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points by p0nce 4 days ago | 0 comments

How could they do anything but implode financially? Genuinely curious. The numbers are not right.

Did the frontier labs take out debt or did they make flimsy unenforceable agreements to neoclouds who took out debt?

Borrowing money is not the only way to go into debt. They reportedly made binding and non-cancelable commitments. Once those commitments come due then they will be indebted to their counterparties until they pay up or the courts sort it out.

This is comparable to how, if I sign a 12 month non-cancelable lease and then don’t pay the rent, I will be in debt to my landlord.

[–] freakynit 4 days ago

People heavily underestimate the number of tricks available to corporates for taking on "debt": https://latentstate.net/the-hidden-ledger/

[–] _heimdall 4 days ago

That's effectively borrowing money with a different name though. The only way to go into debt is to sign an agreement to pay someone money in the future, regardless of the terms used to describe it.

[–] smallmancontrov 4 days ago

No, it's really not. Do you have a war chest to drag out a legal battle and the ability to bankrupt your landlord by withholding payment? The rules are different at this scale, and "you can't enforce a contract if the attempt will bankrupt you" is only one of the possible games.

Here's another one: pay a supplier to cripple their deployment. Suddenly it's the neocloud's fault for failing to deliver, not your fault for failing to pay.

Did we all forget how Sam Altman turned a non-profit into a for-profit? Do we think he'll bring less sociopathy to this battle?

[–] haldujai 4 days ago

> Do you have a war chest to drag out a legal battle and the ability to bankrupt your landlord

Their war chest is not sufficiently larger than the hyperscalers, Broadcom or PE financiers like BlackRock.

> The rules are different at this scale, and "you can't enforce a contract if the attempt will bankrupt you" is only one of the possible games.

Rather, the inverse of what you said and far less Machiavellian.

It is legally well established that take-or-pay contracts are unenforceable if it would bankrupt the buyer which is the more likely resolution in this case. However, this does not mean frontier labs just get to walk away. They would settle in court for a penalty that is less than the full contract price.

See: AMD/global foundries and pretty much every oil and gas or commodity deal that goes bust when market pricing makes extraction unfeasible.

[–] smallmancontrov 3 days ago

> Their war chest is not sufficiently larger

That's not the metric. The legal system is pay-for-delay, not pay-to-win. Once you have enough money to delay, it becomes a contest of who has the longer runway, and that probably goes to the frontier labs rather than the neoclouds who have little alternative revenue and comparatively airtight debt obligations.

> take-or-pay contracts are unenforceable if it would bankrupt the buyer which is the more likely resolution in this case. However, this does not mean frontier labs just get to walk away. They would settle in court for a penalty

Regardless, the terms come down to positioning and bargaining power. Runway vs obligations. This seems to dramatically favor the labs.

[–] haldujai 3 days ago

> it becomes a contest of who has the longer runway

Which is what I said - frontier labs do not have a sufficiently larger war chest.

Respectfully, comparing the balance sheets of a frontier lab to Blackrock, Apollo, Softbank or Nvidia is laughable.

The neocloud will also easily rent out that unused compute and keep funding their war chest via Nvidia’s backstop. If Nvidia can’t pay then it’s all over and AI companies have been swallowed by credit markets.

Your hypothesis also ignores the fact that if frontier labs are not paying for compute it is because they have bad revenue, little cash available and no credit (no one is loaning money to OAI or Anthropic if they can’t pay their bills. They can barely get debt today).

> Regardless, the terms come down to positioning and bargaining power. Runway vs obligations. This seems to dramatically favor the labs.

No, the only way out is for OpenAI or Anthropic to claim in court that they would be insolvent if they are required to pay the bill in full. Otherwise this is a straight forward deal.

You are greatly overestimating their capabilities and underestimating how many substantially more well-funded and highly liquid players will be lining up to take their pound of flesh if OAI or Anthropic default on a bill.

I’d wager my life savings one of those two will go through liquidation.

[–] InsidiousWombat 3 days ago

Does it matter if they "win" or "lose" legally ? They still don't have money to pay, so someone (probably people that gave them their debt in the first place, and their investors) will end holding the bag.

[–] tjwebbnorfolk 4 days ago

Yes.

[–] _heimdall 4 days ago

The government could bail them out, that's the most likely scenario if they don't implode IMO.

They could also continue to grow at the rates they had last year. I don't know where those customers would come from, but if they did pull that off OpenAI and Anthropic could sustain propping up the circular financing going around the AI industry.

[–] xlayn 4 days ago

Goverment bailing they out will be using people tax to rescue the companies that absorbed most of the 801k money so they can get people out of work... it's the ultimate slap to the face... I would strongly resist this, I would vote if they implode to give to whoever owned shares via 801k their money, to people and let them (openai, anthropic, et al) eat shit... I would love to buy one of those gpus to run an open model at discount price...

[–] _heimdall 4 days ago

Completely agree it will be a huge slap in the face to the public, unfortunately that's a common solution.

When everyone is afraid the market will collapse, or more likely distracted because the market collapsed just enough to hurt the average person, the government will bail them out and either people won't notice or will welcome it as a solution to huge levels of fear.

Voting isn't usually much of a solution after the fact, the political machine doesn't allow for candidates that would fix anything to have a chance at any office that matters. There's a reason our politicians today all seem to have roughly the same goals and all seem to become extremely wealthy while in office.

[–] psd1 4 days ago

Government trying to manage financial markets is like trying to steer a rampaging rhino; finance is stronger than government, and can wreck it. But some politicians want to increase regulation and some want to reduce it. Some cynicism is fair, but you've overstated the case. Elections do not offer infinite choice, but the choices are distinct.

