Better Offline - Microsoft Cuts The Power To AI

Episode Date: March 12, 2025

In the first of this week's two-part series, Ed Zitron walks you through how Microsoft pulling back from over a gigawatt of compute capacity is a dark omen for the so-called AI Revolution.  --- LINKS: https://www.tinyurl.com/betterofflinelinks Newsletter: https://www.wheresyoured.at/ Reddit: https://www.reddit.com/r/BetterOffline/  Discord: chat.wheresyoured.at Ed's Socials: https://twitter.com/edzitron https://www.instagram.com/edzitron https://bsky.app/profile/edzitron.com https://www.threads.net/@edzitronSee omnystudio.com/listener for privacy information.

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CallZone Media. Hello, you. It's better offline. I'm your host, Ed Zit. on. Now, I've talked about the pale horses of the AI apocalypse in the past, and these are the events that signify that the generative AI era is coming to an end, and the subject of this episode and its second part, well, I believe represents the biggest paylist horses of the entire flock.

So on February 21st, analyst TD Cohen revealed that Microsoft had cancelled leases, and I quote, totaling a couple hundred megawatts with at least two private data center operators across multiple U.S. markets canceled. The report also detailed how Microsoft pulled down. back on converting negotiated and signed statements of qualifications, SQQs, which it added was precursors to a data center lease, so effectively the first step before you really agree to something, what the last step, I guess. Although the analyst, which is part of the TD Bank company, added it was unclear whether Microsoft might convert these SQQs in the future, these generally closed

to 100% of the time according to them. Cancelling these was effectively rather unusual. Now TD. also added that Microsoft was reallocating a considerable portion of its projected international spend to the US, which suggests to D.D. Cohen that there was a material slowdown in international leasing for Microsoft. But one crucial, teeny tiny part of the report was missed by just about everybody. I'm going to read directly from the report, and you'll probably be able to tell from the tone of my voice which the most pertinent part is. As we highlighted in our recent takeaways from PTC, the Pacific Telecommunications Council Conference, We learned via our channel checks that Microsoft, one, walked away from multiple 100-plus megawatt

deals in multiple markets that were in early to mid-stages in negotiations, two, let one gigawatt of LOIs on larger footprint sites expire, and three walked away from at least five land parcels that it had under contract in multiple Tier 1 markets. What T.D. Cohen is saying is not just that Microsoft cancelled some data centers, but that Microsoft also effectively cancelled over a gigawatt of data center operations on top of the previously reported multiple 100 plus megawatt deals. If we add in the land under contract, which is indeterminate based on what TD Cohen has said and the deals that were in flight, the total capacity likely amounts to even more than a gigawatt. For some context,

data center dynamics reported that Microsoft had five gigawatts of data center capacity in April 2024, saying that Microsoft had also planned to add one gigawatt of capacity by October 2024 and another one and a half gigawatts of capacity by the first half of 2025. Based on this reporting, one can estimate that Microsoft is somewhere between six and seven and a half gigawatts of capacity at this time. As a result, based on TD Cohen's analysis even, Microsoft has, through a combination of cancelled leases, pullbacks and statements of qualifications, cancellations of land parcels, and deliberate expiration of letters of intent, that's those LOIs. They've effectively abandoned data center expansion, equivalent to over 14% of their current capacity. It's completely

bloody insane. And this story just kind of sat there. It kind of knocked the market's confidence, but I don't know. I'm a lot more worried about this than I think people are, and really, I don't like telling people how to feel, but this kind of worries me. Okay. Now, I've thrown a lot of new terminology at you, but before we move on, let's explain some terms, because they're essential to understanding why this is all such a big deal. First of all, Letter of Intent, or L-O-I. In this context, is the statement that an entity intends to lease or buy land or power from a data center. These can be binding or non-biding, A letter of intent is serious, though, and walking away from one is not something you do idly.

