SECTOR R 09 - DBS Bank Established players in the US such as Verizon and CenturyLink have...

DBS Group Research • October 2014DBS Asian Insights09n

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SECTOR BRIEFING

Telco Reloaded A Strategy on Cloud Computing

and Data Centres

DBS Asian Insights SECTOR BRIEFING 0902

0304

10

1819

Introduction

The Future of Cloud Nothing Cloudy about the Business Cloud Business Model Cloud Margins Strategy for Telcos Success Stories Key Challenges

Growth of Data Centres Data Centre Business Models What is a Data Centre? Data Centre Margins Key Considerations

Lastly... To Build or To Acquire?

Investing with the Trend Cloud Price Wars Singapore as a Data Centre Hub Connectivity is King

Introduction elecoms operators have seen their consumer revenue cannibalised by instant messaging services like WhatsApp, LINE and Skype, among others. Even in enterprise markets, leased line revenue has been declining every year. According to Gartner, the percentage of worldwide ICT spending attributed to telecom services has been steadily

declining – from 47% in 2011 to 46% in 2012 – and will decline further to 42% by 2017.

Established players in the US such as Verizon and CenturyLink have successfully acquired cloud providers and have also been providing carrier-neutral data centre services to their customers. Compared to a lack of growth at telcos, CenturyLink has seen this business register a 16% compound annual growth rate over the last three years. On the other hand, Japanese telco NTT Communications has evolved into a major carrier-neutral data centre provider in Asia Pacific.

The total data centre and cloud market size in Asia Pacific was close to US$19 billion in 2012. Data centres comprised about 74% of the total, while cloud services made up the remaining 26%. There is an interesting interplay between data centre and cloud demand. As enterprises buy more cloud services, their need for data centre space may decrease but cloud providers’ need for data centre space would increase. Overall, data centres will continue to thrive due to capital expenditure savings, economies of scale and disaster recovery needs.

The growth potential in data centre services and cloud business is a silver lining for telcos. Frost & Sullivan estimates that the data centre market in Asia Pacific will grow at a 14.6% compound annual growth rate between 2012 and 2017. Forrester Research estimates the cloud market in Asia Pacific will grow at a 24% compound annual growth rate between 2013 and 2020. The big question, however, is whether telcos can compete with carrier-neutral players in data centre services, as well as global players in cloud services to claim a fair share of the growing pie.

Telcos may struggle to compete with global players in public cloud due to a lack of scale. We expect many enterprises to migrate to private cloud instead of public cloud due to security and reliability issues. According to Gartner, about half of large enterprises will be using hybrid cloud in 2017. Telcos are better off tapping the demand for hybrid or private cloud services by either acquiring or liasing with cloud providers.

Meanwhile, enterprises and cloud providers will increasingly prefer carrier-neutral data centres with the choice of multiple carriers. It leads to more competition among carriers and more diverse paths supporting business continuity. Rather than fighting-off this trend, telcos should also provide carrier-neutral data centres, which will enhance their data centre income with a smaller loss of network income.


03

Telco Reloaded A Strategy on Cloud Computing

and Data Centres

T

Sachin MittalVice PresidentEquity [email protected]

The Future of Cloudhe cloud market in Asia Pacific will grow from US$6.9 billion in 2013 to US$31.9 billion in 2020, implying a 24% compound annual growth rate, according to Forrester Research. Gartner estimates about half of large enterprises will be using a mix of public cloud (delivered via the internet) and private cloud (delivered

over a more secure enterprise network) by 2017. Many customer facing and employee productivity applications such as customer relationship management (CRM), e-commerce and collaboration could migrate to public cloud. Meanwhile, applications such as enterprise resource planning (ERP), data warehousing, analytics and operations could migrate to private cloud.

While many cloud services have been dominated by non-telecoms companies such as Amazon, IBM and Microsoft over the past few years, some telcos have been quite successful in the business of leasing servers and hardware to a single client from their own data centres. With enterprises migrating to cloud services for cost savings and the ability to scale up quickly, there is an increasing tendency for telcos to create a foothold in cloud services.

Three major advantages for telcos in the cloud space:

1. Ability to provide service level agreements (SLAs) Telcos control the network through which cloud services are offered. This enables

them to offer end-to-end SLAs.

2. Existing relations with enterprises Many telcos have already been providing email, storage, hosting and enterprise

network solutions to the enterprises, and know the enterprise touch points well. Telcos have a dedicated enterprise sales force to sell those solutions.

