Internet content providers report a strong Q2

Matt Walker/Ovum
09 Aug 2016
00:00

Second quarter 2016 earnings are final for more than 80% of the Internet content provider (ICP) market. Preliminary revenues are up 3.6% year over year (YoY), weak by historic standards but improved from 1Q16. Capex continues to grow faster than revenues, pushing annualized capital intensity to 6.6%. ICPs’ technology capex is concentrated in their clouds of interconnected data centers. As with telco capex, ICP network spend supports a range of services and platforms; video’s role as a driver is growing.

Full-year ICP capex likely around $70 billion

Revenue growth rates for the OTT/cloud players in the ICP segment moderated again in 2Q16. Three of the top five (Google, Amazon and Facebook) continue to report strong year-over-year revenue growth, providing a natural pickup to capex. Chinese ICPs also continue to grow faster than average. However, Apple has had three straight weak top-line quarters, Microsoft has had five, and several of the vendor hybrids in the ICP segment (Fujitsu, HPE, IBM, Oracle, and SAP) have had mixed results. The weaker revenue results inevitably put some downward pressure on capex.

Based on preliminary 2Q16 results, we estimate full-year ICP capex will settle around $70 billion. That’s about halfway between the base case ($75 billion) and pessimistic ($66 billion) scenario mapped out in our latest forecast. Weaker revenues explain part of the shortfall, but another factor is a pickup in consolidation, notably: Microsoft’s June 2016 deal for LinkedIn ($26.2 billion), Alibaba-Youku late last year ($4.4 billion); Dell-EMC ($67 billion); and Yahoo’s recent acquisition by Verizon. Twitter is also rumored to be discussing deals. This kind of deal-making is natural for an emerging “sector” with blurry dividing lines and rapidly shifting business models. For suppliers to these companies, though, there is often a downside; big deals tend to delay new procurement and squeeze cash away from internal projects.

Facebook leading the capex charge in the ICP segment

One ICP going full steam ahead with network infrastructure is Facebook. In 2012, the year of its IPO, Facebook’s capex was $1.2 billion; it more than doubled by 2015, to $2.5 billion; its forecast for 2016 is double again, to $5 billion. Increasingly the driver is video, which Facebook’s CFO notes is “definitely more taxing on the network” than other services. Google and Amazon – among other ICPs – are also investing more in video platforms over time.

Facebook’s wild capex growth will moderate, and even at $5 billion, the company’s 2016 target is less than that of most top-tier telcos. Facebook’s influence is beyond its size, though. It continues to use its clout and scale to push the industry in its direction: first with Open Compute several years ago, and now the Telecom Infra Project. It buys off-the-shelf hardware (optical and routing platforms, for instance) from commercial vendors, like Juniper, Ciena, and BTI. But it also designs some of its own hardware (e.g. the OCP-compliant Wedge and 6-Pack switches) and operating system (FBOSS), and invests heavily in software development. As such, the excitement around a capex surge at an ICP has to come with a caveat: It’s much harder for an outside vendor to sell into Facebook than to a telco.

Matt Walker is a principal analyst for intelligent networks at Ovum. For more information, visit www.ovum.com/

Related content

Follow Telecom Asia Sport!
Comments
No Comments Yet! Be the first to share what you think!
This website uses cookies
This provides customers with a personalized experience and increases the efficiency of visiting the site, allowing us to provide the most efficient service. By using the website and accepting the terms of the policy, you consent to the use of cookies in accordance with the terms of this policy.