Monologue: What The Hell Are The Hyperscalers Doing?

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Superstition, fear, and jealousy. Welcome to this week's Better Offline Monologue. I'm your host, Ed Zitro. Better Offline as ever. Please subscribe to the newsletter. We're running a one year anniversary deal right now. The link will be in the episode notes and we're giving you 10 bucks off the annual rate for life. And even if you die and come back to life, I'll give it to you anyway. The deal runs through midnight on Sunday. But if you happen to hear this after this point, email me at ezetteroffline.com or ez betteroffline.com for the British and Canadians in the audience and I'll sort you out. I'm generous like that and I love my premium mates. Really some of the best analyst work out there. It's very deep. I've got the terminal going now, pulling all sorts of data. The many numbers I read every week are driving me truly insane. And with that in mind, today's monologue starts with a simple question. What the fuck are hyperscalers doing now? I realize I've asked this question maybe 100,000 times in the last two years, but it's begun to get so incredibly stupid that I'm actually a little exasperated. McKinsey spawn and Google CEO Sundar Pichai announced in Wednesday's earnings that Google would raise its year end capital expenditures to somewhere between $195 billion and $205 billion, after burning $80.6 billion in the first half of the year. And this suggests that Google will spend another $114 billion by the end of 2026. They're going to be doing like 55, 60 billion dollars a quarter. It's fucking insane. It's fucking stupid. I'm sorry for swearing, but it's absolutely deranged. What are you doing Sundar? You've already spent $288 billion in CapEx since 2022, and all you've got to show for it is Several also ran LLMs and one indeterminately large customer in Anthropic, who you've also invested $13 billion in. Now one answer might be that Anthropic helped juice Google Cloud's growth by 82% year over year in this quarter. But considering that Google doesn't actually break out, how much of that is from AI or from Anthropic or really from anything? It's difficult to say what exactly this other than turning its free cash flow negative for the first time since Google went public. While I can't say for sure how much Anthropic is spending, I do believe it's taking up the vast majority of Google's AI infrastructure and representing most of its cloud growth. Google Cloud was, up until fairly recently, the last year or so, a much smaller business than Microsoft Azure or Amazon Web Services have been growing somewhere between 22% and 30% year over year, hitting 33.9% year over year growth in the third quarter of 2025. That very same quarter, Google and Anthropic Announced a deal to expand its use of TPUs, which is Google's special GPUs in a contract worth, and I quote, tens of billions of dollars, mysteriously. Can't imagine how Google's next three quarters of cloud revenue growth showed 47.7%, 63.4% and 82.1% year over year growth. Whatever could that be? Where did that come from? I can't work it out. Can you, dear listener?

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What?

