Data Centre & Cloud: Divestments and M&As to Accelerate in 2018 - DBS Bank |Indonesia
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54
SECTOR BRIEFING
number
DBS Asian Insights
DBS Group Research • November 2017
Data Centre & Cloud:
Divestments and M&As
to Accelerate in 2018
DBS Asian Insights SECTOR BRIEFING 53 02 Data Centre & Cloud: Divestments and M&As to Accelerate in 2018 Sachin MITTAL Telecom, Media and Technology Analyst DBS Group Research sachinmittal@dbs.com Tsz Wang TAM Telecom Media and Technology Analyst DBS Vickers (Hong Kong) tw_tam@hk.dbsvickers.com TOH Woo Kim Telecom, Media and Technology Analyst AllianceDBS Research wookim@alliancedbs.com Chris KO CFA Equity Research Analyst DBS Vickers (Hong Kong) chriskof@dbs.com Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights asianinsights@dbs.com Goh Chien Yen Editor-in-Chief Jean Chua Managing Editor Geraldine Tan Editor Martin Tacchi Art Director
DBS Asian Insights
SECTOR BRIEFING 53
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04 Executive Summary
06 Introduction
07 DC Market in Asia
Singapore: Oversupply Till 2018
Hong Kong: Right Supply for Rising
Demand
Australia: Oversupply in Key Markets
Indonesia: Favourable Demand-Supply
Dynamics
Malaysia: Oversupply May Lead to
Consolidation
Thailand: Supply Could Outstrip
Demand in the Future
India: Balanced Demand and Supply
Dynamics
Theme 1: Telcos divesting DC assets
Theme 2: Private cloud players moving
into (i) Cloud ancillary services and (ii)
Industry-specific solutions.DBS Asian Insights
SECTOR BRIEFING 53
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Executive Summary
A
mid surging growth in the public cloud market and changing dynamics of data
centre (DC) businesses, we explore three emerging trends in the DC and cloud
markets.
• Indonesia – top-tier DC players secure double-digit return on
invested capital (ROIC), higher than the rest of the region.
Based on our estimates, we believe that Indonesia offers the best ROIC in the region
coupled with favorable supply-demand dynamics. Australian DC operators, on the
other hand, recorded the lowest ROIC in the region due to the high cost of acquiring
facilities in key metropolitan areas, and pricing pressure on rentals due to oversupply.
Singapore, the largest DC market in South-East Asia, offers moderate ROIC and new
supply is set to enter the market at a much reduced pace over the next 24 months.
Diagram 1. Indonesia – attractive returns for top-tier retail DC operators
Return on Invested Capital
Country Retail DC Wholesale DC
Singapore 9.5% 7.2%
Hong Kong 7.0%
Australia 3.8% 5.1%
Indonesia 11.6% -
Malaysia 7.1% 6.9%
Thailand 8.2% -
India 6.4% -
Source: DBS Bank
• Telcos are better off divesting their DC assets.
DC assets have traditionally been undervalued by being pooled in with telecommunication
companies (telcos). The better cashflow visibility and more focussed operations of DC
businesses have resulted in pure-play DC operators being valued by investors over DC
assets run by telcos. Pure-play DCs are typically valued at 20-25X EV/EBITDA whereas
telcos tend to be valued at 5-10x EV/EBITDA. In more mature markets such as the US,
telcos have begun to divest their DC businesses in a bid to realise the true value of DC
assets. Funds released from DC operations will potentially be diverted to enable cloud
services or invested in high-growth areas such as Big Data analytics.DBS Asian Insights
SECTOR BRIEFING 53
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Diagram 2. Potential impact of DC divestment at 15x-20x EV/EBITDA on the share price
DC Space (sqft) Potential Share Price Impact
Singtel 1,375,000 5% - 7%
Telekom Malaysia 200,000 5% - 9%
Telekomunikasi 1,076,390 2% - 3%
XL Axiata 219,580 6% - 9%
PCCW 400,000 6% - 10%
Citic Telecom 135,000 8% - 12%
Time DotCom 59,755 0% - 4%
Source: Companies, DBS Bank
• Private cloud players moving to cloud ancillary services and
industry-specific solutions.
With more and more corporates adopting public cloud services, the share of new
business going to private cloud is slowing down, encouraging private cloud players to
expand into new areas. Telcos could leverage their cloud expertise to provide ancillary
cloud services such as Cloud Security services, multiple cloud management, and cloud
monitoring services to benefit from the booming demand for cloud services. The key
challenge in offering cloud security services is low operating margins due to high
R&D costs, coupled with high staff and marketing costs. Multiple cloud management
services are in high demand due to the constantly changing nature of public clouds
but retaining these experts can be a challenge too due to the high demand. Cisco’s
acquisition in March 2017 of AppDynamics, a company which allows companies to
monitor the performance of applications in real time, reflects the importance of cloud
monitoring services. Telcos could also consider partnering with large-scale cloud service
providers to provide backup and continuity solutions. Players like IBM have also started
to specialise in the provision of industry-specific solutions.
Diagram 3. Private cloud players moving to cloud ancillary services
Smaller players Cloud Security Strategic Cloud
looking for areas for Security
alternatives Telcos
Cloud Integration
Public Cloud
Cloud monitoring Backup and
Continuity
Ancillary Cloud
Cloud Storage
services and Vertical
Solutions
Specific Solutions are
top candidates
Backup and Cloud
Continuity Integration
Source: DBS BankDBS Asian Insights
SECTOR BRIEFING 53
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Introduction
P
ublic cloud is increasingly adopted in developed markets such as the US and Europe
amid easing concerns surrounding security and expansion of services that better fit
large-scale enterprises. For example, 48 of Fortune Global 50 companies have publicly
announced plans to integrate cloud into their operations. A recent cloud computing
survey by the consultancy firm, Bain 1in the cloud from 1% in 2010 to 16% by 2015, spending
over US$17b in the process. Hybrid cloud adoption has also improved over the past year, rising
from 19% in 2015 to 57% in 2016, according to a survey conducted by the security service
provider, McAfee2.
Diagram 4. The interplay between data centres and cloud services
Evolution of Data Centres – US is at Stage 3; Asia is at Stage 2 transitioning to Stage 3
Source: DBS Bank
Amazon Web Services continues to lead the public cloud market with a market share of 34%,
according to the Synergy Research Group3. Microsoft and Google come in at distant 2nd and
3rd places with market share of 11% and 5%. In terms of cloud infrastructure, private cloud
is expected to record plateauing growth over the short term. According to Cisco4, only 32%
of cloud workloads will be run on private clouds by 2020, down from 51% recorded in 2015.
