The murky economics of the data-centre investment boom

(economist.com)

126 points | by 1vuio0pswjnm7 13 hours ago

14 comments

  • rzk 13 hours ago
  • combyn8tor 11 hours ago
    Meanwhile in Australia we have a "AI data centre" startup being valued at $1.9 billion and given $330 million to play with, having not built anything yet. It's co-founded by a guy that went to prison for insider trading. His wife is also an investor, who happens to be a prominent Australian influencer. The company previously focused on Bitcoin mining but have pivoted to the AI boom, claiming their cooling systems to be 60% better than competitors. Their first project will kick off soon in the Australian state of Tasmania, where there is nothing much more than sheep and tourists.

    https://www.smartcompany.com.au/startupsmart/firmus-raises-3...

    • Hansappreciator 9 hours ago
      Signs of a bubble in this sector are everywhere. OpenAI is trying to fundraise a $5tn infrastructure buildout on $15bn in annual revenue. That's insane.

      What's worse is that OpenAI and the other AI companies are all intertwined. The chipmakers are invested in the datacenter operators are invested in the software guys. When the bubble implodes - and it will implode - the good will go down with the bad, and that's what makes a financial crash a true crash.

      • bob1029 9 hours ago
        The AMD/OpenAI deal sounded like the music stopping to me.
        • nostrademons 9 hours ago
          That and the 3-way "OpenAI pays Oracle $300B in cloud computing on their $15B of revenue", "Oracle buys $40B of NVidia chips for their new datacenter", "NVidia invests $100B in OpenAI". The money's just moving around and around, propping up revenue numbers for Wall Street, but the consumer benefits are dubious.

          https://www.nbcnews.com/business/economy/openai-nvidia-amd-d...

          • Panzer04 9 hours ago
            If the money is leaving the system slow enough (via Employee wages and materials for chip manufacturing) I suppose it can go on for quite some time.
            • munk-a 8 hours ago
              Sure - but nothing driving up revenue value is actually being created[1]. What's missing in that system is a way that money is entering the system. These deals are (in my cynical opinion at least) being inked to create the appearance of large continued investment and market excitement to pump or sustain valuations. Oracle actually spotlit the arrangement as future sales in their recent earnings and that seemed to be what mostly drove their valuation up.

              Performative actions to drive up valuation and try and attract more investors absolutely feels bubbly to me.

              1. Discounting products that are not only currently operating at a loss but are priced well below actual resourcing required to produce.

              • metadat 7 hours ago
                Customers pay for the compute. There are tons of CSPs selling the capacity to small and large consuming entities alike (both OpenAI/Anthropic + other small outfits we've not heard of).

                The fair criticism of the infra $ is where the non-VC non-bank-loan cash stream is, but there could be a lot of B2B deals and e.g. Meta, TikTok and other behemoths do tend to make plenty of money and pay their bills, and have extreme thirst for more AI capacity.

                Take Oracle for example (as a whole, not just OCI) - tons of customers who are paying for AI-enhanced enterprise products.

                It's still the early days, as the cost of creating software continues to approach zero the rules will change in ways which are hard to predict. The effect this will have on other white collar industries is even more challenging to reason about.

          • trhway 8 hours ago
            Just now on NPR - Open AI has inked $1T over this year. Remember the times when $1B were a serious money?
            • metadat 7 hours ago
              Remember a year and a half ago when we all scoffed at the prospect of multi-trillion dollar global AI infrastructure build out? Now it's happening.

              How much is dumb money, though? That's the real question which remains highly relevant post dotcom bust.

          • re-thc 5 hours ago
            > The money's just moving around and around

            There's nVidia that we know (primarily graphics cards) and more like an investment firm "nVidia" these days. The stocks have grown so much that they are trying to turn their fortunes around (to sustain growth) by investing everywhere.

            nVidia has invested in so many companies in the ecosystem and beyond.

            • gazpacho 1 hour ago
              Do they diversify? Is Nvidia buying VXUS?
        • hn_throwaway_99 8 hours ago
          What about the NVidia/OpenAI deal? Such a giant investment in a huge customer looks a heck of a lot like "circular dealing". That is, invest $100 million so your biggest customer can spend a ton of that on your own chips. You get to report skyrocketing revenue but that revenue was bought with your own money.
        • j-krieger 1 hour ago
          This also has gigantic impact potential. Imagine if Lehman Brothers only had one competitor, and they were also at risk to be seriously impacted.
        • MontyCarloHall 6 hours ago
          If the AMD/OpenAI deal means that OpenAI will put serious work into making AMD GPUs finally be more amenable to general purpose computing, it's actually a huge win for AMD. None of the major numerical computing frameworks (PyTorch, TensorFlow, JAX, etc.) work as well on AMD GPUs versus NVIDIA GPUs, and that's really holding AMD back from making inroads into the machine learning space.