3. Pay-per-use billing experience Cloud computing requires pay-per-use billing, which many cloud providers find difficult

to fulfill due to the bundling of various services. Telcos are used to this billing and can even support other cloud providers in pay-per-use billing.

Telcos have a big opportunity in the private cloud space, as it has a variety of advantages beyond virtualisation. Private clouds can provide self-service access for employees to add IT resources. For example, if a developer needs a certain number of virtual machines, they could spin those up without having to contact an IT representative to provision them. Telcos may struggle in delivering public cloud services which are often standardised with automated online sales and almost instantaneous provisioning, which requires global scale. However, telcos’ large enterprise sales force makes them suitable to sell private cloud bundled with their network services.


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04

Nothing Cloudy about the Business

Cloud is generally considered to be the most flexible solution as there is no need to invest in IT infrastructure and personnel for the client. In its simplest form, cloud refers to the sharing of IT resources so that data can be stored and accessed from anywhere in the network.

The two broad cloud providers:

Public cloud providers deliver the cloud service over the internet and the services are highly scalable. The biggest benefit of public cloud is the ability to pay for only what you use. Traditional IT providers operate on high margins while public cloud providers operate on a high volume and low margin business model. With high economies of scale, public cloud providers are able to provide agility and cost savings to their clients. Amazon Web Services is the biggest public cloud provider followed by Microsoft Azure.

Private cloud providers deliver the cloud service over the corporate network and the services are generally considered more secure and reliable than public clouds. Since private clouds serve only a single enterprise, they do not benefit as much from economies of scale and do not follow the pay-per-use model. But private clouds can lead to cost savings from the sharing of internal resources and self-service option for employees. Hewlett Packard, IBM and Cisco are leaders in the private cloud space.

Cloud Business Model

The cloud model has three key variants, including infrastructure as a service (IaaS), platform as a service (PaaS) and software as a service (SaaS).

The IaaS model provides clients with access to virtual servers and networking devices on a monthly fee basis. Clients are able to self-provision this infrastructure, using a web-based graphical user interface. However, clients need to manage the security and scalability aspect, just as if they were using their own data centre. This is the least expensive option and provides the least added value. The global market leader in IaaS is Amazon Web Services followed by Microsoft Azure.

For PaaS, clients get a specified configuration such as firewall, servers and load balancers that are managed by the vendor up through the level of the operating system. Clients need to install and manage any applications that run on top of the infrastructure. An example of PaaS would be the Google App Engine, in which Google staff take care of the infrastructure, security, and scalability of the client’s application. Market leaders in PaaS are Amazon Simple Storage Service (S3) and Azure Storage.


05

Public

Private

IaaS

PaaS

As for the SaaS model, the vendor manages the software application and typically provides an SLA for application uptime. Clients are responsible for the specific configuration of the application and the business processes it automates. This model is the most expensive but also gives the most value to the clients. Key players are SalesForce.com, Oracle and Microsoft Office Online. Google Maps is an example of an SaaS in the consumer space.

Cloud Margins

Cloud offers low margins but recurring income stream with high growth potential

Cloud providers incur IT capital expenditure and earn a monthly income from their customers in return for the cloud service. The time it takes cloud providers to break-even often exceeds a year. The selling and marketing costs of cloud solutions can be much higher than on-premise models – at least as a ratio of initial revenues. As such, most cloud providers are currently not profitable during high customer addition phases due to high sales and marketing expenses. However, as long as cloud providers are able to retain their customers, they are likely to see profits when customer addition slows down.

Public cloud space is very competitive unless one has global scale

Amazon Web Services, Google and Microsoft are using their global scale to offer competitive prices. Despite its massive scale, Amazon Web Services is unlikely to achieve steady state margins of 20%-25% in the future. For smaller players, competing in the public cloud space may not prove profitable.


