Eventually, "Back to the Future" for Lumen Technologies

Eventually, Lumen Technologies will go back to the future, reversing its mashup of focused data transport and enterprise customer base with legacy telco local access businesses.

Right now, Lumen arguably is too small to compete with the likes of AT&T, Verizon and T-Mobile, but too large to effectively compete with local internet service providers.

And if Lumen separates its data transport from local access businesses, it will recreate its existence as a bigger version of Level 3 Communications, but shedding its legacy in the local access business. Still, it will be a smaller company than it is today.

The reason is simply that the capacity business is smaller than the mobility and consumer communications businesses Lumen will leave.

Looking at data transport revenue for major U.S. fixed network providers in 2023, excluding mobile revenues, Lumen’s position is arguably quite different from that of AT&T and Verizon. Because both of the latter firms have such huge mobile services businesses, the data transport portion of total revenue is relatively smaller than at Lumen. 

Though business revenues represent about 30 percent of Verizon’s revenue, and about the same percentage at AT&T, business revenues are 45 percent of Lumen Technologies revenue. Data transport is a portion of total business revenue.

Company	Total Revenue (USD Billion)	Business Segment (USD Billion)	Consumer Segment (USD Billion)
Lumen Technologies	$14.56	$6.6 (Enterprise)	$3.1
AT&T	$120.7	$36.3 (Business Wireline)	$15.1
Verizon	$134.0	$39.6 (Business Solutions)	$21.8

With the caveat that it can be difficult to separate out data transport revenues, such revenues are likely in single-digit billions of dollars for leading transport providers in the U.S. market. 

Company	Core Network Data Transport Revenue
Lumen Technologies	~$4.7 billion (2023)
AT&T	~$9 billion (2023)
Verizon	~$7 billion (2023)
Charter (Spectrum Enterprise)	~$1.5 billion (2023)
Comcast (Comcast Business)	~$2 billion (2023)
Cox Communications	~$1 billion (2023)

The point is simply that Lumen Technologies is different from the other noted providers in having a relatively small consumer business to rely upon for revenue generation. And that consumer business relies principally on the local access facilities, not the wide area data transport network. The other providers have substantial consumer revenue operations in both mobility and fixed network realms. 

Lumen does not have mobile revenue exposure and has a relatively small consumer revenue footprint, as business segment revenues are routinely about 78 percent of total revenues. 

That is the result of a sort of “mashup” of data transport assets with a traditional telco base that always was the least-dense of all former Bell company geographies. That also means it is less feasible for Lumen to upgrade its fixed network for fiber services. 

For that reason, it always has seemed reasonable to assume that, at some point, the former U.S. West (Qwest) assets would be separated from the core data transport assets. 

Looking at the acquisitions and asset dispositions Lumen has made over the past couple of decades, you can see the logic. 

U.S. West, the former telco, was acquired by Qwest Communications--a long-haul data transport and metro fiber company, in (2000. That was the first mashup.

Then, in 2011, Qwest was acquired by CenturyLink, a Louisiana-based telecom provider with a largely rural and consumer footprint. That would seem to be a move back in the direction of local access operations. In fact, CenturyLink sought a bigger role in business and enterprise services, but the acquisition of Qwest also gave the new CenturyLink a greater consumer services footprint. 

The 2011 CenturyLink acquisition of Savvis gave CenturyLink a bigger footprint in data center, cloud computing, and managed hosting services, rebalancing a bit back to enterprise and business revenue.

But it was the acquisition of Level 3 Communications in 2017 that completed the mashup, given Level 3’s huge presence in long-haul data transport, metro fiber operations and international assets. Level 3 has solely focused on enterprise and wholesale capacity operations, not consumer local access.

The first step towards reconfiguring the asset base came as Lumen divested its local telephone business in 20 states in 2021, shrinking the company’s revenue and highlighting its debt profile. 

The next shoe to drop, some would argue, is a separation of the remaining former U.S. West local access assets from the assembled portfolio of global capacity assets. If Lumen retains the capacity portfolio, while shedding the local access assets, it would be a smaller, focused capacity business, as was Level 3 Communications. 

Back to the future, in other words.

High AI Capex is Worrisome, But "Winner Take All" is the Prize

It is not hard to find estimates of investment in U.S. artificial intelligence infrastructure (computing capabilities) in the range of $300 billion or more between 2023 and 2030. IDC analysts have suggested $300 billion in investments between 2023 and 2026.

Nor is it hard to find critics who worry about uncontrolled spending without a clear revenue model. On the other hand, leaders of firms attempting to become leaders in the generative AI model business are likely to keep in mind the “winner take all” dynamic we have seen in the recent internet era, where just one or a few firms emerged as leaders in new markets. 

They might point to:

• Amazon's years of heavy investment to dominate e-commerce

• Google's massive spending to establish search leadership

• Cloud providers' huge datacenter investments

• Meta's acquisition strategy in social media.

In fact, many markets show scant ability to support three providers, as the market leader has twice the share--and up to an order of magnitude more-share compared to  the number-two provider.

