# How Do These Circular Deals Actually Work?

According to Bloomberg's investigation, the financial architecture is deceptively simple but structurally dangerous. Microsoft has invested over $13 billion directly into OpenAI, but the real money flows through operational spending. OpenAI, as a condition of its partnership, spends approximately $4 billion annually on Azure cloud computing services. Microsoft then uses a significant portion of that revenue to purchase Nvidia's H100 and B200 GPUs for its own AI infrastructure. Nvidia, flush with cash from these sales, has invested $300 million into OpenAI's latest funding round.

This means that $1 of Microsoft's investment effectively circulates through the system multiple times, inflating the apparent size of the AI market. Bloomberg's analysis suggests that up to 40% of Microsoft's Azure AI revenue is directly attributable to OpenAI's spending, creating a dependency that is not reflected in standard financial disclosures.

# What Happens If OpenAI's Growth Slows Down?

This is the central question that investors should be asking. If OpenAI fails to meet its aggressive revenue targets—which Bloomberg sources estimate at $10 billion for 2026—the first casualty would be its Azure spending. Microsoft would lose a major cloud customer, and its own AI infrastructure investments would become underutilized. Nvidia would then face a double hit: reduced GPU orders from Microsoft and a direct impact on its investment portfolio.

The risk is asymmetric. According to a senior analyst at a major investment bank who spoke to Bloomberg on condition of anonymity, "The market is pricing each company independently, but the circular nature means they are essentially a single risk factor. If OpenAI stumbles, it's not just an OpenAI problem—it's a Microsoft and Nvidia problem too." This interconnectedness is the core reason why the Bloomberg report has sparked debate among institutional investors about whether to treat these three companies as a single consolidated risk.

# Are Competitors Like Google and Amazon at an Advantage?

Ironically, the circular deal structure may benefit Google and Amazon by forcing them to build more diversified and independent AI ecosystems. Google has its own TPU chips and is investing in multiple AI labs, including Anthropic, without the same circular dependency. Amazon Web Services (AWS) is similarly pursuing a multi-model strategy with investments in Anthropic, AI21 Labs, and its own Titan models.

According to Bloomberg's sources, Google's AI spending is approximately 30% lower per unit of compute than Microsoft's because it doesn't have to pay the premium embedded in the circular deal structure. This cost advantage could become decisive if the AI market shifts from a growth-at-all-costs phase to a profitability-focused phase. Google and Amazon are not immune to the AI spending boom, but their financial structures are more transparent and less prone to cascading failures.

# Is This a Bubble or a Necessary Growth Engine?

The evidence supports both interpretations, which is what makes the situation so precarious. Proponents argue that the circular deals are simply a sophisticated way to align incentives and accelerate the development of transformative AI. They point to OpenAI's rapid progress and Microsoft's market-leading AI product integration as proof that the model works.

However, Bloomberg's reporting highlights a troubling parallel: the circular flow of capital creates the illusion of organic demand. If Microsoft's Azure AI revenue is inflated by its own investments, then the true market size for AI cloud services may be substantially smaller than reported. This is not a new phenomenon—similar circular deals have been observed in the Chinese tech ecosystem and in the pre-2008 financial derivatives market. The key difference is that this time, the underlying technology (AI) is genuinely transformative, which may justify the premium—or it may simply delay the reckoning.

Predictions

1. Microsoft will disclose OpenAI revenue dependency in its Q3 2027 10-K filing. Investor pressure and SEC scrutiny will force the company to break out Azure AI revenue attributable to OpenAI, revealing a dependency of at least 35%.
2. Nvidia will reduce its direct investment in OpenAI by 50% within 12 months. The company's CFO will cite the need to diversify portfolio risk, but the real reason will be internal concern about circular exposure.
3. Google Cloud will gain 5 percentage points of AI cloud market share by Q4 2027. Enterprise customers seeking to avoid the Microsoft-OpenAI-Nvidia circular risk will diversify to Google's more transparent infrastructure.

Article Summary

• The Microsoft-OpenAI-Nvidia circular deal is a financial innovation that creates systemic risk, not a conspiracy or fraud.
• Investors are underpricing the contagion risk because they treat each company as an independent entity when they are financially inseparable.
• Google and Amazon are positioned to benefit from any disruption to this circular flow due to their more diversified and independent AI strategies.
• The circular structure inflates the apparent size of the AI cloud market, potentially misleading investors about true organic demand.
• Regulatory scrutiny and mandatory financial disclosures will eventually force these companies to break out their circular revenue, which will be a negative catalyst for all three stocks.