Investing in Digital Infrastructure
17 February 2021
Why invest in digital infrastructure? Simply because it is now the foundation of the services we rely on and the rate of demand for these services is only set to grow over the coming years, argues Benn Mikula, manager partner, co-CEO and head of Investments, Cordiant Digital Infrastructure.
Modern communication systems – whether those of telecommunications operators, broadcasters, providers of so-called ‘over the top’ content, corporations, cloud computing providers or governments – can be broadly divided into two main categories:
• the rich set of software and high-technology that enables work-from-home (and learn-at-home), streamed entertainment, online shopping and government services, and
• the underlying physical infrastructure – what we like the call the ‘plumbing of the Internet’.
The tragic COVID-19 pandemic has brought into sharp focus the critical role of digital infrastructure in the functioning of business, government, education and indeed society at large. Yet even prior to COVID-19, digital communications had sparked a series of momentous changes in business (email and software as a service, amongst others), the provision of government services and social life (such as Facebook and Instagram).
Life enabled by digital communications network has become the “new normal”. For example, take commerce: how many Amazon parcels have arrived at your door since March 2020? Think of remote working and the digital transformation to support those who are being educated at home, or at risk or in quarantine (food delivery services, such as Deliveroo and Hello Fresh, for example), not to mention government infrastructure.
Quite simply, digital infrastructure is the foundation to most of the services that we, as a society, have come to rely on today.
Digital infrastructure assets can be sub-divided into three broad categories:
1. Mobile Towers that host the radio antennae (whether 3G, 4G or 5G or, in the future, 6G) owned by mobile carriers.
2. Data Centres that host the servers that house corporate data and government data; in effect they are the home of the Internet.
3. Fibre-optic networks that carry data to and from telecommunications company routing and switching equipment, data centres, mobile towers, offices and homes.
The volume of data traffic travelling across the network was already surging. Whether globally, regionally, or nationally, digital communications networks are continuing to carry extremely high volumes of data and moreover are witnessing sustained and strong levels of traffic growth. Whilst the increases in the amounts of data carried to date have been impressive, numerous studies suggest that this rate of growth will continue for many years to come.
This strong and sustained growth in data volumes creates a financial problem for those entities dependent on the Internet (communications operators, corporations, and governments alike): the cost of the “user facing” layer and the “plumbing” creates a high degree of capital expenditure intensity. Most cannot afford both. A simple means of solving this problem is for telecoms operators, corporations and governments to share the core infrastructure, freeing up capital to invest in what makes them unique and lowering operating costs.
Attractive growth dynamics
This exponential growth in data usage, and for corporations, telcos and governments to share the three sub-sets of digital infrastructure named above has therefore created attractive growth dynamics for infrastructure investors.
Digital infrastructure assets are assets that have a series of attractive investment characteristics, namely they have low obsolescence risk, typically lengthy contract terms and a tendency to attract large and well-funded customers. Even when contract terms are shorter, they are often on contract terms that stipulate automatic renewal (with no intervention required). Moving costs are high and renewal rates often are comfortably above 90%.
The ESG and Impact agendas have rapidly moved to centre stage. Investment into digital infrastructure offers a meaningful way to have a positive impact in the jurisdictions where the assets are located. Digital infrastructure is a core part of the United Nations Sustainable Development Goals (UNSDGs) and investment in digital infrastructure assets has a central role to play on the transition to a low-carbon economy through more efficient cities, connecting less well-served regions, and by bringing greater efficiency and use of renewable power to the data centre complex.
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