Digital infrastructure: three waves, three opportunities

9 September 2022

As the rate of digitisation accelerates, digital infrastructure is becoming both more crucial to our economy and more complex in its nature. Artificial intelligence (AI), cloud computing and 5G networks are combining to change the frontiers of digitisation and redefine what constitutes digital infrastructure itself, says Macquarie Capital’s Head of Digital Networks and Data, Edward Burley.

“The mainstream investment community already has a relatively good understanding of now-traditional digital infrastructure assets such as data centres and fibre networks,” he says.

“However, the sheer scale of opportunities available in a 5G and AI-enabled world - which could include everything from low orbit satellite networks to ‘soft’ and social infrastructure - still isn’t fully appreciated."

The first wave, the internet and the cloud

Burley says that when many investors think of digital infrastructure, their minds still turn to the ‘hard’ traditional assets such as mobile towers, cables and wires. These, he explains, provided the initial means for digital disruption to occur by allowing the internet to develop and expand.

“With these types of traditional infrastructure assets, we’re looking at a long time frame that stretched back to as early as the 1970s for fibre and lasted up until the 2010s for 4G towers,” Burley says. “So, people have had time to understand how they work and the role they might play in a portfolio.”

While the hard assets of digital infrastructure are still necessary, Burley says that cloud computing and AI have combined to create a different-looking digital environment.

“It’s only in the last five years that we’ve seen cloud computing become mainstream and it has already transformed the front office functions - such as sales, invoicing, payments and even customer service - of most businesses, even the smallest ones.”

And yet, Burley believes that this trend still has a long way to go.

“We’re only about 20 per cent of the way there,” he says. “80 per cent of government and enterprise processes still need to be migrated. When this happens, it will create so much more data that needs to be transmitted, captured and stored.”

Burley says the sheer volume of data being created - and the infrastructure needed to support it - can be seen in the rapid growth of Asia’s data centres. In 2016, Asia had just 1/16th of the installed data centre base of the United States in term of megawatts. Now, just five years on, the data centre market is bigger than the US in terms of megawatt demand and the installed base of data centres is still catching up.

“We’re only really still at the start of the cloud revolution. The ongoing structural demand for new data centres and other critical digital infrastructure remains acute.”

5G and AI at a tipping point

Despite this, Burley believes that even more significant forces than cloud computing will drive digitisation in the next few years.

Chief among these will be the rise of 5G networks, which covered around 25 per cent of the world’s population at the end of 2021, but by 2027 they are expected to cover around 75 per cent.1

Digital networks will become so entrenched in our lives that the roughly 3.6 internet-connected devices per person globally2 is likely to rise to more than 20."

Edward Burley
Head of Digital Networks and Data, Australia and New Zealand
Macquarie Capital

Most of this growth is likely to come not in personal communications devices, such as mobile phones or computer-based traffic, as it has to date. Instead, it will almost certainly be the result of machine-to-machine (M2M) connections that form part of the internet of things (IoT). This will effectively digitise most processes in our lives and the economy more broadly, from smart home appliances (which automate things like ordering groceries online), to industrial-scale manufacturing.

Burley says that what is now making this possible is yet another technology – artificial intelligence (AI).

“AI allows devices to talk with each other and operate independently, further accelerating the rate of data creation,” Burley says. “This, in turn, will drive the need for more – and different forms of – digital infrastructure.”

New directions, new frontiers, new assets

As 5G and AI change the way we live, Burley says supply to regional and remote areas will begin to become an issue, just as it has for 3G and 4G networks. Here, he argues new technologies such as low earth orbit satellites and edge data centres are likely to play an important role.

“So far, telecommunications satellites have typically been geostationary, meaning they sit over one just part of the earth’s surface and need to be launched very high at great expense. But the commercialisation of space has made launching low earth orbit (LEO) satellites surprisingly cost-effective,” Burley says.

“These satellites sit between 200km and 2,000km above the earth’s surface and orbit the planet, and they’re already used by governments to perform tasks such as border patrol and domain awareness.”

“We’re likely to see a constellation of LEOs used to supplement 5G networks based on the ground, creating a new wave of potential digital infrastructure assets in space.”

‘Soft’ infrastructure assets on the rise

It’s not just new physical assets that Burley says are emerging. As data becomes more crucial to the way governments and individuals function, Burley says it is starting to contain value in its own right. Various levels of government recognise this and have recently started commercialising, in conjunction with private sector parties, important information registries traditionally owned by government, such as lands titles offices (in NSW and Victoria) and motor vehicle registries (Victoria introduced private sector capital to commercialise the Victorian motor vehicle registry in June of this year).

“These businesses aren’t like existing digital infrastructure assets insofar as their value isn’t in hard digital infrastructure such as a fibre network, mobile phone tower or data centre,” Burley explains. “But they still store and manage data required to facilitate core economic functions, such as the sale and transfer of houses and vehicles.”

“The perimeter of soft digital infrastructure is also likely to expand over time to include more data such as payment systems, credit bureaus, regulatory technology (RegTech) and even subscription-based businesses that automate government-mandated functions.”

“Each of these could be packaged and financed in a way that resembles any other infrastructure asset, with predictable long-term cash flows.”

Capital at the ready

Burley notes that, so far, private capital - especially pension funds - have been responsible for stepping up to fund much of the world’s future digital infrastructure requirements. However, those stepping in to capitalise on current opportunities will need to account for a more nuanced and complicated landscape.

“Fund managers will have to be mindful of the new political landscape in which digital infrastructure operates but they also have the opportunity to look beyond what’s traditionally been perceived as infrastructure to access new assets - both physical and non-physical.”

“If they can, he says, it will be private capital, more so than governments and corporations, who will play the pivotal role in standing up the infrastructure for the digital age.”

  1. Ericsson Mobility Report, ‘Network Coverage Outlook’, Accessed August 2022.
  2. Cisco Systems, Cisco Annual Internet Report, Accessed August 2022.