Alphabet said on Tuesday that Oracle will offer Google's tensor processing units, the custom AI chips Google has developed since 2013, marking the first time customers can access the TPUs outside Google's infrastructure.
The arrangement shows cloud chief Thomas Kurian, who spent more than 20 years at Oracle before joining Google in late 2018, is looking beyond the company's own walls for growth. Google opened up TPUs to outside data centers in the second quarter, before this week's announcement with Oracle.
Analysts expect Google Cloud revenue to jump about 90% from a year earlier, after growing 82% in the second quarter, with TPUs contributing to its momentum. "They're a very strong competitor, and it's very possible that they could eventually take market share from Nvidia," said Chris Ballard, managing director of Check Capital Management, referring to Google's position in chips. "Google was great at doing its own thing, but it was never able to serve customers," said Uday Cheruvu, a portfolio manager at Harding Loevner, which owns Alphabet shares. "That mindset has changed."
Estimates for the TPU business vary but point to significant growth. TD Cowen models $9.4 billion in TPU sales for the second half of this year and $62.5 billion for 2027. Wells Fargo expects about $9 billion in third-quarter sales and $99 billion next year. Chief financial officer Anat Ashkenazi said on the last earnings call in July 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 building out its own infrastructure. With $25 billion in second-quarter cloud revenue, Google trailed Amazon Web Services at $42 billion and Microsoft Azure at $29 billion, but is growing the fastest.
Kurian has to balance expanding the customer base with Google's own technology needs. At a Goldman Sachs conference in September, he said 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," he said. Industry research firm SemiAnalysis estimates Google's latest Ironwood TPU costs about 44% less to own and operate than an Nvidia GB200 server. There is also a margin hit from external TPU sales: TD Cowen estimates a 20% operating margin on TPU sales, compared with an overall cloud margin of about 35% last quarter. Cheruvu said he does not think Google's cloud operating margin could widen much beyond the mid-30s. Google declined comment.
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. Mizuho says that agreement brings nearly a gigawatt of capacity online this year and describes the relationship as Google "arming its closest model competitor." OpenAI is also planning to buy TPUs from Google, CNBC confirmed after The Information first reported the ChatGPT maker's intentions on Tuesday.
Anthropic is getting outside help to finance its Google silicon. Broadcom, which works with Google on TPUs, detailed a $63 billion vehicle backed by Blackstone and three big banks that will buy TPUs and networking gear from Broadcom and lease them to Anthropic for five years. According to analysts from William Blair, the financing plan covers about half of Anthropic's 2027 needs, which suggests more financing is coming. In its IPO filing on Monday, Anthropic said it uses silicon from Google, Amazon, Nvidia and Advanced Micro Devices, allowing it to "select chips based on the best price-performance and efficiency characteristics for each workload." Regarding Google and Broadcom, Anthropic said the partnerships "provide us with access to compute capacity powered by Google TPUs across multiple generations of the TPU platform."
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Cloud revenue in Q2 2024 (US$ billion)
US$ billion
Source: Tech: Google alters its cloud playbook (source [1])
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Analysis
Why This Matters
Google's TPUs, previously tied to its own cloud, will now be offered through Oracle, broadening access to the custom AI chips and creating a new revenue stream.
The move intensifies competition with Nvidia, which dominates the AI chip market, at a time when AI labs including Anthropic and OpenAI are seeking alternatives.
Most TPU revenue from existing agreements is expected to be recognized in 2027, meaning the financial payoff will build over time even as capacity comes online this year.
Background
Google has developed tensor processing units since 2013 as custom chips for AI workloads and has offered them through its own cloud, where it competes with Amazon Web Services and Microsoft Azure. Nvidia has dominated the broader market for AI chips. The latest announcement extends Google's hardware push outside its own data centers, building on an opening of TPUs to outside data centers in the second quarter. The shift comes under Thomas Kurian, the cloud chief who joined Google in late 2018 from Oracle.
Key Perspectives
Chris Ballard, managing director of Check Capital Management: Google could eventually take market share from Nvidia, and it is "almost like the bigger the pie is getting, the faster they're accelerating into it."
Uday Cheruvu, portfolio manager at Harding Loevner: "Google was great at doing its own thing, but it was never able to serve customers. That mindset has changed," though he does not think the cloud operating margin can widen much beyond the mid-30s.
Mizuho: describes Google's relationship with Anthropic as Google "arming its closest model competitor."
William Blair analysts: the Broadcom-backed financing covers about half of Anthropic's 2027 needs, suggesting more financing is coming.
What to Watch
Alphabet's third-quarter earnings report, due a day after Tuesday's announcement, for cloud growth and any commentary on TPU revenue timing.
Whether OpenAI's planned purchase of TPUs from Google, reported by CNBC and The Information, becomes a formal deal.
Whether additional partners follow Oracle now that TPUs are available outside Google's infrastructure.
12 claims in this story checked against 1 source: 11 supported.
Show each claim
Not in the sourcesOracle is Google's first partner for offering TPUs to outside customers.Tech: “Alphabet said on Tuesday that Oracle will offer Google's tensor processing units, or TPUs, the custom chips the internet giant has been developing since 2013.”
SupportedAlphabet is looking beyond its own cloud to challenge Nvidia in the AI chip market.Tech: “Now, the company is pushing its equipment outside of its own walls to reach more customers and build a bigger business around artificial intelligence chips, a market that Nvidia has dominated.”
SupportedAlphabet said Oracle will offer Google's TPUs.Tech: “Alphabet said on Tuesday that Oracle will offer Google's tensor processing units, or TPUs”
SupportedThis is the first time customers can access TPUs outside Google's infrastructure.Tech: “It's the first time customers will be able to access TPUs outside of Google's infrastructure”
SupportedChris Ballard said Google could eventually take market share from Nvidia.Tech: “"They're a very strong competitor, and it's very possible that they could eventually take market share from Nvidia," said Chris Ballard, managing director of Check Capital Management”
SupportedUday Cheruvu said Google was great at doing its own thing but had not been able to serve customers, and that its mindset had changed.Tech: “"Google was great at doing its own thing, but it was never able to serve customers," said Uday Cheruvu, a portfolio manager at Harding Loevner, which owns Alphabet shares. "That mindset has changed."”
SupportedTD Cowen models $9.4 billion in TPU sales for the second half of the year and $62.5 billion for 2027.Tech: “TD Cowen models $9.4 billion in TPU sales for the second half of this year and $62.5 billion for 2027.”
SupportedWells Fargo expects about $9 billion in third-quarter TPU sales and $99 billion next year.Tech: “Wells Fargo expects about $9 billion in third-quarter sales and $99 billion next year.”
SupportedAnat Ashkenazi said only a small portion of TPU revenue from existing agreements would be recognized this year, with the “vast majority” coming in 2027.Tech: “CFO Anat Ashkenazi said on the last earnings call in July that only a small portion of TPU revenue from existing agreements will be recognized this year, with the "vast majority" coming in 2027.”
SupportedThomas Kurian said Google's AI servers pay for themselves in under two years, and servers using Google's own silicon reach payback in roughly half that time.Tech: “At a Goldman Sachs conference in September, Kurian said Google's AI servers pay for themselves in under two years, and servers running its own silicon reach payback in roughly half that time.”
SupportedAnthropic agreed last October to use up to 1 million TPUs in a deal worth tens of billions of dollars.Tech: “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.”
SupportedBroadcom detailed a $63 billion vehicle backed by Blackstone and three banks to buy TPUs and networking gear and lease them to Anthropic for five years.Tech: “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.”