It's not like not answering an email. Now, we'll go on to SQQ's statements of qualifications. These set the terms and conditions of a lease. While they do not themselves constitute a lease, they convert into sign leases, as I mentioned, at an almost 100% rate, according to D.D. Cohen, and I generally use as a signal to the landowner to start construction. Basically, they're the green light before the green light. As for Tier 1 markets, these are markets for hyperscale growth,

helped by favourable conditions like power, land and cabling. From what I can tell, there's no fixed list of which cities are Tier 1 and which aren't, but they include obvious candidates like London, Singapore, as well as Northern Virginia, which is the largest hub of data centers in the world. Finally, we're talking power, megawatt and gigawar. This one is really important, but it's also really confusing. Data center capacity is measured not by the amount of computations the facility can handle, but rather by power capacity.

And that makes sense, because power capacity is directly linked to the capabilities to the facility, with more power capacity allowing for more servers, or more power-hungry chips, of course. And because chips themselves are constantly getting faster and more power-efficient, power makes a little more sense. If you mentioned in terms of computations per second, you'd likely have a number that fluctuates as hardware is upgraded and decommissioned. When you hear megawatt or gigawatt in this episode, assume that we're talking about capacity and not power generation, unless I say otherwise. Now, with that out the way, let's talk more about this report.

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and the largest hyperscalular facilities can easily cost several billion dollars, meaning that these moves are extremely forward-looking. You don't just build a data center for the demand you have now, but for the demand you expect further down the line. This suggests that Microsoft believes its current infrastructure and its likely scaled-back plans for expansion will be sufficient for a movement that Sachinadella once called a golden age for systems. He did that less than a year ago.

To quote T.D. Cohen again, the magnitude of both potential data center capacity Microsoft walked away from and the decision to pull back on land acquisition, which supports core long-term capacity growth, in our view, indicates the loss of a major demand signal that Microsoft was originally responding to, and that we believe the shift is in their appetite for capacity is tied to open AI. To explain here, TD Cohen is effectively saying that Microsoft is responding to a major demand signal, and said major demand signal is saying, you do not need more data centers. said demand signal that Microsoft is responding to, in T.D. Cohen's words, is its appetite for capacity to provide servers to open AI. And it seems that said appetite is waning and Microsoft no longer wants to build out data centers for America's most swagged out AI guy. Now, I say that kind of as a joke, and I do think that he's more swagged out than Mark Zuckerberg. Mark Zuckerberg's trying too hard. However, Sam Ortonman is more damp than Mark Zuckerberg, so ultimately Zuckerberg wins. Now, I want to make it clear that Microsoft is effectively cutting its data set expansion by over a gigawatt of capacity, if not more, and it's impossible to reconcile these cuts with the expectation that generative AI will be this massive transformative technological phenomenon. I believe that the reason that Microsoft is cutting back is that it does not have the appetite to provide further data center expansion for OpenAI, and it's having doubts about the future of generative AI as a whole. If Microsoft believed that there was a massive opportunity in supporting

OpenAI's further growth, or that it had massive demand for generative AI services, There'd be no reason to cancel capacity, let alone cancel such a significant amount. These moves also suggests that Microsoft is walking away from building and training further large frontier models, like Chat GPTs, GPT 4.5 now, and from supporting doing so for others. Remember, Microsoft has significantly more insight into the current health and growth of generative AI than any other company. Remember, they have full access to all of OpenAI's tech, probably the future stuff too, not that there's much. They know all their research too. Microsoft knows something we don't. As OpenAI's largest backer and infrastructure partner and the owners of the server architecture

where they train their ultra-expensive models, not to mention the largest shareholder in OpenAI, Microsoft can see exactly what is or isn't coming down the pike, on top of having a view into both the sales of its own generative AI-powered software, such as Microsoft 365 copilot, and sales of both model services and cloud compute for other models run on Microsoft Azure, which is their cloud platform. In plain English, Microsoft, which arguably has more data than anybody else about the health of the generative AI industry and its potential for growth, has decided that it needs to dramatically slow down its expansion. Now, to be clear, this expansion, I really am hammering this home a lot, but I need you to understand this, is absolutely necessary for generative AI to continue evolving and expanding, even if it only does so in ways that kind of do the same thing again and again. Now, before we move on, I want to make it clear that I'm not saying that Microsoft has stopped building data centers. I've said it a few times, but these projects take years, three to six years to complete, and a far, far in advance with their planning.

