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Summary

Telecom's small segment of carrier-neutral providers (CNPs) had another good quarter in 2Q16, growing revenues by 12% year over year (YoY) to about $8.5bn. While revenues in the sector are split about equally between cell towers and data centers, capex is driven by data center-focused CNPs like DuPont Fabros and CyrusOne. On average, these providers spend 35% of revenues on capex, versus about 16% for cell tower-focused CNPs such as Crown Castle and Bharti Infratel.

Data center buildouts driving CNP capex

The CNP segment is small but dynamic. Over the last 12 months (3Q15–2Q16), total CNP revenues were roughly $32.7bn, up 11% YoY. This growth rate is just slightly below the 14% and 12% growth of the prior two years. By comparison, annualized telco (CSP) revenues are still falling, down about 3% YoY in 2Q16.

Capital intensity for the CNP group was 25.5% in 2Q16 (annualized), down slightly from the previous two years. By segment, data center CNP capex totaled $5.5bn in the last 12 months, while tower capex was $2.9bn. To grow their networks, tower companies rely more heavily on M&A – big acquisitions of thousands of towers at a time. American Tower (AT), for instance, reported just under 144K towers under management as of June 2016, up 43% from March; that's due to AT's recent acquisition of Viom Networks in India. Data center-focused CNPs are also involved in M&A, for instance Equinix's recent purchase of Telecity in Europe, but have tended to spend more of their cash internally to develop new properties.

A few capex highlights from 2Q16:

  • CyrusOne: Spent $378m on capex in 1H16, up from just $91m in 1H15. It has also raised 2016 capex guidance to $635–655m, from $380–405m earlier, pointing to new business from ICPs who struggle to build new data centers fast enough.

  • CoreSite Realty: More than doubled capex YoY to $125m in 2Q16, building its US national reach across eight strategic markets.

  • Equinix: It closed its acquisition of European CNP Telecity in January 2016, and its spending is now back up to speed. It expects $500–650m in 2H16 capex, within range of what Equinix and Telecity combined spent in 2H15.

  • Crown Castle: Its 1H16 capex was $393m, down slightly from last year. Directionally, its capex will focus more on fiber and small cells, not just traditional towers. This move is supported by recent acquisitions, of NextG Networks and Sunesys. Other tower providers are also developing small cell propositions.

  • American Tower: After boosting its tower count through the Viom acquisition, it expects to spend $700–800m in capex in 2016, down from $909m in 2015. Capex will fund construction of about 3,000 new towers worldwide, and help secure long-term leases or outright ownership of more existing sites.

As we laid out last quarter, the CNP market is currently tracking towards the optimistic scenario of our forecast. While the sector is small, it's playing a crucial role in network connectivity and the players are growing. They're also evolving beyond the carrier-neutral model. For instance, Zayo started its life as a dark-fiber CNP, but recently bought a Canadian mobile service provider (MTS Allstream). This, at the least, pushes Zayo closer toward the CSP model. More broadly, it suggests the CNP landscape itself will continue to change, possibly with just a few neutral players growing to global scale after further consolidation.

Appendix

Further reading

"ICPs report strong 2Q16; full-year capex approaching 7% of revenues," TE0006-001269 (August 2016)

Google's MVNO Project Fi: A Step Closer to Launch in Europe, TE0014-000417 (July 2016)

Telco Services Innovation Radar 2015: Analysis and Case Studies, TE0009-001529 (July 2016)

"With its $4.8bn deal for Yahoo, Verizon is gunning for Google and Facebook," ME0002-000689 (July 2016)

"Carrier-neutral providers' role keeps on growing despite the sector's tiny size," TE0006-001248 (June 2016)

Microsoft and Facebook to build the Marea subsea cable, TE0017-000068 (June 2016)

Communications Provider Revenue & Capex Highlights: 1Q16, TE0006-001253 (June 2016)

Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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