Internet and data bring IT investment

08/03/2016 - 10:27

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SPECIAL REPORT: The ubiquitous influence of the internet in modern business has brought an uptick in investment in Perth’s data storage capacity, and into new high-speed subsea cables.

Internet and data bring IT  investment
DATA HUB: Nextgen state manager James Reid at the company’s data centre expansion project in Shenton Park. Photo: Attila Csaszar

The ubiquitous influence of the internet in modern business has brought an uptick in investment in Perth’s data storage capacity, and into new high-speed subsea cables.

As Western Australian businesses and government agencies seek cloud-based solutions for their data storage, there has been a parallel demand in the more earthly infrastructure that makes the system function.

That includes fresh investment in data storage centres, which house enormous amounts of information in one central location, using economies of scale to deliver lower costs for end users.

Meanwhile, other players are jockeying to pour capital into the state’s data connections to the rest of the world, with at least five potential subsea cable projects flagged to get under way or in train, improving speeds and bandwidth.

And there has been some major market consolidation among WA’s internet service providers, with the state’s two best-known ISPs – Amcom Telecommunications and iiNet – joining with east coast rivals in an attempt to reduce costs in a capital-intensive industry.

Late last year, in a sign of how important cloud computing has become, the state government’s (then) new chief information officer, Giles Nunis, announced the consolidation of dozens of servers into just a couple of private contracts, forecasting it would save the government as much as $65 million.

That was because less than half of the government’s current storage capacity was used, and was spread across various contracts in different departments.

Using a private provider with the right sort of contract would mean the government increased its utilisation and lowered capital costs.

Modern libraries

Nextgen Group, which is jointly held between CIMIC Group and a Canadian pension plan, has two data centres in Perth – in East Perth and Shenton Park.

The company has nearly completed a second stage expansion the Shenton Park facility, where it is doubling rack capacity at a cost of about $20 million.

Nextgen state manager James Reid said the upgrade came at the right time for the company to bid for state government work, with the existing facility nearing capacity.

“With the expansion coming in place in March-April, we’ll have a lot more capacity in place to supply the market,” Mr Reid told Business News.

“The data centre market has been a very hot market for the last two years or so.”

The centre was built in modules to make upsizing easy.

Mr Reid said there was an enormous checklist of factors to make a data centre competitive.

Location was one of these factors, including the obvious need to be close to high-quality telecommunications lines, access to transport options for customers, and sufficient distance from the ocean to avoid salty air.

Asian tech giant Fujitsu has taken a keen interest in Perth, planning to upgrade its Malaga centre to tier-four certification, for around $10 million.

That would make it the only centre at that level in the Asia Pacific and one of about half a dozen in the world.

Fujitsu vice-president of strategy (Australia & New Zealand) Bridget Murphy said increased reliability of data storage centres would be critical going forward as the ‘internet of things’ (internet connectivity/data collection by objects or equipment) took shape.

She said the capital expenditure required was a barrier to entry to the sector, but ongoing capital investment and predicted customer demand in advance was important.

At the opposite end of the spectrum, local companies Red Cloud and Pier DC have joined the industry.

Red Cloud, which is held by a number of sophisticated investors, has a centre in Bibra Lake and wholesales a transportable centre in a container originally designed for military applications.

The company has been accepted to the federal government’s data centre panel, one of 16 approved providers.

Chief executive Carl Woodbridge said demand was driven by companies seeking to move spending on data from capital to operational.

He did note, however, that although the internet of things and deep data analytics would raise demand, the use of virtualisation would reduce the need for rack space.

Pier DC’s centre is located in Canning Vale, with the company attempting to secure tier-three certification.

Consolidation of ISPs

The past year brought two major telco acquisitions to WA, with iiNet bought by TPG and Amcom purchased by Vocus Communications (see graphic).

Katana Capital portfolio manager Matt Ward said the moves were about building scale in the industry, as telcos had huge fixed costs for network infrastructure while the marginal cost of new customers was small.

He expected the industry would not consolidate any further, with the Australian Competition and Consumer Commission unlikely to allow it.

“The margins are fantastic,” he said.