[–] InsidiousWombat 3 days ago

But why would they bail them out ? Stock value will drop regardless of what govt does and having the borrowers (the private companies that already made billions on selling the shovel) get stuck with the unclaimable debt is far better option, and those are not hiring average blue collar workers in hundreds of thousands so any job loss would be minuscule too

[–] _heimdall 3 days ago

For the same reason the government bailed out the banks, they're too big to fail.

Two companies account for most of the frontier R&D, and something like 7 companies account for a huge portion of growth in the stock market. The government, especially under Trump, is very focused on continuing to see those numbers go up.

I also expect the government is pretty bought in on AI being the future and on us being in a race with China. They'd have to bail out the labs for those reasons alone.

Lastly in my opinion, Trump has a pretty socialist bent to him and regularly talks about a sovereign wealth fund owning portions of companies. He'd love to have take a partial stake in AI companies, and a bail out is a great way to do that.

[–] velcrovan 4 days ago

A bailout would be a slap in the face when the correct solution is to nationalize them. If they are too big to fail then the government gets a controlling share of equity and we finally start the sovereign wealth fund we should have started decades ago.

[–] _heimdall 3 days ago

Nationalization is fundamentally different from a bailout. It tends to go poorly when a government begins taking over the means of production.

Though I agree with you a bailout is a slap in the face. In my opinion bailouts shouldn't be legal, governments should pro actively be making sure individual corporations don't become so large that a failure would wreck the economy or national security.

[–] _heimdall 3 days ago

Why is it you see a sovereign wealth fund as the right answer? Why should the sovereign own the means of production, and why should the people creating and enforcing laws be the same as those in charge of our economic future?

[–] wtch98 4 days ago

How does that work when the official strategy is "Socialise the losses, privatise the profits"

[–] fourthark 4 days ago

Maybe you should try voting harder.

[–] _heimdall 4 days ago

Meaning what? Cast more than one ballot?

I live in a state that votes heavily in one direction, most states are the same. Its fine for me to vote, but the winner of a majority of states is pretty well decided before a ballot is cast (by strong majority, I'm not claiming fraud).

[–] daveguy 4 days ago

If everyone who threw up their hands actually voted, the outcome would change. See also, the elections musk tried to buy in the last 18 months or so since he doged up the place.

[–] _heimdall 4 days ago

Sure, and I hope that (a) everyone votes and (b) most of them agree with me. Bit what is your point exactly?

[–] easyThrowaway 4 days ago

Becoming "too big to fail" has become a viable market strategy.

See also how AI companies re trying to sneak in basically every level of infrastructure and public administration.

[–] rayiner 4 days ago

Apple is worth more than all the AI companies combined. You think LLMs are less valuable in the global market than slightly updated iPhone models every year?

[–] failbuffer 4 days ago

LLMs? No. LLM companies? Yes. It's just math, data centers, and mass copyright infringement. The only scarcity is Nvidia, who just passed Apple in market cap, somewhat proving your point but not in the way you meant it.

[–] _heimdall 4 days ago

If you consider Nvidia an LLM company, and I do at this point given how heavily they've invested in frontier labs and where much of their revenue comes from, they alone are worth slightly more than Apple.

[–] hvb2 4 days ago

But nvidia can sell to anyone, right?

They'll take a heavy hit stock wise, and might be an LLM company through all their shady financial constructions to keep the music going by propping up demand. But in the end, nvidia as a company has a place even when the frontier labs go bankrupt. Some other company will take their place. Worst case it'll be like the cable companies in the end 90s who found themselves out of work because they overbuilt for dotcom

[–] phoghed 4 days ago

> It's just math, data centers, and mass copyright infringement.

Ok then iPhones are just metal, plastic, glass, and a delivery truck. You are just electric meat. This has to be one of the dumber comments I’ve read on here.

[–] jasomill 4 days ago

Maybe not, but it is probably less likely that Apple will face stiff competition from freely available alternatives, given that AOSP has been a thing for the iPhone’s entire lifespan and nonproprietary Android phones have failed to capture significant market share.

[–] daveguy 4 days ago

I don't think we have seen an Apple of AI yet. I wouldn't describe the frontier that way, would you?

[–] jasomill 4 days ago

No, and moreover it’s not entirely inconceivable that the Apple of AI may turn out to be Apple itself.

[–] Danox 3 days ago

For that to happen Apple Silicon needs to continue to move forward and memory needs to move in-house along with local on-device AI agents.

[–] surajrmal 4 days ago

Are you avoiding Google and SpaceX in that math?

[–] InsidiousWombat 3 days ago

Neither's only business is LLM

And SpaceX LLM business is "we failed to build competition so we just rent what we bought in hardware to other companies"

[–] jasomill 4 days ago

Their costs could drop, competition could dry up, or they may only be unprofitable in the first place because they’re choosing to invest more money in growing their business than they’re currently making, a practice which need not and will not continue indefinitely.

It’s not at all unusual for companies to run at a loss for several years before turning a profit.

[–] SlightlyLeftPad 4 days ago

Stuff like this that defies all logic happens all the time. Amazon operated at a massive loss first it’s first decade and still IPO’d years before they posted a profit.

[–] disgruntledphd2 4 days ago

Amazon were investing in goods that lasted longer. It's an open question how long the GPUs will be worth anything, and training costs are the real killer.

Z.ai, who make GLM are public and their books are really, really, really bad.

[–] dnautics 3 days ago

Did you read the anthropic S1 or are you just saying this?