Against this backdrop, we explore the ROIC of DC operations in key Asian markets and other
key emerging trends in the global DC market. We are seeing more telcos divesting their DC
businesses as they face intense competition in local markets from global DC operators. We
believe that by doing so telcos could also unlock the true value of their DC assets which remain
undervalued compared with pure-play DC operators. Secondly, we examine how private cloud
operators have shifted their focus from the provision of private cloud services to focus on cloud
ancillary services catering to hybrid cloud implementation and maintenance in addition to the
development of high-value-adding industry-specific solutions.DBS Asian Insights
SECTOR BRIEFING 53
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DC Market in Asia
Singapore: Oversupply Till 2018
Singapore’s DC market is driven by international demand, which makes up 65-75% of
total demand5. The city is increasingly being chosen as the most preferred location in Asia
by major information-technology services, infrastructure and outsourcing providers. In fact,
Singapore accounts for ~60% of DC capacity in the South East Asia region, according to
the BroadGroup Consulting Group6.
Singapore’s DC market is expected to grow 9% from an estimated US$811m (S$1.1b) in
2016 to US$884m (S$1.2b) in 2017, according to Structure Research7. The research firm
expects the DC market in Singapore to generate US$1.2b (S$1.6b) by 2020, recording a
compound annual growth rate (CAGR) of ~9% over 2016-2020.
There was about 248.5 megawatts (MW) of supply across roughly 50 DCs in Singapore at
the beginning of 20168 and at least six new DCs were completed in 2016, including the
1-Net North DC, DC West by Singtel, and DCs by ST Telemedia, Telin, and Digital Realty
adding close to 100MW in capacity. According to the BroadGroup Consulting9 Group, close
to ~100MW of DC capacity will be added from 2017 to 2020, with demand increasing
~106MW over the same period. Whilst supply additions are expected to exceed demand in
2017 with resultant dips in utilisation, demand is expected to overtake supply from 2018,
restoring balance in demand-supply of DC capacity.
Diagram 5. Key DC operators in Singapore
Company Country of Origin Floor Area (sqft)
Singtel Singapore 1,375,000+
Equinix USA 370,000+
Global Switch USA 270,000+
Keppel DC REIT Singapore 196,000+
Digital Realty USA 547,000+
Ascendas REIT Singapore 889,000+
AIMS Malaysia 45,000+
Cyxtera USA 88,000+
ST Telemedia Singapore 220,000+
Racks Central Singapore N/A
Source: Companies, DBS BankDBS Asian Insights
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Increased compliance requirements on data security from the financial industry, as well
as exponential growth in data storage and management in a digital economy, should
underpin medium-term growth. Availability of high-quality facilities at competitive prices
has also motivated enterprises seeking better DCs or migrating from ageing facilities.
Due to the asset-intensive nature and stable rental properties, DC ownership generally
carries relatively moderate yields. Keppel DC REIT, for example, generates a ROIC of ~7%
from its two wholesale DCs and one retail DC in Singapore.
Diagram 6. Return on Investment relatively low on Keppel DC’s Singapore DCs
In US$m 2015 2016
Invested Capital* 332 333
Lettable Area (in sqft) 146,462 146,809
Gross Revenues 30.6 30.1
Average Occupancy 89.3% 88.6%
Revenue Per Sqft 234 232
EBIT Margin 80% 80%
Operating Income 24.4 24.1
ROIC 7.4% 7.2%
* Carrying values of the properties as of 31 December 2016 of the properties have been considered as Invested Capital. REITs are
not subject to corporate taxes. Exchange Rate – US$ 1 = S$ 1.367
Source: Company, DBS Bank
Wholesale operators enjoy better margins compared to retail DC operators as wholesale
lease agreements are often structured in a manner in which the tenant bears costs of
power, utilities, and other direct maintenance expenses.
Wholesale operators also enjoy higher utilisation of their facilities whilst utilisation rates
of retail operators depend on aspects such as competition, quality of the facility, and
other services on offer. At higher levels of utilisation (>80%), retail operators tend to
enjoy better ROIC than wholesale operators. Hence, based on average ROIC differentials
between retail and wholesale operators in regional markets, we estimate that retail DC
operators in Singapore may enjoy 2%-3% higher ROIC than wholesale DC operators.
Hong Kong: Right Supply for Rising Demand
Hong Kong is set to be one of the major DC hubs in Asia. It is a gateway for Chinese
internet and multi-media content providers as well as telecom operators to connect
to the rest of the world. The city is one of the few locations in Asia that has (i) a safeDBS Asian Insights
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environment sheltered from natural disasters, (ii) reliable and stable supply of electricity,
and (iii) advanced telecom infrastructure.
Overall DC supply in Hong Kong is constrained by the limited supply of land in Hong
Kong. There are mainly two sources of DC supply in Hong Kong, namely (i) conversion
of old industrial buildings and (ii) greenfield DC projects. According to Innovation and
Technology Bureau (ITB) of Hong Kong Government, DC capacity will increase by 32% to
7.1m sqft in terms of Gross Floor Area (GFA) by the end of 2017 from 5.4m sqft by the
end of 2015, thanks to the completion of a number of government-supported greenfield
projects. The government has two dedicated land parcels with GFA of c.500k sqft each
in Tseung Kwan O for auction in 2018. We believe that the supply will come into the
market in 2022-2023 respectively. Before that, we expect steady supply of c.500-600k
sqft per annum from industrial building conversion to continue meet the demand in
2018-2020.
We expect Hong Kong DC market to grow at 15% p.a. for the coming 3-5 years. This
is consistent with Frost & Sullivan’s earlier forecast of 15% p.a. for 2013-2019. The
demand for DC in Hong Kong used to come from the banking and financial segment.
New demand in recent years has come from content hosting by multi-media content
providers such as Letv, as well as internet players such as Tencent. The demand is also
fuelled by the rising adoption of cloud technology by business enterprises. Industry
practitioners also shared with us that Chinese telecom operators are also expanding
their footprint into Hong Kong to serve multinational customers.
Based on our interview with DC operators, utilisation rate of existing DCs currently stands
at about 80-90%, in terms of GFA, which is considered satisfactory for the industry. The
unutilised capacity is mostly newly established capacity or locked-in by existing tenants.
We expect overall utilisation to remain at healthy level in the next few years.
