Digital infrastructure market trends

Digital infrastructure (networks, data centre and software) is growing significantly globally. Tier 1 hubs are densifying and opening up opportunities in new markets. This article provides an overview of the market landscape and dives into the key trends driving growth.

The digital infrastructure market

The digital infrastructure market is made up of two key domains: connectivity (networks) and compute/storage (data centres and the software to support these). Managed services is also a growing related part of the market, which can be provided across either connectivity or compute/storage, or both. COVID-19 and beyond highlighted that digital infrastructure was not a nice-to-have but fundamental to the world we live in. Terms like the “digital divide” and “broadband gap” are being used to encourage governments and the private sector to build out infrastructure, not only in urban centres, but in rural and remote locations too. For example, in the U.S., the largest federal government programme, Broadband Equity, Access and Deployment (BEAD), will provide USD 42.45 billion to broadband projects.

Digital infrastructure market and assets

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 Key trends driving digital infrastructure growth

The growth in digital infrastructure over the next few years is being driven by 4 main factors: demand, data sovereignty, latency and government policy. Demand is growing, as countries globally continue to rely on IT for their core businesses. However, new pockets of demand are being created as industries start to digitalise outside IT, for example in telecoms with network virtualisation, manufacturing with IT/OT convergence and retail with the continuing trend towards e-commerce, but also in-store digitalisation.

The model of using a small set of hyperscale data centres to serve a vast number of markets and customers has its limits. The question of “how do we protect our data?” is front of mind for governments globally, resulting in new data sovereignty laws. In some countries, such as the U.S., data protection laws are complicated by being fragmented across federal and state laws. This is resulting in demand for data centres within countries to serve local markets and keep data within the jurisdiction.

The third factor driving digital infrastructure growth is latency, i.e. the time it takes for an application to respond. With networks becoming congested and digital applications becoming more data rich, existing networks’ ability to ensure an adequate experience becomes limited. In addition to this, we are seeing new applications driving the need for lower latency, particularly as enterprises use video sensors for IoT applications (e.g. for real-time customer engagement and quality assurance.) and in domains such as autonomous driving, AR/VR, etc.

Finally, government policy is helping accelerate this growth. This includes strategies to boost the digital infrastructure industry within the country and result in updates to regulation to make it easier for businesses to set up and implement infrastructure, or incentives such as tax breaks. In India in 2020, The Ministry of Electronics and Information Technology (MEITY) elevated data centres to a higher “infrastructure status”, equivalent to that of roads and electricity and put in policy to streamline approval processes. MEITY also offered subsidies and tax breaks in specific regions.

Telecoms, networks and towers

In telecoms, networks and towers we are seeing the following key trends that are driving growth:

• Tower spin-offs: Mobile towers are being spun off by large telecoms operators to raise capital and ease debt burdens, which has been partly driven by the amount of investment put in for 5G and fibre, coupled with limited top line revenue growth. Companies like Vodafone, Deutsche Telekom, Ooredoo and América Móvil have all done this, or are in the process of doing so, selling their assets to major towerco businesses, such as American Tower and Cellnex.
• Network virtualisation: Telecoms operators are changing the way they build and run their networks, from using purpose-built, proprietary equipment (from traditional vendors such as Nokia, Ericsson, Huawei, Cisco, etc.) to cloud-native platforms. This separates the compute infrastructure from the network functions (applications) and allows telecoms operators to programme their networks much more easily, innovate much quicker and create new (virtual) networks and services on top of that same infrastructure.
• Rise of the AltNets: The ever-increasing rise in demand for connectivity is resulting in new companies entering the network market. These “AltNets” may be quicker to build out network coverage than traditional network operators and often focus on specific regions within countries. According to Intelligens Consulting, AltNets in the U.K. pass fibre in 5.4 million premises in 2023, which was a 28% increase in the number of homes passed in 2022. The challenge for AltNets is ensuring profitability, as they attempt to take business from incumbent network operators, as well as capture new market share.
• Telecoms assets broadening their services: Telecoms assets, such as mobile towers and central offices, are looking to maximise value of their real estate. With 5G, ultra-low latency will be achieved through the use of millimetre wave (high frequency spectrum), which requires a huge amount of small cells to be implemented, some of which be done alongside existing assets. Other trends, such as edge computing, will result in very small data centre-like infrastructure being built. Existing telecoms assets are strong potential locations, given they already have access to power, fibre and some level of security.
• Neutral host networks (NHNs): NHNs are third-party cellular networks that provide wholesale solutions to other mobile network operators (MNOs) or communication service providers. This is interesting for real estate owners who see an opportunity in using their property to help contribute to widening 4G/5G coverage, particularly in areas with insufficient coverage, such as rural locations and in-building. An NHN will likely host multiple MNOs, sometimes offering services in an as-a-Service model.

