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Bill Gurley and Brad Gerstner have a new podcast and discussed exactly this in their first episode, https://youtu.be/Wu_LF-VoB94?si=E1M0RmiKVN4FG9b9&t=523 (8:43)

"from a company's perspective it's like taking out of your left pocket and putting it in your right pocket ... I mean a big skeptic would say you're using your balance sheet to to drive your your income statement which you know should be a no-no"

It's very similar to the wash-trading pump & dumps common in the crypto space. Feed money back to yourself at inflated prices to make the line go up, convince dumber money to enter the market based on the line going up, cash out at their expense. Somehow it's illegal when a crypto company does it but not when a major tech executive does it.

It isn't.

Wash trading generates a fake image. Everyone knows this is happening. They are saying: we invested at this price, these companies are buying our stuff.

Your assumption is: the people making these investments are so clever...I mean, it looks really stupid...but they are so clever, they must be doing this to take advantage of other people.

Reality: the people making these investments are really that stupid.

Reality: they aren't creating money out of thin air, they are investing money into their customers...fine, but the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash and AI is no different).

(This should be obvious too, Microsoft and Google are doing this for defensive reasons...it is like a middle-aged man buying a low spec Porsche...no, his life isn't going okay now that he has a Porsche, he is just going to be miserable but inside a different car).

> they won't, every technological innovation has been an incinerator for cash

this sounds like you're saying that nobody has ever made huge profits off of technological innovations which seems to be heavily contradicted by the fact that I did not have to roll my stone wheel using a stick from my cave to work this morning.

> the bet is that their customers eventually make money (spoiler: they won't, every technological innovation has been an incinerator for cash

Wow.

Well said. Investing in customers is the opposite of wash trading: the goal is to create value.

And it’s probably better to look at it like a VC fund: the expectation is that most customers will fail, but if the next Adobe or Facebook or whatever comes out of the exercise and is heavily technically dependent on your cloud / AI infra, that covers a lot of lost investments.

I think you’re missing the point.

If I take $10 and give it to you for 10% of your company and you give it back to me to rent a room in my building I now own 10% of your company for $0 outlay and you get to use the room in my building for your business, and in these arrangement the room is rented at cost. Everyone wins in this arrangement. This isn’t stupid, this isn’t offloading capital into income. This is an efficient way to maximize my investment by effectively using existing infrastructure spend and boosting my investments cash flow position by reducing their infrastructure spend.

That illustrates exactly the point, though.

Normally when you rent a room for $10, it implies that the room is worth at least $10 to the tenant, and the opportunity cost to the landlord was < $10, otherwise the transaction wouldn't have happened. And similarly, if someone invests $10 for 10% of a company at $100 pre, they're assuming that the discounted cash flows of the company are worth at least $100. People who analyze financial statements and trade in markets assume this to be true - it's fundamental to the price discovery mechanism.

But if the actual cost to the tenant was $0, the value of the service might have been any number greater than $0. And similarly, if all the money in the investment comes back to the investor as revenue, the actual cost of their $10 investment wasn't $10, it was $0. You can't make inferences about what they actually value these services and investments at, because the prices were not set by a free competitive market, they were set by companies colluding (or cooperating, depending on framing) for mutual benefit.

We saw the same issue with all the food-delivery startups that were offering 6 free meals - they booked the revenue and used it to justify outlandish valuations, and they booked the promotion as a marketing expense, but the root problem is that consumers wouldn't buy the product at list price, they were only buying it because of the investor-funded promotion. Or with Groupon - it was economically unviable for the businesses that participated, but they wouldn't find that out until after their revenue could be used to justify the next funding round and cash out in an IPO.

Wash-trading is just the limiting case of this, where it's apparent to everyone that the economic value of the transaction is zero because there is no actual product being traded, but a self-dealing transaction is used to set a price that other participants in the market anchor off of.

The tricky part is that sometimes this tactic can be economically viable, and offering discounted or financed products is a way to get consumers to get over the activation energy of trusting a new product, and once they've converted they become regular customers of the normal product offering and go on to spend a lot more. This is the point of a sale, or a rebate, or a promotion, or a financing deal. Which I guess answers my original question about why it's legal here but not for crypto wash-trades: it can sometimes result in true economic value being provided, and it's difficult to prove malice instead of incompetence.

