SEA Telcos and the Global Data Center Opportunity
Solving for Self-Reliance Amidst Increasing Market Complexity
Authored by: Miguel Castaneda, Anurag Gaur and Davids Tjhin
In the early 2010s, telcos rushed to build out data center (DC) infrastructure. The logic behind the DC expansion was sound given telcos’ enterprise customer relationships and experience managing capital-intensive, asset-heavy, and highly regulated businesses. But despite these inherent advantages, telcos struggled to grow their DC businesses or diversify beyond basic colocation offerings.
With macro headwinds — including stagnating service revenues and high CAPEX obligations for 5G and fiber-to-the-home (FTTH) rollouts — now impacting the telco industry, Western telcos are implicitly acknowledging the underperformance of their DC gambit by divesting their DC assets to DC specialists such as KKR, Equinix etc. This opens the door for DC specialists both to support the technological and operational demands of telcos foraying into next-gen DC services while also crystallizing the valuations of the telco’s DC business. Recent data center selloffs by telcos have demonstrated the latent values of their DC businesses — with post-money EV/EBITDA valuations markedly higher vs. their telco businesses. Select major telcos in North America and Europe who have sold-off their DC businesses at these higher EV/EBITDA levels have been able to utilize the proceeds of these sales as part of broader capital recycling initiatives to fund their core businesses.
In Southeast Asia, telcos are similarly reexamining their data center strategies. This presents an important opportunity for SEA telcos to learn from Western telcos, unlock vital capital for future growth, and develop more resilient business models. It also offers telcos around the world a chance to reflect on their DC strategies — and explore new ways to capture value in today’s fast-growing DC marketplace.
The evolution of SEA telcos’ DC strategies
Telcos in SEA began reexamining their data center strategies in the early 2020s as regional DC demand ramped up. In the Association of Southeast Asian Nations (ASEAN) region, DC capacity is expected to increase from 1.1 GW in 2021 to 2.6 GW in 2025 at a CAGR of 22%1, with a total revenue potential of ~US$6.3bn in 20252. Three broad forces are driving this demand:
1) Digital lifestyle trends, with SEA consumers’ reliance on data-driven services fueling demand for DC capacity. Mobile penetration is estimated at 143%, with many SEA consumers having more than one phone, and data consumption is forecast to reach 167m TB by 2025, with a
CAGR of 22% between 2022–25. Fixed broadband penetration will grow by up to 15 percentage points in Malaysia, Vietnam, Philippines, and Thailand between 2022–25, while Singapore is one of just three countries worldwide to achieve 100% FTTH penetration.3 The region will also see increases in digital payment penetration (~51% by 2025), OTT users (300m by 2025), smartphone users (660m by 2025), and online gamers (230m by 2025).4
2) The digitalization of commerce, with SEA consumers’ evolving digital lifestyles redefining the ways in which they transact with businesses. The ASEAN internet economy is expected to expand to US$240b by 2025, with e-commerce accounting for ~68% of that total.5 On the enterprise side, digital transformation ambitions and the migration of workloads from on-premise infrastructure to the cloud will be key contributing factors behind SEA’s increasing demand for data center capacity. By 2025, it is estimated, 65% of Asian enterprises will have moved to cloud-first models for managing operational data; by 2026, meanwhile, 40% of such businesses’ revenues will be derived from digital products and services.6
3) The need for localization, with countries such as Vietnam requiring enterprises to host data close to end-consumers. Data localization is critical for key industries including healthcare and financial services, creating widespread demand for distributed DC infrastructure. Localized DCs play a crucial role in supporting ultra-responsive “edge” processing, and SEA DCs will also deliver storage and compute for low-latency use-cases including content, gaming, and Industry 4.0. With Singapore curbing future DC capacity, other SEA countries will develop localized infrastructure to manage costs, support innovation, and ultimately improve overall network Quality of Service (QoS).
