Microsoft Cuts The Power To AI

In the first of this week's two-part series, Ed Zitron walks you through how Microsoft pulling back from over a gigawatt of compute capacity is a dark omen for the so-called AI Revolution. --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/ Discord: chat.wheresyoured.at https://discord.com/invite/QUUQUP9szv Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/edzitron.com https://www.threads.net/@edzitron See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 2:20Ed Zitron?

  Hello you, it's Better Offline, I'm your host Ed Zitron.

• 2:36Ed Zitron?

  Now I've talked about the pale horses of the AI apocalypse in the past, and these are the events that signify that the generative AI era is coming to an end, and the subject of this episode and its second part, well, I believe represents the biggest palest horses of the entire flunk. So on February 21st, analyst TD Cohen revealed that Microsoft had cancelled leases and, I quote, "totaling a couple hundred megawatts with at least two private data centre operators across multiple US markets cancelled." The report also detailed how Microsoft pulled back on converting negotiated and signed "statements of qualifications", SQQs, which it added was "precursors to a data centre lease", so effectively the first step before you really agree to something, or the last step, I guess. Although the analyst, which is part of the TD Bank Company, added it was unclear whether

• 3:20Ed Zitron?

  Microsoft might convert these SQQs in the future, these generally closed, close to 100% of the time according to them, cancelling these was effectively rather unusual. Now TD Cohen also added that Microsoft was reallocating a considerable portion of its projected international spend to the US, which suggests to TD Cohen that there was a material slowdown in international leasing for Microsoft. But one crucial, teeny tiny part of the report was missed by just about everybody. I'm gonna read directly from the report and you'll probably be able to tell from the tone of my voice which the most pertinent part is.

• 3:59Ed Zitron?

  As we highlighted in our recent takeaways from PTC, the Pacific Telecommunications Council Conference, we learned via our channel checks that Microsoft, 1) walked away from multiple 100+ megawatt deals in multiple markets that were in early to mid-stages of negotiations; 2) let 1 gigawatt of LOIs on larger footprint sites expire; and 3) walked away from at least 5 land passes that it had under contract in multiple tier 1 markets. What TD Cohen is saying is not just that Microsoft cancelled some data centres, but that Microsoft also effectively cancelled over a gigawatt of data centre operations on top of the previously reported multiple hundred plus megawatt deals. If we add in the land under contract, which is indeterminate based on what TD Cohen has

• 4:41Ed Zitron?

  said, and the deals that were in flight, the total capacity likely amounts to even more than a gigawatt. For some context, Data Centre Dynamics reported that Microsoft had five gigawatts of data centre capacity in April 2024, saying that Microsoft had also planned to add one gigawatt of capacity by October 2024 and another one and a half gigawatts of capacity by the first half of 2025. Based on this reporting, one can estimate that Microsoft has somewhere between six and seven and a half gigawatts of capacity at this time. As a result, based on TD Cohen's analysis, Microsoft has, through a combination of cancelled leases, pullbacks and statements of qualifications, cancellations of land parcels and deliberate expiration of letters of intent, that's those LOIs, they've effectively abandoned data

• 5:24Ed Zitron?

  centre expansion, equivalent to over 14% of their current capacity. It's completely bloody insane, and this story just kind of sat there. It kind of knocked the market's confidence, but I don't know, I'm a lot more worried about this than I think people are, and really, I don't like telling people how to feel, but this kind of worries me. Okay, now I've thrown a lot of new terminology at you, but before we move on, let's explain some terms, because they're essential to understanding why this is all such a big deal. First of all, letter of intent or ELOI. In this context, it's a statement that an entity intends to lease or buy land or power from a data centre. These can be binding or non-binding. A letter of intent is serious, though, and walking away from one is not something you do idly, it's not like not answering an email.

• 6:09Ed Zitron?

