Data centres: Google and Amazon propel African players into the big leagues

By Quentin Velluet
Posted on Tuesday, 29 November 2022 15:32

Datacenters ©Getty Images

The huge needs of US tech companies and telecom operators call for development of a sector that can weather current economic uncertainties.

“How dare you call yourself a hyperscaler when you don’t host any data yourself?” says Nic Rudnick, the British deputy chief executive officer and managing director of Cassava Technologies. His tone is calm, his attitude far from aggressive, but the question resounds like a jolt of anger from the coldest parts of his home country.

On this November evening in Cape Town, South Africa, Rudnick clashed with other participants at a round table organised by South Africa’s Rand Merchant Bank on investment in African technology.

He criticised his co-panelists, Nitin Gajria (director of Google Africa) and Alex Masu (head of Network Infrastructure Investments for sub-Saharan Africa and the Middle East at Meta), for their lack of investment in the continent. These Big Tech companies, known as hyperscalers for their huge and demanding data hosting needs, are building their own data centres to house their cloud software since elsewhere in the world, just not in Africa.

The duo, who had been directly attacked by one of their suppliers on the continent, nonetheless welcomed the criticism at this private event organised on the sidelines of AfricaCom, the annual meeting of African and international telecoms.

A dialogue of equals

“GAFAM’s [Google, Apple, Facebook, Amazon and Microsoft] investments in Africa are disappointing compared to what they spend in other regions of the world. We see them selling advertising, but there is still a long way to go for hosting,” says the head of Cassava, which is present in telecommunications services and infrastructures (Liquid Intelligent Technologies), in fintech (Sasai) and also in neutral data centres (Africa Data Centres) – meaning they are able to interconnect with a large range of connectivity suppliers.

The attitude that Rudnick allows himself to adopt in relation to his colleagues in the sector is symbolic of the position that Cassava is taking on the continent. At home, in Africa, the holding company founded by Zimbabwean telecoms billionaire Strive Masiyiwa is now talking to the big tech companies on an equal footing.

Its subsidiary, Africa Data Centres (ADC), which is dedicated to the construction and management of the continent’s data centres, is one of the main renters of servers on behalf of American tech champions, whose cloud software is beginning to seduce many companies in search of digitalisation.

Billions of dollars at stake

In two years, the operator – led by Tesh Durvasula – has raised more than $1bn to buy existing data centres or build them from scratch. With six active neutral facilities in South Africa, Nigeria and Kenya, as well as seven under construction and land already acquired for development, notably in French-speaking West Africa, ADC is one of the three industry leaders on the continent to offer services at international standards and with capacities ranging from 9 to 20 megawatts (MW).

There is no space for a new player.

In parallel, California’s Equinix entered the market last April with the purchase of the Nigerian company MainOne for $320m. One compatriot of Equinix, Digital Reality, confirmed its appetite for Africa with the acquisition of Medallion in Nigeria in 2021. Digital Reality had already been present in East Africa for five years following the acquisition of the European company Interxion (which owned Kenya’s Icolo).

This was followed by the acquisition of South Africa’s Teraco last August, in a record transaction worth $3.5bn. “South Africa represents 80% of the African hosting market, and Teraco represents 80% of the South African market,” says Caroline Puygrenier, senior director of strategy and development at Digital Realty.

For its part, ADC is the only pan-African player operating data centres offering tens of megawatts, with a majority of its capital in Africa. Like its competitors, it provides hosting to tech giants, such as Microsoft, Google, Amazon, Facebook and Salesforce, but also to a plethora of large, medium and small local or regional companies. The data infrastructure provider is now in a position to play a central role in the consolidation movement that is underway. “There is no space for a new player, so the discussion ha[s] to start and everyone has to talk to everyone now,”  says a connoisseur of the sector in Africa.