          If this means that compute is considerably cheaper for OpenAI, it's a win for them too. But that remains to be seen.

        • SchemaLoad 7 hours ago
          The pivot all the companies made to TikTok style video shitpost apps felt like that too. The ideas are running out and they need a money maker now.
    • theteapot 9 hours ago
      Tasmania doesn't do much sheep farming. They are more into salmon. Maybe you were making a derogatory reference to the local human population? Fair enough.
    • bdangubic 11 hours ago
      > where there is nothing much more than sheep and tourists

      kind of like Mississippi but without the tourists part

      • greenie_beans 10 hours ago
        people have the weirdest/wrong perceptions of mississippi
        • pixl97 10 hours ago
          It's more like "it's like the US, but without the education"
          • anomaly_ 8 hours ago
            Yea you might need to update your knowledge. They are killing it in schools now
          • greenie_beans 9 hours ago
            punching down on a state you don't understand or know anything about is such a overdone trope. at least be funny!
            • pixl97 9 hours ago
              Luckily our government is full bore on banning the collection of statistics so you can feel better about your state.
              • selimthegrim 8 hours ago
                They are serious - MS is doing very well in early reading and vaccination. We in Louisiana don’t get to say last except for MS anymore.
            • cowboylowrez 9 hours ago
              ok how bout this, its all relative except for mississippi, there's too much going on between relatives there.

              get it? hahahaha

              • greenie_beans 8 hours ago
                unfortunate life you must live to be so unfunny
                • cowboylowrez 3 hours ago
                  oooh look who's punching down now haha yes sir, I have an extremely unfortunate life, I'm the sort of individual who does not have good luck. I try not to bring it up because its simply not on topic for hn, me circling the drain is really nobody's business but mine and the drain, oh yeah, yours too I guess. questions?
              • thatsnuts 8 hours ago
                [flagged]
        • bix6 7 hours ago
          So what’s going on in Mississippi these days?
          • greenie_beans 6 hours ago
            improved literacy rates (https://mississippitoday.org/2025/01/24/jim-barksdale-100-mi...), misspent welfare money with brett farve involved (old news), state auditor doxing private individuals for their political speech, new jesmyn ward novel came out a couple years ago, mississippi filmmaker al warren released a funny movie "dogleg", the band mspaint had a good album a couple years ago, etc

            data centers being built but people fighting it. new rezoning in taylor, MS being fought by locals bc they are trying to reclassify agriculture land for heavy industry so they can build an asphalt plant. federal government troops in nearby memphis.

            just like anywhere else in america.

        • quickthrowman 10 hours ago
          When you come in dead last (or in the bottom 5 states) in virtually every possible positive metric, people are going to make negative assumptions. I understand the historical reasons for that, but it doesn’t change what it is.
          • greenie_beans 9 hours ago
            fair enough, but their assumption wasn't even about that. a better joke on that quote would've been about vermont.

            i hear people online punch down on mississippi all the time, and often they don't know anything about the state except whatever metric they've heard about from a headline. the rest of america isn't very far behind, and if you think the state of mississippi isn't a product of america as a whole then you are extremely mistaken. without the industrialized north you have no plantation economy and without the civil war you have no "dead last (or in the bottom 5 states) in virtually every possible positive metric."

            i grew up there, attended public school all the way through my BA, and then spent significant time as a young adult there. based on the stereotypical assumptions, it might be shocking to the big brains on hacker news that somebody from mississippi is an audience of this website.

            • sukhdeeppravish 9 hours ago
              True. As an AI engineer from Gurajatar, Uttar Pradesh I can relate to your experience in this auspicious website sir. We are top human capital.
            • quickthrowman 9 hours ago
              > i hear people online punch down on mississippi all the time, and often they don't know anything about the state except whatever metric they've heard about from a headline. the rest of america isn't very far behind, and if you think the state of mississippi isn't a product of america as a whole then you are extremely mistaken.

              Agreed, people usually just say ‘lol MS is full of idiots, they’re bad at school’ instead of taking the time to understand why. It was more isolated than GA and LA (and AL), there was a higher ratio of slaves to freedmen in the antebellum period, the Delta was undeveloped so lots of impoverished people from across the south moved there to try and develop the land, to name a few reasons.

