And so it begins ...

Meta CEO Mark Zuckerberg has repositioned the social media giant as an AI company.

Vincent Feuray | AFP | Getty Images

And so it begins. Meta is the first AI company starting to see burning through capital at stratospheric rates with no verifiable ROI is not smart but don't worry, OpenAI, and significant others, are next as AI is finally beginning to be seen as not the end all and be in terms of how the world does business
as civilization moves further into the 21st century. 

Meta Platforms shares popped about 4% higher on Thursday after Bloomberg reported that CEO Mark Zuckerberg was looking to make significant cuts to the company’s metaverse resources.

Bloomberg said that executives have considered budget cuts as high as 30% for the unit, citing people familiar with the talks.

The move would be notable for the Facebook parent company, which changed its name to Meta in October 2021 to signal its pivot beyond social media.

Zuckerberg said at the time that “the metaverse is the next frontier just like social networking was when we got started.”

The proposed cuts would likely include layoffs, according to Bloomberg, which said the cuts were part of budget planning for 2026. The cuts will likely hit the company’s virtual reality group.

Meta declined to comment on the report.

Photo by Logan Voss on Unsplash

But, as I have covered before, AI experiences diminishing returns, meaning that AI development costs increase exponentially. As such, the AI boom threatened to drain these tech giants of all their liquid cash. So, the industry switched to equity financing, which involved selling off shares to raise enough cash to keep the lights on. However, this quickly devolved into the infamous circular financing deals between OpenAI, Nvidia, Oracle, CoreWeave and Microsoft, which, in the end, wasn’t even enough cash to cover the spiralling costs of AI.

So, over the past year, Big Tech has turned more and more towards debt financing, or taking out loans, to cover their mounting AI costs. To give you an idea of how rapidly they are taking on debt, Big Tech is predicted to spend $400 billion on AI in 2025 and has issued $200 billion in AI-related bonds (or debt) so far this year, with half of that happening since September.

AI costs are really spiralling out of control. AI expenditure is set to double next year. By 2028, Morgan Stanley predicts that the AI industry will spend $2.9 trillion, the vast majority of which will require debt financing. According to J.P. Morgan, the AI sector will need $1.5 trillion in bonds (or debt financing), to cover the costs of constructing planned data centres alone.

To understand why, we need to understand what a bond is and how it relates to Credit Default Swaps (CDS). Stick with me; this gets juicy, I promise.

Bonds are a way for a corporation or a government to raise funds by directly selling their debt to investors. It is basically a corporation or government saying, “Give us your money now, and we will pay it back plus interest over time.”

But many investors want to mitigate the risks of their bonds. After all, if the government or corporation defaults on this debt, there is no way for the investors to get their money back.

This is where CDS comes in. These are effectively insurance policies for people who hold bonds, typically issued by investment banks or similar. So, if a bondholder is worried the government or corporation isn’t going to pay out and will fold on their obligations, they take out a CDS. This will cost them an annual premium, which is confusingly called a spread, based on how risky the debt is considered to be. Spreads are usually presented as a percentage cost of the bond value, so if a CDS has a spread of 1%, it will have an annual premium of 1% of the value of the bond covered. But in return, if the bond issuer defaults, the organisation providing the CDS will reimburse the full bond value.

Well, the entire future of AI depends on bonds.

And so it begins - K. Vonnegut