What Oracle's Fall From Grace Tells Us About The AI Data Center Business

 Oracle's stock price is diving. Why? A lesson for the AI industry. An AI data center customer faces no switching costs as they are simply installing data and software in bare metal servers leased to them by the data center. The result is a buyer's market as opposed to the traditional sellers market in which Equinix and Digital Reality operate. Oracle, the software company, reinvented itself as a cloud provider and then pivoted to AI data centers when the cloud angle proved disappointing and AI became hot. 

But in a traditional data center the customer installs their equipment and this makes leaving the facility very expensive and difficult as it means they lose an operating network node. In many cases the exit costs can be in the millions of Euros or dollars and require a network redesign to ensure traffic flows are not disrupted. So the traditional data center is more like the Hotel California in the Eagles song where you can check in, but never leave. 

In contrast, most AI data center deals involve no physical colocation on part of the client. The customer provides zero hardware. This is reflected in the contracts themselves where the customer can stop using the service without termination penalties as long as 90 days notice is given. So customers have the upper hand in the AI data center business. It results in fierce wholesale competition among AI data centre providers. Moreover, this is an ultra-capital intensive, and yet, high operating cost business. In contrast, most capital intensive industries have low operating costs, but AI data centres embrace the worse of both worlds. They require a lot of capital to build and a lot of electricity to run. The coup de grace is that power companies cannot meet the power demand and the construction industry is facing high costs. 

In the case of Oracle, we see the hubris and arrogance of American Tech oligarchs. Most of them made good business moves early in their career, but then gradually lost contact with reality and made lots of bad decisions. Once you surround yourself with sycophants and yes men, you lose your ability to think critically. Examples include Larry Elison, Oracle's owner, putting his entire fortune on the AI data center casino table. Ellon Musk is another example. I am confident his tech people have told him that orbital data centers are a bad idea, but he has ignored or fired those that were too frank. Again, trying to reinvent Twitter as an AI company has proven to be a mistake. Grok is a third rate large language model. Finally, Tesla is in decline because Musk has stopped investing in Tesla as a car company and tried to transform into a self driving AI software company. Smart people do not ignore credible information that conflicts with their views. They modify their views. They incorporate new information. Tesla sales are down 15% over the last two years due to Musk's lack of managerial focus and his alienating Tesla drivers with his political views.

Screenshot of Oracle's Stock Price Over the Last 12 Months


Comments

Post a Comment

Popular posts from this blog

The British Empire's Resilient Subsea Telegraph Network

Image
The British empire had largely completed its Red Line cable network by 1902. This network allowed news and messages to be delivered in a few minutes or several hours at most depending on the message queue's length. It spanned the globe and formed a network ring so traffic could be routed in the opposite direction in case of disruption. It was, as Dr. Michael Delaunay has argued, a highly resilient network. Besides the ring configuration, the network relied on multiple cables between any pair of given end points to ensure uptime. The British military believed it would be impossible for an enemy to cut enough cables on any route to sever all communications between any given pair of end points. The Committee of Imperial Defense concluded that 57 cables must be shut down to isolate the British Isles from the Red Line network. The figure was 15 for Canada and 7 for South Africa. The Empire was self sufficient in terms of manufacturing the components for a subsea telegraph cable and re...
Read more

The Short Life Expectancy of Starlink's LEO Satellites

Image
According to FCC filings Starlink shut down almost 500 Starlink satellites during the first half of 2025. The company had them reenter the atmosphere where they burned up. What is striking is that these satellites were all less than 5 years old. The general consensus is that LEOs have a life expectancy ranging from 5 to 8 years. Shorter than expected life spans for the satellites will hit Starlink's income statement hard by increasing network depreciation and replacement needs. However, Starlink has managed to lower its LEO's manufacturing costs down to $500K versus initial figures around $1 million. So these production economies of scale might offset some of the higher than expected depreciation. However, there are also rocket launch costs as well. It costs Starlink about $3 million to put a satellite into orbit. The Falcon 9 costs $67 million per flight and delivers 23 LEOs into low Earth orbit. As a private company Starlink financials are a bit of mystery. The company press ...
Read more

Here We Go Again: Several Major Cables Down Off Yemen

Image
Three industry insiders have confirmed the 'epicenter' of the outages is in Yemen coastal waters at a depth of only one 100 meters. This strongly suggests fishing or more likely an anchor is responsible. Multiple sources have told me that neither Egyptian or Saudi Internet services has been degraded, but the Persian Gulf has been hit hard as well as Pakistan. This is consistent with the epicenter being off Yemen. It is also consistent with the cables reported down below. Four Cables Definitely Down: 1. EIG. 2. SWM4. 3. IMEWE. 4. Falcon Lower left map is SMW4. Center is EIG. Far right is IMEWE. Total capacity of these four cables is approximately 44 Tbps. Pakistan is heavily dependent on SWM4, EIG, and IMEWE. Scattered reports initially suggest AAE1 may also be down. But it is not.
Read more