Market	Dominant Player	Market Share	Runner-up	Market Share
Search Engines	Google	91.9%	Bing	3.0%
Desktop Browsers	Chrome	65.72%	Safari	18.22%
Mobile Browsers	Chrome	66.17%	Safari	23.28%
Social Media	Facebook	2.9B users	YouTube	2.5B users
E-commerce	Amazon	37.8% (US)	Walmart	6.3% (US)
Video Streaming	YouTube	2.5B users	Netflix	231M subscribers
Music Streaming	Spotify	31%	Apple Music	15%
Ride-hailing (US)	Uber	68%	Lyft	32%
Cloud Services	AWS	32%	Azure	22%
Mobile OS	Android	71.8%	iOS	27.6%

So even if McKinsey estimates AI infrastructure spending will exceed $500 billion between 2023 and 2030, and even if many of those investments do nor produce the expected results, model suppliers have incentives to risk quite a lot, knowing that there is a small  prize for being second best. 

Gartner forecasts global AI infrastructure investments will surpass $250 billion annually by 2030. 

The OECD estimates investments in AI infrastructure across industries, will reach $1 trillion by 2030, across the OECD countries. Bloomberg predicts that the global AI infrastructure market will $700 billion by 2030.

On the other hand, most of that investment will be by end users and others in the value chain, not the generative AI model providers. 

And some estimates made in 2023 might be considered conservative in 2024. Morgan Stanley’s  "The Economics of AI” study, published in October 2023 suggested more than $200 billion in AI infrastructure investments by 2030, including:

• Data centers: $125B

• Networking infrastructure: $50B

• Chip fabrication: $25B

• Cooling systems: $10B.

Boston Consulting Group in December 2023 suggested there would be $235 billion cumulative investments in 

• Data center buildout: 45%

• Compute infrastructure: 35%

• Power infrastructure: 20%. 

The Goldman Sachs "AI Infrastructure Report," published in September 2023 estimated $275 billion in  cumulative investment, including:

• Semiconductor investment: $100B

• Data centers: $115B

• Power systems: $35B

• Network upgrades: $25B. 

The caution, though, is that early estimates of the size of new technology markets often lead to overinvestment across the value chain. 

Study/Report	Date	Publisher	Key Conclusions
The Dot-Com Bubble Burst: Causes and Implications	2001	U.S. Securities and Exchange Commission (SEC)	Overinvestment in internet startups led to a speculative bubble that burst in 2000. Many companies were overvalued despite having no profitability.
Boom and Bust: The Telecommunications Investment Bubble	2002	Federal Reserve Bank of San Francisco	Overinvestment in telecom infrastructure during the late 1990s led to a major industry downturn, with unsustainable levels of capital spending.
The Case for Less Innovation	2017	Harvard Business Review	Many companies overinvest in unproven technologies without clear demand, resulting in failed projects and wasted resources.
Lessons from the Clean Tech Bubble	2016	MIT Energy Initiative	Overinvestment in cleantech (2005-2011) led to massive failures, with many companies being too early to market and receiving excessive venture capital.
Investing in Innovation: Creating a Research and Innovation Policy That Works	2010	The NESTA Foundation (UK)	Over-investment in R&D for new technologies can create inefficiencies and fail to produce proportional economic benefits if not managed strategically.
The Nanotechnology Investment Bubble	2005	Journal of Nanoparticle Research	Speculative investments in nanotechnology during the early 2000s led to unmet expectations, as many products were not commercially viable.
Unleashing Productivity: Overinvestment in Information Technology	2005	McKinsey Global Institute	Overinvestment in IT during the late 1990s and early 2000s did not yield expected productivity gains, with firms often adopting technology prematurely.
The Illusions of Overinvestment in AI	2021	Brookings Institution	Many companies overinvest in artificial intelligence without clear applications, leading to inflated expectations and unrealized returns.
The Biotechnology Bubble: When Science and Finance Collide	2004	Nature Biotechnology	Excessive capital flow into biotech during the 1990s led to overvaluation, with many firms failing to achieve meaningful breakthroughs.

In recent years we have also seen examples of overinvestment by many platform suppliers as well. 

Technology	Company/Industry	Year	Description of Over-Investment
Artificial Intelligence	IBM Watson	2011-2022	IBM invested billions in Watson AI for healthcare, but struggled to generate significant revenue and ultimately sold off the health assets
Virtual Reality	Meta (Facebook)	2014-present	Meta has invested over $36 billion in VR/AR technology with limited returns, facing skepticism about the metaverse vision
Blockchain	Various	2017-2018	Many companies rushed to invest in blockchain during the crypto boom, only to scale back or abandon projects when the hype died down
Autonomous Vehicles	Uber	2016-2020	Uber invested heavily in self-driving technology, spending over $1 billion before selling the unit after a fatal accident and regulatory challenges
3D Printing	3D Systems	2013-2015	The company aggressively acquired 3D printing startups, leading to over $1.3 billion in losses and a stock price crash when consumer adoption didn't materialize
Cloud Computing	HP	2011-2012	HP's $11 billion acquisition of Autonomy for cloud services led to an $8.8 billion write-down

So the rationale for investing heavily to secure the leading position in the generative AI model business is a reflection of the possible “winner take all” character of application and platform markets, where the number-one provider dominates. 

And since market share and profit margin generally are related, the rewards for market leadership also are significant. In many capital-intensive markets, the profit margin of the top provider is double that of number two. 

And provider number two can have margins double that of provider number three.