But the caution being offered in this thread is to not take revenue figures or valuations of AI startups or cloud providers at face value, lest you be the one who is incompetent.

I’m not sure I follow your logic. There is a market for, say, cloud computing services. If it helps you could see it as an exchange of cloud computing services for equity, but the reality is the cash invested likely was not 1:1 exchanged to cloud computing and they had optionality. That’s somewhat irrelevant, but it’s still a real truth. Any money used to purchase cloud services has real expenses and capital allocations associated, real economic value for the company who exchanged equity, and the investment still sits as an asset and liability. It’s hard to argue an AI model company derives no value from GPU hours, or Amazon derives no value from owning equity in and locking an AI model company into their platform and business relationships. This isn’t a wash trade, which literally has no economic value, and it isn’t fake revenues as there is a real exchange of economic value for both parties. The fact the exchange involves at cost services isn’t nothing - it magnifies the investment as otherwise they would have to purchase the services at a higher cost. The idea that reserved capital equipment and supporting services have no material cost or value to Amazon is on the surface false - they have a very real cost, both opportunity and capital, especially in a time of high end GPU shortage. The idea that reserved high end GPU at cost has no value for an AI company is absurd. The fact it was done as cash gives flexibility in how the investment is used, and the fact it counts as a tiny amount of aws revenues is not materially relevant to anyone.

These investments don't seem either dishonest or stupid.

Only a fool would buy compute capacity from Google (at least without a special deal), and Google needs apparent wins to sell GCE. They're paying with compute capacity for advertising. They're paying a lot less than they would otherwise be, since costs don't equal sticker price. Right now, AWS has 1/3 market share and Microsoft 1/4. Google claims 1/10th, but that's only by gaming numbers e.g. by including Google Workspace into figures. Now, they've got a massive amount of $$$ to keep those figures pumped up to maintain that 10% number.

Amazon wants a bigger moat, or at least doesn't want Azure eating its lunch in the near future due to a lack of a reasonable AI service (MS is leading here, due to the deal with OpenAI). It needs a reasonable AI service on AWS. It is nowhere close to being able to make one themselves. It's giving money so it can have one, and have one from a company it's part-owner of.

Thing is, both of these investments make absolute sense even without financial games, antitrust, incompetence, or much of anything else.

As a footnote, if I were Amazon, I'd be looking at player like Groq. That could leapfrog Azure + OpenAI for many uses.

A realist would say the money is spent somewhere and better on your platform. Once infrastructure is built it’s hard to offload, so the margin comes from future spend. But revenues are still revenues, and the capital spend is invested in capital growth to support the load from the investment.

CFO: "Don't care; line went up."

Next CFO: "Line went down due to previous CFO. Time for Layoffs."

Not sure why you’re being downvoted; maybe for the completely unnecessary ‘Next’? ;)

It’s a good idea for large companies to use their profit to stay profitable, and if it supports their cloud business…

Where it’s a No-No is in accounting: those should probably not be counted as “sales” but as gifts in nature or some particular category. Bill Gurley and Brad Gerstner are investors, so naturally, they balk when they hear that the documents they read, financial statements, have a creative take on reality. Still, I don’t think they think that lowers Google’s overall value. They just want that in a separate column.

Happened with ad revenue and all the app startups in 2010-2020.

That's what caused the 2002 crash. 99% of the revenues for internet companies came from other internet companies. When the easy money started drying up, revenues collapsed.

99%? Let's not forget the hardware suppliers (e.g. Sun, Cisco, and so many others) who sold hardware to startups and loaned them the money to buy said hardware. They then had hardware revenue to tell shareholders about as well as interest revenue and the NPV of the loan on their balance sheets.

What could possibly go wrong? We all know...and it did.

isn't that kind of like Toyota financing my car loan

Indeed it is and that approach nuked both GM and GE. As bombcar noted in a parallel comment though, it was even worse in the Internet crash.

I suppose in today's Bayes-obsessed world another lesson is: don't finance your customers' purchases if your company name is a two-letter acronym starting with G.

At this rate I’ll never get an Arleigh Burke :(

It's somewhat similar, but Toyota (hopefully) won't have all of its car buyers stop paying the loans at the same time.