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IaaS (Infrastructure as a Service)

Data Centre (Hardware, Servers, Networking)

USD Mn

Increase more than 10% 11%

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Stay about the same 34%

Increase 5% to 10% 48%

Decrease 5% to 10% 6%

60

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160

Virtualisation

Risk profile of the datacentre location

Resilience and availability of thedata centre facility

Level of control over data centre facility

Network connectivity options, carrieravailability, and carrier density

Cost of energy at the datacentre location

Energy efficiency of the datacentre facility

Access to green andsustainable energy sources

Access to cloud, managed services,or other providers

Global footprint of data centreprovider, or multisite availability

Proximity of location tocorporate offices

Ease of access to the location

500 miles or more (805km or more)

200 to 499 miles (321 to 804km)

100 to 199 miles (160 to 320km)

30 to 99 miles (50 to 159km)

Less than 30 miles (less than 50km)

Proximity to my HQ is not important

Not applicable

Don’t know

Singapore Japan Hong Kong Australia

Big data

Consolidation

Business growth

Business continuity

Storage growth

Application proliferation

Redundancy / resilience

Regulatory or compliancerequirements

Mergers and acquisitions

47%

78%

77%

75%

75%

74%

69%

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64%

60%

56%

4%

14%

26%

18%

20%

7%

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2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

59%51%

Hong Kong Singapore Sydney Selangor,Malaysia

Beijing

USD/sqft

1 Trade-off between degree of control and abstraction

Source: J.D. Meier’s Blog

SaaS

Private cloud space may offer similar 15%-20% operating margins

Scale is less important in the private cloud space as infrastructure sharing is mostly limited within the enterprise network. Besides security, customisation and level of support are key considerations in the private cloud space, for which cloud providers charge a premium price. Our view is also supported by a McKinsey study, which states that operating margins of 15%-20% can be achieved by a variety of cloud players with different business models.

Strategy for Telcos

If we look at the total co-location, hosting and cloud market size in Asia Pacific, it was close to US$19 billion in 2012. Co-location and hosting together comprised US$14 billion or about 74% of the total market. Cloud services, at US$5 billion, made up the remaining 26%. However, the cloud service market is expected to grow at a much faster rate than the data centre service market.

While competition is fierce, with leaders Hewlett Packard, IBM and Microsoft in the private cloud space, telcos that acquire or liaise with cloud players with system integration skills are not at a technological disadvantage. Current market leaders have existing relationships with the IT departments of enterprises while telcos have relationships with the networking departments of enterprises. Telcos can therefore compete in the private IaaS space, riding on their strengths in the managed hosting markets in which they also engage with the IT departments of enterprises.

Operators can differentiate themselves by offering end-to-end network, IT and physical data centre security, and service management – something that pure-play providers may not be able to do. This could be a compelling proposition in security and compliance-conscious industry verticals, such as pharmaceuticals and financial services.

Many companies may require a telco to handle their cloud service globally in order to avoid signing different agreements for cloud in various regions. Therefore telcos need to provide cloud service out of data centres situated near the client’s local location in order to minimise latency. As such, telcos may be better served acquiring cloud companies with data centre presence across the globe.

Success Stories

Some of the more successful global telcos in the cloud services market include Verizon, which acquired Terremark, and CenturyLink, which acquired Savvis.


07

Focus on compliance-oriented sectors

Key competitors

Global data centre access

In 2011, Verizon acquired US-based Terremark for US$1.4 billion for its global data centres, cloud and managed hosting solutions. This has also made Verizon Terremark one of the top 12 global IaaS providers as of 2014, according to market research firm IHS.

CenturyLink, the third largest telecom company in the US in terms of fixed line customers, provides communications and data services to residential, business, governmental and wholesale customers. In 2011, the company acquired Savvis, a global provider of cloud infrastructure and hosted IT solutions, for US$2.5 billion, plus net debt of approximately US$700 million. This acquisition allowed CenturyLink to provide expanded managed hosting and cloud services.

Since the acquisition, Savvis’ managed and cloud services revenue has increased 57.6% as of the 2014 June quarter. The segment has been important for CenturyLink to maintain its top line, which has suffered due to lower revenue stemming from legacy telco products.

Key Challenges

Most telcos are recognised nationally, in countries they operate in. Any advantage they may possess through their networks and existing relationships are also limited to their geographies. Global cloud players are securing a big part of the growth in Asia Pacific due to their ability to provide low latency services due to direct connections between their data centres globally. Furthermore, on a global level, telcos’ brand recognition is dwarfed by established cloud computing giants such as Amazon.


Limited reach

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47%

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2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

59%51%


Beijing

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2 Quarterly revenue for CenturyLink/Savvis’ managed and cloud services

Source: CenturyLink


09

Initiative Company Examples

Partnering with technology vendors

Telstra In June 2011, Telstra announced that it is partnering with cloud technology vendors Cisco and VMware to build the next phase of its integrated cloud platform.