  Now, we'll go on to SQQ, statements of qualifications. These set the terms and conditions of a lease. While they do not themselves constitute a lease, they convert into signed leases, as I mentioned, at an almost 100% rate, according to TD Cohen, and are generally used as a signal to the landowner to start construction. Basically, they're the green light before the green light. As for tier one markets, these are markets for hyperscale growth, helped by favourable conditions like power, land and cabling. From what I can tell, there's no fixed list of which cities are tier one and which aren't, but they include obvious candidates like London, Singapore, as well as Northern Virginia, which is the largest hub of data centres in the world. Finally, we're talking power, megawatt and gigawatt. This one is really important, but it's also really confusing.

• 6:52Ed Zitron?

  Data center capacity is measured not by the amount of computations the facility can handle, but rather by power capacity. And that makes sense because power capacity is directly linked to the capabilities of the facility, with more power capacity allowing for more servers, or more power-hungry chips, of course. And because chips themselves are constantly getting faster and more power-efficient, power makes a little more sense. If you measured in terms of computations per second, you'd likely have a number that fluctuates as hardware is upgraded and decommissioned. When you hear megawatt or gigawatt in this episode, assume that we're talking about capacity and not power generation, unless I say otherwise. Now with that out of the way, let's talk more about this report.

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• 8:41Ed Zitron?

  Now, the numbers in the TD Cohen Report, which I'll link in the episode spreadsheet, of course, heavily suggest that Microsoft, the biggest purchaser of Nvidia GPUs, and according to TD Cohen, and I quote, "the most active data center leasing of capacity in 2023 and the first half of 2024," does not believe that there's future growth in generative AI, nor does it have faith in, nor does it want responsibility for, the future of OpenAI. Data center build outs take three to six years to complete, and the largest hyperscaler facilities can easily cost several billion dollars, meaning that these moves are extremely forward looking. You don't just build a data center for the demand you have now, but for the demand you expect further down the line. This suggests that Microsoft believes its current infrastructure and its likely scaled back plans for expansion will be sufficient

• 9:26Ed Zitron?

  for a movement that Satya Nadella once called a golden age for systems. He did that less than a year ago. To quote T D Cohen again, "The magnitude of both potential data center capacity Microsoft walked away from and the decision to pull back on land acquisition, which supports core long-term capacity growth, in our view indicates the loss of a major demand signal that Microsoft was originally responding to, and that we believe the shift in their appetite for capacity is tied to OpenAI." To explain here, T D Cohen is effectively saying that Microsoft is responding to a major demand signal, and said major demand signal is saying you do not need more data centers. Said demand signal that Microsoft was responding to, in T D Cohen's words, is its appetite for capacity to provide servers to OpenAI. And it seems that said appetite is waning,

• 10:10Ed Zitron?

  and Microsoft no longer wants to build out data centers for America's most swagged-out AI guy. Now, I say that kind of as a joke, and I do think that he's more swagged-out than Mark Zuckerberg. Mark Zuckerberg's trying too hard. However, Sam Altman is more damp than Mark Zuckerberg, so ultimately Zuckerberg wins. Now, I want to make it clear that Microsoft is effectively cutting its data center expansion by over a gigawatt of capacity, if not more, and it's impossible to reconcile these cuts with the expectation that generative AI will be this massive transformative technological phenomenon. I believe that the reason that Microsoft is cutting back is that it does not have the appetite to provide further data center expansion for OpenAI, and it's having doubts about the future of generative AI as a whole.

• 10:53Ed Zitron?

