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Summary

Preliminary data for about 85% of the Internet content provider (ICP) market indicates capex growth of 12% in 1H15. This puts group capital intensity at 6.3%, up from 4.2% three years ago. ICPs are spending heavily on data center and content delivery network (CDN) infrastructure, helping to offset lackluster telco capex.

ICPs on track to hit $116bn in capex by 2019

Solid first-half 2015 growth at ICP giants Apple and Google helped total ICP capex rise 12% versus 1H14. ICP revenues grew a bit slower, just over 10%, pushing annualized capital intensity for ICPs to 6.3%. This is far lower than the latest (1Q15) communications service provider (CSP) figure of 19%, but CSP capex is trending downward and revenues remain challenged. While 2Q15 results are not yet available for telcos, in 1Q15 their single-quarter revenues declined 5% YoY to $438bn, the second consecutive quarterly fall. Looking four years down the road, we expect aggregate communications provider capex in 2019 to total approximately $482bn, with fixed CSPs accounting for 29%, mobile CSPs 44%, ICPs 24%, and carrier-neutral providers (e.g. Crown Castle and Equinix) accounting for the final 3%.

Strong, sustained revenue growth among the ICPs is driven by a range of factors and business models: for Google, advertising revenues are key; for Apple, smartphone device sales; for Amazon, online commerce and cloud (AWS) services. These and smaller ICPs are building out large data center networks, investing in content delivery networks, in some cases designing their own equipment, in other cases playing leading roles in industry technology debates (e.g. Facebook and Open Compute). Meanwhile, new vendor opportunities are emerging from ICP growth and from the parallel branching of CSPs into the cloud. Data center interconnect (DCI) revenues, for example, grew 16.2% in 2014, surpassing $2.5bn and breathing new life into the stagnant ON equipment market.

Much of the excitement about the ICP market is for its future, assuming it continues growing as Ovum expects. For now, CSPs still account for well over 80% of total communications provider capex, and they represent close to 100% of the market for certain types of technology (e.g. mobile radio access gear). Since both fixed and mobile telco revenues in 1Q15 were disappointing, we’ll be watching revenue growth metrics closely as CSPs report 2Q15 and 1H15 results over the coming weeks.

Appendix

Further reading

“The data center interconnect market is booming: adapt or die,” TE0006-001078 (June 2015)

Communications Service Provider (CSP) Revenue & Capex Tracker: 1Q15, TE0006-001093 (July 2015)

LTE Deployment Tracker: 1Q15, TE0006-001068 (May 2015)

Google: Network and Technology Profile, TE0006-001064 (May 2015)

Facebook: Network and Technology Profile, TE0006-001059 (May 2015)

Netflix: Network and Technology Profile, TE0006-001056 (April 2015)

Global Data Center Analyzer: 1H15, TE0017-000038 (April 2015)

Communications Provider Capex Forecast Report: 2014–19, TE0006-000993 (January 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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