As in the West, many SEA telcos are responding to these challenges by relinquishing partial ownership of their DC assets. This strategy offers scope to unlock capital while also enabling telcos to scale their DC businesses by leveraging the technological, commercial, and operational expertise of DC specialists. Examples include a Filipino telco that sold 40% of its DC business to a regional communications infrastructure operator; an Indonesian telco that sold 70% of its DC assets to a pan-Asian DC operator; a Malaysian telco that sold 70% of its DC operations to a U.S. infrastructure firm; and an Indonesian telco that fueled expansion by entering a joint venture with an APAC DC operator.
Notably, however, select SEA telco leaders have opted to retain full ownership of their DC infrastructure. These standouts have leveraged key advantages including strong balance sheets; extensive connectivity infrastructure; and established partnerships with hyperscalers, utility companies, and other key players. Examples include:
· A Malaysian telco that offers an extensive array of DC services anchored in a large portfolio of DC infrastructure assets. This telco’s strong position in Malaysia’s DC market is supported by massive fiber assets, and further strengthened by its favorable return on invested capital (ROIC) vs. weighted average cost of capital (WACC) profile relative to its peers.
· An Indonesian telco that expanded its DC holdings domestically and internationally via a dedicated DC subsidiary. With healthy financials from its core mobile and fixed telco business, the telco has high profit margins, low CAPEX intensity, and one of Indonesia’s strongest ROIC vs. WACC profiles; it also owns significant fiber infrastructure, and saw double-digit growth in DC and cloud revenue between 2020–22.
· A regional telco group whose standalone infrastructure unit established joint ventures with regional OpCos and energy companies. The group also established strategic upstream and downstream partnerships with hyperscalers to develop a regional submarine cable system and cloud platform offering. The group earned ~US$200m annually at a 40–60% EBITDA margin from its DC business — a resounding success given other telcos’ struggles.
As DC demand continues to surge, SEA telcos will need to determine whether to capitalize on this emerging opportunity by aiming for self-sufficiency or divesting some of their DC business. While some SEA telcos have been remarkably successful in leveraging their financial strength, infrastructure, and partnerships to build DC businesses, many others are selling large stakes in their DC assets to DC specialists to realize value while maintaining skin in the game.
With SEA telcos facing the same headwinds encountered by Western telcos, firms will need to carefully weigh their assets, finances, and partnerships against the need to match the capabilities of DC specialists. A rare few SEA telcos will remain self-sufficient, but many will find that partial divestiture of their DC assets to DC specialists remains the most effective way to elevate their DC value proposition and drive long-term market success. Given this, crafting robust equity partnership strategies that clearly delineates the operational involvement, mutual synergies, and scope of investment will be key in attracting strategic investment partners that are best positioned to support the telcos’ ambitions in accelerating their DC businesses’.
4 key trends reshaping the global DC industry
Whether telcos seek to maintain full control or partially divest their DC assets to specialists, their success will largely depend on their ability to adapt to emerging trends now shaping the evolution and rapid growth of the DC sector. As they navigate this environment, telcos will need to work to understand the needs of their customers — including longstanding priorities such as security, cost, and stability, but also demand for new business models and DC technologies.
We have identified four overarching trends that telcos in SEA and globally can focus on to maximize the chance of success for their DC business:
1) Client-base shift from retail to wholesale deals with hyperscalers
Enterprises are shifting from direct colocation (i.e., retail DC capacity leasing) to public cloud infrastructure provided by hyperscalers (e.g., AWS, Azure) to support hybrid cloud deployments. To facilitate this, DC operators will need to prioritize wholesale deals with hyperscalers seeking to scale their DC capacity.
This will bring operational challenges as DC operators will have to support more complex, microservice application architectures that hyperscalers leverage to serve their customers. The premium placed on user experience for hyperscaler cloud solutions will impact DC operations: power and cooling provisioning (to ensure maximum up-time), inter/intra-DC network architectures (to ensure low-latency connectivity), and automated load-balancing (to optimize server utilization) will be key priorities as DC operators reposition their infrastructure. DCs will also need to provide direct on-ramps connecting private IT and public cloud, with enterprises increasingly demanding the security, low latency, and reduced data-transfer fees associated with on-ramp connections.