The key market players in Hong Kong include (i) local telecom operators such as PCCW
(8 HK), HGC GlobalCentre Limited (Hutchison Telecom [215 HK]), (ii) local carrier-neutral
DC operators such as SUNeVision (8008 HK), Grand Ming (1271 HK), Telehouse HK
CCC (HKCOLO) and Citic Telecom (1883 HK), (iii) international DC operators such as
NTT communications, Pacnet (Telstra), Global Switch and Equinix, (iv) Chinese telecom
operators such as China Mobile (941 HK), China Telecom (728 HK) and China Unicom
(762 HK). The top two players in terms of GFA are NTT Communications and SUNeVision.DBS Asian Insights
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Diagram 7. Key DC players in Hong Kong
Company Country of Floor Area Market Share*
Origin (sqft)
NTT Communications Japan 992,464 18.4%
SUNeVision Hong Kong 750,000 13.9%
PCCW Hong Kong 400,000 7.4%
Telehouse HK CCC (HKCOLO) Japan 396,000 7.3%
HKEX Hong Kong 337,987 6.3%
Grand Ming Hong Kong 287,972 5.3%
China Mobile China 258,334 4.8%
Towngas Telecom Hong Kong 236,806 4.4%
Equinix USA 236,000 4.4%
Digital Realty & Savvis USA 193,750 3.6%
HGC GlobalCentre Limited Hong Kong 175,000 3.2%
(Hutchison Telecom)
Super Effort Hong Kong 170,000 3.1%
Citic Telecom Hong Kong 135,000 2.5%
Pacnet (Telstra) Australia 60,278 1.1%
New World Telecom Hong Kong 50,000 0.9%
China Telecom China 27,000 0.5%
IBM USA 15,000 0.3%
Others 677,803 12.6%
* Market shares are as of 2015.
Source: Companies, DBS Bank
Hong Kong DC operators yield ROIC on par with regional peers such as Singapore and Malaysia.
Diagram 8. Return on Investment on SUNeVision’s DC
(Mega-I, Mega ONE and Mega Jumbo)
Retail
In US$m SUNeVision
Invested Capital* 482.8
Lettable Area (in sqft) 490,000
Gross Revenues 62.2
Average Occupancy 90%
Revenue Per Sqft 141
EBIT Margin 65%
EBIT 40
* Carrying values of the properties as of
Tax 17% FY6/16, appraised to the movement of
industrial property prices in Hong Kong
Operating Income 33.8 have been considered as Invested Capital.
Exchange Rate – US$ 1 = HK$ 7.8
ROIC 7.0% Source: Company, DBS BankDBS Asian Insights
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Australia: Oversupply in Key Markets
Australia’s DC market is centred on three main clusters, Sydney, Melbourne, and Brisbane.
Sydney, the largest DC market, is home to 42 DCs with a capacity of ~140MW and
generated US$390m (A$500m) in revenues in 2016, according to Structure Research10.
Melbourne housed nearly 30 DCs with a capacity of ~57MW and generated US$127m
(A$163m) in revenues. The DC market in Sydney is expected to record 12% growth in
DC revenues in 2017. DC revenues in Sydney is also expected to grow at a CAGR of 13%
from 2016-2021. Melbourne is expected to record 9% growth in DC revenues in 2017
with a CAGR of 16% by 2021. According to Frost & Sullivan,11the overall DC market in
Australia is expected to grow at a CAGR of 12.4% from 2015-2022, reaching US$1.6b
(A$2.05b) by 2022.
However, much of the supply still remains underutilised in Sydney and Brisbane. According
to BroadGroup Consulting group12, utilisation rates in 2016 in Sydney and Brisbane
hovered around 78% and 83% respectively. Sydney is expected to add 80MW capacity in
2017-18 according to Structure Research which may further exacerbate demand-supply
dynamics in the market.
Diagram 9. Key DC players in Australia
DC Operator Key Markets DC Capacity (sqft)
Equinix Sydney 165,000
Melbourne 26,000
Global Switch Sydney 786,000
Metronode Melbourne 94,500
Sydney 91,000
Perth 15,450
Brisbane 9,300
Adelaide 5,900
Fujitsu Sydney 197,000
Melbourne 41,000
Perth 35,000
Brisbane 8,600
Keppel DC REIT Sydney 179,000
Brisbane 12,400
NextDC Melbourne 65,000
Sydney 62,000
Perth 32,000
Canberra 24,000
Brisbane 17,800
Source: Companies, DBS BankDBS Asian Insights
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Much of the demand in the Australian market is driven by domestic enterprises, which tend
to prefer outsourcing than other Asia-Pacific markets, according to Structure Research.
Stringent data laws that require all firms dealing with personal data of customers to abide
by and maintain standards put forth by the Australian regulator regardless of the location
of the data, is also encouraging firms to retain data in domestic DCs. Demand from large-
scale cloud players is also on the rise. Alibaba Cloud opened its first DC in Sydney in the
latter half of 2016, joining Amazon and Microsoft which are already operating DCs in the
country. Google Cloud also expanded its coverage to Australia with a cloud DC in Sydney
opened in June 2017. Further regional expansion from Microsoft, which remains a key
partner in the Australian government’s cloud strategy, and other cloud service providers
could lead to an increase in demand for wholesale DC space in key markets, in turn
leading to improving demand-supply dynamics in major DC markets in Australia.
The higher cost of acquiring facilities in key DC hubs, which are also centred around
key metropolitan areas, and pricing pressure, due to the supply glut of DC capacity, has
resulted in fairly low yields for Australian DC operators on their DC properties. Based on
our analysis of Keppel DC’s and NextDC’s DC operations, we estimate that DC operators
yield ROIC hovering around 4%-6% in Australia.
Diagram 10. Low yields on DC operations in Australia
Wholesale Retail
In US$m Keppel DC NextDC
Invested Capital* 229 419
Lettable Area (in sqft) 191,274 200,800
Gross Revenues 20.7 91.7
Occupancy 100% n/a
Revenue Per Sqft 108 642
EBIT Margin 80% 25%
EBIT 16.5 22.9
Tax 30% 30%
Operating Income 11.6 16.1
ROIC 5.1% 3.8%
* Carrying values of the properties as of 31 December 2016 of the properties have been considered as Invested Capital for
Keppel DC REIT. Exchange Rates – US$ 1 = S$ 1.367, US$ 1 = A$ 1.28
Source: Company, DBS Bank
Indonesia: Favourable Demand-Supply Dynamics
According to Indonesia’s General Directorate of Applied Informatics, the DC market in the
country is expected to grow at a CAGR of 20% in financial years 2015-2017 from 2014’s
IDR4.4t (US$338.5m).DBS Asian Insights
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Indonesian laws mandating financial organisations to keep financial data within the country
have served to increase domestic demand for DCs. Banking, financial services, and insurance
will continue to be the biggest spender on information, communications and technology (ICT)
services, while manufacturing and transportation will show steady growth with respect to the
adoption of ICT services. Concerns around security and resiliency are also expected to drive
government demand for data-connectivity services especially for disaster recovery, according
to Frost & Sullivan.
Supply growth depends on infrastructure development. The Indonesian DC industry is still in
its infancy, with 60% of centre located in the Greater Jakarta area. The General Directorate of
Applied Informatics believes that the current expansion can meet demand until 2017.
The largest player now is Telkomsigma, a subsidiary of Telkom Indonesia. It has 100 cloud
computerised clients, ranging from small- and medium-sized enterprises (SMEs) to large
corporations.
