Amid 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.
Based on our analysis, we believe that Indonesia offers the best return on invested capital (ROIC) in the region coupled with favourable 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.
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.
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.
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