Every technological megatrend needs that one magical moment when all healthy skepticism is collectively set aside. Today we’re witnessing this spectacle unfold with artificial intelligence: Expectations are astronomical, future revenues have long since been mentally booked away in our minds, and data centers are springing up like mushrooms after a gentle spring rain. Everyone is in complete agreement: This technology will liberate humanity and rake in trillions. But amid all the euphoria, it’s easy to forget one tiny, ruthless truism: Visions take a hell of a long time—but bills and loans have a rock-solid due date.
The Principle of Infinite Growth
To satisfy the insatiable hunger for computing power, the infrastructure pioneer reaches deep into the bag of tricks of modern financial wizardry. He floods the market with billions in convertible bonds and high-yield debt, while simultaneously signing 10- or 15-year lease agreements as if there were no tomorrow.
The reassuring narrative sounds like pure gold at every investor conference:
Whoever builds the data centers today will collect the tolls for the entire digital universe tomorrow.
And if someone does timidly point out the gigantic mountains of debt, the manager waves it off: “Don’t worry, tech heavyweights have secured capacity for years anyway. It’s all absolutely rock-solid!”
The Deadly Trap of Convertible Bonds
Convertible bonds are particularly appealing during such hype phases because, thanks to low interest rates, they seem wonderfully cheap. The clever promise to creditors: “You’ll get almost no interest, but in return, you’ll soon convert your bonds into soaring stocks when our share price goes through the roof.”
It’s just too bad that this is the classic balance-sheet time bomb. If the stock price misses the magic target at maturity, the conversion right vanishes into thin air. And in exactly that fraction of a second, reality strikes with the force of a sledgehammer: The company is contractually obligated to repay the entire amount to investors in real, hard cash.
If the coffers are completely empty at that point—because the revolutionary AI application hasn’t yet brought in billions—it means: batten down the hatches; the bankruptcy trustees take over.
On top of that comes the second, wonderfully creative lever: The financial circular economy. Hardware giants grant data center operators lucrative vendor credit or invest capital directly in them (vendor financing) so that the operators can use that very borrowed money to repurchase expensive servers and chips in record time. This artificially drives chip manufacturers’ revenues through the roof, but at its core, it’s based on pure speculation.
When harsh reality sets in
What actually happens when the hype fizzles out? It’s simple: The laws of money are damn humorless.
- No leniency: Creditors and bondholders want to see real money on the due date—very few bakers will accept promises of a bright future or PowerPoint slides as payment for their bread rolls.
- Pricing collapse: When overcapacity suddenly looms in the market because customers are staying away, rents and prices for computing power plummet.
- Merciless major clients: Even the richest tech giants show zero loyalty as soon as cheap vacant space becomes available. They mercilessly exploit the crisis to renegotiate existing contracts downward.
- Those lovely fixed costs: Meanwhile, interest payments, cash repayments due, and long-term data center leases merrily continue, regardless of whether the servers are humming or standing idle.
The Resolution: A Brief History Lesson
Exactly this brilliant mechanism—endless revenue fantasies, tangled hardware deals, billions in convertible bonds, and outrageously expensive, long-term leases—has, of course, existed before in economic history. We’re talking about the period from 1998 to 2001. And back then, too, it was a data center operator.
I’m not settling scores with today’s NeoClouds here. This is the almost tragicomic story of the company Exodus Communications in the late 1990s and how it built its highly hyped data centers back then, until reality caught up with it.
Exodus was the absolute megastar on the stock market back then. It operated the server infrastructure for the Internet pioneers of the time: Yahoo!, eBay, and Cisco. Tech giants like Intel and Microsoft , as strategic partners, provided the hardware and the funding. Exodus issued convertible bonds on a massive scale and was valued at over $32 billion. Everyone swore back then: The Internet is unstoppable; the debt will pay for itself.
What Nvidia, Broadcom, and AMD are today—key financiers and, at the same time, the largest hardware suppliers for modern cloud operators—was back then Intel, Cisco, and Microsoft, using exactly the same method: They injected capital into the market, extended loans, and, in return, equipped the infrastructure to boost their own sales through targeted vendor financing.
But then came the spring of 2000. Suddenly, it dawned on the market that monetizing the Internet would take much longer than had been simply imagined in the billion-dollar business plans and PowerPoint fantasies. The dot-com bubble burst with a massive bang, and stock prices plummeted.
This abruptly shut the door on the stock consolidation of the convertible bonds—and creditors demanded their hard cash back. Customers went bankrupt, major clients drove down prices, and the coffers were empty. In September 2001 —a mere three years after the triumphant IPO—Exodus was bankrupt and filed for bankruptcy. The shareholders’ money had simply vanished.
What We Can Learn From This
The parallels to today’s NeoClouds are striking. The technology may sound fancy today, but the fundamental mathematical laws of interest, fixed costs, and the harsh reality of failed convertible bonds haven’t changed one bit since 1998.
“History doesn’t repeat itself, but it does rhyme.” (M. Twain)
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