Influencers in APAC MTDC markets: Service Providers
August 27 2019
by Dan Thompson, Stefanie Williams, Emily Wentworth
Across Asia-Pacific (and the globe), service providers are an important customer segment, and one that continues to grow at a solid rate, whether it's network service providers, cloud service providers or managed service providers. Part of a three-part series covering various influencers – the cloud, service providers and regulations – in APAC MTDC markets, this report looks at how services are playing out in APAC MTDC markets, and how service providers are influencing the markets. Among countries in APAC, those dynamics vary widely based on a range of factors, including a country's history of telecommunications, tendencies, economic makeup and adoption rate of digital technologies.
The 451 Take
The days of service providers building datacenters as the main method for geographic expansion are in the past, according to 451 Research's latest service provider survey data, and nowhere is this more evident than in APAC, where only 16% of respondents said they would expand through facilities they own and/or manage. Leasing space in a colocation facility gets the service providers out of the real estate business, and frees up capital for revenue-generating capacity upgrades and growth. In APAC specifically, providers were choosing to expand by leveraging third-party private clouds, third-party public clouds, and by leasing datacenter space from colocation providers (40%, 30% and 26%, respectively) – all of which is great news for datacenter providers that can provide or host all of those venues. That said, the service provider space can look dramatically different, on a country-by-country basis. In some cases, managed services aren't popular at all, but cloud services are; in other cases, both managed services and cloud services are popular, so much so that the datacenter providers themselves are also offering services.
As the gateway into and out of Southeast Asia, Singapore's multi-tenant datacenter (MTDC) market sees influence from service providers in a number of different ways. First and foremost, many of the datacenter providers in the country are also network providers. Given that data transit is particularly important, enterprises and other service providers may leverage multiple network service providers, depending on the destination of their traffic and what the company is trying to accomplish. Colocation providers regularly see network providers from all over the world as customers, and in some cases, those providers may be networking competitors. Coinciding with this, many datacenter providers will tout the number of carriers present in their facilities, as well as their access to undersea cable systems, as part of their normal sales talk tracks.
Second, Singapore's datacenter market has seen influence from service providers on the buyer side, primarily from the cloud service providers. Hyperscale and large-sized deals continue to take place in the market, seeming to largely drive the country's impressive wholesale growth. In response, many of the new builds just starting construction are from wholesale providers, rather than retail providers. In this way, wholesale growth is outpacing retail and causing a shift in the market.
Reflective of this, in a recent 451 Research survey of service providers, respondents overwhelmingly stated (69% of respondents) that they would expand in Singapore by third-party private cloud, the largest representation in all of APAC. This demand signals the reason for the cloud provider growth, and also illustrates that for regional workloads, hosted infrastructure can handle the tasks needed by providers. Furthermore, having a provider in-country that can host the cloud environment and manage it can be extremely beneficial for companies that want to place regional workloads in Singapore, but that don't necessarily have staff located in Singapore.
Finally, we have seen the influence of services push providers in new directions. Earlier in Q2, Equinix announced that it would be offering Azure Stack as a hosted cloud offering throughout the APAC region, in partnership with Hewlett Packard Enterprise. This latest announcement is a direct deviation from its usual stance of refraining from offering services beyond colocation and interconnection to avoid competing with customers and potential customers. The pull of customers wanting a hybrid cloud environment was evidently enough to motivate the provider to jump into the space.
Throughout China, where labor is less expensive than other parts of the world, managed services have yet to gain the popularity seen elsewhere. That said, other IT services have taken hold, and represent a major demand segment for MTDC providers, specifically wholesale providers. Although several factors have contributed to the rapid rise of the wholesale datacenter industry in China over the last few years, none have played as critical a role as the country's giant cloud providers' steady and growing use of carrier-neutral, high-density third-party capacity.
To support accelerating demand for cloud services from Chinese enterprises, companies like Baidu, Alibaba and Tencent (BAT) and others continue to lease entire floors and buildings in primary markets. Another significant driver of wholesale supply additions in China's primary markets is demand from large IT services and online content companies like JD.com, QQ (a service of Tencent), Didi Chuxing, People.cn and Kingsoft.
The rise of the Chinese hyperscalers has led to the proliferation of a new and ever-changing crop of wholesale-focused colocation players sensing opportunities to disrupt the space. This wholesale datacenter wave has altered the relationship between the Big Three and what are now their largest colocation customers. Large IT companies, including BAT, and financial services firms often maintain procurement guidelines that require them to work closely with one or more of the Big Three.
The telcos, on the other hand, increasingly do not want to erect their own buildings due to capital expenditure considerations, and instead contract with developers that agree to deals in order to get brand-name clients into their buildings (not to mention acquiring the necessary network connectivity). The two parties often engage in various revenue-splitting arrangements, and the datacenters are nowadays almost always technically carrier-neutral, depending on customer requirements. This trend has especially held true in the now-restrictive primary markets like Shanghai. Meanwhile, in some locations where the government is instead encouraging datacenter development, the Big Three are still self-constructing facilities for hyperscale tenants, and also occasionally acquire them from direct competitors.
