Beware of Ignoring the “Powers” that Be...

October 18, 2022 | When I was an analyst, I remember at one of our 5G conferences in 2017 when we turned it over to the audience for questions, there was a noticeable turn from the “typical” questions.

Why do I remember this?  It was because a wise investor was connecting dots which needed to be connected well before anyone else.

The topic of these questions was all about access to power.

Of course, five years ago none of us knew about how clairvoyant these questions would be.

In the past few months, access to power and issues surrounding it has reared its ugly head and is having an impact on the Communications Infrastructure space.

In late July, news broke that Northern Virginia – the most important US data center market by a very wide margin– was facing a power crisis that is halting power delivery for new data centers under construction in the area until 2025 or 2026.

Then just last week, French telco Orange discussed several power-saving measures.  While I understand Europe is facing a more dire outlook than the US given their energy crisis and greater dependence on Russia, Orange confirmed it will cut five percent to 10 percent of its instantaneous electricity consumption for one hour per day. By switching to battery backups during this time, it expects to save up to 20 megawatts (MWs).

Inside Towers also called out the fact that several other MNOs and tower companies are considering greater use of renewable energy sources at tower sites in an effort to reduce reliance on the electric grid.

The question in both Europe (especially) and the US is will these changes happen fast enough?  Importantly, all these communications infrastructure and service providers are trying to make this pivot in the face of unprecedented traffic growth. This makes the pivot all the harder.

As I have noted in prior write ups, a continuous message from data center executives, analyst research reports, and general ‘water cooler conversations’ in the sector is that demand for data centers remains extremely robust.  To put this in perspective, when I was a data center analyst (only two short years ago!) a big deal was 30-40 MWs. Yet today the word ‘Gigawatt’ seems to be a part of every data center conversation.  As a reminder, a gigawatt is 1000 times as big as a megawatt.

This traffic growth is also being seen on the wireless side as well. In a September 2022 blog post, Neville Ray, T-Mobile’s President of Technology wrote the following: “…we’ve seen a dramatic increase in how customers leverage our network to get the most out of their 5G experience. On Magenta Max, our customers each use an average of 39 GB of data every month! In fact, 5G users stream 2x more video, spend 1.5x more time on social media and play mobile games 3x more often compared to their 4G LTE counterparts.”

On the heels of this statement, one of my LinkedIn connections noted so accurately: “Contrast the [above] statement to the recent 2022 Ericsson Mobility Report which found that the average monthly mobile data traffic for North American smartphone users was 15 GB and is projected to grow to 52 GB per month by 2027!”

So doing the math - T-Mobile Magenta Max users are already consuming 75 percent of the data which Ericsson forecasted we would not see for five more years.  Just sit with that for a minute.

This discussion leads to two very important issues investors should not / cannot ignore.

1. While having more demand is a positive, are wireless MNOs and data centers able to pull the pricing lever to capitalize on this higher traffic growth? In my view, data centers – which have a wider moat around their business – will be able to pull this pricing tool a lot more easily than wireless. Q3 will be an important one to watch for wireless.  Recall, in the last two consecutive quarters (and three of the last six), the once wireless leader, Verizon Wireless, posted a negative wireless retail postpaid phone metric, something that would have been unheard of during my time as an analyst.  (Note: Verizon reports Q3’22 earnings on October 21st).

2. The critical lynchpin needed to support this traffic and consumption growth is power; and we are entering the great unknown as to how bad this power situation is and will be.  I am not sure we can offer any insight here because it is clearly unchartered territory. It is worth noting that in my day job I am having a lot more internal conversations with our energy team.  My guess is we will become fast friends by the end of this year! 

Time will tell.

Going back to that 2017 conference I mentioned, I wish I listened to that gentleman who asked the questions about power a lot more then. In hindsight, those were incredibly wise words!

---