Connectivity Providers are in a Box

To a signficiant extent, all tier-one connectivity service providers are in the same box: trapped in a highly-competitive business with slow to no growth; with declining profit margins and a "return on investment" problem and lacking the capital resources to make fundamental changes.

AT&T’s forays into media continue to be roundly assailed, but illustrate the problem.

The recent acquisitions and divestitures of DirecTV and WarnerMedia bring to mind earlier “grow the company” efforts that were focused on the core connectivity function, and also cratered, for arguably the same reason: AT&T’s debt burden was too high. 

The strategy might even have been correct, but AT&T could not survive the debt-fueled strategy. And keep in mind "AT&T" has failed in two incarnations: first as a long distance company trying to create local loop facilities; the second time as an integrated provider trying to move beyond a reliance on connectivity revenues.  

In the late 1990s, AT&T made a big move into cable TV, partly to fuel its move into local access services, partly to capitalize on the robust cash flow cable TV was then generating. 

Given the success cable operators have had with broadband access and support for voice services (the networks of the early 1980s were one-way) show the strategy was not wildly off the mark. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984.

When AT&T bought Tele-Communications, the objective was to use those assets to create a national broadband access capability which AT&T did not at that time possess. Recall that the 1983 divestiture of monopoly AT&T created seven local access companies--the “Baby Bells”--while restricting AT&T to long distance. 

When, in 1996 the Telecommunications Act opened all telco markets to competition, AT&T was faced with the challenge of creating a facilities-based local access network capability. That it failed to do so successfully is not too surprising, given the cost of creating an almost-nationwide broadband infrastructure. Think of the continuing cost of creating fiber to home networks nationally. 

Having concluded it had neither the time nor the money to create access networks nationwide, AT&T gambled on upgrading TCI’s cable networks. But the strategy was not the issue, the debt was. 

AT&T also bought Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion, as parts of a move into local access. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

The point is that AT&T could not figure out a way to quickly create a massive facilities-based local access network capability to compete with the Baby Bells and all the other newcomers, after passage of the 1996 Telecom Act. 

As a related issue, AT&T was not able to replicate the success later shown by Comcast in diversifying its product lines beyond the legacy. Comcast now earns significant revenue from content ownership, subscription video, home broadband, business services and voice, where it once relied exclusively on cable TV subscriptions.

AT&T hoped to replicate that feat. Yes, the strategy failed, twice. 

Few--if any--observers note that AT&T has twice been the largest linear video provider in the U.S. market.  The first foray in the 1990s made AT&T the largest cable TV company in the U.S. market. 

The second foray was the purchase of DirecTV, which again made AT&T the largest supplier of linear video subscription services in the U.S. market. 

At the same time, few can recommend any strategy for AT&T--or the other big connectivity providers--that lifts revenue growth beyond a few percent a year. Connectivity is a slow-growth business. If higher growth rates are desirable, that growth almost by definition has to come from outside the traditional connectivity role. 

No firm in the global telco-legacy connectivity industry has really succeeded wildly in that regard. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. Yes, AT&T has twice failed to innovate itself out of a box. But it is a box that has imprisoned virtually all global connectivity providers. 

From time to time a segment of the industry, in some regions, is able to grow--for a time--at fast rates. Quite often that growth only compensates for losses in other parts of the business. Mobility growth balancing declining voice revenues is the best example. 

The internet has made matters worse, further limiting the value and revenues connectivity providers can reap while driving value “up the stack” to third party providers. 

Those who castigate AT&T for its strategic failures are too harsh. Debt has been the issue, as the firm never could afford to spend enough, fast enough, to solve its local access problem, or its revenue source problem. 

If any of us were asked whether AT&T could afford to build a national FTTH network--within 10 years--we would rightly doubt it was possible. Even if it had the money, it did not have the time. 

No single firm could afford to spend $300 billion over 10 years to connect even 100 million homes, which is the scale of the problem AT&T faced. 

The first failure was experienced by AT&T the long distance company. The second failure was that of the former SBC Communications, rebranded as AT&T. It always was an unsolvable problem.

What is Digital Twin?

A digital twin is a virtual model of a process, product or service. It allows analysis of data and monitoring of systems. It can be used to identify problems before they even occur or prevent downtime in any process industry.

In other cases, object or system behavior can be simulated, to test "what if" scenarios. Some with long memories will remember how the spreadsheet allowed financial analysts to make "what if" changes to parts of business models, to see the impact of such changes.

