Agents are becoming the new developer platform, using semantic search with data from tools like Git, Slack, and Jira for context. Things to consider are setting guardrails to block or allow things, and using logs, metrics, and traces to understand agent behavior.

By Ben Linders

Microsoft has open-sourced TauGrid, a cloud-native platform designed to manage, schedule, and monitor AI workloads on GPU-enabled Kubernetes clusters.

By Sergio De Simone

The AI boom is becoming a materials challenge. As AI pushes computing into new territory, the materials behind that infrastructure are becoming just as crucial as the algorithms running on it. Semiconductors and data centers are approaching physical limits around performance, thermal management, electrical efficiency, and reliability, creating new demands for materials that can do more at once. At the same time, AI is giving materials scientists new ways to search the enormous universe of possible molecules and accelerate the development of solutions.

For Mike Finelli, chief technology and innovation officer and chief North America officer at Syensqo, that convergence is transforming what advanced materials can enable. “AI is now, from a material standpoint, really pushing semiconductors and the data centers to their physical limits,” he says.

As requirements accumulate, including high temperature, purity, electrical performance, chemical resistance, plasma resistance, and long-term stability, materials move toward what Finelli calls the “top of the pyramid.” Beyond supporting AI innovation, he contends that advanced materials are “actually increasingly defining what’s going to be possible.”

That challenge is playing out across the infrastructure powering the AI surge. Syensqo is developing materials for high-voltage data center architectures, advanced sealing materials for semiconductor manufacturing, and thermal-management solutions including fluids for direct immersion cooling. Some of those innovations can also cross industry boundaries. Materials developed for electric vehicles, for example, can help address the higher voltage and energy-density demands that are emerging in data centers.

The definition of performance is also changing. More customers are expecting materials to meet technical requirements while reducing environmental impact. “Our goal is to remove the trade-off between performance and sustainability,” Finelli says. That means considering sustainability at the beginning of the research process instead of treating it as an additional requirement once a material has been developed.

AI is changing how those materials are discovered, too. Syensqo is using AI agents to digitally synthesize millions of potential molecular combinations, predict their performance and sustainability characteristics, and narrow them to a much smaller group for laboratory testing. The result, Finelli says, is the ability to go “broader, deeper, and faster” while giving scientists more time to solve complex engineering problems.

Looking to the future, Finelli sees the possibility of a reinforcing cycle: AI helps develop materials that improve AI infrastructure, which in turn enables better AI to accelerate materials discovery. That feedback loop could create a cycle of innovation and expand what future technologies can achieve.

“You end up in this accelerated materials, innovative cycle of materials innovation,” says Finelli. “That really excites me, and it gives us the opportunity to continue enabling technologies that will shape the future.”

This episode of Business Lab is produced in partnership with Syensqo.

Full Transcript:

Megan Tatum: From MIT Technology Review, I’m Megan Tatum, and this is Business Lab, the show that helps business leaders make sense of new technologies coming out of the lab and into the marketplace.

This episode is produced in partnership with Syensqo.

Now asked to name the key enablers to AI advancement, many of us might list algorithms, data centers, or even computing power, but just as critical to the performance are the advanced materials that underpin each layer of that innovation. As AI continues to evolve, it’s pushing the likes of semiconductors and data centers to new physical limits, putting new pressure on the advanced material sector to keep pace. But the relationship goes both ways. As the sector rises to this challenge, AI is also emerging as a powerful tool for accelerating materials discovery and development, significantly shortening development timelines for new solutions.

Two words for you: materials innovation.

My guest today is Mike Finelli, chief technology and innovation officer and chief North America officer at Syensqo.

Welcome, Mike.

Mike Finelli: Thank you, Megan. Nice to be here.

Megan: Thank you so much for joining us. Mike, can I start by asking you to tell us a little bit more about Syensqo and the role it plays in developing advanced materials?

