Living on the “Edge” Often Makes for a More Fulsome View

November 11, 2024 | When American Tower (AMT) purchased Coresite in 2021, it represented a sea change for the industry as it was the first time a data center and tower company locked arms. Looking back, it seems this line was cast with great purpose and strategic thought.

From an outsider’s perspective, AMT and Coresite have maintained a degree of operational independence. However, fair to guess there have been many a Zoom call between the Boston and Denver offices! If you pay attention to what is happening in Raleigh, AMT’s first edge test market, it is clear we are only just beginning to see AMT tip toeing toward the “edge”.

In a recent interview, American Tower’s SVP of Innovation noted:

“We believe that the convergence between tower and cloud is something that has a long-term trajectory and will happen as the wireless operators start converting their networks to 5G and upgrading their core”

If this vision unfolds as anticipated, American Tower stands to benefit significantly. According to the company’s own estimates, the land at the base of its towers provides access to 99 percent of the lower 48 states' population within a 50-mile radius.

To prepare for this expected tsunami of cloud decentralization to come, AMT is casting a variety of “nets” – both big and small. Their data center strategy encompasses three main categories: 1) core regional data centers in major markets (likely aligned with Coresite's existing locations), 2) aggregation centers (secondary market hubs), and 3) ‘Access Edge’ areas for connections under 100 kW. The aggregation centers and Access Edge zones will serve as crucial conduits for Cloud Service Providers (CSPs) seeking proximity to the edge.

The timing for this strategy appears fortuitous, as major CSPs like AWS and Microsoft are actively pursuing initiatives that necessitate such connections. AWS Outposts and Microsoft’s Azure Stack Hub both aim to enhance connectivity in smaller locations. Additionally, recent comments from larger data center platforms indicate growing demand for smaller workloads; Digital Realty reported over $50 million in bookings in Q3 2024 within the 0-1 MW range, a record high.

Given that towers have access to land, fiber, and power - key obstacles to establishing data centers - it is logical for this sector to play a pivotal role in the anticipated decentralization wave among CSPs.

Unlike wireless carriers, CSPs are aggressively investing in infrastructure. A CSP executive I spoke with recently remarked:

“If they can make servers work in tents, we will take it!”

This urgency benefits data centers’ revenue outlook. Basic economics dictates that when demand outstrips supply, pricing can be adjusted. On a national basis, the price per kW rose 18.6 percent in period between 2021 – 2023. In core data center markets (such as No. Virgina), this pricing increase was north of 40 percent in the same period. This very much differs from the tower model which have seen flat to a negative bend in pricing as carriers continue to push back on the ‘nickel and dime’ approach tower cos have implemented toward carrier amendment requests.

A second (and perhaps more important) benefit that comes from the CSPs move toward decentralized edge is it will bring a whole new customer base to the tower model. Today, the tower companies have four main customers - AT&T, DISH, T-Mobile and Verizon. In recent months, AT&T and DISH have both taken steps to improve their balance sheet and overall financial standing. While having a healthier customer base is a positive, carriers have become more cautious in their spend and more affirmative in their “ask” of the towers (both in terms of minimum space on the antennas and the tower structure itself). For the first time in a long time, wireless carriers may find themselves in a stronger negotiating position with tower companies.

The emergence of CSPs as customers not only diversifies the tower companies’ client base but also brings in entities with significantly deeper pockets. Consider this: the estimated capital expenditure for the four major wireless carriers in 2024 is projected to be $51.5B, compared to an estimated $230B for the four largest hyperscalers. To put this into perspective, even if just 25 percent of the CSP capital spend is directed towards decentralized cloud efforts, it would represent $6B more than the telecom carriers will spend in capital for the enter year!

While I am not a fisher lady, I do know that having a wider “net” is always a good thing to catch more (and perhaps, more delicious) “fish!”

Will be interesting to see if more boats get out on the lake anytime soon…...

This communication is for information purposes only and should not be construed as investment, legal, audit or tax advice nor as a solicitation, offer, recommendation, or commitment to buy or sell any investment instruments, to effect any transactions, or to conclude any legal act of any kind whatsoever. We make no representation or assurance regarding the accuracy, completeness or suitability of the information in this communication and have no obligation to provide updates or changes. This information should not be used to make any investment decisions.

Please see https://www.mizuhogroup.com/americas/email-disclaimer and https://www.mizuhogroup.com/americas/disclosures for important additional disclosures and terms and conditions relating to this communication and your reliance upon the contents herein.

---