And Microsoft does have a few big projects in the works. One plan 324 megawatt Microsoft Data Center in Atlanta is expected to cost $1.8 billion, and as far as I know, this deal is still in flight. However, and this was cited separately by T.D. Coe. Microsoft has recently paused construction on parts of its $3.3 billion data center campus in Mount Pleasant, Wisconsin. While Microsoft had tried to reassure locals that the first phase of the project was on course to be complete on time, its justification for delaying the rest of it was, well, not brilliant. And it was to give Microsoft an opportunity to evaluate, and I quote,

the project's scope and recent changes in technology and consider how this might impact the design of its facilities. Oh, buddy, that's not good. You don't want it. No one evaluates the scope and then goes, oh, actually the scope is great, I love it. nor do they think about impacts and go, oh, let's do more. No, no, no. Anyway, the same register article I'm citing here adds that, and I quote, the review process may include the need to negotiate some building permits, potentially placing another hurdle in the way of the project. The register did add that Microsoft said it expected to complete one hyperscaler data center in Mount Pleasant as originally planned, though its capacity wasn't available. Arguably, Microsoft would expand its data center infrastructure anyway. As more stuff moves to the cloud and our dependence,

grows on it, Microsoft and other providers need to build capacity. The organic growth is natural and sadly inevitable. However, Microsoft's plans for data center expansion were far, far in excess of that natural growth, and perhaps we're seeing a pullback from those dated extravagances into something perhaps a little more reasonable. Now, I've talked a lot about megawatts and gigawatts and if you're not in the data center business, and you should be, the parties are an absolute laugh. This can all seem a bit abstract, so let's put it into context. Without context, it's hard to understand how big and 100 megawatt data center is. These are some of the biggest.

According to the International Energy Agency, small data centers can consume anywhere between 1 and 5 megawatts. These are, for the most part, average-sized facilities. Perhaps not for cloud compute giants, but for other companies, it's kind of part for the course. 100 megawatts, by comparison, is huge. It's the equivalent of the annual energy consumption of between 350,000 and 400,000 electric cars.

And I know some sort of pedant is going to say, it's not the same. thing. Shout out of fuck up. Go outside. Stop listen. Go outside. Go outside now. Go do something. Anyway, although there are others that will likely dwarf what we today consider to be a large facility, Meta is in the process of constructing, for example, a $10 billion data center campus in Louisiana with a proposed two-gigawatt capacity. Still, whatever way you cut it, and a 100-megawatt facility is big, and it's a big long-term investment. Cushman and Wakefield's 2024 Global Data Center market comparison gives some chilling context into how significant Microsoft's pullback is.

A gigawatt of data set of capacity is roughly the entire operational IT load of Tokyo, which has a 1.08 gigawatt capacity, or London, 996 megawatts, or the Bay Area, which only has 842 megawatts. These are actually very large. It's just that Microsoft got rid

of so much more. And again, the total figure of cancelled or abandoned capacity is likely far higher than a gigawatt. That number only accounts for the letters of intent that Microsoft allowed to expire. It doesn't include everything else, like the two data centers it already killed, or the land parcels it abandoned, or the deals that were in early to mid-stages of negotiation. Imagine walking away from two London's or two Tokyo's of capacity in it not being a massive deal. This is a huge, flippin deal.

Microsoft is not simply walking back some future plans. It's effectively cancelling what it loudly insisted was the future. If you think this sounds hyperbolic, consider this. London and Tokyo are respectively the biggest data center markets in Europe and Asia, according to the same. Cushman and Wakefield report. Cancelling city's worth of capacity at a time when artificial intelligence is supposedly revolutionizing everything certainly suggests that artificial intelligence isn't really revolutionizing anything. Now, one other detail in T.D. Cohen's report really stood out to me. While this pullback in Microsoft's data center leasing, it's also

seen a commensurate rise in demand from Oracle related to the Stargate Project, a relatively new partnership of up to $500 billion. Stop saying it's $500 billion. To build. To build a massive new data centers for AI, specifically for one company, led by SoftBank and, of course, OpenAI, with investment from Oracle and MGX and a hundred billion dollar investment fund backed by the United Arab Emirates. Open AI has committed $18 to $19 billion to the Stargate project. Money doesn't have, meaning that part of the $25 to $40 billion that they're raising at the moment will be committed to funding these data centers unless, as I'll get to later, Open AI raises more in debt. leading the round is SoftBank, which is also committing $18 to $19 billion,