In the early days of personal computing, the spreadsheet is what created the value for businesses to buy PCs. Digital twins should be the same sort of process.

Will Web 3.0 Fail to Meet its Potential?

Web 3.0 often is said to be “decentralized,” featuring applications based on open-source, trustless, and permissionless blockchain networks. If that sounds much like the direction of the present web, that is correct.

We now routinely use open source. The whole internet operates on a "trustless" and "permissionless access basis. But all that will be extended.

Web 3.0 is said to rely on: 

• Blockchain

• Crypto assets

• Low code or “no code” app development

• Artificial intelligence

• Metaverse or extended or virtual reality

• Users able to monetize their data

• Semantic capabilities (machine-readable data)

It also is reasonable to argue that if Web 3.0 develops, it will build on edge computing as well, simply because the sheer amount of data updates--in real time-- for any immersive experience will require high-performance computing very close to the end user. 

source: GlobalData 

As with the original development of "Web 1.0," proponents had grand dreams about universal sharing of knowledge and information. Web 3.0 is pitched by some as a return to such principles. But we are likely to find that matters will not evolve in the ways proponents hope. Web 2.0 has been effectively balkanized by huge firewalls, where some apps are simply prohibited by government authorities. 

And much content is monetized precisely by putting it beyond paywalls. Web 1.0 might have been about communication. Web 2.0 has been about commerce and content. We still do not know how Web 3.0 will play out. 

source: Elastos

What Metaverse Requires of Connectivity and Data Center Suppliers

“The metaverse may be the next generation of the internet,” say researchers at Citi. “Use cases may include everything we use the internet for today with gaming, commerce, art, media, advertising, smart manufacturing, health care, virtual communities, and social collaboration, including for enterprise and education.”

source: Citi 

But the digital infrastructure is not yet ready to support metaverse platforms, looking only at application latency performance. Today’s cloud-based gaming, for example, sports end-to-end latency of between 75 milliseconds and 150 milliseconds. 

But metaverse persistent and immersive  environments will require end-to-end latency more on the order of 12 ms or less. 

source: Citi 

And though we often think of metaverse as something a user accesses using virtual reality goggles, there is good reason to believe metaverse use cases are more likely to happen using smartphones. The point is that value is not based strictly on three-dimensional graphics but “immersion” more generally. 

“You can think about the Metaverse as an embodied internet, where instead of just viewing content, you are in it,” Mark Zuckerberg, Meta CEO, has said. “And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage.”

So think of “immersion” more than 3D, “realism” more than “avatar.” 

For digital infrastructure providers (narrowly defined), metaverse means investments in latency performance and bandwidth, above all. And that means edge computing, faster broadband and the ability to support untethered devices indoors and outdoors. Wi-Fi will play a part, but so will mobile networks.

SMB IT Priorities are Mostly about Remote Work Support

A survey by Analysys Mason of 1149 of small and mid-sized businesses in Germany, Singapore, the UK and the United States almost predictably suggests those firms will rely more on information technology going forward. In some part, that is because firms expect continued work from home deployments that arguably increase IT support. 

source: Analysys Mason 

Respondents expect roughly 40 percent of employees will work from home for at least some of the time once the Covid-19 crisis is over. This will drive demand for personal computers and mobile devices as well as cloud-based solutions to support remote workers and applications. 

It is probably worth noting that although many use the term “digital infrastructure” to mean connectivity networks, data centers and towers, in the SMB space it is devices and apps that are “digital infrastructure” in a practical sense, as is the case in consumer markets. 

Consumers and SMBs--no less than enterprises--use apps, services and devices. Their “digital infrastructure” is apps and devices. Only on the producer side of the value chain is there a distinction made between devices, apps and “networks and data centers.”

source: Analysys Mason 

From an SMB perspective, IT goals will be to support remote workers and protect apps and devices from hackers or data breaches. 

source: Analysys Mason 

Small firms are defined as having one to 99 employees while mid-sized firms have 100 to 999 employees.

Most Institutional Investors Will Hold Digital Infrastructure Assets

institutional investors now view tower and other digital infrastructure assets in the same way they once viewed real estate holdings. Traditionally, real estate was viewed as an asset with predictable and strong cash flows and a lower correlation with equity markets. Also, such assets are believed to be more protected from inflation. 

source: OECD

In other words, institutional investors now view digital infrastructure in the same way they view transportation, energy and other utility assets. 