Mike: Yeah, absolutely. Syensqo is a global leader in specialty materials. Our job is to help customers solve their toughest technology challenges. We serve a lot of different markets, but the way I like to say it simply is if it flies, we’re on it. If it drives, we’re in it. In healthcare, our products literally are saving lives every day. And if you like your mobile devices, if you like AI, it’s our products that are actually enabling the advanced semiconductor chips that are required to produce all of this. Our role is to enable innovation through advanced chemistry. We develop materials that deliver higher performances, greater reliability, and increasingly more sustainable solutions. The way I would say this, it’s at the heart of our business. Actually, it’s in our name, Syensqo. And to put some numbers around it, 20% of our annual revenues come from new products and applications that we’ve launched in the last five years, which is really evidence of a really strong innovation engine.

Megan: Yeah, absolutely. And as you sort of described there, you’re in all sorts of different industries with an emphasis perhaps on electronics and semiconductors. Can you talk a bit more about that work and where those industries are headed perhaps?

Mike: Sure. So look, electronics and semiconductors have been strategic markets for Syensqo for literally decades. I don’t want to date myself, but 33 years ago when I started in the company, semiconductors were one of the first industries that I worked in. And we’ve supported successive waves of innovation from enabling smaller, more powerful mobile devices, helping the industry get to the smaller and smaller profiles and the chips. We’ve helped to advance hyperconnectivity, supporting increasingly sophisticated semiconductor manufacturing. And today we’re helping to advance the AI era.

We have one of the industry’s broadest portfolios of high performance polymers and advanced materials. We support applications across the entire electronics value chain from semiconductor fabrication, electronic components, to smart devices and telecommunications, even hyperconnectivity. And our materials are helping customers solve increasingly demanding challenges around miniaturization, thermal management, electrical performance, chemical resistance, higher and higher purities, and long-term reliability and sustainability. And today we work with leading semiconductor manufacturers and electronics companies all around the world.

Megan: Fantastic. And as you alluded to there in the last 30 years, we’ve seen huge evolutions in those sectors.

Mike: Oh my God, yes.

Megan: And now AI is putting these new demands on semiconductors and data centers. What does that mean for the materials they’re built from and to what extent will AI innovation be constrained or enabled by materials science finding a solution?

Mike: Yeah, so I mean, you’re absolutely right. But AI is now, from a material standpoint, really pushing semiconductors and the data centers to their physical limits, and materials are becoming a key enabler of that continued progress.

The way I try to describe it, think of a pyramid, I call it the performance pyramid. You have commodity materials at the bottom of the pyramid and you have high performing specialty materials at the top of the pyramid. At Syensqo, all we do is we operate at the top of the pyramid and we’re continually trying to raise the top of that pyramid by bringing newer and newer and more higher performing materials out.

Now you might say, okay, but why doesn’t a data center or a semiconductor manufacturing fab need a specialty versus something in the commodity space? Well, I call it the and, and, and principle. If you just need a polymer or a material that can sit at the table at room temperature and stay there for 10 years and not change, well, there’s a lot of commodity materials that will do that and you don’t have a problem. The minute you start adding requirements, and I call it the and, and, and so if you need a polymer that can handle high temperature and have to have high purity and electrical performance and chemical resistance and plasma resistance and it’s got to have long-term stability, all of these ands, you start moving to the top of the pyramid.

Now what AI is doing with semiconductors, because of the speed at which it’s advancing, it’s requiring semiconductor chips and data centers, the number of requirements are increasing the number of ands which is pushing the limits of the materials. That’s where we come in. And I really believe that advanced materials, they’re no longer just supporting AI innovation, we’re actually increasingly defining what’s going to be possible.

Megan: Right. That’s fascinating. And in terms of rising to that challenge of focusing on that top of the pyramid and that and, and, and principle you’re talking about, could you talk us through perhaps an example or two of those top of the pyramid solutions you’ve created or that you’re working on at the moment?

Mike: Like I said, our focus is enabling higher performance, but it’s also without compromising on reliability or safety. We develop advanced polymers, elastomers, specialty fluids, fluids meaning lubricants and heat transfer fluids, and they’re used throughout the semiconductor manufacturing process and also increasingly in AI data center infrastructure. One example of our work on specialty materials for next generation AI data centers is the work we’re doing around high voltage architectures. Data centers are moving towards high voltage architectures because they can enable greater computing power while also improving energy efficiency. We know that’s a big issue for that segment of the industry, and these high voltage architectures will help them reduce and improve energy efficiency because it reduces energy losses and they can ultimately help lower the environmental footprint of the data centers. And we’re developing new materials that can help them get there.

