If we build it, they will come

Big AI is on track to blow through $300+ billion in capital expenses in 2025. This is a staggering amount of money and an increase from $200+ billion spent in 2024. Capital expenses mostly include construction of data centers and the purchase of computer hardware.  

Has there been historical precedent of such a concentration of capital being deployed in so short a time? If you said, no way, I can only reply — way — and remind you that it did not end well for many.

Remember the telecommunications boom of the later 1990s? It was driven by a few primary factors:

• The dot-com bubble and the rise of Internet-based businesses.

• Fiber-optic network expansion, with companies like WorldCom, Global Crossing, Qwest Communications, and AT&T investing heavily in infrastructure.

• Wireless technology adoption, as mobile phones and digital networks expanded.

Adjusted for inflation, global capital expenses by Big Telco in 2000 were $440 billion. At that time, estimates for Internet adoption were driving the demand for fiber-optic cable to be run across the ocean floor so while you were in Chicago, you could video chat your friend in London as if you were in the same room. A truly remarkable technology when you also consider all the video, data, and everything else that ran through the cable.

Building this type of infrastructure was not cheap, but the players in Big Telco (like the players in Big AI today) viewed it as an arms race. We need to have the fastest connectivity with the most bandwidth. Period.

So, what happened? All that capacity was hardly used. Estimates at the time indicated about 2.0% of global bandwidth was utilized. But Big Telco kept spending and building while convincing investors it was all a good idea so that Big Telco stock prices kept rising. Sound familiar?

An interesting legal case that sprang from the telecom boom that could be a harbinger of what’s to come for Big AI, is the insider-trading case of Joe Nacchio, CEO of Qwest Communications. Qwest was a major player in Big Telco’s massive capital spending and the race to lay transoceanic fiber optic lines.

The case centered on Nacchio selling approximately $52 million worth of Qwest stock in early 2001 while knowing that the company's financial situation was deteriorating and that it was heavily reliant on one-time sales of capacity on its fiber optic network to meet revenue targets.

The prosecution argued that Nacchio knew Qwest couldn't meet its public revenue projections but he continued to make optimistic statements while selling his own shares. Evidence showed he received multiple warnings from Qwest executives about the company's financial challenges.

Nacchio eventually served 4.5 years of a six-year sentence and was ordered to pay millions in fines and restitution.

And there are others. More than a dozen Big Telco players filed for bankruptcy in the early 2000s. Collectively they accounted for more than 100,000 miles of undersea cabling.

Hindsight is 20/20, but with the Big Telco bust, at least there were obvious use cases for the Internet and all that fiber-optic cable. They just built too much of it too fast.

Does Big AI have such obvious use cases as Big Telco did two decades ago? We should be asking that exact question every day.

Key Takeaways

• Today’s media, always looking for the sensational story, love to add hype to the “AI Boom.” And there is a lot of hype.

• The current state of AI feels more like 70% promotion and 30% fact. How can we learn from the Big Telco bust and be smarter this time around?

• Look at the plethora of warning signs surrounding OpenAI, just one of the Big AI players. The company seems to have a scandal about every two weeks. Whether its board and governance issues, less-than-promised performance from a new software release, or the continued promises of Artificial General Intelligence (now, that would be a big deal) being just around the corner, there are continued signals of instability. I would rather read and learn about the real advances in AI technologies, rather than the tabloid fodder that is capturing attention lately. Something just seems off.

Things I think about

Casinos have more physical cash on hand than banks.

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