Infrastructure assets are commonly used to diversify portfolios. 

As with utilities, barriers to competition were important. Over the past few decades, digital infrastructure assets have also been “de-risked” to a large extent, moving them closer to the traditional real estate model. 

source: Schroders 

In search of yield, infrastructure investors also are taking a more-active stance in management, where they might previously have limited their scope to investment-only approaches. Some 80 percent to 90 percent of institutional investors express interest in digital infrastructure assets.  

Though some digital infrastructure investors are active only in “hard” assets such as towers, data centers and networks, others view the broader ecosystem as including applications and services plus devices. 

source: Asian Infrastructure Investment Bank

That view of “hard and soft” is essentially “tangible and intangible” parts of the infrastructure ecosystem. 

source: LBBW

Telco Infra Suppliers Slowly Change

Some changes in telco infrastructure sales in any given year in the fraction of a percent range would not surprise anyone. What might be notable is Amazon appearing in the top 10 of infrastructure suppliers with share gains in the top four. 

As you might expect, given the shift to open source and virtualized platforms traditional suppliers lost a bit of share. Ericsson, Nokia and Huawei all lost share in 2021. 

source: MTN Consulting 

source: Statista 

Huawei continues to lead annual sales, followed by Nokia and Ericsson. 

source: MTN Consulting 

How Metaverse Drives Data Center, Connectivity Investments

As video content distribution has shaped global demand for inter-continental data transport and high-speed connections between major data centers, the metaverse will shape data center and connectivity network requirements. And the key words are “more” and “less.”

“Making the metaverse a reality will require significant advancements in network latency, symmetrical bandwidth and overall speed of networks,” says Dan Rabinovitsj, Meta VP for connectivity. 

The metaverse “will require innovations in fields like hybrid local and remote real-time rendering, video compression, edge computing, and cross-layer visibility, as well as spectrum advocacy, work on metaverse readiness of future connectivity and cellular standards, network optimizations, improved latency between devices and within radio access networks (RANs), and more,” he says. 

Already, experts predict Metaverse environments will require more data centers, more edge computing, more distributed computing, more collocation, more content distribution mechanisms, will require more power consumption and more cooling.

Eventually, fully-developed metaverses will require advances in chip technology as well. Beyond all that, blockchain will probably be necessary to support highly-decentralized value exchanges. And it is impossible to separate metaverse platforms and experiences from use of artificial intelligence, for business or consumer uses. 

source: iCapital Network 

If metaverses are built on persistent and immersive computing and tightly-integrated software stacks, platforms will be necessary. New developments in chip manufacturing also will be needed. 

For connectivity providers--especially internet service providers--far lower latency will be key. Today’s latency-sensitive applications such as video calling and cloud-based games have to meet a round-trip time latency of 75 milliseconds to 150 ms. Multi-player, complex games might require 30 ms latency. 

“A head-mounted mixed reality display, where graphics will have to be rendered on screen in response to where someone is focusing their eyes, things will need to move an order of magnitude faster: from single to low double digit ms,” says Rabinovitsj. 

Image rendering will require edge computing. “We envision a future where remote rendering over edge cloud, or some form of hybrid between local and remote rendering, plays a greater role,” he adds. “Enabling remote rendering will require both fixed and mobile networks to be rearchitected to create compute resources at a continuum of distances to end users.”

Bandwidth could increase by orders of magnitude over what is required to view 720p video on a standard smartphone screen. That might work with just 1.3 Mbps to 1.6 Mbps of downlink throughput. 

But a head-mounted display sitting just centimeters from the eyes required to display images at retina grade resolution will need to be many orders of magnitude larger, he notes. 

To be sure, most of what happens that is part of metaverse experiences rests on things that happen up the stack from computing and communications. 

source: Constellation Research

But we already can see how metaverse support will require changes in computing architecture and network capabilities.

FTTH Network Element Deveolopments Change Cost, Architecture Possibilities

For a variety of reasons--higher government subsidies; higher consumer demand; higher interest by institutional investors in digital infrastructure assets; evolution of the network elements and a change in financial return assumptions--fiber to the home has an investment profile that is higher than it used to be. 

On the network cost front, some sort of subtle changes in network element features also play a role. 

