knowledge centre

Governments wishing to attract investment by data-centre providers must ensure key infrastructure is in place

Andrew Kloeden Principal, Consulting

"Given the long-term, capital-intensive nature of data centres, it is essential to create an overall environment that is stable and conducive to such investment."

Governments that wish to nurture a healthy Internet and technology ecosystem are placing increasing emphasis on attracting investment by data-centre operators and their users. Given the long-term, capital-intensive nature of data centres, it is essential to create an overall environment that is stable and conducive to such investment. This depends on two main factors. First, it is important for the overall business environment to be attractive, and the policy and regulatory environment to be progressive and non-restrictive. Second, certain pieces of key infrastructure must be in place at a high quality and an attractive price. In this article we focus on the infrastructure requirement, which has three key elements: 

  • high-capacity domestic fibre connectivity
  • international connectivity
  • power.

High-capacity domestic fibre connectivity

Data centres are the hub locations of many networks, including the Internet, the networks of cloud service providers, and large-capacity corporate networks. Whilst the operator of the data centre does not necessarily require connectivity itself (although some operate in this space), its customers will certainly have very large connectivity needs. This means that a successful data centre can only be established where there is competitive access to large-capacity domestic connectivity – both high-capacity active connectivity services and passive infrastructure such as physical fibre and duct. 

High-capacity active connectivity services include leased lines with modern interfaces, such as Ethernet, and wavelength-level services that provide more flexibility for multiplexing and management of the links. Bandwidths of greater than 1Gbit/s, and often 10Gbit/s, are usually required, given the significant volume of traffic created in these hubs. Competitive supply of these services is relatively simple to achieve. It requires multiple telecoms operators to co-locate the relevant active network equipment in a data centre. Given that data centres contain a concentration of customers of these high-value services, this is usually an attractive proposition for telecoms operators. Indeed, many large data centres have 50 carriers or more co-located.

Physical duct and fibre requires more investment. Whilst a provider of active connectivity services can lease the relevant fibre on a wholesale basis, a provider of physical infrastructure must make the investment itself. A large data centre can require multiple physical fibre links, in multiple physical ducts. This provides two benefits. The first is physical diversity of routes and ducts, which improves the level of reliability of the entire data-centre facility. The second is price competition. This is crucial to ensure that the total cost to customers of hosting their equipment in the data centre is as low as possible, and competitive with other data centres. Partly for this reason, and partly due to the significant demand generated by data centres, the major data-centre hub cities typically have many operators of physical fibre. For example, London has at least 14, Singapore at least 5, and Hong Kong 5. These networks are available at the majority of large data-centre sites.

International connectivity

In addition to domestic connectivity, international connectivity is important to data-centre investment. Given the global nature of the Internet and other networks, their key nodes must be connected to international capacity. Indeed, the key global data-centre hubs such as London, Amsterdam, Singapore and Hong Kong are also hubs for international connectivity and traffic exchange. These cities have connectivity to many international submarine cables and act as hubs for their respective regions. For example, Singapore is an international traffic hub for the South Asian and South-East Asian regions, as illustrated in Figure 1.

Figure 1: Singapore’s Internet bandwidth on routes to countries where Singapore is a hub location [Source: Telegeography Global Internet Geography, 2015]

Figure 1: Singapore % of country total international internet bandwidthSingapore’s Internet bandwidth on routes to countries where Singapore is a hub location

Power

Finally, data centres consume a significant amount of electric power, which is one of the single largest cost items for a data-centre operator. Reliable, high-capacity and inexpensive power supply is therefore crucial. Power networks are complex, and their operation is influenced by many different factors. However, we will consider two key aspects here. The first is headroom in generation capacity. If overall generation capacity is well above the peak load of the network, interruptions to supply, and therefore to the uptime of the data centre, are less likely. Given the time and expense of creating new-generation capacity, this can be a problem, even in large global data-centre hubs. For example, London has a reserve margin (the excess of supply over demand) of only 5%.

The second factor is price. Given that power makes up 25% to 30% of the total costs of a typical data centre, the prices available to large users are crucial. Pricing of electricity is complex, and depends on the extent of competition at many levels of the value chain (e.g. generation, long-distance transmission, last-mile transmission). Governments should ensure that relevant policies are in place to encourage competition at all relevant parts of the industry.


Analysys Mason has significant experience advising on policy issues related to data centres, and the Internet more broadly.