  If Microsoft believed that there was a massive opportunity in supporting OpenAI's further growth, or that it had massive demand for generative AI services, there'd be no reason to cancel capacity, let alone cancel such a significant amount. These moves also suggest that Microsoft is walking away from building and training further large-frontier models like ChatGPT's GPT-4.5 now, and from supporting doing so for others. Remember, Microsoft has significantly more insight into the current health and growth of generative AI than any other company. Remember, they have full access to all of OpenAI's tech, probably the future stuff too, not that there's much. They know all their research too. Microsoft knows something we don't. As OpenAI's largest backer and infrastructural partner, and the owners of the server architecture

• 11:36Ed Zitron?

  where they train them ultra-expensive models, not to mention the largest shareholder in OpenAI, Microsoft can see exactly what is or isn't coming down the pike, on top of having a view into both the sales of its own generative AI-powered software, such as Microsoft 365 Copilot, and sales of both model services and cloud compute for other models run on Microsoft Azure, which is their cloud platform. In plain English, Microsoft, which arguably has more data than anybody else about the health of the generative AI industry and its potential for growth, has decided that it needs to dramatically slow down its expansion. Now, to be clear, this expansion, I really am hammering this home a lot, but I need you to understand this, is absolutely necessary for generative AI to continue evolving and expanding, even if it only does so in ways that kind of do the same thing again and again.

• 12:22Ed Zitron?

  Now, before we move on, I want to make it clear that I'm not saying that Microsoft has stopped building data centers. I've said it a few times, but these projects take years, three to six years, to complete, and are far, far in advance with their planning. And Microsoft does have a few big projects in the works. One planned 324-megawatt Microsoft data center in Atlanta is expected to cost $1.8 billion, and as far as I know, this deal is still in flight. However, and this was cited separately by TD Koeman, Microsoft has recently paused construction on parts of its $3.3 billion data center campus in Mount Pleasant, Wisconsin. While Microsoft had tried to reassure locals that the first phase of the project was on course to be complete on time, its justification for delaying the rest of it was, well, not

• 13:04Ed Zitron?

  brilliant, and it was to give Microsoft an opportunity to evaluate, and I quote, "the project's scope and recent changes in technology, and consider how this might impact the design of its facilities." Oh, bub, oh buddy, that's not good. You don't want it, no one evaluates a scope and then goes, "Oh, actually, the scope is great. I love it." Nor do they think about impacts and go, "Oh, let's do more." No, no, no. Anyway, the same Register article I'm citing here adds that, and I quote, "The review process may include the need to negotiate some building permits, potentially placing another hurdle in the way of the project." The Register did add that Microsoft said it expected to complete one hyperscaler data center in Mount Pleasant as originally planned, though its capacity wasn't available.

• 13:47Ed Zitron?

  Arguably, Microsoft would expand its data center infrastructure anyway. As more stuff moves to the cloud and our dependence grows on it, Microsoft and other providers need to build capacity. The organic growth is natural and sadly inevitable. However, Microsoft's plans for data center expansion were far, far in excess of that natural growth, and perhaps we're seeing a pullback from those stated extravagances into something perhaps a little more reasonable. Now, I've talked a lot about megawatts and gigawatts, and if you're not in the data center business, and you should be, the parties are an absolute love, this can all seem a bit abstract, so let's put it into context. Without context, it's hard to understand how big an 100-megawatt data center is. These are some of the biggest.

• 14:29Ed Zitron?

  According to the International Energy Agency, small data centers can consume anywhere between 1 and 5 megawatts. These are, for the most part, average-sized facilities. Perhaps not for cloud compute giants, but for other companies, it's kind of par for the course. 100-megawatts, by comparison, is huge. It's the equivalent of the annual energy consumption of between 350,000 and 400,000 electric cars. And I know some sort of pedant is going to say, "It's not the same thing." Shut the fuck up. Go outside. Stop listening. Go outside. Go outside now. Go do something. Anyway, although there are others that will likely dwarf what we today consider to be a large facility, Meta is in the process of constructing, for example, a $10 billion data center campus in Louisiana with a proposed 2-gigawatt capacity.

• 15:11Ed Zitron?