Another example is our high performing sealing materials found inside semiconductor fabs and wafer tools. If you can picture, many people have seen what a semiconductor looks like during processing. It’s a big, big silicon disc that’s then later diced into the tiny little chips that go into the computer. But that wafer is put inside a giant chamber where it has a very extreme environment, aggressive plasmas, reactive chemicals, and they need higher and higher performing materials. And all of the seals that are around that chamber to keep those gases in the environment inside have to be able to withstand that environment. And that’s what we’re developing and we’re pushing the limits. They’re asking for higher temperatures, more aggressive environment with lower out gassing and purity. And that’s what we’re developing for this industry to allow that next chip to be developed and produced industrial.

Megan: It’s so fascinating that people wouldn’t give much though necessarily to the seal in something like that. As you’re outlining, it’s just absolutely critical in terms of performance. And in developing those solutions, I understand you also looked across different markets to see what may be applicable perhaps in more than one space, and that includes an overlap between the automotive sector and data centers, I understand. Can you tell us a little bit more about that?

Mike: As I mentioned just previously, the data centers are shifting to higher voltage architectures. This is the next generation data center, which can be more energy efficient, but it’s got a higher energy density. The power density increases, which increases temperatures. And many of the material challenges that we will be facing there, we’ve already developed for the automotive industry in electric vehicles. I’ll give you an example of an application. I mean, think about an electric vehicle. The powerhouse in electric vehicle is no longer the motor, it’s the battery. That’s where all the energy sits. And when you’re putting a hundred kilowatts of energy, driving that to the electric motor through wires and through what they call bus bars, you got to get that car up to 60 miles an hour pretty quick. You’re driving massive amounts of energy that’s increasing temperatures dramatically.

And all the electrical connections are in these bus bars that there’s a polymer that’s an insulating polymer with copper in between for all the connections. That’s got to withstand that temperature increase, which could come pretty rapidly. We’ve developed new materials there and those materials will be translatable over to these data centers where they’re going to have the higher voltages with a higher energy density.

Another thing we’ve been doing in automotive, we have a lot of knowledge in both automotive and semiconductor around fluid circulation and how to use dielectric materials to do direct immersion cooling. That’s something that will be very valuable for data centers and server farms. Using air to cool semiconductors is really inefficient and energy intensive. If you could submerse them in a liquid, you have direct immersion cooling, that’s extremely efficient, so that’s another thing we’re working on.

Another thing we developed in automotive that will be translated over is battery energy storage systems. Inside the battery, we’ve developed a binder. It’s the highest performing binder on the market, which is using the cathode of a lithium ion battery, and it keeps all the ingredients doing its job working together so that battery can actually last for 10 years and perform. Now that’s moving over to the data centers because they’re moving more towards renewables and they need to have these energy storage systems to smooth the peak loads and provide resilient backup power. That’s one of the things that we’re doing. By transferring our knowledge across the markets, we can accelerate new power and new thermal management solutions while supporting reliability required by next generation AI infrastructure.

Megan: Fantastic. So many transferable applications there that necessarily wouldn’t have sprung to mind. And it isn’t only technical advancements that you need to contend with, of course. Companies today are also demanding the materials are developed and manufactured more responsibly too. So how is sustainability shaping your innovation process?

Mike: Yeah, you’re absolutely right. I will say performance is still the entry ticket. Our customers want performance. Now what’s changing is that definition of performance is now broader and it is including sustainability targets and requirements. Our customers expect materials that deliver outstanding technical performance while also being developed and manufactured more responsibly.

At Syensqo, we believe that operating as a responsible company means we’re providing true sustainable business solutions to our customers. And this is why we developed what we call the Sustainable Portfolio Management tool, SPM. It’s a matrix, and it defines what a sustainable solution is. For us, it’s a product that in a given application improves our product’s social and environmental performance while also demonstrating a lower environmental impact in its production, creating values for our customers. In short, we want to develop products, and this is where it starts. Every one of our research projects before we even start them is assessed on whether it’s going to be a sustainable product or not.

And 88% of our portfolio now is a sustainable product. We’re developing materials that are better for the environment, lower environmental footprint when we produce it, but also they contribute to improvements for our customers as well so they could operate with a lower carbon footprint or they can operate in a safer way or less water consumption. There’s a lot of different lists in there.

