Industry Insight: Digital Infrastructure – the plumbing of the internet

By: Gordon Smith


In a report published mid-way through 2020, the International Data Corporation (IDC), estimated that the amount of data created over the next three years will be more than that created over the prior 30 years, and the world will create more than three times the data over the next five years than it did in the previous five.

This high level of growth is supported by the impact expected from the roll-out of 5G connectivity. The fifth-generation technology standard for broadband cellular networks has the ability to increase download speeds by over 18x, significantly lower latency and support significantly higher device density. This could facilitate fundamental changes to the way individuals and companies utilise connected devices. For example, in manufacturing settings, enhanced connectivity enabled by 5G alongside advances in computing power, sensors, and software is driving a fourth industrial revolution, commonly referred to as Industry 4.0 whereby industries are becoming increasingly automated. At an individual level, the way many of us work, shop and socialise is moving progressively online. The IEA (International Energy Agency) estimate that the number of mobile internet users globally is projected to increase from 3.8 billion in 2019 to 5 billion by 2025, while the number of Internet of Things (IoT) connections is expected to double from 12 billion to 25 billion.

“Infrastructure such as telecommunication towers, fibre-optic cabling and data-centres are often termed the plumbing of the internet.”

The trends described above will create investment opportunities in a number of areas over the coming years. However, growth in data traffic is a clear catalyst for digital communication networks to become ever more critical to the functioning of economies. Infrastructure such as telecommunication towers, fibre-optic cabling and data-centres are often termed the plumbing of the internet and enable the data-driven economic revolution to function. Both domestic and commercial internet-enabled devices connect to the telecommunication networks via fibre and mobile towers which in turn connect to the data centres housing the providers of online services.

data centre

Business models across almost all industries are placing a greater reliance on digitalisation and data capture and analysis. However, it is also becoming increasingly accepted that the sharing of digital infrastructure assets (typically termed network neutral communications infrastructure) and use of outsourced data centre services and cloud computing solutions enables most businesses to optimise their IT budgets and focus on their core operations. This structural trend within the market has been adopted to a greater degree in the US but is also progressing in other regions. A study carried out on the telecommunication towers industry by Ernst & Young (EY) showed that the market share of independent tower companies in the US reached 90% in 2020 but, despite steadily increasing in recent years, remains far lower at 20% in Europe. The EY report exemplifies how independent tower companies are playing a key role in enabling 5G rollout and the continued expansion of mobile network coverage as well as helping deliver the benefits of cheaper and better mobile networks.

“The core infrastructure of data centres, cabling and towers are long-life assets with low risk of technological obsolescence.”

Two new Investment Companies, Cordiant Digital Infrastructure and Digital 9 Infrastructure launched on the
London market earlier this year with the aim of deploying capital into the digital infrastructure sector and benefitting from the opportunity – both are holdings within the Killik & Co Alternative Allocation and Alternative Income Services.

These two companies will focus on a similar investment universe. They have between them begun acquiring mobile communications towers (hosting the radio antennae owned by mobile carriers), data centres (hosting customers’ services that power the storage and transmission of data) and fibre-optic networks (cables carry data to and from telecommunications company routing and switching equipment, data centres, mobile towers, offices and homes).

In addition to the supportive demand profile for this infrastructure, these assets have a number of attractive features. The economics of digital infrastructure assets can be compared to that of multi-tenanted real estate. The core infrastructure of data centres, cabling and towers are long-life assets with low risk of technological obsolescence (unlike the equipment that goes in, on or is connected to these assets which is more frequently upgraded) and they have location-based barriers to entry. Tennant leases are typically between 5 and 10 years, have contractual escalators, and high renewal rates due to the significant investments made on the software and hardware by the tenant alongside the infrastructure.

If you would like to discuss anything raised in this article in more detail, please don’t hesitate to get in touch.

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