Telecom Italia In April 2011, Telecom Italia partnered with EMC to launch ‘Cloud IT Data Space’, a cloud storage service based on EMC’s Atmos cloud delivery platform, for business users in the Italian market.

KT Corp In December 2010, KT Corp announced plans to acquire NexR, a South Korean company that develops and operates cloud computing platforms. The telco also agreed to partner with virtualisation software maker Citrix Systems to offer cloud services for iPad and desktop computer users.

Acquiring technology companies to boost cloud capabilities

NTT Corp In July 2011, NTT Corp said that its South African subsidiary, Dimension Data Holdings Plc, plans to acquire US-based OpSource Inc, which develops software for the core functions of cloud computing services, such as server management and access analysis at data centres, as well as billing. The acquisition price is estimated at US$90 million.

Telefónica In June 2011, Telefónica acquired Acens Technologies, a leading hosting and collocation services provider for small and medium enterprises (SMEs) in the Spanish market. The deal value was not disclosed.

CenturyLink In April 2011, CenturyLink agreed to acquire information technology firm Savvis for US$2.5 billion, to accelerate its ability to deliver managed hosting and cloud capabilities to its business customers.

Verizon In January 2011, Verizon agreed to acquire data centre operator Terremark Worldwide for US$1.4 billion. The acquisition enables Verizon to access Terremark’s large base of business and government customers, along with a global network of 13 data centres.

3 A clear trend

Carrier-neutral data centre providers also provide the benefits of multiple carriers to build redundancy and resilience for business operations. Multiple carriers in the data centre also make sure that the tenant will not be held hostage to a single carrier in the future.

In addition to cost benefits from scale, larger cloud service providers have also adopted a high degree of automation in their processes. This extends from setting up new cloud services almost instantly to online sales. Due to automation, larger cloud services can price their services at lower levels compared to many telcos. These automations also add to service improvements in terms of speed and quality. Telcos, on the other hand, coming from the managed hosting world, rely on a dedicated sales force and provide a more customised but less automated service.

Source: KPMG International

Lack of carrier neutrality

Lack of automation in cloud services

Data centre budgets will grow 5%-10% for most firms over the next 12 months in Asia Pacific

Growth of Data Centreshe Asia Pacific data centre service market is valued at approximately US$14 billion in 2012. It is projected to grow at a 14.6% compound annual growth rate between 2012 and 2017, according to Frost & Sullivan. On the consumer side, the advent of 3G and 4G, and the rise of social networking where consumers are constantly

connected to the internet through their smartphones are driving growth.

On the enterprise side, the rise of e-commerce coupled with reliance on big data analytics to make decisions imply a big spur in data centre spending.


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47%

78%

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46%

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2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

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Beijing

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47%

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46%

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2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

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4

5

How do you expect your firm’s spending on data centre facilities to change over the next 12 months?

What do you believe are the greatest drivers for data centre capacity growth today?

Base: 267 senior-level Asia Pacific decision makers with responsibility for decisions involving data centres


Source: A commissioned study conducted by Forrester Consulting on behalf of Digital Realty, February 2014


Data Centre Business Models

There are two kinds of data centre providers:

Carrier-controlled data centre providers build the facility for their own needs and rent out the extra space. Enterprises can get really high bandwidth and reasonable prices in such a facility, but may have only one or a few carriers to pick from.

Carrier-neutral data centre providers on the other hand do not favour any carrier. Instead, multiple carriers typically support the data centre. Enterprises have a choice among multiple carriers so they are not stuck with just one. More competition among carriers may result in lower price for connectivity each year while the diversity of carriers provides more resilience to their business. Equinix and Global Switch are leaders in this space.


11

Carrier-controlled

Carrier-neutral

What is a Data Centre?

Data centres are facilities specifically designed to house IT infrastructure of businesses. This would comprise servers and storage devices running enterprise software as well as managing business data. Due to the importance of data centres to daily operations, they are built to minimise disruptions and downtime. Hence data centres generally carry specially designed power supply, cooling and redundancy.

Furthermore, due to the sensitive nature of data maintained within businesses, many physical and virtual security features are also incorporated. In addition, multiple modes of high bandwidth access (fiber optic, wireless, etc.) are also generally incorporated into data centre designs. Data centre users vary from SMEs to large multinational corporations, financial institutions and government players. The scale and design of data centres would depend on the business and its purpose.

