LETTER: Financial reality is that Port data centers are likely to fail

To Ozaukee Press:

History tells us that not all companies that engage to profit from newly invented technologies will be successful. In fact most will not be.

For example, over 3,000 automobile companies have existed in America and most of them have gone out of business in the last 100 years. Many of the companies currently trying to profit by developing AI will meet a similar fate.

In all likelihood, these failed enterprises will include both of the companies forming the underpinnings of the $15 billion Vantage data center, Oracle and Open AI.

Oracle has infrastructure commitments of $158 billion in required capital expenditures. They have already borrowed $58 billion, with $38 billion earmarked for projects in Wisconsin, Texas and New Mexico.

They have recently announced that they are considering slashing 30,000 employees to help fund further AI data center expansion because banks have become hesitant to provide additional funding.

The banking retreat has caused Oracle’s borrowing costs to skyrocket. Since September, lenders have roughly doubled the interest rate premiums they charge Oracle for data center project financing. These terms are typically reserved for non-investment grade companies standing on shaky ground. The bonds Oracle issues are graded only slightly above junk bond status.

The higher borrowing costs have resulted in deals being stalled. The financial pressures are also having a negative impact on Oracle’s relationship with Open AI, which has transferred its near term capacity needs to Microsoft or Amazon.

It is also having a negative effect on

Oracle’s stock price, which has fallen around 50% since it’s September high.

An even more troubling sign for investors is its ever increasing reliance on a single opaque customer, Open AI. Open AI’s financial condition may be even more perilous than Oracle’s. Open AI is a privately held company with $1.4 trillion in obligations and has only about $20 billion in revenue.

The question that needs to be answered is whether the capital markets will continue to provide the company with more funding while waiting for it to turn a profit, which is something that Open AI has never done.

Open AI is likely to run out of money long before the profits necessary to service their debt load are realized. In addition, Open AI’s competitors, such as Google, Microsoft and Meta, have such large earnings from their on-going legacy businesses that they can easily afford the billions needed to fund their AI operations. Free standing developers like Open AI do not have that luxury. It’s also believed that the products offered by Google are superior to those of Open AI.

When the day comes in the not to distant future that OpenAI goes broke, its assets will be absorbed by another company. Data center developers like Vantage that had signed agreements with Open AI will be hard pressed to scramble for new customers. If by that time the AI build-out has sufficiently advanced and the industry has excess capacity, new customers might not even exist.

James Parez

Grafton