Cloud Data Centers: How WAN Providers Earn LAN Revenue

The cloud computing business in some cases is remaking the old distinction between “local area network” and “wide area network.”

Traditionally, the business models for LAN and WAN were as different as the physical scope of the networks.

Wide area network services were provided by entities that operate “outside the building.” Local area networks worked “inside the building.”

Businesses and consumers WAN “rent” services but “own” LAN infrastructure (Wi-Fi routers and in-building wiring and servers).

So the ownership modes always have been different. People and organizations own their own LAN infrastructure, and do not pay recurring service fees. Customers pay for WAN services, which are owned by others.

The capital-intensive WAN business requires large organizations with lots of capital to invest in building an operating huge networks. Its revenue model is “recurring access and transport services.”

The LAN ecosystem includes suppliers of consumer electronics appliances, system integrators in the small and mid-sized business segment and consultants and integrators in the enterprise segment.

The shift to cloud computing is in some cases causing WAN providers to blur the lines with the LAN space, at least in the data center “customer” segment. In other words, where LAN operations have not traditionally created revenue opportunities for WAN providers, ownership of data centers now drives traffic to the WAN, and also generates direct real estate revenue.

To be sure, it can be argued that the direct revenue is generated by “hosting” servers in a data center (a real estate transaction), not “moving bits” between customers in a data center. Some might argue ownership of a data center now creates a recurring revenue stream for moving bits within the building (something that formerly would have been a LAN function).

In that sense, at least where it concerns data centers, WAN providers who own data centers might be said to be earning revenue for data communications that might formerly been non-revenue LAN communications.

Global Cloud Xchange has put data centers at the heart of its strategy, even going so far as to change the name of the company from the former Reliance Globalcom.

Tata Communications has done something very similar, with a key nuance.

Like other service providers, such as Verizon, Tata has become an owner and operator of data centers and cloud infrastructure  In that instance, “transport” revenue is earned in a different way, in the form of adding transport to the “real estate” services and cloud infrastructure capabilities.

Global Cloud Xchange does not seem to be buying and operating data centers and colocation facilities that support “meet me” rooms.

Instead, Global Cloud Xchange seems to be architecting its transport network to provide transparency for server-to-server communications, so the long-distance connection acts like a cable connection between servers in the same building, on the same floor.

Tata, for its part, has created IZO Public, a cloud enablement service. Tata recently inked an interconnection agreement with Google, providing business customers a way to connect and build their public cloud services with consistently good user experience.

The IZO platform provides predictable routing and connections to data centers over the Tata Communications global network. In 2014, 24 percent of the world’s Internet routes travel over the Tata Communications network.

Cisco’s latest Global Cloud Index estimates that global data center traffic will grow nearly 300 percent between 2013 and 2018.

Although the amount of global traffic crossing the Internet and IP WAN networks is projected to reach 1.6 ZB per year by 2018,  the amount of annual global data center traffic in 2013 is already estimated to be 3.1 ZB, according to Cisco.

By 2018, “data center to end user traffic” will constitute 17 percent of total. About nine percent of traffic will move from data center to data center. About 75 percent of global data center traffic will stay within the building, moving from server to server.

That explains the high interest by capacity providers in data centers. In the past, most of the revenue made by wide area network providers was supplying capacity across the wide area network.

In the future, it is likely much revenue will be made supporting data communications between servers and entities within data centers, and some of that will fall to WAN providers that own data centers.

Telco Cloud Computing Revenue Opportunity is Still on Training Wheels

CenturyLink, like many other telcos, sees cloud computing as a key opportunity in the enterprise and business services segment of the communications business. There are several reasons for that belief.

Data centers now are primary generators of capacity demand. For example, Cisco’s latest Global Cloud Index estimates that global data center traffic will grow nearly 300 percent between 2013 and 2018.

By 2018, 76 percent of all data center traffic will come from the cloud, while 75 percent of data center workloads will be processed in the cloud.

But that might not even be the most significant prediction. Quantitatively, the impact of cloud computing on data center traffic is clear, Cisco argues.

Most Internet traffic has originated or terminated in a data center since 2008.

Where in the past most traffic (voice) functionally originated and terminate at a central office, though that traffic was passively transmitted to an end user telephone, now most global traffic originates and terminates at a data center.

At the same time, it is possible to argue that “cloud” now is becoming the architecture for computing in the present era, directly embedding the need for wide area and local area communications into the basic fabric of computing itself.

Where one might have argued that the addressable market for WAN transport providers was perhaps $232 billion in 2012, the addressable market now is much bigger. In fact, Bill Barney, Global Cloud XChange CEO argues the addressable market is six times larger.

That includes involvement in the $600 billion "software" business, as most software now is delivered or used "in the cloud."

The market also touches the $965 billion enterprise "information technology" business and the $103 billion data center business as well.

That doesn't necessarily mean WAN transport and services will displace most of the revenue in the extended ecosystem, only that WAN providers now play more central roles in those other areas, and for that reason will be generating additional revenue within the ecosystem.

That noted, cloud services still represent only about five percent of enterprise information technology spending. That is virtually certain to grow, as public cloud remains the first option for a minority of enterprise IT managers at the moment.  

According to Gartner, 75 percent of organizations use public cloud services today, “though sparingly,” while 78 percent plan to increase their investment in cloud services in the next three years.