Telco outside plant architectures were strict “star” designs in the copper era. Though network designed used multiplexing as much as possible, the basic design was a star. 

source: Corning

But there are some changes that can affect fiber to home construction cost. Corning, for example, touts the use of its connectors that do not require splicing. Since labor--not materials--represent the biggest portion of FTTH network construction, total costs should be lower when less labor is required. 

Still, materials costs are different when an architecture that is more like a “bus” or “tree” and less like a “star” is possible. For terrestrial networks using cables, the advantage of the bus is less cabling bulk. 

Telco FTTH networks can use architectures that are partly bus and partly star. The advantage includes some savings on cable, as is true for bus designs.

 

source: Corning

In Corning’s case, connectors that eliminate splicing are not just a way to speed construction, they also allow more hybrid architectures that are more like buses in the trunking part of the network (which allows more sharing and multiplexing) while retaining the star for distribution to end points. . 

source: Utechnoworld

The practical implications for FTTH network construction is that costs should be lower than they have been in the past. That, plus changes in consumer demand (higher) and government subsidies (also higher) plus higher demand on the part of institutional investors for digital infrastructure assets as a form of real estate, are propelling faster investment in FTTH in the U.S. market. 

Cox Boosts Speed on its "Most Purchased" Tier to 250 Mbps

With attention on U.S. headline home broadband speeds of 2 Gbps to 5 Gbps, it is easy to overlook the fact that most consumers do not buy services operating at the headline speeds. 

In fact, at Cox Communications, a cable company with customers concentrated in metro areas, the most-popular service tier  had offered speeds up to 150 Mbps. But Cox now has boosted speeds on that tier by 67 percent to 250 Mbps at no extra charge.

That is part of the typical pattern, where speeds for the most-purchased tiers increase, while prices generally remain the same, with inflation increases being the main changes in posted retail prices. 

Cox has committed to boosting its top tier service to 10 Gbps over the next few years. As speeds at the top grow, so will speeds on the other tiers below. 

In the fourth quarter of 2021, for example, roughly 70 percent of U.S. home broadband customers purchased services operating between 100 Mbps and 400 Mbps, generally measured using Wi-Fi-connected devices. 

That of course means the internet service provider connection delivered to the home ran faster than those measured speeds. 

source: Openvault 

Those sorts of tests also are important because end user experience is dictated as much by in-home Wi-Fi performance as it is by what the ISP is actually delivering to the home. User experience also is shaped by the purchasing decisions consumers make.

It is one thing to describe the speeds consumers choose to purchase; it is another thing to describe what speeds they are able to get. The former is consumer behavior; the latter is network performance.

Hybrid Work Might be a Necessary Enteprrise Compromise

A study conducted by Incisiv for AT&T suggests permanent changes in work venues, though fully-remote work might be less common than many project, as work moves “back into the office” by 2024. 

Such changes matter for all larger enterprises, but also will affect internet access provider, mobility and fixed network capital investment and other priorities. If there are fewer workers at large company sites, on average, demand for bandwidth and other connectivity support will diminish, from expected prior levels. 

Conversely, network support in suburban areas during daytime hours should remain higher than originally foreseen. Growth in demand for mobile internet access also could be affected, if fewer workers, on average, are traveling back and forth from office sites and out and about less often. 

source: AT&T 

Much will depend on whether employees or employers get their way, as there is a huge difference of opinion about the desirability of in-office work. 

Employees prefer remote work over office work, while employers prefer in-office modes.About 86 percent of employees want a distributed model while 64 percent of employers do not want a distributed model. 

source: AT&T 

So much hinges on which view prevails. In fact, it might be fair to note that executives hold inherently contradictory views about the future of remote work. On one hand, 91 percent believe remote work will decrease by 2024. That makes sense if even some workers return to the office, in hybrid deployments. 

And while 70 percent of executives believe hybrid will be the default, 58 percent also believe employees “have not been innovative” in distributed work modes. Also, about 40 percent of executives say their ability to maintain company culture, using distributed basing, has been diminished.

More than half of non-executive workers believe company culture has been negatively affected by enforced remote work. 

source: AT&T 

Of non-executive personnel, about 42 percent say maintaining company culture will be harder in a hybrid environment. 

Given the conflicting views, it might be safe to say that we presently have imperfect knowledge of how work venues might change in coming years. If enforced remote work is no longer necessary, there should be some movement back to office basing, at least part of the time. 

