Alongside renewable energy, telecommunication facilities are the most dynamic sub-sector in the infrastructure investment universe. Thanks to massive government support, it offers many opportunities, even if the different assets show disparate dynamics.
A particularly resilient segment
Telecommunications infrastructure includes devices such as connection cables, telephone network towers, satellites and data centres. On a global scale, if we consider groups with a market capitalisation of more than USD 1 billion, this represents around 180 companies. These assets have high barriers to entry: high local market shares, massive investments in technology, buildable space, construction time, government approvals and maintenance costs.
Telecommunications infrastructure is a particularly resilient segment. Indeed, the demand for these assets is mainly driven by the growing consumption of data (5G growth, online video, cloud etc.). In addition, the industry benefits overwhelmingly from contracts with prices indexed to inflation and the price of the energy used to power the facilities. This is a low-risk business model, uncorrelated with economic cycles and particularly popular in times of crisis. Network towers, for example, have an extremely stable dynamic: leased to telephone operators with a long-term guarantee (10 to 20 years) with an „all or nothing“ renewal clause. The fixed cost base of these assets allows them to generate increasing returns on capital with the number of transmitting stations placed on each tower. The concentration of these sectors further strengthens their resilience through stronger balance sheets. In developed countries, there are about ten telephone tower or data centre operators and five satellite operators.
Redistibution of risks and a disprate market
Fluctuating energy and commodity prices, affected by supply shocks, also put pressure on these markets. In addition, the rise in interest rates complicates the profitability of projects. The strong appreciation of the dollar is a final factor that is detrimental to US companies in international markets.
In addition to these macroeconomic factors, the cards of part of the industry are being reshuffled by structural changes. The development of alternative modes of consumption is affecting certain assets, for example satellite television, which is facing competition from online video on demand. Similarly, there are cost increases for data centres, where electricity supply represents more than 20% of operating costs. These cost increases are, however, contractually rebilled to customers.
Concentrated markets
Despite a strong dollar, the large American groups are maintaining their influence, particularly in mobile networks, data centres and cabling. Google, Meta, Amazon and Microsoft, for example, own a large proportion of the transcontinental submarine cables, along with the major telephone operators.
At the same time, the data centre and telecom tower sectors have been greatly consolidated in recent years, driven by private equity funds, which are very keen on these high-visibility growth assets. This explains why the listed investment universe is relatively small, but remains one of the most attractive sub-sectors of the infrastructure market.