GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore a handful of what we believe are the most relevant and inevitable global trends for investors seeking growth.
These powerful subthemes take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
Today’s post focuses on Data Deluge: Airports of the Digital Age.
One of the major driving forces in the world today is the Data Deluge. Data traffic is growing around 60% per year and is expected to continue doing so.1 At that rate, the amount of data we’ll be handling each year will have increased more than 100-fold by 2022.
There are several companies that are able to profit from their position in this value chain. One of them is data center operator Telecity Group (TCY LN). Here’s why.
Think of gamers who are in different cities. The data each player sends when using his/her gaming or mobile device must be transmitted immediately to the screens of the other players. Assume one player has a data service plan from Verizon in the U.S., another player uses BT Group in the UK and a third player is a German customer of Deutsche Telecom. Each of those three telecom companies must first carry the data over their own systems, then repeatedly pass it back and forth among themselves (like a soccer ball) as rapidly as possible. The less distance a bit of data has to travel—and the closer the different telecom company servers are to each other—the better. Therefore, the best place for their servers to be is right next to each other, as close as possible to the hubs of the major cables which carry data from one region to another.
The global cable and data center networks are arranged much like the hub and spoke systems used by most major airlines. When it comes to data, what hubs do you think are the busiest in the world? It turns out that the top three are Amsterdam, Frankfurt and London. In each of these cities, Telecity owns a data center that houses the telecom’s servers and content providers to ensure that their customers are able to communicate in “real time.” As a result, Telecity’s revenue has grown at over 20% annually in the past three years while net margins have held steady at nearly 18%.2
I believe the location of Telecity’s data centers provides a crucial and durable competitive advantage, especially in view of the hurdles of adding capacity in the center of these cities (think how long travelers have dreamed of adding a fourth runway at Heathrow).
Just look at this picture taken by my colleague, Robert Dunphy, when he recently visited Telecity’s London offices. Do you see the road that is blocked off between Telecity’s two data centers? That’s where Telecity is adding capacity. In essence, London is giving up a road to prevent a data traffic jam.
- The Economist, “All Too Much”, 2/25/2010. http://www.economist.com/node/15557421
- Bloomberg, 6/12/12. Past performance does not guarantee future results.
Read more from the series GrowthSpotting: The Art of Global Investing at http://blog.oppenheimerfunds.com/tag/growthspotting/