Isn’t it a bit curious that major telecom service providers, which only a few years ago invested heavily in data center holdings, are now signaling their desire to sell those very same assets?
During the course of 2015, we have heard a series of leaks and announcements that add up to a picture of telecoms firms reconsidering whether it makes sense for them to own data centers (see box). In February, we heard that AT&T is selling some $2bn worth of data centers, and in July we heard that Tata Communications is selling 44 facilities in India. More recently, in October, Windstream Communications sold its data centers to TierPoint. In November, CenturyLink announced it is considering a sale, and Verizon denied rumors that it is doing the same.
The announcements had several interesting common factors. A majority of the businesses divesting data center assets are telecom service providers. By contrast, of the companies buying or expressing interest in the assets very few, if any, are telecom service providers. The companies selling data centers still want to be a part of the industry, providing data center services through third parties, offering both managed ICT and cloud services. Windstream Communications, for example, obtained the right to lease back the assets it just sold.
It’s also interesting to note that the telcos are investing in networks while selling off data centers. AT&T and Verizon both sold major chunks of their tower infrastructure, yet spent huge sums of money in the FCC’s recent AWS-3 auction. This sold off 65MHz of spectrum, for $45bn, with the majority going to AT&T, Verizon and Dish. The auction reserve was around $10bn.
The Motley Fool’s Adam Levy offers a possible reason why AT&T and Verizon are divesting assets. “Both companies spent heavily in the FCC’s AWS-3 spectrum auction, acquiring valuable airwave licenses for their wireless businesses,” writes Levy. “With both companies heavily burdened with debt, they’re looking to raise funds without increasing their liabilities.”
Some insight as to why CenturyLink might be selling can be gleaned from how CenturyLink chief executive Glenn Post responded to Barclays Capital’s Amir Rozwadowski during the announcement. Rozwadowski asked Post about divesting data center assets, and the CenturyLink chief executive responded: “First of all, as to why now is an opportune time… valuations are obviously good right now. They can always change, but we know the market’s good.” Post continued: “We think our cashflow could be used for investments that can drive higher returns, and better shareholder value. So that’s why we’re looking at divesting data center assets.”
We think our cashflow could be used for investments that can drive higher returns, and better shareholder value. So that’s why we’re looking at divesting data center assets.
Glenn Post, CenturyLink
Fundamentally, the trouble with owning data centers is the expenditure they require, according to Zahl Limbuwala, chief executive of data center operational efficiency and capacity analytics companyRomonet. In his 2014 blog – An open letter to data center investors – he pointed out that data centers incur electrical and mechanical equipment costs, operational costs for staffing, maintenance and power, and an ongoing requirement for investment in equipment updates to meet changing market demands, especially in power and cooling capacity.
“If your data centers are approaching 10 years old and have not had a major reinvestment, you are in for a nasty surprise,” says Limbuwala.
The surprise that Limbuwala refers to is the difference in the expected time between reinvestment in the data center world compared with conventional property. Reinvestment times in real estate are around 20 years, while in data centers mean time between failure rates and capacity obsolescence for the equipment bring this closer to 10 years.
Equipment reinvestment can be an issue, but there is another factor. Commercial data centers offering colocation services are losing market share to cloud services providers, according to numerous reports. This is the most likely reason why telcos are getting out of the data center real estate business. “Cloud providers can threaten to steal business away by offering the same services for the lowest possible price,” explains Limbuwala. “In doing so, they will reveal any inefficiencies and expose margins to potential customers, who will be weighing their options.”
Cloud services providers grabbing market share gain validity when we look at the rapid expansion of firms catering to cloud services providers. For example, Switch has announced its intention to build a $5 billion data center in Michigan, on the site of the Steelcase Pyramid. And in Florida, TierPoint – having bought the data centers that Windstream found uneconomic – is pressing ahead and investing $20 million in improvements to its data center in Jacksonville, Florida.
On the surface, the above explanations seem reason enough to divest data center assets. However, forward-looking people in the data center industry see a different future. “Whether you are considering the Internet of Things, streaming content, or any type of network-delivered service, you must be aware of latency, connectivity and network bandwidth availability,” DatacenterDynamics’ David Chernicoff wrote in Data Centers 2020 (DCD, November 2015). “By moving these capabilities to the edge, you address the plethora of issues that these technologies bring up. But you also have to reimagine what you think of as a data center.”
How will things change? “Imagine an economy without friction – a new world in which labor, information and money move easily, cheaply and almost instantly. Psst – it’s here. Is your company ready?” writes Fortune senior editor Geoff Colvin in his column, “Why Every Aspect Of Your Business Is About To Change”.
Colvin considers how Tesla Motors handled its fire-prone Model S, without an expensive recall, by rapidly pushing corrective software to the affected cars over mobile phone networks, using the edge network to reduce its friction. Colvin says this “lack of friction” gives Tesla considerable advantages over established car makers.
Responding to conditions
“Combine those factors and here’s what happens: General Motors creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9m. You don’t get differences like that just by being more efficient. Tesla – though in the same business as GM – is a fundamentally different idea.”
Tesla is a progressive, innovative company in a traditional market, and it may have shown data center operators and telecom service providers – businesses that enable Tesla’s nimbleness – the way of the future.
It is possible that telecom service providers are responding to market conditions by divesting data center assets, thus decreasing their friction, and investing in technology that the data center environment will need as it moves towards the edge and becomes increasingly network-focused.
This article appeared in the December 2015 issue of DatacenterDynamics magazine