This article is sponsored by Digital Alpha
In April, as much of the world grappled with the implications of the covid-19 lockdown and the challenges of working remotely, we spoke with Digital Alpha managing partner Rick Shrotri about the role digital infrastructure has to play during the crisis, and how it will support a post-pandemic world.
The covid-19 crisis has made the global economy grind to a halt. How resilient is the digital infrastructure sector?
With most of the world in lockdown, the way we do business, educate our children and operate as a society in general has undergone a huge shift. Working remotely is the new normal.
The good news is that digital infrastructure – the underlying networks and the platforms to manage it – is more resilient than other types of infrastructure.
We are seeing tremendous growth across the three verticals in which we invest. These are the next-generation networks such as 5G, wi-fi 6 and active network technologies that move bandwidth at scale; highly secure sovereign data centres where privacy and security are paramount concerns for cloud data storage; smart city technologies, including automated public services; and the internet of things.
Local municipalities are being forced to manage government and emergency services remotely. In a pandemic, having access to data, visualisation, control of assets and being able to track and trace a problem like virus infection, and respond to it, is vital, not a luxury.
Digital infrastructure is ever-more mission-critical and there is huge scope to invest.
How is the existing network coping with soaring demand?
The internet was built to be distributed and resilient with no one point of failure. We are realising the benefit of that today.
There is a lot of strain on the network and there are connectivity challenges, but there is built-in redundancy and the ability to reroute demand from one area of the network to another in the case of an unexpected event.
Having said that, can the network keep up with demand from individuals and businesses for high-definition streaming content? No. We have seen a need to reduce bandwidth quality and ration service due to bottlenecks, a gap that our investment models are specifically designed to address.
What’s the impact on your portfolio?
Working Group Two, our Scandinavian mobile core network platform, saw a 50 percent increase in traffic in just the month of March. We hadn’t anticipated that level of demand growth to happen for a while.
Another of our portfolio companies, US-based PacketFabric – a network-as-a-service platform that moves data with agility and helps businesses manage communications to ensure a guaranteed amount of available bandwidth – has also seen tremendous growth in demand. An example of this demand on networks was shared by Cisco Systems, where the company stated that its WebEx collaboration tool has seen demand rise by 24 times in peak loads versus pre-crisis demand.
In this time of crisis, governments, telecom operators and enterprises need to overprovision the network – ie, make sure they have capacity available. The network has become more essential than ever.
For obvious reasons, during this crisis the need for healthcare data management is booming. UKCloud, which provides specialist multicloud services to the public sector and regulated organisations, has seen an uplift in workloads from UK hospitals and individuals using government websites, and is storing large quantities of genomic data that can be leveraged for the covid-19 vaccine effort.
Our portfolio company Cloudian, a US-based enterprise data storage provider with healthcare and government clients, saw 40 percent revenue growth in Q1 2020, despite the overall economic crisis. Another of our businesses, Quantela, is delivering incremental smart city services tied to the covid-19 pandemic. It has developed a new platform specifically designed to help cities manage virus impact.
That said, nothing is entirely “anti-fragile”, to use title of a book by Nassim Nicholas Taleb, author of The Black Swan. Our portfolio companies have been disrupted by leadership absences due to the virus, so we must ensure there is organisational resiliency. And we are seeing some supply chain interruption for digital infrastructure components.
What are your investment criteria?
We target the active digital infrastructure layer that sits above legacy infrastructure such as fibre cables and radio masts and below the consumer layer that includes mobile applications and social media.
Typically our investments include both hardware and software, but the hardware component is significant. This includes routers and switches running on top of a fibre cable network; high-value components of ruggedised wi-fi (wi-fi boxes that sit outdoors); telco grade wi-fi that runs in airports and railway stations; and industrial internet of things used in urban mission-critical networks or data centres.
We typically invest in a capex-heavy way into established technology with proven lifecycles. For us to work with a company generally it must have already deployed the technology at commercial scale inside a government or municipal setting, in a large telecom network or at a large enterprise. That’s typically our first selection criteria.
Second, similar to traditional infrastructure, we prefer that the business has already agreed a contract with a major government, telecom company or municipality. This gives us some risk protection and long-term certainty around deployment. And third, we seek to back experienced management teams.
Why focus on the active rather than consumer or passive layers?
We believe that this is where the most value can be created. When we began in 2017, we knew there would be a lot of growth in this segment and we would see highly differentiated, off-market dealflow because of our corporate partnerships with the likes of Cisco Systems and other Silicon Valley leaders, which are driving this global transformation. They also contribute expertise.
Finally, unlike other layers of infrastructure, we would argue our distinctive expertise in active networks makes it less likely we will have meaningful competition for deals. This layer is where we believe we can find the best risk/return profile. Like traditional infrastructure, our investments seek to include risk mitigation, but that is combined with anticipated technology upside, which we believe is hard for conventional infra investors to capture.
Where are the new growth areas?
In the short term, the pandemic is very much a catalyst for network investment at the edge. Critically, we believe this demand is sustainable. Even if the virus disappears tomorrow, that will not alter the demand for technology, devices, phones, tablets and television.
Consumers and businesses expect HD content when and how they want it. Looking to the future, it will require a substantial investment in digital infrastructure, which is now a mission-critical utility. Cities are looking for innovative services to optimise the management of a range of functions including parking, lighting, traffic and waste management, and emergency services, in order to save money, improve efficiency, safety and security, protect the environment and enhance quality of life. We are seeing a lot of demand for those kinds of use-cases right now.
And new technology like 5G will create new sources of demand. The greater bandwidth and low latency offered by 5G can support self-driving cars and trucks and automated highways and stores, and specialist services like healthcare delivery. The need for network infrastructure around automated use-cases is expected to be tremendous.
How has the pandemic shaped the future evolution of digital infrastructure?
Over the longer term, the importance of digital infrastructure as a component of overall infrastructure will only continue to increase. Governments, telecom companies and businesses will be judged on the provision of connectivity, the resilience of digital infrastructure, and their ability to stay ahead of the curve.
This is a fast-paced environment that moves in tune with cycles of innovation. Keeping up to speed with developments and key themes will be critical to managing risks and agility.
Case study: Quantela’s covid-19 emergency response platform
Quantela, a Digital Alpha portfolio company, helps a number of municipalities around the world, including in North America, Europe, Asia and Africa, to automate services such as lighting, parking, traffic and waste management in a more efficient way.
In essence, it allows cities to integrate data held on a web of disparate systems that run on different network communication protocol architecture by standardising all that information into one common protocol.
Then it enables that information to be visualised, managed and analysed in a way that’s very powerful. It accelerates data-driven decision making and improves consistency and compliance. Digital Alpha believes that every city in the world needs to digitise and get smarter. Demand is universal and every city is a target market.
In a pandemic, the importance of such a capability only escalates. Quantela has created a covid-19 emergency response platform called CoVER that actively monitors, tracks and diagnoses activity, including virus hotspots, and supports communication between city agencies to reduce the impact of the virus.
Through the virtual command and control centre, authorities can monitor, collaborate, educate, contain and predict the spread of covid-19. The platform can be deployed and go live within days, without weeks and months of planning. When the pandemic ends, cities will still need to have the ability to trace and lock down infection hubs. Doing that systematically rather than on an ad hoc basis will be critical.