Thread

1. bryanlarsen · 1790019810 · focus · HN ↗

   Any data center that can remain profitable selling open source tokens at commodity prices will be fine. Any data center that relies on OpenAI/Anthropic level token prices and margins might be in trouble. After clearing their debts through bankruptcy, they'd likely be quite profitable selling open source tokens at commodity prices.

   1. Apes · 1790020800 · focus · HN ↗

      If it costs you more to generate the tokens that the market is willing to pay for those tokens, then not even bankruptcy will save any of the costs invested in one of these datacenters.

      If the cutting edge OpenAI token prices are $80 per 1M token, and the open source tokens are $1 per 1M token, that's a huge gap of "this will never be able to make money under any scenario if the bubble bursts" that will catch a lot of these new datacenters. No one will run a datacenter that costs $5 per 1M token to sell at $1 per 1M token even if the debts are cleared.

      1. nostrademons · 1790022612 · focus · HN ↗

         The point being made here is that most of those costs are amortized capital costs, which get wiped in bankruptcy.

         That $5 per 1M token doesn't literally cost $5 per 1M token. It's more like they had to build a datacenter for $500M that can service 100T tokens over its lifetime. They did this by borrowing money on the capital markets, and now they have to pay interest to those bondholders, interest that they can recoup with their $80/1MT prices. But if it turns out they can't charge $80 and have to charge $1, they won't be able to make those interest payments. They enter bankruptcy, the court wipes the debt clean, and now they don't have to pay interest, only the actual operating costs, which may be more like 50c/1MT. The company gets recapitalized with the new owners being largely the bondholders, the existing equity holders get wiped out, and they can compete with the commodity producers now.

         1. BobbyTables2 · 1790049631 · focus · HN ↗

            So that’s how bond holders succeed these days! (;->

            That whole thing sounds deliciously evil - I’m not even sure who to be mad at — too many to pick from.

            1. nostrademons · 1790094800 · focus · HN ↗

               In general the bondholders don't win unless they're holding senior secured debt. If they were expecting a return of 5% on their bonds, the fact that the company entered bankruptcy means that the profit it can generate is less than the 5% interest the bondholders were asking for. It may get recapitalized with them as the shareholders, but the profits on the new recapitalized company will be less than the interest previously owed to the bondholders, just by the fact that the company entered bankruptcy.

               The two conditions where they could win are:

               1. When they have liquidation preferences over the other bondholders. In this case, their claims come first at bankruptcy, which means they can end up owning the company at the expense of the other bondholders and stockholders. The company's overall profits might not be sufficient to generate a return at the interest rate of all bondholders, but it might generate returns over what a select group of bondholders would otherwise get.

               2. When the company can't generate sufficient profits now, but their revenues and earnings are expected to grow over time. In this case, the new equity holders would take a significant haircut on the value of their investment at the time of bankruptcy, but improving financial positions means the value of their investment could grow to be worth significantly more than the bonds over time.

               I can't rule out either of these for AI companies. The principals of many of the companies involved have a record of self-dealing that's very similar to #1 - it's illegal if it can be proven in court, but it's often very hard to prove, particularly if there are other parties involved. And the economics of AI are likely very similar to #2.

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