Forget the dot-com crash

Forget the dot-com crash

24 June 2020 | Melanie Mingas

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Burned by the investment decisions of the past, telcos have for years been largely absent from the data space. However, it could be time to revise the strategy. Melanie Mingas writes.

If publishing and telcos have two things in common, it’s that digitalisation sent their traditional revenue streams into freefall.

In the media space this paved the way for a rapid and sharp consolidation, waves of closures, and a significant contraction in the provision high quality news output across print, online and broadcast platforms.

In the telecoms space, it all began in 2001.

Inflated with speculation and hope, the dot-com bubble burst in spectacular style but the impact quietly rippled throughout the telecoms industry to create a situation far more catastrophic.  

In the five years before the telecoms crash, as much as US$500 billion was spent on internet infrastructure, but the resulting capacity overload reduced the value of the investments to almost zero, and some of the biggest names in the industry filed for bankruptcy.

Still mindful of the trauma, many believe this experience is what is stopped telcos from pursuing data centres as both investment assets and innovation springboards.

“I suspect that there are increasingly fewer people around who actually lived it but at this point it has been a cautionary tale for people,” says Rob Coupland, CEO of Pulsant.

Starting his career in telecoms before moving into data centres, Coupland has experienced both sides of the coin.

“Telcos have grappled with the ‘do we don’t we’ investment and several of the bigger ones have been through that a couple of times.

“There is a certain dynamic. The investment cycle around it is somewhat different and both networking and data centre businesses tend to be quite capital intensive. I think what some telcos found was there was a constant debate around where they should put their investment to work – in the network or in the data centres,” he adds.

While many chose the network, data centres have become one of the strongest commercial real estate sectors in the market currently and, despite their CAPEX-intensive business model, Technavio predicts the global industry will see CAGR of 17% to 2023.

The dollar value of that growth will reach $284.44 billion and in India alone, Arizton says investments of $10 billion are expected in the short term.

However, while it has been a natural evolution for telcos to offer some hosting provisions, the majority don’t contribute to these figures.

“Most of the data centres telcos hold are of the first-generation sort. They are facilities that are retrofitted from network sites, or they are smaller and slightly older, purpose-built sites,” says Brenden Rawle, EMEA director of interconnection at Equinix.

“This means they struggle to keep pace with the rapidly evolving technology landscape.

“The advent and growth of public cloud, colocation and other purpose-built managed hosting providers in the last seven to 10 years, has further eroded the revenue potential of telcos in the data centre and hosting space,” he adds.

Along with Digital Realty, KKR and DATA4, Equinix is one of a number of players investing in new – and old – assets. Coupled with hyperscalers building their own multi-billion-dollar global war chest, the market is strong but steady.

It’s great news for the data centre industry, but it gives weight to the question: what happened to the telcos?  

“A lot of the carriers struggled with the neutrality piece because they wanted to make sure the customers who came into their data centres were also taking their network services. There aren’t many carriers that really got that right,” Coupland says.

The question of what do to with these assets is becoming increasingly difficult to answer and dozens have opted to sell, among them Axtel, Verizon, Telefonica SA, AT&T, CenturyLink and Vodafone (see box).

Taking a slightly different approach, last year Telecom Italia (TIM) announced plans to spin off its 23-facility data centre portfolio and list it on the stock market to create a potential US$1.1 billion business.

“Over time we have seen the telcos recognise that they have these assets but they tend to be underachieved in terms of what they have done, and others may be better placed to realise that value,” Coupland says.

Those who dare

Not everyone is stepping away.

Last year Orange invested €100 million in two facilities in France while retiring a further nine centres with now outdated infrastructure.

Center-Val de Loire and Normandie2 are both due online this year and host Orange’s business and residential customer data and services, as well as the telco’s own in-house system.

“Eco-efficient, resilient and highly secure”, Orange said the data centres respond to the growing requirement for hosting space.

“These data centres are real strategic assets for Orange: they will allow us to support our customers’ increased use of digital technology in a trusted environment, whilst also allowing us to significantly reduce our energy and environmental footprint,” said Stéphane Richard, chairman and CEO of the Orange Group at the time.

Orange isn’t just building any old data centres – its facilities are also environmentally friendly with the new centres consuming 60% less energy than their predecessors, and 80% less AC due to the use of free cooling technology.

In late 2019, China Mobile International (CMI) opened its first European data centre, a purpose-built facility in the UK, connected to a newly opened centre in Singapore and the global network centre in Hong Kong. Another facility in Frankfurt, Germany, will follow.

Although this development is as much about Chinese politics as it is innovation – the official announcement credits the centre with contributing to the “belt and road” initiative – it still boasts some noteworthy credentials.

The overall network provides access to more than 300 cities in 31 provinces and regions throughout mainland China and links to CMI's APAC submarine cable systems. The UK centre can leverage the terrestrial cable resources covering the belt and road region.

Noting strong customer demand for connectivity, cloud and content delivery solutions, Dr Li Feng, chairman and CEO of CMI said at the launch: “In the big data era, data centres play a key role in facilitating information exchange. Our UK data centre provides a powerful platform to meet the needs of the financial sector, internet businesses and other digitalising industries today and for the future.”

The business case

Much has changed since the dot-com era, and the business case for the data centre as an asset is just one of those changes.

The sum of the world’s data – according to calculations by IDC – will expand from 33 zettabytes in 2018 to 175 zettabytes by 2025. While telcos won’t be taking full responsibility for its storage, a growing portfolio of services coupled with customer demand for low-latency data services will contribute to its generation. Ahead of the arrival of this tsunami, telcos need to reassess the troubled relationship they have with their data centre assets.

“Disruptive technologies, such as 5G, are placing a huge strain on legacy and outdated digital infrastructures, and this is only set to continue as more connected devices from dispersed locations look to leverage its increased network speed,” Rawle says.

“Siloed, legacy infrastructures ultimately cause sluggish download speeds and have a detrimental impact on customers’ experience,” he adds.

Although the interest is clear, Rawle maintains third-party data centres could be the steppingstone telcos need as they add much needed capacity and capability.

He observes the preferred solution for enterprise is third-party data centre and cloud providers, deploying hybrid IT infrastructures dynamically within highly interconnected digital ecosystems at the edge.

The trend is so strong it is set to push interconnection bandwidth in the telecommunications sector to a compound annual growth rate (CAGR) of 39%, reaching 2,524 tbps by 2022 and outpacing all other industries. 

Rawle says those who miss the bandwagon risk falling behind.

“They will lack the processing power to handle the huge amounts of data being produced, and they will be unable to take advantage of critical services, such as interconnection with clouds and business partners and software defined networking,” he explains.

“Additionally, they could get stuck maintaining an expensive asset that is unlikely to deliver any returns. Reducing reliance on these data centres will allow telcos to free up capital, cut overall IT costs and utilise scalable network architectures, that can be tailored to their specific business needs in a secure environment alongside their customers and partners,” he adds.

From hosting PoPs to enabling the edge, the modern data centre is changing and so too is its business case. But whether through ownership, colocation or renovation, the task at hand remains the same: to address mounting financial pressures telcos must generate revenue by meeting growing and changing demands to the highest possible standards.

Whatever blend of services are selected to achieve this, their relationship with data in all its forms is changing forever.