Another example is our longer-term development of next generation heat transfer fluids. Semiconductor manufacturing and data centers have become more powerful. I mentioned before the heat that they’re generating, especially when they move to the higher voltage architectures. Managing that heat is increasingly important. And again, I talked about direct immersion cooling. We’re developing those solutions because today there are fluids out there that will work, but they got high global warming. That’s not good for the environment. We’re developing the next generation heat transferred fluids that will reduce the potential environmental impact compared to the fluids today. In the end, our goal is to remove the trade-off between performance and sustainability. You notice that’s another and, we can be performing and sustainable.

Megan: That’s so important, isn’t it though, to think about sustainability in terms of performance? As you say, when we’re thinking about commercially scaling up these solutions, it’s such an important part of it. And as I talked about in the introduction, AI isn’t only a challenge, but it’s also an opportunity within the advanced material space. I’d love to explore how you’re using AI tools at Syensqo to inform and accelerate the development of solutions as well.

Mike: Absolutely. We embarked on this journey about two years ago, where we’re using AI in our research and development, and we’ve partnered with Microsoft and their Microsoft discovery tool, and it’s helping us to rapidly identify and evaluate promising molecular candidates.

Now, in the normal research approach, historically, you would design your experiment and you’d look at all the potential combinations of materials and chemicals that you could make all these different molecules. And the combinations of potential and molecules that you could develop to solve a problem could be in the millions, but it’s impossible to develop a million molecules or tens of millions of molecules in your laboratory and actually physically do that. But you have to select a small area based on your expertise and knowledge, based on the literature searches, based on the state of the art that’s out there and looking at patents, et cetera. And you pick a small area and you go through the process, you develop the materials, you test them, you learn something, you go back to the drawing board, you start again. Eventually you find something that works, but it doesn’t mean you found the best possible combination that’s out there.

But what we’re doing with AI is we have developed AI agents with Microsoft that are literally digitally synthesizing the entire millions and millions of combinations of potential molecules. And we have another AI agents that are using physics-based simulation to look at all those molecules and predict the performance of them, and not just performance on physical chemical properties, but also on toxicity, on sustainability, et cetera. Then we have another agent that takes all that information and ranks them all. In the end, we have explored all of the potential molecules out there. We understand roughly what the performance should be, and we end up with a priority list of maybe a hundred, instead of millions and millions, a hundred that we actually synthesize in the lab.

And at the end, you end up getting the solution faster, much, much faster. You’ve explored the entire space. I basically say it allows us to go broader, deeper, and faster. And the important thing is it’s not replacing our scientists, it’s not replacing our scientific expertise. In a way, it’s giving them superpowers. It’s allowing them to spend less time searching and more time solving the industry’s toughest engineering challenges.

Megan: Amazing. It sounds like it’s genuinely a really transformative tool by what you’re explaining.

Mike: Completely, completely.

Megan: I mean, just to finish, Mike, it’d be great to take a look ahead if we could, because there’s so much activity in both AI and the advanced material space. I wonder what is coming down the pipeline that you are most excited about next?

Mike: I’ve talked a lot about AI and how we’re using AI to develop new materials. I think to me, what’s really exciting, and I’m starting to see it actually happen, I’m just curious how fast this is going to go, is that we’re using AI to develop new materials that will enable AI to get better, and then that AI will use the new AI to develop new materials to get AI to go better. I see this loop of developing for AI, for AI to improve, and then we use that AI to improve ourselves. You end up in this accelerated materials, innovative cycle of materials innovation. That really excites me, and it gives us the opportunity to continue enabling technologies that will shape the future. That’s what we do at Syensqo.

Megan: Fantastic. Yeah, real sort of virtuous circle of innovation, it sounds like that. Amazing. Thank you so much, Mike.

Mike: Thank you.

Megan: Thank you so much. That was Mike Finelli, chief technology and innovation officer and chief North America officer at Syensqo, whom I spoke with from Brighton in England.

That’s it for this episode of Business Lab. I’m your host, Megan Tatum. I’m a contributing editor and host for Insights, the custom publishing division of MIT Technology Review. We were founded in 1899 at the Massachusetts Institute of Technology, and you can find us in print on the web and at events each year around the world. For more information about us and the show, please check out our website at technologyreview.com.