Tiers Description Availability Expected outage time per year

Tier-1 Single non-redundant distribution path serving the IT equipment, non-redundant capacity components

99.671% 28.8 hours

Tier-2 Tier-1 compliant, redundant site infrastructure capacity components

99.741% 22.7 hours

Tier-3 Tier-2 compliant, multiple independent distribution paths serving the IT equipment, all IT equipment with dual-power and fully compatible with the topology of a site’s architecture, concurrently maintainable site infrastructure

99.982% 1.6 hours

Tier-4 Tier-3 compliant, all cooling equipment independently dual-powered, including chillers and heating, ventilating and air-conditioning (HVAC) systems, fault-tolerant site infrastructure with electrical power storage and distribution facilities

99.995% 26.3 minutes

6 Data centre business categories

Source: Telecommunications Industry Association, DBS Bank

Data centre providers typically pursue the following business models:

Retail co-location service providers mainly cater to individuals and SMEs, and lease individual racks and cages ranging from 500sq ft-5,000sq ft. The lessees own, use and maintain their own equipment, but share power, communication and data centre floor space with other tenants. Multitenant data centres are a cheaper and more flexible option.

Co-location is a good choice for companies that need full control over their equipment for regulatory requirements. Besides smaller customers, larger corporations also use co-locations to add flexibility to their data centre capacity. Additionally, some consumers use co-locations as secondary sites for disaster recovery purposes, avoiding building an entire second data centre. However, co-location requires time and effort by an organisation’s IT staff to monitor and manage equipment.


Half rack Full rack

Price (S$) 1,100 1,800

Bandwidth 50Mbps guaranteed 100Mbps guaranteed

IP addresses 6 12

Power 1kVa 3kVa

Power sockets 12 24

Visitation access 24/7 24/7

Server uptime monitoring Up to 2 devices Up to 4 devices

Network statistics MRTG graph MRTG graph

Add-ons

10Mbps guaranteed bandwidth S$200/month

50Mbps guaranteed bandwidth S$750/month

1 IP address S$10/month

24 port gigabit managed switch S$150/month

1 power socket S$75/month

1kVa power S$500/month

Remote hands S$250/month

Retail co-location

7 Example of a typical co-location space sale in Singapore

Source: Vodien

Wholesale providers generally build larger data centres and typically lease or sell to one or a few clients in larger floor spaces. Additionally, the clients’ contracts tend to span a longer term. Their customers are large corporations, retail co-location companies and managed hosting companies. Also, due to the larger spaces, lease rates tend to be lower.

Similar to co-location, wholesale lessees own and manage computer hardware, which translates to higher capital expenditure and IT staff workload.

In dedicated hosting, a customer leases servers in an off-site data centre so there is no upfront capital expenditure for servers. Clients generally perform their administrative and management functions remotely. Clients also have more control over the server operations and require more technical know-how.

Managed hosting is generally the highest level of service to support clients with low technical know-how. Users can also choose their preferred operating system as well as optional managed services like security patches, upgrades, backups and firewalls. Furthermore, due to its higher level of service, managed services carry higher rates. Managed service providers often use a flat rate, monthly fee pricing structure that varies according to the services offered and the number of devices managed.

Data Centre Margins

Data centre players tend to see higher earnings before interest, taxes, depreciation and amortisation (EBITDA) margins often exceeding 40%, as they have been disciplined in adding data centre space only when they have an anchor tenant in place. Furthermore, clients tend to have longer-term relationships with data centre players due to possible disruptions that can take place when switching data centres. This leads to lower churn and cost of sales for data centre players. High EBITDA levels remain true for the Asia


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Wholesale co-location

Dedicated and managed hosting

Data centre players tend see higher EBITDA margins often exceeding 40%

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8 Equinix EBITDA margin in 2013

Source: Equinix, DBS Bank

Pacific region as well. In fact, Equinix, a global leader in data centre services, consistently reports higher EBITDA margins in Asia Pacific.

In terms of operating costs, energy would account for the bulk of it, followed by staff and network costs. The location of the data centre would also have a significant influence on energy prices, rent and labour costs.

Key Considerations

1. Both enterprises and cloud providers use co-location facilities According to Gartner, despite some cloud service providers opting to transition to

their own data centres, many will look to utilise multitenant data centres (co-location facilities) and focus on value addition through the development of their services. Having co-location at big data centres versus setting up their own data centres allows cloud providers to achieve carrier diversity as big data centres are served by multiple carriers. As a result, the growth of cloud services goes hand in hand with the growth of co-location.

