They are building data centers pretty much everywhere these days. The vast, windowless buildings are the physical engines of the internet and the cloud; there are more now under construction than ever before, and the The new breed is bigger and hungrier. A typical center used to consume 10 megawatts of electricity; now they are built to suck in ten times as much. Last year, all data centers in the world had room for it 10.1 zettabytes of information – approximately 456 billion Wikipedias. And with the rise of artificial intelligence, which requires large amounts of data and energy, global data center capacity is expected to increase double by 2027. If you’re not alive near a data center, you will soon.
But cloud computing and AI aren’t the only things driving the push for “hyperscaled“data centers. About 65% of capacity is in global centers owned by just three companies: Amazon, Google and Microsoft. Like the railroad magnates of old, they rush to control the market because they understand something that has eluded the rest of us. Data centers are more than just huge digital warehouses. They are the essential infrastructure technology on which almost every other company in the world must run.
Today, when businesses need virtually any computing service (networking, security, data processing, platforms, you name it) it’s easier and cheaper to just now rent it from Amazon Web Services, Google Cloud or Microsoft Azure. The more data centers those companies have, the more services they can offer, and the more storage and number processing capacity they can provide. By trying to corner the data center market, they are not just creating larger repositories for data; they also want to be a one-stop shop for all the technology a business needs.
This is even more true for AI startups. When an innovative newcomer needs access to the large language models needed to train and run generative AI, they pretty much have to go through Big Tech to get them. And now the tech giants are making venture investments in these startups by offering them “credits” for using the company’s cloud. For example, Microsoft has one part of its investment in OpenAI, for example by giving the startup access to its data centers. It is a lucrative incentive to become a member of your own ecosystem.
“This is where the real business is,” says Cecilia Rikap, an economist and author of a new report called “Dynamics of Corporate Governance Beyond Ownership in AI.” “The more AI is consumed, the more cloud consumption there is, which means not only more money for these companies, but also more digital technology intertwined and tangled within their infrastructure.”
And that entanglement is what worries many economists and legal scholars. Regulators call the problem ‘locking-in’. Changing from one data ecosystem to another is not like moving your office to a new building; the programming interfaces between Microsoft Azure, for example, are not simply transferred to Amazon Web Services. Getting in is easy, but like Hotel California, you can never leave. Once a tech giant gives a startup access to its cloud services and its large language models, it has all but assured itself some form of control over a young company that could one day grow into a competitor. “Market leaders benefit from early-mover advantage combined with network effects and high switching costs that lock in customers,” a congressional subcommittee warned in a report Report of 450 pages in 2020. The rush to build data centers is in large part a move by Big Tech to secure the keys to the coming AI kingdom.
In the short term, the rise of data centers has actually been a good thing for startups. “Until recently, the perception among academics was that the rise of cloud computing was great for startups and innovation,” says Matthew Wansley, a law professor at Yeshiva University who studies competition and regulation. “In the past, as a startup you had to build your own servers. Those are huge, fixed upfront costs.”
That is no longer true. The price of cloud computing services has fallen every year since 2006, when Amazon opened its cloud. And it absolutely crashed in 2014, like noted a team of economists, when Microsoft and Google started advertising their competitive pricing. Between 2010 and 2014, prices for AWS databases fell by 11%. Over the next two years they fell by 22%.
Cloud computing also made it easier for startups to get funding. Venture capitalists adopted one ‘spray and pray’ approach to investing, meaning they bet on more companies, but put less money into them. They have also scaled back their direct involvement in running the companies, relying on the market to separate the winners from the losers.
The whole scene has been especially great for AI startups. “Smaller companies like us could gain access to computing power and the scalability that the larger service providers offer,” said Jonas Jacobi, CEO and co-founder of ValidMind, a fintech company. “You have some big players dominating the AI space, but there are also startups trying to compete with them. The only reason they can do that is because of the cloud vendors.”
The trick, Jacobi says, is to write code that can work with any of the three providers, so you’re not locked into one company. You should “stay neutral to the tech stack,” he says. Of course, one of the tech giants can always swoop in and build their own version of your software. There is evidence to suggest that Amazon has made it a standard procedure to “flood“the products of small, open source competitors and repackage them as part of its own suite of services, as it did with the Elastic search engine. “But that’s part of the journey as a startup,” says Jacobi. “It’s just up to us as a company to be faster and more agile.”
But over time, it won’t be enough, economists warn. In the struggle to create foundational technology – the “most important complementary assets” of the company – AI startups will inevitably lose to the tech giants that control the data centers. “AI is a general-purpose technology,” says Rikap. “It’s applied to everything. But what type of AI we get and what type we don’t get is influenced by the power of just three companies. It’s an intellectual monopoly. What they control is data and knowledge.” By locking startups into their systems, Google, Amazon and Microsoft can effectively play favorites, offering better deals and cheaper services to the companies. in which they have the greatest interest.
Rikap has also found that their growing control over data centers also gives Big Tech an incentive to work together to share information and protect their common interests. In an article with Bengt-Åke Lundvall, an economist at Aalborg University in Denmark, Rikap notes that articles in technical and academic journals from researchers at Microsoft, Google and Amazon consistently co-authors employed by their competitors. It is certain that computer science is a small world. But the joint authorship, Rikap says, is “a pure way of showing that they work together and know what each other is doing” – a hallmark of anti-competitive behavior.
At this point, there is still reason to hope that innovation can win out over monopolization. Amazon, Google and Microsoft still compete on price and features, which is good for everyone. And in Europe, where regulators are generally taking a more aggressive approach to technology cloud computing in particular, the Big Three are busy pointing fingers at each other. Recently a Google Cloud manager denounced Microsoft as a “monopoly” and a “walled garden,” and a trade group that includes Amazon has filed an antitrust complaint through Microsoft’s cloud computing licenses. As they compete for market share, the companies are not yet aligned – and that creates an opening, albeit a small one, for nimble, faster competitors.
There is also a tendency, over time, for mature technology companies to move from trying to innovate themselves to simply charging other people to innovate. This is known among economists as ‘rent-seeking behavior”, and it sounds an awful lot like what Amazon, Google and Microsoft are doing with cloud computing and data centers.
So what’s the best way to ensure Big Tech doesn’t use data centers to short-circuit innovation? Researchers point to Google, which offers startups a friendlier kind of partnership. “The Google Cloud Division partners with promising database startups, contributes to open source projects and collaborates with open source foundations,” two scientists recently observed. It’s an “architecture of participation,” they say, that allows Google to make profits while fostering the growth of new companies and ideas.
More importantly, the Federal Trade Commission, aware of the threat posed by data centers, has ordered Big Tech companies to hand over information about their AI investments. Just as new laws eventually caught up with the railroads’ pricing practices in the 1880s, today’s regulators could very well catch up to the futuristic technological tangle of cloud computing. One reason to think so: The lead author of that 450-page House subcommittee report on Big Tech’s anticompetitive behavior was a lawyer named Lina Khan. Today she is the head of the FTC.
Adam Rogers is a senior correspondent at Business Insider.
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