              > i grew up there, attended public school all the way through my BA, and then spent significant time as a young adult there. based on the stereotypical assumptions, it might be shocking to somebody on hacker news that somebody on a similar enough intelligence level to be an audience of this website is from mississippi.

              I can say that I don’t assume everyone from Mississippi is stupid, but the generalization about Mississippi that you related seems to be more common than it should be. I think a lot of it has to do with a lack of exposure to people from Mississippi or Mississippi itself.

              Thanks for taking the time to respond, I appreciate the discussion.

    • pkaye 11 hours ago
      Is there a lot of power generation in Tasmania? That is the main criteria for AI data centers from what I heard. Latency is less critical than cost of power.
      • matt_daemon 10 hours ago
        Plenty of power and it’s almost always renewable: https://explore.openelectricity.org.au/energy/tas1/?range=7d...

        There’s also plenty more there than sheep and tourists (and not really that many of those)

        • decimalenough 10 hours ago
          There's pretty national parks, convict history and some pretty tasty whiskeys and wines, but not a whole lot of reasons to build a data centre. The power argument isn't particularly compelling either, because it's much more sunny on the Australian mainland.
          • hn_throwaway_99 8 hours ago
            > The power argument isn't particularly compelling either, because it's much more sunny on the Australian mainland.

            But the vast majority of Tasmania's power is hydroelectric. Hydro is a much more desirable renewable than solar because it essentially is its own built in battery.

    • gonzo41 9 hours ago
      So the real risk with that data center is the fact that Tasmania is a culdesac on the internet. We have three fiber cables coming to the island, all from Victoria (directly to the north). The whole state has lost internet before due to someone in Victoria digging a trench through the cable (yes a silly mistake but we're all humans).

      It's not a bad idea to put data centers here, but we really need a few more links out to the world from here.

  • jjcm 11 hours ago
    It's a long-term gamble but a short-term win.

    In almost all scenarios, a setup with this incentive structure will lead to massive adoption. It's too tempting, and with most jobs / political positions being short term (<5yrs) ones, people optimize for their time in that timeframe, not longer.

    Boards will pursue stock buybacks (short term growth, long term may cause trouble if there's a downturn), banks will lend out subprime mortgages (hit your sales numbers in the short term, at the cost of long term risk), etc etc.

    This situation is no different. There's money flowing in and there's less red tape since everyone is being pressured to allow it. It might work out in the long term, it might not, but it will 100% benefit those who push it in the short term. People will get promoted for driving a new data center, politicians can promote more jobs being added, everybody wins... for now.

    The future economic aspect becomes irrelevant when the short term candy is sweet enough.

    • jpster 10 hours ago
      IBGYBG. “I’ll be gone, you’ll be gone”. Infamous email sign-off associated with the run-up to the Great Financial Crisis. Used by Wall Streeters asking analysts to inflate credit ratings for undeserving securities, backed by risky mortgages.
  • martinald 7 hours ago
    Every time I read one of these articles the main issue I have is that it doesn't take into account the huge shortages of compute that are going on all the time. Anthropic and Google especially have been incredibly unreliable, struggling to keep up with demand.

    Each of the main providers could easily use 10x the compute tomorrow (albeit arguably inefficiently) by using more thinking for certain tasks.

    Now - does that scale to the 10s of GWs of deals OpenAI is doing? Probably not right now, but the bigger issue as the article does point out in fairness is the huge backlog of power availability worldwide.

    Finally, AI adoption outside of software engineering is incredibly limited at work. This is going to rapidly change. Even the Excel agent Microsoft has recently launched has the potential to result in hundred fold increases in token consumption per user. I'm also suspect of the AI sell through rate being an indicator that it's not popular for Microsoft. The later versions of M365 copilot (or whatever it is called today) are wildly better than the original ones.

    It all sort of reminds me of Apple's goal of getting 1% in cell phone market share, which seemed laughably ambitious at one point - a total stretch goal. Now they are up to 20% and smartphone penetration as a whole is probably close to 90% globally of those that have a phone.

    One potential wild card though for the whole market is someone figuring out a very efficient ASIC for inference (maybe with 1.58bit). GPUs are mostly overkill for inference and I would not be surprised if 10-100x efficiency gains could be had on very specialised chips.

    • mlsu 3 hours ago
      the huge demand exists right now because the cost of a token is near zero. and companies have figured out one weird hack to gaining value in the stock market, which is to brag about how many tokens are being crammed into all manner of places that they may or may not belong.

      customer value must eventually flow out of those datacenters in the opposite direction to the the energy and capex that are flowing in

      do people actually want all this AI? I see studio ghibli portraits, huge amounts of internet spam, workslop... where is the value?

