SUSTAINABILITY INVESTMENTS TO DRIVE DATA CENTRE GROWTH

As demand for data centres surges, investors could support the growth of the sector by exploring investment opportunities in sustainable energy, cooling and energy consumption, data centre operations, and power and connectivity services.

According to McKinsey’s analysis, demand for data centres in the United States is expected to reach 35 gigawatts by 2030, up from 17GW in 2022. This has led to increased investor interest in the sector, with over $48b worth of deals in 2021 and 87 deals worth $24b in the first half of 2022. Data centres are typically owned and operated by large companies or co-location companies, with the latter leasing out space and providing network capacity, power, and cooling equipment. Investors are attracted to the steady, utility-like cash flows and risk-adjusted yields of data centres.

However, there are potential limitations to this trend, such as higher interest rates, competition for potential acquisition targets, and pressure on operating margins from cloud vendors.

Despite these limitations, data centres still present opportunities for investors in sustainable energy. Data centres are big energy consumers, and investors can help them secure carbon-free energy supplies by signing power purchase agreements with suppliers of renewable energy or by investing in renewable-energy plants.

Efficient cooling is also crucial for a data centre’s profitability, as it accounts for 40% of its energy consumption. Companies are developing technologies such as immersion cooling and artificial intelligence and machine learning to address these challenges, and investors can explore investment opportunities in this area.

Investors can also consider investing in data centre operations, such as hosting and infrastructure as a service (IaaS), and power and connectivity services. McKinsey added that the demand for new data centres also opens investment opportunities in the fragmented prefabrication and modular sector and edge computing.

Telcos fall short amidst shifting telecom landscape

An analysis of total shareholder return (TSR) from 2019 to 2022 showed that telcos delivered a middling performance with an average annual return of 9%, Boston Consulting Group (BCG) reported.

This is a point lower than the overall equities market, the BCG report also noted.

The telecommunications sector played a central role in global technology trends and was the essential thread connecting people, businesses, and whole societies during the COVID-19 pandemic.

Despite this, the sector has been unable to achieve returns similar to those seen in other sectors. The rise of Web3, the emergence of Gen Z, intensifying competition from “hyperscalers,” 5G-enabled B2B applications, and the potential in structural separation are set to transform telecommunications, representing an enormous opportunity if navigated correctly.

Lean and digitised operations with excess costs rooted out, a coherent portfolio of products and services, strong customer support built upon aggressively priced products and services, and network investments in 5G, fixed wireless, fiber optics, and other upgrades are some of the traditional strategies that successful telcos have in common. However, these will not be sufficient to drive outsized results in the future given five trends that are set to upend business as usual.

BCG’s analysis reveals that these returns are boosted by pure-play telecom infrastructure companies, whose median annual TSR topped the market by 6 percentage points. However, the other three telco archetypes examined, which include global, large-scale providers, regional, large-scale providers, and smallscale providers, underperformed the market, although a handful of companies within each archetype did better than the average.

Out-creating tech companies

Five trends stand out as having the most potential impact—good or bad—on future revenue and operating income of telcos. The widespread emergence of Web3 will transform consumer and business activities beyond what 5G is offering now. Telcos must begin to anticipate which parts of their markets are threatened by Web3 rivals, the value of these customer segments and how they can invest proactively in new applications that provide innovative and feature-rich Web3 uses and enhanced revenue streams.

The rise of Gen Z, represents a radical opportunity for telcos, that target Gen Z preferences whilst simultaneously being a risk that technology startups and innovators will squeeze telcos out before they make inroads with these new customers. The big tech companies are stretching beyond their original markets and telcos. Telcos have no choice but to out-create the tech companies and develop applications more attractive to consumers and businesses. This will require significant investment in innovation or forging partnerships with other companies that have a foothold in these new markets.

Although 5G networks are already making limited inroads among consumers, particularly for gaming, video, and early-stage virtual reality devices, they may leave a much bigger footprint among business customers. The telecom industry must innovate and anticipate the upcoming changes to compete with its rivals.

If navigated correctly, these five trends represent an enormous opportunity that could significantly change the trajectory for telcos, producing years of solid, above-market returns.