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What could it possibly. It's anthropic. It's obviously anthropic. Except in those same quarters, Google's capital expenditures went up 95%, 107% and 100% year over year, absorbing every dollar of cloud revenue and then some. In fact, Outside of the fourth quarter of 2024, Google's capital expenditures have outpaced cloud growth by at least 12% year over year for two goddamn years. And if your pushback is, well, Google spending that capex on something else. No, they're not. They're not. Maybe they got a couple Billy coming in from Google workspace and cucking their various subscribers with annoying things. It's coming from anthropic. Google is not making that money from Gemini. Your ass must be crazy if you think that's. That's the point. But all of this begs the question, when exactly does all of this pay off? How does it pay off? What does the payoff even look like? And why am I one of the few people asking these questions? Hyperscalers have now spent, I estimate, about $1.1 trillion. I haven't seen Amazon and Microsoft's quarters yet, but I'm going to guess they spent a good amount on capex. They now spent 1.1 trillion bloody dollars on capital expenditures. And when you ask them to tell you how much revenue they made from said expenditures, they look at you like that meme of Brendan Fraser from the whale. Anyway, here's a fun fact for you. Thanks to my own reporting on OpenAI's audited financials, we know that it spent $17.2 billion on Microsoft Azure in calendar year 2025, a year when Microsoft's Intelligent Cloud segment made $120.4 billion in revenue. The segment grew as a result, 26% year over year. I'm a curious little critter. So I ran the numbers and OpenAI's revenue represented 14.3% of all Microsoft's cloud revenues for that period. And to be clear, it's calendar year 2025. They have a fiscal quarter thing. But I went and worked it out. But this means that OpenAI's money represented 18% of the year over year growth of Microsoft's cloud. Without it, their cloud revenue growth was a mere 8% year over year. That's pathetic. That's abominable. That's barely keeping up with inflation. That's dogshit. Satya. Satya. You should be ashamed of yourself. Satya, come on my show so I can ask you very reasonable questions. I'll be nice, I swear you won't. You're scared just like the rest of them. Just like Clammy Samuel1 Clamule, your public relations people said you're too scared to speak to me. Well, they said you wouldn't speak to me and I know you're scared. Same with weird Dario. Where are you boys? You're too scared of better off lime. Anyway, enough of the Trump voice though. There is actually a reason that hyperscalers are still spending all that CAPEX, OpenAI and Anthropic allow hyperscalers to boost growth by feeding their own money back into their businesses. A short term solution to the long term problem of the end of the era of hypergrowth. One of the reasons they're so shy about AI revenues is that they know it'll become obvious where those revenues are coming from. Two unprofitable and unsustainable AI labs and a little trickle, little spurt from AI services they dump on their enterprise customers through confusing subscriptions, upsells and just adding AI to random things and being like look folks, don't we love this? Don't you all love this, you little shits. And hyperscalers also know that the second they cut their capex spend, the AI trade unwinds. If Microsoft, Google, Amazon and Meta aren't buying hundreds of billions of dollars of GPUs a year, that means Taiwanese server manufacturers like Quanta and Hon Hai won't sell as many serv servers and thus won't need as many GPUs. Broadcom and Nvidia won't need as much high bandwidth memory for those TPUs and GPUs and data center speculators across the world will suddenly realize that they conflated hyperscalers being stupid with their money with the existence of massive amounts of demand for AI compute. Put another way, hyperscalers are doing kayfabe to keep the crowd riled up, but everybody's slowly working out that the wrestlers aren't really hitting each other and everything is scripted. I also should add I can just anticipate I'm going to get an email from someone being like, well, actually this is good. The capital expenditures are good because it showed growth even though it's short term. That's a silly, silly perspective to take, considering they're feeding all the revenues back into the business in the capex for stuff that won't be useful in the future. Mathematics, my friend. Try it sometime. Anyway, it is a funny old time for me right now, because I feel like I'm on three or four podcasts or TV shows or interviews a week as the system appears to be trying to cover its arse by having me on to explain stuff I said two years ago, but a little more insistently and clearly than before. While the mainstream media seems hesitant to fully commit to the graveyard smash of the AI bubble, it feels as if there's a conscious attempt to represent my work as more than just the other side, or a hater, or a skeptic or a cynic, which is both edifying and enraging because we are now so far puffed past the point of no return. I mean, yeah, we really can't avoid what's coming. As I wrote in my newsletter this week, I think there's a subprime data center crisis brewing right now with over $500 billion in data center SPVs that can only ever make investors whole if there's hundreds of billions of dollars of AI compute demand in the next two years. And to be clear, when I say hundreds of billions of dollars demand, I mean a year. I mean literally a year. I ran the numbers and and for the what I think is 190 gigawatts of supposedly planned data centers, you'd need $1.6 trillion a year in annual compute revenue to make it worth worthwhile. And by the way, the global software market is under $800 billion a year, so don't know where that fucking money's coming from. And no one else seems to really want to think about it. And I deeply worry about what happens when the demand doesn't arrive, as these data center debt deals are often funded by private credit funds, which are in turn funded by both public and private pensions and insurance funds. Anyway, do read the free newsletter to learn more. It is free, this one. I have a premium one coming out today that will be about, well, the fact that Oracle's dying, which, I mean. Hey you in the back. Stop laughing. Stop it. Poor Larry Ellison. Poor. Who gives a fuck? In all seriousness though, it's going to be a banger. The free one's a banger. There's bangers everywhere. And I'll be back next week with my good friend Nick Suresh to talk about how AI mania is eviscerating global decision making. Creating a cult like environment where one's participation in AI is almost a religious act. And if you talk badly about AI, it's considered a carnal sin or a cardinal sin, one of those two. Sure one of you will correct me on this one. Nevertheless, it's a really he it's based on this incredible piece he wrote. I can't wait for you to read it. I can't wait for you to me talk to him. I don't know. Can't wait for you to consume my content. What a peculiar thing to say. Anyway, I'll catch you next week. Zitron out.

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