It’s exactly the same thing. I don’t know why people think it’s conspiracy to provide financing with equipment sales.

What if you don’t have the same controls as a bank and lend to a lot of people who can’t pay you back?

In GE's case the finance side of an otherwise manufacturing business became so large that the tail wagged the dog.

GE’s decline wasn’t because they offered financial services. It's a textbook case of mismanagement of an overly complex business.

Tons of companies offer financing for products they manufacture just like car companies have done so since the 1920s — more than *100 years! — and in many cases longer than that. It’s not new. It’s not unusual. What’s different about this? The subject matter? The cloud-as-a-service component? How is it really different from support contracts? It’s really not.

Sitting around trying to make it sound like a manufacturer offering financing is some deep conspiracy is crazy talk, no matter how many times I get downvoted for saying it.

(Downvoting on hacker news is supposed to be used for deemphasizing poor comments not downvoting people you don’t agree with btw. This isn’t Reddit. The idea is to encourage high quality discussions not win popularity contests and we should endeavor to keep this community differentiated.)

I would love to see a coherent argument as to what’s so massively unique about providers financing their own equipment to their channels. I just don’t see it as being anything different from standard. Neither is investing in the most promising companies in your ecosystem unusual for Norge companies. These aren’t unusual things: they are well trodden paths used by many kinds of companies.

It's the dose that makes the poison. Drinking too much water will kill you by messing up your electrolyte balance, yet nobody says drinking water is unusual.

There were indeed plenty of missteps, but the imbalance due to GE Capital was the wrecking ball for the company.

> The effective end of GE Capital is the end of an important era for the former conglomerate.

> The company has been trying to become leaner and more profitable in recent years, selling off its appliance business in 2016, its NBC Universal entertainment unit in 2011 and its light bulb business in 2020, among other divisions.

> And while those businesses had a higher public profile than GE Capital, no business was more important to the conglomerate during its heyday than GE’s finance arm. It provided financing on many of its industrial products, such as jet engines and electric power plants, as well as a key source of financing for small business and consumers. It even became a major player in the subprime mortgage business.

> But when the housing bubble burst and the subsequent meltdown in financial markets in 2008, no part of the GE business was wounded more than GE Capital, and what had once been a key driver of the company’s success became an albatross...

(https://www.cnn.com/2021/03/10/investing/ge-capital-close-ai...)

Or "GE dismantles the business that ended its dominance a decade ago" referring to GE Capital: https://abc17news.com/money/2021/03/10/ge-dismantles-the-bus...

Or "How decades of bad decisions broke GE" which sounds like your basic thesis (and I agree there were many problems) but describes GE Capital as "the finance company that dealt GE a near-fatal blow during the 2008 crisis." https://money.cnn.com/2017/11/20/investing/general-electric-...

GMAC / Ally Bank likewise distorted GM, but the example of one company is enough for now.

But to generalize GE as a case study is still incorrect. They are an atypical example.

We can find any metaphor we want, cite one or two example companies like GE (and it was bad company management not the fact that they were in finance that sank them IMO — I was a customer of theirs and they were so poorly run), but it won’t make up for more than a century of the practice working across most major industries without problems. I’ve read several books about the GE failure and am widely aware of the problems, but disagree with the mainstream analysis. Nobody wants to pin it on the management but they deserve the criticism. Read * Lights Out: Pride, Delusion, and the Fall of General Electric* if you haven’t — it’s worth the time.

Don’t you agree that narrowing down the argument that financing your own product is bad because GE took themselves out with a finance division becoming too critical to their business and then blowing up their business with poor management choices to be overly specific as an example?

Broadly, private financing works, and works well.

Jeez, I feel like you’re arguing a point to make a point that nobody is contesting.

During the internet boom people accepted and even celebrated the vendor financing because it is a common mechanism without bothering to pay attention that the recipients were themselves not solvent. Sun, Cisco, Nortel and so many others were using this mechanism to juke the stats.

And I gave the GE and GM examples to show that it the same sort of thing can happen with major corporations too.

But nobody is claiming that it’s 100% inherently bad. It’s just you trying to refute this non-position.

Certainly not my intention to waste time or focus on issues that aren’t relevant like your insinuating. Let’s leave it here and keep it polite as I respect your point and appreciate the real effort to talk about it with me. I don’t want you to feel that way. :(

Be well and thank you.