Key challenges and barriers of entry include connectivity (infrastructure), reliability (track
record), sustainability (execution), and affordability (competitive pricing). Cloud services may
still be too expensive for Indonesian companies and the infrastructure is not yet stable enough
to support reliable cloud services. So far, there has not been any significant issue surrounding
regulation as the Indonesian government sees the DC industry as part of the ICT ecosystem.
For example, there is no hurdle for foreign investors to invest in the industry, as seen in NTT
Communications’ acquisition of Cyber CSF.
Diagram 11. Key DC operators in Indonesia
Company Country of Origin Floor Area (sqft) Remarks
Telkom Sigma Indonesia 1,000,000+
XL Axiata Indonesia 219,000+
NTT Japan 80,000+
Biznet Indonesia 75,000+
Equinix USA 20,000+
PT CBN Nusantara Nex Indonesia 19,000+
Faasri Utama Sakthi Indonesia 13,000+
Elitery Indonesia 13,000+
Aplikasi Lintasarta Indonesia 8,000+
Moratelindo Indonesia N/A Operates 6 DCs across Medan, Batam,
Palembang, Jakarta, Surabaya, Bali
Soluis Media Semesta Indonesia N/A
Source: Companies, DBS BankDBS Asian Insights
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Based on our analysis of TelkomSigma’s operations, we believe that retail colocation
players in Indonesia can realise 8%-10% ROIC on their DC operations. We attach a
discount to the higher ROIC enjoyed by TelkomSigma as TelkomSigma is likely to be able
to price its services at a premium due to the greater footprint and location of its DCs in
key business hubs and its relationship with Telkom Indonesia, the largest telecom and
fixed operator in Indonesia.
Diagram 12. Indonesian operators yield higher ROIC to comparable regional peers
Retail
In US$ m TelkomSigma
Invested Capital* 357
Lettable Area (in SqFt) 1,076,390
Gross Revenues 185 * Revenues and invested capital
are as of FY15. Invested capital is
Occupancy* 80% based on the total asset value of PT
Sigma Cipta Caraka (TelkomSigma)
Revenue Per SqFt 214.84 appraised based on the movement
of office property prices in the
EBIT Margin 30% Greater Jakarta region. Occupancy
and EBIT margins have been
EBIT 55.5 assumed based on regional averages
Tax 25% and competition in the local market.
Exchange Rates US$ 1 = Rp 13,513.
Operating Income 41.63
Source: Company, Bank Indonesia,
ROIC 11.6% DBS Bank
Malaysia: Oversupply May Lead to
Consolidation
The Malaysian DC Alliance (MDCA) estimates that there is a total of one million sqft of
DC space available in Malaysia across 17 players13. The Malaysia Digital Economy Corp14
expects DC revenues in Malaysia to exceed US$235m (MYR1b) in 2017 and expects this
figure to double by 2020. Malaysia currently has around 20 DCs, 90% of which are
operated by domestic firms.
It is a well-known fact that Malaysia has an oversupply of DC space. According to
BroadGroup Consulting15, Cyberjaya, which remains a key DC hub in Malaysia, is expected
to record utilisation levels hovering at around 69% in 2016. The market is expected to
improve in 2018-19, as capacity additions stall amid lower utilisation and pricing while
growing demand for colocation and cloud services is expected to consume additional
capacity.DBS Asian Insights
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Diagram 13. Key DC players in Malaysia
Company Country of Origin Floor Area (sqft) Remarks
CSF* Malaysia 405,000
VADS Malaysia 89,000+
Strateq DCs Malaysia 100,000+
Keppel DC REIT Singapore 48,193
HDC Data Centre Malaysia 50,000 Provides DC design and development
services
AIMS Malaysia 59,755
HeiTech Padu Malaysia 17,000
Basis Bay Malaysia N/A
Aktif Setegap Malaysia N/A Operates two DCs in Kuala Lumpur and
Bandar Utama
MyTelehaus Malaysia N/A Wholesale DC Operator. Specialises in
DC design and development
*CSF has announced that it will divest CX2 and CX5 DCs accounting for 357,000 sqft
Source: Companies, DBS Bank
Current oversupply of capacity has resulted in depressed prices as players are forced to
engage in a price war to attract customers. In fact, these issues have driven out some
players, including Malaysia’s first internet service provider (ISP) Jaring, which went into
liquidation in 2015 and was acquired by AIMS, a subsidiary of Time dotCom. Another
case in point is London AIM-listed CSF Group, the largest wholesale supplier of DC space
in Malaysia with a total net floor area of 405,000 sqft. Due to high rents and operational
costs, the company was forced to negotiate with building owners to restructure rental
rates in 2015. Following further losses and deterioration of financial position, CSF agreed
to dispose of two its largest DCs with a capacity of 357,000 sqft (accounting for 88% of
CSF’s total DC capacity) to a private equity fund of Bain Capital for a nominal consideration
of MYR2.
Top players are doing well despite overcapacity
AIMS recorded healthy sales growth of 24% for its DC business in 2016, outpacing the
industry. AIMS alluded that the oversupply of DC space is not a huge concern and is
achieving utilisation rates 85-90% for its DCs. This is because most of the smaller players
in Malaysia mainly provide only colocation services, due to lack of connectivity and value-
added services, which put them in a weak position to compete against the top DC players.
In fact, the top players in Malaysia such as VADS (owned by Telekom Malaysia), NTT
MSC, and AIMS have been expanding their DC capacity to cater for growing demand, a
testament that they are not worried about the oversupply situation.DBS Asian Insights
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Consolidation among Malaysian players has yet to pick up, with the only case so far being
the acquisition of Jaring’s assets by AIMS after the former went into liquidation in 2015.
We see Tier-2 Malaysian players such as Strateq, Skali, Freenet, and Basis Bay as potential
acquisition candidates as they have the technical capabilities to provide managed services
but are lacking in connectivity compared to Tier-1 players.
Despite the tighter competitive environment, top players are yielding ROIC comparable
to that in developed regional markets such as Singapore. Based on our analysis of DC
operations of Keppel DC REIT and AIMS, we estimate that players with quality facilities
and service offerings are capable of realising ROIC of around 6%-8%.
Diagram 14. Key players enjoy attractive yields
Wholesale Retail
in US$ m Keppel DC Basis Bay* AIMS
Invested Capital** 25.5 71.3
Lettable Area (in SqFt) 48,193 59,755
Gross Revenues 2.9 22.3
Occupancy 100% 90%
Revenue Per SqFt 61 416
EBIT Margin 80% 30%
EBIT 2.34 6.70
Tax 25% 25%
Operating Income 1.76 5.03
ROIC 6.9% 7.1%
* Carrying values of the properties as of 31st of December 2016 have been considered as Invested Capital for Keppel DC REIT.