2. Singapore and Hong Kong are preferred locations for the most demanding data centres Many Asian data centres (including newly-built facilities) are located in expensive

urban locations. This is unlike the trend seen in Europe and North America, where data centres are moving out of cities in pursuit of cost advantages in energy savings and real estate prices. A primary reason for this has been the lack of power and network availability especially for Tier-3 and Tier-4 data centres.


Singapore Hong Kong Australia Malaysia Other

Equinix

Global Switch

Digital Realty

NTT

SingTel

Tata

Keppel TT

Telecom Malaysia

CSF Group

Fujitsu

9 Data centre footprint in Asia Pacific

Source: Company data, DBS Bank


15

Asia is seen as a diverse market with different countries seeing significantly different issues. These include differences in market maturity, infrastructure quality and cost, as well as business culture. Singapore and Hong Kong are generally considered the leaders in the data centre sector in Asia due to regional demand from Southeast Asia and China respectively despite higher real estate prices.

3. Within Southeast Asia, Malaysia, Indonesia and Thailand are seeing some interest In Indonesia, recent laws that require financial organisations to keep financial data

within the country have increased domestic demand for data centres. There is some expectation that this would be extended beyond financial institutions to cover all IT services. As for Thailand, its key appeal lies in the country being a base for the Indo-China region comprising Cambodia, Laos, Myanmar, Thailand and Vietnam.

10 How do you plan to source your new IT capacity in the future?


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(Percentage of respondents who plan to outsource their data centre in the future by co-locating, fully outsourcing, or using infrastructure-as-a-service or managed services)

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11 How far away from your primary headquarters do you plan to locate your next data centre facility?



Asia Pacific firms that plan to outsource their business in the future prefer Singapore

4. Location, resilience and network connectivity are prime considerations for a data centre

5. Singapore versus Hong Kong The basic rental costs in Hong Kong seem to be comparatively lower than in Singapore

when retail co-location rentals are factored in. However, this is because many players in Hong Kong do not include the cost of other services such as network switches or bandwidth in the co-location rentals. All things considered, rental prices in both countries are quite similar.

One of the key cost components for a co-location service provider is real estate price, or rent. In terms of property prices, Singapore offers more cost savings compared with Hong Kong, which has one of the highest property prices in the world. According to numbers published by CBRE in the 2013 December quarter, industrial and logistics real estate space in Singapore is 18% lower than in Hong Kong.




12 How important are the following when making decisions about new data centre facility investments? (‘4’ [important] or ‘5’ [very important])

0

50

100

150

200

250

300


Leve

l of

Ab

stra

ctio

n

Leve

l of

Co

ntr

ol




USD Mn






60

70

80

90

100

110

120

130

140

150

160

Virtualisation













200 to 499 miles (321 to 804km)

100 to 199 miles (160 to 320km)

30 to 99 miles (50 to 159km)



Not applicable

Don’t know


Big data

Consolidation

Business growth

Business continuity

Storage growth





47%

78%

77%

75%

75%

74%

69%

68%

68%

64%

60%

56%

4%

14%

26%

18%

20%

7%

5%

7%

46%

41%

39%

34%

32%

26%

25%

16%

8%

2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

59%51%


Beijing

USD/sqft


17

We would like to highlight that market leaders in both countries charge a significant co-location premium for low-latency services based on their ability to provide the most direct connections to key network and cloud providers.

0

10

20

30

40

50

60%

North America Europe, the Middle East

and Africa

Asia Pacific

Malaysia Thailand Hong Kong Singapore0

200

400

600

800

1000

1200

1400USD/month

0

50

100

150

200

250

300


Leve

l of

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stra

ctio

n

Leve

l of

Co

ntr

ol




USD Mn






60

70

80

90

100

110

120

130

140

150

160

Virtualisation













200 to 499 miles (321 to 804km)

100 to 199 miles (160 to 320km)

30 to 99 miles (50 to 159km)



Not applicable

Don’t know


Big data

Consolidation

Business growth

Business continuity

Storage growth





47%

78%

77%

75%

75%

74%

69%

68%

68%

64%

60%

56%

4%

14%

26%

18%

20%

7%

5%

7%

46%

41%

39%

34%

32%

26%

25%

16%

8%

2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

59%51%


Beijing

USD/sqft

13

14

Average co-location rates per full rack

Industrial and logistics real estate prices

Source: DBS Research

Source: CBRE, Asia Pacific Industrial and Logistics MarketView, 2013 December quarter

Lastly... To Build or To Acquire?Many market participants are integrated across the value chain. Telcos for instance may own the asset, provide co-location and hosting, and also offer cloud services.