We'll just increment the version number at the end of Web like we always have.

Finally time for Web4

It's been a few years of this all over SV with the pivot from "classic web 2" B2C by default for...close to decade now?

It may be brilliant, but in my book that sure sounds like it should be illegal and likely regulated as anticompetitive behavior.

I expect it isn't actually illegal today, they pay plenty of expensive lawyers to cover their ass, but I don't think a majority of the public would want this to be legal if they understood what was being done.

It certainly has a “too clever” vibe to it.

But, who is it anti-competitive from or to? I wonder if there’s evidence out there that the cloud providers are selectively investing in AI companies that use their clouds. That would be a little sketchy I guess. But if Amazon, Microsoft, and Google all pump up AI companies generally with the expectation that it’ll generally benefit their sector, that seems… fine, I guess? Or at least not anti-competitive.

It'd be anticompetitive to any newcomers in the hosting space, wouldn't it?

Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market.

That also doesn't get to a potential money laundering issue. Again I assume it isn't technically illegal accounting, but Microsoft sure seems to have functionally moved money from one side of the books to the other, delaying and reducing potential taxes they would end up paying.

> It'd be anticompetitive to any newcomers in the hosting space, wouldn't it?

> Fly.io recently launched a GPU product. If they can't afford to front $10B to OpenAI they're locked out of the market.

That seems like the first scenario I described. If MS was investing in OpenAI contingent on their using MS’s cloud, then yeah it seems obviously anticompetitive, right?

In this scenario, if the investment is contingent on OpenAI using MS’s cloud, that seems just blatantly anticompetitive.

If it is not, I don’t see any problem.

If MS selectively invests in companies that are already using their cloud services and hopes they stay by inertia… I dunno, seems grey.

> That seems like the first scenario I described. If MS was investing in OpenAI contingent on their using MS’s cloud, then yeah it seems obviously anticompetitive, right?

My understanding is that this is precisely how it was structured, that most of the investment was effectively in MS Cloud credits. If that is inaccurate then I'm not as strong on the anticompetitive behavior being an issue.

OpenAI choosing Azure is not anti-competitive. You can claim it is anti-competitive because the "smaller guy" was not chosen.

If Microsoft's investment came with strings attached pushing OpenAI to use Azure, how is that not functionally anticompetitive behavior (even if they found some legal gymnastics to keep it technically legal)?

But nothing stopping smaller guy to sweeten the deal no? It is the same thing why new entrants tend to offer lower prices and stuff like that. Nobody argues that new entrant to some market should offer something in order to compete with the established giant. Established giant cannot hire goons or suppress the competitor directly, like - "if you use the competitor, then you will lose access to our big store".

So, in this example, you don't see any problem with a market leader offering billions in investment earmarked for use in buying that market leader's products? Assuming that there is some level of economies of scale with regards to cloud computing, how would a new entrant to the market compete?

And is this not anticompetitive only because they used a massive pile of cash to corner the market? If so, why are mergers and acquisitions reviewed at all?

With regards to the accounting of it, are you okay with Microsoft being able to use this as a way to offset billions in profits today and effectively amortize those gains over a few years as OpenAI spends the cash on Azure hosting?

Forget the legal technicalities for a moment, would you as a citizen be okay with Microsoft being able to act this way? Do we want massive corporations able to block markets off as long as they can afford it, and hide away profits to avoid paying taxes?

> If so, why are mergers and acquisitions reviewed at all?

they are reviewed to check if it is lessening of the competition. Like if some new grassroots company decides to offer new OS, Microsoft probably won't be able to go and buy it. It also cannot pay other companies not to use this OS.

> Forget the legal technicalities for a moment, would you as a citizen be okay with Microsoft being able to act this way? Do we want massive corporations able to block markets off as long as they can afford it, and hide away profits to avoid paying taxes?

Acting what way? It is like asking if you are okay if somebody can afford something, you can't.

> It also cannot pay other companies not to use this OS.

Oh I'd assume they could pull that never if they chose to, at least in certain situations.

