Bloomberg just provided the best graphic depicting the AI circularity, or circular economy in which the major companies in the AI sector are engaging in deals with each other.
The AI Circularity
At the center is NVIDIA, the chip maker.
Not too far from the center is OpenAI.
The worry is that this circularity is creating a big financial bubble. If one of the big players tanks, it may have a cascading effect on the entire AI sector.
This graphic went viral. It already received 4 million views on X, and that doesn’t count the many other posts of the same graphic!
The Cisco Circularity
Some analysts would point to the heydey of the dot com bubble when Cisco had extended loans to its customers of telecommunications equipment.
As ChatGPT summarized the Cisco circularity:
Mechanics:
- Cisco lent money or arranged leases to help startups or carriers buy Cisco routers and switches.
- Some of those same customers used their inflated valuations or IPO proceeds to buy more Cisco gear, boosting Cisco’s sales and stock.
- Cisco booked the sales as revenue, even though repayment often depended on those customers’ future solvency.
Outcome:
- When the telecom/Internet bubble burst, many customers defaulted.
- Cisco had to write off hundreds of millions of dollars in bad loans.
- Analysts retroactively called these “circular” or “vendor-financed demand” — revenue that existed only because Cisco helped finance it.
However, the Cisco circularity was different from what’s happening today in the AI circularity. Now we have the big AI companies striking deals and investments with each other. Of course, there are also smaller deals with startups as depicted below in OpenAI’s Top 30 customers.
But a large portion of AI circularity involves deals among the big AI companies or players.
As ChatGPT summarized these differences:
Of course, just because AI circularity is different from Cisco circularity doesn’t mean it’s risk free.
Joost van Leenders, senior investment strategist at Dutch asset manager Van Lanschot Kempen, told CNBC: ““When you look at, for example, investment in AI and the growth in investment, and the fact that some of these companies are financing each other and buying each other’s stocks. I think those are also signals of a bubble.”
The Crypto Contagion
Even if it’s not a financial bubble, the AI circularity appears to magnify the risk of one AI company’s experiencing a negative financial event resulting in a cascading effect on all the other AI companies. See graphic at the end.
A relatively recent example of this cascading effect is when a steep drop in Bitcoin price wiped out a bunch of crypto companies that were highly leveraged on Bitcoin, including FTX, one of the crypto sector leaders at the time. Who can forget that Fortune ran a cover story on Sam Bankman Fried asking if he was the “next Warren Buffett”?
The AI economy is different with more established companies?
One possibility is that the AI economy is different, and more secure, because it includes many established Big Tech companies, including Microsoft, Oracle, NVIDIA. AMD CEO Lisa Su seems less concerned about the circularity in the deal with OpenAI and its taking a 10% stake in AMD:
But what happens, for example, if OpenAI lost the copyright lawsuits in the MDL litigation against it in a trial at which a jury awarded statutory damages in the amount of $450 billion after finding willful infringement (assuming 3 million works and an award of $150,000 per work)?
Although the scenario seems far fetched, it’s not out of the realm of possibility. Indeed, a Monte Carlo analysis of the Anthropic lawsuit–a case that had far fewer works (just books) than the cases against OpenAI collectively have–estimated a probability of a damages award against Anthropic over $100 billion around 14%. The risk of liability was too much for Anthropic to stomach, so it settled the case for $1.5 billion, the largest amount in U.S. copyright history.
Even if the amount is less than $450 billion, a substantial amount in the billions might shake the AI circular economy. Plus, both Microsoft and NVIDIA are being sued for copyright infringement, too. Microsoft is a defendant in the same MDL litigation with OpenAI. So an adverse judgment against OpenAI could be an adverse judgment against Microsoft, in effect, a double whammy.
Could the AI sector weather such a copyright storm?
Probably. Given the market caps of some of the big AI companies, one would think they are “too big to fail.” Or, at the very least, the U.S. government would not stand idly by if the U.S. AI industry faced a calamity, even one created by copyright. But the prospect of a government bailout is cold comfort if any AI contagion leads to a financial crisis to the entire U.S. economy.
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