  Still, whatever way you cut it, a 100-megawatt facility is big, and it's a big, long-term investment. Cushman and Wakefield's 2024 Global Data Center Market Comparison gives some chilling context into how significant Microsoft's pullback is. A gigawatt of data center capacity is roughly the entire operational IT load of Tokyo, which has a 1.028-gigawatt capacity, or London, 996-megawatts, or the Bay Area, which only has 842-megawatts. These are actually very large. It's just that Microsoft got rid of so much more. And again, the total figure of cancelled or abandoned capacity is likely far higher than a gigawatt. That number only accounts for the letters of intent that Microsoft allowed to expire. It doesn't include everything else, like the two data centres it already killed, or

• 15:56Ed Zitron?

  the land parcels it abandoned, or the deals that were in early to mid-stages of negotiation. Imagine walking away from two Londons or two Tokios of capacity and it not being a massive deal. This is a huge flipping deal. Microsoft is not simply walking back some future plans, it's effectively cancelling what it loudly insisted was the future. If you think this sounds hyperbolic, consider this. London and Tokyo are respectively the biggest data centre markets in Europe and Asia, according to the same Cushman and Wakefield report. Canceling cities' worth of capacity at a time when artificial intelligence is supposedly revolutionising everything certainly suggests that artificial intelligence isn't really revolutionising anything. Now, one other detail in T D Cohen's report really stood out to me.

• 16:39Ed Zitron?

  While this pullback in Microsoft's data centre leasing, it's also seen a commensurate rise in demand from Oracle related to the Stargate project, a relatively new partnership of up to $500 billion, stop saying it's $500 billion, to build massive new data centres for AI specifically for one company, led by SoftBank and of course, OpenAI, with investment from Oracle and MGX and $100 billion investment fund backed by the United Arab Emirates. OpenAI has committed $18 to $19 billion to the Stargate project. Money it doesn't have, meaning that part of the $25 to $40 billion that they're raising at the moment will be committed to funding these data centres unless, as I'll get to later, OpenAI raises more in debt.

• 17:21Ed Zitron?

  Leading the round is SoftBank, which is also committing $18 to $19 billion, as well as creating a joint venture fund called SB OpenAI Japan to offer OpenAI services to the Japanese market, something that I thought was already happening, as well as spending $3 billion annually to use OpenAI's technology across its group businesses, according to the Wall Street Journal. In simpler terms, SoftBank is investing as much as, I think it's going to be like $30 billion in OpenAI, than spending another $3 billion a year on software that only loses money and still hallucinates and shows no sign of getting meaningfully better or more reliable. Whether SoftBank actually sees value in OpenAI's tech or whether this purchase deal is a subsidy by the backdoor is open to debate. Given that $3 billion is equivalent to OpenAI's entire revenue

• 18:04Ed Zitron?

  from selling premium access to ChatGPT in 2024, which included some major deals with the likes of PricewaterhouseCoopers, I'm inclined to believe the latter. Even then, how is it feasible that SoftBank can continue paying? To get the deal done, Microsoft changed the terms of its exclusive relationship with OpenAI to allow it to work with Oracle to build out further data centers full of GPUs necessary to power OpenAI's big, shitty, unprofitable and unsustainable models. The OpenAI-Oracle Stargate situation was a direct result, according to reporting from The Information, of OpenAI becoming frustrated with Microsoft for not providing it with servers fast enough, including an allotment of 300,000 of Nvidia's GPT-200 chips by the end of 2025.

• 18:46Ed Zitron?

  For what it's worth, The Wall Street Journal reports that Microsoft was getting increasingly frustrated with OpenAI's constant demands from more compute. The relationship between the two entities had started to fray, with both sides feeling kind of aggrieved. This, combined with Microsoft's data center pullback, heavily suggests that Microsoft is no longer interested in being OpenAI's infrastructure paypick, long term at least. After all, it was, if it was, I mean, it'd fund and support OpenAI's expansion rather than doing the literal opposite. And you have to wonder if, when that whole non-exclusive thing came along, whether Microsoft was kind of like, no, no, you couldn't possibly, like, the papers are already at the pen. They've already got a stamp with Sam Altman's signature. Oh, don't sign it, it'd be so bad. No, I, I really don't.