Just take the OpenAI / Microsoft deal as an example. If a $10B investment into a company comes with strings attached, say with board seats and an exclusivity deal to use Azure products, they just blocked out any other hosting service that could compete. If that is legally questionable but they can invest most of the capital as credits for Azure products, they've effectively done the same thing without it clearly being coercion.

For a new OS, Microsoft this spent decades building an ecosystem and marketshare in the enterprise space. MS could pretty easily make sure none of their services work on the new OS. They wouldn't be fully blocking the new OS out but it would make it an extremely difficult challenge.

> Acting what way? It is like asking if you are okay if somebody can afford something, you can't.

My understanding is that part of the OpenAI investment was in Azure credits. That may technically be legal, but it blocks any competition in the space and defers paying taxes on the value of those credits.

If MS simply made the investment and OpenAI chose to use Azure of their own accord, there's absolutely nothing wrong with that. If MS strong arms OpenAI into using Azure through a combination of strings to the funding and/or board seats, I strongly disagree with that.

> Just take the OpenAI / Microsoft deal as an example. If a $10B investment into a company comes with strings attached, say with board seats and an exclusivity deal to use Azure products, they just blocked out any other hosting service that could compete. If that is legally questionable but they can invest most of the capital as credits for Azure products, they've effectively done the same thing without it clearly being coercion.

Microsoft invested in OpenAI and OpenAI has become a huge success. That's all to it. They offered them a deal with azure credits, profits etc. and OpenAI succeeded. They could have failed and doubt anybody would be concerned about MSFT's deal with OpenAI...It is not like Microsoft forced OpenAI's hand there - they could have gone to Amazon.

> For a new OS, Microsoft this spent decades building an ecosystem and marketshare in the enterprise space. MS could pretty easily make sure none of their services work on the new OS. They wouldn't be fully blocking the new OS out but it would make it an extremely difficult challenge.

They could but they won't due to their high market share and public outrage. That's the whole point. If Microsoft tried to ask for 30% from any Windows app installation then would be in a huge legal trouble immediately. Hell, even bundling Windows Media Player led to some fines...I can have any store on Windows and I don't need to pay Microsoft a thing but if MSFT will try to use Windows API to make Steam work worse than Windows Store, that would cause legal trouble for them.

> My understanding is that part of the OpenAI investment was in Azure credits. That may technically be legal, but it blocks any competition in the space and defers paying taxes on the value of those credits.

But here is the thing - OpenAI went to Microsoft and agreed to that deal. They could have gone to AWS or GCP.

This inter-company accounting gimmick should be eliminated so it does not increase reported revenue: https://www.accountingtools.com/articles/what-are-intercompa...

Additionally, such an investment effectively makes it cheaper to acquire the company down the line (since they already own some percentage of it). In such a scenario their investment would both flow back as revenue and reduce to the eventual cost of acquiring such a company.

Yes we’ve traditionally called it a Ponzi scheme or pyramid. We are in the part of the cycle where no one actually has to make money from AI. We’ve been here before with Uber and WeWork. All these free queries aren’t free and run on incredibly expensive hardware. The final endgame is a Dyson sphere around the sun so that we can ask ChatGPT-XX if it’s raining outside and the owners of the AI and chip companies blast off to their colony on Mars.

How is it a Ponzi scheme or pyramid?

You use later stage investments to pay off the earlier investors.

Eventually, you go and IPO and the general public cashes out the later investors and then the stock goes to zero.

Is the plan or expectation of the stock to go to zero (or otherwise dropping precipitously)? If not, I do not see the value in labeling it a Ponzi scheme.

If there exists a business plan and the bet is to invest in something that provides utility, then it seems like any other investment in any other business.

>because the "investment" is guaranteed to flow back in as cloud revenue

But it can't flow back in as profit. Cloud providers are giving away GPUs for free in a time when GPUs are scarce and could be rented out for a premium. This isn't as free of a scheme as you make it sound.

Who cares about profit if you’re growing revenue 100% yoy as a megacap

Because it does not grow revenue long term.

> These investments not only have no stipulations about how the funds are used, but often aren't used for the business at all - instead directly paying out founders/employees.

Pay for employees is a business expense.

One additional factor is you need to beg for GPU capacity from cloud providers, so they are investing in them, and also giving them preferential capacity over companies they don’t invest in.

I'm not sure I would call it brilliant. I mean, it is, but it's also SOP.