This show is available wherever you get your podcasts, and if you enjoyed it, we hope you’ll take a moment to rate and review us. Business Lab is a production of MIT Technology Review, and this episode was produced by Giro Studios. Thanks so much for listening. Goodbye.

This content was produced by Insights, MIT Technology Review’s custom content arm, not its editorial staff. It was researched and written by humans, with any AI tools that may have been used limited to production processes under human oversight.

Sarah Deitke discusses how Duolingo drives cultural AI adoption beyond tooling access. She explains their internal AI literacy workshops and observability dashboards, then shares a case study on redesigning code review using an automated PR risk-assessment bot. Deitke demonstrates how pairing targeted developer education with safe AI guardrails speeds up delivery without increasing defect rates.

By Sarah Deitke

When Jessica Wachter, a finance professor at the University of Pennsylvania’s Wharton School, wanted to assess AI’s impact on the economy over the next few years, she faced a long list of business and technical uncertainties. So she started with what she calls a “remarkable fact” that is not in question: A handful of so-called hyperscalers are investing huge amounts of money to build AI data centers.

Instead of trying to predict how useful and widely deployed AI models will be, she simply asked how fast the hyperscalers’ earnings will need to grow to justify their spending through 2027, when—she and her collaborator estimate—expenditures will reach nearly $1.1 trillion. It’s a no-nonsense accounting approach to making sense of today’s historical AI buildout.

The results are eye-opening: The AI companies will need to increase their own productivity by a factor of 2.7 to break even by 2030, accounting for the cost of capital and a 15% return, and depreciation of the assets. Not impossible, says Wachter. The result would lead to the kind of economic growth that we saw during the US IT boom over a period of about 10 years starting in the mid-1990s. But, she says, for it to happen by 2030 “that’s a lot of growth compressed into a few years.” And if the hyperscalers cannot meet such profit goals?

“Then they will fall behind on their interest payments, and that risks bankruptcy,” says Wachter, who was previously the SEC’s chief economist and director of its division of economic and risk analysis. If a productivity boom “fails to materialize,” she and her coauthor conclude in their research paper, “the current buildout will be the largest misallocation of capital in history.”  

It doesn’t take superintelligence to realize that today’s large investments in the infrastructure for artificial intelligence come with huge risks. The hyperscalers will spend about $750 billion this year, building massive data centers scattered across the country. And the spending spree shows no signs of slowing. According to some projections, total AI capital investments from the hyperscaler companies—Alphabet, Microsoft, Amazon, Meta, and Oracle (which partners with OpenAI)—could be more than $5 trillion over the next four years.

It’s one of the largest capital investments by any industry in history. But there’s a problem that’s obvious to anyone paying attention.

While the hyperscalers plan to spend trillions, total AI revenues will be around $150 billion to $200 billion this year, says Gary Gensler, who ran the SEC during the Biden administration and is now a professor at MIT’s Sloan School. “The challenge is that the spending does not have commensurate revenues yet. That’s a fact,” he says. “And then the question is, is that an investment that will be paid off in the future?”

At stake in that trillion-dollar question is the financial health of the giant AI companies and the overall US economy—the investments could soon balloon to around 3% of GDP. The answer could also determine the fate of the hugely expensive data centers themselves. 

No one really knows how profitable and useful these multibillion-dollar behemoths will be down the road. Though AI models have made dazzling progress over the last few years, it’s anyone’s guess how much compute capacity we will need. The technology could become more efficient and therefore less dependent on raw computational power. Or demand for AI products could slow, or customers could turn to cheaper models.

The risks, both to investors and to the economy, have become even greater this year, as these AI companies have begun borrowing large amounts of money to build more and more data centers. Free cash flow—operating cash flow minus capital expenditures—is expected to soon dip into negative territory for the group. Even Alphabet, known for generating and hoarding huge amounts of cash, reports in the latest quarter that its impressive revenues of nearly $120 billion were devoured by AI infrastructure spending, leaving it with a free cash deficit of some $5.9 billion—its first shortfall since Google went public in 2004.

