I think you’re just describing how it’s circular.

It’s like Toys R Us not having enough money to pay Mattel for Barbie dolls and telling Mattel they can have partial ownership of the company if they just supply them with some more toys.

But the problem is that Toys R Us is spending $15, 20, or maybe even $50 (who knows?) to sell a $10 toy.

Toys R Us continues selling toys faster and faster despite a lack of profit, making Mattel even more dependent on Toys R Us as a customer. It blows up the bubble where a more natural course of action would be for Toys R Us to go bankrupt or scale back ambitions earlier.

Because it’s circular like this, it lends toward bigger crashing and burning. If OpenAI fails, all these investors that are deeply integrated into their supply chains lose both their investment and customer.

Cisco did this in 1999. That's how my smallish apartment building in Sweden ended up with a kick-ass Cisco 10 Gbps switch in its basement a year later - when these cost real money.

I think the HOA still only pays like $10/month/apartment for an entry level that's now defined as 250/250 Mbit/s. Someone must have been unusually savvy with the contracts.

https://newsroom.cisco.com/c/r/newsroom/en/us/a/y1999/m11/ci...

Cisco survived but it took them until late last year to recover their 1999 stock value (that's 26 years).

Nope wrong framing.

Nvidia is investing assets into OAI - it has to. Because OAI needs to become successful for Nvidia's story in the long-term to play out, to justify its current stock price.

Great analogy. ;-)

Doubt Jensen sees himself as a “dealer” but considering the vendor lock-in and margins, he pretty much is the Tony Montana of Ai Chips.

It’s nuts that this type of financing is legal.

Conversely it’s equity for an in-kind investment. Dave Choe taking the Facebook shares writ large.

I give you $100 cash and you give me $100 worth of stock in return. Now you give me $100 cash to buy something from me that cost me $80 to produce. I end up with $100 worth of stock in your company which cost me only $80. No?

NVIDIA gross margins lately are like 75%, so it's more like you give me $100 to buy something from me that cost me $25 to produce, hence I end up with $100 worth of stock in your company and it only cost me $25.

> Isn't that basically the same as me giving you $80?

In your accounting, you can claim that you have an investment worth $100 and book $100 worth of revenue. You're juicing your sales numbers to impress shareholders - presumably, without your $100, the investee wouldn't have bought $100 worth of your product. The last thing your shareholders want to see are your sales numbers stop growing, or heaven forbid, start shrinking.

Nvidia is not the first company to "buy" sales of its own product via simple or convoluted incentive schemes. The scheme will work for a while until it doesn't.

The problem is here:

> Let's say I give you $100 on the condition that you buy $100 worth of product from me. And let's say that product cost me $80 to produce. Isn't that basically the same as me giving you $80?

Why limit myself to $100 for a product that costs $80? I could just as well give you $1 000 000 to buy this same product from me. That way, I have a $1 000 000 share of your company, and I have $1 000 000 in revenue, and it only cost me $80.

This distorts the market for the product we're trading, and distorts the share price for both my company and yours.

That's like giving them* $20.

And inflate your revenue by $80.

Laws on competition make this kind of arrangements illegal, so you would have to exerce influence and have the invested in company pretends you happen to have been picked among competitors.

In any case the SEC will be focused on whether the filings aren't made up to fraud investors, so they could reject the IPO, of the invested in company. Your own entity also is at risk.

We all know MS gets away with it, they have good legal goons who find way to make all of it appears fair with regards to the law.

In exchange for 100$ of your stock AND making your revenue numbers look insane for the next cycle ?

Also Nvidia margins are waaay higher than 20%

How I see it is the companies want to jack their revenue and in turn jack the price of their stock and please shareholders. Those are the two main goals which this accomplishes, regardless of the underlying fundamentals.

For both Amazon and Nvidia, their marginal costs are probably much lower than their fixed costs.

The reason this doesn't make sense is that this is the math of monopoly creation! The government should be making sure companies don't go around throwing money at circular deals that will make them and their friends a fortune while cornering the market, but it seems that capitalism rules don't exist anymore in the US.

I'm not a finance expert, but it may be because investment and purchase are are taxed differently (I don't know). You gave $100 away as investments, got $100 back as revenue. Meanwhile you establish that your product are worth $100 (while costing $80) and you have $100 worth of shares. Without considering side effects, you gave away $80 worth of product for $100 (supposed) worth of shares. But shares are subject to side effects and those side effects can be quite nice (making the news, establishing price,...).

The issue is that there's no organic force behind those changes and it makes everything hollow. You could create a market inside a deserted area and make it appear like a metropolis.

> I don't understand how this is some kind of cheat code. Let's say I give you $100 on the condition that you buy $100 worth of product from me. And let's say that product cost me $80 to produce. Isn't that basically the same as me giving you $80? I don't see at all how that's me "basically getting that investment back".

What if the product only costs you $20 to produce?

They had a first-mover advantage for sure.

It used to be revolutionary, but now there is a huge difference: plenty of competition, and a growing number of high-quality models that can run offline (for free!) or cheaper (Gemini-Flash for example).

They are in some way the Nokia of AI, "we have the distribution, product will sell", but this is not enough if innovation is weak.

They are even lagging behind (GPT-5 is a weaker coder than Claude, Sora is a toy compared to Seedance 2.0, etc).

One Apple releases the AIPhone, running offline models, with 32 GB of unified memory, with optional cloud requests, then it's going to be super though for OpenAI.

How will they make money on their product exactly? To the tune of being worth nearly a trillion dollars? There is no guarantee that inference will go down, we’ve seen some improvement with cheap models, but they aren’t what people want, and otherwise models stay expensive to run and use

The only reason to draw this comparison is to show SoftBank are not as competent as they'd like to appear to be - so putting their name in relation to investors of OAI does not strengthen the prospects we should share re. OAI.

It’s one of the worst takes I’ve heard. OpenAI creates the fastest growing app ever, spawns a revolution bigger than the internet, and this guys take is they are like WeWork…

Will they maintain an edge over other AI companies long term? With so many market participants will it become a race to the bottom?

This valuation puts their P/E around 40.

Anthropic $380B valuation on $13B ARR. P/E around 30.

5 years ago Uber was in similar territory. Tesla... Well we won't mention Tesla.

How far the volatility ripples out will give us a real look into just how self-reinforced the financials truly are.