The commercial backbone of the AI boom may also be the source of its next potential risk.
Long-term supply agreements have proliferated amid the AI frenzy, with chipmakers, cloud computing firms, and AI developers using them to showcase "unprecedented revenue visibility" to investors.
However, as highlighted in a recent analysis, the true enforceability of these contracts during a demand downturn warrants serious scrutiny, despite their perceived strength during prosperous times.
Historical precedent from the pandemic era, where similar contracts were widely waived after supply-demand dynamics reversed, suggests their binding power is far more fragile than it appears.
The Memory Market: A "Most Extreme Example"
The memory chip sector exemplifies this trend most clearly.
The explosive growth of autonomous AI agents has driven up demand for memory, an application heavily reliant on memory resources. This is pushing the historically cyclical, price-war-prone memory industry toward a more stable model.
The three memory giants—Samsung Electronics, SK Hynix, and Micron Technology—are currently posting record profits and anticipate supply shortages persisting until 2028.
SK Hynix, which listed in New York this month, had an executive state in an April analyst call that long-term contracts help improve the market's perception of the entire memory industry.
Micron has been particularly proactive. Its "Strategic Customer Agreements" typically span five years and feature "take-or-pay" clauses, meaning buyers must pay regardless of whether they take physical delivery.
Micron's CEO stated last month that these agreements are expected to contribute over half of the company's future revenue.
Capital markets have reacted directly: Micron's stock has roughly tripled year-to-date, SK Hynix has seen similar gains, and Samsung's shares have approximately doubled.
The Contract's Weakness: Enforceability in a Downturn
The critical question is whether these long-term contracts, which fuel the boom during an upcycle, can truly enforce commitments when demand falls.
According to the analysis, the answer is likely no, for straightforward reasons.
First, if demand shrinks before a contract expires, chipmakers are reluctant to force shipments on customers. Unused chips would simply pile up in inventory, and when demand returns, customers would first work through that stock before ordering anew, thereby delaying the chipmaker's revenue.
Second, forcing inventory onto customers damages long-term relationships, especially if competitors adopt more flexible approaches, putting the enforcing company at a disadvantage.
History provides a precedent. The chip shortage during the pandemic also spawned long-term contracts, but when the shortage turned to glut, contracts were widely renegotiated or extended, with customers receiving significant waivers.
Microcontroller chipmaker Microchip Technology launched a "Preferred Supplier Program" in 2021 requiring long-term customer commitments. When the supply-demand situation reversed years later, the program was suspended.
The company's CEO stated bluntly last November: "We're not going to force our customers to buy anything that they don't need." That sentiment is a virtual snapshot of the industry's reality during a downturn.
Risk Spreads Across the Entire AI Supply Chain
This risk is not confined to the memory market but extends throughout the entire AI supply chain.
The chain flows roughly as follows: AI developers (like OpenAI) sign compute contracts with cloud companies (like Oracle); cloud companies then sign procurement contracts with AI chipmakers; chipmakers contract Taiwan Semiconductor Manufacturing Company (TSMC) for manufacturing; and TSMC enters into long-term equipment purchase agreements with Dutch firm ASML.
Each link depends on the next to fulfill its demand commitments.
The sums involved are enormous. Oracle signed a massive cloud computing deal with OpenAI last year, and its "remaining performance obligations" stood at $638 billion as of last quarter.
Oracle's CFO told analysts last month that this figure "provides excellent visibility into our future revenue growth, all supported by long-term customer commitments."
Data shows contract dependency has surged over the past year. Since mid-2025, the combined revenue backlog of the four major AI spenders—Google, Microsoft, Amazon, and Oracle—has increased by over $1 trillion, more than doubling the total.
Warning from the Bank for International Settlements
This "visibility" could quickly become obscured.
The Bank for International Settlements (BIS) noted in its recent annual economic report that shortages across the AI supply chain may be amplifying over-investment—"as firms seek to lock in future capacity through long-term contracts, which in turn make them more vulnerable to weaker-than-expected demand."
In other words, lenders and investors funding these companies based on long-term contracts could face unexpected losses if demand cools.
The larger the contracts and the longer the chain, the more severe the ripple effects when a single link breaks.
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