The power grid was probably the single greatest enabler of technological advancement and quality of life improvements in the 20^thcentury. Digital infrastructure has an even greater role. But, as was the case with the power grid, funding its innovations won’t be easy.

This is the fourth in a series of five blog posts reflecting the top-of-mind issues discussed during the Infrastructure Masons Advisory Council meeting on April 25, 2019.

On the eve of the 7th Annual Infrastructure Week (the industry gathering, not the Presidential photo op and social media meme), Siemens USA CEO Barbara Humpton says she wants to see the United States get a high-tech infrastructure upgrade. “While there are people working on concrete and asphalt, a lot of us are working on data,” said Humpton in an interview with Yahoo Business.

The Infrastructure Week calendar was filled with sessions on flood-ready infrastructure, beefing up U.S. public transportation, ensuring safe drinking water, and many talks about P3 (public-private-partnerships) for funding it all. There wasn’t much about digital infrastructure in general or funding improvements to it specifically.

There was a panel on making physical infrastructure “smart” to improve transportation, water, and energy systems. Panelists discussed using cameras to improve road safety and adding sensors to bridges to track traffic patterns. Notably absent from the conversation was the digital infrastructure that is the foundation of all that – the literal brain and nervous system behind “smart” everything.

Barriers to innovation

While digital infrastructure leaders are doing amazing things – think underwater data centers, 5G, liquid cooling, and new battery technologies – that kind of innovation isn’t happening everywhere. Yes, there are the next billion people to be served, but there are also 34 million people in the U.S. without access to broadband Internet.

The situation is similar in Europe. In a recent report on European infrastructure investment, Deutsche Bank said there are economic and regulatory reasons for the insufficient progress with digital infrastructure improvements. One reason is that providers continue to focus on copper infrastructure instead of fiber optic networks. In addition, Deutsche Bank said, state financing bottlenecks, particularly in rural areas, have delayed investment.

Whatever its root causes, a lack of investment in digital infrastructure will stymie companies’ ability to develop digital innovations. It will also limit users’ access to the digital world – a problem arguably more severe than a lack of access to electricity.

The World Economic Forum put it well: “In its own highly interconnected way, the internet can be as fragile as a bridge or roadway exposed to the elements. It is subject to breakdowns; it needs investment and maintenance; it has limitations in reach, penetration and capacity that require innovations to overcome. Perhaps most important, it needs the continuing collaboration of its own ecosystem of participants – companies, governments, users and other parties – to keep things moving.”

“A lack of investment in digital infrastructure will stymie companies’ ability to develop digital innovations and limit users’ access to the digital world – a problem arguably more severe than a lack of access to electricity.”  –Click to tweet

Who’s driving investment?

Financing investments in digital infrastructure was a hot-button discussion item during the Advisory Council meeting.

One end user talked about cost optimization and the importance of continuously “driving down costs.” But a partner responded, “Driving prices down makes it hard to invest in infrastructure – whether that’s a data center or fiber assets. If we just drive cost down without building infrastructure, we’re not going to enable innovation like the edge/POP strategy.”

“Driving prices down makes it hard to invest in infrastructure – whether that’s a data center or fiber assets.”  –Click to tweet

Referring specifically to the opex v. capex juxtaposition of the cloud v. the data center, another end user said, “It’s a three-year capex depreciation unless it’s a building, then it’s a 20-year depreciation. The juxtaposition comes from Wall Street where everyone’s driving to short-term results. We need to change that so we can invest better and take a longer term view.”

Understanding the investment lifecycle

The problem, said one partner, is that the people signing the checks for digital infrastructure investments “are not capex people, they’re opex people and they don’t understand the investment lifecycle across the industry.”

The partner continued, “They don’t understand the idea of making the big capital decision and sticking with it and how variation causes costs to go up and down,” he said. “When you look at big companies with IP and tons of cash, as the fixed asset base goes up and depreciation starts to creep in [the people in finance wonder where all the depreciation is coming from].”

“The problem is that the people signing the infrastructure investment checks aren’t capex people. They’re opex people and they don’t understand the investment lifecycle.”  –Click to tweet

Educating the check-signers

There is “plenty of money that wants to support the industry,” said one partner. “But that money isn’t very smart, or fast. And that slows the industry down. So when we have bursty growth, it’s the customers who lose.”

The answer, one partner suggested, is to educate the end user CFOs – the check-signers.

“The end users are sitting looking at capex and forecasting challenges, and they say ‘Run over here and find me 90 megawatts,’” the partner explained. “Then you find it and they say, ‘Actually I meant the country next door.’ They’re driving to the financial year-end and balance sheet numbers. It’s very easy for them to deploy capital because it’s sort of soft.”

“So, as a partner, we’re being asked to deliver at the same unit cost as a self-build, when the end user is looking at a 15-20 year depreciation, but they want to sign a 7-year contract and would like a break at year 5,” the partner continued. “It ain’t gonna happen guys. As a community we’re not engaged together in spreading the message at all levels of the organization that it’s a capex/opex thing.”

“The answer to bringing more, smarter, faster investment into digital infrastructure is to educate the check signers.”  –Click to tweet

Failure is not an option

Digital infrastructure leaders will figure out how to make the necessary investments that will enable the next generation of digital innovation. It will work because, to borrow a phrase from Captain America, ‘Who knows what we’ll do, if it doesn’t?’

Previous posts in the April 2019 top-of-mind series:

• Power Shift: What Will It Take to Get to 1000x Scale?
• Key to Scale: Collaboration, Cooperation, Coopetition
• Innovations in Sustainability on the Journey to 1000x Scale

Upcoming posts in the April 2019 top-of-mind series:

• More Top of Mind: Talent, Alignment, Emerging Markets, Regulation