Major tech firms Microsoft, Google, and Amazon have ringed ‘accounting alarm bells’ in Silicon Valley with their AI startup cloud deals. These deals entail an investment into the AI startups to make the cloud provider exclusively used by the startup. This has sparked speculation of money ’round-tripping’ and artificially inflating the cloud revenue.
These deals are vigorously monitored and discussed in the tech industry. Microsoft was asked about it in their recent earnings call. Microsoft’s CFO Amy Hood responded that OpenAI is like any other commercial customer that would use an Azure and its spending would be recognized as revenue.
These practices have been in place in the tech industry for decades, and now are increasingly under greater scrutiny. Questions are being raised on Twitter if these companies are using cash from the balance to ‘juice their numbers’. Analysts wonder how much of Azure’s growth is from OpenAI and how much is organic.
US accounting rules require any cash or services, which includes investments, be deducted from revenue or else it is round tripping. US accounting professor, Patrick Badolato, said the specifics of the investment would determine if the revenue can be recognized. Usually if the investment is separate to the service, it can be accounted for, for example, if Microsoft is building a product for OpenAI using their technology.
Not all investors are skeptical of these transactions, some believe Microsoft, Google, and Amazon are actually supporting their partner startups and helping them to mature and become stable. According to Matt McIlwain, managing director from Madrona Ventures, these deals are not meant to inflate cloud revenue, but to start a “symbiotic relationship” between the application and infrastructure provider.
However, most agree that the companies will need to be careful in how they account for these investments, otherwise they could be in violation of US accounting rules.
The companies mentioned in the article have been Microsoft, Google and Amazon.
Microsoft is an American technology company, best known for their computer production and software. Microsoft had an estimated revenue of $(USD) 143.011 billion in 2020 and was founded in 1975.
Amy Hood is the Chief Financial Officer at Microsoft and has held this position since July 2013. She is responsible for the company’s financial operations and managed to make Microsoft grow 3X in size since she started. She has held executive positions with other tech companies such as Boeing and Goldman Sachs.
