Comment by skybrian
14 hours ago
Context: a few weeks ago, Anthropic signed a deal to buy "multiple gigawatts of next-generation TPU capacity" from Google and Broadcom [1]. There have been several previous deals, too.
Some people call this sort of thing a "circular deal", but perhaps a better way to think of it is as a very large-scale version of vendor financing? The simple version of vendor financing is when a vendor gives a retailer time to pay for goods they purchased for resale. This is effectively a loan that's backed by the retailer's ability to resell the goods. There's a possibility that the retailer goes broke and doesn't pay, but the vendor has insight into how well the retailer is doing, so they know if they're a good risk.
Similarly, Google likely knows quite a lot about Anthropic because Anthropic buys computing services from Google for resale. They're making an equity investment rather than a loan, but the money will be coming back to Google, assuming Anthropic's sales continue to rise as fast as they have been.
Also, if you own Google stock, some small part of that is an investment in Anthropic?
[1] https://www.anthropic.com/news/google-broadcom-partnership-c...
So yes, but that doesn't negate the circular investment aspect, for most intents and purposes.
The risk is from this structure is mostly to do with how this affects market cap. Companies using the value of their shares to fund demand for their services.
That's a risk.
I feel like the whole market at this point is just AI since big tech other than Apple are all massively invested into that. Everyone owns either the S&P or the total world ETF which are both heavily skewed towards big tech and this trade - so literally everybody is in it. It might go well for a few more quarters/years but once something breaks or gets exponentially cheaper this will take down the whole market with it.
It's just hard to tell the difference between "real" demand and "circular." That's the concern.
PG had an essay about this during the dotcom, when he worked at yahoo. Iirc...Yahoo's share price and other big successes in the space attracted investment into startups. Startups used that money to advertise on yahoo. Yahoo bought some of these the startups.
So... a lot of the revenue used to analyze companies for investment was actually a 2nd order side effect of these investments.
Here the risk is that we have Ai investments servicing Ai investments for other Ai investments.
Google buys Nvidia chips to sell anthropic compute. Anthropic sells coding assist to Ai companies (including Google and Nvidia). They buy anthropic services with investor money that is flowing because of all this hype.
Imo the general risk factor is trying to get ahead of actual worldly use.
The Ai optimists have a sense that Ai produces things that are valuable (like software) at massive scale...that is output.
But... even if true, it will take a lot of time, and lot of software for the Econony to discover this, go through the path dependencies and actually produce value.
The most valuable, known software has already afy been written. The stuff that you could do, but haven't yet is stuff that hasn't made the cut. Value isn't linear.
5 replies →
> literally everybody
I personally make sure I really diversify, so that when I buy funds, I buy those with stocks of EU companies which pay dividends. AFAICT there are 0 European AI companies that pay dividends.
>Companies using the value of their shares to fund demand for their services.
That's not what's happening here though. Google isn't using the value of its shares to fund demand. Google is using its own cash flow to fund this demand from Anthropic.
The question is whether Anthropic has demand from end users for the capacity they are buying from Google (that's a yes I guess) and whether that demand is profitable for Anthropic (that's a question mark).
True.
Regardless, (a) it's ability/desire to make such investments is still driven by stock-driven optimism and (b) these transactions' "signal" can have a similar, warping effect.
In this case the transaction creates demand for Google's services and also funds anthropic's growth... which represents demands for google's services.
"Loop" is an approximation of an analogy. The risk is that enough of such transactions create a dynamic that distorts feedbacks.
4 replies →
The tech industry goes through investment phases to produce oligopolies it turns around and enshittifies, parasitizing income off what it has built. Venture capital, acquisitions, acquihires, circular investments - It’s been incestuous for years. The question is whether competition from China’s sophisticated tech sector, which already surpasses the US in many areas, will put a pin in these plans this time round.
I don't agree with the "full cynicism" POV, but I do agree that TechnoChina's existence is a potential paradigm shifter.
But generally speaking, AI is currently pretty competitive and robust. Straightforward business model where users pay money and select the best deal are central. Market power is relatively dispersed.
So... Idk. Nvidia doesn't have competition. But Intel didn't have much competition either, and they drive the Moore's law bus for a long time.
Hardware has been less prone to enshitification. Maybe it's because the demand curve for compute doesn't have natural limits. Drive down price, and demand grows by enough that the total market grows.
To be honest, I think "vendor financing" is still a very risky premise.
Vendors may be positioned to know how a customer is doing, but they're also incentivized to overestimate how well a customer is going to perform.
