When creating a new category of products, allowing for some differences in perceived utility, value and valuation often can vary significantly between an older, legacy product and the new product that is a substitute.
To be sure, a fast-growing category of product will have a higher valuation than a slow-growing or declining product. But it also makes sense, from the standpoint of attaining the highest-possible valuation, to position an asset as in the “new” category rather than the older category, when a valuation differential exists.
Granted, it is hard to separate the value of “fast revenue growth” from other attributes driving financial value. Newer products often grow faster precisely because they do offer higher value or utility; have different and better cost structures or other value-creating features.
The point is that key decisions made early in a new product’s positioning within a category can have an important valuation impact later on. This might be true when any single firm has revenue earned from multiple lines of business, for example.
Notably, a pure-play fiber-to-home network carries a distinctly-different valuation from a telco that has both copper and fiber access assets. Data centers tend to have the highest valuations, but, so far, edge computing facilities have a much-lower valuation.
The practical import would seem to be that a unit of revenue earned by a firm with a high valuation is worth more than an equal unit of revenue earned by a firm with a lower valuation ratio. In other words, Equinix earns a higher valuation on a unit of connectivity revenue than does a telco or mobile service provider offering the same product.
When one has a choice, choose to operate in a segment of the digital infrastructure business that carries a higher valuation. Additional assets in other segments with lower valuations will then tend to be credited with the higher valuation.
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