Data centres, cloud and edge computing

The data centre market is growing at a rapid pace globally – analysts estimate between 5-20% compound annual growth from 2020-2030.This is being driven by a combination of factors increasing demand: latency, data sovereignty, digitisation in growing markets resulting in new use cases that require data centre infrastructure.

In some countries, supply is not keeping up with demand. Time to build and time to market is critical as data centre operators seek to capture the opportunity. This need to move quickly has resulted in new ways of building data centres, for example using pre-fabricated, module-like data centres which can be dropped in quickly, rather than opting to build bottom-up.

Cloud is continuing to grow. Infrastructure-as-a-Service (IaaS) is being increasingly adopted, particularly as enterprises move to public cloud and seek to reduce costs related to operating and managing infrastructure. They also prefer to use their real estate for expanding operations of their core business. However, this desire to offload IT operations and management is continuing to higher levels and seeing a rise in Software-as-a-Service and managed services. Attracting talent with skills related to cloud, data science/analytics/AI and software engineering is difficult if you are not a software giant. Nonetheless, it is important that enterprises use software to optimise their business and grow. For these reasons, many are opting to focus upskilling at higher levels of the stack, e.g. in building and programming end-applications that directly impact their business, rather than lower level domains, such as infrastructure, platforms, etc.

One of the key themes in the data centre and cloud market is edge computing. Edge computing is a broad, complicated term that can refer to a number of things, e.g.:

• Smaller, more local data centres
• Bringing cloud to the premises
• Decentralising computing

STL Partners defines edge computing as a method of optimising applications or cloud computing systems by taking some portion of an application, its data, or services away from one or more central nodes (the “core” or cloud) to the other logical extreme (the “edge”) of the network which makes contact with the physical world or end users.. The edge could be a small data centre, but it could also be a small number of computing devices (in some cases servers). In terms of location, this could span from the enterprise site, a telecoms operator central office, street real estate or regional data centres/internet exchange points.

This market is receiving a huge amount of investment in anticipation for the demand for new solutions and services it will bring – USD 1.8 billion in 2020 alone. STL Partners estimates that the market for edge computing (across the value chain, from infrastructure to applications and services) will be USD 445 billion by 2030, largely driven by verticals such as media and manufacturing.

Edge computing market size 2030

The types of companies serving this market include the existing cloud and IT giants, for example AWS has launched a number of offerings that extends its cloud to the edge (such as Wavelength, Outposts and Greengrass) and HPE has an IaaS service, Greenlake, which can be deployed at the edge, as well as its edge orchestration platform offering. On the other hand, STL Partners has been deeply engaged in the industry and tracking newcomers to this space in our Edge Ecosystem Tool. Some of these companies seek to provide platforms that fulfil new requirements emerging with edge computing, for example the ability to easily orchestrate devices and software across a large pool of nodes, or coupling network and compute infrastructure to meet the needs of end-applications, particularly with regards to latency and jitter.

Telecoms operators are evolving their existing sites (e.g. central offices), previously used to house networking equipment, into data centres and see an opportunity to provide edge computing services to enterprises and developers from these sites. STL Partners predicts there will be just under 1,200 network edge data centres by 2026.

Headwinds in the digital infrastructure market going forward

Despite COVID-19 and the macroeconomic climate, the digital infrastructure market has maintained momentum and continued to see investments grow. Whereas other assets have seen capital move away, reliable returns from digital infrastructure assets have attracted investors. There are plenty of greenfield opportunities in new markets that are relatively untapped and the continuous rise of trends such as remote working and digitisation will ensure this stays the case.

However, there are potential considerations and headwinds that can impact certain parts of the market. STL Partners’ Edge Investments Tracker has seen a decline in investments in edge computing over the last 3 years, from USD 1.8 billion in 2020 to USD 1.4 billion in 2022. This is largely due to many of these being higher risk and driven by venture capital; a different class to traditional core infrastructure assets, such as hyperscale data centres and network infrastructure.

Another consideration to be aware of is change in government regulations, either due to data security, economic policy or sustainability. The latter has had force infrastructure owners to change the way they build and manage power, in particular. This can be especially challenging in countries where access to green power is limited.

Author

Dalia Adib

Director, Consulting

Dalia has led numerous projects on edge computing in recent years, working closely with Tier-1 operators to identify strategic opportunities. She has also been leading projects on 5G, blockchain and IoT. Prior to STL Partners, she worked at a start-up and has a BSc in Government and Economics from LSE.