“They’re all margins most other companies would kill for, but you have to keep on reinvesting in the network and the infrastructure ... that just emphasises how much it is a high fixed cost business.”

As a fixed -ine internet service provider, Vocus had an Ebitda margin of 35 per cent, Mr Ward said, while Telstra’s fixed voice margin was 54 per cent.

Vocus director and Amcom Telecommunications founder Anthony Grist said that bigger companies might still seek to grow through buying smaller ISPs, but consolidation had probably reached an end among larger businesses.

“At the big end in terms of the large critical mass players… there is a regulatory competition prohibition really, it’s been signalled through statements from the regulator,” he said.

Household broadband penetration was very high, however, with companies now focused on market share or moving into different customer verticals, for example from residential to small business.

“The four big players that are left in the core telco game all have slightly different strategies, Mr Grist said, adding that the choices to management were whether to sell more to the same customers or whether to find new customers.

“Trying to create new customers is slightly more of a challenge because what you’re doing is taking customers off other people who are trying to take customers away from you,” he said.

For Vocus, the M2 part of the business had sought different industries, including retailing energy solutions in other states, while the traditional Vocus/Amcom business was still experiencing high growth targeting large enterprises.

“That doesn’t have full penetration, that’s the fastest growing piece of the Vocus business,” Mr Grist said.

“It’s still a challenger to the incumbent.”

Another example of moving into new services was at Telstra, which acquired a number of e-health plays in recent years, in a hope of securing a foothold in that market and reducing healthcare costs.

The list

A further union in an entirely different region of the ITC landscape was a scheme arrangement between UXC and American giant Computer Science Corporation.

That deal was valued at more than $400 million, and it means CSC Australia is projected to remain in second spot in the BNiQ information technology industry list (see page 17), despite a year of major growth at consulting competitor Alijon.

Empired and ASG Group switched places, while Accenture, SMS Management & Technology and NEC Australia all moved up despite slightly lower staff numbers.

Vocus dropped five spots.

In the top position was Kinetic IT, which appointed a new chief executive officer, Michael North, who had previously served as chief operating officer.

He replaced cofounder and brother Terry North, who moved to a non-executive role.

There was also change at Cirrus Networks, where Matthew Sullivan is moving from a non executive director role to managing director.

Under the sea

To move the enormous amounts of data that underpin the modern world, whether a Snapchat from England or a phone call to a friend in Japan, requires an enormous array of thousands of kilometres of cables that link continents.

The only existing undersea cable that connects WA spans about 39,000 kilometres, starting in northern Germany and forming a y-shape with Japan and Perth at the other ends.

Built in 2000, the Sea-Me-We-3 cable can fully transfer around 600 hour-long television shows in standard definition every second.

Five new cable projects have been touted for service in the WA market, a need that has been highlighted sporadically in recent years by occasional disruptions to the existing SMW-3.

Three cables are to Singapore, one to Djibouti in Africa, and one to service oil and gas plays in the Browse basin.

Nextgen is due to complete the North West Cable system in the first half of this year, to link Darwin to Port Hedland at a price tag of about $150 million.

The race to build a line to Singapore is very competitive.

Nextgen and Vocus signed off on a memorandum of understanding to jointly fund a $120 million Australia Singapore Cable in November, when the company flagged an operation date in 2017.

Mr Grist said that, in the past, about 10-15 per cent of Australia’s international traffic had headed from Perth to Asia, with the importance of a second cable increasing as that percentage grew.

“You’ve got two quite large businesses (Nextgen and Vocus) where the risk capital is not material to the ordinary operations,” he said.

“I’m getting more confidence that we’ll end up committing to and being the one that wins that race, because you only build one.”

The Vocus/Nextgen partnership had had some expressions of interest from potential users.

Another operation, APX-West, is being pushed by Subsea Partners, led by chief executive Bevan Slattery, who had founded NextDC data centres (see table, page 15).

He also co-founded Pipe Networks, which built a cable from Sydney to Guam and was later sold to TPG Telecom.

Trident Subsea Cable is planning a line from Singapore to Perth and Port Hedland, while a final project by Australia West Express would link to Djibouti and is backed by US-based Go To Networks.

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