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Summary

With more than 90% of the carrier-neutral provider (CNP) market reporting CY16 results, the verdict is clear – 2016 was a blockbuster year. Strong organic growth was underpinned by 25 strategic acquisitions over the year. This high growth may ease in 2017, but the CNPs, through their small proportion of data centers, are taking center stage in adopting virtualization, creating cost efficiencies, and enabling smarter communication providers.

Data center growth outpaces cell tower operators

Although combined CNP segment revenues grew by 16.8% in CY16, higher growth was witnessed by the data center subsegment, whose revenues grew by 23.7% compared to 11.2% for cell tower CNPs. Increasing demand for interconnected solutions, data storage, and integrated networks have driven the growth of data centers. As the number of networking devices multiplies, operators such as AT&T, NTT, and Verizon have been aggressively transitioning to virtualized network management. Data centers act as intermediaries between operators and big cloud providers (such as Amazon and Microsoft) because they co-locate and interconnect in these facilities.

Unlike CSP (communications service provider) capex, CNP capex is surging, up 23.7% YoY in CY16. Data center capex jumped by 29.7% in CY16, while cell tower operators' capex grew by 4.3% YoY. Based on the reported data, the capital intensity for data center CNPs grew from 38.2% in 2015 to 40.1% in 2016, while the ratio for cell tower operators declined from 18.2% in 2015 to 17.0% in 2016.

Continued momentum expected in 2017

As cell tower spinoffs slow in most developed economies, most CNP growth will come from other regions, such as EMEA and Asia, and also from newer business avenues, such as fiber and small cell assets (e.g., Crown Castle and CS&L) and distributed antenna systems (DAS). Data centers will remain in the fast lane with rapidly increasing data traffic, acceleration of cloud adoption, demand for interconnection, and optimization through SDN (software-defined networking)/NFV (network functions virtualization).

The recent succession of M&A deals such as Telxius-KKR, Sentinel-CyrusOne, Cologix-Stonepeak, and IO-Equinix implies that M&A teams will remain busy in 2017. In line with Ovum's revenue and capex forecast, CNP revenues should grow by 10% this year, while CNP capex is expected to remain unchanged in 2017, driven by the decline in cell tower capex.

Appendix

Further reading

"Data centers drive ICP capex up ~16% in 2016; this year's outlook good, but may bring regional shift," TE0006-001343 (February 2017)

Communications Provider M&A: 4Q16 Review & Outlook, TE0006-001341 (February 2017)

Telecom's Slow Growth and the Cell Tower Market, TE0006-001316 (January 2017)

Communications Provider Revenues & Capex Forecast: 2016–21, TE0006-001300 (November 2016)

"Carrier-neutral provider revenues grow 12% in 2Q16, data center buildouts benefit," TE0006-001273 (August 2016)

Author

Gaurav Shukla, Senior Financial Analyst, Intelligent Networks

gaurav.shukla@ovum.com

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