 has 50% more compute than incumbent who paid $10. The important DC TOC consideration, is in world where DC cost regress towards mean, opex > capex... so merely continuing to use that old $10 hammer is losing MORE than buying a $3 better hammer, i.e. the asset is economically stranded, it is COSTING MORE to run old hardware than simply buying new hardware. It's MORE than economically useless and $10 past purchase price not just sunk cost but dragging down balance sheet as amortized liability aka it is full write down / loss.