But employees will resist. And CxOs are likely to continue insisting they lack oversight of employee performance when workers are remote. “Hybrid increasingly will be the compromise. 

Data Center Infra Seeing Contined High M&A Activity

“Demand for data centers by global investors remained robust in the second half of 2021, with record-breaking merger and acquisition activity,” according to CBRE. “Nearly 95 percent of respondents to CBRE’s 2022 Global Data Center Investor Sentiment Survey, many of whom are the world’s largest institutional real estate investors, plan to increase their capital deployment in the data center sector,” says CBRE. 

In North America alone, transactions included:

• American Tower’s acquisition of CoreSite for $10.1 billion.

• Blackstone’s acquisition of QTS for $10 billion.

• Cyxtera’s SPAC merger with Starboard Value Acquisition Corp, valued at $3.4 billion.

• Mapletree’s acquisition of the Silas Realty Trust Portfolio of 29 data centers for $1.3 billion.

• Prudential & Digital Realty’s joint venture sale of 10 powered shell data centers for $581 million.

• DigitalBridge’s Vantage SDC acquisition of CA22, a 24 MW hyperscale data center, for $539 million.

Already in 2022, North American transactions include:

• KKR & Global Infrastructure Partners acquisition of CyrusOne for $15 billion.

• DataBank’s acquisition of four CyrusOne data centers in Houston for $670 million.

In the Europe Middle East Africa market, 2021 transactions include:

• IPI Partners acquired the dominant Nordic operator Digiplex.

• Iron Mountain acquired a turnkey facility in Frankfurt from Keppel Data Centers for €76 million.

• Antin Infrastructure Partners acquired leading U.K. managed-services provider Pulsant.

• Azrieli purchased colocation operator Green Mountain in Norway for 7.6 billion NOK.

• Blackstone acquired a triple-net facility leased to Equinix in London Docklands for £196.5 million.

• Keppel DC REIT acquired two triple-net facilities, one in the Netherlands and the other in the U.K. for a combined total of more than €100 million.

• Digital9 Infrastructure acquired Verne Global, a dominant Icelandic colocation provider for £231 million.

• AtlasEdge, the recently formed edge operator backed by Liberty Global, Digital Bridge and Digital Realty, acquired a portfolio of 12 assets from Colt Data Centers.

In 2022, transactions in EMEA include:

• KAO Data, backed by Legal & General Capital, Goldacre and Infratil, have acquired two data centers in West London via a sale and partial leaseback.

• Digital Realty agreed to acquire a majority stake in Teraco, Africa's leading carrier-neutral colocation provider, from a consortium of investors, including Berkshire Partners and Permira, as well as Medallion Data Centres in Nigeria.

In the Asia-Pacific region, 2021 transactions include:

• Vantage Data Centers and lead investor DigitalBridge acquired Hong Kong-based PCCW and Agile Data Centers.

• GLP acquired a 50% stake in Songjiang Internet Data Centre in Shanghai.

• Digital Edge acquired five data centers in Japan for $230 million.

• Equinix entered the India market through the acquisition of GPX India.

Already in 2022, APAC transactions include: 

• Equinix $525 million joint venture with GIC in South Korea.

• Keppel Capital to close $1.1 billion data center fund.

• Mitsui announced intention to invest $2.7 billion to develop data centers in Japan.

• GLP announced plans to develop 900 MW of data centers across Tokyo and Osaka and totaling $12 billion.

In Latin America, 2021 transactions include:

• Piemonte Holding acquired Globo’s Data Center in Rio de Janeiro.

• Squared Capital acquired KIO Networks, a leading data center operator in Mexico.

• Goldman Sachs Asset Management invested in Piemonte Holdings' Brazilian edge data center platform Elea Digital.

• EllaLink and Equinix delivered the first undersea cable between Europe and Latin America.

In Latin America, 2022 transactions include:

• Equinix opened a hyperscale facility in São Paulo and announced plans for two more in Mexico City and another in São Paulo.

• Ascenty launched two data centers in Rio de Janeiro and Hortolândia.

• DigitalBridge-owned Scala Data Centers began construction on two hyperscale data centers in Brazil, with one fully leased to a cloud provider.

• Tencent Cloud launched its first Brazilian data center.

• Ascenty plans to build its fourth data center in São Paulo.

• Microsoft announced plans to establish a Chilean data center region.