Invested Capital of AIMS was determined based on the cost of acquisition of AIMS by Time DotCom (RM 128m in 2012) and DC
Capex from FY13-16, appraised based on the movement of industrial property prices in Malaysia. Exchange Rates – US$ 1 = S$
1.367, US$ 1 = RM 4.24
Source: Company, National Property Information Centre Malaysia, DBS Bank
Thailand: Supply Could Outstrip Demand in
the Future
IDC projects that by the end of 2017, DC space in Thailand will have grown over 180%, from
2015. Based on analysis by DC Dynamics, 16the Thai DC market is expected to grow 25%-
30% in 2017. At the beginning of 2017, there were around 30 DC operators in the country
but total DC capacity remained at less than 500,000 sqft. Thai government’s Digital Economy
plan, increasing cloud adoption by domestic enterprises, and Thailand’s location as an access
hub to the Greater Mekong Subregion are expected to drive demand for DCs in the future.
Key players in Thailand providing DC services include CS Loxinfo, TCC Technologies (56,000
sqft in capacity across three DCs), Switch, NTT, True Corporation, and KIRZ.DBS Asian Insights
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Several local and international players are taking advantage of the lenient investment
policies by the government such as tax privileges and preferential electricity rates. For
example, US-based DC operator Switch, recently opened the largest DC in Thailand, a
Tier-IV DC with a capacity of around 60MW. As Thailand garners the attention of global
DC operators, supply of DC space could lag growth in demand over the medium term,
leading to price competition among DC operators. Amid tightening competition, local
operators may need to upgrade their service offerings and facilities to match those of
international operators as customers will likely be willing to pay premiums for reliability,
security, and other add-on services on offer by international operators.
Retail colocation and cloud DC operators in Thailand are yielding ROIC on par with
regional peers such as Malaysia and Singapore. Based on our estimates, CS Loxinfo, one
of the largest DC providers in the country, yields ROIC of around ~8%-9%.
Diagram 15. DC yields on par with regional peers
Retail
In US$m CS LoxInfo
Invested Capital* 25.5
Gross Revenues 8.7
EBIT Margin 30%
EBIT 2.6
Tax 20%
Operating Income 2.1
ROIC 8.2%
Tax 25%
* Invested Capital is based on
Operating Income 41.63 estimates of investment per Rack.
Exchange Rate US$ 1 = THB 33.3
ROIC 11.6% Source: Company, DBS Bank
India: Balanced Demand and Supply
Dynamics
The Indian DC market is centred around two key hubs, Mumbai and Chennai, which
provide easy access to submarine lines connecting India to the east (Chennai) and Mumbai
(West). According to Gartner17, the Indian DC IT infrastructure spend is expected to grow
1.5% in 2017 to US$2.2b and will reach US$2.4b by 2020. According to the research
firm18, India was the second fastest-growing DC infrastructure market in the APAC region
in 2016. Indian DCs account for ~5.2% of the APAC DC market.
The Indian DC market (including DC services and infrastructure) is expected to reach
US$4.5b by 2018 according to Cyber Media Research19. India housed ~3.7m sqft of DCDBS Asian Insights
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space in 2013 and total DC capacity is expected to reach 9.14m sqft by 2018, with a
number of large-scale DCs coming online in 2017-1820.
Much of the demand for DCs is expected to be driven by the banking and financial services
industry, government, retail, and telecom operators. Data residency laws are pushing
banks and financial firms to retain data within the country while the booming e-commerce
industry in India is driving demand for DC space from online retailers. Increasing use of
data with the proliferation of high-speed 4G services is also driving demand for DC space
from telecom and media operators.
Data-intensive campaigns by the government such as the Aadhaar digital ID system has
already made the Indian government a key player in the Indian DC industry. The “Digital
India” campaign launched by the Indian government is also expected to drive demand
from state government enterprises for regional DC space. The Indian government has
already approved an outlay of Rs. 1623.20 crores (~US$250m) to be expended over a
period of five years to beef up DC operations of state enterprises as the government plans
to offer most government services digitally in the future.
With booming demand, India has garnered the attention of a number of DC and
cloud operators from around the world. NetMagic, a fully-owned subsidiary of NTT
Communications, is investing heavily to expand its DC footprint and plans to double its
DC capacity to over 1.3m sqft by 2018. NetMagic is currently constructing two DCs in
Mumbai and Bangalore. Oracle, Google, and Alibaba have revealed plans to open DCs in
India in 2017-18. Amazon, IBM, and Microsoft already have DC operations in the country
and have expressed intentions on expanding in the future.
Diagram 16. Key DC players in India
Company Country of Floor Area (sqft)
Origin
Reliance India 1,100,000+
ST Telemedia Singapore 902,000+
NTT (NetMagic) Japan 600,000+
CtrlS Datacenters India 370,000+
Sify India 200,000+
Bharti Airtel (Nxtra) India 164,000+
BSNL NxtGen India 63,000+
Pi* India N/A
Spectra Solutions India N/A
Net4 India N/A
* Pi has a capacity of 5,000+ racks
Source: Company, DBS BankDBS Asian Insights
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Despite the attractive demand-supply dynamics, Indian DCs yield poor ROIC in comparison
to regional markets. High cost of power and connectivity as well as expensive maintenance
have led to poor ROIC for most DC operators. Second-tier operators like NXT Data, the
DC arm of Bharti Airtel, and Net4 India are currently operating on losses. Expectations
for a fast-expanding DC industry in India is likely to attract the attention of international
operators, who may look to consolidate with struggling operators. Tata Communications
for example, once one of the largest DC operators in the country, sold a 74% stake in its
DC business (~17 DCs) to Singapore-based ST Telemedia in 2017.
Diagram 17. Relatively low ROIC yield on DCs in India
Retail
In US$m Sify
Invested Capital* 69
Lettable Area (in sqft) 201,000
Gross Revenues 30
Occupancy** 85%
Revenue Per Sqft 173
EBIT Margin 20% * 40% of the invested capital base
of the company was assumed to
EBIT 5.9 be allocated for DC operations.
Tax 25% Occupancy rates have been
assumed based on demand-supply
Operating Income 4.4 dynamics. Exchange Rate US$ 1 =
INR 66.67
ROIC 6.4% Source: Company, DBS BankDBS Asian Insights
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Theme 1: Telcos divesting DC assets
With the demand shift towards public cloud increasing, the demand for retail colocation
space has started to slow down. While growth forecasts for colocation service and
workloads on private cloud remain more or less in line, with the former expected to
grow at a CAGR of 14.6% from 2017-2022, according to Markets and Markets, 21and
the latter growing at a CAGR of 15% from 2015-2020, according to Cisco22, it should
be noted that wholesale colocation services would be the key driver of growth in the
colocation market and is expected to record the highest CAGR in colocation services.
This has prompted escalating competition in the retail colocation space, where telcos are
visibly active.
Regional telcos tend to be the leading DC providers in most of the important APAC
markets. According to Frost Sullivan, NTT, China Mobile, and Singtel were among the five
largest DC providers in terms of revenue in 2016 within the APAC region.