In the near term, it’s not a big financial worry for most of the companies. They make a lot of money and have very deep pockets. But debt is expensive, and some investors are losing patience. If future demand for the data centers’ computation power drops, the companies will still be on the hook to pay back the borrowed money. What’s more, the risks are spreading to the rest of the economy as the loans get passed along via various financial mechanisms. 

It won’t be enough to simply cover the enormous price tags of the new data centers. Hyperscalers will also have to pay for the rising costs of capital as they borrow more money. They will need returns that are impressive enough to justify all their spending to investors and creditors. And to add to those concerns, they will have to make up for the depreciation of billions of dollars in chips housed within the facilities—a ticking time bomb buried in the investments.

Performance of the expensive GPU chips at the core of the data centers—such compute electronics represent some 60% of costs—is roughly doubling every two years or so. The pace of progress helps explain the increasing wizardry of the AI models, but it comes with a cost. Owners of AI data centers that come online this year and next will need to spend billions more on the next generation of chips by the end of the decade if they want to stay competitive. Without the investments, says Mihir Kshirsagar at Princeton’s Center for Information Technology Policy, the data centers risk becoming “hulks,” stranded assets “scattered all over the place.”

To put it bluntly: The AI companies need to start making a lot more money. And they need to do it fast. But juicing their earnings alone still won’t be enough to sustain their data-center investments for the long term.

Productivity is everything

At some point, AI is also going to have to create broad economic growth to justify continuing the hyperscalers’ spending spree.

Sloan’s Gensler describes today’s large investments into AI infrastructure as “a parlay bet by the capital markets and the economy.” That means success will require winning three related but independent wagers: Hyperscalers must generate massive revenues, AI must boost widespread economic growth, and both must happen while the powerful but expensive so-called frontier models that rely on the data centers fend off cheaper versions, which many businesses might find good enough.

What makes this so tricky is that each wager depends on the other two but also poses its own challenges.

If the hyperscalers continue to spend huge amounts of money on data centers into the next decade, revenues will need to skyrocket into the trillions. Stijn Van Nieuwerburgh, a finance professor at Columbia Business School, bases his estimates on a scenario in which about 183 gigawatts of planned AI compute capacity is built between 2025 and 2032; he calculates that each gigawatt costs about $41 billion. Assuming a 10% return—the minimum that would be acceptable to most investors—“required” annual revenues will be roughly $3.7 trillion by 2032, he says.

Others get a similar number.

Winning the second part of the bet—productivity growth across the economy—will be crucial to achieving such numbers.

For a few years, AI companies could likely boost their revenues by simply selling subscriptions and tokens to all the businesses clamoring to get into AI. But eventually—and this might be happening already—those paying customers will need to justify their expenses by seeing bottom-line benefits from the technology. AI will need to fulfill its promise of making workers more productive and making businesses more efficient and profitable while expanding their products and services.

In economic jargon, that means customers will need to see productivity growth. Taken together, these results will mean the country is prospering and growing.

“If you don’t get the productivity gains, at some point people are going to sour on AI, and that will bring down investments and it would also limit revenue growth,” says Daron Acemoglu, an MIT economist and 2024 Nobel laureate. For the investments to be sustainable over, say, the next five to 10 years, we definitely “need to see productivity gains,” he says.

Most economists who watch the numbers closely agree that, for now, the economy-wide statistics show little or no productivity growth from AI. There are some hopeful signs it’s on the way, though. In a recent survey of some 6,000 senior business executives in the US, the UK, Germany, and Australia, the vast majority—around 90%—report no increase in productivity over the last three years. But they expect a boost of around 1.45% in total over the next three years; US executives anticipate a 2.25% bump over that time. 

In a follow-up survey, the respondents also reported plans for their businesses to spend more on AI, leading the authors to anticipate some $280 billion in private-sector AI expenditures by the end of 2026.

That’s good news for the hyperscalers. But it comes with a dose of bad news for those worried about AI’s impact on jobs. The executives expect to increase the productivity of their companies by increasing their sales while significantly cutting the number of employees.

If AI improves productivity by destroying jobs, public backlash to the technology—the kind we have seen around data centers, for example—will likely get worse. Perhaps it’s worth adding one more wager to the parlay bet described by Gensler: The public and local communities must feel that they are also benefiting from the massive investments in AI.