Presently, the market favours pure co-location providers when compared to cloud businesses. Co-location providers such as Equinix and Digital Realty Trust trade at 13 to 16 times 2014 EBITDA versus integrated data centre and cloud providers such as Rackspace Hosting, which are trading at seven to eight times.

This is because co-location providers can easily spin into real estate investment trusts (REIT) that pays regular dividends due to long-term agreements of three to five years and long-lived assets such as real estate, power and cooling infrastructure.

Cloud providers, which are in the primary business of leasing servers and IT infrastructure, are less likely to morph themselves into a REIT-like structure as they need to invest more frequently in fast-depreciating servers and other infrastructure.

Furthermore, many cloud providers are seeing slower revenue growth due to cannibalisation of their legacy managed hosting revenues. This trend is all the more evident in the face of sharp price reductions for public cloud services by Amazon and Google. Despite these near-term headwinds, cloud providers should continue to do well due to rising pace of demand for cloud services.


15

Industrial Asset Owners Data Centre Providers Cloud Providers

Lease to data centre providers who fit-out the building for co-location and/or hosting.

Lease co-location facilities to enterprises or cloud providers. May also host IT equipments in some cases.

Provide enterprises with on-demand IT services using one or more data centres.

Eg: Industrial REITs Eg: Equinix (no hosting) Eg: Amazon Web Service

Clients save real estate capital expenditure by leasing the space.

Clients benefit from economies of scale at external data centres in addition to disaster recovery needs.

Clients save IT capital expenditure by adopting cloud and get highly-scalable service on-demand.

0

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100

150

200

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300


Level o

f Abstra

ction

Level o

f Contro

l




USD Mn






60

70

80

90

100

110

120

130

140

150

160

Virtualisation













200 to 499 miles (321 to 804km)

100 to 199 miles (160 to 320km)

30 to 99 miles (50 to 159km)



Not applicable

Don’t know


Big data

Consolidation

Business growth

Business continuity

Storage growth





47%

78%

77%

75%

75%

74%

69%

68%

68%

64%

60%

56%

4%

14%

26%

18%

20%

7%

5%

7%

46%

41%

39%

34%

32%

26%

25%

16%

8%

2Q141Q144Q133Q132Q131Q134Q123Q122Q121Q124Q113Q112Q111Q11

78%69%

59%51%


Beijing

USD/sqft

Value Chain of Data Centre and Cloud Providers

Source: DBS Bank

Consequently, Telcos, should focus on growing its carrier-neutral data centres organically Japanese telco, NTT Communications for example, has set up carrier-neutral data centres across all the major markets in Asia Pacific and is known to charge a premium price for co-location services from enterprises and cloud providers.

Given cloud infrastructure players’ sharp discount versus data centre players, we believe telcos would be better off acquiring cloud players rather than building the cloud capabilities themselves.

With the intense price competition in the IaaS market, cloud players need to differentiate themselves from the likes of Amazon Web Services and Google, who are pure IaaS providers.

Telcos’ target market is mainly enterprises that will rely on both public and private clouds. As such, acquired cloud players could help telcos in their foray into the hybrid clouds space.


19

Expand carrier-neutral DCs

Acquire not build cloud competencies

Investing with the Trend

Cloud Price Wars

Cloud is essentially a high volume, low margin business (see report “Telco Reloaded – A Strategy on Cloud Computing and Data Centres” for more on the business model of cloud computing). As such, there is a constant race to lower the cost of their operations. We see big cloud providers adopting the strategy of going directly to the original design manufacturers (ODMs). In the past, original equipment manufacturers (OEMs) such as HP and Dell sold servers to data centre players. But bigger cloud and data centre players are now skipping OEMs and working directly with ODMs according to their own requirements, as there is more demand for compact and low-power servers due to space restrictions in data centres. According to Gartner, the shift towards low-cost equipment could challenge the existence of incumbent data centre vendors.