“We believe that whilst short-term performance for some of the more traditional telecommunications companies might be volatile, there are still opportunities for growth and abovemarket returns over the long-term. By leveraging these trends, companies can build a portfolio that delivers innovative and superior customer experiences, provides targeted, high-quality content and applications, and generates substantial revenue streams,” Joerg Staeglich, a BCG principal and report coauthor said.

CAPs and ISPs must collaborate to support internet growth

The past few years have highlighted the need for internet infrastructure that is resilient and scalable in order to cope with spikes in demand. This has led to a resurgence of the idea that internet content and application providers (CAPs) should pay for the privilege of delivering traffic on internet service providers (ISPs’) networks.

In South Korea, interconnection and traffic delivery are left to commercial negotiations between ISPs and CAPs, but in most other places in the world, everyone pays their own costs based on their individual incentives.

This has led to CAPs constructing their own networks from a combination of owned and rented infrastructure in order to be able to deliver traffic in major cities around the world.

It is estimated that CAPs worldwide invested a total of $883b in infrastructure between 2011 and 2021. About half of this investment occurred between 2018 and 2021, with investments averaging $120b each year during this period. These investments have enabled ISPs to save over $5b per year, based on an analysis conducted by Analysys Mason with Netflix in early 2022. The organisation of traffic delivery on the internet has worked well and has supported growth in the scale and scope of online services. The COVID-19 pandemic illustrated the importance of the internet for working, studying and staying connected, as well as the need for internet infrastructure that is resilient and scalable. The synergies between connectivity and content drive the demand for better connectivity. The results of Analysys

Mason’s consumer survey show that users of more advanced online services, including streaming and gaming, already subscribe to faster broadband packages than those that do not use such services and are more likely to upgrade their connections to faster speeds when available. ISPs should focus on making networks work for the next wave of services, such as metavirtual reality (VR) and augmented reality (AR), which will require more bandwidth and lower latencies than the current generation of services. This will enable them to maintain their revenue and support the growth of the next wave of services. CAPs, on the other hand, should focus on investing in their networks and infrastructure in order to support the growth of the internet. They should also consider collaborating with ISPs in order to ensure that the internet can continue to support the growth of online services. This will require a shift in the way that CAPs and ISPs think about their relationships, but it will ultimately be beneficial for both parties and for end users.

Internet exchange points

One way that CAPs and ISPs can collaborate is by participating in internet exchange points, which are physical locations where networks can interconnect and exchange traffic. These exchange points can help to reduce the cost and improve the quality of traffic delivery, benefiting both parties and their common users. Another way that CAPs and ISPs can collaborate is by making use of commercial content delivery networks (CDNs) and public cloud services. CDNs can help to distribute content and applications more efficiently, whilst public cloud services can provide the infrastructure and networking capabilities needed to support the growth of the internet.

Mobile Operators May Struggle To Justify Higher Prices For Business Mobile Services

Mobileoperators are looking for ways to increase the Average Revenue Per User (ARPU) of their business mobile services, but they may face difficulty justifying higher prices to customers who already have large or unlimited data allowances. To address this problem, some operators are creating a significant pricing gap between their cheapest basic plans and their most expensive premium plans, and offering differentiating features to justify the higher price. Orange (France), A1 (Austria), TIM (Italy), and Swisscom (Switzerland) are amongst the operators that have created the largest pricing gaps between their basic and premium plans, with Orange’s premium plans costing between EUR40 per month for 150GB of data and EUR133 per month for 300GB of data. These operators are differentiating their premium plans with features such as unlimited data, 5G access, faster download/upload speeds, better voice/SMS roaming coverage, service discounts, and value-added services, Analysys

Mason reported. These premium features are helping operators justify the higher cost of their premium offerings and capture high-value SME customers who demand enterprise-like care from their providers.

According to a recent study of 14 operators, 5G network access is one of the most commonly used tools to differentiate between premium plans and basic plans. However, small and medium-sized enterprises (SMEs) have indicated that 5G services are less of a priority than other features, but over a third of SMEs will prioritise 5G when making mobile plan choices nonetheless.

Operators can increase ARPU by extending their portfolios of mobile business plans to include higher-priced packages with a number of upgraded features such as larger data allowances, faster speeds, broader geographical coverage, and valueadded services. Ensuring that basic plans differ significantly from premiums will help operators capture high-value SMEs.

Source: AnalysysMason