And let’s not forget how interdependent these wagers are; if productivity growth comes from companies running models like DeepSeek, then the hyperscalers’ revenues could collapse. If productivity comes from cutting jobs, a public backlash could block many of the planned investments—and stunt anticipated revenues. We will need to win all the wagers for the hyperscalers’ bet to pay off. 

We’re all part of the AI gamble now

It was one thing when the AI companies were spending cash they had accumulated over the years to build their own data centers. Then the risk was largely limited to their own balance sheets and shareholders. But it’s a higher-stakes game when much of the money is borrowed. Morgan Stanley, for one, calculates that more than half of the $2.9 trillion that hyperscalers will spend between 2025 and 2028 to build AI data centers will be financed with “external capital.”

The borrowing is leading some of the companies to engineer complex webs of financing that are becoming intertwined with much of the rest of the economy. “A lot of financial institutions, directly or indirectly, are exposed to these data centers either as lenders, or as guarantors of some of the debt, or as backers of the private credit funds who are funding these data centers,” says Columbia’s Van Nieuwerburgh. “People don’t even know they’re holding this stuff. It’s somewhere deep inside their pension fund. Ultimately, it’s backing their life insurance policies. And that risk is getting distributed everywhere in places that are invisible.”

As the investments in data centers have spiked, the financial engineering has become more byzantine.

Take, for example, Meta’s so-called Hyperion data center under construction in Richland, Louisiana. When the company announced the two gigawatts of compute capacity at a price tag of some $10 billion in late 2024 it was Meta’s largest planned data center. Greeted with much enthusiasm by state and local politicians, the project, located in the rural northeast corner of the state, was seen as a boon to the community. Entergy Louisiana, the state’s largest utility, rushed forward with proposals to build three large natural-gas power plants to service the massive data center.

Then last fall—the projected cost was now $30 billion—the financing got a lot more complex and, to some in the community, a lot more disconcerting. Meta transferred an 80% stake to the large (and troubled) private-credit firm Blue Owl Capital, forming a joint venture called Beignet (like the famed New Orleans pastry) to raise financing for the data center. Meta then signed a series of four-year leases with the joint venture, an arrangement that the company says gives it “long-term strategic flexibility.” To backstop the agreement, Meta provides the venture with what is called a residual value guarantee, in which it will make a cash payment to cover the value of the facility “following any non-renewal or termination of a lease.” Got all that? 

I hope so. The financial wheeling and dealing is actually even more convoluted, with a cast of wholly owned subsidiaries and LLCs. Beignet has set up Laidley LLC, which owns and operates the site as the landlord. In turn, Laidley leases the facilities to Meta’s wholly owned subsidiary Pelican Leap LLC, which is the tenant. And there is a series of four-year leases that cover the different buildings that make up the data center campus. 

It’s not a coincidence, says Van Nieuwerburgh, that the length of the leases matches the expected lifetime of the data center’s GPUs. While Meta has to pay off its loan if it terminates the leases early, that will still leave its investors “with an empty building and no cash flow,” he says. “And then they need to find a new tenant for a huge data center, and good luck with that.”

Meanwhile, Meta is doubling down on its bet. In July, the company announced it was expanding the data center to five gigawatts of compute capacity. The total price tag is now $50 billion (so far, Meta hasn’t said whether Blue Owl will be involved in financing the expansion). Meanwhile, Entergy is now planning to build seven more gas-fired power plants, bringing the total capacity of the facilities to around 7.5  gigawatts—some six times the amount of electricity used by New Orleans.

If the complex financing is a puzzle to many investors and even financial experts, it is even more baffling to those directly affected by the construction of the data center. The main worry concerns how Entergy’s spending on the natural-gas power plants will affect electricity prices, and who will be left paying the bill for the power if Meta walks away.

Entergy says it has a 20-year guarantee from Meta that the company will purchase electricity over that period to cover the costs of the power plants and related infrastructure.  But there are skeptics, especially given how fast the fortunes of the AI industry are changing. “In four years, is Mark Zuckerberg still going to be interested in this? Or is he going to throw in the towel?” asks Paul Arbaje, a senior analyst at the Union of Concerned Scientists, which has been advocating, largely unsuccessfully, for the Louisiana Public Service Commission to provide more transparency around the data center and its financing.

