Google changes cloud strategy, looks to partners to sell more AI chips

google has spent years selling its chips, models and cloud services to customers on the benefits of being able to buy them in one place, offering a competitive full stack. Amazon and microsoft Attempted to duplicate.

Now, the company is pushing its equipment outside its own walls, winning more customers and building a bigger business around its artificial intelligence chips. Nvidia I’ve been in control.

Alphabet said on Tuesday, the day before its third-quarter earnings report. oracle The company will offer Google’s tensor processing unit (TPU), a custom chip that the internet giant has been developing since 2013. This is the first time customers will be able to access TPUs outside of Google’s infrastructure, and signals that cloud chief Thomas Kurian, who previously worked at Oracle for more than 20 years, is looking elsewhere for growth.

Chris Ballard, managing director at Check Capital Management, said of Google’s position in the chip space: “They’re a very strong competitor and they’re very likely to end up taking market share away from Nvidia.”

Mr. Kurian joined Google in late 2018 and operates in a strong position. Analysts expect Google Cloud’s revenue to rise about 90% year-over-year after rising 82% in the second quarter, with TPU contributing to the momentum.

“Google was great at doing its own thing, but it couldn’t serve its customers,” said Uday Cherubu, a portfolio manager at Harding Rovner, which owns Alphabet shares. “That mindset has changed.”

Google opened up its TPUs to external data centers in the second quarter ahead of this week’s announcement with Oracle.

Forecasts for the TPU business vary widely, but all point to significant growth. TD Cowen forecasts TPU sales of $9.4 billion in the second half of this year and $62.5 billion in 2027. Wells Fargo expects sales of about $9 billion in the third quarter and $99 billion next year.

CFO Anat Ashkenazi said during the company’s last earnings call in July that only a small portion of TPU revenue from existing contracts would be recognized this year, with the “vast majority” coming in 2027. He also said that Google plans to leverage more external capacity in the third quarter while it builds out its own infrastructure.

Google’s second-quarter cloud revenue was $25 billion, lower than Amazon Web Services’ $42 billion and Microsoft Azure’s $29 billion.

However, Google is the fastest growing.

“It’s like the bigger the pie gets, the faster we get into that pie,” Ballard said. As of June 30, the company owned approximately $236 million in Alphabet stock.

Kuran aims to rely on external partners to bring more TPUs to market, but must balance the benefits of building a customer base with his own technology needs.

in goldman sachs Kurian said at a conference in September that Google’s AI servers will pay for themselves within two years, and servers running their own silicon will pay for themselves in about half that time.

“Because you can optimize the entire stack,” Kurian says.

Industry research Semi-Analysis estimates that Google’s latest Ironwood TPUs cost approximately 44% less to own and operate than Nvidia GB200 servers.

There is also a margin hit from external TPU sales. TD Cowen estimates operating margins on TPU sales were 20%, compared to overall cloud operating margins of approximately 35% last quarter. Cherub said he doesn’t think Google’s cloud operating margins will expand significantly beyond the mid-30s.

Google declined to comment.

Google’s largest TPU customer is one of its top AI competitors.

Anthropic, whose Claude model competes with Gemini, agreed last October to use up to 1 million TPUs in a deal worth tens of billions of dollars. Mizuho says the deal will bring it nearly a gigawatt of online capacity this year, a relationship Google describes as “arming its closest model competitors.”

OpenAI also plans to buy TPUs from Google, CNBC confirmed after The Information first reported on the ChatGPT maker’s intentions on Tuesday.

Anthropic is getting outside help to finance Google Silicon. this week, broadcomWorking with Google on TPUs details a $63 billion vehicle backed by Blackstone and three major banks that will buy TPUs and networking equipment from Broadcom and lease them to Anthropic for five years. William Blair analysts said the funding plan covers about half of Anthropic’s 2027 needs and suggests further financing is on the way.

Anthropic said in its IPO filing Monday that it uses silicon from Google, Amazon, Nvidia and other companies. advanced micro deviceThis allows the company to “select chips based on the best cost-performance and efficiency characteristics for each workload.”

Regarding Google and Broadcom, Anthropic said the partnership “provides access to computing power powered by Google TPUs across multiple generations of TPU platforms.”

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