A maturing market

With $2bn spent since 2017 on the construction of data centres – equivalent to 200 megawatts of additional capacity – “The African market for data centres is not yet mature, but growing”, says Guy Zibi, founder of the specialised firm Xalam Analytics, which published a study on the market during AfricaCom.

According to the expert, three types of players occupy today’s collocation market:

  • the three giants – ADC, Equinix and Digital Realty – which offer capacities of up to 20 MW;
  • national leaders, such as Rack Center or N+One (although it has a West African expansion strategy, particularly in Senegal), which are capable of offering capacities of more than 10 MW in the long term; and
  • multi-country operators, such as the Raxio Group, Open Access Data Centres or PAIX Data Centres, whose infrastructures offer capacities of less than 10 MW.

“The players likely to be acquired during future consolidations are primarily national players,” says the expert.

However, African companies still need to be able to raise the necessary funds for their expansion. Africa Data Centres still depends a lot on investment funds and international backers, such as the IFC or the American DFC, which have provided several hundred million dollars since its creation in 2018. On the flip side, Digital Realty and Equinix seem to have a fairly solid financial capacity – they are both listed in New York and have respectively achieved more than $4bn and $6bn in turnover in 2021.

Investors are confident even though construction costs have increased by about 30%

Still, in an economic climate where borrowing rates are rising, along with the price of materials, their procurement, and the cost of energy, will ADC and its African challengers be able to sustain themselves?  “The current macroeconomic environment will not necessarily have an immediate impact on the industry, as financial trajectories will remain relevant,” says Xalam Analytics’ Zibi, whose study determined that the African market has been doubling in size every three years.

Confident investors

“Investors are confident even though construction costs have increased by about 30%,” says Digital Realty’s Puygrenier. The challenge, according to the French executive, will be attracting customers other than tech giants and telecom operators, who buy capacity in bulk, but at a low price.

The scramble for African data has been accelerated by a clear signal from cloud service giants Amazon Web Services, Microsoft Azure, Oracle and Google Cloud that they are funding new submarine cables linking Africa to the rest of the world. Accustomed to gradually increasing their demand for capacity in line with businesses’ new digitalisation needs, these announcements confirm that there could be an explosion in demand as soon as the cables came into service.

By increasing internet traffic speeds on the continent, the cables will accelerate the consumption of data by Africans, requiring new infrastructure to store the data that is created. Data centres also help to streamline this traffic as they host data locally that previously had to be fetched from outside the continent. With Google’s Equiano cable due to go live later in 2023 and Facebook’s 2Africa to follow in 2024, demand is exploding.

“While the market has unfolded as expected in South Africa, for Nigeria and Kenya, which seemed to follow suit, the demand boom only started very recently,” says our analyst. Indeed, 2022 was the year in which two hyperscalers decided to commit to heavy investment in the continent.

A long-term vision

In 2020, Google announced the creation of a cloud region – a complex of several data centres dedicated to its data hosting services, in South Africa. However, the infrastructure will be built and managed by service providers, such as ADC or Digital Realty, while part of Amazon’s infrastructure will be built by the American group itself.

The balance between in-house and outsourced management is mainly a question of saving time for the tech giants. “These internet giants don’t have the time to go through all the heavy administrative procedures involved in building a data centre, which takes an average of 12 to 24 months. […] to be sure that at least one project will succeed, three or four must be launched in total,” says our expert, who requests anonymity.

In early November, the group founded by Jeff Bezos announced that it had opened offices in Lagos, while at the same time receiving the green light from the courts to build its continental headquarters in Cape Town. The location of these offices has earned the American giant a lawsuit from associations accusing it of building on sacred land belonging to local tribes.

Although it remains a relatively polarised subject in South Africa, Nigeria and Kenya, Africa’s coverage of data centres should rapidly accelerate in the coming years. “Our investment expenditure is calculated for the next 10 years,” says Puygrenier, whose company is already planning to set up operations in Ghana and Côte d’Ivoire.

The suitors’ ball has only just begun.

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