Even if the 20-year deal holds, consumer advocates are worried that Meta or its partners won’t fully cover all the costs, including those associated with operating and maintaining the power plants—and those additional costs that could be passed on to residential ratepayers. What’s more, says Logan Burke, the executive director of the Alliance for Affordable Energy, if Meta doesn’t end up needing as much power as Entergy planned (these projections are not public), consumers could be left paying for the surplus produced by the plants.

And if Meta terminates its leases early? “It gets complicated very quickly,” says Burke, who questions whether the shifting roster of financial entities will honor existing agreements. “That everybody is going to do what they’re saying they’re going to do over the next 20 years is just hard to believe.”

For UCS’s Arbaje the bottom line is this: “They’re making huge bets that these data centers will be worth it. Bet with your own money, not with ratepayer money.”

After the bubble

Predicting when the AI investment bubble will burst is a fool’s errand. But there is little doubt a day of reckoning is coming, given the irrational exuberance that has overtaken the hyperscalers and their investors. Of course, you might argue that this time is different, and that the rules of accounting and lessons of economic history don’t apply—that AI is too transformative. Maybe, but don’t count on it.

“History tells us that at some point you get a retrenchment, and it’s just a question of when and how severe,” says Sloan’s Gensler. It could be that today’s $750 billion spending rate “goes flat” or decreases next year. Or, he suggests, “we’re now in 2028 or 2029, and then all of sudden they’re retrenching because they’ve got enough capacity.” But, he adds, “you can be pretty assured there’ll be a retrenchment.” 

Though a so-called retrenchment might be inevitable, it’s worth keeping in mind that the fates of the financial bubble and the underlying AI technology revolution could be very different. Already, some Silicon Valley insiders are rooting for a crash; in a recent blog post the longtime venture capitalist Vijay Pande wrote that “the coming crash would be the best thing that happens to this technology.” The argument makes some sense. A crash could make AI investments more rational, calm the impulse to build billion-dollar data centers on every vacant field that CEOs fly over, and refocus investors on how to use the technology to create sustainable value.

But we should probably be careful what we wish for. After the bursting of the dot-com bubble at the beginning of the 2000s, hundreds of thousands lost their jobs, large and small companies alike went bankrupt, the economy of Silicon Valley and San Francisco was decimated (at least for a while), and the shocks sent the US into a mild recession in 2001. For the financial community and many tech workers, it was no fun.

Even more devastating for the economy and the average American was the great recession that began in late 2007. Comparing the financial engineering leading up to it and the methods deployed by hyperscalers today is sobering. So-called special purpose vehicles (SPVs) are back! If Columbia’s Van Nieuwerburgh is right about the dangers of letting investments from the hyperscalers get entangled throughout the economy, the fallout could be severe.

But technologies survived and even prospered in the aftermath of both downturns. The early 2000s, even in the face of the dot-com fiasco, were a time of great innovation and tech optimism. The froth came off the spending on silly technologies, helping to focus investments on more promising ones. It’s no coincidence that each of the hyperscalers rose out of the ashes of the crash or started up shortly after. The fiber-optic infrastructure built during the feverish telecom bubble that ran parallel to the dot-com one is still the backbone of much of today’s communication infrastructure; we wouldn’t have Facebook or Amazon or Google without it.

This time, however, we’re facing a unique risk: The huge financial investments by the hyperscalers have ensnared the future of AI itself with the fortunes of the massive data centers spreading around the country. The logic is founded on a deeply held belief about the power of scaling in AI; the bigger you build it, the smarter it gets. That might be true, but it’s unproven and a risky bet.

There are already plenty of red flags, from strong public opposition to the construction of new data centers to the competitive threat from cheaper, good-enough AI models to the rapid improvement of small, local AI models. None of these trends point toward a future dominated by frontier models housed in massive, billion-dollar data centers.

The financial bubble around the colossal spending by the hyperscalers will likely burst eventually—or maybe soon. It might be financially painful, but we’ll survive. Wall Street will survive. AI itself will survive, though it may look different and lose some of today’s hubris. The financial fate and future utility of the massive data centers fueled by trillions of dollars of spending, on the other hand, are far less certain.