Interconnection is the key to a converging digital future


A CoreSite data center in Silicon Valley. (Photo: Rich Miller)

American Tower has spent years studying advanced computing and the economics of distributed infrastructure. His conclusion: The business value of the edge is tied to the cloud and will require connections that go through data centers at the core of the network.

This is the strategic thinking behind American Tower’s plan to pay $ 10.1 billion to acquire data center operator CoreSite, which operates 25 data centers in eight strategic network hubs.

These data centers are profitable and will remain so in the future. But the real value of the CoreSite platform is providing the link between the cloud platforms and American Tower’s 219,000 tower wireless network. CoreSite installations support 21 cloud ramps and over 32,000 interconnections between customers.

“The digital transformation is going to be cloud-based, interconnected and distributed,” said Tom Bartlett, president and CEO of American Tower, on a call with analysts. “What’s really unique about CoreSite is the interconnection platform.

“This transaction positions American Tower as a leading player in several categories of communications real estate,” added Bartlett, saying that the emergence of 5G wireless and the convergence of wireless and wireline networks will enable American Tower to ” create a hub-and-spoke network originating from the core and extending through the different layers of the edge.

The trend towards convergence

With the emergence of edge computing, an increasing number of wireless companies have acquired assets in the data center industry, preparing for a future with greater integration between data centers, telecommunications towers and antennas. As digital infrastructure-focused real estate investment trusts (REITs), American Tower and the other large tower companies have the potential to become major players in advanced computing. They are optimized for the acquisition of real estate and can finance growth in a number of ways, including securitized loans which can provide a low cost of capital.

At DCF, we’ve been following the growing overlap between the data center and wireless worlds, a trend we first noticed in our forecast for 2018 (8 trends that will shape the data center industry in 2018) . A key transition for both wireless carriers and data centers is reorganizing telecommunications networks to be more like the cloud, moving to a software paradigm that will make networks easier to reconfigure.

Software-Defined Networking (SDN) separates the programming of routers and switches from the underlying hardware, allowing administrators to automate many network functions. A related tool is Network Functions Virtualization (NFV), which bundles many network tasks into virtual machines. This simplifies the deployment of telecommunications services, including 5G, from data centers and cloud nodes, as well as central offices and towers.

A gradual migration to data centers

Monday’s buybacks and bullish presentation of American Tower sparked a rally in shares of public data center companies, which posted gains of 2% or more. Among the biggest winners was DigitalBridge, whose shares climbed 8% during the session. DigitalBridge is also pursuing a strategy focused on the convergence of digital infrastructures, with assets including data centers. towers, small cells and fiber.

In 2019, American Tower acquired colocation provider Colo Atl to assess the peripheral market and understand the interconnection industry. Last year, the company unveiled its Edge of the American tower offering comprising data modules at the base of cell phone towers in six cities – Atlanta, Jacksonville, Denver, Boulder, Austin and Pittsburgh.

An American Tower self-sufficiency tower in Needham, Massachusetts. (Photo: American Tower)

Rival American Tower public tower REITs have also invested in data center companies. SBA has purchased interconnect-focused data centers in Chicago and Jacksonville, while Crown Castle is an investor in edge data center specialist Vapor IO.

But the CoreSite deal is the biggest move yet for a tour operator. Bartlett’s discussion with analysts on Monday highlighted a number of details about the CoreSite acquisition and American Tower’s plans going forward.

  • CoreSite leadership will remain in place. American Tower says it values ​​team experience, execution and discipline.
  • CoreSite, whose data center footprint is entirely in the United States, will expand internationally. Bartlett.
  • American Tower will likely provide capital to CoreSite to add capacity to expansion plots of its existing data center campuses, as well as to enter new US markets.

The thesis of investing in a world of shrinking options

Some analysts have questioned the price of the deal, which values ​​CoreSite at around 27 times EDITDA, and were skeptical as to whether American Tower’s justifications for the deal were valid. Analysts argue that competition in the data center industry is more complicated than that of towers and that owning a platform could be an issue for customers concerned about vendor neutrality.

Even if these reviews are correct, a key question is how companies with data center ambitions do in a rapidly consolidating market filled with potential acquirers with deep pockets. Infrastructure funds, sovereign wealth funds, private equity firms, strategic players and PSPCs all revolve around the dwindling number of platforms available, with two of the most attractive targets currently – CoreSite and CyrusOne, which has been bought Monday by KKR and GIS – being taken. off the field.

And if interconnect is the missing component, CoreSite is the larger platform that isn’t Equinix or Digital Realty – two companies that likely see themselves as acquirers rather than targets in the current consolidation.

The key question for companies like American Tower is whether they want to build or buy. If they want to scale, buying is a faster route, which matters in the rapidly changing world of digital infrastructure.

“We anticipate accelerated compute growth that goes beyond simple large-scale data installations and includes businesses in Tier 2 or Tier 3 markets,” Bartlett said. “The opportunity for us is to be able to take advantage of the real estate that we have taken 20 years to develop. CoreSite allows us to interconnect them and benefit from their relationships with cloud providers.


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