Interestingly, in 451 Research's most recent service provider survey, we found that service providers looking to expand in China were most likely to do so by the public cloud (42% of respondents). This gives some insight into what companies are driving the growth within the public cloud sector, which in turn drives growth in the datacenter industry. The second most popular expansion method was leasing datacenter space (26% of respondents), which again helps the industry. In both cases, China's challenging regulatory environment seems to push companies, specifically foreign companies, into either a cloud solution or leased datacenter solution, rather than attempting to build a datacenter themselves.
If China is one end of the spectrum with regard to managed services and outsourced IT/hybrid IT, Japan is the other. Japan has perhaps the most developed IT services industry in Asia-Pacific. An overwhelming majority of MTDC providers throughout the various markets in Japan offer services beyond colocation, and service providers/systems integrators are a key customer segment for the datacenter industry as well.
Interestingly, most, if not all, of the datacenter providers that offer a lot of services would consider themselves SIs, and in some cases, these providers started as SIs and added colocation over time to address demand. This movement toward services reflects the existing enterprise posture toward hybrid IT, which is very welcoming and open to outside help. A majority of this demand and openness can be linked to a well-documented, nationwide labor shortage, which means enterprises are forced to leverage outside help to accomplish their technology goals.
Beyond managed service providers and systems integrators, cloud service providers are also an important buyer segment in Japan, and are changing the face of colocation in the country. Until a few years ago, when the major cloud providers entered the market, MTDC providers primarily offered datacenter space in a retail pricing model, regardless of the size of the deal. Thanks to the main US and Chinese cloud providers, which brought with them their RFQ processes and buying habits, that has all changed, and there now exists datacenter providers that are dedicated to wholesale, or at least have dedicated wholesale offerings.
When looking at the latest service provider survey data on geographic expansion, Japan stood out among all other countries in APAC in that service providers were most likely to expand there via leased datacenter space, over any other method. Challenges with regard to constructing new facilities due to labor shortages and high construction costs, among other things, and the fact that the cloud is still growing in popularity, are the likely reasons. Given that most of the datacenter providers in the country also offer cloud services, it's a win/win situation for the dominant players, no matter the choice of venue.
Sydney's datacenter market serves as the gateway to Australia. The city's dense subsea cable system makes it the primary location for enterprises requiring access to international connectivity options. Likewise, the roots of its datacenter industry are found with the area's ISPs, which began offering colocation services to network customers. Today, these network providers (which include Optus, TPG, Telstra and Pacnet) continue to build their datacenter business from existing broadband customers. As in other regions, network providers are also target customers for colocation providers, despite the potential competitive nature of the relationship.
Over the last couple of years, Sydney MTDC providers have benefited from increased demand from service providers, particularly from cloud service providers, for larger wholesale datacenters. Our latest Voice of the Service Provider survey indicated that 47% of respondents plan to expand in Australia through third-party private clouds, further supporting providers' push to build out larger facilities in the area. To this end, the city's wholesale providers, including AirTrunk, Digital Realty, Global Switch and NEXTDC, have continued to expand across the city, as have retail providers with access to connectivity and managed services, such as Equinix and Fujitsu.
Services adoption has typically lagged behind more advanced markets. But in Sydney, customers have quickly caught up, although not before learning from the rest of the world. Demand for these services has MTDC providers seeking new opportunities through the development of services in-house, or partnerships and ecosystems to connect customers to each other.
Equinix recently expanded its cloud exchange network to Sydney, which enables its customers to connect to private and public clouds including Alibaba, AWS, IBM, Azure and Oracle, as well as several Australian providers. This development draws Equinix into potentially competing with customers offering cloud on-ramping services from its facilities, but offers other customers additional options. Meanwhile, NEXTDC is working to mimic the Equinix ecosystem model, providing its customers with interconnection services to pick up managed services in its facilities. We've also seen smaller Australian cloud and services providers that have developed partnerships with global datacenter providers to expand their reach.
Indonesia's service provider story is in some sense entering its third decade of existence, and in another sense is just beginning. The telecommunications industry started down the path of deregulation back in 1995, when the Indonesian government allowed PT Telekomunikasi Indonesia (known locally as Telkom), the country's only telecom provider at the time, to become privatized. This was followed by a complete deregulation of the industry in 1999, and the end of the company's exclusive right to fixed-line services in the country in 2001.
Since that time, Indonesia has seen an influx of competition for both fixed and cellular communications, as well as a swell of adoption from its citizens. In 2002, Singapore Telecom Mobile Pte (SingTel Mobile) bought 12.7% of Telkomsel, the wireless subsidiary of Telkom, ushering in a new era of foreign investment in the industry. These network providers operate the bulk of the datacenter space in the country today (Equinix is the fourth largest provider, but is surrounded on both sides by network providers/operators), and networking services are a key point of interest among colocation buyers.
Although telco and network service providers will always be important to the market, cloud service providers are now generating all the buzz in the market for datacenter providers, and a few recent build announcements seem aimed directly at servicing that customer segment. Cloud services are just now catching on among Indonesian enterprises; however, the startup community has embraced the cloud, many of which are IT services and tech companies. The country's political and regulatory climate is forcing companies to bring services in-country, rather than leveraging other places like Singapore, which is bolstering the influx of cloud providers and simultaneously helping the datacenter industry.