But cloud computing and AI are not the only things that lead to “hyperscale” data centers. Approximately 65% of global center capacity is owned by only three companies: Amazon, Google and Microsoft. Like the railroad tycoons of old, they fight to control the market because they understand something that has eluded the rest of us. Data centers are much more than vast digital warehouses. Those are the critical infrastructure technology which virtually every other business in the world must operate on.
These days, when businesses need virtually any IT service (networking, security, data processing, platforms, etc.), it’s easier and cheaper to just to rent from Amazon Web Services, Google Cloud or Microsoft Azure. The more data centers these companies have, the more services they can offer, and the more data storage and processing they have. capacity they can provide. In trying to capture the data center market, they’re not just building bigger data warehouses: they’re aiming to become 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 big language models needed to train and run generative AI, they pretty much have to go through big tech to get them. And now, tech giants are investing in these startups by offering them “credits” for using the company’s cloud. This is how Microsoft created a a large part of its investment in OpenAI, for example – by giving the startup access to its data centers. It’s a lucrative incentive to join a proprietary ecosystem.
“That’s where the real business is,” says Cecilia Rikap, an economist and author of a new report titled “Dynamics of Corporate Governance Beyond Ownership in AI.” “The more AI is consumed, the more cloud is consumed, and therefore not only more money for these companies, but also more digital technology intertwined and entangled within their infrastructure.”
And this tangle is what worries many economists and lawyers. Regulators call the problem “lock-in.” Moving from one data ecosystem to another isn’t like moving your office to a new building; programming interfaces between Microsoft Azure, for example, don’t just transfer to Amazon Web Services. Getting into one is easy, but like the Hotel California, you can never get out. Once a tech giant gives a startup access to its cloud services and large language models, it virtually ensures a form of control over a fledgling company that could one day become a competitor. “Market leaders enjoy a first-mover advantage, coupled with network effects and high switching costs that drive customer loyalty,” a congressional subcommittee warned in a statement. 450 page report in 2020. The rush to build data centers is, in large part, a move by big tech to secure the keys to the future AI kingdom.
In the short term, the rise of data centers is indeed a good thing for startups. “Until recently, academics thought 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. “Previously, if you were a startup, you had to build your own servers. That’s a huge fixed upfront cost.”
This is no longer true. The price of cloud computing services has fallen every year since 2006, when Amazon opened up its cloud. And it completely crashed in 2014, like a team of economists noted, when Microsoft and Google started announcing their competitive prices. From 2010 to 2014, AWS database prices fell 11%. Over the next two years, they fell by 22%.
Cloud computing has also made it easier for startups to obtain funding. Venture capitalists have adopted a “spray and pray” investment approach, meaning they bet on more companies but invested less money in each one. They also reduced their direct involvement in business management, trusting the market to sort winners from losers.
The whole scene has been particularly interesting for AI startups. “Small businesses like ours could have access to the computing power and scalability offered by large service providers,” says Jonas Jacobi, CEO and co-founder of ValidMind, a financial technology company. “There are a few big players dominating the AI industry, but there are also startups trying to compete with them. The only reason they can is because of cloud providers.”
The trick, Jacobi says, is to write code that can work with any of the three vendors, so you’re not locked into just one company. You need to stay “neutral to the tech stack,” he says. Of course, one of the tech giants can always step in and create their own version of your software. Some data suggests that Amazon has made this a standard operating procedure for “engulf“open source products from smaller 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 startup journey,” says Jacobi. “It’s up to us as a company to be faster and more agile.”
But over time, economists warn, agility will no longer be enough. In the battle to create fundamental technology, the “key complementary assets” of the enterprise – AI startups will inevitably lose out to the tech giants that control the data centers. “AI is a general-purpose technology,” says Rikap. “It’s applied to everything. But what kind of AI we get and what kind of AI we don’t get will be affected by the power of just three companies. It is 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 businesses. in which they hold the largest stake.
Over time, economists warn, AI startups will inevitably lose out to the tech giants that control the data centers.
Rikap also found that their increasing control over data centers also incentivizes large tech companies 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 published in technical and academic journals by researchers at Microsoft, Google and Amazon have historically had co-authors employed by their competitors. Today, it’s certain, IT is a small world. But joint authorship, Rikap says, is “a pure way of saying they collaborate and know what each other is doing” – a hallmark of anticompetitive behavior.
For now, there is still reason to hope that innovation will prevail over monopolization. Amazon, Google, and Microsoft always compete on price and features, which benefits everyone. And in Europe, where regulators are taking a more aggressive approach towards technology in general and cloud computing in particular, the Big Three are busy pointing fingers at each other. A Google Cloud executive recently denounced Microsoft as a “monopoly” and a “walled garden” and a trading group that includes Amazon filed an antitrust complaint on Microsoft cloud computing licenses. As they compete for market share, the companies are not yet in sync, creating an opening, albeit modest, for agile, faster competitors.
There is also a tendency, over time, for mature technology companies to stop trying to innovate themselves and simply charge other people who innovate. Among economists this is called “rent-seeking behavior“, and this 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 isn’t using data centers to short-circuit innovation? The researchers cite Google, which offers a friendlier type of partnership to startups. “The Google Cloud division partners with promising database startups, contributes to open source projects, and collaborates with open source foundations.” two scholars recently observed. It’s an “architecture of participation,” they say, that allows Google to make a profit while fostering the growth of new businesses and new ideas.
More importantly, the Federal Trade Commission, recognizing the threat posed by data centers, ordered big tech companies to transmit information about their investments in AI. Just as new laws eventually caught up with railroad pricing practices in the 1880s, today’s regulators may well catch up with the futuristic technological entanglements 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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