Boundaries Always Get Porous in Converging Industries

Public network services traditionally generate “connection” or “service” revenue. Local area connections mostly do not do so. Local area networks--cabled or wireless (Wi-Fi) typically generate hardware, systems integration or maintenance revenue, but rarely direct “connection services” revenue such as earned by connectivity providers selling private line, Ethernet WAN connections, connections to internet exchange points or public cloud computing services. 

The salient exceptions so far, have been business Wi-Fi connections at large public venues such as airports, sports stadiums or convention centers, as well as cross connects inside data centers. 

Consider shipments of Ethernet ports in 2021. The bulk of such shipments are to cloud service providers. Telcos are second, enterprises third. 

source: IHS Markit 

The point is that entities might use such ports for internal LAN communications, cross connect services inside data centers, edge-created enterprise WAN services or public network services. 

WAN services often are created directly by enterprises themselves, rather than purchased from connectivity suppliers, so it often is difficult to know precisely how much activity is “infrastructure” purchases by enterprises to create their own edge networks and how much is service revenue earned by service providers of one sort or another.

Tomorrow’s situation could change. In principle, as networks and server functions are virtualized, it might not matter very much where devices and resources are located. They might be within the same building, the same data center or at remote locations. 

Connections inside the same building tend not to carry service charges. But that could change, in some cases, with greater use of 5G private networks. Connections within a data center do generate service revenue (cross connects), as do some WAN connections between data centers, data centers and internet exchange points or between remote servers located almost anywhere. 

Much WAN traffic now is carried over private networks, some owned by hyperscale app providers and essentially in the same category as older LAN traffic, also exchanged over private networks. 

But most LAN traffic also has access to WAN connections as well. The observation is that former boundaries between private and public traffic, LAN and WAN, infrastructure and services based supply, are becoming more porous.

Who is a "WAN Services" Provider, These Days?

Equinix is widely considered to be a “data center” business with a retail focus. 

On the other hand, a huge portion of its total revenue is earned from interconnection, including private cross connects, the cloud exchange linking Equinix sites to other public cloud computing suppliers, connections from Equinix to internet exchange points, ethernet private line services and virtual LAN services.

By most estimates, those sources of revenue represent more than $1 billion annually, out of a total revenue in excess of $6.6 billion. In other words, interconnection revenue represents nearly 18 percent of total Equinix revenue. 

According to IHS Markit, only about 25 telcos globally earn that much from wide area network data transport services. Assume global WAN revenues of about $58.5 billion. Assume that figure excludes WANs created by enterprises themselves at the edge. 

If there are 25 telcos globally each earning at least $1 billion each, then at least 43 percent of total WAN service revenue is earned by those 25 firms. But a few firms, such as China Mobile, earn as much as $24 billion in WAN revenue. AT&T might earn as much as $13 billion. Verzon earns about $12 billion.

China Telecom earns perhaps $17 billion from WAN services. Deutsche Telekom earns perhaps $14 billion from WAN services. NTT Communications earns something on the order of $8 billion. 

Generally speaking, firms do not tend to separately report revenue items that are “too small.” 

Orange does not disclose its WAN revenue, but it has to be at least $1 billion annually, and probably a couple billion to a few billion dollars. KDDI does not disclose its WAN revenue either, but the amount is at least $1 billion. 

Likewise, SoftBank does not report its WAN revenue, but it is at least $1 billion. SK Telecom also does not report WAN revenues, but one assumes it is at least $1 billion. 

Still, add all that up and global WAN revenue earned by those 10 firms might represent $92 billion in WAN services revenue, with the last four firms booking $1 billion to a few billion in WAN revenue. 

By that measure, Equinix would rank almost within the top 10 telcos globally in terms of WAN service revenue, the caveat being that much Equinix interconnection revenue is in the form of local cross connects.

But in an increasingly virtualized world, the difference between a connection inside the building or across the globe might be increasingly insignificant. And Equinix and other data centers will start to be significant providers of interconnection revenue. 

One Reason Data Centers are More Attractive than Connectivity Businesses

Here is an example of a reason some veterans of connectivity markets now prefer working in the data center business: prices sometimes go up, rather than down. 

source: CBRE 

Virtualization Will Change Interconnection Services Market

The whole point of virtual networks is that location and distance do not matter. Connections are not necessarily defined by what is connected inside the four walls of a single building; between data centers; between domains; between countries and peering points. 

In principle, server-to-server connections inside a single building (cross connects); connections within a single metropolitan area; between data centers and cloud providers or between internet domains. 

source: dgtlinfra.com

To be sure, many estimates of the data center interconnection market show that infra revenues (hardware and software) represent the lion’s share of revenue, as is the case for private networks generally. 

source: kvb Research

Still, interconnection services revenue increasingly will be shaped by virtualization, which tends to erase or minimize physical location as a driver of service revenue. 

source: markets and markets

Eventually, a growing share of “interconnection” services revenue will blur the distinction between “inside the building” and “outside the building.”

Infra Investment Trends

Peter Hopper, managing director at DigitalBridge; Kristin O’Connor Leung, managing director of GIC Real Estate; and Ariana Batori, senior investment officer / global lead broadband investments for IFC – International Finance Corporation discuss the opportunities and risks of investing in digital infrastructure projects and asset classes. The session was moderated by Jonathan Atkin, RBC Capital Markets managing director. 

Multiple compression has been a theme over the past few years

source: Houlihan Loukey