How Much Disaggregation of the Connectivity and Data Center Businesses is Possible?

How much could connectivity service provider models disaggregate? Quite a lot, some believe. 

Consider the analogies of the digital infrastructure value chain to the hospitality value 

Chain (hotels and lodging). That ecosystem and value chain aer built on passive assets such as buildings and land. That is a real estate play with investment time horizons possibly in the decades. 

Then there are hotel properties built to supply lodging, which can use a variety of business models, ranging from real estate rentals to physical facilities management and operations. Investment time frames in this segment also can stretch out for a couple of decades. 

Then there are “brands” that are service providers, essentially focused on marketing and sales functions with scale economies. 

source: European Commission 

To use the connectivity provider analogy, there are digital infrastructure passive assets such as tower locations or some aspects of the data center business. Active assets include data center services, ranging from rack space to virtual service functions, or active wholesale connectivity networks. 

Then there are the clear retail “service” providers supplying internet access, mobile service or  “computing as a service” or “infrastructure” or “apps” as a service under a specific brand name. 

As in the hotel business, branded services often operate with shorter investment payback time frames (five to six years) while full real estate plays often are better suited to patient long-term investors who value predictable income streams more than asset appreciation. 

Private equity tends to operate with shorter five to six year horizons, with a focus on restructuring business models and operations to generate asset value and then selling those assets. 

The thinking there is that the ultimate buyers are patient investors able to handle a 20-year investment return cycle. Private equity acts as a shorter-term value reconstruction play, with the exit being a sale of the assets. 

The issue is the long-term impact on  the connectivity and data center businesses. Will branded service providers more often operate in the marketing and sales functions, and less in the ownership of physical networks part of the business? 

Will many or most service providers eventually resemble mobile virtual network operators who do not own physical network assets? That would be a big change in both fixed and mobile segments of the connectivity business.