    • burroisolator 7 hours ago
      Why have spot H100 prices been going down then? It was roughly $3/hr a year ago and now it is closer to $2.2/hr.
    • lelanthran 3 hours ago
      > Each of the main providers could easily use 10x the compute tomorrow (albeit arguably inefficiently) by using more thinking for certain tasks.

      That's true for everyone with regard to any resource.

      The question is whether the 10x increase in resources results in 10x or more increase in profit.

      If it doesn't then it doesn't make sense to pay for the extra resources. For AI right now, the constraint is profit per resource unit, not number or resource units.

    • Mengkudulangsat 3 hours ago
      "The later versions of M365 copilot (or whatever it is called today) are wildly better than the original ones."

      I find AI agents work very poorly within the Microsoft ecosystem. They can generate great HTML documents (because it's an open source format maybe?) but for word documents, the formatting is so poor I'd had to turn it off and just do things manually.

    • ivape 7 hours ago
      BlackRock just bought a data center for 40bn last week. BlackRock. The animals that bought all the housing once. They must be stupid I guess.
      • pgwhalen 5 hours ago
        BlackRock did not buy “a” data center, it bought a data center company with 78 data centers. I have no comment on whether or not it was a good deal, but your framing is silly.
  • bdbdkdksk 11 hours ago
    Ed Zitron writes about this constantly: https://www.wheresyoured.at/the-case-against-generative-ai/

    All of the big players - Nvidia, OpenAI, Oracle, Microsoft - are in insane circular financing agreements that would make Enron executives blush.

    • mclanett 10 hours ago
      Wow this is quite a rant.

      However Zitron seems to have forgotten that Google exists or makes TPUs. He mentions Google only 10 times in the entire article, always in a minor way.

      • prasadjoglekar 9 hours ago
        Any reason to believe Google's unit economics on AI are any different than the other players here?

        And Google is an advertising company. Mostly in search, and increasingly dependent on YouTube. Everything else is a net money loser, including Waymo, Gemini etc.

        • x-complexity 5 hours ago
          > Any reason to believe Google's unit economics on AI are any different than the other players here?

          Only when it comes to their TPUs, and sometimes that one thing may just be the difference to push them over the hump.

          Per-token cost-wise, TPUs (& specialized processors in general) will beat GPUs every time. The efficiency difference between the 2 types is never to be ignored, & is likely why they can shotgun it everywhere.

          > And Google is an advertising company. Mostly in search, and increasingly dependent on YouTube. Everything else is a net money loser, including Waymo, Gemini etc.

          1) Each venture should be treated as a (relatively) isolated vertical slice

          2) 9 out of 10 times, a venture just doesn't break even. That's just the nature of the business.

        • asa400 7 hours ago
          Almost doesn’t matter what Google’s short term unit economics on AI are as long as their shareholders and board are OK with it. Google makes money hand over fist and can afford it. Microsoft is fine, Oracle is fine, TSMC is fine. These other shops are leveraged to the hilt, so they’ll be in a world of hurt if people stop buying, financing, or investing.
          • wmf 4 hours ago
            Oracle is going to get screwed if they build a bunch of data centers and the customers (mostly OpenAI) all declare bankruptcy.
          • scarface_74 4 hours ago
            Oracle is not fine. They are borrowing money hoping to get paid back by money losing OpenAI propped up by VC funding.

            No business is going to run workloads on OCI outside of ones running Oracle. They a They are a way distance fourth in cloud. I’ve been working in cloud consulting for five years including the first three directly at AWS (Professional Services). No one worried about having talking points about competing against Oracle.

            Microsoft, Google and Amazon have both internal products that can benefit from inference and cloud hosting.

        • scarface_74 5 hours ago
          You should listen to the latest episode of the Acquired podcast about Google.