• 19:29Ed Zitron?

  I don't think that Microsoft's too caught up about that.

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• 20:48Ed Zitron?

  And here's a question for you. If generative AI had so much demand, why is Microsoft cancelling data center contracts? Why is Microsoft Oracle's largest customer as of the end of 2023, allowing SoftBank and OpenAI to work with Oracle to build the future rather than Microsoft? As mentioned previously, TD Cohen specifically noted in its report that Microsoft's shift in appetite for capacity was tied to OpenAI, which, as I've said already, heavily suggests that Microsoft is at best less invested in the future of the company. A statement confirmed by The Information, which adds that Microsoft have been trying to, and I quote, "lessen its reliance on OpenAI technology as they increasingly compete in selling AI products."

• 21:28Ed Zitron?

  Well, at worst, this situation could suggest that Microsoft is actively trying to dump OpenAI and is having questions about the fundamentals of this industry writ large. In very plain terms, Microsoft, despite its excitement around AI and its dogged insistence that it's the future, has canceled data center leases of over a gigawatt of other data center infrastructure. Doing so heavily suggests that they do not intend to expand further, or at least to the extraordinary levels that they had initially promised. I know I'm being kind of repetitive. I know that I'm saying some of these things repeatedly, and you might think, "Why?" I need you to understand how significant this is, because this did not get covered enough. The coverage of this was dogshit.

• 22:10Ed Zitron?

  I'm saying it frankly, everyone missed this detail. I am just one guy. I do a podcast and a newsletter and I run a PR firm. Why am I the person every, not every time, but I, it just drives me a little insane because this is, this was sitting that, how many reporters actually read this report too? This is what drives me insane with my work, but I really do enjoy it. Where was, all right. While Microsoft has reiterated that it intends to spend a ridiculous $80 billion in capital expenditures on AI in 2025 per a CNBC article, it's unclear how it intends to do so if it's pulling back on data center expansion at such a large scale, and the company has provided no tangible explanation or elaboration as to how it might do so. While hardware upgrades could account for some of those

• 22:54Ed Zitron?

  capex, it would be nowhere near the $80 billion figure. Again, hyperscaler data centers aren't cheap, they're massive billion dollar or multi-billion dollar ventures. Microsoft, according to CNBC, also leases data center capacity through CoreWave and other providers, though at that point the reporters stopped being curious enough to ask how much or who those other providers might be. Now luckily, with the power of research, I found that the information reported that Microsoft plans to spend about $10 billion rent in CoreWave service between 2023 and 2030, which was also reported by CNBC and others. Anyway, planned, past tense being the operative word, because last week we learned that Microsoft plans to scale back its purchase of capacity from CoreWave. CoreWave is, as you'll find out in a future episode and newsletter probably before that, they're a very odd company which

• 23:39Ed Zitron?

  is closely tied to another company called Core Scientific, which it actually rents service from, and that company exited Chapter 11 bankruptcy only last year. Core Scientific's financial statements, by the way, are very confusing. They're a mess and it mostly makes its money not from selling high-performance computer services, but from mining Bitcoin. It's a weird relationship and it's weirder still that Microsoft is even entangled with a company connected to Core Scientific. But again, that's a future episode, future newsletter, future panic attack that I'll give myself as I read S1 all day. Moving on, Microsoft also added in a comment to CNBC in the same article that it continues to grow at a record pace to meet customer demand.

• 24:17Ed Zitron?

