Google to Let Oracle Offer TPUs as It Pushes AI Chips Beyond Its Cloud

Google has developed TPUs since 2013 and for years pitched customers on buying chips, models and cloud services in one place. It opened TPUs to outside data centers in the second quarter, before the Oracle announcement, CNBC reported. Kurian, who spent more than 20 years at Oracle before joining Google in late 2018, is now turning to an outside partner to reach more customers.

Analysts expect Google Cloud revenue to rise about 90% from a year earlier in the third quarter, after growing 82% in the second quarter, with TPUs contributing to the momentum, CNBC reported. Google Cloud recorded $25 billion in second-quarter revenue, trailing Amazon Web Services at $42 billion and Microsoft Azure at $29 billion, but it was the fastest-growing of the three. "They're a very strong competitor, and it's very possible that they could eventually take market share from Nvidia," Chris Ballard, managing director of Check Capital Management, said of Google's position in chips, according to CNBC.

Estimates for the TPU business vary widely. TD Cowen models $9.4 billion in TPU sales for the second half of this year and $62.5 billion for 2027, while Wells Fargo expects about $9 billion in third-quarter sales and $99 billion next year, CNBC reported. CFO Anat Ashkenazi said on the July earnings call that only a small portion of TPU revenue from existing agreements will be recognized this year, with the vast majority coming in 2027. She also said Google planned to use more outside capacity in the third quarter while it builds its own infrastructure.

Kurian said at a Goldman Sachs conference in September that Google's AI servers pay for themselves in under two years, and servers running its own silicon reach payback in roughly half that time. "It's because we can optimize that whole stack," Kurian said, according to CNBC. Industry research firm SemiAnalysis estimates that Google's latest Ironwood TPU costs about 44% less to own and operate than an Nvidia GB200 server.

Selling TPUs to outside customers also carries a margin cost. TD Cowen estimates a 20% operating margin on TPU sales, compared with an overall cloud margin of about 35% last quarter, CNBC reported. Uday Cheruvu, a portfolio manager at Harding Loevner, which owns Alphabet shares, said he does not think Google's cloud operating margin could widen much beyond the mid-30s. Google declined to comment, according to CNBC.

Google's biggest TPU customer is one of its top AI competitors. Anthropic, whose Claude models compete with Gemini, agreed last October to use up to 1 million TPUs in a deal worth tens of billions of dollars, CNBC reported. Mizuho says the agreement brings nearly a gigawatt of capacity online this year and describes the relationship as Google "arming its closest model competitor."

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 its Google silicon. This week, Broadcom, which works with Google on TPUs, detailed a $63 billion vehicle backed by Blackstone and three big banks that will buy TPUs and networking gear from Broadcom and lease them to Anthropic for five years, according to CNBC. Analysts from William Blair said the financing plan covers about half of Anthropic's 2027 needs, which suggests more financing is coming.

In its IPO filing on Monday, Anthropic said it uses silicon from Google, Amazon, Nvidia and Advanced Micro Devices, allowing the company to "select chips based on the best price-performance and efficiency characteristics for each workload." Regarding Google and Broadcom, Anthropic said the partnerships "provide us with access to compute capacity powered by Google TPUs across multiple generations of the TPU platform."

Editor's Summary

Alphabet is opening its TPUs to Oracle, the first time the custom chips will be available outside Google's infrastructure, as it seeks more AI chip customers and challenges Nvidia. Analysts expect strong TPU and cloud growth, but external sales carry lower margins than Google's overall cloud business. Anthropic and potentially OpenAI are among the customers expanding the TPU ecosystem, supported by new financing arrangements.