GE Capital (edit: and GMCA) is a great example of how seemingly reasonable vendor financing can cause the lender serious problems.
Are you aware that all heavy industry in all highly developed nations make extensive use of vendor financing to sell their products? Siemens is a perfect example of a well-run, stable, industrial giant. They offer vendor financing for large purchases. Same for the "heavies" (Mitsubishi, Kawasaki, IHI, Hyundai, Doosan, Hanjin) in Japan and Korea.
If anyone is interested to learn about the damage that the financialisation of General Electric (USA) brought upon itself, you can ask ChatGPT to tell you the story. It is too long to repeat here.
Here is a sample prompt that I used to remind myself:
Are we replacing "Let me google that for you" with "Here is a prompt to feed ChatGPT" now?
Edit: I am not asking whether ChatGPT is better than Google Search, I am asking after the standard dodge of citing one's sources.
8 replies →
> Are you aware that all heavy industry in all highly developed nations make extensive use of vendor financing to sell their products?
The OP did mention GE Capital, the motherload of all heavy industry vendor financing. And of massaging the accounting books in order to increase shareholder value in the short term, also.
1 reply →
The risks are different, but there's no getting around that the value of any investment is based on future cash flows and that's speculating about the future.
To the extent that Google and Anthropic are competing for AI business, Google is somewhat hedged against Anthropic winning market share. They still get data center revenue and they own equity, so that’s a consolation prize.
On the other hand, it’s increasing Google’s investment in AI, in general.
GE Capital was a different creature, riding the line of fraud in some ways. They misapplied accounting rules and had to write down or capitalize over $20B for long term care insurance.
That's what brought them down, but that could bring down anyone. My point is that vendor financing turns non-finance companies into finance companies, and brings along a huge can of worms.
1 reply →
I don't know the full the history of this story, but I honestly wonder if type of scandal is still possible in the United States. After Enron and Worldcomm, the US introduced Sarbanes-Oxley reporting regulations. Additionally, after the Global Financial Crisis of 2008/2009, there was a dramatic increase in regulations for banks (of all kinds) and insurance companies.
3 replies →
GE Capital was not just vendor financing and its serious problems were not due to vendor financing. I don’t think it is a great example in any way.
$40 billion is about a quarter’s worth of profits for Google. They make that much every 3 months, what’s the risk
Hat tip. Great point. To quote J Paul Getty: "If you owe the bank $100, that's your problem. If you owe the bank $100 million, that's the bank's problem." In this case, yes, the investment is large, but not bankrupting for Google if it goes wrong.
Reciprocal agreements aren't new, sometimes they're used to gain access to a market the other party already has established a foothold in for other industry segments. These companies operate in the same general industry: tech/internet so it could be complementary services they are each after.
So far both of these companies have shown they suck at support so we know that's not it. It could be that it might help Anthropic to leverage Gemini in their competition with OpenAI and Google will take compute commitments.
Anecdata: I'm finding a lot of my "type random question in URL/search bar" has decent top Gemini answers where I don't scroll to results unless I need to dive deeper.
Funny how Gemini generally takes into account all the words you type whereas Google search tends to ignore most words you type or otherwise direct you to results for thematically (or grammatically or semantically) similar words to what you searched but otherwise wholly irrelevant.
Google crippling search to bolster AI is a dangerous game. But without people going to competitors, what's the recourse?
They're already crippling their AI to perform what look like sponsored searches.
The plural of anecdote is not data but this does not feel like a one-off thing: I was trying to find where it would be possible to get to have a reasonable holiday, and asked Gemini to list me all the international airports in two named countries that had direct flights from my preferred departure airport. The response came back with a single proposed flight destination with "book here" prominently available.
Only once I told it that the search was NOT an impulse purchase intent and I really wanted to know the possible destinations - then did it actually come back with the list of airports that satisfied my search criteria.
Although if we are looking for the bright side, it did provide a valid and informative answer on the second try. I haven't had that kind of experience on SEO-infested Google search for quite a long time now.
I agree those results ate handy, but I had several occasions where they turned out to be completely wrong. 95% correctness rate is not good enough.
LLMs have a lot of issues with facts, because they are probabilistic and you typically only get one answer per query instead of multiple covering a larger space.
However, they are still useful in these cases if you know the above and use their output as a starting point to think and ask questions.
Google already knows Anthropic is a good investment. Google owns the chrome browser and they already know from traffic data how well Anthropic is doing. This is similar to how Mark Zuckerberg came to know Instagram is a good deal.