  Okay, excuse me, what customer demand? What customer demand? What is it? What is the customer demand? What is going on? Microsoft said back in April 2024 that AI demand was exceeding supply even after a 79% surge in capital expenditures. And CFO Amy Hood said in their next quarterly earnings in July 2024 that demand remained higher than Microsoft's available capacity. On its most recent January 2025 earnings call, CFO Amy Hood once again said, as your growth includes 13 points from AI services, which grew 157% year over year and was ahead of expectations even as demand continued to be higher than our available capacity. Riddle me this, Batman.

• 24:58Ed Zitron?

  Why does a company that keeps talking about having demand that exceeds capacity decide to cancel multiple data centers, which collectively account for a significant chunk of its existing capacity? I don't know. Let's see what Microsoft had to say when asked a week or two ago. Thanks to the significant investments we've made up until this point, we are well positioned to meet our current and increasing customer demand. Last year alone, we added more capacity than any prior year in history. While we may strategically adjust our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest and allocate resources to grow areas for our future. The fuck are you talking about? Sounds like Microsoft built too much capacity and in fact has yet to see the customer demand that actually could reach it. In fact, a couple of weeks ago, Microsoft CEO Satya Nadella said in a podcast interview

• 25:43Ed Zitron?

  that one of the things is that there will be, as a result of data center expansion related to AI, overbuild. Why is the CEO of Microsoft saying that if nothing's changed?

• 25:54Ed Zitron?

  Microsoft also in late January said it had $13 billion in annual recurring revenue from AI. And by the way, that's, that's revenue. That's revenue. It's revenue, it's not profit. And on top of that, they don't, it's not like they've made $13 billion. They're multiplying like a month's revenue by 12. And by the way, AI is also not a line item on Microsoft's earnings, meaning that all of this is just related revenue put into a catamari and rolled around by Satya Nadella picking up chairs and shit in the office. Either way, this is a piss poor amount that works out to about $3.25 billion a quarter. These are mediocre numbers, they're bush league, and Microsoft's data center pullback suggests that they're not going to improve. But wait, wait, or perhaps Microsoft's pullback has something to do with Stargate,

• 26:38Ed Zitron?

  OpenAI's big infrastructure project. In fact, I think that might have something to do with it a great deal. Let's take a look. According to the information, OpenAI plans to have Stargate handle three quarters of its computing needs by 2030. Like they'll make it. Which heavily suggests that Microsoft cancelling so much capacity is on some level linked to OpenAI's future plans and not being part of them. While the information reports that OpenAI is still forecasting to spend $13 billion in 2025 and as much as $28 billion in 2028 on Microsoft's cloud compute, in addition to whatever capacity it gets from Stargate or Oracle, one has to wonder how it intends to do so if it needs capacity that Microsoft isn't building and

• 27:18Ed Zitron?

  doesn't have. And these are two huge numbers, by the way. For context, $13 billion is about 10% of Microsoft's cloud revenue in the 2024 fiscal year, though it's unclear whether Microsoft counts OpenAI's compute spend as its revenue. Nevertheless, I've got some real concerns about whether OpenAI is even capable of expanding further, starting with a fairly obvious one. OpenAI's only source of money, SoftBank, the world's worst tech investor, and the only company in the world better at incinerating huge piles of cash than OpenAI, well, they got some money issues that I'll get into, and funnily enough, that is going to be the topic of the next episode. I'm not convinced that Microsoft's pullback is driven by Stargate, largely because I don't think Stargate, at least with the current spending goals and

• 28:00Ed Zitron?

  capacity targets, is actually viable. The real motivations, I believe, have far more to do with the fact that Microsoft is recognizing that maybe it got generative AI and a large part of its future all wrong. See you in the next episode.

• 28:23Ed Zitron?

  Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Matt Osowski. You can check out more of his music and audio projects at mattosowski.com, M-A-T-T-O-S-O-W-S-K-I dot com. You can email me at [email protected] or visit betteroffline.com to find more podcast links and of course my newsletter. I also really recommend you go to chat dot where's your ed dot at to visit the Discord and go to r slash better offline to check out our Reddit. Thank you so much for listening.

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