From Zoom meetings to ChatGPT, modern work is engulfed in cheap, immediate and ubiquitous software. Much of the economy has moved to the cloud. That’s why it’s easy to forget that the intangible cloud is powered by some very tangible hard assets. Savvy investors have spotted an emerging opportunity in this neglected type of infrastructure.
Digital hardware such as cell towers, cables, data centers and sensors have typically been underfunded. Investors seem to have a clear preference for software companies that have lower operational costs, higher margins and easier distribution.
In 2021, for instance, venture capitalists funded 10 software startups for every one hardware startup. Tech equipment makers collectively raised $33.5 billion that year – 93 percent less than their software peers, according to data published by Pitchbook.
A similar story has played out in the public market. Amazon, Google and Microsoft all derive the majority of their revenue from software and online services. Apple is certainly an exception to this but its proportion of software revenues has been rapidly escalating. In its most recent quarter, Apple generated 21 percent of its sales from software and services.
Meanwhile, the insatiable appetite for digital services such as streaming media and telecommuting has boosted the demand for energy.
“While the upward trend of data traffic and consumption, as well as the densification of digital infrastructure, is clear, there are many risk factors that we analyze when making a digital infrastructure investment,” says Matthew Lipton, the co-head of infrastructure investment research at Partners Group. “One of these risks is the need for power and how long it can take to get that power. For example, data centers are power-intensive businesses that require sufficient uninterrupted power supply through grid interconnections, other associated infrastructure, and on-site backup generation.”
According to data published by the International Energy Agency (IEA), global Internet traffic has jumped 20-fold since 2010 and data centers collectively account for roughly 1.5 percent of global energy consumption now. In smaller countries like Ireland, 14 percent of their total energy use is dedicated to data centers.
Recent advancements in digital technology could accelerate this trend. 5G makes consuming large media files (such as audio and video) significantly faster. The “metaverse” could expand internet data usage by 20-fold by 2032, while the Internet of Things (IoT) could increase the number of Internet-enabled devices by 76 percent within seven years.
Based on these forecasts, the need to fund more cell towers, data centers and sensors is clear. But technology could also help cut costs and improve energy efficiency. “5G and IoT can be used in a straightforward manner that leads to cost reduction,” Lipton explains. “For example, we have been adding smart sensors combined with artificial intelligence at some of our wind farm investments to enhance our ability to complete predictive maintenance, rather than perform maintenance that may or may not be needed.”
The growing need for digital infrastructure that is both cost- and energy-efficient is a clear investment theme for the next decade and beyond.
–Vishesh Raisinghani