1


Key beneficiary

Declout is an IT infrastructure services and vertical domain cloud service provider. At present, demand for low-cost IT products and services, and the adoption of cloud services are seeing growth globally. Declout is able to source refurbished IT equipment from the US, Europe and Asia, and also provides maintenance service to cloud or data centre players. The company is currently trading at only 13 times 2014 enterprise value (EV)/EBITDA and 5 times 2015 forecast EV/EBITDA.

Singapore as a Data Centre Hub

Singapore is one of the best locations for data centres in Asia due to its lower risk of natural disasters and solid connectivity to the region. As a matter of fact, senior level managers have indicated their preference for using Singapore for their co-location needs (see report “Telco Reloaded – A Strategy on Cloud Computing and Data Centres). The duration of property leases for data centres tends to be very long (20 to 30 years) versus an average of five to six years for other industrial tenants. This is due to the high fit-out capital expenditure incurred by data centre players to convert properties into data centres. For example, MapleTree Industrial Trust will lease the data centre building to Equinix for 20 years (with an option to renew two additional 5-year terms) with 2% annual rent escalation clause. As such, industrial REITS will continue to benefit from data centre demand in Singapore and deliver healthier distributions to their shareholders.

Key beneficiariesMapleTree Industrial Trust owns two data centres – Tata Communication Exchange and a build-to-suit development project for Equinix (to be completed in the second half of 2014). We estimate that these two assets will contribute to some 6% of revenue in 2016, on a stabilised basis. In the next two years, earnings growth will be driven by the completion of its development project for Equinix, as well as higher committed occupancies at its properties. MapleTree Industrial Trust’s gearing currently stands at 34%, which would allow it to make around S$860 million worth of debt-funded acquisitions. At current prices, the stock offers a 7.1% dividend yield for 2015/16F.

Ascendas REIT owns three data centre properties, valued at S$528 million, or about 7% of its total portfolio. Its largest data centre tenant is SingTel, which occupies 38A Kim Chuan Road and Kim Chuan Telecommunications Complex. Leases from SingTel are noted to be long term, offering strong income visibility to the REIT. Ascendas REIT’s gearing level stands at 32%, giving it the flexibility to acquire up to S$2.1 billion worth of assets, assuming 60% gearing. Given its linkage with JTC and track record in development, we believe Ascendas REIT remains one of the frontrunners for future build-to-suit projects in the data centre space. At current prices, the stock offers a dividend yield of 6.4%-6.6% for 2015/16, which is attractive in our view.

2


21

Connectivity is King

Uptime and disaster preparedness have become basic requirements that most data centres are expected to provide. What really differentiates them, however, is their connectivity ecosystem. Direct connection enables low latency and the most straightforward route to the destination, which is important especially for the financial and media sectors. This is because a difference of a few milliseconds in the speed of procuring stock market data can have a big impact on the trading and brokerage businesses.

Our channels checks indicate that premium co-location providers can charge up to US$4,000-US$5,000 per month, per rack in Hong Kong on the basis of low latency alone, compared with the US$1,000 per month charged by other local players offering an equivalent tier of data centre space.

An effective connectivity ecosystem implies or entails the data centre operating at a certain size and scale. This means data centres would have to host a myriad of networks and cloud providers, and invariably maintain a larger and wider pool of technical expertise. But once economies of scale are reached, it would have a positive reinforcing effect, which in turn will attract other premium customers.

Consequently, market leaders are likely to be bigger carrier-neutral data centre players that are able to provide a choice among various network and cloud providers.

Key beneficiaries21ViaNet is the largest carrier-neutral data centre player in China. NASDAQ lists it as having 31% share of the carrier-neutral data centre market in 2012, according to International Data Corporation, or IDC. The company had 12% share of the overall data centre market in China, with China Telecom being the largest data centre player with 39%, followed by China Unicom with 20%. Besides data centres, the company offers cloud services in revenue sharing arrangements with Microsoft and IBM. The stock is currently trading at 15 times consensus 2014 EV/EBITDA and 9.5 times 2015F consensus EV/EBITDA, which in our view is not expensive given high growth prospects.

SUNevision is the largest carrier-neutral data centre player in Hong Kong. With 500,000sq ft of data centre space, SUNeVision’s subsidiary iAdvantage is acknowledged as the market leader, although market share figures are not available. It had 88% occupancy at the end of 2013, up from 78% the previous year. The company is able to charge a premium rental due to its ability to bring together network, cloud and IT providers. The stock is not expensive at 9 times 2014 EV/EBITDA and has a healthy track record of double-digit growth.

3

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