as well as creating a joint venture fund called SB OpenAI Japan to offer OpenAI services to the Japanese market, something that I thought was already happening, as well as spending $3 billion annually to use OpenAI's technology across its group businesses, according to the Wall Street Journal. In simpler terms, SoftBank is investing as much as, I think, it's going to be like $30 billion in Open AI, then spending another $3 billion a year on software that only loses money and still who, hallucinates and shows no sign of getting meaningfully better or more reliable. Well, a soft bank actually sees value in OpenAI's tech or whether this purchase deal is a subsidy by the back door is open to debate. Given that $3 billion is equivalent to OpenAI's

entire revenue from selling premium access to chat GPT in 2024, which included some major deals with the likes of Price WaterhouseCupers, I'm inclined to believe the latter. Even then, how is it feasible that soft bank can continue paying? To get the deal done, Microsoft changed the terms of its exclusive relationship with OpenAI to allow it to work with Oracle to build out further data centers full of GPUs necessary to power OpenAI's big, shitty, unprofitable and unsustainable models. The OpenAI Oracle's Stargate situation was a direct result, according to reporting from the information, of OpenAI becoming frustrated with Microsoft for not providing it with servers fast enough, including an allotment of 300,000 of

NVIDIA's GBT 200 chips by the end of 2025. For what it's worth, the Wall Street Journal reports that Microsoft was getting increasingly frustrated with OpenAI's constant demands for more compute. The relationship between the two entities had start to fray, with both sides feeling kind of aggrieved. This, combined with Microsoft's data center pullback, heavily suggests that Microsoft is no longer interested in being OpenAI's infrastructure pay-pig, long-term at least. After all, it was, if it was, I mean, it fund and support Open AI's expansion rather than doing the literal opposite. And you have to wonder if when that whole non-exclusive thing came along, whether Microsoft, was kind of like, no, no, you couldn't possibly, like the papers already at the pen.

They've already got a stamp with Sam Wormann's signature. Oh, don't sign it. It would be so bad. No, I really don't. I don't think that Microsoft's too cut up about that. Another podcast from some SNL late-night comedy guide, not quite. Unhumor me with Robert Smigel and Friends. Me and hilarious guests from Jim Gaffigan to Bob Odenkirk to David Letterman,

help make you funnier. This week, my guest, SNL's Mikey Day and head writer Streeter Seidel, help an a cappella band with their between songs banter. There's the worst singer in the group. The worst? Yeah. Me.

Is there anything to the idea that because you're from Harvard, you only got in because your parents made a huge donation. The yard birds, right? That's the name. The Harvard Yard. But they're open to change. Do you have a name suggestion? We're open.

Since you guys are middle aged. One erection. Listen to human. me with Robert Smygel and Friends on the IHeart Radio app, Apple Podcasts, or wherever you get your podcast. Hulmer me. I need some jokes to make me seem funny. Run a business and not thinking about podcasting, think again. More Americans listen to podcasts than ad-supported streaming music from Spotify and Pandora.

And as the number one podcaster, I-Hart's twice as large as the next two combined. So whatever your customers listen to, they'll hear your message. Plus, only IHeart can extend your message to audiences across broadcast radio. Think podcasting can help your business. Think IHeart. Streaming, radio, and podcasting. Call 844-844-I-Hart to get started. That's 844-844-I-Hart.

There are times when the mind becomes a difficult place to live. This is David Eagelman with the Inner Cosmos podcast, and for Mental Health Awareness Month, we're dedicating a series to understanding the mind when it struggles. I'm joined by doctors, researchers, and those with lived experience. We'll talk with singer-songwriter Jewel about anxiety. I started living in my car, and then my car got stolen. I was shoplifting.