These challenges will be complicated by the lower pricing realization associated with wholesale hyperscaler deals. For example, retail colocation prices are ~2x higher than wholesale in Singapore7 while Indonesian retail colocation prices are ~50% higher than wholesale.8 Maximizing profitability through cost-optimization programs and the creation of new revenue streams from value-added services will be critical for DC operators that are readjusting their business models to support more wholesale deals with hyperscalers.
2) The impact of AI
The explosive growth of AI technologies is creating significant new demand for DC capacity, with DCs under pressure to support both computationally intensive training workloads and localized, low-latency inference workloads. These demands will favor DC operators capable of keeping costs and latency low by providing support for strong interconnectivity.
DC operators can also reposition their product offerings to address the expected increase in enterprise generative AI (GenAI) adoption by providing managed services such as GenAI-specific training solutions with high-touch model training support or managed-GPU hardware services. Such services will resonate with enterprises building out customized LLMs or managing the compute infrastructure necessary for GenAI queries across deep or diffuse databases.
Telcos also have an important opportunity to differentiate and enhance their DC value propositions by using AI to support their own operations. Forward-thinking operators will achieve productivity gains in key support functions, with GenAI embedded into both back-office functions (e.g., contracting, customer billing) and core or ancillary support functions (e.g., automated energy management, network routing, load balancing) to deliver compelling new operational efficiencies.
3) Emerging demand for green DCs
Many hyperscalers have made significant sustainability commitments, and expect DC operators to meet strict sustainability standards when operating their DC infrastructure. Major hyperscalers have already made significant progress in reducing Scope 3 emissions, leveraging renewable energy, and achieving net-zero carbon emissions in their own data center infrastructure assets.
DC operators hoping to onboard these hyperscalers will need to ensure similarly high environmental standards across their wholesale colocation operations. Sourcing a dependable and cost-effective supply of renewable energy is a key strategic priority for “green DC” operators, but is not the only area hyperscalers will consider when partnering with DC operators.
Efficient cooling — especially for dense and computationally intensive AI applications — will also be top-of-mind for many hyperscalers during their colocation selection processes. So too will “green building” certifications and the utilization of digital solutions (such as AI-enabled IoT platforms) to ensure sustainable power usage effectiveness (PUE) ratios.
4) A new emphasis on edge compute
As the demand for real-time processing increases across both consumer and enterprise use cases, telcos and DC operators will move up the value chain and generate additional revenues by providing optimized latencies and network performance through highly localized edge compute infrastructure.
In this playing field, telcos — as opposed to specialist DC players — hold an advantageous position. The scale of telcos’ existing last-mile assets (including towers, central offices, fiber cabinet enclosures, and more) and the geographical distribution of their infrastructure gives telcos an important head start in the push to support edge compute.
Telcos also have an opportunity to easily embed edge data centers within existing virtualized RAN infrastructure as these deployments would already have the requisite connectivity, power, and cooling resources to support edge DC environments.
Conclusion: What lies ahead
For global telcos, the SEA experience offers a reminder that no single strategic blueprint can be applied uniformly across the telco space. In the face of surging DC capacity demand, some SEA telcos are adopting divestiture strategies much like those deployed by Western companies; others are achieving remarkable success by striving for self-sufficiency and retaining full control of their DC businesses.
Broad trends such as the rise of AI, the need for edge DC infrastructure, and the shift to wholesale deals with hyperscalers for whom sustainability is a key priority, will place new strains on global telcos as they work to meet soaring demand for DC capacity. For many industry leaders, divestiture and partnerships with DC specialists will remain the strongest strategy; for a select few, self-sufficiency may be a viable and potentially lucrative alternative. To find an optimal path forward, telcos will need to carefully evaluate their resources, capabilities, and partnerships — and the new challenges and opportunities emerging from today’s complex and fast-changing DC marketplace.
