The Hidden Truth Behind AI Prosperity: The "Circular Accounting Game" Behind Trillions in Cloud Revenue

```

A carefully designed cycle of funding between tech giants and AI startups is quietly supporting the flourishing narrative of the entire AI industry.

More than half of the future backlog orders, totaling up to $2 trillion for the cloud businesses of Microsoft, Google, Amazon, and Oracle, originate from the two AI startups OpenAI and Anthropic.

However, according to the latest corporate financial reports, behind this massive pipeline lies an accounting operation known as the "circular revenue loop"—tech giants inject capital into startups under the guise of "investment," but with contract clauses requiring the recipients to return equivalent funds by renting the giants’ cloud servers, thereby generating "new cloud revenue."

The chain effect of this mechanism has already permeated the profit tables of the tech giants. In the first quarter of 2026, Alphabet recorded a record profit of $62.6 billion, of which $28.7 billion—nearly half—came from the book value increase of its investment in Anthropic; in Amazon’s record $30.3 billion profit for the same period, $16.8 billion likewise came from Anthropic’s paper gains.

Meanwhile, Amazon’s actual free cash flow plummeted by 95% to only $1.2 billion, as it had to spend $44.2 billion in real cash to build data centers. This coexistence of paper prosperity and cash flow depletion has led market observers to seriously question the authenticity of the AI industry’s fundamentals.

The Mechanism of Circular Accounting

The core logic of this funding loop is not complicated, but it is highly misleading.

Take Microsoft and OpenAI for example: Microsoft injects $13 billion into OpenAI, but not in cash—instead, the funds are issued as "cloud credits" specifically for use of Microsoft’s servers. OpenAI then uses these credits to train AI models, and Microsoft records the server usage as entirely new cloud revenue from a "customer."

Essentially, the tech giant is using its own money to pay itself, while labeling it as an external sale.

The scale of this mechanism is already considerable. OpenAI’s annual cloud services bill has swollen to over $60 billion, more than double its actual revenue of $25 billion, with this gap almost entirely filled by the circular funding above. Anthropic faces a similar situation—within just nine months, it spent $2.66 billion on Amazon Web Services (AWS), a figure roughly equal to its total revenue for the same period.

Cash Flow Crisis Hidden Beneath Book Profits

Circular accounting not only generates inflated cloud revenue, but also triggers a second accounting effect—tech giants use valuation increases from investments to record substantial paper gains on their profit statements.

Each time an AI startup completes a new round of financing and obtains a higher valuation, the tech giants holding its equity can correspondingly raise its book value, and record the unrealized gains directly as current profits.

This mechanism creates a marked divergence between profit figures and actual operating cash flow. Amazon’s example is particularly typical: in the same quarter it reported record profits, its free cash flow plummeted 95% year-over-year, because the company had to continuously spend real capital on expanding its physical data center infrastructure. The glamor of book figures contrasts sharply with the pressure from cash depletion.

Concentration Risk: The Fragile Structure Where All Fail Together

This circular system is also accumulating highly concentrated counterparty risk in the tech giants’ business pipelines.

According to financial reports, 49% of Microsoft’s $627 billion in future backlog orders are directly tied to OpenAI; Oracle’s $553 billion pipeline relies on OpenAI as a single customer for as much as 54%. This means that if OpenAI’s funding loop is disrupted, the core business metrics of both tech giants will suffer severe impacts.

This structural fragility reminds some analysts of the collapse of the Internet bubble in 2001. At the time, Global Crossing and Qwest Communications exchanged equal amounts of fiber network capacity to inflate sales figures, ultimately leading Qwest to write off $1.4 billion in fictitious revenue, and Global Crossing to declare bankruptcy.

There is a key difference between the two: the internet capacity swaps of the past were deemed illegal, but the circular accounting currently seen in the AI industry is fully compliant under current accounting standards.

A Self-Reinforcing Market Capitalization Bubble

The impact of this mechanism has gone beyond corporate financial reports, extending to the broader capital market.

Circular accounting inflates the tech companies’ book profits, which lifts stock prices; rising stock prices prompt passive retirement accounts and index funds to increase their holdings of related tech stocks, creating a self-reinforcing positive feedback loop. In this process, investment, sales, and stock prices all rise on paper, while the AI technology itself has yet to generate real cash profits.

Historically, the duration of bubbles varied— the South Sea Bubble burst within seven months, while the Internet bubble lasted five years before collapsing. How long the underlying logic of today’s AI boom can hold remains the core question that market participants are increasingly eager to ask.

Risk Reminders and DisclaimerThe market contains risks, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. All responsibility for investing based on this rests with the investor. ```