          Google also has GCP and unlike OpenAI who is dependent on VC funding and Oracle who is borrowing money. Google throws off cash like crazy and self funds its infrastructure which is already better than everyone else’s

        • sidibe 8 hours ago
          Well there's no circular financing for one thing.
    • neffy 11 hours ago
      Feedback loops. Always with the feedback loops.
  • kelp6063 11 hours ago
    Unless the AI industry can figure out how to be profitable soon (to which basically nobody has a clear path to profitability besides maybe ad revenue) it's hard to see this not blowing up in a year or two. The bills for all of this are going to come due eventually and the AI CEOs can only convince investors to keep letting them burn billions for so long.
    • willis936 9 hours ago
      It's incredible how much money is being lit on fire without anyone having an answer to the question "how will you generate revenue". Meanwhile alternative energy discussions here are met with harsh criticisms of their bottom lines while they have some of the most firm demand of any industry. Society should be prudent with their investments, but only when it's used for R&D into essential stuff and not a bunch of toys for rich psychopaths?
      • ehnto 1 hour ago
        That's been the story for the last 20 years of VC culture, and the answer has so often been, ruin the service with advertising.
      • SchemaLoad 7 hours ago
        Their only answer is "if we invent AGI and fire everyone, the profits will be limitless".
        • mrwh 2 hours ago
          And yet, imagine it's 100 million jobs, at 100K per job. That's 10 trillion dollars a year, well worth the investment! Except that it won't be 100K per job that AI companies will capture, it'll be 2K. So that's not 10 trillion dollars a year, it's 200 billion. Which is about what a big tech company makes in advertising already.
  • mwkaufma 11 hours ago
    >> Cheerleaders such as Sam Altman, OpenAI’s boss, argue that the risks of underbuilding are at least as serious as those of overbuilding, because of the long-term economic potential of generative AI.

    Pure hucksterism.

  • melbourne_mat 58 minutes ago
    The market can stay irrational longer than you can stay solvent.
  • dnw 10 hours ago
    I wonder how much of this round tripping is because there are only a few companies that have the demands and can meet those demands...
  • kgwgk 10 hours ago
    https://www.bloomberg.com/news/articles/2025-10-07/oracle-si...

    Oracle Sinks on Report Its Cloud Margins Are Lower Than Expected

    Jeran Wittenstein October 7, 2025 at 6:06 PM GMT+2

    Oracle Corp. shares tumbled after a report that the software maker’s profit margin in its cloud computing business is lower than many on Wall Street have been estimating.

    While Oracle generated roughly $900 million in revenue from the rental of servers powered by Nvidia Corp. chips during the three months ended in August, the company only managed about $125 million in gross profit, the Information reported, citing internal corporate documents.

    • mNovak 9 hours ago
      * Oracle sinks 7%, after having jumped 36% earlier in September.
  • dgfitz 11 hours ago
    Sure seems like a combination of TINA and massive amounts of hope.
  • danielodievich 8 hours ago
    Last weekend we had dinner at a friend to celebrate their child's birthday. They work at OCI in a very senior position and were heading out next day to troubleshoot that exact datacenter in Abilene, TX next day, to presumably yell at various people about cabling and schedule and whatnot. They were not looking forward to it because a) TX and b) it's Abilene TX and c) the overall situation.

    We spoke quite a bit about this project, circular money and things and the impression I got is that OCI is just grabbing money while the perpetuum mobile is unrolling.

    I am looking forward to hearing how the trip went when I see them next.

  • neuroelectron 8 hours ago
    Cloud has failed (by becoming more expensive then on prem) so they're buying up everything in a last ditch effort to centralize compute. Really silly since all those GPUs will be obsolete soon.
    • ecshafer 7 hours ago
      Cloud was always going to be more expensive than on prem, that wasn't what was being sold. Cloud sells that they are able to give you high availability across multiple regions without having to do an expensive capital investment. Amazon/Microsoft/Google is selling the talented engineering for getting these data centers working around the world at a high level of availability to companies. Most companies like recurring costs compared to capital expenditures. Companies also prefer lower head counts and paying for services. It is BETTER from an MBA pov to pay Amazon to run a Data center since they are experts than for you to run a data center as a finance company.
      • gregw2 12 minutes ago
        > Most companies like recurring costs compared to capital expenditures.

        Actually big companies prefer capex to opex and cloud pushed them in the opposite direction of what they'd naturally prefer. But the other advantages you cite + hype overruled the liability of switching from onprem capex to opex.

      • solatic 1 hour ago
        > since they are experts

        This is the engineering perspective, not the finance perspective. As an engineer holding an MBA, I've made the argument countless times in BigCo to move from cloud deployments to on-prem. When you're a startup, you often simply don't have the cash on hand to make the capital expenditure to build out datacenter capacity, especially with an uncertain (but hopefully high) expected rate of growth. When you're a BigCo, the script flips; you have plenty of cash on hand and you want to improve overall profitability, which is done by using capital expenditures to reduce operating expenditures, i.e. funding datacenter build-outs to reduce cloud bills.

        > experts

        Companies can hire experts and can still out-source to colos if they prefer. This is a question of political will and risk analysis.

  • fragmede 8 hours ago
    [flagged]