Some 91 percent of organizations across all industries plan to use external providers to help with cloud adoption, Gartner says. That accounts for the belief that cloud computing can be a new revenue source for capacity suppliers, directly or indirectly.

In some cases, capacity suppliers own data centers as a way of generating direct revenue from data center clients, not just profiting from the communications into and out of the data centers.

By 2018, “data center to end user traffic” will constitute 17 percent of total “data center” traffic. About nine percent of traffic will move from data center to data center.

About 75 percent of global data center traffic will stay within the building, moving from server to server. That illustrates the value of generating direct revenue from data centers. Even if most clients will move data between servers in the center, that in-building traffic still eventually moves out onto the wide area network.

For most suppliers,  the primary revenue opportunity therefore is capacity.

Telco Data Center Strategies Diverge

One example of the growing variety of business strategies embraced by tier-one telcos is the matter of data center “colocation” assets. 

One argument, and one strategy, is that ownership of such facilities creates an access and transport opportunity for the carriers, irrespective of direct revenues earned by supplying real estate and services.

The other argument is that transport and access revenue can be earned without the necessity of owning data centers.

And growing pressure on operating margins can tip the balance, even if data center ownership is generally thought to be a positive. That appears to the case for Cincinnati Bell, which is selling ownership shares of its CyrusOne data center business, raising cash to reduce debt.

CenturyLink appears to be thinking along the same lines regarding its own colocation business. CenturyLink appeared to believe colocation center hosting would provide a boost several years ago when it bought Savvis.

While it plans to continue offering colocation services, CenturyLink says it is looking for alternatives to owning nearly 60 data centers around the world that support colocation, managed hosting, and cloud services.

As in the case of Cincinnati Bell, CenturyLink might now be more concerned about debt reduction than revenue upside from owning the data center business.

CenturyLink business segment revenues might be “driven principally by increased market penetration of our network, hosting, cloud, and IT solution service offerings,” as CEO Glen Post said.

But capital might be better deployed elsewhere, CenturyLink suggests. “We expect colocation services will continue to be a service our customers will look for us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services,” said Post.

CenturyLink’s revenue for the cloud and hosting  business is about $600 million annually, and the company says it seeks to sell or otherwise restructure the data center operations, not the cloud and hosting businesses that use data center real estate.

In fact, most of CenturyLink’s cloud and hosting operations are run out of leased data center space, at the moment.

And CenturyLink executives are not willing to commit the new capital they estimate is required to grow the business. They also believe cash generated by an asset sale would earn a higher return in other lines of business.

Windstream is selling its data center business as well. As often is the case, it appears specialists are better positioned in the data center and colocation business than some telcos might be.

On the other hand, other telcos seem to believe they must take a bigger position in data center business. Reliance Communications is among those firms increasing investment in the data center business.

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.

AI is Going to Change Data Centers

It seems clear that the amount of AI processing and workloads are going to grow quite substantially, assuming AI proves to be as useful as most of us now believe. It might be at the high end of estimates, but some believe AI operations will consume as much as 80 percent of data center power loads by about 2040. 

Other estimates also are significant. Digital Bridge CEO Marc Ganzi believes AI will mean a new or additional market about the size of the whole public cloud computing market, eventually. 

If the public cloud now represents about 13 gigawatts of capacity, AI might eventually require 38 gigawatts, says Ganzi. 

The whole global data center installed base might represent something on the order of 700 gigawatts, according to IDC. Other estimates by the Uptime Institute suggest capacity is on the order of 180 GW. 

According to a report by Synergy Research Group, the global public cloud computing industry now represents 66.8 gigawatts (GW) of capacity. 

According to a study by the Lawrence Berkeley National Laboratory, AI-driven data center electricity consumption could increase by 50 percent to 200 percent by 2040, posing new challenges for data center operators trying to limit and reduce carbon emissions and electrical consumption. 

Study	Year Published	AI-driven electricity consumption (GWh)	Increase over 2023 (%)
Lawrence Berkeley National Laboratory	2020	130	40%
Gartner	2021	200	50%
IDC	2022	300	75%
DigiCapital	2023	400	100%
Study	Year	Projected AI-Driven Data Center Electricity Consumption (2040)	Growth from 2023 (%)
Lawrence Berkeley National Laboratory	2018	10% of total data center electricity consumption	50%
Gartner	2020	15% of total data center electricity consumption	75%
IDC	2021	20% of total data center electricity consumption	100%

Of course, data center operators will continue to seek ways to reduce impact, as well. 

Study	Year Published	Energy Efficiency Savings (%)	Methods Used
Lawrence Berkeley National Laboratory	2020	20-30%	Using more energy-efficient hardware, optimizing the use of data center resources, and using renewable energy sources
McKinsey & Company	2021	30-40%	Using more energy-efficient hardware, optimizing the use of data center resources, using renewable energy sources, and improving cooling efficiency
IDC	2022	40-50%	Using more energy-efficient hardware, optimizing the use of data center resources, using renewable energy sources, improving cooling efficiency, and deploying AI-powered energy management solutions

But there seems little doubt that AI model training and inference generation will become a much-bigger part of data center compute activities and therefore energy load. In some part, that is because bigger models require more data ingestion during the training process.