Understanding The Carrier-Neutral Market (And Why Revenues Will Pass $40B This Year)

MTN Consulting has just published a “Market Review” of the carrier-neutral network operator (CNNO) sector. The report assesses the key role that these tower, data center, and bandwidth specialists are playing in the downsizing of the telecom sector. While many telcos are shrinking, the CNNO sector is growing >10% per year. Revenues for the 25 CNNOs we track should surpass $40B this year, and approach $60B by 2020 (Figure 1).

Takeaways from the study include:

• CNNO revenue growth has been steady around 10-15% YoY for several years, in line with the growing telco (& other provider) need for low cost, carrier-neutral network resources. 3Q17 revenue growth for CNNOs was 13.1% (Telco Network Operators: 1.0%; Webscale Network Operators: 23%).
• CNNO capex rose 11% YoY in 3Q17, to $3.6B. Tower specialists spent 24% of their revenues on capex, data center specialists over 43% due to higher (and lumpy) investments in developing new sites. Tower providers’ incremental capex in new sites is primarily for small cells. Bandwidth specialists’ capital intensity has been over 50% for the last 5 quarters, due to the influence of new builds (NBN in particular).
• CNNO capex hit $15B on an annualized basis in 3Q17; the biggest spenders were Equinix, Level 3, Australia’s NBN, Crown Castle, Digital Realty, American Tower, and Zayo.
• M&A is a big factor in the sector’s growth, but just one. CNNOs are growing organically too, and expanding their business models to require a broader mix of equipment (Crown Castle is looking at edge computing, for instance). Technology-related operating expenses can be quite high, for repairs & maintenance of old plant, and energy costs in particular.
• Total capex across telecom, Webscale, & CNNO was $355B in 4Q16-3Q17 (Figure 2).

The report also assesses CNNOs’ network holdings across four main categories: fiber, data centers, towers, and small cells. Most big operators have assets in multiple areas, and that will increase over time. Tower companies are building small cells, for instance, while bandwidth specialists are extending their fiber routes to small cell sites.

Table 1 provides a snapshot of the infrastructure assets for a sample of the CNNOs covered in this report.

Table 1: CNNO network assets (excerpt)