- Oracle and OpenAI have reportedly struck a five-year, $300 billion cloud computing deal
- The deal raises questions about how OpenAI will pay but also about what exactly it's buying, analysts said
- The rapidly shifting AI landscape could well derail the $300 billion
Turns out, the mystery partner behind Oracle's $30 billion-per-year cloud deal is OpenAI. Trouble is, the deal, which is reportedly worth $300 billion over the life of the contract, raises more questions than it answers.
On Tuesday, the Wall Street Journal reported OpenAI signed a five-year, $300 billion deal to purchase 4.5 gigawatts of cloud compute capacity from Oracle. The contract is set to start in 2027, which coincides with the start of Oracle’s fiscal 2028. The deal is reportedly linked to the pair’s work on the Stargate project.
The confirmation of OpenAI as the blockbuster deal partner raises some key questions. First among these is how OpenAI plans to pay as it's only expecting to bring in around $13 billion in revenue in 2025 and not turn a profit until 2029.
“There is no doubt that AI revenues will increase dramatically over the next few years, and that AI use will have to be hosted somewhere. So, assuming the market and the VCs/funders don’t collapse, they seem to be willing to almost write OpenAI a blank check,” J. Gold Associates Founder Jack Gold told Fierce.
Gold added that hosting their products is a huge expense for OpenAI (see also, OpenAI’s recent $80 billion upward revision of its expected cash burn rate through 2029). But “Oracle gets paid for hosting whether or not OpenAI makes a profit so they are in a great place, assuming OpenAI doesn’t suddenly pull the plug.”
Nitty gritty $300B details
It’s important to note the $300 billion is not an “iron-clad, day-one” number, Gartner VP Analyst Chirag Dekate told Fierce. Rather, these kinds of deals are “typically staged with ramp schedules, region splits, minimum-use tiers, carve-outs and renegotiation gates.”
For Dekate, the real question isn’t how OpenAI will pay, but rather what it is really buying in terms of GPU technology, rate cards and networking tiers. However, none of these details are public.
Why does this matter? Well, variations across these elements can drive very different performance. Additionally, shifts in the GPU market – for instance, prices falling due to the rise of TPUs and custom ASICS – could very well change the headline value of the deal or see OpenAI’s dollars reallocated to other products, he said.
Another big question mark is whether the deal includes purchase minimums or make-good clauses. Likewise, the involvement of OpenAI’s erstwhile partner Microsoft is a massive unknown, Dekate said. It’s public knowledge that Microsoft has right-of-first-refusal for OpenAI’s new capacity, but we don’t know if Microsoft might be a “downstream reseller of a portion of this capacity.”
Where does this leave Oracle?
Given the pace of AI’s evolution, there’s a lot that could happen between now and 2027 or 2029 that could derail the headline figure attached to Oracle and OpenAI’s deal.
Asked what he’ll be watching, Dekate said he’ll be keeping tabs on how quickly Oracle’s $455 billion worth of remaining performance obligations converts to revenue and whether or not capex starts to outpace returns. If delays are a factor on either front, he said the market will likely start to question Oracle’s anticipated four-year path to $144 billion in cloud revenue.
Dekate said he’ll also have his eyes on the aforementioned potential changes in the chip market that could reset cloud economics and whether OpenAI’s margins per query or model differentiation start to slip.
As for what the deal does for Oracle’s reputation, Gold said it could very well be a good thing.
“Oracle has been steadily, often not very visibly, increasing its enterprise cloud infrastructure contracts for some time,” he explained. “As Oracle gets more known as a place to host critical apps, it can leverage that to get more enterprise hosting contracts that may or may not include AI.”
“This is clearly a momentum shift for Oracle,” he concluded.