In another context I might see it as vendor financing. However given that Google and Anthropic are competitors in this segment and given that Google has previously invested in them I'd rather see this as a sort of bartered stock purchase presumably for the purpose of hedging against failure. If Anthropic wins the race and it turns out to be winner takes all and you happen to own half of Anthropic then you still win half of the immediate spoils even though your internal team lost. If you view losing the race as an existential threat then having all your eggs in the one basket is a terrible proposition.
Sure, since Google is both a supplier and a competitor, it’s both vendor finance and hedging. Also, it increases their investment in AI, in general.
Arguably, too much of this kind of hedging is anti-competitive. But that doesn’t seem to be much of a problem yet?
Are we stoping too early in this analysis though?
Google versus OpenAI and Anthropic, sure, but Microsoft is deep into OpenAI. Google helping Anthropic is also putting MS into a corner (one that may even be shrinking? Copilot and openAI financing hurting their brand, rumours of deep displeasure at OpenAIs promises v returns).
Seen from afar I see Google happy to provide TPUs for money (improving Googles strategic positioning), torpedoing confidence in LLMs with their search AI summaries, and using their bankroll to force larger competitors (MS in particular), to keep investments high regardless of performance and user revolts and internal tensions with Sam Altmans sales approach. Plus, Anthropic is in ‘the lead’ right now product wise, so grooming them as a potential purchase would also seem to be a strategic hedge in the long term.
3 replies →
> Arguably, too much of this kind of hedging is anti-competitive. But that doesn’t seem to be much of a problem yet?
By the time it is a problem, it will be too late.
How can there be a "winner takes it all" situation with AI?
OpenAI lead the game while they were best. Antrophic followed and got better. Now openAI is catching up again and also google with gemini(?) ... and the open weight models are 2 years behind.
Any win here seems only temporary. Even if a new breakthrough to a strong AI happen somehow.
Look at the "winner takes all" situation in web search. Of course other search engines exist, but the scale of the Google search operation allows it to do things that are uneconomical for smaller players.
Recursive self-improvement is one argument. Otherwise winner takes all seems much less likely than a OpenAI/Anthropic duopoly. For the best models, obviously other providers will have plenty of uses, but even looking at the revenue right now it's pretty concentrated at the top.
So if I'm Google I'd want a decent chunk of at least one of them.
17 replies →
The first to AGI, or a close approximation, is the winner. That’s what the investors in Anthropic and OpenAI are betting on.
I’d be willing the bet that the Venn diagram of investors in those two companies is nearly a circle.
8 replies →
2 years? 2 years ago, gpt-4o was OpenAI's flagship model. The gap is real, but much smaller than 2 years.
I guess if you build the first AI that can autonomously self improve, then nobody can catch up anymore.
11 replies →
Not even 2 years behind.
I wonder if Google is that much a competitor. Sure, they tried to make an AI of their own.
But they also have access to an unimaginably large data set plus reach into people’s daily lives.
Seems more like partners for world domination.
$40B is not anywhere near half of Anthropic at this point. You do get the same access as nvidia, aws, and other investors, which has value.
I look at this as Google needs a competitor. While Anthropic seems to be the flavor of the quarter OAI looks like such a dumpster fire right now that it's in Google's best interest to help keep Anthropic moving towards winning the #2 spot. I say the #2 spot because it doesn't matter how good this week's LLM is. Until someone else owns the infra and has an actually profitable business model they're all just lighting money and the world around us on fire.
I actually mentioned to a Google friend the other week that I wouldn't be surprised to see Google tipping the hat towards Anthropic soon so as to put a little more heat on OAI.
Good perspective.
Let's say Anthropic fails to pay it's debt, can Google take those TPU's back and make money from them?
IIRC Google already outright owns 15% of Anthropic.
It's pretty much vendor financing (although we could argue whether it should be classed as circular investment), with the extra trick being that both sides get to make number go up with it, through stock market valuations and the ability to borrow more money to set fire to so you can show how successful you are.
I think everyone is incentivized to keep the music playing and the party going with AI. Because the alternative is a massive correction like we have rarely seen.
What if AI is never good or cheap enough to reach significant profitability?
It could be legit, it could be a thickly veiled accounting fraud continuing the valuation inflation with fake deals that count money multiple times.
Maybe a little bit of both.
Lots and lots of vendor financing during the dotcom era, and it ended up being a material part of those vendors' own difficulties. Especially when service providers were concerned (e.g. the huge crash in optical in particular).
Obviously it's not a perfect comparison, but you have to wonder how much of NVIDIA's income (for instance) is ultimately funded by its own money.
it's your time..
~ TK
[dead]