@Llati yes, you may be right -- and we are potentially singing the same song. Although I still take issue with this comment:

• ‘My point was that it doesn't have a network effect from hosting Amazon/etc as pretty much any data centre and/or telecommunications provider will give a high quality connection to all major cloud providers (Microsoft Azure, Amazon's AWS, etc).’

And this one:

• 'A Data Centre without telecommunication services is basically useless, so it is a no brainer that NextDC would want to sell telecommunication services to its clients. I think we all agree that NextDC has a network effect in play as the more clients and sites it has then the more valuable its telecommunication services.'

This part of the business represents nearly 10% of their cash inflow, and I expect this will grow pretty quickly over the coming years. It is also precisely where the network effect opportunity lies - so in my view its important and must be considered. You also say ‘any data centre’ but therein lines another moat (economical), which you highlight. The costs to establish a business like NextDC is enormous, and they’d be starting well behind the eight ball with NextDC already so advanced and dominant.

One of the primary reasons a business wants to be inside a NextDC data centre is to have the opportunity to connect to other businesses that exist within the ecosystem. We are also talking about a company that bosses the Australian market (alongside Equinix), with leading data centres across the country. Additionally, M1 and S1 are the only colocation data centres in the country that are rated 5-star for energy efficiency. This industry could come under the pump in a couple of years’ time so this is another important factor for me -- I know which side I would rather be on.

So we have established that data centres are bloody hard to get up and running (capital requirements and time) -- meaning they are in short supply as a result -- and there IS a compelling network effect underway, as NextDC use its relationships with major providers to attract others to its data centres. This very ecosystem needs Amazon, Microsoft etc to attract the smaller enterprise customers – who follow suit, incentivized by the opportunity to connect to the bigger tenants. This is also a bloody attractive proposition for NextDC too. The interconnection aspect of the business attracts around 80% EBITDA margins and is very sticky (hard to leave physically, and you are also losing the benefits of being connected to the ecosystem).

To go back to my original Straw, I am a firm believer that the network effects -- which relate to a sticky and growing part of their business -- is underappreciated and more compelling than the market suspects. I also don't think the counter view that other data centres can provide the same benefits is particularly fair. We are talking about a reputable industry leader here. Some commentators, Guarav included, liken the network effects to those within Westfield shopping centres (pre pandemic), which I think is a neat comparison. Just because there are lots of shopping centres does not mean that the network effect doesn't exist, nor that we should disregard it.

Hi All,

I'll weigh in too!

Every business grade data center (DC) will offer services as per the image below. As discussed, to set all this up as a business, costs money, the right real estate, and time.

Any ISP/RSP will provide business grade connectivity direct to cloud providers (Azure or AWS or others) - but if your business is entirely in the cloud, then you won't use physical servers, and therefore won't need or use a DC, such as NextDC.

If your business does have physical servers, then they need to be hosted somewhere, on your business premises, where your ISP/RSP provides internet and cloud provider connectivity, or in a DC, where you ISP/RSP still provides the connectivity.

I think it is important to clarify, as per the screen shot below, NextDC does offer telecommunications services, but does not directly own them, they are outsourced to providers whom have equipment hosted in the DCs along side other customers, that NextDC use as add-ons to the customers hosting options, so NextDC would clip the ticket only, or not, depends on the agreement with the provider.

I am not sure there is a network effect simply from having multiple DCs around the country. This is a physical network yes, but perhaps this network is only useful to enterprise sized customers (ie a bank with branches around the nation). Medium sized business or small sized business may simply want to reduce risk of on-premises hosting, and only require access to a single DC, vs the enterprise customer who wants to outsource the on-premises risk and require equipment to be hosted closer to their business edge around the country.

I think the network effect is that B2B customers co-locating their hosting in a DC because of the efficiencies of interconnects - sometimes literally cables run from their rack to the other rack. The added bonus is that your cloud provider might be co-located, and so enable another interconnect.

Example. Customer A is hosted in S1 and M2 and B1. The network effect is created by customers B and C who want interconnect access to customer A, and so choose to pay to host their equipment with NextDC, as the connections between DCs or the connections between customers servers will simply be faster than bouncing out from each ISP/RSP to the internet and back in again. Whether customers B and C use Azure or AWS for other parts of their business may or may not come into the decision to host in S1 - it depends on the specifics of each business.

Hope that helps... to makes it more confusing! hahahahaha. /joke

Great discussion.

Thought you would be interested in following 1H22 earning call transcript.

https://www.marketscreener.com/quote/stock/NEXTDC-LIMITED-9015368/news/Transcript-NEXTDC-Limited-H1-2022-Earnings-Call-Feb-24-2022-39562478/