Diagram 18. Revenue share of leading DC providers in APAC in 2016
Source: Frost and Sullivan
Telcos that are in the DC space have started to find it difficult to compete with pure-play
DC players like Equinix and Digital Realty as these companies provide better coverage,
costs, and overall quality. According to Synergy Research Group, Equinix and Digital Realty
grew 26% and 25% year-on-year, respectively, in 2016 compared to 10-15% for the
overall market23. Pure-play DCs have heavily invested in cost-effective technologies such
as renewable energy and efficient DC designs while also improving quality of connectivity
for their DCs.
As a result, a number of telcos have looked to exit this market so they can focus their
capital on more core businesses and other potential growth opportunities. Verizon andDBS Asian Insights
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CenturyLink, in two of the largest deals in the DC space, divested much of their DC
portfolios over the past 12 months.
Diagram 19. Major DC divestment announcements by telcos over the past 12 months
Operator No. of Buyer Price
DCs (US$)
CenturyLink 57 PE funds including Medina Capital 2.3b
Advisors and Longview Asset
Management
Verizon 29 Equinix, Cincinnati Bell, 3.6b
Windstream and AT&T
Tata Communications 17 ST Telemedia 634m
Source: DBS Bank
However, due to the growing demand for edge DCs, certain regional players such as NTT
have continued to grow in the near term. Colocation clients are increasingly looking to store
and process their data nearer to the source due to latency issues. In addition, regulations such
as data sovereignty laws also have limited enterprises to local DCs in certain geographies. As
a result, some regional DC players have had success in capturing growth.
For example, players such as NTT and China Mobile have had success in capturing growth
in the fast-growing APAC regional markets. Similarly, in the US$3.6b acquisition of
Verizon’s DC assets, one of the key motivations for Equinix was Verizon’s presence in the
Latin American region, as regional companies look for local servers.
Why divest or spin off DC assets?
Telcos should look to divest out of their DC assets for two key reasons:
a) Unlock value in DC Assets – DC assets of telcos often tend to be undervalued as the
valuations attached to the core business of providing network services eclipse the
real value of DC assets held by telcos. Pure-play DC operators fetched an average
EV/EBITDA valuation of ~23x while telcos fetched a valuation of ~7x, suggesting
a potential undervaluation of DC assets held by telcos of over 15x. The difference
in valuations is partially attributable to the different operating structures of the DC
businesses between telcos and pure-play DC operators. Pure-play operators tend to
structure their business in the form of real estate investment trusts (REITs), yielding tax
efficiencies and higher distributions for its owners. This creates a natural premium due
to higher cashflow transparency boosting the marketable value of these businesses.
On the other hand, telcos valuations are largely driven by consumer demand and
other external factors, and are unable to realise these benefits as their DC businesses
remain part of their regular business operations. Hence, the divestment of DC assets
could potentially allow telcos to realise the fair value of their undervalued DC assets.DBS Asian Insights
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Diagram 20. Standalone DC operators fetch much higher valuations than telcos
DC REIT Group
Source: Reuters, DBS Bank
In addition, DC businesses tend to be capex-intensive due to their real estate nature. This
makes pure-play DC asset bases comparatively high and ROICs relatively low. As a result,
by divesting or spinning off DC assets to REITs or other pure-play structures, telcos have
the ability to improve their overall ROICs.
Diagram 21. Lower ROIC yields of standalone DC operators
DC REIT Group
Source: Reuters, DBS BankDBS Asian Insights
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Diagram 21. Lower ROIC yields of standalone DC operators cont.
Source: Reuters, DBS Bank
b) Pure-play DC players have competitive advantages in running DCs – Telcos have been
constantly in battle with large-scale DC operators like Equinix and Digital Reality, who
inherently hold a competitive advantage over telcos as the provision of DC services
remains their core business. Pure-play DC players are capable of offering enterprises
with i) better pricing due to the large-scale nature of their operations and expertise in
running DCs helping them realise cost efficiencies and, ii) global coverage for multi-
national operations. From the point of a global corporate, by procuring services from
a global DC player, it is able to fulfil its global DC requirements through one party. In
addition, with strong inter-connection networks of global DC players, corporates are
able to efficiently operate in multiple regions without the need for several service-
level agreement. With pure-play DC operators looking to further improve their
competitiveness through investing in renewable energy and establishing partnerships
with original equipment manufacturers to improve DC design efficiencies, telcos would
find it increasingly difficult to compete with pure-play DC operators in the future.
By divesting out of non-core businesses such as the provision of DC services, telcos could
free up capital, which could then be redirected to improve the necessary supporting
network services, focusing on factors such as improving latency issues, connectivity and
network bandwidth, necessary for cloud and other technological developments such
as Internet of Things (IoT) and virtual reality (VR) to flourish. CenturyLink for example
has said that it will utilise the proceeds from the sale of its 57 DCs to partially fund
the acquisition of Level 3 Communications, which would provide CenturyLink with a
significant advantage in the enterprise fixed broadband segment. Redirecting capital from
a non-core operation like DCs, where telcos hold no significant competitive advantage
in, to focus on core network services would help telcos improve their return on capital,
making them more attractive to investors. Telcos could also use these funds to expand
into high-growth segments such as Big Data analytics or mobile advertising, where telcos
have a natural advantage in.DBS Asian Insights
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Divestment impact on regional telcos
Given higher EV/EBITDA multiple DC assets generally carry, we believe telcos can spin off
or divest of DC assets at a premium if they wish to do so. We have evaluated the DC assets
of leading telcos in the ASEAN region that have their own DC space to evaluate the value
creation that can happen through such a spinoff. In our estimates, we have assumed the
15-20X EV/EBITDA for DC valuations and ~40% EBITDA margins for DC assets.
Diagram 22. Estimated share price impact of DC divestments by regional telcos
DC Space (sqft) Potential Share Price Impact
Singtel 1,375,000 5% - 7%
Telekom Malaysia 200,000 5% - 9%
Telekomunikasi 1,076,390 2% - 3%
XL Axiata 219,580 6% - 9%
PCCW 400,000 6% - 10%
Citic Telecom 135,000 8% - 12%
Time DotCom 59,755 0% - 4%
Source: DBS Bank
Diagram 23. Impact of DC divestment on valuation, assuming 20x EV/EBITDA for DC assets
Singtel Telekom Telekomunikasi XL Axiata PCCW Citic Tel Time
Malaysia Indonesia DotCom
Floor space 1,375,000 200,000 1,076,390 219,580 400,000 135,000 59,755
Rev per sqft US$ 385 539 215 194 128 128 416
DC Revenue (US$ m) 530 108 231 42 51 17 25
DC EBITDA Margin 40% 40% 40% 40% 55% 55% 40%
DC EBITDA 212 43 93 17 28 10 10
Divestment value (US$ m) 4,237 862 1,851 340 564 190 199
Market Cap (US$ m) 44,846 5,716 35,143 2,691 4,236 1,027 1,260
Enterprise Value (US$ m) 52,726 7,140 37,503 3,879 8,865 1,862 1,199
EBITDA (17F US$ m) 3,713 925 4,909 623 1,626 272 79
EV/EBITDA (X) 5.42 7.72 7.64 6.23 5.45 6.85 15.11
EBITDA post-divestment (US$ m) 3,501 882 4,816 606 1,598 262 69
EV post divestment (US$ m) 55,814 7,669 38,647 4,113 9,275 1,987 1,248
Market Cap post divestment 47,934 6,245 36,287 2,925 4,646 1,152 1,309
Change in share price 7% 9% 3% 9% 10% 12% 4%
Source: Companies, Reuters, DBS BankDBS Asian Insights
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In addition, with the divestment, telcos could potentially maintain network-related
exposure, which is the core competency of their business. For example, Verizon recently
joined the bandwagon of telcos including CenturyLink and AT&T to divest of its cloud
services in a bid to refocus resources on providing managed services.
