When The Data Center Boom Outruns Demand

The media and some clients keep asking me the same question: What happens when the data center boom outruns demand?

After decades of watching technology booms come and go, I no longer ask whether the industry will overbuild. I ask what happens next.

Right now, the hyperscalers and their growing list of new competitors are spending unprecedented amounts of money on AI data centers.

Overcapacity is not a subject the industry seems eager to discuss publicly. But history argues that we should.

In the late 1990s, telecom companies invested in millions of miles of fiber expecting internet traffic to double every couple of months. It did not. At least, not fast enough. In 2001, much of this capacity was “dark,” and Global Crossing and WorldCom went bankrupt under debt pressure.

However, that is not the whole story. That excess bandwidth enabled YouTube, Netflix, cloud computing, and smartphones to emerge. In other words, the investors were burned. The economy gained the necessary infrastructure. The 19th-century railroad boom offers a similar lesson. Companies built ahead of demand, and many went bankrupt. But a failed railroad company did not necessarily mean a useless railroad. The lesson is that a bad investment for the original backers can still leave something valuable behind.

But This Time Is Different In One Big Way

Fiber can remain useful for decades. A GPU cluster faces a much faster cycle of technological change. A new generation of silicon can push older GPUs out of the most demanding workloads long before those chips stop being useful.

AI data center chipsets may be commercially valuable for only a couple of years before a new generation of silicon supersedes them and makes older versions uneconomical for cutting-edge work.

The physical infrastructure is a long-term investment. But silicon is perishable. If demand falls short of expectations, an underused data center creates two problems: too little revenue and equipment that keeps losing value.