Wall Street is showing increased concern about the cloud revenue figures of Big Tech companies such as Amazon, Google, and Microsoft. There are worries that the growth in revenue is being artificially inflated by extensive investments in AI startups and related projects, leading to what is known as “round trip income.”
“Round-trip” income occurs when a large tech company invests in an AI startup, and then that startup purchases AI and cloud services from the same big tech company. This creates a cycle where the money invested returns to the big tech companies in the form of cloud spending, essentially allowing them to buy cloud growth through these startup deals.
These transactions have become more prevalent with the emergence of generative AI technology. Companies like Amazon, Google, Microsoft, and Oracle have all engaged in similar deals where they invest in AI startups and then become the main cloud provider for those startups.
Last year, Business Insider first reported on concerns raised by high-profile investors regarding how these deals could potentially inflate cloud revenue figures artificially. RBC Capital recently highlighted these concerns, questioning how hyperscalers account for training models like LLM or Cohere and raising doubts about the narrative around a widespread recovery of cloud workloads.
While cloud spending growth has slowed in recent years due to economic challenges, it has begun to recover. However, if part of this recovery is based on revenue from round-trip deals, the situation may not be as optimistic as it appears. Microsoft, in particular, has been noted as an exception by RBC, as they do not recognize revenue from training OpenAI on their GPT models on Azure cloud infrastructure, suggesting they have a more conservative approach to revenue recognition.
Amazon, Google, Microsoft, and Oracle have not responded to requests for comment regarding these concerns. An Amazon spokesperson stated that the company complies with all accounting rules and regulations, implying that their agreements with partners are standard business arrangements.
In conclusion, the worrying trend of artificially inflating cloud revenue figures through investments in AI startups raises questions about the sustainability and transparency of Big Tech companies’ business practices. Investors and analysts are closely monitoring these developments to ensure that revenue growth is organic and not propped up by questionable deals.
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https://www.businessinsider.com/ai-revenue-round-tripping-amazon-anthropic-google-oracle-microsoft-cloud-2024-5