How Telcos Can Unlock Value From Their Data Centres
There are about 600 hyperscale data centres globally and, significantly, almost a hundred of those were built in 2020 alone. There are believed to be another 200 under construction around the world. And while approximately 40 per cent of those are in the US, demographic trends will see the region’s share shrink in the coming year. Countries in the APAC region and in particular, in Southeast Asia, will capture much of the growth.
All of this points to robust opportunities opening up for traditional digital infrastructure businesses (like telcos) to release some of the value currently locked up in their operating assets.
Growth drivers
The global pandemic has supercharged the acceleration of business digitalisation. For one thing, it has blown away the biggest inhibitor to transformation: the inertia of “business as usual”, which is no longer viable as consumers around the world shelter in place.
In late 2020 McKinsey and Company revealed that a global survey of its corporate client base found that enterprises experienced as much as seven years worth of transformation in just six months after COVID hit.
That acceleration, on top of two decades of structural shifts like cloud computing and the emergence of “as-a-service” business models, has led to an explosion in the numbers of data centres all over the world.
Even as the world adjusts from responding to the acute phase of the pandemic to dealing with its longer-term baked-in consequences, the indications are that the drivers behind data centre growth will remain.
The share of products and services that are digital in nature grew from 35 to 55 per cent on average globally, according to the McKinsey survey. The change was even more pronounced in the Asia-Pacific region, where this metric more than doubled - from 22 to 53 per cent. All of this in just two quarters.
Little wonder, then, that Accenture forecasts the number of large-scale data centres will increase by 14 per cent each year - growth it attributes largely to rising demand for hyperscale public cloud services.
Globally, the total cloud computing market is expected to hit $163 billion this year - almost a third larger than in 2017.
Yet even before the pandemic, the trend in data centre growth was apparent.
A 2018 study by Cushman and Wakefield identified Southeast Asia as the fastest-growing region for co-location data centres, with the authors arguing that the position was likely to be sustained for five years.
Cushman and Wakefield observed that the hyperscalers - including Google, Amazon, and Alibaba - were all set to expand their infrastructure.
The Indonesian experience
Within Southeast Asia, Indonesia is seen as having the strongest growth potential, with data centre CAGR forecast to average 22 per cent through to 2024.
There are several reasons for this, including growing smartphone usage and ecommerce transactions (with gross merchandise value expected to reach $82 billion by 2025) along with government initiatives around digital service delivery and new regulations concerning data sovereignty.
Indonesia also offers a lower-cost alternative to Singapore - a factor said to have contributed to Google’s entry into the country.
The archipelago’s domestic Internet metrics also suggest a robust opportunity. The country had over 174 million internet users as of 2020, with penetration still sitting at just 64 per cent of the population. Yet it also had over 338 million mobile connections at the same time - equivalent to 124 per cent of the population, but still growing at four and a half per cent.
Its burgeoning middle class will come to expect the kinds of world-class digital services increasingly common in mature internet markets to accompany all that higher prosperity. The government’s commitment to extending Internet connectivity to more remote islands and villages will see total penetration continue rising for years to come.
A robust news cycle around data centres in Indonesia in just the first half of this year underscores the opportunity. Among the key deals:
February - Microsoft says it plans to establish its first data centre in the country.
April - Tencent announces a facility in Jakarta’s CBD, and Telkom Indonesia opens its Neutral Cloud and Internet Exchange data centre in the Kalimantan region. Meanwhile, Indonet purchases 6000 square metres of land for the development of data centres.
May - Singapore ST Telemedia announces a joint venture with Triputra to be built in Greenland International Industrial Center, and partly financed by Temasek.
June - DC Indonesia opens its fourth data centre in the east of Jakarta. Later in the month Digital Edge, backed by Stonepeak Infrastructure Partners, acquires a majority stake in Indonet.
The opportunity for telcos
The growth in the data centre sector, coupled with strong fundamentals for Internet consumption in Indonesia, presents a particular opportunity for telecommunication providers.
However, while a data centre remains trapped inside a carrier, its value tends to be obfuscated by the overall performance of the enterprise. Telcos across the region currently trade on 4-9x forward EBITDA, whereas data centre businesses trade on multiples of 20-40x. (In our November 2020 edition we reported on profound value creation within the data centre sector).
That means there is theoretical potential to unlock significant shareholder value through carve-outs - especially in partnership with the operators who can attract the hyperscalers.
This model has already been successfully executed by XL Axiata, which in 2019 spun out its data centre and then partnered with PDG, which bought a majority stake in the new company.
What is true in Indonesia is also true across the region. As Cushman and Wakefield noted, the hyperscalers are key. Google, Microsoft, and Alibaba are all moving into the region, and they’re committing to supporting the growing data centre sector. For now, only Amazon seems committed to building its own data centres.
For telcos, the first step is to understand the scale of the assets they might bring into potential data centre joint ventures, and then look for operator partners that can attract hyperscalers. In such a model, the telco is effectively the anchor tenant for that co-location joint venture, while the partner brings economies of scale, with their procurement processes and their relationships with hyperscale clients.
The devil, of course, is in the detail. The seemingly obvious value arbitrage may be real, but could also be illusory. We see the upside requiring some repackaging of the assets before they are carved out or spun off.
Conclusion
In much the same way that many telecommunications operators have shed their towers, there is now an opportunity to release the value tied up in their data centres by finding partners to develop a new co-located business with the objective of realising higher valuations.
While there is certainly a pandemic effect behind the rapid digitalisation which is driving data centre investment, there is also a more profound longer-term structural shift in consumer behaviour underway. That will continue to fuel demand for data and information services long after the pandemic has passed into memory.