The company divested the cloud assets it acquired from Terremark back in 2011, selling
29 DCs to Equinix as well as its private cloud and managed hosting business to IBM. By
exiting the DC and cloud businesses, Verizon has focused on strengthening its networking
and security capabilities. Its value-add lies in its ability to connect the various enterprise
IT infrastructure, on the premises and cloud, efficiently and seamlessly to enable the
smooth functioning of enterprise applications and workloads. Hence, upon the sale of
DC assets to Equinix, Verizon entered into an agreement with the company to resell
Equinix’s colocation and interconnection services, bundled with its own managed security,
network, and communications services. The agreement provides Verizon the ability to
access several of Equinix’s International Business Exchange DCs and sell interconnection
and connectivity solutions to enterprise customers, coupled with other managed services
such as advanced communication solutions and managed security that Verizon specialises
in. Verizon has established a similar agreement with IBM to provide “strategic initiatives
involving networking and cloud services”. Details of what services the company was
looking to deploy were not disclosed.
Theme 2: Private cloud players moving into
(i) Cloud ancillary services and (ii) Industry-
specific solutions.
With the dominance of the Big 3 players in the public cloud space, Amazon Web Services
(AWS), Google Cloud, and Azure, other players in the cloud space have had to focus
more on the slower-growing private cloud and exit the public cloud segment. As a result,
smaller private cloud players are looking into (i) industry-specific solutions and (ii) public
cloud ancillary services.
For example, Rackspace, , a cloud service provider, shut down its infrastructure-as-a-
service (IaaS) public cloud service in 2014 as it was unable to compete with the likes of
AWS and Google. Similarly, in 2015, HP shut down its Helion public cloud service while
telcos, Verizon, and AT&T both exited the public cloud space over the past 12-18 months.
With their exit from the public cloud and the slowing growth in private cloud markets,
these cloud players have had to look to differentiate themselves from competitors.
Cloud ancillary services
These include areas where companies can avoid competing with large public cloud players
while benefiting from changing industry trends brought upon by the popularity of public cloud.DBS Asian Insights
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Corporates are increasingly shifting their workloads to the public cloud. However, this
does not mean corporates have completely given up their legacy IT infrastructure and
private cloud platforms. The shift is a process, with private cloud platforms remaining key
components of enterprise IT systems in the long term due to various reasons including
regulatory issue and autonomy.
As a result, we are seeing a growing appetite for hybrid cloud, which promises to give the
best of both worlds to corporates. Corporates are also increasingly interested in hybrid
cloud due to the higher flexibility these platforms offer. For example, an organisation can
use a private cloud to store and process sensitive data while using a public cloud service
to store less-sensitive data. In times of increasing processing requirements (think Black
Friday and Cyber Monday for an online retailer), organisations can easily shift some of
the workloads to public clouds without needing to invest in internal systems and tie up
capital. Similarly, organisations can also gain the flexibility of procuring services from
multiple competing public cloud players, depending on the task at hand.
Diagram 24. Public cloud adoption has reached a tipping point in Asia in 2017
Public-Cloud Evolution – Asia is catching up with the US in public-cloud adoption
Source: DBS Bank
As a result, the growth of the hybrid cloud market is outpacing that of public clouds,
expanding at a CAGR of 22.5% between 2016 and 2021 to reach US$92b, according to
Markets and Markets24.
However, hybrid clouds tend to create a number of challenges for enterprises. The
organisation’s private cloud will need to interact and transfer data within multiple public
clouds systems. These transmissions will need to be secure and encrypted while the
organisation will also have to put in place policies to determine which sensitive pieces of
data should not be transferred from private clouds. Similarly, areas such as data integrity
and access rights for data will need to be policed. Furthermore, costs relating to running
hybrid clouds will become more complex, with a mix of public cloud and private utilisation.DBS Asian Insights
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In addition, transmission of data between multiple public clouds and the private cloud
would also add to the overall complexity monitoring and cost management.
As a result, there is a significant market in facilitating organisations to implement and
maintain hybrid clouds.
By looking at the acquisitions and mergers in the cloud computing world, we have tried
to understand which areas cloud providers and related service providers are looking at in
terms of development and investments. These areas include
• Security
• Cloud integration – multi cloud and systems integration with public cloud providers
• Cost management and monitoring
• Storage solutions
• Backup and continuity solutions
Diagram 25. Latest acquisitions of cloud service providers
Acquirer Target Sector
Rackspace Datapipe Cloud Integration
DXC Technology Tribridge and Concerto Cloud Services Cloud Integration
Oakley Capital Plesk Cloud Integration
Oracle Wercker Cloud Integration
Deloitte Day1 Cloud Integration
HPE Nimble Storage Cloud Integration
Stratoscale Tesora Cloud Integration
Citrix Unidesk Cloud Integration
Freshdesk Pipemonk Cloud Integration
HPE Cloud Technology Partners Cloud Integration
Microsoft Cloudyn Cost monitoring & management
SolarWinds Scout Server Monitoring Cost monitoring & management
Microsoft Deis Cost monitoring & management
CISCO AppDynamics Cost monitoring & management
HPE Cloud Cruiser Cost monitoring & management
Oracle Dyn Cost monitoring & management
Thoma Bravo Continuum Disaster Management & Continuity
IBM Sanovi Disaster Management & Continuity
SolarWinds SpamExperts Security
CISCO Observable Networks Security
Datto Open Mesh Security
AWS Harvest.ai Security
Red Hat Permabit Technology Corporation Storage
Source: DBS BankDBS Asian Insights
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Security
Data transfers, access rights, data integrity, and duplication all become a lot more complex
with the use of hybrid cloud systems. Connecting to public and private clouds increases
an enterprise’s vulnerability to security threats and hence cloud security services play a
large role in hybrid systems. According to Zion Market Research, hybrid cloud security
accounted for almost 43% of the total share of the cloud security market in 2014 and is
the fastest growing sub-segment in the cloud security market25. Overall, the cloud security
market is set to grow from US$1.5b in 2017 to US$3.5b in 2021, according to Forrester26.