I was having panic attacks. I was agoraphobic. And making it through hardship. To be present is a learned skill, and it's hard to be present. We'll talk with John Nelson about clinical depression and the brain implant that saved his life. What I learned is that procedure made me happy because I'm disease-free. And we'll talk with leading experts like Judd Brewer about anxiety and John Hirschfield about obsessive-compulsive disorder

and the science of how the brain can change. This is a month of deeply personal and honest conversations about what happens when the brain goes off course and what we can do about it. Listen to Inner Cosmos on the IHeart Radio app, Apple Podcasts, or wherever you get your podcasts. For one, it's Ryder Strong and Will Ferdell from PodMeets World. And now the Pod Meets Twirled podcast.

We're two men who were completely clueless to reality TV, who now have covered Dancing with the Stars, traitors, and we're gearing up for the season finale of Survivor. So yeah, now we're experts. I know we annoyed a lot of our listeners by our severe lack of survivor knowledge. That is the point of the show. I'm just going to remind you.

I have watched some Survivor. I obviously haven't watched enough. Did people not like it? Yeah. Just because we? Yeah. We'll be recapping the big conclusion in the 50th season

from the final attempts at gameplay to the desperate pleas of finalists to a bunch of ha, hoo. Ha ha, who. Again, we are experts. So make sure to tune in to PodMeets Twirled for all our Survivor 50 takes. Listen to PodMeets Twirled

on the IHeart Radio app, Apple Podcasts, or wherever you get your podcasts. And here's a question for you. If generative AI had so much demand, why is Microsoft canceling data central contracts? Why is Microsoft Oracle's largest customer as of the end of 2023, allowing soft bank and open AI to work with Oracle to build the future rather than Microsoft? As mentioned previously, T.D. Cohen specifically noted in its report that Microsoft's shift in appetite for capacity was tied to Open AI, which, as I've said already, heavily suggests that Microsoft is at best less invested in the future of the company, a statement confirmed by the

information, which adds that Microsoft have been trying to, and I quote, lessen its reliance on open AI technology as they increasingly compete in selling AI products. Well, at worse, this situation could suggest that Microsoft is actively trying to dump open AI and is having questions about the fundamentals of this industry writ large. In very plain terms, Microsoft, despite its excitement around AI and its dogged insistence that it's the future, has cancelled data center leases of over a gigawatt out of other data center infrastructure, Doing so heavily suggests that they do not intend to expand further or at least to the extraordinary levels that they had initially promised. I know I'm being kind of repetitive.

I know that I'm saying some of these things repeatedly and you might think why. I need you to understand how significant this is, because this did not get covered enough. The coverage of this was dog shit. I'm saying it frankly, everyone missed this detail. I am just one guy. I do a podcast and a newsletter and I run a PR firm. Why am I the person every, not every time, but it just drives me a little insane because this is, this was sitting at, how many reporters actually read this report too? This is what drives me insane with my work, but I really do enjoy it.

All right, while Microsoft has reiterated that it intends to spend a ridiculous $80 billion in capital expenditures on AI in 2025 per CNBC article, it's unclear how it intends to do so if it's pulling back on data center expansion at such a large scale. provided no tangible explanation or elaboration as to how it might do so. While hardware upgrades could account for some of those CAPEX, it would be nowhere near the $80 billion figure. Again, hyperscalor data centers aren't cheap. They're massive billion dollar or multi-billion dollar ventures. Microsoft, according to CNBC, also leases data center capacity through Corweave and other providers, though at that point the report has stopped being curious enough to ask how much, or who those other providers might be. Now, luckily, with the power of research, I found that the information reported that Microsoft plans spend about $10 billion rent in Corweave service between

2023 and 2030, which was also reported by CNBC and otherwise. Anyway, planned, past tense being the operative word, because last week we learned that Microsoft plans to scale back its purchase of capacity from Corweave. Corweave is, as you'll find out in a future episode and newsletter, probably before that, they're a very odd company, which is closely tied to another company called Core Scientific, which it actually rents service from. And that company, exited Chapter 11 bankruptcy only last year. CoreScientific's financial statements, by the way, are very confusing. They're a mess, and it mostly makes its money not from selling high-performance computer

services, but from mining Bitcoin. It's a weird relationship, and it's weird a still that Microsoft is even entangled with a company connected to Core Scientific. But again, that's a future episode, future newsletter, future panic attack that I'll give myself as I read S-1s all day. Moving on, Microsoft also added in a comment to CNBC in the same article that it continues to grow at a record pace to meet customer demand. Okay, excuse me, what customer demand?