Companies in the hybrid cloud space has been looking to boost their cloud security
capabilities over the past couple of years. In June 2016, Cisco acquired CloudLock for
US$293m. CloudLock makes technology that allows companies to watch the security
of their apps in the cloud, ensuring employees aren’t sharing sensitive data even with
cloud apps that are not built or managed by internal IT departments. This acquisition
was on top of its purchase of Lancope for US$452.5m in 2015. Lancope focuses on
behaviour analytics, threat visibility, and security intelligence to detect malicious activity
on corporate networks.
Similarly, Oracle acquired Palerra, a vendor of software for securing cloud services in 2016.
Palerra’s Cloud Access Security Broker product called Loric offers a combination of visibility
into cloud usage, data security, user behaviour analytics, and security configuration, with
automated incident responses.
Telcos, being the gatekeepers of access points to private and public clouds, have
significant influence over networks and cloud accessibility. Hence, telcos possess a natural
competitive advantage over other operators in providing cloud security services. However,
telcos do need to invest heavily in developing the core competencies required to provide
cloud security services while such investments are likely to take long periods of time to
turn profits. Telcos such as Verizon and Singtel are already investing in these areas.
However, managed cyber security services tend to carry relatively low margins due to their
high manpower costs. For example, Dell Secureworks, a managed security service provider
in the US is yet to record EBITDA margins above 10%. Cyber security firms need to
continually invest in R&D to keep themselves relevant against new threats and techniques
used by hackers. It is also expensive to hire, train, and retain cybersecurity professionals,
who are short in supply, and managed security services often require top security talent
in numbers to make an offering that is attractive to clients. In addition, most players
also invest heavily in marketing and sales to maintain and increase penetration, which
also directly impacts margins heavily. General overheads often account for 50%-80%
of revenues for cybersecurity firms. As a result, cybersecurity firms need to reach scale
efficiencies over long periods of investment to achieve profitability.DBS Asian Insights
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Diagram 26. Depressed EBITDA margins due to high personnel and R&D costs
Source: Dell Secureworks
Cloud Integration
As discussed above, enterprises often tend not to restrict themselves to a single cloud
provider or method of deployment (private, public and hybrid) in a bid to avoid vendor
lock-ins and realise operational efficiencies as applications tend to perform differently in
different IT environments. According to a survey by Rightscale27, a cloud management
software provider, 85% of enterprises with over 1000 employees surveyed mentioned
that they are using a multi-cloud strategy, running applications on two private and two
public clouds on average.
Diagram 27. 85% of large-scale enterprises on multiple clouds
Source: Rightscale 2017 State of the Cloud ReportDBS Asian Insights
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Managing multiple clouds and multiple methods of deployments (public, private, and
hybrid) requires an in-depth understanding of the different cloud environments to ensure
seamless operation and integration with legacy infrastructure. Maintaining and retaining
an in-house cloud team with this level of expertise often tends to be costly. Furthermore,
constant changes in features of public cloud environments require these experts to be
continuously updated and train themselves. As a result, enterprises tend to look for a
third-party service provider to help them integrate and manage operations in multiple
cloud environments. Enterprises like Rackspace, Dell, Accenture, and Rightscale excel in
the provision of services of this nature.
The multi-cloud management market is expected to grow at a CAGR of ~30% from 2016 to
2021, according to Research and Markets, reaching US$3.4b by the end of 2021. This offers
attractive growth prospects for telcos with experience in providing cloud services as they are
well-equipped with the expertise to understand the nitty-gritty of providing and managing
cloud systems of all forms of deployment. Whilst the global market for multiple cloud
management remains competitive with a number of established operators like Rackspace
and Dell, telcos could focus on their regional markets. As multi-cloud management is likely to
require constant communication and interaction with the service provider, telcos, with their
regional networks and customer bases, are likely to have an advantage over global operators.
Cost monitoring and management
Another area where complexities become hurdles for enterprises is the monitoring and
managing of hybrid cloud systems. Companies that do not want to spend resources on
monitoring and managing cloud systems tend to look for managed service providers
to take up the burden. The cloud managed services market is expected to grow from
US$27b in 2017 to US$54b by 2022, according to Research and Markets, which is a
CAGR of 14.6%28. Companies needing to focus on core businesses and SMEs looking to
adopt managed services are among the key drivers of demand.
For example, Rackspace, a cloud platform provider has focussed on collaborating with
players such as Amazon and Microsoft to provide enterprise clientele with support in the
public cloud platforms while also providing services in private cloud environments. Players
such as Rackspace are better able to compete in the segment than in the public cloud
segment due to their expertise in the cloud segment. The company focuses on providing
specialised expertise, tools, and its dedicated customer support (known in Rackspace as
Fanatical Support) for leading technologies developed by AWS and Microsoft.
For example, if a client is running an outdated version of, say, Linux, which could
potentially lead to gaps in the environment’s security, Rackspace is there to notify the
client and proactively address the issue. If a business suddenly has millions of additional
hits to its web servers, Rackspace is also there to help scale the needs of the business to
withstand this surge.DBS Asian Insights
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The move has paid off, with significant growth in the quarters following their decision to
move out of public cloud, along with increased returns on invested capital.
Diagram 28. ROIC of Rackspace
Source: Company
Other large managed service providers have also looked at investing heavily in this area
due to the growing complexity in managing costs related to the use of cloud. Cisco
completed in March 2017 the acquisition of AppDynamics, whose software allows
companies to monitor in real time the performance of applications they are developing to
understand the IT workload and the eventual cost of the application to the company. This
allows companies to optimise the usage of their IT resources as well as make IT-related
costs more visible and manageable. Similarly, Cisco acquired Cloud Cruiser to enable
enterprises to easily monitor its cloud usage.
Despite the massive market opportunity and growth, one key obstacle for telcos when
it comes to developing and implementing cost management and monitoring tools is the
limited access they have to cloud services. To develop and implement cloud monitoring
tools, access to operations of cloud services is necessary but telcos would only have
minimal exposure in this area.
Cloud storage
Cloud storage, which refers to the storage of data on the servers of a cloud storage
service provider to be accessed remotely, is another area that is garnering the attention of
enterprises as they shift operations to the cloud. Markets and Markets forecasts the cloud
storage market to grow at a CAGR of 25.8% from 2016 to 2021, reaching US$75b by
202129. Despite the attractive growth prospects, the sector is dominated by established
cloud providers such as AWS, Microsoft, and Google as well as storage hardware developers
like IBM, HPE, and Dell EMC. Telcos lack the network effect of large-scale cloud serviceYou can also read