What customer demand? What is it? What is the customer demand? What is going on? Microsoft said back in April 2024 that AI demand was exceeding supply, even after a 79% surge in capital expenditures, and CFO Amyhood sent in their next quarterly earnings in July 24, that demand remained higher than Microsoft's available capacity.

On its most recent January 2025 earnings score, Beau Amy Hood once again said, as your growth included 13 points from AI services, which grew 157% year over year and was ahead of expectations, even as demand continued to be higher than our available capacity. Riddle me this, Batman. Why does a company that keeps talking about having demand that exceeds capacity decide to cancel multiple data centers, which collectively account for a significant chunk of its existing capacity? I don't know. Let's see what Microsoft had to say when asked a week or two ago. Thanks to the significant investments we've made up until this point, we are well positioned to meet our current and increasing customer demand.

Last year alone, we added more capacity than any prior year in history. While we may strategically adjust our infrastructure in some areas, we will continue to grow strongly in all regions. This allows us to invest and allocate resources to grow areas for our future. The fuck are you talking about? Sounds like Microsoft built too much capacity and, in fact, has yet to see the customer demand that actually could reach it. In fact, a couple weeks ago, Microsoft's CEO, Satchinadella, said, a podcast interview, that one of the things is that there will be, as a result of data center expansion related to AI, overbilled. Why is the CEO of Microsoft saying that if nothing's changed?

Microsoft also in late January said it had $13 billion in annual recurring revenue from AI. And by the way, that's revenue. That's revenue. It's revenue. It's not profit. And on top of that, it's not like they've made $13 billion. They're multiplying a month's revenue by 12. By the way, AI is also not a line item on Microsoft's earnings, meaning that all of this is just related revenue put into a catamari and rolled around by Satchinadella picking up chairs and shit in the office. Either way, this is a piss-poor amount that works out to about $3.25 billion a quarter. These are mediocre numbers, their Bush League, and Microsoft's Data Center pullback

suggests that they're not going to improve. But wait, wait, or perhaps Microsoft's pullback has something to do with Stargate, OpenAI's big infrastructure project. In fact, I think that might have something to do with it a great deal. Let's take a look. According to the information, OpenAI plans to have Stargate handle three quarters of its computing needs by 2030, like they'll make it, which heavily suggests that Microsoft cancelling so much capacity is on some level linked to OpenAI's future plans and not being part of them. While the information reports that OpenAI is still forecasting to spend $13 billion in 2025 and as much as $28 billion in 20208 on Microsoft's cloud compute, In addition to whatever capacity it gets from Stargate or Oracle, one has to wonder how it intends to do so if it needs capacity that Microsoft isn't building and doesn't have.

And these are two huge numbers, by the way. For context, $13 billion is about 10% of Microsoft's cloud revenue in the 2024 fiscal year, though it's unclear whether Microsoft counts OpenAI's compute spend as its revenue. Nevertheless, I got some real concerns about whether Open AI is even capable of expanding further, starting with a fairly obvious one. Open AI's only source of money, SoftBank, the world's worst tech investor, and the only company in the world better at incinerating huge piles of cash than Open AI, well, they got some money issues that I'll get into. And funnily enough, that is going to be the topic of the next episode. I'm not convinced that Microsoft's pullback is driven by Stargate, largely because I don't think Stargate, at least with the current spending goals and capacity targets, is actually viable. The real motivations, I believe, have far more to do with the fact that Microsoft is recognizing that maybe it got generative AI and a large part of its future, all wrong. See you in the next episode.

Thank you for listening to Better Offline. The editor and composer of the Better Offline theme song is Mattosowski. You can check out more of his music and audio projects at Mattisowski.com. M-A-T-T-O-S-O-S-K-I.com. You can email me at E-Z at Better Offline.com. or visit betteroffline.com to find more podcast links and, of course, my newsletter. I also really recommend you go to chat. Where's YourEd.com to visit the Discord and go to our slash Better Offline to check out our Reddit.

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